diff --git a/parsed_sections/prospectus_summary/1996/ANF_abercrombi_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/ANF_abercrombi_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following is a summary of certain information contained elsewhere in this Prospectus. Reference is made to, and this summary is qualified in its entirety by, the more detailed information contained in this Prospectus. As used herein, unless the context otherwise requires, the "Company" or "Abercrombie & Fitch" means Abercrombie & Fitch Co. and its subsidiaries (which, prior to the formation of the Company on June 26, 1996, are referred to herein as the "Abercrombie & Fitch Business"), and "The Limited" means The Limited, Inc. and its subsidiaries (other than the Company). Unless indicated otherwise, the information contained in this Prospectus assumes that the Underwriters do not exercise their over-allotment options. Except as otherwise specified, references herein to years are to the Company's fiscal year, which ends on the Saturday closest to January 31 in the following calendar year. For example, "1995" refers to the fiscal year ended February 3, 1996. All fiscal years for which financial information is included in this Prospectus had 52 weeks, except 1995 which had 53 weeks. All references to "dollars" or "$" are to U.S. dollars. Unless otherwise defined herein, capitalized terms used in this summary have the meanings ascribed to them elsewhere in this Prospectus. Prospective investors should carefully consider the information set forth under the heading "Risk Factors". THE COMPANY Abercrombie & Fitch is a rapidly growing specialty retailer of high-quality, casual apparel for men and women approximately 15 to 50 years of age. The Company's net sales have increased from $85.3 million in 1992 to $235.7 million in 1995, representing a compound annual growth rate of 40.3%. During this time, operating income has improved from an operating loss of $10.2 million in 1992 to operating income of $23.8 million in 1995, while the number of Abercrombie & Fitch stores in operation more than doubled, increasing from 40 at the end of 1992 to 100 at the end of 1995. The Company plans to continue this new store expansion program by opening 29 new stores in 1996 and by increasing the number of stores in operation by approximately 20% annually for the next several years thereafter. The Abercrombie & Fitch brand was established in 1892 and became well known as a supplier of rugged, high-quality outdoor gear. Famous for outfitting the safaris of Teddy Roosevelt and Ernest Hemingway and the expeditions of Admiral Byrd to the North and South Poles, Abercrombie & Fitch goods were renowned for their durability and dependability--and Abercrombie & Fitch placed a premium on complete customer satisfaction with each item sold. In 1992, a new management team began repositioning Abercrombie & Fitch as a more fashion-oriented casual apparel business directed at men and women with a youthful lifestyle. In reestablishing the Abercrombie & Fitch brand, the Company combined its historical image for quality with a new emphasis on casual American style and youthfulness. The Company believes that this strategic decision has contributed to the strong growth and improved profitability it has experienced since 1992. BUSINESS STRENGTHS The Company believes that certain business strengths have contributed to its success in the past and will enable it to continue growing profitably. ESTABLISHED AND DIFFERENTIATED LIFESTYLE BRAND. Abercrombie & Fitch has created a focused and differentiated brand image based on quality, youthfulness and classic American style. This image is consistently communicated through all aspects of the Company's business, including merchandise assortments, in-store marketing and print advertising. The Company believes that the strength of the Abercrombie & Fitch brand provides opportunities for increased penetration of current merchandise categories and entry into new product categories. BROAD AND GROWING APPEAL. The Company's merchandise assortment appeals to a broad range of customers with varying ages and income levels. The Company believes that both men and women interested in casual, classic American fashion are attracted to the Abercrombie & Fitch lifestyle image. The Company also believes that the brand's broad appeal has been augmented by, and should continue to benefit from, the current trend in fashion toward casual apparel. PROVEN MANAGEMENT TEAM. Since the current management team assumed responsibility in 1992, the Company has increased the level of brand awareness and consistently reported improved financial results. In addition, the Company's senior management has significant experience, with an aggregate of over one hundred years in the retail business. The Company believes that management's substantial experience and demonstrated track record of highly profitable growth strongly positions the Company for the future. CONSISTENT STORE LEVEL EXECUTION. Abercrombie & Fitch believes that a major element of its success is the consistent store level execution of its brand strategy. Store presentation is tightly controlled by the Company and is based on a detailed and comprehensive store plan regarding visual merchandising, marketing and fixtures to ensure that all stores provide a consistent portrayal of the brand. Store associates are trained as "brand representatives" who convey and reinforce the brand image through their attitude and enthusiasm. QUALITY. Since its founding over 100 years ago, Abercrombie & Fitch has maintained a strong reputation for quality. This reputation has been enhanced in recent years as management has made quality a defining element of the brand. The Company sources high quality natural fabrics from around the world and uses distinctive trim details and specialized washes to achieve a unique style and comfort in its products. As part of this focus on quality, the Company establishes on-going relationships with key factories to ensure reliability and consistency in production. INTERNAL DESIGN AND MERCHANDISING CAPABILITIES. The cornerstone of the Company's business is its ability to design products which embody the Abercrombie & Fitch image. Abercrombie & Fitch develops substantially all of its merchandise line through its own design group, which allows it to develop exclusive merchandise and offer a consistent assortment within a season and from year to year. In addition, because the Company's merchandise is sold exclusively in its own stores, Abercrombie & Fitch is able to control the presentation and pricing of its merchandise, provide a higher level of customer service and closely monitor retail sell-through, which provides competitive advantages over other brand manufacturers that market their goods through department stores. RELATIONSHIP WITH THE LIMITED. Unlike most high growth, specialty apparel retailers, Abercrombie & Fitch directly benefits from the resources and expertise of a major retailer such as The Limited. Abercrombie & Fitch has been able to concentrate the efforts of its management team and associates on strengthening its brand image by taking advantage of The Limited's capabilities in the areas of real estate negotiation and acquisition, central distribution, sourcing, store design and construction and general corporate services. The Company will continue to receive such services after the Offerings pursuant to agreements to be entered into with The Limited. See "Relationship with The Limited". GROWTH STRATEGY The Company has implemented a growth strategy designed to permit Abercrombie & Fitch to capitalize on its business strengths. The Company plans to continue its store expansion program by opening 29 new stores in 1996 and increasing the number of stores in operation by approximately 20% annually for the next several years thereafter. While substantially all stores to be opened in 1996 will be in regional shopping malls, the Company believes that selected street locations in university and high-traffic urban settings also provide attractive expansion opportunities. In addition, Abercrombie & Fitch believes that there are opportunities to expand its customer base and enhance the productivity of its stores through further penetration of existing merchandise categories and the introduction of new classifications and categories. Products which are being introduced or expanded in 1996 include men's and women's underwear and outerwear, fragrances, sunglasses and decorative home accessories. The Company believes that its internal design capability will enable it to continue to develop new merchandise which reflects the Abercrombie & Fitch lifestyle. See "Business--Growth Strategy".
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diff --git a/parsed_sections/prospectus_summary/1996/CALM_cal-maine_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CALM_cal-maine_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, INFORMATION IN THIS PROSPECTUS (I) ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION AND (II) IS ADJUSTED TO REFLECT A RECENT RECAPITALIZATION, WHICH RESULTED IN THE CREATION OF THE COMMON STOCK AND THE CLASS A COMMON STOCK, AND A 1,200-FOR-1 STOCK SPLIT OF THE CAPITAL STOCK, EFFECTIVE AS OF OCTOBER 3, 1996. SEE "CAPITALIZATION -- RECAPITALIZATION AND STOCK SPLIT." THE COMPANY GENERAL The Company is primarily engaged in the production, cleaning, grading, packing and sale of fresh shell eggs and the manufacture and sale of egg products. Shell eggs accounted for approximately 92% and egg products approximately 6% of the Company's net sales in fiscal 1996. The Company currently is the largest producer and distributor of fresh shell eggs in the United States, with fiscal 1996 sales of approximately 384.4 million dozen shell eggs, representing approximately 7.5% of all shell eggs sold in the United States. Cal-Maine primarily markets its shell eggs and egg products in 26 states, chiefly in the southwestern, southeastern, mid-western and mid-Atlantic regions of the United States. The Company's operations are fully integrated. It owns facilities to hatch chicks, grow pullets, manufacture feed and produce, process, manufacture and distribute shell eggs and egg products. Company-owned facilities accounted for approximately 60% of total egg production in fiscal 1996, with the balance attributable to contract producers used by the Company. Approximately 95% of the feed for Company-owned farms and contract producers is manufactured by the Company, from purchased ingredients, in feed mills that it owns and operates. Shell eggs are sold directly by the Company primarily to national and regional supermarket chains. Egg products are sold both on a direct basis and through egg product brokers to institutional users, including manufacturers of baked goods, mayonnaise and confections. GROWTH STRATEGY During the past eight years the Company has pursued an aggressive growth strategy, including the acquisition of existing shell egg production and processing facilities, as well as the construction of new and more efficient facilities. Since the beginning of fiscal 1989, the Company has consummated six acquisitions, adding an aggregate of 13.7 million layers to its capacity, and built four new "in-line" shell egg production and processing facilities and one pullet growing facility, adding 4 million layers and 950,000 pullets to its capacity. The increases in capacity have been offset by the retirement of older and less efficient facilities and a reduction in eggs produced by contract producers. As a result of the Company's growth strategy, its total flock, including pullets, layers and breeders, has increased from approximately 6.8 million at May 28, 1988 to an average of approximately 17.4 million for each of the past five fiscal years. Also, there has been a three-fold increase in the number of dozens of shell eggs sold, from approximately 117 million in the fiscal year ended May 28, 1988 to an average of approximately 394 million in each of the past five fiscal years. Net sales amounted to approximately $282.8 million in fiscal 1996, approximately four times net sales of approximately $70.0 million in fiscal 1988. The Company expects to continue to pursue its growth strategy and to use a portion of its net proceeds from this offering to acquire additional shell egg production and processing facilities and feed mills. However, it has no understandings or agreements in that regard at this time. The Company's new "in-line" facilities result in the gathering, cleaning, grading and packaging of shell eggs by less labor-intensive, more efficient, mechanical means. The increased use of in-line facilities has generated significant cost savings. The cost of eggs produced at these facilities was lower by 1.0cents, 1.5cents, 2.1cents, 2.3cents and 3.1cents per dozen in fiscal 1992, 1993, 1994, 1995 and 1996, respectively, than the cost to the Company of eggs produced from non-in-line facilities. Also, the Company produces a higher percentage of grade A eggs, which sell at higher prices, at its in-line facilities. The percentage of the total number of layers housed in the Company's in-line facilities increased from 25% in fiscal 1992 to 55% in fiscal 1996. The Company's acquisitions and construction of larger facilities, described in the tables below, reflect the continuing concentration of shell egg production in the United States in a decreasing number of shell egg producers. The Company believes that a continuation of that concentration trend may result in the reduced cyclicality of shell egg prices, but no assurance can be given in that regard. ACQUISITIONS OF EGG PRODUCTION AND PROCESSING FACILITIES <TABLE> <CAPTION> LAYERS PURCHASE FISCAL YEAR(1) SELLER LOCATION ACQUIRED PRICE - -------------- ---------------------------------------- --------------- -------------- ----------- <C> <S> <C> <C> <C> 1989 Egg City, Inc........................... Arkansas 1,300,000 $ 6,716,000 1990 Sunny Fresh Foods, Inc.................. (2) 7,500,000 21,629,000 1991 Sunnyside Eggs, Inc..................... North Carolina 1,800,000 6,000,000 1994 Wayne Detling Farms..................... Ohio 1,500,000 12,194,000 1995 A&G Farms(3)............................ Kentucky 1,000,000 2,883,000 1997 Sunbest Farms(4)........................ Arkansas 600,000 1,302,000 ---------- ----------- Total..................................................... 13,700,000 $50,724,000 ========== =========== </TABLE> CONSTRUCTION OF EGG PRODUCTION, PULLET GROWING AND PROCESSING FACILITIES(5) <TABLE> <CAPTION> FISCAL YEAR LAYER PULLET APPROXIMATE COMPLETED LOCATION CAPACITY CAPACITY COST - ----------- -------------------------------------------------- --------- -------- ----------- <C> <S> <C> <C> <C> 1990 Mississippi....................................... 1,000,000 200,000 $10,000,000 1992 Louisiana......................................... 1,000,000 -- 10,000,000 1992 Mississippi....................................... -- 500,000 3,500,000 1994 Mississippi....................................... 1,000,000 -- 9,200,000 1996 Texas............................................. 1,000,000 250,000 14,000,000 --------- ------- ----------- Total............................................. 4,000,000 950,000 $46,700,000 ========= ======= =========== </TABLE> - --------------- (1) The Company's fiscal year ends on the Saturday closest to May 31. (2) New Mexico, Kansas, Texas, Alabama, Oklahoma, Arkansas and North Carolina. (3) In connection with the purchase, the Company leased substantially all facilities and certain equipment of the business under an operating lease with monthly rentals of $79,000. See "Business -- Growth Strategy." (4) Acquired subsequent to quarter ended August 31, 1996. (5) Does not include (i) current construction in Chase, Kansas, expected to be completed in fiscal 1999 at an estimated cost of approximately $16,000,000, adding approximately 1,000,000 layer and 250,000 pullet capacity, and a feed mill and grain storage; or (ii) proposed construction in Waelder, Texas, expected to commence in fiscal 1997, and to be completed in fiscal 2000 at an estimated cost of approximately $13,900,000, adding approximately 1,000,000 layer and 250,000 pullet capacity. The Company was incorporated under Delaware law in 1969. Its principal executive offices are located at 3320 Woodrow Wilson Drive, Jackson, Mississippi 39209, and its telephone number is (601) 948-6813. Except as otherwise indicated by the context, references in this Prospectus to the "Company" or "Cal-Maine" include all subsidiaries of the Company. THE OFFERING Common Stock being offered.......... 1,700,000 shares by the Company and 800,000 shares by the Selling Stockholder(1) Common Stock to be outstanding after the offering...................... 12,006,800 shares(1)(2) Use of Proceeds..................... To provide additional funds for possible future acquisitions, increase working capital, and for general corporate purposes. Proposed NASDAQ National Market trading symbol...................... CALM - --------------- (1) Assumes no exercise of the Underwriters' over-allotment option. See "Underwriting." (2) Excludes shares reserved under the Company's 1993 Stock Option Plan. See "Management -- 1993 Stock Option Plan." SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA (DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> FISCAL YEAR ENDED 13 WEEKS ENDED ----------------------------------------------------------- -------------------- MAY 30, MAY 29, MAY 28, JUNE 3, JUNE 1, SEPT. 2, AUG. 31, 1992 1993 1994 1995 1996 1995 1996 -------- ----------- -------- -------- -------- -------- -------- (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Net sales.............................. $234,767 $ 235,908 $254,713 $242,649 $282,844 $56,219 $65,563 Net income (loss)...................... (2,192) 3,103 224 (8,685) 10,925 (1,635) 1,097 Net income (loss) per common share(1)............................. $ (.18) $ .26 $ .02 $ (.74) $ .94 $ (.14) $ .10 Weighted average shares outstanding(1)....................... 11,921 11,821 11,760 11,700 11,584 11,647 11,509 OPERATING DATA: Total flock size (thousands)(2)........ 16,839 17,439 17,697 18,014 17,209 17,819 17,375 Total shell eggs sold (millions of dozens).............................. 381.2 379.8 403.9 421.8 384.4 94.8 89.4 <CAPTION> AUGUST 31, 1996 ----------------------- (UNAUDITED) AS ACTUAL ADJUSTED(3) -------- ----------- <S> <C> <C> BALANCE SHEET DATA: Working capital........................ $ 28,229 $ 40,286 Total assets........................... 150,351 162,408 Total long-term debt (including current portion and capitalized lease obligations)......................... 62,866 62,866 Total stockholders' equity............. 48,976 61,033 </TABLE> - --------------- (1) Reflects the 1,200-for-1 stock split effective October 3, 1996 as if the split had occurred in the earliest period presented. (2) Includes pullets (young female chickens, usually under 20 weeks of age), layers (mature female chickens), and breeders (male or female birds used to produce fertile eggs to be hatched for egg production flocks). (3) Adjusted to give effect to (i) the sale of 1,700,000 shares of Common Stock offered by the Company (at an assumed initial public offering price of $7.00 per share and after deduction of the underwriting discount and estimated offering expenses payable by the Company) and the addition of the net proceeds thereof to working capital, and (ii) an increase in stockholders' equity resulting from the payment of a note payable to the Company by its principal stockholder. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000004317_sento-corp_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000004317_sento-corp_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS. THE COMPANY Sento Technical Innovations Corporation ("Sento" or the "Company") develops, configures, markets and distributes industry-leading hardware and software computing solutions, combined with consulting, training and support services, to business, government and educational organizations world-wide through direct sales and marketing, channel distribution, and industry partners. The Company, through its four wholly-owned subsidiaries, Spire Technologies, Inc. ("Spire Technologies"), Spire Systems Incorporated ("Spire Systems"), DewPoint Distributed Solutions Incorporated ("DewPoint") and Centerpost Innovations Pty. Ltd., develops and implements system management and office automation solutions for open and proprietary computing environments, acts as a "service and value-added reseller" and distributor of software developed by third parties, resells Digital Equipment Corporation ("Digital") network computer systems and components on a value-added basis and manages value-added reseller and distribution channels in the Americas, Europe, and Southeast Asia. The Company offers a wide range of desktop, workstation, client/server and centralized computing software, systems and peripheral equipment, as well as channel management and support services for both domestic and international clientele in a wide variety of industries and computing environments, including UNIX, Windows NT and Digital Open VMS. In September 1996, the Company obtained an option to acquire the assets (including all intellectual property) of Australian Software Innovations (Services) Pty. Ltd. ("ASI"), a developer of UNIX-based management and performance monitoring software and provider of software education and consulting services based in Sydney, Australia. ASI develops and markets performance monitoring software and provides related technical consulting services to customers located in Asia, Europe, the United Kingdom and the United States. See "Recent Developments--Australian Software Innovations" and "Business-- Products--Software." Unless the context requires otherwise, all references to the "Company" in this Prospectus refer to the Company and each of its subsidiaries. The Company's principal executive offices are located at 311 North State Street, Orem, Utah 84057, and its telephone number is (801) 226-3355. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Selling Shareholders................................ 1,096,214 shares Common Stock outstanding prior to and after this offering............................... 4,347,914 shares(1) Use of Proceeds.............................. The proceeds of the offering will be received by the Selling Shareholders. See "Use of Proceeds." Over-the-counter Bulletin Board symbol....... STIC(2) </TABLE> - ------------------------ (1) As of October 31, 1996, and excluding 879,209 shares issuable upon the exercise of outstanding stock options and warrants granted by the Company. (2) The National Association of Securities Dealers has approved the Company's application for quotation of the Common Stock on the NASDAQ Small Cap Market under the symbol "SNTO." SUMMARY FINANCIAL DATA (1) <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED APRIL 30, JUNE 30, ---------------------------------------------------------- -------------------- 1996 1995 1994 1993 1992 1996 (2) 1995 ---------- --------- --------- ----------- ----------- --------- --------- <S> <C> <C> <C> <C> <C> <C> <C> (UNAUDITED) (UNAUDITED) STATEMENTS OF INCOME DATA: Total revenues....................... $13,873,401 $9,674,683 $6,043,411 $5,949,072 $4,164,044 $4,518,439 $3,302,858 Gross profit......................... 5,421,358 3,060,608 2,076,382 1,875,527 1,437,778 1,568,834 1,385,743 Operating income..................... 547,928 133,527 43,869 27,691 11,884 64,020 250,980 Net income........................... 339,555 98,735 18,233 10,951 (8,109) 51,975 153,462 Net income per common share (3)...... .08 .03 -- -- -- .01 .04 Weighted average common shares outstanding (3).................... 3,992,768 3,346,274 3,612,328 3,547,861 3,547,861 4,269,140 3,949,750 </TABLE> <TABLE> <CAPTION> APRIL 30, JUNE 30, 1996 1996 ------------- ------------- <S> <C> <C> (UNAUDITED) BALANCE SHEET DATA: Cash and Cash Equivalents........................................................... $ 2,459,938 $ 1,552,806 Working Capital..................................................................... 2,692,590 943,332 Total Assets........................................................................ 6,755,007 4,544,825 Total Long-term Debt................................................................ 222,169 223,412 Total stockholders' equity.......................................................... 3,103,490 1,480,907 </TABLE> - ------------------------------ (1) The consolidated financial statements of the Company as of and for the year ended April 30, 1996 include the financial statements of the Company and the three subsidiaries of the Company owned during such year (Spire Technologies, Spire Systems and DewPoint). The financial statements of the Company as of April 30, 1995, and for each of the years in the two-year period then ended are the combined financial statements of Spire Technologies and Spire Systems prior to the consummation of the share exchange transaction completed by the Company in April 1996. See "Recent Developments--Share Exchange." All significant intercompany balances and transactions have been eliminated in consolidation or combination. (2) In June 1996, the Company changed its fiscal year end from April 30 to March 31 of each year, commencing with the fiscal year ending March 31, 1997. The consolidated financial statements set forth in this Prospectus are based upon the Company's former fiscal year end of April 30. (3) Per share amounts are computed by dividing net income by the weighted average number of common shares and common share equivalents resulting from options outstanding. There were 3,992,768, 3,346,274 and 3,612,328 weighted average common shares and common share equivalents outstanding for the years ended April 30, 1996, 1995 and 1994, respectively, and there were 3,547,861 weighted average common shares and common share equivalents outstanding for the years ended April 30, 1993 and 1992, respectively. Income per share for the 1995 and prior fiscal years has been restated to give effect to the share exchange completed by the Company in April 1996. See "Recent Developments--Share Exchange."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000005588_american_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000005588_american_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by more detailed information and financial statements and notes thereto included elsewhere in this Prospectus. Unless otherwise stated, the information contained in this Prospectus (i) assumes no exercise of the U.S. Underwriters' over-allotment option, (ii) reflects a 8.1192-for-one stock split of the existing Common Stock and Common Stock equivalents and (iii) reflects the conversion of all shares of preferred stock and preferred stock equivalents into shares of Common Stock and Common Stock equivalents, respectively. See "The Recapitalization." Unless otherwise stated in this Prospectus, references to (a) the "Company" shall mean American Pad & Paper Company, its consolidated subsidiaries and their respective predecessors; (b) "Williamhouse" shall mean the operations of Williamhouse--Regency of Delaware, Inc. prior to its acquisition by the Company on October 31, 1995 (the "Acquisition"); and (c) "Ampad" shall mean Ampad Corporation, the former operating subsidiary of the Company, prior to Ampad's merger with and into Williamhouse immediately prior to the Acquisition. On May 29, 1996, the Company executed a definitive agreement to purchase the Niagara Envelope Company, Inc. ("Niagara"). Financial data presented herein on a pro forma basis for the year ended December 31, 1995 gives effect to the Acquisition, the other transactions related thereto, the acquisition of Niagara and the Offering as if such transactions occurred on January 1, 1995. See "Unaudited Pro Forma Financial Data." THE COMPANY The Company is one of the largest manufacturers and marketers of paper-based office products (excluding computer forms and copy paper) in the $60 billion to $70 billion North American office products industry. The Company offers a broad product line including nationally branded and private label writing pads, file folders, envelopes and other office products. Through its Ampad division, the Company is among the largest and most important suppliers of pads and other paper-based writing products, filing supplies and envelopes to many of the largest and fastest growing office products distributors. Acquired in October 1995, the Company's Williamhouse division is the leading supplier of mill branded, specialty and commodity envelopes to paper merchants/distributors. The Company's strategy is to grow by focusing on the largest and fastest growing office product distribution channels, making acquisitions, introducing new product lines, broadening product distribution across its channels and maintaining its position among the lowest-cost manufacturers in the industry. As a result of this strategy, the Company's sales have grown at a compound annual rate of approximately 34% from 1992 to 1995. For the year ended December 31, 1995, the Company had net sales of $617.2 million and income from operations of $57.3 million on the pro forma basis described herein. See "Unaudited Pro Forma Financial Data." Since the mid-1980s, the office products industry has experienced significant changes in the channels through which office products are distributed such as the emergence of new channels, including national office products superstores, national contract stationers and mass merchandisers, and consolidation within these and other channels. As a result of these changes, approximately 6,800 office product distributors existed in 1994 compared with approximately 13,300 in 1987. The channels through which office products are distributed from the manufacturer to the end-user include retail channels such as national office products superstores, mass merchandisers and warehouse clubs; commercial channels such as national contract stationers; paper merchants/distributors; and other channels such as regional distributors, school campuses and direct mail. The Company believes that sales of office products through retail channels are approximately $20 billion to $25 billion. The three dominant national superstores (Office Depot, OfficeMax and Staples) have experienced significant growth over the past three years and currently account for approximately 17% of retail office products sales and approximately 6% of total office products sales. The Company believes that sales of office products through commercial channels are approximately $25 billion to $30 billion. Principally through the acquisition of smaller, regional contract stationers, national contract stationers (including Boise Cascade Office Products, BT Office Products, Corporate Express, U.S. Office Products and the contract stationer divisions of Office Depot and Staples) have grown more rapidly than other commercial channels. These national contract stationers now account for approximately 25% of commercial office products sales and approximately 11% of total office products sales. Certain office products, particularly envelopes, are sold predominantly through paper merchants/distributors or directly to end users. Paper merchants/distributors currently account for approximately 30% of the envelope market. The three largest paper merchants (ResourceNet, Unisource and Zellerbach) have experienced significant growth primarily through consolidation. The Company has targeted and will continue to target those customers driving consolidation in the retail, commercial and paper merchant distribution channels and believes that it is uniquely positioned to meet the special requirements of these customers. These customers seek suppliers, such as the Company, who are able to offer broad product lines, higher value-added innovative products, national distribution capabilities, low costs and reliable service. Furthermore, as these customers continue to grow and as they consolidate their supplier bases, the Company's ability to meet their special requirements becomes an increasingly important competitive advantage. Recognizing Ampad's potential for growth through the changing distribution channels, Bain Capital, Inc. ("Bain Capital") and management formed the Company and purchased Ampad from Mead Corporation ("Mead") in 1992. Since that time, management has enhanced the Company's scale, broadened its product line, expanded upon its national presence and strengthened its distribution capabilities through acquisition and innovation while simultaneously delivering higher customer service levels. As a result, the Company's net sales through the most rapidly growing retail and commercial channels increased from $8.8 million in 1992 to $134.8 million ($164.5 million on a pro forma basis) in 1995. COMPETITIVE STRENGTHS The combination of the Company's products, customers and national scale distinguishes it as a leading manufacturer and marketer of paper-based office products (excluding computer forms and copy paper) in North America. The Company attributes this position and its continued opportunities for growth and profitability to the following competitive strengths: . Market Leader. The Company has achieved market leadership in core products sold to customers in the largest and fastest growing office products channels by offering one of the broadest assortments of high quality products in the industry. Furthermore, the Company enjoys national brand awareness in many of its product lines, including Ampad, Century, Embassy, Evidence, Gold Fibre, Huxley, Karolton, Kent, Peel & Seel, SCM, Williamhouse and World Fibre. . Well-Positioned and Diversified Customer Base. The Company has substantial opportunities for growth within several distribution channels of the office products industry. The Company has focused on the largest and fastest growing office products channels. Several of the Company's largest customers, such as Boise Cascade Office Products, BT Office Products, Corporate Express, Office Depot, OfficeMax and Staples, are expected by industry analysts to experience annual revenue growth of 15% to 35% over the next five years. The Company's Williamhouse division maintains particularly strong relationships with the largest and fastest growing paper merchants/distributors in the market, including ResourceNet, Unisource and Zellerbach. The Company also maintains strong customer relationships across all of the other office products distribution channels, including mass merchandisers, warehouse clubs, office products wholesalers and independent dealers. . National Scale and Service Capability. The Company's extensive product line, multiple brands and broad price point coverage provide significant advantages and economies of scale in selling to and servicing its customers. The Company has become an increasingly important strategic partner to its customers as they seek higher value-added products, simplify their purchasing organizations and consolidate their relationships among selected national suppliers. The Company's national presence and network of 22 strategically located facilities have enabled it to maintain rapid and efficient order fulfillment standards. In addition, the Company's advanced electronic data interchange ("EDI") capabilities enable it to meet its customers' EDI requirements, executing automated transactions rapidly, efficiently and accurately. . Innovation/New Products. The Company has introduced several innovative products as part of its marketing strategy to differentiate itself from other suppliers and enhance profitability. Recent examples include Gold Fibre classic and designer notebooks, Papers with a Purpose, World Fibre ground- wood writing pads and Peel & Seel envelopes. Products introduced since 1992 accounted for over $70 million of the Company's 1995 net sales. The Company's brand recognition and presence with its national customers allows it to more easily introduce new or acquired product lines to those customers. . Low-Cost Manufacturer. The Company believes it is among the lowest-cost manufacturers of paper-based office products in the industry. The Company ensures its low-cost manufacturing position through its paper purchasing and distribution advantages as well as its maintenance of modern and efficient manufacturing technology and a high quality workforce. The Company has been successful in reducing costs with each of its acquisitions in the last three years by continually streamlining its manufacturing processes and overhead structure. From 1992 to 1995, the Company reduced its fixed manufacturing costs from 7.4% to 5.2% of net sales and its selling, general and administrative expenses from 10.5% to 7.2% of net sales. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Overview." . Purchasing Advantages. The Company has strong relationships with most of the country's largest paper mills, many of which have been conducting business with the Company for more than 30 years. The Company is one of the largest purchasers of the principal paper grades used in its manufacturing operations. In addition, the Company has the largest number of designated mill relationships which involve some of the largest and most recognized paper mill brands such as Hammermill, Hopper, Neenah and Strathmore. These relationships afford the Company certain paper purchasing advantages, including stable supply and favorable pricing arrangements. . Proven Management Team With Successful Track Record. The Company's senior operating management team averages over 25 years each in the paper products industry. Management has succeeded in increasing sales and operating profitability by recognizing and acting on the transition to the fastest growing distribution channels, introducing higher value-added products, acquiring complementary product lines (Karolton in December 1993, SCM Office Supplies, Inc. ("SCM") in July 1994 and certain product lines of Huxley and Globe-Weis in July 1994 and August 1995, respectively), improving manufacturing processes and reducing overhead and administrative costs. Upon completion of the Offering, the Company's senior management team (Messrs. Hanson, Gard and Benson) will collectively own 865,516 shares of Common Stock (438,427 shares if the U.S. Underwriters' over-allotment option is exercised in full) and hold currently exercisable options to purchase an additional 2,156,000 shares of Common Stock. Assuming an initial public offering price of $16.00 per share, these holdings represent on a fully-diluted basis approximately 10.3% of the outstanding Common Stock (8.9% if the U.S. Underwriters' over-allotment option is exercised in full). See "Principal and Selling Stockholders." GROWTH STRATEGY The Company's strategy is to maintain and strengthen its leadership position by focusing on the following: . Focus on Rapidly Growing Customers. The Company serves many of the largest and best positioned customers in the office products market segment including national office products superstores, mass merchandisers and warehouse clubs, national contract stationers and national paper merchants/distributors. For 1995 on a pro forma basis, approximately 15.3% of the Company's net sales were to national office product superstores, 7.8% to mass merchandisers and warehouse clubs, 9.1% to national contract stationers and 19.7% to the three largest national paper merchants/distributors. Anticipating further consolidation in the office products industry, the Company expects that its national scope and broad product line will be increasingly important in meeting the needs of its customers. The Company will continue to target those customers driving consolidation in the office products industry. . Continue to Introduce New Products. New, higher value-added products give the Company a greater selection to offer its customers and improve product line profitability for both the Company and its customers. The Company plans to differentiate itself from other suppliers and improve profitability through product innovation, differentiation and line extensions. . Pursue Complementary Product Line and Strategic Acquisitions. The office products industry is highly fragmented despite continuing consolidation among its manufacturers. The Company is leading consolidation among manufacturers of writing products, filing supplies and envelopes. The SCM and Williamhouse acquisitions broadened the Company's product line to include filing products and envelopes and enhanced its presence in the growing distribution channels. The Globe-Weis acquisition and the Company's agreement to acquire Niagara demonstrate its commitment to strengthening its competitive and strategic position within its markets. The Company believes that there are significant opportunities to acquire companies in both its existing and complementary product lines. In addition, the Company intends to enter new office products markets through acquisitions of established companies in those markets. . Broaden Product Distribution. The Company's market presence and distribution strengths uniquely position it to sell new or acquired product lines across its distribution channels, including national office products superstores, national contract stationers, office product wholesalers and mass merchandisers. As an important part of its growth strategy, for example, the Company has successfully introduced the envelope product lines acquired in the Acquisition, previously distributed primarily through paper merchants/distributors, to the Ampad division's distribution channels under the Ampad and private label names. The Company estimates that this market opportunity is approximately $350 million in annual net sales. . Continue to Reduce Costs. The Company has identified and is in the process of implementing cost reductions in connection with the Acquisition that are expected to result in approximately $7.4 million of annualized cost savings. In addition, management plans to implement further identified cost reductions beyond 1996. RECENT TRANSACTIONS On May 29, 1996, the Company executed a definitive agreement to acquire Niagara for an aggregate purchase price of approximately $50 million, plus $5.0 million to be paid under a one-year consulting services agreement (the "Niagara Acquisition"). Niagara supplies mill branded, specialty and commodity envelopes to paper merchants/distributors through four manufacturing facilities located near Buffalo, Chicago, Dallas and Denver. Niagara had 1995 net sales of approximately $106 million and operating income of approximately $8.5 million. The Company expects the Niagara Acquisition to be completed by the middle of July 1996. The Company believes that the Niagara Acquisition will strengthen the Company's distribution capabilities in the Midwest, provide additional manufacturing capacity and provide opportunities to achieve operating improvements through the consolidation of Niagara's operations with those of the Company. The completion of the Niagara Acquisition is subject to certain conditions. In October 1995, the Company acquired Williamhouse for an aggregate purchase price (including assumption of debt of approximately $152.9 million) of approximately $300 million, plus reimbursement of certain expenses. In connection with the Acquisition, the Company (i) refinanced an aggregate of approximately $119.1 million of combined indebtedness of the Company and Williamhouse, (ii) purchased for $109.0 million in cash all of the outstanding 11 1/2% Senior Subordinated Debentures due 2005 of Williamhouse (the "Old Debentures"), together with accrued interest thereon of $5.3 million, (iii) declared a stock dividend of $200 million in aggregate liquidation value of preferred stock and preferred stock equivalents (collectively, the "Preferred Stock") and subsequently redeemed approximately $70.6 million of such Preferred Stock and declared a $4.5 million cash dividend on its Class P Common Stock, (iv) paid approximately $34.2 million in related fees and expenses and (v) used approximately $3.4 million for working capital purposes. To finance the Acquisition and these related transactions, the Company's principal operating subsidiary (i) incurred borrowings under a credit agreement (the "Bank Credit Agreement") of approximately $245 million, (ii) issued $200 million in aggregate principal amount of senior subordinated notes due 2005 (the "Notes"), and (iii) received approximately $45 million from the establishment of a new non-recourse, off-balance sheet accounts receivable securitization program (the "Accounts Receivable Facility"). The Acquisition, the other transactions entered into in connection therewith, and the financing thereof are collectively referred to herein as the "Transactions." The Company's management identified the personalizing business division of Williamhouse (the "Personalizing Division") as a nonstrategic asset following the Acquisition and has decided to pursue a sale of the Personalizing Division. As a result, the financial statements of the Company included elsewhere in this Prospectus reflect the Personalizing Division as "Assets held for Sale" as of December 31, 1995 and March 31, 1996. On June 6, 1996, the Company signed a definitive agreement with a potential buyer to sell the Personalizing Division. Under the terms of the agreement, the Company will receive approximately $60 million in gross proceeds (subject to certain closing adjustments) from the sale of the Personalizing Division, which it expects to complete by the end of June 1996. The sales agreement is subject to certain conditions, some of which are outside the control of the Company. As a result, no assurance can be given that the proposed sale will be completed or, if completed, will be on the terms outlined herein. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Overview." Although the Company regularly engages in discussions with companies regarding potential acquisitions, it currently does not have any agreements or understandings relating to acquisitions other than the Niagara Acquisition. THE OFFERING(1) <TABLE> <S> <C> Common Stock offered by The Company........... 12,500,000 shares The Selling 3,125,000 shares Stockholders......... Total............... 15,625,000 shares Common Stock offered U. S. Offering........ 12,500,000 shares International 3,125,000 shares Offering............. Total............... 15,625,000 shares Common Stock to be outstanding after the Offering............... 26,925,272 shares(2) Use of proceeds......... The net proceeds to be received by the Company from the Offering will be used to repay certain outstanding bank indebtedness and to redeem a portion of the Notes issued by the Company's principal operating subsidiary and to pay certain fees. The Company will not receive any proceeds from the sale of shares by the Selling Stockholders. See "Use of Proceeds." Proposed NYSE symbol.... AGP </TABLE> - -------- (1) Does not include the Underwriters' over-allotment option granted by the Selling Stockholders for an aggregate of 2,343,750 shares of Common Stock. (2) Does not include 2,156,000 shares of Common Stock reserved for issuance upon the exercise of options outstanding as of June 5, 1996 and granted to members of management pursuant to the Company's 1992 Key Employees Stock Option Plan (the "1992 Stock Plan") or 2,100,000 shares of Common Stock reserved for issuance under the Company's 1996 Key Employees Stock Incentive Plan (the "1996 Stock Plan"), the Non-Employee Director Stock Option Plan (the "Non-Employee Director Plan") and the Management Stock Purchase Plan. See "Management--Stock Options." SUMMARY FINANCIAL DATA The summary historical consolidated financial data set forth below for the years ended December 31, 1993, 1994 and 1995 have been derived from, and are qualified by reference to, the audited consolidated financial statements of the Company included elsewhere in this Prospectus. The summary historical consolidated financial data set forth below for the three months ended March 31, 1995 and 1996 have been derived from the unaudited consolidated financial statements of the Company, which, in the opinion of the Company, reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation. Results for the three months ended March 31, 1996 are not necessarily indicative of results for the full year. The summary historical consolidated and unaudited pro forma financial data set forth below should be read in conjunction with, and are qualified by reference to, "Selected Historical Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Unaudited Pro Forma Financial Data" and the audited consolidated financial statements and accompanying notes thereto included elsewhere in this Prospectus. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31, ----------------------------------------- ----------------------------------- HISTORICAL HISTORICAL ------------------------------ ----------------- PRO FORMA PRO FORMA 1993 1994 1995 1995(1) 1995 1996 1996(2) -------- -------- -------- --------- ------- -------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> INCOME STATEMENT DATA(3)(4)(5): Net sales............... $104,277 $120,443 $259,341 $617,167 $47,691 $121,418 $149,735 Cost of sales(6)........ 88,491 113,394 211,814 481,804 42,394 97,889 121,245 -------- -------- -------- -------- ------- -------- -------- Gross profit............ 15,786 7,049(6) 47,527 135,363 5,297 23,529 28,490 Selling, general and administrative expenses............... 10,765 10,615 18,545 74,678(7) 2,749 11,026 14,493(7) Non-recurring compensation charge(8).............. -- -- 27,632 3,367 -- -- -------- -------- -------- -------- ------- -------- -------- Income (loss) from operations............. 5,021 (3,566) 1,350 57,318 2,548 12,503 13,997 Interest expense........ 3,320 4,560 13,657 30,953 1,656 12,542 7,738 Other (income) expense.. (167) (90) (735) (642) (65) (269) (265) -------- -------- -------- -------- ------- -------- -------- Income (loss) before income taxes........... 1,868 (8,036) (11,572) 27,007 957 230 6,524 Provision for (benefit from) income taxes..... 64 (488) (6,538) 9,814 366 102 2,596 -------- -------- -------- -------- ------- -------- -------- Income (loss) before extraordinary item..... 1,804 (7,548) (5,034) 17,193 591 128 3,928 Extraordinary loss from extinguishment of debt, net of income tax benefit................ -- -- (9,652) -- -- -- -- -------- -------- -------- -------- ------- -------- -------- Net income (loss)....... $ 1,804 $ (7,548) $(14,686) $ 17,193 $ 591 $ 128 $ 3,928 ======== ======== ======== ======== ======= ======== ======== Pro forma earnings (loss) per share(9).... $ (.95) $ .59 $ .01 $ .14 ======== ======== ======== ======== Pro forma weighted average number of common shares and common share equivalents outstanding(9)......... 15,540 29,063 16,562 29,063 ======== ======== ======== ======== OTHER DATA: Depreciation and amortization........... $ 159 $ 942 $ 4,248 $ 17,982 $ 528 $ 3,020 $ 3,803 Capital expenditures.... 1,656 942 5,640 13,688 2,530 2,321 3,087 </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 ------------------------- PRO FORMA ACTUAL AS ADJUSTED(10) -------- --------------- <S> <C> <C> BALANCE SHEET DATA: Working capital...................................... $109,238 $114,799 Total assets......................................... 500,794 541,933 Long-term debt, less current maturities(11).......... 440,453 319,295 Stockholders' equity (deficit)(12)................... (66,293) 100,650 </TABLE> (footnotes on next page) (1) The summary unaudited pro forma income statement and other data for the year ended December 31, 1995 give pro forma effect, in the manner described under "Unaudited Pro Forma Financial Data" and the notes thereto, to: (i) the Transactions, (ii) the Globe-Weis Acquisition (as defined), (iii) the pending disposal of the Personalizing Division, (iv) the transactions described under "The Recapitalization," (v) refinancing of the Bank Credit Agreement, (vi) the Niagara Acquisition and (vii) the Offering (assuming an initial public offering price of $16.00 per share) and the application of the net proceeds therefrom as described under "Use of Proceeds," as if each had occurred on January 1, 1995. The summary pro forma income statement data and other data do not (i) purport to represent what the Company's results of operations actually would have been if the foregoing transactions had actually occurred as of such date or what such results will be for any future periods or (ii) give effect to certain non- recurring charges expected to result from items (i), (v) and (vii) above, including certain non-cash compensation charges directly related to the Acquisition and an extraordinary charge for the write-off of deferred financing fees and direct expenses to retire and refinance existing Company debt. The final allocation of purchase price and the resulting amortization expense in the income statement data may differ somewhat from the preliminary estimates for the reasons described in more detail in "Unaudited Pro Forma Financial Data" and in Note 3 of the Notes to Consolidated Financial Statements of the Company. (2) The summary unaudited pro forma income statement and other data for the three months ended March 31, 1996 give pro forma effect, in the manner described under "Unaudited Pro Forma Financial Data" and the notes thereto, to: (i) the pending disposal of the Personalizing Division, (ii) the transactions described under "The Recapitalization," (iii) refinancing of the Bank Credit Agreement, (iv) the Niagara Acquisition and (v) the Offering (assuming an initial public offering price of $16.00 per share) and the application of the net proceeds therefrom as described under "Use of Proceeds," as if each had occurred on January 1, 1996. (3) Effective July 5, 1994, the Company acquired the assets and assumed certain liabilities of SCM Office Supplies, Inc. (the "SCM Acquisition"). The acquisition has been accounted for under the purchase method of accounting and, accordingly, the operating results have been included with the Company's results since the date of acquisition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 3 of the Notes to Consolidated Financial Statements of the Company included herein. (4) Effective August 16, 1995, the Company acquired the inventories and certain equipment of the file folder and hanging file product lines of the Globe-Weis office products division ("Globe-Weis") of Atapco (as defined) (the "Globe-Weis Acquisition"). The acquisition has been accounted for under the purchase method of accounting and, accordingly, the operating results have been included in the Company's results since the date of acquisition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," Note 3 of the Notes to Consolidated Financial Statements of the Company and the audited statements of Net Sales and Cost of Sales of Globe-Weis included herein. (5) Effective October 31, 1995, the Company acquired Williamhouse in the Acquisition. The Acquisition has been accounted for under the purchase method of accounting and accordingly, the operating results of Williamhouse, except for the Personalizing Division, for the two-month period ended December 31, 1995 have been included in the Company's results for the year ended December 31, 1995. The Personalizing Division was held for sale at December 31, 1995 and March 31, 1996. As such, the operating results of the Personalizing Division are excluded from the results of operations for the two-month period ended December 31, 1995 (period subsequent to the Acquisition) and the three months ended March 31, 1996. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," Note 3 of the Notes of Consolidated Financial Statements of the Company and the audited financial statements of Williamhouse included herein. (6) Inventory cost is determined using the last-in, first-out ("LIFO") method of valuation. Gross profit in the fourth quarter of 1994 was adversely impacted by a significant increase in paper prices, resulting in a $5.4 million charge for LIFO in advance of the Company's raising selling prices in the first quarter of 1995. Beginning in January 1995, the Company adopted new pricing policies enabling it to set product prices consistent with the Company's cost of paper at the time of shipment. The Company believes that it is now able to price its products so as to minimize the impact of price volatility on dollar margins. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview." (7) Includes charges under a one-year consulting services agreement to be entered into in connection with the Niagara Acquisition of $5.0 million and $1.25 million for the year ended December 31, 1995 and the three months ended March 31, 1996, respectively. (8) Includes non-cash stock option compensation charges of $24.3 million directly related to the Acquisition as well as other non-recurring cash and non-cash charges aggregating $3.3 million. See Note 9 of Notes to Consolidated Financial Statements of the Company included herein. (9) Pro forma earnings (loss) per common share and pro forma weighted average number of shares and share equivalents outstanding have been adjusted to give effect to (i) a 8.1192-for-one stock split of all existing Common Stock and Common Stock equivalents and (ii) the conversion of all shares of Preferred Stock and Preferred Stock equivalents into shares of Common Stock and Common Stock equivalents at the assumed offering price per share to the public. Common Stock equivalents were determined using the treasury stock method. (10) The unaudited "Pro Forma As Adjusted" balance sheet data at March 31, 1996 gives pro forma effect to (i) the transactions described under "The Recapitalization," (ii) the refinancing of the Bank Credit Agreement, (iii) the Niagara Acquisition and (iv) the sale by the Company of 12,500,000 shares of Common Stock pursuant to the Offering, assuming an initial public offering price of $16.00 per share and the application of the estimated net proceeds to the Company therefrom as described under "Use of Proceeds," as if each had occurred on such date. See "Unaudited Pro Forma Financial Data." (11) Does not reflect the expected repayment of debt from the estimated proceeds from the sale of the Personalizing Division. (12) Includes $4.5 million to pay the liquidation preference, including the return of original cost, of the Company's Class P Common Stock and $70.6 million to redeem a portion of its Preferred Stock. See "Dividend Policy."
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. References in this Prospectus to the Company shall, as the context requires, refer to Stage Stores, Inc. ("Stage Stores"), which was previously known as Apparel Retailers, Inc., together with its wholly-owned subsidiaries, including Specialty Retailers, Inc. ("SRI"). References to a particular year are to the Company's fiscal year which is the 52 or 53 week period ending on the Saturday closest to January 31 of the following calendar year (e.g., a reference to "1995" is a reference to the fiscal year ended February 3, 1996). The term pro forma refers to the basis described under "Unaudited Pro Forma Combined Financial Data." In addition, unless otherwise indicated, (i) the information in this Prospectus reflects a .94727 for 1 reverse stock split of the common stock to be consummated prior to the Offering and (ii) the information contained herein assumes that the Underwriters' over-allotment option is not exercised. See "Underwriting." The Company The Company operates the store of choice for well known, national brand name family apparel in over 200 small towns and communities across the central United States. The Company has recognized the high level of brand awareness and demand for fashionable, quality apparel by consumers in small markets and has identified these markets as a profitable and underserved niche. The Company has developed a unique franchise focused on small markets, differentiating itself from the competition by offering a broad range of merchandise with a high level of customer service in convenient locations. The Company currently operates 314 stores through its "Stage", "Bealls" and "Palais Royal" trade names in 20 states throughout the central United States. Approximately 77% of these stores are located in small markets and communities with as few as 4,000 people. The Company's store format (averaging approximately 18,000 total selling square feet) and merchandising capabilities enable the Company to operate profitably in small markets. The remainder of the Company's stores operate in metropolitan areas, primarily in suburban Houston. For the twelve months ended February 3, 1996, the Company would have had pro forma sales and income before extraordinary item of $742.4 million and $20.7 million, respectively. Stage Stores' merchandise offerings include a carefully edited but broad selection of branded, moderately priced, fashion apparel, accessories, fragrances and cosmetics and footwear for women, men and children. Over 85% of 1995 sales consisted of branded merchandise, including nationally recognized brands such as Levi Strauss, Liz Claiborne, Chaps/Ralph Lauren, Calvin Klein, Guess, Hanes, Nike, Reebok and Haggar Apparel. In recent years, the Company has undertaken several initiatives to realize the full potential of its unique franchise in small markets, including (i) recruiting a new senior management team, (ii) embarking on a store expansion program to capitalize on available opportunities in new markets through new store openings and strategic acquisitions, (iii) continuing to refine the Company's retailing concept and (iv) closing unprofitable stores. As a result of these initiatives, the lower operating costs of small market stores, the benefits of economies of scale, and its highly automated facilities and sophisticated information systems, the Company has among the highest operating income margins in the apparel retailing industry. Competitively Well Positioned As a result of its small market focus, Stage Stores generally faces less competition for brand name apparel because consumers in small markets generally have only been able to shop for branded merchandise in distant regional malls. In those small markets where the Company does compete for brand name apparel sales, such competition generally comes from local retailers, small regional chains and, to a lesser extent, national department stores. The Company believes it has a competitive advantage over local retailers and smaller regional chains due to its (i) economies of scale, (ii) strong vendor relationships, (iii) proprietary credit card program and (iv) sophisticated operating systems. The Company believes it has a competitive advantage in small markets over national department stores due to its (i) experience with smaller markets, (ii) ability to effectively manage merchandise assortments in a small store format and (iii) established operating systems designed for efficient management within small markets. In addition, due to minimal merchandise overlap, Stage Stores generally does not directly compete for branded apparel sales with national discounters such as Wal-Mart. Key Strengths The following factors serve as the Company's key strengths and distinguishing characteristics: Ability to Operate Profitably in Smaller Markets. In targeting small markets, the Company has developed a store format, generally ranging in size from 12,000 to 30,000 square feet, which is smaller than typical department stores yet large enough to offer a well edited, but broad selection of merchandise. This format, together with economies of scale in buying and merchandising, information systems, distribution and advertising, has enabled the Company to operate profitably in small markets. In 1995, the Company's small market stores open for at least one year generated a store contribution (operating profit before allocation of corporate overhead) as a percentage of sales of 18%, as compared to 12% for its larger market stores. Benefits of Strong Vendor Relationships. The Company's large store base offers major vendors a unique vehicle for accessing multiple small markets in a cost effective manner. The proliferation of media combined with the significant marketing efforts of these vendors has created significant demand for branded merchandise. However, the financial and other limitations of many local retailers have left vendors of large national brands with limited access to such markets. Further, these vendors, in order to preserve brand image, generally do not sell to national discounters. As a result, the Company is able to carry branded merchandise frequently not carried by local competitors. Additionally, the Company continuously seeks to expand its vendor base and has recently added nationally recognized brand names such as Polo, Dockers for Women, and Oshkosh, and fragrances by Elizabeth Arden, Liz Claiborne and Perry Ellis. In addition, the Company has successfully increased the participation by key vendors in joint marketing programs to a level that the Company believes exceeds the standard programs provided to its smaller, regional competitors. Effective Merchandising Strategy. The Company's merchandising strategy is based on an in-depth understanding of its customers and is designed to accommodate the particular demographic profile of each store. Store layouts and visual merchandising displays are designed to create a friendly, modern, department store environment, which is frequently not found in small markets. The Company's strategy focuses on moderately priced merchandise categories of women's, men's and children's apparel, accessories, fragrances, cosmetics and footwear, which have traditionally experienced attractive margins. The Company utilizes a sophisticated merchandise allocation and transfer system which is designed to maximize in-stock positions, increase sales and reduce markdowns. The Company believes that the combination of the size and experience of its buyer group, strong vendor relationships, effective merchandising systems and participation in the Associated Merchandising Corporation ("AMC") cooperative buying service enable it to compete effectively on both price and selection in its markets. Focused Marketing Strategy. The Company's primary target customers are women between the ages of 20 and 55 with household incomes over $25,000 who are the primary decision makers for family clothing purchases. The Company uses a multi-media advertising approach to position its stores as the local destination for fashionable, brand name merchandise. In addition, the Company heavily promotes its proprietary credit card in order to create customer loyalty and to effectively identify its core customers. The Company believes it has a high level of customer awareness due to the small size of its markets, its aggressive advertising strategy and well developed corporate programs designed to encourage a high level of customer interaction and employee participation in local community activities. Benefits of Proprietary Credit Card Program. The Company aggressively promotes its proprietary credit card and, as a result, the Company believes it experiences a higher percentage of proprietary credit card sales (55.6% of net sales in 1995) than most retailers. The Company considers its credit card program to be a critical component of its retailing concept because it (i) enhances customer loyalty by providing a service that few local and regional competitors or discounters offer, (ii) allows the Company to identify and regularly contact its best customers and (iii) creates a comprehensive database that enables the Company to implement detailed, segmented marketing and merchandising strategies for each store. Emphasis on Customer Service. A primary corporate objective is to provide excellent customer service through stores staffed with highly trained and motivated sales associates. Each sales associate is evaluated based upon the attainment of specific customer service standards such as offering prompt assistance, suggesting complementary items, sending thank-you notes to charge customers and establishing consistent contact with customers in order to create the associate's own customer base. The Company continuously monitors the quality of its service by making over 3,000 calls each month to credit card customers who have recently made a purchase. The results of these surveys are used to determine a portion of each store manager's bonus. The Company further extends its service philosophy to the design of the store, including installing call buttons in its fitting rooms and, in its small market stores, locating the store manager on the selling floor to increase accessibility to customers. Sophisticated Operating and Information Systems. The Company supports its retail concept with highly automated and integrated systems in areas such as merchandising, distribution, sales promotions, credit, personnel management, store design and accounting. These systems have enabled the Company to effectively manage its inventory, improve sales productivity and reduce costs, and have contributed to its relatively high operating income margins. Growth Strategy In order to fully realize the potential of its unique market position and proven ability to operate profitably in small markets, the Company has initiated an aggressive growth strategy to capitalize on available opportunities in new markets through new store openings and strategic acquisitions. The Company opened 23 new stores and 45 acquired stores in 1995, has opened 25 new stores and acquired 34 stores to date in 1996, and expects to open approximately 10 additional new stores during the remainder of 1996. The Company's goal is to open at least 55 new stores in 1997. The following are the primary elements of the Company's strategy for profitable growth: New Store Openings in Smaller Markets. As part of its ongoing expansion program, the Company has identified over 600 additional markets in the central United States and contiguous states which meet its demographic and competitive criteria. All of these target markets are smaller communities, where the Company has historically experienced its highest profit margins. Strategic Acquisitions. The Company believes that it can benefit from strategic acquisitions by (i) applying its buying and merchandising capabilities, sales promotion techniques and customer service methods, (ii) introducing its proven management systems, and (iii) consolidating overhead functions. This strategy has been successfully demonstrated by the Company's acquisition of 45 stores from Beall-Ladymon, Inc. ("Beall-Ladymon") in 1994 and the subsequent reopening of the stores in the first quarter of 1995 under the Stage name. In 1993, the year prior to their acquisition, the Beall-Ladymon stores generated sales of approximately $53.4 million, whereas the newly opened Stage stores in the same locations generated sales for the twelve months ended August 3, 1996 of $95.0 million, an increase of 78%. Over the same periods, store contribution more than doubled. In June 1996, the Company acquired Uhlmans Inc. ("Uhlmans"), a privately held retailer with 34 locations in Ohio, Indiana and Michigan, where the Company previously had no stores (the "Uhlmans Acquisition"). These stores are of similar size and merchandise content to the Company's existing stores and are compatible with the Company's retailing concept and growth strategy. For 1995, Uhlmans had net sales of $59.7 million and operating income of $2.2 million. The Company believes significant opportunities are available to improve Uhlmans' financial results through the expansion of certain merchandise categories, the Company's lower merchandising costs, increased proprietary credit card-based sales, the implementation of the Company's operating systems and the elimination of duplicative central and administrative overhead. Expansion to Micromarkets. The Company recently began targeting its small market retailing concept towards communities with populations from 4,000 to 12,000 ("micromarkets"). These efforts are designed to capitalize on the Company's favorable operating experience in markets of this size. Stage Stores believes that micromarkets may offer a significant avenue for potential growth, because the Company is able to apply its existing successful store model in those micromarkets due to its ability to scale its store concept to the appropriate size (less than 12,000 gross square feet), the generally lower levels of competition and low labor and occupancy costs. The Company has identified approximately 1,200 potential micromarkets in the central United States and contiguous states which meet these criteria. The Offering Common Stock offered by: The Company (1) 10,000,000 shares Selling Stockholders 1,000,000 shares (1) Total 11,000,000 shares ============= Common Stock to be outstanding after the Offering (2) 22,520,892 shares Use of proceeds The net proceeds to be received by the Company from the Offering are estimated to be approximately $139.7 million and will be used (i) to purchase for cash up to all of the Company's outstanding 12-3/4% Senior Discount Debentures due 2005 (the "Senior Discount Debentures") in a tender offer (the "Tender Offer") and to pay a consent fee for elimination or amendment of certain covenants in the Senior Discount Debentures for an aggregate amount of approximately $135.0 million, (ii) to pay consent fees for amendments to certain covenants in the indebtedness of SRI and (iii) to pay a $2.0 million fee to terminate the Professional Services Agreement (as defined). See "Use of Proceeds" and "Certain Relationships and Related Transactions." The Company will not receive any of the proceeds from the sale of shares by the Selling Stockholders. Proposed Nasdaq National "STGE" Market symbol - ------------- (1) Assumes that the Underwriters' over-allotment option is not exercised. (2) Includes 1,351,967 shares issuable upon the conversion of non-voting Class B Common Stock, $0.01 par value per share (the "Class B Common Stock"), which are convertible into Common Stock on a share-for-share basis, subject to certain restrictions. See "Description of Capital Stock." Excludes 1,511,523 shares that may be issued upon the exercise of options granted pursuant to the 1993 Stock Option Plan (as defined). See "Management--1993 Stock Option Plan." Prospective purchasers of the Common Stock offered hereby should carefully consider the "Risk Factors" immediately following this Prospectus Summary. The executive offices of the Company are located at 10201 Main Street, Houston, Texas 77025. The Company's telephone number is (713) 667-5601. Summary Consolidated Historical and Pro Forma Combined Financial and Operating Data The following table sets forth summary consolidated historical and pro forma combined financial and operating data of the Company for the periods indicated. The Company's summary consolidated historical financial data were derived from the Company's Consolidated Financial Statements. The summary pro forma combined financial data were derived from the Unaudited Pro Forma Combined Financial Data of the Company and give effect to the Uhlmans Acquisition, including the issuance of the SRPC Notes (as defined), and the Offering (including a .94727 for 1 reverse stock split of the common stock to be consummated prior to the Offering). The information in the table should be read in conjunction with "Selected Consolidated Historical Financial and Operating Data", "Management's Discussion and Analysis of Financial Condition and Results of Operations", "Unaudited Pro Forma Combined Financial Data", the Company's Consolidated Financial Statements and the Financial Statements of Uhlmans, included elsewhere in this Prospectus. <TABLE> <CAPTION> Fiscal Year ----------------------------------------------------------------------------- Pro Forma 1991 1992 1993(1) 1994 1995(2) 1995 (2) ------------ ------------ ------------ ------------ ------------ ------------ (dollars in thousands, except per share and store data) <S> <C> <C> <C> <C> <C> <C> Statement of operations data: Net sales $447,142 $504,401 $557,422 $581,463 $682,624 $742,373 Gross profit 135,569 154,265 172,579 182,804 214,277 229,498 Selling, general and administrative expenses 116,403 129,193 135,011 134,715 159,625 168,936 Service charge income (3) 22,840 29,670 20,003 8,515 10,523 11,374 Store opening and closure costs 255 120 199 5,647 3,689 3,689 Operating income (4) 41,751 54,622 57,372 50,957 61,486 68,247 Net interest expense 33,407 31,771 36,377 40,010 43,989 34,713 Income before extraordinary item 3,961 12,235 13,426 6,630 10,730 20,673 Pro forma earnings per common share (5) -- -- -- -- -- 0.91 Margin and other data: Gross profit margin 30.3% 30.6% 31.0% 31.4% 31.4% 30.9% Selling, general and administrative expense rate 26.0% 25.6% 24.2% 23.2% 23.4% 22.8% Operating income margin (4) 9.3% 10.8% 10.3% 8.8% 9.0% 9.2% Adjusted operating income margin (6) 8.1% 8.7% 8.4% 9.2% 9.4% 9.4% Adjusted operating income (6) $ 36,064 $ 43,680 $ 46,828 $ 53,677 $ 63,996 $ 70,036 Depreciation and amortization 10,049 9,065 9,259 9,997 12,816 13,712 Capital expenditures 4,768 7,631 8,503 19,706 28,638 -- Store data: (7) Comparable store sales growth: Bealls/Stage (8) 4.1% 5.1% 7.2% 4.8% 3.3% -- Palais Royal (2.8)% (9.8)% 0.8% 1.7% 1.4% -- Total Company (9) 2.9% 1.8% 6.3% 4.1% 0.8%(10) -- Net sales per selling square foot: Bealls/Stage (8) $ 113 $ 118 $ 129 $ 138 $ 142 -- Palais Royal 228 191 200 205 203 -- Total Company (9) 138 138 149 157 157 -- Total selling square footage(11) 3,354 3,418 3,472 3,516 4,581 -- Number of stores open at end of period(12) 159 175 180 188 256 290 </TABLE> Six Months Ended -------------------------------------- Pro Forma July 29, August 3, August 3, 1995 1996 1996 ------------ ------------ ------------ Statement of operations data: Net sales $296,931 $345,927 $362,443 Gross profit 92,838 108,704 112,697 Selling, general and administrative expenses 70,877 84,335 86,425 Service charge income (3) 5,124 5,902 6,171 Store opening and closure costs 1,176 301 301 Operating income (4) 25,909 29,970 32,142 Net interest expense 21,365 24,054 18,091 Income before extraordinary item 2,659 3,520 8,563 Pro forma earnings per common share (5) -- -- 0.37 Margin and other data: Gross profit margin 31.3% 31.4% 31.1% Selling, general and administrative expense rate 23.9% 24.4% 23.8% Operating income margin (4) 8.7% 8.7% 8.9% Adjusted operating income margin (6) 8.5% 7.8% 8.0% Adjusted operating income (6) $ 25,134 $ 27,128 $ 29,031 Depreciation and amortization 5,721 6,844 7,148 Capital expenditures 16,786 15,183 -- Store data: (7) Comparable store sales growth: Bealls/Stage (8) 3.8% 7.7% -- Palais Royal 0.9% 6.2% -- Total Company (9) 0.5% 7.3% -- Net sales per selling square foot: Bealls/Stage (8) -- -- -- Palais Royal -- -- -- Total Company (9) -- -- -- Total selling square footage(11) 4,365 5,361 5,361 Number of stores open at end of period(12) 242 308 308 Balance sheet data (at end of period): Working capital $181,118 $204,808 Total assets 463,240 473,534 Total long-term debt 425,353 308,354 Stockholders' (deficit) equity (68,428) 56,451(13) Notes to Summary Consolidated Historical and Pro Forma Combined Financial and Operating Data (1) During 1993, Stage Stores was formed and concurrently became the direct parent of SRI when the existing stockholders of SRI exchanged all of their common stock for common stock of Stage Stores. Concurrent with the formation of Stage Stores, the Company completed the refinancing of its existing debt and preferred stock (the "Refinancing"). As a result of the Refinancing, the Company recorded an after-tax extraordinary charge of $16.2 million. (2) 1995 includes 53 weeks. (3) Service charge income for 1993, 1994 and 1995 decreased as compared to levels achieved during 1991 and 1992 due to the sale of accounts receivable to the SRI Receivables Master Trust (the "Trust") established as part of the Refinancing in which the Company adopted an accounts receivable securitization program (the "Accounts Receivable Program"). Without giving effect to the Accounts Receivable Program, service charge income for 1993, 1994 and 1995 would have been $32.5 million, $35.2 million and $41.3 million, respectively. For a complete summary of the impact of the Company's proprietary credit card program and the Accounts Receivable Program, see Note 2 to the Company's Consolidated Financial Statements, Note 6 below and "Management's Discussion and Analysis of Financial Condition and Results of Operations--General--Accounts Receivable Program." (4) Operating income and operating income margin decreased during 1994 compared to 1993 due primarily to the impact of the adoption of the Accounts Receivable Program (See Note 2 to the Company's Consolidated Financial Statements and Note 6 below) combined with a $5.2 million provision associated with the closure of a majority of the stores operated under the Fashion Bar name (the "Store Closure Plan") (substantially all of which were underperforming). See Note 4 to the Company's Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations." (5) Pro forma earnings per common share reflects the impact of a .94727 for 1 reverse stock split of the common stock to be consummated prior to the Offering. (6) Adjusted operating income represents operating income adjusted to eliminate store opening and closure costs, and the positive impact on operating income of the Company's proprietary credit card program (including the Accounts Receivable Program). Fiscal Year ---------------------------------------------------------- Pro Forma 1991 1992 1993 1994 1995 1995 --------- --------- ------------------ --------- --------- (in thousands) Operating income $41,751 $54,622 $57,372 $50,957 $61,486 $68,247 Plus: Store opening and closure costs 255 120 199 5,647 3,689 3,689 Less: Positive impact of proprietary credit card program on operating income 5,942 11,062 10,743 2,927 1,179 1,900 --------- --------- ------------------ --------- --------- Adjusted operating income $36,064 $43,680 $46,828 $53,677 $63,996 $70,036 ========= ========= ================== ========= ========= Six Months Ended ----------------------------- July 29, August 3, Pro Forma August 3, 1995 1996 1996 --------- --------- --------- Operating income $25,909 $29,970 $32,142 Plus: Store opening and closure costs 1,176 301 301 Less: Positive impact of proprietary credit card program on operating income 1,951 3,143 3,412 --------- --------- --------- Adjusted operating income $25,134 $27,128 $29,031 ========= ========= ========= The impact of the Company's proprietary credit card program (including the Accounts Receivable Program) on operating income is calculated as: (i) the reported service charge income less (ii) the servicing and bad debt costs reflected in the Company's selling, general and administrative expenses less (iii) the gain (or plus the loss) associated with the sale of receivables to the Trust. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--General--Accounts Receivable Program" and Note 7 to Selected Consolidated Historical Financial and Operating Data. Although adjusted operating income and adjusted operating income margin do not represent operating income or any other measure of financial performance under generally accepted accounting principles, the Company believes they are helpful in understanding the profitability of the Company's retailing operations prior to the impact of its credit card program, the Accounts Receivable Program and store opening and closure costs. (7) Store data exclude Bealls stores scheduled to be closed under the Bealls 1988 store closure program, except as otherwise noted in Note 12 below, and also exclude the Fashion Bar stores included in the Store Closure Plan. Comparable store sales growth and net sales per selling square foot for 1995 have been determined based on a comparable fifty-two week period. Sales are considered comparable after a store has been in operation fourteen months. Net sales per selling square foot are calculated for stores open the entire year. (8) Excludes for all the periods presented the six Bealls stores located on the border of Mexico which were adversely affected by the peso devaluation in 1994. Comparable stores sales growth and net sales per selling square foot for Bealls/Stage including these stores were: Fiscal Year ------------------------------------ Bealls/Stage 1991 1992 1993 1994 1995 ------ ------ ------ ------ ------ Comparable store sales growth 5.4% 6.7% 7.7% 4.6% 0.2% 0.3% Net sales per selling square foot $119 $125 $137 $146 $145 -- Six Months Ended ------------------------- July 29, August 3, Bealls/Stage 1995 1996 ------------ ------------ Comparable store sales growth 0.3% 7.7% Net sales per selling square foot -- -- (9) Total Company comparable store sales growth and net sales per selling square foot including the stores which were part of the Store Closure Plan were as follows: Fiscal Year ------------------------------------ Total Company 1991 1992 1993 1994 1995 ------ ------ ------ ------ ------ Comparable store sales growth 2.9% 1.8% 5.4% 3.2% 0.5% Net sales per selling square foot $138 $138 $143 $151 $150 Six Months Ended ------------------------- July 29, August 3, Total Company 1995 1996 ------------ ------------ Comparable store sales growth 0.4 6.8% Net sales per selling square foot -- -- (10) Excluding the six Bealls stores located on the border of Mexico which were adversely affected by the peso devaluation in 1994, total Company comparable store sales growth for 1995 would have been 3.0%. (11) Excludes data related to the stores which were included in the Store Closure Plan. Data is in thousands and is as of the end of the period. (12) Number of stores open at the end of each period presented also exclude stores in the Store Closure Plan. Stores open at the end of 1992 and 1993 included one and six stores, respectively, which were previously excluded under the Bealls 1988 store closure program. Such stores are only included in the Company's results of operations subsequent to their removal from the Bealls 1988 store closure program. Both the Store Closure Plan and the Bealls 1988 store closure program were substantially completed before the end of 1995. (13) Reflects non-recurring charges, net of tax, totalling approximately $14.8 million in connection with the early retirement of the Senior Discount Debentures and the write-off of related debt issue costs, the payment of consent fees for amendments to certain covenants in the indebtedness of SRI and the termination of the Professional Services Agreement (as defined).
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+PROSPECTUS SUMMARY The following is a summary of certain information contained elsewhere in this Prospectus. Reference is made to, and this summary is qualified in its entirety by, the more detailed information and supplemental combined financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless the context otherwise requires, (i) the "Company" means Associates First Capital Corporation and its consolidated subsidiaries after giving effect to the recontribution by Ford of certain non-U.S. subsidiaries described below under "The Company", (ii) "ACONA" means Associates Corporation of North America, the Company's principal operating subsidiary, (iii) "Ford" means Ford Motor Company and its consolidated subsidiaries (other than the Company) and (iv) the information contained in this Prospectus assumes that the Class A Common Stock offered hereby will be sold in the Offerings at $26.50 per share (the mid-point of the range set forth on the cover page of this Prospectus) and that the Underwriters' over-allotment options are not exercised. Unless otherwise defined herein, capitalized terms used in this summary have the respective meanings ascribed to them elsewhere in this Prospectus. For a description of certain terms and phrases in this Prospectus, see "Glossary" at the end of this Prospectus. Terms and phrases set forth in the Glossary are printed in bold face type the first time they appear in this Prospectus. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS". THE COMPANY The Company is a leading, diversified consumer and commercial finance organization which provides finance, leasing and related services to approximately 9.4 million individual consumers and 143,000 businesses in the United States and internationally. At or for the year ended December 31, 1995, the Company had aggregate NET FINANCE RECEIVABLES of $39.7 billion, total assets of $41.3 billion, net earnings of $723.1 million and stockholder's equity of $4.8 billion. The Company, through its predecessors, commenced operations in 1918 and was acquired by Ford in 1989. The Company believes that it is the second largest INDEPENDENT FINANCE COMPANY in the United States based on aggregate net finance receivables outstanding. The Company's operations outside the United States are conducted principally in Japan ($2.1 billion of net finance receivables) and are also conducted in, among other places, the United Kingdom and Canada. The current credit ratings for the long-term debt of ACONA, through which the Company conducts substantially all of its funding activities, are Aa3 and AA- as determined by MOODY'S and STANDARD & POOR'S, respectively, and those of the Company are A1 and A+. Through various economic conditions and interest rate environments, the Company has produced growth in pre-tax earnings for twenty-one consecutive years. As the following graph depicts, over this period, pre-tax earnings have grown at a compound annual rate in excess of 22% to $1.2 billion for the year ended December 31, 1995. Such growth resulted principally from internal expansion (through, among other things, branch openings, new lines of business and geographic expansion) as well as selective acquisitions. PRE-TAX EARNINGS TREND(1) (DOLLARS IN MILLIONS) [GRAPH] (1) 1990 and 1991 pre-tax earnings exclude non-recurring interest expense. See the immediately following financial information and note (4) thereto. The table below sets forth certain financial information (dollars in millions): <TABLE> <CAPTION> YEAR ENDED OR AT DECEMBER 31(1) --------------------------------------------------------- 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- --------- <S> <C> <C> <C> <C> <C> CONSUMER NET FINANCE RECEIVABLES: Home equity lending.............. $ 14,386.2 $ 12,349.9 $ 10,619.7 $ 9,630.1 $ 8,249.1 Personal lending and retail sales finance....................... 6,117.6 5,304.2 4,354.2 3,640.2 3,224.2 Credit card...................... 4,818.6 3,915.5 3,104.8 2,614.6 2,668.4 COMMERCIAL NET FINANCE RECEIVABLES: Truck and truck trailer.......... $ 7,648.4 $ 6,681.5 $ 5,540.0 $ 4,350.7 $ 4,000.3 Equipment........................ 3,827.2 2,987.4 2,464.5 2,290.6 2,157.9 Manufactured housing(2).......... 2,034.1 1,669.2 1,290.2 983.9 697.2 Other(3)......................... 416.3 336.5 345.3 324.7 269.8 TOTAL NET FINANCE RECEIVABLES...... 39,702.5 33,685.7 28,294.7 24,371.0 21,672.8 TOTAL ASSETS....................... 41,303.9 35,283.5 30,039.6 25,996.3 23,523.5 STOCKHOLDER'S EQUITY............... 4,801.1 4,436.8 3,774.3 3,231.1 3,061.0 NET EARNINGS(4).................... 723.1 603.3 494.0 410.1 311.9 RETURN ON AVERAGE ASSETS(4)........ 1.89% 1.85% 1.76% 1.66% 1.40% RETURN ON AVERAGE EQUITY(4)........ 15.66 14.70 14.10 13.04 12.49 RETURN ON AVERAGE TANGIBLE EQUITY(4)........................ 21.90 21.71 22.31 22.15 24.59 </TABLE> - --------------- (1) Amounts in this table reflect the inclusion of certain non-U.S. subsidiaries of Ford which are expected to be recontributed to the Company prior to the completion of the Offerings. Such subsidiaries were owned by the Company prior to its acquisition by Ford and have been continuously managed by the Company since such acquisition. These subsidiaries had total assets of $4.1 billion at December 31, 1995. See "-- Relationship with Ford" and "The Company". (2) Manufactured housing operations are discussed in this Prospectus as part of the Company's commercial activities because the marketing and management of manufactured housing products are more closely related to commercial finance products. See "Business -- Commercial Finance". Except as otherwise indicated, the dollar amount of manufactured housing receivables is included in the dollar amount of total consumer net finance receivables throughout this Prospectus, because the credit and related risks of the manufactured housing business are similar to those of the Company's consumer finance business. Similarly, manufactured housing receivables are included with consumer net finance receivables in determining the percentage of total net finance receivables which are consumer net finance receivables. (3) Includes auto fleet leasing and management, small business administration lending, relocation services and auto club and roadside assistance services. See "Business -- Commercial Finance -- Other Commercial Activities". (4) In 1991, certain debt related to Ford's acquisition of the Company's operation in Japan was converted to equity. Non-recurring interest expense related to such debt was $39.2 million and $54.2 million in 1991 and 1990, respectively. If 1991 results treated the converted debt as equity and excluded the related non-recurring interest expense consistent with subsequent years, net earnings would have been $351.1 million and the return on average assets, average equity and average tangible equity would have been 1.58%, 12.29% and 21.56%, respectively. In addition, if 1990 results excluded the related non-recurring interest expense, pre-tax earnings would have been $493.7 million. CONSUMER FINANCE The Company's consumer finance business represents approximately $27.6 billion, or 70%, of its 1995 year-end net finance receivables. HOME EQUITY LOANS account for the largest share, or 52%, of the Company's consumer finance portfolio based on outstanding net finance receivables at December 31, 1995. In addition, the Company offers secured and unsecured personal loans and purchases retail sales finance contracts from consumer goods retailers. The Company also provides REVOLVING CREDIT through its VISA(R) and MasterCard(R) bankcard and PRIVATE LABEL CREDIT CARD businesses. In addition, the Company sells a variety of credit-related and other specialized insurance products to its consumer finance customers. At December 31, 1995, the Company had approximately 9.4 million individual consumer finance customers spanning a wide range of income levels, age groups and credit histories. The Company markets its consumer finance products through a number of different channels of distribution, including its network of over 1,400 domestic branch offices and 400 international branch offices as well as its centralized lending operations. The Company believes that its domestic branch system is the largest consumer finance branch system in the United States. In Japan, the Company's branch system and net finance receivables have been growing in recent years at rates in excess of the Company's overall rates of growth, and the Company believes that its international markets offer significant opportunities for future growth. The Company believes that its domestic and international branches enable it to attract, service and retain customers through personal relationships with branch employees. COMMERCIAL FINANCE The Company's commercial finance business, which represents $12.1 billion, or 30%, of its 1995 year-end net finance receivables, consists of a variety of retail and WHOLESALE FINANCING and leasing products and services for heavy-duty (Class 8) and medium-duty (Classes 3 through 7) trucks and truck trailers, construction and material handling equipment and other industrial equipment. The Company believes that it is the leading independent source of financing for heavy-duty trucks, truck trailers and heavy construction equipment in the United States. The Company also engages in a number of other commercial activities, including auto fleet leasing and management, small business administration lending, relocation services and auto club and roadside assistance services. In addition, the Company's commercial operations' staff manages its $2.0 billion portfolio of MANUFACTURED HOUSING receivables (which for financial reporting purposes are treated as consumer receivables). The Company also sells a variety of credit-related and other specialized insurance products to its commercial finance customers. At December 31, 1995, the Company had approximately 143,000 commercial finance customers ranging from large corporate customers to small, individually-owned businesses. The Company provides truck and truck trailer financing and leasing services from 39 branch offices in the United States and Canada, and provides equipment financing and leasing services through 19 branch offices in the United States, Mexico and the United Kingdom and, in the case of material handling and certain other equipment, from two centralized lending and service operations. Manufactured housing financing is provided from five regional offices and 14 sales purchase offices, and fee-based services are provided from centralized locations. STRATEGY The Company believes that its consistent growth in profits has resulted from the balanced pursuit of asset and revenue growth and risk and expense control. The Company believes that the following operating disciplines have been key to its success: (i) focusing employees on growth and profitability through incentives, (ii) maintaining strict credit underwriting standards and collection policies to reduce losses, (iii) controlling operating expenses and (iv) sourcing funds on a cost effective basis. The Company believes that adherence to these disciplines has created a receivables portfolio that is diversified by market, geography, customer, maturity and product. As a result, the Company believes that it has been able to reduce its exposure to adverse economic developments in any particular market or region. The Company's business objective is to continue to achieve consistent profitable growth based upon the foregoing operating disciplines, regardless of economic conditions and interest rate environments. The Company seeks to achieve this goal by (i) expanding its existing businesses by developing new product lines in its core businesses and expanding its flexible delivery systems, (ii) identifying and entering new markets with strong profit potential, (iii) providing superior customer service through building long-term relationships and maintaining an intimate knowledge of its business segments, (iv) employing proven technology to reduce costs and enhance product delivery and portfolio management and (v) pursuing selective acquisitions designed to leverage operating costs, increase market share, introduce new product lines and fuel growth. The Company believes that its strong, experienced management team has developed a disciplined operating philosophy and has defined and implemented a distinct business strategy in each of the Company's diverse business units. Management believes that employees' commitment to a distinct culture and set of core values distinguishes the Company from its competitors. The Company seeks to reinforce its culture and core values to all employees through extensive training, incentive programs and operating controls at every level. The Company believes that maintaining its distinct culture, core values and strong management at every level will continue to be a key element of the Company's future strategy. THE OFFERINGS <TABLE> <S> <C> Class A Common Stock Offered(1): United States Offering........ 51,000,000 shares International Offering........ 9,000,000 shares Total................. 60,000,000 shares Common Stock Outstanding After the Offerings(1)(2): Class A Common Stock.......... 85,883,019 shares Class B Common Stock.......... 253,601,830 shares Total................. 339,484,849 shares Use of Proceeds................. The net proceeds to the Company from the offering made hereby in the United States (the "U.S. Offering") and the concurrent international offering (the "International Offering" and, together with the U.S. Offering, the "Offerings"), are estimated to be $1.51 billion ($1.74 billion if the Underwriters' over-allotment options are exercised in full), all of which is expected to be used to reduce short-term indebtedness of the Company. See "Use of Proceeds". New York Stock Exchange Symbol for Class A Common Stock...... AFS Dividends; Voting Rights; Conversion.................... The holders of CLASS A COMMON STOCK and CLASS B COMMON STOCK (collectively, "Common Stock") share ratably on a per share basis in all dividends and other distributions declared by the board of directors; however, the holders of Class A Common Stock are entitled to one vote per share and holders of Class B Common Stock are entitled to five votes per share. See "Description of Capital Stock -- Common Stock -- Voting Rights". Under certain circumstances, shares of Class B Common Stock convert or are convertible into an equivalent number of shares of Class A Common Stock. See "-- Relationship with Ford" and "Description of Capital Stock -- Common Stock -- Conversion". Controlling Stockholder......... For information regarding the Company's controlling stockholder, see "-- Relationship with Ford" below. </TABLE> - --------------- (1) Excludes up to 7,650,000 shares and 1,350,000 shares subject to over-allotment options granted by the Company to the U.S. Underwriters and the International Underwriters, respectively. See "Underwriting". (2) Excludes 204,200 shares of Class A Common Stock reserved for issuance pursuant to certain employee benefit plans. See "Management -- Additional Material Employee Compensation Plans and Agreements -- Long-Term Equity Compensation Plan". DIVIDEND POLICY The Company's board of directors currently intends to declare quarterly dividends on both the Class A Common Stock and Class B Common Stock. It is expected that the first quarterly dividend payment will be $0.10 per share (a rate of $0.40 annually), with the initial dividend to be declared and paid in the third quarter of 1996. The declaration and payment of dividends by the Company are subject to the discretion of its board of directors. Any determination as to the payment of dividends will depend upon, among other things, general business conditions, the Company's financial results, contractual, legal and regulatory restrictions regarding the payment of dividends by the Company's subsidiaries, the credit ratings of the Company and ACONA and such other factors as the board of directors may consider to be relevant. See "Risk Factors -- Limitations Upon Liquidity and Capital Raising -- Limitations upon the payment of dividends" and "-- Holding Company Structure". The Company paid cash dividends to Ford of $226.0 million, $288.1 million and $318.0 million during the years ended December 31, 1993, 1994 and 1995, respectively. The Company paid a dividend of $1.75 billion to its immediate parent, Ford FSG, Inc., an indirect, wholly-owned subsidiary of Ford ("FFSG"), on February 8, 1996 in the form of an intercompany note (which the Company paid on April 2, 1996), and also paid a cash dividend of $100.0 million to FFSG on March 29, 1996. In 1993, 1994 and 1995, Ford made cash capital contributions to the Company of $200.0 million, $215.1 million and $200.0 million, respectively. Thus, the dividends historically paid by the Company are not indicative of its future dividend policy. RELATIONSHIP WITH FORD The Company is an indirect, wholly-owned subsidiary of Ford. Upon completion of the Offerings, Ford will beneficially own 30.1% of the outstanding Class A Common Stock (27.3% if the Underwriters' over-allotment options are exercised in full) and 100% of the outstanding Class B Common Stock. Accordingly, Ford will beneficially own Common Stock representing in the aggregate 95.6% of the combined voting power of all of the outstanding Common Stock (94.9% if the Underwriters' over-allotment options are exercised in full) and will continue to have the ability to direct the election of members of the board of directors of the Company and exercise a controlling influence over the business and affairs of the Company. Ford has advised the Company that its current intent is to continue to hold all of the Common Stock beneficially owned by it following the Offerings. However, Ford is not subject to any contractual obligation to retain its controlling interest, except that Ford has agreed not to sell or otherwise dispose of any shares of Common Stock of the Company for a period of 180 days after the date of this Prospectus without the prior written consent of Goldman, Sachs & Co. See "Underwriting". As a result, there can be no assurance concerning the period of time during which Ford will maintain its beneficial ownership of Common Stock owned by it following the Offerings. See "Risk Factors -- Control by and Relationship with Ford", "-- Possible Future Sales of Common Stock by Ford" and "Relationship with Ford". From time to time the Company and Ford have entered into, and can be expected to continue to enter into, certain agreements and business transactions in the ordinary course of their respective businesses, and the Company's Restated Certificate of Incorporation includes certain provisions relating to the Company's relationship with Ford. See "Relationship with Ford" and "Description of Capital Stock -- Certain Certificate of Incorporation and By-law Provisions -- Corporate Opportunities". The Company was acquired by Ford and became part of its Financial Services Group in 1989. In connection with this acquisition, the Company's operations in Japan, the United Kingdom, Canada and Puerto Rico were transferred to certain non-U.S. subsidiaries of Ford, but the Company continued to manage such operations. Prior to completion of the Offerings, Ford is expected to recontribute the operations of Ford's non-U.S. subsidiaries managed by the Company (principally subsidiaries in Japan, the United Kingdom, Canada, Puerto Rico and Mexico, the "Foreign Subsidiaries"). In connection with this transaction, Ford will receive an estimated 25,883,019 shares of Class A Common Stock and an estimated 28,113,208 shares of Class B Common Stock (assuming an initial public offering price of $26.50 per share, the mid-point of the range set forth on the cover page of this Prospectus). These share amounts have been used in determining the number of shares of Class A Common Stock and Class B Common Stock to be outstanding upon completion of the Offerings and the percentages of economic and voting interests in the Company to be held by Ford and the other holders of the Class A Common Stock upon completion of the Offerings. The number of shares of Class A Common Stock and Class B Common Stock to be received by Ford in connection with the contribution of the Foreign Subsidiaries will be determined by dividing the aggregate fair market value of such subsidiaries by the initial public offering price per share of Class A Common Stock. The Foreign Subsidiaries had aggregate total assets at December 31, 1995 of $4.1 billion, and the financial and other information with respect to the Foreign Subsidiaries have been retroactively included in the financial and other information of the Company contained herein. See "The Company". SUMMARY SUPPLEMENTAL COMBINED FINANCIAL DATA The summary supplemental combined financial data of the Company presented below presents financial information of the Company giving supplemental combined effect to the expected recontribution by Ford to the Company of the Foreign Subsidiaries. See "The Company". The summary supplemental combined results of operations and balance sheet data presented below as of December 31, 1995 and 1994 and for each of the years in the three-year period ended December 31, 1995 was derived from the supplemental combined financial statements of the Company and the notes thereto set forth herein. The summary supplemental combined results of operations and balance sheet data presented below as of December 31, 1993, 1992 and 1991 and for each of the years in the two-year period ended December 31, 1992 was derived from supplemental combined financial statements and the related notes thereto not presented herein. The data presented below should be read in conjunction with the supplemental combined financial statements and the related notes thereto set forth herein (dollars in millions, except per share data): <TABLE> <CAPTION> YEAR ENDED OR AT DECEMBER 31 --------------------------------------------------------------- 1995 1994 1993 1992 1991 --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> RESULTS OF OPERATIONS Total revenue....................................... $ 6,107.2 $ 4,925.8 $ 4,114.8 $ 3,696.2 $ 3,495.8 Finance charge revenue.............................. 5,560.8 4,445.2 3,709.7 3,330.7 3,117.9 Interest expense.................................... 2,177.9 1,657.3 1,421.7 1,352.1 1,452.8 Net interest margin................................. 3,382.9 2,787.9 2,288.0 1,978.6 1,665.1 Operating expenses.................................. 1,754.7 1,456.1 1,216.8 1,007.2 911.7 Provision for losses................................ 834.0 647.1 536.1 568.6 494.3 Insurance benefits paid............................. 142.5 147.9 118.9 103.7 99.9 Earnings before provision for income taxes and cumulative effect of changes in accounting principles........................................ 1,198.1 1,017.4 821.3 664.6 537.1 Provision for income taxes.......................... 475.0 414.1 327.3 254.5 225.2 Net earnings(1)..................................... 723.1 603.3 494.0 410.1 311.9 Pro forma net earnings per share(2)(3).............. 2.13 BALANCE SHEET DATA Net finance receivables: Consumer.......................................... 27,575.3 23,627.8 19,912.4 17,412.7 15,275.9 Commercial........................................ 12,127.2 10,057.9 8,382.3 6,958.3 6,396.9 --------- --------- --------- --------- --------- Total............................................. 39,702.5 33,685.7 28,294.7 24,371.0 21,672.8 ========= ========= ========= ========= ========= Allowance for losses................................ (1,268.6) (1,061.6) (892.3) (764.7) (649.7) Total assets........................................ 41,303.9 35,283.5 30,039.6 25,996.3 23,523.5 Short-term debt (notes payable)..................... 13,747.3 12,431.9 10,385.9 9,086.4 8,632.4 Long-term debt(4)................................... 21,372.6 17,306.2 14,826.8 12,846.5 11,022.3 Stockholder's equity................................ 4,801.1 4,436.8 3,774.3 3,231.1 3,061.0 Pro forma stockholder's equity per share(2)(3)...... 14.14 SELECTED DATA AND RATIOS Net interest margin as a percentage of average net finance receivables............................... 9.22% 9.00% 8.69% 8.59% 8.25% Earnings to fixed charges........................... 1.55x 1.61x 1.57x 1.49x 1.37x Total debt to equity................................ 7.2:1 6.6:1 6.6:1 6.7:1 6.4:1 Total debt to tangible equity....................... 9.9:1 9.6:1 10.1:1 11.1:1 11.2:1 Return on average assets(1)......................... 1.89% 1.85% 1.76% 1.66% 1.40% Return on average equity(1)......................... 15.66 14.70 14.10 13.04 12.49 Return on average tangible equity(1)................ 21.90 21.71 22.31 22.15 24.59 60+days contractual delinquency..................... 1.71 1.35 1.43 1.85 2.56 Net credit losses to average net finance receivables....................................... 1.70 1.64 1.68 2.04 2.17 Allowance for losses to net finance receivables..... 3.20 3.15 3.15 3.14 3.00 Allowance for losses to net credit losses........... 2.03x 2.09x 2.02x 1.63x 1.49x Number of employees................................. 16,647 15,318 13,933 12,430 11,142 Number of consumer and commercial branch offices Domestic.......................................... 1,543 1,472 1,378 1,133 892 International..................................... 404 329 278 256 240 Total............................................. 1,947 1,801 1,656 1,389 1,132 </TABLE> - --------------- (1) In 1991, certain debt related to Ford's acquisition of the Company's operation in Japan was converted to equity, and 1991 results therefore include $39.2 million of non-recurring interest expense related to the converted debt. If 1991 results treated the converted debt as equity and excluded the related non-recurring interest expense consistent with subsequent years, net earnings would have been $351.1 million and the return on average assets, average equity and average tangible equity would have been 1.58%, 12.29% and 21.56%, respectively. (2) Based on 339,484,849 shares to be outstanding after the Offerings. Excludes up to 7,650,000 shares and 1,350,000 shares subject to over-allotment options granted by the Company to the U.S. Underwriters and the International Underwriters, respectively. See "Underwriting". If such options are exercised in full, pro forma net earnings per share and pro forma stockholder's equity per share would be $2.08 and $13.78, respectively. (3) Due to the change in the Company's capital structure, historical share and per share data will not be comparable to, or meaningful in the context of, future periods. See "Capitalization".
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000011913_beverly_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000011913_beverly_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION CONTAINED IN THIS PROSPECTUS (I) ASSUMES THE REINCORPORATION OF BEVERLY BANCORPORATION, INC., AN ILLINOIS CORPORATION ("BEVERLY ILLINOIS"), AS A DELAWARE CORPORATION, WHICH TOOK PLACE ON AUGUST 16, 1996 (THE "REINCORPORATION"), (II) GIVES EFFECT TO THE ISSUANCE OF FIVE SHARES OF COMMON STOCK OF THE COMPANY FOR EACH SHARE OF COMMON STOCK OF BEVERLY ILLINOIS IN CONNECTION WITH THE REINCORPORATION AND ALL STOCK DIVIDENDS PAID THROUGH THE DATE HEREOF, AND (III) ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS SET FORTH IN "RISK FACTORS." THE COMPANY Beverly Bancorporation, Inc. (the "Company") is a community-based financial services holding company headquartered in Chicago, Illinois. Through its subsidiaries, the Company provides a full range of banking services and also provides personal and corporate trust services. The Company's principal operating subsidiaries are Beverly Bank, Beverly Bank Matteson, First National Bank of Wilmington ("Wilmington") and Beverly Bank Lockport (collectively, the "Banks"), and Beverly Trust Company ("Beverly Trust"). The Banks are chartered as Illinois state banks, with the exception of Wilmington, which was federally chartered in 1863 and is the second oldest active national bank in Illinois. The Banks are community-oriented, full-service commercial banks, providing a full range of banking services to individuals, small-to-medium-sized businesses, and not-for-profit organizations. The Banks operate out of 12 full-service locations in the south and southwest parts of the Chicago metropolitan area, a business development office located in downtown Chicago and a mortgage origination office located in Naperville, Illinois. Through Wilmington, the Company also operates a full-service insurance agency and a residential mortgage brokerage business and offers a broad range of annuities and mutual funds through a relationship with a securities firm. Beverly Trust provides a wide array of trust services for individuals and corporations. As of June 30, 1996, Beverly Trust managed $277.1 million in assets, primarily in the areas of personal living trusts and corporate employee benefit plans, and administered more than 3,000 land trusts. As of December 31, 1995, the Company's total assets were $591.2 million and net income for the year ended December 31, 1995 was $6.2 million, with a return on average assets of 1.09% and a return on average equity of 13.37% for the year then ended. As of June 30, 1996, the Company's total assets had grown to $614.6 million, with net income of $3.0 million for the six months then ended, an increase in net income of 5.4% from the six months ended June 30, 1995. The Company's strategy is to continue to increase its core banking business through its commercial community banking presence and its retail product sales and distribution system. The Company will also pursue an increased market share in personal and corporate trust services and intends to further develop its securities sales and insurance activities. Where opportunities arise, the Company may seek to augment its internal growth through the establishment of additional branches and offices, as well as acquisitions or joint ventures in both banking and non-banking areas. In 1996, Wilmington formed a joint venture, currently in its initial stages, with a prominent realtor for the purpose of increasing its mortgage origination business. The Company was incorporated in Delaware on June 13, 1996 as a wholly-owned subsidiary of Beverly Bancorporation, Inc., an Illinois corporation ("Beverly Illinois"). Beverly Illinois was organized in 1969 and prior to the Reincorporation owned all of the outstanding capital stock of the Banks and Beverly Trust. Pursuant to the Reincorporation, which took place on August 16, 1996, Beverly Illinois was merged with and into the Company and the Company is the surviving corporation. As a result of the Reincorporation, the Company owns all of the outstanding capital stock of the Banks and Beverly Trust. In connection with the Reincorporation, each outstanding share of common stock of Beverly Illinois was converted into five shares of Common Stock of the Company. The Company intends to merge Beverly Bank, Beverly Bank Matteson and Beverly Bank Lockport with and into Wilmington by year-end 1996. Pursuant to the merger, Wilmington will be renamed Beverly National Bank and will remain a nationally chartered bank. The anticipated result of the merger, assuming all regulatory approvals are received, will be to consolidate the operations of the Banks and to reduce the administrative costs under which the Banks presently operate. The Company's principal executive offices are located at 1357 West 103rd Street, Chicago, Illinois 60643, and its telephone number is (312) 881-2214. Except where the context otherwise requires, when used herein the term "Company" refers to Beverly Bancorporation, Inc., a Delaware corporation, its predecessor and its subsidiaries. THE OFFERING <TABLE> <S> <C> Common Stock offered.............. 1,000,000 shares Common Stock to be outstanding after the offering (1)........... 4,974,942 shares Nasdaq symbol..................... BEVB Use of Proceeds................... The Company will use a portion of the net proceeds from the sale of shares of Common Stock offered hereby to repay outstanding short-term borrowings of $9.0 million. The remaining net proceeds will be used for general corporate purposes including, if and when opportunities arise, establishing additional branches and offices and acquiring businesses complementary to those of the Company. See "Use of Proceeds." </TABLE> - ------------------------ (1) Based on the number of shares of Common Stock outstanding as of June 30, 1996 and excluding 7,159 shares of Common Stock issued on July 15, 1996 pursuant to the reinvestment of dividends and the payment of directors' fees and 1,100 shares of Common Stock issued on July 23, 1996 pursuant to the exercise of options. In addition, as of June 30, 1996, 532,945 shares of Common Stock were reserved for issuance under the Company's stock option plan pursuant to which options to purchase 418,040 shares of Common Stock were outstanding, 146,610 of which were exercisable. SUMMARY CONSOLIDATED FINANCIAL DATA <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, (1) YEAR ENDED DECEMBER 31, -------------------- ----------------------------------------------------- 1996 1995 1995 1994 1993 1992 1991 --------- --------- --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF INCOME DATA: Total interest income................... $ 20,778 $ 19,512 $ 39,970 $ 35,206 $ 33,468 $ 36,583 $ 42,328 Total interest expense.................. 9,649 8,335 17,184 12,949 12,805 15,256 20,858 --------- --------- --------- --------- --------- --------- --------- Net interest income..................... 11,129 11,177 22,786 22,257 20,663 21,327 21,470 Provision for loan losses............... 75 103 159 311 1,299 3,577 2,923 Other income............................ 4,149 3,762 7,870 8,017 9,820 11,300 9,048 Operating expenses...................... 10,879 10,727 21,416 20,875 22,169 23,127 22,513 Income tax expense...................... 1,317 1,257 2,877 2,672 2,143 1,519 1,036 Cumulative effect of change in accounting principle................... -- -- -- -- 374 -- -- --------- --------- --------- --------- --------- --------- --------- Net income.............................. $ 3,007 $ 2,852 $ 6,204 $ 6,416 $ 5,246 $ 4,404 $ 4,046 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- PER SHARE DATA (2): Income before cumulative effect of change in accounting principle......... $ .74 $ .58 $ 1.26 $ 1.34 $ 1.05 $ .96 $ .89 Net income.............................. .74 .58 1.26 1.34 1.13 .96 .89 Cash dividends declared................. .10 .10 .19 .18 .17 .17 .12 Book value at end of period............. 10.19 9.87 10.35 8.44 8.58 7.72 6.94 Net tangible book value at end of period................................. 9.92 9.57 10.02 8.11 8.14 7.18 6.29 Stock dividends declared................ 5.00% 5.00% 5.00% 5.00% 5.00% -- -- SELECTED FINANCIAL RATIOS: Return on average assets................ 1.00% 1.02% 1.09% 1.20% 1.03% .90% .85% Return on average equity................ 14.58 13.03 13.37 16.10 13.33 12.61 12.95 Dividend payout ratio (dividends declared per share to net income per share)................................. 13.51 17.24 15.08 13.43 15.04 17.71 13.48 Average equity to average assets........ 6.86 7.84 8.17 7.47 7.72 7.17 6.53 Net interest margin (tax equivalent).... 4.18 4.49 4.49 4.66 4.52 5.05 5.27 Allowance for loan losses to total loans at end of period....................... 1.21 1.24 1.13 1.37 1.51 1.79 1.51 Non-performing loans to total loans at end of period.......................... .55 .57 .57 .82 1.05 1.76 2.70 Net loans charged off (recoveries) to average loans.......................... (.11) .06 .21 .13 .70 1.23 2.02 </TABLE> <TABLE> <CAPTION> JUNE 30, DECEMBER 31, -------------------- ----------------------------------------------------- 1996 1995 1995 1994 1993 1992 1991 --------- --------- --------- --------- --------- --------- --------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> SELECTED BALANCE SHEET DATA: Total assets..................... $ 614,569 $ 567,312 $ 591,203 $ 561,339 $ 519,635 $ 510,642 $ 467,287 Total earning assets............. 566,425 524,183 539,842 505,307 477,196 462,549 422,185 Loans............................ 324,573 314,572 312,160 291,042 267,517 251,062 279,511 Total deposits................... 553,792 507,946 527,131 504,445 459,132 454,917 418,134 Short-term borrowings............ 14,770 7,678 17,292 11,414 13,346 15,795 12,884 Long-term obligations............ 596 -- -- -- -- -- -- Total stockholders' equity....... 40,587 47,951 40,961 40,808 40,055 35,253 31,266 Net tangible book value.......... 39,426 46,510 39,660 39,202 38,017 32,784 28,365 </TABLE> - ------------------------------ (1) Ratios for interim periods are stated on an annualized basis. However, interim operating results and ratios for the six months ended June 30, 1996 are not necessarily indicative of results that may be experienced for the full year. (2) All per share amounts have been adjusted to give effect to the issuance of five shares of Common Stock of the Company for each share of common stock of Beverly Illinois in connection with the Reincorporation and all stock dividends paid through the date hereof.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000014637_bns_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000014637_bns_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the more detailed information and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. As used in this Prospectus, the terms "Brown & Sharpe" and the "Company" refer to Brown & Sharpe Manufacturing Company and its subsidiaries. Except as otherwise noted, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. See "Underwriting." THE COMPANY Brown & Sharpe, which was founded in 1833, is a leading designer, manufacturer and marketer of metrology products worldwide under numerous internationally recognized brand names. Metrology is the science of the physical measurement of objects using various precision instruments and equipment. The Company's high precision products measure physical dimensions of, and inspect and verify conformance to specifications of, components and products and are used in manufacturing, quality control and product development operations. The Company's product line ranges from hand tools and instruments to customized computer-controlled metrology systems which integrate hardware and software and are augmented by service, training and aftermarket support. The Company markets its metrology products and services in North America, Europe, Asia, South America and the Middle East. Important end user markets for the Company's products include the automotive, aerospace, industrial machinery, electronics and computer industries, and the Company's customers include Ford Motor Co., Daimler Benz, Toyota, Chrysler, BMW, Boeing Co., Eastman Kodak Co. Inc., International Business Machines Corp., Hewlett-Packard Co., General Electric Co., Caterpillar Inc., United Technologies Corp., Motorola Inc., Phillips, Samsung and Xerox Corp. For the twelve months ended June 30, 1996, the Company recorded net sales of $335.8 million, approximately two-thirds of which were sales to customers located outside of the United States. Manufacturers depend upon metrology hardware and software products to monitor consistent product conformance to their exacting specifications, thereby improving the reliability, fit and finish of their products. In addition to these quality and performance benefits, metrology products help manufacturers lower costs by reducing errors, scrap, rework and warranty expense, improving the manufacturing process, lowering throughput time, increasing capacity and reducing work-in-progress inventories. In recent years, manufacturers have accelerated the integration of quality control functions directly into the production process by incorporating the use of metrology products on the factory floor. In addition, manufacturers are demanding more precise, capable and flexible metrology systems as their products become smaller, more complex and/or must meet more stringent quality and safety standards. Their exacting product specifications often require measurement to an accuracy of less than one micron (one millionth of a meter or approximately 1/100th of the thickness of a human hair) or, in some special cases, measurement of nanometers (one billionth of a meter or the unit of measurement for the wavelength of light). Increasingly, metrology systems must incorporate a mix of traditional contact and newer non-contact technologies because of reduced part sizes and the diversity of new materials used in manufactured products. Metrology systems are purchased by customers regardless of their need for additional production capacity because of ever-increasing quality requirements and the need to reduce product costs. The price points of metrology products range from $100 for a caliper to over $1.5 million for a sophisticated coordinate measuring machine ("CMM") system. The Company's operations are conducted through three management units: Measuring Systems, Precision Measuring Instruments and Custom Metrology. The Measuring Systems Group (the "MS Group"), which accounted for approximately 67% of the Company's net sales in 1995, manufactures and markets a wide range of manual and computer-controlled, high precision CMMs including "in-process" measuring systems under the Brown & Sharpe, DEA and Leitz brand names. The Company believes it is the worldwide market leader for CMMs as measured by net sales and installed base. The Company believes it has an installed base of over 18,000 CMMs worldwide, creating a significant opportunity for aftermarket sales and services. The Precision Measuring Instruments Division (the "PMI Division"), which accounted for approximately 30% of the Company's net sales in 1995, manufactures a wide range of mechanical and electronic measuring and inspection tools (including height gauges, calipers, dial indicators, micrometers and gauge blocks) which are marketed under the Brown & Sharpe, Tesa, Etalon, Interapid, Standard Gage, Select Gauge, Mauser, Mercer and Roch brand names through more than 450 distributors and catalog houses worldwide. The Custom Metrology Division (the "CM Division") designs and engineers, under the Tesa brand name, specialty products and systems that provide customized solutions for unique measurement or inspection problems primarily utilizing non-contact technology. Technologies and custom applications developed by the CM Division with customer funding have been directly applied to the design of standard products or systems distributed by the MS Group or the PMI Division. REPOSITIONING INITIATIVES Over the past several years, the Company has undertaken a series of divestitures, acquisitions and other strategic initiatives which have repositioned the Company from its historical origins as a machine tool manufacturer into a leader in the field of metrology. These repositioning initiatives included: . Divestiture of Non-Core Operations. The divestiture of non-strategic operations including the machine tool, pump and hydraulics businesses enabled the Company to focus on its core metrology technologies and market distribution strengths. . Strategic Metrology Acquisitions. Strategic metrology acquisitions enabled the Company to increase greatly the breadth of its metrology product offering and the strength of its distribution system. These acquisitions included the 1994 acquisitions of DEA S.p.A. ("DEA"), the Italy-based metrology business of Finmeccanica S.p.A. ("Finmeccanica"), Ets. Pierre Roch S.A. and its German affiliate, Mauser Prazisions- Messmittel GmbH ("Mauser") (together, "Roch") and certain intellectual property and assets of Metronic Engineering Limited ("Metronic Ltd."). . Rationalization and Consolidation of Operations. Lowering the Company's overhead cost structure by reducing duplicative functions and associated headcount and by consolidating and rationalizing the Company's manufacturing facilities and operations enabled the Company to increase productivity and efficiency. As a result of these repositioning initiatives, the Company's net sales increased from $162.5 million in fiscal 1992 to $328.0 million in fiscal 1995, while its gross profit margin increased from 28.5% to 32.4% and selling, general and administrative expenses, excluding foreign currency transaction gains and losses, as a percentage of net sales decreased from 34.0% to 29.1% during the same period. See "Selected Consolidated Financial Data." NEW LEADERSHIP AND BUSINESS STRATEGY Following completion of the Company's repositioning initiatives, the Company sought to recruit new management leadership to enhance the Company's leading market positions, improve its global competitiveness and continue to improve its financial performance. To that end, the Company recruited Frank T. Curtin as its new President and Chief Executive Officer in May 1995, who then restructured the senior management team and recruited additional senior managers for key management roles. The current ten-member senior management team has over 296 years of combined experience in highly competitive industrial businesses and global manufacturing organizations. This team is focused on enhancing the financial performance of the Company, motivated in part by an equity-based incentive compensation system, and has made significant progress in realigning the structure and culture of the Company towards a more focused and integrated metrology business. As a result of the repositioning of the Company and the focus of the current management team on enhancing financial performance, the Company has achieved positive net income in each of its fiscal quarters since Mr. Curtin joined the Company. In addition, management believes that its focus on cost reduction during Mr. Curtin's tenure has resulted in a decrease in selling, general and administrative expenses, excluding foreign currency transaction gains or losses, as a percentage of net sales from 30.7% in the first half of 1995 to 26.7% in the first half of 1996. See "Selected Consolidated Financial Data." The Company is implementing its strategy based on the following elements: . Continue Cost Improvements. The Company intends to continue to implement measures designed to reduce its product costs through: (i) standardizing product designs worldwide; (ii) increasing the cost-effectiveness of product designs; (iii) outsourcing components and products; (iv) increasing supplier partnering; and (v) focusing on core manufacturing processes. The Company also intends to streamline its sales, marketing and general and administrative processes in an effort to reduce selling, general and administrative expenses as a percentage of sales. . Develop New Products and End User Markets. The Company's goal is to increase net sales by expanding penetration of served industrial end user markets and by capitalizing on high growth end user markets such as the electronics, computer and medical industries where metrology needs are growing rapidly. To expand in these high growth industries, the Company intends to focus on development of software and emerging non- contact metrology technologies through continued internal development and through strategic acquisitions and technical partnerships (such as the acquisition of certain intellectual property and assets of Metronic Ltd. and the Automation Software Incorporated joint venture, of which the Company owns 50% of the voting securities ("ASI")). To expand its penetration of served industrial end user markets, the Company expects to continue the introduction of new metrology systems utilizing both contact and non-contact technologies, and to develop sensors and other sophisticated products that can be imbedded in a variety of manufacturing processes. The Company plans to form technical and commercial alliances with manufacturers of process equipment to provide enhanced combined manufacturing systems utilizing the Company's sensors and other products. . Enhance Existing and Develop New Software. The Company intends to emphasize research and development of software systems and applications designed to meet the evolving metrology needs of its end users. To that end, the Company intends to leverage off its software development team of approximately 320 software and applications engineers and technicians (including 50 engineers of ASI) in the following four areas: (i) metrology software for inspection and verification of piece-part integrity and conformance to design specifications; (ii) process control software designed to detect and correct drifts in part tolerances before the manufacturing process produces scrap or improperly configured components; (iii) enhanced management information systems that report statistical and quality information from the manufacturing process; and (iv) new software that will link the Company's CMMs and, therefore, the manufacturing process with computer-aided engineering and manufacturing systems that will provide the means for real-time feedback, analysis and, ultimately, control of manufacturing to design specifications. The Company believes that its existing library of metrology software, together with newly developed software, should enable it to respond to the growing demand in manufacturing for on-line inspection and verification. The Company also believes that its experience with CMM software and manufacturing processes are critical to the successful development of software that is linked with computer-aided engineering systems. . Leverage Worldwide Distribution Capability. Through the acquisitions of DEA and Roch, Brown & Sharpe expanded its product lines and strengthened its marketing and distribution capabilities in Europe, South America, the Middle East, India and China. The Company plans to continue to strengthen and expand its worldwide distribution capability, principally by continuing to rationalize its existing distribution network and by opening new demonstration centers and adding direct sales capacity and distributors where cost effective. The Company also intends to capitalize on the strength of its global distribution network by increasing the number of Company-designed and third-party sourced products sold through its distribution channels in an effort to increase gross profit without a corresponding increase in selling, general and administrative expenses. . Increase Aftermarket Sales and Services. The Company intends to increase its focus on higher margin aftermarket sales and services, including calibration and rebuilding of CMMs, software upgrades and parts sales. The Company believes that the worldwide installed base of CMMs, estimated at over 60,000 (including 18,000 of the Company's CMMs), creates a significant demand for such aftermarket services. The Company believes that the level of customer service it provides, as measured by third-party surveys of its customers, is superior to that of its principal competitors, and expects to further strengthen its customer relationships through enhanced aftermarket support and increased partnering efforts. The Company's net sales attributable to aftermarket sales and service in 1995 were estimated to be approximately 25% of MS Group net sales for the same period. For a discussion of certain risk factors which the Company may face in implementing this strategy, see "Risk Factors--Achievement of Strategic Plan." The Company was founded in 1833, incorporated in Rhode Island in 1868 and reincorporated in Delaware in 1969. The Company's principal executive offices are located at Precision Park, 200 Frenchtown Road, North Kingstown, Rhode Island, 02852, and its telephone number is (401) 886-2000. THE OFFERING <TABLE> <S> <C> Class A Common Stock offered(1): By the Company........ 4,000,000 shares By the Selling Stockholders......... 3,286,000 shares Total............... 7,286,000 shares Common Stock outstanding after the Offering(2): Class A Common Stock(3)............. 12,199,989 shares Class B Common Stock(3)............. 519,436 shares Total............... 12,719,425 shares Use of proceeds......... Approximately $35.1 million of the net proceeds to the Company from the Offering will be used to repay $31.9 million of outstanding short-term indebtedness and $3.2 million of the current portion of long-term indebtedness. The remaining net proceeds to the Company of $10.5 million will be used for working capital and general corporate purposes. See "Use of Proceeds." New York Stock Exchange Symbol................. BNS </TABLE> - -------------------- (1) Pursuant to the Rights Plan adopted in 1988, each purchaser of shares of Class A Common Stock offered pursuant to the Offering will receive three quarters of a preferred stock purchase right (the "Rights") for each share of Class A Common Stock purchased. No additional consideration will be payable with respect to the Rights and, prior to the occurrence of specified events, the Rights will not be exercisable or evidenced separately from the Class A Common Stock. See "Description of Capital Stock--Rights Plan." (2) Excludes 864,283 shares of Class A Common Stock reserved for issuance under the 1989 Equity Incentive Plan, the Amended 1973 Stock Option Plan and the Employee Stock Ownership and Profit Participation Plan. See "Management-- Executive Compensation." Excludes 50,000 shares of Class A Common Stock reserved for issuance upon certain specified events under the Stock Purchase and Transfer Agreement dated March 24, 1994 between the Company and Diehl GmbH & Co. See "Certain Transactions." (3) Assumes no conversions of Class B Common Stock into Class A Common Stock after August 31, 1996. SUMMARY CONSOLIDATED FINANCIAL INFORMATION During the periods presented below, the Company has undertaken a number of divestitures and acquisitions, including the 1994 acquisitions of DEA and Roch. Consequently, the summary consolidated financial information set forth in the table below may not be comparable for all periods presented. The following data should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus. <TABLE> <CAPTION> SIX MONTHS ENDED FISCAL YEAR ENDED DECEMBER (1) JUNE 30, -------------------------------- ---------------------- 1993 1994 1995 1995 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales............... $ 159,518 $ 209,369 $ 328,031 $ 158,349 $ 166,113 Cost of sales........... 110,841 142,776 221,729 108,174 113,693 Selling, general and administrative expense(2)............. 48,073 68,473 94,902 46,580 45,104 Restructuring charges(3)............. -- 4,169 336 247 -- --------- --------- ---------- ---------- ---------- Operating profit (loss)................. 604 (6,049) 11,064 3,348 7,316 Interest expense........ 5,100 6,575 9,129 3,948 4,553 Other income, net....... 2,880 689 688 390 169 --------- --------- ---------- ---------- ---------- Income (loss) before taxes.................. (1,616) (11,935) 2,623 (210) 2,932 Income tax provision.... 800 2,400 697 200 528 --------- --------- ---------- ---------- ---------- Net income (loss)....... $ (2,416) $ (14,335) $ 1,926 $ (410) $ 2,404 ========= ========= ========== ========== ========== Net income (loss) per share.................. $ (0.49) $ (2.37) $ 0.22 $ (0.05) $ 0.27 ========= ========= ========== ========== ========== Weighted average number of shares outstanding and common stock equivalents............ 4,969,543 6,057,090 8,772,748 8,691,487 8,884,156 OTHER DATA: Gross profit margin(4).. 30.5% 31.8% 32.4% 31.7% 31.6% Selling, general, and administrative expense, excluding foreign currency transaction gains or losses, as a percent of net sales... 30.2% 33.2% 29.1% 30.7% 26.7% Net sales per employee(5)............ $ 104 $ 114 $ 138 NM NM PRO FORMA FINANCIAL DATA(6): Interest expense........ $ 5,733 $ 2,875 $ 2,768 Net income.............. 5,294 759 3,741 Net income per share.... $ 0.41 $ 0.06 $ 0.29 Weighted average number of shares outstanding and common stock equivalents............ 12,773,000 12,692,000 12,884,000 </TABLE> <TABLE> <CAPTION> AS OF JUNE 30, 1996 -------------------- AS ACTUAL ADJUSTED(7) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents.................................. $ 4,226 $ 14,686 Working capital............................................ 97,845 143,405 Total assets............................................... 302,652 313,112 Total debt................................................. 106,512 71,412 Total stockholders' equity................................. 84,870 130,430 </TABLE> - -------------------- (1) Fiscal years presented ended December 31, except the Company's 1993 fiscal year which ended on December 25. (2) During fiscal 1994, selling, general and administrative expenses included duplicative costs associated with the DEA and Roch operations which were consolidated during 1994 and 1995. Includes foreign currency transaction gains of $0.2 million, $1.1 million, $0.6 million and $2.0 million in 1993, 1994, 1995 and the first half of 1995, respectively, and $0.7 million of transaction losses in the first half of 1996. (3) Restructuring charges are principally attributable to the payment of employee severance and the closing of sales offices associated with integrating the Company's existing operations with those of DEA and Roch. (4) Data for the first half of the year may not be indicative of data for the full year due to seasonal factors and the frequent impact of product mix variations quarter to quarter. (5) During fiscal 1994, DEA employees have been accounted for by annualizing the number of employees for the period. (6) Pro forma to reflect the sale of the shares of Class A Common Stock offered by the Company hereby, at an assumed public offering price of $12.25 per share, and repayment of all short-term indebtedness and current portions of long-term debt outstanding during the pro forma periods, not exceeding $31.9 million and $3.2 million, respectively, as if such transactions had occurred on the first day of the relevant period. The unaudited pro forma financial information does not purport to be indicative of the financial position or operating results which would have been achieved had the Offering taken place at the dates indicated and should not be construed as representative of the Company's financial position or results of operations for any future period or date. See "Use of Proceeds."
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety and should be read in conjunction with the more detailed information and financial statements, including the notes thereto, included elsewhere in this Prospectus. As used in this Prospectus, unless the context requires otherwise, "Ekco" refers to Ekco Group, Inc. and "Company" refers to Ekco and its subsidiaries. References to "fiscal years" refer to the Company's fiscal years ended on the Sunday closest to December 31 of the referenced year. THE COMPANY The Company is a leading U.S. manufacturer and marketer of multiple categories of branded houseware products for everyday home use. The Company believes it is the leading U.S. supplier of metal bakeware, kitchen tools and gadgets and non-toxic pest control products. In addition, the Company believes it is a leading U.S. supplier of plastic storage products (including crates, containers, baskets and office organizers), cleaning products (primarily brushes, brooms and mops) and small animal care and control products. The Ekco(R) brand ranked eighth in a recent survey of the 300 most widely recognized brand names in home furnishings. The Company markets its products primarily in the U.S. through substantially all distribution channels that sell houseware products for everyday home use, including mass merchandisers, supermarkets, and hardware, drug and specialty stores. The Company has a significant presence among mass merchandisers, selling to each of the 30 largest discount department store chains, and in supermarkets where it occupies space in over 90% of the approximately 38,000 U.S. supermarkets. The Company's sales have increased in each of the last five years as a result of internal growth and acquisitions. The Company's net revenues increased from $166.7 million in Fiscal 1991 to $278.0 million in Fiscal 1995, a compound annual growth rate of 13.6%. The Company's EBITDA (as defined) increased from $31.0 million in Fiscal 1991 to $50.1 million in Fiscal 1995, a compound annual growth rate of 12.7%. The following table summarizes the Company's principal product lines, brand names and net revenues by product category for Fiscal 1995 (in millions): <TABLE> <CAPTION> FISCAL 1995 NET PRODUCT CATEGORY PRINCIPAL PRODUCT LINES PRINCIPAL BRAND NAMES REVENUES ---------------- ----------------------- --------------------- -------- <S> <C> <C> <C> Bakeware Non-stick and uncoated cookie Ekco(R), Baker's Secret(R) $ 81.3 sheets, muffin tins, brownie pans and loaf pans Kitchenware Tools including spoons, spatulas, Ekco(R), Ekco Pro(TM) 73.0 serving forks, ladles and specialty cooking accessories Gadgets including peelers, corkscrews, whisks and can and bottle openers Cleaning products Brushes, brooms and mops Ekco(R), Wright-Bernet(TM) 55.2 Pest control and Spring action rodent traps, glue-based Victor(R), Havahart(R) 34.0 small animal care rodent and insect traps and live animal and control traps products Molded plastic Crates, bins, baskets, organizers, carts Ekco(R) 31.0 products and caddies for storage, laundry and the office VIA! Upscale bakeware, kitchen tools and VIA!(TM) 3.5 gadgets, and tea kettles $278.0 ====== </TABLE> - 4 - <PAGE> 7 THE EKCO INTEGRATION Since the fourth quarter of Fiscal 1993, Ekco has taken a series of actions to position the Company for long-term growth (the "Ekco Integration"). The Ekco Integration included (i) the combination of four of the Company's principal business units into a single operating division and (ii) the introduction of a new branding strategy to capitalize on the strength of the Ekco(R) brand name. The Ekco Integration combined the management and operations of the Company's bakeware, kitchenware, cleaning products and molded plastic products businesses, which sell through common channels of distribution and accounted for over 75% of the Company's net revenues in Fiscal 1995. The newly created single organization combines and coordinates the sales, marketing, manufacturing, distribution, administrative and financial activities for the four product categories. The Company also consolidated a large portion of the distribution of bakeware and kitchenware products as well as certain cleaning products into its new distribution facility in Bolingbrook, Illinois from four separate warehousing and distribution locations. These steps have improved customer service, created more effective sales and marketing programs, reduced costs and resulted in distribution efficiencies. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes to the Consolidated Financial Statements included elsewhere in this Prospectus. As part of the Ekco Integration, in January 1996 the Company introduced its new branding strategy in which the Ekco(R) brand name is used to market most of the products in these four categories. The new strategy enables the Company to capitalize on the strength of the Ekco(R) brand name by improving the brand identification of these products by consumers and increasing promotional opportunities for retailers. In addition, management believes that the new branding strategy enhances the effectiveness of the Company's newly combined sales and marketing effort by facilitating cross-marketing of the Company's products to retail customers under Ekco(R), one of the strongest brand names in the housewares industry. COMPETITIVE STRENGTHS The Company believes its competitive strengths include: - LEADING MARKET POSITIONS. More than 50% of the Company's sales are from metal bakeware and kitchen tools and gadgets, categories in which the Company believes it is the industry leader. The Company has achieved primary vendor status with many of its retail customers in certain product categories, including bakeware, kitchenware, cleaning products and non-toxic pest control products. - WIDELY RECOGNIZED BRAND NAMES. In 1995, the Ekco(R) brand ranked eighth in Home Furnishing News' survey of the 300 most widely recognized brand names in home furnishings. Ekco(R) and the Company's other brand names, including Baker's Secret(R) bakeware, Wright-Bernet(TM) cleaning products, Victor(R) pest control products and Havahart(R) small animal care and control products, are recognized by consumers and retailers for quality, value, design and functionality. - BROAD MARKET PENETRATION. Management believes that the Company has one of the broadest distribution networks of any company in the housewares industry. The Company has a significant presence in mass merchandisers (including Wal-Mart, Kmart and Target) and supermarkets (including Winn-Dixie, Kroger and Albertson's). - MULTIPLE CATEGORY SUPPLIER. The Company serves as a single source for a wide range of products at a variety of price points in several categories, enabling the Company to be a more efficient and attractive vendor to the retail industry, which is consolidating its supply base. - EFFICIENT DISTRIBUTION SYSTEM. The Company's distribution facilities and processes enable the Company to effectively pick, pack and deliver customer orders from its inventory, resulting in greater on-time deliveries, higher order fill rates, optimal use of full-truckload shipments and short purchase order lead times. - CUSTOMER SERVICE. The Company offers retailers an integrated program of productivity enhancing services which are designed to reduce their operating costs and working capital and to increase their sales volume of the Company's products. - 5 - <PAGE> 8 BUSINESS STRATEGY The Company's business strategy has four primary components: (i) leverage Ekco's brand names, (ii) focus on customer sales and service, (iii) increase market and customer penetration and (iv) pursue growth through acquisitions. - LEVERAGE EKCO'S BRAND NAMES: The Company intends to leverage the Ekco(R) brand name to (i) further increase brand recognition and reputation among both retailers and consumers, (ii) expand sales through cross-marketing of the Company's product lines to existing customers and (iii) become the sole or primary vendor to existing and future customers across multiple product categories. As part of the Ekco Integration, in January 1996 the Company introduced its new branding strategy in which the Ekco(R) brand name is used to market most of the Company's bakeware, kitchenware, cleaning products and molded plastic products. The Company continues to promote its Baker's Secret(R), Wright-Bernet(TM), Victor(R) and Havahart(R) brand names and to enhance them with the Ekco(R)signature. - FOCUS ON CUSTOMER SALES AND SERVICE: The Ekco Integration has enabled the Company to shift the focus of its sales and marketing strategy from individual product categories to the broader needs of each of its customers. Each of the Company's customers now has one Ekco sales person responsible for selling and marketing most of the Company's products. The combined marketing staff now coordinates most of the Company's market research, advertising and other marketing related functions. This coordination augments the Company's efforts to leverage the Ekco(R) brand name, to increase market and customer penetration and to provide superior service to its customers. - INCREASE MARKET AND CUSTOMER PENETRATION: The Company strives to expand its retail space at existing customers and to gain new customers by (i) offering differentiated product lines, (ii) developing new and proprietary products, (iii) cross-marketing existing product lines to existing customers who do not currently purchase such product lines and (iv) cross-merchandising combinations of products from different product categories with a uniform Ekco(R) message. The Company offers products which are differentiated by price, quality, value, color, design, packaging and functionality. The Company strives to be a full-line supplier and to be the first to market with new product introductions to increase sales of each of its product lines. - PURSUE GROWTH THROUGH ACQUISITIONS: The Company's growth has been enhanced by acquisitions. The Company's acquisition strategy is focused on long life-cycle consumer products related to the Company's current product portfolio which can benefit from (i) integration into the Company's existing manufacturing, warehousing and distribution systems, (ii) if appropriate, inclusion under the Ekco(R) brand name and (iii) the Company's broad distribution network. Management believes that there are and will continue to be opportunities to acquire additional consumer product lines and businesses due to, among other things, the large number of consumer product companies and the increased pressure on such companies from retailers to provide greater and more costly levels of service and support. The Company's principal executive offices are located at 98 Spit Brook Road, Nashua, New Hampshire 03062 and its telephone number is (603) 888-1212. THE EXCHANGE OFFER Registration Rights Agreement.............. The Old Senior Notes were sold by the Company on March 25, 1996, to Bear, Stearns & Co. Inc. and Smith Barney Inc. (the "Initial Purchasers"), who placed the Old Senior Notes with institutional investors. In connection therewith, the Company and the Guarantors executed and delivered for the benefit of the Holders of the Old Senior Notes a registration rights agreement (the "Registration Rights Agreement") providing, among other things, for the Exchange Offer. - 6 - <PAGE> 9 The Exchange Offer......................... New Senior Notes are being offered in exchange for a like face amount of Old Senior Notes. As of the date hereof, $125,000,000 aggregate face amount of Old Senior Notes are outstanding. The Company will issue the New Senior Notes to Holders promptly following the Expiration Date. See "Risk Factors - Consequences of Failure to Exchange." Expiration Date............................ 5:00 p.m., New York City time, on August 7, 1996, unless the Exchange Offer is extended, in which case the term "Expiration Date" means the latest date and time to which the Exchange Offer is extended. Accrued Interest on the New Senior Notes and the Old Senior Notes................. Each New Senior Note will bear interest from its issuance date. Holders of Old Senior Notes that are accepted for exchange will receive, in cash, accrued interest thereon to, but not including, the issuance date of the New Senior Notes. Such interest will be paid with the first interest payment on the New Senior Notes. Interest on the Old Senior Notes accepted for exchange will cease to accrue upon issuance of the New Senior Notes. Conditions to the Exchange Offer........... The Exchange Offer is subject to certain customary conditions, which may be waived by the Company. See "The Exchange Offer - Conditions." Procedures for Tendering Old Senior Notes.................................... Each Holder of Old Senior Notes wishing to accept the Exchange Offer must complete, sign and date the Letter of Transmittal, or a facsimile thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver such Letter of Transmittal, or such facsimile, together with the Old Senior Notes and any other required documentation to the exchange agent (the "Exchange Agent") at the address set forth herein. By executing the Letter of Transmittal, each Holder will represent to the Company, among other things, that (i) the New Senior Notes acquired pursuant to the Exchange Offer by the Holder and any beneficial owners of Old Senior Notes are being obtained in the ordinary course of business of the person receiving such New Senior Notes, (ii) neither the Holder nor such beneficial owner is participating in, intends to participate in or has an arrangement or understanding with any person to participate in the distribution of such New Senior Notes and (iii) neither the Holder nor such beneficial owner is an "affiliate," as defined under Rule 405 of the Securities Act, of the Company. Each broker-dealer that receives New Senior Notes for its own account in exchange for Old Senior Notes, where such Old Senior Notes were acquired by such broker or dealer as a result of market-making activities or other trading activities (other than Old Senior Notes acquired directly from the Company), may participate in the Exchange Offer but may be deemed an "underwriter" under the Securities Act and, therefore, must acknowledge in the Letter of Transmittal that it will deliver a prospectus in connection with any resale of such New Senior Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker or dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. See "The Exchange Offer - Procedures for Tendering" and "Plan of Description." - 7 - <PAGE> 10 Special Procedures for Beneficial Owners........................ Any beneficial owner whose Old Senior Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact such registered Holder promptly and instruct such registered Holder to tender on such beneficial owner's behalf. If such beneficial owner wishes to tender on such owner's own behalf, such owner must, prior to completing and executing the Letter of Transmittal and delivering its Old Senior Notes, either make appropriate arrangements to register ownership of the Old Senior Notes in such owner's name or obtain a properly completed bond power from the registered Holder. The transfer of registered ownership may take considerable time. See "The Exchange Offer - Procedures for Tendering." Guaranteed Delivery Procedures............. Holders of Old Senior Notes who wish to tender their Old Senior Notes and whose Old Senior Notes are not immediately available or who cannot deliver their Old Senior Notes, the Letter of Transmittal or any other documents required by the Letter of Transmittal to the Exchange Agent prior to the Expiration Date must tender their Old Senior Notes according to the guaranteed delivery procedures set forth in "The Exchange Offer - Guaranteed Delivery Procedures." Withdrawal Rights.......................... Tenders may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. See "The Exchange Offer - Withdrawal of Tenders." Acceptance of Old Senior Notes and Delivery of New Senior Notes............. The Company will accept for exchange any and all Old Senior Notes which are properly tendered in the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Senior Notes issued pursuant to the Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offer - Terms of the Exchange Offer." Exchange Agent............................. Fleet National Bank is serving as Exchange Agent in connection with the Exchange Offer. See "The Exchange Offer - Exchange Agent." SUMMARY DESCRIPTION OF THE NEW SENIOR NOTES The Exchange Offer applies to $125,000,000 aggregate face amount of Old Senior Notes. The terms of the New Senior Notes are identical in all material respects to the Old Senior Notes, except that the New Senior Notes have been registered under the Securities Act and, therefore, will not bear legends restricting their transfer and will not contain certain provisions providing for an increase in the interest rate on the Old Senior Notes under certain circumstances relating to the timing of the Exchange Offer, which rights will terminate when the Exchange Offer is consummated. The New Senior Notes will evidence the same debt as the Old Senior Notes and will be entitled to the benefits of the Indenture, under which both the Old Senior Notes were, and the New Senior Notes will be, issued. See "Description of the Notes." The New Senior Notes....................... $125,000,000 principal amount of 9 1/4% New Senior Notes due 2006. Maturity Date.............................. April 1, 2006. Interest Payment Dates..................... April 1 and October 1, commencing October 1, 1996. Guarantees................................. The New Senior Notes will be fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by substantially all of Ekco's existing and future domestic - 8 - <PAGE> 11 subsidiaries (collectively, the "Guarantors"). See "Description of Senior Notes--General." Ranking.................................... The New Senior Notes will be senior unsecured obligations of Ekco and will rank pari passu in right of payment with all existing and future Senior Indebtedness of Ekco and senior in right of payment to all existing and future Subordinated Indebtedness of Ekco. The Guarantees will be senior unsecured obligations of the Guarantors and will rank pari passu in right of payment with all existing and future Senior Indebtedness of the Guarantors and senior in right of payment to all existing and future Subordinated Indebtedness of the Guarantors. The indebtedness under the Revolving Credit Facility is secured by substantially all of the assets of the Company. As a result, the Senior Notes will effectively be subordinated to the Revolving Credit Facility. At March 31, 1996 the Company's only outstanding indebtedness was its $124.1 million of Senior Notes. The Company had no outstanding Subordinated Indebtedness or indebtedness under the Revolving Credit Facility as of such date. Mandatory Redemption....................... None. Optional Redemption........................ The New Senior Notes will be redeemable for cash at the option of Ekco, in whole or in part, on or after April 1, 2001, at the redemption prices set forth herein, together with accrued and unpaid interest and Liquidated Damages, if any, to the redemption date. See "Description of Senior Notes-- Redemption." Change of Control.......................... Upon the occurrence of a Change of Control, each holder of New Senior Notes will have the option to require Ekco to repurchase such holder's New Senior Notes, in whole or in part, at a purchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, to the date of repurchase. Ekco's ability to repurchase the New Senior Notes following a Change of Control will be dependent upon it having sufficient cash therefor and the terms of its then outstanding Senior Indebtedness, including the Revolving Credit Facility. See "Description of Senior Notes--Certain Covenants--Repurchase of Senior Notes at the Option of the Holder Upon a Change of Control." Certain Covenants.......................... The indenture under which the New Senior Notes will be issued (the "Indenture") contains certain restrictive covenants that, among other things, limit the ability of Ekco and its Subsidiaries to incur additional Indebtedness (as defined) and issue preferred stock, create liens, pay dividends, repurchase capital stock and make certain other Restricted Payments (as defined), sell assets, engage in transactions with affiliates, enter into sale and leaseback transactions, conduct unrelated lines of business and consummate mergers or consolidations. The term "Subsidiaries" is defined in the Indenture to exclude "Unrestricted Subsidiaries." See "Description of Senior Notes- -Certain Covenants." - 9 - <PAGE> 12 Use of Proceeds............................ The Exchange Offer is intended to satisfy certain of Ekco and the Guarantors' obligations under the Registration Rights Agreement. Ekco will not receive any cash proceeds from the issuance of the New Senior Notes in the Exchange Offer. The net proceeds from the issuance of the Old Senior Notes were used by the Company to (i) repurchase all of the outstanding 12.70% Senior Subordinated Notes due 1998 (the "12.70% Notes") of Ekco Housewares, Inc., (ii) repurchase its outstanding 7.0% Subordinated Convertible Note due 2002 (the "7.0% Note") and (iii) repay amounts outstanding under the Revolving Credit Facility. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000025757_crompton_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000025757_crompton_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following is a summary of certain information contained elsewhere in this Prospectus. This summary is not intended to be complete and is qualified in its entirety by the more detailed information and financial statements appearing elsewhere in this Prospectus. Prospective investors are urged to read and consider carefully all of the information contained in this Prospectus. As used herein, the terms "Crompton" and "the Company" refer to Crompton & Knowles Corporation and its consolidated subsidiaries, unless the context otherwise requires. THE COMPANY Crompton is engaged in the manufacture and sale of specialty chemicals and specialty process equipment and controls which are marketed throughout the world. Crompton's line of specialty value-added chemicals includes textile and industrial dyes and auxiliary chemicals, reaction flavors, specialty sweeteners, food colors and inactive pharmaceutical additives and coatings. Crompton's specialty process equipment and controls business consists primarily of the manufacture and sale of plastics and rubber extrusion equipment and integrated extrusion systems, industrial blow molding equipment and electronic controls. The principal executive offices of Crompton are located at One Station Place, Metro Center, Stamford, Connecticut 06902, and its telephone number is (203) 353-5400. See "The Company." RECENT DEVELOPMENTS Pursuant to an Agreement and Plan of Merger, dated as of April 30, 1996 (the "Merger Agreement"), Crompton has agreed to the merger (the "Merger") of Tiger Merger Corp., a Delaware corporation and a wholly owned subsidiary of Crompton ("Subcorp"), with and into Uniroyal Chemical Corporation, a Delaware corporation ("Uniroyal"), subject to the approval of the transaction by the stockholders of each of Uniroyal and Crompton at special meetings thereof currently scheduled to be held on August 21, 1996. The Board of Directors of Crompton has fixed the close of business on July 9, 1996, as the record date for determination of holders of Crompton Common Stock entitled to notice of and to vote at such meeting of Crompton stockholders. Accordingly, purchasers of the shares of Crompton Common Stock offered hereby will not be entitled to vote such shares at such special meeting. The Merger will be consummated on the terms and subject to the conditions set forth in the Merger Agreement (which was filed by Crompton with the Commission as an exhibit to Crompton's Quarterly Report on Form 10-Q for the quarter ended March 30, 1996), pursuant to which, among other things, (i) Subcorp will be merged with and into Uniroyal as a result of which Uniroyal will become a wholly owned subsidiary of Crompton, (ii) each issued and outstanding share (other than shares, if any, held in the treasury of Uniroyal or held by Crompton or any of its subsidiaries, which will be cancelled) of common stock, $0.01 par value per share (together with the attached preferred stock purchase rights, "Uniroyal Common Stock"), of Uniroyal will be converted into 0.9577 shares of Crompton Common Stock (with cash in lieu of fractional shares), and (iii) each issued and outstanding share (other than shares, if any, held in the treasury of Uniroyal or held by Crompton or any of its subsidiaries, which will be cancelled, and other than shares as to which dissenters' appraisal rights have been perfected) of Series A Cumulative Redeemable Preferred Stock, par value $0.01 per share ("Series A Preferred Stock"), of Uniroyal and of Series B Preferred Stock, par value $0.01 per share ("Series B Preferred Stock," and together with the Series A Preferred Stock, "Uniroyal Preferred Stock"), of Uniroyal will be converted into 6.3850 shares of Crompton Common Stock (with cash in lieu of fractional shares). It is currently anticipated that the Merger will be consummated shortly after the special meetings of Crompton and Uniroyal stockholders, assuming the Merger Agreement and the Merger are approved at such meetings and all other conditions to the Merger have been satisfied or waived. Uniroyal, through its subsidiaries, is a major multinational manufacturer of a wide variety of specialty chemical products, including specialty elastomers, rubber chemicals, crop protection chemicals and additives for the plastics and lubricants industries. Uniroyal produces high value added products which are currently marketed in approximately 120 countries. Crompton does not currently AVAILABLE INFORMATION Crompton is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (together with the rules and regulations promulgated thereunder, the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information filed by Crompton with the Commission can be inspected and copied at the public reference facilities maintained by the Commission at its principal office at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the following Regional Offices of the Commission: New York Regional Office, 7 World Trade Center, 13th Floor, New York, New York 10048, and Chicago Regional Office, Citicorp Center, 500 West Madison, Suite 1400, Chicago, Illinois 60661. Copies of such material can also be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates, or through the World Wide Web (http://www.sec.gov). Crompton Common Stock is listed on the NYSE, and such reports, proxy statements and other information concerning Crompton are available for inspection and copying at the offices of the NYSE, 20 Broad Street, New York, New York 10005. Crompton has filed with the Commission a Registration Statement on Form S-1 under the Securities Act of 1933, as amended (together with the rules and regulations promulgated thereunder, the "Securities Act"), with respect to the shares of Crompton Common Stock to be offered hereby (the "Registration Statement"). This Prospectus does not contain all of the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. Reference is hereby made to the Registration Statement and related exhibits for further information with respect to Crompton and the securities offered hereby. Statements contained herein concerning the provisions of any document are necessarily summaries of such documents and not complete, and in each instance, reference is made to the copy of such document attached hereto or filed as an exhibit to the Registration Statement or otherwise filed with the Commission. Each such statement is qualified in its entirety by such reference. intend to make any material changes to the general operating activities of Uniroyal following consummation of the Merger. The principal executive offices of Uniroyal are located at Benson Road, Middlebury, Connecticut 06749, and its telephone number is (203) 573-2000. Uniroyal is subject to the informational requirements of the Exchange Act, and in accordance therewith files reports, proxy statements and other information with the Commission. Prospective investors are urged to read and consider carefully such reports, proxy statements and other information. Uniroyal Common Stock is quoted on the Nasdaq National Market (the "NASDAQ/NM"). Crompton is effecting the Offering in order for the Merger to qualify as a pooling-of-interests for accounting and financial reporting purposes. See "Recent Developments." THE OFFERING <TABLE> <S> <C> Common Stock offered by Crompton............. 1,000,000 shares Common Stock to be outstanding immediately after the Offering........................... 49,039,309 shares(1) NYSE Symbol.................................. CNK Use of Proceeds.............................. The net proceeds to Crompton from the Offering will be used to partially offset the estimated merger costs discussed elsewhere herein. See "Use of Proceeds." Risk Factors................................. See "Risk Factors." </TABLE> - ------------ (1) Calculated based on 48,039,309 shares of Common Stock outstanding on July 30, 1996, and not giving effect to the up to approximately 26,089,206 shares of Common Stock expected to be issued in connection with the Merger. SELECTED HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL DATA Selected Historical Financial Data The selected financial data presented below for Crompton as of December 31, 1994 and December 30, 1995 and for the years ended December 25, 1993, December 31, 1994 and December 30, 1995, and Uniroyal as of October 2, 1994 and October 1, 1995 and for the three years ended September 30, 1993, October 2, 1994 and October 1, 1995, have been derived from and are qualified in their entirety by, and should be read in conjunction with, the respective audited financial statements and notes thereto contained herein. See "Index to Financial Statements." Crompton's statement of operations data for the years ended December 28, 1991 and December 26, 1992 and the balance sheet data as of December 28, 1991, December 26, 1992 and December 25, 1993 are derived from audited Crompton consolidated financial statements that are neither included nor incorporated by reference herein. Uniroyal's statement of operations data for the fiscal years ended September 30, 1991 and 1992 and the balance sheet data as of September 30, 1991, 1992 and 1993 are derived from audited Uniroyal financial statements which are neither included nor incorporated by reference herein. The unaudited financial data presented below for the interim periods ended July 1, 1995 and June 29, 1996, and July 2, 1995 and June 30, 1996, are derived from the unaudited consolidated financial statements of Crompton and Uniroyal, respectively, that are contained herein. In the opinion of Crompton, such unaudited financial data have been prepared on the same basis as the audited financial statements contained herein or otherwise filed with the Commission and include all adjustments (consisting only of normal recurring adjustments) necessary to fairly state the information set forth herein. Operating results for the interim periods ended June 29, 1996 and June 30, 1996 are not necessarily indicative of the results that may be expected for the year or for any other interim period. <TABLE><CAPTION> YEARS ENDED SIX MONTHS ENDED ------------------------------------------------------------------------ ------------------- DECEMBER 28, DECEMBER 26, DECEMBER 25, DECEMBER 31, DECEMBER 30, JULY 1, JUNE 29, 1991 1992 1993 1994 1995 1995 1996 ------------ ------------ ------------ ------------ ------------ -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> Crompton & Knowles Corporation CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales.................. $450,228 517,718 558,348 589,757 665,513 343,810 332,410 Income before extraordinary charges and cumulative effect of accounting changes.................... $ 35,941 43,265 51,958 50,916 40,493 25,254 19,180 Net income................. $ 35,941 34,465 51,958 50,916 40,493 25,254 19,180 Income per common share before extraordinary charges and cumulative effect of accounting changes.................... $ 0.73 0.87 1.00 1.00 0.84 0.52 0.40 Net income per common share...................... $ 0.73 0.69 1.00 1.00 0.84 0.52 0.40 Weighted average number of shares outstanding......... 49,317 49,967 52,176 51,152 48,448 48,569 48,499 CONSOLIDATED BALANCE SHEET DATA: Total assets............... $308,562 350,715 363,246 432,328 484,138 537,369 Long-term debt............. $ 76,118 24,000 14,000 54,000 64,000 79,000 Cash dividends declared per common share............... $ 0.25 0.31 0.38 0.46 0.525 0.255 0.27 </TABLE> <TABLE><CAPTION> YEARS ENDED NINE MONTHS ENDED ------------------------------------------------------------------------- --------------------- SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, OCTOBER 2, OCTOBER 1, JULY 2, JUNE 30, 1991 1992 1993 1994 1995 1995 1996 ------------- ------------- ------------- ---------- ---------- ------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> Uniroyal Chemical Corporation CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales............ $ 832,302 856,591 907,862 946,454 1,079,321 784,567 829,171 Income (loss) before extraordinary charges and cumulative effect of accounting changes... $ (23,648) (27,790) (24,792) (213,843)(3) 99,429(4) 95,694(4) 17,982 Net income (loss).... $ (23,648) (27,790) (236,733) (213,843)(3) 91,150(4) 87,415(4) 17,541 Income (loss) per common share before extraordinary charges and cumulative effect of accounting changes (1)(2)............... $ (2.15) (2.54) (2.31) (20.31)(3) 5.37(4) 5.80(4) 0.72 Net income (loss) per common share (1)(2).. $ (2.15) (2.54) (21.85) (20.31)(3) 4.92(4) 5.30(4) 0.70 Weighted average number of shares outstanding(2)....... 11,167 11,038 10,847 10,543 18,461 16,436 24,582 CONSOLIDATED BALANCE SHEET DATA (5): Total assets......... $ 1,253,370 1,228,569 1,225,438 1,056,017 1,171,707 1,161,047 Long-term debt....... $ 854,619 880,343 1,034,799 1,048,225 910,156 888,856 </TABLE> - ------------ (1) Calculated based on income (loss) available to common shareholders after preferred dividends earned of $375, $262, $267, $292, $395, $298 and $313 for the years ended September 30, 1991, 1992 and 1993, October 2, 1994, and October 1, 1995, and the nine-month periods ended July 2, 1995 and June 30, 1996, respectively. (2) During the second quarter of fiscal 1995, Uniroyal completed an initial public offering. Upon consummation of the offering, certain redeemable common stock owned by Uniroyal management was converted into a single class of common stock. Weighted average number of shares outstanding reflects the conversion on a retroactive basis for all periods presented. (3) Includes an after-tax write-off of $163 million for impairment of certain intangible assets. (4) Includes a gain of $78.9 million related to a deferred tax asset reserve. (See note 10 under "Unaudited Pro Forma Combined Financial Information--Notes To Unaudited Pro Forma Combined Financial Information.") (5) Uniroyal has not declared any dividends on its common stock during the periods indicated above. UNAUDITED SELECTED PRO FORMA COMBINED FINANCIAL DATA The unaudited selected pro forma combined financial data shown below gives effect to the Merger using the pooling-of-interests basis of accounting. The pro forma statement of operations data reflects the combination of statement of operations data of Crompton for each of the years ended December 25, 1993, December 31, 1994 and December 30, 1995, and the six-month periods ended July 1, 1995 and June 29, 1996, with statement of operations data of Uniroyal for each of the years ended September 30, 1993, October 2, 1994 and October 1, 1995, and the six-month periods ended July 2, 1995 and June 30, 1996. The pro forma balance sheet data reflects the combination of balance sheet data of Crompton as of December 25, 1993, December 31, 1994, December 30, 1995 and June 29, 1996 with balance sheet data of Uniroyal as of September 30, 1993, October 2, 1994, October 1, 1995 and June 30, 1996. The selected pro forma combined financial data should be read in conjunction with the unaudited pro forma combined financial information and notes thereto, which are included elsewhere in this Prospectus. These pro forma data do not purport to be indicative of the results that would have actually been obtained if the Merger had been in effect for the above-mentioned periods and on the dates indicated or that may be obtained in the future. <TABLE><CAPTION> SIX MONTHS YEARS ENDED ENDED --------------------------------------------- --------------------- DECEMBER 25, DECEMBER 31, DECEMBER 30, JULY 1, JUNE 29, 1993 AND 1994 AND 1995 AND 1995 AND 1996 AND SEPTEMBER 30, OCTOBER 2, OCTOBER 1, JULY 2, JUNE 30, 1993 1994 1995 1995 1996(4) ------------- ------------ ------------ -------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> PRO FORMA STATEMENT OF OPERATIONS DATA: (2) Net sales................ $ 1,466,210 1,536,211 1,744,834 916,736 930,101 Operating profit........ $ 187,372 1,417(5) 218,122 139,986 131,756 Income (loss) before extraordinary charges and cumulative effect of accounting changes.................. $ 27,166 (162,927)(5) 139,922(6) 131,484(6) 45,530 Income (loss) per common share before extraordinary charges and cumulative effect of accounting changes (1)...................... $ 0.43 (2.65)(5) 2.11(6) 1.96(6) 0.63(7) Weighted average number of shares outstanding (1)...................... 63,689 61,515 66,394 67,109 72,405 PRO FORMA BALANCE SHEET DATA: Total assets............. $ 1,588,684 1,488,345 1,655,845 1,698,416 Long-term debt........... $ 1,048,799 1,102,225 974,156 1,007,906(3) Cash dividends declared per common share (8)..... $ 0.38 0.46 0.525 0.255 0.27 </TABLE> - ------------ (1) Common and common equivalent shares outstanding were calculated assuming a conversion rate of 0.9577 shares of Crompton Common Stock for each share of Uniroyal Common Stock, and 6.3850 shares of Crompton Common Stock for each share of Uniroyal Preferred Stock as provided for in the Merger Agreement. (2) The Pro Forma Statement of Operations Data does not include an estimated $55 million of after tax costs associated with the Merger, as such costs are non-recurring and will be reflected in the statement of operations of the combined company in its first reporting period. (3) Long-term debt includes the financing of the estimated costs of the Merger (see notes 1, 2 and 6 under "Historical and Unaudited Pro Forma Combined Capitalization--Notes to Historical and Unaudited Pro Forma Combined Capitalization"), net of proceeds from the issuance from treasury stock of 1,000,000 shares of Crompton Common Stock to be issued in an offering to take place prior to the consummation of the Merger. (4) After the consummation of the Merger, Uniroyal will change its fiscal year-end to conform with that of Crompton. Results of operations for Uniroyal's quarter ended December 31, 1995 were a net loss of $8.4 million which will be reflected as a one-time adjustment to stockholders' equity in the combined company's 1996 financial statements. (5) Includes an after-tax write-off of $163 million for impairment of certain intangible assets. (6) Includes a gain of $78.9 million related to a deferred tax asset reserve. (See note 10 under "Unaudited Pro Forma Combined Financial Information--Notes To Unaudited Pro Forma Combined Financial Information.") (7) The calculation of pro forma income (loss) per common share before extraordinary charges and cumulative effect of accounting changes does not reflect as outstanding 1,000,000 shares of Crompton Common Stock to be issued in an offering prior to the consummation of the Merger, as such amounts are not reflective of historical trends for the combined company. Assuming the issuance of 1,000,000 shares of treasury stock (see note 3 above) had taken place at the beginning of the year, income per common share before extraordinary charges and cumulative effect of accounting changes for the six months ended 1996 would have been $0.62. (8) Represents Crompton's historical dividends per share. Uniroyal has not declared any dividends on its common stock during the periods presented.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000028630_drs_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000028630_drs_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements (including the notes thereto) appearing elsewhere in this Prospectus. Unless the context otherwise requires, all references herein to the "Company" include Diagnos- tic/Retrieval Systems, Inc. and its consolidated subsidiaries. THE COMPANY Diagnostic/Retrieval Systems,Inc. ("DRS" or the "Company") designs, manufactures and markets high-technology computer workstations for the United States (the "U.S.") Department of Defense, electro-optical targeting systems for military customers and image and data storage products for both military and commer- cial customers. In response to a 1992 mandate by the Joint Chiefs of Staff, the Company focuses on "commercial-off-the- shelf" ("COTS") product designs, whereby commercial electronic components are adapted, upgraded and "ruggedized" for application in harsh military environments. The Company believes that military expenditures on electronic systems and equipment will grow in coming years as the nature of modern warfare dictates increasing reliance on real-time, accurate battlefield informa- tion and the electronic content and sophistication of defense systems increases. During its last three fiscal years, the Company has restruc- tured its management team and implemented strategies to exploit the changing nature of military procurement programs brought on by the end of the cold war, military budget constraints and the COTS mandate. The Company's strategies include: * expanding and diversifying the Company's technol- ogy and product base into complementary military and commercial markets primarily through acquisi- tions and the forging of strategic relationships; * increasing revenue opportunities through the de- sign and adaptation of products for use by all branches of the military; and * enhancing financial performance through specific cost reduction measures and increased manufactur- ing efficiencies. To effect these strategies, the Company has (i) acquired several businesses with complementary military and commercial products and technologies over the last three years; (ii) forged strategic relationships with other defense suppliers such as Lockheed-Martin Tactical Defense Systems (formerly, Loral Corpo- ration) and Westinghouse Electric Corporation, among others; (iii) emphasized the development of COTS-based products as well as products and systems that are easily adapted to similar weapons platforms for use by all branches of the military; and (iv) implemented cost reduction programs to reduce its fixed-cost base, allow for growth and maintain the flexibility of its operations. The implementation of these strategies has resulted in increasing revenues and profits over the last three fiscal years. Although the Company experienced operating losses in fiscal 1990 through 1992, primarily due to cost overruns on a single fixed- price development contract, a shift over the last several years in the nature of military development contracting from fixed- price to cost-type contracts has reduced the Company's exposure in this area. For the fiscal year ended March 31, 1995, the Company had revenues of $69.9 million, net income of $2.6 million and earnings per share of $.50, representing increases of 20.9%, 61.2% and 66.7%, respectively, compared with the year ended March 31, 1994. For the nine months ended December 31, 1995 the Company had revenues of $65.6 million, net income of $2.5 million and fully diluted earnings per share of $.44, representing increases of 38.4%, 45.7% and 29.4%, respectively, compared with the same nine-month period ended December 31, 1994. <TABLE> <CAPTION> SUMMARY FINANCIAL INFORMATION Nine Months Year Ended March 31, Ended December 31, _____________________________________________________________ _____________________ 1995 1994 1993 1992 1991 1995 1994 ____ ____ ____ ____ ____ ____ ____ <S> <C> <C> <C> <C> <C> <C> <C> SUMMARY OF OPERATIONS DATA: Revenues . . . . . . . . $ 69,930,000 $ 57,820,000 $ 47,772,000 $ 28,925,000 $ 47,762,000 $ 65,628,000 $ 47,404,000 Costs and Expenses 64,836,000 54,372,000 45,461,000 37,032,000 52,812,000 60,289,000 44,143,000 Operating Income (Loss) 5,094,000 3,448,000 2,311,000 (8,107,000) (5,050,000) 5,339,000 3,261,000 Interest and Related Expenses (1,372,000) (1,574,000) (1,735,000) (2,198,000) (2,362,000) (1,675,000) (1,020,000) Other Income, Net 534,000 834,000 1,224,000 944,000 1,677,000 425,000 613,000 Earnings (Loss) before Income Taxes (Benefit) 4,256,000 2,708,000 1,800,000 (9,361,000) (5,735,000) 4,089,000 2,854,000 Income Taxes (Benefit) 1,652,000 1,093,000 715,000 (4,006,000) (1,488,000) 1,594,000 1,142,000 Net Earnings (Loss) $ 2,604,000 $ 1,615,000 $ 1,085,000 $ (5,355,000) $ (4,247,000) $ 2,495,000 $ 1,712,000 Net Earnings (Loss) per share of Class A and Class B Common Stock(1)(2) $ .50 $ .30 $ .20 $ (1.01) $ (.79) $ .44 $ .34 December 31, 1995 BALANCE SHEET DATA: Working Capital $ 40,585,000 Net Property, Plant and Equipment $ 14,728,000 Total Assets $ 90,770,000 Long-Term Debt, Excluding Current Installments $ 35,319,000 Net Stockholders' Equity $ 24,907,000 <FN> ___________________________ (1) No cash dividends have been distributed during any of the years in the five-year period ended March 31, 1995 or the nine months ended December 31, 1995. (2) Does not give effect to the Reclassification (as hereinafter defined). On April 1, 1996, the Reclassification became effective pursuant to which each share of the Class A Common Stock (as hereinafter defined) and each share of the Class B Common Stock (as hereinafter defined) was reclassified into one share of the Common Stock. See "The Offering--Reclassification" and "Description of Capital Stock." </TABLE> THE OFFERING Common Stock Offered . . . . 885,924 shares Common Stock to be outstanding after the offering . . . . . . . 5,467,632 shares(1) Reclassification . . . . . . On February 7, 1996, the Board of Directors of the Company approved and recommended for submission to the stockholders of the Company by a majority vote the consideration and approval of an Amended and Restated Certificate of Incor- poration (the "Restated Cer- tificate"), which amended and restated the Company's certif- icate to (i) effect a reclas- sification (the "Reclassifica- tion") of each share of Class A Common Stock, $.01 par value per share (the "Class A Common Stock"), and each share of Class B Common Stock, $.01 par value per share (the "Class B Common Stock"), into one share of Common Stock of the Compa- ny, (ii) provide that action by the stockholders may be taken only at a duly called annual or special meeting, and not by written consent, and (iii) provide that the stock- holders of the Company would have the right to make, adopt, alter, amend, change or repeal the by-laws of the Company only upon the affirmative vote of not less than 66-2/3 % of the outstanding capital stock of the Company entitled to vote thereon. On March 26, 1996, the stockholders approved the Restated Certificate. The Restated Certificate was filed with the Secretary of State of the State of Delaware and became effective on April 1, 1996. As a result of the Reclassification, the Company's 9% Senior Subordi- nated Convertible Debentures due October 1, 2003 (the "De- bentures") and the 81/2% Con- vertible Subordinated Deben- tures due August 1, 1998 (the "1998 Debentures") are con- vertible into shares of Common Stock. In addition, each option issued or issuable pursuant to the Company's stock option plan is now exer- cisable for an equal number of shares of the Common Stock. The purpose of the Reclassifi- cation was to simplify the Company's capital structure, streamline the Company's vot- ing procedures and enhance the marketability and liquidity of and maximize investor interest in the Company's capital stock. In addition, the Com- pany believes that, as a re- sult of the Reclassification, the Company is in a more flex- ible position to raise capital and effect mergers and acqui- sitions using its common stock. However, there can be no assurance that the Reclas- sification will have such effects. Voting Rights . . . . . . . . Holders of Common Stock are entitled to one vote per share on all matters submitted for approval of stockholders. See "Description of Capital Stock." AMEX symbol for Common Stock . . "DRS" Registration Rights . . . . . Pursuant to a registration rights agreement (the "Regis- tration Rights Agreement") between the Company and Pali- sade Capital Management L.L.C. ("Palisade"), acting as in- vestment adviser to the Sell- ing Stockholders, the Company has agreed to file a shelf registration statement (the "Shelf Registration State- ment") relating to the shares of Common Stock offered here- by. The Company has agreed to use its reasonable best ef- forts to maintain the effec- tiveness of the Shelf Regis- tration Statement until the earlier of the disposition of the shares offered hereby or the third anniversary of the effective date of the Shelf Registration Statement, except that it will be permitted to suspend the use of the Shelf Registration Statement during certain periods under certain circumstances. Use of Proceeds . . . . . . . The Company will not receive any proceeds from the sale of shares of Common Stock offered pursuant to this Prospectus. The Selling Stockholders will receive all of the net pro- ceeds from any sale of shares of Common Stock offered here- by. See "Use of Proceeds" and "Selling Stockholders." (1) Based upon 5,467,632 shares of Common Stock outstanding as of May 23, 1996 (exclusive of 498,434 shares held in treasury).
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000030302_alco_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000030302_alco_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. Except as otherwise noted, all information in this Prospectus assumes the Underwriters' over-allotment option has not been exercised (see ``Underwriting''). The Company operates on a fiscal year basis which ends on the Sunday which falls most closely to January 31 of each year. The Company is currently operating in fiscal 1997. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from those discussed in the forward-looking statements. Factors that might cause such a disparity include, but are not limited to, those discussed in ``Risk Factors.'' Prospective investors should carefully consider the information set forth under the heading ``Risk Factors.'' THE COMPANY Duckwall-ALCO Stores, Inc. (the ``Company''), which was established in 1901, is a regional retailer operating, as of September 4, 1996, 173 stores in 16 states in the central United States. Under the names ``ALCO'' and ``Duckwall,'' the Company's strategy is to target smaller markets not served by other regional or national retail discount chains and provide the most convenient access to retail shopping within each market. The Company's ALCO discount stores offer a full line of merchandise consisting of approximately 35,000 items, including automotive, candy, crafts, domestics, electronics, fabrics, furniture, hardware, health and beauty aids, housewares, jewelry, ladies', men's and children's apparel and shoes, pre-recorded music and video, sporting goods, seasonal items, stationery and toys. The Company's smaller Duckwall variety stores offer a more limited selection of merchandise. Of the Company's 121 ALCO discount stores, 77 stores are located in communities which do not have another full service discounter. The Company intends to continue its strategy of opening ALCO stores in markets that do not have other discount retailers and where the opening of an ALCO store would significantly reduce the likelihood of the entry by other competitors in the market. The ALCO stores accounted for approximately 95% of the Company's fiscal 1996 net sales. While the current ALCO stores average approximately 23,300 square feet of selling space, the Company's store expansion program is primarily directed toward stores with a design prototype of approximately 18,000 square feet of selling space, which, based on the Company's experience, has been a design that maximizes return on investment for newly-constructed stores (referred to as ``Class 18 Stores''). The Company's 52 Duckwall variety stores are primarily located in communities of less than 2,500 residents and are designed to act as the primary convenience retailer in these smaller communities. These stores, which accounted for the remaining 5% of the Company's fiscal 1996 net sales, average approximately 4,800 square feet of selling space and offer approximately 12,000 items. Operating Duckwall stores offers the Company the opportunity to serve the needs of a community that would not support a full service retail discount store with a reduced investment per store and a higher return on investment than the Company's average. The Company believes that its strong operating performance and improved financial condition over the last four fiscal years and the first twenty-six weeks of the current fiscal year is the result of the focused execution of a business strategy that includes the following key components: Markets: The Company intends to open ALCO stores in towns with populations of typically less than 5,000 which are in trade areas with populations of less than 16,000 where: (1) there is no direct competition from national or regional discount retailers; (2) economic and demographic criteria indicate the market is able to commercially support a discount retailer; and (3) the opening of an ALCO store would significantly reduce the likelihood of the entry into such market by another discount retailer. This strategy has guided the Company in both its opening of new stores and in the closing of existing stores. Market Selection: The Company has a detailed process which it uses to analyze under-served markets which includes examining factors such as distance from competition, trade area, disposable income and retail sales levels. Markets that are determined to be sizable enough to support an ALCO or a Duckwall store, and that have no direct competition from another discount retailer, are examined closely and eventually selected or passed over by the Company's experienced management team. As of September 4, 1996, the Company's management had approximately 166 markets which it had identified for possible ALCO stores and was in the site selection or development process in 34 of those markets. Store Expansion: The Company's expansion program for ALCO stores is designed around the prototype Class 18 Store. This prototype details for each new store plans for shelf space, merchandise presentation, store items to be offered, parking, storage, as well as other store design considerations. The 18,000 square feet of selling space is large enough to permit a full line of the Company's merchandise, while minimizing capital expenditures, required labor costs and general overhead costs. Generally, the Company has expanded its ALCO stores through internal development efforts on a location-by-location basis. Recently, however, the Company entered into a definitive agreement to assume 14 leases and purchase the related fixtures for ALCO stores in eastern Indiana and western Ohio (the ``Real Estate Transaction''). The Company's expansion strategy for the Duckwall variety store is based on opportunities presented to the Company in and by those communities where there is demand and where existing premises are available for lease at a relatively low cost and with limited financial commitment. Technology: The Company is continually improving its management information technologies in order to reduce costs, improve customer service, and enhance general business planning. The Company's accounting and information systems and merchandise and inventory planning systems have recently been enhanced and are in the process of being implemented. The Company has undertaken a $2.3 million project to upgrade the back office equipment and software being used at the ALCO stores for sales processing. This project is expected to extend the life of the current point-of-sale equipment, as well as to improve efficiencies in training and operations and is expected to be completed in fiscal 1998. In conjunction with the project, the ALCO stores will be equipped with radio frequency hand held devices to allow for additional efficiencies in processing inventory receipts and counts. Advertising and Promotion: The Company utilizes full-color photography advertising circulars of 8 to 20 pages distributed by insertion into newspapers or direct mail where newspaper service is inadequate. These circulars are distributed approximately 41 times per year in ALCO markets. In its Duckwall markets, the Company advertises approximately 12 times a year during seasonal promotions. The Company's marketing program is designed to create an awareness, on the part of its identified target customer base, of the Company's comprehensive selection of merchandise and its competitive pricing. Store Environment: The Company's stores are open, clean, bright and offer a pleasant atmosphere with disciplined product presentation, attractive displays and efficient check-out procedures. The Company strives to staff its stores with courteous, highly motivated, knowledgeable store associates in order to provide a convenient, friendly and enjoyable shopping experience. The Company's growth strategy is to increase sales and profitability at existing stores by continually refining the merchandising mix and improving operating efficiencies, and to open new stores in under-served markets in the central United States. The Company plans to open a total of 15 ALCO stores and 15 Duckwall stores and close 1 ALCO store in the current fiscal year, and open 25 ALCO stores (including the 14 locations involved with the Real Estate Transaction) and at least 15 Duckwall stores during fiscal year 1998, and a minimum of 16 ALCO stores and 15 Duckwall stores during fiscal year 1999. THE OFFERING <TABLE> <S> <C> Common Stock offered: By the Company.............................. 1,000,000 shares By the Selling Stockholders................. 400,000 shares Total................................... 1,400,000 shares Common Stock outstanding after the offering..... 5,000,523 shares <F1> Use of proceeds................................. The Company intends to use the net proceeds of the offering to fund the opening of new stores. Pending such use, the Company intends to use the net proceeds to repay indebtedness under its revolving loan credit facility. Nasdaq National Market symbol................... DUCK <FN> - -------- <F1> Excludes 188,325 Shares of Common Stock for which options have been granted under the Company's Incentive Stock Option Plan and includes 1,013 Shares of Common Stock issued in August and September of 1996 pursuant to options exercised by former employees of the Company. </TABLE> <TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) <CAPTION> TWENTY-SIX WEEKS FISCAL YEAR ENDED ENDED ------------------------------------------------------------------- --------------------- FEBRUARY 2, JANUARY 31, JANUARY 30, JANUARY 29, JANUARY 28, JULY 30, JULY 28, 1992<F1> 1993 1994 1995 1996 1995 1996 ----------- ----------- ----------- ----------- ----------- --------- --------- (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Net sales......................... $210,812 $217,236 $225,903 $242,144 $256,454 $117,532 $127,774 Gross margin...................... 66,181 68,402 71,686 78,964 83,158 38,393 41,962 Income from operations............ 5,561 7,038 8,304 10,207 11,047 4,012 4,715 Interest expense.................. 5,197 4,284 4,091 3,390 2,958 1,417 1,592 Net earnings (loss)............... $ (794) $ 1,559 $ 2,260 $ 4,130 $ 5,130 $ 1,609 $ 1,927 Earnings (loss) per common and common equivalent share<F2><F3>................... $ (.50) $ .57 $ .80 $ 1.51 $ 1.28 $ .40 $ .48 Weighted average common and common equivalent shares outstanding<F3>................. 1,575,813 2,006,250 2,006,250 2,737,620 4,014,351 4,007,909 4,033,522 OPERATING DATA: Stores open at period-end......... 104 110 121 138 156 146 170 Stores in noncompetitive markets at period-end<F4>............... 48 57 72 91 110 100 123 Percentage of total stores in non-competitive markets<F4>..... 46.2% 51.8% 59.5% 65.9% 70.5% 68.4% 72.4% Net sales of stores in non- competitive markets<F4>......... $ 84,835 $ 96,243 $112,590 $132,743 $151,733 $ 69,252 $ 80,793 Percentage of net sales from stores in non-competitive markets<F4>..................... 40.2% 44.3% 49.8% 54.8% 59.2% 58.9% 63.2% Comparable store sales for all stores<F5>...................... (4.2%) (0.3%) 0.0% 1.1% (3.2%) (4.2%) (1.5%) Comparable store sales for stores in non-competitive markets<F4><F5>................. 0.0% 2.7% 4.0% 2.7% (1.0%) (1.4%) 0.2% <CAPTION> JULY 28, 1996 --------------------------- ACTUAL AS ADJUSTED<F6> -------- --------------- <S> <C> <C> BALANCE SHEET DATA: Working capital............................................................. $ 56,786 $ 56,786 Total assets................................................................ 123,072 123,072 Total debt (includes capital lease obligation and current maturities)....... 35,719 23,572 Stockholders' equity........................................................ 55,614 67,761 <FN> - --------- <F1> Net loss and the related loss per share amounts for the fiscal year ended February 2, 1992 as presented above exclude an extraordinary gain from discharge of indebtedness of $43,101 related to the Company's 1991 Reorganization. The extraordinary gain has been excluded from the above table because it is not relevant to ongoing operations. <F2> Earnings per common and common equivalent share for fiscal 1993 and 1994 includes the dilutive effect of accretion in the carrying value of a redeemable common stock purchase warrant of $408 and $645, respectively. See Note 1(i) of Notes to Consolidated Financial Statements. <F3> Pro forma earnings (loss) per common and common equivalent share for fiscal 1992, 1993 and 1994 amounted to $(.41), $.66 and $.96, respectively, based on pro forma weighted average common and common equivalent shares outstanding of 1,925,813, 2,356,250 and 2,356,250, respectively. See Note 1(i) of Notes to Consolidated Financial Statements. <F4> ``Non-competitive'' markets refer to those markets where there is not a national or regional discount store located in the primary market served by the Company. The Company's stores in such non-competitive markets nevertheless face competition from various sources. See ``Business--Competition.'' <F5> Percentages reflect the increase or decrease based upon a comparison of the applicable fiscal year with the immediately preceding fiscal year for stores open during the entirety of both years. <F6> Adjusted to reflect the issuance of 1,000,000 shares of Common Stock offered by the Company hereby, based on an assumed offering price of $13.25 per share, less the underwriting discount and estimated offering expenses, and the application of the net proceeds therefrom. See ``Use of Proceeds'' and ``Capitalization.'' </TABLE>
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000043837_noodle_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000043837_noodle_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere and incorporated by reference in this Prospectus. Unless the context otherwise requires, all references herein to the "Company" include Noodle Kidoodle, Inc. and its subsidiaries. The Company's fiscal year ends on the Saturday closest to January 31 of that year. For example, references to fiscal 1995 refer to the fiscal year ended January 28, 1995. Unless otherwise indicated, the information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. THE COMPANY Noodle Kidoodle, Inc. is a specialty retailer of a broad assortment of educationally oriented, creative and non-violent children's products, including toys, books, games, video and audio tapes, computer software, crafts and other learning products. The Noodle Kidoodle concept offers something new to parents and children by combining the attractive pricing and larger size of traditional toy stores with the more creative product selection and superior customer service of smaller boutiques, while providing an entertaining shopping environment through interactive play areas and daily in-store events. The Company's prototype store is approximately 12,000 square feet and offers customers a warm and inviting shopping environment with brightly lit spaces, colorful walls, ceilings and carpets, wide aisles for strollers and kid-level seating and product shelving. Each store typically carries approximately 25,000 stock-keeping units ("SKUs"), conveniently displayed in separate merchandise departments, such as "Science & Nature" and "Arts & Crafts," which are identified by eye-catching signs that are visual as well as verbal so that children can understand them. All of the products carried in Noodle Kidoodle stores conform to the Company's creative, non-violent and educational merchandising strategy. The Company generally does not carry mass market television advertised toys. However, in certain product categories, the Company does carry brand name products which fit the Noodle Kidoodle philosophy, such as Crayola, Lego, Playmobil, the full line of Walt Disney video titles and the Goosebumps line of books. The Company currently operates 18 Noodle Kidoodle stores in New York, New Jersey, Connecticut and the Chicago metropolitan area, and plans to open approximately 15 more stores in fiscal 1997 in new and existing markets. The Company's near-term plan is to cluster its stores in the Northeastern United States and several Midwestern markets, in order to leverage the Company's advertising programs as well as optimize the capabilities of its strategically located distribution center. The Company believes that there are opportunities for nationwide expansion over the longer term beyond fiscal 1997. The Company's strategy is to become the leading national retailer of educationally oriented children's products. Key components of the Company's business strategy are: . Interactive Shopping Environment--Each Noodle Kidoodle store is designed with children in mind. Each store has designated play areas where children and their parents are encouraged to explore toys and games in keeping with the Company's "try before you buy" philosophy. Among the key interactive features of each store are the Computer Center, "Kidoodle Theater" and Electronic Learning Center. . Broad Assortment of Imaginative Products--Noodle Kidoodle stores offer a broad assortment of products designed to stimulate a child's imagination and contribute to his or her growth and development consistent with the Company's slogan that "Kids learn best when they're having fun." The Company believes that within its targeted age group of infant to twelve years, it offers in a single location one of the broadest available assortments of educationally oriented, creative and non-violent children's products. To keep its merchandise mix fresh and exciting, the Company continually seeks innovative new products. . Daily In-Store Events--The Company provides without charge daily in-store events such as personal appearances by authors and children's television personalities, arts and crafts workshops and readings from selected books to provide entertainment to its customers, increase store traffic and position Noodle Kidoodle as a destination store. . Superior Customer Service--By providing knowledgeable and friendly customer service and selecting enthusiastic employees who enjoy working with children, the Company believes that it has a competitive advantage over lower-service superstores and mass merchandisers. . Targeted Marketing--The Company has created the Noodle Kidoodle Club in order to establish customer loyalty and track repeat customers. The club provides its members advance notice of sale events and special promotions, a bi-monthly newsletter and events calendar, birthday cards sent to children and similar special privileges. The Company is also establishing a targeted direct mail marketing program and is in the process of expanding its customer database for this purpose. . Competitive Pricing--Noodle Kidoodle offers everyday competitive pricing. Many products are regularly discounted and prices in general are believed to be competitive with those featured by superstores carrying the same lines of merchandise. The Company was founded in 1946 and, doing business under its former name Greenman Bros. Inc., historically was engaged in the retail toy business as well as the wholesale distribution of general merchandise, with an emphasis on toys, stationery and housewares. During the 1980s, the Company operated a number of retail toy stores, including a chain of 330 stores under the Circus World name located principally in shopping malls in approximately 30 states. The Company sold the Circus World stores in fiscal 1991 but continued to operate a number of retail toy stores under the Playworld name. The Company opened its first Noodle Kidoodle store in November 1993, and opened three additional Noodle Kidoodle stores in fiscal 1995. During fiscal 1996, management determined, based in large part on the success of its early Noodle Kidoodle stores, that the Company should focus exclusively on its retail business by expanding and developing the Noodle Kidoodle retail concept. Accordingly, in August 1995, the Company adopted a new business plan and ceased operating its wholesale division, which generated net sales of $113.2 million in fiscal 1995. The Company recently changed its name from Greenman Bros. Inc. to Noodle Kidoodle, Inc. and its jurisdiction of incorporation to Delaware. The Company's executive offices are located at 105 Price Parkway, Farmingdale, New York 11735. Its telephone number is (516) 293-5300. RECENT DEVELOPMENT For the nine-week period ended December 30, 1995, during which the Company added three additional Noodle Kidoodle stores, the Company recorded net sales of $15.9 million and gross profit of $6.3 million. The Company was satisfied with its holiday season especially in light of the generally weak retail environment and the severe weather conditions in its major markets, particularly during the week prior to Christmas. THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Company....................... 2,000,000 shares Common Stock to be Outstanding after the Offering......... 7,369,890 shares (1) Use of Proceeds........................................... Primarily to finance new store openings, as well as for general corporate purposes. See "Use of Proceeds" and "Business--Expansion Strategy." Nasdaq National Market Symbol............................. NKID </TABLE> - ------------ (1) Excludes as of February 8, 1996 (i) 587,984 shares of Common Stock issuable upon exercise of outstanding options at exercise prices ranging from $3.50 to $13.13 per share and (ii) 279,250 shares of Common Stock reserved for issuance pursuant to options issuable under the Company's stock option plans. SUMMARY FINANCIAL INFORMATION AND STORE DATA(A) (IN THOUSANDS, EXCEPT PER SHARE AND STORE DATA) <TABLE> <CAPTION> THIRTY-NINE WEEKS FISCAL YEARS ENDED ENDED ---------------------------------------------------- ----------------------- FEB. 2, FEB. 1, JAN. 30, JAN. 29, JAN. 28, OCT. 29, OCT. 28, 1991 1992 1993 1994 1995 1994 1995 -------- -------- -------- -------- -------- ----------- -------- <S> <C> <C> <C> <C> <C> <C> <C> (UNAUDITED) STATEMENT OF OPERATIONS DATA: Net sales......................... $ 11,022 $ 12,850 $ 18,250 $ 20,712 $ 23,308 $12,042 $ 13,508 Gross profit...................... 3,885 4,794 5,471 6,143 7,116 3,828 4,724 Selling and administrative expenses........................ 5,078 5,813 6,645 8,401 10,790 6,937 10,563 Provision for restructured operations(b)................... -- -- -- -- 3,900 3,500 500 Operating loss.................... (1,193) (1,019) (1,174) (2,258) (7,574) (6,609) (6,339) Net income (loss): Continuing operations........... (2,622) (1,141) (425) (1,180) (4,490) (3,819) (5,870) Discontinued operations(c)...... (12,305) 5,069 2,226 1,889 1,096 22 (9,059) Extraordinary item(d)........... 325 (263) -- -- -- -- -- -------- -------- -------- -------- -------- ----------- -------- Net income (loss)............. $(14,602) $ 3,665 $ 1,801 $ 709 $ (3,394) $(3,797) $(14,929) -------- -------- -------- -------- -------- ----------- -------- -------- -------- -------- -------- -------- ----------- -------- Net income (loss) per share: Continuing operations........... $ (.44) $ (.21) $ (.08) $ (.22) $ (.86) $ (.73) $ (1.11) Discontinued operations(c)...... (2.07) .92 .40 .35 .21 -- (1.71) Extraordinary item(d)........... .06 (.05) -- -- -- -- -- -------- -------- -------- -------- -------- ----------- -------- Net income (loss) per share... $ (2.45) $ .66 $ .32 $ .13 $ (.65) $ (.73) $ (2.82) -------- -------- -------- -------- -------- ----------- -------- -------- -------- -------- -------- -------- ----------- -------- Weighted average shares outstanding....................... 5,949 5,540 5,575 5,338 5,220 5,207 5,302 OTHER FINANCIAL DATA: Net sales: Noodle Kidoodle................. $ -- $ -- $ -- $ 1,168 $ 6,414 $ 2,544 $ 11,042 Other Retail(e)................. 11,022 12,850 18,250 19,544 16,894 9,498 2,466 -------- -------- -------- -------- -------- ----------- -------- Total net sales............... 11,022 12,850 18,250 20,712 23,308 12,042 13,508 Discontinued operations:(c) Net sales....................... $198,890 $151,718 $136,488 $122,138 $113,194 $80,729 $ 50,635 Gross profit.................... 52,753 33,475 31,035 26,711 24,604 17,069 9,164 Operating income (loss)......... (8,666) 5,576 3,633 3,171 1,781 37 (1,914) Provision for discontinued operations.................... 5,712 -- -- -- -- -- 7,145 -------- -------- -------- -------- -------- ----------- -------- Net income (loss)............... (12,305) 5,069 2,226 1,889 1,096 22 (9,059) STORE DATA (AT END OF PERIOD): Number of stores: Noodle Kidoodle................. -- -- -- 1 4 3 15 Other Retail(e)................. 6 8 10 10 4 10 4 -------- -------- -------- -------- -------- ----------- -------- Total......................... 6 8 10 11 8 13 19 Gross square footage: Noodle Kidoodle................. -- -- -- 10,450 39,700 29,700 160,130 Other Retail(e)................. 56,570 68,870 86,400 86,400 31,500 86,400 31,500 -------- -------- -------- -------- -------- ----------- -------- Total......................... 56,570 68,870 86,400 96,850 71,200 116,100 191,630 </TABLE> <TABLE> <CAPTION> OCTOBER 28, 1995 ------------------------- ACTUAL AS ADJUSTED(F) ------- -------------- <S> <C> <C> BALANCE SHEET DATA: Working capital............................................................... $14,772 $ 28,911 Net assets of discontinued operations(c)...................................... 6,327 6,327 Total assets.................................................................. 38,872 53,011 Total debt.................................................................... -- -- Total liabilities............................................................. 12,428 12,428 Stockholders' equity.......................................................... 26,444 40,583 </TABLE> - ------------ (a) As a result of recent strategic changes, period-to-period comparisons of financial results are not meaningful. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000052532_mercury_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000052532_mercury_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS NOT INTENDED TO BE COMPLETE AND SHOULD BE READ IN CONJUNCTION WITH, AND IS QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS. EACH PROSPECTIVE INVESTOR IS URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY. UNLESS OTHERWISE INDICATED, ALL INFORMATION HEREIN ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED. ALL PER SHARE AND OTHER SHAREHOLDER INFORMATION HAS BEEN ADJUSTED TO REFLECT THE EFFECT OF A JUNE 16, 1995 TEN PERCENT STOCK DIVIDEND. EXCEPT AS OTHERWISE NOTED, REFERENCES IN THIS PROSPECTUS TO "MERCURY" OR THE "COMPANY" REFER TO MERCURY AIR GROUP, INC. AND ITS SUBSIDIARIES. THE DEBENTURES OFFERED HEREBY ARE OBLIGATIONS OF MERCURY AIR GROUP, INC., THE PARENT HOLDING COMPANY, AND NOT ITS SUBSIDIARIES, AND REFERENCES TO "MERCURY" OR THE "COMPANY" RELATING TO THE DEBENTURES REFER ONLY TO THE PARENT HOLDING COMPANY. THE COMPANY Mercury provides a broad range of services to the aviation industry. These services include fuel sales and fuel delivery to commercial, private and military aircraft (collectively, "fuel sales and services"); cargo handling, space brokerage and general cargo sales agent services (collectively, "cargo operations"); fixed base operations for commercial, private and other aircraft, including fuel sales, fuel delivery services ("into-plane services"), ground support services and tie-down facilities (collectively, "FBOs"); and the operation of government-owned fuel depots and the performance of aircraft and other services at U.S. military bases (collectively, "government contract services"). Mercury's customers in one or more of these categories include domestic and international airlines; regional and commuter air carriers; operators of cargo, corporate and private aircraft; and the U.S. government. FUEL SALES AND SERVICES. Mercury's fuel sales and services consist primarily of aviation fuel sales; comprehensive fuel management services, which allow customers to reduce administrative expenses; into-plane services; and the brokering of non-aviation fuel. Through its extensive network of third-party delivery and supply relationships, Mercury conducts its fuel sales business at over 100 airports primarily in the United States, as well as throughout the world. At most of these locations, Mercury contracts with third parties for into-plane services, thereby minimizing its fixed costs and capital requirements. Mercury believes that its status as a volume purchaser and its creditworthiness enable it to purchase fuel on more favorable pricing and credit terms than most of its customers could obtain independently. Mercury's fuel sales and services strategy is to expand its business with existing customers and attract new customers by further enhancing its customer services and by continuing to offer favorable credit terms and competitive fuel prices. CARGO OPERATIONS. Mercury's cargo operations are conducted primarily at Los Angeles International Airport ("LAX") where it maintains approximately 90,000 square feet of warehouse facilities. Mercury also leases a 45,000 square foot warehouse facility near the San Francisco International Airport which it uses for cargo handling operations. In September 1995, Mercury acquired the operating and other assets of certain providers of cargo handling services at airport facilities in Toronto and Montreal, Canada. See "Business -- Recent Developments - -- Excel Cargo." Mercury's strategy is to continue to expand its cargo handling operations by securing additional warehouse facilities on favorable economic terms and to obtain additional customers to fully utilize existing warehouse facilities. Space brokerage, a significant part of Mercury's cargo operations, consists of contracting with domestic and international airlines for cargo space and reselling the cargo space to customers with shipping needs. This allows airlines to increase cargo capacity utilization by using Mercury's marketing capabilities. Mercury's strategy is to expand its space brokerage operations by establishing relationships with additional shipping agents and by contracting for additional cargo space. In conducting its general cargo sales agent services, another important component of Mercury's cargo operations, Mercury acts as an agent for airlines in the Far East, Mexico, Central and South America and the United States. In this capacity, Mercury earns a commission from the airlines for selling air cargo space. Mercury's strategy is to expand its revenues and operating income from general cargo sales agent services by obtaining new sales territories for airlines with which it has an existing relationship and by entering into arrangements with additional airlines. FBOS. Mercury's FBO services are performed at leased facilities located at LAX and at airports in Reno, Nevada; Bakersfield, California; Burbank, California; and Santa Barbara, California. At each FBO, Mercury maintains administrative offices, conducts fuel sales and refueling operations, provides catering and other ground support services and provides tie-down space for its customers. Mercury's strategy is to acquire additional FBOs on favorable economic terms and to expand its business at existing FBOs. GOVERNMENT CONTRACT SERVICES. Mercury conducts its government contract services at 14 military bases throughout the United States and at three military bases outside the United States, one in Greece and two in Japan. The majority of these contracts entail providing equipment and manpower to fuel aircraft, but do not include the sale of fuel, the procurement of which is handled by the military. The Company's government contracts have terms of one to four years. Mercury has recently lost several government contracts due to base closures and other reasons. Mercury's strategy in the government contract services area is to retain existing contracts and cost effectively bid for new refueling contracts. Mercury also intends to expand the types of outsourcing services provided to the U.S. government beyond the Company's core military refueling business. Potential areas of expansion include engineering services, base operating services and maintenance and operations services. Mercury believes its expansion efforts in this area will be facilitated by its familiarity with military base operations and government contract requirements. Mercury's principal executive offices are located at 5456 McConnell Avenue, Los Angeles, California 90066, and its telephone number is (310) 827-2737. The Company was incorporated in New York in April 1956. THE OFFERING <TABLE> <S> <C> Securities Offered................. $25,000,000 aggregate principal amount of % Convertible Subordinated Debentures due 2006. Maturity Date...................... February , 2006. Interest Payment Dates............. Interest payable semi-annually on August and February of each year, commencing August , 1996. The first interest payment will represent interest from the date of original issuance to and including August , 1996. Denominations...................... $1,000 and any integral multiple thereof. Conversion Rights.................. The Debentures are convertible at the option of the holder at any time prior to maturity, unless previously redeemed or repurchased, at a conversion rate of shares of Common Stock per $1,000 principal amount of Debentures (equivalent to a conversion price of approximately $ per share), subject to adjustment in certain circumstances as described herein. No accrued interest will be paid upon conversion, except that Debentures called for redemption which are held on a record date respecting any interest payment date shall be paid accrued interest to the earlier of the date of conversion or through the end of the related semi-annual interest payment period. See "Description of Debentures -- Conversion Rights." </TABLE> <TABLE> <S> <C> Optional Redemption................ The Debentures are redeemable on or after February , 1999, in whole or in part, at any time, at the option of Mercury, at the declining redemption prices set forth herein plus accrued and unpaid interest to the date of redemption. In addition, Mercury may redeem the Debentures between February , 1998 and February , 1999, if the closing price of the Common Stock has been at least 140% of the Conversion Price (as defined herein) for at least 20 trading days within a period of 30 consecutive trading days ending not more than five trading days prior to the date of the redemption notice. See "Description of Debentures -- Optional Redemption." Sinking Fund....................... None. Redemption Option Upon Death of Holder.................. Debentures tendered by an authorized representative or the surviving joint tenant, tenant by the entirety or tenant in common of a deceased holder will be redeemable, in whole or in part, within 60 days of tender, at 100% of the principal amount plus accrued and unpaid interest to and including the date of redemption, subject to a maximum principal amount of $100,000 per deceased holder and a maximum aggregate principal amount for all deceased holders of $500,000 during each calendar year. See "Description of Debentures -- Repurchase of Debentures Upon Death of Holder." Repurchase at Option of Holder After Certain Changes of Control.......................... After a Change of Control and a Rating Downgrade, each holder will have the right, subject to certain conditions, to require Mercury to repurchase all or part of such holder's Debentures at 100% of the principal amount thereof, plus accrued and unpaid interest to the date of repurchase. See "Risk Factors -- Limitations on Repurchase of Debentures" and "Description of Debentures -- Repurchase of Debentures at the Option of the Holder After Certain Changes of Control." Subordination...................... The Debentures are unsecured obligations of Mercury and are subordinated in the right of payment to all existing and future Senior Indebtedness (as defined herein) of Mercury. As of September 30, 1995, assuming application of the net proceeds of this offering in the manner described herein, Senior Indebtedness would have been approximately $10.9 million. The Indenture does not restrict the incurrence of additional Senior Indebtedness or other indebtedness by Mercury or any subsidiary. See "Risk Factors -- Subordination" and "Description of Debentures -- Subordination." Rating............................. The Debentures are rated "B-" by Standard & Poor's Corporation. See "Rating of Debentures." Listing............................ The Debentures have been approved for listing on the AMEX under the symbol MAX.A. Application has also been </TABLE> <TABLE> <S> <C> made to list the Debentures on the PSE. The Common Stock is listed on the AMEX and traded under the symbol "MAX." See "Price Range of Common Stock and Dividend Policy." Use of Proceeds.................... Mercury intends to use the net proceeds of this offering to repay the outstanding balance under the Revolver (as defined herein); to fund expansion and growth, both internally and through acquisitions; and for general corporate purposes. See "Use of Proceeds." </TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA <TABLE> <CAPTION> THREE MONTHS ENDED FISCAL YEAR ENDED JUNE 30, SEPTEMBER 30, ----------------------------------------------------------- ---------------------- 1991 1992 1993 1994 1995 1994 1995 ---------- ---------- ----------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Sales and revenues.................... $ 73,498 $ 71,746 $ 84,543 $ 103,069 $ 183,000 $ 35,554 $ 51,880 Operating income...................... 7,909 6,492 8,903 12,665 16,573 3,851 4,597 Income before income taxes............ 1,634 616 3,363(1) 5,169 7,312 1,724 2,076 Net income............................ 944 359 1,950 2,995 4,307 1,002 1,232 PER SHARE DATA: (2) Net income per common share on a fully diluted basis....................... $ 0.38 $ 0.01 $ 0.39 $ 0.59 $ 0.76 $ 0.18 $ 0.22 Weighted average common shares outstanding......................... 2,377,821 2,394,151 2,431,549 3,719,884 5,420,158 5,354,000 5,415,000 SUPPLEMENTAL DATA: EBITDA (3)............................ $ 4,474 $ 2,761 $ 5,024 $ 8,404 $ 11,210 $ 2,661 $ 3,124 Ratio of earnings to fixed charges (4)................................. 1.82x 1.36x 2.73 x 3.82x 4.16x 4.34x 4.11x Dividends per share (5)............... -- -- -- -- $ 0.02 -- $ 0.01 </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1995 -------------------------- ACTUAL AS ADJUSTED (6) --------- --------------- (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Working capital......................................................................... $ 20,488 $ 31,991 Total assets............................................................................ 59,491 72,544 Long-term debt (net of current maturities).............................................. 20,011 33,064 Total liabilities....................................................................... 40,756 53,809 Shareholders' equity.................................................................... 18,735 18,735 </TABLE> - --------------- (1) Includes a pre-tax gain from a legal judgment in the amount of $1,060,000. (2) Shares outstanding and earnings per share have been adjusted retroactively to reflect the payment of a ten percent stock dividend on June 16, 1995. (3) EBITDA as used herein means earnings before interest expense, interest income, taxes, depreciation and amortization, and excludes minority interest and the pre-tax gain from a legal judgment in fiscal 1993. (4) For purposes of calculating this ratio, earnings consist of income before income taxes and fixed charges. Fixed charges consist of interest expense and one-third of rental expense, representative of that portion of the rental expense attributable to interest. The pro forma ratio, adjusted to reflect the issuance of the Debentures offered hereby and the application of the net proceeds therefrom to repay the Revolver, with the balance invested at short-term market rates, would be 2.70x and 2.96x for the year ended June 30, 1995 and the three months ended September 30, 1995, respectively. (5) In December 1994, Mercury's Board of Directors adopted a quarterly dividend plan of $.01 per share of common stock. Dividends in the aggregate amounts of $50,000, $50,000, $55,000 and $54,000 were paid on February 1, 1995, May 1, 1995, September 1, 1995 and November 1, 1995, respectively. (6) Adjusted to reflect the issuance of the Debentures offered hereby and the application of a portion of the net proceeds therefrom to repay the Revolver in full. As of December 31, 1995, the amount of the Revolver was $13.2 million. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000055698_first_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000055698_first_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Except as otherwise indicated, the information in this Prospectus assumes the Underwriters' over allotment option is not exercised. All information reflects the two-for-one, three-for-one, and two-for-one stock splits effected on June 14, 1991, December 15, 1992 and December 29, 1995, respectively. The First Years Inc. is a leading developer and worldwide marketer of a broad line of innovative, high-quality, value-priced, developmentally-sound products for infants and toddlers. Since 1973, the Company has sold products under its well-known brand name and principal trademark, THE FIRST YEARS. In the last three years, the Company has entered into licensing agreements with The Walt Disney Companies to feature Winnie the Pooh characters on a variety of its products in various countries. The Company's product line now contains approximately 300 items and is divided into five categories -- Feeding & Soothing, Care & Safety, Play & Discover, Gifts & Sets and Winnie the Pooh. Retail prices for the Company's products range from approximately $0.99 to $69.99. Major channels through which the Company sells its products include mass merchants, supermarkets, drug stores, department stores, wholesale clubs, convenience stores, specialty stores, mail-order catalogs and catalog showrooms. The Company currently has over 1,000 customers in over 40 countries. Major customers include Wal*Mart, Toys "R" Us, Target, Kmart, J. C. Penney, Kroger and Baby Superstore. The Company believes that a number of recent demographic trends in the United States have had a favorable impact on the market for juvenile products in general and the appeal of the Company's product line in particular. In the U.S. and many other developed countries, children are being born to dual-income parents and parents are having children at later ages. The Company also believes that parents in general, and especially older parents, are now more aware of the developmental importance of a child's early years and more concerned about safety, quality and value in juvenile products and that they are also more willing and able to pay for products that embody these qualities. Capitalizing on its reputation for parenting expertise and product quality, its development of products that are based on Ideas Inspired by Parents and its longstanding relationship with Dr. T. Berry Brazelton and the Child Development Unit at Boston's Children's Hospital, the Company believes it is well positioned to produce new and innovative products that meet the requirements of today's parents. The Company believes that its growth will result in large part from the continued expansion of its existing product line for infants and toddlers up to three years of age and the development of products for children from three to six years of age. The Company introduced 45 new products in 1994, 90 new products in 1995 and intends to introduce over 60 new products in 1996. Among the 1995 items were initial entries into product segments that were new to the Company. Those entries included several higher-priced furnishings, such as bath seats, booster seats and step stools; higher-priced boxed toys; electronic products for the nursery, including a nursery monitor and crib tape player/night light; travel-related products such as diaper bags and child carriers; and 25 products featuring Winnie the Pooh characters. In 1996, the Company is expanding each of its product categories, including the introduction of 26 new products featuring Winnie the Pooh characters. During this period of rapid product development, net sales have increased from approximately $46.1 million in 1993 to $75.8 million in 1995. The Company believes that its future growth will also come from the expansion of its distribution in both domestic and international markets. The Company's strategy in the United States is to increase its penetration in all of its major channels of distribution. Internationally, the Company has expanded its sales in Europe with the opening of a sales office in the United Kingdom in 1992 and has increased distribution of its products in the past few years in Canada, Central and South America, the Middle East and the Pacific Rim. The Company believes that its products have been well received by international consumers and that the number of births and rising income levels in international markets present significant opportunities for growth. The Company was incorporated in 1952 in Massachusetts under the name Kiddie Products, Inc. The Company changed its name to The First Years Inc. in May 1995. The Company's headquarters are located at One Kiddie Drive, Avon, Massachusetts 02322, and its telephone number is (508) 588-1220. [THE FIRST YEARS] IFC [Child on parent's shoulders with Company logo superimosed.] THE FIRST YEARS(R), Ideas Inspired by Parents(R), TumbleMates(R), Firstronics(R) and Washables(R) are registered trademarks of The First Years Inc. Simplicity(TM), Sure(TM), Choice(TM), Clip'n Go(TM), Neats(TM), PackMates(TM), Nurserytronics(TM), Step-by-Step(TM) and First Gifts(TM) are trademarks of The First Years Inc. 3M(R) and SCOTCHGARD(R) are registered trademarks of Minnesota Mining and Manufacturing Company. WINNIE THE POOH(R), POOH(R), DISNEY BABIES(R), and 101 DALMATIANS(R) are registered trademarks of Disney Enterprises, Inc. ------------------------ IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. ------------------------ IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS AND THEIR AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF THE COMPANY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING." THE OFFERING <TABLE> <S> <C> Common Stock offered by: The Company............................................. 400,000 shares The Selling Stockholders................................ 1,200,000 shares Total.............................................. 1,600,000 shares Common Stock to be outstanding after completion of this Offering(1)................................................ 4,935,570 shares Use of proceeds.............................................. Debt repayment and working capital. See "Use of Proceeds." Nasdaq National Market symbol................................ KIDD </TABLE> - --------------- (1) Based on shares outstanding at June 3, 1996. Does not include 453,662 shares issuable upon the exercise of outstanding options under the Company's stock plans. SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ----------------------------------------------- ----------------- 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF INCOME DATA: Net sales........................ $37,993 $45,267 $46,124 $53,233 $75,757 $15,802 $23,009 Cost of products sold............ 20,199 23,645 26,654 29,498 45,109 9,256 13,947 Selling, general, and administrative expenses........ 14,776 18,430 17,857 18,916 23,961 5,158 6,926 Income before income taxes....... 3,306 3,315 1,278 4,861 6,207 1,383 1,972 Net income....................... 1,916 1,930 796 2,989 3,724 830 1,187 Earnings per share(1)............ $ 0.43 $ 0.43 $ 0.18 $ 0.66 $ 0.80 $ 0.18 $ 0.25 Weighted average number of shares outstanding.................... 4,497 4,497 4,497 4,497 4,663 4,662 4,689 </TABLE> SUMMARY BALANCE SHEET AT MARCH 31, 1996: <TABLE> <CAPTION> AS ACTUAL ADJUSTED(2) ------- ----------- <S> <C> <C> Current assets........ $37,242 $$37,242 Property, plant, and equipment - net..... 6,708 6,708 ------- ----------- $43,950 $43,950 ======= ========= </TABLE> <TABLE> <CAPTION> AS ACTUAL ADJUSTED(2) ------- ----------- <S> <C> <C> Current liabilities... $16,272 $ 9,863 Long term liabilities......... 715 715 Stockholders' equity.............. 26,963 33,372 ------- ----------- $43,950 $43,950 ======= ========= </TABLE> - --------------- (1) The net proceeds from the sale of approximately 387,000 of the shares of Common Stock offered by the Company hereby will be used to repay certain indebtedness. Assuming these shares had been issued and the indebtedness repaid as of January 1, 1995, pro forma earnings per share for 1995 would have been $0.76. (2) Adjusted to reflect the sale of the 400,000 shares of Common Stock offered by the Company hereby at an assumed public offering price of $17.25 per share (the last reported sale price on June 3, 1996) and after deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company related to the Offering, and the application of the net proceeds therefrom. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000060064_loehmanns_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000060064_loehmanns_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and consolidated financial statements appearing elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus, including the share and per share information, (i) gives effect to the Recapitalization Transactions as defined under "The Company" and (ii) assumes no exercise of the Underwriters' over-allotment option. As used in this Prospectus, references to a fiscal year refer to Loehmann's, Inc.'s fiscal year ended or ending on the Saturday closest to January 31 of the following year. Certain statements in this Prospectus (including this Prospectus Summary) constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). See "Special Note Regarding Forward-Looking Statements." THE COMPANY Loehmann's, Inc. ("Loehmann's" or the "Company"), founded in 1921 as the "Original Designer Outlet," is a leading specialty retailer of well known designer and brand name women's fashion apparel, accessories and shoes offered at prices that are typically 25% to 50% below department store prices. The Company believes it has developed a unique franchise as the largest national upscale off-price specialty retailer--one that differentiates itself from finer department stores by offering similar merchandise at significantly lower prices, and from other off-price apparel retailers by offering a broad range of designer and bridge merchandise. The Company currently operates 73 stores in major metropolitan markets located in 23 states. The Company has embarked on an expansion strategy to capitalize on the strength of its franchise and well-recognized name. The following factors serve as the Company's key strengths and distinguishing characteristics: . The Company, like finer department stores, is known for carrying designer and bridge labels by prominent designers such as Donna Karan, Calvin Klein, Ralph Lauren, Adrienne Vittadini, Tahari, Dana Buchman, Andrea Jovine and Emanuel Ungaro, among others. However, unlike finer department stores, the Company offers such merchandise for sale at a substantial discount. . Loehmann's high quality image and affluent customer base uniquely position the Company as a principal choice for well known designers who believe their prestige will be preserved by having their merchandise offered by Loehmann's as opposed to other off-price retailers. . The Company provides in-season high quality merchandise to its stores on a daily basis as a result of its flexible purchasing strategy, low-price, cyclical markdown policy and efficient inventory management systems. . The Company has a low-cost operating structure as a result of its no-frills store format, lean corporate overhead and disciplined real estate strategy. In recent years, the Company has sought to broaden its appeal and to increase margins through the addition of new product categories such as shoes and a broader range of accessories and intimate apparel. Since the introduction or expansion of these categories starting in fiscal 1992, gross margins have increased from 26.4% for fiscal 1992 to 31.1% for fiscal 1995 and to 31.7% for the first six months of fiscal 1996. In addition, to prepare for its store expansion program, the Company has made significant investments in merchandising, planning, allocation and MIS infrastructure and has continued to refine its store format. To capitalize on its unique franchise, the Company has embarked on a new store expansion program under which it intends to open seven stores in fiscal 1996 and seven to ten stores in each of the next two fiscal years. Four of the seven stores planned for fiscal 1996 already have been opened. Based on its historical operating experience, the Company believes that its larger stores typically experience enhanced operating performance with increased inventory turns, higher margins and increased profitability. The Company's eight stores which exceed 23,000 square feet averaged $11.7 million in net sales in fiscal 1995 as compared to $4.7 million for the balance of the Company's stores which were open for the entire year in fiscal 1995. These eight stores generated store contribution as a percentage of net sales of 15.1% as compared to 13.3% for the balance of the Company's stores. To take advantage of the favorable economics associated with its larger stores, the Company's prototype for its new stores is 25,000 to 35,000 square feet compared to the Company-wide average of approximately 16,000 square feet. The Company's planned store openings for fiscal 1996 will be located in existing markets where the Loehmann's franchise is well established and in central business districts which have appealing demographics, such as New York and Boston. As part of its store opening program, the Company intends to open a new 60,000 square foot flagship store in downtown Manhattan at the site that recently housed Barneys' Seventh Avenue Men's Store in October 1996. RECENT DEVELOPMENTS Since February 1996, the Company has opened four of the seven stores planned for fiscal 1996, one each in Merrick, New York, Houston, Texas, San Diego, California and Paramus, New Jersey. These new stores reflect the Company's new, larger store format and average approximately 26,000 square feet compared to the Company-wide average of approximately 16,000 square feet. Two of the new stores being opened in fiscal 1996 are replacing existing, smaller format stores. The Company has signed leases for its three remaining stores planned for fiscal 1996. Two of these stores are scheduled to open during the third quarter, including the Company's new 60,000 square foot flagship store in downtown Manhattan and a new central business district store in Boston, Massachusetts. The third store, a replacement store in Brooklyn, New York, is scheduled to open in November 1996. These new stores, other than the Company's Manhattan store, will each be approximately 30,000 square feet. The Company has also signed four leases associated with stores to be opened in fiscal 1997 including locations in Seattle, Washington, Ft. Lauderdale, Florida, Tustin, California, and Westbury, New York. The Company is currently in lease negotiations for several other store locations for fiscal 1997 openings. Combined sales of the Company for the months of August and September 1996 rose 12.0% to $73.2 million from $65.4 million in the comparable period in 1995, and combined comparable store sales of the Company for August and September 1996 were up 3.4% from the comparable period in 1995. THE OFFERING <TABLE> <CAPTION> <S> <C> Common Stock offered by the Selling Stockholders..... 1,970,000 shares Common Stock to be outstanding after the Offering.... 8,385,638 shares (1) Nasdaq National Market symbol........................ LOEH </TABLE> - ------------ (1) Excludes (i) 958,664 shares of Common Stock, par value $0.01 per share, of the Company (the "Common Stock") which, upon consummation of the Offering, will be issuable upon the exercise of outstanding stock options at a weighted average exercise price of approximately $7.08 per share, 365,963 of which will be exercisable immediately and (ii) 469,237 shares of Class B Common Stock, which are convertible after November 6, 1996 into 469,237 shares of Common Stock. SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT OPERATING AND PER SHARE DATA) <TABLE><CAPTION> FISCAL YEAR SIX MONTHS ENDED ------------------------------------------------ ----------------------------- JULY 29, AUGUST 3, 1991 1992 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- ------------- -------------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: ]Net sales........................ $389,183 $389,330 $373,443 $392,606 $386,090 $ 186,932 $194,772 Gross profit...................... 92,310 102,691 98,452 114,208 120,201 57,705 61,834 Store contribution (1)............ 39,384 45,948 39,180 49,192 52,159 25,240 28,402 Depreciation and amortization..... 12,462 11,492 14,334 11,955 12,120 6,062 6,046 Charge for store closings and impairment of assets (2)......... -- -- -- -- 15,300 15,300 -- Operating income (loss)........... 11,146 16,233 8,654 16,613 3,296 (6,116) 11,101 Interest expense, net............. 17,663 16,889 17,299 18,085 18,153 8,955 7,990 Income (loss) before extraordinary items............................. (6,472) (783) (8,724) (1,506) (14,963) (15,179) 3,051 Extraordinary items (3)........... -- -- 3,507 -- -- -- 7,101 Net loss (4)...................... (6,472) (783) (12,231) (1,506) (14,963) (15,179) (4,050) Stock dividends on and normal and accelerated accretion of preferred stock (5).............. 1,181 1,335 1,496 1,802 2,056 922 5,668 Net loss applicable to common stock (4)......................... (7,653) (2,118) (13,727) (3,308) (17,019) (16,101) (9,718) Net loss per share applicable to common stock before extraordinary items............................. $(1.78) $(0.49) $(2.18) $(0.63) $(3.12) $(3.07) $(0.38) Net loss per share applicable to common stock after extraordinary items............................. (1.78) (0.49) (2.93) (0.63) (3.12) (3.07) (1.40) Weighted average common shares outstanding (6)................... 4,297 4,299 4,680 5,228 5,463 5,247 6,934 </TABLE> <TABLE><CAPTION> SIX MONTHS ENDED ------------------------------- JULY 29, AUGUST 3, 1995 1996 ------------- -------------- <S> <C> <C> PRO FORMA STATEMENT OF OPERATIONS DATA (7): Net sales........................................................... $ 186,932 $194,772 Store contribution (1).............................................. 25,240 28,402 Depreciation and amortization....................................... 5,722 5,895 Operating income (loss)............................................. (5,776)* 11,253 Interest expense, net............................................... 5,800 5,499 Net income (loss)................................................... (7,061)* 3,510 Earnings (loss) per share........................................... $ (0.79)* $ 0.37 Weighted average common shares and common share equivalents outstanding......................................................... 8,946 9,503 </TABLE> - ------------ * Includes a charge to operating income (loss) and net income (loss) of $15.3 million, related to the closure of 11 stores in August 1995 and the impairment of certain primarily intangible assets, which had a negative impact of $1.03 per share (after tax effect) on earnings per share. <TABLE><CAPTION> FISCAL YEAR SIX MONTHS ENDED ------------------------------------------------ ----------------------------- JULY 29, AUGUST 3, 1991 1992 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- ------------- -------------- <S> <C> <C> <C> <C> <C> <C> <C> SELECTED OPERATING DATA: Number of stores open at end of period............................ 81 85 81 80 69 69 71 Average net sales per gross square foot (8).......................... $350 $333 $320 $337 $327 -- -- Inventory turnover (9)............ 5.4x 5.4x 5.1x 5.7x 5.4x -- -- </TABLE> <TABLE><CAPTION> AUGUST 3, 1996 --------- <S> <C> BALANCE SHEET DATA: Working capital.................................................................... $ 12,985 Total assets....................................................................... 155,667 Total debt......................................................................... 100,543 Common stockholders' equity........................................................ 16,721 </TABLE> - ------------ (1) Computed as gross profit less store operating expenses and pre-opening costs. (2) In fiscal 1995, the Company recorded charges related to the closure of 11 stores in August and the impairment of certain primarily intangible assets of $10.35 million and $4.95 million, respectively. Of the total $15.3 million charge, $10.45 million represents non-cash items. See Notes 5 and 6 to the Consolidated Financial Statements of the Company. (3) The extraordinary loss recorded in the first six months of fiscal 1996 related to the prepayment of the Company's 10 1/2% Senior Secured Notes ($52.5 million face amount), 13 3/4% Senior Subordinated Notes ($77.6 million face amount), 11 7/8% Senior Notes ($5.0 million face amount) along with the write-off of related deferred financing amounts of $2.2 million. The extraordinary loss in fiscal 1993 related to the repurchase of $30.0 million principal amount 13 3/4% Senior Subordinated Notes and the payment of $12.0 million on the remaining balance of a term loan in October 1993. The loss includes a $2.0 million premium paid on the repurchase of the 13 3/4% Senior Subordinated Notes and a $1.5 million write-off of the deferred financing costs attributed to the term loan. (4) At February 3, 1996, the Company had a net operating loss carryforward of $27.0 million which is available to reduce taxes payable on future taxable income. The Company's ability to utilize its net operating loss carryforward will be dependent on the Company generating taxable income in future years and will be subject to certain limitations on its ability to use all of the net operating loss carryforward in any single fiscal year pursuant to Section 382 of the Internal Revenue Code. (5) Represents stock dividends on and normal and accelerated accretion of the Company's Series A Preferred Stock to its liquidation price of $0.56 per share. All shares of Series A Preferred Stock were redeemed in connection with the Company's debt and equity offerings completed in May 1996 (see "The Company"). (6) Excludes for fiscal years 1991 to 1995 and for the six months ended July 29, 1995, 453,317 shares of Common Stock issuable as of August 3, 1996 upon the exercise of outstanding stock options at a weighted average exercise price of approximately $1.60 per share, 416,587 of which are exercisable within 60 days following such date, as inclusion of such options in weighted average shares would have been antidilutive. Excludes for the six months ended August 3, 1996, 877,884 shares of Common Stock issuable as of August 3, 1996 upon the exercise of outstanding stock options at a weighted average exercise price of approximately $3.77 per share, 416,587 of which are exercisable within 60 days following such date, as inclusion of such options in weighted average shares would have been antidilutive. Includes 469,237 shares of Class B Common Stock, convertible after November 6, 1996 into 469,237 shares of Common Stock. (7) Pro forma to reflect the effects of the Company's debt and equity offerings completed in May 1996 (see "The Company") and an assumed effective tax rate of 39%, as if such transactions had been completed immediately prior to the commencement of the respective periods. (8) Average net sales per gross square foot is determined by dividing total net sales by the weighted average gross square footage of stores open during the period indicated. (9) Inventory turnover is determined by dividing cost of sales by monthly average inventory valued at cost.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000061442_ascent_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000061442_ascent_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES IN THIS PROSPECTUS TO THE COMPANY OR TODD-AO INCLUDE THE TODD-AO CORPORATION AND ITS SUBSIDIARIES. THE COMPANY Todd-AO provides sound, video and ancillary post production and distribution services to the motion picture and television industries in the United States and Europe. The Company believes that it is one of the largest independent providers of combined sound studio and video services in the world with facilities located in Los Angeles, New York, London and Atlanta. Sound services include music recording, sound editing and enhancement and the mixing of dialogue, music and sound effects. Todd-AO's principal video services include film-to-video transfer (telecine), mastering and duplication of professional videotape formats, transmission for satellite broadcast, videotape editing, audio post production, and visual effects and graphics. Todd-AO provides these sound and video services to over 500 clients, including the major motion picture studios and television production companies such as The Walt Disney Company ("Disney"), Paramount Pictures Corporation ("Paramount"), Turner Broadcasting System, Inc. ("Turner"), Sony Pictures Entertainment ("Sony"), Warner Bros. Studios Inc. ("Warner Bros.") and Spelling Entertainment Group, Inc. ("Spelling"). The Company believes that its principal strengths include the depth and continuity of its creative and artistic talent, the quality and scope of its facilities, a tradition of providing quality services to its clients and a history of technological innovation. Since its inception in 1952, the Company and its employees have been nominated for 31 Academy Awards-Registered Trademark- and have won 18. Demand for the Company's services and facilities is principally derived from the production of new motion pictures, television programs and television commercials, as well as the distribution of previously released motion pictures and television programming through distribution channels such as television syndication, home video, cable and satellite. Historically, its clients have outsourced, and are expected by the Company to continue to outsource, many services required for production, post production, and distribution of film and television programming. The Company believes that trends toward digitalization and globalization in the entertainment and media industries are increasing the quality, variety and number of post production services required by customers. The Company believes that the worldwide market penetration of distribution channels such as home video and digital satellite broadcast is contributing to a growing demand for original and reissued programming, American product in particular, which in turn should increase demand for the Company's services. The Company's objective is to be the leading worldwide independent provider of sound and video post production services. Since 1994, the Company has implemented a strategy to achieve this objective and to capitalize on the movement towards digitalization and globalization in the motion picture and television industries by expanding its range of services through strategic acquisitions, internal growth and strategic alliances. The Company believes that in the future, U.S. and international entertainment and media companies will demand a broader range of sound and video post production services and are likely to prefer a single-source service provider. This strategy was formulated by the Company and is being executed under the leadership of Salah M. Hassanein, who became President in 1994. Mr. Hassanein has spent his entire career in the entertainment and media industry and has garnered both international experience and mergers and acquisitions expertise with United Artists Theatre Circuit, Inc. and Time Warner International Theatres, where he was responsible for development and expansion of Warner Bros.' overseas theater operations. To implement its strategy, the Company has assembled a senior management team experienced in the industry. The Company entered the video services business in 1994 through its acquisition of Film Video Masters, renamed Todd-AO Video Services. In 1995, the Company expanded its sound studio business through the acquisition of Skywalker Sound South, renamed Todd-AO Studios West, with sound studios and facilities located in the West Los Angeles area. Also in 1995, the Company expanded its operations into Europe through the acquisition of Chrysalis Television Facilities, Ltd. ("Chrysalis"), which augmented the Company's video services capabilities to include the collation of television programming for satellite broadcast. The purchase of Filmatic Laboratories ("Filmatic") in 1996 enlarged Todd-AO's video services capabilities in London and added film processing capability. In August 1996, the Company acquired Edit Acquisition LLC ("Editworks"), located in Atlanta, Georgia, which specializes in providing video services to the advertising industry. As a result of these transactions, the Company has expanded its client base, increased its range of services and broadened its global market coverage. Largely as a result of efforts implementing its strategy, the Company's annual sales have grown in the past three years at an annual compounded rate of 32% from $27.4 million in fiscal 1993 to $62.9 million in fiscal 1996. Net income has grown in the same period at an annual compounded rate of 62% from $1.14 million in fiscal 1993 to $4.84 million in fiscal 1996. THE OFFERING <TABLE> <S> <C> Common Stock Offered................................ 2,500,000 shares of Class A Common Stock Common Stock Outstanding After the Offering......... 9,055,640 shares of Class A Common Stock and 1,747,181 shares of Class B Common Stock (1) Use of Proceeds..................................... For possible future acquisitions, temporary repayment of amounts under credit facility, working capital requirements and general corporate purposes. See "Use of Proceeds." Nasdaq National Market Symbol....................... "TODDA" </TABLE> - ------------------------ (1) Excludes 660,000, 330,000 and 770,000 shares of Class A Common Stock reserved for issuance under the Company's 1986 Stock Option Plan, 1994 Stock Option Plan, and 1995 Stock Option Plan (the "Stock Option Plans"), respectively, of which options for an aggregate of 1,008,645 shares of Class A Common Stock were issued and outstanding as of August 31, 1996 and options for an aggregate of 514,677 shares of Class A Common Stock were exercisable as of August 31, 1996. See "Management--Stock Options." SUMMARY CONSOLIDATED FINANCIAL DATA <TABLE> <CAPTION> YEARS ENDED AUGUST 31, NINE MONTHS ENDED MAY 31, -------------------------------------------- --------------------------------- 1995 1996 ---------------------- ---------------------- PRO PRO 1993 1994 ACTUAL FORMA(1) 1995 ACTUAL FORMA(1) --------- --------- --------- ----------- --------- --------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED INCOME STATEMENT DATA: Revenues............................. $ 27,402 $ 32,892 $ 50,003 $ 53,194 $ 37,125 $ 48,140 $ 51,445 --------- --------- --------- ----------- --------- --------- ----------- Costs and expenses: Operating costs and other expenses......................... 22,641 27,021 39,867 42,126 29,405 37,231 39,345 Depreciation and amortization...... 2,412 2,603 3,917 4,526 3,014 3,967 4,480 Interest expense................... 17 24 581 874 320 531 780 Equipment lease expense, net....... -- -- 593 593 371 415 415 Other (income) expense, net........ (483) (773) (290) (315) (223) (554) (600) --------- --------- --------- ----------- --------- --------- ----------- Total costs and expenses......... 24,587 28,875 44,668 47,804 32,887 41,590 44,420 --------- --------- --------- ----------- --------- --------- ----------- Income before loss from joint venture and provision for income taxes..... 2,815 4,017 5,335 5,390 4,238 6,550 7,025 Loss from joint venture.............. (1,014) (1,215) (249) (249) (167) (117) (117) --------- --------- --------- ----------- --------- --------- ----------- Income before provision for income taxes.............................. 1,801 2,802 5,086 5,141 4,071 6,433 6,908 Provision for income taxes........... 664 1,022 1,711 1,731 1,452 2,371 2,542 --------- --------- --------- ----------- --------- --------- ----------- Net income........................... $ 1,137 $ 1,780 $ 3,375 $ 3,410 $ 2,619 $ 4,062 $ 4,366 --------- --------- --------- ----------- --------- --------- ----------- --------- --------- --------- ----------- --------- --------- ----------- Net income per common share and common share equivalents(2)........ $ 0.14 $ 0.22 $ 0.40 $ 0.40 $ 0.31 $ 0.46 $ 0.49 --------- --------- --------- ----------- --------- --------- ----------- --------- --------- --------- ----------- --------- --------- ----------- Weighted average shares outstanding(2)..................... 8,279 8,196 8,399 8,466 8,352 8,805 8,872 --------- --------- --------- ----------- --------- --------- ----------- --------- --------- --------- ----------- --------- --------- ----------- OTHER FINANCIAL DATA: Capital expenditures................. $ 393 $ 1,404 $ 3,345 $ 3,848 $ 2,638 $ 3,317 $ 3,950 EBITDA(3)............................ 5,244 6,644 9,833 10,790 7,572 11,048 12,285 </TABLE> <TABLE> <CAPTION> MAY 31, 1996 ----------------------------------- PRO FORMA PRO AS ACTUAL FORMA(4) ADJUSTED(5) --------- ----------- ----------- (IN THOUSANDS) <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents...................................................... $ 3,263 $ 3,274 $ 18,556 Working capital................................................................ 11,181 11,012 26,294 Total assets................................................................... 57,684 64,469 79,751 Long-term debt, net of current portion......................................... 6,065 10,945 2,315 Stockholders' equity........................................................... 34,594 35,564 59,476 </TABLE> (FOOTNOTES BEGIN ON NEXT PAGE) (1) The Company purchased substantially all of the assets and certain liabilities of Editworks for cash and the Company's Class A Common Stock as of August 15, 1996. The pro forma summary financial data gives effect to the acquisition of Editworks as if it had occurred as of September 1, 1994. Such pro forma consolidated financial information is not necessarily indicative of the financial position or results of operations as they may be in the future or as they might have been had the acquisition been effected on the assumed date. See "Unaudited Pro Forma Condensed Consolidated Information." (2) Such amounts represent net income per common share and common share equivalents, pro forma, to give effect to the 66,863 shares of the Company's Class A Common Stock issued as part of the purchase of Editworks. The net income per common share and common share equivalent is computed based upon the weighted average number of shares of common stock and common stock equivalents, including the number of shares of common stock issued in connection with the purchase of Editworks, and includes common share equivalents arising from the assumed conversion of any outstanding dilutive stock options. All share and per share data has been adjusted to give effect to the 10% stock dividends paid in August 1995. (3) EBITDA, defined as earnings before interest expense, income taxes, depreciation and amortization and loss from joint venture, is not intended to represent an alternative to net income (as determined in accordance with generally accepted accounting principles) as a measure of performance and is also not intended to represent an alternative to cash flow from operating activities as a measure of liquidity. Rather, it is included herein because management believes that it provides an important additional perspective on the Company's operating results and the Company's ability to service its long-term debt and to fund the Company's continuing operations. (4) Adjusted to give effect to the Editworks acquisition, consummated in the fourth quarter of 1996, as if the acquisition was consummated as of May 31, 1996. (5) Adjusted to give effect to (i) the sale of 2,500,000 shares of Class A Common Stock offered hereby by the Company at an assumed offering price to the public of $10.50 per share, net of underwriting discounts and commission and estimated expenses of the offering, (ii) the Editworks acquisition as if it occurred as of May 31, 1996, and (iii) the anticipated use of the estimated net proceeds of the offering. See "Unaudited Pro Forma Condensed Consolidated Information" and "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000072575_nai_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000072575_nai_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..c631b67f9611ad44c845e542f45f403628553912
--- /dev/null
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@@ -0,0 +1 @@
+SUMMARY The following is a brief summary of certain information contained elsewhere in this Prospectus. This summary is not intended to be complete and is qualified in its entirety by the more detailed information appearing elsewhere in this Prospectus and in the documents referred to herein, all of which should be carefully reviewed. Capitalized terms used herein are defined on the pages of this Prospectus referred to in the Glossary found on page 91. The Company NAI Technologies, Inc., through its wholly-owned subsidiaries (the "Company"), designs, manufactures and markets rugged computer systems, advanced peripheral products, intelligent terminals, high performance work stations, TEMPEST computer systems (which suppress certain radiation to prevent external detectors from reading the data being transcribed) and telecommunications test equipment and transmission products. The Company operates in two distinct operating segments: an Electronic Systems segment and a Telecommunications segment. The Electronic Systems segment, comprised of three subsidiaries, Codar Technology, Inc. ("Codar"), NAI Technologies-Systems Division Corporation ("Systems"), and Lynwood Scientific Developments Limited ("Lynwood"), and all of the Company's defense, military and government-related businesses, provides rugged computer products specifically designed for deployment in harsh environments that require special attention to system configurations. This segment's customer base includes United States and foreign armed services and intelligence agencies. The Telecommunications segment consists of one company, Wilcom, Inc. ("Wilcom"), which provides transmission enhancement products and rugged, hand-held test equipment for analog, digital and fiber-optic communications and data-interchange networks. This segment has developed and is marketing a product which enables telephone companies to enhance the capacity of copper lines for improved voice and data transmission. This segment's customer base includes the Regional Bell Operating Companies ("RBOCs") and independent telephone companies. The Company sells its products directly to these customers and serves as a subcontractor to larger prime contractors serving the same customer base. The Company was incorporated in the State of New York in 1954. The Company's principal executive office is located at 2405 Trade Centre Avenue, Longmont, Colorado 80503, and its telephone number is (303) 776-5674. The Offering Securities Offered $6,342,000 aggregate principal amount of Notes 4,119,700 Warrants to Purchase Common Stock 8,904,336 shares of Common Stock See "DESCRIPTION OF SECURITIES." Terms of the Notes: Maturity Date January 15, 2001. Interest Rate 12% per annum. In the event of a Chapter 11 or Chapter 7 bankruptcy case in which the Company is the debtor, the Notes will bear interest from the date of commencement of the case at a default rate per annum equal to the lesser of 18% or the highest such rate allowable by law. Interest Payment Dates January 15, April 15, July 15 and October 15 of each year, commencing April 15, 1996. Conversion Each Note is convertible into shares of Common Stock at the option of the holder, at any time in whole or in part at a conversion price equal to $2.00 per share, subject to adjustment in certain events (the "Conversion Price"). The Conversion Price will be adjusted to $1.50 or $1.00, respectively, if earnings before interest, taxes, depreciation and amortization ("EBITDA") of the Company fall below $6,000,000 or $4,750,000 in 1996. Should the Company sell the stock or assets of a subsidiary in 1996, such amounts will be reduced by certain agreed amounts, depending on the time of sale. The Conversion Price and the number of shares of Common Stock to be received upon conversion are subject to adjustment upon the occurrence of certain events. See "DESCRIPTION OF SECURITIES--The Notes." The Company may at its option require the conversion of the Notes, at any time prior to maturity, provided that the closing bid price for the Common Stock exceeds $6.00 per share for the 30 consecutive trading days prior to the giving of notice of conversion. Prepayment The Notes are subject to prepayment, in whole and not in part, at the option of the Company, at any time after the third anniversary of the date of issuance, without premium or penalty. Upon the occurrence of a "change in control" of the Company, each holder of the Notes will have the right to require that the Company repurchase such holder's Notes in whole and not in part, without premium or penalty, at a purchase price in cash in an amount equal to 100% of the principal amount thereof, together with accrued and unpaid interest, if any, to the date of purchase, pursuant to an offer made in accordance with the procedures described in the Notes. Subordination; Sinking Fund The indebtedness evidenced by the Notes is subordinated to all existing and future Senior Indebtedness (as hereinafter defined) of the Company. The Notes do not provide for a sinking fund. Certain Covenants The Notes contain certain covenants prohibiting the Company from: (i) creating any liens on its assets, (ii) incurring or assuming any indebtedness other than certain specific indebtedness including the Senior Indebtedness and all extensions, renewals and refundings thereof, (iii) making any investments, (iv) paying dividends on its capital stock, (v) disposing of certain assets, (vi) engaging in certain affiliated party transactions, and (vii) merging or consolidating. Events of Default "Events of Default" under the Notes include the failure to pay principal when due or the failure to pay interest for a period of 10 days after such payment becomes due, the failure to pay other indebtedness for borrowed money in excess of $500,000 when due or the acceleration of such indebtedness, the failure to pay any judgment in excess of $500,000 when due or stayed, and the voluntary or involuntary bankruptcy of the Company. Terms of the Warrants: Exercise and Terms Each Warrant entitles the holder to purchase 250 shares of Common Stock at any time and from time to time on or before February 15, 2002, at an exercise price equal to $2.50 per share of Common Stock, subject to adjustment in certain events (the "Exercise Price"). The Exercise Price will be adjusted to $2.00 or $1.50, respectively, if the Company's EBITDA falls below $6,000,000 or $4,750,000 in 1996. Should the Company sell the stock or assets of a subsidiary in 1996, such amounts will be reduced by certain agreed amounts, depending on the time of sale. The Exercise Price and the number of shares of Common Stock to be received upon exercise are subject to adjustment upon the occurrence of certain events. Warrants will be exercisable, at any time and from time to time, on or before 5:30 p.m., local time, on or before February 15, 2002 (the "Expiration Date") by delivery of an exercise notice duly completed and tendering of the aggregate Exercise Price. Each Warrant may be exercised in whole or in part so long as any exercise in part would not involve the issuance of fractional shares of Common Stock. See "DESCRIPTION OF SECURITIES--The Warrants." Terms of the Common Stock: Terms Holders of shares of Common Stock are entitled to one vote for each share of Common Stock held. The holders of Common Stock are not entitled to preemptive or subscription rights. Upon liquidation, dissolution or winding up of the Company, the holders of the Common Stock are entitled to share ratably in all assets available for distribution after payment in full of creditors and after the preferential rights of holders of shares of Preferred Stock then outstanding, if any, have been satisfied. The affirmative vote of the holders of 80% of all Common Stock of the Company is required for the adoption or authorization of certain extraordinary matters. See "DESCRIPTION OF SECURITIES-- Common Stock." Trading The Common Stock is traded on Nasdaq under the symbol NATL. Offering Period From time to time after the date hereof. Use of Proceeds The Company will not receive any proceeds from the sale of the Securities by the Selling Securityholders. Risk Factors Reference is made to "RISK FACTORS" which contains material information that should be considered in connection with the Securities being offered hereby. Summary Financial Data The summary financial data set forth below for the fiscal years 1991 through 1995 are derived from the consolidated financial statements of the Company which financial statements have been audited by KPMG Peat Marwick LLP, independent certified public accountants, whose report on the Company's consolidated financial statements for the three years ended December 31, 1995 is included elsewhere in this Prospectus. The selected financial data for the six months ended July 1, 1995 and June 29, 1996 have been derived from the Company's unaudited consolidated financial statements included in the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 29, 1996. Such unaudited consolidated financial statements in the opinion of the Company's management reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of interim data. <TABLE> <CAPTION> Year Ended December 31, Six Months Ended ----------------------- ---------------- 1991 1992 1993 1994 1995 July 1, June 29, ---- ---- ---- ---- ---- ------- -------- (in thousands except share and per share data and 1995 1996 ratios) ---- ---- (unaudited) <S> <C> <C> <C> <C> <C> <C> <C> Statement of Operations Data Net sales $ 59,412 $ 67,315 $ 81,024 $ 54,520 $ 60,008 $ 26,771 $ 33,857 Operating earnings (loss)(1) 6,308 8,407 8,960 (14,589) (8,875) (5,826) 1,789 Net earnings (loss)(1) 3,900 5,051 5,455 (11,591) (11,619) (6,899) 365 Per share data: Net earnings (loss)(2) .63 .80 .80 (1.69) (1.57) (0.94) 0.05 Cash dividends(3) -- -- -- -- -- -- -- Ratio of earnings to fixed charges 8.14 13.88 11.55 * * * 1.36 Balance Sheet Data (at end of period) Working capital $ 14,134 $ 17,094 $ 19,105 $ 16,665 $ 10,044 $ -- $ 14,255 Total assets at end of period 33,817 43,704 60,715 53,720 48,012 -- 48,891 Long-term debt 5,017 7,158 10,797 13,990 15,573 -- 15,951 Shareholders' equity 18,897 23,911 30,593 20,296 10,086 -- 13,515 Average market price per common share at end of period 4-9/16 8-3/16 6-1/4 2-11/16 1-1/2 3-1/4 3-5/8 Weighted average common shares outstanding(2) 6,222 6,309 6,843 6,580 7,382 7,459 8,459 </TABLE> (1) Includes $7,321 in restructuring costs in 1994. (2) Prior year per share data has been restated to reflect 4% stock dividends declared in February 1992, 1993 and 1994 and a three-for-two stock split declared in August 1993. (3) There have been no cash dividends paid during the above five fiscal years. * Earnings are inadequate to cover fixed charges. The coverage deficiency is $15,983 for 1994, $11,242 for 1995, and $6,789,000 for July 1, 1995.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0000073822_strategic_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000073822_strategic_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e2227d12c841258e610055e3b577a457b0fc1e65
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000073822_strategic_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following is a summary of certain information contained elsewhere in this Prospectus and is qualified in its entirety by the more detailed information and financial statements, and notes thereto, contained elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. Prospective investors are urged to read this Prospectus in its entirety. Unless otherwise indicated, all information in this Prospectus gives effect to the three percent (3%) Common Stock dividend paid on December 29, 1995 to stockholders of record on December 18, 1995. THE COMPANY The Company provides proprietary industrial supply procurement solutions to industrial sites, primarily through its In-Plant Store(R) program. The Company sells a broad range of industrial supplies, which include maintenance, repair and operations ("MRO") items, replacement parts and selected classes of production materials. Industrial supplies are generally items which are low in price, but are critical to the production process and have historically been characterized by high procurement costs due to inherent inefficiencies in traditional industrial supply distribution methods. The Company's In-Plant Store(R) program, in which large industrial sites outsource the procurement of industrial supplies to the Company, substantially eliminates these inefficiencies by reducing both the process and product costs associated with industrial supply procurement. The Company's In-Plant Store(R) program also helps customers achieve operational improvements, such as reduced plant down-time resulting from unavailable parts and manufacturing process improvements due to better tracking of critical parts. The Company believes that its In-Plant Store(R) program is superior to both traditional and other alternative methods of industrial supply distribution. The Company believes that increased recognition of the inefficiencies associated with the traditional industrial supply distribution process has rapidly increased the demand for the Company's In-Plant Store(R) program in recent years. From January 1994 to April 1996, the number of In-Plant Store(R) sites operated by the Company increased from 13 to 44. Twenty of these sites were added from March 1995 to April 1996. In addition, the Company recently announced the signing of an agreement with a single customer to implement eight additional In-Plant Store(R) facilities during 1996. The In-Plant Store(R) program is a comprehensive outsourcing service through which the Company manages all aspects of industrial supply procurement at a customer's industrial site. Prior to the implementation of an In-Plant Store(R), the industrial site would typically obtain industrial supplies from as many as 500 traditional industrial distributors. Through the In-Plant Store(R) program, the Company becomes responsible for servicing all of its customer's industrial supply needs by establishing a dedicated, fully integrated store within the customer's plant. The customer, in turn, purchases virtually all of its industrial supplies from the In-Plant Store(R). The Company staffs the In-Plant Store(R) with its own highly trained industrial procurement professionals, installs proprietary software designed specifically for industrial procurement and helps determine optimal inventory levels based on the supply needs of each site. Upon implementation, the In-Plant Store(R) purchases, receives, inventories and issues industrial supplies directly to plant personnel, delivers ongoing technical support and provides the customer with a comprehensive invoice twice per month thereby reducing the administrative burden of traditional industrial supply. The In-Plant Store(R) generates system-wide savings generally ranging from 15% to 25% of customers' annual industrial supply purchase costs. The total United States market for the categories of industrial supplies offered by the Company is estimated to be approximately $225 billion annually. Of this total, it is estimated that approximately $20 billion to $30 billion of industrial supplies are purchased annually by the 15,000 largest industrial plants in the United States. These plants represent potential customers for the Company's In-Plant Store(R) program. The Company believes that very few of these 15,000 plants have outsourced their 4 <PAGE> industrial supply procurement. The Company's In-Plant Store(R) customers span a broad range of industries, including the automotive, chemicals, construction, food processing, power generation and natural resource extraction industries, and the In-Plant Store(R) program is suitable for virtually any industry that uses industrial supplies. The Company's existing customers include Allied Signal Inc., The Black and Decker Corporation, Bridgestone/Firestone, Inc., Onan Corporation, Homelite Inc., Hoechst Celanese Corporation, NACCO Materials Handling Group Inc. and Westinghouse Electric Corporation. In addition to its In-Plant Store(R) program, the Company offers several other proprietary industrial supply procurement solutions aimed at specific types of customers. Through its Value Managed SupplySM program, the Company is able to provide some of the features of the In-Plant Store(R) to customers which are too small to support an In-Plant Store(R) or are not prepared to outsource completely their industrial supply procurement. For industrial activities such as construction projects and plant turnarounds, the Company offers its proprietary On-Site StoreSM program in which customers temporarily outsource the management of industrial supply procurement to the Company. The Company offers its Value Managed SupplySM and On-Site StoreSM programs through its network of branches which also provide traditional industrial supply services to customers in markets that have historically been underserved by other industrial supply distributors. The Company also offers other selected outsourcing services for industrial customers, including the management of industrial laundry, process control maintenance and plant logistics. The Company delivers the Value Managed SupplySM program, the On-Site StoreSM program, other outsourcing services and traditional distribution to over 19,000 customers through a network of 32 branches and ten sales and service offices located throughout the United States and in Mexico. The Company's principal executive offices are located at 12136 West Bayaud, Suite 320, Lakewood, Colorado 80228, and the Company's telephone number is (303) 234-1419. 5 <PAGE> THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company.......... 7,000,000 shares Common Stock offered by the Selling Stockholders............................... 1,200,000 shares(1) Total.................................. 8,200,000 shares Common Stock to be outstanding after the Offering................................... 28,765,957 shares(2) Use of Proceeds.............................. To repay bank indebtedness, for working capital, including the opening of In-Plant Store(R) facilities, for general corporate purposes and for the possible acquisition of companies engaged in the business of providing industrial supply services. See "Use of Proceeds." Nasdaq Symbol................................ STRD </TABLE> ------------ (1) Does not include up to 600,000 shares of Common Stock which may be offered by a stockholder of the Company upon exercise of the Underwriters' over-allotment option. See "Principal and Selling Stockholders" and "Underwriting." (2) Excludes (i) 2,976,093 shares of Common Stock at March 31, 1996 which were reserved for issuance under the Company's 1990 Incentive Stock Option Plan and certain other stock option agreements, 1,727,188 of which were subject to currently exercisable options and 429,983 of which were subject to options that were not currently exercisable, and (ii) warrants to purchase 38,625 shares of Common Stock outstanding at March 31, 1996. See Note 14 of Notes to the Company's Financial Statements included elsewhere in this Prospectus. 6 <PAGE> SUMMARY FINANCIAL AND OPERATING DATA The following summary consolidated financial and operating data should be read in conjunction with the Consolidated Financial Statements and Notes thereto of the Company and the other selected historical and pro forma consolidated financial data set forth elsewhere in this Prospectus. <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, --------------------------------------------------- ----------------------- PRO FORMA(1) 1993 1994 1995 1995 1995 1996 ---------- ---------- ---------- ------------ ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA) <S> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues................... $37,098 $77,613 $117,493 $120,265 $25,396 $33,316 Income (loss) from continuing operations.... 202 2,235 1,004 429 540 (1,966)(2) Income from discontinued operations(3)............ 100 -- -- -- -- -- Net income (loss).......... 302 2,235 1,004 429 540 (1,966)(2) PER SHARE DATA: Primary: Income (loss) from continuing operations.. 0.02 0.13 0.05 0.02 0.02 (0.09)(2) Income from discontinued operations(3).......... -- -- -- -- -- -- Net income (loss)........ 0.02 0.13 0.05 0.02 0.02 (0.09)(2) Fully diluted-- Net income (loss)........ 0.02 0.13 0.04 0.02 0.02 (0.09)(2) AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING.. 12,684,911 16,993,971 21,689,653 21,689,653 21,661,222 21,740,823 OTHER DATA: Number of operational In-Plant Store(R) FACILITIES(4)............. -- 17 31 31 24 37 NUMBER OF IN-PLANT STORE(R) CUSTOMERS(4)............. -- 12 21 21 14 23 NUMBER OF BRANCHES(4)...... 23 26 32 32 26 32 REVENUES FROM IN-PLANT STORE(R) FACILITIES...... -- $31,931 $ 53,895 $ 53,895 $ 11,126 $ 16,805 REVENUES FROM BRANCHES(5).............. $37,098 $45,682 $ 63,598 $ 66,370 $ 14,270 $ 16,511 </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 ---------------------- DECEMBER 31, AS 1995 ACTUAL ADJUSTED(6) ------------ ------- ----------- <S> <C> <C> <C> BALANCE SHEET DATA: Working capital.................................... $ 23,599 $19,650 $66,190 Total assets....................................... 48,051 48,881 95,421 Long-term debt obligations......................... 5,903 4,162 1,452 Stockholders' equity............................... 27,391 25,518 74,768 </TABLE> ------------ (1) Includes the applicable pro forma effect of adjustments in 1995 for the acquisition of American Technical Services Group, Inc. ("ATSG") as if such acquisition occurred on January 1 , 1995. See Pro Forma Statement of Income for the year ended December 31, 1995 set forth in the Company's Financial Statements included elsewhere in this Prospectus. (2) Includes a restructuring charge of $920,000. (3) Relates to the Company's discontinuance of its information services business, which constituted the Company's business prior to July 1, 1990. (4) As of the end of the period. (5) Includes all revenues other than those from the Company's In-Plant Store(R) PROGRAM. (6) Adjusted to give effect to the sale by the Company of the Shares offered by the Company hereby (based upon an assumed offering price of $7.50 per share) and the application of the net proceeds therefrom as described under "Use of Proceeds." 7 <PAGE>
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0000080816_providence_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000080816_providence_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a21a475ae8d83f1c06993670584e25d07e248104
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000080816_providence_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless the context otherwise requires, all references to the "Company" are to The Providence Journal Company and its consolidated subsidiaries, as successor to Providence Journal Company ("Old PJC") after giving effect to the transactions described herein under "The Company -- Background; Reorganization". Unless otherwise indicated, all market rank, station rank in market and station audience rating and share data contained herein have been obtained from the Nielsen Station Index dated May 1996 and all "effective buying income" ("EBI"), market population, household growth and retail sales data contained herein have been obtained from Investing in Television, 1996 Market Report, published by BIA Publications, Inc. ("BIA"). Unless otherwise indicated, the information in this Prospectus (i) assumes no exercise of the over-allotment option granted to the Underwriters, (ii) assumes that 450,000 shares of Class A Common Stock will be issued in the Direct Placement and (iii) gives effect to a 450-for-1 stock split (the "Stock Split") of the Common Stock effected on June 18, 1996. THE COMPANY GENERAL The Company owns and operates nine network-affiliated television stations (the "Stations") and provides or will provide programming and marketing services to three television stations (the "LMA Stations") under local marketing agreements ("LMAs") in geographically diverse markets throughout the United States (the "Broadcasting Business"), publishes the largest daily newspaper in the Rhode Island and southeastern Massachusetts market (the "Publishing Business"), and produces diversified programming and interactive electronic media services (the "Programming and Electronic Media Business"). The Company's television broadcasting group reaches 5.6 million households, or 6% of all U.S. television households; its newspaper is the leading newspaper in its market in terms of advertising and circulation; and certain of its programming and electronic media businesses, such as the Television Food Network, serve subscribers and viewers nationwide. Important factors in the success of the Company's broadcasting and publishing businesses have been its strong local news focus, targeted local advertising sales efforts, investment in advanced technology and emphasis on cost control. The resulting strength of its media franchises presents attractive opportunities for future growth and for realization of operating efficiencies. In addition to increasing the reach of its broadcasting operations and cable and satellite television networks through acquisitions and internal growth, the Company intends to develop new revenue sources that build on the existing strength of its brands and expertise and have broad regional or national appeal. See "Business". The Company's broadcasting operations are located in markets ranging from the 12th to the 127th largest Designated Market Areas (defined by A. C. Nielsen Co. ("Nielsen") as geographic markets for the sale of national "spot" and local advertising time) in the United States ("DMAs"), with five such Stations and one LMA Station in the 50 largest DMAs. Five of the Stations are network affiliates of the National Broadcasting Company Incorporated ("NBC") television network, two are network affiliates of the Fox Broadcasting Network ("Fox"), one is a network affiliate of the American Broadcasting Company ("ABC") and one is a network affiliate of CBS, Inc. ("CBS"). In 1995, EBITDA (as defined herein) of the Broadcasting Business represented approximately 81% of the Company's EBITDA excluding programming and electronic media and corporate expenses. Eight of these nine Stations are VHF (as defined herein) television stations. Two of the LMA Stations are affiliated with the United Paramount Network ("UPN"). See "Business -- Broadcasting". The Company publishes the leading newspaper in terms of advertising and circulation in its market of Rhode Island and southeastern Massachusetts, the Providence Journal-Bulletin Monday through Saturday and The Providence Sunday Journal (collectively the "Providence Journal"). Average daily circulation levels for the three months ended March 31, 1996 following the consolidation of the morning and afternoon newspapers in June 1995 (see "Business -- Publishing") were approximately 169,500 for Monday through - ------------------------------------------------------------------------------ INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED JUNE 21, 1996 PROSPECTUS - ---------- 7,125,000 SHARES THE PROVIDENCE [LOGO] JOURNAL COMPANY CLASS A COMMON STOCK ($1.00 PAR VALUE) --------------- All of the 7,125,000 shares of Class A Common Stock, $1.00 par value (the "Class A Common Stock"), offered hereby (the "Underwritten Offering") are being offered by The Providence Journal Company (the "Company"). In addition to the Underwritten Offering contemplated hereby, the Company is also offering an additional 450,000 shares of Class A Common Stock to eligible employees of the Company and its subsidiaries (the "Direct Placement" and, together with the Underwritten Offering, the "Offerings") at a price per share equal to the initial public offering price per share for the Class A Common Stock less an amount equal to the underwriting discount per share. Prior to the Offerings, there has been no public market for the Class A Common Stock. It is currently anticipated that the initial public offering price for the Class A Common Stock will be between $15.00 and $17.00 per share. See "Underwriting" for information relating to the determination of the initial public offering price. Upon consummation of the Offerings, the Company's authorized and outstanding capital stock will consist of Class A Common Stock and Class B Common Stock, $1.00 par value (the "Class B Common Stock" and together with the Class A Common Stock, the "Common Stock"). The rights of the holders of the Common Stock are identical, except that each share of Class B Common Stock entitles the holder to four votes per share, while each share of Class A Common Stock entitles the holder to one vote per share. The Class A Common Stock and Class B Common Stock vote as a single class on substantially all matters, except as otherwise required by law. The Class B Common Stock is convertible at any time at the election of the holder on a share-for-share basis into Class A Common Stock, and automatically converts into Class A Common Stock under certain circumstances involving a transfer. See "Description of Capital Stock". The shares of Class A Common Stock have been approved for listing on the New York Stock Exchange, subject to official notice of issuance, under the symbol "PRJ". SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE CLASS A COMMON STOCK OFFERED HEREBY. --------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. <TABLE> ================================================================================ <CAPTION> PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT(1) COMPANY(2) - -------------------------------------------------------------------------------- <S> <C> <C> <C> Per Share............. $ $ $ - -------------------------------------------------------------------------------- Total(3).............. $ $ $ ================================================================================ - ----------- <FN> (1) The Company has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). See "Underwriting". (2) Before deducting expenses estimated at $1,400,000 payable by the Company. (3) The Company has granted the Underwriters an option, exercisable within 30 days after the date hereof, to purchase up to an aggregate of 1,068,750 additional shares of Class A Common Stock, at the initial price to public per share, less the underwriting discount, solely to cover over-allotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discount and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting". </TABLE> --------------- The shares of Class A Common Stock are being offered by the several Underwriters, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of certain legal matters by counsel for the Underwriters and certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of certificates for the shares of Class A Common Stock will be made in New York, New York on or about ,1996. --------------- MERRILL LYNCH & CO. BEAR, STEARNS & CO. INC. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION --------------- The date of this Prospectus is , 1996. - -------------------------------------------------------------------------------- Saturday and 251,300 for Sunday. The Company, which was founded in 1820, believes that the Providence Journal, published daily since 1829, is the oldest continuously published daily newspaper in the United States. See "Business -- Publishing". The Company produces cable and satellite television programming and interactive and on-line electronic media services through its management role or ownership interests in a variety of content-driven entertainment and information businesses. The Company owns a 46% interest in and participates in the management of Television Food Network, a cable television network that is distributed to approximately 16.5 million subscribers throughout the United States. The Company controls America's Health Network with a 65% ownership interest, and owns all of the equity interest in NorthWest Cable News, both recently launched development stage cable programming network services. The Company also owns equity interests in a variety of interactive, on-line, and broadcast programming businesses. See "Business -- Programming and Electronic Media". BROADCASTING GENERAL. The Stations generally are in markets that the Company believes will experience above-average economic growth in retail sales, EBI and population. The Stations are typically located in the largest cities or state capitals of the states in which they operate. The Company's Stations and the LMA Stations are in geographically diverse regions of the United States, which reduces the Company's exposure to regional economic fluctuations. The following table sets forth general information for each of the Stations and the LMA Stations and the markets they serve, based on the Nielsen Station Index as of May 1996. In February 1992, the Company acquired a 50% joint venture interest (the "King Acquisition") in King Holding Corp. ("KHC"), which indirectly owned Stations KING (Seattle), KGW (Portland), KHNL (Honolulu), KREM (Spokane) and KTVB (Boise) (the "King Stations"). The Company has operated the King Stations since such acquisition and in 1995 acquired 100% of the ownership of the King Stations in the Kelso Buyout (as defined herein). The Stations are listed in order of the ranking of their DMA. <TABLE> <CAPTION> NUMBER OF COMMERCIAL TELEVISION NETWORK CHANNEL/ DMA STATIONS RANK IN STATION MARKET AREA(1) STATION(1) STATUS AFFILIATION FREQUENCY(2) RANK(3) IN MARKET(4) MARKET(5) SHARE(6) - --------------- ------- -------- ----------- --------- ------- ------------ --------- -------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Seattle, WA KING Owned NBC 5/VHF 12 8 1 19% KONG(8) LMA N/A N/A 12 8 -- -- Portland, OR KGW Owned NBC 8/VHF 24 8 1 17 Charlotte, NC WCNC Owned NBC 36/UHF 28 8 3 10 Albuquerque/ KASA Owned Fox 2/VHF 48 6 4 7 Santa Fe, NM Louisville, KY WHAS Owned ABC 11/VHF 50 6 1 23 Honolulu, HI KHNL Owned NBC 13/VHF 70 8 1 19 KFVE LMA UPN 5/VHF 70 8 -- -- Spokane, WA KREM Owned CBS 2/VHF 74 4 2 18 Tucson, AZ KMSB Owned Fox 11/VHF 80 6 4 10 KTTU LMA UPN 18/UHF 80 6 -- -- Boise, ID KTVB Owned NBC 7/VHF 127 5 1 30 <CAPTION> 1995 MARKET REVENUE(7) --------------------- STATION $ (IN MARKET AREA SHARE MILLIONS) - --------------- ------- --------- <S> <C> <C> Seattle, WA 25% $ 269.0 -- 269.0 Portland, OR 22 144.9 Charlotte, NC 11 118.1 Albuquerque/ 16 79.0 Santa Fe, NM Louisville, KY 31 82.3 Honolulu, HI 19 63.7 -- 63.7 Spokane, WA 27 42.8 Tucson, AZ 21 52.2 -- 52.2 Boise, ID 40 26.0 - --------------- <FN> (1) As used in this Prospectus, the following "call letters" refer, as the context may require, either to the corporate owner of the station indicated or to the station itself: "KING" refers to KING-TV, Seattle, Washington; "KONG" refers to KONG-TV, Seattle, Washington; "KGW" refers to KGW(TV), Portland, Oregon; "WCNC" refers to WCNC-TV, Charlotte, North Carolina; "KASA" refers to KASA-TV, Albuquerque/Santa Fe, New Mexico; "WHAS" refers to WHAS-TV, Louisville, Kentucky; "KHNL" refers to KHNL(TV), Honolulu, Hawaii; "KFVE" refers to KFVE(TV), Honolulu, Hawaii; "KREM" refers to KREM-TV, Spokane, Washington; "KMSB" refers to KMSB-TV, Tucson, Arizona; "KTTU" refers to KTTU(TV), Tucson, Arizona; and "KTVB" refers to KTVB(TV), Boise, Idaho. </TABLE> - -------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (2) As used in this Prospectus, "VHF" refers to the very high frequency band (channels 2-13) of the spectrum and "UHF" refers to the ultra-high frequency band (channels above 13) of the spectrum. (3) Ranking of DMA served by the Station among all DMAs, measured by the number of television households for the 1995-1996 broadcast year. (4) Represents the number of television stations ("reportable stations") designated by Nielsen as "local" to the DMA, excluding public television stations and stations that do not meet minimum Nielsen reporting standards (weekly cumulative audience of less than 2.5%) for reporting in the Sunday through Saturday, 6:00 a.m. to 2:00 a.m. period ("sign-on to sign-off"). Does not include national cable channels or satellite stations. The number of reportable stations may change for each reporting period. (5) Station's rank relative to other reportable stations, based upon the DMA rating as reported by Nielsen, 6:00 a.m. to 2:00 a.m., during the May 1996 measuring period. Data for KHNL and KMSB include KFVE and KTTU, respectively. Data for KING does not include KONG because the LMA for such LMA Station was entered into on May 14, 1996 and the station is not yet operational. (6) Represents the number of television households tuned to the Station as a percentage of the number of television households with sets in use for Sunday-Saturday 6:00 a.m. to 2:00 a.m. from the May 1996 Nielsen Station Index. Data for KHNL and KMSB include KFVE and KTTU, respectively. Data for KING does not include KONG because the LMA for such LMA Station was entered into on May 14, 1996 and the station is not yet operational. (7) Represents gross national, local, regional and political advertising revenues, excluding network and barter revenues (defined as the revenue resulting from the exchange of unsold advertising time for products or services, typically including programming, merchandise, fixed assets, other media advertising privileges, travel and hotel arrangements, and entertainment), for all commercial television stations in the DMA, based on actual local market reporting, as estimated by BIA. Station share of 1995 market revenue for KHNL and KMSB includes revenues of KFVE and KTTU, respectively. Data for KING does not include KONG because the LMA for such LMA Station was entered into on May 14, 1996 and the station is not yet operational. (8) Data for KONG is not available because the station is not yet operational. BROADCASTING BUSINESS AND OPERATING STRATEGY. The Company's strategy in the Broadcasting Business is to increase viewership, advertising revenue and EBITDA primarily by capitalizing on its strong local news franchises, targeted marketing and local sales efforts, high quality, non-network programming and strict cost controls. This strategy has contributed to average compound annual growth in the Company's net revenues and EBITDA in the Broadcasting Business, calculated on a combined basis as herein described, of 9.5% and 23.9%, respectively, from 1991 to 1995. In addition, EBITDA as a percentage of net revenues, calculated on a combined basis, has increased from 21.6% in 1991 to 35.7% in 1995. The components of the Company's Broadcasting Business strategy include the following: ENHANCE STRONG LOCAL NEWS FRANCHISES. Most of the Stations lead their markets in terms of ratings for local news and number of hours of local news that are broadcast per week. The Company has focused on enhancing each Station's local market news programming franchise as the foundation to build significant audience share in such market. Local news programming is commercially valuable because of its high viewership level, the attractiveness to advertisers of the demographic characteristics of the typical news audience (allowing stations generally to charge higher rates for advertising time) and the enhanced ratings of programming in time periods adjacent to the news. In addition, the Company believes that its strong local news programming has helped to differentiate the Stations from cable programming competitors, which generally do not provide such programming. LEVERAGE LOCAL MARKET STRENGTH WITH ADDITIONAL LMAS. The Company plans to pursue opportunities to enter into LMAs in the DMAs in which the Company's Stations operate. The Company believes that LMAs enable the Company to increase revenue and broadcast cash flow by taking advantage of the economies of scale derived from being a television station group owner. The Company also believes that there are benefits in terms of increased advertising revenue from LMA arrangements. MATCH ADVERTISERS TO AUDIENCES THROUGH TARGETED LOCAL SALES. The Company seeks to leverage its strong local presence to increase its advertising revenues and broadcast cash flow by expanding relationships with local and national advertisers and attracting new advertisers through targeted marketing techniques and carefully tailored programming. Each of the Company's Stations has developed high quality programming of local interest and sponsored community events to attract audiences with demographic characteristics desirable to advertisers. In addition, the Company works closely with - ------------------------------------------------------------------------------- advertisers to develop campaigns that match specifically targeted audience segments with the advertisers' overall marketing strategies. MAXIMIZE VIEWER SHARE THROUGH HIGH QUALITY, NON-NETWORK PROGRAMMING. Each of the Company's Stations is focused on improving its syndicated and locally produced non-network programming to attract audiences with favorable demographic characteristics. The Company believes that through a cooperative approach to programming, it can generate incremental revenue by adjusting its programming mix to capture viewers of certain targeted demographic segments that meet the needs of valued advertisers. MAINTAIN EFFECTIVE COST CONTROLS AND LEVERAGE ECONOMIES OF SCALE. Each Station emphasizes strict control of its programming and operating costs as an essential factor in increasing broadcast cash flow. In addition, the Company, as a television station group owner, believes that it has the ability to enter into advantageous group programming contracts. As the provider of NBC network programming in five markets, the Company believes that its ability to enter into stable and favorable affiliation agreements with NBC is enhanced. Through strategic planning and annual budget processes, the Company continually seeks to identify and implement cost-saving opportunities at each of the Stations. CREATE OPERATING EFFICIENCIES THROUGH INVESTING IN TECHNOLOGY. The Company invests selectively in technology to increase operating efficiency, reduce Station operating expenses, or gain a local market competitive advantage. Areas of focus include digital news production, editing and library systems, advanced weather radar equipment, and robotic cameras. The Company has entered into an agreement with AVID Technology, Inc. ("AVID") to test and deploy advanced digital editing, production and server technology that is intended to create a more efficient video production environment. The Company believes that the use of AVID or other digital equipment will result in cost savings and operating efficiencies when fully deployed at the Stations. BROADCASTING ACQUISITION STRATEGY. The Company plans to pursue favorable acquisition opportunities as they become available. The Company's acquisition strategy is to target network-affiliated television stations where it believes it can successfully apply its operating strategy and where such stations can be acquired on attractive terms. The Company generally intends to review acquisition opportunities in growth markets, typically in the 75 largest DMAs in the nation, with what the Company believes to be advantageous business climates. In assessing acquisitions, the Company targets stations for which it has identified specific expense reductions and proposals for revenue enhancement that can be implemented upon acquisition. The Company does not presently have any agreements or understandings to acquire or sell any television stations. See "Business -- Broadcasting -- Business and Operating Strategy". PUBLISHING GENERAL. The Providence Journal is the leading newspaper in terms of advertising and circulation in its market of Rhode Island and southeastern Massachusetts. Average daily circulation levels for the three months ended March 31, 1996 following the consolidation of the morning and afternoon newspapers in June 1995 (as described below) were approximately 169,500 for circulation Monday through Saturday and 251,300 for circulation on Sunday. According to a Belden Associates study, an average of approximately 58% and 69% of the 929,000 total adults in the market surveyed in the fourth quarter of 1995 read the daily Providence Journal-Bulletin and The Providence Sunday Journal, respectively, on a daily basis. In addition, according to this study, an average of approximately 77% and 87% of adults in the market who read any newspaper read the daily Providence Journal-Bulletin and The Providence Sunday Journal, respectively, on a daily basis. The Providence Journal has received numerous awards over the years for its local and national coverage, including its fourth Pulitzer Prize in 1994. BUSINESS AND OPERATING STRATEGY. The Company's publishing strategy is to leverage the Providence Journal's comprehensive regional and local news coverage to generate increased readership, local advertising sales, and new revenue sources based on its strong brand recognition. The Company believes that the recent consolidation of its daily newspapers, reorganization of its staff, and effective cost controls will help contribute to improved operating results. The Company's business and operating strategy for the Publishing Business includes the following key elements: ENHANCE STRONG LOCAL NEWS PRESENCE. The Company has the largest local news gathering resources in its Rhode Island and southeastern Massachusetts market. In 1995, the Company intensified its commitment to local news by reallocating resources to the Providence Journal's regional sections that target readers in seven geographic zones of its market. As a result of the Company's strategies to emphasize regionally-zoned news and information sections and to control costs, on June 5, 1995, the Company consolidated the morning and afternoon newspapers in order to reallocate resources to the regional editions and to reduce operating costs (the "Newspaper Consolidation"). A portion of the total annual savings from this consolidation is being used to enhance local news coverage. REORGANIZE SALES FORCE TO INCREASE CUSTOMER FOCUS. The Company emphasizes a targeted approach to its advertisers and has recently begun the reorganization of its sales force to enhance its effectiveness in attracting advertisers. The Company also intends to institute a new performance-based incentive compensation plan for its salespeople that rewards employees based on their contribution to EBITDA rather than to revenues. The Company believes that this reorganization will enable its sales force to better identify sales opportunities, be more responsive to advertiser needs, and operate more cost effectively. REDUCE OPERATING COSTS. Expenses of the Company's Publishing Business are closely monitored in an effort to control costs without sacrificing revenue opportunities. The Company seeks to reduce labor costs through investment in modern production equipment and the consolidation of operations and administrative activities. The Company has recently reduced operating costs through the Newspaper Consolidation and the Newspaper Restructuring (as defined herein), which together have resulted in an estimated $10 million in annual savings. The Company has also made efforts to reduce its newsprint costs through a variety of methods, including reducing the page width of the newspaper and strict control of newspaper waste. INCREASE REVENUES THROUGH RELATED PRODUCTS. The Company has introduced new informational products and services to generate revenue from sources other than newspaper publishing. These products and services seek to exploit the strong local brand recognition of the Providence Journal and include fax-on-demand products, voice information services, a news wire service, and telemarketing services. See "Business -- Publishing -- Business and Operating Strategy" and "Management's Discussion and Analysis of Financial Condition and Results of Operations". PROGRAMMING AND ELECTRONIC MEDIA GENERAL; BUSINESS AND OPERATING STRATEGY. The Company produces cable television and satellite network programming and interactive and on-line electronic media services through its management role or ownership interests in a variety of content-driven entertainment and information businesses. The Company's approach to development of programming and interactive opportunities is to invest in or manage businesses that are extensions of its experience in the production of programming content or that build on existing media franchises. The Company's programming and electronic media strategy consists of the following key elements: LEVERAGE EXISTING EXPERTISE IN PROGRAMMING AND OTHER CONTENT DEVELOPMENT. The Company has invested in and operates certain businesses, such as the Television Food Network, America's Health Network and NorthWest Cable News, that capitalize on the Company's experience in television broadcasting and newspaper publishing. As additional opportunities arise, the Company expects to pursue such opportunities that best exploit or extend the capabilities of existing talent and resources. EMPHASIZE PROGRAMMING TOPICS WITH BROAD APPEAL. The Company's strategy in its programming businesses is to develop cable and satellite programming networks, such as the Television Food Network, America's Health Network and NorthWest Cable News, based on issues of interest to potential viewers such as food, health and local news. As the Company reviews additional opportunities, it plans to invest in such ventures that it believes have broad audience appeal. EXTEND AND ENHANCE EXISTING BRANDS AND CONTENT. The Company's strategy in developing cable network programming and interactive and on-line electronic media products has been to create products that are closely related to the Company's existing brands and franchises. For example, NorthWest Cable News builds on the leading local news franchises of the Stations in Washington, Oregon and Idaho, and Rhode Island Horizons, an on-line service, presents news, features and advertising displayed in the Providence Journal. The Company also believes that the success of these ventures will serve to enhance the Company's existing broadcast and newspaper properties. MINIMIZE RISK THROUGH STAGED INVESTMENTS IN NEW OPPORTUNITIES. The Company attempts to take a staged approach to investing in start-up ventures by committing financial and managerial resources upon reaching certain milestones in the businesses' development. Such milestones are dependent on the nature of the start-up business, but include identifying promising concepts, commissioning market research, establishing strategic relationships with other investors, negotiating contractual arrangements with key suppliers and evaluating early-stage financial results of specific projects. See "Business -- Programming and Electronic Media -- Business and Operating Strategy". THE OFFERINGS <TABLE> <S> <C> Class A Common Stock offered in the Underwritten Offering............... 7,125,000 shares(1) Class A Common Stock offered in the Direct Placement.................... 450,000 shares Common Stock to be outstanding after the Offerings: Class A Common Stock................ 24,911,700 shares(2)(3) Class B Common Stock................ 21,067,650 shares Total....................... 45,979,350 shares Use of Proceeds....................... The net proceeds from the Offerings will be used to repay a portion of the indebtedness outstanding under the Company's revolving credit facility. See "Use of Proceeds". Voting and Conversion Rights.......... The rights of the holders of the Common Stock are identical, except that each share of Class B Common Stock entitles the holder to four votes per share, while each share of Class A Common Stock entitles the holder to one vote per share. The Class A Common Stock and Class B Common Stock vote as a single class on substantially all matters, except as otherwise required by law. The Class B Common Stock is convertible at any time at the election of the holder on a share-for-share basis into Class A Common Stock, and automatically converts into Class A Common Stock under certain circumstances involving a transfer. See "Description of Capital Stock".
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000083402_resource_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000083402_resource_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, all information set forth herein (i) assumes that the Underwriters' overallotment option is not exercised, and (ii) gives effect to 6% stock dividends paid in January 1996 and April 1996 and a five-for-two stock split (effected in the form of a 150% stock dividend) in May 1996. References to the "Company" in this Prospectus include the Company and its consolidated subsidiaries, unless the context otherwise requires. THE COMPANY GENERAL The Company is a specialty finance company engaged in three lines of business: the acquisition and resolution of commercial real estate loans, "small ticket" commercial equipment leasing, and energy operations, including natural gas and oil production. For approximately 25 years prior to 1991, the Company was principally involved in the energy industry. Following the acquisition of a significant ownership position in the Company by new stockholders in 1988 and the appointment of new senior management (including the current Chairman, who has been a senior officer of banking and other financial institutions for the past 30 years), the Company evaluated alternative strategies to expand and diversify its operations (particularly in light of the declining attractiveness of the energy business to small investors following the 1986 changes to the federal tax law). Since 1991, the Company's business strategy has focused on locating and developing niche finance businesses in which the Company can realize attractive returns by targeting well-defined financial services markets and by developing specialized skills to service those markets on a cost-effective basis. To date, the Company has developed two business lines (asset acquisition and resolution, and equipment leasing) that it believes meet these criteria. The Company was organized in 1947. Its executive offices are located at 1521 Locust Street, Philadelphia, Pennsylvania 19102, and its telephone number is (215) 546-5005. ASSET ACQUISITION AND RESOLUTION The Company's asset acquisition and resolution business involves the purchase at a discount of relatively small (generally $1 million to $5 million in purchase price) troubled commercial real estate loans from private market sellers (primarily financial institutions), and the restructuring and refinancing of those loans. These loans typically involve legal and other disputes among the lender, the borrower and/or other parties in interest, and generally are secured by properties which are unable to produce sufficient cash flow to fully service the loans in accordance with the original lender's loan terms. Since entering this business in 1991, the Company's loan portfolio has increased to $100.5 million (before discounts) at September 30, 1996. During the fiscal years ended September 30, 1994, 1995 and 1996, the Company's yield on its net investment in loans acquired (including gains on refinancings and sales of participations) equalled 30.8%, 34.6% and 36.2%, respectively, while its gross profits from its loan activities (that is, revenues from loan activities minus costs attributable thereto and less depreciation, depletion and amortization, but without allocation of corporate overhead) for fiscal 1994, 1995 and 1996 were $2.3 million, $5.3 million and $6.7 million, respectively. The Company seeks to reduce the amount of its own capital invested in loans after their acquisition, and to enhance its returns, through prompt refinancing of the properties underlying its loans, or through sale at a profit of senior participations in its loans (typically on a recourse basis). At September 30, 1996, senior lenders held outstanding obligations of $38.7 million secured by properties with an aggregate appraised value of $68.2 million, resulting in a ratio of senior lien obligations-to-appraised value of property of 56.7%. Currently, the operating cash flow coverage on the required debt service on refinancings and participations (exclusive of proceeds from such refinancings or participations) is 160.8%. The balance of operating cash flow is, pursuant to agreements with the borrowers, retained by the Company as debt service on the outstanding balance of the Company's loans. See "Business -- Asset Acquisition and Resolution: Loan Status." EQUIPMENT LEASING In September 1995, the Company entered the commercial leasing business through its acquisition of the leasing subsidiary of a regional insurance company. This acquisition provided the Company with a servicing portfolio of approximately 520 individual leases held by six leasing partnerships which provided the Company with a servicing revenue stream of $1.1 million during fiscal 1996. More importantly, through this acquisition the Company acquired an infrastructure of operating systems, computer hardware and proprietary software (generally referred to as a "platform"), as well as personnel, which the Company is utilizing to develop a commercial leasing business for its own account. In order to develop this business, in early 1996 the Company hired a team of four experienced leasing executives, including the former chief executive officer of the U.S. leasing subsidiary of Tokai Bank, a major Japanese banking institution. The Company's strategy in developing its leasing business is to focus on leases with equipment costs of between $5,000 to $100,000 (with a targeted average transaction of approximately $15,000 per lease) ("small ticket" leasing) and to market its equipment leasing product through vendor programs with equipment manufacturers likely to generate $10 million or less annually in equipment leases, regional distributors and other vendors. The Company has currently entered into vendor program relationships with five vendors: Minolta Corporation (copiers), Celsis Incorporated (microbial testing systems), American Marabacom Communications (Teleco) (telephone systems), CSi (test equipment) and ATI Communications (telephone systems). The Company believes that this market is under-served by equipment lessors, banks and other financial institutions, affording the Company a niche market with significant growth potential. From the inception of leasing activity for its own account in June 1996 through September 30, 1996, the Company has received 271 lease proposals involving equipment with an aggregate cost of $6.5 million, approved 118 such proposals involving equipment with an aggregate cost of $2.5 million, entered into 39 transactions involving equipment with an aggregate cost of $711,000 and had 21 such proposals pending involving equipment with an aggregate cost of $1.3 million. According to the Equipment Leasing Association of America ("ELA"), a leading industry trade association, approximately 80% of all United States businesses lease some portion of their equipment. Leasing enables a company to obtain the equipment it needs, while preserving cash flow and often receiving favorable accounting and tax treatment. The Company believes that small businesses are becoming more aware of the economic benefits offered by equipment leasing, and that small business leasing will therefore become an increasingly important segment of the leasing market. ENERGY OPERATIONS The Company produces natural gas and, to a lesser extent, oil from locations principally in Ohio, Pennsylvania and New York. At September 30, 1996, the Company had a net investment of $11.3 million in its energy operations, including interests in 769 individual wells owned directly by the Company or through 52 partnerships and joint ventures managed by the Company. While the Company has focused its business development efforts on its specialty finance operations over the past several years, its energy operations historically have provided a steady source of revenues and tax benefits. THE OFFERING Common Stock offered....... 1,200,000 shares(1) Common Stock to be outstanding after the Offering................... 3,094,761 shares(1)(2) Use of Proceeds............ For general corporate purposes, including the acquisition of additional commercial real estate loans for the Company's portfolio and expansion of the Company's equipment leasing operations. See "Use of Proceeds." Nasdaq National Market Symbol..................... REXI Risk Factors............... An investment in the shares of Common Stock offered hereby involves a high degree of risk. See "Risk Factors" beginning on page 8 hereof for information that should be considered by prospective purchasers of the Common Stock offered hereby. - --------------- (1) Assumes that the Underwriters' over-allotment option to purchase up to 180,000 shares of Common Stock is not exercised. (2) Does not give effect to any future exercise of outstanding warrants to purchase up to 983,150 shares of Common Stock or employee stock options to purchase up to 348,316 shares of Common Stock. See "Description of Capital Stock -- Warrants" and "Security Ownership of Certain Beneficial Owners and Management."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000095626_centire_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000095626_centire_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..368193bd7afc6ac4f06341514c15339aeb4da0cb
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+PROSPECTUS SUMMARY This Prospectus contains certain statements of a forward-looking nature relating to future events or the future financial performance of the Company. Prospective investors are cautioned that such statements are only predictions and that actual events may differ materially. In evaluating such statements, prospective investors should specifically consider the various factors identified in this Prospectus, including the matters set forth under the caption "Risk Factors," which would cause actual results to differ materially from those indicated by such forward-looking statements. The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and the Consolidated Financial Statements and notes thereto, appearing elsewhere in this Prospectus. THE OFFERING <TABLE> <CAPTION> <S> <C> Securities........ 1,000,000 shares of Common Stock, $.001 par value per share, offered by the Selling Shareholders. Use of Proceeds... The Company will not receive any proceeds from this offering. Risk Factors...... Investment in the Company involves certain risks. See "Risk Factors." NASDAQ symbol Common Stock ........ ASIA The Company's Common Stock is quoted on the NASDAQ National Market. </TABLE> THE COMPANY Sunbase Asia, Inc., a Nevada corporation (the "Company," which term shall include, unless the context so requires, its subsidiaries and affiliates), is engaged in the design, manufacture and distribution of a broad range of bearing products in the People's Republic of China ("China" or the "PRC"), and the United States ("US"). The Company also distributes its bearing products in Europe, Asia, South America and Africa. The Company's subsidiary in China, Harbin Bearing Company, Ltd. ("Harbin Bearing"), employs approximately 13,000 employees. Harbin Bearing is the largest precision bearing manufacturer and the third largest bearing manufacturer overall in China. Harbin Bearing produces a wide variety of precision and commercial-grade rolling-element bearings in sizes ranging from 10mm to 1000mm (internal diameter). Rolling-element bearings use small metal balls or cylinders to facilitate rotation with minimal friction and are typically used in vehicles, aircraft, appliances, machine tools, general machinery and virtually any other product that contains rotating or revolving parts. Precision bearings are bearings that are produced to more exacting dimensional tolerances and to higher performance characteristics than standard commercial bearings. The manufacturing process for precision bearings generally requires the labor of highly-skilled machinists and the use of sophisticated machine tools. On January 16, 1996 (effective December 29, 1995), the Company acquired Smith Acquisition Company, Inc., d/b/a Southwest Products Company ("Southwest Products"), an engineering-intensive company located in Southern California, that produces precision spherical bearings for US, European and Asian aerospace and high tech commercial applications and the US military. Over 90% of Harbin Bearing's sales are made to the OEM and replacement markets in China. Based on low production costs in China and the on-going world-wide demand for bearings, management intends to create a substantial export business to complement the Company's strong domestic position in the Chinese markets. Historically, Harbin Bearing export sales have been made through trade intermediaries and by receiving customer orders that are placed directly to its offices in China. Southwest Products has commenced providing and will provide engineering and technical support, and has commenced to and will market and distribute Harbin Bearing products internationally, focusing on exports of the products to the US. In addition, Southwest Products has begun to and will assist Harbin Bearing in implementing US manufacturing methods, improving quality control procedures and in developing new products at Harbin Bearing's facilities in China. The Company's principal executive offices are located at 19/F First Pacific Bank Centre, 51-57 Gloucester Road, Wanchai, Hong Kong, telephone (852) 2865-1511. The following is a chart of the Company's organizational structure. [Chart Appears Here] SUMMARY CONSOLIDATED FINANCIAL INFORMATION The following summary financial data (expressed in thousands) have been derived from the audited financial statements of Harbin Bearing General Factory (the predecessor operating company to Harbin Bearing) for the year ended December 31, 1993 and the audited financial statements of the Company for the years ended December 31, 1994 and 1995, and the unaudited financial statements of the Company for the nine month periods ended September 30, 1995 and 1996. All U.S. dollar amounts have been converted from Renminbi based on the exchange rate on September 30, 1996 of $1.00 US to each Rmb 8.3 as quoted at the People's Bank of China. Due to the reorganization of the Harbin Bearing General Factory on January 1, 1994, the 1993 financial information was prepared on a pro-forma basis as if the acquisition of China Bearing and Harbin Bearing had occurred on January 1, 1993. (See the discussion after the table under the caption "Selected Consolidated Financial Information"). <TABLE> <CAPTION> OPERATIONS DATA Twelve Months Ended December 31 Nine Months Ended September 30 --------------------------------------------------- --------------------------------- (UNAUDITED) 1993 1994 1995 1995 1995 1996 1996 RMB RMB RMB US$ RMB RMB US$ PROFORMA <S> <C> <C> <C> <C> <C> <C> <C> Net sales 687,064 719,842 672,359 80,812 651,070 724,960 87,345 Cost of sales (439,417) (441,854) (381,377) (45,838) (397,584) (444,750) (53,584) Gross profit 247,647 277,988 290,982 34,974 253,486 280,210 33,761 Selling, general and administrative expense. (91,197) (95,218) (113,002) (13,582) (77,804) (91,731) (11,052) Interest expense, net (40,638) (43,446) (48,446) (5,822) (36,060) (46,047) (5,548) Foreign exchange gain/loss- - 725 - - - Reorganization expenses (7,307) (7,307) - - - - Income before income taxes 108,505 132,742 129,534 15,570 139,622 142,432 17,161 Provision for income taxes (16,700) (22,687) (20,472) (2,461) (21,497) (23,590) (2,842) Income before minority interests 91,805 110,055 109,062 13,109 118,125 118,842 14,319 Minority interests (50,495) (58,447) (54,967) (6,607) (59,168) (64,926) (7,823) Net income 41,310 51,608 54,095 6,502 58,957 53,916 6,496 BALANCE SHEET DATA AT SEPTEMBER 30, 1996 ------------------------------ RMB US$ Current Assets 1,224,827 147,571 Working Capital 488,671 58,876 Long-Term Debt 262,002 31,567 Minority Interests 408,068 49,165 Shareholders' Equity 419,880 50,587 Total Assets 1,826,106 220,014 </TABLE>
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000202930_printpack_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000202930_printpack_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary information is qualified in its entirety by, and should be read in conjunction with the more detailed information and Financial Statements, and the notes thereto contained elsewhere in this Prospectus. As used herein, "Printpack" or the "Company" refers to the Company and its subsidiaries unless the context otherwise requires. The Company's fiscal year ends on the last Saturday in June, and references to particular fiscal years of the Company refer to the 12 months ended on the last Saturday of June of the year indicated. See the Financial Statements and Notes thereto. THE COMPANY Printpack is one of the largest domestic manufacturers and converters of flexible packaging products used by leading salted snacks, confectionery, cookies/crackers, cereal, beverage and other food and consumer product companies. Management estimates, based in part upon trade and Flexible Packaging Association ("FPA") data as of 1995, that, prior to the Acquisition (as defined herein), the Company had the leading market share in several major end use categories of flexible packaging, including salted snack foods (approximately 30% market share), which includes packaging for such products as Lays(R) and Ruffles(R) potato chips; confectionery products (approximately 30% market share), which includes packaging for such products as Reese's(R) and Hershey's(R) candy bars; and cookies/crackers (approximately 17% market share), which includes packaging for such products as Fig Newtons(R) and Famous Amos(R) cookies. The Company's customer base, prior to the Acquisition included nationally recognized, brand-name food companies such as Frito-Lay, General Mills, Hershey, Mars, Nabisco, Nestle, Quaker Oats and Ralston. Printpack, founded in 1956, is headquartered in Atlanta, Georgia and is owned and managed by the founding family together with several long-term members of management. The Company manufactures a wide variety of high value-added flexible packaging products, including laminates made of various layers of plastic film, aluminum foil, metallized films, paper and specialized coatings, as well as cast and blown monolayer and co-extruded films. Printpack's sales and EBITDA (as defined herein and before certain charges) for fiscal year 1996 were $442.9 million and $60.0 million, respectively. Over the last five fiscal years ending June 1996, the Company has experienced compound annual growth of sales and EBITDA before certain charges of 5.2% and 8.9%, respectively, exclusively through internal growth. Printpack management estimates, based in part upon data prepared by the FPA and other trade and industry information, that the U.S. end use markets for the types of flexible packaging products produced by the Company (the "flexible packaging industry") had annual sales of approximately $7.5 billion in 1995 and has one of the highest historical growth rates in the packaging industry, generally. According to this data, the eight largest flexible packaging companies accounted for approximately 50% of total 1995 sales in the flexible packaging industry, with the balance shared by several hundred other competitors. Management believes recent industry growth has been and will continue to be driven principally by (i) the shift from rigid containers (paperboard, glass and plastic) to lower cost and lighter weight flexible packaging, (ii) changing demographic trends which have increased the demand for more convenient forms of packaging, including single servings and packaging that extends product shelf life, (iii) the growth in several major end use market segments (such as snack foods), (iv) the growth of low-fat and non-fat foods which require more complex packaging barriers, (v) concerns over waste and resource reduction, and (vi) increasing demands for specialized packaging with enhanced barrier properties and distinctive graphics. On August 22, 1996, Printpack closed (the "Closing") the transactions contemplated in an asset purchase agreement dated as of April 10, 1996, as amended (the "Acquisition Agreement"), with James River and acquired substantially all of the assets of JR Flexible. JR Flexible was also one of the largest domestic manufacturers and converters of flexible packaging products to leading food and consumer products companies, as well as a major supplier of high performance films to other converters. The Acquisition has further increased Printpack's leading position in the flexible packaging industry, and as a result, the Company has total annual combined sales of approximately $900 million, which is approximately 12% of total 1995 industry sales. INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION OR THE "SEC"). THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED DECEMBER 18, 1996 PROSPECTUS (LOGO) PRINTPACK INC. OFFER TO EXCHANGE ITS 9 7/8% SENIOR NOTES DUE 2004, SERIES B WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 FOR ANY AND ALL OUTSTANDING 9 7/8% SENIOR NOTES DUE 2004, SERIES A AND 10 5/8% SENIOR SUBORDINATED NOTES DUE 2006, SERIES B WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 FOR ANY AND ALL OUTSTANDING 10 5/8% SENIOR SUBORDINATED NOTES DUE 2006, SERIES A --------------------- EACH EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., EASTERN TIME, ON , 1996, UNLESS EXTENDED BY THE COMPANY IN ITS SOLE DISCRETION (THE "EXPIRATION DATE"). Printpack, Inc., a Georgia corporation (the "Company"), hereby offers (the "Exchange Offer"), upon the terms and subject to the conditions set forth in this Prospectus (the "Prospectus") and the accompanying Letters of Transmittal (the "Letters of Transmittal"), to exchange up to $100,000,000 aggregate principal amount of its 9 7/8% Series B Senior Notes due 2004 (the "Exchange Senior Notes") and $200,000,000 aggregate principal amount of its 10 5/8% Series B Senior Subordinated Notes due 2006 (the "Exchange Senior Subordinated Notes" and, collectively with the Exchange Senior Notes, the "Exchange Notes") for equal principal amounts of its outstanding 9 7/8% Series A Senior Notes due 2004 (the "Senior Notes") and 10 5/8% Series A Senior Subordinated Notes due 2006 (the "Senior Subordinated Notes" and, collectively with the Senior Notes, the "Notes"), respectively. The Exchange Notes are substantially identical (including principal amount, interest rate, maturity and redemption rights) to the Notes for which they may be exchanged pursuant to this offer, except that (i) the offering and sale of the Exchange Notes will have been registered under the Securities Act of 1933, as amended (the "Securities Act"), and (ii) holders of Exchange Notes will not be entitled to certain rights of holders under a Registration Rights Agreement of the Company dated as of August 22, 1996 (the "Registration Rights Agreement"). The Senior Notes have been, and the Exchange Senior Notes will be, issued under an Indenture dated as of August 22, 1996 (the "Senior Note Indenture"), between the Company and Fleet National Bank, as trustee (the "Senior Note Trustee"). The Senior Subordinated Notes have been, and the Exchange Senior Subordinated Notes will be, issued under an Indenture dated as of August 22, 1996 (the "Senior Subordinated Note Indenture" and, collectively with the Senior Note Indenture, the "Indentures"), between the Company and Fleet National Bank, as trustee (the "Senior Subordinated Note Trustee" and, collectively with its capacity as the Senior Note Trustee, the "Trustee"). The Company will not receive any proceeds from this Exchange Offer; however, pursuant to the Registration Rights Agreement, the Company will bear certain offering expenses. See "Description of Exchange Notes -- Registration Rights; Liquidated Damages." The Exchange Notes will bear interest at the same rate and on the same terms as the Notes. Consequently, interest on the Exchange Notes will be payable semi-annually in arrears on February 15 and August 15 of each year, commencing February 15, 1997. The Exchange Senior Notes will mature on August 15, 2004, and may be redeemed at the option of the Company, in whole or in part, at any time on or after August 15, 2000. The Exchange Senior Subordinated Notes will mature on August 15, 2006, and may be redeemed at the option of the Company, in whole or in part, at any time on or after August 15, 2001. See "Description of Exchange Notes." The Exchange Senior Notes will be general unsecured obligations of the Company ranking senior to all subordinated Indebtedness (as defined herein) of the Company, including the Exchange Senior Subordinated Notes, and pari passu with all existing and future senior Indebtedness of the Company, including borrowings under the New Credit Agreement. However, borrowings under the New Credit Agreement are secured by Liens (as defined herein) on substantially all of the assets of the Company and will, therefore, effectively rank senior to the Exchange Senior Notes. As of September 28, 1996, as a result of the Transactions (as defined herein) approximately $210.4 million principal amount of outstanding Indebtedness of the Company will be, by its terms, subordinated to the Exchange Senior Notes. The Exchange Senior Subordinated Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to Senior Debt (as defined herein). As of September 28, 1996, as a result of the Transactions (as defined herein), and excluding receivables sold pursuant to the Receivables Securitization Facility (as defined herein) $318.0 million of Senior Debt was outstanding, $218.0 million of which was secured Indebtedness under the New Credit Agreement. The Indentures (as defined herein) will permit the Company and its subsidiaries to incur additional Indebtedness subject to certain limitations. See "Risk Factors -- Effective Subordination of Exchange Senior Notes" and "Description of Exchange Notes -- Certain Covenants." (Continued on inside front cover) The Company will accept for exchange any and all Notes validly tendered by eligible holders and not withdrawn prior to 5:00 P.M. Eastern time on , 1996, unless extended by the Company in its sole discretion (the "Expiration Date"). Tenders of Notes may be withdrawn at any time prior to the Expiration Date. The Exchange Offer is subject to certain customary conditions. The Notes may be tendered only in integral multiples of $1,000. See "The Exchange Offer." SEE "RISK FACTORS" BEGINNING ON PAGE 18 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY INVESTORS WITH RESPECT TO THE NOTES AND THE EXCHANGE NOTES. ON A PRO FORMA COMBINED BASIS FOR ITS LATEST FISCAL YEAR ENDED JUNE 30, 1996, THE COMPANY'S EARNINGS WERE INADEQUATE TO COVER ITS FIXED CHARGES BY APPROXIMATELY $10.3 MILLION. FOR THE COMPANY'S FIRST FISCAL QUARTER ENDED SEPTEMBER 28, 1996, EARNINGS WERE APPROXIMATELY $5.1 MILLION LESS THAN FIXED CHARGES FOR THAT THREE-MONTH PERIOD. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus is , 1996. "underwriter" within the meaning of the Securities Act. Such broker-dealer will also be deemed to represent and warrant to the Company that it is not participating in, and has no intent to participate in, any distribution of Exchange Notes, and has not entered into any arrangement or understanding with any person to distribute the Exchange Notes. In the event that any holder of Notes is prohibited by law or any policy of the Commission from participating in the Exchange Offer or any holder may not resell the Exchange Notes without delivering a prospectus and the Prospectus contained in this Registration Statement is inappropriate or unavailable for such resales by such holder or if such holder is a broker-dealer and holds Notes acquired directly from the Company or one of its affiliates, and such holder satisfies certain other requirements, the Company has agreed, pursuant to the Registration Rights Agreement, to file a registration statement in respect of such Exchange Notes and Notes pursuant to Rule 415 under the Securities Act. See "Prospectus Summary -- The Exchange Offer;" "The Exchange Offer;" and "Plan of Distribution." Any Notes not tendered and accepted in the Exchange Offer will remain outstanding. To the extent any Notes are tendered and accepted in the Exchange Offer, a holder's ability to sell untendered and unregistered Notes could be adversely affected. Following consummation of the Exchange Offer, the holders of Notes will continue to be subject to the existing restrictions upon transfer thereof and the Company will have fulfilled one of its obligations under the Registration Rights Agreement. Holders of Notes who do not tender their Notes generally will not have any further registration rights under the Registration Rights Agreement or otherwise. See "The Exchange Offer -- Consequences Of Failure To Exchange." The Company expects that similar to the Notes, and except as specifically requested by a holder on the Letter of Transmittal, the Exchange Notes will be issued only in the form of a Global Note (as defined herein), which will be deposited with, or on behalf of, The Depository Trust Company (the "Depository") and registered in its name or in the name of the Depository's nominee, Cede & Co. Beneficial interests in the Global Note representing the Exchange Notes will be shown on, and transfers thereof will be effected through, records maintained by the Depository and its participants. After the initial issuance of the Global Note, Exchange Notes in certificated form may be issued in exchange for the Global Note on the terms and conditions set forth in the Indentures. See "Description of Exchange Notes -- Book-Entry, Delivery and Form." The Company is not currently subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As a result of the offering of the Exchange Notes, the Company will become subject to the informational requirements of the Exchange Act. So long as the Company is subject to the periodic reporting requirements of the Exchange Act, it is required to furnish the information required to be filed with the Commission to the Trustee and the holders of the Notes and the Exchange Notes. The Company has agreed that, even if it is not required under the Exchange Act to furnish such information to the Commission, it will nonetheless continue to furnish information that would be required to be furnished by the Company by Section 13 of the Exchange Act to the Trustee and the holders of the Notes or Exchange Notes as if it were subject to such periodic reporting requirements. "See "Available Information." In addition, the Company has agreed that, for so long as any of the Notes remain outstanding, it will make available to any prospective purchaser of the Notes or beneficial owner of the Notes in connection with any sale thereof the information required by Rule 144A(d)(4) under the Securities Act, until such time as the Company has either exchanged the Notes for the Exchange Notes or until such time as the holders thereof have disposed of such Notes pursuant to an effective registration statement filed by the Company. AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission a registration statement on Form S-1 (together with all amendments and exhibits thereto, the "Registration Statement") under the Securities Act with respect to the securities offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto, as permitted by the rules and regulations of the Commission. For further information with respect to the Company, the Notes and JR Flexible, headquartered in Milford, Ohio, had leading market shares in various flexible packaging end use markets, including bakery, cookies/crackers, cereal, ream wrap (wrapping for reams of office paper), tissue/towel overwrap, coffee serving packs and dentifrice (plastic laminate materials for tooth paste tubes and other personal care products). JR Flexible manufactured many of the same product lines and materials as those manufactured by Printpack. JR Flexible's customer base also included many of the same brand name food companies as Printpack (General Mills, Nabisco, Nestle and Quaker Oats), as well as other major consumer products companies, such as Flowers, Kellogg, Kraft and James River. The Acquisition is expected to broaden Printpack's sales to certain existing customers, as well as provide new customer relationships and products. In recent years, JR Flexible has been an underperforming business; however, in late 1995, James River and JR Flexible management began various profitability improvement measures, including shedding certain lower margin businesses, reducing waste and related costs, improving product mixes and production processes and negotiating more favorable long-term raw materials contracts, especially for resins. As a result of these initiatives, JR Flexible's unaudited EBITDA for the 26 weeks ended June 30, 1996 was $15.9 million, compared to $3.8 million for the same period in 1995. JR Flexible's unaudited sales and EBITDA before certain charges for the latest 12 months ended June 30, 1996 were $467.0 million and $21.8 million, respectively. The Company's principal executive offices are located at 4335 Wendell Drive, S.W., Atlanta, Georgia 30336, and its telephone number is (404) 691-5830. BUSINESS STRATEGY Printpack focuses its sales and marketing efforts, technical development initiatives, and manufacturing capabilities on targeted end use markets for flexible packaging, with the goals of achieving critical mass and leading market shares. Printpack has achieved leadership positions in these markets by (i) making customer service its first priority, (ii) achieving economies of scale and manufacturing efficiencies to remain a low cost producer, (iii) investing in state-of-the-art equipment, and technological and production innovation, and (iv) providing high value-added flexible packaging structures and enhanced graphics. By focusing its equipment and facilities on specific market segments and product structures, the Company has been able to provide high quality products and service and realize production efficiencies. The Company leverages its strong customer relationships, market leadership and economies of scale to earn additional business from existing customers and to attract new customers. Printpack has developed mutually beneficial relationships with large food and consumer product companies and has benefited from the expanding market shares of such customers. The Company expects to continue this strategy. REASONS FOR THE ACQUISITION Printpack's management believes that the JR Flexible Acquisition is a significant strategic opportunity, consistent with the Company's long-term business strategy. The combination of Printpack (approximately 6% market share) and JR Flexible (approximately 6% market share) has created one of the largest U.S. companies focused on film-based flexible packaging products, with combined sales of approximately 12% of the industry's $7.5 billion of total 1995 sales. The Acquisition increased Printpack's leadership in several end use categories, extends its product lines with existing and new customers, helped diversify its customer base and created significant opportunities for cost savings and economies of scale. INDUSTRY LEADERSHIP Printpack management believes that as a result of the Acquisition, it has increased its leading share of the estimated $1.2 billion market for flexible packaging sales to the snack food industry to approximately 30%. Printpack also expects to increase its already leading shares of flexible packaging sales for each of the salted snack, confectionery and cookies/crackers products. Printpack also believes it obtained JR Flexible's leading market shares in several other products that use flexible packaging, including ream wrap, dentifrice, tissue/towel overwrap and bread bags. the Exchange Notes reference is hereby made to the Registration Statement, including the exhibits and schedules filed or incorporated as a part thereof. Statements contained herein concerning the provisions of any document are not necessarily complete and in each instance reference is made to the copy of the document filed as an exhibit or schedule to the Registration Statement. Each such statement is qualified in its entirety by reference to the copy of the applicable documents filed with the Commission. In addition, after effectiveness of the Registration Statement, the Company will file periodic reports and other information with the Commission under the Exchange Act, relating to the Company's business, financial statements and other matters. The Registration Statement, including the exhibits and schedules thereto, and the periodic reports and other information filed in connection therewith, may be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional Offices of the Commission: Seven World Trade Center, New York, New York 10048 and Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. In addition, the Commission maintains a site on the World Wide Web at http://www.sec.gov that contains reports, information statements and other information regarding Printpack, Inc. and other registrants that file electronically with the Commission. SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS Certain of the matters discussed under the captions "Prospectus Summary;" "Risk Factors;" "Summary Unaudited Pro Forma Condensed Combined Financial Data" (including EBITDA and EBITDA before certain charges); "Unaudited Pro Forma Condensed Combined Statement of Operations" (including EBITDA and EBITDA before certain charges); "Printpack Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations;" "Business" and elsewhere in this Prospectus may constitute forward-looking statements, and as such may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Important factors that could cause the actual results, performance or achievements of the Company to differ materially from the Company's expectations are disclosed in this Prospectus ("Cautionary Statements"), including, without limitation, those statements made in conjunction with the forward-looking statements included under "Risk Factors" and otherwise herein. All written or oral forward-looking statements attributable to the Company are expressly qualified in their entirety by the Cautionary Statements. EXTENSION OF PRODUCT LINES AND CUSTOMERS Management believes that the Acquisition provides Printpack with a wider range of flexible packaging capabilities and further diversification of its product offerings, enabling Printpack to better serve customers. The Acquisition is expected to increase Printpack's business with various existing major customers, including General Mills, Mars, Nabisco, Nestle, Quaker Oats and Ralston. In addition, Printpack's new customers include Flowers, Kellogg, Kraft and James River. COST SAVINGS AND ECONOMIES OF SCALE The Acquisition is expected to produce significant cost savings through the elimination of redundant corporate overhead and the reduction of personnel at JR Flexible's headquarters and plants. Printpack management expects to realize significant cost savings through the consolidation and rationalization of JR Flexible's manufacturing operations with Printpack's manufacturing facilities, including the conversion of JR Flexible's plants to Printpack's production strategy. Printpack has announced the closing of two former JR Flexible plants, one in San Leandro, California and one in Dayton, Ohio, which closures presently are expected to be completed by the end of the Company's fiscal year 1997. In addition, after the Acquisition, Printpack is now one of the largest domestic purchasers of certain key materials used for flexible packaging manufacturing such as extrusion grade resin, oriented polypropylene ("OPP") film and other types of plastic film, paper and foil, and its enhanced purchasing power is expected to result in greater cost savings and technical development support from its key raw materials suppliers. See "Printpack, Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." THE ACQUISITION, FINANCING AND RELATED TRANSACTIONS THE ACQUISITION AND RELATED FINANCING The Company acquired JR Flexible for approximately $380 million (including the repayment of approximately $2.4 million of JR Flexible indebtedness on revenue bonds), subject to certain adjustments based upon, among other things, an audited closing date balance sheet that has not yet been completed. The initial offering of the Notes (the "Offering"), the refinancing pursuant to the New Credit Agreement and the transactions contemplated in the Acquisition Agreement were completed contemporaneously on August 22, 1996. The Acquisition, the Offering and the New Credit Agreement are referred to collectively herein as the "Transactions." The First National Bank of Chicago ("First Chicago"), together with a syndicate of lenders, has provided the Company with the New Credit Facilities, including a revolving credit facility (the "Revolving Credit Facility") of $155 million reduced pro rata by sales of accounts receivable pursuant to the Receivables Securitization Facility (as defined below) and a term loan (the "Term Loan") of $170 million. At Closing, the entire amount of the Term Loan and approximately $53.7 million of the Revolving Credit Facility was funded. A portion of the borrowings under the New Credit Facilities, together with the net proceeds to the Company from the Offering of the Notes, were applied against the purchase price of JR Flexible. Approximately $171.2 million of the New Credit Facilities were used at Closing to repay existing credit facilities and to pay prepayment penalties, fees and expenses associated with the Transactions. Approximately $51.3 million remained available under the New Credit Facilities for general corporate purposes, including working capital. See "Description of Certain Indebtedness" and "Receivables Securitization Facility." In addition, the Company entered into an asset-backed accounts receivable financing arrangement through a new special purpose, bankruptcy remote subsidiary of the Company, "Flexible Funding Corp." ("Receivables Funding"), a Delaware corporation. A special purpose bankruptcy remote subsidiary is a corporation which has been formed for a single purpose of (e.g. in the case of Receivables Funding, buying and selling receivables originated by the Company), which operates separately from its parent and other affiliated companies, and which has special charter provisions to assure its corporate separateness from its affiliates in an effort to avoid substantive consolidation in a bankruptcy proceeding involving its parent corporation or other affiliates. Receivables Funding has acquired and will continue to acquire accounts receivable generated by the Company, and sell them to Falcon Asset Securitization Corporation ("Falcon"), an asset-backed commercial paper conduit issuer sponsored by First Chicago, and to First Chicago and other investors. The receivables securitization facility (the "Receivables Securitization Facility") was established in an amount of up to approximately $50 million and, at the Closing, Printpack received approximately $23 million of proceeds from the initial sale of receivables under the Receivables Securitization Facility. See "Receivables Securitization Facility." SOURCES AND USES OF PROCEEDS Presented below are the sources and uses of funds in connection with the Acquisition and the other Transactions: <TABLE> <CAPTION> SOURCES OF FUNDS AMOUNT ------------------------------------------------------------------- ---------------------- (DOLLARS IN MILLIONS) <S> <C> New Credit Agreement: Revolving Credit Facility........................................ $ 53.7 Term Loan........................................................ 170.0 Receivables Securitization Facility................................ 23.0 9 7/8% Senior Notes due 2004....................................... 100.0 10 5/8% Senior Subordinated Notes due 2006......................... 200.0 ------ Total Sources of Funds................................... $546.7 ====== USES OF FUNDS JR Flexible purchase price......................................... $372.5 Repay existing Printpack debt...................................... 146.8 Estimated prepayment penalties, fees and transaction expenses...... 24.4 Working Capital.................................................... 3.0 ------ Total Uses of Funds...................................... $546.7 ====== </TABLE> THE REORGANIZATION The Company was reorganized to facilitate the Acquisition and its financing. Previously, the Company was owned and operated together with Printpack Enterprises, Inc. ("Enterprises"), a Georgia corporation that had elected to be taxed as a Subchapter S corporation under the Internal Revenue Code of 1986, as amended (the "Code"). Printpack and Enterprises were affiliated by common ownership and management. Following the Company's 1996 fiscal year, Printpack and Enterprises were reorganized into a holding company structure (the "Reorganization"). Printpack Holdings, Inc. ("Holdings"), a new Delaware corporation, was formed, and Enterprises contributed substantially all its assets and liabilities to Printpack. Following the Reorganization, Enterprises owns approximately 100% of the Company and Holdings owns approximately 97% of Enterprises. The remaining minority interests are held by members of the Love family and certain members of the Company's senior management who were not eligible to participate in the Reorganization. Prior to the Reorganization, Printpack and Enterprises had acquired and jointly owned approximately 95% of certain separately chartered flexible packaging operations ("Printpack Europe") located in the United Kingdom ("U.K."). Following the Reorganization, Holdings and Enterprises became holding companies that jointly own Printpack Europe, which is operated separately from the Company, except as permitted under the Indentures. See "-- United Kingdom Affiliates" and "Description of Exchange Notes." The Company has acquired all of JR Flexible's business and will conduct all North American operations previously carried on by the Company, Enterprises and JR Flexible, including the operations of various wholly-owned Mexican subsidiaries of the Company and JR Flexible. The Company also owns 100% of Printpack Illinois, Inc. ("Printpack Illinois"), which has been formed to own and operate Printpack's Elgin, Illinois plant, and the Company's patents, trademarks, trade secrets, knowhow and other intellectual property. See "Business -- Patents and Trademarks." UNITED KINGDOM AFFILIATES Printpack Europe began with the purchase of a separate U.K. company from a management and investor group in 1993, which previously had acquired such operations in a management buyout. In 1994, Printpack Europe acquired another U.K. flexible packaging company to become a larger competitor in the U.K. and Continental Europe. The U.K. operations were combined in an effort to assimilate and expand Printpack's European operations, which created one of the three largest flexible packaging companies in the U.K. After Printpack's purchases, Printpack Europe continued to be operated independently by its management, which was responsible for Printpack Europe's policies, operations and day-to-day management, including financial controls. In 1996, it became apparent to the Company that Printpack Europe management was not timely and appropriately recognizing expenses and rebates, and was capitalizing certain expenses, leading to the recognition of approximately $32.5 million of special charges in May 1996, of which approximately $10 million related to fiscal year 1995. As a result of these special charges and increased raw material costs and competition, Printpack Europe had net losses in fiscal years 1995 and 1996. In May 1996, certain former senior managers of Printpack Europe were terminated, and Mr. James J. Greco, a long-time senior Company manager, was sent to the U.K. to manage this unit. Improvements in financial controls and reports also have been made at Printpack Europe. Former credit agreements in existence prior to the effective time of the Acquisition pertaining to approximately $146.7 million of Company debt outstanding at June 29, 1996 contained various covenants related to the Company and Printpack Europe that were not amended to reflect the Reorganization, but these credit agreements were terminated as a result of the Transactions consummated on August 22, 1996. The Company has agreed not to merge, consolidate or otherwise acquire Printpack Europe's operations as a subsidiary of the Company, except as permitted under the Indentures. See "Risk Factors -- Foreign Operations; Losses incurred by Printpack Europe;" "Printpack, Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations;" "Description of Exchange Notes -- Certain Covenants -- Transaction with Affiliates;" and "Management;" and Note 5 to the Printpack Financial Statements. THE EXCHANGE OFFER Securities Offered......... $100,000,000 aggregate principal amount of 9 7/8% Exchange Senior Notes due August 15, 2004. $200,000,000 aggregate principal amount of 10 5/8% Exchange Senior Subordinated Notes due August 15, 2006. The Exchange Offer......... $1,000 principal amount of the Exchange Senior Notes in exchange for each $1,000 principal amount of Senior Notes and $1,000 principal amount of the Exchange Senior Subordinated Notes in exchange for each $1,000 principal amount of Senior Subordinated Notes. As of the date hereof, all of the aggregate principal amount of Senior Notes and Senior Subordinated Notes are outstanding. The Company will issue the Exchange Notes to eligible holders on or promptly after the Expiration Date of the Exchange Offer. Based on interpretations by the staff of the SEC set forth in no-action letters issued to third parties, the Company believes that Exchange Notes issued pursuant to the Exchange Offer in exchange for Notes may be offered for resale, resold and otherwise transferred by any holder thereof (other than any holder which is a broker-dealer that holds Notes acquired for its own account as a result of market-making or other trading activities, or any such holder which is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such Exchange Notes are acquired in the ordinary course of such holder's business and that such holder does not intend to participate and has no arrangement or understanding with any person to participate in a distribution of such Exchange Notes. Each broker-dealer that receives Exchange Notes for its own account pursuant to the Exchange Offer may be a statutory underwriter and must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. The Letters of Transmittal state that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used for 180 days after the Expiration Date by a broker-dealer in connection with resales of Exchange Notes received in exchange for Notes where such Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company has agreed that for a period of 180 days after the Expiration Date, it will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." Any holder who is an affiliate of the Company, and any person who intends to, or is participating in a distribution of the Exchange Notes, will not be able to rely on the position of the staff of the SEC enunciated in Exxon Capital Holdings Corporation (available May 13, 1988), Morgan Stanley & Co., Inc. (available June 5, 1991), and Shearman & Sterling (available July 2, 1993) or similar no-action letters and, in the absence of an exemption therefrom, must comply with the registration and prospectus delivery requirements of the Securities Act in connection with the resale of the Exchange Notes. Failure to comply with such requirements in such instance may result in such holder incurring liability under the Securities Act for which the holder will not be indemnified by the Company. Expiration Date............ 5:00 p.m., Eastern Time, on , 1996, unless the Exchange Offer is extended by the Company in its sole discretion, in which case the term "Expiration Date" means the latest date and time to which the Exchange Offer is extended. Interest on the Exchange Notes and the Notes........ The Exchange Notes will bear interest from August 15, 1996, the date of issuance of the Notes that are tendered in exchange for the Exchange Notes (or the most recent Interest Payment Date (as defined herein) to which interest on such Notes has been paid). Accordingly, holders of Notes that are accepted for exchange will not receive interest on the Notes that is accrued but unpaid at the time of tender, but such interest will be payable on the Exchange Notes issued therefor on the first Interest Payment Date after the Expiration Date. Conditions to the Exchange Offer.................... The Exchange Offer is subject to certain customary conditions, which may be waived, to the extent permitted by law, by the Company. See "The Exchange Offer -- Conditions" and "-- Procedures for Tendering." Procedures for Tendering Notes.................... Each eligible holder of Notes wishing to accept the Exchange Offer must complete, sign and date the accompanying Letter of Transmittal, or a facsimile thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver such Letter of Transmittal, or such facsimile, together with the Notes and any other required documentation to the Exchange Agent (as defined herein) at the address set forth in the Letter of Transmittal. The blue Letter of Transmittal should be used to tender Senior Notes and the yellow Letter of Transmittal should be used to tender Senior Subordinated Notes. By executing the Letter of Transmittal, each holder will represent to the Company that, among other things, the holder or the person receiving such Exchange Notes, whether or not such person is the holder, is acquiring the Exchange Notes in the ordinary course of business and that neither the holder nor any such other person has any arrangement or understanding with any person to participate in the distribution of such Exchange Notes, that neither the holder nor any such person is an "affiliate" (as defined under Rule 405 of the Securities Act) of the Company, and if such holder is a broker-dealer that holds the Notes as a result of market-making or other trading activities, it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resales of the Exchange Notes. In lieu of physical delivery of the certificates representing Notes, tendering holders may transfer Notes pursuant to the procedure for book-entry transfer as set forth under "The Exchange Offer -- Procedures for Tendering." Special Procedures for Beneficial Owners.......... Any beneficial owner whose Notes are held in book-entry form or are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to exchange such Notes for the Exchange Notes should contact such registered holder promptly and instruct such registered holder to tender the Notes for exchange on such beneficial owner's behalf. See "The Exchange Offer -- Procedures for Tendering." Guaranteed Delivery Procedures............... Holders of Notes who wish to tender their Notes and whose Notes are not immediately available or who cannot deliver their Notes, the Letter of Transmittal or any other documents required by the Letter of Transmittal to the Exchange Agent (or comply with the procedures for book-entry transfer) prior to the Expiration Date must tender their Notes according to the guaranteed delivery procedures set forth in "The Exchange Offer -- Guaranteed Delivery Procedures." Withdrawal Rights.......... Tenders may be withdrawn at any time prior to 5:00 P.M., Eastern Time, on the Expiration Date pursuant to the procedures described under "The Exchange Offer -- Withdrawals of Tenders." Acceptance of Notes and Delivery of Exchange Notes.................... The Company will accept for exchange any and all Notes that are properly tendered in the Exchange Offer, and not withdrawn, prior to 5:00 P.M., Eastern Time, on the Expiration Date. The Exchange Notes issued pursuant to the Exchange Offer will be delivered on the earliest practicable date following the Expiration Date. See "The Exchange Offer -- Terms of the Exchange Offer." Federal Income Tax Consequences............. The issuance of the Exchange Notes to holders of the Notes pursuant to the terms set forth in this Prospectus will not constitute an exchange for federal income tax purposes. Consequently, no gain or loss will be recognized by holders of the Notes upon receipt of the Exchange Notes. See "The Exchange Offer -- Certain Federal Income Tax Consequences of the Exchange Offer." Effect on holders of the Notes...................... As a result of the making of this Exchange Offer, the Company will have fulfilled certain of its obligations under the Registration Rights Agreement, and holders of Notes who do not tender their Notes will generally not have any further registration rights under the Registration Rights Agreement or otherwise. Such holders will continue to hold the untendered Notes and will be entitled to all the rights and subject to all the limitations, including, without limitation, transfer restrictions, applicable thereto under the Indentures, except to the extent such rights or limitations, by their terms, terminate or cease to have further effectiveness as a result of the Exchange Offer. Accordingly, if any Notes are tendered and accepted in the Exchange Offer, the trading market, if any, for the untendered Notes could be adversely affected. Exchange Agent............. Fleet National Bank is serving as exchange agent (the "Exchange Agent") with respect to the Senior Notes and the Senior Subordinated Notes. SUMMARY OF TERMS OF EXCHANGE NOTES The form and terms of the Exchange Notes are substantially identical to the form and terms of the Notes which they replace except that (i) the Exchange Notes have been registered under the Securities Act and, therefore, will not bear legends restricting the transfer thereof and (ii) the holders of Exchange Notes generally will not be entitled to further registration rights under the Registration Rights Agreement, which rights generally will have been satisfied when the Exchange Offer is consummated. The Exchange Notes will evidence the same indebtedness as the Notes which they replace and will be issued under, and be entitled to the benefits of the Indentures. See "Description of Exchange Notes." Maturity........................ The Exchange Senior Notes will mature on August 15, 2004 and the Exchange Senior Subordinated Notes will mature on August 15, 2006. Interest........................ Interest on the Exchange Senior Notes will accrue at the rate of 9 7/8% per annum, payable semi-annually in arrears on February 15 and August 15 of each year, commencing on February 15, 1997. Interest on the Exchange Senior Subordinated Notes will accrue at the rate of 10 5/8% per annum, payable semiannually in arrears on February 15 and August 15 of each year, commencing on February 15, 1997. Optional Redemption............. The Exchange Senior Notes may be redeemed at the option of the Company, in whole or in part, at any time on or after August 15, 2000, at the redemption prices set forth herein, plus accrued and unpaid interest and Liquidated Damages (as defined herein), if any, thereon to the applicable redemption date. In addition, in the event of an Initial Public Offering (as defined herein) by the Company on or before August 15, 1999, the Company may use the proceeds from such Initial Public Offering to redeem up to 25% of the aggregate principal amount of Exchange Senior Notes originally issued at a redemption price equal to 108 7/8% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the date of redemption; provided, however, that at least $75.0 million in aggregate principal amount of Exchange Senior Notes remains outstanding following such redemption and, provided further, that such redemption occurs within 60 days of the closing of such Initial Public Offering. The Exchange Senior Subordinated Notes may be redeemed at the option of the Company, in whole or in part, at any time on or after August 15, 2001, at the redemption prices set forth herein, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the applicable redemption date. In addition, in the event of an Initial Public Offering of the Company on or before August 15, 1999, the Company may use the proceeds from such Initial Public Offering to redeem up to 35% of the aggregate principal amount of Exchange Senior Subordinated Notes originally issued at a redemption price equal to 109 5/8% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the date of redemption; provided, however, that at least $100.0 million in aggregate principal amount of Exchange Senior Subordinated Notes remains outstanding following such redemption and, provided further, that such redemption occurs within 60 days of the closing of such Initial Public Offering. Mandatory Redemption............ The Company will not be required to make any mandatory redemption or sinking fund payments with respect to the Exchange Notes. Change of Control............... Upon the occurrence of a Change of Control (as defined herein), each holder of Exchange Notes will have the right to require the Company to purchase all or any part (equal to $1,000 or an integral multiple thereof) of such holder's Notes at a price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the date of purchase. See, however, "Risk Factors -- Possible Inability to Repurchase Exchange Notes upon a Change of Control." Ranking......................... The Exchange Senior Notes will be general unsecured obligations of the Company, ranking senior to all subordinated Indebtedness of the Company, including the Exchange Senior Subordinated Notes, and pari passu with all existing and future senior Indebtedness of the Company, including borrowings under the New Credit Agreement. However, borrowings under the New Credit Agreement will be secured by Liens on substantially all of the assets of the Company and will, therefore, effectively rank senior to the Exchange Senior Notes. The Exchange Senior Subordinated Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to Senior Debt. As of September 28, 1996, as a result of the Transactions and excluding receivables sold pursuant to the Receivables Securitization Facility, there was approximately $318.0 million of Senior Debt outstanding, $218.0 million of which was secured Indebtedness under the New Credit Agreement. See "Risk Factors -- Subordination of Exchange Senior Subordinated Notes" and "-- Effective Subordination of Exchange Senior Notes." Certain Covenants............... The Indentures contain certain covenants that, among other things, limit the ability of the Company and its subsidiaries to incur additional Indebtedness, to issue preferred stock, pay dividends or make other distributions, repurchase Equity Interests (as defined herein) or subordinated Indebtedness, engage in sale and leaseback transactions, create certain liens, enter into certain transactions with affiliates, sell assets of the Company or its subsidiaries, issue or sell Equity Interests of the Company's subsidiaries or enter into certain mergers and consolidations. In addition, under certain circumstances, the Company will be required to offer to purchase Notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the date of purchase, with the proceeds of certain Asset Sales (as defined herein). See "Description of Exchange Notes." Exchange Offer; Registration Rights.......................... If (i) the Exchange Offer is not permitted by applicable law or (ii) any holder of Transfer Restricted Securities (as defined herein) notifies the Company that (A) it is prohibited by law or Commission policy from participating in the Exchange Offer, (B) that it may not resell the Exchange Notes acquired by it in the Exchange Offer to the public without delivering a prospectus and the Prospectus is not appropriate or available for such resales or (C) that it is a broker-dealer and holds Notes acquired directly from the Company or an affiliate of the Company, and such holders timely notify the Company of such facts, the Company will be required to provide a shelf registration statement (the "Shelf Registration Statement") to cover resales of the Notes by the holders thereof. If the Company fails to satisfy these registration obligations, it will be required to pay liquidated damages ("Liquidated Damages") to such holders of Notes under certain circumstances. See "The Exchange Offer -- Registration Rights and Effect of Exchange Offer." PRINTPACK, INC. AND SUBSIDIARIES THE FLEXIBLE PACKAGING GROUP OF JAMES RIVER CORPORATION SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA The following table presents summary unaudited pro forma condensed combined financial information derived from the Unaudited Pro Forma Condensed Combined Financial Statements included elsewhere in this Prospectus. The summary pro forma condensed combined financial information gives effect to the Transactions as if they had occurred as of July 1, 1995 for purposes of the pro forma condensed combined statements of operations data and other financial data. The Unaudited Pro Forma Condensed Combined Financial Statements do not purport to present the actual financial position or results of operations of the Company or JR Flexible had the Transactions and events assumed therein in fact occurred on the dates specified, nor are they necessarily indicative of the results of the operations that may be achieved in the future. The Unaudited Pro Forma Condensed Combined Financial Statements are based on certain assumptions and adjustments described in the notes to the Unaudited Pro Forma Condensed Combined Financial Statements and should be read in conjunction therewith and with the historical financial statements of the Company, the historical combined financial statements of The Flexible Packaging Group of James River Corporation ("JR Flexible Combined Financial Statements"), and the related notes thereto; and the "Printpack, Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations." <TABLE> <CAPTION> HISTORICAL PRO FORMA ----------------------------------- COMBINED PRINTPACK JR FLEXIBLE LATEST 12 LATEST 12 LATEST 12 MONTHS ENDED MONTHS ENDED MONTHS ENDED JUNE 30, JUNE 29, 1996(1) JUNE 30, 1996(2) 1996 ---------------- ---------------- ------------ (DOLLARS IN THOUSANDS) <S> <C> <C> <C> STATEMENT OF INCOME DATA: Net sales........................................... $442,931 $467,023 $909,954 Gross margin........................................ 79,840 34,197 113,327 Selling, administrative and research and development expenses.......................................... 44,581 37,799 57,965 Restructuring charges............................... -- 894 894 Amortization of intangible assets................... 169 732 5,993 Severance expense................................... 7,870 1,200 9,070 Write-off of equity investment...................... 200 -- 200 Income (loss) from operations....................... 27,189 (6,428) 39,205 Interest expense(3)(4).............................. 10,814 244 49,867 Income (loss) before provision for income taxes..... 16,316 (6,112) (9,992) (Provision) benefit for income taxes................ (3,080) 2,219 -- Net income (loss)................................... 13,236 (3,893) (9,992) BALANCE SHEET DATA: Working capital..................................... $ 9,086 $ 57,021 $ 86,477 Total assets........................................ 231,269 346,119 650,037 Total debt.......................................... 157,138 2,392 534,038 Shareholders' equity................................ 13,460 247,249 12,160 OTHER FINANCIAL DATA: EBITDA(3)(5)........................................ $ 52,033 $ 20,310(6) $ 96,758 EBITDA before certain charges(3)(7)................. 59,993 21,844 106,922 Capital expenditures................................ 25,786 29,454 55,240 Depreciation and amortization....................... 24,903 26,178 56,883 </TABLE> <TABLE> <CAPTION> HISTORICAL PRO FORMA ----------------------------------- COMBINED PRINTPACK JR FLEXIBLE LATEST 12 LATEST 12 LATEST 12 MONTHS ENDED MONTHS ENDED MONTHS ENDED JUNE 30, JUNE 29, 1996(1) JUNE 30, 1996(2) 1996 -------- -------- -------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> RATIOS: Ratio of EBITDA to interest expense(3)(5)........... 1.9x Ratio of EBITDA before certain charges to interest expense(3)(7)..................................... 2.1x Ratio of total debt to EBITDA before certain charges(3)(7)..................................... 5.0x Net income (loss)................................... $ 13,236 $ (3,893) $ (9,992) Ratio of earnings to fixed charges(3)(8)............ 2.2x -- 0.8x Earnings greater (less) than fixed charges.......... 16,013 (6,112) (10,295) </TABLE> - --------------- (1) Results of operations are for the 53 weeks ended June 29, 1996. (2) Results of operations are for the 53 weeks ended June 30, 1996. The results of operations for this 53 week period were calculated by adding the six months ended June 30, 1996 to the year ended December 31, 1995 and deducting the results for the six months ended June 30, 1995. (3) Interest expense, EBITDA and the ratio of earnings to fixed charges for JR Flexible are not necessarily indicative of JR Flexible on a stand-alone basis. See Note 2 to the JR Flexible Combined Financial Statements. (4) Pro forma interest expense has been calculated based upon various assumed interest rates on the Notes and under the New Credit Agreement. (5) EBITDA represents net income (loss) before interest expense, taxes, depreciation and amortization, but after deduction for restructuring charges, severance expense and write-off of equity investments. While EBITDA should not be construed as a substitute for operating income or a better indicator of liquidity than cash flows from operating activities, which are determined in accordance with generally accepted accounting principles, it is included herein to provide additional information with respect to the ability of the Company to meet its future debt service, capital expenditures and working capital requirements. EBITDA is not necessarily a measure of the Company's ability to fund its cash needs. EBITDA is included herein because management believes that it will be useful in measuring the Company's ability to service its debt consistent with the terms of such debt. (6) This includes resin price decreases beginning March 1, 1996, the shedding by JR Flexible of certain low margin business, reduction in waste and cost reduction efforts. (7) Pro forma combined EBITDA before certain charges, which adds back restructuring charges, severance expense and write-off of equity investment, would have been $106.9 million, and is provided, in part, because similar measures are included in the terms of the Indentures and the New Credit Agreement. Printpack management estimates that additional savings (not reflected in the pro forma combined statements of operations or other pro forma data) aggregating approximately $22.8 million can be achieved as a result of the following: (A) $7.8 million in anticipated additional savings as a result of the voluntary retirement program completed by Printpack in fiscal 1996 in which approximately 160 employees participated and which savings are not reflected in the Printpack Financial Statements. Total annual savings are expected to be $9.0 million. (B) $5.8 million in anticipated additional savings as a result of below market raw material contracts acquired by Printpack in conjunction with the Acquisition based on current 1996 volumes, and which savings are not reflected in the JR Flexible Combined Financial Statements or in the Printpack Financial Statements. Total annual savings are expected to be $7.6 million. See "Risk Factors -- Exposure to Fluctuations in Raw Material Prices." (C) $9.2 million in anticipated annual savings estimated as a result of the reduction of approximately 150 JR Flexible salaried plant personnel expected to occur shortly after the Closing of the Acquisition. If the above items had occurred at the beginning of Printpack's fiscal 1996, Printpack management estimates that the Company's pro forma combined EBITDA before certain charges would have been approximately $129.7. Accordingly, the pro forma ratio of EBITDA before certain charges to interest expense would have been approximately 2.5x and the ratio of total debt to EBITDA before certain charges would have been approximately 4.1x. See "Printpack, Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Effects of the Acquisition," for a discussion of certain of these costs savings and certain charges related to the Acquisition. (8) The ratio of earnings to fixed charges is computed by dividing earnings by fixed charges. For this purpose, "earnings" include operating income (loss) before income taxes, extraordinary items and cumulative effect of accounting change plus fixed charges. Fixed charges include interest, whether expensed or capitalized, amortization of debt expense and discount or premium relating to any indebtedness, whether expensed or capitalized and the portion of rental expense that is representative of the interest factor in these rentals. <TABLE> <CAPTION> HISTORICAL ----------------------------- PRO FORMA PRINTPACK(1) JR FLEXIBLE(2) COMBINED 3 MONTHS 53 DAYS 3 MONTHS ENDED ENDED ENDED SEPTEMBER AUGUST 22, SEPTEMBER 28, 1996 1996 28, 1996 ------------ -------------- --------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> STATEMENT OF INCOME DATA: Net Sales................................................. $ 150,787 $ 62,942 $ 213,729 Gross margin.............................................. 16,958 1,052 21,573 Selling, administrative and research and development expenses................................................ (15,202) (4,817) (16,474) Amortization of intangible assets......................... (307) (76) (1,101) --------- -------- --------- Income (loss) from operations............................. 1,449 (3,841) 3,998 Interest expense(3)(4).................................... (6,279) (31) (12,317) Loss before provision for income taxes.................... (4,837) (3,754) (8,208) (Provision) benefit for income taxes...................... (1,906) 1,404 (1,925) Income (loss) before extraordinary item................... (6,743) (2,350) (10,133) Extraordinary item -- loss on early extinguishment of debt (net of tax benefit of $999)............................ (1,631) -- (1,631) Net (loss)(7)............................................. $ (8,374) $ (2,350) $ (11,763) --------- -------- --------- OTHER FINANCIAL DATA: EBITDA(3)(5).............................................. 9,115 57 16,366 EBITDA before certain charges(3)(6)....................... 10,746 57 17,997 Capital expenditures...................................... 375,724 2,668 378,392 Depreciation and amortization............................. 9,304 3,780 13,887 RATIOS: Ratio of EBITDA to interest expense(3)(5)................. 1.3x Ratio of EBITDA before certain charges to interest expense(6).............................................. 1.5x Ratio of total debt to EBITDA before certain charges(6)... 30.6x Net income (loss)(7)...................................... $ (8,374) $ (2,350) $ (11,763) Ratio of earnings to fixed charges(3)(7).................. 0.3x 0.4x Earnings less than fixed charges.......................... (5,112) (3,754) (8,251) </TABLE> - --------------- (1) Results of operations are for the 13 weeks ended September 28, 1996. (2) Results of operations are for the 53 days ended August 22, 1996, the Closing Date of the Acquisition. (3) Interest expense, EBITDA and the ratio of earnings to fixed charges for JR Flexible are not necessarily indicative of JR Flexible on a stand-alone basis. See Note 2 to the JR Flexible Combined Financial Statements. (4) Pro forma interest expense has been calculated based upon various assumed interest rates on the Notes and under the New Credit Agreement. (5) EBITDA represents net income (loss) before interest expense, taxes, depreciation and amortization, but after deduction for restructuring charges and severance expense. While EBITDA should not be construed as a substitute for operating income or a better indicator of liquidity than cash flows from operating activities, which are determined in accordance with generally accepted accounting principles, it is included herein to provide additional information with respect to the ability of the Company to meet its future debt service, capital expenditures and working capital requirements. EBITDA is not necessarily a measure of the Company's ability to fund its cash needs. EBITDA is included herein because management believes that it will be useful in measuring the Company's ability to service its debt consistent with the terms of such debt. (6) Pro forma combined EBITDA before certain charges, which adds back restructuring charges, severance expense and write-off of equity investment, as well as extraordinary items such as the $1.6 million loss on early extinguishment of debt, would have been $18.0 million, and is provided primarily because similar earnings measures are included in the terms of the Indentures and the New Credit Agreement. Printpack management estimates that additional savings (not reflected in the pro forma combined statements of operations or other pro forma data) aggregating approximately $3.4 million for similar periods can be achieved as a result of the following: (A) Approximately $2.2 million in savings related to the voluntary retirement program completed by Printpack in fiscal 1996 in which approximately 160 employees participated have been reflected in the Printpack Financial Statements. Total annual savings are expected to be $9.0 million. (B) Approximately $1.1 million in anticipated additional savings as a result of below market raw material contracts acquired by Printpack in conjunction with the Acquisition based on 1996 volumes, and which savings are not reflected in the JR Flexible Combined Financial Statements. Total annual savings are expected to be $7.6 million. See "Risk Factors -- Exposure to Fluctuations in Raw Material Prices." (C) Approximately $2.3 million in anticipated additional savings estimated as a result of the reduction of approximately 150 JR Flexible salaried plant personnel which occurred after the Closing of the Acquisition. If the above items had occurred at the beginning of Printpack's fiscal 1997 on June 30, 1996, Printpack management estimates that the Company's pro forma combined EBITDA before certain charges would have been approximately $21.4. Accordingly, the pro forma ratio of EBITDA before certain charges to interest expense would have been approximately 1.7 and the ratio of total debt to EBITDA before certain charges would have been approximately 25.8. See "Printpack, Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Effects of the Acquisition," for a discussion of certain of these costs savings and certain charges related to the Acquisition. (7) The ratio of earnings to fixed charges is computed by dividing earnings by fixed charges. For this purpose, "earnings" include operating income (loss) before income taxes, extraordinary items and cumulative effect of accounting change plus fixed charges. Fixed charges include interest, whether expensed or capitalized, amortization of debt expense and discount or premium relating to any indebtedness, whether expensed or capitalized and the portion of rental expense that is representative of the interest factor in these rentals. PRINTPACK, INC. AND SUBSIDIARIES THE FLEXIBLE PACKAGING GROUP OF JAMES RIVER CORPORATION SUMMARY HISTORICAL FINANCIAL DATA The summary historical financial data presented in the table below have been derived from the Printpack Financial Statements and the related notes thereto and the JR Flexible Combined Financial Statements and the related notes thereto included elsewhere in this Prospectus and should be read in conjunction therewith. Printpack's historical financial data for the three months ended September 23, 1995 and September 28, 1996 are unaudited, but have been prepared on the same basis as the audited financial statements and, in the opinion of Printpack management, include all adjustments, consisting only of normal recurring entries (except as resulted from the Transactions), necessary for the fair presentation of such statements. JR Flexible's historical financial data for the six months ended June 25, 1995 and June 30, 1996 are unaudited, but have been prepared on the same basis as the audited financial statements and, in the opinion of James River management, include all adjustments, consisting only of normal recurring entries, necessary for the fair presentation of such statements. See "Unaudited Pro Forma Condensed Combined Financial Statements;" and "Printpack, Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000277028_homegold_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000277028_homegold_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Consolidated Financial Statements and Notes thereto appearing elsewhere herein. Unless otherwise indicated, all information in this Prospectus has been adjusted to reflect a one-for-three reverse stock split of the Common Stock effective June 9, 1995 and a two-for-one stock split effected in the form of a 100% stock dividend on the Common Stock effective March 1, 1996. Unless otherwise indicated, the information in this Prospectus assumes that the Underwriters' over-allotment option is not exercised. Unless the context requires otherwise, all references to the Company shall include the Company and all of its subsidiaries. Prospective investors should carefully consider the information set forth under the heading "Risk Factors." THE COMPANY Emergent Group, Inc. is a diversified financial services company headquartered in Greenville, South Carolina, that originates, services and sells residential mortgage loans ("Mortgage Loans"), small business loans ("Small Business Loans") and used automobile loans ("Auto Loans"). The Company makes substantially all of its loans to borrowers who have limited access to credit or who may be considered credit-impaired by conventional lending standards ("non-prime borrowers"). The Company commenced its lending operations in 1991 and has experienced significant loan growth over the past several years. During the years 1993, 1994 and 1995, the Company originated $63.6 million, $150.0 million and $249.5 million in loans, respectively. During the six months ended June 30, 1996, the Company originated $194.4 million in loans. Of the Company's loan originations in the first six months of 1996, $153.8 million were Mortgage Loans, $30.6 million were Small Business Loans and $10.0 million were Auto Loans. For the years ended December 31, 1993, 1994 and 1995, the Company's pre-tax income from continuing operations was $663,000, $2.4 million and $4.9 million, respectively. For the six months ended June 30, 1996, the Company's pre-tax income from continuing operations was $3.6 million. MORTGAGE LOAN DIVISION The Company's Mortgage Loan operation (the "Mortgage Loan Division") makes Mortgage Loans primarily to owners of single family residences who use the loan proceeds for such purposes as debt consolidation, home improvements and educational expenditures. Approximately 93% of the Company's Mortgage Loans are secured by first mortgages, with the balance being secured by second mortgages. The Mortgage Loans generally have initial principal balances ranging from $25,000 to $100,000 (with an average initial principal balance in the first six months of 1996 of approximately $41,500) and fixed rates of interest ranging from 9% to 16% per annum (with an average interest rate earned in the first six months of 1996 of 12.2%). The Mortgage Loan Division has experienced significant growth over the past several years. During 1993, 1994 and 1995, Mortgage Loan originations totaled $20.5 million, $99.4 million and $192.8 million, respectively. During the six months ended June 30, 1996, Mortgage Loan originations totaled $153.8 million. A majority of the Mortgage Loans are sold on a non-recourse basis to institutional investors. The Mortgage Loan Division originates Mortgage Loans on both a retail basis through regional offices and a wholesale basis through independent mortgage brokers and mortgage bankers (collectively, the "Mortgage Bankers"). The Company's retail lending operations were established in the second quarter of 1996, and currently operate through offices in Indianapolis, IN, Baton Rouge, LA and New Orleans, LA. The Company expects to open retail lending operations in Greenville, SC and Phoenix, AZ during the fourth quarter of 1996 and five new retail lending offices during the first quarter of 1997. Through its retail offices, the Company targets Mortgage Loan borrowers through a variety of marketing methods. During August and September 1996, retail originations totaled $5.0 million and $8.4 million, respectively. The Company also originates Mortgage Loans on a wholesale basis through approximately 225 Mortgage Bankers in approximately 12 states. The Company has established strategic alliance agreements with certain Mortgage Bankers (the "Strategic Alliance Mortgage Bankers"), which require the Strategic Alliance Mortgage Bankers to refer to the Company all of their loans up to specified levels which meet the Company's underwriting criteria, in exchange for delegated underwriting, administrative support and expedited funding. The Company currently has four Strategic Alliance Mortgage Bankers (one of which was added in October 1996) and plans to add two more during the remainder of 1996 and the first quarter of 1997. The Company has a minority equity interest in certain of the Strategic Alliance Mortgage Bankers. The Company believes that its use of retail and wholesale origination and strategic alliances is a unique strategy which enables the Company to penetrate the non-prime mortgage loan market through multiple channels. In the first six months of 1996, approximately 53% (or approximately $15 million per month) of the Company's Mortgage Loans by principal amount were originated through one Strategic Alliance Mortgage Banker, First Greensboro Home Equity, Inc. ("First Greensboro"). On June 1, 1996, First Greensboro terminated its agreement with the Company in connection with its sale to a third party. As a result of such termination, First Greensboro paid the Company $7.3 million in September 1996. Although First Greensboro generated a large percentage of the Company's Mortgage Loan originations, the Company believes that it will be able to replace such originations through its retail lending operations and through additional Strategic Alliance Mortgage Bankers, two of which entered into strategic alliance agreements with the Company in the second and third quarters of 1996. During August and September 1996, Mortgage Loan originations through these additional sources totaled $6.2 million and $9.9 million, respectively. SMALL BUSINESS LOAN DIVISION The Company's Small Business Loan operation (the "Small Business Loan Division") makes loans to small businesses primarily for the acquisition or refinancing of property, plant and equipment and working capital. During 1993, 1994 and 1995, Small Business Loan originations totaled $37.9 million, $43.1 million and $39.6 million, respectively. During the six months ended June 30, 1996, Small Business Loan originations totaled $30.6 million. A substantial portion of the Company's Small Business Loans are loans ("SBA Loans") which are guaranteed by the U.S. Small Business Administration (the "SBA"). The SBA Loans are secured by real or personal property and have initial principal balances ranging from $250,000 to $1.5 million (with an average initial principal balance in the first six months of 1996 of $650,000) and variable interest rates limited to a maximum of 2.75% over the prime rate. The SBA guarantees approximately 75% of the original principal amount of the SBA Loans, up to a maximum guarantee amount of $750,000. The Company sells participations representing the SBA-guaranteed portion of its SBA Loans (the "SBA Loan Participations") in the secondary market. In connection with such sales, the Company receives, in addition to excess servicing revenue, cash premiums of approximately 10% of the guaranteed portion being sold. SBA Loans are originated directly by the Company's loan officers in its six branch offices and are primarily generated through referral sources such as commercial loan and real estate brokers ("Commercial Loan Brokers") located in its market areas. Approximately 75% of the SBA Loans originated in the first six months of 1996 were originated through Commercial Loan Brokers. The Company believes that it was among the ten largest SBA Loan lenders in the United States, by principal amount of SBA Loans approved, for the SBA's fiscal year ended September 30, 1995. The Small Business Loan Division also provides working capital loans secured by accounts receivable, inventory and equipment to small- to medium-sized businesses in the southeastern United States ("Asset-based Small Business Loans"). The Company began its asset-based lending operation in April 1996 in Atlanta, GA. For the six months ended June 30, 1996, Asset-based Small Business Loans originated by the Small Business Loan Division totaled approximately $4.6 million. AUTO LOAN DIVISION The Company's Auto Loan operation (the "Auto Loan Division") makes loans to non-prime borrowers for the purchase of used automobiles. Substantially all of the Auto Loans are made directly by the Company to purchasers of automobiles who are referred to the Company by automobile dealers ("Dealers"). Less than 20% of the Auto Loans made in the first six months of 1996 were indirect loans purchased from Dealers. The Auto Loans generally have initial principal balances ranging from $3,000 to $10,000 (with an average initial principal balance in the first six months of 1996 of approximately $5,000), terms ranging from 24 to 48 months, and fixed interest rates ranging from 18% to 46% per annum (with an average yield in the first six months of 1996 of 27.4%). The Auto Loan Division operates through eight locations and originates Auto Loans in connection with approximately 200 Dealers. During 1993, 1994 and 1995, Auto Loan originations totaled $5.2 million, $7.5 million and $17.1 million, respectively. During the six months ended June 30, 1996, Auto Loan originations totaled $10.0 million. LOAN PORTFOLIO/LOAN SALES AND SECURITIZATIONS The Company's loan receivables held for investment at December 31, 1993, 1994 and 1995 totaled $66.3 million, $91.7 million, and $103.9 million, respectively. At June 30, 1996, loan receivables totaled $87.8 million, of which $55.0 million were Mortgage Loans, $24.0 million were Small Business Loans and $8.8 million were Auto Loans. Consistent with the Company's "high velocity" capital strategy described below, the Company has sold a substantial majority of the loans it has originated through whole Mortgage Loan sales, sales of SBA Loan participations and through the securitization of approximately $17.1 million of the unguaranteed portion of SBA Loans in June 1995 and $16.1 million of Auto Loans in March 1996. The Company plans to continue to pursue securitizations in the future, including the securitization of a majority of its Mortgage Loans beginning in 1997, principally because the Company believes that securitization is potentially more profitable than loan sales. BUSINESS AND GROWTH STRATEGY The Company's business strategy is to be a diversified financial services company that meets the credit needs of borrowers in what the Company believes to be under-served credit markets. Key elements of the Company's business strategy are to: -- Maintain a "high velocity" capital strategy whereby loans are generally sold within 10 to 40 days of origination, thereby enabling the Company to recognize cash gains on the sales of its loans and quickly redeploy its capital, as well as reduce its interest rate risk, default risk and borrowing costs. In addition, the Company plans to continue to pursue securitization transactions for all of its loan divisions in the future. -- Respond quickly to customer credit requests by utilizing a decentralized loan approval process, while ensuring consistent credit quality through uniform underwriting guidelines and procedures. -- Utilize a proactive underwriting process whereby the Company may restructure credit requests in order to cause them to meet the Company's underwriting criteria. -- Achieve profitability goals by maximizing interest margins and emphasizing effective monitoring and collection of loans. The Company's growth strategy is to continue to expand all areas of its lending operations, emphasizing profitability, rather than asset growth. Key elements of the Company's growth strategy are to: -- Increase Mortgage Loan originations by expanding its retail lending operations where the Company lends directly to the customer without using a Mortgage Banker. -- Increase wholesale Mortgage Loan originations from the Strategic Alliance Mortgage Bankers and enter into additional strategic alliances with other Mortgage Bankers, as well as increase the number of relationships with other referral sources such as Commercial Loan Brokers and Dealers. -- Expand its Small Business Loan operations by utilizing its "Preferred Lender" status with the SBA to minimize response time and maximize Small Business Loan production. -- Increase its penetration in existing markets and expand geographically by opening additional offices. -- Pursue the acquisition of businesses in the financial services industry (although no agreements or understandings relating to any acquisitions are presently pending). The Company was incorporated in 1968 and until 1990 engaged principally in railroad-related operations. Prior to 1990, the Company incurred significant losses which resulted in net operating losses. In December 1990, current management acquired control of the Company and implemented a strategic plan to acquire profitable businesses which could utilize such net operating losses. Pursuant to such strategy, the Company acquired certain financial services companies in 1991 and an apparel manufacturer in 1993. In 1994, the Company made a strategic decision to divest all non-financial operations and to focus exclusively on the financial services industry. In accordance with such strategy, the Company has completed its divestiture of its apparel-related and transportation-related operations. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company.......... 2,119,031 shares Common Stock offered by the Selling Shareholders....................... 880,969 shares Common Stock to be outstanding after the Offering............................... 8,741,130 shares(1) Use of proceeds.............................. To repay indebtedness under the Company's existing credit facilities(2). See "Use of Proceeds." Proposed Nasdaq National Market symbol....... EMER </TABLE> - --------------- (1) Excludes (i) 226,708 shares of Common Stock issuable upon the exercise of options granted pursuant to the Company's existing stock option plans, (ii) 102,167 shares of Common Stock issuable upon the exercise of outstanding warrants and (iii) 10,500 shares of Common Stock issuable pursuant to stock grants made pursuant to the Company's Restricted Stock Agreement Plan. See "Management." (2) At September 30, 1996, such indebtedness totaled $29.7 million. SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA <TABLE> <CAPTION> AT AND FOR THE SIX MONTHS AT AND FOR THE FISCAL YEAR ENDED DECEMBER 31, ENDED JUNE 30, ----------------------------------------------------------- -------------------------- 1991 1992 1993 1994 1995 1995 1996 -------- -------- --------- --------- --------- --------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF INCOME DATA: Revenues: Interest and servicing revenue....................... $ 4,064 $ 6,980 $ 7,983 $ 10,903 $ 15,639 $ 7,307 $ 9,937 Gain on sale of loans(1)........ -- 1,686 3,605 6,450 9,169 4,355 7,468 Other revenues.................. 96 342 458 842 1,470 692 904 -------- -------- --------- --------- --------- --------- ----------- Total revenues.............. 4,160 9,008 12,046 18,195 26,278 12,354 18,309 Expenses: Interest expense................ 2,399 4,315 5,073 5,879 8,527 3,780 5,576 Provision for credit losses(2)..................... 83 349 686 2,510 2,480 1,240 1,532 General and administrative expenses...................... 2,265 4,698 5,624 7,359 10,419 4,514 7,622 -------- -------- --------- --------- --------- --------- ----------- Total expenses.............. 4,747 9,362 11,383 15,748 21,426 9,534 14,730 Income (loss) from continuing operations(3)(4)................ (595) (249) 937 1,792 4,581 2,696 3,436 Income (loss) from discontinued operations(3)................... 344 685 260 546 (3,924) (751) -- -------- -------- --------- --------- --------- --------- ----------- Net income (loss)(3).............. $ (251) $ 436 $ 1,197 $ 2,338 $ 657 $ 1,945 $ 3,436 ========== ========== =========== =========== =========== =========== ============== Income (loss) per share from continuing operations(3)(4)..... $ (0.11) $ (0.04) $ 0.14 $ 0.27 $ 0.69 $ 0.40 $ 0.51 Income (loss) per share from discontinued operations(3)...... 0.06 0.12 0.04 0.08 (0.59) (0.11) -- -------- -------- --------- --------- --------- --------- ----------- Net income (loss) per share(3).... $ (0.05) $ 0.08 $ 0.18 $ 0.35 $ 0.10 $ 0.29 $ 0.51 ========== ========== =========== =========== =========== =========== ============== Weighted average outstanding equivalent shares (in thousands)...................... 5,660 5,639 6,552 6,689 6,668 6,691 6,728 Supplemental net income per share:(3)(5) Income per share from continuing operations.................... $ 0.52 $ 0.39 Income (loss) from discontinued operations.................... (0.45) -- --------- ----------- Net income per share............ $ 0.07 $ 0.39 =========== ============== OPERATING DATA: Total loans originated or purchased....................... $ 18,361 $ 57,282 $ 63,633 $ 150,044 $ 249,507 $ 104,977 $ 194,437 Total loans sold.................. -- 10,827 31,052 85,772 153,055 58,494 159,886 Total loans securitized........... -- -- -- -- 17,063 17,063 16,107 Total loans serviced (period end)(6)......................... 41,250 68,489 106,898 157,443 214,534 185,118 217,982 Total loans receivable (period end)............................ 39,870 56,785 66,279 95,398 126,458 98,969 103,265 Weighted average interest rate earned.......................... 14.23% 14.19% 12.83% 13.43% 13.94% 15.02% 15.76% Weighted average interest rate paid............................ 7.69 7.74 7.24 6.94 7.57 7.40 8.64 Loans receivable held for investment...................... $ 39,870 $ 56,785 $ 66,279 $ 91,736 $ 103,865 $ 88,842 $ 87,835 Allowance for credit losses as a % of loans receivable held for investment...................... 2.35% 1.92% 1.60% 2.07% 2.02% 1.59% 2.67% Allowance for credit losses as a % of nonperforming loans held for investment...................... 490.05 16.39 45.12 92.17 51.83 52.32 62.84 Allowance for credit losses as a % of nonperforming loans serviced for others(6)................... -- -- -- -- (8) (8) 308.94 Allowance for credit losses as a % of serviced loans (period end)(6)......................... 2.35 1.92 1.60 1.98 2.03 2.07 2.83 Net charge-offs as a % of average serviced loans(2)(6)............ 0.83 0.68 1.29 2.36 1.43 0.90 0.96 General and administrative expenses as a % of average serviced loans(6)............... 8.24 8.56 6.41 5.57 5.60 5.39 6.66 </TABLE> <TABLE> <CAPTION> AT JUNE 30, 1996 ------------------------ AS ACTUAL ADJUSTED(7) --------- ----------- <S> <C> <C> BALANCE SHEET DATA: Loans receivable................................................................................. $ 87,835 $ 87,835 Mortgage loans held for sale..................................................................... 15,430 15,430 Total assets..................................................................................... 146,657 149,787 Total indebtedness............................................................................... 128,334 108,073 Total shareholders' equity....................................................................... 13,535 36,925 </TABLE> - --------------- (1) These amounts represent gains recorded on the sale of Mortgage Loans and SBA Loan Participations. (2) Approximately 90% of the amount in 1994 relates to the writedown to market of certain foreclosed properties associated with speculative construction loans made by the Mortgage Loan Division prior to its acquisition by the Company. Speculative construction loans are no longer being made by the Company. (3) Includes the impact of the utilization of the Company's net operating loss carryforward, which totaled approximately $23 million and $18 million at December 31, 1995 and June 30, 1996, respectively. Absent the utilization of the NOL, for the year ended December 31, 1995 and the six months ended June 30, 1996 (i) income (loss) from continuing operations would have been $2.9 million and $2.2 million, respectively; (ii) income (loss) from discontinued operations would have been ($2.5 million) and $0, respectively; and (iii) the net income (loss) would have been approximately $448,000 and $2.2 million, respectively. (4) The amount set forth with respect to the year ended December 31, 1993 includes $113,000 ($0.01 per share) which reflects the cumulative effect of a change in the method of accounting for income taxes. (5) Supplemental net income per share (as adjusted) reflects the issuance of the 2,119,031 shares of Common Stock offered by the Company hereby, the proceeds of which are to be used to repay approximately $22 million in Company debt. These amounts were calculated based on total weighted average shares of 8,787,222 at December 31, 1995 and 8,846,704 shares at June 30, 1996. (6) Serviced loans includes all portfolio Mortgage Loans and Auto Loans, all securitized loans, and the Small Business Loans, but solely for purposes of calculating the allowance ratio and net charge-off ratio, excludes the guaranteed portion of the SBA Loans. Operating data stated as a percentage of serviced loans (except period end data) for the six month periods ended June 30, 1995 and 1996 have been annualized. (7) Adjusted to reflect the sale by the Company of 2,119,031 shares at an assumed public offering price of $12.00, the receipt by the Company of $242,000 in connection with the exercise of warrants by certain Selling Shareholders and the application of the estimated net proceeds thereof as described under "Use of Proceeds." (8) Allowance for credit losses on non-portfolio loans totaled $773,000 and $669,000 for December 31, 1995 and June 30, 1995, respectively, and there were no nonperforming loans serviced for others at these dates. RECENT DEVELOPMENTS The following table sets forth certain recent unaudited financial data of the Company on a consolidated basis. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the financial position and results of operations for such unaudited periods have been included. The financial position and results of operations for the three and nine month periods ended September 30, 1996, are not necessarily indicative of operations which may be expected for the entire year. <TABLE> <CAPTION> FOR THE THREE AT AND FOR THE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ------------------- --------------------- 1995 1996 1995 1996 ------- ------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> STATEMENT OF INCOME DATA: Revenues: Interest and servicing revenue.................. $ 3,909 $ 5,143 $ 11,216 $ 15,081 Gain on sale of loans........................... 2,224 7,870 6,579 15,338 Other revenues.................................. 526 1,557 1,218 2,459 ------- ------- -------- -------- Total revenues.......................... 6,659 14,570 19,013 32,878 Expenses: Interest expense................................ 2,161 2,603 5,941 8,181 Provision for credit losses..................... 380 1,569 1,620 3,101 General and administrative expenses............. 2,620 6,058 7,134 13,680 ------- ------- -------- -------- Total expenses.......................... 5,161 10,230 14,695 24,962 Income from continuing operations................. 1,376 4,301 4,072 7,736 Income (loss) from discontinued operations........ (2,728) -- (3,479) -- ------- ------- -------- -------- Net income (loss)(1).............................. $(1,352) $ 4,301 $ 593 $ 7,736 ======= ======= ======== ======== Net income (loss) per share....................... $ (0.20) $ 0.63 $ 0.09 $ 1.14 ======= ======= ======== ======== Weighted average outstanding equivalent shares (in thousands)...................................... 6,706 6,777 6,706 6,774 OPERATING DATA: Total loans originated or purchased............. $63,290 $89,043 $168,268 $283,480 Total loans sold................................ 38,694 52,146 94,597 211,913 Total loans securitized......................... -- -- 17,063 16,107 Total loans serviced (period end)............... 197,512 238,737 Allowance for credit losses as a % of serviced loans (period end)(2)........................ 1.97% 2.81% Net charge-offs as a % of average serviced loans(2)..................................... 0.74 1.43 Total serviced loans past due 90 days or more as a % of total serviced loans(2)............... 2.10 4.03 BALANCE SHEET DATA: Loans receivable................................ $ 93,405 $105,700 Mortgage Loans held for sale.................... 14,348 23,111 Total assets.................................... 124,283 165,106 Total indebtedness.............................. 111,031 142,060 Total shareholders' equity...................... 9,743 17,834 </TABLE> - --------------- (1) Absent the utilization of the NOL, for the three months and nine months ended September 30, 1996, the net income (loss) would have been approximately $2.8 million and $5.0 million, respectively. (2) Serviced loans includes all portfolio Mortgage Loans and Auto Loans, all securitized loans, and the Small Business Loans, but solely for purposes of calculating the allowance ratio, net charge-off ratio, and delinquency ratio, excludes the guaranteed portion of the SBA Loans. Operating data stated as a percentage of average serviced loans (except period end data) for the periods indicated have been annualized. Revenues increased $7.9 million, or 118%, from $6.7 million for the three months ended September 30, 1995, to $14.6 million for the three months ended September 30, 1996. This increase in revenues was due principally to increases in interest and servicing revenue, gain on sale of loans, and loan fee income. Interest and servicing revenue increased $1.2 million, or 31%, from $3.9 million for the three months ended September 30, 1995, to $5.1 million for the same period in 1996. The increase in interest and servicing revenue was due principally to the increase in loan originations of $25.7 million, or 41%, from $63.3 million for the three months ended September 30, 1995, to $89.0 million for the same period in 1996. Gain on sale of loans increased $5.7 million, or 259%, from $2.2 million for the three months ended September 30, 1995, to $7.9 million for the same period in 1996. The increase in gain on sale of loans was principally from the recoupment by the Company of previously shared premiums received in connection with the settlement with First Greensboro. Other revenues, including loan fee income, increased $1.1 million, or 220%, from $500,000 for the three month period ended September 30, 1995, to $1.6 million for the same period in 1996. The increase in other revenues was due principally to increased loan-fee income generated by the Company's retail mortgage operation. Interest expense increased $400,000, or 18%, from $2.2 million for the three month period ended September 30, 1995, to $2.6 million for the same period in 1996. Interest expense increased due to the increased borrowings to fund the growth in loan originations. Provision for credit losses increased $1.2 million, or 300%, from $400,000 for the three months ended September 30, 1995, to $1.6 million for the same period in 1996. With this increased provision, the allowance for credit losses increased from 1.97% of average unguaranteed serviced loans at September 30, 1995, to 2.81% of average unguaranteed serviced loans at September 30, 1996. While total serviced loans past due 90 days or more as a percent of total serviced loans increased from 2.10% at September 30, 1995 to 4.03% at September 30, 1996, overall delinquencies of 30 days and greater decreased from 12.46% at September 30, 1995 to 11.37% at September 30, 1996. The increase in total serviced loans past due 90 days or more was principally due to the increase in loans past due 90 days or more in the Small Business Loan Division from .25% at September 30, 1995 to 4.65% at September 30, 1996. Management believes that the allowance for credit losses is adequate to cover possible losses. General and administrative expense increased $3.5 million, or 135%, from $2.6 million for the three months ended September 30, 1995, to $6.1 million for the same period in 1996. The increase in general and administrative expenses was due primarily to increased personnel, facilities, advertising, and operating costs related to new retail mortgage operations in Indianapolis and Baton Rouge, as well as increased loan servicing facilities and personnel to handle additional lending activities. Income from continuing operations for the three month period ended September 30, 1996, increased $2.9 million, or 207%, from $1.4 million for the three month period ended September 30, 1995, to $4.3 million for the three month period ended September 30, 1996. Absent the utilization of the NOL, income from continuing operations for the three month periods ending September 30, 1995 and 1996 would have been approximately $894,000 and $2.8 million, respectively. In October 1996, AmeriFund Group, Inc. ("AmeriFund"), a Strategic Alliance Mortgage Banker, terminated its strategic alliance agreement with the Company. During 1995 and the first nine months of 1996, approximately 7.0% and 14.5%, respectively, of the Company's total loans were originated through AmeriFund. For July, August and September 1996, AmeriFund originated $6.4 million, $2.6 million and $2.0 million in Mortgage Loans, respectively. Because of the Company's agreement with AmeriFund to share certain production costs, the Company's arrangement with AmeriFund was not as profitable for the Company as other Strategic Alliance Mortgage Bankers. For the nine months ended September 30, 1996, approximately $550,000 of the Company's pre-tax income resulted from its relationship with AmeriFund. The Company currently does not have any other arrangements with Strategic Alliance Mortgage Bankers which provide for shared production costs.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000312840_empire-of_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000312840_empire-of_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. See "Underwriting." THE COMPANY Empire of Carolina, Inc. designs, manufactures and markets a broad variety of toys and plastic decorative holiday products. The Company manages its business through four strategic business units ("SBUs") which are accountable for specific product categories: (i) ride-on products including Big Wheel(R) and Power Driver(R) brands; (ii) outdoor activities and games such as Snow Works(TM) winter sleds and Water Works(TM) water slides and pools (including Crocodile Mile(R) water slides); (iii) girls and boys toys featuring Buddy L(R) cars, trucks and other vehicles and Grand Champions(R) collectible horses; and (iv) holiday products featuring plastic decorative holiday display items, including the recently introduced Light Toppers(TM) outdoor lighting add-ons. The Company believes that it is the market share leader in non-powered ride-ons and in plastic water slides, winter sleds, collectible horses and outdoor decorative holiday products. Empire has been a toy manufacturer for approximately 40 years. The Company's business experienced significant change in 1993 when substantial non-toy operations were sold, and since mid-1994 the Company has undergone a change of control and management, established a new business strategy, and effected two acquisitions which added established core toy product lines to the Company's business. Following the divestitures of non-toy businesses, Empire's operations were focused on its toy business, including the Big Wheel(R) non-powered ride-on product line which has been sold throughout the United States since 1970, and its plastic decorative holiday products business. In the third quarter of 1994, current principal stockholders of the Company, led by Steven Geller, the current Chairman and Chief Executive Officer of the Company, acquired control of Empire as a base from which to build a diversified toy and plastic products manufacturing company. In October 1994, Empire acquired Marchon, Inc., a toy designer, marketer and manufacturer founded and managed by Marvin Smollar, the current President and Chief Operating Officer of the Company. Marchon's core toy products included Grand Champions(R) collectible horses and Crocodile Mile(R) water slides. In July 1995, Empire acquired the toy business and certain related liabilities of Buddy L Inc., one of the oldest toy brands in the United States whose core toy products included plastic and metal toy cars, trucks and other vehicles and battery-operated ride-ons. As a result of these recent transactions, the Company believes it is well-positioned to become a leading U.S. toy manufacturer. The Company's net sales were $41.4 million, $58.0 million and $153.7 million, respectively, for the years ended December 31, 1993, 1994 and 1995, and net sales from toy products contributed 51%, 57% and 79%, respectively, of the Company's consolidated net sales. The Company's goal is to become a leading supplier of toy and plastic decorative holiday products to retailers throughout the world. The Company believes it has distinct competitive advantages including: (i) a team of managers that, with one exception, has joined the Company since July 1994, and has extensive experience in the toy industry; (ii) a balanced line of stable core products with long histories of consumer appeal; (iii) manufacturing and sourcing flexibility through use of the Company's 1.2 million square foot facility in Tarboro, North Carolina and foreign sourcing expertise; and (iv) its decorative holiday product line, which has broad consumer appeal, has provided the Company with a consistent source of revenue while reducing the Company's dependence on major toy retailers and can be manufactured during off-peak periods throughout the year in anticipation of seasonal demand. According to the Toy Manufacturers' Association, total domestic shipments of toys, excluding video games, were approximately $13.4 billion in 1995. Management believes changing industry dynamics favor larger toy companies that can offer a broad selection of popular toy products, supported by consistent, high quality marketing programs to an increasingly concentrated distribution channel. Management also believes that there is significant potential for the Company to leverage its existing relationships with major retailers because many of such retailers are seeking to expand their relationships with suppliers like the Company in order to avoid becoming overly dependent on products from the largest domestic toy companies and to help <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION - ------ ------------------------------------------------------------------------------------ <C> <S> 10.31 Asset Purchase Agreement, dated as of March 3, 1995, by and among the Company, Buddy L and Buddy L (Hong Kong) Limited.(14) 10.32 Bid Protection Agreement, dated as of March 3, 1995, between the Company and Buddy L.(14) 10.33 Assignment and Assumption Agreement dated as of June 21, 1995 between the Company and EAC.(4) 10.34 Assignment dated as of May 22, 1995 between the Company and Carnichi Limited.(4) 10.35 Lease dated July 7, 1995 between Buddy L and EAC.(4) 10.36 Access Agreement dated as of July 7, 1995 between Buddy L, BLHK, SLM, and Buddy L Canada Inc., and EAC.(4) 10.37 Access Agreement dated as of July 7, 1995 between Buddy L, BLHK, SLM, and Buddy L Canada Inc., and EAC.(4) 10.38 Assignment and Assumption of Lease dated as of July 7, 1995 between Buddy L and EAC.(4) 10.39 Loan and Security Agreement dated as of June 30, 1995 between LaSalle National Bank, N. A. ("LaSalle") and EAC.(4) 10.40 Guaranty dated as of June 30, 1995 between LaSalle and the Company.(4) 10.41 Subordination Agreement dated as of June 30, 1995 between LaSalle and the Company.(4) 10.42 $7,580,000 Senior/Subordinated Term Loan Agreement dated July 7, 1995 among the Company as Borrower and the Lenders Listed therein ("Lenders").(4) 10.43 Form of the Company's 12% Senior/Subordinated Note due July 7, 1998.(4) 10.44 Form of Warrant to Purchase Common Stock of the Company issued to the Lenders.(4) 10.45 Amended and Restated Intercreditor Agreement dated July 7, 1995 by and among the Company, EII, Wachovia, the Lenders and the holders of certain debentures dated December 22, 1994 issued by the Company.(4) 10.46 Registration Rights Agreement dated July 7, 1995 by and between the Company and the Lenders.(4) 10.47 Form of Subscription Agreement executed in connection with subscription of Common Stock and Preferred Stock by WPG Corporate Development Associates IV (Overseas), L.P., Westpool Investment Trust PLC, Glenbrook Partners, L.P., and WPG Corporate Development Associates IV, L.P.(4) 10.48 Shareholders' agreement ("Shareholders' Agreement") dated December 22, 1994 among WPG Corporate Development Associates IV, L.P., WPG Corporate Development Associates IV (Overseas), Ltd., Weiss, Peck & Greer, as Trustee of Craig S. Whiting IRA, Peter Pfister, Weiss, Peck & Greer, as Trustee of Nora E. Kerppola IRA Westpool Investment Trust, PLC, Glenbrook Partners, L. P., Steve Geller, Neil Saul, Marvin Smollar and Champ Enterprises Limited Partnership.(17) 10.49 Amendment No. 2 to Shareholders Agreement dated as of June 29, 1995 among WPG Corporate Development Associates IV, L.P., WPG Corporate Development Associates IV (Overseas), Ltd., as the exempt transferee of WPG Corporate Development Associates IV (Overseas), Ltd., certain persons identified on Schedule I of Amendment No. 2 to the Shareholders' Agreement, Steven E. Geller ("Geller"), Neil B. Saul ("Saul") and The Autumn Glory Trust, a Cook Islands Registered International Trust ("Trust") as the permitted transferee of Champ Enterprises Limited Partnership.(4) 10.50 Registration Rights Agreement ("Registration Rights Agreement") dated as of December 22, 1994 by and between Empire of Carolina, Inc., WPG Corporate Development Associates IV, L.P. WPG Corporate Development Associates IV (Overseas), Ltd., Weiss Peck & Greer, as Trustee under Craig Whiting IRA, Peter B. Pfister, Weiss, Peck & Greer, as Trustee under Nora Kerppola IRA, Westpool Investment Trust PLC and Glenbrook Partners, L. P.(17) 10.51 Amendment No. 1 to Registration Rights Agreement.(4) </TABLE> assure that reliable supplies of quality products may be obtained at competitive prices. The following are the major elements of the Company's growth strategy: - Focus on core brands with long histories of broad consumer appeal, such as the Big Wheel(R) and Buddy L(R) product lines, which provide the Company with a base from which to build a diversified toy and plastic products manufacturing company. - Leverage existing manufacturing capabilities by upgrading the equipment, increasing the capacity and integrating all of the domestic manufacturing operations of the Buddy L product line at its manufacturing facility in Tarboro, North Carolina. - Offer value to toy retailers and consumers by utilizing the Company's diverse manufacturing capabilities and stable core product lines to offer high quality products and customer support at prices which enable the retailer to realize attractive gross margins. - Expand international presence, especially in Western Europe and Japan, which present significant growth opportunities for the Company. - Acquire new product lines and deepen and expand its core product lines with new licensing arrangements. - Extend core product lines through product innovation resulting from increased investment in research and development. - Develop additional countercyclical product lines to, in part, counterbalance the seasonality generally present in the toy industry and take advantage of additional manufacturing capacity available during off-peak production periods. THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Company................. 1,400,000 shares Common Stock Offered by the Selling Stockholders (1)............................................... 1,723,908 shares Common Stock to be Outstanding Immediately After the Offering (2)...................................... 6,961,300 shares Use of Proceeds to the Company...................... To prepay senior subordinated notes, repay bank debt and for general corporate purposes. See "Use of Proceeds." American Stock Exchange Symbol...................... EMP </TABLE> - ------------------------------ (1) Includes 315,833 outstanding shares obtainable upon exercise of an option being sold to the Underwriters by a Selling Stockholder. See "Principal and Selling Stockholders." (2) Includes 356,100 shares of Common Stock to be issued upon the exercise by certain Selling Stockholders of stock options and warrants concurrently with this Offering, but does not include an aggregate of 6,849,224 shares (758,000 of which are subject to warrants which will lapse upon the application of the net proceeds to the Company from this Offering) comprised of (i) 1,397,500 shares issuable upon the exercise of stock options outstanding on the date of this Prospectus, (ii) 1,962,900 shares issuable upon the exercise of warrants outstanding on the date of this Prospectus, of which warrants for the purchase of 758,000 shares will lapse upon the application of the net proceeds to the Company from this Offering as described in "Use of Proceeds," (iii) 442,264 shares issuable upon the conversion of the Series A cumulative convertible preferred stock upon the affirmative vote of a majority of the shares represented at the Company's 1996 Annual Meeting of Stockholders, (iv) 2,000,000 shares issuable upon the conversion of the convertible subordinated debentures, (v) up to 454,000 shares which may be issuable as a contingent payment obligation in connection with the Buddy L acquisition in certain circumstances and (vi) 592,560 shares available for future grants under the Company's 1994 Employee Stock Option Plan. See "Use of Proceeds" and "Certain Transactions." Empire of Carolina, Inc. was incorporated in Delaware in 1979. Unless the context indicates otherwise, all references to "Empire" or the "Company" refer to Empire of Carolina, Inc. and its subsidiaries. The Company's principal executive offices are located at 5150 Linton Boulevard, Delray Beach, Florida 33484, and its telephone number is (407) 498-4000. <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION - ------ ------------------------------------------------------------------------------------ <C> <S> 10.52 Settlement and Termination Agreement with Neil Saul.(18) 10.53 Extension to Financing Agreement, dated February 12, 1996 between Empire and Wachovia.(18) 10.54+ Loan and Security Agreement between LaSalle National Bank and BT Commercial Corporation to Empire Industries, Inc., with exhibits and security instruments. 21+ Subsidiaries of the Company 23.1 Consent of Deloitte & Touche LLP 23.2+ Consent of Coopers & Lybrand LLP 23.3+ Consent of Wong Brothers & Co. 23.4+ Consent of Schwartz & Freeman (to be included in Exhibit 5.1) 24.1+ Powers of Attorney (included on signature page) 99.1+ Letter dated June 17, 1996 from Wong Brothers & Co. to the Members of Marchon Toys Limited </TABLE> - ------------------------------ + Previously filed (1) Previously filed as an exhibit to the Company's Registration Statement on Form S-1 (File No. 2-73208), dated July 13, 1981 and incorporated by reference herein. (2) Previously filed as an exhibit to Clabir's Current Report on Form 8-K, dated December 23, 1988 (File No. 1-7769) and incorporated by reference herein. (3) Previously filed as an exhibit to the Company's Registration Statement on Form S-4 (File No. 33-32186), dated November 17, 1989 and incorporated by reference herein. (4) Previously filed as an Exhibit to the Company's Current Report on Form 8-K dated July 21, 1995, and incorporated by reference herein. (5) Previously filed as an exhibit to the Company's Current Report on Form 8-K, dated October 6, 1992 and incorporated by reference herein. (6) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1992 and incorporated by reference herein. (7) Previously filed as an exhibit to the Company's Current Report on Form 8-K, dated February 1, 1993 and incorporated by reference herein. (8) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993 and incorporated by reference herein. (9) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated by reference herein. (10) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 and incorporated by reference herein. (11) Previously filed as an exhibit to the Company's Current Report on Form 8-K for September 30, 1994 and incorporated by reference herein. (12) Previously filed as an exhibit to the Company's Current Report on Form 8-K for December 22, 1994 and incorporated by reference herein. (13) Previously filed as an exhibit to Amendment No. 1 to Schedule 13D filed by the WPG Group, dated December 23, 1994 and incorporated by reference herein. (14) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated by reference herein. (15) Previously filed as an exhibit to Amendment No. 1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ---------------------------------------------------------- ------------------ 1991(1)(2) 1992(1)(2) 1993(2) 1994(3) 1995(4) 1995 1996 ---------- ---------- ------- ------- -------- ------- ------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales...................... $ 41,253 $ 42,882 $41,354 $57,964 $153,744 $19,088 $22,186 Gross profit................... 13,936 13,439 11,621 17,407 41,839 6,151 5,969 Nonrecurring restructuring and relocation charges........... -- -- -- -- 7,550 150 -- Operating income (loss)........ 983 1,267 (3,465) 965 (1,894) (803) (1,329) Interest expense............... 13,549 10,314 2,937 1,407 5,996 667 2,132 After-tax income (loss) from continuing operations before extraordinary items and cumulative effect of an accounting change............ (6,318) (2,696) (1,516) 589 (4,501) (1,006) (2,156) Net income (loss).............. 8,756 11,098 24,327 589 (4,501) (1,006) (2,156) Weighted average shares outstanding -- primary(5).... 10,536 10,537 14,670 12,159 4,681 4,191 5,201 Income (loss) per common share from continuing operations -- primary(5)................... $ (.60) $ (.26) $ (.10) $ .05 $ (.96) $ (.24) $ (.41) </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 -------------------------- ACTUAL AS ADJUSTED(6) -------- -------------- <S> <C> <C> BALANCE SHEET DATA: Working capital............................................................ $ 5,978 $ 23,295 Total assets............................................................... 127,467 131,404 Total debt................................................................. 68,581 54,633 Stockholders' equity....................................................... 28,371 46,256 </TABLE> - ------------------------------ (1) Prior to 1992, the Company owned a minority interest in The Deltona Corporation, a real estate development corporation based in Florida. Income from continuing operations includes equity loss of The Deltona Corporation for 1991 of $1,613. Income from continuing operations for 1992 includes the gain on sale of common stock of, and notes receivable from, The Deltona Corporation of $2,000. (2) On October 6, 1992, the Company sold all of the stock of Wilbur Chocolate Co., Inc. In February 1993, the Company sold the assets used in the businesses of The Isaly Klondike Company and Popsicle Industries, Inc. These businesses had been acquired in 1989. As a result of the sale of these businesses, the results of operations and gains on sale from Wilbur, Isaly Klondike, and Popsicle have been included in income from discontinued operations. See Note 15 of Notes to Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations." (3) The results of operations for 1994 reflect the results of operations of Marchon Inc. since its acquisition by the Company on October 13, 1994. See Note 3 of Notes to Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations." (4) The results of operations for 1995 reflect the results of operations of substantially all of the toy business of Buddy L Inc. and its Hong Kong subsidiary since its acquisition by the Company on July 7, 1995. See Notes 3 and 14 of Notes to Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations." (5) Fully diluted income (loss) per common share from continuing operations was $(.28), $(.06), $(.07), $.05 and $(.96), respectively, during the five years ending December 31, 1995 based on weighted average shares outstanding of 16,296, 16,297, 16,295, 12,159 and 4,681, respectively. Fully diluted loss per common share from continuing operations was $(.24) and $(.41) for the three month period ended March 31, 1995 and 1996, respectively, based on weighted average shares outstanding of 4,191 and 5,201, respectively. During September 1994, the Company repurchased approximately 11,800 shares in a treasury stock transaction. Weighted average shares outstanding in 1995 reflects 454 shares which may become issuable as a contingent payment obligation with respect to the acquisition of Buddy L in July 1995. See Notes 2, 3 and 11 of Notes to Consolidated Financial Statements. (6) Adjusted to give effect to (i) the sale by the Company of 1,400 shares of Common Stock offered (at the public offering price per share of $12.00) and the application of the net proceeds therefrom and (ii) the exercise by certain Selling Stockholders of stock options and warrants concurrently with this Offering to purchase an aggregate of 356 shares of Common Stock. See "Use of Proceeds" and "Capitalization."
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements appearing elsewhere in this Prospectus. Unless the context otherwise requires, the term "Company" refers to Host Marriott Corporation and its subsidiaries and their combined operations. Unless otherwise indicated, the information in this Prospectus does not give effect to the exercise of the over-allotment option described in "Underwriting." References herein to "Smith Travel Research" are to industry data provided by Smith Travel Research. References herein to "Coopers & Lybrand" refer to the January 1996 Hospitality Directions Quarterly Research Journal published by Coopers & Lybrand LLP. THE COMPANY The Company is one of the largest owners of hotels in the world with 90 lodging properties as of December 29, 1995, primarily located in the United States. These properties generally are operated under Marriott brands and managed by Marriott International, Inc. ("Marriott International"), formerly a wholly owned subsidiary of the Company. The Marriott brand name is among the most respected and widely recognized brand names in the lodging industry. The Company's primary focus is on the acquisition of full-service lodging properties. During 1994 and 1995, the Company added 27 full-service hotels with approximately 11,300 rooms for an aggregate of approximately $915 million, bringing the Company's total full-service hotels to 55 at December 29, 1995. Based on data provided by Smith Travel Research, the Company believes that its full-service hotels consistently outperform the industry's average occupancy rate by a significant margin and averaged 75.5% occupancy for 1995 compared to 68.2% average occupancy for the upscale full-service segment of the lodging industry (the segment which is most representative of the Company's full- service hotels). The lodging industry as a whole, and the full-service hotel segment in particular, is benefiting from an improved supply and demand relationship in the United States. Management believes that recent demand increases have resulted primarily from an improved economic environment and a corresponding increase in business travel. In spite of increased demand for rooms, the room supply growth rate in the full-service segment has greatly diminished. Management believes that this decrease in the supply growth rate in the full- service segment is attributable to many factors including the limited availability of attractive building sites for full-service hotels, the lack of available financing for new full-service hotel construction and the availability of existing full-service properties for sale at a discount to their replacement value. Due to the relatively high occupancy rates of the Company's hotels, the limited supply of new rooms and the recent increase in business travel, the managers of the Company's hotels have increased average daily room rates by primarily replacing certain discounted group business with higher-rated group and transient business and by selectively increasing room rates. As a result, on a comparable basis, room revenues per available room ("REVPAR") for full-service properties increased approximately 7% for 1995 over the comparable period for the prior year. Furthermore, because lodging property operations have a high fixed cost component, increases in REVPAR generally yield greater percentage increases in operating profit. Accordingly, the approximate 7% increase in REVPAR resulted in a 25% increase in comparable full-service hotel operating profit for 1995. The Company expects this supply/demand imbalance, particularly in the upscale full-service segment, to continue, which should result in improved REVPAR and operating profits at its hotel properties in the near term. BUSINESS STRATEGY The Company's business strategy continues to focus on opportunistic acquisitions of full-service urban, convention and resort hotels primarily in the United States. The Company believes that the full-service segment of the market offers numerous opportunities to acquire assets at attractive multiples of cash flow and at substantial discounts to replacement value, including underperforming hotels which can be improved by conversion to the Marriott brand. The Company believes this segment is very promising because: . There is virtually no new supply of upscale full-service hotel rooms currently under construction. According to Smith Travel Research, from 1988 to 1990, upscale full-service room supply increased an average of approximately 5% annually, which resulted in an oversupply of rooms in the industry. However, this growth slowed to an average of approximately 1.7% from 1990 to 1995. Management believes that the lead time from conception to completion of a full-service hotel is generally five years or more in the types of markets the Company is principally pursuing, which will contribute to the continued low growth of supply. According to Coopers & Lybrand, hotel supply in the upscale full-service segment is expected to grow annually at 1.8% to 1.9% through 1998. Furthermore, because of the prolonged lead time for construction of new full-service hotels, management believes that growth in the full-service segment will continue to be limited at least through 2000. . Many desirable hotel properties are held by inadvertent owners such as banks, insurance companies and other financial institutions which are motivated and willing sellers. The Company has acquired several properties from these inadvertent owners at significant discounts to replacement cost. . Management believes that there are numerous opportunities to improve the performance of acquired hotels by replacing the existing hotel manager with Marriott International and converting the hotels to the Marriott brand. Nine of the 27 full-service hotels added in 1994 and 1995 were converted to the Marriott brand following their acquisition. These conversion properties (excluding the Marriott World Trade Center which was only partially open during 1995) experienced a 66.5% average occupancy rate during 1995 compared to an average occupancy rate of 75.5% for all of the Company's full-service hotels. The Company believes these nine conversion properties will experience improved operations as a result of increases in occupancy and room rates as the properties begin to benefit from Marriott's brand recognition, reservation system and group sales organization. The Company intends to pursue additional full- service hotel acquisitions, some of which may be conversion opportunities. The Company holds minority interests and serves as general partner in various partnerships that own, as of December 29, 1995, an aggregate of 262 additional properties, 42 of which are full-service properties, managed by Marriott International. Four of the properties added by the Company in the last two years were held by a partnership in which the Company holds a minority interest. As opportunities arise, the Company intends to pursue the acquisition of additional full-service hotels currently held by such partnerships and/or additional interests in such partnerships. The Company believes it is well qualified to pursue its acquisition strategy. Management has extensive experience in acquiring and financing lodging properties and believes its industry knowledge, relationships and access to market information provide a competitive advantage with respect to evaluating and acquiring hotel assets. In addition, the Company is well positioned to convert acquired properties to the high-quality Marriott brand name due to its relationship with Marriott International. For a description of the Company's relationship with Marriott International, see "Relationship Between the Company and Marriott International." RECENT ACQUISITIONS, PENDING ACQUISITIONS AND DIVESTITURES During 1994, the Company added 18 full-service hotels with approximately 7,400 rooms (including the Springfield Radisson Hotel, a 199-room hotel subsequently sold in 1995) for approximately $525 million. In 1995, the Company acquired nine full-service hotels with approximately 3,900 rooms in separate transactions for approximately $390 million. In 1996, through the date hereof, the Company has acquired one full-service hotel (374 rooms), controlling interests in three additional properties (2,269 rooms), one of which is currently under construction and is scheduled to be completed during the third quarter of 1996, and an 83% interest in the mortgage loans secured by a 250- room full-service property. See "Business and Properties--1996 Acquisitions." The Company has also entered into agreements to purchase two full-service properties (608 rooms) for approximately $51 million and a controlling interest in one full-service property (400 rooms) for approximately $18 million (together, the "Pending Acquisitions"). See "Business and Properties--Pending Acquisitions." Consistent with its strategy of focusing on the full-service segment of the lodging industry, the Company sold 26 of its 30 Fairfield Inns and all of its 14 senior living communities in 1994. In addition, the Company sold (subject to a leaseback) 37 Courtyard by Marriott ("Courtyard") properties to an unrelated real estate investment trust (the "REIT") in 1995. In 1995, the Company also sold its remaining four Fairfield Inns and the 199-room Springfield Radisson Hotel (which was acquired as part of a portfolio of lodging properties by the Company in 1994). Management believes that all of these sales were made at valuations that were attractive to the Company. In February 1996, the Company entered into an agreement with the REIT to sell and lease back 16 Courtyard properties and 18 Residence Inns (the "Pending Dispositions") for $349 million (10% of which would be deferred). The Pending Dispositions should be completed in the first and second quarters of 1996 and the Company intends to reinvest the proceeds in the acquisition of full-service lodging properties. See "Business and Properties--Pending Dispositions." SPECIAL DIVIDEND The Company previously operated food, beverage and merchandise concessions at airports, on tollroads and at stadiums and arenas and other tourist attractions (the "Operating Group"). On December 29, 1995, the Company distributed to its shareholders through a special dividend (the "Special Dividend") all of the outstanding shares of common stock of Host Marriott Services Corporation ("HM Services"), formerly a wholly owned subsidiary of the Company, which, as of the date of the Special Dividend, owned and operated the Operating Group business. The Special Dividend provided Company shareholders with one share of common stock of HM Services for every five shares of Company Common Stock held by such shareholders on the record date of December 22, 1995. The Special Dividend was designed to separate two types of businesses with distinct financial, investment and operating characteristics and to allow each business to adopt strategies and pursue objectives appropriate to its specific needs. The Special Dividend (i) facilitates the development of employee compensation programs custom-tailored to the operations of each business, including stock-based and other incentive programs, which will more directly reward employees of each business based on the success of that business, (ii) enables the management of each company to concentrate its attention and financial resources on the core businesses of such company, and (iii) permits investors to make more focused investment decisions based on the specific attributes of each of the two businesses. THE OFFERINGS <TABLE> <S> <C> Common Stock Offered U.S. Offering.......................... 20.0 million shares International Offering................. 5.0 million shares Total................................ 25.0 million shares(1) Common Stock to be Outstanding after the Offerings............................... 184.7 million shares(1)(2) NYSE Trading Symbol...................... HMT Use of Proceeds.......................... For the acquisition of lodging properties and for general corporate purposes </TABLE> - -------- (1) Assumes no exercise of the over-allotment option granted to the Underwriters by the Company. (2) Based on the number of shares of Common Stock outstanding on December 29, 1995. Does not include (i) up to 10.0 million shares of Common Stock subject to options held by current and former executive officers and certain employees of the Company, having a weighted average exercise price of $3.92 per share (certain of which options are subject to vesting requirements), (ii) up to 2.0 million shares of Common Stock held by current and former executive officers and certain employees under deferred stock incentive plans (certain of which shares are subject to vesting requirements), (iii) up to 7.5 million shares of Common Stock, issuable upon exercise of warrants having a current exercise price of $8.00 per share, issued or reserved for issuance by the Company to certain plaintiffs as part of a settlement of a class action suit, and (iv) up to 2.1 million restricted stock plan shares under the Comprehensive Stock Incentive Plan, approved by the Board of Directors in February 1996. See "Description of Capital Stock--Warrants" and "Management--Executive Officer Compensation." SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA The following table presents summary consolidated historical and pro forma financial data of the Company for the fiscal years ended December 29, 1995 and December 30, 1994. The historical financial data provided herein is derived from the Consolidated Financial Statements of the Company included in this Prospectus and the unaudited pro forma financial data provided herein is derived from the Pro Forma Condensed Consolidated Financial Data of the Company included in this Prospectus and includes the effect of the acquisitions, dispositions, bond offerings and Special Dividend discussed in this Prospectus. The pro forma financial data set forth below may not necessarily be indicative of the results that would have been achieved had such transactions been consummated as of the dates indicated or that may be achieved in the future. The information presented below should be read in conjunction with the Company's audited Consolidated Financial Statements and Notes thereto, the "Selected Historical Financial Data," "Management's Discussion and Analysis of Results of Operations and Financial Condition," and the "Pro Forma Condensed Consolidated Financial Data" included elsewhere herein. The Company's fiscal year ends on the Friday closest to December 31. <TABLE> <CAPTION> HISTORICAL PRO FORMA(1) ------------- -------------------------- FISCAL YEAR FISCAL YEAR 1995 1994 1995 1994 ----- ------ -------- ------ (IN MILLIONS) <S> <C> <C> <C> <C> INCOME STATEMENT DATA: Revenues........................... $ 484 $ 380 $565 $504 Operating profit before minority interest, corporate expenses and interest.......................... 114 152 114 152 Minority interest.................. 2 1 2 1 Corporate expenses................. 36 31 36 31 Interest expense................... 178 165 209 180 Interest income.................... 27 29 28 25 Loss from continuing operations.... (62) (13) (82) (25) Net loss(2)........................ (143) (25) N/A N/A OTHER DATA: EBITDA(3).......................... $311 $ 269 $306 $258 Depreciation and amortization...... 122 113 120 111 Cash from continuing operations.... 110 75 N/A N/A Cash used in investing activities from continuing operations ....... (156) (135) N/A N/A Cash from financing activities from continuing operations............. 204 24 N/A N/A Ratio of earnings to fixed charges(4)........................ -- -- N/A N/A Deficiency of earnings to fixed charges........................... 70 12 N/A N/A <CAPTION> AS OF DECEMBER 29, 1995 ---------------------------------- PRO PRO FORMA ACTUAL FORMA(5) AS ADJUSTED(5)(6) ------ -------- ----------------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents.......... $ 201 $ 387 $ 694 Total assets....................... 3,557 3,805 4,112 Total debt......................... 2,178 2,384 2,384 Shareholders' equity............... 675 675 982 </TABLE> (footnotes on following page) HOTEL PERFORMANCE The following table sets forth key performance statistics of the Company's properties: <TABLE> <CAPTION> FISCAL YEAR -------------------------- 1995 1994 ------- ------- <S> <C> <C> <C> COMPARABLE FULL-SERVICE HOTELS(7) Number of properties............................... 25 25 Number of rooms.................................... 12,881 12,869 Average daily rate................................. $113.08 $103.53 Occupancy %........................................ 76.6% 77.9% REVPAR(8).......................................... $86.56 $80.69 REVPAR % change.................................... 7.3% -- TOTAL FULL-SERVICE HOTELS Number of properties............................... 55 41 Number of rooms.................................... 25,932 19,492 Average daily rate................................. $110.30(9) $102.82(10) Occupancy %........................................ 75.5%(9) 77.4%(10) REVPAR(8).......................................... $83.32(9) $79.61(10) REVPAR % change.................................... 4.7%(9) -- COURTYARD HOTELS (54 properties with 7,940 rooms)(11) Average daily rate................................. $73.99 $68.86 Occupancy %........................................ 80.5% 80.4% REVPAR(8).......................................... $59.54 $55.37 REVPAR % change.................................... 7.5% -- RESIDENCE INNS (18 properties with 2,178 rooms) Average daily rate................................. $85.07 $79.58 Occupancy %........................................ 86.6% 85.6% REVPAR(8).......................................... $73.69 $68.12 REVPAR % change.................................... 8.2% -- </TABLE> - -------- (1) Pro forma for the 1994 addition of 18 full-service properties (one of which was sold in December 1995), the 1994 sale of 14 senior living communities, the 1994 sale of 26 Fairfield Inns, the 1995 acquisition of eight full-service properties (excluding the Marriott World Trade Center), the 1995 sale/leaseback of 37 Courtyard properties, the 1995 sale of the four remaining Fairfield Inns, the May 1995 Debt Offering (as defined herein), the December 1995 Debt Offering (as defined herein), the 1996 acquisition of a controlling interest in the San Diego Marriott Hotel and Marina, the 1996 acquisition of the Toronto Delta Meadowvale, the 1996 purchase of an 83% interest in the mortgage loans secured by the Newport Beach Marriott Suites, the Pending Acquisitions and the Pending Dispositions. See "Pro Forma Condensed Consolidated Financial Data." (2) For fiscal years 1995 and 1994, the Company recorded extraordinary losses on the extinguishment of debt of $20 million and $6 million, respectively, after taxes. For fiscal years 1995 and 1994, the Company recorded a loss from discontinued operations of $61 million and $6 million, respectively, after taxes. (3) EBITDA consists of the sum of consolidated net income (loss) from continuing operations, interest expense, income taxes, depreciation and amortization and certain other noncash charges (principally noncash write- downs of lodging properties and equity in earnings of affiliates, net of distributions received). The Company considers EBITDA to be an indicative measure of the Company's operating performance due to the significance of the Company's long-lived assets and because EBITDA can be used to measure the Company's ability to service debt, fund capital expenditures and expand its business; however, such information should not be considered as an alternative to net income, operating profit, cash flows from operations, or any other operating or liquidity performance measure prescribed by generally accepted accounting principles. Cash expenditures for various long-term assets, interest expense and income taxes have been, and will be, incurred which are not reflected in the EBITDA presentation. (4) The ratio of earnings to fixed charges is computed by dividing income (loss) from continuing operations before taxes, interest expense and other fixed charges by total fixed charges, including interest expense, amortization of debt issuance costs and the portion of rent expense which represents interest. The deficiency of earnings to fixed charges is largely the result of depreciation and amortization of $122 million for fiscal year 1995, and $113 million for fiscal year 1994. (5) Pro forma for the 1996 acquisition of a controlling interest in the San Diego Marriott Hotel and Marina, the 1996 acquisition of the Toronto Delta Meadowvale, the 1996 purchase of an 83% interest in the mortgage loans secured by the Newport Beach Marriott Suites, the Pending Acquisitions and the Pending Dispositions. See "Pro Forma Condensed Consolidated Financial Data." (6) As further adjusted to give effect to the Offerings. (7) Consists of the 25 properties owned by the Company for all of 1995 and 1994, except for the 255-room Elk Grove Suites hotel, which is leased to a national hotel chain through 1997 and the Sacramento property, which is operated as an independent hotel. (8) REVPAR represents room revenues generated per available room and excludes food and beverage and other ancillary revenues generated by the property. (9) Excludes the 820-room Marriott World Trade Center acquired in the last week of 1995. (10) Excludes six properties acquired in the last two weeks of fiscal year 1994 and the Detroit Airport Marriott included in the Special Dividend. (11) Includes the 37 properties which the Company sold (subject to a leaseback) to the REIT in 1995. CORPORATE STRUCTURE The chart below presents the organizational corporate structure of Host Marriott and certain of its subsidiaries, after giving effect to the Special Dividend (including the Company's properties and other material investments as of March 15, 1996). [FLOW CHART APPEARS HERE] (1) Excludes one full-service property under construction located in Mexico City, Mexico. (2) During February 1996, the Company entered into an agreement to sell and lease back 16 of the 17 Courtyard properties and 18 Residence Inns. See "Business and Properties--Pending Dispositions."
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+PROSPECTUS SUMMARY This summary is qualified in its entirety by the more detailed information and the consolidated financial statements and notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated all information in this Prospectus assumes that the Underwriters' over-allotment option will not be exercised. Certain terms relating to the oil and gas industry are defined in the Glossary of Oil and Gas Terms included elsewhere in this Prospectus. Investors should carefully consider the information set forth in "Risk Factors." THE COMPANY GENERAL HarCor Energy, Inc. is an independent energy company engaged in the acquisition, exploitation and exploration of onshore crude oil and natural gas properties in the United States. Since 1987 when the present management group acquired control of the Company, HarCor has grown through selective acquisitions and development drilling, with estimated proved reserves increasing from 1.35 MMBOE as of January 1, 1990 to 29.9 MMBOE as of January 1, 1996, at an average replacement cost of $2.62 per BOE. The Company's operations are currently focused in the San Joaquin Basin of California, South Texas and the Permian Basin of West Texas. As of January 1, 1996, the Company's proved reserves, as estimated by the Company's independent petroleum engineers, consisted of 15.3 MMBbls of crude oil and NGLs and 87.6 Bcf of natural gas with a Pre-tax SEC 10 Value of $124.5 million, approximately 84% of which was attributable to net proved reserves located in the Lost Hills Field in the San Joaquin Basin. The Company conducts its exploration, development and production activities through strategic alliances with industry partners that are experienced and knowledgeable in the particular geologic basins of activity and that own a significant interest in the jointly owned properties. The industry partner is generally designated as the operator of the jointly owned properties, thereby allowing the Company to avoid the cost of maintaining the personnel and other resources necessary to be an operator. The Company believes, however, that its ownership of meaningful working interests in its properties, its contractual rights to approve drilling budgets or propose wells and its experienced team of oil and gas professionals allow the Company to control or significantly influence the operators' decisions affecting the magnitude and timing of exploration, development and production activities on its properties. Through geographic concentration and tight control over oil and gas operating and general and administrative expenses, the Company has maintained a relatively low cost structure. For the year ended December 31, 1995, the Company had an average production cost of $3.99 per BOE and general and administrative expenses of $1.80 per BOE. BUSINESS STRATEGY The Company's business objective is to increase its hydrocarbon reserves as economically as possible by: - Continuing to develop its San Joaquin Basin, South Texas and Permian Basin properties through additional drilling and secondary recovery activities; - Using the cash flow from its existing properties and the proceeds from the Offering to engage in exploration activities with experienced and technologically knowledgeable industry partners, initially onshore Texas and Louisiana; - Acquiring onshore oil and gas properties with significant development potential; and - Continuing to maintain relatively low production costs through geographic concentration and tight control over operating and general and administrative expenses. DEVELOPMENT ACTIVITIES San Joaquin Basin. Approximately 20.8 MMBOE, or 69.4%, of the Company's total proved reserves as of January 1, 1996 were classified as proved undeveloped by Ryder Scott Company ("Ryder Scott"). Substantially all of the Company's undeveloped reserves are located in the Lost Hills Field in the San Joaquin Basin. Bakersfield Energy Resources, Inc. ("Bakersfield Energy"), a company with extensive experience in the San Joaquin Basin, is the operator of substantially all of HarCor's oil and gas properties in the San Joaquin Basin. As of March 31, 1996, the Company had identified 173 new gross wells which it intends to drill during the next five years to fully develop the proved reserves on the properties, of which 48 are expected to be drilled in 1996. The Company also plans to commence a secondary recovery waterflood project in the fourth quarter of 1996 with respect to a portion of its properties in the Lost Hills Field. In addition, the Company has completed a horizontal well in the Lost Hills Field to test a possible extension of the current proved area of the field and to evaluate the use of horizontal wells to eliminate the need to drill certain infill vertical wells. The Company has identified 60 potential locations for future development of probable and possible reserves located on the San Joaquin Basin properties. The San Joaquin Basin properties produce a light (approximately 40() gravity), low sulfur crude oil that commands a substantial price premium to the heavier crude oils typically produced in California. The associated natural gas produced with the crude oil has a high Btu content (approximately 1,240 Btu) which yields in excess of 2 gallons of NGLs per Mcf of natural gas when processed in the Company's gas processing plant located in the San Joaquin Basin. Since acquiring the properties in June 1994, the Company has drilled 76 gross development wells on the San Joaquin Basin properties, through March 31, 1996. As a result of such drilling activity, the Company's average daily production has increased from 546 Bbls of oil and 7,195 Mcf of gas for the month ended June 30, 1994 to 1,336 Bbls of oil and 13,895 Mcf of gas based on the quarter ended March 31, 1996. The Company's net proved reserves from the San Joaquin Basin properties have increased from 14.4 MMBOE as of January 1, 1994, to 22.7 MMBOE as of January 1, 1996, at an average replacement cost of $1.65 per BOE. The Pre-tax SEC 10 Value of the Company's San Joaquin Basin properties as of January 1, 1996 was $105.2 million as estimated by Ryder Scott. In addition to the extensive development drilling program in the Lost Hills Field, the Company also plans to undertake a secondary oil recovery program to further increase reserves and production from the field. Using primary production techniques, it is estimated by Ryder Scott, as of January 1, 1996, that the Ellis Lease located in the Lost Hills Field has proved reserves net to the Company of approximately 9.0 MMBbls of crude oil. In addition to primary development, the Company intends to increase recovery rates by implementing a secondary recovery waterflood project in the Diatomite Zone on the Ellis Lease, which is similar to waterflood projects currently used by other oil and gas companies operating in the Lost Hills Field. The first phase of the Ellis Lease waterflood project is planned to be initiated in the fourth quarter of 1996, with expansion planned in 1997 and 1998 to cover the entire area currently estimated to cover proved reserves. Ryder Scott estimates that the Company's Ellis Lease will yield an additional 3.7 MMBbls of proved undeveloped secondary recovery crude oil reserves utilizing the waterflood recovery method. In addition, the Company will commence a feasibility study for waterflooding the Reef Ridge Shale and Antelope Shale formations on its San Joaquin Basin properties. During 1995, the Company and Bakersfield Energy completed a three-dimensional ("3-D") reservoir model of the Diatomite Zone on the Ellis Lease, the results of which are being used to examine various means of further optimizing its planned Ellis Lease waterflood, including the use of horizontal drilling on the property, as well as to assist the Company with additional computer simulation modeling of hot water, steam and CO(2) recovery techniques. In the fourth quarter of 1995, the Company undertook studies to evaluate the use of horizontal drilling technology on its San Joaquin Basin properties. As a result of these studies, the first of two horizontal wells planned for 1996 has been drilled and completed on the Ellis Lease in the Diatomite Zone at a vertical depth of approximately 3,450 feet with an approximate 2,000 foot lateral drilled outside of the Diatomite Zone's previous development to test a possible extension of the current proved area of the field and to evaluate the use of horizontal wells to eliminate the drilling of certain infill vertical wells on the Ellis Lease. During the five days of production tests, the well flowed at an average rate of 418 BOE per day. The second horizontal well is planned to evaluate its applicability to producing the deeper MacDonald Shale formation at a depth of AREAS OF 3-D CAEX ACTIVITY Three geological trend maps depicting cumulative natural gas production in the South Texas, West Texas and South Louisiana regions in which the Company intends to pursue its exploration prospects. THE PRODUCTION TREND MAPS DEPICT ESTIMATES OF CUMULATIVE NATURAL GAS PRODUCTION AS REPORTED BY THE OPERATORS IN THE REGIONS SHOWN. SUBSTANTIALLY ALL OF THE PRODUCTION SHOWN IN THESE REGIONS IS FROM COMPANIES OTHER THAN HARCOR ENERGY, INC. approximately 5,200 feet on the Ellis Lease. If these wells are successful, potential additional horizontal locations may be identified for future drilling on the Ellis Lease as well as in areas currently outside the proved areas of the Company's Truman and Tisdale Leases. The Company acquired its San Joaquin Basin properties from Bakersfield Energy in June 1994. Bakersfield Energy, which originally acquired these properties in 1990, retained a 25% working interest in these properties and has continued to serve as the operator. In addition, the Company entered into a joint acquisition agreement with Bakersfield Energy which gives each party the right through June 1997 to participate equally in any acquisition of oil and gas interests located within the state of California by the other party. Gas Plant. As part of the acquisition of the San Joaquin Basin properties, the Company purchased a modern, refrigeration liquid extraction facility with a rated inlet capacity of 23 MMcf of gas per day and a rated liquid fractionation capacity of 100,000 gallons of NGLs per day. Currently, the plant processes all of the gas produced from the Company's San Joaquin Basin properties as well as gas produced by third parties. The plant can deliver dry, residue gas into multiple pipeline systems allowing the Company to enter into contract and marketing arrangements that are not tied to the sometimes unfavorable and volatile California spot market. South Texas. In October 1992, the Company acquired an interest in nine gas fields located in South Texas for a total purchase price of approximately $5.3 million. Subsequent development activities have resulted in average daily production on the South Texas properties of 36 Bbls of crude oil and 4,068 Mcf of natural gas for the quarter ended March 31, 1996 and net proved reserves as estimated by Ryder Scott of 1.7 MMBOE at January 1, 1996. Approximately 51% of the Company's reserves in the South Texas properties is attributable to its interests in the Hostetter Field. The Company owns interests in 17 gross (four net) wells and owns approximately 2,525 gross (956 net) acres in the Hostetter Field. These wells are operated by Texaco Exploration and Production Company ("Texaco") and Cabot Oil and Gas Corporation ("Cabot"). The Company currently believes that there are opportunities for additional development and recompletion work in this field. Permian Basin (West Texas/New Mexico). Since 1989, the Company, in conjunction with Penroc Oil Corporation, has jointly identified and acquired interests in oil and gas properties located in the Permian Basin with total acquisition costs net to the Company of $3.4 million. Subsequent remedial work, development drilling activity and secondary recovery procedures have resulted in average daily production of 269 Bbls of crude oil and 416 Mcf of natural gas based on production in the quarter ended March 31, 1996. Ryder Scott's estimate of the Company's net proved reserves in the Permian Basin as of January 1, 1996 was 2.1 MMBOE. EXPLORATION ACTIVITIES Consistent with its core objective of increasing its reserves as economically as possible, the Company has commenced a program of identifying and developing exploratory prospects in areas where the Company or its partners have expertise. HarCor intends to manage its exploration and economic risks by (i) generating prospects with the assistance of strategic industry partners that are experienced in 3-D seismic and computer assisted exploration ("CAEX") technology, (ii) identifying and pursuing prospects with multiple potential productive zones, (iii) funding its exploration activities with proceeds from the Offering and internally generated cash flow and (iv) limiting its cash exposure to approximately $500,000 for each well. In addition, the Company intends to further manage the drilling risks associated with the exploration projects in South Texas and South Louisiana by drilling multipay prospects that combine shallower lower risk zones that have previously proven productive in the area with deeper potential target zones. In furtherance of this strategy, the Company has recently entered into an agreement with South Coast Exploration Company and its affiliated company Interactive Exploration Solutions, Inc. (collectively, "South Coast Exploration"), which have extensive experience utilizing 3-D seismic and CAEX techniques, to jointly pursue exploration projects on developed and undeveloped properties in South Texas, the Permian Basin of West Texas and South Louisiana. The Company and South Coast Exploration have jointly formed an experienced geologic team (the "GeoTeam") to work exclusively to pursue these joint projects. The following table sets forth certain information as of May 30, 1996 relating to the exploration prospects that the Company currently plans to pursue over the 18-month period ending December 31, 1997, including the estimated cost to the Company for 3-D seismic surveys, leasehold acquisitions and drilling of exploratory and development wells relating to such prospects through such date. <TABLE> <CAPTION> GROSS ACREAGE OWNED OR PROSPECTIVE PROSPECTIVE ESTIMATED COST TO COMPANY(3) UNDER SQUARE MILES OF GROSS ------------------------------------- PROSPECT AREA OPTION(1) 3-D SEISMIC DATA WELLS(2) SEISMIC LAND DRILLING TOTAL - ----------------------------------------------------- ---------------- ----------- ------- ------ -------- ------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> South Texas (Upper Wilcox Trend)........ 23,000 83 18 $ 720 $ 640 $ 8,900 $10,260 West Texas (Permian Basin).............. 80,320 210 4 330 480 900 1,710 South Louisiana (Terrebonne Parish)..... 5,529 46 4 235 240 1,300 1,775 -- ------- ---- ------ ------ ------- ------- Total........................... 108,849 339 26 $1,285 $1,360 $11,100 $13,745 ======= ==== == ====== ====== ======= ======= </TABLE> - --------------- (1) Includes acreage in which the Company currently has leases, options to acquire leases, contingent lease rights or fee interests. (2) Includes 10 exploratory wells and 16 development wells. (3) The estimated cost to the Company is based on (i) preliminary estimates of seismic survey costs, leasehold acquisition costs and drilling and completion costs and (ii) assumed levels of participation by the Company in the costs thereof. Actual costs and participation levels may vary from such estimates. The following sets forth a brief summary of each exploration prospect that the Company has in progress. This discussion only includes prospects on which the Company has acquired substantial leasehold interests, options to acquire leasehold interests or other contingent lease rights and has performed or is in the process of arranging related 3-D seismic surveys. See "Risk Factors -- Risk of Exploratory Drilling Activities" for a discussion of the risks associated with these exploration prospects. South Texas (Upper Wilcox Trend). HarCor has entered into an agreement with Cabot to participate in an 83 square mile 3-D seismic survey in southeast McMullen and northwest Duval Counties, Texas. The expanded and over-pressured Upper Wilcox Trend in the survey area has significant potential for the application of 3-D seismic technology due to complex faulting in the area and stacking of multiple pay zones in both the shallow normal-pressured zones such as the Cole Sand at 1,600 feet and the over-pressured zones such as the House Sand at approximately 12,000 feet. The 3-D seismic survey in the Upper Wilcox Trend commenced in April 1996 and is expected to be completed in July 1996. The survey is designed to evaluate prospects already identified and generate new drilling prospects with both development and exploration potential in the area of the Hostetter Field and the nearby Bonne Terre Field. The survey will evaluate approximately 40 geologic formations at depths ranging between 8,500 feet and 13,000 feet for the expanded over-pressured Upper Wilcox formation and as shallow as 1,500 feet for other intervals. HarCor has joined with Cabot to acquire, or to acquire options for, leasehold interests in 23,000 gross acres inside the 3-D survey area as of May 30, 1996. Production to date in the survey area, including production from the Hostetter Field and the Bonne Terre Field, is estimated to be approximately 450 Bcf of natural gas equivalent. On May 29, 1996, HarCor assigned to South Coast Exploration and one of its affiliates 40% of its rights in its agreement with Cabot in exchange for the interest it received in the South Louisiana project described below. West Texas (Permian Basin). In May 1996, the Company entered into an agreement to participate in a 210 square mile 3-D seismic survey in Reeves County, Texas with Penwell Energy, Inc. ("Penwell") which, along with its investment partner MCN Energy, has extensive recent experience in the Permian Basin. Penwell initially derived its rights to about half of the area in the Penwell survey (74,880 fee mineral acres held by Texaco) from an agreement dated September 1995 among Texaco, Penwell and Meridian Oil Inc. Production in the field within or adjoining gross acreage in which Penwell presently owns or has contingent lease rights is estimated to be 455 Bcf of natural gas equivalents, most of which has been produced from the Silurian/Devonian Fusselman formation at depths between 10,000 feet and 17,000 feet, where the Company intends to focus. South Louisiana (Terrebonne Parish). South Coast Exploration and its affiliate have acquired an interest in a 46 square mile 3-D seismic survey to be conducted in south Terrebonne Parish, Louisiana. To date, the Lapeyrouse Field, which is located in the survey area, has produced approximately 350 Bcf of natural gas equivalents. Based upon 2-D seismic surveys and reports from independent engineers, South Coast Exploration's joint venture preliminarily has identified potential exploration sites in the area to drill an estimated four test wells in the next 18 months. Two of these potential exploration sites have been identified in the Bourg Sands between 14,500 feet and 15,500 feet and the remaining two potential exploration sites have been identified in traps associated with faulting in a series of Upper Middle Miocene Sands between 15,000 feet and 17,000 feet. South Coast Exploration and its affiliate have each assigned to HarCor a portion of their interest in this survey. SELECTIVE OPPORTUNISTIC ACQUISITIONS The Company also intends to pursue selective strategic acquisitions of attractively priced, underexploited onshore oil and gas properties in the United States. As a consequence of its working relationship with South Coast Exploration, the Company will also pursue property acquisitions where it can utilize 3-D seismic and CAEX technology to identify additional potential reserves. Management intends to continue to be active in developing acquisition opportunities rather than pursuing opportunities in the auction market. Management believes that this strategy has resulted in lower acquisition prices for its oil and gas properties. THE OFFERING <TABLE> <S> <C> Shares of Common Stock Offered: By the Company(1)........................... 5,059,059 shares By the Selling Stockholders................. 1,340,941 shares Total............................... 6,400,000 shares Shares of Common Stock Outstanding(1)(2): Before the Offering......................... 8,696,207 shares After the Offering.......................... 13,755,266 shares Use of Proceeds............................... To redeem approximately $10.9 million of principal amount of, together with accrued interest and prepayment premium on, the Company's 14 7/8% Senior Notes due 2002; and to fund 3-D seismic and leasehold acquisitions, 3-D seismic and CAEX processing and interpretation, exploratory and development drilling expenditures and other general corporate purposes. Nasdaq National Market Symbol................. "HARC" </TABLE> - --------------- (1) Does not include up to 960,000 shares of Common Stock which may be sold by the Company pursuant to the Underwriters' over-allotment option. (2) Does not include (i) options to purchase 898,500 shares of Common Stock which have been granted under the Company's stock option plans and (ii) 1,697,772 shares of Common Stock issuable upon conversion of the Company's outstanding Series A, B, C and E Preferred Stock. Also does not include 2,289,791 shares of Common Stock issuable upon exercise of outstanding warrants of the Company. See "Description of Capital Stock and Other Securities." SUMMARY FINANCIAL DATA The following table presents summary historical consolidated financial data of the Company for the five years ended December 31, 1995, which have been derived from the Company's consolidated financial statements. The consolidated financial data of the Company for the three months ended March 31, 1995 and 1996 have been derived from the Company's interim consolidated financial statements which, in the opinion of management of the Company, have been prepared on the same basis as the annual consolidated financial statements and include all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of the financial data for such periods. The information in this table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and the notes thereto included elsewhere herein. <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ---------------------------------------------------- ------------------ 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA(1): Revenues: Oil and gas revenues........................ $ 5,776 $ 6,162 $ 6,507 $10,982 $16,030 $ 3,683 $ 5,956 Gas plant revenues.......................... -- -- -- 1,978 6,362 1,786 1,624 Interest income and other................... 258 504 218 253 203 15 17 ------- ------- ------- ------- ------- ------- ------- Total revenues........................ 6,034 6,666 6,725 13,213 22,595 5,484 7,597 ------- ------- ------- ------- ------- ------- ------- Costs and expenses: Production costs............................ 2,670 2,676 2,249 3,610 5,263 1,263 1,437 Gas plant costs............................. -- -- -- 1,708 3,704 1,410 956 Dry hole, impairment and abandonment costs..................................... 1,287 402 41 75 4 -- -- Engineering and geological costs............ 770 536 188 254 307 89 101 Depletion, depreciation and amortization.... 2,222 2,142 2,641 3,897 5,973 1,346 1,707 General and administrative expenses......... 2,372 2,085 2,105 2,014 2,744 666 721 Interest expense(2)......................... 872 1,048 542 2,269 6,847 1,130 2,642 Other....................................... -- -- -- 203 483 -- 261 ------- ------- ------- ------- ------- ------- ------- Total costs and expenses.............. 10,193 8,889 7,766 14,030 25,325 5,904 7,825 ------- ------- ------- ------- ------- ------- ------- Loss before minority interests................ (4,159) (2,223) (1,041) (817) (2,730) (421) (228) Loss attributable to minority interests....... 2,698 809 -- -- -- -- -- Loss attributable to early extinguishment of debt........................................ -- -- -- (122) (1,888) -- -- ------- ------- ------- ------- ------- ------- ------- Net loss...................................... (1,461) (1,414) (1,041) (939) (4,618) (421) (228) Dividends on preferred stock.................. (40) (32) (246) (795) (1,000) (335) (132) Accretion on redeemable preferred stock....... -- -- -- (156) (2,147) (81) -- ------- ------- ------- ------- ------- ------- ------- Net loss applicable to common stock........... $(1,501) $(1,446) $(1,287) $(1,890) $(7,765) $ (837) $ (360) ======= ======= ======= ======= ======= ======= ======= Net loss applicable to common stock per common and common equivalent share................. $ (0.50) $ (0.41) $ (0.23) $ (0.29) $ (0.98) $ (0.12) $ (0.04) Weighted average number of common and common equivalent shares.................... 2,973 3,512 5,492 6,447 7,904 7,226 8,685 OTHER DATA: EBITDAX(3).................................... $ 992 $ 1,906 $ 2,371 $ 5,881 $10,884 $ 2,145 $ 4,483 Capital expenditures.......................... 2,593 4,237 4,283 45,608(4) 8,953 18 9,635(5) </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 -------------------------- ACTUAL AS ADJUSTED(6) ------- -------------- (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents.............................................................. $ 3,977 $ 13,986 Total assets........................................................................... 86,770 96,007 Total debt............................................................................. 71,276 60,682 Stockholders' equity................................................................... 9,564 31,382 </TABLE> (1) Includes results of operations in 1991 and 1992 from HCO Energy, Ltd. ("HCO"), the Company's former Canadian affiliate. In December 1992, the Company deconsolidated HCO, and in January 1993 the Company sold all of its remaining shares of HCO common stock. (2) Interest expense includes $29,000, $42,000, $64,000, $220,000 and $709,000 in 1991, 1992, 1993, 1994 and 1995, respectively, and $117,000 and $240,000 in the three months ended March 31, 1995 and 1996, respectively, related to amortization of deferred financing costs. (3) EBITDAX represents income (loss) before provision for income tax and extraordinary items and before depletion, depreciation, amortization, interest expense, minority interests, non-recurring charges and exploration expenses. EBITDAX is presented because it is a widely accepted financial indicator of a company's ability to service and/or incur indebtedness. However, EBITDAX should not be considered as an alternative to net income as a measure of operating results or to cash flows as a measure of liquidity. (4) Includes $42 million of cash acquisition costs incurred in connection with the acquisition of the San Joaquin Basin properties. (5) Includes $8.2 million relating to drilling costs which were accrued but unpaid at December 31, 1995 resulting from the Company's 1995 drilling program. (6) As adjusted to (i) reflect an assumed public offering price of $5.125 per share (the closing price on the Nasdaq National Market on July 3, 1996) and (ii) an extraordinary charge estimated at $2,175,000 relating to early extinguishment of debt. Does not include (i) options to purchase 898,500 shares of Common Stock which have been granted under the Company's stock option plans; (ii) 1,697,772 shares of Common Stock issuable upon conversion of the Company's outstanding Series A, B, C and E Preferred Stock; and (iii) 2,289,791 shares of Common Stock issuable upon exercise of outstanding warrants of the Company. See "Description of Capital Stock and Other Securities." The Company repaid $2 million of the outstanding balance under the Credit Facility subsequent to March 31, 1996 from cash flow generated by operations. Pending the use of proceeds from the Offering to fund certain exploration expenditures, the Company will use approximately $5.5 million to repay amounts outstanding under the Credit Facility. The Company will reborrow under the Credit Facility to fund capital expenditures and operations as necessary. See "Use of Proceeds." SUMMARY OIL AND GAS RESERVE DATA The following table sets forth summary information with respect to the Company's estimated proved oil and gas reserves. The estimates of the Company's proved reserves and future net revenues were primarily derived from reports prepared by Ryder Scott. As of December 31, 1993, 1994 and 1995, the average sales prices used for estimating the proved reserves and future net revenues were $11.65, $15.86 and $17.10 per Bbl of crude oil and $2.16, $2.11 and $2.35 per Mcf of natural gas, respectively (which prices with respect to natural gas reflect the effects of the Company's hedging activities). See "Risk Factors -- Reliance on Estimates of Proved Reserves," "-- Certain Business Risks" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." A summary report of Ryder Scott is included as Annex A hereto. <TABLE> <CAPTION> TOTAL PROVED RESERVES AS OF DECEMBER 31, -------------------------------- 1993 1994 1995 ------- ------- -------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> Estimated Proved Reserves: Liquids (MBbl)............................................. -- 2,908 2,979 Crude oil (MBbl)........................................... 1,724 10,581 12,358 Natural gas (MMcf)......................................... 17,169 69,802 87,637 Crude oil equivalents (MBOE)............................... 4,586 25,123 29,943 Pre-tax SEC 10 Value......................................... $20,780 $86,680 $124,498 Percent Proved Undeveloped Reserves (BOE).................... 39.8% 67.4% 69.4% </TABLE> SUMMARY OPERATING DATA The following table sets forth summary information with respect to the Company's operations for the periods indicated. <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------ ---------------- 1993 1994 1995 1995 1996 ----- ----- ------ ------ ------ <S> <C> <C> <C> <C> <C> Average Net Daily Production: Crude oil and plant NGLs (Bbls)................. 505 1,128 1,834 1,657 2,450 Natural gas (Mcf)............................... 5,514 9,239 14,074 12,855 19,240 Crude oil equivalents (BOE)..................... 1,424 2,668 4,180 3,800 5,657 Average Sales Price(1): Crude oil (per Bbl)............................. $16.46 $15.79 $16.49 $16.15 $17.33 Natural gas (per Mcf)........................... $ 1.77 $ 1.82 $ 1.64 $ 1.62 $ 1.86 Cost Data (per BOE)(2): Average production costs(3)..................... $ 4.41 $ 4.13 $ 3.99 $ 4.14 $ 3.22 Depletion, depreciation and amortization........ $ 5.13 $ 4.26 $ 3.60(4) $ 4.26 $ 3.60 General and administrative expense.............. $ 4.13 $ 2.32 $ 1.80 $ 2.18 $ 1.61 Total Proved Reserves to Production Ratio......... 8.8 25.8 19.6 -- -- Crude Oil and NGLs as a Percentage of Total Proved Reserve Volumes................................. 37.6% 53.7% 51.2% -- -- Producing Wells (at end of period): Gross wells..................................... 334 379 424 379 431 Net wells....................................... 104 150 183 150 187 </TABLE> - --------------- (1) Calculation of average selling price per barrel of crude oil and condensate excludes certain revenues attributable to hydrocarbon liquids and plant product sales. All average price data reflect the effects of the Company's fixed-price sales and hedging contracts. See Note 10 of Notes to the Consolidated Financial Statements. (2) Excludes operating costs related to the gas plant. (3) Includes production and ad valorem taxes. (4) Excludes the effect of the impairment write-down pursuant to implementation of SFAS 121 ("Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"). See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
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+PROSPECTUS SUMMARY The following is a selective summary of certain information contained in this Prospectus and is qualified in its entirety by the information and financial statements appearing elsewhere herein. Prospective purchasers are urged to read the entire Prospectus carefully, and to give particular attention to the section entitled "RISK FACTORS" before making any decision to purchase any of the shares offered hereby. THE COMPANY AND THE BANK First Commercial Bancorp, Inc. (the "Company") is a Sacramento, California-based bank holding company which reincorporated in Delaware in 1990 and which conducts its operations through its sole subsidiary, First Commercial Bank, a California state-chartered bank (the "Bank"). The Bank commenced operations in 1979. The Bank operates a general commercial banking business through its headquarters and 6 branch offices located in Sacramento, Roseville (2 branches), San Francisco, Concord and Campbell, California. Deposits in the Bank are insured by the Federal Deposit Insurance Corporation ("FDIC") to the maximum extent permitted by law. The Company is operating under the terms of a Memorandum of Understanding ("MOU") with the Federal Reserve Bank of San Francisco (the "FRB"). The Bank is operating under the terms of a Cease and Desist order ("FDIC Cease and Desist Order") issued by the FDIC and a second amended final order ("SBD Final Order") issued by the California State Banking Department ("SBD") (collectively, the "Orders") and also is subject to capital impairment orders dated August 3, 1994, November 3, 1994, February 17, March 13, May 15 and August 7, 1995 issued by the SBD (the "Capital Impairment Orders"). The MOU and the Orders have placed significant operating and dividend restrictions on the Company and the Bank. In addition, the FDIC notified the Bank that as of July 30, 1995, the Bank was considered "critically undercapitalized" under the Prompt Corrective Action ("PCA") provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). However, as a result of the capital infusion represented by the First Debenture, the Bank was upgraded to "undercapitalized" as of October 31, 1995 and, as of December 31, 1995, as a result of the infusion of $1.5 million provided by First Banks' purchase of 15,000,000 shares of Common Stock and the proceeds of the Second Debenture, the Bank would be considered "adequately capitalized" under such law. The Company and the Bank remain subject to significant operating restrictions, however, including limitations on the payment of dividends. For a full description of the foregoing, see "RISK FACTORS - Failure to Meet Capital Adequacy Requirements and Regulatory Orders" and "REGULATORY AGREEMENTS AND ORDERS." The Company grew substantially during the 1980's, primarily through the acquisition of thirteen branches from California Canadian Bank and the acquisition of Citizens Bank of Roseville. Between 1988 and 1992, the Company focused its lending activities on real estate construction loans and through June of 1994, on loans to small and medium-sized businesses. For deposits, the Company focused on title insurance and escrow companies as well as on small-to-medium- sized business depositors. The focused lending and deposit-generation strategy which the Company pursued during this time period involved certain risk attributes generally not present in a more diversified lending and deposit strategy. See "RISK FACTORS - Recent Losses and Risk of Continued Losses." At December 31, 1993, the Company's assets reached $349,777,000 with $83,682,000 or 42.9% of the Company's gross loans in real estate construction and real estate secured loans, and with $86,549,000 or 26.73% of its deposits in title and escrow accounts, and $237,247,000 in all other deposits. As of December 31, 1994, the Company had consolidated total assets, deposits and stockholders' equity of $239,306,000, $233,536,000 and $4,355,000, respectively. At September 30, 1995, the Company had consolidated total assets, deposits and stockholders' equity of $172,923,000, $167,239,000 and $(1,435,000), respectively. The Company reported net losses in 1992, 1993 and 1994 of $(3,518,000), $(7,311,000) and $(18,190,000), respectively, due primarily to deterioration in its real estate lending portfolio and resultant write-downs and increased loan loss provisions. The Company reported a net loss of $(6,301,000) for the nine months ended September 30, 1995 due primarily to the continued write-down of, and other expenses associated with, real estate acquired through foreclosure or Other Real Estate Owned ("OREO"), further deterioration in the loan portfolio and the reduction in interest on loans resulting from the decrease in the amount of loans outstanding. As a result, at September 30, 1995, the Company's capital was reduced to $(1,435,000) and the Company and the Bank's Tier I leverage ratios declined to (0.83)% and 2.41%, respectively. During the second quarter of 1995, the Bank took substantial write-offs and write-downs of loans and other assets. The most significant write-off resulted from the bankruptcy of one of the Bank's largest borrowers. As a result, the Company's Tier I capital was reduced to (0.23)% at June 30, 1995, and the Bank's Tier I capital would have been reduced to 0.27%, but for the investment of $1.5 million in Bank nonvoting noncumulative preferred stock (the "Bank Preferred Stock") by James F. Dierberg, Chairman, President and Chief Executive Officer of First Banks, pursuant to the terms of the Standby Stock Purchase Agreement. See "THE STOCK PURCHASE AGREEMENT AND CHANGE IN CONTROL OF THE COMPANY." As discussed further below, Dierberg's investment was made under emergency circumstances to forestall possible closure of the Bank by its regulatory authorities. In response to these losses, the Company developed a restructuring plan to redirect the lending and deposit strategy of the Bank. The restructuring plan had six elements: (a) reduce total assets, (b) reduce operating expenses and staffing levels, (c) reduce nonperforming loans and increase reserve coverage of such loans, (d) maintain the commercial and industrial lending portfolio, but significantly reduce real estate construction lending, (e) eliminate volatile deposits and close non-strategic branch offices, and (f) maintain high levels of liquidity to facilitate the asset and deposit dispositions. Implementation of this plan began during the third quarter of 1994 and, as of September 30, 1995, has had the following results: - Total assets were reduced 51% from $349,777,000 at December 1993 to $172,923,000. - Nonperforming assets have been reduced 79% over the same period from $35,321,000 to $7,401,000 and the loan loss reserve coverage of nonperforming loans reached 90.48%. - The nonowner occupied construction loan portfolio was reduced by 86%, from $32,432,000 to $4,479,000. - Core monthly operating expenses were reduced 40% from $1,123,000 to $675,000. - Escrow and title industry deposits were reduced 99% from $86,549,000 at December 31, 1993 to $1,148,000. - Staffing has been reduced 48% from 185 to 97 employees as of September 30, 1995. By December 31, 1995, the FTE staff was reduced to 63 employees. - The Bank's liquidity ratio has been maintained above 30%. - The San Diego branch office was sold in January of 1995, and the Santa Rosa branch office was closed during April 1995. At December 31, 1995, the Company's loan portfolio was concentrated in twenty (20) loans, one (1) of which exceeded the Bank's secured and unsecured lending limit at that date. Commitments to these borrowers represent $31.2 million or 42% of the Bank's total loan portfolio at December 31, 1995. Outstanding balances to these borrowers at December 31, 1995 were $23.6 million or 32% of the Bank's loan portfolio. Four (4) of these loans, representing $7.4 million or 10% of the Bank's total loan portfolio, have been classified by the Bank as "Substandard." One (1) loan in the amount of $754,000 is on nonaccrual status. At December 31, 1995 the Bank's unsecured lending limit was approximately $2.5 million and its combined secured and unsecured lending limit was approximately $4.1 million. At December 31, 1995, the Bank had one (1) loan, representing $3.8 million, which exceeded its unsecured lending limit and one (1) loan, representing $5.5 million that exceeded the secured and unsecured lending limit. The Company intends to be able to continue to satisfy its larger customer's borrowing needs by participating loan amounts above its lending limit with other banks until such time as the Bank becomes recapitalized. On August 7, 1995, the Company entered into an Amended and Restated Stock Purchase Agreement (the "Stock Purchase Agreement") with First Banks, Inc., a Missouri corporation ("First Banks"), pursuant to which First Banks has acquired 65,000,000 shares of Common Stock of the Company at a total purchase price of $6,500,000. Previously, James F. Dierberg, Chairman, President and Chief Executive Officer of First Banks, provided interim financing for the Company's subsidiary, First Commercial Bank (the "Bank"), by purchasing $1.5 million of nonvoting, noncumulative preferred stock of the Bank (the "Bank Preferred Stock") on June 30, 1995, thus forestalling possible closure of the Bank by the FDIC. However, notwithstanding Dierberg's $1.5 million investment in Bank stock, the Bank's Tier I capital ratio at June 30, 1995 remained below 2.0% and, as a result, the Bank was classified as "critically undercapitalized" at July 30, 1995 and became subject to the FDIC's PCA regulations for critically undercapitalized institutions. The Company and the Bank thus were required by FDICIA to seek sufficient capital to bring the Bank's Tier I capital ratio above 2% or face the possible imposition of a conservatorship or receivership within 90 days. Dierberg's investment occurred pursuant to a Standby Stock Purchase Agreement entered into between the Company, the Bank, Dierberg and First Banks as of June 30, 1995 (the "Standby Stock Purchase Agreement"), which was later amended and restated to become the Stock Purchase Agreement. Subsequently, and pursuant to the Stock Purchase Agreement, on August 23, 1995, First Banks purchased 116,666,666 shares of common stock of the Bank (the "Bank Common Stock") at a price of $0.03 per share, the book value of the Bank Common Stock on August 22, 1995, for a total purchase price of $3.5 million. On August 22, 1995, Dierberg transferred to First Banks all of the shares of Bank Preferred Stock owned by him. The shares of Bank Preferred Stock and Bank Common Stock were exchanged by First Banks for 50,000,000 shares of Company Common Stock on December 28, 1995, pursuant to the terms of the Stock Purchase Agreement. The infusion by First Banks of $3.5 million on August 23, 1995 raised the Bank's Tier I capital level to 2.60%, as a result of which the Bank would have been considered "significantly undercapitalized." As described further below, at October 31, 1995, the Bank used the $1.5 million proceeds from sale of a 12% convertible debenture to raise its Tier I capital level above 3.0% and, as a result, the Bank would have been considered "undercapitalized" under the PCA regulations. Pursuant to the Stock Purchase Agreement, which was amended by the Additional Investment Agreement dated October 31, 1995 (the "Additional Investment Agreement"), First Banks has loaned to the Company a total of $6,500,000, in exchange for the issuance of two 5-year 12% convertible debentures (the "Debentures"), pursuant to which the Company agrees to issue to First Banks a total of 65,000,000 shares of Common Stock in respect of the principal amount of the Debentures and pursuant to which any unpaid and accrued interest amount is convertible into up to additional 39,000,000 shares of Common Stock at the rate of $0.10 per share. The Debentures are secured by all of the shares of Bank common stock held by the Company. The initial Debenture (the "First Debenture") was issued on October 31, 1995 and conversion of the principal and any unconverted interest amount is due on October 31, 2000. The subsequent Debenture (the "Second Debenture") was issued on December 28, 1995 and will mature on December 28, 2000, at which time conversion of the principal amount and any unconverted interest amount is due. The principal and interest amounts of each of the First and Second Debentures is payable in shares of Common Stock or cash. However, cash can be paid only when in the sole and absolute discretion of the Board of Directors of the Company, the Company has sufficient funds to make such payment of interest or principal and can make such a payment in accordance with all applicable regulatory requirements, including receipt of all necessary approvals. Management believes it is unlikely that approval for such cash payments would be received from the FRB in the foreseeable future. The Company must give First Banks 10 days prior written notice of any intention to make a payment on the Debentures. The Company contributed all but $250,000 of the proceeds of the Debentures to the Bank. On December 28, 1995, pursuant to the Stock Purchase Agreement, which was amended by the Standby Agreement dated December 28, 1995 (the "Standby Agreement," Additional Investment Agreement and the Stock Purchase Agreement, are collectively referred to herein as the "Stock Purchase Agreement"), after issuance of the Second Debenture and in order to raise the Bank's Tier I capital to the level required by the Orders, First Banks purchased 15,000,000 shares of Company Common Stock at a price of $0.10 per share, for a total of $1.5 million. As a result of First Banks' purchase of 15,000,000 shares and the issuance of the Second Debenture, at December 31, 1995, the Bank's Tier I capital level reached 6.58% and, accordingly, the Bank would continue to be considered "adequately capitalized" under the FDIC's PCA regulations. As of that date, the Bank would have been considered "well capitalized" under the PCA regulations but for the existence of the Orders, which while outstanding limit the Bank to being considered "adequately capitalized." See "SUPERVISION AND REGULATION." However, the Company and the Bank remain subject to significant operating restrictions and no assurance can be given that the Bank will not suffer future additional losses which will erode the capital condition of the Bank. The Company contributed all of the proceeds of the stock sale to the Bank. See "RISK FACTORS," "THE STOCK PURCHASE AGREEMENT AND CHANGE IN CONTROL OF THE COMPANY" and "REGULATORY AGREEMENTS AND ORDERS." As of December 31, 1995, while the Bank met the 6.5% Tier I capital requirement of the FDIC Cease and Desist Order, differences in the method of calculating capital for purposes of the SBD's regulations resulted in the Bank attaining a Tier I capital level, as calculated by the SBD, of 6.45%, thus falling short of the 7.0% capital requirement of the SBD Final Order. On a pro forma basis, at December 31, 1995, the Bank would have required approximately an additional $1,009,000 in capital in order to meet the 7.0% capital requirement of the SBD Final Order. However, the SBD has allowed the Bank to attain the 7.0% capital requirement through the proceeds of this Offering. Unless specified, the Tier I capital numbers for the Bank presented herein have been calculated in accordance with the FDIC's regulations and methodology. See "REGULATORY AGREEMENTS AND ORDERS" and "SUPERVISION AND REGULATION." As a result of the foregoing, as of the date of this Prospectus, First Banks owns 65,000,000 shares of Company Common Stock, or 93.29% of the outstanding shares. Assuming the sale to the Rights Holders and Dividend-Eligible Stockholders of all of the Underlying Shares and Dividend Exchange Shares offered hereby, First Banks would control approximately 50.25% of the outstanding shares of Common Stock of the Company and may acquire up to a total of 104,000,000 additional shares upon conversion of the principal and interest amounts subject to the Debentures. Assuming that all of the principal and interest amounts of the Debentures is converted to Company Common Stock on October 31, 2000 and December 28, 2000, and assuming the sale of all the shares offered hereby to the aforementioned purchases and no interim issuances of Common Stock by the Company, First Banks would control approximately 72.42% of the then outstanding shares of Common Stock. See "THE STOCK PURCHASE AGREEMENT AND CHANGE IN CONTROL OF THE COMPANY." Additionally, as a result of the consummation of the transactions contemplated by the Stock Purchase Agreement, as of December 31, 1995, the Tier I leverage capital levels of the Company and the Bank were 2.14% and 6.58%, respectively. As of that date, the Company and the Bank had risk-based capital levels of 4.99% and 12.66%, respectively. First Banks has agreed that, upon the conclusion of the Rights Offering and any Public Offering, First Banks will purchase, if necessary, as a Standby Purchaser and at the Subscription Price, such number of shares of Common Stock remaining unsold in the Offering as may be required to increase the Bank's Tier I capital level to 7.0%. Such issuance of Common Stock may further dilute the voting power and earnings per share, if any, of the Company's stockholders, other than First Banks. See "RISK FACTORS -- Potential Dilution of Voting Power and Earnings Per Share." However, no assurance can be given that the Bank will not experience further operating losses which will erode the capital levels of the Bank or that the Bank will be able to maintain such capital levels at any time after December 31, 1995. See "THE STOCK PURCHASE AGREEMENT AND CHANGE IN CONTROL OF THE COMPANY." As of December 31, 1995, the Company believes it has achieved substantial compliance with the requirements of the Company's MOU, the FDIC Cease and Desist Order and the SBD Final Order, except for compliance with the 7.0% Tier I capital requirement of the SBD Final Order. Further compliance with the Company's MOU and the Orders is contemplated to occur through this Offering, including any necessary participation by First Banks. As of December 31, 1995, the Bank had not complied with the Capital Impairment Orders, subjecting the Bank Common Stock to assessment. See "REGULATORY AGREEMENTS AND ORDERS." On December 27, 1995, the stockholders of the Company approved an amendment to the Company's Certificate of Incorporation authorizing an increase in the number of authorized shares of Common Stock to 250,000,000. The Company currently has 69,675,110 shares of Common Stock outstanding. If all shares of Common Stock offered pursuant to the Rights Offering, Public Offering and Dividend Exchange Offering (collectively, the "Offering") are sold, the resulting outstanding Common Stock would be 129,363,985 shares. Additionally, if the maximum number of shares are converted pursuant to the Debentures, the resulting outstanding Common Stock would be 233,363,985 shares. Stockholders other than First Banks, whether or not exercising their Stockholder Rights, may experience substantial dilution in the voting power and earnings per share, if any, of their Common Stock holdings. See "RISK FACTORS - Potential Dilution of Voting Power and Earnings Per Share" and "THE STOCK PURCHASE AGREEMENT AND CHANGE IN CONTROL OF THE COMPANY." THE OFFERING The Rights Offering <TABLE> <S> <C> General........................................... Each record holder (a "Rights Holder") of Common Stock at the close of business on October 6, 1995 (the "Rights Record Date") will receive non-transferable subscription rights (the "Stockholder Rights") to purchase shares of Common Stock. The Stockholder Rights will entitle the Rights Holder to purchase from the Company 10.695 shares of Common Stock (the "Underlying Shares") for each share of Common Stock held on the Rights Record Date, at a cash price of $0.10 per share (the "Subscription Price") on the terms and conditions of the Offering. The number of shares of Common Stock issuable upon exercise of Stockholder Rights will be rounded up to the nearest whole number. See "THE OFFERING." The ratio of 10.695 Underlying Shares per share of Common Stock (the "Rights Ratio") was determined by the Board of Directors based on the recently consummated Stock Purchase Agreement, the financial condition of the Company and the Bank, the trading history and per share book value of the Common Stock and other relevant information. See "DETERMINATION OF OFFERING PRICE." After April 12, 1996 (the "Rights Expiration Date"), the Stockholder Rights will no longer be exercisable and will have no value, unless terminated earlier or extended by the Company's Board of Directors in its sole discretion for up to two (2) consecutive periods of up to 30 days each, or until not later than June 11, 1996. Basic Subscription Privilege...................... Rights Holders are entitled to purchase, at the Subscription Price, 10.695 Underlying Shares per share of Common Stock held on the Rights Record Date, subject to reduction by the Company under certain circumstances (the "Basic Subscription Privilege"). No fractional shares will be issued in connection with the Rights Offering. See "THE OFFERING." Oversubscription Privilege........................ Each Rights Holder who elects to exercise its, his or her Basic Subscription Privilege in full may also subscribe at the Subscription Price for additional Underlying Shares (the "Excess Shares") available after satisfaction of the Basic Subscription Privilege (the "Oversubscription Privilege"), up to the greater of (a) an additional one million shares, or $100,000, or (b) an additional 10.695 shares for each share of Common Stock held on the Rights Record Date. Shares subscribed for pursuant to the Oversubscription Privilege are subject to proration and reduction by the Company under certain circumstances. </TABLE> <TABLE> <S> <C> There can be no assurance that there will be Excess Shares sufficient to satisfy all exercises of the Oversubscription Privilege. If an insufficient number of Excess Shares is available to satisfy fully all exercises of the Oversubscription Privilege, then the Excess Shares will be prorated among Rights Holders who exercise their Oversubscription Privilege based upon the number of shares held on the Rights Record Date. See "THE OFFERING." Procedure For Exercising Stockholder Rights................................ The Basic Subscription Privilege and the Oversubscription Privilege may be exercised by properly completing the appropriate Subscription Right Certificate and forwarding it (or following the Guaranteed Delivery Procedures), with payment of the Subscription Price for each Underlying Share subscribed for, to the Subscription Agent, which must receive such Subscription Right Certificate or Notice of Guaranteed Delivery and payment at or prior to the Rights Expiration Date. If Subscription Right Certificates are sent by mail, Rights Holders are urged to use insured, registered mail. See "THE OFFERING - How to Subscribe." The Public Offering............................... Upon the expiration of the Rights Offering, and provided that sufficient shares of Common Stock are available, the Company may offer and sell to the public only in California at the Subscription Price up to 10,000,000 Underlying Shares not sold pursuant to the Basic or Oversubscription Privileges. The expiration date of the Public Offering is April 12, 1996, unless extended in the sole discretion of the Board of Directors of the Company for up to two (2) consecutive periods of up to 30 days each, or no later than June 11, 1996. Shares may be subscribed for in the Public Offering by properly completing the General Subscription Application and Agreement and forwarding it (or following the Guaranteed Delivery Procedures), with payment of the Subscription Price for each Underlying Share subscribed for, to the Subscription Agent, which must receive such General Subscription Application and Agreement or Notice of Guaranteed Delivery and payment at or prior to the Public Offering Expiration Date. See "THE OFFERING - How to Subscribe." Participation by First Banks...................... First Banks has committed to purchase in the Offering and at the Subscription Price, upon completion of the Rights Offering and any Public Offering, if necessary, such number of shares as would be required to raise the Bank's Tier I capital level to 7.0%, as calculated by the SBD. First Banks will only purchase such shares as a "Standby Purchaser" if the proceeds received from the Rights Offering and any Public Offering are insufficient to raise the Bank's Tier I capital level to 7.0%. Any such additional purchase by First Banks may result in substantial further dilution of the voting power and earnings per share, if any, of the Company's stockholders, other than First Banks. See "RISK FACTORS - Potential Dilution of Voting Power and Earnings Per Share." The Offering will remain open for five (5) business days after the later of the Rights Expiration Date and the Public Offering Expiration Date to allow First Banks to make any purchases as "Standby Purchaser." </TABLE> <TABLE> <S> <C> The Dividend Exchange Offer Dividend Rights and Dividend Exchange Shares .................................. Each person who was a record holder of Common Stock at the close of business on June 15, 1992 or September 14, 1992 (the "Dividend Record Dates") will receive a transferable dividend subscription right (the "Dividend Right") exchangeable for shares of Common Stock valued at $0.10 per share (the "Dividend Exchange Shares"). Each Dividend Right will entitle the holder (the "Dividend Rights Holder") to receive one share of Common Stock for each $0.10 of dividend and accrued interest amount exchanged (the "Dividend Right Exchange Ratio"). In lieu of fractional shares, the number of shares issued on exercise of Dividend Rights will be rounded up to the nearest whole number. The Dividend Exchange Shares are being offered in exchange for two dividends, declared by the Board of Directors during 1992, each in the amount of $0.08 per share, which remain unpaid as of the date of this Prospectus, together with accrued interest thereon, (the "1992 Dividends"), which, on December 31, 1995, aggregated $968,887.44, or $0.2073 per share. Dividend-Eligible Stockholders may elect to receive a portion only of their Dividend Rights in the form of Dividend Exchange Shares. See "THE OFFERING - General - The Dividend Exchange Offer" and "FEDERAL INCOME TAX CONSEQUENCES." Procedure For Exercising Dividend Rights............................................ Dividend Rights may be exercised by properly completing the Exchange Offer Certificate and forwarding it (or following the Guaranteed Delivery Procedures) to the Subscription Agent, which must receive such Exchange Offer Certificate or Notice of Guaranteed Delivery at or prior to the Dividend Rights Expiration Date. If Exchange Offer Certificates are sent by mail, Dividend Rights Holders are urged to use insured, registered mail. See "THE OFFERING - How to Subscribe." General Subscription Price................................ $0.10 per share for each Underlying Share. Common Stock Outstanding prior to the Offering...................................... 69,675,110 shares at December 31, 1995. </TABLE> <TABLE> <S> <C> Preferred Stock Outstanding prior to the Offering................................... None. Common Stock to be Outstanding upon Completion of the Offering................... 129,363.985 shares. Common Stock to be Outstanding upon Maximum Conversion of Debentures into Common Stock ..................... 233,363,985 shares, assuming no interim issuances of Common Stock. See "THE STOCK PURCHASE AGREEMENT AND CHANGE IN CONTROL OF THE COMPANY." Expiration Dates.................................. The Rights Expiration Date, the Dividend Rights Expiration Date and the Public Offering Expiration Date (the "Offering Expiration Date") is April 11, 1996, unless terminated or extended by the Company's Board of Directors, in its sole discretion for up to two (2) consecutive periods of up to 30 days each, or not later than June 11, 1996. See "THE OFFERING." Information Agent................................. Carpenter & Company 2600 Michelson Drive, Suite 300 Irvine, CA 92715 Attention: Edward Carpenter or John Flemming Tel: (800) 528-8580 Transfer Agent and Subscription Agent............................................. The First National Bank of Boston 435 Tasso, Suite 250 Palo Alto, CA 94301 Tel: (415) 853-0404 See "THE OFFERING -- Subscription Agent." </TABLE> USE OF PROCEEDS The Company intends to use the net proceeds from the Offering to increase its regulatory capital levels and the regulatory capital levels of the Bank. Such proceeds are expected to constitute Tier I capital for Bank regulatory purposes. The Bank will use the proceeds contributed to it from the Company for general corporate purposes. See "USE OF PROCEEDS." No assurance can be given, however, that the capital of the Bank will not be eroded thereafter if the Bank continues to experience operating losses. See "RISK FACTORS." The Company intends to retain the remaining net proceeds of the Offering, if any, for general corporate purposes, including payment of operating expenses. The Company estimates that the expenses of the Offering will total $444,000. See "USE OF PROCEEDS." STOCK PURCHASE AGREEMENT; CHANGE IN CONTROL; POTENTIAL DILUTION OF VOTING POWER AND EARNINGS PER SHARE On August 7, 1995, the Company entered into the Stock Purchase Agreement pursuant to which First Banks has purchased from the Company at the Subscription Price 65,000,000 shares of Common Stock and has loaned to the Company an additional $1.5 million and $5.0 million in exchange, respectively, for issuance of two the Debentures. Certain provisions of the Stock Purchase Agreement were amended on October 31, 1995 by the Additional Investment Agreement and on December 28, 1995 by the Standby Agreement (collectively, the "Stock Purchase Agreement"). On June 30, 1995, James F. Dierberg provided emergency interim financing for the Bank pursuant to the Standby Stock Purchase Agreement through the purchase of $1.5 million in shares of Bank Preferred Stock. On August 22, 1995, First Banks received approval for a change in control of the Company and the Bank from the Federal Reserve Bank of St. Louis and the SBD. On August 22, 1995, Dierberg sold the shares of Bank Preferred Stock to First Banks. Subsequently, First Banks also purchased 116,666,666 shares, or $3.5 million, of Bank Common Stock on August 23, 1995. The terms of the Stock Purchase Agreement and the Debentures are fully described at "THE STOCK PURCHASE AGREEMENT AND CHANGE IN CONTROL OF THE COMPANY." The stockholders of the Company approved the terms of the Stock Purchase Agreement at the 1995 Special Meeting. Pursuant to the Stock Purchase Agreement, on December 28, 1995, First Banks exchanged the shares of Bank Preferred Stock originally acquired by Dierberg and the $3.5 million in shares of Bank Common Stock acquired by First Banks pursuant to the Stock Purchase Agreement for 50,000,000 shares of Company Common Stock. In addition, First Banks has loaned to the Company a total of $6,500,000 in exchange for the issuance of the Debentures. The Company may issue to First Banks a total of 65,000,000 shares of Common Stock in respect of the principal amount of the Debentures and up to an additional 39,000,000 shares of Common Stock in respect of any unpaid and accrued interest amount. The Debentures are convertible at any time at the option of First Banks into a maximum of 104,000,000 shares if the total principal and interest amounts of the Debentures are converted by First Banks into Common Stock. Finally, on December 28, 1995, First Banks purchased an additional $1,500,000 of Company Common Stock at the Subscription Price, or 15,000,000 shares, which enabled the Bank to meet the 6.5% Tier I capital requirement of the FDIC Cease and Desist Order as of December 31, 1995. For a complete description of the terms of the Stock Purchase Agreement, see "THE STOCK PURCHASE AGREEMENT AND CHANGE IN CONTROL OF THE COMPANY." The foregoing issuances of Common Stock and the Debentures to First Banks pursuant to the Stock Purchase Agreement have significantly diluted the percentage of ownership of the Company held by holders of the Company's Common Stock, other than First Banks. However, while consummation of the Stock Purchase Agreement resulted in such dilution, one purpose of this Offering is to mitigate such dilution by providing the stockholders, other than First Banks, with the opportunity to subscribe for additional shares of Common Stock. Notwithstanding this Offering, however, the voting power the Company's stockholders will be subsequently materially diluted through the issuance of between 65,000,000 and 104,000,000 additional shares of Common Stock upon conversion of the principal and/or interest amounts of the Debentures, respectively, and through the possible issuance of additional shares to First Banks acting as "Standby Purchaser." See "RISK FACTORS - Potential Dilution of Voting Power and Earnings Per Share" and "THE STOCK PURCHASE AGREEMENT AND CHANGE IN CONTROL OF THE COMPANY."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000319085_compressio_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000319085_compressio_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..31b977acbb8385e2008e836f4b3a78adc31760e9
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000319085_compressio_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Prospectus. The discussion in this Prospectus contains forward-looking statements that involve risk and uncertainties. The Company's actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" as well as those discussed elsewhere in this Prospectus. THE COMPANY Compression Labs, Incorporated (the Company or CLI) is a leader in the development, manufacture and marketing of visual communication systems based on Compressed Digital Video (CDV) technology. The Company's systems use proprietary and industry standard algorithms to compress the amount of data required to transmit digital video and audio signals, thereby significantly reducing the cost of transmitting these signals over terrestrial, microwave, cable or satellite networks. The Company's strategy is to use its expertise in CDV technology to enhance its position in videoconferencing and to monitor new markets such as the desktop and personal video markets. CLI's group and desktop videoconferencing systems permit users at different locations to conduct full-color motion videoconferences ranging from two-way informal meetings between individuals to formal meetings between large groups at multiple locations. The Company's present families of videoconferencing systems include Rembrandt II/VP and Radiance videoconferencing systems, the eclipse family of mid-range videoconferencing systems, and the CLI Desktop Video family. Videoconferencing systems operate worldwide over a broad range of transmission speeds from 56 kilobits per second (kbps) to 2.048 megabits per second (mbps) for the Rembrandt and Radiance Systems, 768 kbps for the eclipse, and 384 kbps for the desktop. All of CLI's current videoconferencing systems are compliant with the International Telecommunication Union-Telecommunication (ITU-T) H.320 videoconferencing standard, and most also provide customer-selectable proprietary algorithms. The videoconferencing market has grown as a result of improvements in the price/performance of videoconferencing systems, decreases in transmission costs and increased availability of switched digital transmission services. However, there can be no assurance that this market growth will continue in the future. The Company has been a leader in video compression technology and believes that its large worldwide installed base of videoconferencing systems affords the Company significant competitive advantages. The Company's strategy is to strengthen its position as a leading supplier of a full range of high-performance quality group and desktop videoconferencing systems. CLI's development efforts are primarily directed at achieving greater levels of compression, improving picture quality and system functionality, continuing to reduce system costs, and supporting and improving industry standards. The Company's continued success in its chosen markets is dependent in part on the results of its ongoing technology and product development efforts. The Company's executive offices are located at 350 East Plumeria Drive, San Jose, California 95134, and its telephone number at that location is (408) 435-3000. PROSPECTUS 2,799,242 SHARES COMPRESSION LABS, INCORPORATED ------------------------ COMMON STOCK ------------------------ This Prospectus relates to a total of 2,799,242 shares of Common Stock (the "Shares"), with a par value of $0.001 per share (the "Common Stock") of Compression Labs, Incorporated (the "Company" or "CLI") which are being offered and sold by Infinity Investments Limited ("Infinity"), Seacrest Capital Limited ("Seacrest"), Brown Simpson LLC and Alpine Capital Partners, Inc. (collectively, the "Selling Securityholders"). Of such Shares (i) 2,424,242 shares are issuable upon the exercise of 350,000 shares of Series C Convertible Preferred Stock ("Series C Stock") which were sold by the Company to Infinity and Seacrest in a private financing pursuant to a Convertible Preferred Stock Purchase Agreement dated as of October 24, 1996 (the "Financing") and (ii) 375,000 shares are issuable pursuant to the exercise of warrants held by Selling Securityholders which were issued in connection with the Financing (the "Warrants"). The Warrants have an exercise price of $5.70 per share. The Common Stock is listed on the Nasdaq National Market under the symbol "CLIX." On November 22, 1996, the last reported sale price of the Common Stock on the Nasdaq National Market was $4.25 per share. The Shares may be offered by the Selling Securityholders from time to time in transactions on the Nasdaq National Market, in privately negotiated transactions or a combination of such methods of sale, at fixed prices that may be changed, at market prices prevailing at the time of sale, at prices related to such prevailing market prices or at negotiated prices. The Selling Securityholders may effect such transactions by selling the Shares to or through broker-dealers, and such broker-dealers may receive compensation in the form of discounts, concessions or commissions from the Selling Securityholders or the purchasers of the Shares for whom such broker-dealers may act as agent or to whom they sell as principal or both (which compensation to a particular broker-dealer might be in excess of customary commissions). See "Principal and Selling Securityholders" and "Plan of Distribution." The Company received all of the proceeds from the sale of the Series C Stock issued by the Company in the Financing and will receive any proceeds from the exercise of the Warrants if and when exercised by the Selling Securityholders but will not receive any of the proceeds from the sale of the Shares by the Selling Securityholders hereof. See "Plan of Distribution."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0000319240_iris_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000319240_iris_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..3b125074905378287bebf0d1712e5a8540048916
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000319240_iris_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, all figures assume no exercise of the Underwriters' over-allotment option. THE COMPANY The Company designs, develops, manufactures and markets in vitro diagnostic ("IVD") imaging systems based on its patented and proprietary "Automated Intelligent Microscopy" ("AIM") technology for automating microscopic procedures performed in clinical laboratories. AIM combines the Company's capabilities in automating specimen presentation, including its patented slideless microscope, as well as its proprietary high-speed digital processing hardware and software to rapidly capture, classify and visually present images of microscopic particles in easy-to-use displays. The Company's IVD imaging systems are designed to provide customers with consistent, more precise and timely results and labor cost-savings over manual methods of performing microscopy. The Company markets its products primarily to hospitals and clinical reference laboratories and has an installed base of over 500 customers. The Company estimates that at least three-quarters of all IVD microscopic procedures are performed manually and require trained medical specialists. Manually performed diagnostic tests are costly, labor-intensive, cumbersome, inefficient and often imprecise. Furthermore, there are pressures to reduce costs while improving operating efficiencies in hospitals and clinical reference laboratories. As a result, the Company believes there is a movement in such laboratories to automate microscopic procedures including slide presentation, testing and processing. The Company pioneered its first IVD imaging application in 1983 with the introduction of the first of The Yellow IRIS(R) workstations for urinalysis. The Company believes that it is still the only supplier of laboratory systems which fully automate a complete urinalysis, and it recently introduced its fourth generation models which incorporate significant advancements in speed, utility and ease of use. Earlier this year, the Company received clearance from the Food and Drug Administration ("FDA") and began to market the Model 900UDx(TM) urine pathology system designed especially for the high-volume testing requirements of larger laboratories. The Company is expanding into new applications of IVD imaging. The Company recently developed The White IRIS(R) leukocyte differential analyzer for the field of hematology. The FDA cleared The White IRIS(R) for marketing in May 1996, and the Company expects to initiate sales of this system in late 1996 or early 1997. The Company entered the field of genetics in July of this year with the acquisition (the "PSI Acquisition") of the IVD imaging business of Perceptive Scientific Instruments, Inc. ("PSI"), which included the PowerGene(TM) family of analyzers. PowerGene(TM), an IVD imaging system for karyotyping, DNA probe analysis and comparative genomic hybridization, has experienced average annual worldwide revenue growth of 35% over the last two fiscal years. The Company also acquired significant foreign operations from PSI which are expected to enable the Company to expand in international markets with its other IVD imaging systems and products. The Company also provides significant ongoing sales of supplies and service necessary for operation of The Yellow IRIS(R) workstations and the PowerGene(TM) analyzers and also plans to sell comparable supplies and service for The White IRIS(R). IRIS(R), The Yellow IRIS(R), The White IRIS(R), Model 900UDx(TM), PowerGene(TM), IRIStrip(TM), StatSpin(R), Cen-Slide(R) and Biovation(R) are trademarks of the Company. This Prospectus also contains trademarks and tradenames of other companies. IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE AMEX, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. The Company's goal is to achieve global leadership in automated IVD imaging by pursuing the following strategies: - Introducing New IVD Imaging Applications. The Company believes AIM technology has a number of potential applications in the clinical laboratory and is expanding beyond the field of urinalysis into other fields, including hematology and genetics. - Continuing Market Penetration for Current Applications of IVD Imaging Technology. The Company estimates that it has penetrated less than 20% of the potential market in the United States for The Yellow IRIS(R) urinalysis workstations and plans to continue expanding sales in this segment with its recently introduced fourth generation models of The Yellow IRIS(R) family, including the Model 900UDx(TM) urine pathology system. - Expanding in New Geographic Markets. The PSI Acquisition added significant international operations which are expected to enable the Company to expand the geographic market for its other IVD imaging systems and products. - Increasing Sales of Supplies and Service. The Company seeks to enhance the revenue stream from sales of supplies and service by installing more IVD imaging systems as well as increasing its product offering of supplies for each system. - Adding Complementary Product Lines. The Company has added several complementary lines of small instruments and supplies which appeal to smaller laboratories and respond to the desire of integrated healthcare providers to purchase products for a variety of clinical settings from one supplier. - Maintaining Technological Edge. The Company has an active research and development program to continually enhance its IVD imaging systems and explore other potential IVD imaging applications for its AIM technology. The Company's principal executive offices are located at 9162 Eton Avenue, Chatsworth, California 91311 and its telephone number is (818) 709-1244. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company.......... 3,000,000 shares Common Stock to be outstanding after the Offering................................... 8,908,392 shares(1) Use of Proceeds.............................. To repay $11.9 million of outstanding indebtedness incurred to finance the PSI Acquisition, to repurchase shares of the Company's Common Stock and warrants to purchase Common Stock, and for working capital and general corporate purposes. American Stock Exchange symbol............... IRI </TABLE> - --------------- (1) Excludes an aggregate of 2,542,810 shares of Common Stock reserved for issuance upon exercise of outstanding options and warrants and an aggregate of 199,554 additional shares reserved for issuance pursuant to the Company's stock option plans and its stock purchase plan. Also excludes 469,413 shares of Common Stock and warrants to purchase an additional 250,000 shares of Common Stock to be purchased with the proceeds of the Offering. See "Use of Proceeds." SUMMARY CONSOLIDATED FINANCIAL DATA <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, --------------------------------------------- -------------------------------- HISTORICAL PRO FORMA HISTORICAL PRO FORMA ----------------------------- --------- ------------------- --------- 1993 1994 1995 1995(2) 1995 1996 1996(2) ------- ------- ------- --------- ------- ------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA(1): Revenues Sales of IVD imaging systems.................. $ 5,029 $ 4,559 $ 4,870 $ 9,526 $ 2,150 $ 2,593 $ 5,830 Sales of supplies and service.................. 3,995 5,024 6,738 7,466 3,167 4,166 4,495 Sales of small instruments and supplies............. 3,369 2,886 3,414 3,424 1,566 2,370 2,456 ------- ------- ------- ------- ------- ------ ------- Net sales........... 12,393 12,469 15,022 20,416 6,883 9,129 12,781 Gross margin................. 6,051.. 5,970 7,661 10,702 3,445 4,634 6,827 Operating income (loss)...... 1,313 1,495 (1,549)(5) (2,743)(5) (2,696)(5) 879 520 Income (loss) before income taxes...................... 1,381 1,701 (1,171)(5) (2,717)(5) (2,491)(5) 1,042 472 Net income (loss)............ $ 1,323 $ 1,622 $ 2,357(6) $ 860(6) $(2,519) $ 867 $ 411 ======= ======= ======= ======= ======= ====== ======= Net income (loss) per share...................... $ 0.25 $ 0.28 $ 0.37 $ 0.09 $ (0.46) $ 0.13 $ 0.04 ======= ======= ======= ======= ======= ====== ======= Weighted average shares and share equivalents outstanding................ 5,355 5,699 6,419 9,419 5,486 6,915 9,915 </TABLE> <TABLE> <CAPTION> PRO FORMA HISTORICAL PRO FORMA AS ADJUSTED --------------------- --------- ----------- DECEMBER JUNE 30, JUNE 30, JUNE 30, 1995 1996 1996(3) 1996(3)(4) -------- -------- --------- ----------- (IN THOUSANDS) <S> <C> <C> <C> <C> BALANCE SHEET DATA(1): Cash and cash equivalents............................. $ 1,511 $ 1,229 $ 1,229 $ 7,279 Working capital....................................... 11,465 11,431 8,164 17,914 Total assets.......................................... 22,470 23,676 38,064 43,841 Total debt............................................ 311 -- 16,117 4,267 Total shareholders' equity............................ 19,172 20,366 16,726(7) 34,353(7) </TABLE> - --------------- (1) On February 1, 1996, the Company acquired StatSpin, Inc. (formerly known as StatSpin Technologies) ("StatSpin"). This transaction was accounted for as a pooling of interests and, accordingly, the consolidated financial statements and summary financial data have been retroactively restated for all periods presented to include the financial position, results of operations and cash flows of StatSpin. (2) Represents the unaudited pro forma results of operations for the year ended December 31, 1995 and the six months ended June 30, 1996 giving effect to the PSI Acquisition and related financing and the sale of 3,000,000 shares of Common Stock offered hereby and the application of the net proceeds therefrom as if each were consummated at the beginning of the periods presented. See "Pro Forma Condensed Combined Financial Statements." (3) Reflects the PSI Acquisition and related financing as if each had been consummated on June 30, 1996. See "Pro Forma Condensed Combined Financial Statements." (4) Reflects the sale of 3,000,000 shares of Common Stock offered hereby and the application of the net proceeds therefrom. See "Use of Proceeds." (5) Includes a nonrecurring charge against operations of $2.9 million for 1995 and $3.2 million for the second quarter of 1995 (prior to final purchase price allocation) for the acquisition of in-process research and development for a product prototype not cleared by the FDA in connection with the Company's acquisition of LDA Systems, Inc. ("LDA"). (6) In the fourth quarter of 1995, the Company recognized a deferred tax benefit of $3.6 million resulting from a reduction in its deferred tax asset valuation allowance. See Note 8 to the Consolidated Financial Statements. (7) Includes a nonrecurring charge of $4.6 million for in-process research and development in conjunction with the PSI Acquisition which will be reflected in the Company's statement of operations for the quarter ended September 30, 1996. See "Pro Forma Condensed Combined Financial Statements."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0000700892_laser_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000700892_laser_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..cfe87ddf3c2840b13be8875c9835dcdf8f04d9dc
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000700892_laser_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS, INCLUDING INFORMATION UNDER "RISK FACTORS". THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. THE COMPANY Laser Master International, Inc. ("Laser Master" or the "Company") is a New York Corporation, incorporated on May 5, 1981, originally under the name Lasercraft Industries, Inc. Prior to said date, and in October 1980, in accordance with a specific plan or reorganization of companies under common control and exchange of stock, the Company was organized as a holding company for purposes of acquiring all the issued and outstanding Common Stock of Flexo-Craft Prints, Inc., Utmost Office Supplies, Inc., 185 Front Street Realty Corp, and Harrison Realty Corp. The Company, through its wholly-owned subsidiaries, is engaged in the use of a computerized laser system to accomplish Flexographic printing for industrial and commercial printing and engraving and counts among its customers large corporations, some of which are listed on the New York Stock Exchange. The principal process of Flexo-Craft is the use of a Zed laser in the manufacturing of its products. The Zed laser process emits a "coherent" wave length (color). A large degree of control is afforded and as a consequence, exceptionally high density of power can be delivered to a well defined area by focusing the light energy. Using a computer driven system, the laser beam makes grooves in the form of designs and patterns on to a rubber material. The rubber material is then sealed on a steel or aluminum cylinder which is then placed on a printing press. In the heat transfer printing process, the ink is injected into the grooves using a computer driven process and then the rubber coated cylinder prints on heat transfer paper. The heat transfer paper is sold to manufacturers who then seal it onto textile materials. The same process is used for gift wrap paper, except the paper itself is the final product. One of the Company's six color presses prints heat transfer paper, the Company's eight color press also prints gift wrap paper. The principal parts of the laser system are the scanning mechanism, rotating cylinders and axial scanning platform. In operation, artwork is mounted on a cylinder. As the artwork cylinder rotates, the helium neon laser scanning head reads tonal or line values of a single circumferential scan. A memory stores the data and matches it to the 360 degree rotation of the printing roller. The controlled output of the Everlase Co2 Laser is optically deflected from the laser enclosure through metal tubes to the engraving head. The collimated laser beam can be safely projected over large distances without distortion or inaccuracy. As the cylinder rotates, the scanning-engraving heads move axially between the grooves. The laser receives appropriate commands from the micro-processor insert. A control panel integrates the controls of the Co2 laser with the engraving mechanism. The patterns and designs as created and prepared by artists on multi-colored photographic film segments are fed into the computer, which is an integral part of the laser system. Colored photographic film segments are fed into the computer (this service is contracted out by the Company) and thereafter engraves, on a fully automated basis, each dedicated groove of the design simultaneously, yet separately, for each color. The Company, by this method, is able to service many diverse industries that require material in their own production. Due to the exactness of the engraving by the laser ray, the grooves of the design are so true that the impregnation of specific colored inks in the subsequent printing process produce perfect images. To the best of the Company's knowledge, there is only one major and three minor competitors in the continental United States that operate a comparable version of the laser concept and a subliflex flexographic printing press which accommodates fewer colors and produces material of a substantially narrower width. The Company acquired a new eight ink color press which was put into full operation in July 1996. The new eight color press can print on either heat transfer or gift wrap paper. The new eight color press also allows the Company to print for the wallpaper, home furnishings and carpet industries. The eight color press is three times faster than the newest six color presses. The Company receives patterns from customers and also designs its own patterns using a computerized color separating system. The Company has an extensive inventory of rubber coated cylinders and designs with engravings that can be continually reused in its process. THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Company.......... 4,597,372 shares of Common Stock $.01 par value per share Common Stock to be Outstanding after the Offering................................... 10,297,028 shares(1) Use of Proceeds.............................. The Company will not receive any proceeds from the sale of Common Stock by Selling Stockholders, unless options or warrants are exercised. In the event options or warrants are exercised, the company will use the proceeds received for general working capital purposes. NASDAQ OTC Bulletin Board-Registered Trademark- Symbol......... LMTI </TABLE> SUMMARY FINANCIAL DATA The summary historical consolidated financial data presented below for each of the five fiscal years in the period ended November 30, 1995 have been derived from audited Consolidated Financial Statements. The summary historical data presented below for the six months ended May 31, 1995 and May 31, 1996 were derived from Laser Master International Inc.'s Unaudited Condensed Consolidated Financial Statements which contain all accruals and adjustments (consisting only of normal recurring adjustments) which management considers necessary for a fair presentation of the financial information for such periods. The results of operations for the six months ended May 31, 1996 are not necessarily indicative of the operating results that may be expected for the full fiscal year. This financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations", the Consolidated Financial Statements and Notes thereto, the Unaudited Condensed Consolidated Financial Statements and Notes thereto and the other financial information included elsewhere in this Prospectus. <TABLE> <CAPTION> SIX MONTHS ENDED (UNAUDITED) ---------------------- FISCAL FISCAL FISCAL FISCAL FISCAL MAY 31, MAY 31, 1991 1992 1993 1994 1995 1995 1996 --------- --------- --------- ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> <C> <C> <C> INCOME STATEMENT DATA: Net Sales............................ $6,375,654 $7,268,413 $9,237,340 $8,158,051 $8,432,284 $4,244,770 $4,515,260 Gross Profit......................... $1,824,865 $2,000,118 $2,887,103 $2,391,675 $2,510,644 $1,325,076 $1,776,714 Net Income (loss) from Operations.... $ 633,686 $ 521,376 $ 771,837 $ 276,471 $ (178,957) $ 16,398 $ (116,604) Net Income (loss) Per Share.......... $ .111 $ .091 $ .129 $ .05 $ (.03) $ .00 $ (.01) Total Assets......................... $6,779,570 $7,269,019 $8,183,489 $14,801,853 $13,861,245 $14,826,779 $16,097,770 Total Long Term Liability............ $2,912,042 $3,028,919 $2,756,620 $8,172,928 $5,946,837 $8,134,699 $5,923,503 Total Liabilities.................... $3,745,436 $3,713,509 $3,779,141 $10,123,744 $9,359,383 $10,129,562 $8,212,512 </TABLE> - ------------------------ (1) Excludes 20,000,000 shares of Common Stock reserved for issuance under the Company's proposed Stock Option Plans (the "Plans"). Also, does not include an aggregate of 1,725,000 stock options exercisable at $1.00 per share awarded and or to be awarded to Messrs. Dov, Hershel and Abraham Klein under their respective employment agreements. Additionally, does not include 1,200,000 options awarded and or to be awarded to Mr. Mendel Klein, exercisable at $1.00 per share. Also, does not include a convertible debenture in the sum of $200,000 with interest payable at 5% per annum convertible into Common Stock. The debenture is convertible into shares of stock at a 30% discount to market, based upon the previous five day market average price. The debenture expires June 29, 1998. Additionally, excludes 800,000 shares of Common Stock underlying 800,000 warrants in the within offering, of which 300,000 warrants are exercisable at $1.00 per share expiring May 10, 1999, and 500,000 warrants are exercisable at $2.00 per share expiring May 10, 1999. Additionally, does not include 375,000 shares of Common Stock underlying options in the within offering, of which 100,000 options are exercisable at $1.00 per share expiring May 27, 1997; 100,000 options exercisable at $2.00 per share expiring May 27, 1998, and 175,000 options exercisable at $1.00 per share expiring May 8, 2001.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000708818_nextgen_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000708818_nextgen_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..ae297e45e73e3530716e6f3de6acf017ba50ce7e
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000708818_nextgen_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial data appearing elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus assumes that the Underwriters' over-allotment option is not exercised. THE COMPANY Quality Systems, Inc. ("QSI" or the "Company") develops and markets health care information systems that automate medical and dental group practices, physician hospital organizations ("PHOs"), management service organizations ("MSOs"), health maintenance organizations ("HMOs") and community health centers. In response to the growing need for more comprehensive, cost-effective information solutions for physician and dental practice management, the Company's systems provide clients with the ability to redesign patient care and other workflow processes, to improve productivity and reduce information processing and administrative costs and to provide multi-site access to patient information. The Company's proprietary software systems include general patient information and summary medical records, appointment scheduling, billing, insurance claims submission and processing, managed care implementation and referral management, treatment outcome studies, treatment planning, drug formularies, word processing and accounting. In addition to providing fully integrated information solutions to its clients, the Company provides comprehensive hardware and software installation, maintenance and support services, system training services and electronic claims submission services. The Company is also introducing patient medical records automation for medical and dental practices utilizing proprietary software developed by Clinitec International Inc. ("Clinitec"), a developer of electronic medical records software systems. The Company currently has an installed base of more than 475 operating health care information systems serving PHOs, MSOs, HMOs and other health care organizations, each of which consists of one to 120 physicians or dentists. According to Medical Data International, it is estimated that the physician practice management information systems market is currently $1.8 billion. The Company believes that as health care providers are increasingly required to reduce costs while maintaining the quality of health care, the Company will be able to capitalize on its strategy of providing fully integrated information systems and superior customer service. The Company was founded in 1974, with an early focus on providing information systems and services primarily for dental group practices. The Company's initial "turnkey" systems were designed to improve productivity while reducing information processing costs and personnel requirements. In the mid-1980's, the Company capitalized on the opportunity presented by the increasing pressure of cost containment on physicians and health care organizations and further expanded its information processing systems into the broader medical market. Today, the Company develops and provides integrated UNIX-based health care information systems for both the medical and dental markets. These systems operate on a stand-alone basis or in a networked environment and are expandable to accommodate client needs. Augmenting its practice management software, the Company added electronic medical records software to its product line in 1995 through a strategic relationship with Clinitec. The Company currently holds a 25% interest in Clinitec and a unilateral right to increase its interest to 51%, and has entered into an agreement in principle (the "Clinitec Agreement in Principle") to acquire Clinitec as a wholly-owned subsidiary. Clinitec's principal product, NextGen, permits scanning, annotation, retrieval and analysis of medical records in all formats, from documents to photographs and X-rays. NextGen has been developed using a client/server platform, a graphical user interface for compatibility with UNIX, Microsoft Windows, Windows NT and Windows 95 operating systems, and a relational database for flexibility in screen customization and logic flow. The Company is also in the process of developing an alternative client/server version of its "back office" products utilizing a graphical user interface with screens and templates similar to those in the NextGen product to enable a more seamless integration of the QSI and NextGen applications. With the addition of NextGen, the Company is able to provide its clients with a comprehensive information management solution. NextGen, in conjunction with the Company's practice management software, was first installed at a beta site in August 1995 and is currently being installed in two additional sites. General release of the combined systems is expected to occur in the quarter ending June 30, 1996. LOGO Quality Systems' health care [PHOTO] [PHOTO] information systems automate medical and dental practices and improve efficiency in such areas as billing, patient scheduling and insurance processing. These systems also permit enhanced quality of care by giving the health care professional [PHOTO] access to treatment and outcome data. The Company's health care information systems automate both medical and dental physician group practices, management services organizations ("MSOs"), physician hospital organizations ("PHOs"), health maintenance organizations ("HMOs") and community health centers with a focus on improving overall practice efficiency. These systems offer a broad range of applications for a wide variety of health care organizations. [PHOTO] QSI provides hardware and software system support to its clients seven days a week, 24 hours a day. The Company offers a selection of other client services including training, consulting and custom software development. ------------------------------ IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMPANY'S COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10b-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING." IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. THE OFFERING <TABLE> <S> <C> Common Stock offered By the Company................................ 1,000,000 shares By the Selling Shareholders................... 500,000 shares Total...................................... 1,500,000 shares Common Stock to be outstanding after the offering................................... 5,653,491 shares(1) Use of proceeds................................. For the acquisition of an increased ownership interest in Clinitec and for general corporate purposes, including the financing of product sales growth, development of new products, working capital requirements and potential other acquisitions. See "Use of Proceeds." Nasdaq National Market symbol................... QSII </TABLE> - --------------- (1) Excludes 132,125 shares of Common Stock which were subject to outstanding options as of February 12, 1996 at a weighted average exercise price of $4.61 per share under the Company's 1989 Stock Option Plan (the "1989 Plan"). See "Directors and Executive Officers -- 1989 Stock Option Plan" and Note 6 to Notes to Financial Statements. SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT FOR PER SHARE DATA) <TABLE> <CAPTION> NINE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, --------------------------- ---------------- 1993 1994 1995 1994 1995 ------- ------- ------- ------ ------- <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS: Net revenues: Sales of computer systems, upgrades and supplies................................. $ 6,274 $ 6,146 $ 5,681 $3,895 $ 7,162 Maintenance and other services............. 5,377 5,606 6,368 4,727 5,159 ------- ------- ------- ------ ------- 11,651 11,752 12,049 8,622 12,321 Cost of products and services................. 6,992 6,527 6,060 4,498 5,865 ------- ------- ------- ------ ------- Gross profit.................................. 4,659 5,225 5,989 4,124 6,456 Earnings from operations...................... 517 855 986 433 2,488 Net earnings.................................. $ 623 $ 906 $ 962 $ 524 $ 1,670 ======= ======= ======= ====== ======= Net earnings per share(1)..................... $ 0.15 $ 0.21 $ 0.21 $ 0.11 $ 0.35 ======= ======= ======= ====== ======= Weighted average shares used in computation... 4,187 4,342 4,606 4,641 4,709 ======= ======= ======= ====== ======= </TABLE> <TABLE> <CAPTION> AT DECEMBER 31, 1995 ----------------------------------- PRO FORMA AS ADJUSTED ------------------------- 51% OF 100% OF ACTUAL CLINITEC(2) CLINITEC(3) ------- ----------- ----------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents and short-term investments.......... $ 7,662 $25,606 $22,210 Working capital............................................... 9,302 27,513 24,117 Total assets.................................................. 15,386 33,438 37,001 Shareholders' equity.......................................... 11,681 28,365 32,907 </TABLE> - --------------- (1) Net earnings per share reflects primary earnings per share for all periods indicated. Primary and fully diluted net earnings per share were the same for all periods except for the year ended March 31, 1994, for which fully diluted net earnings per share was $0.20. (2) Gives pro forma effect to the acquisition of an additional interest in Clinitec, providing the Company with a 51% ownership interest in Clinitec as if such acquisition had occurred on December 31, 1995, and adjusted to reflect the sale of 1,000,000 shares of Common Stock by the Company in the offering at an assumed public offering price of $20.75 per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds." (3) Gives pro forma effect to the acquisition of all of Clinitec for $4.9 million in cash and $6.9 million in value of the Company's Common Stock as if such acquisition had occurred on December 31, 1995, and adjusted to reflect the sale of 1,000,000 shares of Common Stock by the Company in the offering at an assumed public offering price of $20.75 per share and the application of the estimated net proceeds reflect additional shares therefrom. See "Use of Proceeds."
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY INFORMATION IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (I) GIVES EFFECT TO THE REPURCHASE OF ALL OF THE OUTSTANDING PREFERRED STOCK AND THE EXCHANGE, REDESIGNATION AND 1.5-FOR-1 STOCK SPLIT OF THE COMPANY'S COMMON STOCK, WHICH WILL OCCUR IMMEDIATELY PRIOR TO, OR SIMULTANEOUSLY WITH, THE CLOSING OF THE OFFERINGS (COLLECTIVELY, THE "1996 RECAPITALIZATION") DESCRIBED UNDER "DESCRIPTION OF CAPITAL STOCK", (II) ASSUMES THAT THE OVER-ALLOTMENT OPTIONS GRANTED TO THE UNDERWRITERS ARE NOT EXERCISED, (III) ASSUMES THE ISSUANCE AND SALE OF COMMON STOCK IN THE OFFERINGS AT $23.00 PER SHARE (THE MID-POINT OF THE RANGE OF THE INITIAL PUBLIC OFFERING PRICES SET FORTH ON THE COVER PAGE OF THIS PROSPECTUS) AND (IV) ASSUMES THE ISSUANCE OF 1,956,520 SHARES OF COMMON STOCK BY THE COMPANY TO CERTAIN SELLING STOCKHOLDERS PURSUANT TO THE EXERCISE OF OUTSTANDING OPTIONS AND THE SALE OF SUCH SHARES IN THE OFFERINGS (WHICH AMOUNTS ARE SUBJECT TO CHANGE PENDING FINAL CONFIRMATION OF SELLING STOCKHOLDER PARTICIPATION IN THE OFFERINGS, PRIOR TO PRICING OF THE OFFERINGS). UNLESS THE CONTEXT REQUIRES OTHERWISE, REFERENCES TO THE COMPANY OR GULFSTREAM REFER TO GULFSTREAM AEROSPACE CORPORATION, ITS PREDECESSORS AND ITS SUBSIDIARIES AND REFERENCES TO "COMMON STOCK" REFER TO THE COMMON STOCK, PAR VALUE $0.01 PER SHARE, OF GULFSTREAM AEROSPACE CORPORATION AFTER GIVING EFFECT TO THE 1996 RECAPITALIZATION. REFERENCES IN THIS PROSPECTUS TO (I) MILES ARE TO NAUTICAL MILES; ONE NAUTICAL MILE IS EQUAL TO 1.15 STATUTE MILES; AND (II) FISCAL YEARS ARE TO THE FISCAL YEAR OF THE COMPANY ENDED DECEMBER 31 OF THE YEAR SPECIFIED (e.g., "FISCAL 1995" REFERS TO THE YEAR ENDED DECEMBER 31, 1995). THE COMPANY Gulfstream Aerospace Corporation is recognized worldwide as a leading designer, developer, manufacturer and marketer of the most technologically advanced intercontinental business jet aircraft. Since 1966, when the Company created the large cabin business jet category with the introduction of the Gulfstream II, the Company has dominated this market segment, capturing a cumulative market share of 60%. The Company has manufactured and sold over 950 large business aircraft since the introduction of the Gulfstream product line in 1958. Since 1990, the Company has been owned by certain partnerships formed by Forstmann Little & Co., a private investment firm ("Forstmann Little"). The Company has developed a broad range of aircraft products to meet the aviation needs of its targeted customers (which include national and multinational corporations, governments and governmental agencies, heads of state and wealthy individuals). See "Business--Customers and Marketing". The Company's current principal aircraft products are the Gulfstream IV-SP, the Gulfstream V, Gulfstream Shares-TM- (fractional ownership interests in Gulfstream IV-SPs) and pre-owned Gulfstream aircraft. As an integral part of its aircraft product offerings, the Company offers aircraft completion (exterior painting of the aircraft and installation of customer selected interiors and optional avionics) and worldwide aircraft maintenance services and technical support for all Gulfstream aircraft. In addition, the Company's financial services subsidiary, Gulfstream Financial Services Corporation, through its private label relationship with a third-party aircraft financing provider, offers customized products to finance the worldwide sale of Gulfstream aircraft. BUSINESS STRATEGY Beginning in 1993, the Company implemented a major restructuring and refocusing of its business in order to improve profitability, increase market share and build backlog. Theodore J. Forstmann, who assumed the position of Chairman of the Company in November 1993, recruited a new senior management team (including over 20 senior executives with aviation and aerospace industry experience) and established a five member Management Committee, chaired by Mr. Forstmann and comprised of four other key executives who share responsibility for strategic decisions, management and oversight of the Company's operations. In addition, Mr. Forstmann assembled both a Board of Directors and an International Advisory Board comprised of prominent business executives and senior statesmen to counsel the Company and assist in its refocused sales and operating initiatives. Under the leadership of Mr. Forstmann and the new management team, the Company (i) recapitalized its balance sheet, thereby reducing the Company's annual interest expense by approximately $38 million, (ii) reduced the Company's cost structure, yielding over $50 million in annual savings, while increasing the Company's aircraft production rate, (iii) strengthened the Company's market position and aircraft order growth, resulting in a contract backlog of approximately $3.0 billion of revenues and executed contracts with financing contingencies of approximately $295 million of potential revenues, representing total revenues and potential revenues of approximately $3.3 billion at September 30, 1996, (iv) expanded and improved the Company's product offerings and (v) increased the Company's completion order rate and expanded its worldwide service and support business. The most significant aspects of the restructuring were: RECAPITALIZATION AND SIGNIFICANT REDUCTION OF INTEREST EXPENSE In late 1993, a partnership formed by Forstmann Little exchanged approximately $469 million of the Company's subordinated debentures (including accrued interest) for preferred stock, thereby reducing the Company's annual interest expense by approximately $38 million. See "Certain Transactions -- The Acquisition; Subsequent Events". This recapitalization and the resulting increase in cash flow (together with the cost reductions and manufacturing efficiencies discussed below) enabled the Company to dedicate additional resources to significantly enhance the design of the Gulfstream V, the Company's new ultra-long range business jet. COST REDUCTIONS AND INCREASED PRODUCTION RATE The Company initiated a restructuring that significantly reduced its cost structure and product manufacturing cycle times. The restructuring program included a voluntary reduction in the Company's work force of approximately 15%, the outsourcing of certain manufacturing activities, the renegotiation of major supplier contracts and the termination of certain leases, which, in the aggregate, have yielded over $50 million in annual savings. Additionally, the Company has reduced final assembly time of an aircraft by more than 50% from over 67 days to approximately 30 days and has reduced aircraft completion time from approximately 35 weeks to approximately 21 weeks. As a result of these cycle time reductions, the use of common tooling and selected outsourcing, the Company expects to increase its production rate from an average of 2.4 aircraft per month in 1996 to an average of 3.5 to 4.0 aircraft per month in 1997. NEW MARKETING INITIATIVES AND SIGNIFICANTLY INCREASED BACKLOG The Company developed and implemented a new, proactive marketing strategy to substantially broaden the markets for its products. In addition to the Company's historical practice of targeting its existing customer base, the Company (a) initiated an aggressive marketing campaign focused on companies and individuals that have not previously owned Gulfstream aircraft, (b) significantly expanded international sales activities, (c) introduced its Gulfstream Shares-TM- program and (d) offered its customers access to customized financing to support the sale of new and pre-owned Gulfstream aircraft. The Company has also redirected its sales and marketing effort to focus on high level decision makers through increased involvement of the Company's Board of Directors, International Advisory Board and senior management in the selling process and restructured its sales commission program to more effectively support the Company's strategic goals. As a result of these new marketing initiatives, the Company has experienced strong growth in aircraft orders and backlog and believes that it has substantially strengthened its market position. At September 30, 1996, the Company had a contract backlog of approximately $3.0 billion of revenues plus executed contracts with financing contingencies of approximately $295 million of potential revenues, representing a total of 69 contracts for Gulfstream Vs and 30 contracts for Gulfstream IV-SPs. Contracts with financing contingencies are converted to backlog upon receipt of financing by the purchaser, which generally occurs within 120 days. In addition, at September 30, 1996, the Company had letters of intent with deposits for a total of 1 Gulfstream V and 4 Gulfstream IV-SPs, representing approximately $140 million of additional potential revenues. In total, approximately 50% of the Gulfstream V contracts in backlog have scheduled deliveries beyond 1997. EXPANDED PRODUCT OFFERINGS The Company expanded its product offerings to provide multiple aircraft products in contrast to its historical strategy of offering only one new aircraft model at a time. In addition, the Company began marketing its products as an integrated whole, offering completion and worldwide maintenance services and technical support for all Gulfstream aircraft. The Company's current product offerings include the following: GULFSTREAM V. The Company significantly enhanced the design and performance characteristics of the Gulfstream V, which was in the early stage of development in 1993, and accelerated the pace of its development. The Gulfstream V is targeted at the market for ultra-long range business jet aircraft (6,500 nautical miles) which is a new market segment for the business jet industry. The Gulfstream V is in the advanced stages of flight testing and is on schedule to obtain certification by the Federal Aviation Administration ("FAA") in the last quarter of 1996, at least 12 months prior to the targeted certification date of any other ultra-long range business jet aircraft. The Company believes the Gulfstream V provides the longest range, fastest cruising speed and most technologically advanced avionics of any ultra-long range business jet aircraft in operation. GULFSTREAM IV-SP. In 1993, the Company introduced the Gulfstream IV-SP, which offers significantly improved performance and upgraded avionics as compared to its predecessor, the Gulfstream IV. The Company believes that the Gulfstream IV-SP offers the best combination of large cabin size, long range (4,220 nautical miles), fast cruising speed and technologically advanced avionics of any large business jet aircraft currently available. GULFSTREAM SHARES-TM-. In 1995, the Company introduced a Gulfstream IV-SP fractional share ownership program (Gulfstream Shares-TM-) in conjunction with Executive Jet International, Inc.'s ("EJI") NetJets-Registered Trademark- Program. Gulfstream Shares-TM- provides customers with the benefits of Gulfstream aircraft ownership at a substantially lower cost than full aircraft ownership and significantly increases the Company's potential customer base. To date, the Company has contracted to deliver 16 Gulfstream IV-SPs and 2 Gulfstream Vs to EJI in connection with this program, 8 of which have been delivered and 10 of which will be delivered through 1999. EJI also has an option to purchase 5 additional Gulfstream IV-SPs in 1998. PRE-OWNED GULFSTREAM AIRCRAFT. The Company assembled a new, experienced management team for its pre-owned aircraft sales operations and introduced a number of initiatives that have enhanced the marketability of pre-owned Gulfstream aircraft. See "Business--Principal Products--Premium Pre-Owned Gulfstream Aircraft and Other Pre-Owned Aircraft". In addition, the Company has been successful in using pre-owned Gulfstream aircraft as a significant tool to expand the Company's potential market and to compete against other manufacturers of lower priced, new aircraft products. As a result of the Company's competitive success in marketing pre-owned aircraft, the Company has reduced its inventory of pre-owned aircraft available for sale to approximately $23.6 million and $35.0 million as of June 30, 1995 and 1996, respectively, as compared with approximately $125.8 million at October 31, 1993. IMPROVED COMPLETION, SERVICE AND SUPPORT The Company's new marketing strategy has resulted in substantial improvements in the Company's completion business. Gulfstream currently completes approximately 95% of all new Gulfstream aircraft sold to customers as compared to 70% in 1990. Further, the Company has significantly expanded its worldwide maintenance services and technical support for Gulfstream aircraft, including opening a new 200,000 square foot service center in 1996 to increase its ability to provide high quality service to Gulfstream customers. These service and support activities provide the Company with ongoing customer contact, which the Company believes enhances its opportunity to sell new aircraft to existing service and support customers. SUCCESSFUL CO-PRODUCTION OF GULFSTREAM V AND GULFSTREAM IV-SP AIRCRAFT The Company is currently manufacturing both the Gulfstream V and Gulfstream IV-SP. Upon FAA certification of the Gulfstream V, which is expected to occur in the last quarter of 1996, the Company will begin delivering Gulfstream V aircraft to customers. Given the Company's increased manufacturing volume and large backlog of orders, the Company expects to deliver aircraft in 1997 at rates substantially in excess of those experienced in the recent past. Assuming FAA certification in the last quarter of 1996, the Company expects to deliver approximately 46 new aircraft in 1997, including 19 Gulfstream IV-SP and 27 Gulfstream V aircraft, representing a 59% increase over the Company's expected deliveries in 1996. Certain partnerships formed by Forstmann Little (the "Forstmann Little Partnerships") own substantially all of the shares of the Company's currently outstanding common stock (87.1% of the common stock on a fully diluted basis). Shares of Common Stock to be sold pursuant to the Offerings will be sold by the Company and by the Forstmann Little Partnerships, as well as by certain other holders of the Company's common stock and certain option holders (collectively, the Forstmann Little Partnerships and such holders of common stock and options are the "Selling Stockholders"). After the consummation of the Offerings, the Forstmann Little Partnerships will beneficially own approximately 61.1% of the Common Stock (55.2% on a fully diluted basis) or 55.6% (50.6% on a fully diluted basis), assuming that the Underwriters' over-allotment options are exercised in full. See "Certain Transactions -- The Acquisition; Subsequent Events" and "Principal and Selling Stockholders". THE OFFERINGS (1) <TABLE> <S> <C> Common Stock offered by the Company: (2) United States Offering........ 3,826,100 shares International Offering........ 956,500 shares Total....................... 4,782,600 shares Common Stock offered by the Selling Stockholders: (2) United States Offering........ 18,573,900 shares International Offering........ 4,643,500 shares Total....................... 23,217,400 shares Common Stock to be outstanding after the Offerings............ 71,963,882 shares (2)(3) Use of proceeds by the Company.. Together with proceeds of $400 million from new bank borrowings, proceeds of expected stock option exercises in connection with the Offerings, and funds generated from operations, to repurchase the outstanding Series A 7% cumulative preferred stock of the Company (the "7% Cumulative Preferred Stock") at its stated value for a purchase price of $450 million, plus approximately $7.9 million of unpaid dividends, to repay outstanding indebtedness under existing credit facilities (which was $119.8 million at June 30, 1996) and to pay the fees and expenses incurred in connection with the Offerings and the refinancing of the Company's indebtedness. The Company will not receive any of the proceeds from the sale of shares by the Selling Stockholders. See "Use of Proceeds". Proposed NYSE symbol............ GAC </TABLE> - -------------- (1) The offering of 22,400,000 shares of Common Stock initially being offered in the United States (the "U.S. Offering") and the offering of 5,600,000 shares of Common Stock initially being offered outside the United States (the "International Offering") are collectively referred to as the "Offerings". The underwriters for the U.S. Offering (the "U.S. Underwriters") and the underwriters for the International Offering (the "International Underwriters") are collectively referred to as the "Underwriters". (2) Assumes that the Underwriters' over-allotment options are not exercised. See "Underwriting". (3) Includes 1,956,520 shares of Common Stock to be issued simultaneously with or immediately prior to the consummation of the Offerings upon exercise of outstanding stock options, which shares will be sold in the Offerings. Does not include 7,697,124 shares issuable upon the exercise of additional outstanding stock options. See "Management -- Stock Options".
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000715428_american_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000715428_american_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the detailed information, financial statements, including the notes thereto, and other data set forth elsewhere in this Prospectus. Unless the context indicates otherwise, (i) "American Exploration" or the "Company" refers to American Exploration Company, a Delaware corporation, and its consolidated subsidiaries, (ii) all information in this Prospectus has been adjusted to reflect the one-for-ten reverse split of the Common Stock effected in June 1995 and (iii) all information in this Prospectus assumes that the Underwriters' over-allotment options will not be exercised. The pro forma information presented in this Prospectus gives effect to the acquisition by the Company of certain properties in March and September 1996 (the "March 1996 Acquisition" and "September 1996 Acquisition," respectively), the proposed sales of certain properties in connection with the liquidation of oil and gas partnerships for which the Company acts as a co-general partner (the "NYLOG Programs") and of certain related properties (collectively, the "1996 Sales") and the application of the net proceeds of the offering made by this Prospectus (the "Offering"). See "--Recent Developments and Results," "Capitalization" and the Notes to the Pro Forma Condensed Consolidated Financial Statements included elsewhere herein. For definitions of certain oil and gas terms used in this Prospectus, see "Glossary of Certain Oil and Gas Terms." THE COMPANY American Exploration is an independent company engaged in the exploration, development, acquisition and production of oil and natural gas. The Company's operations are conducted in the United States with exploration, development and acquisition activities primarily concentrated in the Gulf of Mexico, South Texas and the Smackover Trend in southwestern Arkansas. On a pro forma basis as of June 30, 1996, the Company's proved reserves totaled 13 MMBbls of oil and 145 Bcf of natural gas, or an aggregate of 37 MMBOE, with an SEC-10 Value of $225 million. Approximately 70% of these reserves are developed, and approximately 62% are attributable to properties operated by the Company. The Company also holds in excess of 200,000 net acres of undeveloped properties and owns approximately 1,300 square miles of 3-D seismic data and approximately 79,000 linear miles of 2-D seismic data. On a pro forma basis, the Company's net production for the month of September 1996 averaged 5,100 Bbls of oil and 80,100 Mcf of natural gas per day, representing a 28% increase over average daily BOE production for the second quarter of 1996. Over the past four years, the Company has implemented a series of steps that has resulted in a significant improvement in its oil and gas operating and exploration capabilities, overhead and production costs, financial position and cash operating margins. These steps include (i) hiring experienced personnel in key management and operating positions, (ii) focusing exploration and development activities in areas in which the Company believes it has competitive advantages, (iii) acquiring properties held by certain institutional oil and gas partnerships formed by the Company in the 1980s and (iv) disposing of over 250 properties, including the sale of the Company's interest in the Sawyer Field in West Texas for $64 million in July 1995. Largely as a result of these steps, the Company's operating margin has increased from $2.72 per BOE for the year ended December 31, 1992 to $6.02 per BOE for the nine months ended September 30, 1996. In addition, the Company's ratio of total debt to total capitalization has decreased from 60% at December 31, 1992 to 32% on a pro forma basis at September 30, 1996. BUSINESS STRATEGY American Exploration's strategy is to increase per share reserves, production, cash flow and earnings through exploration, development and selective acquisitions within its core operating areas. The Company's strategy is designed to capitalize on its competitive strengths, including the experience and technical expertise of its operating personnel, a substantial seismic database and a concentration of developed and undeveloped acreage in its core operating areas. The principal features of this strategy follow. GEOGRAPHIC FOCUS. The Company's exploration, development and acquisition activities are primarily focused in the Gulf of Mexico (with an emphasis on the Texas State Waters area), South Texas (with an emphasis on the Wilcox Trend) and the Smackover Trend in southwestern Arkansas. The Company believes that by focusing its operations, it can achieve cost efficiencies and enhance its ability to add new reserves. For 1996, over 90% of the Company's exploration and development budget and all of its acquisition activities have been concentrated in its core operating areas. The Company is also in the process of divesting certain properties that are not consistent with its geographic focus (see "-- Recent Developments and Results") and is reviewing the feasibility of divesting various additional non-strategic properties. ACTIVE DRILLING PROGRAM. The Company is engaged in an active drilling program and attempts to maintain a project portfolio consisting of both high risk, high potential exploration prospects and lower risk development projects. The Company's exploration activities are generally concentrated in areas where in-house geological knowledge and 2-D seismic data can be used to identify prospect leads. The Company then attempts to establish large lease positions and generally initiates or acquires 3-D seismic data to confirm prospects prior to drilling. The Company typically shares the risks associated with its exploration prospects with industry partners. In addition to internally generated exploration prospects, the Company selectively participates in exploration prospects initiated by other oil and gas companies. For 1996, the Company has budgeted approximately $40 million for exploration and development and intends to drill approximately 40 exploratory wells and 45 development wells. During the first nine months of 1996, the Company spent approximately $18 million on exploration and drilled 16 gross (7.0 net) wells, 31% of which were successfully completed. During the same period, the Company spent approximately $12 million on development and drilled 34 gross (11.7 net) wells, 85% of which were successfully completed. SELECTIVE ACQUISITIONS. The Company's acquisition strategy is to acquire producing properties within its core operating areas that enhance its competitive position, offer economies of scale and provide further development and/or exploration potential. The Company seeks to acquire properties in which it can obtain a significant ownership percentage and become the operator. Through September 1996, the Company has invested $53 million, net of interests being sold to a third party, to acquire interests in seven Gulf of Mexico fields, four of which are operated by the Company. See "-- Recent Developments and Results" and the Pro Forma Condensed Consolidated Financial Statements. ADVANCED TECHNICAL CAPABILITIES. The Company makes extensive use of advanced technologies, most notably 3-D seismic, computer-aided exploration and specialized drilling applications such as short radius horizontal wells, to better delineate or produce oil and gas reserves. The Company's experienced staff of geologists and geophysicists performs all interpretation and seismic mapping on in-house 3-D seismic workstations. FINANCIAL FLEXIBILITY. The Company is committed to maintaining financial flexibility in order to pursue its existing exploration and development projects and to take advantage of future opportunities. The Company has taken a number of steps over the past few years to reduce debt and improve its liquidity and financial flexibility. As a result, the Company's ratio of total debt to EBITDA (see Note 4 to "-- Summary Financial Data") for the prior 12 months decreased from 5.2 as of December 31, 1992 to 1.4 on a pro forma basis as of September 30, 1996. The Company intends to use the net proceeds from the Offering to reduce its outstanding bank debt. After giving effect to the proceeds from the Offering, the Company's pro forma ratio of total debt to total capitalization as of September 30, 1996 is expected to be 32%. See "Use of Proceeds," "Capitalization" and the Pro Forma Condensed Consolidated Financial Statements. RECENT DEVELOPMENTS AND RESULTS SEPTEMBER 1996 ACQUISITION. On September 27, 1996, the Company acquired interests in two blocks in the Gulf of Mexico, High Island Block 116 and East Cameron Block 328 (the "Zilkha II Properties"), for a purchase price of $39 million, net of interests being sold to a third party. The acquisition was funded through borrowings under the Company's revolving bank credit agreement (the "Credit Agreement"). The acquired properties added estimated proved reserves (as estimated by the Company as of the date of acquisition) totaling 3.6 MMBbls of oil and 16.9 Bcf of natural gas. In September 1996, production from the acquired interests was approximately 700 Bbls of oil and 17,000 Mcf of natural gas per day. The Company plans to initiate a multi-well development drilling program on East Cameron Block 328 before year-end 1996 and believes that both blocks have additional unproved reserve potential through higher primary reserve recovery and additional drilling. MARCH 1996 ACQUISITION. On March 15, 1996, the Company and a subsidiary of Dominion Resources, Inc. ("Dominion") acquired interests in five offshore blocks in the Gulf of Mexico for a purchase price of approximately $56 million. The Company's $14 million (25%) share of the March 1996 Acquisition was funded through borrowings under the Credit Agreement. The acquired properties (the "Zilkha I Properties") added estimated proved reserves (as estimated by the Company as of the date of acquisition) totaling 600 MBbls of oil and 11.3 Bcf of natural gas, net to the Company's interest. Three of the acquired properties, High Island Block 45, South Marsh Island Block 133 and East Cameron Block 129, which together represent substantially all of the proved reserve value, are operated by the Company. In September 1996, the acquired properties produced an average of approximately 670 Bbls of oil and 7,400 Mcf of natural gas per day, net to the Company's interest. During the third quarter of 1996, the Company completed the installation of production facilities on South Marsh Island Block 133 and a development well on East Cameron Block 129. The Company believes that the acquired properties have additional reserve potential through higher primary reserve recovery and the installation of gas compression. PROPOSED 1996 SALES. The Company is in the process of selling interests in approximately 70 properties, including those properties owned by the NYLOG Programs. Proved reserves and production attributable to these properties have not been included in the pro forma amounts set forth in this Prospectus. The Company intends to use the estimated $8.6 million proceeds from the proposed sales to reduce amounts outstanding under the Credit Agreement. The Company believes that these sales, which are expected to be completed by year-end 1996, will provide additional operating efficiencies. THIRD QUARTER 1996 RESULTS. For a description of the Company's results of operations for the quarter and nine months ended September 30, 1996, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Quarter and Nine Months Ended September 30, 1996 Compared to Quarter and Nine Months Ended September 30, 1995." PRIMARY OPERATING AREAS GULF OF MEXICO. The Gulf of Mexico is the Company's most significant area of exploration, development and acquisition activity and represents approximately 60% of the Company's 1996 exploration and development budget. On a pro forma basis, approximately 40% of total oil and gas production during September 1996 and approximately 29% of the Company's total proved reserves at June 30, 1996 were attributable to properties in the Gulf of Mexico. As of June 30, 1996, the Company held working interests in 41 offshore blocks covering 76,515 gross (28,788 net) undeveloped acres. The Company's principal offshore exploration and development focus is the Texas State Waters area. Beginning with a successful redevelopment program that increased Brazos 440 Field gross production from 5,000 Mcf of natural gas per day in February 1994 to over 25,000 Mcf of natural gas per day in October 1994, the Company has developed a large area-wide project in which it holds 29,300 gross (18,200 net) acres. In 1995, the Company participated in a 400 square mile 3-D survey covering the Brazos area and has confirmed a number of prospect leads previously identified using 2-D seismic data. Since January 1, 1994, the Company has drilled five wells on its Brazos acreage, three of which were successful, and as of September 30, 1996 it was drilling a sixth well. The Company intends to further expand its Texas State Waters acreage and participate in additional 3-D seismic surveys. SOUTH TEXAS. Approximately 30% of the Company's 1996 exploration and development budget is allocated to its South Texas operating area. On a pro forma basis, South Texas represented approximately 10% of total oil and natural gas production during September 1996 and approximately 7% of the Company's total proved reserves at June 30, 1996. American Exploration's principal exploration focus in South Texas is the Yoakum Gorge project, located in Lavaca County, where the Company controls over 55,000 acres, holds a 52.5% working interest and is nearing completion of a 152 square mile proprietary 3-D survey. The initial phase of the 3-D data has confirmed over 20 prospects in the shallow Frio and Yegua formations as well as the deeper Upper and Lower Wilcox formations. The Company plans to commence drilling 16 of these prospects in the fourth quarter of 1996. SMACKOVER TREND. American Exploration's operations in the Smackover Trend of southwestern Arkansas are focused primarily in the Midway and Buckner fields, both of which are operated by the Company. The Company's ongoing strategy in this area is to capitalize on the horizontal drilling expertise it has developed in exploiting the Midway Field by applying this technology to other Smackover fields. In 1995, the Company acquired various interests in the Buckner Field, which is located approximately 11 miles from Midway. The Buckner Field, which is geologically similar to Midway, has never been unitized and waterflooded. The Company is working to unitize the field and plans to initiate a horizontal drilling and waterflood project in 1997. OTHER OPERATING AREAS. The Company's most significant properties outside of its primary operating areas are the Bowdoin Field located in Montana, the Bradshaw Field located near the Hugoton Field in Kansas and the Henderson Canyon Field located in West Texas. During the first nine months of 1996, the Company completed 11 gross (8.7 net) development wells in the Bradshaw Field and increased net gas production by approximately 56% from an average of approximately 8,000 Mcf per day in January 1996 to approximately 12,500 Mcf per day in September 1996. In addition, the Company has a large number of development locations in the Bowdoin Field that it intends to drill as necessary to maintain production capacity at current levels. THE OFFERING <TABLE> <S> <C> Common Stock Offered: By the Company............................................ 3,000,000 shares By the Selling Stockholders............................... 579,229 shares Total............................................. 3,579,229 shares Common Stock to be Outstanding After the Offering (1)....... 14,807,741 shares Use of Proceeds............................................. To reduce amounts outstanding under the Credit Agreement. The Company will not receive any part of the proceeds from the sale of shares by the Selling Stockholders. See "Use of Proceeds." AMEX Symbol................................................. AX </TABLE> - --------------- (1) Excludes (i) up to approximately 1.8 million shares issuable upon conversion of the Company's $450 Cumulative Convertible Preferred Stock, Series C, par value $1.00 per share (the "Convertible Preferred Stock"), at a conversion price of $15.00 per share, subject to adjustment in certain circumstances, (ii) approximately 1.0 million shares issuable upon exercise of stock options outstanding at September 30, 1996 at prices ranging from $11.50 to $40.00 per share at a weighted average exercise price of $13.29 per share and (iii) approximately 1.5 million shares issuable upon exercise of warrants outstanding at September 30, 1996 at a weighted average exercise price of $16.94 per share. SUMMARY FINANCIAL DATA The following table sets forth certain summary historical and pro forma financial data for the Company. The historical financial data was derived from the consolidated financial statements of the Company. The pro forma summary of operations data gives effect to the March 1996 Acquisition, the September 1996 Acquisition and the expected sale of certain assets acquired therein, the 1996 Sales and the application of the net proceeds from the Offering as if such transactions had occurred on January 1, 1995. The pro forma balance sheet data gives effect to the expected sale of certain assets acquired in the September 1996 Acquisition, the 1996 Sales and the application of the net proceeds from the Offering as if such transactions had occurred on September 30, 1996. The pro forma data for the year ended December 31, 1995 does not include results from the High Island 116 well acquired in the September 1996 Acquisition because the well did not produce during the period. Similarly, the pro forma data for the nine months ended September 30, 1996 includes only two months of results from the High Island 116 well. The well commenced production in August 1996 at a net production rate of 300 Bbls of oil per day and 17,100 Mcf of natural gas per day. The data in the following table should be read in conjunction with the Pro Forma Condensed Consolidated Financial Statements, Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and related Notes thereto appearing elsewhere herein. <TABLE> <CAPTION> PRO FORMA NINE MONTHS NINE PRO FORMA ENDED MONTHS YEAR ENDED DECEMBER 31, YEAR ENDED SEPTEMBER 30, ENDED -------------------------------- DECEMBER 31, ----------------- SEPTEMBER 30, 1993(1) 1994(2) 1995(2)(3) 1995 1995 1996 1996 -------- -------- ---------- ------------ ------- ------- ---------- (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) <S> <C> <C> <C> <C> <C> <C> <C> SUMMARY OF OPERATIONS DATA: Revenues: Oil and gas sales................... $ 49,589 $ 50,033 $ 70,768 $ 65,238 $55,049 $52,263 $ 52,928 Other, net.......................... 8,569 1,326 11,166 772 10,352 912 912 -------- -------- ------- -------- ------- ------- ------- Total revenues.................. 58,158 51,359 81,934 66,010 65,401 53,175 53,840 -------- -------- ------- -------- ------- ------- ------- Costs and Expenses: Production and operating............ 15,998 21,302 24,515 19,377 19,079 15,421 14,482 Depreciation, depletion and amortization...................... 23,635 29,616 30,726 30,909 22,446 20,871 22,656 General and administrative.......... 7,413 10,035 7,472 7,528 4,683 4,450 4,450 Taxes other than income............. 4,601 5,710 5,760 4,956 4,413 4,254 3,862 Exploration......................... 7,554 2,559 4,826 4,826 3,269 9,152 9,152 Impairment.......................... 10,975 33,570 1,822 1,822 43 1,841 1,841 -------- -------- ------- -------- ------- ------- ------- Total costs and expenses........ 70,176 102,792 75,121 69,418 53,933 55,989 56,443 -------- -------- ------- -------- ------- ------- ------- Income (loss) from operations......... (12,018) (51,433) 6,813 (3,408) 11,468 (2,814) (2,603) Interest expense...................... (6,847) (6,638) (5,481) (3,336) (4,853) (2,894) (2,984) Other income (expense), net........... (321) (2,164) 145 147 (105) (63) (63) -------- -------- ------- -------- ------- ------- ------- Income (loss) before extraordinary item................................ (19,186) (60,235) 1,477 (6,597) 6,510 (5,771) (5,650) Extraordinary gain on debt extinguishment...................... -- 5,419 2,456 2,456 2,456 -- -- -------- -------- ------- -------- ------- ------- ------- Net income (loss)..................... (19,186) (54,816) 3,933 (4,141) 8,966 (5,771) (5,650) Preferred stock dividends............. (75) (1,800) (1,800) (1,800) (1,350) (1,350) (1,350) -------- -------- ------- -------- ------- ------- ------- Net income (loss) to common stock..... $(19,261) $(56,616) $ 2,133 $ (5,941) $ 7,616 $(7,121) $ (7,000) ======== ======== ======= ======== ======= ======= ======= Net income (loss) per common share: Primary and fully diluted: Loss before extraordinary item.... $ (2.77) $ (7.70) $ (0.03) $ (0.57) $ 0.43 $ (0.60) $ (0.47) Net income (loss)................. (2.77) (7.02) 0.18 (0.40) 0.64 (0.60) (0.47) OTHER FINANCIAL DATA: EBITDA(4)............................. $ 37,224 $ 10,583 $ 33,981 $ 34,588 $27,493 $28,186 $ 30,182 Operating cash flow(5)................ 26,813 4,838 27,514 29,573 21,714 24,285 25,848 Total capital expenditures (6)........ 24,167 49,889 44,215 N/A 31,229 92,116 N/A </TABLE> <TABLE> <CAPTION> PRO FORMA SEPTEMBER 30, SEPTEMBER 30, 1996 1996 ------------- -------------- <S> <C> <C> SUMMARY OF BALANCE SHEET DATA: Working capital (deficit).......................................................... $ (1,623) $(16,007) Total assets....................................................................... 233,363 218,979 Long-term debt, excluding current obligations...................................... 105,000 56,833 Total stockholders' equity......................................................... 87,506 121,289 </TABLE> - --------------- (1) The Company received aggregate proceeds of approximately $35 million for the conveyance of approximately 40% of its interest in the Henderson Canyon Field in March 1993 and the sale of its Canadian assets in mid-1993. (2) The Company purchased investors' interests in certain institutional oil and gas partnerships formed by the Company in the 1980s (the "APPL Programs") in 1994 and 1995 for 4.6 million shares of Common Stock and $40.1 million in cash (the "APPL Consolidation"). (3) The Company sold its interest in the Sawyer Field for $64 million in July 1995. (4) EBITDA is defined for this purpose as net income (loss) plus interest, income taxes, depreciation, depletion and amortization, exploration expense, impairment expense and loss on sales of oil and gas properties, less gain on sales of oil and gas properties and extraordinary gain from extinguishment of debt. EBITDA should not be considered as an alternative to earnings (loss) as an indicator of the Company's financial performance or to cash flow as a measure of liquidity. See the Consolidated Statements of Operations included in the Consolidated Financial Statements appearing elsewhere herein. (5) Cash flow from operations before working capital changes and after preferred dividends. (6) Excludes the acquisition of properties in exchange for the issuance of Common Stock, principally relating to the APPL Consolidation. SUMMARY OPERATING DATA The table below sets forth certain operating information of the Company for the periods presented. <TABLE> <CAPTION> NINE MONTHS YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30, ---------------------------------- ------------------- 1993(2) 1994(3) 1995(3)(4) 1995(3) 1996 ------- ------- ---------- ------- ------- <S> <C> <C> <C> <C> <C> AVERAGE SALES PRICE(1): Gas ($/Mcf)........................... $ 1.92 $ 1.90 $ 1.74 $ 1.70 $ 1.88 Oil ($/Bbl)........................... 16.01 15.39 16.83 16.87 16.87 BOE ($/BOE)........................... 12.99 12.67 12.30 12.05 13.17 PRODUCTION DATA: Gas (MMcf)............................ 15,336 16,241 24,450 19,866 15,772 Oil (MBbls)........................... 1,261 1,241 1,680 1,258 1,340 MBOE.................................. 3,817 3,948 5,755 4,569 3,969 UNIT DATA ($/BOE): Oil and gas sales..................... $ 12.99 $ 12.67 $ 12.30 $ 12.05 $ 13.17 Production and operating costs........ 4.19 5.40(5) 4.26 4.18 3.89 Taxes other than income............... 1.21 1.45 1.00 0.97 1.07 General and administrative expense.... 1.94 2.54(6) 1.30 1.02 1.12 Interest expense...................... 1.79 1.68 0.95 1.06 0.73 Preferred stock dividends............. 0.02 0.46 0.31 0.30 0.34 ------- ------- ------- ------- ------ Operating margin...................... $ 3.84 $ 1.14 $ 4.48 $ 4.52 $ 6.02 ======= ======= ======= ======= ====== </TABLE> - --------------- (1) Prices reflect impact of hedging gains and losses. (2) The Company received aggregate proceeds of approximately $35 million for the conveyance of approximately 40% of its interest in the Henderson Canyon Field in March 1993 and the sale of its Canadian assets in mid-1993. (3) The Company purchased investors' interests in the APPL Programs in 1994 and 1995 for 4.6 million shares of Common Stock and $40.1 million in cash. (4) The Company sold its interest in the Sawyer Field for $64 million in July 1995. (5) Includes $2.4 million, or $.61 per BOE, for remediation and restoration costs incurred in 1994. (6) Includes $2.0 million, or $.51 per BOE, for severance costs incurred in 1994. SUMMARY RESERVE DATA The following table sets forth summary data with respect to the estimated proved oil and gas reserves and related present value of estimated future net revenues of the Company's properties as of June 30, 1996 on a historical basis and on a pro forma basis after giving effect to the September 1996 Acquisition and the 1996 Sales. Such estimates on a historical basis are based upon (i) the quantities of reserves set forth in a reserve report prepared by Netherland, Sewell & Associates, Inc., independent petroleum engineers, as of December 31, 1995 with respect to the properties owned by the Company as of such date, (ii) adjustments to such December 31, 1995 reserves made by the Company to reflect production and drilling activity after such date, which adjustments have been audited by Netherland, Sewell & Associates, Inc. as set forth in their report dated October 8, 1996 and included in Appendix A hereto, and (iii) reserve estimates set forth in a reserve report prepared by William M. Cobb & Associates, Inc., petroleum engineering consultants, as of June 30, 1996, a copy of which is included in Appendix A hereto (the "Cobb Report"), with respect to the properties acquired in the March 1996 Acquisition. Such estimates on a pro forma basis are based on (i) the historical basis estimates as of June 30, 1996 as described above, (ii) adjustments to such June 30, 1996 estimates made by the Company to remove reserves attributable to the 1996 Sales and (iii) reserve estimates set forth in the Cobb Report with respect to the properties acquired in the September 1996 Acquisition. The estimates of the SEC-10 Value of the reserves are based upon prices as of June 30, 1996, except in those instances in which fixed and determinable gas price escalations are covered by contracts. The prices used as of June 30, 1996 averaged $18.19 per Bbl of oil and $2.25 per Mcf of natural gas. There are numerous uncertainties inherent in estimating quantities of proved oil and gas reserves and in projecting future rates of production and future net cash flows, and reserve estimates may differ significantly from the quantities of oil and gas that are ultimately recovered. See "Risk Factors -- Estimates of Reserves and Future Net Revenues" and "Business -- Reserves."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000720481_cerner_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000720481_cerner_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, all financial information and share data in this Prospectus (i) have been adjusted to reflect the conversion of all outstanding shares of the Company's Series A Preferred Stock into 968,750 shares of Common Stock and all outstanding shares of the Company's Series B Preferred Stock into 3,750,000 shares of Common Stock concurrently with the consummation of this Offering, and (ii) assume no exercise of the Underwriters' over-allotment option. Investors should carefully consider the information set forth under the heading "Risk Factors." THE COMPANY Dynamic Healthcare Technologies, Inc. ("Dynamic" or the "Company") is a leading provider of enterprise-wide, patient-centered healthcare information systems. These systems enable hospitals, physician practice groups and integrated delivery networks to capture, store, archive and retrieve clinical, financial and administrative patient information. The Company's products enhance productivity, reduce costs and improve the quality of patient care by providing on-line access to patient information previously maintained on a variety of media, including paper, X-ray film, magnetic disk, and video and audio recordings. The Company's current product lines include clinical information systems for use in laboratory, radiology, anatomic pathology and anesthesiology applications, and imaging and electronic health record solutions. The Company provides support for all of its systems and provides systems integration and other consulting services. The Company currently serves over 250 customers in 44 states. Key customers include the University of California at Los Angeles Medical Center, University of Illinois at Chicago Medical Center, Methodist Hospital of Memphis, Memorial Sloan-Kettering Cancer Center, Ohio State University Hospital, Columbia/HCA, Greater Dayton Area Hospital Association, Advocate Health Care, Temple University Hospital, UniHealth and Orlando Regional Health System. Utilizing the Company's healthcare information experience, imaging technologies and customer input, the Company is focusing on a new product strategy for electronic health records. The Company's new electronic health record product, DynamicVision, provides connectivity and enabling technologies that integrate clinical and imaging information systems to create an open architecture, multi-media clinical workstation. DynamicVision provides prompt and simultaneous on-line access to information stored in various systems and data repositories located at multiple sites. This information can include documents, medical images such as X-rays, MRIs and CAT scans, and video and audio recordings. DynamicVision is currently being beta-tested and is scheduled for general availability by the end of 1996. The healthcare information industry is undergoing rapid and significant change. Cost containment pressures, industry consolidation, the movement toward managed care and rising standards of healthcare quality represent fundamental trends in today's healthcare operating environment. Increasingly, the key to effective cost control and quality management lies in the collection, availability and analysis of medical records in order to assess treatment patterns, resource utilization and outcomes. As a result, the information demands in the healthcare industry are rapidly increasing for caregivers, managers and third party payors. Total healthcare information technology spending in the United States was estimated to be $8.5 billion in 1994, and is projected to reach $13.0 billion by 1997 and $20.0 billion by 2000. The Company's new product development, including DynamicVision, employs technical designs based on open architecture at all levels of data capture, information management and workflow, application software and connectivity, which permits platform independence and plug and play capability. Dynamic's strategy to utilize open architecture leverages its own technology with capabilities of leading technology companies, enabling the Company to focus its research and development on healthcare software applications. The Company has entered into strategic relationships with several leading technology developers, including International Business Machines Corporation ("IBM"), Wang Laboratories, Inc. ("Wang") and others, to gain access to certain technologies that are integrated into the Company's systems. The Company's platform independent systems run on a variety of operating systems, including UNIX, Windows 95/NT, IBM AS/400 and other proprietary platforms. Dynamic's systems are developed using Internet/Intranet standards and protocols, are fully scaleable and preserve the customers' investment in existing systems. The Company believes its technical designs and strategic relationships enable it to respond more rapidly to changes in core technologies at a lower cost than companies utilizing proprietary information systems. The Company's objective is to be the leading provider of enterprise-wide, patient-centered healthcare information systems that enable the efficient capture, storage, archival and retrieval of electronic health information and the secure sharing of this information across the continuum of care throughout a patient's lifetime. To achieve this objective, the Company intends to employ the following strategies: (i) aggressively expand its position in the rapidly growing electronic health record market through the commercial availability of DynamicVision; (ii) focus on cross-selling additional applications and services to existing and new customers; (iii) provide solutions utilizing open architecture that offer cost-effective and flexible information solutions; (iv) maintain its technological advantage by investing in proprietary research and development for healthcare software applications while integrating state-of-the-art technology through strategic relationships with industry leading technology companies; and (v) acquire complementary businesses, products and technologies. The Company was originally incorporated in California in 1977, reincorporated in Nebraska in 1982 and subsequently reincorporated in Florida in 1996. The Company's executive offices are located at 101 Southhall Lane, Suite 210, Maitland, Florida 32751, its telephone number is (407) 875-9991 and its World Wide Web address is http://www.dht.com. THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Company..................... 4,000,000 shares Common Stock Offered by the Selling Shareholders........ 1,000,000 shares Common Stock to be Outstanding after the Offering....... 15,400,536 shares(1) Use of Proceeds......................................... Repayment of indebtedness; expansion of sales, marketing and distribution; research and development; general corporate purposes, including working capital; and potential acquisitions. See "Use of Proceeds." Nasdaq Symbol........................................... DHTI </TABLE> - --------------- (1) Does not include 1,908,190 shares issuable upon the exercise of outstanding options and warrants. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ---------------------------------------- --------------------------------- 1995 1995 1996 --------------------- ------ ------------------------ 1993 1994(1) ACTUAL PRO FORMA(2) ACTUAL ACTUAL(3) PRO FORMA(2) ------ ------- ------ ------------ ------ --------- ------------ <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total operating revenues... $9,688 $6,987 $8,886 $ 14,150 $4,502 $ 6,317 $7,323 Operating income (loss).... 253 (3,559) (162) (219) (503) (417) (1,537) Net earnings (loss)........ 246 (4,307) (513) (646) (706) (522) (1,632) Earnings (loss) per common share.................... $0.05 $(0.78) $(0.08) $(0.10) $(0.11) $ (0.08) $(0.25) Weighted average common shares outstanding....... 5,363 5,536 6,443 6,443 6,295 6,619 6,619 </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 ---------------------------- ACTUAL AS ADJUSTED(4) ----------- -------------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents........................................... $771 $ 19,950 Working capital..................................................... 122 19,301 Total assets........................................................ 11,040 30,219 Long-term obligations, net of current maturities.................... 2,922 234 Series A preferred stock............................................ 10 -- Series B preferred stock............................................ 38 -- Total shareholders' equity.......................................... 3,597 25,537 </TABLE> - --------------- (1) Includes the operating results and related financial information since the acquisition of Dynamic Technical Resources, Inc. on August 23, 1994, accounted for by the purchase method. (2) Gives effect to the acquisition of Dimensional Medicine, Inc. ("DMI") as if the acquisition occurred on January 1, 1995. See "Pro Forma Condensed Consolidated Statements of Operations." (3) Includes the operating results and related financial information since the acquisition of DMI on May 1, 1996, accounted for by the purchase method. (4) Adjusted to give effect to the sale of 4,000,000 shares of Common Stock offered by the Company at an assumed offering price of $6.00 per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000723906_miracor_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000723906_miracor_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..6856716e822c9232f0a67e9c387347b8377b1858
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+PROSPECTUS SUMMARY Unless otherwise expressly set forth herein to the contrary, all per share data in this Prospectus gives effect to the Company's 1-5 reverse stock split in September, 1981, its 1-30 reverse stock split in November, 1990, its 1-6 reverse stock split in January, 1994, and its 1-2 reverse stock split in June, 1996. In addition, unless otherwise expressly set forth herein to the contrary, all references to the Company's % Series A Cumulative Convertible Preferred Stock assumes the conversion of all 247,500 shares of the Company's Series I Convertible Preferred Stock issued in the Company's 1996 Private Placement into 247,500 shares of the Company's % Cumulative Convertible Series A Preferred Stock on a one-for-one basis on the date hereof. See "Business--Corporate History" and "The Company--Recent Financings--1996 Private Placement." THE COMPANY Medical Device Technologies, Inc. (the "Company") is a development stage company engaged in identifying, developing and bringing to market patented technologies in the medical device field. The Company's strategy is to identify technologies that it believes have commercial viability, license or acquire the technologies, complete product development, obtain regulatory clearances and initiate marketing and sales. The Company directs its efforts towards patented technologies that it believes can be commercially developed into medical devices which are innovative, represent improvements over existing products, or are responsive to a presently unfulfilled need in the market place. To date, the Company has licensed the exclusive worldwide rights to commercialize three medical devices: (1) the PERSONAL ALARM SYSTEM ("PAS"), which is designed to immediately alert healthcare professionals when their surgical gloves and garments are torn or punctured or become saturated with fluids and therefore no longer effectively provide protection from infection. The spread of the Human Immunodeficiency Virus ("HIV") that causes Acquired Immune Deficiency Syndrome ("AIDS"), and the spread of Hepatitis and other infections transmitted through bodily fluids has increased the need to protect health care workers and patients, especially in emergency and operating rooms. The Company received clearance from the Food and Drug Administration ("FDA") to sell the PAS in August of 1995, and commenced manufacturing and marketing the PAS in January of 1996; (2) the CELL RECOVERY SYSTEM ("CRS"), which is an automated biopsy brush system that collects specimen cells for cancer diagnosis, offers two distinct advantages over current techniques: it is minimally invasive and is less costly to administer. On March 20, 1996, the Company received clearance from the FDA to market the CRS for the urology market. The Company intends to launch the CRS in the fourth quarter of 1996. Prior to the market launch of the CRS, the Company intends to complete certain clinical trials for a follow-up submission to the FDA to establish that the device assists with the detection of certain urological diseases, such as bladder cancer, and at the same time commence manufacturing for the system's instrumentation and disposables; and (3) the INTRACRANIAL PRESSURE MONITORING SYSTEM ("ICP"), which is a diagnostic device that monitors pressure inside the human skull without having to drill holes in the skull. Presently, the only method by which intracranial pressure can be monitored is to drill a hole in the skull. The Company's development strategy for the ICP involves two specific versions of the device. The first generation ICP device will monitor the direction and rate of change in intracranial pressure. The second generation of the ICP will provide categories of intracranial pressure levels as well. It is presently anticipated that clinical trials for the first generation ICP device will continue through the third quarter of 1996 and clinical trials for the second generation of the device will continue through the third quarter of 1997. The Company believes there exists non-overlapping markets for each generation of the device. <PAGE> At present, the Company does not intend to engage in the manufacture of its products, and in January 1996, it engaged a third party to manufacture the first PAS systems. The Company is currently exploring two strategies in connection with the marketing of its medical devices. The Company will either assemble a network of independent distributors who have proven to be effective in introducing new products in the medical device field, or form an alliance with a strategic corporate partner with a strong presence in the applicable medical device market. The Company was incorporated on February 6, 1980 under the laws of the State of Utah and is located at 9171 Towne Centre Drive, Suite 355, San Diego, California 92122, telephone number (619) 455-7127. 2 <PAGE>
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000726712_sulcus_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000726712_sulcus_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..46f721c2bf6e793f27ddfc394aa319e5f1575875
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS CONTAINED ELSEWHERE IN THIS PROSPECTUS. INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS." EXCEPT AS OTHERWISE SPECIFIED, THE INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES THAT (I) THE PREFERRED STOCK HAS NOT BEEN CONVERTED INTO SHARES OF COMMON STOCK, (II) THE WARRANTS HAVE NOT BEEN EXERCISED, AND (III) THE OVER-ALLOTMENT OPTION AND THE UNDERWRITER'S WARRANTS HAVE NOT BEEN EXERCISED. SEE "UNDERWRITING." THE COMPANY Sulcus provides automation solutions to the worldwide hospitality and tourism market and to the domestic U.S. real estate industry and legal professions. The Company develops, manufactures, markets and installs integrated microcomputer systems designed to automate the creation, handling, storage and retrieval of information and documents. The Company sells computer systems, which include a network of hardware, software and cabling as well as stand-alone turnkey systems. Sulcus sells 24-hour customer support to the hospitality industry and regular business hour support to the real estate industry and the legal profession with each new system sold. This provides a recurring revenue stream beyond the original system sale. The Company's turnkey computer systems provide all of a customers needs to automate segments of its business. Sulcus believes that this approach is critical in the vertical markets in which it competes. Some competitors can automate a specific task, most are unable to automate as broad a range of a customer's business applications as Sulcus. Customers include hotels, motels, restaurants, resorts, cruise lines, country clubs, condominiums, real estate related businesses and law offices. In 1988, the Company conceived a vision to build a leadership position in turnkey computer systems for the hospitality, and real-estate industries and developed a strategic plan to achieve that vision. The strategic plan envisioned internal growth by way of expanded research and development, as well as growth through acquisitions, mergers, joint ventures and similar alliances. In order to fulfill that vision, the Company has made numerous acquisitions, alliances and joint ventures which created additional market opportunities for existing products, created or obtained products that complement or expand existing product lines, and created additional product distribution channels. The Company has assembled a comprehensive product line that includes approximately 800 programs contained in 55 business applications with over 255 interfaces for automatic integration with third party software or hardware systems. Sulcus has built a worldwide distribution system with over 80 locations in over 20 countries and has installed its systems on all continents except Antarctica. See "Business--Historical Development." The Company was incorporated under the laws of the Commonwealth of Pennsylvania on November 5, 1979, under the name "Ragtronics, Inc." and adopted its present name in December 1982. The principal offices of Sulcus are located at Sulcus Centre, 41 N. Main Street, Greensburg, Pennsylvania 15601. Its telephone number at such address is (412) 836-2000. Unless the context indicates otherwise, all references herein to the Company or Sulcus refer to Sulcus Computer Corporation and its wholly owned subsidiaries. PROSPECTUS SUBJECT TO COMPLETION DATED OCTOBER , 1996 SULCUS COMPUTER CORPORATION 200,000 Units Each Unit Consisting of One Share of Preferred Stock and Four Class A Warrants Sulcus Computer Corporation, a Pennsylvania corporation (the" Company" or "Sulcus") hereby offers for sale 200,000 Units (the "Unit"). Each Unit consists of one share of the Company's Series A Redeemable Convertible Preferred Stock, no par value per share, (the "Preferred Stock") and four Class A Warrant (the "Warrants") to purchase Preferred Stock. The shares of Preferred Stock and Warrants included in each Unit will be immediately detachable and separately transferrable. Each share of Preferred Stock may be converted into_____________ shares of Common Stock, no par value per share, of the Company (the "Common Stock") commencing on__________________ , 1997, (six months from the date of this Prospectus). The Preferred Stock is redeemable by the Company any time commencing_________________ , 1997, (15 months from the date of this Prospectus), upon not less than thirty (30) days' notice, at a price of $_________ per share. Two Warrants will entitle the registered holder thereof to purchase one share of Preferred Stock at a price of $__________ if exercised on or before_______________ , 1996, (75 days from the date of this Prospectus). Thereafter, four Warrants shall entitle the registered holder thereof to purchase one share of Preferred Stock at a price of $_____________ , if exercised on or before______________ , 1997, (one year from the date of this Prospectus), the Warrant expiration date. See "Description of Securities" and "Risk Factors." Prior to this Offering, there has been no public market for the Preferred Stock or the Warrants and there can be no assurance that such a market will develop after the completion of this Offering or, if developed, that it will be sustained. It is currently estimated that the initial public offering price will be between $10.00 and $11.00 per Unit. For information regarding the factors considered in determining the initial public offering price of the Units and the terms of the Preferred Stock and Warrants, see "Risk Factors," "Underwriting" and "Description of Securities." The Common Stock of the Company is traded on the American Stock Exchange ("AMEX") under the symbol SUL. The closing price for the Common Stock 21/4 on October 21, 1996. See "Price Range of Common Stock." It is anticipated that the Preferred Stock and Class A Warrants will be traded on the AMEX under the symbols SULP and SULW, respectively. THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS" LOCATED ON PAGE 7 AND "DILUTION." THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION OF THE CONTRARY IS A CRIMINAL OFFENSE. <TABLE> <CAPTION> Price Underwriting Proceeds to Public Discounts(1) to Company(2) <S> <C> <C> <C> Per Unit . . . . . . . . . . . . . . . . $ $ $ Total(3) . . . . . . . . . . . . . . . $ $ $ </TABLE> (Footnotes appear on inside front cover.) The Units are offered by the Underwriter on a "firm commitment" basis, when as and if delivered to and accepted by the Underwriter, and subject to the right of the Underwriter to reject any order in whole or in part and to certain other conditions. It is expected that delivery of certificates representing the Preferred Stock and Warrants comprising the Units will be made at the offices of Joseph Stevens & Company, L.P., 33 Maiden Lane, New York, NY 10038 on or about ____________ , 1996. Joseph Stevens & Company, L.P. The date of this Prospectus is_____________ , 1996 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. THE OFFERING Securities Offered: 200,000 Units, each Unit consisting of one share of Series A Redeemable Convertible Preferred Stock ("Preferred Stock") and four Class A Warrants. Offering Price: $ 10.50 per Unit Terms of Preferred Stock: Conversion Rights. Unless previously redeemed (see below), each share of Preferred Stock is convertible into ______________shares of Common Stock, subject to adjustment in certain events, at any time after six months from the date of issuance. No fractional shares will be issued, nor will cash in lieu thereof be paid. Redemption. The Preferred Stock may be redeemed by the Company upon payment of $___________ per share at any time on or after 15 months from the date of this Prospectus, upon 30 days' prior written notice. Dividends. Payable only to the same extent as dividends are paid on the Common Stock. Liquidation Preference. In the event of any liquidation of the Company, holders of Preferred Stock are entitled to a liquidation preference of $___________ per share (the public offering price). Voting Rights. Non-voting, except with respect to matters that alter or change the powers, preferences and rights of the Preferred Stock. Terms of Class A Warrants: During the 75 day period commencing on the date of this Prospectus, two Class A Warrants entitle the holder to purchase one share of Preferred Stock for $__________. Thereafter, and prior to____________ , 1997, (one year from the date of this Prospectus), the Class A Warrant expiration date, four Class A Warrants entitle the holder to purchase one share of Preferred Stock for $____________. Warrantholders will only be entitled to exercise Class A Warrants to purchase whole shares of the Company's Preferred Stock. Common Stock Outstanding and to be Outstanding after Offering: 15,359,625 shares of Common Stock(1) Preferred Stock to be Outstanding After Offering: 200,000 shares of Preferred Stock(2) Warrants Outstanding After the Offering: 800,000 Class A Warrants Use of Proceeds: The net proceeds of the Offering will be used for working capital and general corporate purposes. Risk Factors: The Offering involves certain risks. See "Risk Factors." AMEX Symbol: Common Stock SUL Proposed AMEX Symbols: Preferred Stock SULP Class A Warrants SULW (1) Does not include (i) 2,678,631 shares reserved for issuance under the Company's stock option plans for employees; (ii) 605,000 shares reserved for issuance upon exercise of options granted to directors, consultants and advisors; (iii) 64,500 shares reserved for issuance under various "earn out" provisions in connection with recent acquisitions; (iv)____________ shares reserved for issuance upon conversion of the Preferred Stock and the conversion of the Preferred Stock issuable to the Underwriter upon exercise of the Underwriter's Warrant; and (v) 327,726 shares of Common Stock issued in connection with "earn out" provisions to the former shareholders of JBA and subsequently cancelled by the Company. See "Business--Historical Development-JBA," "The Company," "Management--Stock Option Plan," "Description of Securities," and Note 15 of Notes to Consolidated Financial Statements. (2) Does not include shares reserved for issuance upon the exercise of the Class A Warrants and the exercise of the Class A Warrants issuable to the Underwriter upon the exercise of the Underwriter's Warrant.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000737755_metromail_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000737755_metromail_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the financial statements and pro forma information (and the notes related thereto) included elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus assumes no exercise of the U.S. Underwriters' over-allotment option. See "Underwriters." THE COMPANY Metromail Corporation ("Metromail" or the "Company") is a leading provider of marketing-oriented consumer information and reference services which it supplies to a wide variety of organizations engaged in direct mail, telephone and target marketing, as well as to clients who need specific reference and information services. In providing these information services, Metromail utilizes its proprietary database, which it believes is one of the most comprehensive and accurate databases in the United States, containing geographic, demographic and other marketing information on over 143 million individuals and over 90% of the households in the United States. The Company has assembled this database over almost 50 years from a wide variety of publicly available and proprietary, third-party sources and acquired databases. The markets in which the Company participates are experiencing increasing demand for high-quality consumer information. In 1995, Metromail generated net sales and earnings from operations of $237.2 million and $30.6 million, respectively. The Company offers two general categories of products and services: direct marketing services and reference services. To its direct marketing clients the Company provides: (i) targeted lists of potential customers; (ii) value-added enhancements of pre-existing customer lists; (iii) processing and mail services; and (iv) proprietary marketing database software for personal computers used to access marketing data from a client's customer database. The Company's reference services include: (1) a National Directory Assistance ("NDA") database for on-line or operator-assistance providers; (2) an on-line look-up/skip-locate service for collection agencies, consumer finance companies and credit card issuers; and (3) the Cole directories, which list households in sequence, by telephone number or address, in approximately 150 markets in the United States and Canada, delivered in printed form or on CD-ROM. Metromail's innovative marketing and distribution programs are important elements of the Company's success to date. Metromail uses a multi-channel distribution strategy to target a broad base of potential clients. The Company has its own sales force, which the Company believes to be the largest direct sales force in its industry, to call primarily on large national accounts. The Company also sells its products and services through direct mail, telemarketing and sales through third-party resellers such as advertising agencies and list brokers. In addition, the Company has invested in the development of sophisticated database marketing software applications which enable clients to create and manage their own databases as well as gain more efficient access to the data available through Metromail's proprietary database. Metromail is consolidating all of its existing databases into a single universal file through an advanced technology initiative. The Company believes that this consolidation will enable it to reduce the costs and time of updating its database and accelerate the speed at which information can be retrieved from the database. Metromail expects to benefit from continued growth in its markets resulting from the ongoing shift from "mass" marketing to "information-driven" targeted marketing, increased access to data and growth in several existing end markets and industries, as well as the emergence of new end markets. The Company believes that its competitive strengths will enable it to continue to compete effectively in its markets. These strengths include the Company's (i) comprehensive proprietary database and expertise in gathering data; (ii) ability to leverage its database into a wide range of information products and services; (iii) large base of established clients and comprehensive, multi- channel sales network; (iv) advanced technological capabilities in database management and software development; and (v) experienced management team and employees. The Company's principal strategy is to capitalize on its competitive strengths to provide high value-added information and information services to an expanding universe of clients. Key elements of the Company's strategy include: . Maintaining, integrating and expanding its proprietary database; . Developing new products and services and targeting new markets; . Developing technologies to analyze, package and distribute information more efficiently; and . Selectively acquiring data, distribution channels and businesses available as a result of ongoing consolidation in the industry. R. R. Donnelley & Sons Company ("R.R. Donnelley") is currently the sole stockholder of the Company and upon completion of the Offering will own approximately 41.7% of the outstanding Common Stock (approximately 38.4% if the over-allotment option granted by the Company to the U.S. Underwriters is exercised in full). While R.R. Donnelley in the future may reduce its ownership interest in the Company, R.R. Donnelley has advised the Company that it has no plans to do so. In connection with the Offering, R.R. Donnelley has agreed not to offer, pledge, sell or otherwise dispose of, directly or indirectly, any shares of Common Stock (or any security convertible into or exercisable or exchangeable for Common Stock) for a period of 180 days after the date of this Prospectus without the prior written consent of Morgan Stanley & Co. Incorporated. See "Relationship with R.R. Donnelley" and "Underwriters." THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company: U.S. Offering.......................... 9,600,000 shares International Offering................. 2,400,000 shares Total................................ 12,000,000 shares Common Stock to be outstanding immediately after the Offering.......... 20,600,000 shares(1) Use of Proceeds.......................... The net proceeds to the Company from the Offering are estimated to be ap- proximately $219.6 million ($252.8 million if the U.S. Underwriters ex- ercise their overallotment option in full) (assuming an initial public of- fering price of $19.50 per share, af- ter deducting estimated underwriting discounts and offering expenses pay- able by the Company). The net pro- ceeds from the Offering together with, to the extent necessary, borrowings under a bank credit facil- ity to be entered into by the Company prior to consummation of the Offering will be used to repay the debt and advances owed to R.R. Donnelley and its subsidiaries, which as of March 31, 1996 totalled approximately $249.5 million. See "Use of Proceeds." NYSE Symbol.............................. ML </TABLE> - -------- (1) Excludes 1,600,000 shares of Common Stock reserved for issuance under the Company's 1996 Stock Incentive Plan and 1996 Broad-Based Employee Stock Plan, including 34,000 shares of restricted Common Stock and options to purchase approximately 1,300,000 shares of Common Stock (at the initial public offering price set forth on the cover page of this Prospectus) that the Company expects to grant to employees in connection with the Offering. See "Management--Stock Plans," "Management--Employment Agreements" and Notes to Consolidated and Combined Financial Statements of Metromail. SUMMARY CONSOLIDATED AND COMBINED FINANCIAL AND OTHER DATA The following table summarizes selected historical consolidated and combined financial and other data of the Company. Statement of operations data for each of the three years in the period ended December 31, 1995 have been derived from the audited consolidated and combined financial statements of the Company contained herein. Statement of operations data for the three month periods ended March 31, 1995 and 1996, respectively, and balance sheet data as of March 31, 1996 have been derived from the unaudited consolidated and combined financial statements of the Company contained herein. Statement of operations data for each of the two years in the period ended December 31, 1992 and other data are derived from unaudited information. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Unaudited Pro Forma Financial Information" and Consolidated and Combined Financial Statements of Metromail and notes thereto included elsewhere in this Prospectus. <TABLE> <CAPTION> THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ----------------------------------------------- ---------------- 1991 1992 1993 1994(1) 1995(1) 1995 1996 -------- -------- -------- -------- -------- ------- ------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Direct marketing sales................. $114,871 $120,364 $127,683 $156,806 $189,713 $38,860 $41,894 Reference sales........ 30,394 33,317 36,032 38,665 47,474 10,972 12,475 -------- -------- -------- -------- -------- ------- ------- Total net sales...... 145,265 153,681 163,715 195,471 237,187 49,832 54,369 Database and production costs...... 88,945 86,184 95,016 108,806 134,361 30,279 33,606 Amortization of goodwill.............. 6,054 6,054 6,054 6,608 7,446 1,790 1,889 Selling expenses....... 26,211 26,252 29,625 37,107 45,913 10,345 11,821 General and administrative expenses.............. 15,919 13,232 12,372 14,408 16,645 3,898 4,909 Provisions for doubtful accounts..... 1,584 1,798 1,959 1,848 2,180 425 419 -------- -------- -------- -------- -------- ------- ------- Earnings from operations.......... 6,552 20,161 18,689 26,694 30,642 3,095 1,725 Interest expense-- related party......... 22,898 21,337 22,112 18,999 21,329 4,968 5,345 Interest expense....... -- -- -- -- 80 -- 60 Other expense (income)--net......... (120) (57) (138) 24 (87) (10) (5) -------- -------- -------- -------- -------- ------- ------- Earnings (loss) before income taxes. (16,226) (1,119) (3,285) 7,671 9,320 (1,863) (3,675) Income taxes........... (4,069) 2,034 1,181 5,684 6,585 (130) (788) -------- -------- -------- -------- -------- ------- ------- Net income (loss) from operations before cumulative effect of accounting change.............. (12,157) (3,153) (4,466) 1,987 2,735 (1,733) (2,887) Cumulative after-tax effect of change in accounting for post retirement benefits other than pensions... -- -- 4,388 -- -- -- -- -------- -------- -------- -------- -------- ------- ------- Net income (loss).... $(12,157) $ (3,153) $ (8,854) $ 1,987 $ 2,735 $(1,733) $(2,887) ======== ======== ======== ======== ======== ======= ======= </TABLE> <TABLE> <CAPTION> AS OF MARCH 31, 1996 ----------------------- ACTUAL AS ADJUSTED(2) -------- -------------- (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Total assets.......................................... $375,678 $375,678 Total debt............................................ 253,290 34,222 Total shareholders' equity............................ 82,603 302,233 </TABLE> <TABLE> <CAPTION> THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, --------------------------------------- --------------- 1991 1992 1993 1994(1) 1995(1) 1995 1996 ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT WHERE NOTED) <S> <C> <C> <C> <C> <C> <C> <C> OTHER DATA (FOR OR AT END OF PERIODS): Capital expenditures... $ 7,699 $ 3,117 $13,426 $ 9,940 $28,459 $ 6,877 $ 7,860 Depreciation and amortization.......... 12,780 11,596 13,143 14,781 20,851 4,774 5,437 Computer processing capacity (in MIPS).... 112 123 185 280 396 280 396 Number of individuals in database........... 132,839 130,122 138,709 146,276 146,579 143,156 143,770 Number of households in database.............. 92,268 92,362 92,859 95,130 94,958 95,465 95,770 </TABLE> - -------- (1) In 1994, the Company purchased Customer Insight Company for approximately $20.0 million. In 1995, an affiliate of R.R. Donnelley acquired International Communication & Data Plc for approximately $15.3 million. See Notes 1 and 14 of Notes to Consolidated and Combined Financial Statements of Metromail. (2) Adjusted to give effect to the Offering being consummated and the assumed net proceeds of the Offering together with, to the extent necessary, borrowings under a bank credit facility to be entered into by the Company prior to consummation of the Offering being applied, as of March 31, 1996, to the repayment of the debt and advances due to R.R. Donnelley and its subsidiaries. See "Use of Proceeds." SUMMARY UNAUDITED PRO FORMA CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS The unaudited pro forma consolidated and combined statements of operations for the year ended December 31, 1995 and the three months ended March 31, 1996 set forth below illustrate: (i) the effects of the historical estimated results of operations (under the Company's accounting policies) of International Communication & Data Plc ("ICD") for the period from January 1, 1995 to April 30, 1995, the date on which ICD was acquired by an affiliate of the Company; (ii) the estimated net operating effects resulting from the Company being a public entity, which include pricing of certain services the Company will provide to and receive from R.R. Donnelley after the Offering under certain intercompany agreements, as well as other incremental public company expenses; and (iii) the Offering being consummated and the assumed net proceeds therefrom together with, to the extent necessary, borrowings under a bank credit facility to be entered into by the Company prior to consummation of the Offering being used to repay the debt and advances owed to R.R. Donnelley and its subsidiaries at January 1, 1995, resulting in (a) the elimination of interest expense associated with the debt and advances owed to R.R. Donnelley and its subsidiaries and (b) additional interest expense related to borrowings under such bank credit facility described in clause (a) and to finance operating and investing activities in 1995 and in the first three months of 1996. The pro forma adjustments are based on available information and upon certain assumptions the Company believes are reasonable. The pro forma statements of operations do not purport to represent what the Company's results of operations would actually have been or to project the Company's results of operations for any future period. <TABLE> <CAPTION> THREE MONTHS YEAR ENDED ENDED DECEMBER 31, 1995 MARCH 31, 1996 ------------------ ---------------- AS AS ACTUAL ADJUSTED(1) ACTUAL ADJUSTED(1) -------- -------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> Direct marketing sales.............. $189,713 $194,768 $41,894 $41,894 Reference sales..................... 47,474 47,474 12,475 12,475 -------- -------- ------- ------- Total net sales.................... 237,187 242,242 54,369 54,369 Database and production costs (2)... 134,361 135,197 33,606 33,431 Amortization of goodwill............ 7,446 7,571 1,889 1,889 Selling expenses (2)................ 45,913 47,407 11,821 11,946 General and administrative expenses (2)................................ 16,645 20,183 4,909 5,409 Provisions for doubtful accounts.... 2,180 2,281 419 419 -------- -------- ------- ------- Earnings (loss) from operations.... 30,642 29,603 1,725 1,275 Interest expense--related party..... 21,329 -- 5,345 -- Interest expense.................... 80 814 60 456 Other expense (income)--net......... (87) (87) (5) (5) -------- -------- ------- ------- Earnings (loss) before income taxes............................. 9,320 28,876 (3,675) 824 Income taxes........................ 6,585 14,485 (788) 1,030 -------- -------- ------- ------- Net income (loss).................. $ 2,735 $ 14,391 $(2,887) $ (205) ======== ======== ======= ======= Pro forma net income (loss) per share (3)......................... $ .70 $ (.01) ======== ======= </TABLE> - -------- (1) For a detailed description of the adjustments to these unaudited pro forma consolidated and combined statements of operations, see "Unaudited Pro Forma Financial Information."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000740622_microenerg_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000740622_microenerg_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary is qualified in its entirety by the more detailed information, financial statements and notes thereto appearing elsewhere in this Prospectus. All references herein to a number of shares of Common Stock have been adjusted to reflect the 1-for-360 reverse stock split of the Company's Common Stock on May 13, 1996. THE COMPANY MicroENERGY, Inc. ("MicroENERGY" or the "Company") has been engaged since 1984 in the business of designing and manufacturing high-frequency power supplies and DC-to-DC converters for original equipment manufacturers ("OEMs") who are engaged in the telecommunications, computer, and instrumentation segments of the electronics industry. Each of the Company's products is custom designed to meet the specific needs of a customer within a power output range of 25 watts to 2500 watts. During the Company's eleven years of operations, the Company has acquired a reputation in the marketplace for making timely deliveries of high-quality power supplies which incorporate state-of-the-art engineering. In recent years, however, the Company's growth has been stagnant, as the Company's ability to attract new customers has been hampered by the Company's high debt-to-assets ratio, which has caused some potential customers to question the Company's financial stability. Since a typical customer order anticipates deliveries over an extended period of time--often years--to meet the customer's manufacturing schedule, OEM customers avoid any supplier whose ability to deliver over the long term is in doubt. Thus, despite eleven years of timely deliveries, customer doubts about MicroENERGY's financial stability continue to hinder sales growth. During the second and third quarters of fiscal 1996, two events occurred which indicate that the Company may now enter a period of significant growth. First, the Company received pre-production orders for new product designs from eight OEM customers. While none of these orders create binding obligations on the customers, the Company expects to receive production orders from each. If all eight customers give the Company the production orders they have quoted, the eight new products will represent $10.2 Million in annual sales beginning in July, 1996. See "BUSINESS OF THE COMPANY--Marketing." The second favorable recent event was the agreement of AT&T Global Information Systems, which was the holder of $2.33 Million of the Company's long-term debt, to accept an immediate payment of $1.33 Million in satisfaction of the debt. The Company was able to effectuate that debt compromise by raising approximately $1.0 Million in debt financing and $330,000 in equity financing from the officers of the Company and the Selling Securityholders. In exchange for payment of these sums to AT&T, AT&T forgave the remaining $1 Million of the debt. See "CAPITALIZATION--Debt Compromise." The effect of the debt compromise and related financing was to reduce the Company's total debt by $1.34 Million, reduce the Company's debt-to-assets ratio from .88-to-1 as of December 31, 1995 to .68-to-1, and increase the Company's net worth by $1.3 Million, resulting in a positive shareholders equity for the first time in several years. The Company intends to use the net proceeds of this offering to finance the expansion of operations necessitated by the expected new orders and to repay some of its debt. See "USE OF PROCEEDS." Management believes that the financial improvements brought about by this offering and the anticipated sales it will finance will enable the Company to compete more effectively and facilitate a period of growth. CROSS-REFERENCE SHEET Pursuant to Item 501(b) Form S-1 Item Number and Heading Prospectus Heading - -------------------------------- ------------------ 1. Forepart of the Registration State- Front Cover of Prospec- ment and Outside Front Cover Page of tus Prospectus 2. Inside Front and Outside Back Cover Inside Front and Outside Pages of Prospectus Back Cover of Prospectus 3. Summary Information, Risk Factors, Prospectus Summary, Risk Ratio of Earnings to Fixed Charges Factors 4. Use of Proceeds Use of Proceeds 5. Determination of Offering Price Underwriting 6. Dilution Not Applicable 7. Selling Security Holders Selling Securityholders 8. Plan of Distribution Underwriting 9. Description of the Securities to be Description of the Registered Company's Securities 10. Interest of Named Experts and Counsel Legal Matters; Experts 11(a) Description of Business Business of the Company 11(b) Description of Property Business of the Company 11(c) Legal Proceedings Not Applicable 11(d) Market Price, Dividends Price Range of Common Stock, Dividends 11(e) Financial Statements Financial Statements 11(f) Selected Financial Data Selected Financial Infor- mation 11(g) Supplementary Financial Information Not Applicable 11(h) Management's Discussion Management's Discussion 11(i) Changes in and Disagreements With Accountants Not Applicable 11(j) Directors and Executive Officers Management 11(k) Executive Compensation Management 11(l) Security Ownership Principal Shareholders 11(m) Certain Relationships and Related Transactions Certain Transactions 12 Disclosure of Commission Position on Indemnification Underwriting The Company's executive offices are located at 350 Randy Road, Carol Stream, Illinois. Telephone: 708-653-5900. Capitalization............ Currently Outstanding: Common Stock: 415,143 shares; Series A Preferred Stock: 350,000 shares THE OFFERING BY THE COMPANY Securities Offered........ 494,500 shares of Series A Preferred Stock, $7.00 par value and 247,250 Class A Warrants. The Securities may be purchased separately and will be separately transferable immediately upon issuance. See "DESCRIPTION OF SECURITIES." Representative's Compensation............. I.A. Rabinowitz & Co. (the "Representative") will receive as compensation for its services in this offering a 10% discount on the purchase price of the Securities, a 3% non-accountable expense allowance and an option to purchase Securities equal to ten percent of the Securities sold in this offering. As part of the underwriting arrangements, the Company will enter into an agreement retaining the Representative as a financial consultant to the Company for a two-year period commencing as of the close of the sale of the securities offered hereby at an annual fee of $24,000, for a total of $48,000 payable in full at the closing of the Offering, and will pay an investment banking fee with respect to any transaction introduced and consummated, and a 4% warrant solicitation fee. See: "UNDERWRITING." PREFERRED STOCK Payment of Dividends...... Dividends are cumulative from the date of issue of shares of Preferred Stock and are payable semi- annually at a rate of 8% per annum. The Company may, at its sole discretion, pay each dividend either in cash or in shares of Common Stock valued at the average closing bid price for the ten days preceding the record date for the dividend or in a combination of cash and Common Stock. In addition, if the Company pays any dividend with respect to a share of its Common Stock, it will pay twice that amount as an additional dividend on each share of Preferred Stock. See "RISK FACTORS--Restrictions on Payment of Dividends." Tax Consequences of Dividends................ To the extent that Common Stock is distributed as dividends on the Preferred Stock, the amount distributed for federal income tax purposes (and consequently, subject to certain exceptions, the amount of dividend income) to the holder of the Preferred Stock would equal the fair market value of such Common Stock on the date of distribution and, accordingly, may be greater or less than the value of the dividend as calculated in the preceding section. See "RISK FACTORS--Income Tax Considerations--Distribution of Common Stock as Dividends" and "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS TO INVESTORS." Redemption................ The Preferred Stock is not redeemable. Conversion................ The Preferred Stock is not convertible into any other security. Liquidation Preference.... Upon any liquidation, before distribution is made to the holders of Common Stock, holders of the Preferred Stock will be entitled to receive $7.00 per share, plus accrued and unpaid dividends to the date of distribution. Holders of the Preferred Stock will then participate with the holders of the Common Stock in the Company's net assets on a 2-to- 1 basis, such that each share of Preferred Stock will receive twice as much of the net assets as each share of Common Stock. Voting.................... The holders of Preferred Stock will be entitled to one vote per share at any meeting of the Company's shareholders. WARRANTS Terms of Class A Warrants................. Each Class A Warrant entitles the holder to purchase one share of the Company's Series A Preferred Stock at a price of $7.00, subject to adjustment, during the three year period beginning one year after the date of this Prospectus. After , 1997, the Class A Warrants are subject to redemption by the Company at any time during the exercise period on not less than 30 days' notice at $.01 per Warrant provided the average closing price of the Preferred Stock exceeds $9.00 per share for 5 consecutive trading days ending within 15 days prior to the notice. Proposed NASDAQ SmallCap Preferred Stock--MICRP; Class A Warrants--MICRW Market Symbols: Risk Factors.............. The securities are subject to a high degree of risk. See: "RISK FACTORS." SELECTED FINANCIAL INFORMATION <TABLE> <CAPTION> NINE MONTHS ENDED MARCH 31 ----------------------- 1996 1995 ----------- ----------- <S> <C> <C> INCOME DATA: Revenues.............................................. $10,718,611 $10,996,535 Operating Income...................................... 392,630 395,125 Net Income............................................ 1,151,869 146,170 Net Income Per Share.................................. $ 3.29 $ .46 </TABLE> <TABLE> <CAPTION> YEARS ENDED JUNE 30 ----------------------------------- 1995 1994 1993 ----------- ----------- ----------- <S> <C> <C> <C> INCOME DATA: Revenues.................................. $14,588,844 $12,771,067 $15,886,279 Operating Income.......................... 581,685 426,419 433,280 Net Income................................ 249,894 204,845 40,806 Net Income Per Share...................... $ .79 $ .65 $ .14 </TABLE> <TABLE> <CAPTION> AS ADJUSTED TO REFLECT: ----------------------------------- --- AT MAR. 31, 1996(1) PUBLIC OFFERING ------------------- --------------- <S> <C> <C> BALANCE SHEET DATA: Working Capital/(Deficit) ........... $ (623,869)(2) $ 2,213,733(2) Total Assets......................... 7,243,714 10,081,316 Long-Term Debt, Net.................. 969,514 969,514 Stockholders Equity.................. 543,389 3,380,991 </TABLE> - -------- (1) Reflects the effect of $1 Million reduction in debt to AT&T and related financing transactions from January through March of 1996. See "CAPITALIZATION--Debt Compromise."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000742246_matewan_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000742246_matewan_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is not intended to be complete and is qualified in its entirety by the more detailed information and the consolidated financial statements and the related notes thereto appearing elsewhere in this Prospectus. All per share data of Matewan included in this Prospectus have been restated to reflect a 300% stock dividend paid in May 1993, a 300% stock dividend paid in May 1994 and a 10% stock dividend paid by Matewan in June 1995. Unless otherwise specified in this Prospectus, the term "Offering" as used herein refers to the Company's Offering of 600,000 shares of Convertible Preferred Stock at $25.00 per share, and does not include the exercise of the Underwriter's over-allotment option. MATEWAN BANCSHARES, INC. Matewan, a bank holding company headquartered in Williamson, West Virginia, provides through the Bank, organized in 1913, and the Thrift, organized in 1994, a broad range of financial services. Matewan has 13 offices located in southwestern West Virginia and eastern Kentucky. At September 30, 1995, Matewan had total assets of $389.5 million, total deposits of $324.0 million and total shareholders' equity of $44.5 million. Matewan ranked third in its Market based on total deposits. Matewan's strategy is to become the leading provider of financial services in its Market by offering customers innovative products through convenient delivery systems and a well-trained, sales-oriented work force. Management believes that effective employment of technology in providing financial services, coupled with a commitment to customer service, affords Matewan with a distinct competitive advantage in its Market. In implementing its strategy, management emphasizes the following: . Technology to enhance products and delivery systems. The Company uses sophisticated technology to enhance its delivery systems. Matewan offers its retail customers 24-hour banking by touch-tone phone by means of an interactive voice response system, and in 1996, Matewan will offer its retail customers the ability to access account information, transfer funds and pay certain bills via personal computer. The Company currently utilizes personal computer technology to enable its commercial customers to access cash management services via interlinks with Matewan's mainframe system. The Company also maintains an integrated PC-based server network system that provides immediate interaction among all operating functions of the Banking Subsidiaries, thereby enhancing internal communication and customer service. In addition, the Company's sophisticated credit rating and pricing models enable the Banking Subsidiaries to price their loan products to reflect credit risk more accurately. . Customer service and convenience. Through extended lobby and drive-up hours, Saturday and Sunday banking hours and alternative delivery systems, Matewan offers convenient service to customers. Because the Banking Subsidiaries have integrated consumer platforms, customers of Matewan can obtain full banking services at any branch office. All but one of the 13 branch offices of the Company are open on Saturdays, and its two supermarket branches are open 363 days a year. No other bank in its Market offers comparable extended service hours. . Dedicated, sales-oriented work force. Matewan has historically devoted significant resources to training its work force and instilling a sales- oriented culture to promote customer service and market penetration. In addition to extensive orientation and training of new employees with an emphasis on the individual's job assignment, the Company also provides regular continuing education and training to all employees. To further promote customer service, the Company emphasizes performance-based compensation, as an increasing percentage of employees have their total compensation, and all employees have at least a portion of their compensation, based on incentive programs. The Company's strategy has enabled it to enjoy a compound annual asset growth rate of 16.9% over the last decade, with assets increasing from $72.8 million on December 31, 1984, to $389.5 million at September 30, 1995. The Company's utilization of technology and commitment to cost control has resulted in an average efficiency ratio of 54.20% for the five years ended December 31, 1994. The Company's returns on average assets were 1.40% and 1.28% (annualized) for the year ended December 31, 1994, and the nine months ended September 30, 1995, respectively. PENDING ACQUISITION Matewan has entered into a stock purchase agreement (the "Purchase Agreement") with Banc One, providing for Matewan's purchase of 100% of the outstanding capital stock of Pikeville, a national bank subsidiary of Banc One, for $28.6 million in cash (the "Acquisition"). Following the Acquisition, Matewan will operate Pikeville as a separate subsidiary under the name "Matewan National Bank/Kentucky." At September 30, 1995, Pikeville had total assets of $221.0 million, total deposits of $181.5 million and total shareholder's equity of $19.4 million. The proceeds of the Offering will be used to fund approximately one-half of the $28.6 million purchase price of the Acquisition. Consummation of the Acquisition is not a condition to closing of the Offering. In the event that the Acquisition is not consummated, Matewan will use the net proceeds from the Offering for general corporate purposes. See "Use of Proceeds." REASONS FOR THE ACQUISITION The following summarizes the major reasons for the Acquisition and the benefits Matewan expects will accrue to its operations from the Acquisition: . Appeal of Pikeville Market. Management views Pikeville and Pike County, Kentucky as the most attractive segments in Matewan's Market. Pikeville, Kentucky is a regional hub of economic activity and provides the area with financial, medical, legal and retail services. Pike County has the largest population of any county in its Market. . Increased Market Share. Following the Acquisition, Matewan will increase its market share of deposits from fourth to second in Pike County and from third to first in its Market. Management believes that economic growth in its Market will continue to provide a favorable climate in which to conduct Matewan's business. . Increased Operating Efficiencies. After the Acquisition, Matewan will be able to realize operating efficiencies by consolidating certain branches, combining data processing operations and leveraging the capabilities of its existing back-office support functions. Management estimates that, within one year following the Acquisition, it can realize expense savings of $1.2 million, or 15% of Pikeville's 1994 non- interest expense, which will reduce Pikeville's efficiency ratio to levels approximating Matewan's. See "Risk Factors--Integration of Pikeville" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Anticipated Operating Effect of Acquisition on Matewan." . Revenue Enhancement Opportunities. Pikeville's profitability levels are below those being realized by Matewan. The Acquisition will provide Matewan with increased revenue enhancement opportunities through expanded customer service and convenience for Pikeville's customer base. Matewan will extend its existing alternative delivery systems and extended banking hours to Pikeville's operations. The Acquisition will also permit Matewan to apply its existing training programs to Pikeville's work force to develop a sales-oriented culture to promote customer service and further Pikeville's market penetration. For a discussion of the potential risks to Matewan inherent in the Acquisition, see "Risk Factors--Negative Effect of Acquisition on Regulatory Capital" and "--Integration of Pikeville."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000745597_interlink_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000745597_interlink_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..371e189ee8e5f7094a1422805fa545791d0b8dee
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+PROSPECTUS SUMMARY This Prospectus contains certain statements of a forward-looking nature relating to future events or the future financial performance of the Company. Prospective investors are cautioned that such statements are only predictions and that actual events or results may differ materially. In evaluating such statements, prospective investors should specifically consider the various factors identified in this Prospectus, including the matters set forth under the caption "Risk Factors," which would cause actual results to differ materially from those indicated by such forward-looking statements. The following summary is qualified in its entirety by the more detailed information and financial statements, including notes thereto, appearing elsewhere in this Prospectus. Certain terms used in this Prospectus are defined in the Glossary beginning on page 61. THE COMPANY Interlink Computer Sciences, Inc. ("Interlink" or the "Company") is a supplier of high-performance solutions for enterprise networked systems management. Interlink provides software and services which enable customers to use their IBM and IBM-compatible MVS mainframes as "enterprise servers" in distributed, heterogeneous client/server network environments. The Company's products and services enable customers to transport, access and manage mission- critical data and applications across distributed network environments. The Company develops and markets network transport products which provide for enterprise server TCP/IP connectivity, fault tolerance and network file transfer. Interlink also develops and markets systems management applications for network backup, archive and restore, distribution of applications, data and software, network printing and other tools which expand the functionality of the enterprise server. Many large organizations depend on centralized mainframe computer systems to manage mission-critical software applications and to serve as the repository for essential business data. Recently, advances in hardware, software and networking technologies have led to the deployment of client/server systems, in which computing tasks are distributed throughout a network of computers. Organizations are now seeking the technology to integrate mainframe computers into client/server networks as "enterprise servers" which, like other servers on the client/server network, have a specialized purpose and function. Specifically, the enterprise server and the systems management applications associated with its use are capable of providing reliable and efficient systems management, data security, and distribution of data and applications. Improvements in the cost-effectiveness of mainframe systems have significantly increased the use of mainframe computers as enterprise servers. With almost ten years of experience in the enterprise networked systems management industry, Interlink provides networking solutions that build upon its expertise in the integration of the MVS operating system with TCP/IP and its reputation for high-performance, efficient products. Interlink's objective is to become the leading supplier of high-performance solutions for enterprise networked systems management. Key elements of the Company's strategy include: supplying a suite of products that expand the functionality of the enterprise server; capitalizing on new sales and cross-selling opportunities resulting from its recent acquisition; employing a consultative sales approach to build long-term customer relationships; differentiating its networking solutions through superior customer support; and leveraging strategic marketing and development relationships in order to provide complete solutions to its customers' evolving network systems management needs. As of June 30, 1996, the Company had approximately 1,200 customers worldwide. The Company markets and sells its software and services primarily through its direct sales organization in North America and Europe and, to a lesser extent, through resellers and international distributors. The Company's major customers include, among others, the Internal Revenue Service, MACIF, U.S. Sprint, W.R. Grace & Co. and Wells Fargo Bank. The Company recently formed a strategic relationship with Legato Systems, Inc. ("Legato") to develop products which will enable the companies to provide enterprise-class storage management solutions. Pursuant to the terms of the agreement, Interlink intends to develop a new product called HARBOR Agent for Networker (Legato's client/server storage management product) which will be distributed by Legato. Interlink will be an authorized reseller of Legato's storage management products, including HARBOR Agent for Networker. On December 29, 1995, the Company acquired New Era Systems Services Ltd. ("New Era") and its HARBOR systems management product line in exchange for cash and notes payable totaling $12.4 million and warrants to purchase 350,000 shares of its Common Stock with additional contingent earnout payments totaling up to $5.2 million due January 31, 1997 and 1998. Prior to the acquisition, the Company distributed the HARBOR products in certain countries in Europe for more than one year. Interlink was incorporated under the laws of the state of California in December 1985. The Company will reincorporate in Delaware prior to the completion of this offering. Unless the context otherwise requires, references in this Prospectus to "Interlink" and the "Company" refer to Interlink Computer Sciences, Inc., a California corporation, and its Delaware successor, together with their subsidiaries. The Company's principal executive offices are located at 47370 Fremont Boulevard, Fremont, California 94538, and its telephone number is (510) 657-9800. THE OFFERING <TABLE> <C> <S> Common Stock Offered by the Company............. 2,000,000 shares Common Stock Outstanding after the Offering..... 5,811,231 shares (1) Use of Proceeds................................. For repayment of indebtedness, capital expenditures, working capital and other general corporate purposes. Nasdaq National Market symbol................... INLK </TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> PRO FORMA FOR YEAR ENDED JUNE 30, ACQUISITION (2) ---------------------------------------- --------------- YEAR ENDED 1992 1993 1994 1995 1996 JUNE 30, 1996 ------- ------- ------- ------- ------- --------------- <S> <C> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Revenues............... $23,326 $21,185 $21,875 $27,079 $34,002 $36,491 Gross profit........... 16,995 17,119 18,065 20,470 25,995 28,197 Purchased research and development and prod- uct amortization...... -- -- -- -- 10,479 642 Operating income (loss)................ (4,935) 2,167 844 104 (6,995) 3,757 Net income (loss)...... (5,864) 2,902 1,667 1,647 (7,616) 2,765 ======= ======= ======= ======= ======= ======= Net income (loss) per share (3)............. $ (5.47) $ 1.17 $ 0.44 $ 0.34 $ (2.44) $ 0.56 ======= ======= ======= ======= ======= ======= Shares used in per share calculation (3). 1,073 2,474 3,808 4,814 3,127 4,954 ======= ======= ======= ======= ======= ======= </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 --------------------- AS ACTUAL ADJUSTED (4) ------- ------------ <S> <C> <C> BALANCE SHEET DATA: Working capital (deficit)................................ $(6,371) $14,019 Total assets............................................. 25,925 41,315 Long-term debt, less current portion..................... 2,892 2,892 Total stockholders' equity (deficit)..................... (4,585) 15,805 </TABLE> - ------- (1) Represents shares outstanding as of June 30, 1996. Reflects the issuance of 98,320 shares of Common Stock immediately subsequent to the offering upon the net exercise of certain outstanding warrants and excludes as of June 30, 1996: (i) options outstanding to purchase up to 1,018,503 shares of Common Stock at a weighted average exercise price of $1.82 per share under the Company's 1992 Stock Option Plan; (ii) 468,750 shares of Common Stock issuable upon exercise of warrants outstanding at a weighted average exercise price of $3.23 per share; and (iii) 870,463 shares of Common Stock reserved for issuance under the Company's 1992 Stock Option Plan. See "Management--Stock Plans," "Description of Capital Stock" and Note 7 of Notes to Consolidated Financial Statements. Also excludes 350,000 shares reserved prior to June 30, 1996 and an additional 300,000 shares reserved subsequent to June 30, 1996 for issuance under the 1992 Stock Option Plan, the 1996 Director Option Plan and the 1996 Employee Stock Purchase Plan. (2) Pro forma to give effect to the Company's acquisition of New Era Systems Services Ltd. in December 1995 as if such acquisition had taken place as of July 1, 1995. See Notes 1 and 2 of Notes to Unaudited Pro Forma Combined Condensed Consolidated Financial Statements. (3) See Note 1 of Notes to Consolidated Financial Statements for a discussion of the computation of net income (loss) per share. (4) Adjusted to reflect the sale of the 2,000,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $11.50 per share, and after deducting underwriting discounts and commissions and the estimated expenses of the offering, and the anticipated application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization." -------------- Enterprise Print Services, SNS and the Interlink logo are registered trademarks of the Company and TCPaccess, TCPaccess Fault Tolerant, Interlink 3762 Network Controller, SNS/NFS, SNS/TCPaccess, Interlink 3700 Series Network Controller, CICS Programmers Toolkit, HARBOR and the HARBOR logo are trademarks of the Company. This Prospectus also contains trademarks and tradenames of other companies. -------------- Except as otherwise indicated, all information contained in this Prospectus (i) assumes that the Underwriters' over-allotment option is not exercised, (ii) reflects an increase in the authorized shares of Common Stock to 25,000,000 shares which will occur prior to this offering, (iii) reflects the one-for-two reverse stock split of the Company's capital stock which will occur prior to this offering, (iv) gives effect to the reincorporation of the Company from California to Delaware which will occur prior to this offering, (v) reflects the conversion of all outstanding shares of Preferred Stock into 1,229,714 shares of Common Stock, which will occur automatically upon the closing of this offering, (vi) reflects the filing, upon the closing of this offering, of the Company's Restated Certificate of Incorporation authorizing 5,000,000 shares of undesignated Preferred Stock, and (vii) reflects the issuance of 98,320 shares upon the net exercise of outstanding warrants, including the reduction of an outstanding warrant to purchase 75,000 shares to 62,500 shares, which will both occur upon the closing of this offering. See "Description of Capital Stock,"
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000751968_galoob_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000751968_galoob_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..11dac6cdf3343fb8f0b3df6efd2f653b68f42193
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to, and should be read in conjunction with, the more detailed information (including the consolidated financial statements and the notes thereto) appearing elsewhere in this Prospectus. Each prospective investor is urged to read this Prospectus in its entirety and should carefully consider the matters set forth in 'Risk Factors.' Except for the historical information contained herein, the discussion in this Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section entitled 'Risk Factors' and elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. See 'Underwriting.' THE COMPANY Founded in 1957, the Company is a leading international toy company that designs, develops, markets and sells a variety of high-quality toy products in an expanding number of product categories. The Company believes it is a leading innovator in the toy industry as evidenced by: its award-winning Sky Dancers, the world's first flying doll, introduced in late 1994; its Double Takes line of Micro Machines transforming playsets, introduced in 1995; its line of Star Wars Action Fleet toys representing a new scale in the male action category; and Dragon Flyz, the world's first fully articulated flying male action figure. The Company's Micro Machines line, introduced in 1987, is the most comprehensive line of miniature scale play for boys in the United States, embracing traditional vehicle, military and male action play patterns. The Company's Sky Dancers line has been the number-one selling mini-doll in the United States in 1995 and 1996, and Dragon Flyz became the second best selling male action assortment in the United States within weeks of its national introduction in June. The Company's 1996 product offerings consist of six product lines: Micro Machines, Star Wars Action Fleet, Dragon Flyz, Jonny Quest, Sky Dancers, and Pound Puppies. In addition to extensions of these product lines, the Company's 1997 product offerings are expected to include new product lines based on three entertainment properties: Men In Black, a new science fiction adventure comedy film scheduled to be released by Sony in the summer of 1997; Starship Troopers, a new science fiction adventure film scheduled to be released by Sony in the summer of 1997; and Anastasia, a new animated film scheduled to be released by Fox in the fall of 1997. In connection with the scheduled re-release of the Star Wars movie trilogy in early 1997, the Company plans to introduce new Star Wars Micro Machines and Action Fleet toys. In addition, the Company intends to aggressively pursue licensing rights in connection with the release of the new Star Wars movie trilogy scheduled to start in 1999. The Company's products are sold in more than 50 countries worldwide. These products are principally sold direct to retailers in the United States and to toy distributors outside of the United States. Since 1993, the Company's revenues have grown approximately 64% from approximately $134 million in 1993 to approximately $220 million in 1995. In 1995, approximately one-third of the Company's revenues were derived from international sales which have increased by approximately 77% since 1993. Although the Company's sales have increased significantly since 1993, its market share in 1995 was only approximately one percent of the total $13.4 billion U.S. wholesale toy shipments and, therefore, management believes there is substantial opportunity for continued growth. The recent consolidations among both toy companies and toy retailers have also provided increased growth opportunities for the Company. The Company believes that the consolidation of the industry into a smaller group of larger toy companies combined with the Company's proven success in developing and marketing licensed products make the Company a relatively more attractive licensee to toy inventors and other licensors. In addition, as a result of industry concentration, the Company has become a relatively more attractive supplier to retailers that do not wish to be dependent on a few dominant toy companies. Toy retailer concentration has also been advantageous to the Company as it has reduced the need to support a large, expensive sales and distribution organization to service numerous small customers. This also enables the Company to ship product, manage account relationships and track retail sales as effectively as much larger competitors. These industry trends and developments, combined with the successful implementation of the Company's growth strategy, lead the Company to believe that it is well positioned for future growth. The key elements of the Company's growth strategy are as follows: o Build The Company's Core Brand--Micro Machines. The Company seeks to continue expanding its Micro Machines brand as the most comprehensive universe of miniature scale play for boys. The Company intends to accomplish this by extending Micro Machines into additional play patterns, such as the Micro Machines Exploration line for 1997, and to continue acquiring and exploiting new entertainment licenses to keep Micro Machines at the leading edge of boys' play. o Enter New Product Categories. The Company has entered and intends to continue to enter into new toy categories. Entering 1993, the Company competed primarily in only one category of the toy industry (excluding video games)--miniature vehicles, which generated approximately $240 million of total U.S. wholesale toy shipments in that year. Currently, the Company competes in four categories that generated approximately $2.1 billion of the total U.S. wholesale toy shipments in 1995. The Company considers entering new categories which have the following characteristics: (i) low barriers to entry such that there is no dominant competitor; and (ii) potential to create product lines that can become multi-year brands based upon collectibility and thematic extendability. o Expand Profit Margins On Rising Sales. A key goal of the Company is to expand profit margins while continuing to increase sales, thereby increasing the rate of profit growth faster than the rate of sales growth. The Company seeks to increase profit margins by: (i) increasing gross margins; (ii) achieving economies of scale on increasing sales volume, thereby reducing operating expenses as a percentage of sales; and (iii) leveraging its investments in product development, tooling and marketing over the longer life spans of its multi-year brands. o Develop Strategic Alliances With Major Content Providers. Over the past three years, the Company has developed important relationships with four major entertainment companies, Lucasfilm, Fox, Sony and Turner, which have licensed to the Company the rights to make toys based on certain of their properties. The Company intends to continue to aggressively pursue opportunities to expand its relationships with these entertainment companies and to form additional alliances with other entertainment companies in order to assure access to a continuous flow of quality entertainment properties that have potential to generate successful toy product lines. o Leverage International Distribution Networks. The Company believes it has developed a strong network of distributors in its key markets outside the United States and through such network has the ability to increase its international sales. While Europe has traditionally accounted for the highest percentage of the Company's international sales, the Company continues to build its worldwide distribution network and sees the potential for growth in new markets such as Mexico and Latin America, the Pacific Rim and the Middle East. The Company, which commenced operations in 1957, was incorporated under the laws of the State of California in 1968. The Company was reincorporated in the State of Delaware in 1987 and recently changed its name to Galoob Toys, Inc. The Company's principal executive offices are located at 500 Forbes Boulevard, South San Francisco, California 94080 and its telephone number is (415) 952-1678. THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Company.......................... 2,000,000 Common Stock Offered by the Selling Stockholder...................... 392,866 shares Common Stock to be Outstanding after the Offering(1)............ 17,544,435 shares NYSE Symbol for the Common Stock... GAL Use of Proceeds to the Company..... To repay indebtedness under its short-term credit facility and the mortgage on the Company's headquarters building and to provide funds necessary to support acquisition of license rights and working capital requirements for future toy products, properties and businesses. </TABLE> - ------------------ (1) Excludes (i) 1,506,250 shares of Common Stock reserved for issuance upon exercise of stock options outstanding at October 31, 1996 and (ii) 75,000 shares of Common Stock reserved for issuance upon exercise of warrants outstanding at October 31, 1996. See 'Capitalization,' 'Management' and 'Description of Capital Stock.' SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The information set forth below should be read in conjunction with 'Selected Consolidated Financial Data,' 'Management's Discussion and Analysis of Financial Condition and Results of Operations' and the Company's consolidated financial statements and related notes thereto included elsewhere in this Prospectus. <TABLE> <CAPTION> NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, -------------------------------- -------------------- 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Net revenues............................ $134,334 $178,792 $220,044 $137,078 $175,270 Gross margin............................ 59,187 83,636 99,210 53,977 82,229 Earnings (loss) from operations......... (9,215) 9,322 12,989 723 9,407 Net proceeds from Nintendo award........ -- 12,124 -- -- -- Interest expense........................ (1,836) (2,609) (3,429) (2,357) (2,665) Earnings (loss) before income taxes..... (10,915) 19,202 9,999 (1,421) 6,927 Net earnings (loss)..................... (10,924) 18,424 9,399 (1,421) 5,541 Preferred stock dividends............... 3,127 3,127 3,127 2,345 21 Charge related to exchange of preferred stock for common...................... -- -- -- -- 24,279 Net earnings (loss) applicable to common shares................................ $(14,051) $ 15,297 $ 6,272 $ (3,766) $(18,759) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Common shares and common share equivalents outstanding-- average..... 9,548 10,111 10,451 10,068 13,565 Net earnings (loss) per common share(1): Primary............................... $ (1.47) $ 1.51 $ 0.60 $ (0.37) $ (1.38) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Fully diluted......................... $ (1.47) $ 1.41 $ 0.60 $ (0.37) $ (1.38) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- </TABLE> <TABLE> <CAPTION> DECEMBER 31, SEPTEMBER 30, 1996 --------------- ----------------------------- 1995 ACTUAL AS ADJUSTED(2) --------------- ----------- -------------- <S> <C> <C> <C> BALANCE SHEET DATA: Working capital.......... $ 54,670 $ 56,450 $107,616 Total assets............. 120,084 164,955 167,812 Short-term debt.......... 19,493 48,309 -- Long-term debt........... 14,000 -- -- Shareholders' equity..... 54,172 72,608 123,774 </TABLE> - ------------------ (1) For a discussion of the impact on net earnings of certain unusual, non-recurring items, see 'Management's Discussion and Analysis of Financial Condition and Results of Operations.' (2) Adjusted to reflect the sale of 2,000,000 shares of Common Stock offered by the Company in this offering based on an assumed offering price of $26 5/8 per share, the last reported sale price of the Common Stock on November 7, 1996 (after deducting the underwriting discounts and estimated offering expenses payable by the Company), the proceeds from the exercise of warrants by the Selling Stockholder and the anticipated application of the estimated net proceeds therefrom. See 'Use of Proceeds' and 'Capitalization.'
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000753081_raster_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000753081_raster_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. THE COMPANY Raster Graphics, Inc. ("Raster Graphics" or the "Company") develops, manufactures and markets high-performance, large format color printing systems and sells related consumables for the on-demand, large format digital printing ("LFDP") market. The LFDP market consists of color print jobs with run lengths ranging from one to 200 copies and output sizes of 20-inches by 30-inches or larger. Applications include point of purchase ("POP") signs, trade show exhibit graphics, banners, billboards, courtroom graphics and backlit signage. The primary users of the Company's products are color photo labs, reprographic houses, graphic arts service bureaus, exhibit builders, digital color printers, screen printers and in-house print shops. The Company's Digital Color Station ("DCS") printing system, consisting of the DCS Printer and PosterShop system software, allows users to print short runs of high quality color graphics on demand at substantial time and cost savings relative to traditional printing methods. According to IT Strategies, the LFDP printers and consumables market is projected to grow from annual sales of approximately $319 million in 1995 to approximately $1.9 billion in 1998. The rapid growth in this market is being driven primarily by the increasing desire and need for customized, large format color graphics, as well as significant advances in short-run printing and desktop publishing technologies. Traditional graphics printing methods, consisting of photographic, screen and offset printing, do not meet the requirements for production short-run print jobs due to the time consuming, multi-step processes and set up costs involved. As a result, digital printing was developed to fulfill the unmet demand of short-run users by allowing graphics to be printed directly from desktop publishing systems to paper. Raster Graphics offers a complete printing solution, consisting of its DCS printers, integrated image processing software and related consumables, to meet the performance, cost, versatility and quality demands of the on-demand production LFDP market. With a production printing speed of 600 to 1,000 square feet per hour, the DCS printing system can produce 50 to 60, full-color, 36- by 48-inch posters in one hour, which the Company believes is significantly faster than comparable digital printers. DCS printing systems are more cost-effective for short-run print jobs in comparison to traditional methods which have high set-up and labor costs. Using digital printing technology, DCS systems allow content to be customized on a print-by-print basis. DCS printing systems also offer two printing resolution modes, which allow the user to adjust the quality level depending on the application. The Company also markets a line of consumables, including specialized inks and print media, which the Company believes will continue to generate increasing recurring revenues to the extent that the installed base of DCS printing systems expands. Raster Graphics' objective is to build on its position as a market leader in sales of digital printing systems and related consumables and services, for the on-demand production LFDP market. In August 1995, as part of the Company's strategy to provide a complete system solution, the Company acquired Onyx Graphics Corporation ("Onyx"), a leading developer of image processing software. In addition to being used in the Company's DCS printers, Onyx's image processing software is available for printers manufactured by other companies. The Company was established in 1987 initially to develop low-cost electrostatic printers for computer aided design ("CAD") applications. In 1993, the Company identified the on-demand production LFDP market as a new opportunity to develop a product based on its proprietary high-speed print head technology. The Company introduced its initial DCS printer, the DCS 5400 in July 1994 and introduced its second generation product, the DCS 5442 in January 1996. The Company currently sells DCS products to a wide range of customers both domestically through direct and independent sales forces, original equipment manufacturers ("OEMs") and value-added resellers ("VARs") and internationally through distributors, OEMs and VARs. Raster Graphics has received five highly acclaimed industry awards for its contribution to digital printing technology, including Digital Printing and Imaging Association's 1994 Product of the Year; Top 10 New Repro Products for 1994 by Modern Reprographics; Hot Product for 1994 by Electronic Publishing; 1994 Editor's Choice from Computer Graphics World; and 1994 Industry Excellence Award by IEEE Computer Graphics and Applications. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. The Raster Graphics logo, ColorStation(R) and PrimaScript(R) are registered trademarks of the Company. PosterShop(TM) and DuraPrint(TM) are trademarks of the Company. This Prospectus also contains the trademarks of other companies. THE OFFERING <TABLE> <S> <C> COMMON STOCK OFFERED BY THE COMPANY.............. 2,000,000 shares(1) COMMON STOCK OFFERED BY THE SELLING STOCKHOLDERS................................... 1,000,000 shares COMMON STOCK TO BE OUTSTANDING AFTER THE OFFERING....................................... 8,341,350 shares(2) USE OF PROCEEDS.................................. General corporate purposes including working capital, capital expenditures, research and development and potential acquisitions of businesses and technologies. See "Use of Proceeds." NASDAQ NATIONAL MARKET SYMBOL.................... RGFX </TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> YEARS ENDED SIX MONTHS ENDED ---------------------------------------------------- ------------------- DEC. 27, DEC. 25, DEC. 31, DEC. 30, DEC. 31, JUNE 30, JUNE 30, 1991 1992 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Net revenues.................. $ 7,770 $ 8,525 $ 14,719 $ 13,235 $ 26,045 $ 11,652 $ 18,151 Gross profit.................. 1,659 2,410 4,777 3,531 9,447 3,951 7,165 Operating income (loss)....... (1,919) (1,725) 106 (2,229) 111 550 1,322 Net income (loss)............. $ (1,963) $ (2,061) $ 41 $ (2,128) $ 77 $ 275 $ 1,201 Net income (loss) per share(3)................... $ 0.01 $ 0.04 $ 0.16 Shares used in per share calculation................ 7,187 7,095 7,412 </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 ------------------------ ACTUAL AS ADJUSTED(4) ------- -------------- <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents........................................... $ 1,775 $ 19,525 Total assets........................................................ 16,052 33,802 Long-term debt...................................................... 318 318 Total stockholders' equity.......................................... 7,942 25,692 </TABLE> - --------------- (1) Excludes up to 450,000 shares of Common Stock that may be sold by the Company pursuant to the Underwriters' over-allotment option. See "Underwriting." (2) Excludes 167,789 shares of Common Stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $2.18 per share and 1,355,652 shares of Common Stock issuable upon exercise of outstanding options at a weighted average exercise price of $2.33 per share at June 30, 1996. See "Management--Stock Options and Incentive Plans and note 7 of Notes to Consolidated Financial Statements." (3) See note 1 of Notes to Consolidated Financial Statements for an explanation of the determination of shares used in computing net income (loss) per share. (4) Adjusted to reflect the sale of shares of Common Stock offered hereby at an assumed initial public offering price of $10.00 per share and the receipt of the estimated proceeds therefrom. See "Use of Proceeds" and "Capitalization." ------------------------------------ Except as otherwise noted, all information in this Prospectus (i) assumes a 1-for-5 reverse stock split of the Common Stock and Preferred Stock to be effective prior to this offering, (ii) assumes the conversion of all outstanding shares of Preferred Stock into Common Stock upon the closing of this offering, (iii) reflects the reincorporation of the Company from California to Delaware prior to the closing of the offering and (iv) assumes no exercise of the Underwriters' over-allotment option. See "Description of Capital Stock" and "Underwriting."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000758722_paracelsus_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000758722_paracelsus_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..734089ea1de08df3fc15de84bf96bf7f2003636d
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY INFORMATION IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS AND THE DOCUMENTS REFERRED TO HEREIN. UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES HEREIN TO "PARACELSUS" REFER TO PARACELSUS HEALTHCARE CORPORATION PRIOR TO THE MERGER OF CHAMPION HEALTHCARE CORPORATION ("CHAMPION") WITH AND INTO A WHOLLY OWNED SUBSIDIARY OF PARACELSUS (THE "MERGER"). REFERENCES TO THE "COMPANY" REFER TO PARACELSUS AFTER THE MERGER AND INCLUDE THE COMBINED OPERATIONS OF PARACELSUS AND CHAMPION. IN ADDITION, ALL REFERENCES TO PROCEEDS FROM THE NOTES OFFERING OR THE OFFERINGS (EACH AS DEFINED BELOW) AND, EXCEPT AS OTHERWISE PROVIDED, THE OTHER INFORMATION IN THIS PROSPECTUS ASSUME (I) NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION WITH RESPECT TO SHARES OF COMMON STOCK BEING OFFERED BY THE COMPANY AND (II) THE PURCHASE OF $75.0 MILLION PRINCIPAL AMOUNT OF PARACELSUS' 9 7/8% SENIOR SUBORDINATED NOTES DUE 2003 (THE "EXISTING SENIOR SUBORDINATED NOTES") IN THE DEBT TENDER OFFER (AS DEFINED BELOW). CERTAIN STATEMENTS UNDER THIS CAPTION "PROSPECTUS SUMMARY" CONSTITUTE "FORWARD-LOOKING STATEMENTS" UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT (THE "REFORM ACT"). SEE "RISK FACTORS -- FORWARD-LOOKING STATEMENTS." THE COMPANY Paracelsus is a leading healthcare company that owns and operates acute care and specialty hospitals and related healthcare businesses serving selected markets in the United States. Paracelsus currently owns and operates 18 acute care hospitals with a total of 1,685 licensed beds in California, Utah, Tennessee, Texas, Florida, Georgia and Mississippi. Paracelsus' acute care hospitals provide a broad array of general medical and surgical services on an inpatient, outpatient and emergency basis. In addition, certain hospitals and their related facilities offer rehabilitative medicine, substance abuse treatment, psychiatric care and Acquired Immune Deficiency Syndrome ("AIDS") care. In California, Paracelsus also owns and operates three psychiatric hospitals with 218 licensed beds, four skilled nursing facilities with 232 licensed beds and a 60-bed rehabilitative hospital. In addition, Paracelsus owns and operates 11 home health agencies and 16 medical office buildings adjacent to certain of its hospitals. For the 12 months ended March 31, 1996 on a pro forma basis after giving effect to acquisitions and dispositions, Paracelsus would have had total operating revenues of $516.9 million, Adjusted EBITDA (as defined below) of $55.8 million and a net loss of $3.1 million. The net loss includes an unusual charge recorded in March 1996 of $22.4 million related to the settlement of two lawsuits ($13.2 million, net of income tax benefit). On April 12, 1996, Paracelsus entered into an Agreement and Plan of Merger, as amended and restated on May 29, 1996 (the "Merger Agreement"), with Champion pursuant to which Champion will become a wholly owned subsidiary of the Company. Champion currently owns and operates five acute care hospitals with a total of 722 licensed beds in Utah, Texas and Virginia and owns a 50% interest in, and operates, a partnership that owns two additional acute care hospitals with a total of 341 licensed beds in North Dakota under the name "Dakota Heartland Health System" ("DHHS"). Champion's acute care hospitals generally offer the same types of services provided by Paracelsus' acute care hospitals. Champion also owns and operates two psychiatric hospitals with a total of 219 licensed beds in Missouri and Louisiana. For the 12 months ended March 31, 1996 on a pro forma basis after giving effect to acquisitions and dispositions, Champion would have had net revenue of $198.2 million, Adjusted EBITDA of $32.2 million and net income of $3.9 million. Following the Merger, the Company will operate 31 hospitals in 11 states, including 25 acute care hospitals with 2,748 licensed beds, five psychiatric hospitals with 437 licensed beds and a rehabilitative hospital with 60 licensed beds. On a pro forma combined basis for the 12 months ended March 31, 1996, after giving effect to the Offerings, the Company would have had total operating revenues of $714.8 million, Adjusted EBITDA of $88.1 million and a net loss of $6.9 million. The net loss includes the unusual charge related to the settlement of two lawsuits. These pro forma combined results do not give effect to any cost savings that management believes will be realized as a result of the Merger due to the combination of the corporate operations of Paracelsus and Champion and the elimination of certain corporate consulting contracts of Paracelsus. In addition, the combined entity should benefit from economies of scale in such areas as purchasing, marketing, information systems, risk management, acquisitions and development, accounting, reimbursement, corporate finance and quality assurance. The Company believes that the Merger represents a unique opportunity to integrate the operations of two companies that have a complementary portfolio of hospitals. Upon completion of the Merger, 22 of the 31 hospitals owned or operated by the Company will be located in markets where a hospital or hospital network operated by the Company is a preeminent provider. On a pro forma combined basis (excluding the PHC Salt Lake Hospital (as defined below) and the two hospitals owned by DHHS), the remaining 19 hospitals would have accounted for approximately 71% and 89% of the 28 remaining hospitals' operating revenues and Adjusted EBITDA, respectively, for the 12 months ended March 31, 1996. Following the Merger, the Company believes that it will be better positioned to implement its business strategy due to its greater scale and diversity of operations, expanded geographic presence and enhanced access to the public capital markets and other financing sources. The Company also believes that it will benefit from the addition to Paracelsus' management team of three key Champion executives who, following the Merger, will have primary responsibility for day to day management of the Company. These Champion executives have an average of 29 years of hospital industry experience and a proven track record in operating and growing publicly held hospital companies. Over the past five years, these executives grew Champion's net revenue at a compounded annual growth rate of 62.0%, from $24.3 million in 1991 to $167.5 million in 1995, while improving its Adjusted EBITDA margins from 9.4% in 1991 to 15.8% in 1995 and 19.2% for the three months ended March 31, 1996. After the Merger, the Company's principal executive offices will be located at 515 West Greens Road, Suite 800, Houston, Texas 77067. Its telephone number will be (713) 873-6623. BUSINESS STRATEGY The Company's strategic objective is to establish each of its hospitals or hospital networks as the provider of choice in its market. To accomplish this, the Company first seeks to establish a presence in geographic locations that are best suited to developing a preeminent market position. These locations primarily include small to mid-sized markets with more favorable demographics and lower levels of penetration by managed care plans and alternative niche competitors than larger metropolitan areas. Moreover, the competing hospitals in the Company's target markets frequently will be not-for-profit facilities that the Company believes have higher cost structures than its hospitals. Second, the Company focuses on implementing operating strategies developed by the Company for positioning each of its hospitals or hospital networks as providers of measurably higher quality and lower cost healthcare services than competing providers. The key elements of the Company's operating strategies are as follows: EXPAND STRATEGICALLY THROUGH SELECTED ACQUISITIONS The Company plans to continue to pursue expansion opportunities through the strategic acquisition of hospitals and complementary healthcare businesses in existing or new markets. The Company has demonstrated this strategy most recently by successfully acquiring four hospitals and a home health agency in the Salt Lake City market. The Company believes that its primary sources of acquisitions will be unaffiliated not-for-profit hospitals and facilities being divested by hospital systems for strategic, regulatory or performance reasons. INCREASE MARKET PENETRATION The Company seeks to increase the market penetration of its hospitals by offering a full range of hospital and related healthcare services and by gaining market share from local competitors by providing measurably higher quality and lower cost services. For example, this strategy has been successfully demonstrated by the addition of obstetrics programs at each of The Medical Center of Mesquite and Westwood Medical Center during the past 12 months. In addition, over the past 24 months the Company has acquired or established five home health agencies that cover 26 counties in Tennessee, providing a large referral base for the Company's four hospitals in that market. ESTABLISH A COMPETITIVE COST ADVANTAGE The Company seeks to position each of its hospitals as the low cost provider in its market by monitoring and controlling fixed and variable operating expenses. Champion's executives have demonstrated an ability to reduce costs as indicated by the improvement in Champion's Adjusted EBITDA margins from 9.4% in 1991 to 15.8% in 1995 and 19.2% for the three months ended March 31, 1996. Labor costs are a primary focus of such efforts, and Champion's executives have reduced salaries, wages and benefits as a percentage of net revenue at Champion's hospitals (including DHHS) from 38.2% in 1994 to 37.9% in 1995 and 35.4% for the three months ended March 31, 1996. The Company believes that a low cost provider is better able to succeed in the current healthcare environment by aggressively pricing its managed care contracts and direct employer arrangements and by maintaining profitability under fixed payment systems. IMPLEMENT A COMPETITIVE QUALITY ADVANTAGE The Company believes that preventing errors in the treatment process can improve quality and lower the cost of care by reducing the risk of adverse events to patients and the consequential costs of such events. For the past two years, the Company has piloted a proprietary program in four of its hospitals designed to identify and measure the incidence of patient treatment errors in 225 separate clinical categories. The Company believes the capability to quantify data regarding the quality of care in its hospitals will enable the Company to reduce the cost of care and will enhance the ability of its hospitals to win and profit from managed care contracts. DEVELOP A COMPETITIVE SERVICE ADVANTAGE The Company believes that bureaucratic and impersonalized customer service is a historical structural deficiency within the hospital industry caused by service systems, policies and procedures that are designed for the convenience of physicians and hospitals rather than patients, payors and employers. The Company is developing a proprietary customer service system that it believes will differentiate its hospitals and facilities from those of its competitors and provide a competitive advantage. REQUIRE LOCAL MANAGEMENT ACCOUNTABILITY The provision of high quality healthcare services is primarily a local business, and the Company's business strategy and operating programs emphasize local management initiative, responsibility and accountability combined with corporate support and oversight. REFINANCINGS IN CONNECTION WITH THE MERGER The Company has filed a registration statement with respect to $325,000,000 aggregate principal amount of % Senior Subordinated Notes due 2006 (the "Notes") that it plans to offer (the "Notes Offering") concurrently with the offering (the "Equity Offering" and, together with the Notes Offering, the "Offerings") of the shares of the Company's common stock, no stated value per share (the "Common Stock"), made hereby. The Company currently intends that a portion of the estimated aggregate net proceeds to the Company from the Offerings of $364.6 million (consisting of $49.8 million from the Equity Offering and $314.8 million from the Notes Offering) will be used by Champion to prepay an estimated $170.6 million of outstanding Champion indebtedness (plus $6.6 million of prepayment premiums) as of June 30, 1996. The remaining net proceeds to the Company from the Offerings will be used to reduce outstanding indebtedness under either the existing Paracelsus credit facility (the "Existing Paracelsus Credit Facility") or the new credit facility (the "New Credit Facility") that the Company intends to establish as soon as practicable at or after the effective time of the Merger (the "Effective Time"), as applicable. In addition, the Company has commenced a tender offer to purchase up to $75.0 million aggregate principal amount of outstanding Existing Senior Subordinated Notes for $1,027.50 per $1,000 principal amount of Existing Senior Subordinated Notes (the "Debt Tender Offer"). The Debt Tender Offer will expire on August 22, 1996 and, as of August 8, 1996, $66.7 million aggregate principal amount of the Existing Senior Subordinated Notes has been tendered in the Debt Tender Offer. A portion of the remaining net proceeds of the Offerings will be used to purchase Existing Senior Subordinated Notes tendered pursuant to the Debt Tender Offer and to pay consent payments of up to $1.5 million in the aggregate to be made in connection with the related consent solicitation to amend the terms of the indenture relating to the Existing Senior Subordinated Notes. Neither the Equity Offering nor the Notes Offering is contingent upon the consummation of the other. See "Risk Factors -- Significant Leverage," "The Merger and Financing" and "Use of Proceeds." The Company currently intends to refinance as soon as practicable at or after the Effective Time, through borrowings under the New Credit Facility, all amounts outstanding under the Existing Paracelsus Credit Facility (the "Credit Facility Refinancing"). The New Credit Facility will provide for borrowings of up to $400.0 million, of which $135.9 million would have been outstanding as of June 30, 1996 on a pro forma basis after giving effect to the Offerings and the Credit Facility Refinancing and the application of the net proceeds therefrom. THE EQUITY OFFERING <TABLE> <S> <C> COMMON STOCK OFFERED BY THE COMPANY (1)............. 5,200,000 shares COMMON STOCK OFFERED BY THE SELLING SHAREHOLDERS(1).................................... 229,000 shares TOTAL........................................... 5,429,000 shares COMMON STOCK OUTSTANDING AFTER THE EQUITY OFFERING(2)........................................ 54,647,167 shares USE OF PROCEEDS BY THE COMPANY...................... The aggregate net proceeds to the Com- pany from the Offerings are estimated to be $364.6 million (consisting of $49.8 million from the Equity Offering and $314.8 million from the Notes Offering). The Company intends that a portion of the net proceeds from the Offerings will be used by Champion to prepay an estimated $170.6 million of outstanding Champion indebtedness (plus $6.6 million of prepayment premiums) as of June 30, 1996. The remaining estimated net proceeds of $187.4 million will be used to purchase up to $75.0 million of Existing Senior Subordinated Notes in the Tender Offer (plus approximately $3.9 million of tender and consent fees and other related expenses) and to reduce outstanding indebtedness under the Existing Paracelsus Credit Facility or the New Credit Facility, as applicable. See "Risk Factors -- Significant Leverage," "The Merger and Financing" and "Use of Proceeds." NEW YORK STOCK EXCHANGE ("NYSE") SYMBOL............. "PLS" </TABLE> - ------------------------ (1) Does not include up to 814,350 shares of Common Stock subject to the Underwriters' over-allotment option. The over-allotment option may be granted by the Selling Shareholders or the Company. (2) Does not include 7,515,740 shares of Common Stock issuable upon conversion or exercise of options, warrants, subscription rights or convertible securities outstanding as of July 10, 1996.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000765803_magicworks_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000765803_magicworks_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..bf1d2a7eeb3edf655c2b52ce6e4ac096587aad2b
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. EACH PROSPECTIVE INVESTOR IS URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY. UNLESS OTHERWISE NOTED, THE INFORMATION IN THIS PROSPECTUS GIVES EFFECT TO THE CONSUMMATION OF THE CONSOLIDATION AND THE MERGER DESCRIBED UNDER "CONSOLIDATION TRANSACTIONS AND S CORPORATION DISTRIBUTIONS." THE COMPANY Magicworks Entertainment Incorporated (the "Company") acquires domestic and international stage and ancillary rights to theatrical productions, produces and promotes live entertainment, manages and books performances and shows, and merchandises a broad range of products associated with its productions and performers. The Company is also involved in the management of performing arts facilities. The Company has experienced significant growth over the past several years. Revenues and pre-tax income have increased from $7.5 million and $1.0 million, respectively, in 1992 to $42.7 million and $3.7 million, respectively, in 1995. However, the Company had pre-tax income of $2,026,725 for the nine months ended September 30, 1996 compared to $4,113,332 for the nine months ended September 30, 1996. The Company's strategy has been to integrate the financing, production, booking and ancillary exploitation of live entertainment, which allows the Company to exercise control over all aspects of its productions, including theatrical production, booking, marketing and merchandising. Prior to 1992, the Company focused primarily on, and derived the majority of its profits from, the worldwide production of "The Magic of David Copperfield," as well as its management and booking agency and its merchandising business, and was not involved in other large scale productions. However, because artists and producers wishing to gauge the market's receptivity to their productions typically approached the Company in its capacity as booking agent early in a show's development process, the Company perceived an opportunity to participate in additional roles beyond its traditional management, booking agency and merchandising operations. In 1992, the Company began to act as producer and co-producer of productions for which the Company believed market demand was strong, based on the responses to its booking inquiries. In some cases, in addition to production rights, the Company obtained other rights associated with the show, such as the ability to present the show in certain venues. The Company's successful productions since 1992 have included "Ken Hill's The Phantom of the Opera" and "South Pacific," starring Robert Goulet, and its major current productions include "Jesus Christ Superstar," "The Magic of David Copperfield," "Hello, Dolly!" starring Carol Channing and "Deathtrap," starring Elliot Gould and Mariette Hartley. In addition, the Company has the rights to produce and anticipates producing "Singin' in the Rain," "Gershwin on Ice" and "The Hunchback of Notre Dame." The Company plans to continue to seek to acquire touring rights for well-established star musicals, and to utilize its management and booking division to determine the demand for live entertainment productions. Since the determination of demand is made in advance of any significant commitment by the Company, the Company believes that its success has been related in part to its ability to produce only those shows which appear prospectively to have limited risk and the potential for significant reward. After obtaining the production rights to a show, the Company typically casts the lead role with recognized talent, and then solicits commitments from promoters in various locations in which the show could be presented. The promoters guarantee the Company a minimum amount of weekly revenues (which guarantee is often secured by a letter of credit) as well as a share of any profits above the guaranteed amount. The Company frequently receives a deposit from the local promoters, the amount of which is based on the Company's past relationship with the individual promoter. For foreign productions, the deposit is generally equivalent to the total amount of the guarantee. In this manner, the Company seeks to further minimize its production risk. In addition to its production business, the Company acts as the management and booking agent for a variety of live entertainment events. As management and booking agent, the Company is retained by producers to arrange bookings for the tours of various theatrical presentations, musical acts and one person shows. The Company then markets the productions to presenters throughout the world, and is paid either a fixed fee or a percentage of proceeds for such bookings. These arrangements preclude the need for the Company to invest any of its own capital in its capacity as management and booking agent. The Company currently acts as exclusive management and booking agent for over 23 shows, including "The Magic of David Copperfield," "Nutcracker on Ice," "Jesus Christ Superstar," by Andrew Lloyd Webber and Tim Rice, "The Pointer Sisters' Ain't Misbehavin'," "Hello, Dolly!" starring Carol Channing, "Three Tall Women," "She Loves Me," "Deathtrap," "Mame" and the national touring company of "A Chorus Line;" musical acts such as the Newport Jazz All-Stars and the Preservation Hall Jazz Band; and one-person shows such as Hal Holbrook in "Mark Twain Tonight," James Whitmore in "Will Rogers USA," Amanda Plummer in "The Belle of Amherst" and Kevin McCarthy in "Give 'Em Hell Harry!" In addition, the Company has recently entered into an exclusive agreement to represent the musical "Big" for all U.S. and Canadian tour bookings (excluding New York, Los Angeles and Toronto). The Company plans to continue to exploit its experience and contacts with performers, venues, presenters and sponsors by expanding its operations, as opportunities arise, in the areas of sports, speakers' bureaus, music, movies and television. Further, the Company believes that its relationships in the entertainment industry will facilitate its expansion into other areas, particularly with respect to facility management, production and presentation opportunities. In addition, the Company perceives an opportunity to grow through the acquisition of local and regional entertainment producers, presenters, facilities owners and management companies. The Company believes that there are significant acquisition opportunities available due to the highly fragmented nature of the live entertainment industry. In keeping with its strategy to further broaden its own business by acquiring entertainment related businesses, on August 28, 1996, the Company acquired all of the issued and outstanding capital stock of Movietime Entertainment, Inc. ("Movietime") in exchange for 1,199,999 shares of Common Stock. Movietime has developed and implemented an interactive telecommunications service that provides digital telephone delivery systems to movie theaters. Movietime's digital-based delivery system replaces the analog recording machines now in use at movie theaters with an interactive digital voicemail system that provides customized, site specific theater information such as show times, ticket prices, location and travel directions. The Company believes that the Movietime system enables a theater to increase ticket sales through improved customer service by significantly increasing the number of telephone calls able to reach the theater simultaneously. If Movietime achieves significant market penetration, the Company hopes to generate revenues by selling advertising time on the recorded announcements. COMPANY BACKGROUND The Company was incorporated under the laws of the State of Utah in February 1985 under the name "Marino Investments, Inc." In April 1988, the Company changed its name to "Rattlesnake Gold, Inc." and changed its state of domicile from Utah to Delaware. In June 1995, the Company changed its name to Shadow Wood Corporation. The Company was formed for the purpose of raising capital and acquiring suitable property, assets or business by means of completing a merger with, or acquisition of, any privately-held business enterprise. The Company had no material operations until July 1996. In July 1996, Magicworks Entertainment Incorporated, a Florida corporation ("MEI"), was merged (the "Merger") into the Company and the Company changed its name to "Magicworks Entertainment Incorporated." MEI was formed in June 1996 as a holding company to facilitate the consolidation of the operations of each of Diamond Bullet Merchandising, Inc., a Florida corporation, Touring Artists Group, Inc., an Ohio corporation ("TAGO"), Touring Artists Group, Inc., a Florida corporation, Performing Arts Management of North Miami, Inc., a Florida corporation, Magic Promotions, Inc., a Florida corporation, and Magic Promotion, Inc., an Ohio corporation ("MPIO"), all of which shared common control, but which had operated previously as independent corporations (the foregoing corporations are referred to herein collectively as the "Constituent Corporations"). Concurrently with the initial closing of the Private Placement, 100% of the capital stock of each of the Constituent Corporations was acquired by the Company (the "Consolidation"). See "Consolidation Transactions and S Corporation Distributions" and "Certain Transactions." The Company was the surviving corporation in the Merger. Pursuant to the Merger, each outstanding share of common stock, $.001 par value per share, of MEI was converted into the right to receive one share of Common Stock. The Board of Directors and management of MEI were elected to corresponding positions with the Company. Simultaneously with the consummation of the Merger, the Company issued and sold 400.06 Units in connection with which it received net proceeds of $8,919,350. On September 27, 1996, the Company issued and sold an additional 14.8 Units pursuant to the Private Placement in connection with which it received additional net proceeds of $333,000. Subsequent to the Merger, on August 28, 1996, the Company acquired (the "Movietime Acquisition") all of the outstanding capital stock of Movietime, pursuant to the merger (the "Movietime Merger") of MT Acquisition Sub Inc. ("MT Sub"), a newly-formed, wholly-owned subsidiary of the Company, with and into Movietime. The Movietime Acquisition was consummated pursuant to that certain Agreement and Plan of Merger dated August 28, 1996 (the "Movietime Agreement") among the Company, MT Sub, Movietime and all of the stockholders of Movietime (the "Movietime Stockholders"). Movietime was the surviving corporation in the Movietime Merger. Pursuant to the Movietime Merger, each share of Movietime common stock, par value $1.00 per share, was converted into the right to receive 2,962.96 shares of Common Stock, rounded to the nearest whole number, resulting in the issuance of 1,199,999 shares of Common Stock to the Movietime Stockholders. Unless the context requires otherwise, all references in this Prospectus to the Company shall mean the Company as successor by merger to the business of MEI and shall include its wholly-owned subsidiaries. The Company's executive offices are located at 930 Washington Avenue, Miami Beach, Florida 33139 and its telephone number is (305) 532-1566. THE OFFERING Securities Offered.................... 26,226,465 shares of Common Stock, including 22,763,179 outstanding shares of Common Stock which may be sold by Selling Securityholders and up to 3,463,286 Note Shares, Placement Agent Warrant Shares and Redeemable Warrant Shares which may be sold by the holders, respectively, of outstanding Notes, outstanding Placement Agent Warrants and Redeemable Warrants which may be issued in the future. 1,981,643 Warrants, including 500,000 Placement Agent Warrants which may be sold by the Selling Securityholders and up to 1,481,643 Redeemable Warrants that may be issued upon the prepayment of the Notes in certain circumstances. Quotation............................ The Common Stock is listed on the OTC Bulletin Board. The Company has applied for the listing of the Common Stock on NMS. Trading Symbol....................... "MAJK" SUMMARY FINANCIAL DATA The summary financial information set forth below has been derived from the audited financial statements of the Company, giving effect to the Consolidation and the Merger, which occurred effective July 30, 1996, and to the Movietime Acquisition which occurred on August 28, 1996 and should be read in conjunction with such financial statements and the notes thereto appearing elsewhere in this Prospectus. MPIO was deemed to be the acquiring entity in the Consolidation.(1) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, --------------------------------------------------- 1991 1992 1993 1994 ----------- ---------- ----------- ---------- STATEMENT OF OPERATIONS DATA: <S> <C> <C> <C> <C> Revenues: Production .................. $ 0 $ 662,222 $18,250,149 $23,346,244 Promotion ................... 4,299,717 3,663,269 10,009,734 6,268,273 Total revenues........................ 7,284,234 7,525,156 32,167,251 33,416,193 Total operating expenses.............. 6,113 678 6,889 895 27,610,205 30,239,412 Income from operations................ 1,170,556 635,261 4,557,046 3,176,781 Net income............................ 1,295,027 1,003,866 3,020,557 2,128,198 Pro forma net income(2) .............. 789,966 612,358 1,842,540 1,298,201 </TABLE> <TABLE> <CAPTION> DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30, -------------------------- ------------------------ ---------- 1995 1995 1995 1996 1996 ---------- ----------- ---------- ---------- ---------- STATEMENT OF OPERATIONS DATA: ACTUAL PROFORMA(3) ACTUAL ACTUAL PROFORMA(3) <S> <C> <C> <C> <C> <C> Revenues: Production .................. $31,638,078 $31,638,078 $20,665,310 $21,773,945 $21,773,945 Promotion ................... 6,668,672 6,668,672 4,738,992 7,412,528 7,412,528 Total revenues........................ 42,734,099 42,734,099 27,702,101 32,213,330 32,213,330 Total operating expenses.............. 38,440,260 38,596,482 23,881,534 29,936,188 30,053,354 Income from operations................ 4,293,839 4,137,617 3,820,567 2,277,142 2,159,976 Net income............................ 3,281,845 2,607,048 2,596,033 1,736,790 1,230,693 Pro forma net income(2) .............. 2,001,925 1,590,299 1,583,580 667,270 750,723 </TABLE> SEPTEMBER 30, 1996 ------------------ BALANCE SHEET DATA: Working capital.............. $ 6,234,223 Total assets................. 13,043,003 Total liabilities............ 8,729,999 Total shareholders' equity... 4,313,004 - ---------------------------- (1) The Consolidation complies with the requirements of Staff Accounting Bulletin No. 48 ("SAB 48") and has therefore been accounted for at the historical cost bases of the transferors. The Movietime Acquisition has been accounted for as a pooling-of-interests in accordance with APB No. 16. See Note 1 to the Historical Supplemental Pooled Financial Statements of Magic Promotion, Inc. and Movietime Entertainment, Inc. appearing elsewhere herein. (2) Reflects the effect of an adjustment for income taxes on historical statement of operations data, assuming the Constituent Corporations had been treated as C corporations for income tax purposes, and assuming an effective income tax rate of 39% for the periods presented and the income tax expense of the Company's switch in tax basis from cash to accrual in connection with the Company's S Corporation status as opposed to the C Corporation status of the Constituent Corporations. See "Consolidation Transactions and S Corporation Distributions."
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+PROSPECTUS SUMMARY THE FOLLOWING INFORMATION IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS, ALL OF WHICH SHOULD BE READ CAREFULLY AND THOROUGHLY. THE COMPANY The Company's focus is global natural resource development based on a strategy of applying the effective use of advanced technologies to products and services oriented toward providing efficient, cost effective and profitable solutions to global environmental and resource development challenges. Primary challenges currently being addressed include mineral resources development and water treatment in developing countries. The business activities of the Company have centered around mineral resource development. The primary focus to date has been the acquisition and exploration of precious mineral resource properties in South Africa and Zimbabwe and research and development related to minerals testing, process engineering and environmental technologies. In addition, the Company has positioned itself in the environmental industry through an investment in the preferred stock of Vector Environmental Technologies, Inc., ("VETI") a Delaware corporation, a company controlled by the Company. VETI is currently focused primarily on the development, manufacture, sale and management of water treatment equipment and facilities. Therefore, the Company and its wholly-owned and majority-owned, through voting control, subsidiaries, are considered to operate in two business segments, mining and environmental technologies, principally water treatment systems. On January 31, 1996, Casmyn Corp. (Company) acquired 100% of the shares of a group of five (5) private mining companies (the "Acquired Companies") controlled by the Muir Family in Zimbabwe through E.W.B. Properties (Private) Limited: Matabeleland Minerals (Private) Limited, Greenhorn Mines (Private) Limited, Morven Mining (Private) Limited, Motapa Minerals (Private) Limited and Turk Mines (Private) Limited. The Acquired Companies own mining claims controlling gold and silver mineral rights on properties that lie within the Bubi Greenstone Belt, which is one of the largest greenstone formations in Zimbabwe and include numerous shafts, mining equipment and mineral processing mills with a total capacity of 1,000 tonnes per day. The Company estimates that total gold resources at the Turk Mines are 5,000,000 ounces. Independent engineering studies are currently underway which may cause this estimate to change. The Company has commenced gold mining operations and is in the process of upgrading and retro-fitting various mine facilities. THE OFFERING This Prospectus relates to 2,805,791 shares of common stock that have been previously issued, 732,143 shares of common stock issuable upon the exercise of warrants and 833,333 shares of common stock issuable under a convertible debenture. The Company will not receive any of the proceeds from the sale of shares by the Selling Shareholders. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> PRO FORMA (1) HISTORICAL -------------------------- ----------------------------------------------------- NINE YEAR MONTHS NINE MONTHS ENDED ENDED ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER JUNE JUNE 30, 30, 30, ------------------------------- -------------------- ------------- ----------- 1993 1994 1995 1995 1996 1995 1996 --------- --------- --------- --------- --------- ------------- ----------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenues $ 75 $ 601 $ 382 $ 375 $ 1,066 $ 2,723 $ 1,939 Loss from operations (1,566) (4,189) (6,400) (4,278) (5,139) (6,015) (4,985) Other income, net 1,272 4,879 3,325 2,067 706 3,035 895 Income (loss) from continuing operations (294) (690) (3,075) (2,211) (4,433) $ (2,980) $ (4,090) ------------- ----------- ------------- ----------- Gain (loss) from discontinued operations (292) (643) 33 32 - - --------- --------- --------- --------- --------- Net income (loss) $ (586) $ 47 $ (3,042) $ (2,179) $ (4,433) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Income (loss) per common share: Income (loss) from continuing operations $ (0.09) $ 0.14 $ (0.40) $ (0.29) $ (0.71) $ (0.23) $ (0.38) ------------- ----------- ------------- ----------- Income (loss) from discontinued operations (0.09) (0.13) - - --------- --------- --------- --------- --------- Net income (loss) $ (0.18) $ 0.01 $ (0.40) $ (0.29) $ (0.71) --------- --------- --------- --------- --------- Weighted average common shares outstanding 3,244 4,946 7,651 7,575 6,271 12,735 10,775 --------- --------- --------- --------- --------- ------------- ----------- --------- --------- --------- --------- --------- ------------- ----------- </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 -------------------------- PRO HISTORICAL FORMA (2) ------------- ----------- <S> <C> <C> BALANCE SHEET DATA: Working capital....................................................................... $ 4,652 $ 12,317 Total assets.......................................................................... 27,502 35,048 Convertible debt...................................................................... 5,000 - Stockholders' equity.................................................................. 19,572 31,995 </TABLE> - ------------------------ (1) Gives effect to the acquisitions of the Zimbabwe properties, 100% of the common shares of Auromar Development Corporation and a 65% interest in WestAmerica Corporation, and the issuance of common stock upon conversion of the convertible debt and the exercise of the warrants. It is assumed that these transactions took place on October 1, 1994. See "Pro Forma Consolidated Financial Statements." (2) Includes the effect of the acquisition of the Zimbabwe properties which occurred on January 31, 1996 and the acquisition of the interest in WestAmerica Corporation which occurred on May 24, 1996 and assumes the acquisitions of Auromar Development Corporation and the interest in WestAmerica Corporation and the issuance of the common stock upon conversion of the convertible debt and the exercise of the warrants occurred on June 30, 1996. Also includes reclassification of investment in Auromar shares of $204 to treasury stock. See "Pro Forma Consolidated Financial Statements." RISK FACTORS PROSPECTIVE PURCHASERS SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS RELATING TO THE BUSINESS OF THE COMPANY AND THIS OFFERING, TOGETHER WITH THE INFORMATION AND FINANCIAL DATA SET FORTH ELSEWHERE IN THIS PROSPECTUS, PRIOR TO PURCHASING ANY SHARES OF COMMON STOCK OFFERED HEREBY. LIMITED OPERATING HISTORY UNDER CURRENT MANAGEMENT The Company has only been operating under its current management since March 1994. Since that time, it has engaged in limited business operations and is still in the process of acquiring and developing mineral properties and technologies for its business plans, and it has been operating with losses. There is no assurance that the Company will be able to generate the revenues necessary to be profitable or that it will be successful if forced to seek additional funds for further development of its current mining properties and technologies. (See "Casmyn Corp. - Business Of the Company", "Casmyn Corp. - Management Of the Company", "Certain Transactions" and "Financial Statements.") RELIANCE ON OUTSIDE FINANCING The Company's management believes that in the long term it will be able to generate revenues sufficient to fund its operations and continue with its proposed business plans. However, to complete current projects under development and should the Company expand its operations and/or make acquisitions that would require substantial sums of money, it will have to seek additional debt or equity financing. There can be no assurance that such financing would be available on terms acceptable to the Company, as and when needed. Since inception, the Company's operations have been financed, in part, through private sales of the Company's securities and private loans. (See "Certain Transactions" and "Financial Statements.") RELIANCE UPON OFFICERS AND DIRECTORS The Company is wholly dependent, at present, upon the personal efforts and abilities of its officers and directors. The loss of one or more of its officers or directors could have a material adverse effect on the Company's operating results. While the Company will solicit business through its officers and directors, there can be no assurance as to the volume of business, if any, which the Company may obtain, or that its operations will prove to be as profitable as presently anticipated. (See "Casmyn Corp. - Management Of the Company" and "Certain Transactions.") CONFLICTS OF INTEREST The Company anticipates obtaining certain of its products and services from companies of which its officers, directors and principal shareholders are officers, directors and/or principal shareholders. All such products and services will be obtained by the Company at terms competitive in the marketplace and at least as favorable to the Company as would be obtained by a third party. The Company has previously engaged, and will continue to engage in certain transactions with its officers, directors, and principal shareholders and will endeavor to insure that such transactions will be as favorable to the Company as comparable arms-length transactions would be. (See "Casmyn Corp. - Business Of the Company" and "Certain Transactions.") RECENT UNPROFITABILITY Despite the business experience of the officers, directors and principal shareholders of the Company, the Company has been operating at a loss and has not been profitable since 1994, when Mr. Dahya acquired majority ownership. There can be no assurance the Company will be productive and/or profitable in the future, or that such productivity and/or profitability, if attained, will be sufficient to permit the Company to be successful in the future or to expand or continue to operate. (See "Casmyn Corp. - Business Of the Company.") COMPETITION There is intense competition in the mineral exploration and development and environmental products industries in which the Company operates. Many of the Company's competitors have greater financial and other resources, better distribution networks and/or greater name recognition than the Company. There can be no assurance that the Company will be able to successfully compete in these industries. (See "Casmyn Corp. - Business Of the Company.") GOVERNMENTAL REGULATIONS The environmental products and mineral exploration and development activities of the Company are significantly impacted by environmental, health and import/export related government regulations and programs which the Company must comply with. If additional regulations were to be implemented, there can be no assurance that the Company would be able to comply with them without incurring substantial additional costs for compliance therewith. (See "Casmyn Corp. - Business Of the Company.") The mining operations of the Company, through its wholly-owned subsidiaries, Casmyn Mining Corporation and Casmyn Zimbabwe (Private) Ltd, are conducted primarily through its offices in South Africa and Zimbabwe. Casmyn Mining Corporation is qualified to do business in South Africa and, as such, is subject to the laws of that country, which includes permits to allow the Company to conduct exploration activities on optioned properties. COMPLIANCE WITH ENVIRONMENTAL LAWS The mining operations of the Company are directed at determining the presence of economically viable mineral resource deposits on properties under option in South Africa. It is the Company's intention, once such mineral resource deposits are discovered, to identify a joint venture partner to develop and operate the mining properties. Under the South Africa Minerals Act, 1991, the Company and/or its joint venture partner are responsible for development of an environmental impact assessment and an environmental management program for the proposed mining venture which must be approved prior to the start of exploration and/or mining operations. The cost of environmental compliance relating to mineral development is estimated by management to be immaterial as of September 30, 1995 due to the nature of the Company's exploration activities. Through January 31, 1996, the Company did not have any producing mining properties. On Janaury 31, 1996, the Company acquired various gold mining properties and processing facilities in Zimbabwe and has begun mining and processing gold at those facilities. The Company is in compliance with environmental laws of Zimbabwe. RISK OF DEVELOPMENT, CONSTRUCTION AND MINING OPERATIONS Should the Company, alone or with a joint venture partner, decide to proceed with development of a mineral resource property, the ability to meet cost estimates and construction and production time estimates cannot be assured. Technical considerations, delay in obtaining governmental approvals, inability to obtain financing or other factors could cause delays in developing mineral resource properties. The businesses of gold and/or diamond mining are subject to a variety of risks and hazards, including environmental hazards, industrial accidents, flooding and the discharge of toxic chemicals. The Company (and its joint venture partners, when identified) intend to obtain insurance in amounts the Company considers to be adequate to protect itself against certain of these risks of mining and processing. However, the Company may become subject to liability for certain hazards for which it cannot obtain insurance or which it may elect not to obtain insurance against because of premium costs or other reasons. EXPLORATION PROGRAMS A major part of the Company's business is the exploration of its existing properties and the evaluation and pursuit of potential new prospects in the exploration stage or of interests in companies which own such properties. Substantial expenditures may be incurred in an attempt to establish the economic feasibility of mining operations by identifying mineral deposits and establishing reserves through drilling and other techniques, designing facilities and planning mining operations. The economic feasibility of a project depends on numerous factors, including the cost of mining and production facilities required to extract the desired minerals, the total mineral deposits that can be mined using a given facility, the proximity of the mineral deposits to a user of the minerals, and the market price of the minerals at the time of sale. There is no assurance that existing or future exploration programs or acquisitions will result in the identification of deposits that can be mined profitably. NO CASH DIVIDENDS The Company has never paid and has no present plans to pay any cash dividends on its common stock. The Company currently intends to retain its earnings to finance the growth and development of its business. See "Price Range of Common Stock and Dividends." USE OF PROCEEDS This Prospectus relates to shares of Common Stock that may be offered and sold from time to time by the Selling Shareholders. See "Plan of Distribution." There will be no proceeds to the Company from the conversion of the convertible debenture into common stock or from previously completed private placements of common stock. The Company would receive $7,785,716 in proceeds (net of approximately $125,000 which is the estimated cost of this offering) from the exercise of warrants. Such proceeds are expected to be used for mineral property development and general corporate purposes. PRICE RANGE OF COMMON STOCK AND DIVIDENDS The shares of Common Stock of the Company are traded in the over-the-counter market in the "pink sheets" by members of the National Association of Securities Dealers, Inc. The following table identifies the high/low or bid/asked sales prices per share based upon information obtained from the National Daily Quotation Service, for each quarterly period, and the last six (6) months, since acquisition of the Company by present Management: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- QUARTER ENDING DATE HIGH LOW - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- July 1, 1996 through September 5, 1996 $ 16.50 $ 14.50 - -------------------------------------------------------------------------------- June 30,1996 $ 18.00 $ 15.00 - -------------------------------------------------------------------------------- March 31, 1996 $ 20.00 $ 16.00 - -------------------------------------------------------------------------------- December 31, 1995 $ 21.50 $ 8.00 - -------------------------------------------------------------------------------- September 30, 1995 $ 9.00 $ 6.00 - -------------------------------------------------------------------------------- June 30, 1995 $ 8.50 $ 6.00 - -------------------------------------------------------------------------------- March 31, 1995 $ 8.00 $ 7.00 - -------------------------------------------------------------------------------- December 31, 1994 $ 9.687 $ 7.75 - -------------------------------------------------------------------------------- September 30, 1994 $ 13.50 $ 8.125 - -------------------------------------------------------------------------------- June 30, 1994 $ 13.00 $ .95 - -------------------------------------------------------------------------------- March 31, 1994 * nil nil - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The Company has never paid and has no present plans to pay any cash dividends on its common stock. The Company currently intends to retain its earnings to finance the growth and development of its business. As of June 30, 1996, there were 7,286,992 shares of the Company's Common Stock issued and outstanding. The Company believes that as of June 30, 1996 there were approximately 100 holders of common stock of record or through nominee or street name accounts with brokers. On September 5, 1996 the last day of trading for shares of the Company's Common Stock prior to the date of this Prospectus, the closing price in the over the-counter market for the Company's Common Stock was $14.50. * Trading activity prior to March 31, 1994 was nil. CAPITALIZATION The following table sets forth as of June 30, 1996 the actual consolidated capitalization of the Company, the consolidated pro forma acquisitions capitalization to give effect to the acquisitions of the common stock of Auromar Development Corporation and WestAmerica Corporation and the consolidated pro forma as adjusted capitalization of the Company to give effect to the Offering for those shares that are being registered that are issuable upon exercise of warrants and upon conversion of a convertible debenture. This table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Pro Forma Consolidated Financial Statements," and the Consolidated Financial Statements and Notes thereto. June 30, 1996 (in thousands) - -------------------------------------------------------------------------------- Actual Pro Forma Pro-Forma As Acquisitions(1) Adjusted(2) --------- --------------- ------------ Convertible debt $ 5,000 $ 5,000 $ - --------- --------------- ------------ Stockholders' Equity: Preferred stock, $.10 par value; 20,000 shares authorized; 2,707 shares issued and outstanding 271 271 271 Common stock, $.04 par value; 300,000 shares authorized; issued and outstanding: 7,285 shares actual; 10,199 shares pro forma acquisitions; 11,764 shares pro forma as adjusted (3) 292 409 472 Additional paid-in capital 27,854 27,823 40,301 Accumulated deficit (8,501) (8,501) (8,501) Less: treasury stock (25) (229) (229) Foreign currency translation adjustment (319) (319) (319) --------- --------------- ------------ Total stockholders' equity 19,572 19,454 31,995 --------- --------------- ------------ Total capitalization $ 24,572 $ 24,454 $ 31,995 --------- --------------- ------------ --------- --------------- ------------ - ----------- (1) Gives effect to the issuance of 2,702 shares of common stock in the acquisition of 100% of the common shares of Auromar Development Corporation, the issuance of 237 additional common shares to the holder of the convertible debentures pursuant to the Auromar acquisition. See "Pro Forma Consolidated Financial Statements" and "Business of the Company." (2) Gives effect to the common stock issued in the acquisitions discussed in (1) above, the issuance of 833 shares of common stock upon conversion of the convertible debenture, and a total of 732 shares of common stock upon the exercise of warrants. Also includes an increase in additional paid-in capital of $245 to reflect the adjustment of unamortized debt issuance costs related to convertible debt and the reclass of investment in Auromar shares of $204 to treasury stock. (3) The number of common shares issued and outstanding do not include shares of common stock issuable upon the exercise of outstanding stock options. See "Employee Stock Option Plan." SELECTED CONSOLIDATED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) The selected consolidated historical financial data presented below as of and for the years ended September 30, 1993, 1994 and 1995 are derived from the Company's audited consolidated financial statements. The selected consolidated historical financial data as of June 30, 1996 and for the nine months ended June 30, 1995 and 1996 are derived from the Company's unaudited consolidated financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of the results for such interim periods, have been reflected therein. The results of operations for the nine months ended June 30, 1996 are not necessarily indicative of the results of operations that may be expected for the full fiscal year 1996. The data set forth below should be read in conjunction with the consolidated financial statements of the Company and the notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Pro Forma Consolidated Financial Statements" appearing elsewhere herein. <TABLE> <CAPTION> HISTORICAL PRO FORMA (1) --------------------------------------------------------- -------------------- YEAR YEAR YEAR NINE MONTHS NINE MONTHS YEAR NINE MONTHS ENDED ENDED ENDED ENDED ENDED ENDED ENDED SEPTEMBER SEPTEMBER SEPTEMBER JUNE 30, JUNE 30, SEPTEMBER JUNE 30, 30, 1993 30, 1994 30, 1995 1995 1996 30, 1995 1996 ----------- --------- --------- ---------- ---------- --------- ---------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Sales $ 75 $ 601 $ 382 $ 375 $1,066 $ 2,723 $ 1,939 Cost of goods sold 1 603 490 270 757 1,886 1,270 -------------------------------------------------------- -------------------- Gross profit (loss) 74 (2) (108) 105 309 837 669 -------------------------------------------------------- -------------------- Costs and expenses: Selling, general and administrative expense 1,077 3,225 4,998 3,296 4,695 5,364 4,830 Depreciation, depletion and amortization 80 39 99 167 101 293 172 Mineral exploration expense - - 1,010 769 448 1,010 448 Research and development 85 15 185 151 204 185 204 Write down and abandonment of assets 399 908 - - - - - -------------------------------------------------------- -------------------- Total costs and expenses 1,641 4,187 6,292 4,383 5,448 6,852 5,654 -------------------------------------------------------- -------------------- Loss from operations (1,566) (4,189) (6,400) (4,278) (5,139) (6,015) (4,985) -------------------------------------------------------- -------------------- Other income (expense): Minority interest in net loss of subsidiary 1,302 4,581 3,502 1,991 499 3,502 499 Other income (expense) (30) 298 (177) 76 207 (467) 396 -------------------------------------------------------- -------------------- Other income, net 1,272 4,879 3,325 2,067 706 3,035 895 -------------------------------------------------------- -------------------- Income (loss) from continuing operations (294) 690 (3,075) (2,211) (4,433) $(2,980) $(4,090) -------------------- -------------------- Gain (loss) from discontinued operations (292) (643) 33 32 - -------------------------------------------------------- Net income (loss) $ (586) $ 47 $(3,042) $(2,179) $(4,433) -------------------------------------------------------- -------------------------------------------------------- Income (loss) per common share: Income (loss) from continuing operations $(0.09) $ 0.14 $ (0.40) $(0.29) $ (0.71) $ (0.23) $ (0.38) -------------------- -------------------- Income (loss) from discontinued operations (0.09) (0.13) - - - -------------------------------------------------------- Net income (loss) $(0.18) $ 0.01 $ (0.40) $(0.29) $ (0.71) -------------------------------------------------------- -------------------------------------------------------- Weighted average number of common shares outstanding 3,244 4,946 7,651 7,575 6,271 12,734 10,775 -------------------------------------------------------- -------------------- -------------------------------------------------------- -------------------- </TABLE> <TABLE> <CAPTION> PRO FORMA JUNE 30, SEPTEMBER SEPTEMBER SEPTEMBER JUNE 30, 1996, AS 30, 1993 30, 1994 30, 1995 1996 ADJUSTED (2) --------- --------- --------- --------- ------------ <S> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Total assets $ 2,309 $3,369 $14,316 $27,504 $35,048 Long term debt 207 110 5,071 5,000 -- Stockholders' equity (deficit) (507) 2,214 8,144 19,572 31,995 </TABLE> (1) Gives effect to the acquisitions of the Zimbabwe properties, 100% of the common shares of Auromar Development Corporation and a 65% interest in WestAmerica Corporation, and the issuance of common stock upon conversion of the convertible debt and the exercise of the warrants. It is assumed that these transactions took place on October 1, 1994. See "Pro Forma Consolidated Financial Statements." (2) Includes the effect of the acquisition of the Zimbabwe properties which occurred on January 31, 1996 and the acquisition of the interest in WestAmerica Corporation which occurred on May 24, 1996, and assumes the acquisitions of Auromar Development Corporation and the issuance of the common stock upon conversion of the convertible debt and the exercise of the warrants occurred on March 31, 1996. Also includes reclassification of investment in Auromar shares of $204 to treasury stock. See "Pro Forma Consolidated Financial Statements." Note: The Company was inactive during the years ended September 30, 1991 and 1992, therefore consolidated financial data for those periods has been omitted. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company's focus is global resource development based on a strategy of applying the effective use of advanced technologies to products and services oriented toward providing efficient, cost effective and profitable solutions to global environmental and resource development challenges. Primary challenges currently being addressed include mineral resources development and water treatment in developing countries. The business activities of the Company have centered around mineral resource development. The primary focus to date has been the acquisition and exploration of precious mineral resource properties in South Africa and Zimbabwe and research and development related to minerals testing, process engineering and environmental technologies through the Casmyn Mining Group. In addition, the Company has positioned itself in the environmental industry through an investment in the preferred stock of VETI. VETI is currently focused primarily on the development, manufacture, sales and management of water treatment equipment and facilities. Therefore, the Company and its wholly-owned and majority-owned, through voting control, subsidiaries, are considered to operate in two business segments, mining and environmental technologies, principally water treatment systems. See Note 2 of the Notes to the Consolidated Financial Statements for information on business segments. RESULTS OF OPERATIONS NINE MONTHS ENDED JUNE 30, 1996 COMPARED TO THE NINE MONTHS ENDED JUNE 30, 1995 Revenues for the nine months ended June 30, 1996, were $1,065,538 compared to $375,270 for the nine months ended June 30, 1995. The $690,268 increase was due to an increase of $317,512 in sales of water purification systems and $372,756 from the sale of gold produced in Zimbabwe. Overall gross profit for the nine months ended June 30, 1996 was 29% compared to 28% for the nine months ended June 30, 1995. Gross profit on water purification equipment sales was 32% for the nine month period ended June 30, 1996 compared to 28% for the nine month period ended June 30, 1995 due to lower freight charges. and lower component costs. Gross profit on gold sales was 23.4% for the nine months ended June 30, 1996, there were no gold sales in the nine month period ended June 30, 1995. Costs and expenses were $5,448,216 for the nine months ended June 30, 1996, compared to $4,383,570 for the nine months ended June 30, 1995, an increase of $1,064,646. Compensation and benefits increased $394,757 for the nine month period ended June 30, 1996 compared to the nine month period ended June 30, 1995 due primarily to the Company recording $364,560 in compensation expense related to the granting of 246,000 non-qualified stock options and increased staff levels in the nine month period ended June 30, 1996 compared to the period ended June 30, 1995. Expenses related to professional services, primarily audit and legal increased by $341,556 in the nine month period ended June 30, 1996 compared to the nine month period ended June 30, 1995. Travel related expenses increased $261,781 in the nine month period ended June 30, 1996 compared to the nine month period ended June 30, 1995 due to increased trips to Africa, India and Vietnam related to the Company's operations in those countries. Mineral exploration expense and depreciation decreased a total of $321,826 in the nine month period ended June 30, 1996 compared to the nine months ended June 30, 1995 due to start up of limited gold production at the Zimbabwe mines. This decrease was offset by a increase in research and development related expenses of $53,345. Other general and administrative costs increased $335,033 for the nine months ended June 30, 1996 compared to 1995 due primarily to higher costs related to business activities in Vietnam, increased costs related to the U.S. rollout of water purification products and expenses incurred at the Zimbabwe mining properties. Other income, exclusive of minority interest, was $207,436 for the nine month period ended June 30, 1996, compared to $76,091 for the nine months ended June 30, 1995, an increase of $131,345. This increase was due primarily to interest income earned on short term investments made by the Company offset by interest expense. Minority interest in the net loss of VETI decreased by $1,492,526 for the nine months ended June 30, 1996 due to a limitation on the amount of loss which could be absorbed by the minority shareholders. The Company anticipates that expenditures related to upgrading the newly acquired mining properties in Zimbabwe will exceed revenues derived from the sale of gold from the mines. The Company is in the process of preparing a capital improvement budget for the Zimbabwe properties. Additionally, the Company anticipates that expense levels experienced in the nine months ended June 30, 1996 relating to active exploration programs in various countries will continue for the foreseeable future. The Company charges to expense all mineral resource exploration and development costs until the mineral property to which they relate is determined to have proven reserves for which recovery is economically feasible. Costs are then capitalized until the mineral property to which they relate is placed into production, sold, abandoned or written down where there is an impairment in value. Capitalized costs are to be charged to future operations on a unit-of-production basis. The Company estimates that total gold resources at the Turk Mines are 5,000,000 ounces. Independent engineering studies are currently underway which may cause this estimate to change. The gold occurs in sulfides, oxides and old mill tailings. YEAR ENDED SEPTEMBER 30, 1995 COMPARED TO THE YEAR ENDED SEPTEMBER 30, 1994 Sales for the year ended September 30, 1995, were $382,158 compared to $600,714 for the year ended September 30, 1994. The $218,556 decrease was due primarily to a decrease of $34,383 from assaying and minerals testing services and a decrease of $184,173 from sales of water purification products. The decrease in assaying and minerals testing was due to discontinuance of those services. The decrease in sales of water purification products was the result of sales efforts being directed to market analysis and new product design and testing thereby reducing sales volume. The gross loss for the year ended September 30, 1995 was $107,431 compared to $1,964 for the year ended September 30, 1994. The increased loss was due mainly to writing off obsolete water purification inventory items. Costs and expenses were $6,292,140 for the year ended September 30, 1995, compared to $4,186,541 for the year ended September 30, 1994, an increase of $2,105,599. $1,010,334 of this increase was due to land fees and exploration costs relating to active exploration programs presently underway on various mineral properties that are under option to the Company. Selling, general and administrative expenses increased $1,773,323 to $4,997,948. Compensation and benefits increased $685,850 for the year ended September 30, 1995 compared to the year ended September 30, 1994 due primarily to the Company recording $955,100 in compensation expense related to the granting of non-qualified stock options. Advertising and marketing costs increased $260,071 for the year ended September 30, 1995 compared to the year ended September 30, 1994 due to various programs relating to the introduction of the Company's water purification systems in the U.S. and foreign markets. Other general and administrative expenses increased $204,668 for the year ended September 30, 1995 compared to the year ended September 30, 1994 due primarily to increased professional and consulting expenses. Research and development expenses for the year ended September 30, 1995 were $185,053 compared to $15,294 for the year ended September 30, 1994 due to increased projects related to the development of water purification technologies. The increase in costs and expenses in 1995 was offset by decreases in abandonment of mineral properties of $150,000 and write down of assets of $758,059 because no such transactions occurred in 1995. Other income, exclusive of minority interest, decreased by $476,325 in the fiscal year ended September 30, 1995, compared to the fiscal year ended September 30, 1994, due mainly to gains on the sale of investments in related parties of $253,218 that were realized in 1994, with a loss on sale in investments in related parties of $150,000 in 1995. Minority interest in the net loss of consolidated subsidiary decreased $1,078,293 to $3,502,401 for the fiscal year ended September 30, 1995. The Company discontinued its metal fabrication business segment in fiscal 1995 recognizing a loss from discontinued operations in the year ended September 30, 1995 of $77,354 compared to a loss of $643,767 for the year ended September 30, 1994. A gain of $109,783 was recognized on the disposal of certain metal fabrication equipment during 1995. Due to net operating loss carry forwards there was no tax provision for the fiscal year ended September 30, 1995. YEAR ENDED SEPTEMBER 30, 1994 COMPARED TO THE YEAR ENDED SEPTEMBER 30, 1993 Revenues for the year ended September 30, 1994, were $600,714 compared to $75,421 for the year ended September 30, 1993, the $525,293 increase was due primarily to sales of water purification products of $566,331, there were no sales of these products in the year ended September 30, 1993. This increase is offset by a decline in revenues recognized from ore assaying activities ($41,038), between 1994 and 1993. The Company curtailed its bulk ore assaying activities due to increasing stringent government regulations relating to the use and disposal of various substances used in the assaying process, and the increasing demands on its technical personnel for engineering and process development services for VETI. Cost and expenses were $4,186,541 in the fiscal year ended September 30, 1994, compared to $1,640,946 in the fiscal year ended September 30, 1993, an increase of $2,545,595. This increase primarily relates to an increase of $831,672 in salaries and benefits due to higher staff levels in fiscal 1994 to support domestic water purification activities and the start-up of operations in South Africa and Vietnam. General and administrative expenses increased by $1,204,864 primarily due to increased accounting, legal, consulting and mineral exploration expenses. During fiscal 1994 the Company wrote off $150,000 related to an investment in mineral properties and wrote off $758,059 in assets, while, in fiscal 1993, the Company wrote off certain assets in the amount of $209,000 and abandoned certain mineral properties totalling $190,470. Other income, exclusive of minority interest, was $298,638 in the fiscal year ended September 30, 1994 due mainly to gains realized on the sale of marketable securities of related parties to unrelated third parties. Minority interest in the net loss of consolidated subsidiary increased $3,278,890 to $4,580,694 for the fiscal year ended September 30, 1994. The Company realized a loss from its discontinued metal fabrication operations of $643,767 in the fiscal year ended September 30, 1994 compared to a loss of $291,812 in the fiscal year ended September 30, 1993. Due to net operating loss carry forwards there was no tax provision for the fiscal year. CAPITAL RESOURCES AND LIQUIDITY At June 30, 1996, the Company's working capital was $4,651,953, including $5,473,211 in cash and cash equivalents. The Company's mineral resource development business segment has acquired certain mineral properties in South Africa and on January 31, 1996 concluded the acquisition of certain mining properties and assets in Zimbabwe for $4,526,415 cash plus applicable taxes of $1,017,854 to be paid upon assessment subject to certain adjustments. In addition, the water purification business segment has begun sales and marketing programs in North America and in various third world countries. Management anticipates that the net use of cash by operations will increase during the foreseeable future due to expenditures on mineral resource development projects in South Africa, mineral exploration and facility upgrades at the Zimbabwe mining properties and development of various markets for VETI's water purification technologies. The Company will use current cash and cash equivalents to fund the on-going projects in the short term and anticipates that it will be able to secure additional debt and/or equity financing, to fund longer term projects. As evidence of the Company's ability to secure debt and/or equity financing in the nine month period ended June 30, 1996 the Company has received $8,809,862, net of commissions and other expenses related to the transaction, through issuance of 750,000 shares of restricted common stock in an exempt private transaction. During the fiscal year ended September 30, 1995, the Company completed private placements of 405,000 Common Shares and 714,286 units for total net proceeds of $7,002,859, and completed placement of a $5,000,000, 2.5%, unsecured, convertible debenture (see Note 7 to the consolidated financial statements) for net proceeds of $4,700,000. Additionally, during the year ended September 30, 1995 VETI completed private placements of 500,000 Common Shares and 1,000,000 units for total net proceeds of $3,375,000. During the fiscal year ended September 30, 1994, the Company completed a private placement of 378,055 shares of common stock for net proceeds of $1,908,000. The following is a discussion of factors that have affected the Company's financial position. NET CASH USED IN OPERATING ACTIVITIES. Net cash used in operating activities was $4,161,707 for the nine months ended June 30, 1996 compared to $4,547,789 for the nine months ended June 30, 1995. The decrease in net cash used in operations was due principally to a decrease in minority interest in the net loss of VETI of $1,492,526 offset by increases in the net loss because of active exploration programs conducted on mineral properties in fiscal 1996 and expenses related to sales of water purification systems. Net cash used in operating activities was $5,996,061, $4,476,585 and $2,196,566 for the years ended September 30, 1995, 1994 and 1993 respectively. The increase in the net cash used in operations in 1995 was due principally to the increase in the net loss because of active exploration programs conducted on mineral properties and increased costs and expenses relating to sales of water purification systems. Also contributing to the increase in the net cash used in operations was an increase in accounts receivable of $456,952 in 1995. The increase in net cash used in operations in 1994 was due primarily to losses attributed to the water purification business segment (the minority interest in net loss of VETI increased by $3,278,890 in the year ended September 30, 1994 compared to 1993). NET CASH USED IN INVESTING ACTIVITIES. Net cash used in investing activities was $10,645,707 for the nine months ended June 30, 1996 compared to net cash provided by investing activities of $605,018 for the nine months ended June 30, 1995. The increase in net cash used in investing activities was due to the purchase of certain mineral properties and assets in Zimbabwe, and purchases of equipment and improvements, primarily related to a water bottling plant under construction in Vietnam. During the year ended September 30,1995, the Company received $1,487,538 from the sale of investments and $209,324 from the sale of assets, this was offset by $650,000 which was used to purchase investments in related parties, and $239,749 that was used to purchase equipment and improvements. These transactions resulted in net cash provided by investing activities of $807,113. In the year ended September 30, 1994, proceeds from the sale of investments of $1,366,220 was the major source of cash from investing activities, offset by purchases of investments of $212,897, investments in and advances to related parties of $413,223 and purchase of equipment and improvements of $142,530. These transactions resulted in net cash provided by investing activities of $599,570. In the year ended September 30, 1993, proceeds from the sales of investments was $346,904 offset by investments in and advances to related parties of $251,302 and purchases of equipment and improvements of $147,262 resulting in net cash used in investing activities of $51,660. NET CASH PROVIDED BY FINANCING ACTIVITIES. Net cash provided by financing activities was $15,668,020 for the nine months ended June 30, 1996 compared to $2,864,398 for the nine months ended June 30, 1995. The increase is due to the Company receiving $15,791,780 from the collection of funds, net of costs, from private placements of common stock of the Company and VETI, offset by the repayment of long-term debt of $98,760 and the purchase of treasury stock of $25,000. As discussed above, during the year ended September 30, 1995, the Company received $4,700,000 (net of debt issuance costs) from the placement of a debenture and $3,060,712 from the issuance of common stock of the Company and $1,326,564 from the issuance of VETI and VVC common stock in private placements, offset by repayment of long-term debt of $42,609, resulting in net cash provided by financing activities of $9,044,667. During the year ended September 30, 1994, the Company received $1,100,000 from the issuance of common stock of the Company and $3,080,820 from the issuance of common stock of VETI and VVC, offset by repayment of long-term debt of $107,003, resulting in net cash provided by financing activities of $4,073,817. During the year ended September 30, 1993, the Company received $3,269,577 from the issuance of common stock of VVC offset by payment of long-term debt of $178,661, resulting in net cash provided by financing activities of $3,090,916. The Company is organized with a relatively small, highly trained staff and anticipates that the overall staff level will remain low in the foreseeable future because the majority of mineral resource development activities are performed by independent contractors on a project by project basis. The Company believes that these arrangements will not require a significant investment by the Company in either personnel or facilities. CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The discussions contained in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Casmyn Corp." sections of this Registration Statement contain various "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Sections 21E of the Securities Exchange Act of 1934, as amended, which represents the Company's expectations or beliefs concerning future events, inlcuding the following: statements regarding the estimated mineral resource levels located at the Company's mining properties in Zimbabwe; the ability of the Company to secure additional debt and/or equity financing to fund future expansion and operations; statements regarding new or increased markets for the Company's water purification and water bottling business segment. In addition, statements containing expressions such as "believes," "anticipated," "plans" or "expects" used in the Company's periodic reports on Forms 10-KSB and 10-QSB filed with the SEC are intended to indentify, forward-looking statements. The Company cautions that these and similar statements included in this and in previously filed periodic reports including reports filed on Forms 10-KSB and 10-QSB are further qualified by important factors that could cause actual results to differ materially from those in the forward-looking statement, including, without limitation, the following: political and economic instability in international markets; the effect of economic conditions; the effect of regulatory and governmental actions; fluctuations in world gold prices, exchange rates, tariffs and other barriers. PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS The pro forma consolidated financial statements are presented in two steps: first, presenting the acquisitions adjustments for the acquisition of the Zimbabwe properties and 100% of the common shares of Auromar Development Corporation ("Auromar"); and a 65% interest in WestAmerica Corporation ("WestAmerica") and second, the adjustments for the issuance of shares of common stock upon conversion of the convertible debt and the exercise of the warrants. These pro forma financial statements have been prepared to show the effect of the January 31, 1996 acquisition of 100% of the shares of a group of five (5) private mining companies controlled by the Muir Family in Zimbabwe through E.W.B. Properties (Private) Limited ("EWB"), in accordance with the terms and conditions of a formal Purchase Agreement concluded in August 1995. The total consideration for this acquisition was $4,071,415 plus applicable taxes which are currently estimated at $1,017,854. The acquisition includes includes mining claims controlling gold and silver mineral rights on several producing gold mining properties covering approximately 1,200 hectares (approximately 2,965 acres) in the Bubi Greenstone Gold Belt of Zimbabwe. These properties include infrastructure, mining and milling equipment. Also on January 31, 1996, the Company purchased the assets of the Dawn Mine property in Zimbabwe from Olympus Gold Mines Limited for $455,000. The Dawn Mine is located in close proximity to the Turk mine and mill and will be operated under a mine plan which includes the Turk mine and mining properties owned by the Company. These transactions have been accounted for as purchases. These pro forma financial statements have also been adjusted to show the effect of the acquisition on May 24, 1996 of a 65% interest in WestAmerica in exchange for 606,061 common shares of the Company. This investment has been accounted for using the equity method. In addition, these pro forma financial statements have been adjusted to reflect the exchange of approximately 2,701,000 shares of the Company's common stock for approximately 7,025,000 shares (100%) of the common stock of Auromar which acquisition is anticipated to be completed in the near future. The pro forma consolidated statements of operations show what the results of the Company's operations would have been for the fiscal year ended September 30, 1995 and the nine months ended June 30, 1996 had the acquisitions been completed on October 1, 1994. The pro forma balance sheet as of June 30, 1996 includes the effect of the Zimbabwe acquisition which occured on January 31, 1996 and the WestAmerica acquisition which occurred on May 24, 1996 and assumes the other acquisitions described above occurred on June 30, 1996. The issuance of the common shares from the issuance of common stock upon conversion of the convertible debt and the exercise of warrants being registered by this offering were assumed to be on October 1, 1994 for the pro forma consolidated statements of operations and on June 30, 1996 for the pro forma consolidated balance sheet. CASMYN CORP. PRO FORMA CONSOLIDATED BALANCE SHEET JUNE 30, 1996 (IN THOUSANDS) <TABLE> <CAPTION> ASSETS ACQUISITIONS PRO FORMA REGISTRATION PRO FORMA AS ACTUAL ENTRIES ACQUISITIONS ADJUSTMENTS ADJUSTED ---------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> CURRENT ASSETS: CASH AND CASH EQUIVALENTS $ 5,473 $ - $ 5,473 $ 7,786 (d) $ 13,259 ACCOUNTS RECEIVABLE, NET 226 - 226 - 226 INVENTORIES 1,750 - 1,750 - 1,750 PREPAID EXPENSES AND OTHER ASSETS 135 - 135 - 135 ---------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 7,584 - 7,584 7,786 15,370 ---------------------------------------------------------------------------------- INVESTMENT IN RELATED PARTY 204 (204) (b) - - - EQUIPMENT AND IMPROVEMENTS, NET 2,945 - 2,945 - 2,945 MINERAL PROPERTIES 6,712 207 (a) 6,919 - 6,919 INVESTMENT IN AFFILIATES 8,368 - 8,368 - 8,368 DUE FROM RELATED PARTIES, NET 67 - 67 - 67 OTHER ASSETS 1,624 - 1,624 (245) (e) 1,379 ---------------------------------------------------------------------------------- TOTAL ASSETS $ 27,504 $ 3 $ 27,507 $ 7,541 $ 35,048 ---------------------------------------------------------------------------------- ---------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITES: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES $ 2,932 $ 121 (a) $ 3,053 $ - $ 3,053 ---------------------------------------------------------------------------------- CONVERTIBLE DEBT 5,000 - 5,000 (5,000) (e) - ---------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY: PREFERRED STOCK, $.10 PAR VALUE 271 - 271 - 271 COMMON STOCK, $.04 PAR VALUE 292 108 (a) 409 33 (e) 472 9 (c) 30 (d) ADDITIONAL PAID-IN CAPITAL 27,854 (22) (a) 27,823 4,722 (e) 40,301 (9) (c) 7,756 (d) ACCUMULATED DEFICIT (8,501) - (8,501) - (8,501) LESS: TREASURY STOCK (25) (204) (b) (229) - (229) FOREIGN CURRENCY TRANSLATION ADJUSTMENT (319) - (319) - (319) ---------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 19,572 (118) 19,454 12,541 31,995 ---------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 27,504 $ 3 $ 27,507 $ 7,541 $ 35,048 ---------------------------------------------------------------------------------- ---------------------------------------------------------------------------------- </TABLE> SEE NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS CASMYN CORP. PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> ACQUISITIONS PRO FORMA REGISTRATION PRO FORMA AS ACTUAL ADJUSTMENTS ACQUISITIONS ADJUSTMENTS ADJUSTED ---------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> SALES $ 382 $ 2,341 (f) $ 2,723 $ - $ 2,723 COST OF GOODS SOLD 490 1,396 (f) 1,886 - 1,886 ---------------------------------------------------------------------------------- GROSS PROFIT (LOSS) (108) 945 837 - 837 ---------------------------------------------------------------------------------- COSTS AND EXPENSES: General and administrative expense 4,998 366 (f) 5,364 - 5,364 Depreciation, depletion and amortization 99 194 (f) 293 - 293 Mineral exploration expense 1,010 - 1,010 - 1,010 Research and development 185 - 185 - 185 ---------------------------------------------------------------------------------- 6,292 560 6,852 - 6,852 ---------------------------------------------------------------------------------- INCOME (LOSS) FROM OPERATIONS (6,400) 385 (6,015) - (6,015) ---------------------------------------------------------------------------------- OTHER INCOME (EXPENSE): Minority interest in net loss of subsidiary 3,502 - 3,502 - 3,502 Equity in net loss of unconsolidated affiliate - (321) (h) (321) (321) Other (177) - (177) 31 (g) (146) ---------------------------------------------------------------------------------- Other income (expense), net 3,325 (321) 3,004 31 3,035 ---------------------------------------------------------------------------------- INCOME (LOSS) FROM CONTINUING OPERATIONS $ (3,075) $ 64 $ (3,011) $ 31 $ (2,980) ---------------------------------------------------------------------------------- ---------------------------------------------------------------------------------- INCOME (LOSS) FROM CONTINUING OPERATIONS PER COMMON SHARE $ (.40) $ .13 (i) $ (.27) $ .04 (i) $ (.23) ---------------------------------------------------------------------------------- ---------------------------------------------------------------------------------- WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 7,651 3,518 11,169 1,565 12,734 ---------------------------------------------------------------------------------- ---------------------------------------------------------------------------------- </TABLE> SEE NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS CASMYN CORP. PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 30, 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> ACQUISITIONS PRO FORMA REGISTRATION PRO FORMA AS ACTUAL ADJUSTMENTS ACQUISITIONS ADJUSTMENTS ADJUSTED ---------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> SALES $ 1,066 $ 873 (f) $ 1,939 $ - $ 1,939 COST OF GOODS SOLD 757 513 (f) 1,270 - 1,270 ---------------------------------------------------------------------------------- GROSS PROFIT 309 360 669 - 669 ---------------------------------------------------------------------------------- COSTS AND EXPENSES: General and administrative expense 4,695 135 (f) 4,830 - 4,830 Depreciation, depletion and amortization 101 71 (f) 172 - 172 Mineral exploration expense 448 - 448 - 448 Research and development 204 - 204 - 204 ---------------------------------------------------------------------------------- 5,448 206 5,654 - 5,654 ---------------------------------------------------------------------------------- INCOME (LOSS) FROM OPERATIONS (5,139) 154 (4,985) - (4,985) ---------------------------------------------------------------------------------- OTHER INCOME (EXPENSE): Minority interest in net loss of subsidiary 499 - 499 - 499 Equity in net income of unconsolidated affiliate - 81 (h) 81 - 81 Other 207 - 207 108 (g) 315 ---------------------------------------------------------------------------------- Other income, net 706 81 787 108 895 ---------------------------------------------------------------------------------- NET INCOME (LOSS) $ (4,433) $ 235 $ (4,198) $ 108 $ (4,090) ---------------------------------------------------------------------------------- ---------------------------------------------------------------------------------- INCOME (LOSS) PER COMMON SHARE $ (.71) $ .25 (i) $ (.46) $ .08 (i) $ (.38) ---------------------------------------------------------------------------------- ---------------------------------------------------------------------------------- WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 6,271 2,939 9,210 1,565 10,775 ---------------------------------------------------------------------------------- ---------------------------------------------------------------------------------- </TABLE> SEE NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS CASMYN CORP. NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS The pro forma adjustments and eliminations are as follows: (a) To record the issuance of 2,701,103 shares of the Company's common stock for 7,024,103 shares of the common stock of Auromar at the exchange rate of one share of the Company's common stock for each two and six tenths (2.6) shares of Auromar. The transaction has been recorded as a purchase (principally mineral properties) with the purchase price of the net assets being recorded at predecessor cost prior to their acquisition by Auromar. (b) Reclassification of the carrying value of Casmyn's 425,750 shares of Auromar common stock which are assumed exchanged for 163,750 Casmyn shares and then recorded as treasury stock. (c) Under the terms of the $5,000,000 unsecured convertible debenture with Societe Generale ("Sogen"), the Company is required to issue additional shares of its common stock upon the merger with Auromar such that Sogen would maintain its relative ownership interest in the Company. Under this provision, the Company would be required to issue 237,218 additional shares. (d) Exercise of 714,286 warrants in exchange for 357,143 common shares at $8.50 per share and exercise of 750,000 warrants in exchange for 375,000 common shares at $13.00 per share, total proceeds of $7,785,716 which is net of estimated costs of $125,000. (e) Conversion of the $5,000,000 convertible debenture to 833,333 common shares at $6.00 per share. Decrease of additional paid-in capital of $245,000 representing the reclassification of unamortized debt issuance costs relating to the convertible debenture. (f) The acquisitions adjustment and eliminations include the estimated results of operations of the Zimbabwe properties for the period October 1, 1994 through and including January 31, 1996 (date of acquisition). Revenues were computed based upon the actual gold production for the Zimbabwe properties for the period, cost of sales was computed using average cost of production per ounce obtained from local mine engineering firms. Costs and expenses were determined based upon the per ounce costs actually realized by the prior owners on a per ounce of production basis. The financial statements have been adjusted to reflect depletion expense that would have been recorded in the periods presented had the transaction occurred on October 1, 1994. The depletion expense per ounce of production was determined by dividing the total cost the Company has incurred in acquiring the gold reserves by the estimated gold reserves acquired. (g) Reduction of interest expense of $63 and $21 and amortization of debt issuance costs of $45 and $10, for the nine months ended June 30, 1996 and the year ended September 30, 1995 respectively, to reflect the assumed conversion of the convertible debenture on October 1, 1994. (h) To record the Company's equity in the income (loss) of WestAmerica for the period October 1, 1994 through and including May 24, 1996 (date of acquisition of interest). The financial statements have been adjusted to reflect depletion expense that would have been recorded in the periods presented had the transaction occurred on October 1, 1994. The depletion expense pertaining to oil and gas production was determined by dividing the excess of the purchase price of WestAmerica over the Company's portion of the net assets of WestAmerica by the estimated reserves. (i) To decrease the net loss per share to give effect to changes in net loss as described above and the issuance of additional shares. CASMYN CORP. BUSINESS OF THE COMPANY The Company was originally incorporated under the laws of the State of Colorado on December 4, 1984, as Fintech, Inc. (the "Company"). In November, 1985, the Company completed its initial public offering of securities. A total of 10,276,500 units were sold at a public offering price of $.02 per unit. The units were comprised of one Common Share and one Class A Warrant to purchase an additional Common Share of the Company at an exercise price of $.06 per share and one Class B Warrant to purchase an additional Common Share of the Company at an exercise price of $.12 per share expiring November 16, 1986 and January 16, 1987, respectively. No warrants were exercised. The Company received net proceeds of approximately $148,844 after deducting costs of $56,686 related to the offering. In 1986, the Company loaned funds obtained in the initial public offering to companies in the medical diagnostic field. The loans were subsequently written off. On November 29,1991, the Company changed its name from Fintech, Inc. to Summa Metals Corporation. In addition, on November 29, 1991, the Company's Board of Directors authorized a 1 for 400 reverse stock split, thereby decreasing the number of outstanding shares to 69,874 on that date. The Company was in the development stage from its inception until August 1994 when it purchased for approximately $150,000 all of the common stock of Casmyn USA, Inc. ("Casmyn USA"), a Nevada corporation, from Dahya Holdings, Inc., a related party. Prior to 1994, the Company's principal business was performing contract research and development services. On March 31, 1994, Amyn Dahya, an individual, acquired 2,400,000 shares (74% of the voting securities of the Company at that time) from certain officers, directors and shareholders in consideration of an agreement to loan the sellers the sum of $100,000. On September 14, 1994 the Company changed its name from Summa Metals Corporation to Casmyn Corp. On July 19, 1995 the Company placed a $5,000,000, 2.5%, unsecured Convertible Debenture, due July 31, 2000, ("Debenture") with Societe Generale, Paris, France ("Holder"). Interest is payable semi-annually commencing January 31, 1996, which, at the election of the Company, may be paid through the issuance of shares of common stock of the Company. The Debenture provides for conversion to Common Stock of the Company at $6.00 per share for the first two years after issuance, increasing to $6.50 during the third year, $7.00 during the fourth year and $7.50 during the fifth year. If the Company merges with Auromar Development Corporation. ("Auromar") on terms described below, or such other terms pursuant to which the Company issues shares of its Common Stock in exchange for a controlling interest in Auromar, then the Company is obligated to issue to the Holder, within 30 days after the effective date of such merger, a number of shares of its Common Stock, at no cost, such that upon conversion, the Holder shall be entitled to receive the number and kind of shares which, together with the shares issued to the Holder following the merger, would be equal to the same percentage of the issued and outstanding shares of Common Stock the Holder would have held if the then-outstanding Debenture had been converted immediately prior to the effective date of the merger. At June 30, 1996, the number of additional shares that the Company would be required to issue in relation to the proposed merger with Auromar would have been approximately 237,000. The net proceeds from this debenture were $4,700,000 after deducting $300,000 in costs relating to the placement. ACQUISITION OF CONTROLLING INTEREST IN VECTOR ENVIRONMENTAL TECHNOLOGIES, INC. On June 29, 1995, the Company acquired a voting controlling interest in Vector Environmental Technologies, Inc. ("VETI") through the acquisition of 3,000,000, 5%, cumulative, convertible, voting preferred shares of VETI ("preferred shares"), in exchange for approximately $2,300,000 in debts owing to the Company. On September 29, 1995, the Company purchased an additional 1,000,000 preferred shares of VETI at $2.00 per share. Each preferred share is convertible, at the Company's option, into one share of VETI common stock. Preferred shares are entitled to vote with Common Shares, with the further provision that each preferred share will be entitled to the equivalent of four (4) common share votes, with the result that the Company has effective voting control of VETI with a 56.25% voting majority. VETI is also related to the Company through certain common officers, directors and significant stockholders. As a result of the relationships between the Company and VETI, the investment in VETI has been accounted for as a combination of entities under common control, which is a method similar to a pooling of interests. Therefore, the accompanying consolidated financial statements include assets and liabilities of VETI at their historical cost and operations of VETI for all periods presented. INVESTMENT IN WESTAMERICA CORPORATION On May 24, 1996 the Company entered into a Stock Purchase Agreement to exchange shares with WestAmerica Corporation ("WACC" NASDAQ symbol - WACC), an Oklahoma corporation, whereby the Registrant received 5,680,514 common shares of WACC in exchange for 606,061 shares of the Company's common stock (approximately a 65% interest). WACC is engaged in the oil and gas exploration and production business primarily in the states of Oklahoma and Texas. WACC also engages in the securities and investment banking businesses through it's ownership of WestAmerica Investment Group, Inc. and it's subsidiary WestAmerica Investment Company, Inc. ("WIC"), a registered broker dealer. The exchange expands the Registrant's strategic interests in resource development and will be accounted for by the Registrant on the equity method. Also on May 24, 1996, the Company entered into an Agreement with WACC and Edward R. Foraker ("Foraker"), an individual and Director of WACC whereby the Company is granted the authority to nominate two of the five members of the Board of Directors of WACC. The Agreement also grants an irrevocable proxy to Foraker to vote the WACC shares held by the Company, restricts any changes in the capital structure of the companies and grants WACC a one year option to revoke the transaction whereby the Company and WestAmerica would return the shares issued under the Stock Purchase Agreement. The Company's investment in WACC, representing approximately 65% of WACC's outstanding common stock, is valued at approximately $6,970,000, representing $11.50 per share of the Company's common stock. This value reflects a discount from recent similar sized transactions to compensate for the restricted nature of the shares issued in the transaction. WACC was incorporated May 4, 1988 to consolidate oil and gas businesses, assets and operations of its predecessor corporation with those of 11 limited partnerships. Effective April 18, 1994 WACC changed its name from ECC Energy Corporation. (See "Consolidated Financial Statements of WestAmerica Corporation"). In 1994, WACC acquired the entire oil and gas leasehold interest in 7,448 contiguous acres in Washington, Nowata and Rogers counties of Northeastern Oklahoma. WACC currently holds in excess of 17,000 acres of oil and gas leases in the area, which include 119 wellbores with the potential for successful completion in coalbed formations. Production from those wellbores will qualify for tax credits under Section 29 of the IRC. During 1995, WACC completed drilling the 14 well first phase of 28 well drilling program under contract with Oklahoma Resources General Partnership, a 50% owned general partnership formed by a wholly owned subsidiary of WACC to conduct the drilling program with outside investors. All 14 of the wells found potentially productive natural gas and will be completed in one or more coalbed formations. In 1993, WACC purchased 100% of the common shares of WestAmerica Investment Group, Inc.. WestAmerica Investment Group, Inc., operates through a wholly owned subsidiary, WIC a registered broker-dealer and investment advisor business which is headquartered in Scottsdale, Arizona. PROPOSED ACQUISITION OF AUROMAR DEVELOPMENT CORPORATION Pursuant to an agreement dated March 29, 1995, amended June 30, 1996, between the Board of Directors of the Registrant and the Board of Directors of Auromar Development Corporation, a British Columbia corporation, the Registrant has offered to exchange one share of common stock of the Registrant for two and six- tenths (2.6) shares of common stock of Auromar. The Offer to Exchange (the "Offer") is applicable to all of the 7,024,103 shares of common stock of Auromar outstanding on the date of consummation of the Offer. The exchange was approved by the shareholders of Auromar at the Extraordinary General Meeting held on March 12, 1996 pursuant to Sections 276-279 of the British Columbia Company Act and has been approved by the Supreme Court of British Columbia. The Company expects to complete the proposed acquisition in the near future. The purpose of the Offer is for Registrant to acquire 100% of all the issued and outstanding shares of common stock of Auromar. Upon completion of the Offer Auromar will become a wholly-owned subsidiary of the Registrant. Auromar is related to the Registrant through common ownership of options to acquire certain mineral properties in South Africa. Auromar was incorporated under the laws of the Province of British Columbia, Canada on August 20, 1987, as Kelan Resources Inc. The name was subsequently changed to Auromar Development Corporation, pursuant to a Certificate of Amendment to the Certificate of Incorporation filed with the Registrar of Companies in the Province of British Columbia on June 22, 1992. Auromar's principal business offices are located at 800 West Pender Street, Suite 440, Vancouver, British Columbia V6C 2V6. Auromar is a mineral exploration company. However, Auromar maintains no ongoing business operations. Auromar's primary assets are options to purchase a 50% working interest in certain properties in the Schweizer-Reneke area of South Africa on which the Registrant holds options on the remaining 50% interest (See - "Casmyn Mining Corporation, South Africa."). The acquisition of Auromar will provide the Registrant with full control of the Schweizer-Reneke properties. The Company believes that such control will facilitate negotiations with major mining companies in the development of this property. OTHER TRANSACTIONS On September 14, 1994, the Company completed a private placement of 378,055 shares of common stock for net proceeds of $1,908,000. On September 29, 1995, the Company completed a private placement of 714,286 units for net proceeds of $4,750,009. Each unit consists of one share of Common Stock of the Company, plus one warrant; two warrants, plus $8.50, will entitle the holder to purchase one share of the Company's Common Stock. All warrants expire on October 1, 1997. VETI completed a private placement of 1,000,000 shares of its common stock in September, 1995 for net proceeds of $2,375,000. At September 30, 1995, $7,125,002 of these amounts was included in Common Stock subscriptions receivable. The subscriptions receivable were collected subsequent to September 30, 1995. The Company operates through the following subsidiaries: <TABLE> <CAPTION> ENTITY: LOCATION BUSINESS PURPOSE - ------- -------- ---------------- <S> <C> <C> MINING Casmyn Mining Corporation ("CMC") Nevada Mining operations - holding company Casmyn Mining Corporation, South Africa Nevada Mining operations - South Africa Casmyn Mining Zimbabwe [Private] Ltd. Zimbabwe Mining operations - Zimbabwe Casmyn Gold Corporation Bahamas Gold acquisition and export ENVIRONMENTAL TECHNOLOGIES Casmyn USA, Inc. * Nevada Research and development Casmyn Technologies Ltd. * Nevada Research and development of water purification technology Casmyn Desalco, Ltd. * Nevada Research and development on desalination projects Vector South Africa Ltd. * Nevada Licensed in South Africa to sell water purification systems Vector Environmental Technologies, Inc. Delaware Environmental technologies with a focus on water treatment - world wide </TABLE> * Inactive or no significant activity, assets or liabilities. Other than Vector Environmental Technologies, Inc. (VETI), all of the above named companies are wholly-owned directly or indirectly, by the Company. The Company owns 100% of the outstanding Series A Preferred shares of VETI which results in a 56.25% voting majority. BUSINESS PURPOSE The Company's focus is global resource development based on a strategy of applying the effective use of advanced technologies to products and services oriented toward providing efficient, cost effective and profitable solutions to global environmental and resource development challenges. Primary challenges currently being addressed include mineral resources development and water treatment in developing countries. Subsequent to the acquisition of the majority ownership of the Company by Mr. Dahya, the business activities of the Company have centered around mineral resource development. The primary focus to date has been the acquisition and exploration of precious mineral resource properties in South Africa and Zimbabwe and research and development related to minerals testing, process engineering and environmental technologies through the Casmyn Mining Group. In addition, the Company has positioned itself in the environmental industry through an investment in the preferred stock of VETI. VETI is currently focused primarily on the development, manufacture, sales and management of water treatment equipment and facilities. Therefore, the Company and its wholly-owned and majority-owned, through voting control, subsidiaries, are considered to operate in two business segments, mining and environmental technologies, principally water treatment systems. See Note 2 of the Notes to the Consolidated Financial Statements for information on business segments. CASMYN MINING GROUP The Casmyn Mining Group ("CMG") operates principally through Casmyn Mining Company, the holding company, and its wholly owned subsidiaries Casmyn Mining Corporation, South Africa, and Casmyn Mining Zimbabwe [Private] Ltd. The primary business activities of these subsidiaries is described below. ACQUISITION OR DISPOSITION OF ASSETS On January 31, 1996, the Company acquired 100% of the shares of a group of five (5) private mining companies (the "Acquired Companies") controlled by the Muir Family in Zimbabwe through E.W.B. Properties (Private) Limited (Matabeleland Minerals (Private) Limited, Greenhorn Mines (Private) Limited, Morven Mining (Private) Limited, Motapa Minerals (Private) Limited and Turk Mines (Private) Limited. The Acquired Companies own mining claims controlling gold and silver mineral rights covering approximately 1,200 hectares (approximately 2,965 acres) on properties that lie within the Bubi Greenstone Belt, which is one of the largest greenstone formations in Zimbabwe and include numerous shafts, mining equipment and mineral processing mills with a total capacity of 1,000 tonnes per day. The Company estimates that the overall gold resources at the Turk Mines are 5,000,000 ounces. Independent engineering studies are currently underway which may cause this estimate to change. The company believes that sustainable production from the mines can be significantly increased through the application of improved mining and processing management and technologies. The Company believes that reserves will support a mine life in excess of 10 years. The total consideration for this acquisition was approximately U.S. $4,071,415 (Zim $37,986,300) cash plus applicable taxes of U.S. $1,017,854 (Zim $9,496,575) to be paid upon assessment subject to certain adjustments. The funds used to conclude this acquisition were obtained from Company bank accounts, those funds originated from a combination of private placements of Company Common Stock and from proceeds of a convertible debenture. Also on January 31, 1996, Casmyn Corp. purchased the assets of the Dawn Mine property in Zimbabwe from Olympus Gold Mines Limited for approximately U.S. $455,000 (Zim $4,250,000). The Dawn Mine is located in close proximity to the Turk mine and mill and will be operated under a mine plan which includes the Turk mine and mining properties in the area owned by the Company. The combined Muir and Dawn properties have been producing gold since the early 1900's. The Company, as part of its diamond and gold exploration activities in South Africa, regularly acquires and divests options on mineral properties. While certain of these properties may be thought to have strategic importance, none of the properties acquired during the year ended September 30, 1995, or since then to the date hereof, is considered to be financially material. In October 1994, Vector Manufacturing Corp., a second tier subsidiary of VETI, discontinued its custom metal fabrication business. MINERAL RESOURCE DEVELOPMENT INDUSTRY OVERVIEW AND CERTAIN FACTORS RELATING TO THE COMPANY'S PROPERTIES COMPETITION Competition comes from large established mining companies having substantial capabilities and greater financial and technical resources than the Company. Therefore, the Company may be unable to acquire future potential mining properties on terms it considers acceptable. The Company also competes with other mining companies in the recruitment and retention of qualified employees. The Company's smaller size and broad strategic objectives, however, may provide the Company with increased flexibility and certain strategic advantages over its competitors in developing countries. GOVERNMENT APPROVAL/REGULATIONS The mining operations of the Company, through its wholly-owned subsidiaries Casmyn Mining Corporation and Casmyn Zimbabwe [Private] Ltd., are conducted primarily through its offices located in South Africa and Zimbabwe. Casmyn Mining Corporation is qualified to do business in South Africa and, as such, is subject to the laws of that country, which includes permits to allow the Company to conduct exploration activities on optioned properties. COMPLIANCE WITH ENVIRONMENTAL LAWS The mining operations of the Company are directed at determining the presence of economically viable mineral resource deposits on properties under option in South Africa. It is the Company's intention, once such mineral resource deposits are discovered, to identify a joint venture partner to develop and operate the mining properties. Under the South Africa Minerals Act, 1991, the Company and/or its joint venture partner are responsible for development of an environmental impact assessment and an environmental management program for the proposed mining venture which must be approved prior to the start of exploration and/or mining operations. The cost of environmental compliance relating to mineral development is estimated by management to be immaterial as of September 30, 1995 due to the nature of the Company's exploration activities. At September 30, 1995, the Company was not actively involved in mining. On February 1, 1996, the Company acquired various gold mining properties and processing facilities in Zimbabwe and has begun mining and processing gold at those facilities. The Company is in compliance with environmental laws of Zimbabwe. The operations of VETI are not subject to specific governmental approval or regulation. The products of VETI are, however, significantly impacted by environmental, health and import/export related government regulations and programs. In many instances these regulations and programs provide strength to VETI's marketing efforts. VETI's water purification systems help rural communities in developing countries, as well as others, meet World Health Organization and governmental standards for drinking water quality. Anticipated costs relating to government approval and regulation, other than those encountered in the normal course of business, are considered minimal. RISK OF DEVELOPMENT, CONSTRUCTION AND MINING OPERATIONS Should the Company, alone or with a joint venture partner, decide to proceed with development of a mineral resource property, the ability to meet cost estimates and construction and production time estimates cannot be assured. Technical considerations, delay in obtaining governmental approvals, inability to obtain financing or other factors could cause delays in developing mineral resource properties. The businesses of gold and/or diamond mining are subject to a variety of risks and hazards, including environmental hazards, industrial accidents, flooding and the discharge of toxic chemicals. The Company (and its joint venture partners, when identified) intend to obtain insurance in amounts the Company considers to be adequate to protect itself against certain of these risks of mining and processing. However, the Company may become subject to liability for certain hazards for which it cannot obtain insurance or which it may elect not to obtain insurance against because of premium costs or other reasons. EXPLORATION PROGRAMS A major part of the Company's business is the exploration of its existing properties and the evaluation and pursuit of potential new prospects in the exploration stage or of interests in companies which own such properties. Substantial expenditures may be incurred in an attempt to establish the economic feasibility of mining operations by identifying mineral deposits and establishing reserves through drilling and other techniques, designing facilities and planning mining operations. The economic feasibility of a project depends on numerous factors, including the cost of mining and production facilities required to extract the desired minerals, the total mineral deposits that can be mined using a given facility, the proximity of the mineral deposits to a user of the minerals, and the market price of the minerals at the time of sale. There is no assurance that existing or future exploration programs or acquisitions will result in the identification of deposits that can be mined profitably. The Company generally acquires the rights to explore for mineral resources on various parcels of land through option payments and nomination agreements negotiated with the property owner. The agreements have a term of 1 year with the right to extend on a year to year basis. The Company is in the process of determining the potential for economically viable mineral resources on properties under option and will either renew or cancel options based upon this determination. CASMYN MINING CORPORATION, SOUTH AFRICA Casmyn Mining Corporation, South Africa is conducting mineral exploration programs in various areas of South Africa, primarily the Schweizer Property, described in more detail below. Schweizer Property The Company has acquired a 50% interest in options on certain mineral properties located in the Schweizer-Reneke area of South Africa. These options cover an area in excess of 300 square kilimeters approximately 90 miles from the Kimberly diamond mining area. Auromar owns the option to acquire the remaining 50% interest in any of the properties located in the Schweizer-Reneke region. Diamond Exploration Activities There has been significant mining of diamonds in the alluvial gravels in the area currently under option by the Company. The Company has conducted extensive research on indicator minerals that are normally found in such diamond operations. These indicator minerals suggest the potential presence of a diamondiferous kimberlite pipe or a cluster of pipes within close proximity. The Company has commenced an exploration program in this area directed at identifying potential locations of kimberlite pipes. The exploration program consists of geophysical studies which include gravity and magnetic surveys and soil sampling. To date no kimberlite pipe(s) have been discovered and there is no assurance that such pipe(s) will be discovered. Gold Mining Activities In addition to the diamond exploration activities discussed above, a core drilling gold exploration program began on a portion of the Schweizer property in which the Company holds a 50% interest in options, during March 1995. The purpose of the drilling is to test a geologic model which suggests the presence of gold bearing reefs representing an extension of the Witwatersrand Basin, an area that has produced almost 40% of the world's gold. The model, which was developed by independent experts specializing in Witwatersrand gold deposits, utilizes the interpretation of geological sequences mapped in the Schweizer area based upon local outcropping of Witwatersrand structures. Gravity surveys performed by independent consultants identified a structure consistent with the model where potential gold bearing reefs could occur at relatively shallow depths. The ultimate goal of the core drilling is to determine whether the Ventersdorp Contact Reef, which is historically a major source of gold in the Witwatersrand, is present on the Company's properties. CASMYN MINING ZIMBABWE [PRIVATE] LTD. Casmyn Mining Zimbabwe [Private] Ltd. was organized and incorporated in Zimbabwe to acquire mineral properties and mining operations as described below. ZIMBABWE GOLD PROPERTIES On January 31, 1996, the Company acquired 100% of the shares of a group of five (5) private mining companies (the "Acquired Companies") controlled by the Muir Family in Zimbabwe through E.W.B. Properties (Private) Limited (Matabeleland Minerals (Private) Limited, Greenhorn Mines (Private) Limited, Morven Mining (Private) Limited, Motapa Minerals (Private) Limited and Turk Mines (Private) Limited. The Acquired Companies own mining claims controlling gold and silver mineral rights on properties that lie within the Bubi Greenstone Belt, which is one of the largest greenstone formations in Zimbabwe and include numerous shafts, mining equipment and mineral processing mills with a total capacity of 1,000 tonnes per day. The Company estimates that the overall gold resources at the Turk Mines are 5,000,000 ounces. Independent engineering studies are currently underway which may cause this estimate to change. The company believes that sustainable production from the mines can be significantly increased through the application of improved mining and processing management and technologies. The total consideration for this acquisition was approximately U.S. $4,071,415 (Zim $37,986,300) cash plus applicable taxes of U.S. $1,017,854 (Zim $9,496,575) to be paid upon assessment of said taxes as defined in the terms of the Memorandum of Agreement. The amount of consideration is subject to certain adjustments. The funds used to conclude this acquisition were obtained from Company bank accounts, those funds originated from a combination of private placements of Company Common Stock and from proceeds of a convertible debenture. The aforementioned consideration was determined as a result of arm's length negotiations between E.W.B. Properties (Private) Limited and the Company. The principal factors considered in the determination of the consideration given for the Acquired Companies include (a) the tangible and intangible asset values of the businesses acquired including primarily gold reserves, (b) the potential for increasing gold production of the Acquired Companies and (c) the expected future operations and related contributions that the companies are expected to make to the total value of the Company. The shafts, mining equipment and mineral processing mills acquired in this transaction were used by the Acquired Companies for the purpose of mining and processing gold, it is the intention of the Company to continue such use. Also on January 31, 1996, Casmyn Corp. purchased the assets of the Dawn Mine property in Zimbabwe from Olympus Gold Mines Limited for approximately U.S. $455,000 (Zim $4,250,000). The Dawn Mine is located in close proximity to the Turk mine and mill and will be operated under a mine plan which includes the Turk mine and mining properties in the area owned by the Company. The combined Muir and Dawn properties have been producing gold since the early 1900's. On August 1, 1996 an option agreement on gold mining properties in Zimbabwe was concluded, on the "Elumba and Up To Date" properties which are within 5 kilometers of the Turk Mine and Mill and were past producers of gold and silver. CASMYN GOLD CORPORATION Casmyn Gold Corporation was organized (subsequent to September 30, 1995) and incorporated in the Bahamas to act as an agent for the purpose of converting raw gold ore to refined ore. RELIEF CANYON MINE On May 7, 1996, the Company entered into a 50:50 joint venture with Newgold Incorporated ("Newgold"), a private company based in Reno, Nevada, for the development of the Relief Canyon Mine located in Pershing County, Nevada. The Relief Canyon Mine was operated during the period 1984 to 1990 producing in excess of 130,000 ounces of gold. Newgold acquired the mine in 1995 and completed additional geological studies establishing a preliminary resource estimate of 8.6 million tons at an average grade of .022 ounces of gold per ton. Newgold has substantially completed a program to upgrade the mine and processing facilities to a capacity of 12,700 tons per day. The Company contributed or accrued approximately $1,400,000 for its 50% interest in the venture. MARKET FACTORS AND VOLATILITY Active international markets exist for both gold and diamonds, minerals which are of a commodity nature, as such the Company anticipates no barriers to the sale of these minerals. However, the marketability of natural resources which may be acquired or discovered by the Company will be affected by numerous factors beyond the control of the Company. These factors include market fluctuations and the proximity and capacity of natural resource markets and processing equipment. Prices of certain minerals have fluctuated widely, particularly in recent years, and are affected by numerous factors beyond the control of the Company. Future mineral prices cannot be accurately predicted. A decline in the price of a mineral being produced or expected to be produced by the Company could have a material adverse effect on the Company. NEED FOR ADDITIONAL FINANCING Continued exploration, development and production on the Company's mineral properties, including the purchase of additional properties, the exercise/extension of options on properties and construction of mining facilities is likely to require substantial additional financing, and there is no assurance that the Company will be able to secure such financing on acceptable terms. PATENTS, COPYRIGHTS AND LICENSES The Company holds patents on a continuous grind-leach process for gold ore grade evaluation. EMPLOYEES The Company and its subsidiaries currently have three-hundred-fifty (350) employees. These employees are primarily management and professional staff and are not subject to any collective bargaining agreements or union affiliations. Relations between management and employees are considered good. GLOSSARY OF MINING TERMS AND DEFINITIONS Presented below are the definitions of various mining terms that were gathered from Securities and Exchange Commission rules and regulations and/or mining industry literature. KIMBERLITE PIPES - geologic structures containing diamond bearing material. INDICATOR MINERALS - minerals such as garnets, ilmenites, chromites and chrome diopside that are found in soil sampling that are indicative of the presence of kimberlitic materials. MINERALIZED DEPOSIT - a mineralized body which has been physically delineated by drilling, underground work, surface trenching and other workings or drill holes to contain a sufficient amount of mineralized material with an average grade sufficient to warrant further evaluation. Such deposit does not qualify as a commercially mineable (or viable) ore body until technical, economic and legal factors have been sufficiently satisfied to classify the mineralized material as a reserve. RESOURCE - the estimated quantity and grade of mineralization that is of potential economic merit. A resource does not require specific mining, metallurgical, environmental, price, and cost data, but the nature and continuity of mineralization must be understood. WATER TREATMENT AND PURIFICATION VECTOR ENVIRONMENTAL TECHNOLOGIES, INC. The Company holds 100% of the issued and outstanding Series A Preferred shares of Vector Environmental Technologies, Inc. (VETI), which represents 56.25% of the total votes and gives the Company effective voting control. Preferred shares are entitled to vote with Common Shares with the further provision that each preferred share is entitled to the equivalent of four (4) common share votes. Preferred Shares are convertible into Common Shares at the Company's option and share equally with Common Shares with respect to dividends, results of operation and assets of VETI. Through its ownership of Preferred shares the Company holds a 24.3% equity interest in VETI. Effective June 19, 1995, VETI acquired 94% of the outstanding shares of Vector Venture Corporation (VVC), a Canadian company, through a tender offer providing for an exchange of one share of VETI for each share of VVG. The acquisition of VVG has been accounted for as a combination of entities under common control, which is a method similar to a pooling of interests. VETI's principal business is to develop or acquire leading edge environmental technologies for rapidly expanding global markets in water treatment, purification and depollution. The corporate goal is to build VETI into a major multinational corporation with a strong technical foundation, capable of providing lasting solutions which address short, medium and long-term water related environmental issues. VETI's current focus is primarily in the area of water treatment and purification. The company's Diamond Rain-TM- water purification systems are designed to purify water from rivers, lakes and other water sources using a combination of filtration, adsorption and microbial destruction processes to produce safe and healthy drinking water, with technical and economic efficiency that is required for conditions which exist in developing nations. The MCV process, used in many Diamond Rain-TM- systems, was the recipient of the NASA Invention of the Year and Commercial Invention of the Year Awards in April, 1994. During 1995, VETI's primary market focus was in Vietnam, however, the company is in the process of developing programs in India, Ghana, South Africa, Mexico and the United States. In Vietnam, VETI, through its wholly-owned subsidiary Vector Vietnam Ltd. (VVL) (as described below), is actively marketing the full range of VETI water related products and services. In India, VETI is currently in negotiations with one of the largest manufacturers of home appliances in India, which has several thousand distribution outlets across India. VETI's products have passed the testing and certification requirements for distribution in India. VETI expects to begin marketing its complete line of products in India in the fourth calendar quarter of 1996. In Ghana, VETI is currently negotiating with the Ghanaian Government on the supply of 85 Community Scale water supply plants, valued at approximately $11,000,000. Diamond Rain-TM- products have passed the testing and certification requirements of Ghana. In South Africa, at the invitation of the South African government, VETI has submitted a proposal regarding a nationwide water purification program for the supply of safe water to the rural and semi-urban townships covering the government's Reconstruction and Development Program. If negotiations are successful, the first phase of the program contemplates the sale of approximately $50,000,000 over a two year period with a subsequent five-year rollout of $250,000,000. A Community Scale Diamond Rain-TM- system installed at the Umgeni River has successfully passed on-site testing by a leading South African Water Board. In Mexico, VETI has shipped an initial order of consumer products for the Mexican market valued at approximately $40,000. In North America, prompted by growing water quality concerns, VETI plans to introduce a line of consumer-based products to combat Cryptosporidium and Giardia, as well as reduce chlorine, lead and turbidity. The Company has taken steps to penetrate this market by recently employing additional sales and marketing personnel, engaging a national sales representative organization currently covering most national mass merchandisers, retaining the services of a major national advertising agency and opening a North American sales office in Dallas, Texas. Plans for 1996 call for the expansion of the Dallas office to include a distribution and assembly center to cover NAFTA related sales. OPERATING SUBSIDIARIES OF VETI VETI currently operates through 7 (seven) subsidiaries: <TABLE> <CAPTION> ENTITY LOCATION BUSINESS PURPOSE <S> <C> <C> Vector Vietnam, Ltd. Vietnam Holds and manages Vietnamese operations Vector Venture Corp. * Canadian Holds certain technologies and licenses Vector India * Nevada Business development in India Vector Manufacturing, Corp. Nevada Provides purchasing and manufacturing services STOX Systems, Inc. Canadian Markets hazardous materials storage systems CGL Technologies, Inc. * Nevada Research and development water purification Alpine Water Purification, Inc. Colorado Markets consumer water treatment equipment </TABLE> * Inactive or no significant activity, assets or liabilities Other than Vector Venture Corp. (VVC), all of the above named corporations are wholly-owned by the Company. The Company owns approximately 94% of the outstanding shares of VVC. VECTOR VIETNAM LTD. ("VVL") VVL markets the full range of VETI's water treatment and purification equipment, products and services throughout the country of Vietnam. The primary markets currently addressed by VVL include: the sale of personal and household water purification systems to both the retail and wholesale markets; the sale and lease of water purification systems to schools and hospitals; the sale of purified water and water products through company and operator owned retail water stores, the development and operation of water bottling plants and sale of bottled water; and the installation and management of water supply plants for rural and semi-urban communities. To date, VVL has experienced strong market demand in Vietnam for its products and services and has devoted substantial resources to the development of in-country support systems and staff. During 1995, sales growth was primarily in the sale of personal and household systems and the sale or lease of systems to schools and hospitals. VVL has installed and commissioned its first bottling plant and its first community water supply plant in April and May 1996. The installation and management of community water treatment facilities is anticipated to represent a major contributor to future results. Rural water agreements have been signed with over 50 provinces under a Build Operate and Transfer (BOT) framework. The first semi-urban water supply plant was commissioned in April 1996 with an additional 6 plants of similar size expected to be completed by September 30, 1996, with a total of 50 plants targeted for installation during calendar 1996. The scope of the BOT program requires the supply of approximately 10,000 community sized systems over a five year period. The program has the current support of the Vietnamese Government and is contingent on the substantial financial commitment and guarantee of the Government. The proposal provides that daily operations and maintenance of water plants will be performed under contract by a government owned company or companies coordinated through the Ministry of Construction, which has country wide responsibility for ground water resources. This program anticipates VETI's ability to finance between 20% to 40% of the capital cost of this program through international financial sources, however, there is no assurance that such funds will be available in the amounts necessary or under acceptable terms. Water purification systems have been installed in schools in Southern, Central, and Northern Vietnam providing safe drinking water to students on a daily basis. To date VVL has installed a total of 60 school systems. For 1996, an estimated 1,000 school installations are targeted. According to the Nationwide BOT Program, VVL has undertaken with the Vietnamese Government to install 15,000 school water purification systems over the next five years. Water purification systems have been installed in several hospitals in Southern, Central, and Northern Vietnam. For 1996, an estimated 500 hospital installations are targeted. VVL has further undertaken with the Vietnamese government to provide safe drinking and utility water to 11,000 hospitals over a five (5) year period. On October 5, 1995, VVL commissioned a Diamond Rain-TM- water purification system under a contract with Vietnam Airlines at the Hanoi Noi Bai International Airport. The system currently supplies purified water to all Vietnam Airlines local and international flights from Hanoi. Similar contracts are under negotiation for the Ho Chi Minh and Da Nang Airports. As of April 30, 1996, VVL had opened 5 Diamond Rain-TM- Water Stores in the North, Central, and Southern regions of Vietnam. These stores provide bulk purified water to customers in the urban areas, on a cash sale basis. VVL is currently working with owner-operators throughout Vietnam under a specially prepared program. Construction of the VVL's first Diamond Rain-TM- water bottling plant was completed and commissioned in May 1996 and will have an initial annual capacity of 8 million liters, with provision to increase the throughput to 16 million liters per year. VVL expects this plant to generate revenues of approximately $4 million per annum with ramp up commencing in the second calendar quarter 1996. Nationwide distribution agreements for Diamond Rain-TM- bottled water have been negotiated with a major beverage distributor in Vietnam. To date, in excess of 5,000 Diamond Rain-TM- household water purifiers had been sold in Vietnam. VECTOR MANUFACTURING CORPORATION ("VMC") VMC is a wholly owned subsidiary of VVC that provides purchasing and manufacturing services relating to VETI's water purification product lines. VMC sells water purification products to distributors as well as its subsidiary companies Alpine Water Purification, Inc. and VVL. ALPINE WATER PURIFICATION, INC. ("ALPINE") VETI markets a line of water treatment products under the Alpine name, primarily directed toward personal and household markets, involving water treatment cartridge technologies. These products are designed primarily for the North American market to improve taste. STOX SYSTEMS, INC. ("STOX") STOX has historically been involved in the design, engineering and installation of a broad range of hazardous materials storage and transportation systems. STOX has developed a diverse product line which consists primarily of prefabricated relocatable buildings or containers for storage of most classes of hazardous materials. These systems are designed to safely handle or store hazardous raw materials, reagents, explosives, products, and effluents from a broad spectrum of industries. The manufacture of these systems has been subcontracted to various other companies. There is a growing worldwide concern over the health and safety implications of improper storage and handling of hazardous materials. The market for these products has not developed to the extent anticipated. VETI remains committed to the long term viability of this product line, but has no plans to actively market this product in 1996. COMPETITION VETI's marketing strategy for water purification systems is to utilize exclusive agreements with individuals, corporations, or organizations which management believes provide contacts and expertise necessary to penetrate target markets. Initial market focus has been directed primarily to developing nations, where the need for purified drinking water is most critical and where VETI's technology and its commitment to developing the infrastructure necessary to assure long term water quality, has an advantage over competitive systems. With the exception of large infrastructure projects involving municipal systems for large cities, competition relating to water treatment equipment and services in developing countries is weak and fragmented with most competitors offering only a limited capacity in terms of technology and product diversification. VETI maintains a broad product line using a wide variety of technologies with a strategy of matching the product and technology to the problem or situation. VETI's products are competitively priced in all of its target markets. PURCHASING AND PRINCIPAL SUPPLIERS The raw materials used in VETI's products include primarily filters, filter housings, treatment media, treatment chemicals, fiberglass tanks, aluminum sheets and various plumbing supplies. Most of these components are of a standard or commodity nature and widely available. VETI maintains relationships with several principal suppliers and subcontractors due to quality considerations and in order to avail itself of volume pricing. No supplier is currently considered a sole source. Alternative suppliers with acceptable technology and quality have been identified for all critical components. PATENTS, COPYRIGHTS AND LICENSES Alpine holds a patent relating to the design of its countertop water purification cartridge. Technologies relating to water purification and treatment and hazardous material storage, while proprietary, are based on know-how and trade secrets and are not patented. VETI does not intend to patent these technologies due to the nature of the technologies and the level of public disclosure involved in the patent process. GOVERNMENT APPROVAL/REGULATIONS The operations of VETI are not subject to specific governmental approval or regulation. The products of VETI are, however, significantly impacted by environmental, health and import/export related government regulations and programs. In many instances these regulations and programs provide strength to the VETI's marketing efforts. The Diamond RainTM water purification systems help rural communities in developing countries, as well as others, meet World Health Organization and governmental standards for drinking water quality. Anticipated costs relating to government approval regulation, other than those encountered in the normal course of business, are considered minimal. RESEARCH AND DEVELOPMENT VETI is committed to ongoing research and development. The nature of environmental issues provides a constant supply of challenges and opportunities for technology based solutions. VETI estimates that it spent $185,053, $410,754 and $186,805 on research and development activities during fiscal years ended September 30, 1995 and June 30, 1994 and the three months ended September 30, 1994, respectively (these amounts are before elimination of intercompany amounts). During the past year VETI devoted substantially all of its research and development efforts toward the review and development of water purification systems and technologies. While a broad line of water purification systems has been developed, continued research and development in this area is ongoing. This research is expected to produce additional product offerings, address new problem areas, reduce the capital cost and maintenance of equipment and improve efficiency. Research and development is conducted or coordinated primarily through contracts with the Company. The Company employs qualified scientists, technologists and engineers experienced in the fields of environmental protection, water purification, treatment of effluents from mineral processing operations, and pollution control of water. The Company established its United States operations in 1991; it occupies a 6,500 square foot building that is fully equipped with offices, laboratories, pilot testing and storage areas. The Company provides research and development services to VETI to develop commercial applications for water purification technologies. In addition, the Company provides technical staff to VETI as required. The Company bills VETI for these at rates approximating cost recovery. FACILITIES The Company is located in Sparks, Nevada in office space which is currently occupied under a month-to- month lease at a cost of approximately $4,100 per month. These operations occupy a portion of a 6,500 square foot unit which includes office and laboratory facilities which are shared with certain related companies. Those companies reimburse the Company for a portion of the monthly rent. These facilities are adequate for the current level of operations and sufficient office and laboratory space is conveniently located to support future growth. Casmyn Mining Corporation, South Africa is located in Pretoria, South Africa in office space which is currently occupied on a month-to-month basis at a cost of approximately $1,700 per month. Casmyn Zimbabwe [Private] Ltd., is located near Bulawayo Zimbabwe in office space and facilities owned by Casmyn Zimbabwe [Private] Ltd. Effective December 1995, VVL occupies office space in Ho Chi Minh City and Hanoi under 36 month leases at an approximate cost of $5,000 per month. These facilities include offices, temporary living quarters and product show rooms. VVL also operates two retail water stores, one in Ho Chi Minh City and one in Hanoi. VVL has constructed a water bottling plant in the Nam Ha Province of Vietnam which began operations in June 1996. EMPLOYEES VETI and the Company currently have in excess of three-hundred-fifty (350) employees. These employees include management and professional staff and mine workers in Zimbabwe and are not subject to any collective bargaining agreements or union affiliations. Relations between management and employees are considered excellent. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Effective December 12, 1994, the Company dismissed its prior certifying accountants, Albright, Persing & Associates, Ltd. ("Albright") and retained as its new certifying accountants, Deloitte & Touche LLP. Albright's report on the Company's financial statements during the two most recent fiscal years preceding the date hereof (periods ended September 30, 1993 and September 30, 1992) contained no adverse opinion or a disclaimer of opinion, and was not qualified as to uncertainty, audit scope or accounting principles. The decision to change accountants was approved by the Company's Board of Directors. During the last two fiscal years and the subsequent interim period to the date of this Prospectus, there were no disagreements between the Company and Albright on any matters of accounting principles or practices, financials statement disclosures, or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of Albright, would have caused it to make a reference to the subject matter of the disagreements in connection with its reports. MANAGEMENT The following is a list of the directors and officers of the Company: NAME AND ADDRESS POSITION(S) HELD Amyn Dahya Chairman of the Board, 1335 Greg Street #104 Chief Executive Officer and Sparks, NV 89431 President Hanif Dahya Vice Chairman of the Board of 1335 Greg Street #104 Directors Sparks, NV 89431 Vijay J. Fozdar Director, Managing Director 1335 Greg Street #104 Finance & Corporate Development Sparks, NV 89431 Sandro Kunzle Director Tenuta Aia Vecchia 58029 Sassafortino (GR) Italy Mehdi Nimjee Director, Vice President Metallurgy Unit #1 - 6645 Tomken Rd. Mississauga, Ontario Canada L5T 2C3 Douglas C. Washburn Vice-President, Treasurer and 1335 Greg Street #104 Secretary Sparks, NV 89431 Dr. Gregory J. Gosson Vice President Geology and Mining Suite 201, United Bank Bldg. Heuwel Ave / Heuwelstraat Verwoerdburg, R.S.A. Dennis E. Welling Controller 1335 Greg Street #104 Sparks, NV 89431 BACKGROUND OF OFFICERS AND DIRECTORS OF THE COMPANY AMYN S. DAHYA. Mr. Dahya has extensive international experience in project development, engineering, joint ventures, and finance. Prior to joining the Company in 1993, he has held senior positions with Davy McKee, an international engineering firm and in 1987 he founded Casmyn Group of Companies specializing in mineral and environmental engineering, which he has developed for the last seven (7) years. Mr. Dahya serves on the Board of Directors of several companies, including Diamond Fontein International, Vector Venture Corp., and VETI where he also holds executive management positions. HANIF DAHYA. Mr. Dahya is a graduate from Harvard Business School (MBA) with an undergraduate degree in (BSc) in Production Engineering from Loughborough University, UK. He has built a distinguished career on the Wall Street and has held senior positions with high profile investment banks including E F Hutton, L F Rothschild Mortgage Corp. (CEO) and Union Bank of Switzerland (managing Director -- UBS Securities). He is currently a partner at Sandler, O'Neil, a Wall Street investment bank. His experience includes multi-million dollar financings and bond issues. As an advisor to the Board of Vector, he provides strategic direction with respect to the Company's financial planning and growth, which is primarily focused on expansion of operations and acquisitions of other cash flow generating companies in the environmental industry. VIJAY J. FOZDAR. Prior to joining VETI as President, Mr. Fozdar was a founder and Managing Director of Bristol International, Ltd., a Dallas-based merchant banking firm, and the Managing Director of Bristol WorldSource, Inc. Before Bristol, he founded and was General Manager for First RepublicBank Trade. Prior to returning to the U.S. in 1978, Mr. Fozdar spent over fifteen years working with several major trading companies operating in the Far East where he helped to establish distribution systems for a number of U.S. consumer and industrial products companies. Mr. Fozdar was formerly a member of the Export Trading Company Committee of Bankers Association for Foreign Trade (BAFT) and served on the Dallas Mayor's Trade and Investment Task Force. He is currently a member of the Advisory Board for the Center for International Business Studies at Texas A & M University. In addition, Mr. Fozdar is a frequent guest lecturer on international trade issues and has addressed market intelligence, structured trade finance, international marketing, and specific country seminars and their related issues. Mr. Fozdar has served on various international trade committees in the U.S. SANDRO KUNZLE. Mr. Kunzle has over 23 years of international banking and finance experience. During his career, Mr. Kunzle has held senior positions with several Swiss banks and financial institutions. He currently holds the position of Managing Director of Witra Inc., an investment firm based in Switzerland. His expertise in international finance and venture capital adds significant experience to the Company's international business development efforts. MEHDI C. NIMJEE. Mr. Nimjee brings to the Company twenty years of project management experience in the field of analytical chemistry and its applications to exploration, mining, agriculture, hazardous materials handling and the environment. He has also had experience in designing and setting up project specific laboratories internationally. Mr. Nimjee currently holds executive and board positions with the Casmyn Canadian organization. DOUGLAS C. WASHBURN. Mr. Washburn holds a MBA/CPA and brings twenty-four (24) years of financial management experience to the Company. Prior to joining the Company in 1993 he was a principal at Washburn Partners, a financial consulting firm, from 1990 to 1993. Between 1980 and 1990, he was Vice President and Controller of Armco Financial Corporation, a $1 billion multinational merchant bank and its successor Glenfed Financial Corporation. Through his background he brings to the Company expertise in areas of international finance, planning, taxation, accounting and management information systems. DR. GREGORY G. GOSSON. Dr. Gosson is the Chief Geologist for Casmyn Mining Corporation and is overseeing the Company's exploration activities from the Pretoria, South Africa office. Dr. Gosson has been involved in the mining industry since 1977 and has managed projects in Canada, the U.S.A., the Caribbean, South East Asia, New Zealand, and most recently in South Africa. Prior to joining Casmyn, Dr. Gosson was Chief Geologist for Plexus Resources in the U.S.A. He is a graduate of Queen's University, Canada and obtained his Ph. D. in Geology from Victoria University, New Zealand. Dr. Gosson has been managing Casmyn's property acquisitions and exploration efforts in South Africa for the past three and one-half years. His experience in base and precious metal deposits, precious stones, coal, and the oil and gas industry will be instrumental in identifying and developing mining opportunities for Casmyn worldwide. DENNIS E. WELLING. Mr. Welling, a CPA, currently serves as Controller. He has twenty-four (24) years internal and external audit and controlling experience, including positions with Deloitte & Touche, Armco Steel Corporation and Glenfed Financial Corporation. He has significant management information systems experience in the mining, manufacturing and financial services sectors. EXECUTIVE COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY In 1994, upon Mr. Dahya's acquisition of a controlling interest in the Company, the organizational structure of the Company was reconstituted to implement the development of mineral resources and environmental technologies. Prior to 1995 there was no compensation paid to any of the officers or directors. On April 14, 1995, the Company hired an entirely new management team, all of whom had previously maintained consulting relationships with the Company and/or are officers of the Company's subsidiary Vector Environmental Technologies, Inc. Since the Company has no compensation committee, or other board committee performing equivalent functions, the Company's full Board of Directors participates in and approves all deliberations concerning executive officer compensation. On December 31, 1993, the Company's subsidiary, Vector Environmental Technologies, Inc., entered into a ten-year employment contract with Amyn Dahya, Chairman of the Board, President and Chief Executive Officer. Pursuant to the terms of the contract, Mr. Dahya will earn an annual base salary of $150,000, which increases by no less than 10% per year if such an increase is approved by the Board of Directors. Under this contract, Mr. Dahya also receives reimbursement for business expenses and normal group benefits available to other executives of the VETI This contract also provides Mr. Dahya with 5-year, non-qualified, stock options to purchase shares of Common Stock of the VETI at an exercise price of $1.00 per share, The issuance of these shares is not intended or anticipated to significantly dilute the equity of the Company. (See "CERTAIN TRANSACTIONS.") Under the terms of the employment contract, Mr. Dahya has been granted options to purchase shares of VETI's Common Stock pursuant to the schedule and LTIP table: NO. OF SHARES TIME OF VESTING - ------------- --------------- 250,000 Immediately upon execution of the Employment Agreement 250,000 When gross sales of VETI reach $2,500,000 250,000 When gross sales of VETI reach $5,000,000 250,000 When gross sales of VETI reach $7,500,000 The following is a Summary Compensation Table disclosing annual compensation over $100,000 paid to the executive officers of Registration and/or Option/SAR Grants during the last fiscal year: SUMMARY COMPENSATION TABLE (INCLUDES COMPENSATION PAID BY THE COMPANY AND VETI) <TABLE> <CAPTION> ANNUAL COMPENSATION LONG-TERM COMPENSATION ---------------------------------------------------------------------------- AWARDS PAYOUTS - ------------------------------------------------------------------------------------------------------------ ALL FISCAL OTHER RESTRICTED OTHER NAME AND YEAR ANNUAL STOCK OPTIONS/ LTIP COMPEN- PRINCIPAL POSITION ENDING SALARY BONUS COMP. AWARD(S) SAR'S PAYOUTS SATION - ------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> Amyn Dahya, 1995 $150,000 None None 0 0 President 1994 $150,000 None None 0 0 and CEO 1993 $100,000 None None $718,750 250,000(2) None None (1) - ------------------------------------------------------------------------------------------------------------ Vijay Fozdar, 1995 $60,000* None $60,000 (4) (4) None None Managing Director (3) Finance & Corporate Development - ------------------------------------------------------------------------------------------------------------ Mehdi Nimjee, 1995 $60,000 None None (4) (4) None None Director and VP 1994 $60,000 None None 1993 $60,000 None None - ------------------------------------------------------------------------------------------------------------ Douglas Washburn, 1995 $60,000* None None (4) (4) None None VP, Treasurer and 1994 $60,000* None None Secretary 1993 $60,000* None None ----------------------------------------------------------------------------------------------------------- Dennis Welling, 1995 $60,000* None None (4) (4) None None Controller 1994 $54,162* None None 1993 $50,000* None None - ------------------------------------------------------------------------------------------------------------ Duane Dunk, 1995 $75,600* None None (4) (4) None None EVP of VETI 1994 $73,000* None None 1993 $60,000 None None - ------------------------------------------------------------------------------------------------------------ David Chase, 1995 $72,000* None None (4) (4) None None VP of VETI 1994 $72,000* None None 1993 $72,000* None None $431,250 150,000 (1) - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ </TABLE> * Paid by VETI. (1) Calculations are based on $3.875 per share, the market value of stock on December 31, 1993 the date the Options were granted, less the option price of $1.00 per share. (2) Immediately upon execution of his employment contract, on December 31, 1993, Mr. Dahya was granted an option to purchase 250,000 shares of VETI's Common Stock at an exercise price of $1.00 per share for a period of 5 years, expiring on December 31, 1998. As of the date of this Prospectus, none of these Options have been exercised. (See "CERTAIN TRANSACTIONS.") (3) Paid to Bristol World Source ("Bristol") for international marketing and management consulting services, Mr. Fozdar is a princpal with Bristol. (4) During 1995, the Company and VETI adopted stock option plans for key officers and employees. All options granted by the Company during 1995 were granted on June 28, 1995; options to purchase 660,000 Common Shares were granted with an option price equal to the then market price of $5.00 per share and options to purchase 246,000 shares were granted at $.04 per share. All options granted during 1995 by VETI were granted on June 20, 1995 with an option price equal to the market price of $1.00 per share on the grant date. See EMPLOYEE STOCK OPTION PLANS for additional information on plans. The following tables summarize the number and value of options to purchase stock granted under these plans: THE COMPANY <TABLE> <CAPTION> ---------------------------------------------------------------------------------------------- Securities underlying Restricted Stock Award (s) Options / SARs Name ($) (#) Exercisable/Unexercisable Exercisable/Unexercisable ---------------------------------------------------------------------------------------------- <S> <C> <C> Amyn S. Dahya $0 / $0 0/0 Vijay Fozdar $248,000 / $0 50,000/150,000 Douglas C. Washburn $62,000 / $62,000 12,500/62,500 Dennis E. Welling $24,800 / $24,800 5,000/35,000 Duane Dunk $24,800 / $24,800 5,000/35,000 David Chase $124,000 / $124,000 25,000/75,000 ---------------------------------------------------------------------------------------------- </TABLE> * Options are subject to vesting period of up to four years. VETI <TABLE> <CAPTION> ---------------------------------------------------------------------------------------------- Securities underlying Restricted Stock Award (s) Options / SARs Name ($) (#) Exercisable/Unexercisable Exercisable/Unexercisable ---------------------------------------------------------------------------------------------- <S> <C> <C> Vijay Fozdar $49,500 / $0 99,500/100,500 Douglas C. Washburn $0 / $0 13,200/26,800 Dennis E. Welling $0 / $0 13,200/26,800 Duane Dunk $0 / $0 16,500/33,500 David Chase $0 / $0 16,500/33,500 ---------------------------------------------------------------------------------------------- </TABLE> * Options are subject to vesting period of up to four years. No compensation is currently paid to non-employee directors. All other executive officers of the Company listed above received a combined annual cash compensation of $156,000 for the fiscal year ended September 30, 1995. In addition, the Company pays a portion of each employee's health insurance premium. There are no employment contracts, other than with Mr. Amyn Dahya outlined below, proposed termination of employment or change-in-control arrangements between the Company and any of its directors or executive officers. The following table lists the Options granted to employees of the Company, excluding those granted to Mr. Dahya in his employment contract, during the last fiscal year: OPTION/SAR GRANTS IN LAST FISCAL YEAR THE COMPANY <TABLE> <CAPTION> - ---------------------------------------------------------------------------------------------------------------------------------- POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF INDIVIDUAL GRANTS STOCK PRICE APPRECIATION FOR OPTION TERM - ----------------------------------------------------------------------------------------------------------------------------------- NO. OF SECURITIES % OF TOTAL UNDERLYING OPTIONS/SAR'S OPTION/SAR'S GRANTED TO EXERCISE OF NAME AND POSITION GRANTED EMPLOYEES BASE PRICE EXPIRATION IN FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($) - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Vijay Fozdar, 50,000 6% $.04 6/2000 $316,518 $399,406 Director 150,000 18% $5.00 12/2003 - ----------------------------------------------------------------------------------------------------------------------------------- Mehdi Nimjee, 50,000 6% $.04 6/2001 $324,431 $419,377 Director and VP - ----------------------------------------------------------------------------------------------------------------------------------- Douglas Washburn, 25,000 3% $.04 6/2001 $162,215 $209,689 VP, Treasurer and Secretary 50,000 6% $5.00 12/2003 $20,500 $48,000 - ----------------------------------------------------------------------------------------------------------------------------------- Dennis Welling, 10,000 1% $.04 6/2001 $64,900 $83,900 Controller 30,000 4% $5.00 12/2003 $12,300 $28,800 - ----------------------------------------------------------------------------------------------------------------------------------- Duane Dunk, 10,000 1% $.04 6/2001 $64,900 $83,900 EVP of VETI 30,000 4% $5.00 12/2003 $12,300 $28,800 - ----------------------------------------------------------------------------------------------------------------------------------- David Chase, 50,000 6% $.04 6/2001 $324,431 $419,377 VP of VETI 50,000 6% $5.00 12/2003 $20,500 $48,000 - ----------------------------------------------------------------------------------------------------------------------------------- </TABLE> VETI <TABLE> <CAPTION> - ---------------------------------------------------------------------------------------------------------------------------------- POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF INDIVIDUAL GRANTS STOCK PRICE APPRECIATION FOR OPTION TERM - ----------------------------------------------------------------------------------------------------------------------------------- NO. OF SECURITIES % OF TOTAL UNDERLYING OPTIONS/SAR'S OPTION/SAR'S GRANTED TO EXERCISE OF NAME AND POSITION GRANTED EMPLOYEES BASE PRICE EXPIRATION IN FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($) - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Vijay Fozdar, 50,000 7% $.01 6/2000 $63,176 $79,720 Managing Director 150,000 22% $1.00 6/2001 $47,850 $108,150 Finance & Corporate Development of VETI - ----------------------------------------------------------------------------------------------------------------------------------- Mehdi Nimjee, 50,000 7% $1.00 6/2001 $15,950 $36,050 Director and VP - ----------------------------------------------------------------------------------------------------------------------------------- Douglas Washburn, 40,000 6% $1.00 6/2001 $12,760 $28,840 VP, Treasurer and Secretary - ----------------------------------------------------------------------------------------------------------------------------------- Dennis Welling, 40,000 6% $1.00 6/2001 $12,760 $28,840 Controller - ----------------------------------------------------------------------------------------------------------------------------------- Duane Dunk, 50,000 7% $1.00 6/2001 $15,950 $36,050 EVP of VETI - ----------------------------------------------------------------------------------------------------------------------------------- David Chase, 50,000 7% $1.00 6/2001 $15,950 $36,050 VP of VETI - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- </TABLE> No other benefits, salaries, bonuses, stock options, grants, SAR's or compensation have been paid or given to executive officers during the last fiscal year and it is not anticipated that any will be in the foreseeable future. The following table lists the aggregated Option/SAR exercises during the last fiscal year by directors and officers of the Company and the fiscal year end Option/SAR values of both the exercised and unexercised Option/SAR Grants: AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION/SAR VALUES THE COMPANY <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- Number of Securities Underlying Value of Unexercised In- Unexercised options at Sept. the-Money options 30, 1995 Exercisable / at Sept. 30, 1995 Shares Value Unexercisable Exercisable / Unexercisable Name Acquired Realized - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Amyn S. Dahya 0 0 0/0 $0/$0 Vijay Fozdar 0 0 50,000/150,000 $448,000/$600,000 Douglas C. Washburn 0 0 12,500/62,500 $112,000/$312,000 Dennis E. Welling 0 0 5,000/35,000 $44,800/$164,800 Duane Dunk 0 0 5,000/35,000 $44,800/$164,800 David Chase 0 0 25,000/75,000 $224,000/$424,000 - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- </TABLE> VETI <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- Number of Securities Underlying Value of Unexercised In Unexercised options at Sept. the-Money options at Shares Value 30, 1995 Exercisable / Sept. 30, 1995 Name Acquired Realized Unexercisable Exercisable / Unexercisable - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Amyn S. Dahya 0 0 250,000/750,000 $437,500/$1,312,500 Vijay Fozdar 0 0 99,500/100,500 $223,625/$175,875 Douglas C. Washburn 0 0 13,200/26,800 $23,100/$46,900 Dennis E. Welling 0 0 13,200/26,800 $23,100/$46,900 Duane Dunk 0 0 16,500/33,500 $28,875/$58,625 David Chase 0 0 16,500/33,500 $28,875/$58,625 - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- </TABLE> LONG TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR To date, none of the foregoing options have been exercised. None of the other directors or executive officers of the Company hold options to purchase shares of the Company's Common Stock. EMPLOYEE STOCK OPTION PLAN During 1995, the Company adopted an Incentive Stock Option Plan (ISOP) which provides that a maximum of 800,000 options to purchase the Company's common stock may be granted to officers and employees of the Company. Options granted under the ISOP are intended to qualify as incentive stock options under the Economic Recovery Tax Act of 1981 (the "1981 Act") as amended by the Tax Reform Act of 1986. The ISOP is administered by the Board of Directors through a committee presently consisting of two members of the Board (Committee). The Committee determines which persons receive options, the number of shares that may be purchased under each option, vesting provisions, option terms and exercise price. Options granted under the ISOP are require to have an exercise price equal to or greater than the market price of the Company's Common Shares at the grant date. In the event an optionee voluntarily terminates his relationship with the Company, he has the right to exercise his accrued options within 3 months of such termination. However, the Company may redeem any accrued options held by an optionee by paying the difference between the option price and the then fair market value. If an optionee's relationship is involuntarily terminated, other than because of death, he also has the right to exercise the accrued options within thirty (30) days of such termination. Upon death, his estate or heirs have one year to exercise his accrued options. Options granted under the ISOP are not transferable other than by will or by the laws of descent and distribution. The ISOP provides that the number of shares and the option price will be adjusted on a pro-rata basis for stock splits and stock dividends. Options must be granted within five (5) years from the effective date of the ISOP. As of September 30, 1995, options to purchase up to 660,000 shares of common stock were granted under the ISOP. All options granted under the ISOP are valid for a term of five (5) years from the date of vesting and vest 25% per year over a period of four years. All options granted to date under the ISOP have a exercise price of $5.00 per share which represents the market price per share on the date of grant The Company also adopted a non-qualified Stock Option Plan (SOP), which grants five year options to purchase a maximum of 250,000 shares of the Company's common stock at a price of $0.04 per share to officers and key employees of the Company. Options granted under the Plan are not-intended to qualify as incentive stock options under the Economic Recovery Tax Act of 1981 (the "1981 Act") as amended by the Tax Reform Act of 1986. The Plan is administered by the Board of Directors through a committee presently consisting of all three members of the Board which determines which persons receive options under the SOP, the number of shares that may be purchased under each option and the vesting period. The term of all options is five (5) years and all options must be granted within five (5) years from the effective date of the Plan. Options granted under the Plan are not transferable other than by will or by the laws of descent and distribution. The Option Plan provides that the number of shares and the option price will be adjusted on a pro-rata basis for stock splits and stock dividends. As of September 30, 1995, options to purchase up to 246,000 shares of common stock were granted under the SOP. With the exception of Mr. Vijay Fozdar, who's options vest 100% on the grant date, the options vest to the optionee over a one (1) year period with 50% vesting at the grant date and 50% on the first anniversary of the grant date. Options granted under the SOP are compensatory in nature and result in total compensation expense of approximately $1,220,160, of which $855,600 was recorded as compensation expense during 1995 and $364,560 will be recorded as expense for the year ended September 30, 1996. During 1995 VETI adopted a qualified Incentive Stock Option Plan (V-ISOP) which provides that a maximum of 700,000 options to purchase the VETI's common stock may be granted to officers and employees and advisors of VETI. Options granted under the V-ISOP are intended to qualify as incentive stock options under the 1981 Act. As of September 30, 1995, options to purchase up to 606,000 shares of common stock were granted under the V-ISOP. All options granted to date under the V-ISOP have a exercise price of $1.00 per share which represents the market price per share on the date of grant. The only other benefit plan offered at the present or during 1995 involves a major medical plan which is made available to all employees on a non-discriminatory basis, the Company currently maintains no other stock option plans, no plan which would termed a "Long-Term Incentive Plan" as explained in Item 402 (a)(6)(iii) of the U.S. Securities and Exchange Act, nor any benefit plan which would give rise to "Long Term Compensation" as defined in Item 402(b)(iv) of the U.S. Securities and Exchange Act, except as described above. INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS Pursuant to the By-Laws of the corporation, the Company has agreed to indemnify an officer or director who is made a party to any proceeding, including a law suit, because of his/her position, if he/she acted in good faith and in a manner he/she reasonably believed to be in the best interest of the corporation and, in certain cases, may advance expenses incurred in defending any such proceeding. To the extent that the officer or director is successful on the merits in any such proceeding as to which such person is to be indemnified, the Company must indemnify him/her against all expenses incurred, including attorney's fees. With respect to a derivative action, indemnity may be made only for expenses actually and reasonably incurred in defending the proceeding, and if the officer or director is judged liable, only by a court order. The indemnification is intended to be to the fullest extent permitted by Colorado law. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be permitted to officers, directors or persons controlling the Company, pursuant to the foregoing provisions, the Company has been informed that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in said Act and is, therefore, unenforceable. PRINCIPAL SHAREHOLDERS The following table lists the shares of Common Stock of the Company owned, directly or indirectly, by each director of the Company, and each executive officer of the Company named in the Summary Compensation Table, affiliates of the directors and executive officers, the directors and executive officers as a group, and shareholders who hold 5% or more of the Company's Common Stock at June 30, 1996: <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------------------------- NAME AND ADDRESS OF AMOUNT AND NATURE OF TITLE OF CLASS BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS (1) - --------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> COMMON STOCK AMYN DAHYA 1335 GREG ST. #104 (2) -- SPARKS, NV. 89431 - --------------------------------------------------------------------------------------------------------------- HANIF DAHYA NIL -- 5 BEECHWOOD ROAD ALLENDALE, NEW JERSEY 07401 - --------------------------------------------------------------------------------------------------------------- SANDRO KUNZLE NIL -- TENUTA AIA VECCHIA 58029 SASSOFORTINO (GR) ITALY - --------------------------------------------------------------------------------------------------------------- NIL -- VIJAY J. FOZDAR 1335 GREG STREET #104 SPARKS, NV 89431 - --------------------------------------------------------------------------------------------------------------- 1,807,750 (3) 19% BISMILLAH CHILDREN'S FOUNDATION LTD. 1335 GREG ST. #104 SPARKS, NV. 89431 - --------------------------------------------------------------------------------------------------------------- 877,580 8.8% SOCIETE GENERALE 17 COURS VALNEY LA DEFENSE CEDEX PARIS, FRANCE 89431 - --------------------------------------------------------------------------------------------------------------- 606,061 6.1% WESTAMERICA CORP. 4141 N. SCOTTSDALE RD. SUITE #100 SCOTTSDALE, AZ 85251 - --------------------------------------------------------------------------------------------------------------- ALL OFFICERS AND DIRECTORS OF THE -- -- COMPANY AS A GROUP - --------------------------------------------------------------------------------------------------------------- </TABLE> (1) These percentages and totals are calculated based upon the total number of shares of common stock issued and outstanding as of the date of this Prospectus plus, in the case of persons holding presently exercisable options, the number of shares subject to such options. (2) At September 30, 1995, Mr. Amyn Dahya held 1,982,000 common shares of the Company, in addition 725,000 common shares of the Company were owned or controlled by Dahya Holdings, Inc., a Bahamiam corporation, of which Mr. Amyn Dahya is an officer and director. Mr. Mansoor Dahya, an uncle to Mr. Amyn Dahya, is the majority shareholder of Dahya Holdings, Inc. and holds 91% of the outstanding voting stock of Dahya Holdings, Inc. As indirect shareholders, Messrs. Amyn Dahya and Mansoor Dahya have shared voting and investment power in and to these shares. On October 3, 1995, these shares were converted into 2,707,000 Series A preferred shares and are entitled to vote with common shares with the further provision that each preferred share will be entitled to the equivalent of five (5) common share votes. (3) Bismillah Children's Foundation Ltd. is a nop-profit/charitable Nevada Corporation of which Mr. Amyn Dahya is a Trustee and Director. Bismillah is managed by a five (5) member Board of Trustees. Mr. Dahya and his wife are two of the five Trustees. A majority vote is required for the Board to take any actions on behalf of the Foundation. LEGAL PROCEEDINGS STOX has commenced an action in Ontario, Canada against Orillia Steel Works, Inc. ("OSW") entitled STOX Systems, Inc. v. Orillia Steel Works, Inc. for $550,000 Cdn ($414,094 U.S.) for breach of contract or, in the alternative, for conversion of intellectual property. OSW has defended the action and launched a counterclaim for $450,000 Cdn. ($339,623 U.S.) for breach of contract. There is also a claim for recovery of related interest and costs. STOX entered into a contract with OSW pursuant to which OSW was to fabricate a hazardous material storage facility (the "Facility"), designed by STOX. The contract included an express term regarding confidentiality (the "Confidentiality Clause"). STOX claims that OSW violated the Confidentiality Clause with respect to the intellectual property used to fabricate the facility and, as a result, STOX suffered damages. OSW claims that it did not violate the Confidentiality Clause because it actually owns the intellectual property used to fabricate the Facility. Rather, OSW alleges that STOX breached a verbal understanding that OSW would have the exclusive right to fabricate the facilities marketed and sold by STOX. AS a result of STOX's alleged breach of the verbal understanding, OSW claims that it suffered damages. STOX denies that there was any verbal understanding with OSW and, if there was, that OSW itself breached a fundamental term of that understanding and, therefore, STOX cannot be held liable. While the Company cannot yet determine the full impact of these actions, it believes that they will not have a material adverse effect on the financial condition or results of operations of the Company. The Company is not aware of any other material litigation, whether pending or threatened, to which it is or may become a party. CERTAIN TRANSACTIONS On December 31, 1993, VETI entered into a ten-year employment contract with Amyn Dahya, Chairman of the Board, President and Chief Executive Officer of Casmyn and now Chairman of the Board and CEO of VETI. Pursuant to the terms of the contract, Mr. Dahya will earn an annual base salary of $150,000, which increases by no less than 10% per year of such an increase is approved by the Board of Directors. Under this contract, Mr. Dahya also receives reimbursement for business expenses and normal group benefits available to other executives of VETI. This contract also provides Mr. Dahya with 5-year, non-qualified, stock options to purchase shares of Common Stock of VETI at an exercise price of $1 .00 per share. The issuance of these shares is not intended or anticipated to significantly dilute the equity off VETI. Under the terms of the employment contract, Mr. Dahya has been granted options to purchase shares of VETI Common Stock pursuant to the following schedule: - -------------------------------------------------------------------------------- NO. OF SHARES TIME OF VESTING - ------------- --------------- 250,000 Immediately upon execution of the Employment Agreement 250,000 When gross sales of VETI reach $2,500,000 250,000 When gross sales of VETI reach $5,000,000 250,000 When gross sales of VETI reach $7,500,000 - -------------------------------------------------------------------------------- As of the date of this Prospectus, none of the options have been exercised (See Executive Compensation of Directors and Executive Officers of the Company"). On January 31, 1994, Ace Capital Inc., a privately-held Nevada corporation of which David Chase, an executive officer of VETI, is an officer, director and shareholder, entered into a Promissory Note with VETI for the purchase of 25,000 shares of Common Stock, in the amount of $75,000, payable to VETI on demand, at 6% interest. (See "VECTOR ENVIRONMENTAL TECHNOLOGIES, Shares of Common Stock of VETI Held by Directors, Executive Officers, Affiliates and/or 5% shareholders.") On January 31, 1994, Taj Mohamed, a director of Auromar, entered into a Promissory Note with VETI for the purchase of 25,000 shares of Common Stock, in the amount of $75,000, payable to VETI on demand, at 6% interest. (See "CASMYN CORP. Shares of Common Stock of VETI Held by Directors, Executive Officers, Affiliates and/or 5% shareholders.") Amyn Dahya, an officer, director, promoter and principal shareholder of the Company was also a director of Auromar from June 29, 1993 to March 13, 1995. In connection with the acquisition of Casmyn Desalco, Ltd. from Dahya Holdings, Ltd., the Company will pay Dahya Holdings a six percent royalty on gross sales recognized from the commercial application of certain water desalination technology. In addition, the Company will issue 250,000 shares of restricted common stock upon the successful completion of a prototype desalination system. In addition, 250,000 restricted Common Shares will be issued upon the Company's achieving each of $5,000,000, $25,000,000 and $50,000,000 in gross sales from the desalination system or related technology. As of June 30, 1996, the Company had advances outstanding to Amyn Dahya of approximately $500,000 primarily relating to relocation expenses. DESCRIPTION OF THE COMPANY'S SECURITIES COMMON STOCK The Company is authorized to issue 320,000,000 shares, of which 20,000,000 are Preferred Shares, par value $.10 per share and 300,000,000 are Common Stock, par value $.04 per share. Each share of Common Stock is entitled to one vote at all meetings of shareholders. The Articles of Incorporation of the Company prohibit cumulative voting in the election of directors. All shares of Common stock are equal to each other with respect to liquidation rights and dividend rights. In the event of liquidation, dissolution or winding up of the Company, holders of the Common Stock will be entitled to receive, on a pro rata basis, all assets of the Company remaining after satisfaction of all liabilities and all liquidation preferences, if any, granted to holders of the preferred shares of the Company. There are no preemptive rights to purchase additional shares of Common Stock. Holders of shares of Common Stock are entitled to receive dividends if, as and when declared by the Board of Directors out of funds legally available therefor, subject to the dividend and liquidation rights of any preferred shares that may be issued. PREFERRED SHARES The Certificate of Incorporation of the Company authorizes issuance of a maximum of 20,000,000 preferred shares, par value $.10 per share. The Articles of Incorporation vest the Board of Directors of the Company with authority to divide the class of preferred shares into series and to fix and determine the relative rights and preferences of the shares of any such series so established to the full extent permitted by the laws of the State of Colorado and the Certificate of Incorporation with respect to, among other things: (a) the number of preferred shares to constitute such series and the distinctive designations thereof; (b) the rate and preference of dividends, if any, the time of payment of dividends, whether dividends are cumulative and the date from which any dividend shall accrue; (c) whether preferred shares may be redeemed and, if so, the redemption price and the terms and conditions of redemption; (d) the liquidation preferences payable on preferred shares in the event of involuntary of voluntary liquidation; (e) sinking fund or other provisions, if any, for redemption or purchase of preferred shares; (f) the terms and conditions by which preferred shares may be converted, if the preferred shares of any series are issued with the privilege of conversion; and (g) voting rights, if any. There are 2,707,000 Series A preferred shares issued and outstanding. Series A preferred shares have no preference with respect to dividends or liquidation and vote with Common Shares with each Series A Preferred share having a voting right equal to five Common Shares. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the common stock is American Securities Transfer Corporation, 938 Quail Street, Suite 101, Lakewood, CO 80215-5513. PLAN OF DISTRIBUTION This Prospectus relates to 4,371,267 shares of Common Stock that may be offered and sold from time to time by certain shareholders of the Company, all of whom have been accorded certain registration rights by the Company that permit such holders to include such shares in this Prospectus. Such shares consist of (i) 2,805,791 shares of common stock that were issued in private placements, (ii) 833,333 shares of common stock issuable in connection with the conversion of a $5,000,000 convertible debenture, and (iii) 732,143 shares of common stock issuable upon the exercise of warrants. Set forth below is information, as of May 29, 1996, regarding the beneficial ownership of the Company's Common Stock by each Selling Shareholder. <TABLE> <CAPTION> SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED PRIOR TO OFFERING (1) NUMBER OF AFTER OFFERING (2) ------------------------------ SHARES ---------------------------- NUMBER PERCENT OFFERED NUMBER PERCENT - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> SOCIETE GENERALE - ORVALOR (3) 2,144,762 22.0% 2,144,762 2,144,762 22.0% - ---------------------------------------------------------------------------------------------------------------------------------- REG "S" OFFERING (4) - ---------------------------------------------------------------------------------------------------------------------------------- CNCA/SCT BRUNDY 33,000 * 33,000 33,000 * - ---------------------------------------------------------------------------------------------------------------------------------- S.E. BANKEN LUXEMBOURGE S.A. 12,000 * 12,000 12,000 * - ---------------------------------------------------------------------------------------------------------------------------------- LA COMPAGNIE FINANCIERE 15,000 * 15,000 15,000 * (ROTHSCHILD BANQUE) - ---------------------------------------------------------------------------------------------------------------------------------- EQUITABLE LIFE ASSURANCE 450,000 3.2% 450,000 450,000 3.2% - ---------------------------------------------------------------------------------------------------------------------------------- CEDEF FINANCE 15,000 * 15,000 15,000 * TORBAY COMPANY 45,000 * 45,000 45,000 * - ---------------------------------------------------------------------------------------------------------------------------------- GFM INTERNATIONAL INVESTORS 60,000 * 60,000 60,000 * - ---------------------------------------------------------------------------------------------------------------------------------- THE PRUDENTIAL INSURANCE CO. 45,000 * 45,000 45,000 * - ---------------------------------------------------------------------------------------------------------------------------------- EXECUTRONICS LTD. 15,000 * 15,000 15,000 * - ---------------------------------------------------------------------------------------------------------------------------------- CM INVESTMENT NOMINEES LTD. 30,000 * 30,000 30,000 * - ---------------------------------------------------------------------------------------------------------------------------------- NUTRACO NOMINEES LTD. 150,000 1.1% 150,000 150,000 1.1% - ---------------------------------------------------------------------------------------------------------------------------------- WOODBRIDGE CAPITAL CORPORATION 15,000 * 15,000 15,000 * - ---------------------------------------------------------------------------------------------------------------------------------- MARTINDALE INC. 378,055 4.0% 378,055 378,055 4.0% - ---------------------------------------------------------------------------------------------------------------------------------- DIAMOND FONTEIN INTERNATIONAL, LTD. 300,000 3.2% 300,000 300,000 3.2% - ---------------------------------------------------------------------------------------------------------------------------------- COVENTRY SECURITIES, LTD. 115,000 1.2% 115,000 115,000 1.2% - ---------------------------------------------------------------------------------------------------------------------------------- NORDIC RESOURCES, CORP. 25,000 * 25,000 25,000 * - ---------------------------------------------------------------------------------------------------------------------------------- ROTH INVESTOR RELATIONS, INC. 10,000 * 10,000 10,000 * - ---------------------------------------------------------------------------------------------------------------------------------- MARSHALL AUERBACK 126,200 1.3% 126,200 126,200 1.3% - ---------------------------------------------------------------------------------------------------------------------------------- T/A PACIFIC SELECT INVESTMENTS LTD. 48,800 * 48,800 48,800 * - ---------------------------------------------------------------------------------------------------------------------------------- NABAT RAJAN 338,450 3.6% 338,450 338,450 3.6% - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- </TABLE> (*) Represents less than 1% of outstanding Common Stock. (1) Unless otherwise indicated, the persons named in the table have sole voting and sole investment power with respect to all shares beneficially owned subject to community property laws where applicable. (2) Assumes that all of the shares offered hereby are actually sold. (3) Consists of shares, warrants and conversion of shares under a convertible debenture. (4) Consists of shares and warrants. The Company has been advised by the Selling Shareholders that they intend to sell all or a portion of the shares of Common Stock offered by this Prospectus from time to time (I) in the over-the-counter market at prices reasonably related to the prices of the Common Stock prevailing at the time of such sales, (ii) otherwise than in the over-the-counter market in negotiated transactions (which may include the pledge or hypothecation of some of all the shares), at fixed prices which may be changed, at market prices prevailing at the time of sale or at prices reasonably related thereto or at negotiated prices, or (iii) by a combination of the foregoing methods of sale. The Selling Shareholders may effect such transactions by selling the shares of Common Stock to or through broker-dealers, and such broker-dealers may receive compensation in the form of discounts, concessions or commissions from the Selling Shareholders and/or the purchasers of the shares of Common Stock for which such broker-dealers may act as agent or to whom they may sell as principal, or both. The Selling Shareholders and any broker, dealer or other agent executing sell orders on behalf of the Selling Shareholders may be deemed to be "underwriters" within the meaning of the Securities Act of 1933, as amended (the "1933 Act") in which event commissions received by any such broker, dealer or agent and profit on any resale of shares of Common Stock of principal may be deemed to be underwriting commissions under the 1933 Act. Such commissions received by a broker, dealer or agent may be in excess of customary compensation. Such shares of Common Stock may also be sold in accordance with Rule 144 and Rule 145 under the 1933 Act. The Company will pay all the costs, expenses and fees incident to the offering and sale of the shares to the public, other than commissions and discounts of underwriters, brokers, dealers or agents not paid by the purchasers of the shares. In addition, the Company has agreed to indemnify the Selling Shareholders against certain liabilities, including liabilities arising under the 1933 Act. EXPERTS The consolidated financial statements of the Company at September 30, 1995 and 1994 and for each of the three years in the period ended September 30, 1995, appearing in this Prospectus and Registration Statement, have been audited by Deloitte & Touche LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein and in the Registration Statement, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The consolidated financial statements of WestAmerica Corporation at March 31, 1995 and 1996 and for each of the three years in the period ended March 31, 1996, appearing in this Prospectus and Registration Statement, have been audited by Tullius Taylor Sartain & Sartain, independent auditors, as set forth in their report thereon appearing elsewhere herein and in the Registration Statement, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The financial statements of WestAmerica Investment Company at March 31, 1996, and December 31, 1994 and for the fifteen month period ended March 31, 1996 and each of the two years in the period ended December 31, 1994 (not separately appearing in this Prospectus and Registration Statement), included in the consolidated financial statements of WestAmerica Corporation have been audited by George Brenner, C.P.A., independent auditor, as set forth in his report thereon appearing elsewhere herein and in the Registration Statement, and are included in the consolidated financial statements of WestAmerica Corporation in reliance upon such report given upon the authority of such firm as an expert in accounting and auditing. The financial statements of Auromar Development Corporation as of and for the years ended March 31, 1996 and 1995, appearing in this Prospectus and Registration Statement, have been audited by Deloitte & Touche, Chartered Accountants, independent auditors, as set forth in their report thereon appearing elsewhere herein and in the Registration Statement, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The financial statements of Auromar Development Corporation as of and for the year ended March 31, 1994, appearing in this Prospectus and Registration Statement, have been audited by Dennis N. Wong, Inc. Chartered Accountant, independent auditor, as set forth in his report thereon appearing elsewhere herein and in the Registration Statement, and are included in reliance upon such report given upon the authority of such firm as an expert in accounting and auditing. None of the named experts listed herein have any security interest in the Company LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Selling Shareholders by Jenkens & Gilchrist, a Professional Corporation.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000774055_transaxis_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000774055_transaxis_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary is qualified in its entirety by the more detailed information and financial statements and related notes appearing elsewhere in this Prospectus. See "Risk Factors" for a discussion of certain factors to be considered in evaluating the Company and its business. The Company DataMark Holding, Inc. (the "Company" or "DataMark") provides highly targeted business to consumer advertising for its clients. The medium for such targeted advertising has been direct mail and is being expanded to include an advertiser funded online network, ValuOne Online. The Company utilizes sophisticated consumer profiling techniques to target advertising to the persons most likely to purchase the specific product or service being marketed. The Company's advertising programs provide highly predictable and measurable advertising campaigns. Some of the features of the Company's services include: * Analysis - The DataMark direct advertising strategy includes an exhaustive analysis of the defining lifestyle characteristics of the client's existing customer base. The Company specifically identifies who is most likely to respond to the client's offer. * Identification - DataMark uses the results of the marketing research and analysis and performs a computerized database compilation. From this, DataMark creates a list of cluster groups or profiled individuals which match the identified demographic, socio-economic, lifestyle and behavior characteristics, and who have the highest propensity to buy the client's product. * Implementation - DataMark implements a strategically designed program of systematic advertising to the targeted potential customers on the customized database list. * Measurement - DataMark conducts a thorough analysis after each advertising campaign to understand exactly what has been accomplished and where the results are leading. This critical information allows the targeting of the marketing program to be consistently fine tuned. Systematized feedback allows accurate adjustments and targeting refinement for maximum efficiency and increased positive results. * Turn-key Services - DataMark offers a turn-key operation to which the client can outsource its entire targeted advertising including targeting, creating, producing, delivering and analyzing the campaign. Online Advertising Services The Company is completing the development of the first interactive promotional national marketing network, ValuOne Online, which is entirely advertiser funded. ValuOne Online incorporates highly successful direct mail strategies and methodologies. The strategy is to offer a leading edge advertising medium by incorporating direct advertising methodologies that can produce predictable and measurable results. ValuOne Online's primary mission is to provide, free to the consumer end-user, technologically superior, interesting, entertaining and convenient interactive promotional advertising information. ValuOne Online intends to stimulate mass use by an initial 1.5 million targeted profiled end-user households. ValuOne Online's initial 1.5 million targeted end-user households have been specifically segmented from the 9.5 million potential online households based on the lifestyle and consumer buying habits most desired by advertisers. This will create significant value and numerous benefits for advertisers who have their <PAGE> products on ValuOne Online. ValuOne Online consumer end-users participate in interactive, money saving, advertising messages. These end-users will be able to find products and services they want, when they want them, free of user fees. ValuOne Online will provide local telephone access for its targeted metropolitan areas through the Sprint Telnet network. This major telecommunication network is used by other major national data providers. The network will connect the end user to the ValuOne Online server in Salt Lake City, Utah. The proprietary network avoids the security risks and delays of using the Internet. National advertising is typically placed through national media representation groups, the oldest and largest of which is Katz Media Group ("Katz") (NYSE:KTZ). The Company and Katz have entered into an exclusive representation agreement whereby Katz is the exclusive agent to represent ValuOne Online to national advertisers and Katz agrees not to represent competitive online services. Katz states that it is the only full service media representative firm serving all types of media, with leading market shares in the representation of radio and television stations and cable television systems. The Company's principal executive offices are located at 488 E. Winchester Street, #100, Salt Lake City, Utah 84107. Its telephone number is 801-268-1001. The Offering Common Stock outstanding prior to offering 8,110,407 shares (1) Common Stock offered by Selling Shareholders (excluding Selling Warrantholders) 2,541,357 shares (2) Common Stock offered by Selling Warrantholders 431,125 shares Use of Proceeds The Company will not receive any proceeds from the sale of Shares by the Selling Shareholders and Selling Warrantholders. The Company may receive up to $3,497,469 in proceeds for exercise of the Warrants if all Warrants are exercised. The Company intends to use any proceeds received on exercise of the Warrants to market ValuOne Online and for working capital and general corporate purposes. See "Use of Proceeds" and "Business of the Company." Trading Symbol DTAM (OTC Bulletin Board)(3) <PAGE> (1) Includes 214,500 shares which have been subscribed for. Of the currently outstanding Common Stock, 7,638,811 shares are "restricted securities" which may not be readily resold into the market. Since only 471,596 shares are believed to be readily tradable, there can be no assurance that the market for the Common Stock will be sufficiently liquid to absorb the shares being offered hereby. (2) Two Selling Shareholders each beneficially own more than 5% of the Company's common stock. See "Principal Stockholders" and "Selling Shareholders." No other Selling Shareholder is an affiliate of the Company. (3) The Company has applied to Nasdaq for listing in the Nasdaq SmallCap Market. There is no assurance Nasdaq listing will be granted. - -------------------- Capitalization The following table sets forth certain information regarding the Company's equity securities outstanding prior to and after the offering: Number of Shares Capital Stock outstanding as of September 30, 1996: Common Stock: 8,110,407 Preferred Stock: 0 Capital Stock to be outstanding after Offering(1): Common Stock: 8,541,532 Preferred Stock: 0 - --------------- (1) Includes 214,500 subscribed shares which the Company has commited to issue to certain of the Selling Stockholders prior to the offering, which are also included in Capital Stock outstanding as of September 30, 1996. Assumes exercise of all Warrants. Excludes 1,047,215 shares of Common Stock which may be issued upon vesting and exercise of options outstanding at September 30, 1996 other than the Warrants, including options for 451,623 shares pursuant to the Company's Omnibus Stock Option Plan. Transactions with Related Parties There have been related party transactions between the Company and it affiliates. See "Certain Transactions with Related Parties." <PAGE> Summary Financial Information Summary Financial Data Set forth below are summary consolidated historical financial data for the Company as of and for the periods indicated. The following information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. <TABLE> <CAPTION> Year Ended June 30, Three Months Ended September 30, ------------------- -------------------------------- <S> <C> <C> <C> <C> <C> 1994 1995 1996 1995 1996 ---- ---- ---- ---- ---- Statement of Operations Data: Net sales $3,017,805 $3,443,965 $4,256,887 $1,074,559 $1,481,171 Cost of Sales Postage 1,133,710 1,360,976 1,580,484 433,766 524,499 Materials and printing 790,744 1,035,954 1,310,184 282,438 514,266 Selling expense 440,236 446,181 700,429 164,369 391,490 Research and development 89,250 560,915 1,565,718 164,350 679,447 General and administrative 456,039 268,765 1,094,375 145,965 373,463 Compensation expense - - 1,484,375 - - Net income (loss) 62,998 (264,270) (3,433,081) (120,696) (840,501) Net income (loss) per common share $ .01 $ (.06) $ (.58) $ (.02) $ (.10) Weighted average common shares outstanding 4,282,299 4,713,028 5,917,491 5,539,953 8,110,407 </TABLE> June 30, September 30, -------- --------- 1995 1996 1996 ---- ---- ---- (unaudited) Balance Sheet Data: Working capital $ 794,156 $12,774,113 $11,242,948 Total assets 1,631,445 16,543,253 15,447,230 Long-term debt, less current portion 25,332 - - Stockholders' equity 1,073,225 15,541,624 14,740,871 <PAGE>
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000782145_playnet_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000782145_playnet_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the more detailed information and the consolidated financial statements and notes thereto appearing elsewhere in this Prospectus. Each prospective investor is urged to read this Prospectus in its entirety. Unless otherwise indicated, all share and per share data and information in this Prospectus relating to the number of shares outstanding assume no exercise of the Underwriters' over-allotment option to purchase 300,000 additional shares from the Company. See "Underwriting." THE COMPANY The Company designs and develops location-based, pay-per-play electronic game and entertainment units and music juke boxes which are networked through the Internet. The Company's products utilize the Internet to enhance traditional video game products and juke boxes through innovations such as linking multiple players in remote locations and offering competitive tournament prize play. The Company intends to initially market these products to location-based venues such as sports bars and "theme" restaurants. The Company plans to introduce three products in the next six months: the PlayNet Music juke box and the TeamNet and TouchNet electronic game systems. The Company's products are designed to utilize the Internet as a communications network and an entertainment medium in a social setting, allowing users to play networked games, compete in local or national tournaments and contests, browse the World Wide Web, participate in chat room discussions and use credit cards to purchase merchandise. The Company's business reflects the growing trend to connect people via computer networks and, as a result, to create new forms of interactive entertainment in a social setting. According to the Vending Times 1996 Census, total coin-drop revenue in the U.S. in 1995 for all amusements was $6.3 billion, and the U.S. electronic pay per play video game business (which excludes pinball and redemption machines) generated $2.0 billion of that revenue. The Company has designed an open, PC-based system architecture which blends proprietary game development, secure communications protocol, and operations software in a client/server environment. Communications take place over the Internet utilizing standard Internet protocols. This integrated system allows the Company to offer networked, location-based entertainment that can be remotely updated with the latest games or entertainment content. The Company's initial product line is expected to consist of the following location-based entertainment systems: PlayNet Music -- A juke box which will provide access to thousands of music titles via an Internet connection to the Company's music database servers, thereby providing significantly greater choices than a standard juke box. In addition to providing the ability to select songs from an extensive library, PlayNet Music will allow customers to purchase merchandise from their favorite bands. TouchNet -- A compact game system engineered to sit on a counter top and accommodate 8 to 12 different games, including trivia, parlor, strategy and action games. Touch Net allows users to choose which game to play and then to choose whether to play against the computer or against other players through an Internet connection. In addition to playing games and participating in contests and prize events, customers can choose to browse the Internet, use e-mail and participate in chat room discussions using attached telephone handsets. TeamNet -- An interactive system which allows two teams of up to four players each to compete against each other in sports simulations and other games. Both teams may be physically present in the same location, competing on the same game system, or may be in separate locations competing through an Internet connection. The TeamNet system has been specifically designed to support tournament play. The Company plans to distribute its location-based entertainment systems through a well-established network of third-party national and local distributors for resale to operators that install, operate and maintain the products, primarily in hospitality locations, including restaurants, bars and hotels, and secondarily in arcades and malls. Certain members of the Company's management have long-standing relationships with many of the major distributors in the United States and internationally. The Company anticipates that tournament play and certain other revenues will be shared among the Company, the distributor and the operator. The Company also intends to distribute its entire product line in international markets through a variety of distribution arrangements. It is contemplated that products will be localized for each territory as appropriate. Aristo is currently in the process of acquiring the rights to the libraries of various music publishers and record labels for use on its PlayNet Music system. Concurrently, the Company is negotiating to enter into sponsorship and advertising programs for its sports games, tournaments and prize contests with high-profile consumer goods and beverage companies. The Company also intends to establish various contractual arrangements, joint ventures and other mutually advantageous programs with technology providers, equipment manufacturers, distributors, major hospitality chains, consumer products companies, music-related companies, content providers and others, to develop broader, more efficient, more profitable and higher-profile products and services. STRATEGY The Company's primary strategic objective is to establish and rapidly grow an installed customer base of its location-based Internet-enabled entertainment units. The Company believes that its products and system architecture will enable it to expand the variety of content and services available beyond that which is available in existing products, as well as to increase the range of locations at which such networked entertainment units can be profitably located. The Company believes that the breadth of entertainment choices which its products will deliver, coupled with a highly diverse range of public locations, will extend the demographic universe of its potential users beyond that of adolescent males who currently dominate the coin-operated video game market. The Company's primary strategies can be summarized as follows: Enhancement of the Location-Based Entertainment Experience -- The Company intends to offer networked entertainment content with multi-player, multi-location and tournament prize play which it believes will result in significantly more compelling entertainment experiences than are possible with existing stand-alone location-based, pay-per-play machines. Unlike most competing entertainment systems, which are primarily based on proprietary hardware platforms, the Company's entertainment units will offer touch screen-operated access to a wide variety of video games including parlor, trivia, strategy and action games and prize tournament play. Additional features will include access to Internet content and thousands of music titles, the ability to purchase general entertainment and music-related merchandise, and ancillary features such as e-mail and "real-time chat" with other users of the system. Hospitality Focus and Penetration Beyond Traditional Locations -- The Company intends to focus its efforts on the hospitality sector which, according to the 1996 Vending Times Census of the Industry comprises 60% of the location-based entertainment industry. This sector primarily includes bars, restaurants and hotels and is distinguished from the remainder of the industry, which is made up of specialized game arcades and locations such as movie theaters. The Company believes that the greater variety of entertainment content offered on its products could significantly expand the number of potential locations in the hospitality sector and allow it to enter non-traditional locations such as airports, railroad stations and shopping malls. The Company intends to accelerate the distribution of its products by forming strategic alliances with major hospitality companies, both in the United States and internationally. Expansion of Potential User Base -- The Company intends to offer a range of entertainment products, including parlor, trivia, strategy and action games, expected to appeal to a broader user base than existing arcade offerings which are increasingly targeting the adolescent male demographic segment. The Company will initially target hospitality locations, especially bars and chain restaurants, for distribution of its products. Networked and prize tournaments and promotions will be aimed at a broad array of consumers who are interested in social interactive entertainment and competitive tournament prize play. The Company believes that its broad-based strategy will allow it to increase average revenue per unit and the number of potential locations for its networked machines. Product Innovation and Improvement -- The Company believes that its flexible system architecture will allow it to update and continually improve its game and entertainment offerings on a cost effective basis through remote downloads from central servers, based on customer feedback and demand. The Company expects to be able to regularly update its musical offerings on PlayNet Music based on the popularity of songs in each location. The Company also expects to augment and improve its game content and add new features on both TouchNet and TeamNet based on customer feedback. Downloading will permit TouchNet games to be updated and new games to be added to optimize choice at each unit. TeamNet sports offerings will be changed based on sport seasons and game popularity. The Company also intends to support usage through tournament prize offerings and promotions. Recurring Revenue Streams -- The Company believes that location-based entertainment product manufacturers only receive revenue from the sale of machines. The Company believes that it will be able to demonstrate that its products will result in increased coin-drop from location-based entertainment units and expects that it will be able to share in incremental revenues, thus creating recurring revenue streams for the Company. The Company intends to promote, arrange sponsorship for, and organize national and local game tournaments with cash and other prizes. The Company believes that the limited tournament features of certain existing location-based entertainment units have demonstrated an increase in machine usage and revenues, especially since such tournaments require higher game fees. Ancillary Revenue Opportunities -- Sponsorship and advertising revenue will be generated from on-screen advertisements and tournaments. The Company also expects to collect fees on merchandise sales made through its Internet-enabled entertainment units. The Company plans to re-market data collected from user polls, music selections and other similar usage to content providers, advertisers and product and service vendors. The Company's principal executive office is located at 152 West 57 Street, New York, New York 10019-3310, and its telephone number is (212) 586-2400. The Company is a Delaware corporation which is the surviving corporation of its merger with a New York corporation (see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview"). References herein to the "Company" or "Aristo" are to the Company (including, for periods prior to the merger, the predecessor New York corporation) and, unless the context otherwise requires, its subsidiaries. THE OFFERING <TABLE> <S> <C> Common Stock offered......................... 2,000,000 shares Common Stock to be outstanding after the offering................................... 16,966,661 shares(1) Use of Proceeds.............................. The Company intends to use the net proceeds of this offering for system and product development, capital expenditures, product launches, software licensing and general corporate purposes. See "Use of Proceeds." Risk Factors................................. The shares offered hereby involve a high degree of risk. See "Risk Factors." Nasdaq SmallCap Market Symbol................ ATSP Proposed Nasdaq National Market Symbol....... </TABLE> - --------------- (1) Does not include (i) an aggregate of 500,000 shares of Common Stock reserved for issuance pursuant to options available for grant under the Company's 1994 Stock Option Plan, of which options to purchase 395,000 shares have been granted as of the date of this Prospectus; (ii) an aggregate of 1,000,000 shares of Common Stock reserved for issuance pursuant to options available for grant under the Company's 1995 Stock Option Plan, of which options to purchase 1,000,000 shares have been granted as of the date of this Prospectus; (iii) an aggregate of 1,500,000 shares of Common Stock reserved for issuance pursuant to options available for grant under the Company's 1996 Stock Option Plan, of which options to purchase 1,425,067 shares have been granted as of the date of this Prospectus; (iv) 433,728 shares of Common Stock issuable in accordance with the terms of certain of the Company's convertible promissory notes; (v) 60,000 shares of Common Stock issuable upon exercise of certain options granted to certain lenders; and (vi) 448,101 shares of Common Stock issuable upon exercise of the Company's outstanding warrants. SUMMARY CONSOLIDATED FINANCIAL INFORMATION The following summary consolidated financial information has been derived from and should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere in this Prospectus. The summary consolidated financial data set forth below should be read in conjunction with the Consolidated Financial Statements and the Notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein. The consolidated statements of operations data set forth below with respect to the three years ended October 31, 1995 are derived from the consolidated financial statements included elsewhere in this Prospectus, which consolidated financial statements have been audited by Coopers & Lybrand L.L.P. The data as of July 31, 1996 and for the nine month periods ended July 31, 1995 and 1996 was derived from unaudited consolidated financial statements that have been prepared on the same basis as the audited financial statements and, in the opinion of management, contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of operations for such period. The historical results are not necessarily indicative of the results to be expected in the future. <TABLE> <CAPTION> NINE MONTHS YEARS ENDED OCTOBER 31, ENDED JULY 31, ------------------------------------------------------------------- -------------------------------- 1991 1992 1993 1994 1995 1995 1996 ----------- ----------- ----------- ----------- ----------- ------------ ----------------- <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED OPERATIONS DATA: Total Revenue.......... $ -- $ 33,333 $ 58,334 $ 16,005 $ 157,627 $ 4,749 $ 198,349 Total Operating Expenses............. 1,462,158 1,487,728 1,659,837 2,188,605 4,281,956 2,246,438 7,499,101 Net Loss............... (1,478,158) (1,480,812) (1,636,310) (2,228,644) (4,116,457) (2,210,086 ) (7,429,529) Net Loss per Share..... $ (0.29) $ (0.23) $ (0.21) $ (0.24) $ (0.40) $ (0.23 ) $ (0.55) Weighted Average Outstanding Common Shares............... 5,122,222 6,450,298 7,723,767 9,244,593 10,388,926 9,714,981 13,554,091 </TABLE> <TABLE> <CAPTION> JULY 31, 1996 ---------------------------------------------- ACTUAL PRO FORMA(1) AS ADJUSTED(1)(2) ----------- ------------ ----------------- <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash......................................................................... $ 544,104 $ 6,104,749 $22,104,749 Working Capital (Deficit).................................................... (2,152,225) 3,728,420 19,728,420 Total Assets................................................................. 10,478,933 16,039,578 32,039,578 Total Liabilities............................................................ 5,685,191 5,365,191 5,365,191 Stockholders' Equity (Deficit)............................................... 4,793,742 10,924,337 26,924,337 </TABLE> - --------------- (1) Reflects on a pro forma basis as at July 31, 1996 the private placements of 1,256,400 shares of Common Stock, the repayment of a $450,000 promissory note of the Company, the issuance of a $130,000 convertible promissory note and the payment in Common Stock of $250,000 of compensation to a senior executive. Assumes full conversion of shares of Astro-Stream Corporation into shares of Common Stock. (2) Also reflects on an as adjusted basis as at July 31, 1996 the sale of the 2,000,000 shares of Common Stock offered hereby and the application of the estimated net proceeds therefrom.
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. CONTEMPORANEOUSLY WITH THE CLOSING OF THE OFFERING MADE BY THIS PROSPECTUS, THE COMPANY WILL ACQUIRE BY MERGER TWO BANKS USING A PORTION OF THE PROCEEDS OF THE OFFERING. SEE "PROPOSED MERGERS" AND "TEXAS REGIONAL BANCSHARES, INC. PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION" REGARDING THE EFFECTS ON THE COMPANY OF THE CONSUMMATION OF SUCH MERGERS. THE COMPANY Texas Regional Bancshares, Inc. ("Texas Regional" or the "Company") is a registered bank holding company whose wholly-owned subsidiary bank, Texas State Bank ("Texas State Bank" or the "Bank"), conducts a commercial banking business in the Rio Grande Valley of Texas. At March 31, 1996, Texas Regional had consolidated assets of $655.9 million, loans outstanding (net of unearned discount) of $467.1 million, total deposits of $586.0 million, and total shareholders' equity of $64.6 million. For the three months ended March 31, 1996 and 1995, the Company earned net income of $2.6 million and $2.0 million, respectively, for a return on average assets for these periods of 1.57% and 1.52%, respectively. At March 31, 1996, the Company had nonperforming assets (including loans 90 days or more past due and still accruing) of $4.9 million, representing 1.0% of period-end loans and other nonperforming assets (primarily other real estate). At December 31, 1995, Texas Regional had consolidated assets of $646.8 million, loans outstanding (net of unearned discount) of $450.9 million, total deposits of $579.7 million, and total shareholders' equity of $62.7 million. For the years ended December 31, 1995 and 1994, the Company earned net income of $8.7 million and $7.2 million, respectively, for a return on average assets for these periods of 1.51% and 1.43%, respectively. At December 31, 1995, the Company had nonperforming assets (including loans 90 days or more past due and still accruing) of $4.2 million, representing 0.9% of period-end loans and other nonperforming assets (primarily other real estate). Texas State Bank operates a total of nine full service banking locations in the Rio Grande Valley. The market area served by Texas State Bank has been recognized as among the fastest growing areas in the nation. The McAllen-Edinburg-Mission area has a projected population growth rate of 23.8% between 1994 and 2000, and the Brownsville-Harlingen area has a projected population growth rate of 16.0% during that same period. The business strategy of Texas Regional is for the Bank to provide its customers with the financial sophistication and breadth of products of a regional bank, while retaining the local appeal and service level of a community bank. Management believes that the Company is well positioned in its market due to its responsive customer service, the strong community involvement of Texas State Bank management and employees, recent trends in the Texas banking environment and the economy of the Rio Grande Valley. Management's strategy is to provide a business culture in which individual customers and small and medium sized businesses are accorded the highest priority in all aspects of the Company's operations. Management believes that individualized customer service will allow the Company to increase its market share in lending volume and deposits. As part of its operating and growth strategies, the Company is working to attract business from, and provide service to, small to medium sized businesses, and expand its operations in McAllen, Harlingen and other strategic areas in the Rio Grande Valley. Consistent with this strategy, during 1995, Texas State Bank acquired banking locations in Rio Grande City and Roma, Texas, and in January 1996 it entered into definitive agreements to acquire two banks headquartered in Mission and Hidalgo, Texas. See "The Company" and "Proposed Mergers." At March 31, 1996, Texas Regional employed 351 full time equivalent employees. The address of Texas Regional's principal executive office is Kerria Plaza, Suite 301, 3700 North 10th Street, McAllen, Texas 78501, and its telephone number is (210) 631-5400. THE MERGERS Texas State Bank has for some time sought appropriate acquisitions to permit the Bank to expand within the market areas served by Texas State Bank and into adjacent market areas in the Rio Grande Valley. In January 1996, the Company entered into definitive agreements to acquire through merger First State Bank & Trust Co., Mission, Texas ("First State Bank") and The Border Bank, Hidalgo, Texas ("Border Bank") (the "Mergers"). First State Bank and Border Bank had combined total assets of approximately $545.5 million at March 31, 1996. Assuming consummation of the Mergers, on a pro forma basis at March 31, 1996, Texas Regional would have had total assets of $1.170 billion, which would have made Texas Regional the largest bank holding company headquartered in the Rio Grande Valley. At March 31, 1996, First State Bank had total assets of $426.1 million, loans outstanding (net of unearned discount) of $192.8 million and stockholders' equity of $61.6 million. At March 31, 1996, Border Bank had total assets of $119.9 million, loans outstanding (net of unearned discount) of $51.0 million and stockholders' equity of $17.2 million. First State Bank and Border Bank had combined total assets of approximately $524.0 million at December 31, 1995. Assuming consummation of the Mergers, on a pro forma basis at December 31, 1995, Texas Regional would have had total assets of $1.143 billion. At December 31, 1995, First State Bank had total assets of $404.5 million, loans outstanding (net of unearned discount) of $188.4 million and stockholders' equity of $59.4 million. At December 31, 1995, Border Bank had total assets of $119.5 million, loans outstanding (net of unearned discount) of $47.3 million and stockholders' equity of $17.1 million. Elliot B. Bottom is the Chairman of the Board of both First State Bank and Border Bank, and the banks have substantial common ownership. The purpose of the Mergers is to further strengthen Texas State Bank's branch network and banking business in the Rio Grande Valley by adding six new banking locations in Mission, Penitas, McAllen and Hidalgo, Texas. The purchase price for the Mergers is estimated to be $99.5 million, approximately $40.0 million of which will be paid from the proceeds of the offering made hereby. The Company intends to fund the balance of the purchase price principally from liquidation of cash equivalents and, to the extent necessary, selected investment securities on a consolidated basis. See "Proposed Mergers" and "Use of Proceeds." Management of Texas State Bank believes that the Mergers will expand the Company's community banking network into contiguous markets, substantially increasing its market share and enabling the Bank to compete more effectively with other financial institutions in the Rio Grande Valley. Because of the proximity of Mission to McAllen, there is a substantial overlap in the markets served by Texas State Bank and First State Bank. For this reason and because the banks serve a similar customer base, First State Bank is considered by Texas State Bank management to be a direct competitor of Texas State Bank, particular as to loan customers. The new or expanded services to be offered to First State Bank and Border Bank customers include enhanced data processing services, additional automated teller facilities and other services now offered to Texas State Bank customers. Texas State Bank management believes that First State Bank, Border Bank and Texas State Bank customers will benefit from the expansion of Texas State Bank's branch network from nine to 15 banking locations. Texas State Bank expects to realize certain operating and administrative efficiencies as a result of the Mergers; however, because of the relatively low employee-to-asset ratio at First State Bank and Border Bank, cost savings is not a principal motivating factor for the Mergers. The operating efficiencies which are expected include the use by all banking locations of the existing Texas State Bank data processing facility, operation of a single human resources department, and economies of a combined advertising program. THE OFFERING <TABLE> <S> <C> Common Stock offered hereby................. 2,200,000 shares(1)(2) by the Company.......................... 2,180,000 shares(1) by the Selling Shareholder.............. 20,000 shares Common Stock to be outstanding after the offering.................................. 8,376,791 shares(1)(2) Use of proceeds............................. Approximately $40.0 million of the net proceeds to be received by the Company from the sale of Common Stock will be used to fund part of the consideration payable by Texas State Bank upon consummation of the Mergers. The remainder of the net proceeds, if any, will be used for general corporate purposes. See "Proposed Mergers" and "Use of Proceeds." Nasdaq National Market symbol............... TRBS </TABLE> - ------------ (1) An additional 330,000 shares may be sold pursuant to an over-allotment option granted by the Company to the Underwriters. See "Underwriting." (2) The shares of Common Stock offered hereby will be sold contemporaneously with the consummation of the Mergers. TEXAS REGIONAL BANCSHARES, INC. SUMMARY CONSOLIDATED FINANCIAL INFORMATION The summary consolidated financial information under the captions "Summary of Operations" and "Period-End Balance Sheet Data" below for, and as of, each of the years in the five-year period ended December 31, 1995 has been derived from the consolidated financial statements of the Company, which financial statements have been audited by KPMG Peat Marwick LLP, independent auditors. The consolidated financial statements of the Company at December 31, 1995 and 1994 and for each of the years in the three-year period ended December 31, 1995 are included elsewhere in this Prospectus. The data presented at March 31, 1996 and 1995 and for each of the three-month periods then ended are derived from unaudited consolidated interim financial statements of the Company and include, in the opinion of management, all adjustments necessary to present fairly the data for such periods. <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, YEARS ENDED DECEMBER 31, ----------------------- ----------------------------------------------------- 1996 1995 1995 1994 1993 1992 1991 ------------ --------- --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> <C> (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) SUMMARY OF OPERATIONS: Net Interest Income......... $ 7,689 $ 6,450 $ 27,540 $ 22,941 $ 19,197 $ 16,861 $ 11,773 Net Income.................. 2,554 1,987 8,725 7,185 6,011 4,519 2,824 PER SHARE DATA: Net Income.................. $ 0.41 $ 0.32 $ 1.40 $ 1.16 $ 1.16 $ 0.92 $ 0.79 Book Value.................. 10.42 9.26 10.12 9.00 7.73 6.42 5.22 Cash Dividends Declared on Common Stock.............. 0.10 0.10 0.40 0.24 -- -- -- Average Shares Outstanding (in thousands)............ 6,295 6,201 6,227 6,035 5,170 4,890 3,578 PERIOD-END BALANCE SHEET DATA: Total Assets................ $ 655,886 $ 539,005 $ 646,769 $ 531,834 $ 473,263 $ 414,331 $ 297,256 Loans....................... 467,059 354,410 450,854 339,939 290,500 252,118 179,853 Deposits.................... 585,994 475,985 579,731 472,108 429,521 375,016 271,540 Shareholders' Equity........ 64,563 57,341 62,720 55,731 39,983 34,318 19,366 PERFORMANCE RATIOS: Return on Average Assets.... 1.57% 1.52% 1.51% 1.43% 1.34% 1.23% 1.00% Return on Average Shareholders' Equity...... 16.01 14.16 14.69 14.11 16.15 15.23 15.85 ASSET QUALITY RATIOS: Nonperforming Assets to Loans and Other Nonperforming Assets...... 0.92% 0.97% 0.79% 1.41% 1.69% 2.31% 4.27% Allowance for Loan Losses as a Percentage of: Loans................... 1.05 1.13 1.01 1.03 1.18 1.16 1.42 Nonperforming Assets.... 113.12 115.33 126.62 72.96 69.39 49.43 32.44 </TABLE> SEE "PROPOSED MERGERS" AND "TEXAS REGIONAL BANCSHARES, INC. PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION" REGARDING THE PRO FORMA COMBINED EFFECT ON THE COMPANY ASSUMING CONSUMMATION OF THE MERGERS AT MARCH 31, 1996 AND DECEMBER 31, 1995. EXCEPT AS OTHERWISE SPECIFIED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. SEE "UNDERWRITING."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000789853_tracker_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000789853_tracker_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary of certain information contained in this Prospectus is not complete. This summary is qualified in its entirety by the more detailed information and financial statements appearing elsewhere in this Prospectus. Prospective investors must read the entire Prospectus. The securities offered hereby are speculative and involve a high degree of risk. See "RISK FACTORS." As used in this Prospectus, the term "Company" includes The Tracker Corporation of America, a Delaware corporation ("Tracker U.S."), and The Tracker Corporation, an Ontario, Canada corporation ("Tracker Canada"), a wholly-owned subsidiary of Tracker U.S., unless the context indicates otherwise; provided, however, that with respect to all information provided herein relating to Tracker U.S.'s Common Stock, options, warrants and other capital securities, the term "Company" means Tracker U.S., unless the context otherwise requires. All dollar amounts contained in this Prospectus are in U.S. dollars unless otherwise noted. The assets and liabilities of the Company are translated at the June 30, 1996 exchange rate while revenues, expenses and cashflows are translated at the average rates in effect for the period. THE COMPANY The Tracker Corporation of America, a Delaware corporation ("Tracker U.S."), is a development stage company which, through its wholly-owned Canadian subsidiary, The Tracker Corporation, an Ontario, Canada corporation ("Tracker Canada"), has developed and has begun to market, sell and operate a personal property identification and recovery system which uses advanced bar code and laser scanning technology to aid in the identification and recovery of lost and stolen personal possessions. The Company launched its service in a limited test market in Toronto, Canada in October 1994 and is slowly continuing to expand its service throughout Canada. The Company recently began test marketing in the United States and has begun to introduce its service to various communities in the United States through the use of diverse marketing channels. As of September 30, 1996, the Company has installed only 17 scanners in the United States. The Company's service has been endorsed by the International Association of Chiefs of Police (the "IACP"). The Company has agreed to pay the IACP a royalty fee for such endorsement. See "BUSINESS--The IACP Endorsement." To date, the Company has received very limited revenues from sales of its service. The Company offers its members special encoded labels that are attached to the members' personal possessions and contain ownership information in advanced bar code form (PDF 417 symbology). After a member's lost item has been found and then scanned, the labels are linked electronically to a central computer base. A Company service representative then notifies the member that his or her possession has been found and informs the member of the item's location. The identified item may then be picked up by the member, or delivered to the member safely and promptly by courier at the member's expense. The Company also has implemented and offers a supplemental service called the "Tracker Plus" service, which covers the full cost of returning possessions to members. The Company plans to expand its recovery service by having manufacturers of products such as computer chips, bicycles, power tools, electronic equipment, cameras and auto parts apply the Company's coding, through laser etching or other methods, directly onto or into products at the source of manufacture. The Company believes that this expansion of its service will be attractive to manufacturers because (i) it will add value to their products by showing that they care about their customers and their customers' ability to recover lost or stolen items and (ii) the coding will enhance the ability of manufacturers and distributors to combat retail and warranty fraud. Currently, however, the Company does not have a contract with any manufacturers to laser etch the Company's coding or to directly apply the Company's coding at the source of manufacture using any other method. The Company anticipates, that if such contracts are procured, the manufacturers will absorb the cost of the laser etching either directly or indirectly (i.e., through the unit price charged to the manufacturer by the Company). There can be no assurance, however, that the Company will be able to successfully expand its service in this fashion. In addition to the Company's personal property identification and recovery system, the Company has implemented and is currently offering a card registration service. The Company offers members of this program the benefit and convenience of card registration. With one phone call, a member can (a) cancel all his lost or stolen cards (whether they be debit cards, gas cards, automated bank teller cards, department THE TRACKER CORPORATION OF AMERICA 13,799,479 SHARES OF COMMON STOCK --------------------------- THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" AT PAGE 6 OF THIS PROSPECTUS. THESE ARE SPECULATIVE SECURITIES. --------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. --------------------------- THE DATE OF THIS PROSPECTUS IS , 1996 ------------- --------------------------- This Prospectus relates to the public offering from time to time by certain holders thereof (the "Selling Securityholders") of up to (i) 4,709,181 issued and outstanding shares of the common stock, par value $0.001 (the "Common Stock"), of The Tracker Corporation of America, a Delaware corporation ("Tracker U.S."); (ii) 250,000 shares of Common Stock which are issuable to the holder thereof upon the exercise of Tracker U.S.'s outstanding Common Stock Purchase Warrants (the "Common Warrants"); (iii) 960,002 shares of Common Stock which are issuable to the holders of Tracker U.S.'s Convertible Subordinated Debentures in an aggregate principal amount of $1,000,000 (the "First Series Convertible Debentures") upon the conversion of such warrants into Common Stock; (iv) 728,957 shares of Common Stock which are issuable to the holders of Tracker U.S.'s Convertible Subordinated Debentures in an aggregate principal amount of $1,189,529 (individually the "Second Series Convertible Debentures" and collectively with the First Series Convertible Debentures, the "Convertible Debentures") upon the conversion of such debentures into Common Stock; (v) 5,225,339 shares of Common Stock which are issuable to the holders of Exchangeable Preference Shares (the "Exchangeable Preference Shares") issued by Tracker U.S.'s subsidiary, The Tracker Corporation, an Ontario, Canada corporation ("Tracker Canada"), and the holders of Tracker Canada's Exchangeable Preference Share Warrants (the "Exchangeable Preference Share Warrants") upon the exchange of Exchangeable Preference Shares for Common Stock; (vi) 900,000 shares of Common Stock which are issuable to the holder thereof upon the exercise of an outstanding Common Stock Purchase Option (the "Merchant Partners Option"); (vii) 326,000 shares of Common Stock which may, at the option of the Company, be issued to the Company's investor relations firm (the "CRG Shares"); (viii) 500,000 shares of Common Stock which are issuable to the holder thereof upon the exercise of outstanding options (the "CRG Options"); and (ix) 200,000 shares of Common Stock which are issuable to the holder thereof upon the exercise of an outstanding Common Stock Purchase Warrant (the "TODA Warrant"). The Common Stock offered by the Selling Securityholders hereby may be offered from time to time for the account of the Selling Securityholders. The Selling Securityholders may sell the shares of Common Stock being offered by them from time to time in transactions in the over-the-counter market, in negotiated transactions, or by a combination of these methods at market prices prevailing at the time of the sale, at prices related to such market prices or at negotiated prices. There can be no assurance, however, that the Selling Securityholders will sell any of the shares of Common Stock offered hereby. See "PLAN OF DISTRIBUTION" and "SELLING SECURITYHOLDERS." Tracker U.S. will not receive any of the proceeds from any sale of the shares of Common Stock. See "USE OF PROCEEDS." The Common Stock is traded on the over-the-counter market and is quoted on the OTC Bulletin Board under the symbol "TRKR." On August 30, 1996, the high bid price and the asked price of the Common Stock were $ 0.24 and $0.28 respectively. See "PRICE RANGE OF COMMON STOCK." store cards or credit cards), (b) request replacement cards, (c) request a change of address for all his cards, (d) receive $15,000 in travel insurance on common carrier, (e) receive $2,000 in AD&D insurance, (f) receive $500 in airline discounts and (g) be covered on fraudulent charges up to $10,000. This service includes 24 identification labels, a card registration form and an indemnification certificate. THE OFFERING Selling Securityholders may sell up to (i) 4,709,181 already issued shares of Common Stock, (ii) 250,000 shares of Common Stock which are issuable to the holder of the Common Warrants upon the exercise thereof; (iii) 960,002 shares of Common Stock which are issuable to the holders of the First Series Convertible Debentures upon the conversion of such debentures into Common Stock; (iv) 728,957 shares of Common Stock which are issuable to the holders of the Second Series Convertible Debentures upon the conversion of such debentures into Common Stock; (v) 5,225,339 shares of Common Stock which are issuable to the holders of the Exchangeable Preference Shares and Exchangeable Preference Warrants upon the exchange of Exchangeable Preference Shares for Common Stock; (vi) 900,000 shares of Common Stock which are issuable to the holder of the Merchant Partners Option upon the exercise thereof; (vii) 326,000 CRG Shares; (viii) 500,000 shares of Common Stock which are issuable to the holder of the CRG Options upon the exercise thereof; and (ix) 200,000 shares of Common Stock which are issuable to the holder of the TODA Warrant upon the exercise thereof. The Selling Securityholders may sell such shares from time to time in transactions in the over-the-counter market, in negotiated transactions, or by a combination of these methods at market prices prevailing at the time of the sale, at prices related to such market prices or at negotiated prices. There can be no assurance, however, that the Selling Securityholders will sell any of the shares of Common Stock offered hereby. COMMON STOCK CURRENTLY OUTSTANDING(1) (2) 15,921,647 COMMON STOCK TO BE OUTSTANDING AFTER THE OFFERING(1) (2) (3) 19,578,482 USE OF PROCEEDS The Company will not receive any of the proceeds of any sales. See "USE OF PROCEEDS."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000791446_trump_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000791446_trump_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following is a summary of certain information contained elsewhere in this Prospectus and is qualified in its entirety by the more detailed information and financial statements, and notes thereto, contained elsewhere in this Prospectus. Unless otherwise indicated, (i) the term "Trump AC" as used in this Prospectus includes Trump AC and its subsidiaries and gives effect to the Merger Transaction, and (ii) the information in this Prospectus assumes no exercise of the Underwriters' over-allotment option in connection with the Stock Offering. Prospective investors are urged to read this Prospectus carefully in its entirety. This Prospectus contains forward-looking information that involves risks and uncertainties and such information is subject to the assumptions set forth in connection therewith and the information contained herein. TRUMP ATLANTIC CITY ASSOCIATES Upon consummation of the Merger Transaction, Trump Atlantic City Associates ("Trump AC"), an indirect subsidiary of Trump Hotels & Casino Resorts, Inc., will own and operate two "Four Star" Atlantic City casino hotels (the "Atlantic City Properties"): the Trump Taj Mahal Casino Resort (the "Taj Mahal") and Trump Plaza Hotel and Casino ("Trump Plaza"). The Taj Mahal is currently Atlantic City's largest casino, and Trump Plaza will have the largest casino in Atlantic City upon completion of its ongoing expansion program (the "Trump Plaza Expansion"). Through its ownership of two successful land-based casino hotels, Trump AC will have a leading presence in the growing Atlantic City market, which, in terms of gaming revenues, has demonstrated a ten-year compound annual growth rate of approximately 5.8% and a growth rate of approximately 9.5% for calendar year 1995 versus calendar year 1994. After giving effect to the Merger Transaction and the Trump Plaza Expansion, Trump AC will have approximately one-quarter of Atlantic City's casino square footage, slot machines, table games and hotel room inventory. In addition, the combination of the Taj Mahal with Trump Plaza's existing operations will also provide opportunities for operational efficiencies, economies of scale and other benefits from the expertise and experience of management at the two operating entities. Trump AC also plans to undertake an expansion program at the Taj Mahal designed to increase its hotel room inventory and casino floor space and expand its entertainment and parking facilities (the "Taj Mahal Expansion"). Management believes Trump AC will benefit from the following factors: . LEADING ATLANTIC CITY FACILITIES. Upon consummation of the Trump Plaza Expansion, Trump AC will own and operate the two largest casino hotel properties in Atlantic City, both of which are strategically located on The Boardwalk. Trump AC believes that the Atlantic City Properties' prime locations, reputations for high quality amenities and first-class customer service and targeted marketing strategies are ideally suited to capitalize on the expected continued growth in the Atlantic City gaming market. Management believes that its leading size and market share in Atlantic City following the consummation of the Merger Transaction will provide it with a competitive advantage in marketing the Atlantic City Properties, particularly to large convention groups and multi-day stay destination resort visitors. . ATLANTIC CITY PROPERTIES EXPANSION. Trump AC has nearly completed the Trump Plaza Expansion and is developing the plans for the Taj Mahal Expansion, which projects will increase the Atlantic City Properties' gaming space and hotel room capacity, allowing Trump AC to meet both existing demand and the anticipated demand from the increased number of available rooms and infrastructure improvements that are currently under development to enhance further the "vacation destination appeal" of Atlantic City. The following table profiles Trump AC's casino and hotel capacity following the planned expansions at the Atlantic City Properties: <TABLE> <CAPTION> TRUMP TAJ TRUMP PLAZA TAJ MAHAL PLAZA(a) MAHAL EXPANSION(b) EXPANSION(c) TOTAL -------- ------- ------------ ------------ ------- <S> <C> <C> <C> <C> <C> Casino square footage... 75,395 120,000(d) 64,158 60,000 319,553 Slot machines........... 2,368 3,550 1,898 2,500 10,316 Table games............. 97 169 44 -- 310 Hotel rooms............. 555 1,250 849 800 3,454 </TABLE> -------------------- (a) Includes the 2,000 square foot area connecting the existing facility with Trump Plaza East (as defined) and the 75 slot machines included in this area. (b) Includes the 15,000 square foot casino with 400 slot machines and 13 table games and 326 hotel rooms which have already opened at Trump Plaza East. The remaining 14 hotel rooms and suites at Trump Plaza East are scheduled to be opened by the end of April 1996. Also reflects nine super suites scheduled to open early in 1997 and not otherwise included in the "Trump Plaza Expansion." The remaining portion of the Trump Plaza Expansion, Trump World's Fair (as defined), is scheduled to open in the second quarter of 1996. (c) Plans for the Taj Mahal Expansion, scheduled to be completed in phases from the first quarter of 1997 through early 1998, are subject to modification. (d) Excludes a 12,000 square foot poker, keno and race simulcasting room which contains 64 poker tables. . OPERATING SYNERGIES. Trump AC intends to capitalize on the opportunities for efficiencies which can be generated by integrating certain operations of the Atlantic City Properties, which previously have been operated separately. Management has identified cost savings which management estimates, by the end of the second year following the Merger Transaction, to be approximately $18-20 million on an annual basis, although no assurance may be made as to the amount which will be realized. Management believes that it will be able to consolidate certain departments at the Atlantic City Properties, reduce general and administrative expenses through possible personnel reductions and the consolidation of certain marketing efforts, and reduce operating costs through efficiencies that are expected to result from the combined purchasing power of the Atlantic City Properties. . THE "TRUMP" NAME. Trump AC capitalizes on the widespread recognition of the "Trump" name and its association with high quality amenities and first-class service. To this end, Trump AC provides a broadly diversified gaming and entertainment experience consistent with the "Trump" name and reputation for quality. ATLANTIC CITY PROPERTIES Trump Plaza. Management believes that Trump Plaza's "Four Star" Mobil Travel Guide rating and "Four Diamond" American Automobile Association rating reflect the high quality amenities and services that Trump Plaza provides to its casino patrons and hotel guests. These amenities and services include a broad selection of dining choices, headline entertainment, deluxe accommodations, tennis courts and swimming and health spa facilities. Trump Plaza Expansion. Management is seeking to enhance further Trump Plaza's position as an industry leader through the Trump Plaza Expansion, scheduled to be completed in the second quarter of 1996, which involves expanding and renovating Trump Plaza's gaming space, increasing its hotel capacity and constructing retail operations and entertainment venues. As part of the Trump Plaza Expansion, management has renovated and integrated into Trump Plaza a hotel located adjacent to Trump Plaza's main tower ("Trump Plaza East"), the grand opening for which was held on February 16, 1996, and is in the process of renovating and integrating the former Trump Regency Hotel ("Trump World's Fair"), located on The Boardwalk adjacent to the existing Atlantic City Convention Center, which is next to Trump Plaza. In February 1996, Trump Plaza East opened the 15,000 square foot Ocean View Casino and Bar, and has to date opened 326 of its 349 hotel rooms. The Ocean View Casino and Bar is the first gaming room in Atlantic City to combine a casino, bar and entertainment area and features a 70-foot long bar with 27 bar- top slot machines, live entertainment and a 58 square foot video wall. With its high ceilings and windows overlooking the Atlantic Ocean and The Boardwalk, Trump Plaza is creating a new and exciting entertainment environment for its casino patrons. Upon completion of the Trump Plaza Expansion, Trump Plaza's casino floor space will be the largest in Atlantic City, increasing from approximately 75,000 square feet to an aggregate of approximately 140,000 square feet, housing a total of approximately 4,270 slot machines and 140 table games. Trump Plaza's hotel capacity will increase to a total of 1,404 guest rooms from 555 guest rooms, making Trump Plaza's guest room inventory one of the largest in Atlantic City. Management believes the increased hotel capacity as a result of the Trump Plaza Expansion will better enable Trump Plaza to meet demand and accommodate its casino guests, as well as to host additional and larger conventions and corporate meetings. The following table details plans for the Trump Plaza Expansion: <TABLE> <CAPTION> TRUMP TRUMP PLAZA TRUMP WORLD'S FACILITY(a) PLAZA EAST(b) FAIR(c) TOTAL ----------- ------------- ------- ------ <S> <C> <C> <C> <C> Casino square footage................. 75,395 14,886 49,272 139,553 Slot machines......................... 2,368 405 1,493 4,266 Table games........................... 97 12 32 141 Hotel rooms........................... 555 349 500 1,404 </TABLE> - -------------------- (a) Includes the 2,000 square foot area connecting the existing facility with Trump Plaza East (as defined) and the 75 slot machines included in their area. (b) The casino and 326 hotel rooms have already opened. The remaining 14 hotel rooms and suites are scheduled to be opened by the end of April 1996. Also reflects nine super suites scheduled to open early in 1997 and not otherwise included in the "Trump Plaza Expansion." (c) Scheduled to open in the second quarter of 1996. The Trump Plaza Expansion will increase Trump Plaza's prime central frontage on The Boardwalk to nearly a quarter of a mile. Furthermore, Trump World's Fair will add approximately 50,000 square feet of casino floor space, approximately 16,000 of which will be directly accessible from The Boardwalk, and Trump Plaza has been reconfigured to provide a new entranceway to Trump Plaza directly off the Atlantic City Expressway. Management believes that the construction of a new convention center and "tourist corridor" linking the new convention center with The Boardwalk will enhance the desirability of Atlantic City generally and, as a result of Trump Plaza's central location, will benefit Trump Plaza in particular. Trump Plaza's location on The Boardwalk at the end of the main highway into Atlantic City makes it highly accessible for both "drive-in" and "walk-in" patrons. The Taj Mahal. The Taj Mahal currently has the largest casino in Atlantic City and has ranked first among all Atlantic City casinos in terms of total gaming revenues, table revenues and slot revenues since it commenced operations in 1990. The Taj Mahal capitalizes on the widespread recognition and marquee status of the "Trump" name and its association with high quality amenities and first-class service as evidenced by its "Four Star" Mobil Travel Guide rating. Management believes that the breadth and diversity of the Taj Mahal's casino, entertainment and convention facilities and its status as a "must-see" attraction will enable the Taj Mahal to benefit from the expected continued growth in the Atlantic City market. In order to enhance its status as a "must- see" attraction, the Taj Mahal has recently signed agreements for the development of Hard Rock Cafe(R), Rainforest Cafe(R) and All Star Cafe(R) themed restaurants on the property. In addition, in order to continue to attract high end players, the Taj Mahal has recently opened the Dragon Room, a new Asian themed table game area, and plans to open the Sultan's Palace, a new high-end "slots only" lounge and private club in the second quarter of 1996. The Taj Mahal Expansion. The Taj Mahal Expansion is scheduled to be completed in phases from the first quarter of 1997 through early 1998. The Taj Mahal Expansion, the plans for which are subject to modification, involves the construction of an approximately 2,000 space expansion of the Taj Mahal's existing self-parking facilities and a new 10,000 seat arena adjacent to the Taj Mahal, each scheduled to be completed in the first quarter of 1997; the conversion of the current site of the Mark Etess Arena into a new 60,000 square-foot circus-themed casino with 2,500 slot machines, scheduled to be completed in mid-1997; and the construction of an approximately 800 room hotel tower adjacent to the Taj Mahal's existing hotel tower, which is scheduled to be completed early in 1998. THE ATLANTIC CITY MARKET. The Atlantic City gaming market has demonstrated continued growth despite the recent proliferation of new gaming venues across the country. The 12 casino hotels in Atlantic City generated approximately $3.75 billion in gaming revenues in 1995, an approximately 9.5% increase over 1994 gaming revenues of approximately $3.42 billion. During 1995, all 12 casinos experienced increased gaming revenues compared to 1994. The approximately $3.75 billion of gaming revenues produced by the 12 Atlantic City casino hotels in 1995 exceeded the approximately $3.12 billion of gaming revenues produced by the 18 largest (based on net revenues) casino hotels on the Las Vegas Strip for the same period, even though the 12 Atlantic City casino hotels have less than one-quarter the number of hotel rooms of such Las Vegas Strip casino hotels. Management believes, however, that given current high occupancy levels, future casino revenue growth in the Atlantic City market will be dependent in part upon expansion in hotel capacity. Due principally to an improved regulatory environment, the general improvement of economic conditions in 1993, 1994 and 1995 and existing high occupancy rates, significant investment in the Atlantic City market has been initiated and/or announced. For example, Trump Plaza will be located at the end of the planned "tourist corridor" featuring an entertainment and retail complex that will link The Boardwalk with downtown Atlantic City. In addition, The New Jersey Casino Redevelopment Authority ("CRDA") is currently overseeing the development of a new convention center. When completed, the approximately $250 million convention center will be the largest exhibition space between New York City and Washington, D.C. The new convention center, currently scheduled to open in January 1997, will be located at the base of the Atlantic City Expressway. Trump Plaza is adjacent to the existing Atlantic City Convention Center and will also be one of the closest casino hotels to the new convention center, which as currently planned would hold approximately 500,000 square feet of exhibit and pre-function space, 45 meeting rooms, various food-service facilities and a 1,600-car underground parking garage. An additional planned infrastructure improvement is the State of New Jersey's approximately $125 million capital plan to upgrade and expand the Atlantic City International Airport. Trump AC believes that the Taj Mahal's and Trump Plaza's positions as leading Atlantic City attractions will enable them to attract a large portion of any increase in the number of potential casino hotel patrons. THE FIRST MORTGAGE NOTE OFFERING ISSUERs..................... Trump AC and Trump AC Funding as joint and several obligors. PRINCIPAL AMOUNT............ $1,100,000,000 aggregate principal amount of % First Mortgage Notes due 2006. MATURITY.................... April , 2006. INTEREST.................... % per annum, payable in cash, semi-annually in arrears, calculated on the basis of a 360-day year consisting of twelve 30-day months. INTEREST PAYMENT DATES...... April and October , commencing October , 1996. GUARANTORS.................. The First Mortgage Notes will be fully and unconditionally guaranteed on a joint and several, senior secured basis by Plaza Associates, Taj Associates, TTMC and each other present and future majority owned or controlled subsidiary (other than "unrestricted subsidiaries," a "Subsidiary") of Trump AC, other than Trump AC Funding (which is one of the Issuers). OPTIONAL REDEMPTION......... The First Mortgage Notes will be redeemable in cash at the option of the Issuers, in whole or in part, at any time on or after , 2001 at the redemption prices set forth herein, together with accrued and unpaid interest through the redemption date. In addition, the First Mortgage Notes are subject at any time to redemption in accordance with an order of a governmental authority having jurisdiction over Taj Associates or Plaza Associates' casino licenses. SINKING FUND................ None. CHANGE OF CONTROL........... Upon the occurrence of a Change in Control (as defined in "Description of the First Mortgage Notes--Certain Covenants--Repurchase of the First Mortgage Notes at the Option of the Holder Upon a Change in Control"), each holder of First Mortgage Notes may require Trump AC to repurchase such holder's First Mortgage Notes at 101% of the principal amount thereof, together with accrued and unpaid interest to the date of repurchase. SECURITY.................... The First Mortgage Notes will be secured by one or more mortgages (the "Mortgage") representing a first lien and security interest (subject to approximately $3.0 million of indebtedness secured by mortgages) on substantially all of the assets comprising Trump Plaza and the Taj Mahal, including the Specified Parcels (as defined in "--Use of Proceeds") and related facilities. The security interest held by a collateral agent on behalf of, among others, the Trustee also includes assignments of leases and rents and operating assets and encumbers furniture, fixtures, machinery and equipment. However, THCR Holdings' direct and indirect equity interests in Trump Atlantic City and its subsidiaries, including Plaza Associates and Taj Associates, will be pledged exclusively for the benefit of the holders of the 15 1/2% Senior Secured Notes due 2005 issued by THCR Holdings and its subsidiary, Trump Hotels & Casino Resorts Funding, Inc. ("THCR Funding") (the "Senior Notes"). NON-RECOURSE................ No direct or indirect stockholder, partner, employee, officer or director, as such, past, present or future, of either the Issuers, any Guarantor or any successor entity shall have any personal liability in respect of the obligations of the Issuers or any Guarantor under the indenture under which the First Mortgage Notes will be issued (the "First Mortgage Note Indenture"), the First Mortgage Notes or the guarantees thereof by reason of the status as such stockholder, partner, employee, officer or director except to the extent such party is an Issuer or Guarantor. CERTAIN COVENANTS........... The First Mortgage Note Indenture will contain certain covenants which, among other things, will (i) limit Trump AC's and its Subsidiaries' ability to incur certain indebtedness unless, among other things, Trump AC's Consolidated Coverage Ratio (as defined) for the four fiscal quarters immediately preceding such event, taken as one period, would have been at least equal to the ratios set forth in the First Mortgage Note Indenture, subject to certain exceptions; (ii) limit the making of certain dividends, distributions and other restricted payments by Trump AC and its Subsidiaries, (iii) limit the lines of business in which Trump AC and its Subsidiaries may engage to those relating to the casino hotel business in AC; (iv) limit the existence of certain liens on assets of Trump AC and its Subsidiaries; (v) restrict the use of proceeds from certain asset sales by Trump AC and its Subsidiaries; (vi) limit transactions by Trump AC and its Subsidiaries with affiliates of Trump AC (other than wholly-owned Subsidiaries); (vii) restrict Trump AC and its Subsidiaries from engaging in certain leasing activities; (viii) limit the Issuers' ability to merge, sell or consolidate; (ix) limit the obligations of Trump AC Funding to those incident to its obligations under the First Mortgage Note Indenture; (x) prohibit Trump AC and its Subsidiaries from paying services fees under a certain services agreement with a corporation wholly owned by Trump, or any expenses relating thereto, under certain circumstances, including if a Default (as defined) or an Event of Default (as defined) has occurred and is continuing; (xi) prohibit Trump AC and its Subsidiaries from paying any other amounts pursuant to other management, services or similar agreements with Trump; (xii) require the maintenance of insurance; and (xiii) limit the issuing or selling of equity interests by any of Trump AC's Subsidiaries (except to Trump AC or a wholly-owned Subsidiary thereof). EVENTS OF DEFAULT........... Events of Default will include (i) default in payment of interest when due for a period of 30 days; (ii) default in payment of principal or premium, if any, when due; (iii) default in the performance or breach of certain specified covenants, including those relating to merger, consolidation or sale of assets, failure to make or consummate a Change of Control Offer (as defined) or an Asset Sale Offer (as defined) as required; (iv) default in the performance or breach of certain other covenants of the Issuers (other than those specifically covered elsewhere in the First Mortgage Note Indenture) for 30 days after notice; (v) certain events of bankruptcy, insolvency or reorganization relating to the Issuers or significant subsidiaries, which, if involuntary, continue for 60 days, (vi) revocation, suspension or loss of certain permits resulting in a cessation of a substantial portion of the operations of Trump Plaza or the Taj Mahal for more than 90 consecutive days; (vii) acceleration prior to the maturity of certain indebtedness or the default in the payment when due of certain indebtedness of Trump AC or its subsidiaries; (viii) except as permitted by the First Mortgage Note Indenture or the First Mortgage Notes, the cessation of any guarantee in any material respect or the finding by any judicial proceeding that the guarantee is unenforceable or invalid in any material respect or the denial or disaffirmation by any Guarantor of its obligations under its guarantee; and (ix) certain events of default under the documents governing the Mortgage (as defined). An Event of Default under the First Mortgage Note Indenture could permit acceleration of the First Mortgage Notes and acceleration of certain other existing or future indebtedness of the Issuers and their affiliates under other instruments that may contain cross-acceleration or cross-default provisions. See "Risk Factors--Restrictions on Certain Activities."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000792341_unicomp_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000792341_unicomp_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS INCLUDES FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS AND UNCERTAINTIES, AND ACTUAL RESULTS MAY DIFFER MATERIALLY. SEE "RISK FACTORS." EXCEPT AS OTHERWISE SPECIFIED, INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. THE COMPANY UniComp, Inc. ("UniComp" or the "Company") provides information technology services to businesses located primarily in the United Kingdom and platform-migration software and payment-processing systems to users in North America and Europe. The Company's strategy is to emphasize its platform- migration and payment-processing software products and to expand its services business within its existing geographic markets. The Company believes this strategy will allow it to expand profit margins and provide its high-quality information technology services to a broad and growing installed base of users of its platform-migration and payment-processing products. The worldwide information technology industry is characterized by rapid technological change, which often leads to increased costs of maintaining internal information technology resources capable of responding to such change. The Company believes that as companies strive to compete and utilize complex new technologies, more companies will move toward outsourcing their information technology requirements, thereby enhancing the Company's information technology services business. The Company believes that decreasing prices, increasing functionality in information technology products and the inherent constraints of proprietary platforms have contributed to increased market acceptance of open systems and customer demand for information technology products based on such systems. Changing to new computing platforms, however, often results in significant disruption of business operations as users are retrained and software errors are discovered and corrected. Also critical is the potential loss of data contained in existing databases that may result from a change to new applications software. The Company's platform-migration software products address these issues, enabling its customers to move more efficiently to open systems. Payment processing for commercial businesses has grown rapidly in recent years as a result of a proliferation in, and increased usage of, credit and debit cards and wider acceptance of such cards among merchants. Advances in payment-processing and telecommunications technologies have also been key factors contributing to such growth. The Company designs, develops and markets payment-processing systems that provide merchants with greater hardware independence by supporting a variety of hardware platforms, including personal computers, point-of-sale terminals and other peripheral devices. The Company's strategy in the payment-processing market is to focus its sales and marketing efforts on the relatively small number of large payment processors and hardware vendors. The Company has experienced significant growth, with total revenues growing to $22.3 million for fiscal year 1996 from $12.2 million for fiscal year 1994, a compound annual growth rate of approximately 35%. In fiscal year 1996, approximately 51% of total revenues were derived from the Company's maintenance and other technology services, with more than 80% of total revenues attributable to international operations, primarily in Northern Ireland. The Company was incorporated in Colorado in 1985. Its executive offices are located at 1800 Sandy Plains Parkway, Suite 305, Marietta, Georgia 30066 and its telephone number is (770) 424-3684. Unless the context otherwise indicates, references to "UniComp" or the "Company" include UniComp, Inc. and its wholly owned subsidiaries. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company.......... 1,500,000 shares Common Stock to be outstanding immediately after this offering........................ 7,090,245 shares (1) Use of proceeds.............................. Repayment of outstanding indebtedness, working capital and other general corporate purposes, including potential acquisitions. See "Use of Proceeds." Nasdaq National Market symbol................ UCMP </TABLE> SUMMARY FINANCIAL DATA (2) (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> FISCAL YEAR ENDED SIX MONTHS ENDED ------------------------------- ------------------------ FEB. 28, FEB. 28, FEB. 29, AUGUST 31, AUGUST 31, 1994 1995 1996 1995 1996 --------- --------- --------- ----------- ----------- <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenues............................................ $ 12,206 $ 18,325 $ 22,291 $ 10,063 $ 11,620 Operating income.......................................... 1,604 2,217 2,555 1,277 1,205 Income before taxes....................................... 1,465 2,117 2,262 1,179 1,043 Provision for taxes....................................... 255 495 203 130 300 Net income................................................ 1,210 1,622 2,059 1,049 743 Net income per share...................................... $ 0.28 $ 0.34 $ 0.40 $ 0.20 $ 0.14 Weighted average shares outstanding....................... 4,344 4,710 5,188 5,186 5,483 </TABLE> <TABLE> <CAPTION> AUGUST 31, 1996 ------------------------- <S> <C> <C> AS ADJUSTED ACTUAL (3) --------- -------------- BALANCE SHEET DATA: Total assets........................................................................... $ 16,060 $ 20,200 Working capital........................................................................ 1,320 6,916 Debt, including current portion........................................................ 3,116 1,116 Total stockholders' equity............................................................. 8,418 14,558 </TABLE> - ------------------------ (1) Based on shares outstanding as of August 31, 1996. Excludes (i) 832,500 shares of Common Stock issuable upon exercise of outstanding stock options granted under the Company's Long Term Incentive Plan (the "LTI Plan"), (ii) 205,000 shares of Common Stock reserved for future issuance under the LTI Plan, (iii) 150,000 shares of Common Stock reserved for future issuance under the Company's 1996 Director Incentive Plan (the "Director Plan"), (iv) 150,000 shares of Common Stock issuable upon exercise of the Representative's Warrant, (v) 25,000 shares of Common Stock issuable upon exercise of an outstanding warrant to purchase shares of Common Stock at $6.90 per share issued in connection with the sale of such convertible promissory notes (the "Note Warrant"), and (vi) 87,500 shares of Common Stock issuable upon exercise of outstanding warrants to purchase shares of Common Stock at $6.00 per share and 87,500 shares of Common Stock issuable upon exercise of outstanding warrants to purchase shares of Common Stock at $7.00 per share issued to a financial advisor to the Company (together, the "Advisor Warrants"). See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources,"
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000799729_parexel_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000799729_parexel_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including Risk Factors and Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Prospectus. This Prospectus contains certain "forward-looking" information, as that term is defined by (i) the Private Securities Litigation Reform Act of 1995 (the "Act") and (ii) releases made by the Securities and Exchange Commission. Such information involves risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors." Unless otherwise indicated, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. THE COMPANY PAREXEL International Corporation ("PAREXEL" or the "Company") is a leading contract research organization ("CRO"), providing clinical research and development services to the worldwide pharmaceutical and biotechnology industries. The Company believes it is the fourth largest CRO, based on estimated annual net revenue, and one of only a few CROs capable of providing a full range of clinical services on a global basis. The Company complements the research and development departments of pharmaceutical and biotechnology companies by offering high quality clinical research services to the client and reducing drug development time and cost. In addition, the Company's integrated services and extensive information technology capabilities, coupled with its broad experience and expertise in global drug development, provide clients with a variable cost alternative to the fixed costs associated with internal drug development. The Company offers a full complement of clinical research and development services, including designing, initiating and monitoring clinical trials, managing and analyzing clinical data and consulting on regulatory affairs. PAREXEL's integrated information systems and worldwide network of offices enable the Company to provide high-quality comprehensive services on a global basis. The Company has provided clinical research and development services in North America since 1985, in Europe since 1989, in Japan since May 1995 and in Australia since December 1995. The Company derived 61.6% and 66.2% of net revenue from its North American operations and 37.3% and 32.5% of net revenue from its European operations in the fiscal year ended June 30, 1996 and the three months ended September 30, 1996, respectively. During fiscal 1996, the Company provided services to each of the 20 largest pharmaceutical companies, as ranked by estimated worldwide 1995 research and development expenditures, and to seven of the ten largest biotechnology companies, as ranked by December 1995 market capitalization. During fiscal 1996, the Company performed services for over 250 clients, including 53 biotechnology companies, involving over 1,000 projects. The CRO industry derives substantially all of its revenue from the pharmaceutical and biotechnology industries. In 1995, the global pharmaceutical and biotechnology industries spent an estimated $33.0 billion on research and development, of which the Company estimates $15.2 billion was spent on the type of services offered by the Company. Of this amount, $2.6 billion was outsourced to CROs. The Company believes that the following trends will cause the CRO industry to continue to grow: (i) many pharmaceutical companies, in response to margin pressures, are seeking to reduce the high fixed costs associated with peak-load staffing for drug development by relying on a combination of internal resources and CROs; (ii) pharmaceutical and biotechnology companies increasingly are attempting to maximize profits from a given drug by pursuing regulatory approvals in multiple countries in parallel, rather than sequentially, by outsourcing to CROs with global capabilities; (iii) as consolidation in the pharmaceutical industry continues, many pharmaceutical companies aggressively manage costs by reducing jobs and outsourcing to variable-cost CROs in an effort to reduce the fixed costs associated with internal drug development; (iv) as regulatory requirements in many jurisdictions have become more complex, the pharmaceutical and biotechnology industries are increasingly outsourcing to certain CROs to take advantage of their data management expertise and global presence; (v) the worldwide research and development expenditures for new drugs, including amounts spent on services of the type provided by CROs, have experienced substantial growth in recent years as a result of pressures to develop new drugs for an aging population and for the treatment of life threatening diseases and chronic disorders; and (vi) the growth of the biotechnology industry has increased the demand for expertise and - -------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- services provided by outside sources, including CROs. There can be no assurance, however, that these trends will result in growth in the CRO industry. PAREXEL's objective is to maintain and enhance its position as a leading CRO by providing a full range of clinical services on a global basis. The Company addresses all aspects of clinical research and development with a flexible approach that allows its clients to use the Company's services on an individual or bundled basis. The Company believes its expertise in conducting scientifically demanding trials and its ability to coordinate complicated global trials are significant competitive strengths. PAREXEL continues to devote significant resources to developing information systems designed to allow the Company to more effectively manage its business operations and deliver services to its clients. The Company will continue to invest in improvements in information technology and consider acquisitions of complementary businesses in order to enhance its competitive position and its level of service. RECENT EVENTS In June 1996, the Company acquired Caspard Consultants, a Paris-based CRO, and in August 1996 acquired Lansal Clinical Pharmaceutics Limited, a Tel Aviv-based CRO. These acquisitions augment the Company's existing clinical operations and are in line with management's focused international expansion efforts. In June 1996, the Company acquired Sitebase Clinical Systems, Inc., a provider of remote data entry ("RDE") technology. RDE technology is expected to enhance the quality and timeliness of clinical trial data. In August 1996, the Company also acquired State and Federal Associates, Inc. ("S&FA"), a Washington D.C.-based provider of consulting services to the healthcare and pharmaceutical industries. The acquisition broadens the Company's portfolio of consulting services, specifically in the area of health economics. These acquisitions are each being accounted for as poolings of interest. The aggregate historical financial results of the acquired companies are not material to the Company's financial position and results of operations. Therefore, prior periods have not been restated and results of operations have been included since the date of acquisition. In addition, during fiscal 1996 the Company opened offices in Chicago and Madrid, Spain. <TABLE> THE OFFERING <S> <C> Common Stock Offered by the Company....................... 1,066,900 shares Common Stock Offered by the Selling Stockholders.......... 208,100 shares Common Stock Outstanding Immediately after the Offering... 9,515,868 shares(1) Use of Proceeds........................................... Working capital and general corporate purposes, including possible acquisitions. Nasdaq National Market Symbol............................. PRXL <FN> - --------------- (1) Based on shares outstanding as of October 15, 1996. Excludes 776,710 additional shares of Common Stock issuable upon exercise of stock options at a weighted average exercise price per share of $23.74. See "Capitalization" and Note 11 of Notes to Consolidated Financial Statements of the Company. </TABLE> - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- <TABLE> SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) <CAPTION> THREE MONTHS ENDED FOR THE YEAR ENDED JUNE 30, SEPTEMBER 30, ----------------------------------------------- ----------------- 1992 1993 1994 1995 1996 1995 1996 ------- ------- ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net revenue........................................... $45,407 $54,000 $58,002 $58,573 $88,006 $17,973 $33,030 ------- ------- ------- ------- ------- ------- ------- Costs and expenses: Direct costs........................................ 29,772 36,106 38,244 42,140 60,141 12,465 22,821 Selling, general and administrative................. 10,164 11,831 13,631 13,294 19,027 3,834 6,617 Depreciation and amortization....................... 2,299 2,511 2,435 2,251 2,343 515 883 Facility and other restructuring charges............ -- 3,254(1) -- -- -- -- -- Impairment of long-lived assets..................... -- -- -- 11,253(2) -- -- -- ------- ------- ------- ------- ------- ------- ------- Total costs and expenses...................... 42,235 53,702 54,310 68,938 81,511 16,814 30,321 ------- ------- ------- ------- ------- ------- ------- Income (loss) from operations......................... 3,172 298 3,692 (10,365) 6,495 1,159 2,709 Other income (expense), net........................... 138 (520) (196) 55 1,157 98 364 ------- ------- ------- ------- ------- ------- ------- Income (loss) before provision for income taxes and cumulative effect of accounting change.............. 3,310 (222) 3,496 (10,310) 7,652 1,257 3,073 ======= ======= ======= ======= ======= ======= ======= Net income (loss)..................................... 1,536 (2,157) 2,423 (10,630) 4,599 742 1,936 ======= ======= ======= ======= ======= ======= ======= Net income (loss) per share........................... $ 0.33 $ (2.97) $ 0.44 $(12.61) $ 0.68 $ 0.14 $ 0.22 ======= ======= ======= ======= ======= ======= ======= PRO FORMA DATA: Income from operations (3)............................ $ 3,172 $ 3,552 $ 3,692 $ 888 $ 6,495 $ 1,159 $ 2,709 <CAPTION> SEPTEMBER 30, 1996 --------------------------- ACTUAL AS ADJUSTED(4) -------- -------------- <S> <C> <C> BALANCE SHEET DATA: Working capital.................................................. $ 54,416 $111,010 Total assets..................................................... 107,670 164,264 Long-term debt, less current maturities.......................... 304 304 Stockholders' equity............................................. 66,372 122,966 <FN> - --------------- (1) Represents a charge incurred in connection with a restructuring of operations in Germany because of a decline in net revenue from those operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 3 of Notes to Consolidated Financial Statements of the Company. (2) Represents a non-cash charge primarily due to the write-down of intangible assets of the Company's German operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 3 of Notes to Consolidated Financial Statements of the Company. (3) Excludes facility and other restructuring charges incurred in fiscal 1993 and the impairment loss from the write-down of long-lived assets incurred in fiscal 1995. (4) Adjusted to give effect to the sale of 1,066,900 shares of Common Stock by the Company in this offering at an assumed public offering price of $56.00 per share, after deducting the estimated underwriting discount and estimated offering expenses. See "Use of Proceeds," "Capitalization" and Note 10 of Notes to Consolidated Financial Statements of the Company. </TABLE> - --------------------------------------------------------------------------------
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000801529_printware_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000801529_printware_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c7def4c54452472547f40c1b8e65c03c423fba12
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000801529_printware_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY INFORMATION IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS TO BE CONSIDERED BY PROSPECTIVE INVESTORS. EXCEPT AS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (I) ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION, (II) DOES NOT INCLUDE UP TO 120,000 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THE REPRESENTATIVE'S WARRANT, AND (III) REFLECTS A ONE-FOR-FOUR REVERSE SPLIT OF THE COMMON STOCK EFFECTIVE APRIL 25, 1996. SEE "DESCRIPTION OF CAPITAL STOCK." THIS PROSPECTUS CONTAINS FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. THE COMPANY Printware, Inc. ("Printware" or the "Company") designs, builds and markets "Computer-to-Plate" systems which are used by the offset printing industry to create printing plates directly from computer data. These systems replace the traditional process of typesetting, paste-up, camera work and processing film to produce a printing plate. Computer-to-Plate technology provides one-step plate making (including text, graphics and photographic halftones) directly from computer data, much as a laser printer makes printed pages directly from computer data. The key benefits of Computer-to-Plate technology are lower costs, faster turnaround times, fewer pieces of equipment and fewer environmental limitations on disposal of by-products. The key hardware element of a Computer-to-Plate system is called a Platesetter, which produces the printing plate by imaging the computer data on the physical plate material. The Company sells Platesetters, supplies for use in Platesetters and raster image processors for connecting the Platesetter to the customer's computer network. Sales of supplies accounted for approximately 55% of the Company's 1995 revenues. The Company is a leader in the development and introduction of Computer-to-Plate systems. To date the Company has sold over 300 Platesetters, which it believes is more than any other single competitor. The Company's marketing strategy is to offer a wide range of Computer-to-Plate products to the broad market of "mainstream" printers who use small format (18" wide or less) presses, typically for high-volume printing applications such as check printing, social printing (such as wedding invitations) and envelope printing. The Company's customers include leading printers such as Deluxe Corporation ("Deluxe"), Pitney Bowes, Thomson Publishing, Liberty Check Printers and Northrup-Grumman. The Company currently manufactures two lines of Platesetters in various configurations. The end-user price ranges from $75,000 to $150,000 for the Model 1440, depending on the configuration, and from $85,000 to $100,000 for the Model 3240. The Company markets the Model 1440 through its own sales force, and the Model 3240 is marketed by Mitsubishi Imaging (MC), Inc. ("Mitsubishi") under its name. Both of these Platesetter lines use patented resonant galvanometer technology which was licensed to the Company by Minnesota Mining and Manufacturing Company ("3M") when the Company was organized in 1985. The resonant galvanometer technology provides precise scanning of the laser beam which writes the digital image on the blank plate. In 1993 the Company began to focus exclusively on Computer-to-Plate products and phased out its manufacturing of laser printers and film imagers. Phasing out of these lower-margin products resulted in a reduction in revenue in 1993 and 1994. The focus on Computer-to-Plate products resulted in an improvement in profitability in 1994 and 1995 due to the higher margins provided by those products and lower research and development and sales and marketing expenditures. The Company is incorporated in Minnesota and has its principal executive office and manufacturing facility at 1270 Eagan Industrial Road, St. Paul, Minnesota 55121. Its telephone number is (612) 456-1400. THE OFFERING <TABLE> <S> <C> COMMON STOCK OFFERED BY THE COMPANY.......... 1,200,000 shares COMMON STOCK OFFERED BY THE SELLING SHAREHOLDERS................................ 400,000 shares COMMON STOCK OUTSTANDING AFTER THE OFFERING.................................... 4,829,713 shares(1) USE OF PROCEEDS.............................. Product development, sales and marketing and working capital PROPOSED NASDAQ NATIONAL MARKET SYMBOL....... PRTW </TABLE> - --------------------------- (1) Does not include, as of March 30, 1996 (i) 135,567 shares issuable upon exercise of stock options held by executive officers and employees of the Company, (ii) 120,000 shares issuable upon exercise of the Representative's Warrant, and (iii) 5,000 shares issuable upon exercise of warrants held by Deluxe. RISK FACTORS AND DILUTION An investment in the Common Stock involves a high degree of risk. See "Risk Factors." Purchasers will experience immediate and substantial dilution in net tangible book value per share. See "Dilution." SUMMARY FINANCIAL DATA <TABLE> <CAPTION> THREE MONTHS ENDED -------------------------- YEAR ENDED DECEMBER 31, MARCH 30, APRIL 1, ----------------------------------------- 1996 1995 1995 1994 1993 ------------ ------------ ------------ ------------ ------------- <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues................................ $ 1,832,013 $ 1,807,623 $ 8,388,148 $ 6,626,925 $ 7,296,484 Gross margin............................ 721,967 806,752 3,384,192 2,524,524 1,951,965 Income (loss) from operations........... 304,555 330,105 1,554,183 622,184 (1,213,897) Net income (loss)(1).................... 330,898 326,483 1,793,425 784,029 (1,204,707) Net income (loss) per common and common equivalent share(1).................... $.09 $.09 $.48 $.21 $(.33) Weighted average common and common equivalent shares outstanding(2)....... 3,705,403 3,705,627 3,705,627 3,685,580 3,635,226 </TABLE> <TABLE> <CAPTION> AS OF MARCH 30, 1996 ----------------------------- ACTUAL AS ADJUSTED(3) ------------ --------------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents........................................................ $ 2,795,856 $ 9,695,856 Working capital.................................................................. 4,491,641 11,391,641 Total assets..................................................................... 5,396,406 12,296,406 Shareholders' equity............................................................. 4,655,666 11,555,666 </TABLE> - --------------------------- (1) Net income in 1994 includes an extraordinary item of $140,927, consisting of a gain on extinguishment of debt. The income per common and common equivalent share attributable to such extraordinary gain was $.04. (2) See Note 1 to Financial Statements for an explanation of the determination of weighted average common and common equivalent shares outstanding. (3) As adjusted to reflect the sale of shares offered hereby, assuming a Price to Public of $6.50 per share, and the application of the estimated net proceeds therefrom of $6.9 million. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0000802916_industrial_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000802916_industrial_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..adaf6b388762a71c976906fb2c5fe34899a628ca
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000802916_industrial_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following is a summary of certain information contained in this Prospectus and is qualified in its entirety by the detailed information and financial statements that appear elsewhere in this Prospectus.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0000805574_digital_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000805574_digital_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8034f520e094f0ce76ded10be8aea35912a69d64
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000805574_digital_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE OFFERING Securities Offered by the Company. . . . . . . . Shares of Common Stock, having an aggregate market value of $600,000 which may be issued in lieu of the Company's obligation to pay an aggregate of $600,000 in cash dividends payable on the Series A Convertible Preferred Stock for the next two years. Securities Offered by the Selling Securityholders. . . . . . . . . . . . . . . . . 54,293,591 shares of Common Stock, 750,000 shares of Series A Convertible Preferred Stock and 800,000 Warrants to purchase Common Stock. Common Stock outstanding after the Offering. . . 72,819,490 shares (1) Use of Proceeds. . . . . . . . . . . . . . . . . The Company may issue shares of Common Stock with an aggregate market value of $600,000 in lieu of its obligation to pay $600,000 in cash dividends on the Series A Convertible Preferred Stock. The Company will not receive any of the proceeds from the sale of securities by the Selling Securityholders. The Company will bear estimated expenses of registration of approximately $250,000. See "Plan of Distribution." Nasdaq SmallCap Market symbol. . . . . . . . . . RDUS SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> NINE MONTHS ENDED YEARS ENDED SEPTEMBER 30 (2), JUNE 30 (2), -------------------------------------------------------------- ------------------ 1995 1994(3) 1993(3) 1992(3) 1991(3) 1996 1995 ---- ------- ------- ------- ------- ---- ----- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales. . . . . . . . . . . . $308,133 $324,805 $337,373 $284,598 $199,033 $83,261 $251,007 Income (loss) from operations. . (104,182) (80,830) (34,583) 20,483 9,485 (11,585) 3,620 Net income (loss). . . . . . . . (131,742) (77,475) (20,139) 13,032 6,204 8,849 (13,857) Net income (loss) per share. . . (8.75) (5.70) (1.56) 1.04 0.54 0.49 (0.96) Shares used to compute income (loss) per share . . . . . . 15,049 13,598 12,905 12,485 11,473 17,950 14,386 <CAPTION> JUNE 30, 1996 (2) ------------------- <S> <C> BALANCE SHEET DATA: Working capital (working capital deficiency) . . . . . . . . $(49,183) Total assets . . . . . . . . . . . . . . . . . . . . . . . . 43,878 Current Liabilities. . . . . . . . . . . . . . . . . . . . . 91,444 Shareholders' equity (net capital deficiency). . . . . . . . (47,887) </TABLE> - ----------------------------------- (1) Based on shares outstanding as of October 31, 1996. Excludes (i) 1,195,124 shares of Common Stock issuable upon the exercise of options outstanding under the Company's Stock Option Plans at a weighted average exercise price of $4.34 per share, (ii) 1,818,103 shares of Common Stock reserved for issuance under the Company's Stock Option Plans and Employee Stock Purchase Plan, and (iii) approximately 4,706,668 shares to be reserved for issuance under the Company's 1996 Stock Option Plan (the "1996 Plan") which the Company intends to adopt in the near future (until conversion of the Series A Convertible Preferred Stock into Common Stock, 2,865,658 shares will be reserved for issuance pursuant to the 1996 Plan). Assumes that (i) all dividends on the Series A Convertible Preferred Stock will be paid in shares of Common Stock based upon a per share price of $1 11/32, the last reported sales price of the Company's Common Stock on the Nasdaq SmallCap Market on September 16, 1996, (ii) 6,075,333 shares of Common Stock, the maximum number of shares issuable upon conversion of the Series A Convertible Preferred Stock, will be issued, (this amount of shares is only issuable in the event that the trading price of the Common Stock exceeds certain levels and the Series A Convertible Preferred Stock is not otherwise redeemed. Otherwise the Series A Preferred Stock is convertible into an aggregate of 5,523,030 shares of Common Stock) and (iii) all 800,000 shares of Common Stock issuable upon exercise of Warrants are issued. See "Description of Capital Stock -- Preferred Stock -- Series A Convertible Preferred Stock" and "-- Warrants."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0000805956_cellnet_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000805956_cellnet_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..6921c588eb4f55d677a2869beda679349a462825
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000805956_cellnet_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (I) ASSUMES NO EXERCISE OF THE U.S. UNDERWRITERS' OVER-ALLOTMENT OPTION, (II) REFLECTS THE AUTOMATIC CONVERSION OF ALL OUTSTANDING SHARES OF THE COMPANY'S REDEEMABLE CONVERTIBLE PREFERRED STOCK AND CONVERTIBLE PREFERRED STOCK (COLLECTIVELY, "PREFERRED STOCK") INTO COMMON STOCK EFFECTIVE UPON THE CLOSING OF THIS OFFERING, (III) ASSUMES THE EXERCISE OF WARRANTS TO PURCHASE 4,132,970 SHARES OF COMMON STOCK EFFECTIVE UPON THE CLOSING OF THIS OFFERING, (IV) GIVES EFFECT TO A 2-FOR-1 SPLIT OF THE COMMON STOCK WHICH WILL BE EFFECTED PRIOR TO THE DATE OF THIS PROSPECTUS AND (V) ASSUMES THE SALE OF 882,353, AND 533,333 AND 160,000 SHARES OF COMMON STOCK TO NSP, UE AND BEN, RESPECTIVELY, CONCURRENTLY WITH THE CLOSING OF THIS OFFERING AT AN ASSUMED PRICE OF $17.00 PER SHARE, $18.75 PER SHARE AND $18.75 PER SHARE, RESPECTIVELY. SEE "DIRECT PLACEMENTS," "DESCRIPTION OF CAPITAL STOCK" AND "UNDERWRITERS." REFERENCES HEREIN TO "CELLNET" OR THE "COMPANY" REFER TO CELLNET DATA SYSTEMS, INC. AND ITS SUBSIDIARIES. THE SHARES OFFERED HEREBY ARE SUBJECT TO A HIGH DEGREE OF RISK. SEE "RISK FACTORS." CERTAIN INFORMATION CONTAINED IN THIS SUMMARY AND ELSEWHERE IN THIS PROSPECTUS, INCLUDING INFORMATION WITH REGARD TO THE COMPANY'S EXPECTED WIRELESS DATA COMMUNICATIONS NETWORK DEPLOYMENTS AND OPERATIONS, ITS STRATEGY FOR MARKETING AND DEPLOYING SUCH NETWORKS AND RELATED FINANCING ACTIVITIES, CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS." THE COMPANY The Company designs, builds, owns and operates innovative wireless networks capable of providing low-cost real-time status and event monitoring of up to several million fixed endpoints. The primary application of the Company's network is to provide network meter reading ("NMR") services to electric, gas and water utility companies pursuant to long-term contracts. The Company is currently building wireless networks to provide NMR services to Kansas City Power & Light Company ("KCPL") and Union Electric Company ("UE") in St. Louis covering a total of approximately 1,220,000 meters, of which more than 105,000 meters were in revenue service as of June 30, 1996. In addition, the Company has recently entered into separate services agreements with Northern States Power Company ("NSP") in Minneapolis and Puget Sound Power & Light Company ("Puget") in Washington State, pursuant to which it has contracted to build wireless networks to provide NMR services covering an aggregate of approximately 1,015,000 additional meters, including 1,000,000 meters under the NSP Services Agreement and an initial installation consisting of 15,000 meters under the Puget Services Agreement. CellNet also currently provides certain network distribution automation services to electric utility customers including monitoring and control of power distribution equipment. CellNet's network uses radio devices fitted to existing utility meters to read and report data from each meter every few minutes. Through efficient use of radio frequency spectrum, the Company's networks will have substantial additional capacity to service non-utility applications that require low-cost monitoring of fixed endpoints, such as home security and remote status monitoring of vending machines and office equipment. The Company is working with industry leaders in those markets to encourage further development of such applications. CellNet believes it has a first-to-market opportunity to offer wireless data communications services on a commercial scale for utility and selected non-utility applications. CellNet's network is distinguished by the following advantages: - infrastructure and operating costs sufficiently low to permit cost effective utility meter reading and other fixed point monitoring applications; - highly efficient use of spectrum -- the equivalent of approximately a single voice channel is needed to operate a network; - proprietary software specifically designed to manage real-time data collection from up to several million endpoints; and - open system architecture designed to allow new applications to be added to the CellNet system. PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERINGS (I) ASSUMES NO EXERCISE OF THE U.S. UNDERWRITERS' OVER-ALLOTMENT OPTION, (II) REFLECTS THE AUTOMATIC CONVERSION OF ALL OUTSTANDING SHARES OF THE COMPANY'S REDEEMABLE CONVERTIBLE PREFERRED STOCK AND CONVERTIBLE PREFERRED STOCK (COLLECTIVELY, "PREFERRED STOCK") INTO COMMON STOCK EFFECTIVE UPON THE CLOSING OF THE OFFERING, (III) ASSUMES THE EXERCISE OF WARRANTS TO PURCHASE 4,132,970 SHARES OF COMMON STOCK EFFECTIVE UPON THE CLOSING OF THE OFFERING WHICH INCLUDES THE ASSUMED EXERCISE OF ALL NOTE WARRANTS ON A CASH BASIS, (IV) GIVES EFFECT TO A 2-FOR-1 SPLIT OF THE COMMON STOCK WHICH WILL BE EFFECTED PRIOR TO THE DATE OF THIS PROSPECTUS AND (V) ASSUMES THE SALE OF 882,353, 533,333 AND 160,000 SHARES OF COMMON STOCK TO NSP, UE AND BEN, RESPECTIVELY, CONCURRENTLY WITH THE CLOSING OF THE OFFERING AT AN ASSUMED PRICE OF $17.00 PER SHARE, $18.75 PER SHARE AND $18.75 PER SHARE, RESPECTIVELY. SEE "DIRECT PLACEMENTS" AND "DESCRIPTION OF CAPITAL STOCK." REFERENCES HEREIN TO "CELLNET" OR THE "COMPANY" REFER TO CELLNET DATA SYSTEMS, INC. AND ITS SUBSIDIARIES. THE NOTE WARRANT SHARES OFFERED HEREBY ARE SUBJECT TO A HIGH DEGREE OF RISK. SEE "RISK FACTORS." CERTAIN INFORMATION CONTAINED IN THIS SUMMARY AND ELSEWHERE IN THIS PROSPECTUS, INCLUDING INFORMATION WITH REGARD TO THE COMPANY'S EXPECTED WIRELESS DATA COMMUNICATIONS NETWORK DEPLOYMENTS AND OPERATIONS, ITS STRATEGY FOR MARKETING AND DEPLOYING SUCH NETWORKS AND RELATED FINANCING ACTIVITIES, CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS." THE COMPANY The Company designs, builds, owns and operates innovative wireless networks capable of providing low-cost real-time status and event monitoring of up to several million fixed endpoints. The primary application of the Company's network is to provide network meter reading ("NMR") services to electric, gas and water utility companies pursuant to long-term contracts. The Company is currently building wireless networks to provide NMR services to Kansas City Power & Light Company ("KCPL") and Union Electric Company ("UE") in St. Louis covering a total of approximately 1,220,000 meters, of which more than 105,000 meters were in revenue service as of June 30, 1996. In addition, the Company has recently entered into separate services agreements with Northern States Power Company ("NSP") in Minneapolis and Puget Sound Power & Light Company ("Puget") in Washington State, pursuant to which it has contracted to build wireless networks to provide NMR services covering an aggregate of approximately 1,015,000 additional meters, including 1,000,000 meters under the NSP Services Agreement and an initial installation consisting of 15,000 meters under the Puget Services Agreement. CellNet also currently provides certain network distribution automation services to electric utility customers including monitoring and control of power distribution equipment. CellNet's network uses radio devices fitted to existing utility meters to read and report data from each meter every few minutes. Through efficient use of radio frequency spectrum, the Company's networks will have substantial additional capacity to service non-utility applications that require low-cost monitoring of fixed endpoints, such as home security and remote status monitoring of vending machines and office equipment. The Company is working with industry leaders in those markets to encourage further development of such applications. CellNet believes it has a first-to-market opportunity to offer wireless data communications services on a commercial scale for utility and selected non-utility applications. CellNet's network is distinguished by the following advantages: - infrastructure and operating costs sufficiently low to permit cost effective utility meter reading and other fixed point monitoring applications; - highly efficient use of spectrum -- the equivalent of approximately a single voice channel is needed to operate a network; - proprietary software specifically designed to manage real-time data collection from up to several million endpoints; and - open system architecture designed to allow new applications to be added to the CellNet system. Utilities are under increasing regulatory and competitive pressures. CellNet offers an outsourced solution which enables utilities to offer time-of-use pricing plans, peak demand monitoring, real-time response to billing inquiries, real-time power outage detection, on-demand meter reads, customized billing functions and distribution automation. The Company believes its NMR services provide utilities with an effective solution to many of the demands created by increased regulatory and competitive pressures within the utility industry. CellNet's system allows utilities to respond effectively to regulatory changes, reduce costs, defer capital spending and enhance their operating efficiencies. CellNet's strategy is to deploy and operate a series of wireless data communications networks pursuant to long-term contracts with utility company customers and to earn recurring revenues by providing NMR services to such utilities and by using the network to support a variety of non-utility applications. Principal elements of CellNet's strategy include (i) focus on utility markets, (ii) promote development of non-utility applications, (iii) form strategic alliances to enhance NMR services and offer additional services, (iv) pursue international expansion and (v) outsource a substantial portion of its manufacturing and installation activities. The Company is actively targeting those utilities which operate in the 60 largest Metropolitan Statistical Areas ("MSAs"), which represent a majority of the 225 million electric, gas and water meters in the United States. The Company believes that utilities operating in these densely populated areas will be the first to experience heightened competitive and regulatory pressures, and as such, will be most likely to benefit from the Company's services. The Company believes that these competitive and regulatory pressures have recently prompted utilities in the United States to undertake increased measures to improve their efficiency and service levels. CellNet's proprietary technology enables the Company to make extremely efficient use of spectrum. As a result, relative to other wireless services, the Company has been able to acquire frequency at a very low cost. The Company had capitalized $762,000 for license fees and related expenses as of June 30, 1996 and has acquired 50 spectrum licenses in 42 of the top 60 MSAs. The Company believes that it will be able to obtain additional spectrum at reasonable cost if required. The Company has focused its spectrum acquisition strategy on these top 60 markets. The Company believes its spectrum-efficient networks will have substantial excess capacity to service non-utility applications which require low-cost monitoring of fixed endpoints. Potential non-utility applications of the Company's systems include home security, remote status monitoring of vending machines, office equipment, parking meters and other equipment and remote control of traffic lights. The Company is working with industry leaders such as Ameritech, Hewlett-Packard, Honeywell, Inc., Real Time Data, Inc., and Interactive Technologies, Inc. to develop such applications. The Company believes that its utility networks will provide an excellent platform to position the Company as a leading wholesale provider of wireless data communications services for such non-utility applications. The Company believes that a significant international market also exists for its services with several hundred million electric, gas and water meters outside of the United States. The Company's strategy is to pursue international markets through a proposed joint venture with BEn. The Company is currently exploring projects with electric utilities in the U.K., Singapore and Thailand. THE OFFERING <TABLE> <S> <C> Common Stock Offered: U.S. Offering (1)............................. 4,000,000 shares International Offering........................ 1,000,000 shares Total Common Stock Offered (1)............ 5,000,000 shares Common Stock to be outstanding after the Offering (1)(2)................................ 40,623,820 shares Use of proceeds................................. For general corporate purposes, including working capital, capital requirements (capital expenditures and negative operating cash flow) in connection with the installation and operation of the Company's networks and research and development expenses. See "Use of Proceeds." Nasdaq National Market Symbol................... CNDS </TABLE> In addition, NSP, UE and BEn have agreed to acquire $15.0 million, $10.0 million and $3.0 million, respectively, of restricted Common Stock from the Company (the "NSP Purchase", "UE Purchase" and "BEn Purchase", respectively, and together, the "Direct Placements") concurrently with the closing of this Offering. NSP will purchase 882,353 shares of Common Stock at a purchase price of $17.00 per share (the initial public offering price, less a discount of up to 15%, which discount is dependent upon entering into a services agreement with Wisconsin Electric Power Company for at least 750,000 meters (if such services agreement is not entered into, the purchase price per share will be adjusted to 90% of the initial public offering price)). UE and BEn will purchase, respectively, 533,333 shares and 160,000 shares of Common Stock at a purchase price of $18.75 per share (the initial public offering price less the underwriting discounts and commissions). Upon the closing of this Offering and the Direct Placements, NSP, UE and BEn will own approximately 2.17%, 1.31%, and 0.39%, respectively, outstanding of the Common Stock. The closing of this Offering is not conditioned upon the closing of the Direct Placements. See "Direct Placements." - --------- (1) Assumes the U.S. Underwriters' over-allotment option is not exercised. See "Underwriters." (2) Based on the number of shares outstanding as of June 30, 1996, after giving effect to the automatic conversion of all outstanding shares of Preferred Stock into Common Stock and the assumed exercise on a cash basis of warrants to purchase 4,132,970 shares of Common Stock effective upon the closing of this Offering. Also includes the sale of 1,575,686 shares of Common Stock pursuant to the Direct Placements concurrently with the closing of this Offering. See "Direct Placements." Excludes 3,779,136 shares of Common Stock issuable upon exercise of outstanding stock options as of June 30, 1996 granted under the Company's 1992 Stock Option Plan and 1994 Stock Plan with a weighted average exercise price of $0.625 per share. Also excludes 50,150 shares of Common Stock issuable upon exercise of warrants outstanding as of June 30, 1996 with a weighted average exercise price of $7.59 per share. See "Management -- Incentive Stock Plans," "Description of Capital Stock -- Warrants" and Note 7 to Consolidated Financial Statements. ------------------- CELLNET WAS INCORPORATED IN CALIFORNIA IN OCTOBER 1984 AND REINCORPORATED IN DELAWARE IN AUGUST 1996. CELLNET'S SUBSIDIARIES INCLUDE CELLNET DATA SERVICES, INC., CELLNET DATA SERVICES (IS), INC., CELLNET DATA SERVICES (KC), INC., CELLNET DATA SERVICES (MSP), INC., CELLNET DATA SERVICES (SL), INC., CN FREQUENCY (KC), INC., CN FREQUENCY (MSP), INC., CELLNET DATA SERVICES (SF), INC., CN FREQUENCY (SL), INC., CN WAN CORP. AND DAC (UK), LIMITED. THE COMPANY'S PRINCIPAL EXECUTIVE OFFICES ARE LOCATED AT 125 SHOREWAY ROAD, SAN CARLOS, CALIFORNIA 94070. THE TELEPHONE NUMBER AT SUCH ADDRESS IS (415) 508-6000. THE OFFERINGS <TABLE> <S> <C> Common Stock Offered: U.S. Offering (1)............................. 4,000,000 shares International Offering........................ 1,000,000 shares Total Common Stock Offered in the Offering (1)............................. 5,000,000 shares Note Warrant Offering......................... 2,600,000 shares Common Stock to be outstanding after the Offerings (1)(2)............................... 40,623,820 shares Use of proceeds................................. For general corporate purposes, including working capital, capital requirements (capital expenditures and negative operating cash flow) in connection with the installation and operation of the Company's networks and research and development expenses. See "Use of Proceeds." Nasdaq National Market Symbol................... CNDS </TABLE> In addition, NSP, UE and BEn have agreed to acquire $15.0 million, $10.0 million and $3.0 million, respectively, of restricted Common Stock from the Company (the "NSP Purchase," "UE Purchase" and "BEn Purchase", respectively, and together, the "Direct Placements") concurrently with the closing of the Offering. NSP will purchase 882,353 shares of Common Stock at a purchase price of $17.00 per share (the initial public offering price, less a discount of up to 15%, which discount is dependent upon entering into a services agreement with Wisconsin Electric Power Company for at least 750,000 meters (if such services agreement is not entered into, the purchase price per share will be adjusted to 90% of the initial public offering price)). UE and BEn will purchase, respectively, 533,333 shares and 160,000 shares of Common Stock at a purchase price of $18.75 per share (the initial public offering price less the underwriting discounts and commissions). Upon the closing of the Offering and the Direct Placements, NSP, UE and BEn will own approximately 2.17%, 1.31% and 0.39%, respectively, of the outstanding Common Stock. The closing of the Offering is not conditioned upon the closing of the Direct Placements. See "Direct Placements." - --------- (1) Assumes the underwriters' over-allotment option in the Offering is not exercised. (2) Based on the number of shares outstanding as of June 30, 1996, after giving effect to the automatic conversion of all outstanding shares of Preferred Stock into Common Stock and the assumed exercise on a cash basis of warrants to purchase 4,132,970 shares of Common Stock effective upon the closing of the Offering which includes the assumed exercise of all Note Warrants on a cash basis. Also includes the sale of 1,575,686 shares of Common Stock pursuant to the Direct Placements concurrently with the closing of the Offering. See "Direct Placements." Excludes 3,779,136 shares of Common Stock issuable upon exercise of outstanding stock options as of June 30, 1996 granted under the Company's 1992 Stock Option Plan and 1994 Stock Plan with a weighted average exercise price of $0.625 per share. Also excludes 50,150 shares of Common Stock issuable upon exercise of warrants outstanding as of June 30, 1996 with a weighted average exercise price of $7.59 per share. See "Management -- Incentive Stock Plans," "Description of Capital Stock -- Warrants" and Note 7 to Consolidated Financial Statements. ------------------- CELLNET WAS INCORPORATED IN CALIFORNIA IN OCTOBER 1984 AND REINCORPORATED IN DELAWARE IN AUGUST 1996. CELLNET'S SUBSIDIARIES INCLUDE CELLNET DATA SERVICES, INC., CELLNET DATA SERVICES (IS), INC., CELLNET DATA SERVICES (KC), INC., CELLNET DATA SERVICES (MSP), INC., CELLNET DATA SERVICES (SL), INC., CN FREQUENCY (KC), INC., CN FREQUENCY (MSP), INC., CELLNET DATA SERVICES (SF), INC., CN FREQUENCY (SL), INC., CN WAN CORP. AND DAC (UK), LIMITED. THE COMPANY'S PRINCIPAL EXECUTIVE OFFICES ARE LOCATED AT 125 SHOREWAY ROAD, SAN CARLOS, CALIFORNIA 94070. THE TELEPHONE NUMBER AT SUCH ADDRESS IS (415) 508-6000. SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA The following table sets forth summary consolidated financial and other data of the Company for each of the three years in the period ended December 31, 1995, for the six months ended June 30, 1995 and 1996 and at June 30, 1996. The financial information data were derived from, and should be read in conjunction with, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of the Company and the Notes thereto included elsewhere in this Prospectus. <TABLE> <CAPTION> SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, --------------------------------- ---------------------- 1993 1994 1995 1995 1996 --------- ---------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues............................................. $ 1,757 $ 1,651 $ 2,126 $ 1,291 $ 420 Costs and expenses: Cost of revenues................................. 1,840 1,191 5,129 1,931 3,483 Research and development......................... 5,262 9,693 22,380 6,735 13,009 Marketing and sales.............................. 1,447 3,257 4,201 1,946 2,924 General and administrative....................... 1,450 2,583 6,805 2,874 5,412 --------- ---------- ---------- ---------- ---------- Total costs and expenses....................... 9,999 16,724 38,515 13,486 24,828 --------- ---------- ---------- ---------- ---------- Loss from operations................................. (8,242) (15,073) (36,389) (12,195) (24,408) Other income (expense)............................... (148) 441 (4,564) 75 (7,903) --------- ---------- ---------- ---------- ---------- Loss before income taxes............................. (8,390) (14,632) (40,953) (12,120) (32,311) Provision for income taxes........................... 1 2 3 1 2 --------- ---------- ---------- ---------- ---------- Net loss............................................. $ (8,391) $ (14,634) $ (40,956) $ (12,121) $ (32,313) --------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ---------- ---------- Pro forma net loss per share (1)..................... $ (1.22) $ (0.94) ---------- ---------- ---------- ---------- Shares used in computing pro forma net loss per share (1)................................................. 33,497 34,483 ---------- ---------- ---------- ---------- </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1995 JUNE 30, 1996 ----------------- ------------- <S> <C> <C> SELECTED OTHER DATA: Meters under contract (2)..................................................... 1,070,000 1,220,000 Meters in revenue service (2)................................................. 17,559 105,354 </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 ------------------------------------------- AS ACTUAL PRO FORMA(3) ADJUSTED(3)(4) ---------- ------------- ---------------- (IN THOUSANDS) <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments.................. $ 102,967 $ 106,621 $ 224,131 Total assets....................................................... 162,653 166,307 283,817 Long-term obligations, including current portion................... 195,513 195,513 195,513 Series CC redeemable convertible preferred stock................... 29,486 -- -- Total stockholders' equity (deficit)............................... (70,400) (37,260) 83,050 </TABLE> - --------- (1) For an explanation of the determination of the number of shares used in computing pro forma net loss per share, see Note 1 to Consolidated Financial Statements. (2) "Meters under contract" refers to the aggregate number of meters for which the Company has agreed to provide NMR services under services agreements with utilities and "Meters in revenue service" refers to the aggregate number of meters under contract which have been installed on the Company's networks and for which the Company is receiving NMR service revenues. As of August 31, 1996, the Company had 2,235,000 meters under contract and as of July 31, 1996, the Company had 143,415 meters in revenue service. (3) Reflects the conversion of all outstanding shares of Preferred Stock into Common Stock and the assumed exercise on a cash basis of warrants to purchase 4,132,970 shares of Common Stock at an aggregate exercise price of approximately $3.7 million upon the closing of the Offering. (4) Adjusted to reflect the proceeds of the Offering at an assumed initial public offering price of $20.00 per share and after deducting estimated underwriting discounts and commissions and offering expenses payable by the Company. See "Use of Proceeds." Also reflects the sale of 1,575,686 shares of Common Stock pursuant to the Direct Placements, less estimated issuance costs of approximately $40,000 with respect to such purchases. See "Direct Placements."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000807051_viewstar_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000807051_viewstar_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Financial Statements and Notes thereto appearing elsewhere in this Prospectus. The Common Stock offered hereby involves a high degree of risk. See "Risk Factors." THE COMPANY ViewStar Corporation ("ViewStar" or the "Company") provides client/server document workflow software that enables customers to automate and improve document-intensive business processes across the enterprise. The ViewStar Enterprise Document Workflow System (the "ViewStar System") allows customers to easily define and change work content, work flows, business rules and user roles, facilitating the rapid design, development and deployment of business process applications. The Company's products are used in a wide variety of applications including consumer and mortgage lending, claims processing, underwriting, trust management, contract management, accounts payable and customer service. In today's highly competitive marketplace, companies must continuously improve their core business processes and operations. Having spent considerable resources in recent years for strategic business process reengineering ("BPR"), many organizations now require innovative software solutions to automate and improve their reengineered business processes. Companies worldwide are implementing business process automation solutions to shorten document- intensive processing cycles, increase productivity and deliver superior customer service. In addition, organizations increasingly seek enterprise applications that can integrate structured data, typically stored in databases, with unstructured data such as imaged documents, faxes, electronic documents, mainframe generated reports, digitized voice messages and Web documents. The ViewStar System is an enterprise-class, client/server application framework that is built around Windows NT and utilizes Microsoft's enterprise computing architecture. The ViewStar System is specifically designed for document-intensive business processes that require the integration of structured and unstructured data, moving beyond document management and simple workflow to deliver an integrated document workflow solution. The Company's software supports deployments ranging from small departmental applications to large systems distributed over multiple locations, serving hundreds to thousands of users throughout the enterprise. The first of the Company's @Work Internet products, expected to be available before the end of 1996, is designed to enable users to originate work and track work-in-progress using Web browsers. The Company's objective is to be the leading global provider of enterprise document workflow software solutions. As part of its strategy, the Company intends to expand its market presence by further leveraging its relationships with system integrators, service providers and other information technology leaders. In addition, the Company intends to increase its penetration of the financial services and insurance industries by providing pre-configured vertical applications to these markets. The Company also plans to continue to enhance its product architecture to encompass Internet technologies, adding functionality to take advantage of the Internet infrastructure and Web-based application platforms. The Company sells directly through a field sales organization and indirectly through system integrators and distributors to medium and large-size organizations worldwide. The Company has over 300 installations in a core group of vertical markets including financial services, insurance, healthcare, utilities, energy, telecommunications and government. The Company's customers include Aetna, American Express, Blue Cross/Blue Shield, MCI, Nissan Motor, Norwest Bank, PNC Bank, Texas Commerce Bank, Zurich American and the United States government, as well as numerous international accounts including GAN Insurance Company Ltd., The Halifax Building Society and PPP Healthcare in the U.K., Barclays Bank in Australia, debitel Kommunikation in Germany, Finnish P&T in Finland and SE Banken in Sweden. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company... 2,000,000 shares Common Stock to be outstanding after the offering......................... 7,296,472 shares (1) Use of proceeds....................... Repayment of approximately $2.0 million of indebtedness and general corporate purposes, including working capital Proposed Nasdaq National Market symbol............................... VSTA </TABLE> SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, -------------------------------------------- ------------------ 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- -------- ------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Total revenues......... $12,450 $23,131 $28,096 $ 22,812 $25,238 $ 9,644 $ 14,741 Operating income (loss)................ (893) (226) (1,876) (11,122) (7,451) (6,878) 491 Net income (loss)...... (841) (412) (2,315) (11,262) (7,956) (7,071) 403 </TABLE> <TABLE> <CAPTION> THREE MONTHS ENDED -------------------------------------------------------- MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, 1995 1995 1995 1995 1996 1996 -------- -------- --------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> Total revenues......... $ 3,836 $ 5,808 $7,511 $8,083 $6,940 $7,801 Operating income (loss)(2)............. (4,325) (2,553) (223) (350) 136 355 Net income (loss)...... (4,372) (2,699) (369) (516) 103 300 Pro forma net income (loss) per share (3).. $ (0.76) $ (0.46) $(0.06) $(0.09) $ 0.02 $ 0.04 Shares used in per share computations (3)................... 5,764 5,813 5,821 5,843 6,456 7,257 </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 ------------------------ ACTUAL AS ADJUSTED (4) ------- --------------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents............................. $ 2,276 Total assets.......................................... 11,298 Long-term debt........................................ 747 Total stockholders' equity (deficit).................. (5,071) </TABLE> - -------------------- (1) Based on shares outstanding as of June 30, 1996. Excludes 40,459 shares issuable upon the exercise of certain warrants to purchase Common Stock at a weighted average exercise price of $9.30 per share and an aggregate of 857,019 shares of Common Stock issuable upon the exercise of outstanding stock options at a weighted average exercise price of $0.37 per share. See "Management--Stock Plans," and "Description of Capital Stock--Warrants." (2) Excluding nonrecurring charges, operating income would have been $379,000 and $421,000 for the three months ended September 30, 1995 and December 31, 1995, respectively. (3) See Note 1 of Notes to Consolidated Financial Statements for a description of the calculation of pro forma net income (loss) per share. (4) Gives effect to (i) the issuance of 57,792 shares issuable upon net exercise of certain outstanding warrants to purchase Common Stock that terminate immediately prior to the closing of this offering, (ii) the conversion of all outstanding shares of Preferred Stock into Common Stock, which will occur automatically upon the closing of this offering and (iii) the sale of 2,000,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $ per share after deduction of the estimated underwriting discount and offering expenses payable by the Company. See "Use of Proceeds." -------------------- Except as otherwise indicated, the information contained in this Prospectus assumes (i) the 1-for-3.5 reverse stock split of the Company's Common Stock to be effected prior to the closing of this offering, (ii) the reincorporation of the Company in Delaware prior to the effective date of this offering, (iii) no exercise of the Underwriters' over-allotment option, (iv) the conversion of all outstanding shares of Preferred Stock into shares of Common Stock upon the closing of this offering and (v) the issuance of 57,792 shares of Common Stock upon net exercise of the warrants expiring prior to the closing of this offering. See "Description of Capital Stock" and "Underwriting."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000811119_americold_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000811119_americold_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following prospectus summary is qualified in its entirety by the more detailed information and consolidated financial statements appearing elsewhere in this Prospectus. Prospective investors are urged to read this Prospectus in its entirety. As used herein, the terms "Americold" and the "Company" refer to Americold Corporation, an Oregon corporation, and its subsidiary, unless the context indicates otherwise. See "Risk Factors" for a discussion of certain factors that should be considered in connection with the Offering. THE COMPANY Americold, the nation's largest supplier of public refrigerated warehouse space, provides integrated logistics services for the frozen food industry. These services, consisting of warehousing and transportation management, are provided through the Company's network of 49 refrigerated warehouses in 16 states and through the Company's refrigerated transportation management unit. Americold serves a broad array of customers ranging from small local food producers to most of the large national frozen food companies, including ConAgra, Inc., H. J. Heinz Co., J. R. Simplot Co., Kellogg Company and Ocean Spray Cranberries Inc. The Company's strategy is to use its position as the largest supplier of public refrigerated warehouse space to access both increased volumes of frozen food storage and additional transportation management business. REFRIGERATED WAREHOUSING Since its founding in 1911, the Company has grown to become the largest owner and operator of refrigerated warehouses in the United States. The Company believes it supplies approximately 15% of the total publicly-available freezer storage space in the country. With approximately twice the capacity of its nearest competitor, the Company's network of 49 refrigerated warehouse facilities provides a total storage capacity of approximately 229 million cubic feet. Approximately 94% of the storage space operated by the Company is freezer space (zero degrees Fahrenheit and below), with the remaining space comprised of cooler space (28 degrees Fahrenheit and above) and unrefrigerated dry storage space. Major items stored include potatoes, vegetables, fish, poultry, prepared foods and fruits. The Company believes that its facilities are sufficiently dispersed geographically to allow it to compete in most of the significant markets in the United States. According to 1995 industry statistics, approximately 77% of all commercial freezer space is available through public suppliers, such as the Company, and the remainder is owned or operated by food processors and distributors for their private use. Since 1979, there has been a trend toward the use of public as opposed to private freezer space. The Company believes it is well-positioned to benefit from this growth in public refrigerated warehouse space. Since August 1994, the Company has added approximately 15.1 million cubic feet of new warehouse space, while eliminating approximately 12 million cubic feet of non- strategic warehouse space. Refrigerated warehouse services provided by the Company include storage, handling, blast freezing and facility leasing. In addition to these services, the Company has developed several ancillary services and intends to continue developing and promoting such services as well as adding incremental freezer, cooler or dry space. Ancillary services include product assembly/packaging, palletizing, labeling and SUPERCOLD freezer storage provided at 11 of Americold's facilities for the preservation of products, such as ice cream, which require storage at temperatures as low as 20 degrees below zero (Fahrenheit). TRANSPORTATION MANAGEMENT The Company has recently expanded its focus to provide integrated warehousing and transportation management services to the frozen food industry. To expand its transportation management business, the Company has consolidated its transportation management functions, added staff resources and improved its transportation management information systems capabilities, including integrating these systems with the Company's warehouse information systems. Transportation management services offered by the Company include dispatching, freight rate negotiation, backhaul coordination, freight bill auditing, network flow management, local/store door delivery, order consolidation, truck routing and distribution channel assessment. As part of its expanded transportation management services, the Company has entered into arrangements with three subsidiaries of its largest customer, H.J. Heinz Co. ("Heinz"), pursuant to which it is providing transportation management services from manufacturing plants through distribution channels to the subsidiaries' customers. In addition, for one of these subsidiaries, the Company also manages the in-bound transportation of over 200 non-frozen ingredients to the subsidiary's manufacturing plants. COMPANY STRATEGY The Company's strategy is to use its position as the largest supplier of public refrigerated warehouse space to access both increased volumes of frozen food storage and additional transportation management business. The Company believes its strong industry position, its geographically dispersed network of refrigerated warehouse facilities and its integrated logistics information systems provide it with a competitive advantage in developing and maintaining relationships with large frozen food manufacturers, distributors and retailers that have freezer storage and product distribution requirements in numerous locations throughout the United States. Industry studies suggest that frozen food processors spend approximately twice as much on transportation as on warehousing of frozen food products. The Company's customers, by outsourcing to Americold, may benefit from the transportation efficiencies Americold achieves while being able to reduce redundant staff and avoid individual investments in warehouse facilities and in the computer hardware and software systems necessary for transportation management. The Company's experience in providing a wide range of services in what it believes to be a reliable and cost-effective manner, together with its warehouse network and expanding capabilities in transportation management services, may enable the Company to attract new customers and to offer enhanced services to current customers. The Company believes that the potential cost savings brought to customers in product distribution will strengthen and broaden the Company's relationships with its customers and provide opportunities to expand its operations to meet customer needs. RECENT DEVELOPMENTS On May 9, 1995, the Company filed a prepackaged plan of reorganization (the "Plan") under Chapter 11 of the Bankruptcy Code (the "Prepackaged Bankruptcy"). The principal purpose of the Plan was to reduce the Company's short-term cash requirements with respect to payments due on its senior subordinated indebtedness by extending the maturity of such indebtedness and to adjust certain restrictive financial covenants and other provisions contained in an agreement with one of its principal lenders. The bankruptcy court approved the Plan as filed and it became effective on June 30, 1995. The Plan as approved provided, among other things, that each holder of the Company's then outstanding 11% Senior Subordinated Debentures due 1997 (the "11% Debentures") was entitled to receive a corresponding amount of the Company's new 15% Senior Subordinated Debentures due 2007 (the "15% Debentures"), plus accrued but unpaid interest; that the holders of the Company's Senior Debt, including holders of the 11.45% First Mortgage Bonds, Series A, due 2002 (the "Series A Bonds") and the 11.5% First Mortgage Bonds, Series B, due 2005 (the "Series B Bonds," and together with the Series A Bonds, the "First Mortgage Bonds") were not adversely affected by the Prepackaged Bankruptcy; and that the prior Amended and Restated Investment Agreement dated as of March 2, 1993 (the "Investment Agreement") was superseded by the Second Amended and Restated Investment Agreement dated as of May 5, 1995 (the "Second Investment Agreement") with Metropolitan Life Insurance Company (the "Institutional Investor"). See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources--Liquidity--Effect of Prepackaged Bankruptcy" and "Legal Proceedings." The Company believes that the restructuring pursuant to the Prepackaged Bankruptcy has not adversely affected the holders of its Senior Debt or its relationships with its customers, suppliers or shareholders. See "Risk Factors--Conclusion of Prepackaged Bankruptcy." The Company intends to apply the net proceeds of the Offering to redeem at par all of its 15% Debentures. The Company is currently considering the possibility of issuing secured debt to refinance a portion of the Series A Bonds. If such a refinancing is consummated, and if after such refinancing the Institutional Investor holds either (i) less than 25% of the outstanding principal amount of Series A Bonds or (ii) less than $25 million in principal amount of the Series A Bonds, certain covenants, redemption obligations and other provisions of the Second Investment Agreement will terminate. The Second Investment Agreement will terminate completely when neither the Institutional Investor nor any of its affiliates continues to hold any Series A Bonds. See "Debt of the Company--The Second Investment Agreement." The Company will not offer or sell any securities in connection with such refinancing unless such securities are registered under the Securities Act of 1933, as amended (the "Securities Act"), or unless an exemption therefrom is available. There can be no assurance as to the terms of such refinancing or that such refinancing will occur. For certain preliminary unaudited financial data of the Company for its most recently completed fiscal year and for its fourth quarter, both ended February 29, 1996, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations--Preliminary Year-End and Fourth Quarter Results." OWNERSHIP The Company is controlled by Kelso & Company, a private investment firm, and its affiliates ("Kelso"), which together currently hold approximately 53% of the Company's common equity. Management of the Company beneficially owns approximately 11% of the Company's common equity. See "Principal Shareholders." The Company's principal executive offices are located at 7007 S.W. Cardinal Lane, Suite 135, Portland, Oregon 97224. Its telephone number at that address is (503) 624-8585. THE OFFERING $120,000,000 principal amount of % Senior Subordinated Notes due 2008 Maturity Date............. May 1, 2008. Interest.................. % per annum payable semi-annually in arrears on each May 1 and November 1, commencing November 1, 1996; provided that (i) the interest rate on the Notes shall be increased by 1% effective November 1, 1997 if, by such date, the Notes do not achieve the Requisite Rating, (ii) if the Notes do not achieve the Requisite Rating by November 1, 1997 but thereafter the Notes do achieve such Requisite Rating, the interest rate then borne by the Notes shall be decreased by 1% effective on the next interest payment date, and (iii) if, after achieving the Requisite Rating, the Notes are subsequently downgraded below the Requisite Rating, the interest rate then borne by the Notes shall be increased by 1% effective on the next interest payment date. In no event shall the interest rate borne by the Notes be greater than % or less than %. Optional Redemption....... The Notes may not be redeemed at the option of the Company prior to May 1, 2001. Thereafter, the Notes will be redeemable at any time, in whole or in part, at the option of the Company, initially at % of their principal amount declining ratably to 100% of their principal amount on or after May 1, 2003, in each case plus accrued interest. In addition, at any time prior to May 1, 1999 up to 35% of the original principal amount of the Notes will be redeemable, at the option of the Company, from the proceeds of one or more Public Equity Offerings (as defined), at % of their principal amount, plus accrued interest. See "Description of Senior Subordinated Notes--Optional Redemption." Change of Control......... Upon the occurrence of a Change of Control (as defined in the indenture pursuant to which the Notes will be issued, the "Note Indenture"), and after satisfaction by the Company of the requirements described below, each holder of the Notes will have the right to require the Company to repurchase all or any part of such holder's Notes at a price in cash equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase, subject to the terms of any Senior Debt (as defined in the Note Indenture). The Company's Senior Debt agreements restrict the redemption or repurchase of the Notes so long as Senior Debt remains outstanding. If a Change of Control occurs, there can be no assurance that the Company will have the financial ability to redeem the Notes. See "Description of Senior Subordinated Notes--Change of Control." Ranking and The Notes will be unsecured senior subordinated Subordination............. obligations of the Company, subordinated in right of payment to all existing and future Senior Debt, including, without limitation, the Company's obligations under the credit agreement with its primary bank dated as of June 19, 1995 (the "Bank Credit Agreement") and the indenture governing the First Mortgage Bonds (the "Bond Indenture"), dated as of March 9, 1993 and as amended on June 30, 1995, between the Company and Fleet National Bank of Connecticut, as trustee (the "Bond Trustee"). The Notes will rank pari passu with all other existing and future senior subordinated indebtedness of the Company and senior in right of payment to any future indebtedness of the Company that is expressly subordinated to senior subordinated indebtedness of the Company. See "Debt of the Company--The Bank Credit Agreement" and "--The First Mortgage Bonds," and "Description of Senior Subordinated Notes-- Ranking." As of November 30, 1995, the Company had approximately $349.5 million of Senior Debt outstanding. Covenants................. The Note Indenture will contain certain covenants for the benefit of the holders of the Notes, including among others, covenants limiting (a) the incurrence of additional indebtedness by the Company, (b) the issuance of debt and preferred stock by the Company's subsidiary, (c) the payment of dividends on, and the redemption of, capital stock of the Company and its subsidiary, (d) the making of investments, (e) the sale of assets and subsidiary stock and (f) transactions with affiliates. In addition, the Note Indenture will restrict the ability of the Company to consolidate or merge with or into, or to transfer all or substantially all its assets to, another person. However, these limitations will be subject to a number of important qualifications and exceptions. See "Description of Senior Subordinated Notes-- Certain Covenants" and "--Consolidation, Merger and Sale of Assets." Use of Proceeds........... The net proceeds of the Offering will be used by the Company to retire at par the Company's 15% Debentures. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000814774_firebrand_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000814774_firebrand_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to, and should be read in conjunction with, the more detailed information and the financial statements (including the notes thereto) appearing elsewhere in this Prospectus. Certain of the information contained in this summary and elsewhere in this Prospectus, including under "Management's Discussion and Analysis of Financial Condition and Results of Operations" are forward-looking statements. For a discussion of important factors that could cause actual results to differ materially from the forward-looking statements, see "Risk Factors" and "Management's Discussion and Anaylsis of Financial Condition and Results of Operations." Each prospective investor is urged to read this Prospectus in its entirety. THE COMPANY GKN Holding Corp. (the "Company") is primarily engaged in securities brokerage, securities trading and investment banking through GKN Securities Corp. ("GKN"), its principal operating subsidiary. GKN is a full service securities brokerage and investment banking firm which is a registered broker-dealer with the Securities and Exchange Commission ("Commission"), in all 50 states, the District of Columbia and Puerto Rico and a member firm of the National Association of Securities Dealers, Inc. ("NASD"). GKN's principal office is located in New York City, New York and its branch offices are located in Great Neck, New York, Boca Raton, Florida, Miami, Florida, and Stamford, Connecticut. The Company began operations in 1987 following the October stock market decline, at which time the founders perceived an opportunity for the creation of a high quality investment bank serving emerging growth and small capitalization corporate clients and investors. From its inception, the Company's plan has been to develop a high quality firm serving this market niche. Since October 1990, when GKN managed its first underwriting, GKN has acted as managing or co-managing underwriter in a total of 43 public offerings, raising approximately $430 million. GKN also regularly participates as a selling group member or participating underwriter in public offerings managed by other underwriters, including national and regional firms. Thirteen of the offerings managed or co-managed by GKN (raising approximately $170 million) were for Specified Purpose Acquisition Companies(R) ("SPAC(R)"), a new publicly-traded financing vehicle developed and introduced by GKN in 1993. A SPAC combines the characteristics of a traditional acquisition or buyout fund and a more liquid, publicly traded industry-specific investment vehicle. The Company believes that the number and dollar amount of GKN's underwritings and the introduction of SPACs have contributed significantly to increased public and industry awareness of the Company and has resulted in increased demand for GKN's investment banking services, although it should be noted that GKN is not currently involved in any new SPAC offerings and currently does not expect that future SPAC offerings, if any, will represent a material portion of its revenues from investment banking activities in subsequent periods. See "Business-- Investment Banking Activities." The Company has grown significantly over the last five years, primarily through increasing the size of its sales force, but more recently by acquisition and expansion into new areas of business. In March 1995, GKN Fund Management, Inc., a wholly-owned subsidiary of the Company, entered the money management business by becoming the general partner and administrator of Kaleidoscope Partners, L.P., a "fund of funds" with approximately $8.1 million in assets at April 30, 1996. In November 1995, the Company acquired all of the outstanding stock of Shochet Securities, Inc. ("Shochet"), a full-service discount brokerage firm with four branches operating in Southern Florida. In February 1996, GKN Securities AG ("GKN AG"), a wholly-owned subsidiary of the Company, commenced operations in Zurich, Switzerland, distributing securities and providing brokerage services to European institutional money managers. As of April 30, 1996, the Company, through its three brokerage subsidiaries, employed 260 registered representatives, serving primarily retail and, to a lesser extent, institutional customers, representing, in the aggregate, more than 27,000 active accounts. The Company was incorporated under the laws of the State of Delaware on January 30, 1987. GKN was incorporated under the laws of the State of New York on May 31, 1985. The Company and GKN maintain their principal offices at 61 Broadway, New York, New York 10006, and their telephone number is (212) 509-3800. THE OFFERING <TABLE> <S> <C> Common Stock Offered..................................... 2,500,000 Shares Common Stock Outstanding Prior to the Offering........................................ 5,559,125 Shares Common Stock to be Outstanding After the Offering..................................... 8,059,125 Shares Use of Proceeds.......................................... The Company intends to apply the net proceeds of this Offering to expand its existing business by: (i) increasing GKN's equity capital to permit it to underwrite larger offerings and increase its principal trading and market making activities; (ii) expanding GKN's retail and institutional sales forces and Shochet's retail sales force; (iii) enhancing GKN's investment banking and research capabilities; (iv) expanding the Company's money management operations and commencing merchant banking activities; and (v) expanding the Company's international operations. Proposed Nasdaq National Market Symbol................... GKNS </TABLE> SUMMARY FINANCIAL DATA The summary financial information set forth below is derived from the financial statements appearing elsewhere in this Prospectus. This information should be read in conjunction with such financial statements, including the notes thereto. STATEMENT OF OPERATIONS DATA: <TABLE> <CAPTION> YEAR ENDED THREE MONTHS ENDED JANUARY 31, APRIL 30, ------------------------------------------- --------------------------- 1996 1995 1994 1996 1995 ------------- ------------- ------------- ------------- ------------ <S> <C> <C> <C> <C> <C> Total revenues.............................. $43,019,000 $32,410,000 $32,956,000 $18,444,000 $7,157,000 Total expenses.............................. 36,732,000 31,516,000 25,534,000 14,449,000 7,526,000 Income (loss) before provision for income taxes....................................... 6,287,000 894,000 7,422,000 3,995,000 (369,000) Net income (loss)........................... $3,469,000 $381,000 $4,006,000 $2,246,000 $(256,000) Primary earnings (loss) per share(1).............................. $0.61 $0.07 $0.72 $0.40 $(0.04) Primary weighted average number of shares outstanding(1).............................. 5,729,000 5,695,000 5,530,000 5,638,000 5,784,000 OTHER FINANCIAL DATA: Ratio of total assets to stockholders' equity...................................... 1.89 1.37 1.43 1.95 1.35 Pre-tax return on average equity.................................... 47.4% 7.8% 80.3% 25.1% (3.2)% Book value per common share outstanding..... $3.02 $2.30 $2.27 $3.34 $2.25 Registered Representatives(2)............... 224 163 126 260 175 </TABLE> BALANCE SHEET DATA: <TABLE> <CAPTION> APRIL 30, 1996 ------------------------------ ACTUAL AS ADJUSTED(3) -------------- -------------- <S> <C> <C> Total assets..................................................................... $ 33,117,000 $ 46,117,000 Total liabilities (excluding subordinated debt).................................. 15,348,000 15,348,000 Subordinated debt................................................................ 868,000 868,000 Total stockholders' equity....................................................... $ 16,901,000 $ 29,901,000 </TABLE> - --------------- (1) Fully diluted earnings per share and fully diluted average number of shares outstanding are not materially different from the primary numbers indicated above. (2) The Registered Representatives data is based upon unaudited personnel records of the Company. (3) Gives effect to the sale of the shares of Common Stock offered hereby ("Shares") at an assumed price of $6.00 per Share and the application of net proceeds therefrom. Unless otherwise indicated, the information in this Prospectus does not give effect to the exercise of the Underwriters' over-allotment option and does not include (i) 5,000,000 shares of Common Stock reserved for issuance under the Company's 1991 Employee Incentive Plan ("1991 Plan"), of which options to purchase 998,506 shares of Common Stock have been granted and are outstanding as of June 30, 1996; (ii) 125,000 shares of Common Stock issuable upon exercise of options and warrants issued outside of the 1991 Plan; or (iii) 1,000,000 shares of Common Stock reserved for issuance under the Company's 1996 Incentive Compensation Plan ("IC Plan").
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000816066_applied_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000816066_applied_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..a3d714d77db58794f944c79184640126206467aa
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This Prospectus contains certain statements of a forward-looking nature re- lating to future events or the future financial performance of the Company. Prospective investors are cautioned that such statements are only predictions and that actual events or results may differ materially. In evaluating such statements, prospective investors should specifically consider the various fac- tors identified in this Prospectus, including the matters set forth under the caption "Risk Factors," which would cause actual results to differ materially from those indicated by such forward-looking statements. The following summary is qualified in its entirety by the more detailed information, including the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Prospectus. THE COMPANY Applied Imaging designs, develops, manufactures and markets automated clini- cal analysis systems used by laboratories for prenatal and other genetic test- ing. The Company's cytogenetic instrumentation business, which has sold systems to approximately 500 sites in more than 30 countries since its inception, in- cludes systems that enable laboratories to automate aspects of the detection of chromosomal abnormalities associated with conditions such as Down's Syndrome. In addition to the Company's core instrumentation business, the Company is de- veloping a proprietary genetic screening system designed to enable prenatal screening for genetic abnormalities by isolating fetal red blood cells ("fetal blood cells") from a routine maternal blood sample. This new system is designed to improve current prenatal screening techniques by providing an accurate, timely and cost-effective procedure without the risks of miscarriage or fetal damage associated with invasive prenatal testing. Prenatal genetic testing is currently performed either invasively by ex- tracting, culturing and analyzing fetal cells taken from amniotic fluid or pla- cental tissue, or non-invasively by analysis of serum markers derived from a maternal blood sample. The Company estimates approximately 2.3 million pregnant women in the United States undergo some form of prenatal screening each year. Despite the widespread use of prenatal screening, there are significant short- comings associated with existing screening methods. Invasive procedures, which include amniocentesis (extracting fetal cells from the amniotic sac) and chori- onic villus sampling (extracting tissues from the placenta), involve direct ex- traction of fetal cells. These procedures can accurately detect a broad range of chromosomal disorders but pose a risk of fetal loss of between 0.5-1.0%. Due to this risk, these invasive procedures are usually only recommended for women age 35 or older, at which ages, the risk of having a child with a chromosomal disorder is greater than the risk of spontaneous miscarriage associated with these procedures. The Company estimates that these procedures are performed on approximately 300,000 women annually in the United States. The non-invasive screening procedures, which include alpha-fetoprotein ("AFP") and the "triple test," both of which are blood chemistry tests, are currently broadly used for pregnant women including those under the age of 35 with approximately 2 million tests performed annually in the United States. While these tests present no risk to the fetus since they do not directly analyze fetal cells, they are much less accurate with detection rates of approximately 60% for chromosomal disor- ders and false positive rates of approximately 5%. The Company's prenatal screening system under development is intended to pro- vide an accurate, non-invasive test by directly analyzing fetal blood cells isolated from a routine maternal blood sample. The Company's proprietary screening system incorporates (i) a patented blood-based procedure to enrich the concentration of fetal blood cells, (ii) automated image analysis instru- mentation to identify the fetal blood cells and (iii) the use of third-party DNA probes to identify certain chromosomal disorders present in fetal blood cells. This system is expected to be accurate because it evaluates actual fetal cells while posing no risk to the fetus. The Company's prenatal screening sys- tem is currently in preclinical evaluation and application for FDA approval has not yet been submitted. The Company believes that a key aspect of its prenatal screening system is its ability to enrich and identify fetal blood cells so that they can be di- rectly analyzed using available DNA probe technology. As of August 1996, the Company and its collaborators have used the fetal blood cell enrichment proce- dure on a total of 133 maternal blood samples. The Company's system has achieved fetal blood cell identification in 120 of the 133 samples tested, or 90% of cases. In 13 maternal blood samples (10% of the total samples), no fetal blood cells were found. The Company intends to continue preclinical and clini- cal evaluation of this system and anticipates beginning a multi-site interna- tional clinical trial during the first half of 1997. Additionally, the Company intends to file two separate 510(k) applications for the fetal cell enrichment and automated imaging system components of its system before the end of 1996, and an additional application (either a 510(k) tier III or a PMA) for the DNA- probe component of its prenatal screening system. There can be no assurance that the Company will be successful in establishing its prenatal screening sys- tem as a broad-based prenatal screening procedure nor can there be any assur- ance that the prenatal screening system will be approved for marketing by the FDA or, if approved, that clinical acceptance will be achieved. The Company's strategy is to establish its system as a broad-based prenatal screening procedure. The Company anticipates that sales of this system, if ap- proved by the FDA, will include both its proprietary consumable enrichment kits, used to separate fetal blood cells from maternal blood samples and imag- ing instrumentation used to analyze the cells. These new image analysis systems are contemplated to be compatible with the Company's existing installed cytoge- netic instrument base. The Company believes that it can leverage its existing infrastructure, worldwide distribution capabilities and extensive laboratory relationships to support the worldwide introduction of this fetal cell screen- ing system under development. Furthermore, the Company believes that its new cell enrichment and image analysis system could have clinical utility for can- cer applications and the prenatal diagnosis of single gene disorders, and, if the Company obtains additional funding, it intends to pursue the development of these other potential applications. Significant additional research and devel- opment will be necessary to establish the clinical utility of the Company's cell enrichment techniques and image analysis system for these other potential applications. THE OFFERING <TABLE> <C> <S> Common Stock to be offered by the Company....... 1,650,000 shares Common Stock to be outstanding after the Offering(1).................................... 6,757,460 shares Use of proceeds................................. For research and development and clinical trials related to the prenatal screening system; repayment of indebtedness; working capital and general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol.......... AICX </TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------------------- ---------------- 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- ------- ------- (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenues.......... $10,781 $11,711 $ 8,681 $ 9,571 $10,798 $ 5,215 $ 5,995 Cost of revenues........ 5,783 6,184 4,965 5,350 5,484 2,611 3,122 ------- ------- ------- ------- ------- ------- ------- Gross profit.......... 4,998 5,527 3,716 4,221 5,314 2,604 2,873 ------- ------- ------- ------- ------- ------- ------- Operating expenses: Research and development........... 1,164 1,316 1,756 2,821 2,919 1,380 1,698 Sales and marketing.... 2,565 3,279 2,543 2,524 2,918 1,335 1,476 General and administrative........ 1,453 1,642 1,229 1,898 2,094 996 949 Restructuring and reorganization costs.. 396 -- -- -- -- -- -- Write-off of research and development in process............... 1,285 -- -- -- -- -- -- ------- ------- ------- ------- ------- ------- ------- Total operating expenses............ 6,863 6,237 5,528 7,243 7,931 3,711 4,123 ------- ------- ------- ------- ------- ------- ------- Operating loss......... $(1,865) $ (710) $(1,812) $(3,022) $(2,617) $(1,107) $(1,250) ======= ======= ======= ======= ======= ======= ======= Net loss............... $ (977) $ (480) $(1,773) $(2,970) $(2,546) $(1,101) $(1,235) ======= ======= ======= ======= ======= ======= ======= Pro forma net loss per common share(2)........ $ (0.45) $ (0.22) ======= ======= Shares used in computing pro forma net loss per common share(2)........ 5,635 5,687 </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 ---------------------- ACTUAL AS ADJUSTED(3) ------- -------------- (UNAUDITED) <S> <C> <C> BALANCE SHEET DATA: Cash, cash equivalents and short-term investments....... $ 3,236 $12,581 Working capital......................................... 2,238 12,179 Total assets............................................ 8,089 17,434 Long-term debt.......................................... 223 223 Accumulated deficit..................................... 10,375 10,375 Total stockholders' equity(4)........................... 3,615 13,556 </TABLE> - ------- (1) Based upon shares outstanding as of June 30, 1996. Excludes (i) 497,250 shares issuable upon exercise of options outstanding under the Company's Amended and Restated 1988 Incentive Stock Option Plan (the "1988 Option Plan"), (ii) 508,734 shares issuable upon exercise of outstanding warrants to purchase Common Stock, (iii) 200,000 shares reserved for issuance under the Company's Employee Stock Purchase Plan (the "Purchase Plan"), (iv) 120,000 shares reserved for issuance under the Company's 1994 Director Option Plan (the "Director Plan") and (v) an additional 632,113 shares reserved for issuance under the 1988 Option Plan. See "Management-- Incentive Stock Plans" and "Description of Capital Stock--Warrants." (2) See Note 1 of Notes to Consolidated Financial Statements for information concerning the computation of pro forma net loss per share. (3) As adjusted to reflect the sale of the 1,650,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $7.00 per share and the receipt of the estimated net proceeds therefrom and repayment of short-term debt. See "Use of Proceeds" and "Capitalization." (4) No cash dividends have been declared with respect to the Company's Common and Preferred Stock. --------------- Except as set forth in the Consolidated Financial Statements or as otherwise indicated, all information in this Prospectus assumes (i) the reincorporation of the Company from California to Delaware which occurred on October 8, 1996, (ii) the filing of the Company's Restated Certificate of Incorporation authorizing a class of undesignated Preferred Stock, to be effective upon the closing of this offering, (iii) the conversion of all outstanding shares of Preferred Stock into Common Stock upon the closing of this offering, (iv) the net exercise of certain outstanding warrants to purchase Series F Preferred Stock into 56,783 shares of Common Stock and (v) no exercise of the Underwriters' over-allotment option. See "Description of Capital Stock" and "Underwriting."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000817647_american_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000817647_american_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..b08c06ee5689d802b742be0721a53719511b52b1
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial data, including the Consolidated Financial Statements and notes thereto included elsewhere in this Prospectus. Unless otherwise stated in this Prospectus, references to (a) the "Company" shall mean American Pad & Paper Company of Delaware, Inc. (formerly known as Williamhouse-Regency of Delaware Inc.) and its consolidated subsidiaries; (b) "APP" shall mean American Pad & Paper Company, the indirect parent of the Company; (c) "Williamhouse" shall mean the operations of the Company prior to its acquisition by APP on October 31, 1995 (the "Acquisition"); and (d) "Ampad" shall mean Ampad Corporation, the former operating subsidiary of APP, prior to Ampad's merger with and into Williamhouse immediately prior to the Acquisition (the "Merger"). See "The Transactions." Although the Company was the surviving corporation in the Merger, Ampad has been treated as the acquiring corporation for accounting purposes. On May 29, 1996, the Company executed a definitive agreement to purchase the Niagara Envelope Company, Inc. ("Niagara"). Financial data presented herein on a pro forma basis for the year ended December 31, 1995 gives effect to the Acquisition, the other transactions related thereto and the acquisition of Niagara as if such transactions occurred on January 1, 1995. See "Unaudited Pro Forma Financial Data." THE COMPANY The Company is one of the largest manufacturers and marketers of paper-based office products (excluding computer forms and copy paper) in the $60 billion to $70 billion North American office products industry. The Company offers a broad product line including nationally branded and private label writing pads, file folders, envelopes and other office products. Through its Ampad division, the Company is among the largest and most important suppliers of pads and other paper-based writing products, filing supplies and envelopes to many of the largest and fastest growing office products distributors. Acquired in October 1995, the Company's Williamhouse division is the leading supplier of mill branded, specialty and commodity envelopes to paper merchants/distributors. The Company's strategy is to grow by focusing on the largest and fastest growing office product distribution channels, making acquisitions, introducing new product lines, broadening product distribution across its channels and maintaining its position among the lowest-cost manufacturers in the industry. As a result of this strategy, the Company's sales have grown at a compound annual rate of approximately 34% from 1992 to 1995. For the year ended December 31, 1995, the Company had net sales of $617.2 million and income from operations of $57.3 million on the pro forma basis described herein. See "Unaudited Pro Forma Financial Data." Since the mid-1980s, the office products industry has experienced significant changes in the channels through which office products are distributed such as the emergence of new channels, including national office products superstores, national contract stationers and mass merchandisers, and consolidation within these and other channels. As a result of these changes, approximately 6,800 office product distributors existed in 1994 compared with approximately 13,300 in 1987. The channels through which office products are distributed from the manufacturer to the end-user include retail channels such as national office products superstores, mass merchandisers and warehouse clubs; commercial channels such as national contract stationers; paper merchants/distributors; and other channels such as regional distributors, school campuses and direct mail. The Company believes that sales of office products through retail channels are approximately $20 billion to $25 billion. The three dominant national superstores (Office Depot, OfficeMax and Staples) have experienced significant growth over the past three years and currently account for approximately 17% of total retail office products sales and approximately 6% of total office products sales. The Company believes that sales of office products through commercial channels are approximately $25 billion to $30 billion. Principally through the acquisition of smaller, regional contract stationers, national contract stationers (including Boise Cascade Office Products, BT Office Products, Corporate Express, U.S. Office Products and the contract stationer divisions of Office Depot and Staples) have grown more rapidly than other commercial channels. These national contract stationers now account for approximately 25% of commercial office products sales and approximately 11% of total office products sales. Certain office products, particularly envelopes, are sold predominantly through paper merchants/distributors or directly to end users. Paper merchants/distributors currently account for approximately 30% of the envelope market. The three largest paper merchants (ResourceNet, Unisource and Zellerbach) have experienced significant growth primarily through consolidation. The Company has targeted and will continue to target those customers driving consolidation in the retail, commercial and paper merchant distribution channels and believes that it is uniquely positioned to meet the special requirements of these customers. These customers seek suppliers, such as the Company, who are able to offer broad product lines, higher value-added innovative products, national distribution capabilities, low costs and reliable service. Furthermore, as these customers continue to grow and as they consolidate their supplier bases, the Company's ability to meet their special requirements becomes an increasingly important competitive advantage. Recognizing Ampad's potential for growth through the changing distribution channels, Bain Capital, Inc. ("Bain Capital") and management formed APP and purchased Ampad from Mead Corporation ("Mead") in 1992. Since that time, management has enhanced the Company's scale, broadened its product line, expanded upon its national presence and strengthened its distribution capabilities through acquisition and innovation while simultaneously delivering higher customer service levels. As a result, the Company's net sales through the most rapidly growing retail and commercial channels increased from $8.8 million in 1992 to $134.8 million ($164.5 million on a pro forma basis) in 1995. The following chart illustrates the Company's principal corporate structure as well as its principal products, customers and brands in its primary business segments. Certain of the operations of the Williamhouse division are conducted through wholly owned subsidiaries of the Company. AMERICAN PAD & PAPER COMPANY | WR ACQUISITION, INC. | THE COMPANY (ISSUER) | _________________________________ | | AMPAD DIVISION WILLIAMHOUSE DIVISION Products: . Pads and Notebooks . Envelopes . Filing Supplies . Invitations . Envelopes . Announcements . Christmas and Holiday Cards Customers: . Retailers . Paper Merchants/Distributors . Contract Stationers . Jobbers . Wholesalers . Personalizing Businesses . Buying Groups Selected Brands: . Ampad(R) . Century(TM) . Embassy(R) . Huxley(TM) . Evidence(R) . Karolton(R) . Globe-Weis(R) . Kent(TM) . Gold Fibre(R) . Peel & Seel(R) . SCM(TM) . Williamhouse(TM) . World Fibre(TM) COMPETITIVE STRENGTHS The combination of the Company's products, customers and national scale distinguishes it as a leading manufacturer and marketer of paper-based office products (excluding computer forms and copy paper) in North America. The Company attributes this position and its continued opportunities for growth and profitability to the following competitive strengths: . Market Leader. The Company has achieved market leadership in core products sold to customers in the largest and fastest growing office products channels by offering one of the broadest assortments of high quality products in the industry. Furthermore, the Company enjoys national brand awareness in many of its product lines, including Ampad, Century, Embassy, Evidence, Gold Fibre, Huxley, Karolton, Kent, Peel & Seel, SCM, Williamhouse and World Fibre. . Well-Positioned and Diversified Customer Base. The Company has substantial opportunities for growth within several distribution channels of the office products industry. The Company has focused on the largest and fastest growing office products channels. Several of the Company's largest customers, such as Boise Cascade Office Products, BT Office Products, Corporate Express, Office Depot, OfficeMax and Staples, are expected by industry analysts to experience annual revenue growth of 15% to 35% over the next five years. The Company's Williamhouse division maintains particularly strong relationships with the largest and fastest growing paper merchants/distributors in the market, including ResourceNet, Unisource and Zellerbach. The Company also maintains strong customer relationships across all of the other office products distribution channels, including mass merchandisers, warehouse clubs, office products wholesalers and independent dealers. . National Scale and Service Capability. The Company's extensive product line, multiple brands and broad price point coverage provide significant advantages and economies of scale in selling to and servicing its customers. The Company has become an increasingly important strategic partner to its customers as they seek higher value-added products, simplify their purchasing organizations and consolidate their relationships among selected national suppliers. The Company's national presence and network of 22 strategically located facilities have enabled it to maintain rapid and efficient order fulfillment standards. In addition, the Company's advanced electronic data interchange ("EDI") capabilities enable it to meet its customers' EDI requirements, executing automated transactions rapidly, efficiently and accurately. . Innovation New Products. The Company has introduced several innovative products as part of its marketing strategy to differentiate itself from other suppliers and enhance profitability. Recent examples include Gold Fibre classic and designer notebooks, Papers with a Purpose, World Fibre ground-wood writing pads and Peel & Seel envelopes. Products introduced since 1992 accounted for over $70 million of the Company's 1995 net sales. The Company's brand recognition and presence with its national customers allows it to more easily introduce new or acquired product lines to those customers. . Low-Cost Manufacturer. The Company believes it is among the lowest-cost manufacturers of paper-based office products in the industry. The Company ensures its low-cost manufacturing position through its paper purchasing and distribution advantages as well as its maintenance of modern and efficient manufacturing technology and a high quality workforce. The Company has been successful in reducing costs with each of its acquisitions in the last three years by continually streamlining its manufacturing processes and overhead structure. From 1992 to 1995, the Company reduced its fixed manufacturing costs from 7.4% to 5.2% of net sales and its selling, general and administrative expenses from 10.5% to 7.2% of net sales. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview." . Purchasing Advantages. The Company has strong relationships with most of the country's largest paper mills, many of which have been conducting business with the Company for more than 30 years. The Company believes it is one of the largest purchasers of the principal paper grades used in its manufacturing operations. In addition, the Company has the largest number of designated mill relationships which involve some of the largest and most recognized paper mill brands such as Hammermill, Hopper, Neenah and Strathmore. These relationships afford the Company certain paper purchasing advantages, including stable supply and favorable pricing arrangements. . Proven Management Team With Successful Track Record. The Company's senior operating management team averages over 25 years each in the paper products industry. Management has succeeded in increasing sales and operating profitability by recognizing and acting on the transition to the fastest growing distribution channels, introducing higher value-added products, acquiring complementary product lines (Karolton in December 1993, SCM Office Supplies, Inc. ("SCM") in July 1994 and certain product lines of Huxley and Globe-Weis in July 1994 and August 1995, respectively), improving manufacturing processes and reducing overhead and administrative costs. GROWTH STRATEGY The Company's strategy is to maintain and strengthen its leadership position by focusing on the following. . Focus on Rapidly Growing Customers. The Company serves many of the largest and best positioned customers in the office products market segment including national office product superstores, mass merchandisers and warehouse clubs, national contract stationers and national paper merchants/distributors. For 1995 on a pro forma basis, approximately 15.3% of the Company's net sales were to national office product superstores, 7.8% to mass merchandisers and warehouse clubs, 9.1% to national contract stationers and 19.7% to the three largest national paper merchants/ distributors. Anticipating further consolidation in the office products industry, the Company expects that its national scope and broad product line will be increasingly important in meeting the need of its customers. The Company will continue to target those customers driving consolidation in the office products industry. . Continue to Introduce New Products. New, higher value-added products give the Company a greater selection to offer its customers and improve product line profitability for both the Company and its customers. The Company plans to differentiate itself from other suppliers and improve profitability through product innovation, differentiation and line extensions. . Pursue Complementary Product Line and Strategic Acquisitions. The office products industry is highly fragmented despite continuing consolidation among its manufacturers. The Company is leading consolidation among manufacturers of writing products, filing supplies and envelopes. The SCM and Williamhouse acquisitions broadened the Company's product line to include filing products and envelopes and enhanced its presence in the growing distribution channels. The Globe-Weis acquisition and the Company's agreement to acquire Niagara demonstrate its commitment to strengthening its competitive and strategic position within its markets. The Company believes that there are significant opportunities to acquire companies in both its existing and complementary product lines. In addition, the Company intends to enter new office products markets through acquisitions of established companies in those markets. . Broaden Product Distribution. The Company's market presence and distribution strengths uniquely position it to sell new or acquired product lines across its distribution channels, including national office product superstores, national contract stationers, office product wholesalers and mass merchandisers. As an important part of its growth strategy, for example, the Company has successfully introduced the envelope product lines acquired in the Acquisition, previously distributed primarily through paper merchants/distributors, to Ampad division's distribution channels under the Ampad and private label names. The Company estimates that this market opportunity is approximately $350 million in annual net sales. . Continue to Reduce Costs. The Company has identified and is in the process of implementing cost reductions in connection with the Acquisition that are expected to result in approximately $7.4 million of annualized cost savings. In addition, management plans to implement further identified cost reductions beyond 1996. THE TRANSACTIONS Acquisition. On October 3, 1995, APP agreed to acquire in a merger transaction all of the outstanding stock of WR Acquisition, Inc. ("WR"), the parent corporation of Williamhouse. In a series of transactions, APP exchanged 100% of the capital stock of its then wholly owned subsidiary, Ampad Corporation, for newly issued shares of WR. WR then effected the Merger of Ampad with and into Williamhouse, with Williamhouse being the surviving legal entity. WR was then merged with a wholly owned subsidiary of APP, pursuant to which WR's stockholders (other than APP and affiliates) received an aggregate of $140.0 million in cash plus reimbursement of certain expenses of $4.0 million. As a result of the transactions, APP now owns all of the issued capital stock of WR, which in turn owns all of the issued capital stock of the Company. APP is owned by the Company's senior management team (Messrs. Hanson, Gard and Benson) and Bain Capital and its related investors. See "Principal Stockholders." In connection with the Acquisition, the Company refinanced approximately $119.1 million of indebtedness, including prepayment penalties of approximately $1.7 million. Concurrently with the closing of the Acquisition on October 31, 1995 (the "Closing"), the Company incurred borrowings under a bank credit agreement (the "Bank Credit Agreement") and the Company entered into a new non-recourse, off-balance sheet accounts receivable securitization program (the "Accounts Receivable Facility"). Bain Capital assisted the Company in analyzing, negotiating and arranging the financing for the Acquisition. Following the Acquisition, the Company's name was changed to American Pad & Paper Company of Delaware, Inc. Tender Offer and Consent Solicitation. On October 23, 1995, an offer (as amended, the "Tender Offer") was commenced to purchase for cash all of the Company's 11 1/2% Senior Subordinated Debentures due 2005 (the "Old Debentures") and a related solicitation (the "Consent Solicitation") of consents to modify certain terms of the indenture under which the Old Debentures were issued. The Company received consents and tenders representing 99.9% in aggregate principal amount of the Old Debentures outstanding at a price of 109% of the aggregate principal amount of the Old Debentures. As of the date hereof, there are no Old Debentures outstanding. Refinancing. Since the Acquisition, the Company has effected the following additional transactions (such transactions, together with the Acquisition, the entering into of the Accounts Receivable Facility and the incurrence of borrowings under the Bank Credit Agreement being referred to collectively as the "Transactions"): (i) the offering of the Notes (the "Offering"); (ii) the Tender Offer and the related Consent Solicitation; (iii) the redemption of $70.6 million of preferred stock and preferred stock equivalents of APP (collectively, the "Preferred Stock"); and (iv) the payment of a $4.5 million cash dividend to pay the liquidation preference, including the return of original costs, on APP's Class P Common Stock (the "Class P Common Stock Dividend"). Certain Arrangements Relating to the Acquisition. Prior to the Acquisition, APP declared a dividend on its common stock and Class P Common Stock (the "Class P Common Stock") of one share of Preferred Stock for each ten shares of common stock and Class P Common Stock. In December 1995, APP redeemed on a pro rata basis a portion of such Preferred Stock with an aggregate liquidation value of approximately $70.6 million from the proceeds of the Offering. At the same time, APP declared a cash dividend of approximately $4.5 million on its Class P Common Stock and, thereafter, converted all outstanding Class P Common Stock on a share-for-share basis into common stock. The Company's senior management team (Messrs. Hanson, Gard and Benson) received an aggregate of 5,400 shares of Preferred Stock as a result of the Preferred Stock Dividend and cash consideration of approximately $9.2 million as a result of the redemption of certain of these shares of Preferred Stock and Preferred Stock equivalents. In connection with the Acquisition, members of Williamhouse's management received substantial payments for their equity interests in Williamhouse. Bain Capital was paid a fee of $5.0 million by Ampad for, among other things, its services in analyzing, negotiating and arranging the financing for the Acquisition. See "Certain Relationships and Related Transactions." Employment Agreements. In June 1996, the Company and Charles G. Hanson, III entered into an employment agreement pursuant to which Mr. Hanson agreed to serve as the Chief Executive Officer of the Company for a period of three years for an annual base salary equal to at least $450,000 plus an annual bonus of up to 100% of his annual base salary (upon the Company achieving certain operating targets) and certain fringe benefits. Russell M. Gard entered into a similar agreement whereby he agreed to serve as the Chief Operating Officer of the Company for an annual base salary equal to at least $400,000 plus an annual bonus of up to 100% of his annual base salary (upon the Company achieving certain operating targets) and certain fringe benefits. Gregory M. Benson has an agreement with the Company pursuant to which he is entitled to an annual base salary of at least $175,000, a bonus of up to 100% of his average annual base salary and certain other payments. See "Management-Management Agreements." SALE OF PERSONALIZING DIVISION The Company's management identified the personalizing division of Williamhouse (the "Personalizing Division") as a nonstrategic asset following the Acquisition and has decided to pursue a sale of the Personalizing Division. As a result, the financial statements of the Company included elsewhere in this Prospectus reflect the Personalizing Division as "Assets for Sale" as of December 31, 1995 and March 31, 1996. On June 6, 1996, the Company signed a definitive agreement with a potential buyer to sell the Personalizing Division. Under the terms of the agreement, the Company will receive gross proceeds of approximately $60 million (subject to certain closing adjustments) from the sale of the Personalizing Division, which it expects to complete by the end of June 1996. The sales agreement is subject to certain conditions, some of which are outside the control of the Company. As a result, no assurance can be given that the sale will be completed or if completed, on the terms set forth in the sales agreement. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview." PENDING ACQUISITION OF NIAGARA On May 29, 1996, the Company executed a definitive agreement to acquire Niagara for an aggregate purchase price of approximately $50 million, plus $5.0 million to be paid under a one-year consulting services agreement (the "Niagara Acquisition"). Niagara supplies mill branded, specialty and commodity envelopes to paper merchants/distributors through four manufacturing facilities located near Buffalo, Chicago, Dallas and Denver. Niagara had 1995 net sales of approximately $106 million and operating income of approximately $8.5 million. The Company expects the Niagara Acquisition to be completed by the middle of July 1996. The Company believes that the Niagara Acquisition will strengthen the Company's distribution capabilities in the Midwest, provide additional manufacturing capacity and provide opportunities to achieve operating improvements through the consolidation of Niagara's operations with those of the Company. The completion of the Niagara Acquisition is subject to certain conditions. Although the Company regularly engages in discussions with companies regarding potential acquisitions, it currently does not have any agreements or understandings relating to acquisitions other than the Niagara Acquisition. USE OF PROCEEDS There will be no cash proceeds to the Company or the Subsidiary Guarantors from the exchange pursuant to the Exchange Offer. The Company received approximately $194 million in net proceeds from the sale of the Notes in the Offering. The net proceeds were used by the Company (i) to repurchase for approximately $109.0 million in cash the Old Debentures in connection with the Tender Offer and Consent Solicitation, together with accrued interest thereon of $5.3 million, (ii) to redeem approximately $70.6 million in aggregate liquidation value of Preferred Stock, (iii) to pay the Class P Common Stock Dividend of $4.5 million, (iv) to provide working capital and (v) to pay related fees and expenses related to the Transactions. See "Use of Proceeds." THE NOTES OFFERING NOTES.......................... The Notes were sold by the Company on December 1, 1995, to BT Securities Corporation and Wasserstein Perella Securities, Inc. (collectively, the "Initial Purchasers") pursuant to a Purchase Agreement, dated November 17, 1995. The Initial Purchasers subsequently resold the Notes to qualified institutional buyers or accredited investors pursuant to Rule 144A under the Securities Act. REGISTRATION RIGHTS.AGREEMENTS.. Pursuant to the Purchase Agreement, the Company, the Subsidiary Guarantors and the Initial Purchasers entered into a Registration Rights Agreement, dated December 1, 1995 (the "Registration Rights Agreement"), which grants the holders of the Notes certain exchange and registration rights. The Exchange Offer is intended to satisfy such exchange rights which terminate upon the consummation of the Exchange Offer. THE EXCHANGE OFFER SECURITIES OFFERED.......... $200,000,000 aggregate principal amount of 13% Senior Subordinated Notes due 2005, Series B (the "Exchange Notes"). THE EXCHANGE OFFER.......... $1,000 principal amount of the Exchange Notes in exchange for each $1,000 principal amount of Notes. As of the date hereof, $200,000,000 aggregate principal amount of Notes are outstanding. The Company will issue the Exchange Notes to holders on or promptly after the Expiration Date. Based on an interpretation by the staff of the Commission set forth in no-action letters issued to third parties, the Company believes that Exchange Notes issued pursuant to the Exchange Offer in exchange for Notes may be offered for resale, resold and otherwise transferred by any holder thereof (other than any such holder which is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such Exchange Notes are acquired in the ordinary course of such holder's business and that such Holder does not intend to participate and has no arrangement or understanding with any person to participate in the distribution of such Exchange Notes. Each Participating Broker-Dealer that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a Participating Broker-Dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a Participating Broker-Dealer in connection with resales of Exchange Notes received in exchange for Notes where such Notes were acquired by such Participating Broker-Dealer as a result of market-making activities or other trading activities. The Company has agreed that, for a period of 180 days after the Expiration Date, it will make this Prospectus available to any Participating Broker-Dealer for use in connection with any such resale. See "Plan of Distribution." Any holder who tenders in the Exchange Offer with the intention to participate, or for the purpose of participating, in a distribution of the Exchange Notes could not rely on the position of the staff of the Commission enunciated in no-action letters and, in the absence of an exemption therefrom, must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. Failure to comply with such requirements in such instance may result in such holder incurring liability under the Securities Act for which the holder is not indemnified by the Company. EXPIRATION DATE............. 5:00 p.m., New York City time, on July 22, 1996, unless the Exchange Offer is extended, in which case the term "Expiration Date" means the latest date and time to which the Exchange Offer is extended. ACCRUED INTEREST ON THE EXCHANGE NOTE AND NOTES...................... Each Exchange Note will bear interest from its issuance date. Holders of Notes that are accepted for exchange will receive, in cash, accrued interest thereon to, but not including, the issuance date of the Exchange Notes. Such interest will be paid with the first interest payment on the Exchange Notes. Interest on the Notes accepted for exchange will cease to accrue upon issuance of the Exchange Notes. CONDITIONS TO THE EXCHANGE OFFER............................... The Exchange Offer is subject to certain customary conditions, which may be waived by the Company. See "The Exchange Offer -- Conditions." PROCEDURES FOR TENDERING NOTES........ Each holder of Notes wishing to accept the Exchange Offer must complete, sign and date the accompanying Letter of Transmittal, or a facsimile thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver such Letter of Transmittal, or such facsimile, together with the Notes and any other required documentation to the Exchange Agent (as defined) at the address set forth herein. By executing the Letter of Transmittal, each holder will represent to the Company that, among other things, the Exchange Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary course of business of the person receiving such Exchange Notes, whether or not such person is the holder, that neither the holder nor any such other person has any arrangement or understanding with any person to participate in the distribution of such Exchange Notes and that neither the holder nor any such other person is an "affiliate," as defined under Rule 405 of the Securities Act, of the Company. See "The Exchange Offer -- Purpose and Effect of the Exchange Offer" and "-- Procedures for Tendering." UNTENDERED NOTES...................... Following the consummation of the Exchange Offer, holders of Notes eligible to participate but who do not tender their Notes will not have any further registration rights and such Notes will continue to be subject to certain restrictions on transfer. Accordingly, the liquidity of the market for such Notes could be adversely affected upon consummation of the Exchange Offer if such holder does not participate in the Exchange Offer. CONSEQUENCES OF FAILURE TO EXCHANGE......................... The Notes that are not exchanged pursuant to the Exchange Offer will remain restricted securities. Accordingly, such Notes may be resold only (i) to the Company, (ii) pursuant to Rule 144A or Rule 144 under the Securities Act or pursuant to some other exemption under the Securities Act, (iii) outside the United States to a foreign person pursuant to the requirements of Rule 904 under the Securities Act, or (iv) pursuant to an effective registration statement under the Securities Act. See "The Exchange Offer -- Consequences of Failure to Exchange." SHELF REGISTRATION STATEMENT.......................... If any holder of the Notes (other than any such holder which is an "affiliate" of the Company or the Subsidiary Guarantors within the meaning of Rule 405 under the Securities Act) is not eligible under applicable securities laws to participate in the Exchange Offer, and such holder has satisfied certain conditions relating to the provision of information to the Company for use therein, the Company and the Subsidiary Guarantors have agreed to register the Notes on a shelf registration statement (the "Shelf Registration Statement") and use their best efforts to cause it to be declared effective by the Commission as promptly as practical on or after the consummation of the Exchange Offer. The Company and the Subsidiary Guarantors have agreed to maintain the effectiveness of the Shelf Registration Statement for, under certain circumstances, a maximum of three years from the date of issuance of the Notes, to cover resales of the Notes held by any such holders. SPECIAL PROCEDURES FOR BENEFICIAL OWNERS.................. Any beneficial owner whose Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact such registered holder promptly and instruct such registered holder to tender on such beneficial owner's behalf. If such beneficial owner wishes to tender on such owner's own behalf, such owner must, prior to completing and executing the Letter of Transmittal and delivering its Notes, either make appropriate arrangements to register ownership of the Notes in such owner's name or obtain a properly completed bond power from the registered holder. The transfer or registered ownership may take considerable time. GUARANTEED DELIVERY PROCEDURES......................... Holders of Notes who wish to tender their Notes and whose Notes are not immediately available or who cannot deliver their Notes, the Letter of Transmittal or any other documents required by the Letter of Transmittal to the Exchange Agent (or comply with the procedures for book-entry transfer) on or prior to the Expiration Date must tender their Notes according to the guaranteed delivery procedures set forth in "The Exchange Offer -- Guaranteed Delivery Procedures." WITHDRAWAL RIGHTS.................... Tenders may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. ACCEPTANCE OF NOTES AND DELIVERY OF EXCHANGE NOTES.................. The Company will accept for exchange any and all Notes which are properly tendered in the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The Exchange Notes issued pursuant to the Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offer - Terms of the Exchange Offer." MATERIAL FEDERAL INCOME TAX CONSEQUENCES....................... The exchange pursuant to the Exchange Offer should not be a taxable event for Federal income tax purposes. See "Certain Material Federal Income Tax Consequences." EXCHANGE AGENT....................... IBJ Schroder Bank & Trust Company THE EXCHANGE NOTES GENERAL..................... The form and terms of the Exchange Notes are the same as the form and terms of the Notes (which they replace) except that (i) the Exchange Notes bear a Series B designation, (ii) the Exchange Notes have been registered under the Securities Act and, therefore, will not bear legends restricting the transfer thereof, and (iii) the holders of Exchange Notes will not be entitled to certain rights under the Registration Rights Agreement, including the provisions providing for an increase in the interest rate on the Notes in certain circumstances relating to the timing of the Exchange Offer, which rights will terminate when the Exchange Offer is consummated. See "The Exchange Offer--Purpose and Effect of the Exchange Offer." The Exchange Notes will evidence the same debt as the Notes and will be entitled to the benefits of the Indenture. See "Description of Exchange Notes." The Notes and the Exchange Notes are sometimes referred to herein collectively as the "Senior Notes." MATURITY DATE............... November 15, 2005. INTEREST PAYMENT DATES...... Interest on the Exchange Notes will accrue from the date of original issuance (the "Issue Date") and is payable semi-annually on each May 15 and November 15, commencing November 15, 1996. RANKING..................... The Exchange Notes and Guarantees will be general unsecured obligations of the Company and Subsidiary Guarantors and will be subordinated in right of payment to all existing and future Senior Debt of the Company and Guarantor Senior Debt of the Subsidiary Guarantors, respectively. The Senior Notes will rank pari passu with any future senior subordinated indebtedness of the Company and Subsidiary Guarantors and will rank senior to all other subordinated indebtedness of the Company and Subsidiary Guarantors. As of March 31, 1996, the Company had approximately $253.5 million of Senior Debt (excluding $8.6 million of Senior Debt owed by a Subsidiary Guarantor, which is being sold subject to such debt. See "Business--Sale of Personalizing Division"). As of March 31, 1996, the Company had approximately $45.7 million available to be drawn under the revolving credit portion and letter credit facility of the Bank Credit Agreement, which amounts would have been Senior Debt. Under the Indenture (without giving effect to the restrictions in the Bank Credit Agreement), the Company could have incurred approximately $74 million of additional indebtedness, including indebtedness senior in right of payment to the Exchange Notes, at March 31, 1996. OPTIONAL REDEMPTION......... The Exchange Notes are redeemable, in whole or in part, at the option of the Company on or after November 15, 2000, at the redemption prices set forth herein plus accrued interest to the date of redemption. See "Description of Exchange Notes - Redemption." In addition, prior to November 15, 1998, the Company, at its option, may redeem up to 35% of the aggregate principal amount of the Exchange Notes originally issued in the Offering with the net cash proceeds of one or more Public Equity Offerings (as defined), at the redemption prices set forth herein plus accrued interest to the date of redemption. APP has filed a registration statement with the Commission for the purpose of registering the initial public offering (the "Proposed Equity Offering") of its Common Stock, par value $.01 per share (the "Common Stock"). The net proceeds to APP from the Proposed Equity Offering are currently estimated to be approximately $187 million. APP intends to use a portion of such proceeds to allow the Company to redeem approximately $70 million aggregate principal amount of the Notes or Exchange Notes from the holders thereof on a pro rata basis and to allow the Company to pay approximately $8 million in redemption premiums thereon. There can be no assurance that APP will consummate the Proposed Equity Offering, or if it does, that it will use the proceeds therefrom to redeem amounts outstanding under the Notes or the Exchange Notes. See "Proposed Initial Public Offering." CHANGE OF CONTROL........... Upon a Change of Control, each holder will have the right to require the Company to repurchase such holder's Exchange Notes at a price equal to 101% of the principal amount thereof plus accrued interest to the date of repurchase. GUARANTEES.................. The Exchange Notes will be fully and unconditionally guaranteed (the "Guarantees") on a senior subordinated basis by the Subsidiary Guarantors jointly and severally. The Guarantees will be general unsecured obligations of the Subsidiary Guarantors and will be subordinated in right of payment to all existing and future Guarantor Senior Debt. As of March 31, 1996, the Subsidiary Guarantors collectively had approximately $8.6 million of Guarantor Senior Debt (excluding guarantees of Senior Debt). As permitted under the Indenture, the Company expects to merge certain of the Subsidiary Guarantors with and into itself following the sale of the Personalizing Division. CERTAIN COVENANTS........... The Indenture governing the Exchange Notes contains certain covenants that limit the ability of the Company and certain of its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt and senior in right of payment to the Exchange Notes, incur liens, impose restrictions on the ability of a subsidiary to pay dividends or make certain payments to the Company and its subsidiaries, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. In addition, the Indenture requires the Company to use 50% of the net cash proceeds of an Initial Public Offering (as defined) to repay up to $50 million of indebtedness of the Company. For additional information regarding the Notes, see "Description of Exchange Notes."
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Prospective investors should consider carefully the information discussed under "Risk Factors." Except as otherwise indicated, all information in this Prospectus (i) assumes no exercise of the Underwriters' over-allotment option, (ii) reflects the automatic conversion of all shares of Class A Preferred Stock and all shares of Class B Preferred Stock into an equal number of shares of Class A Common Stock and Class B Common Stock, respectively, on the date of this Prospectus, (iii) reflects a two-for-three conversion of shares as part of the reincorporation of the Company in Delaware in May 1996, see "Business -- Delaware Reincorporation," and (iv) reflects a change in the Company's fiscal year, effective December 31, 1995 from a fiscal year end of September 30 to a fiscal year end of December 31. All references to fiscal years ended in 1995 and earlier refer to the fiscal year ended September 30. THE COMPANY Bitstream develops and markets software products and technologies to enhance the creation, transport, viewing and printing of electronic documents. The Company's products and technologies consist of (i) type products, such as libraries of type designs (fonts) and custom type products; (ii) enabling technologies, which deliver typographic capabilities to hardware output devices and software applications; and (iii) TrueDoc, a portable type technology providing for the efficient distribution of text, with fidelity, in a highly compressed format. In addition, beginning in the first half of 1997, the Company expects to market a family of TrueDoc-enhanced portable document products that are based upon Novell, Inc.'s portable document technology, Envoy. The Company has obtained from Novell, Inc. ("Novell") certain rights to market and distribute Envoy. Bitstream primarily licenses its products and technologies to original equipment manufacturers ("OEMs") and independent software vendors ("ISVs") for inclusion in their output devices, embedded systems, applications, Internet authoring tools, World Wide Web browsers and other products. The rapid growth in the use of personal computers, advanced software applications and laser printers has dramatically transformed the document creation, production and distribution process, giving rise to the widespread use of word processing and desktop publishing applications. However, these technologies generally operate as stand-alone systems utilizing unique and often competing standards. The problems presented by such competing standards have been further complicated by the adoption of multi-vendor client/server network architectures and the advent of new distribution media, including the Internet, corporate intranets and new classes of information appliances. Currently, techniques used to present text and graphics are based on existing desktop publishing technologies and, when used in new distribution media, often result in a loss of visual integrity, degraded system performance or both. To efficiently deliver digital information that retains the author's intended visual impression, it is necessary to utilize enabling technologies that reduce file size, minimize bandwidth consumption and operate reliably across heterogeneous computing environments. The Company's enabling technologies and TrueDoc allow text-based digital information to retain its intended appearance without regard to the specific computing platforms, operating systems or resident applications used to create the original document. In addition, with products based upon TrueDoc-enhanced Envoy technology, the Company expects to offer a portable document solution that addresses both text and graphics in a simplified and resource-efficient application. The Company markets its products to OEM and ISV customers worldwide through its direct sales force. Outside North America, the Company distributes software products to corporations and end users through a distributor network. The Company's customers include Accent Software International Ltd., Apple Computer, Inc. ("Apple"), Barco Graphics N.V., Corel Systems Corporation, Interleaf, Inc., Kyocera Corp., Macromedia, Inc., Seiko Epson Corporation, Silicon Graphics, Inc. and Sun Microsystems, Inc. In June 1996, the Company entered into licensing agreements with Oracle Corporation ("Oracle") and Spyglass, Inc. ("Spyglass") to provide them with the Company's TrueDoc technology for incorporation into their World Wide Web browser products or navigation tools. In fiscal year 1993, the Company decided to curtail product distribution through the computer software reseller channel and to concentrate the efforts of the Company on the development and sale of technology and products to OEM and ISV customers. In conjunction with this shift in strategic focus, the Company reorganized its operations, reduced its work force, recapitalized its financial structure, changed senior management and restructured its type design group. This shift in strategic focus took place over a period from approximately July 1993 through September 1994. See "Business -- Shift in Strategic Focus." The Company was incorporated in the Commonwealth of Massachusetts in December 1981 and was reincorporated in the State of Delaware in May 1996. The Company's executive offices are located at 215 First Street, Cambridge, Massachusetts 02142 and its telephone number is (617) 497-6222. - -------------------------------------------------------------------------------- <TABLE> THE OFFERING <S> <C> Class A Common Stock offered hereby.......... 2,100,000 shares Class A and Class B Common Stock to be outstanding after the Offering............. 5,593,247 shares(1) Use of proceeds.............................. Repayment of indebtedness, working capital and other general corporate purposes, including product development and potential acquisitions. Nasdaq National Market symbol................ BITS <FN> - --------------- (1) Excludes 1,922,436 shares of Class A Common Stock or Class B Common Stock issuable upon exercise of outstanding options and warrants. See "Management -- Stock Plans" and "Description of Capital Stock." </TABLE> <TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <CAPTION> THREE MONTHS SIX MONTHS ENDED ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31,(1) JUNE 30, ---------------------------------------------- -------------------- --------------- 1991 1992 1993 1994 1995 1994 1995 1995 1996 -------- ------- ------- ------ ------ --------- ------ ------ ------ (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenues............................... $ 25,093 $20,548 $17,430 $9,832 $8,970 $2,276 $2,355 $4,774 $5,411 Gross profit........................... 17,196 15,115 11,154 7,533 7,391 2,003 1,944 3,980 4,603 Operating income (loss)................ (9,819) (3,339) (4,468) 1,019 1,795 742 250 969 1,002 -------- ------- ------- ------ ------ ------ ------ ------ ------ Net income (loss)...................... $(10,262) $(3,624) $(4,805) $ 846 $1,688 $ 723 $ 738 $ 849 $1,044 ======== ======= ======= ====== ====== ====== ====== ====== ====== Pro forma net income per common and common equivalent share(2)........... $ .38 $ .17 $ .24 ====== ====== ====== Pro forma weighted average common and common equivalent shares outstanding(2)....................... 4,984 4,705 4,745 ====== ====== ====== <CAPTION> AS OF JUNE 30, 1996 ------------------------- ACTUAL AS ADJUSTED(3) ------ -------------- (UNAUDITED) <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................................................. $ 686 $10,381 Working capital........................................................................... 1,729 12,365 Total assets.............................................................................. 5,957 15,511 Long-term obligations..................................................................... 292 23(4) Stockholders' equity...................................................................... 2,852 13,620 <FN> - --------------- (1) Effective December 31, 1995, the Company changed its fiscal year end from September 30 to December 31. The information reflected represents results for the three months ended December 31, 1994 and December 31, 1995. The Company's current fiscal year commenced January 1, 1996. (2) Calculated on the basis described in Note 3 of the Notes to the Consolidated Financial Statements. (3) Adjusted to give effect to the sale of 2,100,000 shares of Class A Common Stock offered by the Company hereby at the initial public offering price of $6.00 per share, and the application of the net proceeds therefrom. (4) Does not include $941,000 of short-term indebtedness outstanding as of June 30, 1996 to be repaid by the Company with a portion of the proceeds of this Offering. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000821616_bentley_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000821616_bentley_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..91294cc2516dc7f12ef12b4a3fe973bf46795893
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the detailed information and consolidated financial statements (including the notes thereto) appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus is based on the assumption that the Underwriter's option to purchase Units from the Company to cover over-allotments is not exercised and that all share and per share information has been adjusted to give retroactive effect to a one-for-ten reverse stock split of the Company's Common Stock effected on July 25, 1995 and an increase in the number of authorized shares of Common Stock from 5,000,000 to 20,000,000 effected on January 1, 1996. As used in this Prospectus, the terms "Company" and "Bentley" refer to Bentley Pharmaceuticals, Inc. unless otherwise indicated by the context. THE COMPANY The Company is an international pharmaceutical and health care company engaged primarily in the manufacturing, marketing and distribution of pharmaceutical products in France and Spain, with limited distribution of health care products and research and development activities in the United States. The Company's operations in France consist of the brokerage of fine chemicals and the marketing of the drug Ceredase, manufactured by Genzyme Corporation and used in the treatment of Gaucher's Disease, under contracts of limited duration with Genzyme Corporation, the most recent of which terminates on March 31, 1996. In Spain, the Company manufactures, packages and distributes both its own and other companies' pharmaceutical products and has recently begun to emphasize the manufacture of pharmaceuticals under contract. In the United States, the Company markets disposable linens to emergency health services which are manufactured under contract. The percentage of the Company's total revenues for the nine months ended September 30, 1995 which are attributable to its operations in France, Spain and the United States are approximately 82%, 17% and 1%, respectively. Limited research and development activities are conducted both in the United States and Europe and the Company has several products under development. The Company's chemical and pharmaceutical operations in France and Spain are a result of its 1991 acquisition of Chimos S.A. and the establishment of a pharmaceutical subsidiary in France, Laboratoires Belmac S.A. (these two entities in France have since been merged into one entity named and referred to herein as Chimos/LBF S.A.) and the 1992 acquisition of Rimafar S.A. (subsequently renamed and referred to herein as Laboratorios Belmac S.A.), respectively. The strategic focus of the Company has shifted in response to the evolution of the global health care environment. The Company has moved from a research and development-oriented pharmaceutical company, developing products from the chemistry laboratory through marketing, to a company seeking to acquire late-stage development compounds that can be marketed within one or two years, and currently marketed products. As a result of this transition, the Company has decreased its research and development expenses dramatically over the past few years as well as implemented cost-cutting measures throughout the Company's operations. The Company emphasizes product distribution in France and Spain, strategic alliances and product acquisitions, which management of the Company expects will move the Company closer to profitability in the near future. Throughout its history, the Company has experienced negative cash flows from operations, which have been reduced in the past three years as a result of the shift in the Company's strategic focus. The Company has funded its operations primarily from financing activities and the sale of rights to certain of its pharmaceutical products. In October 1995 the Company completed private placements of debt and equity securities, of which $1,770,000 of the debt must be repaid from the proceeds of this Offering. A portion of the proceeds of this Offering will be utilized for such payment. The address and telephone number of the Company's principal executive offices are 4830 West Kennedy Boulevard, One Urban Centre, Suite 550, Tampa, Florida 33609, (813) 286-4401. The Company was organized under the laws of the State of Florida in February 1974. CONCURRENT OFFERING Concurrent with the Offering hereby, the Company has registered for concurrent or future sale by certain selling shareholders 593,500 shares of Common Stock pursuant to a separate prospectus. 240,000 of such shares are issuable upon conversion of notes sold in a private placement conducted by the Company in October 1995, to the extent such notes have been converted to Common Stock prior to their repayment upon application of a portion of the proceeds of this Offering. The notes were issued in two private placements in October 1995. In the first placement, the Company received proceeds of $720,000 for the issuance of 120,000 shares of Common Stock and 12% convertible promissory notes in an aggregate principal amount of $720,000 due on the earlier of July 31, 1996 or the closing of this Offering. In the second placement, the Company received proceeds of $1,050,000 for the issuance of 131,250 shares of Common Stock and 12% convertible promissory notes in an aggregate principal amount of $1,050,000 due on the earlier of September 30, 1996 or the closing of this Offering. See "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources--Private Placements," and "Underwriting--Private Placements." 102,250 of such shares of Common Stock have been registered upon exercise of various "piggy back" registration rights granted to Baytree Associates, Inc. and Martin E. Janis & Co., Inc. See "Concurrent Offering."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000822084_innerdyne_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000822084_innerdyne_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..978e75d0c76ce60af36abc7eeb28776e0681b7b8
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION, INCLUDING "RISK FACTORS," AND FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THE DISCUSSION IN THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SECTIONS ENTITLED "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS. InnerDyne, Inc. ("InnerDyne" or the "Company") designs, develops, manufactures and commercializes minimally invasive surgical ("M.I.S.") access products incorporating its proprietary radial dilation technology. The Company also has proprietary technology in the areas of thermal ablation and biocompatible coatings, which it intends to continue developing either internally or through strategic alliances. The Company's STEP access products enable a surgeon to perform an M.I.S. procedure without the use of a sharp-bladed trocar to gain access to the patient's abdominal cavity. Access with the Company's STEP product is provided by inserting an expandable sheath into the body cavity through the use of a standard insufflation needle, creating only a small puncture wound. The needle is then removed and the sheath is expanded to an appropriately sized working channel by insertion of a blunt dilator and cannula into the sheath. The blunt dilator is then removed, leaving the cannula in place. The radial dilation of the puncture wound into an appropriately sized working channel holds the cannula in place and obviates the need for an anchoring system that can increase the wound size left following surgery and increase trauma to adjacent tissues. After completion of the procedure, the rigid cannula is removed and the sheath retracts, permitting the opening in the abdominal musculature to recover to a residual wound size that is approximately half the size of that made with a trocar of similar size. The Company believes that the positive attributes of the STEP product could significantly affect health care system costs and patient satisfaction with M.I.S. procedures in which trocars have traditionally been used. The results of a Company-sponsored retrospective comparative outcomes study examining this issue were released during the fourth quarter of 1995. The study included 98 patients and compared an almost equal number of procedures performed using STEP devices and conventional trocars for access. Statistically significant results of that study indicated that STEP reduced device-related complications during surgery by over 90% and resulted in an approximately 22% savings in surgery time. Based upon published operating room costs, this time savings would equate to dollar savings of $345 to $515 per procedure. Management also believes that post-procedure complications, such as infection and incisional hernias at access sites, may be reduced with the use of the STEP device as compared to conventional trocars. It is estimated that in 1994 over 1.0 million procedures traditionally accomplished through open surgery were performed in the United States using M.I.S. techniques. Domestic M.I.S. procedures are expected by industry sources to grow at a rate of almost 11% through 1997, to a level of over 1.4 million procedures. Furthermore, it is estimated that more than 5.3 million domestic surgical procedures performed in 1994 were considered to be potential candidates for minimally invasive approaches. InnerDyne is exploring the potential use of its proprietary radial dilation technology for intra-organ access with its Radially Expanding Dilator ("R.E.D.") product and in other applications such as vascular access, feeding tube placement and orthopedic procedures. The Company has also made significant investments in research and development of its proprietary thermal ablation and biocompatible coatings technology. The Company's ENABL Thermal Ablation System is designed to treat excessive menstrual bleeding by thermally ablating the endometrial lining of the uterus. The Company recently announced the signing of an agreement with Boston Scientific Corporation ("Boston Scientific") covering the potential application and use of InnerDyne's proprietary biocompatible coating technologies with Boston Scientific's stents, grafts, vena cava filters and other implantable medical devices. The Company intends to continue to pursue licensing of its biocompatible coatings technologies to third parties for various applications. THE OFFERING <TABLE> <S> <C> Common Stock offered hereby....... 2,350,000 shares Common Stock to be outstanding after the offering............... 20,939,911 shares (1)(2) Use of Proceeds................... To fund additional development activities and expansion of marketing, sales and manufacturing activities and for general corporate purposes, including working capital. Nasdaq National Market Symbol..... IDYN </TABLE> SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, --------------------------------- -------------------- 1993 1994 1995 1995 1996 ---------- ---------- --------- --------- --------- <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue............................................ $ 43 $ 879 $ 5,275 $ 1,235 $ 1,582 Operating loss..................................... (10,765) (10,061) (5,848) (1,539) (1,601) Net loss........................................... (10,359) (9,904) (5,627) (1,469) (1,584) Net loss per share (3)............................. (0.69) (0.61) (0.32) (0.09) (0.09) Weighted average shares outstanding (3)............ 15,103 16,197 17,561 16,633 18,337 </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 ---------------------------- ACTUAL AS ADJUSTED(1)(4) --------- ----------------- <S> <C> <C> BALANCE SHEET DATA: Cash, cash equivalents and marketable investment securities........................ $ 1,820 $ 9,623 Working capital.................................................................... 2,312 10,115 Total assets....................................................................... 4,725 12,528 Long-term debt, excluding current installments..................................... 230 230 Net stockholders' equity........................................................... 3,095 10,898 </TABLE> - ------------------------ (1) Assumes the Underwriters' over-allotment option from the Company is not exercised. See "Underwriting." (2) Based on the number of shares outstanding as of March 31, 1996. Includes 242,952 shares issued upon exercise of warrants on or prior to April 1, 1996. Excludes (i) an aggregate of 1,993,784 shares of Common Stock issuable upon exercise of options outstanding as of March 31, 1996, (ii) 1,881,739 shares of Common Stock reserved for issuance pursuant to the Company's stock option and stock purchase plans, (iii) 235,000 shares of Common Stock issuable upon exercise of the Representative's Warrant and (iv) 166,667 shares of Common Stock to be issued to Boston Scientific Corporation in May 1996. See "Management -- Stock Plans," "Underwriting" and Note 8 of Notes to Financial Statements. (3) For an explanation of the determination of the number of shares used in computing net loss per share, see Note 2 of Notes to Financial Statements. (4) As adjusted to give effect to the sale of 2,350,000 shares of Common Stock offered by the Company at an assumed offering price of $3.875 per share. See "Use of Proceeds" and "Capitalization." ------------------------ EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITER'S OVER-ALLOTMENT OPTION. SEE "UNDERWRITING."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000822117_norian_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000822117_norian_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..cfbeb1944123d42465758d9e7bd093ce8cecd178
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000822117_norian_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified by the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. THE COMPANY Norian develops, manufactures and markets Norian Skeletal Repair System ("Norian SRS"), a proprietary bone fixation and replacement material designed for use in regions of structurally compromised cancellous bone such as the wrist, hip, knee and spine. Norian SRS is inserted into bone defects as a paste, either through minimally invasive injection or in an open surgical procedure. The material sets within 10 minutes of application and continues to cure over 12 hours to achieve its ultimate strength. The Company believes that Norian SRS provides direct structural support to compromised cancellous bone and can withstand compressive mechanical force soon after a procedure and over time. Additionally, Norian SRS may reduce the need for orthopaedic hardware in weakened cancellous bone. Norian SRS cures into a crystalline structure similar to the mineral phase of natural bone and appears to be replaced by natural bone over time. Fractures in cancellous bone tend to be complex, highly variable and difficult to repair with currently available treatment methods. These problems are compounded when cancellous bone is weakened by osteoporosis. The Company believes that Norian SRS overcomes the shortcomings of currently available treatment methods for cancellous bone fractures. The Company believes that one of the principal benefits of Norian SRS is to provide direct structural support to fractures, thereby reducing the risk of loss of anatomical positioning during the healing process and improving post-operative function and long-term outcome for the patient. In addition, Norian SRS may decrease the overall treatment cost by reducing the extent of rehabilitation required following fracture fixation and immobilization. The orthopaedic trauma market is the second largest segment of the orthopaedic industry, representing approximately 19% of the industry's $2.2 billion estimated 1995 sales in the United States. This market includes over six million fractures in the United States every year. The Company's strategy is to establish Norian SRS as the leading cancellous bone fixation and replacement product to be used independently or in conjunction with conventional fixation devices. Key elements of the Company's strategy include seeking regulatory approvals in the United States and in other selected countries and demonstrating clinical utility and cost-effectiveness by conducting clinical trials of the use of Norian SRS in selected applications. Following receipt of regulatory approvals, the Company intends to focus on providing extensive physician education and training, seeking reimbursement from third-party payors and establishing a direct sales force in the United States and a direct sales force or a network of distributors in foreign markets. However, there can be no assurance that the Company will receive such regulatory approvals or that any such approvals will not contain substantial restrictions limiting the Company's intended uses and applications. The Company intends to seek regulatory approval of Norian SRS as a cancellous bone cement. Under an Investigational Device Exemption ("IDE") approved by the United States Food and Drug Administration ("FDA"), the Company is conducting a randomized, multi-center clinical trial of the use of Norian SRS in the treatment of wrist fractures in up to 324 patients. This study is designed to demonstrate the safety and efficacy of Norian SRS in its ability to maintain the anatomical alignment of cancellous bone fragments and to improve functional outcomes such as grip strength and range of motion. The Company expects to use the data from this trial to support a pre-market approval ("PMA") application to market Norian SRS in the United States and to demonstrate its cost-effectiveness to third-party payors for purposes of reimbursement. As of April 30, 1996, 196 patients had been enrolled in the study. The Company is also seeking to obtain the right to affix to Norian SRS the "CE" mark, an international symbol of adherence to quality assurance standards and compliance with applicable European medical device directives. The CE mark will allow the Company to market the product in all of the member countries of the European Union ("EU"). In addition, the Company has test-marketed Norian SRS in the Netherlands since 1994, where the product is approved for commercial sale. In April 1996, the Company and Mochida Pharmaceutical Co., Ltd. ("Mochida") entered into a collaborative agreement for the exclusive marketing and distribution of Norian SRS in Japan for use in certain applications (the "Mochida Transaction"). The agreement provides for payments by Mochida to Norian of up to a total of $15.0 million, consisting of a $7.0 million equity investment completed in April 1996 and $8.0 million in non-refundable payments based on achievement of time-related, clinical and regulatory milestones, of which $2.0 million was received upon execution of the contract. Mochida will be responsible for performing clinical development in accordance with the Company's protocols and obtaining government approval for Norian SRS in Japan. The Company will be responsible for manufacturing and supplying the product to Mochida. The agreement has an initial term ending on the earlier of 10 years from the date of regulatory approval to commence commercial sales of Norian SRS in Japan or 15 years from the date of the agreement.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000822226_mt_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000822226_mt_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..40658638a2e21d1884d085f2584437a7e78a0037
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements, including the related notes, appearing elsewhere in this Prospectus. Unless the context otherwise requires, the 'Issuer' means MT Acquisition Corp. and, after giving effect to the transactions described in 'The Acquisition' (which are referred to herein collectively as the 'Acquisition'), Mettler-Toledo, Inc. The 'Company' or 'Mettler-Toledo' as used in this Prospectus means the Issuer and its subsidiaries, after giving effect on a pro forma basis to the transactions described in 'The Acquisition'. The 'Mettler-Toledo Group' refers to the group of companies being acquired pursuant to the Acquisition. Unless otherwise indicated, industry data contained herein is derived from publicly available industry trade journals, government reports and other publicly available sources, which the Company has not independently verified but which the Company believes to be reliable, and where such sources were not available, from Company estimates, which the Company believes to be reasonable, but which cannot be independently verified. As used in this Prospectus, '$' refers to U.S. dollars and 'SFr' refers to Swiss francs. THE COMPANY GENERAL Mettler-Toledo is the world's largest manufacturer and marketer of weighing instruments for use in laboratory, industrial and food retailing applications. The Company focuses on the high value-added segments of the weighing instruments market by providing solutions for specific applications. The Company also manufactures and sells certain related laboratory measurement instruments, with one of the top three market positions worldwide in titrators, thermal analysis systems, pH meters and lab reactors. Mettler-Toledo services a worldwide customer base, with 1995 net sales of $850 million, which were derived 52% in Europe, 37% in North and South America and 11% in Asia and other markets. The Company has a global manufacturing presence, with manufacturing facilities in Europe, the United States and Asia. Weighing is one of the most broadly used measuring techniques, and its results are often used as the basis of commercial transactions. The Company's products are used in the laboratory as an integral part of the research process; in industry for materials preparation, filling, counting and dimensioning; and in food retailing for preparation, portioning and inventory control. Customers include pharmaceutical, biotechnology, chemical, cosmetics, food and beverage, postal, jewelry, metals, logistics, shipping and food retailing businesses, as well as schools, universities and government and private standards labs. MARKET LEADERSHIP Mettler-Toledo is the only company to offer weighing products for laboratory, industrial and food retailing applications throughout the world. The Company believes that in 1995, the global market for weighing instruments for laboratory, industrial and food retailing applications was approximately $4.5 billion and that the Company held a market share more than two times greater than its nearest competitor. The Company believes that, in 1995, it had an approximate 40% market share of the global market for laboratory balances, including the largest market share in each of Europe, the United States and Asia (excluding Japan), and one of the three leading positions in Japan. In the industrial and food retailing market, the Company believes it has the largest market share in Europe and in the United States. In Asia, the Company has a substantial, rapidly growing industrial and food retailing business supported by its established manufacturing presence in China. The Company attributes its worldwide market leadership position to the following competitive strengths: Brand Recognition. The Mettler-Toledo brand name is identified worldwide with accuracy, reliability and innovation. The Company's brand name is so well recognized that laboratory balances are often referred to as 'Mettlers.' Brand recognition is important because weighing applications significantly impact customers' product quality, productivity, cost and regulatory compliance. As a result, customers tend to emphasize accuracy, product reliability, technical innovation, reputation and past experience with a manufacturer's products when making their purchasing decisions for weighing instruments. Technological Innovation. Mettler-Toledo has a long and successful track record of innovation, as demonstrated by the invention of the single-pan analytical balance in 1945 and the introduction of the first fully electronic precision balance in 1973. The Company has continued to be at the forefront of weighing technology with several recent innovations, including its ID 20 terminal and 'Brickstone' weighing sensor technology. The Company has particular expertise in sensor technology, electronics and software, and in the industrial design of measurement instruments. The Company believes it is the global leader in providing sophisticated features, such as data-handling and storage capabilities, integration into management information systems and improved productivity through automation, all of which are increasingly important to users of weighing instruments. The Company devotes substantial resources to research and product development in order to maintain its competitive advantage in technological innovation. Comprehensive Product Range. Mettler-Toledo manufactures a more comprehensive range of weighing instruments than any of its competitors. The Company's broad product line addresses a wide range of weighing applications across many industries and regions. Within an industry, the Company offers multiple products to meet customers' requirements. Its broad range of products allows the Company to leverage its manufacturing and distribution capabilities, sales and service organization and product development activities. Global Sales and Service. The Company has the only global sales and service organization among weighing instruments manufacturers. At June 30, 1996, this organization consisted of 2,700 employees organized into locally based, customer-focused groups that provide prompt service and support to the Company's customers and distributors in virtually all major markets across the globe. The local focus of the Company's sales and service organization enables the Company to adapt marketing and service efforts to different cultural and economic conditions, and provides feedback for manufacturing and product development. Largest Installed Base. The Company believes that it has the largest installed base of weighing instruments in the world. Service revenues from this installed base provide a strong, stable source of recurring revenue, representing approximately 17% of net sales in 1995. The Company believes that its installed base represents a competitive advantage with respect to repeat purchases. Customers tend to remain with an existing supplier who can provide accurate and reliable products and related services. In addition, switching to a new instrument supplier entails additional costs to the customer for training, spare parts, service and system integration requirements. Close relationships and frequent contact with its broad customer base provide the Company with sales leads and new product and application ideas. Diversity of Revenue Base. The Company's revenue base is widely diversified by geographic region, by type of customer and by individual customer. The Company's broad range of product offerings is utilized in many different industries, from chemicals and pharmaceuticals to food processing to food retailing to transportation. The Company supplies customers in over 100 countries, and no one customer accounted for more than 2% of 1995 net sales. The Company's diverse revenue base reduces its exposure to regional or industry- specific economic conditions. INDUSTRY TRENDS The Company believes that the weighing instruments market is being influenced by several industry trends. First, customers are demanding products for industry-specific applications, with significant data management capabilities designed to be integrated into business processes and to improve productivity. Second, quality manufacturing and laboratory requirements are becoming more standardized. For example, ISO 9001 standards require manufacturers to utilize certified measurement instruments, and good laboratory practices require each step in the research process to be recorded with certified instruments so that results can be accurately traced and reproduced. Third, increased harmonization of national weighing standards, particularly in the European Union, has facilitated multinational manufacturers' ability to meet local regulatory requirements and provides broader-based markets for their product lines. Most importantly, there has been significant growth in demand in emerging markets as these economies develop and global manufacturing customers shift production operations to these markets. As a result, customers in these emerging markets require additional and more sophisticated weighing instruments. Global manufacturers operating in emerging markets often utilize the same suppliers that service their needs in other markets. The Company believes that its global operations position it to take advantage of these industry trends. BUSINESS STRATEGY The Company's strategy is to enhance its position as global market leader by providing the most comprehensive, innovative and reliable weighing solutions. The Company plans to actively pursue the following initiatives to increase revenues and profitability: Product Innovation. The Company intends to continue to invest in product innovation in order to provide technologically advanced products to its customers for existing and new applications. Over the last three calendar years, the Company invested $149 million in research and development, which has resulted in a pipeline of new and updated products. A recent example of the Company's extensive product development efforts is the innovative ID 20 terminal for use in the Company's range of industrial scales. ID 20 includes the first personal computer interface to be certified by weights and measures regulators, combined with an ergonomically designed personal computer terminal for industrial applications. Other recent examples include a new moisture analyzer, a dimensioning system for logistics applications that combines volume and weight measurements, a new generation of postal meters and a mid-range food retailing scale. The Company is also focused on innovations that can reduce its production costs. For example, the Company's new 'Brickstone' weighing sensor technology, in addition to providing greater accuracy, reduces from approximately 100 to approximately 50 the number of parts in the sensor, and thus significantly reduces manufacturing costs and the time and expense of design changes. Increased Penetration of Developed Markets. The Company intends to leverage its brand name and existing infrastructure to further penetrate selected geographic regions and product lines in Europe, the United States and Japan. For example, in European food retailing products, the Company plans to further expand from its strong base in German-speaking countries into other countries. In addition, the Company plans to increase penetration with shipping and logistics businesses by introducing a new weighing and dimensioning product. The Company also continues to take advantage of the standardization of weights and measures, both in the European Union and worldwide, which favors a manufacturer with a global presence, such as the Company. Further Expansion in Emerging Markets. The Company believes that global recognition of the Mettler-Toledo brand name and the Company's global sales and service organization position the Company to take advantage of continued growth opportunities in emerging markets. In 1995, the Company had net sales of $69 million in Asia (excluding Japan) and Latin America, representing 8% of net sales. In Asia (excluding Japan), it is the market leader in laboratory weighing instruments and has a substantial and rapidly growing industrial and food retailing business. The Company has been operating in China since 1987 through a 60%-owned joint venture, which owns one manufacturing facility, and the Company plans to complete construction of a new wholly owned manufacturing facility in Shanghai by the end of 1996. The Company believes that this manufacturing infrastructure, as well as its sales and service organization in Asia and its already substantial sales in Asia and Latin America, position it to take advantage of further growth opportunities in emerging markets. Reengineering and Cost Reductions. Over the last three years, the Company has been successful at increasing its margins, despite negative currency effects. These increases have been achieved through, among other things, increased workforce flexibility, a reduction in its overall workforce, a shift in the mix of its workforce toward higher growth, lower cost regions and the introduction of new products with lower manufacturing costs. The Company is currently implementing two projects which are aimed at reducing warehouse capacity, improving inventory turnover and reducing materials handling costs. The Company is restructuring the order and product delivery process in Europe to enable the Company to deliver many of its products to its customers directly from the manufacturing facility within several days. The Company is also streamlining its European spare parts inventory management system. In addition to continuing these cost-cutting efforts, the Company is also evaluating its business strategy as an independent company after the Acquisition and believes that it can support continued sales growth while further reducing its overall cost base. In July 1996, in anticipation of the consummation of the Acquisition, the Company announced the closure of its Westerville, Ohio facility. In addition, the Company will implement a targeted workforce reduction by the end of 1996. The Company expects that these two additional projects will result in annual cost reductions of $8.3 million. Pursue Selected Acquisition Opportunities. The Company has a proven record of acquiring and integrating businesses into existing operations. As an independent company, Mettler-Toledo plans to more actively pursue additional product lines and distribution channels through acquisitions, strategic alliances and joint ventures. The Company believes that by taking advantage of its brand name and global sales and service organization it can expand distribution of acquired product lines and operate acquired businesses more efficiently. The mailing address of the Company's and Holding's principal executive offices is Im Langacher, P.O. Box MT-100, CH-8606, Greifensee, Switzerland. Its telephone number is 41-1-944-22-11.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000823314_advanced_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000823314_advanced_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the detailed information and financial statements appearing elsewhere in this Prospectus. The Company Advanced Financial, Inc. (the "Company") is a publicly traded Delaware company formed in June 1988. In July 1990 the principals of the Company recognized an opportunity existed in the mortgage servicing industry due to the collapse of the savings and loan industry. On March 29, 1991 the Company was successful in acquiring Creative Financing, Inc. as a wholly owned subsidiary. In 1992, this subsidiary changed its name to Continental Mortgage, Inc. The name was again changed due to expansion into additional states, to AFI Mortgage, Corp ("AFIM") in November 1994. AFIM is a mortgage banking company servicing approximately $439,000,000 in mortgage loans as of June 30, 1996. The Company's common stock has been traded on the American Stock Exchange since March 29, 1993 under the symbol AVF. On August 7, 1996, the stock had a market price of $1.25. The Company's principal executive offices are located at 5425 Martindale, Shawnee, Kansas 66218. Its telephone number is (913) 441-2466. Summary Financial Data The following summary financial data has been derived from the financial statements of the Company and should be read in conjunction with such financial statements. <TABLE> <CAPTION> Three Months Three Months Year Ended Year Ended Ended Ended March 31 March 31 June 30, 1996 June 30, 1995 1996 1995 ------------- ------------- ---- ---- <S> <C> <C> <C> <C> INCOME STATEMENT DATA: Revenues $1,662,485 $1,600,195 $ 6,891,328 $ 5,481,199 Expense 2,224,615 2,287,549 10,026,555 10,295,464 Net Loss ( 562,130) ( 687,354) (3,184,577) (3,963,497) Weighted Average Shares 3,819,000 3,775,000 3,776,000 3,726,000 Earnings (loss) per Share ( .15) ( .19) ( .88) ( 1.11) BALANCE SHEET DATA: June 30, 1996 ----------- Total Assets $19,680,902 Total Liabilities 19,264,703 Stockholders' Equity 416,199 </TABLE> RECENT EVENTS On February 15, 1996, the Company entered into consulting agreements with Ocean Marketing Corporation, a Colorado corporation; and three Delaware corporations, Cored Capital Corporation, Pyramid Holdings, Inc., and Affiliated Services, Inc. Under the terms of each agreement, the Company is to be provided with financial and public relations services, including advice concerning marketing surveys, investor profile information, methods of expanding investor support and increasing investor awareness of the Company and its products and services. The above named consultants are also to provide services to the Company, including broker relations, assisting in the preparation and format of due diligence meetings, and attendance at conventions and trade shows. The term of each consulting agreement is six months, commencing on February 15, 1996. As compensation for each consultant's services, the Company has granted an option to purchase 250,000 shares of common stock to such consultant at an exercise price of $.50 per share. With respect to options granted to Affiliated Services and Pyramid Holdings, such options expire, if not previously exercised, thirty days after a registration statement covering the shares underlying such options has been declared effective by the Securities and Exchange Commission. None of such options have been exercised as of the date of this Prospectus. Any shares issued upon exercise prior to the effectiveness of such registration statement shall be restricted securities as described in Rule 144 promulgated under the Securities Act of 1933. With respect to options granted to Cored Capital Corporation and Ocean Marketing Corporation, such options were to have expired, if not previously exercised ten days after a registration statement which registered the shares for sale underlying such options was filed with the Securities and Exchange Commission. However, prior to their expiration, the parties mutually agreed to extend the expiration date of such options for an indeterminate period of time. Thereafter, Cored Capital Corporation exercised options on 130,000 shares of common stock and Ocean Marketing Corporation exercised options on 250,000 shares of common stock in June of 1996. In January of 1996, the Company defaulted in the payment of its regular quarterly dividend payable on its 10.5% Series B Convertible Preferred Stock. All dividends not paid will accumulate until such time as the Company has determined that its cash flows have improved enough to sufficiently pay the dividend from the cash flow of its operations. The total arrearage is three quarterly payments totaling $117,180 and interest does not accrue on such arrearage.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000825724_mediqual_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000825724_mediqual_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..3a0e47258680d4bc9716a3ffff7f613d1aca4c4b
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. THE COMPANY MediQual Systems, Inc. ("MediQual" or the "Company") is a leading supplier of clinical information management ("CIM") systems and services to the health care industry. The Company's systems and services combine proprietary clinical knowledge with raw patient encounter data to create valuable information that providers, payors and suppliers use to monitor and enhance the effectiveness, efficiency and appropriateness of care. Health care industry participants are under continuing pressure to reduce costs without jeopardizing quality of care. Increasingly, cost reductions beyond those achieved through administrative efficiencies are being sought at the clinical level, and must be supported by a measurable, quantifiable relationship between services rendered and patient outcomes. This relationship between services rendered and patient outcomes is imperative to maintaining the confidence and cooperation of clinicians, and can only be established through the analysis of patient encounter data, which resides in individual paper files and is captured, in part, by transaction processing systems. Historically, health care data analysts have depended upon batch reports produced by large mainframe computers that required custom programming and long lead times. To remain competitive, providers, payors and suppliers must develop timely and actionable information either by installing CIM systems in-house, or by engaging third-party consultants and analysts. MediQual has addressed the growing demand for this information by developing its Atlas System, a comprehensive, desktop CIM system. The Atlas System is comprised of five major components: (i) a standardized retrospective data repository; (ii) proprietary benchmarking databases; (iii) embedded clinical knowledge; (iv) comprehensive provider databases and (v) on-line analytical processing. The Atlas System enables users to perform sophisticated, quantitative analyses which may be used for a variety of applications including: benchmarking internal performance, competitively assessing cost and quality positions in local markets, quantifying the impact of managed care and capitated contracts, developing local integrated delivery networks, evaluating the efficacy of new pharmaceuticals and medical devices, credentialing physicians and reporting to third parties for regulatory and contract compliance. The modular design of the Atlas System enables MediQual to integrate additional applications quickly and easily in order to be responsive to evolving customer needs. The Company's CIM systems and services are supported by its proprietary master database which contains complete clinical and administrative detail on more than 20 million patient encounters. This master database is continually expanding as additional patient encounters and new types of data, including pharmaceuticals and outpatient services, are transmitted to the Company by its customers. MediQual has developed for substantially all acute diseases more than 200 statistical regression models which are embedded in the Atlas System and support the Company's analytical services for disease management applications. MediQual serves approximately 400 customers, including leading hospitals, community care networks, medical device manufacturers and pharmaceutical firms. The Company licenses the Atlas System pursuant to annual agreements, and since 1993, has experienced customer renewal rates of 90% or higher. The Company is subject to certain risks, including but not limited to dependence on the Atlas System for a majority of the Company's revenues, dependence on continued access to data, dependence on systems development introduction and enhancements, competition from other service providers and dependence on key personnel. The Company has also experienced a limited history of profitability. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company..................... 2,200,000 shares Common Stock to be outstanding after the Offering....... 8,264,306 shares(1) Use of proceeds......................................... For redemption of Class A Preferred Stock, redemption of warrants, retirement of debt, working capital and other corporate purposes. See "Use of Proceeds." Proposed American Stock Exchange symbol................. MQV </TABLE> ------------------------------------ SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ----------------------------------------------- ---------------- 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- ------- ------ <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues: MedisGroups......................................... $14,866 $14,700 $13,097 $ 8,459 $ 4,674 $ 2,173 $ 683 Atlas System........................................ -- -- -- 3,150 5,131 2,614 3,662 CIM Services........................................ -- -- -- 475 1,169 500 1,362 ------- ------- ------- ------- ------- ------ ------ Total revenues.................................. 14,866 14,700 13,097 12,084 10,974 5,287 5,707 Research and development.............................. 2,647 4,204 4,152 3,626 4,013 2,189 1,328 Operating income (loss)............................... (1,199) (225) (233) 132 (1,392) (1,071) 1,440 Net income (loss)..................................... $(1,414) $ (274) $ (186) $ 282 $(1,462) $(1,092) $1,354 Pro forma:(2) Net income (loss) per share......................... $ (.21) $ .20 Weighted average shares outstanding................. 6,632 7,126 </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 ------------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED(3) -------- ---------- --------------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents............................................... $ 1,679 $ 1,679 $ 11,445 Working capital......................................................... 288 288 10,210 Total assets............................................................ 4,185 4,185 13,951 Long-term debt, including current portion............................... 259 259 -- Redeemable preferred stock.............................................. 11,509 3,569 -- Stockholders' equity (deficit).......................................... (10,407) (2,468) 11,327 </TABLE> - --------------- (1) Excludes (i) 1,783,792 shares of Common Stock reserved for issuance under the Company's 1987 Nonqualified Stock Option Plan, as amended, and 1996 Stock Incentive Plan, of which 337,292 shares are subject to options at exercise prices ranging from $1.00 to $7.00 per share, (ii) 26,729 shares of Common Stock subject to warrants with an exercise price of $2.64 per share that will be redeemed upon the closing of the Offering for $103,441 (assuming an initial public offering price of $7.00 per share) and (iii) 156,919 shares of Common Stock issuable upon the exercise of other warrants, at an exercise price of $.80 per share, all outstanding as of June 30, 1996. See "Capitalization," "Management -- Stock Option Plans" and Notes 6 and 9 of Notes to Financial Statements. (2) Computed on the basis described in Note 2 of Notes to Financial Statements. (3) Adjusted to give effect to the sale of the Common Stock offered hereby at an assumed initial public offering price of $7.00 per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000825790_packaging_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000825790_packaging_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..0b94d68b7b9fb6d9a6cde576e16030b07c6d1f09
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. AS USED IN THIS PROSPECTUS, UNLESS THE CONTEXT OTHERWISE REQUIRES, EACH OF "PRI" AND THE "COMPANY" REFERS TO PACKAGING RESOURCES INCORPORATED AND ITS PREDECESSORS. THE COMPANY'S FISCAL YEAR ENDS ON THE LAST DAY OF FEBRUARY IN EACH YEAR. ALL REFERENCES IN THIS PROSPECTUS TO FISCAL YEARS REFER TO THE FISCAL YEAR OF THE COMPANY ENDED IN THE YEAR INDICATED. FOR EXAMPLE, "FISCAL 1996" REFERS TO THE FISCAL YEAR OF THE COMPANY ENDED FEBRUARY 29, 1996. THE COMPANY GENERAL The Company is a leading developer, manufacturer and marketer of rigid plastic packaging, serving primarily as a supplier of customized containers for national branded consumer products. The Company is the largest domestic manufacturer of refrigerated yogurt containers, shelf stable, multi-layer (impermeable to air and moisture) containers for nutritional supplements and frosting containers. The Company also believes that it is the largest designer, manufacturer and supplier of promotional beverage cups in the United States, marketing these products primarily to the fast-food and beverage industries. For the fiscal year ended February 29, 1996, the Company generated net sales of $133.8 million. Approximately 82.8% of the Company's net sales in such period were attributable to rigid plastic packaging and 17.2% to promotional beverage cups. In fiscal 1996, the Company produced almost four billion plastic containers, cups and lids. The Company's packaging products are sold to over 450 customers, including manufacturers of national branded food, dairy and pharmaceutical products such as General Mills, Inc. ("General Mills"), including its Yoplait U.S.A. division ("Yoplait"), The Dannon Company, Inc. ("Dannon"), Ross Laboratories ("Ross Labs"), a division of Abbott Laboratories, Inc. ("Abbott Labs"), The Haagen Dazs Company, Inc. ("Haagen Dazs"), Procter & Gamble Company ("Procter & Gamble") and Pillsbury Company ("Pillsbury"). The Company is also a major supplier of promotional beverage cups to over 150 companies in the fast-food and beverage industries, including McDonald's, Burger King, Pizza Hut, Hardee's, Taco Bell, Coca-Cola and Pepsi. The Company's rigid plastic packaging business has benefitted from, and is positioned to continue to participate in, the growth of the markets for its customers' products, particularly refrigerated yogurt and nutritional supplements. According to data compiled by Find/SVP, Inc., a New York-based market research firm ("Find/SVP"), between 1991 and 1994 U.S. retail yogurt sales grew 9.6%, 11.4% and 7.0% from fiscal 1991 to fiscal 1992, from fiscal 1992 to fiscal 1993 and from fiscal 1993 to fiscal 1994, respectively, or at a compound annual rate of 10.6%, reaching approximately $2.0 billion in 1994. The compound annual rate has been presented as an alternative to cumulative or average annual growth rates because it indicates what the rate of growth would be had such rate been constant year to year over the periods discussed; however, the compound annual rate should not be confused with year to year or other measures of growth rates. This expansion of the U.S. yogurt market resulted, in part, from new product innovations such as lower fat and lower calorie product offerings, the introduction of new flavors and consistencies, the increasing recognition of yogurt's nutritional benefits and innovative packaging solutions targeting niche market segments. Despite this growth, the Company believes U.S. yogurt consumption still lags behind that of Europe. During 1991 and 1992, the most recent periods examined by Find/SVP, the per capita consumption of yogurt in Europe was six times that in the U.S. Net sales of Ross Labs' ENSURE-Registered Trademark- ready-to-drink nutritional supplement increased 20% in 1995, reflecting, in part, the aging of the U.S. population and the corresponding growth in the market for such products. Based on these industry and demographic factors, management expects the markets for refrigerated yogurt and nutritional supplements to continue to grow for the foreseeable future. COMPETITIVE STRENGTHS The Company attributes its leading market positions to the following factors: WELL ESTABLISHED CUSTOMER RELATIONSHIPS. The Company has long-standing customer relationships, in many instances as a sole source supplier under multi-year supply agreements. Yoplait, Dannon and Ross Labs, which accounted for over 17.9%, 18.7% and 15.2% of fiscal 1996 sales, respectively, have been customers of PRI since 1979, 1984 and 1991, respectively. In addition, the Company's established position with its largest customers is evidenced by its status as the sole supplier of such customers' most popular sized containers, including the six ounce container for Yoplait, the four, six and eight ounce containers for Dannon and the eight ounce multi-layer container for Ross Labs' ENSURE-REGISTERED TRADEMARK- nutritional supplement. PRI's status as the sole supplier of such containers positions the Company to benefit from future growth in these product markets. In recognition of the Company's performance, Ross Labs recently awarded PRI certified supplier status in Ross Labs' Partners in Excellence Program. CUSTOMER INTEGRATED PRODUCT DEVELOPMENT AND MANUFACTURING. The Company has worked closely with its customers in all phases of product design and production and has invested heavily in customer-driven research and development activities. For example, PRI developed the Autoweld-Registered Trademark- system, a technology that enables Yoplait to assemble, fill and seal its distinctive cone-shaped container. Yoplait leases from the Company the equipment necessary to operate the Autoweld-Registered Trademark- system for use in Yoplait's production facilities. For Dannon, the Company recently designed and developed a four ounce yogurt cup targeted for the food service and children's markets. The Company also worked successfully with Ross Labs to develop the shelf stable, multi-layer packaging applications for its nutritional supplements and infant formula product lines. In promotional cups, the Company has worked closely with several of its promotional beverage cup customers to develop new and distinctive high-definition graphic designs. In 1993, for example, the Company was the winner of the McDonald's Performance Award for the "Jurassic Park" promotional cup. In addition, the Company's facilities are located, in most cases, adjacent to or within close proximity to its largest customers' manufacturing operations, which has created manufacturing and distribution efficiencies. As more of the Company's customers adopt "just- in-time" inventory systems, these efficiencies have become increasingly important. STATE-OF-THE-ART MANUFACTURING TECHNOLOGIES. The Company, through its five manufacturing facilities, has developed production capabilities in injection molding, linear melt phase thermoforming ("thermoforming") and solid phase pressure forming ("pressure forming") and believes it is the only manufacturer in the rigid plastic packaging industry with capabilities in all three such processes. Because each of these processes offers advantages in achieving certain performance features such as structural strength, rigidity and graphics retention, the Company is able to be highly responsive to customer requirements and preferences by offering a broader range of packaging alternatives than its competitors. The Company's three technical facilities feature design, engineering, prototype production, graphics and diagnostic capabilities. Management believes that the Company's in-house capability to design, engineer and build production molds distinguishes the Company from many of its competitors. This capability provides PRI with an important competitive advantage in maintaining product quality as well as in controlling design, development and maintenance costs. To satisfy the rigorous quality control standards of its customers, the Company maintains a comprehensive quality assurance program. During fiscal 1996, based on internal estimates, the return rate for all of the Company's products was less than one quarter of one percent. ADVANCED GRAPHICS TECHNOLOGIES. Management believes that the Company's MasterColor printing system, which produces high definition graphics utilizing a computer controlled nine color press, is the most technologically advanced color processing system in the rigid plastic packaging and promotional beverage cup industries. The MasterColor system enables the Company to create photograph quality images on plastic containers at speeds comparable to conventional high speed printers and thus provides an important competitive advantage. Although the Company employs the MasterColor system primarily in the printing of promotional beverage cups, management believes significant opportunities exist to apply this technology to create more sophisticated and colorful designs for other forms of plastic packaging as manufacturers of branded products seek to enhance and distinguish the image of their products on store shelves. LOW COST PRODUCTION. The Company believes that its manufacturing costs are among the lowest in its industry primarily due to: (i) the economies of scale provided by the Company's high volume production; (ii) the Company's use of state-of-the-art molds and manufacturing techniques that minimize resin requirements, reduce waste and enhance productivity; (iii) the Company's ability to obtain favorable resin pricing based on its substantial purchase requirements; (iv) the low transportation costs resulting from the proximity of the Company's six manufacturing and warehouse facilities to its major customers; and (v) the Company's continual efforts to achieve operating efficiencies and increase productivity. Over the past several years, the Company has significantly upgraded and automated its manufacturing operations, consolidated certain manufacturing facilities and centralized all of its administrative functions to reduce costs and increase efficiency. The Company was founded in 1984 to capitalize on the growth in outsourcing among nationally branded food producers for their packaging needs. Since its formation, the Company has made six strategic acquisitions which have expanded the Company's product mix and enhanced its competitive position. Most recently, during fiscal 1994, the Company acquired Louisiana Plastics, Incorporated ("Louisiana Plastics") and substantially all the assets of Miner Container Printing, Inc. and certain affiliated companies (collectively, "Miner Container"), which established market share leadership in promotional beverage cups, increased injection molding capacity and packaging sales and provided the MasterColor graphics technology. The Company believes that the fundamental benefits of plastic relative to other packaging materials, including (i) design versatility, (ii) light weight and low cost, (iii) strength and durability, (iv) insulating ability and (v) clarity, will promote opportunities for growth in sales and profitability in both the rigid plastic packaging and promotional beverage cup industries. The Company further believes it is well-positioned to capitalize on these opportunities through its advanced, low-cost, customer-oriented operations. STRATEGY The Company's strategy is to enhance its position in the industry by: (i) participating in the growth being experienced by its largest customers by continuing to meet their increasing packaging needs; (ii) strengthening its relationships with these existing customers by continuing to provide new value-added products and services; (iii) expanding into new packaging and promotional cup products and markets; and (iv) continuing to seek opportunities to reduce manufacturing costs and enhance productivity. GROWTH WITH EXISTING CUSTOMERS. The Company will continue to focus on meeting the rigid plastic packaging needs of Yoplait, Dannon and Ross Labs to keep pace with the growth in the markets for their products. Based in part on growth in domestic consumption of refrigerated yogurt, the Company's net sales to Yoplait and Dannon, who rely on the Company to provide substantially all of their single-serving yogurt containers, have increased 13.1%, 14.6%, 34.9% and 15.5% from fiscal 1992 to fiscal 1993, from fiscal 1993 to fiscal 1994, from fiscal 1994 to fiscal 1995 and from fiscal 1995 to fiscal 1996, respectively, or at a compound annual growth rate of over 19% during the last four years. In addition, the Company's net sales as the sole source supplier of multi-layer containers to Ross Labs for its ENSURE-REGISTERED TRADEMARK- nutritional supplement and SIMILAC-REGISTERED TRADEMARK- infant formula grew 75.5%, 11.2%, 24.9% and 11.6% from fiscal 1992 to fiscal 1993, from fiscal 1993 to fiscal 1994, from fiscal 1994 to fiscal 1995 and from fiscal 1995 to fiscal 1996, respectively, or at a compound annual rate in excess of 29% during the last four years. NEW APPLICATIONS FOR EXISTING CUSTOMERS. The Company intends to expand its relationships with existing customers by developing new applications based on its extensive manufacturing capabilities and advanced graphics technologies. For example, the Company applied thin-wall technology, which combines structural strength with reduced cost and weight, to develop Dannon's six and eight ounce containers. In addition, the Company developed the six ounce multi-layer container presently used by Yoplait which features a glossy exterior finish designed to enhance graphics. NEW PRODUCTS AND MARKETS. The Company plans to expand into related product lines serving new markets with several products under development in both rigid plastic packaging and promotional beverage cups. With respect to packaging, management believes there will be significant opportunities to expand the Company's shelf stable, multi-layer packaging to the extent plastic containers are substituted for metal, glass and composites for products requiring extended shelf life, such as condensed soups, vegetables, baby foods and pet foods. In promotional beverage cups, the Company recently entered the professional sports and college stadium cup market and also has under development a number of new products, including a new cup for the gourmet coffee market. In addition, in both packaging and promotional cups, the Company intends to leverage its advanced graphics capabilities by introducing new products which highlight its high definition printing and quality designs. The Company believes these initiatives will reinforce its reputation as an innovative, value-added marketing partner for its customers while adding to future profitability. CONTINUED COST REDUCTION AND PRODUCTIVITY ENHANCEMENTS. The Company continually seeks opportunities to reduce its costs and improve productivity to maintain its competitive position as a low-cost manufacturer. For example, following the acquisition of Miner Container and Louisiana Plastics, the Company selectively consolidated certain manufacturing facilities and centralized administrative functions. During the first quarter of fiscal 1997, the Company completed the consolidation of its Lenexa, Kansas printing operation into the Kansas City, Missouri facility to reduce overhead and transportation costs and increase manufacturing productivity. In fiscal 1997, the Company intends to initiate projects to further reduce costs and enhance productivity, by, among other things, increasing the automation of its packaging and handling systems. STRUCTURE OF THE COMPANY All of the outstanding capital stock of PRI is held by Packaging Resources Group, Inc. ("Group"). All of the outstanding capital stock of Group is held by HPH Industries, Ltd. ("HPH"), which is wholly-owned by Howard P. Hoeper, the Chairman of the Board of Directors, Chief Executive Officer and President of Group and PRI. As of July 24, 1996, assuming the exercise of all outstanding warrants to acquire the capital stock of Group ("Warrants"), HPH, Apollo Packaging Partners, L.P., a Delaware limited partnership and an affiliate of Apollo Advisors, L.P. ("Apollo"), and TCW/Crescent Mezzanine Partners, L.P. together with TCW/ Crescent Mezzanine Trust (collectively, the "TCW Entities") would beneficially own 60%, 29.3% and 10.7% of such stock, respectively. Each of the TCW Entities is an affiliate of Trust Company of the West. The Company's principal executive offices are located at One Conway Park, 100 Field Drive, Suite 300, Lake Forest, Illinois 60045 and its phone number is (847) 295-6100. THE FINANCING PLAN The Old Notes Offering was part of a plan of financing designed to provide the Company with long-term fixed rate financing and increase the Company's revolving credit availability. In connection with such plan of financing, the Company (i) issued $110.0 million aggregate principal amount of Notes, (ii) entered into a credit agreement which provides for a $20.0 million revolving loan facility, subject to certain borrowing conditions and limitations (the "Senior Credit Facility"), (iii) repaid all outstanding borrowings under PRI's existing senior secured credit facility (the "Old Credit Agreement") in the aggregate principal amount of $73.5 million and (iv) funded a dividend to Group in the amount of $31.7 million. Group, in turn, used the dividend from PRI to redeem without penalty or premium a portion of the outstanding 12.5% Senior Subordinated Notes due June 30, 2003 of Group (the "12.5% Notes") at an aggregate redemption price of $31.7 million, leaving $19 million in principal of the 12.5% Notes outstanding as of May 17, 1996. The foregoing transactions by PRI and Group are collectively referred to herein as the "Financing Plan." See "Use of Proceeds" and "Capitalization." The following table illustrates the sources and uses of funds under the Financing Plan: <TABLE> <CAPTION> AMOUNT ------------- (IN THOUSANDS) <S> <C> SOURCES OF FUNDS: Notes.......................................................................... $ 110,000 ------------- Total Sources................................................................ $ 110,000 ------------- ------------- USES OF FUNDS: Repayment of indebtedness under Old Credit Agreement........................... $ 73,500 Dividend to Group(a)........................................................... 31,700 Fees and expenses(b)........................................................... 4,150 Working capital................................................................ 650 ------------- Total Uses................................................................... $ 110,000 ------------- ------------- </TABLE> - ------------------------ (a) Dividend proceeds were used by Group to redeem, without penalty or premium, a portion of the 12.5% Notes. (b) Includes the discount paid to the Initial Purchasers (as defined) in connection with the issuance of the Old Notes, bank financing fees and legal and accounting expenses. THE EXCHANGE OFFER <TABLE> <S> <C> The Exchange Offer............ The Company is offering to exchange up to $110,000,000 aggregate principal amount of Exchange Notes for up to $110,000,000 aggregate principal amount of the Old Notes. The Old Notes were initially offered and sold by BT Securities Corporation and Donaldson, Lufkin & Jenrette Securities Corporation as the initial purchasers of the Old Notes (the "Initial Purchasers"), to certain "qualified institutional buyers" (as defined in Rule 144A under the Securities Act) and institutional accredited investors at a price of 100% of the principal amount thereof. The form and terms of the Exchange Notes are substantially identical (including principal amount, interest rate, maturity, security and ranking) to the form and terms of the Old Notes for which they may be exchanged pursuant to the Exchange Offer, except that the Exchange Notes are freely transferable by holders thereof except as provided herein (see "The Exchange Offer--Terms of the Exchange" and "Terms and Conditions of the Letter of Transmittal") and are not entitled to certain registration rights and certain additional interest provisions which are applicable to the Old Notes under a registration rights agreement dated as of May 17, 1996 (the "Registration Rights Agreement") between the Company and the Initial Purchasers. Exchange Notes issued pursuant to the Exchange Offer in exchange for the Old Notes may be offered for resale, resold and otherwise transferred by holders thereof (other than any holder which is (i) an Affiliate of the Company, (ii) a broker-dealer who acquired Old Notes directly from the Company or (iii) a broker-dealer who acquired Old Notes as a result of market-making or other trading activities), without compliance with the registration and prospectus delivery provisions of the Securities Act provided that such Exchange Notes are acquired in the ordinary course of such holders' business and such holders are not engaged in, and do not intend to engage in, and have no arrangement or understanding with any person to participate in, a distribution of such Exchange Notes. Minimum Condition............. The Exchange Offer is not conditioned upon any minimum aggregate principal amount of Old Notes being tendered or accepted for exchange. Expiration Date............... The Exchange Offer will expire at 5:00 p.m., New York City time, on , unless extended. Exchange Date................. The first date of acceptance for exchange for the Old Notes will be the first business day following the Expiration Date. Conditions to the Exchange The obligation of the Company to consummate the Exchange Offer......................... Offer is subject to certain conditions. See "The Exchange Offer -- Conditions to the Exchange Offer." The Company reserves the right to terminate or amend the Exchange Offer at any time prior to the Expiration Date upon the occurrence of any such condition. Withdrawal Rights............. Tenders of Old Notes pursuant to the Exchange Offer may be withdrawn at any time prior to the Expiration Date. Any Old Notes not accepted for any reason will be returned without expense to the tendering holders thereof as promptly as practicable after the expiration or termination of the Exchange Offer. </TABLE> <TABLE> <S> <C> Procedures for Tendering Old See "The Exchange Offer -- How to Tender." Notes......................... Federal Income Tax The exchange of Old Notes for Exchange Notes by tendering Consequences.................. holders will not be a taxable exchange for federal income tax purposes, and such holders should not recognize any taxable gain or loss as a result of such exchange. Use of Proceeds............... There wil be no cash proceeds to the Company from the exchange pursuant to the Exchange Offer. Effect on Holders of Old As a result of the making of this Exchange Offer, and upon Notes......................... acceptance for exchange of all validly tendered Old Notes pursuant to the terms of this Exchange Offer, the Company will have fulfilled a covenant contained in the terms of the Old Notes and the Registration Rights Agreement, and, accordingly, the holders of the Old Notes will have no further registration or other rights under the Registration Rights Agreement, except under certain limited circumstances. See "Old Notes Registration Rights." Holders of the Old Notes who do not tender their Old Notes in the Exchange Offer will continue to hold such Old Notes and will be entitled to all the rights and limitations applicable thereto under the Indenture. All untendered, and tendered but unaccepted, Old Notes will continue to be subject to the restrictions on transfer provided for in the Old Notes and the Indenture. To the extent that Old Notes are tendered and accepted in the Exchange Offer, the trading market, if any, for the Old Notes not so tendered could be adversely affected. See "Risk Factors -- Consequences of Failure to Exchange Old Notes." </TABLE> TERMS OF THE EXCHANGE NOTES <TABLE> <S> <C> Securities Offered............ $110,000,000 principal amount of 11 5/8% Senior Secured Notes due 2003. Issuer........................ Packaging Resources Incorporated. Maturity Date................. May 1, 2003. Interest Rate................. The Exchange Notes will bear interest at the rate of 11 5/8% per annum. Interest Payments............. Interest on the Notes will accrue from May 17, 1996 and is payable in cash semi-annually on each May 1 and November 1, commencing November 1, 1996. Optional Redemption........... The Exchange Notes may be redeemed at the option of PRI, in whole or in part, from time to time on or after May 1, 2000, at the redemption prices set forth herein plus accrued and unpaid interest to the redemption date. In addition, at any time on or prior to May 1, 1999, up to 30% of the aggregate principal amount of the Exchange Notes may be redeemed at the option of PRI with the cash proceeds from one or more Public Equity Offerings at 111 5/8% of their principal amount, together with accrued and unpaid interest to the redemption date, if any, provided that after giving effect to such redemption, at least $70.0 million in principal amount of the Exchange Notes remain outstanding immediately after any such redemption. In the case of any Public Equity Offering by Group, PRI is required to apply to a redemption of the Exchange Notes an amount not less than 50% of the aggregate net proceeds of such Public Equity Offering. See "Description of Exchange Notes -- Optional Redemption." </TABLE> <TABLE> <S> <C> Ranking....................... The Exchange Notes will be senior secured obligations of PRI ranking senior to all subordinated indebtedness of PRI and PARI PASSU in right of payment with all other senior indebtedness of PRI. However, lenders under the Senior Credit Facility have claims with respect to the Company's accounts receivable, raw materials and finished goods in- ventory and the proceeds therefrom constituting collateral for such indebtedness that are effectively senior in right of payment to the claims of holders of the Exchange Notes with respect to such assets. At February 29, 1996, on a pro forma basis, after giving effect to the Financing Plan, PRI would have had outstanding approximately $112.2 million in aggregate principal amount of indebtedness (excluding trade payables and other accrued liabilities), all of which would have constituted senior indebtedness and $0.4 million of which would have been indebtedness under the Senior Credit Facility. In addition, PRI would have had $19.6 million in unused senior secured borrowing capacity under the Senior Credit Facility, subject to certain borrowing conditions and limitations. See "Description of Exchange Notes -- Ranking and Security." Collateral.................... The Collateral securing the Exchange Notes will consist of certain equipment, fixtures and general intangibles, and mortgages on substantially all of the owned and certain of the leased property of the Company, and the proceeds therefrom. The Indenture provides that lenders under an Acquisition Financing Facility will have the right to share on a PARI PASSU basis in any proceeds from the sale of Collateral. See "Description of Exchange Notes -- Security." Sinking Fund.................. None. Change of Control............. Upon a Change of Control, PRI will be required to make an offer to purchase all of the Exchange Notes at 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. There can be no assurance that PRI will have sufficient funds to satisfy its obligation to repurchase the Exchange Notes upon a Change of Control. See "Description of Certain Indebtedness -- The Senior Credit Facility" and "Description of Exchange Notes -- Repurchase at the Option of Holders -- Change of Control." Asset Sales................... Under certain circumstances, PRI will be required to make an offer to purchase all outstanding Exchange Notes at a purchase price in cash equal to 100% of their principal amount, plus accrued and unpaid interest to the date of purchase, with the proceeds of Asset Sales. See "Description of Exchange Notes -- Repurchase at the Option of Holders -- Asset Sales; Collateral Loss Events." Certain Covenants............. The Indenture contains certain covenants that, among other things, limit the Company's ability to make certain restricted payments, incur indebtedness, create certain liens, sell assets, engage in transactions with affiliates, merge or consolidate with other entities or engage in new lines of business. See "Description of Exchange Notes -- Certain Covenants."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000829221_tracor_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000829221_tracor_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..6dfb0a7a12b9751a8bc219d8ad98f68eaabb8d14
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the financial statements and notes thereto included elsewhere or incorporated by reference in this Prospectus. Unless otherwise indicated, all information in this Prospectus assumes no exercise of the U.S. Underwriters' over-allotment option and no exercise of outstanding options. See "Underwriters." Certain capitalized terms which are used but not defined in this summary are defined elsewhere in this Prospectus. THE COMPANY Tracor, Inc. (collectively with its subsidiaries, "Tracor" or the "Company") provides sophisticated electronic products, systems and services for the U.S. Department of Defense ("DOD"), other U.S. government agencies, foreign governments and commercial customers. The Company's business units operate primarily in the U.S. and foreign defense electronics markets and largely support existing high-priority DOD weapons, platforms and systems. The Company's products and services enable defense customers to enhance the operational performance and readiness of existing weapons as well as extend their useful lives and survivability. As a result, the Company believes it is well positioned to benefit from fundamental changes in national defense strategy precipitated by the end of the Cold War. Since August 1993, the Company has made three substantial acquisitions as part of its strategy to take advantage of a consolidating defense industry. Largely as a result of such acquisitions, Tracor's revenues and net income have increased from $261.8 million and $4.5 million, respectively, in 1992 to $998.1 million and $26.7 million, respectively, on a pro forma basis in 1995. A key component of the Company's strategy has been establishing itself as an industry leader in several high-priority DOD program areas, including: - Navy Systems Engineering and Integration: Tracor is a major provider of systems engineering and integration services to the U.S. Navy and is the principal systems integrator for certain key programs, including both the radio communications suite for cruisers and destroyers equipped with the AEGIS weapon system and the submarine ballistic missile program. The Company has a similar position in other key programs, including shipboard anti-air warfare guided missile systems (including AEGIS) and the Tomahawk cruise missile. - Imagery Exploitation and Mission Planning: Tracor develops enhanced image interpretation and mission planning systems for the DOD and provides these high-priority systems to several critical areas within the defense and intelligence markets. - Countermeasures Dispensers: The Company designed, and currently is the only manufacturer of, the most advanced and widely used countermeasures dispenser systems in the U.S. and is a major supplier of countermeasures expendables in the domestic and international defense markets. These systems provide an important, cost-effective means of protecting combat aircraft and crews. - Drones: Tracor designs, modifies and converts military aircraft into remotely controlled aerial targets ("drones") and produces sub-scale drones, both of which are critical elements of weapons testing and evaluation. To date, the Company has produced more full-scale target drones than any other DOD contractor. - Automatic Test Systems: The Company supplies avionics automatic test equipment to the U.S. Air Force which substantially improves the readiness of advanced military aircraft, including the F-16 fighter. Tracor also is supplying test equipment for the new Japanese F-2 fighter. The Company believes its established positions in high-priority program areas are due, in part, to its longstanding, consistently high-quality performance under existing contracts. Tracor has won substantially all material contract recompetitions in which it has been involved in the last several years and is the recipient of numerous performance awards, including more than 20 Blue Ribbon awards, placing the Company among the approximately top one percent of contractors who received the award based on their individual records for on- schedule deliveries with no quality defects. For the high-priority AEGIS program, Tracor provides primary support for a U.S. Navy unit which won an unprecedented thirteenth AEGIS Excellence Award. All Tracor units emphasize continuous improvement to increase efficiencies and enhance competitiveness. Two operations recently achieved ISO 9001 certification and a third achieved ISO 9002, enabling the Company to reduce costs associated with military specifications and to comply with foreign customer requirements. One of Tracor's major subsidiaries also achieved the Software Engineering Institute ("SEI") Level 3 certification, placing it in the elite class of the 10 percent of software companies which have adopted a standard software process for both management and engineering activities. The Company's competitive performance and cost structure have allowed it to develop strong, long-lasting relationships with its major customers. The Company has been the prime contractor for services and products for many of the U.S. government's key existing programs for periods ranging from 15 to 40 years, and in many cases has been involved in the evolution of a program or weapons class since its inception. The Company currently is performing under approximately 740 contracts with approximately 105 separate agencies of the U.S. government. This existing business base led to a firm backlog of $966 million on April 30, 1996. The two other primary components of Tracor's business strategy are (i) strategic acquisitions of companies with complementary business areas where significant consolidation and cost reduction opportunities exist and (ii) the expansion into new business areas which complement existing technological expertise. The Company's recent acquisitions have broadened and strengthened the Company's position in core business areas and have created significant opportunities for cost savings. The acquisition of Vitro Corporation and its subsidiaries (individually and collectively, "Vitro") in August 1993 established the Company as a major provider of engineering and management support to the U.S. Navy. The acquisition of GDE Holdings, Inc. and its subsidiaries (individually and collectively, "GDE") in November 1994 established Tracor as a major provider of advanced digital imagery and mission planning technology and has made it the largest supplier of avionics automatic test equipment to the U.S. Air Force. The acquisitions of Vitro and GDE also established Tracor as a key supplier to the civilian and defense intelligence organizations of the U.S. government. The acquisition of AEL Industries, Inc. ("AEL") in February 1996 strengthened Tracor's position in long-term electronic warfare production programs and added key capabilities in radio frequency, antenna and microwave technologies. The Company has a large employee base with special high-level security clearances, which are critical for building a presence in the intelligence market. The Company is also actively developing commercial and other nondefense applications for its technology in a number of diverse markets. The largest portion of Tracor's business is in the operations and maintenance segment of the U.S. defense budget. Operations and maintenance now exceeds procurement as the largest segment of the DOD budget. DOD operations and maintenance expenditures emphasize maintaining the readiness of armed forces and are concentrated on upgrading the effectiveness of existing combat systems and on extending their useful lives. Because the Company is a major supplier of systems and services which improve effectiveness, prolong the life of existing weapons platforms and enhance the survivability of combat systems at a relatively low cost, management believes the Company will benefit from these priorities in the DOD budget. A modest increase in the procurement portion is expected, and Tracor is well positioned to benefit from this upturn. Tracor is organized under the laws of Delaware with principal executive offices located at 6500 Tracor Lane, Austin, Texas 78725 (telephone number: (512) 926-2800). MAJOR ACQUISITIONS In recent years the Company has completed three important acquisitions in connection with the implementation of its broader business strategy. In August 1993, Tracor acquired Vitro for approximately $92 million. This acquisition more than doubled Company revenues and made the combined entity a major provider of systems engineering and integration support to the U.S. Navy. In November 1994, the Company purchased GDE for approximately $102 million (the "GDE Acquisition"), which established the Company as a major provider of advanced digital imagery technology to both the DOD and the intelligence community. In February 1996, the Company purchased AEL for approximately $103 million (the "AEL Acquisition") which strengthened Tracor's position in long-term electronic warfare production programs and added key capabilities in radio frequency, antenna and microwave technologies. The acquisitions of Vitro, GDE and AEL have strengthened the Company's core businesses and enhanced the Company's ability to compete in non-traditional business areas. In particular, the Company expects to have an increased ability to bid on contracts in new business areas which draw upon complementary capabilities or customer relationships of any or all of the acquired companies. In addition, since the acquisition of Vitro, significant cost savings have been realized resulting from the consolidation of facilities, staff reductions, process improvements and elimination of other duplicative costs. While a substantial portion of such savings will also result in reductions in sales under cost-reimbursement contracts, the Company's cost competitiveness should be enhanced. The Company has also realized significant net cost savings in connection with the GDE Acquisition and has identified substantial savings in connection with the AEL Acquisition. Management believes the continuing consolidation within the defense industry will result in additional opportunities for the Company to make attractive acquisitions. WESTMARK ACQUISITION On June 13, 1996, the Company consummated the acquisition (the "Westmark Acquisition") of substantially all of the assets of Westmark Systems, Inc. ("Westmark"). The purchase consideration paid by Tracor to Westmark in the Westmark Acquisition included 8,267,435 shares of Common Stock. The principal assets of Westmark acquired by Tracor in the Westmark Acquisition were 978,458 shares of Class A Common Stock, a Series B Warrant to purchase 5,249,428 shares of Common Stock (the "Series B Warrant"), and a Series C Warrant to purchase 5,455,000 shares of Common Stock (the "Series C Warrant" and, together with the Series B Warrant, the "Tracor Warrants"). The shares of the Class A Common Stock and the Tracor Warrants were cancelled and will not be reissued. See "Westmark Acquisition."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0000829649_contour_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000829649_contour_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..ddc501dd98113ccb7dbce36790e66c876d5b1154
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000829649_contour_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements appearing elsewhere in this Prospectus. THE COMPANY Contour Medical, Inc. and its Michigan and Florida subsidiaries (the "Company") manufactures a full line of orthopedic care and rehabilitation products in addition to a full line of disposable surgical products. The orthopedic and rehabilitative products include pads and positioning aids for x-rays, CAT scans, mammograms and MRI's; braces for reconstructive rehabilitation after surgery; and finger spreaders, leg spreaders and leg positioning devices to prevent atrophy and speed recovery from surgery. Sterile and non-sterile products such as sponges, swabs, instrument holders, equipment covers and drapes make up the Company's disposable product line. In addition to the standard product lines offered, the Company offers customers the benefit of specialty manufacturing. The Company's staff assists in total product development from concept to completed product manufacturing and distribution. In 1994, the Company began manufacturing and marketing its "REDI NURSE SYSTEM[TM]" product line, which provides custom packaged procedural trays for use in clinics and nursing homes as well as by home health care nurses. The Company also designs and fabricates disposable medical products for sports medicine applications. Beginning in 1995, the Company commenced distribution of medical supply products to nursing home and retirement facilities owned, leased or managed by Retirement Care Associates, Inc., the Company's majority shareholder. The Company has now expanded this activity to other nursing home operators and other health care providers. In March 1996, the Company acquired AmeriDyne Corporation ("AmeriDyne"), a bulk medical supply company based in Jackson, Tennessee. AmeriDyne distributes supplies to hospitals, clinics, physicians, pharmacies, nursing homes and other health care providers in Tennessee, Arkansas, Mississippi, Alabama, Illinois, Texas, Kentucky, Missouri and Virginia. THE OFFERING <TABLE> <S> <C> Common Stock Outstanding 5,214,223 Shares<FN1> Securities Offered Upon Exercise of Class B Warrants 125,186 Shares of Common Stock Securities Offered Upon Exercise of Class C Warrants 315,000 Shares of Common Stock Securities Offered Upon Conversion of Series A Convertible Preferred Stock 630,000 Shares of Common Stock Securities Offered Upon Exercise of Consultants' Warrants 577,500 Shares of Common Stock Common Stock Outstanding After Offerings by Company 6,861,909 Shares<FN1> Common Stock Offered by 369,619 Shares Selling Shareholder Nasdaq Small Cap Market Symbol CTMI __________________ <FN> <FN1> As of May 31, 1996. Does not include 415,275 shares of Common Stock issuable upon the exercise of outstanding options. (See "MANAGEMENT.") </FN> </TABLE>
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0000830260_oregon_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000830260_oregon_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8089a9d5cd35bec56a6a8b6875ebf2d48df77de4
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000830260_oregon_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements included and incorporated by reference in this Prospectus. Unless otherwise indicated or the context otherwise requires, (i) all information in this Prospectus assumes that the over-allotment option to purchase up to an additional 900,000 shares of Common Stock granted to the underwriters by the Company in the Common Stock Offering is not exercised and (ii) the terms "Company" and "Oregon Steel" refer to Oregon Steel Mills, Inc. and its consolidated subsidiaries. THE COMPANY Oregon Steel operates two steel minimills and four finishing facilities in the western United States and Canada that produce one of the broadest lines of specialty and commodity steel products of any domestic minimill company. The Company emphasizes the cost-efficient production of higher margin specialty steel products targeted at a diverse customer base located primarily in the western United States, western Canada and the Pacific Rim. The Company's manufacturing flexibility allows it to manage actively its product mix in response to changes in customer demand and individual product cycles. Through strategic acquisitions and selective capital additions, the Company has: - increased shipments of steel products from 762,700 tons in 1991 to 1.4 million tons in 1995 - expanded its range of finished products from plate and large diameter welded pipe in 1991 to eight products currently by adding electric resistance welded ("ERW") pipe, rail, rod, bar, wire and seamless oil country tubular goods ("OCTG") - increased its emphasis on higher margin specialty products - expanded its geographic markets from the western United States to national and international markets The Company is organized into two business units: the Oregon Steel Division and the CF&I Steel Division. The Oregon Steel Division is centered on the Company's steel plate minimill in Portland, Oregon (the "Portland Mill"), which is the only steel plate minimill in the 11 western states and one of only two steel plate production facilities operating in that region. The Oregon Steel Division's steel pipe mill in Napa, California (the "Napa Pipe Mill"), one of only four large diameter pipe mills operating in the United States and the only such mill in the 11 western states, produces large diameter pipe that satisfies the demanding specifications of oil and gas transmission companies. The Oregon Steel Division also produces large diameter pipe and ERW pipe at its 60% owned pipe mill in Camrose, Alberta, Canada (the "Camrose Pipe Mill"), which is strategically located in the Alberta natural gas fields to provide transmission pipe to western Canada's gas industry. The CF&I Steel Division consists of steelmaking and finishing facilities in Pueblo, Colorado (the "Pueblo Mill"). Through the Pueblo Mill, the Company is the sole rail manufacturer west of the Mississippi River and is one of only two rail manufacturers in the United States. During 1995 the Company completed the construction and start-up of a combination rod and bar mill that has an annual capacity of approximately 600,000 tons and the capability to produce specialty bar products and high carbon rod in 6,000-pound coils. The Pueblo Mill is also a producer of wire products and OCTG. Oregon Steel seeks to be a cost-efficient producer of specialty and commodity steel products. The Company strives to reduce costs and improve performance by (i) operating manufacturing facilities capable of responding rapidly to changes in customer demand and individual product cycles, (ii) emphasizing the production of higher margin specialty steel products and (iii) investing in efficient and flexible manufacturing technology. CAPITAL IMPROVEMENT PROGRAM As part of its effort to reduce manufacturing costs, upgrade its steelmaking facilities and improve product quality and product mix, the Company initiated a $410 million (excluding capitalized interest) capital improvement program in late 1993, of which approximately $324 million had been expended as of March 31, 1996. The purpose of the program is to (i) expand and improve the steelmaking and casting capability at the Pueblo Mill from 900,000 tons to 1.2 million tons annually, (ii) reduce the cost of producing rail, rod and bar products at the Pueblo Mill while improving product quality and expanding the specialty grades that can be manufactured there, (iii) reduce the cost and improve the yield of plate rolling and other finishing operations at the Portland Mill while increasing plate rolling capacity from 430,000 tons to 1.2 million tons annually and (iv) reduce dependence on scrap steel. Several of these projects have been completed, and construction of various other projects is scheduled to continue through 1996. As part of its strategy in acquiring the CF&I Steel Division in 1993, the Company initiated significant capital additions to the Pueblo Mill. In 1993 work began on a series of capital improvements, principally to the steelmaking facility, rod and bar mills and rail production facilities. These improvements have been substantially completed except for the installation of equipment capable of producing in-line head hardened rail, which is expected to begin operating in the third quarter of 1996. The new rod and bar mill was completed in July 1995 and is expected to reach full production capacity in the fourth quarter of 1996. Major improvements completed to date include expansion of steelmaking and casting capacity from 900,000 tons to 1.2 million tons annually, upgrading from ingot to continuous casting for rail production, enhancement of the ability to produce specialty grades of steel and construction of a new rod and bar mill. These changes are expected to reduce average production costs at the Pueblo Mill, primarily as a result of increased yields and enhanced production efficiencies, and to improve product quality and allow production of a broader range of products. At the Portland Mill, the Company has begun engineering, site preparation and construction work for installation of a new Steckel combination rolling mill (the "Combination Mill"). When fully operational, the Combination Mill is expected to (i) increase capacity of plate rolling operations from 430,000 tons to 1.2 million tons annually, (ii) reduce the cost and improve the yield of plate rolling and other finishing operations, (iii) provide enhanced manufacturing flexibility, (iv) supply substantially all the Company's requirements for plate used in its manufacturing of large diameter line pipe, (v) add coiled plate to the product mix and (vi) be capable of producing wider steel plate than any such mill currently operating in the world. The Combination Mill is currently scheduled to begin start-up operation in the second half of 1996 and is expected to reach full production capacity by the end of 1997. The Company plans to operate the existing rolling mill at the Portland Mill until the Combination Mill is fully operational. The Company believes the improvements described above will significantly reduce production costs at both the CF&I and Oregon Steel Divisions. The Company estimates that the capital improvements at the Pueblo Mill, when fully operational, should reduce the average production costs of making cast steel for use in its finishing operations by approximately $27 per ton and should reduce the average production costs of making rod and bar products from cast steel by approximately $28 per ton (assuming annual production of approximately 1,000,000 tons of cast steel and approximately 500,000 tons of rod and bar products), in each case compared to average costs for the year ended December 31, 1995. In that regard, average manufacturing costs at the CF&I Steel Division during 1995 were higher than anticipated due to start-up difficulties related to the new rod and bar mill. At the Oregon Steel Division, the Company estimates that the Combination Mill and related improvements, when fully operational and assuming production of approximately 775,000 tons of steel plate and coil product annually, should decrease average rolling costs by approximately $45 per ton, including estimated savings of approximately $11 per ton due to the elimination of transportation costs related to the operations at the Company's plate rolling mill in Fontana, California (the "Fontana Plate Mill"), compared to average plate rolling costs for the year ended December 31, 1994. The Company believes 1994 results are more appropriate than 1995 results for calculating the estimated cost savings at the Oregon Steel Division because of the termination of production at the Fontana Plate Mill in the fourth quarter of 1994. Closure of the Fontana Plate Mill, which was an initial step in the Company's plan to consolidate plate rolling operations at the Portland Mill, reduced the Company's effective plate rolling capacity in 1995 and thereafter by approximately 50%. The Company anticipates that plate rolling capacity lost as a result of the Fontana Plate Mill closure will be restored when the Combination Mill is fully operational. There is no assurance that these estimated cost savings will be realized or that capital improvement projects will be fully operational by the dates anticipated, and actual results will vary from the estimates set forth herein. The estimates of cost savings are based on a number of estimates and assumptions, including completion of the capital improvement program and an assumed increase in production, as a result of the capital improvement program, to the production levels set forth above (which in certain cases are at or near the maximum production levels for the respective facilities); average estimated cost savings per ton would be lower, perhaps substantially, at lower rates of production. In addition, these estimates do not take into account, among other things, estimated increased depreciation expenses resulting from the capital improvement program. Due in large part, however, to the assumed increase in production levels as set forth above, depreciation, if taken into account, would not significantly affect the estimated average cost savings for cast steel, but would reduce the estimated average cost savings for rod and bar to $27 per ton and for steel plate to $35 per ton. Furthermore, following completion of capital improvement projects the Company may continue to experience operational difficulties and delays before those projects become fully operational. As a result, there is no assurance that the new rod and bar mill, the Combination Mill or other capital improvement projects will be fully operational by the dates anticipated, which would delay the realization of benefits from those projects. Moreover, completion of the capital improvement program is subject to a number of uncertainties, including the continued availability of borrowings under the Amended Credit Agreement, and there is no assurance that the program will be completed as planned. See "Risk Factors -- Start-Up Difficulties," "-- Funding for the Capital Improvement Program," "-- Potential Delay in Completion of Capital Improvement Program" and "-- Uncertainty of Benefits of Capital Improvement Program; Increase in Interest and Depreciation Expense" and "Business -- Capital Improvement Program." The Company believes the information set forth in the preceding two paragraphs includes "forward-looking statements" within the meaning of Section 27A of the Securities Act and is subject to the safe harbor created by that section. Certain factors that could cause results to differ materially from those projected in the forward-looking statements are set forth in those paragraphs and in "Risk Factors" and "Business -- Capital Improvement Program." THE REFINANCING The Notes Offering is part of a refinancing (the "Refinancing") which will include (i) the Common Stock Offering and the Notes Offering, (ii) the amendment of the Company's existing bank credit agreement (the "Old Credit Agreement") to establish a $125 million credit facility (the "Amended Credit Agreement") collateralized by accounts receivable and inventory, none of which is expected to be borrowed as of the completion of the Offerings, and (iii) the repayment in full of all of the outstanding indebtedness under the Old Credit Agreement. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Description of Certain Indebtedness." In connection with the proposed Refinancing, Napa Pipe Corporation and Oregon Steel Mills -- Fontana Division, Inc., former subsidiaries of the Company, were merged into the Company in February 1996 (the "Mergers"). The following table sets forth the estimated sources and uses of funds from the Refinancing, assuming a public offering price of $16.00 per share for the Common Stock Offering (in thousands). <TABLE> <S> <C> Sources: Common Stock Offering(1)...................................................... $ 96,000 Notes Offering(1)............................................................. 235,000 Amended Credit Agreement...................................................... -- -------- Total sources......................................................... $331,000 ======== Uses: Repay borrowings under Old Credit Agreement(2)................................ $295,000 Estimated fees and cash expenses(3)........................................... 14,700 Capital expenditures and other general corporate purposes..................... 21,300 -------- Total uses............................................................ $331,000 ======== </TABLE> - --------------- (1) Represents gross proceeds. (2) Estimated outstanding balance upon completion of the Offerings. (3) Includes (i) estimated underwriting discounts and commissions and related expenses of the Offerings and (ii) estimated cash payments in the approximate aggregate amount of $2.6 million to terminate certain interest rate swap agreements related to the Old Credit Agreement. RECENT DEVELOPMENTS On June 7, 1996 the Company announced that a mechanical failure had resulted in the temporary shutdown of the ladle refining furnace (the "LRF") at the Pueblo Mill. The LRF is used to refine the chemistry of the molten steel produced by the electric arc furnaces at the Pueblo Mill. The Company estimates that repairs to the LRF will take approximately 20 days and that, until the LRF is returned to full operation, steel production at the Pueblo Mill will be reduced substantially. There is, however, no assurance that repairs will not take longer. This temporary shutdown of the LRF and the reduction in steel production will increase production costs and adversely affect shipment levels in June and July 1996. The Company estimates that this temporary shutdown will reduce pretax results by approximately $3 million, although the actual effect on results of operations will likely vary from this estimate. The Company has business interruption insurance and is reviewing its coverage under the policy to determine whether it is entitled to any insurance recovery in connection with the LRF shutdown. Although the Company believes there is insurance coverage (subject to a deductible), there is no assurance that the Company will be entitled to any recovery under this policy and, in any event, any recovery would likely occur in a later period. The estimates regarding the length of time it will take to repair the LRF and the effect of the temporary shutdown on results of operations are based on a number of estimates and assumptions and are subject to significant uncertainties. Accordingly, there is no assurance that the LRF will be repaired within the estimated time period set forth above or that the effect of the shutdown on results of operations will not be more adverse than the estimate set forth above. The Company's results of operations for the three months ended March 31, 1996 were favorably affected by strong shipments of rail and OCTG products. Rail sales are expected to decline in the second quarter of 1996, and this decline, together with the need for further adjustment of the product mix at the Pueblo Mill, including rod and bar product mix, is expected to adversely affect results of operations for the second quarter of 1996 compared to the first quarter of 1996. The combined effect of the matters discussed above is expected to have a material adverse effect on the Company's results of operations for the second quarter of 1996 compared to the first quarter of 1996. See "-- Forward-Looking Statements" below.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000831529_connectinc_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000831529_connectinc_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..df11c044fb6a21af692607c558f59fda0305be61
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including Risk Factors and Financial Statements, including Notes thereto, appearing elsewhere in this Prospectus. THE COMPANY CONNECT designs, develops, markets and supports industrial strength, scaleable application software for Internet-based interactive commerce. CONNECT's software and services are designed to reduce the time and overall cost for businesses to implement and maintain a secure sales, marketing and order capture capability on the World Wide Web (the "Web"). The Company's software supports key functions necessary for large-scale interactive commerce, including user registration, multimedia catalog and content management, dynamic merchandising, order capture and management, security, payment processing, enterprise integration and systems administration. In today's competitive global business environment, companies are seeking to streamline their business processes in order to lower costs, forge closer relationships with customers and suppliers and increase market share, revenue and profits. Traditional approaches to sales, marketing and order capture still rely heavily on human involvement, paper-based systems, physical infrastructure and costly advertising and promotion. The Internet is emerging as a powerful new interactive commerce medium that has the potential to address the limitations of these traditional approaches by linking businesses directly with their customers, distributors and suppliers. While the adoption of the Internet as a medium for interactive commerce is in its early stages, Forrester Research, Inc. estimates that the market for all Internet-based packaged applications, including electronic commerce applications (which Forrester Research, Inc. does not separately estimate), will grow from less than $1.0 million in 1995 to over $1.7 billion in 1999. CONNECT's core product, OneServer, which was commercially released in September 1995, is a cross-industry packaged software application for Internet- based interactive commerce, including sales, marketing and order capture. In addition, the Company offers OrderStream, its first preconfigured implementation of OneServer for business-to-business interactive commerce in selected vertical markets. CONNECT's applications are designed to support large numbers of purchasers, products and transactions. The Company's object-oriented software architecture and robust transaction manager tightly integrate OneServer and OrderStream with a relational database to provide increased system performance and transaction capacity. The Company and its Solution Partners offer a broad range of services to implement, support and operate CONNECT's applications. The Company's goal is to be the leading provider of packaged application software for Internet-based interactive commerce. The Company's strategy is to provide comprehensive software and service solutions that can be implemented across a broad range of industries. Additionally, in order to expand market share and establish a leadership position, the Company plans to develop specific implementations of OneServer, such as OrderStream, targeted at specific vertical markets. The Company intends to target corporations planning to deploy large-scale interactive commerce sites on the Web. The Company has licensed OneServer or OrderStream to 11 customers including Ameritech Corporation, Compaq Computer Corporation, ENTEX Information Services, Inc., First Data Corporation, Fruit of the Loom, Inc., PhotoDisc, Inc. and Time Warner Cable (a division of Time Warner Entertainment, L.P.). Three customers are operating OneServer commercially, while the other OneServer licensees are in the process of implementing OneServer applications. Two customers have licensed OrderStream, neither of which is operating the application commercially. During the six months ended June 30, 1996, Fruit of the Loom, Inc. and Time Warner Cable accounted for approximately 25% and 17%, respectively, of the Company's total revenue. No other customer accounted for more than 10% of the Company's total revenue during the first six months of 1996. The Company was incorporated under the laws of the State of California in April 1987 and was reincorporated in Delaware in July 1996. The Company's principal executive offices are located at 515 Ellis Street, Mountain View, California 94043-2242, and its telephone number is (415) 254-4000. CONNECT's World Wide Web site is located at "www.connectinc.com." Information contained on the Company's Web site shall not be deemed to be a part of this Prospectus. As used in this Prospectus, the terms "CONNECT" and the "Company" mean CONNECT, Inc. CONNECT(R) is a registered service mark of the Company. OneServer, OrderStream, CONNECT Online and the CONNECT logo and OneServer logo are trademarks of the Company. This Prospectus also includes trademarks of companies other than CONNECT. THE OFFERING Common Stock offered by the Company..... 2,500,000 shares Common Stock to be outstanding after the offering............................ 18,536,742 shares(1) Nasdaq National Market symbol........... CNKT Use of proceeds......................... Working capital and general corporate purposes. SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> SIX MONTHS YEARS ENDED DECEMBER 31, ENDED JUNE 30, -------------------------------------------- ---------------- 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- ------- -------- ------- ------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue: License................ $ 222 $ 212 $ 1,015 $ 1,627 $ 288 $ 89 $ 1,511 Service................ 2,419 2,617 2,847 6,345 8,285 5,464 2,477 ------- ------- ------- ------- -------- ------- ------- Total revenue......... 2,641 2,829 3,862 7,972 8,573 5,553 3,988 Loss from operations(2).......... (2,135) (2,691) (1,648) (1,540) (13,194) (6,733) (9,148) Net loss(2)............. $(2,268) $(2,932) $(1,921) $(1,765) $(14,139) $(7,101) $(9,127) Pro forma net loss per share(3)............... $ (0.79) $ (0.40) $ (0.51) Shares used in computing pro forma net loss per share(3).. 17,814 17,811 17,893 </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 ---------------------- ACTUAL AS ADJUSTED(4) ------- -------------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................ $ 5,794 $20,794 Working capital ......................................... 2,787 17,787 Total assets............................................. 11,922 26,922 Long-term debt........................................... 1,214 1,214 Stockholders' equity .................................... 5,196 20,196 </TABLE> - -------- (1) Based on the number of shares outstanding as of June 30, 1996, plus 272,750 shares issued in July 1996 in a private placement to a wholly-owned subsidiary of Fruit of the Loom, Inc., one of the Company's customers. Excludes (i) an aggregate of 3,037,056 shares subject to outstanding options as of June 30, 1996 at a weighted average exercise price of $1.78 per share under the Company's 1989 Stock Option Plan and 1996 Stock Option Plan, (ii) 100,750 shares issuable upon exercise of options granted between July 1, 1996 and August 12, 1996 at a weighted average exercise price of $4.80 per share, and (iii) 219,155 shares issuable upon exercise of warrants outstanding as of June 30, 1996 at a weighted average exercise price of $3.30 per share (of which the Company expects warrants to purchase 200,236 shares will be exercised immediately prior to completion of the offering). See "Capitalization," "Management--Stock Plans" and Notes 8 and 14 of Notes to Financial Statements. (2) Includes a one-time expense of $4.1 million in the first quarter of 1995 from the Company's termination of exclusive distribution rights of its European distributor. See Note 10 of Notes to Financial Statements. (3) See Note 2 of Notes to Financial Statements. (4) As adjusted to give effect to the sale of 2,500,000 shares of Common Stock at an assumed initial public offering price of $7.00 per share. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000832485_mednet_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000832485_mednet_prospectus_summary.txt
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+PROSPECTUS SUMMARY RISK FACTORS SECURITIES COVERED BY THIS PROSPECTUS SELLING STOCKHOLDER PLAN OF DISTRIBUTION PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY SELECTED CONSOLIDATED FINANCIAL DATA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS DIRECTORS AND EXECUTIVE OFFICERS SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT TRANSACTIONS WITH RELATED PARTIES DESCRIPTION OF SECURITIES LEGAL PROCEEDINGS LEGAL MATTERS EXPERTS CHANGE IN ACCOUNTANTS INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES ------------------- <PAGE> AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Reports, proxy statements and other information concerning the Company can be inspected and copied at the public reference facilities maintained by the Commission at its office at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, as well as at the Regional Offices of the Commission at Citicorp Center, 300 West Madison Street, Chicago, Illinois 60661; and Seven World Trade Center, New York, New York 10048. Copies of such material can be obtained from the Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission also maintains a site on the World Wide Web (hhtp://www.sec.gov) that contains reports, proxy and information statements and other information regarding the Company filed electronically with the Commission. This Prospectus constitutes a part of Registration Statements on Form S-1 filed by the Company with the Commission under the 1933 Act (the "Registration Statement"). This Prospectus omits certain information contained in the Registration Statement, and reference is hereby made to the Registration Statement and related exhibits for further information with respect to the Company and the shares of Common Stock offered hereby. Statements contained herein concerning the provisions of any document disclose all material aspects thereof but are not necessarily complete and, in each instance, reference is made to the copy of such document filed as an exhibit to the Registration Statement or otherwise filed with the Commission. Each such statement is qualified in its entirety by such reference. <PAGE> PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements (including the notes thereto) appearing elsewhere in this Prospectus, including information under "Risk Factors." The Company The Company was incorporated under the laws of the State of Nevada in September, 1985 and changed its name from Medi-Mail, Inc. to Mednet, MPC Corporation in June, 1995. Substantially all of the Company's business is derived from its activities in the managed prescription care industry. The Company, together with its subsidiaries Medi-Mail, Inc. ("Medi-Mail"), Medi-Claim, Inc. ("Medi-Claim"), Medi-Phar, Inc. ("Medi-Phar") and Family Pharmaceuticals of America, Inc. ("FPA"), acts as an integrated, full service prescription drug benefits manager serving individual members of retirement organizations, fraternal organizations, state employee organizations and commercial organizations ("Affinity Groups"), corporations, self insurance trusts, insurance companies and other benefit plan sponsors ("Third-Party Payors" and collectively with the Affinity Groups, "Payors") throughout the United States. The Company's benefit programs (the "Programs") offer prescription drug benefits to approximately two million individuals ("Participants"), most of whom receive funded benefits through Third-Party Payors and/or are members of an Affinity Group. Description of Prescription Benefits Management Business. The Company develops and administers client- specific Programs on behalf of more than 400 Payors throughout the United States. The Company attempts to customize its Programs to meet the Payors' particular benefits strategy combining a number of managed care features to cost effectively manage the Payor's Program. The Programs combine mail-service pharmacy features such as enhanced generic substitution and the convenience of home delivery, with the features of retail network pharmacy such as automated claims adjudication, real time electronic networking of retail pharmacies and card programs. Payors can choose a Program which incorporates on-line electronic claims processing, drug utilization review and an electronic network linking more than 45,000 retail pharmacies in the United States, as well as features of a mail-service pharmacy program. In the alternative, Payors can choose either a mail-service pharmacy program or a network claims processing program to combine with its other existing prescription benefits. Mail-service Pharmacy Operations. The Company's mail-service pharmacy program is conducted from its Las Vegas and Chicago locations. The Company services customers throughout the United States. The Company's mail-service pharmacy program is designed for convenience and to reduce prescription medication and over-the-counter pharmaceutical costs to individuals, corporations, labor unions, retirement systems, health and welfare trusts, insurance companies, federal and state employee plans, health maintenance organizations and third-party administrators. The mail service pharmacy program attracts senior citizens, home-bound persons, sight or hearing impaired persons and users of regularly prescribed medications who are interested in the convenience of direct delivery of medication and/or lowering their medication and pharmaceutical expenses. The Company believes that it delivers prescription medication and over-the-counter pharmaceutical products to the homes of customers at lower costs, on average, than are generally available through retail pharmacies. These medications are typically maintenance medications, which must be taken on an ongoing basis for chronic conditions such as high blood pressure, arthritis and heart and thyroid conditions. The Company believes that these conditions account for a majority of prescription medication expenditures in the United States. Retail Pharmacy Operations. Through Medi-Phar, the Company operates in-clinic retail pharmacies, located in San Diego, California and Las Vegas, Nevada. Operation of the retail pharmacies provided the Company with a working knowledge of the retail pharmacy business which improved the Company's ability to market and develop its service, primarily the pharmacy network and claims processing system of its subsidiary, Medi-Claim. As the Medi-Claim network has developed, this aspect of the retail pharmacies has become less important. The Company has closed four and anticipates closing one more of its retail locations in 1996. Mednet(R) Claims Processing. The Company's prescription claims administration programs ("Claims Programs") are conducted through Medi-Claim. In November 1994, Medi-Claim acquired substantially all of the assets of Medical Services Agency, Inc. ("MSA"), which operated under the registered service mark of Mednet(R), in exchange for 1,600,000 shares of Common Stock. The Claims Programs are sponsor-specific benefit programs through which Medi-Claim processes and adjudicates paper and electronic prescription drug claims generated through a network of participating retail pharmacies. The pharmacy network includes approximately 45,000 retail pharmacies in the United States, each of which contracts with Medi-Claim to provide prescription dispensing at contracted rates. <PAGE> The first quarter of 1996 marked the first time that the Company obtained net income for a fiscal quarter. Management believes that the profitable quarter reflects economies of scale from recent acquisitions, cost-savings from the consolidation of the Home Pharmacy operations and various cost cutrting moves implemented in the fourth quarter of 1995. Operations for the quarter may not be indicative of operations for the entire year. In particular, the small amount of profit for the quarter ($32,000 or $.001 per share on net sales of $25,720,000) means that even small fluctuations in costs or sales could result in future losses. There is no assurance that the Company will be profitable in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business-Recent Developments". As of July 11, 1996, the Company has 32,657,131 shares of Common Stock outstanding (37,647,131 including the Shares). In addition the Company has 267,500 shares of Series A Preferred Stock, 112,500 shares of Series D Preferred, and 125,000 shares of Series E Preferred. Pursuant to the terms of the Stock Purchase Agreement, the Company has also committed to issue 125,000 shares of Series F Preferred, subject to certain conditions precedent. The Company's executive offices are located at 871-C Grier Drive, Las Vegas, Nevada 89119, and its telephone number is (702) 361-3119. The securities offered hereby involve a high degree of risk. See "Risk Factors". The Offering The Common Stock being offered hereby consists of up to 5,000,000 shares issuable on conversion of the Series E Preferred and the Series F Preferred. See "Securities Covered by This Prospectus" and "Plan of Distribution". <PAGE> Summary Financial Data Set forth below are summary consolidated financial data for the Company as of and for the periods indicated. The following information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Company's Consolidated Financial Statements and Notes thereto, and other financial statements appearing elsewhere in this Prospectus. <TABLE> Three Months Ended March 31, Year Ended December 31, -------------------------- ----------------------------------------------- 1996 1995 1995(1) 1994(2)(3) 1993(4) -------------------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> <C> Statement of Operations Data: Net sales $ 25,720,000 $ 28,329,000 $ 114,297,000 $ 67,863,000 $ 25,224,000 Cost of sales (21,852,000) (24,278,000) (98,253,000) (58,793,000) (19,504,000) Gross profit 3,868,000 4,051,000 16,044,000 9,070,000 5,720,000 Operating Expense (including amortization) (3,414,000) (4,236,000) (26,859,000) (14,794,000) (13,185,000) Net other income (expense) (422,000) (552,000) (2,517,000) 225,000 (761,000) -------------------------- ----------------------------------------------- Net income (loss) $ 32,000 $ (737,000) $ (13,332,000) $ (5,499,000) $ (8,226,000) ========================== =============================================== Net income (loss) per common share $ .00 $ (.03) $ (.53) $ (.26) $ (.49) Weighted average shares outstanding 28,762,000 23,817,000 25,383,000 21,353,000 16,675,000 Balance Sheet Data (end of period)(5): Working capital (deficit) $ (6,533,000) $ 2,749,000 $ (5,138,000) $ 1,420,000 $ 1,310,000 Goodwill and other tangible assets, net 18,034,000 8,882,000 18,582,000 9,308,000 5,406,000 Total assets 44,853,000 22,406,000 41,903,000 22,317,000 13,017,000 Long-term debt less current portion 2,123,000 1,824,000 1,422,000 595,000 952,000 Redeemable Preferred Stock 5,350,000 -- 5,350,000 -- -- Stockholders' equity $ 6,538,000 $ 11,443,000 $ 9,061,000 $ 11,906,000 $ 7,028,000 <FN> (1) In September, 1995 the Company acquired substantially all the assets of Home Pharmacy. The acquisition was accounted for as a purchase. The Company has elected to consolidate the operations of Home Pharmacy retroactively to January 1, 1995. (2) In November, 1994 the Company acquired substantially all the assets of Medical Services Agency, Inc. (doing business as Mednet) ("MSA"). The acquisition was accounted for as a purchase. The Company has elected to consolidate the acquisition of MSA retroactively to January 1, 1994 and these amounts include interim results of MSA through September 30, 1994 as determined by management. (3) In June, 1994 the Company acquired all of the issued and outstanding stock of Family Pharmaceuticals of America, Inc. The acquisition was accounted for as a purchase. The Company has elected to consolidate the acquisition of FPA retroactively to January 1, 1994. (4) In April, 1993, the Company acquired substantially all the assets of Mail Rx. The acquisition was accounted for as a purchase. (5) Figures do not include the proceeds to the Company generated by the sale of Series E Preferred to the Selling Stockholder subsequent to March 31, 1996. </FN> </TABLE>
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000833298_cima-labs_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000833298_cima-labs_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY AND SHOULD BE READ IN CONJUNCTION WITH THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. FOR A DISCUSSION OF CERTAIN FACTORS TO BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY, SEE "RISK FACTORS." UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. SEE "UNDERWRITING." THE COMPANY CIMA is a drug delivery company focused primarily on the development and manufacture of pharmaceutical products based upon its patented OraSolv technology. OraSolv is an oral dosage formulation incorporating microencapsulated active drug ingredients into a tablet which dissolves quickly in the mouth without chewing or water and which effectively masks the taste of the medication being delivered. OraSolv's fast-dissolving capability may enable patients in certain age groups or those with a variety of conditions that limit their ability to swallow conventional tablets to receive medication in a more convenient oral dosage form. The Company believes that OraSolv is more convenient than traditional tablet-based oral dosages as it does not require water to be ingested, thereby enabling immediate medication at the onset of symptoms. In addition, OraSolv can provide more accurate administration of doses than liquid or suspension formulations as no measuring is required. The Company believes OraSolv's ability to be easily ingested by patients will foster greater patient compliance, thereby improving therapeutic outcomes and reducing costs in the healthcare system. CIMA's business focus has evolved over the last several years. From inception until 1992, the Company focused on the development of liquid effervescent products and technologies. In 1993, the U.S. patent covering OraSolv was issued and the Company, perceiving greater commercial opportunity, shifted its focus to the development of OraSolv products. CIMA intends to commercialize the OraSolv technology through collaborations with pharmaceutical and other healthcare companies by developing and manufacturing OraSolv formulations of its collaborators' pharmaceutical products. Since the issuance of the OraSolv patent in 1993, the Company has: - Completed construction of a 75,000 square foot manufacturing facility in Eden Prairie, Minnesota, which has been registered with the FDA and licensed by the State of Minnesota. - Entered into a License and Development Agreement with Glaxo Wellcome plc ("Glaxo") to develop an OraSolv version of Glaxo's Zantac. - Entered into a License Agreement and a Development and License Option Agreement with SmithKline Beecham plc ("SmithKline Beecham") to develop a series of OraSolv versions of SmithKline Beecham products for international and domestic distribution. - Entered into agreements with three other potential partners for the development and manufacture of OraSolv products. - Entered into a License and Supply Agreement with Merck & Co., Inc. ("Merck") to provide an AutoLution (a liquid effervescent) version of Merck's Pepcid AC. - Added key scientific, technical and management personnel. The Company's corporate partnerships enable it to focus on the development and manufacture of OraSolv versions of its partners' products, while allowing its partners to focus on the marketing and distribution of OraSolv formulations. Generally, the Company will be responsible for optimizing the taste-masking and microencapsulation of the active drug ingredient, manufacturing the OraSolv tablets containing the active drug, packaging, labeling and performing quality assurance on the finished product, and shipping the product to its partners. The Company's corporate partners will be responsible for marketing, sale and distribution of the OraSolv product to consumers or healthcare professionals. Generally, corporate partners will also be responsible for the collection and submission of required clinical data, and for the management of required federal or international regulatory approvals of collaborative products. The Company's goal is to have its OraSolv technology incorporated into as many pharmaceutical products as possible with an emphasis on pharmaceutical products which command a large market share or are in large market segments. The Company has developed a strategic plan to accomplish this goal. The Company's primary strategies are to: (i) establish collaborations with pharmaceutical and other healthcare companies; (ii) focus initially on OTC products; (iii) pursue OTC switch and prescription drugs; (iv) expand its intellectual property position; (v) retain the manufacturing rights to the products it develops; and (vi) retain ownership of products developed. THE OFFERING <TABLE> <S> <C> Common Stock offered by: The Company...................................... 1,000,000 shares The Selling Stockholders......................... 1,500,000 shares Common Stock Outstanding after the Offering........ 8,840,099 shares (1) Use of Proceeds.................................... For initiation of commercial production; research and development; and working capital and general corporate purposes Nasdaq National Market Symbol...................... CIMA </TABLE> SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ----------------------------------------------------- -------------------- 1991 1992 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenues: Net sales....................................... $ 2,930 $ 3,251 $ 1,857 $ 1,451 $ 151 $ 11 $ -- Research, development and licensing revenues.... 551 445 368 1,167 684 215 392 Costs and expenses: Cost of goods sold............................ 3,339 3,279 2,844 2,799 240 59 -- Research and product development.............. 843 759 1,857 3,549 6,505 2,292 1,376 Selling, general and administrative........... 1,365 1,306 1,208 2,972 3,658 1,019 784 --------- --------- --------- --------- --------- --------- --------- Operating loss.................................... (2,066) (1,648) (3,684) (6,702) (9,568) (3,144) (1,768) Other income (expense), net....................... (249) (34) 4 490 461 166 34 --------- --------- --------- --------- --------- --------- --------- Net loss.......................................... $ (2,315) $ (1,682) $ (3,680) $ (6,212) $ (9,107) $ (2,978) $ (1,734) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Net loss per share................................ $ (.90) $ (.53) $ (.78) $ (.95) $ (1.16) $ (.39) $ (.22) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Weighted average number of shares outstanding..... 2,565 3,198 4,727 6,505 7,822 7,541 7,824 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1995 MARCH 31, 1996 ----------------- ------------------------- ACTUAL ACTUAL AS ADJUSTED(2) ----------------- --------- -------------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents.......................................... $ 3,559 $ 2,517 $ 10,731 Working capital.................................................... 3,147 1,528 9,742 Total assets....................................................... 15,519 14,364 22,578 Accumulated deficit................................................ (29,259) (30,993) (30,993) Total stockholders' equity......................................... 14,282 12,643 20,857 </TABLE> - ------------ (1) Based on shares outstanding as of March 31, 1996. Excludes 1,915,570 shares of Common Stock reserved for issuance pursuant to the Company's stock option plans, under which options to purchase 1,215,334 shares were outstanding as of March 31, 1996, and 106,467 shares of Common Stock issuable pursuant to warrants. See Note 8 to Financial Statements. (2) As adjusted to reflect receipt of the estimated net proceeds from the sale of 1,000,000 shares of Common Stock by the Company at an assumed public offering price of $9.25 per share. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000835472_dpd_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000835472_dpd_prospectus_summary.txt
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+Prospectus Summary This Summary is qualified by the more detailed information (including the financial statements and related notes) set forth elsewhere in this Prospectus which should be read in its entirety. Unless the context indicates, or it is specifically indicated otherwise, all references to (i) "Corning" include Corning Incorporated, a New York corporation, and its consolidated subsidiaries, (ii) "Quest Diagnostics" or the "Company" include Corning Clinical Laboratories Inc. (to be renamed Quest Diagnostics Incorporated prior to the Distributions), a Delaware corporation, and its direct and indirect subsidiaries (other than Covance) and assume that the Distributions have occurred, and (iii) "Covance" include Covance Inc. (formerly Corning Pharmaceutical Services Inc.), a Delaware corporation, and its direct and indirect subsidiaries and assume that the Distributions have occurred. Capitalized terms used but not defined in this Summary are defined elsewhere in this Prospectus. The Company Quest Diagnostics is one of the largest independent clinical laboratory testing companies in the United States. Quest Diagnostics offers a broad range of routine and specialty ("esoteric") testing services used by the medical profession in the diagnosis, monitoring and treatment of disease and other medical conditions. Quest Diagnostics' network, which processes approximately 60 million requisitions for diagnostic tests annually, consists of 17 regional laboratories across the United States and the Corning Nichols Institute ("Nichols") esoteric testing laboratory in San Juan Capistrano, California. In addition, Quest Diagnostics has 14 branch laboratories in the United States as well as one branch laboratory in Mexico City (branch laboratories are smaller than regional laboratories), approximately 200 "STAT" laboratories and approximately 850 patient service centers located throughout the United States. For the year ended December 31, 1995 and the nine months ended September 30, 1996, Quest Diagnostics had net revenues of $1,629 million and $1,231 million, respectively, and Adjusted EBITDA (income (loss) before income taxes plus net interest expense, depreciation and amortization and restructuring and other special charges) of $177 million and $135 million, respectively. Quest Diagnostics operates 24 hours a day, 365 days a year, utilizing a fully integrated collection and processing system. Quest Diagnostics generally performs and reports most routine procedures within 24 hours, employing a variety of sophisticated and computerized laboratory testing instruments. Quest Diagnostics provides daily pickup of specimens from most customers principally through an in-house courier system. The specimens are sent to one of the Company's laboratories where one or more tests are performed. Each patient specimen is accompanied by a test requisition form, which is completed by the customer, that indicates the tests to be performed and provides the necessary billing information. Each specimen and related requisition form is checked for completeness and then given a unique bar-coded identification number. Once the appropriate information is entered into the computer system, the tests are performed and the results are delivered to the doctor, primarily through computer interface or manually. Corning entered the clinical laboratory business in 1982 with the acquisition of MetPath Inc. ("MetPath"), which was founded in 1967 and was one of the first laboratories to expand beyond a regional market. Since January 1993, Quest Diagnostics has acquired over thirty laboratories, including Damon Corporation ("Damon"), Bioran Medical Laboratory ("Bioran") and Maryland Medical Laboratory, Inc. ("MML"). In 1994, Quest Diagnostics enhanced its presence in the esoteric testing market through the acquisition of Nichols, a preeminent clinical laboratory with a leading reputation for esoteric testing and test innovations. While Corning's ownership provided the Company with the capital to grow through acquisitions and to become one of the nation's largest independent clinical laboratory testing companies, the management of both Corning and Quest Diagnostics believe that Quest Diagnostics will be more competitive and operate more successfully in the future as an independent company, with a strong, focused and experienced management team to concentrate on customer needs. Independence will also enable Quest Diagnostics to motivate its employees by offering equity-based incentives tied directly to the performance of the Company and individual performance. Quest Diagnostics' management team has implemented a new business strategy, which focuses the business around three key strategic areas: clinical operations, customer focus and technological leadership and excellence. The Clinical Laboratory Testing Industry Clinical testing is a critical component in the delivery of quality health care service to patients. Currently, clinical laboratory testing is the first step in determining how a significant amount of all health care dollars are spent. Quest Diagnostics believes that in 1995 the entire United States clinical laboratory industry had revenues exceeding $30 billion. The clinical laboratory industry consists primarily of three types of providers: hospital-affiliated laboratories, independent clinical laboratories, such as Quest Diagnostics, and physician-office laboratories. The Company believes that in 1995 approximately 56% of the clinical testing revenues in the United States were attributable to hospital-affiliated laboratories, approximately 36% were attributable to independent clinical laboratories and approximately 8% were attributable to physicians in their offices and laboratories. Quest Diagnostics believes that consolidation will continue in the clinical laboratory testing business. In addition, Quest Diagnostics believes that it and the other large independent clinical laboratory testing companies may have the opportunity to increase their share of the overall clinical laboratories testing market due to a number of external factors, including cost efficiencies afforded by large-scale automated testing, Medicare reimbursement reductions and the growth of managed health care entities which require low-cost testing services and large service networks. In addition, legal restrictions on physician referrals and the ownership of laboratories as well as increased regulation of laboratories are expected to contribute to the continuing consolidation of the industry. Quest Diagnostics believes that a number of factors are likely to positively influence the volume of clinical laboratory testing performed in the United States in the future, including (1) the general aging of the population in the United States; (2) an expanded base of scientific knowledge which has led to the development of more sophisticated specialized tests and an increase in the awareness of physicians of the value of clinical laboratory testing as a cost-effective means of early detection of disease and monitoring of treatment; (3) an increase in the number and types of tests which are, due to advances in technology and increased cost efficiencies, readily available on a more affordable basis to physicians; (4) expanded substance-abuse testing by corporations and governmental agencies; and (5) increased testing for sexually transmitted diseases such as AIDS. The impact of these factors is expected to be offset in part by increased controls over the utilization of clinical laboratory tests by both Medicare and the private sector, particularly managed care organizations. Business Strategy Quest Diagnostics' overall goal is to be recognized by its customers, employees and competitors as the best provider of comprehensive and innovative clinical testing, information and services. To achieve this, Quest Diagnostics' management team has focused the business around three key strategic areas: clinical operations, customer focus and technological leadership and excellence. (bullet) Best Supplier. Quest Diagnostics seeks to be the best supplier of the highest quality and the lowest-cost testing services. Health care providers and patients expect accurate, timely and consistent laboratory test results at a fair price. (bullet) Lowest-cost provider. Quest Diagnostics' average cost per requisition varies significantly among its regional laboratories; there is an approximately $7.00 difference in cost per requisition between the most efficient regional laboratory and the average, and an approximately $13.00 difference in cost per requisition between the most and the least efficient regional laboratories. In many cases, these variations do not relate to testing volumes or mixes, space costs, service requirements or regional labor cost differences. To reduce costs, Quest Diagnostics has begun to replicate the best practices from each region throughout its national network. Management expects to achieve significant cost savings within the next three years as these programs are fully implemented. * (bullet) Highest Quality Provider. Quest Diagnostics is dedicated to providing accurate and timely test results and to being viewed by its customers as the highest quality provider of clinical testing services. Quest Diagnostics believes that implementation of best practices already developed in certain regions will permit the Company to be viewed by its customers as the highest quality provider of clinical testing services. (bullet) Preferred Provider. Quest Diagnostics seeks to be the preferred provider of laboratory testing services to existing and new health care networks on a selective basis determined by profitability of accounts. Quest Diagnostics believes that it will become the preferred provider to these networks as (1) large networks typically prefer to utilize large independent clinical laboratories that can service them on a national or regional basis and (2) the Company continues to pursue its primary strategy of becoming the highest quality, lowest-cost provider. To achieve this, Quest Diagnostics will employ a rigorous national and regional process to both select and pursue customers and allocate resources to support these efforts. *This is a forward looking statement and is based on current expectations. Actual results may vary materially from those projected. See "Business- Important Factors Regarding Forward Looking Statements." In particular, see factors (a), (d) and (j). (bullet) Account Profitability. Quest Diagnostics intends to refocus its sales efforts on pursuing and keeping profitable accounts. Quest Diagnostics is actively reviewing the profitability of its current accounts, including those with managed care organizations, and will either increase pricing or eliminate accounts that cannot be serviced profitably. (bullet) Regional Profitability. Quest Diagnostics presently believes that it has the leading market share among independent clinical laboratories in most routine testing markets of the northeast, mid-Atlantic and midwest regions. Approximately 65% of Quest Diagnostics' revenues and almost all of its EBITDA is generated from markets in which the Company believes that it has the leading market share. In most of these markets, Quest Diagnostics believes that it also is the lowest cost provider. Quest Diagnostics is evaluating its strategic alternatives relative to units whose profitability does not meet its internal goals. These alternatives may include joint ventures, alliances, or dispositions. Quest Diagnostics believes that, while the clinical laboratory industry is becoming national in scope, the Company can subcontract with other clinical laboratories to perform testing for national accounts in any markets in which the Company chooses not to compete. (bullet) Leading Innovator. Quest Diagnostics intends to remain a leading innovator in the clinical laboratory industry by continuing to introduce new tests, technology and services. Through its relationship with the academic community and pharmaceutical and biotechnology firms and a research and development budget exceeding $15 million per year, Quest Diagnostics believes it is one of the leaders in transferring innovation from academic biotechnology laboratories to the market. Recent Developments By a plea agreement and civil agreement and release dated October 9, 1996, between the Department of Justice ("DOJ") and Damon, all federal criminal matters within the scope of the various federal investigations against Damon, and all claims including the civil qui tam cases underlying the civil investigations were settled for an aggregate of $119 million, which sum was reimbursed to Quest Diagnostics by Corning. The Damon settlement does not exclude Quest Diagnostics from future participation in any federal health care programs on account of Damon's practices. Quest Diagnostics' aggregate reserve with respect to all governmental and private claims was $215 million at September 30, 1996 and is estimated to be reduced to $85 million as of the Distribution Date as a result of the payment of settled claims, primarily the Damon settlement of $119 million. Based on information available to management and Quest Diagnostics' experience with past settlements (including the fact that the aggregate amount of the Damon settlement was significantly in excess of established reserves) management has reassessed its reserve levels and believes that its current level of reserves is adequate. However, it is possible that additional information may become available which may cause the final resolution of these matters to be in excess of established reserves by an amount which could be material to Quest Diagnostics' results of operations and, for non-indemnified claims, Quest Diagnostics' cash flows in the period in which such claims are settled. While none of the governmental or nongovernmental investigations or claims is covered by insurance, Quest Diagnostics does not believe that these matters will have a material adverse effect on Quest Diagnostics' overall financial condition. Corning Indemnity In connection with the Distributions, Corning has agreed to indemnify Quest Diagnostics against all monetary penalties, fines or settlements arising out of any governmental claims arising out of alleged violations of applicable federal fraud and health care statutes and relating to billing practices of Quest Diagnostics and its predecessors that have been settled or are pending on the Distribution Date. Corning has also agreed to indemnify Quest Diagnostics for 50% of the aggregate of all judgment or settlement payments made by Quest Diagnostics that are in excess of $42.0 million in respect of claims by private parties (i.e., nongovernmental parties such as private insurers) that relate to indemnified or previously settled governmental claims and that allege overbillings by Quest Diagnostics or any existing subsidiaries of Quest Diagnostics, for services provided prior to the Distribution Date; provided, however, such indemnification for nongovernmental claims will not exceed $25.0 million in the aggregate and all amounts indemnified against by Corning for the benefit of Quest Diagnostics will be calculated on a net after-tax basis. Such indemnification will not cover (i) any governmental claims that arise after the Distribution Date pursuant to service of subpoena or other notice of such investigation after the Distribution Date, (ii) any nongovernmental claims unrelated to the indemnified governmental claims or investigations, (iii) any nongovernmental claims not settled prior to five years after the Distribution Date, (iv) any consequential or incidental damages relating to the billing claims, including losses of revenues and profits as a consequence of exclusion for participation in federal or state health care programs or (v) the fees and expenses of litigation. The Distributions On May 13, 1996, the board of directors of Corning approved a plan to distribute to Corning shareholders the clinical laboratory testing business being conducted by Quest Diagnostics and the contract research business being conducted by Quest Diagnostics' wholly owned subsidiary, Covance (together, the "Distributions"). The Distributions will be effected by distributing all of the outstanding shares of Quest Diagnostics common stock (the "Quest Diagnostics Common Stock") to holders of Corning common stock (the "Corning Common Stock"), followed immediately by the distribution of all of the common stock of Covance (the "Covance Common Stock") to those same holders, as holders of Quest Diagnostics Common Stock. It is expected that the Distributions will be made on December 31, 1996 (the date on which the Distributions are to be made, the "Distribution Date"). Prior to the consummation of the offering of the Notes contemplated hereby (the "Offering"), the Company entered into a $450 million senior, secured credit facility (the "Credit Facility"), among the Company, the lenders listed therein, NationsBank, N.A., as Issuing Bank, Wachovia Bank of Georgia, N.A., as Swingline Bank, and Morgan Guaranty Trust Company of New York, as Administrative Agent. The Credit Facility is comprised of a $300 million six-year amortizing term loan ("Tranche A Loan"), a $50 million seven-year term loan ("Tranche B Loan" and together with the Tranche A Loan, the "Term Loans") and a $100 million six-year revolving working capital facility (the "Working Capital Facility"). Corning currently has approximately $1.2 billion of Quest Diagnostics intercompany debt. Approximately $145 million of net proceeds from the Offering, together with the $350 million of borrowings under the Term Loans, will be paid to Corning in satisfaction of a portion of the outstanding intercompany debt. Corning will contribute the remaining intercompany debt to Quest Diagnostics' capital. Borrowings under the Working Capital Facility, substantially all of which is expected to be available as of the Distribution Date, will provide for future working capital needs and other general corporate purposes. The Offering <TABLE> <CAPTION> <S> <C> Securities Offered $150,000,000 aggregate principal amount of % Senior Subordinated Notes due December 15, 2006 (the "Notes"). Maturity Date December 15, 2006. Interest Payment Date June 15 and December 15, commencing June 15, 1997. Optional Redemption by the Company The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after December 15, 2001, at the redemption prices set forth herein, plus accrued and unpaid interest, if any, to but excluding the date fixed for redemption. In addition, if as a result of an event outside the control of Corning, Quest Diagnostics and Covance, the Distributions do not occur prior to March 31, 1997, the Notes will be subject to redemption, as a whole and not in part, at the option of Quest Diagnostics, prior to June 30, 1997, at a redemption price equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to but excluding the date fixed for redemption. See "Description of the Notes--Optional Redemption." Change of Control Offer Upon a Change of Control, the Company has the obligation to offer to purchase all the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to but excluding the date of purchase. See "Description of the Notes-- Repurchase at the Option of Holders--Change of Control" for a discussion of the circumstances in which the Company may not be required to make an offer to purchase upon a Change of Control. Offers to Purchase In the event of certain asset sales, the Company will be required to offer to repurchase the Notes at 100% of their principal amount, plus accrued and unpaid interest, if any, to but excluding the date of purchase with the net proceeds of such asset sales. Subordination The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company, including all indebtedness of the Company under the Credit Facility. The Notes will rank Pari Passu in right of payment with any other senior subordinated indebtedness of the Company. Subsidiary Guarantees The Notes will be guaranteed, jointly and severally, and fully and unconditionally, on a senior subordinated basis by the Guarantors (the "Senior Subordinated Guarantees"). The obligations of any Guarantor with respect to its Senior Subordinated Guarantee will be subordinated in right of payment, to the same extent as the obligations of the Company in respect of the Notes, to all existing and future Senior Guarantees, which will include the guarantees of the Credit Facility. The Senior Subordinated Guarantees would also be subordinated to all existing and future indebtedness of the Guarantors if the Senior Subordinated Guarantees were avoided or subordinated in favor of the Guarantors' other creditors. See "Risk Factors--Fraudulent Conveyance." The obligations of a Guarantor under its Senior Subordinated Guarantee will be released in certain circumstances, including if the Guarantor ceases to guarantee the Credit Facility. See "Description of the Notes--Senior Subordinated Guarantees." Principal Covenants The indenture under which the Notes are issued (the "Indenture") will impose certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt and senior in right of payment to the Notes, enter into leases, incur liens, merge or consolidate with any other person, or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. Use of Proceeds The Company intends to use the proceeds from the sale of the Notes, together with the proceeds of borrowings under the Credit Facility, to repay certain intercompany indebtedness owed to Corning. See "Use of Proceeds." The Distributions The Notes are being offered in connection with the Distributions of the Quest Diagnostics Common Stock and the Covance Common Stock to holders of Corning Common Stock. The closing of the offering of the Notes is anticipated to occur prior to the Distributions. Listing The Notes have been approved for listing on the New York Stock Exchange, subject to official notice of issuance. Risk Factors See "Risk Factors" for a discussion of certain factors that should be considered in connection with an investment in the Notes. </TABLE> Summary Financial Data The following table summarizes certain historical and pro forma financial data of Quest Diagnostics at the dates and for each of the periods indicated. The selected financial data as of and for each of the years ended December 31, 1995, 1994 and 1993 have been derived from the audited combined financial statements of (the "Audited Financial Statements") and the notes thereto included elsewhere herein. The selected financial data as of and for the three and nine months ended September 30, 1996 and 1995 have been derived from the unaudited interim combined financial statements of Quest Diagnostics (the "Interim Financial Statements" and, together with the Audited Financial Statements, the "Financial Statements") and the notes thereto included elsewhere herein. In the opinion of Quest Diagnostics management, the unaudited interim combined financial statements include all adjustments, consisting of only normal recurring adjustments, that are necessary for a fair presentation of the financial position and results of operations for these periods. The unaudited interim results of operations for the three and nine months ended September 30, 1996 are not necessarily indicative of the results for the entire year ending December 31, 1996. The selected pro forma financial data have been derived from the unaudited pro forma combined financial information of Quest Diagnostics for the year ended December 31, 1995 and for the three and nine months ended September 30, 1996 (the "Pro Forma Financial Information") and the notes thereto included elsewhere herein. The pro forma statement of operations data gives effect to the Distributions and the Accounting Policy Change (as defined below) as if they had occurred on January 1, 1995 and the pro forma balance sheet data gives effect to the Distributions and the Accounting Policy Change as if they had occurred on September 30, 1996. The pro forma financial data does not purport to represent what Quest Diagnostics' results of operations would have been if the Distributions and the Accounting Policy Change had in fact occurred on such dates, nor does it purport to indicate the future financial position or results of future operations of Quest Diagnostics. The pro forma adjustments are based upon currently available information and certain assumptions that Quest Diagnostics management believes to be reasonable. The summary historical and pro forma financial data set forth below should be read in conjunction with "Selected Historical Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Financial Statements and the notes thereto and the Pro Forma Financial Information and the notes thereto. <TABLE> <CAPTION> Three Months Ended September 30, Nine Months Ended September 30, ------------------------------------------------------------------------------------------------ Pro Forma Historical Pro Forma Historical ------------------------------- ------------------------------- 1996(a) 1996 1995 1996(a) 1996 1995 --------------- --------------- --------------- ---------------- ---------------- -------------- (in thousands, except share, per share and percentage data) <S> <C> <C> <C> <C> <C> <C> Statement of Operations Data: Net revenues $ 405,352 $ 405,352 $ 399,959 $ 1,231,290 $1,231,290 $1,239,474 Costs and expenses: Cost of services 255,390 255,390 240,868 768,809 768,809 735,984 Selling, general and administrative 125,190 125,190 181,346(c) 371,439 371,439 399,635(c) Provision for restructuring and other special charges(d) 155,730 155,730 201,730 201,730 45,885 Interest expense, net 12,189 19,866 20,927 36,938 59,887 61,529 Amortization of intangible assets 7,672 10,328 11,293 23,803 31,772 33,678 Other, net 1,837 1,837 1,930 (198) (198) 4,429 --------------- --------------- --------------- ---------------- ---------------- -------------- Total 558,008 568,341 456,364 1,402,521 1,433,439 1,281,140 --------------- --------------- --------------- ---------------- ---------------- -------------- Income (loss) before taxes (152,656) (162,989) (56,405) (171,231) (202,149) (41,666) Income tax expense (benefit) (40,521) (43,553) (17,810) (34,215) (43,280) (3,642) --------------- --------------- --------------- ---------------- ---------------- -------------- Income (loss) before cumulative effect of change in accounting principle (112,135) (119,436) (38,595) (137,016) (158,869) (38,024) Cumulative effect of change in accounting principle --------------- --------------- --------------- ---------------- ---------------- -------------- Net income (loss) $ (112,135) $ (119,436) $ (38,595) $ (137,016) $ (158,869) $ (38,024) =============== =============== =============== ================ ================ ============== Pro forma shares outstanding(e) 28,901,735 28,901,735 Pro forma net loss per share $ (3.88) $ (4.74) Balance Sheet Data (at end of period): Cash $ 40,000 $ 48,319 $ 46,908 $ 40,000 $ 48,319 $ 46,908 Working capital 306,741 114,718 129,319 306,741 114,718 129,319 Total assets 1,612,459 1,886,378 1,896,058 1,612,459 1,886,378 1,896,058 Long-term debt 515,494 1,219,900 1,114,367 515,494 1,219,900 1,114,367 Total debt 517,379 1,231,785 1,226,211 517,379 1,231,785 1,226,211 Stockholder's equity 604,099 132,670 320,576 604,099 132,670 320,576 Ratio of earnings to fixed charges -- (f) -- (f) -- (f) -- (f) -- (f) -- (f) Supplemental Data: Net cash provided by operating activities $ 25,236 $ 25,236 $ 38,202 $ 41,937 $ 41,937 $ 53,789 Net cash used in investing activities (7,904) (7,904) (17,044) (53,097) (53,097) (77,911) Net cash provided by (used in) financing activities (6,618) (6,618) (18,006) 23,033 23,033 32,311 Bad debt expense $ 30,539 $ 30,539 $ 85,831(c) $ 81,891 $ 81,891 $ 127,297(c) Bad debt expense as a % of net revenues 7.5% 7.5% 21.5% 6.7% 6.7% 10.3% Rent expense $ 12,515 $ 12,515 $ 11,860 $ 37,315 $ 37,315 $ 35,060 Capital expenditures 11,912 11,912 16,441 58,802 58,802 56,062 Depreciation expense $ 14,672 $ 14,672 $ 14,275 $ 43,460 $ 43,460 $ 42,358 EBITDA(g) $ (118,123)(h) $ (118,123)(h) $ (9,910)(c) $ (67,030)(h) $ (67,030)(h) $ 95,899(c) EBITDA as a % of net revenues (29.1%) (29.1%) (2.5%) (5.4%) (5.4%) 7.7% Adjusted EBITDA(i) $ 37,607 $ 37,607 $ (9,910)(c) $ 134,700 $ 134,700 $ 141,784(c) Adjusted EBITDA as a % of net revenues 9.3% 9.3% (2.5%) 10.9% 10.9% 11.4% Supplemental Ratio Data: Adjusted EBITDA/interest expense, net 3.1x 3.6x (Adjusted EBITDA-capital expenditures)/interest expense, net 2.1x 2.1x (Total debt--cash)/annualized adjusted EBITDA 3.2x 2.7x </TABLE> (Footnotes on page 14) <TABLE> <CAPTION> Year Ended December 31, ----------------------------------------------------------- Pro Forma Historical ------------------------------------------- 1995(a) 1995 1994(b) 1993 --------------- --------------- ------------- ------------- (in thousands, except share, per share and percentage data) <S> <C> <C> <C> <C> Statement of Operations Data: Net revenues $ 1,629,388 $1,629,388 $1,633,699 $1,416,338 Costs and expenses: Cost of services 980,232 980,232 969,844 805,729 Selling, general and administrative 523,271(c) 523,271(c) 411,939 363,579 Provision for restructuring and other special charges(d) 50,560 50,560 79,814 99,600 Interest expense, net 50,748 82,016 63,295 41,898 Amortization of intangible assets 34,031 44,656 42,588 28,421 Other, net 6,221 6,221 3,464 6,423 --------------- --------------- ------------- ------------- Total 1,645,063 1,686,956 1,570,944 1,345,650 --------------- --------------- ------------- ------------- Income (loss) before taxes (15,675) (57,568) 62,755 70,688 Income tax expense (benefit) 6,835 (5,516) 34,410 25,929 --------------- --------------- ------------- ------------- Income (loss) before cumulative effect of change in accounting principle (22,510) (52,052) 28,345 44,759 Cumulative effect of change in accounting principle (10,562) --------------- --------------- ------------- ------------- Net income (loss) $ (22,510) $ (52,052) $ 28,345 $ 34,197 =============== =============== ============= ============= Pro forma shares outstanding(e) 28,901,735 Pro forma net loss per share $ (0.78) Balance Sheet Data (at end of period): Cash $ 36,446 $ 38,719 $ 39,410 Working capital 200,740 214,358 139,771 Total assets 1,853,385 1,882,663 1,861,162 Long-term debt 1,195,566 1,153,054 1,025,787 Total debt 1,207,714 1,165,626 1,123,307 Stockholder's equity 295,801 386,812 395,509 Ratio of earnings to fixed charges -- (f) -- (f) 1.77(f) 2.20(f) Supplemental Data: Net cash provided by operating activities $ 85,828 $ 85,828 $ 37,963 $ 99,614 Net cash used in investing activities (93,087) (93,087) (46,186) (473,687) Net cash provided by (used in) financing activities 4,986 4,986 7,532 392,956 Bad debt expense $ 152,590(c) $ 152,590(c) $ 59,480 $ 47,240 Bad debt expense as a % of net revenues 9.4% 9.4% 3.6% 3.3% Rent expense $ 46,900 $ 46,900 $ 49,400 $ 46,900 Capital expenditures 74,045 74,045 93,354 65,317 Depreciation expense $ 56,857 $ 56,857 $ 46,929 $ 38,058 EBITDA(g) $ 125,961(c) $ 125,961(c) $ 215,567 $ 179,065 EBITDA as a % of net revenues 7.7% 7.7% 13.2% 12.6% Adjusted EBITDA(i) $ 176,521(c) $ 176,521(c) $ 295,381 $ 278,665 Adjusted EBITDA as a % of net revenues 10.8% 10.8% 18.1% 19.7% Supplemental Ratio Data: Adjusted EBITDA/interest expense, net 3.5x (Adjusted EBITDA-capital expenditures)/ interest expense, net 2.0x </TABLE> (Footnotes on page 14) (Footnotes for preceding pages) (a) Adjusted to reflect the pro forma effects of the Distributions and the Accounting Policy Change. See "Selected Historical Financial Data" and "Pro Forma Financial Information."
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. Unless the context otherwise requires, references to the Company in this Prospectus include the Company and its direct and indirect subsidiaries including SunRiver Data Systems, Inc., the Company's principal operating subsidiary. The Company The Company is engaged, through operating subsidiaries, in designing and manufacturing graphics and text computer terminals for business use and in developing Internet software for use by businesses. The Company's general strategy is to be a provider of devices which provide access to corporate network computing environments and software for secure, private communications and electronic commerce over the Internet. The Company has two operating subsidiaries, SunRiver Data Systems, Inc. ("SunRiver Data") and TradeWave Corporation ("TradeWave"). SunRiver Data designs, assembles, sells and supports general purpose desktop computer display terminals, which generally do not have graphics capabilities but some of which have limited graphics capabilities ("General Display Terminals"); high resolution high performance desktop network graphics display terminals ("Network Graphics Displays") (this product was formerly referred to by the Company as "X-Terminals") based on the X-Terminal protocol; and desktop high performance alternatives to personal computer and other terminal products in multi-user, personal computer and minicomputer-based environments ("MultiConsole Terminals"). In addition, a partnership (the "GAI Partnership") formed by SunRiver Data and General Automation, Inc. ("GAI") and managed by GAI designs, integrates, sells and supports multi-user computer systems that can manage large volumes of data running SunRiver Data's and GAI's versions of a data-based system licensed from Pick Systems. These products and services are offered solely to businesses. In October 1995, SunRiver Data acquired assets relating to the General Display Terminal products of Digital Equipment Corporation ("Digital") sold under the "VT(R)" and "Dorio(R)" brands (excluding the VT 400 Series) and, as a result, based on published 1994 industry data, the Company believes that SunRiver Data is the second largest manufacturer of General Display Terminals in the world with an installed user base of more than 5,000,000 units. TradeWave develops and sells Internet software products and value-added network services which enable desktop computer users to conduct commercial transactions by way of the Internet. The Company entered into the General Display Terminal and Network Graphics Displays businesses in December, 1994 when the Company purchased Applied Digital Data Systems, Inc. ("ADDS"), which subsequently changed its name to SunRiver Data Systems, Inc., from NCR Corporation (formerly AT&T Global Information Solutions Company) ("NCR" or "AT&T-GIS"). For more than 25 years, ADDS has been a supplier of General Display Terminals and Network Graphics Displays worldwide under either the customer's or ADDS(R) trademark. Simultaneously with the Company's acquisition of ADDS, the Company acquired all of the assets and business of SunRiver Group, Inc. ("SunRiver Group"). Prior to this acquisition, SunRiver Group had been engaged for more than nine years in the development and manufacture of software and hardware for MultiConsole Terminals. SunRiver Group was a pioneer in the development of high-speed multi-console terminals for open system, multi-user platforms. As a result of the Company's acquisition of ADDS and the assets of SunRiver Group, SunRiver Group owns approximately 60% of the Company's outstanding Common Stock (inclusive of 4,174,704 shares underlying warrants). SunRiver Data offers standard and custom models of its General Display Terminals primarily to retail, financial, telecommunications and wholesale distribution businesses requiring them for data entry and point of sale activities. Standard and custom model Network Graphics Displays are sold by SunRiver Data primarily to telecommunications and financial businesses requiring the ability to provide concurrent information to customers on a variety of topics, such as billing, credit history and other account information. MultiConsole Terminals are typically used by small to medium sized businesses, such as chain stores, requiring predominantly transaction-oriented applications. Sales of systems by the GAI Partnership are primarily to large distribution centers, retail establishments, manufacturers, local governments and data-bases for credit and collection, which require management of large volumes of data. TradeWave develops, markets, licenses and supports software and services that allow businesses to design, build and deploy secure intranet applications and Internet-based electronic commerce systems. Its TradeVPI suite of products and services, introduced in March 1996, provides all the tools necessary for a company to build a "virtual private Internet" for secure business-to-business communications over the public Internet. TradeWave's products have not yet gained widespread commercial acceptance. TradeWave commenced operations in April 1995, when it acquired technology, and the personnel who developed that technology, from the Microelectronics and Computer Technology Corporation ("MCC") and became an associate member of MCC. MCC is a research and development consortium whose members include AT&T, Motorola, Kodak and Digital. The Company was incorporated in Delaware in 1988. Prior to November, 1995, the Company was known as All-Quotes, Inc. The Company's executive offices are located at Echelon IV, Suite 200, 9430 Research Boulevard, Austin, Texas 78759-6543, and its telephone number is (512) 349-5800. Before making an investment in the Common Stock, prospective purchasers should carefully consider certain factors set forth under "Risk Factors." The Offering Common Stock Offered by the Company . . . . . . 2,500,000 shares Offered by Selling Stockholders. . 11,944,210 shares Common Stock Outstanding . . . . . . . . . 47,270,726 shares(1) Common Stock to be Outstanding After the Offering . . . . . . . . 50,545,337 shares(2)(3) Use of Proceeds . . . . . . . . . . . . . The Company will not receive any proceeds from the sale of Common Stock offered by the Selling Stockholders. All or a portion of the shares offered by the Company may either be issued in satisfaction of obligations of TradeWave to MCC and SunRiver Data to NCR or be sold, and the proceeds used, for such purposes. Any remaining shares may be sold by the Company, and the proceeds used, for additional working capital or for other corporate purposes. See "Reorganization-TradeWave Acquisition" and "Recent Developments -Restructuring of Obligations to NCR" and "Use of Proceeds." The Nasdaq SmallCap Market Symbol . . . SRVC - ---------------------------- (1) As of July 3, 1996. Excludes 12,633,679 shares issuable upon exercise of outstanding warrants and options at prices ranging from $1.35 to $8.25 per share (subject to adjustment), and warrants the Company expects to issue to SunRiver Group, with an exercise price of $3.875 per share, in connection with SunRiver Data's acquisition of assets from Digital. See "Reorganization-Financing for the Digital Acquisition," "Management-Executive Compensation" and "Security Ownership of Certain Beneficial Owners and Management." (2) Excludes 12,065,679 shares issuable upon exercise of outstanding warrants and options at prices ranging from $1.35 to $8.25 per share, and includes 568,000 shares offered hereby and issuable upon exercise of warrants at prices ranging from $1.35 to $6.60 per share (subject to adjustment), and the maximum of 206,611 shares issuable to Digital depending on the closing price of the Common Stock on the date of this Prospectus. See "Recent Developments - Purchase of Digital's Assets" and "Selling Stockholders."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000851397_etec_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000851397_etec_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and the consolidated financial statements and notes thereto, appearing elsewhere in this Prospectus. THE COMPANY Etec Systems, Inc. ("Etec" or the "Company") is the world leader in the production of mask pattern generation equipment for the semiconductor industry. Etec designs, develops, manufactures and markets equipment that produces high precision masks, which are used to print circuit patterns onto semiconductor wafers. Etec sells its MEBES electron beam systems and its CORE and ALTA laser beam systems at prices currently ranging from approximately $2.5 million to $7.5 million each and accessories and upgrades at prices currently ranging from approximately $1.5 million to $5.0 million each. The Company also derives significant revenues from service and support of its installed base of systems. The Company believes that over 230 commercial electron beam and laser beam mask pattern generation systems are currently installed outside the former Eastern Bloc, of which over 155 have been produced by Etec. The Company believes that advanced masks and mask pattern generation tools are becoming strategically important to the advancement of semiconductor technology. During the second half of the 1980s and the beginning of the 1990s, the maskmaking equipment industry experienced an extended period of slow growth, primarily as a result of several advances in semiconductor production methods that sharply reduced the number of mask units required and the precision requirements for masks. The effects of these advances in production methods have largely run their course, which the Company believes will result in mask demand more closely correlating with semiconductor demand. In addition, as semiconductor devices have become more complex, the semiconductor manufacturing process has become very sensitive to mask errors, requiring more complex masks and, as a result, increasingly sophisticated mask pattern generation tools. The Company is the only maskmaking equipment manufacturer currently offering both electron beam and laser beam systems. The Company believes that the different performance and cost characteristics of electron beam and laser beam systems satisfy the broad range of technical requirements and cost sensitivities of its customers. The Company's systems are designed to provide a low cost of ownership through high performance, reliability and ease of maintenance. The Company's goal is to maintain its leadership position in pattern generation for the semiconductor market and leverage its expertise to pursue other opportunities in high performance imaging. To maintain technology leadership, the Company intends to continue to work closely with major customers and seek strategic alliances with other semiconductor industry participants to identify the leading-edge requirements for semiconductor maskmaking. In addition, Etec plans to develop or acquire lithography-related products that serve other markets having technology and market links with its business, such as direct imaging and maskmaking for large-area applications. In furtherance of this strategy, the Company acquired substantially all of the assets of Polyscan, Inc. ("Polyscan"), a developer of laser direct imaging systems for large-area pattern generation applications, in February 1996. The Company also intends to continue to emphasize the compatibility of its new systems with its installed systems and to provide superior technical service and support to its customers. The Company's customers include merchant maskmakers such as Dai Nippon Printing Co. Ltd., DuPont Photomasks, Inc., Photronics, Inc. and Toppan Printing Company, Ltd., and semiconductor manufacturers with captive mask shops, such as International Business Machines Corporation, Intel Corporation ("Intel"), Samsung Electronics Co., Ltd. and Sony Corporation. Concurrently with the completion of this offering, Intel will purchase $10.0 million of the Company's Common Stock and will receive warrants to purchase additional shares of Common Stock. The Company markets and distributes its products directly into North America, Japan, South Korea and Europe through its sales offices in California, Japan, South Korea and France. Customers in Southeast Asia, China and India are currently covered by sales representatives with assistance by the Company's sales and marketing staff in California. THE OFFERING <TABLE> <C> <S> Common Stock offered by the Company............... 500,000 shares Common Stock offered by the Selling Stockholders.. 4,100,000 shares Common Stock to be outstanding after the offering. 18,864,892 shares(1) Use of proceeds................................... For capital expenditures and for general corporate purposes including working capital. Nasdaq National Market symbol..................... ETEC </TABLE> - -------- (1) Includes 289,855 shares to be sold to Intel pursuant to a private placement concurrently with the consummation of this offering, based on an assumed offering price of $34.50. See "Investment by Intel." Excludes shares of Common Stock issuable upon exercise of stock options of 1,464,233 as of April 30, 1996 and 376,997 shares issuable upon exercise of warrants. Also excludes warrants to purchase 15% of the number of shares of Common Stock purchased by Intel, to be issued to Intel concurrently with such purchase. See "Capitalization" and Note 5 and Note 9 of Notes to Consolidated Financial Statements. SUMMARY CONSOLIDATED FINANCIAL DATA (in thousands, except per share amounts) <TABLE> <CAPTION> PRO NINE FORMA MONTHS NINE ENDED MONTHS YEAR ENDED JULY 31, APRIL 30, ENDED ------------------------- ------------------ APRIL 30, 1993 1994 1995(1) 1995 1996(2)(3) 1996(4) -------- ------- ------- ------- ---------- --------- <S> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue................. $ 58,582 $68,710 $82,916 $61,045 $98,035 $98,035 Gross profit............ 16,644 25,481 35,297 25,623 43,635 43,635 Write-off of in-process technology acquired(5). -- -- -- -- 6,269 -- Income (loss) from operations............. (4,439) 9,576 11,403 9,477 10,402 15,540 Income (loss) before income tax provision (benefit), minority interest and extraordinary items.... (9,530) 4,390 7,340 6,011 11,083 16,429 Net income (loss)....... (11,409) 1,612 9,936 4,018 21,846 27,192 Net income (loss) per share.................. $ (0.94) $ 0.12 $ 0.68 $ 0.28 $ 1.23 $ 1.51 Weighted average common shares(6).............. 12,168 14,008 14,594 14,594 17,750 17,996 </TABLE> <TABLE> <CAPTION> APRIL 30, 1996 ------------------------------------ PRO FORMA AS ACTUAL PRO FORMA(7) ADJUSTED(7)(8) -------- ------------ -------------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash and investments....................... $ 40,996 $ 50,996 $ 66,983 Working capital............................ 74,052 84,052 100,039 Total assets............................... 157,482 168,082 184,069 Long-term debt, less current portion....... 7,625 7,625 7,625 Total stockholders' equity................. 73,377 83,977 99,964 </TABLE> - -------- (1) Net income (loss) reflects the inclusion of an extraordinary gain of $5.4 million recorded as a result of the early extinguishment of $19.7 million of subordinated notes payable and accrued interest. See Note 3 of Notes to Consolidated Financial Statements. (2) Net income (loss) reflects the inclusion of an extraordinary loss of $300,000 recorded as a result of the early extinguishment of $5.0 million of secured notes payable. (3) Net income (loss) reflects a $15.4 million tax benefit realized as a result of reversing a portion of the Company's valuation allowance associated with certain deferred tax assets. See Note 6 of Notes to Consolidated Financial Statements. (4) Pro forma statement of operations data reflects the consolidated results of the Company after giving effect to the acquisition of substantially all of the assets and certain specified liabilities of Polyscan assuming that the acquisition took place on August 1, 1995. (5) In 1996, the Company wrote off $6.3 million of in-process technology in conjunction with its acquisition of substantially all of the assets and certain specified liabilities of Polyscan. See Note 13 of Notes to Consolidated Financial Statements. (6) Computed on the basis described in Note 1 of Notes to Consolidated Financial Statements. (7) Pro forma balance sheet data reflects the sale of $10.0 million of Common Stock to Intel at an assumed price of $34.50 per share and the issuance of warrants to Intel. See "Investment by Intel." (8) Reflects the event specified in footnote (7) above, and as adjusted to reflect the sale by the Company of the 500,000 shares of Common Stock being offered hereby after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company, and the application of the estimated net proceeds therefrom as set forth under "Use of Proceeds." See "Capitalization."
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and consolidated financial statements and related notes appearing elsewhere in this Prospectus. Prospective investors should carefully consider the matters set forth in "Risk Factors." Except as set forth in the consolidated financial statements and notes thereto or otherwise as specified herein, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. Effective upon consummation of the Offering, the Company will change its name from CB Commercial Holdings, Inc. to CB Commercial Real Estate Services Group, Inc. Unless the context requires otherwise, the term the "Company" or "CB Commercial" means CB Commercial Real Estate Services Group, Inc. and each of its consolidated subsidiaries. COMPANY OVERVIEW Founded in 1906, the Company believes that it is the largest vertically- integrated commercial real estate services company in the United States with aggregate 1995 revenue of $468.5 million and 231 business unit offices in 107 locations. In addition, the Company has established exclusive alliances with international commercial real estate service firms which have offices in an additional 109 locations in 30 countries. These relationships are reciprocal referral arrangements whereby the Company's clients who require services in a geographic region serviced by its alliance partners must be referred by the Company to its alliance partner operating in that region. Conversely, the Company's alliance partners are obligated to refer their clients with commercial real estate needs in the United States to the Company. These alliances have not generated significant revenues to date. The Company provides a full range of services to commercial real estate tenants, owners, and investors including: (i) brokerage (facilitating sales and leases), investment properties (acquisitions and sales on behalf of investors), corporate services, property management, and real estate market research (collectively, "Property and User Services"), and (ii) mortgage banking (mortgage loan origination and servicing), investment management and advisory services, and valuation and appraisal services (collectively, "Investor Services"). The Company believes that, on the basis of revenues, its brokerage and independent commercial mortgage origination businesses are the largest such businesses in the United States, and that the Company is among the top ten providers of commercial property management, investment management and advisory services and commercial mortgage loan servicing in the United States. The Company's diverse client base includes local, national and multinational corporations, financial institutions, pension funds and other tax exempt entities, local, state and national governmental entities, and individuals. The Company believes that it enjoys a variety of competitive advantages in the commercial real estate services industry, including the Company's-- . Significant deal flow and strong market presence in its core brokerage and property management businesses, both of which are employed for the benefit of all of the Company's business disciplines; . 90-year tradition and history of providing high-quality services and client coverage and internationally recognized "brand" identity which the Company believes is widely respected in the real estate services industry; . Experienced and trained professionals in all business disciplines, including almost 2,000 sales professionals in Property and User Services who have an average tenure of more than eight years with the Company; . Multi-discipline capabilities and extensive multi-market network; . State-of-the-art technology and professional education programs which enable the Company to deliver superior services; . Experienced management team, the members of which have an average tenure of more than 16 years with the Company and will own approximately 15.2% of the Company's Common Stock (including exercisable stock options and shares held through the Company's Deferred Compensation Plan) after the Offering; and . Employees who will own more than 40% of the Company's Common Stock after the Offering. As part of its growth strategy, the Company is continually assessing acquisition opportunities. Management believes that there are significant opportunities in the fragmented and consolidating real estate services industry to acquire additional companies to complement and expand the Company's existing operations. Since the beginning of 1995, the Company has completed three strategic acquisitions. In July 1996, the Company acquired L.J. Melody & Company and L.J. Melody & Company of California (collectively "L.J. Melody"), a nationally-known mortgage banking firm, for $15 million. The L.J. Melody acquisition provides the Company with leadership for its own mortgage banking business, access to loan sources not previously available to the Company and an enhanced ability to access the Company's deal flow in its investment properties and brokerage businesses as a source of mortgage originations. In June 1995, the Company acquired Westmark Realty Advisors L.L.C. ("Westmark"), an investment management and advisory business with approximately $3.0 billion of assets under management, for $37.5 million, plus a supplemental purchase price component of up to $18.0 million based upon Westmark's adjusted operating income. The Westmark acquisition has moved the Company into a business area which the Company believes has the potential for significant growth. In April 1995, the Company acquired Langdon Rieder Corporation ("Langdon Rieder"), a nationally-known tenant representation firm, for $1.5 million in cash and a deferred payment of $1.9 million payable over three years. The deferred payment is subject to forfeiture under certain circumstances. The Langdon Rieder acquisition strengthened the Company's ability to provide sophisticated tenant representation services to its corporate clients. See "Business--Acquisitions." INDUSTRY TRENDS Over the last ten years, the commercial real estate industry has experienced various structural changes and more recently has been experiencing a broad recovery from the real estate "depression" of the early 1990s. The Company believes that these factors and the resulting trends, which are summarized below, create an opportunity for the Company to leverage its experience, multi- discipline integrated services, multi-market presence and brand equity to its competitive advantage-- . CHANGING COMPOSITION AND NEEDS OF INVESTORS AND OWNERS. Investors in and owners of commercial real estate assets have become increasingly institutional (including pension funds, life insurance companies, banks and publicly-held REITs) with geographically diverse portfolios. With respect to institutions other than REITs, this change in the ownership characteristics and management requirements of institutional real estate investors and owners has fueled the demand for, and growth of, sophisticated multi- service, nationally-oriented real estate service providers. As REITs are internally managed and therefore tend to outsource only their brokerage services, their demand for the Company's other real estate services is expected to be less than that of other institutional investors. . CONTINUING OUTSOURCING TREND. The Company believes that the combination of corporate managements' heightened awareness that corporate real estate assets are a major component of corporate net worth and competitive pressures encouraging a greater focus on core businesses has caused corporations to downsize and, as a result, outsource their non-core activities to third-parties. As a consequence, the demand for multi- disciplined, multi-market professional real estate services firms that provide integrated services capable of supplementing a corporate real estate department has increased significantly. . ONGOING INDUSTRY CONSOLIDATION. The Company also believes that the combination of institutional and corporate real estate service needs and demands, together with the real estate "depression" of the early 1990s, has made it necessary for real estate services firms to (i) provide comprehensive, high-quality services, (ii) make significant investments in corporate infrastructure, including information technology and professional education, and (iii) have access to sufficient capital to support these service and investment needs. These factors have fueled the consolidating industry environment, which the Company believes will motivate local and regional real estate service providers to sell to, or form alliances with, major national and international companies. . EXPANDING CMBS MARKET. Wall Street firms and financial institutions have recently been providing a significant amount of third-party commercial mortgage financing and have been accessing the public debt markets by issuing commercial mortgage-backed securities ("CMBS") in order to securitize their portfolios and avoid holding mortgage loans for the long-term, resulting in increasing liquidity in the real estate markets. The Company's access to real estate transaction deal flow and national mortgage origination capabilities enable it to benefit from this expansion of the CMBS market which creates demand for mortgage originations. . RECOVERING MARKETS. Coincident with the long term structural shifts in the commercial real estate industry, commercial real estate markets in the United States have been recovering over the last several years, experiencing increased leasing and sale activity in many product types and geographic market areas. As a result, brokerage and property management fees, which are based upon a percentage of transaction value and total rent collections, respectively, have begun to increase. THE COMPANY'S BUSINESSES PROPERTY AND USER SERVICES Property and User Services include a broad range of services, delivered primarily to users and owners of commercial real estate, including brokerage (facilitating sales and leases), investment properties (acquisitions and sales on behalf of investors), corporate services, property management, and real estate market research. These services are provided with respect to a wide range of commercial real estate properties, including, but not limited to, office space, industrial buildings, retail properties, multifamily residential properties and unimproved land. Brokerage. Brokerage, the Company's original and core business, advises buyers, sellers, landlords and tenants in connection with the leasing and sale of office space, industrial buildings, retail properties, multifamily residential properties and unimproved land. Brokerage employs approximately 1,640 sales professionals nationally generating significant deal flow and real-time market data. This market presence provides the Company with a competitive advantage in developing business opportunities and client contacts and in developing CB Commercial's brand identity for the Company's other business disciplines. The Company believes its commercial brokerage business is the market-leader in the United States based upon both 1995 revenue, which totaled approximately $294.3 million, and the number of completed transactions, which totaled approximately 19,800. Investment Properties. The Company provides sophisticated strategic planning for, and execution of, acquisitions and sales of income-producing commercial properties for its clients through its investment properties sales professionals. In 1995, approximately 1,000 sales transactions were completed with some of the country's largest and most sophisticated investors, including, as examples, Prudential Insurance Co., RREEF and Security Capital. With aggregate estimated sales consideration of more than $4.0 billion in 1995, the Company believes that it is one of the largest providers of investment properties sales services in the United States. Corporate Services. Corporate services, which generally operates through the CBC/Madison Advisory Group, addresses the multiple-market domestic and international real estate needs of corporate America by providing comprehensive, quality services on a cost efficient basis through a single point-of-contact at the Company. Corporate services coordinates the utilization of all the Company's various disciplines to deliver an integrated service to some of the largest and most sophisticated companies in the United States, including, as examples, Eastman Kodak, Ford Motor Company, and Allstate Insurance Company. CBC/Madison Advisory Group directly addresses client demand driven by corporate downsizing, outsourcing, and alliance partnering, expanding a client's real estate department and performing most of the functions involved in corporate real estate administration. CBC/Madison Advisory Group has been one of the Company's fastest growing services, with revenue having increased at a compound annual rate of 50% from 1993 through 1995. Property Management. Property management provides operations, maintenance, marketing and leasing services for income-producing properties owned primarily by institutional investors. The Company provides asset management-oriented services to its clients to implement their specific goals and objectives, focusing on the enhancement of property values through maximization of cash flow. The Company was recently ranked the eighth largest property management firm in the United States by National Real Estate Investor's 1996 Annual Survey based on square footage under management during 1995. As of September 30, 1996, the Company managed 792 properties aggregating approximately 104 million square feet. Real Estate Market Research. The Company provides its research and forecasting services to its other businesses as well as outside corporate and institutional investor clients through CB Commercial/Torto Wheaton Research, the widely-recognized research division of the Company based in Boston, Massachusetts. The Company's research reports and forecasts are utilized by all of the Company's businesses to assist clients with analysis and interpretation of market data in order to provide them with a competitive edge in the rapidly changing real estate marketplace. The Company's publications and products provide real estate data for more than 50 of the largest Metropolitan Statistical Areas ("MSAs") in the United States and are sold on a subscription basis to many of the largest portfolio managers, insurance companies and pension funds in the United States. INVESTOR SERVICES Investor Services includes mortgage banking (mortgage loan origination and servicing), investment management and advisory services, and valuation and appraisal services relating primarily to office space, industrial buildings, retail properties, multifamily residential properties and unimproved land. Mortgage Banking. The Company provides its mortgage origination and servicing through L.J. Melody, a wholly-owned subsidiary of the Company acquired in July 1996 and based in Houston, Texas. On a combined basis including originations by L.J. Melody prior to its acquisition, the Company originated approximately $2.3 billion, $2.0 billion and $1.1 billion of mortgage loans in 1995, 1994 and 1993, respectively. As part of these origination activities, the Company originates mortgages through special conduit arrangements with affiliates of Merrill Lynch, Citicorp, and Lehman Brothers which permit it to service the mortgage loans that it originates and is currently negotiating a similar arrangement with an affiliate of NationsBank. In addition, the Company is a major mortgage originator for insurance companies having originated, on a combined basis, mortgage loans in the names of the insurance companies valued at approximately $1.6 billion in 1995, of which it serviced $891.4 million. As of December 31, 1995, 1994 and 1993, the Company, on a combined basis, serviced mortgage loan portfolios of approximately $7.3 billion, $7.1 billion and $6.3 billion, respectively. Based upon available statistics, the Company believes that, on a combined basis, it is the largest independent commercial mortgage originator in the United States (originating mortgage loans for others, as opposed to originating mortgage loans for its own account). As of December 31, 1995, the Company, on a combined basis, was the eighth largest commercial mortgage loan servicer in the United States. The Company believes it will have a significant competitive advantage in the commercial mortgage loan origination business due to its anticipated integration with the deal flow generated through the Company's brokerage and investment properties sales activities. This integration will not only provide advantages to mortgage banking, but will also facilitate sales transactions enhancing the Company's capability to execute clients' sales assignments. Investment Management and Advisory. The Company provides its investment management and advisory services primarily to large institutions and pension funds through Westmark which employs over 100 professionals and operates nationally from its headquarters in Los Angeles, California. Westmark operates as a separate and independent subsidiary, providing advisory services and managing approximately $3.7 billion in tax-exempt capital invested in more than 220 office, industrial and retail properties located in more than 40 major U.S. markets with an aggregate of more than 40 million square feet. The Company's investment management and advisory activities include creating investment products, raising investor capital, identifying and acquiring specific properties and managing the operations and dispositions of the assets. As of September 30, 1996, the Company represented more than 180 investors in 13 commingled funds and a variety of nondiscretionarily managed separate accounts. Valuation and Appraisal Services. Valuation and appraisal services delivers sophisticated commercial real estate valuations through a variety of products including market value appraisals, portfolio valuations, discounted cash flow analyses, litigation support, feasibility land use studies and fairness opinions. The Company's appraisal staff has more than 80 professionals with approximately 50% of its professionals holding the Member Appraisal Institute ("MAI") professional designation. Valuation and appraisal services operates nationally through 21 regional offices, and its clients are generally portfolio owners, both corporate and institutional. The Company believes it is among the leading commercial real estate appraisal firms in the United States. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Compa- 4,347,000 shares(1) ny................................ Common Stock to be outstanding af- 13,266,171 shares(1)(2) ter the Offering.................. Use of proceeds.................... The net proceeds from the Offering will be used to repay a portion of the Company's senior secured indebtedness and to pay accrued and unpaid interest on the Company's senior subordinated indebtedness. Any remaining net proceeds will be used for general corporate purposes, including to fund acquisitions. See "Use of Proceeds." Listing............................ The Common Stock has been approved for listing on the Nasdaq National Market under the symbol "CBCG." </TABLE> - -------- (1) Does not include up to 652,050 shares subject to an over-allotment option granted to the Underwriters by the Company. See "Underwriting." (2) Excludes (i) 1,046,890 shares issuable upon exercise of stock options under the Company's stock option plans as of September 30, 1996, (ii) shares of Class C-R and Class J common stock to be repurchased by the Company for an aggregate of $8,000 in connection with the Offering and (iii) 4,000,000 shares of Preferred Stock convertible into a lesser number of shares of Common Stock at the option of the holder after the Offering, which number will not exceed 3,120,000 (assuming there are no dilutive issuances requiring adjustment under the Certificates of Designation for such Preferred Stock). Includes 444,444 shares of Common Stock issuable upon conversion of the 800,000 shares of the Company's Class C-1 common stock (assuming an initial public offering price per share of $22.50). See "Capitalization" and "Description of Capital Stock--Preferred Stock" and "--The Recapitalization." SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA The following table sets forth summary financial and other data for the Company on a consolidated historical basis and a consolidated pro forma basis for the periods and dates indicated. The summary historical balance sheet data as of December 31, 1995 and 1994 and the statement of operations data for each of the three years in the period ended December 31, 1995 are derived from the financial statements of the Company that have been audited by Arthur Andersen LLP, independent public accountants, included herein. The summary historical balance sheet data as of December 31, 1993, 1992 and 1991 and the statement of operations data for the years ended December 31, 1992 and 1991 are derived from audited financial statements not included herein. The summary historical financial data for each of the nine month periods ended September 30, 1996 and 1995 are derived from unaudited financial statements prepared on the same basis as the audited financial statements and containing, in the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position at such dates and the operating results and cash flows for such periods. Period to period comparability in 1995 and 1996 is affected by the Westmark acquisition completed in June 1995 and the L.J. Melody acquisition completed in July 1996. A significant portion of the Company's revenue is transactional in nature and seasonal. Historically, this seasonality has caused the Company's revenue, operating income and net income to be lower in the first two calendar quarters and higher in the third and fourth calendar quarters of each year. The results of operations for the nine months ended September 30, 1996 are not necessarily indicative of results to be expected for the entire year ending December 31, 1996 or for any future period. The summary unaudited pro forma statement of operations data, balance sheet data and other data give effect to the acquisitions of Westmark, L.J. Melody as well as the Offering and Recapitalization as if such transactions had occurred as of January 1, 1995 with respect to operating and other data, and as if the Offering and the Recapitalization had occurred as of September 30, 1996 with respect to the pro forma balance sheet data. The pro forma financial data set forth below is not necessarily indicative of the results that would have been achieved had such transactions been consummated as of the dates indicated or that may be achieved in the future. The information set forth below should be read in conjunction with "Unaudited Pro Forma Financial Statements," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements for each of the Company, L.J. Melody and Westmark and related notes thereto which are included elsewhere in this Prospectus. <TABLE> <CAPTION> NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------------------ 1996 1996 1996 1995 ----------- ----------- ---------- ---------- PRO FORMA ------------------------ ACQUISITION ACQUISITION AND ONLY OFFERING ----------- ----------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue......... $ 394,280 $ 394,280 $ 390,863 $ 324,890 Costs and expenses: Commissions, fees and other incentives..... 198,240 198,240 195,465 167,569 Operating, administrative and other...... 160,741 160,741 159,196 134,839 Depreciation and amortization (1). 10,267 10,267 9,749 8,173 Non-recurring charges........ -- -- -- -- ---------- ---------- ---------- ---------- Operating income (loss)......... 25,032 25,032 26,453 14,309 Interest income. 1,180 1,180 1,035 1,228 Interest expense........ 18,099 13,672 17,883 16,944 ---------- ---------- ---------- ---------- Income (loss) before provision (benefit) for income tax..... 8,113 12,540 9,605 (1,407) Provision for income tax..... 4,323 6,094 4,610 238 Reduction of valuation allowances..... (40,400) (40,400) (40,400) -- ---------- ---------- ---------- ---------- Net provision (benefit) for income tax (2). (36,077) (34,306) (35,790) 238 ---------- ---------- ---------- ---------- Net income (loss)......... $ 44,190 $ 46,846 $ 45,395 $ (1,645) ========== ========== ========== ========== Net income (loss) per common and common equivalent share outstanding.... $ 3.19 $ 3.36 $ 3.28 $ (0.14) Number of shares used in computing per share amounts (3).... 13,858,176 13,049,618 13,858,176 11,908,995 OTHER DATA: EBITDA (4)...... $ 36,202 $ 22,482 Ratio of earnings to fixed charges (5).... 1.42 -- Deficiency of earnings to fixed charges (5)............ -- $ (1,407) Net cash provided by (used in) operating activities..... $ 24,170 $ 551 Net cash (used in) investing activities..... $ (9,517) $ (21,960) Net cash provided by (used in) financing activities..... $ (12,795) $ 3,481 Investments under management at period end (6). $3,730,226 $3,918,825 Loans originated (7)............ $1,715,467 $ 603,097 Loans serviced (7)............ $7,498,905 $3,671,532 Total consideration of properties sold ......... $6,393,389 $4,517,550 Number of sale transactions... 2,758 2,491 Number of lease transactions... 12,521 12,733 ---------- ---------- Total sale and lease transactions... 15,279 15,224 ========== ========== Square feet under management (8). 103,754 95,406 <CAPTION> YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------------ 1995 1995 1995 1994 1993 1992 1991 ------------ ------------ ---------- ---------- ---------- ---------- ---------- PRO FORMA ------------------------- ACQUISITIONS ACQUISITIONS AND ONLY OFFERING ------------ ------------ (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue......... $ 489,684 $ 489,684 $ 468,460 $ 428,988 $ 392,037 $ 360,223 $ 338,119 Costs and expenses: Commissions, fees and other incentives..... 245,564 245,564 239,018 225,085 206,070 187,582 175,142 Operating, administrative and other...... 200,341 200,341 187,968 170,234 160,073 152,402 159,791 Depreciation and amortization (1). 14,502 14,502 11,631 8,091 49,606 45,855 51,946 Non-recurring charges........ -- -- -- -- -- 4,500 12,030 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Operating income (loss)......... 29,277 29,277 29,843 25,578 (23,712) (30,116) (60,790) Interest income. 1,926 1,926 1,674 1,109 915 1,083 1,349 Interest expense........ 26,080 20,177 23,267 17,362 14,240 15,516 24,805 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) before provision (benefit) for income tax..... 5,123 11,026 8,250 9,325 (37,037) (44,549) (84,246) Provision for income tax..... 220 2,581 841 152 112 12 135 Reduction of valuation allowances..... -- -- -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net provision (benefit) for income tax (2). 220 2,581 841 152 112 12 135 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income (loss)......... $ 4,903 $ 8,445 $ 7,409 $ 9,173 $ (37,149) $ (44,561) $ (84,381) ========== ========== ========== ========== ========== ========== ========== Net income (loss) per common and common equivalent share outstanding.... $ 0.36 $ 0.35 $ 0.55 $ 0.69 $ (3.21) $ (3.88) $ (7.39) Number of shares used in computing per share amounts (3).... 13,591,420 12,782,862 13,591,420 13,355,997 11,555,523 11,496,256 11,398,967 OTHER DATA: EBITDA (4)...... $ 41,474 $ 33,669 $ 25,894 $ 15,739 $ (8,844) Ratio of earnings to fixed charges (5).... 1.28 1.40 -- -- -- Deficiency of earnings to fixed charges (5)............ -- -- $ (37,037) $ (44,549) $ (84,246) Net cash provided by (used in) operating activities..... $ 30,632 $ 31,418 $ 19,609 $ 10,911 $ (25,307) Net cash (used in) investing activities..... $ (24,888) $ (3,865) $ (5,629) $ (4,821) $ (3,715) Net cash provided by (used in) financing activities..... $ (11,469) $ (4,923) $ (14,662) $ (2,157) $ 16,012 Investments under management at period end (6). $3,901,727 $ 879,809 $ 760,554 $ 883,761 $ 776,010 Loans originated (7)............ $ 989,872 $ 874,159 $ 613,071 $ 458,792 $ 135,022 Loans serviced (7)............ $3,779,069 $3,578,962 $3,140,635 $3,787,941 $3,830,502 Total consideration of properties sold ......... $6,549,861 $6,521,451 $4,995,234 $4,478,472 $3,986,576 Number of sale transactions... 3,503 3,693 3,249 3,042 2,590 Number of lease transactions... 17,476 17,930 18,338 17,909 17,431 ---------- ---------- ---------- ---------- ---------- Total sale and lease transactions... 20,979 21,623 21,587 20,951 20,021 ========== ========== ========== ========== ========== Square feet under management (8). 105,356 92,311 76,065 70,707 71,156 </TABLE> <TABLE> <CAPTION> AS OF SEPTEMBER 30, AS OF DECEMBER 31, ------------------------------- ---------------------------------------------------- 1996 1996 1995 1995 1994 1993 1992 1991 --------- --------- --------- --------- --------- --------- --------- -------- PRO FORMA OFFERING --------- <S> <C> <C> <C> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equiva- lents.................. $ 26,502 $ 24,903 $ 10,842 $ 23,045 $ 28,770 $ 6,140 $ 6,822 $ 2,889 Total assets............ 248,835 232,575 180,038 190,954 150,100 128,914 173,274 212,249 Total long-term debt.... 143,113 231,986 252,468 250,142 233,571 239,853 239,473 240,401 Total liabilities....... 250,596 339,469 344,184 345,642 314,648 303,774 311,630 306,123 Total stockholders' eq- uity (deficit)......... (1,761) (106,894) (164,146) (154,688) (164,548) (174,860) (138,356) (93,874) </TABLE> (footnotes on following page) - ------- (1) 1993, 1992, and 1991 reflect the amortization of intangibles associated with the acquisition in 1989 of CB Commercial Real Estate Group, Inc. of $42.9 million, $40.7 million and $47.1 million, respectively. (2) Net provision (benefit) for income tax on a consolidated basis for the nine months ended September 30, 1996 was a benefit of ($35.8) million, a change of $36.0 million from a $0.2 million provision for the nine months ended September 30, 1995. During the quarter ended September 30, 1996, the Company projected, on a more likely than not basis, that a portion of its net operating loss carryforwards ("NOLs") would be realized in current and future periods and, accordingly, reduced existing deferred tax asset valuation allowances by $45.7 million, of which $5.3 million has been allocated to the purchase price of L.J. Melody, based on its estimated future potential to generate taxable income, and the remaining $40.4 million has been recorded as a tax benefit (a reduction in income taxes provision). With the recognition of the deferred tax asset, current and future provisions for income tax will be recorded at the full effective tax rate. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Net Operating Losses." (3) Includes the dilutive effect of 1,046,890 shares issuable upon exercise of stock options outstanding as of September 30, 1996 under the Company's stock option plans. Acquisitions and offering pro forma data excludes shares of Class C-R and Class J common stock to be repurchased by the Company in connection with the Offering and shares of Preferred Stock convertible at the option of the holder into Common Stock after the Offering. Pro forma data includes 444,444 shares of Common Stock issuable upon conversion of the 800,000 shares of the Company's Class C-1 common stock (assuming an initial public offering price per share of $22.50). See "Description of Capital Stock--Preferred Stock" and "--The Recapitalization." (4) EBITDA represents earnings before interest, income taxes, depreciation and amortization, thereby removing the effect of certain non-cash charges on income, consisting of depreciation and the amortization of intangible assets relating to acquisitions. Management believes that the presentation of EBITDA will enhance a reader's understanding of the Company's operating performance and ability to service debt as it provides a measure of cash generated that can be used by the Company to service its debt and for other required or discretionary purposes. Management has used EBITDA as one of the primary measures of operating performance in evaluating its recent acquisitions. Net cash available to the Company for discretionary purposes represents remaining cash, after debt service and other cash requirements, such as capital expenditures are deducted from EBITDA. EBITDA should not be considered as an alternative either (i) to operating income (determined in accordance with generally accepted accounting principles ("GAAP")) or (ii) operating cash flow (determined in accordance with GAAP). (5) The ratio of earnings to fixed charges represents earnings before income taxes and fixed charges divided by fixed charges. Fixed charges include interest expense, one-third of rent expense relating to operating leases, and, for purposes of the pro forma ratios, preferred stock dividends. For purposes of this calculation preferred stock dividends are computed to demonstrate earnings required on a pre-tax basis. Deficiency of earnings to fixed charges is presented for periods when the Company's earnings were not sufficient to cover its fixed charges requirement. Earnings included non- cash depreciation and amortization charges of $9.7 million, $8.2 million, $11.6 million, $8.1 million, $49.6 million, $45.9 million and $51.9 million for the nine month periods ended September 30, 1996 and 1995, and for the years ended December 31, 1995, 1994, 1993, 1992 and 1991, respectively. (6) Investments under management represent the market value of the assets managed as of the end of the period shown. (7) Mortgage loans originated represent the initial principal amount of loans originated during the period and loans serviced represents the outstanding principal balance of loans being serviced as of the end of the period shown. The increase in mortgage loans originated and serviced primarily reflects the acquisition of L.J. Melody on July 1, 1996. (8) Square feet under management represents the total square footage of properties for which the Company provided property management services as of the end of the period shown. THE RECAPITALIZATION Immediately prior to the closing of the Offering, (i) the Company's Certificate of Incorporation will be amended to, among other things, change the name of the Company from CB Commercial Holdings, Inc. to CB Commercial Real Estate Services Group, Inc., effect the conversion of the Class B-1 and Class B-2 common stock of the Company into the Common Stock on a 1-for-1 basis, effect the conversion of the Class C-1 common stock of the Company into a lesser number of shares of Common Stock based upon the initial public offering price per share and provide for the convertibility of the Company's Preferred Stock into Common Stock at the holder's option, and (ii) the Company will repurchase all of the outstanding shares of its Class C-R common stock and Class J common stock for $.01 per share, in each case upon the consummation of the Offering, as part of the proposed recapitalization of the Company's capital structure (the "Recapitalization"). The term Recapitalization as used herein refers to the above-described changes in the Company's capital structure and corporate governance, but does not include the Offering. After the Recapitalization, the holders of the 1,000,000 shares of Series A-1 Preferred Stock and the 2,000,000 shares of Series A-2 Preferred Stock will continue to have two votes and one vote per share, respectively, for such shares on all matters submitted to a vote of stockholders of the Company, and the 1,000,000 shares of Series A-3 Preferred Stock will continue to have no right to vote on matters unless otherwise entitled by statute. The Company is effecting the Recapitalization in order to simplify the Company's capital structure, whereas the Offering is being effected in order to enable the Company to pay down a portion of its outstanding secured debt and help to provide liquidity to the Company's stockholders. See "Description of Capital Stock--Preferred Stock" and "--The Recapitalization."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000854152_actv-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000854152_actv-inc_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the detailed information and financial statements with notes thereto appearing elsewhere in this Prospectus. THE COMPANY General ACTV, Inc. ("ACTV" or the "Company") has developed proprietary Programming Technologies (the "Programming Technology") that individualize television programming. ACTV's Programming Technology permits the delivery of individualized television, which, in the Company's view, significantly enhances the quality of most genres of television programming. ACTV's Programming Technology provides instant and seamless changes in the live or prerecorded video picture and/or audio and/or graphics in response to the various selections supplied by each viewer. A specially produced ACTV program (the "ACTV Program" or "ACTV Programming") is like a linear TV program, except that it appears to be individualized for each viewer. (Linear programs are standard television programs that can be viewed only as created and do not offer the viewer the option to make choices as to the content of the program or to respond to the contents of the program in an individualized way.) There is no limit to the number of viewers who can interact simultaneously with an ACTV Program. ACTV's individualized programming is designed to work with both single and multiple channels of 6MHz band-width and with different modes of transmission: cable, direct broadcast satellite ("DBS"), multi-microwave distribution systems ("MMDS"), broadcast systems, distance learning networks and closed circuit televisions systems. It is compatible with commonly available one-way analog systems as well as the newer digital systems that have recently begun to be deployed. ACTV's strategy is to generate revenues from the sale of ACTV Programming that it either owns, has licensed or that has been created by a third party under a license from ACTV, including fees paid by subscribers to premium cable networks in which the Company has an ownership interest. The Company's mission is to improve the quality of entertainment and education television programming. The Company also believes that the Programming Technology can enhance the quality of television advertising by enabling the advertiser to customize each commercial for various audience segments. It is the Company's objective to seek advertiser support for its individualized home entertainment networks. The chief markets presently targeted by the Company for the ACTV Programming Technology are in-home entertainment, education (with an emphasis on distance learning), site-based entertainment and internet applications. The Company seeks to exploit these markets, principally in the U.S., through licensing the Programming Technology, by creating joint venture relationships, and by direct sales. <TABLE> <S> <C> <C> 11. Information with Respect to Cover Page; Prospectus Summary; The Company; Registrant Dividend Policy; Certain Market Information; Capitalization; Selected Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Certain Transactions; Principal Stockholders and Financial Statements. 12. Disclosure of Commission's Not Applicable. Position on Indemnification for Securities Act Liabilities </TABLE> The Company has eight subsidiaries, which include a national entertainment company, a national education company, a three-dimensional company, and five regional television networks; ACTV Entertainment Inc., a New York corporation ("ACTV Entertainment") incorporated on March 9, 1988, ACTV Interactive, Inc., a Delaware corporation incorporated on July 8, 1992, 3D Virtual, Inc., a Delaware corporation incorporated on July 20, 1995, The Los Angeles Individualized Television Network, Inc., a Delaware corporation incorporated on March 7, 1995, The San Francisco Individualized Television Network, Inc., a Delaware corporation incorporated on December 22, 1995, The Chicago Individualized Television Network, Inc., a Delaware corporation incorporated on December 22, 1995, The New York Individualized Television Network, Inc., a Delaware corporation incorporated on December 22, 1995, and The Atlanta Individualized Television Network, Inc., a Delaware corporation incorporated on December 22, 1995. Unless otherwise indicated, all references in this Prospectus to the Company or ACTV include ACTV and its eight subsidiaries. ACTV was incorporated under the laws of the State of Delaware on July 24, 1989. The Company is the successor, by merger effective November 1, 1989, to ACTV, Inc., a California corporation, organized on July 11, 1983. The Company's executive offices are located at 1270 Avenue of the Americas, New York, New York, 10020, telephone number (212) 262-2570. THE OFFERING Securities Offered Company Shares ................... 2,500,000 shares of Common Stock. See "PLAN OF DISTRIBUTION - Company Shares." Security Holders' Shares .................. 3,850,000 shares of Common Stock. Up to 122,855 of such shares may be issued by the Company upon the exercise of options, warrants or pursuant to SARs that are currently outstanding and are not exercisable for a period of six months. Up to 3,727,145 of such shares may be sold by Selling Security Holders who have acquired or will acquire such shares from the Company (i) upon the exercise of currently exercisable options and warrants, and pursuant to SARs, (ii) upon issuance to consultants pursuant to existing agreements, and (iii) upon issuance in connection with certain financings. The Company will receive the net proceeds of the sale of the Company Shares. It will not receive any proceeds from sales of Security Holders' Shares, but will receive the proceeds of the exercise of any options or warrants exercised by the Selling Security Holders. See "SELLING SECURITY HOLDERS" and "PLAN OF DISTRIBUTION." The exercise prices of the shares of Common Stock issuable upon the exercise of options and warrants, and the number of shares issuable, may be subject to adjustment in the event of a merger, stock split, stock dividend and similar transactions. See "MANAGEMENT - Stock Options and Stock Appreciation Rights" and "DESCRIPTION OF CAPITAL STOCK." Common Stock Outstanding At the Date of this Prospectus(1)................... 11,414,211 Shares After the Offering(1)(2).......... 15,075,784 Shares Common Stock Symbols................ NASDAQ: IATV BSE: IAT Use of Proceeds..................... The net proceeds of the sale of the Company Shares and any proceeds from the exercise of options or warrants underlying Security Holders' Shares being registered hereunder will be applied to working capital, which may include research and development. A portion of the proceeds may be utilized to repurchase shares of Common Stock. The Company will not receive any proceeds from the sales of the Security Holders' Shares. See "USE OF PROCEEDS." Risk Factors........................ An investment in the Company's Common Stock involves a high degree of risk and should be made only after a careful consideration of the significant risk factors that may affect the Company. Such risks include special risks concerning the Company and its business, including among other risks, Operating Losses to Date, Possible Need for Additional Financing and Dilution. See "RISK FACTORS." - ------------ (1) Does not include (a) 80,000 shares of Common Stock issuable pursuant to options being offered pursuant to a separate Prospectus (the "Concurrent Prospectus"). See "CONCURRENT OFFERING." (2) Assumes the issuance of all the 2,500,000 Company Shares and the 1,161,573 unissued Security Holders' Shares being offered hereby, including those underlying options and warrants. See "SELLING SECURITY HOLDERS" and "PLAN OF DISTRIBUTION." SUMMARY FINANCIAL DATA (in dollars, except number of shares) <TABLE> <CAPTION> Nine Months Years Ended December 31, Ended September 30, -------------------------------------------------------------------- ------------------------ 1990 1991 1992 1993 1994 1994 1995 ---- ---- ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> <C> <C> Statement of Operations: Revenues $ 615,011 $ 1,018,074 532,596(1) $ 164,602(1) $ 938,416 $ 768,739 $ 1,075,925 Operating Expenses 4,462,771 4,435,322 2,798,847(1) 3,443,513(1) 5,734,132 4,415,721 6,816,816 Equity in Net Loss of ACTV Interactive (2) -- -- 187,781 506,303 143,500 143,500 -- Loss Before Extraordinary Item (3) 3,093,512 3,313,998 2,778,085 4,156,955 5,122,010 3,929,357 5,751,337 Net Loss (3) 3,093,512 3,313,998 2,778,085 4,156,955 4,465,240 3,407,554 5,657,220 Weighted Average Shares Outstanding 3,727,255 4,043,867 4,665,686 5,800,134 7,897,278 7,699,790 9,748,209 Loss Per Common Share Before Extraordinary Item (3) 0.83 0.82 0.59 0.72 0.65 0.51 0.59 Net Loss Per Common Share (3) 0.83 0.82 0.59 0.72 0.57 0.44 0.58 Balance Sheet Data: 12/31/90 12/31/91 12/31/92 12/31/93 12/31/94 9/30/94 9/30/95 -------- -------- -------- -------- -------- ------- ------- Working Capital 2,397,952 128,834 (104,486) 2,263,225 1,503,703 (704,003) 3,458,531 Total Assets 6,211,803 2,828,119 3,146,503 5,920,720 7,733,314 6,129,878 10,454,934 Long Term Obligations 649,796 669,796 1,792,794 2,220,794 2,325,061 2,443,866 222,219 Stockholders' Equity (4) 5,089,036 1,775,038 1,006,314 1,910,603 3,972,543 1,956,892 8,009,212 Total Capitalization 5,738,832 2,444,834 2,799,108 4,131,397 6,297,604 4,400,758 8,231,431 </TABLE> (1) For the period between July 15, 1992, and March 11, 1994, all education sales and expenses were reported separately by the Company's 49% affiliate, ACTV Interactive, and were not consolidated with the Company's statements of operations. For the remainder of 1994, operational results related to education were included with those of the Company, as a result of the Company's March 11, 1994 purchase of the Post Company's 51% interest in ACTV Interactive. (2) The results of ACTV Interactive are accounted for under the equity method of accounting for the years 1992 and 1993 and for the period January 1, 1994 to March 11, 1994. (3) Includes for the year ended 12/31/94 and nine months ended 9/30/94 extraordinary gains of $656,770, ($.08 per share) and $521,803 ($.07 per share), respectively, related to the extinguishment of debt and equipment lease obligations. Includes for the nine months ended 9/30/95 an extraordinary gain of $94,117 ($.01 per share) related to the extinguishment of debt obligations. (4) No cash or non-cash dividends have been paid or granted and the Company does not anticipate the declaration or payment of dividends in the foreseeable future.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0000854551_brake_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000854551_brake_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f2e741f659e0ad6ad6ce3101e20ac100bbc788f1
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000854551_brake_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS, IN ADDITION TO HISTORICAL INFORMATION, FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS. THE COMPANY Brake Headquarters U.S.A., Inc. (the "Company") is a specialized distributor in the automotive aftermarket of a complete line of brake system products including brake drums and rotors, brake master cylinders, wheel cylinders, brake pads, brake shoes and brake hoses for virtually all makes and models of domestic and foreign passenger cars and light trucks from model year 1976 to the present. The Company also sells a variety of other "undercar" parts including ride control products, steering/suspension parts, drive shafts, shock absorbers and clutches. The brake line products are sold primarily under the name "Brake Headquarters," as well as under the name "Sanyo Automotive" and other private labels. The Company was incorporated in the State of Delaware on July 13, 1988 as a blind pool which did not conduct business operations until July 1992 when it acquired, in a reverse acquisition (the "Reverse Merger"), all of the outstanding capital stock of Sanyo Automotive Parts, Ltd. ("Sanyo Automotive"). In connection with the Reverse Merger, the Company amended its Certificate of Incorporation to change its name to Sanyo Industries, Inc. On August 8, 1995, the Company changed its name to Brake Headquarters U.S.A., Inc.. The Company is a publicly-owned holding company that conducts substantially all of its current business operations through its wholly-owned subsidiary Sanyo Automotive, a New York corporation formed in 1976, which is currently doing business under the name Brake Headquarters. <TABLE> <S> <C> Common Stock Outstanding as of November 4, 1996 (1)... 3,868,730 Common Stock to be Outstanding Upon Full Exercise of Warrants and Conversion of Promissory Note (2)...... 4,980,030 Warrants Offered...................................... The Warrants are exercisable until August 13, 1999 at an exercise price of $3.80 per share, subject to adjustment and to redemption by the Company in intervals during the period following their registration hereby, as described under "Description of Securities -- Warrants." Use of Proceeds....................................... The Company will not receive any proceeds from the sale of shares of Common Stock offered hereby by the Selling Shareholders but will receive gross proceeds of $3,824,000 from the full exercise of all warrants offered by the Selling Stockholders. Risk Factors.......................................... Prospective investors should carefully consider the matters set forth under the captions "Risk Factors." An investment in the shares of Common Stock offered hereby involves a high degree of risk. Nasdaq Common Stock Symbol............................ BHQU </TABLE> (1) Excludes an aggregate of 349,000 shares of Common Stock reserved for future issuance upon exercise of options currently outstanding and 131,000 and 120,000 shares reserved for issuance upon options available for issuance under the Company's 1994 and 1995 Employee Stock Option Plans, respectively (the "Plans"), and 100,000 shares of Common Stock reserved for issuance under the Company's Employee Stock Bonus Plan. See "Shares Eligible for Future Sale." (2) Gives effect to the exercise of 900,000 Warrants offered hereby; the Placement Agent's Warrants to purchase up to 120,000 shares of Common Stock and the conversion of a promissory note for 91,300 shares of Common Stock, all of which shares of Common Stock which are issuable are included in this Prospectus. SUMMARY FINANCIAL DATA <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, 1993 1994 1995 1995 1996 <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales......................... $17,717,023 $25,094,473 $30,463,730 $15,617,040 $16,614,411 Income (loss) from operations..... 370,009 (1,041,037)(1) 566,874 1,192,111 557,899 Interest expense.................. (314,796) (520,602) (774,762) (305,429) (478,108) Net income (loss)................. 41,187 (1,968,909)(1) (179,072) 546,659 54,791 Net income (loss) per common and common equivalent share (2)..... $ .00 $ (.92) $ (.06) $ .18 $ .02 </TABLE> <TABLE> <CAPTION> AS OF DECEMBER 31, AS OF JUNE 30, 1996 1993 1994 1995 ACTUAL AS ADJUSTED(3) <S> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Working capital.................. $ 1,823,459 $ 3,706,239 $ 3,288,863 $ 8,050,180 $ 13,082,180(4) Total assets..................... 10,189,885 11,937,143 15,496,294 17,843,732 22,617,732 Long-term obligations............ 133,927 216,469 630,494 5,230,850 5,230,850 Total stockholders' equity....... 2,176,102 4,124,961 3,855,804 3,966,647 8,998,647(4) </TABLE> (1) After a non-cash compensatory charge of $2,314,000 resulting from the release of escrow shares, the exercisability of warrants and the conversion of preferred stock, upon the Company's attainment of the specified 1994 pre-tax income level under the Company's July 1992 Reverse Acquisition and certain cumulative levels for the three-year period ended December 31, 1994. See "Certain Relationships and Related Transactions" and Note 4 of Notes to the 1995 Consolidated Financial Statements. (2) Net income (loss) per share is computed on the basis described in Note 1 of Notes to Consolidated Financial Statements including, but not limited to, the adjustment for dividends on preferred stock. (3) As adjusted to reflect the Company's receipt of proceeds of $4,774,000 consisting of (i) $1,000,000 of net proceeds from the Private Placement in August 1996; (ii) $3,420,000 from the exercise of all Warrants; and (iii) $404,000 from full exercise of the Placement Agent's Warrants and after deducting $50,000 of offering expenses (4) Includes $258,000 from the conversion of a Selling Securityholder's promissory note.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000855197_data_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000855197_data_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..79cfffa03d24a8713cd8f692794507f22b44abb7
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this Prospectus. References to "Iron Mountain" and the "Company" include Iron Mountain Incorporated (including predecessor entities) and its consolidated subsidiaries, unless the context otherwise requires. THE COMPANY Iron Mountain is the largest records management company in the United States, as measured by revenues. The Company is a full-service provider of records management and related services, enabling customers to outsource records management functions. Pro forma for the Acquisitions (as defined herein), as of June 30, 1996, the Company managed approximately 29.6 million Cartons* in 103 records centers in 33 markets nationwide. The Company has a diversified base of over 19,000 customer accounts, which includes more than half of the Fortune 500 and numerous legal, banking, healthcare, accounting, insurance, entertainment and government organizations. The Company provides storage and related services for all major media, including paper (which is the dominant form of records retention and which has accounted for approximately 85% of the Company's revenues since 1992), computer disks and tapes, microfilm and microfiche, master audio and video tapes, film and optical disks, X-rays and blueprints. The Company's principal services include filing, retrieval and destruction of records, courier pick-up and delivery, database management and customized reporting. The Company also sells storage materials and provides consulting and other records-related services. The Company continues to capitalize on its leading position in the records management industry and the industry trends of increased records retention, outsourcing of records management and vendor consolidation. As a result, the Company has achieved significant increases in revenues and EBITDA (as defined herein). From 1991 to 1995, Iron Mountain's total revenues increased from $62.8 million to $104.4 million primarily from internal growth, representing a compound annual growth rate ("CAGR") of 13.5%. During the same period, storage revenues grew at a 12.9% CAGR while service and storage material sales revenues grew at a 14.6% CAGR. From 1991 to 1995, the Company's EBITDA grew from $15.0 million to $26.1 million, representing a 14.9% CAGR. Revenues and EBITDA for the six months ended June 30, 1996 increased 27.3% (10.2% from internal growth and 17.1% from acquisitions) and 24.8%, respectively, over the same period in 1995. For a discussion of the significance of EBITDA and other measures of the Company's performance determined in accordance with generally accepted accounting principles ("GAAP") and the Company's sources and applications of cash flow, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview" and "--Liquidity and Capital Resources." Industry Overview According to industry sources, organizations in the United States generate an estimated four trillion documents each year, many of which must be retained and remain available for reference for many years. These records may be generally divided into two categories: active and inactive. Inactive records, which are the principal focus of the records management industry, consist of records that are not needed for immediate access but which must be retained for legal or regulatory reasons or for occasional reference to support ongoing business operations. Based on industry studies, the Company believes that inactive records make up approximately 80% of all records. The Company believes that the volume of inactive records is increasing for a number of reasons, including: (i) the rapid growth of inexpensive document producing technologies such as facsimile, desktop printing and computer networking; (ii) increased regulatory requirements; (iii) concerns over possible future litigation and the resulting increases in volume and holding periods of documentation; (iv) the high cost of reviewing records and deciding whether to retain or destroy them; and (v) the failure of many entities to adopt or follow policies on records destruction. Despite the growth of new "paperless" technologies, such as the Internet and e-mail, management believes that stored information remains predominantly paper-based and that such technologies have promoted the creation of hard copies of such electronic information. - ------------- * The term "Carton" is defined as a measurement of volume equal to a single standard storage carton, approximately 1.2 cubic feet. The number of Cartons stored does not include storage volumes in the Company's vital records services and data protection services, which are described under "Business." The Company believes that it benefits from several industry fundamentals, including: (i) the historically non- cyclical nature of the records management industry; (ii) the continued trend towards corporate outsourcing of records management functions; (iii) the ability of larger records management companies to achieve economies of scale with respect to labor, real estate costs and the utilization of management information systems; and (iv) the ongoing consolidation of the records management industry. The Company believes that it is one of only four records management providers with a national operating presence, the balance being regional or, in most instances, single-city operators. According to the Association of Commercial Records Centers (the "ACRC"), a trade group of approximately 500 members, as of January 1994 (the latest date for which such information is available), approximately 2,600 firms offered records storage and management services in the United States. The Company believes that there is a trend toward consolidation in the records management industry and that such trend will continue to accelerate primarily because of: (i) the opportunities to achieve economies of scale; (ii) the industry's capital requirements for growth; (iii) customer demands for more sophisticated technology-based solutions; and (iv) the preference of certain large, national customers to outsource a significant portion of their records management functions to one vendor with a national presence, such as Iron Mountain. Financial Characteristics of Iron Mountain's Business Iron Mountain's records management business has the following financial characteristics: (bullet)Recurring Revenues. Iron Mountain derives a majority of its revenues from fixed periodic (usually monthly) fees charged to customers for storage of records. Storage revenues have grown for 30 consecutive quarters and have represented approximately 60% of the Company's total revenues in each of the last five years. Once a customer places a record in storage with the Company and until that record is destroyed or permanently removed (for which the Company typically receives a service fee), the Company receives recurring payments of fixed periodic fees without incurring additional labor or marketing expenses or significant capital costs. The stable and growing storage base also provides the foundation for increases in revenues and EBITDA from service activities and sales of storage materials. (bullet)Historically Non-Cyclical Business. Iron Mountain has not experienced a reduction of its business as a result of past general economic downturns, although there can be no assurance that this would be the case in the future. Management believes that the outsourcing of records management may accelerate during economic downturns as companies focus on reducing costs through outsourcing non-core operating functions. In addition, management believes that companies that have outsourced records management are less likely during economic downturns to incur the move-out costs and other expenses associated with switching vendors or moving records management in-house. (bullet)Inherent Growth from Existing Customers. The Company's customers have on average generated additional Cartons at a faster rate than stored Cartons have been destroyed or permanently removed. From 1992 to 1995, net Cartons from existing customers grew at an average annual rate of 6.7%. The Company believes the consistent growth of its storage revenues is the result of a number of additional factors, including: (i) the trend toward increased records retention; (ii) customer satisfaction with the Company's services; and (iii) the costs and inconvenience of moving storage operations in-house or to another provider of records management services. (bullet)Diversified and Stable Customer Base. The Company has over 19,000 customer accounts in a variety of industries. The Company currently provides services to more than half of the Fortune 500 and numerous legal, banking, healthcare, accounting, insurance, entertainment and government organizations. Only one of the Company's customers accounted for more than 3% of revenues in 1993, 1994 or 1995. From 1992 to 1995, average annual permanent removals of Cartons represented only approximately 4% of total Cartons stored. (bullet)Capital Expenditures Related Primarily to Growth. The Company's business requires limited annual maintenance capital expenditures. Maintenance capital expenditures were $1.8 million, $1.2 million and $0.9 million in 1993, 1994 and 1995, respectively. From 1992 to 1995, over 90% of the Company's aggregate capital expenditures were growth-related investments, primarily in racking systems, new buildings and leasehold improvements, equipment for new facilities, management information systems and facilities restructuring. These growth-related capital expenditures are primarily discretionary and create additional capacity for increases in revenues and EBITDA. Business Strategy Iron Mountain's business strategy is to increase revenues and EBITDA while maintaining a low-cost operating structure and providing premium service. The Company intends to generate growth by increasing its storage and service revenues from existing customers, adding new customers and making acquisitions. The Company's strategy is based on the following elements: (bullet)Provide Superior Customer Service. The Company believes it has a reputation for providing reliable, quality service based on its more than 45 years of operations, its commitment to providing premium customer service and the continuity and depth of its management team. The Company has successfully implemented a decentralized management structure that enables the Company to respond quickly and flexibly to local customer needs. Iron Mountain's proprietary Safekeeper(R) system enables it to quickly provide customized records management solutions to its customers, enhancing the quality of its services. In addition, Iron Mountain's national operating presence allows it to better service large organizations that require records management functions at multiple, geographically diverse facilities. (bullet)Capitalize on Operating Efficiencies. Iron Mountain pursues a low-cost operating strategy based primarily on achieving economies of scale in the areas of storage, labor and transportation, general and administrative functions and management information systems. Because occupancy costs are a major component of the Company's cost of sales, its real estate management staff aggressively seeks to minimize per Carton storage costs by designing racking systems and operating space to maximize facility storage efficiency, negotiating favorable facility leases, contracting for facilities to be built to its custom specifications, and leasing larger facilities in order to reduce operating costs per Carton. The Company seeks to increase labor efficiency by offering incentive compensation to all full-time employees based upon achieving specific operating targets. Certain operating costs, such as the maintenance of local delivery fleets, general and administrative costs and management information systems, offer economies of scale, providing the Company with operating leverage and the ability to increase its efficiency through further growth. (bullet)Pursue Acquisition Opportunities. The Company believes that it is well positioned to participate in the further consolidation of the records management industry. Iron Mountain's management team has successfully completed 18 acquisitions since the Company embarked on a proactive acquisition strategy in mid-1994, and one additional acquisition is currently pending. The Company intends to continue to make fold-in acquisitions to augment its operations in existing markets and to make strategic acquisitions in new geographic markets, with an emphasis on the 50 largest markets in the United States and potentially in certain markets outside the United States. Following an acquisition in a new market, the Company seeks to increase its business with the acquired customer base and to supplement that growth both with new customers and through appropriate fold-in acquisitions. In addition, the Company has successfully reduced the cost structure of its acquired operations by implementing its efficient operating strategies and leveraging its centralized administrative resources and management information systems. (bullet)Leverage Proprietary Safekeeper System. The Company pioneered the application of advanced information technology to the records management industry. Iron Mountain's proprietary Safekeeper system provides advanced inventory control and information access, enabling the Company to provide faster, higher quality and more flexible solutions to its customers and to lower the costs of its operations. Safekeeper has been designed to easily and effectively integrate newly acquired records management companies and offer improved levels of customer service and records management capabilities to customers acquired through acquisitions. Iron Mountain's Safekeeper system exploits bar-code technology to provide a comprehensive, standardized approach to tracking, accessing and retrieving records. Safekeeper offers state-of-the-art records management capabilities and ease of access to customers while featuring security functions to protect customer information from unauthorized access. Since 1992, the Company has invested $12.5 million to develop and refine its management information systems, including Safekeeper. THE OFFERING <TABLE> <CAPTION> <S> <C> Securities Offered $150,000,000 principal amount of % Senior Subordinated Notes due 2006 (the "Notes"). Maturity Date , 2006 Interest Payment Dates and of each year, commencing , 1997. Guarantees The Notes will be fully and unconditionally guaranteed on an unsecured senior subordinated and joint and several basis (the "Subsidiary Guarantees") by substantially all of the Company's present and future Restricted Subsidiaries (collectively, the "Guarantors"). Each of the Guarantors has also guaranteed unconditionally the indebtedness outstanding under the Company's existing bank credit facility (the "Credit Agreement") and will guarantee unconditionally the indebtedness outstanding under the new bank credit facility the Company intends to enter into with its lenders (the "New Credit Facility"). See "Description of the Notes--Subsidiary Guarantees." Subordination The Notes will be general unsecured senior subordinated obligations of the Company ranking junior to all existing and future Senior Debt of the Company, including any indebtedness that may be incurred under the Credit Agreement or the New Credit Facility. The Subsidiary Guarantees will rank junior to all existing and future Senior Debt of the Guarantors. As of June 30, 1996, on a pro forma basis after giving effect to the Transactions, the aggregate outstanding principal amount of Senior Debt of the Company and the Guarantors would have been $24.5 million. See "Description of the Notes--Subordination." Optional Redemption Except as described below, the Notes are not redeemable by the Company prior to , 2001. Thereafter, the Notes are redeemable at the option of the Company, in whole or in part, at any time and from time to time, at the redemption prices set forth herein plus accrued and unpaid interest to, but excluding, the date of redemption. In addition, during the first 36 months after the date of issuance of the Notes, the Company, at its option, may redeem up to 35% of the initial principal amount of the Notes with the net proceeds of one or more Qualified Equity Offerings at a redemption price equal to %, plus accrued and unpaid interest to, but excluding, the date of redemption; provided that at least 65% of the initial principal amount of the Notes remains outstanding after each such redemption. See "Description of the Notes--Optional Redemption." Mandatory Redemption Except with respect to required repurchases upon the occurrence of a Change of Control or in the event of certain Asset Sales, the Company is not required to make sinking fund or redemption payments with respect to the Notes at any time prior to maturity. See "Description of the Notes-- Mandatory Redemption." Change of Control Upon the occurrence of a Change of Control, each Holder of Notes may require the Company to repurchase such Notes at 101% of the principal amount thereof, plus accrued and unpaid interest to, but excluding, the date of repurchase. See "Description of the Notes--Repurchase at the Option of Holders--Change of Control." Certain Covenants The Indenture governing the Notes (the "Indenture") will contain covenants restricting or limiting the ability of the Company and its Restricted Subsidiaries to, among other things: (i) incur additional indebtedness, including indebtedness ranking senior to the Notes and junior to any Senior Debt; (ii) pay dividends or make other restricted payments; (iii) make asset dispositions; (iv) permit liens; (v) enter into sale and leaseback transactions; (vi) enter into certain mergers; (vii) make certain investments; and (viii) enter into transactions with related persons. See "Description of the Notes--Certain Covenants." Use of Proceeds The net proceeds of the Offering will be used to repay outstanding bank debt and certain other indebtedness and to fund a portion of the purchase price of the Pending Acquisition. </TABLE> RISK FACTORS For a discussion of certain material factors that should be considered in connection with an investment in the Notes offered hereby, see "Risk Factors" on pages 10 to 14.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000860235_team_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000860235_team_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..424e5f439ad6f5503491b22e8791ace0c2051d8e
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, all information presented in this Prospectus assumes no exercise of the Underwriters' over-allotment option and has been adjusted to reflect the 184-to-1 split of the Common Shares prior to the Offering and certain other changes in the Company's capital stock to be effected immediately prior to the issuance and delivery of the Common Shares offered hereby. See "Description of Capital Stock." Unless the context otherwise requires, references in this Prospectus to "TEAM America" and the "Company" refer to TEAM America Corporation and its consolidated subsidiaries. This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from the results anticipated in these forward-looking statements as a result of certain of the factors set forth under "Risk Factors" and elsewhere in this Prospectus.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000861878_stericycle_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000861878_stericycle_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..a90af6daec703ef485337b3779da2f9050cef1f9
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS, CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (I) REFLECTS A 1-FOR-5.3089 REVERSE STOCK SPLIT EFFECTED IN AUGUST 1996 PURSUANT TO WHICH EACH OUTSTANDING SHARE OF THE COMPANY'S CLASS A AND CLASS B COMMON STOCK BECAME 0.1883629 SHARE OF COMMON STOCK, AND THE UNDERLYING CLASS OF STOCK AND NUMBER OF SHARES ISSUABLE UPON EXERCISE, AND THE EXERCISE PRICE PER SHARE, OF EACH OUTSTANDING OPTION AND WARRANT WERE ADJUSTED ACCORDINGLY, AND (II) ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED. SEE "DESCRIPTION OF CAPITAL STOCK," "CAPITALIZATION" AND "UNDERWRITING." UNLESS THE CONTEXT REQUIRES OTHERWISE, REFERENCES TO "STERICYCLE" AND THE "COMPANY" REFER TO STERICYCLE, INC. AND ITS SUBSIDIARIES. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION UNDER "RISK FACTORS." THE COMPANY Stericycle is a multi-regional integrated company employing proprietary technology to provide environmentally-responsible management of regulated medical waste for the health care industry. Because of the Company's health care orientation, proprietary technology and breadth of service, the Company believes that it is in a unique position to meet the fundamental need of the health care industry to manage regulated medical waste in a safe and cost-effective manner and to capitalize on the current consolidation trend in the regulated medical waste management industry. The Company believes that its exclusive focus on regulated medical waste and the experience of its management in the health care industry distinguish the Company from its chief competitors, most of whom participate in multiple businesses and most of whose management experience is primarily in the solid waste business. The Company believes that its regulated medical waste management system, including its proprietary ELECTRO-THERMAL-DEACTIVATION ("ETD") treatment process, is the only commercially-proven system that provides all of the following benefits: (i) it kills human pathogens in regulated medical waste without generating liquid effluents or regulated air emissions; (ii) it affords certain operating cost advantages over the principal competing technologies; (iii) it reduces the volume of regulated medical waste by up to 85%; (iv) it renders regulated medical waste unrecognizable; (v) it permits the recovery and recycling of usable plastics from regulated medical waste; and (vi) it enables the remaining regulated medical waste to be safely landfilled or used as an alternative fuel in energy production. The Company's full-service program is designed to help to protect its customers and their employees against potential liabilities and injuries in connection with the handling, transportation and disposal of regulated medical waste. The Company's integrated services include regulated medical waste collection, transportation, treatment, disposal, reduction, reuse and recycling services, together with related training and education programs, consulting services and product sales, in four geographic service areas: (i) California; (ii) Washington, Oregon, Idaho and British Columbia; (iii) Wisconsin, Illinois, Indiana and Michigan; and (iv) Massachusetts, Maine, New Hampshire, Vermont, Rhode Island, Connecticut, New York and New Jersey. As of December 31, 1995, the Company served over 13,000 customers, consisting of two principal types of regulated medical waste generators. Approximately 70% of the Company's 1995 revenues were derived from hospitals, blood banks and pharmaceutical manufacturers ("Core" generators), and approximately 30% of its revenues were derived from long-term and subacute care facilities, outpatient clinics, medical and dental offices, industrial clinics, dialysis centers, laboratories, biotechnology and biomedical companies, veterinary offices, municipal health departments, ambulance, fire and police departments, correctional facilities, schools, park districts and funeral homes ("Alternate Care" generators). The Company's current operations are comprised of four treatment centers, one recycling center, five transfer stations and four customer service centers. Regulated medical waste is generally defined as any waste that can cause an infectious disease or that reasonably can be suspected of harboring human pathogenic organisms. Regulated medical waste includes single-use disposable items such as needles, syringes, gloves and laboratory, surgical, emergency room and other supplies which have been in contact with blood or bodily fluids; cultures and stocks of infectious agents; and blood and blood products. Generators of regulated medical waste are responsible for that waste from its origin through its disposal. The Company seeks to offer a single-source solution to a wide spectrum of regulated medical waste management issues confronting generators of regulated medical waste, thereby managing the generators' compliance responsibilities relating to proper packaging, labeling, handling, treatment, disposal, tracking and reporting. In addition, the Company offers programs to assist customers in educating their employees on safety, resource conservation and compliance issues. This full-service approach to regulated medical waste management assists customers in dealing cost-effectively with the increasingly complex regulatory framework in which generators of regulated medical waste operate. An independent study published in 1995 estimated that the size of the regulated medical waste management market in the United States in 1995 was approximately $1 billion. Based upon certain public information and the Company's estimates of its competitors' revenues, the Company believes that it is the second-largest provider of regulated medical waste management services in the United States. The Company believes that the demand for its services will grow as a consequence of certain trends in the health care and regulated medical waste industries: - The handling and disposal of the large quantities of regulated medical waste generated by the health care industry has attracted increasing public awareness and regulatory attention. The Occupational Health and Safety Administration ("OSHA") has issued regulations concerning employee exposure to bloodborne pathogens and other potentially infectious materials that require, among other things, special procedures for handling regulated medical waste and annual training of all personnel who are potentially exposed to blood and bodily fluids. - Alternate Care generators have become an increasingly important source of revenues in the regulated medical waste industry. Individual Alternate Care generators, however, typically do not produce regulated medical waste in sufficient volumes to justify substantial capital expenditures on their own waste treatment facilities or the expense of hiring regulatory compliance personnel. Accordingly, Alternate Care generators often rely on a regulated medical waste management provider for a broad range of regulated medical waste management services. - The health care industry is under increasing pressure to reduce costs and improve efficiency, which the Company believes can be achieved in the case of regulated medical waste by obtaining waste management services from outside sources. - Governmental clean air regulations and public opposition are combining to increase the cost and difficulty of obtaining permits to build and operate incinerators. As a result, many hospitals have shut down their incinerators, and the Company expects that many more will do so, with a corresponding increase in demand for off-site alternative treatment services such as those offered by the Company. - Although the regulated medical waste management industry remains fragmented, the number of competitors is rapidly decreasing as a result of industry consolidation. The Company believes that it has the opportunity to increase its penetration of the geographic service areas in which it currently operates as well as to expand into adjacent service areas and offer additional products and services to its customers. Since August 1993, the Company has acquired eight regulated medical waste management businesses. The Company intends to continue to expand through business acquisitions, in which it will attempt to acquire businesses that can be integrated into the Company's existing operations and businesses in new geographic service areas that can be assembled in a "hub and spoke" configuration using transfer stations and treatment facilities. Through a combination of logistics and marketing efforts and business acquisitions, the Company intends to improve its operating efficiency. Stericycle, Inc. is a Delaware corporation with its principal executive offices located at 1419 Lake Cook Road, Suite 410, Deerfield, Illinois 60015. Its telephone number is (847) 945-6550. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company............. 3,000,000 shares Common Stock to be outstanding after this 9,218,455 shares (1) Offering........................................ Use of proceeds................................. To repay bank and other debt and for general corporate purposes, including capital expenditures, working capital and potential future acquisitions. See "Use of Proceeds." Proposed Nasdaq National Market symbol.......... SRCL </TABLE> - ------------------------ (1) Based on the number of shares outstanding as of June 1, 1996, after giving effect to the issuance of 98,001 shares of Common Stock in partial payment of a note to be repaid upon completion of this Offering. Excludes 414,030 shares issuable upon the exercise of outstanding stock options exercisable within 60 days of June 1, 1996, at a weighted average exercise price of $0.69 per share, and 387,468 shares issuable upon the exercise of outstanding warrants all of which were exercisable as of June 1, 1996 at a weighted average exercise price of $5.31 per share. Also excludes 304,413 shares issuable upon the exercise of outstanding stock options, at a weighted average exercise price of $1.35 per share, and 21,778 shares issuable upon the exercise of outstanding warrants at a weighted average exercise price of $34.27 per share, which either were not exercisable within 60 days of June 1, 1996 or were exercisable at prices in excess of $11.00 per share, the mid-point of the price range as set forth on the cover page of this Prospectus. See "Description of Capital Stock -- Options" and "-- Warrants." SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ----------------------------------------------------- -------------------- 1991 1992(4) 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Revenues................................. $ 1,563 $ 5,010 $ 9,141 $ 16,141 $ 21,339 $ 10,756 $ 11,616 Cost of revenues......................... 2,005 5,466 9,137 13,922 17,478 8,872 9,189 Selling, general and administrative expenses................................ 3,377 11,223 5,988 7,927 8,137 4,663 3,315 --------- --------- --------- --------- --------- --------- --------- Loss from operations..................... (3,819) (11,679) (5,984) (5,708) (4,276) (2,779) (888) Interest expense......................... (77) (244) (245) (260) (277) (103) (206) Interest income.......................... 243 283 201 156 9 6 -- --------- --------- --------- --------- --------- --------- --------- Net loss................................. $ (3,653) $ (11,640) $ (6,028) $ (5,812) $ (4,544) $ (2,876) $ (1,094) Less cumulative preferred dividends...... (1,351) (2,737) (3,733) (4,481) --(5) (3,146) -- --------- --------- --------- --------- --------- --------- --------- Loss applicable to common stock.......... $ (5,004) $ (14,377) $ (9,761) $ (10,293) $ (4,544) $ (6,022) $ (1,094) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Net loss per common share (1)............ $ (2.38) $ (6.64) $ (4.51) $ (4.76) $ (0.65) $ (2.78) $ (0.15) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Weighted average number of common shares outstanding............................. 2,106,842 2,165,625 2,162,611 2,162,988 7,029,441 2,162,988 7,074,440 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Pro forma net loss per common share (2)..................................... $ (0.62) $ (0.13) --------- --------- --------- --------- Pro forma weighted average number of common shares outstanding (3)........... 7,237,171 7,492,110 --------- --------- --------- --------- <CAPTION> JUNE 30, 1996 -------------------- AS ACTUAL ADJUSTED(6) --------- --------- <S> <C> <C> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents............................................................... $ 40 $ 25,770 Total assets............................................................................ 25,834 51,564 Current portion of long-term debt....................................................... 4,306 816 Long-term debt, net of current maturities............................................... 4,399 2,241 Shareholders' equity.................................................................... 11,911 43,289 </TABLE> - ------------------------------ (1) See Note 2 to the Consolidated Financial Statements for information concerning the computation of net loss per share. (2) Adjusted to give effect to the sale of a sufficient number of shares of Common Stock offered hereby (at an assumed initial public offering price of $11.00 per share, the mid-point of the price range set forth on the cover page of this Prospectus, and after the deduction of estimated underwriting discounts and commissions and a pro rata portion of estimated offering expenses payable by the Company) the net proceeds from the sale of which are used to repay certain indebtedness of the Company, and adjusted to give effect, as of the beginning of the period, to the elimination of the interest expense on the indebtedness repaid ($64,000 for the year ended December 31, 1995 and $86,000 for the six months ended June 30, 1996). The number of such shares would be approximately 207,730 at December 31, 1995 and approximately 417,670 at June 30, 1996. See "Use of Proceeds." (3) Adjusted to include a sufficient number of shares of Common Stock offered hereby (at an assumed initial public offering price of $11.00 per share, the mid-point of the price range set forth of the cover page of this Prospectus, and after the deduction of estimated underwriting discounts and commissions and a pro rata portion of estimated offering expenses payable by the Company) the net proceeds from the sale of which are used to repay certain indebtedness of the Company. The number of such shares would be approximately 207,730 at December 31, 1995 and approximately 417,670 at June 30, 1996. See "Use of Proceeds.". (4) During 1992, the Company approved a restructuring plan which resulted in a nonrecurring charge of $2,747,000, primarily to write-off assets associated with a technology used by the Company prior to the development of the ETD process. (5) In August 1995 and in connection with a recapitalization of the Company, the liquidation preference on the Company's preferred stock was eliminated and the Company's preferred stock was reclassified as Class A common stock. See "Description of Capital Stock -- 1995 Recapitalization." (6) Adjusted to give effect to the sale of 3,000,000 shares of Common Stock offered hereby (at an assumed initial public offering price of $11.00 per share, the mid-point of the price range as set forth on the cover page of this Prospectus, and after the deduction of estimated underwriting discounts and commissions and estimated offering expenses payable by the Company), application of the estimated net proceeds to the Company and the issuance of 98,001 shares of Common Stock in partial payment of a note to be repaid upon completion of this Offering. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000861885_telesensor_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000861885_telesensor_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..415c958d2139b432fe0a37588ce345db4fa1018c
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000861885_telesensor_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Financial Statements and Notes thereto appearing elsewhere in this Prospectus, including information under "Risk Factors." Except as otherwise noted, all information in this Prospectus, including financial information, share and per share data, assumes (i) the issuance of 87,500 shares of Common Stock upon the net exercise of all outstanding warrants, and (ii) no exercise of the Underwriters' over-allotment option. See "Underwriting." This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from the results discussed in these forward-looking statements. Factors that might cause such a difference include, but are not limited to, those set forth in the Section entitled "Risk Factors" and elsewhere in this Prospectus. THE COMPANY Telesensory Corporation ("Telesensory" or the "Company"), founded in 1970, develops, manufactures and markets innovative electronic and computer-based products to assist people with severe visual disabilities to achieve greater independence and privacy. The Company is the leading provider of such products in North America, and one of the two leading companies worldwide. The Company makes video magnifiers and other electronic and computer-based assistive devices for people who are severely visually impaired (the "Low Vision Products") and various braille-related and other electronic and computer-based assistive devices for those who are totally blind or without useable light perception (the "Blindness Products"). Severe visual impairment is defined by the National Center for Health Statistics as the inability to read ordinary newspaper print even when wearing glasses or contact lenses. Such people also have difficulty with daily activities such as reading mail and prescription bottles, balancing checkbooks, viewing photographs and working with small objects. The number of people in the United States who are severely visually impaired is estimated at 4.3 million. A much smaller population, estimated at 100,000 in the United States, is either totally blind or lacks useable light perception. Populations in other developed countries are believed to exhibit similar rates of visual impairment. Age- related macular degeneration, which has no known cure, is the leading cause of visual impairment and currently affects 20% of individuals over age 65. Other leading causes of visual impairment and blindness include diabetes and glaucoma. Disabled people, including those who are visually disabled, are increasingly seeking to participate fully in workplace, recreation and other daily activities enjoyed by non-disabled people. There is also a growing awareness of the need to enhance the quality of lives of disabled people. For example, the Americans with Disabilities Act (the "ADA") mandates that public facilities and services be accessible to disabled people, including those with visual impairments. The Company believes that these trends, combined with an aging but active population that desires to preserve its independence, have contributed to a growing demand for devices to assist visually disabled people and the development of a consumer market willing and able to purchase assistive devices without government assistance. The Company believes that only a small percentage of visually impaired people are familiar with or own electronic assistive devices. For example, the Company estimates that annual unit sales of all electronic and computer-based magnification systems in the United States are made to fewer than 0.5% of the 4.3 million people who are severely visually impaired. Low Vision Products accounted for 71% of the Company's net revenue in 1995. Low Vision Products consist of video magnifiers and computer screen magnification systems, which provide adjustable magnification, enhanced contrast and a larger field of view. In 1994, the Company introduced the Aladdin, a highly innovative, advanced video magnifier. In 1995, the Aladdin won the American Society of Aging's Gold Award for outstanding product design for mature consumers. Primarily as a result of the introduction of the Aladdin, unit sales of video magnifiers increased 53% in 1995 over the prior year, to 11,091 units, and increased 18% in the first half of 1996 as compared to the first half of 1995. The Company believes that its sales of video magnifiers, in both units and dollars, represented approximately 55% of the market in the United States in 1995 and significantly exceeded comparable figures for any of its competitors worldwide. Blindness Products accounted for 29% of the Company's net revenue in 1995. The principal product line consists of refreshable computer-controlled braille displays that enable blind persons to operate personal computers. Other Blindness Products include optical character reading systems with synthesized speech or braille output, and braille printers. The Company believes that it is one of the top three manufacturers worldwide for the majority of its Blindness Products. Telesensory believes that it has the largest worldwide distributor and dealer network of any company marketing assistive devices to severely visually impaired people. For distribution of its Low Vision Products, the Company uses a network of approximately 110 United States and 30 international distributors and dealers. For distribution of its Blindness Products, the Company uses approximately 37 United States and generally the same 30 international distributors and dealers that distribute its Low Vision Products, as well as an in-house sales team. International sales represented approximately 35% of total sales in 1995. The Company and its distributors sell to government agencies, institutions, schools, corporations and individuals. The Company estimates that government funded purchases accounted for approximately 40% of domestic sales and a higher percentage of international sales in 1995. Since 1994, the Company has taken a number of steps to enhance net revenue and profitability. These steps included the appointment of Larry Israel as President and Chief Executive Officer in July 1994, the implementation of a cost reduction program, the closure of the Company's manufacturing facility in Ireland, the reorganization of the Company into two operating divisions, the adoption of a continuous flow manufacturing process for its Low Vision Products and the introduction of the Aladdin line of video magnifiers. The Company also strengthened its international operations by acquiring its distributors in the United Kingdom and France in March 1996. Pre-tax earnings have increased from a loss of $1.3 million in 1993 to a profit of $2.3 million in 1995 and a profit of $1.4 million for the first six months of 1996. See "Selected Consolidated Financial Data."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0000862148_ev_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000862148_ev_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b03c70ee345cb1b28a3c92f7982810592b7539e9
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY PROSPECTUS SUMMARY The following is intended only to supply certain facts and highlights of the material contained in the body of the Prospectus and is qualified in its entirety by the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus and Registration Statement. THE COMPANY The Company is a Delaware corporation with five operating subsidiaries, EV Environmental Systems, Inc., formerly Pollution Control, Inc. ("PCI"), Aer-O-Flo Environmental, Inc. ("Aer-O-Flo"), Pollution Control Engineering, Inc. ("PCE"), EV Engineering, Inc. ("EVE") and EV Contract Management Services, Inc. ("CMS"). PCI, a Kentucky corporation located in Ft. Mitchell, Kentucky (a suburb of Cincinnati, Ohio), is a successor business by merger to a business incorporated in 1985. Aer-O-Flo, an Ontario corporation located in Burlington, Ontario (a suburb of Toronto, Ontario), is a successor business to a business formed in 1963. PCE, a Delaware corporation located in Irvine, California, is the successor to a business formed in 1960. EV Engineering, Inc. and EV Contract Management Services, Inc. (both Delaware corporations) are successors to a business formed in 1969. The Company is engaged in the business of supplying systems and services for the treatment of water and wastewater. The Company markets to its customers its ability to design, supply and operate the total treatment system for the solution of the customer's process discharges. The Company designs the treatment systems, manages the manufacture of the related hardware (through contract manufacturers), manages the installation of the systems, trains customer personnel in their operation, and provides ongoing system management and support. Any combination of these offerings, and in some cases all of them, can be utilized by the Company's customers. The Company believes that its systems provide positive returns on investment for its customers. As freshwater resources are stretched by growth in many regions, the Company believes that reuse of wastewater will become the most economically viable source of additional water. In regions where freshwater use is restricted, it is possible for a customer to expand operations by recycling wastewater or alternatively, to sell water rights to other users. Coupled with reduced operating costs and sewage surcharges, investment in the Company's systems can be economically attractive. The Company does not own or operate a hazardous waste landfill or any other hazardous waste treatment, storage or disposal facility. The Company intends to pursue a business
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0000866253_amc_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000866253_amc_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..4bd846941513a09de6f77fee3c4d6da4897cab91
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000866253_amc_prospectus_summary.txt
@@ -0,0 +1 @@
+SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. THE COMPANY Cityscape Financial Corp., a Delaware corporation ("Cityscape" or the "Company"), is a consumer finance company engaged in the business of originating, purchasing, selling and servicing mortgage loans secured primarily by one- to four-family residences. The Company originates and purchases loans in the US through its subsidiary Cityscape Corp., a New York corporation ("CSC"), using a network of independent mortgage brokers and loan correspondents, and in the United Kingdom (excluding Northern Ireland, the "UK") through its indirect subsidiary City Mortgage Corporation Limited also using a network of independent mortgage brokers. The majority of the Company's loans are made to owners of single family residences who use the loan proceeds for such purposes as debt consolidation, financing of home improvements and educational expenditures. The Company focuses on lending to individuals who have impaired or unsubstantiated credit histories and/or unverifiable income and require or seek a high degree of personalized service and prompt response to their loan applications. As a result, the Company's customers generally are not averse to paying the higher interest rates that the Company charges for its loan programs as compared to the interest rates charged by conventional mortgage sources. Because its customers generally borrow for reasons other than the purchase of homes, the Company believes that it is not as dependent as traditional mortgage bankers on general levels of home sales and refinancing activity. In the US, the Company originates and purchases loans through three channels: (i) originations through an extensive network of independent mortgage brokers utilizing the Company's New York headquarters and four regional processing offices located in California, Georgia, Illinois and Virginia; (ii) purchases on a flow basis through its Wholesale Loan Acquisition Program from selected financial institutions and mortgage bankers known as loan correspondents; and (iii) purchases of large pools of loans (referred to as "bulk purchases") from other originators. The Company originates loans through a network of independent mortgage brokers in 37 states and the District of Columbia, with its highest producing broker accounting for 2.4% of the total US origination and purchase volume for the six months ended June 30, 1996. The Company strives to process each loan application received from mortgage brokers as quickly as possible in accordance with the Company's loan application approval procedures. Accordingly, most loan applications receive preliminary decisions within 24 hours of receipt and most accepted applications are funded within 15-25 days thereafter. Loans purchased on a flow basis in the Wholesale Loan Acquisition Program are originated by loan correspondents in accordance with the Company's underwriting guidelines and purchased as complete loan packages. The highest producing loan correspondent in the Wholesale Loan Acquisition Program accounted for 3.5% of the total US origination and purchase volume for the six months ended June 30, 1996. In addition, in June 1996, the Company expanded its whole loan purchases to include the purchase of loans which other originators offer in the secondary market on a bulk basis. The Company believes it has the underwriting, servicing and management capabilities in place, as well as the necessary access to capital, to review and purchase bulk loans competitively in this market segment and to benefit from the efficiencies related to the purchase and securitization of such loans. As the Company has expanded the channels through which it originates and purchases loans, it has also broadened the types of loans it offers. The Company offers a wide range of loan products in the US, including traditional residential mortgage loans for refinancing, educational, home improvement and debt consolidation purposes, mortgage loans on small multi-family and mixed-use properties, and more recently, adjustable rate mortgage loans and jumbo loans. The Company also purchases conventional home improvement loans and, to a lesser extent, originates and purchases Title I home improvement loans partially insured by the US Department of Housing and Urban Development. For 1995 and the first six months of 1996, the average principal balances of the Company's loans in the US were $69,551 and $66,940, respectively, the weighted average initial loan-to-value ratios on such loans were 66.4% and 69.9%, respectively, and the weighted average interest rate on such loans were 11.9% and 11.4%, respectively. In May 1995, the Company commenced its UK operations with the formation of City Mortgage Corporation Limited ("CSC-UK"), an English corporation that originates, sells and services loans in England, Scotland and Wales. The UK market for the type of loans the Company produces is highly fragmented and, for a variety of reasons, underserved by conventional lenders as compared to the US market. In the UK, the Company originates loans through a network of independent mortgage brokers. The Company has entered into contracts with several of its highest producing brokers which grant the Company a right of first refusal on all loan applications that meet specified underwriting criteria. To further increase its loan origination volume and market share in the UK, the Company also recently acquired J&J Securities Limited ("J&J") and Heritable Group Limited ("Heritable"), two UK-based mortgage bankers (referred to respectively as the "J&J Acquisition" and the "Heritable Acquisition"). The J&J Acquisition has provided the Company with greater strength in the second lien loan market, additional experienced management personnel and a greater share of the fragmented UK market through additional broker relationships and the expansion of product offerings. J&J's loans are generally second lien mortgage loans with lower loan-to-value ratios, higher interest rates, smaller principal loan balances and higher delinquency experience than the loans traditionally originated by CSC-UK. The Heritable Acquisition represents an expansion of new product types offered to a higher credit quality borrower and that are complementary to the Company's other UK business. Heritable's loans are generally second lien mortgage loans with higher loan-to-value ratios, lower interest rates, smaller principal loan balances and lower delinquency experience than the loans traditionally originated by CSC-UK. For 1995 and the first six months of 1996, the average principal balances of the Company's loans in the UK were $43,120 and $14,940, respectively, the weighted average initial loan-to-value ratios on such loans were 49.0% and 51.6%, respectively, and the weighted average interest rates on such loans were 16.4% and 16.9%, respectively. The Company sells its loans primarily in the secondary market through securitizations in order to maximize profitability and reduce its exposure to fluctuations in interest rates. To a lesser extent, the Company sells its loans through whole loan sales to achieve greater liquidity. Through 1994, the Company sold virtually all of its loan production on a whole loan sale basis in private placements to a variety of institutional purchasers. Since 1995, however, the Company has sold a substantial portion of its loan production in securitizations. The Company completed its first US securitization in March 1995 and its first UK securitization in March 1996. Each of the Company's US securitizations has been credit-enhanced by insurance provided by a monoline insurance company to receive ratings of "Aaa" from Moody's Investor Services, Inc. and "AAA" from Standard & Poor's Ratings Group. The Company funds its originations and purchases through warehouse lines of credit and a standby facility in the US and purchase and sale facilities in the US and the UK into which it sells the loans it originates and purchases prior to their securitization. The Company intends to continue to sell loans primarily through securitizations and, subject to market conditions, through whole loan sales. The Company retains the servicing rights to substantially all loans it originates or purchases. Loan servicing involves the collection of payments due under a loan, the monitoring of the loan, the remitting of payments to the holder of the loan, the furnishing of reports to such holder and the enforcement of the lender's rights, including attempting to recover delinquencies and instituting loan foreclosures. As of June 30, 1996, the Company was servicing an aggregate of $757.9 million of US loans, including $56.2 million of loans as master servicer and $20.1 million as contract servicer, and an aggregate of $332.2 million of UK loans. At December 31, 1995 and June 30, 1996, the Company's ratios of delinquent loans (one or more payments 30 or more days past due) to loans serviced by dollar amount were 3.9% and 5.6%, respectively, on its US loan portfolio and 8.6% and 16.7%, respectively, on its UK loan portfolio. The Company has not experienced material loan losses in part because its loan portfolio has been characterized by relatively low initial loan-to-value ratios. Because the Company only expanded into the business of loan servicing in the US during the last two years and in the UK in May 1995, the Company's loan portfolios are relatively unseasoned. The Company believes that over time its delinquency and loan loss experience will increase as its loan portfolio matures. The Company has reserved for loan losses in amounts which it believes to be adequate to cover potential losses for the credit risks it retains on the loans in its servicing portfolio. Management believes that the business of loan servicing provides an additional and profitable revenue stream and one that is less cyclical than the business of originating and purchasing loans. The Company's business strategy includes (i) geographic expansion throughout the US, (ii) growth through selected acquisitions, (iii) further development and expansion of its UK operations, (iv) expansion of its Wholesale Loan Acquisition Program and bulk purchases, (v) maximization of independent mortgage broker relationships, (vi) maintenance of underwriting standards and infrastructure to continue to service its increasing loan portfolio effectively and (vii) introduction and expansion of new products. USE OF PROCEEDS The Company will not receive any proceeds from the sale of the Securities offered hereby. NASDAQ SYMBOL The Common Stock is traded on Nasdaq under the symbol "CTYS."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000868984_whitehall_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000868984_whitehall_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f4e3dd8c93c1ce6f5deef521ed1f34eb9e807e84
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000868984_whitehall_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. The Company's fiscal year ends on January 31. References to fiscal years by date refer to the fiscal year beginning February 1 of that calendar year; for example, "fiscal 1995" began on February 1, 1995 and ended on January 31, 1996. Certain statements in this Prospectus (including this Prospectus Summary) constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Litigation Reform Act"). See "Special Note Regarding Forward-Looking Statements." THE COMPANY Marks Bros. Jewelers, Inc. (the "Company") is a leading, national specialty retailer of fine jewelry, operating 163 stores in 24 states. Founded in 1895, the Company operates stores in regional and super-regional shopping malls under the names Whitehall Co. Jewellers(R) (123 stores), Lundstrom Jewelers(R) (35 stores) and Marks Bros. Jewelers(TM) (5 stores). The Company offers at competitive prices an in-depth selection of fine jewelry in the following key categories: diamond, gold, precious and semi-precious jewelry. The Company's target customers are middle to upper middle income women over 25 years old. Central to the Company's growth in operating profits and its high store productivity are its small but flexible store format, the absence of recourse credit risk, its strong sales culture, and its operating efficiencies at both the store and corporate levels. From fiscal 1991 to fiscal 1995, the Company's net sales grew at a compound annual rate of 14.3%, from $76.7 million to $131.0 million, while income from operations grew at a compound annual rate of 30.2%, from $5.4 million to $15.4 million. The Company's growth during this period is attributable to (i) new store openings, which resulted in an increase in the number of stores from 111 to 146 stores, (ii) higher store productivity, as average annual sales per store increased from $699,000 to $936,000, and (iii) improved operating efficiencies, which resulted in an increase in the Company's operating margin from 7.0% to 11.8%. For the six months ended July 31, 1996, the Company's net sales increased by 23.8% as compared to net sales in the first six months of fiscal 1995, and operating margin improved from 7.0% to 8.5%. The Company believes it has significant opportunities to increase sales and profitability through an increased number of planned store openings, the implementation of several new sales and merchandising programs designed to produce comparable store sales growth, and continued adherence to its strict operating standards regarding performance of sales personnel, store profitability and cost control. The key elements of the Company's multi-faceted operating strategy are as follows: - Small, Flexible Store Format in Regional Malls. The Company believes it has a competitive advantage in obtaining high traffic, "center court" locations in desirable regional and super-regional malls due principally to (i) its small average store size of approximately 790 square feet, which, while considerably smaller than the average store size of most of the Company's competitors, generates comparable sales volumes, (ii) its ability to adapt its store design to various sizes and configurations, and (iii) its high average annual sales per square foot (approximately $1,200 in fiscal 1995). Over two-thirds of the Company's stores are located in high traffic, "center court" locations. The stores' small, flexible format (which lowers the Company's fixed occupancy costs) and high productivity are desirable to mall owners. - Absence of Recourse Credit Risk. The Company operates based upon a "no credit risk" policy. When purchasing on credit, customers must use their personal credit cards, the Company's private label credit card (which is available through a third party and is non-recourse to the Company), or other non-recourse third party credit arrangements. The Company's strict credit policy eliminates its credit risk associated with the customer's failure to pay. This policy also distinguishes the Company from most of its competitors, which not only bear such credit risk, but also rely on finance income in addition to merchandise sales. Photo of Lundstrom Jewelers Store Photo of Whitehall Co. Store - Motivated, Sales-Oriented Store Personnel. The primary responsibility of store sales personnel is selling to customers. Most non-sales activities are largely centralized. Incentive compensation and bonus programs reinforce sales and margin goals on a daily, weekly and monthly basis. The Company continually seeks to enhance the selling skills of its sales associates through recruitment of experienced sales personnel and extensive, ongoing training programs. - Differentiated Merchandising. The Company offers an in-depth selection of merchandise in several key categories of fine jewelry: diamond, gold, precious and semi-precious jewelry. This "key category" focus is oriented to the Company's target customer, the middle to upper middle income woman. Unlike many of its competitors, the Company carries only a limited selection of watches and virtually no costume jewelry or gift merchandise. - Strict Operating Controls. The Company emphasizes high performance standards, backed by strong incentive programs. Adherence to these standards in the areas of store site selection, sales targets, store profitability and cost control is fundamental to the Company's success. RECENT DEVELOPMENTS Strong Operating Performance. The Company's 23.8% increase in net sales for the first six months of fiscal 1996 was driven by a comparable store sales increase of 13.4% and the strong performance of recently opened stores. Operating margin increased 150 basis points to 8.5% for the first six months of fiscal 1996 from 7.0% over the prior year period, and pro forma net income per share increased to $0.18 from $0.05. Store sales productivity continued to increase, as average store sales grew to $972,000 per store ($1,224 per square foot) for the 12 months ended July 31, 1996, from average store sales of $936,000 ($1,187 per square foot) for fiscal 1995. For the first two months of the third quarter of fiscal 1996, comparable store sales increased by 7.8% on top of a 15.9% comparable store sales increase in the corresponding prior year period. Acceleration of Expansion Program. As of October 31, 1996, the Company has opened 18 new stores and plans to open one additional store for a total of 19 new stores by the end of fiscal 1996, compared to the 18 originally planned. As a result of this offering, the Company plans to accelerate its store expansion program to 28 stores scheduled for fiscal 1997 (compared to the 23 originally planned) and already has executed leases for 11 of these locations. The Company intends to open a total of approximately 60 new stores in fiscal 1997 and 1998 combined. Strengthening of Capital Structure. To facilitate its continuing expansion, the Company intends to use proceeds from this offering to strengthen its capital structure, retire $8.0 million of principal amount of its 15% subordinated notes and pay down other outstanding borrowings. THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Company......................... 1,100,000 shares Common Stock Offered by the Selling Stockholders............ 1,205,000 shares Common Stock to be Outstanding Immediately After the Offering.................................................. 9,707,250 shares(1) Use of Proceeds............................................. To reduce indebtedness, accelerate new store openings and for working capital and other general corporate purposes. Nasdaq National Market Symbol............................... MBJI </TABLE> - ------------------------------ (1) Excludes 1,060,476 shares of Common Stock subject to outstanding stock options at a weighted average exercise price of $10.37 per share, of which 318,760 are currently exercisable at a weighted average exercise price of $0.93 per share. See "Management -- Stock Plans." Photo of Whitehall Co. Store Photo of Whitehall Co. Window display SUMMARY FINANCIAL AND OPERATING DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SELECTED OPERATING DATA) <TABLE> <CAPTION> YEAR ENDED JANUARY 31, SIX MONTHS ENDED JULY 31, ----------------------------------------------------------- -------------------------- 1992 1993 1994 1995 1996 1995 1996 -------- -------- -------- -------- ----------- ----------- ----------- (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales......................... $ 76,749 $ 88,141 $ 91,106 $106,683 $131,022 $52,074 $64,466 Gross profit...................... 31,143 36,035 36,595 42,460 53,300 20,115 25,840 Income from operations............ 5,362 8,064 8,255 11,712 15,413 3,657 5,455 Interest expense.................. 9,397 7,821 8,920 10,594 12,314 6,017 4,557 ESOP compensation expense......... -- 3,800 511 547 -- 295 -- Income (loss) from continuing operations before income tax.... (17,157) (3,557) (1,176) 571 2,048 (2,655) 898 Net income (loss)(1)(2)(3)........ $(24,454) $ (3,557) $ (7,002) $ 571 $ 16,972 $(2,655) $11,712 SUPPLEMENTAL PRO FORMA STATEMENT OF OPERATIONS DATA(4): (UNAUDITED) Net sales......................... $131,022 $52,074 $64,466 Income from operations............ 15,413 3,657 5,455 Interest expense.................. 2,943 1,416 1,503 Net income........................ 7,205 1,345 2,371 Net income per share.............. $ 0.72 $ 0.13 $ 0.23 Weighted average number of common shares and common share equivalents outstanding(5)...... 10,008,222 10,014,617 10,170,053 SELECTED OPERATING DATA: Stores open at end of period...... 111 113 122 131 146 143 155 Average net sales per store(6).... $699,000 $784,000 $791,000 $836,000 $936,000 Average net sales per gross square foot(7)......................... $ 883 $ 1,008 $ 1,013 $ 1,068 $ 1,187 Average merchandise sale.......... $ 192 $ 210 $ 229 $ 245 $ 253 $ 262 Comparable store sales increase (decrease)(8)................... 0.4% 12.5% (0.5)% 7.6% 11.0% 11.8% 13.4% </TABLE> <TABLE> <CAPTION> JULY 31, 1996 ------------------------- ACTUAL AS ADJUSTED(9) ------- -------------- <S> <C> <C> BALANCE SHEET DATA: Working capital......................................................................... $15,030 $ 20,267 Total assets............................................................................ 75,300 75,384 Total debt.............................................................................. 43,532 16,753 Stockholders' equity.................................................................... 4,395 31,258 </TABLE> - ------------------------------ (1) The Company sold its direct marketing division as of January 31, 1992. In connection with this disposition, the Company recorded a $7.3 million loss in the year ended January 31, 1992 on the sale of the discontinued operations and a $2.7 million gain in the year ended January 31, 1994 upon its receipt of the deferred proceeds from the sale. (2) Net loss for the year ended January 31, 1994 reflects a charge for the cumulative effect of the Company's change in accounting in the amount of $8.5 million to adopt AICPA SOP 93-6 for the recognition of compensation expense on shares allocated to the ESOP. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Background" and Note 5 of Notes to Financial Statements. (3) Net income for the year ended January 31, 1996 reflects an income tax benefit of $14.9 million, resulting from the reversal of the Company's deferred tax valuation allowance and recognition of a corresponding net deferred tax asset. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Background" and Note 6 of Notes to Financial Statements. (4) Supplemental pro forma statement of operations data reflect (i) the Company's initial public offering (the "IPO") and recapitalization in May 1996 (see "The Company"); (ii) the issuance of 1,100,000 shares of Common Stock offered hereby at an assumed public offering price of $27.00 per share (the "Offering") and the anticipated use of the estimated net proceeds therefrom; and (iii) the application of a tax provision (assuming a statutory rate of 40%) to the pro forma net income from continuing operations, as if each such transaction occurred on the first day of the period presented. (5) The pro forma weighted average number of common shares and common share equivalents outstanding for the year ended January 31, 1996, and the six months ended July 31, 1995 and July 31, 1996, respectively, consisted of (i) 9,707,267, 9,713,662 and 9,707,250 shares of Common Stock outstanding (including 3,269,500 shares of Common Stock issued in the IPO and 1,100,000 shares of Common Stock offered hereby); (ii) 3,588, 3,588 and 3,213 common share equivalents relating to Class B Common Stock; (iii) 297,367, 297,367 and 304,098 common share equivalents relating to the Company's 1995 incentive stock option plan and (iv) -0-, -0- and 222,654 common share equivalents relating to the Company's 1996 incentive stock option plan. (6) Average net sales per store represents the total net sales for stores open for a full fiscal year divided by the total number of such stores. (7) Average net sales per gross square foot represents total net sales for stores open for a full fiscal year divided by the total gross square feet of such stores. (8) A store becomes comparable after it has been open for 12 full months. (9) As adjusted to give effect to (i) the Offering; (ii) the receipt of $0.2 million in proceeds to the Company from the exercise of stock options in connection with the Offering; and (iii) the anticipated use of proceeds from the Offering (including a $0.96 million ($0.58 million net of tax) prepayment premium in connection with the redemption of subordinated debt and a non-cash extraordinary charge of $0.5 million ($0.3 million net of tax) relating to the write-off of deferred financing costs). See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000872548_furrs_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000872548_furrs_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..bb44f803db22aafa327c12a6e0d70c28e4c9bd35
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000872548_furrs_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following is a summary of certain information contained elsewhere in this Prospectus. It is not, and is not intended to be complete. Reference is made to, and this summary is qualified in its entirety by, the more detailed information contained elsewhere in this Prospectus. Unless otherwise defined, capitalized terms used in this Summary have the meanings ascribed to them elsewhere in this Prospectus. Prospective purchasers are encouraged to read carefully all of the information contained in this Prospectus in its entirety. THE COMPANY Furr's/Bishop's, Incorporated, a Delaware corporation (the "Company"), through its subsidiaries, is one of the largest operators of family-style cafeteria restaurants in the United States (based on the number of cafeterias operated). The Company believes that its cafeterias and buffet, which are operated under the "Furr's" and "Bishop's" names, are well recognized in their regional markets for their value, convenience, food quality and friendly service. The Company's 110 cafeterias and one buffet are located in thirteen states in the Southwest, West and Midwest. The Company also operates two specialty restaurants in Lubbock, Texas under the name Zoo-Kini's Soups, Salads and Grill. In addition, the Company operates Dynamic Foods, its food preparation, processing and distribution division in Lubbock, Texas. Dynamic Foods provides approximately 85% of the food and supply requirements of the Company's cafeteria and buffet restaurants. Dynamic Foods also sells pre-cut produce, bakery items, meats and seafood and various prepared foods to the restaurant, food service and retail markets. See "Business." The principal executive offices of the Company are located at 6901 Quaker Avenue, Lubbock, Texas 79413, and the telephone number is (806) 792-7151. Unless the context otherwise requires, all references in this Prospectus to the "Company" include the Company and its subsidiaries. BACKGROUND; THE RESTRUCTURING The Company recently completed a comprehensive restructuring of its and its subsidiaries' financial obligations (the "Restructuring"). As part of the Restructuring, Cafeteria Operators, L.P., a Delaware limited partnership and indirect wholly owned partnership subsidiary of the Company ("Cafeteria Operators"), executed the Amended and Restated Indenture (the "Indenture") dated as of November 15, 1995 between Cafeteria Operators and Fleet National Bank of Massachusetts (f/k/a Shawmut Bank, N.A.), as trustee, pursuant to which, among other things, the terms of $40.0 million aggregate principal amount outstanding under Cafeteria Operators' 11% Senior Secured Notes due June 30, 1998 (the "11% Notes") issued pursuant to the Indenture dated as of March 27, 1992 between the Company and Shawmut Bank, N.A., as collateral agent (the "Old Indenture"), were amended, with the consent of the holders of the 11% Notes at such time (the "Original 11% Noteholders"), to constitute $40.0 million (subject to the issuance of additional notes in payment of the first interest installment) aggregate principal amount of 12% Senior Secured Notes ("12% Notes") issued pursuant to the Indenture. In addition, Cafeteria Operators issued a 12% Note in the original principal amount of $1.7 (plus interest) million to the Trustees of General Electric Pension Trust ("GEPT") in settlement of a $5.4 million judgment against Furr's/Bishop's Cafeterias, L.P., a Delaware limited partnership and indirect wholly owned partnership subsidiary of the Company ("FBLP"). As part of the Restructuring, Wells Fargo Bank, National Association ("Wells Fargo") received an option to purchase 2.5% of the outstanding Common Stock (the "Wells Fargo Option") in satisfaction of approximately $6.1 million principal amount (plus approximately $1.6 million of accrued and unpaid interest) of indebtedness of a subsidiary of the Company. As a result of the Restructuring, indebtedness of Cafeteria Operators in the amount of approximately $153 million aggregate principal amount (plus approximately $46.6 million in accrued and unpaid interest) outstanding under the Old Indenture was exchanged by holders on January 2, 1996 of the 11% Notes (the "Exchanging 11% Noteholders" and together with the Original 11% Noteholders, the "former 11% Noteholders") for an aggregate of 95% of the limited partnership interests of Cafeteria Operators and the right to put to the Company their 95% limited partnership interests in Cafeteria Operators in exchange for 95% of the outstanding Common Stock (the "Put Option"). In addition, outstanding warrants to purchase capital stock of the Company held by certain of the Exchanging 11% Noteholders were cancelled. On March 12, 1996, a majority of the Exchanging 11% Noteholders exercised the Put Option and, accordingly, all Exchanging 11% Noteholders put their aggregate 95% limited partnership interests to the Company in exchange for 95% of the outstanding Common Stock. On March 15, 1996, Wells Fargo exercised the Wells Fargo Option thereby becoming the beneficial owner of 2.5% of the outstanding Common Stock. As of the date of this Prospectus, the Exchanging 11% Noteholders no longer own any limited partnership interests of Cafeteria Operators; however, they and their successors and assigns own an aggregate of 95.0% of the outstanding Common Stock. See "Background; The Restructuring" and "Risk Factors -- Ownership of the Company."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000873269_pharmavene_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000873269_pharmavene_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS." EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION AND REFLECTS (I) THE ONE-FOR-SIX REVERSE SPLIT OF THE COMMON STOCK EFFECTIVE IN MARCH 1996 AND (II) THE AUTOMATIC CONVERSION OF ALL OUTSTANDING SHARES OF MANDATORILY REDEEMABLE SERIES A CONVERTIBLE PREFERRED STOCK, $.01 PAR VALUE (THE "PREFERRED STOCK"), INTO SHARES OF COMMON STOCK AND CERTAIN RELATED TRANSACTIONS UPON THE CLOSING OF THIS OFFERING. THE COMPANY Pharmavene, Inc. (the "Company") develops pharmaceutical products utilizing advanced drug delivery systems. The Company has developed a portfolio of drug delivery and screening technologies designed to produce optimal delivery of a particular pharmaceutical product for a given indication. These technologies include its proprietary Peptitrol systems for the oral delivery of hard-to-deliver compounds, oral controlled-release and sustained-release delivery, transmucosal delivery through tissues in the oral cavity and transdermal delivery. Instead of emphasizing a specific drug delivery system, the Company selects the drug delivery system that it believes is most effective for delivery of a specific compound and that can result in such advantages as convenient dosing, reduced side effects, improved bioavailability or easier administration. The Company has also developed various screening technologies, including its proprietary Peptiscreen system, to systematically and rapidly test a large number of formulations. The Company's strategy in selecting its current product candidates has been to generally select pharmaceutical products for reformulation that the Company believes have a significant commercial market, that are off-patent or for which patent protection will no longer be available at the time the Company's product is introduced and where enhancement of the method of delivery is expected to have measurable clinical value as compared to the existing delivery method. The Company generally selects products for reformulation that treat indications that have relatively simple, clear-cut clinical end-points. Most of the Company's product candidates are reformulations of existing compounds approved by the U.S. Food and Drug Administration (the "FDA") and the Company's delivery systems usually contain inactive ingredients that are generally recognized as safe (GRAS) for food use as determined by the FDA or are inactive ingredients that the Company believes are safe for such use. Therefore, the Company believes that the development process for its products may be expedited and some of the regulatory approval risks may be reduced. In addition to reformulating existing compounds, the Company also intends to seek arrangements with other companies developing pharmaceutical products based on new molecular entities to use the Company's drug delivery systems to formulate these products. The Company's initial product is expected to be Carbatrol, a sustained-release, patented formulation of carbamazepine for the treatment of epilepsy. In 1994, U.S. sales of carbamazepine were approximately $148 million. A major cause of seizures in epileptic patients is patient noncompliance with the treatment regimen, which can be caused by frequent dosing and an adverse side effect profile. Carbatrol would provide convenient twice-a-day dosing and could be administered orally as a capsule or sprinkled on food. On June 1, 1996, the Company's New Drug Application ("NDA") under Section 505(b)(2) (a "505(b)(2) NDA") of the Federal Food, Drug and Cosmetic Act, as amended, relating to Carbatrol was accepted for filing by the FDA. If approved for marketing, Carbatrol, which has been licensed to Athena Neurosciences, Inc. ("Athena"), a wholly-owned subsidiary of Elan Corporation plc ("Elan"), will compete directly with CIBA-Geigy's twice-a-day, extended-release formulation of carbamazepine. The Company has 11 other product candidates, including oral controlled-release formulations of Selegiline SR for treatment of cocaine craving and for the treatment of Parkinson's Disease, Acyclovir CD for the treatment of viral infections, Nifedipine SR (a generic version of Procardia XL) for the treatment of cardiovascular disorders and Insulin CD for diabetes. The Company is also developing a transmucosal formulation of dihydroergotamine (DHE) for the treatment of migraine headache, an injectable formulation of butyrylcholinesterase (BChE) for the treatment of cocaine overdose and for the treatment of post- surgical apnea, as well as three transdermal sustained-release products, Alprazolam TD and Lorazepam TD for the treatment of anxiety and PI 181.2 TD for the treatment of emesis. A number of these product candidates are in the early stages of development. The Company has developed its proprietary Peptitrol drug delivery technologies for the enhanced oral delivery of pharmaceutical compounds that are hard to deliver or have poor oral bioavailability, such as peptides and other large molecules. The Peptitrol drug delivery systems use one or more hydrophobic or hydrophilic materials to protect the pharmaceutical compound from degradation and to increase absorption of the compound from the gastrointestinal tract. The Company then uses its proprietary Peptiscreen cell culture screens to rapidly test the formulations developed using Peptitrol technologies. The Company is currently in the process of developing Acyclovir CD, Insulin CD and DHE IR using its Peptitrol and Peptiscreen technologies. The Company generally intends to develop its products and commence clinical testing in humans and then to seek collaborators to undertake further testing, obtain regulatory approval, manufacture and market such products. In August 1994, the Company entered into its first license agreement with Rhone-Poulenc Rorer, Inc. and its Armour Pharmaceutical Company subsidiary, which subsequently merged with Behringwerke to form the Centeon joint venture (together, "Rhone-Poulenc Rorer") to develop, manufacture and market its BChE Injectable products for the treatment of cocaine overdose and reversal of post-surgical apnea. The Company's BChE Injectable products have been designated as Orphan Drugs by the FDA for each of these indications. As a result, the Company may be entitled to marketing exclusivity for these indications for a seven-year period, subject to certain limitations, if it is the first sponsor to receive FDA approval for such indications. See "Business -- Government Regulation." On July 1, 1996, the Company entered into an exclusive license agreement with Athena for the worldwide marketing, sale and distribution of Carbatrol. Carbatrol will be marketed in the United States by Athena and by its affiliates or sublicensees in the rest of the world. Under the agreement, Athena (i) will make a $2.0 million payment within ten days of the execution of the agreement, (ii) will fund all future development costs associated with Carbatrol which are approved by a steering committee, (iii) will make a milestone payment of up to $8.0 million upon FDA approval of the Company's Carbatrol NDA, of which $5.0 million is creditable against future royalty payments which may be earned on product sales, and (iv) will make future royalty payments to the Company based on net sales of Carbatrol. The milestone payment is conditioned upon the absence of any finding of exclusivity for CIBA-Geigy's Tegretol XR or any actual or threatened proceeding seeking such a finding. Athena has been granted the right to purchase 220,000 shares of Common Stock in this offering. The Company was incorporated in Delaware on December 22, 1989, as Substance Abuse Sciences, Inc. In February 1990, the Company changed its name to Pharmavene, Inc. The Company's executive offices are located at 1550 East Gude Drive, Rockville, Maryland 20850 and its telephone number is (301) 838-2500. THE OFFERING <TABLE> <S> <C> Common Stock offered.......................... 2,200,000 shares Common Stock to be outstanding after the offering..................................... 8,672,332 shares (1) Use of proceeds............................... To fund research and development activities, including the continued development of Carbatrol, and for general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol........ "PHVN" </TABLE> - ------------------ (1) Includes an aggregate of 6,182,818 shares of Common Stock that will be issued upon consummation of this offering, or that have been issued subsequent to March 31, 1996, in connection with the conversion of Preferred Stock and certain convertible notes and the exercise of options under the Stock Option Plan. See "Capitalization." Excludes as of July 1, 1996: (i) 1,827,759 shares of Common Stock reserved for issuance upon exercise of options granted, to be granted or available for grant under the Company's 1991 Stock Option Plan (the "Stock Option Plan"); and (ii) 665,084 shares of Common Stock reserved for issuance upon exercise of warrants that are outstanding or that the Company has agreed to issue. See "Capitalization," "Management -- Stock Options," "Certain Transactions" and "Description of Capital Stock." SUMMARY FINANCIAL DATA <TABLE> <CAPTION> FOR THE PERIOD FOR THE THREE MONTHS FEBRUARY 16, FOR THE YEARS ENDED DECEMBER 31, 1990 (DATE OF ENDED MARCH 31, INCEPTION) TO --------------------------------- ---------------------- MARCH 31, 1993 1994 1995 1995 1996 1996 ----------- --------- --------- --------- ----------- ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues: Licensing revenue........................ $ -- $ 2,000 $ -- $ -- $ -- $ 2,000 Research and development revenue......... -- -- 111 95 19 130 Research and development grants.......... 269 194 -- -- -- 513 Interest income.......................... 19 46 35 5 10 201 ----------- --------- --------- --------- ----------- ------------- Total revenues............................. 288 2,240 146 100 29 2,844 ----------- --------- --------- --------- ----------- ------------- Expenses: Research and development................. 3,932 4,936 4,987 1,230 1,266 20,397 General and administrative............... 1,413 1,317 1,392 369 478 6,777 Interest expense......................... 426 (1) 132 446 58 3,572 (1) 5,166 ----------- --------- --------- --------- ----------- ------------- Total expenses............................. 5,771 6,385 6,825 1,657 5,316 32,340 ----------- --------- --------- --------- ----------- ------------- Net loss................................... $ (5,483) $ (4,145) $ (6,679) $ (1,557) $ (5,287 ) $ (29,496 ) ----------- --------- --------- --------- ----------- ------------- ----------- --------- --------- --------- ----------- ------------- Net loss per common and common equivalent share..................................... $ (1.59 ) $ (1.20) $ (1.91) $ (0.45) $ (1.51 ) $ (8.76 ) ----------- --------- --------- --------- ----------- ------------- ----------- --------- --------- --------- ----------- ------------- Weighted average common and common equivalent shares outstanding............. 3,455 3,458 3,495 3,466 3,508 3,366 ----------- --------- --------- --------- ----------- ------------- ----------- --------- --------- --------- ----------- ------------- </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 ------------------------------------------- PRO FORMA ACTUAL PRO FORMA (2) AS ADJUSTED(2)(3) --------- ------------- ----------------- (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents........................................... $ 586 $ 2,590 $ 24,288 Working capital (deficit)........................................... (225) 1,067 22,766 Total assets........................................................ 3,802 4,901 26,600 Convertible notes................................................... 938 -- -- Capital lease obligations, less current portion..................... 784 784 784 Mandatorily Redeemable Series A Convertible Preferred Stock......... 24,697 -- -- Deficit accumulated during the development stage.................... (29,496) (32,694) (32,694) Total stockholders' equity (deficit)................................ (24,293) 2,442 24,142 </TABLE> - ------------------ (1) Includes non-cash charges of $292,000 during the year ended December 31, 1993, relating to the issuance of warrants to purchase Common Stock at an exercise price below the fair market value per share of the Common Stock and $3,325,000 during the period ended March 31, 1996 in connection with the conversion of an aggregate of $8,000,000 principal amount of convertible notes (the "Convertible Notes") into Preferred Stock at a conversion price below the originally agreed upon conversion price. See "Management's Discussion and Analysis," "Certain Transactions" and Notes 5 and 11 of Notes to Financial Statements. (2) Gives effect to the following events subsequent to March 31, 1996: (i) the borrowing on April 25, 1996 and June 11, 1996 of an aggregate of $2,000,000 principal amount under a credit agreement with certain stockholders entered into in 1996 (the "1996 Credit Agreement"); (ii) the conversion of all of the shares of Preferred Stock outstanding into an aggregate of 5,636,452 shares of Common Stock upon the consummation of this offering; (iii) the conversion of all borrowings under the 1996 Credit Agreement into 545,455 shares of Common Stock upon consummation of this offering ($3,000,000 of such borrowings were outstanding on July 1, 1996 and the foregoing assumes no additional borrowings under the 1996 Credit Agreement and an initial public offering price of $11.00 per share); and (iv) the issuance on June 17, 1996 of 911 shares of Common Stock upon the exercise of options under the Stock Option Plan. See "Capitalization," "Certain Transactions," "Description of Capital Stock" and the Notes to the Financial Statements. (3) Adjusted to give effect to the sale of 2,200,000 shares of Common Stock offered hereby at an assumed initial public offering price of $11.00 per share. See "Capitalization."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0000877929_anergen_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000877929_anergen_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..26e60881979ffc5f6089e5576474a965a5b48217
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000877929_anergen_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors," and the Financial Statements and Notes thereto, appearing elsewhere in this Prospectus. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward- looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" as well as elsewhere in this Prospectus. THE COMPANY Anergen, Inc. ("Anergen" or "the Company") is focused on the treatment of autoimmune diseases through the discovery and development of proprietary therapeutics that selectively interrupt the disease process. Anergen's current research and development efforts are focused on two distinct core technologies, AnergiX(TM) and AnervaX(TM), that the Company believes may be used to treat a broad range of autoimmune diseases without generally suppressing the immune system. Patient selection has begun for a Phase I clinical trial of the Company's AnergiX compound for the treatment of multiple sclerosis ("MS") and the Company has initiated a Phase II clinical trial of its AnervaX compound for the treatment of rheumatoid arthritis ("RA"). Since 1993, the Company has collaborated with Novo Nordisk A/S ("Novo Nordisk") in the development of AnergiX treatments for MS, insulin dependent diabetes mellitus ("IDDM") and myasthenia gravis ("MG"). In June 1996, the Company announced a collaborative agreement with N.V. Organon ("Organon") to develop an AnergiX treatment for RA. In the body's immune system, T cells normally regulate the identification and destruction of foreign substances and malignant cells. Autoimmune diseases are caused by abnormal destruction of healthy body tissues by disease-specific T cells. Anergen's results to date suggest that treatments based on its core technologies may interrupt the chain of events fundamental to the onset and continuation of certain autoimmune diseases. The Company's AnergiX technology selectively destroys or inactivates (anergizes) the T cells implicated in the disease process. Its second core technology, AnervaX, stimulates the immune system to produce antibodies that block the presentation of self-antigens to destructive T cells. The Company believes that, because its potential therapeutics target only disease-specific T cells, the normal function of the immune system should remain unaffected. In contrast, currently available therapies for autoimmune diseases treat only the symptoms of the disease or broadly suppress the immune system, which can compromise the ability of the immune system to protect against foreign substances. Anergen received investigational new drug application ("IND") clearance in December 1995 with the United States Food and Drug Administration ("FDA") to begin Phase I clinical testing of its AnergiX compound for the treatment of MS. In preclinical studies, the administration of an AnergiX compound prevented or reduced disease symptoms caused by the T cell initiated autoimmune response in animal models. The Company has also demonstrated in vitro that its AnergiX compound can inactivate human T cells associated with MS. The Company is collaborating with Novo Nordisk on the development of this compound. In April 1996, the Company initiated a multicenter, double-blind, placebo-controlled Phase II clinical trial of its AnervaX compound for the treatment of RA. The results of a Phase I clinical trial completed in October 1995 indicated that AnervaX is well tolerated and can stimulate an immune response in RA patients. Preclinical results have also demonstrated that the Company's AnervaX approach may prevent the onset or reduce the severity of autoimmune disease in animal models. The Company entered into a collaborative agreement with Novo Nordisk in August 1993 under which Novo Nordisk, in exchange for certain marketing rights, will support research and development of the Company's MS, MG and IDDM programs, make milestone payments, and pay royalties on product sales, if any. The Company has the right to co-promote any resultant products for MS and MG in North America. In addition, at the time of the agreement, Novo Nordisk made an $8 million equity investment in the Company. In March 1996, the development program with Novo Nordisk was extended through August 1998, increasing total funds expected to be received by the Company under the collaboration from $25 million to $35 million. These amounts do not include the cost of clinical trials that will be borne directly by Novo Nordisk. In June 1996, the Company entered into a collaborative agreement with Organon under which Organon, in exchange for certain marketing rights, will support research and development of an AnergiX compound to treat RA that incorporates a proprietary peptide discovered by Organon. Under the arrangement, Organon will also pay the Company a one-time license fee, make milestone payments and pay royalties on product sales, if any. The license fee, research and development support and milestone payments that the Company may receive under this agreement are estimated to exceed $15 million. These amounts do not include the cost of clinical trials that will be borne directly by Organon. The Company was incorporated in California in April 1988 as Biospan Corporation and changed its name to Anergen, Inc. in July 1991. The Company's principal executive offices are located at 301 Penobscot Drive, Redwood City, California 94063, and its telephone number at that location is (415) 361-8901. THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Company....... 3,500,000 shares(1) Common Stock to be Outstanding after the Offering................................ 18,529,430 shares(2) Use of Proceeds........................... Research and product development, clinical trials, additional personnel, capital equipment, manufacturing expansion and other working capital and general corporate purposes. See "Use of Proceeds." Nasdaq National Market Symbol............. ANRG </TABLE> - --------------- (1) Assumes no exercise of the Underwriters' over-allotment option to purchase up to 525,000 additional shares of Common Stock. (2) Based upon the number of shares outstanding as of March 31, 1996. Excludes 825,815 shares issuable upon exercise of options outstanding under the Company's 1988 Stock Option Plan, 20,000 shares issuable upon exercise of options outstanding under the Company's 1995 Director Option Plan and 459,015 shares of Common Stock issuable upon exercise of outstanding warrants. See "Capitalization," "Management -- Incentive Stock Plans" and Note 6 to Financial Statements. SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ----------------------------------------------- ----------------- 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Revenues: Contract revenues -- related party...... $ -- $ -- $ 339 $ 2,325 $ 3,001 $ 551 $ 783 Interest income......................... 163 544 312 207 533 17 139 ------- ------- ------- ------- ------- ------- ------- Total revenues................... 163 544 651 2,532 3,534 568 922 ------- ------- ------- ------- ------- ------- ------- Expenses: Research and development................ 2,696 4,525 5,553 7,423 8,322 1,898 1,895 General and administrative.............. 1,218 1,494 1,716 1,831 1,976 462 503 Interest expense........................ 142 78 226 238 322 71 55 ------- ------- ------- ------- ------- ------- ------- Total expenses................... 4,056 6,097 7,495 9,492 10,620 2,431 2,453 ------- ------- ------- ------- ------- ------- ------- Net loss.................................. $(3,893) $(5,553) $(6,844) $(6,960) $(7,086) $(1,863) $(1,531) ======= ======= ======= ======= ======= ======= ======= Net loss per share(1)..................... $ (0.96) $ (0.99) $ (1.12) $ (0.97) $ (0.55) $ (0.25) $ (0.10) ======= ======= ======= ======= ======= ======= ======= Shares used in calculating per share data(1)................................. 4,059 5,599 6,118 7,202 12,859 7,527 14,984 ======= ======= ======= ======= ======= ======= ======= </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 -------------------------- ACTUAL AS ADJUSTED(2) ------- -------------- <S> <C> <C> BALANCE SHEET DATA: Cash, equivalents and short-term investments...................... $ 9,653 $ 19,144 Total assets...................................................... 12,461 21,952 Long-term portion of capital lease obligations and debt........... 636 636 Total shareholders' equity........................................ 10,190 19,681 </TABLE> - --------------- (1) See Note 1 to Financial Statements for the method used to determine shares used in calculating per share data. (2) Adjusted to reflect the sale by the Company of the 3,500,000 shares of Common Stock offered hereby at an assumed public offering price of $3.00 per share.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0000878760_physician_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000878760_physician_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..4ab2ee04d4d0afb93dc5b50080e7bd7881977808
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Prospective investors should consider carefully the information discussed under 'Risk Factors.' Except as otherwise indicated, all information in this Prospectus (i) has been adjusted to give effect to an increase in the number of authorized shares of common stock from 5,000 to 100,000,000 and a change in the par value of common stock from $.01 to $.001 per share (the 'Common Stock'), to be effective prior to the completion of the Offering, (ii) has been adjusted to reflect the 1,400-for-one stock split with respect to the Common Stock that will occur prior to completion of the Offering and (iii) assumes no exercise of the Underwriters' over-allotment option. THE COMPANY Based on its discussions with others in the industry and data available to the Company, the Company believes that it is a leading provider of business management services to hospital-affiliated physicians in an array of practice settings, including solo and group practices, independent practice associations ('IPAs'), specialty networks and other affiliated-physician groups (such physicians and groups being referred to in this Prospectus as 'Physicians'). The Company offers its clients a broad variety of business management services, ranging from accounts receivable management to financial, administrative and strategic support, data management and information systems support. In addition, the Company employs its proprietary technology and extensive financial and patient encounter databases to provide a comprehensive range of managed care services to its clients, including contract review and negotiation, implementation and administration, thereby enhancing their ability to profitably participate in managed care systems. The Company's services enable Physicians to maintain their independence and clinical autonomy while maximizing their reimbursement and cashflow. The Company believes that it is one of the largest providers of business management services to Physicians. Physicians continue to experience increasing pressure on fees coupled with a growing complexity in obtaining reimbursement from third party payors. In addition, the growth of managed care has fostered the need by Physicians for reliable health care resource utilization data, which is critical in every phase of the physician-payor relationship. Given these and other market forces, the Company believes that there is an increasing need among Physicians for sophisticated business management services and information systems provided on an outsourced basis. The Company believes that the business management services industry is highly fragmented, with services often provided to physicians by smaller accounts receivable management companies with annual revenues of less than $2 million. These organizations are unable to provide the broad range of services provided by the Company due to their limited capital and management resources and to their less comprehensive patient encounter databases, which restrict their ability to provide data that assists Physicians in managing their practices more effectively, including in the evaluation of managed care proposals. The Company believes that, as managed care becomes more prevalent, and as physicians continue to demand greater sophistication, broader product lines and higher service levels, these smaller service providers will find it increasingly difficult to compete. The Company currently provides service to over 2,000 physicians, including radiologists, anesthesiologists, pathologists and emergency room physicians, as well as other specialists, many of whom are affiliated with some form of group practice, IPA or other specialty network. The Company intends to continue utilizing its experience in working with Physicians in a number of different practice settings by acquiring and managing various types of specialty networks. For example, the Company manages what it believes is the oldest and largest IPA in the United States, with over 340 physicians. In addition, with its acquisition of a Cleveland-based company, planned to occur simultaneously with the Offering, the Company believes, based on the Acquired Business' expertise, reputation and experience in the industry with respect to management service organizations ('MSOs'), that it will become a leader in the formation, development and management of MSOs. For its services, the Company generally is compensated with a management fee based upon a percentage of its clients' net collections, which percentage is determined after considering a broad range of factors, including the medical specialty of the client and the nature of the services to be provided. In most cases, the Company enters into written contracts with its clients, which range in duration from month-to-month to five years and renew automatically unless notice to the contrary is given. The agreements describe in general the nature of the services to be provided and the management fee to be charged by the Company. As of December 31, 1995, the Company experienced client retention (as measured by the continuation of written contracts in existence at the end of 1994) of approximately 95% of those clients to which it provided services at the end of 1994. The Company estimates that for the 12 months ended December 31, 1995, its subsidiary, Spring Anesthesia Group, Inc., retained approximately 83% of its clients, substantially all of which are individual physicians that do not have written agreements with Spring. The Company's strategy is to build upon its reputation and expertise in providing a broad range of cost-effective, value-added business management services to Physicians through internal growth and by acquisition. The specific elements of the Company's strategy include (i) providing a high level of customer service on a local level while utilizing cost-effective centralized processing centers, (ii) offering an increasingly broad array of value-added services, such as IPA and MSO services, that address the changing health care environment, (iii) continuing to focus on technological means of increasing Physician revenue by expanding and developing proprietary software systems, patient encounter databases, statistical reporting systems and electronic data interfaces, (iv) expanding geographically through acquisition opportunities in the consolidating physician business management services industry and (v) cross-selling its services to other medical specialties. The Company has entered into agreements to acquire (the 'Acquisitions') simultaneously with the Offering, three businesses, one of which consists of three affiliated companies (all of such businesses being referred to collectively as the 'Acquired Businesses'), currently providing business management services to Physicians. The Offering is contingent on the Acquisitions being completed simultaneously with the Offering. After giving effect to the Acquisitions, the total number of physicians served by the Company will increase to over 2,500. PSS believes that each of the Acquired Businesses operates in a manner consistent with the Company's core business strategy and gives it the opportunity to provide its services to Physicians in other regions of the United States. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company................ 3,500,000 shares(1) Common Stock to be outstanding after the Offering......................................... 5,740,000 shares(1)(2) Use of proceeds.................................... Pending and future acquisitions; repayment of debt; redemption of preferred stock; working capital and other general corporate purposes. Proposed Nasdaq National Market symbol............. PHSS </TABLE> - ------------ (1) Does not include up to an aggregate of 525,000 shares of Common Stock that may be sold by the Company pursuant to the Underwriters' over-allotment option. See 'Underwriting.' (2) Excludes 939,750 shares of Common Stock reserved for future issuance under the Company's proposed stock option plan. It is anticipated that options to purchase up to 95,000 shares of Common Stock will be granted as of the completion of the Offering. See 'Management -- Stock Option Plan.' SUMMARY CONSOLIDATED FINANCIAL AND PRO FORMA INFORMATION (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) <TABLE> <CAPTION> NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ----------------------------------------------- --------------------------------- PRO FORMA PRO FORMA 1992 1993(1) 1994 1994(2) 1994 1995 1995(2) --------- --------- --------- ----------- --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> <C> INCOME STATEMENT DATA: Revenue............................... $ 8,123 $ 13,080 $ 18,773 $ 26,897 $ 14,789 $ 14,631 $ 20,841 Operating expenses: Salaries and wages............... 3,101 5,898 8,866 12,214 6,552 7,234 10,076 General and administrative....... 2,021 4,291 6,723 9,349 5,121 5,020 6,748 Depreciation and amortization.... 1,781 2,566 3,349 4,124 2,522 2,549 3,119 --------- --------- --------- ----------- --------- --------- --------- Total operating expenses.... 6,903 12,755 18,938 25,687 14,196 14,802 19,943 --------- --------- --------- ----------- --------- --------- --------- Income (loss) from operations......... 1,221 325 (165) 1,210 593 (171) 898 Net income (loss)..................... $ 16 $ (672) $ (1,067) $ (363) $ (942) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Net (loss) per share.................. $ (0.08) $ (0.40) $ (0.58) $ (0.24) $ (0.51) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Weighted average shares outstanding(3)...................... 2,240,000 2,240,000 2,240,000 2,240,000 2,240,000 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Pro forma net income.................. $ 326 $ 53 ----------- --------- ----------- --------- Pro forma net income per share........ $ .06 $ .01 ----------- --------- ----------- --------- Pro forma weighted average shares outstanding(3)...................... 5,740,000 5,740,000 ----------- --------- ----------- --------- </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1995 ----------------------- ACTUAL PRO FORMA(2) ------- ------------ (UNAUDITED) <S> <C> <C> BALANCE SHEET DATA: Working capital (deficiency).................................................................. $(1,351) $ 9,034 Total assets.................................................................................. 21,618 42,966 Long-term liabilities, net of current portion................................................. 15,463 6,749 Redeemable preferred stock.................................................................... 2,382 -- Stockholders' equity (deficiency)............................................................. (3,429) 28,321 </TABLE> - ------------ (1) The results for the year ended December 31, 1993 include the results of Spring Anesthesia Group, Inc. from the date of acquisition, August 1, 1993, through December 31, 1993. (2) The pro forma data gives effect to: (a) the acquisition of the Acquired Businesses (NCHC Group, MM Support and DPS) and (b) the sale of the shares of Common Stock offered hereby and the application of the net proceeds thereof as described in 'Use of Proceeds' as if each had occurred at the beginning of the periods presented. In addition, the pro forma information is based on available information and certain assumptions and adjustments. See Notes 1 and 2 to the Pro Forma Financial Information. (3) Weighted average shares outstanding includes 2,240,000 shares outstanding prior to the Offering after adjustment to reflect the 1,400-for-one stock split which will occur prior to completion of the Offering. In addition, pro forma weighted average shares outstanding includes 3,500,000 shares being sold in connection with the Offering. Weighted average shares outstanding and pro forma weighted average shares outstanding do not include any shares reserved for future issuance under the Company's proposed stock option plan.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000878901_koo-koo_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000878901_koo-koo_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements appearing elsewhere in this Prospectus. Without limiting the generality of the foregoing, prospective investors should carefully consider the factors set forth under the caption "Risk Factors." THE COMPANY Koo Koo Roo, Inc. (the "Company") operates restaurants in the emerging food service category of fresh, convenient meals. The restaurants feature the Company's proprietary Original Skinless Flame-Broiled Chicken/TM/, fresh oven- roasted hand-carved turkey, country herb rotisserie chicken, made to order tossed salads, specialty sandwiches on fresh baked rolls, a signature vegetable soup and more than 23 side dishes including hand-mashed potatoes, stuffing, steamed green beans and other vegetables, rices and grains, all prepared fresh in small batches on-site throughout the day. As of March 31, 1996, the Company operated 18 Koo Koo Roo restaurants. The Company's restaurants are designed to appeal to consumers who look for good tasting, freshly prepared food, and who also appreciate menu items that are wholesome and healthy. The products are easy to understand, high in quality and generally low in fat, calories and cholesterol, without the negative connotation or taste of "health food." The sights and smells of fresh food preparation, such as turkey carving and salad tossing, are displayed in glass enclosed stations featuring "chefs" in restaurant whites and toques. Over the past several years, executive management, together with the Company's corporate chef and professional designers, developed the layout, menu and appearance of the current prototype store, referred to as the Koo Koo Roo California Kitchen/TM/ concept. The performance and continuing improvement of this concept led management to plan for a rapid expansion starting in 1995 and to focus on Company ownership or joint venture relationships rather than franchising. The Company is presently emphasizing growth through the development of additional Koo Koo Roo California Kitchen/TM/ stores which will be either owned and operated by the Company or owned in partnership with its existing domestic joint venture partner and operated by the Company. It intends to act opportunistically to establish additional joint venture arrangements and make restaurant acquisitions and may also grow through the acquisition of complementary businesses. Although the focus in 1996 will be on Company-owned restaurants, the Company may pursue additional joint ventures or franchising in certain markets. The Company's principal executive offices are located at 11075 Santa Monica Boulevard, Suite 225, Los Angeles, California 90025 and its telephone number is (310) 479-2080. RECENT DEVELOPMENTS The Company announced several significant transactions in March 1996, including a letter of intent related to the establishment of a joint venture in Canada, the acquisition of 90% of the outstanding capital stock of Color Me Mine, Inc. ("Color Me Mine"), an operator of a small chain of paint-your-own ceramics studios, and the closing of two private placements. In the private placements, the Company received gross proceeds aggregating $33.2 million relating to the issuance of (i) 450,000 shares of Common Stock for $7.245 per share (subject to adjustment) and (ii) 1,200,000 shares of a newly-designated class of 5% Convertible Preferred Stock for $25.00 per share, as well as related warrants. The number of shares of Common Stock issuable in connection with such transactions and offered hereby is subject to adjustment and will depend upon factors which cannot be predicted by the Company at this time including, among others, the future market price of the Common Stock. See "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations--Recent Private Placements," "Description of Capital Stock" and Note 14 to the Consolidated Financial Statements. THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Selling Stockholders (estimate) ............ 5,250,000 shares (1) Shares of Common Stock Outstanding Prior to the Offering....................... 14,766,999 shares (2) Use of Proceeds.............................. The proceeds from the sale of the shares of Common Stock offered hereby are solely for the account of the Selling Stockholders. Accordingly, the Company will receive none of the proceeds from sales thereof. See "Use of Proceeds." Nasdaq National Market Common Stock Symbol... KKRO </TABLE> - -------------------- (1) As set forth in the text on the cover of this Prospectus, this offering includes the resale of such presently indeterminate number of shares of Common Stock as shall be issued in respect of: (i) 450,000 shares of Common Stock (subject to adjustment) issued in a private placement in March 1996, (ii) all shares of Common Stock issuable upon conversion of or otherwise in respect of 1,200,000 shares of the Registrant's 5% Convertible Preferred Stock issued in a private placement in March 1996, (iii) 40,500 shares of Common Stock (subject to adjustment) issuable upon the exercise of warrants issued in connection with the foregoing private placements, (iv) all shares of Common Stock upon conversion of or otherwise in respect of 108,000 shares of the Registrant's 5% Convertible Preferred Stock issuable upon the exercise of warrants issued in connection with the foregoing private placements and (v) 84,409 shares of Common Stock originally issued in other private placements. The number of shares of Common Stock indicated to be offered hereby on the cover of this Prospectus and above is an estimate based upon the market price of the Common Stock set forth on the cover page of this Prospectus assuming that all shares of Convertible Preferred Stock are converted on the first date permitted. The number of shares of Common Stock issuable in connection with such transactions and offered for resale hereby is subject to adjustment and could be materially less or more than such amount depending upon factors which cannot be predicted by the Company at this time, including, among others, the future market price of the Common Stock. This presentation is not intended to constitute a prediction as to the future market price of the Common Stock. See "Risk Factors--Effect of Conversion of Convertible Preferred Stock; Potential Common Stock Adjustment" and "Description of Capital Stock."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000879313_sygnet_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000879313_sygnet_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information (including the Company's combined financial statements and notes thereto) contained elsewhere in this Prospectus. Unless the context otherwise requires, references to the "Company" are to Sygnet Wireless, Inc., an Ohio corporation, its wholly-owned subsidiary, Sygnet Communications, Inc., and their respective predecessors prior to the corporate restructuring described elsewhere in this Prospectus and include the operations to be acquired in part with the proceeds of the Offering. The term "Horizon Acquisition" refers to the acquisition under the agreement to purchase five RSAs in western Pennsylvania and New York (PA-1, PA-2, PA-6, PA-7 and NY-3) from three Horizon Cellular Telephone Company affiliates, as described more fully below under "Business -- The Horizon Acquisition." THE COMPANY Upon consummation of the Horizon Acquisition, the Company will own and operate cellular telephone systems serving one large cluster with approximately 2.4 million Pops in northeastern Ohio, western Pennsylvania and western New York. The Horizon Acquisition will add five RSAs (the "Horizon Systems") to the three MSAs and one RSA currently operated by the Company (the "Existing Systems"), providing the Company with over 89,000 subscribers. The Company's cellular systems are located in Youngstown, Ohio and Erie, Pennsylvania and in primarily suburban and rural areas between the Cleveland, Akron-Canton, Pittsburgh, Buffalo and Rochester metropolitan areas. The Company believes that its mix of suburban and rural locations provides it with advantages over cellular operators in predominately urban areas, including greater roaming revenue opportunities, lower distribution costs and higher costs of entry for new competitors. The Company has converted all of its Existing Systems to TDMA digital technology and will selectively convert the more densely populated portions of the Horizon Systems to digital technology in early 1997. For a general description of the cellular telephone industry and the regulation thereof, see "Business -- Overview of the Cellular Telephone Industry" and "Business -- Regulatory Overview." The Company began operating cellular systems in 1985 in Youngstown, Ohio and has expanded to cover nine contiguous markets through a series of acquisitions. The Company is owned and controlled by the Williamson family, which has owned and operated broadcast and other communications companies in northeastern Ohio and western Pennsylvania since 1926. The following table summarizes the Existing Systems and the Horizon Systems. <TABLE> <CAPTION> DATE OF TOTAL POPS OWNERSHIP NET POPS ACQUISITION <S> <C> <C> <C> <C> EXISTING SYSTEMS(1) Youngstown, OH MSA............................... 491,900 100% 491,900 1985 Sharon, PA MSA................................... 122,100 100% 122,100 1987 Erie, PA MSA..................................... 280,600 100% 280,600 1995 Columbiana, OH, OH-11 RSA........................ 111,700 100% 111,700 1991 HORIZON SYSTEMS(1)(2) Chautauqua, NY, NY-3 RSA......................... 485,200 100% 485,200 1996 Crawford, PA, PA-1 RSA........................... 197,200 100% 197,200 1996 Lawrence, PA, PA-6 RSA........................... 376,400 100% 376,400 1996 Indiana, PA, PA-7 RSA............................ 217,100 100% 217,100 1996 McKean, PA, PA-2 RSA(3).......................... 89,400 100% 89,400 1996 ---------- --------- Total.................................... 2,371,600 2,371,600 </TABLE> - ----------------------------- (1) All of the Existing Systems and Horizon Systems licenses are non-wireline licenses. (2) To be acquired as described under "Business -- The Horizon Acquisition." (3) The Horizon Acquisition includes the Pops in the PA-2 RSA where the Company has IOA pending the FCC's final determination of the qualifications of the initial lottery winner to hold the permanent license for the PA-2 RSA. The Company will not be issued the permanent license to provide cellular service in this RSA (unless the Company were to reach an agreement to purchase the license from the eventual recipient of the license) and the Company's IOA from the FCC will expire upon selection of the new licensee and the commencement of operations by that licensee. Until the expiration of the IOA, however, the Company is entitled to all revenue and income generated by the PA-2 RSA. The Company believes that the expiration of such authority will not have a material adverse effect on its results of operations, financial position or cash flows. CERTAIN TERMS For regulatory purposes, the Federal Communications Commission ("FCC") has designated regions of the United States as either a Metropolitan Statistical Area ("MSA") or Rural Service Area ("RSA"). Interests in cellular markets are commonly measured on the basis of the population of the MSA or RSA served, with each person in the market area referred to as a "Pop." The number of Pops (or "Net Pops") owned is not the same as the number of subscribers, or even potential subscribers. As used in this Prospectus, unless otherwise indicated, the term "Pops" means the estimate of the population of an MSA or RSA, as derived from the Rand McNally Commercial Atlas and Marketing Guide population estimates. The term "Net Pops" means the estimated population with respect to a given service area multiplied by the percentage interest that the Company owns in the entity licensed in such service area (except in the case of the PA-2 RSA which the Company does not own, but operates under an FCC grant of Interim Operating Authority ("IOA")). Because the Company owns 100% of the interest in each of its MSAs and RSAs, at this point in time, Net Pops equal Pops. Except for historical financial information and unless otherwise indicated, all references herein to Pops, Net Pops and the Company's systems give effect to consummation of the Horizon Acquisition, which will occur simultaneously with the closing of the Offering. The term "non-wireline" license refers to the license for any market that was initially awarded to a company, individual or group, not affiliated with any landline carrier providing service in the market. The term "wireline" license refers to the license for any market that was initially awarded to a company, individual or group, affiliated with a landline carrier providing service in the market. There is, however, no technical distinction between a wireline and a non-wireline license. The term "system" means an FCC-licensed cellular telephone system. The term "cell" refers to the service area of an individual transmitter location in a cellular system. The term "footprint" refers to the total system coverage area represented by an MSA or RSA served under FCC license by a given licensee. The term "TDMA" means a digital technology that uses time division multiple access. The term "PCS" means personal communications services. The term "churn" refers to the ratio of disconnected monthly subscribers to average monthly subscribers. The term "CTIA" means the Cellular Telecommunications Industry Association. The term "NACN" means the North American Cellular Network. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "SEC") a Registration Statement on Form S-1 (the "Registration Statement") under the Securities Act with respect to the Notes offered hereby. This Prospectus, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement, certain items of which are contained in schedules and exhibits to the Registration Statement as permitted by the rules and regulations of the SEC. Any statements contained herein concerning the provisions of any document filed as an Exhibit to the Registration Statement or otherwise filed with the SEC are not necessarily complete and, in each instance, reference is made to the copy of such document so filed. Each such statement is qualified in its entirety by such reference. The Company intends to furnish holders of the Notes annual reports containing audited financial statements and quarterly reports for the first three quarters of the fiscal year containing unaudited financial statements. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OPEN MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. BUSINESS STRATEGY The Company's goal is to become the leading full service provider of mobile telecommunications services in its cluster by offering technically advanced cellular service, superior coverage and a high level of customer service at competitive prices. Specifically, the Company's business objectives are to increase penetration and improve profitability in both the Horizon Systems and its Existing Systems by taking advantage of its ability to operate in a much larger regional footprint. In addition, the Company may in the future acquire additional systems that provide the Company with the ability to further its strategic objectives. - Developing the Horizon Systems. The Company believes that the Horizon Systems are underdeveloped and underpenetrated compared to its Existing Systems and represent a substantial growth opportunity for the Company. By taking advantage of marketing, operating and engineering synergies arising from the Horizon Acquisition, the Company believes that it will be able to decrease overall per subscriber operating costs and rapidly increase penetration in the Horizon Systems to levels comparable to those achieved in its Existing Systems. Immediately upon consummation of the Horizon Acquisition, the Company will apply its business strategy to the Horizon Systems, which strategy has generated significant subscriber and revenue growth in its Existing Systems, including the Erie, PA MSA acquired in September 1995 (the "Erie Acquisition"). - Aggressive Marketing and Promotion of Cellular Services. The Company plans to implement the aggressive marketing programs that it has been using in its Existing Systems to increase subscriber activations in the Horizon Systems. These include competitive rate plans which provide low priced regional roaming rates tailored for individual markets and attractive equipment prices. In addition, the Company will use a mix of advertising media such as television, radio and outdoor advertising to reach potential new subscribers. - Local Retail Outlets and Superior Customer Service. The Company strives to provide a high level of customer service and the Company's use of local retail stores is a key element of this local subscriber service strategy. The Company's stores are staffed with sales and customer service representatives who provide a more direct, specifically targeted level of customer service than is ordinarily offered by larger competitors relying on centralized customer service operations. By having a permanent local retail presence, the sales staff can cultivate local market knowledge that allows them to focus their efforts on the specific demands of the market or markets in which they operate. This improves their ability to establish relationships with customers, to understand the customer's needs and to reduce churn. The sales team's ability to promote the Company's services both inside and outside of its cluster is enhanced by its license to market under the CELLULAR ONE(R) brand name and its continuing participation in the NACN, a national cellular network comprised principally of non-wireline carriers whose goal is to make cellular service "seamless" throughout North America by facilitating automatic roaming to and from member systems. - Advanced Systems Design. The Company's system design and the TDMA digital technology it employs provide the foundation for technically superior cellular service. The Company has deployed a large number of cell sites in each service area. Consequently, subscribers in the Existing Systems enjoy a high level of local and regional coverage, resulting in high quality hand-held coverage throughout most of its population centers, minimal call blocking, seamless call delivery through NACN and the availability of digital voice and data services. All of the Company's existing cells have already been upgraded to offer TDMA digital services and the Company intends to selectively improve the technology being used in the Horizon Systems to match this high quality level. The Company believes it is well positioned to address new technologies that might become available in its markets. - Decentralized Marketing Management. The Company has assembled management, sales and operating staff with extensive experience and relationships within each market. The decentralized market management structure adopted by the Company allows it to tailor its service to meet the needs of each market. This local approach to marketing is coordinated with senior management of the Company and allows each market to benefit from shared corporate resources. - Acquisition Strategy. The Company's primary external growth strategy has been to develop its cellular system by pursuing acquisitions that expand its regional footprint, can be operated efficiently, enhance its reciprocal relationships with other cellular telephone carriers and provide an opportunity to gain significant competitive advantages. As it has done successfully in the past, the Company intends to pursue acquisition opportunities which permit the Company to achieve these strategic objectives either with respect to its current cluster or elsewhere. - Future Competition. The Company is preparing for what is expected to be an increasingly competitive telecommunications environment by aggressively working to attract new subscribers. The Company believes it is prepared for this competition because it is not dependent on high roaming or local rates. In addition, the Company believes that it can effectively face this competition from its position as an incumbent in the cellular field with a high quality network that is not capacity constrained. The Company also has an extensive footprint, strong distribution channels, superior customer service capabilities and an experienced management team. Because the Company operates in medium to small markets, the new PCS licensees may be unable or unwilling to offer commercially viable wireless service in much of the Company's area in the near term. The Company believes the extensive capital expenditures required to deploy the infrastructure for PCS is more readily justifiable from an economic standpoint in larger, more densely populated urban areas. This constraint of PCS may position the Company to offer roaming services to PCS customers, as well as to provide bulk lines of service for resale to certain PCS companies. For example, the Company's existing Youngstown and Erie systems are equipped to provide TDMA digital roaming to AT&T Wireless PCS subscribers when AT&T Wireless introduces dual band TDMA phones in the adjacent Cleveland and Buffalo-Rochester MTAs. THE HORIZON ACQUISITION On July 11, 1996, the Company signed an agreement with Horizon Cellular Telephone Company of Chautauqua, L.P., Horizon Cellular Telephone Company of Crawford, L.P. and Horizon Cellular Telephone Company of Indiana, L.P. (the "Horizon Companies") to purchase for $250.0 million in cash (subject to net working capital adjustment) the Horizon Systems, which consist of the PA-1, PA-2, PA-6, PA-7 and NY-3 RSAs. Under the agreement, the Company is to become the cellular licensee serving contiguous markets representing approximately 1.3 million Pops and covering over 16,125 square miles in western Pennsylvania and New York. The PA-2 RSA, which represents 89,400 Pops, currently operates under IOA pending the FCC's final determination of the qualifications of the initial lottery winner to hold the permanent license for the PA-2 RSA. While the Company is not acquiring a permanent license for the PA-2 RSA, it is entitled to all revenue and income generated by the cellular system until the FCC resolves the dispute. The Company is unable to predict when or how the FCC will resolve this matter. Simultaneously with the closing of the Horizon Acquisition, the Subsidiary will obtain secured financing from a number of commercial lenders (the "Lenders") under a $300.0 million revolving line of credit (the "Bank Credit Facility"), the agents for which will be Toronto Dominion (Texas), Inc. and PNC Bank, National Association. In addition, the Company will issue (the "Preferred Stock Investment") $20.0 million liquidation amount of Cumulative Preferred Stock (the "Preferred Stock") to Toronto Dominion Investments, Inc. or one or more other affiliates of Toronto Dominion (Texas), Inc. Dividends on the Preferred Stock will accrue at a rate of 15% per annum for the first four quarters and will increase by 2% for each four quarter period thereafter until reaching a maximum rate of 21% per year, and such dividends will be payable solely through the issuance of additional Preferred Stock. If any event of default under the terms of the Preferred Stock occurs and is continuing or if the Company's Annualized Operating Cash Flow Ratio (using substantially the same definition as that used in the Indenture) exceeds 12.0-to-1.0, then the otherwise applicable dividend rate for the Preferred Stock will be increased by 5% per annum. In addition, Toronto Dominion Investments, Inc. is entitled to warrants to purchase Class A Common Stock (as defined) of the Company unless the Preferred Stock is redeemed with the proceeds of an initial public offering of Class A Common Stock or from other permitted sources within nine months of the date of the Preferred Stock Investment. See "Description of Capital Stock -- Preferred Stock." Proceeds of the Offering, the Preferred Stock Investment and borrowings under the Bank Credit Facility will be used to pay the purchase price in the Horizon Acquisition and the related fees and expenses. See "Use of Proceeds." If the proceeds of the Offering have not been so applied within 120 days of the closing of the sale of the Notes, the Company will offer to purchase the Notes at 101% of the principal amount thereof, plus accrued interest to the purchase date. See "Description of Notes -- Limitation on Use of Proceeds; Proceeds Purchase Offer." The remainder of availability under the Bank Credit Facility will be used for working capital purposes, to refinance $71.5 million in existing debt (unless repaid earlier using proceeds of the Offering) and for system expansion. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Description of Bank Credit Facility." THE OFFERING The following summary description of the Notes is qualified in its entirety by the more detailed information set forth under the caption "Description of Notes" contained elsewhere in this Prospectus. Notes Offered...................... $110,000,000 aggregate principal amount of % Senior Notes due 2006. Maturity Date...................... October 1, 2006. Interest Payment Dates............. April 1 and October 1 of each year, commencing April 1, 1997. Mandatory Redemption............... None. Optional Redemption................ The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after October 1, 2001 at the redemption prices set forth herein, plus accrued and unpaid interest, if any, to the date of redemption. In addition, at any time during the first 36 months after the date of the original issuance of Notes, the Company may redeem up to an aggregate of $38.5 million in principal amount of Notes at a redemption price of % of the principal amount thereof, plus accrued and unpaid interest thereon, with the net proceeds of an offering of Qualified Capital Stock (as defined) of the Company; provided that at least $71.5 million in aggregate principal amount of Notes remain outstanding immediately after the occurrence of such redemption. See "Description of Notes -- Optional Redemption." Limitations on Use of Proceeds; Proceeds Purchase Offer............ All net proceeds received by the Company from the sale of the Notes shall be applied to the purchase of assets in the Horizon Acquisition or, as set forth below, to repay indebtedness under the Subsidiary's existing bank credit facility pending such acquisition; provided, however, that no such proceeds may be applied to the purchase of assets in Horizon Acquisition until the Company has received at least $19.0 million in proceeds from the Preferred Stock Investment and the Trustee has received certain opinions and certificates regarding the Horizon Acquisition. Pending the consummation of the Horizon Acquisition, all such proceeds shall be held by the Company in a separate bank account, except that up to $71.5 million of the net proceeds from the sale of the Notes may be contributed to the Subsidiary to repay indebtedness under the Subsidiary's existing bank credit facility, but only to the extent that the banks thereunder consent to allow the amounts repaid to be reborrowed and paid as a dividend to the Company for the sole purpose of funding a repurchase of the Notes in the event that the Horizon Acquisition does not occur within 120 days following the closing of the sale of the Notes. In the event that all of the net proceeds of the sale of the Notes have not been so applied, directly or indirectly, to the purchase of assets in the Horizon Acquisition within 120 days of the closing of the sale of the Notes, the Company will make an offer (a "Proceeds Purchase Offer") to all holders of Notes to purchase on a pro rata basis, at a price of 101% of the principal amount thereof plus accrued interest to the purchase date, all Notes that may be purchased at such price with such unapplied net proceeds. Ranking............................ The Notes will be general unsecured obligations of the Company and will rank pari passu with all senior indebtedness of the Company, if any, and senior in right of payment to all subordinated indebtedness of the Company, if any. The Company is a holding company with no direct operations and assets other than the stock of the Subsidiary. The Notes will not be guaranteed by the Subsidiary, therefore the Notes will be structurally subordinated to all liabilities of the Subsidiary. After giving effect to the Horizon Acquisition and the other transactions described under "Unaudited Pro Forma Condensed Consolidated Financial Data" (the "Related Transactions") as if such transactions had occurred on June 30, 1996, the Subsidiary would have had $211.8 million of total outstanding indebtedness (including $204.4 million of secured borrowings under the Bank Credit Facility), all of which is structurally senior in right of payment to the Notes. The indenture governing the Notes (the "Indenture") will allow the Company and the Subsidiary to incur additional indebtedness. See "Description of Notes -- Certain Covenants." Certain Covenants.................. The Indenture imposes certain limitations on the ability of the Company and its Restricted Subsidiaries (as defined) to, among other things, incur Indebtedness (as defined), make Restricted Payments (as defined), effect certain Asset Sales (as defined), enter into certain transactions with Related Persons (as defined), merge or consolidate with any other person or transfer all or substantially all of their properties and assets. See "Description of Notes -- Certain Covenants." Change of Control.................. Upon the occurrence of a Change of Control (as defined in the Indenture), each holder of Notes will have the right to require the Company to repurchase such holder's Notes at 101% of the principal amount thereof plus accrued and unpaid interest thereon, if any, to the repurchase date. In addition, a Change in Control (as defined in the Bank Credit Facility) will result both in an event of default under the Bank Credit Facility permitting the Lenders to accelerate such indebtedness and in a Mandatory Redemption Event under the terms of the Preferred Stock (as defined in the Preferred Stock Investment). Under such circumstances, the Company may be obligated to redeem, repurchase or otherwise satisfy up to as much as $110.0 million in principal under the Notes, $300.0 million in principal under the Bank Credit Facility, and $20.0 mil- lion face amount of the Preferred Stock (plus, as applicable, associated accrued interest, dividends, penalties, premiums and expenses). The Bank Credit Facility may restrict the ability of the Company to obtain the funds necessary to repurchase the Notes in the event of a Change of Control, and the Company may not have sufficient funds or financing available to satisfy its obligations to repurchase the Notes. See "Description of Notes -- Certain Covenants -- Change of Control" and "Description of Bank Facility" and "Description of Capital Stock -- Preferred Stock." Events of Default.................. Events of Default under the Indenture include failure to pay principal or interest on the Notes, failure to make payments on other indebtedness, breach of certain covenants, certain events of bankruptcy and insolvency and other customary events. See "Description of Notes -- Events of Default and Remedies." Use of Proceeds.................... The Company intends to use the net proceeds of the Offering to finance a portion of the Horizon Acquisition. See "Use of Proceeds" and "Business -- The Horizon Acquisition."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000879969_carematrix_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000879969_carematrix_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Prospective investors should consider carefully the information set forth under "Risk Factors." Unless otherwise indicated, information in this Prospectus assumes (i) no exercise of the Underwriters' option to purchase from the Selling Stockholders up to 937,500 additional shares of Common Stock to cover over-allotments, if any, and (ii) a one-for-five reverse stock split of the Company's Common Stock effective October 14, 1996 (the "Reverse Split"). The Company CareMatrix Corporation (the "Company") (formerly known as The Standish Care Company) is a provider of assisted living services, operating 20 facilities in eight states with a capacity of approximately 1,580 residents. Of these facilities, two are owned, nine are leased and nine are managed. The Company's three year growth objective is to develop at least 60 new facilities, with a capacity of approximately 7,200 residents, and to acquire additional assisted living facilities or operations. Currently, the Company is developing 28 facilities, of which four facilities are now under construction. The Company's strategy is to provide a full range of assisted living and related services across a range of pricing options. The Company believes that it can effectively and efficiently respond to a variety of the needs of seniors as they age and require additional care. The Company expects its assisted living facilities to serve as the foundation from which it will provide a continuum of care for its residents. When its assisted living facilities are integrated with supportive independent living facilities, skilled nursing/rehabilitation facilities and Alzheimer's care programs, the Company believes that it will have the ability to provide a less stressful transition for those of its residents who need a higher degree of care to more supportive environments either within the same facility, in a campus setting or in a nearby facility. The Company believes that by offering such a continuum of care to its residents, it will be better able to respond to resident needs than free-standing assisted living facilities that do not provide the flexibility for their residents to age in place. The Company intends to provide at all of its assisted living facilities a full range of quality senior residential services that are designed to permit residents to age in place by meeting their evolving personal and health care needs. To accomplish this objective, the Company is developing comprehensive service packages and integrated campuses that the Company believes will enable it to become a leading provider of assisted living services to seniors within a fully integrated matrix of social and healthcare service models. The Company believes that the popularity of assisted living and other senior care alternatives will increase the demand for quality facilities that provide such services across upper, moderate and lower income markets. The Company is developing four such models to meet this anticipated demand: (bullet) Chancellor Park--These facilities will provide supportive independent and assisted living services and are designed to serve primarily upper income residents. The capacity of this model ranges from 100 to 160 residents. The average monthly service fee paid by residents will range from approximately $2,300 to $4,900. (bullet) Chancellor Gardens--These facilities, which target a broader population base, will provide similiar services to moderate and upper income residents. This model typically accommodates 80 to 140 residents. The average monthly service fee paid by residents will range from approximately $1,400 to $3,000. (bullet) Chancellor Village--These facilities, which further broaden the Company's service market, are designed to accommodate lower income residents and Medicaid-eligible residents. This model typically accommodates 80 to 100 residents. The average monthly service fee for residents will range from approximately $900 to $2,000. (bullet) Chancellor Place--These facilities, which will be free-standing or integrated within other Company facilities to provide a continuum of care, are specially designed to meet the programmatic needs of residents with early or intermediate Alzheimer's disease and other forms of dementia. This model, which targets upper income seniors, accommodates 40 to 80 residents. The average monthly service fee paid by residents will range from approximately $3,200 to $3,600. Upon the completion of the Offering, the Company will implement an aggressive development and acquisition program designed to enhance the Company's ability to achieve its growth strategy. The Company will seek to cluster its facilities within selected geographic regions to achieve marketing, cost and service advantages. The Company believes that by combining different levels of care in a single, integrated campus or facility or through a network of facilities within a distinct market, it will be able to respond to the varied needs of seniors as they age, meet the cost containment objectives of private and governmental payor sources and create significant competitive advantages. The Company's senior management team has extensive experience in developing, operating and managing senior residence facilities. The Company expects that the facilities it plans to develop and subsequently manage or lease over the next three years will be developed for both related and unrelated parties. See "Risk Factors-- Dependence by the Company on Related Party Agreements" and "Business--Development and Acquisition." On October 4, 1996, twelve wholly owned subsidiaries of The Standish Care Company ("Standish") were merged into twelve corporations controlled by Abraham D. Gosman, members of his family and certain members of senior management (collectively, "Pre-Merger CareMatrix"), with the stockholders of Pre-Merger CareMatrix receiving approximately 92% of the then outstanding shares of Standish common stock (the "Merger"). Following the Merger, The Standish Care Company changed its name to CareMatrix Corporation. The Merger was accounted for as a reverse acquisition, whereby Pre-Merger CareMatrix is treated as the acquiror for accounting purposes. The Offering <TABLE> <CAPTION> <S> <C> Common Stock Offered 6,250,000 shares Common Stock to be Outstanding After the Offering 17,116,000 shares (1) (2) Use of Proceeds To finance future acquisitions and development, to repay outstanding debt to, and redeem the Series B Preferred Stock held by, the Company's principal stockholder, to pay dividends in arrears on the Series A Preferred Stock and for working capital purposes. See "Use of Proceeds." American Stock Exchange symbol CMD </TABLE> - ------------- (1) Does not include (i) an aggregate of 323,151 shares of Common Stock issuable following the completion of the Offering upon exercise or conversion of outstanding warrants and convertible securities of the Company and (ii) an aggregate of 1,600,000 shares of Common Stock reserved for issuance under the Company's stock option/equity incentive plans, of which approximately 680,000 have been granted at an average exercise price of approximately $14.50 per share. See "Capitalization," "Management" and "Shares Eligible for Future Sale." (2) Includes 108,000 shares of Common Stock to be issued as a fee in connection with the Merger and 19,140 shares of Common Stock issuable upon the expected conversion of the Series A Preferred Stock. See Note 3 to Unaudited Pro Forma Combined Balance Sheet and "Underwriting." Summary Combined Financial Data The following table sets forth the historical combined financial information of the Company and pro forma financial information to give effect to the Merger, the purchase in July 1996 of certain assets from an entity controlled by the Company's principal stockholder (the "Asset Purchase"), the Reverse Split and the sale of the Common Stock offered hereby. The Merger was accounted for as a reverse acquisition, whereby Pre-Merger CareMatrix is deemed the acquiror for accounting purposes. Accordingly, the financial history presented is that of Pre-Merger CareMatrix. <TABLE> <CAPTION> Pro Forma Pro Forma (2) As Adjusted (3) ------------------------ -------------------------- June 24, 1994 Six Six (Inception) Year Ended Months Year Ended Months Year Ended Six Months to December Ended December Ended December Ended December 31, 31, June 30, 31, June 30, 31, June 30, 1994 (1) 1995 (1) 1996 (1) 1995 1996 1995 1996 ------------ ----------- --------- ----------- --------- ----------- ----------- (in thousands, except per share data) <S> <C> <C> <C> <C> <C> <C> <C> Statement of Operations Data: Net revenues $ 366 $ 2,485 $ 2,389 $ 10,921 $ 7,059 $ 10,921 $ 7,059 Operating costs and expenses 2,865 9,147 5,591 20,113 11,128 20,113 11,128 ------------ ----------- --------- ----------- --------- ----------- ----------- Loss from operations (2,499) (6,662) (3,202) (9,192) (4,069) (9,192) (4,069) Interest income -- -- (24) (153) (53) (153) (53) Interest expense 56 544 559 2,044 1,382 1,500 823 Other -- -- -- (558) (743) (558) (743) ------------ ----------- --------- ----------- --------- ----------- ----------- Loss (4) $(2,555) $(7,206) $(3,737) $(10,525) $(4,655) $ (9,981) $(4,096) ============ =========== ========= =========== ========= =========== =========== Pro forma loss per share $ (0.97) $ (0.43) $ (0.58) $ (0.24) Shares outstanding 10,866 10,866 17,116 17,116 </TABLE> <TABLE> <CAPTION> June 30, 1996 ------------------------------------------- Pro Forma Historical Pro Forma As Adjusted (1) (5) (6) ----------- ---------- -------------- (in thousands) Balance Sheet Data: <S> <C> <C> <C> Cash and cash equivalents $ 2,028 $ 3,284 $104,064 Working capital (deficit) 1,286 (3,038) 98,900 Total assets 6,022 44,464 145,244 Long-term debt, less current maturities (7) 16,992 30,753 10,461 Stockholders' equity (deficit) (13,498) 3,326 125,556 </TABLE> - ------------- (1) The historical combined financial data represents the combined financial position and results of operations for the Company for the periods presented. (2) Gives effect to the Merger, the Asset Purchase and the Reverse Split as if such transactions had occurred as of January 1, 1995. See "Unaudited Pro Forma Financial Information." (3) Gives effect to (i) the Merger, the Asset Purchase and the Reverse Split and (ii) the sale of Common Stock offered hereby (assuming a public offering price of $21.25 per share) and the application of the net proceeds therefrom, as if such transactions had occurred as of January 1, 1995. See "Use of Proceeds" and "Unaudited Pro Forma Financial Information." (4) Provisions for income taxes have not been reflected in these combined financial statements since there is no taxable income on a combined basis. See Note 2 of the CareMatrix Combined Financial Statements. (5) Adjusted to give effect to the Merger and the Asset Purchase as if such transactions had occurred on June 30, 1996. See "Unaudited Pro Forma Financial Information." (6) Adjusted to give effect to (i) the Merger and the Asset Purchase and (ii) the sale of the Common Stock offered hereby (assuming a public offering price of $21.25 per share) and the application of the net proceeds therefrom as if such transactions had occurred on June 30, 1996. See "Use of Proceeds" and "Unaudited Pro Forma Financial Information."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000880238_core-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000880238_core-inc_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..169e98ad36b3d2d158e908b93d515c9c5a21f541
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000880238_core-inc_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following information is qualified in its entirety by the more detailed information and financial statements (including the notes thereto) appearing elsewhere in this Prospectus. See "Risk Factors" for a discussion of certain factors to be considered by prospective investors. THE COMPANY CORE, INC. is a national provider of managed disability and health care benefits management services to Fortune 500 companies and other self-insured employers, third-party administrators and insurance carriers. The Company's services include managed disability services using CORE's proprietary WorkAbility(R) disability management software, specialty physician and behavioral health review services and health care benefits utilization review and case management services. The Company's services are designed to assist its clients monitor and control disability and health care benefits costs without compromising the quality of health care services provided to the patient. CORE's managed disability services include monitoring the appropriateness of disability durations under short and long-term disability plans and workers' compensation programs in order to reduce unnecessary absenteeism and its related costs of wage replacement, hiring and training replacement personnel and lost productivity. These services are based on CORE's WorkAbility program, a proprietary software program developed over a ten-year period through the statistical analysis of disability utilization data. CORE's WorkAbility managed disability program provides an objective, medically based method for recommending and monitoring employee's return-to-work dates. The WorkAbility program is designed to obtain and analyze relevant medical and work-related information with the initial onset of the employee's absence and thus assure that the employee, attending physician and employer all have reasonable and consistent expectations as to the projected return-to-work date. CORE's independent physician review programs provide pre-certification, concurrent and appellate physician review services for use with utilization management programs of the Company's insurance company and self-insured corporate clients. The Company believes its more than 230 Board certified physician reviewers comprise the largest independent physician review service in the country. CORE's behavioral health review program provides comparable review services by psychiatric specialists in sub-specialties such as adult and child psychiatry, alcoholism and chemical dependency. The Company also provides utilization review services designed to evaluate the medical necessity and appropriateness of health care services prescribed for participants in health care and medical plans. In cases of high cost injuries or illness, CORE also renders case management services for individual cases to assure that cost- effective treatment alternatives are utilized. In recent years, large corporations have begun to recognize the magnitude of the annual cost of occupational and non-occupational injuries and illnesses, which according to a 1991 publication exceeded $2,200 per employee, or 8% of total payroll costs. These expenses present a significant challenge to corporate productivity. The Company estimates that total U.S. costs due to injury and illness-related workplace absence are approximately $260 billion per year. According to an industry source, workers' compensation expenditures grew at an average annual rate of over 10% from 1982 through 1991, and the Company believes this growth is continuing. The Company estimates that workers' compensation costs were approximately $60 billion in 1994. Despite the general awareness of this high level of workers' compensation costs, expenditures for group disability (including short-term disability and long-term disability plans), sick pay and family leave represent a far larger share of total expenditures at approximately $200 billion in 1994. Two driving factors behind the increase in group disability and workers' compensation expenditures are workplace and legislative changes. Work-related changes that have contributed to rising benefits costs include the aging of the active workforce, increased volatility in hiring and layoffs (which often results in increased benefits utilization) and increased diagnoses of repetitive stress-related injuries. Also contributing to rising disability benefit costs and awareness are legislative changes such as the Family Medical Leave Act and the Americans with Disabilities Act, which mandate accommodation for family circumstances and disabled workers, which both have a growing impact on accommodation and lost time issues. Until recently, recognition and management of these productivity costs have been impaired by their difficulty in measurement, the fragmentation of responsibilities for disability programs within human resources and risk management departments of most corporations and the historical focus on group health managed care. While a small group of companies is emerging that are applying managed care principles to the workers' compensation industry, historically there have been few, if any, companies focusing on the provision of managed care techniques to the broader disabilities market. With the support of its analytic and physician services, CORE's products provide employers with an integrated and comprehensive approach to disability benefits management. CORE intends to expand its position as a leading provider of managed disability benefits services by utilizing its proprietary WorkAbility program and related services to assist its clients in reducing the direct costs of short and long-term disability and workers' compensation benefits and improving employee productivity. The Company believes that the combination of its health care and disability management tools and its strong information technology foundation provide an effective management platform that can be tailored to meet the needs of self-insured employers and third-party payors. The principal elements of the Company's strategy for achieving its objectives are (i) to market aggressively its WorkAbility program in order to achieve greater penetration into the managed disability market; (ii) to pursue disability management outsourcing contracts with large employers; (iii) to make selective acquisitions of businesses that can provide service line extensions and cross- selling synergies in the managed disability market; (iv) to utilize its WorkAbility program as a technology platform in developing managed disability networks in certain geographical markets; and (v) to establish through the WorkAbility program the capability to enter into capitated or other "at risk" arrangements with payors in the managed disability market. On May 10, 1996, CORE entered into an Asset Purchase Agreement (the "AmHealth Agreement") to acquire substantially all of the assets and operations of AmHealth, Inc. (excluding its accounts receivable). AmHealth, Inc. is a management services organization that manages occupational health clinics and on-site industrial facilities in California. On July 24, 1996, the Company terminated the AmHealth Agreement. See "Risk Factors--Termination of AmHealth Acquisition Agreement," "Recent Developments" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview." THE OFFERING <TABLE> <S> <C> Common Stock being offered......... 2,000,000 shares(1) Common Stock outstanding after the offering.......................... 6,842,271 shares(1)(2) Use of Proceeds.................... To expand operating capacity and for other working capital and general corporate purposes Nasdaq National Market Symbol...... CORE </TABLE> - -------- (1) Excludes up to 300,000 shares of Common Stock that may be sold by the Company pursuant to the Underwriters' over-allotment option. See "Underwriting." (2) Based on the number of shares of Common Stock outstanding as of May 31, 1996. Excludes 1,535,979 shares of Common Stock issuable upon exercise of stock options and warrants outstanding at such date. See "Management." SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, --------------------------------------- ------------------ 1993 1994 1995 1995 1996 ------- ------- --------------------- -------- -------- ACTUAL PRO FORMA(2) ------- ------------ <S> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues................ $16,316 $16,746 $20,769 $24,847 $ 4,729 $6,584 Cost of services........ 10,714 11,305 12,839 14,352 3,117 3,939 ------- ------- ------- ------- -------- ------- Gross profit.......... 5,602 5,441 7,930 10,495 1,612 2,645 Total operating ex- penses................. 9,295 10,151 8,185 10,171 2,791 2,151 ------- ------- ------- ------- -------- ------- Income (loss) from operations(1).......... (3,693) (4,710) (255) 324 (1,179) 494 Other income, net....... 317 11 176 14 27 41 ------- ------- ------- ------- -------- ------- Net income (loss)....... $(3,376) $(4,699) $ (79) $ 338 $(1,152) $ 535 ======= ======= ======= ======= ======== ======= Net income (loss) per common share........... $ (0.73) $ (1.01) $ (0.02) $ 0.07 $ (.24) $ .10 ======= ======= ======= ======= ======== ======= Weighted average number of common shares outstanding............ 4,611 4,668 4,755 5,069 4,740 5,532 ======= ======= ======= ======= ======== ======= </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 ------------------------ ACTUAL AS ADJUSTED(3) -------- -------------- <S> <C> <C> BALANCE SHEET DATA: Working capital........................................ $ 2,850 $ 20,249 Total assets........................................... 12,866 30,264 Long-term obligations.................................. 427 427 Accumulated deficit.................................... (10,329) (10,329) Stockholders' equity................................... 8,213 25,612 </TABLE> - -------- (1) Includes the write-off of goodwill in the amount of $2,294,000 and merger related costs and expenses of $1,114,000 in 1994 and merger related costs and expenses of $994,000 in 1995. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (2) Gives effect to the CRS Acquisition (as defined herein) as if such transaction had been completed as of January 1, 1995. See "Pro Forma Combined Condensed Statement of Operations (Unaudited)." (3) Gives effect to the sale of the shares of Common Stock offered hereby (based on an assumed public offering price of $9.625 per share) and the receipt of the estimated net proceeds therefrom as if such transaction had occurred as of March 31, 1996. See "Use of Proceeds." ---------------- Except as otherwise indicated herein, information in this Prospectus assumes no exercise of the Underwriters' option to purchase from the Company up to an aggregate of 300,000 shares of Common Stock to cover over-allotments, if any. See "Underwriting."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000880259_biotranspl_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000880259_biotranspl_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..54b4fd5cb30f503e815321fc11b1bef080a22466
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000880259_biotranspl_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus, including the information under "Risk Factors." This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed under "Risk Factors." Certain technical and medical terms are defined or explained under "Business -- The Company," "-- Overview of Organ Transplantation" and elsewhere in this Prospectus.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0000880414_ambar-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000880414_ambar-inc_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..48970bdc63dd61fdf7ab471855518263ce3c7948
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000880414_ambar-inc_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary is qualified in its entirety by the more detailed information and the consolidated financial statements and notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus assumes (i) that the Underwriters' over- allotment option will not be exercised and (ii) that a reorganization pursuant to which the Company will reincorporate in Louisiana will have been consummated. Immediately prior to consummation of this Offering, the Company will also increase its authorized shares of Common Stock from 7 million to 25 million, $.01 par value per share, will authorize 10 million shares of Preferred Stock, $.01 par value per share and will amend certain other provisions of its Articles of Incorporation. See "Description of Capital Stock." The Company General AMBAR is principally engaged in the custom blending, distribution and sale of clear brine fluids ("CBFs"), drilling fluids (or "muds") and other chemicals used in the drilling, completion and workover (repair and maintenance) of oil and gas wells. The principal consumers of AMBAR's products are oil and gas operators, particularly those with operations offshore in the United States Gulf of Mexico and onshore along the Gulf Coast. Oil and gas operators use muds during the well drilling stage to control formation pressures, lubricate and cool drill bits, and carry cuttings out of the hole. CBFs, which generally are significantly more expensive than muds, are used primarily in the completion and workover stages, when well operators seek to maintain or restore well productivity. To diversify its business and to achieve partial vertical integration of its oilfield business, AMBAR has recently secured access to a brine stream and acquired a plant in Manistee, Michigan (the "Manistee facility") that it is presently retrofitting to produce liquid and dry calcium chloride, important raw materials used in the production of the Company's CBFs and which also have a number of other commercial and industrial applications. AMBAR also provides certain environmental products and services relating to oil spill response, control and remediation, environmental contingency planning and the control and treatment of both hazardous and non-hazardous oilfield waste. Strategy Diversify into Non-Oilfield Markets. The Company intends to diversify its business through the sale of the liquid and dry calcium chloride produced at the Manistee facility into several larger non-oilfield markets. The most significant commercial applications of calcium chloride are to de-ice roads, control road dust and stabilize roadbeds. The Company also intends to add a bromine extraction process to the Manistee facility. The primary commercial applications of bromine are in pharmaceuticals, specialty chemicals and fire retardants. Bromine is also a raw material used in certain important components of many of the Company's higher density, higher cost CBFs. Increase Revenues and Profitability of Oilfield Fluids Business. AMBAR believes that the product costs relating to its CBFs will be favorably affected through its production of calcium chloride at the Manistee facility. Although the Company believes that it will continue to procure calcium chloride from third parties that are geographically convenient, it also believes that its introduction of a substantial volume of low cost calcium chloride into the market will allow it to moderate its product costs. In addition, once AMBAR adds a bromine extraction process, it expects to realize significant cost savings in the production of its higher margin CBFs. The Company also intends to expand its share of the CBF and drilling mud markets by increasing the sales force dedicated to these product lines. Expand and Develop Environmental Products and Services Business. A portion of the net proceeds of the Offering will be used by AMBAR to expand its oil spill response capabilities in the Texas Gulf Coast region and to continue development of new applications for its environmental products. AMBAR is also currently in the process of using and testing AmBaSol, a proprietary chemical designed to rapidly dissolve hazardous oilfield waste (found in barium sulfate scale), in applications such as well stimulation, vessel cleaning and the remediation of hazardous oilfield waste. AMBAR intends to continue development of applications for, and increase its marketing of, this product. <TABLE> <CAPTION> The Offering <S> <C> Common Stock offered by the Company......................... 3,000,000 shares Common Stock offered by the Selling Shareholders............ 500,000 shares Common Stock to be outstanding after this Offering<F1>...... 6,811,505 shares Use of Proceeds............................................. To repay the outstanding balance of the Company's revolving credit facility; to retire long-term indebtedness and to fund the completion of the retrofitting of the Manistee facility; to fund expansion and development of the Company's Environmental Products and Services Division; and for working capital and general corporate purposes. The Company will not receive any of the proceeds from the sale of Common Stock by the Selling Shareholders. See "Business," "Use of Proceeds" and "Principal and Selling Shareholders." Nasdaq National Market Symbol.............................. AMBR </TABLE> ____________________ [FN] <F1> Includes 110,000 shares issuable upon the exercise of warrants held by a Selling Shareholder, all of which will be sold in the Offering. Summary Consolidated Financial Data (in thousands, except per share amounts) <TABLE> <CAPTION> Nine Months Ended Fiscal Year Ended June 30, March 31, ------------------------------------- ----------------------- 1993 1994 1995 1995 1996 ----------- ---------- --------- --------- ----------- <S> <C> <C> <C> <C> <C> Statement of Operations Data: Revenues: Oilfield products and services . . . . . . . . . $ 20,973 $ 37,546 $ 31,661 $ 24,842 $ 27,883 Environmental products and services . . . . . . . . . 3,946 5,762 6,416 4,539 7,725 ----------- ---------- --------- ---------- ---------- Total revenues . . . . . . $ 24,919 $ 43,308 $ 38,077 $ 29,381 $ 35,608 Gross profit . . . . . . . . . . . 2,323 6,942 4,841 4,311 3,891 Operating income (loss) . . . . . . (1,816) 2,375 371 1,009 473 Net income (loss) . . . . . . . . . $ (1,200) $ 1,277 $ (236) $ 294 $ (129) Net income (loss) per share . . . . $ (.33) $ .35 $ (.06) $ .08 $ (.03) Weighted average common shares outstanding . . . . . . . 3,628 3,632 3,667 3,663 3,732 Cash dividends . . . . . . . . . . -- -- -- -- -- At March 31, 1996 ----------------- As Actual Adjusted<F1> --------- ------------ Balance Sheet Data: Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,167 $ 38,901 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,077 62,443 Long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,611 3,739 Stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,865 50,471 </TABLE> ____________________ [FN] <F1> Adjusted to reflect the sale of 3,000,000 shares of Common Stock by the Company, the exercise of warrants to purchase 110,000 shares of Common Stock by a Selling Shareholder and the application of the estimated net proceeds therefrom.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000882100_corvas_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000882100_corvas_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..838f49163a57fca6fe0c1d8d32d6b31e0f487f76
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000882100_corvas_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION, INCLUDING RISK FACTORS AND CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD- LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS", AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS. THE COMPANY Corvas International, Inc. ("Corvas" or the "Company") is a biopharmaceutical firm engaged in the design and development of a new generation of therapeutic agents in the fields of thrombosis and inflammation. The Company seeks to develop and to commercialize novel drugs for the improved treatment and prevention of major cardiovascular diseases, such as heart attack, stroke, deep vein thrombosis, pulmonary embolism, and acute inflammation associated with trauma, shock and reperfusion injury in stroke. In contrast to currently available therapies, the Company's candidate drugs are designed to intervene more specifically in the disease process. Corvas intends to develop both parenteral and oral drugs to treat patients who cannot be optimally treated with current therapeutics. The Company believes that its antithrombotic drug discovery and development program is among the most comprehensive in the industry and that, together with its alliance partner, it is well positioned to develop and commercialize orally-active antithrombotic agents. Corvas has discovered its portfolio of drug candidates by integrating the Company's in-depth knowledge of the biology of thrombosis and, more generally, vascular biology, with advanced and proprietary drug discovery and design technology. The Company believes that such technology has broad potential application outside the antithrombotic field and will provide the basis for expanding its product portfolio. Corvas' scientists are experienced in a wide range of disciplines which are integrated in a systematic discovery approach. Current programs employ medicinal chemistry, peptide chemistry, computer-aided drug design, structural biology, molecular biology, biochemistry, physiology, and pharmacology competencies. The Company's programs are based on three technology platforms: structure-based drug design, biological discovery, and molecular pharmacology. The first two platforms generate drug leads, while the third technology platform enables the selection of drug candidates. The Company's structure-based drug design programs are the source of small molecule drugs, including those demonstrating oral activity. Biological discovery methods, including novel gene discovery, cloning, expression, and mutagenesis methods are used to identify novel biologicals as drug candidates and discovery tools. Molecular pharmacology techniques, including IN VITRO biochemical analysis and IN VIVO biological testing, are used to rigorously characterize the many drug leads derived from the two other platforms in order to select specific drug candidates for preclinical and clinical development. The Company has several antithrombotic compounds in clinical and preclinical development, including orally-active thrombin inhibitors, which are being developed in collaboration with Schering Corporation ("Schering-Plough"). Corvas has developed a portfolio of orally-active, potent and selective thrombin inhibitors upon which this alliance is based. In the second half of 1995, Corvas conducted an initial human safety study of CVS-1123, a lead orally-active thrombin inhibitor. In this Phase Ia study, CVS-1123 demonstrated oral activity and was well tolerated. Corvas and Schering-Plough are actively evaluating a series of follow-on compounds in the same chemical class in order to select a candidate for development by Schering-Plough. This selection is expected to be made by the end of 1996. Corvas is also conducting active discovery programs for inhibitors of coagulation Factor Xa and Factor VIIa, with its co-factor tissue factor ("Factor VIIa/TF"). The primary goal of these programs is the development of safe and effective orally-active drugs. A secondary goal has been the development of parenteral agents targeting these factors. In 1994, Schering- Plough acquired an option to expand its alliance with Corvas to include Factor Xa 2. <PAGE> inhibitors. In January 1996, Schering-Plough made a $1,000,000 payment to extend its option rights until December 1996. In 1995, Company scientists presented initial scientific data on a newly discovered class of natural anticoagulant peptides known as the NAP family. Specific members of this family inhibit either Factor Xa or Factor VIIa/TF. The Company has selected and commenced preclinical development of a Factor VIIa/TF inhibitor as a parenteral agent for acute care indications, such as treatment of venous thrombosis and prevention of pulmonary embolism. In its anti-inflammatory program, the Company has discovered a promising novel protein, neutrophil inhibitory factor ("NIF"), which blocks certain white blood cell functions associated with inflammation. In 1995, initial studies demonstrating the potential of NIF as a therapy for stroke victims were presented at a scientific conference by Corvas collaborators and published in a leading journal. Based on these early results, the Company entered into an agreement with Pfizer Inc. ("Pfizer") to collaborate on the development of NIF. A Phase Ia clinical trial has been completed for the Company's first drug candidate, CORSEVIN M, an antibody-based antithrombotic which has been licensed to, and is being further developed by, Centocor, Inc. ("Centocor"). In 1992, Corvas entered into an alliance with Ortho Diagnostic Systems, Inc. ("Ortho"), a Johnson & Johnson company, to develop and commercialize a laboratory test for blood clotting function based on Corvas' proprietary technology. Corvas supplies a critical raw material, recombinant human tissue factor, to Ortho and has licensed rights to Ortho. Ortho currently produces and markets prothrombin time reagents based on such technology. The Company's principal executive offices are located at 3030 Science Park Road, San Diego, California 92121 and its telephone number is (619) 455-9800. Unless the context otherwise requires, "Corvas" and the "Company" refer to Corvas International, Inc., and its subsidiaries, if any. CORVAS-Registered Trademark- is a registered trademark, and the Corvas logo, CORTHROMBIN-TM-, CORDECIN AS-TM-, CORSEVIN AS-TM- and CORSEVIN M-TM- are trademarks, of the Company. The Prospectus also includes names and marks of companies other than the Company. 3. <PAGE> THE OFFERING <TABLE> <CAPTION> <S> <C> Common Stock offered hereby. . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000 shares Common Stock to be outstanding after the offering. . . . . . . . . . . . . . 13,682,471 (1) Use of proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research, development, preclinical and clinical testing, and working capital and general corporate purposes. See "Use of Proceeds." Nasdaq National Market symbol. . . . . . . . . . . . . . . . . . . . . . . . CVAS </TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA (In thousands, except per share amounts) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: <TABLE> <CAPTION> THREE MONTHS YEARS ENDED DECEMBER 31, ENDED MARCH 31, ----------------------------------------------- ------------------- 1991 1992 1993 1994 1995 1995 1996 ---- ---- ---- ---- ---- ---- ---- <S> (UNAUDITED) <C> <C> <C> <C> <C> <C> <C> Revenues . . . . . . . . . . . . . . . . . $ 1,268 $ 886 $ 845 $ 1,130 $ 5,402 $ 1,080 $ 2,187 Research and development costs . . . . . . 6,252 8,894 12,115 11,378 9,723 2,259 2,299 Total costs and expenses . . . . . . . . . 12,208 12,044 15,287 16,730 12,516 2,946 3,116 Net loss . . . . . . . . . . . . . . . . . (10,098) (9,467) (13,369) (14,903) (6,293) (1,649) (631) Net loss per share (2) . . . . . . . . . . (2.14) (1.08) (1.44) (1.60) (0.67) (0.18) (0.05) Shares used in calculation of net loss per share (2) . . . . . . . 4,724 8,747 9,295 9,336 9,374 9,359 11,507 </TABLE> CONSOLIDATED BALANCE SHEETS DATA: <TABLE> <CAPTION> December 31, March 31, 1996 --------------------------- 1995 Actual As Adjusted (3) ------------- --------- ---------------- (UNAUDITED) <S> <C> <C> <C> Cash, cash equivalents and short-term debt securities. . . . . . . . . . . . .$12,451 $24,908 $29,782 Working capital. . . . . . . . . . . . . . 7,372 21,570 26,444 4. <PAGE> Total assets . . . . . . . . . . . . . . . 14,462 27,370 32,244 Accumulated deficit. . . . . . . . . . . .(60,588) (61,219) (61,219) Total stockholders' equity. . . . . . . . 8,768 23,118 27,992 </TABLE> - -------------------- (1) Excludes, as of May 24, 1996, 1,701,903 shares of Common Stock issuable upon exercise of outstanding options at a weighted average price of $3.47 per share and 3,008,715 shares of Common Stock issuable upon the exercise of outstanding warrants at a weighted average price of $6.00 per share. (2) See Note 2 of Notes to Consolidated Financial Statements. (3) As adjusted to give effect to the issuance of 1,000,000 shares of Common Stock offered hereby at an assumed offering price of $4.87 per share net of estimated offering expenses. See "Use of Proceeds" and "Capitalization." 5. <PAGE> RISK FACTORS THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS SET FORTH BELOW, AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS. THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE PURCHASING THE COMMON STOCK OFFERED HEREBY: EARLY STAGE OF DEVELOPMENT The Company is at an early stage of development. Corvas has only three products from which it derives revenue: recombinant human tissue factor used in a diagnostic test to determine the blood clotting ability of patients, and recombinant human tissue factor and a group of tissue factor-specific monoclonal antibodies used in the research market. The revenue generated from such products has not been substantial in any given year. In addition, Corvas has conducted human clinical trials for only two product candidates, CVS-1123 and CORSEVIN M. The Company's product candidates will require significant additional development, laboratory and clinical trials, regulatory approval and additional investment prior to their commercialization. The Company does not expect to be able to market any of these product candidates for a number of years. There can be no assurance that the Company's product development efforts will progress any further or be successfully completed. In addition, there can be no assurance that the Company's potential products will be capable of being produced in commercial quantities at reasonable costs, that required regulatory approvals can be obtained or that any potential products, if introduced, will be successfully marketed or achieve customer acceptance. CONTINUING OPERATING LOSSES; ACCUMULATED DEFICIT The Company has experienced significant operating losses since its inception in 1987. At March 31, 1996, the Company had an accumulated deficit of approximately $61,219,000. The Company expects to incur substantial additional operating losses over the next several years as the Company attempts to sustain, and possibly expand, its research and development and clinical trial efforts. Substantially all of the Company's revenues to date have consisted of revenue from collaborative agreements, research grants and interest income. To achieve profitable operations, the Company, alone or with others, must successfully identify, develop, manufacture and market additional proprietary products. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING The Company will require substantial funds to conduct the research and development and preclinical and clinical testing of its products, to establish commercial scale manufacturing facilities and to market its products. The Company's future capital requirements will depend on many factors, including, but not limited to, the following factors: continued scientific progress in its drug discovery programs; the magnitude of these programs; progress of preclinical testing and clinical trials; the time and costs involved in obtaining regulatory approvals; the costs involved in filing, prosecuting, maintaining and enforcing patent claims; competing technological and market developments; changes in its existing research relationships; the ability of the Company to establish and maintain collaborative or licensing arrangements; the cost of manufacturing scale-up; and effective commercialization activities and arrangements. The Company intends to seek such additional funding either through collaborative arrangements or through public or private financings. There can be no assurance that additional financing will be available, or, if available, that it will be available on acceptable terms. If additional funds are raised by issuing securities, further dilution to existing stockholders may result. If adequate funds are not available, the Company may be required to delay, scale back or eliminate one or more of its drug discovery programs or obtain funds through arrangements with collaborative partners or others that may require the Company to relinquish rights to certain of its technologies, product candidates or products that the Company would not otherwise relinquish. 6. <PAGE> UNPREDICTABILITY OF, AND LIMITED EXPERIENCE IN, CONDUCTING PRECLINICAL AND CLINICAL TRIALS Although certain of the Company's officers and employees have prior experience in conducting clinical trials, the Company itself has conducted only two early-stage clinical trials to date; Phase Ia clinical trials of CVS-1123 and Phase Ia clinical trials of CORSEVIN M. At present, the Company intends to commence Phase I clinical trials in 1997 of a NAP compound. There can be no assurance that the Company will be able to commence any or all of the clinical trials as currently planned for 1997, or that the Company will meet its development schedule for any of its products in development. If the Company or its collaborators were unable to commence clinical trials as planned, complete the clinical trials or demonstrate the safety and efficacy of its products, the Company's business, financial condition and results of operations would be materially and adversely affected. There can be no assurance that if a product from the Company's research and development programs or any other therapeutic product is successfully developed according to plans, it will be approved by the U.S. Food and Drug Administration ("FDA") on a timely basis or at all. In addition, because the Company will, in a number of cases, rely on its contractual rights to access data collected by others in phases of its clinical trials, the Company is dependent on the continued satisfaction by such parties of their contractual obligations to provide such access and to cooperate with the Company in the execution of successful filings with the FDA. There can be no assurance that the FDA will permit such reliance. If the Company were unable to rely on clinical data collected by others, the Company may be required to repeat clinical trials, which could significantly delay commercialization and require significantly greater capital. Before obtaining regulatory approvals for the commercial sale of any of its products under development, the Company must demonstrate through preclinical studies and clinical trials that the product is safe and efficacious for use in the target indication for which approval is sought. The results from preclinical studies and early clinical trials may not be predictive of results that will be obtained in later-stage testing, and there can be no assurance that future clinical trials conducted by the Company or its collaborators will demonstrate the safety and efficacy of any products or will result in approval to market products. A number of companies in the biotechnology industry have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. The rate of completion of the Company's clinical trials is dependent upon, among other factors, the rate of patient enrollment. Patient enrollment is a function of many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites and the eligibility criteria for the study. Delays in planned patient enrollment may result in increased costs and delays, which could have a material adverse effect on the Company. UNCERTAINTIES OF REGULATORY APPROVAL; GOVERNMENT REGULATION The production and marketing of the Company's products and its ongoing research and development activities are subject to regulation by numerous governmental authorities in the U.S. and other countries. Any drug developed by the Company must undergo rigorous preclinical and clinical testing and an extensive regulatory approval process mandated by the FDA and equivalent foreign authorities before it can be marketed. These processes can take a number of years and require the expenditure of substantial resources. The time required for completing such testing and obtaining such approvals is uncertain and approval itself may not be obtained. The Company has conducted human clinical testing of two product candidates, CVS-1123 and CORSEVIN M. No additional human tests of CVS-1123 are currently planned. Further testing of CORSEVIN M, by Centocor, and the Company's other product candidates in research and development may reveal undesirable and unintended side effects or other characteristics that may prevent or limit their commercial use. The FDA or the Company and its collaborators may decide to discontinue or to suspend clinical trials at any time if the subjects or patients who are participating in such trials are being exposed to unacceptable health risks. There can be no assurance that the Company will not encounter problems in clinical trials that will cause the FDA or the Company to delay or to suspend clinical trials. Furthermore, there can be no assurance that any of the Company's products will be approved by the FDA for any indication. Products, if any, resulting from the Company's research and development programs are not expected to be commercially available for a number of years. Even if regulatory 7. <PAGE> approval of a product is granted, such approval may entail limitations on the indicated uses for which the product may be marketed. In addition, a marketed product, its manufacturer and the facilities in which the product is manufactured are subject to continual review and periodic inspections. Later discovery of previously unknown problems with a product, manufacturer or facility may result in restrictions on such product or manufacturer, including withdrawal of the product from the market. See "Business - Government Regulation." RELIANCE ON COLLABORATIVE PARTNERS Corvas has relied and will continue to rely on certain established pharmaceutical companies interested in its technology to fund a portion of its research and development expenses. The Company has entered into collaborative research agreements with these collaborative partners whereby the partners provide capital in exchange for certain technology, product, manufacturing and marketing rights related to the collaborative research. In November 1991, the Company entered into an agreement with Centocor pursuant to which Corvas granted rights to Centocor to license and to commercialize certain monoclonal antibody products developed by Corvas. For one such monoclonal antibody product, CORSEVIN M, Corvas completed a Phase Ia clinical trial in 1993. Centocor has informed the Company that it intends to continue the development of CORSEVIN M. In 1994, Centocor terminated its option rights to future monoclonal antibody products discovered or acquired by the Company. Corvas will depend on Centocor for the continued development of CORSEVIN M and resulting product sales. The Company may receive a future milestone payment upon receipt of certain regulatory approvals and royalties on any product sales. To date, Corvas has entered into collaborative agreements with Pfizer for the development of NIF, with Schering-Plough for the discovery and commercialization of oral thrombin inhibitor drugs for the prevention and treatment of chronic cardiovascular disorders, with Ortho for the manufacture and worldwide marketing by Ortho of diagnostic tests containing recombinant human tissue factor produced by Corvas and with Centocor pursuant to which Corvas granted rights to Centocor to license and commercialize certain monoclonal antibody products developed by Corvas. As a result, the Company is dependent on Pfizer, Schering-Plough and Centocor with respect to the regulatory filings relating to, and the clinical testing of, certain of the Company's product candidates developed under the collaborations described above. Any of Pfizer, Schering-Plough or Centocor may, based on data obtained in these trials or otherwise, elect to halt or repeat these trials or conduct clinical trials using different formulations of these product candidates. Any of these actions could result in delays in the clinical development of compounds covered by these collaborations. Furthermore, the amount and timing of resources dedicated by these strategic partners to the collaborations is not within the Company's control. In addition, Corvas is dependent on the efforts of Ortho in order to receive revenue from the recombinant human tissue factor produced by the Company. There can be no assurance that the interests of the Company will continue to coincide with those of its collaborators or that the collaborators will not develop independently or with third parties, products that could compete with the Company's products, or that disagreements over rights, technology or other proprietary interests will not occur. Further, there can be no assurance that the collaborative agreements will be extended at the end of their respective terms. If any of the Company's collaborators breaches or terminates its agreement with the Company, or fails to conduct its collaborative activities in a timely manner, the research program under the applicable collaborative agreement, or the development and commercialization of product candidates subject to such collaboration, may be adversely affected. There can be no assurance that the Company's existing strategic alliances will be successful, that the Company will receive any further payments pursuant to the collaborative agreements or that the collaborations will continue. If the strategic alliances are not continued or successful, the Company's business could be materially and adversely affected. Corvas has also established collaborations with scientists at a number of leading U.S. and European academic and clinical research centers to further its technology and product development objectives. These collaborations are generally conducted pursuant to agreements which give the Company a license, or the option to license, certain technology, patent rights or materials which may be valuable to the Company. These agreements may require the Company to fund research or to pay license fees or milestone payments and, upon commercial sale of certain products, royalties. 8. <PAGE> Corvas also expects to rely on additional collaborative arrangements to develop and commercialize some of its products in the future. There can be no assurance that the Company will be able to negotiate acceptable collaborative arrangements, in the future, or that such collaborative arrangements or its existing collaborative arrangements, will be successful. In addition, collaborative partners may pursue alternative technologies or develop alternative compounds either on their own or in collaboration with others, including the Company's competitors, as a means of developing treatments for the diseases targeted by any collaborative programs. See "Business - Strategic Alliances." TECHNOLOGICAL CHANGE AND COMPETITION The Company is engaged in a rapidly evolving field. Competition from other biotechnology companies, pharmaceutical companies and research and academic institutions is intense and expected to increase. There can be no assurance that the Company's competitors will not succeed in developing products based on the Company's technology or other technologies which are more effective than technologies being developed by the Company or which would render the Company's technology and products obsolete and noncompetitive. Many of the Company's competitors may have substantially greater financial, technical and human resources than the Company. In addition, many of these competitors may have significantly greater experience than the Company in undertaking preclinical testing and clinical trials of new pharmaceutical products and obtaining regulatory approvals of human therapeutic products. Accordingly, the Company's competitors may succeed in obtaining FDA approval for products more rapidly than the Company. Furthermore, if the FDA permits the Company to commence commercial sales of products, the Company will compete with respect to manufacturing efficiency and marketing capabilities, areas in which it has limited or no experience. Products under development by the Company address an array of markets. The Company's competition will be determined in part by the potential indications for which the Company's compounds are developed and ultimately are approved by regulatory authorities. For certain of the Company's potential products, an important factor in competition may be the timing of market introduction of its, or competitive, products. Accordingly, the relative speed with which Corvas can develop products, complete the clinical trials and approval processes, and supply commercial quantities of the products to the market is expected to be an important competitive factor. The Company expects that competition among products approved for sale will be based on, among other things, product efficacy, safety, reliability, availability, price and patent position. See "Business - Competition." MANUFACTURING LIMITATIONS In order for the Company's products to be successful, the products must be manufactured in sufficient commercial quantities, in compliance with regulatory requirements, and at an acceptable cost. The Company has limited experience in pilot scale manufacturing. For larger scale production, as will be required for Phase I and later phases of clinical testing, the Company must rely on third parties to manufacture its product candidates. If the Company is unable to develop or contract for large scale manufacturing capabilities on acceptable terms, the Company's ability to conduct clinical trials may be adversely affected, resulting in the delay of submission of products for regulatory approval, which in turn could adversely affect the Company's competitive position and its chances of achieving profitability. See "Business - Properties and Manufacturing." PATENTS AND PROPRIETARY RIGHTS The Company's success will depend in part on its ability to obtain patent protection for its products, both in the U.S. and other countries. The patent position of biotechnology and pharmaceutical companies is highly uncertain and involves complex legal and factual questions. There is no consistent policy regarding the breadth of claims allowed in biotechnology patents. The Company intends to file applications as appropriate for patents covering both its products and processes. As of the date of this Prospectus, Corvas holds rights in nine U.S. patents and has been notified of four allowed patent applications in the U.S. Of the issued patents, seven are owned by the Company and two are licensed by the Company. Corvas has filed or holds licenses to 55 additional patent applications that currently are pending in the U.S. Patent and Trademark Office. Approximately one-third of 9. <PAGE> these pending patent applications are duplicate applications the Company filed in anticipation of changes to U.S. patent law that became effective in June 1995 and that may affect the term of U.S. patents. Foreign counterparts of certain of the U.S. applications have been filed in many countries. In addition, Corvas holds rights in four foreign-issued patents; Corvas owns one such patent and is the exclusive licensee, in a defined field of use, of the remaining three foreign patents. There can be no assurance that patents will issue from any of the patent applications owned or licensed by the Company or that claims allowed under any issued patents will be sufficiently broad to protect the Company's technology. In addition, there can be no assurance that any patents issued or licensed to the Company will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide proprietary protection to the Company. As is typical in the biotechnology industry, the commercial success of the Company will depend in part on the Company neither being found infringing on patents issued to competitors nor breaching the technology licenses upon which the Company's products might be based. While the Company is aware of third party patent applications and issued patents in the Company's field, it is uncertain whether these will require the Company to alter products or processes, obtain licenses or cease certain activities. If the Company is required to obtain such licenses, there can be no assurance the Company will be able to obtain any necessary licenses at a reasonable cost. Failure by the Company to obtain a license to any technology that it requires to commercialize its products and obtain FDA approval within an acceptable period of time, if required to do so, would have a material adverse effect on the Company. Litigation, which could result in substantial costs to the Company, may also be necessary to enforce any patents issued to the Company or to determine the scope and validity of others' proprietary rights. In 1993, the U.S. Patent and Trademark Office declared an interference and is currently in the process of determining the priority of invention between a patent for which some rights are licensed to the Company and a patent application for which rights are licensed to another party. The subject matter of these licenses is recombinant tissue factor which is used by Ortho to determine the blood clotting ability of patients. There can be no assurance that the U.S. Patent and Trademark Office will rule in a manner favorable to the Company on this matter. In addition to patents, the Company relies on trade secrets and proprietary know-how, which it seeks to protect, in part, through appropriate confidentiality and proprietary information and inventions agreements with its current and prospective collaborative partners, employees, scientific advisors and consultants. There can be no assurance that these agreements will not be breached, that the Company will have adequate remedies for any breach, or that the Company's trade secrets will not otherwise become known or be independently discovered by competitors. Certain of the Company's research has been funded in part by the Federal Small Business Innovation Research ("SBIR") program. As a result of such funding, the U.S. Government will have certain rights ("Government Rights") in any technology, including inventions, developed with the funding. These rights include the grant of a non-exclusive, paid-up, worldwide license to such inventions for any governmental purpose. In addition, the government has the right to require the Company to grant an exclusive license to any of such inventions to a third party if the government determines that (i) adequate steps have not been taken to commercialize such inventions, (ii) such action is necessary to meet public health or safety needs or (iii) such action is necessary to meet requirements for public use under federal regulations. Federal law requires any licensor of an invention that was partially funded by federal grants to obtain a covenant from its exclusive licensee to substantially manufacture products using the invention in the U.S. In addition, the Company's licenses may also relate to technology developed with federal funding and, therefore, may also be subject to Government Rights. See "Business - Patents and Proprietary Rights." ABSENCE OF SALES AND MARKETING EXPERIENCE The Company has no experience in sales, marketing or distribution. To market any of its products directly, the Company must develop a substantial marketing and sales force with technical expertise and supporting distribution capability. Alternatively, the Company may obtain the assistance of a pharmaceutical company with a large distribution system and a large direct sales force. Other than its agreements with Ortho, Centocor, Schering-Plough and Pfizer, the Company does not have any existing distribution arrangements with any pharmaceutical company 10. <PAGE> for its products. There can be no assurance that the Company will be able to establish sales and distribution capabilities or be successful in gaining market acceptance for its products. DEPENDENCE ON REIMBURSEMENT Corvas' ability to commercialize its products successfully may depend in part on the extent to which reimbursement for the cost of such products and related treatment will be available from government health administration authorities, private health insurers and other organizations. Third-party payors are increasingly challenging the price of medical products and services. Significant uncertainty exists as to the reimbursement status of newly approved health care products, and there can be no assurance that adequate third-party coverage will be available to enable Corvas to maintain price levels sufficient to realize an appropriate return on its investment in product development. PRODUCT LIABILITY AND INSURANCE The Company's business exposes it to potential product liability risks which are inherent in the testing, manufacturing and marketing of human diagnostic and therapeutic products. While it has been the Company's practice to obtain clinical trials liability insurance when appropriate, there can be no assurance that it will be able to obtain or to maintain such insurance on acceptable terms or that insurance will provide adequate coverage against potential liabilities. HAZARDOUS MATERIALS The Company's research and development involves the controlled use of hazardous materials, chemicals and radioactive compounds. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, the Company could be held liable for any damages that result, which liability could exceed the resources of the Company. VOLATILITY OF COMMON STOCK PRICE The market prices for securities of biotechnology companies, including Corvas, have historically been highly volatile, and the market from time to time has experienced significant price and volume fluctuations that are unrelated to the operating performance of such companies. Factors such as announcements of technological innovations or new commercial therapeutic products by the Company or others, governmental regulations, developments in patent or other proprietary rights, developments in the Company's relationships with its collaborative partners, public concern as to the safety of drugs developed by the Company or others and general market conditions may have a significant effect on the market price of the Company's Common Stock. Fluctuations in financial performance from period to period also may have a significant impact on the market price of the Common Stock. See "Price Range of Common Stock." 11. <PAGE> USE OF PROCEEDS The net proceeds to the Company from the sale of the 1,000,000 shares of Common Stock offered by the Company hereby at an assumed offering price of $5.00 are estimated to be approximately $4,874,000, after deducting estimated offering expenses. The Company expects to use the net proceeds of this offering to continue research and development activities and preclinical and clinical testing, and for working capital and general corporate purposes. The Company may also use a portion of such net proceeds and existing cash and investment balances to acquire or to invest in businesses, products or technologies that are complementary to those of the Company, although no such material acquisitions are planned or being negotiated as of the date of this Prospectus, and no portion of the net proceeds has been allocated for any specific material acquisition. Pending such uses, the net proceeds will be invested in interest bearing, investment grade securities. The amounts actually expended for such purposes may vary significantly depending upon numerous factors, including progress of the Company's drug programs, the number and breadth of these programs, achievement of milestones under strategic alliance arrangements, the ability of the Company to establish and maintain additional strategic alliances and licensing arrangements, the progress of the development and commercialization efforts of the Company's strategic alliance partners, competing technological and market developments, the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other intellectual property rights, the regulatory process and other factors. DIVIDEND POLICY The Company has never declared or paid any cash dividends on its capital stock. The Company currently intends to retain any future earnings to finance the growth and development of its business and therefore does not anticipate paying any cash dividends in the foreseeable future. 12. <PAGE> PRICE RANGE OF COMMON STOCK The Company's Common Stock began trading on the Nasdaq National Market on January 30, 1992 under the symbol "CVAS." Prior to January 30, 1992, there was no public market for the Company's Common Stock. The following table sets forth for the periods indicated the high and low sale prices of Common Stock as reported by the Nasdaq National Market. <TABLE> <CAPTION> HIGH LOW ------- ------- <S> <C> <C> YEAR ENDING DECEMBER 31, 1996 Second Quarter (through June 21, 1996) . . . . . . $7.00 $4 3/4 First Quarter . . . . . . . . . . . . . . . . . . 6 1/8 3 5/8 YEAR ENDED DECEMBER 31, 1995 . . . . . . . . . . . Fourth Quarter . . . . . . . . . . . . . . . . . . 7 3/8 2 1/8 Third Quarter. . . . . . . . . . . . . . . . . . . 4 5/8 2 3/8 Second Quarter . . . . . . . . . . . . . . . . . . 2 7/8 1 5/8 First Quarter. . . . . . . . . . . . . . . . . . . 2 5/8 1 7/8 YEAR ENDING DECEMBER 31, 1994 Fourth Quarter . . . . . . . . . . . . . . . . . . 3 1 5/8 Third Quarter. . . . . . . . . . . . . . . . . . . 3 1/4 2 1/8 Second Quarter . . . . . . . . . . . . . . . . . . 4 1/2 2 7/8 First Quarter. . . . . . . . . . . . . . . . . . . 5 1/4 3 3/4 </TABLE> On June 21, 1996, the last reported sale price of the Common Stock was $5.25 per share. As of June 21, 1996, there were approximately 1,214 holders of record of the Common Stock. 13. <PAGE> CAPITALIZATION The following table sets forth the capitalization of the Company (i) as of March 31, 1996 and (ii) as adjusted to give effect to the issuance of 1,000,000 shares of Common Stock offered hereby at an assumed offering price of $5.00 per share after deducting estimated offering expenses. <TABLE> <CAPTION> MARCH 31, 1996 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) ------------------------------- Actual As Adjusted -------------- ---------------- <S> <C> <C> Long-term debt, net of current portion $ 7 $ 7 Stockholders' equity: Series A convertible preferred stock, $.001 par value, authorized 10,000,000 shares, issued and outstanding 1,000,000 shares actual and as adjusted 1 1 Common stock, $.001 par value, authorized 50,000,000 shares, issued and outstanding 12,522,000 shares actual and 13,522,000 shares outstanding as adjusted (1) 13 14 Additional paid-in capital 84,323 89,196 Accumulated deficit (61,219) (61,219) ------------ ------------ Total stockholders' equity 23,118 27,992 ------------ ------------ Total capitalization $ 23,125 $ 27,999 ------------ ------------ ------------ ------------ - ---------------------- </TABLE> (1) Excludes(i) 1,499,917 shares of Common Stock issuable upon exercise of options outstanding as of March 31, 1996 at a weighted average exercise price of $3.06 per share and (ii) 3,008,715 shares of Common Stock as of March 31, 1996 issuable upon exercise of warrants outstanding as of March 31, 1996 at a weighted average exercise price of $6.00 per share. Subsequent to March 31, 1996, options to purchase 85,619 of these shares were exercised and options to purchase an additional 287,605 shares of Common Stock (net of cancellations) were granted. See "Description of Capital Stock" and Note 13 14. <PAGE> of Notes to Consolidated Financial Statements. Also excludes 75,000 shares of Common Stock issued in May 1996 in connection with the settlement of a lawsuit. See "Business - Legal Proceedings." 15. <PAGE> SELECTED CONSOLIDATED FINANCIAL DATA The selected data presented below under the captions "Consolidated Statements of Operations Data" and "Consolidated Balance Sheets Data" for, and as of the end of, each of the years in the five-year periods ended December 31, 1995, are derived from the consolidated financial statements of Corvas International, Inc. and Subsidiary, which financial statements have been audited by KPMG Peat Marwick LLP, independent certified public accountants. The consolidated financial statements as of December 31, 1994 and 1995, and for each of the years in the three-year period ended December 31, 1995, and the report thereon, are included elsewhere in this Prospectus. The selected data presented below for the three-month periods ended March 31, 1995 and 1996 are derived from the unaudited consolidated financial statements included elsewhere in this Prospectus and, in the opinion of management, includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of operations for such interim periods. Operating results for the three months ended March 31, 1996 are not necessarily indicative of results for the full year or for any future period. The data set forth below should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Prospectus. <TABLE> <CAPTION> Three Months Ended Years Ended December 31, March 31, ----------------------------------------------- ------------------ 1991 1992 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> Consolidated Statements of Operations Data (In thousands, except per share amounts): REVENUES: Net product sales. . . . . . . . . . . . . . $ 121 $ 263 $ 323 $ 280 $ 406 $ 46 $ 21 Research grants. . . . . . . . . . . . . . . 397 513 192 667 -- -- -- Revenue from collaborative agreements (primarily from related party). . . . . . . . . . . . -- -- -- -- 4,354 1,000 2,085 License fees . . . . . . . . . . . . . . . . 750 100 100 -- 500 -- -- Royalties. . . . . . . . . . . . . . . . . . -- 10 230 183 142 34 81 -------- -------- -------- -------- -------- -------- -------- Total revenues . . . . . . . . . . . . . . . 1,268 886 845 1,130 5,402 1,080 2,187 -------- -------- -------- -------- -------- -------- -------- COSTS AND EXPENSES: Cost of products sold. . . . . . . . . . . . 17 106 105 83 211 5 24 Research and development . . . . . . . . . . 6,252 8,894 12,115 11,378 9,723 2,259 2,299 Purchased research and development. . . . . . . . . . . . . . . . 4,060 -- -- -- -- -- -- General and administrative . . . . . . . . . 1,879 3,044 3,067 3,159 2,582 682 793 Litigation settlement and related expenses . . . . . . . . . . . . . -- -- -- 535 -- -- -- Restructuring charge . . . . . . . . . . . . -- -- -- 1,575 -- -- -- -------- -------- -------- -------- -------- -------- -------- 16. <PAGE> Total costs and expenses . . . . . . . . . . 12,208 12,044 15,287 16,730 12,516 2,946 3,116 -------- -------- -------- -------- -------- -------- -------- Loss from operations . . . . . . . . . . . . (10,940) (11,158) (14,442) (15,600) (7,114) (1,866) (929) Other income, net. . . . . . . . . . . . . . 842 1,691 1,073 697 821 217 298 -------- -------- -------- -------- -------- -------- -------- Net loss . . . . . . . . . . . . . . . . . . $(10,098) $(9,467) $(13,369) $(14,903) $(6,293) $(1,649) $ (631) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Net loss per share (1) . . . . . . . . . . . $ (2.14) $ (1.08) $ (1.44) $ (1.60) $ (0.67) $ (0.18) $ (0.05) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Shares used in calculation of net loss per share (1) . . . . . . . . . . . . . 4,724 8,747 9,295 9,336 9,374 9,359 11,507 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- </TABLE> 17. <PAGE> <TABLE> <CAPTION> Years Ended December 31, ------------------------------------------------ March 31, 1991 1992 1993 1994 1995 1996 --------- -------- -------- -------- -------- -------------- (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> Consolidated Balance Sheets Data (In thousands): Cash, cash equivalents and short-term debt securities . . . . . . . . . $13,853 $ 36,398 $ 23,180 $ 19,867 $ 12,451 $24,908 Working capital. . . . . . . . . . . . . . . 13,764 20,987 22,477 13,902 7,372 21,570 Total assets . . . . . . . . . . . . . . . . 16,153 38,925 26,522 22,509 14,462 27,370 Accumulated deficit. . . . . . . . . . . . . (16,556) (26,023) (39,392) (54,295) (60,588) (61,219) Total stockholders' equity . . . . . . . . . 14,260 37,592 24,474 14,647 8,768 23,118 </TABLE> (1) See Note 2 of Notes to Consolidated Financial Statements. 18. <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THIS SECTION, AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS. OVERVIEW Formed in 1987, Corvas is a biopharmaceutical firm engaged in the design and development of a new generation of therapeutic agents for the prevention and treatment of major cardiovascular and inflammatory diseases. To date, the Company has not generated significant revenues from product sales. The Company has not been profitable since inception and expects to incur substantial additional operating losses on an annual basis over the next several years as the Company attempts to sustain, and possibly expand, its research and development and clinical trial efforts. No assurance can be given that the Company can generate sufficient revenues to become profitable at all or on a sustained basis. At March 31, 1996, the Company had an accumulated deficit of $61,219,000. In December 1994, the Company ceased operation of its Belgian subsidiary and, accordingly, recorded a one-time restructuring charge for severance and other expenses. The Belgian operation accounted for 20% of the consolidated operating expenses in 1994 (including the restructuring charge of $1,575,000) and 20% in 1993. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1996 AND 1995 Operating revenues increased from $1,080,000 in the quarter ended March 31, 1995 to $2,187,000 in the first quarter of 1996. This increase is mainly attributable to a $1,000,000 option extension fee received from Schering-Plough pursuant to a strategic alliance agreement for the prevention and treatment of chronic cardiovascular disorders. Accounting for $85,000 of this increase is revenue recognized pursuant to the research and option agreement initiated in October 1995 with Pfizer to collaborate on the development of neutrophil inhibitory factor, an anti-inflammatory agent. First quarter total costs and expenses increased from $2,946,000 in 1995 to $3,116,000 in 1996. Research and development expenditures remained relatively constant comparing these periods, increasing by $40,000. General and administrative expenses increased by $111,000 in the first quarter of 1996 over the same quarter of 1995 due to increased personnel costs and investor relations activities. Comparing the first quarters of 1995 to 1996, total other income increased from $217,000 to $298,000. The majority of this increase resulted from the sale of material to Pfizer in conjunction with the above-mentioned collaboration. Differences in the timing and composition of revenues earned and expenses incurred may contribute to quarter-to-quarter variations in operating results. 19. <PAGE> YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 Operating revenues increased to $5,402,000 in 1995, from $1,130,000 in 1994 and $845,000 in 1993. The major factor contributing to this increase in 1995 was the recognition of $4,354,000 of revenue from collaborative agreements. Of this revenue, $4,000,000 is attributable to the Company's strategic alliance agreement with Schering-Plough to collaborate on the discovery and commercialization of oral thrombin inhibitor drugs for the prevention and treatment of chronic cardiovascular disorders. The remaining $354,000 of revenue from collaborative agreements, and an additional $500,000 in license fees, is attributable to the Company's research and option agreement initiated in October 1995 with Pfizer to collaborate on the development of neutrophil inhibitory factor, an anti-inflammatory agent with therapeutic potential for stroke and other indications. Revenue from product sales increased to $406,000 in 1995, compared to $280,000 and $323,000 in 1994 and 1993, respectively. The majority of product sales were made under agreements with Ortho, whereby Ortho acquired worldwide rights to produce and distribute a Corvas product for diagnostic use in determining the blood clotting ability of patients. In order to maintain its rights pursuant to these agreements, Ortho is required to make minimum annual purchases of materials, royalty payments, and one additional milestone payment. These revenue increases were partially offset by a decrease in research grants revenue. No revenue from research grants was recorded in 1995, compared to $667,000 in 1994 and $192,000 in 1993. This decrease results from closing the Belgian subsidiary, which received the majority of the grant revenue. Research and development expenses decreased to $9,723,000 in 1995, from $11,378,000 in 1994 and $12,115,000 in 1993. Research and development expenses accounted for 78% of the total costs and expenses in 1995, 68% in 1994 and 79% in 1993. This decrease in 1995, primarily due to the closure of the Belgian subsidiary, was partially offset by an increase in clinical trial, preclinical development and medicinal chemistry costs. The decrease in 1994 was caused by the recording of two one-time charges in 1994: a restructuring charge of $1,575,000 pursuant to closing the Belgian subsidiary, and a charge of $535,000 for settlement of stockholder litigation. General and administrative expenses decreased to $2,582,000 in 1995, from $3,159,000 in 1994 and $3,067,000 in 1993. Major factors contributing to the decrease in 1995 include decreased administrative headcount and the final charges for deferred compensation expense related to certain options granted prior to the Company's initial public offering. Total other income was $821,000 in 1995, $697,000 in 1994 and $1,073,000 in 1993. The increase from 1994 to 1995 was primarily attributable to higher investment balances available as a result of the equity and research funding received from Schering-Plough in December 1994. Subject to the availability of additional capital, the Company expects that all expenses will increase over the next several years as the Company's research and development programs progress. However, due to revenue expected to be recognized pursuant to the Company's collaborative agreements, operating losses are not expected to increase significantly, if at all, in 1996 beyond the 1995 amount. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), effective for fiscal years beginning after December 15, 1995. SFAS 123 establishes the fair value based method of accounting for stock-based compensation arrangements, under which compensation cost is determined using the fair value of the stock option at the grant date and the number of options vested, and is recognized over the periods in which the related services are rendered. The Company will adopt SFAS 123 using the pro forma disclosure method. 20. <PAGE> LIQUIDITY AND CAPITAL RESOURCES Since inception, the Company has financed its operations primarily through private placements of convertible preferred stock, the initial public offering of common stock, a private placement of equity securities, interest income earned on cash and investment balances, and revenues from collaborative agreements, research grants and license agreements. On February 2, 1996, the Company completed a private placement of equity securities consisting of 3,000,000 units, resulting in proceeds of $14,835,000, net of estimated issuance costs. Each unit consisted of one share of common stock and one callable warrant to purchase one additional share of common stock. The Company's principal sources of liquidity are its cash and cash equivalents, time deposits and debt securities which, net of a restricted time deposit of $60,000, totaled $24,848,000 as of March 31, 1996. Working capital at March 31, 1996 was $21,570,000. Available cash is invested in accordance with an investment policy set by the Board of Directors, which has the objective to maximize income with preservation of principal and maintenance of adequate liquidity. The policy provides guidelines concerning the quality, term and liquidity of investments. The Company presently invests its excess cash in U.S. government securities. The Company expects to incur substantial additional costs in the foreseeable future, including costs related to sustaining and possibly expanding research and development activities and preclinical and clinical testing, and that such costs will continue to increase. As a result, the Company expects it will experience substantial additional operating losses over the next several years. With the cash infusion from the recent private placement, the Company believes its existing capital resources and interest earned thereon will be adequate to satisfy its capital requirements into 1998. In addition, the Company may also receive milestone payments and royalties on sales of products resulting from its alliances. However, there can be no assurance that products will be successfully developed and commercialized or that the Company will receive any such amounts under these alliances. The Company's future capital requirements will depend on many factors, including, but not limited to, the following factors: continued scientific progress in its drug discovery programs; the magnitude of these programs; progress of preclinical testing and clinical trials; the time and costs involved in obtaining regulatory approvals; the costs involved in filing, prosecuting, maintaining and enforcing patent claims; competing technological and market developments; changes in its existing research relationships; the ability of the Company to establish and maintain collaborative or licensing arrangements; the cost of manufacturing scale-up; and effective commercialization activities and arrangements. The Company leases its laboratory and office facilities and certain equipment under operating and capital leases. It is expected that the Company will need to acquire additional property and equipment as research and development activities progress. The Company anticipates the need for expansion of its laboratory and office facilities over the next several years. The Company's business is subject to significant risks, including but not limited to the risks associated with its research and development efforts, obtaining and enforcing patents, the lengthy and expensive regulatory approval process, product reimbursement levels, competition from other products, dependence on collaborative partners and other third parties, and the availability of capital. Even if the Company's products appear promising at an early 21. <PAGE> stage of development, they may not reach the market for a number of reasons. Such reasons include the possibilities that the potential products: will be ineffective or found to be unsafe during clinical trials, will fail to receive necessary regulatory approvals, will be difficult to manufacture on a large scale, will be uneconomical to market or will be precluded from commercialization by proprietary rights of third parties. Uncertainties associated with the duration and expense of preclinical and clinical testing of any of the Company's products make it difficult to predict the Company's capital requirements, and unexpected developments and/or regulatory requirements could greatly increase the cost of development of such products and affect the timing of anticipated revenues from product sales. Failure by the Company to obtain regulatory approval for any product will preclude its commercialization. In addition, failure by the Company to obtain patent protection may make certain of its products commercially unattractive. To continue its product development efforts, the Company will be required to raise substantial additional funds through public or private sales of its securities and through collaborative arrangements. The Company's ability to raise additional funds through such sales of securities depends in part on investors' perceptions of the biotechnology industry in general and of the Company in particular. The market for biotechnology company stocks has historically been highly volatile and, accordingly, there can be no assurance that additional funding will be available, or, if available, that it will be available on acceptable terms. The Company is seeking to enter into additional collaborative relationships to support development and commercialization under which rights to certain of its technologies or products will be granted. There can be no assurance that the Company will be able to conclude such relationships on satisfactory terms, if at all, or that agreements with its collaborators will successfully reduce its funding requirements. In addition, the Company has no established bank financing arrangements, and there can be no assurance that it will be able to establish such arrangements on satisfactory terms, if at all. If adequate funds are not available, the Company may be required to significantly delay, scale back or eliminate one or more of its drug discovery programs or obtain funds through arrangements with collaborative partners or others that may require the Company to relinquish rights to certain of its technologies, product candidates or products that the Company would not otherwise relinquish. At December 31, 1995, the Company had available net operating loss carryforwards of approximately $37,368,000 for federal income tax reporting purposes which begin to expire in 2002. The net operating loss carryforwards for state purposes, which began to expire in 1995 and fully expire in 2000, are approximately 50% of the federal tax amounts. The Company has unused research and development tax credits for federal income tax reporting purposes of $2,314,000 at December 31, 1995. In accordance with Internal Revenue Code Section 382, the annual utilization of net operating loss carryforwards and credits existing prior to a change in control may be limited. The Company, several of its current and former directors, and Centocor, Inc. were parties to a legal proceeding filed February 18, 1993 in the U.S. District Court for the Southern District of California. The complaint was filed by a stockholder of the Company who represented a class of persons who purchased Corvas stock from January 30, 1992 through April 14, 1992. A settlement was agreed upon and judgment of the Court entered on August 28, 1995. Upon final determination of allocations of stock to approved claimants, the remaining Corvas settlement amounts were distributed in May 1996. The Company continues to deny all claims of wrongdoing and maintains this denial as part of the settlement agreement. Of the $535,000 charge recorded in 1994 related to this settlement, $193,000 remains accrued at March 31, 1996. See "Business - Legal Proceedings." In 1993, the U.S. Patent and Trademark Office declared an interference and is currently in the process of determining the priority of invention between a patent for which some rights are licensed to the Company and a patent application for which rights are licensed to another party. The subject matter of these licenses is recombinant tissue factor which is used by Ortho to determine the blood clotting abilities of patients. The Company believes that its licensed patent should be upheld and is contesting the other party's claims of prior invention. However, there can be no assurance that such patent will be upheld. See "Business - Legal Proceedings." 22. <PAGE> BUSINESS EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THIS SECTION, AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS. OVERVIEW Corvas is a biopharmaceutical firm engaged in the design and development of a new generation of therapeutic agents in the fields of thrombosis and inflammation. The Company seeks to develop and commercialize novel drugs for the improved treatment and prevention of major cardiovascular diseases, such as heart attack, stroke, deep vein thrombosis, pulmonary embolism, and acute inflammation associated with trauma, shock and reperfusion injury in stroke. In contrast to currently available therapies, the Company's candidate drugs are designed to intervene more specifically in the disease process. Corvas intends to develop both parenteral and oral drugs to treat patients who cannot be optimally treated with current therapeutics. The Company believes that its antithrombotic drug discovery and development program is among the most comprehensive in the industry and that, together with its alliance partner, it is well positioned to develop and commercialize orally-active antithrombotic agents. Corvas has discovered its portfolio of drug candidates by integrating the Company's in-depth knowledge of the biology of thrombosis and, more generally, vascular biology, with advanced and proprietary drug discovery and design technology. The Company believes that such technology has broad potential application outside the antithrombotic field and will provide the basis for expanding its product portfolio. Corvas' scientists are experienced in a wide range of disciplines which are all integrated in a systematic discovery approach. Current programs employ medicinal chemistry, peptide chemistry, computer-aided drug design, structural biology, molecular biology, biochemistry, physiology, and pharmacology competencies. The Company's programs are based on three technology platforms: structure-based drug design, biological discovery, and molecular pharmacology. The first two platforms generate drug leads, while the third technology platform enables the selection of drug candidates. The Company's structure-based drug design programs are the source of small molecule drugs, including those demonstrating oral activity. Biological discovery methods, including novel gene discovery, cloning, expression, and mutagenesis methods are used to identify novel biologicals as drug candidates and discovery tools. Molecular pharmacology techniques, including IN VITRO biochemical analysis and IN VIVO biological testing, are used to rigorously characterize the many drug leads derived from the two other platforms in order to select specific drug candidates for preclinical and clinical development. The Company has several antithrombotic compounds in clinical and preclinical development, including orally-active thrombin inhibitors, which are being developed in collaboration with Schering-Plough. Corvas has developed a portfolio of orally-active, potent and selective thrombin inhibitors upon which this alliance is based. In the second half of 1995, Corvas conducted an initial human safety study of CVS-1123, a lead orally-active thrombin inhibitor. In this Phase Ia study, CVS-1123 demonstrated oral activity and was well tolerated. Corvas and Schering-Plough are actively evaluating a series of follow-on compounds in the same chemical class in order to select a candidate for development by Schering-Plough. This selection is expected to be made by the end of 1996. See "Business - Strategic Alliances - Relationship with Schering- Plough." 23. <PAGE> Corvas is also conducting active discovery programs for inhibitors of coagulation Factor Xa and Factor VIIa/TF. The primary goal of these programs is the development of safe and effective orally-active drugs. A secondary goal has been the development of parenteral agents targeting these factors. In 1994, Schering-Plough acquired an option to expand its alliance with Corvas to include Factor Xa inhibitors. In January 1996, Schering-Plough made a $1,000,000 payment to extend its option rights until December 1996. See "Business - Strategic Alliances - Relationship with Schering-Plough." In 1995, Company scientists presented initial scientific data on a newly discovered class of natural anticoagulant peptides known as the NAP family. Specific members of this family inhibit either Factor Xa or Factor VIIa/TF. The Company has selected and commenced preclinical development of a Factor VIIa/TF inhibitor as a parenteral agent for acute care indications, such as treatment of venous thrombosis and prevention of pulmonary embolism. In its anti-inflammatory program, the Company has discovered a promising novel protein, NIF, which blocks certain white blood cell functions associated with inflammation. In 1995, initial studies demonstrating the potential of NIF as a therapy for stroke victims were presented at a scientific conference by Corvas collaborators and published in a leading journal. Based on these early results, the Company entered into an agreement with Pfizer to collaborate on the development of NIF. See "Business - Strategic Alliances - Relationship with Pfizer." A Phase Ia clinical trial has been completed for the Company's first drug candidate, CORSEVIN M, an antibody-based antithrombotic which has been licensed to, and is being further developed by, Centocor. See "Business - Strategic Alliances - Relationship with Centocor." In 1992, Corvas entered into an alliance with Ortho to develop and commercialize a laboratory test for blood clotting function based on Corvas' proprietary technology. Corvas supplies a critical raw material, recombinant human tissue factor, to Ortho and has licensed rights to Ortho. Ortho currently produces and markets prothrombin time reagents based on such technology. See "Business - Strategic Alliances - Relationship with Ortho Diagnostic Systems." With regard to the foregoing discussion of the Company's research and development programs, there can be no assurance that either the underlying science or the related research and development being conducted will successfully yield approved clinical products. Such research and development efforts are subject to failure at any time. BUSINESS STRATEGY Corvas was formed to discover and develop novel pharmaceutical products for the improved treatment and prevention of acute and chronic cardiovascular diseases, inflammatory diseases, and related vascular disorders, including deep vein thrombosis, pulmonary embolism, heart attack, unstable angina, atrial fibrillation, and stroke. The Company believes that it has established a leadership position in the discovery and development of antithrombotic agents - drugs which prevent the formation of blood clots - and particularly in the design of oral drugs which have significant clinical and commercial potential. The Company is also pursuing the development of new parenteral antithrombotic agents based on recent discoveries. Key elements of the Company's strategy include the following: * FOCUS ON ANTITHROMBOTIC DRUGS, A HIGH GROWTH SECTOR IN THE LARGE CARDIOVASCULAR MARKETPLACE. Corvas is developing a portfolio of antithrombotic drug candidates, directed at three molecular targets, for multiple clinical indications and routes of administration. The Company believes that its program to develop blockers of blood coagulation enzymes is among the most comprehensive in the industry. 24. <PAGE> * EXPAND ITS LEADERSHIP POSITION IN INHIBITION OF SPECIFIC PROTEASES AND RECEPTORS INVOLVED IN THROMBOSIS AND RELATED DISEASE MECHANISMS. Corvas has focused on antithrombotic drugs to exploit the potential that has been created by advances in understanding the biology of the disease and new molecular discovery technologies. The blood coagulation enzymes are members of a structurally-related class of serine proteases. Corvas believes it has achieved a leading position in the development of orally-active inhibitors of thrombin (CORTHROMBIN compounds). Advances made in this specific program, and other proprietary technologies, are being leveraged by application to other targets in the same family, including Factor Xa and Factor VIIa/TF. * INTEGRATE DRUG DISCOVERY METHODOLOGIES WITH BIOLOGICAL EVALUATION FOR RAPID ITERATION OF DEVELOPMENT CANDIDATES. Company scientists are experienced in a wide range of disciplines which are all integrated in a systematic discovery approach. Active programs exploit medicinal chemistry, peptide chemistry, computer- aided drug design, structural biology, molecular biology, biochemistry, physiology, and pharmacology competencies. The Company's programs are based on three technology platforms: structure- based drug design, biological discovery, and molecular pharmacology. Structure-based drug design programs are the source of small molecule drugs, including those possessing oral activity. Biological discovery methods, including novel gene discovery, cloning, expression, and mutagenesis methods are used to identify novel biologicals as drug candidates and discovery tools. Molecular pharmacology techniques, including IN VITRO biochemical analysis and IN VIVO biological testing, are used to rigorously characterize the many drug leads in order to select specific drug candidates for preclinical and clinical development. * ESTABLISH A STRONG PORTFOLIO OF PATENTS AND PROPRIETARY TECHNOLOGY. Corvas has adopted a proactive policy of filing and prosecuting patent applications claiming a range of inventions, including uses and methods of synthesis of new molecules, discovery methods, novel genes and gene products, and novel analytical reagents. Corvas has entered into selected agreements to license enabling technology from third parties and intends to seek rights to additional external technology on an ongoing basis to complement internal discovery efforts. See "Business - Patents and Proprietary Rights." * ENTER INTO STRATEGIC ALLIANCES WITH ESTABLISHED PHARMACEUTICAL FIRMS FOR PRODUCTS TARGETED AT CHRONIC INDICATIONS. Corvas has established an initial alliance for chronic care products based on oral thrombin inhibitors (CORTHROMBIN compounds) with Schering-Plough. This relationship may be expanded, at Schering- Plough's option, to include Factor Xa inhibitors (CORDECIN compounds). See "Business - Strategic Alliances - Relationship with Schering- Plough." The Company intends to establish additional alliances to access resources to support the development and commercialization of other chronic care products. * RETAIN/EXPLOIT U.S. RIGHTS TO SELECTED ACUTE CARE PRODUCTS WHEN CONSISTENT WITH THE FIRM'S FINANCIAL RESOURCES AND EXPECTED RETURN ON STOCKHOLDER INVESTMENT. Corvas plans to seek to retain exclusive rights, joint commercialization rights, or co-promotion rights to selected acute care products for the U.S. market when exploiting such rights is feasible and is expected to provide an appropriate economic return, balancing the resources required and risks involved. Based on this strategy, the Company formed an alliance with Pfizer to develop and commercialize NIF as a therapy for stroke. See "Business - Strategic Alliances - Relationship with Pfizer." More recently, the Company has commenced the development of a product candidate from the NAP family. Corvas plans to seek one or more partners to aid in the development of this product and plans to participate in the development and commercialization of such product in the U.S. 25. <PAGE> * EXPAND PRODUCT PORTFOLIO BY APPLICATION OF TECHNOLOGY TO DISEASE TARGETS OUTSIDE THE ANTITHROMBOTIC DRUG FIELD. The Company's technology platforms may be broadly applied to the discovery and development of inhibitors of new serine proteases. In the course of conducting its antithrombotic program, proprietary chemical methods for inhibiting such enzymes have been discovered. The Company is currently adapting these chemical methods to combinatorial chemistry formats to increase the speed and economy of new lead discovery and to strengthen its ability to expand the number of target enzymes in its portfolio. The computational chemistry and drug design technology resident at Corvas also permits the expansion and leveraging of the firm's existing portfolio. Expansion areas being targeted include inflammation and oncology, in which specific proteases play key roles in physiology. The Company also plans to explore the application of its tissue factor technology beyond the current use as a laboratory diagnostic reagent. BACKGROUND Thrombosis and inflammation are closely linked pathologic processes employed by the body to protect itself against injury. When these processes are excessively or inappropriately activated, the processes themselves can result in significant tissue injury, disease and death. THROMBOSIS The formation of a blood clot, or thrombus, in the body results from a complex cascade of biochemical events involving the blood coagulation proteins and blood platelets. Although blood clot formation is a normal vascular repair mechanism, when this mechanism is activated within a blood vessel, local thrombosis may result and occlude the blood vessel. Vascular diseases associated with thrombosis afflict more than 3,000,000 individuals annually in the U.S. and are the causes of significant mortality and morbidity associated with cardiovascular diseases. Thrombosis causes several significant diseases characterized by the location of the blood vessel where the thrombus is lodged. For example, acute myocardial infarction ("MI") results from obstruction of blood flow due to a thrombus in a coronary artery which supplies blood to the heart muscle; stroke or transient ischemic attacks ("TIA") may result from a thrombus in an artery which supplies blood to a part of the brain. Similarly, a clot in the deep veins of the legs, called deep vein thrombosis ("DVT"), causes local inflammation, pain and other complications, including the dislodgment of part of the thrombus which can travel to the lungs and result in life-threatening pulmonary embolism ("PE"). Thrombosis can also be generalized, with microthrombus formation occurring throughout the vascular system. This condition, known as disseminated intravascular coagulation ("DIC"), is a consequence of cancer and various infectious diseases, including sepsis, and may result in depletion of blood coagulation factors, multiple organ failure, hemorrhage and death. Activation of the thrombotic mechanisms contributes to unstable angina ("UA") or serious chest pain and atrial fibrillation ("AF") or rapid, uncontrolled heart muscle contractions. Patients with UA are at significant risk of Ml, and patients with AF are at significant risk of Ml and stroke due to enhanced risk of thrombosis. Patients with TIA are also at risk of stroke. Finally, DVT and PE can arise from complications of vascular surgery such as major orthopedic surgery. Two classes of antithrombotics are presently in clinical use: anticoagulants and antiplatelet agents. In the U.S., heparins and warfarin are the only drugs currently approved for use as anticoagulants. Aspirin is the most commonly used antiplatelet agent, although the first in a new class of antiplatelet agents, GPIIb/IIIa antagonists, has been recently introduced to the market. Although these drugs are widely prescribed, they have significant limitations. Heparins, which act by an indirect mechanism, can cause excessive bleeding and decreased platelet count (thrombocytopenia) and can be administered only by injection. Recently, low molecular weight heparins have been introduced in the U.S. These agents may be injected subcutaneously and routine monitoring of coagulation function is no longer required. These advantages have led to adoption for certain indications, yet low molecular 26. <PAGE> weight heparins still suffer from many of the limitations of traditional heparins. Warfarin lacks specificity of action, may cause bleeding, must be carefully monitored and, due to its slow onset of action, is unsuitable for use as an acute antithrombotic drug. Aspirin also has a slow onset of action and its effect is reversed by the natural production of new blood platelets, a process that takes seven to eleven days. In addition, chronic administration of aspirin carries the risk of gastrointestinal bleeding and hemorrhagic stroke. Currently, GPIIb/IIIa antagonists can be administered acutely by intravenous routes and must be used with an anticoagulant such as heparin. These and other factors limit the use of the currently available antithrombotic drugs, especially on a chronic basis. As there are no selective orally-active thrombin, Factor Xa or Factor VIIa inhibitors presently available, the compounds under development at Corvas aim to address unmet needs in antithrombotic therapy. The worldwide market for antithrombotic agents is estimated to be greater than $2,000,000,000, based on 1994 market audits. Approximately half of the sales are in each of the antiplatelet and anticoagulant categories. According to these market audits, 1994 U.S. sales of anticoagulants were greater than $440,000,000. Of this total, approximately $300,000,000 was contributed by the sales of COUMADIN-Registered Trademark-, the DuPont-Merck brand of warfarin. Sales of COUMADIN have been growing in recent years due to adoption by many physicians for two newly approved indications: treatment of patients with AF for prevention of stroke and prevention of recurrent MI. Treatment guidelines issued by the American College of Chest Physicians ("ACCP") in October 1995 recommend the use of oral anticoagulation to decrease the risk of stroke. Yet federal government agency estimates are that only 25% of AF patients are currently treated with oral anticoagulants. Based on interviews with clinicians, the Company believes that this is primarily because physicians fear the bleeding complications of COUMADIN. Approximately $140,000,000 of the U.S. anticoagulant sales reported in 1994 are in the parenteral category and comprise the traditional heparins and new low molecular weight heparin. In 1994, sales of LOVENOX-Registered Trademark-, the first low molecular weight heparin introduced in the U.S. by Rhone-Poulenc Rorer ("RPR"), reached $38,000,000. RPR has reported that sales of LOVENOX and related brands exceeded $300,000,000 worldwide in 1995. LOVENOX is primarily indicated for prophylaxis of venous thrombosis in major orthopedic surgery, such as hip and knee replacement. In October 1995, treatment guidelines for use of anticoagulation as prophylaxis to prevent deep vein thrombosis were also issued by the ACCP. PE resulting from DVT is estimated to be the most frequent cause of preventable in-hospital deaths. It is estimated that increased prophylaxis with low molecular weight heparins will reduce the risk of fatal pulmonary embolism in major orthopedic procedures. A second low molecular weight heparin, FRAGMIN-TM-, was recently approved in the U.S. for use as therapy in major abdominal surgery. The Company believes the large number of patients affected by thrombotic and associated vascular diseases, together with the limited efficacy of, and adverse side effects associated with, existing surgical procedures and drug therapies, provides significant market opportunities for new drugs. The recent growth in sales in the antithrombotic drug category supports the view that physicians are adopting new agents in search of better therapeutic outcomes and economics. Corvas is building on recent scientific advances in the understanding of the mechanisms of blood clot formation and is developing new therapeutics designed to intervene more specifically in the disease process to result in drugs which the Company believes will offer important economic and therapeutic advantages over existing therapy. INFLAMMATION Inflammation is a response by the body to injury and infection. The diverse inflammatory responses are mediated by a series of molecular events, known as the inflammatory cascades, by which the body attempts to limit or destroy the injurious agents, heal wounds and maintain health. However, inflammatory responses can result in significant tissue injury and disease. A primary event in a major class of inflammatory response is the attachment, or adhesion, of neutrophils, a specific type of white blood cell, to endothelial cells which line the blood vessel walls. Adhesion is caused by the interaction of specific receptors on the neutrophils with target adhesion molecules on the endothelial cells. After adhesion occurs, the neutrophils migrate across the lining of the blood vessel and into the tissue where they release toxic substances, which contribute to tissue damage. These events occur in both acute and chronic inflammatory conditions. Acute disorders which are often accompanied by this inflammatory response 27. <PAGE> include stroke, traumatic shock and many forms of reperfusion injury which can occur following certain surgical procedures such as aortic aneurysm repair, artery bypass grafting and major abdominal surgery. Current anti-inflammatory drugs generally seek to alleviate symptoms rather than intervene in the underlying disease processes. Blocking the activation and adhesion of white blood cells to endothelial cells, and thereby preventing their accumulation in tissue, is an alternate approach which could more effectively intervene early in the inflammatory process. Using advanced understanding of the underlying mechanisms of inflammation and tissue injury, Corvas is seeking to develop new anti-inflammatory agents designed to intervene early in the disease process and provide improved efficacy and safety. The Company is focusing its NIF program on the development of a protein drug that will inhibit neutrophil activation, adhesion and transmigration into brain tissue to attenuate and prevent injury following stroke and head trauma. The Company believes this approach may lead to a new drug for the treatment of stroke victims, for whom no effective therapy exists. INTEGRATED TECHNOLOGY PLATFORMS In its drug discovery programs, Corvas applies a highly integrated, multidisciplinary approach to produce novel molecules as both drug discovery tools and drug candidates. The Company's medicinal chemistry expertise is essential to the development of synthetic pharmaceuticals and is supported by its capabilities in protein engineering, biochemistry, immunology, monoclonal antibody technology, analytical chemistry, animal pharmacology, molecular modeling and IN VITRO and IN VIVO biological testing. In addition, the Company has developed combinatorial chemistry approaches which have yielded lead compounds for its antithrombotic program. The Company believes these technologies have potential application to the discovery of drug candidates in other therapeutic fields. STRUCTURE-BASED DRUG DESIGN Corvas scientists have extensive knowledge and experience in computer-aided drug design and have developed novel, proprietary software to expedite the protein-based design of synthetic drugs. Using computer-aided molecular modeling techniques, Company scientists have developed models of the active sites of serine proteases and have gained valuable insights regarding the unique features of specific targets. Corvas has also used computer modeling to study the interaction of candidate drugs with target enzymes. In addition, through collaboration with university-based scientists, Corvas has obtained X-ray crystal structures of candidate drugs bound to the active site of the target enzyme thrombin. Crystal structures of Corvas inhibitors bound to Factor Xa and Factor VIIa/TF are also being determined. By systematic iterative synthesis, biological evaluation and modeling, Company scientists have developed a comprehensive database correlating biological activity of candidate drugs with their structures. The Company has developed several proprietary chemical strategies for inhibiting serine protease enzymes using a concept known as "transition state analog inhibition." In this approach, an inhibitor is synthesized which mimics the "transition state" structure that is intermediate between that of the enzyme's substrate and its product. By exploiting this principle, Company scientists have produced inhibitors of three enzymes in the coagulation cascade and several other targets outside of thrombosis. The resulting inhibitors bind reversibly, but tightly, to the target enzyme and have been shown to exhibit excellent pharmacologic properties. Company scientists are currently combining certain Corvas proprietary inhibitor chemistry with recently developed methods of combinatorial chemistry to create methods of producing large libraries of candidate inhibitors. It is expected that such methods, if successfully developed, will improve the speed of lead identification efforts and enable the Company to more rapidly expand its portfolio to new target enzymes. BIOLOGICAL DISCOVERY Natural products have been a source of new drugs for many years. Advances in molecular biology permit the search for, and identification of, new biological activities in a variety of sources if appropriate analytical assays exist. A secondary discovery strategy used by Corvas scientists has been to examine blood-feeding parasites which infect mammals as a source of biologically-active agents which can serve as mechanistic probes and potential drug 28. <PAGE> candidates. Using specialized assays of coagulation enzyme and white blood cell activity, Corvas scientists have discovered natural molecules which inhibit certain blood coagulation enzymes and certain white blood cell functions. These molecules, from the NAP and NIF families, are further described below. Techniques used to discover these molecules include classical protein fractionation and activity purification as well as gene cloning techniques, including specialized expression cloning methods developed by Corvas scientists. The study of the structure and function of molecules evolved by nature to perform specialized biochemical functions often yields novel insights into molecular mechanisms. Such studies have provided competitive advantages to Company scientists which are being applied in its small molecule drug discovery programs. The Company anticipates using its biological discovery competence to identify molecules that act on new drug discovery targets and to identify novel targets for future discovery programs as well. MOLECULAR PHARMACOLOGY Using the two platform technologies described earlier, Company scientists seek to generate many lead molecules which must be rigorously evaluated to determine their suitability as drug candidates for further preclinical and clinical development. This evaluation process relies on Corvas' expertise in molecular pharmacology. Corvas has evolved a highly specialized capability to evaluate leads for selection as candidate antithrombotic and related drugs. Such expertise depends on a unique blend of IN VITRO biochemical and IN VIVO biological techniques, with testing in both small and large laboratory animal models of disease processes. Selection of candidates from leads depends on the specific intended use and route of administration of a drug. Company scientists are highly experienced in evaluating molecules for bioavailability by various routes of administration, including the oral, intravenous and subcutaneous routes. To complement its internal resources in physiology and pharmacology, the Company has conducted numerous animal studies in collaboration with outside investigators, primarily in academic settings, who provide specialized models and comparative data bases which are critical to the drug selection process. PRODUCT DEVELOPMENT PROGRAMS The following table describes the Company's primary drug development programs and their potential therapeutic indications and development status. There can be no assurance that the Company's product development efforts will progress any further or be successfully completed. In addition, there can be no assurance that the Company's potential products will be capable of being produced in commercial quantities at reasonable costs, that required regulatory approvals can be obtained or that any potential products, if introduced, will be successfully marketed or achieve market acceptance. 29. <PAGE> <TABLE> <CAPTION> PROGRAM/MOLECULAR TARGET THERAPEUTIC INDICATIONS(1) DEVELOPMENT STATUS(2) - ------------------------ -------------------------- --------------------- <S> <C> <C> ANTITHROMBOTIC CORTHROMBIN COMPOUNDS/THROMBIN Oral(3) DVT, PE, UA, stroke, AF Phase Ia trial completed in 1995; Schering-Plough expected to start Phase I trial in 1997 CORDECIN AS COMPOUNDS(4)/FACTOR Xa Parenteral (NAP-5) MI, UA, DVT, PE Preclinical development Oral Post-MI, UA, stroke, AF, DVT Lead evaluation/Preclinical development CORSEVIN AS COMPOUNDS/FACTOR VIIa/TF Parenteral (NAPc2) DVT, PE, UA Preclinical development Oral Post-MI, prevention of Lead discovery cardiovascular disease, UA, stroke, AF CORSEVIN M(5)/FACTOR VIIa Antithrombotic Phase Ib clinical trials ANTI-INFLAMMATORY NIF(6) Stroke, reperfusion injury Preclinical development with Pfizer </TABLE> ________________ (1) The following abbreviations are used in the table: AF=atrial fibrillation; MI=myocardial infarction; DVT=deep vein thrombosis; PE=pulmonary embolism; UA=unstable angina. (2) The following definitions apply to the table: "Lead discovery"=Identification of lead compounds with activity in appropriate IN VITRO assay systems. These lead compounds may require additional chemical manipulation and more extensive evaluation prior to selection of candidates, if any, for preclinical development. "Lead evaluation"=Extensive evaluation of lead compounds in multiple IN VITRO assay systems and preliminary animal pharmacology studies. "Preclinical development"=Conduct of specific studies to support clinical testing. See "Business - Government Regulation" for a description of the clinical trial process. (3) Oral CORTHROMBIN has been licensed to Schering-Plough. See "Business - Strategic Alliances - Relationship with Schering-Plough." (4) Schering-Plough has an exclusive option until December 1996 for CORDECIN AS compounds. See "Business - Strategic Alliances - Relationship with Schering-Plough." (5) CORSEVIN M has been licensed to Centocor. See "Business - Strategic Alliances - Relationship with Centocor." 30. <PAGE> (6) NIF is subject to an option by Pfizer to take an exclusive license to the product and related technology. See "Business - Strategic Alliances - Relationship with Pfizer." ANTITHROMBOTIC PROGRAM Currently available antithrombotic agents, despite their limitations, are used in a diverse range of clinical indications. In clinical practice, multiple antithrombotic drugs are often administered concurrently, and it is expected that drugs under development by Corvas may also be used in multidrug regimens. The Company has therefore adopted a broad approach in its antithrombotic program, targeting intervention at three key biochemical steps, in order to develop agents for multiple clinical indications. Corvas is developing compounds which inhibit Factor VIIa/TF, Factor Xa and thrombin, and believes that these drugs may have advantages over currently available antithrombotic drugs and over certain other antithrombotic drugs under development. As additional preclinical and clinical data are obtained, the Company expects to select optimal compounds for further development in specific clinical indications, either as parenteral or oral drugs. The Company believes that its program targeting the inhibition of the key coagulation enzymes is among the most comprehensive in the industry and that it has achieved a leading position in the design and development of orally-active antithrombotic agents. CORTHROMBIN COMPOUNDS. Corvas has developed highly potent and selective small molecule inhibitors of thrombin, a key blood enzyme that produces fibrin and causes platelet aggregation. Fibrin and platelets are the two major components of a blood clot. In December 1994, Corvas entered into a strategic alliance with Schering-Plough to develop and commercialize oral thrombin inhibitor drugs. See "Business - Strategic Alliances - Relationship with Schering-Plough." Corvas has developed a strong portfolio of orally-active thrombin inhibitors upon which this alliance is based. Lead compounds in several classes have been identified for further development and are being actively studied in animals and in early human testing. In the second half of 1995, Corvas conducted an initial human safety study of CVS-1123, a lead orally- active thrombin inhibitor. In this Phase Ia study, CVS-1123 demonstrated oral activity and was well tolerated. The Company presented the first results of the Phase Ia clinical trial at a scientific meeting in April 1996. Corvas and Schering-Plough are actively evaluating a series of follow-on compounds in the same chemical class as CVS-1123 in order to select a drug candidate for development by Schering-Plough. This selection is expected to be made by the end of 1996, upon which Schering-Plough will make a $3,000,000 milestone payment. Corvas has filed a series of patent applications covering novel thrombin inhibitor structures, chemical strategies for inhibiting thrombin and related enzymes, and methods of treating thrombosis with such inhibitors. The Company believes that it has and will continue to establish a strong patent position in the field of thrombin inhibitors. See "Business - Patents and Proprietary Rights." CORDECIN AS COMPOUNDS. Corvas is developing synthetic inhibitors of Factor Xa. Progress has been made in the identification of potent and specific Factor Xa inhibitors in IN VITRO assay systems and in IN VIVO animal models, including compounds which exhibit oral activity in rodent models of thrombosis and oral bioavailability in conscious dogs. Research activities are focused on continued refinement of these molecules to identify suitable preclinical candidates. As part of the strategic alliance with Schering-Plough to develop and commercialize oral antithrombotic drugs, Schering-Plough has obtained an exclusive option for CORDECIN through December 1996. See "Business - Strategic Alliances - Relationship with Schering-Plough." CORSEVIN AS COMPOUNDS. Corvas has designed, synthesized and evaluated a large number of proprietary synthetic compounds which inhibit the activity of Factor VIIa/TF. Additional medicinal chemistry research and pharmacology testing is ongoing to refine these molecules and further improve their potency and selectivity. The Company intends to seek a strategic alliance to support the development of Factor VIIa/TF inhibitors for chronic therapy. NAP FAMILY. In addition to the chemistry-based approach described above, Corvas scientists have recently discovered a unique family of small protein inhibitors of Factors Xa and VIIa/TF. These NAP proteins were discovered from blood-feeding hookworms, parasites which have evolved efficient anticoagulation mechanisms. 31. <PAGE> Based on comparative data developed both in the Company's laboratories and with collaborators, the Company believes that these agents exhibit unprecedented antithrombotic potency in animal models. In addition, animal studies demonstrate that NAP proteins may be administered by the subcutaneous route, and assuming that similar properties are demonstrated in humans, this is expected to be an attractive competitive feature of these agents. The discovery and characterization of a specific Factor Xa inhibitor, NAP-5, was reported at scientific meetings in 1995, including the American Heart Association, and was discussed in a full paper in the PROCEEDINGS OF THE NATIONAL ACADEMY OF SCIENCES ("PNAS"). The cloning and characterization of a novel Factor VIIa/TF inhibitor, NAPc2, is described in a second paper, published on March 5, 1996 in PNAS. The Company plans to present additional scientific results at meetings throughout 1996. Based on the preclinical studies conducted to date, the Company has selected NAPc2 as a development candidate and has commenced the necessary preclinical studies to bring NAPc2 to the clinic for initial human testing in early 1997. Initial clinical trials and early Phase II efficacy studies are currently being designed. The Company has engaged a contract manufacturer to produce the necessary clinical supplies. CORSEVIN M. Corvas has developed CORSEVIN M, a potent and specific monoclonal antibody fragment. CORSEVIN M acts at the initial step of the coagulation cascade by binding to coagulation Factor Vlla and neutralizing its clot-forming activity. In 1993, the Company completed a Phase I clinical trial of CORSEVIN M which it believes is the first specific inhibitor of the initiation of the coagulation cascade to have been tested in humans. In Phase Ia clinical trials, this compound showed potential as a safe, fast-acting, potent and reversible anticoagulant. Because the Company is focusing its resources on non-antibody based pharmaceuticals, it licensed this product to Centocor. The Company has been advised that Centocor intends to continue the development of CORSEVIN M and that Centocor is currently evaluating its future development strategy for the agent in the light of the recent clinical trial results with its antiplatelet agent REOPRO-TM-. The Company expects that Centocor will conduct all future trials, if any, of CORSEVIN M. See "Business - Strategic Alliances - Relationship with Centocor." ANTI-INFLAMMATORY PROGRAM NIF. Corvas is developing NIF, a protein which inhibits neutrophil activation, adhesion and transmigration into tissue. Corvas scientists have demonstrated that NIF interacts specifically with a cell adhesion receptor (integrin) on the surface of neutrophils known as CD11b/CD18 (Mac-1). The interaction of NIF with CD11b/CD18 blocks the adhesion of neutrophils to the endothelial cells which line blood vessels, and thereby inhibits the first step in the development of an inflammatory response. Corvas has produced multiple recombinant forms of NIF, selected one form for preclinical development, and demonstrated activity of the molecule in several animal pharmacology models of acute inflammation. The Company believes that NIF is the first identified, naturally-occurring inhibitor of CD11b/CD18, and that this novel molecule may have application as an acute anti-inflammatory drug with safety and efficacy advantages over current clinical therapy and other investigational agents. NIF represents a potential parenteral acute-care anti-inflammatory product. The Company has continued animal pharmacology studies of NIF, focusing on stroke and reperfusion injury, in which earlier studies have shown NIF to be highly effective. In 1995, initial studies demonstrating the potential of NIF as a therapy for stroke victims were presented at a scientific conference by Corvas collaborators and published in the ANNALS OF NEUROLOGY. Based on these early results, the Company entered into a strategic alliance with Pfizer in October 1995 to collaborate on the development of NIF as a therapy for stroke and head injury. In collaboration with Pfizer and an academic laboratory, studies to evaluate the efficacy of NIF in animal models of stroke are continuing. Additionally the Corvas-Pfizer collaboration is currently focusing on the manufacture of additional supplies of NIF for toxicology studies and early human studies. If the project proceeds on schedule, initial human studies are planned for 1997. See "Business - Strategic Alliances - Relationship with Pfizer." DRUG DESIGN In its drug discovery programs, Corvas applies a highly integrated, multidisciplinary approach to produce novel molecules as both drug discovery tools and drug candidates. The Company's medicinal chemistry expertise is essential to the development of synthetic pharmaceuticals and is supported by its capabilities in protein engineering, biochemistry, immunology, monoclonal antibody technology, analytical chemistry, animal pharmacology, 32. <PAGE> molecular modeling and IN VITRO and IN VIVO biological testing. In addition, the Company has developed combinatorial chemistry approaches which have yielded lead compounds for its antithrombotic program. The Company believes these technologies have potential application for the discovery of drug candidates for other therapeutic indications. Corvas scientists also have extensive knowledge and experience in computer- aided drug design and have developed novel, proprietary software to expedite the protein-based design of synthetic drugs. Using computer-aided molecular modeling techniques, Company scientists have developed models of the active sites of serine proteases and have gained valuable insights regarding the unique features of specific targets. Corvas has also used computer modeling to study the interaction of candidate drugs with target enzymes. By systematic synthesis, biological evaluation and modeling, Company scientists have developed a comprehensive database correlating biological activity of candidate drugs with their structures. COMMERCIAL PRODUCTS The Company has entered into two agreements with Ortho for manufacturing and worldwide marketing by Ortho of diagnostic tests containing recombinant human tissue factor produced by Corvas. See "Business - Strategic Alliances - Relationship with Ortho Diagnostic Systems." Corvas also supplies recombinant human tissue factor and a group of tissue factor-specific monoclonal antibodies to a distributor for use in the research market. Sales of these products have not been significant to date and are not expected to be significant in the future. STRATEGIC ALLIANCES As part of the Company's strategy for the research, development and commercialization of its products, the Company may enter into various arrangements with corporate partners, licensors, licensees and others. Such arrangements may include the grant of manufacturing, marketing or other rights. There can be no assurance that any additional arrangements beyond those detailed below will be established or that new products will be successfully developed and commercialized under any existing alliances. If the Company is not able to establish additional arrangements, it could encounter delays in developing its products or find that the development, manufacture or sale of its products in such markets is adversely affected. While Corvas believes that parties to any such arrangements will have an economic motivation to succeed in performing their contractual responsibilities, the amount and timing of resources they devote to these activities will not be within the Company's control. RELATIONSHIP WITH SCHERING-PLOUGH In December 1994, the Company entered into a strategic alliance agreement with Schering-Plough to collaborate on the discovery and commercialization of oral thrombin inhibitor drugs for the prevention and treatment of chronic cardiovascular disorders. The initial collaboration covers development of inhibitors of thrombin, a key blood clotting enzyme. In addition, Schering- Plough acquired an exclusive option (which was extended to December 1996 upon payment of $1,000,000) to expand the program to include inhibitors of a second significant blood coagulation enzyme, Factor Xa. Under the terms of the agreement, Schering-Plough will compensate the Company for the costs of research and preclinical development of thrombin inhibitors over two years. Schering-Plough, which is responsible for certain preclinical development, all clinical trials and regulatory activities, received exclusive worldwide manufacturing and marketing rights for any resulting thrombin inhibitors. The Company may also receive milestone payments and royalties on sales of therapeutics resulting from this alliance. However, there can be no assurance that products will be successfully developed and commercialized under this alliance. In connection with this alliance, Schering-Plough paid certain fees and purchased 1,000,000 shares of Series A Convertible Preferred Stock of the Company in 1994 resulting in net proceeds of $4,864,000. Revenue of $4,000,000 was recognized under this agreement in 1995. If the option for Factor Xa is exercised, Schering-Plough 33. <PAGE> has agreed to make an additional equity investment, as well as payments for certain fees, research and development expenses, and regulatory milestones. To date, Corvas has received a total of $14,000,000 from Schering-Plough under the alliance. Schering-Plough beneficially owns approximately 9.0% of the outstanding securities of the Company on an as-converted basis. RELATIONSHIP WITH PFIZER In October 1995, the Company entered into a research and option agreement with Pfizer to collaborate on the development of NIF. During the option period, which concludes in October 1996 but may be extended by Pfizer until April 1997, Pfizer will fund its own further development of NIF, including costs associated with clinical trials. If Pfizer exercises its option by April 1997, pursuant to a license and development agreement, Corvas will conduct certain development activities for an additional two-year period and Pfizer will receive an exclusive, worldwide license to further develop, manufacture and market NIF as a therapeutic agent. If the option to enter into the license and development agreement is exercised, Pfizer will pay the Company an additional license fee of $1,000,000 and will compensate the Company for certain costs of research and preclinical development of NIF over a two-year period. If products are successfully commercialized from this agreement, the Company will also receive milestone payments and royalty payments on product sales. However, there can be no assurance that products will be successfully developed and commercialized under this alliance. RELATIONSHIP WITH ORTHO DIAGNOSTIC SYSTEMS In June 1992, the Company entered into two agreements with Ortho for manufacturing and worldwide marketing by Ortho of diagnostic tests containing recombinant human tissue factor produced by Corvas. These tests are used to determine the blood clotting ability of patients. European sales of this product commenced in 1992 and sales in the U.S. commenced in 1993. In order to maintain its rights pursuant to these agreements, Ortho is required to make minimum annual purchases of materials, royalty payments, and one additional milestone payment. RELATIONSHIP WITH CENTOCOR In November 1991, the Company entered into an agreement with Centocor in which Corvas granted rights to Centocor to license and commercialize certain monoclonal antibody products developed by Corvas. For one such monoclonal antibody product, CORSEVIN M, Corvas completed a Phase Ia clinical trial in 1993. Centocor has informed the Company that it intends to continue the development of CORSEVIN M. Corvas will depend on Centocor for the continued development of CORSEVIN M and product sales. In 1994, Centocor terminated its option rights to future monoclonal antibody products discovered or acquired by the Company. The Company may receive a future milestone payment upon receipt of certain regulatory approvals and royalties on product sales. In connection with this alliance, Centocor purchased preferred stock (subsequently converted to common stock) of the Company for an aggregate purchase price of $9,250,000. In connection with a lawsuit brought against Corvas, several of its directors and Centocor, Centocor transferred 600,000 of its Corvas shares towards the settlement during 1995. See "Business - Legal Proceedings." On an as-converted basis, Centocor presently beneficially owns approximately 4.9% of the outstanding securities of the Company. RESEARCH COLLABORATIONS AND LICENSES Corvas has also established collaborations with scientists at a number of leading U.S. and European academic and clinical research centers to further its technology and product development objectives. These collaborations are generally conducted pursuant to agreements which give the Company a license, or the option to license, certain technology, patent rights or materials which may be valuable to the Company. These agreements may require the Company to fund research or to pay license fees or milestone payments and, upon commercial sale of certain products, royalties. The Company also has several contractual arrangements with scientific advisors and collaborators for which the Company compensates these individuals or an affiliated entity. 34. <PAGE> PATENTS AND PROPRIETARY RIGHTS The Company's success will depend in part on its ability to obtain patent protection for its products, both in the U.S. and other countries. The patent position of biotechnology and pharmaceutical companies is highly uncertain and involves complex legal and factual questions. There is no consistent policy regarding the breadth of claims allowed in biotechnology patents. The Company intends to file applications as appropriate for patents covering both its products and processes. As of the date of this Prospectus, Corvas holds rights in nine U.S. patents and has been notified of four allowed patent applications in the U.S. Of the issued patents, seven are owned by the Company and two are licensed by the Company. Corvas has filed or holds licenses to 55 additional patent applications that currently are pending in the U.S. Patent and Trademark Office. Approximately one-third of these pending patent applications are duplicate applications the Company filed in anticipation of changes to U.S. patent law that became effective in June 1995 and that may affect the term of U.S. patents. Foreign counterparts of certain of the U.S. applications have been filed in many countries. In addition, Corvas holds rights in four foreign-issued patents; Corvas owns one such patent and is the exclusive licensee, in a defined field of use, of the remaining three foreign patents. There can be no assurance that patents will issue from any of the patent applications owned or licensed by the Company or that claims allowed under any issued patents will be sufficiently broad to protect the Company's technology. In addition, there can be no assurance that any patents issued or licensed to the Company will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide proprietary protection to the Company. As is typical in the biotechnology industry, the commercial success of the Company will depend in part on the Company neither being found infringing on patents issued to competitors nor breaching the technology licenses upon which the Company's products might be based. While the Company is aware of third party patent applications and issued patents in the Company's field, it is uncertain whether these will require the Company to alter products or processes, obtain licenses or cease certain activities. If the Company is required to obtain such licenses, there can be no assurance the Company will be able to obtain any necessary licenses at a reasonable cost. Failure by the Company to obtain a license to any technology that it requires to commercialize its products and obtain FDA approval within an acceptable period of time, if required to do so, would have a material adverse effect on the Company. Litigation, which could result in substantial costs to the Company, may also be necessary to enforce any patents issued to the Company or to determine the scope and validity of others' proprietary rights. In 1993, the U.S. Patent and Trademark Office declared an interference and is currently in the process of determining the priority of invention between a patent for which some rights are licensed to the Company and a patent application for which rights are licensed to another party. The subject matter of these licenses is recombinant tissue factor which is used by Ortho to determine the blood clotting ability of patients. There can be no assurance that the U.S. Patent and Trademark Office will rule in a manner favorable to the Company on this matter. See "Business - Legal Proceedings." In addition to patents, the Company relies on trade secrets and proprietary know-how, which it seeks to protect, in part, through appropriate confidentiality and proprietary information and inventions agreements with its current and prospective collaborative partners, employees, scientific advisors and consultants. There can be no assurance that these agreements will not be breached, that the Company will have adequate remedies for any breach, or that the Company's trade secrets will not otherwise become known or be independently discovered by competitors. Certain of the Company's research has been funded in part by the SBIR program. As a result of such funding, Government Rights will exist in any technology, including inventions, developed with the funding. These rights include the grant of a non-exclusive, paid-up, worldwide license to such inventions for any governmental purpose. In addition, the government has the right to require the Company to grant an exclusive license to any of such inventions to a third party if the government determines that (i) adequate steps have not been taken to commercialize such inventions, (ii) such action is necessary to meet public health or safety needs or (iii) such action is necessary to meet requirements for public use under federal regulations. Federal law requires any licensor of an invention that was partially funded by federal grants to obtain a covenant from its exclusive licensee to substantially manufacture products using the invention in the U.S. In addition, the Company's licenses may also relate to technology developed with federal funding and, therefore, may also be subject to Government Rights. 35. <PAGE> GOVERNMENT REGULATION The production and marketing of the Company's products and its ongoing research and development activities are subject to regulation by numerous governmental authorities in the U.S. and other countries. Any drug developed by the Company must undergo rigorous preclinical and clinical testing and an extensive regulatory approval process mandated by FDA and equivalent foreign authorities before it can be marketed. Various federal and, in some cases, state statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, recordkeeping and marketing of such products. These processes can take a number of years and require the expenditure of substantial resources. Any failure by the Company or its collaborators or licensees to obtain, or any delay in obtaining, regulatory approvals could adversely affect the marketing of any products developed by the Company and its ability to receive product or royalty revenue. The activities required before a pharmaceutical agent may be marketed in the U.S. begin with preclinical testing. Preclinical tests include laboratory evaluation of product chemistry and animal studies to assess the potential safety and efficacy of the product and its formulations. The results of these studies must be submitted to the FDA as part of an Investigational New Drug Application ("IND"), which must be reviewed and become effective pursuant to FDA regulations before proposed clinical testing can begin. Typically, clinical testing involves a three-phase process. In Phase I, clinical trials are conducted with a small number of subjects to determine the early safety profile and the pattern of drug distribution and metabolism. In Phase II, clinical trials are conducted with groups of patients afflicted with a specified disease in order to determine preliminary efficacy, optimal dosages and expanded evidence of safety. In Phase III, large scale, multicenter, comparative clinical trials are conducted with patients afflicted with a target disease in order to provide enough data for the statistical proof of efficacy and safety required by the FDA and others. The results of the preclinical and clinical testing are then submitted to the FDA for a pharmaceutical product in the form of a New Drug Application ("NDA"), or for a biological product in the form of a Product License Application ("PLA"), for approval to commence commercial sales. In responding to an NDA or PLA, the FDA may grant marketing approval, request additional information or deny the application if it determines that the application does not demonstrate to the satisfaction of the FDA that the product is safe and effective for its labeled indications. With respect to biological products, an Establishment License Application ("ELA") must also be filed, and the FDA must approve the manufacturing facilities for the products. There can be no assurance that approvals will be granted on a timely basis, if at all. Among the conditions for NDA or PLA approval is the requirement that the prospective manufacturer's quality control and manufacturing procedures conform on an ongoing basis with Good Manufacturing Practices ("GMP"). In complying with GMP, manufacturers must continue to expend time, money and effort in the area of production and quality control to ensure full technical compliance. Manufacturing facilities are subject to periodic inspections by the FDA, and noncompliance may result in the withdrawal of previously granted approvals and/or the imposition of other regulatory enforcement sanctions. The Company is also subject to regulation by the Food and Drug Branch of the California Department of Health Services ("FDB") and, prior to the marketing of any of its products manufactured in California, the Company will be required to secure a drug manufacturing license from the FDB. Such licenses are issued after an FDB inspection of manufacturing facilities, and are reissued on an annual basis after reinspection by the FDB. The Company is also subject to various federal, state and local laws, regulations and recommendations relating to safe working conditions, laboratory and manufacturing practices, the experimental use of animals and the use and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents, used in connection with the Company's research. The extent of government regulation which might result from any legislation or administrative action cannot be accurately predicted. 36. <PAGE> COMPETITION Due to the high incidence of cardiovascular and inflammatory diseases, most of the major pharmaceutical companies have significant research and product development programs in these areas. The Company expects to encounter significant competition as to each of the products it seeks to develop. Several existing products have well-established market positions and there are a number of new antithrombotic products in advanced clinical development. The Company's competitors include fully-integrated pharmaceutical and biotechnology companies which have expertise in research and development, manufacturing processes, testing, obtaining regulatory approvals and marketing, and may have financial and other resources greater than those of the Company. Smaller companies also may prove to be significant competitors. Furthermore, academic institutions, government agencies and other public and private research organizations conduct research relating to cardiovascular and inflammatory diseases and may seek patent protection for, and establish collaborative arrangements for the development and marketing of, products for the treatment of cardiovascular and inflammatory diseases. Products developed by these and other entities may compete directly with those being developed by the Company. These companies and institutions may also compete with the Company in recruiting and retaining highly qualified scientific personnel. The Company's competition will be determined in part by the potential indications for which the Company's products are developed and ultimately approved by regulatory authorities, by the timing of such approvals and market introduction and by whether any currently available drugs, or drugs under development by others, are effective in the same indications. Accordingly, the relative speed with which the Company can develop products, complete the clinical trials and approval processes, and supply commercial quantities of the products to the market is expected to be important competitive factors. The Company expects that competition among products approved for sale will be based, among other things, on product efficacy, safety, reliability, availability, price and patent position. PROPERTIES AND MANUFACTURING The Company presently occupies approximately 30,200 square feet of laboratory and office space in San Diego pursuant to a lease that expires in September 1997 and has two one-year renewal options remaining. The Company does not have manufacturing facilities for pilot scale or commercial production of compounds under development as therapeutic products. The Company must presently rely on third parties to manufacture its candidate products for clinical testing. For its diagnostic product, the Company has established a quality control and quality assurance program, including a set of standard operating procedures. The Company relies on outside manufacturers for production of raw materials for this product. For therapeutic products, however, the Company will need to establish further manufacturing, quality control and quality assurance programs. The Company will continue to be dependent on contract manufacturers or strategic partners. There can be no assurance that these manufacturers will be available or will meet the Company's requirements for quality, quantity and timeliness, or that the Company would be able to find substitute manufacturers, if necessary. HUMAN RESOURCES As of May 24, 1996, Corvas employed 70 individuals on a full-time basis, 19 of whom hold Ph.D. degrees. A significant number of the Company's management and professional employees have had prior experience with pharmaceutical, biotechnology or medical product companies. Corvas believes that it has been highly successful in attracting skilled and experienced scientific personnel; however, competition for such personnel is intense. None of the Company's employees is covered by a collective bargaining agreement. All of the Company's employees are covered by confidentiality and arbitration agreements, and certain of its officers have employment contracts. 37. <PAGE> LEGAL PROCEEDINGS The Company, several of its current and former directors, and Centocor were parties to a legal proceeding filed February 18, 1993 in the U.S. District Court for the Southern District of California. The complaint was filed by a stockholder of the Company who represented a class of persons who purchased Corvas stock from January 30, 1992 through April 14, 1992. A settlement was agreed upon and judgment of the Court entered on August 28, 1995. Upon final determination of allocations of stock to approved claimants, the remaining Corvas settlement amounts were distributed in May 1996. The Company continues to deny all claims of wrongdoing and maintains this denial as part of the settlement agreement. In 1993, the U.S. Patent and Trademark Office declared an interference and is currently in the process of determining the priority of invention between a patent for which some rights are licensed to the Company and a patent application for which rights are licensed to another party. The subject matter of these licenses is recombinant tissue factor which is used by Ortho to determine the blood clotting abilities of patients (See "Commercial Products"). The Company believes that its licensed patent should be upheld and is contesting the other party's claims of prior invention. However, there can be no assurance that such patent will be upheld. MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of the Company, and their ages as of May 24, 1996, are as follows: <TABLE> <CAPTION> NAME AGE POSITION ---- --- --------- <S> <C> <C> Randall E. Woods. . . . . . . . . . . . . . . . . 44 President and Chief Executive Officer John E. Crawford. . . . . . . . . . . . . . . . . 41 Executive Vice President, Chief Financial Officer and Secretary Donald H. Picker, Ph.D. . . . . . . . . . . . . . 50 Executive Vice President and Chief Operating Officer William C. Ripka, Ph.D. . . . . . . . . . . . . . 56 Senior Vice President, Chemical Research Howard R. Soule, Ph.D.. . . . . . . . . . . . . . 45 Vice President, Product Development George P. Vlasuk, Ph.D. . . . . . . . . . . . . . 40 Vice President, Biological Research David S. Kabakoff, Ph.D.(1) . . . . . . . . . . . 48 Chairman of the Bboard of Directors Thomas S. Edgington, M.D.(1). . . . . . . . . . . 64 Director John H. Fried, Ph.D.(3) . . . . . . . . . . . . . 66 Director Theodor H. Heinrichs(3) . . . . . . . . . . . . . 69 Director M. Blake Ingle, Ph.D.(1)(2) . . . . . . . . . . . 54 Director Michael Sorell, M.D.(2) . . . . . . . . . . . . . 48 Director W. Leigh Thompson, Jr., M.D., Ph.D. . . . . . . . 57 Director Gerard Van Acker(2) . . . . . . . . . . . . . . . 52 Director Nicole Vitullo (3). . . . . . . . . . . . . . . . 39 Director </TABLE> __________________ (1) Member of Executive Committee (2) Member of Audit Committee (3) Member of Compensation and Stock Option Committee RANDALL E. WOODS has been President and Chief Executive Officer since 38. <PAGE> May 1996. Prior to that, he served as President of the U.S. Operations, Boehringer Mannheim Pharmaceuticals Corporation from March 1994 to March 1996 and was Vice President of Marketing and Sales from December 1993 to March 1994. Prior to that, he served in various capacities at Eli Lilly & Company from 1973 to December 1993. Mr. Woods received an M.B.A. degree from Western Michigan University. JOHN E. CRAWFORD, a founder of Corvas, has been Chief Financial Officer since the Company's organization in May 1987, Executive Vice President since April 1989 and Secretary since March 1991. Mr. Crawford also served as President from May 1987 to April 1989, Chief Operating Officer from April 1989 to February 1991, Secretary from May 1987 to June 1989 and as a director from May 1987 to March 1991. Mr. Crawford received an M.B.A. from the University of Chicago Graduate School of Business. DONALD H. PICKER, Ph.D. joined Corvas in February 1996 as Executive Vice President and Chief Operating Officer. Prior to joining Corvas, Dr. Picker was employed by Genta, Inc. for four years, most recently as Senior Vice President, Research and Development. From 1987 to 1991, he was employed at Johnson Matthey, Inc., most recently as Worldwide Vice President, Biomedical Research and Development. Dr. Picker received his Ph.D. in organic chemistry from the State University of New York in Albany. WILLIAM C. RIPKA, Ph.D. joined Corvas in May 1990 as Vice President, Pharmaceutical Research. In January 1995, Dr. Ripka was promoted to Senior Vice President, Chemical Research. Prior to joining Corvas, he was employed for twenty-four years by E.I. duPont de Nemours & Co. in various research positions, most recently as Research Fellow and Supervisor of Drug Design and Molecular Modeling. Dr. Ripka received his Ph.D. in physical organic chemistry from the University of Illinois. HOWARD R. SOULE, Ph.D. has served as Vice President, Product Development since February 1989. From May 1988 to February 1989, he served as Director, Product Development. Dr. Soule was Program Manager of Infectious Disease Research and Development at Kallestad Diagnostics from 1984 to 1988 and previously worked as a Senior Research Chemist at Mallinckrodt, Inc. Dr. Soule received his Ph.D. in virology from Baylor College of Medicine and has four years of post-doctoral experience at The Scripps Research Institute. GEORGE P. VLASUK, Ph.D. joined Corvas in August 1991 as Director, Molecular Pharmacology. He served as Executive Director, Molecular Pharmacology from July 1993 to January 1995, when he was promoted to Vice President, Biological Research. Previously, he was employed for six years at Merck Sharp & Dohme Research Laboratories, most recently as Associate Director of Hematology Research. Dr. Vlasuk received his Ph.D. in biochemistry from Kent State University. DAVID S. KABAKOFF, Ph.D. was named Chairman of the Board in January 1996 and has been a director since June 1989. He also served as President from April 1989 to May 1996, Chief Executive Officer from April 1989 to February 1991 and from November 1991 to May 1996, and Chief Operating Officer from February 1991 to November 1991. Dr. Kabakoff is Executive Vice President and a director of Dura Pharmaceuticals, Inc. and President of an affiliated development company, Spiros Corporation. THOMAS S. EDGINGTON, M.D., a founder of Corvas, has been a director since May 1987 and served as Chairman of the Board from that time until February 1991. He is a Member of The Scripps Research Institute ("Scripps"), with which he has been affiliated since 1965. Since 1968, Dr. Edgington has also been adjunct Professor of Pathology at the University of California, San Diego, and, from 1968 to 1974, he was head of the Department of Pathology and Laboratory Medicine which he founded at Scripps. He has been Vice President for Research, Chairman of the National Research Committee and a member of the Board of Directors of the American Heart Association. He was a member of the Board of Directors and the Past-President of the Federation of American Societies for Experimental Biology. 39. <PAGE> JOHN H. FRIED, Ph.D. was elected a director in May 1992. Dr. Fried served in various executive capacities at Syntex Corporation ("Syntex") from April 1964 to March 1992. He served as President of Syntex Research from 1976 to March 1992, Senior Vice President of Syntex from 1981 to 1985, and Vice Chairman from 1985 to January 1993. Dr. Fried is Chairman of the Board of Alexion Pharmaceuticals and President of Fried and Company, Inc. THEODOR H. HEINRICHS joined the Board of Directors in February 1988. He also served as Chief Executive Officer and Chairman of the Board from February 1991 through November 1991 and January 1996, respectively. Mr. Heinrichs is a general partner with Hambrecht & Quist Life Science Venture Partners ("H&Q LSV"), with whom he has been affiliated since 1985. Mr. Heinrichs served as Chairman of the Board of Directors of Telios Pharmaceuticals, Inc. ("Telios") from January until June 1994. Telios filed for protection under Chapter 11 in the Federal Bankruptcy Court in January 1995 and was subsequently acquired by INTEGRA, L.S. Mr. Heinrichs also served as Chief Executive Officer of Canji, Inc. ("Canji") from its inception through March 1993 and was Chairman of the Board until March 1995. Canji was acquired by Schering-Plough in 1996. M. BLAKE INGLE, Ph.D. was elected a director in January 1994. Dr. Ingle was the President and Chief Executive Officer of Canji from March 1993 to February 1996, when it was acquired by Schering-Plough. Prior to that, he was employed in a variety of capacities with the IMCERA Group, Inc., consisting of Mallinckrodt Medical, Mallinckrodt Specialty Chemicals and Pitman Moore from 1980 to 1993, most recently serving as President/Chief Executive Officer. Dr. Ingle was a director of Telios and was its Chief Executive Officer from December 1994 to January 1995. He currently serves as a director for Synbiotics Corporation and as a member of the Board of Trustees at La Jolla Cancer Research Foundation. MICHAEL SORELL, M.D. was appointed a director in April 1996. He, with several partners, is currently forming an investment bank based in New York. He was associated with Morgan Stanley & Co. in various capacities, the last being Principal, from July 1986 to February 1992. He left the firm to become a partner in a joint venture with Essex Investment Management of Boston. In August 1994, he rejoined Morgan Stanley as the emerging growth analyst and principal where he served until February 1996. Prior to that, he was on staff at Memorial Sloan-Kettering Cancer Center and worked in Clinical Development at Schering-Plough Corporation. W. LEIGH THOMPSON, JR., M.D., Ph.D. was appointed as a director in January 1996. Dr. Thompson retired as Chief Scientific Officer of Eli Lilly and Company in 1995, where he had served in various capacities since 1982. He is the President and Chief Executive Officer of Profound Quality Resources, Ltd., a consulting company, and serves on the Board of Directors for GENEMEDICINE, INC., DNX Corporation, Guilford Pharmaceuticals and Orphan Medical, Inc. GERARD VAN ACKER has been a director since March 1991. Mr. Van Acker has been President and Chief Executive Officer of Gewestelijke Investeringsmaatschappij voor Vlaanderen, N.V. (The Investment Company for Flanders) ("GIMV"), based in Antwerp, Belgium, since founding it in 1980. He was a co-founder and the first President of PGS and currently serves as its Vice-Chairman. Mr. Van Acker is also a director of BARCO, N.V. NICOLE VITULLO was appointed a director in April 1996. She has been a Vice President since November 1992 with Rothschild Asset Management, Inc., which manages two publicly traded funds, International Biotechnology Trust ("IBT") and Biotechnology Investments, Limited. She served as Director of Corporate Communications at Cephalon, Inc. from July 1991 to November 1992. Prior to that, she was Manager, Healthcare Investments at Eastman Kodak Company. Ms. Vitullo serves on the boards of directors of Cytel Corporation, Anergen, Incorporated, and LocalMed, Inc. Mr. Van Acker was nominated for election as a director in accordance with an agreement among the Company, GIMV and PGS, entered into in March 1991 under which the Company issued shares of preferred stock (subsequently converted into common stock) to GIMV and PGS. Pursuant to such agreement, the Company has agreed that, for as long as the holders of such shares of stock hold not less than 10% of the voting power of the 40. <PAGE> Company, it will nominate for election to the Board of Directors the number of persons designated by such holders that they would be entitled to elect under cumulative voting. Each officer serves at the discretion of the Board of Directors subject to existing employment agreements in the case of Mr. Woods, Mr. Crawford and Dr. Picker. See "Management - Employment Agreements." The Company's Bylaws permit the Board of Directors to establish by resolution the authorized number of directors, and the Company currently has ten directors authorized. The Company's Restated Certificate of Incorporation and Bylaws provide that the Board of Directors shall be divided into three classes, each class consisting, as nearly as possible, of one-third of the total number of directors, with each class having a three-year term. Each director holds office until the annual meeting of stockholders of the Company which coincides with the end of such director's three-year term and until such director's successors have been elected and duly qualified. There are no family relationships among any of the directors or officers of the Company. BOARD COMMITTEES The Executive Committee presently consists of Drs. Kabakoff, Edgington and Ingle. This committee is authorized to exercise the full authority of the Board of Directors except with respect to (i) those matters not permitted by the Delaware General Corporation Law to be delegated to any committee, (ii) approval of obligations of the Company in amounts greater than $100,000, (iii) approval of annual operating plans, business plans and major strategic decisions and (iv) approval of other major transactions such as corporate partnerships or financing plans. The Audit Committee consists of Mr. Van Acker and Drs. Ingle and Sorell. The Audit Committee, which meets periodically with management and the Company's independent auditors, reviews the results and scope of the audit and other services provided by the Company's independent auditors and reviews internal accounting procedures and the adequacy of internal controls. The Compensation and Stock Option Committee consists of Mr. Heinrichs, Dr. Fried and Ms. Vitullo. This committee reviews and recommends to the Board salaries, incentives and other forms of compensation for officers and other employees, administers the Company's various incentive compensation and benefit plans, including the Company's 1991 Incentive and Compensation Plan, and recommends policies relating to such plans. DIRECTOR COMPENSATION Members of the Board of Directors generally do not receive compensation for service as directors or for service as members of any committee of the Board, except as noted. Mr. Heinrichs and Dr. Edgington each received compensation of $36,000 for service as non-employee members of the Executive Committee in 1995. Dr. Edgington is currently receiving $36,000 for these services in 1996. Drs. Fried, Ingle, Sorell and Thompson currently receive compensation at the rate of $12,000 per year for service as outside directors unaffiliated with any principal stockholder. The members of the Board are also eligible for reimbursement for their expenses incurred in connection with Company business in accordance with Company policy. In addition, directors have received, and are anticipated to receive in the future, stock options under the Company's equity incentive plans or otherwise. Each non-employee director of the Company receives a non-discretionary stock option grant annually under the Company's 1991 Incentive and Compensation Plan ("1991 Plan"). Options granted to the non-employee directors under the 1991 Plan are not intended by the Company to qualify as incentive stock options under the Internal Revenue Code of 1986, as amended (the "Code"), nor do they disqualify the members of the Compensation and Stock Option Committee as "disinterested directors." Pursuant to an agreement executed in 1988, Dr. Edgington presently receives $36,000 annually for consulting services rendered to the Company. 41. <PAGE> Pursuant to an agreement executed in June 1992, Dr. Fried presently receives $12,000 annually for consulting services rendered to the Company. Pursuant to an agreement executed in May 1996, Mr. Heinrichs presently receives $12,000 annually for consulting services rendered to the Company. Pursuant to an agreement executed in May 1996, Dr. Kabakoff will receive $8,500 for consulting services rendered to the Company in May 1996. COMPENSATION AND STOCK OPTION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Mr. Heinrichs, who currently serves on the Compensation and Stock Option Committee of the Board, also served as Chief Executive Officer of the Company from February 1991 to November 1991. Dr. Fried, who currently serves on the Compensation and Stock Option Committee of the Board, entered into an agreement with the Company in June 1992 pursuant to which Dr. Fried presently receives fees of $12,000 annually for consulting services rendered to the Company. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth for the years ended December 31, 1995, 1994 and 1993, compensation awarded, or paid to and earned by, the Company's Chief Executive Officer and the four other most highly compensated executive officers whose salary and bonus were in excess of $100,000 for services rendered to the Company during the fiscal year ended December 31, 1995 (collectively, the "Named Executive Officers"): <TABLE> <CAPTION> Long-Term Compensation Annual Compensation Awards --------------------------------- ------------- All Other Fiscal Compensation Year Salary($)(1) Bonus($) Shares ($)(3) Name and Principal -------- ----------- ------------ Underlying ------------- Position Options (#)(2) - --------------------------- -------------- <S> <C> <C> <C> <C> <C> David S. Kabakoff, Ph.D(4).... 1995 212,000 -- 164,285 3,971 Chairman, President & 1994 205,000 24,000 65,000 3,974 Chief Executive Officer 1993 205,000 -- -- 3,748 John E. Crawford.............. 1995 129,000 -- 85,000 2,725 Executive Vice President 1994 125,000 12,000 35,000 2,637 & Chief Financial Officer 1993 125,000 -- 15,000 2,507 William C. Ripka, Ph.D........ 1995 165,000 -- 68,000 4,694 Senior Vice President, 1994 160,000 12,000 25,000 4,732 Chemical Research 1993 160,000 -- -- 4,468 Howard R. Soule, Ph.D......... 1995 127,500 -- 40,000 2,406 Vice President, 1994 121,500 12,000 35,000 2,365 Product Development 1993 118,000 -- -- 2,215 George P. Vlasuk, Ph.D........ 1995 130,160 -- 63,257 843 Vice President, Biological Research (5) </TABLE> 42. <PAGE> - ------------------ (1) Includes amounts earned but deferred into the Company's 401(k) Compensation Deferral and Savings Plan ("401(k) Plan") at the election of the executive. (2) The Company has not issued any restricted stock awards or stock appreciation rights ("SARs") to date. These numbers include options regranted by the Company in an exchange that took place on January 16, 1995. See "Option Grants in Last Fiscal Year." (3) Includes amounts paid on behalf of executives for long-term disability insurance premiums and life insurance premiums. (4) Effective May 10, 1996, Dr. Kabakoff resigned as President and Chief Executive Officer of the Company, but will continue as Chairman of the Board. He was also a Consultant to the Company through May 31, 1996. (5) Dr. Vlasuk became an executive officer in January 1995. OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth, for the fiscal year ended December 31, 1995, certain information regarding options granted or repriced to each of the Named Executive Officers: <TABLE> <CAPTION> Individual Grants ----------------------------------------------------------- Potential Realizable Value at Assumed Number of Percentage Annual Rates of Stock Shares of Total Price Appreciation for Underlying Options Exercise Option Terms ($)(6)(7) Options Granted in Price Expiration --------------------------- Name Granted Fiscal ($/Sh)(5) Date 5% 10% - --------------------------- (#)(1)(3) Year(4) ----------- ----------- ----------- ----------- -------------- ------------- <S> <C> <C> <C> <C> <C> <C> David S. Kabakoff, Ph.D.(8).... 164,285(1) 21.8% 2.1875 01/15/05 226,008 572,749 John E. Crawford............... 75,000(1) 9.9% 2.1875 01/15/05 103,178 261,473 10,000(2) 1.3% 3.8125 10/12/05 23,977 60,761 William C. Ripka, Ph.D......... 68,000(1) 9.0% 2.1875 01/15/05 93,548 237,069 Howard R. Soule, Ph.D.......... 30,000(1) 4.0% 2.1875 01/15/05 41,271 104,589 10,000(2) 1.3% 3.8125 10/12/05 23,977 60,761 George P. Vlasuk, Ph.D......... 63,257(1) 8.4% 2.1875 01/15/05 87,023 220,534 </TABLE> _______________ (1) On January 16, 1995, the Compensation and Stock Option Committee of the Board of Directors approved an offer for all employees, including officers, to exchange outstanding options with exercise prices greater than $2.44 per share for an equivalent number of options issued under the 1991 Plan at the fair market value on January 16, 1995. The new options did not vest for six months from the date of grant (12 months for executive officers), at which time the options vested in the equivalent percentage as the canceled options at the 43. <PAGE> time such options were canceled. After the initial vesting of at least 25%, the remainder of the options vest 6.25% per quarter. The options remain exercisable for 10 years from the new grant date. For each employee, the receipt of the replacement grant was subject to the employee's consent to the cancellation of the original grants. (2) Options granted on October 13, 1995 vest over a four year period, 25% on the first anniversary of the grant date and 6.25% each quarter thereafter until fully vested. Upon certain corporate events resulting in a change in control, at the discretion of the Board of Directors, (i) the outstanding options will be assumed or replaced by substitute options granted by any surviving corporation, or (ii) the outstanding options will become exercisable for a minimum of 30 days prior to such event. (3) Options have a maximum term of 10 years measured from the grant date, subject to earlier termination upon the optionee's cessation of service with the Company. (4) Based on an aggregate of 754,727 shares subject to options granted to employees in fiscal 1995, including grants to Named Executive Officers and shares subject to replacement options granted. (5) The exercise price is equal to 100% of the fair market value of the Common Stock on the date of grant, as determined by the Compensation and Stock Option Committee of the Board of Directors. (6) The 5% and 10% assumed rates of appreciation are suggested by the rules of the Securities and Exchange Commission ("Commission") and do not represent the Company's estimate or projection of the future Common Stock price. There can be no assurance that any of the values reflected in the table will be achieved. Actual gains, if any, on stock option exercises and Common Stock holdings are dependent upon a number of factors, including the future performance of the Common Stock, overall market conditions and the timing of option exercises, if any. (7) The potential realizable value is calculated based on the term of the option at its time of grant (10 years in all cases above). It is calculated by assuming that the stock price on the date of grant appreciates at the indicated annual rate, compounded annually for the entire term of the option and that the option is exercised and sold on the last day of its term for the appreciated stock price. No gain to the optionee is possible unless the stock price increases over the option term, which will benefit all stockholders. For example, a stockholder who purchased one share of stock on January 16, 1995 at $2.1875, held the stock for 10 years and sold it on January 15, 2005 while the stock appreciated at 5% and 10% would have profits of $1.38 and $3.49, respectively, on his $2.1875 investment. (8) Effective May 10, 1996, Dr. Kabakoff resigned as President and Chief Executive Officer of the Company, but will continue as Chairman of the Board. He was also a consultant to the Company through May 31, 1996. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table sets forth information with respect to the exercise of stock options by the Named Executive Officers, during the fiscal year ended December 31, 1995 and the number and value of securities underlying unexercised options held by the Named Executive Officers as of December 31, 1995: <TABLE> <CAPTION> NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED IN- UNEXERCISED OPTIONS AT THE-MONEY OPTIONS AT DECEMBER 31, 1995(#)(1) DECEMBER 31, 1995($)(1)(2) ---------------------------- ----------------------------- SHARES VALUE ACQUIRED ON REALIZED NAME EXERCISE (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---------------------------------- ------------ -------- ----------- ------------- ----------- ------------- <S> <C> <C> <C> <C> <C> <C> David S. Kabakoff, Ph.D(3) . . . . -- -- 53,743 164,285 257,966 544,194 John E. Crawford . . . . . . . . . -- -- -- 85,000 -- 265,312 </TABLE> 44. <PAGE> <TABLE> <CAPTION> <S> <C> <C> <C> <C> <C> <C> William C. Ripka, Ph.D.. . . . . . 10,000 29,375 21,428 68,000 99,104 225,250 11,428 59,283 Howard R. Soule, Ph.D. . . . . . . -- -- 33,320 66,250 140,936 191,250 George P. Vlasuk, Ph.D.. . . . . . 5,143 26,679 20,611 42,646 68,273 141,264 </TABLE> - -------------------------- (1) Includes options granted under the 1987 Stock Option Plan ("1987 Plan"), the 1989 Stock Option Plan ("1989 Plan") and the 1991 Plan. Options granted under the 1987 Plan and the 1989 Plan generally vest at the rate of 25% per year over four years and have a term of 10 years. In December 1991, the Board of Directors voted to terminate the 1987 Plan and the 1989 Plan, and no additional grants of options have been made under either of such plans since they were terminated. Options granted under the 1991 Plan generally have the vesting schedule reflected in Footnotes 1 and 2 of "Stock Option Grants and Exercises." (2) Amounts reflected are based on the fair market value of the Company's Common Stock at December 31, 1995 ($5.375) minus the exercise price of the options. (3) Effective May 10, 1996, Dr. Kabakoff resigned as President and Chief Executive Officer of the Company, but will continue as Chairman of the Board. He was also a consultant to the Company through May 31, 1996. EQUITY INCENTIVE PLANS 1987 AND 1989 STOCK OPTION PLANS The Company has a 1987 Plan under which options were granted to key employees and directors of, and consultants to, the Company. As of May 24, 1996, there are 102,529 shares of Common Stock reserved for issuance upon exercise of currently outstanding options under the 1987 Plan, and no options to purchase additional shares of Common Stock are available for future grant. In addition, the Company has a 1989 Plan under which options were granted to key employees and directors of, and consultants to, the Company. As of May 24, 1996, there are 23,743 shares of Common Stock reserved for issuance upon exercise of currently outstanding options under the 1989 Plan and no shares remain available for future grants. Both plans provide for the grant of incentive stock options, intended to qualify as such under Section 422A of the Code, and nonstatutory stock options. The Board of Directors administers the 1987 Plan and the 1989 Plan (collectively, "Stock Option Plans"). The maximum term of each option granted under the Stock Option Plans is ten years. The aggregate fair market value of the Common Stock with respect to which incentive stock options are first exercisable by an optionee in any calendar year may not exceed $100,000. Options granted under the Stock Option Plans generally are nontransferable and expire 30 days after the termination of an optionee's service to the Company. In general, if an optionee is permanently disabled or dies during his or her service to the Company, such person's options may be exercised up to the earlier of the options' expiration date or one year following such disability or death. In December 1991, the Board of Directors voted to terminate the 1987 Plan and the 1989 Plan, effective as of January 30, 1992. The Company has not made any additional grants of options under either the 1987 Plan or the 1989 Plan since the Board of Directors voted to terminate such plans. However, previously granted options continue to be governed by the terms of the 1987 Plan or the 1989 Plan (and the option agreements executed thereunder), as applicable. As of May 24, 1996, the Company had outstanding options under the Stock Option Plans to purchase an aggregate of 126,272 shares held by 20 persons at the weighted average per share exercise price of $1.06. The exercise price of all options granted under the Stock Option Plans has equaled or exceeded the fair market value of the Common Stock on the date of grant as determined in good faith by the Compensation and Stock Option Committee of the Board of Directors. As of May 24, 1996, options 45. <PAGE> to purchase 242,068 shares of Common Stock granted pursuant to the Stock Option Plans have been exercised. As of May 24, 1996, there were no shares available for future grant under the Stock Option Plans. 1991 INCENTIVE AND COMPENSATION PLAN In December 1991, the Board of Directors adopted the 1991 Plan, under which the Company may grant or issue incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards, dividend equivalents, performance awards and stock payments to key employees, officers and directors of, and consultants to, the Company. The 1991 Plan provides for the issuance of 1,275,000 shares of Common Stock. The number of shares issuable under the 1991 Plan will automatically increase each year such that the number of shares issuable at the beginning of any fiscal year will equal 10% of the number of outstanding shares of Common Stock, less the number of shares issued, and as to which options or other awards have been granted and are outstanding under the 1991 Plan (other than annual grants of nonstatutory options to non-employee directors) and the Stock Option Plans. The 1991 Plan provides for appropriate adjustments in the numbers and kind of shares subject to the 1991 Plan and to outstanding grants thereunder in the event of stock splits, stock dividends and certain other types of recapitalizations or restructurings. In January 1996 and April 1996, the Board of Directors amended the 1991 Plan, subject to stockholder approval, to increase the aggregate number of shares of Common Stock authorized for issuance under the 1991 Plan from 1,275,000 shares to 2,225,000 shares and to automatically increase the number of shares issuable under the 1991 Plan each quarter such that the number of shares issuable at the beginning of any fiscal quarter will equal 18% of the number of outstanding shares of Common Stock, less the number of shares issued or subject to outstanding options or other awards under the 1991 Plan (other than annual grants of nonstatutory options to non-employee directors) and the Stock Option Plans. A Compensation and Stock Option Committee duly appointed by the Board of Directors has authority to select the key employees, officers and directors of, and consultants to, the Company to whom grants are to be made (provided that incentive stock options may only be granted to employees of the Company), to designate the type of grant or award to be issued, to designate the number of shares covered by each grant or award, to impose a vesting schedule or other restrictions on the grants or awards, to specify the amount and type of consideration to be paid upon the exercise or receipt of a grant or award under the 1991 Plan (provided that the exercise price of incentive stock options may not be less than the fair market value of the underlying stock on the date of grant), to interpret and adopt rules for the operation of the 1991 Plan and to specify other terms of the grant or award, all subject to the terms of the 1991 Plan. The Compensation and Stock Option Committee may in its discretion delegate to the Chief Executive Officer or the Secretary of the Company, or both, all of its powers, other than the authority to make grants or awards under the 1991 Plan. To the extent that the aggregate fair market value of stock with respect to which incentive stock options are first exercisable by an optionee during any calendar year (under the 1991 Plan and/or under the Stock Option Plans) exceeds $100,000, such options shall be taxed as nonstatutory stock options. Under the 1991 Plan, on the date of the first meeting of the Board of Directors (but in no event later than the 30th day of each fiscal year), each director of the Company who is not an employee of the Company or a parent or a subsidiary of the Company, will automatically receive an award of a nonstatutory stock option exercisable for 5,000 shares of Common Stock. The exercise price of such option will be 85% of the fair market value of such shares of Common Stock on the date the option is granted, and the option shall become exercisable as to 25% of the underlying shares on the first through fourth anniversaries of the grant date. As of May 24, 1996, the Company had outstanding options under the 1991 Plan to purchase an aggregate of 1,567,060 shares held by 82 persons at the weighted average per share exercise price of $3.68. The exercise price of all options granted under the 1991 Plan has equaled or exceeded the fair market value of the Common Stock on the date of grant as determined in good faith by the Compensation and Stock Option 46. <PAGE> Committee of the Board of Directors. As of May 24, 1996, options to purchase 79,061 shares of Common Stock granted pursuant to the 1991 Plan have been exercised. In addition, the Board of Directors has granted, other than under the Stock Option Plans and the 1991 Plan, nonstatutory options to purchase an aggregate of 47,142 shares of Common Stock at a weighted average exercise price of $3.02 per share. The fair market value of the Common Stock on the grant dates, as determined in good faith by the Board of Directors, was $0.88 per share and $3.50 per share. In each case, the Board of Directors established the exercise price of the option at a level it determined to be in the best interests of the Company and necessary to achieve the compensatory purpose of the option. As of May 24, 1996, the Company had outstanding nonstatutory options to purchase an aggregate of 8,571 shares held by 2 persons at the weighted average per share exercise price of $0.88. As of May 24, 1996, nonstatutory options to purchase 28,928 shares of Common Stock have been exercised. 47. <PAGE> EMPLOYEE STOCK PURCHASE PLAN In December 1991, the Company adopted the Employee Stock Purchase Plan ("Purchase Plan") covering an aggregate of 150,000 shares of Common Stock. The Purchase Plan is intended to qualify as an employee stock purchase plan within the meaning of Section 423 of the Code. Under the Purchase Plan, the Board of Directors may authorize participation by eligible employees, including officers, in periodic offerings following the commencement of the Purchase Plan. The Board of Directors may delegate administration of the Purchase Plan to a committee selected by the Board of Directors. Employees are eligible to participate in the Purchase Plan if they are employed by the Company, or a subsidiary of the Company designated by the Board of Directors, for at least 20 hours per week and are employed by the Company or a subsidiary of the Company designated by the Board of Directors for at least five months per calendar year. Employees who participate in an offering have up to 10% of their earnings withheld pursuant to the Purchase Plan. The amount withheld is then used to purchase shares of the Common Stock issued by the Company on specified dates determined by the Board of Directors. The price of Common Stock purchased under the Purchase Plan will be equal to 85% of the lower of the fair market value of the Common Stock on the commencement date of each offering period or on the relevant purchase date. Employees may end their participation in the offering at any time during the offering period, and participation ends automatically on termination of employment with the Company. 401(K) PLAN In 1988, the Company adopted a 401(k) Plan covering all of the Company's employees. Pursuant to the 401(k) Plan, employees may elect to reduce their current compensation by up to the statutorily prescribed annual limit ($9,500 in 1996) and have the amount of such reduction contributed to the 401(k) Plan. The 401(k) Plan is intended to qualify under section 401 of the Code so that contributions by employees or by the Company to the 401(k) Plan, and income earned on plan contributions, are not taxable to employees until withdrawn from the 401(k) Plan and so that contributions by the Company, if any, will be deductible by the Company when made. The Trustee of the 401(k) Plan, at the discretion of each participant, invests the assets of the 401(k) Plan in any of the five investment options. The 401(k) Plan permits, but does not require, qualified nonelective contributions and company profit sharing contributions by the Company on behalf of all participants in the plan. The Company has not made any such contributions to date, but does pay the transaction costs associated with investment options under the 401(k) Plan. EMPLOYMENT AGREEMENTS Pursuant to an executive employment agreement between the Company and John E. Crawford entered into in April 1989, Mr. Crawford receives a base salary, bonuses and equity compensation as determined by the compensation and Stock Option Committee of the Board of Directors. His current annual base salary is $137,000. If Mr. Crawford's employment is terminated without cause (or if he resigns under certain specified conditions, including a change of control of the Company), he will receive as severance his then-current salary and continued health insurance benefits over the 180-day period following the date of termination. If Mr. Crawford's employment is terminated with cause or he resigns, his compensation and benefits will cease immediately and he will not be entitled to severance benefits. Upon his death or total disability, he or his estate or personal representative shall be entitled to receive his then-current salary and benefits 48. <PAGE> over the 180-day period following the date of such event. Pursuant to an executive employment agreement between the Company and Donald H. Picker, Ph.D. entered into in February 1996, Dr. Picker receives a base salary, bonuses and equity compensation as determined by the Compensation and Stock Option Committee of the Board of Directors. His current annual base salary is $250,000. If Dr. Picker's employment is terminated without cause, he will receive as severance his then-current salary and continued health insurance benefits over the 180-day period following the date of termination. If Dr. Picker's employment is terminated with cause or he resigns, his compensation and benefits will cease immediately and he will not be entitled to severance benefits. Upon his death or total disability, he or his estate or personal representative shall be entitled to receive his then-current salary and benefits over the 90-day period following the date of such event. Pursuant to an executive employment agreement between the Company and Randall E. Woods entered into in May 1996, Mr. Woods receives a base salary, bonuses and equity compensation as determined by the Compensation and Stock Option Committee of the Board of Directors. His current annual base salary is $300,000. If Mr. Woods' employment is terminated without cause within one year of his hire date, he will receive as severance (i) his then-current salary and continued health insurance benefits over the 12-month period following the date of termination, and (ii) one-fourth of the stock options granted to Mr. Woods upon his employment with the Company will immediately vest and become exercisable. If such termination occurs after the first year of his employment with the Company, Mr. Woods will receive as severance his then-current salary, continued health insurance benefits and continued stock option vesting over the 180-day period following the date of termination. If Mr. Woods' employment is terminated with cause or he resigns, his compensation and benefits will cease immediately and he will not be entitled to severance benefits. Upon his death or total disability, he or his estate or personal representative shall be entitled to receive his then-current salary and benefits over the 90-day period following the date of such event. LIMITATIONS OF LIABILITY AND INDEMNIFICATION MATTERS The Registrant's Amended and Restated Certificate of Incorporation and Bylaws include provisions to (i) eliminate the personal liability of its directors for monetary damages resulting from breaches of their fiduciary duty to the extent permitted by Section 102(b)(7) of the Delaware General Corporation Law ("Delaware Law") and (ii) require the Registrant to indemnify its directors and officers to the fullest extent permitted by Section 145 of the Delaware Law, including circumstances in which indemnification is otherwise discretionary. The Registrant believes that these provisions are necessary to attract and retain qualified persons as directors and officers. These provisions do not eliminate the directors' duty of care and, in appropriate circumstances, equitable remedies such as injunctive or other forms of non-monetary relief will remain available under Delaware Law. In addition, each director will continue to be subject to liability for breach of the director's duty of loyalty to the Registrant, for acts or omissions not in good faith or involving intentional misconduct, for knowing violations of law, for acts or omissions that the director believes to be contrary to the best interests of the Registrant or its stockholders, for any transaction from which the director derived an improper personal benefit, for acts or omissions involving a reckless disregard for the director's duty to the Registrant or its stockholders when the director was aware or should have been aware of a risk of serious injury to the Registrant or its stockholders, for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to the Registrant or its stockholders, for improper transactions between the director and the Registrant and for improper distributions to stockholders and loans to directors and officers. The provision also does not affect a director's responsibilities under any other law, such as federal securities laws or state or federal environmental laws. The Registrant has entered into indemnity agreements with each of its directors and executive officers that require the Registrant to indemnify such persons against expenses, judgments, fines, settlements and other amounts incurred (including expenses of a derivative action) in connection with any proceeding, whether actual or threatened, to which any such person may be made a party by reason of the fact that such person is or was a director or an executive officer of the Registrant or any of its affiliated enterprises, provided such person acted in good faith 49. <PAGE> and in a manner such person reasonably believed to be in, or not opposed to, the best interests of the Registrant and, with respect to any criminal proceeding, had no reasonable cause to believe his conduct was unlawful. The indemnification agreements also set forth certain procedures that will apply in the event of a claim for indemnification thereunder. At present, there is no pending litigation or proceeding involving a director or officer of the Registrant as to which indemnification is being sought nor is the Registrant aware of any threatened litigation that may result in claims for indemnification by any officer or director. The Registrant has an insurance policy covering the officers and directors of the Registrant with respect to certain liabilities, including liabilities arising under the Securities Act or otherwise. CERTAIN TRANSACTIONS In December 1994, the Company entered into a strategic alliance agreement with Schering-Plough to collaborate on the discovery and commercialization of oral thrombin inhibitor drugs for the prevention and treatment of chronic cardiovascular disorders. The initial collaboration covers development of inhibitors of thrombin, a key blood-clotting enzyme. In addition, Schering- Plough acquired an exclusive option (which was extended to December 1996 upon payment of $1,000,000) to expand the program to include inhibitors of a second significant blood coagulation enzyme, Factor Xa. Under the terms of the agreement, Schering-Plough will compensate the Company for the costs of research and preclinical development of thrombin inhibitors over two years. Schering-Plough, which is responsible for certain preclinical development, all clinical trials and regulatory activities, received exclusive worldwide manufacturing and marketing rights for resulting thrombin inhibitors. The Company may also receive milestone payments and royalties on sales of therapeutics resulting from this alliance. However, there can be no assurance that products will be successfully developed and commercialized under this alliance. In connection with this alliance, Schering-Plough paid certain fees and purchased 1,000,000 shares of Series A Convertible Preferred Stock of the Company in 1994 resulting in net proceeds of $4,864,000. Revenue of $4,000,000 was recognized under this agreement in 1995. If the option for Factor Xa is exercised, Schering-Plough has agreed to make an additional equity investment, as well as payments for certain fees, research and development expenses, and regulatory milestones. To date, Corvas has received a total of $14,000,000 from Schering-Plough under the alliance. Schering-Plough beneficially owns approximately 9.0% of the outstanding securities of the Company on an as- converted basis. In February 1996, the Company completed a private placement of equity securities consisting of 3,000,000 units (the "Units"). Each Unit consisted of one share of common stock and one callable warrant to purchase one additional share of common stock. In connection with such private placement, International Biotechnology Trust and AKKAD, both beneficial owners of more than 5% of the outstanding securities of the Company, purchased 1,400,000 and 800,000 Units, respectively. In February 1996, the Company loaned $300,000 to Dr. Picker in connection with his employment with the Company. The loans were evidenced by two promissory notes, one in the amount of $180,000 (the "$180,000 Note"), secured by his primary residence in San Diego County, California, at an interest rate of 6% per annum, and one in the amount of $120,000 (the "$120,000 Note"), unsecured and bearing no interest. The entire outstanding principal balance of the $180,000 Note is due and payable in full upon the earlier of (i) five years from the loan date or (ii) upon Dr. Picker's termination for cause. In April 1996, Dr. Picker repaid $60,000 of the principal balance of the $120,000 Note. The remaining $60,000 of the outstanding principal balance of the $120,000 Note is due and payable in full thirty days after the earlier of (i) one year from the loan date or (ii) Dr. Picker's termination for cause. The Company will forgive the remaining $60,000 of the outstanding principal balance of the $120,000 Note (i) one year from the date of the note provided Dr. Picker has been continuously employed by the Company for one year or (ii) upon Dr. Picker's termination without cause. In February 1996, Dr. Picker entered into an employment agreement with the Company. In May 1996, Mr. Woods entered into an employment agreement with the Company. See "Management - Employment Agreements." 50. <PAGE> In May 1996, the Company granted Mr. Woods stock options under the 1991 Plan to purchase up to 325,000 shares of Common Stock at an exercise price of $5.06 per share in connection with his employment with the Company. Such options vest over four years: (i) one-fourth of the shares vest after twelve continuous months of service with the Company, and (ii) the remaining three- fourths of the shares vest at a rate of 6.25% for each subsequent quarter of completed service. 51. <PAGE> PRINCIPAL STOCKHOLDERS 5% STOCKHOLDERS The following table sets forth certain information regarding beneficial ownership of the Company's stock as of May 24, 1996 and as adjusted to reflect the sale of the Common Stock being offered hereby by each stockholder known by the Company to be the beneficial owner of more than 5% of a class of the Registrant's voting securities. Unless otherwise indicated in the footnotes to this table, each of the stockholders named in this table has sole voting power and investment power with respect to the shares indicated as beneficially owned. Applicable percentages are based on 13,682,471 shares of Common Stock outstanding on an as-converted basis on May 24, 1996 and 14,682,471 shares of Common Stock outstanding on an as-converted basis after completion of this Offering, adjusted as required by rules promulgated by the Commission. Ownership information is based upon information furnished by the respective entities, including any Schedule 13D or 13G. <TABLE> <CAPTION> PERCENTAGE BENEFICIALLY OWNED SHARES ----------------------- BENEFICIALLY BEFORE AFTER BENEFICIAL OWNER OWNED OFFERING OFFERING - ---------------- ----- -------- -------- <S> <C> <C> <C> Rothschild Asset Management Ltd. International Biotechnology Trust plc(1) . . 2,800,000 18.6% 17.4% Five Arrows House St. Swithin's Lane London EC4N 8NR England Wanger Asset Management, L.P. 227 West Monroe, Suite 3000 Chicago, IL 60606-5016 AKKAD (Acorn Fund)(2). . . . . . . . . . . . 1,600,000 11.0% 10.3% c/o State Street Bank & Trust 225 Franklin Street Boston, Massachusetts 02110 PGS International N.V.(3). . . . . . . . . . 1,334,793 9.8% 9.1% Prins Hendriklaan 20 1075 BC Amsterdam, The Netherlands GIMV, N.V.(4). . . . . . . . . . . . . . . . 1,142,857 8.4% 7.8% Karel Oomsstraat 37 2018 Antwerp, Belgium </TABLE> 52. <PAGE> <TABLE> <CAPTION> <S> <C> <C> <C> Schering Corporation(5). . . . . . . . . . . 1,250,000(5) 9.0% 8.4% 2000 Galloping Hill Road Kenilworth, New Jersey 07033 </TABLE> - ---------------------- (1) Includes 1,400,000 shares of Common Stock issuable upon exercise of warrants exercisable within 60 days of May 24, 1996. (2) Includes 800,000 shares of Common Stock issuable upon exercise of warrants exercisable within 60 days of May 24, 1996. (3) PGS International Netherlands has sole voting and dispository rights to all 1,334,793 shares. PGS International Belgium, a subsidiary of PGS International Netherlands, holds 300,000 of those shares in its name and 1,034,793 shares are held in the name of Chelsea, N.V., a subsidiary of Plant Genetic Systems which is a subsidiary of PGS International Belgium. Mr. Van Acker is Vice Chairman of Plant Genetic Systems and disclaims beneficial ownership of these shares. (4) Held by a subsidiary, Take Off Fonds, N.V. Excludes shares of Common Stock held by PGS, of which GIMV owns 22% of the equity securities. GIMV disclaims beneficial ownership of such shares. Mr. Van Acker is the President and Chief Executive Officer of GIMV and disclaims beneficial ownership of these shares. (5) Includes 1,000,000 shares of Series A Convertible Preferred Stock on an as- converted basis and 250,000 shares of Convertible Preferred Stock issuable upon exercise of an option exercisable within 60 days of May 24, 1996. DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information regarding the ownership of the Company's Common Stock as of May 24, 1996 and as adjusted to reflect the sale of the Common Stock offered hereby by (i) each director and nominee for director, (ii) each of the Named Executive Officers, and (iii) all directors and executive officers as a group. Except as otherwise indicated, the Company believes that the beneficial owners of the Common Stock listed below, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable. Applicable percentages are based on 13,682,471 shares of Common Stock outstanding on an as-converted basis on May 24, 1996 and 14,682,471 shares of Common Stock outstanding on an as-converted basis after completion of this Offering, adjusted as required by rules promulgated by the Commission. Ownership information is based upon information furnished by the respective individuals, including any Section 16 filings. <TABLE> <CAPTION> PERCENTAGE BENEFICIALLY OWNED SHARES ----------------------- BENEFICIALLY BEFORE AFTER DIRECTORS: OWNED OFFERING OFFERING - ---------- ----- -------- -------- <S> <C> <C> <C> Nicole Vitullo(1). . . . . . . . . . . . . . 2,800,000 18.6% 17.4% Gerard Van Acker(2). . . . . . . . . . . . . 2,490,864 18.2% 17.0% </TABLE> 53. <PAGE> <TABLE> <CAPTION> <S> <C> <C> <C> Theodor H. Heinrichs(3). . . . . . . . . . . 688,624 5.0% 4.7% Thomas S. Edgington, M.D.(4) . . . . . . . . 285,490 2.1% 1.9% David S. Kabakoff, Ph.D.(5). . . . . . . . . 234,167 1.7% 1.6% John H. Fried, Ph.D.(6). . . . . . . . . . . 39,750 * * M. Blake Ingle, Ph.D.(7) . . . . . . . . . . 14,750 * * Michael Sorell, M.D. . . . . . . . . . . . . -- -- -- W. Leigh Thompson, Jr., M.D., Ph.D.. . . . . -- -- -- Randall E. Woods . . . . . . . . . . . . . . -- -- -- </TABLE> 54. <PAGE> <TABLE> <CAPTION> PERCENTAGE BENEFICIALLY OWNED SHARES ----------------------- BENEFICIALLY BEFORE AFTER EXECUTIVE OFFICERS: OWNED OFFERING OFFERING - ------------------- ----- -------- -------- <S> <C> <C> <C> John E. Crawford(8). . . . . . . . . . . . . . . . . . . . . 198,172 1.4% 1.3% William C. Ripka, Ph.D.(9) . . . . . . . . . . . . . . . . . 56,490 * * Howard R. Soule, Ph.D.(10) . . . . . . . . . . . . . . . . . 62,943 * * George P. Vlasuk, Ph.D.(11). . . . . . . . . . . . . . . . . 39,437 * * All officers and directors as group (15 persons)(12) . . . . 6,910,687 44.6% 41.9% </TABLE> - ----------------------- * Less than 1%. (1) Includes 1,400,000 shares of Common Stock and 1,400,000 shares of Common Stock issuable upon exercise of warrants exercisable within 60 days of May 24, 1996 owned by IBT. Ms. Vitullo is a vice president of Rothschild Asset Management, Inc., which manages the IBT fund. Ms. Vitullo disclaims beneficial ownership of such shares owned by IBT. (2) Includes 13,214 shares of Common Stock issuable upon exercise of options exercisable within 60 days of May 24, 1996, 1,334,793 shares beneficially owned by PGS, of which Mr. Van Acker is the Vice Chairman, and 1,142,857 shares beneficially owned by GIMV, of which Mr. Van Acker is the Chief Executive Officer. Mr. Van Acker disclaims beneficial ownership of such shares beneficially owned by PGS and GIMV. (3) Includes 18,928 shares of Common Stock issuable upon exercise of options exercisable within 60 days of May 24, 1996 and 669,696 shares owned by H&Q LSV and its affiliates. Mr. Heinrichs is a general partner of H&Q LSV. Mr. Heinrichs disclaims beneficial ownership of such shares owned by H&Q LSV and its affiliates. (4) Includes 39,776 shares of Common Stock issuable upon exercise of options exercisable within 60 days of May 24, 1996. Also includes 245,714 shares held in a trust for which Dr. Edgington is both a trustee and a beneficiary. (5) Includes 116,196 shares of Common Stock issuable upon exercise of options exercisable within 60 days of May 24, 1996. Also includes 4,000 shares held by Dr. Kabakoff's wife as custodian for his minor children. (6) Includes 34,750 shares of Common Stock issuable upon exercise of options exercisable within 60 days of May 24, 1996. (7) Includes 3,750 shares of Common Stock issuable upon exercise of options exercisable within 60 days of May 24, 1996. (8) Includes 159,928 shares of Common Stock held in a trust for which Mr. Crawford is both a trustee and a beneficiary and 38,124 shares issuable upon exercise of options exercisable within 60 days of May 24, 1996. (9) Includes 56,490 shares of Common Stock issuable upon exercise of options exercisable within 60 days of May 24, 1996. (10) Includes 62,382 shares of Common Stock issuable upon exercise of options exercisable within 60 days of May 24, 1996. 55. <PAGE> (11) Includes 37,294 shares of Common Stock issuable upon exercise of options exercisable within 60 days of May 24, 1996. (12) Includes 1,820,904 shares of Common Stock issuable upon exercise of options exercisable within 60 days. See notes (1) through (11) above. DESCRIPTION OF CAPITAL STOCK GENERAL The Company is authorized to issue 50,000,000 shares of Common Stock, $.001 par value per share, and 10,000,000 shares of undesignated Preferred Stock, $.001 par value per share. COMMON STOCK As of May 24, 1996, there were 12,682,471 outstanding shares of the Company's Common Stock. Holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Subject to preferences that may be applicable to any outstanding shares of Convertible Preferred Stock, holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors out of funds legally available for the payment of dividends. See "Dividend Policy." In the event of a liquidation, dissolution or winding up of the Company, holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities and liquidation preferences of any outstanding shares of Convertible Preferred Stock. Holders of Common Stock have no preemptive rights or rights to convert their Common Stock into any other securities. There are no redemption or sinking fund provisions applicable to the Common Stock. All outstanding shares of Common Stock are validly issued, fully paid and nonassessable. All shares of Common Stock issuable upon conversion of the outstanding shares of Convertible Preferred Stock will be validly issued, fully paid and nonassessable upon such conversion. CONVERTIBLE PREFERRED STOCK As of May 24, 1996, there were 1,000,000 outstanding shares of the Company's Series A Convertible Preferred Stock and an option to purchase an additional 250,000 shares of the Company's Convertible Preferred Stock. All such outstanding shares of the Company's Series A Convertible Preferred Stock is convertible into one share of the Company's Common Stock and will automatically convert if the market price of the Company's Common Stock for 10 consecutive trading days exceeds $7.50 per share. Pursuant to the Company's Certificate of Incorporation, the Board of Directors has the authority, without further action by the stockholders, to issue shares of Preferred Stock in one or more series and to fix the designations, powers, preferences, privileges, and relative participating, option or special rights and the qualifications, limitations or restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights of the Common Stock. The Board of Directors, without stockholder approval, can issue Preferred Stock with voting, conversion or other rights that could adversely affect the voting power and other rights of the holders of Common Stock. Preferred Stock could thus be issued quickly with terms calculated to delay or prevent a change in control of the Company or make removal of management more difficult. Additionally, the issuance of Preferred Stock may decrease the market price of the Common Stock, and may adversely affect the voting and other rights of the holders of Common Stock. WARRANTS As of May 24, 1996, there were outstanding warrants to purchase an aggregate of 3,008,715 shares of Common Stock at a weighted average exercise price of $6.00 per share. REGISTRATION RIGHTS The holders of approximately 3,845,973 shares of Common Stock and their permitted transferees (the "Holders") are entitled to certain rights with respect to the registration of such shares under the Securities Act. 56. <PAGE> Under the terms of an agreement between the Company and the Holders, if the Company proposes to register any of its securities under the Securities Act, either for its own account or for the account of other security holders exercising registration rights, the Holders are entitled to notice of such registration and are entitled to include shares of such Common Stock therein. The Holders also have the right to request that the Company file a registration statement under the Securities Act at the Company's expense with respect to their shares of Common Stock, and the Company is required to use its best efforts to effect such registration. In addition, such Holders may require the Company to file registration statements on Form S-3 when such registration form becomes available to the Company. All such registration rights are subject to certain conditions and limitations, including the right of the underwriters of an offering to limit the number of shares to be included in such registration. Generally, the Company is required to bear the expense of all "piggy-back" and demand registrations (but not registrations on Form S-3 requested by the Holders), except for stock transfer fees and underwriters' fees, discounts or commissions relating to the sale of securities by holders. Schering-Plough, which holds 1,000,000 shares of Series A Convertible Preferred Stock, and its permitted transferees are entitled to certain rights with respect to the registration of such shares under the Securities Act. Under the terms of an agreement between the Company and Schering-Plough, if the Company proposes to register any of its securities under the Securities Act, either for its own account or for the account of other security holders exercising registration rights, Schering-Plough is entitled to notice of such registration and is entitled to include its converted shares therein. In addition, Schering-Plough may require the Company to file registration statements on Form S-3 when such registration form becomes available to the Company. All such registration rights are subject to certain conditions and limitations, including the right of the underwriters of an offering to limit the number of shares to be included in such registration. Generally, the Company is required to bear the expense of all "piggy-back" registrations (but not registrations on Form S-3 requested by Schering-Plough), except for stock transfer fees and underwriters' fees, discounts or commissions relating to the sale of securities by holders. TRANSFER AGENT AND REGISTRAR American Stock Transfer & Trust Company is the transfer agent and registrar for the Company's Common Stock. 57. <PAGE> SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, the Company will have 13,682,471 shares of Common Stock outstanding, assuming no exercise of outstanding options and warrants. Of these shares, the 1,000,000 shares of Common Stock sold in this offering, the 3,000,000 shares sold in the Company's initial public offering, the 3,000,000 shares sold in the Company's private placement and registered on a Form S-3 Registration Statement and the 650,000 shares previously sold and registered under the same Form S-3 Registration Statement will be freely transferable without restriction under the Securities Act and the regulations promulgated thereunder. The remaining 6,032,471 shares of Common Stock held by officers, directors, employees, consultants and other stockholders of the Company were sold by the Company in reliance on exemptions from the registration requirements of the Securities Act and are "restricted securities" within the meaning of Rule 144 under the Securities Act. These shares are freely tradable, subject in certain instances to compliance with the provisions of Rules 144 and 701. In addition, an aggregate of approximately 3,008,715 shares of Common Stock issuable upon exercise of outstanding warrants is eligible for immediate sale under Rule 144 upon exercise of such warrants. Under all Stock Option Plans, and for grants outside the Stock Option Plans, there are currently 564,567 shares of Common Stock issuable upon exercise of outstanding options exercisable within 60 days. The Company also has 1,000,000 shares of Series A Convertible Preferred Stock outstanding and an option to purchase an additional 250,000 shares of Convertible Preferred Stock. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated), including an affiliate, who has beneficially owned shares for at least two years is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of (i) one percent of the then outstanding Common Stock (approximately 136,825 shares immediately after this offering) or (ii) the average weekly trading volume in the Common Stock during the four calendar weeks preceding such sale, subject to the filing of a Form 144 with respect to such sale and certain other limitations and restrictions. In addition, a person who is not deemed to have been an affiliate of the Company at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least three years, would be entitled to sell such shares under Rule 144(k) without regard to the volume limitations described above or certain other restrictions of Rule 144. Under Rule 701, an employee, officer or director of, or consultant to, the Company who purchased shares pursuant to a written compensatory plan or contract including the 1991 Plan, and who is not an affiliate of the Company, is entitled to sell such shares without having to comply with the public information, holding period, volume limitation or notice provisions of Rule 144 and permits affiliates to sell such shares without having to comply with the Rule 144 holding period restrictions. The holders of approximately 3,845,973 shares of Common Stock and 1,000,000 shares of Series A Convertible Preferred Stock and their permitted transferees are entitled to certain rights with respect to the registration of such shares under the Securities Act. See "Description of Capital Stock - Registration Rights." Sales of a substantial number of shares of Common Stock by existing or by stockholders purchasing in this offering could have a negative impact on the market price of the Common Stock. PLAN OF DISTRIBUTION The Common Stock is being offered to a limited number of investors directly by the Company. The price of the Common Stock offered hereby will be determined through negotiations between the Company and the purchasers. 58. <PAGE> In order to comply with the securities laws of certain states, if applicable, the Common Stock will be sold in such jurisdictions only through registered or licensed brokers or dealers. In addition, in certain states the Common Stock may not be sold unless it has been registered or qualified for sale. The Company will pay all of the expenses incident to the offering and sale of the Common Stock. LEGAL MATTERS The validity of the issuance of the Common Stock offered hereby will be passed upon for the Company by Cooley Godward Castro Huddleson & Tatum, San Diego, California. Certain members of Cooley Godward Castro Huddleson & Tatum beneficially own an aggregate of 23,941 shares of the Company's Common Stock. EXPERTS The consolidated financial statements of Corvas International, Inc. and Subsidiary as of December 31, 1994 and 1995, and for each of the years in the three-year period ended December 31, 1995, have been included herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended ("Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information filed by the Company may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the SEC's following Regional Offices: Chicago Regional Office, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661; and New York Regional Office, Seven World Trade Center, Suite 1300, New York, New York 10048. Copies of such material can also be obtained at prescribed rates from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission, Washington, D.C., a Registration Statement on Form S-1 under the Securities Act, with respect to the shares of Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. Statements contained in this Prospectus as to the contents of any contract or any other document referred to are not necessarily complete and, in each instance, reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. For further information with respect to the Company and the Common Stock offered hereby, reference is made to such Registration Statement, exhibits and schedules. A copy of the Registration Statement and the exhibits and schedules thereto may be inspected by anyone without charge at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and copies of all or any part of the Registration Statement may be obtained from the Public Reference Section of the Commission upon the payment of certain fees prescribed by the Commission. 59 <PAGE> INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . F-1 Consolidated Balance Sheets as of December 31, 1994 and 1995 and March 31, 1996 (Unaudited) . . . . . . . . . . . . . . . F-2 Consolidated Statements of Operations for the three years ended December 31, 1995 and for the three months ended March 31, 1995 and 1996 (unaudited). . . . . . . . . . . . . . . . . F-3 Consolidated Statements of Stockholders' Equity (Deficit) for the three years ended December 31, 1995 and for the three months ended March 31, 1996 (unaudited). . . . . . . . . . . . . . . F-4 Consolidated Statements of Cash Flows for the three years ended December 31, 1995 and for the three months ended March 31, 1995 and 1996 (unaudited). . . . . . . . . . . . . . . . . F-5 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . F-6 <PAGE> INDEPENDENT AUDITORS' REPORT The Board of Directors Corvas International, Inc.: We have audited the accompanying consolidated balance sheets of Corvas International, Inc. and subsidiary as of December 31, 1994 and 1995, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted out audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Corvas International, Inc. and subsidiary as of December 31, 1994 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP San Diego, California January 29, 1996, except for Note 13 to the consolidated financial statements, as to which date is February 2, 1996. F-1 <PAGE> CORVAS INTERNATIONAL, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) <TABLE> <CAPTION> December 31, March 31, ---------------------------- ------------ ASSETS 1994 1995 1996 ---- ---- ---- (unaudited) <S> <C> <C> <C> Current assets: Cash and cash equivalents $ 3,687 $ 1,427 $ 1,114 Short-term debt securities held to maturity and time deposits, partially restricted (notes 2 and 7) 16,180 11,024 23,794 Receivables 306 338 301 Note receivable from related party (note 3) --- --- 120 Other current assets 242 250 486 ----------- ----------- ----------- Total current assets 20,415 13,039 25,815 Property and equipment, net (notes 4 and 7) 2,094 1,423 1,375 Note receivable from related party (note 3) --- --- 180 ----------- ----------- ----------- $ 22,509 $ 14,462 $ 27,370 ----------- ----------- ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 253 $ 272 $ 155 Accrued expenses 840 461 377 Accrued benefits 645 --- --- Accrued vacation 169 205 228 Accrued litigation settlement expenses (note 13) 535 313 193 Current portion of capital lease obligation (note 7) 71 77 79 Deferred rent (note 7) --- 34 23 Deferred revenue (note 8) 4,000 4,305 3,190 ----------- ----------- ----------- Total current liabilities 6,513 5,667 4,245 ----------- ----------- ----------- ----------- ----------- ----------- Long-term capital lease obligation (note 7) 104 27 7 Deferred rent (note 7) 245 --- --- Deferred revenue (note 8) 1,000 --- --- Stockholders' equity (note 5): Series A convertible preferred stock, $.001 par value, authorized 10,000,000 shares, issued and outstanding 1,000,000 shares at December 31, 1994 and 1995 and March 31, 1996 (liquidating preference $5 per share) 1 1 1 Common stock, $.001 par value, authorized 50,000,000 shares, issued and outstanding 9,352,000 shares at December 31, 1994, 9,448,000 shares at December 31, 9 9 13 1995 and 12,522,000 shares at March 31,1996 Additional paid-in capital 69,149 69,346 84,323 Accumulated deficit (54,295) (60,588) (61,219) Deferred compensation (83) --- --- Foreign currency translation adjustment (134) --- --- ----------- ----------- ----------- Total stockholders' equity 14,647 8,768 23,118 Commitments and contingencies (notes 7 and 13) ----------- ----------- ----------- $ 22,509 $ 14,462 $ 27,370 ----------- ----------- ----------- ----------- ----------- ----------- </TABLE> See accompanying notes to consolidated financial statements. F-2 <PAGE> CORVAS INTERNATIONAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) <TABLE> <CAPTION> Years Ended December 31, Three Months Ended March 31, ------------------------------------ ---------------------------- 1993 1994 1995 1995 1996 ---- ---- ---- ---- ---- (unaudited) <S> <C> <C> <C> <C> <C> REVENUES: Net product sales $ 323 $ 280 $ 406 $ 46 $ 21 Research grants (note 11) 192 667 --- --- --- Revenue from collaborative agreements (primarily from related party) (note 8) --- --- 4,354 1,000 2,085 License fees (note 8) 100 --- 500 --- --- Royalties (note 8) 230 183 142 34 81 ------- ------- ------- ------- ------- Total revenues 845 1,130 5,402 1,080 2,187 ------- ------- ------- ------- ------- COSTS AND EXPENSES: Cost of products sold 105 83 211 5 24 Research and development (note 11) 12,115 11,378 9,723 2,259 2,299 General and administrative 3,067 3,159 2,582 682 793 Litigation settlement and related expenses (note 13) --- 535 --- --- --- Restructuring charge (note 9) --- 1,575 --- --- --- ------- ------- ------- ------- ------- Total costs and expenses 15,287 16,730 12,516 2,946 3,116 ------- ------- ------- ------- ------- Loss from operations (14,442) (15,600) (7,114) (1,866) (929) ------- ------- ------- ------- ------- OTHER INCOME: Interest income, net 1,073 686 835 249 268 Other income --- 11 (14) (32) 30 ------- ------- ------- ------- ------- 1,073 697 821 217 298 ------- ------- ------- ------- ------- Net loss $(13,369) $(14,903) $ (6,293) $ (1,649) $ (631) ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Net loss per share $ (1.44) $ (1.60) $ (0.67) $ (0.18) $ (0.05) ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Shares used in calculation of net loss per share 9,295 9,336 9,374 9,359 11,507 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- </TABLE> See accompanying notes to consolidated financial statements. F-3 <PAGE> CORVAS INTERNATIONAL, INC. AND SUBSIDIARY Consolidated Statements of Stockholders' Equity (Deficit) (In thousands) <TABLE> <CAPTION> Series A Convertible Preferred Stock Common Stock Additional ------------------------------ ------------------------- Paid-In Shares Amount Shares Amount Capital ------------- -------------- ----------- ----------- ------------ <S> <C> <C> <C> <C> <C> Balance as of December 31, 1992 --- $ --- 9,282 9 $ 64,306 Common stock issued upon exercise of stock options --- --- 33 --- 32 Common stock issued pursuant to employee stock purchase plan --- --- 11 --- 53 Amortization of deferred compensation --- --- --- --- (37) Foreign currency translation adjustment --- --- --- --- --- Net loss --- --- --- --- --- ------------- -------------- ----------- ----------- ------------ Balance as of December 31, 1993 --- --- 9,326 9 64,354 Common stock issued upon exercise of stock options --- --- 14 --- 11 Common stock issued pursuant to employee stock purchase plan --- --- 12 --- 30 Series A preferred stock issued for cash, net of issuance costs 1,000 1 --- --- 4,863 Amortization of deferred compensation --- --- --- --- (109) Foreign currency translation adjustment --- --- --- --- --- Net loss --- --- --- --- --- ------------- -------------- ----------- ----------- ------------ Balance as of December 31, 1994 1,000 1 9,352 9 69,149 Common stock issued upon exercise of stock options --- --- 74 --- 150 Common stock issued pursuant to employee stock purchase plan --- --- 16 --- 35 Common stock issued pursuant to employee performance stock award --- --- 6 --- 12 Amortization of deferred compensation --- --- --- --- --- Foreign currency translation adjustment --- --- --- --- --- Net loss --- --- --- --- --- ------------- -------------- ----------- ----------- ------------ Balance as of December 31, 1995 1,000 1 9,448 9 69,346 Common stock issued upon exercise of stock options --- --- 24 --- 27 Common stock and warrants issued for cash in private placement, net of issuance costs --- --- 3,000 3 14,832 Common stock issued in settlement of lawsuit --- --- 50 1 118 Net loss --- --- --- --- --- ------------- -------------- ----------- ----------- ------------ Balance as of March 31, 1996 (unaudited) 1,000 $ 1 12,522 $ 13 $ 84,323 ------------- -------------- ----------- ----------- ------------ ------------- -------------- ----------- ----------- ------------ <CAPTION> Foreign Total Currency Stockholders' Accumulated Deferred Translation Equity Deficit Compensation Adjustment (Deficit) ------------- -------------- ----------- ----------- Balance as of December 31, 1992 $ (26,023) $ (644) $ (56) $ 37,592 Common stock issued upon exercise of stock options --- --- --- 32 Common stock issued pursuant to employee stock purchase plan --- --- --- 53 Amortization of deferred compensatio --- 265 --- 228 Foreign currency translation adjustme --- --- (62) (62) Net loss (13,369) --- --- (13,369) ------------- -------------- ----------- ----------- Balance as of December 31, 1993 (39,392) (379) (118) 24,474 Common stock issued upon exercise of stock options --- --- --- 11 Common stock issued pursuant to employee stock purchase plan --- --- --- 30 Series A preferred stock issued for cash, net of issuance costs --- --- --- 4,864 Amortization of deferred compensation --- 296 --- 187 Foreign currency translation adjustment --- --- (16) (16) Net loss (14,903) --- --- (14,903) ------------- -------------- ----------- ----------- Balance as of December 31, 1994 (54,295) (83) (134) 14,647 Common stock issued upon exercise of stock options --- --- --- 150 Common stock issued pursuant to employee stock purchase plan --- --- --- 35 Common stock issued pursuant to employee performance stock award --- --- --- 12 Amortization of deferred compensation --- 83 --- 83 Foreign currency translation adjustment --- --- 134 134 Net loss (6,293) --- --- (6,293) ------------- -------------- ----------- ----------- Balance as of December 31, 1995 (60,588) --- --- 8,768 Common stock issued upon exercise of stock options --- --- --- 27 Common stock and warrants issued for cash in private placement, net of issuance costs --- --- --- 14,835 Common stock issued in settlement of lawsuit --- --- --- 119 Net loss (631) --- --- (631) ------------- -------------- ----------- ----------- Balance as of March 31, 1996 (unaudited) $ (61,219) $ --- $ --- $ 23,118 ------------- -------------- ----------- ----------- ------------- -------------- ----------- ----------- </TABLE> See accompanying notes to consolidated financial statements. F-4 <PAGE> CORVAS INTERNATIONAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS IN THOUSANDS <TABLE> <CAPTION> Three Months Ended Years Ended December 31, March 31, ------------------------------------------- --------------------------- 1993 1994 1995 1995 1996 ------------------------------------------- --------------------------- (unaudited) <S> <C> <C> <C> <C> <C> Cash flows from operating activities: Net loss $ (13,369) $ (14,903) $ (6,293) $ (1,649) $ (631) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 737 814 834 192 211 Amortization of premiums and discounts on investments 145 (26) (377) 21 (41) Amortization of deferred compensation 228 187 83 21 --- Stock compensation expense --- --- 12 12 --- Translation loss --- --- 92 --- --- Common stock issued in settlement of lawsuit --- --- --- --- 119 Loss on disposal of property and equipment --- --- 154 --- --- Change in assets and liabilities: (Increase) decrease in receivables (260) 346 (32) 45 37 (Increase) decrease in other current assets (2) 107 (8) (218) (236) Increase (decrease) in accounts payable, accrued expenses, accrued benefits, accrued vacation and accrued litigation settlement expenses 745 738 (1,191) (1,323) (298) Increase (decrease) in deferred revenue --- 5,000 (695) (1,000) (1,115) Decrease in deferred rent (30) (99) (211) (36) (11) ------------ ------------ ----------- ----------- ---------- Net cash used in operating activities (11,806) (7,836) (7,632) (3,935) (1,965) ------------ ------------ ----------- ----------- ---------- Cash flows from investing activities: Purchases of investments held to maturity (6,356) (23,587) (14,927) (5,111) (15,927) Proceeds from maturity of investments held to maturity 20,788 28,728 20,460 6,200 3,200 Purchases of property and equipment (1,099) (443) (577) (103) (164) Proceeds from sale of property and equipment --- --- 256 278 --- Repayments from (loans to) employees (150) 150 --- --- (300) ------------ ------------ ----------- ----------- ---------- Net cash provided by (used in) investing activities 13,183 4,848 5,212 1,264 (13,191) ------------ ------------ ----------- ----------- ---------- Cash flows from financing activities: Principal payments under capital lease obligation --- (46) (71) (17) (19) Net proceeds from issuance of preferred stock --- 4,864 --- --- --- Net proceeds from issuance of common stock 77 41 185 5 14,862 ------------ ------------ ----------- ----------- ---------- Net cash provided by (used in) financing activities 77 4,859 114 (12) 14,843 Effect of exchange rate changes on cash (95) (69) 46 (157) --- ------------ ------------ ----------- ----------- ---------- Net increase (decrease) in cash and cash equivalents 1,359 1,802 (2,260) (2,840) (313) Cash and cash equivalents at beginning of period 526 1,885 3,687 3,687 1,427 ------------ ------------ ----------- ----------- ---------- Cash and cash equivalents at end of period $ 1,885 $ 3,687 $ 1,427 $ 847 $ 1,114 ------------ ------------ ----------- ----------- ---------- ------------ ------------ ----------- ----------- ---------- Supplemental disclosures: Interest paid $ --- $ 9 $ 11 $ 3 $ 2 Noncash financing activities- Equipment acquisitions under capital lease $ --- $ 221 $ --- $ --- $ --- </TABLE> See accompanying notes to consolidated financial statements. F-5 <PAGE> CORVAS INTERNATIONAL, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1994 and 1995 and March 31, 1996 (unaudited) (l) THE COMPANY Corvas International, Inc. (the "Company") was incorporated on March 27, 1987 under the laws of the State of California. In July 1993, the Company reincorporated in the state of Delaware. The Company is engaged in the design and development of a new generation of therapeutic agents for the prevention and treatment of major cardiovascular and inflammatory diseases. Prior to December 1994, the Company was considered to be in the development stage for financial reporting purposes. For years prior to 1995, financial statements of the Company were consolidated to include the accounts of Corvas International, Inc. in San Diego and its Belgian subsidiary, Corvas International, N.V. All material intercompany balances and transactions have been eliminated in consolidation. Operating activities at the Belgian subsidiary ceased in December 1994 and the subsidiary was liquidated in December 1995. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) CASH EQUIVALENTS: Cash equivalents consist of an investment in a short-term government fund and are stated at cost, which approximates market value. (b) SHORT-TERM DEBT SECURITIES HELD TO MATURITY AND TIME DEPOSITS: Short-term debt securities consist of government-backed debt instruments. Short-term debt securities are carried at amortized cost which approximates market value and mature at various dates through November 1, 1996. At March 31, 1996 and December 31, 1994 and 1995, $60,000 of time deposits were restricted related to the facility lease. See Note 7. In May 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). SFAS 115 requires that investments be classified as "held to maturity", "available for sale" or "trading securities". The Company records its investments held to maturity at amortized cost, which approximates fair value. Other investments in debt and equity securities are recorded at fair market value. The cost of securities sold, if any, is based on the specific identification method. The Company adopted SFAS 115 effective January 1, 1994. The adoption of SFAS 115 did not have a material impact on the Company's financial position or results of operations. (c) DEPRECIATION AND AMORTIZATION: Depreciation for financial reporting purposes is provided using the straight-line method over estimated useful lives of three to five years. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or estimated useful life of the asset. Assets held under capital lease are amortized over the life of the lease. (d) RESEARCH AND DEVELOPMENT COSTS: Research and development costs are expensed in the period incurred. (e) PATENTS: Costs to obtain and maintain patents are expensed as incurred. F-6 <PAGE> CORVAS INTERNATIONAL, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (f) NET LOSS PER SHARE: Net loss per share is computed using the weighted average number of common and common share equivalents outstanding. Common equivalent shares from convertible preferred stock, stock options and warrants are excluded from the computation as their effect is antidilutive. (g) FOREIGN CURRENCY TRANSLATION: Assets and liabilities of subsidiary operations denominated in foreign currencies are translated at rates in effect at the end of the year. Revenues and expenses are translated at average rates throughout the year. The local currency is considered to be the functional currency, and adjustments resulting from such translation are included in foreign currency translation adjustment, a separate component of stockholders' equity. To date, no sales have been generated by the Company's foreign subsidiary, which was liquidated in 1995. See Note 9. (h) REVENUE RECOGNITION: Revenue on product sales is recorded at the time of shipment. Research grant revenue is recognized as research and development activities are performed under the terms of the research contracts. Revenue from collaborative agreements is generally recognized over the term of the agreement or upon achievement of certain milestones. Advance payments received in excess of amounts earned are classified as deferred revenue. (i) RECLASSIFICATIONS: Certain amounts in the 1993 and 1994 financial statements were reclassified to conform with the 1995 presentation. (j) USE OF ESTIMATES: Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (k) FAIR VALUE OF FINANCIAL INSTRUMENTS: Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" ("SFAS 107"), defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying amount of cash and cash equivalents, short-term debt securities held to maturity, time deposits, receivables, notes receivable, other current assets, accounts payable, accrued expenses, accrued benefits, accrued vacation, accrued litigation settlement expenses, capital lease obligations, deferred rent and deferred revenue, included in the accompanying consolidated balance sheets, approximate the estimated fair value of those instruments because of their short maturities. (l) BASIS OF PRESENTATION: The interim financial information contained herein is unaudited but, in management's opinion, includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation. Results for the interim periods are not necessarily indicative of results for other interim periods or for the full year. F-7 <PAGE> CORVAS INTERNATIONAL, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (3) NOTES RECEIVABLE (UNAUDITED) The notes receivable as of March 31, 1996 consist of loans to an officer of the Company issued in February 1996 in connection with his employment with the Company. The $120,000 loan, which is unsecured and bears no interest, is due and payable in full on the earlier of one year from the loan date or the officer's termination for cause. The $180,000 loan bears interest at 6% per annum and is secured by his primary residence. This loan is due and payable in full on the earlier of five years from the loan date or the officer's termination for cause. (4) PROPERTY AND EQUIPMENT Property and equipment are recorded at cost and are summarized as follows (in thousands). <TABLE> <CAPTION> December 31, March 31, --------------- --------- 1994 1995 1996 ---- ---- ---- (unaudited) <S> <C> <C> <C> Machinery and equipment $ 3,233 $ 2,906 $ 3,066 Furniture and fixtures 139 135 135 Leasehold improvements 670 732 735 ------- ------- -------- Total property and equipment 4,042 3,773 3,936 Less accumulated depreciation and amortization (1,948) (2,350) (2,561) ------- ------- -------- $ 2,094 $ 1,423 $ 1,375 ------- ------- -------- ------- ------- -------- </TABLE> (5) STOCKHOLDERS' EQUITY (a) CONVERTIBLE PREFERRED STOCK: In December 1994, in conjunction with a strategic alliance with Schering-Plough Corporation (See Note 8), the Company issued 1,000,000 shares of Series A Convertible Preferred Stock, resulting in net proceeds of $4,864,000. Each share of Series A preferred stock is convertible into one share of the Company's common stock, and will automatically convert if the market price of the Company's common stock for 10 consecutive trading days exceeds $7.50 per share. As a result, 1,000,000 shares of common stock have been reserved for the potential conversion of Series A preferred stock. Each share of Series A preferred stock is entitled to a fixed, cumulative dividend of $.40 per share per annum, when and if declared by the Board of Directors. No such dividends have been declared. In addition, each share is entitled to one vote and has a liquidating preference of $5.00 plus any declared and unpaid dividends. The Company has a total of 10,000,000 shares of authorized preferred stock. (b) COMMON STOCK: On February 2, 1996, the Company completed a private placement of equity securities consisting of 3,000,000 units, resulting in proceeds of $14,835,000, net of estimated issuance costs. Each unit consisted of one share of common stock and one callable warrant to purchase one additional share of common stock. In February 1992, the Company completed its initial public offering of 3,000,000 shares of common stock, resulting in net proceeds of $32,470,000. The Company filed Restated Articles of Incorporation in February 1992 which increased to 50,000,000 the number of authorized common shares. F-8 <PAGE> CORVAS INTERNATIONAL, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (c) STOCK OPTIONS: The Company has several plans and arrangements under which incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards, dividend equivalents, performance awards and stock payments can be granted to key personnel, including officers, directors, and outside consultants. The terms are determined by the Compensation and Stock Option Committee of the Board of Directors. Options have a term of 10 years and generally become exercisable over a four-year period beginning one year from the date of grant at a price per share not less than the fair market value on the date of grant. All employee options granted after December 1, 1994 vest 25% at the end of the first year and 6.25% per quarter each quarter thereafter. Activity under these plans and arrangements from 1993 through 1995 is as follows (in thousands except per share amounts). <TABLE> <CAPTION> Options Exercise Price ------- -------------- <S> <C> <C> Outstanding, December 31, 1992 761 $ 0.70 - $ 8.50 Granted 167 $ 4.00 - $ 7.88 Exercised (33) $ 0.70 - $ 3.50 Cancelled (55) $ 0.88 - $ 7.75 ----- Outstanding, December 31, 1993 840 $ 0.70 - $ 8.50 Granted 305 $ 2.44 - $ 4.94 Exercised (14) $ 0.70 - $ 0.88 Cancelled (43) $ 0.88 - $ 8.06 ----- Outstanding, December 31, 1994 1,088 $ 0.70 - $ 8.50 Granted 755 $ 1.75 - $ 4.31 Exercised (74) $ 0.70 - $ 3.50 Cancelled (711) $ 0.88 - $ 8.50 ----- Outstanding, December 31, 1995 1,058 $ 0.70 - $ 7.06 Granted 468 $ 3.72 - $ 4.94 Exercised (24) $ 0.70 - $ 2.19 Cancelled (2) $ 2.13 - $ 3.75 ----- Outstanding, March 31, 1996 (unaudited) 1,500 $ 0.70 - $ 7.06 ----- ----- </TABLE> As of March 31, 1996, net options for 1,765,000 shares have been granted since inception of the plan, 504,000 shares were vested and exercisable, 265,000 shares were vested and had been exercised and 996,000 shares remain unvested. A total of 1,500,000 shares are reserved for issuance pursuant to outstanding options, and no shares are available for future grant. In January 1995, the Company offered certain holders of stock options, excluding outside directors of the Company, the opportunity to exchange an issued option for a new stock option on a one-for-one basis at the market value on January 16, 1995. After a waiting period of 6 months (12 months for officers), vesting of the exchanged options was restored to the level existing prior to the exchange. A total of 608,000 options at an average exercise price of $4.83 were exchanged for options with an exercise price of $2.19 per share. These options are included as grants and cancellations in the preceding table. For certain options granted prior to the Company's initial public offering, deferred compensation expense was recognized for the excess of the deemed fair value over the exercise price at the date of grant. This deferred compensation was amortized to expense ratably over the vesting period of each option. As of December 31, 1995, all such deferred compensation expense has been amortized. F-9 <PAGE> CORVAS INTERNATIONAL, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (d) PERFORMANCE AWARDS: In January 1995, the Company granted a total of 6,000 shares of common stock as a performance award to all employees, excluding senior management of the Company. These shares were fully vested and non- restrictive. (e) WARRANTS: In conjunction with the private placement of equity securities completed in February 1996, the Company issued callable warrants to purchase 3,000,000 shares of common stock. The warrants are exercisable at $6.00 per share over a period of six years unless called earlier by the Company. In conjunction with the negotiation of equipment leases entered into in 1990, the Company issued warrants to purchase approximately 9,000 shares of preferred stock (subsequently converted to common stock) to the lessors in lieu of security deposits. The warrants are exercisable at $6.13 or $7.00 per share over a period of ten years from the inception of the leases. The lease agreements are described in Note 7. As of March 31, 1996, none of the outstanding warrants have been exercised. (f) STOCK PURCHASE PLAN: In December 1991, the Company adopted an employee stock purchase plan that provides for the issuance of up to 150,000 shares of common stock. The plan is intended to qualify under Section 423 of the Internal Revenue Code and is for the benefit of qualifying employees, as designated by the Compensation and Stock Option Committee of the Board of Directors. Under the terms of the plan, participating employees are eligible to have a maximum of 10% of their compensation withheld through payroll deductions to purchase shares of common stock at the lower of 85% of the fair market value at the beginning of each offering period or of the fair market value on predetermined dates. As of March 31, 1996, 47,000 shares of common stock have been issued pursuant to this plan. (6) INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes' ("SFAS 109"). Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company adopted SFAS 109 effective January 1, 1993. The adoption did not have a material effect on the consolidated balance sheets or statements of operations. The Company has no net, taxable temporary differences which would require recognition of deferred tax liabilities and, due to the uncertainty of future realizability, has recorded a valuation allowance against any deferred tax assets for deductible temporary differences and tax operating loss carryforwards. The Company increased its valuation allowance by approximately $2,400,000 and $2,200,000 for the years ended December 31, 1995 and 1994, respectively, primarily as a result of the increase in tax operating loss carryforwards. F-10 <PAGE> CORVAS INTERNATIONAL, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued At December 31, 1995, the Company had available net operating loss carryforwards of approximately $37,368,000 for federal income tax reporting purposes which begin to expire in 2002. The net operating loss carry- forwards for state purposes, which began to expire in 1995 and fully expire in 2000, are approximately 50% of the federal tax amounts. The Company has unused research and development tax credits for federal income tax purposes of $2,314,000 at December 31, 1995. In accordance with Internal Revenue Code Section 382, the annual utilization of net operating loss carryforwards and credits existing prior to a change in control may be limited. (7) COMMITMENTS (a) LEASE COMMITMENTS: The Company currently leases its principal facility under an operating lease and certain equipment under a capital lease. The facility lease expires in September 1997 and has two one-year renewal options remaining. Terms of the lease provide for escalating rent payments during the lease term. For financial reporting purposes, rent expense is recognized on a straight-line basis over the term of the lease. Accordingly, rent expense recognized in excess of cash rent paid is reflected as deferred rent. Total rent expense under this lease for the years ended December 31, 1995, 1994 and 1993 was $733,000, $722,000 and $710,000, respectively. Through December 31, 1994, the Company had a lease commitment, which commenced in 1993, with a related party for its Belgian operation. See Notes 9 and 12. Rent expense for this operation for the years ended December 31, 1994 and 1993 was $74,000 and $40,000, respectively. In 1990, the Company entered into equipment leases for a total of $485,000 to be paid over 48 and 61 months. In 1991, the Company entered into additional equipment leases for $243,000 in aggregate to be paid over 37 and 42 months. As of December 31, 1995, these leases have all expired. Lease expense on these operating leases for the years ended December 31, 1995, 1994 and 1993 was $58,000, $247,000 and $361,000, respectively. In 1994, the Company entered into a capital equipment lease for $221,000 to be paid over 36 months. The amortization expense on this lease for the years ended December 31, 1995 and 1994 was $44,000 and $30,000, respectively. Annual future minimum commitments under these leases for years ending December 31 are as follows (in thousands). <TABLE> <CAPTION> Operating Capital Lease Lease ----- ----- <S> <C> <C> 1996 $ 652 $ 82 1997 --- 28 -------- ------- Total minimum lease payments $ 652 110 -------- -------- Less amount representing interest (6) ------- Present value of capital lease payments 104 Less current portion (77) ------- Long-term capital lease obligation $ 27 ------- ------- </TABLE> F-11 <PAGE> CORVAS INTERNATIONAL, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (b) LETTER OF CREDIT: The Company has an unused standby letter of credit of $60,000 that bears interest at the prime rate plus 1% and expires on September 30, 1996 with provisions for annual renewal. This letter of credit, collateralized by a $60,000 time deposit, is pledged in lieu of a security deposit against the principal facility lease discussed above. (8) COLLABORATIVE AGREEMENTS In October 1995, the Company entered into a research and option agreement with Pfizer Inc. ("Pfizer") to collaborate on the development of neutrophil inhibitory factor ("NIF"), an anti-inflammatory agent with therapeutic potential for stroke and other indications. Of the $1,159,000 payment received from Pfizer, license fees of $500,000 and revenue from collaborative agreements of $354,000 were recorded in 1995 on the accompanying statements of operations. The balance of $305,000 is included in deferred revenue on the accompanying balance sheets. During the option period, which concludes in October 1996 but may be extended by Pfizer until April 1997, Pfizer will fund its own further development of NIF including costs associated with clinical trials. If Pfizer exercises its option by April 1997, pursuant to a license and development agreement, Corvas will conduct certain development activities for an additional two-year period and Pfizer will receive an exclusive, worldwide license to further develop, manufacture and market NIF as a therapeutic agent. If the option to enter into the license and development agreement is exercised, Pfizer will pay the Company an additional license fee and will compensate the Company for certain costs of research and preclinical development of NIF over a two- year period. If products are successfully commercialized from this agreement, the Company will also receive milestone payments and royalty payments on product sales. In December 1994, the Company entered into a strategic alliance agreement with Schering Corporation ("Schering-Plough") to collaborate on the discovery and commercialization of oral thrombin inhibitor drugs for the prevention and treatment of chronic cardiovascular disorders. In January 1996, Schering-Plough extended to December 1996 its exclusive option to expand the program to include a second blood clotting enzyme with a $1,000,000 payment which is included as revenue during the three months ended March 31, 1996 in the consolidated statements of operations. Under the terms of the agreement, Schering-Plough will compensate the Company for the costs of research and preclinical development of thrombin inhibitors over two years. A $5,000,000 payment received in 1994 was recorded as deferred revenue as of December 31, 1994. Of this amount, revenue of $4,000,000 was recognized in 1995 and an additional $4,000,000 received through December 31, 1995 has been recorded as deferred revenue on the accompanying balance sheets. This additional $4,000,000 will be recognized as revenue in 1996. The Company may also receive milestone payments and royalties on sales of therapeutics resulting from this alliance. Schering-Plough, which is responsible for certain preclinical development and all future clinical trials and regulatory activities, received exclusive worldwide manufacturing and marketing rights for any resulting thrombin inhibitors. Under a separate agreement also completed in December 1994, Schering-Plough purchased 1,000,000 shares of Series A convertible preferred stock of the Company resulting in net proceeds of $4,864,000. If the option described above is exercised, Schering-Plough has agreed to an additional equity investment. F-12 <PAGE> CORVAS INTERNATIONAL, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued In June 1992, the Company entered into two agreements with Ortho Diagnostic Systems, Inc. ("Ortho"), a Johnson & Johnson company, granting Ortho exclusive worldwide rights to market certain diagnostic reagents. Ortho is obligated to order stipulated minimum amounts each year, or must pay the Company the deficiency between the minimum and the amount actually ordered. Net product sales for the years ended December 31, 1995, 1994 and 1993 were $282,000, $169,000 and $166,000, respectively. These agreements provide that Ortho pay royalties based on unit sales of this product, as well as two milestone payments, the first of which was received in 1992. For the years ended December 31, 1995, 1994 and 1993, royalties under this agreement amounted to $142,000, $183,000 and $230,000, respectively. In November 1991, Centocor, Inc. acquired an exclusive option pursuant to which it licensed certain monoclonal antibody products under development by the Company, as well as future monoclonal antibody products discovered or acquired by the Company. In November 1991, Centocor exercised its option to license a product which was undergoing clinical trials (designated by the Company as CORSEVIN M) for which the Company received a cash license payment of $750,000 in 1991. Centocor paid the Company $100,000 in each of 1993 and 1992 for rights to future monoclonal antibody products, and terminated these option rights in 1994. The Company may also receive a future milestone payment and royalties on product sales; however there is no assurance that the product will be successfully developed. The Company has also entered into research and licensing agreements with scientific consultants, universities and other research institutions which have required the Company to make royalty payments for the years ended December 31, 1995, 1994 and 1993 of $15,000, $14,000 and 16,000, respectively. (9) RESTRUCTURING CHARGE AND LIQUIDATION OF SUBSIDIARY In December 1994, the Company ceased operation of its research and development subsidiary, Corvas International, N.V. in Gent, Belgium. The Belgian operation accounted for 20% of the consolidated operating expenses in 1994 (including a restructuring charge) and 20% in 1993. In connection with this restructuring, the accompanying consolidated statements of operations reflect a one-time charge to earnings of $1,575,000 in 1994 for severance and other expenses. Included in accrued expenses as of December 31, 1994 was $164,000, which was paid in 1995. Corvas International, N.V. was liquidated on December 19, 1995. Substantially all of the assets have been liquidated and any remaining or future liabilities have been assumed by the Company. (10)EMPLOYEE BENEFITS PLAN Effective January 1, 1988, the Board of Directors approved the Corvas 401(k) Compensation Deferral Savings Plan ("The Plan"), adopting provisions of the Internal Revenue Code Section 401(k). The Plan was approved by the IRS in 1989, and was amended and restated in 1994. The Plan is for the benefit of all qualifying employees, and permits employee voluntary contributions, qualified nonelective contributions and company profit sharing contributions. No employer contributions have been approved by the Board of Directors through March 31, 1996. (11)RESEARCH GRANTS For the years ended December 31, 1994 and 1993, research grant revenue of $667,000 and $192,000, respectively, was recorded related to Small Business Innovation Research (SBIR) and other grants. No such revenue was recorded in 1995. The related expenses, which equal research grant revenues, are recorded as research and development expenses in the accompanying consolidated statements of operations. F-13 <PAGE> CORVAS INTERNATIONAL, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (12)RELATED PARTY TRANSACTIONS Pursuant to the acquisition of the Belgian subsidiary, the Company entered into a facility and equipment services agreement with a principal shareholder of the Company in 1991. Under the terms of the agreement, the Company acquired certain services in advance and committed to pay for other services at the principal shareholder's determined cost. The Company amortized $74,000 of prepaid services in 1993 and was charged $410,000 and $361,000 in 1994 and 1993, respectively, pursuant to this agreement. See Notes 7 and 9. (13)LEGAL MATTERS The Company, several of its current and former directors, and Centocor, Inc. were parties to a legal proceeding filed February 18, 1993, in the U.S. District Court for the Southern District of California. The complaint was filed by a shareholder of the Company who represented a class of persons who purchased Corvas stock from January 30, 1992 through April 14, 1992. A settlement was agreed upon and judgment of the Court entered on August 28, 1995. The Company continues to deny all claims of wrongdoing and maintains this denial as part of the settlement agreement. Of the $535,000 charge related to this settlement recorded at December 31, 1994, $193,000 and $313,000 remain accrued at March 31, 1996 and December 31, 1995, respectively. In 1993, the U.S. Patent and Trademark Office declared an interference and is currently in the process of determining the priority of invention between a patent for which some rights are licensed to the Company and a patent application for which rights are licensed to another party. The subject matter of these licenses is recombinant tissue factor which is used by Ortho to determine the blood clotting abilities of patients. The Company believes that its licensed patent should be upheld and is contesting the other party's claims of prior invention. However, there is no assurance that such patent will be upheld. F-14 <PAGE> NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. - -------------------------------------------------------------------------------- TABLE OF CONTENTS Page ---- Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Dividend Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Price Range of Common Stock. . . . . . . . . . . . . . . . . . . . . . . . 12 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . 14 Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . 16 Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Certain Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Principal Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Description of Capital Stock . . . . . . . . . . . . . . . . . . . . . . . 50 Shares Eligible for Future Sale. . . . . . . . . . . . . . . . . . . . . . 52 Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Available Information. . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . 53 - -------------------------------------------------------------------------------- <PAGE> PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth all expenses payable by the Registrant in connection with the sale of the Common Stock being registered. All of the amounts shown are estimates, except for the registration fee and the Nasdaq fee. <TABLE> <CAPTION> <S> <C> Registration fee . . . . . . . . . $ 1,814 Nasdaq fee . . . . . . . . . . . . 17,500 Legal fees and expenses. . . . . . 75,000 Accounting fees and expenses . . . 30,000 Miscellaneous. . . . . . . . . . . 1,686 -------- Total . . . . . . . . . . . . $126,000 -------- -------- </TABLE> ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS Under Section 145 of the Delaware General Corporation Law (the "Delaware Law"), the Registrant has broad powers to indemnify its directors and officers against liabilities they may incur in such capacities, including liabilities under the Securities Act. The Registrant's Amended and Restated Certificate of Incorporation and Bylaws include provisions to (i) eliminate the personal liability of its directors for monetary damages resulting from breaches of their fiduciary duty to the extent permitted by Section 102(b)(7) of the Delaware Law and (ii) require the Registrant to indemnify its directors and officers to the fullest extent permitted by Section 145 of the Delaware Law, including circumstances in which indemnification is otherwise discretionary. Pursuant to Section 145 of the Delaware Law, a corporation generally has the power to indemnify its present and former directors, officers, employees and agents against expenses incurred by them in connection with any suit to which they are, or are threatened to be made, a party by reason of their serving in such positions so long as they acted in good faith and in a manner they reasonably believed to be in, or not opposed to, the best interests of the corporation, and with respect to any criminal action, they had no reasonable cause to believe their conduct was unlawful. The Registrant believes that these provisions are necessary to attract and retain qualified persons as directors and officers. These provisions do not eliminate the directors' duty of care and, in appropriate circumstances, equitable remedies such as injunctive or other forms of non-monetary relief will remain available under Delaware Law. In addition, each director will continue to be subject to liability for breach of the director's duty of loyalty to the Registrant, for acts or omissions not in good faith or involving intentional misconduct, for knowing violations of law, for acts or omissions that the director believes to be contrary to the best interests of the Registrant or its stockholders, for any transaction from which the director derived an improper personal benefit, for acts or omissions involving a reckless disregard for the director's duty to the Registrant or its stockholders when the director was aware or should have been aware of a risk of serious injury to the Registrant or its stockholders, for acts or omission that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to the Registrant or its stockholders, for improper transactions between the director and the Registrant and for improper distributions to stockholders and loans to directors and officers. The provision also does not affect a director's responsibilities under any other law, such as federal securities laws or state or federal environmental laws. The Registrant has entered into indemnity agreements with each of its directors and executive officers that require the Registrant to indemnify such persons against expenses, judgments, fines, settlements and other amounts incurred (including expenses of a derivative action) in connection with any proceeding, whether actual or threatened, to which any such person may be made a party by reason of the fact that such person is or was a director or an executive officer of the Registrant or any of its affiliated enterprises, provided such person acted in good faith and in a manner such person reasonably believed to be in, or not opposed to, the best interests of the Registrant and, with respect to any criminal proceeding, had no reasonable cause to believe his conduct was unlawful. The II-1 <PAGE> indemnification agreements also set forth certain procedures that will apply in the event of a claim for indemnification thereunder. At present, there is no pending litigation or proceeding involving a director or officer of the Registrant as to which indemnification is being sought nor is the Registrant aware of any threatened litigation that may result in claims for indemnification by any officer or director. The Registrant has an insurance policy covering the officers and directors of the Registrant with respect to certain liabilities, including liabilities arising under the Securities Act or otherwise. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Since March 1993, the Registrant has sold and issued the following unregistered securities: 1. In December 1994, the Registrant issued 1,000,000 shares of Series A Convertible Preferred Stock to Schering-Plough at a price of $5.00 per share and an option to purchase an additional 250,000 shares of Convertible Preferred Stock. 2. In January 1996, the Registrant issued 50,000 shares of Common Stock to Agricultural Excess Surplus Insurance Company, in consideration for services rendered in connection with the settlement of a lawsuit. 3. In February 1996, the Registrant issued 3,000,000 shares of Common Stock in a unit financing to certain investors at a price of $5.00 per unit. Each unit consists of one share of Common Stock and one callable warrant to purchase one additional share of Common Stock. The sales and issuances of securities in the transactions described above were deemed to be exempt from registration under the Securities Act by virtue of Section 4(2) and/or Regulation D promulgated under the Securities Act. The purchasers in each case represented their intention to acquire the securities for investment only and not with a view to the distribution thereof. Appropriate legends are affixed to the stock certificates issued in such transactions. Similar legends were imposed in connection with any subsequent sales of any such securities. All recipients either received adequate information about the Registrant or had access, through employment or other relationships, to such information. II-2 <PAGE> ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------ ----------------------- 3.1 Amended and Restated Certificate of Incorporation.(8) 3.2 Bylaws.(8) 4.1 Reference is made to exhibits 3.1, 3.2, 10.20, 10.25, 10.26, 10.43 and 10.45. 4.2 Specimen stock certificate.(1) 5.1 Opinion of Cooley Godward Castro Huddleson & Tatum.(17) 10.1 Form of Indemnification Agreement between the Company and each director and executive officer.(1) 10.2 Stock Option Plan of the Company, as amended.(1) 10.3 Form of Incentive Stock Option Agreement under the Stock Option Plan.(1) 10.4 Form of Non-Incentive Stock Option Agreement under the Stock Option Plan.(1) 10.5 Second Stock Option Plan of the Company.(1) 10.6 Incentive Stock Option Agreement between the Company and David S. Kabakoff, dated as of October 2, 1989.(1) 10.7 Non-Statutory Stock Option Agreement of Theodor H. Heinrichs, dated October 17, 1991.(2) 10.8 Non-Statutory Stock Option Agreement of Pieter C. Bax, dated November 20, 1991.(2) 10.9 Form of Employee Stock Purchase Plan.(1) 10.10 1991 Incentive and Compensation Plan of the Company.(1) 10.11 Form of Incentive Stock Option Agreement under the 1991 Incentive and Compensation Plan of the Company.(2) 10.12 Form of Non-Qualified Stock Option Agreement under the 1991 Incentive and Compensation Plan of the Company.(2) 10.13 Form of Restricted Stock Purchase Agreement between the Company and certain individuals or entities, and attached schedule.(1) 10.14 Second Amended and Restated Stock Registration Rights Agreement between the Company and certain investors and warrantholders named therein, dated as of February 14, 1991, as amended on March 19, 1991, November 13, 1991 and December 4, 1991, and supplemental letter agreement dated December 12, 1991.(1) 10.15 Employment Agreement between the Company and David S. Kabakoff, dated as of March 6, 1989.(1) 10.16 Employment Agreement between the Company and John E. Crawford, dated as of April 17, 1989.(1) 10.17 Consulting Agreement between the Company and Thomas S. Edgington, dated as of May 21, 1987, with attachments and addenda, as extended and assigned pursuant to the Consulting Agreement Extension, dated as of May 21, 1991.(1) 10.18 Consulting Agreement between the Company and John H. Fried, dated as of June 3, 1992.(6) 10.19 Antibody Option Agreement between the Company and Centocor, Inc., dated as of November 7, 1991, with exhibit.(1)(4) II-3 <PAGE> EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------ ----------------------- 10.20 Voting Agreement between Centocor Delaware, Inc. and certain equity security holders of the Company dated November 20, 1991.(1) 10.21 Standstill Letter Agreement between the Company and Centocor, Inc., dated November 20, 1991.(1) 10.22 Research and License Agreement for Human Tissue Factor for Diagnostic Purposes between the Company and Scripps Clinic and Research Foundation, dated May 19, 1988, as amended, including exhibits.(1)(4) 10.23 Agreement for International Business Combination (Series C and D Preferred Stock) between the Company and Plant Genetic Systems, N.V. and Take Off Fonds, N.V., dated as of March 6, 1991.(1) 10.24 Series E, F and G Preferred Stock Purchase Agreement between the Company and Centocor Delaware, Inc., dated as of November 20, 1991.(1) 10.25 Warrant to purchase Series B Preferred Stock of the Company issued to Comdisco, Inc. on June 19, 1990, as amended on January 2, 1992.(1) 10.26 Warrant to purchase Series B Preferred Stock of the Company issued to Praktikerfinans AB on November 30, 1990, as amended on January 15, 1992.(1) 10.27 Master Lease Agreement dated as of June 19, 1990 between the Company and Comdisco, Inc., with exhibit, as amended on January 2, 1992.(1) 10.28 Ventana Leaseline Agreement dated as of March 30, 1990 between the Company and Ventana Leasing, Inc., with exhibit.(1) 10.29 Ventana Leaseline Agreement dated as of September 15, 1991 between the Company and Ventana Leasing, Inc., with exhibits.(1) 10.30 Master Lease Agreement between the Company and Lease Management Services, dated as of August 29, 1991, with addendum and related Equipment Financing Agreement Number 10729 between the Company and Lease Management Services, dated as of August 29, 1991.(1) 10.31 Lease Agreement for 3030 Science Park Road, San Diego, California between the Company and Hartford Accident and Indemnity Company, dated as of March 28, 1989, as amended on March 23, 1990, May 18, 1990 and May 16, 1991.(1) 10.32 Fourth Lease Amendment to Lease Agreement for 3030 Science Park Road, San Diego, California between the Company and Hartford Accident and Indemnity Company, dated as of January 21, 1992.(1) 10.33 Waiver of Conversion Price Adjustment Agreement between the Company and Centocor Delaware, Inc., dated as of January 10, 1992.(1) 10.34 Supply Agreement and License Agreement between the Company and Ortho Diagnostic Systems, Inc., dated June 8, 1992, amended as to confidential treatment pursuant to a Form 8 filed March 18, 1993.(3)(5) 10.35 Fifth Lease Amendment to Lease Agreement for 3030 Science Park Road, San Diego, California between the Company and Hartford Accident and Indemnity Company, dated as of April 15, 1992, Sixth Lease Amendment dated as of July 16, 1992, Seventh Lease Amendment dated as of January 18, 1993.(6) 10.36 Permanent Waiver of Right of Centocor, Inc. to nominate second director under Series E, F and G Preferred Stock Purchase Agreement filed as Exhibit 10.24 herein.(8) II-4 <PAGE> EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------ ----------------------- 10.37 Assignment of Lease Agreement for 3030 Science Park Road, San Diego, California from Corvas International, Inc., a California corporation, to Corvas International, Inc., a Delaware corporation, dated September 14, 1993.(8) 10.38 Corvas International, Inc. 401(k) Compensation Deferral Savings Plan and Trust Agreement (Amended and Restated as of January 1, 1989) (Revised to incorporate amendments to plan).(10) 10.39 Research and License Agreement for Oral Thrombin Inhibitor Drugs between the Company and Schering Corporation and Schering-Plough LTD., dated as of December 14, 1994.(10)(11) 10.40 Series A Preferred Stock Purchase Agreement between the Company and Schering Corporation, dated as of December 14, 1994.(10)(11) 10.41 Eighth Lease Amendment to Lease Agreement for 3030 Science Park Road, San Diego, California between the Company and Hartford Accident and Indemnity Company, dated as of July 7, 1995.(12) 10.42 Extension of Consulting Agreement between the Company and Thomas S. Edgington and Molecular Biology Consultants, dated as of May 21, 1995. (13) 10.43 Form of Warrant Agreement to purchase Common Stock of the Company issued to certain individuals affiliated with Ventana Leasing, Inc. on June 16, 1995.(13) 10.44 Collaborative Research and Option Agreement between the Company and Pfizer Inc. and Pfizer Limited, dated as of October 14, 1995.(13)(14) 10.45 Common Stock and Warrant Purchase Agreement between the Company and certain purchasers, dated as of February 2, 1996, with exhibits.(13) 10.46 Employment Agreement between the Company and Donald H. Picker, dated as of February 2, 1996, with certain exhibits thereto.(13) 10.47 Loan Agreement between the Company and Donald H. Picker, dated February 23, 1996, and the Promissory Notes and letter agreement related thereto.(15) 10.48 Ninth Lease Amendment to Lease Agreement for 3030 Science Park Road, San Diego, California between the Company and Hartford Accident and Indemnity Company, dated as of March 15, 1996.(15) 10.49 Permanent Waiver of Right of Centocor, Inc. to nominate director under Series E, F and G Preferred Stock Purchase Agreement (see Exhibit 10.24).(15) 10.50 Consulting Agreement between the Company and David S. Kabakoff, dated as of May 1, 1996.(16) 10.51 Consulting Agreement between the Company and Theodor H. Heinrichs, dated as of May 1, 1996.(17) 10.52 Employment Agreement by and between the Company and Randall E. Woods, dated as of May 10, 1996, with certain exhibits thereto.(17) 21.1 Subsidiary of the Company.(1) 23.1** Independent Auditors' Consent. Reference is made to page II-8. 23.2 Consent of Cooley Godward Castro Huddleson & Tatum. Reference is made to Exhibit 5.1. 24.1 Power of Attorney. (15) - ------------------------ II-5 <PAGE> ** Filed herewith. (1) Incorporated by reference to Registration Statement on Form S-1 (No. 33- 44555), as amended, filed December 13, 1991. (2) Incorporated by reference to Registration Statement on Form S-8 (No. 33- 45607), as amended, filed February 10, 1992. (3) Incorporated by reference to Quarterly Report on Form 10-Q, filed August 14, 1992. (4) Portions of this exhibit have been granted confidential treatment pursuant to an order granted by the Securities and Exchange Commission on January 30, 1992. (5) Portions of this exhibit have been granted confidential treatment pursuant to an order granted by the Securities and Exchange Commission on December 10, 1992. (6) Incorporated by reference to Annual Report on Form 10-K, filed March 30, 1993. (7) Incorporated by reference to Quarterly Report on Form 10-Q, filed May 14, 1993. (8) Incorporated by reference to Annual Report on Form 10-K, filed February 23, 1994. (9) Incorporated by reference to Quarterly Report on Form 10-Q, filed November 14, 1994. (10) Incorporated by reference to Annual Report on Form 10-K, filed March 30, 1995. (11) Portions of this exhibit have been granted confidential treatment pursuant to an order granted by the Securities and Exchange Commission on May 11, 1995. (12) Incorporated by reference to Quarterly Report on Form 10-Q, filed November 13, 1995. (13) Incorporated by reference to Annual Report on Form 10-K, filed February 28, 1996. (14) Portions of this exhibit have been granted confidential treatment pursuant to an order granted by the Securities and Exchange Commission on April 26, 1996. (15) Incorporated by reference to Registration Statement on Form S-1 (No. 333-2644), filed March 25, 1996. (16) Incorporated by reference to Quarterly Report on Form 10-Q, filed May 13, 1996. (17) Incorporated by reference to Amendment No. 1 to Registration Statement on Form S-1 (No. 333-2644), filed May 31, 1996. ITEM 17. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to provisions described in Item 15 or otherwise, the Registrant has been advised that, in the opinion of the Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant undertakes that: (1) for the purpose of determining any liability under the Securities Act, the information omitted from and form of prospectus filed as part of the registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of the registration statement as of the time it was declared effective; and (2) for the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-6 <PAGE> SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 2 to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Diego, State of California, on June 24, 1996. CORVAS INTERNATIONAL, INC. By: /s/ RANDALL E. WOODS ------------------------------------- Randall E. Woods President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 2 to Registration Statement has been signed below by the following persons in the capacities and on the dates indicated. <TABLE> <CAPTION> Signature Title Date - --------- ----- ---- <S> <C> <C> /s/ RANDALL E. WOODS President and Chief Executive Officer June 24, 1996 - ------------------------------------- (Principal Executive Officer) Randall E. Woods /s/ JOHN E. CRAWFORD Executive Vice President, Chief June 24, 1996 - ------------------------------------- Financial Officer and Secretary John E. Crawford (Principal Financial and Accounting Officer) /s/ DAVID S. KABAKOFF, PH.D.* Chairman of the Board of Directors June 24, 1996 - ------------------------------------- David S. Kabakoff, Ph.D. /s/ THOMAS S. EDGINGTON, M.D.* Director June 24, 1996 - ------------------------------------- Thomas S. Edgington, M.D. /s/ JOHN H. FRIED, PH.D.* Director June 24, 1996 - ------------------------------------- John H. Fried, Ph.D. /s/ THEODOR H. HEINRICHS* Director June 24, 1996 - ------------------------------------- Theodor H. Heinrichs /s/ M. BLAKE INGLE, PH.D.* Director June 24, 1996 - ------------------------------------- M. Blake Ingle, Ph.D. Director June 24, 1996 - ------------------------------------- Michael Sorell, M.D. /s/ W. LEIGH THOMPSON, JR. M.D.,PH.D* Director June 24, 1996 - ------------------------------------- W. Leigh Thompson, Jr., M.D., Ph.D. /s/ GERALD VAN ACKER* Director June 24, 1996 - ------------------------------------- Gerard Van Acker Director June 24, 1996 - ------------------------------------- Nicole Vitullo * By: /s/ JOHN E. CRAWFORD June 24, 1996 - ------------------------------------- John E. Crawford ATTORNEY-IN-FACT </TABLE> II-7 <PAGE> INDEPENDENT AUDITORS' CONSENT We consent to the use of our report included herein and to the references to our firm under the headings "Selected Consolidated Financial Data" and "Experts" in the Prospectus. San Diego, California June 24, 1996 II-8 </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----
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+SUMMARY THE CONTRACT The Panorama Plus Annuity is an individual and group flexible premium deferred annuity which can be purchased on a non-tax-qualified basis ("Non-qualified Contract") or with the proceeds from certain plans qualifying for favorable federal income tax treatment ("Qualified Contract"). The Contract Owner allocates Purchase Payments among two Investment Accounts of C.M. Life: the Panorama Plus Separate Account (the "Separate Account") and the General Account. PURCHASE PAYMENTS A Contract may be purchased with a minimum initial Purchase Payment of at least $500. From time to time, this minimum initial Purchase Payment may be changed. The Contract Owner may make additional Purchase Payments of at least $50 each at any time before the Annuity Income Date. Subsequent Purchase Payments allocated to the General Account are limited in amount, based in part on prior Purchase Payment allocations to that Account. (See "Purchase Payments," page ). THE PANORAMA PLUS INVESTMENT ACCOUNTS On the Contract Issue Date, the initial Net Purchase Payment is allocated among the Investment Accounts (that is, among the General Account and/or the Sub-Accounts of the Separate Account) in accordance with the allocation percentages specified by the Contract Owner in the Application. Allocation changes for subsequent Purchase Payments may be made by sending a Written Request to the Annuity Service Center. Allocation changes will be effective when the Annuity Service Center receives a Written Request. THE SEPARATE ACCOUNT. The Separate Account, a separate account of C.M. Life, invests in shares of various investment Portfolios of two mutual funds ("Funds"): the Panorama Series Fund, Inc. ("the Panorama Fund") and the Oppenheimer Variable Account Funds ("OVAF"). In addition to the Money Portfolio and the Bond Portfolio of OVAF, three (3) Portfolios of the Panorama Fund are currently available under the Contract: the Total Return Portfolio, the Growth Portfolio, and the International Equity Portfolio. Each of the five Sub-Accounts of the Separate Account invests solely in a corresponding Portfolio of a Fund. Because the Separate Account Balance will increase or decrease depending on the investment experience of the selected Sub-Accounts, the Contract Owner bears the entire investment risk with respect to Purchase Payments allocated to, and amounts transferred to, the Separate Account. (See "The Separate Account," page ). THE GENERAL ACCOUNT. The General Account provides for fixed accumulations and a specified interest rate on Purchase Payments allocated to, and amounts transferred to, the General Account. The interest rate will be reset periodically, currently quarterly, at the sole discretion of C.M. Life. The General Account Balance may be subject to an Interest Rate Factor Adjustment upon Surrender and on the Annuity Income Date. (See "Interest Rate Adjustment Factor," page ). The Interest Rate Factor Adjustment does not apply to Contracts issued to Pennsylvania residents. Because of this adjustment and for other reasons, the amount payable upon Surrender, or applied to Annuity Income payments, may be more or less than the General Account Balance at that time, and more or less than the total Purchase Payments allocated to and amounts transferred to the General Account. Thus, the Contract Owner bears certain investment risk with respect to the General Account Balance. (See "The General Account," page ). TRANSFERS The Contract Owner may transfer amounts from one Investment Account or Sub-Account to another Investment Account or Sub-Account, with certain limitations, during the Accumulation Period (I.E., prior to the Annuity Income Date). The Beneficiary may exercise this right if a Death Benefit has become payable. The minimum transfer amount is $100. In addition, the total of all transfers to or from the General Account during any Contract Year is limited to the greater of (a) 30% of the General Account Balance as of the end of the immediately preceding Contract Year, or (b) $25,000. Additional limitations apply to transfers to or from the General Account and the Money Sub-Account. (See "Transfers," page ). 7 <PAGE> During the Annuity Period (I.E., after the Annuity Income Date), a portion of the Separate Account Balance may be transferred from one Sub-Account to any other Sub-Account once during any Contract Year. Transfers to or from the General Account are not permitted during the Annuity Period. (See "Transfers," page ). DOLLAR COST AVERAGING There are three Dollar Cost Averaging options available to the Contract Owner. First, the Contract Owner may elect to transfer fixed dollar amounts at regular intervals from one Sub-Account to another Sub-Account, and to change the fixed dollar amount and the Sub-Accounts selected. As a second option, the Contract Owner may elect to transfer fixed dollar amounts from the General Account to Sub-Accounts (other than the Money Sub-Account). Total transfers from the General Account are limited in the Contract Year of the initial Purchase Payment to the greater of: (i) 30% of the initial Purchase Payment; or (ii) $25,000. In subsequent Contract Years, total transfers from the General Account are limited to the greater of: (i) 30% of the General Account Balance as of the end of the immediately preceding Contract Year; or (ii) $25,000. The timing of the election of this option is restricted. As a third option, the Contract Owner may elect to transfer the credited interest of the General Account at specified intervals to one or more of the Sub-Accounts (other than the Money Sub-Account). A General Account Balance of at least $5,000 must be available at the time of each transfer. Only one Dollar Cost Averaging option may be in effect at any one time. There currently is no charge for Dollar Cost Averaging. However, the Company reserves the right to charge for Dollar Cost Averaging in the future. The Contract Owner may not simultaneously participate in both Dollar Cost Averaging and Systematic Withdrawals. Changes in the Dollar Cost Averaging option may only be made by Written Request from the Contract Owner to terminate the existing Dollar Cost Averaging option, accompanied by a Written Request identifying the new Dollar Cost Averaging option selected. For more details on "Dollar Cost Averaging," see page . SURRENDERS The Contract Owner may elect to Surrender all or a portion ($100 minimum per partial surrender) of the Contract Balance in exchange for a cash payment from C.M. Life at any time during the Accumulation Period and prior to payment of the Death Benefit. Following any partial Surrender, the Contract Balance must be at least $250. Partial Surrenders may be withdrawn from both the General Account Balance and the Separate Account Balance. Partial and full Surrenders are subject to any applicable Surrender Charge, Interest Rate Factor Adjustment, and Contract Maintenance Fee. There is currently no limit on the frequency or timing of Surrenders. (See "Surrenders," page .). Please note, federal income taxes and a tax penalty may be applicable. (See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES," page .) THERE IS NO GUARANTEED OR MINIMUM SURRENDER VALUE, SO REGARDLESS OF THE EXTENT TO WHICH PURCHASE PAYMENTS ARE ALLOCATED TO THE SEPARATE ACCOUNT OR TO THE GENERAL ACCOUNT, THE PROCEEDS OF A FULL SURRENDER (THAT IS, THE SURRENDER VALUE) COULD BE LESS THAN THE TOTAL PURCHASE PAYMENTS. SYSTEMATIC WITHDRAWALS Upon Written Request, the Contract Owner may elect Systematic Withdrawals ($100 minimum per withdrawal) to begin on or after the first anniversary of the Contract Issue Date during the Accumulation Period. There is currently no charge for Systematic Withdrawals. However, the Company reserves the right to charge for Systematic Withdrawals in the future. The Contract Owner may not simultaneously participate in both Systematic Withdrawals and Dollar Cost Averaging. Systematic Withdrawals changes may only be made by Written Request from the Contract Owner to terminate the existing Systematic Withdrawals program accompanied by a Written Request identifying the new Systematic Withdrawals election. (See page .) Systematic Withdrawals may result in tax liabilities. See "Certain Federal Income Tax Consequences," page . 8 <PAGE> TERMINAL ILLNESS BENEFIT In the event that a Contract Owner becomes terminally ill during the Accumulation Period and prior to age 75, the Contract Owner may elect, unless prohibited by law, by submission of a Written Request, a Terminal Illness Benefit equal to the greater of (a) the Purchase Payments less any prior withdrawals and charges; or (b) the Contract Balance. (See "Terminal Illness Benefit," page .) DEATH BENEFIT In the event that the Contract Owner or Annuitant dies prior to the Annuity Income Date, a Death Benefit is payable upon receipt of satisfactory proof of death of the Contract Owner or the Annuitant, an election of the Death Benefit Option and return of the Contract. The Death Benefit will at least equal the Contract Balance at the time of payment. No Surrender Charge, Interest Rate Factor Adjustment, or Contract Maintenance Fee is imposed upon amounts received as a Death Benefit. (If the Annuitant dies before the Contract Owner and there is a Contingent Annuitant who is less than 85 years of age on the Annuitant's date of death, and such Contract Owner is a natural person, no Death Benefit is payable, and the Contract continues in force, with the Contingent Annuitant becoming the Annuitant.) (See "Death Benefit," page .) CHARGES AND DEDUCTIONS SURRENDER CHARGE. To help defray sales expenses a 5% Surrender Charge will be deducted from the Contract Balance in the event of any partial or full Surrender during the first five (5) Contract Years. However, beginning in the second Contract Year, a Free Surrender Amount, equal to 10% of the Contract Balance as of the end of the immediately preceding Contract Year, will be exempt from any Surrender Charge (and any Interest Rate Factor Adjustment see below). In addition, no Surrender Charge or Interest Rate Factor Adjustment is imposed on partial or full Surrenders during the Window Period, which is the last thirty (30) days of each Five-Year Period. C.M. LIFE GUARANTEES THAT THE AGGREGATE SURRENDER CHARGE WILL NEVER EXCEED 8.5% OF THE TOTAL PURCHASE PAYMENTS MADE UNDER THE CONTRACT. (See "Surrender Charge," page .) INTEREST RATE FACTOR ADJUSTMENT. An Interest Rate Factor Adjustment may be applied in the event of any partial or full Surrender of the General Account Balance during the Accumulation Period, and on the Annuity Income Date (if the General Account Balance is applied to a Variable Annuity Option). The Interest Rate Factor Adjustment does not apply to amounts invested in the Separate Account or to Contracts issued to Pennsylvania residents. The Interest Rate Factor Adjustment may be positive or negative. It is based on interest rates payable on U.S. Treasury securities. In general, if rates on U.S. Treasury securities are higher when you Surrender than when you made the applicable Purchase Payments (or up to .30% lower), a negative Interest Rate Factor Adjustment may be applied, and on a full Surrender of your General Account Balance, you could receive an amount lower than the amount of Purchase Payments made (even for Purchase Payments allocated to the General Account). However, if rates on U.S. Treasury securities are more than .30% lower when you Surrender than when you made the applicable Purchase Payments, a positive Interest Rate Factor Adjustment may be applied, and on a full Surrender of your General Account Balance, you could receive an amount higher than the amount of Purchase Payments made, plus interest. (For partial Surrenders of the General Account Balance, the Interest Rate Factor Adjustment will be added to or subtracted from the remaining General Account Balance.) No Interest Rate Factor Adjustment will be applied during the Window Period; in addition, no Interest Rate Factor Adjustment will be applied to the General Account Free Surrender Amount. (See "Interest Rate Factor Adjustment," page .) SEPARATE ACCOUNT CHARGES. C.M. Life deducts a daily charge equal to a percentage of the net assets in the Separate Account for the mortality and expense risks assumed by C.M. Life under the Contracts. The effective annual rate of this charge currently is 1.07%. It may increase but it will not exceed an effective annual rate of 1.25% of the average daily value of the Separate Account's net assets. (See "Mortality and Expense Risk Charge," page .) C.M. Life also deducts a daily Administrative Expense Charge from the net assets of each of the Sub-Accounts of the Separate Account to partially cover expenses incurred by C.M. Life in connection with the administration of the Separate Account and the Contract. This charge is currently at an effective annual 9 <PAGE> rate of 0.07% and it may increase, but the annual charges for mortality and expense risks and administrative expenses are guaranteed not to exceed an effective annual rate of 1.50% of the daily value of the Separate Account's net assets. (See "Administrative Expense Charge," page .) CONTRACT CHARGES. There is also an annual Contract Maintenance Fee imposed each year for Contract maintenance and related administrative expenses. This charge is currently $30 per Contract. It will be calculated as a pro rata portion of the balance of each Sub-Account and the General Account, and deducted from the Contract Balance on the last day of each Contract Year during the Accumulation Period, and upon Full Surrender of the Contract. For Contracts issued to Pennsylvania residents, the Fee will be calculated as a pro rata portion of the balance of each Sub-Account. The Contract Maintenance Fee may increase but it will not exceed $60 per Contract Year. (See "Contract Maintenance Fee," page .) TAXES. C.M. Life may incur Premium Taxes relating to the Contracts. Depending upon applicable state law, C.M. Life will deduct any Premium Taxes related to a particular Contract from Purchase Payments, from the Contract Balance upon Surrender, or on the Annuity Income Date. (See "Premium Taxes," page .) No charges are currently made against the Sub-Accounts for federal, state, or local taxes other than Premium Taxes. However, C.M. Life may deduct charges for such taxes in the future. (See "Federal, State and Local Taxes," page .) CHARGES AGAINST THE FUNDS. The value of the net assets of the Sub-Accounts of the Separate Account will reflect the investment advisory fee and other expenses incurred by the Portfolios of the Funds. EXPENSE DATA. The charges and deductions explained above are summarized in the following table. This tabular information regarding expenses assumes that the entire Contract Balance is in the Separate Account. <TABLE> <CAPTION> MONEY TOTAL INTERNATIONAL MARKET(2) INCOME(3) RETURN GROWTH EQUITY ----------- ----------- --------- ----------- --------------- <S> <C> <C> <C> <C> <C> CONTRACT OWNER TRANSACTION EXPENSES(1) Sales Load On Purchase Payments.......... 0 0 0 0 0 Maximum Surrender (as a % of Contract Balance Surrendered)(4)........................ 5% 5% 5% 5% 5% <CAPTION> ------------------------------------------------ Annual Contract Maintenance Fee.......... $30 Per Contract Transfer Fee............................. Currently No Fee ------------------------------------------------ <S> <C> <C> <C> <C> <C> SEPARATE ACCOUNT ANNUAL EXPENSES (AS A PERCENTAGE OF ACCOUNT VALUE) Mortgage and Expense Risk Charge......... 1.07% 1.07% 1.07% 1.07% 1.07% Administrative Expense Charge............ 0.07% 0.07% 0.07% 0.07% 0.07% ----------- ----------- --------- ----------- ------ Total Separate Account Annual Expenses... 1.14% 1.14% 1.14% 1.14% 1.14% ----------- ----------- --------- ----------- ------ PORTFOLIO ANNUAL EXPENSES(5) (AS A PERCENTAGE OF AVERAGE NET ASSETS) Management Fees.......................... 0.45% 0.75% 0.553% 0.613% 0.98% Other Expenses........................... 0.06% 0.05% 0.037% 0.047% 0.28% ----------- ----------- --------- ----------- ------ Total Portfolio Annual Expenses.......... 0.51% 0.80% 0.59% 0.66% 1.26% ----------- ----------- --------- ----------- ------ ----------- ----------- --------- ----------- ------ </TABLE> (1) In addition to the Contract Owner transaction expenses reflected in the table, an Interest Rate Factor Adjustment is applied to the amount of General Account Balance under the Contract subject to full or partial Surrender during the Accumulation Period, and on the Annuity Income Date (if the General Account Balance is applied to a Variable Annuity Option), unless the amount surrendered is a Free Surrender Amount, or the Surrender is made during a Window Period (the Adjustment does not apply to Contracts issued to Pennsylvania residents). The Interest Rate Factor Adjustment may increase or decrease the General Account Balance Surrender proceeds. 10 <PAGE> (2) Prior to May 1, 1996, the Money Market Sub-Account was invested in the Money Market Portfolio of the Panorama Fund. The management fee, other expenses and total portfolio annual expenses for the Money Market Portfolio for the fiscal year ended December 31, 1995 were 0.50%, 0.07% and .0.57%, respectively. On May 1, 1996, after receiving an order from the SEC approving the transaction C.M. Life redeemed the shares of the Money Market Portfolio of the Panorama Fund and purchased shares of the Money Fund of OVAF with the proceeds. (3) Prior to May 1, 1996, the Government Securities and Income Sub-Accounts of the Separate Account were invested in the corresponding Portfolios of the Panorama Fund. The management fee, other expenses and total portfolio annual expenses for the fiscal year ended December 31, 1995 for the Government Securities Portfolio were 0.554%, 0.156% and 0.71%, respectively and for the Income Portfolio were 0.59%, 0.06%, and 0.65%, respectively. On May 1, 1996, after receiving an order from the SEC approving the transaction, C.M. Life redeemed the shares of the Government Securities and Income Portfolios of the Panorama Fund and purchased shares of the Bond Portfolio of OVAF with the proceeds. Immediately following the substitution, the assets of the Government Securities Sub-Account were transferred to the Income Sub-Account, thereby consolidating the Government Securities Sub-Account into the Income Sub-Account. (4) The Surrender Charge is not applicable after the fifth anniversary of the Contract Issue Date. (5) The Portfolio expenses are actual expenses for each Portfolio for the fiscal year ended December 31, 1995. 11 <PAGE> EXAMPLES The Contract Owner would pay the following expenses on a $1,000 investment, assuming a 5% annual return on assets (and assuming the entire Contract Balance is allocated to the Separate Account). 1. If the Contract is surrendered at the end of the applicable time period: <TABLE> <CAPTION> 1 YEAR 3 YEARS 5 YEARS 10 YEARS ------ ------- ------- -------- <S> <C> <C> <C> <C> Money Market Sub-Account.................... $69.84 $106.03 $ 97.03 $210.49 Income Sub-Account.......................... $72.73 $114.80 $112.55 $242.24 Total Return Sub-Account.................... $70.64 $108.46 $101.33 $219.34 Growth Sub-Account.......................... $71.34 $110.57 $105.08 $227.03 International Equity Sub-Account............ $77.32 $128.60 $136.78 $290.72 </TABLE> 2. If the Contract is not surrendered or annuitized: <TABLE> <CAPTION> 1 YEAR 3 YEARS 5 YEARS 10 YEARS ------ ------- ------- -------- <S> <C> <C> <C> <C> Money Market Sub-Account.................... $18.21 $ 56.39 $ 97.03 $210.49 Income Sub-Account.......................... $21.25 $ 65.61 $112.55 $242.24 Total Return Sub-Account.................... $19.05 $ 58.94 $101.33 $219.34 Growth Sub-Account.......................... $19.78 $ 61.16 $105.08 $227.03 International Equity Sub-Account............ $26.08 $ 80.12 $136.78 $290.72 </TABLE> The above table and examples are intended to assist the Contract Owner in understanding the costs and expenses that will be borne, directly or indirectly, by Purchase Payments allocated to the Separate Account. The table and examples reflect the charges and expenses anticipated for the Separate Account and reflect the actual expenses for each Portfolio for the 1995 fiscal year. For a more complete description of the various charges and expenses described in the table and examples, see "Charges and Deductions," page , and the prospectus for each Fund. In addition to the expenses listed above, Premium Taxes may be applicable. THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN. 12 <PAGE> PANORAMA PLUS SEPARATE ACCOUNT OF C.M. LIFE INSURANCE COMPANY CONDENSED FINANCIAL INFORMATION The audited financial statements for the year ended December 31, 1995 and the period from inception (May 13, 1992) to December 31, 1995 are included in the Statement of Additional Information, which is incorporated by reference in this Prospectus. ACCUMULATION UNIT VALUES <TABLE> <CAPTION> DEC. 31, DEC. 31, DEC. 31, DEC. 31, 1992(A) 1992 1993 1994 1995 --------- --------- --------- ---------- ---------- <S> <C> <C> <C> <C> <C> SUB-ACCOUNT Money Market $1.000000 $1.012022 $1.027456 $1.054570 $1.100599 Government Securities(b) $1.000000 $1.061901 $1.158653 $1.095471 $1.281804 Income $1.000000 $1.060916 $1.174260 $1.114759 $1.306525 Total Return $1.000000 $1.058946 $1.217379 $1.186187 $1.460595 Growth $1.000000 $1.064372 $1.276534 $1.258146 $1.711382 International Equity $1.000000 $0.950887 $1.146031 $1.145014 $1.251930 ACCUMULATION UNITS OUTSTANDING Money Market 681,553 3,136,932 13,603,045 16,949,501 Government Securities(b) 2,152,739 8,444,505 11,994,574 13,726,057 Income 2,564,029 12,281,025 16,488,930 20,617,764 Total Return 12,316,597 71,182,538 147,324,713 194,679,349 Growth 2,798,378 19,370,204 49,636,052 83,371,008 International Equity 742,623 5,578,969 22,419,639 31,322,974 </TABLE> (a) Commencement of operations for the Sub-Accounts occurred on May 13, 1992. (b) Prior to May 1, 1996, the Government Securities Sub-Account was offered as part of the Separate Account and, accordingly, is included in the Condensed Financial Information and financial statements. However, the Government Securities Sub-Account is no longer available for investment. RIGHT TO RETURN THE CONTRACT No Surrender Charge will be applied if the Contract Owner returns the Contract to the Annuity Service Center for cancellation during the first fifteen (15) calendar days following the Contract Issue Date (or a longer period, if required by law). Upon return of the Contract during this period, C.M. Life will refund the Separate Account Balance and any Purchase Payments made to the General Account. If required by state law, C.M. Life will refund all Purchase Payments received upon cancellation of the Contract. FEDERAL INCOME TAX CONSEQUENCES OF INVESTMENT IN THE CONTRACT With respect to Contract Owners who are natural persons, there should be no federal income tax on increases in the Contract Balance (if any) until a distribution under the Contract occurs (E.G., a Surrender or Annuity Income payment) or is deemed to occur (E.G., a pledge or assignment of a Contract). Generally, a portion of any distribution or deemed distribution will be taxable as ordinary income. The taxable portion of certain distributions will be subject to withholding unless the recipient elects otherwise. In addition, a penalty tax may apply to certain distributions or deemed distributions under the Contract. (See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES," page .) 13 <PAGE> INQUIRIES AND WRITTEN NOTICES AND REQUESTS Any questions about procedures or the Contract, or any Written Request required to be directed to C.M. Life, should be sent to Annuity Service Center, 140 Garden Street, Mail Station 305, Hartford, CT 06154. Telephone requests and inquiries may be made by calling 1-800-234-5606. All inquiries and Written Requests should include the Contract number, the Contract Owner's name and the Annuitant's name. VARIATIONS IN CONTRACT PROVISIONS Certain provisions of the Contracts may vary from the descriptions in this Prospectus in order to comply with different state laws. Any such variations will be included in the Contract itself or in riders or endorsements. Note: The foregoing summary is qualified in its entirety by the detailed information in the remainder of this Prospectus, in the Statement of Additional Information, in the prospectus for each Fund, and in the Contract, all of which should be referred to for more detailed information. This Prospectus generally describes only the Contract, the Separate Account and the General Account. A separate prospectus attached hereto describes each Fund. C.M. LIFE INSURANCE COMPANY C.M. Life, 140 Garden Street, Hartford, Connecticut 06154, is a stock life insurance company. It was chartered by a special Act of the Connecticut General Assembly on April 25, 1980. It is principally engaged in the sale of life insurance and annuities, and is licensed in all states except New York. C.M. Life is a wholly-owned subsidiary of Massachusetts Mutual Life Insurance Company ("MassMutual"). MassMutual is a mutual life insurance company specially chartered by the Commonwealth of Massachusetts on May 14, 1851. It is currently licensed to transact life (including variable life), accident, and health insurance business in all states, the District of Columbia and certain provinces of Canada. As of March 1, 1996, MassMutual had total assets of $50 billion. Prior to February 29, 1996, C.M. Life was a wholly-owned subsidiary of Connecticut Mutual Life Insurance Company ("Connecticut Mutual"). On February 29, 1996, Connecticut Mutual merged with and into MassMutual. Connecticut Mutual was a mutual life insurance company originally chartered by a special act of the Connecticut General Assembly in 1846. Upon the merger, Connecticut Mutual's existence ceased and MassMutual became the surviving company under the name Massachusetts Mutual Life Insurance Company. In approving the merger, the boards of directors of MassMutual and Connecticut Mutual determined that the merger would result in a combined company that would be stronger and more efficient and therefore more competitive than either MassMutual or Connecticut Mutual alone. On January 26, 1996, 95.76% of the policyholders of MassMutual and 95.75% of the insured of MassMutual, each voting as a separate class, voted to approve the merger. On January 27, 1996, 94.0% of the policyholders of Connecticut Mutual and 94.27% of the members of Connecticut Mutual, each voting as a separate class, voted to approved the merger. In addition, the Connecticut Insurance Department and the Massachusetts Division of Insurance approved the merger. The merger did not affect any provisions of, or rights or obligations under, the Contracts issued by C.M. Life. For more information about C.M. Life, see "ADDITIONAL INFORMATION ABOUT C.M. LIFE," page . 14 <PAGE> THE PANORAMA PLUS ANNUITY CONTRACT The Panorama Plus Annuity Contract is an individual and group Flexible Premium Deferred Annuity Contract. In certain states the Contract is only available as a group contract. In these states, a Certificate (also referred to herein as a "Contract"), which summarizes the provisions of the group contract under which the Certificate is issued, is issued to individuals. The rights and benefits under the Contract are summarized below. However, the description of the Contract contained in this Prospectus is qualified in its entirety by the Contract itself, a copy of which is available upon request from C.M. Life. The Contract may be purchased on a non-tax-qualified basis ("Non-qualified Contract"). The Contract may also be purchased and used in connection with retirement plans or individual retirement accounts that qualify for favorable federal income tax treatment ("Qualified Contract"). Group contracts may be issued to any employer, entity, or other group acceptable to C.M. Life. An eligible member of a group to which a group contract has been issued may become a participant by completing an Application and forwarding an initial Purchase Payment to C.M. Life. The rights and benefits of a participant under a group contract are summarized in a certificate issued to the participant. Provisions of the group contract are controlling. All rights and benefits may be exercised by the participant without the consent of the group contract owner. Unless otherwise stated, the rights and benefits of an owner of an Individual Panorama Plus Annuity and an owner of a certificate under a group Panorama Plus Annuity are the same. Accordingly, as used herein, the term "Contract" means either an individual annuity or a certificate under a group annuity, depending on the state where it is issued. THERE IS NO GUARANTEED OR MINIMUM SURRENDER VALUE UNDER THE CONTRACT, SO THE AMOUNT RECEIVED ON SURRENDER COULD BE LESS THAN THE AMOUNT OF PURCHASE PAYMENTS. CONTRACT APPLICATION AND ISSUANCE OF CONTRACTS Before it will issue a Contract, C.M. Life must receive a completed Application and an initial Purchase Payment of at least $500. From time to time, this initial Purchase Payment may be reduced. C.M. Life reserves the right to reject any Application or Purchase Payment. If the Application is properly completed and can be accepted in the form received, any initial Net Purchase Payment will be credited to the Contract Balance within two (2) business days after the later of receipt of the Application or receipt of the initial Purchase Payment at the Annuity Service Center. (The Net Purchase Payment is the total Purchase Payment less any applicable Premium Tax.) If the initial Net Purchase Payment allocated to the Separate Account cannot be credited because the Application or other issuing requirements are incomplete, the applicant will be contacted within five (5) business days and given an explanation for the delay, and the initial Purchase Payment will be returned at that time unless the applicant consents to C.M. Life's retaining the initial Purchase Payment and crediting it as soon as the necessary requirements are fulfilled. The date on which the initial Net Purchase Payment is credited to the Contract Balance is the Contract Issue Date. The Contract Issue Date is the date used to determine Contract Years and Contract anniversaries. The Contract Owner may return the Contract for cancellation during the first fifteen (15) calendar days following the Contract Issue Date (or a longer period, if required by law). Upon return of the Contract, C.M. Life will refund the Separate Account Balance (as of the date the returned Contract and cancellation request are received in good order at the Annuity Service Center) and any Purchase Payments allocated to the General Account. For Contracts issued in the States of North Carolina, South Carolina or Washington, C.M. Life will refund all Purchase Payments received upon cancellation of the Contract during this period. ELECTRONIC DATA TRANSMISSION OF APPLICATION INFORMATION. C.M. Life will accept, by agreement with certain broker-dealers, electronic data transmissions of Application information, along with wire transmittals of 15 <PAGE> initial Purchase Payments, from these broker-dealers to the Annuity Service Center for purchase of the Contract. Please contact the Annuity Service Center to receive more information about electronic data transmission of Application information. PURCHASE PAYMENTS All Purchase Payment checks or drafts should be made payable to C.M. Life Insurance Company and sent to the Annuity Service Center. INITIAL PURCHASE PAYMENT. The minimum initial Purchase Payment that C.M. Life currently will accept under a Contract is $500. C.M. Life reserves the right to increase or decrease this amount for Contracts issued after some future date. The initial Purchase Payment is the only Purchase Payment required to be paid under a Contract. However, this initial Purchase Payment may be waived in the case of certain salary reduction/employer contribution arrangements or Automatic Investment Plans, in which case the minimum contribution will be $40 per month per participant. ADDITIONAL PURCHASE PAYMENTS. Before a Death Benefit has become payable and prior to the Annuity Income Date, the Contract Owner may make additional Purchase Payments at any time, and in any frequency. The minimum additional Purchase Payment is $50. If the Annuitant is age 76 or older as of the Contract Issue Date, cumulative Purchase Payments under the Contract may not exceed $500,000. If the Annuitant is younger than age 76 as of the Contract Issue Date, cumulative Purchase Payments may not exceed $1,000,000 without the prior consent of C.M. Life. ALLOCATION OF PURCHASE PAYMENTS. The Contract Owner must allocate Purchase Payments to one or more of the Sub-Accounts or to the General Account, or some combination thereof. The Contract Owner must specify the initial allocation in the Application. This allocation will be used for additional Purchase Payments unless the Contract Owner requests a change of allocation. If the Contract Owner fails to specify how Purchase Payments are to be allocated, the Purchase Payment(s) cannot be accepted. Additional Purchase Payments allocated to the Separate Account will be credited to the Contract and added to the Contract Balance as of the Valuation Period when they are received. Purchase Payments allocated to the General Account will be credited with interest from the day after deposit. After the first Contract Year, the Purchase Payments allocated to the General Account during any Contract Year may not exceed the greater of: (i) 125% of the average annual Purchase Payments allocated to the General Account during the last five (5) full Contract Years (or all years, if less than five (5)); or (ii) $25,000. This restriction does not apply during the Window Period. The Contract Owner may change the allocation instructions for future Purchase Payments by sending a Written Request, signed by such Contract Owner, to the Annuity Service Center. The allocation change will apply to Purchase Payments received with the Written Request and after the Valuation Period in which the Written Request is received. PAYMENT NOT HONORED BY BANK. Any payment due under the Contract which is derived, all or in part, from any amount paid to C.M. Life by check or draft may be postponed until such time as C.M. Life determines that such check or draft has been honored. CONTRACT BALANCE On the Contract Issue Date, the accepted Contract Balance equals the initial Net Purchase Payment. Thereafter, the Contract Balance equals the sum of the Separate Account Balance and the General Account Balance. The Contract Balance will increase by (1) any additional Purchase Payments accepted by C.M. Life, and (2) any increases in the Contract Balance due to investment results of the selected Investment Account or Sub-Account. The Contract Balance will decrease by (1) any Surrenders, including applicable charges, 16 <PAGE> (2) any decreases in the Contract Balance due to investment results of the selected Sub-Accounts, and (3) charges imposed by C.M. Life. The Interest Rate Factor Adjustment imposed upon partial Surrenders may also increase or decrease the remaining Contract Balance. The Contract Balance is expected to change from Valuation Period to Valuation Period, reflecting the investment experience of the selected Sub-Account(s), as well as deductions for charges. A Valuation Period is the period between successive Valuation Dates. It begins at the close of business on each Valuation Date and ends at the close of business on the next succeeding Valuation Date. Holidays are generally not Valuation Dates. THE SEPARATE ACCOUNT BALANCE. When a Net Purchase Payment is allocated to, or an amount is transferred to, a Sub-Account of the Separate Account, it is credited to the Contract in the form of Accumulation Units. Each Sub-Account of the Separate Account has a distinct Accumulation Unit value. The number of Accumulation Units credited is determined by dividing the Net Purchase Payment, or amount transferred, by the dollar value of one Accumulation Unit of the Sub-Account as of the end of the Valuation Period during which the allocation is made. When amounts are transferred out of, or Surrendered from, a Sub-Account, Accumulation Units are cancelled or redeemed in a similar manner. For each Sub-Account, the Accumulation Unit value for a given Valuation Period is based on the net asset value of a share of the corresponding Portfolio of Series Fund I. Therefore, the Accumulation Units will fluctuate in value from day to day based on the investment experience of the corresponding Portfolio, and the Separate Account Balance will decrease or increase to reflect the investment performance of the corresponding Portfolio. The Separate Account Balance also reflects expenses borne by the Portfolio(s) and the deduction of certain charges. The determination of Sub-Account Accumulation Unit values is described in detail in the Statement of Additional Information. THE GENERAL ACCOUNT BALANCE. When a Net Purchase Payment is allocated or an amount is transferred to the General Account, it is credited to the General Account Balance. In addition, interest at a specified interest rate is credited to the General Account Balance. When amounts are transferred out of, or Surrendered from, the General Account, the General Account Balance is reduced accordingly. Unlike the Separate Account, there are no Accumulation Units in the General Account. (See "The General Account," page .) MINIMUM CONTRACT BALANCE. A minimum Contract Balance of $250 must be maintained during the Accumulation Period. If the Contract Owner fails to maintain the minimum Contract Balance, then C.M. Life may, upon sixty (60) days notice, terminate the Contract, and return the Contract Balance, minus any applicable fees or charges, to the Contract Owner. If the Contract Owner makes sufficient Purchase Payments to restore the Contract Balance to the minimum Contract Balance within sixty (60) days of the date of notice, the Contract will continue in force. PANORAMA PLUS INVESTMENT ACCOUNTS Purchase Payments paid under a Contract may be allocated to one or more of the five Sub-Accounts of the Separate Account, to the General Account, or to a combination of these Investment Accounts. There is no guaranteed or minimum Surrender Value for any Purchase Payments, or with respect to amounts allocated to any Investment Account. THE SEPARATE ACCOUNT PANORAMA PLUS SEPARATE ACCOUNT. The Panorama Plus Separate Account of C.M. Life Insurance Company (the "Separate Account") was established as a separate account under the laws of the State of Connecticut, on September 25, 1991. The Separate Account will receive and invest the Net Purchase Payments under the Contracts that are allocated to it as well as amounts transferred to it in shares of two 17 <PAGE> mutual funds ("Funds"): the Panorama Series Fund, Inc. (the "Panorama Fund") (formerly known as Connecticut Mutual Financial Services Series Fund I, Inc.) and the Oppenheimer Variable Account Funds ("OVAF"). The Separate Account currently is divided into five (5) Sub-Accounts. Additional Sub-Accounts may be established in the future at the discretion of C.M. Life. Each Sub-Account invests exclusively in shares of a corresponding Portfolio of the Funds. Prior to May 1, 1996, the Money Market Sub-Account, the Government Securities Sub-Account and the Income Sub-Account were invested in shares of the corresponding Portfolios of the Panorama Fund. On May 1, 1996, after receiving an order from the SEC approving the transaction, C.M. Life redeemed the shares of the Money Market Portfolio held by the Money Market Sub- Account and purchased shares of the Money Portfolio with the proceeds. On that date, C.M. Life also redeemed shares of the Government Securities Portfolio and the Income Portfolio held by the Government Securities and Income Sub-Accounts and purchased shares of the Bond Portfolio with the proceeds. Immediately following the substitution of shares, the assets of the Government Securities Sub-Account were transferred to the Income Sub-Account, thereby consolidating the Government Securities Sub-Account into the Income Sub-Account. The portfolio substitutions and sub-account consolidation took place at net asset value with no change in the amount of any Contract Owner's death benefit or dollar value of his or her investment in the Separate Account. C.M. Life and its affiliates did not receive any compensation or remuneration as a result of this transaction. Under Connecticut law, the assets of the Separate Account are owned by C.M. Life, but they are held separately from the other assets of C.M. Life, and are not chargeable with liabilities incurred in any other business operation of C.M. Life (except to the extent that assets in the Separate Account exceed the reserves and other liabilities of the Separate Account). Income, gains, and losses incurred on the assets in the Sub-Accounts of the Separate Account, whether or not realized, are credited to or charged against that Sub-Account, without regard to other income, gains or losses of any other Investment Account or Sub-Account of C.M. Life. Therefore, the investment performance of any Sub-Account is entirely independent of the investment performance of C.M. Life's general account assets or any other separate account maintained by C.M. Life. The Contract Owner bears the entire investment risk with respect to the Contract Balance allocated to the Separate Account, and the Separate Account Balance will be more or less than the total of the Net Purchase Payments allocated to, and transfers into, the Separate Account. The Separate Account is registered with the Securities and Exchange Commission (the "SEC") under the Investment Company Act of 1940, as amended, (the "1940 Act") as a unit investment trust. It meets the definition of a "separate account" under the federal securities laws. However, the SEC does not supervise the management or the investment practices or policies of the Separate Account or of C.M. Life. THE FUNDS. The Separate Account will invest exclusively in shares of the Panorama Fund and OVAF ("Funds"), each of which is a series-type mutual fund registered with the SEC under the "1940 Act" as an open-end, diversified management investment company. In addition to the Money Portfolio and Bond Portfolio of OVAF, three (3) Portfolios of the Panorama Fund are currently available under the Contract: the Total Return Portfolio, the Growth Portfolio, and the International Equity Portfolio. The assets of each Portfolio are held separately from the assets of the other Portfolios, and each Portfolio has its own distinct investment objective and policies. Each Portfolio operates as a separate investment fund, and the income or losses of one Portfolio have no effect on the investment performance of any other Portfolio. 18 <PAGE> The investment objective of each of the available Portfolios is stated as follows: <TABLE> <S> <C> Money Seeks the maximum current income from investments in "money market" Portfolio securities consistent with low capital risk and the maintenance of liquidity. There can be no assurance that the Money Portfolio will maintain a stable net asset value per share of $1, and the Money Portfolio is not insured or guaranteed by the U.S. Government. Bond Seeks a high level of current income from investments in high-yield, Portfolio fixed-income securities rated "Baa" or better by Moody's or "BBB" or better by Standard & Poor's. As a secondary investment objective, the Bond Fund seeks capital growth when consistent with its primary objective. Total Return Seeks to maximize the total investment return (including capital Portfolio appreciation and income) by allocating its assets among stocks, corporate bonds, securities issued by the U.S. Government and its instrumentalities, and money market instruments according to changing market conditions. Growth Seeks long-term growth of capital by investing primarily in common stocks Portfolio with low price-earnings ratios and better than anticipated earnings. Realization of income is a secondary consideration. International Seeks to provide long-term growth of capital by investing, under normal Equity market conditions, at least 90% of its assets in equity securities (such as Portfolio common stocks) of companies whose primary stock market is outside the U.S. </TABLE> OppenheimerFunds, Inc. ("OFI"), an investment adviser registered with the SEC under the Investment Advisers Act of 1940, as amended, ("Investment Advisers Act") is the investment adviser to the Funds. OFI has operated as an investment adviser since 1959 and, including a subsidiary, manages investment companies with more than $50 billion in assets and nearly 3 million shareholder accounts. OFI is owned by Oppenheimer Acquisition Corp., a holding company that is owned in part by senior officers of OFI and controlled by MassMutual. The address of OFI is Two World Trade Center, New York, NY 10048-0203. Babson-Stewart Ivory International ("Babson-Stewart") provides sub-advisory services to the International Equity Portfolio pursuant to a sub-advisory agreement between Babson-Stewart and OFI. Babson-Stewart is located at One Memorial Drive, Cambridge, MA 02142, and is a parntership formed in 1987 between David L. Babson & Co., Inc., a subsidiary of MassMutual, and Stewart Ivory & Co., Ltd., located in Edinburgh, Scotland. THERE IS NO ASSURANCE THAT ANY PORTFOLIO WILL ACHIEVE ITS STATED OBJECTIVE. MORE DETAILED INFORMATION, INCLUDING A DESCRIPTION OF EACH PORTFOLIO'S INVESTMENT OBJECTIVE AND POLICIES AND A DESCRIPTION OF RISKS INVOLVED IN INVESTING IN EACH OF THE PORTFOLIOS AND OF EACH PORTFOLIO'S FEES AND EXPENSES IS CONTAINED IN THE PROSPECTUS FOR THE FUNDS, A CURRENT COPY OF WHICH IS ATTACHED TO THIS PROSPECTUS. INFORMATION CONTAINED IN THE PROSPECTUSES FOR THE FUNDS SHOULD BE READ CAREFULLY BEFORE MAKING ALLOCATIONS TO A SUB-ACCOUNT OF THE SEPARATE ACCOUNT. THE GENERAL ACCOUNT The General Account is made up of all of the assets of C.M. Life other than those allocated to any separate account. Purchase Payments will be allocated to the General Account to the extent elected by the Contract Owner at the time of the initial Purchase Payment or as subsequently elected. In addition, all or part of the Separate Account Balance may be transferred to the General Account as described under "Transfers." Assets supporting amounts allocated to the General Account become part of C.M. Life's general account assets and are available to fund the claims of all classes of customers, policy owners and other creditors of C.M. Life. Interests under the Contract relating to the General Account are registered under the Securities Act of 1933, as amended, ("1933 Act") but the General Account is not registered under the 1940 Act. 19 <PAGE> Contract Balances in the General Account will not share in the investment performance of the General Account or any portion thereof. Instead, C.M. Life will pay a specified rate of interest on such balance. The interest rate credited to General Account Balances will vary at the sole discretion of C.M. Life. The Contract Owner should check with his or her agent or the Annuity Service Center for current availability. However, C.M. Life will credit interest at an effective annual rate of not less than 3% per year, compounded annually, to amounts allocated to the General Account under the Contract. C.M. Life is not obligated to credit any interest in excess of 3%. There is no specific formula for the determination of the interest rate. Some of the factors that C.M. Life may consider in determining the interest rate are: general economic trends; rates of return currently available and anticipated on C.M. Life's investments; expected investment yields; regulatory and tax requirements; and competitive factors. C.M. Life may, with respect to investments and average terms of investments, use dedication (cash flow matching), and/or duration matching, or other methods to minimize C.M. Life's risk in volatile interest rate environments of not achieving the rates it is crediting. ANY INTEREST CREDITED TO AMOUNTS ALLOCATED TO THE GENERAL ACCOUNT IN EXCESS OF 3% PER YEAR WILL BE DETERMINED AT THE SOLE DISCRETION OF C.M. LIFE. THE CONTRACT OWNER ASSUMES THE RISK THAT INTEREST CREDITED ON AMOUNTS ALLOCATED TO THE GENERAL ACCOUNT MAY NOT EXCEED 3% PER YEAR. C.M. Life resets this rate periodically. It currently resets the rate quarterly, but in the future the rate may be reset more or less frequently. The Contract Owner also assumes the risk that the Surrender Value of amounts allocated to the General Account will be less than the General Account Balance, and less than the Net Purchase Payments allocated to the General Account. C.M. Life is aware of no statutory limitations on the maximum amount of interest it may credit, and the Board of Directors has set no limitations. However, inherent in C.M. Life's exercise of discretion in this regard is the equitable allocation of distributable earnings and surplus among its various policyholders and Contract Owners and to its sole stockholder. Surrenders of General Account Balances may be subject to an Interest Rate Factor Adjustment (as well as a Surrender Charge), so Surrender proceeds may be less than Purchase Payments. The Interest Rate Factor Adjustment may also apply to any General Account Balance applied to Variable Annuity Income payments. The Adjustment does not apply to Contracts issued to Pennsylvania residents. For more information, see "Surrender Charge," page , and "Interest Rate Factor Adjustment," page . C.M. Life will invest the assets of the General Account in those assets chosen by C.M. Life and allowed by applicable state laws regarding the nature and quality of investments that may be made by life insurance companies, and the percentage of their assets that may be committed to any particular type of investment. In general, these laws permit investments, within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, preferred and common stocks, real estate mortgages, real estate and certain other investments. C.M. Life intends to invest assets of the General Account primarily in debt instruments as follows: (1) securities issued by the United States Government or its agencies or instrumentalities, which issues may or may not be guaranteed by the United States Government; (2) debt securities which have an investment grade, at the time of purchase, within the four highest grades assigned by Moody's Investors Services, Inc. ("Moody's") (Aaa, Aa, A or Baa), Standard & Poor's Corporation ("Standard & Poor's) (AAA, AA, A or BBB) or any other nationally recognized rating service; and (3) other debt instruments, including, but not limited to, issues of or guaranteed by banks or bank holding companies and corporations, which obligations, although not rated by Moody's or Standard & Poor's, are deemed by C.M. Life's management to have an investment quality comparable to securities which may be purchased as stated above. General Account assess may also be invested in: (4) other evidences of indebtedness secured by mortgages or deeds of trust representing liens upon real estate; and (5) private placements (I.E., securities not registered with the SEC, and for which there may not be a liquid market). Notwithstanding the foregoing, C.M. Life may also invest a portion of the General Account assets in (6) below investment grade debt instruments. Instruments rated "Baa" and/or "BBB" or lower normally involve a higher risk of default and are less liquid than higher rated instruments. If the rating of an investment grade debt security held by C.M. Life is subsequently downgraded 20 <PAGE> to below investment grade, the decision to retain or dispose of the security will be made based upon an individual evaluation of the circumstances surrounding the downgrading, and the prospects for continued deterioration, stabilization and/or improvement. C.M. Life is not obligated to invest amounts allocated to the General Account according to any particular strategy, except as may be required by applicable state insurance laws. Investments not indicated herein may also be made. C.M. Life may utilize a "segregated account" within its general asset account in connection with the General Account Contract Balances. Nevertheless, Contract Owners who allocate amounts to the General Account do not share in the investment performance of that segregated account or any other portion of the assets of C.M. Life. Accordingly, in contrast to the Panorama Plus Separate Account discussed above, there are no "units" or calculation of "unit values" to measure the investment performance of the General Account. (This type of segregated account is sometimes referred to as a "non-unitized separate account.") TRANSFERS The Contract Owner may transfer Contract Balance amounts to or from the General Account and/or any Sub-Account of the Separate Account, within certain limits, as described below. Although no fee is currently imposed on transfers, C.M. Life reserves the right to charge such a fee in the future, and to otherwise restrict the transfer privilege in any way, or to eliminate it entirely. DURING THE ACCUMULATION PERIOD, the Contract Owner (or the Beneficiary, if a Death Benefit has become payable) may transfer Contract Balance amounts, subject to the following provisions. - The Contract Owner signs and submits a Written Request for a transfer which is received by the Annuity Service Center. - The minimum transfer amount is $100. - The total amount of all transfers to or from the General Account during each Contract Year is limited to the greater of: (i) 30% of the General Account Balance as of the end of the immediately preceding Contract Year; or (ii) $25,000. - Transfers between the General Account and the Money Sub-Account (together, the "Competing Accounts") are only permitted during a Window Period. In addition, for a period of ninety (90) days following a transfer out of one Competing Account, no transfers (i.e., from any Account) may be made into the other Competing Account. - Similarly, for a period of ninety (90) days following a transfer into either Competing Account, no transfers (i.e., to any Account) may be made out of the other Competing Account. DURING THE ANNUITY PERIOD, the Contract Owner (who may or may not be the Annuitant) may transfer Separate Account Balance amounts, subject to the following provisions. - The Contract Owner signs and submits a Written Request for a transfer which is received by the Annuity Service Center. - Transfers to or from the General Account are not permitted during the Annuity Period. - Transfers during the Annuity Period may be made only once during any Contract Year. - Transfers between Sub-Accounts during the Annuity Period will be processed based on the formula outlined in the Statement of Additional Information. Contract Owners may elect to make transfers by telephone. To do so, the Contract Owner must submit a completed Written Request electing the telephone transfer privilege. Telephone requests must be received at the Annuity Service Center no later than 3:30 Eastern Standard Time to assure same day pricing. Telephone requests will not be accepted after that time. C.M. Life will use reasonable procedures to confirm that instructions communicated by telephone are genuine. If it does not, C.M. Life may be liable for any losses due to unauthorized or fraudulent instructions. C.M. Life may tape record all telephone instructions. 21 <PAGE> C.M. Life will not be liable for any loss, liability, cost or expense incurred by the Contract Owner for acting in accordance with such telephone instructions believed to be genuine. The telephone transfer privilege may be discontinued by C.M. Life at any time. DOLLAR COST AVERAGING To the extent provided below, amounts from Sub-Accounts and the General Account may be transferred at regular intervals. This election is called "Dollar Cost Averaging." Upon Written Request, a Contract Owner may elect Dollar Cost Averaging ("DCA") to begin at any time during the Accumulation Period, except as otherwise provided in DCA Option 2 -- Fixed Dollar Amount Transfers described below. There is currently no charge for DCA. However, the Company reserves the right to charge for DCA in the future. The Contract Owner may not simultaneously participate in both DCA and Systematic Withdrawals. (See "Systematic Withdrawals" at page .) DCA will begin when a properly completed Written Request from the Contract Owner is received by the Company at least five (5) business days prior to the transfer start date selected by the Contract Owner. If the DCA start date is less than five (5) days after the date the Written Request is received by the Company, the Company may defer the DCA start date for one (1) month. If no start date has been selected, the Company will automatically start DCA within five (5) business days after the Written Request is received. If DCA is elected, the Contract Owner may direct the transfer of amounts at regular intervals under one of the following options: DCA OPTION 1 FROM THE SUB-ACCOUNTS -- This option provides for the transfer of fixed dollar amounts at regular intervals from any one Sub-Account to one or more other Sub-Account(s), as elected by the Contract Owner. Transfers must be at least $100 per transferee Sub- Account. Transfers to the General Account are not permitted. DCA OPTIONS 2 & 3 FROM THE GENERAL ACCOUNT -- These options provide for the transfer of amounts at regular intervals from the General Account to one or more of the Sub-Accounts (other than the Money Market Sub-Account). Except during the Window Period, additional transfers from the General Account are not permitted while a DCA option 2 or 3 is in effect. DCA Options 2 and 3 are described below. DCA OPTION 2 -- FIXED DOLLAR AMOUNT TRANSFERS --This option provides for the transfer of fixed dollar amounts at regular intervals from the General Account to one or more of the Sub-Accounts (other than the Money Market Sub-Account). Transfers must be for at least $100 per transferee Sub-Account. Total transfers from the General Account are limited in the Contract Year of the initial Purchase Payment to the greater of: (i) 30% of the initial Purchase Payment; or (ii) $25,000. In subsequent Contract Years total transfers from the General Account are limited to the greater of: (i) 30% of the General Account Balance as of the end of the immediately preceding Contract Year; or (ii) $25,000. Election into this option may only be made during the Accumulation Period as follows: at the time of the initial Purchase Payment into the General Account; or, in subsequent years, on the Contract Year anniversary, provided that the Company receives the Written Request for this election at least five (5) business days in advance of such anniversary. DCA OPTION 3 -- INTEREST-ONLY TRANSFERS -- This option provides for the transfer of the credited interest of the General Account at regular intervals to one or more of the Sub-Accounts (other than the Money Market Sub-Account). The transferred amount is comprised of the credited interest for the selected interval (E.G., monthly, quarterly). The $100 minimum transfer amount does not apply to this option. To participate in this option, there is a $5,000 minimum General Account Balance required at the time of each transfer. 22 <PAGE> Changes in the terms of any option elected (such as amount transferred or Sub-Account designation) may be made by Written Request to terminate the existing DCA, along with a Written Request providing new DCA elections. DCA will terminate when any of the following occurs: (1) the number of designated transfers has been completed; (2) the value of the General Account or Sub-Account is insufficient to complete the next transfer; (3) a Written Request from the Contract Owner is received at least five (5) business days prior to the next transfer date; (4) for Option 3, where the General Account balance falls below $5,000; (5) the Annuity Income Date arrives; or (6) the Contract is terminated. Except as otherwise provided, Dollar Cost Averaging is subject to the transfer provisions of the Contract. (See "Transfers" page .) Dollar Cost Averaging is not currently available in all states. DISTRIBUTIONS UNDER THE CONTRACT SURRENDERS The Contract Owner may surrender all or a portion of the Contract Balance in exchange for a cash payment from C.M. Life. The proceeds payable upon a full Surrender are the Contract Balance less any applicable Surrender Charge, Contract Maintenance Fee, any applicable premium taxes, and plus or minus any applicable Interest Rate Factor Adjustment. The net proceeds payable upon full Surrender are the "Surrender Value." THERE IS NO MINIMUM OR GUARANTEED SURRENDER VALUE. The proceeds payable upon a partial Surrender are the Surrender amount requested; any applicable Surrender Charge is subtracted from, and any applicable Interest Rate Factor Adjustment is added to, or subtracted from, the remaining Contract Balance. There is no Surrender Charge or Interest Rate Factor Adjustment on Surrenders during a Window Period. Any Surrender Charge or Contract Maintenance Fee imposed on Surrender will be allocated among the General Account and the Sub-Accounts in the same manner (pro rata) as the Contract Balance subject to Surrender is allocated among the General Account and the Sub-Accounts. For Contracts issued to Pennsylvania residents, the Contract Maintenance Fee will be allocated pro rata among the Sub-Accounts. Any applicable Interest Rate Factor Adjustment imposed on a Surrender will be imposed only on the amount of General Account Balance subject to Surrender. For partial Surrenders, the Contract Owner must specify the Investment Account or Sub-Account from which surrendered amounts should be taken. The minimum amount that can be withdrawn from any Sub-Account or the General Account is $100. In addition, following any partial Surrender, the remaining Contract Balance must be at least $250. If the processing of a partial Surrender request would result in a remaining Contract Balance of less than $250, C.M. Life will treat the partial Surrender request as a full Surrender of the Contract, and the Surrender Value will be paid. Following payment of the Surrender Value, the Contract will be canceled. The Contract Owner may request the Contract Balance at any time during the life of the Annuitant and Contract Owner and prior to the Annuity Income Date, by sending a Written Request to the Annuity Service Center. Surrenders are permitted any time dU ring the Accumulation Period. (See "Annuity Options," page .) C.M. Life will process all partial Surrender and full Surrender requests within seven (7) calendar days (unless a shorter period is required under applicable law) following receipt by the Annuity Service Center of the Contract Owner's Written Request, except in the following situations for the following Accounts. 23 <PAGE> GENERAL ACCOUNT -- C.M. Life reserves the right to defer payment of any Surrender from the General Account for up to six (6) months. SEPARATE ACCOUNT -- C.M. Life reserves the right to defer the payment of any Surrender from the Separate Account as permitted by the 1940 Act. Such delay may occur because: (i) the New York Stock Exchange is closed for trading; (ii) the SEC determines that a state of emergency exists; or (iii) an order or pronouncement of the SEC permits a delay for the protection of Contract Owners. In addition, a Purchase Payment amount is not available to satisfy a Written Request for Surrender until the check, or other instrument by which such Purchase Payment was made, has been honored. Beginning in the second Contract Year, the Contract Owner is entitled to an annual Free Surrender Amount, which is exempt from a Surrender Charge and from any Interest Rate Factor Adjustment. The Free Surrender Amount equals 10% of the Contract Balance as of the end of the immediately preceding Contract Year, and is allocated among the General Account and Sub-Accounts in the same proportion as the partial Surrender or full Surrender requested. The Free Surrender amount may be taken in multiple installments in each Contract Year. Any amount subject to Surrender in excess of the Free Surrender Amount is subject to the Surrender Charge and the Interest Rate Factor Adjustment, as applicable. (See "Interest Rate Factor Adjustment," page and "Surrender Charge," page .) Any unused Free Surrender Amount cannot be accumulated and carried from one year to the next. (Surrenders may result in tax liabilities. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES," page .) Until April 30, 1997, no sales charges will be imposed upon redemption of a Contract where the proceeds of such redemption are applied to the purchase of a new MassMutual group annuity contract. This waiver does not eliminate applicable charges under the particular group contract, and upon surrender of the group contract, charges may apply. Since the Contract Owner assumes the entire investment risk with respect to Purchase Payments and transfers allocated to the Separate Account, and certain risks with respect to amounts allocated to the General Account, and because Surrenders are subject to a Surrender Charge, an Interest Rate Factor Adjustment, a Contract Maintenance Fee, and possibly Premium Taxes, THE TOTAL AMOUNT PAID UPON FULL SURRENDER MAY BE MORE OR LESS THAN THE TOTAL PURCHASE PAYMENTS MADE (taking any prior partial Surrenders into account). Following a Surrender of the total Contract Balance, or at any time the Contract Balance is zero, all rights of the Contract Owner and Annuitant will terminate. SYSTEMATIC WITHDRAWALS Upon Written Request, a Contract Owner may elect Systematic Withdrawals ($100 minimum per withdrawal) to begin on or after the first anniversary of the Contract Issue Date during the Accumulation Period. There is currently no charge for Systematic Withdrawals. However, the Company reserves the right to charge for Systematic Withdrawals in the future. The Contract Owner may not simultaneously participate in both Systematic Withdrawals and Dollar Cost Averaging. If Systematic Withdrawals are elected, the Contract Owner may withdraw fixed dollar amounts at regular intervals from the Contract Balance. Systematic Withdrawals will begin when a properly completed Written Request from the Contract Owner is received by the Company, at least five (5) business days prior to the Systematic Withdrawals start date selected by the Contract Own. If the Systematic Withdrawals start date is less than five (5) days after the date the Written Request is received by the Company, the Company may defer the Systematic Withdrawals start date for one (1) month. If no start date has been selected, the Company will automatically start Systematic Withdrawals within five (5) business days after the Written Request is received. 24 <PAGE> Changes in Systematic Withdrawals may only be made by Written Request from the Contract Owner to terminate the existing Systematic Withdrawals election along with a Written Request designating a new Systematic Withdrawals election. Systematic Withdrawals will terminate when any of the following occurs: (1) the number of designated Systematic Withdrawals has been completed; (2) the value of the General Account or Sub-Account is insufficient to complete the next withdrawal; (3) Written Request from the Contract Owner is received at least five (5) business days prior to the next withdrawal date; (4) the Annuity Income Date arrives; or (5) the Contract is terminated. Withdrawals in excess of the Free Surrender Amount may be subject to any applicable Surrender Charge and Interest Rate Factor Adjustment. (See "Surrenders," page .) Further, withdrawals may result in tax liabilities. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES," page . The Systematic Withdrawals plan is not currently available in all states. ANNUITY INCOME PAYMENTS C.M. Life will pay an Annuity Income beginning on the Annuity Income Date, provided no Death Benefit has become payable, and the Contract Owner has selected an available Annuity Option and payment schedule by Written Request. The Annuity Option and frequency of Annuity Income payments may not be changed after Annuity Income payments begin. Unless the Contract Owner specifies otherwise, the payee of the Annuity Income is the applicable Annuitant. After the death of the Annuitant, any remaining payments will be made to the Beneficiary. The dollar amount and frequency of the payments will depend on numerous factors, such as the Contract Balance, the type of Annuity and Annuity Option elected, possibly age and sex, and any applicable Interest Rate Factor Adjustment. ANNUAL INCOME DATE. Initially, the Annuity Income Date is selected by the Contract Owner at the time the Application is completed. The Annuity Income Date may be changed from time to time by the Contract Owner by Written Request to C.M. Life, provided that notice of each change is received by C.M. Life at its Annuity Service Center at least thirty (30) days prior to the then-current Annuity Income Date. Except as otherwise permitted by C.M. Life, an Annuity Income Date must be a date which is no earlier than the fifth anniversary of the Contract Issue Date. The latest Annuity Income Date which may be elected is the Annuitant's 90th birthday (unless a longer period is required under applicable state law). ELECTION OF ANNUITY OPTION. The Contract Owner will choose an Annuity Option in the Application. During the lifetime of the Annuitant and Contract Owner and prior to the Annuity Income Date, the Contract Owner may change the election, but a Written Request specifying a change of election must be received by C.M. Life at its Annuity Service Center at least thirty (30) days prior to the Annuity Income Date. If no election is made at least thirty (30) days prior to the Annuity Income Date, Annuity Income will be paid under Option B, life income with 120 monthly payments guaranteed. (See "Annuity Options," page .) If the Annuitant or Contract Owner dies prior to the Annuity Income Date, the Beneficiary may receive a Death Benefit. (See "Death Benefit," page .) 25 <PAGE> PREMIUM TAX. C.M. Life may be required by state law to pay a Premium Tax on the amount applied to an Annuity Option (or upon Surrender). If so, C.M. Life will deduct the Premium Tax before applying (or paying) the proceeds. ANNUITY OPTIONS The Contract provides six (6) Annuity Options which are described below. Five (5) of these are offered as EITHER a Fixed Annuity or a Variable Annuity (Option E is only available as a Fixed Annuity). Contract Owners may elect a Fixed Annuity, a Variable Annuity, or a combination of both. If the Contract Owner elects a combination, he must specify what part of the Contract Balance is to be applied to the Fixed and Variable Options. Unless specified otherwise, the General Account Balance will be used to provide a Fixed Annuity, and the Separate Account Balance will be used to provide a Variable Annuity. (If the General Account Balance is used to provide Variable Annuity Income payments, then the Interest Rate Factor Adjustment will be applied at that time.) Variable Annuity income payments will be based on the Sub-Account(s) selected by the Contract Owner, or on the allocation of the Separate Account Balance among the Sub-Accounts. If the amount of the Annuity Income will depend on the age or sex of the Annuitant, C.M. Life reserves the right to ask for satisfactory proof of the Annuitant's (and Joint Annuitant's) age and sex. C.M. Life may delay Annuity Income payments until satisfactory proof is received. On the Annuity Income Date, the sum of: (i) the General Account Balance (adjusted by the Interest Rate Factor Adjustment to the extent that the General Account Balance is applied to a Variable Annuity Option); and (ii) the Separate Account Balance; minus (iii) any Premium Tax, will be applied to provide for Annuity Income payments under the selected Annuity Option. A FIXED ANNUITY provides for Annuity Income payments which will remain constant pursuant to the terms of the Annuity Option elected. The effect of choosing a Fixed Annuity is that the amount of each payment will be set on the Annuity Income Date and will not change. If a Fixed Annuity is selected, the Separate Account Balance used to provide the Fixed Annuity will be transferred to the general assets of C.M. Life, and the Annuity Income payments will be fixed in amount by the Fixed Annuity provisions selected, and, for some options, the age and sex (if consideration of sex is allowed) of the Annuitant. The Fixed Annuity payment amounts are determined by applying the Annuity Purchase Rate specified in the Contract to the portion of the Contract Balance allocated to the Fixed Annuity Option selected by the Contract Owner. A VARIABLE ANNUITY provides for payments that fluctuate or vary in dollar amount, based on the investment performance of a Separate Account Sub-Account. The Variable Annuity purchase rate tables in the Contract reflect an assumed interest rate of 4%, so if the actual net investment performance of the Sub- Account is less than this rate, then the dollar amount of the actual Annuity Income payments will decrease. If the actual net investment performance of the Sub-Account is higher than this rate, then the dollar amount of the actual Annuity Income payments will increase. If the net investment performance exactly equals the 4% rate, then the dollar amount of the actual Annuity Income payments will remain constant. ANNUITY UNITS AND PAYMENTS. The dollar amount of each Variable Annuity payment depends on the number of "Annuity Units" credited to that Annuity Option and the value of those units. The number of Annuity Units is determined as follows. 1. The number of Annuity Units credited in each Sub-Account will be determined by dividing the product of the portion of the Contract Balance to be applied to the Sub-Account and the Annuity Purchase Rate specified in the Contract by the value of one Annuity Unit in that Sub-Account on the Annuity Income Date. 26 <PAGE> 2. The amount of each Annuity Income payment equals the product of the Annuitant's number of Annuity Units and the Annuity Unit Values on the payment date. The amount of each payment may vary from prior Annuity Income payments. ANNUITY UNIT VALUE. The value of an Annuity Unit in a Sub-Account on a ny Valuation Date is determined as follows. 1. The Net Investment Factor for the Valuation Period (for the appropriate Annuity Income payment frequency) just ended is multiplied by the value of the Annuity Unit for the Sub-Account on the preceding Valuation Date. 2. The result in (1) is then divided by an interest factor. The interest factor equals 1.00 plus the interest rate for the number of days since the preceding Valuation Date. Interest is based on an effective annual rate of 4%. This compensates for the interest assumption built into the Annuity Purchase Rates. The Contract Owner may choose to receive Annuity Income payments under any one of the Annuity Options described below. The Company may consent to other plans of payment before the Annuity Income Date. NOTE CAREFULLY: UNDER ANNUITY OPTIONS A AND C, IT WOULD BE POSSIBLE FOR ONLY ONE (1) ANNUITY INCOME PAYMENT TO BE MADE IF THE ANNUITANT WERE TO DIE BEFORE THE DUE DATE OF THE SECOND ANNUITY PAYMENT; ONLY TWO (2) ANNUITY INCOME PAYMENTS IF THE ANNUITANT WERE TO DIE BEFORE THE DUE DATE OF THE THIRD ANNUITY PAYMENT; AND SO FORTH. The following Annuity Options are available. ANNUITY OPTION A -- Life Income -- Periodic payments will be made as long as the Annuitant lives. ANNUITY OPTION B -- Life Income with Period Certain -- Periodic payments will be made for a guaranteed period, or as long as the Annuitant lives, whichever is longer. The guaranteed period, which is selected by the Contract Owner, may be five (5), ten (10), or twenty (20) years. ANNUITY OPTION C -- Joint and Last Survivor Payments -- Periodic payments will be made during the joint lifetime of two (2) Annuitants, continuing in the same amount during the lifetime of the surviving Annuitant. ANNUITY OPTION D -- Joint and 2/3 Survivor Annuity -- Periodic payments will be made during the joint lifetime of two (2) Annuitants. Payments will continue during the lifetime of the surviving Annuitant, and will be computed on the basis of two-thirds of the annuity payment (or units) in effect during the joint lifetime. ANNUITY OPTION E -- PERIOD CERTAIN -- (Available as a Fixed Annuity only)-Periodic payments will be made for a specified period. The specified period must be at least five (5) years and cannot be more than thirty (30) years. ANNUITY OPTION F -- Special Income Settlement Agreement -- C.M. Life will pay the proceeds in accordance with terms agreed upon in writing by the Contract Owner and C.M. Life. This option may be elected only at the Annuity Income Date. * * * * * Annuity Income Payments. Except as otherwise agreed to by the Contract Owner and C.M. Life, Annuity Income payments will be payable monthly. The minimum amount that may be applied under any Annuity Option, and the minimum periodic Annuity Income payment allowed, are the most recently 27 <PAGE> published minimums designated by C.M. Life for this purpose. A portion or the entire amount of the Annuity Payments may be taxable as ordinary income. If, at the time the Annuity Payments begin, C.M. Life has not received a proper written election not to have federal income taxes withheld, C.M. Life must by law withhold such taxes from the taxable portion of such annuity payments and remit that amount to the federal government. (See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES," page .) TERMINAL ILLNESS BENEFIT In the event that a Contract Owner becomes terminally ill during the Accumulation Period and prior to age 75, the Contract Owner may elect, unless prohibited by law, by submission of a Written Request, a Terminal Illness. Benefit equal to the greater of: (a) the Purchase Payments less any prior withdrawals and charges; or (b) the Contract Balance. The Company will require proof that the Contract Owner is terminally ill and not expected to live more than twelve (12) months. This proof will include, but is not limited to, certification by a licensed medical practitioner performing within the scope of his/her license. The licensed medical practitioner must not be the Contract Owner, Annuitant or the Contingent Annuitant, or the parent, spouse or child of the Contract Owner, Annuitant or Contingent Annuitant. Payment of the Terminal Illness Benefit is determined on the date the Company receives the Written Request. No Contract Maintenance Fee for the current year, Surrender Charge or Interest Rate Factor Adjustment shall apply with respect to any Terminal Illness Benefit. Payment of the Terminal Illness Benefit will be in full settlement of the Company's liability under the Contract. The Terminal Illness Benefit is not available for Contracts issued in Kansas, Mississippi, Texas, or Pennsylvania. DEATH BENEFIT If the Annuitant or Contract Owner dies prior to the Annuity Income Date, a Death Benefit will be paid to the Beneficiary upon receipt at the Annuity Service Center of proof of death. If, however, the Annuitant dies before such Contract Owner and there is a Contingent Annuitant who is less than 85 years of age on the Annuitant's date of death (and such Contract Owner is a natural person), then no Death Benefit is payable, and the Contract will continue in force, with the Contingent Annuitant as the Annuitant. For purposes of the Death Benefit, the Annuitant is the Annuitant named in the Application. The Death Benefit is payable upon receipt of proof of death, as well as proof that the death occurred during the Accumulation Period. Upon receipt of this proof and an election of a Death Benefit Option, and return of the Contract, the Death Benefit generally will be payable after C.M. Life has sufficient information to make the payment(s). Payments under a Death Benefit Option are determined at the time of payment, and, if the deceased Annuitant or Contract Owner was a natural person less than age 75 at death, are based on the greater of (a) the Contract Balance or (b) the Purchase Payments less any prior withdrawals and charges. Otherwise, the payments are based on the Contract Balance at the time of payment. No Surrender Charge, Interest Rate Factor Adjustment, or Contract Maintenance Fee shall apply with respect to any Death Benefit Option. Payment of the Death Benefit will be in full settlement of the Company's liability under this Contract. The available Death Benefit Options depend on whether the Contract Owner and Annuitant are the same person. 28 <PAGE> DEATH OF CONTRACT OWNER. If the Contract Owner is not the Annuitant, and the Contract Owner dies before the Annuitant and prior to the Annuity Income Date, one of the following provisions will apply. 1. If the Contract Owner's spouse is the Beneficiary and survives the Contract Owner, the spouse may select only Death Benefit Option A, B, or C within one (1) year after the Contract Owners death. (See page ). If the surviving spouse does not make a selection within one (1) year after the Contract Owner's death, the surviving spouse will become the Contract Owner. 2. If the Beneficiary is a natural person other than the Contract Owner's spouse, the Beneficiary may select only Death Benefit Option B or C within one (1) year after the Contract Owner's death. (See page ). If no selection is made within one (1) year after the Contract Owner's death, the Death Benefit will be paid to the Beneficiary in a single sum at that time. 3. If the Beneficiary is not a natural person, it may select only Death Benefit Option B or D within one (1) year after the Contract Owner's death. 4. If no Beneficiary survives the Contract Owner, the Annuitant shall be deemed to be the Beneficiary and provision 1 or 2 above shall apply. If no selection is made within one (1) year after the Contract Owner's death, the Death Benefit will be paid in a single sum at that time. DEATH OF CONTRACT OWNER/ANNUITANT. If the Contract Owner and Annuitant are the same person, and the Contract Owner/Annuitant dies before the Annuity Income Date, one of the following provisions applies. 1. If the Contract Owner/Annuitant's spouse is the Beneficiary, the surviving spouse may only select Death Benefit Option B, C, or G within (1) one year after the Contract Owner/Annuitant's death. (See below.) If no selection is made within one (1) year after the Contract Owner/Annuitant's death, the surviving spouse will become the Contract Owner and Annuitant of the Contract. 2. If the Beneficiary is a natural person other than the Contract Owner/Annuitant's spouse, the Beneficiary may select only Death Benefit Option B or C within (1) one year of the Contract Owner/ Annuitant's death. If no selection is made within one (1) year after the Contract Owner/Annuitant's death, the Death Benefit will be paid in a single sum at that time. 3. If the Beneficiary is not a natural person, it may select only Death Benefit Option B or D within one (1) year after the Contract Owner/Annuitant's death. See below. 4. If no Beneficiary survives the Contract Owner/Annuitant, the Death Benefit will be paid in a single sum to the Contract Owner/Annuitant's estate within five (5) years of the date of death. If no selection is made within one (1) year after the Contract Owner/Annuitant's death, the Death Benefit will be paid in a single sum at that time. DEATH OF ANNUITANT. If the Contract Owner and Annuitant are not the same person, and the Annuitant dies before the Contract Owner and prior to the Annuity Income Date, and there is no Contingent Annuitant younger than age 85 (or if the Contract Owner is not a natural person), one of the following provisions applies. 1. The Beneficiary, if a natural person, may only select Death Benefit Option E or F within one (1) year after the Annuitant's death. (See page .) 29 <PAGE> If no selection is made within one (1) year after the Annuitant's death, the Death Benefit will be paid in a single sum to the Beneficiary at that time. 2. If the Beneficiary is not a natural person, it may only select Death Benefit Option D or E within one (1) year after the Annuitant's death. (See page ). If no selection is made within one (1) year after the Annuitant's death, the Death Benefit will be paid in a single sum at that time. 3. If no Beneficiary survives the Annuitant, the Contract Owner shall be deemed the Beneficiary and provision 1 or 2 immediately above shall apply. DEATH BENEFIT OPTIONS. Life expectancy for purposes of these Death Benefit Options will be determined from the tables in the Regulations, under Section 72 of the Code. The following Death Benefit Options are available: DEATH BENEFIT OPTION A -- To become the Contract Owner; DEATH BENEFIT OPTION B -- To receive the Death Benefit as a single sum within one (1) year after the Contract Owner's death; DEATH BENEFIT OPTION C -- To receive the Death Benefit under any Annuity Option offered in the Contract, provided the entire Death Benefit is distributed: 1. Within five (5) years of the date of death; or 2. Over a period not extending beyond the life expectancy of the Beneficiary; or 3. Over the life of the Beneficiary. If the Death Benefit is to be paid under provision (2) or (3), the first installment payment must be made within one (1) year after the Contract Owner's death. DEATH BENEFIT OPTION D -- To receive the Death Benefit under any Annuity Option offered in the Contract, provided the entire Death Benefit is distributed within five (5) years of the date of death; DEATH BENEFIT OPTION E -- To receive the Death Benefit as a single sum within one (1) year after the Annuitant's death; DEATH BENEFIT OPTION F -- To receive the Death Benefit under any Annuity Option offered in the Contract, provided the Death Benefit is distributed: 1. Over a period not extending beyond the life expectancy of the Beneficiary; or 2. Over the life of the Beneficiary. The first installment payment must be made within one (1) year after the Annuitant's death. DEATH BENEFIT OPTION G -- To become the Contract Owner and Annuitant of the Contract, just as if the Beneficiary had always been the Contract Owner and Annuitant. DEATH OF ANNUITANT ON OR AFTER ANNUITY INCOME DATE. The Death Benefit payable if the Annuitant dies on or after the Annuity Income Date, if any, depends on the Annuity Option in effect on the date of death of the Annuitant. Any remaining payments will be distributed at least as rapidly as under the method of distribution being used as of the date of the Annuitant's death. If a Beneficiary dies while receiving such benefits, the 30 <PAGE> balance of the benefits, if any, will be paid in a single sum to the estate of the Beneficiary. If no Beneficiary survives the Annuitant, the benefits, if any, will be paid in a single sum to the estate of the last Annuitant to die. BENEFICIARY. One or more Beneficiaries may be designated to receive benefits concurrently, contingently or successively upon the death of the Contract Owner and/or the Annuitant. The Beneficiary designation in the Application will remain in effect until changed. The Contract Owner may, upon Written Request, change the designated Beneficiary before a Death Benefit has become payable. The Beneficiary's consent to such change is not required unless the Beneficiary was irrevocably designated or consent is required by law. (If an irrevocable Beneficiary dies, the Contract Owner may then designate a new Beneficiary.) The change will take effect as of the date the Contract Owner signs the Written Request. However, the change is subject to any payments made or actions taken by C.M. Life before receipt of the Written Request. On or after receipt of proof of death at the Annuity Service Center, the Beneficiary shall have the exclusive right to (i) appoint a contingent Beneficiary to succeed to the interest of the Beneficiary in the event of the Beneficiary's death; and (ii) make transfers under the Contract. (See "Transfers," page 19.) IRS REQUIRED DISTRIBUTION Federal tax law requires that if the Contract Owner dies before the Annuity Income Date, then the entire value of the Contract must generally be distributed within five (5) years of the date of death of the Contract Owner. Special rules may apply to the spouse of the deceased Contract Owner. (See "Federal Tax Matters," page B-11 of the Statement of Additional Information, for a detailed description of these rules.) RESTRICTIONS UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM Section 36.105 of the Texas Educational Code permits participants in the Texas Optional Retirement Program ("ORP") to withdraw their interests in a variable annuity contract issued under the ORP only upon: (1) termination of employment in the Texas public institutions of higher education; (2) retirement; or (3) death. Accordingly, a participant in the ORP (or the participant's estate if the participant has died) will be required to obtain a certificate of termination from the employer, or a certificate of death, before the Contract can be surrendered. RESTRICTIONS UNDER SECTION 403(B) PLANS Section 403(b) of the Code provides for tax-deferred retirement savings plans for employees of certain non-profit and educational organizations. In accordance with the requirements of Section 403(b), any Contract used for a 403(b) plan will prohibit distributions of elective contributions, and earnings on elective contributions, except upon death of the employee, attainment of age 59 1/2, separation from service, disability, or financial hardship. In addition, income attributable to elective contributions may not be distributed in the case of hardship. CHARGES AND DEDUCTIONS C.M. Life will make certain charges and deductions under the Contract in order to compensate it for incurring expenses in distributing the Contract, bearing mortality and expense risks under the Contract, and administering the Investment Accounts and the Contract. Charges may also be made for Premium Taxes, and other federal, state or local taxes. Charges and expenses are also deducted from the assets of the Portfolios. SURRENDER CHARGE C.M. Life will incur expenses relating to the sale of Contracts, including commissions to registered representatives and other promotional expenses. In connection with a full Surrender or partial Surrender 31 <PAGE> during the first five (5) Contract Years, C.M. Life may deduct from the Contract Balance a Surrender Charge equal to 5% of any Contract Balance surrendered in order to help cover distribution expenses. The Surrender Charge will be deducted as of the date of the receipt at the Annuity Service Center of the Written Request for the Surrender. Any Surrender Charge assessed will be allocated among the General Account and the Sub-Accounts in the same manner (pro rata) as the Contract Balance subject to Surrender is allocated among the General Account and the Sub-Accounts. The Surrender Charge will not be applied under the following circumstances: 1. Cancellation of the Contract during the 15-day examination period; 2. Full Surrender of the Contract on the Annuity Income Date; 3. Partial Surrenders or full Surrenders during the Window Period or after the first five (5) Contract Years, (the Window Period is the last thirty (30) days of each Five-Year Period under the Contract); 4. Upon payment of the Death Benefit; 5. On any Free Surrender Amount. Beginning in the second Contract Year, the Contract Owner is entitled to an annual Free Surrender Amount, which is exempt from a Surrender Charge and any applicable Interest Rate Factor Adjustment. See "Interest Rate Factor Adjustment" below. The Free Surrender Amount will be allocated among the General Account and/or Sub-Accounts in the same proportions as the partial Surrender or full Surrender amount. The Free Surrender Amount equals 10% of the Contract Balance as of the end of the immediately preceding Contract Year. Contract Owners may elect to receive 10% of the Contract Balance in multiple installments each contract year. Any amount redeemed during the year in excess of this 10% amount will be subject to a Surrender Charge (and any applicable Interest Rate Factor Adjustment); and 6. Partial Surrenders or full Surrenders of Contracts issued in exchange for Variable Annuity Contracts issued by Connecticut Mutual through its Panorama Separate Account which are beyond any applicable Surrender Charge period. More information about how the Surrender Charge is calculated for partial Surrenders and full Surrenders is contained in Appendices I and III attached hereto. In the case of a partial Surrender, the Surrender Charge will be deducted from the Contract Balance remaining after payment of the requested Surrender amount, or from the amount paid if sufficient balances do not remain in the Sub-Account or General Account to which the Surrender is allocated. Until April 30, 1997, no sales charges will be imposed upon redemption of a Contract where the proceeds of such redemption are applied to the purchase of a new MassMutual group annuity contract. This waiver does not eliminate applicable charges under the particular group contract, and upon surrender of the group contract, charges may apply. C.M. Life anticipates that the Surrender Charge will not generate sufficient funds to pay the cost of distributing the Contracts. If this charge is insufficient to cover distribution expenses, the deficiency will be met from C.M. Life's general funds, which will include amounts derived from the charge for mortality and expense risks. C.M. LIFE GUARANTEES THAT THE AGGREGATE SURRENDER CHARGE WILL NEVER EXCEED 8.5% OF THE TOTAL PURCHASE PAYMENTS MADE UNDER THE CONTRACT. 32 <PAGE> INTEREST RATE FACTOR ADJUSTMENT An Interest Rate Factor Adjustment will be applied in the event of any partial Surrender or full Surrender of the General Account Balance during the Accumulation Period, and on the Annuity Income Date (to the extent, if any, that the General Account Balance is applied to a Variable Annuity Option), but not during a Window Period. The Interest Rate Factor Adjustment is not applicable to the Separate Account or to Contracts issued to Pennsylvania residents. The Interest Rate Factor Adjustment is based on interest rates payable on U.S. Treasury securities. In general, if rates on U.S. Treasury securities are higher (or up to .30% lower) when you Surrender than when you made the applicable Purchase Payments, a negative Interest Rate Factor Adjustment will be applied, and in the event of a full Surrender, YOU COULD RECEIVE AN AMOUNT LOWER THAN THE GENERAL ACCOUNT BALANCE AT THE TIME OF SURRENDER AND EVEN LOWER THAN THE AMOUNT OF PURCHASE PAYMENTS MADE. If rates on U.S. Treasury secur-ities are more than .30% lower when you Surrender than when you made the applicable Purchase Payments, a positive Interest Rate Factor Adjustment will be applied, and in the event of a full Surrender, you could receive an amount higher than the General Account Balance. No Interest Rate Factor Adjustment will be applied during a Window Period; in addition, no Interest Rate Factor Adjustment will be applied to the General Account Free Surrender Amount. (For partial Surrenders of General Account Balance, the Interest Rate Factor Adjustment will be added to or subtracted from the remaining General Account Balance.) (See "Surrender Charge," page .) The Interest Rate Factor Adjustment will reflect the relationship between: (i) the weighted average of U.S. Treasury Index Rates corresponding to Purchase Payments and Transfers into the General Account during the current Five-Year Period (as adjusted for partial Surrenders or Transfers out of the General Account); (ii) the U.S. Treasury Index Rate which would be applicable during the time remaining in the current Five-Year Period on the date of the surrender; and (iii) the time remaining in the current Five-Year Period. The Interest Rate Factor Adjustment formula includes a set percentage factor (.30%) designed to compensate C.M. Life for certain expenses and losses that might be incurred as a direct or indirect result or consequence of Surrenders. In general, if the weighted average of U.S. Treasury Index Rates corresponding to Purchase Payments and Transfers during the current Five-Year Period is lower than the U.S. Treasury Index Rate which would be applicable during the time remaining in the current Five-Year Period (or exceeds such rate by less than .30%), then the application of the Interest Rate Factor Adjustment will result in a lower payment upon Surrender. Therefore, in order for there to be a positive Interest Rate Factor Adjustment, the U.S. Treasury Index Rate must have decreased sufficiently to offset this percentage factor; otherwise, the Interest Rate Factor Adjustment will be negative. In the event of a partial Surrender, there is no Interest Rate Factor Adjustment if the General Account Free Surrender Amount exceeds the General Account portion of such partial Surrender. There is no limit on the Interest Rate Factor Adjustment (except as required by state law with respect to a negative Interest Rate Factor Adjustment and as disclosed in Contracts issued in Oregon and Washington with respect to a positive Interest Rate Factor Adjustment). Additional information regarding the Interest Rate Factor Adjustment is included in Appendices II and III. MORTALITY AND EXPENSE RISK CHARGE C.M. Life imposes a daily charge as compensation for bearing certain mortality and expense risks in connection with the Contracts. This charge currently is 1.07% annually (equal to a daily rate of 0.002932%). It may increase, but it will not exceed an effective annual rate of 1.25% of the average daily value of net assets in the Separate Account. (The approximate portion of this charge estimated to be attributable to mortality risks is 0.42%; the approximate portion of this charge estimated to be attributable to expense risks is 0.65%.) The Mortality and Expense Risk Charge is reflected in the Accumulation Unit value or Annuity Unit value for the Contract for each Sub-Account. 33 <PAGE> Contract Balances and Annuity Income payments are not affected by changes in actual mortality experience nor by actual expenses incurred by C.M. Life. The mortality risks assumed by C.M. Life arise from its contractual obligations to make Annuity Income payments (determined in accordance with the annuity tables and other provisions contained in the Contract), and to pay Death Benefits prior to the Annuity Income Date. Thus, Contract Owners are assured that neither the Annuitant's own longevity, nor an unanticipated improvement in general life expectancy, will adversely affect the Annuity Income payments that the Annuitant will receive under the Contract. C.M. Life also bears substantial risk in connection with the Death Benefit. During the Accumulation Period C.M. Life will, if the deceased Annuitant or Contract Owner was a natural person less than age 75 at death, pay a Death Benefit equal to the greater of (a) the Contract Balance, or (b) the Purchase Payments less any prior partial surrenders and charges. Otherwise, the Death Benefit is based on the Contract Balance. The Death Benefit is paid without imposition of a Surrender Charge or the Interest Rate Factor Adjustment. The expense risk assumed by C.M. Life is the risk that C.M. Life's actual expenses in administering the Contract and the Separate Account will exceed the amount recovered through Administrative Charges. If the Mortality and Expense Risk Charge is insufficient to cover C.M. Life's actual costs, C.M. Life will bear the loss. Conversely, if the charge is more than sufficient to cover costs, the excess will be profit to C.M. Life. C.M. Life expects a profit from this charge. To the extent that the Surrender Charge is insufficient to cover the actual cost of Contract distribution, the deficiency will be met from C.M. Life's general corporate assets, which may include amounts derived from the Mortality and Expense Risk Charge. ADMINISTRATIVE CHARGES In order to cover the costs of administering the Contracts and the Separate Account, C.M. Life deducts a Contract Maintenance Fee from the Contract Balance of each Contract, and also deducts a daily Administrative Expense Charge from the assets of each Sub-Account of the Separate Account. CONTRACT MAINTENANCE FEE. A Contract Maintenance Fee is deducted from the Contract Balance of each Contract on the last day of each Contract Year during the Accumulation Period, and upon full Surrender of the Contract. The charge is not deducted after the Annuity Income Date. This Contract Maintenance Fee currently is $30 per Contract per Contract Year. It may be increased, but will not exceed $60. C.M. Life does not anticipate realizing any profit from this charge. The Contract Maintenance Fee will be deducted pro rata from the Sub-Accounts in the Separate Account and the General Account, in the same proportion that the amount of Contract Balance in each Sub-Account and the General Account bears to the total Contract Balance. For Contracts issued to Pennsylvania residents, the Fee will be calculated as a pro rata portion of the balance of each Sub-Account. ADMINISTRATIVE EXPENSE CHARGE. C.M. Life also deducts a daily Administrative Expense Charge from the assets of each Sub-Account of the Separate Account. This charge is currently at an effective annual rate of 0.07% (equal to a daily rate of 0.000192%). C.M. Life does not anticipate realizing any profit from this charge. The Administrative Expense Charge may be increased in the future, but the combined total of the Administrative Expense Charge and the Mortality and Expense Risk Charge will never exceed an effective annual rate of 1.50% of the average daily value of net assets in the Separate Account. PREMIUM TAXES C.M. Life may pay Premium Taxes in connection with Purchase Payments under the Contracts. Depending upon applicable state law, C.M. Life will deduct the Premium Taxes paid with respect to a particular Contract from the Purchase Payments, from the Contract Balance on the Annuity Income Date (thus reducing the Contract Balance), or upon the full Surrender of a Contract. Premium Taxes currently range from 0% to 4.28% of Purchase Payments. 34 <PAGE> FEDERAL, STATE AND LOCAL TAXES No charges are currently made for federal, state, or local taxes other than Premium Taxes. However, C.M. Life reserves the right to deduct charges in the future for such taxes, or other economic burden resulting from the application of any tax laws that C.M. Life determines to be attributable to the Contracts. OTHER EXPENSES INCLUDING INVESTMENT ADVISORY FEES Each Portfolio of the Funds is responsible for all of its expenses. In addition, charges will be made against each Portfolio of the Funds for investment advisory services provided to the Funds or the Portfolio. The net assets of each Portfolio of the Funds will reflect deductions in connection with investment advisory fees and other expenses. For more information concerning investment advisory fees and other charges against the Portfolios, see the prospectuses for the Funds, a current copy of which accompanies this Prospectus. DISTRIBUTOR OF THE CONTRACTS Effective May 1, 1996, MML Distributors, LLC ("MML Distributors") (formerly known as Connecticut Mutual Financial Services, LLC), 1414 Main Street, Springfield, MA 01144-1013, an affiliate of C.M. Life, is the principal underwriter of the Contracts pursuant to an Underwriting and Servicing Agreement to which MML Distributors and C.M. Life on behalf of the Separate Account are parties. Since March 1, 1996, MML Investors Services, Inc. ("MMLISI"), also located at 1414 Main Street, Springfield, MA 01144-1013, has served as the co-underwriter of the Contracts. Both MML Distributors and MMLISI are registered with the Securities and Exchange Commission ("SEC") as broker-dealers under the Securities Exchange Act of 1934 and are members of the National Association of Securities Dealers, Inc. ("NASD"). MML Distributors may enter into selling agreements with respect to the Contracts with other broker-dealers that are registered with the SEC and are members of the NASD ("selling brokers"). Contracts are sold through agents who are licensed under applicable insurance law to sell the Contracts. These agents are also registered representatives of selling brokers or of MMLISI. MML Distributors does business as MML Distributors, L.L.C. in the states of Illinois, Michigan, Oklahoma, South Dakota and Washington, and as MML Distributors, Limited Liability Company in the states of Maine, Ohio and West Virginia. Commissions of up to 6.0% of Purchase Payments are paid on Contract sales. GENERAL PROVISIONS ASSIGNMENT OF THE CONTRACT A Written Request specifying the terms of an assignment of the Contract must be provided to the Annuity Service Center. Until the Written Request is received at the Annuity Service Center, C.M. Life will not be required to take notice of, or be responsible for, any transfer of interest in the Contract by assignment, agreement, or otherwise. C.M. Life will not be responsible for the validity of tax consequences of any assignment. Any assignment made after the Death Benefit has become payable will be valid only with C.M. Life's consent. If the Contract is assigned, the Contract Owner's rights may only be exercised with the consent of the assignee of record. 35 <PAGE> CONTRACT CHANGES BY C.M. LIFE C.M. Life reserves the right to amend the Contract to meet the requirements of any applicable federal or state laws or regulations, or to make other changes permitted by the Contract. C.M. Life will notify the Contract Owner in writing of any such amendments. Any changes to the Contract by C.M. Life must be signed by an authorized officer of C.M. Life. Agents of C.M. Life have no authority to alter or modify any of the terms, conditions, agreements of the Contract, or to waive any of its provisions. CONTRACT TERMINATION The Contract will terminate upon the occurrence of any of the following events: 1. The date of the last Annuity Income payment; 2. The date payment is made of the Contract Balance; 3. The date of the last Death Benefit payment to the last Beneficiary; 4. The date the Contract is returned under the "Right to Examine Contract" provision, see page ; or 5. Failure to maintain the required Minimum Contract Balance. INCONTESTABILITY The Contract is incontestable. MISSTATEMENT OF AGE OR SEX If the Annuitant's age or sex has been incorrectly stated, the Annuity Income payable will be that which the Contract Balance, reduced by any applicable Premium Tax, would have purchased at the correct age and sex. After correction, the Annuitant will receive the sum of any underpayments made by C.M. Life within thirty (30) calendar days. The amounts of any overpayments made by C.M. Life will be charged against the payment(s) following the correction. NONPARTICIPATING The Contract is nonparticipating and will not share in any surplus earnings of C.M. Life. No dividends are payable on the Contract. NON-BUSINESS DAYS If the due date for any activity required by the Contract falls on a non-business day for C.M. Life, performance will be rendered on the first business day following the due date. REGULATORY REQUIREMENTS All interest guarantees, surrender benefits, and amounts payable at death will not be less than the minimum benefits approved under the laws and regulations of the state in which the Contract is delivered. C.M. Life will administer the Contract in accordance with the U.S. tax laws and regulations in order to retain its status as an annuity contract. 36 <PAGE> RIGHT TO EXAMINE CONTRACT No Surrender Charge will be applied if the Contract Owner returns the Contract for cancellation during the first fifteen (15) calendar days following the Contract Issue Date (or a longer period, if required by law). In addition, no Interest Rate Factor Adjustment, or Contract Maintenance Fee or premium tax will be applied upon such a cancellation. C.M. Life will refund the Separate Account Balance and/or any Purchase Payments made to the General Account upon return of the Contract. If required by state law, C.M. Life will refund any Purchase Payment regardless of whether they were allocated to one or more Sub-Account or to the General Account. CERTAIN FEDERAL INCOME TAX CONSEQUENCES THE FOLLOWING DISCUSSION IS A GENERAL DESCRIPTION OF FEDERAL TAX CONSIDERATIONS RELATING TO THE CONTRACT AND IS NOT INTENDED AS TAX ADVICE. THIS DISCUSSION IS NOT INTENDED TO ADDRESS THE TAX CONSEQUENCES RESULTING FROM ALL OF THE SITUATIONS IN WHICH A PERSON MAY BE ENTITLED TO OR MAY RECEIVE A DISTRIBUTION UNDER THE CONTRACT. ANY PERSON CONCERNED ABOUT THESE TAX IMPLICATIONS SHOULD CONSULT A COMPETENT TAX ADVISOR BEFORE INITIATING ANY TRANSACTION. THIS DISCUSSION IS BASED UPON C.M. LIFE'S UNDERSTANDING OF THE PRESENT FEDERAL INCOME TAX LAWS AS THEY ARE CURRENTLY INTERPRETED BY THE INTERNAL REVENUE SERVICE. NO REPRESENTATION IS MADE AS TO THE LIKELIHOOD OF THE CONTINUATION OF THE PRESENT FEDERAL INCOME TAX LAWS, OR OF THE CURRENT INTERPRETATION BY THE INTERNAL REVENUE SERVICE. MOREOVER, NO ATTEMPT HAS BEEN MADE TO CONSIDER ANY APPLICABLE STATE OR OTHER TAX LAWS. The Contract may be purchased on a non-tax-qualified basis ("Non-qualified Contract"), or purchased and used in connection with plans qualifying for favorable tax treatment ("Qualified Contract"). Qualified Contracts are designed for use by individuals whose premium payments are comprised solely of proceeds from and/or contributions under retirement plans which are intended to qualify as plans entitled to special income tax treatment under Sections 401(a), 403(b), 408, or 457 of the Internal Revenue Code of 1986, as amended (the "Code"). The ultimate effect of federal income taxes on the amounts held under a Contract, Annuity Income payments, the economic benefit to the Contract Owner, the Annuitant, or the Beneficiary depends on the type of retirement plan, on the tax and employment status of the individual concerned, and on the employer's tax status. In addition, certain requirements must be satisfied in purchasing a Qualified Contract with proceeds from a tax-qualified plan and receiving distributions from a Qualified Contract in order to continue receiving favorable tax treatment. Therefore, purchasers of Qualified Contracts should seek competent legal and tax advice regarding the suitability of the Contract for their situation, the applicable requirements, and the tax treatment of the rights and benefits of the Contract. The following discussion assumes that a Qualified Contract is purchased with proceeds from and/or contributions under retirement plans that qualify for the intended special federal income tax treatment. The following discussion is based on the assumption that the Contract qualifies as an annuity contract for federal income tax purposes. The Statement of Additional Information discusses the requirements for qualifying as an annuity. TAXATION OF ANNUITIES IN GENERAL. Section 72 of the Code governs taxation of annuities in general. C.M. Life believes that the Contract Owner who is a natural person generally is not taxed on increases in the value of a Contract until distribution occurs by withdrawing all or part of the Contract Balance (e.g., Surrenders or Annuity Income payments under the Annuity Option elected). For this purpose, the assignment, pledge, or agreement to assign or pledge any portion of the Contract Balance (and in the case of a Qualified Contract, any portion of an interest in the qualified plan) generally will be treated as a distribution. The taxable portion of a distribution (in the form of a single sum payment or an annuity) is taxable as ordinary income. 37 <PAGE> The Contract Owner of any annuity contract that is not a natural person generally must include in income any increase in the excess of the Contract's Contract Balance over the "investment in the contract" (discussed below) during the taxable year. There are some exceptions to this rule, and a prospective Contract Owner that is not a natural person may wish to discuss these with a competent tax adviser. The following discussion generally applies to a Contract owned by a natural person. SURRENDERS. In the case of a Surrender under a Qualified Contract, under section 72(e) of the Code, a ratable portion of the amount received is taxable, generally based on the ratio of the "investment in the contract" to the individual's total accrued benefit for balance under the retirement plan. The "investment in the contract" generally equals the amount of any premium payments paid by or on behalf of any individual for a Qualified Contract. (The investment in the Contract does not include amounts contributed by or on behalf of an individual by an employer.). For a Contract issued in connection with Qualified Plans, the "investment in the contract" can be zero. Special tax rules may be available for certain distributions from a Qualified Contract. With respect to Non-qualified Contracts, partial Surrenders are generally treated as taxable income to the extent that the Contract Balance immediately before the Surrender exceeds the "investment in the contract" at that time. The Contract Balance immediately before a partial Surrender may have to be increased by any positive Interest Rate Factor Adjustment which results from such a Surrender. There is, however, no definitive guidance on the proper tax treatment of Interest Rate Factor Adjustments, and the Contract Owner should contact a competent tax adviser with respect to the potential tax consequences of an Interest Rate Factor Adjustment. Full Surrenders are treated as taxable income to the extent that the amount received exceeds the "investment in the contract." ANNUITY INCOME PAYMENTS. Although tax consequences may vary depending on the annuity option elected under the Contract, under Code section 72(b), gross income generally does not include that part of any amount received as an annuity under an annuity contract that bears the same ratio to such amount as the "investment in the contract" bears to the expected return at the Annuity Income Date. In this respect (prior to recovery of the investment in the contract), there is generally no tax on the amount of each payment which represents the same ratio that the "investment in the contract" bears to the total expected value of the annuity payments for the term of the payments. However, the remainder of each income payment is taxable. In all cases, after the "investment in the contract" is recovered, the full amount of any additional annuity payments is taxable. PENALTY TAX. In the case of a distribution pursuant to a Non-qualified Contract, there may be imposed a federal penalty tax equal to 10% of the amount treated as taxable income. In general, however, there is no penalty tax on distributions: (1) made on or after the date on which the Contract Owner attains age 59 1/2; (2) made as a result of death or disability of the Contract Owner; (3) received in substantially equal periodic payments as a life annuity, or a joint and survivor annuity, for the lives or life expectancies of the Contract Owner and a "designated beneficiary"; (4) from a Qualified Plan where other rules apply; (5) allocable to investment in the Contract before August 14, 1982; (6) under a qualified funding asset (as defined in Code section 130(d)); (7) under an immediate annuity (as defined in Code section 72(u)(4)); or (8) which are purchased by an employer on termination of certain types of Qualified Plans, and which are held by the employer until the employee separates from service. Other similar tax penalties may apply to certain distributions under a Qualified Contract. TRANSFERS, ASSIGNMENTS, OR EXCHANGES OF THE POLICY. A transfer of ownership of a Contract, the designation of the Annuitant or other Beneficiary who is not also the Contract Owner, the designation of certain annuity dates, or the exchange of a Contract, may result in certain tax consequences to the Contract Owner that are not discussed here. The Contract Owner contemplating any such transfer, assignment, designation, or exchange of a Contract, should contact a competent tax adviser with respect to the potential tax effects of such a transaction. 38 <PAGE> MULTIPLE CONTRACTS. All Non-qualified Annuity Contracts that are issued by C.M. Life (or its affiliates) to the same Contract Owner during any calendar year are required by law to be are treated as one Annuity Contract for purposes of determining the amount includable in gross income under section 72(e) of the Code. In addition, the Treasury Department has specific authority to issue regulations that prevent the avoidance of section 72(e) through the serial purchase of annuity contracts or otherwise. Congress has also indicated that the Treasury Department may have authority to treat the combination purchase of an immediate annuity contract and separate deferred annuity contract as a single annuity contract under its general authority to prescribe rules as may be necessary to enforce the income tax laws. WITHHOLDING. The Unemployment Compensation Amendment Act of 1992 made significant changes under the Code for the treatment of distributions of Qualified Plans and Section 403(b) annuities. The Act amended Section 402 of the Code and expanded the types of distributions that can be rolled over tax-free to an Individual Retirement Account, another Qualified Plan, or a Section 403(b) annuity. Under the law, all taxable distributions from Qualified Plans and Section 403(b) annuities are eligible for rollover except 1) annuities paid over life or life expectancy; 2) installments for periods spanning ten (10) years or more; and 3) required minimum distributions under Section 401(a)(9). The Act also amended Section 3405 to impose mandatory 20% income tax withholding on any eligible rollover distribution that an employee receives personally and does not elect to have paid in a direct rollover. The law is effective for payments made after December 31, 1992. Payments that are not eligible for rollover remain subject to the existing pension annuity distribution rules, which are subject to withholding at the rate of 10% for lump sum distributions. Recipients of these types of distributions are generally provided with an opportunity to elect not to have tax withheld from the distributions. POSSIBLE CHANGES IN TAXATION. In past years, legislation has been proposed that would have adversely modified the federal taxation of certain annuities. For example, one such proposal would have changed the tax treatment of non-qualified annuities that did not have "substantial life contingencies" by taxing income as it is credited to the annuity. Although as of the date of this prospectus Congress is not actively considering any legislation regarding the taxation of annuities, there is always the possibility that the tax treatment of annuities could change by legislation or other means (such as IRS regulations, revenue rulings, judicial decisions, etc.). Moreover, it is also possible that any change could be retroactive (that is, effective prior to the date of the change). OTHER TAX CONSEQUENCES. As noted above, the foregoing discussion of the federal income tax consequences under the Contract is not exhaustive, and special rules are provided with respect to other tax situations not discussed in this Prospectus. Further, the federal income tax consequences discussed herein reflect C.M. Life's understanding of current law and the law may change. Federal estate, and state and local estate, inheritance, and other tax consequences of ownership, or receipt of distributions under the Contract, depend on the individual circumstances of each Contract Owner or recipient of the distribution. A competent tax adviser should be consulted for further information. QUALIFIED PLANS The Contract is designed for use with several types of Qualified Plans. The tax rules applicable to Contract Owners in Qualified Plans, including restrictions on contributions and benefits, taxation of distributions, and any tax penalties, vary according to the type of plan and the terms and conditions of the plan itself. Various tax penalties may apply to contributions in excess of specified limits, aggregate distributions in excess of $150,000 annually, distributions that do not satisfy specified requirements, and certain other 39 <PAGE> transactions with respect to Qualified Plans. Therefore, no attempt is made to provide more than general information about the use of the Contract with the various types of Qualified Plans. Contract Owners, Annuitants and Beneficiaries are cautioned that the rights of any person to any benefits under Qualified Plans may be subject to the terms and conditions of the plans themselves, regardless of the terms and conditions of the Contract. Some retirement plans are subject to distribution and other requirements that are not incorporated in the administration of the Contracts. Contract Owners are responsible for determining that contributions, distributions and other transactions with respect to the Contracts satisfy applicable law. Purchasers of Contracts for use with any retirement plan should consult their legal counsel and tax adviser regarding the suitability of the Contract. Following are brief descriptions of the various types of Qualified Plans in connection with which C.M. Life will issue the Contract. Contracts for all types of Qualified Plans may not be available in all states. When issued in connection with a Qualified Plan, the Contract will generally be subject to endorsement. QUALIFIED PENSION AND PROFIT SHARING PLANS. Section 401(a) of the Code permits corporate employers to establish various types of retirement plans for employees. Such retirement plans may permit the purchase of the Contract in order to provide benefits under the plans. Adverse tax consequences to the plan, to the participant or to both may result if this Contract is assigned or transferred to any individual as a means to provide benefit payments. The Self-Employed Individuals' Tax Retirement Act of 1962, as amended, commonly referred to as "H.R. 10," permits self-employed individuals to establish Qualified Plans for themselves and their employees. Purchasers of a Contract for use with such plans should seek competent advice regarding the suitability of the proposed plan documents and the Contract to their specific needs. INDIVIDUAL RETIREMENT ANNUITIES AND INDIVIDUAL RETIREMENT ACCOUNTS. Section 408 of the Code permits eligible individuals to contribute to an individual retirement program known as an Individual Retirement Annuity, or Individual Retirement Account (each hereinafter referred to as "IRA"). Individual Retirement Annuities are subject to limitations on the amount that may be contributed and deducted and the time when distributions may commence. Also, distributions from certain other types of Qualified Plans may be "rolled over" on a tax-deferred basis into an IRA. The sale of a Contract for use with an IRA may be subject to special disclosure requirements of the Internal Revenue Service. Purchasers of the Contract for use with IRAs will be provided with supplemental information required by the Internal Revenue Service or other appropriate agency. Such purchasers will have the right to revoke their purchase within seven (7) days of the earlier of the establishment of the IRA, or their purchase. Purchasers should seek competent advice as to the suitability of the Contract for use with IRAs. Additional information regarding IRAs is provided in Appendix IV, beginning on page . TAX-SHELTERED ANNUITIES. Section 403(b) of the Code permits public school employees, and employees of certain types of religious, charitable, educational, and scientific organizations, specified in Section 501(c)(3) of the Code, to purchase annuity contracts and, subject to certain limitations, exclude the amount of premiums from gross income for tax purposes. However, these payments may be subject to FICA (Social Security) taxes. These annuity contracts are commonly referred to as "Tax-Sheltered Annuities." Subject to certain exceptions, withdrawals under Tax-Sheltered Annuities which are attributable to contributions made pursuant to salary reduction agreements are prohibited unless made after the Contract Owner attains age 59 1/2, upon the Contract Owner's separation from service, upon the Contract Owner's death or disability, or for an amount not greater than the total of such contributions in the case of hardship. SECTION 457 DEFERRED COMPENSATION ("SECTION 457") PLANS. Under Section 457 of the Code, employees of (and independent contractors who perform services for) certain state and local governmental units, or certain tax-exempt employers, may participate in a Section 457 plan of their employer, allowing them to defer part of their salary or other compensation. The amount deferred, and any income on such amount, will not be taxable until paid or otherwise made available to the employee. Depending on the terms of the particular plan, the employer may be entitled to draw on deferred amounts for purposes unrelated to its section 457 plan obligations. In general, all amounts received under a section 457 plan are taxable. 40 <PAGE> The maximum amount that can be deferred under a Section 457 plan in any tax year is ordinarily one-third of the employee's includable compensation, up to $7,500. Includable compensation means earnings for services rendered to the employer which is includable in the employee's gross income, but excluding any contributions under the Section 457 plan, or a Tax-Sheltered Annuity. During the last three (3) years before an individual attains normal retirement age, additional "catch-up" deferrals are permitted. The deferred amounts will be used by the employer to purchase the Contract. The Contract will be issued to the employer, and all Contract Balances will be subject to the claims of the employer's creditors. The employee has no rights or vested interest in the Contract, and is only entitled to payment in accordance with the Section 457 plan provisions. Present federal income tax law does not allow tax-free transfers or rollovers for amounts accumulated in a Section 457 plan, except for transfers to other Section 457 plans in certain limited cases. RESTRICTIONS UNDER QUALIFIED CONTRACTS. Other restrictions with respect to the election, commencement, or distribution of benefits may apply under Qualified Contracts or under the terms of the plans in respect of which Qualified Contracts are issued. GENERAL At the time the initial Purchase Payment is paid, a prospective purchaser must specify whether he or she is purchasing a Non-qualified Contract or a Qualified Contract. If the initial Purchase Payment is derived from an exchange or surrender of another annuity contract, C.M. Life may require that the prospective purchaser provide information with regard to the federal income tax status of the previous annuity contract. C.M. Life will require that persons purchase separate Contracts if they desire to invest monies qualifying for different annuity tax treatment under the Code. Each such separate Contract would require the minimum initial Purchase Payment stated above. Additional Purchase Payments under a Contract must qualify for the same federal income tax treatment as the initial Purchase Payment under the Contract. C.M. Life will not accept an additional Purchase Payment under a Contract if the federal income tax treatment of such Purchase Payment would be different from that of the initial Purchase Payment. ADDITIONAL INFORMATION ABOUT C.M. LIFE THE BUSINESS OF C.M. LIFE C.M. Life, 140 Garden Street, Hartford, Connecticut, 06154, is a stock life insurance company. It was chartered by a Special Act of the Connecticut General Assembly on April 25, 1980. It is principally engaged in the sale of life insurance and annuities, and is licensed to sell insurance in all states except New York. As of December 31, 1995, C.M. Life is licensed to sell annuities in a majority of states and is seeking to be licensed in all states except New York. As of December 31, 1995, C.M. Life was a wholly owned subsidiary of Connecticut Mutual Life Insurance Company ("Connecticut Mutual"), the sixth oldest life insurance company in the United States, and the first life insurance company formed in Connecticut. Connecticut Mutual was chartered by a Special Act of the Connecticut General Assembly on 1846 and has continuously engaged in the insurance business since that time. On September 8, 1995, the Board of Directors of Connecticut Mutual approved the merger of Connecticut Mutual and Massachusetts Mutual Life Insurance Company ("MassMutual"). Thereafter, a definitive agreement was signed by both companies. On January 27, 1996. Connecticut Mutual and insurance subsidiary policyholders and other insureds and annuitants approved the merger. The merger was reviewed by the insurance regulatory authorities in Massachusetts and Connecticut, and approved. The merger was effective March 1, 1996. 41 <PAGE> MassMutual is a mutual life insurance company specially chartered by the Commonwealth of Massachusetts on May 14, 1851. It is currently licensed to transact life (including variable life), and accident and health insurance business in all states, the District of Columbia and certain provinces of Canada. The surviving company is the fifth largest mutual life insurance company, and the eighth largest life insurance company, in the United States, in each case based on the combined statutory total assets of MassMutual and Connecticut Mutual at December 31, 1994. Further references to Connecticut Mutual contained herein should be read to refer to MassMutual. SELECTED FINANCIAL DATA THE FOLLOWING SELECTED FINANCIAL DATA FOR THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED IN THIS PROSPECTUS AND THE RELATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. C.M. LIFE INSURANCE COMPANY SELECTED FINANCIAL DATA FOR THE YEARS ENDED DECEMBER 31, ($ IN THOUSANDS) <TABLE> <CAPTION> RESERVES: 1995 1994 1993 1992 1991 - --------------------------------------- --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> Premiums, annuity considerations and other income.......................... $ 135,949 $ 112,222 $ 108,460 $ 117,805 $ 125,763 Less: reinsurance ceded (50,732) (54,032) (56,905) (60,830) (15,846) --------- --------- --------- --------- --------- Net premiums, annuity considerations and other income...................... 85,217 58,190 51,555 56,975 109,917 Net investment income and realized gains and losses...................... 67,675 57,354 57,919 56,286 53,187 --------- --------- --------- --------- --------- Total Revenue........................ 152,892 115,544 109,474 113,261 163,104 BENEFITS, LOSSES AND EXPENSES: Benefits, claims and settlement expenses.............................. 132,067 101,243 98,700 111,843 129,797 Other operating expenses............... 50,837 28,829 28,440 35,369 47,199 Less: reinsurance benefits and expenses ceded..................... (52,538) (45,804) (50,001) (54,537) (25,156) --------- --------- --------- --------- --------- Total Benefits, Losses and Expenses........................... 130,366 84,268 77,139 92,675 151,840 --------- --------- --------- --------- --------- Income Before Federal Income Tax Expense............................... 22,526 31,276 32,335 20,586 11,264 Federal Income Tax Expense............. 8,776 13,488 11,241 9,055 6,429 --------- --------- --------- --------- --------- Net Income............................. $ 13,750 $ 17,788 $ 21,094 $ 11,531 $ 4,835 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Total Assets........................... $1,533,748 $1,208,291 $ 970,010 $ 768,333 $ 664,755 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- </TABLE> 42 <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS) 1995 COMPARED WITH 1994 For the year ended December 31, 1995, C.M. Life had net income of $13,750, as compared with net income of $17,788 in 1994. The decrease in net income of $4,038 is attributable to increased benefit, claims and settlement expenses and increased acquisition and insurance expenses which exceeded the increase in net premiums and net investment income. Premiums before reinsurance ceded increased $23,040 to $134,278 in 1995 from $111,238 in 1994. Premiums for CM Windows, a single premium deferred annuity, increased $9,412 to $18,894 in 1995 from $9,482 in 1994. The increase is attributable to higher interest rates and increased promotional efforts, which increased demand for single premium deferred annuity products. Premiums for life insurance products increased $13,628 to $115,384 in 1995 from $101,756 in 1994 due to higher sales of universal life policies, primarily the Enterprise Plus product, as well as by increased renewal premiums. Reinsurance premiums ceded decreased by $3,300 in 1995. The decrease is attributable to the decrease in reinsured business as well as increased retention limits. The Enterprise Plus Universal Life product is not included in the C.M. Life/Connecticut Mutual reinsurance treaty. Net investment income increased by $8,928 over 1994. This increase is attributable to increased invested assets and policy loans. Net realized capital losses were $1,140 in 1995 as compared to net realized capital losses of $2,533 in 1994. This loss is due to realized net losses of $1,962, with $822 being transferred to the IMR (Interest Maintenance Reserve) in 1995 as compared to realized net losses of $7,332 in 1994, with $4,799 being transferred to the IMR. Benefits, claims and settlement expenses, before reinsurance benefit reimbursements, increased by $30,824 from 1994. Surrender benefits before reinsurance increased by $2,443, to $33,494 in 1995 from $31,051 in 1994 and reserves ceded increased $6,173. Contributing to the increase was an increase in death claims of $12,853, increased change in reserves of $8,300, increased reserves ceded of $6,173 and increased surrenders and other benefits of $3,498. Acquisition expenses increased $21,190 over 1994. This increase is attributable to increased sales, especially of the new Enterprise Plus Universal Life product. Income tax expense decreased by $4,712 over 1994. This decrease is attributable to lower taxable income in 1995 versus 1994. Taxable income was $27,726, $38,660 and $33,080 in 1995, 1994 and 1993, respectively. C.M. Life's Federal income tax expense is based on income which is currently taxable. The differences between pre-tax book income and taxable income are primarily for lower tax basis reserves for future policy benefits and other book/tax differences associated with gross investment income. RESULTS OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS) 1994 COMPARED WITH 1993 For the year ended December 31, 1994, C.M. Life had net income of $17,788, as compared with net income of $21,094 in 1993. The decrease in net income of $3,306 is attributable to increased benefit, claims and settlement expenses as well as an increase in net realized capital losses and increased federal tax expense, partially offset by increased net premiums, net investment income and decreased reinsurance ceded and acquisition and insurance expenses. 43 <PAGE> Premiums before reinsurance ceded increased $3,141 to $111,238 in 1994 from $108,097 in 1993. Premiums for CM Windows, a single premium deferred annuity, increased $7,343 to $9,482 in 1994 from $2,139 in 1993. The increase is attributable to higher interest rates, which increased demand for single premium deferred annuity products. Premiums for life insurance products decreased $4,202 to $101,756 in 1994 from $105,958 in 1993 due to lower sales of new universal life policies and Executive Benefit Life policies offset by higher term policy sales. Reinsurance premiums ceded decreased by $2,873 in 1994. The decrease is attributable to the decrease in reinsured business as well as increased retention limits. Net investment income increased by $2,427 over 1993; this increase is attributable to increased invested assets. Net realized capital losses were $2,533 in 1994 as compared to a net realized gain of $459 in 1993. This loss is due to realized net losses of $7,332, with $4,799 being transferred to the IMR in 1994 as compared to realized net gains of $4,906 in 1993, with $4,447 of those being transferred to the IMR. The $7,332 loss included realized losses of $2,093 related to the bulk sale of a number of mortgages during 1994 and losses of $2,158 resulted from the sale of two real estate properties. There were no real estate sales in 1993. Benefits, claims and settlement expenses, before reinsurance benefit reimbursements increased by $2,543 from 1993. Surrender benefits before reinsurance increased by $2,116, to $31,051 in 1994 from $28,935 in 1993 and reserves ceded increased $4,928. This increase was partially offset by decreased death claims of $3,217 and decreased change in reserves of $1,580. Income tax expense increased by $2,247 over 1993. This increase is attributable to higher taxable income in 1994 versus 1993. Taxable income was $38,660, $33,080 and $27,414 in 1994, 1993 and 1992, respectively. C.M. Life's Federal income tax expense is based on income which is currently taxable. The differences between pre-tax book income and taxable income are primarily lower tax basis reserves for future policy benefits and other book/tax differences associated with gross investment income. LIQUIDITY AND CAPITAL RESOURCES C.M. Life's operations have historically provided substantial cash flow. The majority of the Company's cash is invested in investment-grade securities to provide ample protection for policyholders. The liabilities of the Company are predominantly long-term in nature and, therefore, the Company invests in long-term fixed maturity investments such as bonds. C.M. Life's liquidity requirements were met by funds provided from operations and investment activity. The primary uses of funds were to purchase investments and to pay commissions, insurance operating expenses and policy benefits. There is not expected to be any material change to C.M. Life's liquidity as a result of the merger of Connecticut Mutual and MassMutual. SEGMENT INFORMATION During 1995, 1994 and 1993, C.M. Life's operations consisted of one business segment which was principally the sale of universal life insurance and annuity products. C.M. Life is not dependent upon any single customer and no single customer accounted for more than 10% of revenues in 1995, 1994 or 1993. 44 <PAGE> RESERVES In accordance with the life insurance laws and regulations under which C.M. Life operates, it is obligated to carry on its books, as liabilities, actuarially determined reserves to meet its obligations on outstanding contracts. Reserves are based on mortality tables in general use in the United States and are computed to equal amounts that, with additions from premiums to be received, and with interest on such reserves computed annually at certain assumed rates, will be sufficient to meet C.M. Life's policy obligations at their maturities or in the event of an insured's death. In the accompanying financial statements, these reserves are determined in accordance with statutory regulations which is a generally accepted accounting principle for wholly owned stock life insurance subsidiaries of mutual life insurance companies. INVESTMENTS At December 31, 1995, the composition of C.M. Life's $976,511 of invested assets was 75.5% fixed maturities, 7.4% equity securities, 2.7% mortgage loans, 12.9% policy loans, and 1.5% cash and cash equivalents. FIXED MATURITIES C.M. Life invests in fixed maturities with the objective of balancing reasonable returns with liquidity, interest rate and credit risks. As a result, C.M. Life's fixed maturity portfolio consists primarily of government securities and high-quality marketable corporate securities. At December 31, 1995, the fixed maturity securities portfolio consisted of $675,850 of investment grade bonds, which represented 91.8% of the fixed maturity portfolio. Below investment grade bonds (those rated below "Baa") were $60,249, which represented 8.2% of the fixed maturity portfolio. Ratings are obtained from external rating agencies, and if not externally rated, are rated by C.M. Life internally using similar methods. The interest rates available on below-investment-grade securities are generally significantly higher than available on other corporate debt securities. Also the risk of loss due to default by the borrower is significantly greater with respect to such below-investment-grade securities for any of a number of reasons including: those securities are unsecured or subordinated to other creditors of the issuer, or are issued by companies that usually have high levels of indebtedness. C.M. Life attempts to minimize the exposure to any one issuer and by closely monitoring the credit worthiness of such issuers. C.M. Life's fixed maturity securities portfolio included $150,694 and $167,641 of mortgage-backed securities at December 31, 1995 and 1994, respectively. The mortgage-backed securities are subject to risks associated with variable prepayments of the underlying mortgages. Prepayments of the underlying mortgages cause those securities to have different actual maturities than scheduled at the time of purchase. The Company limits its investment risk by purchasing fixed maturities either guaranteed by U.S. government-sponsored entities or securities supported in the securitization structure by junior securities enabling the assets to achieve investment grade status. EQUITY SECURITIES In 1995, C.M. Life invested in common stock with the objective of securing long-term asset appreciation. MORTGAGE LOANS ON REAL ESTATE C.M. Life is not currently originating any mortgages. At December 31, 1995 and 1994, C.M. Life's mortgage loans were $26,705 and $42,038, respectively. Mortgage loans, as a percentage of invested assets, have decreased to 2.7% as of December 31, 1995, from 4.8% as of December 31, 1994. Management closely monitors the ongoing performance of the mortgage loan portfolio. Loans are reviewed individually to determine if other than temporary impairments exist. For non-performing loans, 45 <PAGE> reserves are established considering the value of the underlying collateral. Mortgage loans in the amount of $2,774, or 10.4% of the mortgage loan portfolio, were delinquent 90 days or more as of December 31, 1995. This compares with $2,774, or 6.6% of the mortgage loan portfolio at December 31, 1994. Restructured loans are loans whose terms such as interest rate, amortization, or maturity have been modified and are currently performing pursuant to such modified terms. C.M. Life restructures loans to protect its investment and only when it is anticipated that the borrower will be able to meet the modified terms. As of December 31, 1995 and 1994, $17,128 and $24,034 of mortgage loans have been restructured. POLICY LOANS As of December 31, 1995 and 1994, C.M. Life's policy loans were $126,014 and $109,720, respectively. Policy loans, as a percentage of invested assets, have increased from 12.5% in 1994 to 12.9% in 1995. Variable interest rate policy loans were 98.6% and 98.5% of total policy loans at December 31, 1995 and 1994, respectively. For loans with variable interest rates, the rates are adjusted annually based upon changes in a corporate bond index. COMPETITION C.M. Life is engaged in a business that is highly competitive because of the large number of stock and mutual life insurance companies and other entities marketing insurance products comparable to those of C.M. Life. MassMutual is the eighth largest life insurance company in the country with over $52 billion in life insurance assets and $103 billion in total assets. Best's Insurance Reports, Life-Health Edition, upgraded C.M. Life's rating on March 4, 1996 to the highest possible rating of A++ as a result of the merger. MassMutual's ratings were the highest possible from A.M. Best (A++), Duff & Phelps (AAA) and Standard & Poors (AAA), and the second-highest rating from Moody's Investors Service (Aa1). In management's view, independent ratings are significant factors in the competitiveness of insurance companies. TRANSACTIONS WITH CONNECTICUT MUTUAL Connecticut Mutual allocates certain expenses to C.M. Life for providing operating facilities, human resources, computer software development and managerial services. Total expenses allocated to C.M. Life were approximately $34,008, $16,412, and $18,831 in 1995, 1994 and 1993, respectively. The increase is attributable to increased sales for C.M. Life and decreased sales for the parent, Connecticut Mutual, resulting in a larger portion of certain expenses being allocated to C.M. Life. In the future, the parent company (MassMutual) will continue to allocate certain expenses to C.M. Life. REGULATION Currently, the Federal government does not directly regulate the business of insurance. However, Federal legislative, regulatory and judicial decisions and initiatives often have significant effects on C.M. Life's business. Types of changes that are most likely to affect C.M. Life's business include changes to: (a) the taxation of life insurance companies; (b) the tax treatment of insurance products; (c) the securities laws, particularly as they relate to insurance and annuity products; (d) the "business of insurance" exemption from any of the provisions of the anti-trust laws; and (e) declining barriers which prevent most banks from selling or underwriting insurance. C.M. Life could also be affected by federal initiatives that have impact on the ownership of or investment in United States companies by foreign companies or investors. NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board (FASB) has issued an interpretation declaring that financial statements of mutual life insurance companies, and their wholly owned subsidiaries, which are prepared on 46 <PAGE> the basis of statutory accounting principles, will no longer be considered to be in conformity with Generally Accepted Accounting Principles (GAAP). This interpretation applies to financial statements issued for fiscal years beginning after December 15, 1995. Certain accounting principles for mutual life insurance companies, which will be required to be in compliance with GAAP, were also issued by the FASB and the American Institute of Certified Public Accountants in January 1995. The financial statement impact of adopting these accounting principles has not been determined by the Company. The effect of initially adopting the FASB interpretation will be reported retroactively through restatement of all previously issued financial statements presented for comparative purposes for fiscal years beginning after December 15, 1992. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial statements, in the form required by Regulation S-X, are set forth in this Prospectus. The Registrant is not required to file supplementary financial data specified by Item 302 of Regulation S-K. C.M. LIFE'S DIRECTORS AND EXECUTIVE OFFICERS <TABLE> <CAPTION> POSITION WITH C.M. LIFE; NAME (AGE AT 5/01/96) YEAR COMMENCED OTHER POSITIONS DURING THE PAST FIVE (5) YEARS - ----------------------------- ----------------------- ---------------------------------------------------------- <S> <C> <C> David E. Sams, Jr. (53) Director and President, President and Chief Financial Officer of MassMutaul since July 1993 (Principal March 1, 1996; President and Chief Executive Officer of Executive Officer) Connecticut Mutual from July 1993 until February 29, 1996; previously President and Chief Executive Officer of Capital Holding Corp. (now Providian Corporation) -- Agency Group; and Chairman, Commonwealth Life Insurance Company; Director, Compdent Dental Benefit Plans. J. Brinke Marcuccilli (41) Director, June 1995; Chief Executive Officer of MML Investors Services, Inc. Chief Financial Officer since March 1, 1996; Chief Financial Officer, Connecticut August 1994 Mutual from May 1994 until February 29, 1996; Vice President/Chief Financial Officer of Providian Corporation, Agency Group from January 1983 until May 1994. John A. Hubbard (42) Actuary, May 1987 Actuary, Connecticut Mutual from December 1991 until February 29, 1996; Associate Actuary, Connecticut Mutual, March 1990 until December 1991. Ann F. Lomeli (40) Secretary, December Vice President, Associate Corporate Secretary and 1988 Associate General Counsel of MassMutual since March 1, 1996; Corporate Secretary and Counsel of Connecticut Mutual from December 1988 until February 29, 1996. Emelia M. Bruno (47) Controller, August 1994 Corporate Comptroller of MassMutual since March 1, 1996; Controller of Connecticut Mutual from May 1994 until February 29, 1996, and Assistant Vice President of Connecticut Mutual from 1988 until February 29, 1996. Scott C. Peters (38) Treasurer, February Vice President and Treasurer from February 1994 until 1994 February 29, 1996; Associate Treasurer from August 1992 until February 1994; Assistant Vice President and Director of Treasury Operations from September 1990 until August 1992. </TABLE> 47 <PAGE> Effective June 9, 1995, Donald H. Pond, Jr., Director of C.M. Life since February 1990, Vice President and Chief Operating Officer of C.M. Life since August 1988, and Executive Vice President of Connecticut Mutual since November 1988, resigned from his positions at Connecticut Mutual and C.M. Life. Effective May 1995, Rodney O. Martin, Director of C.M. Life since May 1994, and Vice President and Chief Agency Officer of Connecticut Mutual since March 1990, resigned from his positions at Connecticut Mutual and C.M. Life Effective September 1, 1995, David J. Beed, Vice President of C.M. Life since March 1991 and Senior Vice President of Connecticut Mutual for Strategic Planning and Total Quality since June 1992, resigned from his positions at Connecticut Mutual and C.M. Life. Effective September 1995, Donald A. Skokan, Actuary for C.M. Life since February 1991 and Actuary for Connecticut Mutual since December 1989, resigned from his positions at Connecticut Mutual and C.M. Life. Effective May 17, 1995, John D. Loewenberg was elected Executive Vice President of C.M. Life, and a Director on June 9, 1995. He resigned from both of those positions on March 5, 1996. COMPENSATION OF C.M. LIFE'S DIRECTORS AND EXECUTIVE OFFICERS Until February 29, 1996, the officers and directors of C.M. Life were employees of Connecticut Mutual, and performed their duties for C.M. Life as part of their employment with Connecticut Mutual. As of March 1, 1996, C.M. Life became a wholly owned subsidiary of MassMutual. Many of the directors and officers of C.M. Life also serve as directors and officers of other companies that are also wholly-owned by MassMutual. Although applicable expense allocation agreements between and among MassMutual and its subsidiaries (such as C.M. Life) do not specifically allocate to the subsidiaries portions of the salaries paid by MassMutual, the amount of compensation received by any one director or officer of C.M. Life from MassMutual for services performed for C.M. Life would not exceed $100,000. The directors of C.M. Life do not receive fees (or expenses) for serving as directors of C.M. Life, or for attending directors' meetings. None of the officers or directors of C.M. Life owns shares of capital stock of C.M. Life, which is wholly-owned by MassMutual. The officers and directors of C.M. Life, individually and as a group, hold (by virtue of their ownership of insurance policies issued by MassMutual) interests in MassMutual of less than one (1) percent. ADDITIONAL INFORMATION ABOUT THE SEPARATE ACCOUNT ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS C.M. Life cannot and does not guarantee that any of the Sub-Accounts of the Separate Account, or Portfolios of the Funds, will always be available for Purchase Payments, allocations, or transfers. C.M. Life retains the right to make changes in the Separate Account and its investments. C.M. Life reserves the right to eliminate the shares of any Portfolio held by a Sub-Account, and to substitute shares of another Portfolio of the Funds, or of another registered open-end management investment company, for the shares of any Portfolio, if the shares of the Portfolio are no longer available for investment, or if, in C.M. Life's judgment, investment in any Portfolio would be inappropriate in view of the purposes of the Separate Account. To the extent required by the 1940 Act, substitutions of shares attributable to the Contract Owner's interest in a Sub-Account will not be made without prior notice to the Contract Owner and the prior approval of the SEC. Nothing contained herein shall prevent the Separate Account from purchasing other securities for other series or classes of variable annuity policies, or from effecting an exchange between series or classes of variable annuity policies on the basis of requests made by Contract Owners. 48 <PAGE> New Sub-Accounts may be established when, at the sole discretion of C.M. Life, marketing, tax, investment or other conditions warrant. Any new Sub-Accounts may be made available to existing Contract Owners on a basis to be determined by C.M. Life. Each additional Sub-Account will purchase shares in a Portfolio of the Funds, or in another mutual fund or investment vehicle. C.M. Life may also eliminate one or more Sub-Accounts if, at its sole discretion, marketing, tax, investment or other conditions warrant such change. In the event any Sub-Account is eliminated, C.M. Life will notify Contract Owners and request a reallocation of the amounts invested in the eliminated Sub-Account. In the event of any such substitution or change, C.M. Life may, by appropriate endorsement, make such changes in the Contracts as may be necessary or appropriate to reflect such substitution or change. Furthermore, if deemed to be in the best interests of persons having voting rights under the Contracts, the Separate Account may be (i) operated as a management company under the 1940 Act or any other form permitted by law, (ii) deregistered under the 1940 Act in the event such registration is no longer required, or (iii) combined with one or more other separate accounts. To the extent permitted by applicable law, C.M. Life also may transfer the assets of the Separate Account associated with the Contracts to another account or accounts. PERFORMANCE DATA From time to time the yield of the Money Market Sub-Account may be advertised. In addition, total returns for all of the Sub-Accounts may be advertised. These figures will be based on historical performance for the Portfolios and are not intended to and do not indicate future performance. The yield of the Money Market Sub-Account refers to the annualized income generated by an investment in that Sub-Account over a specified seven-day period. The yield is "annualized" by assuming that the income generated for that seven-day period is generated each seven-day period over a 52-week period, and is shown as a percentage of that investment. The effective yield is calculated similarly, but, when annualized, the income earned by an investment in that Sub-Account is assumed to be reinvested. The effective yield will be slightly higher than the yield because of the compounding effect of this assumed reinvestment. Total returns for the Money Market Sub-Account, the Income Sub-Account, the Total Return Sub-Account, the Growth Sub-Account, and the International Equity Sub-Account, may be calculated pursuant to a standardized formula or in non-standardized manners. The standardized total return of the Sub-Accounts refers to return quotations assuming an investment has been held in the Sub-Account for various periods of time including, but not limited to, one (1) year, five (5) years, and ten (10) years (if the Sub-Account has been in operation for those periods), and a period measured from the date the Sub-Account commenced operations. The total return quotations will represent the average annual compounded rates of return that would equate an initial investment of $1,000 to the redemption value of that investment as of the last day of each of the periods for which total return quotations are provided. Accordingly, the total return quotations will reflect not only income but also changes in principal value (that is, changes in the accumulation unit values), whereas the yield figures will only reflect income. In addition, the standardized total return quotations will reflect the Surrender Charge imposed on Surrenders, but the standardized yield figures will not. In addition, the Separate Account may from time to time also disclose total return in non-standard formats and cumulative total return for the Sub-Accounts. The non-standard average annual total return and cumulative total return would not reflect the Surrender Charge, which if reflected would lower the performance figures for periods of less than five (5) years. The Funds may from time to time also disclose standard total returns and non-standard total returns for the Sub-Accounts based on or covering periods of time other than those indicated above. All non-standard performance data will only be disclosed if the standard total return is also disclosed. For additional information regarding the calculation of performance data, please refer to the Statement of Additional Information. 49 <PAGE> Also from time to time, in advertisements, sales literature, or in reports to Contract Owners, the Separate Account may compare the performance of the Sub-Accounts to that of other variable accounts or investment vehicles with similar investment objectives, or to relevant indices published by recognized mutual fund or variable annuity statistical rating services, or publications of general variable annuity statistical rating services, or publications of general interest, such as Forbes or Money magazines. For example, a Sub-Account's performance might be compared to that of other accounts or investments with a similar investment objective as compiled by Lipper Analytical Services, Inc., VARDs, Morningstar, Inc., or by others. In addition, a Sub-Account's performance might be compared to that of recognized stock market indicators, including, but not limited to, the Standard & Poor's 500 Stock Index (which is a group of unmanaged securities widely regarded by investors as representative of the stock market in general), and the Dow Jones Industrial Average (which is a price-weighted average of 30 large, well-known industrial stocks that are generally the leaders in their industry). Performance comparisons should not be considered representative of the future performance of a Sub-Account. Performance data may also be calculated for shorter or longer base periods. The Separate Account may use various base periods as may be deemed necessary or appropriate to provide investors with the most informative performance data information, depending on the then-current market conditions. Performance will vary from time to time and historical results will not be representative of future performance. Performance information may not provide a basis for comparison with other investments or other investment companies using a different method of calculating performance. Current yield is not fixed and varies with changes in investment income and accumulation unit values. The Money Market Sub-Account's yield will be affected if it experiences a net inflow of new money which is invested at interest rates different from those being earned on its then-current investments. An investor's principal in a Sub-Account and a Sub-Account's return are not guaranteed and will fluctuate according to market conditions. And, as noted above, advertised performance data figures will be historical figures for a Contract during the Accumulation Period. The Separate Account may also from time to time, in advertisements, sales literature or in reports to shareholders, discuss the Separate Account's fees and compare those fees to industry averages and to other variable accounts. The Separate Account may also discuss the total amount of money invested in variable annuities. VOTING RIGHTS There are no voting rights associated with the General Account Balance. With respect to the Separate Account Balance, C.M. Life will be the "shareholder" of the Funds, and as such, C.M. Life will have certain voting rights. However, to the extent required by law, C.M. Life will vote the Funds shares held by the Separate Account at regular and special shareholder meetings of the Funds in accordance with instructions received from persons having voting interests in the Portfolios. If, however, the 1940 Act or any regulation thereunder should be amended, or if the present interpretation thereof should change, and as a result C.M. Life determines that it is permitted to vote the Funds' shares in its own right, it may elect to do so. Before the Annuity Income Date, the Contract Owner holds the voting interest in the selected Portfolios. The number of votes that the Contract Owner has the right to instruct will be calculated separately for each Sub-Account. The number of votes that the Contract Owner has the right to instruct for a particular Sub-Account will be determined by dividing his or her Contract Balance in the Sub-Account by the net asset value per share of the corresponding Portfolio in which the Sub-Account invests. Fractional shares will be counted. After the Annuity Income Date, the person receiving Annuity Payments has the voting interest, and the number of votes decreases as Annuity Payments are made and as the reserves for the Contract decrease. The 50 <PAGE> person's number of votes will be determined by dividing the reserve for the Contract allocated to the applicable Sub-Account by the net asset value per share of the corresponding Portfolio of the Funds. Fractional shares will be counted. The number of votes that the Contract Owner, or person receiving income payments, has the right to instruct will be determined as of the date established by the Funds for determining shareholders eligible to vote at the meeting of the Funds. C.M. Life will solicit voting instructions by sending Contract Owners, or other persons entitled to vote, written requests for instructions prior to that meeting, in accordance with procedures established by the Funds. Portfolio shares for which no timely instructions are received may be voted in proportion to the voting instructions that are received with respect to all Contracts participating in the same Sub-Account. Shares held by C.M. Life or its affiliates, in which Contract Owners or other persons entitled to vote have no beneficial interest, may be voted by the shareholder thereof (C.M. Life or its affiliates) at its sole discretion. Each person having a voting interest in a Sub-Account will receive proxy material, reports, and other materials relating to the appropriate Portfolio. It should be noted that the Funds are not required to, and do not intend to, hold annual or other regular meetings of shareholders. REGULATION C.M. Life is organized as a Connecticut stock life insurance company, and is subject to Connecticut law governing insurance companies. C.M. Life is regulated and supervised by the Connecticut Commissioner of Insurance. By March 1 of each year, C.M. Life must prepare and file an annual statement, in a form prescribed by the Connecticut Insurance Department, which covers C.M. Life's operations for the preceding calendar year, and must prepare and file a statement of financial condition as of December 31 of such year. The Commissioner and his or her agents have the right at all times to review or examine C.M. Life's books and assets. A full examination of C.M. Life's operations will be conducted periodically according to the rules end practices of the National Association of Insurance Commissioners ("NAIC"). C.M. Life is also subject to the insurance laws of the states in which it is authorized to do business, to various federal and state securities laws and regulations, and to regulatory agencies which administer those laws and regulations. C.M. Life can be assessed up to prescribed limits for policyholder losses incurred by insolvent insurers under the insurance guaranty fund laws of most states. C.M. Life cannot predict or estimate the amount any such future assessments it may have to pay. However, the insurance guaranty laws of most states provide for deferring payment, or exempting a company from paying such an assessment, if it would threaten such insurer's financial strength. Several states, including Connecticut, also regulate insurers and their affiliates, such as C.M. Life and its affiliates, under insurance holding company laws and regulations. Under such laws, inter-company transactions such as dividend payments to parent companies and transfers of assets, may be subject to prior notice and approval, depending on factors such as the size of the transaction in relation to the financial position of the companies. Currently, the Federal government does not directly regulate the business of insurance. However, federal legislative, regulatory and judicial decisions and initiatives often have significant effects on C.M. Life's business. Types of changes that are most likely to affect C.M. Life's business include changes to: (a) the taxation of life insurance companies; (b) the tax treatment of insurance products; (c) the securities laws, particularly as they relate to insurance and annuity products; (d) the "business of insurance" exemption from many of the provisions of the anti-trust laws; and (e) the barriers preventing most banks from selling or underwriting insurance. C.M. Life could also be affected by federal initiatives that have impact on the 51 <PAGE> ownership of or investment in United States companies by foreign companies or investors. C.M. Life alone, and not the federal Government, or any of its agencies or instrumentalities, backs the guarantees associated with the Contracts. LEGAL PROCEEDINGS C.M. Life is not involved in any litigation that is of material importance in relation to its General Account assets. In addition, there are no legal proceedings to which the Separate Account is a party. AVAILABLE INFORMATION C.M. Life is subject to the informational requirements of the Securities Exchange Act of 1934, and, in accordance therewith, files reports and other information with the SEC. Such reports and other information can be inspected and copied at the public reference facilities of the SEC, at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such materials also can be obtained from the Public Reference Section of the Commission, at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. C.M. Life has filed registration statements (the "Registration Statements") with the SEC under the Securities Act of 1933 relating to the Contracts offered by this Prospectus. This Prospectus has been filed as part of the Registration Statements, and does not contain all of the information set forth in the Registration Statements. Reference is hereby made to such Registration Statements for further information relating to C.M. Life and the Contracts. The Registration Statements may be inspected and copied, and copies can be obtained at prescribed rates in the manner set forth in the preceding paragraph. 52 <PAGE> STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS A Statement of Additional Information is available (at no cost) which contains more details concerning the subjects discussed in this Prospectus. The following is the Table of Contents for that Statement. TABLE OF CONTENTS Page ---- More Information About the Contract. . . . . . . . . . . . . . . . . . . . . B-3 Determination of Sub-Account Accumulation Unit Values . . . . . . . . . B-3 Annuity Period Transfer Formulas. . . . . . . . . . . . . . . . . . . . B-5 Records, Reports and Services. . . . . . . . . . . . . . . . . . . . . . . . B-6 Performance Data and Calculations. . . . . . . . . . . . . . . . . . . . . . B-7 Money Market Sub-Account Yield. . . . . . . . . . . . . . . . . . . . . B-7 Sub-Account Total Return Calculations: Standardized . . . . . . . . . . B-8 Other Performance Data: Non-Standardized. . . . . . . . . . . . . . . . B-9 Federal Tax Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-9 Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .B-14 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . .B-15 Panorama Plus Separate Account . . . . . . . . . . . . . . . . . . . . . . .B-16 53 <PAGE> FINANCIAL STATEMENTS The financial statements for C.M. Life and the related report of independent public accountants are contained in this Prospectus. The Statement of Additional Information contains financial statements for the Separate Account. Arthur Andersen LLP, Hartford, Connecticut 06103, serves as independent auditors for the Separate Account. The financial statements included (incorporated by reference) in this Prospectus and elsewhere in this Registration Statement have been audited by Arthur Andersen LLP, as indicated in their reports with respect thereto, and are included here in reliance upon the authority of said firm as experts in accounting and auditing in giving said reports. 54 <PAGE> REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To C.M. Life Insurance Company: We have audited the accompanying balance sheets of C.M. Life Insurance Company (a Connecticut corporation and a wholly owned subsidiary of Connecticut Mutual Life Insurance Company) as of December 31, 1995 and 1994, and the related statements of operations, stockholder's equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements and the schedules referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of C.M. Life Insurance Company as of December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedules I and VI are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen LLP Hartford, Connecticut February 15, 1996 (Except with respect to the matter discussed in Note 13, as to which the date is March 4, 1996.) -55- <PAGE> INDEX TO FINANCIAL STATEMENTS AND SCHEDULES C.M. LIFE INSURANCE COMPANY BALANCE SHEETS AS OF DECEMBER 31, 1995 AND 1994 . . . . . . . . . . . . . . . . . . . . . . . . C.M. LIFE INSURANCE COMPANY STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 . . . . . . . . . . . . . . C.M. LIFE INSURANCE COMPANY STATEMENTS OF STOCKHOLDER'S EQUITY FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 . . . . . . . . . . . . . . C.M. LIFE INSURANCE COMPANY STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 . . . . . . . . . . . . . . C.M. LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995, 1994 AND 1993 . . . . . . . . . . . . . . . . . . . . . . . . -56- <PAGE> C.M. LIFE INSURANCE COMPANY BALANCE SHEETS AS OF DECEMBER 31, 1995 AND 1994 ($ IN THOUSANDS EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> 1995 1994 ---- ---- <S> <C> <C> ASSETS: Investments: Fixed maturities at cost (fair value: $767,888 in 1995 and $684,213 in 1994) $ 736,099 $ 717,291 Preferred stock at cost (fair value: $210 in 1995 and $2,065 in 1994) 263 1,815 Common stock at market value (cost: $64,225 in 1995) 72,361 -- Mortgage loans on real estate net realizable value 26,705 42,038 Real estate at cost -- 1,897 Policy loans at outstanding balance 126,014 109,720 Cash and cash equivalents 15,069 3,025 ---------- ---------- Total investments 976,511 875,786 Accrued investment income 14,781 14,023 Premiums due and deferred 6,831 5,330 Amounts due from reinsurers 902 1,162 Other assets 3,291 2,318 Assets of Separate Account 531,432 309,672 ---------- ---------- TOTAL ASSETS $1,533,748 $1,208,291 ---------- ---------- ---------- ---------- LIABILITIES AND STOCKHOLDER'S EQUITY: LIABILITIES: Future policy benefits $ 813,188 $ 751,808 Policy claims and benefits currently payable 2,026 1,722 Indebtedness to related parties 12,624 6,965 Federal income tax payable 2,820 2,446 Asset valuation reserve 15,868 6,640 Other liabilities 10,622 7,906 Other deposits 54,269 31,690 Transfers due from Separate Account (22,300) (14,445) Liabilities of Separate Account 531,432 309,672 ---------- ---------- TOTAL LIABILITIES $1,420,549 $1,104,454 ---------- ---------- COMMITMENTS AND CONTINGENCIES -- SEE NOTE 12 STOCKHOLDER'S EQUITY: Common stock, $200 par value - 50,000 shares authorized, 2,500 2,500 12,500 shares issued and outstanding Additional paid-in capital 43,759 43,759 Retained earnings 66,940 57,578 ---------- ---------- TOTAL STOCKHOLDER'S EQUITY 113,199 103,837 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $1,533,748 $1,208,291 ---------- ---------- ---------- ---------- </TABLE> The accompanying notes are an integral part of these financial statements. -57- <PAGE> C.M. LIFE INSURANCE COMPANY STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 ($ IN THOUSANDS) <TABLE> <CAPTION> 1995 1994 1993 ---- ---- ---- <S> <C> <C> <C> REVENUES: Premiums and annuity considerations $134,278 $111,238 $108,097 Less: reinsurance ceded (50,732) (54,032) (56,905) -------- -------- -------- Net premiums and annuity considerations 83,546 57,206 51,192 Net investment income 68,815 59,887 57,460 Net realized capital (losses) gains on investments (1,140) (2,533) 459 Other income 1,671 984 363 -------- -------- -------- TOTAL REVENUES 152,892 115,544 109,474 -------- -------- -------- BENEFITS, LOSSES AND EXPENSES: Benefits, claims and settlement expenses 132,067 101,243 98,700 Acquisition and insurance expenses 45,820 24,630 25,436 Other expenses 5,017 4,199 3,004 Less: reinsurance benefits and expenses ceded (52,538) (45,804) (50,001) -------- -------- -------- TOTAL BENEFITS, LOSSES AND EXPENSES 130,366 84,268 77,139 -------- -------- -------- INCOME BEFORE FEDERAL INCOME TAX EXPENSE 22,526 31,276 32,335 FEDERAL INCOME TAX EXPENSE 8,776 13,488 11,241 -------- -------- -------- NET INCOME $13,750 $17,788 $21,094 -------- -------- -------- -------- -------- -------- </TABLE> The accompanying notes are an integral part of these financial statements. -58- <PAGE> C.M. LIFE INSURANCE COMPANY STATEMENTS OF STOCKHOLDER'S EQUITY FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 ($ IN THOUSANDS) <TABLE> <CAPTION> 1995 1994 1993 ---- ---- ---- <S> <C> <C> <C> Common Stock $ 2,500 $ 2,500 $ 2,500 Additional Paid-in Capital 43,759 43,759 43,759 -------- -------- ------- 46,259 46,259 46,259 Retained Earnings Balance, beginning of year 57,578 41,639 21,163 Net income 13,750 17,788 21,094 Change in asset valuation reserve (9,228) (106) (1,313) Change in nonadmitted assets (1,157) (1,761) 675 Net unrealized capital gain 5,997 18 84 Other -- -- (64) -------- -------- ------- Balance, end of year 66,940 57,578 41,639 -------- -------- ------- TOTAL STOCKHOLDER'S EQUITY $113,199 $103,837 $87,898 -------- -------- ------- -------- -------- ------- </TABLE> The accompanying notes are an integral part of these financial statements. -59- <PAGE> C.M. LIFE INSURANCE COMPANY STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 ($ IN THOUSANDS) <TABLE> <CAPTION> 1995 1994 1993 ---- ---- ---- <S> <C> <C> <C> CASH PROVIDED: Premiums and annuity considerations, net of reinsurance $ 82,207 $ 56,346 $ 49,530 Other deposits 177,301 193,970 129,030 Net investment income 69,306 60,886 58,728 Commission and expense allowance and reserve adjustment 13,904 22,484 29,576 on reinsurance ceded Other 9,196 -- 2,106 --------- --------- --------- 351,914 333,686 268,970 --------- --------- --------- Benefits and interest to policyholders and beneficiaries, net (58,415) (43,808) (28,973) of reinsurance Acquisition and insurance expenses, net of reinsurance (49,690) (25,934) (28,619) Transfers to Separate Account (135,757) (168,913) (114,917) Federal income taxes paid (8,445) (10,076) (11,579) Other payments, net (17,838) (15,132) (17,903) --------- --------- --------- (270,145) (263,863) (201,991) --------- --------- --------- Net cash provided by operations 81,769 69,823 66,979 Proceeds from the disposition of: Fixed maturities 382,105 224,884 334,801 Equity securities 11,191 -- 2,629 Mortgage loans on real estate 12,725 24,154 10,833 Other cash provided -- -- 855 --------- --------- --------- Total cash provided 487,790 318,861 416,097 --------- --------- --------- CASH APPLIED: Purchases of fixed maturities 401,658 320,272 408,017 Purchases of equity securities 72,911 -- 296 Other applications 1,177 1,153 3,974 --------- --------- --------- Total cash applied 475,746 321,425 412,287 --------- --------- --------- Net increase (decrease) in cash and cash equivalents 12,044 (2,564) 3,810 CASH AND CASH EQUIVALENTS: Beginning of year 3,025 5,589 1,779 --------- --------- --------- End of year $ 15,069 $ 3,025 $ 5,589 --------- --------- --------- </TABLE> The accompanying notes are an integral part of these financial statements. -60- <PAGE> C.M. Life Insurance Company Notes to Financial Statements December 31, 1995, 1994 and 1993 ($ In Thousands) 1. ORGANIZATION: C.M. Life Insurance Company (C.M. Life) is a wholly owned stock life insurance subsidiary of Connecticut Mutual Life Insurance Company (Connecticut Mutual). C.M. Life is primarily engaged in the sale of individual life insurance and annuity products. C.M. Life is licensed to transact business in all states except New York. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: C.M. Life's financial statements have been prepared in conformity with accounting practices and procedures of the National Association of Insurance Commissioners (NAIC) as prescribed or permitted by the Insurance Department of the State of Connecticut, which are considered to be generally accepted accounting principles (GAAP) for wholly owned stock life insurance subsidiaries of mutual life insurance companies. (see Note 2.h.). The principal accounting practices currently followed by C.M. Life are as follows: a. Assets -- Assets are stated at amounts reported to state regulatory authorities. Certain assets, such as prepaid agent commissions and other prepaid expenses, are excluded from the balance sheet and amounted to $3,839 and $2,684 as of December 31, 1995 and 1994. b. Investments -- Investments are valued in accordance with procedures prescribed by the NAIC. Fixed maturities eligible for amortization are reported at amortized cost. Eligible preferred stocks are reported at cost and common stocks are reported at market value. Mortgage loans on real estate are reported at the unpaid principal balance unless delinquent, at which time they are reported at the lower of the unpaid principal balance or fair value. Investments in real estate which have been identified for possible sale within the next twelve months are reported at the lower of cost, less accumulated depreciation or market value. The Company calculates depreciation for its real estate investments using principally the straight line method. Policy loans are reported at the aggregate amount of the unpaid balances. The Company maintains an Interest Maintenance Reserve (IMR), prescribed by the NAIC, for all fixed income investments and defers all interest rate related losses, net of taxes, as they occur. The deferral is subsequently amortized to net investment income over the period remaining to maturity of the assets sold. All other realized gains and losses are reported in the Statements of Operations upon sale. Unrealized capital gains and losses are reported as additions to or reductions from retained earnings. The Asset Valuation Reserve (AVR), prescribed by the NAIC, provides a general reserve for possible decline in the value of bonds, stocks, mortgage loans, real estate and other invested assets. The reserve is computed based on prescribed factors, each designed to address specific asset risks. Changes in the AVR are charged or credited directly to retained earnings. The AVR increased by $9,228 and $106 in 1995 and 1994, respectively. There were no investments which exceeded 10% of total stockholder's equity as of December 31, 1995 and 1994. Loans overdue more than 12 months were as follows: -61- <PAGE> <TABLE> <CAPTION> 1995 1994 ---- ---- <S> <C> <C> Defaults on mortgages: (non-income producing for 12 months) $2,774 $2,774 </TABLE> c. Disclosure of the Fair Value of Financial Instruments -- Fair value is defined as "the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale." See Note 8. d. Reserves for Payment of Future Benefits: Reserves for payment of future benefits on life insurance, developed using accepted actuarial methods, are established and maintained primarily on the Commissioners' Reserve Valuation Method utilizing the 1980 Commissioners' Standard Ordinary Mortality Table with interest rates of 4%-4 1/2%. Reserves for single premium deferred annuities are calculated based on the Commissioners' Annuity Reserve Valuation Method utilizing the change in fund method and assuming interest on changes in funds of 8.0%, 7.0% and 7.5% in 1995, 1994 and 1993, respectively. Additional reserves are maintained for contracts where the cash surrender value exceeds the actuarially determined reserve. e. Separate Accounts: Separate accounts include the assets and liabilities of certain annuity contracts that must be segregated from C.M. Life's general assets under the terms of the contracts. The assets consist primarily of marketable securities reported at market value. Reserves for these annuity contracts have been established using assumed interest rates and valuation methods that will provide reserves at least as great as those required by law and contract provisions. Transfers due from Separate Account, a contra-liability, represents Separate Account liabilities in excess of Separate Account reserves. f. Premiums and Insurance Operating Expenses: Premiums are reported as income when due. Commissions and other costs relating to the solicitation, underwriting and issuance of new contracts are reported as acquisition and insurance expenses in the year incurred. g. Cash Equivalents: For purposes of the Statements of Cash Flows, C.M. Life considers all highly liquid short-term investments with a maturity of twelve months or less from the date of purchase to be cash equivalents. The carrying amounts reported approximate those assets' fair value. h. New Accounting Pronouncements: The Financial Accounting Standards Board (FASB) has issued an interpretation stating that financial statements of mutual life insurance companies, and their wholly owned subsidiaries, which are prepared on the basis of statutory accounting principles, will no longer be considered to be in conformity with GAAP. This interpretation applies to financial statements issued for fiscal years beginning after December 15, 1995. Certain accounting principles for mutual life insurance companies, which will be required to be in compliance with GAAP, were also issued by the FASB and the American Institute of Certified Public Accountants in January 1995. The financial statement impact of adopting these accounting principles has not been determined by the Company. The effect of initially adopting the FASB interpretation shall be reported retroactively through restatement of all previously issued financial statements presented for comparative purposes for fiscal years beginning after December 15, 1992. i. Reclassifications: The 1994 and 1993 financial statements and Notes to Financial Statements reflect certain reclassifications to conform with the 1995 presentation. j. Certain Risks and Uncertainties: The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as well as disclosures of contingent assets and liabilities, both at the date of the financial statements. Management must also make estimates and assumptions that affect amounts of revenues and expenses for the reporting period. Actual results could differ from these estimates. -62- <PAGE> Future events, which could impact the estimates used in these financial statements, include changes in the levels of mortality and interest rates. 3. FEDERAL INCOME TAXES: C.M. Life is included in Connecticut Mutual's consolidated Federal income tax return and, in accordance with a written tax-sharing agreement, makes a provision for payment to Connecticut Mutual based on its income included in Connecticut Mutual's consolidated taxable income. This provision is based on income which is currently taxable. 4. STOCKHOLDER'S EQUITY: The Board of Directors of Connecticut Mutual has authorized the contribution of funds to C.M. Life sufficient to meet the capital requirements of all states in which C.M. Life is licensed to do business. Substantially all of the statutory stockholder's equity is subject to dividend restrictions relating to various state regulations which limit the payment of dividends without prior approval. 5. REINSURANCE: C.M. Life reinsures (cedes) a portion of its life insurance business to Connecticut Mutual and other insurers, in order to reduce insurance risk. C.M. Life's retention limit per individual insured is $4 million; the portion of the risk exceeding the retention limit is reinsured with other insurers. The reinsurance contract with Connecticut Mutual is a modified coinsurance quota-share treaty. Under the treaty C.M. Life cedes 50% of the premiums on universal life policies issued in 1985 and 75% of the premiums with issue dates on or after January 1, 1986. In return Connecticut Mutual pays C.M. Life a stipulated expense allowance, death and surrender benefits, and a modified coinsurance adjustment. Reserves for payment of future benefits for the ceded policies are retained by C.M. Life. C.M. Life also has a stop-loss agreement with Connecticut Mutual under which C.M. Life cedes claims which, in aggregate, exceed $24,245 in 1995, $18,348 in 1994, and $16,431 in 1993. In 1995, 1994, and 1993, the limit was not exceeded. The agreement was amended and renewed in 1994 for a duration of three years. The amended maximum coverage is $25,000. C.M. Life paid approximately $602, $435, and $446 in premiums under the agreement in 1995, 1994 and 1993, respectively. C.M. Life is contingently liable with respect to ceded reinsurance in the event any reinsurer is unable to fulfill its contractual obligations. 6. INVESTMENTS: FIXED MATURITIES: The carrying value and estimated fair value of investments in fixed maturities as of December 31, 1995 and 1994 are as follows: -63- <PAGE> <TABLE> <CAPTION> Gross Gross Estimated Carrying Unrealized Unrealized Fair 1995 Value Gains Losses Value - ---- -------- ---------- ---------- --------- <S> <C> <C> <C> <C> U.S. Government $ 24,102 $ 1,764 $ 2 $ 25,864 Special Revenue and Special Assessment Obligations and all Non-guaranteed Obli- gations of Government Agencies, Authorities, and Subdivisions 3,715 -- 6 3,709 Foreign Government, Province & Municipal 11,186 483 295 11,374 Public Utility 45,150 2,303 16 47,437 Mortgage Backed Obligations 150,694 7,144 347 157,491 Industrial and Miscellaneous 501,252 21,472 711 522,013 -------- ------- --------- -------- Total Fixed Maturities $736,099 $33,166 $ 1,377 $767,888 -------- ------- --------- -------- -------- ------- --------- -------- Gross Gross Estimated Carrying Unrealized Unrealized Fair 1994 Value Gains Losses Value - ---- -------- ---------- ---------- --------- U.S. Government $ 62,501 $ -- $ 1,874 $ 60,627 Special Revenue and Special Assessment Obligations and all Non-guaranteed Obli- gations of Government Agencies, Authorities, and Subdivisions 4,373 -- 375 3,998 Foreign Government, Province & Municipal 16,175 117 904 15,388 Public Utility 38,773 227 1,605 37,395 Mortgage Backed Obligations 167,641 533 12,184 155,990 Industrial and Miscellaneous 427,828 967 17,980 410,815 -------- ------- --------- -------- Total Fixed Maturities $717,291 $ 1,844 $ 34,922 $684,213 -------- ------- --------- -------- -------- ------- --------- -------- </TABLE> The carrying value and estimated fair value of C.M. Life's fixed maturities at December 31, 1995, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties. <TABLE> <CAPTION> Estimated Carrying Fair Value Value -------- --------- <S> <C> <C> Due in one year or less $ 17,729 $ 17,781 Due after one year through five years 306,539 313,886 </TABLE> -64- <PAGE> <TABLE> <S> <C> <C> Due after five years through ten years 225,283 240,231 Due after ten years 35,854 38,499 Mortgage-backed securities 150,694 157,491 ------- ------- Total $736,099 $767,888 -------- -------- -------- -------- </TABLE> Proceeds from sales of fixed maturities were $380,567, $224,884, and $334,801 for 1995, 1994 and 1993, respectively. Gross gains of $3,598, $1,358, and $5,931 and gross losses of $4,658, $4,439, and $1,016 were realized on those sales for 1995, 1994 and 1993, respectively. MORTGAGE LOANS ON REAL ESTATE: The following table provides a breakdown of the carrying value of mortgage loans on real estate by geographical location: <TABLE> <CAPTION> 1995 1994 ------- -------- <S> <C> <C> United States Northeast $15,241 $22,111 South Atlantic 8,187 13,090 South Central -- 3,462 West 3,277 3,375 ------- -------- Total $26,705 $42,038 ------- -------- ------- -------- </TABLE> Outstanding mortgages whose terms have been modified aggregated $17,128 and $24,034 which represents 64.1% and 57.2% of the total portfolio as of December 31, 1995 and 1994, respectively. Income recognized during 1995, 1994 and 1993 on these restructured loans was $1,317, $1,379 and $1,495, respectively. Income that would have been recognized during 1995, 1994 and 1993 on these loans, if such loans had been current in accordance with their original terms and had been outstanding throughout the year, was $1,799, $2,296 and $2,568, respectively. Commitments to loan additional funds to mortgage loan borrowers, on loans whose terms have been modified, are not significant. Loans either overdue more than three months or in the process of foreclosure were $2,774 at December 31, 1995 and 1994. Additionally, C.M. Life had properties which it acquired in satisfaction of debt of $1,897 at December 31, 1994. 7. DERIVATIVES: C.M. Life makes only limited use of derivative instruments (as defined in Statement of Financial Accounting Standards No. 119 "DISCLOSURE ABOUT DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS") which include swaps, options and futures, to hedge equity exposure and to hedge reinvestment of proceeds from major anticipated transactions. Derivatives are not used for trading purposes. C.M. Life held one swap investment totaling $12,000 notional amount as of December 31, 1995. During 1995 options (protective puts) were utilized to hedge equity exposures and were accounted for on a mark to market basis. The net 1995 realized losses from this activity were $140. The notional amount of such options totaled $35,900 as of December 31, 1995. During 1994 interest rate futures were acquired to hedge the reinvestment of anticipated proceeds from a bulk mortgage sale. The actual gain of $95 was amortized over the expected term of the assets acquired with the mortgage sale proceeds. No interest rate futures were held as of December 31, 1995 and 1994. -65- <PAGE> 8. FAIR VALUE DISCLOSURE OF OTHER FINANCIAL INSTRUMENTS: The Company has identified certain assets and liabilities as financial instruments that require fair value disclosure. Fair value is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties other than in a forced liquidation sale. If quoted market prices are not available, the values are estimated using discounted cash flow analysis or other valuation techniques. These various techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following methods and assumptions were used to estimate the fair value of each class of these instruments for which it is practicable to estimate the value. The estimated fair value for the public bonds is based on the quoted market price from various external bond pricing services. Private bonds are assigned an internal quality rating which parallels independent rating agency criteria and is consistent with NAIC ratings. The fair value of these bonds is estimated by discounting the expected future cash flows using a current discount rate based on the quality rating and maturity of the specific instruments. The estimated fair value for the equity securities is based on quoted market prices from national securities exchanges and over-the-counter markets. The fair value for performing mortgages is determined by discounting the expected future cash flows using the current interest rates at which similar loans would be made to borrowers with similar credit ratings and remaining maturities. Non-performing mortgages are valued based on a discounted cash flow analysis on the underlying collateral using the current market rate for similar collateral. Policy loans are issued with either fixed or variable interest rates, depending upon the terms of the policies. For those loans with fixed interest rates, the interest rates range from 5% to 8%. Since policy loans do not have defined maturities, management believes it is impractical to estimate the fair value of fixed rate policy loans. For loans with variable interest rates, the rates are adjusted annually based upon changes in a corporate bond index and are stated at fair value. Separate Account assets and liabilities are valued at market. A portion of annuity reserves, which represent contracts in their accumulation phase, are considered to be financial instruments. The Company determines fair value to be equal to the cash surrender value of these contracts (including market value adjustments, if any), which represents the amount payable to policyholders on demand. Since supplementary contracts may be perceived as deposit liabilities with defined maturities, the Company has determined fair value based on the discounted value of amounts payable at maturity of the contract. Discount rates used to determine fair value range from 6.5% to 7.9%. All other deposit liabilities are not considered to have defined maturities. The Company has determined fair value for these contracts to be equal to the cash surrender value, which is that amount which is payable to policyholders on demand. -66- <PAGE> The estimated fair values for assets and liabilities, which the Company has identified as investment contracts and borrowed funds, are as follows: <TABLE> <CAPTION> 1995 1994 ---- ---- Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value -------- ---------- -------- ---------- <S> <C> <C> <C> <C> ASSETS Bonds $736,099 $767,888 $717,291 $684,213 Common and Preferred Stock 72,624 72,571 1,815 2,065 Mortgages 26,705 26,783 42,038 40,241 Policy Loans 126,014 126,014 109,720 109,720 Cash and Cash Equivalents 15,069 15,069 3,025 3,025 Assets of Separate Account 531,432 531,432 309,672 309,672 LIABILITIES Future Policy Benefits Annuity Reserves -- Accumulation Phase 49,078 49,683 30,239 28,868 Other Deposits 54,269 54,918 31,690 29,484 Other Liabilities Funds Deposited Under Income Settlements-- Supplementary Contracts Without Life Contingencies 215 208 270 260 Liabilities of Separate 531,432 531,432 309,672 309,672 </TABLE> 9. RELATED PARTY TRANSACTIONS: Connecticut Mutual allocates certain expenses to C.M. Life for providing operating facilities, human resources, computer software development and managerial services. Total expenses allocated to C.M. Life were approximately $34,008, $16,412 and $18,831 in 1995, 1994 and 1993, respectively. 10. NET INVESTMENT INCOME: Net Investment Income is comprised of the following: <TABLE> <CAPTION> 1995 1994 1993 ---- ---- ---- <S> <C> <C> <C> Fixed maturities $54,625 $47,658 $43,983 Mortgage loans on real estate 2,709 4,383 5,813 Policy loans 9,905 7,925 7,448 Amortization of IMR (60) 309 251 Other 3,091 1,449 1,844 ------- ------- ------- Total investment income 70,270 61,724 59,339 Less: Applicable investment expenses 1,455 1,837 1,879 ------- ------- ------- Net investment income $68,815 $59,887 $57,460 ------- ------- ------- ------- ------- ------- </TABLE> Net investment income and realized gains and losses applicable to the Separate Account are not included in C.M. Life's net investment income and realized gains and losses reported in the Statements of Operations. -67- <PAGE> 11. REALIZED AND UNREALIZED GAINS AND LOSSES: The cost of investments sold is determined by the specific identification method. Realized gains and losses and the change in the difference between market value and cost for fixed maturities and equity securities are summarized as follows: <TABLE> <CAPTION> 1995 1994 1993 ---- ---- ---- <S> <C> <C> <C> Realized Gains and Losses: Fixed Maturities: Realized gains $ 3,598 $ 1,358 $ 5,931 Realized losses (4,658) (4,439) (1,016) --------- --------- ------- (1,060) (3,081) 4,915 --------- --------- ------- Equity Securities and Options: Realized gains 1,518 -- 4 Realized losses (758) -- -- --------- --------- ------- 760 -- 4 --------- --------- ------- Real Estate: Realized gains -- -- -- Realized losses (310) (2,158) -- --------- --------- (310) (2,158) -- --------- --------- ------- Mortgage Loans: Realized gains 52 -- -- Realized losses (1,404) (2,093) (13) --------- --------- ------- (1,352) (2,093) (13) --------- --------- ------- (Gains)/Losses Transferred to IMR 822 4,799 (4,447) --------- --------- ------- Net Realized Capital Gains/(Losses) $ (1,140) $ (2,533) $ 459 --------- --------- ------- --------- --------- ------- Unrealized Gains and Losses: Fixed Maturities: Net unrealized gains(losses),end of year $ 31,789 $ (33,077) $20,870 Net unrealized gains, beginning of year (33,077) 20,870 16,497 --------- --------- ------- Change in unrealized gains or losses on fixed maturities $ 64,866 $ (53,947) $ 4,373 --------- --------- ------- --------- --------- ------- </TABLE> The change in unrealized gains and (losses) for equity securities were $7,422, $(30), and $50 as of December 31, 1995, 1994 and 1993, respectively. 12. CONTINGENCIES: C.M. Life is involved in regulatory proceedings and various litigation in the ordinary course of business. In the opinion of management, the ultimate resolution of such proceedings and litigation will not result in fines or judgements which, in the aggregate, would materially affect C.M. Life's financial position. -68- <PAGE> 13. MERGER OF CONNECTICUT MUTUAL: On September 8, 1995, the Board of Directors of Connecticut Mutual approved the merger of Connecticut Mutual and Massachusetts Mutual Life Insurance Company. Thereafter, a definitive agreement was signed by both companies. On January 27, 1996, Connecticut Mutual and insurance subsidiary policyholders' and other insureds and annuitants approved the merger. The merger was reviewed by the insurance regulatory authorities in Massachusetts and Connecticut, and approved. The merger was effective March 1, 1996. -69- <PAGE> SCHEDULE I C.M. LIFE INSURANCE COMPANY SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES AS OF DECEMBER 31, 1995 ($ IN THOUSANDS) <TABLE> <CAPTION> Fair Balance Cost or Value Sheet Type of Investment Other Basis (see note) Amount ----------- ---------- ------- <S> <C> <C> <C> Fixed Maturities: U.S. Government $ 24,102 $ 25,864 $ 24,102 Special Revenue and Special Assessment Obligations and all Non-guaranteed Obligations of Government Agencies Authorities, and Subdivisions 3,715 3,709 3,715 Foreign Government, Province and Municipal 11,186 11,374 11,186 Public Utility 45,150 47,437 45,150 Mortgage Backed Obligations 150,694 157,491 150,694 Industrial and Miscellaneous 501,252 522,013 501,252 -------- -------- -------- Total Fixed Maturities 736,099 767,888 736,099 -------- -------- -------- Equity Securities: Nonredeemable Preferred Stocks 263 210 263 Common Stocks 64,225 72,361 72,361 -------- -------- -------- Total Equity Securities 64,488 72,571 72,624 -------- -------- -------- Total Fixed Maturities and Equity Securities 800,587 840,459 808,723 -------- -------- -------- -------- Other Investments: Mortgage Loans on Real Estate 33,611 26,783 26,705 Real Estate -- (see note) -- Policy Loans 126,014 (see note) 126,014 Cash and Cash Equivalents 15,069 15,069 15,069 -------- -------- Total Other Investments 174,694 167,788 -------- -------- Total Investments $975,281 $976,511 -------- -------- -------- -------- </TABLE> Note: Fair values for equity securities and fixed maturities approximate those quotations published by applicable stock exchanges or are received from other reliable sources. Fair values for real estate are not -70- <PAGE> readily available. Approximately 98% of policy loans are comprised of variable interest rate loans whose carrying value approximate fair value. -71- <PAGE> SCHEDULE VI C.M. LIFE INSURANCE COMPANY REINSURANCE FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 ($ IN THOUSANDS) <TABLE> <CAPTION> Ceded Gross To Other Net Amount Companies Amount ------ --------- ------ <S> <C> <C> <C> DECEMBER 31, 1995 Life insurance in force $19,132,954 $7,323,441 $11,809,513 ----------- ---------- ----------- ----------- ---------- ----------- Premiums: Life Insurance $134,278 $50,732 $83,546 -------- ------- ------- -------- ------- ------- DECEMBER 31, 1994 Life insurance in force $15,800,300 $7,310,290 $8,490,010 ----------- ---------- ---------- ----------- ---------- ---------- Premiums: Life Insurance $111,238 $54,032 $57,206 -------- ------- ------- -------- ------- ------- DECEMBER 31, 1993 Life insurance in force $14,521,452 $7,382,223 $7,139,229 ----------- ---------- ---------- ----------- ---------- ---------- Premiums: Life insurance $108,097 $56,905 $51,192 -------- ------- ------- -------- ------- ------- </TABLE> -72- <PAGE> APPENDIX I SURRENDER CHARGE CALCULATION A Surrender Charge is deducted from the Contract Balance upon partial or full Surrender of the Contract, unless certain conditions apply. (See "Surrender Charge," page _.) The PARTIAL SURRENDER CHARGE formula is calculated as follows: (PS - FREE) x 5%(95%) = PSC, but not less than zero. The FULL SURRENDER CHARGE formula is calculated as follows: (FS - FREE) x 5% = FSC. Where: (PS) is the Partial Surrender Amount. (FS) is the Full Surrender Amount. (FREE) is the Free Surrender Amount. (PSC) is the Partial Surrender Charge Amount. (FSC) is the Full Surrender Charge Amount. EXAMPLE Assume a Separate Account Balance of $50,000 at the beginning of the second Contract Year. 1) If there is a Full Surrender at the beginning of the second Contract Year: Surrender Charge = ($50,000 - $5,000) x .05 = $2,250.00. Thus, the Surrender proceeds would be = $50,000 - $30 - $2,250.00 = $47,720.00 NOTE: THE CONTRACT MAINTENANCE FEE ($30) APPLIES TO FULL SURRENDERS. 2) If there is a Partial Surrender of $10,000 at the beginning of the second Contract Year: Surrender Charge = ($10,000 - $5000) x .05/.95 = $263.16. Thus, the Separate Account Balance would be reduced by $10,000 + $263.16 = $10,263.16. 73 <PAGE> APPENDIX II INTEREST RATE FACTOR ADJUSTMENT CALCULATION The amount of General Account Balance partially or fully Surrendered during the Accumulation Period, and the total General Account Balance on the Annuity Income Date (if and to the extent that the General Account Balance is applied to a Variable Annuity Option), will be subject to an Interest Rate Factor Adjustment. The Interest Rate Factor Adjustment is based on interest rates payable on U.S. Treasury securities. In general, if rates on U.S. Treasury securities are higher when you Surrender than when you made the applicable Purchase Payments, a negative Interest Rate Factor Adjustment will generally be applied to the amount Surrendered, and you could receive an amount lower than the amount of Purchase Payments made. If rates on U.S. Treasury securities are lower when you Surrender than when you made the applicable Purchase Payments, a positive Interest Rate Factor Adjustment will generally be applied to the amount Surrendered, and you could receive an amount higher than the amount of Purchase Payments made. No Interest Rate Factor Adjustment will be applied during the Window Period. In addition, no Interest Rate Factor Adjustment will be applied to the General Account Free Surrender Amount or to Contracts issued to Pennsylvania residents. The Interest Rate Factor Adjustment will reflect the relationship between (i) the weighted average of U.S. Treasury Index Rates corresponding to Purchase Payments and Transfers into the General Account during the current Five-Year Period (as adjusted for partial Surrenders or Transfers out of the General Account), (ii) the U.S. Treasury Index Rate which would be applicable during the time remaining in the current Five-Year Period on the date of the Surrender, and (iii) the time remaining in the current Five-Year Period. In general, if the weighted average of U.S. Treasury Index Rates corresponding to Purchase Payments and Transfers during the current Five-Year Period is lower than the U.S. Treasury Index Rate which would be applicable during the time remaining in the current Five-Year Period, then the application of the Interest Rate Factor Adjustment will result in a lower payment upon Surrender. The PARTIAL SURRENDER Interest Rate Factor Adjustment Formula is: (1 - 1/IRF) x (GAPS - GAF + GAPSC) = IRFA. In the event of a Partial Surrender, there is no Interest Rate Factor Adjustment if the General Account Free Surrender Amount exceeds the General Account portion of such Partial Surrender. The FULL SURRENDER Interest Rate Factor Adjustment Formula is: (IRF - 1) x (GAFS - GAF) = IRFA. Where: (GAPS) is the General Account Partial Surrender Amount. (GAFS) is the General Account Full Surrender Amount. (GAF) is the General Account Free Surrender Amount. (GAPSC) is the General Account portion of the Partial Surrender Charge Amount determined as follows: GAPSC = (GAPS - GAF) x 5%/95%, but not less than zero. (IRF) is the Interest Rate Factor. (IRFA) is the Interest Rate Factor Adjustment. 74 <PAGE> The Interest Rate Factor is determined by the following formula: (N - 12) (1+Ta) - --------------- =IRF (N - 12) (1.003+Tb) Where: (Ta) is the weighted average of the U.S. Treasury Index Rates which correspond to the Purchase Payments and/or Transfers allocated to the General Account during the current Five-Year Period. The U.S. Treasury Index Rate corresponding to each such allocation is determined by the number of full years and fractions thereof (but not less than one (1) year) remaining from the date of the allocation until the end of the current Five-Year Period. For purposes of determining the average of these rates, each U.S. Treasury Index Rate is weighted by the amount of the corresponding allocation (as adjusted to reflect any partial Surrenders and/or transfers from the General Account subsequent to such allocation). The General Account Balance at the beginning of any Five-Year Period will be treated as a new allocation for purposes of this calculation. Each allocation made prior to a Partial Surrender and/or transfer from the General Account (other than the current Surrender) shall be adjusted by multiplying such allocation by the following fraction: 1 - PS/GAB Where: (PS) is the amount of the Partial Surrender and/or transfer from the General Account made subsequent to the allocation, (GAB) is the beginning General Account Balance on the date of such Partial Surrender and/or transfer from the General Account, A separate adjustment shall be calculated for each prior Partial Surrender and/or transfer from the General Account. (Tb) is the U.S. Treasury Index Rate with a maturity equal to the number of full years and fractions thereof (but not less than one (1) year) remaining in the current Five-Year Period on the date of the Partial or Full Surrender, (N) is the number of whole months remaining in the current Five-Year Period as of the date of the Partial or Full Surrender (rounded down), 1.003 builds into the formula a factor representing direct and indirect costs to C.M. Life associated with liquidating General Account assets in order to satisfy Surrender requests or to begin making Annuity Income payments (to the extent the General Account Balance is applied to purchase a Variable Annuity). This adjustment of .30% has been added to the denominator of the formula because it is anticipated that a substantial portion (more than half) of applicable General Account portfolio assets will be in relatively illiquid private placement securities. Thus, in addition to direct transaction costs, if such securities must be sold (e.g., because of Surrenders), the market price may be lower because they are not registered securities. Accordingly, even if interest rates decline, there will not be a positive adjustment until this factor is overcome, and then any adjustment will be lower than otherwise, to compensate for this factor. Similarly, if interest rates rise, any negative adjustment will be greater than otherwise, to compensate for this factor. If interest rates stay the same, this factor will result in a small but negative Interest Rate Factor Adjustment. (IRF) is the Interest Rate Factor. EXAMPLES. The following examples illustrate the calculation of the Interest Rate Factor and the Interest Rate Factor Adjustment. 75 <PAGE> In the following examples, the Interest Rate Factor Adjustment formula is applied so as to produce only positive numbers, which are then added to, or subtracted from, the Surrender proceeds (for Full General Account Balance Surrenders) or the remaining General Account Balance (for Partial General Account Balance Surrenders). For example, if the Interest Rate Factor is .7, then the Interest Rate Factor Adjustment calculation illustrated below will show 1-.7, rather than .7-1, to result in a positive number. For examples 1 and 2, assume no change in interest rates. 1) Assume a $50,000 General Account Balance at the beginning of the second Five-Year Period, and a Full Surrender at that time. Also, assume the U.S. Treasury Index Rate at that time is 7%. (5) (1.07) THEN:IRF= ------- =.9861 (1.073) Interest Rate Factor Adjustment [deducted from proceeds] = (1 - .9861) x ($50,000 - $5,000) = $625.50. 2) Assume a $50,000 General Account Balance at the beginning of the tenth Contract Year with a Full Surrender at that time. Also, assume the U.S. Treasury Index Rate remains at 7% for all maturities: 1.07 THEN:IRF= ----- =.9972 1.073 Interest Rate Factor Adjustment [deducted from proceeds] = (1-.9972) x ($50,000 - $5,000) = $126.00. For examples 3 and 4, assume a General Account Balance of $50,000 at the beginning of the seventh Contract Year. 3) Assume a Full Surrender at the beginning of the seventh Contract Year: a) Assume that the beginning U.S. Treasury Index Rate was 7%, and the current U.S. Treasury Index Rate is 5.40%. (This is a decrease in rates of 1.60%). Then the IRF = 1.05. Interest Rate Factor Adjustment = (1.05 - 1) x ($50,000 - $5,000) = $2,250. Thus, the actual amount of Surrender proceeds paid = $50,000 + $2,250 - $30 = $52,220. b) Assume that the beginning U.S. Treasury Index Rate was 7%, and the current U.S. Treasury Index Rate is 8.08%. (This is an INCREASE in rates of 1.08%). Then the IRF = .95. Interest Rate Factor Adjustment = (1 - .95) x ($50,000 - $5,000) = $2,250. Thus, the actual amount of Surrender proceeds paid = $50,000 - $2,250 - $30 = $47,720. NOTE: THE CONTRACT MAINTENANCE FEE ($30) APPLIES TO FULL SURRENDERS. 4) Assume a partial Surrender of $10,000 at the beginning of the seventh Contract Year: a) Assume that the beginning U.S. Treasury Index Rate was 7%, and the current U.S. Treasury Index Rate is 5.40%. (This is a decrease in rates of 1.60%). Then the IRF = 1.05. <TABLE> <S><C> ( 1 ) (1- ------)x($10,000-$5,000)=$238.10. ( .1.05) Interest Rate Factor Adjustment = </TABLE> Thus, the General Account Balance would be reduced by $10,000 - $238.10 = $9,761.90. 76 <PAGE> b) Assume that the beginning U.S. Treasury Index Rate was 7%, and the current U.S. Treasury Index Rate is 8.08%. (This is an INCREASE in rates of 1.08%). Then the IRF = .95. <TABLE> <S><C> ( 1 ) (--- -1)x($10,000-$5,000)=$263.16. (.95 ) Interest Rate Factor Adjustment = </TABLE> Thus, the General Account Balance would be reduced by $10,000- $236.16=$10,263.16. 77 <PAGE> APPENDIX III EXAMPLES The following examples illustrate the impact of the Interest Rate Factor Adjustment together with the Surrender Charge (See Appendix I.) on Surrender proceeds. For examples 1 and 2, assume a General Account Balance of $50,000 at the beginning of the second Contract Year. 1) Assume a Full Surrender at the beginning of the second Contract Year. a) Assume that the beginning U.S. Treasury Index Rate was 7%, and the current U.S. Treasury Index Rate is 4.18%. (This is a DECREASE in rates of 2.82%). Then the IRF = 1.10. Surrender Charge = ( $50,000 - $5,000 ) x .05 = $2,250.00. Interest Rate Factor Adjustment = ( 1.10 - 1 ) x ( $50,000 - $5,000 ) = $4,500.00. Thus, the actual amount of Surrender proceeds paid = $50,000 - $2,250 + $4,500 - $30 = $52,220.00. b) Assume that the beginning U.S. Treasury Index Rate was 7%, and the current U.S. Treasury Index Rate is 9.56%. (This is an INCREASE in rates of 2.56%). Then the IRF = .9. Surrender Charge = ( $50,000 - $5,000 ) x .05 = $2,250.00. Interest Rate Factor Adjustment = ( 1 - .9 ) x ( $50,000 - $5,000) = $4,500.00. Thus, the actual amount of Surrender proceeds paid = $50,000 - $2,250 - $4,500 - $30 = $43,220.00. NOTE: THE CONTRACT MAINTENANCE FEE ($30) APPLIES TO FULL SURRENDERS. 2) Assume a partial Surrender of $10,000 at the beginning of the second Contract Year. a) Assume that the beginning U.S. Treasury Index Rate was 7%, and the current U.S. Treasury Index Rate is 4.18%. (This is a DECREASE in rates of 2.82%.) Then the IRF = 1.10. Surrender Charge = ( $10,000 - $5,000 ) x .05/.95 = $263.16. <TABLE> <S><C> Interest Rate Factor Adjustment = ( 1 ) (1- ------)x($10,000-$5,000+$263.16)=$478.47 ( 1.10) </TABLE> Thus, the General Account Balance will be reduced by $10,000 + $263.16 - $478.47 = $9,784.69. b) Assume that the beginning U.S. Treasury Index Rate was 7%, and the current U.S. Treasury Index Rate is 9.56%. (This is an increase in rates of 2.56%.) Then the IRF = .9. Surrender Charge = ( $10,000 - $5,000 ) x .05/.95 = $263.16. Interest Rate Factor Adjustment = ( 1 - 1.9 ) x ( $10,000 - $5,000 + $263.16 ) = $584.80. Thus, the General Account Balance will be reduced by $10,000 + $263.16 + $584.80 = $10,847.96. 78 <PAGE> APPENDIX IV INDIVIDUAL RETIREMENT ANNUITY DISCLOSURE This statement is designed to assist you in understanding the requirements of federal tax law which apply to your Individual Retirement Annuity ("IRA"), Spousal IRA or your Simplified Employee Pension IRA ("SEP-IRA") for employer contributions. If you should desire further information regarding your IRA, it may be obtained either from your G. R. Phelps & Co., Inc. ("G.R. Phelps") representative, from any district office of the Internal Revenue Service, or from a competent tax adviser. The growth in the value of the annuity is neither guaranteed nor projected. SEVEN-DAY REVIEW PERIOD You have seven (7) days after you sign your application to review this statement and the Prospectus without obligation. If you notify G. R. Phelps or your representative, either orally or in writing, within this seven-day period that you do not wish to keep your Contract, your entire Purchase Payment will be refunded to you. Registered Representative: Address: c/o G. R. Phelps & Co., Inc. 140 Garden Street Hartford, Connecticut 06154 Telephone: 1 (800) 234-5606 ELIGIBILITY REQUIREMENTS All persons with earned compensation are eligible for IRAs. Additionally, if you have a spouse who has earned no compensation (and you file a joint tax return), you may establish an IRA on behalf of your spouse. Of course, if you have a working spouse who has earned compensation, that spouse may establish his or her own IRA. Lastly, a divorced or legally separated spouse may treat taxable alimony or separate maintenance payments as compensation for purposes of establishing an IRA. THE ANNUITY AS AN IRA When this Annuity is issued as an IRA, the Contract is amended to provide that the Contract is both nontransferable and nonforfeitable. CONTRIBUTIONS AND DEDUCTIONS As a result of significant changes made by the Tax Reform Act of 1986, contributions to your IRA are limited at two levels. First, there are limits on the amount of contributions which may be deducted for income tax purposes. Second, there is a limit with respect to the amount of nondeductible contributions which can be made. If neither you nor your spouse (if you file a joint return) is an active participant in an employer-maintained retirement plan, then you are eligible to make deductible contributions to an IRA equal to the lesser of 100% of compensation or $2,000 ($2,250 in the case of a Spousal IRA). (See page 75.) However, if you or your spouse (if you file a joint return) is an active participant in an employer-maintained retirement plan, your deduction limit for contributions to an IRA is reduced. Specifically, individuals with adjusted gross income over $35,000, married taxpayers filing jointly with adjusted gross income over $50,000, and a married taxpayer filing separately with adjusted gross income over $10,000, are no longer allowed any IRA deductions if they participate in an employer-maintained retirement plan. In the case of a married couple filing jointly, the restrictions apply where either spouse so participates. For single individuals with adjusted gross income between $25,000 and $35,000, married taxpayers filing 79 <PAGE> jointly with adjusted gross income between $40,000 and $50,000, and a married taxpayer filing separately with adjusted gross income between $0 and $10,000, the IRA deduction will be phased out ratably as income rises above the threshold limits. Nevertheless, you may still make designated nondeductible IRA contributions to the extent of the excess of (1) the lesser of $2,000 ($2,250 in the case of a Spousal IRA), or 100% of compensation annually, over (2) the applicable IRA deduction limit. You may also choose to make a contribution nondeductible even if you could have deducted part or all of the contribution. Interest or other earnings on your IRA contribution, whether from deductible or nondeductible contributions, will not be taxed until distributed to you. For purposes of the above discussion, you are an "active participant" in an employer-maintained retirement plan, if you are covered by such plan, even if you are not yet vested in your retirement benefit. However, an individual who is a participant in only an eligible state deferred compensation plan, as defined in Internal Revenue Code section 457(b), is not considered to be an "active participant." In order to qualify for a particular tax year, IRA contributions must be made during such tax year, or by the deadline for filing your income tax return for that year (not including extensions). For calendar year taxpayers the deadline is generally April 15. If you make contributions in excess of the combined deductible and nondeductible limits, you may be liable for a nondeductible excise tax of 6% of the amount of the excess. You may withdraw an excess contribution together with the net income attributable to the excess, on or before the due date (including extensions of time) for filing your federal income tax return, and the excess amount will be treated as if you never contributed it, regardless of the size of the contribution. The accompanying distribution of the net income, however, is includable in income for the year in which the excess contribution is made. Excess amounts which are not withdrawn by this method are subject to the 6% excise tax in the year of contribution, and are carried over and taxed each year until the year the excess is reduced. No contribution may be made by you to your IRA during or after the tax year in which you attain age 70 1/2. SPOUSAL IRAS If your spouse has no compensation for the year and you file a joint return, you may set up and make contributions to an IRA for your spouse, as well as for yourself. Subject to the active participant rules discussed above, the maximum amount that you can deduct for contributions to both IRAs is the lesser of $2,250, or 100% of compensation. You may not contribute, however, more than $2,000 to either IRA for any year. SEP-IRAS Under a SEP-IRA agreement, your employer may contribute 15% of your compensation, up to $30,000 each year to your IRA. The contribution and interest earned is excludable from your income until such time as it is distributed to you. You must withdraw any excess contribution made to your SEP-IRA by your employer before the date for filing your return. If you do not, you are liable for the 6% excise tax discussed.above. SEP-IRAs are also generally subject to the other requirements applicable to IRAs. ROLLOVER CONTRIBUTIONS AND TRANSFERS You are permitted to withdraw any portion of the value of your IRA and reinvest it in another IRA account, but not more frequently than once in any twelve-month period. Such withdrawals may also be made from other IRAs and contributed to this contract. The amount of the withdrawal reinvested in another IRA within sixty (60) days after the date it is received is called a "rollover contribution" and is not subject to tax. Of course, you will not be allowed a tax deduction for the amount of any rollover contribution. You may not roll over IRA distributions required because you have reached age 70 1/2, or an IRA you inherited as a beneficiary (unless you are the surviving spouse). A similar type of rollover contribution can be made with the proceeds of an eligible rollover distribution or a lump-sum distribution from a qualified retirement plan. Such a distribution must also be invested in the IRA within sixty (60) days of receipt. A lump sum distribution is one made from a Qualified Plan (1) because of your death; (2) because you reached age 80 <PAGE> 59 1/2; (3) because you left your job (unless you are self-employed); or (4) because you become permanently disabled (but only if you are self-employed). To be considered a lump sum, the distribution must also be made entirely in a single tax year, and must represent the entire value of your account in the retirement plan (and in all plans of a similar type sponsored by the same employer). Properly made, such a distribution will not be taxable until you receive payments from the IRA created with it. Eligible rollover distributions are generally all taxable distributions from Qualified Plans and Section 403(b) annuities except for: (1) amounts paid over your life or life expectancy; or (2) installments for periods spanning ten (10) years or more; and (3) required minimum distributions. Also, if you receive a distribution upon a plan termination, you may make a rollover contribution to an IRA. In addition to rollover contributions, you may have the assets of one IRA directly transferred (without any distribution to you) to another IRA. Direct IRA to IRA transfers are not subject to the one-year waiting period applicable to IRA rollover contributions. WITHDRAWALS In general, IRA withdrawals are taxable in full. If you have made both deductible and nondeductible IRA contributions, the part of the withdrawal that is from nondeductible contributions (not including interest) is excludable from income. The amount excludable from income for the tax year is the portion of the amount withdrawn that has the same ratio to the amount withdrawn as your total nondeductible IRA contributions (of all your IRAs) have to the total balance of all your IRAs, including rollover IRAs. The remaining portion of the amount withdrawn for the tax year is includible in income. For purposes of this calculation, all your IRAs are treated as one (1) contract, and all withdrawals you make during a tax year are treated as one (1) distribution, and the value of the contract (after adding back distributions made during the year), income on the contract and investment in the contract are computed at the end of the year. The special tax rules for lump sum distributions from pension plans do not apply to IRAs. PREMATURE DISTRIBUTIONS Premature distributions are amounts you withdraw from your IRA before you are age 59 1/2. Premature distributions which are not rolled over are subject to a penalty tax equal to 10% of the amount of the distribution includible in gross income in the tax year, unless you are totally disabled, or receive the distributions in substantially equal payments (at least annually) for your life or life expectancy, or the joint lives or life expectancies of you and your beneficiary, or unless the distributions are made to your beneficiary upon your death. The penalty tax is also applicable to income taxable distributions deemed to have been made upon disqualification of your IRA as a result of a prohibited transaction (including, in general, the sale or assignment of your interest in your IRA to anyone), or as a result of borrowing on your IRA, or using your IRA as security for a loan. INADEQUATE DISTRIBUTION OR UNDERDISTRIBUTION---50% TAX Your IRA is intended to provide retirement benefits over your lifetime. Thus, federal law requires that you either (1) receive a lump sum distribution from your IRA not later than April 1st of the year after the year in which you attain age 70 1/2 or (2) start to receive periodic payments by that date. If you elect to receive periodic payments, those payments must be sufficient to pay out the entire value of your IRA during your life or life expectancy or over the life or life expectancies of you and your beneficiary. If the payments are not sufficient to meet these annual requirements, an excise tax of 50% will be imposed on the amount of any underpayment. EXCESS DISTRIBUTIONS---15% TAX Certain persons, particularly those who participate in more than one (1) tax-qualified retirement plan, may be subject to an excise tax of 15% on certain excess aggregate distributions from those plans. In general, excess distributions are taxable 81 <PAGE> distributions from all tax-qualified plans in excess of a specified annual limit for payments made in the form of an annuity (generally, $150,000 for 1993, indexed for inflation), or five (5) times the annual limit for lump sum distributions. DEATH BENEFITS If you should die before receiving any benefits from your IRA, your beneficiary must elect to either (1) receive the balance of your account in a lump sum within five (5) years of your death, or (2) have the balance applied to purchase an immediate annuity payable over the life or life expectancy of the beneficiary. Such annuity must commence within one (1) year of your death. If your spouse is your beneficiary, however, distributions are not required to be distributed until the date you would have attained age 70 1/2, and if your spouse dies before any distribution to him or her commences, your spouse is treated as the owner of your IRA for purposes of any required distributions. If you should die after benefits have commenced to you, the remaining portion of your account must be distributed to your beneficiary as rapidly as under the method of distribution in effect on the date of your death. If you engage in certain prohibited transactions with your IRA, the IRA will lose its exemption from taxation. Depending on the type of prohibited transaction, you must include in income all or a portion of the fair market value of the IRA account. Examples of prohibited transactions are: (1) any borrowing from the account; (2) use of the account as security for a loan; (3) receipt by you or certain family members of unreasonable compensation for managing the IRA. PROTOTYPE STATUS C.M. Life anticipates requesting an opinion letter from the Internal Revenue Service stating that your prototype IRA qualifies as a prototype IRA. An opinion letter would only be a determination as to the form of the IRA, and would not represent a determination as to its merits. REPORTING TO THE IRS If you make a designated nondeductible contribution to an IRA for a taxable year, or receive a distribution from an IRA during a taxable year, you are required to provide such information as the IRS may prescribe on your tax return for the taxable year and, to the extent required, for succeeding taxable years. The information that may be required includes, but is not limited to: (1) the amount of designated nondeductible contributions for the taxable year; (2) the total amount of designated nondeductible contributions for all preceding taxable years that have not previously been withdrawn; (3) the total balance of all your IRAs as of the close of the calendar year with or within which the taxable year ends; and (4) the amount of distributions from your IRAs during the taxable year. If the required information is not shown on your return, all IRA contributions are presumed to have been deductible. Therefore, they will be taxable upon withdrawal from the IRA, unless it can be shown, with satisfactory evidence, that the contributions were nondeductible when they were made. Whenever you are liable for one of the penalty taxes discussed above (6% for excess contributions, 10% for premature distributions, 50% for underpayments, or 15% for excess distributions), you must file Form 5329 with the Internal Revenue Service. The form is to be attached to your income tax return (Form 1040) for the tax year in which the penalty applies. FINANCIAL DISCLOSURE The charges which may be made against a contribution to your IRA include the Mortality and Expense Risk Charge, and other fees for the Investment Accounts set forth in the Prospectus. The charges which may be made against a withdrawal are also described in the Prospectus, and you should read the Prospectus carefully and retain it for your future reference. Growth in the value of your IRA is neither projected nor guaranteed. Capital gains in excess of net realized short-term capital losses of a Portfolio are declared and paid annually in additional full and fractional shares. 82 <PAGE> PART II. INFORMATION NOT REQUIRED IN A PROSPECTUS <PAGE> Item 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Not applicable ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS The following provisions regarding the Indemnification of Directors and Officers of the Registrant are applicable: CONNECTICUT LAW. Except where an applicable insurance policy is procured, Connecticut General Statutes ("C.G.S.") Section 33-320a is the sole source of indemnification rights for directors and officers of Connecticut corporations and for persons who may be deemed to be controlling persons by reason of their status as a shareholder, director, officer, employee or agent of a Connecticut corporation. Under C.G.S. Section 33-320a, a corporation shall indemnify any director or officer who was or is a party, or was threatened to be made a party, to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter referred to as "proceeding") by virtue of the fact that he or the person whose legal representative he is: (i) is or was a director or officer of the corporation; (ii) while a director or an officer of the corporation, is or was serving at the request of the corporation as a director, officer, partner, trustee, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise (hereinafter referred to as "enterprise"), other than an employee benefit plan or trust; or (iii) while a director or an officer of the corporation, is or was a director or officer serving at the request of the corporation as a fiduciary or an employee benefit plan or trust maintained for the benefit of employees of the corporation or any other enterprise, against "covered expenditures" if (and only if) his conduct met the applicable statutory eligibility standard. The types of expenditures which are covered and the statutory eligibility standard vary according to the type of proceeding to which the director or officer is or was a party or was threatened to be made a party. According to C.G.S. Section 33-320a, in non-derivative proceedings other than ones brought in connection with an alleged claim based upon the purchase or sale by a director or officer of securities of the corporation or of another enterprise, which the director or officer serves or served at the request of the corporation, the corporation shall indemnify a director or officer against judgments, fines, penalties, amounts paid in settlement and reasonable expenses, including attorneys' fees, actually incurred by him in connection with the proceeding, or any appeal therein, IF AND ONLY IF he acted (i) in good faith and (ii) in a manner he reasonably believed to be in the best interests of the corporation or, in the case of a person serving as a fiduciary of any employee benefit plan or trust, in a manner he reasonably believed to be in the best interests of the corporation or in the best interest of the participants and beneficiaries of such employee benefit plan or trust and consistent with the provisions of such employee benefit plan or trust. However, where the proceeding brought is criminal in nature, C.G.S. Section 33-320a requires that the director or officer must satisfy the additional condition that he had no reasonable cause to believe that his conduct was unlawful in order to be indemnified. A director or officer also will be entitled to indemnification as described above if (i) he is successful on the merits in the defense of any non-derivative proceeding brought against him or (ii) a court shall have determined that in view of all the circumstances he is fairly and reasonably entitled to be indemnified. The decision about whether the director or officer qualifies for indemnification under C.G.S. Section 33-320a may be made (i) in writing by a majority of those members of the board of directors who were not parties to the proceeding in question, (ii) in writing by independent legal counsel selected by a consent in writing signed by a majority of those directors who were not parties to the proceeding, or (iii) by the shareholders of the corporation at a special or annual meeting by an affirmative vote of at least a majority of the voting power of shares not owned by parties to the proceeding. A director or officer also may apply to a court of competent jurisdiction for indemnification even though he previously applied to the board, independent legal counsel or the shareholders and his application for indemnification was rejected. For purposes of C.G.S. Section 33-320a, the termination of any proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent shall not create, of itself, a presumption that the director or officer did not act in good faith or in a manner which that director or officer did not believe B-1 <PAGE> reasonably to be in the best interests of the corporation or of the participants and beneficiaries of an employee benefit plan or trust and consistent with the provisions of such plan or trust. Likewise, the termination of a criminal act or proceeding shall not create, of itself, a presumption that the director or officer had reasonable cause to believe that his conduct was unlawful. In non-derivative proceedings based on the purchase or sale of securities of the corporation or of another enterprise, which the director or officer serves or served at the request of the corporation, C.G.S Section 33-320a provides that the corporation shall indemnify the director or officer only after a court shall have determined upon application that, in view of all the circumstances, the director or officer is fairly and reasonably entitled to be indemnified. Furthermore, the expenditures for which the director or officer shall be indemnified shall be only such amount as the court determines to be appropriate. Pursuant to C.G.S. Section 33-320a, where a director or officer was or is a party or was threatened to be made a party to a derivative proceeding, the corporation shall indemnify him against expenses, including attorneys' fees, actually and reasonably incurred by him in connection with the proceeding or any appeal therein, in relation to matters as to which he is finally adjudged not to have breached his duty to the corporation. The corporation also shall indemnify a director or officer where the court determines that, in view of all the circumstances, such person is fairly and reasonably entitled to be indemnified; however, in such a situation, the individual shall be indemnified only for such amount as the court determines to be appropriate. Furthermore, the statute provides that the corporation shall not indemnify a director or officer for amounts paid to the corporation, to a plaintiff or to counsel for a plaintiff in settling or otherwise disposing of a threatened or pending action, with or without court approval, or for expenses incurred in defending a threatened action or a pending action which is settled or otherwise disposed of without court approval. C.G.S. Section 33-320a also provides that expenses incurred in defending a proceeding may be paid by the corporation in advance of the final disposition of such proceeding upon authorization of the board of directors, provided said expenses are indemnifiable under the statute and the director or officer agrees to repay such amount if he is later found not entitled to indemnification by the corporation. Lastly, C.G.S. Section 33-320a is intended to be an exclusive statute. A corporation established under Connecticut statute cannot indemnify a director or officer (other than a director or officer who is or was serving at the request of the corporation as a director, officer, partner, trustee, employee or agent of another enterprise), to an extent either greater or less than that authorized by the statute, and any provision in the certificate of incorporation, the by-laws, a shareholder or director resolution, or agreement or otherwise that is inconsistent with the statute is invalid. C.M. Life Insurance Company was not established under Connecticut statute but was instead created by special act of the Connecticut General Assembly. Currently, its charter does not have provisions dealing with indemnification of its directors or officers, therefore the provisions of C.G.S. Section 33-320a currently apply to such indemnification. However, in the event C.M. Life Insurance Company's charter is amended by the Connecticut General Assembly in such a manner which is inconsistent with the statute, the charter would take precedence over C.G.S. Section 33-320a. Notwithstanding the above, C.G.S. Section 33-320a specifically authorizes a corporation to procure insurance providing greater indemnification rights than those set out in the statute the premium cost of which may be shared with the director or officer on such basis as may be agreed upon. The directors and officers may be covered by an errors and omissions insurance policy or other insurance policy. Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being B-2 <PAGE> registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. Item 15. RECENT SALES OF UNREGISTERED SECURITIES Not applicable. Item 16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES (a) Exhibits (1) (a) Principal Underwriting Agreement by and between C.M. Life Insurance Company and G.R. Phelps & Company, Inc.** (b) Underwriting and Servicing Agreement between MML Investors Services, Inc. and C.M. Life Insurance Company.*** (3) (a) Charter of C.M. Life Insurance Company* (b) By Laws of C.M. Life Insurance Company* (4) (a) Form of Individual Contract for the Panorama Plus Annuity.** (i) Form of IRA Endorsement for the Panorama Plus Annuity Individual Contract.** (ii) Form of Terminal Illness Endorsement for the Panorama Plus Annuity Individual Contract.** (iii) Form of Tax-Sheltered Annuity Endorsement for the Panorama Plus Annuity Individual Contract.** (iv) Form of Qualified Plan Endorsement for the Panorama Plus Annuity Individual Contract.** (v) Form of Unisex Endorsement for the Panorama Plus Annuity Individual Contract.** (vi) Form of Systematic Withdrawal Endorsement for the Panorama Plus Annuity Individual Contract.** (vii) Form of Dollar Cost Averaging Endorsement for the Panorama Plus Annuity Individual Contract.** (b) Form of Group Contract for the Panorama Plus Annuity.** (i) Form of IRA Endorsement for the Panorama Plus Annuity Group Contract.** (ii) Form of Terminal Illness Endorsement for the Panorama Plus Annuity Group Contract.** (iii) Form of Tax-Sheltered Annuity Endorsement for the Panorama Plus Annuity Group Contract.** (iv) Form of Qualified Plan Endorsement for the Panorama Plus Annuity Group Contract.** (v) Form of Unisex Endorsement for the Panorama Plus Annuity Group Contract.** (vi) Form of Systematic Withdrawal Endorsement for the Panorama Plus Annuity Group Contract.** (vii) Form of Dollar Cost Averaging Endorsement for the Panorama Plus Annuity Group Contract.** B-3 <PAGE> (c) Form of Individual Certificate for the Panorama Plus Annuity.** (i) Form of IRA Endorsement for the Panorama Plus Annuity Individual Certificate.** (ii) Form of Terminal Illness Endorsement for the Panorama Plus Annuity Individual Certificate.** (iii) Form of Tax-Sheltered Annuity Endorsement for the Panorama Plus Annuity Individual Certificate.** (iv) Form of Qualified Plan Endorsement for the Panorama Plus Annuity Individual Certificate.** (v) Form of Unisex Endorsement for the Panorama Plus Annuity Individual Certificate.** (vi) Form of Systematic Withdrawal Endorsement for the Panorama Plus Annuity Individual Certificate.** (vii) Form of Dollar Cost Averaging Endorsement for the Panorama Plus Annuity Individual Certificate.** (d) Form of Application for the Panorama Plus Annuity Individual Contract.** (e) Form of Application Supplement for Panorama Plus Tax Sheltered Annuity.** (f) Form of Application for the Panorama Plus Annuity Group Contract.** (g) Form of Application for Panorama Plus Annuity Group Contract (NC).** (h) Form of Application for the Panorama Plus Annuity Individual Certificate.** (i) Form of Certificate Application Supplement for Panorama Plus Tax Sheltered Annuity.** (5) Opinion Regarding Legality*** (10) (a) Agreement to Purchase Shares by and between C.M. Life Insurance Company and Connecticut Mutual Financial Services Series Fund I, Inc.** (b) Participation Agreement among Oppenheimer Variable Account Funds, OppenheimerFunds, Inc. and C.M. Life Insurance Company*** (21) Subsidiaries of Registrant** (23) (a) Consent of Independent Auditors*** (b) Consent of Counsel*** (24) (a) Powers of Attorney*** (b) Certified Board of Directors Resolution*** (b) Financial Data Schedule*** * Incorporated by reference to the initial registration statement on Form N-4 for the Panorama Plus Separate Account (File No. 33-45122) as filed with the Securities and Exchange Commission on January 16, 1992. B-4 <PAGE> ** Incorporated by reference to Pre-Effective Amendment No. 1 to the registration statement on Form N-4 for the Panorama Plus Separate Account (File No. 33-45122) as filed with the Securities and Exchange Commission on April 13, 1992. *** Filed herewith. Item 17. UNDERTAKINGS The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represents a fundamental change in the information set forth in the registration statement; and (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) That, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (5) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. B-5 <PAGE> SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this initial registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Hartford, State of Connecticut, on this 8th day of April, 1996. C. M. LIFE INSURANCE COMPANY *BY */s/ Ann F. Lomeli --------------------- David E. Sams, Jr. Director and President Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated. Signatures Title Date - ---------- ----- ---- */s/ Ann F. Lomeli Director and President April 8,1996 - --------------------- (Principal Executive Officer) David E. Sams, Jr. */s/ Ann F. Lomeli - --------------------- J. Brinke Marcuccilli Chief Financial Officer April 8, 1996 */s/ Ann F. Lomeli Controller April 8, 1996 - --------------------- (Principal Accounting Emelia M. Bruno Officer) */s/ Ann F. Lomeli *Attorney in fact pursuant April 8, 1996 - --------------------- to the Powers of Attorney Ann F. Lomeli filed herewith. <PAGE> FORM S-1 INDEX TO EXHIBITS EXHIBIT (1)(b) Underwriting and Servicing Agreement between MML Investors Services, Inc. and C.M. Life Insurance Company (5) Opinion Regarding Legality (10)(b) Participation Agreement among Oppenheimer Variable Account Funds, OppenheimerFunds, Inc. and C.M. Life Insurance Company (23(a) Consent of Independent Auditors (23)(b) Consent of Counsel (24)(a) Powers of Attorney (24)(b) Certified Board of Directors Resolution (27) Financial Data Schedule </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-1.(B) <SEQUENCE>2 <DESCRIPTION>EXHIBIT 1(B) UNDERWRITING AND SERVICING AGREEMENT <TEXT> <PAGE> EXHIBIT 1(b) UNDERWRITING AND SERVICING AGREEMENT This UNDERWRITING AND SERVICING AGREEMENT is made this 1st day of March, 1996, by and between MML Investors Services, Inc. ("MMLISI") and C. M. Life Insurance Company ("C. M. Life"), on its own behalf and on behalf of Panorama Plus Separate Account (the "Separate Account"), a separate account of C. M. Life, as follows: WHEREAS, the Separate Account was established on September 25, 1991 pursuant to authority of C. M. Life's Board of Directors in order to set aside and invest assets attributable to certain variable annuity contracts (the "Contracts") issued by C. M. Life; and WHEREAS, C. M. Life has registered the Separate Account under the Investment Company Act of 1940, as amended, (the "1940 Act") and has registered the Contracts under the Securities Act of 1933, as amended, (the "1933 Act"); and WHEREAS, C. M. Life will continue the effectiveness of the registrations of the Separate Account under the 1940 Act and the Contracts under the 1933 Act; and WHEREAS, C. M. Life intends for the Contracts to be sold by its agents and brokers who are required to be registered representatives of a broker-dealer that is registered with the Securities and Exchange Commission (the "SEC") under the Securities Exchange Act of 1934 ("1934 Act") and a member of the National Association of Securities Dealers, Inc. (the "NASD"); and WHEREAS, C. M. Life desires to engage MMLISI, a broker-dealer registered with the SEC under the 1934 Act and a member of the NASD, to act as a co-underwriter ("Co-underwriter") in connection with the distribution of the Contracts by the full-time career contracted agents of C. M. Life ("Agents") and certain other brokers, and in connection therewith, to provide certain services and supervision to such Agents and brokers who are also registered representatives of MMLISI and who sell the Contracts, and to otherwise perform certain duties and functions that are necessary and proper for the distribution of the Contracts as required under applicable federal and state securities laws and NASD regulations, and MMLISI desires to act as Co-underwriter for the sale of the Contracts and to assume such responsibilities; NOW, THEREFORE, the parties hereto agree as follows: 1. UNDERWRITER. C. M. Life hereby appoints MMLISI as, and MMLISI agrees to serve as, Co-underwriter of the Contracts during the term of this Agreement for purposes of federal and state securities laws. C. M. Life reserves the right, however, to refuse at <PAGE> any time or times to sell any Contracts hereunder for any reason, and C.M. Life maintains ultimate responsibility for the sales of the Contracts. 2. SERVICES. MMLISI agrees, on behalf of C. M. Life and in its capacity as Co-underwriter, to undertake at its own expense except as otherwise provided herein, to provide certain sales, administrative and supervisory services relative to the Contracts as described below, and otherwise to perform all duties that are necessary and proper for the distribution of the Contracts as required under applicable federal and state securities laws and NASD regulations. 3. BEST EFFORTS. MMLISI shall use reasonable efforts to sell the Contracts but does not agree hereby to sell any specific number of Contracts and shall be free to act as underwriter of other securities. MMLISI agrees to offer the Contracts for sale in accordance with the prospectus then in effect for the Contracts. 4. COMPLIANCE AND SUPERVISION. All persons who are engaged directly or indirectly in the operations of MMLISI and C. M. Life in connection with the offer or sale of the Contracts shall be considered a "person associated" with MMLISI as defined in Section 3(a)(18) of the 1934 Act. MMLISI shall have full responsibility for the securities activities of each such person as contemplated by Section 15 of the 1934 Act. MMLISI shall be fully responsible for carrying out all compliance, supervisory and other obligations hereunder with respect to the activities of its registered representatives as required by the NASD Rules of Fair Practice (the "Rules") and applicable federal and state securities laws. Without limiting the generality of the foregoing, MMLISI agrees that it shall be fully responsible for: (a) ensuring that no representative of MMLISI shall offer or sell the Contracts until such person is appropriately licensed, registered, or otherwise qualified to offer and sell such Contracts under the federal securities laws and any applicable securities laws of each state or other jurisdiction in which such Contracts may be lawfully sold, in which C. M. Life is licensed to sell the Contracts, and in which such person shall offer or sell the Contracts; and (b) training and supervising C. M. Life's Agents and brokers who are also registered representatives of MMLISI for purposes of complying on a continuous basis with the Rules and with federal and state securities laws applicable in connection with the offering and sale of the Contracts. In this connection, MMLISI shall: (i) jointly conduct with C. M. Life such training (including the preparation and utilization of training materials) as in the opinion of MMLISI and C. M. Life is necessary to accomplish the purposes of this Agreement; - 2 - <PAGE> (ii) establish and implement reasonable written procedures for supervision of sales practices of registered representatives of MMLISI who sell the Contracts; (iii) provide a sufficient number of registered principals and an adequately staffed compliance department to carry out the responsibilities as set forth herein; (iv) take reasonable steps to ensure that C. M. Life Agents and brokers who are also registered representatives of MMLISI recommend the purchase of the Contracts only upon reasonable grounds to believe that the purchase of the Contracts is suitable for such applicant; and (v) impose disciplinary measures on agents of C. M. Life who are also registered representatives of MMLISI as required. The parties hereto recognize that any registered representative of MMLISI selling the Contracts as contemplated by this Agreement shall also be acting as an insurance agent of C. M. Life or as an insurance broker, and that the rights of MMLISI to supervise such persons shall be limited to the extent specifically described herein or required under applicable federal or state securities laws or NASD regulations. Such persons shall not be considered employees of MMLISI and shall be considered agents of MMLISI only as and to the extent required by such laws and regulations. Further, it is intended by the parties hereto that such persons are and shall continue to be considered to have a common law independent contractor relationship with C. M. Life and not to be common law employees of C. M. Life. 5. REGISTRATION AND QUALIFICATION OF CONTRACTS. C. M. Life has prepared or caused to be prepared a registration statement describing the Contracts, together with exhibits thereto (hereinafter referred to as the "Registration Statement"). The Registration Statement includes a prospectus (the "Prospectus") for the Contracts. C. M. Life agrees to execute such papers and to do such acts and things as shall from time-to-time be reasonably requested by MMLISI for the purpose of qualifying and maintaining qualification of the Contracts for sale under applicable state law and for maintaining the registration of the Separate Account and interests therein under the 1933 Act and the 1940 Act, to the end that there will be available for sale from time-to-time such amounts of the Contracts as MMLISI may reasonably be expected to sell. C. M. Life shall advise MMLISI promptly of any action of the SEC or any authorities of any state or territory, of which it is aware, affecting registration or qualification of the Separate Account, or rights to offer the Contracts for sale. If any event shall occur as a result of which it is necessary to amend or supplement the Registration Statement in order to make the statements therein, in light of the circumstances under which they were or are made, true, complete or not misleading, C. M. Life will forthwith prepare and furnish to MMLISI, without charge, - 3 - <PAGE> amendments or supplements to the Registration Statement sufficient to make the statements made in the Registration Statement as so amended or supplemented true, complete and not misleading in light of the circumstances under which they were made. 6. REPRESENTATIONS OF C. M. LIFE. C. M. Life represents and warrants to MMLISI as follows: (a) C. M. Life is an insurance company duly organized under the laws of the State of Connecticut and is in good standing and is authorized to conduct business under the laws of each state in which the Contracts are sold, that the Separate Account was legally and validly established as a segregated asset account under the Insurance Code of Connecticut, and that the Separate Account has been properly registered as a unit investment trust in accordance with the provisions of the 1940 Act to serve as a segregated investment account for the Contracts. (b) All persons that will be engaging in the offer or sale of the Contracts will be authorized insurance agents of C. M. Life. (c) The Registration Statement does not and will not contain any misstatements of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were or are made, not materially misleading. (d) C. M. Life shall make available to MMLISI copies of all financial statements that MMLISI reasonably requests for use in connection with the offer and sale of the Contracts. (e) No federal or state agency or bureau has issued an order preventing or suspending the offer of the Contracts or the use of the Registration Statement, or of any part thereof, with respect to the sale of the Contracts. (f) The offer and sale of the Contracts is not subject to registration, or if necessary, is registered, under the Blue Sky laws of the states in which the Contracts will be offered and sold. (g) The Contracts are qualified for offer and sale under the applicable state insurance laws in those states in which the Contracts shall be offered for sale. In each state where such qualification is effected, C. M. Life shall file and make such statements or reports as are or may be required by the laws of such state. (h) This Agreement has been duly authorized, executed and delivered by C. M. Life and constitutes the valid and legally binding obligation of C. M. Life. Neither the execution and delivery of this Agreement by C. M. Life nor the consummation of the transactions contemplated herein will result in a breach or violation of any provision of - 4 - <PAGE> the state insurance laws applicable to C. M. Life, any judicial or administrative orders in which it is named or any material agreement or instrument to which it is a party or by which it is bound. 7. REPRESENTATIONS OF MMLISI. MMLISI represents and warrants to C. M. Life as follows: (a) MMLISI is duly registered as a broker-dealer under the 1934 Act and is a member in good standing of the NASD and, to the extent necessary to perform the activities contemplated hereunder, is duly registered, or otherwise qualified, under the applicable securities laws of every state or other jurisdiction in which the Contracts are available for sale. (b) This Agreement has been duly authorized, executed and delivered by MMLISI and constitutes the valid and legally binding obligation of MMLISI. Neither the execution and delivery of this Agreement by MMLISI nor the consummation of the transactions contemplated herein will result in a breach or violation of any provision of the federal or state securities laws or the Rules, applicable to MMLISI, or any judicial or administrative orders in which it is named or any material agreement or instrument to which it is a party or by which it is bound. (c) MMLISI shall comply with the Rules and the securities laws of any jurisdiction in which it sells, directly or indirectly, any Contracts. 8. EXPENSES. MMLISI shall be responsible for all expenses incurred in connection with its provision of services and the performance of its obligations hereunder, except as otherwise provided herein. C. M. Life shall be responsible for all expenses of printing and distributing the Prospectuses, and all other expenses of preparing, printing and distributing all other sales literature or material for use in connection with offering the Contracts for sale. 9. SALES LITERATURE AND ADVERTISING. MMLISI agrees to ensure that its registered representatives use only the Prospectus, statements of additional information, or other applicable and authorized sales literature then in effect in selling the Contracts. MMLISI is not authorized to give any information or to make any representations concerning the Contracts other than those contained in the current Registration Statement filed with the SEC or in such sales literature as may be authorized by C. M. Life. MMLISI agrees to make timely filings with the SEC, the NASD, and such other regulatory authorities as may be required of any sales literature or advertising materials relating to the Contracts and intended for distribution to prospective investors. C. M. Life shall review and approve all advertising and sales literature concerning the Contracts - 5 - <PAGE> utilized by MMLISI. MMLISI also agrees to furnish to C. M. Life copies of all agreements and plans it intends to use in connection with any sales of the Contracts. 10. APPLICATIONS. All applications for Contracts shall be made on application forms supplied by C. M. Life, and shall be remitted by MMLISI promptly, together with such forms and any other required documentation, directly to C. M. Life at the address indicated on such application or to such other address as C. M. Life may, from time to time, designate in writing. All applications are subject to acceptance or rejection by C. M. Life at its sole discretion. 11. PAYMENTS. All money payable in connection with any of the Contracts, whether as premiums, purchase payments or otherwise, and whether paid by, or on behalf of any applicant or Contract owner, is the property of C. M. Life and shall be transmitted immediately in accordance with the administrative procedures of C. M. Life without any deduction or offset for any reason, including by example but not limitation, any deduction or offset for compensation claimed by MMLISI. Checks or money orders as payment on any Contract shall be drawn to the order of "C. M. Life Insurance Company." No cash payments shall be accepted by MMLISI in connection with the Contracts. Unless otherwise agreed to by C. M. Life in writing, neither MMLISI nor any of C. M. Life's Agents nor any broker shall have an interest in any surrender charges, deductions or other fees payable to C. M. Life as set forth herein. 12. INSURANCE LICENSES. C. M. Life shall apply for and maintain the proper insurance licenses and appointments for each of the Agents and brokers selling the Contracts in all states or jurisdictions in which the Contracts are offered for sale by such person. C. M. Life reserves the right to refuse to appoint any proposed Agent or broker, and to terminate an Agent or broker once appointed. C. M. Life agrees to be responsible for all licensing or other fees required under pertinent state insurance laws to properly authorize Agents or brokers for the sale of the Contracts; however, the foregoing shall not limit C. M. Life's right to collect such amount from any person or entity other than MMLISI. 13. AGENT/BROKER COMPENSATION. Commissions or other fees due all brokers and Agents in connection with the sale of Contracts shall be paid by C. M. Life, on behalf of MMLISI, to the persons entitled thereto in accordance with the applicable agreement between each such broker or Agent and C. M. Life or a general agent thereof. MMLISI shall assist C. M. Life in the payment of such amounts as C. M. Life shall reasonably request, provided that MMLISI shall not be required to perform any acts that would subject it to registration under the insurance laws of any state. The responsibility of MMLISI shall include the performance of all activities by MMLISI necessary in order that the payment of such amounts fully complies with all applicable federal and state securities laws. Unless applicable federal or state securities law shall require, C. M. Life retains the ultimate right to determine the commission rate paid to its Agents. - 6 - <PAGE> 14. MMLISI COMPENSATION. As payment for its services hereunder, MMLISI shall receive an annual fee that has the following components: (1) a fixed fee in the amount of $64,000 per year, and (2) a variable fee in the amount of 2 basis points (.0002) per year of new sales of the Contracts. Payments shall commence and be made no later than December 31 of the year in which a Contract is issued. The variable component of the fee shall be paid to MMLISI's wholly-owned subsidiary, MML Insurance Agency, Inc. ("MMLIAI"). The fixed component shall be renegotiated annually commencing in 1997. The last agreed-to amounts for each of these fees shall remain in effect until the new fees are mutually agreed upon and are set forth in schedules attached hereto. 15. BOOKS AND RECORDS. MMLISI and C. M. Life shall each cause to be maintained and preserved for the period prescribed such accounts, books, and other documents as are required of it by the 1934 Act and any other applicable laws and regulations. In particular, without limiting the foregoing, MMLISI shall cause all the books and records in connection with the offer and sale of the Contracts by its registered representatives to be maintained and preserved in conformity with the requirements of Rules 17a-3 and 17a-4 under the 1934 Act, to the extent that such requirements are applicable to the Contracts. The books, accounts, and records of MMLISI and C. M. Life as to all transactions hereunder shall be maintained so as to disclose clearly and accurately the nature and details of the transactions. The payment of premiums, purchase payments, commissions and other fees and payments in connection with the Contracts by its registered representatives shall be reflected on the books and records of MMLISI as required under applicable NASD regulations and federal and state securities laws requirements. MMLISI and C. M. Life, from time to time during the term of this Agreement, shall divide the administrative responsibility for maintaining and preserving the books, records and accounts kept in connection with the Contracts; provided, however, in the case of books, records and accounts kept pursuant to a requirement of applicable law or regulation, the ultimate and legal responsibility for maintaining and preserving such books, records and accounts shall be that of the party which is required to maintain or preserve such books, records and accounts under the applicable law or regulation, and such books, records and accounts shall be maintained and preserved under the supervision of that party. MMLISI and C. M. Life shall each cause the other to be furnished with such reports as it may reasonably request for the purpose of meeting its reporting and recordkeeping requirements under such regulations and laws, and under the insurance laws of the Commonwealth of Massachusetts and any other applicable states or jurisdictions. MMLISI and C. M. Life each agree and understand that all documents, reports, records, books, files and other materials required under applicable Rules and federal and state securities laws shall be the property of MMLISI, unless such documents, reports, records, books, files and other materials are required by applicable regulation or law to - 7 - <PAGE> be also maintained by C. M. Life, in which case such material shall be the joint property of MMLISI and C. M. Life. All other documents, reports, records, books, files and other materials maintained relative to this Agreement shall be the property of C. M. Life. Upon termination of this Agreement, all said material shall be returned to the applicable party. MMLISI and C. M. Life shall establish and maintain facilities and procedures for the safekeeping of all books, accounts, records, files, and other materials related to this Agreement. Such books, accounts, records, files, and other materials shall remain confidential and shall not be voluntarily disclosed to any other person or entity except as described below in section 16. 16. AVAILABILITY OF RECORDS. MMLISI and C. M. Life shall each submit to all regulatory and administrative bodies having jurisdiction over the sales of the Contracts, present or future, any information, reports, or other material that any such body by reason of this Agreement may request or require pursuant to applicable laws or regulations. In particular, without limiting the foregoing, C. M. Life agrees that any books and records it maintains pursuant to paragraph 15 of this Agreement which are required to be maintained under Rule 17a-3 or 17a-4 of the 1934 Act shall be subject to inspection by the SEC in accordance with Section 17(a) of the 1934 Act and Sections 30 and 31 of the 1940 Act. 17. CONFIRMATIONS. C. M. Life agrees to prepare and mail a confirmation for each transaction in connection with the Contracts at or before the completion thereof as required by the 1934 Act and applicable interpretations thereof, including Rule 10b-10 thereunder. Each such confirmation shall reflect the facts of the transaction, and the form thereof will show that it is being sent on behalf of MMLISI acting in the capacity of agent for C. M. Life. 18. INDEMNIFICATION. C. M. Life shall indemnify MMLISI, its registered representatives, officers, directors, employees, agents and controlling persons and hold such persons harmless, from and against any and all losses, damages, liabilities, claims, demands, judgments, settlements, costs and expenses of any nature whatsoever (including reasonable attorneys' fees and disbursements) resulting or arising out of or based upon an allegation or finding that: (i) the Registration Statement or any application or other document or written information provided by or on behalf of C. M. Life includes any untrue statement of a material fact or omits to state a material fact necessary to make the statements therein, in light of the circumstances under which they are made, not misleading, unless such statement or omission was made in reliance upon, and in conformity with, written information furnished to C. M. Life by MMLISI or its registered representatives specifically for use in the preparation thereof, or (ii) there is a misrepresentation, breach of warranty or failure to fulfill any covenant or warranty made or undertaken by C. M. Life hereunder. - 8 - <PAGE> MMLISI will indemnify C. M. Life, its officers, directors, employees, agents and controlling persons and hold such persons harmless, from and against any and all losses, damages, liabilities, claims, demands, judgments, settlements, costs and expenses of any nature whatsoever (including reasonable attorneys' fees and disbursements) resulting or arising out of or based upon an allegation or finding that: (i) MMLISI or its registered representatives offered or sold or engaged in any activity relating to the offer and sale of the Contracts which was in violation of any provision of the federal securities laws or, (ii) there is a material misrepresentation, material breach of warranty or material failure to fulfill any covenant or warranty made or undertaken by MMLISI hereunder. Promptly after receipt by an indemnified party under this paragraph 18 of notice of the commencement of any action by a third party, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this paragraph 18, notify the indemnifying party of the commencement thereof; but the omission to notify the indemnifying party will not relieve the indemnifying party from liability which the indemnifying party may have to any indemnified party otherwise than under this paragraph. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, to assume the defense thereof, with counsel satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this paragraph for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. 19. INDEPENDENT CONTRACTOR. MMLISI shall be an independent contractor. MMLISI is responsible for its own conduct and the employment, control and conduct of its agents and employees and for injury to such agents or employees or to others through its agents or employees. MMLISI assumes full responsibility for its agents and employees under applicable statutes and agrees to pay all employer taxes thereunder. 20. TERMINATION. Subject to termination as hereinafter provided, this Agreement shall remain in full force and effect for the initial term of the Agreement, which shall be for a two year period commencing on the date first above written, and this Agreement shall continue in full force and effect from year to year thereafter, until terminated as herein provided. This Agreement may be terminated by either party hereto upon 30 days written notice to the other party, or at any time upon the mutual written consent of the parties hereto. This Agreement shall automatically be terminated in the event of its assignment. Subject to C. M. Life's approval, however, MMLISI may delegate any duty or function assigned to it in this agreement provided that such delegation is permissible under applicable law. Upon termination of this Agreement, all authorizations, rights and obligations shall cease except the the obligations to settle accounts hereunder, including - 9 - <PAGE> the settlement of monies due in connection with the Contracts in effect at the time of termination or issued pursuant to applications received by C. M. Life prior to termination. 21. INTERPRETATION. This Agreement shall be subject to the provisions of the 1934 Act and the rules, regulations, and rulings thereunder and of the NASD, from time to time in effect, and the terms hereof shall be interpreted and construed in accordance therewith. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule, or otherwise, the remainder of this Agreement shall not be affected thereby. This Agreement shall be interpreted in accordance with the laws of the Commonwealth of Massachusetts. 22. NON-EXCLUSIVITY. The services of MMLISI and C. M. Life to the Separate Account hereunder are not to be deemed exclusive and MMLISI and C. M. Life shall be free to render similar services to others so long as their services hereunder are not impaired or interfered with hereby. 23. AMENDMENT. This Agreement constitutes the entire Agreement between the parties hereto and may not be modified except in a written instrument executed by all parties hereto. 24. INTERESTS IN AND OF MMLISI. It is understood that any of the policyholders, directors, officers, employees and agents of C. M. Life may be a shareholder, director, officer, employee, or agent of, or be otherwise interested in, MMLISI, any affiliated person of MMLISI, any organization in which MMLISI may have an interest, or any organization which may have an interest in MMLISI; that MMLISI, any such affiliated person or any such organization may have an interest in C. M. Life; and that the existence of any such dual interest shall not affect the validity hereof or of any transaction hereunder except as otherwise provided in the Charter, Articles of Incorporation, or By-Laws of C. M. Life and MMLISI, respectively, or by specific provision of applicable law. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their respective officials thereunto duly authorized and seals to be affixed, as of the day and year first above written. ATTEST: C. M. LIFE INSURANCE COMPANY, on its behalf and on behalf of PANORAMA PLUS SEPARATE ACCOUNT By: ------------------------------ - 10 - <PAGE> ATTEST: MML INVESTORS SERVICES, INC. By: ----------------------------- - 11 - </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-5 <SEQUENCE>3 <DESCRIPTION>EXHIBIT 5 OPINION 2 <TEXT> <PAGE> EXHIBIT 5 [LETTERHEAD OF C.M. LIFE] April 5, 1996 Board of Directors C.M. Life Insurance Company 140 Garden Street Hartford, CT 06154 Gentlemen: With reference to the registration statement on Form S-1 under the Securities Act of 1933 filed by C.M. Life Insurance Company (the "Company") with the Securities and Exchange Commission for the general account option under the Panorama Plus group and individual flexible premium deferred variable annuity ("Contracts"), I have examined such documents and such law as I have considered necessary and appropriate, and on the basis of such examination, it is my opinion that: 1. The Company is duly organized and validly existing under the laws of the State of Connecticut and is duly to issue the Contracts; and 2. The Contracts, when issued in accordance with the prospectus contained in the above-mentioned registration statement, will be legally issued and valid, legal and binding obligations of the Company in accordance with their terms. I hereby consent to the filing of this opinion as an exhibit to the above-mentioned Registration Statement. Very truly yours, /s/ Michael A. Chong --------------------------- Michael A. Chong Counsel </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.(B) <SEQUENCE>4 <DESCRIPTION>EXHIBIT 10(B) <TEXT> <PAGE> EXHIBIT 10(b) PARTICIPATION AGREEMENT Among OPPENHEIMER VARIABLE ACCOUNT FUNDS, OPPENHEIMERFUNDS, INC. and CM LIFE INSURANCE COMPANY THIS AGREEMENT (the "Agreement"), made and entered into as of the 12th day of January, 1996 by and among CM Life Insurance Company (hereinafter the "Company"), on its own behalf and on behalf of C.M. Multi-Account A (hereinafter collectively the "Accounts"), Oppenheimer Variable Account Funds (hereinafter the "Fund") and OppenheimerFunds, Inc. (hereinafter the "Adviser"). WHEREAS, the Fund is an open-end management investment company and is available to act as the investment vehicle for separate accounts now in existence or to be established at any date hereafter for variable life insurance policies and variable annuity contracts (collectively, the "Variable Insurance Products") offered by insurance companies (hereinafter "Participating Insurance Company"); WHEREAS, the beneficial interest in the Fund is divided into several series of shares, each designated a "Portfolio", and each representing the interests in a particular managed pool of securities and other assets; WHEREAS, the Fund has obtained an order from the Securities and Exchange Commission, dated July 16, 1986 (File No. 812-6324) granting Participating Insurance Company and variable annuity and variable life insurance separate accounts exemptions from the provisions of sections 9(a), 13(a), 15(a), and 15(b) of the Investment Company Act of 1940, as amended, (hereinafter the "1940 Act") and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent necessary to permit shares of the Fund to be sold to and held by variable annuity and variable life insurance separate accounts of both affiliated and unaffiliated life insurance companies (hereinafter the "Shared Funding Exemptive Order") <PAGE> WHEREAS, the Fund is registered as an open-end management investment company under the 1940 Act and its shares are registered under the Securities Act of 1933, as amended (hereinafter the "1933 Act"); WHEREAS, the Adviser is duly registered as an investment adviser under the federal Investment Advisers Act of 1940; WHEREAS, the Company has registered or will register certain variable annuity and/or life insurance contracts under the 1933 Act (hereinafter "Contracts"); WHEREAS, the Accounts are or will be duly organized, validly existing segregated asset accounts, established by resolution of the Board of Directors of the Company, to set aside and invest assets attributable to the aforesaid variable contracts (the Contract(s) and the Account(s) covered by the Agreement are specified in Schedule B attached hereto, as may be modified by mutual consent from time to time); WHEREAS, the Company have registered or will register the Accounts as unit investment trusts under the 1940 Act; WHEREAS, to the extent permitted by applicable insurance laws and regulations, the Company intend to purchase shares in the Portfolios (the Portfolios covered by this Agreement are specified in Schedule A attached hereto as may be modified by mutual consent from time to time), on behalf of the Accounts (which are also described on Schedule A, as may be modified by mutual consent from time to time) to fund the Contracts and the Fund is authorized to sell such shares to unit investment trusts such as the Accounts at net asset value; and NOW, THEREFORE, in consideration of their mutual promises, the Fund, the Adviser and the Company agree as follows: ARTICLE I. SALE OF FUND SHARES 1.1 The Fund agrees that shares of the Fund will be sold only to Variable Insurance Products. - 2 - <PAGE> 1.2. The Company shall not permit any person other than a Contract Holder or such Contract Holder's duly authorized representative to give instructions to the Company which would require the Company to redeem or exchange shares of the Fund. ARTICLE II. SALES MATERIAL, PROSPECTUSES AND OTHER REPORTS 2.1. The Company shall furnish, or shall cause to be furnished, to the Fund or its designee, each piece of sales literature or other promotional material in which the Fund or the Adviser is named, at least ten Business Days prior to its use. No such material shall be used if the Fund or its designee reasonably object to such use within ten Business Days after receipt of such material. "Business Day" shall mean any day in which the New York Stock Exchange is open for trading and in which the Fund calculates its net asset value pursuant to the rules of the Securities and Exchange Commission. 2.2. The Company shall not give any information or make any representations or statements on behalf of the Fund or concerning the Fund in connection with the sale of the Contracts other than the information or representations contained in the registration statement or prospectus for the Fund shares, as such registration statement and prospectus may be amended or supplemented from time to time, or in reports or proxy statements for the Fund, or in sale literature or other promotional material approved by the Fund or its designee, except with the permission of the Fund. 2.3. For purposes of this Article II, the phrase "sales literature or other promotional material" means advertisements (such as material published, or designed for use in, a newspaper, magazine, or other periodical, radio, television, telephone or tape recording, videotape display, signs or billboard or electronic media), and sales literature (such as brochures, circulars, market letters and form letters), distributed or made generally available to customers or the public. 2.4. The Fund shall provide a copy of its current prospectus within a reasonable period of its filing date, and provide other assistance as is reasonably necessary in order for the Company once each year (or more frequently if the prospectus for the Fund is supplemented or amended) to have - 3 - <PAGE> the prospectus for the Contracts and the Fund's prospectus printed together in one document (such printing to be at the Company's expense). The Adviser shall be permitted to review and approve the typeset form of the Fund's Prospectus prior to such printing. 2.5. The Fund or the Adviser shall provide the Company with either: (i) a copy of the Fund's proxy material, reports to shareholders, other information relating to the Fund necessary to prepare financial reports, and other communications to shareholders for printing and distribution to Contract owners at the Company's expense, or (ii) camera ready and/or printed copies, if appropriate, of such material for distribution to Contract owners at the Company' expense, within a reasonable period of the filing date for definitive copies of such material. The Adviser shall be permitted to review and approve the typeset form of such proxy material and shareholder reports prior to such printing provided such materials have been provided within a reasonable period. ARTICLE III. FEES AND EXPENSES 3.1. The Fund and Adviser shall pay no fee or other compensation to the Company under this agreement, and the Company shall pay no fee or other compensation to the Fund or Adviser, except as provided herein. 3.2. All expenses incident to performance by each party of its respective duties under this Agreement shall be paid by that party. The Fund shall see to it that all its shares are registered and authorized for issuance in accordance with applicable federal law and, if and to the extent advisable by the Fund, in accordance with applicable state laws prior to their sale. The Fund shall bear the expenses for the cost of registration and qualification of the Fund's shares, preparation and filing of the Fund's prospectus and registration statement, proxy materials and reports, and the preparation of all statements and notices required by any federal or state law. 3.3. The Company shall bear the expenses of typesetting, printing and distributing the Fund's prospectus, proxy materials and reports to owners of Contracts issued by the Company. 3.4. In the event the Fund adds one or more additional Portfolios and the parties - 4 - <PAGE> desire to make such Portfolios available to the respective Contract owners as an underlying investment medium, a new Schedule A or an amendment to this Agreement shall be executed by the parties authorizing the issuance of shares of the new Portfolios to the particular Account. The amendment may also provide for the sharing of expenses for the establishment of new Portfolios among Participating Insurance Company desiring to invest in such Portfolios and the provision of funds as the initial investment in the new Portfolios. ARTICLE IV. POTENTIAL CONFLICTS 4.1. The Board of Trustees of the Fund (the "Board") will monitor the Fund for the existence of any material irreconcilable conflict between the interests of the Contract owners of all separate accounts investing in the Fund. An irreconcilable material conflict may arise for a variety of reasons, including: (a) an action by any state insurance regulatory authority; (b) a change in applicable federal or state insurance, tax, or securities laws or regulations, or a public ruling, private letter ruling, no-action or interpretative letter, or any similar action by insurance, tax, or securities regulatory authorities; (c) an administrative or judicial decision in any relevant proceeding; (d) the manner in which the investments of any Portfolio are being managed; (e) a difference in voting instructions given by variable annuity contract and variable life insurance contract owners; or (f) a decision by an insurer to disregard the voting instructions of Contract owners. The Board shall promptly inform the Company if it determines that an irreconcilable material conflict exists and the implications thereof. 4.2. The Company will each report any potential or existing conflicts of which it is aware to the Board. The Company will assist the Board in carrying out its responsibilities in monitoring such conflicts by providing the Board in a timely manner with all information reasonably necessary for the Board to consider any issues raised. This includes, but is not limited to, an obligation by the Company to inform the Board whenever Contract owner voting instructions are disregarded and by confirming in writing, at the Fund's request, that the Company are unaware of any such potential or existing material irreconcilable conflicts. - 5 - <PAGE> 4.3. If it is determined by a majority of the Board, or a majority of its disinterested Trustees, that a material irreconcilable conflict exists, the Company shall, at their expense and to the extent reasonably practicable (as determined by a majority of the disinterested trustees), take whatever steps are necessary to remedy or eliminate the irreconcilable material conflict, up to an including: (1) withdrawing the assets allocable to some or all of the separate accounts from the Fund or any Portfolio and reinvesting such assets in a different investment medium, including (but not limited to) another Portfolio of the Fund, or submitting the question whether such segregation should be implemented to a vote of all affected Contract owners and, as appropriate, segregating the assets of any appropriate group (I.E., annuity contract owners, life insurance contract owners, or variable contract owners of one or more Participating Insurance Company) that votes in favor of such segregation, or offering to the affected Contract owners the option of making such a change; and (2) establishing a new registered management investment company or managed separate account. 4.4. If a material irreconcilable conflict arises because of a decision by the Company to disregard Contract owner voting instructions and that decision represents a minority position or would preclude a majority vote, the Company may be required, at the Fund's election, to withdraw the Account's investment in the Fund and terminate this Agreement; provided, however, that such withdrawal and termination shall be limited to the extent required by the foregoing material irreconcilable conflict as determined by a majority of the disinterested members of the Board. Any such withdrawal and termination must take place within six (6) months after the Fund gives written notice that this provision is being implemented, and until the end of the six month period the Fund shall continue to accept and implement orders by the Company for the purchase and redemption of shares of the Fund. 4.5. If a material irreconcilable conflict arises because a particular state insurance regulator's decision applicable to the Company conflicts with the majority of other state regulators, then the Company will withdraw the Account's investment in the Fund and terminate this Agreement within - 6 - <PAGE> six months after the Board informs the Company in writing that it has determined that such decision has created an irreconcilable material conflict; provided, however, that such withdrawal and termination shall be limited to the extent required by the foregoing material irreconcilable conflict as determined by a majority of the disinterested members of the Board. Until the end of the foregoing six month period, the Fund shall continue to accept and implement orders by the Company for the purchase and redemption of shares of the Fund, subject to applicable regulatory limitation. 4.6. For purposes of Sections 4.3 through 4.6 of this Agreement, a majority of the disinterested members of the Board shall determine whether any proposed action adequately remedies any irreconcilable material conflict, but in no event will the Fund be required to establish a new funding medium for the Contracts. The Company shall not be required by Section 4.3 to establish a new funding medium for Contracts if an offer to do so has been declined by vote of a majority of Contract owners materially adversely affected by the irreconcilable material conflict. In the event that the Board determines that any proposed action does not adequately remedy any irreconcilable material conflict, then the Company will withdraw the particular Account's investment in the Fund and terminate this Agreement within six (6) months after the Board informs the Company in writing of the foregoing determination, provided, however, that such withdrawal and termination shall be limited to the extent required by any such material irreconcilable conflict as determined by a majority of the disinterested members of the Board. ARTICLE V. APPLICABLE LAW 5.1. This Agreement shall be construed and the provisions hereof interpreted under and in accordance with the laws of New York. 5.2. This Agreement shall be subject to the provisions of the 1933, 1934 and 1940 Acts, and the rules and regulations and rulings thereunder, including such exemptions from those statutes, rules and regulations as the Securities and Exchange Commission may grant (including, but not - 7 - <PAGE> limited to, the Shared Funding Exemptive Order) and the terms hereof shall be interpreted and construed in accordance therewith. ARTICLE VI. TERMINATION 6.1 This Agreement shall terminate with respect to some or all Portfolios: (a) at the option of any party upon six month's advance written notice to the other parties; (b) at the option of the Company to the extent that shares of Portfolios are not reasonably available to meet the requirements of its Contracts or are not appropriate funding vehicles for the Contracts, as determined by the Company reasonably and in good faith. Prompt notice of the election to terminate for such cause and an explanation of such cause shall be furnished by the Company; or (c) as provided in Article IV 6.2. It is understood and agreed that the right of any party hereto to terminate this Agreement pursuant to Section 6.1(a) may be exercised for cause or for no cause. ARTICLE VII. NOTICES Any notice shall be sufficiently given when sent by registered or certified mail to the other party at the address of such party set forth below or at such other address as such party may from time to time specify to the other party. If to the Fund: Oppenheimer Variable Account Funds c/o OppenheimerFunds, Inc. 2 World Trade Center New York, NY 10048-0203 Attn: Legal Department - 8 - <PAGE> If to the Adviser: OppenheimerFunds, Inc. 2 World Trade Center New York, NY 10048-0203 Attn: General Counsel If to the Company: CM Life Insurance Company 140 Garden Street Hartford, CT 06154 Attn: Legal Department ARTICLE VIII. MISCELLANEOUS 8.1. Subject to the requirements of legal process and regulatory authority, each party hereto shall treat as confidential the names and addresses of the owners of the Contracts and all information reasonably identified as confidential in writing by any other party hereto and, except as permitted by this Agreement, shall not disclose, disseminate or utilize such names and addresses and other confidential information without the express written consent of the affected party until such time as it may come into the public domain. 8.2. The captions in this Agreement are included for convenience of reference only and in no way define or delineate any of the provisions hereof or otherwise affect their construction or effect. 8.3. This Agreement may be executed simultaneously in two or more counterparts, each of which taken together shall constitute one and the same instrument. 8.4. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of the Agreement shall not be affected thereby. 8.5. Each party hereto shall cooperate with, and promptly notify each other party and all appropriate governmental authorities (including without limitation the Securities and Exchange Commission, the NASD and state insurance regulators) and shall permit such authorities reasonable - 9 - <PAGE> access to its books and records in connection with any investigation or inquiry relating to this Agreement or the transactions contemplated hereby. 8.6. The rights, remedies and obligations contained in this Agreement are cumulative and are in addition to any and all rights, remedies and obligations, at law or in equity, which the parties hereto are entitled to under state and federal laws. 8.7. It is understood by the parties that this Agreement is not an exclusive arrangement in any respect. 8.8. The Company and the Adviser each understand and agree that the obligations of the Fund under this Agreement are not binding upon any shareholder of the Fund personally, but bind only the Fund and the Fund's property; the Company and the Adviser each represent that it has notice of the provisions of the Declaration of Trust of the Fund disclaiming shareholder liability for acts or obligations of the Fund. 8.9. The parties agree that the Company may, on behalf of their respective Accounts and Contracts listed in Exhibits A and B, elect to make additional Portfolios available to Accounts upon the approval of the Adviser and the provision of reasonable notice to the Adviser. Any Portfolio so added will be subject to all of the terms and conditions of this Agreement. IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed in its name and on its behalf by its duly authorized representative and its seal to be hereunder affixed as of the date specified below. CM LIFE INSURANCE COMPANY By its authorized officer, By: -------------------------------- Title: -------------------------------- Date: -------------------------------- - 10 - <PAGE> OPPENHEIMER VARIABLE ACCOUNT FUNDS By its authorized officer, By: -------------------------------- Robert G. Zack Title: Assistant Secretary -------------------------------- Date: -------------------------------- OPPENHEIMERFUNDS, INC. By its authorized officer, By: -------------------------------- Mitchell J. Lindauer Title: Vice President -------------------------------- Date: -------------------------------- - 11 - <PAGE> SCHEDULE A Portfolios of Oppenheimer Variable Account Funds: Oppenheimer Money Fund Oppenheimer Bond Fund - 12 - <PAGE> SCHEDULE B C.M. Multi-Account A (Panorama Premier Contract) Panorama Plus Separate Account (Panorama Plus Contract) legag\999CM - 13 - </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-23.(A) <SEQUENCE>5 <DESCRIPTION>EXHIBIT 23(A) <TEXT> <PAGE> EXHIBIT 23(a) CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report (and to all references to our Firm) included in or made a part of this Registration Statement for C.M. Life Insurance Company. /s/ ARTHUR ANDERSEN LLP Hartford, Connecticut April 4, 1996 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-23.(B) <SEQUENCE>6 <DESCRIPTION>EXHIBIT 23(B) <TEXT> <PAGE> EXHIBIT 23(b) [LETTERHEAD OF C.M. LIFE] April 5, 1996 Board of Directors C.M. Life Insurance Company 140 Garden Street Hartford, CT 06154 Gentlemen: With reference to the registration statement on Form S-1 under the Securities Act of 1933 filed by C.M. Life Insurance Company (the "Company") with the Securities and Exchange Commission for the general account option under the Panorama Plus group and individual flexible premium deferred variable annuity ("Contracts"), I have examined such documents and such law as I have considered necessary and appropriate, and on the basis of such examination, it is my opinion that: 1. The Company is duly organized and validly existing under the laws of the State of Connecticut and is duly to issue the Contracts; and 2. The Contracts, when issued in accordance with the prospectus contained in the above-mentioned registration statement, will be legally issued and valid, legal and binding obligations of the Company in accordance with their terms. I hereby consent to the filing of this opinion as an exhibit to the above-mentioned Registration Statement. Very truly yours, /s/ Michael A. Chong --------------------------- Michael A. Chong Counsel </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-24.(A) <SEQUENCE>7 <DESCRIPTION>EXHIBIT 24(A) POWER OF ATTORNEY <TEXT> <PAGE> EXHIBIT 24(a) POWER OF ATTORNEY C.M. LIFE SEPARATE INVESTMENT ACCOUNTS The undersigned, David E. Sams, Jr., a member of the Board of Directors and President of C.M. Life Insurance Company ("C.M. Life"), does hereby constitute and appoint Lawrence V. Burkett, Thomas F. English, Richard M. Howe, Michael Berenson, and Ann F. Lomeli, and each of them individually, as his true and lawful attorneys and agents. The attorneys and agents shall have full power of substitution and power to take any and all actions and execute any and all instruments on the undersigned's behalf as a member of the Board of Directors and President of C.M. Life that said attorneys and agents may deem necessary or advisable to enable C.M. Life to comply with the Securities Act of 1933, as amended (the "1933 Act"), the Investment Company Act of 1940, as amended (the "1940 Act"), and any rules, regulations, orders or other requirements of the Securities and Exchange Commission (the "Commission") thereunder. This power of attorney applies to the registration, under the 1933 Act and the 1940 Act, of shares of beneficial interest of C.M. Life's separate investment accounts (the "C.M. Life Separate Accounts"), as well as interests of C.M. Life's General Account. This power of attorney authorizes such attorneys and agents to sign the undersigned's name on his behalf as a member of the Board of Directors and President of C.M. Life to the Registration Statements and to any instruments or documents filed or to be filed with the Commission under the 1933 Act and the 1940 Act in connection with such Registration Statements, including any and all amendments to such statements, documents or instruments of any C.M. Life Separate Account, or C.M. Life's General Account, including but not limited to those listed below. C.M. Multi-Account A SEI Variable Annuity Panorama Premier Variable Annuity OFFITBANK Variable Annuity Panorama Plus Separate Account C.M. Life Variable Life Separate Account I <PAGE> The undersigned hereby ratifies and confirms all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has set his hand this 21st of March, 1996. /s/ David E. Sams, Jr. ----------------------------------- David E. Sams, Jr. Director and President Attest: Ann F. Lomeli ------------- <PAGE> EXHIBIT 24(a) POWER OF ATTORNEY C.M. LIFE SEPARATE INVESTMENT ACCOUNTS The undersigned, J. Brinke Marcuccilli, a member of the Board of Directors and Chief Financial Officer of C.M. Life Insurance Company ("C.M. Life"), does hereby constitute and appoint Lawrence V. Burkett, Thomas F. English, Richard M. Howe, Michael Berenson, and Ann F. Lomeli, and each of them individually, as his true and lawful attorneys and agents. The attorneys and agents shall have full power of substitution and power to take any and all actions and execute any and all instruments on the undersigned's behalf as a member of the Board of Directors and Chief Financial Officer of C.M. Life that said attorneys and agents may deem necessary or advisable to enable C.M. Life to comply with the Securities Act of 1933, as amended (the "1933 Act"), the Investment Company Act of 1940, as amended (the "1940 Act"), and any rules, regulations, orders or other requirements of the Securities and Exchange Commission (the "Commission") thereunder. This power of attorney applies to the registration, under the 1933 Act and the 1940 Act, of shares of beneficial interest of C.M. Life's separate investment accounts (the "C.M. Life Separate Accounts"), as well as interests of C.M. Life's General Account. This power of attorney authorizes such attorneys and agents to sign the undersigned's name on his behalf as a member of the Board of Directors and Chief Financial Officer of C.M. Life to the Registration Statements and to any instruments or documents filed or to be filed with the Commission under the 1933 Act and the 1940 Act in connection with such Registration Statements, including any and all amendments to such statements, documents or instruments of any C.M. Life Separate Account, or C.M. Life's General Account, including but not limited to those listed below. C.M. Multi-Account A SEI Variable Annuity Panorama Premier Variable Annuity OFFITBANK Variable Annuity Panorama Plus Separate Account C.M. Life Variable Life Separate Account I <PAGE> The undersigned hereby ratifies and confirms all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has set his hand this 22nd day of March, 1996. /s/ J. Brinke Marcuccilli -------------------------- J. Brinke Marcuccilli Director and Chief Financial Officer Attest: Ann F. Lomeli ------------- <PAGE> EXHIBIT 24(a) POWER OF ATTORNEY C.M. LIFE SEPARATE INVESTMENT ACCOUNTS The undersigned, Emelia M. Bruno, Controller of C.M. Life Insurance Company ("C.M. Life"), does hereby constitute and appoint Lawrence V. Burkett, Thomas F. English, Richard M. Howe, Michael Berenson, and Ann F. Lomeli, and each of them individually, as her true and lawful attorneys and agents. The attorneys and agents shall have full power of substitution and power to take any and all actions and execute any and all instruments on the undersigned's behalf as a member of the Board of Directors and Controller of C.M. Life that said attorneys and agents may deem necessary or advisable to enable C.M. Life to comply with the Securities Act of 1933, as amended (the "1933 Act"), the Investment Company Act of 1940, as amended (the "1940 Act"), and any rules, regulations, orders or other requirements of the Securities and Exchange Commission (the "Commission") thereunder. This power of attorney applies to the registration, under the 1933 Act and the 1940 Act, of shares of beneficial interest of C.M. Life's separate investment accounts (the "C.M. Life Separate Accounts"), as well as interests of C.M. Life's General Account. This power of attorney authorizes such attorneys and agents to sign the undersigned's name on her behalf as a member of the Board of Directors and Controller of C.M. Life to the Registration Statements and to any instruments or documents filed or to be filed with the Commission under the 1933 Act and the 1940 Act in connection with such Registration Statements, including any and all amendments to such statements, documents or instruments of any C.M. Life Separate Account, or C.M. Life's General Account, including but not limited to those listed below. C.M. Multi-Account A SEI Variable Annuity Panorama Premier Variable Annuity OFFITBANK Variable Annuity Panorama Plus Separate Account C.M. Life Variable Life Separate Account I <PAGE> The undersigned hereby ratifies and confirms all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has set her hand this 22nd day of March, 1996. /s/ Emelia M. Bruno ------------------------ Emelia M. Bruno Director and Controller Attest: Ann F. Lomeli ------------- </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-24.(B) <SEQUENCE>8 <DESCRIPTION>EXHIBIT 24(B) <TEXT> <PAGE> EXHIBIT 24(b) C.M. LIFE INSURANCE COMPANY I, ANN F. LOMELI, Secretary of C.M. Life Insurance Company, do hereby certify that the following is a true and accurate copy of a Resolution adopted by unanimous consent of the Board of Directors of C.M. Life Insurance Company on the 22nd day of March 1996; RESOLVED, that it is desirable and in the best interest of the Company that interests in its general account option under the Panorama Plus combination fixed and variable annuity be registered under the Securities Act of 1933 in appropriate amounts to facilitate sales of the annuity; and that Lawrence V. Burkett, Thomas F. English, Richard M. Howe, Michael Berenson, and Ann F. Lomeli are each individually authorized, acting alone or in conjunction with the other, to perform on behalf of the Company any and all such acts as each may deem necessary or advisable in order to allow the Company to continuously offer interests in its fixed account option to the general public, and in connection therewith to execute and file all requisite papers and documents on behalf of the Directors and Officers of the Company, including, but not limited to, registration statements, exemptive requests, no-action letter requests, reports, and any amendments thereto under the Securities Act of 1933, the Securities Exchange Act of 1934, and/or the Investment Company Act of 1940, and the execution by any one of them of any such paper or document or the doing of any such act in connection with the foregoing matters shall conclusively establish their authority therefor from the Company and the approval and ratification by the Company of the papers and documents so executed and the action so taken. IN WITNESS WHEREOF, I hereunto set my hand as Secretary and have affixed the corporate seal of said Company, this 22nd day of March 1996. /s/ Ann F. Lomeli ------------------------------- Ann F. Lomeli, Secretary </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>9 <DESCRIPTION>EXHIBIT 27 (FDS) <TEXT> <TABLE> <S> <C> <PAGE> <ARTICLE> 7 <LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM C.M. LIFE'S DECEMBER 31, 1995 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCES TO SUCH FINANCIAL STATEMENTS. </LEGEND> <CIK> 0000883232 <NAME> C.M. LIFE INSURANCE COMPANY <MULTIPLIER> 1000 <S> <C> <PERIOD-TYPE> 12-MOS <FISCAL-YEAR-END> DEC-31-1995 <PERIOD-END> DEC-31-1995 <DEBT-HELD-FOR-SALE> 736099<F1> <DEBT-CARRYING-VALUE> 0 <DEBT-MARKET-VALUE> 0 <EQUITIES> 72624 <MORTGAGE> 26705 <REAL-ESTATE> 0 <TOTAL-INVEST> 976511 <CASH> 15069 <RECOVER-REINSURE> 902 <DEFERRED-ACQUISITION> 0 <TOTAL-ASSETS> 1533748 <POLICY-LOSSES> 813188 <UNEARNED-PREMIUMS> 0 <POLICY-OTHER> 2026 <POLICY-HOLDER-FUNDS> 531432 <NOTES-PAYABLE> 0 <PREFERRED-MANDATORY> 2500 <PREFERRED> 0 <COMMON> 0 <OTHER-SE> 110699 <TOTAL-LIABILITY-AND-EQUITY> 1533748 <PREMIUMS> 83546<F2> <INVESTMENT-INCOME> 68815 <INVESTMENT-GAINS> (1140) <OTHER-INCOME> 1671 <BENEFITS> 132067 <UNDERWRITING-AMORTIZATION> 0 <UNDERWRITING-OTHER> 45820 <INCOME-PRETAX> 22526 <INCOME-TAX> 8776 <INCOME-CONTINUING> 13750 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 13750 <EPS-PRIMARY> 0 <EPS-DILUTED> 0 <RESERVE-OPEN> 0 <PROVISION-CURRENT> 0 <PROVISION-PRIOR> 0 <PAYMENTS-CURRENT> 0 <PAYMENTS-PRIOR> 0 <RESERVE-CLOSE> 0 <CUMULATIVE-DEFICIENCY> 0 <FN> <F1>C.M. LIFE'S FINANCIAL STATEMENTS HAVE BEEN PREPARED IN CONFORMITY WITH ACCOUNTING PRACTICES AND PROCEDURES OF THE NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS AS PRESCRIBED OR PERMITTED BY THE INSURANCE DEPARTMENT OF THE STATE OF CONNECTICUT. UNDER THESE ACCOUNTING PRACTICES, FIXED MATURITIES ELIGIBLE FOR AMORTIZATION ARE REPORTED AT AMORTIZED COST. <F2>PREMIUMS ARE REPORTED NET OF $50,732 IN REINSURANCE CEDED. </FN> </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000883670_lone-star_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000883670_lone-star_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to, and should be read in conjunction with, the more detailed information and the Consolidated Financial Statements (including the notes thereto) appearing elsewhere in this Prospectus. In August 1995, the Company acquired 11 Lone Star Steakhouse & Saloon restaurants. All financial and restaurant information herein reflects this acqisition. Unless otherwise indicated, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. THE COMPANY Lone Star Steakhouse & Saloon, Inc. ("Lone Star" or the "Company") has positioned itself as "The Steak Company" which will operate three distinct steakhouse restaurant concepts. The primary growth vehicle will be the Lone Star Steakhouse & Saloon restaurant concept which operates in the mid-scale steak segment ("Lone Star Restaurants"). The Company is also developing two restaurant concepts in the upscale steakhouse market, Del Frisco's Double Eagle Steak House ("Del Frisco's") and Sullivan's Steakhouse ("Sullivan's"). The Company currently owns and operates 168 Lone Star Restaurants in the United States. Internationally, the Company's Australian joint venture owns and operates 11 restaurants in Australia. The Lone Star Restaurants are mid-priced, full service casual dining restaurants which embrace a Texas-style concept featuring Texas artifacts and country and western music. The Lone Star Restaurants serve mesquite grilled steaks, ribs, chicken and fish. The exciting and vibrant atmosphere created by the Lone Star Restaurants' "Texas Roadhouse" ambiance is enhanced by free buckets of roasted peanuts, neon beer signs and peanut-shell-littered floors. Lone Star Restaurants are further distinguished by its high quality, USDA choice-graded steaks which are hand- cut fresh daily at each restaurant and mesquite grilled to order. Meals are served in generous "Texas-sized" portions and full liquor and bar service is available. The Lone Star Restaurants serve both lunch and dinner with an average check per customer for 1995 of approximately $8.50 at lunch and $18.50 at dinner. Lone Star opened its first restaurant in 1989 and currently operates in 32 states.The Company is continuing its domestic expansion program pursuant to which it opened 36 Lone Star Restaurants in 1993, 48 restaurants in 1994 and 45 restaurants in 1995. In addition, in August 1995, the Company acquired 11 Lone Star Restaurants which had been operated under the Lone Star name pursuant to a trademark license granted by the Company with respect to certain areas of North Carolina (the "1995 Lone Star Acquisition"). As of May 20, 1996, the Company had opened eight of the 45 restaurants it intends to open in 1996. New restaurants are expected to be located within the Company's existing markets as well as in new markets. In addition, the Company expects that its Australian joint venture will open seven to nine new restaurants in 1996. The Company currently operates three Lone Star Restaurants in Europe pursuant to a joint venture agreement. On May 20, 1996, the Company's Board of Directors approved a plan to discontinue the European joint venture. The Company anticipates closing its European restaurants as early as the second quarter of fiscal 1996; however, the Company may seek to sell or license such restaurants. The Company expects to incur a non-recurring pre-tax charge as early as the second quarter of fiscal 1996 in the range of $9,000,000 to $11,000,000. See "Risk Factors -- Discontinuance of European Operations." In connection with the Company's strategy to become "The Steak Company," the Company recently decided to develop additional steak restaurant concepts in the upscale segment. The Company entered this market in September 1995 by acquiring the intellectual property rights, marks and tradename of Del Frisco's Double Eagle Steak House restaurant, the existing Del Frisco's located in Dallas, Texas, and a Del Frisco's under construction in Fort Worth, Texas (collectively, the "Del Frisco's Acquisition") which opened in April 1996. The average check per customer for the Del Frisco's concept is approximately $60. The Company expects to open one or two additional Del Frisco's in the United States in 1996. The Company is developing another upscale steak restaurant concept under the tradename Sullivan's Steakhouse. The average check per customer for the Sullivan's concept is anticipated to be $35 to $40. The Company opened its first Sullivan's in May 1996 and expects to open one to three additional Sullivan's in the United States in 1996. THE OFFERING <TABLE> <CAPTION> <S> <C> Common Stock offered by the Company ........ 2,500,000 shares Common Stock offered by the Selling Stockholders............................... 1,500,000 shares Common Stock to be outstanding after the Offering .............................. 40,427,580 shares (1) Use of Proceeds ............................ To finance the development of additional restaurants and for general corporate purposes, including potential acquisitions. Nasdaq National Market symbol .............. STAR </TABLE> - ------ (1) Does not include as of May 21, 1996 (i) 6,623,284 shares reserved for issuance under the Company's 1992 Stock Option Plan (the "Plan"), of which options to purchase 4,726,636 shares are currently outstanding, (ii) 329,334 shares reserved for issuance under the Company's 1992 Directors Stock Option Plan (the "Directors Plan"), of which options to purchase 146,000 shares are currently outstanding, and (iii) 200,000 shares reserved for issuance pursuant to options granted in connection with the Australian joint venture. See "Capitalization." SUMMARY PRO FORMA AND CONSOLIDATED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) <TABLE> <CAPTION> Twelve Weeks Ended(1) Year Ended December 31,(1) --------------------------- --------------------------------------------------------------------- March 21, March 19, 1991 1992(2) 1993 1994 1995(3) 1995 1996 --------- ------------ ------------ ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> <C> <C> Income Statement Data: Net sales .............. $ 9,231 $ 40,602 $ 112,263 $ 215,800 $ 340,857 $ 69,393 $ 106,375 Income from operations . 209 6,918 23,643 45,810 70,773 14,393 20,094 Net income ............. 128 4,512 16,371 30,173 47,568 9,237 12,936 Primary net income per share ................ $ 0.22 $ 0.16 $ 0.49 $ 0.87 $ 1.27 $ 0.26 $ 0.33 Primary weighted average shares outstanding .. 580,433 28,872,151 33,339,007 34,608,610 37,537,891 34,931,291 38,797,073 Pro Forma Income Statement Data(4): ..... Income before income taxes, net of minority interest $ 128 $ 7,277 $ 25,483 $ 47,073 $ 74,388 $ 14,552 Pro forma provision for income taxes ........ 50 2,813 9,696 17,884 27,653 5,682 --------- ------------ ------------ ------------ ------------ ------------ Pro forma net income ... 78 4,464 15,787 29,189 46,735 8,870 Pro forma primary net income per share .... $ 0.14 $ 0.15 $ 0.47 $ 0.84 $ 1.25 $ 0.25 Restaurant Operating Data: Average sales per restaurant on an annualized basis .... $ 1,556 $ 2,389 $ 2,502 $ 2,481 $ 2,536 $ 2,587 $ 2,664 Number of restaurants at end of period(5) .. 7 32 68 116 175 121 180 Number of full restaurant periods open(6) ..... 78 241 569 1,114 1,521 351 529 </TABLE> March 19, 1996 ---------------------------------- Actual As Adjusted(7) --------- ------------- Balance Sheet Data: Working capital ............. $ 54,972 $150,272 Total assets ................ 370,530 465,830 Stockholders' equity ........ 336,238 431,538 - ------ (1) The Company operates on a 52 or 53 week fiscal year ending the last Tuesday in December. The fiscal quarters for the Company consist of accounting periods of 12, 12, 12, and 16 or 17 weeks, respectively. The Company's 1991 fiscal year ended on December 31 and its 1992, 1993, 1994, and 1995 fiscal years ended on December 29, 28, 27 and 26, respectively. (2) Reflects the operations of eight restaurants acquired on March 19, 1992 from Lone Star Steakhouse & Saloon Group concurrently with the Company's initial public offering in an exchange transaction whereby the Company issued 5,308,432 shares of its Common Stock. The acquisition was accounted for using the purchase method of accounting. (3) In June 1995, the Company increased its ownership interest in the Australian joint venture from 50% to 65%. The operations of the joint venture are included in the Company's consolidated operating results since the date of the change of control. (4) Pro Forma Income Statement Data is based upon unaudited information providing for income taxes on pooled S Corporations from a group of related entities which were operated under common control (collectively, the "CCC Group") prior to acquisition at the estimated effective tax rate. (5) Includes all restaurants for which restaurant sales are included in the Company's net sales amounts for the period. (6) Full restaurant periods are four-week accounting periods within the fiscal year (excluding the first partial accounting period of operations) that a restaurant was open. (7) Adjusted to reflect the sale of 2,500,000 shares of Common Stock offered by the Company hereby at an assumed public offering price of $39 7/8 per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000883979_pomeroy_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000883979_pomeroy_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING NOTES THERETO CONTAINED ELSEWHERE IN THIS PROSPECTUS. PROSPECTIVE INVESTORS SHOULD ALSO REVIEW CAREFULLY THE INFORMATION SET FORTH UNDER "RISK FACTORS." UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN OF THE FACTORS SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. A GLOSSARY OF NAMES AND CERTAIN TECHNICAL TERMS IS LOCATED AFTER THE FINANCIAL STATEMENTS IN THIS PROSPECTUS BEGINNING AT PAGE G-1. THE COMPANY Pomeroy Computer Resources, Inc. ("Pomeroy Computer Resources" or the "Company") sells a broad range of microcomputers and related products and provides professional services ranging from basic equipment selection and procurement to complex network design, integration and system support. The Company provides its products and services to a wide variety of commercial, health care, governmental and educational customers. The Company's operating strategy is to provide its customers with cost-efficient comprehensive solutions that satisfy their computing needs. To achieve this objective, the Company uses its (i) relationships with leading computer hardware manufacturers, software developers and computer product distributors and service providers to deliver and support quality products at competitive prices, (ii) distribution skills to promptly and efficiently manage inventory and deliver products, and (iii) technical expertise to provide a broad range of complementary value-added services. The Company offers microcomputer products from an array of manufacturers including Compaq, Hewlett-Packard, IBM, Lexmark, NEC and Toshiba. The Company sells these products together with a broad selection of networking, integration and software products from manufacturers including 3Com, Bay Networks, Intel, Microsoft and Novell. Services provided by the Company allow customers to outsource the selection, installation, integration and maintenance of their microcomputer systems. The Company's services include custom configuration of PC systems, LAN and WAN design, comprehensive project management, installation and integration services including cabling and wiring, user support, on-site network management services, computer repair and on-site staffing. The Company, headquartered in northern Kentucky near Cincinnati, Ohio, services and supports its customers through its 184 direct sales and sales support representatives located in 11 regional offices in Kentucky, Iowa, Tennessee, Ohio, Florida, Alabama and Indiana. Pomeroy Computer Resources has more than 12,000 customers, the largest of which include Barnett Bank, Columbia HCA, Commonwealth of Kentucky, General Electric, Principal Insurance and Providian. As of June 5, 1996, the Company had approximately 2,900 service contracts in effect (one customer can have multiple contracts) and employed approximately 300 service and technical personnel. The continuous technological changes occurring in the computer industry, combined with significant structural changes in the information technology requirements of large companies, have facilitated the Company's growth. Factors that influence organizations to seek the professional expertise of the Company include: the need for information regarding technological advances in microcomputer systems; the reduced price and increased power of PCs; the emergence of open, distributed client/ server systems (LANs and WANs) as a viable alternative to mainframe systems; the increased use of software products for such networks; the increased need to access information from, and equip personnel at, remote sites; and the continued effort by organizations to reduce costs by outsourcing their management information system needs. As part of its strategy to expand its geographic locations, add new customers and increase its product and service offerings, the Company seeks acquisition candidates that would complement its ongoing operations. Such acquisition candidates include resellers, value-added resellers, service and support companies and related businesses. In December 1992, the Company entered the Florida and Tennessee markets by acquiring C&N Corp., a computer reseller, and in October 1995, the Company acquired Cabling Unlimited, a provider of communication cable installation services located in Indianapolis, Indiana. See "Business -- Operating and Growth Strategy." In March 1996, the Company acquired the assets of The Computer Supply Store, Inc. ("TCSS"), a corporate reseller of microcomputer systems based in Des Moines, Iowa. TCSS provides the Company with expanded geographic coverage in the Midwest, new customers and additional sales and service personnel. In calendar 1995, TCSS reported revenues of $60.5 million and pre-tax income of $2.0 million. The product offerings and types of customer of TCSS are similar to those of the Company and the principals of TCSS have become employees of the Company and will continue to manage the Des Moines branch on an ongoing basis. See "Business -- Acquisition of TCSS." In addition, the Company has reached an agreement in principle to acquire a small computer systems integrator located in Birmingham, Alabama. The Company is a Delaware corporation with its principal executive office located at 1020 Petersburg Road, Hebron, KY 41048; its telephone number is (606) 282-7111. THE OFFERING <TABLE> <CAPTION> Common Stock offered by the Company..................... 1,200,000 shares <S> <C> Common Stock offered by the Selling Stockholder......... 150,000 shares Common Stock to be outstanding after the Offering....... 3,952,643 shares (1) Use of proceeds by the Company.......................... To reduce indebtedness; increase available credit for general business purposes and acquisitions. See "Use of Proceeds." Nasdaq National Market symbol........................... PMRY </TABLE> - ------------------------ (1) Excludes 258,990 shares subject to outstanding options at June 7, 1996 at a weighted average exercise price of $9.35 per share. See Note 15 of the Notes to Consolidated Financial Statements. SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> FISCAL YEAR (1) THREE MONTHS ENDED APRIL 5, -------------------------------------------------- --------------------------------------- PRO FORMA PRO FORMA 1993 1994 1995 1995 (2) 1995 1996 1996 (2) ----------- ----------- ----------- ----------- --------- ------------- ------------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF INCOME DATA: Net sales and revenues........ $ 112,178 $ 144,575 $ 230,710 $ 291,209 $ 47,990 $ 63,224 $ 75,041 Gross profit.................. 18,027 23,674 33,536 41,531 7,753 9,600 11,075 Income from operations........ 4,053 5,557 9,285 10,735 1,988 2,457 2,898 Net income (loss)............. 1,900 2,727 4,367 4,794 906 (1,355)(4) (1,101)(4) Net income (loss) per share (3).......................... $ 0.78 $ 1.12 $ 1.64 $ 1.73 $ 0.36 $ (0.49)(4) $ (0.39)(4) Weighted average shares outstanding (5).............. 2,434 2,430 2,670 2,770 2,534 2,745 2,821 </TABLE> <TABLE> <CAPTION> AS OF APRIL 5, 1996 ------------------------- ACTUAL AS ADJUSTED(6) --------- -------------- <S> <C> <C> BALANCE SHEET DATA: Working capital....................................................................... $ 4,666 $ 19,158 Total assets.......................................................................... 82,403 82,403 Total debt (7)........................................................................ 25,091 9,849 Stockholders' equity.................................................................. 18,950 34,192 </TABLE> - ------------------------ (1) The Company's fiscal year ends on January 5th of the following year. (2) The pro forma statement of income data is based on the historical financial information of the Company and TCSS and includes pro forma adjustments to reflect pro forma results of operations as if the acquisition of TCSS had occurred on January 6, 1995. See "Selected Pro Forma Consolidated Financial Data" and "Business -- Acquisition of TCSS." (3) Fully diluted earnings per share for fiscal years 1993, 1994, 1995, pro forma 1995, the first three months of 1995, the first three months of 1996 and pro forma 1996, were $0.78, $1.12, $1.62, $1.71, $0.35, $(0.49) and $(0.39), respectively. (4) The first three months of 1996 actual and pro forma results reflect the Vanstar litigation settlement and related costs of $4,392. Without this charge, net income would have been $1,258 and $1,511 for the first three months of 1996 actual and pro forma, respectively, and net income per share would have been $0.46 and $0.54 actual and pro forma, respectively. (5) Reflects a 10% stock dividend effective on May 22, 1995. (6) Adjusted to reflect the sale by the Company of 1,200,000 shares of Common Stock offered hereby at an assumed public offering price of $14.00 per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000884497_medquist_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000884497_medquist_prospectus_summary.txt
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+SUMMARY This Prospectus contains certain statements of a forward-looking nature relating to future events or the future financial performance of the Company. Prospective investors are cautioned that such statements are only predictions and that actual events or results may differ materially. In evaluating such statements, prospective investors should specifically consider the various factors identified in this Prospectus, including the matters set forth under the caption 'Risk Factors,' which could cause actual results to differ materially from those indicated by such forward-looking statements. The following summary is qualified in its entirety by the more detailed information, including 'Risk Factors' and Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Prospectus. THE COMPANY The Company is a leading national provider of electronic transcription and document management services to the healthcare industry. Through its proprietary software, open architecture environment and network of more than 1,500 trained transcriptionists, the Company converts free-form medical dictation into electronically formatted patient records which healthcare providers use in connection with patient care and for administrative purposes. The Company's customized outsourcing services enable clients to improve the accuracy of transcribed medical reports, reduce report turnaround times, shorten billing cycles and reduce overhead and other administrative costs. The Company believes that the electronic capture and delivery of free-form dictation are key components in the increasing implementation by healthcare providers of electronic medical record systems. The Company develops long term client relationships due to its technological expertise, efficient and cost-effective services and experienced management team. The Company's diversified client base includes more than 400 hospitals and other healthcare organizations such as outpatient clinics, health maintenance organizations and physician practice groups. The Company has a history of customer satisfaction and retention and has provided services for an average of over five years for its 25 largest clients in 1995. The Company performed services in 1995 for 88%, 92% and 100% of those clients which were its 25 largest clients in 1992, 1993 and 1994, respectively. Growth in the demand for medical transcription services is directly impacted by the number of hospital admissions and outpatient visits. Each hospital admission or outpatient visit generates dictated or written data which must be entered into a patient's record. For the quarter ended September 30, 1995, the American Hospital Association estimated that the numbers of hospital admissions and outpatient visits in the United States were 8.3 million (an increase of approximately 3% over the corresponding period in 1992) and 112 million (an increase of approximately 22% over the corresponding period in 1992), respectively. The Company continues to implement advances in technology to improve the delivery of its services. The Company utilizes its Medical Transcription System ('MTS'), an integrated transcription and document management system based upon proprietary software, to service the transcription and document management needs of its clients. The Company's technical staff customizes MTS to address initial data capture, conversion of data into electronic format, editing of data and routing of electronically formatted reports to the client's host computer system. For electronic data interchange MTS incorporates the HL-7 format or other interface protocols. The Company's Dictation Tracking System ('DTS') enables the Company and its clients to track the status of particular patient data and transcribed reports at any point in time and to evaluate the Company's on-time performance. Clients also use DTS as an integral management tool to monitor physician timeliness in the dictation, review and sign-off process. The Company's objectives are to maintain its leadership position as a provider of electronic transcription and document management services to the healthcare industry and to enhance that position as the information needs of healthcare providers continue to expand and evolve. The key elements of the Company's strategy include: expanding relationships with existing clients to capture their growing transcription requirements; extending its current client base by attracting new hospital clients, health maintenance organizations, outpatient clinics and physician practice groups; leveraging its technological leadership to create customized solutions to client needs and changing industry standards; capitalizing on emerging technologies such as voice recognition and Internet based communications; and pursuing strategic acquisitions. The executive offices of the Company are located at Five Greentree Centre, Suite 311, Marlton, New Jersey 08053, and its telephone number is (609) 596-8877. THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Company...................... 2,200,000 shares Common Stock Outstanding after the Offering.............. 5,660,875 shares (1) Use of Proceeds.......................................... To repay existing indebtedness (including a subordinated payable to related parties) incurred in the acquisition of Transcriptions, Ltd. Proposed Nasdaq Symbol................................... MEDQ </TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA (in thousands, except per share data) <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------------- -------------------- 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues (2)................................................. $ -- $ 24,841 $ 45,127 $ 10,426 $ 13,978 Operating income (loss) (2).................................. (1,760) 2,463 4,733 762 1,790 Income (loss): Continuing operations..................................... (1,896) (166) 607 (115) 546 Discontinued operations (3)............................... 3,746 1,612 (1,729) 441 -- Extraordinary item (4).................................... -- -- (545) -- -- --------- --------- --------- --------- --------- Net income (loss)....................................... $ 1,850 $ 1,446 $ (1,667) $ 326 $ 546 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Income (loss) per share (5): Continuing operations..................................... $ (0.40) $ 0.09 $ 0.26 $ -- $ 0.14 Discontinued operations (3)............................... 1.02 0.49 (0.73) 0.13 -- Extraordinary item (4).................................... -- -- (0.23) -- -- --------- --------- --------- --------- --------- Net income (loss) per share............................. $ 0.62 $ 0.58 $ (0.70) $ 0.13 $ 0.14 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Shares used in computing net income (loss) per share (5)..... 3,656 3,316 2,362 3,130 4,363 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- </TABLE> <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ----------------------------------------------------- 1991 1992 1993 1994 1995 --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> TRANSCRIPTIONS, LTD. DATA: Revenues(6).............................................. $ 20,020 $ 23,025 $ 27,103 $ 36,634 $ 45,127 </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 ------------------------------------------ ACTUAL PRO FORMA (7) AS ADJUSTED (8) --------- -------------- --------------- <S> <C> <C> <C> BALANCE SHEET DATA: Working Capital..................................................... $ 6,104 $ 6,104 $ 19,481 Total assets........................................................ 59,082 59,082 69,122 Current portion of long-term debt................................... 3,337 3,337 -- Long-term debt, net of current portion.............................. 16,054 9,599 -- Subordinated payable to related parties............................. 22,276 22,276 4,550 Total shareholders' equity.......................................... 11,002 17,477 58,179 </TABLE> - ------------------ (1) Include 962,675 shares of Common Stock to be issued to Heller Equity Capital Corporation ('Heller') upon the closing of this Offering pursuant to the exercise of warrants to purchase Preferred Stock (the 'Heller Warrants') by cancelling the $7,000 principal amount of a senior subordinated note (carrying value of $6,455 at March 31, 1996 due to original issue discount) and the simultaneous conversion of such Preferred Stock into Common Stock (the Heller Warrants were originally issued in December 1992 and currently have an exercise price of $7.27 per share), and 42,500 shares of Common Stock to be issued to Heller in connection therewith (collectively, the 'Heller Transaction'). Excludes (i) 861,463 shares of Common Stock to be issued in connnection with the payment of the deferred purchase price for Transcriptions, Ltd.; (ii) 689,202 shares of Common Stock which may be issued upon exercise of outstanding options; (iii) 320,296 shares of Common Stock which may be issuable upon exercise of options to purchase Common Stock which may be granted in the future; and (iv) 75,351 shares of Common Stock reserved for issuance pursuant to the exercise of warrants (at $6.74 per share as of March 31, 1996) held by Chemical Bank ('Chemical'). The weighted average exercise price of all outstanding options as of March 31, 1996 was $7.19 per share. See 'Management -- Director Compensation,' '--Executive Compensation,' 'Certain Transactions,' and Notes 2, 6, 8 and 9 of Notes to Consolidated Financial Statements of the Company. (2) Transcriptions, Ltd. was acquired by the Company effective May 1, 1994 and its business is the only operating business of the Company. All of the Company's prior businesses have been treated as discontinued operations. See (3) below. (3) On November 14, 1995, the Company signed a letter of intent to sell its receivables management business. The operations and net assets of the Company's receivables management business and previously divested businesses have been accounted for as discontinued operations. Discontinued operations are presented net of tax and include a gain on disposal of $1,749 in 1993 and a loss on disposal of $3,180 in 1995. See Note 3 of Notes to Consolidated Financial Statements of the Company. (4) Represents the loss on early extinguishment of debt, net of income taxes. (5) The Company's total outstanding options and warrants to purchase Common Stock exceed 20% of the total outstanding Common Stock. Therefore, the income (loss) per share computations are modified as required under Accounting Principle Board Opinion No. 15. Upon the completion of this Offering and the closing of the Heller Transaction, the Company will no longer be subject to the modified treasury stock method of Accounting Principle Board Opinion No. 15. See Note 1 of Notes to Consolidated Financial Statements of the Company. (6) The revenues for Transcriptions, Ltd. prior to its acquisition by the Company on May 1, 1994 have been derived from its historical financial statements. The 1994 revenues reflect Transcriptions, Ltd.'s revenues for four months and the Company's revenues for eight months. See 'Business -- Company History' and the Combined Financial Statements of Transcriptions, Ltd. (7) Pro forma to reflect the Heller Transaction, including an estimated non-recurring deduction of $718 from net income available to common shareholders to be incurred in connection with issuance of 42,500 shares of common stock to Heller to induce Heller to exercise the warrants and simultaneously convert the Preferred Stock into Common Stock. The actual non-recurring deduction will be based on the discounted fair value of the Common Stock at the date of issuance. (8) Adjusted to reflect the Heller Transaction, and the sale of 2,200,000 shares of Common Stock offered by the Company hereby at an assumed public offering price of $19.875 per share and the application of the estimated net proceeds therefrom. See 'Use of Proceeds.'
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000885741_gliatech_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000885741_gliatech_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..a8919f2c8ac35c49313670d0227f979923276170
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the consolidated financial statements and related notes thereto appearing elsewhere in this Prospectus. References in this Prospectus to the "Company" refer to Gliatech Inc. and its subsidiaries. Prospective investors should carefully consider the information set forth under the heading "Risk Factors." THE COMPANY Gliatech Inc. (the "Company") is engaged in the development and commercialization of medical devices designed to inhibit excessive surgical scarring and adhesion formation following surgery. Postoperative scarring and adhesion formation can become excessive, binding together tissues and organs causing pain, obstruction and impairment of function. Further, excessive scarring can obstruct access to the surgical site, making additional surgery difficult. The Company is engaged in the development and commercialization of the ADCON family of medical devices to address such postoperative complications. In addition, the Company is pursuing the development of drug candidates for the treatment of certain nervous system disorders, including Alzheimer's disease, through its strategic alliance with Janssen Pharmaceutica, N.V. of Belgium ("Janssen"), a wholly-owned subsidiary of Johnson & Johnson, and cognitive disorders. ADCON SURGICAL ADHESIONS PRODUCTS The ADCON family of medical devices are being developed by the Company to inhibit excess scarring and adhesion formation at the surgical site. The initial ADCON products are formulated as proprietary resorbable gels for direct application by surgeons to organs and tissues during surgery to inhibit surgical scarring and adhesions. ADCON-L is designed to inhibit scarring and adhesions formation following lumbar disc surgery. ADCON-T/N is designed for use in tendon and peripheral nerve repair surgeries, such as carpal tunnel syndrome and tenolysis. In addition to ADCON-L and ADCON-T/N, the Company is in the early stages of development of several additional ADCON products for use in pelvic/gynecological, abdominal, cardiac and implant/prosthetic surgeries. Because of the differences in the body environments in which each of these product candidates would be used, a number of different formulations may be required. Approximately 800,000 lumbar disc surgeries are performed annually in the U.S., Europe and Japan with approximately 420,000, 250,000 and 130,000 performed in the U.S., Europe and Japan, respectively. Certain of these patients experience severe recurrent postoperative pain or impairment of daily living activities due to surgical scarring and adhesions. Since it is not possible to predict prior to surgery which patients are likely to develop adhesion-related problems, the Company believes that ADCON-L is appropriate for use prophylactically during most lumbar disc surgeries. Based on European pivotal clinical studies and other compliance efforts and submission of data, the Company recently obtained regulatory clearance to affix CE Marking on ADCON-L and ADCON-T/N, thereby allowing ADCON-L and ADCON-T/N to be marketed in the 15 European Union countries for lumbar disc surgery and tendon and peripheral nerve repair surgery, respectively. The Company has entered into distribution agreements with independent distributors for ADCON-L in Austria, Belgium, France, Germany, Italy, The Netherlands, Spain, Switzerland and the United Kingdom. For ADCON-T/N, the Company intends initially to pursue only a limited distribution in the 15 European Union countries during 1996 and currently has entered into distribution agreements in Austria, Belgium, Italy, The Netherlands and Switzerland. In addition, the Company received approval from the U.S. Food and Drug Administration ("FDA") to initiate pivotal clinical trials for ADCON-L and ADCON-T/N in the United States. The Company is currently enrolling patients in these clinical trials. The Company intends to submit Premarket Approval Applications ("PMA") to the FDA upon the successful completion of these trials. NERVOUS SYSTEM DISORDERS The Company is also engaged in the research and development of therapeutic products for the treatment of certain nervous system disorders, including Alzheimer's disease, and cognitive disorders. Studies have shown that certain glial cells and glial-derived factors are consistently associated with senile neuritic beta-amyloid plaques, which are thought to be a key contributor to Alzheimer's disease associated pathology. In October 1994, the Company entered into an agreement with Janssen to collaborate on the research and development of therapeutic products to treat Alzheimer's disease (the "Janssen Agreement"). In addition, in September 1995, the Company entered into an addendum to the Janssen Agreement in order to expand the scope of the collaboration. As a result of screening compounds from Janssen's pharmaceutical library, several lead compounds have been identified. The Company's Cognition Modulation program is focused on a class of compounds designed to act on the histamine H(3) receptor in the brain which regulates sleep/wakeful states and modulates the level of arousal and alertness. An antagonist to this receptor could lead to enhanced states of alertness for treating narcolepsy, attention deficit hyperactive disorder (ADHD) and the cognitive deficit in Alzheimer's disease patients. The Company has identified a number of lead compounds and is currently conducting preclinical studies on certain of these antagonist compounds. An agonist to the histamine H(3) receptor could reduce levels of wakefulness and arousal for use in the treatment of anxiety and insomnia. The Company was incorporated under the laws of the State of Delaware on August 12, 1987 and commenced operations in 1988. The Company's executive offices are located at 23420 Commerce Park Road, Cleveland, Ohio 44122, telephone number (216) 831-3200. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company.......... 1,500,000 shares Common Stock offered by the Selling Stockholders............................... 250,000 shares Common Stock to be outstanding after the offering................................... 8,811,036 shares (1) Use of proceeds.............................. For research and development of products relating to the Cognition Modulation program of the Company, continued research and development of ADCON products other than ADCON-L and ADCON-T/N, working capital and other general corporate purposes. Nasdaq National Market symbol................ GLIA </TABLE> - --------------- (1) Does not include an aggregate of 768,975 shares of Common Stock issuable upon exercise of outstanding options granted under the Company's Stock Option Plans (as defined herein) and 20,000 shares of Common Stock reserved for issuance upon the exercise of warrants. See "Description of Capital Stock -- Warrants." SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, INCEPTION TO --------------------------------------------------- ----------------------- MARCH 31, 1991 1992 1993 1994 1995 1995 1996 1996 ------- ------- ------- --------- --------- --------- --------- ------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues: Government grants................ $ 85 $ 186 $ 302 $ 141 $ 255 $ 48 $ 38 $ 1,007 Research contracts and licensing fees........................... -- -- -- 918 2,217 481 715 3,849 Product sales.................... -- -- -- 86 182 0 76 345 ------- ------- ------- --------- --------- --------- --------- ------------ Total revenues................. 85 186 302 1,145 2,654 529 829 5,201 Operating Costs and Expenses: Research and development......... 2,013 2,618 4,441 4,658 5,230 1,187 1,501 22,611 Selling, general and administrative................. 825 1,693 1,674 2,365 2,599 518 779 10,888 Depreciation and amortization.... 151 279 312 272 171 47 31 1,307 ------- ------- ------- --------- --------- --------- --------- ------------ Total operating costs and expenses..................... 2,989 4,590 6,427 7,295 8,000 1,752 2,311 34,806 ------- ------- ------- --------- --------- --------- --------- ------------ Loss from operations............. (2,904) (4,404) (6,125) (6,150) (5,346) (1,223) (1,482) (29,605) Interest income, net............. 74 324 211 97 360 38 305 1,613 ------- ------- ------- --------- --------- --------- --------- ------------ Net Loss....................... $(2,830) $(4,080) $(5,914) $ (6,053) $ (4,986) $ (1,185) $ (1,177) $(27,992) ====== ====== ====== ======== ======== ======== ======== ============ Net loss per common share (pro forma for 1994 and 1995)....... $ (1.30) $ (0.91) $ (0.24) $ (0.16) ======== ======== ======== ======== Shares used for purposes of computing net loss per common share............................................ 4,651,616 5,497,351 4,928,755 7,305,441 ======== ======== ======== ======== </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 ------------------------- ACTUAL AS ADJUSTED(1) -------- -------------- (UNAUDITED) <S> <C> <C> BALANCE SHEET DATA: Cash, cash equivalents and short-term investments................ $ 20,724 $ 39,359 Working capital.................................................. 20,554 39,189 Total assets..................................................... 23,311 41,946 Deficit accumulated during the development stage................. (28,931) (28,931) Total stockholders' equity....................................... $ 22,084 $ 40,719 </TABLE> - --------------- (1) As adjusted data reflects the sale by the Company of 1,500,000 shares of Common Stock and the receipt of estimated net proceeds (after deducting the placement agents' fee and estimated offering expenses) to the Company of $18,635,000.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000886530_datatrak_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000886530_datatrak_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..9673b66227c5717f5f37aef4f5f772557952874f
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+++ b/parsed_sections/prospectus_summary/1996/CIK0000886530_datatrak_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and Financial Statements and Notes thereto appearing elsewhere in this Prospectus, including information under "Risk Factors." THE COMPANY Collaborative Clinical Research, Inc. ("Collaborative" or the "Company") manages a network comprised of over 400 affiliated clinical research sites ("Affiliated Sites") providing access to over 3,000 principal investigators in the United States, Canada and the United Kingdom. In addition, through its recent acquisition of an Affiliated Site, GFI Pharmaceutical Services, Inc. ("GFI"), the Company operates three research facilities, conducts Phase I through Phase IV clinical research and provides clinical reference laboratory and Institutional Review Board ("IRB") services. Since commencing operations in 1991, the Company has provided site selection and trial management services for 183 clinical trials in a variety of therapeutic areas involving over 10,000 patients and 79 sponsors (primarily pharmaceutical and biotechnology companies and, in selected cases, contract research organizations ("CROs") -- collectively, "Sponsors"). The Company provides these Sponsors with an innovative, time-efficient method of site selection and clinical trial management. The Company leverages its Affiliated Site network in order to provide rapid access to qualified investigators and patients. The Company believes that such access is key to enabling Sponsors to reduce the length of the product development process. The Company has Affiliated Sites in a number of health care delivery settings, including academic medical centers, community hospitals, outpatient treatment centers, for-profit research sites, managed care organizations, physician practice groups, regional research subnetworks and long-term care facilities. The Company markets the capabilities of all Affiliated Sites to Sponsors, thus reducing the inefficiencies associated with single-site marketing efforts. Affiliated Sites also are exposed to a number of interventional and non-interventional clinical research opportunities involving various therapeutic areas, thus increasing their likelihood of success in obtaining revenue from clinical research. Demand for the Company's services has been driven by the significant changes in the health care industry that have occurred in recent years. These changes have caused pharmaceutical companies to focus on ways in which to reduce development costs and improve profitability. For example, pharmaceutical companies are placing increased importance on developing innovative drugs which may generate greater market value. In addition, these companies are outsourcing many aspects of the drug development process in order to reduce fixed costs. Moreover, pharmaceutical companies are seeking ways in which to improve the efficiency of the clinical research process, thereby enhancing revenue by extending the period of the products' market exclusivity. The Company believes that its Affiliated Site network provides a clinical research model that is responsive to the health care industry's need to increase the speed with which new products are brought to market. The primary objective of the Company's Affiliated Site network is to improve the time-efficiency of the clinical research process. By accelerating the identification and qualification of research sites and clinical investigators, the Company provides Sponsors with the opportunity to begin clinical research sooner, thus potentially reducing the length of the new product development process. The Company also believes that its Affiliated Site network offers an attractive opportunity for health care institutions and providers. The growth of managed care, as well as efforts by the federal and state governments and insurers to contain increases in reimbursement rates, have imposed significant cost containment pressures on these institutions and providers. Such pressures have led institutions and providers to seek alternative sources of revenue. As clinical research activities have expanded beyond traditional academic settings, clinical research has become an increasingly attractive alternative revenue source. However, health care providers often face significant obstacles in initiating or expanding a clinical research program. Many non-traditional research sites do not have established research programs, and need to make investments in administrative staffing and marketing. Furthermore, institutions and providers that can offer only a single research site confront significant obstacles in marketing their services to Sponsors. In many situations, Sponsors will require multiple sites for a clinical trial, and it is inefficient for Sponsors to spend significant amounts of time learning about the capabilities of a single site. The Company markets the capabilities of its Affiliated Sites to Sponsors in order to assist individual research sites in realizing the full potential of clinical research as an additional source of revenue. The Company intends to expand its Affiliated Site network in the United States, Canada and the United Kingdom, and to enter other selected European markets. The Company believes its Affiliated Site network provides a unique platform for expanding its services beyond clinical research. The Company has entered into a joint venture with Pharmaceutical Marketing Services, Inc. ("PMSI") to develop and market health-economic data collection and analytical services. In order to increase the speed, efficiency and accuracy of clinical data collection within the Affiliated Site network, the Company has also entered into a letter of intent to form an alliance with Integrated Systems Solutions Corporation ("ISSC"), a wholly-owned subsidiary of IBM Corporation, to develop and implement a network-wide, on-site electronic data collection and management system. Additionally, the Company believes that selective acquisitions of research organizations will play an important role in the Company's efforts to become an integrated provider of research services. The Company plans to acquire controlling interests in research entities that have an established reputation and on-going business in the performance and management of clinical trials. The Company was incorporated in Ohio on July 17, 1991. Its principal executive offices are located at 20600 Chagrin Boulevard, Cleveland, Ohio 44122 and its telephone number is (216) 491-9930.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000887227_cholestech_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000887227_cholestech_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..ce426a4b3e75abd443096822430c5e71728ac9a1
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000887227_cholestech_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS, INCLUDING INFORMATION UNDER "RISK FACTORS." EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS, INCLUDING FINANCIAL INFORMATION, SHARE AND PER SHARE DATA, ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. SEE "UNDERWRITING." SPECIAL NOTE: CERTAIN STATEMENTS SET FORTH BELOW CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE REFORM ACT. SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS" ON PAGE 2 FOR ADDITIONAL FACTORS RELATING TO SUCH STATEMENTS. Cholestech Corporation ("Cholestech" or the "Company") develops, manufactures and markets a proprietary point of care diagnostic system (the "L-D-X System") which measures specific analytes to detect various diseases and disorders within five minutes using a single drop of whole blood. The Company currently markets its L-D-X System and a series of lipid and glucose panels for preventive screening and monitoring applications. In January 1996, the L-D-X System and the Company's total cholesterol, high density lipoprotein ("HDL"), triglycerides and glucose tests were granted waived status under the Clinical Laboratory Improvement Amendments of 1988 ("CLIA"), the first such waiver granted under CLIA's newly-developed ease of use, accuracy and precision guidelines. The CLIA waiver allows health care providers to use the L-D-X System without the additional operating costs and extensive regulatory requirements associated with CLIA compliance. The Company believes that the L-D-X System is the only multi-analyte diagnostic system to be classified as waived under CLIA. The Company also believes that the L-D-X System's CLIA waived status, technological flexibility, ease of use, accuracy and low maintenance costs provide it with competitive advantages over other point of care diagnostic systems. As a result of the cost and administrative burden associated with CLIA compliance, the L-D-X System and its lipid-focused test menu were initially marketed to health care providers performing high volume preventive risk factor screening, including hospitals, corporate wellness programs, community health centers and health promotion service providers. Immediate results are important in this setting because it allows high risk individuals to be identified and enrolled in appropriate intervention programs in the same visit. With its recent CLIA waived status, the Company has expanded its marketing and distribution focus to also target the monitoring market, in particular the physician office laboratory ("POL") and pharmacy segments. The Company's access to this market was limited prior to the CLIA waiver because of the cost and administrative burden associated with the CLIA regulations. The Company intends to target initially the 54,000 POLs in the United States. The Company believes that the L-D-X System will enable health care providers in the monitoring market, particularly POLs, to better control their medical costs by eliminating the need for patient follow-up with test results and reducing the time before therapy can be prescribed or modified, and to permit them to capture additional revenue from conducting testing in their offices. In order to effectively penetrate the POL market, the Company has recently entered into a non-exclusive distribution agreement with Physician Sales and Services, Inc. ("PSS"), a national medical products distributor with more than 700 sales professionals who focus on the POL market. The L-D-X System consists of a portable analyzer and proprietary disposable test cassettes. The test cassette is the focal point of the L-D-X System and the key to its flexibility. The Company has incorporated most of the critical technological features of the system into the test cassette so that as new tests are developed, the existing L-D-X Analyzer can be utilized with simple software upgrades. The Company has recently demonstrated the feasibility of performing immunoassay-based tests (tests which use antibodies specific to target analytes to be detected) on the L-D-X Analyzer. The Company believes that, if an immunoassay cassette is successfully developed, the L-D-X Analyzer will be the only point of care diagnostic system capable of performing both dry chemistry (tests which use enzymes specific to target analytes to be detected) and immunoassay-based tests on a single instrument. The Company intends to leverage the technological flexibility of L-D-X- System to capitalize on attractive markets that can be served by point of care diagnostic instruments. The Company is developing additional test cassettes which will enable it to provide a more comprehensive line of products to the monitoring market. These cassettes include tests for uric acid, blood urea nitrogen and creatinine used to measure kidney function. The Company believes that these tests, along with cholesterol and glucose, are among the most ordered tests by physicians in the POL market. In May 1996, the Company entered into an agreement with Metra Biosystems, Inc. ("Metra Biosystems") to develop an immunoassay test cassette to measure bone resorption, a key gauge of the effectiveness of osteoporosis treatment. The Company has also demonstrated the feasibility of measuring prostate specific antigen ("PSA") for prostate cancer screening from whole blood using the Company's technology. There can be no assurance that the Company will be able to successfully complete the development, introduction and scale up of manufacturing of any of these future products or that any such tests will achieve a significant level of market acceptance. See "Risk Factors -- Dependence on Development and Introduction of New Products," "Business -- Products -- Products Under Development" and "-- Manufacturing." THE OFFERING <TABLE> <S> <C> Common Stock offered................................. 2,500,000 shares Common Stock outstanding after the Offering.......... 10,631,824 shares (1) Use of proceeds...................................... For research and development, capital expenditures, repayment of indebtedness, expansion of sales and marketing capabilities, and other working capital and general corporate purposes Nasdaq National Market symbol........................ CTEC </TABLE> SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> YEAR ENDED MARCH 31, ----------------------------------------------------- 1992 1993 1994 1995 1996 --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues........................................................... $ 1,518 $ 3,744 $ 3,029 $ 4,038 $ 6,873 Cost of products sold.............................................. 565 4,908 4,972 3,933 4,505 --------- --------- --------- --------- --------- Gross profit (loss)................................................ 953 (1,164) (1,943) 105 2,368 --------- --------- --------- --------- --------- Operating expenses: Research and development......................................... 6,124 1,843 2,134 715 714 Sales and marketing.............................................. 1,446 2,171 2,909 2,694 3,168 General and administrative....................................... 2,373 3,133 2,288 1,983 1,376 --------- --------- --------- --------- --------- Total operating expenses....................................... 9,943 7,147 7,331 5,392 5,258 --------- --------- --------- --------- --------- Loss from operations............................................... (8,990) (8,311) (9,274) (5,287) (2,890) Interest income, net............................................... 100 246 364 243 144 --------- --------- --------- --------- --------- Net loss........................................................... $ (8,890) $ (8,065) $ (8,910) $ (5,044) $ (2,746) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Net loss per share (2)............................................. $ (13.38) $ (1.57) $ (1.14) $ (.63) $ (.34) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Weighted average common shares (2)................................. 664 5,122 7,791 7,954 8,042 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 -------------------------- ACTUAL AS ADJUSTED (3) --------- --------------- <S> <C> <C> BALANCE SHEET DATA: Cash, cash equivalents and restricted marketable securities.......................... $ 4,111 $ 13,688 Working capital...................................................................... 4,442 14,768 Total assets......................................................................... 9,645 19,222 Long-term obligations, net of current portion........................................ 810 11 Accumulated deficit.................................................................. (49,662) (49,662) Shareholders' equity................................................................. 5,982 17,107 </TABLE> - ------------------ (1) Based upon shares outstanding as of March 31, 1996. Excludes: (i) 518,244 shares of Common Stock issuable upon exercise of options outstanding as of March 31, 1996, with a weighted average exercise price of $3.49 per share; (ii) 39,242 shares of Common Stock issuable upon exercise of warrants outstanding as of March 31, 1996, with an exercise price of $3.50 per share; (iii) 183,412 shares of Common Stock reserved for future issuance under the Company's stock plans; (iv) 39,526 shares of Common Stock issued to Metra Biosystems in May 1996 at a purchase price of $6.325 per share; and (v) an aggregate of up to $750,000 of Common Stock to be purchased by Metra Biosystems at fair market value upon achievement of certain milestones by the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business -- Strategic Relationships," "Management -- 1988 Stock Incentive Program," "-- Employee Stock Purchase Plan," "Description of Capital Stock" and Notes 7 and 11 of Notes to Financial Statements. (2) See Note 1 of Notes to Financial Statements for an explanation of shares used in computing net loss per share. (3) Adjusted to reflect the sale of 2,500,000 shares of Common Stock offered by the Company hereby, after deducting underwriting discounts and commissions and the estimated expenses of the Offering, and the anticipated application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000887353_seven-up_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000887353_seven-up_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2af81ebfe11d0c8f387d11055a5da1cd5746e0f1
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000887353_seven-up_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. All information provided herein as of a date or dates prior to July 1, 1996 reflects the inclusion of Seven-Up/RC Bottling Company of Puerto Rico, Inc. ("Puerto Rico"). The Company is among the largest beverage distributors in the United States and is the largest bottler of Seven-Up in the United States. The Company manufactures and distributes a broad range of beverage products in Southern California, Central California, and in portions of Nevada and New Mexico. The Company has the exclusive right within its territories to manufacture and/or distribute Seven-Up (lemon-lime), Royal Crown (cola), A&W (root beer and cream soda), Sunkist (orange and lemonade), Hawaiian Punch (fruit punch), Schweppes (ginger-ale and mixers), Evian (imported still water), Perrier (imported mineral water), Welch's (grape, strawberry and pineapple), and Yoo-Hoo (chocolate drink). The Company's net sales in 1995 were $396,725,000. The Company competes as an independent bottler on the basis of its large portfolio of franchised brands, its significant combined market share, its ability to market, distribute and merchandise its products effectively and favorable demographics within its territories. The Company's portfolio of franchised brands consists of highly recognizable trademarks that are in almost all cases the first ranking brand in their respective beverage flavor categories. The Company's combined market share of its franchised brands and other products enables the Company to realize purchasing, manufacturing, marketing, and delivery efficiencies. In addition, the Company's territories have many attributes that contribute to revenue growth in the beverage industry, including a favorable climate and a high density of retail outlets in populous areas. The Company's products are made available to its customers through a network of distribution facilities positioned within major population areas. The Company distributes almost all of its products directly to retail outlets through its core direct-store-door ("DSD") distribution system. Through its DSD distribution channel, the Company provides efficient, high-quality services to more than 35,000 retail outlets. These retail outlets include supermarkets, warehouse clubs, convenience stores, and other retail establishments that serve a combined population of over 30 million consumers. The Company's business strategy is to manufacture and distribute a franchised portfolio of leading trademarked beverages in each beverage flavor category and to create additional sources of revenue through contract manufacturing. In accordance with this strategy, the Company's Liquitrend division ("Liquitrend") engages in contract manufacturing, which utilizes the Company's excess production capacity by manufacturing carbonated soft drink products for a variety of small, independent franchisors and retailers selling private label products. As part of the Company's restructuring effort, the Liquitrend division was significantly downsized and the Company's Avalon Food and Beverage division ("Avalon"), which provided a wide array of beverage products primarily to large retail grocers who picked up the products from the Company's warehouse facilities and distributed these products through their internal distribution systems, was discontinued. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Selling Stockholders....................... 1,904,805 shares Common Stock to be outstanding after the Offering(1).................... 5,000,000 shares Use of Proceeds..................... The Company is not selling shares in the Offering and is not receiving any proceeds from the Offering. See "Use of Proceeds." </TABLE> - -------- (1) Excludes 263,158 shares issuable upon the exercise of a warrant held by WB Bottling Corporation. See "Principal and Selling Stockholders."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000888676_mafco_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000888676_mafco_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..54594881fc1f57e6dd22801eacd92f64aa7bdcdd
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000888676_mafco_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the consolidated financial statements and the notes thereto contained elsewhere in this Prospectus. Unless otherwise indicated or unless the context otherwise requires, the information contained in this Prospectus gives effect to (i) the payment to the Company by Flavors Holdings of a $5.4 million cash dividend prior to the Disposition (the 'Flavors Dividend'), (ii) the Disposition and (iii) the Distribution. The Flavors Dividend, the Disposition and the Distribution are collectively referred to herein as the 'Transactions.' Unless the context otherwise requires, all references in this Prospectus to the 'Company' mean Mafco Consolidated Group Inc. and its subsidiaries, including its operating subsidiary Consolidated Cigar Corporation ('Consolidated Cigar'). CERTAIN PAYMENTS RELATED TO THE DISPOSITION AND THE VSRS In the Distribution, the Company will receive an aggregate of 8,439,400 VSRs, comprised of 5,939,400 VSRs with respect to the PCT Common Stock it holds and 2,500,000 VSRs with respect to the PCT Preferred Stock it holds. The Company currently intends to cancel the VSRs it receives. If the Company does not cancel the VSRs it receives, however, and if the Company were required to make any payments on the VSRs, the maximum amount that the Company would be required to pay itself with respect to the VSRs that it will receive is $27,428,050. In addition, in connection with the Disposition, the Company made a payment of approximately $3.0 million to the Company's Chief Executive Officer pursuant to the Company's Transaction Bonus Plan. See 'Management--Transaction Bonus Plan.' THE COMPANY GENERAL The Company is a holding company with no business operations of its own. After the Disposition, the Company's only material assets are (i) its ownership of 80.2% of the outstanding shares of capital stock of Consolidated Cigar Holdings Inc. ('Cigar Holdings') (representing approximately 97.6% of the combined voting power), which owns 100% of the outstanding shares of capital stock of Consolidated Cigar, (ii) its ownership of 100% of the outstanding shares of PCT Preferred Stock and approximately 29% of the outstanding shares of PCT Common Stock (together, representing approximately 36% of the outstanding shares of PCT Common Stock on a fully diluted basis), (iii) approximately $412.8 million in cash and marketable securities at September 29, 1996, on a pro forma basis after giving effect to the Transactions, $172.7 million of which represents the net proceeds received by the Company in connection with International, (iv) the Promissory Note and (v) a pension plan asset with a book value of approximately $62.5 million at September 29, 1996. Through Consolidated Cigar, the Company manufactures and distributes cigars and pipe tobacco products. In addition, in connection with the Abex Transactions (as defined under '--Background and the Disposition--Background'), the Company assumed and agreed to indemnify PCT against, or to manage on PCT's behalf, various contingent and other liabilities. See 'Background and the Disposition' and 'Business.' CONSOLIDATED CIGAR Through Consolidated Cigar, the Company is the largest manufacturer and marketer of cigars sold in the United States in terms of dollar sales, with a 1995 market share of approximately 23% according to the Company's estimates. The Company markets its cigar products under a number of well-known brand names at all price levels and in all segments of the growing cigar market, including premium large cigars, mass market large cigars and mass market little cigars. The Company attributes its leading market position to the following competitive strengths: (i) well-known brand names, many of which are the leading brands in their category; (ii) broad range of product offerings within both the premium and mass market segments of the United States cigar market; (iii) commitment to and reputation for manufacturing quality cigars; (iv) marketing expertise and close attention to customer service; (v) efficient manufacturing operations; and (vi) an experienced management team. The Company is also a leading producer of pipe tobacco and is the largest supplier of private label and branded generic pipe tobacco to mass market retailers. In addition, the Company distributes a variety of pipe and cigar smokers' accessories. The Company's cigars and pipe tobacco products are marketed under a number of well-known brand names. The Company's premium cigars include the H. UPMANN, MONTECRISTO, DON DIEGO, TE-AMO, SANTA DAMIANA, ROYAL JAMAICA, PRIMO DEL REY and MONTECRUZ brands. The Company's mass market large cigars include the ANTONIO Y CLEOPATRA (also known as AYC), DUTCH MASTERS, EL PRODUCTO, MURIEL, BACKWOODS, SUPER VALUE and SUPRE SWEETS brands. The Company's mass market little cigars include the DUTCH TREATS, SUPER VALUE and SUPRE SWEETS brands. The Company's pipe tobacco products include the MIXTURE NO. 79 and CHINA BLACK brands. OWNERSHIP OF THE COMPANY The following chart sets forth in simplified form the ownership structure of the Company. - ------------------------------------------ Ronald O. Perelman | 100% | | Mafco Holdings Inc. ('Mafco Holdings') | 85% | | MAFCO CONSOLIDATED GROUP INC. (THE 'COMPANY') | 80.2% | | Consolidated Cigar Holdings Inc. ('Cigar Holdings') | 100% | | Consolidated Cigar Corporation ('Consolidated Cigar') - ------------------------------------------ The Company was incorporated on June 1, 1988 under the laws of the state of Delaware. The Company's principal executive office is located at 35 East 62nd Street, New York, New York 10021 and its telephone number is (212) 572-8600. BACKGROUND AND THE DISPOSITION BACKGROUND On June 15, 1995, as part of a series of transactions (collectively, the 'Abex Transactions'), C&F Merger Inc., a wholly owned subsidiary of Mafco Holdings Inc. ('Mafco Holdings'), which then owned 100% of the outstanding capital stock of Cigar Holdings and Flavors Holdings, merged (the 'C&F Merger') with and into Abex Inc. ('Abex'), with Abex being the surviving corporation in the C&F Merger and being renamed Mafco Consolidated Group Inc. Prior to the Abex Transactions, Abex was engaged in an aerospace business through its then wholly owned subsidiary, PCT. In connection with the Abex Transactions, (i) holders of Abex's common stock ('Abex Common Stock') and related rights to acquire Abex Common Stock received in exchange therefor, among other consideration, 20% of the common stock (the 'Company Common Stock') of the Company and all of the outstanding shares of PCT Common Stock; (ii) Mafco Holdings, through its wholly owned subsidiary Mafco Consolidated Holdings Inc. ('Mafco Consolidated Holdings'), received 80% of the Company Common Stock; and (iii) the Company retained PCT Preferred Stock convertible into approximately 11% of the PCT Common Stock on a fully diluted basis (in each case, such percentages reflect the outstanding capital stock immediately following consummation of the Abex Transactions). In addition, as part of the Abex Transactions, the Company retained substantially all of Abex's consolidated assets and liabilities other than those principally related to PCT's aerospace business. Accordingly, as a result of the Abex Transactions, the Company acquired certain non-aerospace assets and assumed certain liabilities of Abex as well as acquired an interest in the PCT Preferred Stock. PCT, which became a separate publicly-traded company, continued to operate the aerospace business. Subsequently, and in a separate transaction, on July 17, 1995, the Company purchased 5,939,400 shares of PCT Common Stock (thereby increasing its investment in PCT to approximately 36% of the shares of PCT Common Stock then outstanding on a fully diluted basis) and 1,484,850 shares of Company Common Stock from Libra Invest & Trade Ltd. ('Libra') for approximately $63.9 million in cash. In connection with such purchase, the Company entered into an agreement with PCT which, subject to certain exceptions, limits the Company's ability to dispose of its shares of PCT Stock for a period of three years. On April 15, 1996, PCT sold its entire operations, including substantially all of its assets, to Parker-Hannifin Corporation ('Parker-Hannifin') for an aggregate cash consideration of approximately $201.1 million before transaction costs. On August 21, 1996, Cigar Holdings completed an initial public offering of 6,075,000 shares of its Class A Common Stock. The net proceeds to Cigar Holdings from the Cigar IPO of approximately $127.8 million were paid as a dividend to the Company. As a result of the Cigar IPO, the Company beneficially owns 80.2% of the outstanding shares of capital stock of Cigar Holdings (representing approximately 97.6% of the combined voting power), which owns 100% of the outstanding shares of capital stock of Consolidated Cigar. In connection with the Cigar IPO, Cigar Holdings issued the Promissory Note in an original principal amount of $70 million to the Company. See 'Description of Certain Indebtedness--Promissory Note.' For a discussion of the events leading up to the Disposition, see 'Background and the Disposition--Background.' THE DISPOSITION On November 25, 1996, pursuant to the Purchase Agreement, the Company sold to PCT International (i) all of the outstanding shares of Flavors Common Stock and (ii) 23,156,502 VSRs for aggregate consideration of approximately $297.3 million, consisting of $180.0 million cash, the assumption of approximately $110.1 million of indebtedness of Mafco Worldwide and deferred cash payments from PCT International aggregating $7.2 million, $3.7 million of which will be paid on June 30, 1997 and $3.5 million of which will be paid on December 31, 1997. The VSRs were subsequently distributed to PCT. Immediately following the Disposition, Mafco Worldwide Corporation, a wholly owned subsidiary of Flavors Holdings ('Mafco Worldwide'), was, through a series of transactions, merged into Pneumo Abex Corporation ('Pneumo Abex'), an indirect wholly owned subsidiary of PCT. See 'Background and the Disposition--The Disposition.' The Company expects to use its cash, including the net proceeds from the Disposition and the sale of the VSRs, for general corporate purposes, including acquisitions, although no specific acquisition is currently contemplated by the Company. Accordingly, there can be no assurance that such proceeds will be available to pay any of the Company's obligations under the VSRs or, if issued, the VSR Notes. See 'Risk Factors' and 'Business.' THE DISTRIBUTION <TABLE> <S> <C> Distributing Corporation............. Power Control Technologies Inc. DISTRIBUTED CORPORATION.............. Mafco Consolidated Group Inc. SECURITIES TO BE DISTRIBUTED......... 23,095,062 VSRs on the Distribution Date. The remaining 61,440 VSRs will continue to be held by PCT for the account of those stockholders of PCT that have not yet exchanged their Abex Common Stock for PCT Common Stock after the C&F Merger. DISTRIBUTION RATIO................... Each holder of PCT Common Stock will receive one VSR for each share of PCT Common Stock held on the Record Date and each holder of PCT Preferred Stock will receive 125 VSRs for each share of PCT Preferred Stock held on the Record Date. See 'The Distribution.' RECORD DATE.......................... Close of business on December 23, 1996. DISTRIBUTION DATE.................... On or about December 30, 1996. MAILING DATE......................... Certificates representing the VSRs will be mailed to PCT's stockholders on or about the Distribution Date. TAX CONSEQUENCES..................... See 'Certain United States Federal Income Tax Consequences.' NYSE SYMBOL.......................... MFOrt </TABLE> THE VALUE SUPPORT RIGHTS AND VSR NOTES <TABLE> <S> <C> SECURITIES........................... 23,095,062 Value Support Rights. Upon the Maturity Date, each VSR will entitle the holder thereof to an amount equal to the lesser of (x) the excess, if any, of the Base Amount over the 30-Day Average Market Price and (y) $3.25, unless the right to receive such payment has been previously satisfied in connection with an Optional Call Date, a Total Disposition, an Event of Default or a Redemption Event. See 'Description of the Value Support Rights and VSR Notes.' MATURITY DATE........................ January 1, 1999. BASE AMOUNT.......................... As of any date of determination, the excess of (a) (x) $10.25, if the date of determination occurs on or before January 1, 1998, or (y) $11.00, if the date of determination occurs after January 1, 1998, over (b) the Distribution Amount. DISTRIBUTION AMOUNT.................. The sum of (i) the value all cash dividends or other cash distributions, (ii) all cash received as consideration in certain extraordinary transactions, (iii) the fair market value of all dividends or other distributions consisting of property or other assets and (iv) the fair market all dividends or other distributions consisting of property or other assets received in certain extraordinary transactions, in each case with respect to the Applicable Number of shares of PCT Common Stock. The Applicable Number of shares of PCT Common Stock initially shall be equal to one, subject to equitable adjustment to reflect stock splits, stock dividends, reverse stock splits or otherwise. 30-DAY AVERAGE MARKET PRICE.......... As of any date of determination, the average of the Market Price of the Applicable Number of shares of PCT Common Stock for the 30 consecutive trading days ended on the business day immediately prior to such date of determination. </TABLE> <TABLE> <S> <C> OPTIONAL CALL DATE................... Each April 1, July 1, October 1 and January 1 from and including April 1, 1997 to and including October 1, 1998. Upon an Optional Call Date, the Company may, in its sole discretion, pay to the Holder of each VSR an amount payable in cash equal to the lesser of (x) the excess, if any, of the Base Amount over the 30-Day Average Market Price and (y) $3.25; provided, however, such amount shall in no event be less than $0.50 if such Optional Call Date is on or prior to January 1, 1998. TOTAL DISPOSITION.................... Either (i) one or more mergers, consolidations or other business combinations, involving PCT after giving effect to which no shares of PCT Common Stock shall remain outstanding or registered under the Exchange Act, (ii) a sale, transfer or other disposition in one or a series of transactions, of all or substantially all of the assets of PCT or (iii) a reclassification of PCT Common Stock as the capital stock of any other person (other than an affiliate of PCT). EVENT OF DEFAULT..................... Either (i) default in the payment of all or any part of the amounts payable in respect of any of the VSRs as and when the same shall become due and payable, (ii) default in the performance, or breach, of any covenant or warranty of the Company, and continuance of such default or breach for a period of 90 days after written notice has been given to the Company by the Trustee or to the Company and the Trustee by the holders of at least 25% of the outstanding VSRs or (iii) certain events of bankruptcy, insolvency, reorganization or other similar events in respect of the Company. REDEMPTION EVENT..................... Either (i) as a result of an event beyond the reasonable control of the Company, the existence of the VSRs would cause the Company to cease to be a member of the consolidated group with respect to which the Company files consolidated federal income tax returns and such situation would be avoided or cured by the redemption of the VSRs or (ii) the VSRs would create any material financial or legal impediment to the consummation of any bona fide significant corporate event or transaction (a 'Redemption Transaction') involving the Company, which transaction would, if consummated, result in a change of control of the Company and in connection therewith the Company has entered into definitive documentation which creates a binding obligation upon the Company to consummate such transaction (subject to customary conditions to closing and fiduciary obligations), in either of clauses (i) and (ii) as determined in good faith by the Board of Directors of the Company. VSR NOTES............................ To the extent the aggregate principal amount is at least $25,000,000, all amounts payable pursuant to the VSRs on the Maturity Date (but not otherwise) may be paid, at the option of the Company, either in cash or by the issuance, not later than the date on which the cash amount would otherwise be payable, of VSR Notes. See 'Description of the Value Support Rights and VSR Notes--Payment in Cash or VSR Notes.'
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0000889085_internatio_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000889085_internatio_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..edbc4de42572c3bacdd724238ce8f791583efeac
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000889085_internatio_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the financial statements and notes thereto appearing elsewhere in this Prospectus, including under "Risk Factors."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0000889906_capmac_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000889906_capmac_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d16b5e42c87bba401d62fa723ce4a0653ed72a9d
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000889906_capmac_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the detailed information and financial statements contained elsewhere in this Prospectus. Prospective purchasers of the Common Stock should carefully read this entire Prospectus and should consider, among other things, the matters set forth under "Risk Factors." All financial information in this Prospectus is presented in accordance with generally accepted accounting principles ("GAAP"), unless otherwise noted. See "Glossary of Insurance Terms" for definitions of certain terms used in this Prospectus. Unless the context otherwise requires, references to "CapMAC" mean Capital Markets Assurance Corporation, references to "CFS" mean CapMAC Financial Services, Inc. and its wholly owned subsidiary, CapMAC Financial Services (Europe) Ltd., references to "Holdings" mean CapMAC Holdings Inc. and references to "the Company" mean Holdings and its consolidated subsidiaries, including CapMAC, CFS and CapMAC Asia Ltd. ("CapMAC Asia"). THE COMPANY The Company provides financial guaranty insurance, principally of asset-backed obligations, through its wholly owned subsidiary CapMAC; advisory and structuring services in connection with asset-backed financings, through its wholly owned subsidiary CFS; and access to funding for its customers through securitization funding vehicles. The Company was established in 1987 as a subsidiary of Citicorp and was acquired from Citicorp (the "Acquisition") in 1992 by the Company's management and a group of institutional and other investors. On December 19, 1995 the Company completed an initial public offering of its Common Stock (the "IPO") in which it sold 2,500,000 shares and certain selling shareholders sold 1,766,437 shares. Contemporaneously with the IPO, the Company sold 500,000 shares of Common Stock to Centre Reinsurance Limited ("Centre Re"), a wholly owned indirect subsidiary of The Zurich Insurance Company. The net proceeds to the Company of the IPO and the sale of shares to Centre Re, after commissions and fees, were $54.7 million, of which approximately $50 million was contributed to CapMAC to support planned growth. The balance was retained by Holdings for general purposes, including investments in international business ventures and strategic alliances. CapMAC, a New York financial guaranty insurance company, is a leading insurer of asset-backed obligations in both the domestic and international capital markets. As of March 31, 1996, obligations backed by consumer, trade and corporate receivables and other taxable obligations constituted approximately 95% of CapMAC's insured portfolio. CapMAC's claims-paying ability is rated triple-A by Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. ("S&P"), Duff & Phelps Credit Rating Co. ("DCR") and Nippon Investors Service, Inc., a Japanese rating agency. The Company's total revenue for the three month period ended March 31, 1996 was $23.2 million, a 90% increase from $12.2 million in the same period of 1995, with net income of $9.9 million, a 158% increase from $3.8 million in the three month period ended March 31, 1995. The significant increase in revenues and net income for the three month period ended March 31, 1996 was primarily due to the payment to CFS of advisory fees with respect to the closing of certain transactions. Such fees may fluctuate significantly from period to period. See "Risk Factors--Market and Other Factors." Total revenue in 1995 was $62.6 million, a 41% increase from $44.6 million in 1994, with net income of $23.5 million, a 37.9% increase from $17.1 million in 1994. The Company's total assets have grown from $184.7 million at December 31, 1992 to $406.1 million at March 31, 1996. From its inception through March 31, 1996, CapMAC has issued guarantees with respect to $61.1 billion principal amount of securities. The Company's objective is to expand its leadership position in the asset-backed securities market as a credit enhancer and as a provider of innovative solutions for the credit risk management, funding, accounting and regulatory issues facing financial institutions and other customers. As part of its growth strategy, the Company intends to apply its expertise in credit risk management to new products and markets and to emphasize the development of customized funding options and enhancements that it can offer its customers, regardless of whether those solutions require the issuance by CapMAC of a financial guaranty policy. The Company has historically been an innovator in the financial guaranty market for asset-backed obligations, utilizing the insurance policies issued by CapMAC to enable customers holding diverse pools of assets to obtain low-cost funding. In addition to the corporate and consumer assets which have been widely securitized in recent years, CapMAC's insurance policies have guaranteed obligations backed by, among other things, delinquent tax receivables, premium receivables of property/casualty insurance companies, healthcare receivables, recreational vehicle and boat loans and student loans originated by banks. In order to generate repeat business and thus a significant flow of steady revenues and profits, the Company intends to concentrate on building long-term relationships with certain targeted customers. The Company will continue to pursue opportunities that provide superior returns rather than those that merely increase market share or business volume. The Company believes the asset-backed securities market will continue to grow both domestically and internationally in future years because securitization benefits both issuers and investors. Issuers will continue to take advantage of asset-backed issuance because securitization provides funding flexibility and increases asset diversification and, for certain financial institutions, facilitates compliance with regulatory capital requirements. Investors will continue to be attracted to asset-backed securities because they represent high-quality investments that provide an attractive risk/reward profile and protection from event and corporate credit risk. This growth in the asset-backed securities market is expected to fuel an increased demand for financial guaranty insurance because fixed income investors are expected to continue to demand the enhanced credit quality and potential for liquidity provided by financial guaranty insurance, particularly in connection with new applications of securitization. The asset-backed obligations insured by CapMAC are generally issued in structured transactions and are backed by pools of assets such as consumer or trade receivables, securities, residential mortgage loans or other assets having an ascertainable cash flow. Financial guaranty insurance written by CapMAC guarantees payment, when due, of scheduled payments on an issuer's obligation. In the case of a payment default on an insured obligation, CapMAC is generally required to pay the principal, interest or other amounts due in accordance with the obligation's original payment schedule or, at its option, to pay such amounts on an accelerated basis. CapMAC underwrites insurance policies by applying a "zero loss" standard, meaning that risks are insured only if there is an expectation at the time a policy is issued, based on the Company's underwriting criteria at such time, that there will be no loss during the term of the policy. CapMAC's underwriting criteria require that asset-backed transactions insured by CapMAC be structured to provide protection to CapMAC through excess collateral, cash reserve accounts, third party credit support and other appropriate mechanisms designed to cover expected credit losses, even under adverse scenarios. However, there can be no assurance that losses for CapMAC's account will not occur in its insured portfolio, and such losses may have a material adverse effect on the Company. In order to be able to offer its customers a variety of funding options in addition to credit enhancement, the Company, together with two investment banks, participated in the formation of Triple-A One Funding Corporation, Triple-A One Plus Funding Corporation and Hemispheres Funding Corporation. Triple-A One Funding Corporation and Triple-A One Plus Funding Corporation (collectively, "Triple-A One Funding") are third party owned and managed special purpose conduits that issue asset-backed commercial paper, and Hemispheres Funding Corporation ("Hemispheres") is a third party owned and managed special purpose conduit that issues asset-backed medium term notes. Each of these conduits provides multiple sellers/borrowers with access to the commercial paper and medium term note markets on better terms than they could obtain by issuing securities directly. The Company provides administrative and referral services to these conduits, and CapMAC guarantees the underlying asset-backed transactions. As of March 31, 1996, the aggregate principal amount of commitments issued by Triple-A One Funding was approximately $3.1 billion and the commercial paper outstanding under such commitments was approximately $1.7 billion, while the total securities issued by Hemispheres amounted to approximately $1.0 billion. The Company intends to continue to develop additional funding vehicles so that it can expand the diversity of the product offerings which are available to its customers. In recognition of the increasing potential for securitization in certain foreign markets, the Company has selectively expanded its activities in Europe and Asia. The percentage of revenues from international sources was approximately 29.8% and 46.7%, for 1995 and the three month period ended March 31, 1996, respectively. The significant increase in the percentage of revenues from international sources for the first quarter of 1996 is primarily due to the payment of advisory fees from certain large international transactions which closed during such period. Such percentage will fluctuate from period to period to the extent that advisory fees are a significant portion of international revenue. See "Risk Factors--Market and Other Factors." Since the inception of European operations in 1990, the principal amount of obligations supported by CapMAC's policies in Europe has increased to $13.9 billion. Given the growing importance and growth prospects of Asia's economies, the Company has undertaken a number of initiatives to expand in that region. By entering into alliances with local entities, the Company intends to become a leading participant in the emerging Asian securitization business, while limiting the capital investment required and the business risks incurred. In Japan, the Company has entered into a strategic alliance with Mitsui Marine and Fire Insurance Co., Ltd. ("Mitsui Marine"). The 1995 cooperation agreement among CapMAC, CFS and Mitsui Marine is designed to establish, among other things, the joint pursuit of financial guaranty business with respect to obligations that are backed by assets originated in Japan or that are issued by Japanese entities. The Company is a minority shareholder in a corporation in Indonesia established to develop securitization for obligations that are backed by assets originated in Indonesia or that are issued by Indonesian entities. In addition, the Company initiated the formation of Asia Credit Services (Private) Ltd ("Asia Services"), a new financial guaranty company located in Singapore, which will provide guarantees of debt securities in the Asian emerging markets and advisory and structuring services in connection with Asian securitization transactions. The Company has made an investment in and provides technical advice and assistance to Asia Services and its wholly owned subsidiary, Asian Securitization & Infrastructure Assurance (Private) Ltd ("ASIA Ltd"). The Company derives its revenue primarily from net premiums earned on insurance policies written by CapMAC, advisory and structuring fees earned by CFS and income earned on investments. CFS earns fees in connection with providing advisory and structuring services to clients who may also be purchasers of CapMAC's insurance policies. Premiums for financial guaranty insurance policies written by CapMAC on asset-backed obligations are generally payable on an installment basis over the life of the policy. Accordingly, CapMAC's existing in force insurance policies provide it with an identifiable source of future revenues. At March 31, 1996, the total estimated present value of future revenues ("PFR"), consisting of premiums (net of ceded premiums) and ceding commission income contractually due to or to be earned by CapMAC in the future under outstanding policies, was estimated to be $168.3 million. See "Risk Factors--Realization of PFR" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--General." In managing its investment portfolio, the Company places a high priority on credit quality and liquidity. The Company's current investment policy permits investment only in U.S. Government and agency obligations, fixed income securities rated "A" or better and short-term investments rated A1+/P1 or higher by the major U.S. rating agencies. At March 31, 1996, 72.4% of the Company's investment portfolio consisted of fixed income securities rated AAA or the equivalent or obligations issued by the U.S. Government or its agencies or instrumentalities. The Company's investment portfolio had an average credit quality rating of at least AA as of March 31, 1996. Citicorp (through its subsidiary, Citibank (New York State)) established the predecessor to Holdings ("Original Holdings") in 1987 to focus primarily on the taxable structured asset-backed market. Through the Company's Employee Stock Ownership Plan (the "ESOP", see "Management-- Employee Benefit Plans"), stock option plans, and direct equity investments, management and employees own approximately 16.6% of Holdings' Common Stock on a fully diluted basis. Upon consummation of the Offering, the other original investors in the Acquisition will own at least 43.1% of Holdings' Common Stock on a fully diluted basis (40.9% if the Underwriters' over-allotment option is exercised in full). Those original investors owning 5% or more of Holdings' Common Stock are named in "Principal and Selling Stockholders." See also "Risk Factors--Control by Original Stockholders." THE OFFERING <TABLE> <S> <C> Common Stock Offered by Selling Stockholders......... 3,000,000 shares Common Stock outstanding(1).. 15,505,603 shares Dividend Policy.............. Holdings currently has a policy of paying quarterly cash dividends of $0.02 per share on each share of Holdings' Common Stock, subject to declaration by Holdings' Board of Directors and certain contractual and regulatory constraints. See "Risk Factors-- Holding Company Structure" and "Dividend Policy." NYSE Symbol.................. KAP Use of Proceeds.............. Holdings will not receive any proceeds from the Offering. </TABLE> - ------------ (1) As of April 30, 1996. Excludes 2,301,213 shares issuable upon exercise of certain outstanding stock options at a weighted average exercise price of $15.42 per share, 2,230,024 shares issuable upon exercise of warrants at an exercise price of $13.33 per warrant and 460,392 unallocated ESOP shares. SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION The following tables present summary consolidated financial data derived from the consolidated financial statements of Holdings and Original Holdings and the related notes thereto for each of the periods indicated. The summary historical information as of and for the year ended December 31, 1991, pro forma information for the year ended December 31, 1992, selected historical information for the three months ended March 31, 1995, and March 31, 1996, the adjusted book value per share, the Net Statutory P&I amounts and the policyholders' leverage ratio are unaudited. Although the financial statements for the year ended December 31, 1991 for Original Holdings are unaudited, the financial statements of CapMAC during that period have been audited. Certain amounts, ratios and statistics in the Company's financial statements relate solely to CapMAC and consequently, certain items of revenue and expense such as premium and loss information and selected financial statistics for the audited periods are directly related to CapMAC and have been audited. This information should be read in conjunction with the consolidated financial statements of the Company and the related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus. The summary historical consolidated and pro forma financial statements were prepared in accordance with GAAP and include the accounts of Holdings and its consolidated subsidiaries, including CapMAC, CFS and CapMAC Asia. The selected financial statistics were prepared in accordance with GAAP or SAP, as indicated. All significant intercompany transactions have been eliminated in consolidation. <TABLE><CAPTION> THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ----------------- ---------------------------------------------------------- HOLDINGS PRO FORMA(1) ORIGINAL HOLDINGS FOR ACQUISITION HOLDINGS ------------------------------------------------- --------------- -------- 1996 1995 1995 1994 1993 1992 1991 ------- ------- --------- ------- ------- --------------- -------- (UNAUDITED) (AUDITED) (UNAUDITED) ----------------- ----------------------------- -------------------------- ($ IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> OPERATING DATA: Gross premiums written.......... $15,029 $16,992 $ 57,476 $44,662 $24,894 $17,607 $ 18,077 Net premiums written............ 13,119 13,899 41,484 33,593 21,308 13,359 13,807 Net premiums earned............. 8,828 7,101 29,242 23,103 17,483 12,222 12,088 Advisory fees................... 9,549 2,024 15,470 10,723 4,722 1,130 2,370 Net realized gains (losses)..... 149 9 1,351 (117) 1,490 176 2,918 Net investment income........... 4,111 2,811 12,843 10,316 10,205 10,045 17,040 Total revenues.................. 23,247 12,207 62,632 44,551 34,547 24,254 34,418 Total expenses.................. 8,509 6,802 27,968 19,693 16,508 14,168 27,086 Income before income taxes...... 14,738 5,405 34,664 24,858 18,039 10,086 7,332 Net income...................... 9,900 3,840 23,528 17,066 12,469 7,853 6,983 Primary earnings per share(2)... 0.57 0.28 1.73 1.23 0.96 0.62(2) -- Fully diluted earnings per share(2)........................ 0.57 0.28 1.65 1.23 0.96 0.62(2) -- SELECTED FINANCIAL STATISTICS - --GAAP BASIS(3): Loss ratio...................... 12.2% 9.8% 10.7% 6.2% 5.2% 7.2% 7.7% Expense ratio................... 68.4 76.9 71.9 70.8 80.8 96.1 98.2 Combined ratio.................. 80.6 86.7 82.6 77.0 86.0 103.3 105.9 - --SAP BASIS (3): Loss ratio...................... 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Expense ratio................... 64.3 71.0 77.1 81.8 112.2 141.9 116.5 Combined ratio.................. 64.3 71.0 77.1 81.8 112.2 141.9 116.5 <CAPTION> MARCH 31, DECEMBER 31, ----------- ----------------------------------------------------------------------------------- ORIGINAL HOLDINGS HOLDINGS ----------------------------------------------------------------------------------- ----------- 1996 1995 (7) 1994 1993 1992(8) 1991 ----------- ------------------- ----------- ----------- ------------------- ----------- (UNAUDITED) (AUDITED) (UNAUDITED) ----------- --------------------------------------------------------------------- ----------- ($ IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Total investments(4)... $ 344,629 $ 329,758 $ 202,637 $ 190,428 $ 172,474 $ 251,588 Total assets........... 406,118 391,273 244,404 212,992 184,693 283,458 Unearned premiums...... 50,266 45,767 25,905 10,062 6,038 4,900 Long term debt......... 15,000 15,000 15,000 15,000 15,000 115,000 Total liabilities...... 103,022 95,191 63,743 41,564 29,983 195,895 Stockholders' equity... 281,698 276,519 180,661 171,428 154,710 87,563 Book value per share... 18.18 17.86 15.38 14.72 13.34 -- Shares outstanding(5)......... 15,498,889 15,478,729 11,745,186 11,646,290 11,599,935 -- SELECTED FINANCIAL STATISTICS (3): Net Statutory P&I...... $16,808,000 $ 15,138,000 $10,838,000 $ 6,846,000 $ 4,933,000 $ 4,424,000 Qualified Statutory Capital ............... $ 245,413 $ 239,927 $ 170,477 $ 167,825 $ 163,087 $ 242,131 Policyholders' leverage ratio.................. 68:1 63:1 64:1 41:1 30:1 18:1 OTHER DATA: Adjusted book value per share(6)............... $ 23.66 $ 21.91 $ 19.50 $ 17.48 $ 15.82 -- </TABLE> (Footnotes on following page) (Footnotes for preceding page) - ------------ (1) The following table presents the statements of income for (i) the six-month period ended June 30, 1992 for Original Holdings prior to the Acquisition; (ii) the six-month period ended December 31, 1992 for Holdings after the Acquisition and (iii) the condensed pro forma income statement for the year ended December 31, 1992 assuming that the Acquisition had occurred on January 1, 1992. The pro forma information reflects adjustments relating to (a) lower investment income due to the reduction in the investment portfolio as a result of the Distribution made in connection with the Acquisition; (b) higher benefits expense due to establishment of the ESOP; (c) lower policy acquisition costs due to the assumed write-off of deferred acquisition costs at January 1, 1992 and (d) lower interest expense due to recapitalization. The pro forma information does not purport to represent what the results of operations would actually have been if the Acquisition had occurred on January 1, 1992 or to be indicative of the future results of operations of Holdings. <TABLE><CAPTION> HOLDINGS PRO FORMA ORIGINAL HOLDINGS HOLDINGS FOR ACQUISITION JANUARY 1- JULY 1- ACQUISITION YEAR ENDED JUNE 30, 1992 DECEMBER 31, 1992 ADJUSTMENTS DECEMBER 31, 1992 ----------------- ----------------- ----------- ----------------- (UNAUDITED) (AUDITED) (UNAUDITED) (UNAUDITED) ($ IN THOUSANDS) <S> <C> <C> <C> <C> REVENUES: Net premiums earned......... $ 5,969 $ 6,253 $-- $12,222 Net investment income....... 7,519 4,823 (2,297) 10,045 Net realized gains.......... -- 176 -- 176 Other income................ 415 1,020 376 1,811 -------- -------- ----------- -------- Total revenues........ 13,903 12,272 (1,921) 24,254 -------- -------- ----------- -------- EXPENSES: Losses and loss adjustment expenses.................... 460 422 -- 882 Underwriting and operating expenses.................... 4,979 6,154 596 11,729 Policy acquisition costs.... 2,911 143 (2,686) 368 Interest expense............ 6,425 439 (5,676) 1,189 -------- -------- ----------- -------- Total expenses........ 14,775 7,158 (7,765) 14,168 -------- -------- ----------- -------- Income before income taxes....................... (872) 5,114 5,844 10,086 -------- -------- ----------- -------- Income taxes.......... 1,691 1,148 2,776 2,233 -------- -------- ----------- -------- Net Income............ $ 819 $ 3,966 $ 3,068 $ 7,853 -------- -------- ----------- -------- -------- -------- ----------- -------- </TABLE> (2) Earnings per share ("EPS") has been computed using the modified treasury stock method and the market value of the shares has been determined by an independent consulting firm in connection with an annual valuation conducted for the ESOP, except for the market values subsequent to the IPO, which are based on quoted trading prices on the New York Stock Exchange. EPS for the six-month period ended December 31, 1992 was $0.62. (3) These ratios and statistics relate solely to CapMAC. The GAAP loss ratio is losses and loss adjustment expenses incurred (inclusive of additions to the Supplemental Loss Reserve) divided by net premiums earned. The SAP loss ratio is losses and loss adjustment expenses incurred (exclusive of additions to the Supplemental Loss Reserve) divided by net premiums earned. The GAAP expense ratio is underwriting and operating expenses and policy acquisition costs, divided by net premiums earned. The SAP expense ratio is SAP underwriting and operating expenses, divided by net premiums written. The combined ratio on both a GAAP and SAP basis is the sum of the applicable loss and expense ratios. (Footnotes continued on following page) (Footnotes continued from preceding page) (4) The Company changed its method of accounting for investments to adopt the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," on December 31, 1993. (5) Shares outstanding do not include the common stock equivalents (i.e., warrants, stock options and unallocated ESOP shares) or ______shares issued in connection with the exercise of warrants. See "Description of Capital Stock--Warrants to Acquire Common Stock." (6) Adjusted book value per share is not based on GAAP and is not a substitute for GAAP book value per share of Common Stock. Due to the PFR embedded in CapMAC's existing book of business, the book value per share has been adjusted to present additional information concerning the value of CapMAC. The adjusted book value is determined by adding to the GAAP book value the PFR per share reduced by the deferred acquisition costs net of the related tax effects. However, PFR is not earned until subsequent periods, and the amount actually realized may be less than the amount estimated. See "Risk Factors--Realization of PFR." For a discussion of how PFR is computed see "Management's Discussion and Analysis of Financial Condition and Results of Operations-- General."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000890763_general_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000890763_general_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE REQUIRES, "GSI" OR THE "COMPANY" REFERS TO GENERAL SURGICAL INNOVATIONS, INC. AND ITS WHOLLY OWNED SUBSIDIARY. THE DISCUSSION IN THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS" AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS. THE COMPANY General Surgical Innovations, Inc. ("GSI" or the "Company") develops, manufactures and sells balloon dissection systems for minimally invasive surgery ("MIS"). Each of GSI's proprietary Spacemaker balloon dissection systems consists of an access and deployment platform and a balloon dissector. By using the Company's products, surgeons can access a surgical site in a minimally invasive manner and can rapidly and relatively atraumatically create a working space at the target surgical site where no space previously existed. The Company's balloon dissection systems are currently offered in four access and deployment platforms, along with 14 different balloon shapes and sizes, which are specifically designed for various surgical techniques, procedure types and market segments. The Company commenced commercial sales of its first product, the Spacemaker I platform for hernia repair, in September 1993 and to date almost all of the Company's revenues have been derived from sales of products for this procedure, primarily pursuant to a distribution agreement with United States Surgical Corporation ("USSC"). The Company currently sells products in the United States and certain other countries, including the United Kingdom, Germany and France, for selected applications, including hernia repair, subfascial endoscopic perforator surgery and breast augmentation and reconstruction. Over the next 18 months, the Company anticipates completing marketing-related clinical evaluations of and launching products for several new applications, including treatment of stress urinary incontinence, saphenous vein harvesting and anterior spinal fusion. Open surgery is an invasive procedure that generally requires large incisions and significant tissue manipulation in order to provide the surgeon with direct access to the intended surgical site. Much of the trauma suffered in connection with open surgery is a result of gaining access to the surgical site and is not caused by the surgical repair itself. In order to reduce the complications associated with many open surgical procedures, surgical techniques referred to as MIS have recently been developed. These techniques allow surgeons to access the target surgical site through the body's natural openings (E.G., mouth, urethra or rectum) or by making small incisions to access body cavities such as the abdominal cavity (the "peritoneum"). The benefits of MIS as compared to open surgery generally include reduced patient trauma (including muscle, nerve and other tissue damage), reduced blood loss, reduced post-operative infection, reduced scarring at the site of the incision, shorter patient recovery time, reduced procedure time and ultimately lower medical costs. As a result of these benefits, MIS has been used increasingly for surgical procedures within the peritoneum. For example, in 1995 approximately 93% of the estimated 857,000 cholecystectomies (gallbladder removal) performed in the United States were performed using MIS, compared to none in 1988. Despite the documented benefits of MIS, its adoption to date has been limited to a select number of surgical procedures, and, in the aggregate, represented only an estimated 15% of all surgical procedures performed in the United States in 1995. The most widely adopted MIS procedure, laparoscopic cholecystectomy, has been successfully adopted largely because of the proximity of the target surgical site to the peritoneum, the only natural body cavity that provides a working space when insufflated. Application of MIS techniques to other surgical procedures and the ability to exploit the clinical benefits of MIS have been limited by the lack of a natural body cavity proximate to the surgical site and the inability of the surgeon to easily and atraumatically access the surgical site or establish a surgical working space where no natural body cavity exists. MIS conducted outside of a natural body cavity requires the surgeon to use blunt dissection tools to tunnel through tissue to reach the surgical site, creating a relatively bloody working space with poor visualization. GSI's proprietary Spacemaker balloon dissection systems are designed to address the limitations of blunt dissection MIS and enable the adoption of MIS techniques for a variety of surgical procedures. The body has a large number of naturally occuring tissue layers, including skin, muscle and fat. The Company's balloon dissection systems allow the surgeon to exploit this physiology by inflating the balloon to separate the natural tissue planes that exist between these layers, thereby creating a working space at or near the target surgical site. By utilizing any one of a range of balloons with pre-specified deployment characteristics, the surgeon is able to accurately and predictably determine the size, shape and proximity of the surgical working space relative to the target surgical site. The Company believes that its technology can be deployed anywhere in the body where a natural tissue plane exists. The Company believes that its proprietary balloon dissection technology provides the following benefits: (i) the ability to create a predictable working space tailored for a specific procedure; (ii) the ability to rapidly dissect tissue, thereby reducing procedure time; (iii) compatibility with existing MIS techniques and instruments, facilitating the adoption of the Company's products for a variety of surgical procedures; and (iv) ease of use, thereby minimizing surgeon training requirements. In addition, the Company believes that its products provide substantial clinical and cost benefits for the patient, surgeon and payor, including reduced patient trauma, reduced blood loss, shorter patient recovery time and reduced procedure time. GSI believes that its current patent and regulatory status provide it with competitive advantages in the balloon dissection market, and the Company plans to capitalize on its proprietary position in establishing and maintaining market leadership. To date, the Company has received 510(k) clearances from the FDA for the use of its Spacemaker balloon dissection technology to perform dissection of tissue planes during general, endoscopic, laparoscopic or cosmetic and reconstructive surgery using a broad range of balloon sizes and shapes. The Company believes that these FDA clearances allow the use of the Company's balloon dissection technology for many surgical applications that the Company may pursue, including those involving other balloon sizes and shapes. GSI currently has 13 issued United States patents and two issued foreign patents, and numerous additional United States and foreign patent applications covering the Company's Spacemaker technology. In particular, the Company has received a notice of allowance for one of its patent applications which contains claims regarding the use of balloons to dissect tissue planes anywhere in the body. The Company believes that the scope of these claims could provide a long-term competitive advantage for many of its balloon dissection products. The Company's objective is to become the leading provider of balloon dissection systems and specialty surgical instruments for MIS procedures. The Company's market penetration and adoption strategy is comprised of several key elements. First, the Company seeks to develop and maintain relationships with leading general surgeons and specialists in each of its target surgical fields, including general surgery, obstetrics, gynecology, urology, cosmetic and reconstructive surgery, orthopedic surgery and vascular surgery. Second, the Company intends to develop relationships with leading medical device companies that can support surgeon training in the use of the Company's products and augment the Company's direct sales and marketing capabilities. The Company's initial partnership in this area is the distribution of balloon dissection systems for hernia repair through USSC. Third, the Company plans to capitalize on its favorable regulatory and patent position to develop and rapidly introduce additional products that broaden the surgical applications for its Spacemaker technology. Finally, the Company will continue to develop surgical instruments tailored for use in the working spaces created by the Company's balloon dissection systems, with the goal of facilitating the adoption of the Company's products for target procedures. The Company's principal offices are located at 3172A Porter Drive, Palo Alto, California 94304, and its telephone number is (415) 812-9730. The Company was incorporated in California in April 1992. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company.......... 3,000,000 shares Common Stock to be outstanding after the offering (1)................................ 12,653,342 shares Use of proceeds.............................. To fund sales and marketing activities, research and development, marketing-related clinical evaluations, capital expenditures, expansion of manufacturing and other facilities and other general corporate purposes. See "Use of Proceeds." Approved Nasdaq National Market symbol....... GSII </TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> FISCAL YEAR ENDED NINE MONTHS ENDED JUNE 30, MARCH 31, ------------------------------- ---------------------- 1993 1994 1995 1996 --------- --------- --------- 1995 --------- ----------- (UNAUDITED) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Sales...................................................... $ -- $ 789 $ 2,437 $ 1,805 $ 3,421 Cost of sales.............................................. -- 600 1,262 908 1,654 --------- --------- --------- ----------- --------- Gross profit............................................. -- 189 1,175 897 1,767 Operating expenses: Research and development................................. 750 496 975 735 864 Sales and marketing...................................... 42 1,532 2,859 1,965 2,578 General and administrative............................... 398 1,338 1,400 1,127 1,120 Write-off of acquired in-process research and development............................................. 2,791 --------- --------- --------- ----------- --------- Total operating expenses................................. 1,190 3,366 5,234 3,827 7,353 --------- --------- --------- ----------- --------- Loss from operations....................................... (1,190) (3,177) (4,059) (2,930) (5,586) Interest and other income (loss), net...................... 18 58 8 (6) 151 --------- --------- --------- ----------- --------- Net loss................................................... $ (1,172) $ (3,119) $ (4,051) $ (2,936) $ (5,435) --------- --------- --------- ----------- --------- --------- --------- --------- ----------- --------- Pro forma net loss per share (2)........................... $ (0.16) $ (0.34) $ (0.40) $ (0.29) $ (0.53) Shares used in computing pro forma net loss per share (2)....................................................... 7,275 9,276 10,241 10,217 10,301 </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 ---------------------------- ACTUAL AS ADJUSTED(1)(3) --------- ----------------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents.......................................................... $ 3,904 $ 42,164 Working capital.................................................................... 2,788 41,298 Total assets....................................................................... 6,708 44,968 Convertible redeemable preferred stock............................................. 15,547 -- Total shareholders' equity (deficit)............................................... (12,291) 41,766 </TABLE> - ------------------------------ (1) Excludes (i) 1,133,266 shares of Common Stock issuable upon exercise of outstanding stock options and (ii) 2,155,164 shares of Common Stock reserved for issuance under the Company's equity incentive plans as of March 31, 1996. See "Management -- Stock Options" and "-- Equity Incentive Plans." (2) Computed on the basis described in Note 14 of Notes to Consolidated Financial Statements. (3) Adjusted to give effect to the sale of 3,000,000 shares of Common Stock offered by the Company at an assumed initial public offering price of $14.00 per share after deducting estimated Underwriting discounts and commissions and estimated offering expenses payable by the Company. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000891461_greenwich_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000891461_greenwich_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f48b8c5b07a78ad84bfa3ef267bbb2418c977a87
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) AND PRO FORMA FINANCIAL INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS. THE CONSUMMATION OF THE NOTE OFFERING WILL OCCUR CONCURRENTLY WITH, AND IS CONDITIONED UPON, THE CONSUMMATION OF (I) GREENWICH'S ACQUISITION (THE "AVIALL ACQUISITION") OF THE COMMERCIAL GAS TURBINE ENGINE SERVICE AND ENGINE COMPONENTS REPAIR BUSINESS OF AVIALL, INC. AND AVIALL SERVICES, INC. (COLLECTIVELY, "AVIALL") AND (II) A $175.0 MILLION SENIOR SECURED REVOLVING CREDIT FACILITY (THE "NEW CREDIT FACILITY"). THE NOTE OFFERING IS ANTICIPATED TO OCCUR CONCURRENTLY WITH, BUT IS NOT CONTINGENT UPON, THE COMMON STOCK OFFERING. IN THE EVENT THAT THE COMMON STOCK OFFERING IS NOT CONSUMMATED, BUT THE NOTE OFFERING AND THE NEW CREDIT FACILITY ARE CONSUMMATED, GREENWICH WILL PAY $80.4 MILLION OF THE PURCHASE PRICE FOR THE AVIALL BUSINESS (AS DEFINED BELOW) BY THE DELIVERY OF UP TO $55.0 MILLION IN SHARES OF ITS CLASS B COMMON STOCK TO AVIALL, AND THE BALANCE WILL BE PAID IN CASH THROUGH ADDITIONAL BORROWINGS UNDER THE NEW CREDIT FACILITY. ALL INFORMATION IN THIS PROSPECTUS ASSUMES (I) A PUBLIC OFFERING PRICE IN THE COMMON STOCK OFFERING OF $25 1/4 PER SHARE, THE CLOSING PRICE OF THE CLASS B COMMON STOCK AS REPORTED BY THE NASDAQ NATIONAL MARKET ON MAY 10, 1996, (II) NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION IN CONNECTION WITH THE COMMON STOCK OFFERING AND (III) THE DISTRIBUTION ON MAY 8, 1996 BY GREENWICH OF ONE SHARE OF CLASS B COMMON STOCK FOR EACH SHARE OF GREENWICH'S CLASS A COMMON STOCK OUTSTANDING ON APRIL 18, 1996. PRO FORMA INFORMATION IN THIS PROSPECTUS GIVES EFFECT TO (I) THE NOTE OFFERING, (II) THE AVIALL ACQUISITION, (III) INITIAL BORROWINGS UNDER THE NEW CREDIT FACILITY OF $74.4 MILLION (THE "INITIAL DRAWDOWN") AND (IV) THE COMMON STOCK OFFERING, IN EACH CASE AS IF IT HAD OCCURRED ON OCTOBER 1, 1994, UNLESS OTHERWISE INDICATED. ALL REFERENCES TO FISCAL YEARS REFER TO THE FISCAL YEAR OF GREENWICH ENDED SEPTEMBER 30 UNLESS THE CONTEXT OTHERWISE INDICATES. ALL REFERENCES TO (I) COMMON STOCK INCLUDE BOTH THE COMPANY'S CLASS A COMMON STOCK AND CLASS B COMMON STOCK, (II) "GREENWICH" MEAN GREENWICH AIR SERVICES, INC. AND ITS CONSOLIDATED SUBSIDIARIES BEFORE GIVING EFFECT TO THE AVIALL ACQUISITION, (III) THE "AVIALL BUSINESS" MEAN THE COMMERCIAL GAS TURBINE ENGINE SERVICE AND ENGINE COMPONENTS REPAIR BUSINESS OF AVIALL BEFORE GIVING EFFECT TO THE AVIALL ACQUISITION AND (IV) THE "COMPANY" MEAN GREENWICH AND ITS CONSOLIDATED SUBSIDIARIES AFTER GIVING EFFECT TO THE AVIALL ACQUISITION. THE COMPANY On April 19, 1996, Greenwich and Aviall signed a definitive purchase agreement for the acquisition by Greenwich of the gas turbine engine service and engine components repair business of Aviall. The combination of Greenwich and the Aviall Business will create the largest and most diversified independent gas turbine engine repair and overhaul company in the world. On a pro forma basis, the Company would have had combined sales of $701.1 million and EBITDA (as defined below) of $63.1 million in fiscal 1995. GREENWICH Greenwich is a leading independent provider of repair and overhaul services for gas turbine aircraft engines used to power Boeing 707, 727, 737 and 747; McDonnell Douglas DC-8, DC-9, DC-10 and MD-80; Airbus A-300; Lockheed L-1011; and a variety of military aircraft. Greenwich also services aeroderivative engines used in a variety of industrial and marine applications. In addition, Greenwich manages government and military service and maintenance programs and provides for the sale and refurbishment of gas turbine power plants (with electrical power output of up to 120 megawatts) in various countries around the world. Greenwich provides services to more than 400 customers including passenger airlines such as Carnival Airlines, Continental Airlines and VASP Brazilian Airlines; freight and package air carriers such as Emery Worldwide Airlines and United Parcel Service; banks and leasing companies such as The CIT Group and International Air Leases; utilities and industrial users such as Commonwealth Edison, Dow Chemical and Southern California Gas; and military and government programs such as those involving the United States government, Boeing and Lockheed Martin. Greenwich's principal engine repair, overhaul and testing facilities are located at Miami International Airport, Miami, Florida; Bradley International Airport, East Granby, Connecticut; JFK International Airport, New York, New York; and Westover Airport, Chicopee, Massachusetts. Greenwich's net sales have increased from $75.8 million in fiscal 1991 to $196.3 million in fiscal 1995. THE AVIALL BUSINESS The Aviall Business is the leading independent provider of gas turbine aircraft engine maintenance and engine components repair services. The Aviall Business provides repair and overhaul services for gas turbine engines used to power Boeing 727, 737, 747 and 767; McDonnell Douglas DC-9, DC-10, MD-11, MD-80 and MD-90; and Airbus A-300, A-319, A-320, A-321, A-330 and A-340 aircraft, and also services turboprop engines predominantly used by regional air carriers. The primary customer base of the Aviall Business includes major and regional commercial air and freight and package carriers such as America West, British Airways, Continental Airlines, Federal Express, Southwest Airlines and USAir. The engine repair and overhaul operations of the Aviall Business are located in Dallas, Texas; Fort Worth, Texas; and Prestwick, Scotland, and its components repair operations are located in McAllen, Texas. Aviall's engine repair and overhaul operations date back to 1932, and in 1955, it became the world's first major independent gas turbine engine repair facility. These operations have been owned by Aviall since Aviall was spun-off from Ryder System, Inc. ("Ryder") in 1993. The Aviall Business' net sales have increased to $504.8 million in 1995 from $482.9 million in 1993. The Aviall Business has spent in excess of $84.0 million over the last five calendar years to build state-of-the-art engine repair and overhaul facilities and to develop programs designed to provide the fastest overhaul turnaround time in the engine repair and overhaul industry. However, its operating income has declined significantly over this period. These declines in profitability can be attributed to a variety of factors, including unfavorable pricing granted to certain customers, inefficiencies in its overhaul operations, expenses associated with reengineering its facilities, and significant costs and penalties on specific contracts where the Aviall Business was unable to meet contractual requirements. THE INDUSTRY The Company believes that the worldwide market for aircraft gas turbine engine repair and overhaul services is approximately $6.5 billion. Growth of the engine repair and overhaul market is primarily driven by the activity of the commercial aviation industry. Such market is projected to grow over the next ten years at an annual rate of 4% in North America, 8% in the Asia-Pacific region and 6% in Latin America. Approximately 55% of this market is currently serviced by operators of the engines, principally major commercial airlines, for their own engine needs. The remaining gas turbine engines are serviced by commercial airlines, the original equipment manufacturers ("OEMs") and by a limited number of independent operators, including the Company. Commercial airlines, OEMs and independent operators compete on the ability to provide services tailored to each customer's requirements, turnaround times, breadth of services offered and price. The repair and overhaul of aircraft engines is regulated by governmental agencies throughout the world, including the Federal Aviation Administration (the "FAA") and the British Civil Aviation Authority (the "BCAA"), and is supplemented by guidelines established by OEMs which generally require that engines be overhauled and certain engine components and parts be replaced after a certain number of flight hours or cycles (take-offs and landings). Engine maintenance costs can range from $100,000 for certain repairs to as much as $1.5 million or more for a complete engine overhaul. Certain trends within the aviation industry favoring independent overhaul providers include: -OUTSOURCING OF COMMERCIAL ENGINE SERVICES. In order to lower costs, many passenger airlines and freight and package carriers are seeking to outsource their engine servicing. Airlines such as British Airways, Continental Airlines, Southwest Airlines and USAir currently utilize third parties, and other airlines are expected to follow as labor agreements allow. -OUTSOURCING OF MILITARY MAINTENANCE SERVICES. It is estimated that the U.S. military market is greater than the commercial aircraft market for engine and aircraft maintenance and related services. The closing of military bases and reductions in personnel have resulted in an increase in the demand for these services in the commercial marketplace. As additional bases are closed or realigned, this trend is expected to continue. -INCREASED AIR TRAVEL. It is estimated that world air travel will grow by 70% by 2005 and the number of passenger and freight and package delivery aircraft in service will increase by 47%, which should substantially increase the demand for engine repair and overhaul services. -START-UP AIRLINES. Deregulation of the aviation industry in the United States and the European Community, relatively low barriers to entry and excess capacity in equipment, as well as increased consumer demand for air travel, has led to the emergence of several low cost start-up airlines. Because start-up airlines generally do not invest in the infrastructure necessary to service their aircraft, many outsource all of their engine repair and overhaul services. Start-up airlines also tend to use older aircraft with engines that require greater servicing. Consequently, the Company believes that the growth of start-up airlines is increasing demand for independent engine repair and overhaul services. -GROWTH OF DEMAND FOR AIR FREIGHT AND PACKAGE DELIVERY. The demand for air freight and package delivery is projected to grow at an average annual rate of 7% over the next 20 years. This trend is expected to result in the continued growth of established carriers such as Airborne Express, Emery Worldwide Airlines, Federal Express and United Parcel Service, and has caused the emergence of new cargo carriers such as Atlas Air and Polar Air. Many of these carriers also use older aircraft, increasing the demand for engine repair and overhaul services. -LEASING COMPANIES. The number of aircraft owned by financial institutions or leasing companies, many of which use independent engine repair and overhaul services, has grown from just over 200 aircraft in 1986 to over 1,000 aircraft in 1995. THE AVIALL ACQUISITION On April 19, 1996, Greenwich entered into a definitive agreement to acquire the gas turbine engine service and engine components repair business of Aviall for a purchase price estimated to be approximately $239.0 million (net of assumed liabilities). The purchase price of the Aviall Business, $5.6 million in estimated expenses related to the Aviall Acquisition and the New Credit Facility and amounts needed to repay certain existing indebtedness of $55.3 million will be financed through approximately $80.4 million of net proceeds from the Common Stock Offering, approximately $145.1 million of net proceeds of the Note Offering and approximately $74.4 million from the Initial Drawdown. In the event that the Common Stock Offering is not consummated, but the Note Offering and the New Credit Facility are consummated, Greenwich will pay $80.4 million of the purchase price for the Aviall Business by the delivery of up to $55.0 million in shares of its Class B Common Stock to Aviall, and the balance will be paid in cash through additional borrowings under the New Credit Facility. COMPETITIVE ADVANTAGES The Company believes that its principal competitive advantages are: -WORLDWIDE LEADER. The Company will be the world's largest independent gas turbine engine repair and overhaul company and will have major facilities strategically located in the United States and in Europe. In addition, the Company believes that its base of over 500 customers will be the largest and most diversified of all independent providers of gas turbine repair and overhaul services. -FULL SERVICE PROVIDER. Upon consummation of the Aviall Acquisition, the Company will provide repair and overhaul services on 14 engine lines and 50 engine models, supporting the world's five leading gas turbine engine manufacturers -- CFM International, General Electric, International Aero Engines, Pratt & Whitney and Rolls Royce. The Company believes that no other independent overhaul company or OEM has this breadth of capabilities. -EFFICIENT PROVIDER. The Company believes that it will continue to provide its customers with a high level of service at competitive prices, as a result of existing and anticipated productivity of its work force, efficient production techniques and the ability to acquire inventory and fixed assets at costs which will improve combined profit margins and reduce the cost of entry into new product lines. -STRONG ENTREPRENEURIAL MANAGEMENT TEAM. Greenwich's operating income has grown at a compound annual growth rate of 43% since 1993. In 1994, Greenwich acquired the assets of Gas Turbine Corporation East Granby Division (the "GTC Division"), a company with revenues of approximately 83% of Greenwich's revenues at the time of the acquisition. Greenwich successfully integrated the GTC Division and improved its operating performance and profitability through the reduction of personnel, the elimination of duplicate functions, the rationalization of product lines and the realignment of overhaul services among Greenwich's facilities. COMPANY STRATEGY INTEGRATION PLAN The Company's strategy following the Aviall Acquisition is to improve the profitability of the Aviall Business, enhance services offered to the Company's customers and to maintain Greenwich's historical efficiency. The Company intends to implement this strategy by: -ACHIEVING COST REDUCTIONS. The Aviall Acquisition will enable the Company to eliminate duplicative functions currently being performed by both Greenwich and the Aviall Business in the areas of administration, finance, sales, marketing, purchasing, technical and field services, and management information systems ("MIS systems"). The Company will also eliminate a portion of certain other corporate overhead charges which have historically been allocated by Aviall to the Aviall Business. In addition, the Company will benefit by having Greenwich utilize the Aviall Business' components repair facility to perform work that Greenwich formerly contracted out to third parties. -IMPROVING OPERATING EFFICIENCIES. Greenwich believes that it is one of the most efficient providers of gas turbine engine repair and overhaul services. The Company intends to achieve greater production and operating efficiencies by realigning engine repair and overhaul services among its several facilities. The Company also intends to integrate the MIS systems which have been successfully utilized by Greenwich with those of the Aviall Business. These MIS systems are expected to provide the Company's management with the ability to monitor operating costs utilizing real-time data while enhancing the information flow to the Company's customers. -IMPROVING CONTRACTUAL PERFORMANCE. Greenwich believes that its experienced and entrepreneurial management team will enable the Aviall Business to improve engine turnaround time and reduce related contractual penalties through increased productivity of the Aviall Business' domestic workforce and improved operating and production efficiencies. The Aviall Business incurred contractual penalties of approximately $6.2 million in 1995, primarily for late deliveries on scheduled engine overhauls. STRATEGIC OBJECTIVES Upon integration of Greenwich and the Aviall Business, the Company's long-term strategic objectives will be to improve its profitability, maintain its position as the world's largest independent provider of gas turbine engine repair and overhaul services, and accelerate its growth. The Company's strategic objectives may be summarized as follows: -SERVICE NEW ENGINE LINES AND MODELS. Greenwich has successfully implemented a strategy to increase the number of engine lines and models serviced by its facilities, thereby creating new market opportunities while offering its customers one-stop shopping capability. The Company will continue this strategy and seek to develop servicing capabilities for additional high by-pass and high horsepower gas turbine engines. Many of the Company's existing customers use engines for which the Company currently has no servicing capabilities and development of such capabilities would present the Company with opportunities to expand the services provided to these customers. -OFFER ADDITIONAL SERVICES TO EXISTING CUSTOMERS. Many of the engine lines and models serviced by the Aviall Business are not currently serviced by Greenwich and many of the engine lines and models serviced by Greenwich are not currently serviced by the Aviall Business. The Company believes that opportunities exist to provide services to customers of both Greenwich and the Aviall Business for engine lines and models previously serviced by competitors. Continental Airlines is the only major customer serviced by both Greenwich and the Aviall Business. -SERVICE AERODERIVATIVE ENGINE LINES. Certain of the engine lines serviced by the Company for its airline and cargo customers have aeroderivative engine lines used in industrial, marine and military applications. Greenwich has been successful in providing service to the aeroderivative gas turbine engine market, resulting in sales growth in these services from $10.5 million in 1992 to $19.0 million in 1995. -EXPAND SERVICE TO REGIONAL CARRIERS. The Aviall Business is a leading provider of engine repair and overhaul services for the PW-100, an engine predominantly used by regional carriers. The Company believes that this market has the potential for substantial growth and that the Company will be well-positioned to capture a larger share of this market. The Company maintains its principal executive offices at 4590 N.W. 36th Street, Building 23, Miami International Airport, Miami, Florida, 33122, and its telephone number is (305) 526-7000. THE OFFERING <TABLE> <S> <C> Notes Offered..................... $150,000,000 principal amount of % Senior Notes due 2006. Maturity.......................... The Notes will mature on , 2006. Interest Payment Dates............ Interest on the Notes is payable semiannually on each and , commencing , 1996. Optional Redemption............... The Notes will be redeemable at the option of the Company at any time, in whole or in part, on or after , 2001, at the redemption prices set forth herein, plus accrued and unpaid interest, if any, to the date of redemption. Sinking Fund...................... None. Change of Control................. Upon a Change of Control (as defined), the Company will be required to make an offer to purchase the Notes at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase. See "Description of Notes -- Repurchase at the Option of Holders Upon a Change of Control." Ranking........................... The Notes are senior unsecured obligations of the Company, will rank PARI PASSU with other unsubordinated, unsecured indebtedness of the Company, and will rank senior in right of payment to all existing and any future subordinated indebtedness of the Company. The Notes will also be guaranteed on a senior unsecured basis by the Subsidiary Guarantors (as defined) and jointly secured on a PARI PASSU basis with indebtedness under the New Credit Facility by a pledge of 65% of the capital stock of Aviall Limited. As of March 31, 1996, after giving effect to the Note Offering, Common Stock Offering, the Aviall Acquisition and the Initial Drawdown, the total consolidated indebtedness of the Company would have been approximately $239.6 million. See "Risk Factors -- Substantial Leverage; Restrictive Covenants," "Capitalization," "Description of Certain Indebtedness" and "Description of Notes." Certain Covenants................. The Indenture (as defined) for the Notes will contain limitations on, among other things, (a) the Incurrence of additional Company Indebtedness, (b) the Incurrence of Indebtedness or the issuance of Preferred Stock by Restricted Subsidiaries, (c) the payment of dividends and other distributions with respect to Capital Stock of the Company and the purchase, redemption or retirement of Capital Stock of the Company, (d) the making of certain Investments, (e) the incurrence of certain Liens, (f) sale and leaseback transactions, (g) the issuance and sale of Capital Stock of, and certain payments by, Restricted Securities, (h) Asset Sales (as defined) by the Company or the Restricted Subsidiaries, (i) transactions with Affiliates, (j) the designation of Restricted and Unrestricted Subsidiaries, (k) Guar- antees of Indebtedness by the Company's Restricted Subsidiaries and (l) consolidations, mergers and transfers of assets. See "Description of Notes." </TABLE> <TABLE> <S> <C> Concurrent Transactions........... Concurrently with the Note Offering, the Company is con- ducting the Common Stock Offering by means of a separate Prospectus (the Note Offering and the Common Stock Offering are together referred to herein as the "Offerings"). The Note Offering will occur concurrently with, and is contingent upon, consummation of the Aviall Acquisition and the New Credit Facility. The Note Offering is anticipated to occur concurrently with, but is not contingent upon, the consummation of the Common Stock Offering, and no assurance can be given that the Common Stock Offering will be consummated. Concurrently with the consummation of the Note Offering and the Aviall Acquisition, the Company will refinance certain existing indebtedness through the New Credit Facility, a $175.0 million senior secured revolving credit facility. Pursuant to the Initial Drawdown, the Company anticipates that it will initially borrow approximately $74.4 million under the New Credit Facility. In the event that the Common Stock Offering is not consummat- ed, but the Note Offering and the New Credit Facility are consummated, Greenwich will pay $80.4 million of the purchase price for the Aviall Business by the delivery of up to $55.0 million in shares of its Class B Common Stock to Aviall, and the balance will be paid in cash through additional borrowings under the New Credit Facility. See "Concurrent Transactions," "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Pro Forma Liquidity and Capital Resources" and "Description of Certain Indebtedness." Use of Proceeds................... The net proceeds from the Offerings and the Initial Drawdown are estimated to be approximately $299.9 million ($314.3 million if the Underwriters' over-allotment option is exercised in full). The net proceeds from the Offerings and the Initial Drawdown will be used to pay the purchase price for the Aviall Acquisition of $239.0 million and $5.6 million in expenses relating to the New Credit Facility and the Aviall Acquisition and to refinance certain existing indebtedness of $55.3 million. See "Use of Proceeds." Risk Factors...................... An investment in the Notes offered hereby involves certain risks including (i) Substantial Leverage; Restrictive Covenants; (ii) Risks of Business Integration; (iii) Declining Operating Income of Aviall Business; (iv) Dependence Upon Key Customers; (v) Unfavorable Agreements and Penalties; (vi) Competition; (vii) Potential Labor Issues; (viii) Dependence on Key Suppliers; (ix) Dependence on Key Management; (x) Control by Principal Stockholders; (xi) Defense Spending Reductions; (xii) Airline Industry Risks; (xiii) Government Regulation; (xiv) Environmental Regulation; (xv) Product Liability Risks; (xvi) Risks Relating to a Change of Control and (xvii) Absence of a Previous Market for the Notes. See "Risk Factors." </TABLE> SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) The following summary historical and pro forma financial data should be read in conjunction with Greenwich's Consolidated Financial Statements and Notes thereto included elsewhere in this Prospectus and the Aviall Business' Combined Financial Statements and Notes thereto included elsewhere in this Prospectus as well as the information appearing in "Unaudited Pro Forma Combined Financial Information," "Selected Historical Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." <TABLE> <CAPTION> FISCAL YEAR ENDED SEPTEMBER 30, 1995 -------------------------------------------------------- HISTORICAL ---------------------------- PRO FORMA AVIALL -------------------------- GREENWICH BUSINESS (1) ADJUSTMENTS COMBINED ----------- --------------- ------------- ----------- <S> <C> <C> <C> <C> INCOME STATEMENT DATA: Net sales........................................... $ 196,320 $ 504,755 $ $ 701,075 Gross profit........................................ 31,362 42,196 20,394 93,952 Income from operations.............................. 17,725 12,150 25,084 54,959 Interest expense.................................... 7,951 19,216 (2,227) 24,940 Net income (loss)................................... 6,201 (9,780) 22,130 18,551 Fully-diluted weighted average number of shares..... 12,836,406 16,236,406 Fully-diluted earnings per share.................... $ 0.54 $ 1.18 Ratio of earnings to fixed charges (2).............. 2.1x 2.1x OTHER FINANCIAL DATA: EBITDA (3).......................................... $ 19,932 $ 31,809 $ 11,407 $ 63,148 Depreciation and amortization....................... 1,815 19,659 (13,677) 7,797 Capital expenditures................................ 2,725 13,246 15,971 Pro forma total debt to EBITDA...................... 3.8x Pro forma EBITDA to interest expense................ 2.5x <CAPTION> SIX MONTHS ENDED MARCH 31, 1996 -------------------------------------------------------- HISTORICAL ---------------------------- PRO FORMA AVIALL -------------------------- GREENWICH BUSINESS (4) ADJUSTMENTS COMBINED ----------- --------------- ------------- ----------- <S> <C> <C> <C> <C> INCOME STATEMENT DATA: Net sales........................................... $ 118,625 $ 264,749 $ $ 383,374 Gross profit........................................ 18,703 11,097 12,993 42,793 Income (loss) from operations....................... 10,961 (6,392) 15,641 20,210 Interest expense.................................... 3,635 9,087 (593) 12,129 Net income (loss)................................... 4,418 (56,219) 56,730 4,929 Fully-diluted weighted average number of shares..... 12,844,590 16,244,590 Fully-diluted earnings per share.................... $ 0.35 $ 0.31 Cash dividends declared per share of common stock... $ 0.01 $ 0.01 Ratio of earnings to fixed charges (2).............. 2.6x 1.6x OTHER FINANCIAL DATA: EBITDA (3).......................................... $ 11,980 $ 3,636 $ 8,604 $ 24,220 Depreciation and amortization....................... 1,019 10,028 (7,037) 4,010 Capital expenditures................................ 1,737 4,530 6,267 Pro forma EBITDA to interest expense................ 2.0 BALANCE SHEET DATA (AT PERIOD END): Working capital..................................... $ 98,178 $ 132,331 $ 18,901 $ 249,410 Total assets........................................ 188,298 463,038 (84,901) 566,435 Total debt.......................................... 65,653 17,954 155,947 239,554 Stockholders' equity (Aviall investment)............ 50,873 300,829 (220,479) 131,223 </TABLE> <TABLE> <CAPTION> FISCAL YEARS ENDED SIX MONTHS ENDED SEPTEMBER 30, MARCH 31, --------------------------------------------------------------- ------------------------ GREENWICH 1991 1992 1993 1994 1995 1995 1996 - -------------------------------- ------------- ---------- ---------- ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> <C> HISTORICAL OPERATING DATA: Net sales..................... $ 75,821(5) $ 62,009 $ 69,467 $ 105,233 $ 196,320 $ 83,147 $ 118,625 Gross profit.................. 13,576 12,779 14,391 17,259 31,362 13,228 18,703 Income from operations........ 9,150 6,902 8,698 10,253 17,725 7,757 10,961 Interest expense.............. 3,678 2,950 3,039 4,758 7,951 3,813 3,635 Net income.................... 3,469 2,506 3,374 3,346 6,201 2,359 4,418 Fully-diluted weighted average number of shares............. 9,972,000 9,648,000 8,000,000 12,574,654 12,836,406 13,102,190 12,844,590 Fully-diluted earnings per share........................ $ 0.35 $ 0.26 $ 0.42 $ 0.33 $ 0.54 $ 0.21 $ 0.35 Cash dividends declared per share of common stock........ $ 0.01 Ratio of earnings to fixed charges (2).................. 2.3x 2.2x 2.5x 1.9x 2.1x 1.9x 2.6x OTHER FINANCIAL DATA: EBITDA (3).................... $ 10,090 $ 7,803 $ 9,696 $ 11,609 $ 19,932 $ 8,676 $ 11,980 Depreciation and amortization................. 829 807 950 1,285 1,815 875 1,019 Capital expenditures.......... 243 1,791 5,128 1,691 2,725 586 1,737 BALANCE SHEET DATA (AT PERIOD END) Working capital............... $ 33,329 $ 39,430 $ 46,010 $ 76,078 $ 87,829 $ 83,480 $ 98,178 Total assets.................. 50,376 59,102 67,708 138,423 185,620 160,210 188,298 Total debt.................... 26,338 29,411 35,686 74,985 67,880 79,537 65,653 Stockholders' equity.......... 10,620 13,126 15,951 27,963 36,788 30,322 50,873 </TABLE> <TABLE> <CAPTION> FISCAL YEARS ENDED SIX MONTHS ENDED DECEMBER 31, MARCH 31, ------------------------------- -------------------- AVIALL BUSINESS 1993 1994 1995 1995 (4) 1996 (4) - ---------------------------------------------------------- --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> HISTORICAL OPERATING DATA: Net sales............................................... $ 482,938 $ 490,390 $ 504,755 $ 267,067 $ 264,749 Gross profit............................................ 62,374 53,167 42,196 30,342 11,097 Income (loss) from operations........................... 32,368 17,776 12,150 14,048 (6,392) Interest expense........................................ 13,984 18,171 19,216 9,958 9,087 Net income (loss)....................................... 7,606 (4,407) (9,780) 2,459 (56,219) Ratio of earnings to fixed charges (2).................. 2.2x 1.4x OTHER FINANCIAL DATA: EBITDA (3).............................................. $ 48,545 $ 35,031 $ 31,809 $ 23,377 $ 3,636 Depreciation and amortization........................... 16,177 17,255 19,659 9,329 10,028 Capital expenditures.................................... 14,501 21,572 13,246 9,807 4,530 BALANCE SHEET DATA (AT PERIOD END) Working capital......................................... $ 194,602 $ 226,000 $ 175,436 $ 195,033 $ 132,331 Total assets............................................ 482,255 500,376 463,337 479,861 463,038 Total debt.............................................. 25,299 19,731 17,509 23,061 17,954 Aviall investment....................................... 343,311 390,888 347,786 365,206 300,829 </TABLE> - ------------------------------ (1) Historical financial information presented for the Aviall Business is for the year ended December 31, 1995. (2) For the purpose of determining the ratio of earnings to fixed charges, earnings consist of income before income taxes, change in accounting, extraordinary items and fixed charges. Fixed charges consist of interest on indebtedness, including, if any, the amortization of debt issue costs, accretion of debt discount, interest expense accrued in accordance with EITF Issue No. 86-15 and one-third of rental expense (which is deemed representative of the interest factor therein). Earnings for the Aviall Business were insufficient to cover fixed charges in the historical fiscal years ended December 31, 1994 and 1995 and for the six months ended March 31, 1996 by $395, $7,066 and $55,046 (including $39,567 of restructuring costs), respectively. (3) EBITDA represents net income (loss) before the cumulative effect of change in accounting plus provisions for income taxes, interest expense, depreciation and amortization, restructuring costs, and any charge related to any premium or penalty paid in connection with redeeming and retiring any indebtedness prior to its stated maturity. While EBITDA should not be construed as a substitute for income from operations, net income (loss) or cash flows from operating activities in analyzing the Company's operating performance, financial position and cash flows, the Company has included EBITDA because it is commonly used by certain investors to analyze and compare companies on the basis of operating performance, leverage and liquidity, and to determine the Company's ability to service debt. (4) Historical financial information presented for the Aviall Business for the six months ended March 31, 1995 and 1996 includes the three months ended December 31, 1994 and 1995, respectively, which is also included in the summary historical financial information of the Aviall Business for the fiscal years ended December 31, 1994 and 1995, respectively. (5) Includes $7,075 in revenues derived from the de-emphasized structural aircraft services business.
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless the context otherwise requires, all references to the "Company" include Muzak Limited Partnership and its consolidated subsidiary, Muzak Capital Corporation ("Capital Corp."). THE COMPANY The Company is the leading provider of business music in the United States, based on the number of customer locations served. The Company and its franchisees serve approximately 180,000 customer locations in the United States, representing a market share of approximately 50% of the estimated number of domestic locations currently served by business music providers and approximately twice the estimated number of locations served by its nearest competitor. Through a network of distributors, the Company also provides business music to subscribers outside the United States. In addition, the Company offers its customers a range of non-music services, including broadcast data delivery, video, audio marketing and in-store advertising services, and sells, installs and services related equipment. The Company markets business music in a variety of formats, including (i) its well-known proprietary Environmental Music(R) (or "background" music) and (ii) over 100 "foreground" music formats ranging from top-of-the-charts hits to contemporary jazz, country music and classical music. Internal and third-party studies sponsored by the Company have indicated that properly programmed music can have a favorable impact on listeners in business and retail environments. The broadcasting of music, including the rebroadcasting of commercial music, in such locations is not permitted without licenses and the payment of royalties. Environmental Music(R), which is principally comprised of instrumental versions of popular songs that have been adapted and rerecorded by the Company, is generally used in business offices and manufacturing facilities to improve employee concentration and reduce stress. Foreground music, consisting principally of original artist recordings, is most commonly used in public areas, such as restaurants and retail establishments, primarily as a sales enhancement tool. The Company distributes 30 of its channels by broadcast media (principally direct broadcast satellite ("DBS") transmission) and supplies the balance to subscribers in the form of long-playing audio tapes. Since 1991, the total number of domestic customer locations served by the Company and its franchisees has grown from 134,000 to 180,000, with the number of domestic customer locations served by the Company growing from approximately 32,000 to approximately 62,000 and the number of domestic customer locations served by the Company's franchisees growing from approximately 102,000 to approximately 118,000. Over the same period, the Company's total revenues and earnings before interest, taxes, depreciation, amortization and other income/expense ("EBITDA") have grown from $56.0 million and $12.6 million in 1991, respectively, to $86.9 million and $20.0 million in 1995, respectively, and the Company's net losses from operations have decreased from approximately $9.5 million in 1991 to approximately $5.7 million in 1995. COMPETITIVE STRENGTHS The Company believes that it possesses a number of attributes that have allowed it to become the leading provider of business music in the nation (based on number of customer locations served), including: Broad Appeal to Diverse Customer Base. The Company's music products have been programmed to appeal to a variety of end users, including business offices, manufacturing facilities, retail establishments and restaurants. The Company's salesforce markets over 100 different music formats, allowing each customer to select a format appropriate for its line of business and customer base. The Company's major national customers include national restaurant chains, such as Taco Bell, McDonald's and Boston Market, and specialty retailers, such as Nordstrom, Crate & Barrel, Kroger, Staples, Hallmark and Wal-Mart, as well as a large number of local and regional accounts, none of which represents more than 3% of the Company's consolidated revenues and the top five of which represent in the aggregate less than 10% of consolidated revenues. The Company believes that the geographic dispersion of its customers, and the diversity of businesses in which they are engaged minimizes the impact to the Company of a cyclical downturn in any one area of the country or in any one sector of the economy. Attractive Economics to Customers and the Company. The Company believes that its services are highly cost effective, providing an important business tool to its customers for a low monthly cost. On average, the Company receives approximately $45 of revenue per month per subscriber location, net of licensing fee and applicable royalties, for which it makes an investment per subscriber location (including sales commission) of approximately $950 for medium-powered DBS subscribers (substantially lower for local broadcast technology subscribers). This allows the Company to recover its capital costs within two years. The Company's customers typically enter into long-term contracts, which are generally for a period of five years with an automatic renewal option. The Company's annual cancellation rate is less than 10% of music and other business services revenues, which equates to an average length of service per customer of approximately ten years. Full Line of Audio, Video and Data Products and Services. The Company can provide its customers with an integrated package of services including: (i) over 100 different music formats including both background and foreground music; (ii) customized audio messages inserted in regular programming; (iii) e- mail and computer bulk data transfer; (iv) on-premise music videos; (v) customized messages for use with "on-hold" business telephone systems; and (vi) "point of purchase" audio advertising and merchandising services. The ability to deliver a package of music and non-music services over a common transmission system has been a critical factor in enabling the Company to generate incremental revenues from its customers at little or no additional cost, gain new customers and protect existing customers from competitive business music providers that do not offer such a broad line of products and services. Multiple Delivery Systems. The Company believes that its ability to distribute its services through each of high-powered and medium-powered DBS transmission, local radio broadcast transmission, telephone lines and audio tapes enables it to effectively serve customers with either single or multiple locations as well as those having varied music or service needs. The number of domestic subscriber locations served by medium-powered DBS transmission has grown from approximately 26,000 at the end of 1991 to approximately 120,000 at June 30, 1996. In addition, the Company has recently entered into a unique distribution arrangement with EchoStar Satellite Corporation ("EchoStar"). The Company anticipates that its agreements with EchoStar will enable it to: (i) attract additional business music subscribers by offering an expanded array of DBS-delivered music programming; (ii) deliver music services to residential subscribers for the first time; and (iii) deliver television programming, such as CNN(R), MTV(R) and ESPN(R), to business music subscribers in packages specifically designed for businesses (i.e., news, entertainment or lifestyles). In addition, the EchoStar agreements provide the Company with high-powered DBS transmission capability to supplement its existing medium-powered DBS system, reduced equipment installation costs and an opportunity to shift certain equipment costs to the subscriber. Integrated Sales Network. The Company believes that its 35 sales offices in the United States, its 81 franchisees, whose sales territories cover the remaining market in the United States, and its 20 international distributors in 15 foreign countries, comprise the largest network of customer sales and service offices among business music providers in the United States. The Company further believes that this network allows the Company, among other things, to more effectively market to and support its national and international accounts. OPERATING STRATEGY The Company believes it has opportunities to achieve growth in revenues and cash flow by: Increasing U.S. Market Penetration. The Company intends to increase its penetration of the U.S. market by expanding its local and national account sales force, offering more music formats (including up to 60 broadcast formats with the EchoStar agreements), developing sales strategies focused on underserved market segments and aggressively marketing its services as part of a unique bundled package. 1993 census data indicate that there are approximately 6.4 million business locations in the United States, including approximately 1.1 million retail outlets and 450,000 restaurant and other food service locations. Of the total 6.4 million business locations, only about 5% are currently believed by the Company to subscribe to a business music service. Pursuing Strategic Relationships and Acquisitions. The Company intends to pursue additional strategic relationships, acquisitions and joint ventures, such as the Company's recent distribution agreements with EchoStar and its 1994 acquisition of the assets of Comcast Sound Communications Inc. ("Comcast"), then the Company's largest franchisee, in order to: (i) increase the breadth of its programming offerings; (ii) further diversify its distribution channels; and (iii) take advantage of certain economies of scale. Expanding in International Markets. The Company plans to continue its expansion in Europe primarily through strategic relationships and joint ventures, such as Muzak Europe B.V. ("Muzak Europe"), a joint venture formed in 1995 between the Company and Alcas Holdings B.V. ("Alcas"), a leading European business music provider. This joint venture couples the Company's broadcast technology skills with Alcas' market knowledge and marketing expertise and further permits the Company to leverage its assets and programming expertise and diversify its sources of revenue. The Company also intends to expand into Latin America and Asia by establishing similar strategic relationships in those markets. Exploiting New Market Opportunities. The Company intends to continue to leverage its music programming expertise and its extensive recorded music library into new products and markets. For example, the Company has recently developed and begun operating its proprietary MusicServer SM service, which permits real-time delivery of digitized song samples over the Internet to music retailers and others (including companies such as CDnow!, Tower Records and Microsoft) that require access to a large library of recorded music. Enhancing Operating Margins. The Company seeks to enhance operating margins through continued centralization of operations and leveraging fixed expenses over a wider customer base. The Company strives to exploit less costly transmission technologies and to reduce the capital required to initiate service to a customer. The Company was formed in September 1992 by Centre Capital Investors L.P. ("CCI"), a private investment partnership of which Centre Partners L.P. ("Centre Partners") is the general partner, to acquire substantially all of the assets and business of the Company (the "1992 Acquisition") from a predecessor entity (the "Predecessor"). MLP Holdings L.P. ("MLP"), an affiliate of CCI, and the Management Investors (as defined herein) beneficially own approximately 62.9% and 9.7%, respectively, of the outstanding partnership interests of the Company. Capital Corp., a Delaware corporation, is acting as co-obligor for the Senior Notes. Capital Corp. is a wholly-owned subsidiary of the Company which has nominal assets and will not conduct any operations. Certain institutional investors that might otherwise be limited in their ability to invest in securities offered by partnerships by reason of the investment laws of their states of organization or their charter documents may be able to invest in the Senior Notes because Capital Corp. is a corporation. A portion of the net proceeds from the Offering will be used to retire indebtedness incurred in the 1992 Acquisition. THE OFFERING Securities Offered........ $100,000,000 in aggregate principal amount of % Senior Notes due 2003 (the "Senior Notes"). Maturity Date............. , 2003. Interest Payment Dates.... and of each year, commencing , 1997. Optional Redemption....... The Senior Notes will be redeemable at the option of the Issuers, in whole or in part, at any time on or after , 2000, in cash at the redemption prices set forth herein, plus accrued and unpaid interest, if any, thereon to the date of redemp- tion. In addition, during the first 36 months after the date of this Prospectus, the Issuers may on any one or more occasions redeem up to 35% of the ini- tially outstanding aggregate principal amount of Senior Notes at a redemption price equal to % of the principal amount thereof, plus accrued and un- paid interest, if any, thereon to the redemption date, with the net proceeds of one or more equity offerings of the Issuers; provided that at least 65% of the initially outstanding aggregate princi- pal amount of Senior Notes remains outstanding im- mediately after the occurrence of any such redemp- tion. See "Description of the Senior Notes--Op- tional Redemption." Change of Control......... Upon the occurrence of a Change of Control, each holder of Senior Notes will have the right to re- quire the Issuers to repurchase all or any part of such holder's Senior Notes at an offer price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, thereon to the date of purchase. See "De- scription of the Senior Notes--Repurchase at the Option of Holders--Change of Control." There can be no assurance that, in the event of a Change of Con- trol, the Issuers would have sufficient funds to purchase all Senior Notes tendered. See "Risk Fac- tors--Risk of Inability to Satisfy Change of Con- trol Offer." Ranking................... The Senior Notes will represent unsecured senior obligations of the Issuers, will rank senior in right of payment to all Subordinated Indebtedness of the Issuers and will rank pari passu in right of payment with all senior indebtedness of the Is- suers. At June 30, 1996, on a pro forma basis after giving effect to the Offering and the application of the estimated net proceeds therefrom, the Is- suers would have had approximately $1.1 million of total indebtedness, other than the Senior Notes. The Senior Notes will be guaranteed on a senior ba- sis by all future Domestic Subsidiaries of the Com- pany (other than Capital Corp.). As of the date hereof, the Company has no subsidiaries other than Capital Corp., which will be a Restricted Subsidi- ary. The Indenture will limit the ability of the Company and its Restricted Subsidiaries to incur additional indebtedness; however, the Company and its Restricted Subsidiaries will be permitted to incur certain indebtedness, which may be secured. See "Description of the Senior Notes--General" and "--Certain Covenants." Certain Covenants......... The Indenture will contain certain covenants that will limit, among other things, the ability of the Company and its Restricted Subsidiaries to (i) pay dividends or make certain other restricted payments or investments, (ii) incur additional indebtedness or issue preferred equity interests, (iii) merge, consolidate or sell all or substantially all of their assets, (iv) create liens on assets, (v) en- ter into certain transactions with affiliates or related persons and (vi) engage in other lines of business. See "Description of the Senior Notes-- Certain Covenants."
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS (I) ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED, (II) GIVES EFFECT TO THE ONE-FOR-FOUR REVERSE STOCK SPLIT EFFECTED ON JULY 28, 1995 AND (III) IS BASED ON THE NUMBER OF SHARES OF COMMON STOCK AND OTHER SECURITIES OUTSTANDING AS OF SEPTEMBER 30, 1996. EACH PROSPECTIVE INVESTOR IS URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY. THE COMPANY Ultrafem-Registered Trademark-, Inc. ("Ultrafem" or the "Company") was formed to design, develop and manufacture products based upon its proprietary and patented SoftCup-Registered Trademark- Technology to address women's health care needs. The SoftCup Technology is a physical barrier-type vaginal device designed to enhance the comfort, functionality and effectiveness of products designed for women in the areas of feminine protection, contraception, the prevention of sexually transmitted diseases ("STDs") and the treatment of vaginal infections. The commercial products which will employ the SoftCup Technology will be disposable, single use, universal size and made from a soft, inert, thermoplastic material which becomes more pliable at body temperature and molds to fit the individual user's anatomy. The Company's business strategy is to develop and market proprietary products based on its patented SoftCup Technology directed at high potential, underserved segments of the women's health care market. The key elements of this strategy are to (i) continue the launch of the Company's feminine protection product, INSTEAD-TM-, in the United States, (ii) expand the Company's manufacturing capabilities, (iii) develop and submit for Food and Drug Administration ("FDA") clearance or pre-market approval products based upon the SoftCup Technology for the medical product arena and (iv) pursue strategic alliances with multi-national consumer product and pharmaceutical companies for marketing, sales and distribution. FEMININE PROTECTION PRODUCT -- INSTEAD-TM- Management of the Company believes that INSTEAD-TM- represents one of the most significant technological developments for feminine protection since the introduction of the first commercial disposable tampon in 1933. INSTEAD-TM- differs from other forms of feminine protection currently on the market in that it collects, rather than absorbs, menstrual fluid. The Company believes that the unique design of INSTEAD-TM- provides several distinct benefits over currently available forms of feminine protection, including increased comfort, improved performance, reduced health concerns and freedom to engage in most physical (including sexual) activities during menstruation. The Company has obtained FDA clearance to market INSTEAD-TM- in the United States. INSTEAD-TM- may also be marketed in each of Belgium, Canada, Denmark, Finland, France, the Netherlands, Spain, Sweden, Switzerland and the United Kingdom subject to compliance with applicable international labeling laws and United States export requirements. The Company initiated the launch of INSTEAD-TM- in the Fall of 1996 in the Pacific Northwest, a region which the Company estimates represents approximately 8% of United States households and includes the major markets of San Francisco, Seattle and Portland. The Company intends to introduce INSTEAD-TM- in stages into additional significant geographic regions with full national distribution anticipated to be achieved over a three year period, which may be accelerated or delayed depending upon various factors including market acceptance by retailers and consumers, and the availability of additional financing. The Company has conducted market research and consumer use testing which indicate significant consumer interest in INSTEAD-TM-. The Company intends to distribute INSTEAD-TM- principally through supermarkets and drug stores. See "Risk Factors -- Inherent Limitation of Market Research and Consumer Use Testing," "-- Need for Additional Financing for Unforeseen Risks," "Business -- Product Testing," and "-- Strategy and Plan of Operations." PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS (I) GIVES EFFECT TO THE ONE-FOR-FOUR REVERSE STOCK SPLIT EFFECTED ON JULY 28, 1995, (II) GIVES EFFECT TO THE SALE BY THE COMPANY OF 2,000,000 SHARES OF COMMON STOCK IN THE CONCURRENT OFFERING (ASSUMING THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED) AND (III) IS BASED ON THE NUMBER OF SHARES OF COMMON STOCK AND OTHER SECURITIES OUTSTANDING AS OF SEPTEMBER 30, 1996. EACH PROSPECTIVE INVESTOR IS URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY. THE COMPANY Ultrafem-Registered Trademark-, Inc. ("Ultrafem" or the "Company") was formed to design, develop and manufacture products based upon its proprietary and patented SoftCup-Registered Trademark- Technology to address women's health care needs. The SoftCup Technology is a physical barrier-type vaginal device designed to enhance the comfort, functionality and effectiveness of products designed for women in the areas of feminine protection, contraception, the prevention of sexually transmitted diseases ("STDs") and the treatment of vaginal infections. The commercial products which will employ the SoftCup Technology will be disposable, single use, universal size and made from a soft, inert, thermoplastic material which becomes more pliable at body temperature and molds to fit the individual user's anatomy. The Company's business strategy is to develop and market proprietary products based on its patented SoftCup Technology directed at high potential, underserved segments of the women's health care market. The key elements of this strategy are to (i) continue the launch of the Company's feminine protection product, INSTEAD-TM-, in the United States, (ii) expand the Company's manufacturing capabilities, (iii) develop and submit for Food and Drug Administration ("FDA") clearance or pre-market approval products based upon the SoftCup Technology for the medical product arena and (iv) pursue strategic alliances with multi-national consumer product and pharmaceutical companies for marketing, sales and distribution. FEMININE PROTECTION PRODUCT -- INSTEAD-TM- Management of the Company believes that INSTEAD-TM- represents one of the most significant technological developments for feminine protection since the introduction of the first commercial disposable tampon in 1933. INSTEAD-TM- differs from other forms of feminine protection currently on the market in that it collects, rather than absorbs, menstrual fluid. The Company believes that the unique design of INSTEAD-TM- provides several distinct benefits over currently available forms of feminine protection, including increased comfort, improved performance, reduced health concerns and freedom to engage in most physical (including sexual) activities during menstruation. The Company has obtained FDA clearance to market INSTEAD-TM- in the United States. INSTEAD-TM- may also be marketed in each of Belgium, Canada, Denmark, Finland, France, the Netherlands, Spain, Sweden, Switzerland and the United Kingdom subject to compliance with applicable international labeling laws and United States export requirements. The Company initiated the launch of INSTEAD-TM- in the Fall of 1996 in the Pacific Northwest, a region which the Company estimates represents approximately 8% of United States households and includes the major markets of San Francisco, Seattle and Portland. The Company intends to introduce INSTEAD-TM- in stages into additional significant geographic regions with full national distribution anticipated to be achieved over a three year period, which may be accelerated or delayed depending upon various factors including market acceptance by retailers and consumers, and the availability of additional financing. The Company has conducted market research and consumer use testing which indicate significant consumer interest in INSTEAD-TM-. The Company intends to distribute INSTEAD-TM- principally through supermarkets and drug stores. See "Risk Factors -- Inherent Limitation of Market Research and Consumer Use Testing," "-- Need for Additional Financing for Unforeseen Risks," "Business -- Product Testing," and "-- Strategy and Plan of Operations." Management estimates that the domestic and international feminine protection markets in developed countries are in excess of $9 billion annually. The United States market for feminine protection products such as tampons and pads generates approximately $1.8 billion in annual revenues (based on a 1995 report by A.C. Nielsen). Approximately 58 million women between the ages of 18 and 54 use feminine protection products in the United States. Approximately 63% of menstruating women in the United States use tampons exclusively or in combination with pads (based on 1996 Simmons Market Research Bureau). The European market for feminine protection products generates approximately $2.9 billion in annual revenues (based on a 1995 report by A.C. Nielsen) with an estimated 105 million women between the ages of 18 and 54 using feminine protection products. Other developed markets, including Canada, Latin America, Mexico and Asia (other than China and India) represent a combined population in excess of 200 million potential users. MEDICAL PRODUCT APPLICATIONS Ultrafem intends to develop additional applications of the SoftCup Technology for vaginal delivery of agents for use in contraception, the prevention of STDs, and the treatment of vaginal infections. The Company's initial medical product under development is a contraceptive product which combines the SoftCup Technology with the BufferGel Technology, which is licensed by the Company for vaginal use on a worldwide basis. The BufferGel Technology, which has the ability to maintain the normal vaginal pH balance while killing sperm and most STD pathogens, was invented by scientists associated with The Johns Hopkins University ("Johns Hopkins") with whom the Company has previously conducted research. The Company has entered into a research and development agreement with ReProtect, LLC ("ReProtect"), a company founded by these scientists which will continue the investigation and development of medical applications of the SoftCup Technology. The United States market for contraceptive products such as condoms, oral contraceptives, diaphragms and implantable contraceptives generates approximately $2 billion in annual revenues (based on Theta Corporation, 1994). Based on the population of women between the ages of 18 and 54, estimated to be in excess of 300 million women in Europe and other developed markets, and assuming that the frequency of use of contraceptive products is less than that in the United States, management estimates the international markets for contraceptives to be approximately $6 billion annually outside the United States. Additionally, at least 330 million new cases of STDs occur each year throughout the world (World Health Organization, 1995), indicating a significant market for a STD prevention product. RECENT DEVELOPMENTS - - PRODUCT LAUNCH. INSTEAD-TM- is available for sale by retailers in the Pacific Northwest, including in the major markets of San Francisco, Seattle, and Portland. In order to introduce INSTEAD-TM- in the Fall of 1996, the Company began selling INSTEAD-TM- in August 1996. Revenues to date have been limited. Marketing and sales programs, such as print and TV advertising, sampling, consumer promotion, direct mail, public and professional relations, and in-store merchandising have been developed and are being utilized to generate consumer awareness and trial. - - PRODUCT DISTRIBUTION. The Company intends to distribute INSTEAD-TM- primarily through supermarkets and drug stores. The Company has retained Meridian Consulting Group ("Meridian") to provide sales management services, including supervision of a broker network, development of trade promotion plans and introductory sales presentations for the initial introduction of INSTEAD-TM- into the United States market. Ultrafem has hired Morgan & Sampson Pacific, a leading Health and Beauty Aid broker in the Northwest, as the broker for INSTEAD-TM- in the Pacific Northwest. Sales calls in the Pacific Northwest to date have resulted in commitments from retailers which account for more than 75% of ACV (all commodity volume) in the food and drug classes of trade. These include commitments for in-store merchandising and displays, on shelf dates, and desired shelf space. Management estimates that the domestic and international feminine protection markets in developed countries are in excess of $9 billion annually. The United States market for feminine protection products such as tampons and pads generates approximately $1.8 billion in annual revenues (based on a 1995 report by A.C. Nielsen). Approximately 58 million women between the ages of 18 and 54 use feminine protection products in the United States. Approximately 63% of menstruating women in the United States use tampons exclusively or in combination with pads (based on 1996 Simmons Market Research Bureau). The European market for feminine protection products generates approximately $2.9 billion in annual revenues (based on a 1995 report by A.C. Nielsen) with an estimated 105 million women between the ages of 18 and 54 using feminine protection products. Other developed markets, including Canada, Latin America, Mexico and Asia (other than China and India) represent a combined population in excess of 200 million potential users. MEDICAL PRODUCT APPLICATIONS Ultrafem intends to develop additional applications of the SoftCup Technology for vaginal delivery of agents for use in contraception, the prevention of STDs, and the treatment of vaginal infections. The Company's initial medical product under development is a contraceptive product which combines the SoftCup Technology with the BufferGel Technology, which is licensed by the Company for vaginal use on a worldwide basis. The BufferGel Technology, which has the ability to maintain the normal vaginal pH balance while killing sperm and most STD pathogens, was invented by scientists associated with The Johns Hopkins University ("Johns Hopkins") with whom the Company has previously conducted research. The Company has entered into a research and development agreement with ReProtect, LLC ("ReProtect"), a company founded by these scientists which will continue the investigation and development of medical applications of the SoftCup Technology. The United States market for contraceptive products such as condoms, oral contraceptives, diaphragms and implantable contraceptives generates approximately $2 billion in annual revenues (based on Theta Corporation, 1994). Based on the population of women between the ages of 18 and 54, estimated to be in excess of 300 million women in Europe and other developed markets, and assuming that the frequency of use of contraceptive products is less than that in the United States, management estimates the international markets for contraceptives to be approximately $6 billion annually outside the United States. Additionally, at least 330 million new cases of STDs occur each year throughout the world (World Health Organization, 1995), indicating a significant market for a STD prevention product. RECENT DEVELOPMENTS - - PRODUCT LAUNCH. INSTEAD-TM- is available for sale by retailers in the Pacific Northwest, including in the major markets of San Francisco, Seattle, and Portland. In order to introduce INSTEAD-TM- in the Fall of 1996, the Company began selling INSTEAD-TM- in August 1996. Revenues to date have been limited. Marketing and sales programs, such as print and TV advertising, sampling, consumer promotion, direct mail, public and professional relations, and in-store merchandising have been developed and are being utilized to generate consumer awareness and trial. - - PRODUCT DISTRIBUTION. The Company intends to distribute INSTEAD-TM- primarily through supermarkets and drug stores. The Company has retained Meridian Consulting Group ("Meridian") to provide sales management services, including supervision of a broker network, development of trade promotion plans and introductory sales presentations for the initial introduction of INSTEAD-TM- into the United States market. Ultrafem has hired Morgan & Sampson Pacific, a leading Health and Beauty Aid broker in the Northwest, as the broker for INSTEAD-TM- in the Pacific Northwest. Sales calls in the Pacific Northwest to date have resulted in commitments from retailers which account for more than 75% of ACV (all commodity volume) in the food and drug classes of trade. These include commitments for in-store merchandising and displays, on shelf dates, and desired shelf space. - - COMMERCIAL PRODUCTION COMMENCED. Subsequent to the Company's initial public offering ("IPO") in February 1996, the Company entered into a lease for manufacturing and office space in Missoula, Montana and remodeled the manufacturing space principally to create the controlled environment module that secures the manufacturing equipment. The special thermoforming line which produces INSTEAD-TM- completed high volume testing and, in June 1996, commenced manufacturing commercial quantities of INSTEAD-TM- for the Fall 1996 launch. The Company placed an order for a second semi-automated line scheduled to be installed in the Fall of 1996 and an order for a fully automated line scheduled to be installed in the Spring of 1997. The Company believes that its manufacturing capacity will be sufficient to meet consumer demand. There can be no assurance, however, that any of the foregoing goals or timetables can be met. - - BUFFERGEL TECHNOLOGY RECEIVES HIVNET GRANT; PHASE I TRIALS SCHEDULED TO BEGIN. The National Institute of Health ("NIH") has granted $2 million in contracts to ReProtect and Johns Hopkins for the research and development of the BufferGel Technology for contraception and the prevention of AIDS and other STDs. Subsequent to the IPO, ReProtect was selected by HIVNET, a unit of the NIH, to test the use of the BufferGel Technology as a vaginal microbicide for the prevention of AIDS and other STDs. The FDA allowed an Investigational New Drug ("IND") application permitting the BufferGel Technology to enter Phase I clinical trials which are currently scheduled to begin in December 1996. The Company plans to begin clinical trials of its contraceptive product upon completion of the Phase I clinical trials of the BufferGel Technology. A portion of these clinical trials may be funded by the net proceeds of the Offering. In order to achieve this timetable, the Company will need to complete the development of the contraceptive product by combining the SoftCup Technology and the BufferGel Technology. The Company plans to simultaneously develop additional applications of such technologies for treatment of vaginal infections and topical and systemic therapies. There can be no assurance, however, that any of the clinical trials will demonstrate the necessary degree of safety and effectiveness required for FDA pre-market approval, that ReProtect will receive the benefit of the entire $2 million under the NIH contracts or that any of the foregoing goals or timetables can be met. See "Risk Factors -- Dependence on Single Product" and "-- Risks Associated with Research and Development for Other Applications of the SoftCup Technology." The Company was incorporated under the laws of the State of Delaware on March 22, 1990 by Audrey Contente, the founder of the Company and inventor of the SoftCup Technology, and its principal executive office is located at 500 Fifth Avenue, Suite 3620, New York, New York 10110. The Company's telephone number is (212) 575-5740. - - COMMERCIAL PRODUCTION COMMENCED. Subsequent to the Company's initial public offering ("IPO") in February 1996, the Company entered into a lease for manufacturing and office space in Missoula, Montana and remodeled the manufacturing space principally to create the controlled environment module that secures the manufacturing equipment. The special thermoforming line which produces INSTEAD-TM- completed high volume testing and, in June 1996, commenced manufacturing commercial quantities of INSTEAD-TM- for the Fall 1996 launch. The Company placed an order for a second semi-automated line scheduled to be installed in the Fall of 1996 and an order for a fully automated line scheduled to be installed in the Spring of 1997. The Company believes that its manufacturing capacity will be sufficient to meet consumer demand. There can be no assurance, however, that any of the foregoing goals or timetables can be met. - - BUFFERGEL TECHNOLOGY RECEIVES HIVNET GRANT; PHASE I TRIALS SCHEDULED TO BEGIN. The National Institute of Health ("NIH") has granted $2 million in contracts to ReProtect and Johns Hopkins for the research and development of the BufferGel Technology for contraception and the prevention of AIDS and other STDs. Subsequent to the IPO, ReProtect was selected by HIVNET, a unit of the NIH, to test the use of the BufferGel Technology as a vaginal microbicide for the prevention of AIDS and other STDs. The FDA allowed an Investigational New Drug ("IND") application permitting the BufferGel Technology to enter Phase I clinical trials which are currently scheduled to begin in December 1996. The Company plans to begin clinical trials of its contraceptive product upon completion of the Phase I clinical trials of the BufferGel Technology. A portion of these clinical trials may be funded by the net proceeds of the Concurrent Offering. In order to achieve this timetable, the Company will need to complete the development of the contraceptive product by combining the SoftCup Technology and the BufferGel Technology. The Company plans to simultaneously develop additional applications of such technologies for treatment of vaginal infections and topical and systemic therapies. There can be no assurance, however, that any of the clinical trials will demonstrate the necessary degree of safety and effectiveness required for FDA pre-market approval, that ReProtect will receive the benefit of the entire $2 million under the NIH contracts or that any of the foregoing goals or timetables can be met. See "Risk Factors -- Dependence on Single Product" and "-- Risks Associated with Research and Development for Other Applications of the SoftCup Technology." The Company was incorporated under the laws of the State of Delaware on March 22, 1990 by Audrey Contente, the founder of the Company and inventor of the SoftCup Technology, and its principal executive office is located at 500 Fifth Avenue, Suite 3620, New York, New York 10110. The Company's telephone number is (212) 575-5740. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company............. 2,000,000 shares Common Stock to be outstanding after the Offering....................................... 7,889,651 shares (1) Use of proceeds................................. For expenses relating to the continued support and expansion of the launch of INSTEAD-TM-, including marketing and sales activities and capital expenditures, for research to accelerate the development of medical products and funding certain clinical trials of such products, to repay certain indebtedness, and for general corporate and working capital purposes. See "Use of Proceeds." Risk factors.................................... The shares of Common Stock offered hereby involve a high degree of risk and immediate substantial dilution. See "Risk Factors" and "Dilution." Nasdaq National Market symbol................... UFEM </TABLE> - ------------------------ (1) Excludes 5,047,603 shares of Common Stock issuable upon the conversion or exercise of certain currently outstanding securities of the Company, of which 3,227,703 shares are being offered in the Concurrent Offering. See "Concurrent Sales by Selling Stockholders." THE OFFERING <TABLE> <S> <C> Common Stock offered by Selling Stockholders.... 4,301,303 shares(1) Common Stock outstanding prior to this Offering...................................... 5,889,651 shares(2) Shares of Common Stock to be outstanding after Offering...................................... 11,117,354 shares(3) Use of proceeds................................. The Company will not receive any of the proceeds from the sale of shares of Common Stock by the Selling Stockholders. Risk factors.................................... The Securities offered hereby involve a high degree of risk and immediate substantial dilution. See "Risk Factors" and "Dilution." Nasdaq National Market symbol................... UFEM </TABLE> - ------------------------ (1) Includes 1,073,600 shares of Common Stock held by the Selling Stockholders and offered hereby and 3,227,703 shares of Common Stock issuable upon conversion or exercise of securities convertible into or exercisable for Common Stock held by the Selling Stockholders and offered hereby. (2) Includes 1,073,600 shares of Common Stock held by the Selling Stockholders and offered hereby. Excludes 5,047,603 shares of Common Stock issuable upon the conversion or exercise of securities which are convertible into or exercisable for Common Stock, of which 3,227,703 are held by the Selling Stockholders and offered hereby, and 2,000,000 shares of Common Stock issuable in connection with the Concurrent Offering. (3) Includes 1,073,600 shares of Common Stock held by the Selling Stockholders and offered hereby, 3,227,703 shares of Common Stock issuable upon conversion or exercise of securities which are convertible into or exerciseable for Common Stock held by the Selling Stockholders and offered hereby and 2,000,000 shares of Common Stock issuable in connection with the Concurrent Offering. Excludes 1,819,900 shares of Common Stock issuable upon the conversion or exercise of securities which are convertible into or exercisable for Common Stock which are not offered hereby. SUMMARY FINANCIAL INFORMATION The summary financial information for the five years ended June 30, 1996 are derived from the audited financial statements of the Company. The financial statements as of June 30, 1996 and for the three years then ended have been audited by Deloitte & Touche LLP, independent auditors. The summary financial information for the three months ended September 30, 1995 and 1996 have been derived from the Company's unaudited financial statements which, in the opinion of management, contain all adjustments (consisting of normal and recurring adjustments) necessary for a fair presentation of the Company's financial position and results of operations at such dates and for such periods. Operating results for the three months ended September 30, 1996 are not necessarily indicative of the results that may be expected in any other interim period or for the full year. The summary financial information below should be read in conjunction with the Company's financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus. <TABLE> <CAPTION> THREE MONTHS ENDED FISCAL YEAR ENDED JUNE 30, SEPTEMBER 30, --------------------------------------------------------------- ------------------------ <S> <C> <C> <C> <C> <C> <C> <C> 1992 1993 1994 1995 1996 1995 1996 ----------- ----------- ----------- ----------- ----------- ----------- ----------- STATEMENT OF OPERATIONS DATA: Net Sales........................ $ -- $ -- $ -- $ -- $ -- $ -- $ 192,540 Cost of Sales (exclusive of depreciation).................. -- -- -- -- -- -- 358,377 Marketing, Sales and Distribution................... -- -- -- 123,531 2,406,277 345,416 2,921,392 General and Administrative Expense........................ 2,141,249 1,139,339 1,387,784 1,444,911 5,095,261 597,529 1,924,557 Operating Income (Loss).......... (3,827,114) (2,020,786) (1,967,208) (1,916,450) (9,643,978) (1,091,743) (5,619,919) Net Income (Loss)................ (3,831,536) (2,091,903) (2,303,940) (2,381,065) (9,819,980) (1,257,083) (5,457,432) Net Income (Loss) Per Share: Primary.......................... $ (1.61) $ (0.79) $ (0.87) $ (0.87) $ (2.74) $ (0.49) $ (0.94) Fully Diluted.................... $ (1.61) $ (0.79) $ (0.87) $ (0.87) $ (2.74) $ (0.49) $ (0.94) Weighted Average Common Shares and Equivalents(1)............. 2,386,847 2,640,387 2,658,214 2,698,152 3,529,494 2,502,626 5,827,622 </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1996 --------------------------- <S> <C> <C> AS ACTUAL ADJUSTED(2) ----------- -------------- BALANCE SHEET DATA: Working Capital(3)................................................................. $10,372,110 $ 46,772,110 Total Assets....................................................................... 26,766,632 59,735,820 Long-term Debt..................................................................... 700,000 700,000 Stockholders' Equity............................................................... 16,873,062 53,273,062 </TABLE> - ------------------------------ (1) The weighted average number of common shares outstanding during the first half of fiscal year 1996 (including the three months ended September 30, 1995), and during fiscal years 1995, 1994, 1993 and 1992 includes incremental shares for the Common Stock, warrants and other potentially dilutive securities issued and options granted to purchase Common Stock which were issued within one year prior to the effective date of the IPO (the "Incremental Shares"). Such Incremental Shares were determined utilizing the treasury stock method. The effect of the assumed exercise of stock options which were issued one year prior to the effective date of the IPO and the effect of the assumed conversion of the convertible preferred stock are not included because their effect is antidilutive. (2) Adjusted to reflect the sale of 2,000,000 shares of Common Stock by the Company at an assumed offering price of $20.00 per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization." (3) Includes current portion of long-term debt. SUMMARY FINANCIAL INFORMATION The summary financial information for the five years ended June 30, 1996 are derived from the audited financial statements of the Company. The financial statements as of June 30, 1996 and for the three years then ended have been audited by Deloitte & Touche LLP, independent auditors. The summary financial information for the three months ended September 30, 1995 and 1996 have been derived from the Company's unaudited financial statements which, in the opinion of management, contain all adjustments (consisting of normal and recurring adjustments) necessary for a fair presentation of the Company's financial position and results of operations at such dates and for such periods. Operating results for the three months ended September 30, 1996 are not necessarily indicative of the results that may be expected in any other interim period or for the full year. The summary financial information below should be read in conjunction with the Company's financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus. <TABLE> <CAPTION> THREE MONTHS ENDED FISCAL YEAR ENDED JUNE 30, SEPTEMBER 30, ---------------------------------------------------------- ---------------------- <S> <C> <C> <C> <C> <C> <C> <C> 1992 1993 1994 1995 1996 1995 1996 ---------- ---------- ---------- ---------- ---------- ---------- ---------- STATEMENT OF OPERATIONS DATA: Net Sales........................ $ -- $ -- $ -- $ -- $ -- $ -- $ 192,540 Cost of Sales (exclusive of depreciation)................. -- -- -- -- -- -- 358,377 Marketing, Sales and Distribution.................. -- -- -- 123,531 2,406,277 345,416 2,921,392 General and Administrative Expense....................... 2,141,249 1,139,339 1,387,784 1,444,911 5,095,261 597,529 1,924,557 Operating Income (Loss).......... (3,827,114) (2,020,786) (1,967,208) (1,916,450) (9,643,978) (1,091,743) (5,619,919) Net Income (Loss)................ (3,831,536) (2,091,903) (2,303,940) (2,381,065) (9,819,980) (1,257,083) (5,457,432) Net Income (Loss) Per Share: Primary.......................... $ (1.61) $ (0.79) $ (0.87) $ (0.87) $ (2.74) $ (0.49) $ (0.94) Fully Diluted.................... $ (1.61) $ (0.79) $ (0.87) $ (0.87) $ (2.74) $ (0.49) $ (0.94) Weighted Average Common Shares and Equivalents(1)............ 2,386,847 2,640,387 2,658,214 2,698,152 3,529,494 2,502,626 5,827,622 </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1996 --------------------------- <S> <C> <C> ACTUAL AS ADJUSTED(2) ----------- -------------- BALANCE SHEET DATA: Working Capital(3)................................................................ $10,372,110 $ 46,772,110 Total Assets...................................................................... 26,766,632 59,735,820 Long-term Debt.................................................................... 700,000 700,000 Stockholders' Equity.............................................................. 16,873,062 53,273,062 </TABLE> - ------------------------------ (1) The weighted average number of common shares outstanding during the first half of fiscal year 1996 (including the three months ended September 30, 1995), and during fiscal years 1995, 1994, 1993 and 1992 includes incremental shares for the Common Stock, warrants and other potentially dilutive securities issued and options granted to purchase Common Stock which were issued within one year prior to the effective date of the IPO (the "Incremental Shares"). Such Incremental Shares were determined utilizing the treasury stock method. The effect of the assumed exercise of stock options which were issued one year prior to the effective date of the IPO and the effect of the assumed conversion of the convertible preferred stock are not included because their effect is antidilutive. (2) Adjusted to reflect the sale of 2,000,000 shares of Common Stock by the Company in the Concurrent Offering at an assumed offering price of $20.00 per share and the application of the estimated net proceeds therefrom. See "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000892335_garden_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000892335_garden_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including the Consolidated Financial Statements, and the Notes thereto, appearing elsewhere in this Prospectus. Each prospective investor is urged to read this Prospectus in its entirety. Unless otherwise indicated, the information in this Prospectus: (i) gives effect to the conversion of each outstanding share of the Company's Preferred Stock, par value $.01 per share, into one share of Common Stock upon the closing of this offering (see "Description of Capital Stock"); (ii) gives effect to an approximate 1:7.87 reverse stock split to be voted on by the Company's shareholders on May 20, 1996 and certain other matters to be effected upon the effectiveness or closing of this offering; and (iii) assumes that the Underwriters' over-allotment option is not exercised. The Company's fiscal year ends on the Saturday nearest the end of January and is identified as the preceding calendar year. For example, the fiscal year ended on February 3, 1996 is referred to as "fiscal 1995." THE COMPANY Garden Botanika, Inc. ("Garden Botanika" or the "Company") is a rapidly growing retailer of high-quality, reasonably priced personal care products. The Company's proprietary products encompass such categories as skin care, color cosmetics, fragrances, bath and body care and related accessories and gifts. Garden Botanika develops its branded products and distributes them for sale through its 161 Company-owned and -operated specialty retail stores in 31 states nationwide and the Company's catalog. Since it commenced operations in 1990, the Company's primary goal has been to establish Garden Botanika as among the most recognized and respected brands of personal care products in the markets in which it competes. The Company believes that its strong brand identity is based upon (i) high-quality products with botanically based formulations subject to strict ingredient guidelines; (ii) its value-oriented pricing strategy; and (iii) a high-quality store experience, which the Company provides through its upscale store design, excellent customer service and the uniform presentation of its products. Garden Botanika has grown from a three-store start-up company in 1990 to a national chain with fiscal 1995 revenues of $55.3 million. Garden Botanika's marketing and merchandising efforts primarily target 30- to 45-year-old working women who have traditionally purchased skin care and cosmetic products from mall-based department stores and who utilize quality personal care products both on a daily basis and as an affordable luxury item. The Company believes these women are increasingly seeking better pricing without having to sacrifice high quality and personal service. The Company also believes that its marketing strategy has been successful in attracting a broad cross-section of other consumers beyond its primary target. Garden Botanika seeks to become a leading developer, manufacturer and retailer of personal care products. The key elements of Garden Botanika's strategy are to provide (i) high-quality, proprietary products; (ii) attractive pricing; (iii) an extensive product assortment; (iv) continuous new product development; (v) excellent customer service; (vi) an upscale shopping environment; and (vii) expanded recognition of the "Garden Botanika" brand name. Consumer acceptance of the Garden Botanika concept has been demonstrated to date by the Company's annual average sales per store, average sales per square foot and store contribution margins, which, for each class of the Company's stores, have improved significantly as each respective class has matured. After opening 45 and 66 stores in fiscal 1994 and 1995, respectively, the Company currently plans to open approximately 100 additional stores in fiscal 1996 and approximately 120 stores in fiscal 1997, which would broaden the Company's operations to include most major U.S. markets. Garden Botanika achieved sales per square foot of $458 in fiscal 1995, at the end of which the average age of its stores was 18 months. The Company's comparable store sales increased 19.5%, 32.9% and 16.7% during fiscal 1993, 1994 and 1995, respectively. The Company's principal executive offices are located at 8624 154th Avenue N.E., Redmond, Washington 98052, and its telephone number is (206) 881-9603. Upon completion of this offering, the Company's investor relations telephone number will be (206) 883-GBOT. The Company was incorporated in Washington in October 1989. INSIDE FRONT COVER: GARDEN BOTANIKA LOGO, FOUR REPRESENTATIVE CATALOG COVERS, OUTSIDE VIEW OF A REPRESENTATIVE STORE. GATEFOLD: GARDEN BOTANIKA LOGO, OUTSIDE VIEW OF A REPRESENTATIVE STORE, PHOTOGRAPHS OF SAMPLE SKIN CARE, NATURAL COLOR COSMETICS, AROMATICS, HAIR CARE, VANILLA DAWN, SKIN RENEWING SYSTEM AND CUSTOM FRAGRANCE PRODUCT LINES. INSIDE BACK COVER: GARDEN BOTANIKA LOGO, REPRESENTATIVE CATALOG COVER, FOUR PHOTOGRAPHS OF VARIOUS PRODUCTS. [PHOTOGRAPHS] IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET(R) OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. --------------- "Garden Botanika," "BotanikaBaby," "Botanikids," "Garden Botanika Natural Color," "Sun & Sport" and the Company's GB-and-design stylized logo are all registered trademarks of the Company. This Prospectus also contains trademarks other than those of the Company. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company............ 2,700,000 shares(1) Common Stock to be outstanding after the offering..................................... 6,662,577 shares(2) Use of proceeds................................ To finance the opening of additional stores; to repay outstanding bank debt; and for other capital expenditures related to expansion of the Company's operations, working capital and general corporate purposes. See "Use of Proceeds." Nasdaq National Market(R) symbol............... GBOT </TABLE> - ------------------------------ (1) Approximately 20% of the shares of Common Stock offered hereby have been reserved for sale to certain customers, existing shareholders, employees and other persons designated by the Company. See "Underwriting." (2) Does not include (i) 392,825 shares of Common Stock reserved for issuance upon exercise of options under the Company's 1992 Combined Incentive and Nonqualified Stock Option Plan (the "Stock Option Plan"), of which 271,665 shares were outstanding on April 18, 1996, (ii) 63,561 shares of Common Stock reserved for issuance upon exercise of options under the Company's 1996 Directors' Nonqualified Stock Option Plan (the "Directors' Plan"), none of which were outstanding on April 18, 1996, (iii) 25,424 shares of Common Stock reserved for issuance upon exercise of outstanding options granted to a key employee outside of the Company's stock option plans and (iv) 23,724 shares of Common Stock reserved for issuance upon exercise of certain warrants. As of April 18, 1996, the weighted average exercise price of the Company's stock options was $10.77 per share. The exercise price of the warrants is $9.83 per share. See "Capitalization" and Notes to Consolidated Financial Statements. SUMMARY FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT PER SHARE AND SELECTED OPERATING DATA) <TABLE> <CAPTION> FISCAL YEAR ENDED(1) ------------------------------------------------------- FEB. 1, JAN. 30, JAN. 29, JAN. 28, FEB. 3, 1992 1993 1994 1995 1996 ------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales............................................ $ 2,046 $ 6,407 $12,569 $27,510 $55,339 Cost of sales (including buying and occupancy costs)............................................. 1,609 4,191 7,794 15,521 31,448 ------- ------- ------- ------- ------- Gross margin......................................... 437 2,216 4,775 11,989 23,891 Operating expenses: Stores and catalog(2).............................. 807 2,044 4,093 8,956 18,746 General and administrative......................... 1,086 1,541 2,759 3,917 6,041 Preopening expenses.................................. 178 110 417 733 798 ------- ------- ------- ------- ------- Operating loss....................................... (1,634) (1,479) (2,494) (1,617) (1,694) Interest income, net................................. 154 27 140 230 30 ------- ------- ------- ------- ------- Loss before income tax provision..................... (1,480) (1,452) (2,354) (1,387) (1,664) Income tax provision................................. -- -- -- -- -- ------- ------- ------- ------- ------- Net loss............................................. $(1,480) $(1,452) $(2,354) $(1,387) $(1,664) ======= ======= ======= ======= ======= Pro forma net loss per share(3)...................... $ (1.33) $ (1.03) $ (0.88) $ (0.43) $ (0.44) ======= ======= ======= ======= ======= Pro forma common and common equivalent shares........ 1,114 1,416 2,676 3,209 3,781 SELECTED OPERATING DATA: Stores open at period-end............................ 13 23 41 86 152 Average square footage of stores opened during period............................................. 765 936 951 1,077 1,256 Sales per square foot(4)............................. $384 $498 $484 $535 $458 Average store age (in months)........................ 6 12 16 16 18 Comparable store sales increase(5)................... 13.9% 34.4% 19.5% 32.9% 16.7% Number of catalogs mailed (000s)..................... -- -- -- 2,311 5,021 </TABLE> <TABLE> <CAPTION> FEBRUARY 3, 1996 JAN. 28, ---------------------------- 1995 ACTUAL AS ADJUSTED(6) -------- ------- -------------- <S> <C> <C> <C> BALANCE SHEET DATA: Working capital................................................ $ 1,415 $ 2,662 $ 39,089 Total assets................................................... $25,518 $47,137 $ 81,024 Total debt..................................................... $ -- $ 2,540 $ -- Shareholders' equity........................................... $18,183 $33,116 $ 75,003 </TABLE> - ------------------------------ (1) The fiscal years ended February 1, 1992 and February 3, 1996 were 53-week years. (2) The Company commenced its catalog operations in the third quarter of fiscal 1994. (3) Based on the number of common and preferred shares outstanding after giving effect to the conversion of all Preferred Stock into Common Stock. See Notes to Consolidated Financial Statements. (4) For stores open at beginning of period indicated. (5) Stores enter the comparable store base in their 13th full month of operation. The numbers of comparable stores used to compute such percentages were 3, 13, 23, 41 and 85 as of the end of each of fiscal 1991 through 1995, respectively. (6) As adjusted to reflect the sale of the 2,700,000 shares of Common Stock offered hereby and the application of the estimated net proceeds therefrom. See "Use of Proceeds."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0000893188_consortium_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000893188_consortium_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8e80006158e963f86786d54f1b7d16134d4d1db1
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+SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements and the notes thereto appearing elsewhere in this Prospectus. As used herein, unless the context otherwise requires, "Grupo Dina" means Consorcio G Grupo Dina, S.A. de C.V. and its consolidated subsidiaries, "MCII Holdings" means MCII Holdings (USA), Inc., a wholly-owned subsidiary of Grupo Dina, and "MCII" means Motor Coach Industries International, Inc. and its consolidated subsidiaries. Unless otherwise defined herein, capitalized terms used in this summary have the respective meanings ascribed to them elsewhere in this Prospectus. See "Risk Factors" for a discussion of certain factors that should be considered in connection with the Exchange Offer. CONSORCIO G GRUPO DINA, S.A. DE C.V. Grupo Dina is one of the leading suppliers of medium-duty and heavy-duty trucks in Mexico in the combined Class 5, 6, 7 and 8 truck market. Classifications in the truck market are made on the basis of gross vehicle weight ("GVW"). Class 5, 6 and 7 trucks are considered to be medium-duty trucks while Class 8 trucks, which are characterized primarily by "cabs" consisting of a separate engine and drive compartment section to which trailers are attached, are considered heavy-duty trucks. Grupo Dina is a domestic manufacturer of European-style intercity coaches in Mexico and a major supplier of intercity coaches used primarily in the executive and first-class service segments of the Mexican intercity transportation market. Grupo Dina also manufactures and distributes replacement parts for trucks and coaches and plastic components for truck, coach, bus and other industries. See "Business of Grupo Dina." The principal executive offices of Grupo Dina are located at Tlacoquemecatl 41 Colonia Del Valle, 03100, Mexico D.F., Mexico, (525) 420-3900. MCII HOLDINGS (USA), INC. MCII Holdings is a Delaware corporation and a wholly-owned subsidiary of Grupo Dina. MCII Holdings is a limited purpose corporation and will conduct virtually no operations for so long as the Notes are outstanding. Until such time as the MCII Shares are sold in accordance with the terms set forth herein, MCII Holdings' wholly owned subsidiary will be MCII. MCII Holdings, through its wholly owned subsidiary, MCII, designs, manufactures, assembles and markets intercity coaches and replacement parts for coaches and transit buses, principally in the United States and Canada. See "Business of MCII Holdings." The principal executive offices of MCII Holdings are located at Dial Tower, 1850 North Central Avenue, Phoenix, Arizona 85004, (602) 207-5000. THE EXCHANGE OFFER Securities Offered...... Up to US$206,499,680 aggregate principal amount of Senior Secured Discount Exchange Notes due 2002, which have been registered under the Securities Act. The terms of the New Notes and the Old Notes are identical in all material respects, except for certain transfer restrictions and registration rights relating to the Old Notes and except that, if the Exchange Offer is not consummated by December 30, 1996, the Old Notes will bear additional interest as described herein. See "Description of the Notes -- Registration Rights." The Exchange Offer...... The New Notes are being offered in exchange for a like principal amount of Old Notes. The issuance of the New Notes is intended to satisfy obligations of the Issuers contained in the Registration Agreement. For procedures for tendering, see "The Exchange Offer." Tenders, Expiration Date; Withdrawal...... The Exchange Offer will expire at 5:00 p.m., New York City time, on December 2, 1996, or such later date and time to which it is extended. The tender of Old Notes pursuant to the Exchange Offer may be withdrawn at any time prior to the Expiration Date. Any Old Note not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Exchange Offer. Certain Tax Consequences.......... The exchange of Old Notes for New Notes pursuant to the Exchange Offer will not be subject to Mexican or U.S. income tax. See "Tax Considerations." Use of Proceeds......... There will be no proceeds to the Issuers from the exchange pursuant to the Exchange Offer. Exchange Agent.......... IBJ Schroder Bank & Trust Company is serving as exchange agent (the "Exchange Agent") in connection with the Exchange Offer. CONSEQUENCES OF EXCHANGING OLD NOTES Holders of Old Notes who do not exchange their Old Notes for New Notes pursuant to the Exchange Offer will continue to be subject to the provisions in the Indenture regarding transfer and exchange of the Old Notes and the restrictions on transfer of such Old Notes as set forth in the legend thereon as a consequence of the issuance of the Old Notes pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws. In general, the Old Notes may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. The Issuers do not currently anticipate that they will register Old Notes under the Securities Act. See "Description of the Notes--Registration Rights." Based on interpretations by the staff of the SEC as set forth in no-action letters issued to third parties, the Issuers believe that New Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be offered for resale, resold or otherwise transferred by holders thereof (other than any holder which is an "affiliate" of the Issuers within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such New Notes are acquired in the ordinary course of such holders' business and such holders have no arrangement with any person to participate in the distribution of such New Notes. However, the Issuers do not intend to request the SEC to consider, and the SEC has not considered, the Exchange Offer in the context of a no-action letter and there can be no assurance that the staff of the SEC would make a similar determination with respect to the Exchange Offer as in such other circumstances. Each holder, other than a broker-dealer, must acknowledge that it is not engaged in, and does not intend to engage in, a distribution of New Notes and has no arrangement or understanding to participate in a distribution of New Notes. Each broker-dealer that receives New Notes for its own account in exchange for Old Notes must acknowledge that such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities and that it will deliver a prospectus in connection with any resale of such New Notes. See "Plan of Distribution." In addition, to comply with the state securities laws, the New Notes may not be offered or sold in any state unless they have been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied with. The offer and sale of the New Notes to "qualified institutional buyers" (as such term is defined under Rule 144A of the Securities Act) is generally exempt from registration or qualification under the state securities laws. The Issuers currently do not intend to register or qualify the sale of the New Notes in any state where an exemption from registration or qualification is required and not available. See "The Exchange Offer--Consequences of Exchanging Old Notes" and "Description of the Notes--Registration Rights." SUMMARY DESCRIPTION OF THE NEW NOTES The terms of the New Notes and the Old Notes are identical in all material respects, except for certain transfer restrictions and registration rights relating to the Old Notes and except that, if the Exchange Offer is not consummated by December 30, 1996, the Old Notes will bear additional interest as described under "Description of the Notes -- Registration Rights." Old Notes accepted for exchange will cease to accrue interest from and after the date of consummation of the Exchange Offer. Holders of Old Notes whose Old Notes are accepted for exchange will not receive any payment in respect of interest on such Old Notes otherwise payable on any interest payment date the record date for which occurs on or after consummation of the Exchange Offer. Securities Offered........ Up to US$206,499,680 aggregate principal amount of Senior Secured Discount Exchange Notes due 2002, which have been registered under the Securities Act, each with an initial accreted value as of November 18, 1995 of US$705.65 for each US$1,000 in principal amount. Payment of Interest....... The Old Notes are, and the New Notes will be, dated as of, and accrue interest from, November 18, 1995 and will bear interest at the rate of 12% per annum through maturity; provided, that, if the Notes are not rated either BB-or better by S&P or Ba3 or better by Moody's at November 15, 1999 the per annum interest rate shall be increased on such date to 15% until maturity. Prior to and including the interest payment due on November 15, 1998, the Notes will accrue interest on a zero coupon basis and, accordingly, the accreted value of the Notes will accrete from US$705.65 as of November 18 1995 for each US$1,000 in principal amount to US$1,000 at November 15, 1998. Thereafter, all interest will be payable in cash semiannually on May 15 and November 15 of each year, commencing May 15, 1999. Original Issue Discount... The New Notes, like the Old Notes, will be issued with original issue discount ("OID"). Each U.S. holder of the New Notes will be required to include OID in income as it accrues under a constant yield method in advance of cash payments attributable to such income. See "Tax Considerations." Repayment of Principal.... Principal of the Notes will be payable in full on November 15, 2002. Optional Redemption....... The Notes will be redeemable at the option of Grupo Dina, in whole or in part, at any time on or after November 15, 1998 at 100% of the principal amount thereof plus accrued and unpaid interest. Security.................. MCII Holdings' obligation under the Old Notes is, and under the New Notes will be, secured by (i) a pledge of MCII Shares held by MCII Holdings and (ii) a perfected first priority security interest in any cash or Cash Equivalents deposited with the Trustee under the Indenture governing the New Notes. Under certain circumstances, collateral in the form of MCII Shares may be released by the Trustee and sold by MCII Holdings. See "Description of the Notes." Change of Control......... Upon a Change of Control, each holder of New Notes shall have the right to require Grupo Dina and MCII Holdings to repurchase all or any part of the outstanding New Notes at a purchase price equal to the Accreted Value thereof, if on or prior to November 15, 1998, and equal to the aggregate principal amount thereof, plus accrued and unpaid interest, if any, thereafter. See "Description of the Notes--Change of Control." Ranking................... The obligation of Grupo Dina in respect of the New Notes will rank pari passu with the Old Notes and with all other outstanding unsecured and unsubordinated obligations of Grupo Dina, present or future, other than obligations which are mandatorily preferred by statute or by operation of law. The obligation of MCII Holdings in respect of the New Notes will rank pari passu with the Old Notes and, by reason of its being secured by collateral, effectively senior to any outstanding unsecured obligations of MCII Holdings. At June 30, 1996, Grupo Dina had outstanding Ps 2,442.2 million in aggregate principal amount of indebtedness that, by reason of its being secured by collateral, ranks effectively senior to the Old Notes and the New Notes. At such date, MCII Holdings had no outstanding indebtedness ranking senior to the Old Notes or the New Notes. At such date, MCII and its subsidiaries had outstanding indebtedness in an aggregate principal amount of US$195.6 million that is structurally senior to the Old Notes and the New Notes. Form and Denominations.... New Notes will generally be issued in denominations of US$1,000 and integral multiples of US$1,000. Covenants................. The indenture governing the Notes provides for certain affirmative and negative covenants by MCII Holdings and to a lesser extent by Grupo Dina for the benefit of the holders of Notes. Use of Proceeds........... The Issuers will not receive any proceeds from the Exchange Offer. Exchange Offer; Registra- tion Rights............. Holders of New Notes are not entitled to any registration rights with respect to the New Notes. Pursuant to the Registration Agreement, the Issuers agreed to file, at their cost, a registration statement with respect to the Exchange Offer. The Registration Statement of which this Prospectus is a part constitutes the registration statement for the Exchange Offer. See "Description of the Notes--Registration Rights." Governing Law............. The Notes and any controversy arising thereunder will be governed by the laws of the State of New York.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000893970_interpharm_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000893970_interpharm_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..fb332c7e285f1e5588a4e1ce552bdde38ac24108
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+++ b/parsed_sections/prospectus_summary/1996/CIK0000893970_interpharm_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED IN THIS PROSPECTUS AND IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT WHEN OTHERWISE INDICATED, ALL SHARE AND PER SHARE INFORMATION CONTAINED IN THIS PROSPECTUS REFLECT A ONE FOR TEN REVERSE STOCK SPLIT EFFECTIVE SEPTEMBER 9, 1994. The Company - ----------- ATEC Group, Inc. (the "Company"), formerly Hillside Bedding, Inc., was incorporated in July 1992 under the laws of the State of Delaware to engage in the operation of retail bedding locations. In June 1994 the Company discontinued its bedding operations and changed its business focus to engage in the installation, sale and service of computer hardware and software products. In June 1994 the Company acquired Sun Computer and Software, Inc. ("SCSI") and Microcomputer Stores, Inc. ("MCS"). In February 1995 the Company acquired American Computer Systems Corp. and Laptop and Office Solutions, Inc. (collectively referred to as "ACS"). In March 1995 the Company acquired Cony Computer Systems, Inc. ("Cony"). SCSI, MCS, ACS and Cony are wholly owned subsidiaries of the Company and are hereinafter sometimes collectively referred to as the Company. The Company is engaged in the sale of computer hardware and software to businesses, professionals, governmental agencies and educational institutions. The Company provides customers with a range of services including designing and installing computer systems, training system users and maintaining and repairing hardware and software products. The Company maintains retail facilities in New York City, Long Island, New York, Albany, New York and Norwalk, Connecticut. The Company's subsidiaries are authorized dealers and value added resellers for major manufacturers such as Hewlett Packard, Compaq, IBM, Panasonic, Toshiba, Sharp, AST, Epson and NEC. Hardware products sold by the Company include microcomputer systems, laptop computers, monitors, data storage devices, printers, keyboards and related products. The Company also sells a vast number of different software packages for both IBM compatible and Apple applications. The software products include packages which address a variety of business, personal productivity, utility, educational and entertainment functions. The Company also provides its customers with a wide range of computer support services including network analysis and design, system configuration, physical installation, software loading, application trading, continuing education, maintenance and repair services. The Company is actively seeking the acquisition of other computer system integrators in order to expand its revenue base. In this regard the Company recently acquired 100% of the issued and outstanding shares of capital stock of Innovative Business Micros, Inc. ("Innovative") a Long Island based computer systems integrator. Innovative is owned by Surinder Rametra and Ashok Rametra, the Company's principal executive officer and principal financial officer, respectively, and their brother Rajnish Rametra. There can be no assurance that the Company will acquire any other computer system integrators (see "Business - General"). The Company's corporate headquarters are located at 1952 Jericho Turnpike, East Northport, New York 11731. The Company's telephone number is 516 462-6700. Securities Outstanding Shares of Common Stock 18,443,462 Shares of Series A Preferred Stock 28,897 Shares of Series B Preferred Stock 3,111.28 Shares of Series D Preferred Stock 400,000 Shares of Series E Preferred Stock 200,000 Shares of Series J Preferred Stock 800,000 Shares of Series K Preferred Stock 400,000 Shares Underlying Common Stock Purchase Warrants (1) 3,250,000 Risk Factors: An investment in the Company's securities involves a high degree of risk. For discussion of certain risk factors effecting the Company, see "Risk Factors". NASDAQ Symbol: ATEC (1) Represents (i) 925,000 shares issuable upon exercise of Class W Warrants; (ii) 925,000 shares issuable upon exercise of Class X Warrants; (iii) 425,000 shares issuable upon exercise of Class Y Warrants; and (iv) 625,000 Shares issuable upon exercise of Class Z Warrants and (v) 350,000 shares issuable upon exercise of Class C Common Stock Purchase Warrant. Class C Warrants are exercisable at $3.00 per share. The Company is in the process of issuing the Class C Warrants along with 350,000 Shares Class C Preferred Stock. (See"Description of Securities") SUMMARY FINANCIAL INFORMATION <TABLE> <CAPTION> Operating Data 1995 (2) 1994 1993 1992(1) 1991(1) - -------------- -------- ---- ---- ------- ------- <S> <C> <C> <C> <C> <C> Net Sales $29,738,315 $25,481,246 $39,836,094 $15,722,000 $9,438,933 Income (Loss) from $(2,347,655) $ (309,891) $ 133,605 $ (12,160) $ (51,689) continuing operations Income (Loss) per common share - primary $(.59) $(.80) $.34 $(.03) $(.03) fully diluted $(.59) $(.80) $.02 $(.03) $(.03) Balance Sheet Data - ------------------ Total Assets $ 8,056,607 $4,856,611 $ 5,888,036 $ 2,261,025 $ 1,456,995 Long-term obligations $ 396,246 $ 970,255 $ 0 $ 39,709 $ 562,255 Cash dividends per common share Nil Nil Nil Nil Nil </TABLE> (1) Information for these years are based on a combination of MCS (fiscal year ended March 31) and SCSI (fiscal year ended December 31) and are unaudited. (2) See pages 40 and 41, F-13 to F-15 for a discussion of the 1995 acquisitions of ACS and Cony. Operating Data Nine Months Ended - -------------- ----------------- March 31, 1996 March 31, 1995 -------------- -------------- (Unaudited) (Unaudited) Net Sales $45,196,268 $17,498,148 Income (loss) from Continuing Operations 308,099 (785,932) Income (loss) per Common Share - Primary .03 (.25) Fully diluted .02 (.25) Balance Sheet Data March 31, 1996 - ------------------ -------------- (Unaudited) Total Assets $9,668,438 Working Capital 2,647,909 Long-Term Obligations 397,244
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0000894705_scopus_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000894705_scopus_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..19bdbae61ccf258977555529d2f5aa58fc40834c
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000894705_scopus_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the consolidated financial statements and the notes thereto appearing elsewhere in this Prospectus.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0000895044_microsurge_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000895044_microsurge_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..27e0af964b878b3b08d9ea947d928154ded27d73
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000895044_microsurge_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Investors should carefully consider the information set forth under the heading "Risk Factors." Except as otherwise specified, all information in this Prospectus assumes no exercise of the Underwriters' over- allotment option and reflects (i) a 0.644-for-1 reverse stock split of the Common Stock of the Company effected on June 17, 1996, (ii) the conversion of all outstanding shares of the Company's Redeemable Convertible Preferred Stock into an aggregate of 5,525,860 shares of Common Stock at the closing of this offering, (iii) the sale and issuance in June 1996 of the Company's Convertible Subordinated Notes due August 28, 1997 in the aggregate principal amount of $933,766 (the "June 1996 Notes") and related warrants to purchase shares of Common Stock (the "June 1996 Warrants") and (iv) the conversion of the outstanding principal amount of and accrued interest on the Company's Convertible Subordinated Notes due August 28, 1997 issued in February and March 1996 in the aggregate principal amount of $2,334,414 (the "February 1996 Notes" and together with the June 1996 Notes, the "1996 Notes") and the June 1996 Notes into an aggregate of 659,685 shares of Common Stock at the closing of this offering (assuming an initial public offering price of $8.50 per share and a closing date of July 31, 1996). THE COMPANY Microsurge designs, develops, manufactures and markets surgical instrumentation for use in minimally invasive surgery. The Company is currently developing families of surgical instrumentation for use in minimally invasive abdominal procedures, referred to as laparoscopy, and minimally invasive thoracic procedures, referred to as thoracoscopy. Microsurge's laparoscopic instrumentation is based on a novel "multi-use" design concept which seeks to address the shortcomings of, and provide an alternative to, currently available single-use disposable and traditional reusable laparoscopic instrumentation. The Company's thoracoscopic instrumentation is being developed to address a market need for a family of products specifically designed for thoracoscopic surgery. The Company began marketing its laparoscopic products in July 1993 and plans to release its first thoracoscopic products in the second half of 1996. The Company is also exploring the applicability of its product designs and technologies to other areas of minimally invasive surgery, such as cardiac and colorectal surgery. Minimally invasive surgical procedures are performed through strategically placed punctures in a patient's body without the major incisions used in traditional open surgery. Minimally invasive surgical procedures generally offer a range of clinical and healthcare cost containment benefits in comparison with traditional open surgery, including reduced patient trauma, decreased scarring, reduced risk of infection, shortened post-operative hospitalization and more rapid recovery times. These benefits have resulted in a growing preference among patients, surgeons and healthcare payors for minimally invasive procedures over traditional open surgery. From 1990 to 1995, the number of laparoscopic procedures performed annually in the United States increased from approximately 84,000 to more than an estimated 2,400,000 and the number of thoracoscopic procedures performed annually in the United States increased from fewer than 1,000 to over an estimated 92,000. Laparoscopy was initially performed using traditional stainless steel instrumentation designed to be sterilized and reused many times. The principal benefit of traditional reusable instrumentation is that its reusable nature reduces the instrumentation cost per procedure. However, this instrumentation is often difficult to clean and needs to be repaired periodically in order to continue to be used effectively. In addition, after a number of repairs, the precision of traditional reusable instrumentation permanently degrades. In response to these shortcomings, surgical instrumentation manufacturers introduced single-use disposable laparoscopic instrumentation in 1989. These manufacturers facilitated the market acceptance of single-use disposable products by offering surgeons training programs focusing on the use of this new instrumentation. Although disposable laparoscopic instrumentation has less precision than traditional reusable instrumentation it was widely accepted because it did not need to be cleaned or repaired. However, the managed care cost containment pressures of the 1990s have caused healthcare providers to reevaluate the use of single-use disposable laparoscopic instrumentation because of its high cost per surgical procedure. To address the shortcomings of single-use disposable and traditional reusable laparoscopic instrumentation, Microsurge is developing a family of "multi-use" laparoscopic surgical instrumentation. Multi-use laparoscopic instrumentation is designed to provide a lower instrumentation cost per procedure than single- use disposable instrumentation and greater convenience and more consistent performance than traditional reusable instrumentation. The Company's multi-use laparoscopic instrumentation is designed to be easily cleaned and used multiple times. Most of this instrumentation is comprised of two components. One component, generally a handle, is designed to be used many, often hundreds of, times. The other component, generally a tip configuration, is designed to be used one or more times. When the performance of any component deteriorates, it is discarded and replaced by a new component, eliminating the need for repairs. Microsurge's principal laparoscopic products include its line of DetachaTip multi-use hand-held scissors, graspers and dissectors and DetachaPort multi-use trocars. The Company is also developing a DetachaClip multi-use laparoscopic clip applier for use in ligating vessels and ducts. The Company began marketing its laparoscopic products in July 1993 and has since introduced 52 products to the laparoscopic instrumentation market. The Company plans to release seven additional laparoscopic products by the end of 1996. The Company believes that its multi-use laparoscopic instrumentation addresses the requirements of today's managed care environment due to the cost benefits of this instrumentation and its precision, quality and feel. In contrast with laparoscopy, thoracoscopy is a relatively new surgical approach. Surgical instrumentation manufacturers are not yet offering broad lines of instrumentation specifically designed for use in thoracoscopy. To address this need, the Company is developing a family of surgical instrumentation for use in thoracoscopic surgery, including DetachaTip multi- use scissors, a line of dilators and trocars to gain access to the chest cavity, a novel plication device and an array of accessories. The Company has 16 thoracoscopic products under development and expects to release eight of these products in the second half of 1996. The Company believes that the availability of surgical instrumentation and training programs specifically designed for thoracoscopic surgery may significantly increase the use of thoracoscopy. The Company's objective is to achieve a significant presence in the minimally invasive surgical instrumentation market by developing and marketing families of innovative surgical instrumentation. The Company believes that the development of targeted, cost-effective instrumentation will play an important role in the growth of minimally-invasive surgical procedures. In pursuit of the Company's obejective Microsurge has recruited a direct sales force to market the Company's products in the United States. As the Company expands its product offerings, it plans to significantly increase its domestic direct sales force. Through March 31, 1996, the Company had sold its laparoscopic products to over 650 customers in the United States. The Company also markets its products in 18 foreign countries through 14 international distributors and is in the process of expanding its international distributor network. The Company was organized as a Delaware corporation in 1991. The Company's principal office is located at 150 A Street, Needham, MA 02194 and its telephone number is (617) 444-2300. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company.... 3,000,000 shares Common Stock to be outstanding after the offering.......................... 9,591,019 shares(1) Use of proceeds........................ To fund sales and marketing activities and research and product development, to pay a license fee, to repay bank debt and for general corporate purposes. Nasdaq National Market symbol.......... MSRG </TABLE> - -------- (1) Reflects (i) the conversion of all outstanding shares of Redeemable Convertible Preferred Stock into an aggregate of 5,525,860 shares of Common Stock at the closing of this offering and (ii) the conversion of the outstanding principal amount of and accrued interest on the 1996 Notes into an aggregate of 659,685 shares of Common Stock at the closing of this offering (assuming an initial public offering price of $8.50 per share and a closing date of July 31, 1996). Does not include 892,450 shares reserved for issuance upon the exercise of outstanding options and warrants (excluding the warrants to purchase shares of Common Stock issued in connection with the sale and issuance of the February 1996 Notes (the "February 1996 Warrants" and together with the June 1996 Warrants, the "1996 Warrants") and the June 1996 Warrants) as of March 31, 1996 at a weighted average exercise price of $1.44 per share, 274,694 shares reserved for issuance upon the exercise of outstanding options granted in May 1996 at an exercise price equal to the initial public offering price (the "May 1996 Options") and 192,226 shares reserved for issuance upon the exercise of the outstanding 1996 Warrants at an exercise price equal to the public offering price (assuming an initial public offering price of $8.50 per share). See "Dilution," "Capitalization," "Certain Transactions" and "Description of Capital Stock." SUMMARY FINANCIAL DATA <TABLE> <CAPTION> THREE MONTHS YEARS ENDED DECEMBER 31, ENDED MARCH 31, ------------------------------------------- ---------------- 1991(1) 1992 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Product sales.......... $ -- $ -- $ 101 $ 1,548 $ 3,797 $ 687 $ 1,173 Cost of goods sold..... -- -- 53 1,042 2,370 428 724 Operating expenses Research and development.......... 466 1,313 1,939 2,010 1,913 399 496 Selling, general and administrative....... 473 1,372 1,759 3,312 5,912 1,187 1,437 ------ ------- ------- ------- ------- ------- ------- Total operating expenses........... 939 2,685 3,698 5,322 7,825 1,586 1,933 ------ ------- ------- ------- ------- ------- ------- Interest and other (income) expense...... (12) (15) (194) (139) (67) (19) 12 ------ ------- ------- ------- ------- ------- ------- Net loss............... $ (927) $(2,670) $(3,456) $(4,677) $(6,331) $(1,308) $(1,496) ====== ======= ======= ======= ======= ======= ======= Pro forma net loss per share(2).............. $ (1.01) $ (0.24) ======= ======= Pro forma weighted average common and common equivalent shares outstanding(2)........ 6,245 6,264 ======= ======= </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 ------------------------------- PRO FORMA PRO AS ACTUAL FORMA(3) ADJUSTED(4) ---------- -------- ----------- (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Cash, cash equivalents and marketable securi- ties......................................... $ 2,403 $3,337 $26,252 Working capital............................... 2,672 3,606 26,521 Total assets.................................. 5,520 6,454 29,369 Long-term debt, net of current portion........ 2,412 136 136 Redeemable convertible preferred stock........ 25,875 -- -- Total stockholders' equity (deficit).......... (24,262) 4,822 27,737 </TABLE> - -------- (1) For the period February 27, 1991 (date of inception) to December 31, 1991. (2) See Note 2 to Financial Statements for information concerning the computation of pro forma net loss per share and shares used in computing pro forma net loss per share. (3) Presented on a pro forma basis to give effect to (a) the conversion of all outstanding shares of Redeemable Convertible Preferred Stock into an aggregate of 5,525,860 shares of Common Stock at the closing of this offering, (b) the sale and issuance of the June 1996 Notes and the June 1996 Warrants and (c) the conversion of the outstanding principal amount of and accrued interest on the 1996 Notes into an aggregate of 659,685 shares of Common Stock at the closing of this offering (assuming an initial public offering price of $8.50 per share and a closing date of July 31, 1996). (4) Adjusted to give effect to the sale of the 3,000,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $8.50 per share and the application of net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0000895051_casi_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000895051_casi_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..83ec0e65fafd4cda167f4bc9bc341b44d22f0042
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000895051_casi_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT INDICATES OTHERWISE, THE INFORMATION IN THIS PROSPECTUS (I) DOES NOT GIVE EFFECT TO THE EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION AND (II) GIVES RETROACTIVE EFFECT TO A TWO-FOR-THREE REVERSE STOCK SPLIT OF THE COMMON STOCK EFFECTED IN APRIL 1996 AND THE AUTOMATIC CONVERSION OF THE 3,000,000 OUTSTANDING SHARES OF THE COMPANY'S PREFERRED STOCK INTO 2,000,000 SHARES OF COMMON STOCK EFFECTIVE ON THE DATE OF THIS PROSPECTUS. SEE "CAPITALIZATION," "DESCRIPTION OF CAPITAL STOCK" AND NOTE 13 OF NOTES TO FINANCIAL STATEMENTS. INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS." THE COMPANY EntreMed is engaged primarily in the research and development of biopharmaceutical products that address the role of blood and blood vessels in the prevention and treatment of a broad range of diseases. The Company's core technologies include (i) an antiangiogenesis program focused on the development of proprietary products intended to inhibit the abnormal growth of new blood vessels associated with cancer and certain causes of blindness and (ii) a blood cell permeation device designed to enhance the ability of red blood cells to deliver oxygen to organs and tissues and which may also be used to deliver drugs, genes or other therapeutic agents that otherwise would not readily diffuse through blood cell membranes. Angiogenesis is the fundamental process by which new blood vessels are formed and primarily occurs during the first three months of embryonic development. Except for wound healing and certain reproductive processes in women, angiogenesis is otherwise generally associated with several diseases, including cancer and certain causes of blindness. The Company believes that antiangiogenic products, which inhibit the abnormal growth of blood vessels, may have significant advantages over traditional therapies for these diseases. The Company is currently developing several angiogenesis inhibitors, including thalidomide and its chemical analogs and Angiostatin-TM-, a protein produced by the body. The Company is also applying its expertise in the role of blood function to the development of a blood cell permeation device designed to enhance the oxygen releasing capabilities of red blood cells. Organs and tissues in the body require oxygen to function properly and oxygen deficiency may lead to tissue damage or death. In December 1995, the Company and Bristol-Myers Squibb Company ("Bristol-Myers") entered into a collaboration to develop and commercialize certain antiangiogenesis therapeutics. This collaboration provides for Bristol-Myers to fund Company research, provide milestone payments to the Company and pay the Company royalties on net sales of any products developed under the collaboration. In addition, Bristol-Myers made a $6,500,000 equity investment in the Company and agreed to make an additional $5,000,000 equity investment at the closing of this offering. In return, the Company granted Bristol-Myers exclusive worldwide rights to antiangiogenic applications of thalidomide, thalidomide analogs and Angiostatin-TM- protein. The Company's product candidates have been developed primarily through sponsored research collaborations and licensing agreements. The principal antiangiogenesis therapeutics currently under development by the Company were licensed from Children's Hospital at Harvard Medical School where the Company sponsors research under the direction of Dr. M. Judah Folkman. The flow electroporation technology used in the cell permeation device was licensed from the Center for Blood Research Laboratories at Harvard Medical School. The Company's sponsored research programs are augmented by its internal capabilities in the fields of the vasculature system, blood vessel growth and blood function. To date, the Company and its collaborators have: -Initiated Phase II clinical trials to evaluate the antiangiogenic effects of thalidomide in inhibiting the progression of breast cancer, prostate cancer and Kaposi's sarcoma. -Initiated Phase II clinical trials to evaluate the antiangiogenic effects of thalidomide in inhibiting the progression of age-related macular degeneration, a major cause of blindness. -Isolated, identified, sequenced, cloned and recombinantly expressed Angiostatin-TM- protein. In preclinical studies, Angiostatin-TM- protein appeared to inhibit vascularization and growth of primary and metastatic tumors. -Constructed a prototype device designed to introduce inositol hexaphosphate ("IHP") molecules into red blood cells, which may enhance the delivery of oxygen to organs and tissues in the body. The Company's strategy is to accelerate development of its antiangiogenesis and cell permeation technologies as well as other promising technologies which the Company perceives to have clinical and commercial potential. The principal elements of the Company's strategy are (i) to focus its resources on current core technologies, (ii) to broaden its product and technology portfolio through sponsored research collaborations with academic institutions, government organizations and private enterprises, (iii) to augment product development with its in-house research and development capabilities and (iv) to leverage its resources through corporate partnerships in order to minimize the cost to the Company of late-stage clinical trials and to accelerate effective product commercialization. All of the Company's product candidates are in the development stage and require further research, development, testing and regulatory clearances. The Company was incorporated in Delaware in September 1991. The Company's executive offices are located at 9610 Medical Center Drive, Suite 200, Rockville, Maryland 20850 and its telephone number is (301) 217-9858. THE OFFERING <TABLE> <S> <C> Common Stock offered hereby.................. 3,200,000 shares Common Stock to be outstanding after the offering.................................... 11,993,912 shares (1) Use of Proceeds.............................. For research and development, working capital and general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol....... ENMD Risk Factors................................. The Common Stock offered hereby involves a high degree of risk. See "Risk Factors." </TABLE> - ------------------------ (1) Includes (i) 333,333 shares (assuming an initial public offering price of $15.00 per share) to be sold to Bristol-Myers in a private placement on the closing of this offering at the initial public offering price and (ii) 2,000,000 shares of Common Stock issuable upon the automatic conversion of all outstanding shares of Preferred Stock, $1.00 par value (the "Preferred Stock") on the date of this Prospectus. Excludes (i) 2,381,688 shares of Common Stock issuable upon exercise of outstanding options and warrants at a weighted average exercise price of $4.92 per share and 444,444 shares of Common Stock issuable upon exercise of warrants issued to Bristol-Myers exercisable at $22.50 per share (assuming an initial public offering price of $15.00 per share) and (ii) an additional 642,969 shares reserved for issuance under the Company's stock option plans. See "Capitalization," "Business -- Collaborations and License Agreements," "Management -- Stock Options" and "Description of Capital Stock." SUMMARY FINANCIAL DATA <TABLE> <CAPTION> THREE MONTHS ENDED MARCH SEPTEMBER 18, 31, 1991 (DATE OF YEAR ENDED DECEMBER 31, (UNAUDITED) INCEPTION) TO -------------------------------------------------- ------------------------ DECEMBER 31, 1991 1992 1993 1994 1995 1995 1996 ----------------- ----------- ----------- ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues (1): Grant revenues............ $ -- $ -- $ -- $ 90,185 $ 347,001 $ -- $ -- Collaborative research and development.............. -- -- -- -- 347,501 -- 1,042,500 License fees.............. -- -- -- -- 16,667 -- 50,000 ----------------- ----------- ----------- ----------- ----------- ----------- ----------- Total revenues.............. -- -- -- 90,185 711,169 -- 1,092,500 Expenses: Research and development.. -- 645,752 4,772,652 3,673,929 5,939,512 1,596,677 2,063,270 General and administrative........... 23,873 812,198 1,552,143 1,549,705 2,458,976 455,342 771,411 Interest expense.......... -- -- -- -- 65,754 -- 9,547 Interest income........... -- (56,383) (85,939) (18,993) (44,854) (5,559) (76,321) ----------------- ----------- ----------- ----------- ----------- ----------- ----------- Net loss.................... $ (23,873) $(1,401,567) $(6,238,856) $(5,114,456) $(7,708,219) $(2,046,460) $(1,675,407) ----------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------------- ----------- ----------- ----------- ----------- ----------- ----------- Pro forma net loss per share (2)........................ $ (0.83) $ (0.18) ----------- ----------- ----------- ----------- Pro forma weighted average number of shares outstanding (2)............ 9,271,943 9,312,035 ----------- ----------- ----------- ----------- </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 -------------------------------- ACTUAL AS ADJUSTED (3) --------------- --------------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents...................................................... $ 7,600,058 $ 56,000,058 Working capital................................................................ 3,727,118 52,127,118 Total assets................................................................... 8,606,849 57,006,849 Deferred revenue, less current portion......................................... 2,566,667 2,566,667 Accumulated deficit............................................................ (22,162,378) (22,162,378) Total stockholders' equity..................................................... 2,051,853 50,451,853 </TABLE> - ------------------------ (1) With the exception of license fees and research funding under the Bristol-Myers collaboration and research grants, the Company has not derived any revenues from operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (2) Pro forma net loss per share and weighted average shares outstanding for the year ended December 31, 1995 and the three month period ended March 31, 1996 give effect to the automatic conversion of 3,000,000 outstanding shares of Preferred Stock into 2,000,000 shares of Common Stock upon the date of this Prospectus. See Note 1 of Notes to Financial Statements. (3) Adjusted to give effect to the sale at an assumed initial public offering price of $15.00 of (i) the Common Stock offered hereby and (ii) 333,333 shares of Common Stock by the Company to Bristol-Myers in a private placement at the closing of this offering, and the receipt of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0000895127_vk-ac_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000895127_vk-ac_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e40c858e4b6baca8663858cd7143fee341a06f92
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000895127_vk-ac_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and consolidated financial statements, including the notes thereto, appearing elsewhere in this Prospectus. The Company is a Delaware corporation that has as its primary asset all the outstanding common stock of Van Kampen American Capital, Inc., a Delaware corporation ("VKAC"). Hereinafter, references in this Prospectus to the "Company" shall mean (a) Van Kampen American Capital Group, Inc. or (b) Van Kampen American Capital Group, Inc. and VKAC and its subsidiaries, as the context requires. Except where otherwise indicated, all pro forma financial information included in this Prospectus and all share and per share data (including data with respect to options to purchase shares of stock) in this Prospectus give effect to (i) a stock dividend (the "Stock Split Dividend") on the Common Stock and the Company's Class B Common Stock, par value $.01 per share (the "Class B Common Stock" and, together with the Common Stock, the "Company Common Stock"), which will occur prior to the commencement of the Offerings and (ii) the distributions (the "Special Dividends"), to be effected prior to the completion of the Offerings, by the Company to (x) holders of Company Common Stock of the Company's interests in McCarthy, Crisanti & Maffei, Inc. ("MCM"), a wholly owned subsidiary of the Company engaged in the business of distributing research and financial information, and Hansberger Global Investors, Inc. ("HGI"), a company in which the Company made a minority investment in May 1996, and certain related cash amounts, and (y) holders of the Company's Junior Non-Cumulative Participating Preferred Stock, par value $200 per share (the "Junior Preferred Stock"), of certain cash preferred dividends required to be paid thereon in connection with the Special Dividends. In addition, unless otherwise indicated, all such data assume that the over-allotment options granted by the Selling Stockholders to the Underwriters are not exercised. See "Underwriting." THE COMPANY The Company is a leading marketer and provider of investment advisory and administrative services to open-end and closed-end funds, unit investment trusts and institutional clients ("Institutional Accounts"). As of March 31, 1996, the Company had more than $57 billion of assets under management and/or supervision, including approximately $40 billion in 65 open-end equity and fixed income funds (the "Open End Funds"), 36 closed-end funds (the "Closed End Funds") and the Van Kampen American Capital Prime Rate Income Trust (the "Prime Rate Trust" and, together with the Open End Funds and the Closed End Funds, the "Funds"). The Company was formed through the combination in December 1994 of The Van Kampen Merritt Companies, Inc. ("VKM") and American Capital Management & Research, Inc. ("American Capital"), which was founded in 1926 as one of the first investment management companies in the United States. This transaction significantly expanded and upgraded the product offering, distribution and service capabilities of both firms by (i) combining American Capital's expertise and reputation in equity products and investor services with VKM's expertise and reputation in tax-exempt and taxable fixed income products and (ii) enabling each firm to cross-sell through the other firm's major distributors, given the limited overlap between the two firms' major distributors prior to the transaction. Fund assets under management for the Company (as if VKM and American Capital were combined as of 1991) have grown at a compound annual rate of 13.6% from December 31, 1991 to December 31, 1995, which the Company attributes to the rapid growth of the mutual fund industry generally and to investors' and distributors' confidence in the Company's products, services and investment philosophy. Such confidence has led to what the Company believes are lower than average Fund redemption rates. <TABLE> <CAPTION> Exhibit Number Description - -------------- ----------- <S> <C> 3.4 Certificate of Amendment, dated as of January 19, 1995, of Van Kampen/American Capital, Inc. (incorporated by reference to Exhibit 3.4 to VK/AC Holding, Inc.'s Form 10-K for the fiscal year ended December 31, 1994, Commission File No. 33-56334). 4.1 Third Restated Certificate of Incorporation of VKM Holding, Inc. (See Exhibit 3.1). 4.2 Bylaws of VKM Holding, Inc., as amended (See Exhibit 3.2). 4.3 Form of Stock Certificate of VK/AC Holding, Inc. for Class A Common Stock, par value $.01 per share (incorporated by reference to Exhibit 4.3 to VK/AC Holding, Inc.'s Form 10-K for the fiscal year ended December 31, 1994, Commission File No. 33-56334). 4.4 Form of Stock Certificate of VK/AC Holding, Inc. for Class B Common Stock, par value $.01 per share (incorporated by reference to Exhibit 4.4 to VK/AC Holding, Inc.'s Form 10-K for the fiscal year ended December 31, 1994, Commission File No. 33-56334). 4.5 Stock Subscription Agreement between VKM Holding, Inc. and The Clayton & Dubilier Private Equity Fund IV Limited Partnership (incorporated by reference to Exhibit 4.5 to VKM Holding, Inc.'s Form 10-K for the fiscal year ended December 31, 1993, Commission File No. 33-56334). 4.6 Form of Management Stock Subscription Agreement between CDV Holding, Inc. and the purchasers named therein, dated February 17, 1993. (incorporated by reference to Exhibit 4.6 to VKM Holding, Inc.'s Form 10-K for the year ended December 31, 1993, Commission File No. 33-56334). 4.7 Form of Management Stock Option Agreement between CDV Holding, Inc. and the parties named therein, dated February 17, 1993. (incorporated by reference to Exhibit 4.7 to VKM Holding, Inc.'s Form 10-K for the fiscal year ended December 31, 1993, Commission File No. 33-56334). </TABLE> Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED JUNE 6, 1996 PROSPECTUS [VKAC GROUP LOGO] ____________ SHARES VAN KAMPEN AMERICAN CAPITAL GROUP, INC. COMMON STOCK All of the shares of Class A Common Stock (the "Common Stock") of Van Kampen American Capital Group, Inc. (the "Company") offered hereby will be sold by certain stockholders (the "Selling Stockholders") of the Company. See "Selling Stockholders." The Company is not selling shares of Common Stock in this offering and will not receive any of the proceeds from the sale of shares of Common Stock offered hereby. Of the shares offered hereby, shares are being offered in the United States and Canada by the U.S. Underwriters (the "U.S. Offering") and shares are being offered in a concurrent offering outside the United States and Canada by the International Managers (the "International Offering, " and together with the U.S. Offering, the "Offerings"). The price to public and the underwriting discount per share will be identical for both Offerings. See "Underwriting." Prior to the Offerings there has been no public market for the Common Stock. It is currently estimated that the initial public offering price will be between $ and $ per share. For information relating to the determination of the initial public offering price, see "Underwriting." Application will be made for the Common Stock to be listed on the New York Stock Exchange under the symbol " ." SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. <TABLE> <CAPTION> ======================================================================== PRICE TO UNDERWRITING PROCEEDS TO SELLING PUBLIC DISCOUNT(1) STOCKHOLDERS(2) - ------------------------------------------------------------------------ <S> <C> <C> <C> Per Share $ $ $ Total(3) $ $ $ ======================================================================== </TABLE> (1) The Company and the Selling Stockholders have agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) The Company will pay the expenses of the Offerings estimated to be $ . (3) The Selling Stockholders have granted the U.S. Underwriters and the International Managers options, exercisable within 30 days after the date hereof, to purchase up to and additional shares of Common Stock, respectively, solely to cover over-allotments, if any. If such options are exercised in full, the total Price to Public, Underwriting Discount and Proceeds to Selling Stockholders will be $ , $ and $ , respectively. See "Underwriting." The shares of Common Stock are offered by the several Underwriters subject to prior sale, when, as and if issued to and accepted by them, subject to approval of certain legal matters by counsel for the Underwriters and certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of the shares of Common Stock will be made in New York, New York, on or about , 1996. MERRILL LYNCH & CO. GOLDMAN, SACHS & CO. The date of this Prospectus is , 1996 The Company's business strategy is comprised of the following key components: * Diversified Product and Asset Base. The Company sponsors Open End Funds and Closed End Funds, including four equity Funds and four fixed income Funds each of which has assets of more than $ 1.0 billion, and more than 2,500 series of tax-exempt, taxable and equity unit investment trusts ("UITs"), making it one of only three mutual fund complexes today with a major presence in all three of these areas. In addition, the Company sponsors the Prime Rate Trust, which has grown from $1.0 billion at December 31, 1991 to $4.4 billion at March 31, 1996 and is the largest of only five mutual funds in the United States that invest primarily in floating or variable rate senior loans. These investment products give the Company one of the most extensive product lines in the investment management industry. Approximately 36% of the Fund assets under management consist of equity securities, 30% consist of tax-exempt fixed income securities, 23% consist of taxable fixed income securities and 11% consist of variable rate senior loans. By providing a wide spectrum of clearly-defined risk/return options in its Funds, the Company's investment products offer both distributors and investors a broad "family of funds" to satisfy the full range of their investment product needs. The Company believes that its comprehensive product line, together with its broad-based and balanced distribution network, has positioned the Company to achieve stability in assets and earnings and limits the Company's exposure to a market downturn in any one particular product or asset category. * Extensive and Established Distribution Relationships. Today an investor can buy the Company's investment products from an investment broker in virtually any city in the United States. The Company has developed significant distribution relationships with almost every major securities distributor in the United States, including national and regional securities firms (28% of 1995 sales), financial planners (25% of 1995 sales), banks (24% of 1995 sales), and global securities firms (23% of 1995 sales). The Company's products are distributed through more than 2,400 firms (the "Retail Distribution Firms"), representing more than 100,000 investment brokers. The Company has a "proprietary vendor" relationship with Smith Barney Inc. ("Smith Barney") and has become a "preferred vendor" to a number of major distribution firms, including PFS Investments, Inc. ("PFSI"), a broker-dealer affiliate of The Travelers Inc. ("Travelers"), E.D. Jones & Co. ("E.D. Jones"), A.G. Edwards & Sons, Inc. Prudential Securities Incorporated, PaineWebber Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and SunAmerica Inc. ("SunAmerica"). PFSI is also the sponsor, exclusive distributor and servicer of ten Open End Funds advised by the Company (the "Common Sense Funds"). The Common Sense Funds, which had assets of $4.5 billion as of March 31, 1996, are sold exclusively through a distribution network of more than 20,000 PFSI sales representatives located in communities throughout the United States. The Company believes that it has created one of the industry's largest and most effective sales forces with more than 100 wholesalers and sales associates who are responsible for marketing the Company's products and services to Retail Distribution Firms across the United States. * Disciplined and Consistent Investment Philosophy. The Company is recognized as a highly disciplined asset manager seeking to achieve consistent superior long-term investment results within defined risk profiles through a fully invested asset management approach. The Company's investment philosophy is based on the view that distributors and investors desire consistent, long-term, above average performance within chosen risk profiles. Following the acquisition of American Capital in December 1994, the Company adopted the specific goal of achieving long-term performance rankings in the first quartile of all comparable rated funds by achieving annual performance in at least the second quartile. * Focus on Growth Opportunities. The Company continually explores opportunities to expand its investment product offerings in higher growth areas. In recent years, the Company (i) has established the infrastructure necessary to package the Funds into investment <TABLE> <CAPTION> Exhibit Number Description - -------------- ----------- <S> <C> 4.8 Form of Stock Subscription Agreement between CDV Holding, Inc. and certain investors, dated February 17, 1993. (incorporated by reference to Exhibit 4.8 to VKM Holding, Inc.'s Form 10-K for the fiscal year ended December 31, 1993, Commission File No. 33-56334). 4.9 Management Stock Purchase Agreement between John C. Merritt and Don G. Powell, dated December 20, 1994 (including a schedule of additional Management Stock Purchase Agreements) (incorporated by reference to Exhibit 4.11 to VK/AC Holding, lnc.'s Form 10-K for the fiscal year ended December 31, 1994, Commission File No. 33-56334). 4.10 Management Stock Subscription Agreement between VK/AC Holding, Inc. and William N. Brown, dated January 11, 1995 (incorporated by reference to Exhibit 4.12 to VK/AC Holding, Inc.'s Form 10-K for the fiscal year ended December 31, 1994, Commission File No. 33-56334). 4.11** Letter Agreement between VK/AC Holding, Inc., Van Kampen/American Capital, Inc. and Don G. Powell, dated January 9, 1995 (incorporated by reference to Exhibit 4.13 to VK/AC Holding, Inc.'s Form 10-K for the fiscal year ended December 31, 1994, Commission File No. 33-56334). 4.12 Management Stock Option Agreement between VK/AC Holding, Inc. and Don G. Powell, dated January 11, 1995 (including a schedule of additional Management Stock Option Agreements) (incorporated by reference to Exhibit 4.14 to VK/AC Holding, lnc.'s Form 10-K for the fiscal year ended December 31, 1994, Commission File No. 33-56334). 4.13 Registration and Participation Agreement among CDV Holding, Inc., The Clayton & Dubilier Private Equity Fund IV Limited Partnership and certain stockholders of CDV Holding, Inc. (incorporated by reference to Exhibit 4.9 to VKM Holding, lnc.'s Form 10-K for the fiscal year ended December 31, 1993, Commission File No. 33-56334). </TABLE> programs for 401(k) plans and other retirement vehicles, and is aggressively marketing these programs; (ii) has developed competitively priced variable annuity programs and expanded its equity UIT offerings to target specific market niches; and (iii) has created a number of new Funds directed at specific market segments, such as the Van Kampen American Capital Aggressive Growth Fund, an aggressive growth fund that the Company launched in May 1996. The Company devotes considerable resources to developing new investment products to respond to changing market conditions. * Superior Customer Service. The Company also devotes considerable resources to providing superior service to its customers. To this end, the Company has (i) completed significant investments to establish full service systems; (ii) trained a skilled managerial and employee base; and (iii) implemented procedures and controls to monitor service quality. The Company's outstanding customer service performance has been recognized by DALBAR Financial Services, Inc. ("DALBAR"), an independent mutual fund research organization, which awarded the DALBAR Quality Tested Service Award to American Capital for each of the five years prior to the Company's acquisition of American Capital and to the combined Company for 1995. In 1995, only six other mutual fund complexes received this award, and only one other mutual fund complex has received the award for each of the past six years. The Company believes that the combination of VKM and American Capital has positioned the Company for further growth. The Company began the integration of the two companies at the beginning of 1995 by selecting the best talent available from each company, training the new combined sales force with respect to the full range of products offered and standardizing fund expense policies and marketing materials to produce a fully exchangeable family of Funds. The integration process was substantially completed by the end of 1995 and the Company believes that it now has the necessary critical mass, product breadth and expertise to further penetrate its combined distribution network and cross-sell the full array of its products, as well as to develop new investment products that can be sold through this network. Background. The Company and VKAC were organized in 1992 under the laws of the State of Delaware to acquire a company then named The Van Kampen Merritt Companies, Inc. and certain of its subsidiaries (the "VKM Acquisition") from Xerox Financial Services, Inc. ("Xerox Financial") in February 1993. In December 1994, the Company acquired American Capital (the "AC Acquisition") from Travelers. Principally as a consequence of these transactions, as of , 1996, the Company's management beneficially owned % (or % on a fully diluted basis) of the outstanding Company Common Stock. The Company's executive offices are located at One Parkview Plaza, Oakbrook Terrace, Illinois 60181 and at 2800 Post Oak Boulevard, Houston, Texas 77253, and its telephone number is (708) 684-6000. THE OFFERINGS Of the shares of Common Stock offered hereby, shares are initially being offered in the United States and Canada by the U.S. Underwriters and shares are initially being offered outside the United States and Canada by the International Managers. <TABLE> <CAPTION> Exhibit Number Description - -------------- ----------- <S> <C> 4.14 Amendment No. 1, dated as of April 15, 1994, to the Registration and Participation Agreement among VK/AC Holding, Inc. (formerly VKM Holding, Inc.), The Clayton & Dubilier Private Equity Fund IV Limited Partnership and certain stockholders of VK/AC Holding, Inc. (incorporated by reference to Exhibit 4.16 to VK/AC Holding, Inc.'s Form 10-K for the fiscal year ended December 31, 1994, Commission File No. 33-56334). 4.15 Amendment No. 2, dated as of December 20, 1994, to the Registration and Participation Agreement among VK/AC Holding, Inc. (formerly VKM Holding, Inc.), The Clayton & Dubilier Private Equity Fund IV Limited Partnership and certain stockholders of VK/AC Holding, Inc. (incorporated by reference to Exhibit 4.12 of VK/AC Holding, lnc.'s Report on Form 8-K dated December 20, 1994, filed with the Commission on January 4, 1995, Commission File No. 33-56334). 4.16 Third Restated Certificate of Incorporation of VKM Holding, Inc. (See Exhibit 3.4) 4.17 Certificate of Ownership and Merger dated as of December 20, 1994, merging American Capital into Van Kampen/American Capital, Inc. (incorporated by reference to Exhibit 4.2 of VK/AC Holding, lnc.'s Report on Form 8-K dated December 20, 1994, filed with the Commission on January 4, 1995, Commission File No. 33-56334). 4.18 Stock Subscription Agreement between VK/AC Holding, Inc. (formerly VKM Holding, Inc.) and The Clayton & Dubilier Private Equity Fund IV Limited Partnership, dated as of December 20, 1994. (incorporated by reference to Exhibit 4.3 of VK/AC Holding, lnc.'s Report on Form 8-K dated December 20, 1994, filed with the Commission on January 4, 1995, Commission File No. 33-56334). 4.19 Stock Subscription Agreement between VK/AC Holding, Inc. (formerly VKM Holding, Inc.) and The Travelers Indemnity Company, dated as of December 20, 1994 (incorporated by reference to Exhibit 4.4 of VK/AC Holding, lnc.'s Report on Form 8-K dated December 20, 1994, filed with the Commission on January 4, 1995, Commission File No. 33-56334). </TABLE> Common Stock offered by the Selling Stockholders...... shares(1) Common Stock outstanding after the Offerings(2)....... shares Proposed NYSE Symbol.................................. - ------------------- (1) Does not include shares that are subject to over-allotment options granted by the Selling Stockholders to the Underwriters. See "Underwriting." (2) Based upon shares of Common Stock outstanding at , 1996, including shares of Common Stock issuable upon conversion of the same number of shares of Class B Common Stock, and excluding shares of Company Common Stock issuable upon the exercise of outstanding options (whether vested or unvested) and shares of Common Stock issuable upon the vesting of outstanding deferred stock units. The Company will not receive any of the proceeds from the sale of shares sold by the Selling Stockholders. Pursuant to the Registration and Participation Agreement (as defined herein), the Company is required to assume the costs of the Offerings and to pay fees and expenses in connection with the sale of shares by the Selling Stockholders. See "Selling Stockholders."
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to, and should be read in conjunction with, the more detailed information and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, all information assumes that the Underwriters' over-allotment option is not exercised. Unless otherwise indicated or the context otherwise requires, references in this Prospectus to the term "Company" refer to Sight Resource Corporation and its subsidiaries on a consolidated basis. An investment in the securities offered hereby involves a high degree of risk. See "Risk Factors." THE COMPANY Sight Resource Corporation (the "Company") provides a complete range of eye care products and services through integrated networks of opticians, optometrists and ophthalmologists. The Company's services are provided primarily to persons with common vision disorders, as well as to persons with sight-threatening conditions. The Company's operations currently consist of 29 eye care centers, a centralized optical laboratory and distribution center, two management service organizations ("MSOs") and six laser vision correction ("LVC") centers. Each of the Company's eye care centers includes one or more opticians and a Company-managed optometric office, and provides access to a Company-affiliated ophthalmologist. The Company's LVC centers are established in association with hospitals, ambulatory surgery centers and private practice facilities, and include the Massachusetts Eye and Ear Infirmary, an affiliate of the Harvard Medical School, and the Medical College of Pennsylvania/Hahnemann University. The Company's objective is to become the leading integrated provider of eye care products and services in select, regional markets. The principal elements of the Company's business strategy are to (i) acquire and integrate the assets of regional multi-site eye care centers and the practices of eye care professionals (optometrists and ophthalmologists), (ii) employ or enter into management services contracts with these professionals, (iii) establish LVC centers, (iv) expand strategic affiliations with select hospitals, ambulatory surgery centers and eye care professionals and (v) continue to market comprehensive and competitively priced eye care programs to leading HMOs, insurance companies and other third party payors in the Company's regional markets: Acquire and Integrate Assets of Eye Care Centers and Professional Practices. Acquiring and integrating the assets of eye care centers and professional practices provide the Company with significant and direct access to persons with vision disorders and sight-threatening conditions, thereby establishing a broad patient base for the Company's integrated eye care strategy. The Company estimates that opticians, optometrists, retail optical chains and multi-site eye care centers are the primary vision care providers to approximately 82% of the population with common vision disorders. The Company's eye care centers sell products and services to approximately 125,000 customers annually and, through its eye care centers, the Company maintains an updated customer database of approximately 350,000 individuals who have utilized the services of the Company and its affiliated eye care professionals over the last few years. Enter into Management Services Contracts with Eye Care Professionals. By entering into management services contracts with eye care professionals, the assets of whose practices the Company has acquired, the Company earns revenues from the management, administrative, marketing and other services it provides to such affiliated professionals. These professionals, in turn, benefit from the services and resources provided by the Company's MSOs. Establish LVC Centers. By establishing LVC centers in association with hospitals, ambulatory surgery centers, ophthalmologic practice groups and ophthalmologists, the Company is able to provide LVC services to its eye care center customers and the patients of its affiliated eye care professionals. In addition, under the Company's Open Access Plan(TM), the Company's laser systems are made available for use by all ophthalmologists in the local market; thus the Company earns fees from such non-affiliated professionals' use of the Company's laser systems to perform LVC. INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED MAY 29, 1996 PROSPECTUS LOGO 1,600,000 SHARES SIGHT RESOURCE CORPORATION COMMON STOCK All of the shares of common stock, par value $.01 per share (the "Common Stock"), offered hereby are being sold by Sight Resource Corporation (the "Company"). The Common Stock is quoted on the Nasdaq National Market under the symbol "VISN". On May 28, 1996, the last reported sales price of the Common Stock was $7.00 per share. ------------------------ THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 8. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. <TABLE> <S> <C> <C> <C> - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- UNDERWRITING PRICE TO DISCOUNTS PROCEEDS TO PUBLIC AND COMMISSIONS(1) COMPANY(2) - ------------------------------------------------------------------------------------------------- Per Share................... $ $ $ - ------------------------------------------------------------------------------------------------- Total(3).................... $ $ $ - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- </TABLE> (1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses payable by the Company estimated to be approximately $616,000 ($678,400 if the Underwriter's over-allotment option is exercised in full), including the Underwriter's nonaccountable expense allowance. See "Underwriting." (3) The Company has granted the Underwriters a 45-day option to purchase up to 240,000 additional shares of Common Stock on the same terms and conditions as the Common Stock offered hereby solely to cover over-allotments, if any. If such over-allotment option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. ------------------------ The Common Stock is being offered by the Underwriters as set forth under "Underwriting" herein (the "Offering"). It is expected that delivery of certificates representing the shares of Common Stock offered hereby will be made at the offices of Commonwealth Associates at 733 Third Avenue, New York 10017, on or about , 1996. ------------------------ COMMONWEALTH ASSOCIATES The date of this Prospectus is , 1996 Expand Strategic Affiliations. The Company intends to both expand its existing LVC center strategic affiliations and enter into new strategic affiliations with health care providers, including hospitals, ambulatory surgery centers, ophthalmologic practice groups and ophthalmologists. The Company's goals in expanding its strategic affiliations are to broaden its service capabilities and afford the Company, for itself and on behalf of its affiliated eye care professionals, significant opportunities for cross- referrals and volume contracting with third party payors and their intermediaries. Market Eye Care Programs to Third Party Payors. The Company intends to build on its existing managed care contracts and integrated eye care strategy to market comprehensive and competitively priced eye care service programs to leading HMOs, insurance companies and other third party payors in the Company's regional markets. Approximately 40 million Americans currently receive eye care benefits via third party payor programs. Through its integrated approach to eye care, the Company believes that it offers a complete range of eye care products and services at competitive cost; consequently, payors benefit from contracting with the Company's networks of integrated and efficient providers. LVC STRATEGY. The Company has established a model for the delivery of LVC services. The Company's LVC strategy is based upon (i) generating and controlling patient flow, (ii) delivering LVC through eye care centers and (iii) promoting cooperation with local ophthalmologists and optometrists through the Company's Open Access Plan. In October 1995, the U.S. Food and Drug Administration (the "FDA") approved the use of ophthalmic excimer lasers to correct nearsightedness. In FDA-required clinical trials involving the treatment and subsequent follow up, studies found that one year after treatment 98.8% of treated eyes were corrected to 20/40 or better without eyeglasses or contact lenses, and 80.5% were 20/20 or better without eyeglasses or contact lenses. Industry studies indicate that 60 to 70 million Americans are nearsighted and that more than 90% of these people have a refractive disorder that falls within the LVC treatment parameters approved by the FDA. Industry sources conservatively estimate that an aggregate of approximately four million LVC procedures for nearsighted patients will be performed in the U.S. by the year 2000, resulting in a potential annual market in excess of $1 billion in the year 2000. In addition, LVC for farsightedness and astigmatism is currently undergoing FDA-required clinical testing. Consistent with the Company's strategy to provide a complete range of eye care services, as new technologies or procedures are approved for refractive correction, the Company intends to incorporate these technologies and procedures into the services provided by the Company. ACQUISITION STRATEGY. The Company also intends to continue its acquisition program to expand the number of eye care centers which it owns and operates and the number of eye care professionals whose business the Company owns or manages or with whom the Company has a strategic affiliation. Eye care products and services in the U.S. are delivered through a fragmented system of local providers, including approximately 65,000 opticians, 31,000 optometrists and 16,500 ophthalmologists. The Company believes that approximately $20 billion is annually spent on eye care products and services, including eyeglasses, contact lenses and professional eye care services. Within this large and fragmented market, the Company believes that significant opportunities exist (i) to participate in the consolidation of multi-site eye care centers, (ii) to enter into management services and other agreements with eye care professionals and (iii) to provide technologically advanced services, such as LVC. Acquisitions in existing markets (a) permit the Company to effect economies of scale and realize other operating efficiencies, (b) provide the Company with the opportunity to expand its patient base and revenues without a proportionate increase in administrative costs and (c) permit the Company to strategically complement existing operations. For example, the Company's centralized optical laboratory and distribution center has the capacity to service additional multi-site eye care centers. The Company believes that it will be an attractive acquiror to owners of independent multi-site eye care centers and ophthalmic and optometric practices because of the Company's (i) fee structure, which allows owners and professionals to participate in the cost efficiencies and revenue growth realized by the affiliated centers and practices and (ii) transaction structure, which permits owners and professionals to become stockholders of the Company, thus permitting ownership liquidity and alignment of the interests of the owners and professionals with the Company's business strategy. The Company believes that its integrated approach to eye care provides significant advantages, benefits and opportunities to patients, providers and payors. Patients benefit from the convenience of eye care products and services delivered or accessed efficiently at a single location. Eye care professionals benefit from the supplemental management and administrative services and resources provided by the Company, permitting them to continue to dedicate their time and effort to their patients and professional practices. Payors benefit from the Company's ability to provide a complete range of eye care products and services in select regional markets at lower cost. The Company's executive offices are located at 67 South Bedford Street, Burlington, Massachusetts 01803 and its telephone number is (617) 229-1100. THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Company.......... 1,600,000 shares Common Stock Outstanding before the Offering................................... 6,346,715 shares(1) Common Stock to be Outstanding after the Offering................................... 7,946,715 shares(1)(2) Use of Proceeds.............................. Working capital and general corporate purposes, including acquisitions. Nasdaq National Market Symbols............... Common Stock -- VISN Warrants -- VISNZ Risk Factors................................. The Common Stock offered hereby involves a high degree of risk. Prospective investors should carefully consider the factors discussed under the heading "Risk Factors." <FN> - --------------- (1) Excludes (i) 2,472,100 shares of Common Stock issuable upon the exercise of 2,472,100 Warrants (defined below) outstanding as of the date of this Prospectus, (ii) 215,000 shares of Common Stock included in, and 215,000 shares of Common Stock issuable upon the exercise of warrants included in, Units (defined below) issuable in connection with the exercise of Unit Purchase Options (defined below), (iii) 85,000 shares of Common Stock issuable upon exercise of, and 85,000 shares of Common Stock issuable upon the exercise of warrants issuable upon exercise of, the IPO Representative's Warrants (defined below), (iv) 85,000 shares of Common Stock issuable upon the exercise of the Class A Warrants (defined below) and (v) 875,333 shares of Common Stock issuable upon the exercise of stock options outstanding as of the date of this Prospectus (the "Outstanding Stock Options"). See "Description of Securities." (2) Excludes 160,000 shares of Common Stock included in the Representative's Warrants. See "Description of Securities" and "Underwriting."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000897729_trump_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000897729_trump_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following is a summary of certain information contained elsewhere in this Prospectus and is qualified in its entirety by the more detailed information and financial statements, and notes thereto, contained elsewhere in this Prospectus. Unless otherwise indicated, (i) the term "Trump AC" as used in this Prospectus includes Trump AC and its subsidiaries and gives effect to the Merger Transaction, and (ii) the information in this Prospectus assumes no exercise of the Underwriters' over-allotment option in connection with the Stock Offering. Prospective investors are urged to read this Prospectus carefully in its entirety. This Prospectus contains forward-looking information that involves risks and uncertainties and such information is subject to the assumptions set forth in connection therewith and the information contained herein. TRUMP ATLANTIC CITY ASSOCIATES Upon consummation of the Merger Transaction, Trump Atlantic City Associates ("Trump AC"), an indirect subsidiary of Trump Hotels & Casino Resorts, Inc., will own and operate two "Four Star" Atlantic City casino hotels (the "Atlantic City Properties"): the Trump Taj Mahal Casino Resort (the "Taj Mahal") and Trump Plaza Hotel and Casino ("Trump Plaza"). The Taj Mahal is currently Atlantic City's largest casino, and Trump Plaza will have the largest casino in Atlantic City upon completion of its ongoing expansion program (the "Trump Plaza Expansion"). Through its ownership of two successful land-based casino hotels, Trump AC will have a leading presence in the growing Atlantic City market, which, in terms of gaming revenues, has demonstrated a ten-year compound annual growth rate of approximately 5.8% and a growth rate of approximately 9.5% for calendar year 1995 versus calendar year 1994. After giving effect to the Merger Transaction and the Trump Plaza Expansion, Trump AC will have approximately one-quarter of Atlantic City's casino square footage, slot machines, table games and hotel room inventory. In addition, the combination of the Taj Mahal with Trump Plaza's existing operations will also provide opportunities for operational efficiencies, economies of scale and other benefits from the expertise and experience of management at the two operating entities. Trump AC also plans to undertake an expansion program at the Taj Mahal designed to increase its hotel room inventory and casino floor space and expand its entertainment and parking facilities (the "Taj Mahal Expansion"). Management believes Trump AC will benefit from the following factors: . LEADING ATLANTIC CITY FACILITIES. Upon consummation of the Trump Plaza Expansion, Trump AC will own and operate the two largest casino hotel properties in Atlantic City, both of which are strategically located on The Boardwalk. Trump AC believes that the Atlantic City Properties' prime locations, reputations for high quality amenities and first-class customer service and targeted marketing strategies are ideally suited to capitalize on the expected continued growth in the Atlantic City gaming market. Management believes that its leading size and market share in Atlantic City following the consummation of the Merger Transaction will provide it with a competitive advantage in marketing the Atlantic City Properties, particularly to large convention groups and multi-day stay destination resort visitors. . ATLANTIC CITY PROPERTIES EXPANSION. Trump AC has nearly completed the Trump Plaza Expansion and is developing the plans for the Taj Mahal Expansion, which projects will increase the Atlantic City Properties' gaming space and hotel room capacity, allowing Trump AC to meet both existing demand and the anticipated demand from the increased number of available rooms and infrastructure improvements that are currently under development to enhance further the "vacation destination appeal" of Atlantic City. The following table profiles Trump AC's casino and hotel capacity following the planned expansions at the Atlantic City Properties: <TABLE> <CAPTION> TRUMP TAJ TRUMP PLAZA TAJ MAHAL PLAZA(a) MAHAL EXPANSION(b) EXPANSION(c) TOTAL -------- ------- ------------ ------------ ------- <S> <C> <C> <C> <C> <C> Casino square footage... 75,395 120,000(d) 64,158 60,000 319,553 Slot machines........... 2,368 3,550 1,898 2,500 10,316 Table games............. 97 169 44 -- 310 Hotel rooms............. 555 1,250 849 800 3,454 </TABLE> -------------------- (a) Includes the 2,000 square foot area connecting the existing facility with Trump Plaza East (as defined) and the 75 slot machines included in this area. (b) Includes the 15,000 square foot casino with 400 slot machines and 13 table games and 326 hotel rooms which have already opened at Trump Plaza East. The remaining 14 hotel rooms and suites at Trump Plaza East are scheduled to be opened by the end of April 1996. Also reflects nine super suites scheduled to open early in 1997 and not otherwise included in the "Trump Plaza Expansion." The remaining portion of the Trump Plaza Expansion, Trump World's Fair (as defined), is scheduled to open in the second quarter of 1996. (c) Plans for the Taj Mahal Expansion, scheduled to be completed in phases from the first quarter of 1997 through early 1998, are subject to modification. (d) Excludes a 12,000 square foot poker, keno and race simulcasting room which contains 64 poker tables. . OPERATING SYNERGIES. Trump AC intends to capitalize on the opportunities for efficiencies which can be generated by integrating certain operations of the Atlantic City Properties, which previously have been operated separately. Management has identified cost savings which management estimates, by the end of the second year following the Merger Transaction, to be approximately $18-20 million on an annual basis, although no assurance may be made as to the amount which will be realized. Management believes that it will be able to consolidate certain departments at the Atlantic City Properties, reduce general and administrative expenses through possible personnel reductions and the consolidation of certain marketing efforts, and reduce operating costs through efficiencies that are expected to result from the combined purchasing power of the Atlantic City Properties. . THE "TRUMP" NAME. Trump AC capitalizes on the widespread recognition of the "Trump" name and its association with high quality amenities and first-class service. To this end, Trump AC provides a broadly diversified gaming and entertainment experience consistent with the "Trump" name and reputation for quality. ATLANTIC CITY PROPERTIES Trump Plaza. Management believes that Trump Plaza's "Four Star" Mobil Travel Guide rating and "Four Diamond" American Automobile Association rating reflect the high quality amenities and services that Trump Plaza provides to its casino patrons and hotel guests. These amenities and services include a broad selection of dining choices, headline entertainment, deluxe accommodations, tennis courts and swimming and health spa facilities. Trump Plaza Expansion. Management is seeking to enhance further Trump Plaza's position as an industry leader through the Trump Plaza Expansion, scheduled to be completed in the second quarter of 1996, which involves expanding and renovating Trump Plaza's gaming space, increasing its hotel capacity and constructing retail operations and entertainment venues. As part of the Trump Plaza Expansion, management has renovated and integrated into Trump Plaza a hotel located adjacent to Trump Plaza's main tower ("Trump Plaza East"), the grand opening for which was held on February 16, 1996, and is in the process of renovating and integrating the former Trump Regency Hotel ("Trump World's Fair"), located on The Boardwalk adjacent to the existing Atlantic City Convention Center, which is next to Trump Plaza. In February 1996, Trump Plaza East opened the 15,000 square foot Ocean View Casino and Bar, and has to date opened 326 of its 349 hotel rooms. The Ocean View Casino and Bar is the first gaming room in Atlantic City to combine a casino, bar and entertainment area and features a 70-foot long bar with 27 bar- top slot machines, live entertainment and a 58 square foot video wall. With its high ceilings and windows overlooking the Atlantic Ocean and The Boardwalk, Trump Plaza is creating a new and exciting entertainment environment for its casino patrons. Upon completion of the Trump Plaza Expansion, Trump Plaza's casino floor space will be the largest in Atlantic City, increasing from approximately 75,000 square feet to an aggregate of approximately 140,000 square feet, housing a total of approximately 4,270 slot machines and 140 table games. Trump Plaza's hotel capacity will increase to a total of 1,404 guest rooms from 555 guest rooms, making Trump Plaza's guest room inventory one of the largest in Atlantic City. Management believes the increased hotel capacity as a result of the Trump Plaza Expansion will better enable Trump Plaza to meet demand and accommodate its casino guests, as well as to host additional and larger conventions and corporate meetings. The following table details plans for the Trump Plaza Expansion: <TABLE> <CAPTION> TRUMP TRUMP PLAZA TRUMP WORLD'S FACILITY(a) PLAZA EAST(b) FAIR(c) TOTAL ----------- ------------- ------- ------ <S> <C> <C> <C> <C> Casino square footage................. 75,395 14,886 49,272 139,553 Slot machines......................... 2,368 405 1,493 4,266 Table games........................... 97 12 32 141 Hotel rooms........................... 555 349 500 1,404 </TABLE> - -------------------- (a) Includes the 2,000 square foot area connecting the existing facility with Trump Plaza East (as defined) and the 75 slot machines included in their area. (b) The casino and 326 hotel rooms have already opened. The remaining 14 hotel rooms and suites are scheduled to be opened by the end of April 1996. Also reflects nine super suites scheduled to open early in 1997 and not otherwise included in the "Trump Plaza Expansion." (c) Scheduled to open in the second quarter of 1996. The Trump Plaza Expansion will increase Trump Plaza's prime central frontage on The Boardwalk to nearly a quarter of a mile. Furthermore, Trump World's Fair will add approximately 50,000 square feet of casino floor space, approximately 16,000 of which will be directly accessible from The Boardwalk, and Trump Plaza has been reconfigured to provide a new entranceway to Trump Plaza directly off the Atlantic City Expressway. Management believes that the construction of a new convention center and "tourist corridor" linking the new convention center with The Boardwalk will enhance the desirability of Atlantic City generally and, as a result of Trump Plaza's central location, will benefit Trump Plaza in particular. Trump Plaza's location on The Boardwalk at the end of the main highway into Atlantic City makes it highly accessible for both "drive-in" and "walk-in" patrons. The Taj Mahal. The Taj Mahal currently has the largest casino in Atlantic City and has ranked first among all Atlantic City casinos in terms of total gaming revenues, table revenues and slot revenues since it commenced operations in 1990. The Taj Mahal capitalizes on the widespread recognition and marquee status of the "Trump" name and its association with high quality amenities and first-class service as evidenced by its "Four Star" Mobil Travel Guide rating. Management believes that the breadth and diversity of the Taj Mahal's casino, entertainment and convention facilities and its status as a "must-see" attraction will enable the Taj Mahal to benefit from the expected continued growth in the Atlantic City market. In order to enhance its status as a "must- see" attraction, the Taj Mahal has recently signed agreements for the development of Hard Rock Cafe(R), Rainforest Cafe(R) and All Star Cafe(R) themed restaurants on the property. In addition, in order to continue to attract high end players, the Taj Mahal has recently opened the Dragon Room, a new Asian themed table game area, and plans to open the Sultan's Palace, a new high-end "slots only" lounge and private club in the second quarter of 1996. The Taj Mahal Expansion. The Taj Mahal Expansion is scheduled to be completed in phases from the first quarter of 1997 through early 1998. The Taj Mahal Expansion, the plans for which are subject to modification, involves the construction of an approximately 2,000 space expansion of the Taj Mahal's existing self-parking facilities and a new 10,000 seat arena adjacent to the Taj Mahal, each scheduled to be completed in the first quarter of 1997; the conversion of the current site of the Mark Etess Arena into a new 60,000 square-foot circus-themed casino with 2,500 slot machines, scheduled to be completed in mid-1997; and the construction of an approximately 800 room hotel tower adjacent to the Taj Mahal's existing hotel tower, which is scheduled to be completed early in 1998. THE ATLANTIC CITY MARKET. The Atlantic City gaming market has demonstrated continued growth despite the recent proliferation of new gaming venues across the country. The 12 casino hotels in Atlantic City generated approximately $3.75 billion in gaming revenues in 1995, an approximately 9.5% increase over 1994 gaming revenues of approximately $3.42 billion. During 1995, all 12 casinos experienced increased gaming revenues compared to 1994. The approximately $3.75 billion of gaming revenues produced by the 12 Atlantic City casino hotels in 1995 exceeded the approximately $3.12 billion of gaming revenues produced by the 18 largest (based on net revenues) casino hotels on the Las Vegas Strip for the same period, even though the 12 Atlantic City casino hotels have less than one-quarter the number of hotel rooms of such Las Vegas Strip casino hotels. Management believes, however, that given current high occupancy levels, future casino revenue growth in the Atlantic City market will be dependent in part upon expansion in hotel capacity. Due principally to an improved regulatory environment, the general improvement of economic conditions in 1993, 1994 and 1995 and existing high occupancy rates, significant investment in the Atlantic City market has been initiated and/or announced. For example, Trump Plaza will be located at the end of the planned "tourist corridor" featuring an entertainment and retail complex that will link The Boardwalk with downtown Atlantic City. In addition, The New Jersey Casino Redevelopment Authority ("CRDA") is currently overseeing the development of a new convention center. When completed, the approximately $250 million convention center will be the largest exhibition space between New York City and Washington, D.C. The new convention center, currently scheduled to open in January 1997, will be located at the base of the Atlantic City Expressway. Trump Plaza is adjacent to the existing Atlantic City Convention Center and will also be one of the closest casino hotels to the new convention center, which as currently planned would hold approximately 500,000 square feet of exhibit and pre-function space, 45 meeting rooms, various food-service facilities and a 1,600-car underground parking garage. An additional planned infrastructure improvement is the State of New Jersey's approximately $125 million capital plan to upgrade and expand the Atlantic City International Airport. Trump AC believes that the Taj Mahal's and Trump Plaza's positions as leading Atlantic City attractions will enable them to attract a large portion of any increase in the number of potential casino hotel patrons. THE FIRST MORTGAGE NOTE OFFERING ISSUERs..................... Trump AC and Trump AC Funding as joint and several obligors. PRINCIPAL AMOUNT............ $1,100,000,000 aggregate principal amount of % First Mortgage Notes due 2006. MATURITY.................... April , 2006. INTEREST.................... % per annum, payable in cash, semi-annually in arrears, calculated on the basis of a 360-day year consisting of twelve 30-day months. INTEREST PAYMENT DATES...... April and October , commencing October , 1996. GUARANTORS.................. The First Mortgage Notes will be fully and unconditionally guaranteed on a joint and several, senior secured basis by Plaza Associates, Taj Associates, TTMC and each other present and future majority owned or controlled subsidiary (other than "unrestricted subsidiaries," a "Subsidiary") of Trump AC, other than Trump AC Funding (which is one of the Issuers). OPTIONAL REDEMPTION......... The First Mortgage Notes will be redeemable in cash at the option of the Issuers, in whole or in part, at any time on or after , 2001 at the redemption prices set forth herein, together with accrued and unpaid interest through the redemption date. In addition, the First Mortgage Notes are subject at any time to redemption in accordance with an order of a governmental authority having jurisdiction over Taj Associates or Plaza Associates' casino licenses. SINKING FUND................ None. CHANGE OF CONTROL........... Upon the occurrence of a Change in Control (as defined in "Description of the First Mortgage Notes--Certain Covenants--Repurchase of the First Mortgage Notes at the Option of the Holder Upon a Change in Control"), each holder of First Mortgage Notes may require Trump AC to repurchase such holder's First Mortgage Notes at 101% of the principal amount thereof, together with accrued and unpaid interest to the date of repurchase. SECURITY.................... The First Mortgage Notes will be secured by one or more mortgages (the "Mortgage") representing a first lien and security interest (subject to approximately $3.0 million of indebtedness secured by mortgages) on substantially all of the assets comprising Trump Plaza and the Taj Mahal, including the Specified Parcels (as defined in "--Use of Proceeds") and related facilities. The security interest held by a collateral agent on behalf of, among others, the Trustee also includes assignments of leases and rents and operating assets and encumbers furniture, fixtures, machinery and equipment. However, THCR Holdings' direct and indirect equity interests in Trump Atlantic City and its subsidiaries, including Plaza Associates and Taj Associates, will be pledged exclusively for the benefit of the holders of the 15 1/2% Senior Secured Notes due 2005 issued by THCR Holdings and its subsidiary, Trump Hotels & Casino Resorts Funding, Inc. ("THCR Funding") (the "Senior Notes"). NON-RECOURSE................ No direct or indirect stockholder, partner, employee, officer or director, as such, past, present or future, of either the Issuers, any Guarantor or any successor entity shall have any personal liability in respect of the obligations of the Issuers or any Guarantor under the indenture under which the First Mortgage Notes will be issued (the "First Mortgage Note Indenture"), the First Mortgage Notes or the guarantees thereof by reason of the status as such stockholder, partner, employee, officer or director except to the extent such party is an Issuer or Guarantor. CERTAIN COVENANTS........... The First Mortgage Note Indenture will contain certain covenants which, among other things, will (i) limit Trump AC's and its Subsidiaries' ability to incur certain indebtedness unless, among other things, Trump AC's Consolidated Coverage Ratio (as defined) for the four fiscal quarters immediately preceding such event, taken as one period, would have been at least equal to the ratios set forth in the First Mortgage Note Indenture, subject to certain exceptions; (ii) limit the making of certain dividends, distributions and other restricted payments by Trump AC and its Subsidiaries, (iii) limit the lines of business in which Trump AC and its Subsidiaries may engage to those relating to the casino hotel business in AC; (iv) limit the existence of certain liens on assets of Trump AC and its Subsidiaries; (v) restrict the use of proceeds from certain asset sales by Trump AC and its Subsidiaries; (vi) limit transactions by Trump AC and its Subsidiaries with affiliates of Trump AC (other than wholly-owned Subsidiaries); (vii) restrict Trump AC and its Subsidiaries from engaging in certain leasing activities; (viii) limit the Issuers' ability to merge, sell or consolidate; (ix) limit the obligations of Trump AC Funding to those incident to its obligations under the First Mortgage Note Indenture; (x) prohibit Trump AC and its Subsidiaries from paying services fees under a certain services agreement with a corporation wholly owned by Trump, or any expenses relating thereto, under certain circumstances, including if a Default (as defined) or an Event of Default (as defined) has occurred and is continuing; (xi) prohibit Trump AC and its Subsidiaries from paying any other amounts pursuant to other management, services or similar agreements with Trump; (xii) require the maintenance of insurance; and (xiii) limit the issuing or selling of equity interests by any of Trump AC's Subsidiaries (except to Trump AC or a wholly-owned Subsidiary thereof). EVENTS OF DEFAULT........... Events of Default will include (i) default in payment of interest when due for a period of 30 days; (ii) default in payment of principal or premium, if any, when due; (iii) default in the performance or breach of certain specified covenants, including those relating to merger, consolidation or sale of assets, failure to make or consummate a Change of Control Offer (as defined) or an Asset Sale Offer (as defined) as required; (iv) default in the performance or breach of certain other covenants of the Issuers (other than those specifically covered elsewhere in the First Mortgage Note Indenture) for 30 days after notice; (v) certain events of bankruptcy, insolvency or reorganization relating to the Issuers or significant subsidiaries, which, if involuntary, continue for 60 days, (vi) revocation, suspension or loss of certain permits resulting in a cessation of a substantial portion of the operations of Trump Plaza or the Taj Mahal for more than 90 consecutive days; (vii) acceleration prior to the maturity of certain indebtedness or the default in the payment when due of certain indebtedness of Trump AC or its subsidiaries; (viii) except as permitted by the First Mortgage Note Indenture or the First Mortgage Notes, the cessation of any guarantee in any material respect or the finding by any judicial proceeding that the guarantee is unenforceable or invalid in any material respect or the denial or disaffirmation by any Guarantor of its obligations under its guarantee; and (ix) certain events of default under the documents governing the Mortgage (as defined). An Event of Default under the First Mortgage Note Indenture could permit acceleration of the First Mortgage Notes and acceleration of certain other existing or future indebtedness of the Issuers and their affiliates under other instruments that may contain cross-acceleration or cross-default provisions. See "Risk Factors--Restrictions on Certain Activities."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000898148_lundgren_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000898148_lundgren_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED IN THIS PROSPECTUS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THE COMPANY Lundgren Bros. Construction, Inc. ("Lundgren" or the "Company") is engaged in the interrelated activities of land development and the design, construction and sale of detached single family homes in the Minneapolis and St. Paul, Minnesota (the "Twin Cities") metropolitan area. The Company maintains an inventory of potential home lots by controlling undeveloped land through options, contingent purchase agreements, joint ventures, partnerships and other contractual relationships with the landowners (referred to herein collectively as "Land Acquisition Agreements"). Upon obtaining the appropriate regulatory approvals and zoning changes, and dependent on market conditions, the Company develops the undeveloped land into finished lots for residential subdivisions, primarily for its own use in the sale of single family homes. The Company also periodically options or purchases finished lots from other developers. Since its incorporation in 1970, the Company and its affiliates have developed 2,549 lots. On August 1, 1996, the Company controlled 16 parcels of land under Land Acquisition Agreements for future development of an estimated 1,848 lots. The Company's land development strategy is to control prime property for residential development two to five years in advance of actual development, using Land Acquisition Agreements structured to require limited initial investment by the Company. Management believes that this strategy minimizes the risk of the Company owning too much land at any one time, but allows the Company to control key sites for future development. See "Business -- Land Acquisition." Since inception, the Company has built and sold over 2,330 single family homes. The Company sells its homes primarily through its own staff of sales personnel, although it also utilizes local realtors. In 1995, the Company was the fourth largest builder in the Twin Cities metropolitan area, based on total dollar volume of building permits issued, and is the only one of the top five builders in the Twin Cities metropolitan area whose stock is privately held. The Company builds custom homes and homes from standard plans at prices typically ranging from $190,000 to $700,000 for both the house and lot, with an average selling price of approximately $336,000 for the first six months of 1996. The Company also designs and builds residential remodeling projects through its remodeling division. Additionally, Lundgren's wholly-owned subsidiary, Brush Masters, Inc. ("Brush Masters"), provides painting and staining services to the Company, as well as to other residential building contractors in the Twin Cities metropolitan area. The Company closed the sales of 80 homes in the first six months of 1996 and as of June 30, 1996, had purchase agreements for the sale of 86 homes, representing approximately $29.8 million in sales. In the first six months of 1995, the Company had closed the sales of 77 homes and as of June 30, 1995, had contracts for the sale of 86 homes, representing approximately $26.4 million in sales. The Company markets its homes to middle and upper income professionals and executives. The Company's marketing efforts emphasize the community atmosphere of its residential subdivisions and those characteristics it believes are distinctive to Lundgren-built homes: desirable designs, quality construction, competitive prices and special customer service, before, during and after the sale of a home. The Company was incorporated in Minnesota in October 1970. Its principal offices are located at 935 East Wayzata Boulevard, Wayzata, Minnesota 55391, and its telephone number is (612) 473-1231. THE OFFERING Debentures $3,000,000 aggregate principal amount of Senior Subordinated Debentures, Series 11%, due October 1, 2004. The Debentures will be issued pursuant to an Indenture (the "Indenture") between the Company and National City Bank (the "Trustee"). The Debentures will be issuable only in fully registered form in denominations of $1,000 each or any integral multiple thereof. A minimum purchase of $2,000 is required. See "Description of Debentures." Interest Rate The Debentures will bear interest at the rate of 11% per annum. Interest Payment Dates Interest will be payable quarterly on January 1, April 1, July 1 and October 1 of each year, commencing as to each Debenture on the first of such dates to occur after issuance of such Debenture. Interest on the Debentures will accrue from October 18, 1996 or, with respect to Debentures sold after a quarterly interest payment date, the most recent quarterly interest payment date. Redemption of Lundgren, at its option, may redeem Debentures all or a portion of the Debentures at any time beginning October 31, 1998 upon at least 30 days' written notice at the redemption prices set forth herein. There is no sinking fund requiring payments of principal prior to maturity. In addition, the Debentures are subject to mandatory redemption in certain circumstances, including a Change of Control, as defined in the Indenture. Repayment Upon Death Under certain circumstances, Lundgren will repay up to $25,000 in aggregate principal amount of Debentures at par upon the death of a Debentureholder. The Company's obligation to make such repayment will be limited to an aggregate maximum of $200,000 per calendar year. See "Description of Debentures." Subordination and Seniority The Debentures are subordinated to all of Lundgren's existing and future Senior Indebtedness. Lundgren's Senior Indebtedness aggregated approximately $32.2 million at June 30, 1996. The Debentures will rank PARI PASSU with all Parity Indebtedness of the Company, including its Senior Subordinated Debentures, Series 10%, due 2003 (the "1993 Subordinated Debentures"), and will be senior in right of payment to any Subordinated Indebtedness. Subject to a maximum debt-to-equity ratio covenant, Lundgren is not prohibited from incurring, and will likely incur, additional Senior Indebtedness during the term of the Debentures. Capitalized terms used in this paragraph are defined in the Indenture pursuant to which the Debentures will be issued. See "Description of Debentures." Use of Proceeds The Company intends to use the net proceeds from the sale of the Debentures, estimated to be approximately $2,521,000 assuming all of the Debentures are sold, for general corporate purposes, including land acquisition, land development, construction of homes and working capital. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000899045_lamar_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000899045_lamar_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise provided herein, the "Company" refers to Lamar Advertising Company, together with its consolidated subsidiaries. Unless otherwise indicated, the information in this Prospectus (i) gives effect to the amendment and restatement of the Company's certificate of incorporation and by-laws and related actions regarding the restructuring of the Company's capital stock immediately prior to this Offering as more fully described below under "The Company" and (ii) assumes the Underwriters' over-allotment option is not exercised. THE COMPANY Lamar Advertising Company is one of the largest and most experienced owners and operators of outdoor advertising structures in the United States. It conducts a business that has operated under the Lamar name since 1902. As of April 30, 1996, the Company operated approximately 23,000 outdoor advertising displays in 13 southeastern, midwestern and mid-Atlantic states. In each of the Company's 33 primary markets, the Company believes that it is the only full-service outdoor advertising company serving such markets. The Company also operates the largest logo sign business in the United States. Logo signs are erected pursuant to state-awarded franchises on public rights-of-way near highway exits and deliver brand name information on available gas, food, lodging and camping services. The Company currently operates logo sign franchises in 12 of the 20 states which have a privatized logo sign program. In addition, the Company has executed an agreement to acquire the logo sign franchises in Tennessee and Kansas and has been awarded the logo sign franchise for the state of New Jersey. As of April 30, 1996, the Company maintained over 13,500 logo sign structures containing over 34,000 logo advertising displays under these franchises. The Company has recently expanded into the transit advertising business through the operation of displays on bus shelters, benches and buses in 7 of its 33 primary markets. For the twelve months ended October 31, 1995, the Company reported net revenues and operating income of $102.4 million and $26.9 million, respectively. For the six months ended April 30, 1996, the Company reported net revenues and operating income of $56.6 million and $14.0 million, respectively, compared to $50.0 million and $11.8 million, respectively, for the six months ended April 30, 1995. The Company's strategy is to be the leading provider of outdoor advertising in each of the markets it serves, with an emphasis on markets with a media industry ranking based on population between 50 and 250. Important elements of this strategy are the Company's decentralized management structure and its focus on providing high quality local sales and service. Through its local offices, the Company offers a full complement of outdoor advertising services coupled with local production facilities, management and account executives in order to be more responsive to specific local market demands. While maintaining its local focus, the Company seeks to expand its operations within existing and contiguous markets. The Company also pursues expansion opportunities, including acquisitions, in additional markets which the Company believes provide it with an opportunity to gain a leading revenue share. In the logo sign business, the Company's strategy is to maintain its position as the largest operator of logo signs in the U.S. by expanding through the addition of state logo franchises as they are awarded and through possible acquisitions. The Company may also pursue expansion opportunities in transit and other out-of-home media which the Company believes will enable it to leverage its management skills and market position. [COMPANY MAP -- OUTDOOR MARKETS AND LOGO STATES] IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A COMMON STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. Management believes that operating in small to medium-sized markets provides the Company with a diverse and reliable mix of local advertisers, geographic diversification, direct transactions which eliminate many agency commissions, rate integrity, stable real estate portfolios and an ability to package inventory effectively. Local advertising constituted over 81% of the Company's outdoor advertising net revenues in fiscal 1995, which management believes is higher than the industry average. The Company believes that the experience of its senior and local managers has contributed greatly to its success. Its regional managers have been with the Company, on average, for 24 years. The average tenure of the Company's 33 local managers is 11 years. In addition, each of the four regional managers and 30 of the 33 local managers began their careers with the Company as local sales executives. The Company emphasizes decentralized local management of operations with centralized support and financial and accounting controls. As a result of this local focus, the Company maintains an extensive local operating presence within its markets and employs a total of 120 local account executives. Local account executives are typically supported by additional local staff and have the ability to draw upon the resources of the central office and offices in other markets in the event that business opportunities or customers' needs support such allocation of resources. Outdoor advertising generated total revenues of approximately $1.8 billion in 1995, or approximately 1.1% of the total advertising expenditures in the United States, according to recent estimates by the Outdoor Advertising Association of America (the "OAAA"), the trade association for the outdoor advertising industry. This represents growth of approximately 8.2% over estimated total 1994 revenues and compares favorably to the growth of total U.S. advertising expenditures of approximately 7.7% during the same period. Outdoor advertising offers repetitive impact and a relatively low cost-per-thousand impressions compared to broadcast media, newspapers, magazines and direct mail marketing, making it attractive to both local businesses targeting a specific geographic area or set of demographic characteristics and national advertisers seeking mass market support. Outdoor advertising services have recently expanded beyond billboards to include a wide variety of out-of-home advertising media, including advertising displays in shopping centers, malls, airports, stadiums, movie theaters and supermarkets, as well as on taxis, trains, buses and subways. The OAAA estimates that total out-of-home advertising revenues, including traditional billboard advertising, exceeded $3.0 billion in 1995. As used in this Prospectus, the term "market" refers to the geographic area represented by the Fall 1995 Arbitron Radio Metro Market ranking, as determined by The Arbitron Company, which ranks, according to population of persons 12 years or older, the largest 261 markets in the U.S. -- from New York, NY (1) to Casper, WY (261). The Company believes that the Metro Market ranking is a standard measure of market size used by the media industry. The following table sets forth certain information regarding the Company's 33 primary outdoor advertising markets and the Company's logo sign franchises. THE COMPANY'S 33 PRIMARY OUTDOOR ADVERTISING MARKETS AND LOGO SIGN FRANCHISES(1) OUTDOOR ADVERTISING <TABLE> <CAPTION> NUMBER OF DISPLAYS(4) ------------------------------------------------------------ STATE/PRIMARY MARKET MARKET RANK(3) BULLETINS POSTERS NET REVENUES(5) - --------------------------------------------------------- -------------- --------- ------- --------------- (IN THOUSANDS) <S> <C> <C> <C> <C> LOUISIANA Baton Rouge............................................ 81 419 684 $ 7,280 Shreveport............................................. 126 268 730 3,389 Lafayette.............................................. 97 154 353 2,035 Lake Charles........................................... 202 189 285 1,915 Monroe................................................. 224 123 508 1,534 Alexandria............................................. 198 49 224 757 Houma(2)............................................... -- 40 164 -- ------ ----- ------- Total............................................ 1,242 2,948 16,910 TENNESSEE Nashville.............................................. 44 326 1,174 7,488 Knoxville.............................................. 69 694 896 7,171 Clarksville............................................ -- 98 357 1,533 ------ ----- ------- Total............................................ 1,118 2,427 16,192 FLORIDA Pensacola.............................................. 125 250 662 3,113 Lakeland............................................... 104 184 372 2,586 Fort Myers............................................. 77 133 297 2,153 Panama City............................................ 223 223 306 1,962 Tallahassee............................................ 167 121 302 1,908 Fort Walton............................................ 206 151 220 1,627 Daytona Beach.......................................... 93 54 339 1,456 ------ ----- ------- Total............................................ 1,116 2,498 14,805 ALABAMA Mobile................................................. 84 381 630 4,755 Montgomery............................................. 142 248 499 3,598 ------ ----- ------- Total............................................ 629 1,129 8,353 MISSISSIPPI Jackson................................................ 118 268 698 4,420 Gulfport............................................... 134 207 559 2,953 ------ ----- ------- Total............................................ 475 1,257 7,373 GEORGIA Savannah............................................... 153 344 604 3,307 Augusta................................................ 116 163 471 2,482 Albany................................................. 241 92 271 1,031 ------ ----- ------- Total............................................ 599 1,346 6,820 VIRGINIA Richmond............................................... 56 309 616 4,288 Roanoke................................................ 101 83 450 1,750 ------ ----- ------- Total............................................ 392 1,066 6,038 TEXAS Brownsville............................................ 63 204 873 2,577 Beaumont............................................... 127 204 308 2,165 Wichita Falls.......................................... 233 89 165 902 ------ ----- ------- Total............................................ 497 1,346 5,644 KENTUCKY Lexington.............................................. 105 117 507 3,127 WEST VIRGINIA Wheeling............................................... 212 261 551 2,626 COLORADO Colorado Springs....................................... 98 141 355 2,486 OHIO Dayton................................................. 52 3 529 1,960 ------ ----- ------- TOTAL.................................................... 6,590 15,959 $92,334 </TABLE> LOGO SIGN FRANCHISES <TABLE> <CAPTION> LOGO LOGO YEAR ADVERTISING YEAR ADVERTISING FRANCHISE AWARDED DISPLAYS(6) FRANCHISE AWARDED DISPLAYS(6) - ----------- ------- ----------- -------------- ------- ----------- <S> <C> <C> <C> <C> <C> Nebraska 1989 784 Georgia 1995 5,236 Oklahoma 1989 1,363 Minnesota(8) 1995 1,922 Utah 1990 1,463 South Carolina 1995 1,887 Missouri(7) 1991 7,619 Virginia 1995 4,748 Ohio 1992 5,447 Michigan 1996 --(9) Texas 1993 924 New Jersey 1996 --(9) Mississippi 1993 2,761 </TABLE> - --------------- (1) Includes additional or outlying markets served by the office in the applicable market. (2) Houma was established as a separate primary market in fiscal 1995, and, therefore, net revenues is not included. (3) Indicates the Fall 1995 Arbitron Radio Metro Market ranking within which the office is located, as determined by The Arbitron Company. The Company believes that the Metro Market ranking, which ranks, according to population of persons 12 years or older, the largest 261 markets in the U.S., is a standard measure of market size used by the media industry. Houma and Clarksville are not ranked. (4) The two standardized types of industry displays are bulletins and posters. See "Business -- Company Operations." The display count is as of October 31, 1995. (5) Represents net revenues for fiscal year ended October 31, 1995 attributable to each outdoor advertising market. These revenues, together with logo sign and transit advertising revenues and production revenue, comprise outdoor advertising net revenues shown in the Company's consolidated statements of earnings (loss). (6) Number of logo advertising displays as of April 30, 1996, which totals 34,154. (7) Franchise operated by a 66.7% owned partnership. (8) Franchise operated by a 95.0% owned partnership. (9) The Company was recently awarded the New Jersey and Michigan franchises, and, accordingly, no logo signs had been erected as of April 30, 1996. The Company's address is 5551 Corporate Boulevard, Baton Rouge, Louisiana 70808. Its telephone number is (504) 926-1000. THE OFFERING Class A Common Stock offered by the Company...................... 4,000,000 shares Class A Common Stock offered by the Selling Stockholders......... 735,000 shares Common Stock to be outstanding after the Offering............... 14,446,735 shares of Class A Common Stock 14,035,289 shares of Class B Common Stock 28,482,024 total shares of Common Stock Use of proceeds.................. $5 million for payment of contingent consideration in connection with certain previous common stock redemptions; $43.8 million to repay certain outstanding bank debt, contingent upon approval of amendments to the Company's Senior Note Indenture; and the remainder for general corporate purposes, including possible acquisitions and repayment of indebtedness. See "Use of Proceeds." Voting rights.................... The holders of the Class A Common Stock and the holders of the Class B Common Stock vote together as a single class (except as may be otherwise required by Delaware law) on all matters submitted to a vote of stockholders, with each share of Class A Common Stock entitled to one vote and each share of Class B Common Stock entitled to ten votes. Each share of Class B Common Stock converts automatically into one share of Class A Common Stock upon the sale or other transfer of such share of Class B Common Stock to a person or entity other than a Permitted Transferee (as defined under "Description of Capital Stock -- Common Stock"). Each class of Common Stock otherwise has identical rights. Proposed Nasdaq National Market Symbol.................. LAMR Dividend policy.................. The Company does not expect to pay dividends on the Common Stock in the foreseeable future. The Company's ability to pay dividends in the future to holders of the Common Stock is subject to limitations and prohibitions contained in certain debt instruments to which the Company is a party and to the rights of the holders of its preferred stock. See "Dividend Policy." SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA <TABLE> <CAPTION> SIX MONTHS ENDED APRIL 30, FISCAL YEAR ENDED OCTOBER 31, ----------------- ------------------------------------------------ 1996 1995 1995 1994 1993 1992 1991 ------- ------- -------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net revenues.............................. $56,645 $49,999 $102,408 $84,473 $66,524 $61,955 $62,262 Operating expenses: Direct advertising expenses............. 20,893 18,184 34,386 28,959 23,830 22,783 22,143 General and administrative expenses..... 14,695 13,243 27,057 24,239 19,504 18,225 17,703 Depreciation and amortization........... 7,028 6,768 14,090 11,352 8,924 8,881 8,826 Total operating expenses......... 42,616 38,195 75,533 64,550 52,258 49,889 48,672 Operating income.......................... 14,029 11,804 26,875 19,923 14,266 12,066 13,590 Interest expense.......................... 7,852 7,857 15,783 13,599 11,502 10,454 11,650 Earnings before income taxes and extraordinary item...................... 5,451 2,802 8,308 5,227 1,677 2,625 936 Income tax expense (benefit)(1)........... 2,190 (1,767) (2,390) (2,072) 476 270 207 Net earnings (loss)(2).................... 3,261 4,569 10,698 7,299 (653) 2,355 729 Net earnings (loss) applicable to common stock................................... 3,079 4,569 10,698 7,299 (653) 2,355 729 Earnings per common share before extraordinary item(3)................... $ .11 $ .14 $ .32 $ .21 $ .03 $ .07 $ .02 ======= ======= ======== ======= ======= ======= ======= Net earnings (loss) per common share(3)... $ .11 $ .14 $ .32 $ .21 $ (.02) $ .07 $ .02 ======= ======= ======== ======= ======= ======= ======= OTHER DATA: Operating cash flow(4).................... $21,057 $18,572 $ 40,965 $31,275 $23,190 $20,947 $22,416 Cash flows from operating activities(5)... 8,486 4,977 25,065 15,214 12,411 12,930 10,328 Cash flows from investing activities(5)... (18,403) (7,030) (17,817) (53,569) (10,064) (7,273) (4,236) Cash flows from financing activities(5)... 5,783 (2,855) (9,378) 37,147 6,802 (6,734) (5,133) Capital expenditures: Outdoor advertising..................... 2,676 2,628 6,643 4,997 2,374 1,695 1,847 Logos................................... 5,849 330 1,567 2,761 2,009 3,056 629 Number of outdoor advertising displays(6)............................. 23,209 22,555 22,547 22,369 17,659 17,835 18,829 Number of logo advertising displays(6).... 34,154 19,161 24,219 18,266 13,820 11,371 5,027 Cumulative logo sign franchises(6)(7)..... 12 8 11 7 7 5 4 </TABLE> <TABLE> <CAPTION> AS OF APRIL 30, 1996 --------------------------- ACTUAL AS ADJUSTED(8) -------- -------------- (DOLLARS IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................... $ 1,752 $ 55,522 Working capital............................. 1,164 54,934 Total assets................................ 142,360 196,130 Total long-term obligations................. 153,567 173,567 Stockholders' equity (deficit).............. (28,288) 5,482 </TABLE> - --------------- (1) The benefit of the Company's net operating loss carryforward was fully recognized as of October 31, 1995, resulting in the income tax expense shown for the six months ended April 30, 1996, compared to the income tax benefit for the same period in the prior year. (2) Includes, in 1993, an extraordinary loss on debt extinguishment, net of an income tax benefit, of $1.9 million. (3) After giving effect to the proposed stock split and subsequent exchanges discussed under "The Company." (4) "Operating Cash Flow" is defined as operating income before depreciation and amortization. It represents a measure which management believes is customarily used to evaluate the financial performance of companies in the media industry. However, operating cash flow is not a measure of financial performance under generally accepted accounting principles and should not be considered an alternative to operating income or net earnings as an indicator of the Company's operating performance or to net cash provided by operating activities as a measure of its liquidity. (5) Cash flows from operating, investing and financing activities are obtained from the Company's consolidated statements of cash flows prepared in accordance with generally accepted accounting principles. (6) As of the end of the period. (7) In May 1996, the Company was awarded the logo sign franchise for the state of New Jersey. (8) Adjusted for the Offering and the other matters discussed under "The Company;" does not give effect to the possible repayment of $43.8 million of outstanding bank debt. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000900029_source_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000900029_source_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements appearing elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus gives effect to a 1-for-2 reverse stock split effected on October 10, 1995 (the "Reverse Split"). Except as otherwise specified, (a) all references to Source or the Company include Source Media, Inc. and its wholly-owned subsidiary, IT Network, Inc. ("IT"), and (b) all references to Source's activities, results of operations or financial condition prior to June 23, 1995 relate to IT. "Dollars" and "$" refer to United States dollars, and "Cdn$" refers to Canadian dollars. Investors should carefully consider the information set forth under the heading "Risk Factors." THE ARRANGEMENT On November 13, 1996, Source entered into an agreement with Cableshare (the "Arrangement Agreement") to, in effect, acquire the outstanding voting stock of Cableshare that it and its subsidiaries did not already own. Pursuant to the Arrangement Agreement, Source acquired the balance of Cableshare's voting shares (the "Cableshare Common Shares") pursuant to a procedure known as a statutory arrangement (the "Arrangement"), which was subject to approval by the Ontario Court of Justice (General Division) (the "Ontario Court") pursuant to Section 182 of the Business Corporations Act (Ontario) (the "OBCA"). In general, the Arrangement involved a recapitalization of the Cableshare Common Shares pursuant to which the outstanding Cableshare Common Shares were exchanged, at the option of the holder thereof, either for shares of (i) a new class of Cableshare non-voting exchangeable shares, no par value per share (the "Exchangeable Shares") or (ii) common stock, $.001 par value per share, of Source ("Source Common Shares"), and Source and its subsidiaries became the owners of all of the outstanding voting stock of Cableshare. The holders of Exchangeable Shares have no rights to any assets of Cableshare except, on a redemption or retraction of the Exchangeable Shares or a liquidation of Cableshare or Source, to receive Source Common Shares and an amount equal to declared but unpaid dividends on such Exchangeable Shares. PLAN OF DISTRIBUTION Source Common Shares may be issued to holders of Exchangeable Shares as follows: (i) holders of Exchangeable Shares may at any time elect to retract such shares and exchange such shares for an equivalent number of Source Common Shares; (ii) at the times described below, Source may redeem such Exchangeable Shares by exchanging therefor an equal number of Source Common Shares; and (iii) upon liquidation of Source or Cableshare, holders of Exchangeable Shares may be required to, or may elect to, exchange such Exchangeable Shares for Source Common Shares. Holders of Exchangeable Shares are entitled at any time to retract any or all such Exchangeable Shares owned by them and to receive an equivalent number of Source Common Shares, plus an amount of cash equal to all declared but unpaid dividends on such Exchangeable Shares. The retraction will become effective on the date specified by the holder, which date must be not less than 10 business days nor more than 15 days after the request was received by Cableshare. Source has the overriding call right to purchase all of the Exchangeable Shares submitted for a purchase price equal to an equivalent number of Source Common Shares, plus an amount equal to all declared but unpaid dividends, if Source notifies Cableshare within five business days after receiving notice of the request for retraction. The holder may revoke the request at any time before the close of business on the business day preceding the date on which the Exchangeable Shares were to be retracted. On December , 2001, unless a later date has been specified by the Cableshare Board of Directors or an earlier date has been specified by the Cableshare Board of Directors after there are fewer than 350,000 Exchangeable Shares outstanding, Cableshare will redeem all of the then outstanding Exchangeable Shares in exchange for an equal number of Source Common Shares, plus an amount of cash equal to all declared but unpaid dividends on the Exchangeable Shares. Source will have the overriding right to purchase all of the then outstanding Exchangeable Shares for a purchase price equal to an equal number of Source Common Shares plus an amount equal to all declared but unpaid dividends on the Exchangeable Shares. Cableshare will provide at least 120 days' notice prior to such redemption. See "Plan of Distribution." THE COMPANIES SOURCE Source is a provider of information and services to consumers through the television and telephone. In September 1996, in Colorado Springs, Colorado, Source commercially introduced the Interactive Channel (SM), its on-line television programming service which provides a range of on-demand information and services to consumers utilizing cable television and telephone lines. Source utilizes Cableshare's patents and technologies embodied in an interactive television system to deliver the service to cable subscribers through the Interactive Channel. Source has announced distribution agreements for the Interactive Channel with three cable operators: Marcus Cable Company L.P., Cablevision Systems Corporation, and Century Communications Corporation. The Interactive Channel offers over 60 interactive programs including on demand local and national news, sports and weather, home shopping with companies such as J.C. Penney, Hallmark Connections and Waldenbooks, interactive Yellow Pages, television and movie guides, travel information and games. Since 1988, Source has been delivering audiotext information to consumers through the touch-tone telephone. Through its On-Line Telephone Business, Source provides consumers with information on demand, such as news, weather and sports, together with topical information for health, legal and other matters of consumer interest. Source's principal On-Line Telephone Business product, called the Network Guide, consists of approximately 800 specific information topics listed in a stand-alone insert generally bound in the front of Yellow Pages directories distributed by certain regional bell operating companies or their affiliates ("RBOCs") or other Yellow Pages publishers. Source's future performance will depend substantially on its ability to manage change in its businesses and operations, to respond to competitive developments, to upgrade its technologies and programming, to commercialize products and services incorporating such upgraded technologies and programming and to adapt its operational and financial control systems as necessary to respond to continuing changes in its businesses. See "Business of Source." CABLESHARE Cableshare has developed a patented interactive television technology that uses telephone and cable television to deliver interactive services to consumers. This interactive television technology is a multi-user, multimedia system designed to deliver pictures, text, graphics and audio on demand to a user's television set through existing coaxial cable television and telephone networks. This technology stores the video and audio presentations in a compressed digital form on a computer hard drive. Cableshare has licence agreements with Source and GTE Corporation. Cableshare has entered into an agreement with Source's subsidiary, IT, whereby Cableshare is developing a new interactive television system for Source's Interactive Channel. The new system is intended to utilize recent advances in technology, software, and computer systems in conjunction with Cableshare's patented process, and to utilize Cableshare's experience in engineering, software development, and systems integration to deliver an interactive television system that Cableshare believes is low cost, reliable, easy to maintain, user friendly, and application developer friendly. Cableshare believes this new system will have advantages over other interactive television and interactive information delivery systems. Cableshare designed the system for quick response to users' requests. Implementation should be less costly on a per household basis than under the former system. It should not require upgrades to function on broadband digital systems. If digital systems become available, Cableshare believes the system can be enhanced to provide features such as computer animation and full motion video. More than $35 million has been invested in development of this technology. Three patents have been issued to Cableshare in the United States and two patents in Canada covering the delivery of video presentation over cable and broadcast systems. Cableshare positions its interactive television technology as an ideal platform for delivering home shopping and information services. See "Business of Cableshare."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000900122_oravax_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000900122_oravax_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Financial Statements, including the Notes thereto, appearing elsewhere in this Prospectus. Certain terms are defined in the glossary beginning on page 60 of this Prospectus. This Prospectus contains estimates on market size, incidence of disease and medical costs that have been developed by the Company based on sources including medical journals, industry reports and literature distributed at medical seminars and conferences. Unless otherwise indicated, all information contained in this Prospectus assumes no exercise of the Underwriters' over-allotment option. THE COMPANY OraVax is a leader in the discovery and development of oral vaccines and non-injected antibody products for the prevention and treatment of diseases which infect the human body at its mucosal surfaces. Most bacterial and viral infections attack the body's mucosal tissues. These tissues include the linings of the gastrointestinal, respiratory and genitourinary tracts and the surface of the eyes, an exposed surface area of over 3,600 square feet in the average adult. Consequently, the largest part of the body's immune system is at the mucosal surface and forms an important first line of defense against disease. OraVax was founded to pursue drug discovery and development utilizing the mucosal immune system. OraVax believes oral and non-injected products that provide immunity at mucosal surfaces offer a number of important clinical and commercial advantages relative to injected antibody and vaccine products, including greater clinical efficacy, a higher level of safety, lower costs of administration and improved patient compliance. The Company has developed a portfolio of proprietary technologies and accumulated valuable expertise in the exploitation of the mucosal immune system for drug discovery and development. The Company's product candidates are designed to generate mucosal immunity utilizing a specialized class of antibodies, secretory IgA, found solely at the mucosal surfaces. These product candidates are intended to be delivered orally or through other non-injected delivery systems. In contrast, conventional antibody products and vaccines generate immunity principally based on IgG, a class of antibodies found in the bloodstream, and are usually delivered by injection. OraVax is currently pursuing three principal product development programs which target diseases that have high rates of incidence, compelling pharmaco-economic profiles and for which there are no adequate therapeutic or preventive antibody products or vaccines. These disease targets are viral pneumonia in children, peptic ulcer disease and antibiotic-associated diarrhea and colitis. The Company's principal product candidates are the following: - -------------------------------------------------------------------------------- <TABLE> <CAPTION> PRODUCT CANDIDATE INDICATION STATUS -------------------- ---------------------------------------------- ------------------------- <S> <C> <C> HNK20 antibody Prevention of viral pneumonia in children Phase 3 trials UreAB oral vaccine Prevention and treatment of peptic ulcers Phase 2 trials Prevention of antibiotic-associated diarrhea CdAB oral vaccine and colitis Preclinical development </TABLE> - -------------------------------------------------------------------------------- The Company's most advanced product candidate is the HNK20 antibody being developed to prevent viral pneumonia in children caused by respiratory syncytial virus ("RSV"). HNK20 is designed to be administered directly to the mucous lining of the nasal passages by nose drops, thereby providing protection against infection at the point of entry to the respiratory system. In the United States, approximately 250,000 children annually have moderate to severe underlying medical problems that put them at risk of contracting viral pneumonia from RSV infection. Approximately 36% of these children require hospitalization due to severe lower respiratory infections from RSV and up to 5% of these hospitalized cases prove to be fatal. The nose drop formulation of HNK20 may facilitate its use in children who present a wide range of risk factors. The Company estimates that the direct medical costs associated with the treatment of the disease in the United States exceed $500 million annually. Phase 2 trials of this product candidate in adults were completed in July 1995. A Phase 1 safety trial in children was also completed in July 1995, and a Phase 2 trial in high risk infants was completed in April 1996. See "Recent Developments." The Company commenced Phase 3 trials in children in early May 1996 in the Southern Hemisphere, where the months of greatest risk for RSV infection are May to September. The Company's second product candidate is UreAB, a urease-based oral vaccine designed to prevent and treat infection by Helicobacter pylori bacteria ("H. pylori"). In recent years, H. pylori infection has been identified as the underlying cause of the majority of cases of chronic gastritis and peptic ulcer disease and as a major risk factor for stomach cancer. The Company believes that approximately 90% of peptic ulcer cases are attributable to chronic H. pylori infections. In addition, H. pylori has been formally classified as a Category 1 (or definite) human carcinogen by the World Health Organization. The Company is developing an oral vaccine for the prevention of infection by H. pylori and, in chronically infected persons, to clear the infection and prevent reinfection. The Company estimates that the direct medical costs of treating peptic ulcers in the United States exceed $5 billion per year. Although frequently asymptomatic, all persons infected by H. pylori have chronic stomach inflammation (gastritis). The Company estimates that approximately 30% of the United States population is infected with H. pylori. Infection rates in most parts of the world exceed those in the United States. OraVax completed a Phase 1 clinical safety study of its H. pylori vaccine in chronically infected adults in December 1995. A Phase 2 safety and immunogenicity trial was initiated in adults in September 1995 and is expected to be completed in the third quarter of 1996. In March 1995, the Company entered into a collaboration (the "Joint Venture") with Pasteur Merieux Serums & Vaccins S.A. ("Merieux"), a wholly-owned subsidiary of Rhone-Poulenc S.A., for the development, manufacturing, marketing and sale of immuno-therapeutic and preventive vaccines against H. pylori. Under the Joint Venture, OraVax and Merieux have agreed to co-develop vaccines which use the urease protein or any of its sub-units as an antigen (the "Target Products"). OraVax and Merieux will share equally in profits from the sales of the Target Products and in all future research, development, clinical and commercialization costs. Merieux made an initial milestone payment, purchased equity in the Company and agreed to make certain payments to the Company during the development period, subject to the achievement of certain clinical and regulatory milestones. The first of these milestone payments was made in the fourth quarter of 1995. See "Business -- Products under Development -- UreAB Oral Vaccine Against H. pylori." The Company's third product candidate is CdAB, an oral vaccine designed to prevent antibiotic-associated diarrhea and colitis caused by Clostridium difficile ("C. difficile"). Approximately two million cases of antibiotic-associated diarrhea and colitis occur annually in hospitalized patients and nursing home residents in the United States. Preclinical trials in animal models with CdAB have demonstrated effectiveness in prevention of C. difficile induced disease. The Company expects to file an IND in the fourth quarter of 1996. In addition to the Company's three principal product development programs, the Company has rights to certain other technologies which may have the potential to be developed into products. These technologies also build on the Company's platform of knowledge of immunology and infectious disease. These technologies include methods for stimulating IgA antibody production, a potential improved vaccine for prevention of Japanese Encephalitis ("JE") viral infections, an antigen delivery system using genetically engineered virus-like particles, Viricles, and a Shigella live-vector antigen delivery system. In March 1996, the Company was notified that it had been awarded a Phase 2 Small Business Innovation Research grant from the United States National Institutes of Health to fund its product development efforts in JE. OraVax was incorporated in Delaware in 1990. The Company's principal office is located at 38 Sidney Street, Cambridge, Massachusetts 02139 and its telephone number is (617) 494-1339. As used in this Prospectus, the terms "OraVax" and the "Company" refer to OraVax, Inc. and its wholly-owned subsidiaries, OraVax JVM, Inc. and OraVax Securities Corp., unless the context otherwise requires. ViricleTM and OraVaxTM are registered trademarks of the Company. All other trademarks or trade names referred to in this Prospectus are the property of their respective owners. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company..................................... 2,000,000 shares Common Stock to be outstanding after the offering....................... 9,643,306 shares(1) Use of proceeds......................................................... Research and development Nasdaq National Market symbol........................................... ORVX </TABLE> SUMMARY FINANCIAL DATA The summary financial data set forth below as of December 31, 1995 and for the years ended December 31, 1995, 1994 and 1993 is derived from the financial statements of the Company, which have been audited by Coopers & Lybrand L.L.P., independent accountants. The unaudited balance sheet data as of March 31, 1996 and the unaudited statement of operations data for the three months ended March 31, 1996 and March 31, 1995 have been prepared on a basis substantially consistent with the audited financial statements and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the information set forth herein. Results for the three months ended March 31, 1996 are not necessarily indicative of results to be expected for the year ending December 31, 1996, although a significant loss is expected for that period. See "Risk Factors -- History of Operating Losses; Uncertainty of Future Profitability." The data set forth below should be read in conjunction with "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's financial statements and related notes included elsewhere in this Prospectus. <TABLE> <CAPTION> THREE MONTHS YEARS ENDED DECEMBER 31, ENDED MARCH 31, ---------------------------- ---------------- 1993 1994 1995 1995 1996 ------- -------- ------- ------ ------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues: Collaborative research and development................... $ -- $ -- $ 8,684 $3,190 $ 1,571 Government grants........................................ 349 257 311 78 192 Interest................................................. 78 51 1,080 79 310 ------- -------- ------- ------ ------- 427 308 10,075 3,347 2,073 Expenses: Research and development................................. 5,981 8,406 12,450 2,775 5,280 General and administrative............................... 1,848 2,580 3,299 1,165 843 Interest................................................. 92 190 87 21 139 ------- -------- ------- ------ ------- 7,921 11,176 15,836 3,961 6,262 ------- -------- ------- ------ ------- Equity in operations of joint ventures..................... -- -- (2,436) -- (1,086) ------- -------- ------- ------ ------- Net loss(2)................................................ (7,494) (10,868) (8,197) (614) (5,275) Net loss to common stockholders(2)......................... $(7,494) $(10,968) $(8,305) $ (671) $(5,275) ======== ========= ======== ====== ======== </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 -------------------------- ACTUAL AS ADJUSTED(3) ------- -------------- <S> <C> <C> BALANCE SHEET DATA: Cash and investments........................................................... $22,543 $ 35,823 Total assets................................................................... 29,086 42,366 Working capital................................................................ 16,652 29,932 Total stockholders' equity..................................................... 19,353 32,633 </TABLE> - --------------- (1) Based on the number of shares outstanding at April 15, 1996. Excludes options outstanding as of April 15, 1996 to purchase approximately 865,963 shares of Common Stock at a weighted average exercise price of $3.361. (2) The net loss for the years ended December 31, 1994 and 1995 and the three months ended March 31, 1995 excludes accretion to redemption value of preferred stock of $100,000, $108,000 and $57,000, respectively, which is included in net loss to common shareholders. (3) Adjusted to give effect to the sale by the Company of 2,000,000 shares of Common Stock offered hereby. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000902600_aksys-ltd_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000902600_aksys-ltd_prospectus_summary.txt
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+++ b/parsed_sections/prospectus_summary/1996/CIK0000902600_aksys-ltd_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. See "Risk Factors" for a discussion of certain factors to be considered by prospective investors. THE COMPANY Aksys, Ltd. ("Aksys" or the "Company") was formed to provide hemodialysis products and services for patients suffering from end stage renal disease ("ESRD"), commonly known as chronic kidney failure. The Company has developed an automated personal hemodialysis system (the "Aksys PHD system"), which is designed to enable patients to perform hemodialysis in a self-care setting, such as the patient's home, on a daily basis. The Company believes that its products and services will offer a superior alternative to currently available kidney dialysis treatment modalities by providing better clinical outcomes, lower overall costs and improved quality of life for dialysis patients. The Company has submitted a 510(k) premarket notification to the United States Food and Drug Administration ("FDA") to market the Aksys PHD system and, if clearance is granted, the Company plans commercial launch of its products and services during 1997. See "Business--Government Regulation." There can be no assurance that the Company will be able to obtain regulatory clearance or approval in a timely manner or at all. ESRD is a slow, progressive loss of kidney function which eventually becomes life-threatening and for most patients can be treated only through dialysis. Based upon information published by the Health Care Financing Administration ("HCFA") of the United States Department of Health and Human Services, the approximate number of ESRD patients in the United States requiring dialysis treatments has grown from 66,000 at the end of 1982 to 187,000 at the end of 1994, representing a compound annual growth rate of approximately 9%. In addition, according to international patient registries compiled by the United States Renal Data System ("USRDS"), there were approximately 240,000 dialysis patients in Europe and Japan in 1993. Reimbursement for dialysis treatments in the United States in 1995 is estimated by the Company to have exceeded $3.5 billion. The prevailing methods of kidney dialysis are hemodialysis delivered in outpatient clinics three times per week and peritoneal dialysis performed by patients at home through the infusion of a blood-cleansing solution into the patient's peritoneal cavity. Both of these treatment methods have significant limitations which have produced relatively poor clinical outcomes, an escalation in total treatment costs and decreased quality of life for ESRD patients. These clinical outcomes are reflected in the annual mortality rate of dialysis patients which, in 1992 according to the National Kidney Foundation, was 23.6% in the United States. The Company believes that these circumstances have created significant demand for improved dialysis systems. The Company believes that hemodialysis performed on a daily basis can significantly improve clinical outcomes, reduce total treatment costs and improve the quality of life of ESRD patients. Daily hemodialysis in the clinical setting for the general dialysis population, however, is not economically feasible under current reimbursement systems and would place even greater burdens on patient lifestyles. The Company has developed a personal hemodialysis system which is designed to overcome the barriers to daily hemodialysis in a self-care setting. The Aksys PHD system (i) is designed for operation by patients through a computerized, user-friendly interface, (ii) is automated, requiring minimal patient involvement, (iii) includes an integrated automatic disinfection system which is designed to enable safe and effective reuse of several key components, (iv) enables the patient to be monitored by, and to communicate with, a treatment clinic through a real time, on-line monitoring system, (v) requires fewer consumables and (vi) is relatively compact and is transportable by car, with all essential components, including the water purification system, integrated into the machine. The Company holds exclusive licenses to patents relating to certain features of the Aksys PHD system. The Company's strategy is to (i) target its marketing activities toward those providers of dialysis services most focused on patient outcomes and total cost of care, (ii) provide a broad range of products and services to ESRD patients and providers for a single monthly price, (iii) use the Aksys PHD system's built-in computer to provide outcome data to healthcare providers and others, (iv) conduct clinical studies and implement other measures designed to document the clinical and cost benefits it believes will result from daily hemodialysis using the Aksys PHD system and (v) address the worldwide demand for a lower cost, more clinically effective approach to dialysis through a phased domestic and international market launch.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0000904918_blackrock_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000904918_blackrock_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a2b18e4034fd581f47a6802d8b6d5a5a1902a238
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000904918_blackrock_prospectus_summary.txt
@@ -0,0 +1 @@
+SUMMARY The nature of an investment in the Fund is complex and must be carefully reviewed by any person considering purchasing Units. The following summary is qualified in its entirety by the information set forth elsewhere in this Prospectus. -------------------- THE FUND ML GLOBAL HORIZONS L.P. (THE "FUND") is a limited partnership which trades in the international futures and forward markets with the objective of achieving significant profits over time. The general partner of the Fund is MERRILL LYNCH INVESTMENT PARTNERS INC. ("MLIP"). The Fund's assets are allocated and reallocated by MLIP to the trading management of independent professional advisors (the "Trading Advisors" or the "Advisors") applying proprietary strategies in numerous markets. The Fund offers its Units, and receives and processes subscriptions, on a continuous basis throughout each month. Investors whose subscriptions are accepted during a month are admitted to the Fund as Limited Partners as of the beginning of the immediately following month. Investors' customer securities accounts are debited in the amount of their subscriptions on a single monthly settlement date within approximately five business days of the issuance of the Units. The Fund began trading on January 4, 1994 with an initial capitalization of $35,835,000. A total of an additional $80,346,819 was invested in the Units through October 1, 1996, and Units with an aggregate Net Asset Value of $53,776,736 had been redeemed. As of October 1, 1996, the capitalization of the Fund was $81,077,111, and the Net Asset Value per Unit, originally $100 as of January 4, 1994, had risen to $128.97. As of October 1, 1996, the Fund had 3,064 Limited Partners. Through October 1, 1996, the net gain in the Net Asset Value per Unit was 28.97%. The highest month-end Net Asset Value per Unit through October 1, 1996 was $128.97 (October 1, 1996) and the lowest $97.36 (March 1, 1994). See "--Performance of the Fund," below at page 5, and "Selected Financial Data" at page 19. RISK FACTORS THE FOLLOWING ARE CERTAIN OF THE SIGNIFICANT RISKS OF THIS INVESTMENT. . INVESTORS MUST BE PREPARED TO LOSE ALL OR SUBSTANTIALLY ALL OF THEIR INVESTMENT. THE FUND HAS NO "PRINCIPAL PROTECTION" FEATURE ASSURING THE RETURN OF SUBSCRIBERS' INITIAL INVESTMENTS AS OF A SPECIFIED FUTURE DATE. SEE "RISK FACTORS -- (1) INVESTORS MAY LOSE ALL OR SUBSTANTIALLY ALL OF THEIR INVESTMENT" AT PAGE 9. . THE PAST PERFORMANCE OF THE FUND AND THE ADVISORS IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. SEE "COMMODITY FUTURES TRADING COMMISSION-- RISK DISCLOSURE STATEMENT" AT PAGE 1 AND "RISK FACTORS -- (2) PAST PERFORMANCE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS" AT PAGE 9. . THE FUND TRADES WITH A HIGH DEGREE OF LEVERAGE IN VOLATILE MARKETS. SEE "RISK FACTORS -- (3) VOLATILE MARKETS; HIGHLY LEVERAGED TRADING" AT PAGE 9. . THE FUND IS SUBJECT TO SUBSTANTIAL CHARGES. ESTIMATED GROSS TRADING PROFITS OF APPROXIMATELY 8.16% OF THE FUND'S AVERAGE MONTH-END NET ASSETS MUST BE EARNED DURING THE FIRST YEAR AFTER A UNIT IS SOLD IN ORDER FOR THE REDEMPTION VALUE OF SUCH UNIT TO EQUAL ITS INITIAL SUBSCRIPTION PRICE. SEE "-- BREAKEVEN TABLE," BELOW AT PAGE 7, "RISK FACTORS -- (4) SUBSTANTIAL CHARGES" AT PAGE 9 AND "CHARGES" AT PAGE 33. . CERTAIN GENERAL TYPES OF MARKET CONDITIONS -- IN PARTICULAR, TRENDLESS PERIODS WITHOUT MAJOR PRICE MOVEMENTS -- MAKE IT DIFFICULT FOR THE ADVISORS' TO TRADE SUCCESSFULLY. SEE "RISK FACTORS -- (5) IMPORTANCE OF GENERAL MARKET CONDITIONS" AT PAGE 9. NO SUBSCRIBER SHOULD INVEST MORE THAN 10% OF HIS OR HER READILY MARKETABLE ASSETS IN THE FUND. SEE "RISK FACTORS" AT PAGES 9 THROUGH 11.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0000906611_dal-tile_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000906611_dal-tile_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..764cf46c9ff05664a3d9953cc5e973193891d66a
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000906611_dal-tile_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements and related notes thereto appearing elsewhere in this Prospectus. Industry data used throughout this Prospectus were obtained from industry publications and internal Company estimates that the Company believes to be reliable, but has not independently verified. Unless the context otherwise requires, all references to "Dal-Tile" herein refer to Dal-Tile International Inc. and all references to the "Company" herein refer collectively to Dal-Tile and its subsidiaries, including the operations of American Olean Tile Company, Inc. which was acquired on December 29, 1995. Except where otherwise indicated, the information in this Prospectus, including all share and per share amounts, (i) assumes the U.S. Underwriters' over-allotment option is not exercised, and (ii) reflects the conversion of all shares of all classes of the Company's currently outstanding capital stock into 45,404,472 shares of Common Stock (the "Common Stock Conversion"). See "Description of Capital Stock--Common Stock Conversion" and "Underwriting." THE COMPANY The Company believes that it is the largest manufacturer, distributor and marketer of ceramic tile in North America, and one of the largest in the world. The Company produces and distributes a broad line of high quality wall tile and floor tile products for both residential and commercial applications, marketed primarily under its Daltile and American Olean brand names. The Company's strengths include (i) the U.S. ceramic tile industry's broadest distribution system, consisting of Company-operated sales centers, independent distributors and home center retailers, (ii) leading brand names, (iii) North America's largest ceramic tile manufacturing capacity, with manufacturing plants in the United States and Mexico, and (iv) the U.S. ceramic tile industry's most comprehensive product offering, including glazed and unglazed ceramic tile, stone products and installation materials and tools. From 1985 through 1995, the Company's net sales have increased from $169.1 million to $474.8 million, exclusive of the AO Acquisition described below. On December 29, 1995, the Company acquired American Olean Tile Company, Inc. ("AO") and certain related assets of the ceramic tile business of Armstrong World Industries, Inc. ("AWI") (the "AO Acquisition"). As a result of the AO Acquisition, the Company has increased its presence in all ceramic tile applications and distribution channels and expects to achieve significant cost savings. The Company believes, inclusive of AO, that it had an approximately 27% unit share of the 1.32 billion square feet of ceramic tile sold in the United States in 1995, which was significantly greater than the Company's nearest competitor. Pro forma for the AO Acquisition, the Company's net sales and operating income for the fiscal year ended December 31, 1995 were $724.4 million and $117.2 million, respectively. See "Unaudited Pro Forma Consolidated Financial Information." INDUSTRY OVERVIEW Since 1991, U.S. ceramic tile sales (by unit volume) have increased from approximately 916 million square feet to approximately 1.32 billion square feet in 1995. The Company believes that ceramic tile consumption has increased due to (i) increasing usage of tile, particularly floor tile, in remodeling and redecorating applications, (ii) the development of new uses for tile such as countertops and back splashes, (iii) increasing usage of tile in areas of the home such as dens, patios, kitchens and foyers, and (iv) increasing usage of tile in commercial applications such as restaurants, schools, hospitals, hotels, airports and retail establishments. The Company expects these trends to continue due to increasing consumer awareness of ceramic tile's aesthetic and utilitarian advantages, as well as ceramic tile's relatively low cost over its useful life. U.S. ceramic tile unit sales increased at a compound annual rate of 9.5% from 1991 to 1995. During the same period, carpet, resilient flooring and wood flooring unit sales increased 6.2%, 4.4% and 8.2%, respectively. Nevertheless, ceramic tile comprised only a small portion of the approximately 23 billion square feet of U.S. floor covering sales in 1995. In addition, despite a 39% increase in U.S. per capita ceramic tile consumption from 1991 to 1995, the United States continues to lag significantly behind the per capita consumption in many Western European countries, which the Company believes is an indication of growth potential in the U.S. ceramic tile business. COMPANY ATTRIBUTES AND OPERATING STRATEGIES The Company believes that it is well positioned to capitalize on the growing demand for ceramic tile. The following attributes and operating strategies have enabled the Company to achieve its current market presence and should serve as a basis for the Company's future growth and profitability: . INDUSTRY'S BROADEST DISTRIBUTION NETWORK. The Company's products are sold through (i) Company-operated sales centers, (ii) independent distributors, and (iii) home center retailers. The Company's sales center network consists of approximately 235 Company-operated sales centers (after giving effect to the anticipated closing of redundant sales centers in connection with the AO Acquisition) in 44 states, which is the largest wholesale distribution network in the U.S. ceramic tile industry, serving customers in all 50 states. The sales centers function as a "one-stop" source for ceramic tile, stone products and installation materials and tools ("allied products"), serving tile contractors, architects, design professionals, builders and developers. As a result of the AO Acquisition, the Company also markets its products to over 100 independent distributor locations for resale to retail outlets. In addition, the Company believes that it is one of the U.S. ceramic tile industry's largest suppliers to the do-it-yourself ("DIY") and buy-it- yourself ("BIY") markets by supplying home center retailers, including The Home Depot, Lowe's, Menards and Payless Cashways. The home center retailer channel has provided the Company with new sources of sales over the past five years. Sales to both independent distributors and home center retailers are expected to present significant growth opportunities for the Company. . LEADING BRAND NAMES MARKETED THROUGH TARGETED DISTRIBUTION CHANNELS. The Company believes that it has two of the leading brand names in the U.S. ceramic tile industry--Daltile and American Olean--and has recently established the new Homesource brand name. The Company's strategy is to independently market each of its brands to create brand differentiation within its respective customer segments. Company-operated sales centers principally distribute the Daltile brand, while the American Olean brand is principally marketed through independent distributors. In addition to distributing the Daltile and American Olean brands, home center retailers distribute the newly established home center brand--Homesource. . NEW PRODUCT DEVELOPMENT DRIVEN BY TECHNOLOGICAL INNOVATION. The Company believes that, due to technological innovations, the U.S. ceramic tile industry is increasing its fashion orientation, particularly in floor tile. The Company has developed capabilities to produce fashionable and innovative tile products and to simulate natural products such as stone, marble and wood. In order to capitalize on the increasing demand for, and higher margins generated by, fashion-oriented tile products, the Company has (i) increased the number of new floor tile product introductions, (ii) focused on shortening product introduction cycle time, (iii) expanded its relationships with leading glaze and equipment manufacturers, (iv) focused on evolving consumer preferences to deliver products consistent with current design trends, and (v) increased its investment in research and development to further develop new products and manufacturing capabilities. . BROAD AND DIFFERENTIATED PRODUCT LINE. The Company offers the most comprehensive product line in the U.S. ceramic tile industry, including glazed floor tile, glazed wall tile, glazed and unglazed mosaic tile, porcelain tile, quarry tile, stone products and allied products. In addition, the Company believes that it produces one of the industry's largest offerings of colors, textures and finishes and that its ability to efficiently manufacture the industry's largest offering of trim and angle pieces differentiates the Company from many of its competitors, including foreign ceramic tile manufacturers. Management believes that the Company's comprehensive product line, including its trim and angle pieces and fashion-oriented tile products, results in an average selling price for Company-produced tile that is higher than the industry average. The Company also sells products manufactured by third parties for resale, including ceramic tile and allied products, which constituted approximately 30% of net sales in 1995, inclusive of AO. The Company intends to increase the amount of Company-manufactured products as a percentage of net sales, which products historically have generated higher margins than products purchased for resale. . LOW COST MANUFACTURING. The Company has annual manufacturing capacity of approximately 321 million square feet, the largest ceramic tile manufacturing capacity in North America. The Company's lowest cost manufacturing facility is located in Monterrey, Mexico and represents approximately 40% of the Company's manufacturing capacity. In addition, as a result of the AO Acquisition, the Company has the contractual right to be supplied with an additional 24 million square feet of floor tile annually by a Mexican joint venture. In 1995, the Company initiated full production at its newest facility, a highly automated wall tile plant in El Paso, Texas. Since 1991, the Company (exclusive of AO) has invested approximately $90 million in capital expenditures, including approximately $63 million in new plants and state-of-the-art equipment to increase manufacturing capacity, improve efficiency and develop new manufacturing capabilities. Over the next 18 months, the Company intends to further increase capacity at its existing floor tile factories in the United States and Mexico. The Company believes that additional manufacturing investments will continue to generate attractive rates of return due to the Company's economies of scale in manufacturing and its broad distribution network, thereby allowing the Company to spread fixed costs over a wider sales base. SIGNIFICANT BENEFITS RESULTING FROM THE AO ACQUISITION In addition to providing the Company with one of the U.S. ceramic tile industry's leading brands and product lines and a significantly increased presence in the independent distributor channel, the AO Acquisition provides the Company with the opportunity to achieve significant cost savings and sales diversification. . COST SAVINGS. The Company expects to achieve significant cost savings as a result of the AO Acquisition by (i) consolidating manufacturing facilities, (ii) restructuring its sales organizations, and (iii) eliminating duplicative administration functions. The Company believes that the operational changes implemented to date will enable it to achieve annual cost savings of approximately $34.9 million (of which approximately $26.8 million is expected to be realized in 1996, and the full amount is expected to be realized beginning in 1997). These cost savings include $10.1 million attributable to reductions in depreciation and amortization expense pursuant to purchase accounting. In connection with these operational changes, the Company has recorded non-recurring pre-tax merger integration charges of $9.0 million in the six months ended June 30, 1996 and $22.4 million in the fiscal year ended December 31, 1995. In addition to the operational changes implemented to date, the Company intends to implement additional cost saving initiatives, which the Company believes will enable it to realize significant additional cost savings. THE ANTICIPATED COST SAVINGS DESCRIBED HEREIN ARE BASED ON ESTIMATES AND ASSUMPTIONS MADE BY THE COMPANY THAT, ALTHOUGH CONSIDERED REASONABLE BY THE COMPANY, ARE SUBJECT TO SIGNIFICANT BUSINESS, ECONOMIC AND OTHER UNCERTAINTIES. THERE CAN BE NO ASSURANCE THAT SUCH COST SAVINGS WILL BE ACHIEVED OR THAT THE BENEFITS OF SUCH COST SAVINGS WILL NOT BE MITIGATED BY OTHER FACTORS AFFECTING THE COMPANY'S PERFORMANCE. SEE "RISK FACTORS--RISKS RELATED TO REALIZING BENEFITS FROM AO ACQUISITION." . SALES DIVERSIFICATION. As a result of the AO Acquisition, the Company is diversified both in its business mix and geographical presence. The Company believes that its sales are relatively evenly distributed between residential and commercial applications. In addition, AO's significant presence in the northeast and midwest regions of the United States complements the Company's long-standing presence in the west and sunbelt regions of the United States. BACKGROUND The Company commenced operations in 1947 as the Dallas Ceramic Company and established its first wall tile manufacturing facility and corporate headquarters in Dallas, Texas. On January 9, 1990, AEA Investors Inc., a privately held corporation headquartered in New York ("AEA Investors"), arranged for Dal-Tile to acquire (the "AEA Acquisition") all the outstanding capital stock of Dal-Tile Corporation, its affiliated companies and certain related assets. After giving effect to the Offerings and the Private Placement, DTI Investors LLC ("DTI Investors"), whose members include AEA Investors, certain current and former management employees of AEA Investors, AEA Investors' investor-stockholders, and certain members of Company management (the "DTI Investors Group"), will beneficially own 54.0% of the outstanding Common Stock (52.9%, if the U.S. Underwriters' over-allotment option is exercised in full). As part of the AO Acquisition, which was completed on December 29, 1995, AWI received 37% of Dal-Tile's then outstanding capital stock and paid the Company cash in the amount of $27.6 million. After giving effect to the Offerings and the Private Placement, Armstrong Enterprises, Inc., a wholly owned subsidiary of AWI ("AEI"), will beneficially own 32.8% of the outstanding Common Stock (32.2%, if the U.S. Underwriters' over-allotment option is exercised in full). Dal-Tile was incorporated under Delaware law in 1987. The principal executive offices of the Company are located at 7834 Hawn Freeway, Dallas, Texas 75217. Its telephone number at that address is (214) 398-1411. ARMSTRONG AGREEMENTS Concurrently with the consummation of the Offerings, the Company will sell in the Private Placement to AEI approximately 588,235 shares of Common Stock, at a price per share equal to the initial public offering price per share for the Common Stock in the Offerings, for an aggregate purchase price of approximately $10,000,000. During the 270-day period following the first to occur of (i) the closing of the sale of Common Stock to the U.S. Underwriters pursuant to the exercise of their over-allotment option and (ii) the expiration of such option, AWI or one or more of its subsidiaries will purchase, from time to time, additional Common Stock in open market transactions at then prevailing market prices having an aggregate purchase price (exclusive of brokerage commissions) of $15,000,000 in connection therewith (the "Additional AWI Shares"). See "Armstrong Agreements."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000906873_asahi_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000906873_asahi_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..6dccdf844e7d81b2ed9e518ba8c610e267c9d938
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000906873_asahi_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Investors should carefully consider the information set forth under the heading "Risk Factors." Unless otherwise indicated, all Common Stock share and per share data and information in this Prospectus (i) have been adjusted to give effect to an approximately 836-for-1 stock split (the "Stock Split") to be effective immediately prior to the effectiveness of the registration statement of which this Prospectus is a part and (ii) assume no exercise of the Underwriters' over-allotment option. Unless the context otherwise requires, references in this Prospectus to the "Company" include Asahi/America, Inc., its predecessor, and the Company's wholly-owned subsidiary, Asahi Engineered Products, Inc. The Company Asahi/America, Inc. markets and sells thermoplastic valves, piping systems and components manufactured by the Company and others for use in a variety of environmentally sensitive and industrial applications, including semiconductor manufacturing, chemical processing, waste treatment processing and pharmaceutical manufacturing. The Company, an ISO 9001 quality control certified manufacturer, makes electric and pneumatic valve actuators and controls, proprietary double containment thermoplastic piping systems, and custom fabricated fittings and specialty products. The Company offers a broad selection of industrial thermoplastic valves in, and, based on a Company-commissioned market study prepared by an unaffiliated firm, believes it has one of the largest shares of the United States industrial thermoplastic valve market. The Company is the exclusive master distributor in the United States, Latin America and the Caribbean for Asahi Yukizai Kogyo Co., Ltd. ("AYK"), a large Japanese manufacturer of thermoplastic valves. The Company is also the exclusive master distributor in the United States for Alois-Gruber GmbH (together with its United States subsidiary, "Agru"), an Austrian manufacturer of thermoplastic pipe and fittings. The Company distributes its products under the brand names Asahi, DuoPro and PolyFlo, among others. As a master distributor for AYK since 1974 and for Agru since 1985, the Company has developed a network of more than 400 United States and approximately 20 foreign distributors. Initially developed as the distribution channel for products purchased by the Company from AYK and Agru, this extensive distribution network also supports increasing sales of the higher margin products manufactured by the Company. From 1993 to 1995, annual sales of valve actuators and controls, custom valves and piping systems manufactured by the Company have increased by 64% from approximately $7.6 million to approximately $12.4 million and from 30% to 36% of total sales. During the past three years, the Company acquired the rights to three new product lines, which broadened the array of products manufactured by the Company and sold through its distribution network. The new product lines include the patented PolyFlo extruded double containment piping system, a line of pressure relief valves and a line of patented industrial filtration equipment. The Company intends to use a portion of the proceeds of this offering to acquire additional complementary product lines and businesses as opportunities are identified. Advances in thermoplastic technology have made it practical to substitute thermoplastic products for metal products in a variety of industrial valve and piping applications, creating an opportunity to increase the market share of thermoplastic products. End users of the Company's products often specify thermoplastic valves and piping systems instead of metal because thermoplastics resist corrosion and do not contaminate the transported fluids or gases. The Company's products combine the benefits associated with all plastic valve and piping products, such as light weight, ease of installation, long life and low installed cost, with the additional benefits of thermoplastic products, such as resistance to damage from temperature and corrosion. The Company seeks to identify industrial applications where the end users' requirements justify the use of industrial thermoplastics. Examples include double containment corrosion-resistant piping systems that meet Environmental Protection Agency ("EPA") regulations, piping systems for compressed air and gases, and high purity pipe and valves to assure contaminant free processing of liquids. The Company sells its products to distributors who sell to end users. Representative end users during the past year include Motorola, WMX Technologies, Micron Technology, the Corps of Engineers, Browning Ferris Industries, IBM, Schering-Plough, Estee Lauder, Rhone Poulenc and DuPont, none of which individually represents a material portion of the Company's sales. AYK, Nichimen Corporation and its affiliate, Nichimen America Inc. ("Nichimen America"), are principal stockholders of the Company. Nichimen Corporation, one of the largest Japanese trading companies, and Nichimen America, provide credit and import services to the Company in connection with its purchases from AYK. The Company's predecessor was established as a division of Conant Controls, Inc. in 1974, and the Company was incorporated in The Commonwealth of Massachusetts on August 18, 1977. The Company's principal executive offices are located at 19 Green Street, Malden, Massachusetts 02148, and its telephone number is (617) 321-5409. The Offering <TABLE> <S> <C> Common Stock Offered by the Company 1,000,000 shares Common Stock Offered by the Selling Stockholders 160,000 shares Common Stock to be outstanding after the offering (1) 3,340,000 shares Use of Proceeds To expand the Company's manufacturing and warehouse capacity, to repay short-term bank debt in full, and for general corporate purposes, including acquisitions of complementary businesses and product lines as opportunities are identified. See "Use of Proceeds." Risk Factors The securities offered hereby involve a high degree of risk and immediate substantial dilution. See "Risk Factors" and "Dilution." Proposed Nasdaq symbol "ASAM" </TABLE> (1) Does not include a total of 350,000 shares of Common Stock reserved for issuance upon the exercise of stock options granted under the Company's Equity Incentive Plan and Independent Directors' Stock Option Plan. See "Management" and "Principal and Selling Stockholders." Summary Consolidated Financial Information (in thousands, except per share and footnote data) <TABLE> <CAPTION> Three months ended Year ended December 31, March 31 --------------------------------------------------- -------------------- 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- ------- --------- <S> <C> <C> <C> <C> <C> <C> <C> Consolidated Statements of Operations Data: Net sales $21,495 $22,670 $25,514 $28,518 $34,998 $7,807 $9,651 Cost of goods sold 16,245 15,449 17,021 18,608 23,409 5,178 6,409 Foreign currency (gains) losses (351) 126 48 47 (391) 108 (105) Gross profit 5,601 7,095 8,445 9,863 11,980 2,521 3,347 Income (loss) from operations (1,864) 434 1,244 2,250 3,298 447 981 Income (loss) before provision (benefit) for income taxes (2,811) (340) 787 1,714 2,585 269 867 Net income (loss) (2,721) (26) 619 1,118 1,585 165 508 Net income (loss) per common share $ (2.58) $ (.02) $ .30 $ .48 $ .68 $ .07 $ .22 Weighted average number of common shares outstanding 1,056 1,146 2,048 2,340 2,340 2,340 2,340 </TABLE> March 31, 1996 ------------------------------- Actual As Adjusted (1) -------- ------------------- Consolidated Balance Sheet Data: Working capital $ 4,310 $ 8,737 Total assets $22,630 $27,735 Long-term liabilities $ 5,214 $ 5,214 Total liabilities $14,688 $12,866 Stockholders' equity $ 7,942 $14,869 (1) Adjusted to give effect to the sale by the Company of 1,000,000 shares of Common Stock at an assumed initial public offering price of $8.00 per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000906938_first_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000906938_first_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..63f5e653824e7e1d48fcd8977d1b5b5ad45a0202
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000906938_first_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE SPECIFIED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. SEE "UNDERWRITING". CERTAIN CAPITALIZED FINANCIAL TERMS USED HEREIN ARE DEFINED IN THE FINANCIAL GLOSSARY ON PAGE 67. THIS PROSPECTUS GIVES EFFECT TO THE REORGANIZATION OF THE COMPANY, PURSUANT TO WHICH, IMMEDIATELY PRIOR TO THE CLOSING OF THE PUBLIC OFFERING, FIRST ALLIANCE MORTGAGE COMPANY, A CALIFORNIA CORPORATION ("FAMCO"), WILL BECOME A WHOLLY-OWNED SUBSIDIARY OF A NEWLY-FORMED DELAWARE CORPORATION, FIRST ALLIANCE CORPORATION (THE "COMPANY"). ALL REFERENCES TO THE COMPANY SHALL BE DEEMED TO INCLUDE THE COMPANY AND ITS SUBSIDIARIES. The Company originates, purchases, sells and services non-conventional mortgage loans secured primarily by first mortgages on single family residences. The Company focuses on a distinct segment of the home equity lending market by narrowly targeting its marketing efforts at homeowners believed by management of the Company, based on historic customer profiles, to be pre-disposed to using the Company's products and services while satisfying its underwriting guidelines. The Company originates loans through its centralized telemarketing operations, its direct mailing campaigns and its expanding retail branch network of 19 offices located in 12 states. Since January 1, 1996, the Company has opened 3 new retail branch offices in Pennsylvania, Ohio and New Jersey. The Company intends to continue to expand its retail branch network in selected states on a nationwide basis and currently plans to open at least four new retail branches per year. The Company has also recently organized a subsidiary to pursue retail and wholesale loan originations and purchases in the United Kingdom. The Company also purchases loans from other originators. The Company's customers, who principally use the loans from the Company to consolidate indebtedness or to finance other consumer needs rather than to purchase homes, consist of two primary groups. The first category of the Company's customers are individuals who are unable to obtain mortgage financing from banks, savings and loan institutions and other companies that have historically provided loans to individuals with favorable credit characteristics ("Conventional Lending Institutions"). These individuals often have impaired or unsubstantiated credit characteristics and/or unverifiable income and respond favorably to the Company's marketing. The Company's second category of customers consists of individuals who could qualify for loans from Conventional Lending Institutions but instead choose to use the Company's products and services. See "Business--Underwriting." The Company's experience has shown that these individuals are attracted by the Company's high degree of personalized service and timely response to loan applications. Each category of customers has historically been willing to pay the Company's loan origination fees and interest rates that are typically higher than the fees and rates charged by Conventional Lending Institutions. The Company has historically generated positive cash flow due principally to the magnitude of its retail loan origination fees. For the quarter ended March 31, 1996 and the years ended December 31, 1995, 1994 and 1993, the Company's weighted average retail loan origination and processing fees as a percentage of gross loans originated in the retail branches were 14.8%, 15.3%, 15.6% and 17.8%, respectively. The loan origination fee charged to the borrower is included in the principal balance of the loan originated. The Company then borrows approximately the principal amount of the loan (subject to collateral valuation) under its Warehouse Financing Facility and disburses to the borrower the loan amount less the loan origination fee. Thus, the Company generally receives cash in the amount of the loan origination and processing fee at the time of the Warehouse Financing Facility borrowing and prior to the time the Company recognizes such fee for accounting purposes as a component of loan origination and sale revenue, which occurs upon the sale of the loan. The Company's ability to fund and subsequently Securitize loans has significantly improved its financial performance and enabled it to offer new and enhanced loan products. The Company's significant expansion of its retail branch network and the ability to Securitize its loans have contributed significantly to the increase in the Company's loan origination volume to $216.6 million in 1995 from $93.6 million in 1992. Since 1992, the Company has Securitized $826.8 million of loans through ten public and two private "AAA/Aaa" rated Securitizations. While the Company anticipates Securitizing a majority of its loan originations in 1996 and thereafter, the Company will continue to sell those loans which are originated through its proprietary marketing system that do not satisfy the Company's criteria for Securitization. Such loans are sold on a servicing released basis to unaffiliated wholesale purchasers on either a bulk or flow-through basis. These wholesale loan sales enable the Company to realize a return on all loans generated by its marketing efforts by retaining loan origination fees without the associated credit risk. Additionally, the Company continues to sell a small number of loans to private investors and service the loans that it has previously sold through Securitizations as well as those to private investors. As of March 31, 1996, the Servicing Portfolio consisted of 8,787 loans with an outstanding balance of $611.7 million. THE PUBLIC OFFERING <TABLE> <C> <S> Class A Common Stock offered by the Company: 3,500,000 shares Capital Stock to be Outstanding after the Public Offering: Class A Common Stock....................... 3,500,000 shares(1) Class B Common Stock....................... 10,750,000 shares(2) ---------- Total.................................... 14,250,000 shares ========== Voting Rights............................... Each share of Class A Common Stock is entitled to one vote and each share of Class B Common Stock is entitled to four votes on most matters requiring a shareholder vote. See "Description of Capital Stock- Common Stock." Use of Proceeds............................. The Company intends to use between $42 million and $47 million of the net proceeds to repay, immediately after the Closing Date (or as soon thereafter as is practicable), the principal and interest outstanding under the S Distribution Notes. See "Prior S Corporation Status." To the extent that the balance of the net proceeds exceeds the amount due under the S Distribution Notes, such excess will be used initially to repay any outstanding borrowings on the Company's Warehouse Financing Facility, then to fund costs associated with the Company's retail branch network and United Kingdom expansions and for general corporate purposes. See "Use of Proceeds." Nasdaq National Market Symbol for the Class A Common Stock....................... FACO Risk Factors................................ See "Risk Factors" for a discussion of certain material factors that should be considered in connection with an investment in the Class A Common Stock offered hereby. </TABLE> - -------- (1) Excludes 750,000 shares of Class A Common Stock reserved for issuance upon the exercise of options available for grants under the Company's Stock Incentive Plan. None of the options has been granted to date. See "Management-1996 Stock Incentive Plan" and "Description of Capital Stock." (2) Class B Common Stock is convertible into Class A Common Stock on a one for one basis at the option of the holder and in certain other circumstances. See "Description of Capital Stock." SUMMARY CONSOLIDATED FINANCIAL DATA The financial data set forth below should be read in conjunction with the Financial Statements of the Company and related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein. <TABLE> <CAPTION> QUARTERS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ---------------------------- ------------------ 1993 1994 1995 1995(5) 1996 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> STATEMENT OF INCOME DATA: Revenue: Loan origination and sale.... $ 22,489 $ 27,902 $ 35,493 $ 1,086 $ 9,371 Loan servicing and other fees........................ 8,989 9,106 8,543 1,977 2,243 Interest..................... 4,452 8,650 14,668 2,871 3,158 Other........................ 20 144 176 29 38 -------- -------- -------- -------- -------- Total revenue............... 35,950 45,802 58,880 5,963 14,810 Total expense................ 24,987 30,568 27,860 6,263 6,950 -------- -------- -------- -------- -------- Income (loss) before income tax provision (benefit)..... 10,963 15,234 31,020 (300) 7,860 Income tax provision (benefit)................... 222 363 478 (5) 118 -------- -------- -------- -------- -------- Net income (loss)............ $ 10,741 $ 14,871 $ 30,542 $ (295) $ 7,742 ======== ======== ======== ======== ======== Dividends declared(1)........ $ 5,853 $ 17,341 $ 12,205 $ 2,874 $ 15,101 PRO FORMA INCOME STATEMENT DATA(2): Income (loss) before income tax provision (benefit)..... $ 10,963 $ 15,234 $ 31,020 $ (300) $ 7,860 Income tax provision (benefit)................... 4,403 6,200 12,772 (123) 3,233 -------- -------- -------- -------- -------- Net income (loss)............ $ 6,560 $ 9,034 $ 18,248 $ (177) $ 4,627 ======== ======== ======== ======== ======== LOANS ORIGINATED OR PURCHASED(6): Retail Branch Originations... $148,718 $151,338 $200,371 $ 32,298 $ 56,693 Portfolio Refinancing Originations................ 47,189 70,501 16,195 9,045 5,586 Wholesale purchases.......... 84,034 91,826 24,078 10,602 13,455 -------- -------- -------- -------- -------- Total....................... $279,941 $313,665 $240,644 $ 51,945 $ 75,734 ======== ======== ======== ======== ======== LOANS SOLD(6): Securitizations.............. $141,795 $350,331 $167,974 $ -- $ 52,420 Wholesale.................... -- -- 51,542 3,528 21,536 Private...................... 70,554 22,857 13,709 4,032 438 -------- -------- -------- -------- -------- Total....................... $212,349 $373,188 $233,225 $ 7,560 $ 74,394 ======== ======== ======== ======== ======== SERVICING PORTFOLIO(3): Private investor loans....... $150,657 $ 87,659 $ 65,404 $ 78,422 $ 61,431 Securitized loans(7)......... 234,913 468,026 548,387 497,560 550,287 -------- -------- -------- -------- -------- Total....................... $385,570 $555,685 $613,791 $575,982 $611,718 ======== ======== ======== ======== ======== FINANCIAL RATIOS AND OTHER DATA: Number of retail branch offices(3).................. 11 13 17 14 18 Weighted average interest rate on loan originations and purchases............... 9.5% 8.7% 10.3% 10.8% 9.2% Weighted average initial combined loan-to-value ratio: Retail Branch and Portfolio Refinancing Originations... 52.4% 54.4% 58.6% 55.4% 60.4% Wholesale purchases......... 61.6% 60.5% 66.5% 64.0% 70.4% Average retail loan size..... $ 53.6 $ 66.1 $ 68.8 $ 58.3 $ 80.5 Weighted average loan origination and processing fees as a percent of gross loans originated as applicable: Retail Branch Originations.. 17.8% 15.6% 15.3% 16.1% 14.8% Portfolio Refinancing Originations:.............. 2.5% 7.5% 13.0% 13.3% 5.6% Total delinquencies as a percentage of Servicing Portfolio at end of period . 4.0% 4.3% 5.8% 4.7% 6.3% Real estate acquired through foreclosure ("REO") as a percentage of Servicing Portfolio at end of period(4)................... .9% .6% 1.3% .7% 1.4% REO losses as a percentage of average Servicing Portfolio during the period(4)........ .02% .01% .03% -- .08% Pre-tax income (loss) as a percentage of total revenue. 30.5% 33.3% 52.7% (5.0)% 53.1% </TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA (CONTINUED) <TABLE> <CAPTION> AS OF DECEMBER 31, AS OF MARCH 31, ----------------------- --------------- 1993 1994 1995 1995(5) 1996 ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents.............. $ 4,387 $ 5,298 $ 4,019 $ 1,809 $ 2,206 Loans held for sale(5)................. 74,196 18,676 24,744 58,631 26,325 Residual Interests..................... 6,879 11,645 19,705 12,283 20,732 Total assets........................... 99,855 48,226 66,987 86,792 71,355 Total borrowings(5).................... 68,773 14,839 19,356 59,733 22,038 Stockholders' equity................... 26,454 23,984 42,321 20,815 34,962 </TABLE> - -------- (1) Historical dividends are not necessarily indicative of dividends expected to be declared in the future. See "Dividend Policy."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000909990_wild-oats_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000909990_wild-oats_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including notes thereto, appearing elsewhere in this Prospectus. Except as otherwise specified, all information in this Prospectus assumes: (i) a 1.7735 for 1 stock split of the Common Stock to be effected prior to the closing of this offering; (ii) the conversion of each outstanding share of preferred stock into Common Stock upon the closing of this offering; and (iii) no exercise of the Underwriters' over-allotment option. Unless otherwise indicated, references herein to fiscal years of the Company are to the Company's 52- or 53-week fiscal year, which ends on the Saturday nearest to December 31 of each year, and references to fiscal years of Alfalfa's, Inc. are to Alfalfa's 52- or 53-week fiscal year, which ends on the Sunday nearest to June 30 of each year. Except as otherwise indicated in this Prospectus or the financial statements included elsewhere in this Prospectus, all references to "Wild Oats" and the "Company" refer to Wild Oats Markets, Inc. and its predecessors or subsidiaries. See "Risk Factors" for a discussion of certain factors that should be considered by prospective purchasers of the Common Stock offered hereby. THE COMPANY Wild Oats Markets, Inc. ("Wild Oats" or the "Company") is the second largest natural foods supermarket chain in North America with the largest natural foods store base in the western United States. The Company currently operates 38 stores in seven states, including California, Colorado, Kansas, Missouri, Nevada, New Mexico, Utah, and British Columbia, Canada. According to The Natural Foods Merchandiser, growth in the natural foods industry has accelerated from a 10% increase in sales in 1991 to a 22% increase in each of 1994 and 1995, when the market reached $9.1 billion. The Company believes that this growth reflects a broadening of the natural foods consumer base which is being propelled by several factors including healthier eating patterns, increasing concern regarding food purity and safety, and greater environmental awareness. Wild Oats believes it has developed a differentiated concept that provides this expanding consumer base with an attractive one-stop, full-service shopping alternative to both conventional supermarkets and traditional health food stores. Since acquiring its first natural foods store in 1987, Wild Oats has pursued an aggressive growth strategy. The Company grew from six natural foods stores located primarily in Colorado at the end of 1991, to 21 stores in six states at the end of 1995, representing a compound annual growth rate of 36.8%. During this period, the Company's sales increased from $25.2 million to $98.5 million, representing a compound annual growth rate of 40.6%. In the first half of 1996, the Company opened three stores and acquired three additional stores and sales increased 61.0% to $68.9 million from $42.8 million in the first half of 1995. Historically, the Company's growth resulted from the acquisition of independent and small chain natural foods store operators, the opening of new stores and positive comparable store sales growth. In July 1996, Wild Oats completed the acquisition of Alfalfa's Inc. ("Alfalfa's"), a leading natural foods supermarket chain that operated 11 stores in three states and Canada. For its fiscal year ended June 30, 1996, Alfalfa's had sales of $85.6 million. Through the acquisition of Alfalfa's, the Company combined two natural foods retailers with similar operating strategies and complementary store bases, increased the Company's penetration of existing markets, entered new geographic markets and created a stronger platform for future growth. The Company believes the successful integration of Alfalfa's will result in future operating efficiencies created by: (i) warehousing, distribution and administrative economies of scale; (ii) improved merchandise buying terms as a result of the Company's larger size; and (iii) the implementation of coordinated merchandising and marketing strategies. On a pro forma basis, after giving effect to the Company's acquisition of three stores in the first half of 1996 and the acquisition of Alfalfa's, the Company had sales of $182.4 million in 1995 and $118.8 million in the first half of 1996. Wild Oats' stores range in size from 5,000 to 35,000 square feet and feature between 10,000 and 25,000 stock-keeping units (SKUs) of natural and gourmet foods and related products in virtually every product category found in a conventional supermarket. The Company's strict quality standards require products to be minimally processed, free of preservatives, artificial colors and chemical additives, and not tested on animals. Ten photographs, including seven pictures of store interiors and three pictures of private label products. One picture of private label products contains fragments of quotations from the product packaging, including "Health is the primary duty of life. Oscar Wilde. Hurt not the earth, neither the sea nor the trees. Revelations. The frog does not drink up the pond in which it lives. Buddhist proverb. Life is not merely to be alive, but to be well. Martial." The Company emphasizes unique products not typically found in conventional supermarkets and tailors the product mix to meet the preferences of the local market. In addition, the Company has implemented a "down to earth" competitive price program which offers high quality, all natural items in each product category at prices competitive with those of similar items in conventional supermarkets. Each Wild Oats store strives to create a fun, friendly and educational store environment that makes grocery shopping enjoyable and encourages shoppers to spend more time in the store and to purchase new products. The Company trains its store staff to educate customers as to the benefits and quality of its products and prominently features educational brochures, newsletters and an in-store information department. In addition, many of the stores offer cafe seating areas, espresso and fresh juice bars, and in-store massage therapists, all of which emphasize the comfortable and relaxed nature of the Wild Oats shopping experience. The Company also seeks to engender customer loyalty by demonstrating its high degree of commitment to the local community through on-going programs which provide significant monetary and in-kind contributions to local not-for-profit organizations. Wild Oats plans to open one additional store in the remainder of 1996 and to open or acquire seven stores in 1997. The Company intends to continue to strengthen its position in the western United States and to expand to new regions, such as Florida, which it believes are currently underserved by natural foods retailers. The Company believes its flexible store format strategy, which includes large supermarket format stores and medium-sized urban format stores, and its store clustering strategy enable it to increase market penetration, reach a broader customer base, and operate successfully in a diverse set of markets. The Company periodically evaluates the location and positioning of its stores and may close, consolidate or relocate stores from time to time. As part of this strategy, the Company has recently closed two stores which did not fit the Company's current operating strategy. The Company expects to incur a non-recurring charge of approximately $7.3 million in the third quarter of 1996 in connection with the closing of these stores and certain redundant facilities. While the Company believes that most of its growth will result from new store openings, it continues to evaluate possible acquisition opportunities in both new and existing markets. The Company was incorporated in Colorado in 1987 and reincorporated in Delaware in 1993. In July 1996, in connection with the acquisition of Alfalfa's, Inc., the Company effected a merger into WO Holdings, Inc., a Delaware corporation, which subsequently changed its name to Wild Oats Markets, Inc. The Company's executive offices are located at 1645 Broadway, Boulder, Colorado, and its telephone number is (303) 440-5220. THE OFFERING <TABLE> <CAPTION> <S> <C> Common Stock offered by the Company........................ 1,400,000 shares Common Stock offered by the Selling Stockholders........... 280,000 shares Common Stock to be outstanding after the offering.......... 6,867,768 shares (1) Use of proceeds............................................ To repay outstanding bank debt, finance new store openings and possible acquisitions and for working capital and other general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol..................... OATS </TABLE> - --------------- (1) Excludes 659,979 shares of Common Stock issuable upon exercise of options outstanding under the Company's stock option plans as of August 1, 1996 (of which 167,701 shares were vested as of such date), 171,207 shares reserved for issuance pursuant to the Company's stock options plans and 6,191 shares of Common Stock reserved for issuance upon exercise of outstanding warrants. As of August 1, 1996, the weighted average exercise prices of the Company's stock options and warrants were $13.18 and $16.50 per share, respectively. See "Capitalization," "Management--Stock Option Plans" and Note 7 of Notes to Consolidated Financial Statements of Wild Oats Markets, Inc. SUMMARY FINANCIAL AND OPERATING DATA OF WILD OATS MARKETS, INC. (IN THOUSANDS, EXCEPT OPERATING AND PER SHARE DATA) <TABLE> <CAPTION> SIX MONTHS ENDED FISCAL YEAR ------------------- --------------------------------------------------- JULY 1, JUNE 29, 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- ------- -------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Sales............................. $25,222 $36,638 $47,266 $65,219 $98,517 $42,785 $ 68,929 Store contribution................ 2,047 2,859 3,915 4,897 6,281 4,060 5,137 Income from operations............ 1,084 1,160 1,675 2,580 779 1,858 1,480 Net income(1)..................... 580 616 804 1,327 376 1,068 501 Unaudited net income per common share(2)........................ $ 0.10 $ 0.13 ======= ======== Unaudited weighted average number of common shares outstanding.... 3,864 3,886 ======= ======== SELECTED OPERATING DATA: Number of stores at end of period.......................... 6 9 11 14 21 17 27 Average square feet per store..... 8,039 11,802 11,196 11,780 13,653 11,736 13,884 Average sales per square foot(3)......................... $ 500 $ 434 $ 383 $ 432 $ 464 $ 482 $ 444 Comparable store sales increase(4)..................... 8% 13% 5% 13% 7% 12% 0% </TABLE> SUMMARY FINANCIAL AND OPERATING DATA OF ALFALFA'S, INC. (IN THOUSANDS, EXCEPT OPERATING DATA) <TABLE> <CAPTION> FISCAL YEAR ------------------------------- 1994 1995 1996(5) ------- ------- ------- <S> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Sales............................................................... $45,880 $64,852 $85,623 Store contribution.................................................. 3,952 5,308 4,973 Income (loss) from operations....................................... 1,738 1,717 (51) Net income (loss)................................................... 979 933 (93) SELECTED OPERATING DATA: Number of stores at end of period................................... 6 9 11 Average square feet per store....................................... 17,783 17,000 16,418 Average sales per square foot(3).................................... $ 443 $ 489 $ 484 Comparable store sales increase(4).................................. 8% 7% 3% </TABLE> SUMMARY PRO FORMA COMBINED FINANCIAL DATA OF WILD OATS MARKETS, INC. (IN THOUSANDS, EXCEPT OPERATING AND PER SHARE DATA) <TABLE> <CAPTION> SIX MONTHS ENDED FISCAL YEAR JUNE 29, 1995 1996 ------------ ------------ <S> <C> <C> PRO FORMA COMBINED STATEMENT OF OPERATIONS DATA(6): Sales...................................................................... $182,432 $118,755 Store contribution......................................................... 11,723 9,203 Income from operations..................................................... 929 3,068 Unaudited pro forma net income............................................. 212 1,307 Unaudited pro forma net income per common share(7)......................... $ 0.05 $ 0.30 Pro forma weighted average number of common shares outstanding................................................ 4,267 4,290 Number of stores at end of period.......................................... 35 38 </TABLE> <TABLE> <CAPTION> JUNE 29, 1996 ---------------------------------------------- PRO FORMA AS ACTUAL PRO FORMA(8) ADJUSTED(9) ------------ ------------ ------------ <S> <C> <C> <C> PRO FORMA BALANCE SHEET DATA: Working capital (deficit)................................. $ (497) $(3,043) $ 8,461 Total assets.............................................. 47,907 92,341 103,845 Long-term debt, including capitalized lease obligations... 17,592 17,722 60 Redeemable convertible preferred stock.................... 18,009 Stockholders' equity (deficit)............................ (4,764) 46,643 75,809 </TABLE> - --------------- (1) On July 3, 1993, Wild Oats changed its corporate status from an S corporation to a C corporation. Net income for 1991, 1992 and 1993 are shown pro forma (unaudited) to reflect income taxes for Wild Oats as if it had been a C corporation for all periods presented. See Note 8 of Notes to the Consolidated Financial Statements of Wild Oats Markets, Inc. (2) Unaudited net income per common share was computed, on a pro forma basis, assuming conversion of all outstanding shares of preferred stock into Common Stock, which will occur upon the completion of this offering. See Note 1 of Notes to Consolidated Financial Statements of Wild Oats Markets, Inc. (3) Average sales per square foot is calculated by dividing total sales by the weighted average gross square footage of stores open during the period. See "Business--Properties." (4) Sales of a store are deemed to be comparable commencing in the thirteenth full month after the store was opened or acquired. (5) Alfalfa's fiscal 1996 was a 53-week year. (6) Pro Forma Combined Statement of Operations data reflects the acquisitions of New Frontiers in June 1996 and Alfalfa's in July 1996 as if they had occurred at the beginning of each period presented. See "Pro Forma Combined Condensed Financial Statements (Unaudited)" including the notes thereto. (7) A portion of the net proceeds from the offering will be used to repay certain indebtedness. If, at the beginning of the year ended December 30, 1995 and the six-month period ended June 29, 1996, the Company had sold a sufficient number of shares at $23.00 per share to repay the indebtedness, and used the net proceeds therefor, supplemental pro forma combined net income per common share would have been $0.10 and $0.32 for the respective periods. (8) Reflects the sale by the Company of 876,016 shares of its Series E Preferred Stock and the acquisition of Alfalfa's in July 1996, the conversion of all outstanding shares of preferred stock into Common Stock, which will occur upon the completion of this offering and the effect of a $7.3 million non-recurring charge, net of estimated tax effects. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Non-Recurring Charge." (9) Reflects the sale of the 1,400,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $23.00 per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000910338_openvision_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000910338_openvision_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and Consolidated Financial Statements (including the notes thereto), appearing elsewhere in this Prospectus. THE COMPANY OpenVision Technologies, Inc. ("OpenVision" or the "Company") develops, markets and supports systems management software for client/server computing environments. OpenVision's AXXiON products address three essential areas of systems management -- storage, operations and security. The Company's highly scalable products can be used independently and certain products can be combined to provide interoperable client/server systems management solutions. AXXiON products offer centralized administration with a high degree of automation, enabling customers to manage complex, distributed environments cost-effectively by increasing system administrator productivity and system availability. The Company's largest customer installation to date consists of more than 2,400 nodes in a heterogeneous hardware and software environment. The Company also provides a comprehensive range of services to assist customers in planning and implementing systems management solutions. OpenVision has licensed its AXXiON applications to more than 800 customers. Historically, large organizations depended on centralized mainframe and mini-computers as the primary computing resource for mission-critical applications and as the central repository for essential data. The market for mainframe systems management software evolved as a result of the need to monitor and control the availability, performance and integrity of these host-based computing environments and, according to Gartner Group, totaled approximately $3.0 billion in 1995. In recent years, however, many large organizations have moved their information systems from mainframe and mini-computer based architectures to distributed client/server computing environments. Client/server environments are more complex than mainframe environments, because they include various types of servers, such as file, application and database servers, and potentially thousands of clients. These environments frequently include a variety of operating systems, networking protocols, database management systems and software applications. In order to monitor and control the availability, performance and integrity of these newer client/server computing environments, there is a need for client/server systems management software. According to Gartner Group, the market for client/server systems management software for storage, operations and security products is expected to expand from $950 million in 1995 to more than $2.6 billion in 1999. The Company provides a broad range of client/server systems management software that performs storage, operations and security management functions across multiple hardware platforms, operating systems, relational databases and networks. OpenVision's products feature a client/server architecture and automated, event-driven technology, enabling its products to scale from a few nodes to several thousand nodes, thereby addressing the needs of large, dispersed enterprises. Using the Company's scalable architecture, it is possible for a single system administrator to centrally define policies and monitor and manage thousands of nodes effectively. The Company's ten principal products are independently packaged and certain of the products are designed to be interoperable in order to provide customers flexibility in purchasing and deployment. The Company believes that customers will acquire and deploy client/server systems management products and services in a phased manner. Accordingly, the Company's strategy is to cultivate long-term customer relationships that foster ongoing and additive purchases of the Company's products and services. The Company markets its products through both direct sales and indirect sales channels, and its service organization assists customers in designing systems management strategies and implementing OpenVision products. The Company's customers include: AT&T, Boeing, British Gas, British Telecom, Chrysler, Motorola, the NASD, Nomura International, Sun Microsystems and Wells Fargo Bank. The Company was incorporated in June 1992 and has acquired a significant part of its technology through ten acquisitions of companies, divisions of companies or products, all of which were completed prior to July 31, 1993. The Company's operating results in the past four fiscal quarters have benefited from increased market acceptance of the Company's products and a significant reduction in operating expenses due to expense and headcount reductions implemented in a restructuring in late fiscal 1994 and the first half of fiscal 1995. As of March 31, 1996, the Company had 206 full-time employees. The Company's headquarters are located at 7133 Koll Center Parkway, Pleasanton, CA 94566, and its telephone number is (510) 426-6400. In addition, the Company has ten sales offices and four development offices throughout the United States, Canada and Europe. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company...................... 2,500,000 shares Common Stock offered by the Selling Stockholders......... 235,000 shares Common Stock to be outstanding after the offering........ 18,006,887 shares(1) Use of proceeds.......................................... To retire indebtedness and for general corporate purposes, including working capital. See "Use of Proceeds." Nasdaq National Market symbol............................ OPVN </TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA(2) (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> NINE MONTHS ENDED FISCAL YEAR ENDED JUNE 30, MARCH 31, ------------------------------ ----------------- 1993 1994 1995 1995 1996 -------- -------- -------- ------- ------- <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total net revenue.............................................. $ 1,774 $ 15,624 $ 18,524 $12,311 $20,325 Gross profit (loss)............................................ (932) 95 12,174 7,045 17,677 Total operating expenses(3).................................... 15,589 42,142 29,837 22,780 18,728 Income (loss) from operations.................................. (16,521) (42,047) (17,663) (15,735) (1,051) Net income (loss).............................................. (16,424) (42,727) (18,112) (15,459) (1,546) Pro forma net income (loss) per share(4)....................... $ (1.15) $ (0.10) Pro forma shares used in per share calculations(4)............. 15,751 15,775 Supplemental pro forma net income (loss) per share(5).......... $ (1.09) $ (0.07) Supplemental pro forma shares used in per share calculations(5).............................................. 16,251 16,275 </TABLE> <TABLE> <CAPTION> QUARTER ENDED ------------------------------------------------------ JUNE 30, SEPT. 30, DEC. 31, MAR. 31, 1995 1995 1995 1996 -------- --------- -------- -------- <S> <C> <C> <C> <C> Total net revenue.............................................. $ 6,213 $ 5,140 $ 7,351 $ 7,834 Gross profit (loss)............................................ 5,129 4,332 6,424 6,921 Total operating expenses....................................... 7,057 6,035 6,210 6,483 Income (loss) from operations.................................. (1,928) (1,703) 214 438 Net income (loss).............................................. (2,653) (1,811) 30 235 Pro forma net income (loss) per share(4)....................... $ (0.17) $ (0.11) $ 0.00 $ 0.01 Pro forma shares used in per share calculations(4)............. 15,773 15,773 15,773 16,114 </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 -------------------------- ACTUAL AS ADJUSTED(6) ------- -------------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents............................................................. $ 1,697 $ 18,865 Working capital (deficit)............................................................. (4,129) 16,609 Total assets.......................................................................... 13,947 31,115 Notes payable, less current portion................................................... 5,463 463 Stockholders' equity (deficit)........................................................ (6,222) 19,516 </TABLE> - --------------- (1) Based on the number of shares outstanding as of March 31, 1996. Excludes options and warrants to purchase 1,128,158 shares of Common Stock outstanding as of March 31, 1996 at a weighted average exercise price per share of $1.02. See "Management -- 1992 Stock Plan" and Note 6 of Notes to Consolidated Financial Statements. (2) The financial data presented reflects financial data of the Company for all years since its incorporation in June 1992. (3) Includes (i) charges for acquired technologies of $2.6 million and $3.3 million for fiscal 1993 and 1994, respectively, and (ii) charges for restructuring of $1.4 million in fiscal 1994. (4) See Note 1 of Notes to Consolidated Financial Statements for an explanation of the determination of shares used in calculating pro forma net income (loss) per share. (5) Supplemental pro forma net income (loss) per share and supplemental pro forma shares used in per share calculations gives effect to the intended use of approximately $5.0 million of the net proceeds of this offering to retire the outstanding principal amount of indebtedness payable to a stockholder under the Company's subordinated debt agreement, as if such repayment had occurred at the beginning of each period. (6) Adjusted to reflect the sale of the 2,500,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $11.50 per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization." ------------------------ OpenVision, the OpenVision logo and SecureMax are registered trademarks of the Company, and AXXiON is a trademark of the Company. This Prospectus also includes trademarks of companies other than the Company. ------------------------ Except as set forth in the Consolidated Financial Statements or as otherwise indicated, all information in this Prospectus (i) reflects the conversion of all of the Company's outstanding shares of Preferred Stock into shares of Common Stock, and the conversion of outstanding warrants to purchase Preferred Stock into warrants to purchase Common Stock, which will occur automatically upon the closing of this offering, (ii) does not reflect the exercise of options or warrants after March 31, 1996, (iii) reflects a one-for-two reverse stock split effected on April 4, 1996, (iv) includes as Common Stock 3,247,142 shares of nonvoting Class B Common Stock and (v) assumes that the Underwriters' over-allotment option is not exercised. Unless otherwise indicated herein, references to Consolidated Financial Statements shall mean references to the consolidated financial statements of OpenVision Technologies, Inc. and its subsidiaries. See "Description of Capital Stock" and "Underwriting."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000910507_u-s_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000910507_u-s_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary should be read in conjunction with, and is qualified in its entirety by the more detailed information and financial statements and the notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, all financial and share information set forth in this Prospectus assumes (i) the conversion at the closing of this offering of all 6,693,582 outstanding shares of the Company's Preferred Stock to 6,693,582 shares of Common Stock, (ii) no issuance of an aggregate of 3,197,196 shares of Common Stock reserved for issuance pursuant to outstanding options and warrants, (iii) an initial public offering price of $ per share, the midpoint of the range set forth on the cover page of this Prospectus and (iv) no exercise of the Underwriters' over-allotment option. All references to fiscal years refer to the fiscal year of the Company ending January 31. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in "Risk Factors." THE COMPANY The Company designs, develops, manufactures and markets proprietary, safety-enhanced, disposable medical products intended to protect healthcare workers from the spread of infectious diseases such as AIDS and hepatitis. The Company's first product line, the SafeSnap syringe, consists of a line of single-use hypodermic syringes designed to reduce the risk of transmission of blood borne diseases from accidental needlesticks. A SafeSnap syringe is similar in appearance, size and manner of use to a standard (i.e., non-safety) syringe; however, it incorporates patented retraction and encapsulation technology that permits the isolation of the needle within the barrel of the syringe immediately after use, thereby facilitating safe disposal. The SafeSnap product line consists of four syringes which vary by size, needle length and gauge. The SafeSnap syringe is also latex-free and will not cause adverse reactions in the estimated 8-10% of patients and healthcare workers with allergies to latex. The Company believes that the SafeSnap syringe is the only safety syringe currently on the market that is latex-free. The Company has five additional safety products under development: a winged butterfly set, an arterial-venous fistula set, a blood gas syringe, a needleless vial adapter and a phlebotomy (blood collection) device. An estimated 800,000 accidental needlesticks from syringes, catheters and blood collection devices occur nationwide each year in hospital and clinic settings with direct costs of up to $1,200 per incident, including treatment of the wound, diagnostic tests and lost worker time and excluding long-term treatment and liability costs. The spread of infectious diseases to nurses, doctors, medical technicians and others through accidental needlesticks is a matter of concern to the healthcare industry. Heightened awareness of the risk of infection from accidental needlesticks and the substantial cost to healthcare providers of complying with regulatory protocols when needlesticks occur have led to growing demand for safe medical devices such as the Company's SafeSnap syringes. In response to these concerns, healthcare regulations have been promulgated by the Occupational Safety and Health Administration mandating that "universal precautions" be observed to minimize exposure to blood and other body fluids. In addition, several states have directed hospitals to develop programs to track the effectiveness of safety devices and to develop guidelines for the handling and disposal of "sharps" devices. According to industry reports, approximately 5.2 billion syringes were sold in the United States in 1995. Although safety has increasingly become a concern in the healthcare industry, safety syringes currently represent only a small portion of the overall syringe market. Studies indicate that safety syringes will become widely used during the next five years, capturing up to 80 percent of the syringe market by the year 2001. The Company believes that its SafeSnap syringe has the potential to capture a significant share of the overall syringe market because of its advantages over standard and other competitive safety syringes. The Company's objective is to become a leading designer, developer, manufacturer and marketer of safety-enhanced medical products. Its business strategy is to (i) increase its customer base through direct selling efforts and establishing strategic distribution alliances, (ii) broaden its product lines by applying its technology, manufacturing capabilities and market presence developed with the SafeSnap syringe and (iii) reduce per unit cost by increasing unit volume, completing the Company's automation of assembly and printing processes and incorporating design enhancements in production tooling. The Company has devoted a substantial portion of its efforts since its formation to research and development and the establishment of its manufacturing capabilities. From inception through April 30, 1996, the Company has incurred approximately $3.4 million in research and development expenses and approximately $10.8 million in pre-manufacturing and manufacturing costs, including depreciation. In addition, as of April 30, 1996, the Company had invested approximately $9.6 million in property and equipment. The Company operates a 55,000 square foot vertically integrated manufacturing facility where it designs and builds most of its high precision molds and prototypes. The Company has established a high-speed, fully automated production line for the molding, printing, assembly and packaging of the 3cc size SafeSnap syringe. The Company also molds, prints and packages the remaining sizes at its facility. Assembly of those sizes is currently performed by third-party subcontractors. The Company will use a portion of the proceeds of this offering to implement automation of the printing and assembly processes for those remaining syringe sizes. The Company has recently expanded its direct sales force and distribution channels. Since January 31, 1996, the Company has hired a Vice President of Sales, area sales directors and a majority of its planned 24 member direct sales force which will establish a presence in 24 major metropolitan areas in the United States. The Company has also entered into a distribution partnership with one of the largest medical products distributors in Asia to facilitate sales of its products in Japan. In the five months ended June 30, 1996, net sales were approximately $630,000, principally as a result of sales to the Company's distributor in Japan and increased domestic sales, as compared to net sales of $51,000 in the five months ended June 30, 1995. The Company was incorporated in California in 1991. Its offices are located at 16825 Via Del Campo Court, San Diego, California 92127, and its telephone number is (619) 674-7200. THE OFFERING Common Stock Offered by the Company............................. shares Common Stock to be Outstanding After the Offering........................ shares (1) Use of Proceeds..................... Purchase of capital equipment for manufacturing and assembly; marketing, sales, and advertising; development of additional product lines; and general working capital purposes. Proposed Nasdaq National Market Symbol.............................. "USMI" - --------------- (1) Excludes (i) 1,377,000 shares of Common Stock issuable upon exercise of options granted under the Company's 1993 Stock Plan (the "Option Plan"), (ii) up to 1,820,196 shares of Common Stock issuable upon exercise of outstanding warrants and (iii) up to shares of Common Stock issuable upon exercise of a warrant to Rodman & Renshaw, Inc. (the "Representative's Warrant"). See "Description of Capital Stock." SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) <TABLE> <CAPTION> THREE MONTHS ENDED FISCAL YEAR ENDED JANUARY 31, APRIL 30, ----------------------------------------------- ----------------- 1992(1) 1993 1994 1995 1996 1995 1996 ------- ------- ------- ------- ------- ------- ------- (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales................................ $ -- $ 5 $ 1 $ 44 $ 372 $ 22 $ 222 Costs and expenses: Pre-manufacturing and manufacturing.... -- 366 626 3,926 4,966 1,355 937 General and administrative............. 142 651 1,049 1,217 1,925 398 502 Selling and marketing.................. -- 571 385 1,136 941 198 354 Research and development............... 458 249 1,116 857 588 178 117 ----- ------- ------- ------- ------- ------- ------- Total costs and expenses............. 600 1,837 3,176 7,136 8,420 2,129 1,910 ----- ------- ------- ------- ------- ------- ------- Loss from operations..................... (600) (1,832) (3,175) (7,092) (8,048) (2,107) (1,688) Interest expense and debt issuance costs................................ -- -- 67 205 765 40 33 Other expenses......................... -- 8 -- 185 -- -- -- ----- ------- ------- ------- ------- ------- ------- Net loss................................. $(600) $(1,840) $(3,242) $(7,482) $(8,813) $(2,147) $(1,721) ===== ======= ======= ======= ======= ======= ======= Pro forma net loss per common share...... ======= ======= Shares used in computing pro forma net loss per common share.............. </TABLE> <TABLE> <CAPTION> AT APRIL 30, 1996 -------------------------- ACTUAL AS ADJUSTED(2) ------- -------------- (UNAUDITED) <S> <C> <C> BALANCE SHEET DATA: Total assets.............................................................. $12,352 Long-term debt, including current portion................................. 2,049 Working capital (deficit)................................................. (1,089) Shareholders' equity...................................................... 8,073 </TABLE> - --------------- (1) From the date of the Company's inception on June 19, 1991 to January 31, 1992. (2) Adjusted to reflect receipt by the Company of estimated net proceeds of $ from the issuance of shares of Common Stock at an assumed public offering price of $ per share and the application of such proceeds. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000911566_renco_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000911566_renco_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the financial statements contained elsewhere in this Prospectus. Unless the context otherwise requires, references to the "Company" mean Renco Metals, Inc., references to "Magcorp" mean Magnesium Corporation of America, references to "Sabel" mean Sabel Industries, Inc. and references to "Subsidiaries" and "Guarantors" mean Magcorp and Sabel, each of which is a wholly-owned subsidiary of the Company. The Company's fiscal year ends October 31. Therefore, for example, "fiscal year 1995" refers to the fiscal year ended October 31, 1995. THE COMPANY The Company is engaged in the production and sale of magnesium and magnesium alloys through its wholly-owned subsidiary, Magcorp, and diversified steel service operations through its wholly-owned subsidiary, Sabel. For the twelve months ended April 30, 1996, the Company had revenues, EBITDA (as defined) and net income of $197.2 million, $61.8 million and $29.7 million, respectively. Magcorp In 1995, Magcorp was the third largest producer of pure magnesium and magnesium alloys in North America and the fourth largest producer in the world outside the Commonwealth of Independent States ("CIS") and People's Republic of China ("PRC"). Magnesium and magnesium alloys are components in products ranging from aluminum beverage cans, computer chassis and power tools to complex castings for the aerospace, automotive and recreation industries. Additionally, magnesium is used in the production of steel, ductile iron and other metals and as a reagent in the manufacture of various organic and pharmaceutical products. Magcorp sells pure magnesium and magnesium alloys to domestic and international customers. Magcorp's plant, which was constructed in 1972, is located in Rowley, Utah, and has a nominal annual production capacity of approximately 41,000 metric tons. Magcorp produced approximately 38,400 metric tons in fiscal year 1995 and approximately 20,300 metric tons in the six months ended April 30, 1996. Magcorp accounted for 21% of calendar year 1995 North American production and 16% of calendar year 1995 global production, excluding CIS and PRC, according to statistics published by the International Magnesium Association (the "IMA") and management estimates. Due to the high-quality brine drawn from the Great Salt Lake and a proprietary production process, Magcorp is capable of consistently producing magnesium with a purity level which exceeds the industry standard of 99.8%. Magcorp offers over 30 different sizes, shapes and weights of primary magnesium and magnesium alloy products in a range of purity levels to meet customer needs in all of its major markets. Limited magnesium supply combined with continued increases in demand resulted in significant increases in pure magnesium list prices during 1995. From 1986 to 1995, magnesium demand increased at a compound annual growth rate ("CAGR") of approximately 3.8%. This growth is due to magnesium's inherent metallurgical properties including its light weight, high strength-to-weight ratio, excellent corrosion resistance and reactivity with certain elements. As a result of these characteristics, from 1986 to 1995, the use of magnesium increased in most of magnesium's largest end markets including aluminum alloying (3% CAGR), die castings (20% CAGR) and desulfurization in steel production (8% CAGR). The increase in demand for magnesium has not resulted in significant increases in supply. In early 1994, one of the largest domestic producers significantly reduced its capacity, and that capacity has not been replaced. North American producers are currently operating at approximately 95% of capacity. Magcorp's current capacity utilization rate is 96%. As a result of these industry conditions, list prices for pure magnesium sold by North American producers in North America increased to record highs in 1995. Pure magnesium list prices increased from $1.43 per pound in 1991 to $1.93 per pound in mid-1995, and have remained stable since such time. Magnesium regularly sells for prices lower than the list price for pure magnesium, with price dependent on market segment, chemistry, contract terms, including negotiated discounts, and quality, with the higher quality magnesium sold by Magcorp selling at or near list price, and lower quality magnesium, like that produced in the PRC, selling at substantially below list price. Manufacturers of lower quality pure magnesium, including those in the PRC, have experienced price reductions during 1996. Magcorp believes that the price that it will receive for higher quality pure magnesium sold in the United States may decrease modestly in the second half of 1996 but remain at levels above 1995. As of March 31, 1996, magnesium producer inventories outside the PRC and CIS were 30,300 metric tons, which represents approximately five weeks of supply, compared with normal levels of approximately eight weeks, and up from a record low of 17,200 metric tons in June 1995. The recent increase in inventories resulted from slightly higher production of high quality pure magnesium and an increase in the availability of magnesium produced in the CIS and PRC. Management believes that the industry's high capacity utilization rates will continue through at least the year 2000 due to increasing demand for magnesium and the high costs and difficulty associated with constructing a new facility. The magnesium manufacturing process is also highly technical and proprietary to each company. Management estimates a cost of approximately $500 million to establish a facility with the same production capacity as Magcorp's facility. One new facility, located in Israel with an estimated annual capacity of 27,500 metric tons, is expected to begin production in early 1997. The capacity of the Israeli facility may also be increased, subject to start-up success, viability and market conditions, from 27,500 to 55,000 metric tons, with a possible start-up date for the second phase in 1999. Magcorp's business strategy consists of three principal elements: (i) maximize sales in markets in which superior margins can be achieved, (ii) establish and maintain long-term customer relationships through service, product flexibility and responsiveness and (iii) manage production and overhead costs aggressively. In furtherance of its business strategy, Magcorp emphasizes quality, service and flexibility to meet changing customer specifications. In particular, management believes that Magcorp's range of products and delivery program has afforded Magcorp a significant degree of flexibility to meet customer needs which serves to foster long-term relationships with its core customers. Additionally, with respect to costs, management has maintained an aggressive cost management program since 1987 which has resulted in a 28.3% reduction of direct unit manufacturing costs. Management is committed to pursuing further efficiencies and cost reductions to maintain its competitive position within the industry. To this end, management has developed a capital improvement program totaling approximately $46 million which encompasses the installation of new electrolytic cell technology, as well as the installation of a magnesium caster. The new electrolytic cells are expected to reduce operating costs and improve manufacturing efficiencies resulting from reductions in: (i) electricity consumption; (ii) manufacturing labor requirements; (iii) magnesium metal losses in the manufacturing process; and (iv) chlorine emissions. The electrolytic cell conversion will commence in early 1997 with the installation of a prototype cell and, assuming its successful operation, the conversion of the remaining cells is expected to be completed by 1999. Management estimates that the magnesium caster will be installed in fiscal year 1997. Sabel Sabel is a diversified company primarily involved in the steel service center, scrap metal and reinforcing bar ("rebar") fabrication businesses. Through its four steel service centers located in Alabama, Sabel distributes a full line of hot rolled and cold rolled carbon steel and structural steel to industrial accounts as well as the general public throughout the Southeast. Sabel's scrap metal operations process to customer specifications and sell and transport ferrous and non-ferrous scrap metal to mini- and integrated mills. Sabel's rebar fabrication operation customizes rebar to sizes and shapes required for use in building and highway construction. Sabel processes more than 90% of the steel it sells to more than 3,500 customers. Sabel's business strategy is to maintain and strengthen its presence in niche markets while emphasizing supplier and customer relationships. Sabel concentrates on low volume, high margin sales to customers whose order sizes are not efficiently handled by larger steel service centers and scrap metal companies. Sabel's ability to provide one-day turnaround service on most commonly used steel products at competitive prices enables its smaller customers to implement just in time delivery for material requirements planning. With a primary focus on the Southeast region, Sabel's geographic proximity to its customers facilitates this service while minimizing freight costs and delivery time. Sabel's strong market presence in the region enables it to obtain contracts for on-site collection of scrap materials from a number of industrial concerns. Control of the Company All of the Company's issued and outstanding capital stock is owned by The Renco Group, Inc. ("Group"), which is 95.8% owned by Mr. Ira Leon Rennert, the Chairman and Chief Executive Officer of the Company and Group, and by trusts established by him for members of his family (but of which he is not a trustee). As a result of such ownership, Mr. Rennert controls the Company and its subsidiaries. THE OFFERING <TABLE> <S> <C> SECURITIES OFFERED................. $150,000,000 aggregate principal amount of % Senior Notes due 2003 (the "Senior Notes"). MATURITY DATE...................... , 2003. INTEREST PAYMENT DATES............. Interest will accrue from the date of issuance and will be payable semi-annually on each and , commencing , 199 . OPTIONAL REDEMPTION................ The Senior Notes are redeemable, in whole or in part, at the option of the Company on or after , 2000 at the redemption prices set forth herein plus accrued interest to the redemption date. See "Description of Senior Notes -- Optional Redemption." In addition, prior to , 1999, the Company, at its option, may redeem up to 33% of the aggregate principal amount of the Senior Notes originally issued with the net proceeds of one or more Public Equity Offerings at the redemption price set forth herein plus accrued interest to the date of redemption; provided that at least $100.0 million of Senior Notes remain outstanding immediately after such redemption. See "Description of Senior Notes -- Optional Redemption Upon Public Equity Offerings." CHANGE OF CONTROL.................. Upon a Change of Control, each holder of Senior Notes will have the right to require the Company to repurchase all or a portion of such holder's Senior Notes at a price of 101% of the principal amount thereof plus accrued interest to the repurchase date. See "Description of Senior Notes -- Change of Control." ASSET SALE PROCEEDS................ The Company is obligated in certain instances to make offers to purchase the Senior Notes at a redemption price of 100% of the principal amount thereof plus accrued interest to the repurchase date with the net cash proceeds of certain sales or other dispositions of assets. See "Description of Senior Notes -- Certain Covenants -- Disposition of Proceeds of Asset Sales." GUARANTEES......................... The Senior Notes are fully and unconditionally guaranteed, jointly and severally, by the Guarantors on a senior unsecured basis. See "Description of Senior Notes -- Guarantees." RANKING............................ The Senior Notes will be senior obligations of the Company and will rank pari passu with all senior indebtedness of the Company, including any Existing Notes that remain outstanding after the Tender Offer, and will rank senior to all subordinated indebtedness of the Company. USE OF PROCEEDS.................... The Company intends to use the net proceeds from the Offering of the Senior Notes, together with available cash of the Company, to (i) retire Existing Notes validly tendered pursuant to the Tender Offer (as defined), (ii) redeem the Company's existing 10% Preferred Stock held by Group, (iii) make certain contractual compensation payments to certain executives of Magcorp, (iv) pay a dividend to Group and (v) pay related fees and expenses. See "Use of Proceeds." The use of the proceeds and the application of the available cash, together with certain amendments to the Revolving Credit Facilities, are collectively referred to herein as the "Transactions." </TABLE> <TABLE> <S> <C> CERTAIN COVENANTS.................. The Indenture governing the Senior Notes will contain certain covenants that, among others, limit the type and amount of additional indebtedness that may be incurred by the Company or any of its subsidiaries and impose limitations on investments, loans, advances, the payment of dividends and the making of certain other payments, the creation of liens, certain transactions with affiliates and certain mergers. See "Description of Senior Notes -- Certain Covenants."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000911583_steinway_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000911583_steinway_prospectus_summary.txt
new file mode 100644
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY INFORMATION IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION, INCLUDING "RISK FACTORS," AND FINANCIAL STATEMENTS AND NOTES THERETO CONTAINED ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE SPECIFICALLY NOTED HEREIN, ALL OF THE SHARE DATA WITH RESPECT TO THE ORDINARY COMMON STOCK AND THE CLASS A COMMON STOCK (COLLECTIVELY, THE "COMMON STOCK") OF STEINWAY MUSICAL INSTRUMENTS, INC. (THE "COMPANY") CONTAINED HEREIN GIVES EFFECT TO (I) THE CONVERSION OF THE CONVERTIBLE PARTICIPATING PREFERRED STOCK INTO SHARES OF THE ORDINARY COMMON STOCK, (II) THE EXERCISE OF ALL OUTSTANDING WARRANTS TO PURCHASE THE ORDINARY COMMON STOCK AND (III) THE 2.83-FOR-1 STOCK SPLIT OF ALL OF THE COMPANY'S OUTSTANDING SHARES OF COMMON STOCK. ALL REFERENCES TO THE COMPANY SHALL INCLUDE ITS SUBSIDIARIES EXCEPT AS OTHERWISE SPECIFICALLY NOTED HEREIN. EXCEPT AS NOTED, INFORMATION PRESENTED HEREIN ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED. THE COMPANY The Company, through its subsidiaries Steinway Musical Properties, Inc. ("Steinway") and The Selmer Company, Inc. ("Selmer"), is one of the world's leading manufacturers of musical instruments. Steinway produces the highest quality piano in the world and has one of the most widely recognized and prestigious brand names. For more than a century, the Steinway concert grand has been the piano of choice for the world's greatest and most popular pianists, including artists such as Vladimir Horowitz, George Gershwin and Billy Joel. More than 90% of all concert piano performances worldwide were on Steinway grand pianos during the 1995 concert season. Selmer is the leading domestic manufacturer of band and orchestral instruments and related accessories, including a complete line of brasswind, woodwind, percussion and stringed instruments. SELMER PARIS saxophones, BACH trumpets and trombones and LUDWIG snare drums are considered by many to be the finest such instruments in the world. In 1995, Selmer's domestic market share was approximately 42% in advanced and professional band instruments and 25% in beginner instruments. On a pro forma combined basis for 1995, the Company's net sales were $233.7 million. Steinway concentrates on the high-end grand piano segment of the industry. Steinway also offers vertical pianos as well as a mid-priced line of grand and vertical pianos under the Boston brand name to provide dealers with a broader product line. Steinway hand crafts its pianos in New York and Germany and sells them through more than 200 independent piano dealers worldwide and five Steinway-operated retail showrooms located in New York, New Jersey, London, Hamburg and Berlin. In 1995, approximately 50% of Steinway's net sales were in the United States, 37% in Europe and the remaining 13% primarily in Asia. Selmer has the leading domestic market share in virtually all of its product lines, with such widely recognized brand names as SELMER PARIS, BACH, GLAESEL, WILLIAM LEWIS, LUDWIG and MUSSER. Selmer's products are made by highly skilled craftsmen at manufacturing facilities in Indiana, North Carolina, Ohio and Illinois, and sold through more than 1,600 independent dealers. Beginner instruments accounted for 76% of Selmer's unit sales and 53% of instrument revenues in 1995 with advanced and professional instruments representing the balance. In 1995, 81% of Selmer's net sales were in the United States. The Company acquired Selmer in August 1993 from an affiliate of Integrated Resources, Inc., and Steinway in May 1995 (the "Steinway Acquisition") from John and Robert Birmingham. DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR ACCOUNTS OF OTHERS IN THE ORDINARY COMMON STOCK PURSUANT TO EXEMPTIONS FROM RULES 10B-6, 10B-7, AND 10B-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934. BUSINESS STRATEGY The Company believes that there are significant opportunities in the Steinway and Selmer businesses which were not fully pursued by the previous owners. The Company's strategy is to capitalize on its strong brand names and leading market positions to grow sales and profitability. On a pro forma combined basis, the Company's net sales and earnings from operations improved 8.7% and 28.0%, respectively, for 1995 compared to 1994, and 15.4% and 31.3%, respectively, for the first six months of 1996 over the comparable period in 1995. The Company intends to pursue the following strategic opportunities. CAPITALIZE ON SELMER'S STRONG INDUSTRY DEMAND The Company believes that the domestic demand for band and orchestral instruments has increased significantly over the last few years as a result of strong demographic trends and a heightened overall interest in music. Sales of Selmer instruments have been generally resistant to macroeconomic cycles and are strongly correlated to the number of school children in the United States. The domestic student population is currently the largest it has been over the past 30 years and is expected to grow steadily over the next decade. During the past two years, Selmer has been unable to manufacture enough instruments to satisfy the demand for its products. Selmer has recently made investments to improve production output and expand capacity, including hiring and training of additional personnel and installation of state-of-the-art equipment. The Company expects to benefit from increased production in 1996. For the first six months of 1996, Selmer's net sales were up 15.0% with instrument unit volumes up 7.6% compared to the first six months of 1995. INCREASE STEINWAY'S PENETRATION OF DOMESTIC MARKET Steinway's share of the domestic grand piano market was approximately 7% in 1995. The Company believes there is a significant opportunity to better penetrate the domestic market through improved selling and marketing techniques and better training and selection of dealers. During the past two years, Steinway has increased its focus on these efforts and has developed several new initiatives. For example, dealer training material has been redesigned and customized marketing campaigns have been developed for all dealers. In addition, each market is reviewed periodically and rated relative to its size and demographic potential. Underperforming markets are targeted and a comprehensive plan is developed to improve performance. Largely as a result of these measures, domestic unit sales of grand pianos increased 11% from 1994 to 1995 and 23% from the first six months of 1995 to the comparable period in 1996. The institutional segment of the U.S. piano market, which includes music schools, conservatories and universities, currently represents less than 10% of Steinway's domestic sales. Until recently, many institutions have been reluctant to purchase new pianos because of the high cost and their limited annual budgets. The Company estimates that existing institutional pianos have an average age of approximately 30 years and are, therefore, prime candidates for replacement. In 1995, Steinway introduced a new marketing initiative, supported by a unique third-party financing program, which enables institutions to purchase pianos on a long-term installment basis at attractive financing terms. The historically high resale value of Steinway pianos allows the third-party lender to provide this attractive financing program without any obligation on the part of the Company. The Company believes that this program will significantly enhance its institutional sales efforts. Since its recent implementation, the program has helped generate additional institutional sales, including the sale of over 80 pianos to two major U.S. universities which had previously been using competitors' pianos. PURSUE STRATEGIC ACQUISITIONS The Company believes that the fragmented nature of the music industry provides significant opportunities for acquisitions to further increase its growth. The Company considers itself uniquely positioned to make strategic acquisitions in complementary music-related businesses due to its market leadership, broad distribution capabilities and history of successful acquisitions. Several acquisition opportunities have been identified with candidates that have attractive market shares and growth potential, as well as other candidates whose manufacturing and distribution systems can be combined with the Company's systems to achieve operating efficiencies. Currently, the Company is at various stages of discussions with several potential acquisition candidates. EXPLOIT INTERNATIONAL OPPORTUNITIES The Company believes that Steinway is well positioned to benefit from further economic recovery in Europe. Since 1992, the number of Steinway grand pianos sold outside the United States has been relatively flat at approximately 900 units per year. However, for the 15 years prior to 1992, Steinway's foreign operations sold approximately 1,200 to 1,400 grand pianos annually. The Company believes this recent decline is primarily due to relatively weak economies in Europe, particularly in its largest markets of Germany, Switzerland, France and Italy. The Company believes that it has at least maintained its market share in its foreign markets throughout this period and expects to benefit significantly from a recovery of foreign sales to levels which more closely resemble Steinway's higher historical experience. In addition, the Company is exploring expansion opportunities for Steinway beyond its traditional markets of North America and Western Europe. One of the most attractive opportunities for Steinway lies in its continued expansion into the Asian piano market. Steinway's current market share in Japan and Korea combined is less than 1.0%, although these countries are two of the largest piano markets in the world. Although the Steinway piano has an excellent reputation in Asia and is the piano of choice in virtually every Japanese concert venue, Steinway has not historically focused significant selling or marketing efforts in these markets. The Company is reviewing these important markets and is taking steps to improve Steinway's local distribution and marketing capabilities. Although Selmer's brand names are recognized worldwide, foreign sales have historically represented less than 20% of Selmer's net sales, due largely to manufacturing capacity limitations at its present facilities. The Company believes that the European market presents significant opportunities for growth, particularly in the professional segment. To target this market, the Company is aggressively pursuing relationships with new dealers as well as utilizing the existing Steinway dealer network. IMPROVE MANUFACTURING EFFICIENCIES The Company believes that Steinway and Selmer manufacture the highest quality musical instruments in the world. The manufacturing processes of both companies require a significant level of hand craftsmanship. A Steinway grand piano contains more than 12,000 parts. At Selmer, the manufacturing process for a typical instrument involves thousands of intricate and precise steps. The Company believes that, over time, portions of the manufacturing processes for Steinway and Selmer can be simplified or stream-lined to improve productivity without compromising the quality and integrity of the finished product. The Company has increased its capital expenditure budget for 1996 and 1997 to approximately $5.0 million from $4.1 million in 1995 on a pro forma basis. The majority of this spending is targeted for capacity expansion and manufacturing quality and productivity improvements. THE OFFERING (1) <TABLE> <S> <C> Ordinary Common Stock Offered: U.S. Offering: By the Company.......................... 2,880,000 shares By the Selling Stockholders............. 504,000 shares -------- Total U.S. Offering................... 3,384,000 shares -------- -------- International Offering: By the Company.......................... 720,000 shares By the Selling Stockholders............. 126,000 shares -------- Total International Offering.......... 846,000 shares -------- -------- Total Offering...................... 4,230,000 shares -------- -------- Common Stock to be outstanding after the Offering................................... 9,079,174 shares of Ordinary Common Stock 477,953 shares of Class A Common Stock -------- 9,557,127 Total shares outstanding -------- -------- Use of Proceeds............................. The estimated net proceeds to the Company of $68.2 million will be used to reduce indebtedness and for general corporate purposes. Proposed NYSE Symbol........................ "LVB" </TABLE> - ------------------------ (1) Assumes the Underwriters' over-allotment option is not exercised. If such over-allotment is exercised, up to an additional 540,000 shares will be issued and sold by the Company and 94,500 shares will be sold by the Selling Stockholders. SUMMARY PRO FORMA FINANCIAL INFORMATION The following pro forma financial information gives pro forma effect to (i) the Steinway Acquisition, (ii) the sale by the Company of Ordinary Common Stock in the Offering, (iii) a reduction in interest expense as a result of reduced indebtedness upon application of the net proceeds to the Company of the Offering, (iv) conversion of the Convertible Participating Preferred Stock into shares of Ordinary Common Stock and (v) the exercise of all outstanding warrants to purchase Ordinary Common Stock, in each case as if such transactions had occurred on January 1, 1995. See "Use of Proceeds," "Capitalization," "Pro Forma Condensed Consolidated Financial Information," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Description of Capital Stock" and the Company's Consolidated Financial Statements. <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED ------------------------------ DECEMBER 31, 1995 JULY 1, 1995 JUNE 29, 1996 ----------------- ------------- -------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION) <S> <C> <C> <C> INCOME STATEMENT DATA: Net sales............................. $233,731 $115,640 $133,416 Gross profit (1)...................... 74,357 37,458 42,687 Earnings from operations.............. 25,761 12,577 16,474 Net income (2)........................ 4,507 2,455 5,476 Net income per share (2).............. 0.49 0.27 0.57 Weighted average common and common equivalent shares outstanding........ 9,284,763 9,260,000 9,557,127 OTHER FINANCIAL DATA: EBITDA (1)(3)......................... $37,845 $18,526 $22,285 Interest expense, net................. 12,706 6,489 6,192 Capital expenditures.................. 4,066 1,834 1,555 Cash flows from: (4) Operating activities................ 5,626 (14,054) (18,667) Investing activities................ (106,521) (102,902) (1,381) Financing activities................ 104,249 116,290 20,284 MARGINS: Gross profit (1)...................... 31.8% 32.4% 32.0% EBITDA (1)(3)......................... 16.2 16.0 16.7 BALANCE SHEET DATA (AT PERIOD END): Cash.................................. $1,670 Current assets........................ 146,099 Total assets.......................... 270,062 Current liabilities................... 34,038 Total debt............................ 131,532 Stockholders' equity.................. 71,426 </TABLE> - ------------------------------ (1) Gross profit and EBITDA for the year ended 1995 and six months ended July 1, 1995 reflect positive adjustments of $9,638 and $2,433, respectively relating to purchase accounting adjustments to inventory for the Steinway Acquisition in 1995. (2) Pro forma net income for the year ended December 31, 1995 and the six months ended July 1, 1995 does not include an extraordinary charge of $4,589 ($0.49 per share) which would have been incurred by the Company in connection with the reduction in indebtedness upon application of a portion of the net proceeds to the Company from the Offering had such repayment occurred on January 1, 1995. (3) EBITDA represents earnings before depreciation and amortization, net interest expense, other expenses (including certain management fees and bank fees) and income tax expense (benefit), adjusted to exclude non-recurring charges. While EBITDA should not be construed as a substitute for operating income or a better indicator of liquidity than cash flow from operating activities, which are determined in accordance with generally accepted accounting principles, it is included herein to provide additional information with respect to the ability of the Company to meet its future debt service, capital expenditure and working capital requirements which the Company believes certain investors find to be useful. EBITDA is not necessarily a measure of the Company's ability to fund its cash needs. (4) For more information regarding cash flow data, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and the Company's Consolidated Financial Statements included elsewhere in this Prospectus. SUMMARY HISTORICAL FINANCIAL INFORMATION <TABLE> <CAPTION> PREDECESSOR (1) --------------------------------- YEAR ENDED COMPANY ---------------------------------------------------------- PERIOD YEAR ENDED SIX MONTHS ENDED DECEMBER 31, ----------------------- DECEMBER 31, ---------------------- -------------------- 1/1/93 - 8/11/93 - ---------------------- JULY 1, JUNE 29, 1991 1992 8/10/93 12/31/93 1994 1995 (2) 1995 (2) 1996 (2) --------- --------- ----------- ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> <C> INCOME STATEMENT DATA: Net sales................... $ 83,232 $ 85,895 $ 57,171 $ 34,339 $ 101,114 $ 189,805 $ 71,714 $ 133,416 Gross profit (3)............ 27,139 29,458 17,955 10,238 31,925 59,856 22,956 42,687 Earnings (loss) from operations................. 7,993 9,233 5,520 (1,640) 12,472 13,102 7,243 16,353 Net income (loss)........... 766 2,343 1,405 (3,109) 2,922 (2,074) 1,709 3,291 Net income per share........ -- -- -- (2.07) 0.52 (1.36) 0.30 0.55 SUPPLEMENTARY INCOME STATEMENT DATA: (4).......... Supplementary net income before extraordinary item (5)........................ $ 2,326 $ 5,476 Supplementary net income per share before extraordinary item (5)................... $ 0.25 $ 0.57 OTHER FINANCIAL DATA: EBITDA (3)(6)............... $ 13,128 $ 14,437 $ 8,522 $ 4,597 $ 16,638 $ 30,479 $ 11,925 $ 22,285 Interest expense, net....... 7,165 6,797 4,072 3,028 7,752 14,340 4,608 9,576 Capital expenditures........ 744 720 576 303 1,112 3,162 1,080 1,555 Cash flows from: (7) Operating activities...... 8,952 6,847 (8,565) 15,102 10,973 6,663 (11,838) (20,579) Investing activities...... (676) (553) (577) (94,413) (1,202) (107,702) (104,054) (1,381) Financing activities...... (9,845) (5,967) 9,512 78,648 (9,549) 104,365 116,373 20,284 MARGINS: Gross profit (3)............ 32.6% 34.3% 31.4% 29.8% 31.6% 31.5% 32.0% 32.0% EBITDA (3)(6)............... 15.8 16.8 14.9 13.4 16.5 16.1 16.6 16.7 BALANCE SHEET DATA (AT PERIOD END): Cash........................ $ 473 $ 402 $ 716 $ 53 $ 380 $ 3,706 $ 1,053 $ 1,670 Current assets.............. 54,671 55,712 69,563 56,736 56,265 132,380 143,600 146,099 Total assets................ 85,649 82,785 95,349 88,970 85,524 263,796 280,598 271,048 Current liabilities......... 8,870 9,519 9,907 10,174 13,388 41,767 39,170 34,038 Total debt.................. 60,374 55,024 65,053 71,369 62,057 174,039 186,824 194,148 Partners'/Stockholders' equity..................... 14,537 16,626 17,999 4,226 7,253 5,828 10,371 7,321 </TABLE> - ------------------------------ (1) On August 10, 1993, the Company purchased substantially all of the assets and certain liabilities of The Selmer Company, L.P. (the "Predecessor"), a wholly-owned subsidiary of Integrated Resources, Inc. (2) The Company acquired Steinway in May 1995. (3) Gross profit and EBITDA for the period August 11, 1993 to December 31, 1993, and the years ended 1994 and 1995 and the six months ended July 1, 1995 reflect positive adjustments of $4,754, $264, $9,638 and $2,433, respectively, relating to purchase accounting adjustments to inventory for the Steinway Acquisition in 1995 and the acquisition of Selmer in 1993. (4) As adjusted to give effect to a reduction in interest expense as a result of reductions in indebtedness upon application of the net proceeds to the Company of the Offering, as if such transaction had occurred on January 1, 1995. See "Use of Proceeds." Supplementary weighted average common and common equivalent shares reflect the additional shares assumed to be outstanding to effect the transaction described above. (5) Supplementary net income for the year ended December 31, 1995 does not include an extraordinary charge of $4,589 ($0.49 per share) which would have been incurred by the Company in connection with the reduction in indebtedness upon application of a portion of the net proceeds to the Company from the Offering had such repayment occurred on January 1, 1995. (6) EBITDA represents earnings before depreciation and amortization, net interest expense, other expenses (including certain management fees and bank fees) and income tax expense (benefit), adjusted to exclude non-recurring charges. While EBITDA should not be construed as a substitute for operating income or a better indicator of liquidity than cash flow from operating activities, which are determined in accordance with generally accepted accounting principles, it is included herein to provide additional information with respect to the ability of the Company to meet its future debt service, capital expenditure and working capital requirements which the Company believes certain investors find to be useful. EBITDA is not necessarily a measure of the Company's ability to fund its cash needs. (7) For more information regarding cash flow data, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and the Company's Consolidated Financial Statements included elsewhere in this Prospectus.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000911755_andrx-corp_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000911755_andrx-corp_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS DOES NOT GIVE EFFECT TO 1,539,787 SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF OUTSTANDING OPTIONS AND WARRANTS, INCLUDING THE INVESTOR WARRANTS, THE AGENT'S OPTION AND THE AGENT'S WARRANTS. THE COMPANY Andrx is engaged in the formulation and commercialization of controlled-release oral pharmaceuticals utilizing the Company's proprietary drug delivery technologies. Pharmaceutical companies are increasingly utilizing controlled-release drug delivery technologies to improve drug therapy. Controlled-release drug delivery technologies generally provide more consistent and appropriate drug levels in the bloodstream than immediate-release dosage forms and may improve drug efficacy and reduce side effects by releasing drug dosages at specific times and in specific locations in the body. These technologies also allow for the development of "patient-friendly" dosage forms, which reduce the frequency of drug administration, thus improving patient compliance. Controlled-release pharmaceuticals can be especially beneficial for certain patient populations, such as the elderly, who often require several medications with differing dosing regimens. To date, the Company has developed six distinct drug delivery technologies that are patented or for which patent applications have been filed. The Company believes that its technologies are relatively flexible and can be modified to apply to a variety of pharmaceutical products. The Company also believes that major pharmaceutical companies often do not possess controlled-release drug delivery technology expertise and rely upon third parties such as Andrx to develop such technologies for their product candidates. The market for advanced drug delivery systems is large and is growing rapidly. Based on published data, the market for orally-administered drugs that utilize sustained and controlled-release drug delivery systems is projected to increase to approximately $15 billion in 2000 from approximately $4 billion in 1993. The Company is applying its proprietary drug delivery technologies and formulation skills initially to the development of generic versions of selected high sales volume, controlled-release brand name pharmaceuticals, for which marketing exclusivity or patent rights have expired or are near expiration. In late 1995, the Company submitted Abbreviated New Drug Applications ("ANDAs") to the U.S. Food and Drug Administration (the "FDA") covering generic versions of Cardizem CD/registered trademark/ and Dilacor XR/registered trademark/. According to data from IMS America, the brand name versions of these drugs had combined 1995 U.S. sales in excess of $870 million. The Company currently has 15 additional generic controlled-release drugs under development, the brand name versions of which had combined 1995 U.S. sales in excess of $4 billion. Of these product candidates, 11 are in various phases of bioequivalence studies and four are in formulation development. To expedite product development and reduce the Company's development costs, the Company has entered into collaborative arrangements with major generic pharmaceutical companies. Andrx is a 50% partner in a joint venture known as ANCIRC with Watson Pharmaceuticals, Inc. ("Watson") for the development of up to eight controlled-release generic pharmaceuticals and has entered into development and licensing agreements with Mylan Laboratories, Inc. ("Mylan"), Zenith Laboratories, Inc., a subsidiary of IVAX Corporation ("IVAX"), and Watson for four additional controlled-release products. Watson owns approximately 15.6% of the Company's presently outstanding Common Stock. Generic pharmaceuticals are therapeutic equivalents of brand name drugs for which marketing exclusivity or patent rights have expired. According to data from IMS America, U.S. sales of generic pharmaceuticals exceeded $6.3 billion in 1994 and have grown at an average rate of 32% since 1992. The Company believes that the market for generic pharmaceuticals has grown and will continue to grow because of various factors, including the aging of the U.S. population, continuing efforts to contain health care costs by governmental agencies, health care institutions and third party payors, and the increasing awareness and acceptance of generic drugs by physicians, pharmacists and consumers. Andrx believes that the drug delivery technologies it uses for the development of generic controlled-release pharmaceuticals will also have application to the development of brand name controlled-release pharmaceuticals. To commercialize this opportunity, Andrx plans to work with brand name pharmaceutical companies in two basic ways: (i) by developing controlled-release formulations of existing immediate-release drugs and (ii) by applying its drug delivery technologies to the formulation of new drugs under development by these pharmaceutical companies. In addition to the potential for improving drug efficacy, the Company believes that its drug delivery technologies will provide pharmaceutical companies with the opportunity to enhance the commercial value of their new drug product candidates. In April 1996, the Company entered into its first collaboration for the development of a brand name controlled-release pharmaceutical through its agreement with Sepracor, Inc. ("Sepracor"). Pursuant to this agreement, Andrx is using one of its controlled-release drug delivery technologies to formulate a once-a-day version of terfenadine carboxylate, an antihistamine being developed by Sepracor. A twice-a-day version of this drug was approved by the FDA in 1996, and is marketed in the U.S. under the brand name Allegra/registered trademark/ by Hoechst Marion Roussel, Inc. ("HMR"). In addition to developing controlled-release pharmaceuticals, the Company markets and distributes generic drugs manufactured by third parties. These operations, which commenced in late 1992, generated 1995 revenues of $50.5 million. To date, substantially all of the Company's revenues have been generated by its distribution operations. The Company's customer base consists primarily of independent pharmacies, regional pharmacy chains which do not maintain their own central warehousing facilities and pharmacy buying groups. The Company currently utilizes gross profit from its generic pharmaceutical distribution operations to offset a portion of the Company's overall administrative costs. These operations also provide Andrx with an ability to directly observe and participate in developments and trends in the generic pharmaceutical industry. The Company plans to use its distribution operations to assist in the marketing of generic controlled-release products developed by the Company and its collaborative partners. The Company was incorporated on August 28, 1992 under the name "Andrx Pharmaceuticals, Inc.", commenced operations and assumed its present name in November of that year. The Company's executive offices are located at 4001 Southwest 47th Avenue, Suite 201, Ft. Lauderdale, Florida 33314, and the Company's telephone number is (954) 584-0300. Unless the context otherwise requires, references herein to "Andrx" or the "Company" are to Andrx Corporation and its subsidiaries. <TABLE> <CAPTION> THE OFFERING <S> <C> Common Stock offered................................. 1,205,530 shares, of which 602,618 shares are presently outstanding, 502,428 shares are issuable upon the exercise of the Investor Warrants, 50,242 shares are issuable upon exercise of the Agent's Option and 50,242 shares are issuable upon exercise of the Agent's Warrants. Common Stock to be outstanding after the offering................................. 13,985,071 shares(1) Use of proceeds...................................... The Company will not receive any proceeds from the sale of the shares of Common Stock by the Selling Shareholders. The Company will only receive proceeds upon the exercise of the Investor Warrants, the Agent's Option and the Agent's Warrants by the holders thereof, which proceeds, if any, will be used for working capital requirements and other general corporate purposes. See "Use of Proceeds." Nasdaq National Market symbol........................ ADRX </TABLE> - ------------------------- (1) Assumes the Investor Warrants, the Agent's Option and the Agent's Warrants are exercised in full. <TABLE> <CAPTION> SUMMARY CONSOLIDATED FINANCIAL DATA AUGUST 28, 1992 NINE MONTHS ENDED (INCEPTION) YEAR ENDED DECEMBER 31, SEPTEMBER 30, THROUGH -------------------------------- ------------------ DEC. 31, 1992 1993 1994 1995 1995 1996 ------------- ---- ---- ---- ---- ---- STATEMENT OF OPERATIONS DATA: <S> <C> <C> <C> <C> <C> <C> Revenues: Distribution revenues, net........ $243,200 $5,654,500 $25,915,500 $50,467,800 $35,008,300 $61,097,000 Research and development services to joint venture................ -- -- 375,300 2,528,700 1,722,300 1,829,300 Licensing revenues................ -- 225,000 155,500 165,000 165,000 -- ---------- --------- ---------- ---------- ---------- ---------- Total revenues...................... 243,200 5,879,500 26,446,300 53,161,500 36,895,600 62,926,300 ---------- --------- ---------- ---------- ---------- ---------- Cost of revenues: Distribution revenues............. 219,000 5,257,900 21,362,400 41,780,900 28,922,600 50,975,300 Research and development services to joint venture................ -- -- 375,300 2,528,700 1,722,300 1,829,300 ---------- --------- ----------- ---------- ---------- ---------- Total cost of revenues.............. 219,000 5,257,900 21,737,700 44,309,600 30,644,900 52,804,600 ---------- --------- ---------- ---------- ---------- ---------- Gross profit........................ 24,200 621,600 4,708,600 8,851,900 6,250,700 10,121,700 Selling, general and administrative expenses.......................... 169,700 1,706,300 5,389,800 8,647,200 5,944,400 9,333,000 Research and development expenses... -- 959,900 2,109,600 3,254,700 1,638,800 2,499,400 Equity in losses of joint venture... -- -- 315,800 1,839,700 1,298,000 1,384,000 ---------- ---------- ---------- ---------- ----------- ---------- Loss from operations................ (145,500) (2,044,600) (3,106,600) (4,889,700) (2,630,500) (3,094,700) Other income (expense), net......... 100 300 2,100 (297,300) (253,900) 191,700 ---------- ----------- ----------- ----------- ----------- ----------- Net loss............................ $(145,400) $(2,044,300) $(3,104,500) $(5,187,000) $(2,884,400) $(2,903,000) ========== =========== =========== =========== =========== =========== Net loss per share.................. $ (0.03) $ (0.26) $ (0.35) $ (0.55) $ (0.31) $ (0.25) ========== =========== =========== =========== =========== =========== Weighted average shares of Common Stock outstanding............ 4,681,400 7,745,100 8,758,400 9,446,800 9,252,100 11,734,000 ========== =========== =========== =========== =========== =========== </TABLE> SEPTEMBER 30, 1996 ------------------ BALANCE SHEET DATA: Cash, cash equivalents and investments available for sale.... $33,965,300 Total assets........................ 66,074,500 Short-term borrowings............... 7,820,100 Total shareholders' equity.......... 43,435,200 FORWARD-LOOKING STATEMENTS Andrx Corporation and subsidiaries ("Andrx" or the "Company") cautions readers that certain important factors may affect the Company's actual results and could cause such results to differ materially from any forward-looking statements which may be deemed to have been made in this Prospectus or which are otherwise made by or on behalf of the Company. For this purpose, any statements contained in this Prospectus that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as "may", "will", "expect", "believe", "anticipate", "intend", "could", "estimate", or "continue" or the negative other variations thereof or comparable terminology are intended to identify forward-looking statements. Factors which may effect the Company's results include, but are not limited to, the risks and uncertainties associated with a drug delivery company which has not commercialized its first product, including a history of net losses, unproven technology, lack of manufacturing experience, current and potential competitors with significant technical and marketing resources, need for future capital and dependence on collaborative partners and on key personnel. Additionally, the Company is subject to the risks and uncertainties associated with all drug delivery companies, including compliance with government regulations and the possibility of patent infringement litigation. The Company is also subject to other risks detailed herein or detailed from time to time in the Company's Commission filings. Factors that could cause or contribute to such difference include, but are not limited to, those discussed in "Risk Factors" below, as well as those discussed elsewhere in this prospectus and in the Company's filings with the Commission.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000912034_seda_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000912034_seda_prospectus_summary.txt
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+Cross-references in this summary are to captions in this Prospectus. PARTIES TO THE MERGER SEDA SPECIALTY PACKAGING CORP. SEDA Specialty Packaging Corp. ("SEDA") develops, manufactures and sells specialty plastic packaging products to the personal care, food and beverage, household and industrial chemical and pharmaceutical industries. SEDA's products consist of lined and linerless plastic caps and closures, flexible plastic tubes and custom plastic products offered in a broad variety of sizes with diverse choices of color and printing. SEDA focuses on customers who require shorter lead times, superior product quality, uniform appearance, customized service and flexible delivery schedules. SEDA's strategy is designed to respond to these key factors in order to position SEDA as a preferred supplier in the highly competitive industries in which it operates. On July 19, 1994, SEDA's stockholders approved the reincorporation of SEDA in the State of Delaware. Such reincorporation was effected on August 1, 1994. As a result of the reincorporation, each outstanding share of the Company's no par value common stock was exchanged for 1 share of $0.001 par value common stock of the Delaware corporation. The total number of common shares outstanding at the date of the reincorporation was 5,015,000. SEDA's executive offices are located at 2501 West Rosecrans Boulevard, Los Angeles, California 90059-3510 and its telephone number is (310) 635-4444. AMERICAN SAFETY CLOSURE CORP. American Safety Closure Corp. ("ASC") develops, manufactures and sells specialty plastic closures to the personal care, food and beverage and vitamin industries. ASC produces two types of tamper-evident caps, a drop-ring cap (in which the lower portion of the cap breaks away, drops down and remains on the bottle neck) and a proprietary tear-band cap (in which a narrow plastic band must be removed before the bottle can be opened). ASC also has made significant progress in developing a tamper-evident and child-resistant cap which it believes will be well received by the pharmaceutical, vitamin and food producers. ASC has four U.S. patents issued and two patent applications relating to the design of its caps, the molds and process and manufacture of the caps. Through its wholly-owned subsidiary, Arpak Plastics, Inc. ("Arpak"), ASC has made sizable inroads into the vitamin and food business with its tamper-evident closures. Additionally, ASC plans to add a child-resistant feature to certain caps in the near future, which is expected to increase ASC's access to the pharmaceutical packaging and prescription ware market. With the leasing, commencing in 1993, of certain assets formerly owned by Tredegar Molded Products ("Tredegar"), Arpak has maintained and further developed business of customers previously supplied by Tredegar, primarily in the cosmetic sector. In January 1995, these assets were purchased by SEDA from KGE Leasing Associates, Inc. ("KGE"), a corporation controlled by certain principal stockholders of ASC. See "Transaction - Interests of Certain Persons in the Merger." In addition to allowing Arpak to move into the cosmetic sector as a major source, the extra mold capacity and the wide range of decorating abilities that Arpak now possesses should enable it to become even more competitive in its traditional market sectors. ASC's executive offices are located at 1 Plant Road, Plattsburgh, New York 12901 and its telephone number is (518) 561-2030. SEDA SPECIALTY PACKAGING CORP. Cross-Reference Sheet to Form S-1 Registration Statement Pursuant to Item 501(b) of Regulation S-K <TABLE> <CAPTION> Location in Prospectus\ Form S-1 Item Registration Statement - ------------- ----------------------- <S> <C> 1. Forepart of Registration Statement and Outside Front Cover Page of Prospectus ............................. Outside Front Cover Page of Prospectus, 2. Inside Front and Outside Back Cover Pages of Prospectus.................................................. Inside Front Cover Page of Prospectus; Back Cover Page 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges .................................. Summary; Risk Factors 4. Use of Proceeds............................................. Use of Proceeds 5. Determination of Offering Price ............................ Not Applicable 6. Dilution.................................................... Not Applicable 7. Selling Security Holders.................................... Selling Security Holders 8. Plan of Distribution........................................ Plan of Distribution 9. Description of Securities to be Registered ................. Outside Front Cover Page of Prospectus; Description of Securities 10. Interests of Named Experts and Counsel ..................... Legal Opinion; Experts 11. Information with Respect to Registrant ..................... Outside Front Cover Page of Prospectus, Inside Front Cover Page of Prospectus; Prospectus Summary; Risk Factors; Capitalization; Description of Securities; Business: Market for SEDA's Common Equity and Related Stockholder Matters; Pro Forma Combined Financial Statements; Management's Discussion of Financial Condition and Results of Operations; Directors and Executive Officers; Certain Relationships and Certain Transactions 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities ............. Directors and Executive Officers </TABLE> SEDA ASC ACQUISITION CORP. ("SUBSIDIARY") Subsidiary is a corporation recently organized by SEDA in the state of Delaware for the purpose of effecting the Merger. It has no material assets and has not engaged in any activities except in connection with such proposed transaction. The mailing address of Subsidiary's executive offices is 2501 West Rosecrans Boulevard, Los Angeles, California 90059-3510, and its telephone number is (310) 635-4444. INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. PRELIMINARY PROSPECTUS DATED JUNE , 1996 SUBJECT TO COMPLETION --------------- SEDA SPECIALTY PACKAGING CORP. 2501 West Rosecrans Boulevard Los Angeles, California 90059-3501 PROSPECTUS FOR SALE OF UP TO 82,500 SHARES OF SEDA COMMON STOCK AND UP TO 150,000 SHARES OF SEDA COMMON STOCK UNDERLYING WARRANTS TO PURCHASE 150,000 SHARES OF SEDA COMMON STOCK This Prospectus relates (a) to the sale of 82,500 shares of common stock of SEDA Specialty Packaging Corp., a Delaware corporation (the "Company" and "SEDA") which were issued by SEDA in connection with the acquisition and merger of American Safety Closure Corp., a New York corporation ("ASC") and the Agreement and Plan of Merger (the "Merger Agreement") whereby ASC will be acquired by through the merger of a wholly-owned subsidiary of SEDA into ASC. Pursuant to the Plan of Merger, ASC Managing Partners, a general partnership ("ASC Partners") received $1,050,000 and 82,500 shares of common stock, $.001 par value, of SEDA (the "Common Stock") in exchange for 1,656,257 shares of the common stock of ASC, $.30 par value, of ASC (the "ASC Common Stock"), and (b) 150,000 shares of SEDA common stock issuable upon exercise of warrants (the "Underwriters Warrants") held by Sutro & Co., Incorporated ("Sutro") and NatWest Securities Limited ("NatWest"). Sutro and NatWest were the managing underwriters in SEDA's initial public offering of October 29, 1993. The exercise price of the Underwriters Warrants is the greater of $16.80 per share or the closing sale price of SEDA's common stock as reported on the NASDAQ National Market System on the date of exercise of the Underwriters Warrants less $10.00. The 82,500 shares of Common Stock, offered hereby are being offered by ASC Partners (the "Selling Stockholders"). The 150,000 shares underlying the Underwriters Warrants are being offered by SUTRO and NatWest (the "Selling Warrant Holders"). The Company will not receive any proceeds from the sale of Common Stock offered by the Selling Stockholders or the Selling Warrant Holders. Expenses of the Offering are estimated to be $51,359 and are being paid by the Company. The Selling Stockholders may from time to time sell all or a portion of the Common Stock which may be offered by them hereby in routine brokerage transactions in the over-the-counter market, at prices and terms prevailing at the time of the sale. The Selling Stockholders and Selling Warrant Holders may also make private sales directly or through brokers or may make sales pursuant to Rule 144 of the Securities Act of 1933, as amended (the "Securities Act"). The Selling Stockholders and Selling Warrant Holders may pay customary brokerage fees, commissions and expenses. The brokers executing selling orders on behalf of the Selling Stockholders and Selling Warrant Holders may be deemed to be "underwriters" within the meaning of the Securities Act, in which event commissions received by such brokers may be deemed underwriting commissions under the Securities Act. The Damon Group may be acting as a broker for the Selling Stockholders. See "Plan of Distribution." The Common Stock is included in Nasdaq and price quotations are reported on the Nasdaq National Market under the symbol "SSPC." On June 12, 1996, the closing sales price of the Common Stock as reported on the Nasdaq National Market was $21.3750. THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS," page 6. --------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. --------------- The date of this Prospectus is ________________, 1996. INTERESTS OF CERTAIN PERSONS IN THE MERGER In connection with the Merger, on January 3, 1995, SEDA entered into a letter of intent with KGE and ASC Managing Partners, a general partnership composed of David L. Kassel, Harry Goodman and Vincent Conti, the three of whom are former officers and directors of ASC, and Catherine Kassel, Tina Conti, Robert Gillings, Dorothy Goodman and Damon Testaverde. Pursuant to the letter of intent, ASC Managing Partners agreed to exchange in the Merger an aggregate of 1,656,127 shares of ASC Common Stock for $1,050,000 in cash and 82,500 shares of SEDA Common Stock. KGE, a corporation affiliated with ASC Managing Partners, also agreed to sell to SEDA all machinery and equipment then being leased to Arpak Plastics, Inc., a subsidiary of ASC, for $1,525,000 in cash, and the payment of $13,000 in accrued and unpaid lease payments. Furthermore, and without any additional consideration on January 5, 1995, ASC Managing Partners agreed AVAILABLE INFORMATION SEDA has filed a Registration Statement (the "Registration Statement") on Form S-1 under the Securities Act, with the Securities and Exchange Commission (the "Commission") with respect to the SEDA Common Stock being offered hereby. As permitted by the rules and regulations of the Commission, the Prospectus omits certain information contained in the Registration Statement. Statements made in this Prospectus as to any contract, agreement or other document referred to herein are not necessarily complete. With respect to each such contract, agreement or other document filed as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. SEDA is subject to the information requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Commission. SEDA's Exchange Act filing number is 0-22508. Such reports, proxy statements and any other information filed by SEDA with the Commission can be inspected and copied at the public reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth Street, NW, Washington, D.C. 20549, and at the following Regional Offices of the Commission: New York Regional Office, 7 World Trade Center, New York, New York 10048; and Chicago Regional Office, 500 West Madison Street, Chicago, Illinois 60661; and copies of such material can be obtained from the Public Reference Section of the Commission, located at 450 Fifth Street, N.W., Washington, D. C. Washington DC 20549 at prescribed rates. Proxy statement, reports, and other information concerning the Company may be inspected at the offices of the National Association of Securities Dealers, Inc., 1735 K Street, N.W. Washington, D.C. 20006. -------------------- SEDA furnishes to its stockholders annual reports containing financial statements audited by its independent accountants. In addition, SEDA furnishes unaudited quarterly or other interim reports to its stockholders as required. -------------------- NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS WITH RESPECT TO THE MATTERS DESCRIBED IN THIS PROSPECTUS OTHER THAN THOSE CONTAINED HEREIN. ANY INFORMATION OR REPRESENTATIONS WITH RESPECT TO SUCH MATTERS NOT CONTAINED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY SEDA. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF SEDA SINCE THE DATE HEREOF OR THAT THE INFORMATION IN THIS PROSPECTUS OR IN THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. -------------------- The Company will provide without charge to each person to whom this Prospectus is delivered, upon written or oral request of such person, a copy of any or all of the information referred to above that has been or may be incorporated by reference into this Prospectus (not including exhibits to the information so incorporated unless such exhibits are specifically incorporated by reference as well). Such request should be addressed to Ronald W. Johnson, SEDA Specialty Packaging Corp., 2501 West Rosecrans Boulevard, Los Angeles, California 90059-3510. to execute irrevocable proxies (the "Management Proxy") in favor of SEDA with regard to the 1,656,127 shares of ASC Common Stock referred to above. On January 3, 1995, the closing bid price for ASC Stock was $2 per share, and the closing bid price for SEDA Stock was $10 1/4 per share. ACCOUNTING TREATMENT The Merger will be accounted for by SEDA as a "purchase" for accounting and financial reporting purposes. COMPARATIVE MARKET PRICES The public announcement of the proposed Merger was made after the close of the market on January 5, 1995. The closing sales price for SEDA Common Stock and the closing price for ASC Common Stock on that day were $11.25 and $1.50, respectively. On June 6, 1996, the closing bid price for SEDA Common Stock was $21.50 and the closing bid price of ASC Common Stock was $1 7/16. See "SEDA Specialty Packaging Corp. - Market for SEDA's Common Equity and Related Stockholder Matters" and "American Safety Closure Corp. - Market for ASC's Common Equity and Related Stockholder Matters".
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000912553_magnesium_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000912553_magnesium_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the financial statements contained elsewhere in this Prospectus. Unless the context otherwise requires, references to the "Company" mean Renco Metals, Inc., references to "Magcorp" mean Magnesium Corporation of America, references to "Sabel" mean Sabel Industries, Inc. and references to "Subsidiaries" and "Guarantors" mean Magcorp and Sabel, each of which is a wholly-owned subsidiary of the Company. The Company's fiscal year ends October 31. Therefore, for example, "fiscal year 1995" refers to the fiscal year ended October 31, 1995. THE COMPANY The Company is engaged in the production and sale of magnesium and magnesium alloys through its wholly-owned subsidiary, Magcorp, and diversified steel service operations through its wholly-owned subsidiary, Sabel. For the twelve months ended April 30, 1996, the Company had revenues, EBITDA (as defined) and net income of $197.2 million, $61.8 million and $29.7 million, respectively. Magcorp In 1995, Magcorp was the third largest producer of pure magnesium and magnesium alloys in North America and the fourth largest producer in the world outside the Commonwealth of Independent States ("CIS") and People's Republic of China ("PRC"). Magnesium and magnesium alloys are components in products ranging from aluminum beverage cans, computer chassis and power tools to complex castings for the aerospace, automotive and recreation industries. Additionally, magnesium is used in the production of steel, ductile iron and other metals and as a reagent in the manufacture of various organic and pharmaceutical products. Magcorp sells pure magnesium and magnesium alloys to domestic and international customers. Magcorp's plant, which was constructed in 1972, is located in Rowley, Utah, and has a nominal annual production capacity of approximately 41,000 metric tons. Magcorp produced approximately 38,400 metric tons in fiscal year 1995 and approximately 20,300 metric tons in the six months ended April 30, 1996. Magcorp accounted for 21% of calendar year 1995 North American production and 16% of calendar year 1995 global production, excluding CIS and PRC, according to statistics published by the International Magnesium Association (the "IMA") and management estimates. Due to the high-quality brine drawn from the Great Salt Lake and a proprietary production process, Magcorp is capable of consistently producing magnesium with a purity level which exceeds the industry standard of 99.8%. Magcorp offers over 30 different sizes, shapes and weights of primary magnesium and magnesium alloy products in a range of purity levels to meet customer needs in all of its major markets. Limited magnesium supply combined with continued increases in demand resulted in significant increases in pure magnesium list prices during 1995. From 1986 to 1995, magnesium demand increased at a compound annual growth rate ("CAGR") of approximately 3.8%. This growth is due to magnesium's inherent metallurgical properties including its light weight, high strength-to-weight ratio, excellent corrosion resistance and reactivity with certain elements. As a result of these characteristics, from 1986 to 1995, the use of magnesium increased in most of magnesium's largest end markets including aluminum alloying (3% CAGR), die castings (20% CAGR) and desulfurization in steel production (8% CAGR). The increase in demand for magnesium has not resulted in significant increases in supply. In early 1994, one of the largest domestic producers significantly reduced its capacity, and that capacity has not been replaced. North American producers are currently operating at approximately 95% of capacity. Magcorp's current capacity utilization rate is 96%. As a result of these industry conditions, list prices for pure magnesium sold by North American producers in North America increased to record highs in 1995. Pure magnesium list prices increased from $1.43 per pound in 1991 to $1.93 per pound in mid-1995, and have remained stable since such time. Magnesium regularly sells for prices lower than the list price for pure magnesium, with price dependent on market segment, chemistry, contract terms, including negotiated discounts, and quality, with the higher quality magnesium sold by Magcorp selling at or near list price, and lower quality magnesium, like that produced in the PRC, selling at substantially below list price. Manufacturers of lower quality pure magnesium, including those in the PRC, have experienced price reductions during 1996. Magcorp believes that the price that it will receive for higher quality pure magnesium sold in the United States may decrease modestly in the second half of 1996 but remain at levels above 1995. As of March 31, 1996, magnesium producer inventories outside the PRC and CIS were 30,300 metric tons, which represents approximately five weeks of supply, compared with normal levels of approximately eight weeks, and up from a record low of 17,200 metric tons in June 1995. The recent increase in inventories resulted from slightly higher production of high quality pure magnesium and an increase in the availability of magnesium produced in the CIS and PRC. Management believes that the industry's high capacity utilization rates will continue through at least the year 2000 due to increasing demand for magnesium and the high costs and difficulty associated with constructing a new facility. The magnesium manufacturing process is also highly technical and proprietary to each company. Management estimates a cost of approximately $500 million to establish a facility with the same production capacity as Magcorp's facility. One new facility, located in Israel with an estimated annual capacity of 27,500 metric tons, is expected to begin production in early 1997. The capacity of the Israeli facility may also be increased, subject to start-up success, viability and market conditions, from 27,500 to 55,000 metric tons, with a possible start-up date for the second phase in 1999. Magcorp's business strategy consists of three principal elements: (i) maximize sales in markets in which superior margins can be achieved, (ii) establish and maintain long-term customer relationships through service, product flexibility and responsiveness and (iii) manage production and overhead costs aggressively. In furtherance of its business strategy, Magcorp emphasizes quality, service and flexibility to meet changing customer specifications. In particular, management believes that Magcorp's range of products and delivery program has afforded Magcorp a significant degree of flexibility to meet customer needs which serves to foster long-term relationships with its core customers. Additionally, with respect to costs, management has maintained an aggressive cost management program since 1987 which has resulted in a 28.3% reduction of direct unit manufacturing costs. Management is committed to pursuing further efficiencies and cost reductions to maintain its competitive position within the industry. To this end, management has developed a capital improvement program totaling approximately $46 million which encompasses the installation of new electrolytic cell technology, as well as the installation of a magnesium caster. The new electrolytic cells are expected to reduce operating costs and improve manufacturing efficiencies resulting from reductions in: (i) electricity consumption; (ii) manufacturing labor requirements; (iii) magnesium metal losses in the manufacturing process; and (iv) chlorine emissions. The electrolytic cell conversion will commence in early 1997 with the installation of a prototype cell and, assuming its successful operation, the conversion of the remaining cells is expected to be completed by 1999. Management estimates that the magnesium caster will be installed in fiscal year 1997. Sabel Sabel is a diversified company primarily involved in the steel service center, scrap metal and reinforcing bar ("rebar") fabrication businesses. Through its four steel service centers located in Alabama, Sabel distributes a full line of hot rolled and cold rolled carbon steel and structural steel to industrial accounts as well as the general public throughout the Southeast. Sabel's scrap metal operations process to customer specifications and sell and transport ferrous and non-ferrous scrap metal to mini- and integrated mills. Sabel's rebar fabrication operation customizes rebar to sizes and shapes required for use in building and highway construction. Sabel processes more than 90% of the steel it sells to more than 3,500 customers. Sabel's business strategy is to maintain and strengthen its presence in niche markets while emphasizing supplier and customer relationships. Sabel concentrates on low volume, high margin sales to customers whose order sizes are not efficiently handled by larger steel service centers and scrap metal companies. Sabel's ability to provide one-day turnaround service on most commonly used steel products at competitive prices enables its smaller customers to implement just in time delivery for material requirements planning. With a primary focus on the Southeast region, Sabel's geographic proximity to its customers facilitates this service while minimizing freight costs and delivery time. Sabel's strong market presence in the region enables it to obtain contracts for on-site collection of scrap materials from a number of industrial concerns. Control of the Company All of the Company's issued and outstanding capital stock is owned by The Renco Group, Inc. ("Group"), which is 95.8% owned by Mr. Ira Leon Rennert, the Chairman and Chief Executive Officer of the Company and Group, and by trusts established by him for members of his family (but of which he is not a trustee). As a result of such ownership, Mr. Rennert controls the Company and its subsidiaries. THE OFFERING <TABLE> <S> <C> SECURITIES OFFERED................. $150,000,000 aggregate principal amount of % Senior Notes due 2003 (the "Senior Notes"). MATURITY DATE...................... , 2003. INTEREST PAYMENT DATES............. Interest will accrue from the date of issuance and will be payable semi-annually on each and , commencing , 199 . OPTIONAL REDEMPTION................ The Senior Notes are redeemable, in whole or in part, at the option of the Company on or after , 2000 at the redemption prices set forth herein plus accrued interest to the redemption date. See "Description of Senior Notes -- Optional Redemption." In addition, prior to , 1999, the Company, at its option, may redeem up to 33% of the aggregate principal amount of the Senior Notes originally issued with the net proceeds of one or more Public Equity Offerings at the redemption price set forth herein plus accrued interest to the date of redemption; provided that at least $100.0 million of Senior Notes remain outstanding immediately after such redemption. See "Description of Senior Notes -- Optional Redemption Upon Public Equity Offerings." CHANGE OF CONTROL.................. Upon a Change of Control, each holder of Senior Notes will have the right to require the Company to repurchase all or a portion of such holder's Senior Notes at a price of 101% of the principal amount thereof plus accrued interest to the repurchase date. See "Description of Senior Notes -- Change of Control." ASSET SALE PROCEEDS................ The Company is obligated in certain instances to make offers to purchase the Senior Notes at a redemption price of 100% of the principal amount thereof plus accrued interest to the repurchase date with the net cash proceeds of certain sales or other dispositions of assets. See "Description of Senior Notes -- Certain Covenants -- Disposition of Proceeds of Asset Sales." GUARANTEES......................... The Senior Notes are fully and unconditionally guaranteed, jointly and severally, by the Guarantors on a senior unsecured basis. See "Description of Senior Notes -- Guarantees." RANKING............................ The Senior Notes will be senior obligations of the Company and will rank pari passu with all senior indebtedness of the Company, including any Existing Notes that remain outstanding after the Tender Offer, and will rank senior to all subordinated indebtedness of the Company. USE OF PROCEEDS.................... The Company intends to use the net proceeds from the Offering of the Senior Notes, together with available cash of the Company, to (i) retire Existing Notes validly tendered pursuant to the Tender Offer (as defined), (ii) redeem the Company's existing 10% Preferred Stock held by Group, (iii) make certain contractual compensation payments to certain executives of Magcorp, (iv) pay a dividend to Group and (v) pay related fees and expenses. See "Use of Proceeds." The use of the proceeds and the application of the available cash, together with certain amendments to the Revolving Credit Facilities, are collectively referred to herein as the "Transactions." </TABLE> <TABLE> <S> <C> CERTAIN COVENANTS.................. The Indenture governing the Senior Notes will contain certain covenants that, among others, limit the type and amount of additional indebtedness that may be incurred by the Company or any of its subsidiaries and impose limitations on investments, loans, advances, the payment of dividends and the making of certain other payments, the creation of liens, certain transactions with affiliates and certain mergers. See "Description of Senior Notes -- Certain Covenants."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0000912555_sabel_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000912555_sabel_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2b7ed488d0cfb4145610947637d076c48627b661
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000912555_sabel_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the financial statements contained elsewhere in this Prospectus. Unless the context otherwise requires, references to the "Company" mean Renco Metals, Inc., references to "Magcorp" mean Magnesium Corporation of America, references to "Sabel" mean Sabel Industries, Inc. and references to "Subsidiaries" and "Guarantors" mean Magcorp and Sabel, each of which is a wholly-owned subsidiary of the Company. The Company's fiscal year ends October 31. Therefore, for example, "fiscal year 1995" refers to the fiscal year ended October 31, 1995. THE COMPANY The Company is engaged in the production and sale of magnesium and magnesium alloys through its wholly-owned subsidiary, Magcorp, and diversified steel service operations through its wholly-owned subsidiary, Sabel. For the twelve months ended April 30, 1996, the Company had revenues, EBITDA (as defined) and net income of $197.2 million, $61.8 million and $29.7 million, respectively. Magcorp In 1995, Magcorp was the third largest producer of pure magnesium and magnesium alloys in North America and the fourth largest producer in the world outside the Commonwealth of Independent States ("CIS") and People's Republic of China ("PRC"). Magnesium and magnesium alloys are components in products ranging from aluminum beverage cans, computer chassis and power tools to complex castings for the aerospace, automotive and recreation industries. Additionally, magnesium is used in the production of steel, ductile iron and other metals and as a reagent in the manufacture of various organic and pharmaceutical products. Magcorp sells pure magnesium and magnesium alloys to domestic and international customers. Magcorp's plant, which was constructed in 1972, is located in Rowley, Utah, and has a nominal annual production capacity of approximately 41,000 metric tons. Magcorp produced approximately 38,400 metric tons in fiscal year 1995 and approximately 20,300 metric tons in the six months ended April 30, 1996. Magcorp accounted for 21% of calendar year 1995 North American production and 16% of calendar year 1995 global production, excluding CIS and PRC, according to statistics published by the International Magnesium Association (the "IMA") and management estimates. Due to the high-quality brine drawn from the Great Salt Lake and a proprietary production process, Magcorp is capable of consistently producing magnesium with a purity level which exceeds the industry standard of 99.8%. Magcorp offers over 30 different sizes, shapes and weights of primary magnesium and magnesium alloy products in a range of purity levels to meet customer needs in all of its major markets. Limited magnesium supply combined with continued increases in demand resulted in significant increases in pure magnesium list prices during 1995. From 1986 to 1995, magnesium demand increased at a compound annual growth rate ("CAGR") of approximately 3.8%. This growth is due to magnesium's inherent metallurgical properties including its light weight, high strength-to-weight ratio, excellent corrosion resistance and reactivity with certain elements. As a result of these characteristics, from 1986 to 1995, the use of magnesium increased in most of magnesium's largest end markets including aluminum alloying (3% CAGR), die castings (20% CAGR) and desulfurization in steel production (8% CAGR). The increase in demand for magnesium has not resulted in significant increases in supply. In early 1994, one of the largest domestic producers significantly reduced its capacity, and that capacity has not been replaced. North American producers are currently operating at approximately 95% of capacity. Magcorp's current capacity utilization rate is 96%. As a result of these industry conditions, list prices for pure magnesium sold by North American producers in North America increased to record highs in 1995. Pure magnesium list prices increased from $1.43 per pound in 1991 to $1.93 per pound in mid-1995, and have remained stable since such time. Magnesium regularly sells for prices lower than the list price for pure magnesium, with price dependent on market segment, chemistry, contract terms, including negotiated discounts, and quality, with the higher quality magnesium sold by Magcorp selling at or near list price, and lower quality magnesium, like that produced in the PRC, selling at substantially below list price. Manufacturers of lower quality pure magnesium, including those in the PRC, have experienced price reductions during 1996. Magcorp believes that the price that it will receive for higher quality pure magnesium sold in the United States may decrease modestly in the second half of 1996 but remain at levels above 1995. As of March 31, 1996, magnesium producer inventories outside the PRC and CIS were 30,300 metric tons, which represents approximately five weeks of supply, compared with normal levels of approximately eight weeks, and up from a record low of 17,200 metric tons in June 1995. The recent increase in inventories resulted from slightly higher production of high quality pure magnesium and an increase in the availability of magnesium produced in the CIS and PRC. Management believes that the industry's high capacity utilization rates will continue through at least the year 2000 due to increasing demand for magnesium and the high costs and difficulty associated with constructing a new facility. The magnesium manufacturing process is also highly technical and proprietary to each company. Management estimates a cost of approximately $500 million to establish a facility with the same production capacity as Magcorp's facility. One new facility, located in Israel with an estimated annual capacity of 27,500 metric tons, is expected to begin production in early 1997. The capacity of the Israeli facility may also be increased, subject to start-up success, viability and market conditions, from 27,500 to 55,000 metric tons, with a possible start-up date for the second phase in 1999. Magcorp's business strategy consists of three principal elements: (i) maximize sales in markets in which superior margins can be achieved, (ii) establish and maintain long-term customer relationships through service, product flexibility and responsiveness and (iii) manage production and overhead costs aggressively. In furtherance of its business strategy, Magcorp emphasizes quality, service and flexibility to meet changing customer specifications. In particular, management believes that Magcorp's range of products and delivery program has afforded Magcorp a significant degree of flexibility to meet customer needs which serves to foster long-term relationships with its core customers. Additionally, with respect to costs, management has maintained an aggressive cost management program since 1987 which has resulted in a 28.3% reduction of direct unit manufacturing costs. Management is committed to pursuing further efficiencies and cost reductions to maintain its competitive position within the industry. To this end, management has developed a capital improvement program totaling approximately $46 million which encompasses the installation of new electrolytic cell technology, as well as the installation of a magnesium caster. The new electrolytic cells are expected to reduce operating costs and improve manufacturing efficiencies resulting from reductions in: (i) electricity consumption; (ii) manufacturing labor requirements; (iii) magnesium metal losses in the manufacturing process; and (iv) chlorine emissions. The electrolytic cell conversion will commence in early 1997 with the installation of a prototype cell and, assuming its successful operation, the conversion of the remaining cells is expected to be completed by 1999. Management estimates that the magnesium caster will be installed in fiscal year 1997. Sabel Sabel is a diversified company primarily involved in the steel service center, scrap metal and reinforcing bar ("rebar") fabrication businesses. Through its four steel service centers located in Alabama, Sabel distributes a full line of hot rolled and cold rolled carbon steel and structural steel to industrial accounts as well as the general public throughout the Southeast. Sabel's scrap metal operations process to customer specifications and sell and transport ferrous and non-ferrous scrap metal to mini- and integrated mills. Sabel's rebar fabrication operation customizes rebar to sizes and shapes required for use in building and highway construction. Sabel processes more than 90% of the steel it sells to more than 3,500 customers. Sabel's business strategy is to maintain and strengthen its presence in niche markets while emphasizing supplier and customer relationships. Sabel concentrates on low volume, high margin sales to customers whose order sizes are not efficiently handled by larger steel service centers and scrap metal companies. Sabel's ability to provide one-day turnaround service on most commonly used steel products at competitive prices enables its smaller customers to implement just in time delivery for material requirements planning. With a primary focus on the Southeast region, Sabel's geographic proximity to its customers facilitates this service while minimizing freight costs and delivery time. Sabel's strong market presence in the region enables it to obtain contracts for on-site collection of scrap materials from a number of industrial concerns. Control of the Company All of the Company's issued and outstanding capital stock is owned by The Renco Group, Inc. ("Group"), which is 95.8% owned by Mr. Ira Leon Rennert, the Chairman and Chief Executive Officer of the Company and Group, and by trusts established by him for members of his family (but of which he is not a trustee). As a result of such ownership, Mr. Rennert controls the Company and its subsidiaries. THE OFFERING <TABLE> <S> <C> SECURITIES OFFERED................. $150,000,000 aggregate principal amount of % Senior Notes due 2003 (the "Senior Notes"). MATURITY DATE...................... , 2003. INTEREST PAYMENT DATES............. Interest will accrue from the date of issuance and will be payable semi-annually on each and , commencing , 199 . OPTIONAL REDEMPTION................ The Senior Notes are redeemable, in whole or in part, at the option of the Company on or after , 2000 at the redemption prices set forth herein plus accrued interest to the redemption date. See "Description of Senior Notes -- Optional Redemption." In addition, prior to , 1999, the Company, at its option, may redeem up to 33% of the aggregate principal amount of the Senior Notes originally issued with the net proceeds of one or more Public Equity Offerings at the redemption price set forth herein plus accrued interest to the date of redemption; provided that at least $100.0 million of Senior Notes remain outstanding immediately after such redemption. See "Description of Senior Notes -- Optional Redemption Upon Public Equity Offerings." CHANGE OF CONTROL.................. Upon a Change of Control, each holder of Senior Notes will have the right to require the Company to repurchase all or a portion of such holder's Senior Notes at a price of 101% of the principal amount thereof plus accrued interest to the repurchase date. See "Description of Senior Notes -- Change of Control." ASSET SALE PROCEEDS................ The Company is obligated in certain instances to make offers to purchase the Senior Notes at a redemption price of 100% of the principal amount thereof plus accrued interest to the repurchase date with the net cash proceeds of certain sales or other dispositions of assets. See "Description of Senior Notes -- Certain Covenants -- Disposition of Proceeds of Asset Sales." GUARANTEES......................... The Senior Notes are fully and unconditionally guaranteed, jointly and severally, by the Guarantors on a senior unsecured basis. See "Description of Senior Notes -- Guarantees." RANKING............................ The Senior Notes will be senior obligations of the Company and will rank pari passu with all senior indebtedness of the Company, including any Existing Notes that remain outstanding after the Tender Offer, and will rank senior to all subordinated indebtedness of the Company. USE OF PROCEEDS.................... The Company intends to use the net proceeds from the Offering of the Senior Notes, together with available cash of the Company, to (i) retire Existing Notes validly tendered pursuant to the Tender Offer (as defined), (ii) redeem the Company's existing 10% Preferred Stock held by Group, (iii) make certain contractual compensation payments to certain executives of Magcorp, (iv) pay a dividend to Group and (v) pay related fees and expenses. See "Use of Proceeds." The use of the proceeds and the application of the available cash, together with certain amendments to the Revolving Credit Facilities, are collectively referred to herein as the "Transactions." </TABLE> <TABLE> <S> <C> CERTAIN COVENANTS.................. The Indenture governing the Senior Notes will contain certain covenants that, among others, limit the type and amount of additional indebtedness that may be incurred by the Company or any of its subsidiaries and impose limitations on investments, loans, advances, the payment of dividends and the making of certain other payments, the creation of liens, certain transactions with affiliates and certain mergers. See "Description of Senior Notes -- Certain Covenants."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000913077_affymetrix_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000913077_affymetrix_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..5b51c4757c9873421754d522ed7d0644c0332767
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000913077_affymetrix_prospectus_summary.txt
@@ -0,0 +1 @@
+SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION, INCLUDING "RISK FACTORS", AND THE FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. A GLOSSARY OF TECHNICAL TERMS USED IN THIS PROSPECTUS APPEARS AT PAGE 64 OF THIS PROSPECTUS. THE COMPANY Affymetrix has developed and intends to establish its GeneChip system as the platform of choice for acquiring, analyzing and managing complex genetic information in order to improve the diagnosis, monitoring and treatment of disease. The Company's system consists of disposable DNA probe arrays containing gene sequences on a chip, instruments to process the probe arrays, and software to analyze and manage genetic information. The Company commenced commercial sales of the GeneChip system and an HIV probe array for research use in April 1996. The Company manufactures its DNA probe arrays using an innovative and proprietary process that combines photolithographic fabrication techniques from the semicondutor industry with solid phase DNA synthesis to assemble large amounts of genetic information on a small glass chip called a probe array. The Company can manufacture a number of identical DNA probe arrays on a glass wafer, which is then diced into individual probe arrays. Currently, each probe array manufactured by the Company contains from 16,000 to more than 100,000 different DNA probes. Genes provide the fundamental basis for understanding human health and disease. Increased knowledge of how genes encode the functions of living organisms has generated a worldwide effort to identify and sequence genes of many organisms, including the estimated 100,000 genes within the human genome. This effort is being led by the Human Genome Project and related academic, government and industry research projects. Once the genes and their sequences are identified, it is anticipated that many years of additional research will be required to understand the specific function of each gene and its role in disease. Affymetrix believes that the GeneChip system can play an important role in this research and its application in drug discovery and the development of new diagnostic products. The Company intends to commercialize the GeneChip system in two principal areas: genomics, or the study of genes and their function, and diagnostics. In genomics, Affymetrix intends to sell custom DNA probe arrays to pharmaceutical and biotechnology companies through collaborative agreements. The Company would receive revenues in the form of probe array design and development fees, and subsequently through the sale of DNA probe arrays and instruments. In addition, the Company may receive milestone payments and royalties from discoveries made through the use of the DNA probe arrays. Affymetrix also intends to use the GeneChip technology to help create and commercialize databases containing information on the function of genes and their role in disease. There can be no assurance that the Company will be successful in marketing its GeneChip system for these genomics applications. In diagnostics, Affymetrix intends to develop DNA probe arrays to analyze genetic information from patient samples to improve the accuracy and speed of diagnosis. The Company is pursuing diagnostic products and research applications in infectious diseases, cancer and other areas, such as monitoring drug metabolism. The Company intends to market its diagnostic GeneChip products directly and through collaborative partnerships. Affymetrix believes its GeneChip technology can also be used as a discovery tool for new diagnostic markers to be used in conventional immunoassays. There can be no assurance that the Company will be successful in marketing its GeneChip system for these diagnostic applications. The Company's first application for the GeneChip system is to help researchers identify mutations in HIV that cause resistance to antiviral drugs, such as AZT. The Company believes that monitoring such mutations may become an important aspect of managing patients with AIDS. As of March 31, 1996, Affymetrix had placed five prototype GeneChip systems for the HIV application in academic research centers and pharmaceutical companies for research use. An important part of the Company's strategy is to work with collaborative partners to expand the applications of the Company's technology and to acquire access to complementary technologies and resources such as manufacturing and marketing. Affymetrix has two agreements with Genetics Institute, Inc. ("GI") to apply the Company's technology to understand the function of human genes. The Company will design, manufacture and supply custom probe arrays for use in GI's drug discovery programs. Affymetrix also has a collaborative agreement with Hewlett-Packard Company ("HP"), whereby HP will develop advanced instruments to read the GeneChip probe arrays. In addition, in collaboration with HP, the Company will develop and manufacture certain probe arrays to be marketed by HP. Affymetrix began operations in 1991 as a division of Affymax N.V. ("Affymax"), was incorporated in California in March 1992 and began operating independently as a wholly-owned subsidiary of Affymax in March 1993. In March 1995, Glaxo plc, now Glaxo Wellcome plc ("Glaxo"), purchased Affymax. Prior to this offering, Glaxo indirectly owns approximately 46% of the Common Stock of Affymetrix.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000913165_exactech_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000913165_exactech_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..bfe5329e6ae0fa1029e94920f3f2e12743ca49db
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION, AND THE FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL SHARE AND PER SHARE DATA IN THIS PROSPECTUS (I) HAS BEEN ADJUSTED TO REFLECT A 3 FOR 4 REVERSE STOCK SPLIT EFFECTED IN MARCH 1996 AND THE ISSUANCE OF 13,548 SHARES OF COMMON STOCK PURSUANT TO THE AUTOMATIC CONVERSION OF THE SERIES B PREFERRED STOCK OF THE COMPANY UPON CONSUMMATION OF THIS OFFERING, (II) ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION, THE REPRESENTATIVE'S WARRANTS OR OUTSTANDING WARRANTS, OPTIONS OR OTHER CONVERTIBLE SECURITIES AND (III) ASSUMES AN INITIAL PUBLIC OFFERING PRICE OF $7.75 PER SHARE. CERTAIN TERMS USED HEREIN ARE DEFINED IN THE GLOSSARY ON PAGES 54 TO 56 OF THIS PROSPECTUS. THE COMPANY Exactech, Inc. (the "Company") develops, manufactures, markets and sells orthopaedic implant devices and related surgical instrumentation to hospitals and physicians in the United States and overseas. The Company's orthopaedic implant products are used to replace joints which have deteriorated as a result of injury or diseases such as arthritis. Prior to 1995, the Company's revenues were derived primarily from sales of its primary hip replacement systems. During 1995, the Company introduced Optetrak/registered trademark/, a total primary knee replacement system, which had been in development for three years. The Optetrak/registered trademark/ knee system was conceived by the Company in collaboration with members of its Scientific Advisory Board in cooperation with the Hospital for Special Surgery, an internationally known hospital for orthopaedic surgery. The Optetrak/registered trademark/ system represents a highly differentiated product based on precision manufacturing techniques and a design which reduces articular contact stress. The Optetrak/registered trademark/ system is the most modern rendition of a series of knee implants which were first introduced in 1974 and are still being marketed by certain of the Company's competitors. The Company has entered into an agreement with the Hospital for Special Surgery which gives the Company a non-exclusive option with respect to future knee systems developed at the Hospital for Special Surgery. The Company anticipates the full scale marketing of its existing line of knee systems in 1996 as well as the development of a shoulder replacement system for introduction in 1998. The Company's strategy has been to utilize members of its Scientific Advisory Board, consisting of physicians and biomechanists affiliated with major medical facilities and academic institutions, in the design process to facilitate the development of high quality products at cost-effective prices. The Company believes this strategy permits the Company to quickly identify and respond to the demands of orthopaedic surgeons. The Company was incorporated under the laws of the State of Florida in November 1985. The Company's principal executive office is located at 4613 N.W. 6th Street, Gainesville, Florida 32609, and its telephone number is (352) 377-1140. THE OFFERING <TABLE> <CAPTION> <S> <C> COMMON STOCK OFFERED .................................... 1,600,000 SHARES Common Stock Outstanding Prior to this Offering ...... 2,962,149 shares(1) Common Stock to be Outstanding after this Offering ... 4,575,697 shares(1)(2) Use of Proceeds ....................................... The Company intends to apply the net proceeds of this offering for: purchase of inventory, instruments and equipment; research and development; repayment of indebtedness; redemption of preferred stock; and working capital and general corporate purposes. See "Use of Proceeds." Risk Factors .......................................... This offering involves a high degree of risk and immediate substantial dilution. See "Risk Factors" and "Dilution." Proposed NASDAQ-National Market System Symbol ........ EXAC </TABLE> (1) Does not include (i) 240,000 shares of Common Stock reserved for issuance upon exercise of the Underwriters' over-allotment option, (ii) 160,000 shares of Common Stock reserved for issuance upon exercise of the Representative's Warrants, (iii) an aggregate of 406,448 shares of Common Stock reserved for issuance upon exercise of outstanding options under the Company's Employee Stock Option and Incentive Plan and Directors' Stock Option Plan, (iv) an aggregate of 193,552 shares of Common Stock reserved for issuance upon exercise of options available for future grant and future grants of restricted stock awards under these Plans, (v) 35,470 shares of Common Stock reserved for issuance upon conversion of the Company's outstanding 10% Debentures in the principal amount of $260,000, (vi) 17,576 shares of Common Stock reserved for issuance upon conversion of the outstanding shares of the Company's Series A Preferred Stock and (vii) 172,469 shares of Common Stock reserved for issuance upon exercise of other outstanding options and warrants. Assumes an initial public offering price of $7.75 per share and the redemption of the outstanding shares of Series A Preferred Stock of the Company and the outstanding shares of Series C Preferred Stock of the Company upon consummation of this offering. See "Management--Stock Option Plans," "Certain Transactions," "Description of Securities" and "Underwriting." (2) Includes 13,548 shares of Common Stock issuable upon consummation of this offering pursuant to the automatic conversion of the outstanding shares of Series B Preferred Stock of the Company. SUMMARY FINANCIAL DATA The summary financial information set forth below should be read in conjunction with the financial statements appearing elsewhere in this Prospectus. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31, ------------------------------------------------------------------------- ---------------------------- 1991 1992 1993 1994 1995 1995 1996 ------------- ------------- ------------- ------------- ------------- -------------- ----------------- (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales ............ $2,424,056 $3,722,478 $4,675,505 $5,355,804 $9,118,075 $1,688,481 $3,423,629 Cost of goods sold .. 556,135 941,528 1,360,025 1,586,633 2,995,955 445,585 1,267,332 Gross profit ......... 1,867,921 2,780,950 3,315,480 3,769,171 6,122,120 1,242,896 2,156,297 Total operating expenses ........... 1,323,978 2,042,430 2,641,884 3,088,386 4,642,462 1,013,616 1,531,810 Income from operations ......... 543,943 738,520 673,596 680,785 1,479,658 229,280 624,487 Net income ........... 306,101 417,660 353,439 346,128 826,928 116,371 311,475 Preferred stock dividends(1) ....... -- -- 8,194 19,298 22,798 4,824 5,824 Net income applicable to common shareholders ....... 306,101 417,660 345,245 326,830 804,130 111,547 305,651 Net income per common and common equivalent share ... $ 0.11 $ 0.15 $ 0.12 $ 0.11 $ 0.27 $ 0.04 $ 0.10 </TABLE> <TABLE> <CAPTION> AS OF DECEMBER 31, AS OF MARCH 31, 1996 1995 ------------------------------- ACTUAL AS ADJUSTED(2) ------------- ---------------- (UNAUDITED) <S> <C> <C> <C> BALANCE SHEET DATA: Total current assets .............. $ 8,411,133 $ 8,727,985 $16,804,919 Total assets ...................... 10,620,750 11,674,597 20,351,531 Total current liabilities ......... 4,476,374 5,283,382 5,025,976 Total liabilities ................. 6,452,479 7,195,675 5,260,829 Total preferred stock ............. 291,220 291,220 -- Total common shareholders' equity 3,877,051 4,187,702 15,090,702 </TABLE> (1) Upon consummation of this offering, all shares of the Company's outstanding preferred stock will be redeemed or converted into Common Stock. (2) As adjusted to give effect to the sale of the shares of Common Stock offered hereby at an assumed offering price of $7.75 per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0000913600_gunther_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000913600_gunther_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..504c806af16cab59378894c2b594144fb30b75eb
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000913600_gunther_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and must be read in conjunction with, the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. As used in this Prospectus, unless the context otherwise requires, the "Company" refers to Gunther International, Ltd., a Delaware corporation. Unless otherwise indicated, the information in this Prospectus does not give effect to the exercise of issued and outstanding warrants to purchase Common Stock or any other currently outstanding rights to acquire Common Stock. Investors should consider carefully the information set forth under "Risk Factors."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0000913912_gcr_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000913912_gcr_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..4d48568a40982017ed5330060517f8e7cd87dd53
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000913912_gcr_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements included elsewhere in this Prospectus. Unless the context otherwise requires, references herein to the "Company" mean GCR Holdings Limited, a Cayman Islands company, and references herein to "GCR" mean the Company together with its wholly owned subsidiary, Global Capital Reinsurance Limited, a Bermuda corporation ("Global Capital Re") through which the Company conducts all its operations. References herein to any fiscal year are to the Company's fiscal year ending on September 30 of the year specified. All monetary amounts herein are stated in United States dollars unless otherwise specified. See "Glossary of Selected Insurance Terms" for definitions of certain terms used in this Prospectus; such terms are printed in boldface the first time they appear in the text below. An investment in the Ordinary Shares offered hereby involves significant risks. See "Risk Factors." In December 1995, the Company effected a five-for-one split of the Ordinary Shares in the form of a share dividend (the "Share Split"). Unless the context otherwise requires, all information in this Prospectus gives effect to the Share Split. See note (1) to the financial statements. Unless the context otherwise requires, this Prospectus also assumes that the Underwriters' over-allotment option is not exercised. The Company has invited certain of its shareholders to participate in the Offering as Selling Shareholders. Because participations (including those for the Company's founding sponsors) have not yet been determined, the information in this Prospectus regarding the Selling Shareholders and share ownership before and after the Offering and the GCR Repurchase (as defined below) is subject to change prior to the pricing of the Offering. See "Principal and Selling Shareholders." THE COMPANY The Company, through Global Capital Re, its Bermuda-domiciled subsidiary, provides property catastrophe and other short-TAIL property REINSURANCE on a worldwide basis. In the first six months of fiscal year 1996, approximately 66% of this reinsurance covered property catastrophe risks, of which 96% was written on an EXCESS-OF-LOSS basis. Substantially all reinsurance written by Global Capital Re was written for primary insurers rather than reinsurers. Global Capital Re had 233 clients on March 31, 1996, including many of the leading insurance companies around the world. At that date, approximately 55% of Global Capital Re's clients were based in the United States and approximately 55% of its PREMIUMS WRITTEN on policies in force related to U.S. risks. The balance of Global Capital Re's clients and covered risks were located in the largest international insurance markets, principally in Europe, Japan and Australia/New Zealand. GCR was established in 1993 through the sponsorship of Goldman, Sachs & Co., a leading international investment banking firm, and Johnson & Higgins, a leading global provider of insurance and reinsurance brokerage services. These firms, together with their affiliates, own approximately 17.2% and 6.4%, respectively, of the Ordinary Shares and, upon completion of the Offering and the GCR Repurchase, will own approximately 14.6% and 4.6%, respectively, of the Ordinary Shares based on current assumptions regarding the levels of Selling Shareholder participation in the Offering (in each case calculated on the basis set forth in the notes to "Principal and Selling Shareholders"). See "Certain Relationships and Related Party Transactions." GCR was formed in response to a severe imbalance between the global supply of and demand for property catastrophe reinsurance that developed in 1993. This imbalance resulted from relatively high levels of worldwide property catastrophe losses in prior years, particularly 1992 when Hurricane Andrew occurred, causing some reinsurers to withdraw from the market or curtail their participation and leading to a very substantial increase in premium rates and RETENTION levels throughout this market in 1993. Based on industry trade publications and information obtained from clients and brokers, manage- INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED JUNE 26, 1996 4,000,000 SHARES LOGO GCR HOLDINGS LIMITED ORDINARY SHARES (PAR VALUE $0.10 PER SHARE) ------------------------ All the Ordinary Shares offered are being sold by the Selling Shareholders. See "Principal and Selling Shareholders." The Company will not receive any of the proceeds from the sale of the Ordinary Shares. One million of the Ordinary Shares offered will be repurchased in the Offering by the Company's operating subsidiary, at the initial public offering price net of the underwriting discount. See "Prospectus Summary -- The Offering and the GCR Repurchase." SEE "RISK FACTORS" ON PAGES 13 THROUGH 23 FOR CERTAIN CONSIDERATIONS RELEVANT TO AN INVESTMENT IN THE ORDINARY SHARES. The last reported sale price of the Ordinary Shares, which are quoted under the symbol "GCREF," on the Nasdaq National Market on June 25, 1996 was $25.938 per share. See "Price Range of Ordinary Shares." ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ <TABLE> <CAPTION> INITIAL PUBLIC OFFERING UNDERWRITING PROCEEDS TO SELLING PRICE DISCOUNT(1) SHAREHOLDERS(2) ------------- ----------- -------------------- <S> <C> <C> <C> Per Share.................................. $ $ $ Total(3)(4)................................ $ $ $ </TABLE> - ------------ (1) The Company and the Selling Shareholders have agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. (2) The Company will pay certain expenses related to the offering estimated at approximately $1.1 million. (3) Certain Selling Shareholders have granted the Underwriters an option for 30 days to purchase up to an additional 600,000 Ordinary Shares at the initial public offering price per share, less the underwriting discount, solely to cover over-allotments. If such option is exercised in full, the total initial public offering price, underwriting discount and proceeds to Selling Shareholders will be $ , $ and $ , respectively. See "Underwriting." (4) The information set forth in this table does not include the 1,000,000 Ordinary Shares to be repurchased by the Company's operating subsidiary from the Underwriters, at the initial public offering price net of the underwriting discount. The proceeds to Selling Shareholders from these shares will be $ . See "Prospectus Summary -- The Offering and the GCR Repurchase." ------------------------ The Ordinary Shares offered hereby are offered severally by the Underwriters, as specified herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that certificates for the shares will be ready for delivery in New York, New York, on or about , 1996, against payment therefor in immediately available funds. GOLDMAN, SACHS & CO. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION J.P. MORGAN & CO. SMITH BARNEY INC. ------------------------ The date of this Prospectus is , 1996. ment believes that over $4.0 billion of capital has entered the Bermuda-based property catastrophe reinsurance market since November 1992 in response to these developments. See "-- Industry Trends." GCR began operations in October of 1993. GCR's principal operating objective is to UNDERWRITE property catastrophe risks in a manner that maximizes shareholder return on equity. Its underwriting strategy is based on two main principles. First, in selecting its reinsurance programs, GCR targets clients with reputations for quality underwriting and risks that GCR's analysis indicates have superior risk/return profiles. Also, by limiting itself largely to writing reinsurance directly for its insurance company clients and limiting the amount of coverage it is willing to write on a RETROCESSIONAL basis, GCR is able to access more information regarding underlying risks and therefore evaluate the quality of the primary underwriting more effectively. As a result of this selective approach, during fiscal year 1995 and the first six months of fiscal year 1996, respectively, GCR offered capacity for only 15% and 13% of the new reinsurance programs submitted for its review (i.e., excluding renewals of existing programs). During these periods, GCR underwrote 105 and 37 programs, respectively, for new clients. The number of new programs written in fiscal year 1995 reflects the start-up nature of GCR's business during that period. In addition, the number of new programs written during the first half of the current fiscal year reflects the fact that contract renewals are concentrated in the first calendar quarter of each year, so that the number of new programs as well as premiums written in the first half are likely to exceed those written in the second half of the current fiscal year. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Second, in managing its portfolio of reinsurance contracts, GCR seeks to limit its aggregate loss exposure in any one geographic zone to a specified level rather than measuring and managing risk in relation to premium volume. As a result, GCR intends to pursue new business opportunities in markets where geographic concentration of risk is relatively low, and not necessarily where premium volume growth would be fastest. GCR believes that this approach should lead to an improved balance of risk worldwide, which should moderate the effects of catastrophic events as compared to a book of business accumulated without regard to geographic zone limits. Some of GCR's competitors may follow a similar strategy. GCR believes that this approach not only enhances risk management but, as evidenced by its success in establishing relationships with targeted clients, is highly attractive to "blue chip" insurance companies, which tend to regard capital strength and underwriting reputation as primary factors in selecting a reinsurer, and thus greatly enhances GCR's ability to establish and develop long-term relationships with preferred clients. Given the industry practice of generally offering renewal opportunities to existing reinsurers, (i.e., the tendency of client companies to prefer a long-term relationship with well capitalized reinsurers to achieve security and continuity of coverage in and subsequent to periods of significant loss experience), GCR believes that its existing reinsurance portfolio is a valuable asset and a competitive advantage in retaining existing business as it comes up for renewal. This practice was a significant factor in GCR's ability to retain, in fiscal year 1995 and the first six months of fiscal year 1996, respectively, 99% and 98% of the programs written in the prior fiscal year or period on which it offered capacity. Approximately 66% and 83% of the reinsurance programs underwritten by GCR during these periods, respectively, represented renewals of programs underwritten in the prior fiscal year. To implement its underwriting strategy, GCR, in addition to using geographic zone limits, imposes aggregate loss-per-event limits on almost all its reinsurance contracts. GCR also writes most of its coverage on an excess-of-loss basis, with ATTACHMENT POINTS designed to minimize claims from relatively high frequency, low severity events, and a relatively small portion of coverages are written on a PROPORTIONAL basis, whereby the reinsurer assumes a specified percentage of the primary insurer's entire loss exposure to a covered risk. In addition, for each reinsurance program it writes, GCR combines proprietary and other computer modelling systems with the analysis and judgment of its experienced underwriting team to assess the adequacy of the pricing terms in the light of the associated risk and, ultimately, the potential effect of the program on GCR's overall rate of return on capital and its aggregate loss exposure. In light of its principal operating objective, the Company adopted a policy in December 1995 with regard to capital management and payment of dividends. Under this policy, the Company intends to target an average return on shareholders' equity of approximately 20% to 25% over time and a dividend payout that would total, in each fiscal year, approximately 60% to 80% of the Company's net operating earnings (which exclude any realized investment gains and losses), if any, in the prior fiscal year. As an important first step toward these goals, the Company distributed approximately $201 million of its capital to shareholders in August 1995 (the "1995 Distribution"). During the current fiscal year to date and consistent with its dividend policy, the Company has declared two quarterly dividends of $0.62 per share each, totalling $31.8 million. On an annualized basis, these dividends represent a dividend payout of approximately 70% of the Company's net operating earnings for fiscal year 1995. As part of the Company's continuing efforts to achieve its capital targets, Global Capital Re will repurchase 1,000,000 of the Ordinary Shares being offered hereby, at the initial public offering price net of the underwriting discount (the "GCR Repurchase"). Assuming a net offering price of $25 per share, the GCR Repurchase would reduce GCR's capital by $25 million, thereby further enhancing its ability to pursue a return on equity within its current target range. GCR achieved a return on average shareholders' equity of 25.0% during fiscal year 1995 on a pro forma basis (after giving effect to the 1995 Distribution, the GCR Repurchase and certain related events) and 25.0% during the first six months of fiscal year 1996 on a pro forma, annualized basis (after giving effect to the GCR Repurchase and certain other events). See "-- Selected Pro Forma Financial Data." The Company's ability to meet these capital and dividend targets in the future will depend on various factors, some of which are beyond its control, and these targets are subject to change at the discretion of the Board of Directors. See "Risk Factors" and "Dividend Policy." GCR markets its reinsurance products worldwide through non-exclusive relationships with more than 40 reinsurance BROKERS. GCR deals with most of the leading brokers active in the U.S. and non-U.S. markets for property catastrophe reinsurance, including Guy Carpenter, which accounted for approximately 29% of GCR's premiums written under contracts in force on March 31, 1996, and Willcox Incorporated Reinsurance Intermediaries ("Willcox"), an affiliate of Johnson & Higgins, which accounted for approximately 11% of such premiums. GCR focuses its marketing efforts primarily on developing long-term relationships with existing clients and intends to pursue new business opportunities mainly in the principal reinsurance markets outside the United States. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Marketing." As indicated above, GCR's business is focused principally on the property catastrophe reinsurance market. However, GCR continues to explore opportunities to build or acquire new lines of business throughout the world. Management's objective is to identify new lines that are compatible with GCR's property catastrophe lines, that do not increase the concentration of GCR's exposure to catastrophe events and that will contribute to shareholder value. To date, these efforts have focused on expanding GCR's portfolio of marine excess of loss reinsurance business, which represents a growing portion of GCR's premiums written. The Company is also exploring possible opportunities in marine excess of loss insurance. There can be no assurance that new opportunities will be identified or as to the effect that any new lines might have on GCR. See "Business -- Reinsurance Products." INDUSTRY TRENDS Based on industry trade publications, underwriting submissions and meetings with clients and brokers, management believes that the relatively high level of worldwide property catastrophe losses from 1987 to 1993 had a significant effect on the results of property insurers and property catastrophe reinsurers and on the property catastrophe reinsurance market, causing some reinsurers to withdraw from the market or reduce their underwriting commitment while also causing a substantial increase in market demand. In particular, Hurricane Andrew in 1992 caused unprecedented insured claims, in excess of $16 billion industry-wide as estimated by the American Insurance Services Group, and caused many insurers and property catastrophe reinsurers to reassess their assumptions concerning their maximum potential catastrophe exposure and their need for reinsurance. The demand for property catastrophe reinsurance also increased due to greater scrutiny by rating agencies of insurers and reinsurers with respect to their catastrophe exposure. Based on these sources, management believes that these developments created a severe imbalance between the supply of and demand for property catastrophe reinsurance, which in turn caused premium rates to more than double and retentions (i.e., the portions of risk exposure retained by ceding insurers) to rise very substantially in 1993. In response to this imbalance, management believes, over $4.0 billion of capital entered the Bermuda-based property catastrophe reinsurance market since November 1992, making Bermuda a leading global source of this reinsurance. Industry analysts estimate that the Bermuda market currently writes about 25% of worldwide property catastrophe reinsurance premiums. This capital flow has helped to balance supply and demand in recent years, and this improved balance led to a stabilization in worldwide premium rates and retentions in 1994 compared to 1993. Based on these sources, management believes that premium rates in the global property catastrophe reinsurance market decreased by an average of 10% to 15% in 1995 compared to 1994 and in the first quarter of 1996 compared to the same period last year, as a result of favorable loss experience. If and while this favorable loss experience continues, management expects further downward pressure on rates during the remainder of 1996 and into 1997. In particular, rates on Japanese business, which generally renews on April 1, have declined approximately 20% in 1996 compared to 1995. In the U.S. market, where the level of property catastrophe losses has generally been higher than in international markets in recent years, rates have decreased but still remain at a higher level than those which prevailed in 1992. Moreover, the levels of catastrophe risk exposure that U.S. ceding insurers are generally prepared to retain continue to be substantially higher than in 1992. Higher retentions tend to reduce GCR's exposure to losses from catastrophic events of relatively higher frequency and lower severity. For a discussion of the impact that these trends have had on GCR's recent results of operations, see "-- Recent Developments." RECENT DEVELOPMENTS The recent decline in worldwide premium rates in the property catastrophe reinsurance market, which resulted primarily from favorable loss experience, adversely affected the level of premiums written by GCR at January 1 and April 1, 1996. In furtherance of its underwriting principle of targeting reinsurance programs with superior risk/return profiles, GCR declined to offer coverage on a substantial number of new programs, as well as on a number of renewal programs, submitted for its review with proposed pricing terms that management considered inadequate. Due primarily to these underwriting decisions, and secondarily to the generally lower rates applicable to programs that were written, the level of premiums written by GCR in the first six months of fiscal year 1996 was 6.6% lower than in the same period last year. Management expects this trend to accelerate during the second half of fiscal year 1996, with the level of premiums written decreasing by a greater percentage during the second half compared to the same period last year. The percentage decrease from the prior year period is expected to be greater in the second half than in the first six months of the current fiscal year mainly because worldwide premium rates have softened further in the third fiscal quarter (ending June 30, 1996) and, due to industry renewal practice, a larger portion of the reinsurance programs written by GCR in the second half will involve international risks, for which premium rates generally have declined further than those for North American risks in recent periods. Overall, GCR expects premium rates to be down approximately 12% to 15% for its third quarter ending June 30, 1996 compared to the same quarter of the previous year. The Company expects this to account for a $5 to $6 million reduction in premiums written for the quarter. In addition, several other factors are expected to further reduce third quarter premiums written, including: (i) reduced participation by the Company in renewal programs resulting in a $3 million decline, (ii) a weakening of the Japanese yen, causing a $2 million decline and (iii) a shift in the renewal date of a large existing third quarter program resulting in a $4 million reduction; although a significant portion of the latter amount is expected to be included in the fourth quarter. In total, premiums written for the third quarter are expected to be approximately $25 million compared to premiums written of $40 million in the third quarter of the prior fiscal year. Despite the decline in premiums written, GCR earned net income of $49.2 million during the first six months of fiscal year 1996, an increase of 14.7% over the same period last year. These results are primarily attributable to favorable loss experience during the period. GCR recorded losses and loss expenses of $13.4 million during the first six months of fiscal year 1996, compared to $17.2 million in the same period last year. For the first two months of the Company's third fiscal quarter, loss experience has continued to be favorable and is expected to be comparable to loss experience in the second fiscal quarter, for which GCR's loss ratio was 10.4%. Overall, net income for the third fiscal quarter is expected to be comparable to the $26.4 million achieved during the second fiscal quarter, although less favorable than the $30.7 million achieved during GCR's third fiscal quarter of 1995, the Company's best quarter to date. GCR is subject to infrequent but severe effects of natural and man-made catastrophes, which can lead to volatile losses and financial results. Premium and net income estimates are forward-looking statements which involve risks and uncertainties, and actual results may differ substantially from such estimates. Factors that might cause such differences include, but are not limited to, those discussed below in "Risk Factors." See "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company believes that its current dividend and capital management policies promote its strategic objectives, particularly in periods of declining pricing. The Company also believes that its focus on returning capital to shareholders through a high dividend payout allows the Company to maintain its selective underwriting strategy and to forego writing programs with less desirable risk/return profiles while still pursuing returns on equity in its target range of 20% to 25%. See "Dividend Policy." In December 1995, the Company completed an initial public offering of 7,618,750 Ordinary Shares (the "1995 IPO"). All of these shares were sold by certain of the Company's original shareholders, and the Company did not receive any of the sale proceeds. In connection with the 1995 IPO, Goldman, Sachs & Co., Johnson & Higgins and certain of their respective affiliates exercised warrants (the "Sponsors' Warrants") to purchase 3,303,655 Ordinary Shares at an exercise price of $11.00 per share, or $36.3 million in total. The Sponsors' Warrants were granted in connection with the formation of GCR in 1993. The exercise of the Sponsors' Warrants has had a dilutive effect on the Ordinary Shares. See "-- Selected Consolidated Financial Data." In August 1995, the Company paid an extraordinary cash distribution totaling $201 million, or $9.00 per Ordinary Share, to its shareholders. The Company also entered into a three-year, $150 million revolving credit facility with several commercial banks (as amended, the "Credit Agreement"), which it used to fund most of this 1995 Distribution. All borrowings under this facility have been repaid and the facility remains available to the Company for further borrowing, subject to minimum net worth and other requirements thereunder. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- The Credit Agreement." THE OFFERING AND THE GCR REPURCHASE <TABLE> <S> <C> Ordinary Shares offered by the Selling Shareholders............. 4,000,000 Ordinary Shares Ordinary Shares to be repurchased by Global Capital Re............. 1,000,000 Ordinary Shares Ordinary Shares offered to the public........................... 3,000,000 Ordinary Shares Ordinary Shares to be outstanding immediately after the Offering*..................... 24,668,255 Ordinary Shares GCR Repurchase..................... One million of the Ordinary Shares being offered will be repurchased by Global Capital Re in the Offering, at the initial public offering price net of the underwriting discount shown on the cover page of this Prospectus. Assuming a net purchase price of $25 per share, the aggregate purchase price to be paid by Global Capital Re in the GCR Repurchase would be $25 million, which would be funded by the sale of a portion of Global Capital Re's investment portfolio. The actual purchase price will depend on the initial public offering price and underwriting discount for the Offering and thus will not be known until the Offering is priced. The closing for the GCR Repurchase will occur simultaneously with the closing for the Offering. All Ordinary Shares purchased by Global Capital Re will carry the voting, dividend and other rights associated with the Ordinary Shares, until such time as the shares are transferred to the Company and retired. However, for purposes of the Company's consolidated financial statements after the Offering and the GCR Repurchase, any shares held by Global Capital Re would be treated as if they had been retired by the Company. There is no assurance as to whether or when shares held by Global Capital Re will be transferred to the Company and retired. Nasdaq National Market symbol...... GCREF Use of proceeds.................... The Company will not receive any of the proceeds from the sale of Ordinary Shares sold in the Offering. The Company will pay certain fees and expenses related to the Offering, including certain of those incurred by the Selling Shareholders. See "Use of Proceeds" and "Principal and Selling Shareholders." Dividend policy.................... In December 1995, the Company adopted a policy with regard to managing its return on equity and the payment of dividends. Under this policy, the Company intends to target an average return on shareholders' equity of approximately 20% to 25% over time and, in light of that target, to distribute a substantial portion of its earnings each year. Currently, the Company's Board of Directors has targeted a dividend payout that would total, in each fiscal year, approximately 60% to 80% of the Company's net operating earnings (which exclude any realized investment gains and losses), if any, in the prior fiscal year. Dividends would be paid on a quarterly basis, in February, May, August and November of each year. Based on its operating results for fiscal year </TABLE> - --------------- * Based upon Ordinary Shares outstanding at March 31, 1996, exclusive of up to 631,925 Ordinary Shares issuable upon the exercise of outstanding options held by employees and directors. See "Management -- Provisions Governing the Board of Directors -- Compensation of Directors" and "-- Executive Compensation -- Management Options." Does not include 1,000,000 Ordinary Shares which will be held by Global Capital Re immediately after the Offering as a result of the GCR Repurchase and, for purposes of the Company's consolidated financial statements, will be treated as if they have been retired. <TABLE> <S> <C> 1995, the Company paid an initial quarterly dividend of $0.62 per share on February 27, 1996 and a second quarterly dividend of $0.62 per share on May 15, 1996. These two quarterly dividends represent, on an annualized basis, a dividend payout of approximately 70% of GCR's net operating earnings for fiscal year 1995. The actual timing and amount of future dividends (if any), as well as the general targets referred to above, will depend on various factors as described in the following paragraph and are subject to change at the discretion of the Board from time to time. In light of the Company's capital management policy, the Board of Directors has approved the GCR Repurchase and may also consider repurchasing outstanding Ordinary Shares in the open market from time to time after the Offering, either in lieu of or in addition to the payment of dividends. Any such open market repurchases would depend on market conditions, GCR's liquidity and capital needs and other factors. At present, the Board has not taken action to approve any such open market repurchases and there is no assurance that any such repurchases will be made. Notwithstanding this policy, dividends will be paid only when, as and if determined by the Company's Board of Directors out of funds legally available therefor. The actual amount and timing of dividends (if any) will depend on GCR's results of operations and capital needs, which in turn will depend on the level of losses incurred, opportunities to expand the business, GCR's competitive position and any other factors that the Board may deem relevant. In particular, it is possible that losses incurred in any period may require GCR to retain its earnings and replenish its capital base over an extended period of time, including in subsequent periods when loss experience may be favorable. Dividend payments also are subject to regulatory requirements and restrictions under the Credit Agreement. See "Risk Factors" and "Dividend Policy."
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+SUMMARY OF PROSPECTUS THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY IS INTENDED ONLY TO HIGHLIGHT CERTAIN INFORMATION CONTAINED IN THIS PROSPECTUS. IT IS NOT INTENDED TO BE COMPLETE IN ITSELF, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE DETAILED INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. PROSPECTIVE PURCHASERS OF THE NOTES ARE URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY. FOR A DISCUSSION OF CERTAIN RISK FACTORS IN CONNECTION WITH THE OFFERING, SEE "RISK FACTORS". THE COMPANY Harveys Casino Resorts ("Harveys" or the "Company") is an established owner, operator and developer of high-quality hotel/casinos in the state of Nevada and new gaming jurisdictions. The Company owns and operates Harveys Resort Hotel/Casino ("Harveys Resort"), the Lake Tahoe area's largest hotel/casino. Harveys Resort, in operation since 1944, is situated on the south shore of scenic Lake Tahoe on the Nevada/ California state line. The Company owns and operates Harveys Wagon Wheel Hotel/Casino in Central City, Colorado ("Harveys Wagon Wheel"), which opened in December 1994 as the first major hotel/casino serving the greater Denver area. Harveys owns and operates a riverboat casino and is in the process of constructing a hotel/convention center, scheduled to open in mid-1996, in Council Bluffs, Iowa ("Harveys Casino/Hotel") across the Missouri River from Omaha, Nebraska. The Harveys Casino/Hotel riverboat casino opened on January 1, 1996 and is one of only three operators in the Omaha/Council Bluffs gaming market, which also includes one other riverboat casino and a slot machine operator at the local dogtrack. In addition, through a joint venture between Harveys and the Hard Rock Cafe co-founder Peter A. Morton, Harveys owns 40% of and manages the Hard Rock Hotel and Casino in Las Vegas, Nevada (the "Hard Rock Hotel"), which opened in March 1995. For the twelve months ended February 29, 1996, Harveys generated net revenues and earnings before interest, taxes, depreciation and amortization ("EBITDA") of $184.3 million and $38.5 million, respectively. See note 3 of "Summary Financial Data". BUSINESS STRATEGY The Company's business strategy is to develop premium hotel/casino facilities in markets in which the Company believes it can establish and maintain a prominent or niche position. Each of Harveys' properties offers casino gaming and a full array of amenities in a friendly atmosphere that caters to middle- and upper-middle income customers. The Company's strategy focuses on five key components: high-quality facilities and superior customer service, strategic locations, a targeted customer base, effective marketing and an emphasis on slot play. Harveys' properties are strategically located on highly visible sites or near regional population centers. The Company seeks to attract customers with higher disposable incomes by offering well-appointed rooms, quality food and beverages, and an array of gaming and non-gaming amenities. The Company also has established extensive customer databases and uses sophisticated player-tracking systems to develop and monitor playing habits of its customers. In response to customer preferences at certain of the Company's properties, the Company has changed its mix of games at such properties to increase the number of slot machines. Compared to table games, slot machines are less labor-intensive, require less square footage and generate higher profit margins. The Company monitors payment percentages closely and ensures that its slot machine payouts are competitive. Each of Harveys' properties is aggressively promoted through advertising campaigns tailored to its targeted customer base in each market. The Company promotes each property through various combinations of newspaper and broadcast advertisements, billboards, regular promotions and sweepstakes, as well as point-of-sale material in nearby hotels, restaurants and visitor attractions. As part of its commitment to ensuring a high level of customer satisfaction, Harveys is dedicated to ensuring customer loyalty by providing attentive customer service in a friendly environment. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. HARVEYS RESORT Harveys Resort, the largest hotel/casino in the Lake Tahoe area, is located on approximately 19.8 acres on U.S. Highway 50, the main route through South Lake Tahoe. The hotel/casino, situated on the south shore of Lake Tahoe with a panoramic view of the lake and surrounding mountains, is among Lake Tahoe's most modern facilities. The main structure is an all-glass 17-story tower which was completed in 1991, connected to a 12-story tower which was completely re-built in 1982. Harveys Resort features 740 rooms, 36 of which are luxury suites, and an 88,000 square foot casino containing approximately 2,100 slot machines, 105 table games, a 15-table poker area, a race and sports book and a keno lounge. Other amenities include 23,000 square feet of convention space, 2,967 parking spaces, the 280-seat Emerald Theater and Cabaret, a wedding chapel, restaurants, retail shops, a pool, a health club and a video arcade. Harveys Resort's eight restaurants offer a wide variety of high quality food and consist of a coffee shop, a Mexican restaurant, a seafood and pasta restaurant, a pizzeria, a premier steakhouse, a buffet, a burger emporium and Llewellyn's, Harveys Resort's award-winning restaurant that features top quality food and a spectacular view of Lake Tahoe. In recognition of the outstanding quality of the facility and its excellent service, Harveys Resort has received both the Mobil Four Star and AAA Four Diamond Awards every year for the last 15 years. Management has allocated a total of $20.0 million for capital improvements to be made to Harveys Resort through 1997 to increase the Company's market share and to position the Company to benefit from the ongoing South Lake Tahoe Redevelopment Project. The South Lake Tahoe gaming market generated approximately $320 million in gaming revenues in each of the last three years. The Lake Tahoe area is a unique gaming location because of its natural surroundings and variety of year-round outdoor recreational activities, including skiing, boating, fishing and golfing. The South Lake Tahoe area draws tourists primarily from nearby Reno and Northern California. There are four major casinos in this market to serve the approximately 2 million annual visitors. Existing environmental regulations prevent the addition of new gaming facilities or the expansion of existing hotel/ casinos. Management seeks to attract middle- to upper-middle income customers to Harveys Resort by offering well-appointed rooms and a "party" atmosphere for those seeking nightlife and entertainment. The Company has increased its share of gaming revenues in South Lake Tahoe to approximately 27% in 1995 from approximately 24% in 1989 due largely to its effective marketing campaigns. Management believes that by continuing to focus its efforts on the maintenance of customer relationships and the Harveys image, it will increase its share of higher-income customers in the South Lake Tahoe market. In response to the increased popularity of slot machines over the past several years, Harveys Resort has shifted its gaming mix toward slot machines. Harveys Resort now includes a greater percentage of $1 and higher denominated machines to appeal to the higher-income gaming clientele of Harveys Resort, including $5, $25 and $100 slot machines offered within a premium player section. This increase in higher denominated machines increased win per unit at Harveys Resort by approximately 19% between 1988 and 1994. HARVEYS WAGON WHEEL Through Harveys Wagon Wheel, which opened in December 1994, the Company established the first major hotel/casino serving the greater Denver area. Harveys Wagon Wheel is located on a highly visible site in Central City, Colorado, a picturesque mountain town approximately 35 miles west of Denver. Unlike most existing gaming facilities in the Central City area, which offer no overnight accommodations, scarce on-site parking and few non-gaming amenities, Harveys Wagon Wheel includes approximately 40,000 square feet of casino space, 850 slot machines (approximately 250 more than are currently offered by any other gaming facility in the area), 18 table games, a nine-table poker area, a 118-room hotel and 195 on-site parking spaces. Other amenities include a 220-seat coffee shop/buffet, a snack bar, an entertainment lounge and a children's arcade. No other casino in Central City/Black Hawk currently offers all of these amenities. In 1995, the Central City/Black Hawk market hosted approximately 3 million visitors and generated gaming revenues of more than $290.7 million, an increase of 18.7% over gaming revenues of $244.9 million in 1994. Harveys Wagon Wheel targets middle- to upper-income customers from the greater Denver area who seek a quality gaming experience, convenient parking and overnight accommodations. By offering a facility with overnight accommodations and more amenities than are offered by other casinos in the Central City/ Black Hawk market, Harveys Wagon Wheel has been successfully building a loyal customer base. The Company attracts customers to Harveys Wagon Wheel by aggressively promoting the facility's hotel rooms, on-site parking, quality dining facilities and varied entertainment activities in a market in which such amenities are a distinct competitive advantage. On April 30, 1996, the Company exchanged 382,500 shares of the Company's common stock, par value $.01 per share ("Common Stock"), for (i) 30% of the equity interests of Harveys Wagon Wheel Casino Limited Liability Company ("HWW"), an entity in which the Company held a 70% equity interest prior to the consummation of the acquisition and which owns Harveys Wagon Wheel, (ii) the rights to an approximately $3.0 million priority return from HWW and (iii) an option to acquire an additional 5% of the equity interests of HWW (the "Minority Interest"). Upon consummation of the acquisition, HWW and Harveys Wagon Wheel became wholly-owned by the Company. In addition, on such date the Company exchanged $8.0 million in principal amount of the Company's Subordinated Notes due December 31, 2000 (the "Subordinated Notes") and $6.0 million cash for $11.9 million in aggregate principal amount of HWW 12% Senior Notes due 1997 (the "HWW Notes"), constituting all of the outstanding HWW Notes, and $1.9 million of unpaid interest accrued thereon. A portion of the proceeds of the Offering will be used to redeem the Subordinated Notes. HARVEYS CASINO/HOTEL On January 1, 1996, the Company opened, as the first phase of Harveys Casino/Hotel, a 1,700-passenger riverboat casino berthed on the Missouri River directly across from Omaha, Nebraska in Council Bluffs, Iowa. The riverboat casino has more than 23,500 square feet of casino space on two decks and contains 883 slot machines and 51 table games. Land-based amenities at Harveys Casino/Hotel include surface parking for approximately 1,100 cars, and will include a 14-story, 251-room hotel with a 21,000 square foot convention center by mid-1996 and additional surface parking for approximately 500 cars. Harveys Casino/Hotel is within a ten-minute drive from the Omaha/Council Bluffs regional airport and is located directly off of Interstate 29, Interstate 80 and Interstate 480. Harveys Casino/Hotel is located on a 60-acre parcel of land which the Company acquired from the City of Council Bluffs. Approximately 20 acres of the site are occupied by a municipal nine-hole golf course, which is leased to the City of Council Bluffs for a nominal fee. This arrangement allows Harveys the option of using this land for future expansion needs. In addition, the Company has acquired an adjacent 44-acre site to accommodate future expansion or support facilities. Harveys Casino/Hotel's target market is the approximately 650,000 residents in the greater Omaha metropolitan area and the nearly 3 million adults within a three-hour drive of the facility. In addition, the casino, hotel and convention facilities will be marketed to the estimated 2.5 million visitors and tourists who visit the Omaha metropolitan area annually. Harveys Casino/Hotel markets itself as "The Preferred Place to Play" in the Omaha/Council Bluffs market through the extensive use of television and newspaper advertisement, billboards, regular promotions and sweepstakes as well as point-of-sale materials located in local hotels, restaurants and other visitor attractions. Harveys Casino/Hotel targets frequent, mid-level players from Omaha, Council Bluffs and the surrounding areas. The Company anticipates that the hotel and convention facilities that are currently under construction and are scheduled to open in mid-1996 will attract new players by capturing overnight guests and meeting and small convention business. In addition, by positioning the property as the "Preferred Place to Play", management believes that Harveys Casino/Hotel will attract a large percentage of the gaming revenues generated by the Omaha/Council Bluffs regional population and visitors to the Omaha/Council Bluffs area. HARD ROCK HOTEL AND CASINO The Company, through a joint venture with Peter A. Morton, co-founder of the Hard Rock Cafes, developed the Hard Rock Hotel, which opened in March 1995 in Las Vegas, Nevada. The Company owns a 40% equity interest in and manages this unique first-class facility which is modeled after the highly successful Hard Rock Cafe concept and targets younger and higher-income gaming patrons. Under the terms of a management agreement relating to the Hard Rock Hotel, the Company receives a management fee equal to 4% of the adjusted gross revenues derived from the Hard Rock Hotel plus additional incentive compensation of up to 2% of adjusted gross revenues if certain performance targets are achieved by the Hard Rock Hotel. Located three blocks from the Las Vegas Strip and five minutes from McCarran International Airport, the 339-room hotel and casino houses 28,000 square feet of casino space containing 802 slot machines, 39 table games and a sports and race book. The Hard Rock Hotel features the Hard Rock Beach Club offering lush landscaping, whirlpools, luxury cabanas and a sandy beach, and "The Joint", a live music venue with a 1,400-person capacity. Additional amenities include a health club, retail store, and two restaurants, a 24-hour casual dining coffee shop and Mortoni's, an Italian fine dining room, with a view of the Hard Rock Beach Club, offering indoor and garden patio dining. The hotel/casino also provides parking spaces for approximately 1,285 cars. The Hard Rock Hotel is located adjacent to the Hard Rock Cafe on approximately 16 acres of land with 1,200 feet of frontage near the intersection of Paradise Road and Harmon Avenue. The site is conveniently located at one of the busiest intersections in Las Vegas and is a short distance from the Las Vegas Convention Center, three non-gaming full service hotels with a combined total of approximately 850 rooms and the New Four Corners, which includes major casinos such as the MGM Grand Casino Hotel and Theme Park. The Hard Rock Hotel hosts special events such as award presentations to rock stars and other celebrities, film premiere parties and fundraising and other charitable activities, as well as frequently-scheduled live entertainment, in order to attract its target customers, who tend to be younger and have higher disposable incomes than the average Las Vegas visitor. The Company believes that the Hard Rock Hotel appeals to higher income patrons because of the Hard Rock theme, upscale hotel facilities and the wide variety of special events designed to maintain the image of the facility in the mind of the Hard Rock Hotel customer base. THE OFFERING <TABLE> <S> <C> Notes......................... $150,000,000 principal amount of % Senior Subordinated Notes Due 2006 (the "Notes"). Maturity Date................. , 2006. Interest Payment Dates........ and , commencing , 1996. Guarantees.................... The Notes will be fully and unconditionally guaranteed (the "Guarantees") jointly and severally by the Company's Restricted Subsidiaries (as defined herein). Optional Redemption........... The Notes are redeemable at the option of the Company, in whole or in part, at any time on or after , 2001 at the redemption prices set forth herein, plus accrued interest to the date of redemption. See "Description of the Notes -- Optional Redemption". Special Redemption............ The Notes are subject to redemption requirements imposed by gaming laws and regulations of the state of Nevada. See "Description of the Notes -- Optional Redemption". Subordination................. The Notes are general unsecured obligations of the Company, subordinated in right of payment to all existing and future Senior Debt (as defined herein) of the Company. Each Guarantee will be a general unsecured obligation of the guaranteeing Restricted Subsidiary (each a "Guarantor" and collectively the "Guarantors"), subordinated in right of payment to all existing and future Senior Debt of such Guarantor. As of February 29, 1996, on a PRO FORMA basis after giving effect to the Exchange Offer and the offering of the Notes made hereby (the "Offering") and application of the net proceeds therefrom, the Company and its subsidiaries would have had approximately </TABLE> <TABLE> <S> <C> $14 million of indebtedness outstanding that would have constituted Senior Debt and approximately $28.8 million of trade payables and accrued liabilities. Change of Control............. Upon a Change of Control (as defined herein), each holder of the Notes will have the right to require the Company to repurchase such holder's Notes at 101% of the principal amount thereof, plus accrued interest to the repurchase date. The Company's ability to make such a repurchase may be limited by its financial condition at the time, covenants in Senior Debt documents or its inability to finance such a repurchase. Such a repurchase may cause cross defaults under existing or future indebtedness and would make a takeover of the Company more expensive to a potential acquirer and accordingly may make such a takeover less likely. In any event, the Company must comply with all applicable laws, including Section 14(e) of the Securities Exchange Act of 1934, as amended, and the rules thereunder, in the event that it is required to offer to repurchase any Notes upon a Change of Control. See "Risk Factors" and "Description of the Notes -- Repurchase at the Option of Holders". Certain Covenants............. The indenture governing the Notes (the "Indenture") contains certain covenants that impose limitations on, among other things, (i) the incurrence of additional indebtedness by the Company or any Restricted Subsidiary (as defined herein), (ii) the payment of dividends, (iii) the repurchase of capital stock and the making of certain other Restricted Payments and Restricted Investments (each as defined herein) by the Company or any Restricted Subsidiary, (iv) mergers, consolidations and sales of assets by the Company or any Restricted Subsidiary, (v) the creation or incurrence of liens on the assets of the Company or any Restricted Subsidiary and (vi) transactions by the Company or any of its subsidiaries with Affiliates (as defined herein). These limitations are subject to a number of important qualifications and exceptions. See "Description of the Notes". Use of Proceeds............... The net proceeds of the Offering, estimated to be approximately $144.5 million, will be used by the Company to repay (i) approximately $107.1 million of indebtedness incurred under the Company's reducing revolving credit facility (the "Credit Facility"); (ii) $7.8 million to redeem the entire $8.0 million principal amount outstanding of the Subordinated Notes; (iii) a $10.0 million promissory note evidencing indebtedness incurred by the Company to fund construction of a parking garage adjacent to Harveys Wagon Wheel (the "Promissory Note"); and (iv) approximately $19.6 million of indebtedness incurred to finance the purchase of the riverboat casino at Harveys Casino/ Hotel (the "Iowa Loan"). See "Use of Proceeds". </TABLE> SUMMARY FINANCIAL DATA The following table sets forth selected summary financial data of the Company for the years ended November 30, 1991 through November 30, 1995 and the three months ended February 28, 1995 and February 29, 1996. The income statement and balance sheet data for the years ended November 30, 1991 through November 30, 1995 are derived from the Company's audited consolidated financial statements for such periods which, except for 1991 and 1992, are included elsewhere in this Prospectus. The Summary Financial Data are not necessarily indicative of the Company's future results of operations or financial condition, and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements of the Company, including the notes thereto, and the other financial and statistical information appearing elsewhere in this Prospectus. The Summary Financial Data presented below as of and for the three months ended February 28, 1995 and February 29, 1996 are derived from unaudited consolidated financial statements of the Company; however, in the opinion of the Company, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the Company's financial position and result of operations for such periods have been included. Operating results for the three months ended February 28, 1995 and February 29, 1996 are not necessarily indicative of the results that may be expected for future periods, including the entire year ending November 30, 1996. The Summary Financial Data include operating results for Harveys Wagon Wheel from its opening on December 2, 1994, for the Hard Rock Hotel from its opening on March 9, 1995 and for Harveys Casino/Hotel from the opening of the riverboat casino on January 1, 1996. <TABLE> <CAPTION> THREE MONTHS ENDED FISCAL YEARS ENDED NOVEMBER 30, ------------------------------- ------------------------------------------------ FEBRUARY 28, FEBRUARY 29, 1991 1992 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- -------------- -------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF INCOME DATA: Net revenues............................ $127,517 $132,482 $132,259 $128,286 $173,200 $ 38,337 $ 49,474 Depreciation and amortization........... 11,027 10,786 10,300 9,704 12,333 3,015 3,561 Pre-opening expense..................... -- -- -- -- 2,147 2,147 3,590 Operating income (loss)................. 11,247 14,754 12,193 10,382 18,354 (528) 895 Interest expense, net (1)............... (6,091) (5,084) (4,256) (2,886) (7,960) (1,725) (1,954) Net income (loss) (2)................... $ 3,197 $ 7,612 $ 4,809 $ 5,138 $ 9,345 $ (1,117) $ (576) -------- -------- -------- -------- -------- -------------- -------------- -------- -------- -------- -------- -------- -------------- -------------- OTHER OPERATING DATA: EBITDA (3).............................. $ 22,274 $ 25,540 $ 24,327 $ 20,458 $ 35,080 $ 4,634 $ 8,046 Net cash provided by (used in): Operating activities.................. 18,878 25,656 15,563 14,106 14,270 6,225 10,917 Investing activities (4).............. (8,518) (15,585) (25,592) (33,505) (74,244) (13,532) (29,488) Financing activities.................. (5,618) (3,938) (730) 15,506 63,021 14,393 23,156 Capital expenditures (5)................ 8,690 10,034 10,648 35,593 70,709 9,549 29,655 PRO FORMA DATA (6): Interest expense, net (1)....................................................... $ 12,460 N/A $ 2,720 EBITDA/Interest expense, net (1)................................................ 2.8x N/A 3.0x </TABLE> <TABLE> <CAPTION> AT FEBRUARY 29, 1996 ------------------------- ACTUAL AS ADJUSTED (7) -------- --------------- (UNAUDITED) <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents............... $ 15,078 $ 15,078 Total assets............................ 346,855 352,164 Long-term debt.......................... 147,362 161,461 Stockholders' equity.................... 131,780 138,680 </TABLE> - - ------------------------------ (1) Net of amounts capitalized and interest income. (2) For fiscal 1992, net income includes approximately $1.6 million of nonrecurring income items (approximately $1.1 million net of tax). (3) EBITDA (operating income (loss) plus depreciation and amortization) should not be construed as an indicator of the Company's operating performance, or as an alternative to cash flows from operating activities as a measure of liquidity. The Company has presented EBITDA solely as supplemental disclosure because the Company believes that it enhances the understanding of the financial performance of companies with substantial depreciation and amortization. For fiscal 1993, EBITDA excludes approximately $1.8 million of nonrecurring compensation charges, for fiscal 1995, EBITDA excludes approximately $2.1 million of pre-opening expenses, and for fiscal 1994 and 1995, EBITDA includes approximately $371,000 and $2.2 million, respectively, of life insurance benefits. (4) Net cash used in investing activities includes amounts expended by the Company for capital expenditures. (5) Of amounts shown, approximately $3.6 million in fiscal 1991, $2.8 million in fiscal 1992, $6.5 million in fiscal 1993, $4.4 million in fiscal 1994, $4.6 million in fiscal 1995, $1.3 million for the three months ended February 28, 1995 and $0.9 million for the three months ended February 29, 1996 related to recurring capital expenditures for maintenance of the current facilities. (6) The PRO FORMA data gives effect to (i) the Exchange Offer, (ii) the incurrence of indebtedness under the Iowa Loan, (iii) the incurrence of indebtedness under the Promissory Note and (iv) the Offering and the application of the proceeds therefrom to repay certain indebtedness, in each case as if such transaction had occurred or such indebtedness had been incurred on the first day of the period presented. (7) Adjusted to give effect to the Exchange Offer and the Offering and the application of the proceeds therefrom to repay certain indebtedness, in each case as if such transaction had occurred as of February 29, 1996.
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the detailed information and financial statements appearing elsewhere in this Prospectus. THE COMPANY Telmark Inc. ("Telmark" or the "Company") is in the business of leasing agricultural related equipment, vehicles, and buildings. Telmark's customers are farmers and other rural businesses as well as manufacturers and independent dealers that serve the agricultural marketplace. Telmark is indirectly owned and controlled by Agway Inc. ("Agway"), one of the largest agricultural supply and services cooperatives in the United States, in terms of revenues, based on a 1995 Co-op 100 Index produced by the National Cooperative Bank. Telmark is a direct wholly-owned subsidiary of Agway Holdings, Inc., a subsidiary of Agway. There are certain risks that should be carefully reviewed by an investor before deciding to purchase the Debentures. See "Risk Factors." NEITHER AGWAY NOR ANY OF ITS OTHER SUBSIDIARIES GUARANTEES THE PAYMENT OF INTEREST ON OR THE PRINCIPAL OF THE DEBENTURES. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - LIQUIDITY AND CAPITAL RESOURCES." Telmark operates throughout the continental United States. The Company's field representatives serve customers in 27 states including Alabama, Connecticut, Delaware, Georgia, Illinois, Indiana, Iowa, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Vermont, Virginia, West Virginia, and Wisconsin. Customers in other states are served through dealers of equipment distributed by selected farm equipment manufacturers. The Company's principal executive office is located at 333 Butternut Drive, New York 13214 and its telephone number is (315)449-7935. THE OFFERING Securities Offered . . . . . [$28,000,000] principal amount of Debentures (the "Debentures") pursuant to the Indenture dated as of September 30, 1993 (the "Indenture"), between Telmark and OnBank & Trust Co. As of July 31, 1996, the Company had debentures in the principal amount of $25,716,400 issued and outstanding under the Indenture. Form and Denomination....... The Debentures will be issued in registered form in minimum denominations as set forth in the table on the cover page of this Prospectus. The Company may, from time to time, change the minimum denominations offered by filing a supplement with the Securities and Exchange Commission. The applicable supplement, if any, will be attached to this Prospectus. Any change in minimum denominations offered will not affect the minimum denominations of any Debentures theretofore issued. Additional amounts may be added to the principal of the Debenture pursuant to an election by the holder thereof to have quarterly interest payments added to the principal of the Debenture. Debenture holders who elect the reinvestment option will receive a statement from the Company indicating the amounts added to the principal of the Debentures. Maturity Date............... Principal on the Debentures will be payable on the maturity dates for each Debenture as set forth in the table on the cover page of this Prospectus. The Company may, from time to time, change the maturity date offered by filing a supplement with the Securities and Exchange Commission. The applicable supplement, if any, will be attached to this Prospectus. Any change in maturity date offered will not affect the maturity date of any Debentures theretofore issued. PROSPECTUS SUMMARY (CONTINUED) THE OFFERING (CONTINUED) Interest.................... Interest on the 7.25% Debentures due March 31, 2000, is payable at a rate per annum equal to the greater of: (1) the "stated rate" of 7.25% per annum; and, (2) the "Treasury Bill Rate" as defined below under "Description of Debentures - Interest." Interest on the 7.50% Debentures, due March 31, 2002, is payable at a rate per annum equal to the greater of: (1) the "stated rate" of 7.50% per annum; and (2) the "Treasury Bill Rate" as defined below under "Description of Debentures Interest." The company may, from time to time prior to the completion of the offering of the Debentures, change the rate of interest offered by filing a supplement with the Securities and Exchange Commission. The applicable supplement, if any, will be attached to this Prospectus. Any change in the interest rate offered will not affect the rate of interest on any Debentures theretofore issued. Interest Payment Dates...... Interest will be payable quarterly in arrears on January 1, April 1, July 1 and October 1 of each year and on the Maturity Date as set forth in the table on the cover page of this Prospectus. Additional amounts may be added to the principal of the Debenture pursuant to an election by the holder thereof to have quarterly payments added to and increase the principal amount of the Debenture. See "Description of Debentures - Payments of Principal and Interest." Optional Redemption......... Upon not less than 30 days written notice, the Debentures are redeemable on a designated date (each such date, a "Redemption Date"), in whole or in part, at the option of the Company, at the principal amount thereof, together with accrued but unpaid interest thereon. See "Description of the Debentures - Redemption Provisions." Ranking..................... The Debentures are subordinated to all Senior Debt (as defined herein) of the Company. Therefore, in the event of any distribution of assets of Telmark under any total liquidation or reorganization of Telmark, the holders of all Senior Debt shall be entitled to receive payment in full before the holders of the Debentures are entitled to receive any payment. In addition to its subordination provisions, the Indenture contains only limited restrictions on highly leveraged transactions, reorganizations, restructuring, mergers or similar transactions involving the Company, which may adversely affect the holders of the Debentures. See "Description of the Debentures - Subordination Provisions." Use of Proceeds............. The Company intends to ultimately use the entire net proceeds from this offering to purchase equipment and buildings for lease. Pending such application, the net proceeds may be used to (i) reduce outstanding borrowings, if any, under the Company's line of credit agreements or (ii) fund maturing Senior Debt. See "Use of Proceeds." Settlement and Issue Date .. Persons interested in purchasing Debentures should forward their completed application and a check (personal, cashiers or certified) or money order payable to the Company in an amount equal to the principal amount of the Debenture to be purchased. Applications are available at certain Company and Agway locations. Applications generally will be processed by the Company within five to ten days of the date of receipt by the Company, at which time they will be forwarded to the trustee to authenticate, who in turn will forward the Debenture to the applicant. The "Issue Date" is defined as the first day of the month in which the application and proceeds are received by the Company for such Debenture. RISK FACTORS GENERAL PORTFOLIO RISK The principal assets of the Company are its portfolio of outstanding leases and the residual value of equipment or other property under lease. Investment risks inherent in any leasing company include the possibility that lessees fail to make the payments required under a lease and that the equipment or property leased might be sold at lease expiration for less than the residual value anticipated at the initiation of the lease. The Company's leasing business may be affected by general economic conditions, including the level of inflation, fluctuations in general business conditions, and the availability of financing to the Company and its customers. The Company's business is dependent upon continued demand for leases as a financing vehicle and would be adversely affected by customer use of other finance methods in acquiring the use of equipment such as the election to purchase equipment. CREDIT RISK. Bankruptcies, contract disputes, or defaults by lessees could result in the nonpayment of amounts due to the Company under its leases. The ultimate collectibility of amounts due under its leases is directly dependent upon the credit practices employed by Telmark and the creditworthiness of the individual leases comprising its portfolio. See "Business of Telmark - Credit Policies." Despite current credit practices and the existence of financial reserves to anticipate the potential impact of default or nonpayment of leases, there are other factors that could significantly impact the Company's lease collection experience and its earnings. These factors include changes in general economic conditions, government farm policy, adverse weather conditions and international commodities prices which are beyond the control of the Company. Some of these risks are related to Telmark's concentration of customers in particular segments of agriculture or specific geographic areas. Telmark's business is concentrated in agriculture in the New England, Mid-Atlantic, and Midwest states with approximately 75% of its leases directly related to production agriculture. At June 30, 1996, approximately 52% of the Company's net lease investment was in the states of Michigan, New York, Ohio and Pennsylvania. Adverse developments in any of these areas of concentration could have a corresponding adverse effect on the collectibility of its lease receivables. See "Risk Factors - Agricultural Economy." RESIDUAL VALUE RISK. Residual values represent the estimated resale value of leased equipment or other leased property that the Company expects to derive as leases expire. Residual values of leased assets are estimated at the time that the leases are written. Realization of residual values depends on several factors not within the Company's control, such as the condition of the equipment, the cost of comparable new equipment and technological or economic obsolescence of the equipment. Telmark has generally not experienced any losses as a result of the failure to realize estimated residual values on equipment and property lease expirations. During the past eight years, the Company has collected slightly over 100% of the net lease receivable for all leases which terminated. The net lease receivable with respect to a lease equals the sum of payments due to the Company under the lease, the estimated residual value of the leased property at the end of the lease and the net costs incurred by the Company in entering into the lease, less imputed unearned interest and finance charges with respect to the lease. Although there can be no assurance this experience will continue in the future, Company management monitors residual collections and anticipates this trend to continue. Failure to realize residual values could have a material adverse effect on the Company's earnings. See "Business of Telmark - Residual Value." FINANCING The ongoing availability of adequate financing to maintain the size of the Company's current lease portfolio and to permit lease portfolio growth is key to the Company's continuing profitability and stability. Telmark's principal sources of financing include banks, debt placements with private institutional investors, and Debentures sold to the public; at June 30, 1996, these financing sources provided approximately 49%, 43% and 8%, respectively, of the Company's outstanding debt. Telmark has been successful in arranging its past financing needs and believes that its current financing arrangements are adequate to meet its foreseeable operating requirements. There can be no assurance, however, that Telmark will be able to obtain future financing in amounts that are sufficient or on terms that are acceptable. The Company's inability to obtain adequate financing would have a material adverse effect on its operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operation Liquidity and Capital Resources." INTEREST RATE RISK AFFECTING THE COMPANY The Company endeavors to limit the effects of changes in interest rates by matching as closely as possible, on an ongoing basis, the maturity and repricing characteristics of funds borrowed to finance its leasing activities with the maturity and repricing characteristics of its lease portfolio. However, a rise in interest rates would increase the cost of funds borrowed by the Company to finance its leasing business and could lower the value of the Company's outstanding leases in the secondary market. See "Management's Discussion and Analysis of Financial Condition and RISK FACTORS (CONTINUED) Results of Operations - Liquidity and Capital Resources." In addition, higher interest rates, inasmuch as they would increase the cost of funds borrowed by the Company for financing its leases, would also increase the cost of leases to potential lessees and could decrease the demand for the Company's leases. SUBORDINATION The Debentures are unsecured obligations of the Company and are subordinated to all Senior Debt (as defined herein) of the Company. Therefore, in the event of bankruptcy, liquidation or reorganization of the Company, its assets will be available to pay obligations of the Debentures only after all Senior Debt has been paid in full, and there may not be sufficient assets remaining to pay amounts due on any or all of the Debentures then outstanding. As of July 31, 1996, Senior Debt of $280,944,445 was outstanding. See "Description of the Debentures - Subordination Provisions." LIMITED PROTECTIONS IN CONNECTION WITH CERTAIN TRANSACTIONS In addition to its subordination provisions, the Indenture contains only limited restrictions on highly leveraged transactions, reorganizations, restructuring, mergers or similar transactions involving the Company, which may adversely affect the holders of the Debentures. See "Description of Debentures - General" and "Description of Debentures - Subordination Provisions." NO UNDERWRITING The offering of the Debentures is not being underwritten. Accordingly, no underwriter, such as an investment bank, has undertaken a review of the corporate records of the Company, evaluated its financial conditions, or evaluated the terms of the Debentures and this offering, including the Company's ability to meet its payment obligations on the Debentures. See "Plan of Distribution." CONTROL OF THE COMPANY Agway owns all of the voting stock of the Company through subsidiaries. This ownership permits Agway to control all corporate actions of the Company (including the payment of dividends by the Company to Agway) and could result in the Company taking actions that would adversely affect its ability to make payments of principal or interest on the Debentures. See "Principal Stockholder," "Directors and Management," and "Executive Compensation." AGRICULTURAL ECONOMY The financial condition of the Company is indirectly affected by factors influencing the agricultural economy, since these factors impact the demand for equipment leased by the Company and the ability of its customers to make payments on leases. These factors include: (i) changes in the level of government expenditures on farm programs and the elimination of the acreage reduction programs could adversely affect the level of income of customers of the Company; (ii) adverse weather-related conditions that negatively impact the agricultural productivity and income of customers of the Company; and (iii) oversupply of, or reduced demand for, agricultural commodities produced by customers of the Company. To the extent that these factors adversely affect the customers of the Company, the financial condition of the Company and the ability of the Company to make payments on the Debentures could be adversely affected. See "Business of Telmark - Agricultural Economy." LACK OF GUARANTEE Although Agway owns all of the common stock of the Company through subsidiaries, neither Agway nor any of its subsidiaries guarantees the payment of interest on or the principal of the Debentures. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." ABSENCE OF PUBLIC MARKET, REDEMPTION AND MARKET RISK There is no market for the Debentures and there is no intent on the part of the Company to create or encourage a trading mechanism for these Debentures. The Company does not intend to apply for listing of the Debentures on any securities exchange. The secondary market for, and the market value of, the Debentures will be affected by a number of factors independent of the creditworthiness of Telmark, including the level and direction of interest rates, the remaining period to maturity of the Debentures, Telmark's right to redeem the Debentures, the aggregate principal amount of the Debentures and the availability of comparable investments. In addition, the market value of the Debentures may be affected by numerous other interrelated factors, including factors that affect the U.S. corporate debt market generally and Telmark specifically. RISK FACTORS (CONTINUED) There is no assurance that: (1) a secondary market value of the Debentures will develop, (2) any secondary market will continue, (3) the price at which an investor can sell the Debentures will enable the investor to realize a desired yield on that investment, or (4) in the event of redemption the investor will be able to reinvest the proceeds in comparable securities at an effective interest rate as high as that of the Debentures. The market value of the Debentures is likely to fluctuate; such fluctuations may be significant and could result in significant losses to investors. Debenture holders should rely solely on the Company's ability to repay principal at maturity of the offered Debentures as the source for liquidity in this investment. COMPETITION The Company competes with finance affiliates of equipment manufacturers, agricultural financial institutions, other independent finance and leasing companies, and commercial banks. Many of these organizations have substantial financial and other resources and as a consequence are able to compete on a long-term basis within the market segment that the Company serves. The Company believes its leasing products and services will effectively serve its intended markets in the foreseeable future and that existing competition, while formidable, will not impair prospects for growth. See "Business of Telmark - Competition."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000914670_correction_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000914670_correction_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and consolidated financial statements (including the notes thereto) appearing elsewhere in this Prospectus. All references to the Company in this Prospectus include Correctional Services Corporation and its subsidiaries and, unless otherwise indicated, all references to the Company's outstanding Common Stock assume no exercise of the Underwriters' over-allotment option. THE COMPANY The Company is a leading developer and manager of privatized correctional and detention facilities in the United States. Through its three divisions, Adult, Juvenile and Community Corrections, the Company provides a diverse range of services to local, state, and federal governmental correctional agencies. The Company currently has agreements to operate 15 correctional and detention facilities in New York, Florida, Arizona, Texas and the State of Washington. Eleven of these facilities, with a total of 1,975 beds, are currently in operation, three, with a total of 796 beds, are anticipated to be operational in the first quarter of 1997 and one, with 100 beds, is anticipated to be operational in the fourth quarter of 1997. Further, the Company recently was advised that it has been selected, following a competitive bidding process, to negotiate an agreement to design, construct, own and manage a 600-bed adult prison in Arizona, which is anticipated to become operational in the fourth quarter of 1997. The Company is also aggressively pursuing other privatized correctional projects both at the request for proposal ("RFP") stage and the pre-RFP development stage. The Company manages both secure and non-secure facilities. The Company's secure facilities include a detention and processing center for illegal aliens, an adult prison, intermediate sanction facilities, driving while intoxicated ("DWI") facilities, and military-style boot camps for juvenile offenders. Its non-secure facilities include residential programs, such as community correctional facilities for federal and state offenders serving the last six months of their sentences, and non-residential supervision programs. In addition to providing fundamental residential services for adult and juvenile inmates, the Company has developed a broad range of programs intended to reduce recidivism, including basic and special education, substance abuse treatment and counseling, vocational training, life skills training, and behavioral modification counseling. The management services offered by the Company range from project consulting to the design, development and management of new correctional and detention facilities and the redesign, renovation and management of older facilities. The Company believes its proven ability to manage the full spectrum of correctional facilities and its wide variety of programs and services will increase its marketing opportunities. The privatized correctional services industry has experienced rapid growth in recent years. According to the Private Adult Correctional Facility Census, Ninth Edition, prepared by the Private Corrections Project, Center for Studies in Criminology & Law, University of Florida, dated March 15, 1996, the rated capacity of international privatized secure adult correctional facilities grew from 2,620 beds in 1986 to 63,595 beds at year-end 1995 and, in a June 16, 1996 forecast prepared by the Project, is projected to grow to 197,503 beds by year-end 2000. This projection does not include the projected growth of privatized juvenile and community correctional facilities, both of which, the Company believes, are also growing rapidly. According to the United States Department of Justice, Office of Juvenile Justice and Delinquency Prevention, between 1988 and 1994 juvenile arrests for violent crimes grew by more than 50%. Also, according to the United States Department of Justice, Bureau of Justice Statistics, the number of adult inmates housed in federal and state facilities increased from 487,593 at December 31, 1985, to 1,104,074 at December 31, 1995. The Company believes the growth in demand for privatized correctional facilities is attributable to a number of factors, including a shortage of correctional beds, increasing public demand that convicted offenders serve a longer portion of their imposed sentences, the requirements imposed by legal and regulatory authorities to remedy overcrowded conditions and outmoded facilities, and increasing fiscal pressures on governmental agencies to deliver cost-effective correctional services to address these issues. The Company's business strategy is to enhance its position as an industry leader and to expand its operations, both internally and through selective acquisitions, in order to capitalize on current growth trends in the privatized corrections industry. The Company intends to continue emphasizing the quality management of its facilities and to continue developing and refining its diversified programs and services. Where appropriate, the Company may commit its own capital for the renovation or expansion of existing facilities or the development and construction of new facilities. The Company was incorporated under the laws of the State of Delaware on October 28, 1993 to acquire all of the outstanding capital stock of a number of affiliated companies engaged in operating correctional or detention facilities. The Company's executive offices are located at Suite 1000, 1819 Main St., Sarasota, Florida 34236 (telephone no. 941-953-9199). RECENT EVENTS In July 1996, the Company entered into an agreement with Colorado County, Texas to operate a 100-bed military-style boot camp in Eagle Lake, Texas for juvenile offenders aged 12 to 17. The agreement is for an initial five-year term with three five-year renewal options to the County. The Company will act as an advisor to the County during the construction phase, which is expected to commence in the first quarter of 1997, with the facility scheduled to be completed and become operational during the fourth quarter of 1997. In August 1996, the Company was advised it had been selected, through a competitive RFP process, to own and manage a 600-bed adult prison in Florence, Arizona, which is anticipated to become operational in the fourth quarter of 1997. The agreement, which is to be negotiated, will be for an initial three-year term with one two-year renewal option to the Arizona Department of Corrections, as provided in the RFP. The Company will own the facility and is responsible for the related costs, including design, development, construction and start-up expenses, currently estimated at approximately $15.0 million. In September 1996, the Company entered into an agreement with Bell County, Texas to operate a secure juvenile detention facility anticipated to be operational in the first quarter of 1997. The agreement provides initially for 64 beds, which is to be expanded to 96 beds by the third quarter of 1997, and has an initial five-year term, with three five-year renewal options to the County. Also, in September 1996, the Company entered into a one-year agreement with the Fort Bend County Community Supervision and Corrections Department to provide beds (estimated by the Company at up to 50 beds) at the Company's South Texas Intermediate Sanction Facility in Houston, Texas and to provide substance abuse treatment to offenders assigned to the facility by the Department. On August 1, 1996, the Company filed an amendment to its Certificate of Incorporation changing its name from Esmor Correctional Services, Inc. to Correctional Services Corporation and increasing its authorized Common Stock from 10,000,000 shares, $.01 par value, to 30,000,000 shares, $.01 par value. THE OFFERING Common Stock offered by the Company............. 2,000,000 shares Common Stock offered by the Selling Stockholders.................................... 450,000 shares. See "Principal and Selling Stockholders." Common Stock to be outstanding after the offering........................................ 7,145,503 shares(1) Use of proceeds................................. To finance construction, start-up and related costs of the Florence, Arizona and the Eagle Lake, Texas facilities and the start-up costs of two Florida facilities, repay bank indebtedness and for general corporate purposes. See "Use of Proceeds." The Nasdaq Stock Market symbol.................. CSCQ - --------------- (1) Excludes (i) 648,112 shares of Common Stock reserved for issuance under the Company's stock option plans, pursuant to which options to purchase 346,813 shares at a weighted average exercise price of $9.51 per share are outstanding, of which options to purchase 195,944 shares are currently exercisable; (ii) 200,000 shares issuable at $8.875 per share upon exercise of non-qualified options granted to two employees and 15,000 shares issuable at $8.75 per share upon exercise of a non-qualified option granted to a director, of which options to purchase 66,666 shares are currently exercisable; and (iii) 851,202 shares issuable upon exercise of outstanding warrants at an average exercise price of $7.65 per share. See "Management -- Stock Options" and "Description of Securities -- Warrants." SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OPERATING DATA) <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ---------------------------------------------- ----------------- 1991 1992 1993 1994 1995(1) 1995 1996 ------ ------- ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues.......................... $5,444 $10,322 $14,101 $24,273 $31,552 $16,406 $15,073 Operating expenses................ 3,840 6,292 8,651 14,899 19,732 9,915 10,242 General and administrative expenses....................... 1,232 2,888 3,579 6,696 9,938 5,064 4,402 New Jersey facility closure costs(1)....................... -- -- -- -- 3,910 1,488 -- ------- -------- -------- -------- -------- -------- -------- Operating income (loss)........... 372 1,142 1,871 2,678 (2,028) (61) 429 Interest expense.................. 67 36 31 133 761 215 453 ------- -------- -------- -------- -------- -------- -------- Earnings (loss) before income taxes.......................... 305 1,106 1,840 2,545 (2,789) (276) (24) Income tax expense (benefit)(2)... 35 390 736 1,002 (1,050) 21 (10) ------- -------- -------- -------- -------- -------- -------- Net earnings (loss)(2)............ $ 270 $ 716 $ 1,104 $ 1,543 $(1,739) (297) (14) ======= ======== ======== ======== ======== ======== ======== Net earnings (loss) per share(2)....................... $ 0.08 $ 0.22 $ 0.34 $ 0.35 $ (.38) $ (0.07) $ (0.00) ======= ======== ======== ======== ======== ======== ======== Weighted average shares outstanding.................... 3,281 3,281 3,281 4,395 4,553 4,408 4,975 OPERATING DATA:(3) Number of beds.................... 297 731 1,222 1,805 1,575 1,585 1,975 Actual mandays.................... 81,221 186,970 282,263 507,884 609,392 320,122 305,489 Available mandays................. 82,869 221,176 285,132 519,746 635,754 337,354 320,870 Average occupancy................. 98.0% 84.5% 99.0% 97.7% 95.9% 94.9% 95.2% </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 ------------------------- ACTUAL AS ADJUSTED(4) ------- --------------- <S> <C> <C> BALANCE SHEET DATA: Working capital..................................................... $ (601) $ 5,271 Total assets........................................................ 24,836 46,534 Long-term debt, including current portion........................... 6,572 -- Subordinated notes.................................................. 4,032 4,032 Total stockholders' equity.......................................... 10,801 39,071 </TABLE> - --------------- (1) The 1995 consolidated financial statements have been restated with respect to the closure of the New Jersey facility. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Calendar Year 1995 Compared to Calendar Year 1994" and Note L-1 of Notes to Consolidated Financial Statements. (2) Net earnings and net earnings per share for 1991, 1992 and 1993 are shown on a pro forma basis to reflect income taxes which were not applicable under the Company's then Subchapter S Corporation status. (3) All references to the number of beds in this Prospectus, together with all related statistical data, refer to the number of beds under contract which is an estimate in the contract by the contracting governmental agency of the number of offenders expected to be assigned to the facility and not a guarantee of a minimum or maximum number of offenders to be so assigned. (4) Adjusted to reflect the sale of the 2,000,000 shares of Common Stock offered by the Company hereby and the application of the estimated net proceeds of $28.3 million therefrom (based on an assumed offering price of $15.25 per share). SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for certain qualifying forward-looking statements. Certain information included in this Prospectus and other materials filed or to be filed by the Company with the Securities and Exchange Commission (as well as certain information included in oral statements or other written statements made or to be made by the Company) may contain statements that are forward-looking, such as statements relating to projected financial items and results, plans for future expansion and other business development activities, capital spending or financing sources, capital structure and the effects of regulation and competition. Such forward-looking information involves important risks and uncertainties that could significantly impact anticipated results in the future and, accordingly, such results may materially differ from those expressed in any forward-looking statements by or on behalf of the Company. These risks and uncertainties include, but are not limited to, those described under "Risk Factors" below.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000914698_xylan-corp_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000914698_xylan-corp_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..79128ffe8014e361dc5115b639ffd67b8e9f8b33
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000914698_xylan-corp_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. THE COMPANY Xylan Corporation ("Xylan" or the "Company") is a leading provider of high- bandwidth switching systems that enhance the performance of existing local area networks and facilitate migration to next generation networking technologies such as ATM. Current hub- and router-based networks are facing performance degradation due to the continued growth in the size of networks, increasing demands of high-performance personal computers and workstations, and emergence of graphical applications, such as document image processing, desktop video, medical imaging, modeling and simulation and the World Wide Web. To address these issues, a new generation of "switched-media" technologies has emerged, including LAN switching, ATM switching and virtual LANs. Xylan offers the OmniSwitch and PizzaSwitch product families, which support all popular LAN types with "any-to-any" MAC-layer translation, and allow the use of LAN switches in place of shared-media hubs. The Company's switches are based on a distributed, modular, multiprocessor architecture that currently combines LAN switching, virtual LANs and routing in a single product and allows switching performance to increase in linear proportion to the number of ports. Xylan's AutoTracker product supports flexible virtual LANs and simplifies network management. The Company is also developing ATM switching technology and ASICs for integration into its product line. Xylan has strategic OEM partnerships with leading communications and networking companies, including Alcatel N.V., Digital Equipment Corporation, Hitachi Computer Products (America), Inc. and Network Systems Corporation, that have significant customer relationships already in place. Xylan pursues direct sales to organizations in the United States with large networking requirements and employs network integrators to target customers worldwide. The Company's products have been deployed by a broad range of organizations, ranging from companies in the telecommunications, manufacturing, medical, computer services, media and finance/insurance industries to educational institutions and the federal government. RECENT DEVELOPMENTS For the quarter ended March 31, 1996, the Company reported revenue of $23.4 million, a 51% increase over the prior quarter, and net income of $2.7 million. The Company's PizzaSwitch product, introduced in March 1996, contributed approximately 10% of revenue for the quarter. During the quarter, the Company expanded its direct sales force by 25%. Since the completion of its initial public offering in March 1996, the Company completed the installation of a new management information system and entered into a binding memorandum of understanding to settle its litigation with Ascom Timeplex Inc. THE OFFERING <TABLE> <S> <C> U.S. Offering........... 2,800,000 Shares International Offering.. 700,000 Shares Total................... 3,500,000 Shares (including 400,000 Shares by the Company and 3,100,000 Shares by the Selling Shareholders) Common Stock to be outstanding after the offering............... 40,643,427 Shares (1)(2) Use of Proceeds......... For general corporate purposes, including working capital Nasdaq National Market Symbol................. XYLN </TABLE> SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, THREE MONTHS ENDED PERIOD ENDED ---------------- ------------------------------------------------ DECEMBER 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, 1993 1994 1995 1995 1995 1995 1995 1996 ------------ ------- ------- --------- -------- --------- -------- --------- <S> <C> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue................. $ -- $ 443 $29,662 $1,397 $ 4,503 $ 8,240 $15,522 $23,392 Gross profit............ -- 116 14,244 436 1,844 3,854 8,110 12,569 Operating income (loss). (531) (4,151) (9,514) (3,041) (3,743) (3,181) 451 2,586 Net income (loss)....... (522) (4,083) (9,441) (2,970) (3,713) (3,195) 437 2,683 Net income (loss) per share (3).............. $ (0.45) $ 0.01 $ 0.06 Shares used in per share computation (3)........ 21,151 43,096 43,957 </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 DECEMBER 31, -------------------------- 1995 ACTUAL AS ADJUSTED(1)(4) ------------ -------- ----------------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........................... $ 6,034 $ 81,652 $107,033 Working capital........................ 11,130 92,393 117,774 Total assets........................... 27,248 122,246 147,627 Net shareholders' equity............... 16,105 106,391 131,772 </TABLE> - ------- (1) Assumes the Underwriters' over-allotment option from the Company is not exercised. See "Underwriters." (2) Based on the number of shares outstanding as of March 31, 1996. Does not include an aggregate of 6,811,300 shares of Common Stock issuable upon exercise of options outstanding as of March 31, 1996. (3) For an explanation of the determination of the number of shares used in computing net income per share, see Note 1 of Notes to Consolidated Financial Statements. (4) As adjusted to reflect the sale of 400,000 shares of Common Stock offered by the Company at an assumed offering price of $67 3/4 and the application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000914978_consep-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000914978_consep-inc_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b6e4c5b71db3d271c737ebc295e1f7ea8bb1e64b
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000914978_consep-inc_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, (i) all information in this Prospectus assumes that the Underwriters' over-allotment option will not be exercised and (ii) references to the "Company" or "Consep" shall include Consep, Inc. and each of its subsidiaries. THE COMPANY Consep is a diversified pest control company with an environmental focus that provides products and services to the commercial agriculture and consumer home, lawn and garden markets. The Company's principal proprietary products, unlike most conventional insecticides, are non-toxic to humans and animals, leave no harmful residues, do not contaminate soil or groundwater and do not disrupt beneficial insect populations. In addition to manufacturing non-toxic pest control products, the Company also owns and operates full-line agrichemical distributors in major agricultural regions of California and in the Connecticut River Valley. The principal commercial agriculture products manufactured by the Company, which are applied to certain fruit, nut, vegetable and selected row crops, combine patented controlled release technologies with biorational pest control agents. Biorational pest control products use naturally occurring agents and biochemicals, such as synthetic pheromones, to control pest populations. Synthetic pheromones, the primary biorational agents used in the principal commercial agriculture products manufactured by the Company, are synthesized equivalents to compounds emitted by insects as their primary means of communication. The Company's controlled release technologies enhance the effectiveness and duration of the synthetic pheromones by protecting them from natural degradation and controlling their release over planned periods of time. The synthetic pheromones emitted by these products interfere with the ability of male insects to locate females of the same species, thereby disrupting mating and controlling the target insect population within the application area. Although pheromones have been studied as a means of controlling insects since the 1960s, the Company believes that their usage was limited due to variability in performance and the absence of cost-effective delivery systems. The Company has developed and believes it can continue to develop products and delivery systems which effectively address these problems. The commercial agriculture products manufactured by the Company are marketed through an established distribution system which includes a network of wholly-owned distributors in North America, and independent distributors in North and South America, Europe and Africa. The full-line agrichemical distributors owned and operated by the Company are established dealers who emphasize the use of environmentally oriented pest control products and techniques as well as sell a full range of crop protection products. In addition to selling the Company's commercial agriculture products, the Company's agrichemical distributors also sell products produced by other manufacturers, including biorational insect control products, conventional toxic pesticides, fertilizers and other farm supplies. Additionally, the Company's five distribution locations in California employ numerous pest control advisors ("PCAs") who are licensed by that state and provide consulting services to commercial growers. The Company believes the PCAs' advice is an important part of commercial growers' buying decisions, and therefore focuses much of its marketing efforts on educating and training PCAs on the uses and advantages of its products. The Company sells seven pheromone-based mating disruption products under its CheckMate label for use in the commercial agriculture market. Six of these products are registered with the U.S. Environmental Protection Agency (the "EPA"). In addition, the Company is field testing seven new CheckMate products or formulations and plans to develop and register additional CheckMate products. Consep also sells a line of pheromone-based insect traps and lures under its BioLure label which are used to monitor the degree of insect infestation in a variety of crops. For the consumer home, lawn and garden pest control market, Consep manufactures and distributes non-toxic pest control products that use a variety of proprietary attractants and technologies, including the Company's proprietary controlled release technology, to trap or otherwise control pests in and around the home without exposing the household to the toxic effects of conventional pesticides. The Company's consumer products are marketed in the U.S. under the SureFire label and in Canada under the Insectigone label. These products are sold through a network of cooperative buying groups and distributors who in turn resell to lawn and garden centers, hardware stores and retail chains. The Company's consumer products are also sold directly to retailers and through mail-order catalogs. The Company will begin distributing for the 1997 season a line of consumer products, based on natural oils, to repel biting insects. These insect repellent products, which are manufactured by, and are the proprietary products of, a third party, will be marketed on an exclusive basis in the United States, Canada and Mexico under the Company's Bite Blocker label. Consep has licensed its core controlled release technologies from, and has an ongoing research and development relationship with, Bend Research, Inc. ("Bend Research"), an independent research and development firm specializing in membrane-based controlled release and materials separations technologies. In addition to conducting its own research and development efforts, Consep's research and development personnel work with scientists at Bend Research to define research projects which support the adaptation of licensed technologies to new products and to new uses of existing products. In general, basic research related to these projects takes place at Bend Research, and the resulting technology is transferred to Consep for applied research, product development and commercialization. Consep has also established joint testing and development programs with academic, governmental and corporate entities in the United States and in selected international markets in order to accelerate development, registration and market acceptance of its products. Management believes that regulatory limitations on the use, and growing concern over the safety and effectiveness of conventional toxic insecticides have created substantial opportunities to expand the use of the Company's alternative biorational pest control products. The key components of the Company's strategy include (i) continuing to develop proprietary biorational pest control products and acquiring complementary product lines, technologies or businesses; (ii) focusing on selected high-value crops where growers are generally more concerned with reducing toxic residues and where regulatory costs of using toxic chemicals are high; (iii) utilizing Company-owned distributors and their PCA employees to educate commercial growers on the advantages of its products; (iv) expanding the Company's international sales effort to support the introduction of its products through established distributors in key international markets; and, (v) expanding the Company's presence and distribution channels in the consumer market. The Company was incorporated in Oregon in 1984. The Company's principal executive offices are located at 213 S.W. Columbia Street, Bend, Oregon 97702, and its telephone number is (541) 388-3688.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0000915518_3dx_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000915518_3dx_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c4f6b741e73c85d66d57dad6f0369ad4f2cbae2b
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000915518_3dx_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY AND SHOULD BE READ IN CONJUNCTION WITH THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED AND GIVES EFFECT TO A REVERSE SPLIT (THE "REVERSE SPLIT") OF THE COMMON STOCK AT A RATIO OF 0.517-TO-1 TO BE EFFECTED IMMEDIATELY PRIOR TO THE CONSUMMATION OF THE OFFERING. SEE THE "GLOSSARY OF CERTAIN OIL AND GAS TERMS" APPEARING ELSEWHERE HEREIN FOR DEFINITIONS OF CERTAIN TERMS USED IN THIS PROSPECTUS. INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER THE CAPTION "RISK FACTORS." THE COMPANY 3DX Technologies is a knowledge-based oil and gas exploration company whose core competence and strategic focus is the utilization of 3-D seismic imaging and other advanced technologies in the search for commercial quantities of hydrocarbons. The Company only enters into arrangements that enable it to combine its expertise and exploration capabilities with the operating skills of other oil and gas companies. The Company participates in carefully selected exploration projects as a non-operating, working interest owner, sharing both risks and rewards with its partners. The Company commenced operations in January 1993 to take advantage of perceived opportunities emerging from changes in the domestic oil and gas industry, including the divestiture of domestic oil and gas properties, advances in technology and the outsourcing of specialized technical capabilities. By reducing drilling risk through 3-D imaging and analysis, the Company seeks to improve the expected return on investment in its oil and gas projects. The Company has developed a rigorous screening process that it applies to all projects that it considers. The screening process, which is adapted continually to incorporate the Company's ongoing experience, is designed to produce a balanced portfolio of projects that have reliable and experienced operating partners, are conducive to the application of advanced 3-D technology, have significant upside potential and may be extended into exploration trends. As of the date of this Prospectus, the Company's current portfolio includes 12 active operator partners and 24 exploration projects, primarily located onshore and near shore within the Gulf Coast region from South Texas to Southern Florida. Although the Company's current geographic focus is principally the Gulf Coast region, the Company has and will continue to pursue opportunities that may become available in other select geographic areas as its capital resources increase. The Company believes that it can effectively and efficiently participate in an increasing number of concurrent projects by continually improving its techniques for acquiring and analyzing data. One example of such an improvement is the Company's 3DXPRESS process, an innovative exploration technique that improves the quality of seismic data and significantly compresses the time frame traditionally required for acquisition, processing, imaging and analysis. This process allows analysis of 3-D data while the seismic survey is being conducted, giving the Company's explorationists the ability to ensure data quality and to steer data collection toward more promising prospective areas. Utilizing this technology, the Company has been able to image and analyze an increased number of projects concurrently and to identify potential drilling sites more rapidly and accurately. Since its formation through the date of this Prospectus, the Company has participated in the drilling of 32 gross wells that have been drilled based on the Company's site and target depth recommendations. Twenty of these wells were successful and discovered estimated proved reserves of 40.3 Bcfe (2.8 Bcfe net to the Company's interest), of which 27.0 Bcfe (2.1 Bcfe net to the Company's interest) were discovered during the first nine months of 1996. The Company currently expects to participate in the drilling of between 35 and 40 wells during 1997, although the number of wells may increase as additional projects are added to the Company's portfolio. The Company believes that the disciplined approach it utilizes to select its partners and projects, together with its technological expertise, will result in improved exploration success and project economics. This success should position the Company to acquire larger working interests in an increased number of exploration projects. THE OFFERING <TABLE> <S> <C> Shares of Common Stock Offered: By the Company (1).............. 2,500,000 By the Selling Stockholder...... 449,862 Total....................... 2,949,862 Shares of Common Stock Outstanding (1)(2): Before the Offering............. 4,505,049 After the Offering.............. 7,005,049 Use of proceeds................... The net proceeds of the shares of Common Stock sold in the Offering by the Company, estimated to be approximately $29.5 million (approximately $34.0 million if the Underwriters' over-allotment option is exercised in full), will be used by the Company for (i) capital expenditures to fund the Company's exploration and development program; (ii) redemption of all of the issued and outstanding shares of the Company's Redeemable Preferred Stock, Series B, $0.01 par value per share (the "Series B Preferred Stock") and payment of all accrued but unpaid dividends on the Company's Senior Redeemable Convertible Preferred Stock, Series C, $0.01 par value per share (the "Series C Preferred Stock") prior to the conversion thereof; and (iii) general corporate purposes including expenses associated with hiring additional personnel. See "Use of Proceeds." Nasdaq National Market symbol..... TDXT </TABLE> - ------------------------ (1) Excludes 442,480 shares of Common Stock subject to issuance pursuant to the over-allotment option granted to the Underwriters. See "Underwriting." (2) Gives effect to the Transactions defined below, but excludes 1,501,813 shares of Common Stock reserved for issuance upon exercise of stock options which may be granted under the 1994 Stock Option Plan, as amended (the "Stock Option Plan"), of which options to purchase 794,479 shares of Common Stock, exercisable at prices ranging from $0.19 to $11.20 per share, have been granted and are outstanding as of the date hereof. See "Management--Stock Option Plan." THE TRANSACTIONS The following transactions (collectively, the "Transactions") will be effected in connection with the consummation of the Offering: (i) the exercise of each of the 266,224 shares of Series C Preferred Stock issuable upon exercise of certain outstanding warrants (the "Series C Preferred Stock Warrants") at a price of $3.00 per share, (ii) the conversion of each of the then outstanding 2,928,465 shares of Series C Preferred Stock (consisting of the 2,662,241 shares of Series C Preferred Stock issued and outstanding as of the date of this Prospectus and the 266,224 shares to become outstanding upon exercise of the Series C Preferred Stock Warrant) into 1,514,017 shares of common stock (giving effect to the .517 Reverse Common Stock Split), with a total recorded value of $8,711,040 (consisting of the September 30, 1996 book value of the outstanding Series C Preferred Stock of $7,912,368 plus the gross proceeds of $798,672 from exercise of the Series C Preferred Stock Warrant), (iii) the redemption immediately after the closing of this Offering of all issued and outstanding shares of the Series B Preferred Stock (including the effects of a $376,676 redemption premium which adjusts the Series B Preferred Stock carrying value to the liquidation price of $100 per share), and (iv) the payment immediately after the closing of this Offering of Series C Preferred Stock dividends currently accrued on the September 30, 1996 balance sheet of $780,423. See "Risk Factors--Benefits of the Offering to Existing Stockholders." For the pro forma effects of these Transactions on the Company's balance sheet as of September 30, 1996 see the "Prospectus Summary-- Summary Historical Financial Data," "Capitalization," "Selected Financial Data," and the Company's Financial Statements. SUMMARY HISTORICAL FINANCIAL DATA The financial information set forth below for the period from inception of operations (January 6, 1993) through December 31, 1993 and for the years ended December 31, 1994 and 1995 is derived from the Financial Statements of the Company, which were audited by Arthur Andersen LLP. The financial information set forth below as of September 30, 1996 and for the nine month periods ended September 30, 1995 and 1996 is derived from unaudited financial statements of the Company which, in the opinion of management, include all adjustments necessary for a fair presentation of the financial condition and results of operations of the Company for such periods. The results of operations for interim periods are not necessarily indicative of a full year's operations. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Financial Statements of the Company, the notes related thereto and the other financial data included elsewhere in this Prospectus. <TABLE> <CAPTION> PERIOD FROM INCEPTION OF OPERATIONS (JANUARY 6, 1993) YEAR ENDED DECEMBER NINE MONTH PERIODS THROUGH 31, ENDED SEPTEMBER 30, DECEMBER ---------------------- ---------------------- 31, 1993 1994 1995 1995 1996 ---------- ---------- ---------- ---------- ---------- (UNAUDITED) <S> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Revenues: Oil and gas......................... $ -- $ 303,836 $ 274,511 $ 202,185 $ 408,459 Rental income....................... 127,034 100,962 58,195 45,563 120,098 Interest and other.................. 7,528 52,817 236,186 125,549 217,678 ---------- ---------- ---------- ---------- ---------- Total revenues.................... 134,562 457,615 568,892 373,297 746,235 Costs and expenses: Lease operating..................... -- 14,225 60,877 31,443 28,463 Production taxes.................... -- 19,812 17,656 12,380 22,764 Impairment of oil and gas properties........................ -- -- 1,627,321 1,477,567 1,476,690 Depletion, depreciation & amortization...................... 65,368 210,347 446,350 287,933 463,573 General and administrative.......... 596,267 598,244 905,063 652,671 1,343,660 Interest and other.................. 88,006 -- -- -- 289 ---------- ---------- ---------- ---------- ---------- Total costs and expenses.......... 749,641 842,628 3,057,267 2,461,994 3,335,439 ---------- ---------- ---------- ---------- ---------- Net loss from continuing operations... (615,079 ) (385,013) (2,488,375) (2,088,697) (2,589,204) Dividends on preferred stock.......... (52,790 ) (421,696) (1,058,956) (113,257) (505,167) Accretion on preferred stock.......... (14,353 ) (30,367) (48,408) (34,681) (41,133) ---------- ---------- ---------- ---------- ---------- Net loss from continuing operations applicable to common stockholders... $(682,222 ) $ (837,076) $(3,595,739) $(2,236,635) $(3,135,504) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Pro forma net loss from continuing operations applicable to common stockholders (unaudited) (1)........ $(2,488,375) $(2,589,204) ---------- ---------- Pro forma primary and fully diluted net loss from continuing operations per share (unaudited)............... $ (0.48) $ (0.49) ---------- ---------- Pro forma weighted average number of common shares outstanding (unaudited) (2)..................... 5,234,857 5,236,428 ---------- ---------- </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1996 ----------------------------------------------------- (UNAUDITED) PRO FORMA AS ADJUSTED FOR ACTUAL ADJUSTMENTS PRO FORMA OFFERING (6) ---------- ----------- ----------- --------------- <S> <C> <C> <C> <C> BALANCE SHEET DATA: Working capital..................................... $3,435,650 $ 798,672(3) $4,234,322 $26,216,799 Property and equipment, net......................... 4,852,759 -- 4,852,759 4,852,759 Total assets........................................ 8,994,140 798,672(3) 9,792,812 31,775,289 Long-term debt...................................... -- -- -- -- Accrued dividends................................... 780,423 -- 780,423 -- Mandatorily redeemable Series B preferred stock..... 6,310,424 376,676(5) 6,687,100 -- Mandatorily redeemable Series C preferred stock..... 7,912,368 (7,912,368)(4) -- -- Common Stockholders' (deficit) equity............... $(6,704,515) $8,334,364(3 (5) $1,629,849 $31,079,849 </TABLE> - ------------------------------ (1) Adjusted to eliminate dividends and accretion on the Series B Preferred Stock and Series C Preferred Stock as if the shares of Series B Preferred Stock had been redeemed and the shares of Series C Preferred Stock had been converted into shares of Common Stock as of the beginning of the respective periods. (2) Adjusted for both periods to give effect to the issuance and sale of a sufficient number of shares of Common Stock in the Offering to redeem all the issued and outstanding shares of Series B Preferred Stock and pay the accrued dividends. (3) Adjustments required to give effect for the exercise of the Series C Preferred Stock Warrants as described on page 5. See "--The Transactions." (4) Adjustments to give effect to the conversion of all outstanding Series C Preferred Stock. See "--The Transactions." (5) Adjustment to give effect to the $376,676 redemption premium on the Series B Preferred Stock. (6) Adjusted to give effect to the Offering and the proposed application of net proceeds therefrom as described in "Use of Proceeds." SUMMARY OPERATING AND RESERVE DATA The following table sets forth certain summary operating data for the Company for the periods indicated: <TABLE> <CAPTION> NINE MONTH PERIODS YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30, ---------------------------------- ---------------------- 1993 1994 1995 1995 1996 ---------- ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> <C> PRODUCTION DATA (NET): Gas (MMcf).......................... -- 105.1 97.1 73.3 117.8 Oil and condensate (MBbls).......... -- 6.1 6.7 4.5 6.5 Total equivalent (MMcfe)............ -- 141.7 137.3 100.3 156.8 AVERAGE SALES PRICE PER UNIT: Gas (Mcf)........................... -- $ 1.93 $ 1.59 $ 1.63 $ 2.41 Oil and condensate (Bbl)............ -- 16.58 17.89 18.35 19.17 AVERAGE EXPENSES (PER MCFE): Lease operating (1)................. -- $ 0.24 $ 0.57 $ 0.44 $ 0.33 Depletion of oil and gas properties (2)............................... -- 0.64 1.15 0.94 0.81 </TABLE> - ------------------------ (1) Includes all direct expenses of operating the Company's properties, as well as severance and ad valorem taxes. (2) Excludes depreciation and amortization of technical interpretation equipment, office furniture and equipment and office leasehold improvements, impairments of oil and gas properties and amortization of organization costs. The following table sets forth summary information with respect to the Company's estimated proved oil and gas reserves as of each of the dates indicated, which estimates have been prepared by the Company. Crude oil and condensate are converted to Mcfe on the basis of one barrel of crude oil and condensate to six Mcfe. See "Risk Factors--Uncertainty of Estimates of Oil and Gas Reserves" and "Business--Oil and Gas Reserves."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0000915916_anesta_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000915916_anesta_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..29a692fe8dbf44002f4552feb00952655799f2c8
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000915916_anesta_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY Except for the historical information contained herein, the discussion in this Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section entitled "Risk Factors" and elsewhere in this Prospectus. The following summary is qualified in its entirety by the more detailed information and Financial Statements, including notes thereto, appearing elsewhere in this Prospectus. Except as otherwise specified, all information in this Prospectus (i) assumes no exercise of the Underwriters' over-allotment option, and (ii) excludes options to purchase 801,754 shares of Common Stock outstanding as of March 31, 1996. THE COMPANY Anesta is a leader in the development of new pharmaceutical products for transmucosal drug administration using its proprietary oral transmucosal (OT) system. The OT-system consists of either a dissolvable or non-dissolvable matrix which is mounted on a handle and contains a drug. The Company's OT-system provides rapid absorption of certain potent drugs into the bloodstream, which can produce the onset of the desired therapeutic effect within five to ten minutes. Anesta's OT-system allows the caregiver or patient to monitor the onset of action, remove the unit and stop administration of the drug once the desired therapeutic effect has been achieved. In certain situations, this allows the caregiver or the patient an element of therapeutic control not possible with traditional drug delivery products and technologies such as tablets, capsules or transdermal patches. Prior to the development of Anesta's OT-system, infusions or injections were generally required to achieve rapid drug absorption, dose control and titration (dose-to-effect). Anesta's non-invasive OT-system is more comfortable and convenient for patients, provides flexibility to caregivers, and has the potential to be more effective and less costly in a variety of clinical settings. The Company's first OT-fentanyl product, Fentanyl Oralet, has been approved by the U.S. Food and Drug Administration (FDA) and is being marketed by Abbott Laboratories (Abbott) for use in both children and adults as a surgical premedication and for conscious sedation (sedation/analgesia) prior to diagnostic or therapeutic procedures in hospital settings. Fentanyl, the active ingredient, has been widely used in other dosage forms for nearly 30 years. Anesta is nearing completion of its Phase III clinical trial program of a second OT-fentanyl product, Actiq, to treat breakthrough pain (moderate to severe transitory pain) associated with cancer in patients already receiving around-the-clock opioid therapy for their persistent or constant pain. The Company believes that the ability of Actiq to provide rapid relief from breakthrough pain (onset of meaningful pain relief in five to ten minutes) will enhance the patient's ability to more precisely control his or her own pain and enhance the patient's overall quality of life. Current breakthrough pain treatment most commonly includes orally administered morphine which usually requires 30 minutes or more to provide pain relief. Anesta also has several other products in clinical development, targeting applications where the OT-system advantages of rapid onset of action and patient or caregiver control may provide therapeutic value. Products in clinical trials include OT-fentanyl for acute pain (Phase II/III), OT-nicotine for smoking cessation (Phase II) and OT-etomidate for sedation (Phase I). Several drugs are being evaluated preclinically with the OT-system, including drugs to treat migraine headaches and nausea and vomiting. Anesta entered into a strategic alliance with Abbott in 1989 under which Abbott has provided funding to Anesta for the development of Fentanyl Oralet, Actiq and other applications for OT-fentanyl. Abbott contract manufactures Fentanyl Oralet for Anesta and is marketing Fentanyl Oralet to U.S. hospitals. Abbott has also agreed to manufacture Anesta's OT-fentanyl line of products, including Fentanyl Oralet and Actiq, for Anesta's potential international distributors and licensing partners. RECENT DEVELOPMENTS The following is a summary of certain developments involving the Company's business: - - In March 1996, the FDA eased the conditions of the controlled roll-out that had been imposed on the marketing of Fentanyl Oralet, based on safe clinical and commercial use since its introduction to the marketplace. Abbott is now permitted to advertise and promote Fentanyl Oralet and distribute it to all hospitals and surgical centers. Clinical use of Fentanyl Oralet can begin after clinical personnel have been trained by Abbott's sales force. [ARTWORK TO COME] IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE MARKET-MAKING TRANSACTIONS IN THE COMMON STOCK OF THE COMPANY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000916075_koppers_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000916075_koppers_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..6065346dca2b3c8e3d7a5a0a704adab3f9bbbd6b
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000916075_koppers_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Consolidated Financial Statements of the Company, including the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, all information contained in this Prospectus (i) assumes that the over-allotment option granted by the Company to the U.S. Underwriters is not exercised and (ii) has been adjusted to give effect to a 3-for-1 stock split of the Common Stock which occurred on May 23, 1996. THE COMPANY The Company is a leading integrated producer of carbon compounds and treated wood products for use in a variety of markets including the chemical, railroad, aluminum and steel industries. The "Koppers" name has been associated with the carbon compounds and wood treating businesses for over 70 years, and the Company has leading market positions in most of its products. The Company operates 24 facilities in the United States and maintains indirect ownership interests in 17 facilities overseas. The Company recorded net sales and net income of $525.7 million and $24.4 million, respectively, for the year ended December 31, 1995. In 1995, the Company's three divisions, Coke Products, Carbon Materials & Chemicals and Railroad & Utility Products, accounted for 15.2%, 37.6% and 47.2% of net sales, respectively. Through its Coke Products division, the Company is the largest independent merchant producer of coke and coke by-products in the United States. The Coke Products division converts coal into coke for sale to integrated steel producers and foundries that use coke in the production of iron and steel. The Company's Carbon Materials & Chemicals division distills coal tar into a variety of intermediate products, including carbon pitch, phthalic anhydride ("PAA") and creosote, which are basic materials necessary in the production of aluminum, polyester resins and plasticizers, and the pressure treatment of wood. The Company's Railroad & Utility Products division is the largest supplier of treated wood products, such as railroad crossties and utility poles, to the United States railroad and utility industries. The Company's operations are substantially vertically integrated, providing it with operating flexibility. Coal tar, a by-product of the Company's coke production, is the primary raw material used in the distillation process of the Carbon Materials & Chemicals division. Creosote, a major product of the coal tar distillation process, is used as a raw material in the treatment of wood by the Company's Railroad & Utility Products division. Other areas in which the Company is vertically integrated include the production of PAA through the use of a by-product of coal tar distillation and the utilization of coke oven gas and recycled wood products to fulfill a portion of its energy needs. The Company believes it has achieved leading positions in each of its markets as a result of the following strengths: Vertical Integration--The Company's ability to utilize by-products produced in its Coke Products and Carbon Materials & Chemicals divisions, as well as its ability to generate much of its own energy through the burning of wood waste and coke oven gas, provides the Company with significant operating flexibility. Continuous Investment In Facilities--Since 1988, the Company has invested over $145 million to modernize its facilities and to meet or exceed environmental compliance standards. Strong Customer Relationships--The "Koppers" name has been associated with quality and reliability since the 1920's and its reputation has enabled the Company to count among its customers many of the premier companies in each of its markets. The Company's predecessors have supplied many of these companies for decades. Since its formation in 1988, the Company has continued to supply most of these companies and many of its facilities are strategically located to service its customers' requirements. In order to enhance these relationships, the Company continually has instituted programs to ensure quality and customer satisfaction. Annual and Multi-Year Sales Contracts--Historically, the Company has sought to reduce its exposure to industry fluctuations and general economic conditions by diversifying its customer base and securing commitments for a large portion of its planned production through annual and multi-year contracts. In each year since it was formed in 1988, the Company has been able to secure over 50% of its following year's sales through such contracts. Strong Relationships With Multiple Suppliers--The Company's predecessors have enjoyed long-term relationships, in some cases over 50 years, with their major suppliers. Since its formation in 1988, the Company has maintained most of these relationships and its ability to source high- quality coal, coal tar and wood from multiple suppliers provide it with a significant competitive advantage in meeting customer requirements in a timely and economically advantageous manner. Global Presence--Directly and through its international joint ventures, the Company serves the North American, European, Asian and Australian markets with carbon materials and chemical products. The Company works closely with its joint ventures in Denmark and Australia on marketing strategy, raw material sourcing and technology sharing. Through its international joint ventures, the Company has completed several acquisitions and has entered into marketing agreements enabling the Company to expand its presence into new and emerging markets, including the People's Republic of China and other Pacific Rim nations. The Company's strategy for future growth and enhanced profitability includes the use of its cash flow for strategic acquisitions, productivity and cost reduction initiatives and the expansion of existing facilities. The Company also intends to develop, market and sell new products and broaden its customer base in new and existing markets. The Company is currently developing new low- emission and high-softening-point pitches for the aluminum industry, specialty coal tar pitches to be used to increase carbon content in electrode carbon markets (currently utilizing petroleum pitches) and additional downstream applications for naphthalene in the super-plasticizer and other specialty chemical markets. In addition, in 1995, the Company initiated a strategic review which identified opportunities to increase capacity at several of its facilities and to expand services offered, such as plant-assembled track sections, freight car cleaning and used tie disposal. This review also identified several areas where logistics, manufacturing processes and management systems can be improved. ACQUISITION STRATEGY As part of its growth strategy, the Company intends to pursue strategic acquisitions. Over the past three years, the Company has completed five acquisitions, including the purchase of the largest railroad crosstie treating facility in the United States, which is located in Somerville, Texas (the "Somerville Facility"); a coke facility in Monessen, Pennsylvania (the "Monessen Facility"), which is now one of the most modern coking facilities in the United States; and the coal chemical business of Aristech Chemical Corporation ("Aristech"), which included a low-cost coal tar processing facility in Clairton, Pennsylvania (such business and facility hereinafter referred to as "Clairton"). The Company believes each of these acquisitions will provide the Company with significant financial and strategic benefits, as they will allow the Company to further integrate and rationalize its businesses and facilities and gain access to high-quality, low-cost raw materials. As part of these acquisitions, the Company was also able to secure significant long- term contracts with customers prior to closing. The Monessen Facility, acquired in 1995, was an idled facility. After refurbishment by the Company, the Monessen Facility was restarted in late 1995 and reached full production capacity in the second quarter of 1996. In addition to improving the Company's strategic position in the merchant coke market, the Company's investment in the Monessen Facility provides an advantageous energy tax credit based on the production of coke as an alternative energy product. The credit is available through December 31, 2002 and is expected to provide a tax benefit to the Company of approximately $8 million in 1996 (after offset of a previously taken energy credit) and $9 million per year thereafter, unadjusted for inflation and assuming full production at the Monessen Facility. On April 1, 1996, the Company completed the Clairton acquisition for a cash purchase price of approximately $40 million and the assumption of approximately $8 million in liabilities. The Clairton facility is a low-cost coal tar processing facility producing carbon pitch and related distillates. As part of the purchase agreement, the Company received a long-term coal tar supply contract with USX Corporation ("USX"), the largest North American coal tar producer. In 1995, this business generated over $64 million of sales, excluding sales to the Company. The Company has obtained a term loan of $35 million to effect the acquisition, with remaining funding requirements obtained from its existing working capital revolving credit line. THE OFFERINGS Of the 7,001,922 shares of Common Stock being offered, 5,601,537 shares are being offered in the U.S. Offering and 1,400,385 shares are being offered in the International Offering. <TABLE> <S> <C> Common Stock Offered: By the Company....................................... 1,800,000 shares By the Selling Stockholders.......................... 5,201,922 shares ------------------- Total.............................................. 7,001,922 shares ------------------- ------------------- Common Stock to be outstanding after the Offerings (1). 10,158,587 shares Use of Proceeds........................................ Repayment of indebtedness and for general corporate purposes. Dividend Policy........................................ The Company currently intends to pay quarterly dividends of $0.11 per share of Common Stock, subject to general business conditions, the effect on the Company's financial condition and compliance with the covenants governing the Company's long-term debt. See "Dividend Policy" and "Description of Certain Indebtedness". Proposed NYSE symbol................................... KOP </TABLE> - -------------------- (1) Excludes 1,125,000 shares of the 2,250,000 shares of Common Stock held by a subsidiary of Koppers Australia Pty. Limited, a company in which the Company holds a 50% interest, and 688,606 shares of Common Stock issuable upon exercise of outstanding employee stock options under the stock option plan of the Company (the "Stock Option Plan"). See "Principal and Selling Stockholders" and "Management--Option Exercises and Fiscal Year End Values".
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0000916457_calpine_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000916457_calpine_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f984e4ddf60ced2f5914f0de6bf732b571e75415
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000916457_calpine_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements appearing elsewhere in this Prospectus. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those projected in such forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. Unless the context indicates otherwise, (i) all references in this Prospectus to the "Company" or "Calpine" include Calpine Corporation and its consolidated subsidiaries, (ii) all references to "Common Stock" refer to the Company's Common Stock, $.001 par value, (iii) all information in this Prospectus relating to the Company's Common Stock assumes no exercise of the Underwriters' over-allotment option, and (iv) all information in this Prospectus assumes the following transactions are completed prior to or concurrent with the consummation of the Common Stock Offering: (1) the reincorporation of the Company in Delaware, (2) the conversion of the Company's outstanding Class B Common Stock into Common Stock and the elimination of the Class A Common Stock and Class B Common Stock, (3) a 5.194-for-1 stock split of the Company's Common Stock, and (4) the conversion of the Company's outstanding Preferred Stock into 2,179,487 shares of Common Stock. THE COMPANY Calpine is engaged in the acquisition, development, ownership and operation of power generation facilities and the sale of electricity and steam in the United States and selected international markets. The Company has interests in 15 power generation facilities and steam fields having an aggregate capacity of 1,057 megawatts. Since its inception in 1984, Calpine has developed substantial expertise in all aspects of electric power generation. The Company's vertical integration has resulted in significant growth over the last five years as Calpine has applied its extensive engineering, construction management, operations, fuel management and financing capabilities to successfully implement its acquisition and development program. During the last five years, Calpine has expanded substantially, from $41.2 million of total assets as of December 31, 1991 to $911.0 million of total assets on a pro forma basis as of June 30, 1996. Calpine's revenue on a pro forma basis for 1995 increased to $224.3 million, representing a compound annual growth rate of 55% since 1991. The Company's EBITDA (as defined herein) on a pro forma basis for 1995 increased to $123.8 million. See "Pro Forma Consolidated Financial Data." Calpine's strategy is to capitalize on opportunities in the power market through an ongoing program to acquire, develop, own and operate electric power generation facilities, as well as marketing power and energy services to utilities and other end users. THE MARKET The power generation industry represents the third largest industry in the United States, with an estimated end user market of approximately $207.5 billion of electricity sales and 3 million gigawatt hours of production in 1995. In response to increasing customer demand for access to low cost electricity and enhanced services, new regulatory initiatives are currently being adopted or considered at both state and federal levels to increase competition in the domestic power generation industry. To date, such initiatives are under consideration at the federal level and in approximately thirty states. For example, in April 1996, the Federal Energy Regulatory Commission ("FERC") adopted Order No. 888, opening wholesale power sales to competition and providing for open and fair electric transmission services by public utilities. In addition, the California Public Utilities Commission ("CPUC") has issued an electric industry restructuring decision which envisions commencement of deregulation and implementation of customer choice of electricity supplier by January 1, 1998. Calpine believes that industry trends and such regulatory initiatives will lead to the transformation of the existing market, which is largely characterized by electric utility monopolies selling to a captive customer base, to a more competitive market where end users may purchase electricity from a variety of suppliers, including non-utility generators, power marketers, public utilities and others. The Company believes that these market trends will create substantial opportunities for companies such as Calpine that are low cost power producers and have an integrated power services capability which enables them to produce and sell energy to customers at competitive rates. The Company also believes that these market trends will result in the disposition of power generation facilities by utilities, independent power producers and industrial companies. Utilities such as Pacific Gas & Electric Company ("PG&E") and Southern California Edison Company have announced their intentions to sell power generation facilities totalling approximately 3,150 megawatts and 5,000 megawatts, respectively. The independent power industry, which represents approximately 8% of the installed capacity in the United States, or approximately 59,000 megawatts, and has accounted for approximately 50% of all additional capacity in the United States since 1990, is currently undergoing significant consolidation. Many independent producers operating a limited number of power plants are seeking to dispose of such plants in response to IN CONNECTION WITH THE COMMON STOCK OFFERING, CS FIRST BOSTON CORPORATION ON BEHALF OF THE U.S. UNDERWRITERS AND MANAGERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. DURING THE COMMON STOCK OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR THE ACCOUNTS OF OTHERS IN THE COMMON STOCK PURSUANT TO EXEMPTIONS FROM RULES 10B-6, 10B-7, AND 10B-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934. competitive pressures, and industrial companies are selling their power plants to redeploy capital in their core businesses. Over 200 independent power plant and portfolio sale transactions have occurred in the past two years. The Company believes that this consolidation will continue in the highly fragmented independent power industry. The power generation industry outside the United States is approximately three times larger than the domestic market, and the demand for electricity is growing rapidly. In 1996, it has been estimated that in excess of 590 gigawatts of new capacity will be required outside the United States over the ensuing ten-year period. In order to satisfy this anticipated increase in demand, many countries have adopted active government programs designed to encourage private investment in power generation facilities. The Company believes that these market trends will create significant opportunities to acquire and develop power generation facilities in such countries. STRATEGY Calpine's objective is to become a leading power company by capitalizing on these emerging opportunities in the domestic and international power markets. The key elements of the Company's strategy are as follows: Expand and diversify domestic portfolio of power projects. In pursuing its growth strategy, the Company intends to focus on opportunities where it is able to capitalize on its extensive management and technical expertise to implement a fully integrated approach to the acquisition, development and operation of power generation facilities. This approach includes design, engineering, procurement, finance, construction management, fuel and resource acquisition, operations and power marketing, which Calpine believes provides it with a competitive advantage. By pursuing this strategy, the Company has significantly expanded and diversified its project portfolio. Since 1993, the Company has completed transactions involving five gas-fired cogeneration facilities and two steam fields. As a result of these transactions, the Company has more than doubled its aggregate power generation capacity and substantially diversified its fuel mix since 1993. The Company is also pursuing the development of highly efficient, low cost power plants that seek to take advantage of inefficiencies in the electricity market. The Company intends to sell all or a portion of the power generated by such merchant plants into the competitive market, rather than exclusively through long-term power sales agreements. As part of Calpine's initial effort to develop merchant plants, the Company entered into an agreement with Phillips Petroleum Company to develop a gas-fired cogeneration project with a capacity of 240 megawatts. Under this agreement, approximately 90 megawatts of electricity will be sold to the Phillips Houston Chemical Complex, with the remainder to be sold into the competitive market through Calpine's power marketing activities. The Company expects that this project will represent a prototype for future merchant plant developments. The development of this project is subject to the satisfaction of various conditions, including completion of financing and obtaining required approvals. See "Business -- Development and Future Projects." Enhance the performance and efficiency of existing power projects. The Company continually seeks to maximize the power generation potential of its operating assets and minimize its operating and maintenance expenses and fuel costs. To date, the Company's power generation facilities have operated at an average availability in excess of 97%. The Company believes that achieving and maintaining a low cost of production will be increasingly important to compete effectively in the power generation market. Continue to develop an integrated power marketing capability. The Company has established an integrated power marketing capability, conducted through its wholly owned subsidiary, Calpine Power Services Company ("CPSC"). In 1995, CPSC received approval from the FERC to conduct power marketing activities. The Company believes that a power marketing capability complements its business strategy of providing low cost power generation services. CPSC's power marketing activities will focus on the development of long-term customer service relationships, supported primarily by generating assets that are owned, operated or controlled by Calpine. CPSC will aggregate the Company's own resources, the resources of its customers, power pool resources, and market power supply to provide the customized services demanded by its customers at a competitive price. Selectively expand into international markets. Internationally, the Company intends to utilize its geothermal and gas-fired expertise in selected markets of Southeast Asia and Latin America, where demand for power is rapidly growing and private investment is encouraged. In November 1995, the Company made an investment in the Cerro Prieto steam fields, located in Baja California, Mexico. In March 1996, the Company entered into a joint venture agreement to pursue the development of a geothermal resource in Indonesia with an estimated potential capacity in excess of 500 megawatts. Calpine believes that its investments in these projects will effectively position it for future expansion in Southeast Asia and Latin America. BACKGROUND Calpine was founded in 1984 by Peter Cartwright, the Company's President and Chief Executive Officer. Through 1988, the Company provided engineering, management, finance and operating and maintenance services to the emerging independent power production industry. Since 1989, the Company has focused on the acquisition, development, ownership, operation and maintenance of gas-fired and geothermal power generation facilities. Prior to the Common Stock Offering, the Company has been a wholly owned subsidiary of Electrowatt Ltd. ("Electrowatt"), a major utility, industrial products and engineering services company based in Zurich, Switzerland. Electrowatt has advised the Company that its current strategy is to focus its resources on its industrial business. As a result of the Common Stock Offering, Electrowatt will no longer own any interest in the Company and Calpine management will hold stock options representing approximately 11.7% of the Company's Common Stock. Calpine was incorporated under the laws of the State of California in 1984 and was reincorporated in the State of Delaware in September 1996. The principal executive offices of the Company are located at 50 West San Fernando Street, San Jose, California 95113, and its telephone number is (408) 995-5115.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000916605_redfed_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000916605_redfed_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..6c0f5aacf6154103b18868c3768070fdd4996214
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000916605_redfed_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary should be read in conjunction with, and is qualified in its entirety by, the more detailed information and consolidated financial statements of the Company appearing elsewhere in this Prospectus. Historical information presented herein at dates and for periods prior to the Company's commencement of operations on April 7, 1994 is that of the Bank (as defined below) and its subsidiaries. Except as otherwise indicated, (i) references to the Company herein include the Bank and its subsidiaries on a consolidated basis, and (ii) all information contained herein assumes that the Underwriter's over-allotment option is not exercised. THE COMPANY RedFed Bancorp Inc. (the "Company") is the holding company for Redlands Federal Bank, a federal savings bank (the "Bank"). The Bank is one of the three largest financial institutions headquartered in Southern California's "Inland Empire" region, a relatively less urban area to the east of Los Angeles comprised of San Bernardino and Riverside counties. During its 106-year history, the Bank has operated as a community-oriented savings institution serving the residential loan and retail deposit needs of the predominantly suburban and rural communities in its market area. At March 31, 1996, the Company had consolidated assets of $858.0 million, deposits of $769.7 million and stockholders' equity of $48.3 million. The Company offers a range of consumer financial services to its customers, including retail transaction and term deposits, single-family mortgage loans and consumer loans. The Company's single-family mortgage loan products include adjustable and fixed rate conforming and nonconforming permanent loans, as well as spot (non-tract) construction loans, which are combination construction and permanent loans made to borrowers who will occupy the completed home as their primary residence ("spot construction loans"). The Company's consumer loan products, which have to date been offered on a relatively limited basis, include home equity lines of credit, Federal Housing Administration ("FHA") Title I home improvement loans, credit card loans, mobile home loans, new and used automobile and recreational vehicle loans and secured and unsecured personal loans (collectively, "consumer loans"). The Company also invests in U.S. government and agency securities, mortgage-backed securities ("MBS") and other investments permitted by federal laws and regulations. The Company also offers insurance and securities brokerage services through a subsidiary of the Bank. The Company formerly originated substantial amounts of multi-family (5 or more units) residential real estate loans, as well as a lesser amount of loans secured by small commercial and mixed use properties, tract construction projects and developed and undeveloped land. Due to significant losses in the Company's multi-family loan portfolio resulting from higher defaults and substantial declines in the value of multi-family residential properties caused by the Southern California recession beginning in 1991, the Company has substantially curtailed its multi-family lending activities, other than in connection with the disposition of problem assets. The Company has also eliminated tract construction and land lending and limited its commercial lending activities. Multi-family and commercial loans constituted 36.02%, and developed lot, tract construction and land loans constituted 6.50%, of the Company's loan portfolio at March 31, 1996. Due to its long history in the Inland Empire region and its customer service focus, the Company believes that it has developed strong deposit customer relationships and substantial deposit market share in the small and medium sized communities in which its banking offices are primarily located. The Company has historically had an average cost of deposits that has been lower than that reflected in the Federal Home Loan Bank Eleventh District Cost of Funds Index ("11th District COFI"), the index on which the adjustable interest rates on most of its loan portfolio are based. The Company conducts business from its home office located in Redlands and thirteen branch offices located in Fontana (2), Yucaipa, Beaumont, Riverside, Loma Linda, Norco, Calimesa, Big Bear, Banning, Colton, Corona and Highland, and its three loan production offices located in Palm Desert, Temecula and Laguna Hills. The Company estimates that it currently serves over 50,000 households in the Inland Empire region and believes that it is the primary financial institution for many of those households. The Company's market share of all bank and thrift deposits in San Bernardino and Riverside counties was 5.82% and 2.80%, respectively, at June 30, 1995. At June 30, 1995, the Company's market share of thrift deposits in nine out of the thirteen communities it serves was greater than 30% and in four of such communities its market share of thrift deposits was greater than 70%. The Company and the Bank are subject to regulation and examination by the Office of Thrift Supervision (the "OTS"). The Bank's customer deposits are insured by the Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation (the "FDIC"). The Bank is also a member of the Federal Home Loan Bank (the "FHLB") of San Francisco. The Company was incorporated in 1993 in connection with the Bank's 1994 conversion from a federally-chartered mutual savings bank to a federally-chartered stock savings bank. The Company's executive office is located at 300 E. State Street, Redlands, California 92373; its telephone number is (909) 335-3551. BUSINESS STRATEGY As a result of adverse economic conditions in Southern California, including defense industry declines and military base closures and downsizings in, and corporate relocations from, the Company's primary market area, real estate markets have experienced a severe decline since 1991. These recessionary conditions have had an adverse effect on the Company's loan portfolio, particularly with respect to its portfolio of multi-family loans, and results of operations. In response to these adverse economic conditions, the Company is (i) aggressively managing and reducing the level of nonperforming and adversely classified assets, (ii) reducing non-interest expense and improving non- interest expense ratios and (iii) maintaining capital in compliance with regulatory requirements. The Company is also enhancing and streamlining its operations and initiating new lines of business to promote future growth and increase profitability. Key elements in the development and implementation of the Company's strategies include the following: NEW MANAGEMENT. Anne Bacon, an executive with substantial and successful experience in managing and improving the performance of troubled thrift institutions, became the Company's President and Chief Executive Officer in April 1995 upon the retirement for health reasons of the Company's former Chief Executive Officer. Most recently before joining the Company, Ms. Bacon was the President and Chief Executive Officer of First Western Financial Corporation, a Nevada-based savings and loan holding company ("First Western"), until First Western's merger into AMFED Financial, Inc. in October 1994. See "Directors and Executive Officers--Biographical Information." To complement existing management, Ms. Bacon has hired experienced asset managers to assist in managing and reducing problem assets, including nonperforming and other classified assets. AGGRESSIVELY MANAGE AND REDUCE PROBLEM ASSETS. The Company has intensified its procedures for the classification, management and resolution of problem assets. The Company's Internal Asset Review Committee meets monthly to review and approve actions to be taken with respect to asset classification, nonaccrual loans, and real estate acquired through foreclosure, deed in lieu of foreclosure or in-substance foreclosure (collectively, "REO"). Performing loans meeting specified criteria are also reviewed on a periodic basis, with any loans exhibiting weaknesses being scheduled for more intensive monitoring and action. An asset manager is assigned to monitor each loan relationship and to develop and implement an appropriate plan of action, which may include modification of the loan to reduce the interest rate or payment structure, acquisition of the property through foreclosure where modification or workout is not feasible, rehabilitation of the property if required to maximize the sale value thereof, and sale of the REO. As a result of these procedures, the Company's classified assets have been reduced by 53.6% from $114.1 million at December 31, 1994 to $52.9 million at March 31, 1996, and its nonaccrual loans and REO, net of specific valuation allowances (collectively, "nonperforming assets") have been reduced by 34.8% from $47.1 million to $30.7 million during the same period. See "Management's Discussion and Anaylsis of Financial Condition and Results of Operations--Nonperforming Assets and Allowance for Losses" and "Business--Asset Quality." CONTROL COSTS. During 1995, the Company implemented a 20% staff reduction, a salary and retirement plan freeze and substantial reductions in other operating expenses resulting in a $895,000 ($3.6 million, or 13.6%, annualized) decrease in general and administrative expense ("G&A") for the three-month period ended March 31, 1996 as compared with the three- month period ended March 31, 1995. Additional cost savings are expected beginning in 1997 from the consolidation of the Company's two current data processing arrangements in one outside service bureau, which is expected to be completed in August 1996. Total costs estimated for the data processing consolidation are $1.8 million, of which $1.5 million for hardware and software will be capitalized and amortized over subsequent years. Costs incurred as of June 30, 1996 amounted to $510,000. The Company intends to continue its efforts to monitor and reduce G&A, although further reductions are expected to be less substantial than those achieved during the past year. CHANGE LOAN PRODUCT MIX. The Company has substantially curtailed its multi-family and other non-single-family mortgage lending activities, other than in connection with resolutions of problem assets. While the Company expects to continue its small commercial property lending activities on a limited basis and may reenter the multi-family lending market on a reduced basis (as compared with its prior level of activity) if conditions warrant in the future, the Company's current principal lending products are adjustable rate single-family loans, including spot construction loans. The Company plans to expand its consumer lending operations to capitalize on its strong existing community base and diversify its product offerings. The Company has recently begun to utilize third party "conduit" programs to broker loans insured by the FHA and loans partially guaranteed by the Department of Veteran Affairs ("VA"), and conventional single-family loans made to borrowers not meeting the Company's normal credit criteria (referred to in the lending industry as "B" and "C" credit loans). Under the conduit programs, third party lenders preapprove and fund such loans, with the Company being paid a fee by the third party lenders. The Company believes that such loans are an attractive lending product in its marketplace that can be originated prudently, and with higher rates and fees than normally qualifying single-family loans. While the Company currently only acts as a broker for such loans, it may consider originating such loans for sale and for retention in its portfolio in the future as it gains further experience in this market. MAINTAIN LOW COST DEPOSIT BASE. The Company emphasizes its community and retail customer service focus in attracting deposits. The Company believes that this focus has enabled it to develop primary household banking relationships with many of its customers and to maintain the Company's historical deposit cost advantage as compared with the 11th District COFI on which the interest rates on its adjustable rate loans are primarily based. The Company is placing particular emphasis on offering checking and other transaction account services to obtain deposits at lower cost and to position itself as the customer's primary bank so as to increase cross- selling opportunities for other financial services. The Company also intends to focus on attracting small business deposit relationships in its communities. The consolidation and enhancement of its data processing service arrangements and related systems that is currently in process will enable the Company to provide more comprehensive and integrated deposit and cash management services for such customers. INCREASE REGULATORY CAPITAL. As a result of the substantial losses experienced in recent years, the Bank's margin of compliance with its regulatory capital requirement has been reduced, with its risk-based capital at March 31, 1996 being $55.2 million, or 8.39% of risk-adjusted assets, as compared with its minimum required level of risk-based capital, based on total risk-adjusted assets at that date, of $52.6 million, or 8.00% of risk-adjusted assets. The Bank is subject to a Supervisory Agreement (the "Supervisory Agreement") with the OTS, its primary federal regulator, that requires, among other things, that the Bank submit a business plan to the OTS and explore the possibility of raising additional capital. The Company will use the proceeds of this Offering for the primary purpose of increasing the Bank's regulatory capital in order to provide maximum flexibility of operations under applicable regulatory requirements and to enable the Company to take advantage of future growth opportunities, including the prudent expansion of the Company's lending operations. The Company anticipates that the net proceeds from the sale of the Common Stock offered hereby will be sufficient to enable it to increase the regulatory capital of the Bank to the levels required to qualify as a "well capitalized" institution under OTS regulations (even after payment of the one-time surcharge on SAIF-insured institutions that has been proposed in connection with the recapitalization of the SAIF) and believes that the OTS will thereafter terminate the Supervisory Agreement. The Company further believes that, based on its expected "well capitalized" status, the FDIC will substantially reduce the Bank's annual deposit insurance premiums from their current high level of 0.30% of insured deposits. See "Selected Consolidated Financial, Operating and Other Data of the Company--Regulatory Capital Ratios," "Risk Factors-- Recapitalization of SAIF and Its Impact on SAIF Premiums and the Company's Results of Operations," "Regulation and Supervision--Capital Requirements" and "--Deposit Insurance." THE OFFERING <TABLE> <C> <S> Common Stock offered hereby........................... 2,600,000 shares Common Stock to be outstanding after the Offering(1).. 6,990,504 shares Use of Proceeds....................................... The Company intends to contribute $20.6 million of the net proceeds to the Bank to increase the Bank's regulatory capital and to retain the remainder of such net proceeds for general corporate purposes. See "Use of Proceeds." Nasdaq Symbol......................................... "REDF" </TABLE> - -------- (1) Based on the number of shares of Common Stock outstanding as of June 30, 1996. Does not include shares issuable pursuant to outstanding employee stock options. See "Executive Compensation." SUMMARY CONSOLIDATED FINANCIAL, OPERATING AND OTHER DATA OF THE COMPANY The summary data presented below under the captions "Consolidated Financial Condition Data" and "Consolidated Operating Data" for, and as of the end of, each of the years in the five-year period ended December 31, 1995, are derived from the audited consolidated financial statements of the Company. The consolidated financial statements as of December 31, 1995 and 1994, and for each of the years in the three-year period ended December 31, 1995, and the report thereon are included elsewhere in this Prospectus. The summary unaudited data presented below under the captions "Consolidated Financial Condition Data" and "Consolidated Operating Data" as of March 31, 1996 and for each of the three-month periods ended March 31, 1996 and 1995, are derived from the unaudited consolidated financial statements of the Company included elsewhere in this Prospectus, which in the opinion of management of the Company, reflect all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation. The results of operations for the three-month period ended March 31, 1996 are not necessarily indicative of the results of operations to be expected for the entire year. <TABLE> <CAPTION> AT AT DECEMBER 31, MARCH 31, -------------------------------------------- 1996 1995 1994 1993 1992 1991 --------- -------- -------- -------- -------- -------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> CONSOLIDATED FINANCIAL CONDITION DATA: Total assets............ $857,959 $871,814 $960,853 $916,846 $932,232 $849,299 Loans receivable, net(1)................. 672,151 682,984 733,132 645,670 647,889 570,542 MBS..................... 56,499 52,116 79,971 109,982 100,771 160,807 Investment securities... 38,797 41,655 38,899 55,101 42,004 9,293 Real estate(2).......... 17,416 26,258 41,269 22,011 28,349 26,933 Deposits................ 769,679 776,528 805,334 835,134 828,054 750,319 Borrowed funds.......... 24,534 31,133 80,085 8,845 26,845 33,345 Total liabilities....... 809,630 823,736 905,345 863,485 875,993 796,621 Stockholders' equity, substantially restricted............. 48,329 48,078 55,508 53,361 56,239 52,678 </TABLE> <TABLE> <CAPTION> FOR THE THREE MONTHS ENDED MARCH 31, FOR THE YEAR ENDED DECEMBER 31, --------------------- ------------------------------------------------------ 1996 1995 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ------- ------- ------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED OPERATING DATA: Interest income......... $ 15,446 $ 15,134 $ 64,224 $ 56,515 $59,436 $69,257 $77,118 Interest expense........ 8,463 9,319 38,366 29,869 30,869 37,154 49,804 ---------- ---------- ---------- ---------- ------- ------- ------- Net interest income..... 6,983 5,815 25,858 26,646 28,567 32,103 27,314 Provision for losses on loans.................. 1,400 373 7,938 12,651 12,990 6,106 2,968 ---------- ---------- ---------- ---------- ------- ------- ------- Net interest income af- ter provision for losses on loans....... 5,583 5,442 17,920 13,995 15,577 25,997 24,346 ---------- ---------- ---------- ---------- ------- ------- ------- Non-interest income..... 1,589 1,448 11,198 6,275 6,884 6,066 6,362 ---------- ---------- ---------- ---------- ------- ------- ------- Non-interest expense: G&A.................... 5,701 6,596 24,285 27,195 25,458 23,931 22,712 Real estate operations, net(3)................ 528 2,126 10,258 8,370 3,222 2,148 88 Provision for losses on letters of credit..... -- 193 2,536 9,895 694 1,866 276 ---------- ---------- ---------- ---------- ------- ------- ------- Total non-interest expense............. 6,229 8,915 37,079 45,460 29,374 27,945 23,076 ---------- ---------- ---------- ---------- ------- ------- ------- Earnings (loss) before income taxes........... 943 (2,025) (7,961) (25,190) (6,913) 4,118 7,632 Income taxes (benefit).. 2 -- 124 1,150 (3,669) 557(4) 3,700 ---------- ---------- ---------- ---------- ------- ------- ------- Net earnings (loss)..... $ 941 $ (2,025) $ (8,085) $ (26,340) $(3,244) $ 3,561 $ 3,932 ========== ========== ========== ========== ======= ======= ======= PER SHARE DATA: Net earnings (loss) per share.................. $ 0.23 $ (0.51) $ (2.03) $ (6.08)(5) n/a n/a n/a Average shares used for calculation of earnings per share.............. 4,126,438 3,978,617 3,981,821 4,002,920 n/a n/a n/a Stockholders' equity per share.................. $ 11.90 $ 13.58 $ 12.06 $ 13.87 n/a n/a n/a Shares used for calculation of stockholders' equity per share.............. 4,059,914 3,978,617 3,987,010 4,002,920 n/a n/a n/a </TABLE> (See notes on following page.) <TABLE> <CAPTION> AT OR FOR THE THREE MONTHS ENDED MARCH 31, AT OR FOR THE YEAR ENDED DECEMBER 31, -------------- ---------------------------------------------- 1996 1995 1995 1994 1993 1992 1991 ------ ------ ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> PERFORMANCE RATIOS: Return on average assets (6)(7)................. 0.39% (0.76)% (0.78)% (2.50)% (0.31)% 0.35% 0.41% Return on average equity (7).................... 7.76 (14.58) (15.05) (38.30) (6.00) 6.34 7.68 Equity to total assets.. 5.63 5.52 5.51 5.78 5.82 6.03 6.20 Interest rate spread (7).................... 3.46 2.44 2.87 3.19 3.44 3.90 3.44 Net interest margin..... 3.48 2.57 2.98 3.19 3.45 3.95 3.53 Average interest-earning assets to average interest-bearing liabilities............ 100.60 103.03 102.62 100.03 100.25 101.21 101.35 G&A to average assets (6)(7)................. 2.37 2.48 2.36 2.59 2.44 2.38 2.38 Efficiency ratio (8).... 66.51 90.59 72.14 82.61 71.81 62.70 67.44 REGULATORY CAPITAL RATIOS: TANGIBLE CAPITAL: Actual.................. 5.51 5.40 5.24 5.65 5.42 5.58 5.68 Pro Forma (9)(10)....... 7.74 n/a n/a n/a n/a n/a n/a CORE CAPITAL: Actual.................. 5.51 5.40 5.24 5.65 5.42 5.58 5.68 Pro Forma (9)(10)....... 7.74 n/a n/a n/a n/a n/a n/a RISK-BASED CAPITAL: Actual.................. 8.39 8.37 8.17 8.59 8.11 8.64 7.71 Pro Forma (9)(10)....... 11.40 n/a n/a n/a n/a n/a n/a ASSET QUALITY RATIOS: Nonaccrual loans to total loans............ 1.98 1.37 2.45 1.77 3.34 2.74 1.89 Nonperforming assets to total assets and LOCs (11)................... 3.21 4.70 4.53 4.46 3.17 3.18 2.62 Total allowance for losses on loans, LOCs and real estate to total assets and LOCs.. 2.58 2.57 3.28 2.85 1.95 1.15 0.66 GVAs for losses on loans to nonaccrual loans.... 80.37 119.69 56.53 108.03 44.96 33.85 32.62 GVAs for losses on loans, real estate and LOCs to total nonperforming assets (11)................... 58.41 42.18 39.30 51.20 40.90 25.52 15.89 OTHER DATA: Number of deposit accounts............... 88,566 91,374 89,015 89,763 87,630 84,344 81,464 Full service customer facilities............. 14 15 14 16 16 16 15 Full time equivalent employees.............. 275 333 281 350 337 313 294 </TABLE> - -------- (1) Includes loans held for sale. (2) Includes REO and real estate held for sale or investment. (3) Includes provision for losses on real estate of $0, $1,422, $8,336, $4,653, $1,968, $1,128 and $768 for the three-month periods ended March 31, 1996 and 1995 and for the years ended December 31, 1995, 1994, 1993, 1992 and 1991, respectively. (4) Income taxes (benefit) for the year ended December 31, 1992 includes a $1.3 million benefit due to the cumulative effect of a change in accounting principle. (5) Loss per share data has been calculated based on the Company's net loss of $24.4 million for the period April 7, 1994 (the date of the Company's initial public offering) through December 31, 1994. (6) Off-balance sheet letters of credit ("LOCs") have been added to recorded assets for purposes of this calculation. See "Business--Lending Activities--Multi-family Lending; LOCs." (7) Ratios for the three-month periods ended March 31, 1996 and 1995 have been annualized. (8) G&A expense to net interest income plus total non-interest income. Excludes provisions for losses on loans and LOCs and real estate operations, and for the year ended December 31, 1995, excludes curtailment gain on retirement plan of $3.4 million. (9) The OTS minimum capital requirements at March 31, 1996 were 1.50% for tangible capital, 3.00% for core capital and 8.00% for risk-based capital. A "well capitalized" institution under OTS regulations must have a risk- based capital ratio of 10.00% or greater and a leverage (core capital) ratio of 5.00% or greater, as well as a Tier 1 risk-based capital ratio of 6.00% or greater. See "Regulation and Supervision--Capital Requirements." (10) Assumes the issuance of 2,600,000 shares of Common Stock in the Offering at an assumed offering price of $9.00 per share, after deducting the underwriting discount and estimated offering expenses payable by the Company and the disposition of the proceeds thereof. Does not include the effect of possible special assessment on SAIF-insured institutions. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000917059_coral_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000917059_coral_prospectus_summary.txt
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+PROSPECTUS SUMMARY This Prospectus contains certain statements of a forward-looking nature relating to future events or the future financial performance of the Company. Prospective investors are cautioned that such statements are only predictions and that actual events or results may differ materially. In evaluating such statements, prospective investors should specifically consider the various factors identified in this Prospectus, including the matters set forth under the caption "Risk Factors," which could cause actual results to differ materially from those indicated in such forward-looking statements. The following summary is qualified in its entirety by the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus: (i) gives effect to the conversion of each outstanding share of Preferred Stock into Common Stock upon the closing of this offering, (ii) has been adjusted to reflect a 1-for-2 reverse stock split of the Common Stock effected on December 5, 1996, and (iii) assumes no exercise of the Underwriters' over-allotment option. THE COMPANY Coral Systems provides client-server software products for the wireless telecommunications industry to enable carriers to reduce fraud and customer turnover, or "churn," and increase operating efficiencies. The Company's products are based upon its proprietary core technology, which provides several key advantages, including rapid product development, portability, technology independence and enhanced scalability. The Company's fraud management software, FraudBuster, incorporates a fraud profiler and subscription fraud monitoring functionality and is designed to combat most currently identified types of wireless fraud. Unlike many other fraud prevention techniques which typically address specific types of fraud, FraudBuster detects multiple types of existing and emerging fraud, including cloning, subscription fraud, tumbling fraud and cellular telephone theft. Coral Systems' veRiFier line extension, when released, will expand the FraudBuster solution by providing interfaces to complementary fraud prevention products, including radio frequency ("RF") signature detection. The Company's churn prevention product, ChurnAlert, allows carriers to analyze and identify potential churn candidates before they seek customer service assistance or deactivate service. The Company's Home Location Register ("HLR") networking product facilitates seamless roaming and enhanced services and optimizes switch capacity with minimal capital outlays. The Company's Data Message Handler ("DMH") networking product, when released, will enable carriers to capture and distribute data on a near real-time basis to facilitate billing, wireless fraud detection, churn prevention and customer service applications. Wireless telecommunications is one of the fastest growing segments of the telecommunications industry and has become increasingly competitive as a result of a number of recent regulatory and technological changes, causing increasing pressure on carrier profitability. Subscriber growth, new market entrants, declining revenue per subscriber and the transition to a mass market subscriber base have created significant challenges for wireless carriers, including rising losses from fraud and churn, growing strains on network capacity and increasing demand for enhanced services. Industry sources estimate that in the U.S. the total revenue lost to wireless telecommunications fraud was approximately $650 million in 1995, up from $482 million in 1994. Wireless carriers are also focusing on improving customer retention to reduce subscriber churn as the cost of acquiring new subscribers increases. Wireless carriers in the U.S. have recently experienced average annual subscriber churn at rates of 26% to 36%. Fraud and churn also pose significant problems for carriers in many international markets. The Company's objective is to become a leading provider of software solutions for a broad range of challenges facing wireless carriers by capitalizing on the growth of the wireless telecommunications industry, leveraging its proprietary core technology to develop new products and enhanced versions of existing products, and maximizing its recurring revenue stream through a per subscriber license fee model. Coral Systems licenses its products pursuant to agreements that typically provide for an initial license fee and an annual maintenance fee for a defined number of subscribers, as well as additional license and maintenance fees for net subscriber additions. The Company has entered into strategic development and distribution relationships with manufacturers and providers of switching equipment and billing services, including Cincinnati Bell Information Systems, Inc. ("CBIS"), Ericsson Radio Systems AB ("Ericsson"), Lucent Technologies Inc. ("Lu- cent") and Nortel. Wireless carriers using the Company's products include AirTouch Communications, Inc. ("AirTouch"), BellSouth PCS, Cox Communications, Orange Personal Communications Services and Sprint Spectrum. The Company was incorporated in Colorado in August 1991 and reincorporated in Delaware in April 1995. The Company's executive offices are located at 1500 Kansas Avenue, Suite 2E, Longmont, Colorado 80501, and its telephone number is (303) 772-5800. --------------------- The Company intends to furnish its stockholders with annual reports containing audited financial statements and an opinion thereon expressed by independent certified public accountants and with quarterly reports for the first three quarters of each fiscal year containing interim unaudited financial information. FraudBuster(R), ChurnAlert(R) and veRiFier(TM) are trademarks of the Company. All other brand names and trademarks appearing in this Prospectus are the property of their respective holders. THE OFFERING <TABLE> <S> <C> Common Stock to be offered............... 2,700,000 shares Common Stock to be outstanding after the offering............................... 9,930,137 shares(1) Use of proceeds.......................... For working capital and other general corporate purposes Proposed Nasdaq National Market symbol... CSYS </TABLE> SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ---------------------------------------- ------------------------ 1993 1994 1995 1995 1996 ------------- ------------ --------- -------- ------------- <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenue....................................... $ 504 $ 1,417 $ 3,890 $ 3,093 $ 6,183 Cost of revenue..................................... 244 508 1,909 1,542 1,474 ------- ------- ------- ------- ------- Gross profit........................................ 260 909 1,981 1,551 4,709 Operating expenses: Research and development.......................... 414 573 2,160 1,496 1,953 Sales and marketing............................... 158 645 1,870 1,427 2,629 General and administrative........................ 677 886 1,351 1,066 1,765 ------- ------- ------- ------- ------- Total operating expenses.................... 1,249 2,104 5,381 3,989 6,347 ------- ------- ------- ------- ------- Loss from operations................................ (989) (1,195) (3,400) (2,438) (1,638) Other income (expense), net......................... (61) (33) 9 15 (31) ------- ------- ------- ------- ------- Loss before extraordinary item...................... (1,050) (1,228) (3,391) (2,423) (1,669) Extraordinary item: Gain on extinguishment of debt and other liabilities(2).................................. -- -- -- -- 243 ------- ------- ------- ------- ------- Net loss............................................ $(1,050) $(1,228) $(3,391) $(2,423) $(1,426) ======= ======= ======= ======= ======= Pro forma net loss per common share before extraordinary item................................ $ (.21) ======= Pro forma net loss per common share................. $ (.48) $ (.18) ======= ======= Pro forma weighted average number of shares outstanding....................................... 7,097 8,096 ======= ======= </TABLE> <TABLE> <CAPTION> QUARTER ENDED ------------------------------------------------------------------- SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, 1995 1995 1996 1996 1996 ------------- ------------ --------- -------- ------------- <S> <C> <C> <C> <C> <C> Total revenue....................................... $ 274 $ 796 $ 1,029 $1,557 $3,598 Cost of revenue..................................... 251 366 257 393 823 ------- ------ ------- ------ ------ Gross profit........................................ 23 430 772 1,164 2,775 Operating expenses: Research and development.......................... 540 663 699 585 668 Sales and marketing............................... 464 443 659 829 1,142 General and administrative........................ 288 285 399 651 716 ------- ------ ------- ------ ------ Total operating expenses.................... 1,292 1,391 1,757 2,065 2,526 ------- ------ ------- ------ ------ Income (loss) from operations....................... (1,269) (961) (985) (901) 249 Other income (expense), net......................... 7 (7) (37) 7 (2) ------- ------ ------- ------ ------ Income (loss) before extraordinary item............. (1,262) (968) (1,022) (894) 247 Extraordinary item: Gain on extinguishment of debt and other liabilities(2).................................. -- -- -- -- 243 ------- ------ ------- ------ ------ Net income (loss)................................... $(1,262) $ (968) $(1,022) $ (894) $ 490 ======= ====== ======= ====== ====== </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1996 ------------------------- ACTUAL AS ADJUSTED(3) ------ -------------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................................................. $3,374 $ 30,174 Total assets.............................................................................. 6,983 33,783 Long-term debt, non-current portion....................................................... 313 313 Stockholders' equity...................................................................... 2,754 29,554 </TABLE> - --------------- (1) Does not include (i) 1,102,346 shares of Common Stock issuable upon exercise of stock options outstanding as of September 30, 1996, granted under the Company's Amended and Restated Stock Option Plan (the "Stock Option Plan") at a weighted average exercise price of $1.26 per share and (ii) 979,937 shares of Common Stock issuable upon exercise of warrants outstanding as of September 30, 1996, at a weighted average exercise price of $0.28 per share. See "Management -- Stock Option Plan" and "Description of Capital Stock."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000917524_talx-corp_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000917524_talx-corp_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and Consolidated Financial Statements, including the notes thereto, appearing elsewhere in this Prospectus. See "Glossary" for definitions of certain terms used in this Prospectus. THE COMPANY TALX Corporation ("TALX" or the "Company") designs and implements interactive communications solutions, primarily for Fortune 500 and other large organizations other than telephone service providers, using computer telephony ("CT") to integrate technologies such as interactive voice response ("IVR"), facsimile, e-mail, Internet and corporate Intranet. The Company's interactive communications solutions enable an organization's employees, customers, vendors and business partners ("Users") to access, input and update information without human assistance. The Company's solutions enhance service levels, improve productivity and reduce costs by enabling Users to perform self-service transactions using interactive communications technologies. Historically, the Company has designed and implemented "tailored" systems that provide an organization's Users with access to databases of information relating to that organization. In early 1995, the Company introduced a "branded" service, The Work Number for Everyone(R) ("The Work Number"), which is a national service providing automated access to information from multiple organizations. The Work Number provides automated employment verification to mortgage lenders and other verifiers. Using The Work Number, verifiers are able to confirm employment information regarding participating employers' current and former employees, including their past three years' salary history. The Work Number reduces an employer's cost of providing this information and at the same time increases the timeliness and accuracy of the delivery of such information to mortgage lenders and other verifiers. Four out of the five largest mortgage lenders in the U.S. (based on 1995 residential mortgage originations), including Countrywide Home Loans, Inc., the country's leading independent mortgage lender, currently utilize The Work Number to facilitate their underwriting process. Verification of employment and salary history via The Work Number is accepted by the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac") in connection with the securitization and resale of residential mortgages, as well as by the Department of Veteran's Affairs ("VA") and the Federal Housing Administration ("FHA") for home loan guarantee purposes. As of June 30, 1996, 69 employers had contracted to provide approximately 5.7 million employment records of current and former employees. Contracting employers include Hewlett Packard Company, J.C. Penney Company, Inc., McDonnell Douglas Corporation, Motorola, Inc., The Procter and Gamble Company and The Quaker Oats Company. Tailored interactive communications solutions are offered by TALX to its customers either as systems for installation on customers' premises or on an outsourced services basis. The Company has provided tailored interactive communications systems for installation at customers' premises since the early 1980s and has shipped over 575 systems to approximately 350 customers during the last five years. In 1993, the Company introduced its outsourced services business, which allows a customer to realize the benefits of an interactive communications system without incurring the administrative or maintenance burdens of operating such a system. For outsourced services customers, the Company maintains the customer's database on a system at the Company's facilities, where incoming requests for access to the information are received. Acquiring an interactive communications capability on an outsourced basis is an attractive alternative to many of the Company's existing and prospective customers. For example, the human resources departments of many companies have outsourced their annual benefits enrollment process to the Company. The Company has established the broad utility of its interactive communications solutions for complex business problems in a wide range of industries. The Company believes it is a leader in providing such solutions for human resource applications, which include 401(k) plan administration, benefit plan enrollment and modification, staffing, scheduling and payroll. The Company has targeted two additional applications categories usable by a broad range of businesses regardless of the industry in which they operate (i.e., horizontal application segments): financial applications (e.g., status inquiry for accounts payable or accounts receivable) and distribution/logistics applications (e.g., order entry and inventory status). The Company is pursuing these horizontal marketing initiatives both through direct sales and through strategic marketing alliances with providers of enterprise software applications. TALX entered into such an alliance with PeopleSoft, Inc. ("PeopleSoft") in 1993. More recently, it has entered into similar alliances with Oracle Corporation ("Oracle") and SAP AG ("SAP"). All three are leading providers of enterprise-wide client/server business applications, with PeopleSoft, similarly to the Company, being particularly well established in human resource applications. The Company has also developed and markets specialized implementations of its products targeted at specific industries (i.e., vertical market segments) such as health care (e.g., prescription refill and appointment scheduling and cancellation) and financial services (e.g., account balance inquiry, funds transfer and credit card balance inquiry). The Company has provided tailored interactive communications solutions to customers such as Aetna, GE Capital Services, Kaiser Permanente, Motorola, Inc., Putnam Investments, Inc. and Texaco, Inc. TALX has implemented tailored interactive communications solutions since the early 1980s. The Company's systems combine "best-of-class" technologies with proprietary software called TALXWare. TALXWare's open architecture enables popular interactive features such as voice recognition, text-to-speech, facsimile, e-mail and client/server interfaces to be integrated to create effective interactive communications solutions. In 1989, with the introduction of EasyScript to its TALXWare software platform, the Company became the first among its competitors to offer a powerful graphical user interface ("GUI") application development environment. Subsequent releases of TALXWare have included enhancements to EasyScript such as advanced editing capabilities and self-documenting features. In 1992, EasyScript received Voice Processing Magazine's Editors' Choice Award, and, in 1996, the most recent TALXWare release received the Editors' Choice Award from Call Center Magazine. In addition to providing interactive communications systems, the Company has historically provided database and document services. In August 1996, the Company determined to pursue the divestiture of the database and document services businesses and, accordingly, has reflected the results of operations of such businesses as discontinued operations. Database services include providing sales leads and pre-press services for directory publishers, and document services include the preparation and mailing of invoices, statements and confirmation letters for organizations with high volume requirements. The Company was incorporated under Missouri law in 1973. Its principal executive offices are located at 1850 Borman Court, St. Louis, Missouri 63146, and its telephone number is (314) 434-0046.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000918358_wireless_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000918358_wireless_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements (including the notes thereto) appearing elsewhere in this Prospectus. On July 29, 1996, the Company and TruVision Wireless, Inc. ("TruVision") completed a merger of a subsidiary of the Company with TruVision (the "TruVision Transaction"), whereupon TruVision became a subsidiary of the Company. Unless otherwise indicated, all information contained in this Prospectus (i) reflects consummation of the TruVision Transaction and (ii) assumes consummation of all other pending acquisitions (the "Acquisitions") more fully detailed under "Acquisitions." Unless the context otherwise requires, references to the "Company" mean Wireless One, Inc., its subsidiaries (including TruVision) and predecessors. The Company The Company acquires, develops, owns and operates wireless cable television systems, primarily in small to mid-size markets in the southeastern United States. The Company's 80 markets (including 10 through a limited liability company which is 50% owned by the Company) are located in Texas, Louisiana, Mississippi, Tennessee, Kentucky, Alabama, Georgia, Arkansas, North Carolina, South Carolina and Florida and represent approximately 9.6 million households (including households in markets held through such limited liability company). The Company believes that approximately 7.3 million households (1.1 million of which are in markets held through such limited liability company) can be served by line-of-sight ("LOS") transmissions. LOS transmissions generally require a direct, unobstructed transmission path from the central transmitting antenna to an antenna at the subscriber's location. The Company believes that certain of its Louisiana, Mississippi, Tennessee, Alabama, Georgia and Florida markets comprise one of the largest contiguous geographic clusters in the wireless cable industry, covering approximately 204,000 square miles. The Company operates in and targets small to mid-size markets with a significant number of LOS households that are unpassed by traditional hard- wire cable. The Company estimates that approximately 25% of its LOS households are unpassed by traditional hard-wire cable. By comparison, in the 20 largest hard-wire cable markets in the United States, only approximately 2% of all households are unpassed by traditional hard-wire cable. Many of the households in the Company's Markets (as defined), particularly in rural areas, also have limited access to local off-air VHF/UHF programming from ABC, NBC, CBS and Fox affiliates, and typically do not have access to subscription television service except via satellite television operators, whose equipment and subscription fees generally are more costly than those of wireless cable, and which are unable to retransmit local off-air channels. In many of the Company's rural Markets, the Company believes a significant number of households passed by cable are served by local cable operators with lower quality service and limited reception and channel lineups. As a result, the Company believes that its wireless cable television service is an attractive alternative to existing television choices for both passed and unpassed households. At June 30, 1996, the Company's markets included (i) 24 markets in which the Company had systems in operation (the "Operating Systems"), (ii) 9 markets in which the Company's systems were under construction and in which the Company expects to begin operations by the end of November 1996 (the "Systems Under Construction"), (iii) 17 markets in which the Company believes that it has obtained sufficient wireless cable channel rights to launch commercially viable systems (the "Near-Term Launch Markets"), and (iv) 20 markets in which the Company believes that it has obtained sufficient wireless cable channel rights to launch commercially viable systems, but which are subject to the receipt of certain FCC approvals and third party consents (the "Long-Term Launch Markets" and, together with the Operating Systems, the Systems Under Construction, and the Near-Term Launch Markets, the "Markets"). Since June 30, 1996, the Company has launched four of the Systems Under Construction. In addition, the Company owns a 50% interest in a limited liability company which holds channel rights to serve 10 markets in North Carolina, all of which are Long-Term Launch Markets. See "Risk Factors -- Need for Additional Financing for Growth; Certain Covenants," "-- Uncertainty of Ability to Obtain FCC Authorizations." During the six months ended June 30, 1996, the Company increased its aggregate number of subscribers through internal growth and new system launches from approximately 23,725 to 40,253, representing a 139% annualized growth rate and a penetration rate of approximately 1.8% of the LOS households in the Operating Systems at June 30, 1996. While none of the Company's Operating Systems currently generate operating income or positive cash flow from operations, as of June 30, 1996 three of the Company's Operating Systems, Delta and Jackson, Mississippi, and Huntsville, Alabama generate positive System EBITDA (as defined in "Management's Discussion and Analysis of Financial Condition and Results of Operations"). EBITDA is presented because it is a widely accepted financial indicator of a company's ability to service and/or incur indebtedness. EBITDA is not intended to represent cash flows, as determined in accordance with generally accepted accounting principles, nor has it been presented as an alternative to operating income or cash flow from operations or as an indicator of operating performance. EBITDA should not be considered as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. Based on its brief operating history, the Company believes that its typical Operating Systems will generate positive System EBITDA upon the achievement of 2,500 to 3,000 subscribers, however, there can be no assurance this level of subscribers will continue to result in positive System EBITDA in the future. As of June 30, 1996, the Company had 40,253 subscribers in its 24 Operating Systems. <TABLE> <CAPTION> Average Monthly Estimated Extimated Approximate Revenue per Operating Date of Current Total LOS Subscribers at Subscriber for Systems Launch Channels<F1> Households<F2> Households<F3> June 30, 1996 June 1996 _________________________________________________________________________________________________ <S> <C> <C> <C> <C> <C> <C> Brenham, TX February 20 39,500 32,100 857 $33.69 1996 Bryan/College May 1995 32 102,700 65,600 2,899 33.66 Station, TX Milano, TX October 20 40,900 36,800 1,659 32.34 <F4> 1995 Wharton, TX June 21 102,300 92,000 2,114 34.28 1994 Bunkie, LA December 20 94,700 81,600 1,498 33.17 1995 Lafayette, LA January 11 180,300 153,200 697 23.15 <F5> 1994 Lake Charles, April 17 111,600 92,500 555 30.66 LA 1994 Monroe, LA October 23 114,100 89,600 1,806 30.64 <F4> 1995 Jackson, MS June 29 211,500 176,900 10,745 30.06 1994 Delta, MS <F6> July 31 100,800 92,800 4,096 28.97 1995 Gulf Coast, January 24 132,300 121,700 1,672 21.59 MS <F7> 1996 Natchez, MS June 20 76,500 60,000 2 --- 1996 Oxford, MS June 20 60,100 53,500 23 --- 1996 Bucks, AL April 20 150,800 113,700 454 33.32 1996 Demopolis, AL April 28 17,500 15,600 266 20.25 1996 Dothan, AL June 23 100,500 81,200 1 --- 1996 Huntsville, February 27 196,800 181,900 4,014 31.25 AL 1991 Fort Walton May 1996 15 64,200 54,600 70 --- Beach, FL Gainesville, January 24 138,700 115,200 986 26.56 FL <F8> 1996 Panama City, September 23 108,300 83,300 1,751 30.08 FL 1995 Pensacola, FL July 28 217,400 157,900 2,041 35.88 1995 Jeffersonville,March 20 189,300 147,000 247 32.35 GA 1996 Lawrenceburg, June 20 76,400 44,100 397 30.08 TN 1995 Tullahoma, TN November 20 109,600 73,600 1,403 31.36 1995 _________ _________ ______ TOTAL 2,736,800 2,216,400 40,253 ========= ========= ====== </TABLE> ___________________________ <F1>Includes wireless cable channels and, where applicable, local off-air VHF/UHF channels that are not retransmitted by the Company via wireless cable frequencies. <F2>Estimated Total Households represents the Company's estimate of the total number of households that are within the Company's Intended Service Area. Intended Service Area includes (i) areas that are presently served, (ii) areas where systems are not presently in operation but where the Company intends to commence operations and (iii) areas where service may be provided by signal repeaters or, in some cases, pursuant to FCC applications. <F3>Estimated LOS Households represents the Company's estimate of the number of households that can receive an adequate signal from the Company in its Intended Service Area (determined by applying a discount to the Estimated Total Households to account for those homes that the Company estimates will be unable to receive service due to certain characteristics of the market). The calculation of Estimated LOS Households assumes (i) the grant of pending applications for new licenses or for modifications of existing licenses and (ii) the grant of applications for new licenses and license modification applications which have not yet been filed with the FCC. <F4>Acquired from Heartland Division in October 1995 as part of the Heartland Transaction (as defined). The Milano system was acquired by Heartland Division in December 1994. The Monroe System was constructed in March 1993. These systems were not actively marketed until being acquired by the Company as part of the Heartland Transaction. <F5>The Company is not actively marketing its service in the Lafayette Market and does not intend to do so until an increase in the number of channels is achieved, which the Company expects to occur within 6 months from the date hereof. <F6>Eight channels currently utilized in the Delta System are operated under special temporary FCC authorization. <F7>Four channels currently utilized in the Gulf Coast System were granted by the FCC without acting on an objection filed by a third party. <F8>Ten channels currently utilized in the Gainesville System are operated under special temporary FCC authorization. Business Strategy The Company's primary business objective is to acquire, develop, own and operate wireless cable television systems in rural markets in which the Company believes it can achieve positive System EBITDA upon achieving 2,500 to 3,000 subscribers. The Company intends to accomplish this business objective through implementation of the following operating strategies. Rural market focus. The Company obtains wireless cable channel rights and locates operations in geographic clusters of small to mid-size markets that have a significant number of households not currently passed by traditional hard-wire cable. The Company believes that such markets have less competition from alternative forms of entertainment and are characterized by a relatively high number of "value conscious" consumers, and that the Company's low-priced service is the most economical subscription television alternative for many consumers in such markets. Furthermore, the Company believes that its Markets typically have a stable base of subscribers, which have allowed the Company to maintain an average turnover or "churn" rate below 2.5% per month for the six months ended June 30, 1996, as compared to a churn rate of approximately 3% per month typically experienced by traditional hard-wire cable operators. Lower churn rates result in reduced installation and marketing expenses. Contiguous geographic cluster. The Company believes that through its large contiguous geographic cluster it is able to achieve significant cost savings through centralization of operations. The Company further believes that its contiguous cluster simplifies its market launch program by facilitating the movement of skilled personnel from one launch market to another. The Company also believes that a contiguous cluster is more attractive to regional advertisers and offers greater opportunities for telecommunications and other sources of revenue. Low cost structure. Wireless cable systems typically cost significantly less to build and operate than traditional hard-wire cable systems because, unlike traditional hard-wire cable systems, they do not require an extensive network of coaxial or fiber optic cable, amplifiers and related equipment (the "Cable Plant") for the transmission of programming. Once the Company constructs a headend for a system, the Company estimates that each additional subscriber requires a capital expenditure of approximately $375 to $475, consisting of, on average, $240 to $340 of equipment and $135 of installation labor and overhead charges. The Company also believes that its cost structure compares favorably with that of direct broadcast satellite ("DBS") operators, which must incur the fixed cost of a satellite and the variable cost of subscriber receive site equipment, which is typically twice the cost of the Company's receive site equipment. Focused operating strategy. The Company attempts to manage subscriber growth in order to make the most efficient use of its assets, assure customer satisfaction and minimize churn. Within a Market, the Company initially targets selected geographic sub-markets characterized by a significant number of households that are unpassed by cable or are served by smaller independent hard-wire cable operators and focuses marketing on such sub-markets so that subscribers generally wait no more than ten days from initial inquiry to commencement of service. The Company seeks to maintain high levels of customer satisfaction in installation, maintenance and customer service and to minimize churn by charging up-front installation fees and, in certain cases, performing credit checks on potential subscribers. Experienced management team. The Company intends to capitalize on its experienced management to implement its business strategy. The Company's top four senior managers have an average of 12 years of senior management experience in both hard-wire and wireless cable systems. Ownership Principal stockholders of the Company include (i) affiliates of The Chase Manhattan Corporation ("Chase"), (ii) Heartland Wireless Communications, Inc. ("Heartland") and (iii) Mississippi Wireless T.V., L.P. ("MWTV"). Chase Manhattan Capital Corporation ("CMCC"), an indirect subsidiary of Chase, presently owns approximately 10.5% of the Common Stock on a fully- diluted basis, Chase Venture Capital Associates, L.P. ("CVCA"), an affiliate of CMCC, owns 7.9% of the Company's Common Stock on a fully-diluted basis, and Chase Capital Partners ("CCP"), which is the general partner of CVCA, has voting discretion with respect to the 2.0% of the Common Stock of the Company on a fully-diluted basis owned by Baseball Partners. In total, affiliates of Chase own 20.4% of the outstanding Common Stock on a fully-diluted basis. Heartland presently owns approximately 18.0% of the Company's Common Stock on a fully-diluted basis as a result of the transaction in October 1995 by which the Company acquired the wireless cable assets and all related liabilities of Heartland with respect to certain of Heartland's markets in exchange for approximately 3.5 million shares of the Company's Common Stock (the "Heartland Transaction"). MWTV owns approximately 8.8% of the Company's Common Stock on a fully-diluted basis. Wireless TV, Inc. ("WTV"), a corporation controlled by Henry Burkhalter, the Company's President and Vice Chairman of its Board of Directors, is the general partner of MWTV. As a result, of the Company's initial public offering of Common Stock in October 1995, the public owns approximately 17.9% of the Company's Common Stock on a fully-diluted basis. Recent Developments TruVision Transaction. Pursuant to the TruVision Transaction, which was consummated on July 29, 1996, a subsidiary of the Company exchanged approximately 3.4 million shares of the Company's Common Stock for all of TruVision's outstanding shares and merged with and into TruVision, at which time TruVision became a wholly-owned subsidiary of the Company. The TruVision Transaction and certain acquisitions described below have added and are expected to add 21 Markets representing approximately 1.9 million LOS households to the Company's portfolio of wireless cable markets. See "Acquisitions" and "The TruVision Transaction." Of these Markets, eight were in operation as of June 30, 1996, with an aggregate of 21,215 subscribers. BTA Auction. In March 1996, The Company and TruVision participated in an auction (the "BTA Auction") conducted by the Federal Communications Commission ("FCC") for the exclusive right to apply for available Multipoint Distribution Services ("MDS") commercial channels in certain designated Basic Trading Areas ("BTAs"), subject to compliance with the FCC's interference standards and other rules. The Company and TruVision were the winning bidders for FCC authorizations in 66 BTA markets (the "BTA Markets"), and such authorizations, which primarily will increase the number of expected channels in the Company's Markets upon FCC approval, are reflected in the information set forth in this Prospectus. Subsequent to the BTA Auction and consistent with FCC rules, the Company filed applications for authorizations in each BTA Market. There can be no assurance that the FCC will approve these applications. See "Risk Factors -- Uncertainty of Ability to Obtain FCC Authorizations." The Company's winning bids in the BTA Auction aggregated approximately $30.3 million (net of a small business bidding credit), 80% of which will be financed through indebtedness provided to the Company by the United States government. See "Management's Discussion and Analysis of Financial Condition and Results of Operation - Liquidity and Capital Resources" and "Wireless Cable Industry -- Regulatory Environment -- Licensing Procedures." Applied Video Acquisition. On May 15, 1996, the Company acquired 100% of the stock of Applied Video Technologies (the "Applied Video Acquisition") for a total purchase price of approximately $6.5 million in cash. The Applied Video Acquisition added wireless cable rights covering one Operating System (Dothan, Alabama), one System Under Construction (Albany, Georgia) and one Near-Term Launch Market (Montgomery, Alabama). These three Markets cover approximately 263,100 LOS households. For a description of certain pending and recently completed acquisitions, see "Acquisitions." Financing. On August 12, 1996, the Company consummated the 1996 Debt Offering in which the Company issued $239,252,000 in principal amount of its Discount Notes and 239,252 1996 Warrants. The net proceeds from the 1996 Debt Offering (after deduction of discounts, commissions and expenses of such offering payable by the Company) were $118.6 million. The Company applied the proceeds of the 1996 Debt Offering to repay $18 million of the indebtedness of TruVision and is using the remaining net proceeds of $100.6 million to finance the launch and initial development of the Markets. The Company will require additional financing to finance the launch and initial development of all of the Markets described in this Prospectus and to continue to add subscribers to the Markets in accordance with its current business plan. The Company may elect to invest its capital in building subscriber levels in selected Markets prior to investing capital in the launch of systems in all of the Markets described in this Prospectus. The indenture that governs the 13% Notes (the "1995 Indenture") and the indenture that governs the Discount Notes (the "1996 Indenture," and, together with the 1995 Indenture, the "Indentures") limit, but do not prohibit, the incurrence of additional indebtedness, secured and unsecured, by the Company and its subsidiaries. The Indentures also limit, to some extent, the business purposes for which proceeds from the 1996 Debt Offering and the 1995 Debt Offering may be used. The Company reserves the right to allocate its capital to different business purposes as opportunities arise and business conditions change. See "Risk Factors - Substantial Indebtedness of the Company," "-- Need for Additional Financing; Certain Covenants." The Company intends to use the proceeds, if any, from this offering of Common Stock (the "Offering"), to finance the launch, initial development and expansion of the Company's Markets. See "Use of Proceeds." The Company's executive offices are located at 11301 Industriplex Boulevard, Suite 4, Baton Rouge, Louisiana 70809-4115, and its telephone number at such address is (504) 293-5000. THE OFFERING Common Stock Offered...........................................944,059 shares Common Stock outstanding upon the exercise of the 1995 and 1996 Warrants<F1>................19,265,169 shares Proceeds<F2>.......................................................$14,249,281 Use of Proceeds.................................The Company intends to use the net proceeds of this Offering, if any, as working capital. See "Use of Proceeds." Nasdaq National Market Symbol............................................WIRL ______________________ <F1> Includes shares issuable upon the exercise of (i) the 1995 and 1996 warants, (ii) warrants issued to Gerard Klauer Mattison & Co., LLC in October 1995 (the "GKM Warrants") and (iii) certain director, managment and employee options. <F2> There can be no assurance that any of the 1995 or 1996 Warrants will be exercised before such Warrants expire and, as a result, that the Company will receive any proceeds from this Offering. Even if exercised, the Company cannot predict when the 1995 or 1996 Warrants will be exercised and the proceeds received.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000918390_colorado_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000918390_colorado_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by and should be read in conjunction with the detailed information and financial statements and related notes appearing elsewhere in this Prospectus. Unless the context otherwise requires, references in this Prospectus to the Company includes BWBH, BWCC, Silver Hawk, Millsite and the Company's other consolidated subsidiaries. THE COMPANY The Company develops, owns and operates gaming and related entertainment facilities. The Company owns and operates, through subsidiaries, two of the largest casinos in terms of number of slot machines in the historic mining towns of Black Hawk and Central City, Colorado, under the "Bullwhackers" name (individually, "Bullwhackers Black Hawk" and "Bullwhackers Central City," and collectively, the "Bullwhackers Casinos"). The Company also owns and operates, through a subsidiary, a third gaming facility, located in Black Hawk, Colorado, which it opened as the Silver Hawk Saloon & Casino on June 26, 1996 (the "Silver Hawk Casino," together with the Bullwhackers Casinos, the "Colorado Casinos"). The Company offers parking for patrons of Bullwhackers Black Hawk and the Silver Hawk Casino at its surface parking lot (the "Surface Parking Lot") with a capacity of approximately 375 cars located directly between the two casinos. See "Business--The Colorado Casinos." As a result of the financial difficulties of a riverboat gaming project undertaken by a wholly-owned subsidiary of the Company in New Orleans, Louisiana (the "Riverboat Project"), the Company, BWBH, BWCC and Millsite sought protection under Chapter 11 of the United States Bankruptcy Code on November 7, 1995. The First Amended Joint Plan of Reorganization of the Company, BWBH, BWCC and Millsite (the "Plan of Reorganization") was confirmed on April 8, 1996 and became effective on June 7, 1996 (the "Effective Date"). As a result, among other things, the Company has significantly reduced its consolidated debt and no longer has any interest in the Riverboat Project. See "Legal Proceedings--Background of Bankruptcy; Plan of Reorganization." The Company was incorporated in August 1993 for the purpose of conducting the operations of certain entities, which, along with certain predecessor entities, constructed and were operating the Bullwhackers Casinos. BWBH was incorporated in 1993 for the purpose of owning and operating the Bullwhackers Black Hawk Casino. BWCC was incorporated in 1993 for the purpose of owning and operating the Bullwhackers Central City Casino. Silver Hawk was incorporated in 1996 for the purpose of acquiring, owning and operating the Silver Hawk Casino. Millsite, which was incorporated in 1993, owns the land underlying the Surface Parking Lot. The principal executive offices of the Company and its subsidiaries is 1700 Lincoln Street, 49th Floor, Denver, Colorado 80203, and its telephone number is (303) 863- 2400. RISK FACTORS AN INVESTMENT IN THE COMMON STOCK AND NOTES INVOLVES CERTAIN RISKS. SEE "RISK FACTORS." THE OFFERING The following securities may be offered and sold from time to time by the Selling Securityholders: 5,138,888 shares of Common Stock. $50,000,000 principal amount of Notes. An additional $5,883,000 in principal amount of Notes are being registered hereunder by the Company and may be issued directly by the Company to the holders of the Notes as payment of certain accrued interest when due, in lieu of cash, pursuant to the terms of the Notes. Such Notes, if issued, may be subsequently resold by the Selling Securityholders pursuant to this Prospectus or otherwise. The Notes are guaranteed by the Guarantors and are secured by, among other things, a lien on substantially all of the real and personal property owned or leased by the Company and the Guarantors, subject only to the liens of the Company's working capital lender, and a collateral pledge of the capital stock of the Guarantors. See "Description of Capital Stock - Description of the Notes." None of the securities are being offered to the public by the Company. See "Selling Securityholders" and "Plan of Distribution." <TABLE> SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE DATA AND RATIOS) Years Ended December 31, 1995 <CAPTION> 1992(a) 1993 1994(c) 1995(c) (Pro Forma)(d) --------- -------- ----------- ----------- -------------- STATEMENT OF OPERATIONS DATA: (unaudited) <S> <C> <C> <C> <C> <C> Net revenues........................... $ 17,045 $ 38,468 $ 45,474 $ 47,428 $ 47,428 Operating Expenses: Impairment of assets and - - 10,804 11,347 11,347 predevelopment expense.............. Reorganization items................ - - - 17,910 - Other operating expenses............ 25,349 35,310 47,631 44,807 46,120 Income (loss) from operations.......... (8,304) 3,158 (12,961) (26,636) (10,039) Interest expense....................... 3,000 6,987 18,822 18,664 6,731 Equity loss in unconsolidated subsidiary (GPRI)................... - - (2,323) (70,277) - Net loss............................... $(11,241) $ (3,829) $(32,131) $(115,216) $(16,720) ======== ========= ========= ========== ======== Net loss per common share (e).......... $ N/A $ N/A $ N/A $ N/A $ (3.25) ======== ========= ========= ========== ======== Weighted average common shares (b) (e)...................... N/A N/A N/A N/A 5,138,888 Ratio of Earnings to Fixed Charges..... (2.75) .45 (.71) (5.17) (2.48) </TABLE> <TABLE> <CAPTION> Six Months Ended Jan. 1,1996 June 7, 1996 June 30, through through 1995 June 6, 1996 June 30, 1996 (unaudited) (unaudited) (unaudited) STATEMENT OF OPERATIONS DATA: <S> <C> <C> <C> Net revenues........................... $ 23,667 $19,982 $3,245 Operating Expenses: Impairment of assets and predevelopment expense.............. 5,077 -- -- Reorganization items................ 500 2,290 -- Other operating expenses............ 23,743 16,886 3,064 Income loss from operations............ (5,653) 806 181 Interest expense....................... 9,976 579 403 Equity loss in unconsolidated subsidiary (GPRI)................... (12,187) -- -- Extraordinary gain from reorganization. -- 164,358 -- Net Income (loss)...................... $(27,600) $164,407 $(211) ======== ======== ====== Ratio of Earnings to Fixed Charges..... (1.77) 1.08 .48 </TABLE> <TABLE> <CAPTION> As of December 31, As of June 30, 1993 1994(c) 1995(c) 1996 ------ -------- ------- ---- (unaudited) BALANCE SHEET DATA: <S> <C> <C> <C> <C> Cash and cash equivalents.............. $ 1,676 $ 7,977 $ 3,623 $ 5,369 Total assets........................... 35,181 141,093 37,680 69,770 Long-term debt (excluding current portion)............................ 35,064 155,675 - 55,272 Liabilities subject to compromise...... - - 186,460 - Total stockholders' equity (deficit)... (10,002) (36,824) (153,137) 3,948 <FN> (a) Reflects operating results for the period from June 15, 1992 to December 31, 1992 for Bullwhackers Central City and the period from July 17, 1992 to December 31, 1992 for Bullwhackers Black Hawk. (b) Warrants totaling 7,552,213 shares of common stock and 179,000 common stock, warrants and options issued under the Company's pre-bankruptcy Restricted Share Plan and Non-Employee Director Plan were not included in the calculation of weighted average shares outstanding as their effect would have been anti-dilutive. (c) Grand Palais Riverboat, Inc. ("GPRI"), was consolidated with the Company and its other wholly-owned subsidiaries for the Company's fiscal year ended December 31, 1994, but was not consolidated with the Company and its other wholly owned subsidiaries for the Company's fiscal year ended December 31, 1995 because the Company no longer controlled GPRI following the commencement of the GPRI's bankruptcy case (the "GPRI Bankruptcy Case"). See Consolidated Financial Statements and Notes thereto. (d) For information on specific pro forma adjustments resulting from the reorganization, see "Unaudited Pro Forma Condensed Consolidated Financial Information." (e) The weighted average number of common shares outstanding and net income per common share for the Company prior to the Effective Date (the "Predecessor Company") have not been presented because, due to the Reorganization and implementation of fresh start reporting, they are not comparable to subsequent periods. </FN> </TABLE> RISK FACTORS THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), THAT INVOLVE RISKS, UNCERTAINTIES, AND OTHER FACTORS WHICH MAY CAUSE THE COMPANY'S ACTUAL PERFORMANCE TO BE MATERIALLY DIFFERENT FROM THE PROJECTIONS EXPRESSED OR IMPLIED BY SUCH STATEMENTS. SUCH FORWARD-LOOKING STATEMENTS MAY BE FOUND IN THE MATERIAL SET FORTH UNDER "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AN RESULTS OF OPERATIONS--LIQUIDITY AND CAPITAL RESOURCES," "BUSINESS," AND "DESCRIPTION OF CAPITAL STOCK--DESCRIPTION OF NOTES," AS WELL AS WITHIN THE PROSPECTUS GENERALLY. SUCH FACTORS INCLUDE, AMONG OTHERS, THE RISK FACTORS SET FORTH BELOW AND THE MATTERS SET FORTH OR INCORPORATED IN THE PROSPECTUS GENERALLY. PROSPECTIVE INVESTORS OF THE SHARES AND NOTES OFFERED HEREBY SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS IN EVALUATING AN INVESTMENT. RECENT EMERGENCE FROM BANKRUPTCY The Company emerged from bankruptcy on the Effective Date. Also, on the Effective Date, the Company adopted fresh start reporting in accordance with generally accepted accounting policies, resulting in adjustment of the Company's common stockholders' equity and the carrying value of assets and liabilities. Therefore, the Company's post-reorganization balance sheets and statements of operations are not prepared on a consistent basis of accounting with its pre-reorganization balance sheets and statements of operations. Accordingly, the Company has had limited history of operations post-bankruptcy on which its performance may be evaluated and the Company does not believe that pre- bankruptcy performance yields a valid comparison. See "Legal Proceedings--Background of Bankruptcy; Plan of Reorganization" and Consolidated Financial Statements and the Notes thereto. COMPETITION Colorado law permits limited stakes casino gaming in three historic mining towns, Black Hawk and Central City, adjacent towns located approximately 35 miles west of Denver, and Cripple Creek, approximately 90 miles south of Denver. Black Hawk and Central City form the primary gaming market in Colorado, and competition is intense. Bullwhackers Central City is located approximately one and one-half miles from Bullwhackers Black Hawk and the Silver Hawk Casino is located adjacent to the Surface Parking Lot, and across the Surface Parking Lot from Bullwhackers Black Hawk. Due to their proximity, the Colorado Casinos compete for some of the same target markets of customers in the Denver metropolitan area. However, the Company believes that its primary competition for the Colorado Casinos are other casinos operating in Black Hawk and Central City, of which there were approximately 33 as of August 31, 1996, and, secondarily, casinos operating in Cripple Creek of which there were approximately 26 as of August 31, 1996. Recently, more experienced, nationally recognized casino operators from other areas of the country have entered, or announced plans to enter, the Colorado gaming market, including Harrah's, Harvey's, ITT Sheraton, Colorado Central Station and Fitzgerald's, many of which have substantially greater financial and marketing resources than the Company. Because Colorado does not limit the total number of gaming licenses available for issuance in Colorado and there are no minimum facility size requirements, the Company expects the number of gaming facilities to continue increasing. The Company believes that the primary competitive factors in the Black Hawk-Central City market are location, availability and convenience of parking, number of slot machines and gaming tables, types and pricing of amenities, name recognition, and overall atmosphere. The Company believes it generally competes favorably on these factors, although Bullwhackers Central City offers less convenient parking than some of its direct competitors and the Silver Hawk Casino, recently opened, is smaller and currently has less name recognition than some of its direct competitors. The Company believes that since October 1991, approximately 12 casinos in Black Hawk and 20 casinos in Central City have ceased operations. In addition, several operators, including the Company, have reduced staffing and others have closed temporarily or reduced their square footage and/or hours of operations. The Company believes that the casinos that failed did so for a variety of reasons, including inferior design, inconvenient parking, inadequate size, inexperienced management and undercapitalization. Various published reports detailing additional gaming projects have been announced for Black Hawk. The majority of these projects are along the southern end of Black Hawk at the first major intersection off State Highway 119, providing these projects with the initial opportunity to capture visitors to Black Hawk and Central City from the Denver metropolitan area. Bullwhackers Black Hawk and the Silver Hawk Casino, in contrast, are located at the northern end of Black Hawk at the second major intersection off State Highway 119. In addition, the Colorado Department of Transportation is analyzing plans to potentially construct a third major intersection off State Highway 119 in between the two current intersections. This additional intersection, if constructed, would provide the casinos south of Bullwhackers Black Hawk and the Silver Hawk Casino with another opportunity to capture visitors to Black Hawk from the Denver metropolitan area before they reach Bullwhackers Black Hawk and the Silver Hawk Casino, thereby potentially reducing traffic flow and customer visitors to Bullwhackers Black Hawk and the Silver Hawk Casino, as well as to casinos in Central City, including Bullwhackers Central City. While it is difficult to assess the development stage of each of the announced projects and the likelihood of whether any or all of the announced projects will eventually be built and at what size, it is reasonably likely that at least some of the new competition may be completed and open to the public by early to mid-1998. Therefore, should several of the announced competitive projects open, the increased competition may adversely affect the Company's operations in both Black Hawk and Central City and, accordingly, may have a material adverse effect on the Company's consolidated results of operations, financial position and cash flows. Several lobbying groups placed initiatives for additional Colorado limited stakes gaming venues, including Denver, on the November 1992 statewide ballot. Each of these initiatives was defeated by a wide margin. However, in November 1996 there will be an initiative on the statewide ballot to expand limited stakes gaming to the city of Trinidad, approximately 125 miles south of Colorado Springs, and similar initiatives, legislation or regulations could be introduced in the future. The enactment of any initiative, legislation or regulations legalizing gaming elsewhere in Colorado could, and if such legalized gaming was closer to Denver would, have a material adverse effect on the Company's consolidated results of operations, financial position and cash flows. In addition to competing with other gaming facilities in Colorado as described above, the Company competes, to a lesser degree, for both customers and potential future gaming sites, with gaming facilities nationwide, including casinos in Nevada and Atlantic City, many of which have substantially greater financial resources and experience in the gaming business. The Company also competes with other forms of gaming on both a local and national level, including state-sponsored lotteries, charitable gaming and pari-mutuel wagering, among others, and competes for entertainment dollars generally with other forms of entertainment. The recent and continuing expansion of legalized casino gaming to new jurisdictions throughout the United States may also affect competitive conditions. Although the Company's focus is the Colorado gaming market, it is considering gaming ventures in other locations that the Company believes present favorable opportunities, and may pursue certain of such opportunities if its resources allow it to do so. However, its ability to capitalize on such opportunities is expected to be limited due to competition for such opportunities from more experienced and financially stronger entities. FLUCTUATING MARKET Due to the rapid growth of the Colorado gaming market, changes in the number of facilities operating and their individual layouts, the seasonality of the business and the local attributes of each Colorado gaming market, revenue results have varied, and likely will vary, significantly between the various Colorado gaming markets and between properties within those markets. As the Black Hawk market expands, both in terms of gaming device capacity and market share, the Central City market tends to contract. The majority of new and expansion projects are focused in Black Hawk, accordingly, the Company expects revenue per gaming device in Central City generally and Bullwhackers Central City in particular to decline relative to Black Hawk over the foreseeable future. RELIANCE ON DENVER MARKET The Company's gaming revenues currently depend primarily upon "day-tripper" visitor traffic at the Colorado Casinos from Denver metropolitan area residents. A decline in the Denver economy, a decline in the Black Hawk-Central City gaming market, or increased competition for Denver metropolitan area residents from other gaming jurisdictions both inside and outside Colorado, could have a material adverse effect on the Company's consolidated results of operations, financial position and cash flows. COLORADO GAMING REGULATIONS GENERAL. Under Colorado law and regulations (the "Colorado Regulations"), the ownership and operation of casino facilities in Colorado are subject to strict and extensive regulation by the Colorado Division of Gaming supervised by the five-member Colorado Limited Gaming Control Commission (the "Gaming Commission"). The ownership and operation of casino gaming facilities are subject to extensive state and local regulation. The Gaming Commission requires various licenses, findings of suitability, registrations, permits and approvals to be held by the Company and its subsidiaries. The Gaming Commission may, among other things, limit, condition, suspend or revoke a license to operate for any cause deemed reasonable. Substantial fines or forfeiture of assets for violations of gaming laws or regulations may be levied against the Company, the Company's subsidiaries and the persons involved. In addition, the actions of persons associated with the Company and its management employees, over whom the Company may have no control, could jeopardize any licenses held by the Company in Colorado. The suspension or revocation of any of the Company's licenses or the levy on the Company of substantial fines or forfeiture of assets would have a material adverse effect on the Company. To date, the Company has obtained all governmental licenses, findings of suitability, registrations, permits and approvals necessary for the operation of the Colorado Casinos. However, gaming licenses and related approvals are deemed to be privileges under Colorado law, and no assurances can be given that any new licenses, permits and approvals that may be required in the future will be given or that existing ones will not be revoked. The current licenses for the Bullwhackers Casinos expire on December 2, 1996 and the license for the Silver Hawk Casino expires on June 24, 1997. Renewal is subject to, among other things, continued satisfaction of suitability requirements. There can be no assurance that the Company will successfully renew its licenses in a timely manner or at all. Under the Colorado Regulations, no person can have an "interest" in more than three gaming retailer/operator licenses. The Company currently has three such licenses, one each for Bullwhackers Black Hawk, Bullwhackers Central City and the Silver Hawk Casino. Accordingly, any expansion opportunities that the Company may have in Colorado would be limited absent the disposition of one of the Colorado Casinos. See "Business - Colorado Gaming Regulations." RESTRICTIONS ON HOLDERS OF COMMON STOCK. Under Colorado Regulations, the definition of an "interest" in a gaming license excludes ownership of less than 5% of a "publicly traded" company such as the Company. Because the Company has three such licenses, any owner of any interest in a non-publicly traded Colorado licensee or a 5% or greater interest in a publicly traded Colorado licensee may be precluded from owning 5% or more of the Common Stock. To enable the Company to comply with the Colorado Regulations and secure and maintain the business and other regulatory approvals necessary for operating a gaming-related business in Colorado, the Company's Certificate of Incorporation provides that the Company may not issue any voting securities except in compliance with the rules of any gaming authority. The Company's Certificate of Incorporation also provides that all transfers of its voting securities must be in compliance with applicable gaming authority rules and if any gaming authority issues an order disqualifying a person from owning shares of Common Stock, the Company may redeem the stock of the disqualified holder unless Common Stock is transferred to a person found by the Gaming Commission to be suitable within 60 days from the finding of unsuitability. See "Business - Colorado Gaming Regulations" and "Description of Capital Stock Description of Common Stock." RESTRICTIONS ON HOLDERS OF NOTES. If a record or beneficial owner of Notes is required by any Gaming Authority (as defined in the Indenture) to be licensed, qualified or found suitable, such holder must apply for a license, qualification or finding of suitability within the required time period requested by such Gaming Authority. The applicant for a finding of suitability must pay all costs of the investigation for such finding of suitability. If a record or beneficial owner is required to be licensed, qualified or found suitable and is not licensed, qualified or found suitable by such Gaming Authority, the Company shall require such owner to dispose of the Notes. See "Business-Colorado Gaming Regulations" and "Description of Capital Stock-Description of the Notes-Redemption-Mandatory Redemption." LIQUOR REGULATION The sale of alcoholic beverages is subject to licensing, control and regulation by certain Colorado state and local agencies (the "Liquor Agencies"). Subject to certain exceptions, all persons who directly or indirectly own 5% or more of the Company must file applications with and are subject to investigation by the Liquor Agencies. The Liquor Agencies also may investigate persons who, directly or indirectly, loan money to liquor licensees. All liquor licenses are subject to renewal, are revocable and are not transferable. The Liquor Agencies have broad powers to limit, condition, suspend or revoke any liquor license. Any disciplinary action could, and any failure to renew or other revocation of any of its liquor licenses would, have a material adverse effect upon the operations of the Company and the Colorado Casinos. Colorado law prohibits any person or entity from having an "interest" (as defined) in more than one type of alcoholic beverage license or more than three gaming tavern liquor licenses. The Company currently holds a gaming tavern license for each of the three Colorado Casinos. Accordingly, the Company's expansion opportunities in Colorado are limited by such licensing restrictions. Furthermore, no person that holds an interest in the Company may hold any interest in any other Colorado alcoholic beverage licensees. See "Business - -Non-Gaming Regulation-Liquor Regulation." TAXATION The Company's operations are subject to taxes imposed upon gaming operators by the Gaming Commission and the municipalities of Black Hawk and Central City. Taxes currently levied on the Company's operations include taxes on gross gaming proceeds and annual gaming device fees. Such taxes and fees are subject to revision from time to time. Effective October 1, 1996, the Gaming Commission changed the tax rate. While certain of the tax rates were decreased in some of the lower-revenue brackets, the top tax rate was increased from 18% to 20% on all revenue in excess of $10 million. The new tax rates are 2% of the gross gaming revenue up to and including $2 million (unchanged from the previous year), 4% of the gross gaming revenue above $2 million up to and including $4 million (a decrease from the 8% tax rate for the previous year), 14% of the gross gaming revenue above $4 million up to and including $5 million (a decrease from the 15% tax rate for the previous year), 18% of gross gaming revenue above $5 million up to and including $10 million (unchanged from the previous year) and 20% of gross gaming revenue in excess of $10 million (an increase in the top tax rate). The increase in the top tax rate is expected to have a greater effect on the Company than the tax decrease in the lower revenue brackets. Accordingly, the Company expects to pay between $300,000-$400,000 in additional gaming taxes as a direct result of the change in tax rates. See "Business-Non-Gaming Regulation-Taxation." SEASONALITY AND INCLEMENT WEATHER Because the Colorado Casinos are located in the Rocky Mountains, they are subject to sudden and severe winter storms. Access to Central City and Black Hawk, which are both located ten miles from Interstate 70, is made via a two- lane secondary road. In bad weather, and in the winter months generally, this access road is difficult to traverse, which reduces the number of patrons traveling to Black Hawk and Central City, and, accordingly, negatively affects the Company's operating results during these periods. In addition, bad weather can result in a loss of services to the Colorado Casinos which also negatively affects the Company's operating results. As a result, the Colorado Casinos' business tends to be seasonal, with the highest level of activity occurring during the summer months. The sites of Bullwhackers Black Hawk and the Silver Hawk Casino are located in a 100-year flood plain. To date, the Company has not experienced any flooding resulting in damage to the casino. The Company carries $5 million in flood insurance on Bullwhackers Black Hawk, which management currently believes is adequate. There can be no assurance that Bullwhackers Black Hawk will not suffer flood damage in the future or that any damage will be adequately covered by insurance. AVAILABILITY AND RETENTION OF KEY MANAGEMENT AND OTHER EMPLOYEES The Company's operations and development are dependent upon the services of its executive officers. In connection with the Reorganization, most of the Company's senior management positions were eliminated. The Company's remaining senior executives, Stephen J. Szapor, Jr., President and Chief Executive Officer of the Company, Alan L. Mayer, Senior Vice President, Chief Legal Officer and Secretary of the Company and Richard Rabin, Senior Vice President of Operations of the Company, entered into employment agreements with the Company on the Effective Date. The loss of the services of any of these individuals could adversely affect the Company. See "Management." The Company's operations and development also are dependent in part on its ability to attract and retain qualified management personnel or obtaining the services of third parties in connection with the development, operation and management of the Colorado Casinos. Certain of the Company's current management, some of whom have been engaged by the Company only recently, have limited experience in the development or operation of casinos. In addition, competition for qualified personnel at all employment levels in the gaming industry in Colorado is intense. There can be no assurance that in the future the Company will be able to attract and retain the personnel necessary for successful operation and development. ABSENCE OF ESTABLISHED TRADING MARKET FOR THE SHARES AND THE NOTES; POSSIBLE VOLATILITY OF TRADING PRICES No established public trading market exists for either the Common Stock or the Notes. Although the Company understands that the Common Stock and the Notes trade sporadically in the "pink sheets" in the over-the-counter market, neither the Common Stock nor the Notes are, or will be upon effectiveness of the Registration Statement of which this Prospectus is a part, listed or be qualified for listing on any national securities exchange or on a Nasdaq Stock Market. A primary reason that neither the Common Stock or Notes qualify for any listing is that they are held by a relatively small number of holders, which the Company estimates at 40 for the Common Stock and 15 for the Notes, which has an adverse effect on the liquidity of the markets for the Common Stock and Notes. There can be no assurance that the Common Stock or the Notes will ever have enough holders or meet the other criteria to qualify for a listing on any national securities exchange or a Nasdaq Stock Market, that an active trading market for the Common Stock or the Notes will develop, or, if such a market develops, as to the liquidity or sustainability of such market. Accordingly, there can be no assurance that a holder of the Common Stock or Notes will be able to sell such securities in the future or as to the price at which any sale may occur. Factors such as quarterly fluctuations in the financial and operating results of the Company, negative announcements by the Company or others, developments affecting the Company or the gaming industry generally, and general stock market or economic conditions not necessarily related to the Company's operating performance, could cause the market price of such securities to fluctuate substantially. Market prices may also be affected by the amount of Common Stock and Notes sold, and the timing of sales, by the Selling Securityholders. DEBT SERVICE Although much of the Company's debt obligations were eliminated or reduced in connection with the Reorganization, the Company has significant interest expense and principal repayment obligations under the Notes and its credit facility and the Company is required to comply with certain financial covenants under the Notes and its credit facility. The Company's ability to service its debt, including interest and principal payments on the Notes, and comply with such financial covenants, will depend on its future performance, which will be affected by the Company's operating and marketing success, prevailing economic conditions, government regulation and taxation and financial, business and other factors, certain of which are beyond the Company's control. Accordingly, no assurance can be given that the Company will maintain a level of operating cash flow that will permit it to service its obligations and to satisfy such financial covenants. If the Company is unable to generate sufficient cash flow or is unable to refinance or extend its outstanding indebtedness, it will have to adopt one or more alternatives, such as reducing or delaying future expansion and capital expenditures, selling assets, restructuring debt or obtaining additional equity capital. There is no assurance that any of these strategies could be effected on satisfactory terms or at all. In addition, there is no sinking fund for the retirement of the Notes. Therefore, the Company will be required to repay the entire principal amount of the Notes when they mature on June 7, 2003, unless the Notes are previously redeemed. There can be no assurances that the Company will have available funds or will be able to raise funds for the repayment of the Notes at maturity. The terms and financial covenants contained in the Notes and the Company's credit facility restrict the ability of the Company to incur additional indebtedness. Those restrictions may limit the Company's ability to compete in the gaming market by effectively preventing expansion of the Company's facilities or other competitively advantageous capital expenditures. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources" and "Description of Capital Stock-Description of Notes-Certain Covenants-Limitation on Indebtedness." SECURITY FOR THE NOTES The lien on real and personal property of the Company and the Guarantors securing the Notes (the "Collateral") is junior to a lien on the Collateral held by the Company's lender under its credit facility. If an Event of Default (as defined in the Indenture) occurs, there can be no assurance that a foreclosure on the Collateral would produce proceeds in an amount that would be sufficient to pay the principal of, and accrued interest on, the Notes. In addition, the trustee for the Notes (the "Trustee") may be limited in its ability to foreclose upon the Collateral by applicable gaming laws and regulations. In particular, in any foreclosure sale involving a Colorado Casino, the purchaser would be required to obtain retail/operator licenses from the Commission as well as a gaming tavern liquor license from Colorado state and local agencies. If the trustee for the Notes was unable to, or chose not to, sell the Colorado Casinos or their assets, the trustee would be required to obtain such licenses. Such requirements may limit the number of potential bidders, and may adversely affect the sales price for the Colorado Casinos or their assets. Furthermore, the right of the Trustee to repossess and dispose of the Collateral upon the occurrence of an Event of Default is likely to be significantly impaired by applicable bankruptcy law if a bankruptcy proceeding was commenced by or against the Company or any Guarantor prior to the Trustee having repossessed and disposed of the Collateral. See "Description of Capital Stock-Description of the Notes-Security." MANDATORY OFFER TO PURCHASE NOTES UPON CHANGE OF CONTROL In the event of a Change of Control (as defined in the Indenture), the Company is obligated to offer to purchase all or a portion of each holder's Notes in accordance with the terms of the Indenture at a price of 101% of the principal amount of such Notes plus accrued but unpaid interest. The Company's ability to pay cash to the holders of the Notes upon such event, and the ability of the Guarantors to pay pursuant to the terms of the Guarantees upon the failure of the Company to purchase the Notes upon such event, may be limited by the Company's and Guarantors' respective financial condition at the time of such event. See "Description of Capital Stock-Description of the Notes-Mandatory Offers to Purchase." ENVIRONMENTAL MATTERS The Black Hawk and Central City gaming districts, including the Colorado Casino sites, are located generally within the Central City/Clear Creek Superfund site (the "Site") as designated by the Environmental Protection Agency (the "EPA"), pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"). The Site includes numerous specifically identified areas of mine tailings and other waste piles from former gold mine operations that are the subject of ongoing investigation and clean-up by the EPA and the Colorado Department of Public Health and Environment (the "CDPHE"). CERCLA requires remediation of sites from which there has been a release or threatened release of hazardous substances and authorizes the EPA to take any necessary response actions at Superfund sites, including authorizing potentially responsible parties ("PRPs") to clean up or contribute to the clean-up of a Superfund site. PRPs are broadly defined under CERCLA, and include past and present owners and operators of a site. CERCLA imposes strict liability on PRPs, and courts have commonly held PRPs to be jointly and severally liable for all response costs. Although the Colorado Casinos are not within any of the specific areas of the Site currently identified by the EPA for investigation or remediation, the site on which the Surface Parking Lot was constructed was identified as requiring remediation in connection with the construction of the Surface Parking Lot. That remediation was completed in June 1994. In the process of completing additional environmental remediation in connection with expanding the Surface Parking Lot, the Company discovered that two small and confined treatment cells within the Surface Parking Lot contain unacceptable levels of mercury and lead within the soil, and thus are classified as hazardous. The Company immediately reported this finding to the EPA and the CDPHE. The hazardous soil is located above the groundwater table. At the direction and approval of the EPA and CDPHE, the Company placed an asphalt cap over the hazardous soil to prevent infiltration. While the parties have agreed that the hazardous soil presents minimal impact to the environment in the short term, the Company has reached an agreement with the EPA and CDPHE to remove the hazardous soil and dispose of the material at a hazardous waste landfill prior to December 31, 1996. The Company is currently analyzing the most efficient way and time period within which to complete the removal of the hazardous soil. It is currently estimated that the cost of this removal project will be approximately $100,000. See "Legal Proceedings - Environmental Matters." The Company has conducted environmental examinations of the real property underlying the Bullwhackers Casinos. Based on these examinations, the Company is not aware of any environmental problems affecting the Bullwhackers Casinos which are likely to result in material costs to the Company. Although the Company has not conducted environmental examinations of the real property underlying the Silver Hawk Casino facility, it does not believe that there are any environmental problems affecting the Silver Hawk Casino site which are likely to result in material costs to the Company. No assurance can be given, however, that the Company will not subsequently discover significant environmental problems at any of its Colorado properties. Furthermore, the EPA or other governmental authorities could broaden their investigations and identify additional areas within the Site, including the Colorado Casino sites, for remediation. If any of the Colorado Casinos were included in additional areas of concern within the Site, the Company could be identified as a PRP and any liability related thereto could have a material adverse effect on the Company. MARKET PRICE OF COMMON STOCK AND DIVIDEND POLICY No established trading market for the Common Stock exists. Since the Effective Date, the Company has neither declared nor paid dividends on the Common Stock and does not anticipate paying dividends in the foreseeable future. The Company intends to follow a policy of retaining any earnings either to repay borrowings under the Company's credit facility, finance the Company's growth, or for general corporate purposes. In addition, the Company's credit facility and the Indenture restrict the Company from paying cash dividends. Payment of dividends in the future will be determined by the Company's Board of Directors and will depend upon, among other things, the Company's future earnings, operations, capital requirements, contractual restrictions in the Company's debt or other instruments, and such other factors the Board of Directors may deem relevant. SELECTED FINANCIAL DATA The selected consolidated financial information presented below for each year since the Predecessor Company commenced operations through the year ended December 31, 1995 and for the six-month period ended June 30, 1995, the period from January 1, 1996 through June 6, 1996, and the period from June 7, 1996 (the Effective Date) through June 30, 1996, is derived from the Company's Consolidated Financial Statements and Notes thereto which include BWBH, Inc., BWCC, Inc., Millsite 27, Inc. and Silver Hawk Casino, Inc. Separate financial statements for BWBH, BWCC, Millsite, and Silver Hawk, as the guarantors of the Notes, are not included herein because the Guarantors are each jointly and severally liable with respect to the full amount of Notes and the aggregate total assets, net earnings and net equity of the Guarantors are substantially equivalent to the total assets, net earnings and net equity of the Company and its subsidiaries on a consolidated basis. This data should be read in conjunction with the Consolidated Financial Statements of the Company and the Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in this Prospectus. The pro forma condensed consolidated statement of operations data has been prepared assuming that the Effective Date occurred on January 1, 1995. For a more complete discussion of the pro forma data, see "Colorado Gaming & Entertainment Co. Unaudited Pro Forma Condensed Consolidated Financial Information." <TABLE> IN THOUSANDS, EXCEPT SHARE DATA <CAPTION> Years Ended December 31, 1995 1992(a) 1993 1994(c) 1995(c) (Pro Forma)(d) --------- -------- ----------- ----------- -------------- STATEMENT OF OPERATIONS (unaudited) DATA: <S> <C> <C> <C> <C> <C> Net revenues........................... $ 17,045 $ 38,468 $ 45,474 $ 47,428 $ 47,428 Operating Expenses: Impairment of assets and - - 10,804 11,347 11,347 predevelopment expense.............. Reorganization items................ - - - 17,910 - Other operating expenses............ 25,349 35,310 47,631 44,807 46,120 Income (loss) from operations.......... (8,304) 3,158 (12,961) (26,636) (10,039) Interest expense....................... 3,000 6,987 18,822 18,664 6,731 Equity loss in unconsolidated subsidiary (GPRI)................... - - (2,323) (70,277) - Net loss............................... $(11,241) $ (3,829) $(32,331) $(115,216) $(16,720) ========= ========= ========= ========== ========= Net loss per common share(e)........... N/A N/A N/A N/A $ (3.25) ========= ========= ========= ========== ========= Weighted average common shares (b)(e)....................... N/A N/A N/A N/A 5,138,888 </TABLE> <TABLE> <CAPTION> Six Months Jan. 1, 1996 June 7, 1996 Ended through through June 30, 1995 June 6, 1996 June 30, 1996 (unaudited) (unaudited) (unaudited) STATEMENT OF OPERATIONS DATA: <S> <C> <C> <C> Net revenues........................... $ 23,667 $19,982 $3,245 Operating Expenses: Impairment of assets and predevelopment expense.............. 5,077 -- -- Reorganization items................ 500 2,290 -- Other operating expenses............ 23,743 16,886 3,064 Income loss from operations............ (5,653) 806 181 Interest expense....................... 9,976 579 403 Equity loss in unconsolidated subsidiary (GPRI)................... 12,187 -- -- Extraordinary gain from reorganization....................... -- 164,358 -- Net income (loss)...................... $(27,600) $164,407 $(211) ======== ======== ====== </TABLE> <TABLE> As of December 31, <CAPTION> As of June 30, 1992 1994(c) 1995(c) 1996 -------- ----------- --------- ------------- (unaudited) BALANCE SHEET DATA: <S> <C> <C> <C> <C> Cash and cash equivalents ............. $ 1,676 $ 7,977 $ 3,623 $5,369 Total assets .......................... 35,181 141,093 37,680 69,770 Long-term debt (excluding current portion)............................... 35,064 155,675 - 55,272 Liabilities subject to compromise...... - - 186,460 -- Total stockholders' equity (deficit) (10,002) (36,824) (153,137) 3,948 ======================================================================================================= <FN> (a) Reflects operating results for the period from June 15, 1992 to December 31, 1992 for Bullwhackers Central City and the period from July 17, 1992 to December 31, 1992 for Bullwhackers Black Hawk. (b) Warrants totaling 7,552,213 shares of common stock and 179,000 common stock, warrants and options issued under the Company's pre-bankruptcy Restricted Share Plan and Non-Employee Director Plan were not included in the calculation of weighted average shares outstanding as their effect would have been anti-dilutive. (c) GPRI was consolidated with the Company and its other wholly owned subsidiaries for the Company's fiscal year ended December 31, 1994, but was not consolidated with the Company and its other wholly owned subsidiaries for the Company's fiscal year ended December 31, 1995 because the Company no longer controlled GPRI following the commencement of the GPRI Bankruptcy Case. See Consolidated Financial Statements and Notes thereto." (d) For information on specific pro forma adjustments resulting from the reorganization, see "Unaudited Pro Forma Condensed Consolidated Financial Information." (e) The weighted average number of common shares outstanding and net income per common share for the Predecessor Company have not been presented because, due to the Reorganization and implementation of fresh start reporting, they are not comparable to subsequent periods. </FN> </TABLE> UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION The following unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 1995 of the Company is based on the consolidated financial statements of the Company included elsewhere in this Prospectus. The unaudited pro forma condensed consolidated statement of operations has been prepared assuming that the Effective Date of the Plan of Reorganization had occurred on January 1, 1995. The unaudited pro forma condensed consolidated statement of operations of the Company does not reflect the acquisition of the Silver Hawk Casino or the commencement of construction of the Parking Garage. The unaudited pro forma condensed statement of operations of the Company and accompanying notes should be read in conjunction with the Company's consolidated financial statements and notes thereto included in this Prospectus. The unaudited pro forma condensed consolidated statement of operations is being presented for information purposes only and does not purport to represent what the Company's consolidated results of operations would actually have been if the Effective Date of the Plan of Reorganization had occurred on January 1, 1995 or to project the Company's results of operations at any future date. <TABLE> COLORADO GAMING & ENTERTAINMENT CO. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS) Year Ended <CAPTION> Year Ended December December 31, Reorgan- 31, 1995 ization Fresh Start 1995 (Historical) Adjustments Adjustments (Pro Forma) <S> <C> <C> <C> <C> Revenues, net............................... $ 47,428 $ 47,428 ------ ------ Operating Expenses: Casino..................................... 13,087 13,087 Gaming taxes............................... 8,277 8,277 Food and beverage.......................... 3,173 3,173 Casino general & administrative............ 3,223 3,223 Corporate general & administrative......... 6,470 6,470 Marketing.................................. 5,806 5,806 Depreciation and amortization.............. 4,771 1,313(5) 6,084 Impairment assets and predevelopment 11,347 11,347 expense.................................... Reorganization items....................... 17,910 (17,910)(1) -- ------- -------- Total operating expenses................. 74,064 57,467 ======= ======== Operating loss.............................. (26,636) (10,039) Interest expense............................ (18,664) 11,933 (2) (6,731) Interest income............................. 361 (311)(3) 50 Equity in loss - unconsolidated subsidiary (GPRI)...................................... (70,277) 70,277 (4) -- ------ --------- Loss before income taxes.................... (115,216) (16,720) Provision for income taxes.................. -- -- ----------- --------- Net loss.................................... $ (115,216) $ (16,720) ========== ========= </TABLE> Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements The following notes set forth the explanations and assumptions used and adjustments made in preparing the unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 1995. The unaudited pro forma condensed consolidated statement of operations reflects the adjustments described under "- Pro Forma Adjustments" below, which are based on the assumptions and preliminary estimates described therein, which are subject to change. These statements do not purport to be indicative of the results of operations of the Company for such periods, nor are they indicative of future results. Furthermore, these unaudited pro forma condensed consolidated statement of operations does not reflect anticipated changes which may occur as the result of activities before and after the Effective Date of the Plan of Reorganization and other matters. The unaudited pro forma condensed consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in this Prospectus. PRO FORMA ADJUSTMENTS The unaudited pro forma condensed consolidated statement of operations reflects the following pro forma adjustments based on the assumptions described below: 1). Elimination of one time non-recurring reorganization items. 2). Adjustment to interest expense to reflect the reorganized debt structure of the Company. 3). This adjustment reflects the reduction of interest income recorded on affiliate loans in the 1995 period. 4). Elimination of any charges from the disposed subsidiary (GPRI). Fresh Start Adjustments 5). Recording of additional amortization charges on excess reorganization value, based on a 18.5 year amortization period. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company emerged from bankruptcy on the Effective Date. The Company and its consolidated subsidiaries prior to the Effective Date are sometimes referred to below and elsewhere in this Prospectus as the "Predecessor Company." Prior to the Effective Date, the Company, through its Colorado Subsidiaries (as defined below), owned and operated the Bullwhackers Casinos and the Surface Parking Lot in Colorado, and, through Grand Palais Riverboat, Inc. ("GPRI"), operated a riverboat gaming facility on the Mississippi River adjacent to downtown New Orleans and owned a 50% interest in River City Joint Venture ("RCJV") which owned and leased certain shore facilities in New Orleans, including approximately 53 acres of land. Additionally, RCJV provided administrative services on behalf of its joint venture partners to support their riverboat gaming operations. Both the Company's and its joint venture partner's riverboat gaming facilities were operated under the name `River City'. The Company's riverboat gaming facility commenced operations on March 29, 1995, and due to substantial operating losses, stopped operations on June 6, 1995. The Company's joint venture partner stopped riverboat gaming operations on June 9, 1995. Prior to the closure of its riverboat gaming operations, GPRI had incurred substantial obligations, including construction costs, equipment purchases, and trade payables, for which it had no funds available or financial ability to pay. On July 26, 1995, three creditors of GPRI filed a Chapter 7 involuntary bankruptcy petition against GPRI in the United States Bankruptcy Court for the Eastern District of Louisiana. On July 27, 1995, GPRI's involuntary bankruptcy case was converted into a voluntary Chapter 11 case (the "GPRI Bankruptcy Case"). On March 29, 1996, a plan of reorganization (the "GPRI Plan") was confirmed in the GPRI Bankruptcy Case. On May 3, 1996 as part of the Company's overall restructuring, the Company's equity interest in GPRI was sold to Casino America, Inc. pursuant to the GRPI Plan of Reorganization. Consideration, consisting of cash, stock and notes, totaling approximately $59 million, was given to GPRI creditors, including the Company's senior secured creditors. Accordingly, the Company received no consideration from the sale of GPRI. Concurrently with this stock sale, all claims against the Company related to GPRI were released. This transaction had no financial statement impact on the Company in the 1996 period, as the Company's investment in GPRI was reduced to zero in the 1995 period. As a result of GPRI's financial difficulties and subsequent bankruptcy filing, the outstanding 11 1/2 Senior Secured Pay-In-Kind Notes due 2000 issued by the Company (the "Old Notes") were declared in default in June 1995. After reaching agreement on a debt restructuring with the holders of the Old Notes, the Company and the Colorado Subsidiaries filed a voluntary Chapter 11 case in the United States Bankruptcy Court for the District of Delaware (the "Hemmeter Bankruptcy Cases") on November 7, 1995. The venue of the Hemmeter Bankruptcy Cases was changed to the United States Bankruptcy Court for the Eastern District of Louisiana on December 27, 1995. The Plan of Reorganization of the Company and its Colorado Subsidiaries was confirmed on April 8, 1996 and became effective on June 7, 1996. The Company and the Colorado Subsidiaries continued their business operations as debtors-in-possession under the supervision of the Bankruptcy Court from the date their bankruptcy petitions were filed. The Company's Reorganization became effective on June 7, 1996, the Effective Date. Pursuant to the Reorganization, the following events occurred: o $176 million of senior secured debt was canceled and $50 million in new debt, consisting of the Notes, was issued. o All outstanding common stock and warrants were canceled and 5 million shares of new common stock was issued on a pro rata basis to the holders of the Old Notes and Resort Income Investors ("RII"). o Certain unsecured liabilities totaling approximately $1.2 million were canceled. o The Company changed its name to Colorado Gaming & Entertainment Co. Also on the Effective Date, the Company adopted fresh start reporting in accordance with SOP 90-7 resulting in adjustment of the Company's common stockholder equity and the carrying values of assets and liabilities. Accordingly, the Company's post-Reorganization balance sheets and statements of operations are not prepared on a consistent basis of accounting with its pre-Reorganization balance sheets and statements of operations, a substantial amount of pre-bankruptcy liabilities of the Company were converted to equity or otherwise discharged and significant adjustments were made to reflect the resolution of certain liabilities. Because of the Hemmeter Bankruptcy Cases and the elimination of GPRI's operations, no measure of comparability can be drawn from past results in order to measure those that may occur in the future. Among the uncertainties which have affected the Company's operations in the past and might adversely impact the Company's future operations are (i) general economic conditions, especially in the Denver, Colorado, metropolitan area, (ii) the intensely competitive nature of the Colorado gaming industry, (iii) the entry into the Black Hawk and Central City gaming markets of licensees with substantially greater economic resources and gaming experience than the Company, (iv) changes in the laws governing gaming operations, and (v) the possibility of increased taxes and other regulatory burdens on the Company's operations. IMPACT OF THE PLAN OF REORGANIZATION ON RESULTS OF OPERATIONS Upon the Company's emergence from bankruptcy on the Effective Date, the Company's aggregated outstanding debt balance was reduced from $185.2 million to approximately $56.6 million. The reduction in debt is expected to result in a reduction in annual interest expense of approximately $12 million based on the Company's weighted average interest rate on outstanding debt in 1995. The Company obtained a credit facility with an unaffiliated lender to provide working capital financing and financing for its expansion plans. See "- Liquidity and Capital Resources." Interest on this facility, the amount of which will depend on the amount borrowed by the Company, will increase the Company's post-Effective Date interest expense. The Company also incurred reorganization charges totaling $17.9 million in 1995 which are non-recurring in nature. The Company's corporate general and administrative expense in 1995 was $6.5 million. In early 1995, the Company employed 27 corporate management employees who provided operations, finance, design, development, legal and aviation services to the Company. As part of the downsizing of the Company, the Company employed five corporate management employees on the Effective Date. The Company has also terminated its arrangement with an affiliate for use of a corporate aircraft and has renegotiated its office lease to provide for more favorable terms. The reductions resulting from these measures is expected to allow the Company to reduce its corporate general and administrative expense by approximately $4.0 million per year. Because of the divestiture of GPRI through the GPRI Bankruptcy Case, the Company's operations will no longer be burdened with the loss on GPRI's New Orleans operations, which totaled $71.7 million in 1995. The adoption of fresh start accounting will result in increased amortization charges of approximately $1.0 million annually as a result of recording $18.5 million of excess reorganization value. Since its inception, the Company has generated significant net operating loss carryforwards for tax purposes, which, in the absence of the Company's bankruptcy, would have been available to offset any taxable income earned in the future. As a result of the consummation of the Plan of Reorganization, the Company underwent a substantial change in ownership and incurred significant forgiveness of indebtedness income. For tax purposes, the forgiveness of indebtedness income and the ownership change will significantly limit or eliminate the Company's net operating loss carryforwards and other tax benefits. Additionally, while fresh start accounting requires the Company to significantly increase the book basis of its assets, the tax bases of those assets generally remain at their historical bases. Therefore, given the potential limitation or elimination of the Company's net operating loss carryforwards and the increased book depreciation and amortization charges, the Company may have taxable income in the future, and, therefore, may be required to pay income taxes, even though it may record a loss for financial reporting purposes. RESULTS OF OPERATIONS For the Six Months Ended June 30, 1996 as Compared to the Six Months Ended June 30, 1995 The Company's net revenue decreased 2%, to $23.2 million for the six months ended June 30, 1996, from $23.7 million for the six months ended June 30, 1995. The decrease in revenue is due to significant revenue declines at the Company's Central City property, and unusually severe weather in the central Colorado Rocky Mountains in January 1996. The Company's Black Hawk facility has produced a 6% increase in revenues for the six months, despite the fact Black Hawk's operations were negatively affected by the construction activities relating to expansion of the parking lot which began April 1 and ended in early June. The revenue gains in Black Hawk were offset by significant revenue declines at the Company's Central City property due to a continued competitive market. The Central City market, which was relatively flat year to year, continues to struggle to compete with Black Hawk, which continues to offer better access and parking convenience. The Company's facility in Central City has not been able to compete effectively with certain other competitors which offer substantially more amenities in terms of on-site parking and hotel rooms. The Silver Hawk Casino, located in Black Hawk adjacent to the Company's expanded parking lot, opened for business on June 26, 1996 and contributed approximately $164,000 in net revenue for the five days in June. The initial results for June and the month of July exceeded management's expectations, however, it is premature to estimate whether these results will continue. Expenses directly related to casino operations, including casino expense, gaming taxes and food and beverage expense decreased 5% to $12.0 million for the six months ended June 30, 1996, as compared to $12.6 million for the six months ended June 30, 1995. The decrease in expenses is due to certain labor efficiencies and other cost saving programs implemented in late 1995 and early 1996. Marketing expense remained constant at $2.8 million for both the six months ended June 30, 1996 and 1995. Casino general and administrative expenses decreased to $1.4 million for the six months ended June 30, 1996, as compared to $1.8 million for the six months ended June 30, 1995. The decrease primarily relates to reductions in staffing at the Central City property and decreased insurance costs. Corporate expense was reduced to $1 million for the six months ended June 30, 1996, as compared to $4.2 million for the six months ended June 30, 1995. These reductions included the elimination of most corporate positions, combining corporate offices with the Colorado Casinos offices and terminating the use and subsidy of a corporate aircraft, all beginning in the second quarter of 1995. Depreciation and amortization expense decreased to $2.3 million for the six months ended June 30, 1996 as compared to $2.4 million for the six months ended June 30, 1995. Due to the increased book basis of the Company's assets as a result of adopting fresh start accounting, depreciation and amortization charges going forward will be substantially greater. The Company incurred $388,000 in pre-opening expense for the six months ended June 30, 1996 related to its Silver Hawk Casino which opened on June 26, 1996. Reorganization and other impairment charges totaled $2.3 million for the six months ended June 30, 1996, as compared to $5.6 million for the six months ended June 30, 1995. Reorganization expenses are costs directly related to the Company's Reorganization. Operating Income. Income from operations increased to $908,000 for six months ended June 30, 1996, as compared to a $5.7 million loss for the six months ended June 30, 1995. The increase in operating income is primarily attributable to the $5.6 million in one-time reorganization and other impairment charges incurred in the 1995 period, and a reduction of corporate expense from the 1995 period. Interest expense totaled $982,000 for the six months ended June 30, 1996, as compared to $10 million for the six months ended June 30, 1995. The Company did not record any interest expense during the reorganization period on its debt obligations in default. On a pro forma basis, based on the reorganized capital structure interest for the second quarter would have been approximately $3.3 million. For the Year Ended December 31, 1995 as Compared to the Year Ended December 31, 1994. Although GPRI's results of operations were consolidated with the results of operations of the Company and its other wholly owned subsidiaries for the Company's fiscal year ended December 31, 1994 and were not consolidated for the Company's fiscal year ended December 31, 1995, GPRI's only operating item in 1994 was the preopening expense of $2.6 million discussed below. Therefore, with the exception of this item, the Company's 1995 results of operations which do not include GPRI are comparable to the Company's 1994 results of operations which do include GPRI. The Company's net revenue increased to $47.4 million in 1995 as compared with $45.5 million in 1994, representing a 4% increase in net revenues. The growth is primarily attributable to increased revenues at Bullwhackers Black Hawk resulting from the fact that Bullwhackers Black Hawk had the benefit of the Surface Parking Lot, which opened in April 1994, for all of 1995, as opposed to eight months during 1994, and the fact of the overall market growth in Black Hawk of 14% in 1995. The revenue growth at Bullwhackers Black Hawk was offset by a slight decrease in Bullwhackers Central City gross revenues. Expenses directly related to the casinos, including casino expense, gaming taxes and food and beverage expense decreased by 3% to an aggregate of $24.5 million for 1995 as compared to an aggregate $25.3 million for 1994. Casino expense was 52% of net revenue at the Bullwhackers Casinos for 1995 as compared 56% of net revenue at the Bullwhackers Casinos for 1994. Casino expense consists of all direct costs of casino operations, and includes salaries, wages and benefits expense. General and administrative expense decreased to $9.7 million for 1995 as compared to $11.4 million for 1994, representing a 15% decrease. The decrease is due to the Company's reduced corporate group during the second half of 1995. During the second quarter of 1995, the Company began to implement significant cost reductions at the corporate level as part of the Company's reorganization. Most corporate positions were eliminated, administrative offices were combined with the Colorado Casinos, and the use and subsidy of a corporate airplane was terminated. Marketing expense increased to $5.8 million for 1995 as compared to $3.8 million for 1994. The increase primarily relates to the increased promotional costs due to increased business volume and the competitive nature of the market. Depreciation and amortization expense increased to $4.7 million for 1995 as compared to $4.3 million for 1994, representing a 9% increase. The increase primarily reflects a full year of depreciation on the improvements at the Surface Parking Lot in 1995. There were no pre-opening costs for 1995 as compared to $2.6 million in pre-opening costs for 1994. Pre- opening costs in 1994 consisted of expenditures incurred to prepare the New Orleans riverboat gaming facility for opening. Predevelopment expense decreased to $402,000 in 1995, as compared to $3.9 million in 1994. Predevelopment expense consists of costs incurred during the investigation of potential new gaming venues throughout North America, including legal, consulting and design costs, political contributions and travel expenses. The Company substantially reduced its predevelopment activity in early 1995 due to the Company's lack of financial resources. The Company is not currently engaged in any predevelopment activities and has focused its expansion efforts on the Black Hawk market in the immediate future. Impairment of asset charges were $10.9 million for 1995 as compared to $6.9 million for 1994. In 1995, the impairment charges resulted primarily from approximately $6.4 million of affiliate company receivables determined to be uncollectible, $2.7 million of capitalized interest related to construction of the Riverboat Project and $1.5 million of capitalized offering costs which were written-off once certain initial public offering and debt registration efforts were abandoned. Reorganization expense in 1995 totaled approximately $17.9 million as compared to none in 1994. Reorganization expenses are costs directly related to the Company's Chapter 11 reorganization and consist primarily of professional fees and the write-off of unamortized debt placement costs and debt discount. Operating Income. The loss from operations increased to $26.6 million for 1995 as compared to $13.0 million for 1994. The New Orleans operations accounted for none and $2.6 million of this loss in 1995 and 1994, respectively. In 1995, reorganization, impairment and other necessary charges totaled approximately $29.3 million. The Bullwhackers Casinos had operating income of $9.7 million for 1995 as compared to $8.3 million for 1994. This increase primarily reflects the growth in the Colorado market and the impact of the Surface Parking Lot on the Bullwhackers Black Hawk operations. Interest expense totaled $18.7 million for 1995 as compared to $18.8 million for 1994. The Company ceased accruing interest on the Old Notes and on certain of its Bullwhackers Casino equipment financings as of November 7, 1995 because of the Company's bankruptcy filing. As a result of the decrease in the Company's debt following the Effective Date, the Company anticipates that its interest expense will be substantially reduced in the future. The Company has made no provision for income taxes in 1995 or since its inception because the Company never generated taxable income. The Company has reserved the full amount of its net deferred tax asset (primarily net operating loss carry forwards) because future taxable income, if any, is uncertain. The reorganization of the Company on the Effective Date may have substantial tax consequences to the Company. For the Year Ended December 31, 1994 as Compared to the Year Ended December 31, 1993. Net revenues for 1994 were $45.5 million, an increase of 18% over the $38.5 million of net revenues for 1993. The increase in revenue is due primarily to the completion of the Surface Parking Lot in the spring of 1994 and an expanded gaming market in Black Hawk. Expenses directly related to the casinos, including casino expense, gaming taxes and food and beverage expense increased to an aggregate of $25.3 million for 1994 as compared to $19.7 million for 1993. The increase in casino expenses is due primarily to increased staffing as a result of greater activity at Bullwhackers Black Hawk. General and administrative expense increased to $11.4 million for 1994 as compared to $7.7 million for 1993. These expenses include the cost of support services such as finance, marketing, and administrative staff. The increased expense for 1994 is due to costs totaling $8.1 million incurred in 1994 associated with the creation of a corporate group and related staff, which were added beginning in January 1994. The corporate group was involved with strategic planning and administration, the development of the Company's Louisiana operations and the pursuit and development of gaming in other venues. The corporate group put in place in 1994 was designed to manage several operating companies in addition to the Colorado Subsidiaries and to pursue and develop opportunities in new venues. Marketing expense decreased to $3.8 million for 1994 as compared to $4.0 million for 1993. Depreciation and amortization increased to $4.3 million for 1994 as compared to $3.9 million for 1993. The increase is related to depreciation of the improvements at the Surface Parking Lot which was completed in April 1994. Pre-opening expense totaled $2.6 million for 1994 as compared to none in 1993. Pre-opening costs consist of expenditures incurred to prepare for the opening of the casinos and include labor costs, certain consulting, marketing and other direct costs. The pre-opening expense incurred in 1994 relates to costs associated with the Company's New Orleans riverboat gaming facility. In 1994, the Company recorded predevelopment expense of $3.9 million as compared to none in 1993. This amount related to costs incurred during investigation of potential new gaming venues which was initially capitalized as investment in development projects. These costs are expended when a project is no longer deemed viable. As a result of various gaming initiatives which were not adopted by voters in potential new gaming venues, unsuccessful gaming legislation proposed in potential new venues and municipalities which selected gaming operators other than the Company, all such costs were expended in 1994. Beginning in 1995, costs related to the investigation of new venue development projects were expended as incurred. Once management has determined a new venue project has a high probability of success, commercial development costs incurred will be capitalized. In September 1994, the Company entered into an agreement to acquire a 25% equity interest in Promociones e Inversiones de Guerrero S.A. de C.V. ("PRIGSA"), a Mexican gaming company operating a sports book and jai alai Erenton. The Company contributed $5.9 million to PRIGSA during 1994. The contributions were made in the form of loans and, upon approval by the Mexican government, were convertible into common stock. The results of PRIGSA's operations upon opening in the fall of 1994 were substantially below expectations, and, as a result, PRIGSA suffered significant operating losses and has significant liabilities which are senior to the Company's loans to PRIGSA. As of December 31, 1994, the Company wrote-off its investment in PRIGSA for a total charge to earnings of $5.9 million. Although Mexico is considering legalizing casino-style gaming, even if this occurred and PRIGSA's gaming operations may become viable, the Company believes that any recovery on its PRIGSA investment would be speculative In 1994, the Company established a reserve of $1 million for certain affiliate receivables that management believed might not be collectable. The loss is included in impairment of investments as of December 31, 1994 in the accompanying consolidated financial statements of the Company for 1994. See Note 11 to the Company's 1994 Consolidated Financial Statements. Interest expense increased to $18.8 million, net of $2.1 million of interest costs capitalized for construction projects, in 1994 as compared to $7.0 million for 1993. The increase in interest costs relates to the interest on the Old Notes which were issued during December 1993. Interest expense of $4.8 million in 1993 related to certain loans provided by RII which were repaid out of the proceeds of the Old Notes. The Company had a net loss of $32.1 million for 1994 and accordingly recorded no provision for income taxes. The loss for tax reporting purposes was different than the net loss for financial reporting purposes due to differences between the book and tax basis of the Company's assets. In 1994, the Company booked a valuation allowance to offset the net deferred tax asset of approximately $16.0 million arising from differences between the book and tax basis of the Company's assets, liabilities and net operating loss carryforwards, because future taxable income was uncertain. LIQUIDITY AND CAPITAL RESOURCES On the Effective Date of the Company's Plan of Reorganization, June 7, 1996, the Company's outstanding Old Notes totaling $174 million, and certain other notes payable to RII totaling $2 million, were canceled and $50 million in Notes were issued on a pro rata basis to the holders of the Old Notes and the RII notes. The Notes are secured by sub stantially all the assets of the Company and require semi-annual interest payments commencing on December 1, 1996. On the first two interest payment dates, December 1, 1996 and June 1, 1997, interest on the Notes may, at the Company's option, be paid by issuing additional notes in lieu of cash interest payments. As a result, the Company will have the option of deferring approximately $6 million in interest payments until the Notes are due in 2003. Also on the Effective Date, the Company closed on a credit facility (the "Credit Facility") with Foothill Capital Corporation. The Credit Facility provides for loans up to $12.5 million in the form of several sub facilities including a construction line of $5 million, an equipment financing line of $5 million, a revolving working capital line for up to $3.5 million, and a $1 million Silver Hawk line. At no point may the aggregate borrowings exceed $12.5 million. Borrowings under the Credit Facility are subject to a 1% financing fee and accrue interest at prime plus 2.375%. The loans have varying terms, ranging from three to five years from the date funds are borrowed. The Credit Facility is secured by first liens on substantially all the Company's assets and are senior, in terms of lien rights, to the Notes. As of June 30, 1996, the Company had borrowed approximately $4.3 million under the Credit Facility primarily to refinance existing equipment financing. In the third quarter, the Company borrowed an additional $1.1 million under the equipment line to pay for Silver Hawk Casino slot machines. Later in the third quarter, the Company borrowed $1 million under the Silver Hawk facility and repaid $1.3 million under the working capital line, thus preserving the full $3.5 million available under the working capital line. In April 1996, the Company purchased the Silver Hawk Casino, which was not operating at the time, for $2.7 million, of which $900,000 was borrowed under the DIP Facility. The $1.8 million note payable to the seller accrued interest at 9.5% per annum, and provided for monthly principal and interest payments on a 20 year amortization schedule. The seller of the Silver Hawk Casino is an elected official of Black Hawk. A statute in Colorado prohibits an elected official from having an "interest" in a gaming license. To avoid any potential regulatory interpretation that the seller would have an "interest" in the Silver Hawk Casino gaming license, thereby detrimentally affecting the Company's ability to obtain the gaming license, the Company retired the seller's note from available cash on June 18, 1996. Certain other equipment financing, with a principal balance totaling $3.9 million, was retired prior to and on the Effective Date in accordance with the Reorganization for $3.1 million (realizing an $800,000 discount) with proceeds from the DIP Facility and Credit Facility. This equipment refinancing , the Silver Hawk Casino down payment, accrued interest and certain borrowing expenses, altogether totaling approximately $4.3 million, were replaced or borrowed on the Effective Date from the Credit Facility. The Company opened the Silver Hawk Casino on June 26, 1996. The Silver Hawk Casino had been closed since 1993. Prior to opening, the Company refurbished the interior, outfitted the Silver Hawk Casino with equipment (including slot machines) and incurred certain other pre-opening expenses. As of June 30, the vast majority of these costs, totaling approximately $2.0 million, were unpaid. The Company paid for these costs in July by financing $1.1 million in slot machines from funds available under the Credit Facility and paid the remaining costs from available cash. The excavation of the Company's surface parking lot in Black Hawk commenced on April 1, 1996 and concluded on June 7, 1996. Upon completion of the extensive excavation work, which included the excavation of a substantial portion of the mountain located on the back part of the 3.25 acre site, and the subsequent repaving of the surface parking lot, the surface parking lot was increased from 260 parking spaces to a capacity of approximately 375 cars, an approximately 45% increase. The Company is analyzing whether to construct the parking garage given the fact that it has achieved 75% of the desired parking capacity for only a fraction of the total capital cost anticipated to be spent on the parking garage. The Company is also considering the benefit of avoiding the business disruption that would occur during the parking garage construction project. The Company has concluded that it will indefinitely delay the construction of the parking garage as it continues to re-evaluate the long-term utilization of the site pending market conditions. During the Reorganization, the Company incurred substantial bankruptcy related expenses including the expenses of attorney's, accountants, and financial advisors. The Company anticipates the total unpaid billings to such professionals are approximately $2.9 million, reflected in accounts payable in the accompanying balance sheet as of June 30, 1996. The Company made substantially all of these payments in the third quarter from available cash. Subsequent to the end of the second quarter, the Company entered into an agreement with New Horizon Kids Quest III, Inc. ("Kids Quest"), a provider of child care to the casino industry. The agreement provides for Kids Quest to operate a licensed day care facility adjacent to Bullwhackers Black Hawk. Kids Quest would be solely responsible for the day-to-day operations of the day care facility. The Company would receive a percentage of revenues from the Kids Quest operations. The Company will construct a day care facility for use by Kids Quest. However, construction of the facility is subject to reaching agreement with Kids Quest on certain issues and obtaining necessary permits and financing, and no assurances can be given that the necessary agreements will be reached or the necessary permits or financing obtained, or if reached or obtained, on satisfactory terms. The preliminary cost estimate for the day care facility is approximately $1.3 million, although the actual costs could be higher. The Company estimates that the ongoing capital expenditures necessary to keep its casinos competitive are approximately $2.5 million per year. As part of this expenditure program, the Company has upgraded most of its slot machines by installing bill validators or purchasing new slot machines with bill validators. The Company anticipates paying for its capital expenditures from cash flow from operations or loans under the Credit Facility. The Company believes that the Credit Facility and its operating cash flows will provide sufficient liquidity and capital resources for the Company's operations. However, there is no assurance the Company's estimate of its need for liquidity and capital resources is accurate or that new business developments or other unforeseen events will not occur which will increase those needs. Although no additional financings are contemplated at this time, the Company may seek additional debt or equity financing if necessary. There can be no assurance that additional financing will be available, or if available, will be on terms favorable to the Company. Additionally, debt or equity financing may require consent from the holders of the Notes and the lender under the Credit Facility. BUSINESS GENERAL The Company develops, owns and operates gaming and related entertainment facilities. The Company owns and operates, through subsidiaries, Bullwhackers Black Hawk and Bullwhackers Central City, two of the largest casinos in terms of number of slot machines in the historic mining towns of Black Hawk and Central City, Colorado, respectively. In addition, the Company owns and operates, through a subsidiary, a third gaming facility, the Silver Hawk Casino, in Black Hawk, which opened on June 26, 1996. In addition, through a subsidiary, the Company owns the Surface Parking Lot with a capacity of approximately 375 cars, which is located directly between, and used by, Bullwhackers Black Hawk and the Silver Hawk Casino. Colorado law currently permits limited stakes gaming (with a maximum single bet of $5.00) in three historic mining towns: Black Hawk and Central City, adjacent towns located approximately 35 miles from Denver, and Cripple Creek, located approximately 40 miles from Colorado Springs and 90 miles from Denver. Gaming operations also exist on two Native American reservations in Southwest Colorado. Colorado law only permits casinos to offer slot machines and the table games of blackjack and poker. As a result of the financial difficulties of a riverboat gaming project undertaken by a wholly-owned subsidiary of the Company in New Orleans, Louisiana (the "Riverboat Project"), the Company, BWBH, BWCC and Millsite sought protection under Chapter 11 of the United States Bankruptcy Code on November 7, 1995. The first Amended Joint Plan of Reorganization (the "Plan of Reorganization") of the Company, BWBH, BWCC and Millsite was confirmed on April 8, 1996 and became effective on June 7, 1996 (the "Effective Date"). As a result, among other things, the Company has significantly reduced its consolidated debt and no longer has any interest in the Riverboat Project. See "Legal Proceedings-Background of Bankruptcy; Plan of Reorganization." THE COLORADO CASINOS BULLWHACKERS BLACK HAWK. Bullwhackers Black Hawk opened on July 17, 1992 and is currently one of the largest gaming facilities, in terms of number of slot machines, in Black Hawk. It is located on a prime site at the town's main intersection of Colorado State Highway 119 (the primary access road to Interstate 70, which leads to Denver) and Gregory Street (which connects Black Hawk to Central City). Bullwhackers Black Hawk is housed in a 36,000 square foot facility which contains approximately 12,000 square feet of gaming space on four levels with the main entry on the second level. The casino currently has approximately 600 slot machines, 8 black jack tables and 7 poker tables. The facility has one bar on each level, a 176-seat full service restaurant and office space. Bullwhackers Black Hawk utilizes a Victorian theme in its interior design, featuring a winding grand staircase and a glass-enclosed elevator connecting the various levels of the facility. The Company recently entered into an agreement with Kids Quest under which Kids Quest will operate a licensed day care facility adjacent to Bullwhackers Black Hawk. Kids Quest would be solely responsible for the day-to-day operations of the day care facility. The Company would receive a percentage of revenues from the Kids Quest operation. The Company will construct a day care facility for use by Kids Quest. However, construction of the facility is subject to reaching agreement with Kids Quest on certain issues and obtaining necessary permits and financing, and no assurances can be given that the necessary agreements will be reached or the necessary permits or financing obtained, or, if reached or obtained, on satisfactory terms. The preliminary cost estimate for the day care facility is approximately $1.3 million, although the actual costs could be higher. The Company believes the day care facility, if constructed and opened, will give it a competitive advantage with other casinos that do not have such a facility. The Company believes that no other casinos in the Black Hawk-Central City market currently have, or have announced plans to build, a day care facility. BULLWHACKERS CENTRAL CITY. Bullwhackers Central City opened on June 15, 1992 and is currently one of the largest gaming facilities, in terms of number of slot machines, in Central City. It is located on a prime site at one of the town's two main intersections, and is adjacent to a public parking facility and two of Central City's other large casinos. This 31,000 square foot facility contains approximately 8,750 square feet of gaming space on three levels with the main entry to the facility on the second level. Bullwhackers Central City currently has approximately 400 slot machines and 4 black jack tables. The facility has one bar on each level, a 126-seat full service restaurant, a retail shop and office space. Bullwhackers Central City also utilizes a Victorian theme in its interior design. The Company believes that proximity to parking is extremely important to Central City casinos. However, except for the largest casino in Central City, none of the casinos currently operating in Central City offer onsite parking for more than 50 cars immediately adjacent to their facilities. There are several public parking lots in Central City offering parking for a total of approximately 550 cars, including a 200-space public lot adjacent to Bullwhackers Central City. To alleviate the difficulties associated with a lack of adequate parking, the Company has recently implemented several busing programs in conjunction with other Central City casino operators, which offer cash promotions and other incentives designed to enhance incremental patron play, particularly during off-peak periods. THE SILVER HAWK CASINO. The Silver Hawk Casino is an approximately 12,000 square foot four-story building constructed in 1993, and was operated as a casino by an unaffiliated third party for less than 90 days in 1993 before it was closed. The Company purchased the Silver Hawk Casino facility on April 12, 1996. The Company completed minor interior remodeling, installed approximately 230 slot machines and 4 table games and reopened the facility on June 26, 1996. The purchase price for the Silver Hawk land and building was $2.7 million, of which $900,000 was paid in cash and the balance was financed by the seller and payable pursuant to a promissory note secured by a first deed of trust on the facility. The initial cash portion of the purchase price was financed through borrowings under the DIP Facility, later refinanced through the Credit Facility. The seller is an elected official of Black Hawk. A statute in Colorado prohibits an elected official from having an interest in a gaming license. To avoid any potential regulatory interpretation that the seller would have an interest in the Silver Hawk Casino gaming license, thereby detrimentally affecting the Company's ability to obtain the gaming license, the Company paid in full the outstanding balance owing the seller with available cash on June 18, 1996. SURFACE PARKING LOT. The Company owns the approximately 3.25-acre Surface Parking Lot site located between Bullwhackers Black Hawk and the Silver Hawk Casino. The Company believes that proximity to parking is extremely important in Black Hawk. The Company believes that onsite parking is currently inadequate for most Black Hawk casinos. Although the town has developed an approximately 3,000-space public parking facility which serves all of the Black Hawk casinos by shuttle service, the location of, and access to, the municipal parking facility are generally considered to be inadequate by most casino patrons. The Company believes that the few gaming facilities that offer substantial parking at or close to the facility generate higher revenues per gaming device than gaming facilities that do not offer adequate parking. The Company believes that the Surface Parking Lot gives Bullwhackers Black Hawk and the Silver Hawk Casino a competitive advantage over casinos in Black Hawk that offer fewer parking spaces or less convenient parking. Because of the importance of convenient close-in parking to maximizing casino revenue, in April 1994 the Company completed development of the Surface Parking Lot site into a paved and lighted surface parking facility staffed for valet service with 260 parking spaces. Subsequently, the Company announced plans to construct in phases an approximately 500-space structured parking garage on the Surface Parking Lot, for which it previously received the requisite local zoning approvals. The parking garage was expected to cost approximately $6 million. In connection with the readying the surface parking lot for construction, the Company completed environmental remediation and excavation work, at a cost of approximately $1.3 million. Upon completion of the extensive excavation work, which included the excavation of a substantial portion of the mountain located on the back part of the 3.25 acre site, and the subsequent repaving of the Surface Parking Lot, the number of cars which can be parked on the Surface Parking Lot at any one time increased to approximately 375 cars, a 45% increase. Thus, the Company analyzed whether to construct the parking garage given the fact that it had achieved 75% of the desired parking capacity for only a fraction of the total capital cost anticipated to be spent on the parking garage. The Company also considered the benefit of avoiding the attendant business disruption that would occur during the parking garage construction project. The Company has concluded that it will indefinitely delay the construction of the parking garage as it continues to re-evaluate the long-term utilization of the site pending market conditions. OTHER. Although the Company intends to focus on its existing operations, it continues to evaluate new opportunities to apply existing management expertise to additional gaming operations both in Colorado and in other jurisdictions. The Company's ability to acquire additional gaming facilities in Colorado without disposing of existing facilities is limited by the fact that no entity may hold more than three Colorado gaming licenses or more than three gaming tavern liquor licenses or more than one type of liquor license. The Company currently holds, through its subsidiaries, the maximum number of gaming and liquor licenses allowed in Colorado. See "Colorado Gaming Regulations" and "Non-Gaming Regulation." MARKET FOR THE COLORADO CASINOS GENERAL. Black Hawk and Central City are historic mining towns made famous during the gold rush of 1869. Prior to the advent of casino gaming in October 1991, Black Hawk, and to a greater extent, Central City, were popular tourist towns, especially in the summer months. The two towns offered mine tours, antique and rock shops and live performances of opera in the Central City Opera House. Casino gaming is currently the main draw to the towns and gaming establishments have displaced many of the former tourist-related businesses. Customers for casinos in Black Hawk and Central City are primarily "day trippers" from within a 100-mile radius of Black Hawk and Central City, which includes the Denver metropolitan area. Approximately 1.6 million people live in the Denver metropolitan area, and approximately two million people live within a 50-mile radius, and approximately 2.8 million people live within a 100-mile radius, of Black Hawk and Central City. Black Hawk and Central City are located approximately 35 miles west of Denver and approximately ten miles from Interstate 70, the main east-west artery connecting Denver with many of Colorado's premier ski resorts. MARKETING STRATEGY. The Company targets customers in the Denver metropolitan area. The Company seeks to attract customers to the Colorado Casinos by: (i) offering first class facilities with comfortable and efficient layouts; (ii) providing ample parking which is more convenient than that provided by many of its competitors; (iii) promoting customer awareness through marketing of the Bullwhackers name and theme; (iv) providing excellent customer service with a motivated staff; (v) utilizing strategic busing programs; (vi) offering customer promotions; (vii) providing desirable food products and refreshments; and (viii) providing incentives to higher value repeat customers. In particular, the Company has used extensive marketing programs to build customer awareness, including television, radio, print and direct mail. The Company believes that Bullwhackers enjoys among the highest name recognition among all casinos located in Colorado, a fact which the Company attributes in part to the success of its marketing campaigns. The Company has also developed promotional offerings centered around the Bullwhackers theme of offering a fun, exciting gaming atmosphere, including providing gift items and a cash-back reward system based upon level of play through membership in the "Bullwhackers Five Star Players Club". The Company also has instituted a popular busing program known as the "Bullride." The Bullride operates at least four times per day from Golden, a western Denver suburb, to and from Black Hawk and Central City, and between the two towns, and carries an average of 2,500 patrons per week. The Company has upgraded most of its slot machines at the Colorado Casinos by equipping them with bill validators, either by retrofitting existing slot machines or replacing them with new slot machines with bill validators, as part of its capital expenditure program pursuant to which it expects to spend approximately $1.5 million per year. Bill validators allow patrons to use paper currency rather than tokens or coins in slot machines. This capital expenditure program is expected to increase the competitiveness of the Colorado Casinos within their markets by increasing the convenience and therefore the usage of the slot machines. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." COMPETITION Competition in the Black Hawk and Central City gaming market, which forms the primary gaming market in Colorado, is intense. Bullwhackers Central City is located approximately one and one-half miles from Bullwhackers Black Hawk and the Silver Hawk Casino is located adjacent to the Surface Parking Lot, across the Surface Parking Lot from Bullwhackers Black Hawk. Due to their proximity, the Colorado Casinos compete for some of the same target markets of customers in the Denver metropolitan area. However, the Company believes that its primary competition for the Colorado Casinos are other casinos operating in Black Hawk and Central City, of which there approximately 33 as of August 31, 1996, and, secondarily, casinos operating in Cripple Creek, of which there approximately 26 as of August 31, 1996. Recently, more experienced, nationally recognized casino operators from other areas of the country have entered, or announced plans to enter, the Colorado gaming market, including Harrah's, Harvey's, ITT Sheraton, Colorado Central Station, and Fitzgerald's, many of which have substantially greater financial and marketing resources than the Company. Because Colorado does not limit the total number of gaming licenses available for issuance in Colorado and there are no minimum facility size requirements, the Company expects the number of gaming facilities and gaming devices to continue increasing. The Company believes that the primary competitive factors in the Black Hawk-Central City market are location, availability and convenience of parking, number of slot machines and gaming tables, types and pricing of amenities, name recognition, and overall atmosphere. The Company believes it generally competes favorably on these factors, although Bullwhackers Central City offers less convenient parking than some of its competitors and the Silver Hawk Casino, recently opened, is smaller and currently has less name recognition than some of its direct competitors. According to the Colorado Division of Gaming, there were 59 gaming facilities operating in Colorado in August 1996, with a total of 13,408 slot machines and 253 table games. Of these, 20 facilities, 5,185 slot machines and 111 table games were located in Black Hawk; 13 facilities, 3,445 slot machines and 66 table games were located in Central City; and 26 facilities, 4,778 slot machines and 76 table games were located in Cripple Creek. In August 1996, the average daily adjusted gross proceeds (determined by deducting the amount paid out to patrons from gross proceeds, and sometimes referred to as the casino's "win") per slot machine was $119.78 in Black Hawk, $73.40 in Central City and $69.84 in Cripple Creek. The cumulative win for slot machines in Black Hawk as a market was $181 million in 1995 and $119 million for the first seven months of 1996, compared with the cumulative win for slot machines in Central City as a market of $86 million and $49 million, respectively. The Company believes that since October 1991, approximately 12 casinos in Black Hawk and 20 casinos in Central City have ceased operations. In addition, several operators, including the Company, have reduced staffing and others have closed temporarily or reduced their square footage and/or hours of operations. The Company believes that the casinos that failed did so for a variety of reasons, including inferior design, inconvenient parking, inadequate size, inexperienced management and undercapitalization. Various published reports detailing additional gaming projects have been announced for Black Hawk. The announced projects include: Colorado Central Station, an existing casino in Black Hawk, has announced both an expansion of its existing casino and a new 22,000 square foot casino across the street from its existing casino with 600 slot machines, a 120-room hotel and an 800-space parking garage; Caesar's of Las Vegas, a subsidiary of ITT Sheraton, has announced plans to build an approximately $80 million project with 600 - 700 slot machines, and 800 parking spaces; the Black Hawk Brewery has shown drawings of a $23 million project, with 46,000 square feet of gaming space containing 500-700 slot machines; the Gilpin Hotel has announced a joint venture with Jacobs Entertainment from Cleveland for a new 35,000 square foot casino with 52 hotel rooms, 250 parking spaces and 750-1,000 slot machines; the Jazz Alley has announced an expansion to roughly 650 slot machines in a highly themed casino to be known as Virginia City. In Central City, Harvey's Wagon Wheel, currently the largest casino in Central City, has announced plans to build a new parking garage. The majority of the Black Hawk projects are along the southern end of Black Hawk at the first major intersection off of State Highway 119, providing these projects with the initial opportunity to capture visitors to Black Hawk and Central City from the Denver metropolitan area. Bullwhackers Black Hawk and the Silver Hawk Casino, in contrast, are located at the northern end of Black Hawk at the second major intersection off State Highway 119. In addition, the Colorado Department of Transportation is analyzing plans to potentially construct a third major intersection off State Highway 119 in between the two current intersections. This additional intersection, if constructed, would provide the casinos south of Bullwhackers Black Hawk and the Silver Hawk Casino with another opportunity to capture visitors to Black Hawk from the Denver metropolitan area before they reach Bullwhackers Black Hawk and the Silver Hawk Casino, thereby potentially reducing traffic flow and customer visitors to Bullwhackers Black Hawk and the Silver Hawk Casino, as well as to casinos in Central City, including Bullwhackers Central City. While it is difficult to assess the development stage of each of the announced projects and the likelihood of whether any or all of the announced projects will eventually be built and at what size, it is reasonably likely that at least some of the new competition may be completed and open to the public by early to mid-1998. In addition, as the Town of Black Hawk expands, both in terms of gaming device capacity and market share, the Central City market tends to contract. Therefore, should several of the announced competitive projects open, the increased competition may adversely affect the Company's operations in both Black Hawk and Central City and, accordingly, may have a material adverse effect on the Company's consolidated results of operations and financial position. Several lobbying groups placed initiatives for additional Colorado limited stakes gaming venues, including Denver, on the November 1992 statewide ballot. Each of these initiatives was defeated by a wide margin, however, in November 1996 there will be an initiative on the statewide ballot to expand limited stakes gaming to the city of Trinidad, approximately 125 miles south of Colorado Springs, and similar initiatives, legislation or regulation could be introduced in the future. The enactment of any initiatives, legislation, or regulations legalizing gaming elsewhere in Colorado could, and if such legalized gaming was closer to Denver would, have a material adverse effect on the Company's consolidated results of operations or financial position. In addition to competing with other gaming facilities in Colorado as described above, the Company competes to a lesser degree, for both customers and potential future gaming sites, with gaming facilities nationwide, including casinos in Nevada and Atlantic City, many of which have substantially greater financial resources and experience in the gaming business. The Company also competes with other forms of gaming on both a local and national level, including state-sponsored lotteries, charitable gaming and pari-mutuel wagering, among others, and competes for entertainment dollars generally with other forms of entertainment. The recent and continuing expansion of legalized casino gaming to new jurisdictions throughout the United States may also affect competitive conditions. Although the Company's focus is the Colorado gaming market, it is considering gaming ventures in other locations that the Company believes present favorable opportunities if its resources allow it to do so. However, its ability to capitalize on such opportunities is expected to be limited due to competition for such opportunities from more experienced and financially stronger entities. COLORADO GAMING REGULATIONS The State of Colorado created the Colorado Division of Gaming within the Department of Revenue to license, implement, regulate and supervise the conduct of limited stakes gaming. The Director of the Division, under the supervision of the Gaming Commission, has been granted broad power to ensure compliance with Colorado law and regulations adopted thereunder (collectively, the "Colorado Regulations"). The Director of the Division may inspect, without notice, premises where gaming is being conducted; may seize, impound or remove any gaming device; may examine and copy all of a licensee's records; may investigate the background and conduct of licensees and their employees; and may bring disciplinary actions against licensees and their employees. He may also conduct detailed background checks of persons who loan money to or invest money in a licensee. It is illegal to operate a gaming facility without a license issued by the Gaming Commission. The Gaming Commission is empowered to issue five types of gaming and gaming-related-licenses. The licenses are revocable and non- transferrable. The failure or inability of the Company, BWBW, BWCC, Silver Hawk, or associated persons to maintain necessary gaming licenses will have a material adverse effect on the operations of the Company. The Gaming Commission closely regulates the suitability of persons owning or seeking to renew an interest in a gaming license or permit, and the suitability of a licensee or permittee can be adversely affected by persons associated with the licensee or permittee. Additionally, any person or entity having any direct interest in the Company or any casino directly or indirectly owned by the Company may be subject to administrative action, including personal history and background investigations. The actions of persons associated with the Company and its management employees, over whom the Company may have no control, could jeopardize any licenses held by the Company in Colorado. Bullwhackers Black Hawk, Bullwhackers Central City and the Silver Hawk Casino were granted retailer/operator licenses concurrently with their respective openings. These licenses are subject to continued satisfaction of suitability requirements. The current licenses for the Bullwhackers Casinos expire on December 2, 1996 and the license for the Silver Hawk expires on June 24, 1997. There can be no assurance that the Company will successfully renew its licenses in a timely manner or at all. All persons employed by the Company who are involved, directly or indirectly, in gaming operations in Colorado also are required to obtain a "key" license. Key licenses are issued to "key employees," which include any executive, employee or agent of a licensee having the power to exercise a significant influence over decisions concerning any part of the operations of a licensee. At least one key license holder must be on the premises of each Colorado Casino at all times. Messrs. Szapor, Mayer and Rabin, among others, hold key licenses for the Company. All of the Company's directors are required to obtain key licenses before serving as such. In addition to Mr. Szapor, Messrs. Wimer, DiBerardino and Leonard have obtained their key licenses and the Company's other director nominee has applied for his key license. There is no assurance that such director nominee will meet applicable licensing criteria, or as to when, if at all, such license will be will be issued. Accordingly, the Company is operating with an interim board of directors consisting of Messrs. Szapor, Wimer, DiBerardino, Leonard and Mayer until such time as the remaining director nominee is able to obtain his key license. See "Management-Directors and Executive Officers." As a general rule, under the Colorado Regulations, it is a criminal violation for any person to have a legal, beneficial, voting or equitable interest, or right to receive profits, in more than three retail/operator gaming licenses in Colorado. The Company currently has three such licenses, one each for Bullwhackers Black Hawk, Bullwhackers Central City and the Silver Hawk Casino. Accordingly, any expansion opportunities that the Company may have in Colorado are limited absent the disposition of one of the Colorado Casinos. In addition, this limitation may affect the ability of certain persons to own the Company's stock. Under the Colorado Regulations, the definition of an "interest" in a licensee excludes ownership of less than 5% of a publicly traded company. Pursuant to the Colorado Regulations, a licensee that elects to register its common stock under Section 12(g) of the Exchange Act is considered to be publicly traded. The Company registered its common stock effective on the Effective Date and, accordingly, is treated as a publicly traded company within the meaning of the Colorado Regulations. Any owner of any interest in a Colorado licensee that is not publicly traded or a 5% or more interest in a publicly traded licensee may be precluded from owning more than 5% of the Company's stock. The Gaming Commission has ruled that a person does not have an interest in a licensee for purposes of the multiple-license prohibition if: (i) such person has less than a five percent (5%) interest in an institutional investor which has an interest in a publicly traded licensee or publicly traded company affiliated with a licensee (such as the Company); (ii) a person has a five percent (5%) or more financial interest in an institutional investor, but the institutional investor has less than a five percent (5%) interest in a publicly traded licensee or publicly traded company affiliated with a licensee; (iii) an institutional investor has less than a five percent (5%) financial interest in a publicly traded licensee or publicly traded company affiliated with a licensee; (iv) an institutional investor possesses securities in a fiduciary capacity for another person, and does not exercise voting control over five (5%) or more of the outstanding voting securities of a publicly traded licensee or of a publicly traded company affiliated with a licensee; (v) a registered broker or dealer retains possession of securities of a publicly traded licensee or of a publicly traded company affiliated with a licensee for its customers in street name or otherwise, and exercises voting rights for less than five percent (5%) of the publicly traded licensee's voting securities or of a publicly traded company affiliated with a licensee; (vi) a registered broker or dealer acts as a market maker for the stock of a publicly traded licensee or of a publicly traded company affiliated with a licensee and possesses a voting interest in less than five percent (5%) of the stock of the publicly traded licensee or of a publicly traded company affiliated with a licensee; (vii) an underwriter is holding securities of a publicly traded licensee or of a publicly traded company affiliated with a licensee as part of an underwriting for no more than 90 days if it exercises voting rights of less than five percent (5%) of the outstanding securities of a publicly traded licensee or of a publicly traded company affiliated with a licensee; (viii) a stock clearinghouse holds voting securities for third parties, if it exercises voting rights with respect to less than five percent (5%) of the outstanding securities of a publicly traded licensee or of a publicly traded company affiliated with a licensee; or (ix) a person owns less than five percent (5%) of the voting securities of the publicly traded licensee or publicly traded company affiliated with a licensee. Hence, the Company's and its stockholders' business opportunities in Colorado are limited to such interests that comply with the statute and Gaming Commission's rule. Under the Colorado Regulations, any person or entity having any direct or indirect interest in a gaming licensee or an applicant for a gaming license, including but not limited to the Company and stockholders of the Company, may be required to supply the Gaming Commission with substantial information, including but not limited to, personal background and financial information, source of funding information, a sworn statement that such person or entity is not holding his interest for any other party, and fingerprints. Such information, investigation and licensing as an "associated person" is automatically required of all persons who directly or indirectly own 10% or more of a direct or indirect legal, beneficial or voting interest in the Colorado Casinos, through their ownership of the Company, as a publicly traded licensee. Such persons (other than certain institutional investors discussed below) must report their interest and apply to the Gaming Commission for a finding of suitability within 45 days after acquiring such interest. Persons directly or indirectly having an interest of between 5% and 9.99% in a publicly held licensee must report their interest to the Gaming Commission within ten days after acquiring their interest and may be required to provide additional information and may be required to be found suitable by the Gaming Commission. If certain kinds of institutional investors provide specified information to the Gaming Commission, such investors, at the Gaming Commission's discretion, may be permitted to own up to 14.99% of the Colorado Casinos, through their ownership of the Company, before a finding of suitability will be required. The Gaming Commission also has the right to request information from any person, directly or indirectly interested in or employed by a licensee. An application for licensure or a finding of suitability may be denied for any reason deemed reasonable by the Gaming Commission or the Director of the Division. All licensing and investigation fees must be paid by the person in question. The associated person investigation fee currently is $48 per hour. If the Gaming Commission determines that a person or entity is not suitable to own a direct or indirect voting interest in the Company, the Company may be sanctioned unless the person or entity disposes of its voting interest. Sanctions may include the loss by any of the Colorado Casinos of their licenses. In addition, the Colorado Regulations prohibit a licensee or any affiliate of a licensee from paying dividends, interest or other remuneration to any person found to be unsuitable, or recognizing the exercise of any voting rights by any person found to be unsuitable. The Colorado Regulations require an operating casino licensee to include in its corporate charter provisions which permit the repurchase of the voting interests of any person found to be unsuitable. The Company's Certificate of Incorporation includes the required provisions. See "Description of Capital Stock- Description of Common Stock." The Gaming Commission has the power to require the Company to suspend or dismiss officers, directors and other key employees or sever relationships with other persons who refuse to file appropriate applications or who are found to be unsuitable to act in such capacities, and may have such power with respect to any entity which is required to be found suitable under the Colorado Regulations. A person or entity may not sell, lease, purchase, convey, acquire or pledge an interest in an entity licensed to conduct limited stakes gaming in Colorado without the prior approval of the Gaming Commission, except for a less than 5% interest in a publicly traded corporation. The Gaming Commission also has the right to request information from any person directly or indirectly interested in, or employed by, a licensee, and to investigate the moral character, honesty, integrity, prior activities, criminal record, reputation, habits and associations of (i) all persons licensed pursuant to the Colorado Limited Gaming Act, (ii) all officers, directors and stockholders of a licensed privately held corporation, (iii) all officers, directors and stockholders holding either a five percent (5%) or greater interest or a controlling interests in a licensed publicly traded corporation, (iv) all general partners and all limited partners of a licensed partnership, (v) all persons which have a relationship similar to that of an officer, director or stockholder of a corporation (such as members and managers of a limited liability company), (vi) all persons supplying financing or loaning money to any licensee (such as the holders of the Notes) connected with the establishment or operation of limited gaming, and (vii) all persons having a contract, lease or ongoing financial or business arrangement with any licensee, where such contract, lease or arrangement relates to limited gaming operations, equipment, devices or premises. In addition, under the Colorado Regulations, every person who is a party to a "gaming contract" with an applicant for a license, or with a licensee, upon the request of the Gaming Commission or the Director, promptly must provide to the Gaming Commission or Director all information which may be requested concerning financial history, financial holdings, real and personal property ownership, interests in other companies, criminal history, personal history and associations, character, reputation in the community, and all other information which might be relevant to a determination whether a person would be suitable to be licensed by the Gaming Commission. Failure to provide all information requested constitutes sufficient grounds for the Director or the Gaming Commission to require a licensee or applicant to terminate its "gaming contract" (as defined below) with any person who failed to provide the information requested. In addition, the Director or the Gaming Commission may require changes in "gaming contracts" before an application is approved or participation in the contract is allowed. A "gaming contract" is defined as an agreement in which a person does business with or on the premises of a licensed entity. Holders of the Notes will be considered parties to a gaming contract and subject to potential review by the Gaming Commission or the Director. An application for licensure or suitability may be denied for any cause deemed reasonable by the Gaming Commission or the Director, as appropriate. Specifically, the Gaming Commission and the Director must deny a license to any applicant who (i) fails to prove by clear and convincing evidence that the applicant is qualified; (ii) fails to provide information and documentation requested; (iii) fails to reveal any fact material to qualification, or supplies information which is untrue or misleading as to a material fact pertaining to qualification; (iv) has been, or has any director, officer, general partner, stockholder, limited partner or other person who has a financial or equity interest in the applicant who has been, convicted of certain crimes, including the service of a sentence upon conviction of a felony in a correctional facility, city or county jail, or community correctional facility or under the state board of parole or any probation department within ten years prior to the date of the application, gambling-related offenses, theft by deception or crimes involving fraud or misrepresentation, is under current prosecution for such crimes (during the pendency of which license determination may be deferred), is a career offender or a member of associate of a career offender cartel, or is a professional gambler; or (v) has refused to cooperate with any state or federal body investigating organized crime, official corruption or gaming offenses. If the Gaming Commission determines that a person or entity is unsuitable to own interests in the Company, then the Company, and/or any of the Colorado Casinos may be sanctioned, which may include the loss by the Company, and/or any of the Colorado Casinos of their respective approvals and licenses. The Gaming Commission does not require advance approval of a public offering of securities, but rather requires a filing of notice and additional documents with regard to such public offering prior to such public offering. Under the regulations, the Gaming Commission may, in its discretion, require additional information and prior approval of such public offering. The Company may not sell any interest in any of the Colorado Casinos without the prior approval of the Gaming Commission. In addition to its authority to deny an application for a license or suitability, the Colorado Commission has jurisdiction to disapprove a change in corporate position of a licensee and may have such authority with respect to any entity which is required to be found suitable by the Gaming Commission. The Gaming Commission has the power to require the Company and the Colorado Casinos to suspend or dismiss managers, officers, directors and other key employees or sever relationships with other persons who refuse to file appropriate applications or whom the authorities find unsuitable to act in such capacities, and may have such power with respect to any entity which is required to be found suitable. The Colorado Casinos may operate only between 8:00 a.m. and 2:00 a.m., and may permit only individuals 21 years or older to gamble in the casino. Slot machines, black jack and poker are the only permitted games, with a maximum single bet of $5.00. The Colorado Casinos may not provide credit to gaming patrons. The Colorado Regulations restrict the percentage of space a casino may use for gaming to 50% of any floor and 35% of the overall square footage of the building in which the casino is located. Effective October 1 of each year, Colorado establishes the gross gaming revenue tax rate for the ensuing twelve months. Under the Colorado Constitution, the rate can be increased to as much as 40%. Colorado has both raised and lowered gaming tax rates since they were initially set in 1991. Currently, the maximum gaming tax rate is 20%. These regulations and taxes adversely affect the Colorado Casinos' ability to generate revenues and operating profits. See "- Non-Gaming Regulation - Taxation." The Company believes that it is presently in material compliance with all applicable gaming rules and regulations. NON-GAMING REGULATION LIQUOR REGULATION. The sale of alcoholic beverages is subject to licensing, control and regulation by certain Colorado state and local agencies (the "Liquor Agencies"). Subject to certain exceptions, all persons who directly or indirectly own 5% or more of the Company must file applications with and are subject to investigation by the Liquor Agencies. The Liquor Agencies also may investigate persons who, directly or indirectly, loan money to liquor licensees. All liquor licenses are renewable, are revocable and are not transferable. The Liquor Agencies have broad powers to limit, condition, suspend or revoke any liquor license. Any such disciplinary action could, and any failure to renew or other revocation of any of its liquor licenses would, have a material adverse effect upon the operations of the Company and the Colorado Casinos. Under Colorado law, it is a criminal violation for any person or entity to own a direct or indirect interest in more than one type of alcoholic beverage license or more than three gaming tavern liquor licenses. Each Colorado Casino has a gaming tavern liquor license. Accordingly, the Company's expansion opportunities in Colorado are limited by such licensing restriction. Furthermore, no person that holds an interest in the Company may hold any direct or indirect legal, equitable or voting interest in any other Colorado alcoholic beverage licensee, and vice versa. TAXATION. Gaming operators in Colorado are subject to state and local taxes and fees in addition to ordinary federal and state income taxes. Black Hawk and Central City have imposed annual license fees, currently $750 and $1,265, respectively, for each gaming device installed in a casino. Colorado currently levies an annual device fee of $75 for each gaming device installed in a casino. In addition, Colorado has recently promulgated a revised annual gross gaming revenue tax (gross gaming revenue being generally defined as the total amount wagered less the total amount paid out in prizes) of 2% of the gross gaming revenue up to and including $2 million, 4% of the gross gaming revenue above $2 million up to and including $4 million, 14% of gross gaming revenue above $4 million up to and including $5 million, 18% of gross gaming revenue above $5 million up to and including $10 million, and 20% of gross gaming revenue in excess of $10 million. The increase in the top tax rate is expected to have a greater effect on the Company than the tax decrease in the lower revenue brackets. Accordingly, the Company expects to pay between $300,000-$400,000 in additional gaming taxes as direct result of the change in tax rates. See "Risk Factors - Taxation." Under the Colorado Constitution, the Commission could increase the top rate to as much as 40%. Pursuant to a more recent tax limitation amendment to the Colorado Constitution, however, neither the state nor any local government may increase a tax rate without an affirmative vote of the people; therefore, there is some question as to whether the Gaming Commission could constitutionally increase the state tax levied on gross gaming revenues without such a vote. EMPLOYEES The Company employs approximately 635 persons, including cashiers, dealers, food and beverage service, facilities maintenance, accounting, marketing and human resources personnel. Several of the Company's employees hold key licenses in Colorado. See "-Colorado Gaming Regulations." No labor unions currently represent any employees of the Company. A standard package of employee benefits is provided to full-time employees. The Company believes that its employee relations are satisfactory. PROPERTIES The Company owns, through wholly owned subsidiaries, the Colorado Casinos and the Surface Parking Lot including, with the exception of Bullwhackers Black Hawk, the land underlying the buildings. Under a current city ordinance which imposes a fee on parking facilities which are not "on-site" to a casino, the Company previously was required to pay the Town of Black Hawk $4 per day for each space in the Surface Parking Lot. However, the Surface Parking Lot is on-site to the Silver Hawk Casino, and the Company is no longer required to pay such fee. The Company leases the land underlying Bullwhackers Black Hawk pursuant to a 23-year ground lease expiring in 2014. The terms of the ground lease require base minimum payments for the calendar year 1996 of $150,000 per quarter. The base minimum quarterly payments increase thereafter for each five-year period for the balance of the lease term, up to a maximum of $195,000 per quarter. Additional rent in the amount of 1.9% of Bullwhackers Black Hawk's adjusted gross revenue is payable monthly in arrears throughout the term of the lease. The lease contains a buy-out provision which allows the Company to buy the land subject to the lease on or after November 1, 2001 at a price equal to nine times the annual base minimum rent payments in effect when the buy-out is exercised. See "Business-The Colorado Casinos." In January 1996, the Company entered into an amended sublease for approximately 19,500 square feet of office space located in Denver, Colorado which the Company occupies as its corporate offices. The sublease expires in October 31, 1997 and provides for rent of approximately $7,500 per month. MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS Set forth below is certain information with respect to each individual who is a director of the Company or is nominated to be a director of the Company and each individual who is an executive officer of the Company: Name Age Position(s) Stephen J. Szapor, Jr. 36 Chief Executive Officer, President and Director Alan L. Mayer 35 Senior Vice President, Chief Legal Officer and Secretary Richard J. Rabin 50 Senior Vice President of Operations Robert Stephens 29 Vice President of Finance Franklin S. Wimer 60 Director Steve Leonard 42 Director Philip J. DiBerardino 54 Director Mark Van Hartesvelt 45 Director Nominee Mr. Mayer is serving as an interim director until Mr. Van Hartesvelt obtains his Colorado key gaming license. STEPHEN J. SZAPOR, JR. has served as President and Chief Executive Officer of the Company since August 1995 and as a director since June 7, 1996, the Effective Date. Mr. Szapor served as Executive Vice President and Chief Financial Officer from March 1995 until August 1995. From July 1994 until joining the Company, he served as the Chief Operating Officer and a member of the board of directors of Sahara Gaming Corporation, and from June 1993 until July 1994, he was the Executive Vice President/Chief Financial Officer of Sahara Gaming Corporation. From October 1986 until June 1993, Mr. Szapor held several executive positions with Hollywood Casino Corporation including Assistant to the President and Vice President--Strategic Planning. Mr. Szapor has also held financial and accounting positions with Merrill Lynch & Co. and Arthur Andersen LLP. He holds a key license from the Gaming Commission and is a Certified Public Accountant. Mr. Szapor's employment agreement with the Company provides that he shall serve as President and Chief Executive Officer and as a director during the term of his employment. See "-Employment and Consulting Agreements." ALAN L. MAYER has served as Senior Vice President, Secretary and Chief Legal Officer of the Company and its predecessors since September 1992 and as an interim director since the Effective Date. From 1987 to 1992, Mr. Mayer was associated with Isaacson, Rosenbaum, Woods & Levy in Denver, where he specialized in real estate, land use planning, finance, corporate and gaming law. Mr. Mayer is a member of the American Bar Association, the Colorado Bar Association, the California Bar Association and the International Association of Gaming Attorneys. He is licensed to practice law in California and Colorado. He holds a key license from the Gaming Commission and is a member of the Board of Directors of the Casino Owners Association of Colorado. See "-Employment and Consulting Agreements." RICHARD RABIN has served as Senior Vice President of Operations of the Company since March 1996 and as an interim director since the Effective Date. Mr. Rabin served as Vice President, Finance & Administration of the Company from August 1995 until March 1996. From 1994 until joining the Company, he served as Chief Financial Officer of a riverboat gaming facility operated by Sahara Gaming Corporation in Missouri and then as General Manager of a gaming facility operated by Sahara Gaming Corporation in Nevada. From 1991 to 1994, Mr. Rabin was Chief Financial Officer and Vice President and, beginning in 1993, also General Manager, of the Glory Hole Saloon and Gambling Hall in Central City, Colorado. From 1985 until 1991, Mr. Rabin served in various positions in the gaming industry in Reno, Nevada. Mr. Rabin holds a key license from the Gaming Commission and is a Certified Public Accountant. See "-Employment and Consulting Agreements." ROBERT J. STEPHENS has served as Vice President of Finance since September 1996. He served as Controller, Chief Accounting Officer and Treasurer of the Company from August 1995 until September 1996. Previously, Mr. Stephens served in various finance and accounting positions since joining the Company in May 1994. From 1990 to 1994 Mr. Stephens was associated with Arthur Andersen LLP. Mr. Stephens is a Certified Public Accountant. FRANKLIN S. WIMER has served as a director of the Company since July 16, 1996. Mr. Wimer is a founder of and has been the President of UniRock Management Corporation, a Denver, Colorado investment banking firm, since January 1988. Prior to forming UniRock Management Corporation, Mr. Wimer held executive positions with a number of financial institutions. STEVE LEONARD has served as a director of the Company since October 4, 1996. Mr. Leonard has been President of Pacifica Holding Company, a Denver-based commercial real estate firm since 1990. Prior to establishing Pacifica Holding Company in 1990, Mr. Leonard held various executive positions in the real estate and real estate development industry. PHILIP J. DIBERARDINO has served as a director of the Company since October 9, 1996. Mr. DiBerardino has been Senior Vice President of Commerce Bank in New Jersey since September 1993. From October 1990 to September 1993, Mr. DiBerardino was President and Chairman of Coastal Bank in New Jersey. Prior to October 1990, he served as Deputy Commissioner of the New Jersey Department of Banking. Prior to his service at the New Jersey Department of Banking, Mr. DiBerardino held various executive positions in the banking industry. MARK VAN HARTESVELT will become a director of the Company upon approval of the Gaming Commission. Mr. Van Hartesvelt has been President of the Village at Breckenridge Resort, a Breckenridge, Colorado resort, since 1994. From 1989 to 1994 he was Senior Vice President Sales and Marketing of Doubletree Hotels Corporation. Prior to 1989, Mr. Van Hartesvelt served in a number of senior executive positions in the gaming industry. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE. The following table provides information concerning compensation paid to the Company's chief executive officer, the three other executive officers serving as such at year-end 1995 who earned at least $100,000 during such year, and two executive officers who would have been among the most highly compensated had they been employed at year end, for services rendered by such persons in all positions with the Company. <TABLE> <CAPTION> Annual Compensation Long-Term Compensation Awards Payouts Other Shares Name and Principal Annual Underlying LTIP Positions Year Salary Bonus Compensation Options/SARs Payouts ----------- ---- ------ ----- ------------ ------------ ------- <S> <C> <C> <C> <C> <C> <C> Stephen J. Szapor, Jr. 1995 $ 211,728 $ 5,000 $ 0 0 $ 0 President and Chief 1994 N/A N/A N/A N/A N/A Executive Officer 1993 N/A N/A N/A N/A N/A since August 10, 1995, Chief Financial Officer from March, 1995 to August 10, 1995 Alan L. Mayer Senior Vice President, 1995 111,926 15,000 2,798 0 0 Chief Legal Officer 1994 106,384 30,000 2,144 40,000* 0 and Secretary since 1993 N/A N/A N/A N/A N/A September 1992 Christopher B. Hemmeter 1995 351,182 100,000 0 0 0 Chief Executive Officer 1994 336,709 100,000 0 0 0 December 15, 1993 1993 0 0 0 0 0 to August 10, 1995, Vice President August 10, 1995 to June 7, 1996 Mark M. Hemmeter 1995 194,223 0 0 0 0 President December 15, 1994 126,977 37,500 0 0 0 1993 to March 27, 1995, 1993 57,962 0 0 0 0 Executive Vice President . March 27, 1995 to August 1, 1995, Vice President August 1, 1995 to June 7, 1996 . Kevin G. DeSanctis 1995 522,688 0 0 0 0 Executive Vice 1994 572,110 0 0 120,000* 60,000 President, Chief 1993 N/A N/A N/A N/A N/A Operating Officer from April 8, 1994 to March 27, 1995 President and Chief Operating Officer from March 27, 1995 to August 10, 1995 Thomas Robinson 1995 172,706 0 2,415 144,000* 0 Executive Vice President, 1994 240,569 100,000 0 0 0 Development to July 1993 N/A N/A N/A N/A N/A 1995 </TABLE> - ------------------------- *Cancelled in connection with the Reorganization. COMPENSATION OF DIRECTORS Directors who are officers or employees of the Company receive no compensation for service as members of the Board. The Company compensates directors who are not officers or employees of the Company for their services by paying such directors annual retainers of $20,000, paid quarterly, and by allowing such non-employee directors to participate in the Company's non-employee director component of the Company's Management Incentive and Non-Employee Director Stock Plan (the "Stock Plan"). Under the Stock Plan, each non-employee director receives an award of 2,315 restricted shares of Common Stock on the date such a director qualifies as a director and thereafter upon reelection, subject to the maximum number of shares of Common Stock that may be issued to non-employee directors under the Stock Plan. See "- Management Incentive and Non- Employee Director Stock Plan." EMPLOYMENT AND CONSULTING AGREEMENTS On the Effective Date, the Company entered into the following employment and consulting agreements: Stephen J. Szapor, Jr. The Company's employment agreement with Stephen J. Szapor, Jr., provides that Mr. Szapor will serve as president, chief executive officer and as a director of the Company. Pursuant to this agreement, Mr. Szapor earns an initial annual salary of $300,000, subject to increases based on cost-of-living adjustments and other mutually agreed factors. As additional compensation, on the Effective Date Mr. Szapor received a bonus of $100,000 and 138,888 shares of Common Stock representing 2.5% of the capital stock of the Company (determined on a fully diluted basis), and will be entitled to participate in Stock Plan. In addition, he is entitled to 30% of the bonus pools, if any, under the Company's Cash Bonus Plan (the "Cash Bonus Plan"). Mr. Szapor's employment agreement is for an initial term of three years and renews thereafter for successive one year terms unless terminated by either party. The employment agreement with Mr. Szapor provides for payment to Mr. Szapor equal to the greater of $500,000 or his base salary for the then remaining period of his employment agreement in the event of the termination of Mr. Szapor's employment by the Company without cause or by Mr. Szapor for good reason as defined in the employment agreement. Other Employment Agreements. The Company's employment agreement with Alan L. Mayer provides that he will serve as the Company's Senior Vice President, Chief Legal Officer and Secretary, and the Company's employment agreement with Richard Rabin provides that he will serve as the Company's Senior Vice President of Operations. Mr. Mayer and Mr. Rabin currently earn annual salaries of $130,000 and $120,000, respectively, subject to increases based on cost-of-living adjustments and other mutually agreed factors. Messrs. Mayer's and Rabin's employment agreements are each for an initial term of three years, and renew thereafter for successive one year terms unless terminated by each of the respective parties. These employment agreements also provide that in the event of termination by the Company without cause or by the respective employee for good reason (as defined in the respective employment agreements) the employee will receive a payment equal to his base salary then in effect for the then remaining period of his employment agreement. Mr. Mayer and Mr. Rabin are entitled to participate in the Stock Plan and Cash Bonus Plan. Christopher B. Hemmeter. Pursuant to the Plan of Reorganization, the Company entered into a consulting agreement with Christopher B. Hemmeter pursuant to which the Company pays Mr. Hemmeter $29,166.67 per month from the Effective Date through August 1997 in return for services rendered thereunder. The consulting services provided to the Company by Mr. Christopher B. Hemmeter include advice and services related to gaming regulatory issues and help in identifying potential new business opportunities. Mark M. Hemmeter. Pursuant to the Plan of Reorganization, the Company entered into a consulting agreement with Mark M. Hemmeter (the "Mark M. Hemmeter Consulting Agreement") pursuant to which the Company pays Mr. Hemmeter $10,416.67 per month from the Effective Date through November 1996 in return for services rendered thereunder. The consulting services provided to the Company by Mr. Mark M. Hemmeter include advice and services related to gaming regulatory issues and help in identifying potential new business opportunities. The Mark M. Hemmeter Consulting Agreement will expire on November 30, 1996. MANAGEMENT INCENTIVE AND NON-EMPLOYEE DIRECTOR STOCK PLAN The Company has established the Stock Plan, which became effective on the Effective Date, pursuant to which the senior management of the Company will be eligible to earn stock grants of up to 7.0% of the Common Stock (determined on a fully diluted basis) if certain performance benchmarks as determined by the Board of Directors are achieved and non-employee directors will be awarded 0.50% of the capital stock of the Company (also determined on a fully diluted basis). The Stock Plan provides for the following participation levels of the Common Stock: Stephen J. Szapor, Jr. 2.50% Alan L. Mayer 1.25% Richard Rabin 1.25% Robert J. Stephens 0.50% Other Employees 1.50% Non-employee Directors 0.50% ----- 7.50% Shares awarded to non-employee directors are restricted and shall be forfeited if the director is not serving as such on the date of the first annual meeting of the Company following the date of the award. Shares awarded to eligible employees will be restricted and subject to forfeiture if certain, pre-determined annual performance goals are not obtained. One-third of awarded shares will vest and become non-forfeitable for each year in which such performance goals are achieved. MANAGEMENT CASH BONUS PLAN The Company has established a Cash Bonus Plan which became effective on the Effective Date for senior management employees in which the participants will split a bonus pool equal to 15% of the increase in earnings before interest, taxes, depreciation and amortization for each plan period commencing with the period beginning on the Effective Date and ending on December 31, 1996 and each six months thereafter over the same period in the immediately preceding calendar year determined, in the case of the periods in 1995 and 1996, without regard to the effect of the Company's Riverboat Project or the Company's extraordinary expenses resulting from the Hemmeter or GPRI Bankruptcy Cases. Mr. Szapor's employment agreement provides that he will receive 30% of the bonus pools, if any. The other plan participants will split the remaining 70% of any bonus pools. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Prior to the Effective Date, the Company entered into certain transactions in which Christopher B. Hemmeter, who formerly served as Chief Executive Officer and in other executive officer positions and was the controlling stockholder of the Company, and Mark M. Hemmeter, formerly an executive officer of the Company, had, or may be deemed to have had, direct or indirect material interests, as described below. Resort Income Investors ("RII") made an acquisition, development and construction loan to the predecessor of the Company in the principal amount of $12 million (later increased to $12.3 million). At that time, Christopher B. Hemmeter was the president and chairman of the board of RII and the beneficial owner of approximately 2.2% of RII's outstanding equity securities and Mark M. Hemmeter was executive vice president, secretary and treasurer and a director of RII and the beneficial owner of less than 1% of RII's outstanding equity securities. The loan was secured by a third mortgage on the real property and improvements comprising Bullwhackers Central City as well as liens on all personal property contained therein and $6,551,200 of the principal thereof was personally guaranteed by Christopher B. Hemmeter. In 1992, RII also made an acquisition, development and construction loan in the principal amount of $12 million to a predecessor of the Company secured by a senior leasehold mortgage on Bullwhackers Black Hawk. The terms and provisions of this loan were substantially the same as the loan secured by Bullwhackers Central City except that the loan was not personally guaranteed by Christopher B. Hemmeter. Both loans obligated the Company to pay, under certain circumstances, contingent interest equal to a portion of any increase in the value of the collateral securing the loans. The $24.3 million of principal, $790,000 of accrued interest and $700,000 of bonus interest on both of these loans were repaid in 1993 with $25.8 million of the $131.5 million of net proceeds to the Company from the offering of the Old Notes. Upon repayment of the loans, Christopher B. Hemmeter was released from his guarantee. On April 21, 1995, the Company borrowed $1 million from RII. On May 15, 1995, the Company borrowed $2 million from RII on a secured basis and used $1 million of this loan to repay the April 21, 1995 loan from RII. At that time, Christopher B. Hemmeter beneficially owned approximately 1.7% of RII's outstanding equity securities and Mark M. Hemmeter beneficially owned less than 1% of RII's outstanding equity securities. This loan was satisfied pursuant to the Plan of Reorganization. Currently, both Christopher B. Hemmeter and Mark M. Hemmeter each own less than 1% of the outstanding equity securities of RII. The general contractor for the Bullwhackers Casinos held a construction note in the principal amount of $6,251,200 (the "Construction Note") which was secured by a second mortgage on the land and improvements comprising Bullwhackers Central City. Christopher B. Hemmeter personally guaranteed the Construction Note. The Construction Note was repaid with a portion of the proceeds of the offering of the Old Notes and Mr. Hemmeter was released from his guarantee. In 1994, the Company and certain affiliates entered into an amended consulting agreement with Mr. Daniel P. Robinowitz, a pre-Effective Date stockholder of the Company of approximately 9.1% on a fully diluted basis, pursuant to which Mr. Robinowitz was entitled to receive an ownership interest in the Company and a $3 million fee in exchange for his assistance in obtaining necessary licensing and other regulatory approvals with respect to the Company's Louisiana operations. Pursuant to this agreement, Mr. Robinowitz's right to receive an ownership interest in the Company was converted in January 1995 into 1,605,739 shares of common stock of the Company. The $3 million fee was paid to Mr. Robinowitz in March 1994. In addition, Mr. Robinowitz was paid an initial consulting fee of $2,790,000 for his services with respect to certain Louisiana projects, of which $279,000 was allocated to the Company. In December 1993, the Company reimbursed Christopher B. Hemmeter in the amount of $225,000 for advances made by him in 1993 to Michigan City Casino & Lodge, Inc., a wholly owned, non-operating subsidiary of the Company. The Company made outstanding advances to the following: December 31 June 30, 1994 1995 1996 (in thousands) Canadian Pavilion Limited Partnership... $ 1,323 $1,573* $1,573 Outlaws Casino, Ltd..................... 876 1,072* 1,072 RCJV.................................... 763* 43 43 RCH Investments, NV..................... 250 259* 259 Hemmeter Partners....................... 344* 335 335 Grand Palais Casino, Inc................ 557 587* 587 Officers................................ 585* 867 867 Other................................... 62* 35 35 ---------- --------- -------- $ 4,760 $ 4,771 $ 4,771 ======== ======== ======== *Constitutes largest aggregate amount outstanding. Canadian Pavilion Limited Partnership ("CPLP"), Outlaws Casino, Ltd. ("Outlaws"), RCH Investments, NV ("RCH") and Hemmeter Partners are majority owned by Christopher B. Hemmeter and Mark M. Hemmeter. The advances to CPLP, Outlaws, RCH, and Hemmeter Partners accrue interest at 14% per annum, with interest payable quarterly, and are due on demand. Grand Palais Casino, Inc. ("GPCI") is a wholly owned subsidiary of Grand Palais Enterprises, Inc. ("GPEI"), of which certain stockholders were also majority stockholders of the Company prior to the Effective Date. This advance accrues interest at 14% per annum, and is due on demand. The Company has fully reserved the amounts of these advances because of uncertainty as to their collectibility. In July 1994, Kevin G. DeSanctis, then Executive Vice President and Chief Operating Officer of the Company, received a $225,000 advance in accordance with the terms of his employment agreement, of which none has been repaid to date. In September 1994, Christopher B. Hemmeter, was advanced funds totaling $275,000, accruing interest at prime plus 2%, and due on demand. In January 1995, an additional $373,000 was advanced to Mr. Hemmeter on an interest free basis, of which $110,000 has been repaid. The amount of Mr. Hemmeter's advances that remained unpaid totaled $641,900. In 1994, the Company established a reserve of $1 million for the portion of the affiliate advances described above that the Company believed may not be collectible. This reserve was not allocated to any particular affiliate advances. In 1995, due to the deteriorating financial condition of Christopher B. Hemmeter and the affiliate companies listed in the above table who received those advances and possible defenses that they could raise, the Company provided a reserve for the remainder of the amounts owed the Company by these individuals and affiliates. The affiliate advances described above are fully reserved and the Company has ceased accruing interest thereon. The Company is assessing its strategy in terms of pursuing any collection of these advances. The Company has agreed not to exercise any rights of set-off that the Company may have in respect of the payments which the Company will make to Christopher B. Hemmeter under his consulting agreement with the Company, and the Company, as a result of the Plan of Reorganization, does not have any obligations to the other obligors which would give it set-off rights. Hemmeter Partners, an affiliate of Christopher B. Hemmeter, leased an aircraft that Mr. Hemmeter used for business and personal purposes. In exchange for Mr. Hemmeter making the aircraft available to the Company for business purposes, the Company agreed to pay such affiliate approximately $100,000 per month and to pay the salary and benefits of the aircraft pilot and co-pilot, which totaled approximately $125,000 per year. Direct payments to Hemmeter Partners totaled $1.5 million and $420,000 for 1994 and 1995, respectively. Payments made by the Company with respect to the aircraft represent the Company's pro rata share of the costs and expenses associated with the aircraft and are adjusted based on actual use of the aircraft. The Company ceased using the aircraft and terminated this arrangement as of May 1995. In 1992 and 1993, Grand Palais Casinos, Inc. ("GPCI"), undertook a private offering of senior secured exchangeable notes. Certain of the Company's former majority stockholders and warrantholders, including Christopher B. Hemmeter and Daniel P. Robinowitz, were also stockholders of GPCI's parent company, Grand Palais Enterprises, Inc. ("GPEI"). In September 1993, $7.5 million of the net proceeds of GPCI's private offering were loaned to GPRI. The loan was evidenced by a demand note payable to GPCI which accrued interest at the rate of 12% per annum. The loan was repaid with proceeds from the sale of the Old Notes. As additional consideration, the GPCI noteholders were issued warrants to purchase 2,980,986 shares of common stock. All warrants were extinguished pursuant to the Plan of Reorganization. GPCI also made additional advances to GPRI on an as needed basis. In 1993, the advances totaled $2.2 million, accrued interest at 12% and were unsecured. Proceeds from the Old Notes were used to repay $1.70 million of the advances. The remaining $490,000 was repaid in the first quarter of 1994. Through December 31, 1993, GPCI also paid certain overhead costs and expenses on behalf of GPRI, which amounts were not material. The Company paid $1.5 million, $1.3 million and $624,000 to the law firm of Shefsky, Froelich & Devine Ltd. for legal services rendered to the Company in 1993, 1994 and 1995, respectively. Cezar M. Froelich, a pre-Effective Date director and stockholder of the Company of 1.4% on a fully diluted basis, is a member of that firm. Shefsky, Froelich & Devine Ltd. provided legal services to the Company until February 9, 1996. Any further payments to Shefsky, Froelich & Devine Ltd. are subject to Bankruptcy Court approval. LEGAL PROCEEDINGS BACKGROUND OF BANKRUPTCY; PLAN OF REORGANIZATION The Company was incorporated in August 1993 for the purpose of conducting the operations of HP Casino Management, L.P., BH Management Company, LLC, Central City Management Company, LLC, HP Black Hawk, LLC and HP Central City, LLC, which, along with certain predecessor entities, constructed and were operating the Bullwhackers Casinos. In June 1994, through its wholly owned subsidiary, GPRI, the Company entered into a joint venture with an unrelated entity to construct and operate the Riverboat Project. The Company's share of development costs of the Riverboat Project was financed in part through the private placement by the Company of $140,000,000 of Notes (the "Old Notes"). On June 15 and December 15, 1994, and June 15, 1995, the Company issued additional Old Notes in the respective principal amounts of $8,117,000, $8,884,000 and $9,420,000 in payment of the interest then due and payable on the outstanding Old Notes. The Riverboat Project incurred construction cost overruns and had substantial operating losses as a result of the failure of the New Orleans gaming market to develop as anticipated and the resulting failure of the Riverboat Project to achieve projected revenues. In June 1995, GPRI discontinued operation of the Riverboat Project because it was unable to generate sufficient revenues to cover operating expenses. On July 26, 1995, the GPRI Bankruptcy Case was commenced in the United States Bankruptcy Court for the Eastern District of Louisiana. The GPRI Bankruptcy Case was converted into a voluntary Chapter 11 case on July 27, 1995. As a result of the financial difficulties of GPRI, the Old Notes were declared to be in default in June 1995. During the summer and early fall of 1995, the Company and investment advisors to certain of the holders of the Old Notes negotiated a debt restructuring which contemplated the commencement of Chapter 11 bankruptcy proceedings for the Company and the Colorado Subsidiaries which were not then in bankruptcy. On November 7, 1995, the Company and the Colorado Subsidiaries commenced the Hemmeter Bankruptcy Cases. On December 27, 1995, the venue of the Hemmeter Bankruptcy Cases was transferred to the United States Bankruptcy Court for the Eastern District of Louisiana. The Company and the Colorado Subsidiaries continued their business operations as debtors-in-possession under the supervision of the Bankruptcy Court following the commencement of the Hemmeter Bankruptcy Cases. The Company received approval from the Bankruptcy Court to pay or otherwise honor certain of its pre-petition obligations related to the Bullwhackers Casinos, including employee wages and benefits, utilities, and claims of certain trade vendors, and such payments were made. In addition, the Bankruptcy Court approved a $7.9 million debtor-in-possession credit facility (the "DIP Facility"). On March 29, 1996, the GPRI Plan was confirmed in the GPRI Bankruptcy Case. The GPRI Plan was consummated on May 3, 1996. The GPRI Plan provided that all outstanding shares of capital stock of GPRI (which were owned by the Company) were cancelled and new stock issued to Casino America, Inc., an unrelated party, or its assigns, which provided consideration to GPRI's creditors. Under the GPRI Plan, the Company received GPRI's causes of action, if any, against GPRI's joint venture partner in the Riverboat Project and received no other distribution in respect of its stock ownership in GPRI or any claim that it may have in the GPRI Bankruptcy Case. On April 8, 1996, the Plan of Reorganization in the Hemmeter Bankruptcy cases was confirmed by order of the United States Bankruptcy Court for the Eastern District of Louisiana, and was consummated on the Effective Date. The following events occurred at the Effective Date pursuant to the Plan of Reorganization: 1. The Company and its Colorado Subsidiaries were discharged from any liability to GPRI or its creditors. The Company no longer has any interest in GPRI or the Riverboat Project and its principal assets consist of the stock of its subsidiaries which own the Colorado Casinos and the Surface Parking Lot. 2. The claims of entities which provided goods and services to the Bullwhackers Casinos were paid in full or were otherwise treated in such a manner so that they were not impaired and all other unsecured creditors of the Bullwhackers Casinos received notes in a principal amount equal to the allowed amount of their claims which provide for a single payment of principal and accrued interest on the tenth anniversary of the issuance thereof. All other unsecured creditors of the Company received no distribution in respect of their claims against the Company. 3. The holders of the Old Notes1 and Resort Income Investors, Inc., which held a secured claim in the Hemmeter Bankruptcy Case (the "RII Claim"; Resort Income Investors, Inc. is sometimes referred to as "RII") received an aggregate of $50,000,000 in principal amount of the Notes and one hundred percent (100%) of the issued and outstanding capital stock of the reorganized Company, subject to being diluted to 90% by certain stock grants to be provided to senior management employees and non-employee directors. See "Management-Executive Compensation." As a result, the holders of the Old Notes and RII are the principal creditors and stockholders of the Company. The portion of the principal amount of the Notes paid to RII is less than $1 million and a similar portion of common stock was issued to RII. 4. Pursuant to the settlement of certain lawsuits against the Company and certain of its executive officers, the Company issued the CAI Notes (defined below) to Capital Associates, Inc. ("CAI"). The Company's obligation in respect of the CAI Notes was reduced dollar for dollar by any amounts received by CAI in respect of its claims filed in the GPRI Bankruptcy Case. 5. Certain claims of the Company and the Colorado Subsidiaries against third parties, including derivative claims against the pre-Effective Date directors, officers, and employees of the Company and its Colorado Subsidiaries, were transferred to a litigation trust (the "Litigation Trust"). The trustees of the Litigation Trust are the post-Effective Date directors of the Company and will determine whether or not to pursue any such claims. Any amounts received in respect of any such claims will inure to the benefit of the holders of the Old Notes and RII. ------------- (1) Because the Old Notes were primarily held in the names of nominees, the Company was unable to determine the identity of the Old Note holders directly. The individual holders of approximately $152,775,000 of the outstanding principal balance of the Old Notes filed proofs of claim in the Chapter 11 bankruptcy proceedings of the Company described below. The holders of five percent or more of the Old Notes at the time of filing of those proofs of claim are described below in "Principal and Selling Securityholders." 6. The amounts outstanding under the DIP Facility were paid in full and the DIP Facility was terminated. The Company replaced the DIP Facility with the Foothill Credit Facility. See "Management's Discussion and Analysis of Financial Condition and Results of Operation." 7. The Company changed its name to Colorado Gaming & Entertainment Co. The foregoing is only a summary of some of the principal terms of the Plan of Reorganization and is qualified in its entirety by reference to the complete copy of the Plan of Reorganization that has been filed as an Exhibit to the Registration Statement of which this Prospectus is a part. OTHER During June 1995, CAI filed an action against the Company, BWBH, BWCC, Christopher B. Hemmeter and Mark M. Hemmeter in the District Court for the City and County of Denver, Colorado, seeking to enforce guarantees allegedly provided by the defendants of an equipment lease provided to GPRI. On September 14, 1995, the court granted summary judgment in favor of CAI and against the defendants in the amount of $4,477,950.26, plus interest. In July 1995, CAI also filed an action against the Company, Messrs. Szapor and Mayer, BWBH, BWCC, and GPRI in the District Court for the City and County of Denver, Colorado alleging that, among other things, they negligently and fraudulently induced it into entering into the equipment lease which was the subject of its June 1, 1995 lawsuit. Messrs. Szapor and Mayer filed answers denying the allegations in the complaint and have asserted a counterclaim against CAI for abuse of process. On February 6, 1996, both lawsuits filed by CAI were settled, subject to the consummation of the Plan of Reorganization. Upon the Effective Date, CAI dismissed both lawsuits with prejudice and released all claims asserted therein. In accordance with the settlement, on the Effective Date, the Company issued two unsecured promissory notes to CAI (the "CAI Notes") in the respective principal amounts of $1.6 million and $3 million and Messrs. Szapor and Mayer released their counterclaims. Both CAI Notes accrue interest at the rate of 9% per annum. The $1.6 million CAI Note is due in ten equal quarterly installments commencing September 7, 1996. The $3 million CAI Note has been reduced by amounts received by CAI in respect of its claims filed in the Chapter 11 bankruptcy cased filed by GPRI. Accordingly, the outstanding balance on the $3 million CAI Note is in the range of between $500,000 to $700,000, depending on the ultimate resolution of the exact amount received by CAI from GPRI distributions to be credited against this CAI Note. Accordingly, the Company has reflected $700,000 of the second CAI Note as an obligation in its consolidated balance sheet, although this amount might be reduced as discussed above. Upon the Effective Date, a Litigation Trust was formed with the exclusive right to enforce, in its sole discretion, any and all causes of action of the debtors in the Chapter 11 cases. Accordingly, certain claims of the Company against third parties were transferred to the Litigation Trust. The Trustee of the Litigation Trust will initially be the directors of the Company who will determine whether to pursue any such claims. Any amounts received in respect of such claims by the Litigation Trust will benefit the holders of the Old Notes and RII. Included among the transfer of claims to the Litigation Trust was the derivative action filed in September 1995 against the pre-Effective Date directors of the Predecessor Company by Daniel P. Robinowitz, a pre-Effective Date stockholder of the predecessor company. Claims that the Company may have against affiliates of the predecessor company for outstanding receivables that such affiliates owe to the Company were not transferred to the Litigation Trust. Such claims remain with the Company and any amounts received by the Company on account of such claims will benefit the Company. All affiliate receivables have been fully reserved and, it is unlikely that the Company will receive any amounts in respect of such claims. All other legal proceedings pending against the predecessor company prior to the Effective Date were settled pursuant to the Reorganization. There are no legal proceedings pending against the Company after the Effective Date which could reasonably be believed to have a material adverse effect on the Company's consolidated results of operation. See "-Background of Bankruptcy; Plan of Reorganization." The Plan of Reorganization provides that the Company's obligation to indemnify Messrs. Szapor and Mayer against any claims asserted against them as a result of their service as employees of the Company, both before and after the commencement of the Hemmeter Bankruptcy Cases, will not be affected by the Hemmeter Bankruptcy Cases and that the Company will assume any obligations of GPRI to indemnify Messrs. Szapor and Mayer against claims arising as a result of their service with GPRI. The Plan of Reorganization also provides that Messrs. Szapor and Mayer are released from any liability in respect of causes of action assigned to the Litigation Trust. The Plan of Reorganization also provides that the Company's obligations to indemnify its other officers and employees who are employed by the Company on the date of commencement of the Hemmeter Bankruptcy Cases, other than Christopher B. Hemmeter and Mark M. Hemmeter (together, the "Hemmeters"), against claims against them as a result of their service with the Company after the commencement of the Hemmeter Bankruptcy Cases will not be affected by the Hemmeter Bankruptcy Cases and that the Company will assume any similar indemnity obligations of GPRI. The Plan of Reorganization also requires the Company to indemnify its pre-Effective Date directors other than the Hemmeters (the "Independent Directors") against any claims asserted against them as a result of their service as directors of the Company if the final report of the Independent Litigation Counsel indicates that there is no basis for pursuing any of the potential claims against them reviewed by the Independent Litigation Counsel. The Company's maximum indemnity obligation for all of the Independent Directors is capped at $500,000 in the aggregate. Although the Company has no direct indemnity obligations with respect to claims against the Hemmeters, if a claim is asserted against both the Independent Directors and the Hemmeters, the Hemmeters will be entitled to be represented by the counsel representing the Independent Directors at the expense of the Company to the extent that the claims are based on the Hemmeters' actions as directors of the Company. ENVIRONMENTAL MATTERS The Black Hawk and Central City gaming districts, including the Colorado Casino sites, are located generally within the Central City/Clear Creek Superfund site (the "Site") as designated by the Environmental Protection Agency (the "EPA"), pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"). The Site includes numerous specifically identified areas of mine tailings and other waste piles from former gold mine operations that are the subject of ongoing investigation and clean-up by the EPA and the Colorado Department of Public Health and Environment (the "CDPHE"). CERCLA requires remediation of sites from which there has been a release or threatened release of hazardous substances and authorizes the EPA to take any necessary response actions at Superfund sites, including authorizing potentially responsible parties ("PRPs") to clean up or contribute to the clean-up of a Superfund site. PRPs are broadly defined under CERCLA, and include past and present owners and operators of a site. CERCLA imposes strict liability on PRPs, and courts have commonly held PRPs to be jointly and severally liable for all response costs. Although the Colorado Casinos are not within any of the specific areas of the Site currently identified by the EPA for investigation or remediation, the site on which the Surface Parking Lot was constructed was identified as requiring remediation in connection with the construction of the Surface Parking Lot. That remediation was completed in June 1994. In the process of completing additional environmental remediation on the Surface Parking Lot, the Company discovered that two small and confined treatment cells within the Surface Parking Lot contain unacceptable levels of mercury and lead within the soil, and thus are classified as hazardous. The Company immediately reported this finding to the EPA and the CDPHE. The hazardous soil is located above the groundwater table. At the direction and approval of the EPA and CDPHE, the Company placed an asphalt cap over the hazardous soil to prevent infiltration. While the parties have agreed that the hazardous soil presents minimal impact to the environment in the short term, the Company has reached an agreement with the EPA and CDPHE to remove the hazardous soil and dispose of the material at a hazardous waste landfill prior to December 31, 1996. The Company is currently analyzing the most efficient way and time period within which to complete the removal of the hazardous soil. It is currently estimated that the cost of this removal project will be approximately $100,000. The Company, through independent environmental consultants, conducted both Phase I and Phase II environmental examinations of the real property underlying the Bullwhackers Casinos and obtained subsequent follow-up reports. Based on these examinations, the Company is not aware of any environmental problems affecting the Bullwhackers Casinos which are likely to result in material costs to the Company. Although the Company has not conducted environmental evaluations of the real property underlying the Silver Hawk Casino facility, it does not believe that there are any environmental problems affecting the Silver Hawk Casino site which are likely to result in material costs to the Company. No assurance can be given, however, that the Company will not subsequently discover significant environmental problems at any of its Colorado properties. Furthermore, the EPA or other governmental authorities could broaden their investigations and identify additional areas within the Site, including the Colorado Casino sites, for remediation. If any of the Colorado Casinos were included in additional areas of concern within the Site, the Company could be identified as a PRP and any liability related thereto could have a material adverse effect on the Company. Furthermore, environmental conditions at any of the Company's Colorado properties could have, or could in the future have, a detrimental impact on adjacent or nearby properties or persons. No assurance can be given that no such impact on a third party will arise in the future, nor that such an impact, if it arises, will not have a material adverse impact on the Company. PRINCIPAL AND SELLING SECURITYHOLDERS This Prospectus covers resales of Common Stock and Notes received under the Plan of Reorganization by the Selling Securityholders named below and other Selling Securityholders pursuant to certain registration rights under the Registration Rights Agreement (as defined below). This Prospectus may be supplemented or amended from time to time to reflect its use for resales by persons who are entitled to such rights but are not named below. All such Selling Securityholders may be deemed to be underwriters of such securities within the meaning of the Securities Act. See "Plan of Distribution." The following table sets forth certain information regarding beneficial ownership of the Common Stock as of October 16, 1996, and as adjusted to reflect the sale of the Shares offered hereby by, (i) each person known by the Company to be the beneficial owner of more than 5% of the Company's Common Stock, (ii) each of the Company's directors, (iii) each of the executive officers named in the Summary Compensation Table above (See "Management -- Executive Compensation"), (iv) all executive officers and directors as a group, and (v) the Selling Securityholders. The information presented in this table and the following table regarding the Selling Securityholders' holdings of the Common Stock and the Notes is based on information furnished to the Company by the Selling Securityholders and other sources that the Company has not verified. Unless otherwise indicated, to the Company's knowledge, all beneficial ownership is sole and direct. Certain of the Selling Securityholders were holders of the Old Notes and certain of such holders participated in negotiations relating to the Company's bankruptcy and the Reorganization. Other than relationships arising in connection with such matters and with regard to Stephen J. Szapor, Jr., President and Chief Executive Officer and a director of the Company, none of the Selling Securityholders has had a material relationship with the Company within the past three years. <TABLE> COMMON STOCK <CAPTION> NUMBER SHARES SHARES OWNED OF OWNED PRIOR TO SHARES AFTER OFFERING PERCENT OFFERED OFFERING <S> <C> <C> <C> <C> Grace Brothers, Ltd.........................490,607 9.6 490,607 0 1560 Sherman Avenue Suite 900 Evanston, IL 60201 Archstone Partners, L.P.1................... 22,262 * 22,262 0 Cragswood Ltd.1............................. 29,683 * 29,683 0 Glen Rock Partners, L.P.1................... 41,471 * 41,471 0 Martino-Swartz JT Venture 1................. 14,842 * 14,842 0 NF & M International 1...................... 14,842 * 14,842 0 RH Capital Assoc. #1, L.P 1................. 39,366 * 39,366 0 Keystone Small Company Growth Fund 2........494,015 9.6 494,015 0 Keystone High Income Bond Fund 2............477,839 9.3 477,839 0 Keystone America Strategic Income Fund 2....195,843 3.8 195,843 0 Keystone Fixed Income Advisers, Inc.2....... 39,698 * 39,698 0 200 Berkeley Street Boston, MA 02116 The Mainstay Funds, on behalf of its High Yield Corporate Bond Fund Series3 . . . . . . . . . . . . . . . . .368,128 7.2 368,128 0 Brown & Williamson High Yield Account3 . . . 33,647 * 33,647 0 New York Life MFA Series Fund, Inc., on behalf of its High Yield Corporate Bond Fund Portfolio3 .. . . . . . . . . . . . . 12,468 * 12,468 0 c/o Mackey-Shields Financial Corporation 9 West 57th Street New York, NY 10019 Millison Investment Management, Inc....... 74,531 1.5 74,531 0 Prudential Distressed Fund................ 50,000 * 50,000 0 PaineWebber Strategic Income Trust........ 102,958 2.0 102,958 0 Managed High Yield Fund, Inc.............. 105,643 2.1 105,643 0 PaineWebber High Income Trust............. 768,570 14.9 768,570 0 All-American Term Trust Inc............... 77,681 1.5 77,681 0 PaineWebber Offshore Funds, plc--......... 0 The High Income Fund.................... 27,766 * 27,766 0 c/o PaineWebber Incorporated 1285 Avenue of the Americas New York, NY 10019 Putnam Advisory Funds..................... 296,834 5.8 296,834 0 One Post Office Square Boston, MA 01209 SC Fundamental Value Fund, L.P.......... 416,311 8.1 416,311 0 SC Fundamental Value BVI, Ltd............. 190,192 3.7 190,192 0 712 Fifth Avenue New York, NY 10019 Resort Income Investors................... 60,170 1.2 60,170 0 Stephen J. Szapor, Jr..................... 138,888 2.7 138,888 0 Alan L. Mayer............................. 0 0 0 0 Richard Rabin............................. 0 0 0 0 Franklin S. Wimer ............... 2,315 * 0 2,315 Steve Leonard............................. 2,315 * 0 2,315 Mark Van Hartesvelt....................... 0 0 0 0 Philip J. DiBerardino..................... 2,315 * 0 2,315 All directors and officers as a group (8 persons) 145,833 2.7 138,888 6,945 - -------------------------- <FN> 1 Bear Stearns is the nominee of such holder. 2 Keystone Investment Management Company serves as investment adviser to Keystone Small Company Growth Fund, Keystone High Income Bond Fund, Keystone America Strategic Income Fund, and Keystone Fixed Income Advisers, Inc. 3 Mackay-Shields Financial Corporation serves as investment adviser to these holders. * Less than 1%. </FN> </TABLE> The following table sets forth certain information regarding the ownership of the Notes, as of October 16, 1996, offered pursuant to this Prospectus held by the Selling Securityholders. <TABLE> <CAPTION> PRINCIPAL PRINCIPAL AMOUNT OF PRINCIPAL AMOUNT OF NOTES OWNED AMOUNT OF NOTES OWNED PRIOR TO NOTES AFTER OFFERING PERCENT OFFERED OFFERING <S> <C> <C> <C> <C> GM High Yield Fund $ 2,250,000 4.5% $ 2,250,000 0 High Yield Income Fund 1,250,000 2.5 1,250,000 0 Prudential High Yield Fund 6,000,000 12.0 6,000,000 0 Prudential Series High Yield Fund 2,500,000 5.0 2,500,000 0 Prudential Distressed Fund 297,000 * 297,000 0 Putnam Advisory Funds 20,219,000 40.4 20,219,000 0 IDS Financial Services, Inc. 14,000,000 28.0 14,000,000 Resort Income Investors 601,702 1.2 601,702 0 SunAmerica $ 2,500,000 5.0 $ 2,500,000 *Less than 1% </TABLE> PLAN OF DISTRIBUTION GENERAL An aggregate of up to 5,138,888 shares of Common Stock and $55,883,000 principal amount of Notes may be offered pursuant to this Prospectus. Of the Notes, $50,000,000 are currently held by the Selling Securityholders and are being registered for resale hereunder. An additional $6,000,000 in principal amount of Notes are being registered hereunder by the Company and may be issued directly to the holders of the Notes as payment of certain accrued interest when due, in lieu of cash, pursuant to the terms of the Notes. Such Notes, if issued, may be subsequently resold by the Selling Securityholders pursuant to this Prospectus or otherwise. The Company will not receive any of the proceeds from the sale by the Selling Securityholders of the Notes or Common Stock offered hereby. Such securities may be sold by the Selling Securityholders in the over-the-counter market, or otherwise, in transactions at prices prevailing at the time of sale, at prices related to such prevailing market prices, or at such other prices as may be negotiated among the parties. The Selling Securityholders' Shares and Notes may be sold by one or more of the following methods, without limitation: (a) a block trade in which a broker or dealer so engaged will attempt to sell the securities as agent but may position and resell a portion of the block as principal to facilitate the transaction; (b) purchases by a broker or dealer as principal and resale by such broker or dealer for its account pursuant to this Prospectus; (c) ordinary brokerage transactions and transactions in which the broker solicits purchases; and (d) directly in transactions between sellers and purchasers without a broker/dealer. In effecting sales, brokers or dealers engaged by the Selling Securityholders may arrange for other brokers or dealers to participate. The Selling Securityholders, such brokers or dealers may receive commissions or discounts from Selling Securityholders in amounts to be negotiated. Broker or dealers participating in such transactions as agent may receive commissions from the purchasers as well as from the Sellers, if also acting as agent for the purchasers, Selling Securityholders and any participating brokers or dealers may be deemed to be "underwriters" within the meaning of the Securities Act, in connection with such sales. Profits, commissions, concessions, and discounts on sales by persons who may be deemed to be underwriters within the meaning of the Securities Act may be deemed underwriting compensation under the Securities Act. Selling Securityholders may also offer the Shares or Notes covered by this Prospectus under other registration statements or pursuant to exemptions from the registration requirements of the Securities Act, including sales which meet the requirements of Rules 144 or 148 under the Securities Act or pursuant to an exemption contained in the Federal Bankruptcy Code. Selling Securityholders should seek advice from their own counsel with respect to the legal requirements for such sales. The Company will pay all expenses of filing the Registration Statement and preparing and reproducing this Prospectus which the Company estimates to be $95,000. The Selling Securityholders will pay any selling expenses, including brokerage commissions, incurred in connection with their sale of any Shares covered by this Prospectus. In order to comply with certain states' securities laws, if applicable, the Notes or Common Stock will be sold in such jurisdictions only through registered or licensed brokers or dealers. In certain states the Notes and Common Stock may not be sold unless they have been registered or qualified for sale in such state, or unless an exemption from registration or qualification is available. REGISTRATION RIGHTS AGREEMENT Pursuant to a Registration Rights Agreement, dated as of the Effective Date, among the Company and the Initial Holders as defined therein (the "Registration Rights Agreement"), the Company agreed to file the Registration Statement of which this Prospectus is a part with the Commission and use its best efforts to have it declared effective within 150 days of the Effective Date. Under the terms of the Registration Rights Agreement, substantially all of the expenses of the offering (other than broker or dealer discounts, commissions, or other compensation) will be paid by the Company. Furthermore, the Company has agreed to keep the Registration Statement continuously effective, subject to certain blackout periods, for a period of up to three years following the effective date of the Registration Statement. In addition, the Company and the Selling Securityholders are obligated to indemnify each other against certain liabilities, including liabilities arising under the Securities Act. This Prospectus may be supplemented or amended from time to time to reflect its use relating to the Common Stock and Notes for resales by Selling Securityholders not named in this Prospectus as such who are entitled to certain registration rights under the Registration Rights Agreement. SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no established market for the Common Stock of the Company and there can be no assurance that an active trading market will subsequently develop. Sales of substantial shares of Common Stock in the public market could adversely affect the market price of the Common Stock prevailing from time to time. The Company has 5,138,888 shares of Common Stock outstanding, all of which are being registered on the Registration Statement of which this Prospectus forms a part. Accordingly, all such shares will be freely transferable without restriction or registration under the Securities Act, except for any shares purchased by an existing "affiliate" of the Company, as that term is defined by the Securities Act (an "Affiliate"), which shares will be subject to the resale limitations of Rule 144 adopted under the Securities Act ("Rule 144"). In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned restricted securities for at least two years (including the holding period of any prior owner except an affiliate of the Company) would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: (i) one percent of the number of shares of Common Stock then outstanding (which equals approximately 51,139 shares); or (ii) the average weekly trading volume of the Common Stock during the four calendar weeks preceding the filing of a Form 144 with respect to such sale. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about the Company. Under Rule 144(k), a person who is not deemed to have been an Affiliate at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least three years (including the holding period of any prior owner except an Affiliate), is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provision of Rule 144. DESCRIPTION OF CAPITAL STOCK DESCRIPTION OF COMMON STOCK The Company's authorized capital stock consists of 20,000,000 shares of Common Stock, of which 5,145,833 shares are issued and outstanding. Holders of Common Stock are entitled to one vote for each share held in the election of directors and on all other matters submitted to a vote of stockholders, and do not have cumulative voting rights in the election of directors. Accordingly, the stockholders of a majority of the shares of Common Stock entitled to vote in any election of directors may elect all of the directors standing for election. Stockholders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared by the Board out of funds legally available therefor. Upon the liquidation, dissolution or winding-up of the Company, the stockholders of Common Stock are entitled to receive ratably the net assets of the Company available after payment of all debts and other liabilities. Stockholders of Common Stock have no preemptive, subscription, redemption or conversion rights. All shares of the Common Stock are fully paid and non-assessable when issued upon receipt of the purchase price therefor. As of October 18, 1996, the Company had approximately 40 holders of record of the Common Stock. COLORADO GAMING REGULATIONS Pursuant to the Colorado Regulations, the Gaming Commission has broad powers to require stockholders of the Company, as a gaming licensees, to provide it with information and to determine the suitability of any stockholders of the Company to hold voting interests in the Company. If the Gaming Commission determines that a person or entity is not suitable to own a voting interest in the Company, whether directly or indirectly, the Company may be sanctioned (including by loss of any gaming licenses) unless such person or entity disposes of its voting interests. In addition, the Colorado Regulations prohibit a licensee from paying dividends, interest or other remuneration to any person found to be unsuitable, or from recognizing the exercise of any voting rights by any person found to be unsuitable. The Colorado Regulations require a casino licensee to include in its corporate charter provisions to permit the repurchase of the voting interests of any person who the Gaming Commission finds unsuitable. The Company has included the required provisions in its Certificate of Incorporation. See "- Certain Charter and Bylaws Provisions." In addition, a person or entity may not sell, lease, purchase, convey, acquire or pledge 5% or more of the stock of a "publicly traded" gaming licensee, such as the Company, shares in a gaming license without the prior approval of the Gaming Commission, except for sales or other transactions involving less than a 5% interest in a publicly traded licensee. See "Business - Colorado Gaming Regulations." CERTAIN CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS To enable the Company to secure and maintain the business and other regulatory approvals necessary for operating a gaming-related business, the Company's Certificate of Incorporation provides that the Company may not issue any voting securities except in compliance with the rules of any gaming authority. The Company's Certificate of Incorporation also provides that all transfers of voting securities of the Company must be in compliance with applicable gaming authority rules and if any gaming authority issues an order disqualifying a person from owning shares of Common Stock, the Company may redeem the stock of the disqualified holder unless Common Stock is transferred to a person found by the Gaming Commission to be suitable within 60 days from the finding of unsuitability. See "- Colorado Gaming Regulations." The redemption price will be equal to the lesser of the holder's investment in the voting securities or the current market price as of the finding of unsuitability. No holder of voting securities of the Company which has been found to be unsuitable may vote any such voting securities and such voting securities shall not be deemed outstanding for quorum or other purposes and the disqualified holder shall not be entitled to any dividends or other remuneration with respect to such voting securities. See "Business -- Colorado Gaming Regulations." As permitted by the provisions of the Delaware General Corporation Law (the "DGCL"), the Company's Certificate of Incorporation eliminates in certain circumstances the liability of directors of the Company for a breach of their fiduciary duty as directors. These provisions do not eliminate the liability of a director for: (i) breach of the director's duty of loyalty to the Company or its stockholders; (ii) acts or omissions by a director not in good faith or which involve intentional misconduct or a knowing violation of the law; (iii) liability arising under Section 174 of the DGCL (relating to the declaration of dividends and purchase or redemption of shares in violation of the DGCL); or (iv) any transaction from which the director derived an improper personal benefit. In addition, these provisions do not eliminate the liability of a director for violations of federal securities laws, nor do they limit the rights of the Company or its stockholders, in appropriate circumstances, to seek equitable remedies such as injunctive or other forms of non-monetary relief. Such remedies may not be effective in all cases. The Company's Certificate of Incorporation and Bylaws provide that the Company shall indemnify all directors and officers of the Company to the full extent permitted by the DGCL. Under such provisions, any director of officer, in his capacity as such, who is made or threatened to be made a party to any suit or proceeding, may be indemnified if the Board determines such director of officer acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interest of the Company. The Company's Certificate of Incorporation, Amended and Restated Bylaws and the DGCL further provide that such indemnification is not exclusive of any other rights to which such individuals may be entitled under the Company's Certificate of Incorporation and Amended and Restated Bylaws, or under any agreement, vote of stockholders or disinterested directors or otherwise. The Company's Certificate of Incorporation provides initially for a five member board of directors with each director serving a one year term. Directors may be removed with or without cause. DESCRIPTION OF THE NOTES GENERAL The Notes were issued on the Effective Date to the holders of the Old Notes and the RII Claim as fully registered Notes, without coupons, under an Indenture dated as of the Effective Date (the "Indenture") between the Company, its Colorado Subsidiaries and Fleet National Bank, as trustee (together with any successor, the "Trustee"). This summary of the material terms of the Notes does not purport to be complete and is subject to, and qualified in its entirety by, the provisions of the Indenture. Capitalized terms used under this heading which are not otherwise defined herein shall have the meanings ascribed thereto in the Indenture, which is included as an exhibit to the Registration Statement of which this Prospectus is a part. TERMS The Notes are senior secured obligations of the Company and will mature on June 1, 2003. The aggregate principal amount of Notes which may be authenticated and delivered under the Indenture is limited to $50,000,000 (plus any Secondary Notes, as described below) except for Notes authenticated and delivered upon registration of transfer of, or in exchange for, other Notes. Interest on the Notes accrues at the rate of 12% per annum, computed on the basis of a 360-day year comprised of twelve 30-day months. Interest is payable commencing December 1, 1996 and semiannually thereafter on June 1 and December 1 of each year, to the holders of record of Notes at the close of business on May 15 and November 15 immediately preceding each such interest payment date. The Company may, at its option if an effective registration statement under the Securities Act covers such issuance or such issuance is exempt from registration under the Securities Act, pay interest on the Notes through the issuance of additional Notes (the "Secondary Notes") in an aggregate principal amount equal to the interest that would be payable if such interest were paid in cash (provided, however, that amounts less than $1,000 shall be payable in cash). The terms of the Secondary Notes shall be identical to the terms of the Notes, except that interest on the Secondary Notes is payable only in cash. All references to "Notes" herein shall, unless the context otherwise requires, also refer to any Secondary Notes. Principal of, premium, if any, and interest on the Notes is payable at the office or agency of the Company maintained for that purpose, provided that upon the agreement of the Company and a holder (a "Holder") of a Note payments of interest and principal of any Note may be made directly to the Holder of such Note. The Notes are transferrable at the corporate trust office of the Trustee located at 777 Main Street, Hartford, Connecticut. No service charge is made for any registration of transfer or exchange of the Notes, except for any tax or other governmental charge that may be imposed in connection therewith. REDEMPTION Optional Redemption. The Notes are redeemable prior to maturity, in whole or part, at the election of the Company on or after June 1, 2000, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest to the redemption date, if redeemed during the 12-month period beginning on the June 1st that begins in the years indicated below: Year Redemption Price 2000 104% 2001 103% 2002 and thereafter 102% Mandatory Redemption. Notwithstanding any other provision of the Indenture, if any Gaming Authority requires that a Holder or beneficial owner of Notes must be licensed, qualified or found suitable under any applicable Gaming Law, such Holder or beneficial owner must apply for a license, qualification or a finding of suitability within the required time period after being requested to do so by the Gaming Authority. If such Holder or such beneficial owner is not so licensed, qualified or found suitable within the period provided therefor by such Gaming Authority, the Company shall have the right, at its option, (i) to require such Holder or beneficial owner to dispose of such Holder's or beneficial owner's Notes within 30 days of receipt of notice of the Company's election or such earlier date as may be ordered by such Gaming Authority, or (ii) to call for a redemption of the Notes of such Holder or beneficial owner at a price equal to the lesser of 100% of the principal amount thereof or the price at which such Holder or beneficial owner acquired the Notes, plus, in either case, accrued interest to the earlier of the date of redemption or the date of the finding of unsuitability by such Gaming Authority (which may be less than 30 days following the notice of redemption, if so ordered by such Gaming Authority). The Company is not responsible for any costs or expenses that any Holder may incur in applying for a license, qualification or finding of suitability. Selection and Notice. In the event that less than all of the Notes are to be redeemed at any time, selection of Notes for redemption will be made by the Trustee on a pro rata basis, by such method as the Trustee shall deem fair and appropriate (provided that no Notes in a principal amount of $1,000 or less shall be redeemed in part). Unless otherwise specified herein, notice of redemption shall be mailed by first class mail not less than 30 days nor more than 60 days before the redemption date to each Holder to be redeemed at its registered address. If any New Note is to be redeemed in part only, the notice of redemption that relates to such New Note shall state the portion of the principal amount thereof to be redeemed. On and after the redemption date, interest will cease to accrue on Notes or portions thereof called for redemption. NO SINKING FUND No sinking fund payments are required with respect to the Notes. MANDATORY OFFERS TO PURCHASE Offer to Purchase Upon Change of Control. The Company is obligated to make an offer to purchase all outstanding Notes at a purchase price of 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase if a Change of Control of the Company occurs. A Change of Control includes (i) the sale or other disposition of substantially all of the Company's assets; (ii) the liquidation or dissolution of the Company; (iii) the acquisition by any person or group (within the meaning of Section 13(d) and 14(d) of the Exchange Act) of beneficial ownership or the right to acquire, whether immediately or only after the passage of time, of more than 50% of all classes of capital stock of the Company then outstanding normally entitled to vote for the election of directors; (iv) during the twelve months following the Issue Date of the Notes, a change in the composition of the Board of Directors of the Company such that a majority of the directors of the Company nominated to be such on the Issue Date cease to be directors of the Company (other than as may be caused by the replacement of interim directors who are serving as directors only until the individuals named to serve as directors on the Issue Date receive Commission approval). If a Change of Control occurs, the Company shall, within 15 days, notify the Trustee in writing of such occurrence, and the Trustee shall, within 15 days following receipt of notice to the Trustee, notify the Holders of such occurrence. Such notice from the Company shall include an offer to purchase all Notes then outstanding at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the payment date. The purchase offer by the Company must remain open for at least 20 business days from the date of the Trustee's notice. The obligation of the Company to purchase the Notes upon a Change of Control may not be amended or waived without the concurrence of the Holders of not less than 66-2/3% of the aggregate principal amount of the Notes then outstanding. See "- Amendments and Waivers." There can be no assurance that the Company will have sufficient funds to purchase the Notes upon a Change of Control. Other Offers to Purchase. The Company is also obligated to make offers to purchase Notes at a purchase price of 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase in an amount equal to the Net Cash Proceeds of certain sales or other dispositions of assets or certain events of loss. See "- Certain Covenants - Restricted Asset Sales" and "- Application of Net Cash Proceeds in Event of Loss." GUARANTEE OF NOTES The Notes and the Company's obligations under the Indenture are irrevocably and unconditionally guaranteed by the Guarantors. The Guarantees of the Guarantors are in addition to (and not in substitution for) any other security for the Notes and may not be revoked by the Guarantor until all guaranteed obligations have been indefeasibly paid and performed in full. SECURITY The Notes are secured by a perfected lien on certain Collateral of the Company and the Guarantors, including all of the capital stock of the Guarantors owned by the Company and on substantially all of the assets of the Company and the Guarantors, whether owned on the Issue Date or thereafter acquired, including the Colorado Casinos, the Surface Parking Lot and, if and when constructed, the Parking Garage through appropriate Security Documents in favor of the Trustee as Collateral Agent. The liens securing the Notes will be subordinate only to those liens defined in the Indenture as "Permitted Liens," which include: (i) liens securing credit facilities providing for an aggregate principal amount of indebtedness of up to $17,500,000 incurred pursuant to permitted credit facilities; (ii) certain specified liens on certain assets of the Company or the Guarantors in existence on the date of the Indenture; (iii) liens on the Silver Hawk casino securing the deferred portion of the purchase price thereof; (iv) liens encumbering after-acquired property of the Company or a Guarantor which were in existence when the encumbered property was acquired and which were not created in connection with the acquisition; (v) certain statutory liens, such as mechanics or materialmen's liens and tax liens, to the extent that the obligation secured is not delinquent or is being contested in good faith; and (vi) leases, subleases, easements, rights-of-way and other minor title irregularities which do not materially interfere with the business of the Company or any of its subsidiaries. Provided that no Event of Default then exists, the Company is entitled to obtain a release of any lien securing the Notes with respect to any property of the Company sold or otherwise disposed of in the ordinary course of business (including the sale of gaming and other equipment as part of a program to replace or upgrade gaming or such other equipment) up to $1,500,000 in the aggregate in any 12-month period (an "Unrestricted Asset Sale"). The Company is also entitled to obtain a release of any lien securing the Notes with respect to any property sold or otherwise transferred in any other permitted asset sale provided that the Company complies with certain reinvestment or Note repurchase obligations. See "- Certain Covenants - Restricted Asset Sales." The proceeds of any sale of the Collateral in whole pursuant to the Indenture and the related Security Documents following an Event of Default may not be sufficient to satisfy payments due on the Notes. In addition, the ability of the Holders to realize upon the Collateral may be limited pursuant to gaming laws as described below, in the event of a bankruptcy or pursuant to other applicable laws, including securities laws. Certain Gaming Law Limitations. The Trustee's ability to foreclose upon the Collateral is limited by relevant Gaming Laws, which generally require that persons who own or operate a casino or possess or sell gaming equipment hold a valid gaming license. No person can hold a license in the State of Colorado unless the person is found qualified or suitable by the relevant Gaming Authorities. In order for the Trustee to be found qualified or suitable such Gaming Authorities would have discretionary authority to require the Trustee and any or all of the Holders to file applications, be investigated and be found qualified or suitable as a casino licensee or as a landlord or landlords of a gaming establishment. The applicant for qualification for a suitability determination or for licensing must pay all costs of such investigation. If the Trustee is unable or chooses not to qualify, be found suitable or be licensed to own, operate or sell such assets, it would have to retain an entity licensed to operate or sell such assets. In addition, in any foreclosure sale or subsequent resale by the Trustee, licensing requirements under the relevant Gaming Laws may limit the number of potential bidders and may delay any sale, which may have an adverse effect on the sale price of such Collateral. In addition, under Colorado law, Holders may be required to file personal history and financial background information with the Gaming Authorities and to be found suitable in order for the Trustee to foreclose on gaming equipment and the Colorado Casinos. Therefore, the practical value of realizing on the Collateral may, without the appropriate approvals, be limited. Certain Bankruptcy Limitations. The right of the Trustee to repossess and dispose of the Collateral upon the occurrence of an Event of Default is likely to be significantly impaired by applicable bankruptcy law if a bankruptcy proceeding were to be commenced by or against the Company or the Company Subsidiaries prior to the Trustee having repossessed and disposed of the Collateral. Under the United States Bankruptcy Code (the "Bankruptcy Code"), a secured creditor such as the Trustee is prohibited from repossessing its security from a debtor in a bankruptcy case, or from disposing of security repossessed from such debtor, without bankruptcy court approval. Moreover, the Bankruptcy Code permits the debtor to continue to retain and to use Collateral owned as of the date of the bankruptcy filing (and the proceeds, products, rents or profits of such Collateral) to the extent provided by the Security Documents and applicable nonbankruptcy law even though the debtor is in default under the applicable debt instruments, provided that the secured creditor is given "adequate protection." The meaning of the term "adequate protection" may vary according to circumstances, but it is intended in general to protect the value of the secured creditor's interest in the Collateral and may include, if approved by the court, cash payments or the granting of additional security for any diminution in the value of the Collateral as a result of the stay of repossession or disposition or any use of Collateral by the debtor during the pendency of the bankruptcy case. In view of the lack of a precise definition of the term "adequate protection" and the broad discretionary power of a bankruptcy court, it is impossible to predict how long payments under the Notes could be delayed following commencement of a bankruptcy case, whether or when the Trustee could repossess or dispose of the Collateral or whether or to what extent Holders would be compensated for any delay in payment or loss of value of the Collateral through the requirement of "adequate protection." CERTAIN COVENANTS The following summarizes certain of the covenants with which the Company and each Company Subsidiary must comply: Limitation on Indebtedness. The Company shall not, and shall not permit any Company Subsidiary to, directly or indirectly, incur any Indebtedness other than: (a) Indebtedness under the Notes, the Indenture and the Security Documents; (b) Bank Indebtedness and any renewals, replacements and/or refinancings thereof, so long as the aggregate principal amount of Bank Indebtedness at any one time outstanding pursuant to this paragraph (b) does not exceed the Bank Indebtedness Amount; (c) Any Indebtedness, if (i) no Default or Event of Default shall have occurred and be continuing at the time of, or would occur after giving effect to, on a pro forma basis, such incurrence of such Indebtedness and (ii) immediately after giving effect to the incurrence thereof, and the receipt and the application of the proceeds thereof, the Consolidated Coverage Ratio would be greater than (A) 1.75 to 1, in the case of such Indebtedness incurred or to be incurred on or prior to December 31, 1996 and (B) 2.0 to 1, in the case of such Indebtedness incurred or to be incurred on or after January 1, 1997; provided that any such Indebtedness shall mature at a date not earlier than the Stated Maturity of the Notes and shall have an Average Life to Stated Maturity equal to or greater than the remaining Average Life to Stated Maturity of the Notes; or (d) Any Indebtedness issued in exchange for or to repay, prepay, repurchase, redeem, defease, retire or refinance ("refinance") any Indebtedness permitted by clauses (a) or (c) above; provided that (i) if the principal amount of the Indebtedness so issued shall exceed the principal amount of the Indebtedness so exchanged or refinanced, then such excess shall be permitted only to the extent that it is otherwise permitted to be incurred hereunder and (ii) the Indebtedness so issued (A) has a Stated Maturity later than the Stated Maturity of the Indebtedness so exchanged or refinanced, (B) has an Average Life to Stated Maturity equal to or greater than the remaining Average Life to Stated Maturity of the Indebtedness so exchanged or refinanced, and (C) is subordinated to the Notes to at least the same extent as the Indebtedness so exchanged or refinanced. Limitation on Restricted Payments. The Company shall not, and shall not permit any Company Subsidiary to, make, directly or indirectly, any Restricted Payment, including (i) any declaration or payment of any dividend or similar payments in respect of the capital stock of the Company or a Company Subsidiary (other than dividends payable solely in capital stock or payments of dividends on capital stock of a Company Subsidiary payable to the Company or to Company Subsidiary which is wholly owned by the Company); (ii) any purchase, defeasance, redemption or other acquisition or retirement for value of any capital stock, or any warrants, rights or options to purchase any capital stock, of the Company or any Company Subsidiary; (iii) any payment of principal on any Indebtedness which is subordinated in right of payment to the Notes, or (iv) any loan, stock purchase or other Investment in any Person that will not be a wholly owned Company Subsidiary of the Company immediately after giving effect to such loan, stock purchase or other Investment, if after giving effect thereto, on a pro forma basis: (a) a Default or Event of Default shall have occurred and is continuing or would occur as a consequence thereof; (b) immediately after giving effect to such Restricted Payment, the Company could not incur at least $1.00 of Indebtedness and maintain the Consolidated Coverage Ratio required for the incurrence of additional debt; or (c) the aggregate of all Restricted Payments declared or made after the Issue Date exceeds the sum of: (i) 50% of Consolidated Net Income (or in the event such Consolidated Net Income shall be a deficit, minus 100% of such deficit) accrued during the period (treated as one accounting period) commencing on the first full quarter after the Issue Date, to and including the last day of the fiscal quarter ended immediately prior to the date of each such calculation, minus (ii) 100% of the amount of any write downs, write-offs, or negative extraordinary charges not otherwise reflected in Consolidated Net Income during such period, plus (iii) an amount equal to the aggregate Net Cash Proceeds received by the Company from the issuance or sale (other than to a subsidiary) of its Capital Stock (excluding Disqualified Stock, but including capital stock issued upon conversion of convertible Indebtedness and from the exercise of options, warrants or rights to purchase capital stock, other than Disqualified Stock, of the Company) after the Issue Date; provided, however, that the foregoing provisions will not prevent, provided that no Default or Event of Default shall have occurred and is continuing at the time of the restricted payment: (i) the payment of any dividend within 60 days after the date of its declaration if, at the date of declaration, such payment would be permitted by the foregoing provisions; (ii) the payment of dividends or the making of distributions solely in shares of capital stock of the Company; and (iii) Restricted Payments not otherwise permitted by clauses (i) through (iii) above in an amount not exceeding $200,000 in any calendar year. Limitation of Liens. The Company shall not, and shall not permit any Company Subsidiary to, create, incur, assume or suffer to exist any lien of any kind upon any of its property or assets (including, without limitation, any income or profits) now owned or hereafter acquired by it, other than Permitted Liens. Limitation on Dividends and Other Payment Restrictions Affecting Company Subsidiaries. The Company shall not, and shall permit any Company Subsidiary to, directly or indirectly create or otherwise cause or suffer to exist any consensual encumbrance or restriction on the ability of any Company Subsidiary to pay dividends, make distributions on the capital stock of such Company Subsidiary, pay any obligation to the Company or a Company Subsidiary, or otherwise transfer assets or make or pay loans to the Company or any Company Subsidiary, except: (i) restrictions imposed by the Security Documents; (ii) certain other restrictions set forth in the Indenture; (iii) customary non-assignment provisions restricting subletting or assignment of any lease entered into in the ordinary course of business; (iv) restrictions imposed by Gaming Laws or any Gaming Authority; (v) restrictions under any agreement relating to any property, assets or business acquired by the company or its Company Subsidiaries, which restrictions are applicable only to the assets or business acquired; (v) any restrictions with respect to capital stock or assets of a Company Subsidiary imposed pursuant to a stock or asset sale of such Company Subsidiary, and (vii) replacements of restrictions imposed pursuant to clauses (i) through (vi) above that are no more restrictive than those being replaced. Limitation on Sale-Leaseback Transactions. The Company shall not, and shall not permit any Company Subsidiary to, directly or indirectly enter into, guarantee or otherwise become liable with respect to any Sale-Leaseback Transaction involving Collateral or any other Sale-Leaseback Transaction unless: (i) after giving effect to any such Sale-Leaseback Transaction the Company could incur $1.00 of additional Indebtedness and its Consolidated Coverage Ratio would be no less than the ratio necessary to increase additional Indebtedness; (ii) such Sale-Leaseback Transaction does not involve the creation of a lien which is not a Permitted Lien; (iii) the consideration received by the Company and/or any of its Company Subsidiaries for such Sale-Leaseback Transaction is at least equal to the Fair Market Value of such property being transferred, and (iv) the Company shall apply the Net Cash Proceeds of the sale as if such sale was a Restricted Asset Sale. See "- Restricted Asset Sales". Restricted Asset Sales. The Company shall not, and shall not permit any Company Subsidiary to, directly or indirectly, make any Restricted Asset Sale, including the issuance by a Company Subsidiary of any capital stock or other equity interests to a Person other than the Company or a wholly owned Company Subsidiary or any asset sale or other disposition which is not an Unrestricted Asset Sale, unless: (i) at the time of such Restricted Asset Sale the Company or such Company Subsidiary, as the case may be, receives consideration at least equal to the Fair Market Value of the assets sold or otherwise disposed of; (ii) with certain exceptions, which include the sale of Bullwhackers Central City, at least 90% in value of the proceeds therefrom consist of U.S. dollars; (iii) no Default or Event of Default shall have occurred and be continuing at the time of or after giving effect to such Restricted Asset Sale; and (iv) unless otherwise permitted by the Indenture, the Restricted Asset Sale does not involve any Collateral. On or before the 180th day after the date on which the Company or any Company Subsidiary consummates a Restricted Asset Sale, the Company shall make an offer to purchase a principal amount (expressed as a multiple of $1,000) of Notes equal to the Net Cash Proceeds received by the Company in respect of the Restricted Asset Sale at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest thereon, if any, to the date of purchase; provided that the Company will not be required to purchase Notes with the Net Cash Proceeds of a Restricted Asset Sale if and to the extent that on or before the 180th day after the date on which the Company or such Company Subsidiary consummates the Restricted Asset Sale, the Company or such Company Subsidiary applies all or part of the Net Cash Proceeds from the Restricted Asset Sale to acquire other assets for use in the Company's gaming business, and upon consummation thereof, the Trustee shall have received a perfected security interest in the property or assets acquired by the Company or any of its Company Subsidiaries in connection therewith. Each offer to purchase Notes after a Restricted Asset Sale shall remain open for a period of at least twenty (20) business days. In the event any Restricted Asset Sale involves any Collateral, the Company or such Company Subsidiary, as the case may be, shall cause such Net Cash Proceeds to be deposited in a Collateral Account maintained by the Trustee. Such funds may be released from the Collateral Account only to repurchase Notes or to acquire assets for use in the Company's gaming business. Application of Net Cash Proceeds in Event of Loss. In the event that the Company or any Company Subsidiary suffers any casualty loss or government taking to any material asset, on or before the 360th day that the Company or such Company Subsidiary received any Net Cash Proceeds from such Event of Loss, the Company shall make an offer to purchase from all Holders up to a maximum principal amount (expressed as a multiple of $1,000) of Notes equal to the Net Cash Proceeds at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest thereon, if any, to the date of purchase; provided that the Company will not be required to purchase Notes with such Net Cash Proceeds if and to the extent that on or before the 360th day after the date on which the Company or such Company Subsidiary receives such Net Cash Proceeds, the Company or such Company Subsidiary applies all or part of the Net Cash Proceeds to acquire other assets for use in the Company's gaming business and upon consummation thereof, the Trustee shall have received a perfected security interest (subject only to Permitted Liens) in the property or assets acquired by the Company or any of its Company Subsidiaries in connection therewith. In the event any casualty loss or government taking involves any Collateral, the Company or such Company Subsidiary, as the case may be, shall cause such Net Cash Proceeds to be deposited in a Collateral Account maintained by the Trustee. Such funds may be released from the Collateral Account only to repurchase Notes or to acquire assets for use in the Company's gaming business. Limitation on Company Subsidiary Preferred Stock. The Company shall not issue or permit any Company Subsidiary to issue, directly or indirectly, any preferred stock other than preferred stock issued to and held by the Company or a wholly owned Company Subsidiary of the Company. Ownership of Stock of Company Subsidiaries. The Company shall at all times have, or cause a wholly owned Company Subsidiary (other than a Non-Operating Subsidiary) of the Company to have, ownership of at least 100% of each class of Voting Stock of, and all other equity securities in, each Company Subsidiary other than a Company Subsidiary which becomes such as a result of a permitted Investment. Limitation on Transactions with Affiliates. The Company shall not, and shall not permit any Company Subsidiary to, conduct any business or enter into any transaction or series of transactions with any of their respective Affiliates (defined to include entities having 15% or more voting control), except such transactions that are on terms that are no less favorable to the Company or such Company Subsidiary, as the case may be, than those that could have been obtained in a comparable transaction on an arm's-length basis from an unaffiliated third party. All transactions with Affiliates involving aggregate payments (i) in excess of $500,000 shall not be permitted unless, prior to the consummation thereof, the transaction shall be approved by the Board of Directors of the Company, including a majority of the independent directors, as evidenced by a Board Resolution, and (ii) in excess of $2 million shall not be permitted unless, prior to consummation thereof, the Company shall, in addition to board approval, receive a favorable opinion as to the fairness of the transaction from any national or regional investment banking firm with recognized experience with the gaming industry. Change in Nature of Business. The Company shall not, and shall not permit any of its Company Subsidiaries to, own, manage or conduct any operation other than an operation involved in the gaming and ancillary businesses. Maintenance of Consolidated Fixed Charge Coverage Ratio. The Company shall, at the end of each fiscal quarter beginning with the fiscal quarter ending March 31, 1998, maintain the ratio of the difference between its Consolidated EBITDA and its Capital Expenses to its Consolidated Fixed Charges for the four quarters then ending at a ratio which is greater than or equal to 1.25 to 1. Consolidation, Merger, Conveyance, Transfer or Lease. Except as part of a permitted Restricted Asset Sale, the Company shall not consolidate with, merge with or into, sell, assign, convey, lease or transfer all or substantially all of its properties and assets to any Person or group of affiliated Persons unless (i) the Company shall be surviving entity or the surviving entity shall be a corporation organized and existing under the laws of the United States or any State thereof or the District of Columbia; (ii) the surviving entity shall expressly assume all of the obligations of the Company under the Notes, the Indenture, and the Security Documents; (iii) no Default or Event of Default shall have occurred and be continuing; (iv) the surviving entity shall, immediately after giving effect to such transaction on a pro forma basis, have a Consolidated Net Worth equal to or greater than the Consolidated Net Worth of the Company immediately prior to such transaction; (v) immediately after giving effect to such transaction on a pro forma basis, the Company or the surviving entity could incur at least $1.00 of additional Indebtedness and maintain a Consolidated Coverage Ratio of no less than the ratio necessary to incur additional Indebtedness; (vi) the surviving entity shall have delivered to the Trustee an Officer's Certificate stating that such consolidation, merger, conveyance, transfer or lease and supplemental indenture if a supplemental indenture is required in connection with such transaction or series of transactions complies with this covenant and that all conditions precedent in the Indenture relating to the transaction or series of transactions have been satisfied, and (vii) such transaction will not result in the loss of any Gaming License or Change in Control. Other than the provisions of the Indenture discussed above, the Indenture may not afford Holders any further protection in the event of a highly leveraged transaction, reorganization, restructuring, merger or similar transaction involving the Company that may adversely affect the holders of the Notes, if such transaction is not a transaction defined as a Change of Control. EVENTS OF DEFAULT AND REMEDIES The following are Events of Default under the Indenture: (a) the default in the payment of any interest on any Note when it becomes due and payable and the continuance of any such default for a period of ten (10) days; or (b) the default in the payment of the principal of or premium, if any, on any Note when due at maturity, upon acceleration, mandatory redemption, optional redemption, required purchase or otherwise; or (c) the failure by the Company to own directly or through wholly owned Company Subsidiaries subject to certain exceptions, 100% of the Voting Stock of all Company Subsidiaries, the failure by the Company to maintain the required Consolidated Fixed Charges Coverage Ratio at the required level or if the Company or any Company Subsidiary modifies any agreement with Christopher B. Hemmeter or Mark M. Hemmeter existing as of the Issue Date or enters into any additional agreement after the Issue Date with either Person. (d) default in the performance, or breach of any covenant or warranty of the Company or any Company Subsidiary in the Indenture, or by the Company or any Guarantor under any other Noteholder Document, or by any Guarantor under its Guarantee (other than defaults otherwise specified in this section), and the continuance of such default or breach for a period of thirty (30) days after written notice to the Company by the Trustee or to the Company and the Trustee by the holders of at least 25% in aggregate principal amount of the outstanding Notes; or (e) failure by the Company or any Company Subsidiary to make any payment when due or within applicable grace periods with respect to any other Indebtedness to the extent that all such payments then due aggregate the principal amount of $1 million or more; or (f) a final judgment for the payment of money in excess of $1 million shall be entered against the Company, any Guarantor or any Company Subsidiary and remaining undischarged for a period of thirty (30) days; or (g) any warrant of attachment in an amount of $1 million or more shall be issued against any portion of the property or assets of the Company, any Guarantor or any Company Subsidiary; or (h) certain events of bankruptcy, insolvency or reorganization with respect to the Company or any Company Subsidiary shall have occurred; or (i) any Noteholder Document ceases to be in full force and effect or any Noteholder Documents ceases to create in favor of the Trustee, with respect to any portion of the Collateral, a valid and perfected Lien on the Collateral (subject only to Permitted Liens) purported to be covered thereby; or (j) any Guarantee of a Guarantor is determined by a court of competent jurisdiction to be null and void with respect to such Guarantor or any Guarantor denies that it has any further liability under its Guarantee or gives notice to such effect; or (k) the cessation of substantially all gaming operations at any Gaming Facility which has commenced operations, other than the Central City Casino, for more than 45 days, except as a result of an Event of Loss (or 90 days in the case of cessation as a result of renovations to or construction at or adjacent to such Gaming Facility); or (l) the revocation, suspension or involuntary loss of the legal right to operate any Gaming Facility which continues for more than 45 days; or (m) the Company ceases to own 100% of the Voting Stock of BWBH, Inc., sells the Black Hawk Casino or all or a significant portion of BWBH, Inc.'s assets or properties, the occurrence of a Restricted Asset Sale involving assets or property owned or leased by BWBH, Inc. or used by BWBH, Inc. in the operation of the Black Hawk Casino, or certain Events of Loss occur with respect to the Black Hawk Casino or BWBH, Inc. The Company is required to deliver to the Trustee on or before the date which is 45 days after the end of each of the first three fiscal quarter of the Company's fiscal year and on or before the date which is 90 days after the end of each fiscal year of the Company, an officer's certificate stating whether or not any Default or Event of Default has occurred. Within 45 days after the occurrence of any Default, unless such Default shall have been cured or waived, the Trustee must deliver notice of such Default known to the Trustee to all Holders. Except in the case of a Default specified in clauses (a) or (b) above, the Trustee may withhold such notice if and so long as it determines in good faith that withholding such notice is in the interest of the Holders. If an Event of Default (other than an Event of Default specified in clause (h) above) occurs, the Trustee or the Holders of at least 25% in principal amount of the outstanding Notes may, by written notice, declare the principal of, premium, if any, and accrued interest on all the Notes to be immediately due and payable. If an Event of Default specified in clause (h) occurs, then the principal of and accrued interest on all the Notes shall become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. After a declaration of acceleration, the Holders of a majority in principal amount of Outstanding Notes may, by notice to the Company and the Trustee, rescind such declaration of acceleration if (a) the Company has deposited with the Trustee a sum sufficient to pay the unpaid principal of (and premium, if any, on) the Notes, all overdue interest on the Notes (including interest on overdue interest), and the Trustee's reasonable expenses, (b) all existing Events of Default have been cured or waived, other than nonpayment of principal of and interest on the Notes due solely by such acceleration, and (c) the rescission of acceleration would not conflict with any judgment or decree. Notwithstanding the preceding paragraph, in the event of a declaration of acceleration in respect of the Notes because of an Event of Default specified in clause (e), such declaration of acceleration shall be automatically annulled if (i) the Indebtedness that is the subject of such Event of Default has been discharged or the holders thereof have waived the default and rescinded their declaration of acceleration in respect of such Indebtedness, (ii) the Company shall have given notice of such discharge to the Trustee (countersigned by the holders of such Indebtedness) within 30 days after such declaration of acceleration in respect of the Notes, and (iii) no other Event of Default has occurred during such 30 day period which has not been cured or waived. Upon the occurrence of an Event of Default which is continuing, the Trustee may, or at the direction of the Holders of at least 25% in principal amount of the outstanding Notes shall, initiate suit for collection of the amounts due under the Notes and the Guarantees, exercise all rights and remedies in respect of the Collateral pursuant to the Noteholder Documents or otherwise exercise any rights and remedies available to it under the Indenture or otherwise. No Holder of any of the Notes has any right to institute any proceeding with respect to the Indenture or any remedy thereunder, unless the Holders of at least 25% in principal amount of the outstanding Notes have made written request, and offered reasonable indemnity, to the Trustee to institute such proceeding as Trustee, the Trustee has failed to institute such proceeding within 15 days after receipt of such notice and the Trustee has not within such 15-day period received directions inconsistent with such written request by Holders of a majority in principal amount of the outstanding Notes. Such limitations do not apply, however, to a suit instituted by a Holder for the enforcement of the payment of the principal of, premium, if any, or accrued interest on, such Note on or after the respective due dates expressed in such Note. During the existence of an Event of Default, the Trustee is required to exercise such rights and powers vested in it under the Indenture and use the same degree of care and skill in its exercise thereof as a prudent Person would exercise under the circumstances in the conduct of such Person's own affairs. Subject to the provisions of the Indenture relating to the duties of the Trustee, in case an Event of Default shall occur and be continuing, the Trustee is not under any obligation to exercise any of its rights or powers under the Indenture at the request or direction of any of the holders unless such holders shall have offered to such Trustee reasonable security or indemnity. Subject to certain provisions concerning the rights of the Trustee, the holders of a majority in principal amount of the outstanding Notes have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee exercising any trust or power conferred on the Trustee. DEFEASANCE The Company may at any time terminate all of its obligations with respect to the Notes and the Indenture ("Legal Defeasance"), except for certain obligations, including those regarding any trust established for a defeasance and obligations to register the transfer or exchange of the Notes, to replace mutilated, destroyed, lost or stolen Notes and to maintain agencies in respect to the Notes. The Company may also at any time terminate its obligations under certain covenants set forth in the Indenture that constitute a Default or an Event of Default with respect to the Notes issued under the Indenture ("Covenant Defeasance"). In order to exercise either Legal Defeasance or Covenant Defeasance, the Company must irrevocably deposit with the Trustee in trust, for the benefit of the Holders, money or United States Government Obligations (or a combination thereof) in such amounts as will be sufficient to pay the principal of, premium, if any, and interest on the Notes to redemption or maturity, together with all other sums payable by it under the Indenture, and comply with certain other conditions, including the delivery of an opinion as to certain tax matters. SATISFACTION AND DISCHARGE Upon the request of the Company, the Indenture will cease to be of further effect (except as to surviving rights of registration of transfer or exchange of Notes) as to all outstanding Notes when either: (a) all such Notes theretofore authenticated and delivered (except lost, stolen or destroyed Notes which have been replaced or paid and Notes for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust) have been delivered to the Trustee for cancellation; or (b)(i) all such Notes not theretofore delivered to the Trustee for cancellation have become due and payable or will become due and payable at their Stated Maturity within one year or are to be called for redemption within one year, and the Company has irrevocably deposited or caused to be deposited, prior to the date of such discharge, with the Trustee funds sufficient to pay and discharge the entire indebtedness on the Notes not theretofore delivered to the Trustee for cancellation, for principal, premium, if any, and accrued interest to the date of such deposit; (ii) the Company has paid all sums payable by it under the Indenture, and (iii) the Company has delivered to the Trustee an Officer's Certificate and an opinion of counsel stating that all conditions precedent to satisfaction and discharge have been complied with. AMENDMENTS AND WAIVERS The Company may, when authorized by resolutions of its Board of Directors, and the Trustee may, without the consent of the Holders, amend, waive or supplement the Indenture, the Security Documents or the Notes for certain specified purposes. The purposes for which amendments may be made without the consent of the holders include, among other things, curing ambiguities, defects or inconsistencies, maintaining the qualification of the Indenture under the Trust Indenture Act, or making any change that does not adversely affect the rights of any Holder. Other amendments and modifications of the Indenture, the Notes or the Security Documents may be made by the Company and the Trustee with the consent of the Holders of not less than a majority of the aggregate principal amount of the Outstanding Notes, provided that no such modification or amendment may, without the consent of the Holder of each Outstanding New Note affected thereby: (a) Alter the maturity, principal amount, interest rate or priority of the Notes (or the right to institute suit for any payment after stated maturity), (b) Release any Guarantor from its Guarantee or amend the provisions of the Indenture relating to the Guarantee (other than a release resulting from a permitted sale of all of the capital stock of a Guarantor), (c) Except as otherwise provided in the Indenture, release any Collateral or permit creation of any Lien senior to or equal to the Lien of any Security Document, or (d) Reduce the percentage in principal amount of the Outstanding Notes the consent of whose Holders is required for any supplemental indenture, waiver, amendment or consent to take any action under the Indenture. No supplemental indenture shall, without the consent of the Holders of 66 2/3% in principal amount of the Outstanding Notes, waive or amend the obligation of the Company to repurchase the Notes upon a Change of Control. See "- Mandatory Offers to Purchase - Offer to Purchase Upon Change of Control". REGARDING THE TRUSTEE Fleet National Bank, Hartford, Connecticut, will serve as Trustee under the Indenture and will act as collateral agent and the mortgagee, as applicable, under the Security Documents. Any replacement trustee must be qualified to act as such under the United States Trust Indenture Act of 1940, as amended. GUARANTEES OF 12% SENIOR SECURED PAY-IN-KIND NOTES DUE 2003 BWBH, BWCC, Millsite and Silver Hawk, have irrevocably and unconditionally guaranteed the payment of the Notes and the Company's obligations under the Indenture. The Guarantees of the Guarantors are in addition to (and not in substitution for) any other security for the Notes and may not be revoked by Guarantor until all guaranteed obligations have been indefeasibly paid and performed in full. The liability of each Guarantor under its Guarantee is joint and several for the full amount of each new Note and is independent of, and not in consideration of or contingent upon, the liability of the Company or any other Guarantor. The obligation of each Guarantor under its Guarantee is continuing, absolute and unconditional without regard to (i) the legality, validity or enforceability of the Notes, the Indenture, any Security Document, any Lien or Collateral or the Guarantee given by any other Guarantor; (ii) any defense (other than payment), set-off or counterclaim that may be available to the Company or any other Guarantor against any Holder; or (iii) any other circumstance whatsoever. Each Guarantor waives (i) any and all rights of subrogation, indemnity or reimbursement (until all guaranteed obligations have been paid in full); (ii) the right to require the Holders to proceed against the Company, any other Guarantor, or any Collateral for the Notes or other guaranteed obligations; (iii) all rights under applicable law which reduce a guarantor's obligations; (iv) the benefit of any statute of limitations; (v) any requirement of marshalling or any other principle of election or remedies; (vi) any right to assert any defense, set-off or counterclaim; (vii) notice of any kind, except as expressly required by any Security Documents securing any guaranteed obligations, and (viii) all defenses available to any Guarantor by virtue of valuation, stay, moratorium or other law. LEGAL MATTERS Certain matters regarding the validity of the Notes, the Guarantee and the Common Stock will be passed upon for the Company by LeBoeuf, Lamb, Greene & MacRae, L.L.P., a partnership including professional corporations. EXPERTS The consolidated financial statements of the Company at December 31, 1994 and 1995, and for each of the three years in the period ended December 31, 1995, appearing in this Prospectus and Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as set forth in their reports thereon appearing elsewhere herein and in the Registration Statement, and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. INDEX TO FINANCIAL STATEMENTS Page CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Public Accountants..................................F-2 Consolidated Balance Sheets...............................................F-3 Consolidated Statements of Operations.....................................F-4 Consolidated Statements of Stockholders' Equity (Deficit).................F-5 Consolidated Statements of Cash Flows.....................................F-6 Notes to Consolidated Financial Statements................................F-8 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Hemmeter Enterprises, Inc.: We have audited the accompanying consolidated balance sheets of Hemmeter Enterprises, Inc. and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Hemmeter Enterprises, Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As described more fully in Note 1 to the consolidated financial statements, on November 7, 1995, the Company filed a voluntary petition under Chapter 11 of the Federal Bankruptcy Code and has since operated its business as a debtor-in-possession under the supervision the Bankruptcy Court. The Company's proposed plan of reorganization ("Plan" -- see Note 1) was confirmed by the Bankruptcy Court on March 28, 1996; however, there are certain events that must occur for the Plan to be declared effective by the Bankruptcy Court. Because the Company's Plan is not yet effective, and the Company would be unable to satisfy its default on its senior secured pay-in-kind notes if the Plan does not become effective, substantial doubt exists regarding the Company's ability to continue as a going concern. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Denver, Colorado, April 11, 1996 <TABLE> HEMMETER ENTERPRISES, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED BALANCE SHEETS (in thousands) <CAPTION> Predecessor Company Reorganized Company (a) December 31, June 30, 1996 ASSETS 1994 1995 (unaudited) ------ ---- ---- CURRENT ASSETS: <S> <C> <C> <C> Cash and cash equivalents................................... $ 7,977 $ 3,623 $ 5,369 Accounts receivable, net.................................... 1,109 226 260 Inventories................................................. 85 85 94 Prepaid expenses............................................ 1,581 638 598 Due from affiliates, net.................................... 3,625 -- -- ---------- ----------- ------------ Total current assets................................. 14,377 4,572 6,321 --------- ----------- ------------ PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS................... 69,079 32,127 43,488 EQUITY INVESTMENT IN UNCONSOLIDATED SUBSIDIARY................... 18,010 18,010 -- -- RESTRICTED FUNDS IN ESCROW....................................... 18,648 -- 509 EXCESS REORGANIZATION VALUE (Note 1)............................. -- -- 18,676 OTHER ASSETS, net................................................ 20,979 981 776 ---------- ----------- ------------ $ 141,093 $ 37,680 $ 69,770 ========= =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable............................................ $ 3,118 $ 404 $ 5,671 Accrued expenses............................................ 3,727 3,953 3,532 Current portion of credit facility.......................... -- -- 1,347 Current portion of notes payable............................ 14,610 -- -- Current portion of obligations under capital leases 787 --------- ---------- ------------ Total current liabilities............................ 22,242 4,357 10,550 --------- ---------- ------------ NOTES PAYABLE, net of current portion: Senior secured notes payable................................ 154,213 -- 50,000 Obligations under capital leases............................ 1,462 -- -- Other notes................................................. -- -- 5,272 --------- ---------- ------------ 155,675 -- 55,272 --------- ---------- ------------ LIABILITIES SUBJECT TO COMPROMISE................................ -- 186,460 -- --------- ---------- ------------ ---- Total liabilities.................................... 177,917 190,817 65,822 --------- ---------- ------------ COMMITMENTS AND CONTINGENCIES (NOTE 12) STOCKHOLDERS' EQUITY (DEFICIT): Preferred stock, $.01 par value, 2,000,000 shares authorized, none issued................................ -- -- -- Common stock, $.01 par value, 50,000,000 shares authorized, 9,847,787 and 11,786,235 shares issued and outstanding at December 31, 1994 and 1995, respectively, cancelled on June 6, 1996.................. Warrants issued............................................. 99 118 -- 8,266 7,000 -- Common stock,$.01 par value, 20,000,000 shares authorized, 5,138,888 shares issued and outstanding at June 30, 1996............................................ -- -- 51 Additional paid-in capital.................................. 2,012 2,162 14,653 Accumulated deficit......................................... (47,201) (162,417) (10,756) --------- ---------- ----------- Total stockholders' equity (deficit)................. (36,824) (153,137) 3,948 --------- ---------- ----------- $ 141,093 $ 37,680 $ 69,770 ========= ========== =========== <FN> (a) Due to the Reorganization and implementation of fresh-start reporting, financial statements for the new Reorganized Company (period starting June 7, 1996) are not comparable to those of the Predecessor Company. See Notes to the Financial Statements for additional information. </FN> </TABLE> The accompanying notes are an integral part of these consolidated balance sheets. <TABLE> HEMMETER ENTERPRISES, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) <CAPTION> Six June 7, Month January 1, 1996 Years Ended December 31, Ended 1996 through ------------------------ June 30, through June 30, 1993 1994 1995 1995 June 6, 1996 1996 ---- ---- ---- ---- --------- --------- (unaudited) (unaudited) (unaudited) <S> <C> <C> <C> <C> <C> <C> Casino........................... $ 35,984 $ 42,724 $ 44,854 $ 22,383 $ 19,126 $ 3,100 Food and beverage................. 2,935 3,571 3,737 1,804 1,288 215 Other............................. 259 389 286 155 32 7 -------- --------- --------- ---------- --------- ---------- Gross revenues.................. 39,176 46,684 48,877 24,342 20,446 3,322 Less: promotional allowances........... (708) (1,210) (1,449) (675) (464) (77) -------- --------- --------- ---------- --------- --------- Net revenues.................. 38,468 45,474 47,428 23,667 19,982 3,245 -------- --------- --------- ---------- --------- --------- OPERATING EXPENSES: Casino.............................. 12,705 14,006 13,087 6,518 5,544 591 Gaming taxes and device fees ....... 7,703 8,178 8,277 4,562 3,614 760 Food and beverage 3,270 3,140 3,173 1,551 1,299 200 General and administrative: Casino........................... 4,325 3,281 3,223 1,802 1,249 194 Corporate........................ -- 8,108 6,470 4,200 902 147 Marketing........................... 3,376 3,776 5,806 2,759 2,349 435 Depreciation and amortization....... 3,931 4,307 4,771 2,351 1,882 396 Pre-opening......................... -- 2,594 -- -- 47 341 Reorganization items (Note 1)....... -- -- 17,910 500 2,290 -- Impairment of assets (Notes 5 and 11) -- 6,875 10,945 5,077 -- -- Predevelopment costs................ -- 3,929 402 -- -- -- Other............................... -- 241 -- 73 244 -- --------- ------- --------- --------- ------- --------- Total operating expenses........ 35,310 58,435 74,064 19,420 3,064 29,393 --------- ------- --------- --------- ------- --------- </TABLE> <TABLE> <CAPTION> <S> <C> <C> <C> <C> <C> <C> INCOME (LOSS) FROM OPERATIONS...................... 3,158 (12,961) (26,636) (5,726) 562 181 Interest expense (includes $4,755 and $122 to affiliates in 1993 and 1995, respectively, (contractual interest of $3,179 was not recognized for December 31, 1995 (Note 7))....... (6,987) (18,822) (18,664) (9,976) (579) (403) Interest income........................ -- 1,976 361 66 11 289 Equity in loss of unconsolidated subsidiary....................... -- (2,324) (70,277) (12,187) -- -- --------- ---------- ----------- ---------- --------- ---------- INCOME (LOSS) BEFORE INCOME TAX.............................. (3,829) (32,131) (115,216) (27,600) 49 (211) Provision for income taxes.......... -- -- -- -- --------- ---------- ---------- ---------- --------- ---------- gain................................ (3,829) (32,131) (115,216) (27,600) 49 (211) Extraordinary gain from reorganization items............................... -- -- -- -- 164,358 -- ========== ========== =========== ========= ========= ========== NET INCOME (LOSS).....................$ (3,829) $ (32,131) $ (115,216) $(27,600) $ 164,407 $ (211) ========== ========== =========== ========= ========= ========== NET INCOME (LOSS) PER SHARE(b)........ N/A N/A N/A N/A N/A (0.04) ========== ========== ============ ========= ========= ========== WEIGHTED AVERAGE COMMON AND EQUIVALENT SHARES OUTSTANDING.................10,269,641 9,969,142 11,786,23 11,786,235 11,786,235 5,138,888 ========== ========= ========= ========== ========== =========== <FN> (a) Due to the Reorganization and implementation of fresh start reporting, financial statements for the new Reorganized Company (period starting June 7, 1996) are not comparable to those of the Predecessor Company. See Notes to the Financial Statements for additional information. (b) The weighted average number of common shares outstanding and net income per common share for the Predecessor Company have not been presented because, due to the Reorganization and implementation of fresh start reporting, they are not comparable to subsequent periods. </FN> </TABLE> The accompanying notes are an integral part of these consolidated statements. <TABLE> HEMMETER ENTERPRISES, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 and 1995 AND THE SIX MONTHS ENDED JUNE 30, 1996 (in thousands, except number of shares) <CAPTION> Common Stock -------------------------------- Additional Warrants Paid-in Accumulated Shares Amount Issued Capital Deficit Totals ------------ --------- --------- --------- ------------ --------- <S> <C> <C> <C> <C> <C> <C> BALANCES, December 31, 1992................................ -- $ -- $ -- $ 1,239 $ (11,241) $ (10,002) Capital contributions to predecessor companies............. -- -- -- 871 -- 871 Issuance of common stock pursuant to restructuring......... 10,269,641 103 -- (102) -- 1 Issuances of warrants to purchase common stock............. -- -- 8,266 -- -- 8,266 Net Loss................................................... -- -- -- -- (3,829) (3,829) ------------ -------- ----------- --------- --------- ------- BALANCES, December 31, 1993................................ 10,269,641 103 8,266 2,008 (15,070) (4,693) Conversion of common stock to warrants..................... (421,854) (4) -- 4 -- -- Net Loss................................................... -- - -- -- (32,131) (32,131) ------------ -------- ---------- --------- --------- -------- BALANCES, December 31, 1994................................ 9,847,787 99 8,266 2,012 (47,201) (36,824) Vesting of common stock grants to officers and directors... 88,667 1 -- 168 -- 169 Warrants of deconsolidated subsidiary...................... -- -- (1,266) -- -- (1,266) Conversion of warrants to common stock..................... 1,849,781 18 -- (18) -- -- Net Loss................................................... -- - -- -- (115,216) (115,216) ------------ -------- ----------- --------- -------- --------- BALANCES, December 31, 1995................................ 11,786,235 118 7,000 2,162 (162,417) (153,137) Reorganization transaction (unaudited)..................... (6,647,347) (67) (7,000) 12,491 151,872 157,296 Net Loss June 7 through June 30, 1996 (unaudited).......... -- -- -- -- (211) (211) ------------ -------- ----------- -------- ----------- ---------- BALANCES, June 30, 1996 (unaudited)........................ 5,138,888 $ 51 $ -- $ 14,653 $ (10,756) $ 3,948 ============ ======== ========= ======== =========== ========== </TABLE> The accompanying notes are an integral part of these consolidated statements. <TABLE> HEMMETER ENTERPRISES, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) <CAPTION> January 1, June 7, Six 1996 1996 Months through through Years Ended December 31, Ended June June 6, June 30, 30, 1995 1996 1996(a) 1993 1994 1995 ---------- ---------- --------- ---- ---- ---- (unaudited)(unaudited)(unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: <S> <C> <C> <C> <C> <C> <C> Net income (loss)................................ $ (3,829) $ (32,131) $(115,216) $ (27,600) $ 164,407 $ (211) ---------- ---------- ---------- ---------- --------- ------- Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization.................... 3,931 4,307 4,771 2,351 1,882 396 Loss on retirements of property and equipment.... 92 -- 127 73 244 -- Equity in loss of unconsolidated subsidiaries.... -- 2,324 70,277 12,187 Noncash compensation............................. -- -- 169 128 -- -- Predevelopment costs............................. -- 3,929 -- Impairment of assets............................ -- 6,875 11,347 -- -- -- Noncash interest expense..................... 692 17,909 17,895 10,669 495 398 Extraordinary gain from reorganization........... -- -- -- -- (164,358) -- Change in working capital and other............. (433) (650) 1,315 3,141 822 1,611 Noncash reorganization items..................... -- -- 15,317 500 1,825 -- -------- ------- -------- --------- -------- -------- Total adjustments................................ 4,282 34,845 121,218 -- -- -- ------- ------- -------- --------- -------- -------- Net cash provided by operating activities........ 453 2,714 6,002 1,449 5,317 2,194 ------- ------- -------- --------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for property, equipment and leasehold improvements.................................. (9,812) (31,560) (1,508) (1,631) (3,855) (2,090) Investment in development projects............... (571) (3,358) -- 4,208 -- -- Net restricted funds (placed in) disbursed from escrow (71,200) 52,552 4,209 (7,642) (507) (2) Investment in unconsolidated subsidiaries........ -- (20,334) (9,270) -- -- -- Advances to PRIGSA (Note 5)...................... -- (5,875) (289) -- -- -- (Increase) decrease in other assets.............. (7,830) (5,174) 59 -- -- -- Advances to affiliates, net...................... (365) (4,402) (1,257) (510) -- -- -------- -------- ------- -------- -------- ------- Net cash (used in) provided by investing activities (89,778) (18,151) (8,056) (5,575) (4,392) (2,092) -------- -------- ------- -------- -------- ------- </TABLE> <TABLE> <CAPTION> January 1, Six Months 1996 June 7, 1996 Years Ended December 31, Ended June through June through June 30, 1995 6, 1996 30, 1996(a) 1993 1994 1995 ----------- ------------ ------------ ---- ---- ---- (unaudited) (unaudited) (unaudited) <S> <C> <C> <C> <C> <C> <C> CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable to affiliate......... 6,285 -- 2,000 -- -- -- Repayment of notes payable to affiliate.......... (31,851) -- -- -- -- -- Proceeds from notes payable and obligations under capital leases................................ 135,255 13,048 -- 2,000 5,824 -- Payment of debt placement costs, net of accrued liabilities................................... (7,667) (38) (315) -- -- -- Repayments of notes payable and obligations under capital leases................................ (10,565) (2,540) (1,651) (1,331) (3,304) (1,801) Capital contributions received by predecessor companies..................................... 871 -- -- -- -- -- Issuance of warrants to purchase common stock 8,266 -- -- -- -- -- -------- -------- -------- ------- -------- -------- Net cash provided by financing activities........ 100,594 10,470 34 -- -- -- ------- -------- -------- ------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................. 11,269 (4,967) (2,020) (3,457) 3,445 (1,669) CASH AND CASH EQUIVALENTS, at beginning of period (less $2,334 of cash in subsidiary deconsolidated for the 1995 period).............. 1,675 12,944 5,643 5,643 3,623 7,068 -------- ------- -------- -------- ---------- ---------- CASH AND CASH EQUIVALENTS, at end of period......... $12,944 $ 7,977 $ 3,623 $ 2,186 $ 7,068 $5,369 ======= ======= ========= ========= ========== ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest, net of amounts capitalized $ 6,647 $ 965 $ 579 $ 373 $ 19 $ -- ======= ======= ========= ========= ========== ========== SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Issuance of notes payable and capital lease obligations for purchases of property and equipment...... $ 408 $ 726 $ 227 $ -- $ -- $ -- ======== ======= ========= ========= ========= ========== Issuance of notes payable for accrued interest obligations.................................. $ -- $17,001 $ 9,416 $ -- $ -- $ -- ======== ======= ========= ========= ========= ========== <FN> (a) Due to the Reorganization and implementation of fresh-start reporting, financial statements for the new Reorganized Company (period starting June 7, 1996) are not comparable to those of the Predecessor Company. See Notes to the Financial Statements for additional information. </FN> </TABLE> The accompanying notes are an integral part of these consolidated statements. HEMMETER ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1994 AND 1995 AND AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 (Information as of June 30, 1996 and for the six months ended June 30, 1995 and 1996 is unaudited) (1) ORGANIZATION, PLAN OF REORGANIZATION AND GOING-CONCERN CONSIDERATIONS ORGANIZATION Hemmeter Enterprises, Inc. ("HEI"), and its subsidiaries (the"Company"), develop, own and operate gaming and related entertainment facilities. HEI was incorporated in August 1993 to acquire and serve as the parent company of certain companies now comprising HEI's wholly owned subsidiaries pursuant to a restructuring of certain entities under common control which was consummated on December 17, 1993. The accompanying financial statements have been prepared to give effect to the 1993 restructuring. Three wholly owned subsidiaries, BWBH, Inc., BWCC, Inc., Silver Hawk Casino, Inc., own and operate limited stakes gaming facilities in Colorado (collectively, the "Colorado Casinos"). Millsite 27, Inc., also a wholly owned subsidiary, owns a surface parking facility constructed in 1994 for the benefit of BWBH, Inc.'s casino. The Colorado Casinos commenced operations in 1992. Another wholly owned subsidiary, Grand Palais Riverboat, Inc. ("GPRI"), is a fifty percent joint venture partner in River City Joint Venture ("RCJV") with Crescent City Capital Development Corp. ("CCCD"), an affiliate of Capital Gaming International, Inc., which developed and operated a riverboat gaming project in New Orleans, Louisiana (the "Riverboat Project") (Note 6). GPRI and CCCD each operated separate riverboat gaming operations which commenced on March 29, 1995 and April 3, 1995, respectively. RCJV operated an entertainment and docking facility for the two riverboats, with parking, dining, entertainment facilities and other amenities. GPRI BANKRUPTCY The Riverboat Project incurred construction cost overruns and had substantial operating losses as a result of the failure of the New Orleans gaming market to develop as anticipated and the resulting failure of the Riverboat Project to achieve projected revenues. As a result, GPRI and CCCD terminated riverboat gaming operations on June 6, 1995 and June 9, 1995, respectively. On July 26, 1995, certain creditors filed an involuntary petition under Chapter 11 of the Federal Bankruptcy Code against GPRI, CCCD and RCJV. On July 27, 1995, GPRI converted its petition to a voluntary petition under Chapter 11 of the Federal Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of Louisiana (the "Court"). Since that time, GPRI has continued to operate as a debtor-in-possession, although the business of GPRI has not operated since June 6, 1995. Following termination of operations, HEI management began assessing the possibility that all or part of the Riverboat Project could be sold to another gaming operator. After evaluation and negotiation of potential transactions, HEI, certain creditors and GPRI entered into a letter of intent with Casino America, Inc. ("Casino America Agreement"). Generally, the Casino America Agreement provides for the purchase by Casino America, Inc. of 100% of the newly issued shares of common stock of a Reorganized GPRI in exchange for consideration from Casino America, Inc. valued at approximately $59 million, including cash, stock, notes and the assumption of certain GPRI liabilities. On January 30, 1996, GPRI filed its proposed plan of reorganization ("GPRI Plan") pursuant to which it seeks to implement the terms of the Casino America Agreement. The GPRI Plan was confirmed by the Court on March 29, 1996. The GPRI Plan will be consummated on the date on which the conditions to the effectiveness of the GPRI Plan have been satisfied or waived (Note 13). Under the GPRI Plan, the Company will receive GPRI's causes of action, if any, against GPRI's joint venture partner in the Riverboat Project and will receive no other distribution in respect of its stock ownership in GPRI or any claim that it may have in the GPRI bankruptcy case. HEI BANKRUPTCY In June 1995, HEI received "Notices of Default" from the trustee of its Senior Secured Pay-In-Kind Notes (the "Old Notes") (See Note 7), alleging that HEI was in default under various provisions of the Old Notes Indenture. The alleged defaults included, among other matters, violations related to the issuance of certain additional indebtedness, the termination of riverboat gaming operations, the numerous liens filed against the Riverboat Project and the failure to file audited financial statements on a timely basis. HEI negotiated with a committee comprised of certain holders of the Old Notes to restructure the Old Notes. On November 7, 1995, HEI and three of its wholly owned subsidiaries (BWBH, Inc. BWCC, Inc. and Millsite 27, Inc.) (collectively, the "Debtor"), filed voluntary petitions for reorganization under Chapter 11 of the Federal Bankruptcy Code in the District of Delaware as contemplated by the negotiations with the holders of the Old Notes. The Chapter 11 case subsequently was transferred to the Court. The Court allowed the Debtor to continue business operations as a debtor-in-possession. The Debtor's primary operations now consist of the Bullwhackers Casinos. The Debtor received approval from the Court to pay or otherwise honor certain of its pre-petition obligations related to the Bullwhackers Casinos, including employee wages and benefits, utilities, and claims of certain trade vendors. Accordingly, these amounts have been paid or are included in the appropriate liability captions in the accompanying December 31, 1995 and June 30, 1996 consolidated balance sheet. In addition, the Court approved the Debtor's entering into a $7.9 million debtor-in-possession financing facility (see Note 7). HEI PROPOSED PLAN OF REORGANIZATION On February 12, 1996, the Debtor filed its Chapter 11 First Amended Plan of Reorganization and Disclosure Statement (as amended, the "Plan") with the Court. The Court granted motions filed by the Debtor approving an amended Disclosure Statement describing the Plan and establishing procedures for notification of creditors and stockholders and for solicitation of formal acceptances of the Plan by creditors. The Plan was confirmed by the Court on March 28, 1996. The Plan will be consummated on the date on which certain conditions specified in the Plan will be satisfied or waived (the "Effective Date"). The following events will occur at the Effective Date pursuant to the Plan: 1. The Debtor will be discharged from any liability to GPRI or its creditors. The Company will no longer have any interest in GPRI or the Riverboat Project and its principal assets at that time will consist of the stock of its subsidiaries which own the Bullwhackers Casinos and The Surface Parking Lot. If the GPRI Plan is not effective prior to the Effective Date, the Company will continue to own the capital stock of GPRI until the GPRI Plan becomes effective. 2. The claims of entities which provide goods and services to the Bullwhackers Casinos will be paid in full or will otherwise be treated in such a manner so that they are not impaired and all other unsecured creditors of the Bullwhackers Casinos will receive notes in a principal amount equal to the allowed amount of their claims which provide for a single payment of principal and accrued interest on the tenth anniversary of the issuance thereof. All other unsecured creditors Company will receive no distribution in respect of their claims against the Company. 3. The holders of the Old Notes and the holder of the secured claim of Resort Income Investors, Inc. ("RII") will receive $50,000,000 in principal amount of 12% Senior Secured Pay-In-Kind Notes of the Company, due 2003 (Note 7), and one hundred percent (100%) of the issued and outstanding capital stock of the "Reorganized Company," subject to being diluted to 90% by certain stock grants to be provided to senior management employees and non-employee directors of the Reorganized Company (Note 8). As a result, the holders of the Old Notes and the RII claim will be the principal creditors and stockholders of the Company. The portion of the new Senior Secured Pay-In-Kind Notes paid to the holder of the RII claim will be less than $1 million and a similar portion of common stock will be issued to the holder of the RII claim. 4. Pursuant to the settlement of certain lawsuits against the Company and certain of its executive officers, the Company will issue two promissory notes to Capital Associates, Inc. ("CAI"), an equipment lessor which had leased equipment to the Company and GPRI, in the respective principal amounts of $1.6 million and $3 million (the "CAI Notes"). The Company's obligation in respect of the CAI Notes will be reduced dollar for dollar by any amounts received by CAI in respect of its claims filed in the GPRI bankruptcy case (Note 10). 5. Certain claims of the Debtor against third parties, including derivative claims against the pre-Effective Date directors, officers, and employees of the Debtor, will be transferred to a litigation trust (the "Litigation Trust"). The trustees of the Litigation Trust are the post-Effective Date directors of the Company and will determine whether or not to pursue any such claims. Any amounts received in respect of any such claims will benefit the holders of the Old Notes and the RII claim (Note 12). 6. The amounts outstanding under the DIP Facility (Note 7) will be paid in full and the DIP Facility will be terminated. The Company anticipates replacing the DIP Facility with a new $12.5 million credit facility on the Effective Date. 7. The Company will change its name to Colorado Gaming & Entertainment Co. LIABILITIES SUBJECT TO COMPROMISE Pursuant to the Chapter 11 proceedings, certain secured and unsecured claims against the Debtor in existence prior to the filing of the petitions for relief under the Federal Bankruptcy Code were stayed while the Debtor continued business operations as a debtor-in- possession. The stayed claims which are "impaired" under the Plan are reflected in the accompanying December 31, 1995 consolidated balance sheet as "liabilities subject to compromise." As of the petition date, the Debtor also discontinued accruing interest on its pre-petition debt obligations. Additional claims have arisen subsequent to the petition date resulting from the rejection of executory contracts and/or leases and from the allowance by the Court of contingent and/or disputed claims. Creditors and other parties in interest have filed claims with the Court which are substantially in excess of the amounts recorded in the Debtor's records. Management believes these differences are primarily related to errors, duplicative claims and overstatement of claims. The exact amount of these liabilities is subject to adjustment as disputed claim amounts are resolved by the Court, which management believes will not have a material adverse effect on the Company's financial position, results of operations or cash flows. Liabilities subject to compromise consist of the following (in thousands): December 31, 1995 Senior Secured Pay-In-Kind Notes................. $174,274 Resort Income Investors notes payable............ 2,122 Equipment financing.............................. 4,169 HEI guarantee of subsidiary debt................. 4,600 HEI trade payables............................... 1,295 --------- Total................................... $186,460 ======== The accompanying consolidated financial statements have been prepared on a going-concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. However, as a result of the Chapter 11 filing and circumstances relating to this event, including the Debtor's highly leveraged financial structure, there is substantial doubt about the continuity of the Company's operations and the realization of the Company's assets and liquidation of its liabilities. While under the protection of Chapter 11, the Debtor may, with the approval of the Court, sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the consolidated financial statements. Further, the proposed Plan will materially change the amounts reported in the consolidated financial statements, which do not give effect to any adjustments to the carrying value of the assets or amounts of liabilities that might be necessary as a consequence of the proposed Plan. The appropriateness of using the going-concern basis is dependent upon both the Plan and the GPRI Plan becoming effective, generation of sufficient cash from operations and financing sources to meet obligations and achievement of satisfactory levels of future operating profit. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary if the Company is unable to continue as a going concern. FRESH START REPORTING Upon confirmation of the Plan, the Company's post-petition liabilities and allowed claims exceeded the reorganization value of the reorganized Company. Additionally, the Plan provides that the existing stockholders of the Company will receive no ownership interest in the Reorganized Company. Because these two conditions exist, the Company is subject to and as of the Effective Date of the Plan, the Reorganized Company will adopt Fresh Start Reporting in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7"). Fresh start reporting will result in material changes to the consolidated balance sheet, including revaluation of assets and liabilities to fair market value and revaluation of equity based on the reorganization value of the ongoing business. The $65.2 million reorganization value was estimated based upon a Discounted Cash Flow Analysis. Under the Discounted Cash Flow Analysis, the value of the Company was calculated utilizing five year projected cash flows plus an estimated terminal value at the end of year five. The terminal value was calculated at 6 times year five cash flows. The cash flows and terminal values were then discounted to present values by applying a discount rate of approximately 17%. The Company's cash flow forecasts reflect numerous assumptions, including modest increases in revenues and profitability resulting primarily from enhanced marketing efforts, selective capital expenditures, implementation of additional cost efficiencies and overall growth in the Black Hawk market. The increases have been assumed to be offset somewhat by an increased level of competition in the Black Hawk market. The forecasts do not take into account the Company's proposed expansion plans including the acquisition and opening of the Silver Hawk Casino or the construction of the proposed parking structure in Black Hawk. Upon adopting fresh start reporting, the reorganization value will be allocated to the assets and liabilities of the Reorganized Company, including subsidiaries. Any excess of the reorganization value over the fair market value of the net assets and liabilities will be reported as excess reorganization value and will be amortized over a 20-year period or less. As a result of adopting fresh start reporting, the Reorganized Company's consolidated financial statements will not be comparable with those prepared before the effective date, including the historical consolidated financial statements included herein. (2) SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of HEI and its wholly owned subsidiaries. Intercompany balances and transactions have been eliminated. As of December 31, 1994, the accounts of GPRI are consolidated with those of HEI and its other majority owned subsidiaries. Because of the pending GPRI Chapter 11 bankruptcy proceedings and Casino America Agreement, it has been determined that HEI does not "control" GPRI and, therefore, GPRI no longer meets the consolidation criteria pursuant to Statement of Financial Standards No. 94, "Consolidation of All Majority-Owned Subsidiaries." Accordingly, effective January 1, 1995, HEI's investment in GPRI is being accounted for under the equity method. Under the equity method, original investments and advances are recorded at cost and adjusted by the Company's share of undistributed losses of the investee. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS Cash and cash equivalents includes cash in banks, currency located in the casinos' vaults, coins located in the gaming device hoppers and other cash used in daily operations. Included in cash and cash equivalents at December 31, 1994, 1995 and June 30, 1996 is restricted cash totaling $618,000, $595,000 and $509,000, respectively, which represents the portion of cash on hand that is required to be maintained by the Bullwhackers Casinos based on regulations promulgated by the Colorado Limited Gaming Control Commission (the "Colorado Gaming Commission"). The Company considers all highly-liquid investments purchased with an original maturity of three months or less to be cash equivalents. The carrying amount of cash equivalents approximates fair value because of the short-term maturity of those investments. INVENTORIES Inventories consist of food and beverage, retail and casino supplies. Inventories are stated at the lower of cost (first-in, first-out basis) or market. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Property, equipment and leasehold improvements are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets. Costs of major improvements are capitalized; costs of normal repairs and maintenance are charged to expense as incurred. OTHER ASSETS Other assets consisted of the following (in thousands): <TABLE> <CAPTION> December 31, 1994 1995 June 30,1996 ---- ---- ------------ <S> <C> <C> <C> Debt placement costs for $140 million 11 1/2% Senior Secured Pay-In-Kind Notes (net of $1,441,000 of accumulated amortization in 1994)............. $ 7,377 $ -- $ -- Dock Board deposit................... 7,551 -- -- Licensing Costs...................... 3,271 -- -- Other, net........................... 2,780 981 776 --------- ------ ------ $ 20,979 $ 981 $ 776 ======== ====== ====== Debt placement costs incurred to obtain the Old Notes were being amortized over the seven-year term of the Old Notes using the effective interest rate method. In 1995, all unamortized debt placement cost were charged-off as reorganization items in accordance with the provisions of SOP 90-7. The Dock Board deposit represents a deposit paid by GPRI to the Board of Commissioners of the port of New Orleans related to the Riverboat Project. Costs incurred in relation to formation of GPRI and licensing fees for its initial farming license have been capitalized and were being amortized over the five-year term of the initial Louisiana gaming license beginning in March 1995. Effective January 1, 1995, as a result of the deconsolidation of GPRI, the Dock Board deposit and license costs were included in the separate financial statements of GPRI. Accumulated amortization of other assets as of December 31, 1994 and 1995 and June 30, 1996 totaled $175,200, $239,400 and $271,500, respectively. ACCRUED EXPENSES </TABLE> <TABLE> Accrued expenses consisted of the following (in thousands): <CAPTION> December 31, June 30, 1994 1995 1996 (unaudited) <S> <C> <C> <C> Gaming taxes payable............ $ 541 $537 $ 542 Accrued payroll and related expenses............. 1,310 1,048 1,023 Accrued offering costs.......... 200 -- -- Accrued gaming liabilities...... 659 437 1,187 Other accruals.................. 1,017 729 780 ------ ------- ------ $3,727 $3,953 $3,532 ====== ====== ====== </TABLE> CASINO REVENUES AND PROMOTIONAL ALLOWANCES In accordance with industry practice, the Company recognizes as casino revenues the net win from gaming activities, which is the difference between gaming wins and losses. The retail value of food and beverage furnished to customers on a complimentary basis is included in gross revenues and then deducted as promotional allowances. The estimated cost of providing such promotional allowances is included in casino operating expenses in the accompanying consolidated statements of operations and totaled approximately $251,000, $429,000 and $615,000 for the years ended December 31, 1994 and 1995, respectively, and for the six months ended June 30, 1996. PREDEVELOPMENT EXPENSE Historically, costs incurred during investigation of potential development projects were capitalized and charged to expense at such time as management concluded that a development project was no longer viable. As of December 31, 1994 all costs related to development projects were expensed as management had determined each of the related projects were no longer viable development opportunities. Beginning in 1995, costs related to investigation of new venue development projects were expensed as incurred. PRE-OPENING EXPENSES The Company expenses pre-opening costs as incurred. Pre-opening costs consist of expenditures incurred prior to the opening of the casinos to prepare the casinos for business and include labor costs, certain consulting, marketing and other direct costs. Because GPRI was consolidated in 1994, pre-opening costs of $2.6 million incurred in 1994 in connection with GPRI's riverboat are reflected in the accompanying 1994 consolidated statement of operations. REORGANIZATION ITEMS Reorganization items consist of income, expenses and other costs directly related to the Chapter 11 reorganization of the Debtor. Reorganization items consisted of the following (in thousands): <TABLE> <CAPTION> December 31, June 30, 1995 1996 (unaudited) <S> <C> <C> Charge-off of debt discount and placement costs..................................... $10,717 $ -- Guarantee of subsidiary debt................. 4,600 -- Professional fees............................ 2,593 2,290 ------- ------ $17,910 $2,290 ======= ====== </TABLE> NET LOSS PER COMMON SHARE Net loss per common share and common equivalent share are computed by dividing net loss by the weighted average number of shares of common stock and common stock equivalents outstanding during the year. For all periods presented in the accompanying consolidated statements of operations, outstanding warrants, options and restricted stock have been excluded from the calculation of weighted average common and common equivalent shares outstanding as their impact in net loss per share would have been antidilutive. NEW AUTHORITATIVE PRONOUNCEMENTS Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," will be adopted by the Company in 1996. The adoption of this Statement is not expected to have a material impact upon the Company's results of operations or financial position. RECLASSIFICATIONS Certain prior period amounts have been reclassified to conform to the current year presentation. INTERIM FINANCIAL STATEMENTS The financial statements as of June 30, 1996 and for the six month periods ended June 30, 1996 and 1995 are unaudited. In management's opinion, the unaudited financial statements as of June 30, 1996 and for the six month periods ended June 30, 1996 and 1995 include all adjustments necessary for a fair presentation. Such adjustments were of a normal recurring nature with the exception of Fresh-start accounting adjustments. (3) RESTRICTED FUNDS IN ESCROW In connection with the issuance of the $140 million aggregate principal amount of Old Notes (Note 7), the Company was required to escrow a portion of the net proceeds to be used to fund a portion of the Company's expected share of the total cost to develop the Riverboat Project (Note 6). The Company also escrowed additional net proceeds used for construction of a surface parking facility (Note 12). Transactions in the escrow account were managed by an independent trustee and disbursement agent who administered requests for disbursements pursuant to a Disbursement Agreement, which was a condition to the issuance of the Old Notes. Total deposits to the escrow account were $81.7 million in 1993 of which $10.5 million and $64.8 million had been disbursed as of December 31, 1993 and 1994, respectively, including $9 million used to repay loans from an affiliate in 1993 (Note 11) and $15 million which was released to the Company in 1994 for general working capital upon the occurrence of certain events as allowed by the Old Notes Indenture. Approximately $2.5 million of the funds disbursed in 1994 were used for construction of the surface parking facility. The remaining funds were disbursed in 1995 for development of the Riverboat Project, including funds for construction of the riverboat, and the acquisition of property for the entertainment and dock facility. Funds held in this account served as collateral for the Old Notes. (4) PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET Property, equipment and leasehold improvements consisted of the following (in thousands): <TABLE> <CAPTION> December 31, June 30, 1994 1995 1996 ---- ---- ---- (unaudited) <S> <C> <C> <C> Land and improvements.............. $ 14,105 $ 14,330 $ 11,799 Building and improvements.......... 5,722 5,764 5,212 Leasehold improvements............. 7,699 7,626 18,901 Gaming equipment, furniture and fixtures.................... 18,204 18,570 18,688 Construction-in-progress........... 33,551 - 3,880 --------- --------- --------- 79,281 46,290 58,480 Less: accumulated depreciation and amortization................ (10,202) (14,163) (14,992) --------- --------- --------- $ 69,079 $ 32,127 $ 43,488 ========= ========= ========= </TABLE> For the year ended December 31, 1994, interest costs totaling $248,000 were capitalized to land and improvements during construction of the surface parking facility. In addition, interest costs totaling $1.3 million and $1.8 million were capitalized on construction costs related to the riverboat in 1993 and 1994, respectively, and are included in construction-in-progress. Construction-in-progress at December 31, 1994 consisted of construction costs related to GPRI's riverboat. Effective January 1, 1995, these costs are now reflected in the separate financial statements of GPRI. Depreciation and amortization are computed using the straight-line method over the following useful lives: Useful Lives Land improvements............... 15 years Building and improvements....... 5 - 31.5 years Leasehold improvements.......... 5 - 23 years Gaming equipment, furniture and fixtures................. 5 - 31.5 years (5) NEW VENUE PROJECTS For the years ended December 31, 1994 and 1995, the Company expensed $3.9 million and $402,000, respectively, of predevelopment expenses related to various potential development opportunities in new gaming venues throughout North America. The costs incurred represented design, presentation, research, consulting, regulatory and other costs associated with pursuing development opportunities in new gaming venues. The Company expensed these costs as management determined that each of the potential new gaming venues were no longer viable development projects. In early 1995, the Company ceased such activities due to its deteriorating financial condition. In September 1994, the Company entered into an agreement to invest $6.2 million for a 25% interest in Promociones e Inversiones de Guerrero S.A. de C.V. ("PRIGSA"), a Mexico based development and gaming Company with operations in Acapulco. As of December 31, 1994, the Company had contributed $5.8 million towards its investment. In 1995, the Company contributed its remaining commitment of approximately $289,000. The Company had an option to convert its contributions to shares of common stock in PRIGSA upon approval by the Mexican government. Results of PRIGSA operations upon opening in the fall of 1994 were substantially below expectations and, as a result, PRIGSA suffered significant operating losses. Because the majority of PRIGSA's other debt securities are in a senior position to PRIGSA's obligation to the Company, the Company has determined that it is unlikely that the Company's advances will be repaid or that the Company will otherwise realize its investment in PRIGSA. Accordingly, as of December 31, 1994, the Company charged-off the full value of its investment to impairment of assets in the accompanying consolidated statements of operations. (6) INVESTMENT IN AND ADVANCES TO GRAND PALAIS RIVERBOAT, INC. As discussed in Note 1, GPRI was formed in March 1993 to design, develop, own and operate a riverboat casino in New Orleans, Louisiana. In connection with the issuance of the Old Notes, HEI escrowed $79.2 million of the proceeds of the Old Notes for GPRI's share of the development costs of the proposed Riverboat Project (Note 3). In June 1994, GPRI and CCCD formed the RCJV to develop the proposed Riverboat Project. The original budgeted cost for the Riverboat Project was $196.3 million, exclusive of capitalized interest. Through December 31, 1994, the Company had invested $64.2 million in GPRI relating to the construction of the riverboat, licensing, Dock Board costs and funds invested in RCJV for construction of the entertainment and dock facility. In addition, in 1994 the Company recorded net losses of $3.3 million from GPRI, related to pre-opening costs of GPRI and RCJV, offset by interest income. Amounts relating to GPRI have been consolidated with HEI and its other subsidiaries in the accompanying December 31, 1994 consolidated financial statements. In April 1995, the Riverboat Project budget was revised to approximately $223 million. The increased costs primarily related to additional construction and design fees on the RCJV entertainment and dock facility, funds which were spent to accomplish an accelerated opening, and increased pre-opening costs, including additional bankroll requirements, insurance costs and outside services for staffing and operating the riverboats. GPRI intended to fund its share of these additional costs by deferral of payments, cash flows from the project and additional equity contributions from HEI and from CCCD. Upon commencement of operations, revenues derived during the period of operations of the Riverboat Project were approximately one third of projected revenues. Accordingly, during the period of operations (March 29, 1995 to June 6, 1995), GPRI incurred significant operating losses. As a result of the construction cost overruns and the failure of the Riverboat Project to generate sufficient revenues to cover operating costs, GPRI determined it could no longer continue the operation of its riverboat casino. As of December 31, 1995, HEI's investment in GPRI had increased to $73.5 million, primarily related to additional funds contributed in 1995 to cover construction overruns and operating losses. For the year ended December 31, 1995, GPRI reported a net loss of $71.7 million, including a $20.2 million write-down of GPRI assets to estimated realizable value and a $44.9 million write-down of its interest in RCJV and assumption of certain RCJV debts to be paid by GPRI pursuant to the GPRI Plan in connection with the sale of GPRI to Casino America, Inc. As a result of the losses of GPRI, including its write-down of RCJV, the Company's investment in GPRI has been reduced to zero. As discussed in Note 1, under the GPRI Plan, HEI will receive no distribution on account of its current stock ownership in GPRI, and HEI has also guaranteed $4.6 million of GPRI's debt. (7) NOTES PAYABLE Notes payable consisted of the following (in thousands): <TABLE> <CAPTION> December 31, June 30, 1994 1995(1) 1996 (unaudited) <S> <C> <C> <C> Secured Pay-In-Kind Notes (net of unamortized discount of $5.9 million in 1994)............... $ 151,982 $ 174,274 $ 50,000 Credit facility with a bank............................ 13,048 -- 4,319 Notes payable to gaming equipment vendors............... 3,793 2,623 -- Notes payable to RII.............. -- 2,122 -- Other............................. -- 4,600 2,300 ---------- ---------- --------- 168,823 183,619 56,619 Less: current portion............ (14,610) -- (1,347) ---------- ---------- --------- $ 154,213 $ 183,619 $ 55,272 ========== ========== ========= </TABLE> (1) These amounts are included in "liabilities subject to compromise" in the accompanying December 31, 1995 consolidated balance sheet. DEBTOR-IN-POSSESSION FINANCING On December 8, 1995, the Court approved certain financing and security agreements (the "DIP Facility") between the Debtor and an unaffiliated lender (the "DIP Lender") designed to provide the Debtor with adequate financing to operate its businesses during the bankruptcy period. The aggregate DIP Facility was $7.9 million in the form of revolving credit facilities to provide up to $2.5 million for working capital purposes, $4.4 million for equipment refinancing and $1 million to provide financing for the Debtor's possible acquisition of strategic assets (Note 12). Borrowings under the DIP Facility are secured by a first priority lien and security interest in all of the Debtor's property and equipment, except for certain "permitted liens" as defined in the DIP Facility agreements. In addition, borrowings under the DIP Facility constitute Allowed Superpriority Administrative Expense Claims and, therefore, have priority over substantially all other administrative expense claims of the bankruptcy proceedings. The DIP Facility will be repaid with proceeds from the Exit Financing (see below). Interest on borrowings under the DIP Facility accrue interest at prime plus 2.75%. Loan fees and other expenses totaling $300,000 were paid to the DIP Lender, which amounts are included in other assets in the accompanying consolidated balance sheets and are being amortized over the one-year term of the facility. The term of the DIP Facility is one year subject to an accelerated maturity on the effective date of confirmation of the proposed Plan. The Debtor is subject to certain covenants which require, among other things, that the Debtor maintain certain financial ratios, and that restrict, among other things, the incurrence of additional debt, the disposal of assets and capital expenditures. As of December 31, 1995, there were no outstanding borrowings under the DIP Facility. EXIT FINANCING It is a condition precedent to the effectiveness of the proposed Plan that the Debtor will have closed on a facility from the DIP Lender to provide up to a $12.5 million revolving credit facility to the Reorganized Company to replace the existing DIP Facility. Borrowings under the revolving credit facility will be used for working capital purposes, refinancing of existing equipment secured debt and for construction of a parking structure located near the Bullwhackers Casino (see Note 12) and adjacent to the proposed Silver Hawk Casino in Black Hawk, Colorado. Borrowings, including accrued interest at prime plus 2.375%, would be payable monthly, subject to a maximum five-year term, and would be secured by a first priority lien and security interest in substantially all the assets of the Reorganized Company. SENIOR SECURED PAY-IN-KIND NOTES On December 21, 1993, the Company completed a private offering of 140,000 units consisting of $140 million aggregate principal amount of the Old Notes with detachable warrants to acquire 1,750,000 shares, or 10%, of common stock of the Company. The warrants were valued by the Company at $7 million, which amount was offset against the Old Notes balance and was being amortized as interest costs over the seven-year term of the Old Notes. The net proceeds from the offering, after deducting the commissions and other offering expenses were approximately $131 million. The net proceeds were used to repay construction financing for the Bullwhackers Casinos and provide funds for the Riverboat Project and for working capital purposes. The offering expenses of approximately $9 million, were capitalized as other assets, and were being amortized over the seven-year term of the Old Notes using the effective interest rate method. As of December 31, 1995, all remaining unamortized discount and offering expenses related to the Old Notes were written-off as a reorganization item in accordance with SOP 90-7. Interest on the Old Notes accrued at 12% per annum and was payable semiannually on June 15 and December 15, commencing June 15, 1994. Through December 15, 1995, at the Company's option, interest on the Old Notes was payable either in cash or through the issuance of additional Old Notes. Thereafter, the Company was required to pay interest on the Old Notes in cash. On June 15 and December 15, 1994, the Company made interest payments on the Old Notes by issuing a total of $17 million of additional Old Notes. On June 15, 1995, the Company made interest payments on the Old Notes by issuing a total of $9.4 million of additional Old Notes. No interest payment or issuance of additional Old Notes was made on December 15, 1995, because of the Debtor's bankruptcy filing. The Old Notes were redeemable by the Company, in whole or in part, at any time beginning December 15, 1996, at certain times and redemption prices as specified in the Old Notes Indenture. Unless previously reduced, the Company was required to redeem, at par plus accrued interest, 20% of the then outstanding aggregate principal amount of the Old Notes on each of December 15, 1998 and 1999, with the remainder due in December 2000. To date, no Old Notes have been redeemed. The Old Notes were secured by substantially all the assets of the Company, including the common stock of its subsidiaries, GPRI's joint venture interest in the RCJV, guarantees of certain of HEI's subsidiaries, and other personal property. The Company was also subject to certain covenants which restricted, among other things, the incurrence of additional debt, payment of dividends, ownership of new subsidiaries, new business activities, proceeds from the sale of assets and transactions with affiliates. As discussed in Note 1, in June 1995, HEI received "Notices of Defaults" from the trustee of the Old Notes, alleging that HEI was in default under various provisions of the Indenture. As a result of the defaults under the Indenture, the holders of the Old Notes are entitled to all of the remedies contained in the Indenture, including but not limited to acceleration of repayment of the Old Notes and foreclosing on the security pledged by the Company to the trustee. On November 7, 1995, the Debtor filed for Chapter 11 protection. Accordingly, interest totaling approximately $3 million was not accrued for the period November 7, 1995 to December 31, 1995. Additionally, for the three months ended March 31, 1996, interest totaling $5.2 million was not recorded due to the Chapter 11 proceedings. As of December 31, 1995, the total amount of the Old Notes, plus accrued interest through November 7, 1995, is $174.3 million which amount is included in "liabilities subject to compromise" in the accompanying consolidated balance sheets. The Debtor negotiated with a committee comprised of certain of the holders of the Old Notes to restructure the Old Notes. Pursuant to the proposed Plan, the holders of the Old Notes, along with RII, (see below) will receive, on a pro rata basis, New Senior Secured Notes ("New Notes") having an aggregate principal amount of $50 million and 5 million shares of common stock of the Reorganized Company (Note 8). Interest will accrue at a rate of 12% per annum, and is payable semi-annually. Through the first year, at the option of the Reorganized Company, interest on the New Notes will be payable either in cash or through the issuance of additional New Notes. Thereafter, the Reorganized Company will be required to pay interest on the New Notes in cash. The New Notes will be secured by substantially all the assets of the Reorganized Company, including the common stock of the subsidiaries. The New Notes will be redeemable after the fourth anniversary at redemption prices to be set forth in the New Notes Indenture subject to final maturity in 2003. In addition, the New Notes Indenture will include certain restrictive covenants. OTHER BORROWINGS On May 15, 1995, HEI entered into a $4 million working capital credit facility with RII. HEI borrowed $2 million under this facility, which proceeds were then invested in GPRI. Borrowings accrued interest at 12% and were due on September 30, 1995. The Company granted a security interest to RII in certain of the Company's assets including a subordinated interest in GPRI's riverboat. HEI was unable to repay the $2 million and thus is in default under the RII facility. Interest totaling $35,000 was not accrued from the petition date, November 7, 1995 to December 31, 1995. The $2 million, plus accrued and unpaid interest through November 7, 1995 totaling $2.1 million, is included in "liabilities subject to compromise" in the accompanying consolidated balance sheet as of December 31, 1995. Pursuant to the proposed Plan, RII will receive New Notes and shares of common stock of the Reorganized Company as discussed above. In 1994, GPRI obtained a credit facility from a Bank in the amount of $15 million to fund a portion of the riverboat casino construction. As of December 31, 1994, GPRI had borrowed $13.0 million under this facility. Borrowings accrued interest at prime plus 1% and matured on April 24, 1995 and accordingly, were reflected as a current note payable in the accompanying December 31, 1994 consolidated balance sheet. Effective January 1, 1995, as a result of the de-consolidation of GPRI, borrowings under this credit facility are no longer recorded in the consolidated balance sheets and are recorded in the separate financial statements of GPRI. BWBH, Inc. and BWCC, Inc. are guarantors under this credit facility and, accordingly, the Bank has filed a claim in the bankruptcy proceedings of the Debtor. However, the Bank's claims are expected to be satisfied in accordance with the proposed GPRI Plan (Note 13). During 1991 and 1992, RII made acquisition, development and construction loans to the Company totaling $24.3 million ("RII Notes") for the Bullwhackers Casinos. The original maturity date of the RII Notes was October 31, 1996. The RII Notes were repaid with proceeds from the Old Notes in December 1993. Prior to repayment, interest on the RII Notes accrued at 14.5% and was payable quarterly. Upon prepayment, RII received bonus interest totaling $700,000 in accordance with the terms of the RII Notes. To obtain the financing, the Company paid RII loan fees totaling $729,000. The unamortized balance of these loan fees upon repayment, totaling $457,800, was written off as interest expense in 1993. In May 1992, the Company signed a note agreement with its construction contractor for payment of outstanding construction costs related to the Bullwhackers Casinos. The note, as modified in 1993, required monthly interest payments at prime plus 2%, with maturity in December 1994. This note was repaid with proceeds from the Old Notes in December 1993. The Company financed a portion of the purchase price of the land on which the Bullwhackers Casino in Central City, Colorado is located with a purchase money note payable to the seller. The note required monthly payments of principal and interest of $108,100 (at 10%) through its October 1994 maturity date. This note was repaid with proceeds from the Old Notes in December 1993. The Company financed the acquisition of a portion of the Bullwhackers Casinos' gaming equipment with notes payable to an equipment vendor totaling $7 million. Such notes are secured by the gaming equipment and the proceeds from the gaming equipment and are guaranteed by certain of the HEI's stockholders. In April 1993, the terms of the notes payable were modified. Beginning April 1993, the then outstanding principal balance and accrued interest were combined and began accruing interest at a fixed rate of 9.5%. Monthly principal and interest payments of $151,000 were required through April 1997. As of the petition date, November 7, 1995, the Company stopped accruing interest, totaling $37,940, for the period from November 7, 1995 to December 31, 1995, and making any repayments on these notes. Subsequent to year end, the Company reached an agreement with the lender to repay the $2.6 million outstanding balance on the notes for approximately $2 million with proceeds from the DIP Facility realizing a 20% discount for retiring the notes (Note 13). (8) CAPITAL STRUCTURE CAPITAL STRUCTURE AFTER CONSUMMATION OF THE PROPOSED PLAN The proposed Plan provides for the amendment and restatement of the Company's certificate of incorporation and bylaws. The new charter will authorize 20 million shares of $.01 par value common stock. The holders of the Old Notes and RII (Note 1) will receive 5 million shares of common stock, representing 100% of the outstanding shares of common stock subject to being diluted to 90% by certain stock grants to be issued to senior management employees and non-employee directors of the Reorganized Company pursuant to a proposed Management Incentive Program and under an employment agreement with the chief executive officer of the Reorganized Company. CAPITAL STRUCTURE PRIOR TO THE CONSUMMATION OF THE PLAN PREFERRED STOCK Preferred stock of the Company consists of 2 million authorized shares, of which none has been issued. COMMON STOCK Common stock of the Company consists of 50 million authorized shares. All common stock will be canceled under the Plan (Note 1). In 1993, 10,269,641 were issued pursuant to the restructuring (Note 1). In addition, warrants to purchase a total of 7,130,359 shares of common stock were issued in connection with the restructuring (2,399,373 shares), the issuance of the Old Notes (1,750,000 shares) (Note 7) and the loan from an affiliate (2,980,986 shares) (Note 11). The warrants are immediately exercisable at a price of $.01. The warrants to acquire 2,399,373 shares of common stock of the Company were issued to certain individuals having ownership rights in the predecessors to the Company. These warrants were assigned a nominal value because these individuals acquired such rights in connection with the formation of the predecessor companies at either nominal or no cost. A consultant to the Company in connection with the Company's Riverboat Project received 1,605,739 of such warrants in exchange for his right to receive ownership in the predecessor companies. In 1994, 421,854 shares of common stock were converted into warrants to acquire 421,854 shares of common stock as a result of transfers to this consultant from an existing shareholder. In 1995, certain warrants were converted into 1,849,781 shares of common stock. The Company adopted an "Omnibus Stock and Incentive Plan" (the "Stock Plan") in December 1993. A maximum of 1,000,000 shares were reserved for issuance under the Stock Plan. The Stock Plan was to terminate five years from the date of its adoption, unless sooner terminated by the Board of Directors. In 1993 the Company granted a total of 130,000 restricted shares to officers of the Company and a consultant. In 1994, 28,000 shares of Restricted Stock were forfeited. In 1994 the Company granted 60,000 ISO's to a former officer to purchase shares of common stock of the Company at an exercise price of $4.00 per share. The options vest equally over three years with the first vesting date on April 1, 1995. In 1995 the Company granted 85,000 restricted shares and 85,000 options, at an exercise price of $4.00 per share, to a current officer of the Company. Both the options and restricted stock shares vest equally over a three year period. All grants under the Stock Plan will be forfeited as a result of the proposed Plan (Note 1). The Company recognized compensation expense of $169,000 in 1995 related to the vesting of the restricted shares. No additional compensation expense was recognized after November 7, 1995. WARRANTS ISSUED Warrants issued includes $7 million of value assigned to the Old Notes warrants (Note 7) and, in 1994, $1.3 million of value assigned to the GPRI warrants (Note 11). The Company has warrants outstanding to purchase 5,702,432 shares of common stock at a nominal exercise price. Subject to obtaining any necessary gaming approvals, the warrants may be exercisable any time after their issuance. Prior to the exercise of the warrants, holders of warrants are not entitled to any of the rights of a holder of the Company's common stock, including the right to vote or to receive dividends. All warrants will be extinguished and canceled under the proposed Plan (Note 1). NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN The Company has also adopted the "Non-Employee Director Stock Option Plan." Only non-employee directors are eligible to participate in the Non-Employee Director Stock Option Plan. A total of 100,000 shares of common stock are authorized and reserved for issuance under the Non-Employee Director Stock Option Plan. A total of 20,000 options have been granted and vested to five non-employee directors at an exercise price of $4.00 per share. All grants under the Non-Employee Director Stock Option Plan will be extinguished and canceled under the Plan. (9) INCOME TAXES The Company has no provision for income taxes in 1994 or 1995 nor for the six months ended June 30, 1996, due to the Company's significant loss position. Prior to December 21, 1993 or the formation of the Company, taxes were not provided on the predecessor entities because all tax obligations of those entities passed through to the owners of those entities. The Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), in December 1993. SFAS 109 requires recognition of deferred tax assets and liabilities based on enacted tax laws for any temporary differences between the financial reporting and tax basis of assets, liabilities and carryforwards. Deferred taxes are then reduced, if deemed necessary, by a valuation allowance for the amount of any tax benefits which, based on management's opinion, are not expected to be realized. The net deferred tax asset as of December 31, 1994 and 1995 is comprised of the following (in thousands): <TABLE> <CAPTION> December 31, June 30, 1994 1995 1996 ---- ---- ---- (unaudited) CURRENT: <S> <C> <C> <C> Accrued vacation and gaming liabilities........................ $ 356 $ 184 $ 184 NON-CURRENT: Difference in asset basis............. 3,478 3,053 (461) Cancellation of indebtedness.......... -- -- (55,035) Start up costs/intangibles capitalized for tax................ 1,967 -- -- Impairment of assets.................. 3,164 5,832 2,565 Reorganization items.................. -- 4,287 -- Deferred interest for tax............. -- 404 -- Book tax difference of RCJV........... -- 8,646 8,646 Net operating loss carryforwards...... 7,899 41,148 49,410 -------- -------- -------- Net deferred tax asset................ 16,864 63,554 5,309 Valuation allowance................... (16,864) (63,554) (5,309) -------- -------- -------- $ -- $ -- $ -- ======== ======== ======== </TABLE> The net deferred tax asset valuation allowance is equal to the full amount of the net deferred tax asset because the realization of such asset is dependent upon future taxable income, which is uncertain. The Company currently has net operating loss carryforwards totaling approximately $103 million, which expire beginning in 2008. These net operating loss carryforwards do not include the separate company net operating loss generated by GPRI in 1995. Generally, the Company anticipates that the reorganization will allow the Company to produce income from operations and potentially taxable income and net income for financial reporting purposes. Since its inception, the Company has generated significant net operating loss carryforwards for tax purposes, which, in the absence of the Company's bankruptcy, would have been available to offset any taxable income earned in the future. As a result of the consummation of the proposed Plan, the Company may undergo a substantial change in ownership and incur significant forgiveness of indebtedness income. Additionally, a significant portion of the tax assets includes tax losses of GPRI. If GPRI is unable to retribute those losses to HEI, then those assets will be transferred to Casino America in connection with the sale of GPRI stock to Casino America. If HEI is unable to attain such assets the debt forgiveness income and the potential ownership change may significantly limit or eliminate the Company's net operating loss carryforwards and other tax benefits. Fresh start accounting requires the Company to significantly increase the book basis of its assets, the tax basis of those assets generally remain at their historical basis. Therefore, given the potential limitation or elimination of the Company's net operating loss carryforwards and the increased book depreciation and amortization charges, the Company may have taxable income in the future, and, therefore, may be required to pay income taxes, even though it may record a loss for financial reporting purposes. (10) LEASES CAPITAL LEASES On March 1, 1993, the Company entered into a Master Lease Agreement with Capital Associates International, Inc. ("CAI") for lease financing totaling $2.2 million to provide working capital. Certain of the Company's equipment was pledged as security for the borrowings. The Debtor, and certain of HEI's stockholders also guaranteed repayment of the borrowings. In 1995, the Master Lease Agreement was amended to provide $2.8 million in additional lease financing to be used for the Riverboat Project and to be repaid by GPRI. The financing has been treated as a capital lease in the separate financial statements of the Company and of GPRI. As a result of the termination of Riverboat Project operations, GPRI was unable to make its required payments under the lease. Accordingly, CAI initiated a lawsuit against the Company (Note 12) to recover all amounts owing under the Master Lease, as amended ("Lawsuit #1"). The finance company initiated a second lawsuit against the Company and certain of its officers alleging that the finance company was misled into entering into the amendment to the Master Lease Agreement ("Lawsuit #2"). In September 1995, a judgment was entered against the Company in Lawsuit #1 for $4.6 million, which judgment has been appealed by the Company. This amount is reflected as a liability subject to compromise in the accompanying consolidated balance sheets. In February 1996, the parties to the two lawsuits entered into a settlement agreement which seeks to resolve the disputes. Pursuant to the settlement agreement, both lawsuits will be dismissed and the Reorganized Company will issue two notes payable to CAI. The first note will be in the amount of $1.6 million, payable in 10 quarterly installments of principal and interest (at 9% per annum) and will be unsecured. The second note will be in the amount of $3 million, payable in 20 quarterly installments of principal and interest (at 9% per annum) and will be unsecured. Payments on each note will begin 90 days after the Effective Date of confirmation of the proposed Plan. The settlement agreement further provides that if the finance company receives any distributions (as defined) from its claims in the GPRI bankruptcy, or if Casino America, Inc. agrees to assume any or all of the finance company liability, then such amounts will serve to reduce the amounts payable under the $3 million note first, then the $1.6 million note (Note 13). The terms of the settlement agreement must be approved by the Court. The Company also has capital lease obligations related to gaming devices and certain other equipment totaling $1.6 million. The interest rate for the various leases range from 12% to 15%. As a result of the bankruptcy proceedings, all capital lease obligations have been reclassified as "liabilities subject to compromise" in the accompanying consolidated balance sheets. Subsequent to year end, an agreement was reached with such lessors to retire the remaining lease obligation for approximately $1.2 million. OPERATING LEASES The Company leases real property, on which the Bullwhackers Casino in Black Hawk, Colorado, was constructed. The lease is for a period through 2015 and requires an annual base rent as specified below, payable quarterly. The land lease also requires monthly payments of additional rent equal to 1.9% of gross revenues, as defined. Total base rent plus additional rent pursuant to the lease agreement for the years ended December 31, 1993, 1994 and 1995 and the six months ended June 30, 1995 and 1996 was $986,000, $1.1 million, $1.1 million, $577,000 and $609,000, respectively. In addition to the specified rental payments, the Company is also responsible for any and all costs associated with the leased property, including but not limited to taxes and assessments, utilities, insurance, maintenance and repairs. The Company has an option to purchase the leased land, beginning November 1, 2001, for an amount equal to nine times the annual base minimum rent payment then in effect. Future annual base rental payments for the land lease as of December 31, 1995 are as follows: Year ending December 31 (in thousands): 1996.....................$600 1997......................600 1998......................600 1999......................600 2000......................600 Thereafter..................10,070 Total . . . . . . . . . . .$13,070 Beginning in September 1994, the Company entered into an approximate seven year lease for office space. The lease agreement requires monthly payments of approximately $23,300. As a result of the bankruptcy proceedings, the Debtor may reject certain leases under the provisions of the Bankruptcy Code. The Reorganized Company anticipates ratifying the Black Hawk land lease. However, the Debtor has renegotiated the terms of its office space. Under the revised lease terms, which were approved by the Court, the Reorganized Company will surrender its $200,000 security deposit to the landlord and pay monthly rent of $7,500 through October 1997, at which time the lease will terminate. (11) OTHER RELATED PARTY TRANSACTIONS DUE FROM AFFILIATES The Company has outstanding advances to the following affiliates (in thousands): <TABLE> <CAPTION> December 31, June 30, ------------ 1996 1994 1995 ----- ---- ---- (unaudited) <S> <C> <C> <C> Canadian Pavillon Limited Partnership................. $1,323 $1,573 $1,573 Outlaws Casino, Ltd............ 876 1,072 1,072 RCJV........................... 763 43 43 RCH Investments, NV............ 250 259 259 Hemmeter Partners.............. 344 335 335 Grand Palais Casino, Inc....... 557 587 587 Officers....................... 585 867 867 Other.......................... 62 35 35 ------ ------ ------ $4,760 $4,771 $4,771 ====== ====== ====== </TABLE> Canadian Pavilion Limited Partnership ("CPLP"), Outlaws Casino, Ltd. ("Outlaws"), RCH Investments, NV ("RCH") and Hemmeter Partners are majority owned by certain of the current controlling shareholders and officers of HEI. The advances to CPLP, Outlaws, RCH, and Hemmeter Partners accrue interest at 14% with interest payable quarterly, and are due on demand. Grand Palais Casino, Inc. ("GPCI") is a wholly owned subsidiary of Grand Palais Enterprises, Inc. ("GPEI"), of which certain stockholders are also current stockholders of HEI. This advance accrues interest at 14% and is due on demand. In July 1994, Kevin G. DeSanctis, then Executive Vice President and Chief Operations Officer received a $225,000 advance in accordance with the terms of his employment agreement of which none has been repaid. In September 1994, Christopher B. Hemmeter, the President and Chief Executive Officer was advanced funds totaling $275,000, accruing interest at prime plus 2%, and due on demand. In January 1995, an additional $373,000 was advanced to Mr. Hemmeter on an interest free basis, of which $110,000 has been repaid. As of December 31, 1995, the outstanding advances to Mr. Hemmeter totaled $641,000. All advances to affiliates were made on an unsecured basis. In 1994, the Company established a reserve of $1 million for certain affiliate receivables that management believed may not be collectible. Because of the continued deterioration in 1995 of the financial condition of the affiliates and certain officers to which the Company has advanced funds, the Company has determined that it is unlikely that it will collect any of the advances to affiliates and, accordingly, has provided an additional reserve of $3.9 million for the remainder of the amounts owed the Company. These amounts are reflected as impairment of assets in the accompanying consolidated statements of operations. The Company continues to pursue collection of the advances to affiliates. CONSULTING AGREEMENT GPRI was party to a consulting agreement whereby the consultant was entitled to receive an initial consultation fee and a supplemental $3 million fee in exchange for the consultant's assistance in obtaining necessary licensing and other regulatory approvals with respect to the Riverboat Project. In addition, the consultant was paid an initial consultation fee of $2.8 million for his services with respect to the Riverboat Project and GPCI project. Of this amount, 10% or $280,000, was allocated to the Company based on relative estimates of the potential value of the Riverboat Project and GPCI project. This amount is included in other assets in the accompanying consolidated balance sheet as of December 31, 1994. As a result of the deconsolidation of GPRI, these amounts are now reflected in the separate financial statements of GPRI. This consultant has initiated a lawsuit against the Company as described further in Note 12. TRANSACTIONS WITH GPCI In 1992 and 1993, GPCI completed private offerings of senior secured exchangeable notes. Certain of HEI's majority stockholders are also stockholders and warrant holders, including Christopher B. Hemmeter and Daniel Robinowitz of GPCI's parent company, GPEI. In September 1993, $7.5 million of the net proceeds of GPCI's private offering were loaned to GPRI. The loan was evidenced by a demand note payable to GPCI and accrued interest at 12%. The loan was repaid with proceeds from the Old Notes (Note 7). As additional consideration, the GPCI noteholders were to be issued warrants to purchase one share of GPRI's common stock per warrant for $.01 (the "GPRI Warrants"). In connection with the formation of the Company, the GPCI noteholders were issued warrants to purchase 2,980,986 shares of common stock of the Company. These warrants were valued at $1.3 million, which amount was offset against the $7.5 million demand note and amortized as interest costs. The $1.3 million of interest costs were then capitalized as part of construction-in-progress (Note 4) in the accompanying consolidated balance sheet as of December 31, 1994. As a result of deconsolidation of GPRI in 1995, these amounts are now reflected in the separate financial statements of GPRI. During 1993, GPCI had advanced other funds to GPRI. The advances totaled $2.2 million, accrued interest at 12% and were unsecured. Proceeds from the Old Notes were used to repay $1.7 million of the advances in 1993. The remaining $490,000 was repaid in the first quarter of 1994. The Company advanced GPCI an additional $556,500 and $30,000 in 1994 and 1995, respectively, which is included in due to affiliates in the accompanying consolidated balance sheets. As of December 31, 1995, all outstanding amounts have been reserved as uncollectable due to the bankruptcy filing of Harrah's Jazz Company, of which GPCI is a one-third equity partner. OTHER Hemmeter Partners, an affiliate of Christopher B. Hemmeter, leased an aircraft that Mr. Hemmeter used for business and personal purposes. In exchange for Mr. Hemmeter making the aircraft available to the Company for business purposes, the Company agreed to pay Mr. Hemmeter's affiliate approximately $100,000 per month and to pay the salary and benefits of the aircraft pilot and co-pilot, which totaled approximately $125,000 per year. Direct payments to Hemmeter Partners totaled $1.5 million and $420,000 for 1994 and 1995, respectively. Payments made by the Company with respect to the aircraft represent the Company's pro rata share of the costs and expenses associated with the aircraft and are adjusted based on actual use of the aircraft. The Company ceased using the aircraft and terminated this arrangement as of May 1995. The Company paid $1.5 million, $1.3 million and $624,000 to the law firm of Shefsky Froelich & Devine Ltd. for legal services rendered to the Company in 1993, 1994 and 1995, respectively. Cezar M. Froelich, a director, owns 1.4% of the Company on a fully diluted basis, and is a member of that firm. Shefsky Froelich & Devine Ltd. provided legal services to the Company until February 9, 1996. Any further payments to Shefsky Froelich & Devine Ltd., are subject to Bankruptcy Court approval. Christopher B. Hemmeter received no compensation for acting as Chief Executive Officer in 1993. The value of these services provided by Mr. Hemmeter was not material. (12) COMMITMENTS AND CONTINGENCIES GAMING LICENSES The Bullwhackers Casinos are required to comply with laws and regulations promulgated by the Colorado Gaming Commission in order to maintain continued operations. The Bullwhackers Casinos operate under separate current annual gaming licenses which expire in December 1996. Management anticipates that such gaming licenses will be renewed. GAMING TAXES AND FEES The Bullwhackers Casinos operate as licensed gaming establishments pursuant to the Colorado Limited Gaming Act and, accordingly, are required to make monthly gaming tax payments to the State of Colorado which are subject to annual revisions with a maximum rate of 40%. Such tax for the 1995 period is calculated as a percentage of adjusted gross proceeds (casino net win). Gross Proceeds Tax Rate -------------- -------- First $2 million....................... 2% Next $2 million........................ 8% Next $1 million........................ 15% Proceeds over $5 million............... 18% Additionally, the city and state levy device fees ranging from $75 to $1,265 per annum. For the years ended December 31, 1993, 1994 and 1995, and the six months ended June 30, 1995 and 1996, the Company recorded $7.7 million, $8.2 million, $8.3 million, 4.6 million and $4.3 million, respectively, in total gaming taxes and device fees. BLACK HAWK PARKING FACILITY The Company acquired a land parcel on which it constructed a 260 stall surface parking facility. As part of the land development, the Company agreed to conduct environmental remediation of the land parcel pursuant to an Administrative Order on Consent with the Environmental Protection Agency ("EPA") and the State of Colorado Department of Health. The Company expended approximately $1.8 million for this remediation work in 1994. The cost of the remediation was anticipated and provided for from the net proceeds of the Old Notes and has been capitalized as part of the land acquisition as incurred because the work was necessary to prepare the property for its intended use. Possible additional remediation costs are estimated at approximately $1 million. However, the Company believes, based on consultations with various governmental agencies and correspondence with the EPA, that the likelihood of the EPA or other regulatory agencies requiring this further remediation is remote. The City of Black Hawk assesses each casino which provides off-site parking to its patrons, a $4 per day per stall parking fee, which is included in casino expense. The Company anticipates that upon commencement of operations of the proposed Silver Hawk Casino (see below), the parking fee will terminate. LEGAL PROCEEDINGS In September 1995, Daniel P. Robinowitz, a pre-effective date stockholder of the Company (Note 11), filed a stockholders derivative action against the directors of the Company in the United States District Court for the Eastern District of Louisiana (the "Robinowitz Derivative Action"). The complaint alleges in general that the Company, through its board of directors, mismanaged the affairs of the Company. Because the Company filed bankruptcy prior to any responsive pleadings being filed, no activity has occurred in this case. The Company appointed its chief executive officer to serve as a special litigation committee for the board of directors of the Company and he retained independent counsel in October 1995 to investigate the allegations raised by the complaint. Pursuant to the proposed Plan, certain claims by the Company against third parties, including the Robinowitz Derivative Action, are assigned to the Litigation Trust. All legal proceedings pending against the Company or its Colorado subsidiaries prior to the effective date of the proposed Plan will be settled pursuant to the proposed Plan. As a result, there will be no litigation pending against the Reorganized Company or its Colorado subsidiaries on the effective date of the proposed Plan. The determination by the Litigation Trust whether or not to pursue any causes of action assigned to it will have no material impact on the Reorganized Company or the Colorado subsidiaries. The proposed Plan provides that the Company's obligation to indemnify certain of its officers against any claims asserted against them as a result of their service as employees of the Company, both before and after the commencement of the Debtor's bankruptcy cases, will not be affected by the Debtor's bankruptcy cases and that the Company will assume any obligations of GPRI to indemnify the two officers discussed above against claims arising as a result of their service with GPRI. The proposed Plan also provides that the officers will be released from any liability in respect of causes of action assigned to the Litigation Trust. The proposed Plan also provides that the Company's obligations to indemnify its other officers and employees, other than Christopher B. Hemmeter and Mark M. Hemmeter (collectively, the "Hemmeters"), against claims against them as a result of their service with the Company after the commencement of the Debtor's bankruptcy cases will not be affected by the Debtor's bankruptcy cases and that the Company will assume any similar indemnity obligations of GPRI. The proposed Plan also requires the Company to indemnify its pre-effective date directors other than the Hemmeters (the "Independent Directors") against any claim asserted against them as a result of their service as directors of the Company if the final report of the Independent Litigation Counsel indicates that there is no basis for pursuing any of the potential claims against them reviewed by the Independent Litigation Counsel. The Company's maximum indemnity obligation for all of the Independent Directors is capped at $500,000 in the aggregate. Although the Company has no direct indemnity obligations with respect to claims against the Hemmeters, if a claim is asserted against both the Independent Directors and the Hemmeters, the Hemmeters will be entitled to be represented by the counsel representing the Independent Directors at the expense of the Company to the extent that the claims are based on the Hemmeters' actions as directors of the Company. The Company's management believes that the ultimate resolution of all legal proceedings will not have a material adverse impact on the Company's financial position or results of operations. (13) EVENTS SUBSEQUENT TO THE DATE OF THE AUDITORS' REPORT (unaudited) GPRI PLAN On May 3, 1996, the Company closed on the sale of its stock ownership in GPRI to Casino America, thus signifying the effectiveness of GPRI's Plan. The aggregate consideration paid by Casino America totaled approximately $59 million. All proceeds from the sale were distributed to the creditors of GPRI, including the holders of the Company's Old Notes, pursuant to the GPRI Plan. Part of the consideration given by Casino America was the assumption of $2.3 million of the CAI $3 million note. Accordingly, the Company is only obligated for the remaining $700,000. Additionally, the effectiveness of the GPRI Plan released the Company and all of its remaining subsidiaries from any obligations to GPRI, RCJV, and their creditors. HEI PLAN On June 7, 1996 (the "Effective Date"), the Company and its three subsidiaries emerged from bankruptcy. In general, the Reorganization provided for resolution of all claims against the Predecessor Company and amounts pending as of November 7, 1995, the Chapter 11 filing date, as well as resolution of certain legal disputes, in exchange for the issuance of new indebtedness and new common stock (see Notes 5 and 6). Upon the Effective Date, the name of HEI was changed to Colorado Gaming & Entertainment Co. FRESH START REPORTING In accordance with AICPA Statement of Position 90-7, "Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"), the Company was required to adopt "fresh-start" accounting, on the Effective Date. The impact of the adoption of fresh-start reporting is reflected in the June 30, 1996 consolidated balance sheets. The adjustments to reflect the consummation of the Reorganization (including the gain on extinguishment of debt and other pre-petition liabilities) and the adjustment to record assets and liabilities at their fair values have been reflected in the unaudited consolidated financial statements to separate post-Reorganization operations from those prior to June 7, 1996, which have not been prepared on a comparable basis. Such adjustments resulted in an approximate $164 million extraordinary gain as reflected in the Statement of Operations. SILVER HAWK ACQUISITION On March 27, 1996, Silver Hawk Casino, Inc. ("Silver Hawk") was incorporated in Delaware as a wholly owned subsidiary of Hemmeter Enterprises, Inc., for purposes of acquiring and operating a limited stakes casino in Black Hawk, Colorado. In April 1996, the Company purchased the Silver Hawk Casino, which was not operating at the time, for $2.7 million, of which $900,000 was borrowed under the DIP Facility. The remaining $1.8 million was financed by a note payable to the seller, which accrued interest at 9.5% per annum, and provided for monthly principal and interest payments on a 20 year amortization schedule. The seller of Silver Hawk Casino is an elected official of Black Hawk. A statute in Colorado prohibits an elected official from having an "interest" in a gaming license. To avoid any potential regulatory interpretation that the seller would have an "interest" in the Silver Hawk Casino gaming license, thereby detrimentally affecting the Company's ability to obtain the gaming license, the Company retired the seller's note from available cash on June 18, 1996. Additionally, the Company invested an additional $2 million to equip and prepare the Silver Hawk Casino for opening. The Company commenced gaming operations at the Silver Hawk Casino on June 25, 1996. CREDIT FACILITY On June 7, 1996, the Company entered into a $12.5 million revolving credit facility (the "Credit Facility") with Foothill Capital Corporation. The Credit Facility is segregated into several different facilities, including a $5 million construction line, a $5 million equipment financing line, up to a $3.5 million working capital line and a $1 million Silver Hawk line. No more than $12.5 million of borrowings may be outstanding at any time. Borrowings under the Credit Facility are subject to a 1% financing fee and accrue interest at prime plus 2.375%. The loans have varying terms ranging from three to five years from when the funds are borrowed. As of June 30, 1996, the Company had drawn approximately $3 million under the equipment facility and $1.3 million under the working capital line. Borrowings are secured by a first priority lien and security interest in substantially all of the real and personal property owned or leased by the Company. The Credit Facility replaced a Debtor-in-Possession facility, also provided by Foothill Capital Corporation. Subsequent to the end of the second quarter, the Company borrowed $1.1 million under the equipment line to pay for the Silver Hawk Casino slot machines, $1 million under the Silver Hawk facility and repaid in full the working capital line. OTHER NOTES Pursuant to the Reorganization, the Company issued two unsecured promissory notes to Capital Associates International, Inc. ("CAI") in the respective principal amounts of $1.6 million and $3 million, both accruing interest at the rate of 9% per annum. The $1.6 million note is due in 10 equal quarterly installments commencing September 7, 1996. The $3 million note has been reduced by amounts received by CAI in respect of its claims filed in the chapter 11 bankruptcy case filed by GPRI. Accordingly, the outstanding balance on the $3 million note is approximately $700,000 depending on the ultimate resolution of the exact amount received by CAI from GPRI distributions to be credited against the note. Accordingly the Company has reflected approximately $700,000 of the second note as an obligation in the accompanying consolidated balance sheet. EQUITY Pursuant to the Reorganization, the Predecessor Company's common stock and warrants were cancelled on the Effective Date. The Reorganization also provided for the amendment and restatement of the Company's certificate of incorporation and bylaws. The new charter authorized 20 million shares of $.01 par value common stock. Upon the Effective Date, 5 million shares of common stock of the Company were issued on a pro rata basis to the holders of Old Notes and RII. In addition, the Company's President and Chief Executive Officer was issued 138,888 shares of common stock on the Effective Date. Also on the Effective Date, 416,667 shares were reserved to be issued to executive management pursuant to the Management Stock Incentive Plan (the "Stock Plan"). The Stock Plan provides for shares to be issued to certain management individuals annually for the next three years based on the Company meeting certain performance criteria. Once issued, the shares are fully vested. The first grant is expected to be on June 7, 1997. - ----------------------------------------------------- - ----------------------------------------------------- NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OF ANY UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THIS DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. ------------------ TABLE OF CONTENTS Page Additional Information.............................................2 Prospectus Summary.................................................3 Risk Factors.......................................................6 Market Price of Common Stock and Dividend Policy.......................................................12 Selected Financial Data...........................................12 Unaudited Pro Forma Condensed Consolidated Financial Information........................................15 Management's Discussion and Analysis of Financial Condition and Results of Operations..........................18 Business..........................................................25 Management........................................................33 Certain Relationships and Related Transactions....................37 Legal Proceedings.................................................39 Principal and Selling Securityholders.............................43 Plan of Distribution..............................................45 Shares Eligible for Future Sale...................................46 Description of Capital Stock......................................46 Legal Matters.....................................................57 Experts...........................................................57 Index to Financial Statements....................................F-1 ----------------------------------------------------- ----------------------------------------------------- 5,138,888 SHARES OF COMMON STOCK $55,883,298 PRINCIPAL AMOUNT OF 12% SENIOR SECURED PAY-IN-KIND NOTES COLORADO GAMING & ENTERTAINMENT CO. ----------------- PROSPECTUS ----------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets for the costs and expenses payable by the Company in connection with the sale of the Notes and Common Stock being registered. All items are estimated except the SEC Registration Fee. SEC Registration Fee . . . . . . . . . . . . . . $24,356 Printing . . . . . . . . . . . . . . . . . . . . 1,000 Legal Fees and Expenses. . . . . . . . . . . . . 50,000 Qualification under State Securities Laws (including legal fees) . . . 6,000 Accounting Fees and Expenses . . . . . . . . . . 7,500 Transfer Agent Fees . . . . . . . . . . . . . . 4,000 Miscellaneous . . . . . . . . . . . . . . . . . 5,144 -------- Total . . . . . . . . $95,000 ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the DGCL empowers a Delaware corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation) by reason of the fact that such person is or was a director, officer, employee or agent of such corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or enterprise. A corporation may indemnify such person against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. A corporation may, in advance of the final disposition of any civil, criminal, administrative or investigative action, suit or proceeding, pay the expenses (including attorneys' fees) incurred by any officer or director in defending such action, provided that the director or officer undertakes to repay such amount if it shall be ultimately determined that he is not entitled to be indemnified by the corporation. A Delaware corporation may indemnify officers and directors in an action by or in the right of the corporation to procure a judgment in its favor under the same conditions, except that no indemnification is permitted without judicial approval if the officer or director is adjudged to be liable to the corporation. Where an officer or director is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify him against the expenses (including attorneys' fees) which he actually and reasonably incurred in connection therewith. The indemnification provided is not deemed to be exclusive of any other rights to which an officer or director may be entitled under any corporation's by-law, agreement, vote or otherwise. Article IX of the Company's Certificate of Incorporation provides that the Company shall indemnify its officers, directors, agents and other persons to the fullest extent permitted by the DGCL. Article IX of the Company's Certificate of Incorporation provides that a director of the Company shall not be personally liable to the Company or its stockholders for monetary damages for breaches of fiduciary duty as a director, except for liability (i) for any breach of the officer's or director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL, or (iv) for any transaction from which the director derived any improper personal benefit. Pursuant to the Plan of Reorganization, Messrs. Szapor and Mayer and certain other pre-Effective Date directors and officers of the Company are entitled to certain additional indemnification rights. See "Legal Proceedings." ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES On June 7, 1996, the Effective Date, all of the Company's then-outstanding capital stock was cancelled and the Company issued, $50,000,000 in principal amount of its 12% Senior Secured Pay-In-Kind Notes due 2003 and 5,000,000 shares of Common stock pursuant to the Plan of Reorganization pursuant to an exemption from registration under the United States Bankruptcy Code. In addition, on such date, the Company issued 138,888 shares of Common Stock to Stephen J. Szapor, Jr., the Company's President and Chief Executive Officer, pursuant to Mr. Szapor's Employment Agreement, pursuant to Section 4(2) of the Securities Act. On December 15, 1993, the Company sold $140,000,000 in principal amount of its Old Notes in a private placement pursuant to Regulation D under the Securities Act. The Company believes that all of the purchasers of such notes were "accredited investors" within the meaning of Regulation D and that the Notes were not offered to prospective purchasers who were not accredited investors. Salomon Brothers Inc served as placement agent for the sale of the Old Notes. Each note purchaser also received 12 warrants to purchase 1.041667 shares of common stock of the Company (subject to certain anti-dilution provisions) for each $1,000 of principal amount of Old Notes purchased. The aggregate offering price of the Old Notes and the warrants was $140,000,000, of which $4,900,000 was paid to Salomon Brothers Inc as a placement fee. On June 15 and December 15, 1994, and June 15, 1995, the Company issued additional Old Notes pursuant to Section 4(2) of the Securities Act in the respective principal amounts of $8,117,000, $8,884,000 and $9,420,000 to the then holders of the Old Notes in payment of the interest then due and payable on the outstanding Old Notes. On December 17, 1993, the Company issued 10,269,641 shares of its common stock and 5,380,359 warrants to purchase shares of common stock for an exercise price of $.01 per share to the owners of certain predecessors of the Company and its Colorado Subsidiaries in exchange for the assets of these predecessors. A total of 1,427,927 of the warrants have been exercised since December 17, 1993 for an aggregate consideration to the Company of $14,279.27. These shares were issued pursuant to Section 4(2) of the Securities Act. Pursuant to the Company's Omnibus Stock and Incentive Plan, the Company granted employees the right to receive 130,000 shares of its common stock provided that the restrictions to which such grants were subject were satisfied. A total of 33,667 of these shares were issued to employees in 1995. Each of the five non-employee directors of the Company were each awarded 1,000 shares of common stock of the Company in December 1993. The shares issued to employees and directors were issued pursuant to Section 4(2) of the Securities Act. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits See Index to Exhibits (b) Financial Statement Schedules Not Applicable ITEM 17. UNDERTAKINGS The undersigned registrants hereby undertake: (1) To file, during any period in which offers or sales are being made, a post effective amendment to this registration statement; (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information as set forth in the registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at the time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post effective amendment any of the securities being registered which remain unsold at the termination of the offering. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrants pursuant to the foregoing provisions, the registrants have been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is, therefore, enforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrants of expenses incurred or paid by a director, officer or controlling person of the registrants in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Denver, and the State of Colorado on October 22, 1996. COLORADO GAMING & ENTERTAINMENT CO. By: /s/ Stephen J. Szapor, Jr. Stephen J. Szapor, Jr. President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the date indicated. Signature Title Date /s/ Stephen J. Szapor, Jr. October 22, 1996 - --------------------------------- President and Chief Stephen J. Szapor, Jr. Executive Officer (Principal Executive Officer) /s/ Robert Stephens October 22, 1996 - --------------------------------- Vice President of Finance Robert Stephens (Principal Financial and Accounting Officer) /s/ Philip J. DiBerardino Director October 22, 1996 - --------------------------------- Philip J. DiBerardino /s/ Steve Leonard Director October 22, 1996 Steve Leonard /s/ Franklin S. Wimer Director October 22, 1996 - --------------------------------- Franklin S. Wimer /s/ Alan L. Mayer Director October 22, 1996 - --------------------------------- Alan L. Mayer INDEX TO EXHIBITS Exhibit No. Description 2.1 Disclosure Statement for First Amended Joint Plan of Reorganization of the Company, BWBH, Inc., BWCC, Inc. and Millsite 27, Inc.* 2.2 First Amended Joint Plan of Reorganization of the Company, BWBH, Inc., BWCC, Inc. and Millsite 27, Inc. (included in exhibit 2.1.).* 3.1 Amended and Restated Articles of Incorporation of the Company.* 3.2 Amended and Restated By laws of the Company.* 4.1 Indenture between the Company and Fleet National Bank, as Trustee.* 4.2 Specimen Certificate of Common Stock.* 4.3 Form of Note.* 4.4 Registration Rights Agreement.* 5.1 Opinion of LeBoeuf, Lamb, Greene & MacRae regarding validity of securities (including consent). 10.1 Loan and Security Agreement, dated as of November 1, 1995 by and between BWBH, Inc., BWCC, Inc. and Millsite 27, Inc. and Foothill Capital Corporation.* 10.2 Amendment Number One to Loan and Security Agreement, dated as of December 4, 1995.* 10.3 Amendment Number Two to Loan and Security Agreement, dated as of January 24, 1996.* 10.4 Letter Agreement, dated as of December 18, 1995, from BWBH, Inc., BWCC, Inc. and Millsite 27, Inc. to Foothill Credit Corporation.* 10.5 Security Agreement, dated as of November 1, 1995, between the Company and Foothill Credit Corporation.* 10.6 Trademark Security Agreement, dated as of November 1, 1995, between the Company and Foothill Credit Corporation.* 10.7 Continuing Guaranty, dated as of November 1, 1995 by the Company and Foothill Credit Corporation.* 10.8 Amended and Restated Loan and Security Agreement, dated as of June 4, 1996 between Foothill Capital Corporation, BWBH, Inc., BWCC, Inc., Millsite 27, Inc. and Silver Hawk Casino, Inc.* 10.9 Lease Agreement, dated October 25, 1991 by and among Jerry L. Brown and Harold Gene Reagin and HP Black Hawk, L.P.* 10.10 Option to Purchase dated October 28, 1991 by and among Jerry L. Brown and Harold Gene Reagin and HP Black Hawk, L.P.* 10.11 Sublease Agreement by and between Marsh & McLennan, Incorporated and the Company.* 10.12 Amendment to Sublease Agreement, dated as of January 18, 1996 by and between Marsh & McLennan, Incorporated and the Company.* 10.13 Guaranty, dated as of January 18, 1996, by BWBH, Inc., BWCC, Inc. and Millsite 27, Inc.* 10.14 Agreement for Sale of Real Estate, dated October 20, 1995, by and between Millsite 20 Limited Liability Company, Iron City Limited Liability Company and the Company.* 10.15 First Amendment to Agreement for Sale of Real Estate, dated December 21, 1995 by and between Millsite 20 Limited Liability Company, Iron City Limited Liability Company and the Company.* 10.16 Letter dated February 28, 1996 from the United States Environmental Protection Agency.* 10.17 Subdivision Agreement dated February 28, 1996 by and among the City of Black Hawk, the Black Hawk/Central City Sanitation District, Millsite 27, Inc. and Millsite 20 Limited Liability Company.* 10.18 State of Colorado, Department of Revenue, Limited Gaming License issued to Bullwhackers Black Hawk Casino.* 10.19 State of Colorado, Department of Revenue, Alcoholic Beverage License issued to BWBH, Inc.* 10.20 City of Black Hawk, Retail Liquor License with Extended Hours issued to BWBH, Inc.* 10.21 State of Colorado, Department of Revenue, Limited Gaming License issued to Bullwhackers Central City Casino.* 10.22 State of Colorado, Department of Revenue, Alcoholic Beverage License issued to BWCC, Inc.* 10.23 City of Central City, Retail Liquor License issued to BWCC, Inc.* 10.24 City of Central City, Extended Hours License issued to BWCC, Inc.* 10.25 Colorado Gaming & Entertainment Co. Management Stock Incentive Plan.* 10.26 Colorado Gaming & Entertainment Co. Cash Bonus Plan.* 10.27 Form of Consulting Agreement between the Company and Christopher B. Hemmeter.* 10.28 Form of Consulting Agreement between the Company and Mark M. Hemmeter.* 10.29 Employment Agreement between the Company and Stephen J. Szapor, Jr.* 10.30 Employment Agreement between the Company and Alan L. Mayer.* 10.31 Employment Agreement between the Company and Richard Rabin.* 21.1 List of Subsidiaries.* 23.1 Consent of Arthur Andersen LLP. 23.2 Consent of LeBoeuf, Lamb, Greene & MacRae, L.L.P. (included in Exhibit 5.1). 24.1 Power of Attorney granted by individuals signing the Registration Statement, included on signature page of Registration Statement.** 99.1 Statement of Eligibility under the Trust Indenture Act of 1939, as amended of Fleet National Bank, as Trustee under the Indenture.* - --------------------- * Incorporated by reference to the same exhibit number in the Company's Registration Statement on Form 10 (File No. 0 - 28068). ** Previously filed. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-5.1 <SEQUENCE>2 <DESCRIPTION>OPINION OF COUNSEL <TEXT> EXHIBIT 5.1 LEBOEUF, LAMB, GREENE & MACRAE L.L.P. 633 17th Street, Suite 2800 Denver, Colorado 80203 (303) 291-2600 October 22, 1996 Colorado Gaming & Entertainment Co. 1700 Lincoln Street, 49th Floor Denver, CO 80203 Re: Form S-1 Registration Statement (Reg. No. 333-12999) Relating to the Resale of up to 5,138,888 Shares of common stock, $.01 par value per share (the Common Stock) and up to $55,883,000 Principal Amount of 12% Senior Secured Pay-In-Kind Notes Due 2003 (the "Notes") of Colorado Gaming & Entertainment Co. Gentlemen: As your counsel, it is our opinion that the Common Stock and the Notes being registered in the above-referenced Registration Statement on Form S-1 (the "Registration Statement") have been legally issued and are fully paid and non-assessable, except in the case of certain of the Notes that have not yet been issued, which will be legally issued, fully paid and non-assessable when issued in accordance with the terms of such Notes and the governing indenture against payment of any applicable consideration. As your counsel, we hereby consent to the use of our opinion as an exhibit to the Registration Statement and to all references to our firm included in or made a part of the Registration Statement and any amendments thereto. Very truly yours, /s/ LeBoeuf, Lamb, Greene & MacRae, L.L.P. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-23.1 <SEQUENCE>3 <DESCRIPTION>CONSENT OF EXPERTS AND COUNSEL <TEXT> CONSENT OF ARTHUR ANDERSEN LLP As independent public accountants, we hereby consent to the use of our reports (and to all references to our Firm), included in or made a part of this registration statement. ARTHUR ANDERSEN LLP /s/ Arthur Andersen LLP October 22, 1996 </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000919999_pc_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000919999_pc_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information, financial statements and related notes included elsewhere in this Prospectus. Unless otherwise indicated, the information contained in this Prospectus does not give effect to the exercise of the Underwriters' over-allotment option. THE COMPANY PCSS is the leading provider of service logistics to the personal computer and related peripherals ("PC") hardware repair industry. These service logistics include sourcing and distributing spare parts, inventory management, warranty claims processing, parts remanufacturing and related functions. PCSS is the largest independent distributor of parts used in the repair of PCs in North America, distributing over 150,000 different parts to approximately 20,000 PC service and maintenance providers ("Service Providers"). The Company currently maintains in its inventory over 15,000 different parts. Such parts include printer parts, logic boards, controllers, disk drives, monitors, memory boards, cables and related hardware. PCSS has established vendor relationships with over 25 leading original equipment manufacturers ("OEMs"), including AST, Canon, Compaq, Hewlett-Packard and IBM. To complement its distribution operations, PCSS seeks to supply additional value-added services to OEMs to allow OEMs to completely outsource their service logistics functions. Dataquest estimates that the market for independent, multi-vendor hardware maintenance in the United States will grow from $5.0 billion in 1995 to $7.7 billion in 1999, representing a compound annual growth rate of 11.2%. Dataquest further estimates that the market for service logistics companies ("Service Logistics Companies") in the United States will grow from $1.2 billion in 1995 to $1.9 billion in 1999, representing a compound annual growth rate of 13.0%. The expected growth rate of Service Logistics Companies is higher because both OEMs and Service Providers are relying increasingly on Service Logistics Companies, such as the Company, to outsource their inventory management, order processing, warranty claims processing, parts remanufacturing and other service logistics functions on new PCs and PC products and equipment already in use ("the installed base"). The Company believes that it will benefit from the growth in both of these markets. The foundation for the Company's service logistics is its ability to provide accurate, efficient and rapid delivery of repair parts to its customers. In January 1996, PCSS opened a 155,200 square foot automated distribution facility at the Alliance Airport located in the Dallas/Fort Worth Metroplex to enhance its parts distribution capabilities. PCSS offers a wide range of value-added service logistics to Service Providers and OEMs to meet their particular needs. These logistics services include inventory management, parts sales and sourcing, warranty claims administration, exchanged parts remanufacturing administration, vendor returns, management reporting, and inventory liquidation and consignment. Under alliance arrangements with Service Providers, PCSS not only effectively and efficiently performs many of these functions for the Service Providers, but also becomes the primary source of specified parts. The Service Provider benefits from this alliance with the Company because these value-added services decrease the Service Provider's inventory carrying costs, improve customer service and responsiveness, and permits the Service Provider to devote less of its capital to these business functions. The Company has entered into Service Provider alliances with Ameridata, CompUSA and The Future Now, a division of Intelligent Electronics and now known as XLConnect ("XLConnect"). PCSS also has leveraged its logistics services capabilities and strong vendor relationships to establish outsourcing arrangements with OEMs. Under the terms of an OEM outsourcing arrangement, the OEM may direct authorized Service Providers, customers and dealers to the Company for some or all of the OEM's warranty and non-warranty parts business. PCSS believes that OEMs find this type of arrangement beneficial because, by reducing infrastructure needs, it reduces the amount of capital committed by the OEM to the non-core segments of its business, as well as improves the service levels for the OEM's products in the market. The Company has entered into OEM outsourcing arrangements with AST, Compaq, Exabyte, NEC and Packard Bell. PCSS believes an important factor in an OEM's decision to outsource its service logistics functions is the extent to which this arrangement relieves the OEM of functions outside of the OEM's core competencies. In the service and warranty logistics area this often includes remanufacturing activities. To support this function, PCSS commenced its own remanufacturing operations through Cyclix Engineering Corporation ("Cyclix") during 1995. The principal business objective of Cyclix is to outsource the remanufacturing and component level repair operations of OEMs. PCSS believes its remanufacturing capabilities through Cyclix are an important aspect of the full range of value-added services which it offers to OEMs in an effort to outsource larger functions of the OEM's service and warranty logistics functions. The Company's principal executive offices and mailing address are 2350 Valley View Lane, Dallas, Texas 75234, and its telephone number is (214) 406-8583. The Company was incorporated in Delaware in January 1990. THE OFFERING Common Stock offered by the Company............................. 1,250,000 shares Common Stock offered by the Selling Stockholders...................... 950,000 shares Common Stock to be outstanding after the Offering........................ 5,523,016 shares(1) Use of proceeds..................... Reduction of indebtedness and for working capital. See "Use of Proceeds." Nasdaq National Market symbol....... PCSS - --------------- (1) Excludes 100,000 shares reserved for issuance upon exercise of outstanding warrants. See "Description of Capital Stock -- Warrants." Also excludes 1,000,000 shares reserved for issuance upon exercise of employee and director stock options, of which options to purchase 503,500 shares will be outstanding immediately following the offering. See "Management -- Stock Option Plan." Also excludes 20,000 and 100,000 shares, respectively, reserved for issuance under the Company's Director Compensation Plan and Employee Stock Purchase Plan. See "Management -- Director Compensation" and "Management -- Employee Stock Purchase Plan."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000920052_renal_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000920052_renal_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to, and should be read in conjunction with, the more detailed information and financial statements, including notes thereto, appearing elsewhere in this Prospectus. Prospective investors should also review carefully the information set forth under "Risk Factors." Unless otherwise indicated, the information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. THE COMPANY Renal Care Group is a specialized provider of nephrology services to patients with kidney disease, including patients suffering from chronic kidney failure, also known as end-stage renal disease ("ESRD"). The Company provides dialysis and ancillary services to approximately 5,000 patients through 76 outpatient dialysis centers in 11 states and manages an additional ten dialysis centers in five states, six of which are in affiliation with leading medical centers such as Vanderbilt University Medical Center and The Cleveland Clinic Foundation. In addition to its outpatient dialysis center operations, Renal Care Group provides acute dialysis services through contractual relationships with 44 hospitals, staff-assisted dialysis services to 37 skilled nursing facilities and physician practice management services to 16 of the 62 nephrologists who are affiliated with the Company's outpatient dialysis centers. Renal Care Group was formed by leading nephrologists with the objective of creating an entity with the clinical and financial capability to manage the full range of care for ESRD patients on a cost-effective basis. The Company is working in conjunction with its affiliated physicians to develop fully integrated nephrology networks that will implement clinical protocols designed to improve outcomes and reduce costly medical complications associated with ESRD. Nephrology is the specialized practice of medicine dedicated to providing care to patients with ESRD and other kidney-specific ailments. A key component of the nephrologist's practice is the dialysis facility, where ESRD patients receive their dialysis treatments three times per week in a technologically advanced outpatient setting. Outpatient dialysis facilities generally are owned by nephrology groups and comprise an integral component of the nephrologist's practice because of the critical role that dialysis plays in the treatment of ESRD patients. According to the Health Care Financing Administration ("HCFA"), there were approximately 2,800 dialysis centers in the United States at the end of 1995. The Company believes that approximately 45% were owned by multi-center dialysis companies, 25% were owned by independent physicians and other companies and 30% were hospital-based centers. Although numerous nephrology groups have in the past sold their dialysis centers to entities engaged in the business of owning and operating such facilities, the Company believes that many nephrology groups recognize the need to affiliate with an entity having broader capabilities that can provide clinical, financial and business expertise to help them manage the increasingly complex and time-consuming aspects of both their dialysis center operations and their nephrology practices. In addition, many hospitals are motivated to sell or outsource management of their dialysis facilities as they refocus their resources on their core business in response to increasing competitive pressures. ESRD is the state of advanced renal impairment that is irreversible and imminently lethal. ESRD patients require dialysis or kidney transplantation to sustain life, with dialysis being the form of treatment provided to all such patients other than those who receive a transplant (approximately 6% of ESRD patients annually). Since 1972, individuals with ESRD who are eligible for Social Security have been entitled to Medicare benefits regardless of age or financial circumstances. According to data published by HCFA, the number of patients receiving chronic dialysis services in the United States has grown at a compound annual rate of 8.9%, from 66,000 patients in 1982 to approximately 200,000 in 1995. According to the United States Renal Data System ("USRDS"), the ESRD incidence rate among Medicare-eligible patients increased by 97.3% from 1984 to 1993. The USRDS estimates that the total direct medical charges for ESRD were approximately $11.1 billion in 1994. The Company attributes the growth in the number of ESRD patients principally to the aging of the general population and better treatment and survival of patients with hypertension, diabetes and other illnesses that lead to chronic kidney disease. In addition, improved technology has enabled older patients and those who previously could not tolerate dialysis due to other illnesses to benefit from this life-sustaining treatment. The Company believes these trends will result in continued growth in the number of ESRD patients and increased demand for dialysis and associated nephrology services. Renal Care Group's objective is to develop fully integrated nephrology provider networks to assume and manage the clinical and financial risk associated with providing renal disease management services on a capitated basis. The Company seeks to achieve this objective by (i) acquiring, developing and managing outpatient and university-based dialysis centers, (ii) integrating its dialysis centers with affiliated nephrology practices, (iii) developing a protocol-driven ESRD management model to enhance clinical outcomes and (iv) providing an appropriate range of ancillary services to ESRD patients. The Company believes an integrated network of nephrologists and dialysis centers, combined with the Company's clinical expertise, management experience and access to capital, will provide significant advantages to patients and third-party payors by improving the quality of care while reducing the overall costs associated with treating patients with all forms of kidney disease, including those who have ESRD. RECENT DEVELOPMENTS On September 30, 1996, the Company completed a merger with RenalWest, L.C. ("RenalWest") which was accounted for as a pooling of interests. RenalWest, which has 18 affiliated nephrologists, operates 19 freestanding hemodialysis centers and three home peritoneal dialysis centers serving approximately 1,200 patients in the state of Arizona. RenalWest also provides inpatient dialysis services to 16 acute care hospitals and staff-assisted dialysis services to 37 skilled nursing facilities. In October 1996, the Company acquired a dialysis company in Anniston, Alabama and began managing, with the right to develop, a dialysis facility in Bay City, Texas, which together serve an aggregate of approximately 200 patients. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company.......... 1,063,598 shares Common Stock offered by the Selling Stockholders............................... 1,436,402 shares Common Stock to be outstanding after the Offering(1)................................ 13,689,552 shares Use of proceeds.............................. For general corporate purposes, which may include potential future acquisitions. See "Use of Proceeds." Nasdaq Stock Market symbol................... RCGI </TABLE> - --------------- (1) Excludes (i)1,912,993 shares subject to options outstanding at a weighted average exercise price of $20.12 per share, (ii) 220,000 shares subject to warrants outstanding at an exercise price of $7.50 per share and (iii) 184,000 shares of Common Stock that may be issued upon conversion of $1,380,000 in principal amount of Convertible Senior Subordinated Promissory Notes (the "Convertible Notes"). See "Management -- Stock Option and Stock Purchase Plans" and "Capitalization." SUMMARY COMBINED FINANCIAL AND STATISTICAL DATA (IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA) The following presents summary combined financial and statistical data for the periods indicated of Renal Care Group, five companies (the "Founding Companies") acquired in simultaneous transactions in February 1996 (the "Combination"), Main Line Suburban Dialysis Centers, Inc. ("Main Line") acquired in April 1996 and RenalWest acquired in September 1996. The financial data set forth below are unaudited and have been derived from the financial statements of Renal Care Group and the Founding Companies and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and related notes appearing elsewhere in this Prospectus. <TABLE> <CAPTION> NINE MONTHS ENDED YEAR ENDED DECEMBER 31,(1) SEPTEMBER 30,(1) ----------------------------------------- ----------------------------- PRO FORMA PRO FORMA 1993 1994 1995 1995(2) 1995 1996 1996(3) ------- -------- -------- --------- ------- ------- --------- <S> <C> <C> <C> <C> <C> <C> <C> INCOME STATEMENT DATA: Net revenue................ $80,442 $110,670 $115,329 $ 115,329 $84,749 $97,363 $97,363 Patient care costs......... 58,314 75,366 80,417 79,949 58,956 68,124 68,124 General and administrative expenses................ 6,799 12,616 12,866 15,466 9,775 9,860 9,860 Provision for doubtful accounts................ 2,010 2,914 3,995 3,995 2,775 1,835 1,835 Depreciation and amortization............ 2,416 3,414 3,661 3,914 2,824 3,370 3,370 Merger expenses............ -- -- -- -- -- 1,960 1,960 ------- -------- -------- -------- ------- ------- ------- Income from operations..... 10,903 16,360 14,390 12,005 10,419 12,214 12,214 Income before income taxes................... 10,443 15,714 13,377 11,499 9,813 12,514 12,514 Net income................. 7,129 7,838 Earnings per share......... $ 0.64(4) $ 0.59 Weighted average shares outstanding............. 11,091(4) 13,207 </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1996 ---------------------------- ACTUAL AS ADJUSTED(5) ------- -------------- <S> <C> <C> BALANCE SHEET DATA: Working capital................................................. $24,226 $ 56,044 Total assets.................................................... 88,779 120,597 Total debt...................................................... 6,638 6,638 Stockholders' equity............................................ 54,104 85,922 </TABLE> <TABLE> <CAPTION> NINE MONTHS YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30, ------------------------------- ------------------- 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> STATISTICAL DATA: Treatments(6).......................... 470,035 598,274 624,988 465,637 510,360 Patients at period-end(7).............. 3,697 4,063 4,246 4,067 4,727 Outpatient centers at period-end(8).... 70 72 75 73 83 Acute service agreements at period-end.......................... 43 43 44 44 44 </TABLE> - --------------- (1) The Combination was accounted for using historical cost, in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 48, because no single owner group from any of the Founding Companies held more than a 50% equity interest in the Company as of the closing of the Company's initial public offering. Accordingly, the Company has recorded the net assets acquired at the Founding Companies' historical cost basis, as determined by generally accepted accounting principles. (2) Pro forma information for the year ended December 31, 1995 gives effect to (a) the provision for federal and state income taxes as if not-for-profit and S-corporations had been subject to such taxes; (b) additional estimated corporate overhead of approximately $2.6 million that would have been incurred had the Combination occurred at the beginning of 1995; and (c) certain other adjustments to reflect the Combination and the initial public offering. See Pro Forma Combining Financial Statements of Renal Care Group, Inc. (of Delaware). (3) Pro forma information for the nine months ended September 30, 1996 gives effect to the provision for federal and state income taxes as if not-for-profit and S-corporations had been subject to such taxes. See Pro Forma Combining Financial Statements of Renal Care Group, Inc. (of Delaware). Net income and earnings per share before merger expenses for the nine month period ended September 30, 1996 would have been $9,072,000 and $0.69, respectively. (4) The calculation of pro forma earnings per share for the year ended December 31, 1995 excludes 1,156,000 shares of Common Stock issued in the initial public offering. The net proceeds from these shares were used for general corporate purposes and therefore are excluded from the calculation. All subsequent periods reflect the full impact of all shares issued in the initial public offering. (5) Adjusted to reflect the sale of 1,063,598 shares offered by the Company hereby at the public offering price of $32.00 per share and the application of the net proceeds therefrom. (6) Treatments include all hemodialysis treatments provided in outpatient facilities, as well as all home dialysis treatments and acute care treatments provided in hospitals. Peritoneal dialysis treatments are stated in hemodialysis equivalents. Excludes treatments provided at centers managed by the Company. (7) Number of ESRD patients under care of outpatient centers at period-end, including patients receiving treatments at the Company's outpatient centers and in the patients' homes. Excludes patients receiving care at centers managed by the Company. (8) Includes centers managed by the Company.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0000920645_integ_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000920645_integ_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..4a35063bee021d4be7ad58d6053bf41643597ba7
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000920645_integ_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by and should be read in conjunction with the more detailed information and Financial Statements and the Notes thereto appearing elsewhere in this Prospectus. Except as otherwise noted, all information in this Prospectus, including financial information, share and per share data, (a) has been adjusted to reflect the conversion of all outstanding shares of the Company's Series A, Series B, Series C, Series D and Series E-1 Convertible Preferred Stock (the "Preferred Stock") into an aggregate of 5,835,705 shares of Common Stock upon closing of the Offering, (b) reflects the two-for-three reverse stock split of the Common Stock effected on April 24, 1996 and (c) assumes no exercise of the Underwriters' over-allotment option. See "Underwriting." Investors should carefully consider the information set forth under the heading "Risk Factors." THE COMPANY Integ Incorporated ("Integ" or the "Company") is developing the Lifeguide System, a painless and bloodless hand-held glucose monitoring product for use by people with diabetes. Utilizing the Company's proprietary interstitial fluid ("ISF") sampling technology, the Lifeguide System will allow people with diabetes to frequently self-monitor their glucose levels without repeatedly enduring the pain of lancing their fingers to obtain a blood sample. The Company believes that the Lifeguide System represents a significant technological advance in glucose monitoring and will enable people with diabetes to manage their disease more effectively and conveniently. The Company anticipates that it will file a 510(k) premarket notification with the United States Food and Drug Administration (the "FDA") for the Lifeguide System in the first half of 1997. It is estimated that there are as many as 100 million people with diabetes worldwide. In the United States, diabetes is a leading cause of blindness, kidney failure, amputation and heart failure and the fourth leading cause of death by disease. Nearly 16 million people in the United States have diabetes and more than 625,000 new cases of diabetes are diagnosed each year. Diabetes is a chronic disease characterized by the body's inability to maintain the proper amount of circulating glucose. Glucose levels vary significantly throughout the day, and the use of personal glucose monitors is a key factor in the management of diabetes. According to Medical Data International, sales of personal blood glucose monitoring products in the United States have increased from approximately $450 million in 1991 to an estimated $730 million in 1995. The Company estimates that the worldwide market for personal blood glucose monitoring products was over $1.5 billion in 1995. Due to the release in 1993 of the results of the landmark Diabetes Control and Complications Trial (the "DCCT"), people with diabetes are becoming increasingly aware of the need for more intensive glucose monitoring. The DCCT demonstrated, through a 1,400 patient trial over a nine-year period, that more intensive treatment of people with Type I (insulin-dependent) diabetes can reduce their risk of developing diabetes-related complications by approximately 60%. Despite the recommendation of the DCCT panel that people with Type I diabetes follow an intensive therapy program, which includes testing glucose levels at least four times a day, the majority of people with diabetes who use insulin currently monitor their glucose level less than once per day. The Company believes that the pain and inconvenience associated with conventional "finger-stick" blood glucose monitoring systems is the primary reason that most people with diabetes fail to comply with the recommendations of the DCCT panel. The Company's proposed Lifeguide System is based on Company research indicating that ISF glucose levels correlate closely with blood glucose levels. The Company's proprietary method for ISF sampling involves a painless and bloodless procedure that draws an ISF sample from the outermost layers of the skin and captures that sample for measurement of glucose levels. The proposed Lifeguide System will be comprised of the Lifeguide Monitor, a hand-held, battery-powered monitor, and the Lifeguide Key, a single-use, disposable sample collection device. The Company believes that its Lifeguide System will offer significant advantages over commercially available personal blood glucose monitoring systems and alternative non-invasive technologies under development, including: . Painless Procedure. By drawing ISF from only the outermost layers of the skin, the Lifeguide System avoids areas of high nerve density, eliminating the pain associated with conventional "finger-stick" sampling approaches. . Bloodless Approach. Utilizing the Company's proprietary ISF sampling technology, the Lifeguide System is designed to allow for the accurate measurement of glucose levels without drawing blood. . Sampling Flexibility. The Lifeguide System is designed to be used on skin almost anywhere on the body, not merely areas (such as the fingertips) where blood capillaries and nerve endings are concentrated. . Ease of Use. The testing procedure of the proposed Lifeguide System has been reduced to simply holding the device against an area of exposed skin until an adequate sample has been obtained (5 to 30 seconds) and waiting briefly for the displayed result. . Cost Competitive. Unlike some alternative non-invasive technologies under development, it is anticipated that the proposed Lifeguide System will be offered at competitive prices and will not be a significant departure from current consumer buying patterns and reimbursement practices for commercially available personal glucose monitoring products. The Company's offices are located at 2800 Patton Road, St. Paul, Minnesota 55113, and its telephone number is (612) 639-8816. The Company was incorporated in Minnesota in 1990. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company. 3,000,000 shares Common Stock to be outstanding after the Offering....................... 9,269,038 shares (1) Use of proceeds..................... For continued development and testing of and clinical trials for the Lifeguide System; capital expenditures; research and development, manufacturing and marketing activities; and working capital and other general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol............................. NTEG </TABLE> SUMMARY FINANCIAL INFORMATION (in thousands, except per share amounts) <TABLE> <CAPTION> THREE MONTHS YEAR ENDED DECEMBER ENDED MARCH 31, 31, ----------------------- -------------- 1993 1994 1995 1995 1996 ----- ------- ------- ----- ------- <S> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Operating expenses: Research and development............ $ 442 $ 1,568 $ 2,463 $ 460 $ 768 General and administrative.......... 237 792 1,417 273 502 Clinical and regulatory............. -- 52 298 61 123 Manufacturing development........... -- 56 718 49 308 Sales and marketing................. -- 54 385 87 189 ----- ------- ------- ----- ------- Total operating expenses........... 679 2,522 5,281 930 1,890 ----- ------- ------- ----- ------- Operating loss....................... (679) (2,522) (5,281) (930) (1,890) Interest income (expense), net....... (4) 30 232 (27) 159 ----- ------- ------- ----- ------- Net loss........................... $(683) $(2,492) $(5,049) $(957) $(1,731) ===== ======= ======= ===== ======= Pro forma net loss per share (2)..... $ (.72) $ (.20) ======= ======= Pro forma weighted average shares outstanding (2)..................... 6,987 8,637 ======= ======= </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 -------------------- AS ACTUAL ADJUSTED(3) -------- ---------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents............................... $ 14,561 $ 50,431 Working capital......................................... 14,197 50,067 Total assets............................................ 16,545 52,415 Long-term debt and capital lease obligations, less current portion........................................ 1,259 1,259 Deficit accumulated during the development stage........ (11,521) (11,521) Total shareholders' equity.............................. 14,818 50,688 </TABLE> - -------- (1) Based on the number of shares outstanding as of May 1, 1996. Excludes 970,103 shares of Common Stock issuable upon exercise of options outstanding on such date, which had a weighted average exercise price of $3.46 per share. Also excludes 459,359 shares of Common Stock issuable upon exercise of warrants outstanding, which had a weighted average exercise price of $4.73 per share. See "Description of Capital Stock." (2) Computed on the basis described in Note 2 of Notes to Financial Statements. (3) Adjusted to reflect the sale of 3,000,000 shares of Common Stock offered hereby at an assumed public offering price of $13.00 per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000920729_infoseek_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000920729_infoseek_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1f8d70134b3d98df3b4186ca680caf73a524c4ab
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000920729_infoseek_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. It is the Company's belief that this Prospectus may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"). Actual results and the timing of certain events could differ materially from those projected in the forward-looking statements as a result of certain factors described under "Risk Factors" commencing on page 5 and described elsewhere in this Prospectus. THE COMPANY Infoseek develops and provides branded, comprehensive Web-based navigational services that help users access and personalize the vast resources of the Internet. The Company's primary service offering, Infoseek Guide, is a free service targeted at individual users. The Company believes that Infoseek Guide goes beyond the functionality offered by other search engines and directory services, by aggregating and packaging the resources of the Internet to serve individuals' unique and personal interests and create rich Internet experiences. The Company believes that Infoseek Guide has been well received by consumers and has achieved a strong brand presence among Web users. The Company's objective is to establish itself as the dominant, branded navigational service provider on the Internet in order to reach the greatest audience. The Company seeks to build a high volume of traffic on its services to provide a preferred platform for content providers and advertisers to reach their target audiences. To achieve its objective, the Company intends to: enhance the attractiveness of its service to users through the addition of new features and functionality; develop and license innovative technologies which can differentiate its service and scale with the growth of the Internet; offer advertisers high impact, innovative advertising products; distribute its service widely through software companies, access providers and others; and form relationships with leading third party content providers. The Company's service is differentiated by its underlying search technology, which is noted for its high accuracy and fast searching capability. Based on this technology, Infoseek Guide has won a number of industry awards including"Number 1 Rated Search Engine" (PC Computing Sept 95), "Best of the Test" (Internet World May 96) and "MVP: Internet Tools" (PC Computing Dec 95). The Company is currently working on its next generation search engine, Ultraseek, which the Company plans to release in the second half of 1996. Ultraseek will enable the searching of a much greater number of Web sites at even faster speeds with the same level of accuracy for which Infoseek Guide is currently known. The Company believes that Infoseek Guide is also differentiated through its design, which integrates the capabilities of a search engine and a directory to combine specific responses to search queries with communities of related Web, USENET and branded third party content and targeted, related advertising. By creating communities of context-specific information in real-time for users, Infoseek Guide addresses the needs of consumers for relevant and related information, enables content providers to reach interested audiences, and allows advertisers to deliver advertisements to a target group of potential buyers. The Web is emerging as an important new advertising medium. According to Forrester Research, Inc., the market for Internet-based advertising will reach approximately $700 million by 1998, from $37 million in 1995. The Company believes it is well positioned to take advantage of this growth by serving the needs of advertisers. By creating communities where users' interests are matched with advertisements, by tracking impressions and by offering a significant volume of Web traffic, Infoseek Guide enables advertisers to undertake measurable, targeted, cost-effective and interactive advertising. During the quarter ended March 31, 1996, over 120 advertisers placed advertisements on Infoseek Guide. The Company is actively exploring new technologies which will allow it to track user behavior and interests, and therefore even more closely match the interests of audience and advertisers. The Company believes that distributing and marketing its services widely is key to successfully growing its audience. The Company was able to gain access to a large audience and build early brand awareness through its initial relationship with Netscape Communications Corporation ("Netscape") as the sole premier "Net Search" navigational service on the Netscape Web page. Beginning April 11, 1996, Netscape implemented a new "Net Search" display, in which several navigational service providers are rotated through the most visible position on the page. In order to maximize its exposure, the Company has also broadened its channels of distribution through other entities including Microsoft Corporation, NETCOM On-Line Communication Services, Inc., NYNEX Information Technologies Company ("NYNEX"), Quarterdeck Corporation, and Verity, Inc. and will continue to broaden its channels of distribution through additional entities. The Company has also established key strategic alliances with leading media companies including Reuters NewMedia Inc. and IDG Holdings, Inc. for content provisions and with distribution companies including NYNEX and Kanematsu Corporation for further national and international distribution. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company......... 3,454,500 shares Common Stock to be outstanding after the Offering........................ 25,400,728 shares(1) Use of proceeds............................. For general corporate purposes, including capital expenditures and working capital. Nasdaq National Market symbol............... SEEK </TABLE> SUMMARY FINANCIAL DATA (in thousands, except per share data) <TABLE> <CAPTION> INCEPTION YEARS ENDED THREE MONTHS ENDED (AUGUST 30, 1993) DECEMBER 31, MARCH 31, TO DECEMBER 31, ------------------ ------------------ 1993 1994 1995 1995 1996 ----------------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Total revenues.................... $ -- $ -- $ 1,032 $ 5 $ 1,731 Gross profit...................... -- -- 418 (74) 1,041 Operating loss.................... (27) (1,520) (3,393) (426) (3,509) Net loss.......................... $ (27) $(1,510) (3,296) (422) (3,568) Pro forma net loss per share (2)............................. $ (0.13) $ (0.02) $ (0.14) Shares used in computing pro forma net loss per share (2).......... 25,863 25,966 25,914 </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 ----------------------------------------------- PRO FORMA ACTUAL PRO FORMA(3) AS ADJUSTED(3)(4) -------- ------------ ----------------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents...................... $ 10,114 $ 18,202 $ 52,692 Working capital................................ 7,131 15,219 49,709 Total assets................................... 15,747 23,835 58,325 Total shareholders' equity..................... 8 5,203 51,540 </TABLE> - --------------- (1) Based on the number of shares outstanding as of March 31, 1996 and the issuance of 673,500 shares of Convertible Preferred Stock and 375,001 shares of Redeemable Convertible Preferred Stock in April 1996. Excludes 4,440,876 options and warrants outstanding at March 31, 1996, of which 311,537 were exercisable as of such date. See "Management--1996 Stock Option/Stock Issuance Plan" and Notes 5, 7 and 10 of Notes to Financial Statements. (2) See Note 1 of Notes to Financial Statements. (3) Reflects the issuance of 673,500 shares of Convertible Preferred Stock and 375,001 shares of Redeemable Convertible Preferred Stock for net proceeds of $8,088,000 in April 1996. (4) Adjusted to reflect the sale to the public of 3,454,500 shares of Common Stock offered by the Company at an assumed initial public offering price of $11.00 per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0000921317_elcom_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000921317_elcom_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d1d51b42f96823324feafd127bb6af5343b00c92
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000921317_elcom_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and the Financial Statements and related Notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus (i) gives retroactive effect to a one-for-two reverse stock split of the Company which was effected on October 11, 1996 and (ii) assumes that the Underwriters' over-allotment option is not exercised. The discussion in this Prospectus contains forward-looking statements that include risks and uncertainties. The Company's actual results could differ materially from those discussed in this Prospectus. See "Cautionary Statement Regarding Forward-Looking Information" in this Prospectus Summary and "Risk Factors." THE COMPANY Elcom Technologies Corporation (the "Company") is the developer of the CUSTOMER PREMISES AREA NETWORK or CPAN System, which enables the distribution of video, voice, audio and data signals through a premises' (typically a home or small business) existing electrical wiring eliminating the need for additional television cables, phone lines and stereo wires throughout the premises. The CPAN System consists of a transmitter and a receiver which plug into standard electrical outlets. The transmitter is linked by standard input connectors to the signal source such as cable/satellite television, telephone line, stereo or computer. One or more receivers, located in other rooms, are linked by standard output connectors to televisions, telephones, fax/modems, speakers, computers or printers. The Company is developing a family of products incorporating the CPAN System, and recently began marketing five such products: ezTV, ezPHONE, ezONLINE, ezAUDIO and ezREMOTE. The ezTV product enables the distribution of a video signal, such as a cable television channel, to multiple locations within a home without installing additional cabling and offers remote control capability in either the primary or secondary viewing room. The ezPHONE and ezONLINE products provide access to telephone service in most rooms of the home for phone, fax, caller ID and provide computer modem access up to 33.6 Kbps. The Company's ezONLINE product is specifically targeted to the personal computer market. The ezAUDIO product enables the distribution of audio signals in stereo to multiple locations within a home for home theater systems and second room audio. The ezREMOTE product enables consumers to operate remote control enabled equipment and appliances in most rooms where an electrical outlet is present. The CPAN System provides a common platform for additional products currently under development, including the ezVIEW and ezCOMM products. The ezVIEW product is intended to integrate electrical wiring systems with video cameras to enable premises surveillance in most rooms. The ezCOMM product is intended to enable the connection of multiple computers to a single printer. In addition to its CPAN System products, the Company is developing its ezGUARD surge protection device, under license from a third party licensor. The ezGUARD product is designed to substantially reduce the risk of damage to computers, televisions and other home appliances from electrical outlet power surges as compared with competitive consumer products. The Company is currently devoting significant resources toward the foregoing product development and anticipates marketing these products beginning in 1997. There can be no assurance that the Company will successfully complete the development of these products or that the Company's existing or planned products will satisfy the needs of the market place. The Company markets its products directly and through sales representatives to national retail organizations, such as consumer electronics and computer retailers, electronics distributors and catalog retailers. Additionally, the Company has an agreement with QVC, Inc. ("QVC") which, subject to certain conditions, grants QVC exclusive direct response television rights to sell Elcom branded products and to launch all other Company developed products on the QVC network. The Company's growth strategy is to: (i) improve, expand and diversify its product lines utilizing its CPAN System and its ezGUARD product; (ii) expand its sales and marketing efforts both domestically and internationally, including targeting individual retail segments such as home computing and entertainment; (iii) establish sales to Original Equipment Manufacturers ("OEMs"), enabling the Company to privately label and embed its products; and (iv) develop digital technology to incorporate into its product lines. The Company was incorporated in Pennsylvania in September 1993. The Company's executive offices and product development facilities are located at 78 Great Valley Parkway, Malvern, Pennsylvania 19355, and its telephone number is (610) 408-0130. Information relating to the Company and its products is located on its home page on the World Wide Web at www.elcomtech.com. <TABLE> <CAPTION> THE OFFERING <S> <C> Common Stock offered by the Company........ 2,000,000 shares Common Stock offered by certain Selling 100,000 shares Shareholders.............................. Common Stock to be outstanding after the 8,878,340 shares(1) offering.................................. Use of Proceeds............................ To increase the Company's outsourced manufacturing capabili- ties, for research and develop- ment, for sales and marketing and for working capital and other gen- eral corporate purposes, including possible acquisitions. Proposed NASDAQ National Market Symbol..... ELCM </TABLE> - -------- (1) Excludes 776,250 shares of Common Stock available for issuance upon the exercise of outstanding options to purchase common stock. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION This Prospectus includes forward-looking information. All statements other than statements of historical fact, including, without limitation, those with respect to the Company's objectives, plans and strategy set forth under "Prospectus Summary--The Company," "Business--Business Strategy," and "Business--Short-Term Plan of Operations," those with respect to anticipated product development and the need for additional financing set forth under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and those preceded by or that include the words "believes," "expects," "anticipates" or similar expressions, are forward-looking statements. Although the Company believes that such forward-looking statements are reasonable, it can give no assurance that the Company's expectations are correct. All forward-looking statements contained in this Prospectus are expressly qualified in their entirety by this Cautionary Statement. SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------- ------------------ 1993(1) 1994 1995 1995 1996 ------- ------- ------- -------- -------- <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales................. $ 0 $ 0 $ 0 $ 0 $ 523 Operating loss............ (55) (1,238) (6,781) (5,716) (8,030) Net loss.................. (54) (1,227) (6,733) (5,693) (7,952) Net loss per common share.................... $ (.01) $ (.20) $ (1.12) $ (.93) $ (1.25) Weighted average number of common shares outstanding.............. 5,210 6,195 6,009 6,144 6,372 </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1996 ---------------------- ACTUAL AS ADJUSTED(2) ------- -------------- <S> <C> <C> BALANCE SHEET DATA: Working capital..................................... $ 4,103 $20,103 Total assets........................................ 10,571 26,571 Shareholders' equity................................ 5,500 21,500 </TABLE> - -------- (1) For period from inception through December 31, 1993. (2) Adjusted to give effect to the issuance and sale of 2,000,000 shares of Common Stock offered by the Company hereby at an assumed initial offering price of $9.00 per share and the application of the net proceeds therefrom. See "Use of Proceeds."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0000921506_cv_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000921506_cv_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e41783814d1496eb5041efcbebff043543c9d3e0
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000921506_cv_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. THE DISCUSSION IN THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES INCLUDING, BUT NOT LIMITED TO, THOSE SPECIFICALLY IDENTIFIED HEREIN. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES (I) A 1-FOR-10 REVERSE SPLIT OF THE COMPANY'S OUTSTANDING COMMON STOCK EFFECTED IN OCTOBER 1996; (II) THE ISSUANCE OF 673,997 SHARES OF COMMON STOCK UPON THE NET EXERCISE OF CERTAIN WARRANTS UPON THE CLOSING OF THE OFFERING; (III) THE CONVERSION OF ALL OUTSTANDING SHARES OF PREFERRED STOCK INTO SHARES OF COMMON STOCK TO BE EFFECTED UPON THE CLOSING OF THE OFFERING; AND (IV) NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. THE COMPANY The Company is a biopharmaceutical company focused exclusively on the application of molecular cardiology to the discovery, development and commercialization of novel, small molecule drugs for the treatment of chronic cardiovascular diseases. Molecular cardiology was developed, in part, by CVT scientists and their academic collaborators and is based upon the application of molecular biology and genetics to cardiovascular diseases. This discipline has yielded new insights into the mechanisms underlying chronic cardiovascular diseases and has enhanced the search for innovative cardiovascular drugs by providing an increasing number of new molecular targets for drug discovery. To date, CVT has discovered five compounds and completed the strategic in-license of a sixth compound for treatment of chronic cardiovascular diseases. Cardiovascular disease is the leading cause of death in the United States, claiming more than 950,000 lives in 1993. The American Heart Association projects the total cost of cardiovascular medications in the United States for 1996 at $11 billion. Two of the Company's drug candidates, CVT-124 and ranolazine, are in clinical trials. CVT-124 is an adenosine A(1) receptor antagonist discovered by CVT. Adenosine A(1) receptor antagonists block certain actions of adenosine, a hormone that modulates different functions of the cardiovascular system. CVT-124 has potential applications in the treatment of edema (fluid accumulation) associated with congestive heart failure ("CHF") and in the prevention and treatment of acute renal failure. A Phase I/II study completed by the Company in the United States indicated that CVT-124 is generally well tolerated and produces diuretic activity in healthy volunteers. Approximately one-quarter of the 875,000 patients in the United States hospitalized with a primary diagnosis of CHF exhibit resistance to current intravenous diuretic treatments. The Company believes that these patients would represent the initial target market for CVT-124 in this indication. The Company's second compound in clinical trials, ranolazine, is a novel compound for the treatment of angina. Ranolazine was licensed from Syntex (U.S.A.), Inc. ("Syntex"), an indirect subsidiary of Roche Holding Limited ("Roche"), in March 1996. Its novel metabolic mechanism of action was discovered, in part, by cardiovascular researchers now at or associated with CVT. In Phase I and Phase II clinical trials conducted by Syntex, an immediate release formulation of ranolazine ("ranolazine IR") was administered to over 1,200 patients. These clinical trials have indicated that ranolazine IR improved exercise tolerance in angina patients without adversely affecting heart rate or decreasing blood pressure, a clinical profile absent from currently available drugs. Based on these data, as well as Syntex pilot Phase II data from a sustained release formulation of ranolazine ("ranolazine SR") for intermittent claudication (pain in the legs due to insufficient blood flow), the Company intends to commence further clinical trials of ranolazine SR. The Company believes ranolazine could particularly benefit angina patients who also suffer from CHF or remain symptomatic despite maximal doses of currently available anti-anginal drugs. In the United States, approximately 6.7 million patients are currently diagnosed with angina. Based on published studies, approximately one-third, or 2.2 million, are either diagnosed with both angina and CHF or are resistant to currently available treatments. The Company believes these patients would represent the initial target market for ranolazine. The four other compounds discovered by the Company are in preclinical studies. CVT-313 is a selective inhibitor of the cell cycle enzyme, cyclin-dependent kinase 2 ("CDK2"). The Company believes that CVT-313 may be useful in a variety of cellular proliferative disorders, including the prevention of restenosis, as an adjunct to coronary artery bypass surgery and as a treatment for cardiomyopathy (heart muscle damage). CVT-634, an inhibitor of another cell cycle regulating enzyme, is also being evaluated in animal models of chronic cardiovascular disease. CVT-609 and CVT-429 are highly selective adenosine A(1) receptor agonists which the Company believes may have potential activity in treating certain common cardiac arrhythmias. The Company believes that compared to current therapies, these compounds may offer an improved clinical profile for immediate treatment of these arrhythmias including avoiding unwanted blood pressure lowering effects. In addition, the Company has discovered a novel inflammatory factor found in human cardiovascular diseases, which it partnered to Bayer AG for continued development. BUSINESS STRATEGY The Company's strategy is to become a leader in the development of novel, cost-effective treatments for chronic cardiovascular diseases by leveraging its expertise in molecular cardiology. The Company is developing products based on small molecules designed to (i) utilize novel mechanisms of action, (ii) address segments of the cardiovascular patient population which are either underserved or not treatable by existing therapies, and (iii) offer the currently served cardiovascular patient population the potential for improved efficacy with fewer side effects than currently available drugs. The Company believes that it can best utilize its internal resources by concentrating its activities on discovery, preclinical evaluation and early clinical phases of drug development. The Company intends to establish partnerships with pharmaceutical companies for later stage clinical trials and marketing and sales activities for its products. The Company believes that such partnerships will enable the Company to more effectively and economically develop and market its initial products. DRUG DISCOVERY PLATFORM CVT's drug discovery platform supports several programs, including those focused on the adenosine A(1) receptor, the cell cycle and chronic inflammation in the cardiovascular system. These programs have produced compounds currently in clinical or preclinical development or outlicensed for use in third party drug discovery programs. CVT's expertise in molecular cardiology and drug development has been critical to the identification of these drug candidates. The Company believes that its drug discovery platform allows it to efficiently select novel, clinically relevant drug candidates that have a significant probability of commercial potential. CVT first evaluates new targets with respect to clinical relevance and suitability for small molecule inhibition. CVT then utilizes a highly integrated, multidisciplinary approach to produce novel small molecules as drug candidates for these targets. The Company combines molecular modeling and combinatorial chemistry to assemble targeted libraries of new chemical entities, an approach which the Company believes expedites the identification of potential drug leads. The Company has developed a comprehensive proprietary database correlating biological activity of candidate drugs with their structures. From this database, CVT identifies final lead compounds based on predetermined development criteria including potency, specificity, manufacturability, and pharmacologic activity in animal and IN VITRO models. The Company determines the proper selection of cell-based assays and animal models of disease to enhance development of the drug candidate based on its projected use in the clinical setting.
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+PROSPECTUS SUMMARY This summary is qualified in its entirety by the more detailed information and the consolidated financial statements and notes thereto appearing elsewhere in this Prospectus. Unless the context indicates otherwise, any reference in this Prospectus to "Trico" or the "Company" refers to Trico Marine Services, Inc. and its predecessor, together with the consolidated subsidiaries of Trico Marine Services, Inc. Unless otherwise indicated, all information in this Prospectus assumes that the Underwriters' over-allotment option is not exercised.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000921623_complete_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000921623_complete_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and consolidated financial statements and related notes thereto appearing elsewhere in this Prospectus. Completion of this offering is conditioned upon and will occur contemporaneously with the completion of the Restructuring Plan of Presidential Mortgage Company (the "Partnership"). All references to the Corporation after the closing of this Offering assume that the Restructuring Plan has been completed. See "Risk Factors" on pages 12 through 16 for a discussion of certain factors that should be considered by each prospective investor. THE CORPORATION PacificAmerica Money Center, Inc. (the "Corporation," as previously defined) is a Delaware corporation formed in 1994 as a wholly owned subsidiary of Presidential Mortgage Company, a California limited partnership (referred to herein on a consolidated basis with its subsidiaries as the "Partnership" and on an unconsolidated basis as "Presidential"). Pursuant to a Restructuring Plan approved by the general partner of Presidential (the "General Partner") and the requisite vote of limited partners of Presidential (the "Limited Partners" and collectively with the General Partner, the "Partners"), Presidential will transfer all of its assets and liabilities to the Corporation. From the date of its formation in 1981 until 1988, Presidential's sole business was the direct origination and servicing of real estate secured loans under California consumer and commercial finance lender licenses. In 1988, Presidential formed Pacific Thrift and Loan Company, a California corporation ("Pacific Thrift"), as a wholly owned subsidiary of Presidential, to engage in the business of origination, purchase and sale of real estate secured loans under a California thrift and loan license. Since 1990, substantially all new lending activity has been conducted by Pacific Thrift, and Presidential has continued to hold a portfolio of loans substantially originated prior to 1991. In 1990, Presidential acquired two additional subsidiaries, Consolidated Reconveyance Company, a California limited partnership ("CRC"), which provides trust deed foreclosure services, and Lenders Posting and Publishing Company, a California limited partnership ("LPPC"), which provides posting and publishing services in connection with trust deed foreclosures. In 1994, Presidential formed the Corporation and PacificAmerica Mortgage, Inc. ("PacificAmerica Mortgage") for the purpose of completing a proposed restructuring of Presidential. These subsidiaries have had no significant operations as of March 31, 1996. In 1995, Presidential formed another subsidiary, Consolidated Reconveyance Corporation, a Washington corporation ("CRC Washington"), to provide trust deed foreclosure services in the State of Washington. On May 31, 1996, Presidential transferred to the Corporation all of the outstanding stock of Pacific Thrift, CRC Washington and PacificAmerica Mortgage for the purpose of filing consolidated tax returns for those entities. On the closing date of the Restructuring Plan, Presidential will transfer all of its interests in CRC and LPPC to the Corporation. For the year ended December 31, 1995, the Partnership sustained a consolidated net loss of $1.7 million, consisting of a $5.8 million net loss of Presidential, offset by $3.2 million net income of Pacific Thrift, $.6 million net income of CRC and $.3 million net income of LPPC. For the quarter ended March 31, 1996, the Partnership reported consolidated net income of $.3 million, consisting of $.9 million net income of Pacific Thrift, $.2 million net income of CRC and $.1 million net income of LPPC, offset by a net loss of $.9 million of Presidential. After the Restructuring, the Corporation will be the holding company for Pacific Thrift, PacificAmerica Mortgage, CRC, CRC Washington and LPPC. The principal executive offices of the Corporation are located at 21031 Ventura Boulevard, Woodland Hills, California 91364, and its telephone number at that address is (818) 992-8999. Following is a description of each of the subsidiaries: PACIFIC THRIFT. Pacific Thrift focuses on the origination of residential, multi-family and commercial real estate loans to borrowers whose credit histories limit their ability to qualify for low-rate financing at more credit sensitive financial institutions. Such loans are generally referred to in the lending industry as "B" and "C" credit loans. Pacific Thrift originated $151.5 million in loans in all of 1995 and $119.0 million loans in the first five months of 1996. Pacific Thrift sells a substantial majority of all residential loans it originates to larger mortgage lenders for securitization. During all of 1995, Pacific Thrift sold $145.0 million of loans originated for sale. During the five months ended May 31, 1996, Pacific Thrift sold $121.9 million of loans originated for sale. At April 30, 1996 and December 31, 1995, Pacific Thrift held an additional $8.9 million and $9.6 million, respectively, of loans originated for sale. In addition, Pacific Thrift offers investment certificates in the form of passbook and certificate of deposit accounts insured by the Federal Deposit Insurance Corporation ("FDIC") up to applicable limits. At March 31, 1996, Pacific Thrift had total assets of $81.6 million, total deposits of $72.8 million and total shareholders' equity of $7.8 million. Pacific Thrift is subject to regulation and supervision by the FDIC and the California Department of Corporations ("DOC"). CRC. CRC provides trust deed foreclosure services to over 300 banks, thrifts, mortgage banks, life insurance companies and federal agencies. At March 31, 1996, CRC had total assets of $3.2 million, total liabilities of $2.3 million and partners' capital of $.9 million. All of the limited partnership interests of CRC will be transferred to the Corporation on the Closing Date. CRC WASHINGTON. CRC Washington provides trust deed foreclosure services on loans secured by real estate located in the State of Washington. CRC Washington had no material assets, liabilities or operations at or during the year ended December 31, 1995 or at or during the quarter ended March 31, 1996. The Corporation is the sole shareholder of CRC Washington. LPPC. LPPC provides posting and publication services in connection with trust deed foreclosure sales. At March 31, 1996, LPPC had total assets of $.3 million, total liabilities of $.1 million and partners' capital of $.2 million. All of the limited partnership interests of LPPC will be transferred to the Corporation on the Closing Date. PACIFICAMERICA MORTGAGE. As part of the Restructuring Plan, PacificAmerica Mortgage will acquire the loan portfolio of Presidential, substantially all of which was originated prior to 1991. At March 31, 1996, the Presidential portfolio consisted of residential, multi-family and commercial loans with a gross aggregate principal balance of $8.3 million, down from a high of $130.2 million in 1989. The Presidential portfolio is pledged to secure a loan obligation (the "Bank Loan") owed by Presidential to Fleet Bank, N.A. ("Fleet" or the "Bank," into which NatWest Bank, N.A., the original lender, was merged as of May 1, 1996), with a remaining balance of $5.0 million owed as of May 31, 1996 and a maturity date of June 30, 1997. The Presidential portfolio is being reduced through loan payoffs and loan sales to pay down the Bank Loan. Management further intends for PacificAmerica Mortgage to become a California licensed finance lender, and, where necessary or advisable, to obtain other state licenses to act as a real estate secured lender in locations in which Pacific Thrift is unable to engage in real estate secured lending. BUSINESS STRATEGY After the consummation of this Offering and the Restructuring, management of the Corporation intends to pursue a national expansion strategy for the Corporation's lending business. While there can be no assurance that management of the Corporation will be successful in executing its business strategy, principal strategic objectives include: -- CONTINUE TO EMPHASIZE FEE INCOME FROM LOANS ORIGINATED FOR SALE. Pacific Thrift has developed the ability to originate a high volume of mortgage loans for sale to larger mortgage lenders for securitization. For the quarter ended March 31, 1996, Pacific Thrift increased gains on sale of loans by $3.2 million (213.3%) to $4.7 million from $1.5 million for the quarter ended March 31, 1995. For the year ended December 31, 1995, gains on sale of loans increased by $7.7 million (856%), to $8.6 million from $.9 million for the prior year. By focusing on the origination of loans for sale, Pacific Thrift has reduced its reliance on interest income, the primary source of income for traditional banks and mortgage lenders. The origination of loans for sale mitigates the credit risks associated with loan defaults, because the risk of loss on loans is transferred to the loan purchasers, subject to standard representations and warranties made by Pacific Thrift to the loan purchasers at the time of sale for which Pacific Thrift remains liable. -- INCREASE VOLUME OF LOANS ORIGINATED FOR SALE IN STATES IN WHICH PACIFIC THRIFT HAS RECENTLY COMMENCED LENDING OPERATIONS. In 1994, management of Pacific Thrift began to implement a geographic expansion strategy to increase the volume of loans originated for sale. Pacific Thrift first expanded operations into the western states of Washington, Oregon and Nevada, where certain officers had previous experience with mortgage lending operations. Pacific Thrift later expanded lending operations into Colorado, Arizona and Utah, and began exploring other regions for possible lending operations. As of April 30, 1996, Pacific Thrift had loan representatives in the 22 states of Arizona, California, Colorado, Connecticut, Delaware, Florida, Georgia, Idaho, Illinois, Kansas, Maryland, Massachusetts, Minnesota, Missouri, Nevada, New York, Oregon, Pennsylvania, Texas, Utah, Virginia and Washington. In addition, as of April 30, 1996, Pacific Thrift was in the early stages of operations in Indiana, New Hampshire, New Mexico, North Carolina, Ohio, Rhode Island, South Carolina, Washington D.C. and Wisconsin. -- EXPAND LOAN OPERATIONS INTO NEW STATES. As of April 30, 1996, management has taken steps to qualify for or confirm exemption from consumer lending licensing requirements in the states of Hawaii, Iowa, Kentucky, Louisiana, Michigan, Montana, Oklahoma, Tennessee and West Virginia. -- MINIMIZE OVERHEAD COSTS BY OPERATING WITHOUT OFFICES IN MOST AREAS. Management of Pacific Thrift has developed an operating system which allows it to expand lending operations in new areas without opening loan production offices. Whenever possible, a senior loan officer with experience in an existing Pacific Thrift office is transferred to a new region to hire local loan representatives on a commission-only basis. The senior loan officer supervises and trains the local representatives, all of whom operate independently without office space. Local loan representatives typically have contacts with local mortgage loan brokers, which provide sources of loan referrals. All loan applications and supporting documentation are delivered to Pacific Thrift's California loan review office for processing and underwriting. As operations expand in one or more locations, Pacific Thrift may consider renting small offices as necessary to facilitate business operations, subject to applicable regulatory requirements. However, management believes that Pacific Thrift may continue to be able to conduct business without the expense and risk of undertaking long-term lease and other material overhead obligations in most locations. -- CONTINUE TO EVALUATE POSSIBLE SECURITIZATION PROGRAMS. Management believes that Pacific Thrift may reach loan volume levels sufficient to support direct securitization programs by the end of 1996 or the beginning of 1997. Management will continue to evaluate programs to securitize loans to the extent that future lending volume permits. Management believes that the implementation of such programs could further enhance revenues of Pacific Thrift because, as sponsor of securitization programs, Pacific Thrift would retain the interest spread and servicing fees which it currently releases for a premium as a seller of loans. In addition, Pacific Thrift would consider the purchase of loans from other originators to enhance securitized loan volume. -- GRADUALLY REBUILD PACIFIC THRIFT'S LOAN PORTFOLIO BALANCE. Although management intends to emphasize loans originated for sale, it also intends to gradually rebuild Pacific Thrift's loan portfolio balance with residential and commercial mortgage loans. Management believes that diversification of revenue sources between securitization and loan sales and loan portfolio income allows for adaptation to changing economic and business conditions. -- CONTINUE TO IMPROVE ASSET QUALITY. In 1994, management of Pacific Thrift began an ongoing effort to improve loan underwriting policies and procedures for portfolio loans. Lending criteria were revised to place a greater emphasis on the borrower's ability to repay, and appraisal standards for real property collateral were strengthened. Management believes that these changes have substantially improved asset quality. While loan delinquencies over 60 days on portfolio loans originated prior to January 1, 1994 were approximately 15.22% of all such loans at March 31, 1996, loan delinquencies over 60 days on loans originated after January 1, 1994 were only 2.07% of all of those loans as of March 31, 1996. There can be no assurance that the level of delinquencies experienced with respect to portfolio loans originated after January 1, 1994 will not increase as this pool of loans continues to age. -- CONTINUE TO EXPAND THE BUSINESS OF CRC, CRC WASHINGTON AND LPPC. The trust deed foreclosure services and posting and publishing services businesses of CRC, CRC Washington and LPPC provide a secondary source of fee income that capitalizes on management's expertise in servicing mortgage loans. CRC, CRC Washington and LPPC offer their services to over 300 banks, thrifts, mortgage banks, life insurance companies and federal regulatory agencies with trust deeds on real property located in California, Nevada and Washington. In addition, insofar as foreclosures typically increase during periods of a weakening economy, these businesses provide a counter-cyclical source of revenues that can partially offset reduced revenues or losses in the Corporation's lending business which may occur during these periods. BACKGROUND AND REASONS FOR RESTRUCTURING Presidential's primary business from its inception in 1981 through 1990 was the origination of B and C credit loans secured by California real property (primarily residential), which Presidential retained and serviced for the life of the loans. Presidential financed its lending activity with revolving lines of credit from major commercial banks and periodic offerings of limited partnership units. At the height of this business in 1989, Presidential and Pacific Thrift (which commenced business in December 1988) had a total combined loan portfolio of $130.2 million and Presidential had borrowed $82 million on a credit line. Beginning in 1990, with the downturn in the California real estate market, the credit line was restructured as a one-year renewable term loan (the "Bank Loan") with required monthly or quarterly pay down levels. Accordingly, since 1990, Presidential has been required to pay down over $77 million on the Bank Loan, which has resulted in a systematic reduction of the Partnership's loan portfolio from its high of $130.2 million in 1989 to a combined loan portfolio of $56.6 million (net of general reserves of $4.7 million but including $11.4 million in loans held for sale) as of March 31, 1996. The reduction in the loan portfolio, coupled with substantial loan losses caused by the California recession and substantial declines in the value of California real estate, caused declines in the Partnership's net income through 1992 and net losses of $1.7 million, $9.5 million and $5.9 million for the years ended December 31, 1995, 1994 and 1993, respectively. In addition, pursuant to the terms of the Bank Loan, Presidential was required to suspend all distributions and capital withdrawal payments to limited partners in June 1993. As a result, Presidential has paid no distributions or capital withdrawal payments since June 1993. In 1994 and 1995, management of the Partnership refocused its lending business on loans originated for sale and analyzed possible restructuring alternatives which would provide a means for limited partners of the Presidential to realize potential capital appreciation and greater liquidity for their investment. Management proposed the Restructuring Plan to the Limited Partners pursuant to a Proxy Statement/Prospectus dated May 14, 1996, and received the approval of over 70% of the Limited Partners to complete the Restructuring Plan by June 17, 1996. The completion of this Offering is a condition to and will be the final step in the consummation of the Restructuring Plan. SUMMARY OF THE PUBLIC OFFERING Common Stock offered by the Corporation.............. The Corporation is offering 763,661 shares of Common Stock in this offering. The Corporation has agreed to issue 890,000 shares to the partners of Presidential in connection with the Restructuring Plan, less 287,083 shares that would otherwise be issued to limited partners electing the Cash Out Option and 1,206 shares representing fractional interests, the value of which will be paid in cash to the partners. The Corporation is also issuing 324,628 shares in connection with the Rights Offering (as described below). The Restructuring Plan, the Rights Offering and the Public Offering will close concurrently (the "Closing Date") and all shares will be issued on the Closing Date. No investor may purchase more than seven percent of the total shares to be issued in connection with the Restructuring, the Rights Offering and the Public Offering. Use of Proceeds............ The net proceeds of the additional capital raised in the Rights Offering and the Public Offering will be used approximately as follows: $2,871,000 owed to Limited Partners who have elected the Cash Out Option in connection with the Restructuring Plan, which entitles those Limited Partners to receive $10 times the amount of shares they otherwise would have received in connection with the Restructuring based on their capital accounts in the Partnership; $1,307,000 to pay the aggregate amount owing to former Limited Partners who are now creditors of the Partnership, whose withdrawal requests were approved prior to June 30, 1993; $1,185,000 to pay substantially all of the debt which the Partnership estimates is owed by it to the General Partner as of May 31, 1996, which the General Partner will use to purchase General Partner Warrants and Common Stock in the Rights Offering; $1,000,000 to pay down the Bank Loan; $200,000 to redeem a warrant for 2% of the Common Stock (see "Summary of the Restructuring Plan -- Bank Warrants"); and $12,000 to pay the value of fractional interests to the partners the balance of net proceeds will be added to working capital of the Corporation, portions of which may be contributed from time to time as additional capital to Pacific Thrift or used to pay down the Bank Loan, as management deems appropriate. Nasdaq National Market Symbol................... "PAMM" SUMMARY OF THE RESTRUCTURING PLAN Exchange of Assets and Liabilities of the Partnership for Common Stock.................... Shares of Common Stock equal to the Net Tangible Equity of the Partnership on the last day of the month preceding the Closing Date, equal to 890,000 shares based on Net Tangible Equity of $8.9 million at May 31, 1996, will be distributed to the General Partner and all Limited Partners of the Partnership on the Closing Date, less 287,083 shares that would otherwise be issued to Limited Partners electing the Cash Out Option and 1,206 shares representing fractional interests, the value of which will be paid in cash to the partners. Net Tangible Equity is defined as total assets minus total liabilities, goodwill and capitalized organization costs other than capitalized costs of the Rights Offering and Public Offering, as adjusted for an increase in capital due to the General Partner's purchase of General Partner Warrants for $385,000 and the General Partner's purchase of Common Stock for $800,000, to be paid with the proceeds of repayment of the debt which the Partnership owes to the General Partner as of May 31, 1996. Rights Offering............ In connection with the Restructuring Plan, Limited Partners, partners of the General Partner and the officers, directors and employees of Presidential and its subsidiaries were given the right to subscribe for up to 800,000 additional shares of Common Stock in a rights offering (the "Rights Offering"), at $10 per share. Subscriptions for 324,628 shares were received in the Rights Offering. Subscriber Warrants........ For every five shares of Common Stock subscribed for in the Rights Offering, the Corporation has agreed to issue to each subscriber a transferable warrant (the "Subscriber Warrants") for one additional share of Common Stock, exercisable at any time after issuance for a period of two years, at an exercise price equal to 125% of the Public Offering Price per share. Based on subscriptions for 324,628 shares received in the Rights Offering, the Corporation will issue 64,925 Subscriber Warrants. General Partner Warrants and Purchase of Common Stock.................... The General Partner of the Partnership will purchase warrants from the Corporation ("General Partner Warrants") exercisable for up to 25% of the Common Stock outstanding on the Closing Date, on a fully diluted basis assuming the exercise of all General Partner Warrants, exercisable at any time for a period of 18 months after the Closing Date, at an exercise price equal to 150% of the Public Offering Price per share. The General Partner will receive payment of $1,185,000 of the debt owed to it by the Partnership out of the proceeds of this Offering and will use this amount to pay $385,000 to purchase General Partner Warrants and $800,000 to purchase Common Stock in the Rights Offering. The General Partner will distribute all Common Stock, Subscriber Warrants and General Partner Warrants received by it to its partners and creditors. Bank Warrant............... The Corporation has agreed to grant to Fleet a Warrant (the "Bank Warrant") to purchase 2% of the Common Stock of the Corporation, exercisable at any time for a period of five years after issuance, at an exercise price equal to 25% of the book value of the Corporation on December 31, 1995, as adjusted for shares sold in the Rights Offering and the Public Offering, redeemable at any time within one year at the option of the Corporation for $200,000. The Corporation intends to redeem the Bank Warrant promptly after the closing of the Restructuring Plan and this offering. Conditions to Completion of the Restructuring Plan, Rights Offering and Public Offering.......... The closing of the Restructuring Plan, the Rights Offering and the Public Offering are subject to the satisfaction of the following conditions: (a) the approval of Limited Partners holding at least 51% of the total Capital Contributions of all Limited Partners (except the General Partner to the extent of its ownership of Limited Partnership Units), which has been obtained; (b) Minimum Market Capitalization of $16.9 million is achieved as a result of the Rights Offering and the Public Offering; (c) the Common Stock is approved for listing on the Nasdaq National Market ("NNM"), the American Stock Exchange ("ASE") or the Pacific Stock Exchange ("PSE"); (d) the Bank consents to the completion of the Restructuring Plan; (e) the FDIC and the DOC consent to the change in control of Pacific Thrift as a result of the Restructuring Plan or a determination is made by the FDIC and the DOC that their consent is not required; (f) there is no moratorium resulting from federal or state legislative action that would prohibit the closing of the Restructuring Plan; (g) there is no material adverse change in the business or prospects of the Partnership; and (h) there is no injunction or court order relating to the Restructuring Plan that would have a material adverse effect upon the Corporation or which would prevent the completion of the Restructuring Plan. None of the conditions specified in paragraphs (a), (b), (c), (d) or (e) above may be waived, except with respect to the listing of the Common Stock on the NNM, AMEX or PSE, which may only be waived upon re-solicitation and the requisite vote of the Limited Partners to complete the Restructuring Plan on a modified basis. The conditions specified in paragraphs (f), (g) and (h) may be waived by the General Partner in its sole discretion. The FDIC has determined that the Restructuring Plan does not require its approval. Except with respect to the possible required consent of the DOC, there are no federal or state regulatory requirements that must be complied with or approvals that must be obtained as a condition of completion of the Restructuring Plan. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA The following tables present selected consolidated financial and other data of the Partnership as of and for the three months ended March 31, 1996 and 1995 and as of and for each of the years in the five years ended December 31, 1995. The information below should be read in conjunction with, and is qualified in its entirety by, the more detailed information included elsewhere in this Prospectus, including the Consolidated Financial Statements of the Partnership and notes thereto and in Management's Discussion and Analysis of Financial Condition and Results of Operations. <TABLE> <CAPTION> AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, (UNAUDITED) AS OF AND FOR THE YEARS ENDED DECEMBER 31, -------------------- ---------------------------------------------------- 1996 1995 1995 1994 1993 1992 1991 ------- -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total interest income........................ $ 2,408 $ 2,612 $ 9,577 $ 11,404 $ 14,212 $ 16,827 $ 18,668 Total interest expense....................... 1,227 1,405 5,199 4,927 5,718 6,725 8,683 -------- -------- -------- -------- -------- Net interest income.................. 1,181 1,207 4,378 6,477 8,494 10,102 9,985 Total noninterest income..................... 5,807 2,608 13,265 6,002 5,305 5,316 4,865 Provision for loan losses.................... 725 446 3,289 6,096 4,655 3,888 2,617 Other real estate owned expense.............. 165 238 1,212 732 3,307 1,014 881 General and administrative expense........... 5,471 3,354 16,062 15,164 11,705 10,367 7,517 Provision for income taxes (benefit)......... 348 (430) (1,222) 1 1 1 -0- -------- -------- -------- -------- -------- Net income (loss)............................ $ 279 $ 207 $ (1,698) $ (9,514) $ (5,869) $ 148 $ 3,835 ======== ======== ======== ======== ======== Distributions paid........................... -0- -0- -0- -0- 1,943 4,610 5,747 STATEMENT OF FINANCIAL CONDITION DATA: Total assets................................. $95,030 $101,694 $ 82,557 $103,747 $114,324 $120,216 $138,405 Net loans(1)................................. 56,637 59,280 56,485 65,056 84,755 101,405 122,628 Total deposits............................... 72,781 69,032 60,156 69,501 62,421 50,561 39,555 Mortgage notes and notes payable............. 7,753 15,611 7,982 17,691 25,578 36,507 59,412 Partners' equity............................. 9,006 10,632 8,727 10,425 19,939 28,830 36,706 SELECTED RATIOS (%): Return on average assets..................... 1.26% .82% (1.82)% (8.73)% (5.00)% .11% 2.77% Return on average partners' equity........... 12.62% 7.97% (17.73)% (62.67)% (24.07)% .45% 10.13% Net interest margin(2)....................... 6.20% 5.62% 5.79% 6.82% 8.65% 8.71% 7.57% Noninterest expense to average assets........ 25.46% 14.18% 18.54% 14.58% 12.80% 8.80% 6.07% Efficiency ratio(3).......................... 80.65% 94.15% 97.91% 127.38% 108.79% 73.82% 56.55% Efficiency ratio excluding REO expense(3).... 78.29% 87.92% 91.04% 121.52% 84.82% 67.24% 50.62% General and administrative expense to average assets..................................... 24.71% 13.24% 17.24% 13.91% 9.98% 8.02% 5.43% Average partners' equity to average assets... 9.99% 10.25% 10.28% 13.92% 20.79% 25.34% 27.35% Loan originations............................ $66,388 $ 30,905 $170,861 $ 76,838 $ 48,612 $ 53,207 $ 60,278 ASSET QUALITY DATA: Nonaccrual loans............................. $ 781 $ 4,340 $ 793 $ 3,146 $ 5,316 $ 3,253 $ 3,942 REO (net of senior liens).................... 2,606 5,702 2,545 5,308 4,225 6,973 4,199 Total nonperforming assets................... 3,387 10,042 3,338 8,454 9,541 10,226 8,141 Troubled debt restructurings................. 950 324 948 -0- -0- -0- -0- Allowance for credit losses.................. 4,725 3,940 4,229 4,307 3,122 2,646 1,821 Net loan charge offs......................... 229 813 3,367 4,912 4,178 3,063 1,907 ASSET QUALITY RATIOS: Nonperforming assets to total assets......... 3.56% 9.87% 4.04% 8.15% 8.35% 8.51% 5.88% Allowance for credit losses to net loans..... 8.34% 6.65% 7.49% 6.62% 3.68% 2.61% 1.48% Allowance for credit losses to nonaccrual loans...................................... 604.99% 90.78% 533.29% 136.94% 58.74% 81.34% 46.19% Net loan charge offs to average loans........ 1.38% 5.30% 5.28% 5.79% 4.12% 2.67% 1.32% </TABLE> - --------------- (1) Net of allowances for loan loss and deferred loan fees and costs, including loans held for sale. (2) Net interest margin represents net interest income divided by total average earning assets. (3) Efficiency ratio represents noninterest expense divided by noninterest income and net interest income. SELECTED PACIFIC THRIFT FINANCIAL AND OTHER DATA The following selected financial and other data is for Pacific Thrift and Loan Company, the primary operating subsidiary of the Partnership and of the Corporation from and after the Closing Date of the Restructuring. <TABLE> <CAPTION> AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, AS OF AND FOR THE YEARS ENDED (UNAUDITED) DECEMBER 31, ------------------- ------------------------------------------------------- 1996 1995 1995 1994 1993 1992 1991 ------- ------- ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total interest income.................... $ 2,112 $ 2,132 $ 7,695 $ 8,434 $ 9,314 $ 8,988 $ 4,492 Total interest expense................... 1,010 980 3,820 2,953 3,225 3,061 2,081 ------- ------- ------- ------- ------- ------- ------- Net interest income.................... 1,102 1,152 3,875 5,481 6,089 5,927 2,411 Total noninterest income................. 4,789 1,610 9,599 2,297 405 630 824 Provision for loan losses................ 649 (60) 1,395 1,414 2,321 1,054 394 Other real estate owned expense.......... 105 18 92 293 1,323 105 117 General and administrative expense....... 3,857 2,151 10,056 8,978 6,000 6,037 3,423 Provision for income taxes (benefit)..... 348 (430) (1,224) 1 1 1 1 ------- ------- ------- ------- ------- ------- ------- Net income (loss)........................ $ 932 $ 1,083 $ 3,155 $(2,908) $(3,151) $ (640) $ (700) ======== ======== ======== ======== ======== ======== ======== Dividends paid........................... -0- -0- -0- -0- -0- -0- -0- STATEMENT OF FINANCIAL CONDITION DATA: Total assets............................. $81,566 $75,840 $67,899 $74,404 $70,302 $56,286 $45,170 Net loans(1)............................. 51,269 44,953 50,153 49,387 50,091 51,330 40,928 Total deposits........................... 72,781 69,032 60,156 69,501 62,421 50,561 39,555 Mortgage notes and notes payable......... 366 697 51 212 1,024 81 2,200 Stockholder's equity..................... 7,751 4,401 6,819 3,240 5,029 5,189 2,889 SELECTED RATIOS (%): Return on average assets................. 5.00% 5.85% 4.43% (4.02)% (4.98)% (1.26)% (2.11)% Return on average partners' equity....... 51.31% 114.98% 62.73% (70.33)% (61.68)% (15.85)% (23.94)% Net interest margin(2)................... 7.15% 6.99% 6.06% 8.36% 10.62% 12.71% 7.99% Noninterest expense to average assets.... 21.26% 11.71% 14.26% 12.81% 11.57% 12.11% 10.69% Efficiency ratio(3)...................... 67.26% 78.53% 75.32% 119.20% 112.77% 93.67% 109.43% Efficiency ratio excluding REO expense(3)............................. 65.47% 77.88% 74.63% 115.43% 92.39% 92.07% 105.81% General and administrative expense to average assets......................... 20.70% 11.61% 14.13% 12.41% 9.48% 11.90% 10.33% Average shareholder's equity to average assets................................. 9.75% 5.09% 7.07% 5.71% 8.07% 7.96% 8.83% ASSET QUALITY DATA: Nonaccrual loans......................... $ 513 $ 2,818 $ 405 $ 1,967 $ 1,230 $ 3,720 $ 3,904 REO (net of senior liens)................ 1,789 2,026 1,697 930 2,278 1,473 1,385 Total nonperforming assets............... 2,302 4,844 2,102 2,897 3,508 5,202 5,269 Troubled debt restructurings............. 590 324 588 -0- -0- -0- -0- Allowance for credit losses.............. 1,954 1,419 1,458 1,804 1,300 789 733 Net loan charge offs..................... 154 325 1,741 910 1,810 999 36 ASSET QUALITY RATIOS: Nonperforming assets to total assets..... 2.82% 6.39% 3.10% 3.89% 4.99% 9.24% 11.70% Allowance for credit losses to net loans.................................. 3.81% 3.16% 2.91% 3.65% 2.60% 1.54% 1.79% Allowance for credit losses to nonaccrual loans.................................. 380.90% 50.35% 360.00% 91.71% 105.69% 21.16% 18.78% Net loan charge offs to average loans.... 1.22% 2.79% 3.50% 1.83% 3.57% 2.17% .12% REGULATORY CAPITAL RATIOS: Leverage Ratio........................... 9.42% 5.47% 9.09% 3.87% 7.12% 9.21% N/A Tier 1 risk-based capital ratio.......... 10.65% 7.15% 11.17% 5.41% 8.84% 10.64% N/A Total risk based capital ratio........... 11.90% 8.40% 12.42% 6.66% 10.09% 11.89% N/A </TABLE> - --------------- (1) Net of allowances for loan loss and deferred loan fees and costs, including loans held for sale. (2) Net interest margin represents net interest income divided by total average earning assets. (3) Efficiency ratio represents noninterest expense divided by noninterest income and net interest income.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000921898_accent_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000921898_accent_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus gives effect to (i) a 3-for-1 Common Stock split which was effected on October 8, 1996, (ii) the conversion of all outstanding shares of Series A Convertible Voting Preferred Stock (the "Series A Preferred Stock") of Accent Color Sciences, Inc. ("Accent Color" or the "Company") into 1,362,312 shares of Common Stock as of the date of this Prospectus and (iii) the conversion of the Company's outstanding 8.00% Convertible Subordinated Debentures (the "Series III Debentures"), including accrued interest thereon, into approximately 606,888 shares of Common Stock upon the closing of this offering. Unless otherwise indicated, all information contained in this Prospectus assumes no exercise of the Underwriters' over- allotment option. An investment in the shares of Common Stock offered hereby involves a high degree of risk. See "Risk Factors." THE COMPANY Accent Color designs, manufactures and sells innovative, high-speed, spot color printing systems ("Truecolor Systems") for integration with digital, high-speed, black-on-white printers and sells related consumables. Spot color printing involves the use of color to enhance traditional black-on-white documents by accenting critical information, such as a balance due on a billing statement, or by printing graphics, such as a company logo. The Company believes its Truecolor Systems are the first, and only, printers capable of cost-effectively printing or highlighting variable data (text or graphics which may vary from page to page) in multiple standard and custom colors with the speed and functionality of existing high-speed (more than 80 pages per minute), black-on-white printers. Truecolor Systems are designed to address what the Company believes is a substantial, unfulfilled demand for spot color printing in the production printing and production publishing segments of the digital printing market. Accent Color's strategy is to rapidly penetrate these global markets through strategic relationships with major original equipment manufacturers ("OEMs"), including Xerox Corporation ("Xerox"), International Business Machines Corporation ("IBM") and Oce Printing Systems USA, Inc. ("Oce"). Truecolor Systems are designed to print spot color in high-speed, high-volume applications at a low incremental cost per page without diminishing the speed or performance of the high-speed, black-on-white host printer or affecting the end user's existing operational methods. Truecolor Systems are capable of printing up to 310 pages per minute, utilizing up to eight different colors, including custom colors, to print or highlight fixed or variable data. Truecolor Systems combine the Company's proprietary paper handling technology with patented ink jet technology from Spectra, Inc. ("Spectra"). The Company holds an exclusive right to supply products which include Spectra ink jet printheads to print color on the black-on-white output from specified high- speed printers from Xerox, IBM, Oce and certain other parties through the year 2002. In connection with their arrangements with the Company, Xerox and IBM are adapting their existing high-speed, black-on-white printers for integration with the Company's Truecolor Systems. The Company intends to market its Truecolor Systems to OEMs of high-speed, black-on-white printers. According to CAP Ventures, Inc. ("CAP Ventures"), a printing industry market research firm, the 1995 year-end installed base of digital, high-speed, black-on-white printers in the U.S. was approximately 22,400 and the installed base of these printers is projected to grow at a five- year compounded annual growth rate ("CAGR") of approximately 11% to 37,100 systems by the year 2000. In addition, approximately 4,800 digital, high-speed, black-on-white printers were sold in the U.S. in 1995. Revenue from new system sales, supplies and service exceeded $3.6 billion in 1995 and is expected to grow at a five-year CAGR of approximately 12% to $6.4 billion by the year 2000. This growth is further driven by the number of pages printed per year, which is projected to grow at a five-year CAGR of approximately 13% by the year 2000. To facilitate access to its target markets, the Company has entered into agreements with Xerox and IBM, and has entered into a memorandum of understanding with Oce, which the Company expects to result in an agreement during late 1996. Xerox, IBM and Oce intend to market, sell and service Truecolor Systems under their respective corporate logos and product identifications. Accent Color expects to substantially reduce or eliminate the cost and time required to develop and maintain a direct sales and service organization or distribution channel of its own by using the existing sales and distribution channels of Xerox, IBM and Oce. According to Dataquest, a market research firm, Xerox (excluding its DocuTech systems), IBM and Oce accounted for approximately 80% of the high-speed, black-on-white printing systems sold in the U.S. during 1994 and 1995. In addition, according to Xerox, there are over 10,000 DocuTech printers installed with which Truecolor Systems are designed to be integrated. See "Business--Strategic Relationships." The Company also sells consumables comprised of standard and custom color wax-based inks, as well as spare parts used with Truecolor Systems. The Company expects that consumables will generate recurring revenue which the Company believes will increase as the installed base and usage of Truecolor Systems increase. According to CAP Ventures, typical high-speed, black-on-white printers servicing the production printing and production publishing market segments produce approximately 1.7 million and 975,000 pages per month, respectively. The Company was incorporated in Connecticut in May 1993. The Company's principal executive offices are located at 800 Connecticut Boulevard, East Hartford, Connecticut 06108, and its telephone number is (860) 610-4000. The Company's Internet address is www.accentcolor.com. The information contained in the Company's World Wide Web site should not be considered a part of this Prospectus. INTERIM FINANCING On October 11, 1996, the Company sold to a group of accredited investors an aggregate principal amount of $3.45 million of its 8.70% notes (the "Interim Notes"), together with warrants to purchase 45,000 shares of Common Stock (the "Interim Financing"). The net proceeds to the Company in the amount of $2.78 million will be used for working capital and general corporate purposes. The Interim Notes will be fully repaid with a portion of the proceeds from this offering. THE OFFERING <TABLE> <S> <C> Common Stock offered.............. 3,000,000 shares Common Stock to be outstanding after this offering.............. 9,689,040 shares(1) Use of proceeds................... For (i) the repayment of the Interim Notes and (ii) working capital and general corporate purposes, including the expansion of the Company's manufacturing, development, engineering and customer support capabilities, the commercial production of additional Truecolor Systems, the further enhancement of the Company's products and possible further debt reduction Proposed Nasdaq National Market symbol........................... ACLR </TABLE> - -------- (1) Excludes as of November 15, 1996 (i) 1,159,503 shares of Common Stock issuable upon the exercise of outstanding warrants, with a weighted average exercise price of $3.52 per share, all of which are currently exercisable, (ii) 45,000 shares of Common Stock issuable upon the exercise of outstanding warrants issued in connection with the Interim Financing exercisable at the lesser of $10.00 per share or the initial public offering price set forth on the cover page hereof and (iii) 1,289,850 shares of Common Stock issuable upon the exercise of stock options outstanding under the Company's 1995 Stock Incentive Plan, with a weighted average exercise price of $3.53 per share, of which options to purchase 398,750 shares are currently exercisable. See "Management--1995 Stock Incentive Plan," "Description of Capital Stock," and Notes 5, 6 and 7 of Notes to Financial Statements.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000921948_nichols_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000921948_nichols_prospectus_summary.txt
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+Prospectus Summary This Summary is qualified by the more detailed information (including the financial statements and related notes) set forth elsewhere in this Prospectus which should be read in its entirety. Unless the context indicates, or it is specifically indicated otherwise, all references to (i) "Corning" include Corning Incorporated, a New York corporation, and its consolidated subsidiaries, (ii) "Quest Diagnostics" or the "Company" include Corning Clinical Laboratories Inc. (to be renamed Quest Diagnostics Incorporated prior to the Distributions), a Delaware corporation, and its direct and indirect subsidiaries (other than Covance) and assume that the Distributions have occurred, and (iii) "Covance" include Covance Inc. (formerly Corning Pharmaceutical Services Inc.), a Delaware corporation, and its direct and indirect subsidiaries and assume that the Distributions have occurred. Capitalized terms used but not defined in this Summary are defined elsewhere in this Prospectus. The Company Quest Diagnostics is one of the largest independent clinical laboratory testing companies in the United States. Quest Diagnostics offers a broad range of routine and specialty ("esoteric") testing services used by the medical profession in the diagnosis, monitoring and treatment of disease and other medical conditions. Quest Diagnostics' network, which processes approximately 60 million requisitions for diagnostic tests annually, consists of 17 regional laboratories across the United States and the Corning Nichols Institute ("Nichols") esoteric testing laboratory in San Juan Capistrano, California. In addition, Quest Diagnostics has 14 branch laboratories in the United States as well as one branch laboratory in Mexico City (branch laboratories are smaller than regional laboratories), approximately 200 "STAT" laboratories and approximately 850 patient service centers located throughout the United States. For the year ended December 31, 1995 and the nine months ended September 30, 1996, Quest Diagnostics had net revenues of $1,629 million and $1,231 million, respectively, and Adjusted EBITDA (income (loss) before income taxes plus net interest expense, depreciation and amortization and restructuring and other special charges) of $177 million and $135 million, respectively. Quest Diagnostics operates 24 hours a day, 365 days a year, utilizing a fully integrated collection and processing system. Quest Diagnostics generally performs and reports most routine procedures within 24 hours, employing a variety of sophisticated and computerized laboratory testing instruments. Quest Diagnostics provides daily pickup of specimens from most customers principally through an in-house courier system. The specimens are sent to one of the Company's laboratories where one or more tests are performed. Each patient specimen is accompanied by a test requisition form, which is completed by the customer, that indicates the tests to be performed and provides the necessary billing information. Each specimen and related requisition form is checked for completeness and then given a unique bar-coded identification number. Once the appropriate information is entered into the computer system, the tests are performed and the results are delivered to the doctor, primarily through computer interface or manually. Corning entered the clinical laboratory business in 1982 with the acquisition of MetPath Inc. ("MetPath"), which was founded in 1967 and was one of the first laboratories to expand beyond a regional market. Since January 1993, Quest Diagnostics has acquired over thirty laboratories, including Damon Corporation ("Damon"), Bioran Medical Laboratory ("Bioran") and Maryland Medical Laboratory, Inc. ("MML"). In 1994, Quest Diagnostics enhanced its presence in the esoteric testing market through the acquisition of Nichols, a preeminent clinical laboratory with a leading reputation for esoteric testing and test innovations. While Corning's ownership provided the Company with the capital to grow through acquisitions and to become one of the nation's largest independent clinical laboratory testing companies, the management of both Corning and Quest Diagnostics believe that Quest Diagnostics will be more competitive and operate more successfully in the future as an independent company, with a strong, focused and experienced management team to concentrate on customer needs. Independence will also enable Quest Diagnostics to motivate its employees by offering equity-based incentives tied directly to the performance of the Company and individual performance. Quest Diagnostics' management team has implemented a new business strategy, which focuses the business around three key strategic areas: clinical operations, customer focus and technological leadership and excellence. The Clinical Laboratory Testing Industry Clinical testing is a critical component in the delivery of quality health care service to patients. Currently, clinical laboratory testing is the first step in determining how a significant amount of all health care dollars are spent. Quest Diagnostics believes that in 1995 the entire United States clinical laboratory industry had revenues exceeding $30 billion. The clinical laboratory industry consists primarily of three types of providers: hospital-affiliated laboratories, independent clinical laboratories, such as Quest Diagnostics, and physician-office laboratories. The Company believes that in 1995 approximately 56% of the clinical testing revenues in the United States were attributable to hospital-affiliated laboratories, approximately 36% were attributable to independent clinical laboratories and approximately 8% were attributable to physicians in their offices and laboratories. Quest Diagnostics believes that consolidation will continue in the clinical laboratory testing business. In addition, Quest Diagnostics believes that it and the other large independent clinical laboratory testing companies may have the opportunity to increase their share of the overall clinical laboratories testing market due to a number of external factors, including cost efficiencies afforded by large-scale automated testing, Medicare reimbursement reductions and the growth of managed health care entities which require low-cost testing services and large service networks. In addition, legal restrictions on physician referrals and the ownership of laboratories as well as increased regulation of laboratories are expected to contribute to the continuing consolidation of the industry. Quest Diagnostics believes that a number of factors are likely to positively influence the volume of clinical laboratory testing performed in the United States in the future, including (1) the general aging of the population in the United States; (2) an expanded base of scientific knowledge which has led to the development of more sophisticated specialized tests and an increase in the awareness of physicians of the value of clinical laboratory testing as a cost-effective means of early detection of disease and monitoring of treatment; (3) an increase in the number and types of tests which are, due to advances in technology and increased cost efficiencies, readily available on a more affordable basis to physicians; (4) expanded substance-abuse testing by corporations and governmental agencies; and (5) increased testing for sexually transmitted diseases such as AIDS. The impact of these factors is expected to be offset in part by increased controls over the utilization of clinical laboratory tests by both Medicare and the private sector, particularly managed care organizations. Business Strategy Quest Diagnostics' overall goal is to be recognized by its customers, employees and competitors as the best provider of comprehensive and innovative clinical testing, information and services. To achieve this, Quest Diagnostics' management team has focused the business around three key strategic areas: clinical operations, customer focus and technological leadership and excellence. (bullet) Best Supplier. Quest Diagnostics seeks to be the best supplier of the highest quality and the lowest-cost testing services. Health care providers and patients expect accurate, timely and consistent laboratory test results at a fair price. (bullet) Lowest-cost provider. Quest Diagnostics' average cost per requisition varies significantly among its regional laboratories; there is an approximately $7.00 difference in cost per requisition between the most efficient regional laboratory and the average, and an approximately $13.00 difference in cost per requisition between the most and the least efficient regional laboratories. In many cases, these variations do not relate to testing volumes or mixes, space costs, service requirements or regional labor cost differences. To reduce costs, Quest Diagnostics has begun to replicate the best practices from each region throughout its national network. Management expects to achieve significant cost savings within the next three years as these programs are fully implemented. * (bullet) Highest Quality Provider. Quest Diagnostics is dedicated to providing accurate and timely test results and to being viewed by its customers as the highest quality provider of clinical testing services. Quest Diagnostics believes that implementation of best practices already developed in certain regions will permit the Company to be viewed by its customers as the highest quality provider of clinical testing services. (bullet) Preferred Provider. Quest Diagnostics seeks to be the preferred provider of laboratory testing services to existing and new health care networks on a selective basis determined by profitability of accounts. Quest Diagnostics believes that it will become the preferred provider to these networks as (1) large networks typically prefer to utilize large independent clinical laboratories that can service them on a national or regional basis and (2) the Company continues to pursue its primary strategy of becoming the highest quality, lowest-cost provider. To achieve this, Quest Diagnostics will employ a rigorous national and regional process to both select and pursue customers and allocate resources to support these efforts. *This is a forward looking statement and is based on current expectations. Actual results may vary materially from those projected. See "Business- Important Factors Regarding Forward Looking Statements." In particular, see factors (a), (d) and (j). (bullet) Account Profitability. Quest Diagnostics intends to refocus its sales efforts on pursuing and keeping profitable accounts. Quest Diagnostics is actively reviewing the profitability of its current accounts, including those with managed care organizations, and will either increase pricing or eliminate accounts that cannot be serviced profitably. (bullet) Regional Profitability. Quest Diagnostics presently believes that it has the leading market share among independent clinical laboratories in most routine testing markets of the northeast, mid-Atlantic and midwest regions. Approximately 65% of Quest Diagnostics' revenues and almost all of its EBITDA is generated from markets in which the Company believes that it has the leading market share. In most of these markets, Quest Diagnostics believes that it also is the lowest cost provider. Quest Diagnostics is evaluating its strategic alternatives relative to units whose profitability does not meet its internal goals. These alternatives may include joint ventures, alliances, or dispositions. Quest Diagnostics believes that, while the clinical laboratory industry is becoming national in scope, the Company can subcontract with other clinical laboratories to perform testing for national accounts in any markets in which the Company chooses not to compete. (bullet) Leading Innovator. Quest Diagnostics intends to remain a leading innovator in the clinical laboratory industry by continuing to introduce new tests, technology and services. Through its relationship with the academic community and pharmaceutical and biotechnology firms and a research and development budget exceeding $15 million per year, Quest Diagnostics believes it is one of the leaders in transferring innovation from academic biotechnology laboratories to the market. Recent Developments By a plea agreement and civil agreement and release dated October 9, 1996, between the Department of Justice ("DOJ") and Damon, all federal criminal matters within the scope of the various federal investigations against Damon, and all claims including the civil qui tam cases underlying the civil investigations were settled for an aggregate of $119 million, which sum was reimbursed to Quest Diagnostics by Corning. The Damon settlement does not exclude Quest Diagnostics from future participation in any federal health care programs on account of Damon's practices. Quest Diagnostics' aggregate reserve with respect to all governmental and private claims was $215 million at September 30, 1996 and is estimated to be reduced to $85 million as of the Distribution Date as a result of the payment of settled claims, primarily the Damon settlement of $119 million. Based on information available to management and Quest Diagnostics' experience with past settlements (including the fact that the aggregate amount of the Damon settlement was significantly in excess of established reserves) management has reassessed its reserve levels and believes that its current level of reserves is adequate. However, it is possible that additional information may become available which may cause the final resolution of these matters to be in excess of established reserves by an amount which could be material to Quest Diagnostics' results of operations and, for non-indemnified claims, Quest Diagnostics' cash flows in the period in which such claims are settled. While none of the governmental or nongovernmental investigations or claims is covered by insurance, Quest Diagnostics does not believe that these matters will have a material adverse effect on Quest Diagnostics' overall financial condition. Corning Indemnity In connection with the Distributions, Corning has agreed to indemnify Quest Diagnostics against all monetary penalties, fines or settlements arising out of any governmental claims arising out of alleged violations of applicable federal fraud and health care statutes and relating to billing practices of Quest Diagnostics and its predecessors that have been settled or are pending on the Distribution Date. Corning has also agreed to indemnify Quest Diagnostics for 50% of the aggregate of all judgment or settlement payments made by Quest Diagnostics that are in excess of $42.0 million in respect of claims by private parties (i.e., nongovernmental parties such as private insurers) that relate to indemnified or previously settled governmental claims and that allege overbillings by Quest Diagnostics or any existing subsidiaries of Quest Diagnostics, for services provided prior to the Distribution Date; provided, however, such indemnification for nongovernmental claims will not exceed $25.0 million in the aggregate and all amounts indemnified against by Corning for the benefit of Quest Diagnostics will be calculated on a net after-tax basis. Such indemnification will not cover (i) any governmental claims that arise after the Distribution Date pursuant to service of subpoena or other notice of such investigation after the Distribution Date, (ii) any nongovernmental claims unrelated to the indemnified governmental claims or investigations, (iii) any nongovernmental claims not settled prior to five years after the Distribution Date, (iv) any consequential or incidental damages relating to the billing claims, including losses of revenues and profits as a consequence of exclusion for participation in federal or state health care programs or (v) the fees and expenses of litigation. The Distributions On May 13, 1996, the board of directors of Corning approved a plan to distribute to Corning shareholders the clinical laboratory testing business being conducted by Quest Diagnostics and the contract research business being conducted by Quest Diagnostics' wholly owned subsidiary, Covance (together, the "Distributions"). The Distributions will be effected by distributing all of the outstanding shares of Quest Diagnostics common stock (the "Quest Diagnostics Common Stock") to holders of Corning common stock (the "Corning Common Stock"), followed immediately by the distribution of all of the common stock of Covance (the "Covance Common Stock") to those same holders, as holders of Quest Diagnostics Common Stock. It is expected that the Distributions will be made on December 31, 1996 (the date on which the Distributions are to be made, the "Distribution Date"). Prior to the consummation of the offering of the Notes contemplated hereby (the "Offering"), the Company entered into a $450 million senior, secured credit facility (the "Credit Facility"), among the Company, the lenders listed therein, NationsBank, N.A., as Issuing Bank, Wachovia Bank of Georgia, N.A., as Swingline Bank, and Morgan Guaranty Trust Company of New York, as Administrative Agent. The Credit Facility is comprised of a $300 million six-year amortizing term loan ("Tranche A Loan"), a $50 million seven-year term loan ("Tranche B Loan" and together with the Tranche A Loan, the "Term Loans") and a $100 million six-year revolving working capital facility (the "Working Capital Facility"). Corning currently has approximately $1.2 billion of Quest Diagnostics intercompany debt. Approximately $145 million of net proceeds from the Offering, together with the $350 million of borrowings under the Term Loans, will be paid to Corning in satisfaction of a portion of the outstanding intercompany debt. Corning will contribute the remaining intercompany debt to Quest Diagnostics' capital. Borrowings under the Working Capital Facility, substantially all of which is expected to be available as of the Distribution Date, will provide for future working capital needs and other general corporate purposes. The Offering <TABLE> <CAPTION> <S> <C> Securities Offered $150,000,000 aggregate principal amount of % Senior Subordinated Notes due December 15, 2006 (the "Notes"). Maturity Date December 15, 2006. Interest Payment Date June 15 and December 15, commencing June 15, 1997. Optional Redemption by the Company The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after December 15, 2001, at the redemption prices set forth herein, plus accrued and unpaid interest, if any, to but excluding the date fixed for redemption. In addition, if as a result of an event outside the control of Corning, Quest Diagnostics and Covance, the Distributions do not occur prior to March 31, 1997, the Notes will be subject to redemption, as a whole and not in part, at the option of Quest Diagnostics, prior to June 30, 1997, at a redemption price equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to but excluding the date fixed for redemption. See "Description of the Notes--Optional Redemption." Change of Control Offer Upon a Change of Control, the Company has the obligation to offer to purchase all the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to but excluding the date of purchase. See "Description of the Notes-- Repurchase at the Option of Holders--Change of Control" for a discussion of the circumstances in which the Company may not be required to make an offer to purchase upon a Change of Control. Offers to Purchase In the event of certain asset sales, the Company will be required to offer to repurchase the Notes at 100% of their principal amount, plus accrued and unpaid interest, if any, to but excluding the date of purchase with the net proceeds of such asset sales. Subordination The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company, including all indebtedness of the Company under the Credit Facility. The Notes will rank Pari Passu in right of payment with any other senior subordinated indebtedness of the Company. Subsidiary Guarantees The Notes will be guaranteed, jointly and severally, and fully and unconditionally, on a senior subordinated basis by the Guarantors (the "Senior Subordinated Guarantees"). The obligations of any Guarantor with respect to its Senior Subordinated Guarantee will be subordinated in right of payment, to the same extent as the obligations of the Company in respect of the Notes, to all existing and future Senior Guarantees, which will include the guarantees of the Credit Facility. The Senior Subordinated Guarantees would also be subordinated to all existing and future indebtedness of the Guarantors if the Senior Subordinated Guarantees were avoided or subordinated in favor of the Guarantors' other creditors. See "Risk Factors--Fraudulent Conveyance." The obligations of a Guarantor under its Senior Subordinated Guarantee will be released in certain circumstances, including if the Guarantor ceases to guarantee the Credit Facility. See "Description of the Notes--Senior Subordinated Guarantees." Principal Covenants The indenture under which the Notes are issued (the "Indenture") will impose certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt and senior in right of payment to the Notes, enter into leases, incur liens, merge or consolidate with any other person, or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. Use of Proceeds The Company intends to use the proceeds from the sale of the Notes, together with the proceeds of borrowings under the Credit Facility, to repay certain intercompany indebtedness owed to Corning. See "Use of Proceeds." The Distributions The Notes are being offered in connection with the Distributions of the Quest Diagnostics Common Stock and the Covance Common Stock to holders of Corning Common Stock. The closing of the offering of the Notes is anticipated to occur prior to the Distributions. Listing The Notes have been approved for listing on the New York Stock Exchange, subject to official notice of issuance. Risk Factors See "Risk Factors" for a discussion of certain factors that should be considered in connection with an investment in the Notes. </TABLE> Summary Financial Data The following table summarizes certain historical and pro forma financial data of Quest Diagnostics at the dates and for each of the periods indicated. The selected financial data as of and for each of the years ended December 31, 1995, 1994 and 1993 have been derived from the audited combined financial statements of (the "Audited Financial Statements") and the notes thereto included elsewhere herein. The selected financial data as of and for the three and nine months ended September 30, 1996 and 1995 have been derived from the unaudited interim combined financial statements of Quest Diagnostics (the "Interim Financial Statements" and, together with the Audited Financial Statements, the "Financial Statements") and the notes thereto included elsewhere herein. In the opinion of Quest Diagnostics management, the unaudited interim combined financial statements include all adjustments, consisting of only normal recurring adjustments, that are necessary for a fair presentation of the financial position and results of operations for these periods. The unaudited interim results of operations for the three and nine months ended September 30, 1996 are not necessarily indicative of the results for the entire year ending December 31, 1996. The selected pro forma financial data have been derived from the unaudited pro forma combined financial information of Quest Diagnostics for the year ended December 31, 1995 and for the three and nine months ended September 30, 1996 (the "Pro Forma Financial Information") and the notes thereto included elsewhere herein. The pro forma statement of operations data gives effect to the Distributions and the Accounting Policy Change (as defined below) as if they had occurred on January 1, 1995 and the pro forma balance sheet data gives effect to the Distributions and the Accounting Policy Change as if they had occurred on September 30, 1996. The pro forma financial data does not purport to represent what Quest Diagnostics' results of operations would have been if the Distributions and the Accounting Policy Change had in fact occurred on such dates, nor does it purport to indicate the future financial position or results of future operations of Quest Diagnostics. The pro forma adjustments are based upon currently available information and certain assumptions that Quest Diagnostics management believes to be reasonable. The summary historical and pro forma financial data set forth below should be read in conjunction with "Selected Historical Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Financial Statements and the notes thereto and the Pro Forma Financial Information and the notes thereto. <TABLE> <CAPTION> Three Months Ended September 30, Nine Months Ended September 30, ------------------------------------------------------------------------------------------------ Pro Forma Historical Pro Forma Historical ------------------------------- ------------------------------- 1996(a) 1996 1995 1996(a) 1996 1995 --------------- --------------- --------------- ---------------- ---------------- -------------- (in thousands, except share, per share and percentage data) <S> <C> <C> <C> <C> <C> <C> Statement of Operations Data: Net revenues $ 405,352 $ 405,352 $ 399,959 $ 1,231,290 $1,231,290 $1,239,474 Costs and expenses: Cost of services 255,390 255,390 240,868 768,809 768,809 735,984 Selling, general and administrative 125,190 125,190 181,346(c) 371,439 371,439 399,635(c) Provision for restructuring and other special charges(d) 155,730 155,730 201,730 201,730 45,885 Interest expense, net 12,189 19,866 20,927 36,938 59,887 61,529 Amortization of intangible assets 7,672 10,328 11,293 23,803 31,772 33,678 Other, net 1,837 1,837 1,930 (198) (198) 4,429 --------------- --------------- --------------- ---------------- ---------------- -------------- Total 558,008 568,341 456,364 1,402,521 1,433,439 1,281,140 --------------- --------------- --------------- ---------------- ---------------- -------------- Income (loss) before taxes (152,656) (162,989) (56,405) (171,231) (202,149) (41,666) Income tax expense (benefit) (40,521) (43,553) (17,810) (34,215) (43,280) (3,642) --------------- --------------- --------------- ---------------- ---------------- -------------- Income (loss) before cumulative effect of change in accounting principle (112,135) (119,436) (38,595) (137,016) (158,869) (38,024) Cumulative effect of change in accounting principle --------------- --------------- --------------- ---------------- ---------------- -------------- Net income (loss) $ (112,135) $ (119,436) $ (38,595) $ (137,016) $ (158,869) $ (38,024) =============== =============== =============== ================ ================ ============== Pro forma shares outstanding(e) 28,901,735 28,901,735 Pro forma net loss per share $ (3.88) $ (4.74) Balance Sheet Data (at end of period): Cash $ 40,000 $ 48,319 $ 46,908 $ 40,000 $ 48,319 $ 46,908 Working capital 306,741 114,718 129,319 306,741 114,718 129,319 Total assets 1,612,459 1,886,378 1,896,058 1,612,459 1,886,378 1,896,058 Long-term debt 515,494 1,219,900 1,114,367 515,494 1,219,900 1,114,367 Total debt 517,379 1,231,785 1,226,211 517,379 1,231,785 1,226,211 Stockholder's equity 604,099 132,670 320,576 604,099 132,670 320,576 Ratio of earnings to fixed charges -- (f) -- (f) -- (f) -- (f) -- (f) -- (f) Supplemental Data: Net cash provided by operating activities $ 25,236 $ 25,236 $ 38,202 $ 41,937 $ 41,937 $ 53,789 Net cash used in investing activities (7,904) (7,904) (17,044) (53,097) (53,097) (77,911) Net cash provided by (used in) financing activities (6,618) (6,618) (18,006) 23,033 23,033 32,311 Bad debt expense $ 30,539 $ 30,539 $ 85,831(c) $ 81,891 $ 81,891 $ 127,297(c) Bad debt expense as a % of net revenues 7.5% 7.5% 21.5% 6.7% 6.7% 10.3% Rent expense $ 12,515 $ 12,515 $ 11,860 $ 37,315 $ 37,315 $ 35,060 Capital expenditures 11,912 11,912 16,441 58,802 58,802 56,062 Depreciation expense $ 14,672 $ 14,672 $ 14,275 $ 43,460 $ 43,460 $ 42,358 EBITDA(g) $ (118,123)(h) $ (118,123)(h) $ (9,910)(c) $ (67,030)(h) $ (67,030)(h) $ 95,899(c) EBITDA as a % of net revenues (29.1%) (29.1%) (2.5%) (5.4%) (5.4%) 7.7% Adjusted EBITDA(i) $ 37,607 $ 37,607 $ (9,910)(c) $ 134,700 $ 134,700 $ 141,784(c) Adjusted EBITDA as a % of net revenues 9.3% 9.3% (2.5%) 10.9% 10.9% 11.4% Supplemental Ratio Data: Adjusted EBITDA/interest expense, net 3.1x 3.6x (Adjusted EBITDA-capital expenditures)/interest expense, net 2.1x 2.1x (Total debt--cash)/annualized adjusted EBITDA 3.2x 2.7x </TABLE> (Footnotes on page 14) <TABLE> <CAPTION> Year Ended December 31, ----------------------------------------------------------- Pro Forma Historical ------------------------------------------- 1995(a) 1995 1994(b) 1993 --------------- --------------- ------------- ------------- (in thousands, except share, per share and percentage data) <S> <C> <C> <C> <C> Statement of Operations Data: Net revenues $ 1,629,388 $1,629,388 $1,633,699 $1,416,338 Costs and expenses: Cost of services 980,232 980,232 969,844 805,729 Selling, general and administrative 523,271(c) 523,271(c) 411,939 363,579 Provision for restructuring and other special charges(d) 50,560 50,560 79,814 99,600 Interest expense, net 50,748 82,016 63,295 41,898 Amortization of intangible assets 34,031 44,656 42,588 28,421 Other, net 6,221 6,221 3,464 6,423 --------------- --------------- ------------- ------------- Total 1,645,063 1,686,956 1,570,944 1,345,650 --------------- --------------- ------------- ------------- Income (loss) before taxes (15,675) (57,568) 62,755 70,688 Income tax expense (benefit) 6,835 (5,516) 34,410 25,929 --------------- --------------- ------------- ------------- Income (loss) before cumulative effect of change in accounting principle (22,510) (52,052) 28,345 44,759 Cumulative effect of change in accounting principle (10,562) --------------- --------------- ------------- ------------- Net income (loss) $ (22,510) $ (52,052) $ 28,345 $ 34,197 =============== =============== ============= ============= Pro forma shares outstanding(e) 28,901,735 Pro forma net loss per share $ (0.78) Balance Sheet Data (at end of period): Cash $ 36,446 $ 38,719 $ 39,410 Working capital 200,740 214,358 139,771 Total assets 1,853,385 1,882,663 1,861,162 Long-term debt 1,195,566 1,153,054 1,025,787 Total debt 1,207,714 1,165,626 1,123,307 Stockholder's equity 295,801 386,812 395,509 Ratio of earnings to fixed charges -- (f) -- (f) 1.77(f) 2.20(f) Supplemental Data: Net cash provided by operating activities $ 85,828 $ 85,828 $ 37,963 $ 99,614 Net cash used in investing activities (93,087) (93,087) (46,186) (473,687) Net cash provided by (used in) financing activities 4,986 4,986 7,532 392,956 Bad debt expense $ 152,590(c) $ 152,590(c) $ 59,480 $ 47,240 Bad debt expense as a % of net revenues 9.4% 9.4% 3.6% 3.3% Rent expense $ 46,900 $ 46,900 $ 49,400 $ 46,900 Capital expenditures 74,045 74,045 93,354 65,317 Depreciation expense $ 56,857 $ 56,857 $ 46,929 $ 38,058 EBITDA(g) $ 125,961(c) $ 125,961(c) $ 215,567 $ 179,065 EBITDA as a % of net revenues 7.7% 7.7% 13.2% 12.6% Adjusted EBITDA(i) $ 176,521(c) $ 176,521(c) $ 295,381 $ 278,665 Adjusted EBITDA as a % of net revenues 10.8% 10.8% 18.1% 19.7% Supplemental Ratio Data: Adjusted EBITDA/interest expense, net 3.5x (Adjusted EBITDA-capital expenditures)/ interest expense, net 2.0x </TABLE> (Footnotes on page 14) (Footnotes for preceding pages) (a) Adjusted to reflect the pro forma effects of the Distributions and the Accounting Policy Change. See "Selected Historical Financial Data" and "Pro Forma Financial Information."
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. INDUSTRY DATA USED THROUGHOUT THIS PROSPECTUS WERE OBTAINED FROM MARKET RESEARCH ORGANIZATIONS, INDUSTRY PUBLICATIONS AND INTERNAL COMPANY ESTIMATES THAT THE COMPANY BELIEVES TO BE RELIABLE, BUT HAS NOT INDEPENDENTLY VERIFIED. UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES TO "LEINER" OR THE "COMPANY" INCLUDE LEINER HEALTH PRODUCTS GROUP INC. AND ITS DIRECT AND INDIRECT SUBSIDIARIES, INCLUDING ITS PRINCIPAL OPERATING SUBSIDIARY, LEINER HEALTH PRODUCTS INC. ("LHP"). REFERENCES HEREIN TO A "FISCAL" YEAR REFER TO THE COMPANY'S FISCAL YEAR ENDED MARCH 31 IN THE CALENDAR YEAR INDICATED (E.G., REFERENCES TO FISCAL 1996 ARE REFERENCES TO THE COMPANY'S FISCAL YEAR ENDED MARCH 31, 1996). INCOME STATEMENT DATA FOR THE YEAR ENDED MARCH 31, 1993 CONSIST OF THE RESULTS OF THE COMPANY'S PREDECESSOR FOR THE ONE MONTH ENDED APRIL 30, 1992 TOGETHER WITH THE RESULTS OF THE COMPANY FOR THE ELEVEN MONTHS ENDED MARCH 31, 1993. REFERENCES TO "COMMON STOCK" REFER TO THE SHARES OF COMMON STOCK, PAR VALUE $0.01 PER SHARE, OF LEINER HEALTH PRODUCTS GROUP INC. EXCEPT WHERE OTHERWISE INDICATED, (I) ALL SHARE AND PER SHARE DATA IN THIS PROSPECTUS HAVE BEEN ADJUSTED TO REFLECT THE RECAPITALIZATION (AS HEREINAFTER DEFINED) THAT WILL BE IMPLEMENTED CONCURRENTLY WITH THE SALE OF THE COMMON STOCK OFFERED HEREBY (SEE "THE COMPANY -- RECAPITALIZATION") AND (II) ALL INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE OVER-ALLOTMENT OPTION GRANTED TO THE UNDERWRITERS HAS NOT BEEN EXERCISED. THE COMPANY GENERAL Leiner is the nation's largest manufacturer and marketer of vitamins, minerals and nutritional supplements (collectively, "vitamin products"). Leiner markets over 320 vitamin products in more than 4,600 stock keeping units ("SKUs"). The Company estimates that it has a 50% share of private label sales (three times as large as its largest competitor) and a 20% share of overall vitamin product sales through mass market retailers in the United States. Vitamin product sales represent approximately 79% of the Company's net sales. The Company's vitamin products are sold in all 50 states through more than 50,000 retail outlets. The Company's vitamin product customers are primarily mass market retailers and include the country's 20 largest drug store chains (including Walgreen, American Stores, Eckerd, CVS, Rite-Aid and Revco), 18 of the 20 largest supermarket chains (including Safeway, Winn-Dixie, Albertson's, A&P and Lucky Stores), the 10 largest mass merchandising chains (including Wal-Mart, Target, Kmart and Venture) and the two largest warehouse club chains (Sam's and PriceCostco) (such retailer categories are referred to herein, collectively, as "mass market"). The Company's vitamin products are sold under its customers' store names ("private label products"), as well as under its own brand, Your Life-Registered Trademark-, one of the nation's leading broadline vitamin brands. The Company estimates that private label vitamin products account for approximately 38% of total vitamin product sales by mass market retailers and account for approximately 59% of Leiner's total net sales. In recent years, Leiner has benefited from significant increases in demand for vitamin products. According to industry sources and management estimates, 1995 retail sales of vitamin products in the U.S. mass market channel were $1.9 billion and have grown at a compound annual rate of approximately 11% since 1993. Since 1993, the fastest growing segment of the vitamin products category has been nutritional supplements (including herbal products), sales of which have grown at a compound annual rate of approximately 38% since 1993 to $307.8 million in 1995. According to the Gallup Organization, from 1991 to 1995, the percentage of the U.S. population using vitamin products has grown from 34% to 38%. Management believes that growth in vitamin product sales has been driven by (i) national media attention regarding scientific research suggesting potential health benefits from regular consumption of vitamin products; (ii) the aging of the U.S population (because a larger portion of older age groups use vitamin products); (iii) the growing practice of self-care and preventive medicine; and (iv) the favorable effects and opportunities presented by the enactment and implementation of the Dietary Supplement Health and Education Act of 1994, which enhanced the ability of vitamin product manufacturers to communicate the benefits and functions of their products and to introduce new products. See "Business -- Industry Overview." By leveraging its strengths and resources in vitamin product manufacturing and distribution, Leiner has also become one of the nation's largest manufacturers and marketers of private label non-prescription ("over-the-counter") pharmaceuticals, such as analgesics, cough and cold remedies and digestive aids ("OTC pharmaceuticals"). Leiner markets over 100 OTC pharmaceutical products in approximately 1,600 SKUs. OTC pharmaceutical sales represent approximately 17% of the Company's net sales. The Company's OTC pharmaceuticals are sold as private label products as well as under the Company's Pharmacist Formula-Registered Trademark- brand. The Company's net sales have increased from $230.8 million in fiscal 1993 to $338.4 million in fiscal 1996. During the same period, the Company's operating income, excluding certain charges not expected to continue, has increased from $9.7 million in fiscal 1993 to $20.9 million in fiscal 1996. Excluded charges in fiscal 1993 include management fees of $321,000 paid to AEA Investors Inc. ("AEA") that are expected to be discontinued and costs of $3.7 million related to the LHP Acquisition (as hereinafter defined). Excluded charges in fiscal 1996 include management fees of $350,000 paid to AEA and a charge of $4.7 million for impairment of long-lived assets. See "Selected Consolidated Financial Data." While experiencing this growth, the Company has invested approximately $20.2 million in a facilities consolidation, capacity expansion and equipment modernization program with respect to its facilities in the western United States (the "Manufacturing Program"). The Company has also invested $3.7 million in modern equipment for its midwestern U.S. facilities. MARKET LEADERSHIP Leiner is the largest manufacturer and marketer of vitamins to the mass market channel in the United States. This channel accounts for approximately 52% of overall vitamin product sales in the United States, according to industry sources. The leading role Leiner enjoys in the mass market channel allows the Company to realize economies of scale while developing strong relationships with the nation's leading mass market retailers. The Company attributes its leadership in the overall vitamin products business to several competitive advantages: PRODUCT QUALITY. Leiner believes its reputation for quality is a critical factor in customer purchase decisions, particularly for private label products, which are marketed under the names of Leiner's mass market retailer customers. The Company believes that in 1991 it became the first major vitamin product supplier to manufacture its vitamin products to meet standards for dissolution and disintegration in substantially the form later adopted by the United States Pharmacopoeial Convention, Inc. (the "USP"). Leiner promotes its innovation in this area under the Proven Release-Registered Trademark- and Release Assured-Registered Trademark- trademarks. In 1994, the Company became the first vitamin product manufacturer to sell vitamin products exhibiting the USP symbol. In 1995, the Company became the first vitamin product manufacturer certified as being in compliance with USP vitamin product manufacturing standards. The Company's facilities were audited by an independent quality assurance laboratory and received the laboratory's highest rating category. See "Business -- Government Regulation." PRODUCT INNOVATION. Leiner has consistently introduced product innovations based on scientific research and in response to consumer needs. It was the first major vitamin product supplier to introduce such industry-wide innovations as Proven Release-Registered Trademark- (standards for dissolution and disintegration in substantially the form later adopted by the USP), Daily Paks-Registered Trademark- (pre-sorted, prepackaged vitamin combinations), the Naturalized-Registered Trademark- line (vitamin products free of preservatives and artificial colors and flavors), Family Size packages (larger quantity packages initially developed for warehouse clubs) and Phytograph-TM- herbal testing (a process of testing herbal products to ensure that active constituents contained in the products are in conformity to the natural source). The Company also believes that its reputation for introducing new products only after careful review of their safety, utility and commercial acceptance is a key element of Leiner's strong relationships with mass market retailers and, in turn, enhances Leiner's ability to introduce new products into the channels it serves. Leiner has created a scientific advisory board (the "Scientific Advisory Board") composed of scientific and regulatory authorities on nutrition and related health fields to assist the Company in the evaluation of research and new products. The Company believes that its Scientific Advisory Board is viewed by Leiner's customers as a valuable resource. CUSTOMER SERVICE, SALES AND MARKETING SUPPORT. The Company's long-standing customer relationships are built upon its commitment to a high level of customer service and have been recognized by "vendor of the year" awards from several of the nation's leading retailers, including Albertson's, Revco, Rite-Aid, Safeway and Target. The Company believes it has an excellent reputation for customer service, which has been enhanced by consistently shipping complex orders complete and on time and by providing electronic data interchange and vendor managed inventory services to its customers. The Company, through its direct sales force and account marketing managers, also provides retailers with category management services, including integrated schedules of merchandising programs, advertising and promotions, designed to maximize retailers' sales and profits. See "Business -- Customers, Sales and Marketing." GRAPHICS AND PACKAGING EXPERTISE. Leiner designs and manages over 6,600 labels for approximately 265 customers. The Company believes that its resources and expertise in label design and management are significant competitive advantages in servicing the complex needs of its private label customers. Leiner's in-house graphics capability enables the Company to deliver quick turnaround times for private label design projects and allows its customers to participate in the development and production of labeling and packaging. Leiner's customers benefit from Leiner's significant investment in computer design equipment, as well as in-house expertise in marketing strategies and regulatory matters applicable to labels and packaging. The Company operates four packaging facilities equipped with 32 packaging lines in order to satisfy the complex demands and rapid response times required by its customers. MODERN, EFFICIENT MANUFACTURING. The Company has the largest manufacturing capacity in the vitamin product industry with two tableting facilities operating to USP standards capable of producing over 13 billion tablets per year and four packaging facilities containing 32 packaging lines, of which 25 are modern, high speed lines. In fiscal 1994, Leiner began the Manufacturing Program, a facilities consolidation, capacity expansion and equipment modernization program designed to consolidate its western U.S. facilities into a smaller number of larger, more efficient units, outfitted with modern tableting and packaging equipment. The Manufacturing Program has allowed the Company to increase capacity by adding modern, high speed equipment and to reduce variable manufacturing costs by producing larger batch sizes and conducting longer uninterrupted tableting and packaging runs. Through the consolidation of packaging and distribution facilities, the Manufacturing Program has also allowed the Company to reduce distribution costs in its western facilities. Leiner's investment in the Manufacturing Program totaled approximately $20.2 million. Leiner expects to realize further improvements in efficiency as the elements of the Manufacturing Program are further integrated into the Company's operations. See "Business -- Manufacturing and Distribution." COMPLEMENTARY NATURE OF VITAMIN PRODUCT AND OTC PHARMACEUTICAL BUSINESSES. The Company's OTC pharmaceutical products are sold through the same distribution channels and, for most products, manufactured by the same processes as the Company's vitamin products. In addition, vitamin product and OTC pharmaceutical purchase decisions are generally made by the same buyer at the Company's customers. This overlap of channels and processes allows the Company to enhance its strong position with mass market retailers and its manufacturing and distribution expertise by (i) strengthening the relationship between the Company and its customers by allowing the Company to offer "one-stop" vitamin/OTC pharmaceutical shopping, (ii) allowing the Company to allocate its fixed costs across a broader revenue base and (iii) offering a more diversified source of revenue to fund future growth of the Company. BUSINESS STRATEGY The Company's business strategy is to use its competitive advantages to increase its share of the growing overall vitamin product business and to leverage its distribution, marketing and manufacturing strengths in vitamin products to maximize profitability. In order to implement this strategy, the Company intends to: DEVELOP AND MARKET NEW PRODUCTS. The Company believes it is a leader in the vitamin product industry in the responsible development of new products. The Company intends to continue to develop new products and programs based on scientific research and consumer needs. During fiscal 1997 the Company plans to introduce a number of new nutritional supplements (including herbal products) as line extensions that build on successful nutritional supplements previously introduced. The Company believes that new nutritional supplement products offer an important avenue of growth because (i) industry sales of nutritional supplements have increased in the mass market channel at a compound annual rate of approximately 38% from 1993 through 1995 and (ii) the Company's share of nutritional supplement sales in the mass market channel is substantially lower than the Company's share for vitamin and mineral sales and thus presents a growth opportunity. EXPAND VITAMIN PRODUCT SALES THROUGH NEW CHANNELS. The Company intends to expand vitamin product sales through new channels such as warehouse club stores (a new component of the mass market channel for vitamin products) and military commissaries. In addition to continuing its efforts to increase its sales to warehouse club stores and to the military through the development of specialized sales and marketing programs designed to meet the unique needs of these channels, the Company intends to focus on expanding its international sales (primarily in Asia, South America and Canada) through increased investment of resources in international sales development and by joining with its U.S. mass market customers in their international expansion. To date, Leiner has obtained, or has pending applications to obtain, trademark registrations or authorization for importation and sale of its products in 44 countries outside of the United States. In addition, Leiner has entered into a strategic alliance with Takeda Chemical Industries, Ltd., one of Japan's largest pharmaceutical companies, regarding the introduction, marketing and distribution of Your Life-Registered Trademark- brand vitamin products in Japan. EXPAND SALES AND DISTRIBUTION OF BRANDED PRODUCTS. Leiner's Your Life-Registered Trademark- brand is one of the largest broadline brands of vitamin products in the United States and accounted for approximately $66.5 million, or 20%, of the Company's net sales in fiscal 1996. Sales of Your Life-Registered Trademark- brand vitamin products yield higher margins for the Company than sales of comparable private label products. Nearly all of the Company's product innovations (including Proven Release-Registered Trademark-, Daily Paks-Registered Trademark-, Naturalized-Registered Trademark- vitamin products, Family Size packages and Phytograph-TM- herbal testing) are initially introduced under the Your Life-Registered Trademark- label. In 1993, Your Life-Registered Trademark- was appointed the exclusive mass market vitamin licensee of the United States Olympic Committee (through the 1996 Olympic games) and has developed a marketing program based on this appointment. In order to strengthen the Your Life-Registered Trademark- brand and expand the distribution and sales of Your Life-Registered Trademark- vitamin products, Leiner is increasing marketing and advertising expenditures in support of Your Life-Registered Trademark- from approximately $8 million in fiscal 1996 to approximately $10 million in fiscal 1997. An integral part of this expanded marketing program will be a national radio campaign featuring endorsements by well known personalities George Brett and Chuck Yeager. SELECTIVE ACQUISITIONS. In addition to internally generated growth, Leiner intends to expand sales and profitability through acquisitions of closely related businesses and product lines. Leiner will focus on acquiring companies that will add new distribution channels or additional brands to complement its existing business. Although the Company is not currently considering any acquisitions, it intends to review acquisitions in the future as opportunities arise. INCREASE OPERATING MARGINS. The Company's operating margin, excluding certain charges not expected to continue, has increased from 4.2% in fiscal 1993 to 6.2% in fiscal 1996. Excluded charges in fiscal 1993 include management fees of $321,000 paid to AEA that are expected to be discontinued and costs of $3.7 million related to the LHP Acquisition. Excluded charges in fiscal 1996 include management fees of $350,000 paid to AEA and a charge of $4.7 million for impairment of long-lived assets. In addition to continuing to control operating costs, the Company intends to increase margins by shifting its product mix and further reducing manufacturing costs. Leiner intends to shift its product mix to increase the relative share of higher margin products by (i) introducing new products, including herbal products, in the nutritional supplement category, which typically earn higher margins, (ii) developing new channels, such as international sales and warehouse club stores, which sell a greater proportion of higher margin branded products than the mass market generally and (iii) promoting the sales of Your Life-Registered Trademark- branded products through increased marketing support. As a result of the Manufacturing Program, Leiner has experienced significant reductions in costs in its new and expanded facilities. The Company believes similar opportunities to realize cost reductions exist with respect to its midwestern U.S. facilities. The Company has decreased its operating expenses (i.e., marketing, selling, distribution, general and administrative expenses) as a percentage of net sales from 20.8% in fiscal 1993 to 18.5% in fiscal 1996, illustrating the continuing focus of Leiner's management on controlling operating costs. Although the Company expects operating expenses as a percentage of net sales to increase slightly in fiscal 1997 due to the Company's decision to increase marketing support of the Your Life-Registered Trademark- brand, management intends to continue its focus on controlling costs. Before making an investment in the Common Stock, prospective purchasers should carefully consider certain matters set forth under "Risk Factors." THE OFFERING <TABLE> <S> <C> Common Stock offered........................ 5,000,000 shares Common Stock to be outstanding after the Offering.................................. shares (1) Use of proceeds............................. To (i) repay certain outstanding indebtedness of LHP and (ii) redeem the outstanding preferred stock of the Company. See "Use of Proceeds." Proposed NYSE symbol........................ LNR </TABLE> - ------------------- (1) Does not include shares of Common Stock issuable upon the exercise of outstanding management stock options having a weighted average exercise price of $ per share and does not include certain other options issued in connection with the XCEL Acquisition (as hereinafter defined). As of the date of this Prospectus, shares are issuable pursuant to currently exercisable management stock options and no options issued in connection with the XCEL Acquisition are exercisable. See "Management" and Notes 9 and 15 to the Company's Consolidated Financial Statements contained elsewhere in this Prospectus. SUMMARY ACTUAL AND PRO FORMA DATA On May 4, 1992, the Company, through a wholly owned subsidiary, acquired P. Leiner Nutritional Products Corp. (the "Predecessor Company"), then a publicly traded Delaware corporation (the "LHP Acquisition"). P. Leiner Nutritional Products Corp. subsequently changed its name to Leiner Health Products Inc. On May 22, 1992, the Company, through LHP, acquired XCEL Laboratories, Inc. ("XCEL"), an OTC pharmaceutical manufacturer (the "XCEL Acquisition"). Prior to the LHP Acquisition, the Company did not have any significant assets or liabilities and did not engage in any activities other than those incident to the formation of the Company and the LHP and XCEL Acquisitions. See "The Company - -- History." The following table presents summary actual and combined financial data derived from the historical consolidated financial statements of the Company for the periods subsequent to April 1992 and the Predecessor Company for the periods prior to May 1992. The combined statement of operations data for the year ended March 31, 1993 was derived from the audited historical consolidated statement of operations of the Company for the eleven months ended March 31, 1993 together with the audited historical consolidated statement of operations of the Predecessor Company for the month ended April 30, 1992. The LHP and XCEL Acquisitions were accounted for under the purchase method of accounting and new bases of accounting were established at the time of each acquisition. Accordingly, the results of operations for the Predecessor Company are not comparable to the results of operations for the Company. The following table also presents summary pro forma statement of operations data and summary pro forma balance sheet data. The summary pro forma statement of operations data for the year ended March 31, 1996 gives effect to (i) the Recapitalization, the issuance of shares of Common Stock offered hereby at an assumed offering price of $15.00 per share and application of the estimated net proceeds of $68.3 million as provided under "Use of Proceeds" as if such transactions occurred at the beginning of the year, (ii) the elimination of the long-lived asset impairment charge related to goodwill that arose as part of the XCEL Acquisition, (iii) the elimination of certain management fees that are expected to be discontinued and (iv) the elimination of actual interest incurred in respect of indebtedness under the Credit Agreement (as hereinafter defined) and the vendor revolving loan agreement. The summary as adjusted balance sheet data for March 31, 1996 gives effect to the Recapitalization, the issuance of the shares of Common Stock offered hereby at an assumed offering price of $15.00 per share and application of the estimated net proceeds as provided under "Use of Proceeds" as if such transactions occurred on March 31, 1996. The pro forma financial information does not necessarily reflect the results of operations or the financial position of the Company that would have actually resulted had the events referred to above or in the notes to the pro forma financial information been consummated as of the date and for the period indicated and is not intended to project the Company's financial position or results of operations for any future period. The consolidated financial statements of the Company and notes thereto are hereinafter referred to as the "Consolidated Financial Statements." See "Capitalization," "Pro Forma Financial Information" and the Consolidated Financial Statements contained elsewhere in this Prospectus. <TABLE> <CAPTION> PREDECESSOR COMPANY COMBINED (1) COMPANY --------------- ------------- ------------------------------- YEAR ENDED MARCH 31, --------------------------------------------------------------- 1992 1993 1994 1995 1996 --------------- ------------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales......................................... $ 140,063 $ 230,847 $ 303,629 $ 314,730 $ 338,417 Cost of sales..................................... 94,183 171,691 226,045 236,613 253,272 --------------- ------------- --------- --------- --------- Gross profit...................................... 45,880 59,156 77,584 78,117 85,145 Marketing, selling and distribution expenses...... 26,081 33,306 43,056 42,400 44,228 General and administrative expenses............... 10,328 14,693 16,476 17,302 18,344 Charge for long-lived asset impairment (2)........ -- -- -- -- 4,730 Amortization of goodwill.......................... 323 1,419 1,551 1,586 1,585 Other charges (3)................................. 958 3,981 2,367 1,044 482 --------------- ------------- --------- --------- --------- Operating income.................................. 8,190 5,757 14,134 15,785 15,776 Interest expense, net............................. 915 5,791 6,974 9,010 9,924 --------------- ------------- --------- --------- --------- Income (loss) before income taxes................. 7,275 (34) 7,160 6,775 5,852 Provision for income taxes........................ 3,521 999 3,631 3,333 4,686 --------------- ------------- --------- --------- --------- Net income (loss)................................. $ 3,754 $ (1,033) $ 3,529 $ 3,442 $ 1,166 --------------- ------------- --------- --------- --------- --------------- ------------- --------- --------- --------- PRO FORMA STATEMENT OF OPERATIONS DATA (4): Net sales......................................... $ 338,417 Operating income.................................. 20,856 Net income........................................ 8,867 Net income per share (5).......................... Weighted average number of shares outstanding (5).............................................. </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 ---------------------- ACTUAL AS ADJUSTED --------- ----------- (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Working capital........................................................................... $ 72,253 $ 76,654 Goodwill, net............................................................................. 52,386 52,386 Total assets.............................................................................. 251,314 254,584 Long-term debt............................................................................ 102,151 51,077 Redeemable preferred stock................................................................ 11,875 -- Total common shareholders' equity......................................................... 60,922 128,272 </TABLE> - ------------------------ (1) The combined statement of operations data for the year ended March 31, 1993 represents the results of the Predecessor Company for the month ended April 30, 1992 together with the results of the Company for the eleven months ended March 31, 1993. (2) During fiscal 1996, the Company decided to significantly reduce the size of its liquid OTC pharmaceuticals manufacturing business. Accordingly, the Company determined that certain long-lived assets with a carrying amount of $8,256,000 were impaired and wrote them down by $4,730,000 to their estimated fair values. See Note 3 to the Consolidated Financial Statements contained elsewhere in this Prospectus. (3) Other charges for the year ended March 31, 1992 consist of certain acquisition related costs, including fees and expenses paid to financial advisors, legal advisors and others related to the LHP Acquisition. Other charges for each of the years ended March 31, 1993 through March 31, 1996 include management fees paid to AEA during the respective periods that are expected to be discontinued. Other charges also include costs related to the LHP Acquisition and compensation expense arising from the sale of shares of Common Stock to management in connection with the LHP Acquisition in the year ended March 31, 1993, the write-off of deferred charges associated with the refinancing of the Company's revolving credit facility in the year ended March 31, 1994 and expenses incurred in connection with the proposed public offering in the year ended March 31, 1995. Other charges in the years ended March 31, 1994 through March 31, 1996 include compensation expense arising from the granting of stock options. See Notes 6, 9 and 11 to the Consolidated Financial Statements contained elsewhere in this Prospectus. (4) Does not include the charge of $1.5 million expected to be incurred in connection with the termination of the management agreement with AEA. Such amount is anticipated to be paid in fiscal 1997. (5) Pro forma net income per share is computed using the weighted average number of common shares and common share equivalents outstanding during fiscal 1996. Common share equivalents result from outstanding options to purchase common stock. Pursuant to the requirements of the Securities and Exchange Commission, common shares issued by the Company during the twelve months immediately preceding the initial public offering, plus the number of shares issuable upon exercise of stock options granted during this period, have been included in the calculation of the shares used in computing net income per share as if they were outstanding for all periods presented (using the treasury stock method and the estimated public offering price in calculating equivalent shares). Pro forma net income per share also gives effect to the Recapitalization (as hereinafter defined) and the issuance of 5,000,000 shares of Common Stock offered hereby as if such transactions had occurred at the beginning of fiscal 1996.
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to, and should be read in conjunction with, the more detailed information and financial statements contained elsewhere in this Prospectus. Except as otherwise indicated by the context, references in this Prospectus to the "Company" include Paxson Communications Corporation and its direct and indirect wholly-owned subsidiaries. Capitalized terms used without definition in the following summary are defined elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus assumes that the over-allotment option is not exercised. See "Underwriting." THE COMPANY Paxson Communications Corporation (the "Company" or "Paxson Communications") has created a nationwide network of television stations dedicated to the airing of infomercial programming (the "Infomall TV Network" or "inTV"*). In addition, the Company has a significant radio and network-affiliated television broadcasting presence in the state of Florida. The Company owns 16 radio stations in the four largest Florida cities, and will own 19 such stations upon completion of the Proposed Acquisitions (as defined), and owns one network-affiliated television station and operates another pursuant to a time brokerage agreement in the West Palm Beach market. The Company introduced its Infomall TV Network in January 1995 with four television stations. inTV has expanded rapidly and currently consists of 24 owned, operated pursuant to a time brokerage agreement or affiliated inTV stations. Upon completion of the Proposed Acquisitions, the Company will have 28 owned or operated inTV stations and four affiliated inTV stations operating in 30 television markets, 20 of which are among the 30 largest in the United States. The Company expects the Proposed Acquisitions to be consummated over the next ten months, subject to receipt of regulatory approvals. See "The Proposed Acquisitions." The Company believes that (i) its inTV stations comprise the only national network of television stations dedicated to the airing of infomercial programming, (ii) its inTV stations represent a valuable national television broadcasting distribution infrastructure that would be difficult and expensive to replicate, and (iii) its radio and network-affiliated television stations in Florida's five largest markets provide it with a significant statewide presence. The Company was founded in 1991 by Lowell W. "Bud" Paxson. Mr. Paxson has been at the forefront of several innovative broadcasting concepts over the last decade, including his leadership role in the creation and early growth of electronic retailing as the creator and co-founder of Home Shopping Network, Inc. and Silver King Communications, Inc. Mr. Paxson has made equity investments in the Company in excess of $33 million. BUSINESS STRATEGY The Company's business strategy is to increase revenue and cash flow by (i) expanding its inTV network, (ii) applying its multiple station operating strategy to its television and radio properties, (iii) exploring the additional distribution potential of the television stations comprising its national inTV network, and (iv) acquiring additional radio stations, primarily in Florida markets. INFOMALL TV NETWORK In January 1995, Paxson Communications introduced the Infomall TV Network in order to capitalize on what the Company believes to be a rapidly growing industry. The Company has assembled 24 stations dedicated to inTV programming and has entered into agreements with respect to eight stations in seven additional markets to be owned or operated by the Company as inTV stations. The Company believes that its - --------------- * inTV is a service mark of Paxson Communications Corporation. PAXSON COMMUNICATIONS CORPORATION CROSS REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K <TABLE> <CAPTION> FORM S-1 ITEM NUMBER AND CAPTION CAPTION IN PROSPECTUS ------------------------------------------- ------------------------------------------- <C> <S> <C> 1. Forepart of Registration Statement and Outside Front Cover Page of Prospectus... Forepart of the Registration Statement and Outside Front Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus............................ Inside Front and Outside Back Cover Pages 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges............. Prospectus Summary; Risk Factors 4. Use of Proceeds............................ Prospectus Summary; Use of Proceeds 5. Determination of Offering Price............ Outside Front Cover Page; Underwriting 6. Dilution................................... Dilution 7. Selling Security Holders................... Principal and Selling Stockholders 8. Plan of Distribution....................... Outside Front Cover Page; Underwriting 9. Description of Securities to be Registered............................... Prospectus Summary; Dividend Policy; Price Range of Class A Common Stock; Capitalization; Description of Capital Stock 10. Interests of Named Experts and Counsel..... Inapplicable 11. Information with Respect to the Registrant............................... Inside Front and Outside Back Cover Pages; Certain Definitions and Market and Industry Data; Prospectus Summary; Risk Factors; The Proposed Acquisitions; Use of Proceeds; Dividend Policy; Capitalization; The Company; Dilution; Selected Historical and Pro Forma Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Certain Transactions; Principal and Selling Stockholders; Description of Capital Stock; Shares Eligible for Future Sale; Experts; Financial Statements 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities.............................. Inapplicable </TABLE> CERTAIN DEFINITIONS AND MARKET AND INDUSTRY DATA The terms "EBITDA," "broadcast cash flow," "segment operating profit" and "Adjusted EBITDA" are referred to in various places in this Prospectus. EBITDA is defined as net income (loss) before (i) extraordinary item and cumulative effect of a change in accounting principle, (ii) benefit (provision) for income taxes, (iii) other income (expense), net, (iv) interest expense, (v) depreciation and amortization, (vi) option plan compensation and (vii) non-recurring items including terminated operations, less scheduled broadcast rights payments. Broadcast cash flow is defined as income (loss) from broadcast operations plus non-cash expenses, less scheduled broadcast rights payments and non-cash revenue. Although EBITDA and broadcast cash flow are not measures of performance under United States generally accepted accounting principles ("GAAP"), the terms are widely used in the broadcast industry as a measure of a broadcasting company's financial performance. "Segment operating profit" is defined as segment EBITDA before corporate overhead allocations. "Adjusted EBITDA" is defined as EBITDA for the period, less (i) operating profit for the Infomall TV Network segment for such period plus (ii) four times such segment's operating profit for the most recently completed quarter prior to the measuring date. Neither EBITDA, broadcast cash flow, segment operating profit, nor Adjusted EBITDA, should be considered in isolation or as a substitute for net income, cash flows from operating activities and other income or cash flow statement data prepared in accordance with GAAP, or as a measure of profitability or liquidity. The term "time brokerage agreement" (known in the broadcast industry as a "local marketing agreement"), generally refers to an agreement under which a radio or television programmer agrees to purchase from a broadcast station licensee substantially all of the broadcast time on a station, provides programming and sells advertising during the purchased time, receives all the revenue derived from advertising sold during the purchased time, pays certain expenses of the station and performs other functions, with the licensee retaining responsibility for ultimate control of the station in accordance with FCC policies. Time brokerage agreements are more fully described in "Business -- Federal Regulation of Broadcasting." The term "joint sales agreement" (a "JSA") refers to an agreement under which a broadcast station agrees to provide sales and marketing services for another broadcast station while the owner of such broadcast station provides the programming for such other broadcast station. Unless otherwise indicated herein, all market rankings, audience ratings and audience rankings have been derived for the indicated radio station or group of radio stations from surveys of the indicated demographic group listening Monday-Sunday, 6:00 a.m. to 12:00 midnight, as reported by Arbitron, Radio Market Report, The Arbitron Company ("Arbitron"). Unless otherwise indicated, audience share data is expressed as the local average quarter-hour share for each indicated radio station. A radio station's local audience share is derived by comparing the radio station's average quarter-hour share to the total average quarter-hour share for all radio stations listed as inside the Metro Survey Area by Arbitron. Average quarter-hour share is a percentage of the estimated number of persons who listen to a given radio station for a minimum of five minutes within a quarter-hour compared to the total number of persons who listen to radio in the market within such quarter-hour. The most recent Arbitron survey utilized in this Prospectus is Fall 1995. Market radio advertising revenue, revenue share data and revenue rankings for radio stations have been obtained from Miller, Kaplan Market Revenue Report, a monthly publication of Miller, Kaplan, Arase & Co., Certified Public Accountants ("Miller Kaplan"); provided, however, that market radio advertising revenue, revenue share data, and revenue rankings for the Company's radio stations in the Cookeville, Tennessee area have been estimated by the Company without the benefit of any independent investigation or confirmation, as no published data on that survey area is available from Miller Kaplan. Arbitron and Miller Kaplan both compile their audience share, revenue share, revenue ranking and other statistical data under procedures and methodologies that are described, and that have the limitations provided, in their respective reports. All such information provided herein is subject to those limitations. This Prospectus reflects data from the December 1995 Miller, Kaplan Market Review Report unless otherwise indicated. The Company does not assume responsibility for the accuracy or completeness of such published data. All television station audience rating data in this Prospectus has been obtained from the Nielsen Station Index Viewers and Profile for November 1995, a publication of A. C. Nielsen Co. ("Nielsen"). All market rank and television household data has been obtained from U.S. Television Household Estimates for November 1995, as prepared by Nielsen for each designated market area ("DMA"). In addition, revenue data for the West Palm Beach television market has been obtained from the local office of Ernst & Young LLP. The Company does not assume responsibility for the accuracy or completeness of such published data. network of inTV stations is the only group of broadcast television stations in the United States that offers infomercial advertisers significant national, regional and local distribution capability and airtime during each of the popular morning, daytime and prime time viewing hours. The television stations acquired by the Company and converted to inTV stations are typically non-network-affiliated stations with marginal operating results that can be acquired at a relatively low cost compared to network-affiliated stations. Certain of these stations are licensed to communities outside the center of major television markets, but within such markets' designated market area ("DMA") and by virtue of the FCC's "must carry" rules are thus generally entitled to carriage on cable systems within such DMA. Through the exercise of "must carry" rights and the improvement of its stations' over-the-air signals, the Company intends to continue its efforts to maximize its cable household coverage within its markets beyond the 53.7% achieved currently. The Company's goal is to reach approximately 85% of the cable homes in its markets (although there can be no assurance that the Company will reach such goal). The Company believes that it also reaches a significant number of over-the-air television households that do not receive cable television. The markets to be served by the Company upon completion of the Proposed Acquisitions currently contain approximately 44.2 million television households, of which 28.6 million are served by cable television. The Company continues to evaluate the acquisition of or affiliation with additional independent television stations to further extend the national reach of its Infomall TV Network. Shortly after the Company acquires a television station or commences operating a television station pursuant to a time brokerage agreement, the Company replaces the existing programming with infomercial programming. The Company's infomercial programming format allows it to eliminate substantially all programming expenses and achieve significant reductions in other operating expenses. Unlike traditional television stations, inTV programming is paid for by the advertiser as opposed to the broadcaster. The Company centralizes many accounting, traffic and national sales functions at its headquarters, minimizing the staff required at each station location. The Company's inTV stations are connected through a wide area computer network enabling them to utilize common computerized financial and sales systems. Engineering functions are standardized through the purchase of similar equipment at each location for editing, playback-to-air and signal transmission, thereby reducing maintenance expense. As a result, the Company's inTV stations are operated by an average of 15 people, compared to network and independent television stations which average over 100 and 60 people, respectively, in markets of similar size to the Company's. To date, each of the inTV stations owned or operated by the Company has contributed rapidly to broadcast cash flow, typically within two months after the commencement of inTV operations. PAXSON RADIO Upon completion of the Proposed Acquisitions, Paxson Communications will own and operate 24 radio stations (13 FM and 11 AM stations), with more radio stations in Florida than any other broadcaster. The Company operates two FM and two AM stations, commonly referred to as a "duopoly," serving each of Florida's four largest cities (Miami, Tampa, Orlando and Jacksonville), and has agreed to acquire two additional FM stations in the Miami market and an additional FM station in the Jacksonville market. In addition, the Company owns and operates an AM/FM combination in Cookeville, Tennessee, and has agreed to acquire an additional AM/FM combination in that market, and has a joint sales agreement with an AM station in Miami in which the Company owns a 49% interest. The Company operates six radio networks with 338 affiliated radio stations in the eastern and southeastern United States and controls 67 billboard locations (161 faces) in the Tampa and Orlando markets that support the Company's radio station operations and provide advertising revenue. The Company believes that its established position among the leading radio broadcast groups in each of its Florida markets differentiates it from its competitors and makes the Company attractive to regional and national advertisers. In addition to having leading positions in its markets, the Company believes that its Florida markets are highly attractive and among the fastest growing radio markets in the nation. The Company's radio operating strategy, which is implemented by the Company's highly experienced management team, is to capitalize on the revenue enhancing and cost saving opportunities of operating EXPLANATORY NOTE This Registration Statement contains two forms of prospectus, one to be used in connection with a United States offering to U.S. or Canadian Persons (as defined) (the "U.S. Prospectus") and one to be used in connection with a concurrent international offering (the "International Prospectus"). The two prospectuses relate to a public offering of 11,500,000 shares of Class A Common Stock, par value $.001 per share, of Paxson Communications Corporation. The complete U.S. Prospectus follows this explanatory note. After the U.S. Prospectus are the following alternate pages for the International Prospectus: a front cover page, a "Certain United States Tax Consequences to Non-United States Holders" section and a back cover page. All other pages of the U.S. Prospectus are to be used for both the United States offering and the international offering. Each alternate page for the International Prospectus included herein is labeled "Alternate Page for International Prospectus." multiple FM and AM stations in geographically proximate markets. The principal elements of the Company's operating strategy include: (i) extensive market research, (ii) aggressive marketing and promotion and (iii) strict cost controls. PAXSON NETWORK-AFFILIATED TELEVISION Paxson Communications owns and operates an ABC-TV affiliate, WPBF-TV, in the West Palm Beach market. Pursuant to a time brokerage agreement, the Company provides programming and markets commercial time for a second television station, WTVX-TV (a combined United Paramount Network and Warner Brothers Network affiliate), which is also in the West Palm Beach market. The West Palm Beach television market is one of the fastest growing markets in the country as evidenced by its increased market ranking from 65th in 1985 to 45th in 1995. The Company acquired WPBF-TV in July 1994 for approximately $32.5 million and began operating WTVX-TV under a time brokerage agreement in August 1995. The Company has a long-term option to acquire WTVX-TV for approximately $19 million. The Company's television operating strategy is similar to its radio operating strategy as the Company seeks to capitalize on the revenue enhancing and cost saving opportunities from operating two television stations in one market from a single studio facility. After the acquisition of WPBF-TV, the Company installed its management team and implemented a program of cost rationalization measures consisting of, among other things, a reduction in program rights payments, an increase in salesperson commissions related to additional staffing and higher revenues, and increased local news expenses to generate higher audience ratings. INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED MARCH 4, 1996 PROSPECTUS 11,500,000 SHARES LOGO PAXSON COMMUNICATIONS CORPORATION CLASS A COMMON STOCK ------------------------- Of the 11,500,000 shares of Class A Common Stock, par value $.001 per share (the "Class A Common Stock"), offered hereby, 10,300,000 shares are being issued and sold by Paxson Communications Corporation (the "Company" or "Paxson Communications") and 1,200,000 shares are being sold by certain stockholders of the Company (the "Selling Stockholders"). See "Principal and Selling Stockholders" and "Underwriting." The Company will not receive any part of the proceeds from the sale of securities by the Selling Stockholders. Of the 11,500,000 shares of Class A Common Stock offered hereby, 9,200,000 shares are being offered in the United States and Canada (the "U.S. Offering") by the U.S. Underwriters (as defined) and 2,300,000 shares are being offered in a concurrent international offering (the "International Offering" and, together with the U.S. Offering, the "Offering") outside the United States and Canada by the Managers (as defined). The public offering price and aggregate underwriting discount per share are identical for both offerings. See "Underwriting." The Company's authorized capital stock includes Class A Common Stock, Class B Common Stock and Class C Common Stock (collectively, the "Common Stock") and preferred stock. The rights of holders of Common Stock are identical, except that each share of Class B Common Stock generally entitles its holders to ten votes, whereas each share of Class A Common Stock entitles its holders to one vote and the holders of Class C Common Stock generally have no right to vote. Shares of Class B Common Stock and Class C Common Stock are convertible into shares of Class A Common Stock on a one-for-one basis at the option of the holder. See "Description of Capital Stock." The Company's Class A Common Stock is listed on the American Stock Exchange under the symbol "PXN." The last reported sale price of the Company's Class A Common Stock as reported on the American Stock Exchange on February 29, 1996 was $20.00 per share. ------------------ SEE "RISK FACTORS" STARTING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE CLASS A COMMON STOCK OFFERED HEREBY. ------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS - --------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Per share.................................. $ $ $ $ - --------------------------------------------------------------------------------------------------------------- Total(3)................................... $ $ $ $ - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- </TABLE> (1) The Company and the Selling Stockholders have agreed to indemnify the U.S. Underwriters and the Managers against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting estimated expenses of $1,500,000 payable by the Company. (3) The Company and the Selling Stockholders have granted the U.S. Underwriters a 30-day option to purchase up to 1,725,000 additional shares of Class A Common Stock solely to cover over-allotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions, Proceeds to Company and Proceeds to Selling Stockholders will be $ , $ , $ and $ , respectively. See "Underwriting." ------------------ The shares of Class A Common Stock are being offered by the U.S. Underwriters named herein, subject to prior sale, when, as and if accepted by them and subject to certain conditions. It is expected that certificates for the shares of Class A Common Stock offered hereby will be available for delivery on or about , 1996, at the offices of Smith Barney Inc., 388 Greenwich Street, New York, New York 10013. ------------------ SMITH BARNEY INC. PAINEWEBBER INCORPORATED CIBC WOOD GUNDY SECURITIES CORP. BT SECURITIES CORPORATION , 1996 MARKET OVERVIEW INFOMALL TV NETWORK The following table lists those inTV properties that the Company owns, operates or is affiliated with, and those properties which the Company has agreements to acquire or operate, as identified under "Proposed inTV Stations" below. (Television and cable households in thousands.) <TABLE> <CAPTION> INTV ACTUAL OR CABLE NATIONAL ANTICIPATED CARRIAGE CURRENT TV COMMENCE- AT INTV TOTAL CURRENT INTV TOTAL MARKET MENT OF COMMENCE- CABLE MARKET CABLE CABLE MARKET TV MARKET(1) RANK(2) STATION OPERATIONS MENT(3) CARRIAGE(4) HOUSEHOLDS(5) CARRIAGE(6) HOUSEHOLDS(7) - -------------------- -------- ------------------ --------- --------- ----------- ------------- ------------- ------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Owned or Operated New York, NY........ 1 WHAI-TV 3/96 626 626 4,529 13.8% 6,695 Los Angeles, CA..... 2 KZKI-TV 5/95 1,453 2,002 2,997 66.8 4,918 Philadelphia, PA.... 4 WTGI-TV 2/95 1,225 1,436 1,961 73.2 2,646 San Francisco, CA... 5 KLXV-TV 6/95 650 796 1,578 50.4 2,257 Boston, MA.......... 6 WGOT-TV 5/95 604 841 1,625 51.8 2,122 Washington, DC...... 7 WYVN-TV(8) 4/96 0 0 1,238 0.0 1,884 Atlanta, GA......... 10 WTLK-TV 4/94 300 919 1,015 90.5 1,584 Houston, TX......... 11 KTFH-TV 3/95 647 777 867 89.6 1,574 Cleveland, OH*...... 13 WOAC-TV 10/95 332 336 966 34.8 1,452 Cleveland, OH....... 13 WAKC-TV 3/96 560 560 966 58.0 1,452 Tampa, FL........... 15 WFCT-TV(9) 8/94 0 831 976 85.1 1,395 Miami, FL........... 16 WCTD-TV(9) 4/94 396 868 922 94.1 1,341 Denver, CO.......... 18 KUBD-TV(9) 8/95 430 433 699 61.9 1,160 Phoenix, AZ......... 19 KWBF-TV(9) 1/96 23 23 661 3.5 1,170 St. Louis, MO....... 20 WCEE-TV(9) 1/96 227 227 569 39.9 1,108 Orlando, FL*........ 22 WIRB-TV 12/94 468 482 741 65.0 998 Hartford, CT*....... 26 WTWS-TV(10) 3/95 661 719 770 93.4 911 Raleigh, NC*........ 32 WRMY-TV(11) 6/96 0 0 481 0.0 792 Dayton, OH.......... 53 WTJC-TV(9) 10/95 298 312 341 91.5 501 San Juan, PR........ NR WSJN-TV(9)(12)(15) 2/96 285 285 298 95.6 1,064 --------- ----------- ------ ------ Total Owned or Operated(7)... 9,185 12,473 23,234 53.7% 35,572 --------- ----------- ------ ------ Affiliates Sacramento, CA...... 21 KCMY-TV 7/95 624 640 688 93.1% 1,101 Indianapolis, IN.... 24 WIIB-TV 1/96 401 418 580 72.1 925 Norfolk, VA......... 40 WJCB-TV 8/95 343 354 446 79.4 619 Fresno, CA.......... 57 KGMC-TV 1/96 179 179 256 69.8 482 --------- ----------- ------ ------ Total Affiliates.... 1,547 1,591 1,970 80.8% 3,127 --------- ----------- ------ ------ Total Owned, Operated and Affiliates(7). 10,732 14,064 25,204 55.8% 38,699 --------- ----------- ------ ------ Proposed inTV Stations Dallas, TX.......... 8 Channel 68(15) 12/96 924 0.0% 1,822 Atlanta, GA*........ 10 WNGM-TV(15) 4/96 1,015 17.8 1,584 Milwaukee, WI*...... 29 WHKE-TV(15) 1/97 438 58.8 783 Salt Lake City, UT................ 37 KZAR-TV(12)(15) 12/96 359 0.0 656 Grand Rapids, MI.... 38 WJUE-TV(13)(15) 6/96 390 0.0 637 West Palm Beach, FL................ 45 WHBI-TV(14)(15) 7/96 468 0.0 576 Providence, RI...... 46 WOST-TV(12)(15) 12/96 412 0.0 557 Albany, NY.......... 52 WOCD-TV(15) 5/96 357 68.8 507 ------ ------ Total Proposed inTV Stations(7)... 4,363 15.7% 7,122 --------- ----------- ------ ------ TOTAL INTV NETWORK(7).... 10,732 14,064 28,552 44,237 ========= ========= =========== =========== </TABLE> (see footnotes on the following page) <TABLE> <S> <C> * Operated or to be operated pursuant to a time brokerage agreement. (1) Each station is licensed by the FCC to serve a specific community, which is included in the listed market. (2) See "Certain Definitions and Market and Industry Data" for information concerning market rank. (3) Cable households reached at commencement of station's operations. (4) Estimated cable households reached at 1/96 based on cable operators' information. (5) Source: AC Nielsen. San Juan cable households provided by J. Walter Thompson Latin America, June 1995. (6) Cable households reached at 1/96 as a percent of the market's total cable households. (7) Figures represent total television households in each market only and are not necessarily indicative of the number of television households reached by each station in its market; totals do not double count markets where the Company has more than one station. Source: AC Nielsen. San Juan cable households provided by J. Walter Thompson Latin America, June 1995. (8) Station is not currently on the air. (9) Currently operated pursuant to a time brokerage agreement pending completion of the Proposed Acquisitions and exercise of the Station Options. (10) To be operated pursuant to a time brokerage agreement upon completion of an FCC-required restructuring of the Company's investment in such station in connection with the Company's acquisition of WHAI-TV. (11) Option to acquire 40% ownership interest. (12) 50% ownership interest to be acquired. (13) 70% ownership interest to be acquired. (14) inTV affiliate upon acquisition by Cocola Media Corporation of Florida. See "Business -- Time Brokerage Agreements, Joint Sales Agreements and Other Interests in Broadcast Stations." (15) Purchase considered an asset acquisition for accounting purposes and therefore historical financial information not required to be included in the pro forma financial information included herein. </TABLE> PAXSON RADIO <TABLE> <CAPTION> COMMENCEMENT NATIONAL RADIO OF RADIO MARKET(1) MARKET RANK(2) STATION FORMAT OPERATIONS - ------------------------------- -------------- ------- -------------------------- ------------ <S> <C> <C> <C> <C> Miami/Ft. Lauderdale, FL....... 11 WLVE-FM Smooth Jazz 4/93 WZTA-FM Mainstream AOR 4/92 WXDJ-FM Spanish Salsa, Meringue (3)(4) WRMA-FM Spanish Adult Contemporary (3)(4) WINZ-AM News/Sports 4/92 WFTL-AM Talk/Sports 6/95 WACC-AM Spanish Sports (5) Tampa/St. Petersburg, FL....... 21 WHPT-FM Rock Adult Contemporary 11/91 WSJT-FM Smooth Jazz 7/95 WHNZ-AM News/Sports 11/91 WNZE-AM Sports 8/94 Orlando, FL.................... 35 WMGF-FM Soft Adult Contemporary 6/92 WJRR-FM Modern Rock 7/92 WWNZ-AM News 4/92 WWZN-AM Sports 12/94 Jacksonville, FL............... 50 WROO-FM Young Country 9/91 WPLA-FM Alternative Rock 6/92 WFSJ-FM Smooth Jazz (3)(6)(7) WNZS-AM Sports 5/93 WZNZ-AM News 6/92 Cookeville, TN................. n/c WGSQ-FM Country 4/94 WHUB-FM Adult Contemporary (3)(7) WPTN-AM Talk 4/94 WHUB-AM Country (3)(7) </TABLE> <TABLE> <CAPTION> COMMENCEMENT AFFILIATE OF RADIO NETWORKS(6) STATIONS FORMAT OPERATIONS - ----------------------------------------------------------------- --------- ------ ----------- <S> <C> <C> <C> Alabama Radio Network............................................ 74 News 1/95 Florida Radio Network............................................ 56 News 3/93 Tennessee Radio Network.......................................... 79 News 4/94 University of Florida Sports Network............................. 53 Sports 4/94 University of Miami Sports Network............................... 25 Sports 4/95 Penn State Sports Network........................................ 51 Sports 4/94 </TABLE> PAXSON NETWORK-AFFILIATED TELEVISION <TABLE> <CAPTION> COMMENCEMENT NATIONAL TV OF TV MARKET(1) MARKET RANK(2) STATION NETWORK AFFILIATION OPERATIONS - -------------------------------- -------------- ------- ------------------- ------------ <S> <C> <C> <C> <C> West Palm Beach, FL............. 45 WPBF-TV ABC 7/94 WTVX-TV(8) Warner/UPN 8/95 </TABLE> - --------------- (1) Each station is licensed by the FCC to serve a specific community, which is included in the listed market. (2) See "Certain Definitions and Market and Industry Data" for information concerning market rank. (3) Included in the Proposed Acquisitions. (4) Purchase considered a significant business acquisition for accounting purposes and therefore certain historical financial information is included in pro forma financial information included herein. (5) Company provides services to the station under a JSA; Company owns a 49% interest. (6) Company provides services to the station under a JSA. (7) Purchase considered an insignificant business acquisition for accounting purposes and therefore historical financial information is not required to be included in the pro forma financial information included herein. (8) Operated under a time brokerage agreement. n/c Market not covered by Arbitron; revenue not independently reported. THE OFFERING <TABLE> <S> <C> Class A Common Stock Offered: Company.................................... 10,300,000 shares Selling Stockholders(1).................... 1,200,000 shares Total.............................. 11,500,000 shares U.S. Offering.............................. 9,200,000 shares International Offering..................... 2,300,000 shares Total.............................. 11,500,000 shares Common Stock to be Outstanding after this Offering: Class A Common Stock(2).................... 37,396,954 shares Class B Common Stock(3).................... 8,311,639 shares Total(2)(3)(4)..................... 45,708,593 shares Use of proceeds.............................. The Company intends to use the net proceeds to the Company of the Offering to fund the Proposed Acquisitions and related capital expenditures, the exercise of the Station Options (as defined), and capital expenditures associated with certain previous acquisitions. Pending such uses, the Company may repay amounts outstanding under the Company's New Credit Facility (as defined), which amounts may subsequently be reborrowed. See "Use of Proceeds." Voting rights................................ The holders of the Class A Common Stock and the Class B Common Stock vote together as a single class on all matters submitted to a vote of stockholders of the Company, with each share of Class A Common Stock entitled to one vote, and each share of Class B Common Stock entitled to ten votes, except as otherwise provided by law. Holders of Class C Common Stock have no right to vote on any matter voted on by the Stockholders of the Company, except as may be provided by law or as provided in certain circumstances in the Company's Certificate of Incorporation (as defined). See "Description of Capital Stock." Upon consummation of the Offering and as a result of his ownership of Class B Common Stock, Mr. Paxson will continue to control the outcome of any matter submitted to a vote of stockholders, including the election of a majority of the directors. American Stock Exchange symbol............... PXN Dividend policy.............................. The Company has not paid cash dividends on its Common Stock and does not intend for the foreseeable future to declare or pay any cash dividends and intends to retain earnings, if any, for the future operation and expansion of the Company's business. The Company's ability to pay dividends in the future is subject to limitations and prohibitions of certain of the Company's debt instruments and of its Preferred Stock (as defined). See "Dividend Policy." </TABLE> (1) Includes 738,000 shares of Class A Common Stock issuable upon exercise of the warrants to be purchased by the Underwriters from certain Selling Stockholders. See "Principal and Selling Stockholders" and "Underwriting." (2) Excludes (i) up to 568,000 shares of Class A Common Stock that may be sold by the Company upon exercise of the overallotment option, (ii) the 1,639,205 shares of Class A Common Stock issuable upon exercise of options outstanding as of February 29, 1996 under the Company's Stock Incentive Plan that are not being exercised as a part of the Offering and (iii) the 2,441,379 shares of Class A Common Stock that are issuable by the Company upon the exercise of certain warrants outstanding as of February 29, 1996 that are not being exercised as a part of the Offering. See "Underwriting" and "Description of Capital Stock." (3) Excludes the 813,793 shares of Class B Common Stock that are issuable by the Company upon exercise of certain warrants outstanding as of February 29, 1996 that are not being exercised as a part of the Offering, which Class B Common Stock is generally convertible into Class A Common Stock at the holder's option. See "Description of Capital Stock." (4) Excludes the 4,472,628 shares of Class C Common Stock that are issuable by the Company upon exercise of certain Warrants outstanding as of February 29, 1996 that are not being exercised as a part of the Offering, which Class C Common Stock is generally convertible into Class A Common Stock at the holder's option. See "Description of Capital Stock."
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL DATA, INCLUDING THE FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS (I) ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED; (II) GIVES EFFECT TO THE COMPLETION OF THE TRANSACTIONS DESCRIBED UNDER "RECAPITALIZATION", WHICH WILL BE EFFECTED IMMEDIATELY PRIOR TO, OR SIMULTANEOUSLY WITH, THE CONSUMMATION OF THE OFFERINGS; AND (III) HAS BEEN ADJUSTED TO REFLECT A STOCK SPLIT EFFECTED ON APRIL 27, 1994. REFERENCES TO "BIG FLOWER" MEANS BIG FLOWER PRESS HOLDINGS, INC., AND UNLESS THE CONTEXT INDICATES OTHERWISE, REFERENCES TO THE "COMPANY" INCLUDE BIG FLOWER AND ITS SUBSIDIARIES. THE COMPANY The Company is a leading producer and marketer of advertising circulars, newspaper TV listing guides and Sunday comics in the United States. In the fiscal year ended June 30, 1995, the Company produced more than 21 billion advertising circulars, 1.5 billion Sunday comics and 535 million newspaper TV listing guides. During fiscal 1995, the Company generated net sales of $896.6 million and operating profit of $48.3 million. The Company operates a national network of 20 production facilities with 122 heatset and cold web offset presses, enabling it to market an array of highly flexible printing services meeting the diverse needs of its customers. Advertising circulars are printed advertisements inserted in newspapers, mailed to consumers or distributed in stores. These products represented approximately 86% of the Company's net sales in fiscal 1995. Major advertising circular customers include many leading U.S. retailers such as American Stores, Circuit City, Home Depot, J.C. Penney, Kmart, Lowes, Montgomery Ward, Safeway, Sears, Walgreens and Wal-Mart. The Company believes it is the largest producer of advertising circulars in the United States. The Company also prints TV listing guides, Sunday comics, Sunday magazines and/or special supplements for approximately two-thirds of the 50 most widely-circulated newspapers in the United States. These newspapers include The Baltimore Sun, The Boston Globe, The Los Angeles Times, The New York Times, The Philadelphia Inquirer and The Newark Star Ledger. Providing printing services to approximately 300 newspapers nationwide, the Company is the largest printer of newspaper TV listing guides and Sunday comics in the United States. Newspaper TV listing guides, Sunday comics, other newspaper products and other publications represented approximately 14% of the Company's net sales in fiscal 1995. Big Flower's principal subsidiary, Treasure Chest Advertising Company, Inc. ("Treasure Chest"), established in 1967, was one of the first commercial printers specializing in advertising circulars in the United States. In 1982, Treasure Chest expanded its business with the introduction of newspaper TV listings guides and Sunday comics. Treasure Chest was acquired by Big Flower in August 1993. In 1994, the Company acquired KTB Associates, Inc. ("KTB") and Retail Graphics Holding Company ("Retail Graphics"), increasing its net sales in fiscal 1994 by more than 36% on a pro forma basis. MARKET BACKGROUND Based on recent industry studies, the Company believes the U.S. market for advertising circulars exceeds $3.8 billion and has grown at a faster rate in recent years than overall newspaper advertising expenditures as well as overall advertising expenditures. Advertising circulars are a low cost, flexible and highly effective advertising medium for retailers. Management believes that the costs associated with advertising circulars have increased at a slower rate over the past five years than the costs associated with advertising in alternative media, such as radio and television, thus enhancing the relative cost effectiveness of such circulars for advertisers. Industry research indicates that more than 75% of consumers read advertising circulars appearing in their Sunday newspaper. A recent Gallup Poll indicated 59% of respondents used advertising circulars once a month or more to make buying decisions and that 25% used advertising circulars on a consistent, weekly basis to make buying decisions. The Company believes that Big Flower and three other companies account for approximately 50% of the advertising circular market in the United States, with more than 130 regional and local printers accounting for the balance. Management believes that the Company's national network of printing facilities, advanced marketing services and ability to produce high quality products at a low cost will enable it to continue to compete effectively in this environment. See "Business--Competition". In recent years, newspapers have increased their emphasis on TV listing guides, Sunday comics and other products to enhance circulation in a competitive market. The Company believes that these publications represent attractive media for advertisers. For example, a recent industry study indicated that more than 70% of respondents keep the TV listing guide from their Sunday newspaper for future consultation, creating opportunities for multiple viewings of advertisements carried in such publications. See "Business--Competition". BUSINESS STRATEGY The Company's business strategy is to increase revenues and maximize profitability in its core business of printing advertising circulars and newspaper publications. The strategy is also focused on achieving additional revenue growth through the development of new products and services and through strategic acquisitions and investments. The cornerstone of this strategy is the continued development of a high quality sales, marketing and printing organization with an emphasis on assisting customers in maximizing the effectiveness of their advertising dollars. This customer focus is designed to increase demand for the Company's products and services. The Company believes it is well positioned to realize further gains due to its nationwide printing network and competitive cost position. NATIONWIDE PRINTING NETWORK. The Company operates a nationwide network of sales offices and printing plants which are strategically located to service major population centers throughout the United States. As the only advertising circular printer offering a national network of both heatset and cold web offset printing locations, the Company is able to meet the diverse needs of its customers and achieve significant cost and distribution advantages. COMPETITIVE COST POSITION. The Company maintains stringent cost controls and has implemented programs to enhance efficiency and improve profitability in recent years. These programs have resulted in increased press speeds, reduced paper waste and improved capacity utilization. As one of the largest consumers of newsprint and ink in the United States, the Company believes it is able to achieve significant purchasing economies under most market conditions. The Company believes it has significant opportunities to generate new sources of revenue through the following initiatives: ENHANCED IMAGE MANAGEMENT SYSTEMS AND ELECTRONIC PRE-PRESS SERVICES. The Company is designing an interactive image management system which would link advertisers and graphic designers with a database of images to streamline production flows and provide information to help customers plan their advertising programs more effectively. The Company is also enhancing its computerized electronic pre-press ("EPP") services. Such services provide customers the flexibility of changing their print advertisements through on-line connections from their offices and enable the Company to service its customers from inception of an advertising concept through layout design to final press run. See "Recent Developments" for information regarding the proposed acquisition (the "LTC Acquisition") of Laser Tech Color, Inc. ("Laser Tech"), a pre-press company. DATABASE PROGRAM. The Company is developing a database information system designed to enable advertisers to use advertising circulars to target messages specifically to potential customers meeting the advertisers' desired geographic, demographic and purchase pattern profiles, resulting in more cost-effective advertising. NEWSPAPER TV LISTING GUIDES PROGRAMS. The Company currently offers a variety of programs to increase newspaper revenues by including advertising in their TV listing guides. These programs include bound-in inserts, cover wraps, pullout or stand-alone inserts and promotional ink jet numbering. In addition, the Company has organized a network of newspapers in the western part of the United States which it is marketing as an effective way for advertisers to include regional advertising in newspaper TV listing guides. The Company will seek to establish similar networks in other regions of the United States. STRATEGIC ACQUISITIONS AND INVESTMENTS. The Company routinely reviews opportunities to acquire businesses with operations in its core business of printing advertising circulars and newspaper publications. In addition, the Company may seek to acquire or invest in businesses operating in other segments of the printing industry, including free-standing pre-press businesses. Upon the consummation of the Offerings, the Company will have significant borrowing capacity for acquisitions. See "Use of Proceeds" and "Bank Refinancing". The Company is currently negotiating a stock purchase agreement for the LTC Acquisition. If consummated, the Company expects that it will continue to have significant borrowing capacity for acquisitions. The Company does not have a binding commitment for the LTC Acquisition and no assurance can be given that such acquisition will be consummated. See "--Recent Developments". RECENT DEVELOPMENTS The Company is currently negotiating a stock purchase agreement to acquire Laser Tech. Laser Tech is a pre-press company which provides high quality electronic and conventional graphic services for the advertising, trading card and printed collectibles, catalog and packaging industries. Services include digital and conventional photography, image scanning, digital image archiving through electronic databases, computerized image retouching, desktop publishing, and flexographic pre-press services for such industries. Laser Tech's customers include some of the leading U.S. advertisers and packagers, including Compaq Computer, J.C. Penney, Mary Kay Cosmetics, Marvel Holdings, Pepsico and Tyson Foods. During its fiscal year ended December 31, 1994 and for the nine-month period ended September 30, 1995, Laser Tech generated net sales of $18.3 million and $17.6 million, respectively, and operating profit of $2.0 million and $2.5 million, respectively. As of October 1, 1995, Laser Tech had 200 employees. The Company expects to acquire Laser Tech for approximately $31.3 million, of which $3.0 million will be paid in cash, $18.1 million will be paid in a note due in January, 1996, $4.5 million will be paid in shares of Common Stock based on the trading price of the Common Stock at or about the time of the closing of the LTC Acquisition (or, if the closing of the LTC Acquisition is at or prior to the closing of the Offerings, at the initial public offering price on the cover page of this Prospectus) and $5.7 million will be used to repay indebtedness of Laser Tech. The final cash portion of the purchase price may be adjusted at or after the closing of the LTC Acquisition based on changes in Laser Tech's balance sheet. Sullivan Communications, Inc. ("SCI") has alleged that the LTC Acquisition violates a confidentiality agreement that was entered into between Big Flower and SCI (the "Confidentiality Agreement") in connection with a proposed merger between the two companies. The discussions regarding such proposed merger were terminated in May 1995. In a letter dated November 8, 1995, SCI alleged that the Company used information about Laser Tech that the Company learned during its merger discussions with SCI in violation of the Confidentiality Agreement. In such letter, SCI further claimed that the Company solicited two employees to leave SCI to work for Laser Tech in violation of the Confidentiality Agreement. SCI indicated that it would pursue all available remedies for any breach of the Confidentiality Agreement. The Company understands that if SCI files a lawsuit it may seek to recover damages or obtain injunctive relief. The Company believes that SCI's claims as set forth in its letter are without merit. If any lawsuit is filed, the Company intends to vigorously defend itself and does not believe that any such lawsuit would have a material adverse effect on the financial condition of the Company. There can be no assurance, however, that the Company would prevail in any such lawsuit or that any such lawsuit would not delay the LTC Acquisition. THE OFFERINGS <TABLE> <S> <C> Common Stock initially offered in(1): The U.S. Offering.......................... 5,379,750 shares The International Offering................. 1,344,938 shares Common Stock to be outstanding after Offerings............................ 16,173,187 shares (2) Use of net proceeds.......................... The net proceeds received by the Company, together with borrowings under the New Credit Agreement (as defined), will be used to redeem or retire approximately $213.2 million indebtedness of the Company, and to repurchase all outstanding preferred stock of Big Flower Press, Inc. ("BFP"), a wholly owned subsidiary of Big Flower and the parent of Treasure Chest, which will be merged with and into Big Flower in connection with the Offerings. The Company will not receive any of the proceeds of the shares sold by the Selling Stockholders. See "Use of Proceeds" and "Bank Refinancing". </TABLE> - -------------- (1) Of the 6,724,688 shares of Common Stock offered, 5,500,000 shares are being sold by Big Flower and 1,224,688 shares are being sold by certain institutional investors (the "Institutional Investors"). Does not include shares of Common Stock which may be purchased from Apollo Big Flower Partners, L.P. ("Apollo") and BT Investment Partners, Inc. ("BTIP", and together with Apollo and the Institutional Investors, the "Selling Stockholders") pursuant to the Underwriters' over-allotment option. (2) Includes 1,738,692 shares issuable in certain circumstances upon conversion of non-voting Class B Common Stock, par value of $0.01 per share (the "Class B Stock"), of Big Flower held by BTIP. See "Description of Capital Stock--Class B Stock". Does not include (i) 861,769 shares of Common Stock reserved for issuance upon the exercise of stock options, of which 248,569 stock options are presently exercisable or will become exercisable in January 1996 or (ii) approximately 281,250 shares of Common Stock issuable in the LTC Acquisition assuming a price of $16 per share. See "Management--Incentive and Bonus Plans" and "Recent Developments".
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000924374_chs_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000924374_chs_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL FINANCIAL INFORMATION AND SHARE DATA IN THIS PROSPECTUS (I) HAVE BEEN ADJUSTED TO REFLECT A ONE-FOR-TWO REVERSE STOCK SPLIT OF THE COMPANY'S COMMON STOCK (THE "COMMON STOCK") ON MARCH 14, 1996, AND (II) ASSUME NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. THE COMPANY CHS Electronics, Inc. ("CHS" or the "Company") is a leading international distributor of microcomputer products, networking products and software. CHS operates in 24 countries across three regions, including Western Europe, Eastern Europe and South America and services an active customer base of greater than 24,300 resellers. Products sold by the Company are manufactured by approximately 35 vendors including Hewlett-Packard, Seagate, Microsoft, Novell, Acer, Creative Labs, 3Com, Canon, Epson and Intel. The Company recently was selected by IBM to be one of a limited number of distributors offering the complete IBM microcomputer product line in Western Europe, Eastern Europe and South America. The Company is a focused distributor, as opposed to a broadline distributor, and seeks to represent leading vendors within specific product categories. CHS believes that it is the sixth largest distributor of microcomputer products in the world, and the largest distributor in South America and Eastern Europe. The Company has no significant sales in the United States. The large number and diversity of resellers make it cost efficient for vendors to outsource to wholesale distributors such as the Company some portion of their distribution, credit, inventory, marketing and customer support requirements. Similarly, due to the large number of product vendors, resellers generally cannot efficiently establish direct purchasing relationships with each vendor and instead rely on distributors to satisfy their product, financing, marketing and technical support needs. The Company believes the wholesale distribution industry is consolidating as access to financial resources and economies of scale become more critical and as certain vendors limit the number of authorized distributors of their respective products. According to International Data Corporation ("IDC"), Western Europe represents approximately 23% of the worldwide personal computer ("PC") market. The Company's pan-European presence strategically positions the Company to take advantage of the consolidation trend in the distribution industry and increase its market share in Western Europe. Additionally, the regions in which the Company operates are relatively underpenetrated compared to the United States. The penetration rate, defined as number of PCs per person, in Western Europe is 15.3% compared to a penetration rate of 35.8% in the United States. A significant portion of the Company's sales are in the emerging markets of Eastern Europe and South America, regions which the Company believes are underserved relative to the entire industry and offer substantial growth opportunities. IDC projects PC sales in Eastern Europe (including the Middle East and Africa) will grow from $3.9 billion in 1995 to $7.6 billion in 1999, representing a compound annual growth rate of 18.5%. IDC projects PC sales in South America (including Mexico and Central America) will grow from $3.5 billion in 1995 to $7.8 billion in 1999, representing a compound annual growth rate of 22.2%. This compares favorably to a 9.6% compound annual growth rate projected by IDC for PC sales in the United States over the same period. CHS operates under a decentralized structure which delegates to managers familiar with the customs and needs of a particular country the authority to make daily operational decisions including those necessary to satisfy the particular demands of their market. As compared to certain competitors which operate under a more centralized system, the Company believes that its business model of focused distribution through locally managed full service facilities integrating warehousing, purchasing, sales, credit and accounting services provides competitive cost and operating advantages. The Company's objective is to strengthen its position as a leading distributor of microcomputer products in Western Europe, Eastern Europe and South America. In order to achieve this objective, CHS intends to continue to implement the following strategies: /bullet/ OPERATE A FOCUSED DISTRIBUTION MODEL. The Company's strategy is to be a focused distributor by concentrating on a limited number of products from a select group of high quality branded vendors in each major product category, such as Hewlett-Packard for printers, Microsoft for software, Novell for networking, Seagate for mass storage and Hewlett-Packard and IBM for PCs. Additionally, the Company seeks to be a significant distributor for each of its vendors and establish a partnering relationship with them. For example, the Company believes that it is one of the largest distributors of Hewlett-Packard products in Western Europe and the largest in Eastern Europe and South America. The Company believes this focused strategy enables it to respond more quickly to customer requests and gives it greater availability of products, enhanced access to new products and better pricing. The Company believes this strategy also enables it to develop greater expertise in the sale and servicing of the products of these vendors. The Company believes that its focused distribution model also results in more effective asset management. Generally, products from leading vendors are in greater demand, resulting in higher inventory turns and lower working capital requirements. Additionally, fewer stock keeping units ("SKUs") result in more efficient inventory management. CHS currently maintains up to 4,000 SKUs while broadline distributors typically carry greater than 15,000 SKUs. /bullet/ FURTHER DEVELOP AND PENETRATE INTERNATIONAL MARKETS. The Company has focused its activities on the distribution of microcomputer products in Western Europe and the emerging markets of Eastern Europe and South America, regions which it believes are underserved with respect to the distribution of microcomputer products and therefore provide significant growth opportunities. The Company believes that the markets in Western Europe, Eastern Europe and South America are complex due to the diversity of language, regulatory, technical and other factors and provide increased opportunities for CHS to add value to its relationships with its vendors and customers because of the presence of its knowledgeable local management. The Company attempts to limit its exposure to declines in any one area or economy by its presence in a large number of markets. /bullet/ GROW THROUGH ACQUISITIONS. A major portion of the Company's growth is attributable to acquisitions and the Company intends to continue its practice of making targeted purchases of high quality distributors in selected markets in the future. The Company typically structures an acquisition with an earnout component payable in shares of Common Stock one year subsequent to the acquisition and based on the performance of the acquired company. These local distributors generally are attracted to combining with CHS in order to gain personal financial liquidity, access to key product lines provided by CHS and enhanced vendor credit facilities. Over the past three years, the Company has acquired over 20 companies. The Company seeks acquisition candidates that have strong entrepreneurial management teams and experience in the local market and that could benefit from the synergies arising out of the Company's superior product line. After an acquisition, the new CHS subsidiary adopts the policies and financial reporting procedures of the Company but operates as a relatively autonomous business unit, consistent with the Company's decentralized structure. The Company believes its acquisition strategy is advantageous to its vendors because, through their relationship with CHS, vendors gain entry into new markets with established local distribution companies. The Company's operating results have increased significantly in the three-year period ending December 31, 1995, with net sales increasing from $146.4 million in 1993 to $936.7 million in 1995 and operating earnings increasing from $365,000 in 1993 to $10.8 million in 1995. Additionally, for the three months ended March 31, 1996 compared to the three months ended March 31, 1995, the Company's net sales increased to $303.0 million from $204.8 million and operating earnings increased to $4.7 million from $2.8 million. On a pro forma basis, assuming all 1995 and 1996 acquisitions were made on January 1, 1995, the Company's 1995 net sales and operating earnings would have been $1.1 billion and $15.5 million and the Company's net sales and operating earnings for the quarter ended March 31, 1996 would have been $327.0 million and $5.3 million, respectively. See "Summary Consolidated Financial Data" and "Reincorporation and Acquisitions." THE OFFERING Common Stock Offered by the Company................ 3,001,539 shares Common Stock Offered by the Selling Shareholders.................................... 1,583,461 shares Common Stock to be Outstanding after the Offering(1)..................................... 10,584,073 shares Use of Proceeds ................................... To provide funds for working capital and other general corporate purposes including acquisitions. Nasdaq National Market Symbol ..................... CHSE - -------------- (1) Does not include 1,028,080 shares of Common Stock reserved for issuance upon exercise of currently outstanding options and additional options which may be granted under the Company's 1994 Stock Option Plan, other outstanding options and the Representative's Warrants. See "Management--Stock Option Plans," "Certain Transactions," and "Underwriting." SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA) <TABLE> <CAPTION> PREDECESSOR(1) THE COMPANY ----------------- ------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31, ------------------------------------------------------------------ -------------------------------- 1991 1992 1993(2) 1994(2)(3) 1995 1995 1996 1996 ------- ------- -------- ---------- ----------------------- -------- -------- ------------ ACTUAL(4) PRO FORMA(5) ACTUAL ACTUAL FRO FORMA(6) ---------- ------------ -------- -------- ------------ (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> INCOME STATEMENT DATA: Net sales ................... $41,644 $79,884 $146,408 $359,169 $936,703 $1,140,130 $204,835 $302,995 $326,946 Gross profit ................ 4,042 7,178 9,440 25,186 67,987 84,714 14,911 22,542 24,818 Operating earnings .......... 428 2,078 365 3,388 10,799 15,459 2,792 4,692 5,302 Earnings (loss) before income taxes .............. 215 1,812 (482) 1,568 6,102 10,023 2,049 3,366 3,830 Net earnings (loss) ......... 215 1,156 (723) 965 4,305 5,962 1,667 1,988 2,177 Net earnings (loss) per share primary ................... N/A N/A (.32) .21 .59 .63 .24 .25 .23 fully diluted ............. N/A N/A (.32) .21 .59 .63 .24 .24 .23 Weighted average shares outstanding primary ................... N/A N/A 2,269 4,693 7,283 9,539 6,966 7,862 9,612 fully diluted ............. N/A N/A 2,269 4,693 7,283 9,539 6,966 8,183 9,612 OTHER DATA: Number of countries ......... 1 1 1 6 17 24 10 23 24 Inventory turns ............. 16 17 23 10 10 12 12 10 10 Days receivable ............. 34 32 31 32 35 31 30 34 34 </TABLE> AT MARCH 31, 1996 -------------------------------------------- PRO FORMA ACTUAL PRO FORMA(7) AS ADJUSTED(8) ------------ ------------- --------------- (UNAUDITED) BALANCE SHEET DATA: Cash and cash equivalents.. $ 13,000 $ 7,817 $ 37,823 Working capital............ 15,232 13,741 43,747 Total assets............... 281,925 313,199 343,205 Lines of credit............ 52,237 57,272 57,272 Long-term debt............. 13,510 13,510 13,510 Shareholders' equity ...... 31,605 50,860 80,866 - -------------- (1) In December 1993, the Company acquired its operating subsidiary in Germany. The Predecessor information provided represents the operations of this acquired company prior to the acquisition and is derived from the financial statements of the acquired company. (2) Restated to give effect to the acquisition in 1995 of CHS Portugal and 16% of CHS Czechia as of January 1, 1993. See "Reincorporation and Acquisitions" and Note B to the Company's Consolidated Financial Statements. (3) Restated to give effect to the acquisition in 1995 of CHS England, CHS France and CHS Belgium as of September 1, 1994, the date Comtrad, Inc. ("Comtrad") acquired these companies. See "Reincorporation and Acquisitions" and Note B to the Company's Consolidated Financial Statements. (4) Restated to give effect to the acquisition in 1995 of CHS Finland, CHS Sweden and CHS BEK as of July 1, 1995, CHS Poland as of November 1, 1995, and the acquisition in 1996 of CHS Brazil, CHS Slovakia, CHS Baltic, CHS Bulgaria, CHS Romania and CHS Croatia as of December 31, 1994, the dates Comtrad or Comtrad Holdings, Inc. acquired these companies. See "Reincorporation and Acquisitions" and Note B to the Company's Consolidated Financial Statements. (5) Gives effect to the acquisition in 1995 of CHS BEK, CHS Czechia, CHS Finland, CHS Sweden and CHS Poland and in 1996 of CHS Hungary (51%), CHS Peru (60%) and CHS Switzerland, assuming such transactions had occurred as of January 1, 1995. See "Reincorporation and Acquisitions" and Note B to the Company's Consolidated Financial Statements and Pro Forma Condensed Consolidated Financial Information (Unaudited). (6) Gives effect to the acquisition in 1996 of CHS Hungary (51%), CHS Peru (60%) and CHS Switzerland, assuming such transactions had occurred as of January 1, 1996. See "Reincorporation and Acquisitions" and Note B to the Company's Consolidated Financial Statements and Pro Forma Condensed Consolidated Financial Information (Unaudited). (7) Gives pro forma effect to the acquisitions in 1996 of CHS Hungary and CHS Switzerland, assuming such transactions had occurred as of March 31, 1996. See "Reincorporation and Acquisitions" and "Pro Forma Condensed Consolidated Financial Information (Unaudited)."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000924862_algos_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000924862_algos_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the financial statements and notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, all information in the Prospectus (i) gives effect to a 8.30-for-1 stock split in the form of a stock dividend declared in May 1996, and (ii) assumes no exercise of the Underwriters' over-allotment option. THE COMPANY Algos Pharmaceutical Corporation ('Algos' or the 'Company') is a leader in developing a new generation of proprietary pain management products. The Company develops its proprietary pain management products by combining existing analgesic or anesthetic drugs with N-methyl-D-aspartate ('NMDA') antagonist drugs that have been approved for human use in other applications. Independent research and the Company's pre-clinical studies and clinical trials conducted to date have shown that the Company's products may significantly improve pain relief over currently available analgesics, including narcotic drugs such as morphine, hydrocodone and oxycodone and non-narcotic analgesics such as acetaminophen (e.g. Tylenol'r'), ibuprofen (e.g. Advil'r') and naproxen (e.g. Aleve'r'). The Company is also developing a local anesthetic product that has the potential to provide greater anesthetic effect with longer and more controlled duration than existing products. The Company's analgesic and anesthetic products will target markets with combined 1995 U.S. sales estimated at $6.4 billion. In addition, the Company is using its NMDA antagonist technology to develop products to treat urge urinary incontinence and opiate and cocaine addiction. The Company believes that its analgesic and anesthetic products have the potential for more rapid market introduction than many other new drugs because (i) the Company's products combine existing drugs whose separate safety profiles are known and established and (ii) clinical trials for new analgesics and anesthetics historically have achieved statistically significant results with fewer patients than may be required for many other drugs. As a result, the Company currently anticipates that it will file its first New Drug Application ('NDA') with the Food and Drug Administration ('FDA') in 1997. The Company has ten products that have reached Phase II clinical trials or are scheduled for Phase II or Phase III clinical trials in 1996. The Company has completed or is currently conducting eleven clinical trials and has scheduled additional clinical trials to commence in 1996. A pivotal Phase II clinical efficacy trial has been completed with MorphiDex'tm' demonstrating statistically significant superior pain relief over morphine. The Company's products that have reached Phase II clinical trials or are scheduled for Phase II or Phase III clinical trials consist of: (i) four narcotic analgesic/NMDA antagonist combination products: MorphiDex'tm', expected to be used primarily to treat cancer pain, HydrocoDex SR'tm' and HydrocoDex Plus'tm', expected to be used primarily to treat moderate to moderately severe post-operative, musculoskeletal and trauma-related pain, and OxycoDex'tm', expected to be used primarily to treat moderate to moderately severe post-operative pain; (ii) two over-the-counter ('OTC') analgesic/NMDA antagonist combination products: a combination product of an NMDA antagonist with acetaminophen, the largest selling OTC analgesic, and a combination product of an NMDA antagonist with ibuprofen, the largest selling OTC non-steroidal anti-inflammatory drug ('NSAID'); (iii) one injectable local anesthetic/NMDA combination product intended to provide greater anesthetic effect with longer and more controlled duration for use in dental procedures and in-patient and out-patient surgeries; (iv) one product that uses an NMDA antagonist intended as a treatment for urge urinary incontinence, a condition which afflicts an estimated five million people in the U.S.; and (v) two products intended as treatments for opiate and cocaine addiction, which the Company expects to develop in collaboration with the National Institute on Drug Abuse ('NIDA'), National Institutes of Health ('NIH'). In June 1996, the Company entered into a license agreement with McNeil Consumer Products Company ('McNeil'), an affiliate of Johnson & Johnson, pursuant to which the Company granted McNeil the exclusive right to develop acetaminophen/NMDA antagonist combination products and certain NSAID/NMDA antagonist combination products for the treatment of pain (the 'McNeil License Agreement'). The McNeil License Agreement: (i) grants McNeil an exclusive worldwide license to manufacture and market such products; (ii) provides for an initial payment of $2.0 million to the Company and subsequent payments of up to an additional $8.0 million upon the achievement of certain milestones generally relating to product development and patent issuances; and (iii) provides for the payment of royalties to the Company on net sales of the licensed products. McNeil will bear all of the costs of developing products it selects, except for approximately $500,000 to be borne by the Company. McNeil will be required to pay minimum royalties, provided that certain conditions have been met, even if McNeil has not commenced marketing of an acetaminophen product or an NSAID product. In June 1996, the Company entered into a letter of intent with NIDA, NIH, pending formal approval of a cooperative research and development agreement (a 'CRADA'), to conduct joint research on a methadone/NMDA antagonist combination drug as a potential treatment for opiate addiction. The Company believes that the markets in which it intends to compete offer attractive opportunities. Favorable factors in the target analgesic markets include: high growth rates partially attributable to the rapidly growing population segment aged 65 and older; increasing recognition of the therapeutic benefits of effective pain treatment including reductions in healing and recovery time; generally concentrated distribution channels that permit more cost-effective selling and marketing; lack of recent product innovation which has resulted in market segments comprised largely of older off-patent drugs; higher profit margins from branded proprietary products; and the potential for rapid acceptance of new pain management pharmaceuticals by members of the medical profession. The market for local anesthetics also presents attractive opportunities for the Company's controlled duration product because existing local anesthetics have limited and less controllable duration which restricts their use in surgery. The Company believes the markets for its products to treat urge urinary incontinence and drug addiction present significant opportunities because of the lack of satisfactory pharmaceutical treatments and the large potential market sizes. The Company's strategic goal is to establish a leading position in the pain management pharmaceutical market. The Company intends to achieve this goal by: (i) introducing superior proprietary products; (ii) minimizing development time, cost and risk; (iii) leveraging its proprietary technology across multiple product opportunities; (iv) outsourcing to efficiently deploy resources; and (v) maximizing market penetration and margin potential through a combination of Company direct sales and strategic alliances. The Company seeks to protect its proprietary position by, among other methods, filing United States and foreign patent applications with respect to the development of its products. The Company has exclusive licenses for three issued U.S. patents and six U.S. patent applications pending and holds one additional U.S. patent application pending. To date, the Company has generated no product revenues and has experienced net losses in each year since its inception. At June 30, 1996, the Company had an accumulated deficit of approximately $4.9 million. The Company was incorporated in Delaware in 1992. Its executive offices are located at Collingwood Plaza, 4900 Route 33, Neptune, New Jersey 07753, and its telephone number is (908) 938-5959. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company................................... 3,500,000 shares Common Stock to be outstanding after the Offering...................................... 15,544,123 shares(1) Use of Proceeds................................. To fund research and product development, the establishment of a direct sales force, working capital and for other general corporate purposes. See 'Use of Proceeds.' Proposed Nasdaq National Market symbol.......... ALGO </TABLE> - ------------ (1) Excludes an aggregate of 1,085,665 shares of Common Stock reserved for issuance upon the exercise of outstanding options and warrants, including the conversion of the Company's Series B Convertible Preferred Stock, $.01 par value per share (the 'Series B Preferred Stock'). See 'Management and Key Scientific Advisors -- Stock Option Plans' and 'Description of Capital Stock.' SUMMARY FINANCIAL INFORMATION <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ---------------------------------------- ---------------------- 1992 1993 1994 1995 1995 1996 ----- ----- ------- ------- ------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues.................................... $ 96(1) $ 215(1) $ -- $ -- $ -- $ 1,500 Operating expenses: Research and development............... 125 40 654 1,615 801 1,004 General and administrative............. 369 436 623 760 396 1,628 ----- ----- ------- ------- ------- ----------- Total operating expenses.......... 494 476 1,277 2,375 1,197 2,632 ----- ----- ------- ------- ------- ----------- Interest income............................. 13 4 153 253 138 77 ----- ----- ------- ------- ------- ----------- Net loss.................................... $(385) $(257) $(1,124) $(2,122) $(1,059) $(1,055) ----- ----- ------- ------- ------- ----------- ----- ----- ------- ------- ------- ----------- Pro forma net loss per common share(2)...... $ (0.17) $ (0.09) ------- ----------- ------- ----------- Pro forma weighted average common shares outstanding(2)............................ 12,199 12,329 ------- ----------- ------- ----------- </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 --------------------- AS ACTUAL ADJUSTED(3) ------ ----------- (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents(4)............................................................... $2,505 $50,584 Working capital............................................................................ 3,268 51,590 Total assets............................................................................... 4,903 52,685 Deficit accumulated during the development stage........................................... (4,943) (4,943) Total stockholders' equity................................................................. 3,649 51,674 </TABLE> - ------------ (1) Represents revenues from consulting activities in which the Company has ceased to engage. (2) Adjusted to give effect to the automatic conversion of all outstanding shares of Series A Preferred Stock (the 'Series A Preferred Stock') into Common Stock upon consummation of the Offering. See Note 2 to the Financial Statements. (3) As adjusted to give effect to the Offering at an assumed initial public offering price of $15.00 per share (after deducting the underwriting discounts and commissions and estimated offering expenses) and the receipt of the net proceeds therefrom. See 'Use of Proceeds' and 'Capitalization.'
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0000924919_rainforest_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000924919_rainforest_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..6eed1f28bb7582637b89d1151ed908cc97b7b12f
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000924919_rainforest_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the more detailed information and Financial Statements, including the notes thereto, appearing elsewhere in this Prospectus. All information in this Prospectus reflects the Company's three-for-two stock split effective July 1, 1996. Except as otherwise specified, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. THE COMPANY The Company owns and operates four large, high volume, themed restaurant/retail facilities under the name "Rainforest Cafe -- A Wild Place to Shop and Eat" (a "Rainforest Cafe" or "Unit"). The Company's Units are designed to provide a visually and audibly stimulating and entertaining rainforest environment that appeals to a broad range of customers of all ages. Each Rainforest Cafe consists of a dining area (the "Restaurant") and a retail area (the "Retail Village"). The Restaurant provides an attractive value to customers by offering a full menu of high quality food and beverage items, generous portions and excellent service in a unique and exciting environment. The Retail Village features apparel and gifts with the Rainforest Cafe logo and eight proprietary animal characters, and other items reflecting the rainforest theme. The Company currently operates Rainforest Cafes at the Mall of America in Bloomington, Minnesota, a suburb of Minneapolis, at the Woodfield Mall in Schaumburg, Illinois and Gurnee Mills in Gurnee, Illinois, both suburbs of Chicago, and at Walt Disney World Marketplace near Orlando, Florida. The Company is developing two additional Rainforest Cafes in 1996, at Tysons Corner Center I in McLean, Virginia, a suburb of Washington, D.C., and at Sawgrass Mills in Fort Lauderdale, Florida, both scheduled to open in the fourth quarter of 1996. The Company plans to open seven additional Rainforest Cafes during 1997. The Trump Taj Mahal Casino and Hotel Unit in Atlantic City, New Jersey and the Palisades Center Unit in West Nyack, New York are scheduled to open during the second quarter of 1997. The Company plans to open Units at Stratosphere in Las Vegas, Nevada, South Coast Plaza in Costa Mesa, California and The Source in Westbury, Long Island, New York in the third quarter of 1997. Units located at the MGM Grand Hotel and Casino in Las Vegas, Nevada and at Grapevine Mills near Dallas, Texas are scheduled to open during the fourth quarter of 1997. The Company plans to open six Units in 1998, including Units at Disney's Animal Kingdom near Orlando, Florida and at the Aventura Mall in Miami, Florida, both scheduled to open in the second quarter of 1998, and at Cherry Creek Mall in Denver, Colorado, which is scheduled to open during the third quarter of 1998. The Company has signed leases for all these Units, with the exception of the MGM Grand Hotel and Casino and the Aventura Mall Units, with respect to which the Company is negotiating leases. The Company is currently negotiating an exclusive license agreement with Empresas de Comunicacion y Entretenimiento ("ECE"), the owner and operator of seven Hard Rock Cafes, three Planet Hollywoods and an Official All-Star Cafe in Mexico, under which ECE will develop seven Rainforest Cafes in Mexico over a ten year period. Pursuant to this agreement, the Company will receive a non-refundable development fee at the time of execution of the agreement, per Unit development fees, and license fees based on a percentage of gross sales. The Company anticipates that the first Rainforest Cafe to be opened under the ECE license agreement will be in Cancun in the second quarter of 1997. The Company is also negotiating an exclusive license agreement with Glendola Leisure Limited ("Glendola"), a wholly owned subsidiary of the Foundation Group, a London-based hotel and restaurant operator, under which Glendola will develop five Rainforest Cafes in the United Kingdom and Ireland over a ten year period. Pursuant to this agreement, the Company will have the option to purchase up to 20% of the equity interest in any Unit developed by Glendola, will receive per Unit development fees, and will receive license fees based on a percentage of gross sales. The Company anticipates that the first Rainforest Cafe to be opened under this joint venture will be in London during the third quarter of 1997. The Company's rainforest theme is promoted by a simulated unique rainforest environment throughout the Unit. Each Rainforest Cafe features a visually and audibly exciting environment that includes a variety of live tropical birds, exotic fish in large, custom-designed aquariums, animated artificial animals and several sculpted banyan trees that create a canopy of foliage over diners and shoppers. The dynamic rainforest atmosphere is further enhanced by simulated thunder and lightning storms, tropical rain showers, waterfalls, mists that emanate from extensive rock formations, and specially-developed aromatic scents. This entertaining rainforest environment makes each Rainforest Cafe "A Wild Place to Shop and Eat." The Restaurant features an assortment of theme-titled, casual menu items including appetizers, salads, pastas, pizzas, sandwiches, burgers and full entree platters all served in generous portions. Lunch and dinner entrees range in price from $7.95 to $15.95, with an average check per person of approximately $11.80 for the twenty-six week period ended June 30, 1996. Each Rainforest Cafe also features a "Mushroom Bar," which, in addition to being a full bar, offers tropical blends of fruit and vegetable juices, and coffees. Alcoholic beverages are primarily served to complement meals and account for approximately 10% of total Restaurant sales. Management believes that its high quality food and customer service, combined with its exciting and entertaining rainforest theme concept, have resulted in a high level of repeat business. In order to enter the Restaurant, all customers must pass through the Unit's Retail Village. The Retail Village offers over 4,000 stock keeping units ("SKUs") and includes apparel and gifts with the Rainforest Cafe logo and other items reflecting the rainforest theme such as toys and educational games. The Company has also developed eight proprietary animal characters ("Animal Characters"), each with a distinct personality, as an additional method of merchandising its retail products. The Animal Characters appear on clothing and gift items. By offering items featuring the Rainforest Cafe logo or an Animal Character, the Company believes it is building "brand equity" in the Rainforest Cafe name that will allow it to attract more customers and to enhance its competitive retail position. For the twenty-six week period ended June 30, 1996, the Restaurants and the Retail Villages in the Company's three operating Units accounted for approximately 80% and 20% of the Units' total revenues, respectively. For the twenty-six week period ended June 30, 1996, the Mall of America Unit generated revenues of $5.2 million, operating income of $1.0 million, or 20.1% of revenues, and cash flow of $1.3 million, or 24.3% of revenues. Cash flow represents the Unit's operating income before depreciation and amortization. This 14,900 square foot Unit was developed at a cost of approximately $3.9 million, including costs related to the expansion of its Restaurant and net of landlord contributions. For this same period, the Woodfield Mall Unit generated revenues of $6.7 million, operating income of $1.2 million or 18.5% of revenues (before amortization of pre-opening costs), and cash flow of $1.6 million, or 23.8% of revenues. This 23,000 square foot Unit was developed at a cost of approximately $5.9 million, net of landlord contributions. Additionally, the Company incurred approximately $630,000 in pre-opening costs and purchased approximately $320,000 of inventory in connection with the Woodfield opening. The Gurnee Mills Unit opened June 2, 1996 and had revenues for the remainder of the second quarter of $918,000, which may not be indicative of future results. This 20,000 square foot Unit was developed at a cost of approximately $4.0 million, net of landlord contributions. Additionally, the Company incurred approximately $550,000 in pre-opening costs and purchased approximately $300,000 of inventory in connection with the Gurnee Mills opening. The Walt Disney World Marketplace Unit opened July 25, 1996 and had revenues for the four weeks ended August 25, 1996 of $2.2 million, which may not be indicative of future results. This 30,000 square foot Unit was developed at an estimated cost of approximately $11.5 million, net of landlord contributions. Additionally, the Company estimates that it incurred approximately $1.1 million in pre-opening costs and purchased approximately $500,000 of inventory in connection with the Disney opening. The Company expects that most of its future Units will be between 18,000 to 23,000 square feet and cost between $4.0 and $6.0 million, net of anticipated landlord contributions. The Company expects that pre-opening and inventory costs at its future locations will be approximately $600,000 and $400,000, respectively. The Company also expects to open selected Units, such as its planned Units at the Trump Taj Mahal Casino and Hotel, the MGM Grand Hotel and Casino and Disney's Animal Kingdom, which may cost significantly more. The Company was incorporated in 1994 under the laws of the State of Minnesota. Its executive offices are located at 720 South Fifth Street, Hopkins, Minnesota 55343, and its telephone number is (612) 945-5400. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company.............. 2,550,000 shares Common Stock offered by the Selling Shareholders................................... 200,000 shares Common Stock to be outstanding after the offering....................................... 16,487,555 shares(1) Use of proceeds.................................. To finance the development and opening of additional Rainforest Cafes, and to provide working capital. See "Use of Proceeds." Nasdaq National Market Symbol.................... RAIN </TABLE> - ------------------------- (1) Does not include: (i) 1,500,000 shares reserved for issuance under the Company's 1995 Stock Option and Compensation Plan, of which options to purchase 1,036,244 shares are outstanding; (ii) options to purchase 275,001 shares of Common Stock issued to an officer employee and non-officer employee of the Company; (iii) 137,500 shares reserved for issuance upon exercise of Directors' Stock Options (as defined herein); and (iv) 225,000 shares reserved for issuance under the Company's 1996 Employee Stock Purchase Plan, none of which shares have been issued. SUMMARY OF SELECTED FINANCIAL DATA <TABLE> <CAPTION> TWENTY-SIX FEBRUARY 3, 1994 WEEKS ENDED (INCEPTION) THROUGH YEAR ENDED ------------------- JANUARY 1, DECEMBER 31, JULY 2, JUNE 30, 1995 1995 1995 1996 -------------------- ------------ ------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA:(1) Revenues: Restaurant sales.............................. $ 1,337 $9,979 $ 3,312 $ 10,312 Retail sales.................................. 729 3,472 1,182 2,502 --------- ------- -------- -------- Total revenues............................. 2,066 13,451 4,494 12,814 Restaurant and retail operating income.......... (19) 2,166 616 2,176 Income (loss) before income taxes and extraordinary item............................ (1,628) 1,169 2 2,131 Income (loss) before extraordinary item......... (1,628) 1,169 2 1,381 Extraordinary item(2)........................... -- 1,053 1,053 -- --------- ------- -------- -------- Net income (loss)............................... $ (1,628) $ 116 $(1,051) $ 1,381 Net income (loss) per common share before extraordinary item............................ $ (0.46) $ 0.16 $ 0.00 $ 0.10 Net income (loss) per common share.............. $ (0.46) $ 0.02 $ (0.14) $ 0.10 Weighted average shares outstanding............. 3,543 7,312 7,630 14,027 </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 ---------------------------- ACTUAL AS ADJUSTED(3) -------- -------------- (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Working capital................................................... $ 74,187 $ Total assets...................................................... 114,986 Total liabilities................................................. 11,784 Shareholders' equity.............................................. 103,202 </TABLE> - ------------------------- (1) The Mall of America Unit began operations on October 3, 1994. Prior thereto, the Company had no operating Units or revenues. The Mall of America Unit was the only operating Unit until October 20, 1995, when the Woodfield Mall Unit began operations. The Company's third Unit opened at Gurnee Mills on June 2, 1996. The Company's fourth Unit opened at Walt Disney World Marketplace on July 25, 1996. (2) On April 7, 1995, the holders of $1,222,500 of promissory notes converted such notes into shares of Common Stock at a conversion price of $2.67 per share. The Company recorded the conversion as an extinguishment of debt which resulted in an extraordinary charge to earnings of $1,053,128, or $0.14 per share, at the date of conversion. (3) As adjusted to give effect to the sale by the Company of 2,550,000 shares of Common Stock at an assumed public offering price of $ per share and the application of the net proceeds therefrom.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0000925072_innoveda_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000925072_innoveda_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..6bf6cd77b7ffe9a217b6e8bb20b4042d3533d61d
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+++ b/parsed_sections/prospectus_summary/1996/CIK0000925072_innoveda_prospectus_summary.txt
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+SUMMARY This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. The following summary is qualified in its entirety by the more detailed information, including "Risk Factors," and the consolidated financial statements and notes thereto, appearing elsewhere in this Prospectus. THE COMPANY Summit Design, Inc. ("Summit" or the "Company") is a leading provider of graphical design entry and verification software tools and design to test software tools. The Company's products assist integrated circuit ("IC") system, design and test engineers in meeting the market demands for rapid time to market, increased product functionality and lower product cost. Summit's graphical Systems Level Design Automation ("SLDA") products enable IC systems and design engineers to create and verify IC designs using familiar graphical paradigms such as block diagrams, state machines, flow charts or truth tables rather than the less intuitive textual hardware description language ("HDL") code required by synthesis and simulation tools. The Company's SLDA products automatically generate optimized HDL descriptions from graphical designs, eliminating time consuming and error prone manual entry of HDL code. The Company's Design to Test products provide graphical simulation test data creation, graphical simulation results analysis and automatic manufacturing test program generation. Faced with a scarcity of qualified design and test engineers and the need to improve time to market given shorter product lifecycles, corporations with IC design requirements need to increase design productivity to keep pace with the increasing complexity of IC designs and the growth in the number of new IC designs starts. Electronic design automation ("EDA") software tools have enabled engineers to accelerate IC development schedules and create more complex chips. However, IC development productivity has continued to lag advances in fabrication technology in part because these tools require circuits to be described in a textual HDL. IC design engineers, who typically create a design using hand-drawn graphical paradigms, must manually translate their hand-drawn designs into HDL code. This process is time-consuming and error prone, and requires the engineer to master a complex HDL programming language. The complexity of the textual HDL code also inhibits the ability of design teams to communicate the functional intent of the code and to reuse the code or retarget the design in future projects. In addition, most manufacturing test program generation software tools require IC test engineers to work with complex textual test programs and related data and to debug these programs on the actual manufacturing test equipment used to test the ICs, consuming valuable equipment process time. Summit's SLDA products allow engineers to graphically design and verify ICs using familiar graphical paradigms and automatically produce a synthesis-ready HDL design, thus eliminating manual textual coding in an HDL. Graphical IC designs are more easily debugged and communicated among IC design teams, facilitate review by engineering management and can be more easily modified and reused in future developments. These products optimize and can automatically re-target the design output for nearly all of the EDA industry's standard synthesis and simulation tools. The Company's Design to Test tools allow design and test engineers to graphically develop simulation test pattern and timing data, analyze the complex and voluminous simulation results and automatically generate manufacturing test programs. These graphical tools allow the engineer to check the IC design for manufacturing testability prior to release from the design cycle, minimizing the need to re-design the IC to improve testability. Summit's Visual Testbench product, released in the fourth quarter of 1995, integrates the design and test processes and allows the design engineer and test engineer to cooperatively develop simulation and manufacturing test programs. The Company employs direct sales, distributors and telesales to target individual customers and product market segments. The Company's end-user customers include companies in a wide range of industries, including semiconductor devices, semiconductor test equipment, telecommunications, computer/peripherals, consumer electronics and aerospace/defense. The Company has installed more than 1,300 seats of its SLDA tools in more than 125 companies, of which more than 100 companies have entered into support contracts. In addition, the Company has more than 250 active installations of its Design to Test products. THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Company........................ 2,000,000 shares Common Stock Offered by the Selling Stockholders........... 2,000,000 shares Common Stock Outstanding after the Offering................... 13,319,204 shares (1) Use of Proceeds................ Working capital and general corporate purposes and to repay certain outstanding indebtedness. See "Use of Proceeds." Nasdaq National Market symbol.. SMMT </TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA (In thousands, except per share data) <TABLE> <CAPTION> NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------- ---------------- 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA (2): Revenue............................ $ 7,240 $12,982 $14,070 $ 9,742 $14,355 Income (loss) from operations...... (1,503) (1,544) (2,576) (2,774) 1,313 Net income (loss).................. (1,622) (2,046) (3,151) (3,216) 1,023 Pro forma net income (loss) per share (3)......................... $ (0.14) $ (0.17) $ (0.26) $ (0.27) $ 0.09 Pro forma number of shares used in per share calculation (3)......... 11,569 11,870 11,900 11,816 11,978 </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1996 ---------------------- ACTUAL AS ADJUSTED (4) ------ --------------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................ $2,459 $15,770 Working capital.......................................... 32 14,148 Total assets............................................. 9,792 22,062 Long-term obligations, less current portion.............. 969 748 Total stockholders' equity............................... 1,732 15,362 </TABLE> - -------- (1) Based on the number of shares outstanding as of September 30, 1996. Excludes 880,034 shares issuable upon exercise of options outstanding as of September 30, 1996 at a weighted average exercise price of $1.90 per share. See "Capitalization." (2) The results of SEE Technologies are included in the Consolidated Financial Statements of the Company commencing January 1, 1994. (3) See Note 1 of Notes to Consolidated Financial Statements for an explanation of the determination of shares used in computing pro forma net income (loss) per share. (4) Adjusted to give effect to the sale of 2,000,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $8.00 per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000925172_mkr_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000925172_mkr_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Consolidated Financial Statements, including the Notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, all information set forth herein assumes that the Underwriters' over-allotment option will not be exercised. Unless the context otherwise requires, all references herein to the "Company" or "Marker" include Marker International and its subsidiaries. Prospective purchasers should review carefully the information set forth under "Risk Factors." THE COMPANY Marker International is the leading marketer of alpine ski bindings in the United States and Germany and one of the three largest in the world. Since being acquired in 1984 by Henry E. Tauber, the Company's Chairman and President, Marker has focused its strategy on developing strong brand awareness and loyalty through high quality, technologically advanced design, production and sales capabilities. From 1984 through the 1996 fiscal year, sales have grown from $16.0 million to $87.9 million, a compounded annual growth rate of approximately 15%. Marker's market share has also increased as industry surveys currently estimate the Company's share of the United States, German and Japanese ski binding markets at more than 45%, 40% and 16%, respectively. Having established itself as a leader in the alpine ski binding business, the Company believes that it is well positioned to diversify its business into other winter sports markets. In seeking such diversification, the Company expects to capitalize on its existing design and production capabilities as well as its distribution and sales organization. Whether in its traditional alpine ski binding markets or in newer markets, the Company's objective is to produce and market products recognized for high-quality and high-performance. THE SNOWBOARD INDUSTRY The Company views the snowboard industry as a winter sports market with significant growth potential. Snowboarding is a relatively new sport that began to attract a broader following in the early 1990's and has continued to grow steadily to date. This growth in overall popularity has led to an increase in the sales of snowboarding equipment. According to the International Snowboard Federation, 1.27 million snowboards were sold to retailers in the 1995/96 snowboard season, which ended March 31, 1996. The Company believes that snowboarding is developing from a sport for young males between the ages of 12 and 24 into a mainstream sport that has growth possibilities with respect to a wide range of consumers. One indication of the increased acceptance of the sport is that snowboarding will be included for the first time as a full medal sport in the 1998 Olympic Winter Games in Nagano, Japan. The Company expects that the increased exposure of potential consumers to snowboarding through the 1998 Olympics and, later, the 2002 Olympic Winter Games in Salt Lake City, Utah, will further enhance the popularity of the sport. DNR SPORTSYSTEM LTD. To enter the snowboard market, the Company acquired, in June 1995, through its wholly-owned Swiss subsidiary, Marker AG, a 25% equity interest in Switzerland-based DNR Sportsystem Ltd. ("DNR Sportsystem"), a leading developer, marketer and distributor of snowboards, snowboard boots, snowboard bindings and other related products. The Company believes that established snowboard companies, such as DNR Sportsystem, with solid technological and production capabilities and distribution and sales organization, are well positioned to capitalize on the growth potential in the snowboard industry. To increase its ownership interest in DNR Sportsystem, the Company will use substantially all of the proceeds of this offering to satisfy the DNR Equity Purchase Notes (as defined) issued in connection with the Company's recent purchase of an additional 55% interest in DNR Sportsystem, thereby increasing the Company's ownership to 80% (the "DNR Equity Purchase"). In February 1996, the Company, in conjunction with DNR Sportsystem and Tecnica S.p.A., a leading Italian ski and snowboard boot manufacturer ("Tecnica"), introduced the DNR Soft Boot/Step-in Binding Interface SystemTM, an innovative snowboard boot/binding system (the "DNR Interface System"). The Company believes the DNR Interface System may have the potential to become a technology standard in the newly developing step-in binding segment of the snowboard industry. The Company has co-developed the new DNR Interface System by utilizing its technological expertise in alpine ski bindings. Designed specifically for the needs of snowboard riders, the goal of the new DNR Interface System is to significantly improve snowboard rider performance while offering step-in/step-out convenience. The Company expects that the advanced design and quality of the new system combined with the Company's strong distribution capabilities should permit the system to be readily integrated into the marketplace. To date, the Company has received a substantial number of orders for the new DNR Soft Boot/Step-in Binding Interface SystemTM for delivery in the upcoming 1996/97 snowboard season. DNR Sportsystem, co-founded in 1990 by its Chairman and Chief Executive Officer, Lucio Roffi, had net sales of approximately $44.0 million and net income of approximately $5.6 million in its last fiscal year which ended December 31, 1995, as compared to net sales of approximately $26.5 million and net income of approximately $3.8 million in its fiscal year ended December 31, 1994. Based on information from the International Snowboard Federation and other industry sources, the Company estimates that, during the 1995/96 snowboard season, DNR Sportsystem's share of the snowboard market was approximately 13% worldwide and, in its largest markets, located in Asia, Europe and North America, was approximately 13%, 10% and 14%, respectively. DNR Sportsystem, which presently markets its products under the trade names of "DNR(R)," "Santa Cruz(R)," and "Sims(R)," receives approximately 95% of its revenues from the sales of its hard goods merchandise, which includes snowboards, snowboard boots and snowboard bindings. The Company believes that DNR Sportsystem is a well established, well managed company which emphasizes high quality products and service and which, therefore, has significant synergies with the Company's own business strategies. In this regard, the Company closed the DNR Equity Purchase on June 26, 1996 by issuing a short-term promissory note to each of the selling equity holders (such notes, collectively, the "DNR Equity Purchase Notes"). The DNR Equity Purchase Notes will become due and payable upon the earlier of (i) August 31, 1996 and (ii) the consummation of this offering. The Company will use substantially all of the net proceeds of this offering, estimated to be $14.4 million, to pay the DNR Equity Purchase Notes. To the extent the proceeds of this offering will be insufficient to enable the Company to pay the entire $19.4 million purchase price for the additional 55% interest, the Company will pay the difference with funds borrowed through its short-term credit facilities. DNR NORTH AMERICA In December 1995, the Company announced plans to form, together with DNR Sportsystem and Gregor Furrer & Partner Holding AG ("Gregor Furrer"), which is the parent of the German ski and snowboard manufacturer, Volkl GmbH ("Volkl"), a joint venture company named DNR North America, LLC ("DNR North America"). DNR North America will be organized as a Delaware limited liability company and will develop and manufacture snowboards at a state of the art snowboard production facility currently being built in Salt Lake City, Utah (such facility, the "DNR North America Production Facility"). DNR North America will be 60% directly owned by the Company, 25% by DNR Sportsystem (thereby giving the Company an additional 20% indirect interest through its ownership in DNR Sportsystem) and 15% by Gregor Furrer. The Company believes that DNR North America constitutes an integral component of the Company's plans to expand into new markets. The Company, in collaboration with its joint venture partners, is currently building the state of the art DNR North America Production Facility which is scheduled to begin production in October 1996. The 56,000 square foot facility, which will be leased by the Company to DNR North America, is designed to eventually produce up to 200,000 snowboards annually and will also be the location of the new DNR North America snowboard technology center (the "DNR Snowboard Technology Center"). The DNR Snowboard Technology Center will focus on areas of advanced research and development in snowboard technologies, boot/board interface, and product testing procedures and will offer its services to the industry in order to assist in the development of standards and practices. The Company expects that the DNR North America Production Facility will produce high quality, technologically advanced snowboards that will be distributed by DNR Sportsystem in addition to snowboards that will be produced by Volkl, the current exclusive supplier of snowboards to DNR Sportsystem. SKI BINDINGS In addition to its new growth strategies, the Company continues to focus on its traditional core markets. The Company's ski binding product line consists of more than 30 models of ski bindings designed for racers, other high-performance skiers and recreational skiers of all ages. Many Olympic ski medalists and World Cup ski champions, with whom Marker has entered into compensatory relationships, endorse and use Marker ski bindings. As a result of the Company's emphasis on research and development of advanced ski binding technology, the Company has a worldwide total of over 225 patents and patent applications covering various aspects of its technology. In 1995, the Company introduced a second generation of its patented Selective ControlTM technology, the M51 Turbo SCTM and M41 SC2TM. These bindings, exclusively from Marker, are designed for skiers of all levels. They feature a patented Dynamic StabilizerTM, Carbon Composite Torsion BarTM base and exclusive Edge Pressure SystemTM and are unique in the industry because they offer the only adjustable interface system skiers can easily change on the mountain to accommodate different snow conditions, speeds and varying terrain. The system is designed to provide a better skiing experience, make turning easier, improve control, and help all skiers attain new levels of performance and confidence. The system has received critical praise from ski publications and the Turbo SC was named a "break-through" product by, and was the only binding to receive a Gold Medal rating in, the Buyer's Guide '96 published in the September 1995 issue of Ski Magazine in the United States. The Company believes Marker ski bindings are superior to those of its competitors due to the Company's advanced proprietary features. All current Marker bindings feature TwincamTM and Gliding AFDTM technology. The Company developed and patented the TwincamTM and Gliding AFDTM technology, which, together, tightly couple the ski boot and binding toe-piece, resulting in a binding system that is designed not to be affected by contamination between the ski boot and binding. This provides skiers with reliable and consistent retention and release performance under actual ski conditions. In addition, certain models of Marker bindings also feature either the Company's Full-SpectrumTM or V-TECHTM technology. These technologies allow the ski boot to be released from a binding at any angle in a 180 degree full spectrum, thereby increasing skier safety. The Company is a holding company which operates through its subsidiaries, Marker Deutschland GmbH ("Marker Germany"), Marker USA, Marker Japan, Ltd. ("Marker Japan"), Marker Ltd., Marker Austria GmbH ("Marker Austria"), Marker Canada, Ltd. ("Marker Canada") and Marker AG which is located in Switzerland ("Marker Switzerland"). Substantially all of the Company's ski bindings and snowboard bindings are manufactured by Marker Germany, which also distributes bindings in Germany, to subsidiaries of the Company and to independent distributors in countries where the Company does not have a distribution subsidiary. Marker USA and Marker Japan each has its own sales force and marketing department for sales and marketing of Marker bindings and related parts directly to retailers in the United States and to both retailers and wholesalers in Japan, respectively. Marker Austria distributes the Company's ski bindings into Austria through an independent sales force. Marker Canada distributes the Company's ski bindings into Canada which are then sold through an independent distributor. Marker Switzerland operates primarily as a holding company which owns an unconsolidated 25% interest in DNR Sportsystem (which is included in the aggregate 80% interest in DNR Sportsystem held by the Company). Marker Ltd., the Company's soft goods subsidiary, designs, distributes and markets to retailers the Company's clothing, gloves and luggage products for skiing and other recreational activities. Marker Ltd. products are sold mainly in the United States. Henry E. Tauber, the Company's Chairman of the Board and President, is actively involved in the promotion and development of the sport of skiing. Mr. Tauber is a member of the boards of directors of the United States Ski Association and the United States Ski Team. Mr. Tauber is also a Vice President and Council Member of the International Ski Federation (FIS), the governing body for international ski racing. The Company's principal executive offices are located at 1070 West 2300 South, Salt Lake City, Utah 84119 and its telephone number at that address is (801) 972-2100. THE OFFERING <TABLE> <CAPTION> <S> <C> Common Stock offered by the Company.......... 2,500,000 shares Common Stock offered by the Selling Stockholder.................................. 900,000 shares Common Stock to be outstanding after the offering..................................... 10,949,127 shares(1) Use of proceeds.............................. Substantially all of the net proceeds of this offering, estimated to be $14.4 million, will be used to satisfy the DNR Equity Purchase Notes issued in connection with the Company's recent acquisition of an additional 55% interest in DNR Sportsystem, a company in which the Company now holds an 80% equity interest. To the extent that the proceeds of this offering are insufficient to enable the Company to pay the entire $19.4 million purchase price for the additional 55% interest, the Company expects to pay the difference with funds borrowed through its short-term credit facilities. Nasdaq National Market symbol................ "MRKR" </TABLE> - ------------ (1) Based on the number of shares outstanding as of May 31, 1996. Excludes 510,000 shares of Common Stock subject to an over-allotment option granted to the Underwriters. Excludes shares of Common Stock that may be acquired within 60 days of May 31, 1996 pursuant to management stock options. SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA AND NOTES) <TABLE> <CAPTION> YEAR ENDED MARCH 31, -------------------------------------------------------------- 1996 ---------------------- 1992 1993 1994 1995 ACTUAL PRO FORMA(2) ------- ------- ------- ------- ------- ------------ <S> <C> <C> <C> <C> <C> <C> (UNAUDITED) <CAPTION> CONSOLIDATED INCOME STATEMENT DATA: <S> <C> <C> <C> <C> <C> <C> Net sales................................ $65,916 $84,920 $82,637 $83,962 $87,911 $131,949 ------- ------- ------- ------- ------- ------------ Gross profit............................. 25,061 29,383 33,065 35,084 35,303 50,293 Operating expenses....................... 19,649 22,824 25,846 26,167 29,479 38,555 ------- ------- ------- ------- ------- ------------ Operating income......................... 5,412 6,559 7,219 8,917 5,824 11,738 Other expense, net....................... (4,497) (4,832) (3,490) (3,415) (1,526) (3,122) ------- ------- ------- ------- ------- ------------ Income before income taxes, minority interest and cumulative effect of accounting change........................ 915 1,727 3,729 5,502 4,298 8,616 Provision for income taxes............... (103) (133) (510) (1,395) (609) (2,156) Minority interest........................ -- -- -- -- -- (1,117) ------- ------- ------- ------- ------- ------------ Income before cumulative effect of accounting change...................... 812 1,594 3,219 4,107 3,689 5,343 Cumulative effect of accounting change, net of tax............................. -- -- -- -- (266) (266) ------- ------- ------- ------- ------- ------------ Net income............................... $ 812 $ 1,594 $ 3,219 $ 4,107 $ 3,423 $ 5,077 ------- ------- ------- ------- ------- ------------ ------- ------- ------- ------- ------- ------------ Net income applicable to common shares(1)................................ $ 70 $ 900 $ 1,803 $ 3,653 $ 3,423 $ 5,077 ------- ------- ------- ------- ------- ------------ ------- ------- ------- ------- ------- ------------ Income per common share before cumulative effect of accounting change(1)........... n/a n/a $ 0.31 $ 0.50 $ 0.43 $ 0.48 ------- ------- ------- ------------ ------- ------- ------- ------------ Net income per common share(1)........... n/a n/a $ 0.31 $ 0.50 $ 0.40 $ 0.46 ------- ------- ------- ------------ ------- ------- ------- ------------ Weighted average common shares outstanding.............................. n/a n/a 5,785 7,368 8,595 11,095 ------- ------- ------- ------------ ------- ------- ------- ------------ </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 ------------------------- PRO FORMA ACTUAL AS ADJUSTED(3) ------- -------------- (UNAUDITED) <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Current assets....................................................... $64,592 $ 79,714 Total assets......................................................... 87,265 115,792 Current liabilities.................................................. 51,045 63,489 Long-term debt....................................................... 15,452 15,452 Minority interest.................................................... -- 1,664 Total shareholders' equity........................................... $20,768 $ 35,187 </TABLE> - ------------ (1) Net income applicable to common shares for fiscal years 1992 and 1993 is based upon net income less preferred stock dividends of $742,000 and $694,000, respectively. Net income applicable to common shares for fiscal years 1994 and 1995 reflects the following transactions as if they occurred on April 1, 1993 (the beginning of fiscal 1994): (a) the exchange of Series A preferred stock (including the premium thereon) for 378,572 shares of Common Stock resulting in the elimination of dividends totaling approximately $387,000 and $87,000 for the fiscal years ended March 31, 1994 and 1995, respectively, and (b) the exchange of Series A-1, A-2, and A-3 redeemable preferred stock for $19 million aggregate principal amount of Series A-1, A-2 and A-3 bonds resulting in the treatment of dividends totaling approximately $1,416,000 and $454,000 as interest expense net of the related tax effect for the fiscal years ended March 31, 1994 and 1995, respectively, and (c) a 3,604 to 1 stock split of the Company's outstanding Common Stock. (2) Gives effect to the acquisition of a 25% equity interest in DNR Sportsystem which occurred in June 1995 and the acquisition of an additional 55% equity interest in DNR Sportsystem which occurred in June 1996, assuming such transactions had occurred as of April 1, 1995. See the Company's Unaudited Pro Forma Condensed Consolidated Financial Statements commencing on page 20. The Company will use proceeds from this offering to satisfy the DNR Equity Purchase Notes issued in connection with the DNR Equity Purchase. (3) Gives effect to the additional acquisition of DNR Sportsystem described in (2) above as if it had occurred on March 31, 1996. The additional acquisition will be funded with (i) assumed net proceeds of approximately $14.4 million from the sale by the Company of 2,500,000 shares of Common Stock offered hereby and (ii) short-term borrowings of approximately $5.0 million. See the Company's Unaudited Pro Forma Condensed Consolidated Financial Statements commencing on page 20.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000925744_chancellor_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000925744_chancellor_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Certain capitalized terms used in this Prospectus are defined herein under the captions "Certain Definitions and Market and Industry Data" and "Description of the New Preferred Stock and Exchange Debentures -- Certain Definitions." Unless the context otherwise requires, references herein to the New Preferred Stock following the consummation of the Exchange Offer assume that all outstanding shares of Old Preferred Stock are tendered and exchanged for shares of New Preferred Stock in the Exchange Offer. THE COMPANY The Company is one of the leading "pure play" radio broadcasting companies in the United States. Upon completion of its pending acquisitions, station swaps and divestitures (collectively, the "Pending Transactions"), the Company will own and operate 41 radio stations (27 FM and 14 AM) located in 13 of the 40 largest MSAs in the country, including five of the top ten MSAs. The Company is committed to acquiring and operating radio stations that management believes will benefit from its strategies to maximize broadcast cash flow by increasing revenues and controlling operating expenses. On a pro forma basis, after giving effect to the Shamrock Acquisition (as defined), the Denver Exchange (as defined) and the Pending Transactions as though all such transactions had occurred on January 1, 1995, the Company would have had net revenue and broadcast cash flow of $181.6 million and $68.4 million, respectively, for the year ended December 31, 1995. The Company focuses on owning and operating radio stations in the top 40 U.S. markets, which account for a disproportionately large percentage of radio advertising revenue. The Company believes that the large revenue base in these markets generally enables operators to achieve a greater degree of profitability than operators in smaller markets. The Company also believes that because it employs a variety of programming formats, including country, oldies, news/talk, adult contemporary, progressive album rock, contemporary hit radio, sports and classical, it is less susceptible to changes in listening preferences. Furthermore, management believes that the number and diversity of its stations and markets reduces the Company's dependence upon any local economy or advertiser category. For the year ended December 31, 1995, on a pro forma basis after giving effect to the Shamrock Acquisition, the Denver Exchange and the Pending Transactions, no single market in which the Company operates would have provided more than 12.2% of the Company's revenues. As the following chart illustrates, upon completion of the Pending Transactions, the Company's portfolio will consist of 41 stations, including AM and FM duopolies in San Francisco and Minneapolis-St. Paul, and FM duopolies in Long Island, Denver, Cincinnati, Sacramento and Orlando: <TABLE> <CAPTION> NUMBER OF STATIONS 3-YEAR ------------------------ METROPOLITAN MARKET RADIO OWNED PENDING STATISTICAL REVENUE COMPOUND ---------- ---------- MARKET AREA RANK ANNUAL GROWTH RATE AM FM AM FM - -------------------------------------------------------- ------------ ------------------ --- --- --- --- <S> <C> <C> <C> <C> <C> <C> New York................................................ 1 8.8% -- 1 -- -- Los Angeles............................................. 2 6.0 1 1 -- -- San Francisco........................................... 4 5.8 2 2 -- -- Atlanta................................................. 9 17.2 -- 1 -- -- Riverside-San Bernardino................................ 10 10.0 1 1 -- -- Minneapolis-St. Paul(2)................................. 12 9.0 2 3 -- -- Nassau-Suffolk(2)....................................... 14 3.5 1 1 1 3 (Long Island, N.Y.) Phoenix................................................. 17 12.2 -- 1 -- -- Pittsburgh(2)........................................... 19 6.8 1 1 -- -- Denver.................................................. 26 13.2 1 4 -- -- Cincinnati.............................................. 30 9.5 1 2 1 -- Sacramento.............................................. 34 7.4 1 2 1 -- Orlando................................................. 40 11.8 -- 1 -- 3 </TABLE> - --------------- (1) For the year ended December 31, 1995. (2) Includes one AM/FM simulcast combination. OPERATING STRATEGY The Company's senior management team, led by Steven Dinetz, its President and Chief Executive Officer, has extensive experience in acquiring and improving the operations of radio stations and radio station groups. Management's primary operating strategy is to maximize station revenue through the development of large, focused local sales forces dedicated to obtaining the largest possible share of local radio advertising revenue in each market and the use of effective inventory management systems. Management also seeks to increase audience share by using targeted programming and active promotional and marketing efforts. Management complements its revenue and programming strategies by strictly controlling costs and developing skilled, decentralized local management and staff whose compensation is linked directly to station operating performance. Prior to the February 14, 1996 Shamrock Acquisition, the Company had completed three acquisitions of radio stations or radio station groups, and in each case had employed its operating strategy to improve the revenues and broadcast cash flows of these acquired stations. The Company completed the first of these acquisitions in January 1994 by purchasing KFBK-AM and KGBY-FM in Sacramento. Since this acquisition, the Company has changed these stations' sales management, separated and increased the size of the stations' local sales forces, improved inventory management systems and eliminated unprofitable programming. These strategies helped to increase broadcast cash flow for these stations for the year ended December 31, 1994 by 32.9% over 1993 and for the year ended December 31, 1995 by 29.5% over 1994. In October 1994, the Company completed its second acquisition by acquiring the 11 stations comprising the American Media Station Group. Since that acquisition, the Company has undertaken several initiatives to maximize the operating performance of these stations, including increasing the size of local sales forces, changing formats, reducing costs and reprogramming certain simulcast stations. As a result, for the year ended December 31, 1995, the American Media Station Group's net revenue increased 6.3%, from $40.0 million to $42.5 million, and broadcast cash flow increased 12.5%, from $16.0 million to $18.0 million, over 1994. Broadcast cash flow margins improved to 42.3% for 1995 compared to 39.9% for 1994. In February 1995, the Company entered into a local marketing agreement ("LMA") with respect to, and in July 1995 subsequently acquired, KDWB-FM in Minneapolis-St. Paul, which provided the Company with an FM duopoly in the Minneapolis-St. Paul market. As a result of the reconfiguration of KDWB's sales management, better utilization of its available inventory and cost savings realized by the Company's management during the period the LMA was in effect, KDWB's broadcast cash flow margin for the year ended December 31, 1995 was 27.5% as compared to 21.4% for 1994. On February 14, 1996, the Company acquired Shamrock Broadcasting (the "Shamrock Acquisition"), the owner and operator of 19 stations (12 FM and 7 AM) in 10 of the largest markets in the United States, including stations in 7 of the top 10 MSAs. The stations acquired from Shamrock (the "Shamrock Stations") historically were operated, on average, at substantially lower broadcast cash flow margins and had lower market revenue shares than the Company's stations. Management intends to increase the revenues of the 16 Shamrock Stations it programs and operates (the "Core Shamrock Stations") through improved local and national sales operations, programming improvements and more focused marketing strategies. In addition, the Company believes that it can apply its cost control strategies to the Core Shamrock Stations to improve their broadcast cash flow margins. In this regard, for the year ended December 31, 1995, the Company has identified $11.4 million of pro forma cost savings at the Core Shamrock Stations resulting from the elimination of redundant operating expenses, including the elimination of certain station management positions, the standardization of employee benefits and compensation practices and the implementation of operating strategies currently utilized by the Company's management. Had these savings been realized on January 1, 1995, they would have increased the broadcast cash flow margins of the Core Shamrock Stations, without giving effect to any potential increases in revenues, for the year ended December 31, 1995 from 24.6% to 38.4%. ACQUISITION STRATEGY The Company's acquisition strategy is to purchase radio stations or radio station groups operating in top 40 markets that possess programming, demographic, technical and operating attributes that management believes it can exploit. The Company's primary focus is the acquisition of multiple stations in a single market. Management believes that the ownership of multiple stations in a market benefits radio operators by giving them greater knowledge of the radio broadcasting and advertising environment in that market. In addition, multiple station ownership enables operators to reduce costs through the consolidation of administrative, engineering and management functions and to reduce the risk of direct format competition. As part of this strategy, the Company will explore options, such as station-for-station exchanges with other operators, to increase the Company's presence in those markets where management believes there may be an opportunity to create or otherwise attain multiple station ownership. It is the Company's practice to seek to enter into LMAs in order to sell advertising time and provide other services to the stations its has contracted to purchase during the pendency of an acquisition. The Company has also entered into similar arrangements with respect to stations it is divesting pursuant to which it outsources limited functions of these stations to the future acquiror. Management believes that LMAs, when the Company is the buyer, provide an opportunity to introduce its operating strategies at an earlier time than in traditional acquisitions and, when the Company is the seller, enable management to focus its efforts on stations that are more important to the Company's ongoing strategy. RECENT DEVELOPMENTS On February 14, 1996, the Company completed the Shamrock Acquisition for approximately $408.0 million, including acquisition costs. Simultaneously with the Shamrock Acquisition, (i) Chancellor completed its $154.1 million initial public offering (the "Initial Public Offering") of shares of its Class A Common Stock ("Class A Common Stock"), (ii) Chancellor Radio Broadcasting entered into a new, $135 million credit agreement (the "Credit Agreement"), (iii) Chancellor Radio Broadcasting issued and sold $200.0 million aggregate principal amount of its 9 3/8% Senior Subordinated Notes due 2004 (the "Notes") and (iv) Chancellor Radio Broadcasting issued and sold $100.0 million initial liquidation preference of exchangeable redeemable preferred stock (the "Acquisition Preferred Stock") and, in connection therewith, Chancellor issued and sold 742,192 shares of Class A Common Stock to the purchasers of the Acquisition Preferred Stock (the "Preferred Stock Financing"). The Acquisition Preferred Stock was partially repurchased and the remainder redeemed with the proceeds of the sale of Old Preferred Stock. In addition, in connection with the Shamrock Acquisition and the financing thereof, Hicks, Muse, Tate & Furst Equity Fund II, L.P. ("HM Fund II"), an affiliate of Hicks, Muse, Tate & Furst Incorporated ("Hicks Muse"), advised the Company that, on or before September 30, 1996, it would sell all of its capital stock of its affiliate, HMW Communications, Inc. ("HMW"), or would cause HMW to sell all or substantially all of its assets (which consisted primarily of six radio broadcast stations), and that it or HMW would invest the net proceeds in Class A Common Stock (the "Hicks Muse Equity Investment"). HM Fund II has further agreed that, to the extent that such net proceeds are less than $23.0 million, it will purchase additional shares of Class A Common Stock in order that, in the aggregate, Chancellor will receive net proceeds of $23.0 million through the Hicks Muse Equity Investment. In June 1996, HMW effected the sale of five of its radio stations to an affiliate of SFX and concurrently entered into an asset purchase agreement with respect to the sale of its remaining station. HM Fund II has advised Chancellor that it intends to consummate the Hicks Muse Equity Investment on or about August 9, 1996. The proceeds from the Hicks Muse Equity Investment will be contributed by Chancellor to the capital of Chancellor Radio Broadcasting and are expected to be used to fund part of the cash purchase price of the Pending Transactions. On July 31, 1996, the Company exchanged (the "Denver Exchange") KTBZ-FM in Houston, plus approximately $6.0 million in cash, for Secret's KALC-FM and KIMN-FM (the "Denver Stations") in Denver, Colorado. The Company had been providing certain services to the Denver Stations pursuant to an LMA since April 1, 1996. In January 1996, the Company entered into an agreement (the "Detroit Option Agreement") with Evergreen pursuant to which the Company granted Evergreen the option to buy, and Evergreen granted the Company the option to sell, WWWW-FM and WDFN-AM in Detroit (the "Detroit Stations") for $30.0 million in cash (the "Detroit Disposition"). Pursuant to the Detroit Option Agreement, the Company outsourced to Evergreen certain limited functions of the Detroit Stations in exchange for an annual fee of $2.6 million to be paid to the Company. The Company anticipates that it will enter into an definitive purchase agreement with Evergreen Media with respect to the sale of the Detroit Stations. The proceeds of the Detroit Disposition are expected to be used to fund part of the cash purchase price for the Pending Transactions. On May 15, 1996, the Company entered into an agreement to acquire eight Florida radio stations from Omni for an aggregate price of $178.0 million, including $163.0 million of cash and $15.0 million of Chancellor's Class A Common Stock (the "OmniAmerica Acquisition"). On June 24, 1996, the Company entered into a letter of intent with American Radio under which, subject to negotiation of a definitive agreement, the Company has agreed to exchange the West Palm Beach, Florida stations being acquired from Omni for American Radio's AM station in Sacramento, California, plus $33.0 million in cash. On July 1, 1996, the Company entered into an agreement with SFX under which the Company will exchange the Jacksonville, Florida stations being acquired from Omni and $11.0 million in cash for SFX's three FM stations and one AM station in Long Island, New York. These acquisition and exchange agreements are subject, among other things, to FCC approval. Pursuant to LMAs, the Company began managing certain limited functions of the Omni Orlando stations and the SFX Long Island stations on July 1, 1996, and will begin managing certain limited functions of American Radio's Sacramento AM station beginning August 1, 1996. Similarly, beginning July 1, 1996, SFX began managing limited functions of the Jacksonville stations it has agreed to acquire from the Company, and it is anticipated that American Radio will agree to manage certain functions of the West Palm Beach stations once a definitive agreement is reached with the Company. After giving effect to all of the foregoing transactions, the Company will own four FM stations in Orlando, Florida, four FM and two AM stations in Long Island, New York and two FM and two AM stations in Sacramento, California. The aggregate net purchase price for the eight new stations to be acquired, in the aggregate, from Omni, SFX and American Radio will be approximately $156.0 million, excluding acquisition costs. The Detroit Disposition, the acquisition of the Omni Stations and the consummation of the station exchanges with SFX and American Radio are collectively referred to in this Prospectus as the "Pending Transactions." The Company anticipates that it will consummate all the Pending Transactions by the end of January 1997. However, the closing of each of those transactions is subject to FCC approval and other closing conditions, certain of which are beyond the Company's control, and there can be no assurance when those transactions will be completed or that they will be completed on the terms described herein, or at all. The Company intends to finance the cash portion of the purchase price for the Pending Transactions with the proceeds from the Hicks Muse Equity Investment, the proceeds from the Detroit Disposition, cash flow from operations, financing under the Credit Agreement and additional bank financing. There can be no assurance that these sources of funds will be sufficient or that additional sources of financing will be available to the Company on terms considered favorable by management, if at all. THE EXCHANGE OFFER The Exchange Offer......... One share of New Preferred Stock in exchange for each outstanding share of Old Preferred Stock. As of the date hereof, 1,000,000 shares of Old Preferred Stock are issued and outstanding. The New Preferred Stock offered hereby is identical in all material respects to the Old Preferred Stock, except that shares of New Preferred Stock will be freely transferable by the holders thereof except as otherwise provided herein. See "Description of the New Preferred Stock and Exchange Debentures." Based on an interpretation by the Commission's staff set forth in no-action letters issued to third parties unrelated to the Company, the Company believes that shares of New Preferred Stock issued pursuant to the Exchange Offer in exchange for Old Preferred Stock may be offered for sale, sold and otherwise transferred by any person receiving the New Preferred Stock, whether or not that person is the registered holder (other than any such holder or such other person that is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that (i) the shares of New Preferred Stock are acquired in the ordinary course of business of that holder or such other person, (ii) neither the holder nor such other person is engaging in or intends to engage in a distribution of the New Preferred Stock, and (iii) neither the holder nor such other person has an arrangement or understanding with any person to participate in the distribution of the New Preferred Stock. See "The Exchange Offer -- Purpose and Effect." Each broker-dealer that receives New Preferred Stock for its own account in exchange for Old Preferred Stock, where those shares of Old Preferred Stock were acquired by the broker-dealer as a result of its market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such shares of New Preferred Stock. See "Plan of Distribution." Registration Rights Agreement................ The shares of Old Preferred Stock were sold by the Company on February 26, 1996, in a private placement in reliance on Section 4(2) of the Securities Act and immediately resold by the initial purchasers thereof in reliance on Rule 144A under the Securities Act (the "Original Offering"). In connection with the sale, the Company entered into a Registration Rights Agreement with the initial purchasers of the Old Preferred Stock (the "Registration Rights Agreement") requiring the Company to make the Exchange Offer. The Registration Rights Agreement further provides that the Company must use its best efforts to (i) cause the Registration Statement with respect to the Exchange Offer to be declared effective on or before August 24, 1996 and (ii) consummate the Exchange Offer on or before October 8, 1996. See "The Exchange Offer -- Purpose and Effect." Expiration Date............ The Exchange Offer will expire at 5:00 p.m., New York City time, , 1996, or such later date and time to which it is extended by the Company. Withdrawal................. The tender of shares of Old Preferred Stock pursuant to the Exchange Offer may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Any shares of Old Preferred Stock not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Exchange Offer. Dividends on the New Preferred Stock and Old Preferred Stock.......... Dividends on each share of New Preferred Stock will accrue from the date of issuance of the Old Preferred Stock for which the New Preferred Stock is exchanged or from the date of the last dividend payment (or deemed dividend payment) on such Old Preferred Stock, whichever is later. No additional dividends will be paid on Old Preferred Stock tendered and accepted for exchange. Conditions to the Exchange Offer.................... The Exchange Offer is subject to certain customary conditions, certain of which may be waived by the Company. See "The Exchange Offer -- Certain Conditions to Exchange Offer." Procedures for Tendering Old Preferred Stock........ Each holder of shares of Old Preferred Stock wishing to accept the Exchange Offer must complete, sign and date the Letter of Transmittal, or a copy thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver the Letter of Transmittal, or copy thereof, together with certificates representing the shares of Old Preferred Stock and any other required documentation, to the Exchange Agent (as defined) at the address set forth herein. Persons holding shares of Old Preferred Stock through the Depository Trust Company ("DTC") and wishing to accept the Exchange Offer must do so pursuant to the DTC's Automated Tender Offer Program, by which each tendering participant will agree to be bound by the Letter of Transmittal. By executing or agreeing to be bound by the Letter of Transmittal, each holder will represent to the Company that, among other things, (i) the shares of New Preferred Stock acquired pursuant to the Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Preferred Stock, whether or not such person is the registered holder of the Old Preferred Stock, (ii) neither the holder nor any such other person is engaging in or intends to engage in a distribution of such New Preferred Stock, (iii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Preferred Stock, and (iv) neither the holder nor any such other person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of the Company. Pursuant to the Registration Rights Agreement, the Company is required to file a "shelf" registration statement for a continuous offering pursuant to Rule 415 under the Securities Act in respect of the Old Preferred Stock if (i) because of any change in law or in currently prevailing interpretations of the staff of the Commission, the Company is not permitted to effect the Exchange Offer, (ii) the Exchange Offer is not consummated within 225 days of the Original Offering, (iii) any holder of Private Exchange Preferred Stock (as defined) requests at any time after the consummation of the Private Exchange (as defined), (iv) the holders of not less than a majority of shares of the Old Preferred Stock determine that the interests of the holders would be adversely affected by consummation of the Exchange Offer, or (v) any holder of Old Preferred Stock participates in the Exchange Offer and does not receive freely transferrable shares of New Preferred Stock in exchange for Old Preferred Stock (other than as a result of the status of such holders as an "affiliate" of the Company within the meaning of the Securities Act). See "The Exchange Offer -- Purpose and Effect." Acceptance of Old Preferred Stock and Delivery of New Preferred Stock.......... The Company will accept for exchange any and all shares of Old Preferred Stock which are properly tendered (and not withdrawn) in the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Preferred Stock issued pursuant to the Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offer -- Terms of the Exchange Offer." Exchange Agent............. KeyCorp Shareholder Services, Inc. is serving as Exchange Agent (the "Exchange Agent") in connection with the Exchange Offer. Federal Income Tax Considerations........... The exchange pursuant to the Exchange Offer should not be a taxable event for federal income tax purposes. See "Certain Federal Income Tax Considerations." Effect of Not Tendering.... Shares of Old Preferred Stock that are not tendered or that are tendered but not accepted will, following the completion of the Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. The Company will have no further obligation to provide for the registration under the Securities Act of such shares of Old Preferred Stock. THE NEW PREFERRED STOCK Securities Offered......... 1,000,000 shares (the "Shares") of 12 1/4% Series A Senior Cumulative Exchangeable Preferred Stock, par value $.01 per share (the "New Preferred Stock"). Liquidation Preference..... Initially equal to the liquidation value per share of Old Preferred Stock at the date of exchange, plus accumulated and unpaid dividends. Optional Redemption........ The New Preferred Stock is redeemable, at the option of the Company, in whole or in part, at any time on or after February 15, 2001 at the redemption prices set forth herein, plus, without duplication, accumulated and unpaid dividends to the date of redemption. In addition, prior to February 15, 1999, the Company may, at its option, use the net cash proceeds of one or more Public Equity Offerings to redeem the New Preferred Stock at the redemption prices set forth herein, plus, without duplication, accumulated and unpaid dividends to the date of redemption; provided, however, that after any such redemption, the number of shares of New Preferred Stock outstanding must equal at least 75% of the shares of New Preferred Stock originally issued in the Exchange Offer. Mandatory Redemption....... The Company is required, subject to certain conditions, to redeem all of the New Preferred Stock outstanding on February 15, 2008 at a redemption price equal to 100% of the then effective liquidation preference thereof, plus, without duplication, accumulated and unpaid dividends to the date of redemption. Dividends.................. At a rate equal to 12 1/4% per annum of the then effective liquidation preference per share, cumulative and, when declared, payable quarterly beginning November 15, 1996 and accumulating from August 15, 1996. The Company, at its option, may pay dividends on any dividend payment date occurring on or before February 15, 2001 either in cash or by adding such dividends to the then effective liquidation preference of the New Preferred Stock. Dividend Payment Dates..... February 15, May 15, August 15 and November 15, commencing November 15, 1996. Voting..................... The New Preferred Stock will be non-voting, except as otherwise required by law and except in certain circumstances described herein, including (i) amending certain rights of the holders of the New Preferred Stock and (ii) the issuance of any class of equity securities that ranks on a parity with or senior to the New Preferred Stock. In addition, if after February 15, 2001 the Company (i) fails to pay dividends in respect of six or more quarters in the aggregate, (ii) fails to make a mandatory redemption or a Change of Control Offer (as defined) or (iii) fails to comply with certain covenants or make certain payments on its Indebtedness, holders of a majority of the outstanding shares of New Preferred Stock, voting as a class, will be entitled to elect the lesser of two directors or that number of directors constituting at least 25% of the Company's board of directors. Exchange Provisions........ Exchangeable into the Exchange Debentures, at the Company's option, subject to certain conditions, in whole, but not in part, on any scheduled dividend payment date. Ranking.................... The New Preferred Stock will, with respect to dividend rights and rights on liquidation, winding-up and dissolution of the Company, rank senior to all other classes of equity securities of the Company outstanding upon consummation of the Exchange Offer. Change of Control.......... In the event of a Change of Control, the Company will, subject to certain conditions, offer to purchase all outstanding shares of New Preferred Stock at a purchase price equal to 101% of the then effective liquidation preference thereof, plus, without duplication, accumulated and unpaid dividends to the date of purchase. There can be no assurance that the Company will have sufficient funds to purchase all of the New Preferred Stock in the event of a Change of Control or that the Company would be able to obtain financing for such purpose on favorable terms, if at all. In addition, the Credit Agreement restricts the Company's ability to repurchase the New Preferred Stock, including pursuant to a Change of Control Offer. Furthermore, a Change of Control will result in a default under the Credit Agreement. The Credit Agreement also contains certain other provisions relating to a change of control of the Company. These provisions are generally broader than the Change of Control provisions of the Certificate of Designation governing the New Preferred Stock (the "Certificate of Designation"). Consequently, certain events that may give rise to change of control under the Credit Agreement may not give rise to a Change of Control for purposes of the Certificate of Designation. See "Risk Factors -- Change of Control" and "Description of the New Preferred Stock and Exchange Debentures -- New Preferred Stock -- Change of Control." Certain Restrictive Provisions............... The Certificate of Designation will contain certain restrictive provisions that, among, other things, limit the ability of the Company and its subsidiaries to incur additional Indebtedness, pay dividends or make certain other restricted payments, or merge or consolidate with or sell all or substantially all of their assets to any other person. THE EXCHANGE DEBENTURES Issue...................... 12 1/4% Subordinated Exchange Debentures due 2008 issuable in exchange for the New Preferred Stock in an aggregate principal amount equal to the then effective liquidation preference of the New Preferred Stock, plus, without duplication, accumulated and unpaid dividends to the date fixed for the exchange thereof (the "Exchange Date"), plus any additional Exchange Debentures issued in lieu of cash interest. Maturity................... February 15, 2008. Interest Rate and Payment Dates.................... The Exchange Debentures will bear interest at a rate of 12 1/4% per annum. Interest will accrue from the date of issuance or from the most recent interest payment date to which interest has been paid or provided for or, if no interest has been paid or provided for, from the Exchange Date. Interest will be payable semi-annually in cash (or, at the option of the Company, on or prior to February 15, 2001, in additional Exchange Debentures) in arrears on each February 15 and August 15, commencing with the first such date after the Exchange Date. Optional Redemption........ The Exchange Debentures are redeemable, at the option of the Company, in whole or in part, at any time on or after February 15, 2001 at the redemption prices set forth herein, plus accrued and unpaid interest to the date of redemption. In addition, prior to February 15, 1999, the Company may, at its option, use the net cash proceeds of one or more Public Equity Offerings to redeem the Exchange Debentures at the redemption prices set forth herein, plus accrued and unpaid interest to the date of redemption; provided, however, that after any such redemption, the aggregate principal amount of the Exchange Debentures outstanding must equal at least $75,000,000. Ranking.................... The Exchange Debentures will be subordinated to all existing and future Senior Debt of the Company. In addition, the Exchange Debentures will be effectively subordinated to all existing and future Indebtedness of the Company's subsidiaries. The Exchange Debentures will rank pari passu or senior to any class or series of Indebtedness that expressly provides that it ranks pari passu or subordinate to the Exchange Debentures, as the case may be. On a pro forma basis, as if the Denver Exchange and the Pending Transactions and, in each case, the financing thereof, had occurred on March 31, 1996, there would have been $454.7 million of Senior Debt outstanding and no Indebtedness pari passu with or junior to the Exchange Debentures. Change of Control.......... In the event of a Change of Control, the Company will, subject to certain conditions, be required to offer to purchase all outstanding Exchange Debentures at a purchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. There can be no assurance that the Company will have sufficient funds to purchase all the Exchange Debentures in the event of a Change of Control or that the Company would be able to obtain financing for such purpose on favorable terms, if at all. In addition, the Credit Agreement restricts the Company's ability to repurchase the Exchange Debentures, including pursuant to a Change of Control Offer. Furthermore, a Change of Control will result in a default under the Credit Agreement. The Credit Agreement also contains certain other provisions relating to a change of control of the Company. These provisions are generally broader than the Change of Control provisions of the indenture governing the Exchange Debentures (the "Exchange Indenture"). Consequently, certain events that may give rise to change of control under the Credit Agreement may not give rise to a Change of Control under the Exchange Indenture. See "Risk Factors -- Change of Control" and "Description of the New Preferred Stock and Exchange Debentures -- Exchange Debentures -- Change of Control." Certain Covenants.......... The Exchange Indenture contains certain covenants that, among other things, limit the ability of the Company and its subsidiaries to incur additional Indebtedness, pay dividends or make certain other restricted payments, sell or swap assets, enter into certain transactions with affiliates or merge or consolidate with or sell all or substantially all of their assets to any other person. USE OF PROCEEDS There will be no cash proceeds to the Company from the exchange pursuant to the Exchange Offer. The net proceeds from the Original Offering were used to repurchase and redeem all the shares of Acquisition Preferred Stock. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000926019_open_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000926019_open_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c142b35698d83cb243fa024898b8795c75819f16
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Except as otherwise noted herein, all information contained in this Prospectus (i) reflects the conversion of all outstanding shares of the Company's Series A, B and C Convertible Preferred Stock (the "Preferred Stock") into an aggregate of 13,437,025 shares of Common Stock at the closing of the Offerings, and (ii) assumes no exercise of the Underwriters' over-allotment options. THE COMPANY Open Market, Inc. ("Open Market" or the "Company") develops, markets, licenses and supports high performance software products that allow its customers to engage in business-to-consumer and business-to-business electronic commerce on the Internet and to deploy Internet-based business applications within an enterprise ("Intranet"). Open Market's innovative technology enables the separation of the management of business transactions from the management of content, thereby allowing companies to securely and centrally manage business transactions using content located on multiple distributed Web servers. The Company's products permit functions such as order taking, authorization, payment processing, security and customer service to be performed centrally by a "back office" transaction management system, allowing merchants and other content providers to focus on management of the "front office" content at their distributed Web sites. Open Market's strategy is to focus on providing Internet software for business. The Company's objective is to make its software an industry standard for managing business transactions on the Internet. The Company's products feature open application interfaces allowing for integration with existing corporate systems and a scalable distributed infrastructure that can grow with a company's needs. The products provide the core building blocks for managing transactions on the Internet, support open standards and multiple security and payment protocols and work with popular browsers and servers. The Company's products include: OM-TRANSACT(TM) - a transaction management system with the capacity to handle a high volume of transactions via standard Web protocols. Coupled with OM-SecureLink(TM), the Company's enabling technology for linking content to management servers, OM-Transact enables companies to use the Web to take customers' orders, authorize their credit, instruct the warehouse to ship the goods, request the bank to transfer funds and track transactions from start to finish. OM-AXCESS(TM) - an Intranet authentication and authorization system that, coupled with OM-SecureLink, allows companies to control access to content located on private Intranets. Using OM-Axcess, companies issue "access tickets" to employees, contractors, partners and visitors seeking to access secure Web-based information and to engage in collaboration and other forms of electronic commerce within an enterprise. OM-EXPRESS(TM) - a desktop software product that allows users to download selected Internet content to their local personal computers during off-peak hours for later viewing and use. The Company's other products include Open Market Secure WebServer(TM), Open Market WebReporter(TM) and Merchant Solution(TM). To accelerate the market acceptance of its technology architecture and products, the Company has entered into numerous technology, marketing and distribution relationships. Among the companies that have entered into these agreements with Open Market are Novell, Inc., FTP Software, Inc., Hewlett- Packard Company, Digital Equipment Corporation, Tandem Computers Incorporated, Interleaf, Inc., Bluestone, Inc., Stratus Computer, Inc. and Sequent Computer Systems Incorporated. The Company was incorporated as a Delaware corporation in December 1993. The Company's principal executive office is located at 245 First Street, Cambridge, Massachusetts 02142, and its telephone number is (617) 621-9500. The Company's home page is located at http://www.openmarket.com. Open Market(TM), OM-Transact, OM-Axcess, OM-SecureLink, OM-Express, Open Market Secure WebServer, Open Market WebReporter, Merchant Solution and StoreBuilder(TM), are trademarks of Open Market, Inc. All other trademarks or trade names referred to in this Prospectus are the property of their respective owners.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0000926764_holmes_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000926764_holmes_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..9c51bada8f07955a322e664195a477b8b1c08f5e
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and Financial Statements and Notes thereto appearing elsewhere in this Prospectus, including information under "Risk Factors." The shares of Common Stock offered hereby involve a high degree of risk and investors should carefully consider information set forth in "Risk Factors." Unless otherwise indicated, all information contained in this Prospectus assumes that the Underwriters' over-allotment option as described in "Underwriting" is not exercised. THE COMPANY Holmes provides security alarm monitoring services and designs, sells, installs and services electronic security systems for commercial and mid- to high-end residential subscribers. These systems include event detection devices, surveillance equipment and access control devices which restrict access to specified areas. The Company currently provides its services in the Northeast, primarily in New York, New Jersey and Pennsylvania, and conducts its operations through four branch offices, two central monitoring stations and 46 independent alarm service dealers and franchisees. In addition, the Company recently acquired a central monitoring station in Southern California which provides monitoring services for other alarm companies. According to a published survey, the Company was the twelfth largest provider of electronic security services in the United States in terms of total 1995 revenues. Following an internal management transition and reorganization that occurred during 1995, the Company engaged the services of several former senior executives of The National Guardian Corporation ("National Guardian"), a large national electronic security alarm services company which was acquired by Ameritech Monitoring Services, Inc. in October 1995. Among the executives hired by the Company was George V. Flagg, the Company's President and Chief Executive Officer, who served as the President and Chief Executive Officer of National Guardian from 1986 to 1995. During Mr. Flagg's tenure, National Guardian became one of the four largest electronic security services companies in the United States based upon revenues, which grew from approximately $40 million in 1985 to over $200 million in 1995. Under the direction of the Company's new management team, the Company is implementing a new business strategy involving a combination of strategic acquisitions and internal growth. In regard to strategic acquisitions, the Company intends to pursue both (i) fold-in acquisitions, which consist of businesses or portfolios of alarm monitoring accounts that can be readily combined with the Company's existing branch offices and management structure and (ii) new market acquisitions, which consist of companies in the electronic security services industry located outside the Company's current geographic market. In regard to its internal growth strategy, the Company intends to capitalize on public recognition of the historic Holmes brand name (which has been utilized in the security services industry since 1858) in connection with (i) expanding its security services product offerings, including the HolmesNet system for wireless data communications; (ii) establishing a national accounts program; (iii) increasing its sales and marketing efforts; and (iv) expanding its dealer operations. The Company's revenues consist primarily of recurring payments under written contracts for security alarm monitoring activities and associated services, which represented approximately 74% of total revenues in 1995. The Company monitors digital alarm signals arising from various activities, including burglaries, fires and other events, through security systems installed at subscribers' premises. These signals are received and processed at one of the Company's central monitoring stations. In order to reduce overall manpower requirements, achieve economies of scale and other cost efficiencies, and enhance the quality of service being provided, the Company is in the process of consolidating its central monitoring stations located in the Northeast into one state-of-the-art facility with monitoring capacity of approximately 60,000 accounts. In order to avail itself of more extensive technological resources, the Company entered into a ten-year information technology services agreement with a subsidiary of Electronic Data Systems Corporation ("EDS") in 1995. Pursuant to this agreement, the Company has consolidated four central monitoring stations into two, and completion of the consolidation activities is scheduled for the fourth quarter of 1996. The Company currently monitors approximately 35,000 accounts from its central monitoring stations located in the Northeast and 14,500 accounts from its central monitoring station located in Southern California. An additional 16% of the Company's total revenues in 1995 was comprised of direct sales and installation of security equipment. The balance of the Company's revenues in 1995 was derived from (i) jewelry vault rentals, (ii) insured parcel delivery services for the jewelry trade and (iii) royalty fees and product sales relating to its franchise and dealer operations. Approximately 80% of the Company's business is derived from commercial customers, including financial institutions, jewelry and fine art dealers, corporate headquarters, manufacturers, distribution facilities and health care and education facilities. The Company's residential business focuses principally on mid- to high-end customers. Electronic security services is a consolidating but still a highly fragmented industry, consisting of a large number of local and regional companies and several integrated national companies. The fragmented nature of the industry can be attributed to the low capital requirements associated with performing basic installation and maintenance of electronic security systems. However, the business of a full service, integrated electronic security services company providing central station monitoring services is capital intensive, and the Company believes that the high fixed costs of establishing both central monitoring stations and full service operations contribute to the small number of national competitors. The low marginal cost of monitoring additional customers has been one of the principal factors leading full service, integrated electronic security services companies to seek acquisitions of other electronic security businesses to consolidate into their existing operations. The principal focus of the Company's business strategy is to aggressively pursue acquisitions in this environment. The Company was incorporated as a Delaware corporation on October 29, 1982. The Company's principal executive offices are located at 440 Ninth Avenue, New York, New York 10001-1695, and its telephone number is (212) 760-0630. Unless the context indicates otherwise, references to the "Company" or "Holmes" in this Prospectus are to Holmes Protection Group, Inc. and its direct and indirect subsidiaries. THE OFFERING <TABLE> <CAPTION> <S> <C> Common Stock Offered by the Company .............. 1,100,000 shares Common Stock Outstanding After the Offering(1) ... 5,663,062 shares Use of Proceeds .................................. To finance the Company's business expansion plans, including pursuing strategic acquisitions, expanding its security services product offerings, establishing a national accounts program, increasing its sales and marketing efforts, and expanding its dealer operations. Nasdaq National Market Symbol .................... "HLMS" </TABLE> - ------ (1) Excludes (i) 57,846 and 165,429 shares of Common Stock reserved for issuance upon exercise of outstanding options under the Executives Plan and the Directors Plan (each as defined in "Management--Stock Option Plans"), respectively; (ii) 878,864 shares of Common Stock reserved for issuance upon exercise of the Investor Warrants and Institution Warrants (each as defined in "Risk Factors--Control by Certain Stockholders"); (iii) 166,666 shares of Common Stock reserved for issuance upon exercise of the New Bank Warrants (as defined in "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources"); and (iv) 830,000 shares of Common Stock reserved for issuance upon exercise of options which have been granted under the 1996 Stock Incentive Plan (the "1996 Plan"), subject to and conditioned upon stockholder approval of the 1996 Plan at the Company's 1996 annual meeting of stockholders, scheduled for October 31, 1996. See "Management--Stock Option Plans," "Business--Historical Developments" and Notes 7 and 8 to Notes to Consolidated Financial Statements. SUMMARY FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> Six Months Ended June 30, Year Ended December 31, ----------------------------- ------------------------------------------------------------ (unaudited) 1996 1995 1995 1994 1993 1992 1991 ---------- --------------- ---------- ---------- ---------- ---------- --------- <S> <C> <C> <C> <C> <C> <C> <C> Statement of Operations Data:(1) Revenues .......................... $24,483 $25,123 $50,075 $51,402 $53,500 $56,173 $59,042 Cost of sales (exclusive of depreciation expense) ............ (12,809) (12,563) (26,262) (24,885) (26,916) (29,560) (32,152) Gross profit ...................... 11,674 12,560 23,813 26,517 26,584 26,613 26,890 Selling, general and administrative expenses ......................... (6,844) (7,760) (16,668) (15,051) (17,837) (17,287) (18,157) Depreciation and amortization ..... (5,432) (5,095) (10,390) (9,736) (8,919) (8,139) (8,034) Income (loss) before cumulative effect of change in accounting principle and extraordinary item . (736) (640) (3,674) 404 (55) (3,795) (73,066) Net income (loss) ................. (736) 1,837 (1,197) 404 (55) 19,392 (73,066) Income (loss) per common share before cumulative effect of change in accounting principle and extraordinary item ............... (0.17) (0.14) (0.82) 0.11 (0.02) (3.04) (372.10) Net income (loss) per common share(2) ......................... (0.17) 0.41 (0.27) 0.11 (0.02) 15.54 (372.10) Weighted average shares outstanding 4,459 4,459 4,459 3,580 2,944 1,250 196 At June 30, 1996 ----------------------------- (unaudited) Actual As Adjusted(3) Balance Sheet Data: Working capital ................... $(6,176) $4,456 Total assets ...................... 76,601 87,233 Long-term debt, net of current maturities ....................... 3,668 3,668 Shareholders' equity .............. 46,936 57,568 </TABLE> - ------ (1) Results of operations vary significantly among the years due to several reorganizations and a recapitalization of the Company. Net loss for 1995 reflects the effect of a non-recurring charge of $2,074,000 recorded in the fourth quarter of 1995 and the cumulative effect of a change in the method of accounting for non-refundable payments received from customers for company-owned systems resulting in a net credit after tax of $2,477,000. See Notes 3 and 4 to Notes to Consolidated Financial Statements for further explanations. Net income for 1992 reflects the effect of an extraordinary gain, net of tax of $23,187,000, resulting from the restructuring of debt that occurred in August 1992. Net income for 1991 includes a non-recurring charge of $70,412,000 for the writedown of subscriber contracts, goodwill, fixed assets and other items resulting from management's assessment of the adequacy of the carrying values of such assets and other non-recurring expenses. (2) The net income (loss) per common share data has been adjusted to give effect to the one-for-fourteen reverse stock split of the Common Stock on March 27, 1995. (3) Adjusted to reflect the sale of 1,100,000 shares of Common Stock offered by the Company hereby at the offering price set forth on the cover page of this Prospectus (after deducting underwriting discounts and commissions and estimated offering expenses) and the application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000927417_avintiv_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000927417_avintiv_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..c57a94a4cde886dcb722f24844c4217561e72bac
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements, and the related notes thereto, included elsewhere in this Prospectus. As used in this Prospectus, unless the context otherwise requires, the term "Company" includes the Company and all of its subsidiaries and its and their respective predecessors and subsidiaries. Unless otherwise indicated, all financial statements used in this Prospectus have been prepared in accordance with United States generally accepted accounting principles and all dollar references are to U.S. dollars. Except as otherwise indicated, (i) all information in this Prospectus (a) assumes no exercise of the Underwriters' over-allotment options and (b) has been adjusted to give effect to a reclassification and an approximate 19.97 to 1 stock split of the Common Stock, (ii) the income statement information presented herein on a pro forma basis for the year ended December 30, 1995 gives effect to the Chicopee Acquisition (as defined) and the Recapitalization (as defined) as if each had occurred on January 1, 1995, and (iii) the income statement information presented herein on a pro forma basis for the quarter ended March 30, 1996 gives effect to the Recapitalization as if it had occurred on December 31, 1995. THE COMPANY Polymer Group, Inc. (the "Company") is a leading worldwide manufacturer and marketer of a broad range of nonwoven and woven polyolefin products. The Company's principal lines of business include industrial and specialty products and disposable wiping, medical and hygiene products. The Company believes that it is the third largest producer of nonwovens in the world and that it employs the most extensive range of nonwoven technologies of any nonwovens producer, which allows it to supply products tailored to customers' needs at a competitive cost. Nonwovens are flat, flexible porous sheets produced by interlocking fibers or filaments or by perforating films. Nonwovens provide certain qualities similar to those of textiles at a significantly lower cost. The Company also believes that it is the largest producer of woven polyethylene fabrics in North America. Woven polyethylene fabrics are flat, flexible structures produced by weaving narrow tapes of slit film and are characterized by high strength-to-weight ratios. The Company is a leading nonwovens supplier to a number of the largest consumer products manufacturers in the world and specifically targets market niches with high value-added products for these customers. The Company has a global presence with an established customer base in the three major developed markets of North America, Europe and Japan, as well as developing markets such as Latin America. The Company's products are sold principally to converters that manufacture a wide range of end-use products, such as hospital surgical gowns and drapes, wound care sponges, multi-use wiping cloths and towels, flexible industrial packaging, filtration media, battery separators, diapers, feminine hygiene products and automotive insulation products. The Company supplies nonwovens to customers such as Johnson & Johnson and its affiliates (collectively, "Johnson & Johnson") for healthcare products, including operating room gowns, The Procter & Gamble Company ("Procter & Gamble") for Pampers(R) and Luvs(R) diapers and Paragon Trade Brands Inc. for private label diapers. The Company is a leader in nonwoven process technology. The Company operates twelve manufacturing facilities located in five countries and is currently the only nonwovens producer that utilizes all of the established nonwoven process technologies. The Company recently successfully introduced the new, proprietary Apex technology, which is a surface-forming technology capable of producing low-cost textile replacement fabrics with intricate, three-dimensional patterns. The Company believes that the quality of its manufacturing operations and the breadth of its nonwovens process technologies give it a competitive advantage in meeting the current and future needs of its customers and in leading the development of an expanded range of applications for nonwovens. The Company continues to make significant investments in advanced technology in order to increase capacity, improve quality and develop new low-cost, high- value structures. For example, the Company recently invested in a spunbond/meltblown/spunbond ("SMS") line that the Company believes is one of the most advanced in the world, which allows the Company to produce highly uniform structures at less than half of the unit weight produced by other SMS lines. The Company believes that its broad technological base gives it the capability to design and manufacture products with optimal cost and functionality. Working as a developmental partner with its major customers, the Company utilizes its technologies to develop and manufacture new products to meet their needs. Management has built the Company through a series of strategic business acquisitions that have broadened the Company's technology base and increased its product lines. The Company's strategic acquisitions have helped it to establish strong positions in both the nonwoven and woven polyolefin fabric markets. Synergies realized through these acquisitions have enabled the Company to better meet the needs of existing customers, to reach emerging geographic markets and to exploit niche market opportunities through customer-interactive specialty product development. For example, technology improvements developed at the Company's Landisville, New Jersey facility, such as improvements in the meltblown process, continuous spreading and comprehensive process automation, have been integral to capacity increases and the implementation of new production lines in Europe and Mexico. The Company's objectives are to continue to expand its core business while building new capabilities to capitalize on both a broad range of new, high value-added niche product opportunities and expanded geographic markets. In addition to growth in its core businesses, the Company expects growth to come from the application of several new technologies, including (i) the Apex nonwoven process technology, (ii) a new line of specialty sorbents, marketed under the Micro-Set(TM) brand, providing EPA-approved disposability at a competitive cost and (iii) a newly developed polymer technology designed to recover heavy metals, which can then be recycled and sold, from contaminated solutions such as hazardous waste sites. The Company expects to accomplish these objectives by relying on its principal strengths, which include technological leadership, state-of-the-art manufacturing capabilities, significant market share in its primary markets and an experienced and successful management team. The Company seeks to utilize these strengths by following a strategy based on (i) continuous improvement aimed at increasing product value and reducing costs, (ii) development of high value-added niche products, (iii) entrance into new markets with existing products, (iv) expansion of capacity through capital improvements and (v) strategic acquisitions. The principal executive offices of the Company are located at 4838 Jenkins Avenue, North Charleston, South Carolina 29405, and the Company's telephone number is (803) 566-7293. THE OFFERINGS The offering of 11,393,939 shares of Common Stock initially being offered in the United States (the "U.S. Offering") and the concurrent offering of 2,848,485 shares of Common Stock initially being offered outside the United States (the "International Offering") are collectively referred to herein as the "Offerings." <TABLE> <S> <C> Common Stock offered by the Company. 11,500,000 shares U.S. Offering................... 9,200,000 shares International Offering.......... 2,300,000 shares Common Stock offered by the Selling Stockholders....................... 2,742,424 shares U.S. Offering................... 2,193,939 shares International Offering.......... 548,485 shares Common Stock outstanding after the Offerings.......................... 32,000,000 shares Use of Proceeds..................... The net proceeds to be received by the Company from the Offerings will be utilized by the Company principally to repay outstanding borrowings under the New Credit Facility (as defined), to redeem a portion of the Notes (as defined) and to redeem the Redeemable Preferred Stock (as defined). The Company will not receive any of the proceeds from the sale of shares by the Selling Stockholders (as defined). See "Use of Proceeds" and "Certain Relationships and Related Transactions."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000927567_us-trade_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000927567_us-trade_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..ab855d28cfb7c60327277d66553ec04c84122539
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the detailed information appearing elsewhere in this Prospectus. Certain capitalized terms used in the summary are defined elsewhere in this Prospectus. Title of Certificates............... 6.75% Trade Trust Certificates, Series 1996-A (the "Certificates"). The Trust........................... U.S. Trade Trust Series 1996-A (the "Trust"). The Trust will be formed pursuant to the Trust Agreement for the purpose of acquiring and holding the Loan Notes and issuing the Certificates. The Company......................... U.S. Trade Funding Corp. (the "Company"). The Trustee......................... LaSalle National Bank (the "Trustee"). The Seller and Servicer............. ABN AMRO Bank N.V. The Certificates.................... The Certificates will be issued in an aggregate amount of approximately $101,672,199.28, will entitle the holder to interest at a rate of 6.75% per annum, and will have a final distribution date of August 15, 2008. Principal on the Certificates will be payable in 24 semi-annual installments, on each February 15 and August 15 (or, if not a Business Day (as defined below) on the immediately succeeding Business Day except with respect to the final payment at maturity, in which case such payment shall be made on the immediately preceding Business Day) in each year, commencing on February 15, 1997, in the amounts set forth under "Description of the Certificates--Payment on the Certificates." The payment dates specified in the preceding sentence are referred to herein as "Payment Dates." Interest on the Certificates will accrue from and include the date set forth on the cover of this Prospectus and will be payable on each semi-annual Payment Date. A schedule of distributions on the Certificates is attached as Annex A. Each Certificate will represent the right to receive a pro rata portion of each semi-annual payment on the Loan Notes held by the Trust or, in the event of a default in the payment thereon, the right to receive a pro rata portion of any payment received under the Liquidity Facility and/or the Eximbank Guarantee, which guarantee is backed by the full faith and credit of the United States of America. Following an initial payment by Eximbank under the Eximbank Guarantee, Eximbank will issue Eximbank Payment Certificates (as defined below) to the Trustee which will require Eximbank, on each subsequent Due Date (as defined below), to directly and timely pay to the Trust an amount equal to the amounts that were originally scheduled to be due on such Due Date with respect to the Loan Notes and the Trust shall distribute such amounts pro rata among the holders of the Certificates. The Certificates will be available for purchase in minimum denominations of $100,000. The Certificates will be available only in book-entry form and will be represented by a single global Certificate registered in the name of Cede & Co., the nominee of DTC. Beneficial interests in the global Certificate will be shown on, and transfers thereof will be effected only through, records maintained by DTC and its participants. The Certificates represent beneficial interests in the Trust only and do not represent interests in or obligations of the Seller, the Borrower, the Lessee (defined below), the Company or the Trustee nor are they obligations of or guaranteed by Eximbank, the United States of America or any other governmental agency. No Prepayment or Acceleration....... The Certificates will not be subject to prepayment or acceleration under any circumstances. Rating.............................. It is a condition to the issuance of the Certificates that they receive a rating of "AAA" by Standard & Poor's Ratings Group, a division of the McGraw-Hill Companies ("S&P" or the "Rating Agency"). A security rating is not a recommendation to buy, sell or hold securities, and may be subject to revision or withdrawal at any time. Investor Eligibility................ There are no restrictions set forth in the Eximbank Guarantee on the eligibility of holders of the Certificates, including any restrictions based upon residency or citizenship. However, certain pension, profit sharing and other benefit plans and other investors subject to ERISA may be subject to certain restrictions. See "ERISA Considerations." Underwriting........................ ABN AMRO Securities (USA) Inc. will serve as Underwriter. The Underwriter proposes initially to offer the Certificates to the public at the offering price set forth on the cover page of this Prospectus. After the initial public offering, such public offering price may be changed. See "Underwriting." The Trust Assets.................... The property of the Trust will consist of the Loan Notes and the rights under the Eximbank Guarantee together with the right to draw amounts under the Liquidity Facility (as defined herein). On and after an Eximbank Payment Event (as defined below) and in certain other circumstances described below, the property of the Trust will consist of Eximbank Payment Certificates (as defined below). The Loan Notes will evidence the obligations of the Borrower to pay to the Trust, in U.S. Dollars, semi- annually on each February 15 and August 15 (or, if not a Business Day, on the immediately succeeding Business Day except that if the final maturity date of August 15, 2008 is not a Business Day, such payment shall be made on the immediately preceding Business Day) in each year, commencing on February 15, 1997, interest at a fixed rate and principal in 24 semi-annual installments as set forth under "The Loan Notes." Such payment dates are referred to herein as "Due Dates" and each Due Date shall coincide with a "Payment Date" on the Certificates (as such term is defined below). All scheduled payments of principal and interest on the Loan Notes made by or on behalf of the Borrower on a Due Date will be distributed to the Certificateholders on the related Payment Date. The scheduled principal and interest payments due on the Loan Notes on each Due Date will be sufficient to enable the Trustee to distribute the scheduled amounts to the Certificateholders on the corresponding Payment Date. See "The Loan Notes." Upon the occurrence of a payment default on a Loan Note held by the Trust (an "Event of Default"), Eximbank may accelerate the payment of principal of and interest on all such Loan Notes. Whether or not Eximbank accelerates the Loan Notes, if a timely demand shall have been made on Eximbank by the Trustee or the Servicer on behalf and in the name of the Trustee in compliance with the Eximbank Guarantee, Eximbank will issue Eximbank Payment Certificates to the Trust in exchange for the Trustee's assignment to Eximbank of the Loan Notes in default. The Eximbank Payment Certificates will provide that Eximbank will make payments directly to the Trust on each subsequent Due Date of the amounts that were originally scheduled to be due on such Due Date with respect to such Loan Notes. Any such acceleration of the Loan Notes will not result in an acceleration of the Certificates. See "The Eximbank Guarantee--The Eximbank Guarantee." The Loan Notes evidence loans made to the Borrower by the Seller to enable the Borrower to finance the acquisition of two Boeing 767-300 Aircraft (the "Aircraft") and certain fees and expenses related thereto. The Borrower has leased the Aircraft to the Lessee and has granted a mortgage thereon. See "The Loan Notes" and "The Borrower and the Lessee." If a total loss occurs with respect to any Aircraft and such Aircraft is not replaced in accordance with the terms of the respective Aircraft lease, insurance proceeds and any other required amounts with respect to such Aircraft will be paid to Eximbank. The Loan Note with respect to such Aircraft will then be assigned to Eximbank and Eximbank will then issue an Eximbank Payment Certificate to the Trust requiring Eximbank to thereafter make payments directly to the Trust on each subsequent Due Date of the amounts that were originally scheduled to be due on such Due Date with respect to such Loan Note. Failure to maintain adequate insurance will not, however, relieve Eximbank of its obligation to make payment under the Eximbank Guarantee with respect to Borrower payment defaults, provided the notices and demands described below are timely made. Similarly, if the Lessee exercises its right to terminate the lease relating to an Aircraft following a determination by the Lessee that such Aircraft is surplus to its requirements or economically obsolete, the Loan Note relating to such Aircraft and affected by such early lease termination shall be assigned by the Trustee to Eximbank, and Eximbank will then issue an Eximbank Payment Certificate to the Trust requiring Eximbank to thereafter make payments directly to the Trust on each subsequent Due Date of the amounts that were originally scheduled to be due on such Due Date with respect to such Loan Note. Trustee's Fees and Expenses of the Trust........................ The Trustee's fees and expenses will be prepaid by or on behalf of the Borrower on the date of issuance of the Certificates. Such fees and expenses will not be payable from the scheduled payments on the Loan Notes. See "Description of the Certificates -- Duties and Immunities of the Trustee." The Eximbank Guarantee.............. Eximbank has endorsed each Loan Note with its guarantee of the payment of 100% of all scheduled amounts of principal of and interest on such Loan Note (the "Eximbank Guarantee"). The Eximbank Guarantee provides that if any scheduled amount of principal or interest due on a Loan Note on a Due Date is not paid when due, such amount will be payable by Eximbank, subject to compliance with the applicable terms and conditions set forth in the Eximbank Guarantee. According to an opinion of the Attorney General of the United States of America dated September 30, 1966, the Eximbank Guarantee represents an obligation of Eximbank backed by the full faith and credit of the United States of America, enforceable against Eximbank even if the obligations of the Borrower under a Loan Note are unenforceable. Under the terms of the Eximbank Guarantee, Eximbank will not be required to make a payment under the Eximbank Guarantee of amounts due but not paid on a Due Date which were not paid by or on behalf of the Borrower on such Due Date if the Trustee or the Servicer, on behalf and in the name of the Trustee, fails to make a written demand for payment upon Eximbank within 150 calendar days following such Due Date (but at least 30 calendar days after such Due Date) and upon the Borrower and the Lessee with respect to such Loan Note at least 15 calendar days prior to such demand upon Eximbank. In addition, it is a condition of the Eximbank Guarantee that a demand for payment must be made on the Industrial and Commercial Bank of China, on behalf of Eximbank, at least 15 calendar days prior to the date demand is made on Eximbank for payment under the Eximbank Guarantee. Accordingly, the Servicing Agreement requires the Servicer, on behalf of the Trustee, to make such a timely demand upon Eximbank, the Borrower, the Lessee and the Industrial and Commercial Bank of China. If the Servicer or Trustee fails to timely make such demand, the Servicer and Trustee forfeit the right to collect amounts on the Eximbank Guarantee with respect to such Due Date, but this failure does not affect the right to collect amounts on the Eximbank Guarantee with respect to any future Due Date. The Trustee is obligated pursuant to the Trust Agreement to make timely demands on Eximbank, the Borrower, the Lessee and the Industrial and Commercial Bank of China in the event the Servicer fails to make such demands. Liquidity Facility.................. The Certificates will benefit from an irrevocable liquidity facility arranged by the Company with ABN AMRO Bank N.V. in order to provide for the timely payment of principal and interest on the Certificates on any Payment Date on which the Borrower defaults in the payment of amounts due under a Loan Note. See "The Liquidity Facility." Initial Certificate Principal Balance.......................... $101,672,199.28 representing the aggregate principal balance on the Loan Notes as of October 25, 1996 (the "Cutoff Date"). Tax Status.......................... Chapman and Cutler, as special United States tax counsel to the Trust, will render an opinion to the effect that the Trust will be classified as a grantor trust for United States Federal income tax purposes, and the Certificateholders will be treated as beneficial owners of undivided fractional interests in the assets of the Trust. See "Certain Federal Income Tax Consequences." ERISA Considerations................ Certain prospective investors in the Certificates will be subject to the requirements of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") or Section 4975(e)(1) of the Internal Revenue Code of 1986, as amended (the "Code") if they are pension, profit sharing, or other employee benefit plans, individual retirement accounts or annuities or employee annuity plans (a "Plan" or "Plans"). The purchase of Certificates by Plans may cause the assets of the Trust to be treated as "plan assets," subjecting the Trustee to the fiduciary responsibility rules of ERISA, with which the Trustee may not be in a position to comply. Regardless of whether the Trust's assets are regarded as "plan assets," if the Certificates are purchased with assets of Plans and the Underwriter, the Trustee, the Lessee (as defined below), the Liquidity Provider or the Borrower, or any of their respective affiliates, is a party in interest or disqualified person with respect to any such Plan, possible violations of the prohibited transaction or fiduciary responsibility rules of ERISA could occur, unless such purchase is subject to a statutory or administrative exemption. Any fiduciary of a Plan considering the purchase of Certificates should consult its legal advisors regarding the consequences of such purchase under ERISA. See "ERISA Considerations."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000928022_callon_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000928022_callon_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b504226f5b6aaeee72c2b833245105310e7bd4ec
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000928022_callon_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO APPEARING ELSEWHERE HEREIN. UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITER'S OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED. REFERENCES TO "CALLON" OR THE "COMPANY" HEREIN INCLUDE CALLON PETROLEUM COMPANY AND ITS PREDECESSORS AND SUBSIDIARIES UNLESS THE CONTEXT OTHERWISE REQUIRES. CERTAIN TERMS RELATING TO THE OIL AND GAS INDUSTRY ARE DEFINED IN "GLOSSARY." THE COMPANY Callon Petroleum Company and its predecessors have been engaged in the acquisition, development, exploration and production of oil and gas since 1950. The Company's properties are geographically concentrated in Louisiana, Alabama and offshore Gulf of Mexico. Callon also manages properties for certain institutional investors. Callon was formed in 1994 through the consolidation of a publicly traded limited partnership, a joint venture with a consortium of European entities and an independent energy company owned by certain members of current management. As of December 31, 1995, the Company had estimated net proved reserves of 58.3 Bcfe with a PV-10 Value of $63.8 million, representing increases of 15% and 54% respectively, from December 31, 1994. The Company's objective is to enhance stockholder value through sustained growth in its reserve base, production levels and resulting cash flows from operations. Over the past two years, the Company has shifted its emphasis from the acquisition of producing properties to the acquisition of acreage with development and exploratory drilling opportunities to further increase potential recoverable reserves. In evaluating drilling opportunities, Callon performs extensive geological and geophysical studies using computer aided exploration techniques ("CAEX"), including, where appropriate, the acquisition of 3-D seismic or high-resolution 2-D seismic data to facilitate these efforts. EXPLORATION AND DEVELOPMENT OPERATIONS. The Company's exploratory and development operations are concentrated in two areas in the Gulf of Mexico, the Shallow Miocene focus area, located in the state waters of Alabama and the federal outer continental shelf in the Gulf of Mexico ("OCS"), and the outer regions of the OCS, at depths of between 13,000 and 18,000 feet ("Deep OCS Prospects"). Wells drilled in the Shallow Miocene focus area seek oil and gas deposits at from 1,800 to 6,000 feet, and are characterized by relatively low exploration and development costs, high initial production rates and short reserve lives. Wells drilled on the Deep OCS Prospects are more expensive to drill and complete. These wells have greater risks, but seek larger oil and gas deposits with longer reserve lives. In 1995 and 1996, the Company acquired an extensive infrastructure of production platforms, gathering systems and pipelines in the Shallow Miocene focus area. During 1996, the Company completed four proprietary high resolution seismic surveys over an eight block area contiguous to Chandeleur Block 40 ("CB 40") in the Shallow Miocene focus area. Based on these surveys, in October and November of 1996, the Company drilled two gross (1.52 net) successful development wells and one gross (1.0 net) successful exploratory well in this area. These wells are expected to be placed on production by the end of November and, coupled with the replacement of compression equipment at the CB 40 and Main Pass Block 163 production facilities, the Company anticipates a significant increase in its gas production rates by year-end 1996. The Company's capital budget currently anticipates drilling an additional five gross (4.0 net) development wells and three gross (0.9 net) exploratory wells during late 1996 and 1997 in this area, for aggregate net cost to drill and complete of $15.3 million. In 1996, the Company joined with Murphy Exploration and Production, Inc. ("Murphy") to acquire 18 blocks in the OCS. Callon owns a 25% working interest in these Deep OCS Prospects. The Company's capital budget for late 1996 and 1997 contemplates drilling eight gross (2.0 net) exploratory wells jointly with Murphy at a total cost to Callon to drill and complete of $11.3 million. The first well commenced drilling in the West Cameron 603 Block in October 1996, and drilling of the second well is scheduled in November 1996. In addition to the wells drilled with Murphy, the Company, as operator, plans to drill an additional two wells in 1997 on Deep OCS Prospects. In total, the Company's current capital budget contemplates the drilling of nine gross (5.9 net) development wells and 12 gross (3.9 net) exploratory wells during late 1996 and 1997 at an estimated net cost to the Company to drill and complete of $34.9 million. These drilling operations will be financed through cash flows from operations, the net proceeds of this Offering and borrowings under the Company's credit facility with a commercial bank ("Credit Facility"). See "Use of Proceeds." PRODUCING PROPERTY ACQUISITIONS. Over the past seven years, the Company has increased its reserves through the acquisition of producing properties that are geologically complex, have (or are analogous to fields with) an established production history from stacked pay zones and are candidates for exploitation. The Company focuses on reducing operating costs and implementing production enhancements through the application of technologically advanced production and recompletion techniques. Between 1989 and September 30, 1996, Callon acquired producing properties in 16 negotiated transactions, on behalf of itself and, in certain cases, its primary institutional investor, for an aggregate net purchase price of $194 million and, during that period, the Company had an average Reserve Replacement Cost of $0.84 per Mcfe. During the nine months ended September 30, 1996, the Company invested a total of $1.0 million and acquired an average 73% working interest (55% net revenue interest) in 12 producing wells, as well as a 100% ownership of one production facility and a 49% ownership in another, both of which are located in its Shallow Miocene focus area. Estimated net proved reserves attributable to these properties, as estimated by the Company's internal reserve engineers as of September 30, 1996, is 10 Bcfe. Through its acquisition program, the Company has assembled an operational and technical database in geographical areas at a low cost to the Company. The relationship with its institutional investors has allowed the Company to pursue larger acquisitions, while the cost sharing arrangements and ongoing management fees have enabled the Company to enhance the rate of return on its properties and to maintain a larger, more experienced team of technical and operating personnel than otherwise would be feasible for a company of its size. SIGNIFICANT PRODUCING PROPERTIES. The following table shows the PV-10 Value and estimated net proved oil and gas reserves by major field for the Company's four largest producing fields and for all other properties combined at December 31, 1995. <TABLE> <CAPTION> ESTIMATED NET PROVED PERCENT ---------------------- PV-10 TOTAL OIL GAS PRIMARY VALUE PV-10 RESERVES RESERVES FIELD NAME/LOCATION OPERATOR(S) ($000) VALUE (MBBLS) (MMCF) - ------------------------------------- ------------- ------- -------- --------- --------- <S> <C> <C> <C> <C> <C> Chandeleur Block 40.................. Callon $16,851 26.4% -- 12,161 Federal Waters Black Bay Complex.................... Callon 10,187 16.0 2,144 684 Louisiana State Waters North Dauphin Island................. Callon 9,749 15.3 -- 6,879 Alabama State Waters Big Escambia Creek Field............. Exxon 9,330 14.6 1,053 2,305 Escambia County, Alabama Other properties..................... Various 17,647 27.7 1,569 7,638 ------- -------- --------- --------- Total........................... $63,764 100.0% 4,766 29,667 ======= ======== ========= ========= </TABLE> THE OFFERING Securities Offered...... $21,000,000 aggregate principal amount of % Senior Subordinated Notes due 2001, assuming no exercise of the Underwriter's overallotment option to purchase up to $3,150,000 additional aggregate principal amount of Notes. Maturity Date........... December 15, 2001. Interest Payment Dates.. December 15, March 15, June 15 and September 15, commencing March 15, 1997. The first interest payment will represent interest from the date of original issuance through March 15, 1997. Optional Redemption..... The Notes will be redeemable at the Company's option, in whole or in part, on or after December 15, 1997 at 100% of the principal amount plus accrued interest to the date of redemption. See "Description of Notes -- Optional Redemption by Company." Ranking................. The Notes will be unsecured and subordinated in right of payment to all existing and future Senior Indebtedness of the Company. The Notes will also be structurally subordinated to all liabilities of the Company's subsidiaries. On September 30, 1996, the total amount of Senior Indebtedness of the Company was $8.9 million and the total amount of liabilities of the Company's subsidiaries as of September 30, 1996 was $13.0 million excluding guarantees of Senior Indebtedness. The Notes will rank senior to the Company's existing Series A Preferred Stock and any Convertible Debentures that may be issued upon the exchange of such Series A Preferred Stock. The Indenture pursuant to which the Notes will be issued will prohibit the Company's Restricted Subsidiaries from incurring subordinated indebtedness. See "Description of Notes -- Subordination" and "-- Certain Covenants -- Limitation on Indebtedness for Money Borrowed" and "Description of Existing Securities and Debt Instruments." Principal Covenants..... The Indenture will contain covenants restricting the Company's ability to incur additional indebtedness if the ratio of the Company's consolidated Indebtedness for Money Borrowed (as defined) to Consolidated EBITDA (as defined) would exceed 10.0:1 or if the ratio of Consolidated EBITDA to Consolidated Interest Expense (as defined) would be less than 1.1:1. The Indenture will also prohibit restrictions on the payments of dividends by Restricted Subsidiaries and will place limitations on certain liens, restricted payments and transactions with Affiliates and the ranking of future subordinated indebtedness. See "Description of Notes -- Certain Covenants."
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. AS USED HEREIN, THE "COMPANY" MEANS UNIVERSAL OUTDOOR HOLDINGS, INC., TOGETHER WITH ITS CONSOLIDATED SUBSIDIARIES, UNLESS THE CONTEXT OTHERWISE REQUIRES. "UOI" REFERS TO UNIVERSAL OUTDOOR, INC. AND ITS CONSOLIDATED SUBSIDIARIES, WHICH CONSTITUTE THE OPERATING SUBSIDIARIES OF THE COMPANY. UNLESS OTHERWISE SPECIFIED, THE PROSPECTUS ASSUMES (I) THE COMPLETION OF THE TRANSACTIONS (AS DEFINED) SCHEDULED OR ANTICIPATED TO OCCUR, (II) THE COMPLETION OF THE OFFERING AT A PRICE OF $32.00 PER SHARE, AND (III) NO EXERCISE OF THE UNDERWRITER'S OVER-ALLOTMENT OPTION. THE "TRANSACTIONS" CONSIST OF THE ACQUISITION OF OUTDOOR ADVERTISING HOLDINGS, INC. BY AN INDIRECT SUBSIDIARY OF UOI PURSUANT TO A MERGER OF SUCH INDIRECT SUBSIDIARY WITH AND INTO OUTDOOR ADVERTISING HOLDINGS, INC. (THE "POA ACQUISITION"), THE DEBT TENDER OFFERS (AS DEFINED), THE EXECUTION OF THE NEW CREDIT FACILITY (AS DEFINED), THE MEMPHIS/TUNICA ACQUISITION (AS DEFINED) AND THE ADDITIONAL ACQUISITIONS (AS DEFINED). SEE "TRANSACTIONS." "ACQUISITIONS" MEANS, COLLECTIVELY, THE POA ACQUISITION, THE MEMPHIS/TUNICA ACQUISITION AND THE ADDITIONAL ACQUISITIONS. "OPERATING CASH FLOW" HAS THE MEANING SET FORTH IN FOOTNOTE 2 ON PAGE 7 HEREOF AND "OPERATING CASH FLOW MARGIN" HAS THE MEANING SET FORTH IN FOOTNOTE 3 ON PAGE 7 HEREOF. THE TERM "MARKET" REFERS TO THE GEOGRAPHIC AREA CONSTITUTING A DESIGNATED MARKET AREA AS DEFINED BY THE A.C. NIELSON COMPANY. THE COMPANY The Company is a leading outdoor advertising company operating approximately 21,114 advertising display faces in two distinct regions: the Midwest (Chicago, Minneapolis/St. Paul, Indianapolis, Milwaukee, Des Moines, Evansville (IN) and Dallas) and the Southeast (Orlando, Jacksonville, Palm Beach, Ocala and the East Coast and Gulf Coast areas of Florida, Memphis/Tunica and Chattanooga (TN) and Myrtle Beach (SC)). After giving effect to the Acquisitions, the Company will be the third largest pure-play outdoor advertising company in the United States on the basis of net revenues. For the six months ended June 30, 1996, on a pro forma basis the Company had net revenues and Operating Cash Flow of $65.1 million and $32.0 million, respectively, which compare favorably to the pro forma results for the same period in 1995 of $56.7 million and $26.4 million, respectively. For the fiscal year ended December 31, 1995, on a pro forma basis the Company had net revenues and Operating Cash Flow of $121.0 million and $58.1 million, respectively. The Company believes that its 1995 Operating Cash Flow Margin of 48.7%, or 48.0% on a pro forma basis after giving effect to the Acquisitions, is among the highest in the industry. The Acquisitions will significantly expand and diversify the Company's presence into new major metropolitan markets. The following table sets forth, as of August 31, 1996, certain information with respect to the Company's outdoor markets after giving effect to the Acquisitions: <TABLE> <CAPTION> % OF 1995 PRO FORMA 30-SHEET 8-SHEET TOTAL DISPLAY MARKET NET REVENUES BULLETINS POSTERS POSTERS FACES - ------------------------------------- 1995 --------------- ----------- ----------- ----------- ------------- PRO FORMA NET REVENUES ---------------------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> MIDWEST: Chicago............................ $ 16,579 13.7% 653 -- 3,646 4,299 Minneapolis/St. Paul............... 16,320 13.5 447 1,365 -- 1,812 Indianapolis....................... 9,897 8.2 257 1,385 142 1,927 Milwaukee.......................... 4,686 3.9 260 -- 321 581 Des Moines......................... 3,141 2.6 84 590 9 683 Evansville......................... 3,028 2.5 142 687 -- 829 Dallas............................. 1,738 1.5 245 -- 1,201 1,446 SOUTHEAST: Orlando............................ 22,253 18.4 842 1,080 -- 1,922 Jacksonville....................... 8,528 7.0 383 942 -- 1,325 Palm Beach......................... 290 0.2 99 21 -- 120 Ocala.............................. 5,011 4.1 879 199 -- 1,078 Memphis/Tunica*.................... 13,104 10.8 706 1,179 133 2,018 Chattanooga........................ 4,582 3.8 359 663 -- 1,022 Myrtle Beach....................... 7,931 6.6 729 455 -- 1,184 East Coast area (FL)............... 2,784 2.3 567 -- -- 567 Gulf Coast area (FL)............... 1,095 0.9 444 -- -- 444 ---------- ----- ----- ----- ----- ------------- Total............................ $ 120,967 100.0% 7,096 8,566 5,452 21,114** ---------- ----- ----- ----- ----- ------------- ---------- ----- ----- ----- ----- ------------- </TABLE> - ------------------------ * To be acquired in connection with the Memphis/Tunica Acquisition. ** Excludes 143 transit display faces located in Indianapolis. OPERATING STRATEGY The Company's objective is to be the leading provider of outdoor advertising services in each of its two regional operating areas and to expand its presence in attractive new markets. The Company believes that regional clusters provide it with significant opportunities to increase revenue and achieve cost savings by delivering to local and national advertisers efficient access to multiple markets or highly targeted areas. Management intends to implement the following operating strategy: - MAXIMIZE RATES AND OCCUPANCY. Through continued emphasis on customer sales and service, quality displays and inventory management, the Company seeks to maximize advertising rates and occupancy levels in each of its markets. The Company has recruited and trained a strong local sales staff supported by local managers operating under specific, sales-based compensation targets designed to obtain the maximum potential from the Company's display inventory. - INCREASE MARKET PENETRATION. The Company seeks to expand operations within its existing markets through new construction, with an emphasis on painted bulletins, which generally command higher rates and longer term contracts from advertisers than other types of display faces. In addition, the Company historically has acquired, and intends to continue to acquire, additional advertising display faces in its existing markets as opportunities become available. - PURSUE STRATEGIC ACQUISITIONS. In addition to improved penetration of its existing markets, the Company also seeks to grow by acquiring additional display faces in closely proximate new markets. Such new markets allow the Company to capitalize on the operating efficiencies and cross-market sales opportunities associated with operating in multiple markets within distinct regions. The Company intends to develop new regional operating areas in regions where attractive growth and consolidation opportunities exist. - CAPITALIZE ON TECHNOLOGICAL ADVANCES. The Company seeks to capitalize on technological advances that enhance its productivity and increase its ability to effectively respond to its customers' needs. The Company's continued investment in equipment and technology provides for greater ongoing benefits in the areas of sales, production and operation. - MAINTAIN LOW COST STRUCTURE. Through continued adherence to strict cost controls, centralization of administrative functions and maintenance of low corporate overhead, the Company seeks to maximize its Operating Cash Flow Margin, which it believes to be among the highest in the industry. The Company believes its centralized administration provides opportunities for significant operating leverage from further expansion in existing markets and from future acquisitions. - DEVELOP OTHER OUT-OF-HOME MEDIA. The Company seeks to develop other forms of out-of-home media such as bus shelter or transit advertising in order to enhance revenues in existing markets or provide access to new markets. The Company believes that its experienced senior management team is an important asset in the successful implementation of its operating strategy. Daniel L. Simon, President and Chief Executive Officer and the founder of the Company, has spent his entire professional career of 23 years in the outdoor advertising business. Brian T. Clingen, Vice President and Chief Financial Officer, and Paul G. Simon, Vice President and General Counsel, together possess over 24 years of experience in the industry. As of June 30, 1996, this management team has successfully completed and integrated 16 acquisitions since 1989. RECENT ACQUISITIONS Consistent with its operating strategy, the Company has recently acquired the assets or capital stock of three outdoor advertising companies and has entered into an agreement to acquire the assets of an additional outdoor advertising company. The Company believes that these acquisitions will significantly strengthen its market presence in the midwest and southeast United States and will allow the Company to capitalize on the operating efficiencies and cross-market sales opportunities associated with operating in closely proximate markets. THE POA ACQUISITION. The Company acquired the outstanding capital stock of Outdoor Advertising Holdings, Inc. ("OAH") pursuant to a merger of an indirect subsidiary of the Company with and into OAH for approximately $240 million in cash. As a result of the POA Acquisition, the Company acquired a total of approximately 6,337 advertising display faces located in five markets in the southeast United States. The Company believes that the POA Acquisition will substantially strengthen the Company's operations in the southeast United States, particularly in Florida, where the Company believes it has the largest number of outdoor advertising display faces and has the largest market share in each of its markets, except Palm Beach. The Company believes that the southeast United States is a particularly attractive region due to its (i) high concentration of destination cities and resorts; (ii) above average population growth; (iii) extensive highway/roadway systems; and (iv) temperate climate that promotes outdoor lifestyles. THE MEMPHIS/TUNICA ACQUISITION. The Company, through a newly-formed indirect subsidiary, has acquired the option (the "Memphis/Tunica Option") to purchase during the period from December 1, 1996 to December 31, 1996 certain assets located in and around Memphis, Tennessee and Tunica County, Mississippi (the "Memphis/Tunica Acquisition"). The purchase price of the Memphis/Tunica Option was $5 million. The purchase price of the Memphis/Tunica Acquisition is approximately $71 million (inclusive of the price of the Memphis/Tunica Option) plus 100,000 shares of Common Stock of the Company. Upon consummation of the Memphis/Tunica Acquisition, the Company will acquire a total of approximately 2,018 advertising display faces located in and around Memphis, Tennessee. A significant number of these display faces were previously owned by Naegele (as defined). The Company believes that the Memphis/Tunica Acquisition will complement the Chattanooga operations which were acquired by the Company in the POA Acquisition. This will give the Company a leading presence in two of the largest markets in Tennessee and strengthen its presence in the southeast United States. THE ADDITIONAL ACQUISITIONS. The Company has acquired certain assets of (i) Iowa Outdoor Displays for approximately $1.8 million in cash (the "Iowa Acquisition") and (ii) The Chase Company for approximately $5.8 million in cash (the "Dallas Acquisition," and together with the Iowa Acquisition, the "Additional Acquisitions"). As a result of the Additional Acquisitions, the Company will acquire approximately 160 advertising display faces consisting primarily of posters in and around Des Moines and approximately 245 advertising display faces consisting primarily of bulletins in and around Dallas. The Company believes that the Additional Acquisitions will further enhance the Company's current presence in each of its Des Moines and Dallas markets and provide increased revenue opportunities in the midwest United States. As of the date of this Prospectus, the Memphis/Tunica Acquisition have not been consummated. See "Transactions" and "Description of Indebtedness and Other Commitments -- New Credit Facility". THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company.......... 5,000,000 shares Common Stock offered by the Selling Stockholders................................ 750,000 shares Common Stock to be outstanding after the Offering.................................... 23,242,800 shares(1) Use of Proceeds to the Company............... To repay existing bank indebtedness, repurchase certain outstanding notes and finance a portion of the purchase price payable in connection with certain of the Acquisitions. The Company will not receive any proceeds from the sale of shares by the Selling Stockholders. See "Principal and Selling Stockholders." Nasdaq National Market Symbol................ UOUT </TABLE> - ------------------------ (1) Excludes 2,470,608 shares of Common Stock issuable pursuant to the 1996 Warrant Plan and 387,200 shares of Common Stock issuable pursuant to the outstanding Noteholder Warrants. See "Management -- The 1996 Warrant Plan" and "Description of Capital Stock -- The Noteholder Warrants." Excludes issuance of 100,000 shares of Common Stock to be issued in connection with the Memphis/Tunica Acquisition. SUMMARY PRO FORMA FINANCIAL INFORMATION The following sets forth summary unaudited consolidated pro forma financial information derived from the information contained under the caption "Pro Forma Financial Information" elsewhere in this Prospectus. The summary unaudited pro forma consolidated statement of operations for the year ended December 31, 1995 and for the latest twelve month period ended June 30, 1996 give effect to (i) the Transactions, (ii) the Offerings and the application of the estimated net proceeds therefrom (assuming an Offering price of $32.00 per share), (iii) the acquisitions of NOA Holding Company ("Naegele"), Ad-Sign, Inc., Image Media, Inc. and consummation of the IPO (as hereafter defined) and the application of the estimated net proceeds therefrom, and (iv) the net reduction in operating expenses of the businesses acquired as if each had occurred at the beginning of the respective periods. The summary unaudited pro forma balance sheet as of June 30, 1996 has been prepared as if the Transactions, the Offerings and the IPO had occurred on June 30, 1996. The summary unaudited consolidated pro forma financial information does not purport to present the actual financial position or results of operations of the Company had the transactions and events assumed therein in fact occurred on the dates specified, nor are they necessarily indicative of the results of operations that may be achieved in the future. The summary unaudited pro forma consolidated financial information is based on certain assumptions and adjustments described in the notes contained in "Pro Forma Financial Information" and should be read in conjunction therewith. See "Management's Discussion and Analysis of Results of Operations and Financial Condition," the Consolidated Financial Statements and the Notes thereto of the Company, the Consolidated Financial Statements and the Notes thereto of NOA Holding Company, the Statement of Revenues and Direct Expenses and the Notes thereto of Ad-Sign, the Financial Statements and Notes thereto of POA Acquisition Corporation and the Combined Financial Statements and Notes thereto of Tanner-Peck, L.L.C. included elsewhere in this Prospectus. <TABLE> <CAPTION> PRO FORMA LATEST PRO FORMA TWELVE MONTHS YEAR ENDED DECEMBER ENDED 31, 1995 JUNE 30, 1996 ------------------- ----------------- <S> <C> <C> (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Net revenues(1)........................................................ $ 120,967 $ 129,381 Direct cost of revenues................................................ 45,309 46,938 General and administrative expenses.................................... 17,590 18,803 Depreciation and amortization.......................................... 36,271 35,786 Non cash compensation for common stock warrants........................ -- 9,000 Operating income....................................................... 21,797 18,854 Interest expense....................................................... 31,656 31,656 Other expense (income), net............................................ (150) 1,552 Net loss............................................................... (9,709) (14,354) OTHER DATA: Operating Cash Flow(2)................................................. $ 58,068 $ 63,640 Operating Cash Flow Margin(3).......................................... 48.0% 49.2% </TABLE> <TABLE> <CAPTION> AS OF JUNE 30, 1996 -------------------------------------- ACTUAL AS ADJUSTED ------------------- ----------------- <S> <C> <C> BALANCE SHEET DATA: Working capital........................................................ $ 8,330 $ 21,608 Total assets........................................................... 179,175 521,158 Total long-term debt................................................... 182,673 323,303 Common stockholders' equity (deficit).................................. (9,682) 187,911 </TABLE> - ------------------------------ (1) Net revenues are gross revenues less agency commissions. (2) "Operating Cash Flow" is operating income before depreciation and amortization and other non cash charges. Operating Cash Flow is not intended to represent net cash flow provided by operating activities as defined by generally accepted accounting principles and should not be considered as an alternative to net income (loss) as an indicator of the Company's operating performance or to net cash provided by operating activities as a measure of liquidity. The Company believes Operating Cash Flow is a measure commonly reported and widely used by analysts, investors and other interested parties in the media industry. Accordingly, this information has been disclosed herein to permit a more complete comparative analysis of the Company's operating performance relative to other companies in the media industry. (3) "Operating Cash Flow Margin" is Operating Cash Flow stated as a percentage of net revenues. SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ----------------------------------------------------- -------------------- 1991 1992 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Gross revenues................................... $ 21,435 $ 27,896 $ 28,710 $ 33,180 $ 38,101 $ 18,292 $ 29,366 Net revenues(1).................................. 18,835 24,681 25,847 29,766 34,148 16,411 26,239 Direct advertising expenses...................... 7,638 10,383 10,901 11,806 12,864 6,266 9,520 General and administrative expenses.............. 3,515 3,530 3,357 3,873 4,645 2,233 3,086 Depreciation and amortization.................... 5,530 7,817 8,000 7,310 7,402 3,538 4,674 Non cash compensation for common stock warrants........................................ -- -- -- -- -- -- 9,000 Operating income................................. 2,152 2,951 3,589 6,777 9,237 4,374 (41) Interest expense................................. 6,599 9,591 9,299 11,809 12,894 6,342 8,441 Loss before extraordinary item(2)................ (4,500) (6,349) (6,061) (5,166) (3,703) (1,993) (10,156) Net loss......................................... (4,500) (6,349) (9,321) (5,166) (3,703) (1,993) (10,156) Net loss per share............................... (0.59) (0.83) (1.22) (0.67) (0.48) (0.26) (0.97) Weighted average common and equivalent shares outstanding..................................... 7,654 7,654 7,654 7,654 7,654 7,654 10,489 OTHER DATA: Operating Cash Flow(3)........................... $ 7,682 $ 10,768 $ 11,589 $ 14,087 $ 16,639 $ 7,912 $ 13,633 Operating Cash Flow Margin(4).................... 40.8% 43.6% 44.8% 47.3% 48.7% 48.2% 52.0% Capital expenditures............................. 2,047 2,352 2,004 4,668 5,620 2,521 2,943 </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 ---------------------------------------- ACTUAL PRO FORMA(6) AS ADJUSTED(7) --------- ------------- -------------- <S> <C> <C> <C> BALANCE SHEET DATA: Working capital....................................................... $ 8,330 $ 21,608 $ 21,608 Total assets.......................................................... 179,175 514,408 521,158 Total long-term debt(5)............................................... 182,673 449,837 323,303 Common stockholders' equity (deficit)................................. (9,682) 54,627 187,911 </TABLE> - ------------------------------ (1) Net revenues are gross revenues less agency commissions. (2) Extraordinary loss represents loss on early extinguishment of debt. (3) "Operating Cash Flow" is operating income before depreciation and amortization and other non cash charges. Operating Cash Flow is not intended to represent net cash provided by operating activities as defined by generally accepted accounting principles and should not be considered as an alternative to net income (loss) as an indicator of the Company's operating performance or to net cash provided by operating activities as a measure of liquidity. The Company believes Operation Cash Flow is a measure commonly reported and widely used by analysts, investors and other interested parties in the media industry. Accordingly, this information has been disclosed herein to permit a more complete comparative analysis of the Company's operating performance relative to other companies in the media industry. (4) "Operating Cash Flow Margin" is Operating Cash Flow stated as a percentage of net revenues. (5) Long-term debt does not include current maturities. (6) Represents actual amounts adjusted to give effect to the Transactions, and the application of the net proceeds from the IPO of $62.4 million. (7) Represents pro forma amounts adjusted to give effect to the Offerings.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000928737_control_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000928737_control_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus assumes that the Underwriters' over-allotment option to purchase up to 300,000 additional Common Shares is not exercised and is adjusted to give effect to (i) the exercise of all outstanding warrants to purchase an aggregate of 564,100 Class B Series 1 Common Shares at $0.01 per share, (ii) the conversion of all 999,996 Class B Series 1 Common Shares outstanding after such exercise into a like number of Class A Common Shares, (iii) the reclassification of Class A Common Shares into Common Shares and the elimination of the designations of Class A Common Shares and Class B Common Shares and (iv) the conversion of all RDI Convertible Notes (as defined below) into 89,240 Common Shares (assuming an initial public offering price of $10.00 per share). The adjustments discussed above will occur immediately prior to the closing of this Offering. See "Company History," and "Description of Capital Shares." Reference herein to the "Company" includes predecessors of the Company and the Company's consolidated subsidiaries, unless the context otherwise requires. Prospective investors should carefully consider the information set forth under the heading "Risk Factors." THE COMPANY Control Devices, Inc. ("CDI" or the "Company") designs, manufactures and markets circuit breakers, electronic sensors and electronic ceramic component parts used by original equipment manufacturers ("OEMs") in the automotive, appliance and telecommunications markets. The Company is a leading supplier of automatically resetting circuit breakers and solar sensors for the automotive market and of glass enclosed circuit breakers for the appliance market. The Company has supplied circuit breakers to automotive OEMs for more than 30 years, and in 1991 expanded its offerings to the automotive market by introducing its initial sensor product, a solar sensor used to automatically signal adjustments in climate control systems in luxury cars. The Company's products are sold to the three major North American automotive OEMs, General Motors Corporation ("GM"), Ford Motor Company ("Ford") and Chrysler Corp. ("Chrysler"), as well as to foreign OEMs such as Mercedes, Peugeot, Volkswagen and Valeo. Sales to GM, Ford and Chrysler, and their suppliers, in North America accounted for approximately 45% of net sales in 1995. Other principal customers include Danfoss, Celwave and Siecor. In April 1996, the Company acquired all of the outstanding capital stock of Realisations et Diffusion pour l'Industrie ("RDI"), which is headquartered near Paris, France. RDI markets, distributes, assembles and packages a full line of circuit protection devices, including various fuses and circuit breaker components and assemblies manufactured by other companies. The Company purchased RDI primarily to enhance its market penetration of the automotive OEM market in Europe, in part by locating itself closer to European customers. Management believes that the resulting expansion of its European presence and improvement of its European distribution network will enhance the Company's ability to distribute in Europe existing, internally developed and newly acquired products. Since 1991, CDI has shipped approximately 4.2 million solar sensor units. To complement its solar sensor product lines, in July 1995, the Company commenced shipments of its steering wheel sensor to Ford, and in September 1996 commenced shipments of its twilight sensor to GM to be used in GM's Daytime Running Lamp ("DRL") program beginning with certain 1997 models. The Company is also in various stages of development of its rain, window fog and other solar (climate control)/twilight (headlamp control) sensors for a number of domestic and foreign automotive OEMs. In late 1995, in an effort to encourage automotive OEMs' use of sensors in a greater range of vehicle models, the Company sought to lower the cost of its sensors by incorporating chip-on-board manufacturing technology. With chip-on-board technology, the Company bonds custom silicon wafers directly onto an integrated circuit board, to incorporate both the function of numerous discrete electronic components and a photodiode. This technology significantly reduces the number of components in the Company's sensor products, thereby lowering the cost of the sensor as well as providing greater design flexibility through reduced board size requirements. The Company's chip-on-board technology is currently employed on the twilight sensor being delivered to GM, and the Company is redesigning all of its sensor products to incorporate this technology. On July 29, 1994, the Company acquired substantially all of the assets and certain liabilities (the "Business") of GTE Control Devices Incorporated and Dominican Overseas Trading Company, two subsidiaries of GTE Corporation (collectively referred to herein as "GTE"). For periods prior to July 29, 1994, the Business is sometimes referred to herein as the "Predecessor Company." The Company is an Indiana corporation incorporated in June 1994 to purchase the Business. See "Company History." The principal executive offices of the Company are located at 228 Northeast Road, Standish, Maine 04084, and its telephone number is (207) 642-4535. THE OFFERING Common Shares being Offered by the 2,000,000 shares Company............................ Common Shares to be outstanding after the Offering................. 4,653,334(1) Use of Proceeds..................... Repayment of long-term indebtedness (including accrued interest), redemption of outstanding preferred shares (including payment of accrued dividends) and the balance, if any, for working capital. See "Use of Proceeds." SNSR Nasdaq National Market Symbol.. - -------- (1) Excludes a currently exercisable option to purchase 200,000 Common Shares and options to purchase 150,000 Common Shares granted, subject to the closing of this Offering, and not yet exercisable. See "Description of Capital Shares." SUMMARY FINANCIAL INFORMATION (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> PREDECESSOR CONTROL COMPANY(1) DEVICES, INC. PRO FORMA(2) CONTROL DEVICES, INC. --------------------------------- ------------- ------------ ---------------------------- SEVEN FIVE MONTHS MONTHS YEAR YEAR SIX MONTHS YEARS ENDED ENDED ENDED ENDED ENDED ENDED DECEMBER 31, JULY 29, DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30, ------------------------ -------- ------------- ------------ ------------ --------------- 1991 1992 1993 1994 1994 1994 1995 1995 1996(3) ------- ------- ------- -------- ------------- ------------ ------------ ------- ------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF INCOME DATA: Net sales.............. $38,088 $39,747 $39,807 $24,995 $18,847 $43,842 $38,881 $20,713 $28,180 Gross profit........... 2,394 5,328 9,761 7,319 6,688 14,007 13,160 7,380 10,310 Operating income (loss)(4)............. (3,512) 1,084 4,380 3,825 3,223 7,053 6,916 4,006 4,273 Net income (loss)(5)... (2,107) 650 2,628 2,295 1,576 3,319 3,458 1,964 2,123 Net income applicable to common shareholders(6)....... 1,466 3,055 3,194 1,832 1,991 Net income per share(6)(7)........... $ 0.57 $ 1.19 $ 1.25 $ 0.71 $ 0.78 ======= ======= ======= ======= ======= Weighted average number of common shares and equivalents outstanding(6)........ 2,564 2,564 2,564 2,564 2,564 OTHER DATA: Research and development........... $ 863 $ 651 $ 2,144 $ 1,598 $ 1,052 $ 2,650 $ 2,740 $ 1,402 $ 1,880 Research and development as a percentage of net sales(8).............. 2.3% 1.6% 5.4% 6.4% 5.6% 6.0% 7.0% 6.8% 6.7% </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 ---------------------- ACTUAL AS ADJUSTED(9) ------- -------------- <S> <C> <C> BALANCE SHEET DATA: Working capital........................................ $ 8,515 $ 9,273 Total assets........................................... 42,986 42,067 Long-term debt, net of current maturities.............. 16,743 1,487 Redeemable preferred shares............................ 2,400 -- Shareholders' equity................................... 7,274 25,688 </TABLE> - -------- (1) On July 29, 1994, the Company purchased the Business. See "Company History." The data prior to July 29, 1994 represent the financial information of the Predecessor Company, and has been prepared by the Company. See Note 1 to the Company's Financial Statements. (2) Pro forma year ended December 31, 1994 amounts were prepared as if the acquisition of the Business and initial capitalization of the Company had occurred on January 1, 1994. These pro forma results include adjustments for depreciation and amortization of assets acquired based on their fair market values at the acquisition date, increased interest on acquisition debt, additional preferred share dividends, limination of allocated employee benefit and administrative expenses, additional professional fees and the related income tax effect. The unaudited pro forma consolidated financial data do not purport to represent what the results of operations of the Company would actually have been if the acquisition and initial capitalization had in fact occurred on January 1, 1994, or to project the results of operations of the Company for any future date or period. See Note 3 to the Company's Financial Statements. (3) The Summary Financial Information for the six months ended June 30, 1996 includes RDI's results of operations from April 1, 1996, the date of the acquisition. (4) The Predecessor Company incurred an operating loss in the year ended December 31, 1991, due in part to the GTE corporate allocation charge of approximately $2,000,000 and higher cost of sales associated with manufacturing facilities closed in 1991. (5) For purposes of computing the income tax provision (benefit), an effective tax rate of 40% was used for the Predecessor Company results of operations because no income taxes were allocated to the Predecessor Company. (6) See Note 2 to the Company's Financial Statements. Net income, net income applicable to common shareholders, and weighted average number of common shares and equivalents outstanding are not presented for periods prior to and including July 29, 1994 as the Business did not operate as an independent entity during such periods. (7) The supplemental net income per share would have been $0.99 and $0.56 for the year ended December 31, 1995, and the six month period ended June 30, 1996, respectively, assuming the conversion of the RDI Convertible Notes, the issuance of 1,816,500 and 1,842,600 Common Shares, respectively, at a public offering price of $10.00 per share (the midpoint of the estimated range of the initial public offering price), and the application of proceeds thereof and cash on hand to retire the Company's 10% Senior Notes plus accrued interest, 11% Subordinated Notes plus accrued interest and the Redeemable Preferred Shares plus accrued dividends, as of the beginning of each period. (8) Research and development as a percentage of net sales for the six months ended June 30, 1996 includes the financial data for RDI. The percentage for the six months ended June 30, 1996 without RDI was 8.5%. (9) After giving effect to (i) the adjustments described above in this Prospectus Summary and (ii) the sale by the Company of the Common Shares offered hereby at an assumed initial public offering price of $10.00 per share (the midpoint of the estimated range of the initial public offering price) and application of the net proceeds therefrom and cash on hand. See "Use of Proceeds".
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000928775_associated_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000928775_associated_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. THE COMPANY Associated Business & Commerce Insurance Corporation (the "Company") commenced business as a stock insurance company in December 1995 upon receipt from the Florida Department of Insurance (the "Department of Insurance") of a Certificate of Authority. Concurrently with the commencement of business, the Company assumed substantially all of the assets and liabilities of the Associated Business and Commerce Workers' Compensation Self-Insurance Fund (the "Fund"), a certified assessable workers' compensation group self-insurance fund that began operations in late 1991. The Fund's officers and employees have continued in similar positions with the Company, and the Trustees and Administrator of the Fund act as directors and officers of the Company. Further, the Company has continued the Fund's relationship with the network of independent agents in Florida. See "Business." As of May 1, 1996, the Company had approximately 1,200 policyholders and $27.5 million in annual written premiums. The Company offers a full range of workers' compensation coverage, including a managed care plan. See "Business--Products" and "Business--Managed Care." The Company's business is regulated by the Department of Insurance. The Company is subject to assessments by the Florida guarantee association for traditional insurance carriers. Policies issued by the Company to its insureds, however, are non-assessable, in contrast to the assessable policies issued by self-insurance funds. A stock insurance company cannot assess its policyholders for losses of the company and is required to satisfy statutory capital and surplus requirements. Therefore, stock insurance companies afford their policyholders greater financial certainty and security. It is the goal of the Company to provide superior service and minimize the cost of workers' compensation insurance for its insureds. This focus on a single line of business is expected to give the Company a unique opportunity to position itself as a focused company in a service-intensive line of insurance. The Company's primary marketing strategy is to preserve existing business relationships and establish new relationships with agents, thus creating a network of high-quality, high-volume producers for the Company. In addition to the current agency network, the Company's marketing representatives will continue to contact other independent agents. See "Business--Strategy." Upon acquisition of the Fund's assets and liabilities by the Company, the Company assumed claims liabilities and assessable provisions of existing insurance coverage of past members of the Fund who chose to be insured by the Company. Financial information will be available to shareholders upon request. INVESTMENT BY HOLDINGS AND UNDERWRITERS LOAN The Company is a wholly owned subsidiary of Associated Business & Commerce Holdings, Inc. ("Holdings"). Holdings was organized solely for the purpose of providing financing for the Company and performing certain management services for the Company under a Management Agreement between the Company and Holdings (the "Management Agreement"). Holdings does not carry on any other business activities. The officers and employees of Holdings devote their full business time to the business and affairs of the Company pursuant to the terms of the Management Agreement. See "Business--Management Agreement." Holdings has invested $3,200,000 in the Company through the purchase of 3,200,000 shares of the Company's Convertible Preferred Stock, Series B (the "Series B Preferred"). Holdings entered into a term loan agreement (the "Loan Agreement") with Underwriters Reinsurance Company ("Underwriters") pursuant to which Underwriters loaned Holdings $3,200,000 for use by Holdings to purchase Series B Preferred from the Company. The loan bears interest at 12.75% per annum. If not earlier prepaid, the loan is due on September 30, 2000. Holdings has pledged as collateral for the loan, among other things, all of the Common Stock of the Company held by Holdings and all of the Series B Preferred purchased by Holdings with the loan proceeds. The Series B Preferred does not carry any voting or dividend rights. It is convertible into shares of Common Stock at a price of $1.00 per share. In the event of a liquidation of the Company, holders of the Series B Preferred have equal priority to the net assets of the Company up to the Series B liquidation value of $1.00 per share. In the event the Series B Preferred is converted to Common Stock, the ownership interest of the holders of the Series A Preferred will be substantially diluted. In addition, Holdings granted Underwriters options to purchase shares of Holdings common stock in an amount, after issuance, up to a maximum of 49% of the number of shares and options held by the founders, shareholders, officers, directors and employees ("Insiders") of Holdings. The number of shares subject to the option is based upon the date on which the final payment to Underwriters pursuant to the loan is made. If the final payment is made during the first year that the loan is outstanding, Underwriters may purchase shares of Holdings common stock equal to 10% of the stock held by Insiders; in the second year, shares equal to 20%; in the third year, shares equal to 30%; in the fourth year, shares equal to 40%; and after the fourth year, shares equal to the maximum of 49%. All of the shares subject to the option described above may be purchased by Underwriters for the book value of such shares. The options remain exercisable until five years after the loan is repaid. If the loan is repaid on its due date of September 30, 2000, the options would remain outstanding until September 30, 2005. If Underwriters exercises all such options, it will be the largest shareholder of Holdings and, as a result, will be able to control the business and affairs of the Company. Holdings has agreed not to permit the Company to pay any dividends or repurchase any of its stock without the prior consent of Underwriters. The Company does not expect Underwriters to permit the Company to pay dividends until the loan to Holdings is repaid. Until the loan to Holdings is repaid in full, Holdings and its shareholders have agreed to cause one designee of Underwriters to be elected to the board of directors of Holdings. The current designee to the board of Holdings is Mr. Lawrence G. Frank, Vice President, Pegasus Advisors, Inc. (Underwriters agent). Mr. Frank does not have any prior relationship with Holdings or the Company and is not a director of the Company. Holdings has also granted Underwriters options to purchase Holdings common stock, exercisable in an amount based on the amount of the loan which becomes past due. The amount of exercise price paid by Underwriters upon exercise of the options will be credited against the past due amount. The other shareholders of Holdings have the right to purchase any shares of Holdings acquired by Underwriters pursuant to such options. Holdings expects to repay Underwriters through fees received by it pursuant to the Management Agreement, which may include distributions from the sale of shares of Series A Preferred pursuant to this Offering. See "Business--Management Agreement." In the event Holdings is unable to repay the loan in accordance with its terms, it is expected that Underwriters would foreclose its lien on the shares of Common Stock pledged to it by Holdings, and thereby become the sole holder of the Company's Common Stock. As sole common shareholder, Underwriters would be able to elect all of the directors of the Company and thereby control the Company's business and affairs. Underwriters may also foreclose its lien on the pledged shares of the Company's Common Stock in the event that the Loan Agreement is breached. In addition to customary loan agreement events of default, the Loan Agreement will be in breach if (i) the Company fails to maintain statutory surplus of at least $4,000,000, (ii) the Company fails to maintain risk based capital at 120% of amounts adopted by the Florida Department of Insurance, (iii) the Company fails to maintain a ratio of net premiums written during each calendar quarter, annualized, of not greater than 320% of statutory surplus, or (iv) Errol Bader ceases to be the President of Holdings, other than as a result of his death, Mr. Bader ceases to own or control at least 30% of the outstanding stock of Holdings or Holdings fails to maintain a key man life insurance policy on Mr. Bader's life. Based on the March 31, 1996 financial statements of the Company, the Company believes it is in compliance with such financial covenants. The Loan Agreement also provides that, to the extent permitted by law, the proceeds of future sales of securities by the Company, excluding the shares offered hereby, and Holdings be used to repay the loan. Before any proceeds of sales of securities by the Company could be permitted to be paid to Holdings to repay the loan, all accrued dividends on the Company's preferred stock would have to be paid and the permission of the Department of Insurance would have to be obtained. In connection with the loan, Holdings has also agreed to cause Underwriters to provide the Company with proportional quota share reinsurance until the loan is repaid. If the rate of profit made by Underwriters on the reinsurance agreement exceeds an agreed upon amount, the excess will reduce the loan balance, on a dollar for dollar basis. If the loan is repaid prior to its due date, Holdings has agreed to cause the Company to give Underwriters a right of first refusal on the Company's quota share reinsurance through September 30, 2000. The quota share reinsurance obligations were a material inducement to Underwriters to agree to make the loan to Holdings to finance Holdings' purchase of the Series B Preferred. The Series B Preferred does not have voting rights, does not bear a dividend and is convertible into shares of Company Common Stock. Holdings has also pledged to Underwriters as additional collateral all of Holdings' rights in the Management Agreement. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources," "Principal Shareholders--Investment by Holdings and Underwriters Loan" and "Description of Capital Stock--Series B Preferred." THE OFFERING The Company is hereby offering for sale up to 1,000,000 shares of its 6% Cumulative Convertible Preferred Stock, Series A (the "Series A Preferred"), to current and prospective customers of Company insurance products as well as Company agents and vendors and their employees. Customers or agents are not required to purchase shares of Series A Preferred as a condition of doing business with the Company. The offering is being made only to residents of Florida. The only persons authorized to make this offer on behalf of the Company are Errol Bader, Ronald Rupp, Timothy Spear, John Kennedy and Marsha Duffy. Each of these persons is a full time officer or employee of the Company and does not represent a broker or dealer firm. No other person or firm is authorized to represent the Company in any capacity in connection with the offering, to provide any information, to answer any inquiries or otherwise participate in the offering for the Company. See "Plan of Distribution." Subscriptions received for shares of Series A Preferred offered hereby are irrevocable. There are no minimum purchase requirements for the Series A Preferred. In the event the offering is oversubscribed, the Company reserves the right to pro rate subscriptions. In the future, the Company intends to offer and sell additional shares of the Series A Preferred, or shares of different series of preferred stock, in order to provide capital to meet statutory requirements for future growth of the Company's business. Different series of preferred stock may have different dividend, redemption and conversion rates and may rank equal with the Series A Preferred offered hereby with respect to priority in the payment of dividends and upon liquidation. See "Description of Capital Stock." 6% CUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES A The Series A Preferred ranks senior to the Common Stock with respect to dividend rights and rights upon liquidation, dissolution or winding up of the Company. The Company has the right, without the consent of the holders of the Series A Preferred, to issue further series of preferred stock as well as additional shares of the Series A Preferred. As of March 31, 1996, there were 251,536 shares of Series A Preferred outstanding. At the discretion of the Board of Directors, dividends are payable semi-annually on April 1 and October 1 at the rate of 6% per year ($.60 per share). Dividends not paid will accrue and become payable upon the next dividend payment with respect to the Series A Preferred, or upon liquidation, dissolution or winding up of the Company. Upon liquidation of the Company, holders of the Series A Preferred will be entitled to receive $10.00 per share, plus accrued and unpaid dividends, prior to holders of the Common Stock receiving any amount. Each share of the Series A Preferred will be convertible, at the option of the holder, at any time after December 31, 2000, at a conversion ratio of one share of Common Stock for each $5.00 of stated value of Series A Preferred. The stated value of the Series A Preferred is $10.00 per share. In addition, the Company may, at its option at any time after December 31, 1998, redeem the outstanding shares of Series A Preferred at a price per share equal to $10.00 plus accumulated and unpaid dividends. In order to redeem the shares, the Company is obligated to give holders of the Series A Preferred 30 days' advance notice. During such 30 day period, holders may, at their option, convert their shares of Series A Preferred into shares of Common Stock in lieu of redemption. See "Dividend Policy" and "Description of Capital Stock." USE OF PROCEEDS The net proceeds to be received by the Company from the sale of the Series A Preferred offered hereby will be used first to fund statutory surplus levels for the growth and expansion of the Company's business. After necessary minimum statutory surplus levels are obtained, additional net proceeds received, if any, may be used to redeem shares of the Series B Preferred pledged as collateral for Holdings' loan from Underwriters. Additional proceeds, if any, will be used for general working capital purposes. PLAN OF DISTRIBUTION The Company expects to direct this offer to current and prospective customers of Company insurance products, as well as to Company agents and vendors and their employees, through direct contact by persons authorized to make this offer on behalf of the Company. Company customers or agents are not required to purchase shares of Series A Preferred as a condition of doing business with the Company. The offering is only being made to residents of Florida. The only persons authorized to make this offer on behalf of the Company are Errol Bader, Ronald Rupp, Timothy Spear, John Kennedy and Marsha Duffy. Each of these persons is a full time officer or employee of the Company and does not represent a broker or dealer firm. No other person or firm is authorized to represent the Company in any capacity in connection with the offering, to provide any information, to answer any inquiries or otherwise participate in the offering for the Company. No person or firm, including the five authorized Company personnel, will receive any additional compensation or commissions for their activities in connection with sales of the Series A Preferred. The offering price of the Series A Preferred was arbitrarily determined by the Company. Prior to this offering, there has been no public market for the Series A Preferred and it is unlikely that a public market for the Series A Preferred will develop. In the future, the Company intends to offer and sell additional shares of the Series A Preferred, or shares of different series of preferred stock, in order to provide capital to meet statutory requirements for future growth of the Company's business. Different series of preferred stock may have different dividend, redemption and conversion rates and may rank equal with the Series A Preferred offered hereby with respect to priority in the payment of dividends and upon liquidation. See "Description of Capital Stock." SUMMARY FINANCIAL DATA <TABLE> <CAPTION> MARCH 31, 1996 ------------------------------------------------- AS CURRENTLY APPLICATION OF PRO FORMA REPORTED(1) NET PROCEEDS AS ADJUSTED(2) --------------- --------------- --------------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash and invested assets ..................... $15,266,443 $ 9,925,000 $25,191,443 Premium receivable ........................... 3,881,855 -- 3,881,855 Reinsurance recoveries ....................... 15,642,408 -- 15,642,408 Other assets ................................. 4,057,798 75,000 4,132,798 --------------- --------------- --------------- Total assets ............................... $38,848,504 $10,000,000 $48,848,504 =============== =============== =============== Reserve for claims ........................... $27,825,314 -- $27,825,314 Other liabilities ............................ 5,149,385 -- 5,149,385 Stockholders' equity: Common Stock ................................ 102,501 -- 102,501 Preferred Stock, Series A ................... 251,536 1,000,000 1,251,536 Preferred Stock, Series B ................... 3,200,000 -- 3,200,000 Additional paid-in capital .................. 2,263,824 9,000,000 11,263,824 Retained earnings ........................... 55,944 -- 55,944 --------------- --------------- --------------- Total stockholders' equity .................. 5,873,805 10,000,000 15,873,805 --------------- --------------- --------------- Total liabilities and stockholders' equity $38,848,504 $10,000,000 $48,848,504 =============== =============== =============== <FN> - ---------------- (1) As reported by the Company in unaudited, GAAP-basis financial statements included elsewhere in this prospectus. (2) Adjusted to reflect receipt of the net proceeds from the sale of 1,000,000 shares of Series A Preferred hereby and the application of the proceeds therefrom. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000929452_knight_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000929452_knight_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..6ebec4967bb4aaf55960fb23f2cf22c9ca4b152b
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Consolidated Financial Statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. Unless the context otherwise requires, references in this Prospectus to "Knight" or the "Company" refer to Knight Transportation, Inc. and its consolidated subsidiaries. THE COMPANY Knight is a short to medium-haul, dry van truckload carrier providing regional service primarily in the western United States. The Company transports general commodities, including consumer goods, packaged foodstuffs, paper products, beverage containers, and imported and exported commodities. The Company has recently established operations near Houston, Texas to provide dedicated services to one of its larger customers and to commence regional service in Texas and Louisiana. The Company has also initiated operations in Indianapolis, Indiana, from which it will provide regional and dedicated service in the Midwest and on the East Coast. The Company's operating strategy is to achieve significant but controlled growth by providing high quality services to service-sensitive customers, with the goal of obtaining sustained, predictable business that will allow the Company to achieve a high level of equipment utilization and other operating efficiencies. Knight commenced operations in July 1990, when Kevin, Gary and Keith Knight joined Randy Knight to establish a new short to medium-haul truckload carrier. The Knights average more than 20 years of experience in the truckload industry. The Company's goal is to attain growth and profitability through intensive management and the creation of simplified, cost effective operations. During the five year period ended December 31, 1995, management led the Company to a 43.0% compounded annual increase in operating revenue and a 61.2% compounded annual increase in net income. The Company intends to continue to develop its business by servicing existing and new customers in its core markets in the western United States, while expanding its operations and providing regional and dedicated service in Texas and Louisiana as well as in the Midwest and on the East Coast. The Company was incorporated in Arizona in 1989. Knight's headquarters are located at 5601 West Buckeye Road, Phoenix, Arizona 85043, and its telephone number is (602) 269-2000. THE OFFERING Common Stock offered by the Company ................. 800,000 shares Common Stock offered by the Selling Shareholders .... 800,000 shares Common Stock to be outstanding after the offering .. 9,902,000 shares(1) Use of proceeds ..................................... To reduce indebtedness, acquire revenue equipment, and for other general corporate purposes Nasdaq National Market symbol ....................... KNGT - ---------- (1) Excludes 648,000 and 75,000 shares reserved for issuance under the Company's Stock Option Plan and 401(k) Plan, respectively. See "Executive Compensation and Other Information -- 1994 Stock Option Plan; 401(k) Plan." <TABLE> SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OPERATING DATA) <CAPTION> THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ------------------------------------------------- ------------------- 1991 1992 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENTS OF INCOME DATA: Operating revenue .................$13,445 $19,579 $26,381 $37,543 $56,170 $11,908 $16,581 Income from operations ............ 2,287 3,366 5,126 8,112 10,601 2,362 2,835 Net interest expense and other ... (786) (847) (844) (734) (195) (44) (97) Income before income taxes ........ 1,501 2,519 4,282 7,378 10,406 2,318 2,738 Net income ........................ 861 1,399 2,447 4,094 5,806 1,286 1,588 Net income per share .............. .11 .17 .30 .49 .64 .14 .17 Weighted average outstanding shares .......................... 8,200 8,200 8,200 8,375 9,141 9,142 9,151 OPERATING DATA: Operating ratio(1) ................ 83.0% 82.8% 80.6% 78.4% 81.1% 80.2% 82.9% Average revenue per mile ..........$ 1.20 $ 1.17 $ 1.22 $ 1.29 $ 1.26 $ 1.29 $ 1.24 Average length of haul (miles) .... 448 464 472 482 494 488 483 Empty mile factor ................. 12.8% 14.3% 11.8% 10.1% 10.3% 10.0% 10.4% Tractors operated at end of period: Company ...................... 110 147 199 262 310 285 360 Independent contractor ....... -- -- -- 30 115 55 131 --------- --------- --------- --------- --------- --------- --------- Total tractors .................... 110 147 199 292 425 340 491 Trailers operated at end of period 260 323 489 639 1,044 664 1,264 </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 ------------------------- ACTUAL AS ADJUSTED(2) ---------- -------------- <S> <C> <C> BALANCE SHEET DATA: Working capital (deficit) ..................................$(5,807) $ 9,474 Total assets ............................................... 52,791 63,072 Current portion of long-term debt and line of credit ....... 6,003 1,003 Long-term debt, net of current portion ..................... 754 754 Shareholders' equity ....................................... 26,320 41,601 <FN> - ---------- (1) Operating expenses as a percentage of operating revenue. (2) Adjusted for the sale of 800,000 shares offered by the Company (at an assumed public offering price of $20.50 per share) and the application of the estimated net proceeds as described in "Use of Proceeds". </FN> </TABLE>
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000929473_thermatrix_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000929473_thermatrix_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..a54dedbaab0819cc9a0a92e756c8fb3fe22bc469
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the consolidated financial statements and notes thereto appearing elsewhere in this Prospectus. As used in this Prospectus, the terms "Thermatrix" and the "Company" refer to Thermatrix Inc., a Delaware corporation, its predecessor Thermatrix Inc., a California corporation and its sole subsidiary, Thermatrix Ltd., a corporation incorporated under the laws of England and Wales. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. Unless otherwise indicated, all information contained in this Prospectus: (i) assumes an initial public offering price of $13.00 per share, the mid-point of the range set forth on the cover page of this Prospectus; (ii) assumes no exercise of outstanding options or warrants to purchase an aggregate of 814,097 shares of Common Stock; (iii) assumes no exercise of the Underwriters' over-allotment option; (iv) reflects the automatic conversion of all outstanding shares of Series B, Series C, and Series D Preferred Stock (collectively, the "Preferred Stock") into an aggregate of 5,267,313 shares of Common Stock upon the closing of this offering; (v) reflects the one-for-three reverse split of the Common Stock (assuming conversion of all outstanding shares of Preferred Stock); (vi) reflects the reincorporation of the Company in Delaware; and (vii) reflects the filing of amendments to the Company's Certificate of Incorporation authorizing 50,000,000 shares of Common Stock and 5,000,000 shares of undesignated preferred stock and eliminating the Company's existing Preferred Stock. See "Principal Stockholders," "Description of Capital Stock," "Underwriting" and Notes 5, 6 and 11 of Notes to Consolidated Financial Statements. THE COMPANY Thermatrix Inc. is an environmental technology company engaged in the development, manufacture and sale of innovative, proprietary industrial process equipment for the destruction of volatile organic compounds and hazardous air pollutants (collectively, "VOCs"). The core component of the Company's technology is its proprietary flameless thermal oxidizer, which is capable of treating virtually all VOCs while achieving destruction removal efficiency ("DRE") of 99.99% or higher with de minimis formation of hazardous by-products such as oxides of nitrogen ("NOX"), carbon monoxide ("CO"), and products of incomplete combustion ("PICs"). The Company sells its flameless thermal oxidizer as a stand-alone unit or as an integrated system. See "Business-- Introduction." The Company seeks to expand the use and application of its proprietary flameless thermal oxidation ("FTO") technology globally and to become a leading supplier of VOC treatment systems. The Company has initially focused on the industrial VOC market where it believes the Company's FTO system offers the greatest economic and environmental advantages over competing VOC treatment methods. These advantages include: (i) high DRE; (ii) de minimis formation of hazardous by-products; (iii) low operating and maintenance costs; (iv) product safety; (v) broad application to a wide range of VOCs, including difficult-to- treat chlorinated, sulfonated and fluorinated compounds; (vi) the ability to economically treat fume streams with variable flows and concentrations; and (vii) high operating reliability. See "Business--Strategy." VOCs are an unavoidable by-product of numerous manufacturing and process industries worldwide and must be controlled due to serious health, safety and environmental risks. The current global market for VOC control equipment exceeds $2.0 billion and is estimated to grow at 10% per annum according to McIlvaine & Co., a market analyst firm serving the air pollution control industry. Conventional technologies for the treatment of industrial VOCs are primarily flame-based destruction systems (such as incinerators), carbon adsorption systems and scrubbing systems, most of which have been in use for over thirty years. See "Business--Existing Treatment Methods For Control of VOCs." The Company has achieved a number of significant milestones in commercializing its technology, including: (i) establishing the application of its proprietary FTO technology in the petroleum, chemical/petrochemical, pulp and paper and pharmaceutical industries with "market leader" customers, and for soil and groundwater remediation; (ii) selling more than 40 commercial-scale systems; (iii) establishing a global sales and marketing organization; and (iv) the receipt of regulatory approvals by the Company's customers for the use of the Company's systems in the United States, Canada, England and France. The Company's customers include: Chevron U.S.A., Inc., Dow Chemical Company, Chesebrough-Pond's USA Co., Monsanto Company, FMC Corporation and Zeneca, Ltd. as well as the United States Departments of Defense and Energy (the "DOD" and the "DOE", respectively). The Company's strategy in the industrial VOC market is to: (i) increase market penetration for established applications; (ii) broaden application of the Company's proprietary FTO technology for new industrial VOC applications; and (iii) expand its international operations. In addition to its core industrial VOC emissions control business, the Company has embarked on a strategy of working with strategic partners to evaluate the feasibility of applying the Company's FTO technology for other uses. The Company is presently exploring the application of its FTO technology to the destruction of chemical weapons, treatment of radioactive mixed wastes and control of diesel emissions. The Company is also pursuing a strategy to selectively acquire complementary technologies in order to expand its presence in the VOC treatment market. In October 1995, the Company acquired an exclusive license to the PADRE VOC adsorption technology from Purus, Inc. and acquired all rights to the technology in April 1996. The PADRE technology is a recovery technology using a regenerative synthetic adsorption resin to capture and recover very low concentration VOCs from low to medium flow vapor streams. The Company plans to sell PADRE units on a stand-alone basis as well as in conjunction with Thermatrix systems. See "Business--Strategy." As of April 12, 1996, the Company owned four United States and six international patents, had received notice of allowance for one additional United States patent application, and had an additional seven United States and 32 international patent applications pending that cover the fundamental aspects of the Company's flameless thermal oxidation technology. See "Risk Factors-- Proprietary Technology and Unpredictability of Patent Protection" and "Business--Intellectual Property." The Company was founded in 1985 as In-Process Technology Inc. ("IPT"). In July 1992, the Company restructured its operations, installed new senior management, changed its name to Thermatrix Inc. and focused exclusively on applications for its technology as a flameless thermal destruction process for the treatment of VOCs. Accordingly, the Company has a limited operating history in the VOC emissions market. See "Risk Factors--Limited Operating History" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The principal office of the Company is located at 101 Metro Drive, Suite 248, San Jose, California 95110. Its telephone number is (408) 453-0490. THE OFFERING Common Stock Offered.............. 2,000,000 shares Common Stock Outstanding After the Offering..................... 7,400,838 shares(1) Use of Proceeds................... For working capital, repayment of short- term borrowings, the purchase of capital equipment and other general corporate purposes, including development of strategic alliances and strategic joint ventures to pursue new applications of the FTO technology. Proposed Nasdaq National Market TMXI Symbol........................... - ------- (1) Excludes as of March 31, 1996: (i) 746,997 shares of Common Stock issuable upon the exercise of outstanding stock options under the Company's 1987 Incentive Stock Plan at a weighted average exercise price of $1.61 per share; no additional stock options will be granted under the 1987 Incentive Stock Plan (see "Management--Employee Benefit Plans--1987 Incentive Stock Plan"), (ii) 67,100 shares of Common Stock reserved for issuance upon the exercise of warrants to purchase Common Stock at a weighted average exercise price of $4.65 per share (see "Description of Capital Stock-- Warrants"), and (iii) 333,334 shares of Common Stock reserved for future issuance pursuant to the Company's 1996 Stock Plan, 116,667 shares of Common Stock reserved for future issuance pursuant to the Company's Employee Stock Purchase Plan and 83,334 shares of Common Stock reserved for future issuance pursuant to the Company's 1996 Director Option Plan. See "Management--Director Compensation" and "--Employee Benefit Plans." SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ---------------------------- -------------------- 1993 1994 1995 1995 1996 -------- -------- -------- --------- --------- (UNAUDITED) <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues.................. $ 881 $ 3,135 $ 6,494 $ 549 $ 2,735 Cost of revenues.......... 966 3,099 6,064 574 2,506 -------- -------- -------- --------- --------- Gross margin.............. (85) 36 430 (25) 229 Operating expenses: Research and development.. 483 1,326 1,084 327 138 Selling, general and administrative........... 2,100 4,503 4,740 1,090 1,328 Interest income (expense), net...................... 47 (28) 231 97 (1) Income taxes.............. -- -- 31 8 5 -------- -------- -------- --------- --------- Net loss.................. $ (2,621) $ (5,821) $ (5,194) $ (1,353) $ (1,243) ======== ======== ======== ========= ========= Pro forma net loss per share(1)................. $ (0.91) $ (0.24) $ (0.22) ======== ========= ========= Pro forma weighted average shares outstanding(1).... 5,723 5,701 5,766 ======== ========= ========= </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 -------------------------------------- PRO FORMA ACTUAL PRO FORMA(2) AS ADJUSTED (3) -------- ------------ --------------- (UNAUDITED) <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short- term investments.................. $ 1,477 $ 1,477 $ 24,857 Working capital.................... 1,882 1,882 25,262 Total assets....................... 5,798 5,798 29,178 Long-term debt..................... -- -- -- Redeemable convertible preferred stock............................. 13,405 -- -- Accumulated deficit................ (23,430) (23,430) (23,430) Total stockholders' equity (deficit)......................... (10,588) 2,817 26,197 </TABLE> - ------- (1) See Note 2 of Notes to Consolidated Financial Statements--Summary of Significant Accounting Policies--Pro Forma Net Loss Per Share. (2) Presented on a pro forma basis to give effect to the conversion of all outstanding shares of Preferred Stock into an aggregate of 5,267,313 shares of Common Stock upon completion of this offering. (3) Presented on a pro forma basis as adjusted to give effect to the issuance of the 2,000,000 shares of Common Stock offered hereby and the receipt of the estimated net proceeds therefrom.
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the detailed information appearing elsewhere in this Prospectus. Reference is made to the Index of Principal Terms for the location herein of the definitions of certain capitalized terms used herein. Title of Securities........ Series 1996-2, Floating Rate Dealer Loan Backed Certificates, Class A (the "Class A Certificates") and Class B (the "Class B Certificates"). Issuer..................... World Omni Wholesale Master Trust (the "Trust"). Series..................... The Class A Certificates and the Class B Certificates (together, the "Certificates") will comprise a separate Series ("Series 1996-2") of the Trust. The Class A Certificates and the Class B Certificates are being offered hereby. The Trust has previously issued (i) in a registered public offering, Series 1994-1, Floating Rate Dealer Loan Backed Certificates (the "Series 1994-1 Certificates"), (ii) in a private placement, Series 1995-1, Floating Rate Dealer Loan Backed Certificates (the "Series 1995-1 Certificates") and (iii) in a private placement, Series 1996-1, Floating Rate Dealer Loan Backed Variable Backed Certificates (the "Series 1996-1 Certificates"). Transferor................. World Omni Dealer Funding Inc. (the "Transferor" or "WODFI"), a wholly-owned subsidiary of World Omni Financial Corp. Servicer................... World Omni Financial Corp. ("WOFCO," or together with, as applicable, a successor servicer, the "Servicer"), a wholly-owned subsidiary of JM Family Enterprises, Inc. ("JMFE"). Trustee.................... Fleet National Bank (the "Trustee"), as successor to NationsBank, N.A. (f/k/a NationsBank of Virginia, N.A.). The Trust.................. The Trust was formed pursuant to a Pooling and Servicing Agreement, dated as of October 1, 1994, among WODFI, as Transferor, WOFCO, as Servicer, and the Trustee, as supplemented by the Supplements relating to the Series 1994-1 Certificates, the Series 1995-1 Certificates and the Series 1996-1 Certificates (as so supplemented, as further supplemented by the Supplement relating to the Certificates, and as hereafter supplemented and amended from time to time, the "Pooling and Servicing Agreement"). On the Closing Date, the net proceeds of the Certificates will be paid to the Transferor, and the Transferor will use such net proceeds to purchase Receivables from WOFCO, to make deposits into the Excess Funding Account, and to purchase interests in the Trust held by the holders of the Series 1996-1 Certificates. The assets of the Trust include (a) all Receivables existing under certain Accounts on the Initial Closing Date, all Receivables generated under the Accounts from time to time thereafter during the term of the Trust as well as all Receivables generated under any Accounts the Receivables in which are added to the Trust from time to time (less Receivables paid or charged off and excluding Receivables generated in any Accounts the Receivables in which are removed from the Trust from time to time after the Closing Date), (b) all funds collected or to be collected in respect of such Receivables, (c) all funds on deposit in certain accounts of the Trust, including funds on deposit in the Excess Funding Account, the Principal Funding Account and the Reserve Fund, (d) any Enhancement issued with respect to any other Series and (e) security interests in new and used automobiles, light duty trucks and other motor vehicles (the "Vehicles"), security interests in certain parts inventory, equipment, fixtures, accounts and/or rights under personal guaranties, intercreditor agreements and subordination agreements (collectively, the "Collateral Security") securing or guaranteeing the Receivables. The term "Enhancement" shall mean, with respect to any Series or Purchased Interest, any letter of credit, surety bond, cash collateral account, guaranteed rate agreement, maturity liquidity facility, tax protection agreement, interest rate swap agreement or other similar arrangement for the benefit of certificateholders of such Series or Purchased Interest. The Accounts............... The Accounts pursuant to which the Receivables have been, or will be, generated primarily consist of revolving financing arrangements entered into by WOFCO with motor vehicle dealers to purchase or finance Vehicle inventory and to purchase or finance used automobiles at certain car auctions. The Accounts are selected from all such revolving credit arrangements of WOFCO which meet the criteria provided in the Pooling and Servicing Agreement (the "Eligible Accounts"). Under certain circumstances, additional Accounts may be designated by the Transferor the Receivables in which are added to, or removed from, the Trust. See "The Accounts," "Description of the Certificates -- Addition of Accounts" and "-- Removal of Accounts." The Receivables............ The Receivables have arisen, or will arise, in the Accounts. The Receivables consist primarily of wholesale floor planning advances made directly or indirectly by WOFCO to (i) dealers located in the United States franchised by Southeast Toyota Distributors, Inc. ("SET"), a wholly-owned subsidiary of JMFE, which franchisees are approved by Toyota Motor Sales U.S.A., Inc. ("Toyota U.S.A."), a wholly-owned subsidiary of Toyota Motor Corporation of Toyota City, Japan ("Toyota") or franchised by other manufacturers or distributors and (ii) independent dealers located in the United States (such dealers, the "Dealers"). Some Dealers are affiliates of JMFE. The advances made by WOFCO are used by the Dealers to finance the purchase of Vehicles. Purchases by a Dealer may be made from the manufacturer or distributor of a Vehicle, from an auction or directly from Vehicle owners. Generally, the principal amount of an advance in respect of a new Vehicle is equal to the wholesale purchase price of the Vehicle and, subject to certain limited exceptions, is due shortly after the retail sale of the Vehicle. See "The Dealer Floor Plan Financing Business -- Creation of Receivables" and " -- Payment Terms." Collections of principal under the Receivables are herein referred to as "Principal Collections," and collections of interest and other nonprincipal charges (including insurance service fees, amounts recovered with respect to Defaulted Receivables and insurance proceeds) are referred to herein as "Interest Collections." Each Receivable bears interest at an adjustable rate described herein. See "The Dealer Floor Plan Financing Business -- Payment Terms." WODFI has entered into a Receivables Purchase Agreement, dated as of the date of the Pooling and Servicing Agreement, between WODFI, as purchaser, and WOFCO, as seller (the "Receivables Purchase Agree- ment"). Pursuant to the Receivables Purchase Agreement, WOFCO sells from time to time to the Transferor all of its right, title and interest in, to and under certain Receivables, and assigns its interests in the related Vehicles and the Collateral Security to the Transferor. Pursuant to the Pooling and Servicing Agreement, the Transferor, in turn, transfers to the Trust those Receivables, as well as its interests in the Vehicles and the related Collateral Security. All Receivables sold by WOFCO to the Transferor meet certain eligibility criteria contained in the Receivables Purchase Agreement ("Eligible Receivables"), except that, for administrative convenience, certain Ineligible Receivables arising in an Eligible Account may be transferred to the Trust from time to time and, upon such transfer, will become a part of the Transferor Interest through an increase in the Incremental Subordinated Amount. The Transferor has also assigned to the Trust its rights with respect to the Receivables under the Receivables Purchase Agreement. See "Description of the Receivables Purchase Agreement." During the term of the Trust, all new Receivables arising from time to time in Accounts and sold by WOFCO to the Transferor will be transferred by the Transferor to the Trust. Accordingly, the aggregate amount of Receivables in the Trust will fluctuate from day to day as new Receivables are generated and as existing Receivables are collected, charged off as uncollectible or otherwise adjusted. The Certificates........... The Trust's assets will be allocated in part to make payments required to be made to (i) the Class A Certificateholders and the Class B Certificateholders (together, the "Certificateholders' Interest"), (ii) to the certificateholders of any other outstanding Series (such other certificateholders, together with the Certificateholders, are referred to as "certificateholders") and (iii) the purchaser of any Purchased Interest in the Trust (each such purchaser, a "Purchaser"), with the remainder allocated to the Transferor (the "Transferor Interest"). A portion of the Transferor Interest will be subordinated to the Certificateholders' Interest, as described below. The principal amount of the Transferor Interest may fluctuate as the aggregate amount of the Receivables balance changes from time to time and as new Series are issued or Purchased Interests are sold. The Certificates will evidence an undivided beneficial interest in assets of the Trust allocated to the Certificateholders' Interest and will represent the right to receive from such assets funds up to (but not in excess of) the amounts required to make monthly payments of interest on the Certificates and to make the payment of principal on the Expected Final Payment Date or earlier or later under certain limited circumstances in an amount up to the outstanding principal amount of the Certificates. Except in certain limited circumstances as described herein under "Description of the Certificates -- Definitive Certificates," the Certificates will only be available in book-entry form. The Certificates will represent beneficial interests in the Trust only and will not represent interests in or recourse obligations of WOFCO, WODFI or any affiliate thereof. Neither the Certificates nor the Receivables are insured or guaranteed by WOFCO, WODFI or any affiliate thereof or by any governmental agency. On the date of the initial issuance of the Certificates (the "Closing Date"), the Invested Amount will equal the sum of the Class A Initial Principal Amount and the Class B Initial Principal Amount minus amounts deposited in the Excess Funding Account on the Closing Date and will represent the principal amount of Certificates invested in Receivables as of the Closing Date (the "Initial Invested Amount"). On any date following the Closing Date, the Invested Amount will equal the Initial Invested Amount minus the sum of (i) the amount deposited in the Excess Funding Account and available for Series 1996-2 in connection with a reduction in Principal Receivables, (ii) the amount of principal payments (except principal payments made from the Series 1996-2 portion of the Excess Funding Account and transfers made from the Series 1996-2 portion of the Excess Funding Account to the Principal Funding Account) made to Certificateholders or deposited in the Principal Funding Account prior to such date of determination and (iii) the aggregate amount of unreimbursed Class A Investor Charge-Offs and Class B Investor Charge-Offs for all previous Distribution Dates and plus the amount of any withdrawals from the Excess Funding Account allocable to Series 1996-2 in connection with an increase in Principal Receivables. In no event will the Invested Amount be less than zero. The Class A Certificates... The Class A Certificates will be issued in the aggregate initial principal amount of $167,500,000 (the "Class A Initial Principal Amount"), in minimum denominations of $1,000 and in integral multiples thereof. The principal amount of the Class A Certificates (the "Class A Principal Amount") will be reduced from time to time by (i) the amount of principal payments made to Class A Certificateholders and (ii) the aggregate amount of unreimbursed Class A Investor Charge-Offs (which will not occur unless and until the Class B Principal Amount is reduced to zero as a result of Class B Investor Charge-Offs). In no event will the Class A Principal Amount be less than zero. The Class B Certificates... The Class B Certificates will be issued in the aggregate initial principal amount of $7,500,000 (the "Class B Initial Principal Amount" and, together with the Class A Initial Principal Amount, the "Initial Principal Amount"), in minimum denominations of $1,000 and in integral multiples thereof. The principal amount of the Class B Certificates (the "Class B Principal Amount") will be reduced from time to time by (i) the amount of principal payments made to Class B Certificateholders (which will not be made until the Class A Principal Amount has been repaid in full) and (ii) the aggregate amount of unreimbursed Class B Investor Charge-Offs. In no event will the Class B Principal Amount be less than zero. Subordination of Class B Certificates............. If the Interest Collections, Investment Proceeds, certain amounts in the Reserve Fund, certain portions of the Transferor's Interest and certain other amounts allocable to the Certificateholders' Interest are insufficient to cover in full the Investor Default Amount for any Collection Period as described herein, then the Class B Certificateholders will bear directly the credit and other risks associated with their undivided interests in the Trust, and the Class B Principal Amount will be reduced by an amount equal to such insufficiency but not in excess of the Investor Default Amount and the unreimbursed Monthly Dilution Amount for such Collection Period. If the Class B Principal Amount is reduced to zero, any further insufficiency will reduce the Class A Principal Amount, but not in excess of the Investor Default Amount for such Collection Period, and the Class A Certificateholders will bear directly the credit and other risks associated with their undivided interests in the Trust. See "Description of the Certificates -- Allocation Percentages." Principal payments with respect to the Class B Certificates will not be made until the final principal payment with respect to the Class A Certificateholders has been made, nor will interest payments with respect to the Class B Certificates for any Interest Period be made until the interest accrued on the Class A Certificates with respect to such Interest Period has been paid in full. Registration of the Certificates............... Each Class of Certificates will initially be represented by one or more Certificates of such Class registered in the name of Cede & Co., as the nominee of DTC. No person acquiring an interest in the Certificates will be entitled to receive a definitive certificate representing such person's interest except in the event that Definitive Certificates are issued under the limited circumstances described herein. As used herein, the term "Class A Certificateholders" refers to registered holders of the Class A Certificates, the term "Class B Certificateholders" refers to registered holders of the Class B Certificates, and the term "Certificateholders" refers to the Class A Certificateholders and the Class B Certificateholders, collectively. See "Description of the Certificates -- Book-Entry Registration" and " -- Definitive Certificates." Issuance of New Series, Sales of Purchased Interests................ The Pooling and Servicing Agreement provides that, pursuant to any one or more supplements thereto (each, a "Supplement") or Purchase Agreements, the Transferor may cause the Trustee to issue one or more new Series of certificates or to sell a Purchased Interest (the issuance of a new Series or the sale of a Purchased Interest, a "New Issuance"). However, at all times, the interest in the principal balances of Receivables ("Principal Receivables") represented by the Transferor Interest must equal or exceed a specified amount. The Pooling and Servicing Agreement also provides that the Transferor may specify, with respect to any Series or Purchased Interest, the Principal Terms of the Series or Purchased Interest. The Transferor may offer any Series or Purchased Interest to the public or to other investors under a prospectus or other disclosure document in transactions either registered under the Securities Act or exempt from registration thereunder, directly or through the Underwriter or one or more other underwriters or placement agents. Under the Pooling and Servicing Agreement, a New Issuance may only occur upon delivery to the Trustee of the following: (a) a Supplement specifying the Principal Terms of such Series or a purchase agreement (each, a "Purchase Agreement") specifying the terms of a Purchased Interest, as applicable, (b) opinions of counsel to the effect that, for United States Federal, Florida or Connecticut income tax purposes (i) such issuance will not adversely affect the applicable income tax characterization of the certificates of any outstanding Series or class or any outstanding Purchased Interest, (ii) such issuance will not cause a taxable event to any certificateholders or to any Purchaser, (iii) such issuance will not cause the Trust to be treated as an association (or publicly traded partnership) taxable as a corporation for Federal income tax purposes or as a taxable entity for Florida and Connecticut tax purposes and (iv) such new Series or Purchased Interest will be characterized as debt or an interest in a partnership and (c) letters from the Rating Agencies confirming that the issuance of the new Series or Purchased Interest will not result in the reduction or withdrawal of the rating of either Class of Certificates or the rating of any other Series or class of certificates or any Purchased Interest then outstanding. See "Description of the Certificates -- New Issuances." Allocations................ The Certificateholders' Interest will include the right to receive (but only to the extent needed to make required payments under the Pooling and Servicing Agreement) varying percentages of Interest Collections and Principal Collections collected during each calendar month (a "Collection Period") that are allocable to the portion of each Dealer's aggregate Principal Receivables that does not represent Concentration Amounts (the "Regular Pool"). Interest Collections, Principal Collections and Defaulted Receivables for any Collection Period will be allocated to the Certificateholders' Interest from the Regular Pool as described below and as more fully described under "Description of the Certificates -- Allocation Percentages." Interest Collections, Principal Collections and Defaulted Receivables not allocated to Series 1996-2 will be allocated to the Transferor Interest, to the certificateholders' interests in other Series and to the interests of the Purchasers of Purchased Interests. From time to time, the Trust may issue additional Series or Purchased Interests representing interests in that portion of each Dealer's aggregate Principal Receivables that constitutes a Concentration Amount (the "Concentration Pool") (any such series or purchase interest, a "Concentration Series"). The "Concentration Amount" with respect to any Account on any day will equal the aggregate amount of Receivables in such Account (excluding Ineligible Receivables) on such day minus the product of (i) the Concentration Limit (as defined herein) and (ii) the aggregate amount of Principal Receivables included in the Trust on such day, except as otherwise described in "Description of the Certificates -- Allocation Percentages." Interest Collections and Defaulted Receivables allocated to the Regular Pool will be allocated at all times to the Certificateholders' Interest based on the Floating Allocation Percentage applicable during the related Collection Period. The Floating Allocation Percentage for any Collection Period is the percentage obtained by dividing (i) the Invested Amount on the last day of the immediately preceding Collection Period by (ii) the excess of the aggregate amount of Principal Receivables (other than Ineligible Receivables and certain excess receivables) held by the Trust (the "Pool Balance") over the aggregate amount of the Concentration Amounts in all Accounts (such excess being the "Regular Pool Balance") on such last day. The Floating Allocation Percentage for the first Collection Period will be the percentage obtained by dividing the Invested Amount of the Certificates by the Regular Pool Balance on the Closing Date; provided that the Floating Allocation Percentage on the Closing Date and until the second Determination Date will not exceed the Transferor Percentage at such time minus 2%. During the Revolving Period, subject to certain limitations, Principal Collections allocable to the Regular Pool that are allocable to the Certificateholders' Interest from the Regular Pool will be allocated and paid to the Transferor or allocated to any other Series or any Purchased Interest. During the Accumulation Period and any Early Amortization Period, Principal Collections allocated to the Regular Pool will be allocated to the Certificateholders' Interest based on the Principal Allocation Percentage. The Principal Allocation Percentage for a Collection Period during the Accumulation Period and any Early Amortization Period is the percentage equivalent of a fraction, the numerator of which is the Invested Amount on the last day of the Revolving Period and the denominator of which is the greater of (x) the Regular Pool Balance on the last day of the immediately preceding Collection Period and (y) the sum of the numerators used to calculate the floating allocation percentage or the principal allocation percentage, as the case may be, with respect to each outstanding Series or Purchased Interest (other than any Concentration Series). Unless an Early Amortization Event shall have occurred, monthly deposits of principal to the Principal Funding Account with respect to the Certificates will not exceed the Controlled Distribution Amount and, subject to certain limitations, any Principal Collections allocated to but not paid to the Principal Funding Account will be first treated as Shared Principal Collections to the extent necessary and then paid to the Transferor. See "Description of the Certificates -- Allocation Percentages" and " -- Distributions from the Collection Account; Reserve Fund -- Principal Collections." Interest................... Interest on the principal balance of the Class A Certificates will accrue and be payable monthly at a per annum rate (the "Class A Certificate Rate") equal to One-Month LIBOR (calculated as provided herein) plus ____ basis points (0.____%) (the "Class A LIBOR Rate") and interest on the principal balance of the Class B Certificates will accrue and be payable monthly at a per annum rate (the "Class B Certificate Rate") equal to One-Month LIBOR (calculated as provided herein) plus ____ basis points (0.____%) (the "Class B LIBOR Rate," and together with the Class A LIBOR Rate, a "LIBOR Rate"); provided that, if the weighted average of the Class A LIBOR Rate and the Class B LIBOR Rate for any Distribution Date is greater than the Asset Receivables Rate, then the Class A Certificate Rate and the Class B Certificate Rate for such Distribution Date will be the Asset Receivables Rate. In the event that the Class A and Class B Certificate Rates for any Interest Period are limited to the Asset Receivables Rate, the excess of the interest calculated at the applicable LIBOR Rate over the Asset Receivables Rate will constitute a Class A or Class B shortfall amount (each, a "Shortfall Amount") which will be payable, together with interest thereon, in the manner provided herein. The ratings of the Certificates do not address the likelihood of the payment of any Shortfall Amount. Interest at the applicable Certificate Rate will be payable monthly to Certificateholders on each Distribution Date, commencing in May 1996. "Distribution Date" shall mean the twenty-fifth day of each month (or, if such date is not a business day, the next succeeding business day). Interest payable on a Distribution Date will accrue from and including the preceding Distribution Date (or, in the case of the first Distribution Date, from and including the Closing Date) to but excluding such Distribution Date. Interest for any Distribution Date will be calculated on the basis of the actual number of days elapsed during the related Interest Period and a year assumed to consist of 360 days, and interest due but not paid on any Distribution Date will be due on the next Distribution Date, together with, to the extent lawfully payable, interest on such amount at the Class A Certificate Rate or Class B Certificate Rate, as applicable, plus 200 basis points (2%). Interest payments at the applicable Certificate Rate on the Certificates will be derived from Certificateholder Interest Collections for the related Collection Period, withdrawals, if any, from the Reserve Fund, Investment Proceeds, if any, and, under certain circumstances, Available Transferor Collections to the extent of the Available Subordinated Amount. Interest payable to Class B Certificateholders will be subordinated in right of payment and priority to interest payable to Class A Certificateholders, as described herein. The "Asset Receivables Rate" for any Interest Period shall equal the product of (a) the quotient obtained by dividing (i) 360 by (ii) the actual number of days elapsed in such Interest Period and (b) a percentage, expressed as a fraction, (i) the numerator of which is the sum of (A) the Floating Allocation Percentage of Interest Collections allocable to the Regular Pool for the latest Collection Period ending prior to the last day of such Interest Period (which for this purpose only is based on interest amounts billed to the Dealers which are due during such Collection Period) less, unless waived by the Servicer, the Monthly Servicing Fee with respect to such immediately preceding Collection Period and (B) the Investment Proceeds to be applied on the Distribution Date related to such Interest Period and (ii) the denominator of which is the sum of (A) the product of the Floating Allocation Percentage and the average Regular Pool Balance (after giving effect to any Investor Charge-Offs, and including Ineligible Receivables and certain excess receivables) for such immediately preceding Collection Period and (B) the Series 1996-2 portion of the average principal balance of funds on deposit in the Excess Funding Account for such Collection Period. If, for any Interest Period, the weighted average of the Class A LIBOR Rate and the Class B LIBOR Rate exceeds the Asset Receivables Rate, funds available as provided herein after making all required distributions and deposits with respect to each Class of Certificates, including payments with respect to principal (including payments to the Excess Funding Account), Class A Monthly Interest and Class B Monthly Interest, the Monthly Servicing Fee, the Reserve Fund Deposit Amount, the Investor Default Amount and the unreimbursed Monthly Dilution Amount, will be used to pay the Shortfall Amount. If the Servicer determines that such amounts will not be sufficient to pay the Shortfall Amount on the related Distribution Date, the Servicer shall notify the Transferor and the Transferor will be obligated to deposit an amount sufficient to pay such Shortfall Amount in the Collection Account on the day preceding the related Distribution Date for payment to Certificateholders. Under certain circumstances specified in the Pooling and Servicing Agreement, failure by the Transferor to pay any Shortfall Amount or any Carry-Over Amount may result in an Early Amortization Event. See "Description of the Certificates -- Early Amortization Events." In the event that the Transferor fails to pay a Shortfall Amount on any Distribution Date, interest shall accrue on such Shortfall Amount and shall be payable, together with interest thereon at the applicable Certificate Rate plus 2% (such Shortfall Amount plus such interest thereon, a "Carry-Over Amount"), on the next succeeding Distribution Date in the same manner as a Shortfall Amount. At such time as (i) the Invested Amount of the Certificates is reduced to zero and all interest at the applicable Certificate Rate due and owing on the Certificates has been paid in full and (ii) any accrued and unpaid applicable Carry-Over Amount exists at such time, then, in such event, Available Transferor Collections will be applied by the Servicer to pay any such accrued and unpaid Carry-Over Amount up to an amount equal to the Available Subordinated Amount. The ratings of the Certificates do not address the likelihood of the payment of any Carry-Over Amount. In addition, Certificates may be issued with original issue discount. See "Certain Tax Matters" for additional information concerning the application of United States Federal and state tax laws. Principal.................. It is expected that the final principal payment with respect to the Certificates will be made on the October 1999 Distribution Date (the "Expected Final Payment Date"). Principal payments with respect to the Certificates may be made earlier than the applicable Expected Final Payment Date if an Early Amortization Event or an Asset Composition Event occurs, or later under certain circumstances described herein. Principal payments on the Class B Certificates will be made only after all required payments of principal to the Class A Certificateholders have been made. In the event that any Carry-Over Amount exists following payment of all principal of, and interest accrued on, the Certificates at the applicable Certificate Rate, the Series will remain outstanding and Available Transferor Collections up to an amount equal to the Available Subordinated Amount will be applied on subsequent Distribution Dates to pay such Carry-Over Amounts and interest accrued thereon as provided herein. Revolving Period........... During the Revolving Period, Principal Collections allocable to the Certificateholders' Interest generally will be paid to the Transferor, deposited to the Excess Funding Account and allocated to Series 1996-2 or allocated to another Series or to a Purchased Interest in order to maintain the sum of the Invested Amount and the amount, if any, on deposit in the Excess Funding Account at a constant level. The "Revolving Period" will be the period beginning on the Closing Date and ending on the earlier of (x) the day immediately preceding the Accumulation Period Commencement Date and (y) the business day immediately preceding the day on which an Early Amortization Event occurs. See "Description of the Certificates -- Early Amortization Events" and " -- Asset Composition Event" for a discussion of certain events which might lead to (i) the early termination of the Revolving Period and, in certain limited circumstances, the recommencement of the Revolving Period and (ii) prepayment of a portion of the principal balance of the Certificates, respectively. Accumulation Period........ Unless an Early Amortization Period commences, the Certificates will have an accumulation period (the "Accumulation Period"), which will commence on the Accumulation Period Commencement Date and continue until the earlier of (a) the commencement of an Early Amortization Period and (b) the Expected Final Payment Date. Unless an Early Amortization Event shall have occurred, the Accumulation Period will be one, two or three month(s) long as described in the following paragraph. During the Accumulation Period, Certificateholders' Principal Collections (to the extent of the Controlled Distribution Amount) and certain other amounts allocable to the Certificateholders' Interest will be deposited on each Distribution Date in a trust account (the "Principal Funding Account") and, together with any amounts in the Excess Funding Account allocable to the Certificates, used to make principal distributions first to Class A Certificateholders and then, after payment in full to the Class A Certificateholders, to Class B Certificateholders when due. See "Description of the Certificates -- Distributions from the Collection Account; Reserve Fund -- Principal Collections." On the June 1999 Distribution Date, the Servicer shall determine the Accumulation Period Length. The "Accumulation Period Length" will be one, two or three month(s) and will be calculated as the product, rounded upwards to the nearest integer, of (a) 3 and (b) a fraction, the numerator of which is the Invested Amount as of the June 1999 Distribution Date (after giving effect to all changes therein on such date) and the denominator of which is the sum of such Invested Amount and the invested amounts as of the June 1999 Distribution Date (after giving effect to all changes therein on such date) of all other outstanding Series and Purchased Interests (other than any Concentration Series) whose respective revolving periods are not scheduled to end before the last day of the September 1999 Collection Period. If the Accumulation Period Length is one month, two months or three months, the "Accumulation Period Commencement Date" shall be the first day of the September 1999 Collection Period, the August 1999 Collection Period, or the July 1999 Collection Period, respectively. Notwithstanding the foregoing, the Accumulation Period Commencement Date shall be July 1, 1999, if, prior to such date, any other outstanding Series or Purchased Interest shall have entered into an early amortization period. In addition, if the Accumulation Period Length shall have been determined to be less than three months and, thereafter, any outstanding Series or Purchased Interest shall enter into an early amortization period, the Accumulation Period Commencement Date shall be the earlier of (i) the date that such outstanding Series or Purchased Interest shall have entered into its early amortization period and (ii) the Accumulation Period Commencement Date as previously determined. Other Series issued or Purchased Interests sold by the Trust may have either an accumulation period or an amortization period. Such accumulation periods or amortization periods may have different lengths and begin on different dates. Thus, certain Series or Purchased Interests may be in their early amortization periods or accumulation periods, while other Series or Purchased Interests are not. Early Amortization Period..................... During the period beginning on the day on which an Early Amortization Event has occurred and, except as described below, ending on the earlier of the payment in full of both the Class A Principal and the Class B Principal and the Termination Date (the "Early Amortization Period"), the Revolving Period or the Accumulation Period, as the case may be, will terminate, and Principal Collections and certain other amounts allocable to the Certificateholders' Interest will no longer be paid to the Transferor or the holders of any other outstanding Series or Purchased Interest as described above, but instead will be distributed first to the Class A Certificateholders and then, after payment in full to the Class A Certificateholders, to the Class B Certificateholders monthly on each Distribution Date (each, a "Special Payment Date") beginning with the Distribution Date following the Collection Period in which an Early Amortization Period commences. See "Description of the Certificates -- Early Amortization Events" for a description of events that might result in the commencement of any Early Amortization Period. During an Early Amortization Period, distributions of principal on the Certificates will not be limited by the Controlled Distribution Amount. See "Description of the Certificates -- Distributions from the Collection Account; Reserve Fund -- Principal Collections." In addition, on the first Special Payment Date any amounts on deposit in the Excess Funding Account (to the extent allocable to Series 1996-2) and the Principal Funding Account will be paid first to the Class A Certificateholders up to the Class A Principal Amount and then to the Class B Certificateholders up to the Class B Principal Amount. See "Description of the Certificates -- Distributions." The Transferor is required to add Receivables to the Trust under certain circumstances described under "Description of the Certificates -- Addition of Accounts." The failure of the Transferor to add Receivables when required will result in the occurrence of an Early Amortization Event. However, if no other Early Amortization Event has occurred, the Early Amortization Period resulting from such failure will terminate and the Revolving Period will recommence when the Transferor would no longer be required to add Receivables to the Trust, so long as the scheduled termination date of the Revolving Period has not occurred, and provided that the Revolving Period for such Series shall not previously have terminated and recommenced. Asset Composition Event.... An "Asset Composition Event" will occur if, during the Revolving Period, (a) the sum of all Eligible Investments and amounts on deposit in the Excess Funding Account represents more than 25% of the total assets of the Trust on each of twelve or more consecutive Determination Dates, after giving effect to all payments made or to be made on the Distribution Date next succeeding each such respective Determination Date; or (b) on any two consecutive Determination Dates, the sum of all Eligible Investments and amounts on deposit in the Excess Funding Account represents more than 50% of the total assets of the Trust, after giving effect to all payments to be made on the next succeeding Distribution Date. Upon the occurrence of an Asset Composition Event, the Servicer will calculate the "Asset Correction Amount," which equals the amount that would be necessary to be paid out of the Series 1996-2 portion of the Excess Funding Account and the portions of the Excess Funding Account allocable to other Series and Purchased Interests (other than Concentration Series) on the next Distribution Date to achieve compli- ance with the tests specified above, after giving effect to such payment and to all payments that otherwise would have been made on such Distribution Date, and the Servicer shall deposit such amount into the Collection Account on or prior to the next succeeding Distribution Date. The Class A Principal Amount and, after the Class A Principal Amount has been paid in full, the Class B Principal Amount, will become payable on such Distribution Date to the extent of the Series 1996-2 Allocation Percentage of the Asset Correction Amount. Subordination of the Transferor Interest........ If the Interest Collections, Investment Proceeds, certain amounts in the Reserve Fund and certain other amounts allocable to the Certificateholders for any Collection Period are not sufficient to cover the interest payable on the Certificates on the next Distribution Date (plus any overdue interest and interest thereon as set forth above to the extent permitted by law), the Monthly Servicing Fee for such Distribution Date, any Investor Default Amount for such Distribution Date, and certain other amounts, a portion of the Transferor Interest will be applied to make up such deficiency. Generally, the amount of the Transferor Interest subject to such subordination is the Available Subordinated Amount. The "Required Subordinated Amount" shall mean, as of any date of determination, either (A) if the amount on deposit in the Series 1996-2 portion of the Excess Funding Account equals zero, the sum of (i) the product of the Subordinated Percentage and the sum of the Class A Principal Amount and the Class B Principal Amount on such day plus (ii) the Incremental Subordinated Amount or (B) if the amount on deposit in the Series 1996-2 portion of the Excess Funding Account is greater than zero, the sum of (i) the Incremental Subordinated Amount and (ii) the product of 4% multiplied by the Regular Pool Balance multiplied by the Series 1996-2 Allocation Percentage multiplied by 98%; provided, however, that for any Determination Date following the end of the Revolving Period, or on any Determination Date on which a Carry-Over Amount exists, the Required Subordinated Amount shall in no event be less than an amount equal to the Subordinated Percentage of the sum of the Class A Initial Principal Amount plus the Class B Initial Principal Amount of the Certificates. The Available Subordinated Amount for subsequent Distribution Dates will be determined pursuant to the calculation described under "Description of the Certificates -- Allocation of Collections; Deposits in Collection Accounts; Limited Subordination of Transferor Interest." The "Subordinated Percentage" will equal the percentage equivalent of a fraction, the numerator of which is 4% and the denominator of which will be the excess of 100% over 4%. The Available Subordinated Amount will fluctuate based on the increase and decrease, if any, in the Invested Amount and the corresponding decrease and increase in the amount, if any, in the Excess Funding Account and the additions and subtractions specified in the calculation referred to above. The Transferor may, but is not obligated to, increase at any time the Available Subordinated Amount so long as the cumulative amount of all such increases does not exceed the lesser of (i) $1,925,000 or (ii) 1.1% of the Invested Amount on such date. Any such increase may have the effect of avoiding an Early Amortization Event. The Available Subordinated Amount, to the extent it was reduced because of any application of the Transferor Interest to cover a deficiency, will be reinstated by the amount, if any, for each Distribution Date of Excess Interest allocated and available to be paid to the Transferor as described under "Description of the Certificates -- Distributions from the Collection Account; Reserve Fund -- Excess Interest." Servicing.................. The Servicer (initially, WOFCO) is responsible for servicing, managing and making collections on the Receivables and will generally deposit such collections in the Collection Account within two business days following the receipt thereof, generally up to the amount of such collections required to be distributed to Certificateholders with respect to the related Collection Period. During the Revolving Period, Principal Collections allocable to Series 1996-2 will be used by the Servicer to finance the purchase of new Receivables as described herein. In addition, under certain circumstances not currently applicable, the Servicer will be permitted to use for its own benefit and not segregate collections on the Receivables received by it during each Collection Period until no later than the business day prior to the related Distribution Date. See "Description of the Certificates -- Allocation of Collections; Deposits in Collection Account; Limited Subordination of Transferor Interest." On the second business day preceding each Distribution Date (each a "Determination Date"), the Servicer will calculate the amounts described herein in respect of collections on Receivables received with respect to the related Collection Period which are to be allocated to the Certificateholders, to the holders of other outstanding Series or to the Transferor as described herein. See "Description of the Certificates -- Allocation of Collections; Deposits in Collection Account; Limited Subordination of Transferor Interest," "Risk Factors" and "Certain Legal Aspects of the Receivables." In certain limited circumstances, WOFCO may resign or be removed as Servicer, in which event either the Trustee, or, so long as its meets certain eligibility standards set forth in the Pooling and Servicing Agreement, a third-party servicer, may be appointed as successor servicer. WOFCO is permitted to delegate any of its duties as Servicer to any of its affiliates, but any such delegation (other than any Annual Servicing Transfer) will not relieve the Servicer of its obligations under the Pooling and Servicing Agreement. The Servicer will receive a monthly servicing fee and certain other amounts as described herein as servicing compensation from the Trust. See "Description of the Certificates -- Servicing Compensation and Payment of Expenses." Mandatory Reassignment and Transfer of Certain Receivables.............. The Transferor will make certain representations and warranties in the Pooling and Servicing Agreement with respect to the Receivables in its capacity as Transferor, and WOFCO will make certain representations and warranties in the Pooling and Servicing Agreement in its capacity as Servicer. If the Transferor breaches certain of its representations and warranties with respect to any Receivables and such breach remains uncured for a specified period and has a materially adverse effect on the Certificateholders' Interest or the interests of the holders of other outstanding Series therein or the interests of the Purchasers of any Purchased Interests, the Certificateholders' Interest and such other certificateholders' and Purchasers' interests in such Receivables will, subject to certain conditions specified herein, be reassigned to the Transferor. If WOFCO, as Servicer, fails to comply in any material respect with certain covenants or warranties with respect to any Receivables and such noncompliance is not cured within a specified period after WOFCO becomes aware or receives notice thereof from the Trustee and such noncompliance has a materially adverse effect on the Certificateholders' Interest or such other certificateholders' or Purchasers' interest therein, all Receivables affected will be purchased by WOFCO. In the event of a transfer of servicing obligations to a successor Servicer, such successor Servicer, rather than WOFCO, would be responsible for any failure to comply with the Servicer's covenants and warranties arising thereafter. Tax Matters................ Skadden, Arps, Slate, Meagher & Flom, special tax counsel for the Transferor and the Trust, will render its opinion, as more fully described under "Certain Tax Matters" herein, that the Certificates will be characterized as debt for United States Federal income tax purposes. Each Certificateholder, by the acceptance of a Certificate, will agree to treat the Certificates as debt for United States Federal, state and local income tax purposes. The Certificates may be issued with original issue discount. See "Certain Tax Matters" for additional information concerning the application of United States Federal and state tax laws. ERISA Considerations....... Employee benefit plans, insurance company general accounts, individual retirement accounts and other plans and entities ("Benefit Plans") subject to the fiduciary responsibility provisions (the "Fiduciary Responsibility Provisions") of Section 406 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") and Section 4975 of the Internal Revenue Code of 1986, as amended, should consult with counsel before making a purchase of Certificates, and such counsel should consider, among other things, the potential applicability of the Publicly-Offered Securities Exception (as defined below) to the Certificates. See "ERISA Considerations."
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+PROSPECTUS SUMMARY This summary is qualified in its entirety by reference to the detailed information appearing elsewhere in this Prospectus. A listing of pages on which some of such terms are defined can be found in the "Index of Terms" herein. Issuer.............................. Copelco Capital Funding Corp. II (the "Issuer"), a Delaware corporation. The Issuer's offices are located at East Gate Center, 700 East Gate Drive, Mount Laurel, New Jersey 08054-5400 and its phone number is (609) 231-9600. The Issuer has been established as a bankruptcy remote entity, wholly-owned by Copelco Capital, Inc. ("Copelco Capital") and is intended to be a limited-purpose corporation. Accordingly, the Issuer's operations have been restricted so that (a) it does not engage in business with, or incur liabilities to, any other entity which may bring bankruptcy proceedings against the Issuer; and (b) the risk that it will be consolidated into the bankruptcy proceedings of any other entity is diminished. The Issuer will have no significant assets other than the Trust Fund (as described below) and the trust funds securing other notes issued by the Issuer in previously rated transactions. Securities Offered.................. $214,736,000 (approximate) aggregate principal amount of the ____% Class A Lease-Backed Notes, Series 1996-A (the "Class A Notes") and $14,119,000 (approximate) aggregate principal amount of the ___% Class B Lease-Backed Notes, Series 1996-A (the "Class B Notes"; together with the Class A Notes, the "Offered Notes"). In addition, the Issuer will be issuing, through a private placement, $6,472,208 (approximate) aggregate principal amount of the ____% Class C Lease-Backed Notes, Series 1996-A (the "Class C Notes"; together with the Class A Notes and the Class B Notes, the "Notes"). The Class B Notes will be subordinated to the Class A Notes to the extent provided in the Indenture as described herein. The Class C Notes will be subordinated to the Offered Notes to the extent provided in the Indenture as described herein. The Class C Notes are not offered hereby. The combined aggregate principal amount of the Class A Notes, the Class B Notes and the Class C Notes will comprise the initial principal amount (the "Initial Principal Amount") of the Notes. The aggregate principal amounts of the Class A Notes, the Class B Notes and the Class C Notes set forth herein are based upon the Discounted Present Value of the Leases (as defined herein) as of the close of business on July 31, 1996 (the "Cut-Off Date") calculated at the Statistical Discount Rate (defined herein). The Initial Principal Amount of the Notes will be calculated using the actual Discount Rate. Denominations....................... The Notes will be issued in minimum denominations of $100,000 and integral multiples of $1,000 in excess thereof, except that one Class A Note, Class B Note and Class C Note may be issued in another denomination. Interest Rate....................... ___% per annum on the Class A Notes (the "Class A Interest Rate"), ___% per annum on the Class B Notes (the "Class B Interest Rate") and ___% per annum on the Class C Notes (the "Class C Interest Rate"), calculated on the basis of a year of 360 days comprised of twelve 30-day months. Initial Principal Amount.............................. $214,736,000 (approximate) for the Class A Notes (the "Class A Initial Principal Amount"), $14,119,000 (approximate) for the Class B Notes (the "Class B Initial Principal Amount") and $6,472,208 (approximate) for the Class C Notes (the "Class C Initial Principal Amount"). The Class A Initial Principal Amount will be equal to 91.25% (the "Class A Percentage") of the Discounted Present Value of the Leases (as defined herein) as of the Cut-Off Date, the Class B Initial Principal Amount will be equal to 6.00% (the "Class B Percentage") of the Discounted Present Value of the Leases as of the Cut-Off Date and the Class C Initial Principal Amount will be equal to 2.75% (the "Class C Percentage") of the Discounted Present Value of the Leases as of the Cut-Off Date. See "Description of the Notes." Discounted Present Value of the Leases................. The Discounted Present Value of the Leases (the "Discounted Present Value of the Leases"), at any given time, shall equal the future remaining scheduled payments (not including delinquent amounts or Excess Copy Charges (defined below)) from the Leases (including Non-Performing Leases), discounted at a rate equal to ____% (the "Discount Rate"), which rate is equal to the sum of (a) the weighted average Interest Rate of the Class A Notes, the Class B Notes and the Class C Notes on the Issuance Date and (b) the Servicing Fee Rate of 0.75% per annum. The "Discounted Present Value of the Performing Leases" equals the Discounted Present Value of the Leases, reduced by all future remaining scheduled payments on the Non-Performing Leases (not including delinquent amounts or Excess Copy Charges), discounted at the Discount Rate. See "Description of the Notes--General." Each of the Indenture and the Sales and Servicing Agreements will provide that any calculation of future remaining scheduled payments made on a Determination Date or with respect to a Payment Date will be calculated after giving effect to any payments received prior to such date of calculation to the extent such payments relate to scheduled payments due and payable by the Lessees with respect to the related Due Period (defined herein) and all prior Due Periods. "Statistical Discounted Present Value of the Leases" means an amount equal to the future remaining scheduled payments (not including delinquent amounts or Excess Copy Charges) from the Leases as of the Cut-off Date, discounted at a rate equal to 7.15% (the "Statistical Discount Rate"). The Statistical Discounted Present Value of the Leases as of the Cut-Off Date is $235,327,208.56 and will not vary materially from the Discounted Present Value of the Leases as of the Cut-Off Date. See "The Series Pool--The Equipment." The aggregate Discounted Present Value of the Leases as of the Cut-Off Date, calculated at the Discount Rate is $______________. "Non-Performing Leases" are (a) Leases that have become more than 123 days delinquent or (b) Leases that have been accelerated by the Servicer or Leases that the Servicer has determined to be uncollectible in accordance with its customary practices. See "The Series Pool--The Leases." Stated Maturity..................... The July 2004 Payment Date. However, if all payments on the Leases are made as scheduled, final payment with respect to the Notes would occur prior to stated maturity. The Notes........................... The Notes will represent obligations solely of the Issuer and are secured by the Trust Fund. Seller and Servicer................. Copelco Capital, Inc., a Delaware corporation ("Copelco Capital", the "Seller," or in its capacity as servicer, the "Servicer"). Copelco Capital will enter into a sales and servicing agreement (the "Sales and Servicing Agreement") with the Issuer to sell and service the Leases included in the Series Pool and make Servicer Advances (as defined herein). Concurrently with the sale of the Leases by Copelco Capital to the Issuer, Copelco Capital's interest in the Equipment (which is either an ownership interest or a security interest) will be transferred to the Issuer as a contribution of capital. Contemporaneously with the sale, the Issuer will transfer its interests in the Leases and Equipment to the Trustee in accordance with the provisions of the Indenture (as defined herein). Trust Fund.......................... The Trust Fund will consist of a pool (the "Series Pool") of equipment lease contracts consisting of equipment lease contracts of copiers, facsimile machines, computers and other business equipment (the "Lease Contracts"), including all payments due thereunder (the "Lease Receivables"; together with the Lease Contracts, the "Leases") and the interest in the related leased equipment (the "Equipment") transferred by Copelco Capital to the Issuer. In addition, the Trust Fund will include the funds on deposit in the Reserve Account, if any, and to the limited extent provided in the Indenture, amounts on deposit in the Residual Account, if any. Trustee............................. Manufacturers and Traders Trust Company (the "Trustee"). The Trustee's offices are located at One M&T Plaza, 7th Floor, Buffalo, New York 14203. Determination Date.................. The fifth day prior to each Payment Date (or the preceding business day, if such day is not a business day). On such date (each, a "Determination Date"), the Servicer will determine the amount of payments received on the Leases in respect of the immediately preceding calendar month (each such period, a "Due Period") which will be available for distribution on the Payment Date. See "Description of the Notes--Distributions on Notes." Payment Date........................ Payments on the Notes will be made on the twentieth day of each month (or if such day is not a business day, the next succeeding business day), commencing on September 20, 1996 (each, a "Payment Date"), to holders of record on the last day of the immediately preceding calendar month (each, a "Record Date"). See "Description of the Notes--Distributions on Notes." Interest Payments................... On each Payment Date, the interest due (the "Interest Payments") with respect to the Class A Notes, the Class B Notes and the Class C Notes since the last Payment Date will be the interest that has accrued on such Notes since the last Payment Date, or in the case of the first Payment Date, since August __, 1996 (the "Issuance Date") at the applicable Interest Rate applied to the then unpaid principal amounts (the "Outstanding Principal Amounts") of the Class A Notes, the Class B Notes and the Class C Notes, respectively (the "Outstanding Class A Principal Amount", the "Outstanding Class B Principal Amount" and the "Outstanding Class C Principal Amount", respectively), after giving effect to payments of principal to the Class A Noteholders, the Class B Noteholders and the Class C Noteholders, respectively, on the preceding Payment Date. See "Description of the Notes--General" and "Distributions on Notes." Principal Payments.................. For each Payment Date, each of the Class A Noteholders, the Class B Noteholders and the Class C Noteholders will be entitled to receive payments of principal ("Principal Payments"), to the extent funds are available therefor, in the priorities set forth in the Indenture and described herein under "-Application of Payments" and "Description of the Notes-Distributions on Notes." On each Payment Date, to the extent funds are available therefor, the Principal Payment payable to the Noteholders is as follows: (a) to the Class A Noteholders, the amount necessary to reduce the Outstanding Class A Principal Amount to the Class A Target Investor Principal Amount (the "Class A Principal Payment"), (b) to the Class B Noteholders, the amount necessary to reduce the Outstanding Class B Principal Amount to the greater of the Class B Target Investor Principal Amount and the Class B Floor (the "Class B Principal Payment"), (c) to the Class C Noteholders, the amount necessary to reduce the Outstanding Class C Principal Amount to the greater of the Class C Target Investor Principal Amount and the Class C Floor (the "Class C Principal Payment"), and (d) to the extent that the Class B Floor exceeds the Class B Target Investor Principal Amount and/or the Class C Floor exceeds the Class C Target Investor Principal Amount, Additional Principal (defined below) shall be distributed, sequentially, as a principal payment on the Class A Notes, the Class B Notes and the Class C Notes until the Outstanding Principal Amount of each has been reduced to zero. "Additional Principal" with respect to each Payment Date is an amount equal to (a) the difference between (i) the Discounted Present Value of the Performing Leases as of the previous Determination Date and (ii) the Discounted Present Value of the Performing Leases as of the related Determination Date, less (b) the Class A Principal Payment, the Class B Principal Payment and the Class C Principal Payment (defined above) to be paid on such Payment Date. The "Class A Target Investor Principal Amount" with respect to each Payment Date is an amount equal to the product of (a) the Class A Percentage and (b) the Discounted Present Value of the Performing Leases as of the related Determination Date. The "Class B Target Investor Principal Amount" with respect to each Payment Date is an amount equal to the product of (a) the Class B Percentage and (b) the Discounted Present Value of the Performing Leases as of the related Determination Date. The "Class C Target Investor Principal Amount" with respect to each Payment Date is an amount equal to the product of (a) the Class C Percentage and (b) the Discounted Present Value of the Performing Leases as of the related Determination Date. The "Class B Floor" with respect to each Payment Date means (a) 2.50% of the initial Discounted Present Value of the Leases as of the Cut-Off Date, plus (b) the Cumulative Loss Amount with respect to such Payment Date, minus (c) the sum, as of the related Determination Date, of the Outstanding Principal Amount of the Class C Notes and the amount on deposit in the Reserve Account after giving effect to withdrawals to be made on such Payment Date. The "Class C Floor" with respect to each Payment Date means (a) 1.00% of the initial Discounted Present Value of the Leases as of the Cut-Off Date, plus (b) the Cumulative Loss Amount with respect to such Payment Date, minus (c) the amount on deposit in the Reserve Account after giving effect to withdrawals to be made on such Payment Date; provided, however, that if the Outstanding Class B Principal Amount is equal to the Class B Floor, on such Payment Date the Class C Floor will equal the Outstanding Class C Principal Amount utilized in the calculation of the Class B Floor Amount for such Payment Date. The "Cumulative Loss Amount" with respect to each Payment Date is an amount equal to the excess, if any, of (a) the total of (i) the Outstanding Principal Amount of the Notes as of the immediately preceding Payment Date after giving effect to all payments made on such Payment Date, minus (ii) the lesser of (A) the Discounted Present Value of the Performing Leases as of the Determination Date relating to the immediately preceding Payment Date minus the Discounted Present Value of the Performing Leases as of the related Determination Date and (B) Available Funds remaining after the payment of amounts owing the Servicer and in respect of interest on the Notes on such Payment Date over (b) the Discounted Present Value of Performing Leases as of the related Determination Date. The Series Pool..................... The Series Pool will consist of the Leases as of the Cut-Off Date, plus any Substitute Leases (as defined herein) and any Additional Leases (as defined herein) excluding any Leases which have been replaced by one or more Additional Leases or Substitute Leases and, the interest of the Issuer in the related Equipment. See "The Series Pool" and "Certain Legal Matters Affecting a Lessee's Rights and Obligations." Copelco Capital will represent and warrant that, as of the Cut-Off Date, all Leases were current or less than 63 days delinquent and that, as of the Issuance Date, the Lessees have made at least one lease payment. Equipment........................... As of the Cut-Off Date, a majority of the Statistical Discounted Present Value of the Leases consisted of leases of copier equipment. The remaining Leases consisted of Leases of facsimile machines, computers and other business equipment. Lessees............................. The Lessees consist of businesses and business owners (each, a "Lessee"; and collectively, the "Lessees"). As of the Cut-Off Date, the Collateral included 22,256 separate Leases and 19,951 Lessees. As of the Cut-Off Date, Leases relating to Lessees in any one state did not account for more than 18.73% of the Statistical Discounted Present Value of the Leases. See "The Series Pool--The Leases." Certain Lease Terms................. The Leases are triple-net leases, requiring the Lessee to pay all taxes, maintenance and insurance associated with the Equipment. The Leases are non-cancelable by the Lessees. All payments under the Leases are absolute, unconditional obligations of the Lessees without right of offset for any reason. Each Lessee entered into its Lease for specified Equipment designated in schedules incorporated into the Lease. The schedules, among other things, establish the payments and the term of the Lease with respect to such Equipment. The Leases have remaining terms to maturity, calculated as of the Cut-Off Date, of between approximately 1 and 83 months and a weighted average term to stated maturity of 43 months. See "The Series Pool--The Leases." Substitutions and Adjustments....... Although the Leases will be non-cancelable by the Lessees, Copelco Capital has, from time to time, permitted early termination by Lessees ("Early Lease Termination") or other modifications of the lease terms in certain circumstances more fully specified in the Sales and Servicing Agreement, including, without limitation, in connection with a full or partial buy-out or equipment upgrade. In the event of an Early Lease Termination which has been prepaid in full, the Issuer will have the option to reinvest the proceeds of such Early Termination Lease in one or more Leases having similar characteristics for such terminated Lease (each, an "Additional Lease"). In addition, Copelco Capital will have the option to substitute one or more leases having similar characteristics (each, a "Substitute Lease") for (a) Non-Performing Leases, (b) Leases subject to repurchase as a result of a breach of representation and warranty (each a "Warranty Lease") and (c) Leases following a modification or adjustment to the terms of such Lease (each, an "Adjusted Lease"). The aggregate Discounted Present Value of the Non-Performing Leases and Warranty Leases for which Copelco Capital may substitute Substitute Leases is limited to an amount not in excess of 7% of the aggregate Discounted Present Value of the Leases as of the Cut-Off Date. The aggregate Discounted Present Value of Adjusted Leases for which Copelco Capital may substitute Substitute Leases is limited to an amount not in excess of 8% of the aggregate Discounted Present Value of the Leases as of the Cut-Off Date. In no event will the aggregate scheduled payments of the Leases, after the inclusion of the Substitute Leases and Additional Leases be materially less than the aggregate scheduled payments of the Leases prior to such substitution or reinvestment. In addition, after giving effect to such additions and substitutions, the aggregate Booked Residual Value of the Leases must not be materially less than the aggregate Booked Residual Value of the Leases immediately prior to such substitutions or additions. Additionally, either the final payment on such Substitute Lease or Additional Lease must be on or prior to June 30, 2003 or, to the extent the final payment on such Lease is due subsequent to June 30, 2003, only scheduled payments due on or prior to such date may be included in the Discounted Present Value of such Lease for the purpose of making any calculation under the Indenture. In the event that an Early Lease Termination is allowed by Copelco Capital and an Additional Lease is not provided, the amount prepaid will be equal to at least the Discounted Present Value of the terminated Lease, plus any delinquent payments. See "The Series Pool--The Leases." Payments on Leases.................. All payments on Leases will be made by the Lessees to the order of the Issuer to the address specified by Servicer. The Servicer will deposit the proceeds of such payments to the Collection Account (as defined herein) within two Business Days of the receipt thereof. See "Description of the Notes--Collection Account." Advances by Servicer................ Prior to any Payment Date, the Servicer may, but will not be required to, advance (each, a "Servicer Advance") to the Trustee, an amount sufficient to cover delinquencies on Leases in the Trust Fund with respect to the prior Due Period. The Servicer will be reimbursed for Servicer Advances not recovered from late payments from Available Funds on the Payment Date following the date on which the Servicer determined such Lease to be a Non-Performing Lease. See "Description of the Notes--Advances by Servicer." Servicing Fee....................... A Servicing Fee (the "Servicing Fee"), will be paid monthly to the Servicer on each Payment Date from amounts in the Collection Account and will be calculated by multiplying one-twelfth of 0.75% times the Outstanding Principal Amount of the Notes at the Determination Date for such Payment Date before application of payments with respect thereto. The Servicing Fee will be paid to the Servicer for servicing the Series Pool and to pay certain administrative expenses in connection with the Notes, including Trustee fees and expenses. See "Copelco Capital's Underwriting and Servicing Practices." Use of Proceeds..................... The net proceeds from the sale of the Offered Notes will be used to purchase the Leases from Copelco Capital. In addition, the net proceeds from the private placement of the Class C Notes will be used for the same purpose. Copelco Capital will use such amounts to repay bank indebtedness and for general corporate purposes. The Indenture....................... The Notes are to be issued pursuant to, and are to be in such form, bear interest and be payable on such terms as are prescribed in an indenture (the "Indenture") to be executed between the Issuer and the Trustee. Available Funds..................... On each Payment Date, the Trustee will use such funds to make required payments of principal and interest to Noteholders. Funds received on or prior to the related Determination Date ("Available Funds") will be available for distribution by the Trustee on a Payment Date and will include: a) Lease Payments due during the prior Due Period (net of any Excess Copy Charges); b) Residual Realizations up to the Residual Amount Cap; c) recoveries from Non-Performing Leases to the extent Copelco Capital has not substituted a Substitute Lease for such Non-Performing Leases (except to the extent required to reimburse unreimbursed Servicer Advances); d) proceeds from repurchases by Copelco Capital of Leases as a result of breaches of representations and warranties; e) proceeds from investment of funds in the Collection Account and the Reserve Account; f) Casualty Payments (as defined herein); g) Servicer Advances; h) Termination Payments; i) funds, if any, on deposit in the Reserve Account; and j) funds, if any, on deposit in the Residual Account to the limited extent provided in the Indenture. Application of Payments............................ Monthly distributions will be made by the Trustee from Available Funds in the following priority: a) to pay the Servicing Fee; b) to reimburse unreimbursed Servicer Advances in respect of a prior Payment Date; c) to make Interest Payments owing on the Class A Notes; d) to make Interest Payments owing on the Class B Notes; e) to make Interest Payments owing on the Class C Notes; f) to make the Class A Principal Payment; g) to make the Class B Principal Payment; h) to make the Class C Principal Payment; i) to pay the Additional Principal, if any, to the Class A Noteholders until the Outstanding Class A Principal Amount has been reduced to zero, then to the Class B Noteholders until the Outstanding Class B Principal Amount has been reduced to zero and thereafter to the Class C Noteholders until the Outstanding Class C Principal Amount has been reduced to zero; j) to the Reserve Account, an amount equal to the excess of the Required Reserve Amount over the Available Reserve Amount; k) following a Residual Event (defined below), to the Residual Account an amount equal to Residual Realizations up to the Residual Amount Cap; and l) to the Issuer, the balance, if any. See "Description of the Notes-Distribution on Notes." Redemption.......................... The Issuer will have the option, subject to certain conditions, to redeem all, but not less than all, of the Notes and thereby cause early repayment of the Notes as of any Payment Date on which the Discounted Present Value of the Performing Leases is less than or equal to 10% of the Discounted Present Value of the Leases as of the Cut-Off Date (after giving effect to the payment of principal on such Payment Date). See "Description of the Notes--Redemption." Residual Realizations............... Following the Issuance Date, aggregate cash flows realized from the sale or re-lease of the Equipment, other than Equipment subject to Non-Performing Leases (the "Residual Realizations"), shall be deposited into the Collection Account for distribution until the aggregate Residual Realizations used (without duplication) to cover amounts owing the Noteholders and the Servicer, deposited into the Reserve Account, on deposit in the Residual Account, or withdrawn from the Residual Account as a result of an Available Funds Shortfall, equals $__________, which represents 7% of the Discounted Present Value of the Leases as of the Cut-Off Date (the "Residual Amount Cap"), and will provide additional credit support to the Notes. Actual Residual Realizations may be more or less than the residual value of the Equipment recorded on the books of the Issuer (the "Booked Residual Value"). Under certain limited circumstances more fully described in the Indenture (a "Residual Event"), the Residual Realizations not distributed to Noteholders, paid to the Servicer or deposited into the Reserve Account will be deposited in the Residual Account. As provided in the Indenture, funds on deposit in the Residual Account will be available to cover shortfalls in the amount available to pay the amounts owing the Servicer and to make interest and principal payments on the Notes. Following the termination of a Residual Event, amounts on deposit in the Residual Account will be disbursed to the Issuer. The aggregate Booked Residual Values of the Lease as of the Cut-Off Date equals $32,226,023. Subordination....................... The Class A Notes will be senior in right of payment to the Class B Notes and the Class B Notes will be senior in right to the Class C Notes to the extent described herein. See "Description of the Notes--Distributions on Notes." Reserve Account..................... The Noteholders will have the benefit of funds on deposit in an account (the "Reserve Account") to the extent that there is a shortfall in the amount available to pay amounts owing the Servicer and to make interest and principal payments on the Notes, on any Payment Date. The Reserve Account will be funded by an initial deposit of 1.25% of the Discounted Present Value of the Leases as of the Cut-Off Date. Thereafter, to the extent provided in the Indenture, additional deposits will be made to the Reserve Account to the extent that the amount on deposit in the Reserve Account (the "Available Reserve Amount") is less than the Required Reserve Amount. The "Required Reserve Amount" equals the greater of (a) 1.25% of the Discounted Present Value of the Performing Leases as of the related Payment Date and (b) 1.00% of the Discounted Present Value of the Leases as of the Cut-Off Date, but not more than the Outstanding Principal Amount of the Notes, (the "Required Reserve Amount"). Amounts on deposit in the Reserve Account in excess of the Required Reserve Amount will be disbursed to the Issuer in accordance with the provisions of the Indenture. Federal Income Tax Considerations...................... It is intended that the Notes will be characterized as indebtedness of the Issuer for federal income tax purposes. If characterized as indebtedness, interest on the Notes will be taxable as ordinary income when received by a Noteholder on the cash method of accounting and when accrued by Noteholders on the accrual method of accounting. See "Certain Federal Income Tax Considerations." ERISA Considerations...................... The Employee Retirement Income Security Act of 1974, as amended ("ERISA") places certain restrictions on those pension and other employee benefits plans to which it applies. Pursuant to regulations issued by the United States Department of Labor defining "plan assets", if the Notes are considered to be indebtedness without substantial equity features under local law, the assets of the Issuer will not be considered assets of any ERISA plan holding the Notes, thereby generally avoiding potential application of ERISA's prohibited transaction rules. However, in certain circumstances, the prohibited transaction rules may be applicable to the purchase of the Notes even if the Notes are not deemed to have substantial equity features. Certain exemptions from the prohibited transaction rules could be applicable, however, with respect to the acquisition and holding of the Notes. Accordingly, the notes may be acquired by ERISA plans, subject to certain restrictions. Before purchasing any of the Notes, fiduciaries of such plans should determine whether an investment in the Notes is appropriate under ERISA. See "ERISA Considerations." Rating.............................. It is a condition to the issuance of the Offered Notes that the Class A Notes be rated at least "AAA," "AAA" and "Aaa" and that the Class B Notes be rated at least "A," "A" and "A2" by Standard & Poor's Ratings Group ("S&P"), Duff & Phelps Credit Ratings Co. ("DCR") and Moody's Investors Service, Inc. ("Moody's"), respectively. The ratings assess the likelihood of timely payment of interest and the ultimate payment of principal to the Noteholders by the Stated Maturity Date. There is no assurance that any rating will not be lowered or withdrawn if, in the judgement of any Rating Agency, circumstances in the future so warrant. See "Rating of the Notes."
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the consolidated financial statements and the notes thereto appearing elsewhere in this Prospectus. Unless the context otherwise requires, the term "Company" or "Western Wireless" when used in this Prospectus refers to Western Wireless Corporation, a Washington corporation which is the successor to a Delaware corporation pursuant to a reincorporation merger that will be effected prior to the consummation of the Debt Offering and the Offerings, and its subsidiaries and predecessors. All share and per share data in this Prospectus assume no exercise of the Underwriters' over-allotment options in the Offerings and the reclassification prior to the Offerings and the Debt Offering of each share of the Company's outstanding common stock, par value $0.001 per share, into 3.1 shares of the Company's Class B Common Stock, no par value (the "Class B Common Stock"), which together with the Company's Class A Common Stock, no par value (the "Class A Common Stock"), is referred to herein as the "Common Stock." In addition, all references to the Class B Common Stock prior to the date of the reclassification refer to the common stock, par value $0.001 per share, of Western Wireless Corporation. Unless the context otherwise requires, when used herein with respect to a licensed area, "persons" and "population" are interchangeable and refer to the aggregate number of persons located in such licensed area, and "pops" refers to the number of such persons in a licensed area multiplied by a company's ownership interest in the license for such licensed area. Persons, population and pops data are estimated for 1996 based upon 1995 estimates by Equifax Marketing Decision Systems, Inc. ("Equifax") adjusted by the Company by applying Equifax's growth factors from 1990 to 1995 to the 1990 U.S. Census Bureau population figures, unless otherwise specified. THE COMPANY Western Wireless provides wireless communications services in the western United States. The Company owns or has the right to acquire an aggregate of 80 cellular and PCS licenses for a geographic area covering approximately 25.5 million pops and 41% of the continental United States. The Company owns and operates cellular communications systems in 57 Rural Service Areas ("RSAs"), including one RSA which it has the right to acquire, and 16 Metropolitan Statistical Areas ("MSAs") with an aggregate population of approximately 6.0 million persons. In its cellular markets, the Company uses the CELLULAR ONE brand name and currently serves over 240,000 subscribers. Through the Federal Communications Commission ("FCC") auction concluded in 1995, the Company acquired broadband personal communications services ("PCS") licenses for six Major Trading Areas ("MTAs") with an aggregate population of approximately 15.1 million persons -- Honolulu, Salt Lake City, Portland, Des Moines/Quad Cities, El Paso/Albuquerque and Oklahoma City -- for an aggregate purchase price of $144 million. In January 1996, the Company agreed to acquire a broadband PCS license for the Denver MTA from GTE Mobilnet Incorporated ("GTE") for a purchase price of $66 million. The Company's seven PCS licenses cover markets with an aggregate population of approximately 19.5 million persons, including approximately 4.4 million persons covered by the Denver MTA. In all of its PCS markets, the Company intends to use its proprietary VoiceStream(SM) brand name. In February 1996, the Company's PCS system in the Honolulu MTA became the first auction-awarded PCS system to commence commercial operations in the United States. See "Business -- Introduction," "-- Markets and Systems" and "-- PCS Operations." Western Wireless Corporation was formed in July 1994 as the result of a business combination (the "Business Combination") among various companies, including MARKETS Cellular Limited Partnership d/b/a Pacific Northwest Cellular, a Delaware limited partnership ("MCLP"), and General Cellular Corporation, a Delaware corporation ("GCC"). GCC commenced operations in 1989 and MCLP was formed in 1992. As a result of the Business Combination and a series of INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED MAY 22, 1996 $200,000,000 LOGO WESTERN WIRELESS CORPORATION % SENIOR SUBORDINATED NOTES DUE 2006 --------------------- THE SENIOR SUBORDINATED NOTES WILL BE SENIOR UNSECURED OBLIGATIONS OF THE COMPANY AND WILL BE SUBORDINATED IN RIGHT OF PAYMENT TO THE PRIOR PAYMENT IN FULL OF ALL SENIOR INDEBTEDNESS AND SENIOR IN RIGHT OF PAYMENT TO ANY CURRENT OR FUTURE SUBORDINATED INDEBTEDNESS OF THE COMPANY. IN ADDITION, ALL EXISTING AND FUTURE INDEBTEDNESS AND OTHER LIABILITIES OF THE COMPANY'S SUBSIDIARIES WILL BE EFFECTIVELY SENIOR IN RIGHT OF PAYMENT TO THE SENIOR SUBORDINATED NOTES. THE COMPANY HAS NOT ISSUED, AND DOES NOT HAVE ANY FIRM ARRANGEMENT TO ISSUE, ANY SIGNIFICANT INDEBTEDNESS TO WHICH THE SENIOR SUBORDINATED NOTES WOULD BE SENIOR. AT MARCH 31, 1996, SENIOR INDEBTEDNESS AGGREGATED APPROXIMATELY $435.8 MILLION. Interest on the Senior Subordinated Notes is payable on and of each year, commencing , 1996. Prior to , 2001, the Senior Subordinated Notes are redeemable at the option of the Company in whole or, from time to time, in part at a price equal to the sum of (i) the principal amount plus accrued interest to the redemption date and (ii) the Make-Whole Amount; and on or after , 2001 at the redemption prices set forth herein. In addition, on or before , 1998, the Company may, at its option, apply Qualified Capital Stock Proceeds and Affiliate and Related Person Proceeds to redeem up to $66.0 million in aggregate principal amount of Senior Subordinated Notes together with accrued interest. The Senior Subordinated Notes will be represented by one or more global notes registered in the name of the nominee of the Depository Trust Company ("DTC"). Beneficial interests in the global notes will be shown on, and transfers thereof will be effected only through, records maintained by DTC and its participants. Except as described herein, Senior Subordinated Notes in definitive form will not be issued. The Senior Subordinated Notes will be issued only in denominations of $1,000 and any integral multiples thereof. The Senior Subordinated Notes will trade in DTC's Same-Day Funds Settlement System until maturity, and secondary market trading activity for the Senior Subordinated Notes will therefore settle in immediately available funds. All payments of principal and interest will be made by the Company in immediately available funds. See "Description of Senior Subordinated Notes." The Company and certain Selling Shareholders are offering 8,800,000 shares of Class A Common Stock in a concurrent United States offering and 2,200,000 shares of Class A Common Stock in a concurrent international offering (together, the "Offerings"). The closing of this Debt Offering is conditioned on the closing of the Offerings. SEE "RISK FACTORS" BEGINNING ON PAGE 14 HEREOF FOR CERTAIN CONSIDERATIONS RELEVANT TO AN INVESTMENT IN THE SENIOR SUBORDINATED NOTES. --------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. --------------------- <TABLE> <CAPTION> INITIAL PUBLIC OFFERING UNDERWRITING PROCEEDS TO PRICE(1) DISCOUNT(2) COMPANY(1)(3) ---------------- ---------------- ---------------- <S> <C> <C> <C> Per Senior Subordinated Note........................ % % % Total............................................... $ $ $ </TABLE> - --------------- (1) Plus accrued interest, if any, from , 1996. (2) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. See "Underwriting." (3) Before deducting estimated expenses of $625,000 payable by the Company. --------------------- The Senior Subordinated Notes offered hereby are offered severally by the Underwriters, as specified herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that the Senior Subordinated Notes will be ready for delivery in book-entry form only through the facilities of DTC in New York, New York, on or about , 1996, against payment therefor in immediately available funds. GOLDMAN, SACHS & CO. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION MERRILL LYNCH & CO. SALOMON BROTHERS INC TORONTO DOMINION SECURITIES (USA) INC. --------------------- The date of this Prospectus is , 1996. related transactions, Western Wireless Corporation became the owner of all of the issued and outstanding shares of common stock of GCC and the owner of all of the assets of MCLP. The Business Combination constituted an acquisition of MCLP by GCC for accounting purposes. As a result, all financial data relating to the Company herein with respect to periods after the date of the Business Combination reflect the combined operations of GCC and MCLP and all such data with respect to prior periods reflect only the operations of GCC, which, for accounting purposes, is considered Western Wireless Corporation's predecessor. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." STRATEGY The Company believes that its combination of cellular and PCS licenses creates a unique opportunity in the wireless communications industry. The Company has focused on the acquisition and operation of cellular communications systems in RSAs and small MSAs in the western United States, which the Company believes it has acquired at attractive prices. The Company's recent acquisition of PCS licenses enables it to significantly expand both its customer base and geographic coverage and to offer enhanced wireless communications services. The Company's initial focus with its PCS licenses is to commence operations in the more densely populated areas within its MTAs. The Company believes that cellular is the optimum technology for rural, less densely populated areas and that PCS is the optimum technology for more densely populated urban areas where analog cellular systems are more expensive to deploy and face potential capacity constraints. The Company and, prior to the Business Combination, MCLP entered markets at a relatively low cost, having purchased cellular licenses for an average of $45.68 per pop and PCS licenses for an average of $10.81 per pop. The Company's operating strategy is to (i) achieve a critical time-to-market advantage by rapidly constructing and commencing operations of PCS systems in urban areas within its PCS markets; (ii) continue to expand its operations through increased subscriber growth and usage; (iii) utilize its centralized management and back office functions to support the combined needs of its cellular and PCS subscribers, thereby further improving operating efficiencies and generating greater economies of scale; and (iv) selectively acquire cellular and PCS properties primarily in contiguous markets. The Company is implementing its strategy by aggressively building its PCS systems, offering a wide range of products and services at competitive prices, continually upgrading the quality of its network, establishing strong brand recognition, creating a strong sales and marketing program tailored to local markets and providing a superior level of customer service. The Company believes the wireless communications industry will continue to grow due to enhanced service offerings, the emergence of PCS systems, increased awareness of the productivity, convenience and security benefits associated with wireless communications services and anticipated declines in service prices. The Company believes it is well positioned to take advantage of these growth opportunities as a result of its existing operations and systems infrastructure, its wide geographic coverage and the experience and expertise of its management team. See "Business -- Strategy," "-- Cellular Operations," "-- PCS Operations," "-- Products and Services" and "-- System Equipment, Development and Expansion." CELLULAR OPERATIONS The Company owns and operates high quality cellular systems in 15 western states and generally owns 100% of each of its cellular licenses. The Company focuses on RSAs and small MSAs because it perceives such markets, which are less densely populated, to be less susceptible to competition and to have greater capacity for future growth than most major markets. Cellular service was generally introduced later in RSAs and small MSAs than in major markets. As a result, cellular penetration is currently lower and subscriber growth rates are significantly higher than in major markets. Although two cellular operators exist in all markets, the Company's competitor in many of its markets tends to be smaller and less well capitalized than the large market operators. The Company's cellular markets exhibit positive characteristics for wireless communications, including a high percentage of business customers with substantial needs for wireless communications, such as those employed in agriculture, mining, oil and gas, and populations accustomed to long travel times. Additionally, the Company's service areas cover over 20,000 highway miles and the popular destination areas of Yellowstone National Park, Glacier National Park and Mount Rushmore National Monument, providing attractive sources of roaming revenues. In its rural markets, the Company believes that its cellular systems, which can cover large geographic areas with relatively few cell sites, provide the optimum cost efficient wireless service technology. In contrast, PCS technology requires more closely located cell sites to broadcast over extended geographic areas. Accordingly, PCS service will be less efficient and more expensive to deploy in rural markets than cellular service, making it likely that PCS competitors will delay or avoid entry into such markets. The Company has experienced rapid growth of its cellular operations during the last three years. The number of the Company's cellular subscribers grew to 239,200 at March 31, 1996 from 13,700 at January 1, 1993. Service (subscriber and roamer) revenues grew to $135.1 million in 1995 from $18.4 million in 1993 and operating income (loss) from cellular operations before interest, taxes and depreciation and amortization increased to $28.9 million in 1995 from $0.5 million in 1993. In addition, during the three year period ended December 31, 1995, the monthly subscriber revenue per subscriber in the industry declined while the Company's monthly subscriber revenue per subscriber increased to $57.25 for 1995 from $49.72 for 1993. The Company believes these results reflect the strong demand for wireless services in its markets, the success of its marketing strategy and its management capabilities. See "Risk Factors -- Seasonality," "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company offers its subscribers high quality cellular service, as well as custom calling services such as call forwarding, call waiting, conference calling, voice message storage and retrieval and no-answer transfer. The Company also acts as a retail distributor of wireless handsets. The Company sells its products and services primarily through its direct sales force and 108 retail locations, as well as through a network of independent agents and national retailers. In addition, the Company recently began providing replacement wireless services for rural customers in sparsely populated areas where the cost of providing wired telephone services is relatively high. The Company markets its cellular services under the CELLULAR ONE brand name, allowing it to enjoy the strength of a nationally recognized service mark in its cellular markets. The Company has roaming arrangements with virtually every cellular carrier in North America and has entered into agreements or letters of intent with a number of PCS carriers which, when the technology is available, will enable PCS subscribers of these carriers to roam on the Company's cellular systems. The Company is also a member of North American Cellular Network ("NACN"), a wireless network linking cellular operations throughout the United States, Canada, Puerto Rico and the Virgin Islands. NACN participation allows the Company to offer convenient access to the Company's subscribers when roaming throughout the United States and Canada. See "Business -- Strategy," "-- Cellular Operations" and "-- Products and Services - Cellular." PCS OPERATIONS The Company has completed initial construction and commenced commercial operations of its PCS system in the Honolulu MTA and is in the initial construction phase of its PCS systems in the Portland, Salt Lake City and El Paso/Albuquerque MTAs. Design and engineering have been initiated in the Company's remaining PCS markets. When completed, the Company's PCS systems will cover a substantial geographic area in the western United States complementary to the Company's cellular operations. The Company expects to extend its PCS systems based on economic factors, customer demand and FCC licensing requirements. The Company believes its PCS service offerings will be broader than those currently offered by cellular systems in the Company's PCS markets. PCS service offerings will initially include all of the services typically provided by cellular systems, as well as paging, caller identification, text messaging, smart cards, over-the-air activation and over-the-air subscriber profile management. To date, the Company has not derived significant revenues from its PCS operations. The following table sets forth certain information regarding the MTAs in which the Company intends to operate PCS systems: <TABLE> <CAPTION> MTA POPULATION SYSTEM STATUS ----------------------------------------------- ---------- ----------------------- <S> <C> <C> Honolulu....................................... 1,215,729 commercial service Portland....................................... 3,460,182 construction Salt Lake City................................. 2,999,636 construction El Paso/Albuquerque............................ 2,387,710 construction Denver......................................... 4,411,211 design and engineering Des Moines/Quad Cities......................... 3,067,795 design and engineering Oklahoma City.................................. 1,945,271 design and engineering </TABLE> The Company believes that being the first to offer PCS services in a market will be a key competitive advantage. The Company's goal is to achieve significant market penetration by aggressively marketing competitively priced PCS services under its proprietary VoiceStream brand name, offering enhanced services not currently provided by analog or digital cellular operators and providing superior customer service. In addition, the Company believes it can become a low-cost provider of PCS services by taking advantage of the existing business infrastructure established for its cellular operations, including centralized management, marketing, billing and customer service functions, and by focusing on efficient customer acquisition and retention. The Company uses the internationally-proven Global System for Mobile Communications ("GSM") as the network standard for its PCS systems. GSM is the leading digital wireless standard worldwide, with approximately 120 systems operating in 92 countries serving over 13 million subscribers. In the United States, GSM has been chosen by six other companies as the network standard in their 18 MTAs which, together with the Company's seven MTAs, cover markets containing approximately 149.2 million persons, representing approximately 55.7% of the U.S. population. The Company has entered into roaming agreements or letters of intent with all of the companies in the United States that have chosen to deploy the GSM standard in their PCS markets, which will provide for roaming by the Company's PCS subscribers into these carriers' PCS markets, and vice versa, when such systems are operational. As of March 31, 1996, the Company also had reciprocal roaming agreements or letters of intent with 28 international carriers who have chosen to deploy the GSM standard. The Company anticipates entering into similar agreements with other domestic and international carriers who deploy the GSM standard. The Company will seek to enter into reciprocal roaming agreements with cellular carriers in markets where the GSM standard will not be initially deployed to enable the Company's PCS subscribers to roam in such markets when dual-mode handsets are available. See "Risk Factors -- Risks Relating to GSM Technical Standard," "-- Absence of PCS Operating History in the United States; Handset Availability," "Business -- Markets and Systems," " -- PCS Operations" and "-- Products and Services - PCS." FINANCING PLAN The Company believes that access to capital and financial flexibility are necessary to successfully implement its strategy. The Company currently anticipates that it will require approximately $500 million to finance the build-out of its PCS systems through the end of 1998. The Company will require additional funds to finance the continued growth of its cellular operations, provide for working capital, service debt and finance potential acquisitions. Such additional financing requirements will be dependent upon a variety of factors including the rate of growth of the Company's cellular operations. Historically, the Company has relied on a combination of private equity financings and borrowings. Since January 1, 1993, the Company has raised over $185.8 million of equity through issuances of capital stock. From inception until the Business Combination, MCLP had raised $79.0 million of partner capital. See "Certain Transactions." The Company has a credit facility (the "Credit Facility") with a consortium of lenders providing for $750 million of revolving credit and a $200 million term loan. A subsidiary of the Company also has a $200 million credit facility (the "NORTEL Facility" and, together with the Credit Facility, the "Senior Secured Facilities") with Northern Telecom Inc. ("NORTEL"). As of March 31, 1996, $435.8 million was outstanding under the Senior Secured Facilities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Description of Indebtedness." The Company is offering $200 million principal amount of Senior Subordinated Notes in this offering (the "Debt Offering") and is concurrently offering 7,211,840 shares of Class A Common Stock in the United States (together with the 1,588,160 shares of Class A Common Stock offered by the Selling Shareholders, the "U.S. Offering") and 1,802,960 shares of Class A Common Stock outside the United States (together with the 397,040 shares of Class A Common Stock offered by the Selling Shareholders, the "International Offering" and, together with the U.S. Offering, the "Offerings") for estimated aggregate net proceeds to the Company of $380.5 million ($415.5 million if the Underwriters' over-allotment options in the Offerings are exercised in full). The Company believes these proceeds, in combination with the Senior Secured Facilities, will be sufficient to fund operating losses, capital expenditures and working capital necessary for the build-out of its PCS systems and the continued growth of its cellular operations through December 31, 1998. To the extent that the build-out of the PCS systems is faster than expected, the costs are greater than anticipated or the Company takes advantage of additional acquisition opportunities, including those that may arise through current or future FCC auctions, the Company may require additional funding to implement its business strategy. See "Risk Factors -- High Leverage; Debt Service; Restrictive Covenants," "-- PCS Build-out and Capital Expenditures," "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Use of Proceeds." THE DEBT OFFERING <TABLE> <S> <C> Securities Offered............ $200 million principal amount of % Senior Subordinated Notes Due 2006 (the "Senior Subordinated Notes"). Principal of, premium, if any, and interest on the Senior Subordinated Notes will be payable in immediately available funds. Maturity Date................. The Senior Subordinated Notes will mature on , 2006. Interest Payment Dates........ and of each year, commencing , 1996. Ranking....................... The Senior Subordinated Notes will be senior unsecured obligations of the Company and will be subordinated in right of payment to the prior payment in full of all Senior Indebtedness and senior in right of payment to any current or future subordinated Indebtedness of the Company. In addition, all existing and future Indebtedness and other liabilities of the Company's Subsidiaries will be effectively senior in right of payment to the Senior Subordinated Notes. At March 31, 1996, Senior Indebtedness aggregated approximately $435.8 million. At March 31, 1996, the total outstanding Indebtedness of the Company's Subsidiaries not eliminated in the Company's consolidated financial statements was approximately $36.5 million. See "Risk Factors -- Holding Company Structure; Subordination" and "Description of Senior Subordinated Notes -- Subordination." Optional Redemption........... Prior to , 2001, the Senior Subordinated Notes may be redeemed at the option of the Company in whole or, from time to time, in part at a redemption price equal to the sum of (i) the principal amount of the Senior Subordinated Notes to be redeemed plus accrued interest to but excluding the redemption date and (ii) the Make-Whole Amount. After , 2001, the Senior Subordinated Notes may be redeemed as a whole or, from time to time, in part at the option of the Company at the following redemption prices (expressed as percentages of principal amount), in each case together with accrued interest to but excluding the date fixed for redemption, if redeemed during the 12-month period beginning of each of the years indicated: 2001 at %, 2002 at %, 2003 at % and 2004 and thereafter at 100%. In addition, on or before , 1998, the Company may, at its option, apply Qualified Capital Stock Proceeds and Affiliate and Related Person Proceeds to redeem up to $66.0 million in aggregate principal amount of Senior Subordinated Notes together with accrued interest. See "Description of Senior Subordinated Notes -- Optional Redemption." In addition, the Company may be required to offer to repurchase the Senior Subordinated Notes upon the occurrence of a Change of Control or upon certain Asset Dispositions. See "Description of Senior Subordinated Notes -- Change of Control" and "-- Covenants - Limitation on Certain Asset Dispositions." The Credit Facility prohibits the repayment of all or any portion of the principal amount of the Senior Subordinated Notes prior to the repayment of all indebtedness under the Credit Facility. See "Description of Indebtedness -- Credit Facility." </TABLE> <TABLE> <S> <C> Sinking Fund.................. The Senior Subordinated Notes will not be entitled to any sinking fund. Change of Control............. Upon a Change of Control, each Holder of Senior Subordinated Notes will have the right to have the Company repurchase all or a portion of such Holder's Senior Subordinated Notes at a purchase price in cash equal to 101% of the aggregate principal amount of the Senior Subordinated Notes plus accrued interest to but excluding the Purchase Date. The Company will not be able to so repurchase Senior Subordinated Notes without obtaining written consents from or repaying the lenders under the Credit Facility. Certain Covenants............. The Indenture contains limitations on, among other things, (a) the Incurrence of additional Indebtedness, (b) the issuance of Preferred Stock by Restricted Subsidiaries, (c) the making of Restricted Payments, (d) the Incurrence of certain Liens, (e) certain Asset Dispositions, (f) dividend and other payment restrictions affecting Restricted Subsidiaries, (g) the sale or issuance of a Wholly Owned Restricted Subsidiary's Capital Stock, (h) transactions with Affiliates and (i) certain consolidations, mergers and transfers of assets. See "Description of Senior Subordinated Notes -- Covenants." Use of Proceeds............... Estimated net proceeds to the Company from the Debt Offering and the Offerings of approximately $193.1 million and $187.4 million, respectively, will be used to finance a portion of the Company's PCS build-out, to fund the purchase of the Denver MTA license, to fund expansion of existing cellular operations and for general corporate purposes; and, pending such uses, for working capital and to repay revolving credit indebtedness under the Credit Facility. See "Use of Proceeds." </TABLE> For definitions of certain capitalized terms used herein, see "Description of Senior Subordinated Notes."
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+SUMMARY This Summary is qualified in its entirety by reference to the detailed information appearing elsewhere in this Prospectus. Certain capitalized terms used in the Summary are defined elsewhere in this Prospectus. Reference is made to the "Index of Principal Terms" for the location herein of defined terms. Issuer .................... CIT RV Owner Trust 1996-A (the "Trust" or the "Issuer"), a Delaware business trust to be formed by the Seller and the Owner Trustee pursuant to the Trust Agreement, to be dated as of February 1, 1996. Seller .................... The CIT Group Securitization Corporation II (the "Company"), a wholly-owned, limited purpose subsidiary of The CIT Group Holdings, Inc. ("CIT"). Neither CIT nor any of its affiliates, including the Company and The CIT Group/Sales Financing, Inc. ("CITSF"), has guaranteed, insured or is otherwise obligated with respect to the Securities. See "Risk Factors--Limited Obligations". Servicer ................... The CIT Group/Sales Financing, Inc. (in such capacity referred to herein as the "Servicer"), a wholly-owned subsidiary of CIT. Indenture Trustee .......... Harris Trust and Savings Bank, as trustee under the Indenture, to be dated as of February 1, 1996 (the "Indenture Trustee"). Owner Trustee .............. The Bank of New York (Delaware), as trustee under the Trust Agreement, to be dated as of February 1, 1996 (the "Owner Trustee" and, together with the Indenture Trustee, the "Trustees"). Risk Factors ................ Certain potential risks and other considerations are particularly relevant to a decision to invest in any securities sold hereunder. See "Risk Factors". The Notes ................... The CIT RV Owner Trust 1996-A Class A % Asset Backed Notes (the "Notes" or the "Class A Notes") will represent obligations of the Trust secured by the assets of the Trust (other than the Certificate Distribution Account and the Cash Collateral Account). See "The Notes--General". The Trust will issue $236,250,000 aggregate principal amount of Class A Notes pursuant to an Indenture, to be dated as of February 1, 1996, between the Issuer and the Indenture Trustee (the "Indenture"). See "The Notes--General". The Notes will be offered for purchase in minimum denominations of $1,000 and integral multiples of $1,000 in excess thereof in book-entry form only. Definitive Notes will be issued only under the limited circumstances described herein. Persons acquiring beneficial interests in the Notes will hold their interests through The Depository Trust Company ("DTC") in the United States or Cedel Bank, societe anonyme ("Cedel") or the Euroclear System ("Euroclear") in Europe. See "Certain Information Regarding the Securities--Book-Entry Registration" and "--Definitive Securities" and Annex I hereto. The Certificates ........... The CIT RV Owner Trust 1996-A % Asset Backed Certificates (the "Certificates" and, together with the Notes, the "Securities") will represent fractional undivided interests in the Trust. See "The Certificates--General". - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The Trust will issue $13,750,000 aggregate principal amount of Certificates (the "Original Certificate Balance") pursuant to a Trust Agreement, to be dated as of February 1, 1996, between the Seller and the Owner Trustee (the "Trust Agreement"). Payments in respect of the Certificates will be subordinated to payments on the Notes to the limited extent described herein. See "The Certificates--General". The Certificates will be issued in minimum denominations of $20,000 and integral multiples of $1,000 in excess thereof in book-entry form only; provided, however, that one Certificate may be issued in a denomination other than an integral multiple of $1,000 such that the Affiliated Purchaser (as defined herein) may be issued at least 1% of the Certificate Balance (as described herein). Persons acquiring beneficial interests in the Certificates will hold their interests through DTC. Definitive Certificates will be issued only under the limited circumstances described herein. See "Certain Information Regarding the Securities--Book-Entry Registration" and "--Definitive Securities". Property of the Trust .... The property of the Trust will primarily include (i) a pool of simple interest retail installment sale contracts (the "Initial Contracts") secured by the new and used recreational vehicles financed thereby (the "Initial Financed Vehicles"), (ii) certain monies received under the Initial Contracts on and after February 1, 1996 (the "Initial Cut-off Date"), (iii) security interests in the Initial Financed Vehicles, (iv) the Collection Account, the Note Distribution Account, the Certificate Distribution Account, the Cash Collateral Account, the Capitalized Interest Account and the Pre-Funding Account, in each case together with the proceeds thereof (other than investment earnings on the Cash Collateral Account), (v) the proceeds from claims under certain insurance policies in respect of individual Initial Financed Vehicles or the related Obligors and (vi) certain rights under the Sale and Servicing Agreement, to be dated as of February 1, 1996 (the "Sale and Servicing Agreement"), among the Seller, the Servicer and the Trust. From time to time on or before May 15, 1996, additional simple interest retail installment sale contracts (the "Subsequent Contracts" and, together with the Initial Contracts, the "Contracts") secured by the new and used recreational vehicles financed thereby (the "Subsequent Financed Vehicles" and, together with the Initial Financed Vehicles, the "Financed Vehicles"), certain monies received under the Subsequent Contracts on and after the related Subsequent Cut-off Dates, security interests in the Subsequent Financed Vehicles and proceeds from claims under certain insurance policies in respect of individual Subsequent Financed Vehicles or the related Obligors will be purchased by the Trust from the Seller from monies on deposit in the Pre-Funding Account. See "The Trust Property". The Contracts .......... The property of the Trust will consist primarily of installment sale contracts for recreational vehicles originated by recreational vehicle dealers ("Dealers") in the ordinary course of business and acquired by CITSF or The CIT Group/Consumer Finance, Inc. (NY) ("CITCF-NY") in the ordinary course of its business. The Financed Vehicles will consist of motor homes, travel trailers and other types of recreational vehicles. See "The Contract Pool". On or prior to the date of issuance of the Securities (the "Closing Date"), CITCF-NY will sell certain contracts that will constitute a portion of the Initial Contracts to CITSF - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- pursuant to a purchase agreement, to be dated as of February 1, 1996, and CITSF will sell the Initial Contracts to the Company pursuant to a purchase agreement, to be dated as of February 1, 1996 (the "Purchase Agreement"), and the Company will sell the Initial Contracts to the Trust pursuant to the Sale and Servicing Agreement. As of the Initial Cut-off Date, the Initial Contracts had an aggregate principal balance of $181,744,965, a weighted average original maturity of 156 months and a remaining weighted average maturity of 148 months. The final scheduled payment date on the Initial Contract with the last maturity occurs in February 2011. See "The Contract Pool". From time to time on or prior to May 15, 1996, pursuant to the Sale and Servicing Agreement, CITSF will be obligated to sell, and the Company will be obligated to purchase, subject to the satisfaction of certain conditions described therein, Subsequent Contracts at a purchase price equal to the aggregate principal amount thereof as of the first day in the related month of transfer designated by CITSF and the Company (each, a "Subsequent Cut-off Date"). A portion of such Subsequent Contracts may be acquired by CITSF from CITCF-NY. Pursuant to the Sale and Servicing Agreement and one or more subsequent transfer agreements (each, a "Subsequent Transfer Agreement") between the Company and the Trust, and subject to the satisfaction of certain conditions described therein, the Company will in turn sell the Subsequent Contracts to the Trust at a purchase price equal to the amount paid by the Company to CITSF for such Subsequent Contracts, which purchase price shall be paid from monies on deposit in the Pre-Funding Account. The aggregate principal balance of the Subsequent Contracts to be conveyed to the Trust during the Funding Period will not exceed $68,255,035. Subsequent Contracts will be transferred from CITSF to the Company and from the Company to the Trust on the Business Day specified by CITSF and the Company during the month in which the related Subsequent Cut-off Date occurs (each, a "Subsequent Transfer Date"). The Pre-Funding Account .. The Pre-Funding Account will be maintained with an Eligible Institution (as defined herein), initially the Indenture Trustee, and the funds on deposit therein will be invested solely in Permitted Investments (as defined herein), that mature not later than one Business Day prior to the next succeeding Distribution Date, until they are applied by the Owner Trustee during the Funding Period to pay to the Company the purchase price for Subsequent Contracts. See "The Purchase Agreements and the Trust Documents--Accounts." Monies on deposit in the Pre-Funding Account will not be available to cover losses on or in respect of the Contracts. On the Closing Date the Pre-Funding Account will be created with an initial deposit, from the proceeds of the Securities, of $68,255,035 (the "Pre-Funded Amount"), representing 27.3% of the initial balance of the Securities. The "Funding Period" will be the period from the Closing Date until the earliest to occur of (i) the date on which the amount on deposit in the Pre-Funding Account is less than $100,000, (ii) the date on which an Event of Default occurs under the Indenture, (iii) the date on which an Event of Termination occurs under the Sale and Servicing Agreement, (iv) the insolvency of the Company, CITSF, CITCF-NY or CIT or (v) the close of business on May 15, 1996. During the Funding Period, on one or more Subsequent - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Transfer Dates, the Pre-Funded Amount will be applied to purchase Subsequent Contracts from the Company. The Company expects that the Pre-Funded Amount will be reduced to less than $100,000 by May 15, 1996, although no assurance can be given that this will in fact occur. Any portion of the Pre-Funded Amount remaining on deposit in the Pre-Funding Account at the end of the Funding Period will be payable as principal to Noteholders and Certificateholders in accordance with the Pre-Funded Percentage (as hereinafter defined) on the first Distribution Date thereafter or, if the end of the Funding Period is on a Distribution Date, then on such date. Capitalized Interest Account ............... On the Closing Date approximately $ of the proceeds from the sale of the Securities will be deposited into an account (the "Capitalized Interest Account") maintained with an Eligible Institution, initially the Indenture Trustee,in the name of the Owner Trustee on behalf of the Securityholders. Amounts deposited in the Capitalized Interest Account will be used on the March 15, 1996, April 15, 1996 and May 15, 1996 Distribution Dates, if applicable, to fund the excess, if any, of (i) the product of (x) one-twelfth of the weighted average of the Class A Rate and the Pass-Through Rate as of the first day of the related Interest Accrual Period and (y) the undisbursed funds (excluding investment earnings) in the Pre-Funding Account (as of the last day of the related Due Period) over (ii) the amount of any investment earnings on funds in the Pre-Funding Account that are available to pay interest on the Securities on each such Distribution Date. On each Distribution Date during the Funding Period any amount remaining in the Capitalized Interest Account in excess of the Required Capitalized Interest Amount (as defined under "The Contract Pool--Pre-Funding Account; Capitalized Interest Account") shall be released to the Affiliated Purchaser (as defined herein). Any amounts remaining in the Capitalized Interest Account on the last day of the Funding Period and not used for such purposes will be deposited in the Collection Account and will be available for distributions, as described herein, on the first Distribution Date thereafter or, if the end of the Funding Period is on a Distribution Date, then on such date. Distribution Dates ....... Payments of interest and principal on the Securities will be made on the fifteenth day of each month or, if any such day is not a Business Day (as hereinafter defined), on the next succeeding Business Day (each, a "Distribution Date"), commencing March 15, 1996. Payments on the Securities on each Distribution Date will be made to the holders of record of the related Securities at the close of business on the day immediately preceding such Distribution Date or, in the event Definitive Securities have been issued, at the close of business on the last day of the month immediately preceding the month in which such Distribution Date occurs (each, a "Record Date"). To the extent not previously paid in full prior to such time, the outstanding principal amount of the Class A Notes and the Certificates will be payable on the Distribution Date occurring in December 2011 (the "Class A Final Scheduled Distribution Date" and the "Certificate Final Scheduled Distribution Date"). A "Business Day" is any day other than a Saturday, Sunday or any day on which banking institutions or trust companies in the states of New York, Delaware, Illinois or Oklahoma are authorized by law, regulation or executive order to be closed. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Interest Accrual Period .. The period for which interest is payable on a Distribution Date on the Securities shall be the one-month period from the most recent Distribution Date on which interest has been paid to but excluding the following Distribution Date, or in the case of the initial Distribution Date from February 15, 1996 to but excluding the initial Distribution Date (each, an "Interest Accrual Period"). Due Period ............... With respect to any Distribution Date, the "Due Period" is the period during which principal, interest and fees will be collected on the Contracts for application towards the payment of principal and interest to the Securityholders and the payment of fees on such Distribution Date. The "Due Period" will be the calendar month immediately preceding the Distribution Date. The first Due Period will commence on and include February 1, 1996 and will end on and include February 29, 1996. Determination Date ....... The "Determination Date" is the third Business Day prior to each Distribution Date. On each Determination Date, the Indenture Trustee will determine the amount in the Collection Account available for distribution on the related Distribution Date, allocate such amounts between the Notes and the Certificates and make payments to Securityholders all as described under "The Purchase Agreements and The Trust Documents--Distributions". Terms of the Notes ....... The principal terms of the Notes will be as described below: A. Interest Rate ........ The Class A Notes will bear interest at the rate of % per annum (the "Class A Rate"). B. Interest ............ Interest accruing during the related Interest Accrual Period (computed on the basis of a 360-day year consisting of twelve 30-day months) will be paid to the Noteholders of record on the related Record Date, on each Distribution Date, to the extent of the Available Amount on such Distribution Date (i) in an amount equal to one-twelfth of the product of the Class A Rate and the outstanding principal balance on the Notes, as of the preceding Distribution Date (after giving effect to distributions of principal and interest to be made on such Distribution Date) or (ii) in the case of the first Distribution Date, in an amount equal to interest accruing at the Class A Rate from February 15, 1996 to but excluding the first Distribution Date, on the outstanding principal balance of the Notes as of the Closing Date. See "The Notes--Payment of Interest". C. Principal ........... Principal of the Notes will be payable on each Distribution Date in an amount equal to the Principal Distribution Amount, calculated as described under "The Notes--Payments of Principal", to the extent of the Available Amount (as defined under "The Purchase Agreements and The Trust Documents--Distributions" herein) remaining after the Servicer has been reimbursed for any outstanding Monthly Advances and has been paid the Servicing Fee (including any unpaid Servicing Fee with respect to one or more prior Due Periods) and following the payment of interest due on the Notes on such Distribution Date. The unpaid principal balance of the Notes will be payable on the Class A Final Scheduled Distribution Date. See "The Notes--Payments of Principal". - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- D. Redemption .......... The Notes will be subject to mandatory redemption in part, on a pro rata basis, in the event that any portion of the Pre-Funded Amount remains on deposit in the Pre-Funding Account at the end of the Funding Period. The aggregate principal amount of Notes to be redeemed on such date will be an amount equal to the Pre-Funded Percentage allocable to the Notes of the amount then on deposit in the Pre-Funding Account. The "Pre-Funded Percentage" with respect to the Notes or the Certificates is the percentage derived from the fraction, the numerator of which is the initial principal balance of the Notes or the Original Certificate Balance, as the case may be, and the denominator of which is the sum of the initial principal balance of the Notes and the initial Certificate Balance. See "The Notes--Redemption" and "Certain Information Regarding the Securities". In the event of an Optional Purchase or Auction Sale, as described herein, the outstanding Notes will be redeemed, at a redemption price equal to the unpaid principal amount of the Class A Notes plus accrued and unpaid interest thereon at the Class A Rate. See "Summary--Optional Purchase of the Contracts", "--Auction Sale", "The Notes--Redemption" and "The Purchase Agreements and The Trust Documents--Insolvency Event". If an Insolvency Event (as defined herein) with respect to the Affiliated Purchaser (as defined herein) occurs, the Indenture Trustee (or, if no Notes are outstanding, the Owner Trustee) will promptly sell, dispose of or otherwise liquidate the Contracts in a commercially reasonable manner on commercially reasonable terms, except under certain limited circumstances. The proceeds from any such sale, disposition or liquidation of the Contracts will be treated as collections on the Contracts and deposited in the Collection Account. If the proceeds from the liquidation of the Contracts and any amounts on deposit in the Note Distribution Account and the Certificate Distribution Account are not sufficient to pay the Notes and Certificates in full, distributions will be made first, to the payment of interest and principal on the Notes and second, to the payment of interest and principal on the Certificates. In such event, the amount of principal returned to the Certificateholders will be reduced and such Certificateholders will incur a loss, except to the extent of payments to the Certificateholders from the Cash Collateral Account, subject to the Available Cash Collateral Amount. See "The Purchase Agreements and The Trust Documents--Insolvency Event". Terms of the Certificates ........... The principal terms of the Certificates will be as described below: A. Pass-Through Rate ... The Certificates will bear interest at the rate of % per annum (the "Pass-Through Rate"). B. Interest ............ Interest accruing during the related Interest Accrual Period (computed on the basis of a 360-day year consisting of twelve 30-day months) will be paid to the Certificateholders of record on the related Record Date, on each Distribution Date, to the extent of the Available Amount on such Distribution Date (i) in an amount equal to one-twelfth of the product of the Pass-Through Rate and the Certificate Balance, as of the preceding Distribution Date (after giving effect to distributions of principal and interest to be made on such Distribution Date) or (ii) in - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- the case of the first Distribution Date, in an amount equal to interest accruing at the Pass-Through Rate from February 15, 1996 to but excluding the first Distribution Date, on the Original Certificate Balance. See "The Certificates--Distribution of Interest". The "Certificate Balance" means the Original Certificate Balance reduced by (i) all distributions allocable to principal actually made to Certificateholders, including payments of any Principal Liquidation Loss Amount and payments of any Principal Distribution Amount made to the Certificateholders which are allocable to principal, (ii) the aggregate amount of all Principal Liquidation Loss Amounts distributable to Certificateholders to the extent such amounts have not been so previously distributed and (iii) on or after the Distribution Date on which the Class A Notes have been paid in full (the "Cross-Over Date"), the aggregate amount of all Principal Distribution Amounts distributable to Certificateholders to the extent such amounts have not been so previously distributed. Distributions of interest on the Certificates will be funded to the extent of the Available Amount after the Servicer has been reimbursed for any outstanding Monthly Advances and has been paid the Servicer Payment and interest and principal has been paid in respect of the Notes on such Distribution Date or, to the extent such Available Amount is insufficient, will be funded through a payment from the Cash Collateral Account, subject to the Available Cash Collateral Amount (as hereinafter defined), under the circumstances described herein. The rights of Certificateholders to receive distributions of interest will be subordinated to the rights of Noteholders to receive interest and principal, as described herein. See "The Certificates--Distributions of Interest". C. Principal ........... On each Distribution Date on or after the Cross-Over Date, principal of the Certificates will be payable, subject to the remaining Available Amount and the Available Cash Collateral Amount, in an amount equal to the Principal Distribution Amount with respect to such Distribution Date. Such principal payments will be funded to the extent of the Available Amount remaining after the Servicer has been reimbursed for any outstanding Monthly Advances and has been paid the Servicer Payment, and the interest due on the Certificates has been paid or, to the extent such Available Amount is insufficient, will be funded through a payment from the Cash Collateral Account, subject to the Available Cash Collateral Amount, under the circumstances described herein. The rights of Certificateholders to receive distributions of principal (following the payment of distributions of interest in respect of the Certificates) will be subordinated to the rights of Noteholders to receive distributions of interest and principal. On each Distribution Date prior to the Cross-Over Date, the Certificateholders will be entitled to receive the Principal Liquidation Loss Amount for such Distribution Date. Such principal payments will be funded to the extent of the Available Amount remaining after the Servicer has been reimbursed for any outstanding Monthly Advances and has been paid the Servicer Payment, the principal and interest due on the Notes has been paid and the interest on the Certificates has been paid or, to the extent that such remaining Available Amount is insufficient, will be funded through a payment from the Cash Collateral Account, subject to the - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Available Cash Collateral Amount, under the circumstances described herein. The "Principal Liquidation Loss Amount" for any Distribution Date will equal the amount, if any, by which the sum of the aggregate outstanding principal balance of the Notes and the Certificate Balance (after giving effect to all distributions of principal on such Distribution Date) exceeds the sum of the aggregate principal balance of the Contracts (the "Pool Balance") plus the amounts remaining on deposit in the Pre-Funding Account, if any, at the close of business on the last day of the related Due Period. The Principal Liquidation Loss Amount represents future principal payments on the Contracts that, because of the subordination of the Certificates and liquidation losses on the Contracts, will not be paid to the Certificateholders. The Certificate Balance will be reduced to the extent that prior to the Cross-Over Date distributions are not made in respect of the Principal Loss Liquidation Amount and on or after the Cross-Over Date distributions are not made in respect of the Principal Distribution Amount. As a result of such reductions, less interest will accrue on the Certificates than would otherwise be the case. In the event that the Certificates are outstanding on the Certificate Final Scheduled Distribution Date (after taking into account distributions on such date), the Owner Trustee will withdraw from the Cash Collateral Account (to the extent funds are available therefor in the Cash Collateral Account), and will deposit in the Certificate Distribution Account for distribution to the Certificateholders in retirement of the Certificates, an amount equal to the Certificate Balance. D. Redemption ............ The Certificates will be subject to mandatory redemption in part, on a pro rata basis, in the event that any portion of the Pre-Funded Amount remains on deposit in the Pre-Funding Account at the end of the Funding Period. The aggregate principal amount of Certificates to be redeemed on such date will be an amount equal to the Pre-Funded Percentage allocable to the Certificates of the amount then on deposit in the Pre-Funding Account. See "The Certificates--Redemption" and "Certain Information Regarding The Securities". In the event of an Optional Purchase or Auction Sale, the Certificates will be redeemed at a redemption price equal to the Certificate Balance plus accrued and unpaid interest thereon at the Pass-Through Rate. See "Summary--Optional Purchase of the Contracts", "--Auction Sale", "The Certificates--Redemption" and "The Purchase Agreements and The Trust Documents--Insolvency Event". Mandatory Prepayment ..... The Notes and the Certificates will be prepaid in part, on a pro rata basis, on the Distribution Date immediately succeeding the day on which the Funding Period ends (or on the Distribution Date on which the Funding Period ends if the Funding Period ends on a Distribution Date) in the event that any portion of the Pre-Funded Amount remains on deposit in the Pre-Funding Account after giving effect to the acquisition by the Seller and the sale to the Trust of all Subsequent Contracts, including any such acquisition and conveyance on the date on which the Funding Period ends. The amount to be distributed to Noteholders and Certificateholders in connection with any such prepayment will equal the Pre-Funded Percentage allocable to the Notes and the Certificates, respectively, of the remaining Pre-Funded Amount. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Subordination of the Certificates ....... The rights of the Certificateholders to receive distributions with respect to the Contracts will be subordinated to the rights of the Class A Noteholders, to the extent described herein. This subordination is intended to enhance the likelihood of timely receipt by Class A Noteholders of the full amount of interest and principal required to be paid to them, and to afford such Class A Noteholders limited protection against losses in respect of the Contracts. No distribution will be made to the Certificateholders on any Distribution Date in respect of (i) interest until the full amount of interest and principal on the Class A Notes payable on such Distribution Date has been distributed to the Class A Noteholders, other than payments from the Cash Collateral Account, and (ii) principal until the Class A Notes have been paid in full, other than distributions in respect of the Principal Liquidation Loss Amount. The protection afforded to the Class A Noteholders by the subordination feature described above will be effected by the preferential right of the Class A Noteholders to receive, to the extent described herein, current distributions from collections on or in respect of the Contracts prior to the application of such collections to making payments in respect of the Certificates. There is no other protection against losses on the Contracts afforded the Class A Notes. The Cash Collateral Account will not be available to provide a source of funds to make payments of principal or interest on the Notes. Cash Collateral Account .. On the Closing Date, an account (the "Cash Collateral Account") will be established pursuant to the Sale and Servicing Agreement. The Owner Trustee will have the right to withdraw (or cause to be withdrawn) payments from the Cash Collateral Account under certain circumstances specified below. The Cash Collateral Account will be funded on the Closing Date in the amount of $5,625,000 (the "Initial Cash Collateral Amount") from the proceeds of a loan (the "Loan") to be made by one or more financial institutions selected by the Company (the "Cash Collateral Depositor") pursuant to a Cash Collateral Agreement among the Cash Collateral Depositor, the Trust and the Servicer (the "Cash Collateral Agreement"). The Cash Collateral Depositor's only recourse against the Trust for repayment of the Loan is from the Cash Collateral Account Surplus (as hereinafter defined), certain investment earnings on funds deposited in the Cash Collateral Account and payments from the Cash Collateral Account upon maturity of the Loan, in each case as set forth in the Cash Collateral Agreement. With respect to any Distribution Date, the amount available to be withdrawn from the Cash Collateral Account (the "Available Cash Collateral Amount") will equal the lesser of (i) the Required Cash Collateral Amount and (ii) the amount on deposit in the Cash Collateral Account, exclusive of interest and earnings thereon and any investment losses and expenses and before giving effect to any deposit to be made to the Cash Collateral Account on such Distribution Date. If the Available Amount on any Distribution Date is insufficient (after reimbursing the Servicer for Monthly Advances to the extent required by the Sale and Servicing Agreement, paying the Servicer Payment and paying the interest and - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- principal due on the Notes) to pay the interest and principal (including, prior to the Cross-Over Date, any Principal Liquidation Loss Amount) required to be distributed on the Certificates on such Distribution Date, the Owner Trustee will withdraw (or cause to be withdrawn) from the Cash Collateral Account an amount equal to the lesser of the amount of such deficiency or the Available Cash Collateral Amount. See "The Purchase Agreement and The Trust Documents--Credit Enhancement--Cash Collateral Account" and "--Distributions". If the Available Cash Collateral Amount is zero, holders of the Certificates will bear the risk of loss resulting from default by Obligors (as hereinafter defined) and will have to look primarily to the value of the related Financed Vehicles for recovery of the outstanding principal and unpaid interest on the Defaulted Contracts. On each Distribution Date, the Servicer will deposit Excess Collections into the Cash Collateral Account in an amount sufficient to increase the amount on deposit in the Cash Collateral Account to the Required Cash Collateral Amount and to make payments of principal or interest on the Loan as required by the Cash Collateral Agreement. Excess Collections, if any, not so required to be deposited in the Cash Collateral Account will be paid to the Affiliated Purchaser (as defined herein). "Excess Collections" for any Distribution Date will equal the amounts collected or deposited in respect of the Contracts in the related Due Period and which are remaining in the Collection Account on such Distribution Date after taking into account distributions to be made on the Securities and payments and reimbursements to be made to the Servicer on such Distribution Date. See "The Purchase Agreements and The Trust Documents--Distributions". The "Required Cash Collateral Amount" with respect to any Distribution Date means 2.25% of the Pool Balance as of the first day of the related Due Period, but in no event less than $1,875,000, subject to adjustment based on delinquencies and losses on the Contracts, provided that the Required Cash Collateral Amount shall never be greater than the outstanding balance of the Certificates and may be reduced from time to time if the Rating Agencies shall have given prior written notice to the Seller, the Servicer and the Issuer that such reduction will not result in a downgrade or withdrawal of the then current ratings of the Notes and the Certificates. See "The Purchase Agreement and The Trust Documents--Credit Enhancement--Cash Collateral Account". If, on any Distribution Date, the Available Cash Collateral Amount (after taking into account any deposits to and withdrawals from the Cash Collateral Account pursuant to the Sale and Servicing Agreement on such Distribution Date) exceeds the Required Cash Collateral Amount for the next Distribution Date, such excess (the "Cash Collateral Account Surplus") will, to the extent required to make payments of principal and interest on the Loan, be withdrawn from the Cash Collateral Account and paid to the Cash Collateral Depositor. The balance, if any, of such excess will be withdrawn from the Cash Collateral Account and paid to the Affiliated Purchaser. See "The Purchase Agreement and The Trust Documents--Credit Enhancement--Cash Collateral Account". - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Monthly Advances ......... With respect to each Contract as to which there has been an Interest Shortfall during the related Due Period (other than an Interest Shortfall arising from a Contract which has been prepaid in full or which has been subject to a Relief Act Reduction (as defined herein) during the related Due Period), the Servicer shall advance funds in the amount of such Interest Shortfall (each, a "Monthly Advance"), but only to the extent that the Servicer, in its good faith judgment, expects to recover such Monthly Advance from subsequent collections with respect to interest on such Contract made by or on behalf of the obligor thereunder (the "Obligor"), net liquidation proceeds or insurance proceeds with respect to such Contract. The Servicer shall be reimbursed for any Monthly Advance from subsequent collections with respect to such Contract. If the Servicer determines in its good faith judgment that an unreimbursed Monthly Advance shall not ultimately be recoverable from such collections, the Servicer shall be reimbursed for such Monthly Advance from collections on all Contracts. In determining whether an advance is or will be nonrecoverable, the Servicer need not take into account that it might receive any amounts in a deficiency judgment. The Servicer will not advance funds in respect of the principal component of any scheduled payment. See "The Purchase Agreements and The Trust Documents--Monthly Advances". "Interest Shortfall" means with respect to any Contract and any Distribution Date, the excess of (x) the sum of (i) the product of one-twelfth of the weighted average of the Pass-Through Rate and the Class A Rate multiplied by the outstanding principal amount of such Contract as of the last day of the second preceding Due Period (or, in the case of the first Due Period ending after the Contract was acquired by the Trust, as of the Initial Cut-off Date or the Subsequent Cut-off Date, as the case may be) and (ii) the product of (A) one-twelfth of the Servicing Fee Rate and (B) the outstanding principal amount of such Contract as of the last day of the second preceding Due Period (or, in the case of the first Due Period ending after the Contract was acquired by the Trust, as of the Initial Cut-off Date or the Subsequent Cut-off Date, as the case may be), over (y) the amount of interest, if any, collected on such Contract in the related Due Period. Non-Reimbursable Payments ............... With respect to each Contract as to which there has been an Interest Shortfall in the related Due Period arising from either a prepayment in full of such Contract or a Relief Act Reduction in respect of such Contract during such Due Period, the Sale and Servicing Agreement will require the Servicer to deposit into the Collection Account on the Business Day immediately preceding the following Distribution Date, without the right of subsequent reimbursement, an amount equal to such Interest Shortfall (a "Non-Reimbursable Payment"). Servicing Fees ........... The Servicer shall receive a monthly fee (the "Servicing Fee"), payable on each Distribution Date, equal to the sum of (i) one-twelfth of the product of 1.00% (the "Servicing Fee Rate") and the Pool Balance as of the last day of the second preceding Due Period (or, in the case of the first Distribution Date, as of the Initial Cut-off Date) and (ii) any investment earnings on amounts on deposit in the Collection Account, the Note Distribution Account and the Certificate Distribution Account. In addition, the Servicer will be entitled to collect and retain any late fees, prepayment charges, - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- extension fees or other administrative fees or similar charges allowed by applicable law with respect to the Contracts ("Late Fees"). See "The Purchase Agreements and The Trust Documents--Servicing Compensation". Optional Purchase of the Contracts ...... At its option, CITSF may purchase all the Contracts on any Distribution Date following any Record Date on which the Pool Balance is 10% or less of the Initial Pool Balance, at a purchase price determined as described under "The Purchase Agreements and The Trust Documents--Termination." The "Initial Pool Balance" equals the sum of (i) the Pool Balance as of the Initial Cut-off Date and (ii) the aggregate principal balance of all Subsequent Contracts added to the Trust as of their respective Subsequent Cut-off Dates. Auction Sale ............. Within ten days after a Distribution Date following the Record Date on which the Pool Balance is 5% or less of the Initial Pool Balance, the Indenture Trustee (or, if the Notes have been paid in full and the Indenture has been discharged in accordance with its terms, the Owner Trustee) shall solicit bids for the purchase of the Contracts remaining in the Trust. In the event that satisfactory bids are received as described in "The Purchase Agreements and The Trust Documents--Termination," the net sale proceeds will be distributed to Securityholders, in the same order of priority as collections received in respect of the Contracts, on the second Distribution Date succeeding such Record Date. If satisfactory bids are not received, such Trustee shall decline to sell the Contracts and shall not be under any obligation to solicit any further bids or otherwise negotiate any further sale of the Contracts. See "The Purchase Agreements and The Trust Documents--Termination". Ratings ................ It is a condition to the issuance of the Securities that the Class A Notes be rated in the highest rating category by at least one nationally recognized rating agency (each, a "Rating Agency") and the Certificates be rated in at least the third highest rating category by at least one Rating Agency. The ratings of the Class A Notes will be based primarily on the value of the Initial Contracts, the Pre-Funding Account and the terms of the Securities, including the subordination provided by the Certificates. The ratings of the Certificates will be based primarily on the Cash Collateral Account. The foregoing ratings do not address the likelihood that the Securities will be retired following the sale of the Contracts by the Trustee as described above under "Auction Sale" or "Optional Purchase of the Contracts". See "Ratings". There can be no assurance that any rating will remain in effect for any given period of time or that a rating will not be lowered or withdrawn by the assigning Rating Agency if, in its judgement, circumstances so warrant. In the event that the rating initially assigned to the Securities is subsequently lowered or withdrawn for any reason, no person or entity will be obligated to provide any additional credit enhancement with respect to such Securities. There can be no assurance whether any other rating agency will rate the Class A Notes or the Certificates, or if one does, what rating would be assigned by any such other rating agency. A security rating is not a recommendation to buy, sell or hold securities. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Certain Federal Income Tax Considerations ..... For Federal income tax purposes: (1) the Notes will constitute indebtedness; and (2) the Certificates will constitute interests in a trust fund that will not be treated as an association taxable as a corporation. Each Noteholder, by acceptance of a Note, will agree to treat the Notes as indebtedness, and each Certificateholder, by the acceptance of a Certificate, will agree to treat the Trust as a partnership in which the Certificateholders are partners for Federal income tax purposes. See "Certain Federal Income Tax Consequences". ERISA Considerations ..... Subject to certain considerations discussed under"ERISA Considerations" herein, the Notes will be eligible for purchase by employee benefit plans that are subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Employee benefit plans subject to ERISA will not be eligible to purchase the Certificates. Any benefit plan fiduciary considering the purchase of the Notes should, among other things, consult with its counsel in determining whether all required conditions have been satisfied. See "ERISA Considerations".
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000931686_depotech_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000931686_depotech_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c9cb047244c61791b243d3a3d50c85e8e7e15392
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000931686_depotech_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the financial statements (including the notes thereto) appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. This Prospectus contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed under "Risk Factors," as well as those discussed elsewhere in this Prospectus.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0000932279_btg-inc-va_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000932279_btg-inc-va_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c1fe75d51e191ab98ef2a14f1931e00377bca07a
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000932279_btg-inc-va_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus, including information under "Risk Factors." Unless otherwise specified, all information contained in this Prospectus assumes that the Underwriters' over-allotment options and outstanding options and warrants to purchase in the aggregate 648,068 shares of Common Stock will not be exercised. Unless the context indicates otherwise, BTG, Inc. and its subsidiaries are collectively referred to as "BTG" or the "Company." References herein to the "Government" are to the Federal Government of the United States and its departments, agencies and offices, including the U.S. Mission to the North Atlantic Treaty Organization ("NATO") Consultation, Command and Control Agency. THE COMPANY BTG is an information technology company providing complete solutions to a broad range of complex systems and product needs of the Government, state and local governments and commercial clients. The Company provides systems development, integration, engineering and network design, implementation and security expertise services (its "Systems Business"). The Company also resells computer hardware, software and integrated systems (its "Product Reselling Business"). According to Federal Sources, Inc., an independent market research firm specializing in the federal market, the Government is expected to spend over $26 billion in its fiscal 1997 on information technology services and products. In addition, the Electronic Industries Association, a major industry trade association, estimates that Government agencies that are not required to report their information technology expenditures, including the intelligence community, will spend an additional $20 billion in the Government's fiscal 1997 on such technology. Through acquisitions, internal growth and successful contract awards, the Company has increased its participation as a significant provider of information technology solutions to the Government. The Company intends to continue to expand and diversify its Government client base and to pursue other opportunities for commercial application of its expertise. For fiscal 1996 and the six months ended September 30, 1996, the Company's revenues were $213.6 million and $190.6 million, respectively, and its net income was $3.0 million and $2.8 million, respectively. The Company's Systems Business specializes in network planning, design, implementation, and support; client/server architecture for platform migration; design and development of Internet/intranet applications; and large volume document management and imaging applications for search and retrieval for a variety of Government and commercial clients. Using leading edge technologies, the Company designs, develops and integrates command, control, communications and intelligence systems that provide open, modular computer-based solutions for specific military applications, including information warfare. The Company uses either commercial, off-the-shelf ("COTS") software and hardware from multiple providers or custom-built systems to service its clients. BTG provides data fusion systems that accept, analyze and display electronic data from land-, sea-, air- and space-based sensors. The Company also designs proprietary products for environmental management, cost modeling and project planning, and furnishes a variety of services to accomplish the integration and continuing support of its systems. In fiscal 1996 and for the six months ended September 30, 1996, revenues from Systems Business activities were 31.4% and 26.0%, respectively, of the Company's total revenues. The Company's Product Reselling Business provides clients with advanced technology products in the areas of enterprise networking, the UNIX operating system environment, data storage, image processing and high-performance client/servers. The Company has established relationships with over 200 providers of information technology products, including Compaq Computer Corporation ("Compaq"), Dell Computer Corp. ("Dell"), Digital Equipment Corp. ("Digital"), Ingram Micro, Inc. ("Ingram") and Toshiba America Information Systems, Inc. ("Toshiba"). These relationships provide access, at favorable prices, to a wide variety of advanced technological products. The Company maintains a number of contract vehicles, including a variety of large, agency-specific contracts and four General Services Administration ("GSA") Schedule contracts to facilitate its sales to the Government. In fiscal 1996 and the six months ended September 30, 1996, revenues from Product Reselling Business activities were 68.6% and 74.0%, respectively, of the Company's total revenues. The Company's key strategies are the following: - LEVERAGE COMPLEMENTARY BUSINESSES. The Company will continue to leverage the core competencies of its Systems Business, including its expertise in the areas of information warfare, intelligence systems, cost modeling and simulation and local and wide area network design, implementation and management, with the procurement capabilities of its Product Reselling Business to provide complete information technology solutions. - PURSUE STRATEGIC ACQUISITIONS. The Company will seek additional opportunities to acquire companies with complementary technical capabilities, new geographic locations, or clients in new markets. During the last four years, the Company has made four such acquisitions. The Company believes that continued consolidation within the information technology industry will provide further opportunities to expand through acquisitions. - USE TEAMING RELATIONSHIPS. The Company is building teaming relationships with other major participants in the information technology industry that will enhance its ability to participate in increasingly large and complex procurement programs. The Company seeks to generate increased revenue and profitability from these relationships. - DIVERSIFY SYSTEMS BUSINESS TOWARDS NON-DEFENSE CLIENTS. The Company will seek to extend its expertise in systems integration and networking beyond its traditional defense intelligence client base. The Company will use its capabilities in open systems development, networking, client-server architecture, and document imaging and management, together with its access to COTS hardware/software products, to expand its growing civilian government and commercial business bases. - LEVERAGE EXPERTISE WITH LEADING EDGE TECHNOLOGIES. The Company will leverage its expertise with leading edge technologies to provide creative solutions for complex systems integration and networking requirements. The Company will use its skills in large scale document imaging, information management and data retrieval, Internet/intranet applications and network security and encryption technology to expand the solutions it offers. In order to maximize its ability to offer complete solutions, the Company will also continue to develop strategic alliances with leading edge information technology suppliers and to assemble custom, high-performance microcomputers and servers under its own trade name. The Company believes that through these strategies it will meet its objective of providing responsive and high-quality products, services and solutions that meet the complete information technology needs of a growing and increasingly diversified client base. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company..................... 1,670,000 shares Common Stock offered by the Selling Shareholder......... 80,000 shares Common Stock to be Outstanding after the Offering(1).... 7,843,782 shares Use of Proceeds......................................... Reduction of bank borrowings. See "Use of Proceeds." Nasdaq National Market symbol........................... BTGI </TABLE> - --------------- (1) Does not include 648,068 shares subject to options or warrants outstanding as of September 30, 1996, at a weighted average exercise price of $7.80, of which options or warrants to purchase 427,943 shares are currently exercisable at a weighted average exercise price of $7.97. See Notes 8 and 9 of Notes to Consolidated Financial Statements. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> FISCAL YEAR ENDED MARCH 31, SIX MONTHS ENDED SEPTEMBER 30, ------------------------------------------------------------- ------------------------------ PRO PRO FORMA FORMA 1992 1993(1) 1994 1995(1) 1996(2) 1996(3) 1995 1996 1996(4) ------- -------- ------- -------- -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue: Contract revenue(5)..... $28,758 $ 32,071 $35,509 $ 46,130 $ 67,014 $ 74,985 $ 28,556 $ 49,504 $ 49,504 Product sales(5)........ -- 24,436 68,045 109,859 146,544 172,847 61,763 141,063 141,063 ------- -------- ------- -------- -------- -------- -------- -------- -------- Total revenue......... 28,758 56,507 103,554 155,989 213,558 247,832 90,319 190,567 190,567 Direct costs: Contract costs.......... 14,563 15,838 17,287 23,046 35,577 41,836 14,375 30,073 30,073 Cost of product sales... -- 20,978 60,276 95,585 128,070 152,467 53,143 123,332 123,332 ------- -------- ------- -------- -------- -------- -------- -------- -------- Total direct costs.... 14,563 36,816 77,563 118,631 163,647 194,303 67,518 153,405 153,405 Gross profit.............. 14,195 19,691 25,991 37,358 49,911 53,529 22,801 37,162 37,162 Operating income.......... 1,053 2,485 4,228 6,900 7,489 5,908 4,525 6,776 6,776 Net income (loss)......... (478) 1,193 1,818 3,132 2,954 2,681 1,966 2,751 3,336 Net income (loss) per share............... $ (0.19) $ 0.25 $ 0.38 $ 0.60 $ 0.47 $ 0.34 $ 0.32 $ 0.43 $ 0.42 Weighted average common shares outstanding...... 2,526 4,756 4,774 5,196 6,233 7,927 6,196 6,371 8,041 BACKLOG DATA (AT PERIOD END)(6): Total contract backlog.... $43,347 $107,669 $98,956 $227,700 $788,000 $788,000 $255,300 $857,000 $857,000 Funded contract backlog... 9,192 9,515 18,715 34,100 36,000 36,000 43,500 104,700 104,700 </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1996 -------------------------- ACTUAL AS ADJUSTED(7) -------- -------------- <S> <C> <C> BALANCE SHEET DATA: Working capital................................................................. $ 71,354 $ 71,354 Total assets.................................................................... 167,635 167,635 Line of credit.................................................................. 50,506 24,908 Other long term debt, including current maturities.............................. 14,625 14,625 Shareholders' equity............................................................ $ 30,839 $ 56,437 </TABLE> - --------------- (1) In June 1992, the Company acquired all the outstanding common stock of BDS, Inc. ("BDS"). In July and November 1994, the Company acquired all of the outstanding common stock of Advanced Computer Technology, Inc. ("ACTech") and Delta Research Corporation ("Delta"), respectively. The acquisitions were accounted for as purchases and, accordingly, the results of their operations have been included in the Company's consolidated financial statements from the dates of acquisition. See Note 11 of Notes to Consolidated Financial Statements. (2) In October 1995, the Company acquired all of the outstanding common stock of Concept Automation, Inc. of America ("CAI"). This acquisition was accounted for as a purchase and, accordingly, the results of operations of CAI have been included in the Company's consolidated financial statements from the date of acquisition. See Note 11 of Notes to Consolidated Financial Statements. SUMMARY CONSOLIDATED FINANCIAL DATA -- CONTINUED (3) These results assume (i) the acquisition of CAI, (ii) the sale by the Company of 1,670,000 shares of Common Stock offered hereby at an assumed offering price of $16.625 per share, and (iii) the elimination of interest expense on Company borrowings to be repaid with the net proceeds of this offering, occurred at the beginning of the period. See Unaudited Pro Forma Condensed Consolidated Financial Statements. (4) Assumes the sale by the Company of 1,670,000 shares of Common Stock offered hereby at an assumed offering price of $16.625 per share and the elimination of interest expense on Company borrowings to be repaid with the net proceeds of this offering occurred at the beginning of the period. See Unaudited Pro Forma Condensed Consolidated Financial Statements. (5) The Company's revenues are derived from contract activities of the Systems Business and from product sales of the Product Reselling Business. (6) Total contract backlog represents management's estimate of the aggregate contract revenues that will be earned by the Company over the life of its contracts, including option periods. Funded contract backlog consists of the aggregate dollar portion of contracts that is currently appropriated by Government clients and allocated to contracts by the purchasing Government agencies or otherwise allocated for payment by clients upon completion of specified work. See "Business -- Backlog."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000932903_avigen_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000932903_avigen_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..318b59254deda15dbd74b4dfa0ffb8835911acc1
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000932903_avigen_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Financial Statements and Notes thereto appearing elsewhere in this Prospectus. THE COMPANY Avigen is a leader in the development of gene therapy products derived from adeno-associated virus ("AAV") for the treatment of inherited and acquired diseases. The Company's proposed gene therapy products are designed for in vivo administration to achieve the production of therapeutic proteins within the body. The Company is developing two broad-based proprietary gene delivery technologies: AAV vectors and the Targeted Vector Integration ("TVI") system. The Company believes AAV vectors can be used to deliver genes for the treatment of brain, liver and prostate cancer, anemia, hemophilia, hyperlipidemia and metabolic storage diseases. The Company also believes its TVI system will allow it to pursue more effective treatments for blood cell-related diseases, including sickle cell anemia, beta-thalassemia and human immunodeficiency virus ("HIV") infection. AAV Vectors. The Company's gene therapy products are based on gene delivery systems called vectors. AAV vectors are derived from AAV, a common non-pathogenic human virus, and take advantage of the natural efficiency with which viruses deliver genes to cells. To produce an AAV vector, the virus is modified by removing the viral genes and replacing them with genes for therapeutic proteins. The Company believes that AAV vectors combine desirable properties of viral and non-viral vectors and may offer several potential advantages over other gene therapy vectors. These advantages include efficient delivery of genes to both dividing and non-dividing target cells, absence of viral genes that may be responsible for causing an undesirable immune response, in vivo administration to patients, higher levels of gene expression and improved stability allowing AAV vectors to be manufactured, stored and handled like more traditional pharmaceutical products. Avigen believes that its proprietary manufacturing process will simplify manufacturing and purification and achieve increased yield of high purity AAV vectors. In spite of the potential advantages, the use of AAV vectors for gene therapy also presents potential disadvantages. Since the genome of the natural AAV virus is relatively small, the amount of the genetic material that can be included in an AAV vector is limited. Therefore, large genes cannot be delivered by AAV vectors. In addition, in vivo administration of AAV vectors may result in the production of antibodies which may limit the effectiveness of repeat dosing of these vectors. Furthermore, direct administration of AAV vectors may result in their distribution to inappropriate tissues. TVI System. The Company's proprietary TVI system utilizes components of AAV to integrate large segments of DNA at a specific location on human chromosome 19. Integration is essential for certain gene therapy applications where the genes must be passed on to the progeny of the cell. The Company believes gene therapy vectors that integrate at a specific site, such as the site on chromosome 19 where the non-pathogenic AAV normally integrates, will have an increased safety profile relative to vectors that integrate randomly. The Company also believes that the ability to integrate large segments of DNA could lead to gene therapy applications involving the delivery of multiple genes or requiring precise or controllable gene regulation. Product Development. Based on encouraging results in animal models, the Company has initiated two preclinical development programs using AAV vectors for the treatment of brain tumors and anemia. Additionally, the Company has a number of research programs and collaborations intended to generate product development candidates for liver and prostate cancer, hemophilia, hyperlipidemia, metabolic storage diseases, hemoglobin disorders and HIV infection. Avigen believes that the number of potential applications for gene therapy will increase significantly as advances are made in the area of genomics. These advances are enabling scientists to link diseases to specific gene defects. As more genes are discovered, the need for improved gene delivery technologies is expected to increase. With the identification of new disease-related genes, the Company believes that its AAV vectors and its TVI system will provide it with significant opportunities for new gene therapy products. Corporate Partnering Strategy. The Company is seeking to develop long-term strategic collaborations with pharmaceutical companies that can provide funding for research and development activities and clinical trials as well as access to complementary technologies, including gene sequences. The Company believes that its broad-based proprietary gene delivery technologies can be used to deliver a number of different genes, giving rise to multiple product and corporate partnering opportunities. THE OFFERING <TABLE> <S> <C> Common Stock outstanding before the 7,285,193 shares(1) Offering................................... Common Stock offered by the Selling 243,905(2) Stockholders............................... Common Stock to be outstanding after the 7,498,318 shares(2) Offering................................... Use of proceeds.............................. Proceeds to the Company from the exercise of the Warrants will be used for general corporate purposes. The Company will not receive any of the proceeds from the sale of the Shares by the Selling Stockholders. Nasdaq National Market symbol................ AVGN </TABLE> - --------------- (1) Based on shares outstanding at October 31, 1996. Excludes 1,175,324 shares of Common Stock issuable upon the exercise of outstanding stock options as of October 31, 1996 at a weighted average exercise price of $1.51, the 213,125 Warrants covered by this Registration Statement, and 507,880 warrants outstanding at October 31, 1996 at exercise prices ranging from $4.87 to $9.60. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources," "Description of Capital Stock," and Notes 5 and 7 to Notes to Financial Statements at June 30, 1996. (2) Assumes exercise of the Warrants. SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> THREE MONTHS ENDED PERIOD FROM YEAR ENDED OCTOBER 22, 1992 JUNE 30, SEPTEMBER 30, (INCEPTION) ---------------------------- ------------------- THROUGH 1994 1995 1996 1995 1996 SEPTEMBER 30, 1996 ------- ------- -------- -------- -------- ------------------ <S> <C> <C> <C> <C> <C> <C> (UNAUDITED) (UNAUDITED) STATEMENT OF OPERATIONS DATA: Grant Revenue.................................. $ -- $ 178 $ 87 $ 44 $ -- $ 265 Expenses: Research and development....................... 2,558 2,290 2,550 581 632 8,962 General and administrative..................... 1,283 1,334 1,102 281 346 4,602 ------- ------- ------- ------ ------ ------- Total expenses................................. 3,841 3,624 3,652 862 978 13,564 ------- ------- ------- ------ ------ ------- Loss from operations........................... (3,841) (3,446) (3,565) (818) (978) (13,299) Other income (expense), net.................... (8) 181 (533) (5) 106 (278) ------- ------- ------- ------ ------ ------- Net loss....................................... $(3,849) $(3,265) $ (4,097) $ (823) $ (872) $(13,577) ======= ======= ======= ====== ====== ======= Net loss per share (1)......................... $ (0.12) ------ Shares used in computing net loss per share (1).......................................... 7,253 ------ Pro forma net loss per share (1)............... $ (0.62) $ (0.80) $ (0.15) ======= ======= ====== Shares used in computing pro forma net loss per share (1).................................... 5,295 5,142 5,410 ======= ======= ====== </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 SEPTEMBER 30, 1996 ------------- ------------------ <S> <C> <C> (UNAUDITED) BALANCE SHEET DATA: Cash, cash equivalents and marketable securities.............................. $ 16,443 $ 17,153 Working capital............................................................... 15,364 15,870 Total assets.................................................................. 17,532 18,695 Capital lease obligations, noncurrent portion................................. 176 151 Deficit accumulated during the development stage.............................. (12,705) (13,576) Stockholders' equity.......................................................... 16,027 17,016 </TABLE> - --------------- (1) See Note 1 of Notes to Financial Statements describing the shares used in calculating net loss per share and pro forma net loss per share. Except for the historical information contained herein, the discussion in this Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as those discussed elsewhere in this Prospectus. Avigen(SM) is a service mark of the Company.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000933454_voxware_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000933454_voxware_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and the financial statements and notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus (i) gives effect to a stock split at the rate of one share of Common Stock for every two shares of Common Stock effected September 19, 1996, (ii) gives effect to the automatic conversion of all outstanding shares of the Company's Series A Convertible Preferred Stock (the "Series A Preferred Stock") into 3,000,000 shares of Common Stock effective upon the closing of this offering and (iii) assumes no exercise of the over- allotment option. THE COMPANY Voxware, Inc. (the "Company" or "Voxware") develops, markets, licenses and supports a comprehensive, integrated set of digital speech processing technologies which provide the ability to compress, model and transform speech. MetaVoice(TM), the Company's innovative coding technology, is designed to reproduce high quality speech while requiring very low communications bandwidth and processing power. In addition to efficiently compressing speech, MetaVoice enables a broad array of voice transformation capabilities. Voxware's technologies enable its customers to create a new generation of speech-enhanced communications and interactive products for the Internet and other bandwidth- constrained environments. The Company licenses its technologies, including speech coder/decoders ("codecs") and application programming interfaces, to software, computing and communications companies and distributes its end-user application software to consumers and businesses. Digital speech technologies are increasingly being integrated into a variety of applications including voice-enabled Web pages, Internet telephony and conferencing, Internet broadcasting, interactive games, voice messaging, wireless and satellite communications, multimedia computing and voice-enabled devices. Speech applications on the Internet and in other environments in which these speech applications are implemented are often constrained by a combination of low bandwidth, low processing power, network congestion and inconsistent data delivery. Voxware's speech coding and transmission quality management technologies are designed to address these challenges and deliver superior speech quality for a wide variety of applications. To accelerate adoption of its technologies, the Company seeks to broadly license its products and establish strategic relationships with market leaders. The Company has established a strategic relationship with Netscape Communications Corporation ("Netscape"). Netscape uses Voxware's speech coding technology as a part of its LiveMedia(TM) multimedia framework to provide low bandwidth speech functions with version 3.0 of Netscape Navigator(TM). Navigator is the most widely used software application for the World Wide Web. Netscape has also made a minority equity investment in the Company. In addition to Netscape, the Company has licensed its products to America Online, Inc., Andrea Electronics Corporation, Apple Computer, Inc., Farallon Computing, Inc., InterVoice, Inc., Lucent Technologies Inc., Microsoft Corporation, Mpath Interactive, Inc., Tribal Voice and VDOnet Corporation Ltd., among others. Intel Corporation ("Intel") has made a minority equity investment in the Company. Intel provides consulting support to Voxware for the optimization of the Company's technologies on Intel processor platforms, consults with Voxware on standards issues of mutual interest and supplies the Company with pre- release versions of its advanced processors for development of the Company's products. Voxware was incorporated in Delaware in 1993. Its executive offices are located at 305 College Road East, Princeton, New Jersey 08540, and its telephone number is (609) 514-4100. Voxware's home page is located at www.voxware.com on the World Wide Web. THE OFFERING Common Stock offered by the Company... 2,700,000 shares Common Stock to be outstanding after the offering......................... 11,647,496 shares(1) Use of proceeds....................... For general corporate purposes, including working capital and capital expenditures. Nasdaq National Market symbol......... VOXW SUMMARY FINANCIAL DATA <TABLE> <CAPTION> PERIOD FROM INCEPTION (AUGUST 20, 1993) YEAR ENDED JUNE 30, TO JUNE 30, ----------------------- 1994 1995 1996 ----------------- ---------- ----------- <S> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenues..................... $ -- $ -- $ 1,607,038 Gross profit....................... -- -- 1,561,624 Total operating expenses........... 215,508 1,233,720 4,560,793 Operating loss..................... (215,508) (1,233,720) (2,999,169) Net loss........................... (215,508) (1,168,780) (2,867,312) Pro forma net loss per share....... $ (0.33) Shares used in computing pro forma net loss per share(2)............. 8,642,804 </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 --------------------------- PRO FORMA PRO FORMA(3) AS ADJUSTED(4) ------------ -------------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents.......................... $ 3,836,836 $21,919,336 Working capital.................................... 3,887,338 21,969,838 Total assets....................................... 5,336,453 23,418,953 Stockholders' equity............................... 4,862,847 22,945,347 </TABLE> - -------- (1) Based on shares outstanding as of June 30, 1996. Excludes (i) 885,000 shares of Common Stock reserved for issuance upon the exercise of outstanding warrants at an exercise price of $1.50 per share, (ii) 1,261,150 shares of Common Stock issuable upon exercise of outstanding options and (iii) 1,098,850 shares reserved for future grants under the Company's 1994 Stock Option Plan. See "Management--1994 Stock Option Plan" and "Description of Securities--Warrants." (2) See Note 1 of "Notes to Financial Statements" for an explanation of the determination of the number of shares and share equivalents used in computing the pro forma per share amount. (3) Reflects the conversion of all the outstanding shares of the Company's Series A Preferred Stock into Common Stock upon the closing of this offering. (4) Represents the pro forma data as adjusted to give effect to the sale of 2,700,000 shares of Common Stock offered by the Company at the initial public offering price of $7.50 per share (after deducting underwriting discounts and commissions and estimated offering expenses) and the application of the estimated net proceeds therefrom. See "Capitalization" and "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000934151_ihf_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000934151_ihf_prospectus_summary.txt
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+PROSPECTUS SUMMARY In this Prospectus, all references to "IHF Capital," "IHF Holdings" and "Health & Fitness" refer to IHF Capital, Inc., IHF Holdings, Inc. and ICON Health & Fitness, Inc., respectively. The issuer of Common Stock is IHF Capital. IHF Capital is a holding company whose principal asset is all of the common stock of IHF Holdings. IHF Holdings is a holding company whose principal asset is all of the capital stock of Health & Fitness. Concurrently with the Offering, IHF Holdings will be merged with and into IHF Capital (the "Merger"), with IHF Capital as the surviving corporation, which will change its name to ICON Fitness Corporation ("ICON"). Health & Fitness and IHF Holdings have been reporting companies under the Securities Exchange Act of 1934 (the "1934 Act"). Financial information provided herein is of IHF Capital unless otherwise noted. Unless the context requires otherwise, all references in this Prospectus to the "Company" with respect to periods prior to November 14, 1994 refer to the combined operations of Weslo, Inc. ("Weslo"), ProForm Fitness Products, Inc. ("ProForm") and American Physical Therapy, Inc. ("WeiderCare") (collectively, the "Recapitalized Companies") which were recapitalized in a transaction (the "Recapitalization") described under "Background" and with respect to periods after November 14, 1994 refer to the consolidated operations of IHF Capital, IHF Holdings and Health & Fitness. Prior to the Recapitalization, the Recapitalized Companies were wholly owned subsidiaries of Weider Health and Fitness ("WHF"). Except as otherwise specified, references herein to years are to the Company's fiscal year, which ends on May 31 of each calendar year. For example, "1996" refers to the fiscal year ended May 31, 1996. Industry data is based on the calendar year, however. The principal executive offices of the Company are located at 1500 South 1000 West, Logan, Utah 84321. IHF Capital is a Delaware corporation incorporated in 1994. THE COMPANY The Company is one of the largest manufacturers and marketers of fitness equipment in the United States. The Company's focus is to address consumers' interest in a healthy, active lifestyle with a broad range of high quality products at a variety of price/value relationships specifically targeted to meet different consumers' health and fitness needs. The Company's line of home fitness aerobic products includes treadmills, upright rowers, exercise bikes, stair steppers and cross country skiers, and its line of anaerobic fitness products includes home gyms, weight benches and recently introduced abdominal machines. The Company also offers trampolines, recreational sports products, sports medicine products and fitness accessories. The Company markets the majority of its products under the brand names ProForm, Image, Weslo, Weider, WeiderCare, Legend, JumpKing, and Lifestyler (a private label brand manufactured for Sears). Founded in 1977, the Company has been a pioneer in the fitness equipment industry since 1980 and has focused on developing innovative, high-quality fitness products. The Company estimates that its U.S. net sales (prior to its acquisitions of HealthRider, Inc. ("HealthRider") and certain related manufacturing assets which were acquired in August 1996 and which are described below under the headings "--Pursuing Growth Opportunities" and "HealthRider Acquisition") represented approximately 30% of total wholesale domestic home fitness equipment sales in calendar 1995. In the first quarter of fiscal 1996, the Company began to directly market its products in Europe. In 1996, the Company had net sales of $747.6 million versus $202.4 million in 1991, reflecting compound annual growth in net sales of 29.9% and an increase in 1996 net sales of 40.8% from 1995 net sales of $530.8 million. The Company had a net loss of $12.9 million and net income of $1.6 million in 1995 and 1996, respectively. The Company believes that from 1991 to 1996 its sales growth rate exceeded the industry growth rate due to the Company's emphasis on product innovation through research and development, its multiple distribution channels and its flexible manufacturing capacity. Based on industry trade association data, the Company believes that retail sales of fitness equipment in the U.S. grew from approximately $.4 billion in calendar 1980 to approximately $2.6 billion in calendar 1993, $2.8 billion in calendar 1994 and $2.9 billion in calendar 1995. The growth of the fitness equipment industry can be attributed primarily to increased consumer emphasis on health, fitness and weight management. In particular, the medical community's promotion of exercise as a means of preventing cardiovascular disease and maintaining health and the diet industry's recognition of the need to incorporate exercise as a component of weight management programs have prompted consumers to place greater emphasis on health and fitness. The Company believes that several other factors have contributed to the growth of the fitness equipment industry, including product innovation at attractive price/value relationships, growth in infomercials and cable television shows which promote exercise and fitness and favorable demographic trends. The Company believes that sales of home fitness equipment have also benefitted from consumers' desire to spend more time at home. The Company's strategy is to expand its market leadership position by, among other things: DEVELOPING INNOVATIVE, HIGH-QUALITY PRODUCTS A key element of the Company's strategy is product innovation and development. The Company evaluates new product concepts on an ongoing basis and seeks to respond to the desires and needs of consumers by frequently introducing new products and repositioning old ones (i.e., selling a modified product in a different price range). This focus on new products and innovation enables the Company to begin selling early in a product's life cycle and, as sales moderate, to extend product life cycles by introducing new features and repositioning products within the Company's line of brands. In 1994, 1995 and 1996, approximately 40%, 42% and 52%, respectively, of the Company's net sales were from products that were new, enhanced or repositioned. Recent examples of the Company's product development include the introduction of the Space Saver treadmill, which folds vertically for easy storage, the development of the Cardio family of upright rowers, which significantly improved on upright rower designs first marketed by others, and the introduction of the Company's abdominal machines, which improved upon existing products manufactured by others by adding a fold for storage feature. The Company believes that its ability to identify industry trends and to quickly take a product from concept to delivery gives it significant advantages over competitors. TARGETING MULTIPLE DISTRIBUTION CHANNELS The Company markets its products under multiple brands through multiple distribution channels including specialty dealers, sporting goods chains, department stores, discount merchants, warehouse clubs, catalogue showrooms and, to a limited extent, infomercials and direct response marketing. The Company believes the marketing of its products through multiple distribution channels provides it with several competitive advantages including: (i) greater growth and increased market access; (ii) the ability to maximize revenue throughout a product's life cycle by repositioning products in different channels and under different brand names as products mature; (iii) feedback on market trends and changing consumer tastes; and (iv) reduced dependence on any single channel of distribution. POSITIONING ITS BRANDS To enhance its distribution strategy, the Company targets its brands to specific distribution channels. By marketing specific brands tailored to appeal to different demographic groups, the Company is able to market products with varying designs, features and price ranges and target these products to a wide variety of consumers with different fitness needs and disposable incomes. The Company believes its brand positioning strategy enables it to: (i) achieve greater appeal to each market segment; (ii) promote price stability across its product lines as brand segmentation minimizes conflicts between different distribution channels; and (iii) provide high-quality products with the price ranges and features desired by different demographic groups. The Company's various brands are supported by distinct marketing and product strategies and, in some cases, separate sales forces. PROVIDING BROAD PRODUCT OFFERINGS The Company manufactures and distributes a broad line of aerobic and anaerobic fitness equipment. The Company also markets recreational sports products, sports medicine products and fitness accessories. The Company offers a range of technological features, from manual equipment to sophisticated programmable electronic products, in a variety of price ranges. The Company's strategy of offering a broad range of products enables it to: (i) offer categories of fitness products that appeal to different demographic groups; (ii) respond quickly to changes in consumer preferences and fitness trends; (iii) reduce its dependence on any single product category; and (iv) participate in growth opportunities across a wide variety of product categories. UTILIZING FLEXIBLE, LOW-COST MANUFACTURING The Company's manufacturing facilities are designed to be flexible in order to permit the Company to shift its product mix quickly and efficiently. The combination of internal manufacturing and assembly capacity and the Company's access to third-party vendors has helped the Company meet customer demand on a competitive basis. The design of these facilities provides the Company with the flexibility to change production runs on short notice and to respond to changing customer needs. PURSUING GROWTH OPPORTUNITIES The Company is seeking strategic acquisition opportunities which would complement its existing business and provide an opportunity for growth. The Company believes growth opportunities exist in its current domestic markets as well as in selected international markets. The North American fitness equipment market is significantly more developed than other markets around the world. However, the Company began to directly market its products in the first quarter of 1996 in the key European markets of the U.K., France, Italy and the Benelux countries and is attempting to increase its market penetration in these and other foreign countries. Prior to 1996, the Company had minimal foreign sales. Net sales from international markets in the four quarters of 1996 were $6.0 million, $9.3 million, $7.8 million and $10.2 million, respectively. In connection with the Recapitalization, the Company granted certain exclusive and non-exclusive rights to distribute its products in certain other international markets to Weider Sports Equipment Co., Ltd. ("Weider Sports"). In September 1996, the Company acquired certain assets and assumed certain liabilities of the sports equipment business lines of Weider Sports (the "Weider Sports Acquisition"). Pursuant thereto, the Company reacquired distribution rights originally granted to Weider Sports in connection with the Recapitalization, subject to certain rights granted by Weider Sports to third parties. The Company also purchased certain assets of a Canadian manufacturing business affiliated with WHF ("CanCo") (the "CanCo Acquisition"). See "Certain Relationships and Related Transactions" "Business--Legal Proceedings-- Settlement of WHF Litigation" and "Risk Factors--Expansion Strategy." HEALTHRIDER ACQUISITION In keeping with its strategy of pursuing growth opportunities, in August 1996, the Company: (i) purchased substantially all the assets of HealthRider for approximately $16.8 million and assumed (or refinanced) substantially all the liabilities of HealthRider; (ii) purchased certain related manufacturing assets of Parkway Manufacturing, Inc., ("Parkway"), including Parkway's contract to manufacture and supply upright rowers to HealthRider, for approximately $10.1 million; and (iii) purchased the minority interest of HealthRider's European subsidiary for approximately $1.4 million (of which $.7 million was paid by HealthRider, $.6 million was paid by the Company in cash and $.1 million was paid by the Company in inventory) (together, the "HealthRider Acquisition"). The liabilities assumed or refinanced included capital lease obligations of approximately $19.3 million and revolving credit borrowings and other long term debt of approximately $9.5 million. For a description of certain accounts payable and other accrued payables the Company assumed in connection with the HealthRider Acquisition, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources." HealthRider, a designer, marketer and distributor of fitness equipment, distributes its products through direct response advertising, through a national network of over 200 HealthRider kiosks and stores in shopping malls, and through third party retailers. HealthRider had net sales of $241.4 million and $113.2 million and net income of $13.6 million and a net loss of $3.6 million in calendar 1995 and the first six months of calendar 1996, respectively. HealthRider's flagship product is the HealthRider, a brand of upright rower. In aggregate, and excluding freight related revenues, sales of upright rowers (including the HealthRider) accounted for 94.4% and 93.4% of HealthRider's net sales in calendar 1995 and the first six months of calendar 1996, respectively. In calendar 1995 and the first six months of calendar 1996, purchases from Parkway accounted for approximately 73.5% and 54.3%, respectively, of total upright rower purchases by HealthRider. HealthRider has experienced a substantial, continuing and accelerating deterioration of its business since the beginning of calender 1996. See "Risk Factors--Expansion Strategy; Acquisitions," and "Management's Discussion and Analysis of Financial Condition--HealthRider," and Note 1 to the HealthRider consolidated financial statements included herein. As a result of the HealthRider Acquisition, the Company believes it is the leading maker and distributor of upright rowers in the United States with its net sales of upright rowers, calculated on a pro forma basis as if the HealthRider Acquisition had occurred on December 31, 1994, representing over 76% of all U.S. upright rower sales in calendar 1995. The Company estimates that its U.S. net sales, calculated on the same pro forma basis represented approximately 39% of total wholesale domestic home fitness equipment sales in calendar 1995. The Company believes that the HealthRider Acquisition will strengthen its position as a leading manufacturer and marketer of fitness equipment in the United States. The Company's plan for integrating HealthRider into its business includes: (i) marketing a broad line of products such as treadmills, stair steppers and cross-country skiing machines under the HealthRider brand name through HealthRider's established distribution channels; (ii) altering direct response advertising with respect to HealthRider products with the goal of enhancing the Company's return on its advertising investment; and (iii) realizing synergies from the HealthRider Acquisition by integrating the Company's and HealthRider's operations. The Company expects to increase its net sales as a result of the HealthRider Acquisition, but by substantially less than 100% of HealthRider's net sales. The Company will recognize a significant, non-recurring, non-cash increase in cost of goods sold in the second and third quarters of 1997 not to exceed approximately $26.2 million (based on HealthRider's inventory at June 30, 1996) related to the fact that the Company's purchase accounting for the HealthRider Acquisition will include writing-up the book value of the acquired HealthRider inventory to fair market value less estimated sales costs, which will result in higher cost of goods sold and lower gross profit until the acquired inventory has been sold. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--HealthRider." The HealthRider Acquisition was funded through additional borrowings under the Credit Agreement with General Electric Capital Corporation ("GE Capital"), various other lenders and GE Capital, as Agent, as amended (the "Credit Agreement"). See "Description of Certain Indebtedness." BACKGROUND On November 14, 1994 (the "Recapitalization Closing"), the Company effected the Recapitalization in which affiliates of Bain Capital, Inc. ("Bain Capital") and certain other investors invested $40.4 million and became the controlling and largest shareholders of the Company. At the same time, IHF Capital's subsidiaries issued $60.0 million in proceeds of 15% Senior Secured Discount Notes due 2004 (the "Discount Notes") and $100.0 million in proceeds of 13% Senior Subordinated Notes due 2002 (the "Senior Subordinated Notes") and made term borrowings of $35.0 million and revolving borrowings of $111.5 million under the Credit Agreement. As a result of the Recapitalization, the Company had a deficiency in stockholder's equity of $104.8 million as of May 31, 1996. The above summary is qualified in its entirety by the more detailed information and financial statements (including the notes thereto) appearing elsewhere in this Prospectus. Unless otherwise indicated, all financial information and share and per share data contained in this Prospectus (i) give effect to the conversion ("Conversion") that will occur concurrently with the closing of the sale of the common stock, $0.001 par value (the "Common Stock"), offered hereby, whereby all shares of the existing Class A Common Stock, par value $.001, and Class L Common Stock, par value $.001, of IHF Capital will be exchanged on the basis of a formula that will be derived from the actual initial public offering price for the Common Stock at a ratio estimated (based on an assumed offering price of $16.00 per share and a valuation date of September 24, 1996) to be 1.20773 and 9.27978 shares of Common Stock per share of Class A Common Stock and Class L Common Stock, respectively; (ii) assume no exercise of the Underwriters' over-allotment option; and (iii) assume the exercise of warrants issued to purchasers of the Senior Subordinated Notes and the Discount Notes to purchase 2,135,708 shares of Common Stock. See "Background," "Description of Capital Stock," "Underwriting" and the Notes to Consolidated Financial Statements. Certain of the information contained in this summary and elsewhere in this Prospectus, including under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and information with respect to the Company's plans and strategy for its business are forward-looking statements. For a discussion of important factors that could cause actual results to differ materially from the forward-looking statements, see "Risk Factors." THE OFFERING The offering of 9,600,000 shares of Common Stock in the United States (the "U.S. Offering") and the offering of 2,900,000 shares of Common Stock outside the United States (the "International Offering") are collectively referred to herein as the "Offering." <TABLE> <S> <C> Common Stock offered(a): U.S. Offering................ 9,600,000 shares International Offering....... 2,900,000 shares ----------------- Total....................... 12,500,000 shares Common Stock to be outstanding after this Offering(b)....... 25,467,327 shares Sources and uses of funds..... The net proceeds to the Company from this Of- fering together with borrowings under the Credit Agreement will be used for the redemp- tion of certain indebtedness of the Company, to purchase Common Stock held by WHF and cer- tain other stockholders (collectively the "WHF Stockholders"), to retire all of the preferred stock of IHF Holdings ("IHF Hold- ings Preferred Stock") and options to pur- chase IHF Holdings Preferred Stock. See "Sources and Use of Funds." New York Stock Exchange, Inc. ("NYSE") symbol.............. IHF </TABLE> - -------- (a) Assumes that the Underwriters' over-allotment options are not exercised. See "Underwriting." (b) Excludes 1,719,727 shares that may be issued upon exercise of options granted pursuant to the Company's 1994 Stock Option Plan at an average exercise price of approximately $4.36 per share and an additional 802,102 shares that may be issued upon exercise of options at an exercise price of $.42402 per share. SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA(1) (IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA) <TABLE> <CAPTION> YEAR ENDED MAY 31, ------------------------------------------ 1992 1993 1994 1995 1996 ------ ------ ------ ------ ---------- <S> <C> <C> <C> <C> <C> OPERATING DATA: Net sales........................... $254.1 $314.9 $403.0 $530.8 $ 747.6 ------ ------ ------ ------ ---------- Gross profit........................ 59.2 86.3 114.8 152.4 206.1 ------ ------ ------ ------ ---------- Operating expenses: Selling, general and administrative and other operating expenses...... 46.9 64.6 83.5 105.0 148.7 Compensation expense attributable to options........................ -- -- -- 39.0 (2) 2.8 ------ ------ ------ ------ ---------- Total operating expenses............ 46.9 64.6 83.5 144.0 151.5 ------ ------ ------ ------ ---------- Income from operations.............. 12.3 21.7 31.3 8.4 54.6 Interest expense.................... 4.9 5.5 6.2 21.5 36.5 Amortization of deferred financing fees............................... -- -- -- 1.7 3.5 Dividends on preferred stock of subsidiary......................... -- -- -- 2.8 5.1 ------ ------ ------ ------ ---------- Income (loss) before income taxes... 7.4 16.2 25.1 (17.6) 9.5 Provision for (benefit from) income taxes.............................. 2.8 6.2 9.8 (4.7) 7.9 ------ ------ ------ ------ ---------- Net income (loss)................... $ 4.6 $ 10.0 $ 15.3 $(12.9) $ 1.6 ====== ====== ====== ====== ========== SUPPLEMENTARY INCOME STATEMENT DATA(3): Supplemental pro forma net income............................... $ 12.8 ========== Supplemental pro forma net income per common share.............. $ .46 ========== Supplemental pro forma weighted average common shares outstanding.................................................... 27,500,000 ========== OTHER DATA: Depreciation and amortization....... $ 3.0 $ 3.4 $ 4.0 $ 11.6 $ 19.7 Capital expenditures ............... 4.0 4.0 6.9 8.0 15.4 </TABLE> <TABLE> <CAPTION> MAY 31, 1996 MAY 31, ------------------------ 1995 ACTUAL AS ADJUSTED (3) ------- ------- --------------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash........................................ $ 4.1 $ 19.3 $ 20.2 Working capital............................. 137.7 159.0 213.0 Total assets................................ 290.2 316.7 417.4 Total indebtedness.......................... 268.1 282.8 280.6 Preferred stock of subsidiary (including accrued dividends)......................... 42.8 47.9 -- Stockholders' equity (deficit).............. (109.6) (104.8) 3.6 </TABLE> - ------- (1) Financial data through May 31, 1994 reflect the combined results of the Recapitalized Companies and their subsidiaries. Financial data for periods ending thereafter reflect the consolidated results of IHF Capital and its subsidiaries. (2) Consists of accounting charges incurred in connection with the Recapitalization as a result of the exchange by certain senior executives of the Company of their options to purchase capital stock of the Recapitalized Companies for $34.7 million of replacement options to purchase Common Stock of IHF Capital and $4.0 million of replacement options to purchase IHF Holdings Preferred Stock and related warrants to purchase Common Stock of IHF Capital ( the "Preferred Warrants") and $.3 million of related payroll tax payments made by the Company. After the Recapitalization, the Company redeemed $26.4 million of the $34.7 million of replacement options (the "Redeemable Options"). (3) Reflects: (i) the sale by IHF Capital of 12,500,000 shares of Common Stock offered hereby and an increase of $41.8 million in revolving credit borrowings and the application of the estimated net proceeds therefrom to: (a) redeem $35.0 million principal amount of Senior Subordinated Notes, all of the Discount Notes, all of the IHF Holdings Preferred Stock and all of the options to purchase IHF Holdings Preferred Stock, (b) pay approximately $39.1 million in connection with the purchase of the Common Stock and warrants to purchase Common Stock held by the WHF Stockholders and (c) repay indebtedness incurred in connection with the Weider Sports Acquisition and the CanCo Acquisition and the payment of settlement expenses related to the WHF Settlement (as defined) which together total approximately $25.5 million; (ii) the HealthRider Acquisition (including the refinancing of approximately $11.6 million of revolving credit borrowings outstanding at June 30, 1996, the assumption of $.2 million of other long term debt and $19.3 million of capital lease obligations outstanding at June 30, 1996 and the incurrence of approximately $27.5 million of additional indebtedness to finance the HealthRider Acquisition); (iii) the effect of the Conversion; and (iv) the impact of $28.6 million non-recurring expenses, net of the related tax benefit, expected to be incurred in the first through third quarters of 1997, including (a) expenses related to the termination of the annual management fee payable to Bain Capital, (b) expenses related to the WHF Settlement, and (c) integration expenses and higher cost of goods sold (resulting from the Company's purchase accounting which will include writing-up the book value of the acquired HealthRider inventory to fair market value less estimated sales costs) related to the HealthRider Acquisiton; as if such transactions occurred on May 31, 1996, and, for purposes of the per share information (which includes all common stock equivalents), as if such transactions had occurred on June 1, 1995. See "Unaudited Pro Forma Financial Data,"
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OPTION TO PURCHASE ADDITIONAL COMMON STOCK TO COVER OVER-ALLOTMENTS, IF ANY. UNLESS THE CONTEXT OTHERWISE REQUIRES, THE TERM "COMPANY" OR "STB" WHEN USED IN THIS PROSPECTUS REFERS TO STB SYSTEMS, INC., A TEXAS CORPORATION, AND ITS CONSOLIDATED SUBSIDIARIES AND PRIOR AFFILIATES. THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE FEDERAL SECURITIES LAWS. ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN OR CONTEMPLATED BY THE FORWARD-LOOKING STATEMENTS DUE TO A NUMBER OF FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. THE COMPANY STB designs, manufactures and sells graphics adapters and other multimedia subsystem products for use primarily in desktop personal computers ("PCs"). The Company's graphics adapters, almost all of which are video graphics adapters that display full-motion video images on a monitor, enable users to take advantage of true-color graphics, 3D and video features found in the latest operating systems, such as Microsoft Windows 95 and Windows NT, and in multimedia applications. The Company's multimedia subsystem product line includes a wide selection of video graphics adapters designed for use primarily in mid-range to high-end PCs and also features several complementary products, including digital video products and sound cards. The Company's multimedia subsystem products are sold to original equipment manufacturers ("OEMs") and, to a lesser extent, through the commercial sales channel to retailers, distributors and direct-mail companies. The Company's OEM and commercial customers include Gateway 2000, Dell Computer, Compaq Computer, CompUSA, Best Buy, Tech Data and Ingram Micro. STB also sells specialized technology products that incorporate graphics technologies and are usually designed to enable one computer to simultaneously control the display of multiple monitors. These products are sold to customers for specialized applications in a number of industries, including the financial services, hospitality, factory automation, transportation and emergency response industries. The Company's customers for specialized technology products include Reuters and Lodgenet. STB has demonstrated outstanding growth, with revenues increasing from $23.8 million in fiscal 1991 to $129.6 million in fiscal 1995, a compound annual growth rate of 52.8%. According to International Data Corporation ("IDC"), STB has increased its market share to become the second largest independent supplier of graphics adapters (based on units shipped), with an estimated 16.7% worldwide market share in 1995. Dataquest estimates that 71.7 million PCs are expected to be shipped worldwide in 1996, compared to 60.2 million units in 1995 and 47.9 million units in 1994. A substantial portion of PCs shipped in recent periods incorporate high performance Intel Pentium and Pentium Pro processors and support multimedia functionality including CD-ROM storage, higher-resolution graphics, digital video and audio and, in some systems, hardware 3D and telecommunications. The evolution of these multimedia-enabled PCs has been driven by the proliferation of higher performance hardware, operating systems such as Microsoft Windows 95 and Windows NT, the popularity of the Internet and the growth in the number of consumer and business applications featuring greater use of 3D graphics, video and sound. The accelerating pace of technological advancement in the PC industry has made it increasingly difficult for OEMs to devote the resources necessary for the timely internal development of multimedia subsystems incorporating the latest innovations. Furthermore, many OEMs are seeking to expand their product lines in response to consumer demand for a broader range of price and performance options. As a result, the Company believes OEMs increasingly are choosing to outsource many of their component and subsystem needs to specialized subsystem vendors with focused development efforts. The Company focuses primarily on the sale of its products to OEMs. Sales of multimedia subsystem products to OEMs represented approximately 81% of the Company's total net sales in the nine months ended July 31, 1996. The Company has increased its unit sales volumes in each of the five most recent quarters primarily as a result of the expansion of relationships with established OEM customers, such as Gateway 2000, and the addition of new OEM customers, such as Dell Computer, Compaq Computer and IBM. STB is striving to expand its position in the OEM market by adding new high-end video graphics adapters to its product line, such as the Velocity 3D video graphics adapter. The Company is also broadening its relationships with OEMs beyond the sale of video graphics adapters through the sale of other multimedia subsystem products, such as digital video products and sound cards. STB works closely with component suppliers and OEM customers to develop innovative products that are responsive to product development trends and consumer demands. As OEM customers communicate desired features of next generation products, STB uses its numerous supplier relationships and its technical and marketing expertise to determine the most appropriate components to meet required price and performance specifications. The Company designs and installs STB's proprietary software drivers and utilities to optimize the performance and compatibility of a new video graphics adapter product. This strategy has allowed the Company to be a leader in computer graphics technology. The Company develops new products at its headquarters in Richardson, Texas and manufactures products at its facility in Juarez, Mexico. By maintaining direct control over production, the Company can control product quality and costs and quickly respond to changing customer needs. The Company's manufacturing facility is located in Mexico to benefit from low labor and shipping costs, as well as proximity to the Company's headquarters in Richardson, Texas. The Company believes that the benefits derived from its close relationships with customers and suppliers, its low-cost manufacturing operations and its technical expertise position it to compete effectively in its target markets. In addition to focusing its efforts on the OEM market, STB sells its multimedia subsystem products to the commercial market. The Company has invested substantial marketing efforts to build the STB brand in the commercial sales channel. STB has experienced strong growth in this sales channel in the first nine months of fiscal 1996 and now has significant shelf space with retailers such as CompUSA, Best Buy and Computer City. STB also serves specialized technology product markets, where it seeks to capitalize on its technical expertise in targeted industry niches. The Company's specialized technology products are sold primarily to resellers and corporate customers for specialized applications in a number of industries, including the financial services, hospitality, factory automation, transportation and emergency response industries. STB's efforts in the specialized technology market increase the Company's awareness of the demands of sophisticated end-users, and the prices that the Company's products can command in this market bolster the Company's margins. The Company's principal offices are located at 1651 North Glenville Drive, Richardson, Texas 75081, and the Company's telephone number is (972) 234-8750. The STB logo is a registered trademark of the Company. STB owns common law trademark rights for STB Vision, Mediator, Powergraph, Lightspeed, Velocity, Soundrage, Video Rage, MVP and Channel. Windows is a trademark of Microsoft Corporation. Pentium, Pentium Pro, MMX, AGP and Intercast are trademarks of Intel Corporation. Destination is a trademark of Gateway 2000, Inc. Dolby Digital is a trademark of Dolby Labs. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company.................. 1,500,000 shares Common Stock offered by the Selling Shareholders..... 300,000 shares Common Stock to be outstanding after the offering.... 6,013,598 shares (1) Use of proceeds...................................... To reduce bank indebtedness and for general corporate purposes Nasdaq National Market symbol........................ STBI </TABLE> - ------------------------ (1) Excludes (i) 850,000 shares of Common Stock reserved for issuance under the Company's 1995 Long Term Incentive Plan (the "Incentive Plan"), of which options to purchase 775,000 shares of Common Stock were outstanding as of October 31, 1996 with a weighted average exercise price of $15.81 per share, (ii) 100,000 shares of Common Stock reserved for issuance under the Company's Stock Option Plan for Non-Employee Directors (the "Directors Option Plan"), of which options to purchase 25,000 shares of Common Stock were outstanding as of October 31, 1996 with an exercise price of $12.00 per share, and (iii) 197,402 shares of Common Stock reserved for issuance under the Company's 1995 Employee Stock Option Purchase Plan (the "Employee Plan"). See "Management." SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> NINE MONTHS FISCAL YEAR ENDED OCTOBER 31, ENDED JULY 31, ----------------------------------------------------- -------------------- 1991 1992 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales...................................... $ 23,818 $ 27,786 $ 39,236 $ 89,836 $ 129,603 $ 89,771 $ 132,034 Gross profit................................... 6,698 6,885 8,510 16,623 19,474 13,356 24,281 Income from operations......................... 557 97 786 4,109 3,146 1,482 6,868 Net Income (loss).............................. $ 362 $ (100) $ 560 $ 3,521 $ 1,998 $ 1,057 $ 3,947 PRO FORMA DATA: Pro forma adjustments (1)...................... (315) (315) --------- --------- Pro forma net income........................... $ 1,683 $ 742 --------- --------- Pro forma net income per share (1996 actual) (2).......................................... $ 0.45 $ 0.20 $ 0.88 --------- --------- --------- Weighted average shares and equivalents used for pro forma net income per share (1996 actual) (2).................................. 3,746 3,746 4,504 </TABLE> <TABLE> <CAPTION> AS OF JULY 31, 1996 ---------------------- AS ACTUAL ADJUSTED(3) --------- ----------- <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Working capital.......................................................................... $ 23,427 $ 57,107 Total assets............................................................................. 52,606 83,176 Short-term borrowings including current portion of long-term liabilities................. 5,540 2,430 Long-term liabilities, net of current portion............................................ 1,672 1,672 Total shareholders' equity............................................................... 27,360 61,040 </TABLE> - ------------------------ (1) Reflects certain pro forma adjustments assuming (a) the Company's profit-sharing allocation to employees had been reduced from 25% to 10% of income before taxes (as calculated prior to profit sharing expenses), effective November 1, 1994; (b) the portion of indebtedness evidenced by certain promissory notes (the "Founding Shareholder Notes") issued to the founding shareholders of the Company (the "Founding Shareholders") relating to approximately one-half of the amount of undistributed earnings of the Company as of October 31, 1994 (at which time the Company was treated as an S corporation for federal and state income tax purposes) (the "Undistributed S Corporation Earnings"), or $2.04 million, had been outstanding effective November 1, 1994 and bearing interest at 9% per annum; and (c) the Company had been treated as a C corporation rather than as an S corporation for federal and state income tax purposes, effective November 1, 1994 (and assuming an effective tax rate of approximately 33%). The adjustment in the Company's profit sharing allocation to employees and the termination of the Company's S corporation status occurred contemporaneously with the Company's initial public offering ("IPO") in February 1995. See "Management--Profit Sharing Plan," "Certain Transactions--S Corporation Distribution" and Note 1 of Notes to October 31, 1995 Consolidated Financial Statements. (2) Pro forma net income per share is based on the Company's weighted average number of shares outstanding, plus the common equivalent number of shares that the Company would have had to issue to distribute to the Founding Shareholders $2.04 million, which amount equals approximately one-half of the Undistributed S Corporation Earnings at October 31, 1994. See "Certain Transactions--S Corporation Distribution" and Note 1 of Notes to October 31, 1995 Consolidated Financial Statements. (3) Adjusted to reflect the sale of 1,500,000 shares of Common Stock offered by the Company hereby and the application of the estimated net proceeds therefrom (assuming a public offering price of $24.00 per share). See "Use of Proceeds" and "Capitalization."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0000934851_systemone_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000934851_systemone_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b1bf5b7c35290fe166f965cefdb9c354dde5bf92
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE NOTED, THE INFORMATION IN THIS PROSPECTUS ASSUMES (I) THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION (THE "OVER-ALLOTMENT OPTION") TO PURCHASE UP TO 127,500 SHARES OF COMMON STOCK HAS NOT BEEN EXERCISED, (II) THAT THE REPRESENTATIVE'S WARRANTS TO PURCHASE 85,000 SHARES OF COMMON STOCK HAVE NOT BEEN EXERCISED, AND (III) THAT $1,012,500 IN PRINCIPAL AMOUNT OF CONVERTIBLE NOTES (THE "CONVERTIBLE NOTES") ISSUED IN A PRIVATE FINANCING COMPLETED BY THE COMPANY IN JUNE 1996 HAS BEEN CONVERTED INTO 150,000 SHARES OF COMMON STOCK SIMULTANEOUSLY WITH THE CLOSING OF THIS OFFERING. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "UNDERWRITING." THE COMPANY Mansur Industries Inc. (the "Company") has developed and obtained patent protection with respect to a full line of self-contained, recycling industrial parts washers that incorporate innovative, proprietary waste minimization technologies and represent a significant advance over currently available machinery and processes. Focusing on waste minimization rather than its removal and recovery, the Company believes that its equipment will have a major impact on the industrial parts cleaning industry and will have a broad appeal to customers, because its equipment, unlike the machines now in use, facilitates efficient and economical compliance with environmental regulations, minimizes waste disposal requirements, enhances cleaning solution utilization, and increases worker safety and productivity. Most machinery and equipment require oil lubrication to function properly. Removal of lubrication oils from tools and parts during automotive, aviation, marine and general industrial maintenance, service and repair operations is typically effected through the use of mineral spirit solvents which become contaminated in the cleaning process. Under the most common current practice, the solvent becomes more contaminated (and less effective) with repeated use, and, when it is saturated with oil, sludge and other contaminants as a result of the cleaning process (and frequently classified as a hazardous waste under federal and state regulations), it must be stored on site until pick-up, when pure solvent is delivered and the contaminated solvent is, generally, shipped to regional refining facilities. This off-site recycling program is typically scheduled on four to sixteen week cycles and involves both the utilization of progressively more contaminated solvent for cleaning operations until the solvent is too contaminated for use, and thereafter, the on-site storage of the hazardous solution until the periodic waste recovery service. By contrast, the Company's products allow the use and re-use of the solvent by removing all the contaminants from the solvent within the cleaning unit itself, minimizing the volume of waste by-product and providing pure solvent to the customer on demand, without the costly and dangerous storage and transportation of hazardous waste. Moreover, the small amount of waste by-product yielded in the distillation process utilized by the Company's products can typically be recycled and/or disposed of together with the customer's used motor oil, which is generally not classified as a hazardous waste. The Company believes that substantially all of the Company's target customers have established systems for the handling, transportation, recycling and disposal of used motor oil. The effectiveness of the Company's products in accomplishing the distillation of contaminated solvent to yield pure solvent and a by-product comparable to used oil has been extensively tested by the laboratory of a division of Valvoline Oil Company and the independent engineering concern of Law Engineering and Environmental Services, Inc. While the Company intends to exploit its current full line of industrial washers, and to continue its research and development of new products, it has initially focused its attention on its General Parts Washer, marketed as SystemOne(Trademark) (the "SystemOne(Trademark) Washer"). The SystemOne(Trademark) Washer consists of a washing sink mounted on top of a metal cabinet in which the distillation and recovery apparatus is contained. The equipment allows the solvent to be used, treated and re-used, on demand, without PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE NOTED, THE INFORMATION IN THIS PROSPECTUS ASSUMES (I) THAT THE CONCURRENT OFFERING HAS BEEN CONSUMMATED AT AN ASSUMED INITIAL OFFERING PRICE OF $7.50 PER SHARE (II) THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IN THE CONCURRENT OFFERING (THE "OVER-ALLOTMENT OPTION") TO PURCHASE UP TO 127,500 SHARES OF COMMON STOCK HAS NOT BEEN EXERCISED, AND (III) THAT THE REPRESENTATIVE'S WARRANTS TO PURCHASE 85,000 SHARES OF COMMON STOCK HAVE NOT BEEN EXERCISED. THE COMPANY Mansur Industries Inc. (the "Company") has developed and obtained patent protection with respect to a full line of self-contained, recycling industrial parts washers that incorporate innovative, proprietary waste minimization technologies and represent a significant advance over currently available machinery and processes. Focusing on waste minimization rather than its removal and recovery, the Company believes that its equipment will have a major impact on the industrial parts cleaning industry and will have a broad appeal to customers, because its equipment, unlike the machines now in use, facilitates efficient and economical compliance with environmental regulations, minimizes waste disposal requirements, enhances cleaning solution utilization, and increases worker safety and productivity. Most machinery and equipment require oil lubrication to function properly. Removal of lubrication oils from tools and parts during automotive, aviation, marine and general industrial maintenance, service and repair operations is typically effected through the use of mineral spirit solvents which become contaminated in the cleaning process. Under the most common current practice, the solvent becomes more contaminated (and less effective) with repeated use, and, when it is saturated with oil, sludge and other contaminants as a result of the cleaning process (and frequently classified as a hazardous waste under federal and state regulations), it must be stored on site until pick-up, when pure solvent is delivered and the contaminated solvent is, generally, shipped to regional refining facilities. This off-site recycling program is typically scheduled on four to sixteen week cycles and involves both the utilization of progressively more contaminated solvent for cleaning operations until the solvent is too contaminated for use, and thereafter, the on-site storage of the hazardous solution until the periodic waste recovery service. By contrast, the Company's products allow the use and re-use of the solvent by removing all the contaminants from the solvent within the cleaning unit itself, minimizing the volume of waste by-product and providing pure solvent to the customer on demand, without the costly and dangerous storage and transportation of hazardous waste. Moreover, the small amount of waste by-product yielded in the distillation process utilized by the Company's products can typically be recycled and/or disposed of together with the customer's used motor oil, which is generally not classified as a hazardous waste. The Company's products produce by-products that have been extensively tested by the laboratory of a division of Valvoline Oil Company and the independent engineering concern of Law Engineering and Environmental Services, Inc. The Company's products have proven effective in accomplishing the distillation of contaminated solvent to yield pure solvent and a by-product comparable to used oil. The Company believes that substantially all of the Company's target customers have established systems for the handling, transportation, recycling and disposal of used motor oil. While the Company intends to exploit its current full line of industrial washers, and to continue its research and development of new products, it has initially focused its attention on its General Parts Washer, marketed as SystemOne(Trademark) (the "SystemOne(Trademark) Washer"). The SystemOne(Trademark) Washer consists of a washing sink mounted on top of a metal cabinet in which the distillation and recovery apparatus is contained. The equipment allows the solvent to be used, treated and re-used, on demand, without requiring off-site processing. The Company has concluded extensive testing by independent laboratories and at various commercial sites and is currently conducting test marketing in a local area within close requiring off-site processing. The Company has concluded extensive testing by independent laboratories and at various commercial sites and is currently conducting test marketing in a local area within close proximity to its facilities. Demonstrator models were placed in 38 selected automotive repair facilities of national, fleet, industrial and commercial accounts. Notwithstanding the absence of a formal marketing program during the test period, the Company has, as of the date of this Prospectus, received firm purchase orders from a number of facilities in which the machines were placed, including Florida Detroit Diesel MTU (46 Units); Kelly Tractor Company and Pantropic Power Products, South Florida Caterpillar dealers (48 Units); United States Postal Service (2 Units); Southern Sanitation, a subsidiary of Waste Management, Inc. (5 Units); Broward County Mass Transit (25 Units); Greenwich Air Services Inc. (10 Units); and a number of South Florida automobile dealerships (an aggregate of 60 Units). The Company finances its SystemOne/trademark/ Washers through a third party leasing program with Oakmont Financial Services. The Company commenced commercial sales and delivery of units in July 1996 at an approximate price per unit of $2,700, and expects to deliver substantially all units ordered to date prior to December 31, 1996. As of the date of this Prospectus, the Company had delivered and recognized the sale of 44 units. The initial market for the Company's industrial cleaning product line includes automotive, aviation, marine and general industrial maintenance, service and repair operations. The Company believes that domestic expenditures in connection with industrial parts cleaning machines exceeds $1.0 billion annually, and that the anticipated monthly cost to the customer for the Company's products typically will not exceed, and is intended to be well below, the monthly cost of the non-recycling machines now in use. Additional competitive advantages provided by the Company's products include practical and cost effective compliance with demanding regulations of the Environmental Protection Agency; elimination of routine waste disposal costs; significant improvements in cleaning productivity; minimized cleaning solution purchases; and reduction of equipment down time for routine machine maintenance. The Company has retained experienced executives to head and develop its sales and marketing organization. In addition to its regional office in Miami, the Company expects to open four additional service centers in Orlando, Tampa, Jacksonville and West Palm Beach, Florida during 1996. The Company expects to pursue a national expansion program, through internal growth utilizing a network of regional distribution and service centers, as in Florida, through a strategic alliance with a national distributor, if one is available on favorable terms, or through a combination of the two. In August, the Company commenced a pilot program with First Recovery and Valvoline Oil Company, two affiliates of Ashland Inc., a multinational oil refiner and distributor of automotive related products, including Valvoline Oil and Ashland 140 Solvent, one of the brands of mineral spirits solvent used in the Company's SystemOne/trademark/ Washer. Under the pilot program, First Recovery is the exclusive distributor of the SystemOne(Trademark) Washer in the Dallas/Ft. Worth and Houston markets. The initial term of the program is one year. If the arrangement proves successful, the Company expects to negotiate a broader agreement, possibly including a national distribution program. The Company has manufactured all its prototype and test models at its 10,000 square foot research and development ("R&D") facility. The Company's current manufacturing capabilities include advanced Computer Aided Design/Computer Aided Manufacturing technology and state of the art manufacturing machinery. Because the Company's R&D facility can be utilized to manufacture up to 200 units of the SystemOne(Trademark) Washer per month, all manufacturing operations, including design, metal fabrication, robotic welding, painting and assembly, can be performed in the Company's R&D facility during the Company's initial roll-out phase. At present, the Company plans to continue to use its own facility for existing and new product R&D activities and to use contract manufacturers when a product achieves commercial sales levels. In order to accommodate increased demand for the SystemOne(Trademark) Washer, the Company has entered into an agreement with a contract manufacturer with respect to the manufacture of at least 3,000 units during the first year thereof. In addition, the Company has entered into negotiations with a major contract manufacturer with a 2 million square foot facility and 75 years of experience to provide the manufacturing capacity needed to meet anticipated future customer demand. proximity to its facilities. Demonstrator models were placed in 38 selected automotive repair facilities of national, fleet, industrial and commercial accounts. Notwithstanding the absence of a formal marketing program during the test period, the Company has, as of the date of this Prospectus, received firm purchase orders from a number of facilities in which the machines were placed, including Florida Detroit Diesel MTU (46 Units); Kelly Tractor Company and Pantropic Power Products, South Florida Caterpillar dealers (48 Units); United States Postal Service (2 Units); Southern Sanitation, a subsidiary of Waste Management, Inc. (5 Units); Broward County Mass Transit (25 Units); Greenwich Air Services Inc. (10 Units); and a number of South Florida automobile dealerships (an aggregate of 60 Units). The Company finances its SystemOne(Trademark) Washers through a third party leasing program with Oakmount Financial Services. The Company commenced commercial sales and delivery of units in July 1996 at an approximate price per unit of $2,700, and expects to deliver substantially all units ordered to date prior to December 31, 1996. As of the date of this Prospectus, the Company had delivered and recognized the sale of 44 units. The initial market for the Company's industrial cleaning product line includes automotive, aviation, marine and general industrial maintenance, service and repair operations. The Company believes that domestic expenditures in connection with industrial parts cleaning machines exceeds $1.0 billion annually, and that the anticipated monthly cost to the customer for the Company's products typically will not exceed, and is intended to be well below, the monthly cost of the non-recycling machines now in use. Additional competitive advantages provided by the Company's products include practical and cost effective compliance with demanding regulations of the Environmental Protection Agency; elimination of routine waste disposal costs; significant improvements in cleaning productivity; minimized cleaning solution purchases; and reduction of equipment down time for routine machine maintenance. The Company has retained experienced executives to head and develop its sales and marketing organization. In addition to its regional office in Miami, the Company expects to open four additional service centers in Orlando, Tampa, Jacksonville and West Palm Beach, Florida during 1996. The Company expects to pursue a national expansion program, through internal growth utilizing a network of regional distribution and service centers, as in Florida, through a strategic alliance with a national distributor, if one is available on favorable terms, or through a combination of the two. In August, the Company commenced a pilot program with First Recovery and Valvoline Oil Company, two affiliates of Ashland Inc., a multinational oil refiner and distributor of automotive related products, including Valvoline Oil and Ashland 140 Solvent, one of the brands of mineral spirits solvent used in the Company's SystemOne(Trademark) Washer. Under the pilot program, First Recovery is the exclusive distributor of the SystemOne(Trademark) Washer in the Dallas/Ft. Worth and Houston markets. The initial term of the program is one year. If the arrangement proves successful, the Company expects to negotiate a broader agreement, possibly including a national distribution program. The Company has manufactured all its prototype and test models at its 10,000 square foot research and development ("R&D") facility. The Company's current manufacturing capabilities include advanced Computer Aided Design/Computer Aided Manufacturing technology and state of the art manufacturing machinery. Because the Company's R&D facility can be utilized to manufacture up to 200 units of the SystemOne(Trademark) Washer per month, all manufacturing operations, including design, metal fabrication, robotic welding, painting and assembly, can be performed in the Company's R&D facility during the Company's initial roll-out phase. At present, the Company plans to continue to use its own facility for existing and new product R&D activities and to use contract manufacturers when a product achieves commercial sales levels. In order to accommodate increased demand for the SystemOne(Trademark) Washer, the Company has entered into an agreement with a contract manufacturer with respect to the manufacture of at least 3,000 units during the first year thereof. In addition, the Company has entered into negotiations with a major contract manufacturer with a 2 million square foot facility and 75 years of experience to provide the manufacturing capacity needed to meet anticipated future customer demand. <TABLE> <CAPTION> THE OFFERING <S> <C> Common Stock Offered .............................850,000 shares Common Stock Outstanding After Offering ..........4,351,309(1) Use of Proceeds by the Company ...................The Company intends to apply the net proceeds of the offering for the: development of manufacturing capacity; development of marketing, sales and service centers and a fleet of service vehicles; development of corporate headquarters and research and development facilities; purchase of raw materials and inventory; and working capital and general corporate purposes. See "Use of Proceeds." Risk Factors ......................................This offering involves a high degree of risk and immediate substantial dilution. See "Risk Factors" and "Dilution." Proposed Nasdaq SmallCap Symbol ..................MANS </TABLE> - ----------------------------------------------------------------------------- (1) Does not include an aggregate of 375,000 shares of Common Stock reserved for issuance upon exercise of options available for future grant and future restricted stock awards under the Company's Incentive Compensation Plan. See "Underwriting" and "Management--Incentive Compensation Plan." Mansur Industries Inc. was incorporated in Florida in 1990. The Company's principal executive office is located at 8425 S.W. 129th Terrace, Miami, Florida 33156, and its telephone number is (305) 232-6768. <TABLE> <CAPTION> THE OFFERING <S> <C> Common Stock Offered ...................150,000 shares Common Stock Outstanding After Offering...4,351,309(1) Use of Proceeds by the Company ..........The Company utilized the proceeds of the private financing pursuant to which the Convertible Notes were issued to finance the Concurrent Offering and for general corporate purposes. The Company will not receive any of the proceeds from the sale by the holders thereof of the shares of Common Stock issued pursuant to this Prospectus. Risk Factors .............................This offering involves a high degree of risk and immediate substantial dilution. See "Risk Factors" and "Dilution." Nasdaq SmallCap Symbol ..................MANS </TABLE> - -------------------------- (1) Does not include an aggregate of 375,000 shares of Common Stock reserved for issuance upon exercise of options available for future grant and future restricted stock awards under the Company's Incentive Compensation Plan. See "Underwriting" and "Management--Incentive Compensation Plans." The Company will furnish its shareholders with annual reports containing audited financial statements certified by an independent auditing firm. CONCURRENT OFFERING On the date of this Prospectus, a registration statement filed under the Securities Act with respect to a concurrent underwritten public offering by the Company of 850,000 shares of Common Stock, and up to 127,500 additional shares of Common Stock to cover over-allotments, if any, was declared effective by the Securities and Exchange Commission (the "Concurrent Offering"). The Company received net proceeds of approximately $ from the sale of those shares, and will receive approximately $ __________ in additional net proceeds if the over-allotment option is exercised in full, after payment of underwriting discounts and commissions and estimated expenses of the Concurrent Offering. Mansur Industries Inc. was incorporated in Florida in 1990. The Company's principal executive office is located at 8425 S.W. 129th Terrace, Miami, Florida 33156, and its telephone number is (305) 232-6768.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000936746_pallet_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000936746_pallet_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..9b62f12e577252a037aa53c4e272345d864101bd
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, (i) ALL INFORMATION HEREIN ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION (412,500 SHARES) OR THE REPRESENTATIVE'S WARRANT (275,000 SHARES), (ii) ALL SHARE AND PER SHARE DATA HAVE BEEN ADJUSTED TO GIVE EFFECT TO A 1-FOR-8 REVERSE STOCK SPLIT WITH RESPECT TO THE COMMON STOCK AND A 1-FOR-2 REVERSE STOCK SPLIT WITH RESPECT TO THE PREFERRED STOCK, EACH APPROVED BY THE COMPANY'S SHAREHOLDERS ON APRIL 4, 1996 AND (iii) THE CONVERSION OF ALL OUTSTANDING SHARES OF PREFERRED STOCK INTO COMMON STOCK ON A 1-FOR-1 BASIS AS OF THE CLOSING OF THIS OFFERING. SEE "UNDERWRITING." THE COMPANY Pallet Recycling Associates of North America, Inc. ("PRANA" or the "Company") was founded in 1993 to create a national network of pallet recycling companies to service the pallet needs of manufacturing, distribution, transportation and retailing companies that use pallets to move goods throughout North America. The Company has expanded rapidly through acquisitions from a single operation based in Saint Paul, Minnesota to a network of 15 companies (the "Subsidiaries") operating from 23 locations in 17 states. The Company has also signed agreements to acquire two additional pallet recycling companies operating from three locations in two states. These acquisitions are expected to close upon completion of this Offering using a portion of the proceeds therefrom (the "Pending Acquisitions"). The Company believes its achievement of critical mass, access to greater capital resources and its ability to add a tradeable security to the consideration it offers acquisition candidates will enhance its ability to make further acquisitions. Pallet recycling services involve retrieving pallets and repairing or rebuilding and selling the pallets. The Company believes that the market for pallet recycling services had annual sales in excess of $2 billion in 1995. According to Company estimates there are more than two billion pallets in circulation in the United States today. According to the THE PALLET ENTERPRISE, an industry trade publication, respondents to an annual pallet recycling survey reported average sales growth of approximately 32% in 1994, 13% in 1995 and are anticipating growth of 17% in 1996. The Company believes this growth is being driven by a number of factors including: (i) recycled pallets are 25% to 35% less expensive than new pallets; (ii) the wood in recycled pallets has lost moisture over time and is, therefore, lighter and stronger; (iii) overall demand for pallets has continued to rise and (iv) recycled pallets offer several environmental benefits, including companies sending fewer pallets to landfills. The Company believes that it is currently the largest supplier of pallet recycling services in North America; nevertheless, it estimates that its market share, based on the Company's pro forma combined net sales for 1995, is less than three percent. The pallet recycling industry is highly fragmented. According to industry sources, there are an estimated 3,000 independent pallet recycling businesses in the United States, substantially all of which operate in only one city or town. The Company believes that the pallet recycling industry is consolidating and that this consolidation is being driven by the demands of large multi-location companies for a company such as PRANA to offer a national network to manage the sourcing, retrieval and repair of pallets. Due to the fragmentation of the pallet recycling industry, national and regional companies must currently contract with numerous independent pallet recycling operations in order to meet their pallet recycling needs, which is often expensive and time consuming. It is common for businesses that use pallets (i.e., a manufacturer or distributor) to ship goods on a pallet and never receive the pallet back, nor receive any value for the pallet. As a result, many of these businesses view pallets as a shipping expense rather than a reusable asset. The Company believes a national network of pallet recyclers would improve the level of service, reduce the complexity of managing the sourcing, retrieval and repair of pallets for these multi-location companies and will enable pallet users to view pallets as an asset to be retained rather than an expense to be incurred. Through its Subsidiaries the Company serves over 1,000 customers, including numerous multi-national companies such as Motorola Inc., GAF Materials Corporation and 3M. The Company currently has agreements to serve twelve customers on a regional and national basis and plans to continue to add to its list of national customers. The Company's objective is to build upon its current position to become the dominant provider of pallet recycling services in North America. Its strategies to achieve this objective include: (i) rapidly expanding its network, primarily through acquisitions; (ii) driving internal growth; (iii) establishing and expanding relationships with large national customers; (iv) managing pallet supply and demand across regions and (v) providing superior value and service to its customers. The Company was incorporated on March 2, 1993 in the State of Minnesota and its principal executive offices are located at 2665 Long Lake Road, Suite 120, Roseville, Minnesota 55113. The Company's telephone number is (612) 635-0661. THE OFFERING COMMON STOCK OFFERED 2,750,000 Shares COMMON STOCK OUTSTANDING AFTER THIS 6,264,716 Shares(1) OFFERING USE OF PROCEEDS To complete Pending Acquisitions, to finance additional acquisitions, to repay outstanding indebtedness, to increase working capital and for other general corporate purposes. See "Use of Proceeds." PROPOSED NASDAQ SMALLCAP MARKET PRNA SYMBOL PROPOSED BOSTON STOCK EXCHANGE SYMBOL PRN (1) Excludes: (i) 2,000,000 shares of Common Stock reserved for issuance under the Company's 1995 Long-Term Incentive and Stock Option Plan (the "Stock Option Plan"), of which options to purchase 495,000 shares of Common Stock were outstanding as of August 30, 1996; (ii) 592,593 shares of Common Stock issuable upon conversion of the Convertible Subordinated Debentures (the "Convertible Debentures") (assuming a conversion price of $3.38 per share); (iii) 554,491 shares of Common Stock issuable upon exercise of outstanding warrants and (iv) up to 275,000 shares of Common Stock issuable upon exercise of the Representative's warrant. Includes the conversion of all outstanding Preferred Stock into Common Stock on a one-for-one basis upon completion of the Offering and the issuance of 250,000 shares of Common Stock issuable in connection with the consummation of the Pending Acquisitions. See "Management -- Stock Option Plan," "Description of Capital Stock" and "Underwriting." SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA, OPERATING DATA AND FOOTNOTES) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, PRO FORMA PRO FORMA 1993(1) 1994 1995 1995(2) 1995 1996 1996(2) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales $ -- $9,844 $30,004 $ 44,800 $12,263 $18,424 $ 22,231 Gross profit -- 2,808 6,064 9,917 2,583 4,273 5,508 Selling, general and administrative expenses: Operating subsidiaries -- 1,481 3,776 5,570 1,597 2,858 3,320 Corporate 196 1,337 2,725 2,725 1,197 1,595 1,595 Amortization expense 1 35 344 781 102 320 460 Goodwill write-off -- -- 539 539 -- -- -- Operating profit (loss) (197) (45) (1,320) 302 (313) (500) 133 Other income (expense), net 12 (32) (568) (613) (126) (741) (539) Loss before income taxes (185) (77) (1,888) (311) (439) (1,241) (406) Income tax benefit (expense) -- (49) 75 (369) 20 (70) 16 Net loss $(185) $ (126) $(1,813) $ (680) $ (419) $(1,311) $ (390) Net loss per share $ (0.19) $ (0.11) Weighted average shares outstanding(3) 3,650,301 3,650,301 OPERATING DATA: Number of locations at period end -- 11 21 26 11 23 26 </TABLE> <TABLE> <CAPTION> DECEMBER 31, JUNE 30, 1996 PRO FORMA 1993 1994 1995 ACTUAL PRO FORMA(4) AS ADJUSTED(5) <S> <C> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Working capital (deficit) $751 $ 94 $(3,407) $(4,775) $(6,944) $ 3,141 Total assets 901 7,878 17,448 22,352 25,286 32,204 Total debt and capital leases (including current maturities) -- 3,285 10,422 13,200 14,693 10,876 Stockholders' equity 798 2,624 3,452 5,229 6,354 17,089 </TABLE> (1) Period from March 2, 1993 (date of inception) to December 31, 1993. (2) Gives effect to (i) the acquisition of all Subsidiaries and the completion of the Pending Acquisitions, as if such transactions had been made on January 1, 1995, (ii) the sale of the Shares offered hereby and (iii) all other pro forma adjustments set forth in "Pro Forma Financial Data." (3) Pro forma weighted average shares outstanding includes: (i) 1,081,292 shares of Common Stock outstanding as of December 31, 1995 and June 30, 1996; (ii) 2,183,424 shares of Preferred Stock outstanding as of December 31, 1995 and June 30, 1996, which shares will be converted to shares of Common Stock on a 1-for-1 basis upon completion of the Offering; (iii) 250,000 shares of Common Stock to be issued as consideration for the Pending Acquisitions and (iv) 135,585 shares of Common Stock equivalents related to stock options and warrants. (4) Gives effect to (i) the completion of the acquisition of all Subsidiaries and the completion of the Pending Acquisitions, as if such transactions had been completed as of June 30, 1996 and (ii) all other pro forma adjustments set forth in "Pro Forma Financial Data." (5) Gives effect to: (i) the completion of the acquisition of all Subsidiaries and the completion of the Pending Acquisitions, as if such transactions had been completed as of June 30, 1996; (ii) all other pro forma adjustments set forth in "Pro Forma Financial Data," and (iii) the sale of the shares offered hereby. RISK FACTORS IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY. LIMITED OPERATING HISTORY; NET LOSSES The Company was incorporated on March 2, 1993 and began operations on January 1, 1994. The Company had a net loss of approximately $1.8 million during the twelve months of operations ended December 31, 1995 and a working capital deficit of approximately $4,775,000 as of June 30, 1996. Prior to January 1, 1994, the Company had no operations or revenues. Accordingly, the Company's operations are subject to all of the risks inherent in the establishment of a new business enterprise, including the lack of operating history. Future revenues and profits, if any, will depend upon various factors, including the quality of operations, the acceptance of the Company's services and general economic conditions. There can be no assurance that the Company can operate profitably or that it will successfully implement its acquisition strategy, in which case the Company will continue to be dependent on the revenues of the Subsidiaries. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." ACQUISITION RISKS The Company intends to acquire additional pallet recycling companies throughout North America as part of its strategy to establish a national pallet recycling network. There can be no assurance that the Company will be able to make additional acquisitions or make such acquisitions on terms that are favorable to the Company. Locating and negotiating additional acquisition prospects involves considerable management time and Company expense which may affect the Company's ability to manage successfully its day-to-day operations. In addition, integration of the acquired companies into the Company's national network also involves considerable management time and Company expense. There can be no assurance that the Company will successfully integrate the acquired companies into its national network or that the benefits of establishing the national network, such as national sales contracts and economies of scale, will ever be realized. See "Business -- Acquisition Strategy." The Company currently has signed acquisition agreements for the two Pending Acquisitions. The Pending Acquisitions are expected to close upon the consummation of this Offering using a portion of the proceeds therefrom. There can be no assurance that either of the Pending Acquisitions will be completed. In consummating the Pending Acquisitions or other acquisitions, the Company relies upon certain representations, warranties and indemnities made by the sellers in each acquisition, as well as its own due diligence investigation. There can be no assurance that such representations and warranties will be true and correct or that the Company's due diligence will uncover all material adverse facts relating to the operations and financial condition of the pallet recycling companies acquired. Any material misrepresentations could have a material adverse effect on the Company's financial condition and results of operations. See "Use of Proceeds" and "Business -- Pending Acquisitions." NEED FOR ADDITIONAL CAPITAL TO IMPLEMENT ACQUISITION STRATEGY The Company intends to finance further acquisitions by using cash and shares of the Company's Common Stock. In the event potential acquisition candidates are unwilling to accept the Company's Common Stock or the Company chooses not to employ its Common Stock as a part of the consideration for the purchase of such acquisition candidates, the Company may be required to utilize more of its cash resources, if available, in order to continue its acquisition strategy. If the Company does not have sufficient cash resources, its growth could be limited unless it is able to obtain the necessary capital through additional debt or equity financings. There can be no assurance that the Company will be able to obtain such financing if and when it is needed or that, if available, such financing will be on terms acceptable to the Company. The Company believes that cash generated from operations, borrowing capacity under credit facilities and the proceeds from this Offering will be sufficient to fund its ongoing operations, the Pending Acquisitions, additional acquisitions and budgeted capital expenditures through 1996. If the Company is unable to obtain additional financing when needed, it may be unable to fully implement its acquisition strategy. See "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Business -- Acquisition Strategy." NEED FOR PROMISSORY NOTE EXTENSION; LONG-TERM DEBT COVENANT NON-COMPLIANCE; GOING CONCERN UNCERTAINTY The Company currently has promissory notes with a principal balance of approximately $800,000 made with private investors which are due and payable. The Company is currently negotiating extensions of the maturity dates of such promissory notes. There can be no assurance that the Company will be able to negotiate such extensions with the noteholders. The failure of the Company to obtain such extensions could have an adverse effect on the Company's financial condition and results of operations. The Company currently is out of compliance with certain covenants of its long-term debt agreements. Approximately $4,300,000 of the outstanding long-term debt is callable and has therefore been classified as current. The Company is currently negotiating with its primary lender to amend the covenants. There can be no assurance that the Company will be able to negotiate such an amendment. The failure of the Company to obtain an amendment could have an adverse effect on the Company's financial condition and results of operations. The report of the independent auditors on the Company's Financial Statements contains an explanatory paragraph concerning the Company's ability to continue as a going concern. See Notes 10 and 17 to the Company's Consolidated Financial Statements for a description of the factors related to going concern issues and management's plans regarding operating losses and liquidity. The Company believes that upon the successful completion of this Offering, it will have the cash resources to meet its current obligations. RAPID EXPANSION; MANAGEMENT OF GROWTH; INTERNAL CONTROLS The Company is undergoing a period of rapid growth which the Company believes will continue for the foreseeable future. The growth of the Company has occurred in all phases of its business, including the number of Subsidiaries, the number of employees and the scope and geographic location of its operations. This growth has resulted in, and is expected to continue to create, new and increased responsibilities for management personnel and added pressures on the Company's operational and financial systems. The Company's ability to manage future growth effectively and to accomplish its overall goals will depend on its ability to hire or successfully promote and retain qualified personnel. If the Company is unable to manage its growth effectively or to hire or promote and retain qualified personnel, the Company's business and results of operations could be materially adversely affected. Additionally, the Company's rapid growth will continue to place an emphasis on its internal controls, in particular its information systems. The Company's ability to successfully integrate the accounting and financial reporting activities, among other activities, of its Subsidiaries will depend on its ability to continue developing and implementing internal controls. COMPETITION It is anticipated that the Company's current products and services will compete for sales with well-established companies including, but not limited to, those in the new and recycled pallet industries as well as those that rent or lease pallets. There can be no assurance that pallet leasing services will not capture market share from pallet recycling companies. The Company competes with other pallet recycling companies for its supply of pallets to recycle. There can be no assurance that the Company will be able to compete successfully with other pallet recycling companies in obtaining an adequate supply of pallets or, in doing so, at prices that will allow the Company to operate profitably. The majority of the pallets recycled by the Company are made of wood and as such are also subject to competition from pallets fabricated from other materials, including steel, plastic, cardboard and molded wood fiber, and may be subject to competition from pallets fabricated from other materials developed in the future. Other companies may also attempt to establish a national pallet recycling company and thus compete with the Company in the identification and acquisition of existing pallet recycling companies. Companies which attempt to establish national recycling companies will also compete with the Company for national account customers. The Company's current and potential competitors may have substantially greater resources than the Company and there can be no assurance that the Company will be able to compete successfully with such competitors. DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL The Company is highly dependent on each of its executive officers and on a limited number of other key management personnel. The Company's future success will also depend, in part, on its ability to attract and retain highly qualified personnel. There can be no assurance that the Company will be successful in hiring or retaining qualified personnel. The loss of key personnel, or inability to hire and retain qualified personnel, could have an adverse effect on the Company's business, financial condition and results of operations. The Company does not have key-person life insurance on any of its personnel. See "Management." CONTROL BY MANAGEMENT Immediately after the closing of the Offering, the directors and executive officers of the Company will own beneficially approximately 20% of the Company's outstanding Common Stock. Accordingly, these shareholders may be able substantially to influence the outcome of shareholder votes as to matters on which they may be in agreement. See "Principal Shareholders." SHARES ELIGIBLE FOR FUTURE SALE The availability for sale of certain shares of Common Stock held by existing shareholders of the Company after this Offering could adversely affect the market price of the Common Stock. Of the 6,264,716 shares of Common Stock to be outstanding following this Offering, the 2,750,000 Shares being offered by the Company hereby will be freely tradeable without restrictions or additional registration under the Securities Act of 1933, as amended (the "Securities Act"). The remaining 3,514,716 shares were issued and sold by the Company in private transactions in reliance upon exemptions from registration under the Securities Act. Of these 3,514,716 shares, 1,985,012 will be freely tradeable upon the effective date of this Offering, subject to restrictions imposed by Rule 144 and the remaining 1,529,704 will be eligible for resale under Rule 144 after expiration of applicable holding periods, subject to restrictions imposed by Rule 144. In connection with this Offering, all executive officers and directors and five percent shareholders of the Company have agreed not to offer, sell or otherwise dispose of a total of approximately 1,580,335 shares held by them for a period of 365 days after the effective date of this Offering, without the prior written consent of the Representative. In addition, certain other shareholders of the Company have agreed not to offer, sell or otherwise dispose of a total of 1,888,256 shares (the "Lock-up Shares") held by them for a period of 180 days. Of the Lock-up Shares, 472,064 will be eligible for resale between 181 days and 270 days after the effective date of this Offering, and 472,064 additional shares will be eligible for resale between 271 and 365 days after the effective date of this Offering. All shares held by the Company's executive officers, directors and five percent shareholders and all Lock-up Shares will be eligible for resale 366 days after the effective date of this Offering, subject to any restrictions under Rule 144. Sales of a substantial amount of the currently outstanding shares of Common Stock in the public market may adversely affect the market price of the Common Stock and the ability of the Company to raise additional capital by occurring at a time when it would be beneficial for the Company to sell securities. See "Description of Capital Stock," "Shares Eligible for Future Sale" and "Underwriting." NO PRIOR PUBLIC MARKET; DETERMINATION OF OFFERING PRICE; STOCK PRICE VOLATILITY Prior to this Offering, there has been no public market for the Company's Common Stock, and there can be no assurance that an active trading market for the Common Stock will develop or be sustained after this Offering. In the event the market for the Company's Common Stock is thinly traded, shareholders may not be able to sell a significant amount of Common Stock at the price quoted or at all. The initial public offering price for the Shares has been determined by negotiation between the Company and the Representative and may bear no relationship to the market price of the Shares subsequent to this Offering. Following this Offering, the market price for the Common Stock may be highly volatile depending on various factors, including the general economy, stock market conditions, announcements by the Company, its competitors, and fluctuations in the Company's operating results. See "Underwriting." ANTI-TAKEOVER PROVISIONS The Board of Directors, without any action by the Company's shareholders, has the authority to issue up to 5,000,000 shares of authorized but undesignated preferred stock and to fix the powers, preferences, rights and limitations of any such preferred shares or any class or series thereof, without shareholder approval. Persons acquiring preferred stock could have preferential rights with respect to voting, liquidation, dissolution or dividends over existing shareholders. The Company is subject to certain provisions of the Minnesota Business Corporation Act which limit the voting rights of shares acquired in "control share acquisitions" and restrict certain "business combinations." Such provisions, as well as the ability to issue undesignated preferred shares, could have the effect of deterring or delaying a takeover or other change in control of the Company and could deny shareholders the receipt of a premium on their Common Stock and could have a depressive effect on the market price of the Company's Common Stock. The Board of Directors is divided into three classes of directors elected for staggered three year terms. Such staggered terms may affect the ability of the holders of the Common Stock to effect a change in control of the Company. See "Description of Capital Stock." ABSENCE OF DIVIDENDS The Company has not paid any dividends on its capital stock since its inception and does not intend to pay any dividends in the foreseeable future. Moreover, the Company's Convertible Subordinated Debentures (the "Convertible Debentures") prohibit payment of cash dividends on the Company's capital stock. See "Description of Capital Stock -- Convertible Subordinated Debentures." DILUTION Investors in this Offering will incur immediate and substantial dilution in the net tangible book value of the shares of approximately $3.74 per share from the initial public offering price. Additional dilution could result from the exercise of certain options and warrants. See "Dilution." POSSIBLE DELISTING FROM NASDAQ SMALLCAP MARKET AND MARKET ILLIQUIDITY While the Company's Common Stock is expected to meet the current Nasdaq SmallCap Market initial listing requirements, there can be no assurance that such securities will meet the continued listing requirements. Under current criteria for continued inclusion on the Nasdaq SmallCap Market, (i) the Company will have to maintain at least $4,000,000 in total assets and $2,000,000 in total shareholders' equity, (ii) the minimum bid price of the Common Stock will have to be $3.00 per share, (iii) there must be at least 1,000,000 shares in the public float valued at $1,000,000 or more, (iv) the Common Stock must have at least two active market makers, and (v) the Common Stock must be held by at least 300 holders. In the event that the Company fails to meet the requirements for continued listing on the Nasdaq SmallCap Market, the market for the Common Stock would be adversely affected. APPLICABILITY OF THE "PENNY STOCK RULES" If, during the time in which the Common Stock is quoted on the Nasdaq SmallCap Market, the Common Stock is priced below $5.00 per share, and is delisted from the Nasdaq SmallCap Market, trading of the Common Stock will be subject to certain federal regulations governing "penny stocks" (the "Penny Stock Rules"). The Penny Stock Rules require brokers to confirm certain information regarding purchasers of Common Stock and to meet certain other requirements when executing trades. If the Common Stock becomes subject to the Penny Stock Rules, it may be more difficult for shareholders to sell their shares. DILUTION The net tangible book value of the Company's Common Stock as of June 30, 1996 was approximately ($3,605,000) or $(1.10) per share. "Net tangible book value" represents the tangible assets less total liabilities of the Company and "net tangible book value per share" was determined by dividing the net tangible book value of the Company by the number of shares of Common Stock and Preferred Stock (assuming a one-to-one conversion of outstanding shares of Preferred Stock to shares of Common Stock) outstanding on June 30, 1996. Net tangible book value dilution represents the difference between the per share offering price and the adjusted net tangible book value per share, adjusted to give effect to the sale of the Common Stock. Without giving effect to any other exercise or conversion events relating to the Common Stock, as a result of the sale by the Company of 2,750,000 shares of Common Stock at an assumed initial public offering price of $4.50 per share (resulting in net proceeds of approximately $10,735,000 after deducting estimated expenses of this Offering and underwriting discounts payable by the Company), the pro forma net tangible book value of the Company as of June 30, 1996 would have been approximately $6,265,000 or $0.76 per share. This represents an immediate increase in the net tangible book value per share to the existing shareholders of $1.86 and there will be an immediate net tangible book value dilution of $3.74 to new investors, as illustrated by the following table: <TABLE> <CAPTION> Assumed initial public offering price per share $4.50 <S> <C> <C> Net tangible book value per share at June 30, 1996 $(1.10) Consummation of Pending Acquisitions (0.59) Increase value per share attributable to the Offering 2.45 Pro forma net tangible book value per share after this Offering $0.76 Dilution to purchasers of shares offered hereby $3.74 </TABLE> The following table summarizes, as of June 30, 1996, the total number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share paid by existing shareholders and by the new investors who purchase shares of Common Stock pursuant to the Offering at an assumed initial public offering price of $4.50 per share. <TABLE> <CAPTION> SHARES PURCHASED TOTAL CONSIDERATION AVERAGE PRICE NUMBER(1) PERCENT AMOUNT PERCENT PER SHARE <S> <C> <C> <C> <C> <C> Existing Shareholders(2) 3,514,716 56.1% $ 9,849,248 44.3% $2.80 New Investors 2,750,000 43.9% $12,375,000 55.7% $4.50 Total 6,264,716 100.0% $22,224,248 100.0% </TABLE> (1) Excludes: (i) 2,000,000 shares of Common Stock reserved for issuance under the Company's Stock Option Plan, of which options to purchase 495,000 shares of Common Stock were outstanding as of August 30, 1996; (ii) 592,593 shares of Common Stock issuable upon conversion of the Convertible Debentures (assuming a conversion price of $3.38 per share); (iii) 554,491 shares of Common Stock issuable upon exercise of outstanding warrants and (iv) up to 275,000 shares of Common Stock issuable upon exercise of the Representative's warrant. Includes the issuance of 250,000 shares of Common Stock issuable in connection with the consummation of the Pending Acquisitions. See "Management -- Stock Option Plan," "Description of Capital Stock," and "Underwriting." (2) Consists of shares of Common Stock and Preferred Stock convertible into shares of Common Stock on a one-for-one basis, including shares of Common Stock to be issued in connection with the consummation of the Pending Acquisitions using a portion of the proceeds from this Offering. See "Description of Capital Stock -- Preferred Stock" and "Business -- Pending Acquisitions." USE OF PROCEEDS The net proceeds to the Company from the sale of Common Stock offered hereby are estimated to be $10,735,000 ($12,375,000 if the Underwriter's over-allotment option is exercised in full) after deducting the underwriting discount and estimated offering expenses payable by the Company. The Company currently intends to apply these proceeds approximately as follows: <TABLE> <CAPTION> <S> <C> Complete pending acquisitions $ 2,890,000 Repayment of outstanding debt 3,817,000 Additional acquisitions, working capital and general corporate purposes 4,028,000 Total $10,735,000 </TABLE> Approximately $2.9 million of the net proceeds of the Offering are intended to be used to complete the Pending Acquisitions, including the retirement of $605,000 of indebtedness owed to a shareholder of one of the Pending Acquisitions. The Company intends to use approximately $3.8 million of the proceeds of the Offering to repay outstanding debt. Approximately $2.3 million of the proceeds of the Offering will be used to repay promissory notes, due and payable between July 15, 1996 and December 13, 1997, under loan commitments entered into with individual investors. Amounts outstanding under such promissory notes are general, unsecured obligations of the Company and bear interest at the rate of 10% per annum. The proceeds of such notes were used to acquire the assets and business of Blue Light Pallet Company and form PRANA Las Vegas, Inc. and for working capital and general corporate purposes. The Company also intends to use approximately $1.5 million of the proceeds of the Offering to repay secured notes (the "Secured Notes") under loan commitments entered into with individual investors. Amounts outstanding under the Secured Notes are secured obligations of the Company, bear interest at a rate of 11.25% per annum and are due and payable on the earlier of (i) April 23, 1997 or (ii) the closing of the Company's initial public offering or a private sale for cash by the Company of at least $1,500,000 of the Company's equity or debt ("Qualified Financing"). The proceeds of the Secured Notes were used to complete the acquisition of the assets and business of Metroplex Wood Products, Ltd. and for working capital and general corporate purposes. See "Description of the Term Loan and Other Outstanding Indebtedness." The Company intends to use the remaining $4.0 million for additional acquisitions, working capital and general corporate purposes. Proceeds of this Offering that are not immediately required for the purpose described above will be invested in short-term certificates of deposit, money market funds or other short-term interest-bearing investments. The Company anticipates that the net proceeds of this Offering will be sufficient to satisfy the Company's cash requirements through 1996. DIVIDEND POLICY The Company has not declared or paid any dividends on its Common Stock since its inception. The Company currently intends to retain all earnings for the business and does not anticipate paying any cash dividends in the foreseeable future. Moreover, the Company's Convertible Debentures prohibit payment of cash dividends on the Company's capital stock. See "Description of Capital Stock -- Convertible Subordinated Debentures." CAPITALIZATION The following table sets forth the capitalization of the Company as of June 30, 1996: (i) on an actual basis; (ii) on a pro forma basis to reflect the acquisition of the Subsidiaries and the consummation of the Pending Acquisitions and (iii) on a pro forma basis as adjusted to give effect to (x) the acquisition of the Subsidiaries and the consummation of the Pending Acquisitions and (y) the sale by the Company of the 2,750,000 shares of Common Stock offered hereby at an assumed initial offering price of $4.50 per share, less underwriting discounts, commissions and estimated offering expenses, and the application of the net proceeds therefrom. This table should be read in conjunction with the historical financial statements and the pro forma combined financial statements of the Company, and the related notes to each thereof appearing elsewhere in this Prospectus. <TABLE> <CAPTION> JUNE 30, 1996(1) PRO FORMA ACTUAL PRO FORMA AS ADJUSTED (IN THOUSANDS) <S> <C> <C> <C> Current maturities of debt $ 8,359 $ 8,449 $ 5,282 Long-term debt and capital leases (less current maturities) 4,841 6,244 5,594 Stockholders' equity: Preferred Stock, par value $.01 per share, 5,000,000 shares authorized, 2,183,424 shares issued, 0 shares issued as adjusted (2) 22 22 0 Common Stock, par value $.01 per share, 20,000,000 shares authorized, 1,081,292 shares issued, 6,264,716 shares issued as adjusted (2) 11 14 63 Additional paid in capital 8,632 9,754 20,462 Accumulated deficit (3,436) (3,436) (3,436) Total stockholders' equity 5,229 6,354 17,089 Total capitalization $10,070 $12,598 $22,683 </TABLE> (1) Excludes: (i) 2,000,000 shares of Common Stock reserved for issuance under the Company's Stock Option Plan of which options to purchase 495,000 shares of Common Stock were outstanding as of August 30, 1996; (ii) 592,593 shares of Common Stock issuable upon conversion of the Convertible Debentures (assuming a conversion price of $3.38 per share); (iii) 554,491 shares of Common Stock issuable upon exercise of outstanding warrants and (iv) up to 275,000 shares of Common Stock issuable upon exercise of the Representative's warrant. Includes the issuance of 250,000 shares of Common Stock issuable in connection with the consummation of the Pending Acquisitions. See "Management -- Stock Option Plan," "Description of Capital Stock," and "Underwriting." (2) The shares have been adjusted to give effect to: (i) a 1-for-8 reverse stock split with respect to the Common Stock and a 1-for-2 reverse stock split with respect to the Preferred Stock, each approved by the Company's shareholders on April 4, 1996 and (ii) the conversion of all outstanding shares of Preferred Stock into Common Stock on a 1-for-1 basis as of the closing of this Offering. SELECTED FINANCIAL DATA The following Selected Financial Data as of and for the years ended December 31, 1993(1), 1994 and 1995 have been derived from the Company's financial statements which were audited by KPMG Peat Marwick LLP, independent public accountants. The Selected Financial Data for the six months ended June 30, 1995 and 1996 (except pro forma amounts) have been derived from unaudited consolidated financial statements that appear elsewhere in the Prospectus. These unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, contain all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the financial position and results of operations for the periods presented. The pro forma Statements of Operations Data and pro forma Balance Sheet Data are provided for informational purposes only and do not purport to represent what the Company's results of operations and financial condition would have been had the acquisitions of the Subsidiaries and the Pending Acquisitions occurred as of the dates indicated or to project the Company's results of operations or financial condition for any future period. The Selected Financial Data and the operating data set forth below should be read in conjunction with the financial statements and notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Pro Forma Financial Information" included elsewhere in this Prospectus. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, PRO FORMA PRO FORMA 1993(1) 1994 1995 1995(2) 1995 1996 1996(2) (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales $ -- $9,844 $30,004 $44,800 $12,263 $18,424 $22,231 Cost of sales -- 7,036 23,940 4,883 9,680 14,151 16,723 Gross profit -- 2,808 6,064 9,917 2,583 4,273 5,508 Selling, general and administrative expenses: Operating subsidiaries -- 1,481 3,776 5,570 1,597 2,858 3,320 Corporate 196 1,337 2,725 2,725 1,197 1,595 1,595 Amortization expense 1 35 344 781 102 320 460 Goodwill writeoff -- -- 539 539 -- -- -- Total selling, general and administrative expenses 197 2,853 7,384 9,615 2,896 4,773 5,375 Operating profit (loss) (197) (45) (1,320) 302 (313) (500) 133 Interest expense -- (67) (687) (741) (180) (732) (532) Other income, net 12 35 119 128 54 (9) (7) Loss before income taxes (185) (77) (1,888) (311) (439) (1,241) (406) Income tax benefit (expense) -- (49) 75 (369) 20 (70) 16 Net loss $(185) $ (126) $(1,813) $ (680) $ (419) $(1,311) $(390) Pro forma net loss per share $(0.19) $(0.11) Weighted average shares outstanding(3) 3,650,301 3,650,301 OPERATING DATA: Number of locations at period end -- 11 21 26 11 23 26 </TABLE> <TABLE> <CAPTION> DECEMBER 31, JUNE 30, 1996 PRO FORMA 1993 1994 1995 ACTUAL PRO FORMA(4) AS ADJUSTED(5) <S> <C> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Working capital (deficit) $751 $ 94 $(3,407) $(4,775) $(6,944) $ 3,141 Total assets 901 7,878 17,448 22,352 25,286 32,204 Total debt and capital leases (including current maturities) -- 3,285 10,422 13,200 14,693 10,876 Stockholders' equity 798 2,624 3,452 5,229 6,354 17,089 </TABLE> (1) Period from March 2, 1993 (date of inception) to December 31, 1993. (2) Gives effect to (i) the acquisition of all Subsidiaries and the completion of the Pending Acquisitions, as if such transactions had been made on January 1, 1995, (ii) the sale of the Shares offered hereby and (iii) all other pro forma adjustments set forth in "Pro Forma Financial Data." (3) Pro forma weighted average shares outstanding includes: (i) 1,081,292 shares of Common Stock outstanding as of December 31, 1995 and June 30, 1996; (ii) 2,183,424 shares of Preferred Stock outstanding as of December 31, 1995 and June 30, 1996, which shares will be converted to shares of Common Stock on a 1-for-1 basis upon completion of the Offering; (iii) 250,000 shares of Common Stock to be issued as consideration for the Pending Acquisitions and (iv) 135,585 shares of Common Stock equivalents related to stock options and warrants. (4) Gives effect to (i) the completion of the acquisition of all Subsidiaries and the completion of the Pending Acquisitions, as if such transactions had been completed as of June 30, 1996 and (iii) all other adjustments set forth in "Pro Forma Financial Data." (5) Gives effect to: (i) completion of the acquisition of all Subsidiaries and the completion of the Pending Acquisitions, as if such transactions had been completed as of June 30, 1996; (ii) all other pro forma adjustments set forth in "Pro Forma Financial Data" and (iii) the sale of the shares offered hereby. PRO FORMA FINANCIAL DATA PRO FORMA FINANCIAL STATEMENTS (UNAUDITED) The unaudited pro forma financial statements give effect to: (i) the consummation of the Pending Acquisitions, the 1996 acquisitions and the sale of the Secured Notes in April 1996 and (ii) the completion of this Offering and the application of the estimated net proceeds therefrom (collectively, the "Pro Forma Transactions"). The unaudited pro forma statements of operations for the year ended December 31, 1995 and the six month period ended June 30, 1996 give effect to the Pro Forma Transactions as if each had occurred as of the beginning of the respective periods. The unaudited pro forma balance sheet as of June 30, 1996 gives effect to the Pro Forma Transactions as if each had occurred as of that date. See "Use of Proceeds." In the opinion of the Company's management, all adjustments necessary to present fairly such pro forma financial statements have been made based on the proposed terms and structure of the Pro Forma Transactions. The Company anticipates, however, that changes in the composition of the assets to be acquired and the liabilities to be assumed in connection with the Pending Acquisitions will occur due to changes in the ordinary course of business of the companies to be acquired in connection with the Pending Acquisitions; however, the terms of the agreements relating to the Pending Acquisitions provide that operations of these companies are to continue in the ordinary course of business until the date of acquisition. Therefore, the Company believes any related change in adjustments will not be material to the pro forma financial statements. The unaudited pro forma financial information is provided for informational purposes only and does not purport to represent what the Company's results of operations or financial position would have been had the Pro Forma Transactions occurred on any of the dates set forth above or to project the Company's results of operations for any future period. The unaudited pro forma financial information should be read in connection with the accompanying notes and the historical financial statements and notes thereto of the Company and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus. PRO FORMA STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) (IN THOUSANDS) <TABLE> <CAPTION> PRANA AND SUBSIDIARIES PRO FORMA 1996 PRANA AND ACQUISITIONS(1) 1996 METROPLEX ACQUISITIONS DIAMOND WOOD PRO FORMA PRANA PALLET PRODUCTS ADJUSTMENTS SUBTOTAL <S> <C> <C> <C> <C> <C> Net sales $18,424 $99 $470 $ -- $18,993 Cost of sales 14,151 73 317 -- 14,541 Gross profit 4,273 26 153 -- 4,452 Selling, general and administrative expenses: Operating subsidiaries 2,858 8 25 (12)(2) 2,879 Corporate 1,595 -- -- -- 1,595 Amortization expense 320 -- -- 53(4) 373 Total selling, general and administrative expenses 4,773 8 25 41 4,847 Operating profit (loss) (500) 18 128 (41) (395) Other income (expense) Interest expense (732) -- (1) (15)(5) (748) Other (9) -- -- -- (9) Total other income (expense) (741) -- (1) (15) (757) Net income (loss) before income taxes (1,241) 18 127 (56) (1,152) Income tax benefit (expense) (70) 419(6) 349 Net income (loss) $(1,311) $ (803) </TABLE> WIDE TABLE CONTINUED FROM ABOVE <TABLE> <CAPTION> PENDING ACQUISITIONS PENDING ACQUISITIONS SUBTOTAL PRO FORMA INDY PALLET PRO FORMA PENDING OFFERING PRO FORMA PALLET OUTLET ADJUSTMENTS ACQUISITIONS ADJUSTMENTS AS ADJUSTED <S> <C> <C> <C> <C> <C> <C> Net sales $1,096 $2,142 $ -- $3,238 $ -- $22,231 Cost of sales 775 1,407 -- 2,182 -- 16,723 Gross profit 321 735 -- 1,056 -- 5,508 Selling, general and administrative expenses: Operating subsidiaries 192 265 (16)(2) 441 -- 3,320(3) Corporate -- -- -- -- -- 1,595 Amortization expense -- -- 87 (4) 87 -- 460 Total selling, general and administrative expenses 192 265 71 528 -- 5,375 Operating profit (loss) 129 470 (71) 528 -- 133 Other income (expense) Interest expense (36) (18) (48)(5) (102) 318 (5) (532) Other -- 2 -- 2 -- (7) Total other income (expense) (36) (16) (48) (100) 318 (539) Net income (loss) before income taxes 93 454 (119) 428 318 (406) Income tax benefit (expense) (206)(6) (206) (127)(6) 16 Net income (loss) $ 222 $ 191 $ (390) </TABLE> (1) Represents the results of operations for the 1996 acquisitions for the period from January 1, 1996 to the date of acquisition. (2) Reflects the net reduction in compensation expense as a result of the negotiation of compensation agreements with certain employees of the 1996 acquisitions and the Pending Acquisitions. (3) Includes depreciation expense of $411,000. (4) Reflects (i) amortization expense of $87,000 on $3.5 million of goodwill capitalized in connection with the completion of the Pending Acquisitions assuming an initial public offering price of $4.50 per share; (ii) additional amortization expense of $14,000 to reflect amortization of goodwill for the period prior to acquisition for the 1996 acquisitions and (iii) amortization expense of $39,000 on $3,088,000 of goodwill for the period from January 1, 1996 to April 4, 1996 capitalized in connection with the Company's reverse stock splits of its Common Stock and Preferred Stock completed April 4, 1996. (5) Reflects (i) additional interest expense of $15,000 on $690,000 in notes payable, at 8% interest rates, related to the 1996 acquisitions for the period prior to the date of acquisition; (ii) additional interest expense of $48,000 related to notes payable of $1.2 million, with interest at 8%, related to the Pending Acquisitions; (iii) the reduction of interest expense of $116,000 resulting from the reduction of debt of $2.3 million, at an interest rate of 10%, from the net proceeds of the Offering; (iv) the reduction of interest expense of $32,000 resulting from the repayment of $1.5 million of Secured Notes, at an interest rate of prime plus 3% from the net proceeds of the Offering; (v) the reduction of interest expense of $134,000 resulting from the reduction of an interest rate of 21% to 10% on $2.6 million of existing debt outstanding and (vi) the reduction of interest expense of $36,000, at an interest rate of 12%, resulting from the repayment of $605,000 of debt of one of the Pending Acquisitions from the proceeds of the Offering. (6) Reflects adjustment to calculate the provision for income taxes on the pro forma combined results at an effective statutory rate of 40% of net income before nondeductible goodwill expense and acquisition costs. PRO FORMA STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 (UNAUDITED) (IN THOUSANDS) <TABLE> <CAPTION> PRANA AND SUBSIDIARIES PRO FORMA 1995 ACQUISITIONS(1) 1996 ACQUISITIONS AMERICAN CENTURY (PRANA B&B OKLAHOMA PALLET PALLET METROPLEX PRANA CITY) SUPPLY SUPPLY OTHER DIAMOND WOOD Net sales $30,004 $476 $767 $3,538 $675 PALLET PRODUCTS <S> <C> <C> <C> <C> <C> <C> <C> Cost of sales 23,940 345 415 3,042 612 $999 $2,136 Gross profit 6,064 131 352 496 63 753 1,595 Selling, general and 246 541 administrative expenses: Operating subsidiaries 3,776 89 172 534 76 165 66 Corporate 2,725 -- -- -- -- -- -- Amortization expense 344 -- -- -- -- -- -- Goodwill write-off 539 -- -- -- -- -- -- Total selling, general and administrative expenses 7,384 89 172 534 76 165 66 Operating profit (loss) (1,320) 42 180 (38) (13) 81 475 Other income (expense) Interest expense (687) (1) (5) (40) (5) (6) (2) Other 119 (2) -- 4 -- -- 1 Total other income (expense) (568) (3) (5) (36) (5) (6) (1) Net income (loss) before income taxes (1,888) 39 175 (74) (18) 75 474 Income tax benefit (expense) 75 Net income (loss) $(1,813) </TABLE> WIDE TABLE CONTINUED FROM ABOVE <TABLE> <CAPTION> PENDING ACQUISITIONS PRANA AND 1995 AND 1996 PENDING PRO PRO ACQUISITIONS ACQUISITIONS SUBTOTAL FORMA FORMA PRO FORMA INDY PALLET PRO FORMA PENDING OFFERING AS ADJUSTMENTS SUBTOTAL PALLET OUTLET ADJUSTMENTS ACQUISITIONS ADJUSTMENTS ADJUSTED <S> <C> <C> <C> <C> <C> <C> <C> <C> Net sales $ -- $38,595 $2,732 $3,473 $ -- $6,205 $ -- $44,800 Cost of sales -- 30,702 1,858 2,323 -- 4,181 -- 34,883 Gross profit -- 7,893 874 1,150 -- 2,024 -- 9,917 Selling, general and administrative expenses: Operating subsidiaries (209)(2) 4,669 409 557 (65)(2) 901 -- 5,570(3) Corporate -- 2,725 -- -- -- -- -- 2,725 Amortization expense 263 (4) 607 -- -- 174 (4) 174 -- 781 Goodwill write-off -- 539 -- -- -- -- -- 539 Total selling, general and administrative expenses 54 8,540 409 557 109 1,075 -- 9,615 Operating profit (loss) (54) (647) 465 593 (109) 949 -- 302 Other income (expense) Interest expense (72)(5) (818) (70) (20) (96)(5) (186) 263 (5) (741) Other -- 122 2 4 -- 6 -- 128 Total other income (expense) (72) (696) (68) (16) (96) (180) 263 (613) Net income (loss) before income taxes (126) (1,343) 397 577 (205) 769 263 (311) Income tax benefit (expense) 39 (6) 114 (377)(6) (377) (106)(6) (369) Net income (loss) (1,229) $ 392 $ 157 $ (680) </TABLE> (1) Represents the results of operations for the 1995 acquisitions for the period from January 1, 1995 to the date of acquisition. (2) Reflects the net reduction in compensation for the period prior to acquisition as a result of the elimination of certain positions and the negotiation of compensation arrangements relating to the Pending Acquisitions and the Subsidiaries. (3) Includes depreciation expense of $774,000. (4) Reflects (i) amortization expense of $174,000 on $3.5 million of goodwill capitalized in connection with the completion of the Pending Acquisitions assuming an initial public offering price of $4.50 per share; (ii) additional amortization expense of $52,000 to reflect amortization of goodwill for the period prior to acquisition for the 1995 acquisitions; (iii) amortization expense of $57,000 on $1.1 million of goodwill capitalized in connection with the acquisitions completed subsequent to December 31, 1995 and (iv) amortization expense of $154,000 on $3,088,000 of goodwill capitalized in connection with the Company's reverse stock splits of its Common Stock and Preferred Stock completed subsequent to December 31, 1995. (5) Reflects (i) interest expense of $17,000 for the four months prior to acquisition on a $500,000 note payable, at an interest rate of 10%, entered into by a Subsidiary immediately prior to its acquisition by the Company; (ii) interest expense of $55,000 on a $690,000 in notes payable at an interest rate of 8% entered into in connection with the acquisitions of Subsidiaries during 1996; (iii) interest expenses of $96,000 on a $1.2 million note payable, at an interest rate of 8%, relating to a Pending Acquisition; (iv) the reduction of interest expense of $56,000 resulting from the repayment of $560,000 in debt at an interest rate of 10% and outstanding for substantially all of 1995, from the net proceeds of the Offering; (v) the reduction of interest expense of $58,000 resulting from the reduction of debt of 1.8 million, at an interest rate of 10% and outstanding for approximately four months in 1995, from the net proceeds of the Offering; (vi) the reduction of interest expense of $79,000 resulting from the reduction of an interest rate of 21% to 10% on $2.1 million of existing debt outstanding for an average of four months in 1995 and (vii) reduction of interest expense of $70,000, at an interest rate of 12%, resulting from the repayment of $605,000 in debt of one of the Pending Acquisitions from the net proceeds of the Offering. (6) Reflects adjustment to calculate the provision for income taxes on the pro forma combined results at an effective statutory rate of 40% of net income before nondeductible goodwill expense and acquisition costs. PRO FORMA BALANCE SHEET JUNE 30, 1996 (UNAUDITED) (IN THOUSANDS) <TABLE> <CAPTION> PRO FORMA PENDING PRO FORMA OFFERING PRO FORMA PRANA ACQUISITIONS ADJUSTMENTS PRO FORMA ADJUSTMENTS(1) AS ADJUSTED <S> <C> <C> <C> <C> <C> <C> ASSETS: Current assets: Cash $ 152 $ 255 $(2,890)(2) $(2,483) $ 6,918 $ 4,435 Accounts receivable 3,828 634 -- 4,462 -- 4,462 Inventories 2,714 146 -- 2,860 -- 2,860 Prepaid expenses and deposits 167 34 -- 201 -- 201 Total current assets 6,861 1,069 (2,890) 5,040 6,918 11,958 Net property, plant & equipment 5,692 1,179 -- 6,871 -- 6,871 Other Assets: Goodwill, net 8,198 -- 3,473 (3) 11,671 -- 11,671 Other 1,601 103 -- 1,704 -- 1,704 Total other assets 9,799 103 3,473 13,375 -- 13,375 ASSETS $22,352 $2,351 $ 583 $25,286 $ 6,918 $32,204 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable 2,175 65 -- 2,240 -- 2,240 Current maturities of LTD and notes payable 8,359 695 (605)(4) 8,449 (3,167) 5,282 Accrued liabilities 867 147 -- 1,014 -- 1,014 Deferred income taxes 235 -- 46 (6) 281 -- 281 Total current liabilities 11,636 907 (559) 11,984 (3,167) 8,817 Long-term liabilities: Long-term debt (less current portion) 4,841 203 1,200 (5) 6,244 (650) 5,594 Deferred income taxes 646 -- 58 (6) 704 -- 704 Total long-term liabilities 5,487 203 1,258 6,948 (650) 6,298 Stockholders' equity: Preferred stock 22 -- -- 22 (22) -- Common stock 11 18 (15)(7) 14 49 63 Additional paid-in capital 8,632 -- 1,122 (7) 9,754 10,708 20,462 Retained earnings (3,436) 1,223 (1,223)(7) (3,436) -- (3,436) Stockholders' equity 5,229 1,241 (116) 6,354 10,735 17,089 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $22,352 $2,351 $ 583 $25,286 $ 6,918 $32,204 </TABLE> (1) Reflects (i) proceeds of $10,735,000 from the sale of 2,750,000 shares of Common Stock, net of the underwriting discounts and offering expenses, (ii) payment of $3,817,000 of current and long-term debt of the Company with the proceeds of the Offering and (iii) the conversion of 2,183,424 shares of Preferred Stock to Common Stock in connection with the Offering. (2) Reflects the payment of $2,890,000 to consummate the Pending Acquisitions including estimated acquisition costs and the repayment of $605,000 in debt. (3) Reflects goodwill of $3,473,000 for the Pending Acquisitions assuming an initial public offering price of $4.50 per share. (4) Reflects the repayment of $605,000 of debt of one of the Pending Acquisitions with the proceeds of the Offering. (5) Reflects the addition of a $1,200,000 note payable entered into in connection with a Pending Acquisition. (6) Reflects the establishment of deferred tax liabilities related to the Pending Acquisitions. (7) Reflects (i) the elimination of the equity accounts of the Pending Acquisitions and (ii) the issuance of 250,000 shares of Common Stock with a market value of approximately $1,125,000 to consummate the Pending Acquisitions. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS MEMORANDUM. GENERAL The Company was founded in 1993 to create a national network of pallet recycling companies to service the pallet needs of manufacturing, distribution, transportation and retail companies that use pallets to move goods throughout North America. The pallet recycling industry is highly fragmented. Recognizing an opportunity to consolidate a fragmented industry, the Company began acquiring pallet recycling companies in 1994. Due to limited financial resources early in its history, the Company's initial acquisition strategy included acquiring pallet recycling companies primarily in stock-for-stock exchanges. The Company employed this strategy throughout 1994 and into early 1995. Due in part to the Company's acquisitions in 1994 and early 1995, the Company was able to: (i) create critical mass, (ii) establish itself as a leader in the consolidation of the pallet recycling industry (iii) attract an increasing number of acquisition candidates, (iv) begin to implement a national account strategy and (v) access greater financial resources. As a result, the Company modified its acquisition strategy by acquiring pallet recycling companies for a combination of cash, seller notes and stock. The Company employed this strategy to acquire pallet recycling companies for the remainder of 1995 and continues to employ this strategy in 1996. The Company believes its ability to add a tradeable security to the consideration it offers acquisition candidates will enhance its ability to make further acquisitions. All of the Company's acquisitions have been accounted for under the purchase method of accounting. Therefore, the financial results of each acquired subsidiary are included in the Company's consolidated financial results from the date of acquisition. As a result, the historical consolidated financial results of the Company are not necessarily directly comparable. The Company's net sales are derived from: (i) the sale of recycled and to a lesser degree new wooden pallets; (ii) the repair of wooden pallets for a fee; (iii) the brokering of wooden pallets and (iv) the sale of various by-products from wooden pallets. The sale of recycled pallets and the repair of pallets for a fee account for approximately 80% of total net sales. Net sales are recognized upon delivery to the customer. Selling, general and administrative expenses are comprised of subsidiary and corporate operating expenses. Operating expenses include goodwill amortization attributable to the acquisition of the Subsidiaries under the purchase method of accounting. Goodwill is generally recognized at the corporate level and is amortized using the straight-line method over a term of twenty years. RESULTS OF OPERATIONS The following table sets forth various items as a percentage of net sales for the fiscal years ended December 31, 1993, 1994 and 1995 and the six month periods ended June 30, 1995 and 1996, as well as for the fiscal year ended December 31, 1995 and the six month period ended June 30, 1996 on a pro forma basis. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, PRO FORMA PRO FORMA 1993(1) 1994 1995 1995 1995 1996 1996 <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales N/A 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales N/A 71.5 79.8 77.9 78.9 76.8 75.2 Gross profit N/A 28.5 20.2 22.1 21.1 23.2 24.8 Selling, general and administrative expenses: Operating subsidiaries N/A 15.0 12.6 12.4 13.0 15.5 14.9 Corporate N/A 13.6 9.1 6.1 9.8 8.7 7.2 Amortization expense N/A 0.4 1.1 1.7 0.8 1.7 2.1 Goodwill writeoff N/A -- 1.8 1.2 -- -- -- Total selling, general and administrative expenses N/A 29.0 24.6 21.4 23.6 25.9 24.2 Operating profit (loss) N/A (0.5) (4.4) 0.7 (2.5) (2.7) 0.6 Interest expense N/A (0.7) (2.3) (1.7) (1.5) (4.0) (2.4) Other income, net N/A 0.4 0.4 0.3 0.4 0.0 0.0 Loss before income taxes N/A (0.8) (6.3) (0.7) (3.6) (6.7) (1.8) Income tax benefit (expense) N/A (0.5) 0.3 (0.8) 0.2 (0.4) 0.1 Net loss N/A (1.3) (6.0) (1.5) (3.4) (7.1) (1.7) </TABLE> (1) Period from March 2, 1993 (date of inception) to December 31, 1993. Data as a percent of net sales is not applicable ("N/A") as the Company had no net sales for the period. PRO FORMA RESULTS OF OPERATIONS The pro forma financial results reflect the combined results of operations as if each Subsidiary was owned at the beginning of the periods presented. The Company believes this presentation provides a more meaningful representation of the financial results and liquidity of the Company for the periods presented compared to the historical results of operations and incorporates the effects of all acquisitions for the entire periods presented, including the impact of the Pending Acquisitions and this Offering. FOR THE SIX MONTHS ENDED JUNE 30, 1996 NET SALES. Pro forma net sales were $22.2 million for the six months ended June 30, 1996. Pro forma net sales for the Subsidiaries for the period were $19.0 million. Pro forma net sales for the Pending Acquisitions were $3.2 million for the period, or 14.6% of pro forma net sales. GROSS PROFIT. Pro forma gross profit for the six months ended June 30, 1996 was $5.5 million or 24.8% of pro forma net sales as compared to 23.2% for the actual six months ended June 30, 1996. This change is attributable to the inclusion of the Pending Acquisitions and the full inclusion of two Subsidiaries acquired in early 1996 which yield higher gross profit margins than the Subsidiaries owned for the entire period. Pro forma gross profit for the Subsidiaries for the six months ended June 30, 1996 was $4.5 million or 23.4% of pro forma net sales. Pro forma gross profit for the Pending Acquisitions for the same period was $1.1 million or 32.6% of pro forma net sales. The Company believes these results in part demonstrate the achievement of a critical mass necessary to attract and acquire higher performing companies. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Pro forma selling, general and administrative expenses were $5.4 million or 24.2% of pro forma net sales for the six months ended June 30, 1996. As a percent of pro forma net sales, this represents a decrease from 25.9% for the actual six months ended June 30, 1996. Selling, general and administrative expenses are comprised of operating expenses at both the subsidiary and corporate levels and amortization expense. Pro forma selling, general and administrative expenses at the operating subsidiary level for the Subsidiaries and the Pending Acquisitions for the six months ended June 30, 1996 were $3.3 million or 14.9% of pro forma net sales. This amount reflects a reduction in compensation at the subsidiary level of $28,000 for the six months ended June 30, 1996 as a result of the elimination of certain positions and the negotiation of compensation arrangements in connection with the 1995 and 1996 acquisitions and the Pending Acquisitions. As a percent of pro forma net sales, these expenses were similar to the results for the actual six months ended June 30, 1996. Pro forma selling, general and administrative expenses at the operating subsidiary level for the Subsidiaries were $2.9 million or 15.2% of pro forma net sales for the six months ended June 30, 1996. Pro forma selling, general and administrative expenses for the Pending Acquisitions were $441,000 or 13.6% of pro forma net sales. As a percent of pro forma net sales, these expenses are higher for the Subsidiaries than such expenses for the Pending Acquisitions due to higher operating expenses at Pallet Supply, Inc. and Pallet City, Inc. due to the regional infrastructure at these Subsidiaries necessary to manage their numerous locations. Pro forma selling, general and administrative expenses at the corporate level were $1.6 million or 7.2% of pro forma net sales. The percentage decrease from 8.7% for the actual six months ended June 30, 1996 is attributable to allocating corporate expense over a higher base of net sales. Amortization expense was $460,000 or 2.1% of pro forma net sales which includes $291,000 of goodwill amortization reflecting adjustments to include the amortization of goodwill for the 1996 acquisitions and the Pending Acquisitions for the entire period and amortization of goodwill resulting from consideration incurred as a result of the reverse stock splits (see Note 16 of the Company's financial statements). INTEREST EXPENSE AND OTHER INCOME, NET. Pro forma interest expense and other income, net was $539,000 or 2.4% of pro forma net sales for the six months ended June 30, 1996. This represents a combination of the interest expense of the Company and the Pending Acquisitions plus interest expense on notes issued for acquisitions in 1996 and the Pending Acquisitions as if the notes were issued for the entire period. This interest expense is offset by the elimination of interest on debt which will be repaid or refinanced upon consummation of the Offering. INCOME TAX EXPENSE. Pro forma income tax expense has been estimated as a benefit of $16,000 for the six months ended June 30, 1996. This amount reflects an effective tax rate of 40% of pre-tax loss before amortization of nondeductible goodwill and other nondeductible amortization costs. Several of the businesses acquired by the Company were non-taxable entities (primarily S-corporations). Upon acquisition, these entities were converted to a taxable C-corporation status. Deferred taxes were recorded accordingly upon acquisition by the Company. Furthermore, one of the Pending Acquisitions is a S-corporation. Pro forma income tax expense related to these businesses for the six months ended June 30, 1996 have also been estimated at 40% of pre-tax income before amortization of nondeductible goodwill and other nondeductible amortization costs as if these businesses were taxable entities for the full fiscal six month period. FOR THE YEAR ENDED DECEMBER 31, 1995 NET SALES. Pro forma net sales were $44.8 million for 1995. Pro forma net sales for the Subsidiaries for 1995 were $38.6 million. Pro forma net sales of the Pending Acquisitions were $6.2 million for the period, or approximately 13.9% of pro forma net sales. GROSS PROFIT. Pro forma gross profit for the Subsidiaries and the Pending Acquisitions for 1995 was $9.9 million or 22.1% of pro forma net sales. The increase in pro forma gross profit as a percent of net sales to 22.1% from 20.2% for the year ended 1995 is attributable to the inclusion of the Pending Acquisitions and two Subsidiaries acquired in early 1996 which have higher, gross profit percentages than the Subsidiaries owned in 1995. Pro forma gross profit for the Subsidiaries for 1995 was $7.9 million or 20.5% of pro forma net sales. Pro forma gross profit for the Pending Acquisitions for 1995 was $2.0 million or 32.6% of the Pending Acquisitions' pro forma net sales. The Company believes these results in part demonstrate the achievement of a critical mass necessary to attract and acquire higher performing companies. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Pro forma selling, general and administrative expenses were $9.6 million or 21.4% of pro forma net sales for 1995. As a percent of net sales, this represents a decrease from 24.6% of net sales for 1995. Selling, general and administrative expenses are comprised of operating expenses at both the subsidiary and corporate levels and amortization expense. Pro forma selling, general and administrative expenses at the operating subsidiary level for the Subsidiaries and the Pending Acquisitions for 1995 were $5.6 million or 12.4% of net sales. This amount reflects a reduction in compensation at the operating subsidiary level of $274,000 for 1995 as a result of the elimination of certain positions and the negotiation of compensation arrangements in connection with the 1995 and 1996 acquisitions and the Pending Acquisitions. Pro forma selling, general and administrative expenses for the Subsidiaries were $4.7 million or 12.1% of the pro forma net sales for 1995. Pro forma selling, general and administrative expenses for the Pending Acquisitions were $901,000 or 14.5% of pro forma net sales. As a percent of pro forma net sales, pro forma selling, general and administrative expenses for the Pending Acquisitions is higher than such expenses for the Subsidiaries due to the transfer of certain Subsidiary managers' compensation from the operating subsidiary level to the corporate level. Pro forma selling, general and administrative expenses at the corporate level were $2.7 million or 6.1% of pro forma net sales. The percentage decrease from 9.1% for 1995 is attributable to allocating corporate expense over a higher base of net sales. Amortization expense was $781,000 or 1.7% of pro forma net sales which includes $619,000 of goodwill amortization reflecting adjustments to reflect the amortization of goodwill for all 1995 acquisitions, the 1996 acquisitions and the Pending Acquisitions for the entire year and amortization of goodwill resulting from consideration incurred as a result of the reverse stock splits (see Note 16 of the Company's financial statements). The Company also took a one-time charge to 1995 earnings in the amount of $539,000 or 1.2% of pro forma net sales due to the write-off of goodwill pertaining to two Subsidiaries which are performing below the Company's expectations due to, in one case the loss of a low-cost supply of pallets in early 1995 and in the second case, the slow development of recycling operations of another Subsidiary primarily involved in pallet brokerage prior to acquisition. INTEREST EXPENSE AND OTHER INCOME, NET. Pro forma interest expense and other income, net was $613,000 or 1.4% of pro forma net sales for 1995. This represents a combination of the interest expense of the Company and the Pending Acquisitions plus interest expense on notes issued for acquisitions in 1995 and 1996 and for the Pending Acquisitions as if the notes were issued for all of 1995. This interest expense is offset by the elimination of interest expense on debt which will be repaid or refinanced upon consummation of the Offering. INCOME TAX EXPENSE. Pro forma income tax expense has been estimated at $369,000 for 1995. This amount reflects an effective tax rate of 40% of pre-tax income before amortization of nondeductible goodwill and other nondeductible acquisition costs. For future periods, the Company and the Pending Acquisitions will file as a consolidated group for federal income tax purposes. Several of the businesses acquired by the Company were non-taxable entities (primarily S-corporations). Upon acquisition, these entities were converted to a taxable C-corporation status. Deferred taxes were recorded accordingly upon acquisition by the Company. Furthermore, one of the Pending Acquisitions is a S-corporation. Pro forma income tax expense related to these businesses for the year ended December 31, 1995 have also been estimated at 40% of pre-tax income before amortization of nondeductible goodwill and other nondeductible amortization costs as if these businesses were taxable entities for the full fiscal year. HISTORICAL CONSOLIDATED RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 NET SALES. Net sales increased from $12.3 million for the six months ended June 30, 1995 to $18.4 million for the six months ended June 30, 1996. The increase of $6.1 million or 50.2% over the comparable period is primarily attributable to an increase of $5.5 million in net sales due to the full contribution from Subsidiaries acquired during the six months ended June 30, 1995 and a contribution from Subsidiaries acquired after June 30, 1995. Growth in sales for Subsidiaries operating throughout both six month periods ended June 30, 1995 and 1996 was approximately $600,000 or 6%. GROSS PROFIT. Gross profit increased from $2.6 million for the six months ended June 30, 1995 to $4.3 million for the six months ended June 30, 1996. Gross profit as a percent of sales increased from 21.1% of sales to 23.2% primarily as a result of higher gross margin contribution as a percent of sales from the Subsidiaries acquired after March 31, 1995. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased from $2.9 million for the six months ended June 30, 1995 to $4.8 million for the six months ended June 30, 1996. As a percent of net sales, selling, general and administrative expenses increased from 23.6% to 25.9% for the periods. Selling, general and administrative expenses are comprised of operating expenses at both the subsidiary and corporate levels and amortization expense which includes goodwill amortization. The percentage increase is attributable to an increase in Subsidiary expense and amortization expense as a percent of sales, offset slightly by a decrease in corporate expense as a percent of sales. Selling, general and administrative expenses for the Subsidiaries increased from $1.6 million for the six months ended June 30, 1995 to $2.9 million for the six months ended June 30, 1996. As a percent of net sales, these expenses increased from 13.0% to 15.5% for the respective periods. The increase is primarily attributable to the addition of Pallet Supply Company, Inc. which was acquired in June 1995 and has a higher percentage of selling, general and administrative costs to sales than other Subsidiaries and due to decreased sales at two Subsidiaries without a commensurate decrease in administrative expense. Corporate selling, general and administrative expenses increased from $1.2 million for the six months ended June 30, 1995 to $1.6 million for the six months ended June 30, 1996. The increase is attributable to higher expenses in the first six months of 1996 reflecting the Company's decision to enhance its corporate infrastructure and from approximately $100,000 in previously capitalized acquisition costs which were expensed in connection with the expiration of an acquisition agreement as of June 30, 1996. As a percent of net sales, corporate selling, general and administrative expenses decreased from 9.8% for the six months ended June 30, 1995 to 8.7% for the six months ended June 30, 1996 as net sales increased at a greater rate than corporate selling, general and administrative expense. INTEREST EXPENSE AND OTHER INCOME, NET. Interest expense and other income, net increased from $126,000 for the six months ended June 30, 1995 to $741,000 for the six months ended June 30, 1996. The increase is attributable to interest expense relating to additional debt incurred at both the corporate and subsidiary levels to fund both operations and the acquisition of pallet recycling companies. INCOME TAX EXPENSE. The Company recorded an income tax benefit of $20,000 for the six months ended June 30, 1995 compared to an income tax expense of $70,000 for six months ended June 30, 1996. The expense for 1996 is primarily attributable to estimated state income taxes. Consistent with the accounting treatment for the years ended December 31, 1994 and 1995 (see following commentary), no tax benefit has been recorded for the six months ended June 30, 1995 and 1996 related to net operating loss carryforwards. See "-- Net Operating Loss Carryforwards." FOR THE PERIOD FROM MARCH 2, 1993 (DATE OF INCEPTION) TO DECEMBER 31, 1993 AND THE YEARS ENDED DECEMBER 31, 1994 AND 1995 The Company was formed in March 1993 and had no meaningful operations during the period ended December 31, 1993. As a result, no meaningful comparisons can be made between the year ended December 31, 1994 and the period ended December 31, 1993. NET SALES. Net sales increased from $0.0 in 1993 to $9.8 million in 1994 and $30.0 million in 1995. The increase of approximately 205% from 1994 to 1995 is primarily attributable to the inclusion of $9.0 million in net sales in 1995 from acquisitions completed during 1995, 1994 acquisitions being included for a full year in 1995 and internal growth. Net sales increased by 10.8% from 1994 to 1995 at Subsidiaries owned for all of 1995 that were acquired during 1994. GROSS PROFIT. Gross profit increased from $0.0 in 1993 to $2.8 million in 1994 and $6.1 million in 1995. Gross profit as a percent of net sales decreased from 28.5% in 1994 to 20.2% in 1995 due to: (i) a change in the sales mix attributable to the acquisitions of two Subsidiaries engaged in lower margin new pallet manufacturing, in addition to pallet recycling, one of which was also involved in other facets of the pallet business including lower margin pallet brokerage and saw milling; (ii) an increase in material costs at one Subsidiary due to the loss of a low cost supply of pallets and (iii) a higher ratio of fixed costs to net sales at two start-up pallet recycling facilities as they initiated operations. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased from $200,000 in 1993 to $2.9 million in 1994 and $7.4 million in 1995. As a percent of net sales, selling, general and administrative expenses were 29.0% in 1994 and 24.6% in 1995. Selling, general and administrative expenses are comprised of operating expenses at both the subsidiary and corporate levels, amortization expense and a goodwill write-off in 1995. The percentage decrease is attributable to both a decrease in operating Subsidiary expenses and corporate expenses as a percent of net sales. Selling, general and administrative expenses for the Subsidiaries increased from $1.5 million in 1994 to 3.8 million in 1995. As a percent of net sales, these expenses decreased from 15.0% in 1994 to 12.6% in 1995. The decrease is attributable to: (i) the inclusion of certain Subsidiaries acquired during 1995; (ii) the full inclusion of certain Subsidiaries acquired during 1994 that carried lower administrative expenses than companies owned during the majority of 1994 and (iii) the elimination and consolidation of certain Subsidiary expenses. Selling, general and administrative expenses for corporate increased from $1.3 million in 1994 to $2.7 million in 1995. The increase is attributable to the Company's investment in corporate infrastructure to support the acquisition, assimilation and management of a national network of pallet recycling companies. As a percent of net sales, corporate selling, general and administrative expenses decreased from 13.6% in 1994 to 9.1% in 1995 due to allocating corporate expense over a higher base of net sales. The Company also took a one-time charge to 1995 earnings in the amount of $539,000 or 1.8% of pro forma net sales due to the write-off of goodwill pertaining to two Subsidiaries which are performing below the Company's expectations due to, in one case the loss of a low-cost supply of pallets in early 1995 and in the second case, the slow development of recycling operations of another Subsidiary primarily involved in pallet brokerage prior to acquisition. INTEREST EXPENSE AND OTHER INCOME, NET. Interest expense and other income, net resulted in a net expense of $12,000 in 1993 compared to $32,000 in 1994 and $568,000 in 1995. The change from 1993 to 1994 was a result of increased interest expense due to debt assumed in acquisitions. The increase in 1995 over 1994 is attributable to increases in interest expense due to corporate borrowings to fund operations and additional debt assumed or arising from financing acquisitions during 1995. INCOME TAX EXPENSE. No income tax provision was recorded in 1993. The Company recorded income tax expense of $49,000 in 1994 compared to an income tax benefit of $75,000 in 1995. The 1995 income tax benefit resulted from a deferred benefit of approximately $112,000 which was offset by current state tax expense of $37,000. The deferred tax benefit was due primarily to a change in the deferred tax asset valuation allowance. No tax benefit has been recorded related to net operating loss carryforwards for the years ended December 31, 1994 and 1995. The Company has recorded a full valuation allowance as of December 31, 1994 and 1995 for deferred tax assets related to net operating loss carryforwards ($113,400 and $385,800, respectively). The limited operating history of the Company coupled with the generation of losses each year since inception has raised sufficient uncertainty regarding the future utilization of the net operating loss carryforwards. Furthermore, future profitability is dependent upon a number of factors which the Company has yet to demonstrate. Due to these uncertainties, management believes it is prudent to maintain a full valuation allowance related to these assets. LIQUIDITY AND CAPITAL RESOURCES Since inception the Company has financed its acquisitions primarily through stock-for-stock exchanges and to a limited extent through the issuance of debt. The Company has financed operations and met capital expenditure requirements from cash flow from operations, the private sale of Common Stock and from borrowings. The Company's primary long-term capital requirements are derived from its acquisition strategy and the implementation of systems and equipment to improve the efficiency of its operations. Total working capital decreased from a surplus of $94,000 as of December 31, 1994, to a deficit of $2.2 million as of December 31, 1995 and then decreased to a deficit of $4.8 million as of June 30, 1996. As of December 31, 1995, current liabilities increased $6.1 million as compared to December 31, 1994, due primarily to a $4.8 million increase in current maturities of debt incurred to fund both operations and the acquisition of five pallet recycling companies and a $1.1 million increase in accounts payable resulting from the acquisition of the five additional companies. Current assets increased $3.8 million as of December 31, 1995 as compared to December 31, 1994 due primarily to a net increase in accounts receivable and inventory resulting from the acquisition of additional pallet recycling companies. As of June 30, 1996 current liabilities increased $2.4 million from December 31, 1995 to June 30, 1996, due primarily to a $2.1 million increase in current maturities of debt including $1.5 million in Secured Notes issued in April 1996. Current assets decreased slightly resulting from a decrease in cash of $581,000 offset by increases in inventory and accounts receivable due to the acquisitions of Diamond Pallet, Inc. and Metroplex Wood Products. The Pending Acquisitions, prior to pro forma adjustments, had working capital of $162,000 due to the classification of $605,000 of shareholder debt associated with Indy Pallet Company, Inc. as short term debt. The closing of the Pending Acquisitions are dependent upon the completion of this Offering. As of June 30, 1996 working capital on a pro forma basis is $7.9 million higher than on an actual basis due primarily to a net increase in cash of $4.3 million and a decrease in current maturities of debt of $3.1 million. Net capital expenditures were $40,000 in 1993, $474,000 in 1994, $1,084,000 in 1995 and $419,000 for the six months ended June 30, 1996. The increases relate primarily to the purchase of equipment at the Company's expanding base of pallet recycling operations. In March 1995, the Company issued through a private placement $2 million aggregate principal amount of its Convertible Debentures. In August 1995, PRANA Holdings, Inc. ("PRANA Holdings"), a wholly owned subsidiary of the Company, entered into the Term Loan and Security Agreement (the "Term Loan") with Norwest Bank Minnesota, National Association ("Norwest"). Under the Term Loan, the Company may borrow up to $2.6 million for acquisition and working capital purposes. As of June 30, 1996, the Company had borrowed $2.6 million under the Term Loan. During the third and fourth quarters of 1995, the Company issued an additional $1.7 million aggregate principal amount of unsecured promissory notes to fund working capital requirements. Such notes are to be repaid from the proceeds of this Offering. In December 1995, certain of the company's Subsidiaries entered into secured lending facilities (the "Secured Credit Facilities") with Norwest Credit, Inc. ("Norwest Credit"). The aggregate amount that may be borrowed under the Secured Facilities is $3.2 million. As of June 30, 1996, the Subsidiaries had outstanding $2.3 million under the Secured Credit Facilities. In April 1996, the Company issued $1.5 million of Secured Notes to fund the acquisition of a Subsidiary and to fund working capital requirements. Such Secured Notes are to be repaid from the proceeds of this Offering. See "Description of the Company's Securities -- Convertible Subordinated Debentures," "Description of the Term Loan and Certain Other Outstanding Indebtedness" and "Certain Transactions." The Company believes that cash generated from operations, borrowing capacity under its credit facilities and the proceeds from this Offering will satisfy the Company's projected working capital requirements at least through the end of 1996, although actual capital needs may change, particularly as a result of future acquisitions. The Company is currently out of compliance with certain covenants of its long-term debt. See "Risk Factors - Need for Promissory Note Extension; Long-Term Debt Current Non-Compliance; Going Concern Uncertainty" and Notes 10 and 17 of the Company's Consolidated Financial Statements. NET OPERATING LOSS CARRYFORWARDS At December 31, 1995 the Company had net operating loss carryforwards for federal income tax purposes of approximately $965,000. If not utilized to offset future taxable income, these carryforwards will begin to expire in 2008. See note 11 of notes to financial statements. SEASONALITY AND QUARTERLY RESULTS The last six months of the year generally have slightly higher net sales than the first six months of the year, and the third quarter generally has the highest net sales due in part to the shipment of seasonal items. Seasonality also varies slightly by region. Quarterly results may be materially affected by the timing of acquisitions and the timing and magnitude of acquisition assimilation costs. Therefore, the operating results for any three month period are not necessarily indicative of the results that may be achieved for any subsequent fiscal quarter or for a full fiscal year. INFLATION The Company does not believe that inflation has had a material impact on its results of operations. BUSINESS GENERAL PRANA was founded in 1993 to create a national network of pallet recycling companies to service the pallet needs of manufacturing, distribution, transportation and retailing companies that use pallets to move goods throughout North America. The Company has expanded rapidly through acquisitions from a single operation based in Saint Paul, Minnesota to a network of 15 companies (the Subsidiaries) operating from 23 locations in 17 states. The Company has also signed agreements to acquire two additional pallet recycling companies operating from three locations in two states (the Pending Acquisitions). These acquisitions are expected to close upon completion of this Offering using a portion of the proceeds therefrom. The Company believes its achievement of critical mass, access to greater capital resources and its ability to add a tradeable security to the consideration it offers acquisition candidates will enhance its ability to make further acquisitions. Pallet recycling services involve retrieving pallets and repairing or rebuilding and selling the pallets. The Company believes that the market for pallet recycling services had annual sales in excess of $2 billion in 1995. According to Company estimates there are more than two billion pallets in circulation in the United States today. According to THE PALLET ENTERPRISE respondents to an annual pallet recycling survey reported average sales growth of approximately 32% in 1994, 13% in 1995 and are anticipating growth of 17% in 1996. The Company believes this growth is being driven by a number of factors including: (i) recycled pallets are 25% to 35% less expensive than new pallets; (ii) the wood in recycled pallets has lost moisture over time and is, therefore, lighter and stronger; (iii) overall demand for pallets has continued to rise and (iv) recycled pallets offer several environmental benefits, including companies sending fewer pallets to landfills. The Company believes that it is currently the largest supplier of pallet recycling services in North America; nevertheless, it estimates that its market share, based on the Company's pro forma combined net sales for 1995, is less than three percent. The pallet recycling industry is highly fragmented. According to industry sources, there are an estimated 3,000 independent pallet recycling businesses in the United States, substantially all of which operate in only one city or town. The Company believes that the pallet recycling industry is consolidating and that this consolidation is being driven by the demands of large multi-location companies for a company such as PRANA to offer a national network to manage the sourcing, retrieval and repair of pallets. Due to the fragmentation of the pallet recycling industry, national and regional companies must currently contract with numerous independent pallet recycling operations in order to meet their pallet recycling needs, which is often expensive and time consuming. It is common for businesses that use pallets (i.e., a manufacturer or distributor) to ship goods on a pallet and never receive the pallet back, nor receive any value for the pallet. As a result, many of these businesses view pallets as a shipping expense rather than a reusable asset. The Company believes a national network of pallet recyclers would improve the level of service, reduce the complexity of managing the sourcing, retrieval and repair of pallets for these multi-location companies and will enable pallet users to view pallets as an asset to be retained rather than an expense to be incurred. Through its Subsidiaries the Company serves over 1,000 customers, including numerous multi-national companies such as Motorola, Inc., GAF Materials Corporation and 3M. The Company currently has agreements to serve twelve customers on a regional and national basis and plans to continue to add to its list of national customers. The Company's objective is to build upon its current position to become the dominant provider of pallet recycling services in North America. Its strategies to achieve this objective include: (i) rapidly expanding its network, primarily through acquisitions; (ii) driving internal growth; (iii) establishing and expanding relationships with large national customers; (iv) managing pallet supply and demand across regions and (v) providing superior value and service to its customers. PRANA's founder, Chairman and Chief Executive Officer, Jeffery Otto, is also the founder of the International Association of Pallet Recyclers, an industry trade organization, with over 120 member companies, which recently merged into the National Wooden Pallet and Container Association. Under Mr. Otto's leadership, the Company has assembled a strong management team with experience in pallet recycling, acquisitions, integration of acquired companies, management controls, sales and marketing. INDUSTRY OVERVIEW The United States pallet industry is estimated by the Company to have exceeded $5.5 billion in sales in 1995. The industry is generally comprised of companies that manufacture new pallets and companies that recycle pallets. The Company estimates that the size of the new pallet and recycled pallet markets were in excess of $3.5 billion and $2 billion, respectively, in 1995. Currently the pallet industry is highly fragmented in both the new and recycled segments of the market with numerous independent businesses operating on a localized basis. A pallet is a platform, usually made of wood, that is used for storing and shipping goods. Pallets are used in industries that require mass distribution of products, including the food, chemical, printing, automotive, paper and fiber, consumer products, general retailing and steel and other metals businesses. Industry sources estimate that during 1995 approximately 450 million new wooden pallets were produced. The Company estimates there are more than two billion pallets in circulation in the United States today. Pallets come in a wide range of shapes and sizes and are primarily made of wood, but may also be made from steel, plastics, cardboard and molded wood fiber to satisfy smaller niche markets. The Company believes that over 90 percent of the pallets used are of the traditional wooden type, fabricated from lumber and nails. The wooden pallet has traditionally been the basis for the design of storage racks, warehouse storage areas, forklifts, docks and containers used in shipping goods. The new pallet manufacturing industry and the pallet recycling industry have traditionally been viewed as two separate and distinct industries, but some crossover has occurred. The new pallet industry is mature, well developed and highly automated. In contrast, the pallet recycling industry is relatively new in its development, labor intensive and generally not very automated. According to industry sources the recycled pallet industry consists of over 3,000 companies, some of which are primarily engaged in recycling used pallets but may also manufacture new pallets. According to THE PALLET ENTERPRISE, respondents to an annual pallet survey experienced average sales growth of approximately 32% in 1994, 13% in 1995 and are anticipating growth of 17% in 1996. The Company believes growth in the pallet recycling industry is being driven by the following factors: (i) recycled pallets are generally 25% to 35% less expensive than new pallets; (ii) recycled pallets are generally both lighter and stronger than new pallets (since the wood in recycled pallets has lost moisture and become more rigid); (iii) demand for pallets is escalating due to the increased use of modern inventory control and product delivery practices such as "just-in-time" inventory management, companies shifting from "floor loading" to pallet loading and handling of materials and products, and companies implementing automated material handling systems which require pallets; (iv) companies seeking to outsource activities which are outside their core business, such as pallet recycling and (v) environmental benefits, including the reduction of trees harvested to manufacture new pallets and the reduction of pallets a company would otherwise send to landfills, which enables companies to meet environmental directives. STRATEGY PRANA's primary objective is to build upon its current position to become the dominant provider of pallet recycling services in North America. The Company's strategy to achieve its primary objective consists of the following key elements: RAPIDLY EXPAND ITS NETWORK, PRIMARILY THROUGH ACQUISITIONS. The Company seeks to acquire profitable pallet recycling operations in strategic regions in the United States. PRANA believes it is the first company to pursue aggressively the establishment of a national pallet recycling network. The Company believes this national network will give PRANA competitive advantages, including greater resources and an ability to provide services on a national scale. DRIVE GROWTH AT EXISTING OPERATIONS. The Company believes that it will be able to increase sales and improve operating margins as a result of: (i) realized efficiencies resulting from a national pallet recycling network; (ii) economies of scale that result in reduced raw material, transportation, disposal and overhead costs; (iii) leveraging technological improvements and management efficiencies on a national scale; (iv) standardization of operations and plant utilization; (v) improved management systems and controls and (vi) more efficient sourcing and pricing strategies. ESTABLISH AND EXPAND RELATIONSHIPS WITH LARGE NATIONAL CUSTOMERS. The Company has established relationships with many national companies, and continues to strengthen and increase the number of these relationships. PRANA's national network will enable these national companies to centralize the purchasing of recycled pallets, obtain convenient and dependable service, secure a consistent supply of quality pallets and access an outlet for unwanted pallets. MANAGE PALLET SUPPLY AND DEMAND ACROSS REGIONS. In general, the demand for recycled pallets exceeds current supplies on a national basis; however, there are regional imbalances. In certain geographic areas, incoming shipments of goods exceed outgoing shipments, resulting in an excess supply of pallets. The opposite may also occur, resulting in a shortage of pallets for recycling. The Company believes that its national network will allow it to better match the supplies of pallets available for recycling with the demand for pallets by shipping whole pallets, partially dismantled pallets and "tear-down" lumber from areas with an excess supply of pallets and lower prices to areas with a shortage of pallets and higher prices. PROVIDE SUPERIOR VALUE AND SERVICE TO ITS CUSTOMERS. The Company believes that its national network will enable it to provide complete pallet management services and reduce its customers' overall cost of pallet ownership and management. The Company believes its national network, along with the services its provides, will enable the pallet user to view pallets as an asset to be retained rather than an expense to be incurred. In order to service certain of its customers' entire pallet requirements certain of the Company's Subsidiaries also manufacture new pallets. ACQUISITION STRATEGY PRANA intends to continue to implement an aggressive acquisition program to establish a national network of pallet recycling companies. The Company will generally target as acquisition candidates pallet recycling companies in large metropolitan areas of North America, but will also target specific acquisition candidates in key markets necessary to serve national account customers. In order to establish a presence in smaller, yet strategic markets the Company intends to acquire pallet recycling companies that operate in such markets. The Company's acquisition strategy has resulted in several operating efficiencies which the Company believes will increase as future acquisitions are made, including: (i) the ability to purchase goods and services, including equipment, supplies and insurance, at lower cost; (ii) reduced freight expense as customers and sources of pallets are served from closer locations; (iii) the transfer of pallets, lumber and equipment within the network to the location with the highest and best use and (iv) pooled technical expertise enabling the Company to develop the most efficient operational unit processes. The Company believes it is an attractive acquiror of pallet recycling companies due to: (i) the benefits afforded by an association with a national network of pallet recyclers, including an enhanced ability to attract the pallet recycling business of large national companies; (ii) the potential for increased profitability as a result of economies of scale, including greater buying power; (iii) the Company's financial strength and visibility as a public company and (iv) the Company's intention to allow, when appropriate, local management to remain involved in the operations of acquired companies. The Company believes that the ability to add a tradeable security to the consideration it offers its acquisition candidates will also enhance its ability to acquire companies. The Company has developed a systematic process for identifying and acquiring pallet companies which includes a standard acquisition agreement. The Company's acquisition criteria include strategic geographic location, annual sales in excess of $1 million, historical and projected profitability, a diverse customer and supply base and capable, committed management who intend to stay with the acquired business. In order to assure the services of qualified management at the Subsidiary level, PRANA may enter into employment contracts and noncompete agreements with the prior owners and/or key employees of the acquired companies. Acquisitions have generally been made by merging the acquired company into a wholly-owned subsidiary of the Company in a tax free stock-for-stock exchange. In conducting its acquisition activities to date, PRANA has gathered and assembled data with respect to numerous pallet recycling companies and believes it is well positioned to continue to aggressively pursue its acquisition strategy. The Company's acquisition strategy will be executed by members of the management team, several of whom have extensive experience in acquiring and integrating businesses. See "Management." PRANA's primary focus is the pallet recycling industry. However, the Company also may consider acquiring new pallet manufacturers in order to meet customer needs and to assist in integrating the technology of new pallet operations into pallet recycling operations. PALLET MANAGEMENT The primary business of the Company is coordinating the acquisition and recycling of pallets. Acquiring or "sourcing" pallets is a critical element in successful pallet recycling operations. The Company sources the majority of its pallets from businesses that use pallets and from trucking companies. Businesses that receive and ship a significant amount of goods are generally good sources for used pallets. Often the pallets they receive are damaged or do not meet their size or other specifications for internal systems or shipping. As a result, these businesses accumulate pallets that can be recycled. The Company identifies these sources through establishing relationships with pallet users, and by direct solicitation, telemarketing and advertising. The Company generally achieves timely pallet removal by placing a trailer at a source which loads unwanted pallets onto the trailer. The Subsidiary then removes the load of pallets at the same time it delivers recycled pallets to the company. In some cases, the recycler is paid a tipping fee for hauling away the used pallets or is allowed to take the pallets away at no charge, and, in other cases, the recycler buys the pallets. The Company believes trucking companies will be a growing source of pallets both at "truck stop" depots and at sites where truckers clear their trailers. Landfills and waste management haulers represent another source of pallets to recycle as a significant number of pallets are discarded in landfills each year. The Company's Subsidiaries are currently shipping pallets and lumber within its network and the Company expects these activities will accelerate. The Company believes that its ability to ship pallets throughout its network will enhance its ability to effectively service national customers. An important element of maintaining access to pallet supplies and managing customer pallet needs will be the Company's ability to use its network of Subsidiaries to supply recycled pallets for first use (i.e., for storing and shipping goods), retrieve pallets at the point at which they are to be reused (i.e., after unloading the shipped goods) and then insure that the pallet or some value is returned to the original user of the pallet (i.e., "close the loop"). It is common for businesses that use pallets (i.e., a manufacturer or distributor) to ship goods on a pallet and never receive the pallet back, either directly or through an exchange program, nor receive any value for that pallet. As a result, many of these businesses view pallets as a shipping expense rather than a reusable asset. It is generally uneconomical for these businesses to retrieve the pallets they use for a variety of reasons, including wide dispersion, distance and freight costs. Attempts have been made to "close the loop," by compelling truck drivers to exchange pallets; however, the trucking industry has generally been unsuccessful in these attempts. RECYCLING OPERATIONS The Company's Subsidiaries are generally located in industrial areas and near trucking centers. Some operations are located on customers' sites and are dedicated to serving only those customers. The Company believes it can enhance the performance of its existing Subsidiary operations and future acquisitions through plant optimization, automation and standardization. The Company seeks to identify the best practices in its Subsidiary operations and implement them in all appropriate locations. The typical pallet recycling operations of the Company's Subsidiaries involve the following five steps: RETRIEVE. Flatbed trucks or trailers from a Subsidiary pick up pallets from various pallet sources. Pallets received from a source are typically of a number of different sizes and are of a broad range of conditions. TRANSPORT AND SORT. The retrieved pallets are hauled back to the Subsidiary facility and sorted by size and condition. A portion of the retrieved pallets require no repair and can be resold or returned immediately. The pallets that can be repaired are separated from those that cannot be repaired. DISMANTLE. The pallets that cannot be repaired are dismantled and the salvageable boards are recovered for use in repairing and building other pallets. The remaining damaged boards are typically ground into wood fiber, which is sold as landscaping mulch, fuel, animal bedding and for other uses. REPAIR. The pallets that can be repaired, are repaired by replacing damaged boards with salvaged boards or boards from new stock inventoried at the facility. In certain instances, the Subsidiaries enter into repair contracts with businesses that use pallets whereby the Subsidiary is engaged for a fee to repair and return pallets to the business or repair pallets on site. DISTRIBUTE. The repaired pallets are either sold and delivered or, in the case of pallets recycled under repair contracts, returned. Despite recent increases in the level of automation, pallet recycling remains a labor intensive business. A significant challenge in the industry is employee turnover, particularly among workers who fabricate pallets. The Company is undertaking measures to reduce employee turnover, such as automating physically demanding tasks, offering employee benefit programs, improving working conditions, enhancing employee practices and providing job training. The Company's national network will provide both laborers and managers the opportunity for advancement in a national organization and the potential for relocation, if desired. PRANA has developed incentive compensation programs for Subsidiary managers and is developing and training managers, primarily by promoting people from within its Subsidiaries, who can manage an acquired company or, if necessary, a start-up operation. SALES AND MARKETING The Company's Subsidiaries aggressively market their pallet recycling services and promote the growth in the use of recycled pallets. Through its Subsidiary, the Company sells to local, regional and national companies. Subsidiary sales are conducted typically by the Subsidiary's president or general manager; however, certain larger Subsidiaries have dedicated sales personnel. The primary sales and marketing activities involve direct selling, developing relationships with trucking companies and directory (yellow page) advertising in local and regional directories. In addition, pricing is established at the Subsidiary level. The Company believes there is an opportunity to improve Subsidiary margins by analyzing individual customer contributions and optimizing pricing at each location. The Company has also developed and is executing a national sales and marketing plan to provide pallet recycling services to large national companies that require such services at many locations throughout the United States. The Company's national network will allow these companies to: (i) centralize their purchasing of recycled pallets; (ii) obtain convenient and dependable service and a consistent supply of uniform quality pallets; (iii) achieve greater efficiencies in their pallet use and (iv) meet corporate recycling goals. The Company is conducting its national sales and marketing effort through its corporate office. The Company has developed relationships with several national customers, including Motorola Inc., GAF Materials Corporation and 3M, and intends to service these and numerous other customers' needs on a local, regional and national basis. The pallet needs of national companies are not uniform and the Company intends to tailor its national programs for each customer. These programs include a combination of sourcing, retrieving, repairing and recycling pallets according to individual customer requirements. MANAGEMENT INFORMATION AND CONTROLS The Company centralizes accounting and financial reporting activities at its corporate office, while basic accounting activities are conducted at the Subsidiary level. The Company recently upgraded the information systems hardware and software at its corporate headquarters to meet current and perceived needs for financial reporting and internal management control information and other necessary information. The Company believes this system enhances its ability to: (i) monitor each Subsidiary; (ii) prepare both operations and capital asset budgets and budget variances; (iii) assimilate newly acquired operations into its network through standard reporting mechanisms; (iv) implement operational and productivity measurements and benchmarking and (v) conduct individual customer profitability analyses. The Company anticipates that this system will fulfill its information and control requirements at least through 1997. PRINCIPAL BUSINESS UNITS SUBSIDIARIES Since inception PRANA has acquired 14 pallet recycling Subsidiaries and formed one start up pallet recycling Subsidiary. The following table sets forth the location and date of acquisition for each Subsidiary. <TABLE> <CAPTION> NAME DATE ACQUIRED LOCATIONS <S> <C> <C> Otto Packaging, Inc. January 1, 1994 St. Paul, MN BVS, Inc. February 1, 1994 Phoenix, AZ (2 locations) Harris Supply Company, Inc. April 1, 1994 Orlando, FL Pallet City, Inc. June 1, 1994 Buffalo, Rochester, Amherst and Syracuse, NY Pallet Exchange of Kansas City, Inc. August 22, 1994* Kansas City, KS Pallet Source, Inc. December 1, 1994 Mansfield, AR Hurt's Pallet & Sales, Inc. December 1, 1994 Summitville, IN Quality Pallet, Inc. December 1, 1994 Green Bay, WI PRANA Oklahoma City, Inc. (formerly April 1, 1995 Oklahoma City, OK American Century Pallet Company, Inc.) B&B Pallet Supply Company May 5, 1995 Springfield, MO PRANA Denver, Inc. May 15, 1995 Denver, CO (formerly Skid Row Pallet) Pallet Supply Company, Inc. June 1, 1995 Memphis, TN, Indianola, MS, Little Rock, AR, Hanceville and Birmingham, AL PRANA Las Vegas, Inc. October 30, 1995 Las Vegas, NV (formerly Blue Light Pallet Company) Diamond Pallet, Inc. February 15, 1996 Stockton, CA PRANA Fort Worth, Inc. April 25, 1996 Fort Worth, TX (formerly Metroplex Wood Products, Ltd.) </TABLE> *Date of organization by the Company. PENDING ACQUISITIONS As of the date hereof, the Company has signed acquisition agreements to complete the Pending Acquisitions. The Pending Acquisitions will be consummated using the proceeds of this Offering. The following table sets forth the name and location of the Pending Acquisitions: <TABLE> <CAPTION> NAME LOCATIONS <S> <C> Indy Pallet Company, Inc. Indianapolis, IN Pallet Outlet Company, Inc. Biglerville and York, PA </TABLE> ON-SITE REPAIR AND RECYCLING OPERATIONS The Company also has on-site repair and recycling operations at customer locations in Cullman, Alabama, Syracuse, New York, New Albany, Mississippi and Phoenix, Arizona (two). COMPETITION The business of providing pallet recycling services is highly competitive in each of the markets in which the Company operates. Each Subsidiary competes in the markets it serves with other pallet recycling companies as well as new pallet companies and companies that rent or lease pallets. Additionally, firms that do not presently compete with the Company or its Subsidiaries may enter their markets. The Company and its Subsidiaries also compete with other pallet recycling companies for supplies of pallets to recycle. The Company will compete with other companies that may try to establish a national pallet recycling company. Currently, the Company is aware that Pallet Pallet Inc., located in Canada, is attempting to establish a national pallet company engaged in manufacturing new pallets, brokering new and recycled pallets and recycling pallets. If other companies attempt to establish a national pallet recycling company, the Company could compete with such companies in the acquisition of existing pallet recycling companies. Set forth below is a brief description of the principal competitors of PRANA. CHEP, INC., a large international pallet leasing company based in Australia, leases pallets to large companies on a national and international basis, including companies located in North America. CHEP entered the United States market in the late 1980s and has built an extensive customer base in the grocery industry. CHEP generally operates as a third party management company that contracts with new pallet manufacturers for its supply of new pallets and with pallet recyclers for repair of its pallets. PALLET PALLET INC. is a Canadian company whose shares trade on the Toronto Stock Exchange under the ticker symbol "PLT-T." PRANA believes that this company desires to create an integrated distribution network of new and recycled pallets, reusable containers, packaging equipment, and related supplies. PRANA believes that Pallet Pallet's strategy differs from the Company's strategy as Pallet Pallet has generally acquired companies that manufacture new pallets, broker new and used pallets and recycle used pallets while the Company's primary focus is on pallet recycling. PALLET MANAGEMENT SYSTEMS, INC. is a company whose shares trade on the Florida local over-the-counter market under the ticker symbol "PALT." Pallet Management Systems has pallet recycling operations in Florida, New England and Virginia. Pallet Management Systems' largest operations is Abbell Industries, a new pallet manufacturer based in Virginia. Pallet Management Systems may expand its pallet operations beyond its existing territories and attempt to become a national pallet recycling company. BROMLEY PALLET RECYCLERS, which also operates as Suncoast Pallet Corporation, is a privately owned pallet recycling company based in Tampa, Florida. Bromley is developing a pallet recycling network in the southeastern region of the United States. Bromley offers its customers service in the areas of pallet recycling, repairs and disposal. Bromley has publicly stated that its objective is to be a regional pallet recycling company. FACILITIES AND EQUIPMENT PRANA's corporate headquarters are located in Roseville, Minnesota. The Company leases approximately 5,000 square feet of office space at this location pursuant to a lease expiring in 2000. The lease provides for rent of approximately $8,300 per month. Each Subsidiary leases the plants at which it conducts its pallet recycling operations under various terms. The Company owns or leases the pallet recycling equipment at each of its locations, including specialized saws for dismantling pallets and cutting wood, machines for disassembling and renailing pallets and equipment and systems for moving and lifting pallets. In addition, the Company owns and operates transportation equipment used in its operations including semitractors and trailers. EMPLOYEES As of August 30, 1996, the Company had 13 full-time employees at its corporate office and approximately 525 full and part-time employees at its Subsidiary locations. The Company anticipates that it will need to hire additional personnel, primarily in the areas of accounting and general administrative support, but has built much of the infrastructure necessary to accommodate its growth. None of the Company's employees is a member of a collective bargaining unit, and the Company's management believes employee relations are good. LEGAL PROCEEDINGS From time to time, the Company and its Subsidiaries have become involved in various claims or lawsuits incident to the operation of its businesses, including claims arising from accidents. Management believes that none of these actions will have a material adverse effect on the financial condition or results of operations of the Company. MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The directors and executive officers of the Company are: <TABLE> <CAPTION> NAME AGE POSITION <S> <C> <C> Jeffery E. Otto 50 Director, Chairman and Chief Executive Officer Bruce C. Faulken 45 President and Chief Operating Officer Edward R. Van 63 Vice President, Operations Clarence A. Johnson 45 Vice President, Chief Financial Officer Randy L. Hines 37 Vice President and Treasurer Terry T. Stewart 47 Vice President, Corporate Development and Secretary William L. Alvey 70 Director Robert C. Klas 66 Director(1)(2) Reynold P. Flom 73 Director(1)(2) Thomas S. Schreier 59 Director(1)(2) Donald J. Matre 30 Director </TABLE> (1) Member of the Audit Committee (2) Member of the Compensation Committee JEFFERY E. OTTO founded PRANA in 1993 and has served as a director and its Chief Executive Officer since inception. In 1977, Mr. Otto founded Otto Packaging, Inc., a St. Paul, Minnesota based pallet recycling company. Mr. Otto and his wife, as the sole owners of Otto Packaging, sold Otto Packaging to PRANA in 1994. Prior to founding Otto Packaging, Mr. Otto held various sales positions in the industrial packaging business. Mr. Otto is the founder and past president of the International Association of Pallet Recyclers, the only pallet recycling industry trade association in the United States, which recently merged into the National Wooden Pallet and Container Association. BRUCE C. FAULKEN joined PRANA in 1994 and served as General Counsel and then as Vice President of Development and General Counsel prior to becoming President and Chief Operating Officer in 1996. From 1987 to 1994, Mr. Faulken practiced law as a solo practitioner. From 1984 to 1987, Mr. Faulken practiced law with Ross, Faulken and Rosenblatt, a law firm of which he was a founding partner. From 1976 to 1984, Mr. Faulken practiced law with the law firm of Doherty, Rumble and Butler. EDWARD R. VAN has been PRANA's Vice President of Operations since 1994. In 1981, Mr. Van co-founded BVS, Inc., a pallet recycling business in Phoenix, Arizona, and has served as its President since its inception. Mr. Van, an owner of BVS, sold BVS to PRANA in 1994. CLARENCE A. JOHNSON joined PRANA in 1995 and has served in various capacities including acquisitions, operations and finance. Mr. Johnson has served as Vice President, Chief Financial Officer since 1996. From 1985 to 1995, Mr. Johnson was an independent consultant working in operations management and corporate finance. From 1974 to 1984, Mr. Johnson worked for ECOLAB INC. in marketing and the general management of various business units acquired by the company through its Commercial Development Division. RANDY L. HINES joined PRANA in 1995 as Director of Corporate Development prior to becoming Vice President and Treasurer in 1996. From 1992 to 1995, Mr. Hines was Vice President of Corporate Finance for Principal Financial Securities, Inc. (formerly Craig-Hallum) ("Principal Financial"). From 1987 to 1992, Mr. Hines was a Vice President in private placements with Washington Square Capital, Inc. He is a Chartered Financial Analyst. TERRY T. STEWART joined PRANA in 1995, as Director of Acquisitions prior to becoming Vice President, Corporate Development and Secretary. From 1992 to 1995, Mr. Stewart was Vice President of Corporate Finance for Principal Financial. Previously, Mr. Stewart founded and was President of Biowaste Services, Inc., a medical waste disposal company which he sold to a public company in that industry. Mr. Stewart was also a Regional Market Development Manager for Browning Ferris Industries, Inc. from 1980 to 1983 where he was responsible for the acquisition of solid waste disposal and collection companies in ten states and a portion of Canada. WILLIAM L. ALVEY has served as a director since 1993. From 1993 to 1995 Mr. Alvey served as the Company's Vice President of Acquisitions. From 1981 to 1992, Mr. Alvey was the President and Chief Executive Officer of A&H, Inc., a company engaged in managing a bond shed warehouse and providing employment services. Before joining PRANA, Mr. Alvey spent approximately 25 years in the trucking industry. ROBERT C. KLAS has served as a director since 1993. Mr. Klas is currently Chairman of TapeMark Company, a privately-held company engaged in manufacturing pressure sensitive labels and medical products. Mr. Klas is also Chairman of WTC Industries, Inc., a publicly held company engaged in the manufacturing of water purification products. REYNOLD P. FLOM has served as director since 1993. In 1981, Dr. Flom founded Datron Corporation, a holding company engaged in the veterinary supply, real estate rental and rehabilitation center businesses. Dr. Flom has been a director of Datron Corporation since its inception. Dr. Flom also founded Financial Analysis, Inc., a management services company, for which he has been a director since 1981. Dr. Flom is also the Treasurer of Healthcare Group Inc. which provides workers' compensation insurance in the health care field. THOMAS S. SCHREIER has served as a director since 1996. Mr. Schreier served as the Company's Chief Financial Officer from January 1994 through August 1995. From 1967 to 1992, Mr. Schreier was a partner in Schreier, Kosbab, Cornell, Kahler & Co., a public accounting firm which he founded. DONALD J. MATRE has served as a director since 1995. In 1990, Mr. Matre founded Pallet City, Inc., which PRANA acquired in 1994. Mr. Matre is the President of Pallet City and is responsible for its day-to-day operations The Company's Board of Directors has a Compensation Committee. Members of the Compensation Committee are Messrs. Flom and Klas. The Compensation Committee was established to review and approve officer salaries and other compensation and benefit programs and to determine officer bonuses. The Compensation Committee also administers and makes grants under the Company's Stock Option Plan. The Bylaws of the Company, as amended, provide for a Board of Directors with staggered terms. One third of the total number of directors will be elected at each annual meeting of shareholders, for a term of three years. Each of the Company's directors holds office until the next annual meeting of shareholders and until their respective successors shall have been elected and qualified or until their earlier death, resignation or removal. EXECUTIVE COMPENSATION The following summary compensation table sets forth the total annual compensation paid or accrued by the Company to or for the account of the Chief Executive Officer and each other of the executive officers of the Company whose total cash compensation for the fiscal year ended December 31, 1995 exceeded $100,000. SUMMARY COMPENSATION TABLE <TABLE> <CAPTION> ANNUAL COMPENSATION NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS(2) <S> <C> <C> <C> Jeffery E. Otto 1995 $157,500 $11,506 Chairman and Chief Executive Officer Bruce C. Faulken 1995 98,077 9,650 President and Chief Operating Officer Edward R. Van 1995 113,918 8,756 </TABLE> Vice President, Operations (1) Salary increases for Mr. Otto are determined by the Board of Directors; however, pursuant to the employment agreement between the Company and Mr. Otto, such increases are required to be no less than 5% of Mr. Otto's salary in the immediately preceding year. (2) Bonuses paid in 1995 were determined based upon performance criteria related to the Company's acquisition strategy. COMPENSATION OF DIRECTORS The Company does not pay any annual retainer or meeting fees to its directors. The Company reimburses all of the directors for their out-of-pocket expenses in connection with performing their duties as directors of the Company. EMPLOYMENT AGREEMENTS The Company has entered into written employment agreements with members of its management, including Jeffery Otto, Bruce Faulken, Edward Van, Clarence Johnson, Randy Hines, Terry Stewart and William Alvey. Upon expiration, each such agreement provides for automatic renewal for a period of one year unless either party gives thirty days advance notice to the other party of its desire to terminate the agreement. The employment agreement with Mr. Otto expires December 31, 2000 and provides for a base salary of $150,000 with annual increase of not less than 5%. The agreement contains provisions for termination, life insurance, the proceeds of which are to be used by the Company under certain circumstances to fund redemptions of the Company's stock from the employee's estate, bonus, paid vacation and other benefits, as well as for annual increases in base salary. The employment agreement with Mr. Faulken expires December 31, 1997 and provides for a base salary of $100,000. The agreement contains provisions for termination, covenants not to compete, stock options, bonus, paid vacation and other benefits. The employment agreement with Mr. Van expires February 20, 1998 and provides for a base salary of $80,000. The agreement contains provisions for termination, life insurance, the proceeds of which are to be used by the Company under certain circumstances to fund redemptions of the Company's stock from the employee's estate, bonus, paid vacation and other benefits. The employment agreement with Mr. Johnson expires December 31, 1997 and provides for a base salary of $96,000. The agreement contains provisions for termination, covenants not to compete, stock option, bonus, paid vacation and other benefits. The employment agreement with Mr. Hines expires December 31, 1997 and provides for a base salary of $75,000. The agreement contains provisions for termination, covenants not to compete, stock option, bonus, paid vacation and other benefits. The employment agreement with Mr. Stewart expires December 31, 1997 and provides for a base salary of $75,000. The agreement contains provisions for termination, covenants not to compete, stock option, bonus, paid vacation and other benefits. The employment agreement with Mr. Alvey expires December 31, 1996 and provides for a base salary of $70,000. The agreement contains provisions for termination, covenants not to compete, bonus, paid vacation and other benefits. The employment agreements with Messrs. Otto and Van do not include covenants not to compete; however, Messrs. Otto and Van are subject to covenants not to compete contained in the agreements pursuant to which PRANA acquired the pallet recycling companies previously owned by them (Otto Packaging, Inc. and BVS, Inc., respectively) in exchange for shares of Preferred Stock of the Company. Under such agreements not to compete, Messrs. Otto and Van are each prohibited from competing with the Company directly or indirectly within the continental United States or Canada for a period of five years from the date of such agreements or for one year after their termination of employment by PRANA, whichever date is later. In addition to the employment agreements described above, the Company has entered into a number of other employment agreements with its employees at the corporate and Subsidiary levels. STOCK OPTION PLAN The Company is authorized to grant options to purchase up to 2,000,000 shares under its Stock Option Plan to employees and other representatives of the Company and its Subsidiaries. Such plan has been approved by the Board of Directors and the Company's shareholders. As of August 30, 1996 the Company has outstanding options to purchase 495,000 shares of Common Stock under the Stock Option Plan at an exercise price of $3.60 per share. The Stock Option Plan provides that executive officers, other employees and consultants of the Company may receive options to purchase Common Stock. The Stock Option Plan provides for the grant of both incentive stock options intended to qualify for preferential tax treatment under Section 422 of the Internal Revenue Code of 1986, as amended, and nonqualified stock options that do not qualify for such treatment. Only employees are eligible for the grant of incentive stock options. The exercise price of all options granted under the Stock Option Plan must equal or exceed the fair market value of the Common Stock at the time of grant. The Stock Option Plan also provides for grants of stock appreciation rights, restricted stock awards and performance awards. The Stock Option Plan is administered by the Compensation Committee of the Board of Directors of the Company, which determines the persons who are to receive options to purchase shares of the Company's Common Stock, the exercise price, the number of shares of Common Stock subject to each option and other terms of the option and whether the option is an incentive stock option or a non-qualified stock option. CERTAIN TRANSACTIONS On April 4, 1996 the Company's shareholders approved a 1-for-8 reverse stock split with respect to Common Stock and a 1-for-2 reverse stock split with respect to Prefered Stock. All share and per share data contained in this Prospectus have been adjusted to give effect to such splits. The Company was incorporated in March 1993 in Minnesota. In December 1993, the Company completed a private placement of 250,000 shares of its Common Stock at a price of $4.00 per share and received gross proceeds from the offering of $1,000,000. The shares of Common Stock sold in such private placement were offered and sold on behalf of the Company solely by its officers and directors. The Company paid no selling commission to such officers or directors or to any other person in connection with such private placement. In January 1994, the Company entered into an Amended and Restated Agreement and Plan of Reorganization, among the Company, PRANA St. Paul, Inc., a wholly owned subsidiary of the Company, Otto Packaging, Inc. and Jeffery E. Otto and Judy M. Otto (the "Ottos"). Mr. Otto is the Chairman and Chief Executive Officer of the Company. Pursuant to such agreement, the Company acquired all of the outstanding capital stock of Otto Packaging, Inc. in exchange for shares of the Company's Preferred Stock. The agreement contains terms and conditions generally contained in the Company's acquisition agreements. The Ottos have also entered into a building lease with Otto Packaging, Inc. Payments by the Company to the Ottos amounted to approximately $175,000 during 1995 and $170,000 during 1994. The Company believes that its lease rates are no less favorable than those that would be obtained from unrelated third parties. See "Business -- Acquisition Strategy" and "-- Principal Business Units." In February 1994, the Company entered into an Amended and Restated Agreement and Plan of Reorganization, among the Company, PRANA Phoenix, Inc., a wholly owned subsidiary of the Company, BVS, Inc. and Orville Roberts, Thomas Shepard and Edward Van. Mr. Van is a Vice President of the Company. Pursuant to such agreement, the Company acquired all of the outstanding capital stock of BVS, Inc. in exchange for shares of the Company's Preferred Stock. The agreement contains terms and conditions generally contained in the Company's acquisition agreements. See "Business -- Acquisition Strategy" and "-- Principal Business Units." In May 1994, the Company entered into an Agreement and Plan of Reorganization, among the Company, Pallet City, Inc. and Donald J. Matre, Ronald J. Matre, Ronald A. Matre, Thomas R. Matre and Tracy Matre-Waring. Mr. Donald J. Matre is a five percent shareholder of the Company. Pursuant to such agreement, the Company acquired all of the outstanding capital stock of Pallet City, Inc. in exchange for shares of the Company's Preferred Stock. The agreement contains terms and conditions generally contained in the Company's acquisition agreements. See "Business - Acquisition Strategy" and " - - Principal Business Units." In September 1994, Robert Klas, a Director of the Company, entered into a loan commitment with the Company pursuant to which Mr. Klas agreed to lend the Company upon its request $300,000 on an unsecured basis. Amounts borrowed from Mr. Klas by the Company are evidenced by promissory notes payable in full two years from the date of the borrowing and carrying an interest rate of 10 percent per annum. As consideration for entering into such loan commitment, the Company issued warrants to purchase 750 shares of Common Stock to Mr. Klas at an exercise price of $20.00 per share. In addition, for each $10,000 borrowed by the Company under such loan commitment, the Company is required to issue warrants to Mr. Klas to purchase 125 shares of the Company's Common Stock at a purchase price of $20.00 per share. If the Company has not paid the principal amount on any promissory note delivered under such loan commitments by the first anniversary date of such note, then the Company is required to issue warrants to the lender to purchase 125 shares of the Company's Common Stock at a purchase price of $20.00 per share for each $10,000 in principal amount remaining unpaid on such date. Mr. Klas has loaned the Company $300,000 under such loan commitment and received warrants to purchase 8,250 shares of the Company's Common Stock at the price of $20.00 per share. In exchange for Mr. Klas extending the maturity date of his loan, the Company issued Mr. Klas a warrant to purchase 33,000 shares of the Company's Common Stock at an exercise price of $6.40 per share. In November 1994, Thomas Schreier, a director of the Company, entered into a loan commitment with the Company pursuant to which Mr. Schreier agreed to lend the Company $150,000 on an unsecured basis. Amounts borrowed by the Company were evidenced by a promissory note which carried an interest rate of 10 percent per annum. Such Promissory note was paid in full by the Company in January 1996. As consideration for entering into such loan commitment, the Company issued a warrant to purchase 375 shares of Common Stock at an exercise price of $20.00 per share. In addition, for each $10,000 borrowed by the Company under such loan commitment, the Company issued a warrant to purchase 125 shares of Common Stock at a purchase price of $20.00 per share. Mr. Schreier received warrants to purchase 2,250 shares of the Company's Common Stock at $20.00 per share. In June 1995, the Company entered into an Agreement and Plan of Reorganization, among the Company, Pallet Supply Company, Inc. and James J. Doyle, Lisa B. Doyle, Dawn Christine Crenshaw, Lisa Ann Chayer, James J. Doyle II, Gregory B. Crenshaw, Tabitha Doyle Barkley, Terri Leigh Doyle and Clay Barkley. Mr. Doyle is a five percent shareholder of the Company. Pursuant to such agreement, the Company acquired all of the outstanding capital stock of Pallet Supply Company, Inc. in exchange for shares of the Company's Preferred Stock. The agreement contains terms and conditions generally contained in the Company's acquisition agreements. See "Business - Acquisition Strategy" and " - Principal Business Units." Pursuant to offers of employment with the Company, the Company has issued options to purchase shares of the Common Stock to the following employees. The option holders are not entitled to vote, receive dividends, or exercise any of the rights of holders of shares of Common Stock for any purpose until such options have been duly exercised and payment of the exercise price has been made. <TABLE> <CAPTION> EXERCISE PRICE NAME POSITION OPTIONS PER SHARE <S> <C> <C> <C> Bruce Faulken President and Chief Operating Officer 77,049 $3.60 Clarence Johnson Chief Financial Officer 49,719 3.60 Randy Hines Vice President and Treasurer 61,783 3.60 Terry Stewart Vice President, Corporate Development and Secretary 49,719 3.60 </TABLE> In connection with the Company's acquisitions of Subsidiaries made through December 1, 1994, the Company issued shares of separate series of its Class One Preferred Stock, the terms of which include the unwind provision (the "Unwind Provision"). The Unwind Provision entitled the former shareholders of the Subsidiary who received shares of a separate series of Class One Preferred Stock in the merger to unwind the acquisition and regain ownership of the Subsidiary in the event that the Company did not complete an initial public offering of its Common Stock registered under the Securities Act prior to June 30, 1996 under certain conditions. For various reasons the Company determined that it would be in its best interests to obtain the agreement of the holders of shares of Class One Preferred Stock to waive the Unwind Provision. In August 1995, in connection with the Class One Preferred Stockholders' agreement to waive the Unwind Provision, the Company offered to such holders, as consideration for the waiver, either (i) the payment of $50,000 in cash per series to be distributed pro rata among the holders of the applicable series of Class One Preferred Stock (i.e., $50,000 to be distributed to the former owners of the Subsidiary) ("Cash Redemption") in addition to continued ownership of all shares of Class One Preferred Stock held prior to the waiver or (ii) the redemption of a number of shares of each series of Class One Preferred Stock equal to the net worth of the Subsidiary at the time of the acquisition ("Redemption") divided by $10. The Company provided the holders of Class One Preferred Stock agreeing to waive their unwind rights with a further option to take the payment due from the Company in the form of a promissory note maturing one year from the date of issuance (in each case August 8, 1995) and bearing interest at the rate of 10 percent per annum payable quarterly, together with warrants to purchase the Company's Common Stock with an exercise price $32.00 per share. The waivers of the Unwind Provision obtained by the Company are not subject to any expiration date. The following table summarizes the consideration paid by the Company for the waiver of the Unwind Provision: <TABLE> <CAPTION> CASH PAYMENT REDEMPTION <S> <C> Otto Packaging, Inc.(1) BVS, Inc.(3) Harris Supply Company, Inc.(2) Pallet City, Inc.(4) Pallet Source, Inc. Quality Pallet, Inc.(5) Hurt's Pallet & Sales, Inc. </TABLE> (1) Jeffery Otto, a director and officer of the Company, and his wife Judy received the $50,000. (2) Payment of the $50,000 was made in the form of a promissory note from the Company in addition to a warrant to purchase 3,438 shares of the Company's Common Stock. (3) Edward Van, an officer of the Company, and former owner of BVS, Inc., received $352,725 in exchange for the redemption of 35,273 shares of Class One Preferred Stock. (4) Payment of the $467,000 was made in the form of a promissory note from the Company in exchange for redemption of 46,700 shares of Class One Preferred Stock in addition to a warrant to purchase 32,109 shares of the Company's Common Stock. Of the total consideration paid to Pallet City, Inc., Donald Matre, a five percent shareholder of the Company and former owner of Pallet City, Inc., received payment in the form of a $214,820 promissory note from the Company in exchange for redemption of 21,482 shares of Class One Preferred Stock in addition to a warrant to purchase 14,769 shares of the Company's Common Stock. (5) Payment of the $318,018 was made in the form of a promissory note from the Company in exchange for the redemption of 31,802 shares of Class One Preferred Stock in addition to a warrant to purchase 21,844 shares of the Company's Common Stock. Prior to the Company's acquisition of Pallet Supply, Inc., Pallet Supply, Inc. spun off one of its divisions, Machine Specialists, Inc. to James Doyle, a former owner of Pallet Supply, Inc. (the "Spin-Off"). Machine Specialists, Inc. manufactures equipment for the new and recycled pallet industry. Under the terms of the Spin-Off, the Company loaned Machine Specialists $300,000 on a subordinated basis. Amounts outstanding under this loan bear interest at the prime rate as published from time to time in The Wall Street Journal. Amounts due in respect of principal and interest under the loan are payable in eight quarterly installments beginning July 1, 1998, and any unpaid principal, together with accrued interest, is payable in full on July 1, 2000. James J. Doyle has also entered into four separate building lease agreements with Pallet Supply Co., Inc. Payments by the Company to Mr. Doyle with respect to all four leases amounted to approximately $113,050 during 1995. The Company believes that its lease rates are no less favorable than those that would be obtained from unrelated third parties. On May 1, 1996, Mr. Doyle entered into a one-year employment agreement with the Company. Such employment agreement automatically renews for additional one-year terms unless either party terminates the agreement. The employment agreement provides for an annual base salary of $50,000 plus commissions for acquisitions consummated by the Company for which Mr. Doyle provided services. The employment agreement contains provisions for termination, paid vacation and other benefits. All future material transactions with and loans to directors, officers or stockholders holding more than 5% of the Company's outstanding Common Stock, or affiliates of any such persons, will be (i) made for bona fide business purposes, (ii) on terms no less favorable than could be obtained from an unaffiliated third party, and (iii) approved by a majority of the independent outside members of the Company's Board of Directors who do not have an interest in the transactions or loans. PRINCIPAL SHAREHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock and Preferred Stock (assuming a one-for-one conversion of shares of Preferred Stock to shares of Common Stock) as of the date of this Offering, and as adjusted to reflect the sale of Common Stock being offered by the Company for (i) each director and named executive officers in the summary compensation table of the Company, (ii) all directors and executive officers of the Company as a group, and (iii) each person or entity known by the Company to own beneficially 5% or more of the Company's Common Stock. Unless otherwise indicated, the person or entity listed in the table is the beneficial owner of the shares and has sole voting and investment power with respect to such shares. <TABLE> <CAPTION> PERCENTAGE OF OUTSTANDING SHARES SHARES OWNED BENEFICIALLY BEFORE NAME OF BENEFICIAL OWNER AND POSITION OWNED(1) OFFERING AFTER OFFERING <S> <C> <C> <C> DIRECTORS AND EXECUTIVE OFFICERS(2): Jeffery E. Otto(3) 546,330 16.7% 8.7% Edward Van(4) 339,460 10.4 5.4 William L. Alvey(5) 100,000 3.1 1.6 Reynold P. Flom(6) 62,500 1.9 * Bruce C. Faulken(7) 56,199 1.7 * Robert C. Klas(8) 53,750 1.6 * Thomas S. Schreier(9) 39,730 1.2 * All Directors and Officers as a group (includes 10 persons)(10) 1,266,710 38.8 20.2 OTHER 5% OR MORE SHAREHOLDERS: James J. Doyle(11) 326,371 10.0 5.2 Donald J. Matre(12) 197,797 6.1 3.2 </TABLE> *Less than 1%. (1) Beneficial ownership is determined in accordance with rules of the Securities and Exchange Commission, and includes generally voting power and/or investment power with respect to securities. Shares of Common Stock subject to options or warrants currently exercisable or exercisable prior to June 1, 1996 are deemed outstanding for computing the beneficial ownership percentage of the person holding such options but are not deemed outstanding for computing the beneficial ownership percentage of any other person. (2) The address for each director and officer of the Company is 2665 Long Lake Road, Suite 120, Roseville, Minnesota 55113. (3) Includes 97,978 shares owned by Mr. Otto's wife and 15,000 shares owned by Mr. Otto's children. Mr. Otto disclaims beneficial ownership of these shares. (4) Includes 4,854 shares issuable pursuant to currently exercisable options. (5) Includes 50,000 shares owned by Mr. Alvey's wife. Mr. Alvey disclaims beneficial ownership of these shares. (6) Includes 12,500 shares owned by Mr. Flom's wife. Mr. Flom disclaims beneficial ownership of these shares. (7) Includes 56,199 shares issuable pursuant to currently exercisable options. (8) Includes 41,250 shares issuable pursuant to currently exercisable warrants. (9) Includes 22,480 shares issuable pursuant to currently exercisable options and 2,250 shares issuable pursuant to currently exercisable warrants. (10) See notes (3), (4), (5), (6), (7), (8) and (9) above. Includes an additional 66,875 shares of Common Stock issuable pursuant to currently exercisable options and warrants. (11) Mr. Doyle's address is 321 St. Paul Street, Memphis, Tennessee 38126. (12) Mr. Matre's address is 310 Grand Island Boulevard, P.O. Box 911, Tonawanda, New York 14151. Includes 11,706 shares issuable pursuant to currently exercisable warrants. DESCRIPTION OF CAPITAL STOCK GENERAL The following description does not purport to be complete and is qualified in its entirety by this reference to the Company's Amended and Restated Articles of Incorporation (the "Articles"), a copy of which is filed as an exhibit to the Registration Statement of which this Prospectus is a part. The authorized capital stock of the Company consists of 25,000,000 shares of capital stock, par value $.01 per share, of which 20,000,000 are Common Stock and 5,000,000 are Preferred Stock. On April 4, 1996 the Company's shareholders approved a 1-for-8 reverse stock split with respect to Common Stock and a 1-for-2 reverse stock split with respect to Prefered Stock. All share and per share data contained in this Prospectus have been adjusted to give effect to such splits. As of August 30, 1996, there were 1,081,292 shares of Common Stock issued and outstanding held by 74 holders of record and 2,183,424 shares of Class One through Class Three Preferred Stock (the "Preferred Stock") issued and outstanding, held by 32 holders of record. Concurrent with the completion of this Offering, all outstanding shares of Preferred Stock will be converted into shares Common Stock on a one-for-one basis. All rights and privileges of the Preferred Stock will terminate upon completion of this Offering and all such shares of converted Preferred Stock will have the same rights and privileges as Common Stock. Upon completion of this Offering there will be 6,264,716 shares of Common Stock outstanding and no shares of Preferred Stock will be outstanding. COMMON STOCK The holders of shares of Common Stock are entitled to one vote per share on all matters which shareholders may vote on at all meetings of shareholders. All shares of the Company's Common Stock now outstanding are fully paid and nonassessable. The holders of shares of the Company's Common Stock have equal ratable rights to dividends with other holders of shares of Common Stock from funds legally available therefore, when, as and if declared by the Board of Directors of the Company. The holders of shares of the Company's Common Stock are entitled to share ratably with other holders of shares of Common Stock in all of the assets of the Company available for distribution to the holders of the Common Stock upon liquidation, dissolution or winding up of the affairs of the Company. The holders of shares of Common Stock do not have preemptive, subscription or conversion rights and there are no redemption or sinking fund provisions applicable thereto. The holders of the Common Stock do not have cumulative voting rights, which means that the holders of more than 50% of the outstanding shares of Common Stock voting for the election of directors can elect all of the directors of the Company to be elected, if they so choose. In such event, the holders of the remaining shares will not be able to elect any of the Company's directors. The payment by the Company of dividends, if any, in the future rests within the discretion of the Board of Directors and will depend, among other things, upon the Company's earnings, its capital requirements and its financial condition, as well as other relevant factors, including any limitations on dividend payments set forth in agreements governing the Company's outstandingindebtedness. See "-- Convertible Subordinated Debentures" and "Description of the Term Loan and Certain Other Outstanding Indebtedness -- Term Loan." PREFERRED STOCK Upon conversion of the Preferred Stock to be effected concurrent with the completion of this Offering as described above, no shares of the Company's preferred stock will be outstanding. The Company is authorized to issue 5,000,000 shares of preferred stock with such designation, rights and preferences as may be determined from time to time by the Board of Directors. Accordingly, the Board of Directors is empowered, without shareholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of the Company's Common Stock. In the event of issuance, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. Such transactions could be made more difficult to accomplish even if favorable to the interests of the shareholders. The Company is not aware of any person seeking to gain control of the Company. CONVERTIBLE SUBORDINATED DEBENTURES In connection with a private placement completed in the first quarter of 1995, the Company issued $2,000,000 aggregate principal amount of 10.25% Convertible Debentures due March 31, 1998 through a placement agent. The Convertible Debentures bear interest at the rate of 10.25%, payable quarterly until maturity on March 31, 1998. The entire principal of the Convertible Debentures is due and payable March 31, 1998. The Convertible Debentures are unsecured, general obligations of the Company and are subordinate in right of payment to all Senior Debt (as defined in the Convertible Debentures) of the Company and to liabilities that are secured by specific assets and payment streams of the Company. The Convertible Debentures do not contain restrictions on the creation of Senior Debt or secured obligations of the Company. Unless previously redeemed, the Convertible Debentures will be convertible, at any time prior to maturity at the option of the holder, into Common Stock of the Company at a conversion price equal to the lesser of (a) 75% of the offering price per share in an underwritten initial public offering by the Company of shares of its Common Stock or (b) in the event no such offering occurs or the offering price in such offering is greater than $10.00 per share, $7.50 per share, subject to adjustment. The Convertible Debentures are redeemable, in whole or in part, at the option of the Company upon 30 days written notice, upon payment of the principal amount of, together with accrued but unpaid interest on, the Convertible Debentures to be redeemed; provided that such redemption is permitted only if the Company has closed an initial public offering of its Common Stock, the shares of its Common Stock are listed or admitted for quotation on a national securities exchange or quotation system and the closing price of such shares as reported or quoted is greater than three times the offering price of such shares in the initial public offering for a period of twenty or more consecutive days. Events of default nder the Convertible Debentures include failure to pay interest and principal when due; certain events of receivership, insolvency, bankruptcy and reorganization; and failure to perform the covenants contained in the Convertible Debentures after notice and opportunity to cure. The Convertible Debentures contain covenants, among others, that restrict the Company from selling substantially all of its assets or changing its business in any material respect; prohibit mergers or acquisitions, except in the ordinary course of business; and prohibit the payment of cash dividends in respect of the Company's Common Stock or Preferred Stock and the repurchase of its Common Stock. OPTIONS AND WARRANTS The Company has issued warrants to purchase shares of the Company's Common Stock in connection with certain loans made to the Company in the aggregate principal amount of $710,000. Such warrants are exercisable at any time and allow the holder thereof to purchase 16,525 shares of the Company's Common Stock at a purchase price of $20.00 per share. In connection with certain of these loans in the aggregate principal amount of $200,000 the Company issued to the agent a warrant to purchase 250 shares of the Common Stock of the Company at an exercise price of $36.00 per share. See "Certain Transactions" and "Description of the Term Loan and Certain Other Outstanding Indebtedness." Pursuant to the Stock Option Plan, the Company has outstanding options to purchase 495,000 shares of the Company's Common Stock at an exercise price of $3.60 per share. In connection with the private placement of the Company's Convertible Debentures, the Company issued to the agent for such private placement, warrants to purchase up to 6,667 shares of Common Stock at an exercise price of $36.00 per share, subject to adjustment under certain circumstances. In connection with an amendment to the agency agreement, the Company issued the agent a warrant to purchase 30,000 shares of the Company's Common Stock at an exercise price the greater of (i) 100% of the per share price in the Company's next Qualified Financing or (ii) $5.00 per share. See "-- Convertible Subordinated Debentures". The Company has issued warrants to purchase shares of its Common Stock in connection with certain loans to the Company in the aggregate principal amount of $1.8 million. Such warrants are exercisable at any time and allow the holders thereof to purchase 28,123 shares of Common Stock at an exercise price of the lesser of (i) $24.00 per share or (ii) 60% to 67% of the offering price in an initial public offering of the Company's Common Stock. In connection with obtaining the agreement of the holders of the Company's Class One Preferred Stock to waive their rights to unwind the acquisition pursuant to which such Class One Preferred Stock was issued, the Company issued to holders of certain series of Class One Preferred Stock warrants to purchase up to a total of 14,347 shares of the Company's Common Stock at an exercise price of $32.00 per share See "Certain Transactions." The Company has issued warrants to purchase 19,563 shares of its Common Stock in connection with assistance in obtaining financing through various means. Such warrants are exercisable at any time and allow the holder to purchase shares of Common Stock at exercise prices the lesser of (i) $20 to $24 per share or (ii) 50% to 100% of the offering price in an initial public offering. The Company has issued warrants to purchase 300,000 shares of its Common Stock in connection with the Secured Notes. The warrants are exercisable at a per share price equal to the greater of (i) 75% of the per share price of Common Stock at the Company's next Qualified Financing or (ii) $5.00 per share. In connection with the placement of the Secured Notes the Company issued the agent a warrant to purchase 30,000 shares of the Company's Common Stock at an exercise price the greater of (i) 100% of the per share price in the Company's next Qualified Financing or (ii) $5.00 per share. The Company has issued warrants to purchase 109,016 shares of its Common Stock in connection with extending the maturity dates on certain outstanding debt at an exercise price of the lesser of (i) $6.40 per share or (ii) 80% of the per share offering price in an initial public offering of the Company's Common Stock. No holders of the options and warrants described above are entitled, on account of their ownership of options or warrants, to vote, receive dividends, or exercise any of the rights of holders of shares of Common Stock for any purpose until such options or warrants have been duly exercised and payment of the purchase or exercise price has been made. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Company's Amended and Restated Articles of Incorporation and Amended Bylaws and the provisions of the Minnesota Business Corporation Act, which govern the actions of the Company, provide that present officers and directors of the Company shall be indemnified against certain liabilities and expenses which any of them may incur as a result of being, or having been, an officer or director of the Company. Indemnification is contingent upon certain conditions being met, including, that the indemnified person: has not been previously indemnified by another party for the same matter; has acted in good faith; has received no improper personal benefit and in the case of a criminal proceeding, has no reason to believe that the conduct complained of was unlawful and reasonably believed that the conduct complained of was in the best interest of the Company, or in certain circumstances, reasonably believed that the conduct complained was not opposed to the best interests of the Company. PROVISIONS OF THE COMPANY'S AMENDED AND RESTATED ARTICLES OF INCORPORATION AND AMENDED BYLAWS AND MINNESOTA BUSINESS CORPORATION ACT The existence of authorized but unissued preferred stock, described above, and certain provisions of the Company's Amended and Restated Articles of Incorporation and Amended Bylaws and Minnesota law, described below, could have an anti-takeover effect. These provisions are intended to provide management flexibility, to enhance the likelihood of continuity and stability in the composition of the Company's Board of Directors and in the policies formulated by the Board and to discourage an unsolicited takeover of the Company if the Board determines that such a takeover is not in the best interests of the Company and its shareholders. However, these provisions could have the effect of discouraging some attempts to acquire the Company which would deprive the Company's shareholders of opportunities to sell their shares of Common Stock at prices higher than prevailing market prices. Section 302A.671 of the Minnesota Statutes applies, with certain exceptions, to any acquisition of voting stock of the Company (from a person other than the Company, and other than in connection with certain mergers and exchanges to which the Company is a party) resulting in the beneficial ownership of 20 percent or more of the voting stock then outstanding. Section 302A.671 requires approval of any such acquisitions by a majority vote of the shareholders of the Company prior to its consummation. In general, shares acquired in the absence of such approval are denied voting rights and are redeemable at their then fair market value by the Company within 30 days after the acquiring person has failed to give a timely information statement to the Company or the date the shareholders voted not to grant voting rights to the acquiring person's shares. Section 302A.673 of the Minnesota Statutes generally prohibits any business combination by the Company, or any subsidiary of the Company, with any shareholder which purchases 10% or more of the Company's voting shares (an "interested shareholder") within four years following such interested shareholder's share acquisition date, unless the business combination is approved by a committee of all of the disinterested members of the Board of Directors of the Company before the interested shareholder's share acquisition date. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Company's Common Stock is Norwest Bank Minnesota, N.A. DESCRIPTION OF THE TERM LOAN AND CERTAIN OTHER OUTSTANDING INDEBTEDNESS TERM LOAN On August 8, 1995, the Company, through its wholly owned subsidiary PRANA Holdings, entered into the Term Loan with Norwest. Pursuant to the Term Loan, PRANA Holdings may borrow from Norwest up to $2.6 million through the issuance of notes to Norwest. All amounts due under the Term Loan are guaranteed by the Company. As of the date hereof, PRANA Holdings had borrowed $2.6 million under the Term Loan. All principal borrowed under the Term Loan is due February 28, 1998, unless the payment of principal outstanding is accelerated pursuant to the terms of the Term Loan. Amounts outstanding under the Term Loan bear interest at a floating rate per annum equal to the base rate publicly announced from time to time by Norwest plus 3 percent. The interest so calculated is payable monthly and upon termination, acceleration or prepayment in full of the Term Loan. Amounts outstanding under the Term Loan also accrue interest at the rate (the "Accrual Rate") of 9 percent per annum compounded monthly. Such interest is due and payable upon termination, acceleration or prepayment in full of the Term Loan. Pursuant to the Term Loan, the Company granted Norwest an option to purchase a warrant exercisable for shares of Common Stock of the Company. Under such option, Norwest may elect, under certain events, to designate amounts of interest accrued under the Term Loan pursuant to the Accrual Rate for conversion into a warrant to purchase shares of Common Stock of the Company. If Norwest exercises such option, the Company will issue to Norwest, for a nominal purchase price, a warrant to purchase a number of shares of Common Stock of the Company equal to (i) the amount of Accrual Interest so designated by Norwest divided by (ii) a price per share equal to (x) the price at which the Company sold shares of its Common Stock in a public offering or its most recent private placement or (y) in the event that the Company sells convertible securities in such a public offering or private placement, the price at which such convertible securities are convertible into shares of Common Stock of the Company. Any amounts of Accrual Interest so designated by Norwest for the purchase of shares of Common Stock under the warrant are not required to be paid by PRANA Holdings. PRANA Holdings may prepay amounts outstanding under the Term Loan at any time. PRANA Holdings is required to make mandatory prepayments of the amounts outstanding under the Term Loan out of Excess Cash Flow (as defined in the Term Loan) and in certain other events. Norwest has waived the provision of the Term Loan requiring mandatory prepayment of the amount outstanding under the Term Loan upon completion of an initial public offering by the Company. Events of default under the Term Loan include, failure to pay interest or principal when due; failure to perform the covenants and agreements in the Term Loan; certain events of receivership, insolvency, bankruptcy and reorganization; default in the payment of indebtedness under other borrowings; and certain changes in the ownership of the issued and outstanding Common Stock of PRANA Holdings and other events customary in these transactions. The Term Loan contains such covenants that are customary in bank lending transactions of this type, including, among others, covenants relating to maintenance of a debt service coverage ratio and net book worth; ownership of stock of subsidiaries; prohibitions on liens; restrictions on the incurrence of indebtedness and guaranties; restrictions on investments; restrictions on dividends; prohibitions on asset sales, mergers and acquisitions and sale and leaseback transactions; limitations on salaries and management fees; and a limitation on the ability of PRANA Holdings to make upstream transfers of cash to the Company. The obligations of PRANA Holdings under the Term Loan are secured by a pledge by PRANA Holdings of, among other things, its equipment, general intangibles, inventory, receivables, certain specified notes payable and the shares of the Subsidiaries owned by PRANA Holdings. The Company is currently out of compliance with certain covenants of its long-term debt. See "Risk Factors - Need for Promissory Note Extension; Long-Term Debt Current Non-Compliance; Going Concern Uncertainty" and Notes 10 and 17 of the Company's Consolidated Financial Statements. CERTAIN OTHER OUTSTANDING INDEBTEDNESS The Company has issued promissory notes under loan commitments entered into from time to time with individual investors. In certain instances, the Company has engaged placement agents to locate such investors and, in certain instances, the Company has entered into such loan commitments with officers and directors of the Company. To date, the Company has outstanding a total of $2.3 million aggregate principal amount of promissory notes under such loan commitments. Amounts outstanding under such promissory notes are general, unsecured obligations of the Company. All of such promissory notes bear interest at the rate of 10 percent per annum. Such promissory notes have maturity dates of either one year or two years from the date of issuance. In connection with the issuance of promissory notes under the loan commitments, the Company has issued to the holders of the promissory notes warrants to purchase shares of the Company's Common Stock. Under certain of such loan commitments, the Company is obligated to issue additional warrants to purchase shares of its Common Stock in the event the Company does not pay the principal amount due under the related promissory note by certain specified dates. See "Certain Transactions" and "Description of Capital Stock -- Options and Warrants." Certain of the Company's Subsidiaries have entered into the Secured Credit Facilities with Norwest Credit. The aggregate amount that may be borrowed under the Secured Credit Facilities is $3.2 million. Amounts outstanding under the Secured Credit Facilities bear interest at a floating rate equal to the prime rate publicly announced by Norwest plus 1.25% to 1.75%. Amounts outstanding under the Secured Credit Facilities are secured by the assets of the Subsidiary parties and are guaranteed by the Company and its other Subsidiaries. The Secured Credit Facilities terminate on February 28, 1998. The Company has issued $1.5 million in Secured Notes. The Secured Notes are due and payable on the earlier of (i) April 23, 1997 or (ii) the closing date of the Company's next Qualified Financing. The Secured Notes bear interest at 11.25% per annum. In connection with the issuance of the Secured Notes the Company granted to investors warrants to purchase 300,000 shares of the Company's Common Stock exercisable at a price equal to the greater of (i) 75% of the per share price of Common Stock at the Company's next Qualified Financing or (ii) $5.00 per share. UNDERWRITING The Underwriters named below, for which John G. Kinnard and Company, Incorporated is acting as representative (the "Representative"), have severally agreed, subject to the terms and conditions of the Underwriting Agreement, to purchase from the Company the 2,750,000 shares of Common Stock offered hereby. The number of Shares that each Underwriter has agreed to purchase is set forth opposite its name below: <TABLE> <CAPTION> NUMBER UNDERWRITER OF SHARES <S> <C> John G. Kinnard and Company, Incorporated Total 2,750,000 </TABLE> The Underwriting Agreement provides that the several Underwriters will be obligated to purchase all of the Shares offered hereby, if any are purchased. The obligation of the Underwriters to purchase the Shares is several and not joint, meaning that, subject to the terms of the Underwriting Agreement, each Underwriter is obligated to purchase only the number of Shares set forth opposite its name, and that its civil liability under the Securities Act may be limited to the public offering price of such Shares. The Underwriters propose to offer the shares to the public at the Price to Public set forth on the cover page of this Prospectus and to dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other brokers and dealers. After the initial public offering, the Price to Public, concession and reallowance may be changed by the Representative. The Company has granted the Underwriters an option exercisable within 30 days after the date of this Prospectus, to purchase up to an additional 412,500 shares of Common Stock at the Price to Public, less the Underwriting Discount shown on the cover page of this Prospectus. The Underwriters may exercise such option only for the purpose of covering any over-allotments in the sale of the Shares offered hereby. The Company has agreed to reimburse the Representative for accountable expenses which are incurred by the Representative in connection with the Offering. Such accountable expenses, which will include legal fees and disbursements of counsel to the Representative, may not exceed $65,000. The Company has paid the Representative $15,000 as an advance against such accountable expenses. The Underwriting Agreement provides the Representative the right to act as sole agent for the Company in connection with future financings or certain corporate transactions until (i) the closing of the Company's first public offering of Common Stock following completion of this Offering or (ii) three years from the date of the Underwriting Agreement. The Company has agreed to sell to the Representative, for nominal consideration, a warrant to purchase up to 275,000 shares of Common Stock (the "Representative's Warrant"). The Representative's Warrant may be exercised in whole or in part commencing twelve months after the date of this Prospectus and for a period of four years thereafter, at an exercise price equal to 120% of the Price to Public. During the term of the Representative's Warrant, it may not be transferred, sold, assigned or hypothecated except to persons who are both officers and stockholders of the Representative. The Representative's Warrant contains anti-dilution provisions providing for appropriate adjustments on the occurrence of certain events, and contains customary demand and participatory registration rights. Any profits realized by the Representative upon the sale of such warrant or the securities issuable upon exercise thereof may be deemed to constitute additional underwriting compensation. The Representative has informed the Company that the Underwriters do not intend to confirm sales to any account over which they exercise discretionary authority. In April 1996, the Representative acted as the agent of the Company for the placement of the Secured Notes. In connection therewith the Representative received a five-year warrant to purchase 30,000 shares of Common Stock. This warrant contains customary demand and participatory registration rights. The Underwriting Agreement provides for reciprocal indemnification between the Company, the Underwriters and their controlling persons against civil liabilities in connection with the Offering, including liabilities under the Securities Act. Insofar as indemnification for liabilities arising under the Securities Act may be permitted pursuant to the foregoing provisions, the Company has been informed that, in the opinion of the Securities and Exchange Commission (the "Commission"), such indemnification is against public policy as expressed in such Act and is therefore unenforceable. Each of the executive officers and directors and five percent shareholders of the Company have agreed, for a period of 365 days from the effective date of this Offering, not to offer, sell or otherwise dispose of approximately 1,580,335 shares of the Common Stock without the prior written consent of the Representative. Additionally, certain other shareholders of the Company have agreed, for a period of 180 days from the effective date of this offering, not to offer, sell or otherwise dispose of the Lock-up Shares. 472,064 of the Lock-up Shares will be available for resale between 181 days and 270 days after the effective date of the Offering and 472,064 of the Lock-up Shares will be available for resale between 271 days and 365 days after the effective date of this Offering. Prior to this Offering, there has been no public trading market for the Common Stock. The initial public offering price of the Shares has been determined by negotiations between the Company and the Representative. Among the factors considered in such negotiations were the prevailing market conditions, estimates of the business potential of the Company, the results of operations of the Company in recent periods and other factors deemed to be relevant. The foregoing is a brief summary of the material provisions of the Underwriting Agreement and the Representative's Warrant and does not purport to be a complete statement of their terms and conditions. The Underwriting Agreement and the Representative's Warrant have been filed as an exhibit to the Registration Statement of which this Prospectus is a part. SHARES ELIGIBLE FOR FUTURE SALE At the date of this Prospectus, the Company has outstanding 1,081,292 shares of Common Stock and 2,183,424 shares of Preferred Stock (concurrent with the completion of this Offering, all outstanding shares of Preferred Stock will be converted into shares of Common Stock on a one-for-one basis). In addition, as of such date, the Company had 495,000 shares reserved for issuance upon exercise of options granted under the Company's Stock Option Plan, 554,497 shares of Common Stock issuable upon exercise of outstanding warrants and 592,593 shares of Common Stock reserved for issuance upon exercise of the Convertible Debentures. Of the 6,264,716 shares to be outstanding after the Offering, the 2,750,000 Shares sold to the public hereby will be freely tradeable without restrictions or registration under the Securities Act. The remaining 3,514,716 shares were issued and sold by the Company in private transactions in reliance upon exemptions from registration under the Securities Act. Of the 3,514,716 shares, 1,985,012 shares will be freely tradeable upon the effective date of this Offering, subject to restrictions imposed by Rule 144, and 1,529,704 shares will be eligible for resale under Rule 144 after expiration of applicable holding periods, subject to restrictions imposed by Rule 144. These shares were purchased at prices substantially below the Price to Public. Therefore, investors in this Offering will experience immediate and substantial dilution in their investment in the Shares. See "Dilution." In general, Under Rule 144 a person (or persons whose sales are aggregated) who beneficially owns shares last acquired privately from the Company or an affiliate of the Company at least two years previously and affiliates of the Company who beneficially own shares last acquired (whether or not such shares were acquired privately) from the Company or an affiliate of the Company at least two years previously, is entitled to sell within any three-month period a number of shares that does not exceed the greater of 1% of the then outstanding shares of the Company's Common Stock or the average weekly trading volume in the Company's Common Stock during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to certain manner-of-sale provisions, notice requirements and the availability of current public information about the Company. A person who has not been an affiliate of the Company at any time during the three months preceding a sale, and who beneficially own shares last acquired from the Company or an affiliate of the Company at least three years previously is entitled to sell all such shares under Rule 144 without regard to any of the limitations of the Rule. In addition, Rule 144A under the Securities Act, as currently in effect, in general permits unlimited resales of certain restricted securities of any issuer provided that the purchaser is an institution that owns and invests on a discretionary basis at least $100 million in securities or is a registered broker-dealer that owns and invests $10 million in securities. Rule 144A allows the existing stockholders of the Company to sell their shares to such institutions and registered broker-dealers without regard to any volume or other restrictions. Unlike under Rule 144, restricted securities sold under Rule 144A to nonaffiliates do not lose their status as restricted securities. In connection with this Offering, all executive officers, directors and five percent shareholders of the Company have agreed not to offer, sell or otherwise dispose of the shares of Common Stock (approximately 1,580,335 shares) for a period of 365 days after the effective date of this Offering, without the prior written consent of the Representative. Additionally, certain other shareholders have agreed not to offer, sell or otherwise dispose of the Lock-up Shares for a period of 180 days following the effective date of this Offering. Of the Lock-up Shares, 472,064 shares will be eligible for resale between 181 days to 270 days after the effective date of this Offering, 472,064 additional shares will be eligible for resale between 271 days to 365 days after the effective date of this Offering. All of the shares held by the executive officers, directors and five percent shareholders of the Company and all Lock-up Shares will be eligible for resale 366 days after the effective date of this Offering, subject to any restrictions under Rule 144. The Company cannot predict the effect, if any, that sales of restricted securities or the availability of such securities for sale could have on the market price, if any, prevailing from time to time. Nevertheless, sales of substantial amounts of the Company's securities, including the securities offered hereby, could adversely affect prevailing market prices of the Company's securities and the Company's ability to raise additional capital by occurring at a time when it would be beneficial for the Company to sell securities. ADDITIONAL MATTERS The Company intends to file a registration statement under the Securities Act to register shares of Common Stock reserved for issuance pursuant to the Company's Stock Option Plan. However, such registration statement will not be filed until 365 days following the effective date of this Offering without the prior written consent of the Representative. Such shares will thereafter be available for sale in the public market upon vesting of such shares except to the extent that the holders thereof are affiliates of the Company, in which case the limitations of Rule 144 (other than the holding period) will apply. LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Dorsey & Whitney LLP, Minneapolis, Minnesota. Certain legal matters will be passed upon for the Underwriters by Briggs & Morgan, Professional Association, Minneapolis, Minnesota. EXPERTS The financial statements of the Company, certain of the Company's Subsidiaries, and companies defined as the "Pending Acquisitions," included in this Prospectus and elsewhere in the Registration Statement have been audited by either KPMG Peat Marwick LLP or Schutta Nelson & Zembal, Ltd., both independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firms as experts in accounting and auditing. The report of KPMG Peat Marwick LLP covering the December 31, 1995 consolidated financial statements of Pallet Recycling Associates of North America, Inc. contains an explanatory paragraph that states that the Company has incurred net losses since its inception date, has defaulted on the payment of certain notes, and is not in compliance with certain terms of its long-term debt agreements. The combination of these events has put the Company in a working capital deficit position, which raises substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of that uncertainty. ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement under the Securities Act with respect to the Common Stock offered hereby. This Prospectus, which is a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the Common Stock, reference is hereby made to such Registration Statement and the exhibits and schedules thereto, copies of which may be inspected without charge at the public reference facilities maintained by the Commission at Judiciary Plaza, Room 1024, 450 Fifth Street N.W., Washington, DC 20549, and at its regional offices at 7 World Trade Center, New York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois 60661-2551. Copies of such materials may also be obtained from the Public Reference Section of the Commission, Washington, DC 20549, upon payment of the fees prescribed by the Commission. The summaries in this Prospectus of additional information included in the Registration Statement or any exhibit thereto are qualified in their entirety by reference to such information or exhibit. The Company intends to distribute to its shareholders annual reports containing audited financial statements and interim reports containing unaudited financial information. The Company has federally registered its trademark PRANA and the associated design. INDEX TO FINANCIAL STATEMENTS <TABLE> <CAPTION> <S> <C> Page PALLET RECYCLING ASSOCIATES OF NORTH AMERICA, INC. Independent Auditors' Report F-5 Consolidated Balance Sheets as of December 31, 1994 and 1995 F-6 Consolidated Statements of Operations for the period from March 2, 1993 (date of inception) to December 31, 1993, the years ended December 31, 1994 and 1995 and the six-month periods ended June 30, 1995 and 1996 (unaudited) F-7 Consolidated Statements of Stockholders' Equity (Deficit) for the period from March 2, 1993 (date of inception) to December 31, 1993, the years ended December 31, 1994 and 1995 and the six-month period ended June 30, 1996 (unaudited) F-8 Consolidated Statements of Cash Flows for the period from March 2, 1993 (date of inception) to December 31, 1993 and the years ended December 31, 1994 and 1995 and the six-month periods ended June 30, 1995 and 1996 (unaudited) F-9 Notes to Financial Statements F-10 OTTO PACKAGING, INC. Independent Auditor's Report F-24 Balance Sheets as of December 31, 1993 and 1992 F-25 Statements of Earnings for the years ended December 31, 1993 and 1992 F-26 Statements of Changes in Stockholders' Equity for the years 1991, 1992 and 1993 F-27 Statements of Cash Flows for the years ended December 31, 1993 and 1992 F-28 Notes to Financial Statements F-29 Independent Auditor's Report on Additional Information F-32 Schedule I -- Supplementary Information on Operations F-33 BVS, INC. Independent Auditors' Report F-34 Balance Sheets as of January 31, 1993 and 1994 F-35 Statements of Earnings for the years ended January 31, 1993 and 1994 F-36 Statements of Stockholders' Equity for the years ended January 31, 1993 and 1994 F-37 Statements of Cash Flows for the years ended January 31, 1993 and 1994 F-38 Notes to Financial Statements F-39 HARRIS SUPPLY COMPANY, INC. Independent Auditors' Report F-41 Balance Sheets as of June 30, 1992, 1993 and March 31, 1994 F-42 Statements of Operations for the years ended June 30, 1992, 1993 and the nine-month period ended March 31, 1994 F-43 Statements of Stockholders Equity for the years ended June 30, 1992, 1993 and the nine-month period ended March 31, 1994 F-44 Statements of Cash Flows for the years ended June 30, 1992, 1993 and the nine-month period ended March 31, 1994 F-45 Notes to Financial Statements F-46 PALLET CITY, INC. Independent Auditors' Report F-50 Balance Sheets as of September 30, 1992 and 1993 and May 31, 1994 F-51 Statements of Operations and Retained Earnings for the years ended September 30, 1992 and 1993 and the eight-month period ended May 31, 1994 F-52 Statements of Cash Flows for the years ended September 30, 1992 and 1993 and the eight-month period ended May 31, 1994 F-53 Notes to Financial Statements F-54 PALLET SOURCE, INC. Independent Auditors' Report F-57 Balance Sheets as of December 31, 1992 and 1993 and November 30, 1994 F-58 Statements of Operations and Retained Earnings (Accumulated Deficit) for the years ended December 31, 1992 and 1993 and the eleven-month period ended November 30, 1994 F-59 Statements of Cash Flows for the years ended December 31, 1992 and 1993 and the eleven-month period ended November 30, 1994 F-60 Notes to Financial Statements F-61 HURT'S PALLET AND SALES, INC. Independent Auditors' Report F-64 Balance Sheets as of December 31, 1992 and 1993 and November 30, 1994 F-65 Statements of Operations and Retained Earnings (Accumulated Deficit) for the years ended December 31, 1992 and 1993 and the eleven-month period ended November 30, 1994 F-66 Statements of Cash Flows for the years ended December 31, 1992 and 1993 and the eleven-month period ended November 30, 1994 F-67 Notes to Financial Statements F-68 QUALITY PALLET, INC. Independent Auditors' Report F-72 Balance Sheets as of December 31, 1992 and 1993 and November 30, 1994 F-73 Statements of Earnings for the years ended December 31, 1992 and 1993 and the eleven-month period ended November 30, 1994 F-74 Statements of Stockholders' Equity for the years ended December 31, 1992 and 1993 and the eleven-month period ended November 30, 1994 F-75 Statements of Cash Flows for the years ended December 31, 1992 and 1993 and the eleven-month period ended November 30, 1994 F-76 Notes to Financial Statements F-77 AMERICAN CENTURY PALLET, INC. Independent Auditors' Report F-80 Balance Sheets as of December 31, 1993 and 1994 and March 31, 1995 F-81 Statements of Operations for the years ended December 31, 1993 and 1994 and the three-month period ended March 31, 1995 F-82 Statement of Stockholders' Equity for the years ended December 31, 1993 and 1994 and the three-month period ended March 31, 1995 F-83 Statements of Cash Flows for the years ended December 31, 1993 and 1994 and the three-month period ended March 31, 1995 F-84 Notes to Financial Statements F-85 B & B PALLET SUPPLY COMPANY Independent Auditors' Report F-90 Balance Sheet as of December 31, 1992, 1993 and 1994, and May 5, 1995 F-91 Statements of Operations and Retained Earnings for the years ended December 31, 1992, 1993 and 1994, and the period from January 1, 1995 to May 5, 1995 F-92 Statements of Cash Flows for the years ended December 31, 1992, 1993 and 1994, and the period from January 1, 1995 to May 5, 1995 F-93 Notes to Financial Statements F-94 PALLET SUPPLY COMPANY, INC. Independent Auditors' Report F-97 Balance Sheet as of December 31, 1992, 1993, 1994 and May 31, 1995 F-98 Statements of Operations for the years ended December 31, 1992, 1993 and 1994 and the five-month period ended May 31, 1995 F-99 Statements of Stockholders' Equity for the years ended December 31, 1992, 1993 and 1994 and the five-month period ended May 31, 1995 F-100 Statements of Cash Flows for the years ended December 31, 1992, 1993 and 1994 and the five-month period ended May 31, 1995 F-101 Notes to Financial Statements F-102 DIAMOND PALLET, INC. Independent Auditors' Report F-106 Balance Sheets as of June 30, 1994 and 1995 and February 15, 1996 F-107 Statements of Operations and Retained Earnings for the years ended June 30, 1994 and 1995 and seven and one-half month period ended February 15, 1996 F-108 Statements of Cash Flows for the years ended June 30, 1994 and 1995 and seven and one-half month period ended February 15, 1996 F-109 Notes to Financial Statements F-110 METROPLEX WOOD PRODUCTS Independent Auditors' Report F-114 Balance Sheets as of December 31, 1993, 1994 and 1995 F-115 Statements of Operations and Equity for the years ended December 31, 1993, 1994 and 1995 F-116 Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 F-117 Notes to Financial Statements F-118 INDY PALLET COMPANY, INC. AND SPECIALTY PALLET COMPANY, INC. Independent Auditors' Report F-120 Combined Balance Sheets as of December 31, 1993, 1994 and 1995 and June 30, 1996 (unaudited) F-121 Combined Statements of Operations for the years ended December 31, 1993, 1994 and 1995 and the six-month periods ended June 30, 1995 and 1996 (unaudited) F-122 Combined Statement of Stockholders' Equity (Deficit) for the years ended December 31, 1993, 1994, and 1995 and the six-month period ended June 30, 1996 (unaudited) F-123 Combined Statement of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and the six-month periods ended June 30, 1995 and 1996 (unaudited) F-124 Notes to Combined Financial Statements F-125 PALLET OUTLET COMPANY, INC. Independent Auditors' Report F-129 Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996 (unaudited) F-130 Statements of Operations and Retained Earnings for the years ended December 31, 1993, 1994 and 1995 and the six-month periods ended June 30, 1995 and 1996 (unaudited) F-131 Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and the six-month periods ended June 30, 1995 and 1996 (unaudited) F-132 Notes to Financial Statements F-133 </TABLE> INDEPENDENT AUDITORS' REPORT The Board of Directors Pallet Recycling Associates of North America, Inc.: We have audited the accompanying consolidated balance sheets of Pallet Recycling Associates of North America, Inc. and subsidiaries as of December 31, 1994 and 1995 and the related consolidated statements of operations, stockholders' equity, and cash flows for the period from March 2, 1993 (date of inception) to December 31, 1993 and for the years ended December 31, 1994 and 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pallet Recycling Associates of North America, Inc. and subsidiaries as of December 31, 1994 and 1995 and the results of their operations and their cash flows for the period from March 2, 1993 (date of inception) to December 31, 1993 and for the years ended December 31, 1994 and 1995, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the accompanying consolidated financial statements, the Company has incurred net losses since its inception date. As discussed in notes 10 and 17, the Company has defaulted on the payment of notes with a principal balance of approximately $800,000 as of August 30, 1996. Additionally, the Company is not in compliance with certain terms of its long-term debt agreements. The outstanding balance related to these agreements amounts to approximately $4,300,000 as of August 30, 1996. As a result of the covenant violations, the holder of the debt may, after notice, declare the entire amount of such indebtedness due and payable immediately. The combination of the above events has put the Company in a working capital deficit position. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are described in note 17. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. KPMG Peat Marwick LLP Minneapolis, Minnesota February 9, 1996, except as to notes 10, 17, 14, 16(c)(iii), 15, 16(a),16(c)(ii), 16(b), and 16(c)(i), which are as of August 30, 1996, August 30, 1996, August 19, 1996, June 25, 1996, June 7, 1996, April 25, 1996, April 23, 1996, April 4, 1996, and March 4, 1996, respectively PALLET RECYCLING ASSOCIATES OF NORTH AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS <TABLE> <CAPTION> DECEMBER 31, JUNE 30, 1994 1995 1996 (UNAUDITED) <S> <C> <C> <C> Cash and cash equivalents $ 441,843 $ 733,682 $ 152,462 Accounts receivable, less allowance for doubtful accounts of $13,546, $30,273 and $30,273 (unaudited) as of December 31, 1994 and 1995 and June 30, 1996, respectively 1,624,977 3,521,089 3,828,086 Inventories (note 4) 1,009,885 2,605,397 2,714,088 Refundable income tax 0 40,061 2,368 Prepaid expenses 98,446 105,459 164,871 Total current assets 3,175,151 7,005,688 6,861,875 Property and equipment, net (notes 5 and 12) 2,827,824 5,436,503 5,691,506 Goodwill, net of accumulated amortization of $30,002, $180,267 and $331,265 (unaudited) as of December 31, 1994 and 1995 and June 30, 1996, respectively (notes 2 and 3) 1,800,752 3,790,747 8,197,894 Other assets, net of accumulated amortization of $4,299, $170,148 and $339,633 (unaudited) as of December 31, 1994 and 1995 and June 30, 1996, respectively 74,763 1,215,549 1,600,296 $7,878,490 $17,448,487 $22,351,571 LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 917,829 $ 2,057,063 $ 2,174,964 Demand notes payable (note 7) 282,535 900,318 376,682 Current maturities of notes payable to related parties (note 6) 60,000 160,000 0 Current maturities of long-term debt (note 10) 335,826 5,107,859 7,898,331 Current maturities of capital lease obligations (note 12) 53,147 79,072 83,852 Current maturities of deferred payment obligations (note 2) 703,893 0 0 Accrued liabilities (note 8) 358,041 650,673 866,831 Income taxes payable 91,917 0 0 Deferred income taxes (note 11) 278,000 237,500 235,000 Total current liabilities 3,081,188 9,192,485 11,635,660 Notes payable to related parties (note 6) 450,000 300,000 300,000 Long-term debt, less current maturities (note 10) 428,263 1,801,674 2,428,843 Subordinated debentures (note 9) 0 2,000,000 2,000,000 Capital lease obligations, less current maturities (note 12) 136,177 73,425 112,788 Deferred payment obligations (note 2) 835,018 0 0 Deferred income taxes (note 11) 324,000 629,200 645,600 Stockholders' equity (notes 2, 14, 15 and 16): Preferred stock, $.01 par value. Authorized 5,000,000 shares; 1,485,009, 2,183,424 and 2,183,424 (unaudited) shares issued and outstanding as of December 31, 1994 and 1995 and June 30, 1996, respectively 14,850 21,834 21,834 Common stock, $.01 par value. Authorized 20,000,000 shares; 1,025,000, 1,081,292 and 1,081,292 (unaudited) shares issued and outstanding as of December 31, 1994 and 1995 and June 30, 1996, respectively 10,250 10,813 10,813 Additional paid-in capital 2,909,817 5,543,449 8,631,601 Accumulated deficit (311,073) (2,124,393) (3,435,568) Total stockholders' equity 2,623,844 3,451,703 5,228,680 Commitments (notes 12, 13, 14, 15, and 16) $7,878,490 $17,448,487 $22,351,571 </TABLE> See accompanying notes to consolidated financial statements. PALLET RECYCLING ASSOCIATES OF NORTH AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS <TABLE> <CAPTION> PERIOD FROM MARCH 2, 1993 SIX-MONTH (DATE OF PERIODS ENDED INCEPTION) YEARS ENDED DECEMBER 31, JUNE 30, TO DECEMBER 31, 1993 1994 1995 1995 1996 (UNAUDITED) <S> <C> <C> <C> <C> <C> Net sales $ 0 $9,843,791 $30,003,509 $12,263,024 $18,424,246 Cost of sales 0 7,035,909 23,939,773 9,680,073 14,150,818 Gross profit 0 2,807,882 6,063,736 2,582,951 4,273,428 Selling, general, and administrative expenses: Operating subsidiaries 0 1,481,120 3,775,742 1,596,924 2,858,469 Corporate 196,241 1,337,029 2,725,196 1,196,892 1,594,921 Amortization expense 1,185 34,747 344,388 101,796 320,483 Goodwill write-off (note 3) 0 0 538,331 0 0 Total selling, general, and administrative expenses 197,426 2,852,896 7,383,657 2,895,612 4,773,873 Operating loss (197,426) (45,014) (1,319,921) (312,661) (500,445) Other income (expense): Interest income 12,506 12,540 12,803 10,013 584 Interest expense (12) (67,322) (687,095) (180,315) (731,762) Gain (loss) on sale of assets 0 15,087 (7,424) (11,419) 1,371 Other 0 7,568 113,317 55,874 (10,734) Total other income (expense) 12,494 (32,127) (568,399) (125,847) (740,541) Loss before income taxes (184,932) (77,141) (1,888,320) (438,508) (1,240,986) Income tax expense (benefit) (note 11) 0 49,000 (75,000) (20,000) 70,189 Net loss $ (184,932) $ (126,141) $(1,813,320) $ (418,508) $(1,311,175) Net loss per share $ (.18) $ (.06) $ (.58) $ (.15) $ (.39) Weighted average shares and common share equivalents outstanding 1,054,133 1,945,071 3,118,379 2,837,494 3,400,301 </TABLE> See accompanying notes to consolidated financial statements. PALLET RECYCLING ASSOCIATES OF NORTH AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY <TABLE> <CAPTION> ADDITIONAL PREFERRED STOCK COMMON STOCK PAID-IN ACCUMULATED SHARES PAR VALUE SHARES PAR VALUE CAPITAL DEFICIT TOTAL <S> <C> <C> <C> <C> <C> <C> <C> Initial common stock issued for cash in 1993 at $.01 per share 0 $ 0 750,000 $ 7,500 $ (1,500) $ 0 $ 6,000 Common stock issued for cash in April through October 1993 at $4.00 per share, net of placement costs of $22,586 0 0 250,000 2,500 974,914 0 977,414 Net loss 0 0 0 0 0 (184,932) (184,932) Balances as of December 31, 1993 0 0 1,000,000 10,000 973,414 (184,932) 798,482 Common stock issued for cash at $4.00 per share 0 0 25,000 250 99,750 0 100,000 Preferred stock issued for acquisitions of companies 1,485,009 14,850 0 0 1,836,653 0 1,851,503 Net loss 0 0 0 0 0 (126,141) (126,141) Balances as of December 31, 1994 1,485,009 14,850 1,025,000 10,250 2,909,817 (311,073) 2,623,844 Common stock issued for acquisition of company 0 0 56,292 563 584,869 0 585,432 Preferred stock issued for acquisition of companies 690,915 6,909 0 0 2,018,838 0 2,025,747 Preferred stock issued as down payment for acquisition 7,500 75 0 0 29,925 0 30,000 Net loss 0 0 0 0 0 (1,813,320) (1,813,320) Balances as of December 31, 1995 2,183,424 21,834 1,081,292 10,813 5,543,449 (2,124,393) 3,451,703 Additional paid-in capital resulting from a disproportionate stock split 0 0 0 0 3,088,152 0 3,088,152 Net loss 0 0 0 0 0 (1,311,175) (1,311,175) Balances as of June 30, 1996 (unaudited) 2,183,424 $21,834 1,081,292 $10,813 $8,631,601 $(3,435,568) $ 5,228,680 </TABLE> See accompanying notes to consolidated financial statements. PALLET RECYCLING ASSOCIATES OF NORTH AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> PERIOD FROM MARCH 2, 1993 (DATE OF INCEPTION) YEARS ENDED DECEMBER 31, TO DECEMBER 31, 1993 1994 1995 <S> <C> <C> <C> Cash flows from operating activities: Net loss $(184,932) $(126,141) $(1,813,320) Adjustments to reconcile net loss to net cash used in operating activities: Loss (gain) on sale of property and equipment 0 (15,087) 7,424 Depreciation 2,007 152,665 449,996 Amortization 1,185 34,747 344,388 Goodwill write-off 0 0 538,331 Deferred income taxes 0 (26,428) (116,000) Changes in operating assets and liabilities: Accounts receivable (4,770) (253,863) (739,535) Inventories 0 (352,509) (1,104,280) Prepaid expenses (5,590) (48,958) 26,421 Accounts payable 32,463 264,099 392,198 Accrued liabilities 69,865 (123,624) 130,916 Income taxes payable/refundable 0 104,291 (131,978) Net cash used in operating activities (89,772) (390,808) (2,015,439) Cash flows from investing activities: Proceeds from sale of property and equipment 0 38,013 130,947 Purchase of property and equipment (40,161) (474,440) (1,083,978) Proceeds from sale of marketable securities 0 530,100 0 Purchase of marketable securities (530,100) 0 0 Increase in other assets (10,263) (64,816) (566,648) Cash paid and other costs incurred in acquisitions of companies, net of cash acquired 0 (132,234) (506,899) Net cash used in investing activities (580,524) (103,377) (2,026,578) Cash flows from financing activities: Cash payments for debt issuance costs 0 0 (459,927) Proceeds from demand notes payable 0 62,957 275,760 Payments on demand notes payable 0 (2,763) (364,265) Proceeds from notes payable to related parties 0 515,000 20,414 Payments on notes payable to related parties 0 0 (86,967) Proceeds from issuance of long-term debt 0 134,086 5,634,561 Principal payments on long-term debt 0 (167,537) (1,165,560) Proceeds from subordinated debentures 0 0 2,000,000 Principal payments on capital lease obligations 0 (18,833) (174,631) Payments on deferred payment obligations 0 0 (1,345,529) Net proceeds from issuance of common stock 983,414 100,000 0 Net cash provided by financing activities 983,414 622,910 4,333,856 Net increase (decrease) in cash and cash equivalents 313,118 128,725 291,839 Cash and cash equivalents: Beginning of period 0 313,118 441,843 End of period $313,118 $441,843 $733,682 Supplemental disclosures of cash flow information: Cash paid during period for interest $12 $56,521 $460,450 Cash paid during period for income taxes 0 45,719 85,478 Supplemental schedule of non-cash investing and financing activities: Equipment acquired under capital lease 0 96,218 99,560 Common stock issued for acquisition of companies 0 0 585,432 Preferred stock issued for acquisition of companies 0 1,851,503 2,025,747 Preferred stock issued as down payment for acquisition of company 0 0 30,000 Deferred payment obligations incurred in acquisition of companies 0 1,538,911 641,636 Long-term debt incurred in acquisition of companies 0 0 211,020 Long-term debt incurred to repay deferred payment obligations 0 0 835,018 Goodwill as a result of a stock split 0 0 0 Goodwill as a result of the purchase of puts and registration rights through the issuance of debt 0 0 0 </TABLE> WIDE TABLE CONTINUED FROM ABOVE <TABLE> <CAPTION> SIX-MONTH PERIODS ENDED JUNE 30, 1995 1996 (UNAUDITED) <S> <C> <C> Cash flows from operating activities: Net loss $(418,508) $(1,311,175) Adjustments to reconcile net loss to net cash used in operating activities: Loss (gain) on sale of property and equipment 11,419 12,985 Depreciation 179,919 308,453 Amortization 101,796 320,483 Goodwill write-off 0 0 Deferred income taxes 63,500 0 Changes in operating assets and liabilities: Accounts receivable (638,461) (256,111) Inventories (275,789) 58,822 Prepaid expenses (6,995) (53,087) Accounts payable 380,311 (151,216) Accrued liabilities (49,279) 195,318 Income taxes payable/refundable (188,989) 37,693 Net cash used in operating activities (841,076) (837,835) Cash flows from investing activities: Proceeds from sale of property and equipment 67,680 77,913 Purchase of property and equipment (551,625) (418,568) Proceeds from sale of marketable securities 0 0 Purchase of marketable securities 0 0 Increase in other assets (338,938) (370,386) Cash paid and other costs incurred in acquisitions of companies, net of cash acquired (419,317) (770,815) Net cash used in investing activities (1,242,200) (1,481,856) Cash flows from financing activities: Cash payments for debt issuance costs 0 (258,847) Proceeds from demand notes payable 12,042 0 Payments on demand notes payable (42,011) (523,636) Proceeds from notes payable to related parties 93,998 0 Payments on notes payable to related parties 0 (160,000) Proceeds from issuance of long-term debt 335,174 3,192,275 Principal payments on long-term debt (185,224) (465,041) Proceeds from subordinated debentures 2,000,000 0 Principal payments on capital lease obligations (38,955) (46,280) Payments on deferred payment obligations (50,000) 0 Net proceeds from issuance of common stock 0 0 Net cash provided by financing activities 2,125,024 1,738,471 Net increase (decrease) in cash and cash equivalents 41,748 (581,220) Cash and cash equivalents: Beginning of period 441,843 733,682 End of period $483,591 $152,462 Supplemental disclosures of cash flow information: Cash paid during period for interest $84,754 $505,356 Cash paid during period for income taxes 90,274 32,307 Supplemental schedule of non-cash investing and financing activities: Equipment acquired under capital lease 16,000 61,261 Common stock issued for acquisition of companies 585,432 0 Preferred stock issued for acquisition of companies 2,013,747 0 Preferred stock issued as down payment for acquisition of company 0 0 Deferred payment obligations incurred in acquisition of companies 641,636 0 Long-term debt incurred in acquisition of companies 85,000 690,407 Long-term debt incurred to repay deferred payment obligations 0 0 Goodwill as a result of a stock split 0 3,088,152 Goodwill as a result of the purchase of puts and registration rights through the issuance of debt 0 236,882 </TABLE> See accompanying notes to consolidated financial statements. PALLET RECYCLING ASSOCIATES OF NORTH AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED AS TO JUNE 30, 1996 DATA) (1) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS Pallet Recycling Associates of North America, Inc. and subsidiaries (the Company) was incorporated in March 1993 with the intent of forming a national pallet recycling company through the acquisition of pallet recycling companies throughout the United States. During 1994, the Company acquired seven pallet recycling companies and started one other production facility. During 1995, the Company acquired two pallet recycling companies and acquired the assets of four additional pallet recycling operations. The Company builds, refurbishes, and distributes wooden pallets for use in a variety of industries. The Company's headquarters are in Roseville, Minnesota with twenty production facilities located in fifteen states. The Company sells its products on an unsecured basis primarily to customers in a wide range of businesses, generally within a 150-mile radius of its production facilities. The Company's ability to collect the amounts due from customers is affected by economic conditions within these areas. CONSOLIDATION The consolidated financial statements include the accounts of Pallet Recycling Associates of North America, Inc., its wholly-owned subsidiary PRANA Holdings, Inc., and its thirteen wholly-owned subsidiaries after elimination of all significant intercompany accounts and transactions. REVENUE RECOGNITION The Company recognizes sales and the related cost of sales on the accrual basis of accounting at the time the new, recycled, or repaired pallets or pallet by-products are shipped to or picked up by customers. Brokerage pallet sales are recognized when shipments are received by the customers. CASH EQUIVALENTS The Company considers all highly liquid debt instruments purchased with an initial maturity of three months or less to be cash equivalents. INVENTORIES Inventories are stated at the lower of first in, first out (FIFO) cost or market. PROPERTY AND EQUIPMENT Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed on a straight-line basis over estimated lives as follows: Leasehold improvements 4-10 years Furniture and fixtures 3-7 years Equipment 7-15 years Transportation equipment 5-10 years GOODWILL Goodwill represents the amount paid in excess of the fair market value of assets acquired of purchased businesses and is amortized using the straight-line method over a term of 20 years. RECOVERABILITY OF LONG-LIVED ASSETS TO BE HELD AND USED IN THE BUSINESS The Company has adopted Statement of Accounting Standards No. 121 (SFAS No. 121), ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, for purposes of determining and measuring impairment of certain long-lived assets to be held and used in the business (see note 3). The Company reviews its property and equipment, identifiable intangibles and goodwill related to those assets to be held and used in the business for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company considers a history of operating losses within an individual operating company in excess of one year since being acquired by the Company as the primary indicator of potential impairment. The Company considers an asset to be impaired if a forecast of undiscounted future operating cash flows related to an individual operating company is less than its carrying amount. If an asset is determined to be impaired, the loss is measured as the amount by which the carrying amount of the net asset exceeds its fair value. An estimate of fair value is based on the best information available, which is generally determined by estimating the present value of expected future cash flows using the Company's incremental borrowing interest rate as the discount rate. OTHER ASSETS Other assets consist primarily of deposits, non-compete agreements, debt issuance costs and capitalized acquisition costs related to the pending acquisitions. The non-compete agreements are amortized using the straight-line method over the term of the non-compete agreements. Debt issuance costs are amortized using the straight-line method over the length of the agreements. In 1995, the Company capitalized approximately $460,000 of debt issuance costs. The unamortized balance as of December 31, 1995 is approximately $331,000. Capitalized acquisition costs consist primarily of legal and accounting costs related to the pending acquisitions (see note 15). These costs are included as part of the purchase price upon the closure of the related acquisition. In the event that a pending acquisition is not finalized, these costs will be expensed in the period it becomes probable that the acquisition will not occur. PREFERRED STOCK On February 18, 1994, the Company designated 1,485,009 shares of the Company's common stock as preferred stock to be issued in series alphabetically (Class One Preferred Stock). On April 12, 1995, the Company designated 687,916 of the Company's common stock as Class Two Preferred Stock. Class One (all series) and Class Two Preferred Stock have the same features including a par value of $.01 per share, are entitled to one vote on all matters voted on by common stockholders, have preference over common stock in the event of liquidation of the Company and are automatically converted to one share of the Company's common stock upon completion of an initial public offering. On September 27, 1995, the Company designated 2,827,075 shares of the Company's common stock as Class Three Preferred Stock. The preferred stock has a par value of $.01 per share, is entitled to one vote on all matters voted on by common stockholders, and is automatically converted to one share of the Company's common stock upon completion of an initial public offering. The Class Three Preferred Stock has a $.10 per share preference over common stock in the payment of any cash dividends by the Company and has a $10.00 per share preference over common stock in the receipt of cash or other property upon the complete liquidation of the Company. The number of outstanding preferred shares is as follows: <TABLE> <CAPTION> DECEMBER 31 1994 1995 <S> <C> <C> Class One 1,485,009 1,485,009 Class Two 0 687,915 Class Three 0 10,500 1,485,009 2,183,424 </TABLE> INCOME TAXES Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. NET LOSS PER SHARE Net loss per share is determined by dividing the net loss by the weighted average number of shares of common share, preferred share and common share equivalents outstanding. Common share equivalents result, under Securities and Exchange Commission rules, from shares sold or options and warrants granted within 12 months prior to the date of an initial public offering at per share prices less than that of the initial public offering (assumed to be $4.50 per share). Accordingly, 135,585 shares related to options and warrants granted have been treated as common share equivalents for all periods presented on the consolidated statements of operations. Preferred shares are included in the weighted average shares outstanding as they automatically convert to an equal number of common shares upon completion of an initial public offering. The following is a summary of the weighted average common and preferred shares outstanding and common share equivalents: <TABLE> <CAPTION> PERIOD FROM MARCH 2, 1993 YEAR ENDED (DATE OF INCEPTION) TO DECEMBER 31 DECEMBER 31, 1993 1994 1995 <S> <C> <C> <C> Weighted average shares outstanding 918,548 1,809,486 2,982,794 Common share equivalents 135,585 135,585 135,585 1,054,133 1,945,071 3,118,379 </TABLE> ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS The carrying value of cash equivalents approximates market due to the short-term nature of the investments. The carrying value of debt approximates market, as the substantial majority of debt carries interest rates that approximate market. UNAUDITED FINANCIAL INFORMATION In the opinion of management, the Company has made all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the financial condition of the Company as of June 30, 1996 and the results of operations and cash flows for the six-month periods ended June 30, 1995 and 1996, as presented in the accompanying unaudited interim financial statements. (2) ACQUISITIONS 1994 In 1994, the Company acquired seven companies summarized as follows: <TABLE> <CAPTION> ACQUISITION TYPE DATE ACQUIRED <S> <C> <C> Otto Packaging, Inc. Stock purchase January 1, 1994 BVS, Inc. Stock purchase February 1, 1994 Harris Supply Company Stock purchase April 1, 1994 Pallet City, Inc. Stock purchase June 1, 1994 Quality Pallet, Inc. Stock purchase December 1, 1994 Pallet Source, Inc. Stock purchase December 1, 1994 Hurt's Pallet & Sales, Inc. Stock purchase December 1, 1994 </TABLE> All of the acquisitions have been accounted for by the purchase method and, accordingly, the aggregate acquisition costs have been allocated to the net assets acquired based on the fair values of such assets at the acquisition date. In connection with these acquisitions, the Company issued 1,485,009 shares of Series A through Series G Preferred Stock, which were independently valued. A summary of the purchase price paid, net assets acquired, and goodwill recorded on the acquisitions is as follows: <TABLE> <CAPTION> <S> <C> Preferred shares issued $ 1,851,503 Cash paid and other acquisition costs, net of cash acquired 132,234 Deferred payment obligations 1,538,911 Total purchase price and acquisition costs 3,522,648 Net assets acquired (1,691,894) Goodwill $ 1,830,754 </TABLE> Net assets acquired consist of the following: <TABLE> <CAPTION> <S> <C> Accounts receivable $1,366,344 Inventories 657,376 Prepaid expenses 43,898 Refundable income taxes 12,374 Property and equipment 2,397,871 Other assets 2,316 Accounts payable (621,267) Notes payable to banks (222,341) Notes payable to related party (45,000) Accrued liabilities (411,800) Capital lease obligations (111,909) Long-term debt (747,540) Deferred tax liabilities (628,428) $ 1,691,894 </TABLE> Certain companies acquired were non-taxable S-corporations. Upon acquisition, these entities were converted to a taxable C-corporation status. Accordingly, deferred taxes were recorded upon acquisition by the Company and included in the above summary of net assets acquired. 1995 During 1995, the Company acquired two pallet recycling companies in stock acquisitions and acquired the assets of four additional pallet recycling operations, summarized as follows: <TABLE> <CAPTION> ACQUISITION TYPE DATE ACQUIRED <S> <C> <C> American Century Pallet Company, Inc. Asset purchase April 1, 1995 Woodgo Enterprises, Inc. Asset purchase April 1, 1995 B&B Pallet Supply Company, Inc. Stock purchase May 5, 1995 Skid Row Pallet (a division of Falcon Manufacturing) Asset purchase May 15, 1995 Pallet Supply Company, Inc. Stock purchase June 1, 1995 Blue Light Pallet Company Asset purchase October 30, 1995 </TABLE> All of the acquisitions have been accounted for by the purchase method and, accordingly, the aggregate acquisition costs have been allocated to the net assets acquired based on the fair values of such assets at the acquisition date. In connection with these acquisitions, the Company issued 687,915 shares of its Class Two Preferred Stock, 3,000 shares of its Class Three Preferred Stock, and 56,292 shares of its Common Stock, which were independently valued. A summary of the purchase price paid, net assets acquired, and goodwill recorded on the acquisitions is as follows: <TABLE> <CAPTION> <S> <C> Class Two Preferred Stock issued $ 2,013,747 Class Three Preferred Stock issued 12,000 Common Stock issued 585,432 Note issued 211,020 Cash paid and other acquisition costs, net of cash acquired 506,899 Deferred payment obligations 641,636 Total purchase price and acquisition costs 3,970,734 Net assets acquired (1,263,809 ) Goodwill $ 2,706,925 </TABLE> Net assets acquired consist of the following: <TABLE> <CAPTION> <S> <C> Accounts receivable $1,156,577 Inventories 491,232 Prepaid expenses 33,434 Property and equipment 2,013,508 Noncompete agreements 250,000 Accounts payable (747,036) Notes payable to banks (706,288) Notes payable to related party (16,553) Long-term debt (630,405) Accrued liabilities (161,716) Capital lease obligations (38,244) Deferred tax liabilities (380,700) $ 1,263,809 </TABLE> Certain companies acquired were non-taxable S-corporations. Upon acquisition, these entities were converted to a taxable C-corporation status. Accordingly, deferred taxes were recorded upon acquisition by the Company and included in the above summary of net assets acquired. The following summarized, unaudited pro forma results of operations for the years ended December 31, 1994 and 1995 assume the acquisitions occurred as of the beginning of the respective years: <TABLE> <CAPTION> 1994 1995 <S> <C> <C> Net sales $19,396,000 $ 35,460,000 Net income (loss) 205,000 (1,371,000) Net income (loss) per share .11 (.44) </TABLE> (3) IMPAIRMENT OF GOODWILL As described in note 1, the Company has adopted SFAS No. 121. A charge of $538,331 was recorded in 1995 which represented the unamortized goodwill balances related to two operating companies acquired on December 1, 1994. These companies have incurred continuing operating losses since acquisition and are expected to incur future operating losses. The charge recorded in 1995 represents the expected non-recovery of the goodwill related to these companies, determined by using the estimated discounted future cash flows of these companies' operations. Considerable management judgment is necessary to estimate discounted future cash flows. Accordingly, actual results could vary significantly from such estimates. (4) INVENTORIES Inventories consist of the following: <TABLE> <CAPTION> DECEMBER 31 JUNE 30, 1994 1995 1996 (UNAUDITED) <S> <C> <C> <C> Raw materials $ 482,385 $ 961,886 $1,002,014 Finished goods 527,500 1,643,511 1,712,074 $1,009,885 $2,605,397 $2,714,088 </TABLE> (5) PROPERTY AND EQUIPMENT Property and equipment consist of the following: <TABLE> <CAPTION> DECEMBER 31 1994 1995 <S> <C> <C> Leasehold improvements $ 213,119 $ 475,572 Furniture and fixtures 164,009 412,705 Equipment 1,861,550 3,833,759 Transportation equipment 742,634 1,314,403 2,981,312 6,036,439 Less accumulated depreciation (153,488) (599,936) $2,827,824 $5,436,503 </TABLE> (6) NOTES PAYABLE TO RELATED PARTIES The Company had seven unsecured notes payable to related parties totaling $510,000 as of December 31, 1994 with interest rates ranging from 10% to 11%. The Company has four unsecured notes payable to related parties totaling $460,000 as of December 31, 1995, of which $160,000 is due in 1996 and $300,000 is due in 1997. Interest on these notes payable is 10% and is payable quarterly. (7) DEMAND NOTES PAYABLE The Company has a demand note payable totaling $212,957 and $250,000 as of December 31, 1994 and 1995, respectively. Interest on the note payable is 1% above the prime interest rate and is payable monthly. The note is secured by substantially all assets of a certain subsidiary of the Company. The Company also has demand notes payable totaling $69,578 and $650,318 as of December 31, 1994 and 1995, respectively, with various short-term maturities. Interest on these notes payable ranges from 8% to 11% and is payable monthly. $500,000 of the notes payable in 1996 are personally guaranteed by the former owner of one of the Company's subsidiaries and the remaining notes are secured by equipment of certain subsidiaries of the Company. (8) ACCRUED LIABILITIES Accrued liabilities consist of the following: <TABLE> <CAPTION> DECEMBER 31 1994 1995 <S> <C> <C> Accrued compensation and related taxes $234,960 $343,856 Accrued interest 10,811 237,456 Other 112,270 69,361 $358,041 $650,673 </TABLE> (9) SUBORDINATED DEBENTURES The Company has $2,000,000 of convertible, subordinated debentures outstanding as of December 31, 1995. The debentures bear interest at 10.25%, payable quarterly, and are convertible at any time prior to maturity at the option of the holder into the Company's common stock at a conversion price equal to the lesser of 75% of the offering price in an initial public offering or $7.50. The debentures are redeemable at the option of the Company prior to March 31, 1998 only if the Company has completed an initial public offering of its common stock, the shares of its common stock are listed or admitted for quotation on a national securities exchange or quotation system, and the closing price of such shares is greater than three times the offering price of such shares in the initial public offering for a period of twenty or more consecutive days. The entire principal amount of the debentures is due and payable on March 31, 1998, unless the debentures are previously redeemed or converted. The debentures also contain a covenant which prohibits the Company from the payment of a cash dividend in respect to the Company's common or preferred stock. (10) LONG-TERM DEBT Long-term debt consists of the following: <TABLE> <CAPTION> DECEMBER 31 1994 1995 <S> <C> <C> Note payable to bank in monthly installments of $7,287 including interest at 8.75%, final installment due June 1997, secured by substantially all assets of one of the Company's subsidiaries $ 190,526 $ 116,115 Note payable to bank in monthly installments of $3,709 plus interest at 9.05%, final installment due June 1997, secured by funds, deposits, and other property of one of the Company's subsidiaries 68,171 28,200 Note payable to bank in monthly installments of $4,798 including interest at 9.40%, final installment due November 1998, secured by all funds, deposits, and other property of one of the Company's subsidiaries 0 97,883 Note payable to an individual with principal plus interest at 7% due in January 1996, secured by substantially all the equipment of one of the Company's subsidiaries 0 126,020 Note payable to an individual in monthly installments of $2,075 including interest at 8%, final installment due April 1999 0 72,655 Note payable to an individual in monthly installments of $714 including interest at 10%, final installment due July 2000 0 31,242 Notes payable to individuals with maturity dates ranging from July 1996 through January 1997, with interest at 10% payable annually 50,000 1,967,000 Financing agreement with the Company's primary lender with a line of credit of $2,600,000, principal balance due February 1998, interest payable monthly at the bank's base rate plus 3%. The line also contains a provision whereas interest accrues at 9% and is convertible into warrants to purchase the Company's common stock. The number of warrants to be granted equals the total accrued interest at the date of an initial public offering of the Company's common stock divided by the offering price per share. The warrants expire five years from the date of issue 0 2,117,817 Notes payable to bank in monthly installments of $27,249 plus interest at the bank's base rate plus 1.75%, final balloon installment of $354,237 plus interest due December 1998, secured by receivables, inventory and fixed assets of certain subsidiaries 0 1,392,813 Notes payable to individuals with interest payable quarterly at 10% and principal due August 1996 0 835,018 Other notes payable to banks in monthly installments totaling $5,557 including interest ranging from 7.25% to 16%, expiring through September 1999, secured by certain assets of the operating subsidiaries 163,865 124,770 Notes paid during 1995 291,527 0 764,089 6,909,533 Less current portion (335,826) (5,107,859) $ 428,263 $ 1,801,674 </TABLE> Maturities of long-term debt as of December 31, 1995 are as follows: <TABLE> <CAPTION> <S> <C> Twelve months ending December 31 1996 $ 5,107,859 1997 1,602,827 1998 169,207 1999 24,809 2000 4,831 $ 6,909,533 </TABLE> In addition to the $2,600,000 line of credit listed in the above table, the Company has lines of credit with its primary lender totaling $1,850,000, interest payable monthly at the bank's base rate plus 1.25%. These lines of credit are secured by receivables, inventory, fixed assets, and general intangibles of certain subsidiaries. Amounts borrowed under these lines were $84,813 as of December 31, 1995. The terms of the lines of credit contain, among other provisions, requirements for maintaining certain financial ratios, net worth and net income levels, and limitations on capital expenditures, cash transfers, and related party receivables. The Company failed to meet certain covenants related to the above financing agreements. On April 23, 1996, the Company's bank waived all prior covenant violations, canceled the covenants and amended the finance agreements to establish new covenants. The new covenants established requirements for the Company to maintain certain financial ratios, net worth and net income levels, and limitations on capital expenditures, cash transfers and related party receivables. As of the most recent debt covenant compliance date, the Company was out of compliance with several of the new covenants (See Note 17). As of August 30, 1996, the Company was in default on $800,000 of notes payable to individuals (See Note 17). (11) INCOME TAXES Components of the provision for income taxes are as follows: <TABLE> <CAPTION> CURRENT DEFERRED TOTAL <S> <C> <C> <C> December 31, 1994: Federal $ 0 $ 27,000 $ 27,000 State 9,000 13,000 22,000 $ 9,000 $ 40,000 $ 49,000 December 31, 1995: Federal 0 (95,000) (95,000) State 37,000 (17,000) 20,000 $37,000 $(112,000) $(75,000) </TABLE> The provision for income taxes varied from the expected federal statutory rate as follows: <TABLE> <CAPTION> DECEMBER 31 <S> <C> <C> 1994 1995 Expected federal tax recovery using statutory rate of 34% $(26,000) $(642,000) Increase (reduction) in taxes resulting from: Change in valuation allowance 39,800 231,500 Nondeductible acquisition costs 41,000 39,600 Goodwill amortization 10,000 59,500 Goodwill write-off 0 183,000 State taxes, net of federal benefit 15,000 13,400 Other (30,800) 40,000 $ 49,000 $ (75,000) </TABLE> As of December 31, 1995, the Company had a net operating loss carryforward of approximately $965,000. If not utilized to offset future taxable income, this carryforward will begin to expire in 2008. The tax effects of temporary differences that give rise to significant portions of the net deferred tax liability are as follows: <TABLE> <CAPTION> DECEMBER 31 1994 1995 <S> <C> <C> Deferred tax assets: Accounts payable $ 106,400 $ 0 Net operating loss carryforward 113,400 385,800 Inventories 0 52,800 Other 10,900 32,300 230,700 470,900 Less valuation allowance (113,400) (385,800) 117,300 85,100 Deferred tax liabilities: Accounts receivable (246,300) 0 Inventories (97,600) 0 Property and equipment (354,900) (866,700) Other (20,500) (85,100) (719,300) (951,800) Net deferred tax liabilities $(602,000) $(866,700) </TABLE> The Company has recorded a valuation allowance with respect to the net operating loss carryforward reflected as a deferred tax asset due to the uncertainty of its ultimate realization. (12) LEASES The Company has several capital leases with monthly payments totaling $7,652 including imputed interest ranging from 2.87% to 14.60%. These leases have various expiration dates through October 2000. In addition, the Company has several operating leases. Minimum lease commitments as of December 31, 1995 are as follows: <TABLE> <CAPTION> OPERATING CAPITAL RELATED PARTIES OTHER <S> <C> <C> <C> 1996 $ 90,402 $ 553,556 $ 768,511 1997 47,334 566,464 637,896 1998 26,295 563,567 388,513 1999 3,667 561,086 289,594 2000 2,444 566,240 97,605 Thereafter 0 2,192,496 188,000 170,142 $5,003,409 $2,370,119 Less amounts representing interest (17,645) 152,497 Less current maturities (79,072) $ 73,425 </TABLE> Capital leases included in property and equipment are as follows: <TABLE> <CAPTION> DECEMBER 31 1994 1995 <S> <C> <C> Cost $201,236 $203,393 Less accumulated depreciation (2,767) (10,619) $198,469 $192,774 </TABLE> Rent expense is as follows: <TABLE> <CAPTION> RELATED PARTIES OTHER TOTAL <S> <C> <C> <C> 1993 $ 0 $ 12,462 $ 12,462 1994 214,000 401,555 615,555 1995 438,675 928,894 1,367,569 </TABLE> (13) EMPLOYMENT COMMITMENTS The Company has entered into employment agreements with members of its management and key employees at its subsidiaries. The commitments under these employment agreements as of December 31, 1995, are summarized as follows: <TABLE> <CAPTION> SUBSIDIARIES' MANAGEMENT EMPLOYEES TOTAL <S> <C> <C> <C> 1996 $1,114,500 $ 744,409 $1,858,909 1997 542,500 669,441 1,211,941 1998 432,692 550,120 982,812 1999 422,500 314,005 736,505 2000 321,516 57,800 379,316 Thereafter 400,000 52,891 452,891 $3,233,708 $2,388,666 $5,622,374 </TABLE> (14) STOCK OPTIONS AND WARRANTS STOCK OPTION PLAN The Pallet Recycling Associates of North America, Inc. 1995 Long-term Incentive and Employee Stock Option Plan (Option Plan) allows for the grant of options to officers and employees of the Company and its subsidiaries to purchase common shares at an exercise price not less than 100% of fair market value on the dates of grant. The Option Plan also provides for grants of stock appreciation rights, restricted stock awards, and performance awards. Outstanding options as of December 31, 1995, consisted of 145,250 options with exercise prices ranging from $4.00-$20.00. On August 30, 1996, the Company canceled all outstanding options that existed as of December 31, 1995 and re-issued new options. After re-issuance the outstanding options can be summarized as follows: <TABLE> <CAPTION> TOTAL EXERCISE SHARES OPTIONS OPTIONS OUTSTANDING PRICE PER YEAR OF GRANT GRANTED EXPIRED EXERCISED OPTIONS SHARE <C> <C> <C> <C> <C> <C> 1996 495,000 0 0 495,000 $3.60 </TABLE> The above options vest from 1996 to 1998. WARRANTS In connection with certain loans to the Company made or to be made pursuant to loan commitments, or the private placement of the Company's promissory notes, the Company has issued and may issue in the future warrants to purchase shares of the Company's common stock. Outstanding warrants issued as of December 31, 1995 are as follows: <TABLE> <CAPTION> EXERCISE TOTAL WARRANTS WARRANTS OUTSTANDING PRICE PER EXPIRATION YEAR OF GRANT GRANTED EXPIRED EXERCISED WARRANTS SHARE DATE <S> <C> <C> <C> <C> <C> <C> 1994 7,500 750 0 6,750 $ 20.00 1997 1995 7,775 625 0 7,150 $ 20.00 1998 1995 6,917 0 0 6,917 $ 36.00 1998 1995 14,347 0 0 14,347 $ 32.00 1998 1995 27,394 0 0 27,394 Lesser of 1998 $24.00 or 60% of initial public offering price 63,933 1,375 0 62,558 </TABLE> At various dates from January 1, 1996 through June 25, 1996, the Company granted warrants to purchase an additional 491,933 shares of common stock as follows: <TABLE> <CAPTION> OUTSTANDING WARRANTS EXERCISE PRICE PER SHARE EXPIRATION DATE <S> <C> <C> 2,625 $ 20.00 1999 12,500 Initial public offering price 1999 60,000 Greater of $5.00 or 100% of the price in the Company's 2001 next Qualified Financing (initial public offering of common stock or private sale of at least $1,500,000 of the Company's equity or debt) (See note 16(c)(ii)) 300,000 Greater of $5.00 or 75% of the price in the 2001 Company's next Qualified Financing (See note 16(c)(ii)) 729 Lesser of $24.00 or 67% of initial public 1999 offering price 7,063 Lesser of $20.00 or 50% of initial public 2000 offering price 109,016 Lesser of $6.40 or 80% of initial public offering 2001 price (See note 16(c)(iii)) </TABLE> (15) COMMITMENTS On October 26, 1995, the Company entered into an agreement to purchase all of the outstanding stock of Indy Pallet Company, Inc. (together with Specialty Pallet Company, Inc., the Pending Acquisition), a pallet recycling company located in Indianapolis, Indiana. The sales agreement has closed into escrow, pending funding by the Company. To complete the transaction funding of the escrow agreement must be completed prior to October 31, 1996. On June 7, 1996, the Company entered into an agreement to purchase all of the outstanding stock of Pallet Outlet Company, Inc., a pallet recycling company with locations in Biglerville and York, Pennsylvania. The sales agreement has closed into escrow, pending funding by the Company. As of June 30, 1996, an agreement the Company had entered into with Pallet Factory, Inc. to purchase all of their outstanding stock expired. The stockholders of Pallet Factory, Inc., decided not to extend the existing agreement. As is the Company's policy, approximately $100,000 of acquisition related costs, including accounting and legal fees, which had been capitalized in anticipation of completion of the purchase, were expensed as corporate selling and administrative costs. The Company is obligated to pay approximately $2,890,000, issue 250,000 shares of common stock and issue $1,200,000 in debt to consummate the above transactions. The Company must also repay $605,000 in stockholder debt related to the above transactions. (16) SUBSEQUENT EVENTS (a) ACQUISITIONS On February 15, 1996, the Company purchased all of the outstanding stock of Diamond Pallet, Inc., a pallet recycling company located in Stockton, California, in exchange for cash and notes payable. The notes are payable to the former owners of Diamond Pallet, Inc. in monthly installments of $3,861 including interest at 8%, with the final installment due in February, 2001. The notes are secured by all of the equipment of Diamond Pallet, Inc. On April 25, 1996, the Company purchased the equipment and inventory of Metroplex Wood Products (a sole proprietorship), a pallet recycling company located in Fort Worth, Texas, in exchange for cash and notes payable. These notes are payable in monthly installments of $10,138 including interest at 8%, with the final installment due in April 2001. The note is secured by the equipment and inventory purchased. The Company paid approximately $725,000 in cash and issued notes of approximately $690,000 to complete the above acquisitions. (b) STOCKHOLDERS' EQUITY Dollar, share, and per share amounts in the accompanying financial statements have been adjusted retroactively, where appropriate, to reflect a 1-for-8 common stock split and a 1-for-2 preferred stock and stock warrant split effected on April 4, 1996, as approved by the board of directors on March 29, 1996. As a result of the disproportionate stock split between the common and preferred shares, additional goodwill and additional paid-in capital of approximately $3,088,000 was recorded on April 4, 1996. The disproportionate stock split effectively resulted in additional consideration being given to the previous owners of certain businesses that were acquired by the Company in 1994 and 1995 through the issuance of preferred stock. The additional goodwill will be amortized over the remaining lives of the original goodwill generated from individual businesses that were acquired through the issuance of preferred stock. (c) FINANCING (i) On March 4, 1996, the Company has signed a letter of intent with an underwriter to conduct an initial public offering during 1996. The Company is obligated to pay the expenses of the underwriter relating to this anticipated offering. (ii) The Company completed a private debt placement on April 23, 1996 for $1,500,000. The debt carries an interest rate of prime plus 3% and matures on April 23, 1997 or upon the completion of an initial public offering or other qualified offering. The Company issued 360,000 warrants of the Company's common stock in connection with this private debt placement (See note 14). (iii) Through June 25, 1996, the Company obtained agreements to extend the term of notes aggregating $1,485,018 for a period of one year. The Company issued 109,016 warrants to purchase the Company's common stock in connection with these agreements (See note 14). (17) GOING CONCERN The accompanying consolidated financial statements have been prepared on a going concern basis which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company has had recurring net losses since inception. As discussed in note 10, the Company is in default on the payment of notes to individuals with a principal balance of approximately $800,000 as of August 30, 1996, and is not in compliance with certain covenant terms contained in its long-term debt agreements with its primary lender. The outstanding balances related to these agreements were approximately $4,300,000 as of August 30, 1996. As a result of these events, the indebtedness is classified as current and as a result the Company has a working capital deficit. The Company has filed for an initial public offering of its common stock. Proceeds from the offering, if completed, will be used to complete the pending acquisitions, repay outstanding debt including the notes to individuals as to which the Company is in default, additional acquisitions, working capital, and general corporate purposes. The Company's management believes that the net proceeds of the offering, cash generated from operations, and borrowing capacity under credit facilities will be sufficient to satisfy the Company's operating cash requirements for the foreseeable future. Additionally, management is working with its individual debt holders to extend their notes. As of August 30, 1996, management has been successful in extending approximately $1,485,000 of approximately $3,152,000 in notes payable to individuals which have due dates between July of 1996 and April of 1997. Management is in discussions with the Company's primary lender to amend the loan covenants. No demand for payment has been made for any of the indebtedness for which the Company is in default or for which the Company is currently out of compliance. INDEPENDENT AUDITOR'S REPORT To The Stockholders Otto Packaging, Inc. St. Paul, Minnesota We have audited the accompanying balance sheets of Otto Packaging, Inc. (an S corporation) as of December 31, 1993 and 1992, and the related statements of earnings, changes in stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Otto Packaging, Inc. as of December 31, 1993 and 1992, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. SCHUTTA, NELSON & ZEMBAL, LTD. Certified Public Accountants February 4, 1994 OTTO PACKAGING, INC. BALANCE SHEETS DECEMBER 31, 1992 AND 1993 ASSETS (NOTES 3 AND 5) <TABLE> <CAPTION> 1993 1992 <S> <C> <C> Current assets: Cash $ 75,842 $ 88,030 Accounts receivable: Trade, less allowance for uncollectible accounts of $1,500 at December 31, 1993 146,331 157,677 Other 5,475 5,113 Inventory 32,557 28,494 Prepaid expenses 17,328 26,841 Total current assets 277,533 306,155 Other assets: Cash value of life insurance 14,998 Leasehold improvements and equipment, at cost: Leasehold improvements 99,363 99,363 Furniture and equipment 56,176 64,918 Factory equipment 336,721 325,585 Vehicles/trailers 300,778 334,525 793,038 824,391 Less accumulated depreciation and amortization 446,548 396,875 346,490 427,516 $624,023 $748,669 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable: Trade $ 55,408 $ 42,289 Related party (note 2) 12,500 11,000 Accrued salaries and payroll taxes 10,105 19,548 Sales tax payable 867 563 Current portion of long-term debt (note 5) 122,440 128,009 Total current liabilities 201,320 201,409 Long-term debt, less current portion (note 5) 177,385 295,244 Commitments (notes 3 and 7) Stockholders' equity: Common stock--$100 par value; 250 shares authorized; 10 shares issued and outstanding 1,000 1,000 Paid-in-capital 590 590 Retained earnings 243,728 250,426 245,318 252,016 $624,023 $748,669 </TABLE> See notes to financial statements. OTTO PACKAGING, INC. STATEMENTS OF EARNINGS YEARS ENDED DECEMBER 31, 1992 AND 1993 <TABLE> <CAPTION> 1993 1992 <S> <C> <C> Net sales $1,799,470 $1,690,863 Cost of sales 1,251,045 1,171,331 Gross margin 548,425 519,532 Operating expenses 479,775 448,706 Income from operations 68,650 70,826 Other income (expense): Interest expense -- net (27,774) (29,174) Other (2,451) 4,475 (30,225) (24,699) Net earnings $ 38,425 $ 46,127 </TABLE> See notes to financial statements. OTTO PACKAGING, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY <TABLE> <CAPTION> COMMON STOCK PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS <S> <C> <C> <C> <C> Balances at December 31, 1991 200 $1,000 $590 $245,169 Net earnings 46,127 Distributions (40,870) Balances at December 31, 1992 200 1,000 590 250,426 Net earnings 38,425 Distributions (45,123) Balances at December 31, 1993 200 $1,000 $590 $243,728 </TABLE> See notes to financial statements. OTTO PACKAGING, INC. STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1993 AND 1992 <TABLE> <CAPTION> 1993 1992 <S> <C> <C> Cash flows from operating activities: Net earnings $ 38,425 $ 46,127 Adjustments to reconcile net earnings to net cash flow provided by operating activities: Depreciation and amortization 82,987 83,820 Net decrease in receivables, inventories and prepaids 16,434 9,220 Net increase (decrease) in payables and accrued expenses 5,480 (37,620) Loss on disposal of assets 3,016 371 Cash surrender value (3,492) (3,437) Net cash flow provided by operating activities 142,850 98,481 Cash flows from investing activities: Capital expenditures (17,077) (164,819) Proceeds from asset disposals 12,100 37,107 Net cash used in investing activities (4,977) (127,712) Cash flows from financing activities: Proceeds from long-term borrowings 5,074 154,688 Repayment of long-term debt (128,502) (141,193) Stockholder distributions (26,633) (40,870) Net cash used in financing activities (150,061) (27,375) Net decrease in cash and cash equivalents (12,188) (56,606) Cash and cash equivalents: Beginning of year 88,030 144,636 End of year $ 75,842 $ 88,030 </TABLE> See notes to financial statements. OTTO PACKAGING, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1993 AND 1992 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: BUSINESS ACTIVITY: The Company acquires and refurbishes used wooden pallets for resale. CONCENTRATION OF CREDIT RISK: Most of the Company's business activity consists of customers located within Minnesota. Collateral is generally not required. The Company specifically charges-off potential credit losses and such losses have been within management's expectations. The Company invests its excess cash deposits with local financial institutions. The Company has not experienced losses related to these deposits. INVENTORY: Inventory consists primarily of rebuilt and refurbished wooden pallets. Inventory is valued at average acquisition cost plus average refurbishing and overhead costs which approximates lower of cost or market. DEPRECIATION AND AMORTIZATION: Equipment and vehicles are being depreciated using the straight line method over lives of 5-7 years. Leasehold improvements are being amortized over an estimated life of thirty-one and one-half years. INCOME TAXES: The Company, with consent of its Stockholders, has elected under the Internal Revenue Code to be an S Corporation. In lieu of corporation income taxes, the stockholders of an S Corporation are taxed on their proportionate share of the Company's taxable income. Therefore, no provision or liability for Federal and State income taxes has been included in the financial statements. Effective with the approval of the Company's plan of reorganization (see Note 4) on January 1, 1994, the Stockholders terminated the election to be treated as an S Corporation. STATEMENT OF CASH FLOWS: The Company considers all highly liquid debt instruments purchased with maturities of three months or less to be cash equivalents. (2) RELATED PARTY TRANSACTIONS: The Company leases its shop, office and storage facilities under an annual lease from a partnership consisting of the Company's Stockholders. Under the lease agreement, the Company is responsible for payment of maintenance, insurance and all other occupancy costs. Total payments made to the partnership for rent under this agreement included in the statement of earnings aggregated $139,740 and $132,010 for the years ended December 31, 1993 and 1992, respectively. (3) LINE OF CREDIT: The Company has a $50,000 line of credit (subject to a borrowing base -- as defined) with a bank available until June 5, 1994. Interest on advances under the line of credit are at 1.5% over the bank prime rate (as defined). Performance under the agreement is secured by inventory, equipment, accounts receivable and general intangibles, and is personally guaranteed by the Stockholders. The line of credit is also subject to the same minimum financial statement requirements, covenants, and restrictions required under the Term Loan Agreement (see Note 5). At December 31, 1993, the Company was in compliance with or obtained waivers for all such covenants. There were no borrowings under the line of credit during the year ended December 31, 1993. (4) SUBSEQUENT EVENT: The Stockholders approved a plan of reorganization on December 31, 1993, to merge the Company with PRANA St. Paul, Inc., a Minnesota Corporation. The Company is to be the surviving entity of the merger (effective January 1, 1994) and will be a wholly-owned subsidiary of Pallet Recycling of North America, Inc. (5) LONG-TERM DEBT: <TABLE> <CAPTION> DECEMBER 31 1993 1992 <S> <C> <C> Promissory note, interest at 1.5% over the bank prime rate, due in monthly installments of $8,100 (including interest), until June 1996(1) $ 180,623 $ 260,433 Promissory note, interest at 2% over the bank prime rate, due in monthly installments of $1,000 (plus interest) until May 1997(1) 41,000 53,000 Installment note, 8%, due in monthly installments of $771 (including interest), until November 1997 (secured by vehicle)(2) 31,040 37,458 Installment note, interest at 2% over the bank prime rate, due in monthly installments of $625 (plus interest) until December 1996(2) 21,955 29,375 Installment notes, 2.9%-11.5%, (secured by vehicles and equipment) 25,207 42,987 299,825 423,253 Less current portion (122,440) (128,009) $ 177,385 $ 295,244 </TABLE> (1) Provisions of the Term Loan Agreement require the Company to meet certain annual minimum financial ratios, covenants and restrictions. At December 31, 1993, the Company was in compliance with or obtained waivers for all such covenants. The notes are secured by a security agreement and personally guaranteed by the President/Stockholder of the Company. (2) Performance under the note is personally guaranteed by the President/Stockholder of the Company. Future maturities of long-term debt are as follows: <TABLE> <CAPTION> Year ending December 31: <S> <C> 1994 $122,440 1995 128,188 1996 36,051 1997 13,146 $299,825 </TABLE> (6) SUPPLEMENTARY STATEMENT OF CASH FLOWS INFORMATION: Supplementary cash flow information: <TABLE> <CAPTION> YEAR ENDED DECEMBER 31 1993 1992 <S> <C> <C> Cash paid for: Interest $28,846 $31,956 </TABLE> NONCASH TRANSACTION: Effective December 31, 1993, the Company assigned its interest in a life insurance policy with a cash surrender value of $18,490 to the Stockholders. (7) COMMITMENTS: The Company entered into lease agreements for certain factory equipment and a vehicle requiring various monthly payments through December 1995. Minimum payments under the noncancellable operating lease agreements are as follows: <TABLE> <CAPTION> Year ending December 31: <S> <C> 1994 $7,120 1995 5,496 </TABLE> Rent expense under these operating lease agreements aggregated approximately $19,000 and $12,000 for the years ended December 31, 1993 and 1992, respectively. (8) MAJOR CUSTOMERS: During the years ended December 31, 1993 and 1992, sales to two customers were approximately 25.8% and 22.8%, respectively, of net sales. INDEPENDENT AUDITOR'S REPORT ON ADDITIONAL INFORMATION To The Stockholders Otto Packaging, Inc. St. Paul, Minnesota Our report on our audits of the basic financial statements of Otto Packaging, Inc. for 1993 and 1992 appears on page 1. Those audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary information on operations on page 11 is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. SCHUTTA, NELSON & ZEMBALL, LTD. Certified Public Accountants February 4, 1994 OTTO PACKAGING, INC. SCHEDULE I -- SUPPLEMENTARY INFORMATION ON OPERATIONS <TABLE> <CAPTION> YEAR ENDED DECEMBER 31 1993 1992 <S> <C> <C> Cost of sales: Materials $ 188,989 $ 80,419 Wages and benefits 546,497 565,162 Depreciation 57,671 57,630 Building rent 133,600 126,070 Manufacturing overhead 324,288 342,050 $1,251,045 $1,171,331 Operating expenses: Depreciation $ 25,316 $ 26,190 Building rent 6,140 5,940 Wages and benefits 286,677 271,926 Professional fees 17,924 26,147 Other 143,718 118,503 $ 479,775 $ 448,706 </TABLE> See Independent Auditor's Report on Supplementary Information. INDEPENDENT AUDITORS' REPORT The Board of Directors BVS, Inc.: We have audited the accompanying balance sheets of BVS, Inc. as of January 31, 1993 and 1994, and the related statements of earnings, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of BVS, Inc. as of January 31, 1993 and 1994, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Minneapolis, Minnesota October 7, 1994 BVS, INC. BALANCE SHEETS January 31, 1993 and 1994 Assets <TABLE> <CAPTION> 1993 1994 <S> <C> <C> Current assets: Cash $ 1,210 $ 2,519 Trade accounts receivable 133,920 242,071 Inventories 129,843 160,656 Prepaid expenses 9,561 10,983 Refundable income taxes 0 2,974 Total current assets 274,534 419,203 Property and equipment at cost: Furniture and fixtures 7,315 12,169 Equipment 184,195 249,279 Transportation equipment 92,986 163,485 Construction in progress 0 94,188 284,496 519,121 Less accumulated depreciation 117,308 164,823 Net property and equipment 167,188 354,298 Total assets $441,722 $773,501 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 7,357 $ 34,654 Stockholder note payable 15,000 0 Accrued liabilities 10,136 16,054 Income taxes payable 1,260 0 Deferred income taxes 103,000 149,000 Total current liabilities 136,853 199,708 Deferred income taxes 41,000 69,900 Stockholders' equity: Common stock--no par value; 1,000,000 shares authorized; 1,111 and 1,070 shares issued and outstanding as of January 31, 1993 and 1994, respectively 2,000 1,926 Retained earings 261,869 501,967 Total stockholders' equity 263,869 503,893 Commitments and contingencies (note 3) Total liabilities and stockholder' equity $441,722 $773,501 </TABLE> See accompanying notes to financial statements. BVS, INC. STATEMENTS OF EARNINGS Years ended January 31, 1993 and 1994 <TABLE> <CAPTION> 1993 1994 <S> <C> <C> Net sales $1,571,841 $2,673,150 Cost of sales 1,237,369 1,862,163 Gross profit 334,472 810,987 Operating expenses: Selling 42,377 73,094 General and administrative 175,878 278,367 Total operating expenses 218,255 351,461 Operating income 116,217 459,526 Other income (expense): Interest expense (1,532) (1,119) Loss on sale of equipment (2,492) 0 Miscellaneous, net 9,392 2,449 Total other income 5,368 1,330 Earnings before income taxes 121,585 460,856 Provision for income taxes 49,591 186,679 Net earnings $ 71,994 $ 274,177 </TABLE> See accompanying notes to financial statements. BVS, INC. STATEMENTS OF STOCKHOLDERS' EQUITY Years ended January 31, 1993 and 1994 <TABLE> <CAPTION> COMMON STOCK RETAINED SHARES AMOUNT EARNINGS TOTAL <S> <C> <C> <C> <C> Balance, January 31, 1992 1,111 $2,000 $189,875 $191,875 Net income 0 0 71,994 71,994 Balance, January 31, 1993 1,111 2,000 261,869 263,869 Net income 0 0 274,177 274,177 Repurchase of stock at $833 per share (41) (74) (34,079) (34,153) Balance, January 31, 1994 1,070 $1,926 $501,967 $503,893 </TABLE> See accompanying notes to consolidated financial statements. BVS, INC. STATEMENTS OF CASH FLOWS Years ended January 31, 1993 and 1994 <TABLE> <CAPTION> 1993 1994 <S> <C> <C> Cash flows from operating activities: Net earnings $ 71,994 $ 274,177 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 28,774 47,515 Loss on sale of equipment 2,492 0 Deferred income taxes 46,100 74,800 Changes in operating assets and liabilities: Trade accounts receivable (35,497) (108,151) Inventories (53,768) (30,813) Prepaid expenses 244 (1,422) Accounts payable (8,266) 27,297 Accrued liabilities 1,068 5,918 Income taxes payable/refundable 2,881 (4,234) Net cash provided by operating activities 56,022 285,087 Cash flows from investing activities: Proceeds from sale of equipment 10,000 0 Purchases of property and equipment (68,299) (234,625) Net cash used in investing activities (58,299) (234,625) Cash flows from financing activities: Net principal payments on stockholder note payable 0 (15,000) Purchase of common stock 0 (34,153) Net cash used in financing activities 0 (49,153) Net increase (decrease) in cash (2,277) 1,309 Cash at beginning of year 3,487 1,210 Cash at end of year $ 1,210 $ 2,519 Supplemental disclosures of cash flow information: Cash paid during the year for interest $ 1,589 $ 1,200 Cash paid during the year for income taxes 610 116,113 </TABLE> See accompanying notes to financial statements. BVS, INC. NOTES TO FINANCIAL STATEMENTS JANUARY 31, 1993 AND 1994 (1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS BVS, Inc. (the Company) builds, refurbishes and distributes wooden pallets for use in a variety of industries. The Company is located in Phoenix, Arizona and sells its products on an unsecured basis to customers throughout the Southwestern United States. The Company's ability to collect the amounts due from customers is affected by regional economic conditions. INVENTORIES Inventories are stated at the lower of first in, first out (FIFO) cost or market. DEPRECIATION Depreciation is computed under the straight-line method over the estimated useful lives of assets as follows: <TABLE> <CAPTION> <S> <C> Furniture and fixtures 7 years Equipment 5-7 years Transportation equipment 7 years </TABLE> INCOME TAXES Effective February 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES. Under Statement No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Adoption of Statement No. 109 had an immaterial effect on the Company's 1994 financial position and results of operations. The Company is on the cash basis of accounting for income tax purposes. (2) INVENTORIES Inventories consist of the following: <TABLE> <CAPTION> 1993 1994 <S> <C> <C> Raw materials $ 80,210 $ 83,239 Finished goods 49,633 77,417 $129,843 $160,656 </TABLE> (3) OPERATING LEASES The Company leases its corporate office and production facility from a third party under an operating lease expiring November 1994. Rent expense for this lease was $63,965 and $68,553 in 1993 and 1994, respectively. The Company's future obligation under the lease is $47,610 at January 31, 1994. (4) INCOME TAXES Effective February 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES. Components of the provision for income taxes are as follows: <TABLE> <CAPTION> CURRENT DEFERRED TOTAL <S> <C> <C> <C> 1993: Federal $ 1,824 $39,900 $ 41,724 State 1,667 6,200 7,867 $ 3,491 $46,100 $ 49,591 1994: Federal $ 86,140 $65,100 $151,240 State 25,739 9,700 35,439 $111,879 $74,800 $186,679 </TABLE> The tax effect of temporary differences that give rise to significant portions of the net deferred tax liability as of January 31, 1994 are as follows: <TABLE> <CAPTION> <S> <C> Deferred tax asset: Accrual to cash differences $ 20,800 Deferred tax liabilities: Accrual to cash differences 182,700 Depreciation 38,000 Other 19,000 239,700 Net deferred tax liability $218,900 </TABLE> No valuation allowance for the deferred tax asset was necessary as of January 31, 1994. The character of the deferred tax asset is such that it can be realized through carryback to prior tax periods or offset against future taxable income. The provision for income taxes varied from the expected federal statutory rate as follows: <TABLE> <CAPTION> 1993 1994 <S> <C> <C> Expected federal tax expense using statutory rate of 34% $41,339 $156,691 Increase (reduction) in taxes resulting from: State income taxes, net of federal income tax benefit 7,295 27,651 Other 957 2,337 $49,591 $186,679 </TABLE> (5) RELATED PARTY TRANSACTIONS The Company had a note payable to one of its stockholders in the amount of $15,000 as of January 31, 1993. The demand note bears interest at 12% and was paid in 1994. Interest expense related to this note was $1,532 and $1,119 for 1993 and 1994, respectively. (6) SUBSEQUENT EVENT Effective February 1, 1994, the Company was acquired by, and became a wholly owned subsidiary of, Pallet Recycling of North America, Inc., a Minnesota corporation. INDEPENDENT AUDITORS' REPORT The Board of Directors Harris Supply Company, Inc.: We have audited the accompanying balance sheets of Harris Supply Company, Inc. as of June 30, 1992, 1993, and March 31, 1994, and the related statements of operations, stockholder's equity and cash flows for the years ended June 30, 1992 and 1993 and the nine-month period ended March 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Harris Supply Company, Inc. as of June 30, 1992, 1993, and March 31, 1994, and the results of its operations and its cash flows for the years ended June 30, 1992 and 1993 and the nine-month period ended March 31, 1994, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Minneapolis, Minnesota January 20, 1995 HARRIS SUPPLY COMPANY, INC. BALANCE SHEETS JUNE 30, 1992, 1993, AND MARCH 31, 1994 Assets <TABLE> <CAPTION> 1992 1993 1994 <S> <C> <C> <C> Current assets: Cash $ 30,014 $ 26,465 $ 12,326 Trade accounts receivable 92,700 151,512 122,375 Inventories 29,892 40,922 37,494 Prepaid expenses 150 150 0 Refundable income taxes 0 1,944 600 Total current assets 152,756 220,993 172,795 Property and equipment at cost: Building 11,706 11,706 11,706 Equipment 147,270 171,023 173,250 Transportation equipment 123,170 103,317 88,601 282,146 286,046 273,557 Less accumulated depreciation 140,414 165,389 170,600 Net property and equipment 141,732 120,657 102,957 Total assets $294,488 $341,650 $275,752 LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable $ 11,696 $ 35,714 $ 16,328 Current maturities of long-term debt 19,391 6,411 3,008 Due to stockholder 0 0 15,127 Stockholder note payable 45,000 45,000 45,000 Accrued liabilities 6,708 19,358 20,540 Income taxes payable 2,499 0 0 Deferred income taxes 0 0 3,900 Total current liabilities 85,294 106,483 103,903 Long-term debt, net current maturities 11,764 6,855 4,582 Defered income taxes 0 0 7,900 Stockholder's equity: Common stock--$1.00 par value; 7,500 shares authorized; 3,500 shares issued and outstanding as of June 30, 1992, 1993, and March 31, 1994 3,500 3,500 3,500 Additional paid-in capital 172,496 207,496 218,149 Retained earnings (accumulated deficit) 56,434 52,316 (62,282) Treasury stock, at cost (35,000) (35,000) 0 Total stockholder's equity 197,430 228,312 159,367 Commitments and contingencies (notes 3 and 5) Total liabilities and stockholder's equity $294,488 $341,650 $275,752 </TABLE> See accompanying notes to financial statements. HARRIS SUPPLY COMPANY, INC. STATEMENTS OF OPERATIONS YEARS ENDED JUNE 30, 1992, 1993, AND THE NINE-MONTH PERIOD ENDED MARCH 31, 1994 <TABLE> <CAPTION> 1992 1993 1994 <S> <C> <C> <C> Net sales $1,477,390 $1,180,629 $926,928 Cost of sales 1,055,490 805,536 641,134 Gross profit 421,900 375,093 285,794 Operating expenses: Selling, general and administrative 433,584 375,629 335,114 Operating loss (11,684) (536) (49,320) Other income (expense): Interest expense (10,703) (3,423) (3,509) Miscellaneous, net 2,340 1,059 159 Total other expense (8,363) (2,364) (3,350) Loss before income taxes (20,047) (2,900) (52,670) Provision for income taxes 2,400 1,218 11,800 Net loss $ (22,447) $ (4,118) $(64,470) </TABLE> See accompanying notes to financial statements. HARRIS SUPPLY COMPANY, INC. STATEMENTS OF STOCKHOLDER'S EQUITY YEARS ENDED JUNE 30, 1992, 1993, AND THE NINE-MONTH PERIOD ENDED MARCH 31, 1994 <TABLE> <CAPTION> RETAINED COMMON STOCK ADDITIONAL EARNINGS TREASURY STOCK PAID-IN (ACCUMULATED SHARES AMOUNT CAPITAL DEFICIT) SHARES AMOUNT TOTAL <S> <C> <C> <C> <C> <C> <C> <C> Balance, June 30, 1991 7,469 $ 7,469 $162,496 $ 92,035 0 $(35,000) $227,000 Distributions 0 0 0 (13,154) 0 0 (13,154) Capital contribution 0 0 10,000 0 0 0 10,000 Repurchase of stock at $1.00 per share (3,969) (3,969) 0 0 0 0 (3,969) Net loss 0 0 0 (22,447) 0 0 (22,447) Balance, June 30, 1992 3,500 3,500 172,496 56,434 0 (35,000) 197,430 Capital contribution 0 0 35,000 0 0 0 35,000 Net loss 0 0 0 (4,118) 0 0 (4,118) Balance, June 30, 1993 3,500 3,500 207,496 52,316 0 (35,000) 228,312 Distributions 0 0 0 (15,128) 0 0 (15,128) Capital contribution 0 0 10,653 0 0 0 10,653 Retirement of treasury stock 0 0 0 (35,000) 0 35,000 0 Net loss 0 0 0 (64,470) 0 0 (64,470) Balance, March 31, 1994 3,500 $ 3,500 $218,149 $(62,282) 0 $ 0 $159,367 </TABLE> See accompanying notes to consolidated financial statements. HARRIS SUPPLY COMPANY, INC. STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1992, 1993, AND THE NINE-MONTH PERIOD ENDED MARCH 31, 1994 <TABLE> <CAPTION> 1992 1993 1994 <S> <C> <C> <C> Cash flows from operating activities: Net loss $(22,447) $ (4,118) $(64,470) Adjustments to reconcile net loss to net cash provided (used in) by operating activities: Depreciation 42,431 40,937 31,035 (Gain) loss on sale of equipment 0 (2,508) 8,858 Deferred income taxes 0 0 11,800 Changes in operating assets and liabilities: Trade accounts receivable 49,944 (58,812) 29,137 Inventories 10,047 (11,030) 3,428 Prepaid expenses 3,970 0 150 Accounts payable (15,768) 24,018 (19,386) Accrued liabilities (49,439) 12,650 1,182 Income taxes payable/refundable 25 (4,443) 1,344 Net cash provided by (used in) operating activities 18,763 (3,306) 3,078 Cash flows from investing activities: Proceeds from sale of equipment 0 6,882 0 Purchases of property and equipment (12,220) (39,243) (22,193) Net cash used in investing activities (12,220) (32,361) (22,193) Cash flows from financing activities: Principal payments on long-term debt (32,574) (2,882) (5,676) Proceeds from stockholder advances 0 0 15,127 Capital contributions from stockholders 10,000 35,000 10,653 Distributions to stockholders (13,154) 0 (15,128) Purchase of common stock (3,969) 0 0 Net cash provided by (used in) financing activities (39,697) 32,118 4,976 Net decrease in cash (33,154) (3,549) (14,139) Cash at beginning of period 63,168 30,014 26,465 Cash at end of period $ 30,014 $ 26,465 $ 12,326 Supplemental disclosures of cash flow information: Cash paid during the period for interest $ 10,703 $ 3,423 3,509 Cash paid (refunded) during the period for income taxes 2,375 5,661 (1,344) Suplemental schedule of non-cash investing and financing activities: Debt retired in exchange for transportation equipment 0 15,007 0 Treasury stock retired against common stock 0 0 35,000 </TABLE> See accompanying notes to financial statements. HARRIS SUPPLY COMPANY, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1992, 1993, AND MARCH 31, 1994 (1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS Harris Supply Company, Inc. (the Company) builds, refurbishes and distributes wooden pallets for use in a variety of industries. The Company is located in Orlando, Florida and sells its products on an unsecured basis to customers throughout the Southeastern United States. The Company's ability to collect the amounts due from customers is affected by regional economic conditions. MERGER Effective March 1, 1994, Ropco, Inc. (Ropco) was merged into the Company and 500 shares of the Company's common stock were issued in exchange for all of the outstanding common stock of Ropco. The merger was accounted for as a pooling of interests, and accordingly, the accompanying financial statements have been restated to include the accounts and operations of Ropco for all periods prior to the merger. Separate results of the combining entities for the years ended June 30, 1992 and 1993, and the nine months ended March 31, 1994 are as follows: <TABLE> <CAPTION> 1992 1993 1994 <S> <C> <C> <C> Net sales: Harris $1,477,390 $1,180,629 $ 926,928 Ropco 875,356 879,502 575,667 Less intercompany (875,356) (879,502) (575,667) $1,477,390 1,180,629 926,928 Net income (loss): Harris 7,305 4,942 (44,133) Ropco (29,752) (9,060) (20,337) $ (22,447) $ (4,118) $ (64,470) </TABLE> INVENTORIES Inventories are stated at the lower of first in, first out (FIFO) cost or market. DEPRECIATION Depreciation is computed under the straight-line method over the estimated useful lives of assets as follows: <TABLE> <CAPTION> <S> <C> Building 15 years Equipment 5-7 years Transportation equipment 7 years </TABLE> INCOME TAXES Effective July 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES. Under Statement No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Adoption of Statement No. 109 increased the provision for income taxes by $11,800 in 1994 and reduced stockholder's equity. As discussed above, effective March 1, 1994, Ropco was merged into Harris. Prior to the merger, Ropco was incorporated under Subchapter S of the Internal Revenue Code. Accordingly, the results of Ropco's operations passed through to its stockholder's individual return and Ropco paid no federal income taxes. (2) INVENTORIES Inventories consist of the following: <TABLE> <CAPTION> JUNE 30 MARCH 31, 1992 1993 1994 <S> <C> <C> <C> Raw materials $17,098 $23,259 $25,123 Finished goods 12,794 17,663 12,371 $29,892 $40,922 $37,494 </TABLE> (3) LONG-TERM DEBT Long-term debt consists of the following: <TABLE> <CAPTION> JUNE 30 MARCH 31, 1992 1993 1994 <S> <C> <C> <C> Note payable to stockholder in monthly installments of $282 including interest at 6%, due August 1995 $ 0 $ 9,731 $ 7,590 Note payable to bank in monthly installments of $523 including interest at 10.68% secured by transportation equipment, paid in full in December 1993 9,107 3,535 0 Note payable to bank in monthly installments of $791 including interest at 11.32%, secured by transportation equipment, paid in full in September 1992 16,288 0 0 Note payable to bank in monthly installments of $474 including interest at 12.58% secured by transportation equipment, paid in full in November 1992 2,299 0 0 Note payable to bank in monthly installments of $406 including interest at 13.24% secured by transportation equipment, paid in full in September 1992 1,193 0 0 Note payable to bank in monthly installments of $468 including interest at 12.21% secured by transportation equipment, paid in full in November 1992 2,268 0 0 31,155 13,266 7,590 Less current maturities (19,391) (6,411) (3,008) $ 11,764 $ 6,855 $ 4,582 </TABLE> Maturities of long-term debt as of March 31, 1994 are as follows: <TABLE> <CAPTION> <S> <C> Twelve months ending March 31: 1995 $3,008 1996 3,193 1997 1,389 $7,590 </TABLE> (4) INCOME TAXES Effective July 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES. Components of the provision for income taxes are as follows: <TABLE> <CAPTION> CURRENT DEFERRED TOTAL <S> <C> <C> <C> 1992: Federal $2,400 $ 0 $ 2,400 1993: Federal 1,218 0 1,218 1994: Federal 0 11,800 11,800 </TABLE> The tax effect of temporary differences that give rise to significant portions of the net deferred tax liability as of March 31, 1994 are as follows: <TABLE> <CAPTION> <S> <C> Deferred tax assets: Accounts receivable $ 3,600 Accrued expenses 5,700 9,300 Deferred tax liabilities: Inventories (13,200) Depreciation (7,900) (21,100) Net deferred tax liability $(11,800) </TABLE> No valuation allowance for the deferred tax assets was necessary as of March 31, 1994. The character of the deferred tax assets is such that it can be offset against anticipated future taxable income. The provision for income taxes varied from the expected federal statutory rate as follows: <TABLE> <CAPTION> YEAR ENDED NINE-MONTH JUNE 30 PERIOD ENDED MARCH 31, 1992 1993 1994 <S> <C> <C> <C> Expected federal tax recovery using statutory rate of 34% $(6,816) $ (986) $(17,908) Increase (reduction) in taxes resulting from: Effects of S-Corp losses 10,116 3,080 27,978 Other (900) (876) 1,730 $ 2,400 $1,218 $ 11,800 </TABLE> (5) Related Party Transactions The Company had an 11% demand note payable to one of its stockholders in the amount of $45,000 as of June 30, 1992, 1993, and March 31, 1994. The Company also had a long-term note payable to one of its stockholders in the amount of $9,731 and $7,590 as of June 30, 1993 and March 31, 1994, respectively. Interest expense related to these notes was $4,956, $5,505 and $4,112 for 1992, 1993 and 1994, respectively. In addition, the Company owed one of its stockholders $15,127 at March 31, 1994 for operating advances. The land and building is owned personally and leased to the Company for $2,500 per month with a lease term of four years commencing March 1, 1994. Therefore, the building and land is not included on the balance sheet of Harris Supply. The minimum annual lease commitments at March 31, 1994 under this lease is as follows: <TABLE> <CAPTION> FISCAL YEAR AMOUNT <S> <C> 1995 $30,000 1996 30,000 1997 30,000 1998 30,000 </TABLE> (6) SUBSEQUENT EVENT Effective April 1, 1994, the Company was acquired by, and became a wholly owned subsidiary of, Pallet Recycling Associates of North America, Inc., a Minnesota corporation. INDEPENDENT AUDITORS' REPORT The Board of Directors Pallet City, Inc.: We have audited the accompanying balance sheets of Pallet City, Inc. as of September 30, 1992 and 1993 and May 31, 1994, and the related statements of operations and retained earnings, and cash flows for the years ended September 30, 1992 and 1993, and the eight-month period ended May 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pallet City, Inc. as of September 30, 1992 and 1993, and May 31, 1994 and the results of its operations and its cash flows for the years ended September 30, 1992 and 1993 and the eight-month period ended May 31, 1994, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Minneapolis, Minnesota March 24, 1995 PALLET CITY, INC. BALANCE SHEETS SEPTEMBER 30, 1992 AND 1993 AND MAY 31, 1994 ASSETS <TABLE> <CAPTION> 1992 1993 1994 <S> <C> <C> <C> Current assets: Cash $ 3,399 $ 421 $ 37,908 Trade accounts receivable, net of allowance for doubtful accounts of $14,000 in 1994 259,822 335,583 373,234 Inventories 51,683 62,564 103,958 Prepaid expenses 0 6,528 10,655 Total current assets 314,904 405,096 525,755 Property and equipment at cost: Leasehold improvements 153,662 161,662 169,012 Machinery and equipment 231,297 459,247 590,385 Office furniture and equipment 22,527 22,527 22,527 407,486 643,436 781,924 Less accumulated depreciation (73,348) (112,039) (149,229) Net property and equipment 334,138 531,397 632,695 Total assets $649,042 $ 936,493 $1,158,450 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Bank overdraft $ 2,253 $ 21,156 $ 0 Note payable to bank 20,886 10,213 150,000 Current maturities of long-term debt 34,470 33,558 70,088 Current maturities of capital lease obligations 13,501 68,756 0 Accounts payable 77,304 122,030 209,497 Accrued liabilities 20,211 29,099 35,248 Total current liabilities 168,625 284,812 464,833 Long-term debt, less current maturities 36,330 9,772 159,912 Capital lease obligations, less current maturities 28,897 96,319 0 Stockholders' equity: Common stock--no par value; 100 shares authorized; 100 shares issued and outstanding 41,000 41,000 41,000 Retained earnings 374,190 504,590 492,705 Total stockholders' equity 415,190 545,590 533,705 Commitments and contingencies (notes 3 and 6) Total liabilities and stockholders' equity $649,042 $ 936,493 $1,158,450 </TABLE> See accompanying notes to financial statements. PALLET CITY, INC. STATEMENTS OF OPERATIONS AND RETAINED EARNINGS YEARS ENDED SEPTEMBER 30, 1992 AND 1993 AND THE EIGHT-MONTH PERIOD ENDED MAY 31, 1994 <TABLE> <CAPTION> 1992 1993 1994 <S> <C> <C> <C> Net sales $2,039,902 $2,940,491 $2,560,458 Cost of sales 1,580,983 2,344,254 1,659,531 Gross profit 458,919 596,237 900,927 Operating expenses: Selling, general and administrative 442,334 408,914 658,938 Operating income 16,585 187,323 241,989 Other expense: Interest expense 17,897 17,047 15,126 Miscellaneous 0 0 1,142 Total other expense 17,897 17,047 16,268 Net income (loss) (1,312) 170,276 225,721 Retained earnings -- beginning of period 378,701 374,190 504,590 Stockholder distributions (3,199) (39,876) (237,606) Retained earnings -- end of period $ 374,190 $ 504,590 $ 492,705 </TABLE> See accompanying notes to financial statements. PALLET CITY, INC. STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 1992 AND 1993 AND THE EIGHT-MONTH PERIOD ENDED MAY 31, 1994 <TABLE> <CAPTION> 1992 1993 1994 <S> <C> <C> <C> Cash flows from operating activities: Net income (loss) $ (1,312) $ 170,276 $ 225,721 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 31,336 38,691 37,190 Changes in operating assets and liabilities: Trade accounts receivable 65,065 (75,761) (37,651) Inventories (19,175) (10,881) (41,394) Prepaid expenses 4,073 (6,528) (4,127) Bank overdraft 2,253 18,903 (21,156) Accounts payable 49,255 44,726 87,467 Accrued liabilities 7,596 8,888 6,149 Net cash provided by operating activities 139,091 188,314 252,199 Cash flows from investing activities: Purchases of property and equipment (59,566) (79,464) (138,488) Cash flows from financing activities: Proceeds from (payments on) note payable to bank (8,583) (10,673) 139,787 Proceeds from long-term debt 0 9,683 77,879 Net principal payments on stockholder note payable (13,769) 0 0 Principal payments of long-term debt (42,911) (37,153) (30,123) Principal payments of capital lease obligations (7,664) (33,809) (26,161) Stockholder distributions (3,199) (39,876) (237,606) Net cash used in financing activities (76,126) (111,828) (76,224) Net increase (decrease) in cash 3,399 (2,978) 37,487 Cash at beginning of period 0 3,399 421 Cash at end of period $ 3,399 421 37,908 Supplemental disclosures of cash flow information: Cash paid during the period for interest $ 17,897 $ 17,047 $ 15,126 Supplemental disclosure of non-cash investing and financing activities: Equipment acquired with capital lease obligations $ 28,800 $ 156,486 $ 0 Capital lease obligations refinanced to long-term debt 0 0 138,914 </TABLE> See accompanying notes to financial statements. PALLET CITY, INC. NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1992 AND 1993 AND MAY 31, 1994 (1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS Pallet City, Inc. (the Company) builds, refurbishes and distributes wooden pallets for use in a variety of industries. The Company has operating facilities in both the Buffalo and Rochester, New York areas and sells its products on an unsecured basis to customers primarily in the Western and Central New York area. The Company's ability to collect the amounts due from customers is affected by regional economic conditions. MERGER Effective May 31, 1994, Ertam Enterprises, Inc. (Ertam) was merged into the Company. The merger was accounted for as a pooling of interests, and accordingly, the accompanying financial statements have been restated to include the accounts and operations of Ertam for all periods prior to the merger. Separate results of the combining entities for the years ended September 30, 1992 and 1993 and the eight months ended May 31, 1994 are as follows: <TABLE> <CAPTION> 1992 1993 1994 <S> <C> <C> <C> Net sales: Pallet City $2,024,473 $2,920,788 $2,514,670 Ertam 77,429 304,703 272,788 Less intercompany (62,000) (285,000) (227,000) $2,039,902 $2,940,491 $2,560,458 Net income (loss): Pallet City $ (3,631) $ 172,254 $ 225,836 Ertam 2,319 (1,978) (115) $ (1,312) $ 170,276 $ 225,721 </TABLE> INVENTORIES Inventories are stated at the lower of first in, first out (FIFO) cost or market. DEPRECIATION Depreciation is computed under the straight-line method over the estimated useful lives of assets as follows: <TABLE> <CAPTION> <S> <C> Building improvements 7-31.5 years Machinery and equipment 5-7 years Office furniture and equipment 5-7 years </TABLE> INCOME TAXES The Company has elected to be taxed as an S corporation under the provisions in the Internal Revenue Code. Accordingly, the Company's taxable income (loss) is passed through to its stockholders to be included in their individual income tax returns. As discussed above, effective May 31, 1994, Ertam was merged into Pallet City. Prior to the merger, Ertam was incorporated under Subchapter C of the Internal Revenue Code. Accordingly, the results of Ertam's operations were subject to income taxes. Income taxes were not material to Ertam as it had minimal net income for financial and income tax purposes. (2) INVENTORIES Inventories consist of the following: <TABLE> <CAPTION> SEPTEMBER 30 MAY 31, 1992 1993 1994 <S> <C> <C> <C> Raw materials $15,505 $18,769 $ 19,341 Finished goods 36,178 43,795 84,617 $51,683 $62,564 $103,958 </TABLE> (3) NOTE PAYABLE TO BANK The Company has a $200,000 line of credit agreement with its bank. Interest is payable monthly at 1% above the bank's base rate. The note is secured by substantially all assets and is due on demand. Outstanding balances on the note were $20,886, $10,213, and $150,000 at September 30, 1992 and 1993, and May 31, 1994, respectively. (4) LONG-TERM DEBT Long-term debt consists of the following: <TABLE> <CAPTION> SEPTEMBER 30 MAY 31, 1992 1993 1994 <S> <C> <C> <C> Note payable to bank in monthly installments of $7,287 including interest at 8.75%, secured by inventory, accounts receivable and equipment, due June 1997 $ 0 $ 0 $230,000 Note payable to bank in monthly installments of $1,250 plus interest at prime plus 2.25%, secured by inventory, accounts receivable and equipment, paid in full in 1994 39,772 24,772 0 Note payable to bank in monthly installments of $996 including interest at 12% secured by inventory, accounts receivable and equipment, paid in full in 1994 20,832 8,875 0 Notes payable to banks for various vehicles and transportation equipment paid in full in 1994 10,196 9,683 0 70,800 43,330 230,000 Less current maturities (34,470) (33,558) (70,088) $ 36,330 $ 9,772 $159,912 </TABLE> Maturities of long-term debt as of May 31, 1994 are as follows: <TABLE> <CAPTION> Twelve months ended May 31: <S> <C> 1995 $ 70,088 1996 76,473 1997 83,439 $230,000 </TABLE> (5) CAPITAL LEASE OBLIGATIONS Capital lease obligations consists of the following: <TABLE> <CAPTION> SEPTEMBER 30 MAY 31, 1992 1993 1994 <S> <C> <C> <C> Capital lease obligations paid in full in 1994 $ 42,398 $165,075 0 Less current maturities (13,501) (68,756) 0 $ 28,897 $ 96,319 0 </TABLE> Machinery and equipment includes equipment under capital lease as follows: <TABLE> <CAPTION> SEPTEMBER 30 MAY 31, 1992 1993 1994 <S> <C> <C> <C> Machinery and equipment $53,795 $210,281 0 Less accumulated depreciation (4,727) (13,031) 0 $49,068 $197,250 0 </TABLE> (6) OPERATING LEASES The Company leases certain facilities and manufacturing equipment under noncancelable operating leases. Future minimum obligations under operating leases as of May 31, 1994 are as follows: <TABLE> <CAPTION> <S> <C> Twelve months ending May 31: 1995 $ 96,017 1996 87,723 1997 48,457 1998 26,688 1999 26,688 Thereafter 13,344 $298,917 </TABLE> Total rent expense under operating leases was $15,516, $23,290, and $56,149 in 1992, 1993 and 1994, respectively. (7) RELATED PARTY TRANSACTIONS The Company conducts some of its operations in facilities leased from related parties under a month-to-month oral lease agreement. Lease payments to related parties were approximately $14,100, $14,100, and $9,400 in 1992, 1993 and 1994, respectively. The shareholders of the Company are also the shareholders of Ertam, a related party which provides transportation services to the Company. Total payments made to Ertam for transportation services were $62,000, $285,000 and $227,000 in 1992, 1993 and 1994, respectively. (8) SUBSEQUENT EVENT Effective June 1, 1994, the Company was acquired by, and became a wholly owned subsidiary of, Pallet Recycling Associates of North America, Inc., a Minnesota corporation. INDEPENDENT AUDITORS' REPORT The Board of Directors Pallet Source, Inc.: We have audited the accompanying balance sheets of Pallet Source, Inc. as of December 31, 1992 and 1993, and November 30, 1994 and the related statements of operations and retained earnings (accumulated deficit), and cash flows for the years ended December 31, 1992 and 1993, and the eleven-month period ended November 30, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pallet Source, Inc. as of December 31, 1992 and 1993 and November 30, 1994, and the results of its operations and its cash flows for the years ended December 31, 1992 and 1993 and the eleven-month period ended November 30, 1994, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Minneapolis, Minnesota February 28, 1995 PALLET SOURCE, INC. BALANCE SHEETS DECEMBER 31, 1992 AND 1993 AND NOVEMBER 30, 1994 ASSETS <TABLE> <CAPTION> 1992 1993 1994 <S> <C> <C> <C> Current assets: Trade accounts receivable $153,514 $344,172 $166,567 Advances to stockholders 0 0 3,065 Inventories 45,901 63,320 72,994 Prepaid expenses 1,668 3,167 4,932 Total current assets 201,083 410,659 247,558 Property and equipment at cost: Buildings 64,070 157,514 0 Furniture and fixtures 8,935 8,935 9,498 Equipment 37,808 138,097 219,124 Transportation equipment 67,373 100,951 136,677 178,186 405,497 365,299 Less accumulated depreciation (24,485) (40,883) (64,630) Net property and equipment 153,701 364,614 300,669 Total assets $354,784 $775,273 $548,227 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Bank overdraft $ 37,888 $ 43,928 $ 30,237 Accounts payable 183,202 375,850 164,132 Notes payable 72,798 169,969 72,341 Current maturities of long-term debt 37,172 33,481 13,023 Current maturities of capital lease obligations 3,062 12,918 23,983 Accrued liabilities 12,451 24,189 31,745 Total current liabilities 346,573 660,335 335,461 Long-term debt, less current maturities 13,926 41,904 33,953 Capital lease obligations, less current maturities 11,218 29,815 62,052 Other long-term obligation 0 0 150,000 Stockholders' equity: Common stock--no par value; 2,000 shares authorized; 100 shares issued and outstanding 300 300 300 Retained earnings (accumulated deficit) (17,233) 42,919 (33,539) Total stockholders' equity (deficit) (16,933) 43,219 (33,239) Commitments and contingencies (notes 3 and 4) Total liabilities and stockholders' equity $354,784 $775,273 $548,227 </TABLE> See accompanying notes to financial statements. PALLET SOURCE, INC. STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (ACCUMULATED DEFICIT) YEARS ENDED DECEMBER 31, 1992 AND 1993 AND THE ELEVEN-MONTH PERIOD ENDED NOVEMBER 30, 1994 <TABLE> <CAPTION> 1992 1993 1994 <S> <C> <C> <C> Net sales $2,699,262 $3,264,485 $2,682,897 Cost of sales 2,372,162 2,666,562 2,044,262 Gross profit 327,100 597,923 638,635 Operating expenses: Selling, general and administrative 286,726 507,928 630,223 Operating income 40,374 89,995 8,412 Other income (expense): Interest expense (8,961) (13,652) (26,202) Loss on sale of fixed assets 0 (818) (7,504) Miscellaneous, net 0 3,286 3,100 Total other expense (8,961) (11,184) (30,606) Net income (loss) 31,413 78,811 (22,194) Retained earnings (accumulated deficit) beginning of period (4,512) (17,233) 42,919 Distributions (44,134) (18,659) (54,264) Retained earnings (accumulated deficit) end of period $ (17,233) $ 42,919 $ (33,539) </TABLE> See accompanying notes to financial statements. PALLET SOURCE, INC. STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1992 AND 1993 AND THE ELEVEN-MONTH PERIOD ENDED NOVEMBER 30, 1994 <TABLE> <CAPTION> 1992 1993 1994 <S> <C> <C> <C> Cash flows from operating activities: Net income (loss) $ 31,413 $ 78,811 $ (22,194) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation 17,139 32,482 43,809 Loss on sale of equipment 0 818 7,504 Changes in operating assets and liabilities: Trade accounts receivable (931) (190,658) 177,605 Inventories (25,479) (17,419) (9,674) Prepaid expenses (1,587) (1,499) (1,765) Bank overdraft 13,623 6,040 (13,691) Accounts payable 30,212 192,648 (211,718) Accrued liabilities 6,186 11,738 7,556 Net cash provided by (used in) operating activities 70,576 112,961 (22,568) Cash flows from investing activities: Proceeds from sale of equipment 0 5,700 4,018 Purchases of property and equipment (52,142) (228,565) (148,259) Net cash used in investing activities (52,142) (222,865) (144,241) Cash flows from financing activities: Proceeds from notes payable 72,798 184,589 107,809 Principal payments of notes payable (28,710) (87,418) (32,537) Proceeds from long-term debt 28,588 67,615 31,345 Principal payments of long-term debt (18,896) (43,328) (26,836) Principal payments of capital lease obligations (2,825) (4,926) (15,498) Proceeds from other long-term obligations 0 0 150,000 Repayments of advances from stockholders (25,255) 0 0 Advances to stockholders 0 0 (3,065) Distributions to stockholders (44,134) (6,628) (44,409) Net cash provided by (used in) financing activities (18,434) 109,904 166,809 Net change in cash 0 0 0 Cash at beginning of period 0 0 0 Cash at end of period $ 0 $ 0 $ 0 Supplemental disclosures of cash flow information: Cash paid during the period for interest $ 8,692 $ 12,725 $ 26,598 Supplemental schedule of non-cash investing and financing activities: Equipment traded in for new equipment $ 0 $ 21,565 $ 6,000 Capitalized lease obligations for equipment 17,105 33,379 58,800 Land and building sold in exchange for assumption of debt 0 0 205,818 Transportation equipment distributed to stockholder 0 12,031 9,855 </TABLE> See accompanying notes to financial statements. PALLET SOURCE INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1992 AND 1993 AND NOVEMBER 30, 1994 (1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS Pallet Source, Inc. (the Company) builds, refurbishes and distributes wooden pallets for use in a variety of industries. In addition, the Company acts as a broker in transferring pallets between nonrelated companies. The Company is located in Mansfield, Arkansas and sells its products on an unsecured basis to customers in the area. The Company's ability to collect the amounts due from customers is affected by regional economic conditions. INVENTORIES Inventories are stated at the lower of first in, first out (FIFO) cost or market. DEPRECIATION Depreciation is computed under the straight-line method over the estimated useful lives of assets as follows: <TABLE> <CAPTION> <S> <C> Building 10-30 years Furniture and fixtures 5-7 years Equipment 7 years Transportation equipment 5-10 years </TABLE> INCOME TAXES The Company is an S corporation and, accordingly, is not subject to federal or state income taxes. The Company's taxable income (loss) is included in the individual tax returns of its stockholders. (2) INVENTORIES Inventories consist of the following: <TABLE> <CAPTION> DECEMBER 31, NOVEMBER 30, 1992 1993 1994 <S> <C> <C> <C> Raw materials $18,147 $49,035 $43,423 Finished goods 27,754 14,285 29,571 $45,901 $63,320 $72,994 </TABLE> (3) NOTES PAYABLE The Company has several demand notes payable to its bank with interest rates ranging from 8% to 9%. The notes are secured by property and equipment and had outstanding balances of $72,798, $169,969 and $72,341 as of December 31, 1992 and 1993 and November 30, 1994, respectively. (4) LONG-TERM DEBT Long-term debt consists of the following: <TABLE> <CAPTION> DECEMBER 31, NOVEMBER 30, 1992 1993 1994 <S> <C> <C> <C> Note payable to bank in monthly installments of $815, including interest at 8%, final payment due July 1997, secured by transportation equipment $ 0 $ 30,372 $ 23,408 Note payable in monthly installments of $509 including interest at 8.5%, final payment due July 1999, secured by transportation equipment 0 0 23,190 Note payable to bank in monthly installments of $723 plus interest at 8%, paid in full in 1994 0 24,595 0 Note payable to bank in monthly installments of $349 including interest at 8%, paid in full in 1994 14,728 10,865 0 Note payable to bank in monthly installments paid in full in 1993 19,746 0 0 Various notes payable to banks 16,624 9,553 378 51,098 75,385 46,976 Less current maturities (37,172) (33,481) (13,023) $ 13,926 $ 41,904 $ 33,953 </TABLE> Maturities of long-term debt as of November 30, 1994 are as follows: <TABLE> <CAPTION> Twelve months ending November 30: <S> <C> 1995 $13,023 1996 13,544 1997 11,410 1998 5,540 1999 3,459 $46,976 </TABLE> (5) CAPITAL LEASE OBLIGATIONS The Company has several capital leases with monthly payments totaling $2,760 including imputed interest at 7.8% to 12.5%. The leases have various expiration dates through July 1999. Minimum lease commitments under capitalized lease obligations as of November 30, 1994 are as follows: <TABLE> <CAPTION> Twelve months ending November 30: <S> <C> 1995 $ 33,117 1996 32,012 1997 16,401 1998 15,711 1999 10,474 107,715 Less amounts representing interest (21,680) 86,035 Less current maturities (23,983) $ 62,052 </TABLE> Capital leases included in property and equipment are as follows: <TABLE> <CAPTION> DECEMBER 31, NOVEMBER 30, 1992 1993 1994 <S> <C> <C> <C> Cost $17,105 $55,689 $114,539 Less accumulated depreciation (2,055) (6,643) (14,627) $15,050 $49,046 $ 99,912 </TABLE> (6) RELATED PARTY TRANSACTIONS On November 30, 1994, the Company sold its buildings with book value of $209,891, net of accumulated depreciation, to one of its stockholders in exchange for the stockholder assuming notes payable and debt of $205,818. The Company recorded a loss of $4,073 on this transaction and entered into a five-year lease on the property with the stockholder. Minimum future payments under this lease are as follows: <TABLE> <CAPTION> Twelve months ending November 30: <S> <C> 1995 $ 30,000 1996 30,000 1997 30,000 1998 30,000 1999 30,000 $150,000 </TABLE> (7) SUBSEQUENT EVENT Effective December 1, 1994, the Company was acquired by, and became a wholly owned subsidiary of, Pallet Recycling Associates of North America, Inc. (PRANA), a Minnesota corporation. The acquisition agreement contains a provision that allows the former stockholders to rescind the agreement if certain conditions are not met prior to June 30, 1996. In addition, as part of this agreement, PRANA advanced $150,000 to the Company in November 1994 in anticipation of the transaction closing. This amount is shown on the November 30, 1994 financial statements as another long-term obligation and was reclassified to equity on December 1, 1994 when the acquisition became effective. INDEPENDENT AUDITORS' REPORT The Board of Directors Hurt's Pallet and Sales Inc.: We have audited the accompanying balance sheets of Hurt's Pallet and Sales Inc. as of December 31, 1992 and 1993, and November 30, 1994, and the related statements of operations and retained earnings (accumulated deficit) and cash flows for the years ended December 31, 1992 and 1993 and the eleven-month period ended November 30, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Hurt's Pallet and Sales Inc. as of December 31, 1992 and 1993, and November 30, 1994, and the results of its operations and its cash flows for the years ended December 31, 1992 and 1993 and the eleven-month period ended November 30, 1994, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Minneapolis, Minnesota February 17, 1995 HURT'S PALLET AND SALES INC. BALANCE SHEETS DECEMBER 31, 1992 AND 1993 AND NOVEMBER 30, 1994 ASSETS <TABLE> <CAPTION> 1992 1993 1994 <S> <C> <C> <C> Current assets: Cash $ 26,785 $ 22,954 $ 47,554 Trade accounts receivable, less allowance for doubtful accounts of $1,100, $0, and $2,042, respectively 43,749 49,435 71,703 Inventories 41,264 46,794 82,374 Prepaid expenses 2,306 0 0 Deferred tax assets 23,200 41,800 8,800 Total current assets 137,304 160,983 210,431 Property and equipment at cost: Land (note 6) 8,500 8,500 0 Building (note 6) 161,244 161,244 0 Furniture and fixtures 5,979 5,219 5,219 Equipment 164,663 230,160 277,674 Transportation equipment 96,734 99,115 99,115 437,120 504,238 382,008 Less accumulated depreciation 146,747 132,020 155,551 Net property and equipment 290,373 372,218 226,457 Other assets 3,688 2,847 2,316 Total assets $431,365 $536,048 $439,204 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 68,861 $111,010 $ 34,674 Current maturities of long-term debt 72,186 115,857 28,231 Current maturities of capital lease obligations 17,768 6,748 6,330 Due to stockholder 24,074 19,074 19,074 Accrued liabilities 50,525 54,492 50,964 Income taxes payable 4,305 3,972 55,505 Total current liabilities 237,719 311,153 194,778 Long-term debt, less current maturities 242,539 203,054 20,575 Capital lease obligations, less current maturities 4,016 9,841 3,511 Deferred tax liabilities 6,500 19,300 29,400 Stockholders' equity: Common stock -- no par value; 1,000 shares authorized; 800 shares issued and outstanding 1,000 1,000 1,000 Retained earnings (accumulated deficit) (60,409) (8,300) 189,940 Total stockholders' equity (deficit) (59,409) (7,300) 190,940 Commitments and contingencies (notes 3 and 4) Total liabilities and stockholders' equity $431,365 $536,048 $439,204 </TABLE> See accompanying notes to financial statements. HURT'S PALLET AND SALES INC. STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (ACCUMULATED DEFICIT) YEARS ENDED DECEMBER 31, 1992 AND 1993 AND THE ELEVEN-MONTH PERIOD ENDED NOVEMBER 30, 1994 <TABLE> <CAPTION> 1992 1993 1994 <S> <C> <C> <C> Net sales $1,765,635 $2,126,434 $1,816,484 Cost of sales 1,502,677 1,796,514 1,306,003 Gross profit 262,958 329,920 510,481 Operating expenses: Selling, general and administrative 193,948 224,170 188,200 Operating income 69,010 105,750 322,281 Other income (expense): Interest expense (32,712) (33,679) (21,395) Gain (loss) on sale of fixed assets 1,798 (13,482) 12,737 Miscellaneous, net 474 663 (296) Total other expense (30,440) (46,498) (8,954) Income before income taxes 38,570 59,252 313,327 Provision for income taxes 9,105 7,143 115,087 Net income 29,465 52,109 198,240 Accumulated deficit beginning of period (89,874) (60,409) (8,300) Retained earnings (accumulated deficit) end of period $ (60,409) $ (8,300) $ 189,940 </TABLE> See accompanying notes to financial statements. HURT'S PALLET AND SALES INC. STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1992 AND 1993 AND THE ELEVEN-MONTH PERIOD ENDED NOVEMBER 30, 1994 <TABLE> <CAPTION> 1992 1993 1994 <S> <C> <C> <C> Cash flows from operating activities: Net income $ 29,465 $ 52,109 $ 198,240 Adjustments to reconcile net income to net cash provided by operating activities: Amortization 1,294 1,294 531 Depreciation 43,606 54,399 54,279 (Gain) loss on sale of equipment (1,798) 13,482 (12,737) Deferred tax assets and liabilities 4,800 (5,800) 43,100 Changes in operating assets and liabilities: Trade accounts receivable 5,904 (5,686) (22,268) Inventories (7,665) (5,530) (35,580) Prepaid expenses (2,306) 2,306 0 Other assets 150 (453) 0 Accounts payable 8,064 42,149 (76,336) Accrued liabilities 6,087 3,967 (3,528) Income taxes payable 4,305 (333) 51,533 Net cash provided by operating activities 91,906 151,904 197,234 Cash flows from investing activities: Proceeds from sale of equipment 8,000 16,700 0 Purchases of property and equipment (29,765) (151,968) (50,029) Net cash used in investing activities (21,765) (135,268) (50,029) Cash flows from financing activities: Proceeds from long-term debt 15,000 84,000 0 Principal payments of long-term debt (49,651) (79,814) (115,857) Principal payments of capital lease obligations (15,761) (19,653) (6,748) Repayments of stockholder advances 0 (5,000) 0 Net cash used in financing activities (50,412) (20,467) (122,605) Net increase (decrease) in cash 19,729 (3,831) 24,600 Cash at beginning of period 7,056 26,785 22,954 Cash at end of period $ 26,785 $ 22,954 $ 47,554 Supplemental disclosures of cash flow information: Cash paid during the period for interest $ 37,873 $ 36,326 $ 23,180 Cash paid during the period for income taxes 0 13,276 20,454 Supplemental schedule of non-cash investing and financing activities: Finished goods inventory exchanged for raw materials inventory $363,443 $ 519,108 $ 408,328 Equipment traded in for new equipment 0 6,135 0 Capitalized lease obligations for equipment 14,250 14,458 0 Land and building sold in exchange for assumption of debt 0 0 154,248 </TABLE> See accompanying notes to financial statements. HURT'S PALLET AND SALES INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1992 AND 1993 AND NOVEMBER 30, 1994 (1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS Hurt's Pallet and Sales Inc. (the Company) builds, refurbishes and distributes wooden pallets for use in a variety of industries. The Company is located in Summitville, Indiana and sells its products on an unsecured basis to customers in the area. The Company's ability to collect the amounts due from customers is affected by regional economic conditions. INVENTORIES Inventories are stated at the lower of first in, first out (FIFO) cost or market. DEPRECIATION Depreciation is computed under the straight-line method over the estimated useful lives of assets as follows: <TABLE> <CAPTION> <S> <C> Building 31.5 years Furniture and fixtures 7 years Equipment 5-7 years Transportation equipment 3-7 years </TABLE> INCOME TAXES Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Under Statement No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. All statements presented reflect the provisions of Statement No. 109. (2) INVENTORIES Inventories consist of the following: <TABLE> <CAPTION> DECEMBER 31 NOVEMBER 30, 1992 1993 1994 <S> <C> <C> <C> Raw materials $30,279 $40,827 $64,512 Finished goods 10,985 5,967 17,862 $41,264 $46,794 $82,374 </TABLE> (3) LONG-TERM DEBT Long-term debt consists of the following: <TABLE> <CAPTION> DECEMBER 31 NOVEMBER 30, 1992 1993 1994 <S> <C> <C> <C> Note payable to bank in monthly installments of $1,875 including interest at 2.5% above prime rate, final installment due September 1995, secured by equipment $ 0 $ 35,489 $ 17,792 Note payable in monthly installments of $637 including interest at 10%, final installment due September 1998 0 10,883 6,742 Note payable to bank in monthly installments of $452 including interest at 10%, final installment due March 1996, secured by equipment 0 30,000 24,272 Note payable due in monthly installments of $1,556 including interest at prime rate, assumed by stockholder in 1994 100,000 72,301 0 Note payable to bank in monthly installments of $2,400 including interest at 2.75% above prime rate, assumed by stockholder in 1994 131,588 113,375 0 Notes payable, paid in full 83,137 56,863 0 314,725 318,911 48,806 Less current maturities (72,186) (115,857) (28,231) $242,539 $ 203,054 $ 20,575 </TABLE> Maturities of long-term debt as of November 30, 1994 are as follows: <TABLE> <CAPTION> <S> <C> Twelve months ended November 30: 1995 $28,231 1996 7,811 1997 6,673 1998 6,091 $48,806 </TABLE> (4) CAPITALIZED LEASE OBLIGATIONS Included in property and equipment are several capitalized lease obligations as follows: <TABLE> <CAPTION> DECEMBER 31 NOVEMBER 30, 1992 1993 1994 <S> <C> <C> <C> Cost $54,483 $68,941 $68,941 Accumulated depreciation 23,817 33,457 41,904 $30,666 $35,484 $27,037 </TABLE> Minimum lease commitments under capitalized lease obligations as of November 30, 1994 are as follows: <TABLE> <CAPTION> <S> <C> Twelve months ending November 30: 1995 $ 6,958 1996 3,624 10,582 Less amounts representing interest (741) $ 9,841 </TABLE> (5) INCOME TAXES Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Components of the provision for income taxes are as follows: <TABLE> <CAPTION> CURRENT DEFERRED TOTAL <S> <C> <C> <C> December 31, 1992: Federal $ 4,237 $ 2,200 $ 6,437 State 68 2,600 2,668 $ 4,305 $ 4,800 $ 9,105 December 31, 1993: Federal $ 7,210 $(6,800) $ 410 State 5,733 1,000 6,733 $12,943 $(5,800) $ 7,143 November 30, 1994: Federal $56,487 $37,800 $ 94,287 State 15,500 5,300 20,800 $71,987 $43,100 $115,087 </TABLE> The tax effects of temporary differences that give rise to significant portions of the net deferred tax liability as of November 30, 1994 are as follows: <TABLE> <CAPTION> <S> <C> Deferred tax assets: Accounts receivable $ 795 Prepaid expenses 4,155 Accrued liabilities 27,050 32,000 Deferred tax liabilities: Inventories 23,200 Depreciation 29,400 52,600 Net deferred tax liability $20,600 </TABLE> No valuation allowance for the deferred tax asset was necessary as of November 30, 1994. The character of the deferred tax asset is such that it can be offset against future anticipated taxable income. The provision for income taxes varied from the expected federal statutory rate as follows: <TABLE> <CAPTION> ELEVEN-MONTH YEARS ENDED PERIOD ENDED DECEMBER 31 NOVEMBER 30, 1992 1993 1994 <S> <C> <C> <C> Expected federal tax recovery using statutory rate of 34% $13,114 $ 20,145 $106,531 Increase (reduction) in taxes resulting from: Effects of graduated rates (7,328) (10,333) 0 Effects of changes in effective tax rates 0 (7,200) 0 State taxes, net of federal benefit 1,761 4,444 13,728 Other 1,558 87 (5,172) $ 9,105 $ 7,143 $115,087 </TABLE> (6) RELATED PARTY TRANSACTIONS The Company paid $117,000, $99,300, and $11,000 in trucking expenses in 1992, 1993 and 1994, respectively, to another company with common ownership. In addition, the Company owed its stockholders $24,074 at December 31, 1992, and $19,074 at December 31, 1993 and November 30, 1994 for operating advances. On November 30, 1994, the Company sold its land and building totaling $141,002, net of accumulated depreciation, to one of its stockholders in exchange for the stockholder assuming company debt of $154,248. The Company recorded a gain of $13,246 on this transaction and entered into a ten-year lease of the property with the stockholder. Minimum future payments under this lease are as follows: <TABLE> <CAPTION> <S> <C> Twelve months ending November 30: 1995 $ 48,000 1996 48,000 1997 48,000 1998 48,000 1999 48,000 Thereafter 240,000 $480,000 </TABLE> (7) SUBSEQUENT EVENT Effective December 1, 1994, the Company was acquired by, and became a wholly owned subsidiary of, Pallet Recycling Associates of North America, Inc. (PRANA), a Minnesota corporation. The acquisition agreement contains a provision that allows the former shareholders to rescind the agreement if certain conditions are not met prior to June 30, 1996. (8) SIGNIFICANT CUSTOMERS Sales to the Company's four largest customers represents 67%, 57%, and 65% of total sales for the years ended December 31, 1992 and 1993 and the eleven-month period ended November 30, 1994, respectively. INDEPENDENT AUDITORS' REPORT The Board of Directors Quality Pallet, Inc.: We have audited the accompanying balance sheets of Quality Pallet, Inc. as of December 31, 1992 and 1993 and November 30, 1994, and the related statements of earnings, stockholders' equity and cash flows for the years ended December 31, 1992 and 1993 and the eleven-month period ended November 30, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Quality Pallet, Inc. as of December 31, 1992 and 1993 and November 30, 1994, and the results of its operations and its cash flows for the years ended December 31, 1992 and 1993 and the eleven-month period ended November 30, 1994, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Minneapolis, Minnesota January 13, 1995 QUALITY PALLET, INC. BALANCE SHEETS DECEMBER 31, 1992 AND 1993 AND NOVEMBER 30, 1994 ASSETS <TABLE> <CAPTION> 1992 1993 1994 <S> <C> <C> <C> Current assets: Cash and cash equivalents $ 27,891 $ 36,744 $126,942 Trade accounts receivable, less allowance for doubtful accounts of $0, $4,512, and $9,314 respectively 113,445 150,095 235,523 Inventories 48,802 134,981 167,343 Prepaid expenses 4,146 8,289 0 Note receivable from related party 0 114,335 0 Total current assets 194,284 444,444 529,808 Property and equipment at cost: Building and improvements 1,829 1,829 6,440 Equipment 51,333 154,311 196,657 Transportation equipment 14,954 22,303 22,303 68,116 178,443 225,400 Less accumulated depreciation (38,358) (28,016) (56,169) Net property and equipment 29,758 150,427 169,231 Total assets $224,042 $594,871 $699,039 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 13,792 $ 21,646 $ 59,873 Accrued liabilities 13,211 76,312 172,672 Current portion of long-term debt 0 30,763 54,275 Total current liabilities 27,003 128,721 286,820 Long-term debt, net of current portion 0 74,680 94,201 Stockholders' equity: Common stock--no par value; 9,000 shares authorized; 9,000 shares issued and outstanding as of December 31, 1992 and 1993 and November 30, 1994 105,598 105,598 105,598 Retained earnings 91,441 285,872 212,420 Total stockholders' equity 197,039 391,470 318,018 Commitments (note 7) Total liabilities and stockholders' equity $224,042 $594,871 $699,039 </TABLE> See accompanying notes to financial statements. QUALITY PALLET, INC. STATEMENTS OF EARNINGS YEARS ENDED DECEMBER 31, 1992 AND 1993 AND THE ELEVEN-MONTH PERIOD ENDED NOVEMBER 30, 1994 <TABLE> <CAPTION> 1992 1993 1994 <S> <C> <C> <C> Net sales $804,796 $1,387,011 $2,921,131 Cost of sales 489,622 932,418 2,204,354 Gross profit 315,174 454,593 716,777 Operating expenses: Selling, general and administrative 167,986 241,060 619,539 Operating income 147,188 213,533 97,238 Other income (expense): Interest expense 0 (1,587) (9,773) Interest income 0 658 5,969 Miscellaneous, net 58 31,827 4,339 Total other income 58 30,898 535 Net earnings $147,246 $ 244,431 $ 97,773 </TABLE> See accompanying notes to financial statements. QUALITY PALLET, INC. STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1992 AND 1993 AND THE ELEVEN-MONTH PERIOD ENDED NOVEMBER 30, 1994 <TABLE> <CAPTION> COMMON STOCK RETAINED SHARES AMOUNT EARNINGS TOTAL <S> <C> <C> <C> <C> Balance, December 31, 1991 9,000 $105,598 $ 46,695 $ 152,293 Distributions 0 0 (102,500) (102,500) Net earnings 0 0 147,246 147,246 Balance, December 31, 1992 9,000 105,598 91,441 197,039 Distributions 0 0 (50,000) (50,000) Net earnings 0 0 244,431 244,431 Balance, December 31, 1993 9,000 105,598 285,872 391,470 Distributions 0 0 (171,225) (171,225) Net earnings 0 0 97,773 97,773 Balance, November 30, 1994 9,000 $105,598 $ 212,420 $ 318,018 </TABLE> See accompanying notes to financial statements. QUALITY PALLET, INC. STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1992 AND 1993 AND THE ELEVEN-MONTH PERIOD ENDED NOVEMBER 30, 1994 <TABLE> <CAPTION> 1992 1993 1994 <S> <C> <C> <C> Cash flows from operating activities: Net earnings $ 147,246 $ 244,431 $ 97,773 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 8,904 18,723 29,625 Gain on sale of equipment 0 (2,284) (2,220) Changes in operating assets and liabilities: Trade accounts receivable (72,521) (36,650) (85,428) Inventories (47) (86,179) (32,362) Prepaid expenses (490) (4,143) 8,289 Accounts payable 13,792 7,854 38,227 Accrued liabilities 10,863 63,101 96,360 Net cash provided by operating activities 107,747 204,853 150,264 Cash flows from investing activities: Proceeds from sale of equipment 0 8,553 8,000 Purchases of property and equipment (6,700) (145,661) (54,209) Net cash used in investing activities (6,700) (137,108) (46,209) Cash flows from financing activities: (Issuance) repayment of stockholder note receivable 0 (114,335) 114,335 Distributions to stockholders (102,500) (50,000) (171,225) Principal payments of long-term debt 0 (11,397) (133,467) Proceeds from long-term debt 0 116,840 176,500 Net cash used in financing activities (102,500) (58,892) (13,857) Net increase (decrease) in cash (1,453) 8,853 90,198 Cash at beginning of period 29,344 27,891 36,744 Cash at end of period $ 27,891 $ 36,744 $ 126,942 Supplemental disclosures of cash flow information: Cash paid during the period for interest $ 0 $ 1,587 $ 9,773 </TABLE> See accompanying notes to financial statements. QUALITY PALLET, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1992 AND 1993 AND NOVEMBER 30, 1994 (1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS Quality Pallet, Inc. (the Company) builds, refurbishes and distributes wooden pallets for use in a variety of industries. The Company is located in Seymour, Wisconsin and sells its products on an unsecured basis to customers throughout the Midwestern United States. The Company's ability to collect the amounts due from customers is affected by regional economic conditions. CASH EQUIVALENTS Cash equivalents consist of short-term investments in money market funds with an expected maturity of three months or less. INVENTORIES Inventories are stated at the lower of first in, first out (FIFO) cost or market. DEPRECIATION Depreciation is computed under the straight-line method over the estimated useful lives of assets as follows: <TABLE> <CAPTION> <S> <C> Building improvements 1-10 years Equipment, furniture and fixtures 5-7 years Transportation equipment 5 years </TABLE> INCOME TAXES The Company is an S corporation and, accordingly, is not subject to federal or state income taxes. The Company's taxable income is included in the individual tax returns of its stockholders. (2) ACCOUNTS RECEIVABLE Trade accounts receivable consist principally of amounts due from customers for pallet purchases and are reflected as follows: <TABLE> <CAPTION> DECEMBER 31 NOVEMBER 30, 1992 1993 1994 <S> <C> <C> <C> Accounts receivable $113,445 $154,607 $244,837 Less: Allowance for doubtful accounts 0 (4,512) (9,314) $113,445 $150,095 $235,523 </TABLE> (3) INVENTORIES Inventories consist of the following: <TABLE> <CAPTION> DECEMBER 31 NOVEMBER 30, 1992 1993 1994 <S> <C> <C> <C> Raw materials $24,967 $ 98,301 $106,670 Finished goods 23,835 36,680 60,673 $48,802 $134,981 $167,343 </TABLE> (4) LONG-TERM DEBT Long-term debt consists of the following: <TABLE> <CAPTION> DECEMBER 31 NOVEMBER 30, 1992 1993 1994 <S> <C> <C> <C> Note payable to bank in monthly installments of $2,000, including interest at 7.5%, paid in full March 1994 $0 $ 80,309 $ 0 Note payable to bank in monthly installments of $472, including interest at 7.93%, paid in full March 1994 0 16,139 0 Capital lease for forklift, payable in monthly installments of $666, including interest at 5.97% through February 1995 0 8,995 1,988 Note payable to bank in monthly installments of $3,600, including interest at 7.5%, due July 1997 0 0 102,875 Note payable to bank in monthly installments of $1,600, including interest at 8.0%, due June 1997 0 0 43,613 0 105,443 148,476 Less current portion 0 (30,763) (54,275) $0 $ 74,680 $ 94,201 </TABLE> Maturities of long-term debt as of November 30, 1994 are as follows: <TABLE> <CAPTION> Twelve months ending November 30: <S> <C> 1995 $ 54,275 1996 57,152 1997 37,049 $148,476 </TABLE> (5) PROFIT SHARING PLAN In December 1993, the Company adopted a profit sharing plan (the Plan) which covers substantially all employees. The Company makes annual contributions of 15% of all eligible employees' wages to the Plan in accordance with the Plan agreement. Profit sharing expense was approximately $19,000 and $47,000 for the year ended December 31, 1993 and the eleven months ended November 30, 1994, respectively. (6) RELATED PARTY TRANSACTIONS The Company had a note receivable from B&B ENTERPRISES in the amount of $114,335 as of December 31, 1993. An additional $19,864 was added to the note in January of 1994. The note bears interest at 7%. Interest income related to this note was $658 and $5,969 in 1993 and 1994, respectively. In September of 1994, the Company forgave the remaining note receivable principal balance of approximately $116,000. The forgiveness was treated as distributions to shareholders. The Company paid fees of approximately $58,000 in 1992, $112,000 in 1993, and $275,000 in 1994 to a Corporation which had officers and stockholders in common. The related Corporation provided freight services to the Company. In July 1992, the Company entered into an agreement with B&B ENTERPRISES to lease the corporate office and production facility. The Company paid rent payments of approximately $13,500 in 1992, $27,000 in 1993, and $55,000 in 1994, respectively. In July 1992, the Company entered into an agreement with a Corporation which had officers and stockholders in common to sublease corporate office space. Rental income related to this sublease was $600, $1,200, and $2,050 for 1992, 1993 and 1994, respectively. (7) SUBSEQUENT EVENTS Effective November 30, 1994, the Company was acquired by, and became a wholly owned subsidiary of, Pallet Recycling of North America, Inc., a Minnesota Corporation. On December 1, 1994, the Company renegotiated the terms of its facility lease. The operating lease, which expires November 30, 2004, calls for monthly payments of $12,500. On December 1, 1995 and on the same day of each succeeding year thereafter during term of the lease, monthly lease payment is increased by 5%. Future minimum lease payments for the noncancelable operating lease as of November 30, 1994 are as follows (in thousands): <TABLE> <CAPTION> <S> <C> 1994 $ 150,000 1995 157,500 1996 165,000 1997 172,500 1998 180,000 Remainder 1,012,500 Total minimum obligations $1,837,500 </TABLE> INDEPENDENT AUDITORS' REPORT The Board of Directors American Century Pallet, Inc.: We have audited the accompanying balance sheets of American Century Pallet, Inc. as of December 31, 1993 and 1994, and March 31, 1995, and the related statements of operations, stockholders' equity and cash flows for the years ended December 31, 1993 and 1994 and the three-month period ended March 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of American Century Pallet, Inc. as of December 31, 1993 and 1994, and March 31, 1995, and the results of its operations and its cash flows for the years ended December 31, 1993 and 1994, and the three-month period ended March 31, 1995, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Minneapolis, Minnesota April 8, 1996 AMERICAN CENTURY PALLET, INC. BALANCE SHEETS DECEMBER 31, 1993 AND 1994, AND MARCH 31, 1995 ASSETS <TABLE> <CAPTION> 1993 1994 1995 <S> <C> <C> <C> Current assets: Cash $ 43,158 $ 21,314 $109,269 Restricted cash (note 2) 0 0 10,000 Trade accounts receivable 91,007 160,777 133,551 Other receivables 10,932 10,205 12,293 Inventories (note 3) 73,027 66,789 47,429 Prepaid expenses 4,780 4,153 2,119 Deferred income taxes (note 5) 3,476 3,802 14,998 Income taxes refundable 0 16,408 0 Total current assets 226,380 283,448 329,659 Property and equipment at cost: Furniture and fixtures 1,844 1,844 1,844 Equipment 50,372 60,973 60,973 Transportation equipment 77,870 72,370 74,284 130,086 135,187 137,101 Less accumulated depreciation 36,979 45,404 49,858 Net property and equipment 93,107 89,783 87,243 Total assets $319,487 373,231 416,902 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt (note 4) $ 16,280 $ 0 $ 0 Current maturities of capital lease obligations (note 6) 7,476 7,476 7,476 Notes payable--related party (note 7) 0 10,000 0 Accounts payable 39,119 39,276 51,465 Accrued liabilities (note 8) 14,642 22,780 25,035 Income taxes payable (note 5) 0 0 16,094 Total current liabilities 77,517 79,532 100,070 Capital lease obligations, less current maturities (note 6) 16,757 12,542 11,380 Deferred income taxes (note 5) 7,567 17,821 17,337 Stockholders' equity: Common stock $1 par value: 16,500 shares authorized; 16,500 shares issued and outstanding at Decem ber 31, 1993, 11,000 shares issued and outstanding as of December 31, 1994 and March 31, 1995 16,500 11,000 11,000 Retained earnings 201,146 252,336 277,115 Total stockholders' equity 217,646 263,336 288,115 Commitments (note 6) Total liabilities and stockholders' equity $319,487 $373,231 $416,902 </TABLE> See accompanying notes to financial statements. AMERICAN CENTURY PALLET, INC. STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1993 AND 1994, AND THE THREE-MONTH PERIOD ENDED MARCH 31, 1995 <TABLE> <CAPTION> 1993 1994 1995 <S> <C> <C> <C> Net sales $1,658,764 $1,964,102 $475,930 Cost of sales 1,423,639 1,496,570 344,858 Gross profit 235,125 467,532 131,072 Operating expenses: Selling, general and administrative 247,007 335,519 89,075 Operating income (loss) (11,882) 132,013 41,997 Other income (expense): Interest expense (2,708) (3,261) (707) Gain (loss) on sale of equipment 354 1,320 (686) Miscelleaneous 0 (2,446) (1,515) Total other income (expense) (2,354) (4,387) (2,908) Income (loss) before income taxes (14,236) 127,626 39,089 Income tax expense (benefit) (note 5) (5,811) 36,936 14,310 Net income (loss) $ (8,425) $ 90,690 $ 24,779 </TABLE> See accompanying notes to financial statements. AMERICAN CENTURY PALLET, INC. STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1993 AND 1994, AND THREE-MONTH PERIOD ENDED MARCH 31, 1995 <TABLE> <CAPTION> RETAINED SHARES AMOUNT EARNINGS TOTAL <S> <C> <C> <C> <C> Balance, December 31, 1992 16,500 $16,500 $209,571 $226,071 Net loss 0 0 (8,425) (8,425) Balance, December 31, 1993 16,500 16,500 201,146 217,646 Purchase of common stock (note 7) (5,500) (5,500) (39,500) (45,000) Net income 0 0 90,690 90,690 Balance, December 31, 1994 11,000 11,000 252,336 263,336 Net income 0 0 24,779 24,779 Balance, March 31, 1995 11,000 $11,000 $277,115 $288,115 </TABLE> See accompanying notes to financial statements AMERICAN CENTURY PALLET, INC. STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1993 AND 1994, AND THE THREE-MONTH PERIOD ENDED MARCH 31, 1995 <TABLE> <CAPTION> 1993 1994 1995 <S> <C> <C> <C> Cash flows from operating activities: Net income (loss) $ (8,425) $ 90,690 $ 24,779 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 18,553 21,511 5,311 (Gain) loss on sale of equipment (354) (1,320) 686 Deferred income taxes (5,811) 9,928 (11,680) Changes in operating assets and liabilities: Trade accounts receivable 39,843 (69,770) 27,226 Other receivables (1,083) 727 (2,088) Inventories (12,481) 6,238 19,360 Prepaid expenses (842) 627 2,034 Accounts payable 3,907 156 12,189 Accrued liabilities (11,292) 8,138 2,255 Income taxes payable 0 (16,408) 32,502 Net cash provided by operating activities 22,015 50,517 112,574 Cash flows from investing activities: Investment in restricted cash money market account 0 0 (10,000) Proceeds from sale of equipment 8,455 10,735 58 Purchase of property and equipment (26,317) (27,601) (3,515) Net cash used in investing activities (17,862) (16,866) (13,457) Cash flows from financing activities: Proceeds from long-term debt 16,280 (16,280) 0 Principal payments of long-term debt (9,278) 0 0 Principal payments of capital lease obligations (2,820) (4,215) (1,162) Proceeds from notes payable to stockholders 0 56,050 70,050 Repayments of notes payable to stockholders 0 (56,050) (80,050) Purchase of common stock (note 7) 0 (35,000) 0 Net cash provided by (used in) financing activities 4,182 (55,495) (11,162) Net increase (decrease) in cash 8,335 (21,844) 87,955 Cash at beginning of period 34,823 43,158 21,314 Cash at end of period $ 43,158 $ 21,314 $109,269 Supplemental disclosures of cash flow information: Cash paid during the period for interest $ 2,709 $ 3,261 $ 707 Cash paid (refunded) during the period for income taxes 0 43,416 (6,512) Supplemental schedule of non-cash investing and financing activities: Purchase of common stock financed by note from stockholder $ 0 $ 10,000 $ 0 Equipment purchased under capital lease 27,053 0 0 </TABLE> See accompanying notes to financial statements. AMERICAN CENTURY PALLET, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1993 AND 1994, AND MARCH 31, 1995 (1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS American Century Pallet, Inc. (the Company) builds, refurbishes and distributes wooden pallets for use in a variety of industries. The Company is located in Oklahoma City, Oklahoma and sells its products on an unsecured basis to customers in that area. The Company's ability to collect the amounts due from customers is affected by regional economic conditions. INVENTORIES Inventories are stated at the lower of first in, first out (FIFO) cost or market. DEPRECIATION Depreciation is computed under the straight-line method over the estimated useful lives of assets as follows: <TABLE> <CAPTION> <S> <C> Furniture and fixtures 7 years Equipment 7 years Transportation equipment 5 years </TABLE> INCOME TAXES The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES. Under Statement No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS The carrying value of debt approximates market, as the substantial majority of debt carries interest rates that approximate market. (2) RESTRICTED CASH BALANCES As part of the acquisition agreement (see note 9), the Company was required to invest $10,000 in a money market account to cover costs associated with the acquisition. The Company is prevented by the agreement from using the account for activities not related to the acquisition. (3) INVENTORIES Inventories consist of the following: <TABLE> <CAPTION> 1993 1994 1995 <S> <C> <C> <C> Raw materials $12,054 $19,349 $13,660 Finished goods 60,973 47,440 33,769 $73,027 $66,789 $47,429 </TABLE> (4) NOTES PAYABLE TO THIRD PARTIES The Company had a note payable to its bank due in a single payment upon maturity plus interest at 7.9% secured by transportation equipment. The outstanding balance was $15,273 as of December 31, 1993. The note was paid in 1994. The Company also had a note payable to a third party payable in monthly installments of $407 including interest at 7.5% secured by transportation equipment. The outstanding balance was $1,007 as of December 31,1993. The note was paid in 1994. (5) INCOME TAXES Components of income tax expense (benefit) for the years ended December 31, 1993 and 1994 and the three-month period ended March 31, 1995 are as follows: <TABLE> <CAPTION> CURRENT DEFERRED TOTAL <S> <C> <C> <C> December 31, 1993: Federal $ 0 $ (4,940) $(4,940) State 0 (871) (871) $ 0 $ (5,811) $(5,811) December 31, 1994: Federal $21,195 $ 8,439 $29,634 State 5,813 1,489 7,302 $27,008 $ 9,928 $36,936 March 31, 1995: Federal $21,907 $ (9,828) $11,979 State 4,083 (1,752) 2,331 $25,990 $(11,680) $14,310 </TABLE> The tax effects of temporary differences that give rise to significant portions of the net deferred tax liability as of December 31, 1993 and 1994, and March 31, 1995 are as follows: <TABLE> <CAPTION> 1993 1994 1995 <S> <C> <C> <C> Deferred tax assets: Accounts receivable $ 5,251 $ 0 $ 160 Inventories 0 0 1,265 Accounts payable 0 132 6,868 Accrued liabilities 2,251 4,805 12,053 Capital lease obligations 9,693 8,007 7,542 Deferred tax assets 17,195 12,944 27,888 Deferred tax liabilities: Restricted cash 0 0 4,000 Other receivables 0 172 0 Inventories 3,600 0 0 Prepaid expenses 426 963 1,348 Depreciation 17,260 25,828 24,879 Deferred tax liabilities 21,286 26,963 30,227 Net deferred tax liability $ 4,091 $14,019 $ 2,339 </TABLE> Income tax expense (benefit) varies from the expected federal statutory rate as follows: <TABLE> <CAPTION> DECEMBER 31 MARCH 31 1993 1994 1995 <S> <C> <C> <C> Expected federal tax recovery using rate of 34% $(4,840) $43,393 $13,290 Increase (decrease) in taxes resulting from: State taxes, net of federal benefit (971) 1,445 1,020 Effect of graduated rates 0 (7,902) 0 $(5,811) $36,936 $14,310 </TABLE> (6) LEASES The Company leases equipment under a capital lease with monthly payments of $623 including imputed interest at approximately 14% through May 1998. The Company also leases various equipment under operating leases with monthly payments totaling $1,852 expiring through January 2004. The Company also leases its operating facility from a related party with monthly payments of $2,250 through March, 2000. Minimum lease commitments as of March 31, 1995 are as follows: <TABLE> <CAPTION> OPERATING THIRD RELATED CAPITAL PARTY PARTY <S> <C> <C> <C> Twelve months ended March 31: 1996 $ 7,476 $22,230 $ 27,000 1997 7,476 20,101 27,000 1998 7,476 7,418 27,000 1999 1,247 0 27,000 2000 0 27,000 23,675 $49,749 $135,000 Less amounts representing interest (4,819) 18,856 Less current maturities (7,476) $11,380 </TABLE> Capital leases included in property and equipment are as follows: <TABLE> <CAPTION> DECEMBER 31 MARCH 31 1993 1994 1995 <S> <C> <C> <C> Cost $27,053 $27,053 $27,053 Accumulated depreciation (1,932) (5,797) (6,763) $25,121 $21,256 $20,290 </TABLE> Total rent expense under operating leases was $35,721, $59,560 and $17,014 of which $34,200, $34,200 and $8,700 were paid to related parties for the years ended December 31, 1993 and 1994, and the three-month period ended March 31, 1995, respectively. (7) RELATED PARTY TRANSACTIONS The Company had short term advances from its shareholders in the amount of $0, $56,050 and $70,050 during the years ended December 31, 1993 and 1994, and the three-month period ended March 31, 1995, respectively. The Company repaid the advances during the period they were received. Effective December 31, 1994, the Company purchased 5,500 shares of common stock for $45,000. $35,000 was paid in cash and a $10,000 note payable was issued to the former stockholder and paid in 1995. (8) ACCRUED LIABILITIES Accrued liabilities consist of the following: <TABLE> <CAPTION> DECEMBER 31 MARCH 31 1993 1994 1995 <S> <C> <C> <C> Payroll and payroll taxes $ 5,658 $12,424 $11,713 Workers compensation insurance payable 3,018 2,239 3,015 Real estate and property taxes payable 1,689 2,453 713 Sales tax payable 3,741 5,151 0 Accrued legal fees 0 0 9,500 Other 536 513 94 $14,642 $22,780 $25,035 </TABLE> (9) SUBSEQUENT EVENT Effective April 24, 1995, the Company was acquired by, and became a wholly owned subsidiary of, Pallet Recycling Associates of North America, Inc. (PRANA), a Minnesota corporation. INDEPENDENT AUDITORS' REPORT The Board of Directors B & B Pallet Supply Company: We have audited the accompanying balance sheets of B & B Pallet Supply Company as of December 31, 1992, 1993, 1994, and May 5, 1995, the related statements of operations and retained earnings, and cash flows for the years ended December 31, 1992, 1993, and 1994, and the period from January 1, 1995 to May 5, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of B & B Pallet Supply Company as of December 31, 1992, 1993, 1994, and May 5, 1995, and the results of its operations and its cash flows for the years ended December 31, 1992, 1993, and 1994, and the period from January 1, 1995 to May 5, 1995, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Minneapolis, Minnesota June 9, 1995 B & B PALLET SUPPLY COMPANY BALANCE SHEETS DECEMBER 31, 1992, 1993, AND 1994, AND MAY 5, 1995 ASSETS <TABLE> <CAPTION> 1992 1993 1994 1995 <S> <C> <C> <C> <C> Current assets: Cash $ 159,670 $ 323,972 $ 412,871 $ 34,788 Marketable securities 9,190 33,326 26,456 29,498 Trade accounts receivable, less allowance for doubtful accounts obligations of $1,000, $3,000, $2,000 and $3,000, respectively 124,356 179,248 226,820 217,335 Inventories 36,559 15,283 93,667 78,792 Prepaid expenses 25,670 3,999 4,143 6,726 Other current assets 0 0 0 2,800 Total current assets 355,445 555,828 763,957 369,939 Property and equipment at cost: Land (note 8) 38,600 8,600 75,468 0 Building (note 8) 118,182 118,182 242,216 0 Fixtures and equipment 142,519 190,538 257,604 266,863 Transportation equipment 136,861 145,834 145,834 133,311 436,162 463,154 721,122 400,174 Less accumulated depreciation (202,233) (269,906) (312,639) (295,610) Net property and equipment 233,929 193,248 408,483 104,564 Other assets 3,285 3,285 3,285 485 Total assets $ 592,659 $ 752,361 $1,175,725 $ 474,988 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 204 $ 2,484 $ 7,329 $ 8,467 Current maturities of long-term debt 100,000 2,589 12,496 1,666 Current maturities of capital lease obligations 0 4,247 3,004 5,208 Accrued liabilities 13,919 11,492 15,952 22,740 Deferred revenue 41,377 55,723 49,969 20,224 Total current liabilities 155,500 76,535 88,750 58,305 Long-term debt, less current maturities 0 5,140 188,568 1,680 Capital lease obligations, less current maturities 0 6,030 3,743 0 Stockholders' equity: Common stock -- $1 par value; 30,000 shares authorized; 1,000 shares issued and outstanding 1,000 1,000 1,000 1,000 Net unrealized loss on marketable equity securities 0 0 (13,189) (10,147) Retained earnings 436,159 663,656 906,853 424,150 Total Stockholders' equity 437,159 664,656 894,664 415,003 Commitments (note 7) Total liabilities and stockholders' equity $ 592,659 $ 752,361 $1,175,725 $ 474,988 </TABLE> See accompanying notes to financial statements. B & B PALLET SUPPLY COMPANY STATEMENTS OF OPERATIONS AND RETAINED EARNINGS YEARS ENDED DECEMBER 31, 1992, 1993, 1994, AND THE PERIOD FROM JANUARY 1, 1995 TO MAY 5, 1995 <TABLE> <CAPTION> 1992 1993 1994 1995 <S> <C> <C> <C> <C> Net sales $1,240,709 $1,558,310 $2,014,710 $ 766,946 Cost of sales 719,677 887,895 1,222,320 415,160 Gross profit 521,032 670,415 792,390 351,786 Operating expenses: Selling, general, and administrative 403,922 400,864 490,088 171,720 Operating income 117,110 269,551 302,302 180,066 Other (income) expense: Interest expense (income) (1,566) (5,157) (5,512) 4,728 (Gain) loss on sale of fixed assets 0 5,000 (36,228) 0 (Gain) loss on sale of marketable securities, net (81) 9,190 0 0 Miscellaneous, net (2,871) (7,479) (2,396) 0 Total other expense (income) (4,518) 1,554 (44,136) 4,728 Net income 121,628 267,997 346,438 175,338 Retained earnings -- beginning of period 314,531 436,159 663,656 906,853 Stockholder distributions 0 (40,500) (103,241) (658,041) Retained earnings -- end of period $ 436,159 $ 663,656 $ 906,853 $ 424,150 </TABLE> See accompanying notes to financial statements. B & B PALLET SUPPLY COMPANY STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1992, 1993, 1994, AND THE PERIOD FROM JANUARY 1, 1995 TO MAY 5, 1995 <TABLE> <CAPTION> 1992 1993 1994 1995 <S> <C> <C> <C> <C> Cash flows from operating activities: Net income $ 121,628 $ 267,997 $ 346,438 $ 175,338 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 49,226 67,673 67,008 19,011 (Gain) loss on sale of property and equipment 0 5,000 (36,228) 0 (Gain) loss on sale of marketable securities (81) 9,190 0 0 Changes in operating assets and liabilities: Trade accounts receivable (63,374) (54,892) (47,572) 9,485 Inventories (24,870) 21,276 (78,384) 14,875 Prepaid expenses 7,371 21,671 (144) (2,583) Other assets (2,800) 0 0 0 Accounts payable (8,081) 2,280 4,845 1,138 Accrued liabilities (844) (2,427) 4,460 6,788 Deferred revenue 41,377 14,346 (5,754) (29,745) Net cash provided by operating activities 119,552 352,114 254,669 194,307 Cash flows from investing activities: Proceeds from sale of property and equipment 0 25,000 182,434 0 Purchases of property and equipment (109,766) (44,008) (428,449) (26,899) Purchases of marketable securities (9,109) (33,326) (6,319) 0 Net cash used in investing activities (118,875) (52,334) (252,334) (26,899) Cash flows from financing activities: Proceeds from long-term debt 100,000 8,067 200,000 0 Principal payments of long-term debt (121,729) (100,338) (6,665) (3,515) Principal payments of capital lease obligations 0 (2,707) (3,530) (1,539) Stockholder distributions 0 (40,500) (103,241) (540,437) Net cash (used in) provided by financing activities (21,729) (135,478) 86,564 (545,491) Net increase (decrease) in cash (21,052) 164,302 88,899 (378,083) Cash at beginning of period 180,722 159,670 323,972 412,871 Cash at end of period $ 159,670 $ 323,972 $ 412,871 $ 34,788 Supplemental schedule of non-cash investing and financing activities: Change in unrealized holding losses in marketable securities $ 0 $ 0 $ (13,189) $ 3,042 Land and building distributed to stockholders 0 0 0 117,604 Capitalized lease obligations for equipment 0 12,984 0 0 Land and building sold in exchange for assumption of debt 0 0 0 194,203 </TABLE> See accompanying notes to financial statements. B & B PALLET SUPPLY COMPANY NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1992, 1993, 1994, AND MAY 5, 1995 (1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS B & B Pallet Supply Company (the Company) builds, refurbishes, and distributes wooden pallets for use in a variety of industries. The Company is located in Ozark, Missouri and sells its products on an unsecured basis to customers in the area. The Company's ability to collect the amounts due from customers is affected by regional economic conditions. INVENTORIES Inventories are stated at the lower of first in, first out (FIFO) cost or market. DEPRECIATION Depreciation is computed under an accelerated depreciation method over the estimated useful lives of assets as follows: <TABLE> <CAPTION> <S> <C> Building 31.5 years Fixtures and equipment 5-7 years Transportation equipment 3-7 years </TABLE> MARKETABLE SECURITIES Marketable securities consist of available-for-sale investments in marketable equity securities and are recorded at fair value. Unrealized holding gains and losses are excluded from earnings and are reported as a separate component of stockholders' equity until realized. INCOME TAXES The Company is an S corporation and, accordingly, is not subject to federal or state income taxes. The Company's taxable income is included in the individual tax returns of its stockholders. (2) MARKETABLE SECURITIES The amortized cost, gross unrealized holding losses, and fair value of marketable securities consist of the following: <TABLE> <CAPTION> DECEMBER 31 MAY 5, 1992 1993 1994 1995 <S> <C> <C> <C> <C> Amortized cost $9,190 $33,326 $ 39,645 $ 39,645 Gross unrealized holding losses 0 0 (13,189) (10,147) Fair value $9,190 $33,326 $ 26,456 $ 29,498 </TABLE> (3) INVENTORIES Inventories consist of the following: <TABLE> <CAPTION> DECEMBER 31 MAY 5, 1992 1993 1994 1995 <S> <C> <C> <C> <C> Raw materials $16,127 $11,076 $64,130 $55,263 Finished goods 20,432 4,207 29,537 23,529 $36,559 $15,283 $93,667 $78,792 </TABLE> (4) LONG-TERM DEBT Long-term debt consists of the following: <TABLE> <CAPTION> DECEMBER 31 MAY 5, 1992 1993 1994 1995 <S> <C> <C> <C> <C> Note payable to bank in install-ments of $250, including interest at 7.25%, through June 1996 $ 0 $ 7,729 $ 4,246 $ 3,346 Note payable to bank in monthly installments of $1,804, including interest at 7.05%, paid in full May 1995 0 0 196,818 0 Note payable to bank in interest only payments at 2.7% paid in full in July 1993 100,000 0 0 0 100,000 7,729 201,064 3,346 Less current maturities (100,000) (2,589) (12,496) (1,666) $ 0 $ 5,140 $188,568 $ 1,680 </TABLE> Maturities of long-term debt as of May 5, 1995 are as follows: <TABLE> <CAPTION> <S> <C> Twelve months ended May 5: 1996 $1,666 1997 1,680 1998 0 1999 0 2000 and thereafter 0 $3,346 </TABLE> (5) ACCOUNTS RECEIVABLE Trade accounts receivable consist principally of amounts due from customers for pallet purchases and are reflected as follows: <TABLE> <CAPTION> DECEMBER 31 MAY 5, 1992 1993 1994 1995 <S> <C> <C> <C> <C> Accounts receivable $125,356 $181,248 $229,820 $220,335 Less allowance for doubtful accounts (1,000) (2,000) (3,000) (3,000) $124,356 $179,248 $226,820 $217,335 </TABLE> (6) CAPITALIZED LEASE OBLIGATIONS Included in property and equipment is one capitalized lease obligation as follows: <TABLE> <CAPTION> DECEMBER 31 MAY 5, 1992 1993 1994 1995 <S> <C> <C> <C> <C> Cost $0 $13,651 $13,651 $13,651 Less accumulated depreciation 0 (1,950) (5,293) (6,089) $0 $11,701 $ 8,358 $ 7,562 </TABLE> Minimum lease commitments under capitalized lease obligations as of May 5, 1995 are as follows: <TABLE> <CAPTION> <S> <C> Twelve months ending May 5, 1996 $5,366 Less amounts representing interest (158) $5,208 </TABLE> (7) OPERATING LEASES The Company leases certain tractor trailers under a cancelable operating lease agreement. The Company leases trailers on an as-needed basis at $200 per month. No future minimum obligations exist under these operating leases as of May 5, 1995. Total rent expense under operating leases was $14,400, $21,600, $32,800, and $21,800 for the years ended December 31, 1992, 1993, and 1994 and the period from January 1, 1995 to May 5, 1995, respectively. (8) RELATED PARTY TRANSACTIONS On May 5, 1995, the Company sold its building and land with book value of $311,807, net of accumulated depreciation, to its stockholders in exchange for the stockholders assuming notes payable and debt of $194,203. The Company recorded a distribution of $117,604 on this transaction and agreed to lease the building from the stockholders. Minimum future payments under this lease are as follows: <TABLE> <CAPTION> Twelve months ending May 5: <S> <C> 1996 $ 40,000 1997 40,000 1998 40,000 1999 40,000 2000 40,000 $200,000 </TABLE> (9) SUBSEQUENT EVENT On May 22, 1995, the Company entered into an Acquisition Agreement, whereby the Company was acquired by, and became a wholly owned subsidiary of, Pallet Recycling Associates of North America, Inc. (PRANA), a Minnesota corporation effective as of the close of business on May 5, 1995. As part of this agreement, the Company distributed cash dividends to the former stockholders related to a $500,000 note payable with a bank entered into on May 10, 1995. The note bears interest at 9% with interest only installments of $3,750 due monthly. The note payable is due on the earlier of demand or May 10, 1996. The $500,000 distribution was reclassified to equity when the acquisition became effective. INDEPENDENT AUDITORS' REPORT The Board of Directors Pallet Supply Company, Inc.: We have audited the accompanying balance sheets of Pallet Supply Company, Inc. as of December 31, 1992, 1993, and 1994 and May 31, 1995, and the related statements of operations, stockholders' equity, and cash flows for the the years ended December 31, 1992, 1993, and 1994 and the five-month period ended May 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pallet Supply Company, Inc. as of December 31, 1992, 1993, and 1994 and May 31, 1995, and the results of its operations and its cash flows for the years ended December 31, 1992, 1993, and 1994 and for the five-month period ended May 31, 1995 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Minneapolis, Minnesota June 29, 1995 PALLET SUPPLY COMPANY, INC. BALANCE SHEETS DECEMBER 31, 1992, 1993, 1994 AND MAY 31, 1995 ASSETS <TABLE> <CAPTION> 1992 1993 1994 1995 <S> <C> <C> <C> <C> Current assets: Cash $ 0 $ 0 $ 14,790 $ 0 Trade accounts receivable, less allowance for doubtful accounts of $10,000, $12,500, $15,000, and $15,000, respectively 428,594 624,506 692,684 727,341 Other receivables 4,308 4,143 3,237 24,245 Inventories (note 2) 208,710 256,043 287,318 256,545 Prepaid expenses 24,253 3,490 0 14,909 Total current assets 665,865 888,182 998,029 1,023,040 Property and equipment at cost: Leasehold improvements 32,644 103,011 127,213 153,924 Furniture and fixtures 36,307 39,457 52,832 54,782 Equipment 626,412 1,101,017 1,215,817 1,207,338 Transportation equipment 355,982 422,909 390,008 361,129 1,051,345 1,666,394 1,785,870 1,777,173 Less accumulated depreciation (404,458) (577,247) (754,673) (833,509) Net property and equipment 646,887 1,089,147 1,031,197 943,664 Assets of discontinued machine division (note 7) 45,377 73,746 182,662 0 Total assets $1,358,129 $2,051,075 $2,211,888 $1,966,704 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Bank overdraft $ 54,915 $ 164,363 $ 0 $ 53,779 Accounts payable 331,339 499,701 645,424 664,566 Notes payable (note 3) 143,791 466,845 100,000 160,000 Advances from stockholder (note 6) 76,866 82,845 52,832 16,553 Current maturities of long-term debt (note 4) 167,977 231,046 657,041 595,528 Current maturities of capital lease obligations (note 5) 27,327 39,735 8,042 7,556 Accrued liabilities 43,363 73,342 100,838 59,151 Total current liabilities 845,578 1,557,877 1,564,177 1,557,133 Long-term debt, less current maturities (note 4) 106,859 50,137 40,701 31,531 Capital lease obligations, less current maturities (note 5) 24,923 22,222 14,180 6,624 Stockholders' equity (note 1): Common stock 2,000 2,000 2,000 2,000 Treasury stock (30,000) (30,000) 0 0 Retained earnings 408,769 448,839 590,830 369,416 Total stockholders' equity 380,769 420,839 592,830 371,416 Commitments and contingencies (notes 3, 4, 5, and 6) Total liabilities and stockholders' equity $1,358,129 $2,051,075 $2,211,888 $1,966,704 </TABLE> See accompanying notes to financial statements. PALLET SUPPLY COMPANY, INC. STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1992, 1993, AND 1994 AND THE FIVE-MONTH PERIOD ENDED MAY 31, 1995 <TABLE> <CAPTION> 1992 1993 1994 1995 <S> <C> <C> <C> <C> Net sales $5,652,737 $7,176,573 $9,532,690 $3,537,566 Cost of sales 4,590,581 6,007,061 7,898,520 3,042,328 Gross profit 1,062,156 1,169,512 1,634,170 495,238 Operating expenses: Selling, general, and administrative 981,512 994,923 1,255,213 533,794 Operating income (loss) 80,644 174,589 378,957 (38,556) Other income (expense): Interest expense (52,739) (47,176) (94,684) (40,407) Loss on sale of fixed assets 0 0 (6,748) (1,824) Miscellaneous, net (50,446) (16,680) (20,638) 5,971 Total other expense (103,185) (63,856) (122,070) (36,260) Income (loss) from continuing operations (22,541) 110,733 256,887 (74,816) Loss from operation of discontinued Machine Division (note 7) (6,515) (70,663) (84,896) 0 Net income (loss) $ (29,056) $ 40,070 $ 171,991 $ (74,816) </TABLE> See accompanying notes to financial statements. PALLET SUPPLY COMPANY, INC. STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1992, 1993, AND 1994 AND THE FIVE-MONTH PERIOD ENDED MAY 31, 1995 <TABLE> <CAPTION> COMMON STOCK RETAINED TREASURY STOCK AMOUNT EARNINGS AMOUNT TOTAL <S> <C> <C> <C> <C> Balance, January 1, 1992 $2,000 $ 437,825 $(30,000) $ 409,825 Net loss 0 (29,056) 0 (29,056) Balance, December 31, 1992 2,000 408,769 (30,000) 380,769 Net income 0 40,070 0 40,070 Balance, December 31, 1993 2,000 448,839 (30,000) 420,839 Retirement of treasury stock 0 (30,000) 30,000 0 Net income 0 171,991 0 171,991 Balance, December 31, 1994 2,000 590,830 0 592,830 Distribution (note 7) 0 (146,598) 0 (146,598) Net loss 0 (74,816) 0 (74,816) Balance, May 31, 1995 $2,000 $ 369,416 $ 0 $ 371,416 </TABLE> See accompanying notes to financial statements. PALLET SUPPLY COMPANY, INC. STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1992, 1993, AND 1994 AND THE FIVE-MONTH PERIOD ENDED MAY 31, 1995 <TABLE> <CAPTION> 1992 1993 1994 1995 <S> <C> <C> <C> <C> Cash flows from operating activities: Net income (loss) $ (29,056) $ 40,070 $ 171,991 $(74,816) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation 161,988 177,865 225,226 96,693 Loss on sale of equipment 0 0 6,748 1,824 Changes in operating assets and liabilities: Trade accounts receivable (38,400) (195,912) (68,178) (34,657) Other receivables (1,900) 165 906 (21,008) Inventories (34,241) (47,333) (31,275) 30,773 Prepaid expenses (24,253) 20,763 3,490 (14,909) Accounts payable 143,910 168,362 145,723 19,142 Accrued liabilities (31,862) 29,979 27,496 (41,687) Net cash provided by (used in) operating activities 146,186 193,959 482,127 (38,645) Cash flows from investing activities: Proceeds from sale of equipment 0 0 10,000 36,300 Purchases of property and equipment (123,650) (572,085) (184,024) (47,284) Net change in assets of discontinued operations (45,377) (28,369) (108,916) 36,064 Net cash provided by (used in) investing activities (169,027) (600,454) (282,940) 25,080 Cash flows from financing activities: Net change in bank overdraft 34,823 109,448 (164,363) 53,779 Proceeds from notes payable 99,480 466,845 100,000 60,000 Principal payments of notes payable 0 (143,791) (466,845) 0 Proceeds from long-term debt 227,668 260,075 647,604 0 Principal payments of long-term debt (118,149) (253,728) (231,045) (70,683) Principal payments of capital lease obligations (204,656) (38,333) (39,735) (8,042) Repayments of advances from stockholder (16,325) 5,979 (30,013) (36,279) Net cash provided by (used in) financing activities 22,841 406,495 (184,397) (1,225) Net increase (decrease) in cash 0 0 14,790 (14,790) Cash at beginning of period 0 0 0 14,790 Cash at end of period $ 0 $ 0 $ 14,790 $ 0 Supplemental disclosures of cash flow information: Cash paid during the period for interest $ 45,238 $ 39,784 $ 85,832 $ 39,044 Supplemental schedule of non-cash investing and financing activities: Equipment traded in for new equipment $ 45,281 $ 11,262 $ 55,106 $ 0 Capitalized lease obligations for equipment 50,316 48,040 0 0 Retirement of treasury stock 0 0 30,000 0 Assets of discontinued operations distributed to stockholder 0 0 0 146,598 </TABLE> See accompanying notes to financial statements. PALLET SUPPLY COMPANY, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1992, 1993, AND 1994 AND MAY 31, 1995 (1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS Pallet Supply Company, Inc. (the Company) builds, refurbishes, and distributes wooden pallets for use in a variety of industries. The Company is located in Memphis, Tennessee with additional facilities in Little Rock, Arkansas; Hanceville, Alabama; Birmingham, Alabama; and Indianola, Mississippi and sells its products on an unsecured basis to customers in those areas. The Company's ability to collect the amounts due from customers is affected by regional economic conditions. INVENTORIES Inventories are stated at the lower of first in, first out (FIFO) cost or market. DEPRECIATION Depreciation is computed under the straight-line method over the estimated useful lives of assets as follows: <TABLE> <CAPTION> <S> <C> Leasehold improvements 10-31.5 years Furniture and fixtures 3-5 years Equipment 5-10 years Transportation equipment 5-7 years </TABLE> INCOME TAXES The Company is an S corporation and, accordingly, is not subject to federal or state income taxes. The Company's taxable income is included in the individual tax returns of its stockholders. STOCKHOLDERS' EQUITY Common stock of the Company consists of Class A voting no-par common stock with four shares authorized, issued, and outstanding and Class B nonvoting no-par common stock with 100,000 shares authorized; 84,486 shares issued and outstanding. (2) INVENTORIES Inventories consist of the following: <TABLE> <CAPTION> DECEMBER 31, MAY 31, 1992 1993 1994 1995 <S> <C> <C> <C> <C> Raw materials $123,173 $120,423 $135,309 $171,740 Finished goods 85,537 135,620 152,009 84,805 $208,710 $256,043 $287,318 $256,545 </TABLE> (3) NOTES PAYABLE The Company has a $300,000 line of credit agreement with its bank. Interest is payable monthly at 1.25% above the bank's base rate. The note is secured by accounts receivable and inventory and is due on demand. Additionally, the outstanding balance of the line must be zero for sixty consecutive days at any time during the year. Outstanding balances on the note were $100,000 and $160,000 at December 31, 1994 and May 31, 1995, respectively. The Company has maintained line of credit agreements with other institutions in the past with similar terms. Outstanding balances on those notes were $143,791 and $466,845 at December 31, 1992 and December 31, 1993, respectively. (4) LONG-TERM DEBT Long-term debt consisted of the following: <TABLE> <CAPTION> DECEMBER 31 MAY 31, 1992 1993 1994 1995 <S> <C> <C> <C> <C> Note payable to bank in monthly installments of $10,616, plus interest at 1.25% above the bank's prime rate, final payment due December 1999, secured by substantially all assets of the Company $ 0 $ 0 $ 639,755 $ 586,358 Note payable in monthly installments of $361, including interest at 9.75%, final payment due December 1996, secured by equipment 0 0 7,848 6,433 Note payable in monthly installments of $714, including interest at 10%, final payment due July 2000 45,360 41,178 36,530 34,268 Note payable to bank in monthly installments of $1,550, plus interest at 1.50% above the bank's prime rate, paid in full in 1995 41,826 23,226 3,076 0 Note payable to bank in monthly installments of $320, plus interest at 1.50% above the bank's prime rate, paid in full in 1995 8,570 4,730 566 0 Note payable to bank in monthly installments of $1,993, plus interest at 1.50% above the bank's prime rate, paid in full in 1995 59,792 35,876 9,967 0 Note payable in monthly installments of $3,800, including interest at 1.5% above the bank's prime, paid in full in 1994 0 174,325 0 0 Note payable in monthly installments of $1,100, including interest at 1.5% above the bank's prime, paid in full in 1993 28,740 0 0 0 Note payable in monthly installments of $1,334, including interest at 1.5% above the bank's prime, paid in full in 1993 32,833 0 0 0 Various notes payable to banks, all were paid in full prior to 1995 57,715 1,848 0 0 274,836 281,183 697,742 627,059 Less current maturities (167,977) (231,046) (657,041) (595,528) $ 106,859 $ 50,137 $ 40,701 $ 31,531 </TABLE> Maturities of long-term debt as of May 31, 1995 are as follows: <TABLE> <CAPTION> Twelve months ending May 31: <S> <C> 1996 $595,528 1997 8,370 1998 6,542 1999 7,227 2000 7,984 Thereafter 1,408 $627,059 </TABLE> (5) LEASES The Company has several capital lease obligations with monthly payments totaling $939 including imputed interest rates ranging from 6.1% to 8.9%. The leases have various expiration dates through May 1997. In addition, the Company has several operating leases. Minimum lease commitments as of May 31, 1995 as are follows: <TABLE> <CAPTION> OPERATING RELATED CAPITAL PARTY OTHER <S> <C> <C> <C> Twelve months ending May 31: 1996 $ 8,112 $ 193,800 $30,000 1997 6,858 193,800 12,500 1998 0 161,400 0 1999 0 161,400 0 2000 0 161,400 0 Thereafter 0 712,850 0 $14,970 $1,584,650 $42,500 Less amounts representing interest (790) 14,180 Less current maturities (7,556) $ 6,624 </TABLE> Capital leases included in property and equipment are as follows: <TABLE> <CAPTION> DECEMBER 31, MAY 31, 1992 1993 1994 1995 <S> <C> <C> <C> <C> Cost $105,485 $121,160 $121,160 $121,160 Less accumulated (43,244) (61,300) (84,488) (92,083) $ 62,241 $ 59,860 $ 36,672 $ 29,077 </TABLE> (6) RELATED PARTY TRANSACTIONS The Company's stockholder advanced the Company $76,866, $82,845, $52,832, and $16,553 as of December 31, 1992, 1993, and 1994 and May 31, 1995, respectively. In addition, the Company leases certain properties from its stockholders. Rent expense on these leases was $139,846, $148,183, $192,200, and $58,500 for 1992, 1993, 1994, and 1995, respectively. (7) DISCONTINUED MACHINE DIVISION Effective December 31, 1994, the Company discontinued its machine division and in January 1995, distributed $146,598 of assets of the machine division to a stockholder. The assets and liabilities of the discontinued machine division have been reclassified on the balance sheet from the previously reported classification to separately identify them as net assets related to discontinued operations. These net assets consist of net working capital, net property, plant and equipment, and other assets less related liabilities. The results of the machine division have been reported separately as a component of discontinued operations in the statements of operations. Prior year financial statements have been restated to present the machine division as a discontinued operation. Summarized results on the machine division are as follows: <TABLE> <CAPTION> FIVE-MONTH YEAR ENDED DECEMBER 31, PERIOD ENDED 1992 1993 1994 MAY 31, 1995 <S> <C> <C> <C> <C> Net sales $31,720 130,843 451,132 0 Loss from operation of discontinued machine division (6,515) (70,663) (84,896) 0 </TABLE> (8) SUBSEQUENT EVENT Effective June 1, 1995, the Company was acquired by, and became a wholly owned subsidiary of, Pallet Recycling Associates of North America, Inc. (PRANA), a Minnesota corporation. As part of the agreement, the Company distributed cash dividends to the former stockholders on August 18, 1995, totaling $591,636. INDEPENDENT AUDITORS' REPORT The Board of Directors Diamond Pallet, Inc.: We have audited the accompanying balance sheets of Diamond Pallet, Inc. as of June 30, 1994 and 1995 and February 15, 1996 and the related statements of operations and retained earnings and cash flows for the years ended June 30, 1994 and 1995 and for the seven and one-half month period ended February 15, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Diamond Pallet, Inc. as of June 30, 1994 and 1995 and February 15, 1996, and the results of its operations and its cash flows for the years ended June 30, 1994 and 1995 and the seven and one-half month period ended February 15, 1996, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Minneapolis, Minnesota March 1, 1996 DIAMOND PALLET, INC. BALANCE SHEETS JUNE 30, 1994 AND 1995 AND FEBRUARY 15, 1996 ASSETS <TABLE> <CAPTION> 1994 1995 1996 <S> <C> <C> <C> Current assets: Cash $ 0 $ 5,961 $ 44,133 Trade accounts receivable 76,347 88,554 56,719 Advances to stockholders (note 8) 24,805 21,500 18,000 Inventories (note 2) 29,317 24,303 36,539 Prepaid expenses 7,158 5,899 6,325 Deferred income taxes (note 6) 44,800 20,200 2,500 Total current assets 182,427 166,417 164,216 Equipment at cost (notes 5 and 7): Transportation equipment 81,624 81,624 81,624 Other equipment 137,605 139,668 139,032 219,229 221,292 220,656 Less accumulated depreciation 100,563 119,696 130,520 Net equipment 118,666 101,596 90,136 Total assets $301,093 $268,013 $254,352 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term debt (note 3) $ 37,285 $ 3,182 $ 90 Current maturities of long-term debt (note 5) 13,636 9,332 14,497 Current maturities of capital lease obligations (note 7) 4,263 3,087 5,034 Accounts payable 39,065 20,455 3,365 Accrued liabilities (note 4) 32,222 14,683 15,691 Income taxes payable (note 6) 800 9,240 149 Total current liabilities 127,271 59,979 38,826 Long-term debt, less current maturities (note 5) 32,793 23,461 8,964 Capital lease obligations, less current maturities (note 7) 18,760 15,673 10,639 Deferred income taxes (note 6) 11,400 14,100 12,400 Stockholders' equity: Common stock no par value; 1,000 shares authorized; 100 shares issued and outstanding 1,000 1,000 1,000 Retained earnings 109,869 153,800 182,523 Total stockholders' equity 110,869 154,800 183,523 Commitments (note 7) Total liabilities and stockholders' equity $301,093 $268,013 $254,352 </TABLE> See accompanying notes to financial statements. DIAMOND PALLET, INC. STATEMENTS OF OPERATIONS AND RETAINED EARNINGS YEARS ENDED JUNE 30, 1994 AND 1995 AND SEVEN AND ONE-HALF MONTH PERIOD ENDED FEBRUARY 15, 1996 <TABLE> <CAPTION> 1994 1995 1996 <S> <C> <C> <C> Net sales $1,352,491 $1,048,125 $573,838 Cost of sales 1,151,742 810,715 420,622 Gross profit 200,749 237,410 153,216 Operating expenses: Selling, general, and administrative 156,498 149,516 98,792 Operating income 44,251 87,894 54,424 Other income (expense): Interest expense (8,929) (7,423) (2,572) Gain on disposal of equipment 12,633 0 0 Total other income (expense) 3,704 (7,423) (2,572) Income before income taxes 47,955 80,471 51,852 Provision for income taxes (note 6) 21,900 36,540 23,129 Net income 26,055 43,931 28,723 Retained earnings, beginning of period 83,814 109,869 153,800 Retained earnings, end of period $ 109,869 $ 153,800 $182,523 </TABLE> See accompanying notes to financial statements. DIAMOND PALLET, INC. STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1994 AND 1995 AND SEVEN AND ONE-HALF MONTH PERIOD ENDED FEBRUARY 15, 1996 <TABLE> <CAPTION> 1994 1995 1996 <S> <C> <C> <C> Cash flows from operating activities: Net income $ 26,055 $ 43,931 $ 28,723 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 22,268 19,133 11,460 Gain on sale of equipment (12,633) 0 0 Deferred income taxes 21,100 27,300 16,000 Changes in operating assets and liabilities: Trade accounts receivable 2,298 (12,207) 31,835 Inventories 28,228 5,014 (12,236) Prepaid expenses (821) 1,259 (426) Accounts payable (84,233) (18,610) (17,090) Accrued liabilities 2,290 (17,539) 1,008 Income taxes payable 0 8,440 (9,091) Net cash provided by operating activities 4,552 56,721 50,183 Cash flows from investing activities: Proceeds from disposal of equipment 17,877 0 0 Purchases of equipment (8,813) (2,063) 0 Net cash provided by (used in) investing activities 9,064 (2,063) 0 Cash flows from financing activities: Net payments on short-term debt (4,715) (34,103) (3,092) Principal payments of long-term debt (13,168) (13,636) (9,332) Principal payments of capital lease obligations (1,977) (4,263) (3,087) Repayments of advances to stockholders 0 3,305 3,500 Net cash used in financing activities (19,860) (48,697) (12,011) Net increase (decrease) in cash (6,244) 5,961 38,172 Cash at beginning of period 6,244 0 5,961 Cash at end of period $ 0 $ 5,961 $ 44,133 Supplemental disclosures of cash flow information: Cash paid during the period for interest $ 8,929 7,423 2,572 Cash paid during the period for income taxes 800 800 16,220 Supplemental schedule of non-cash investing and financing activities: Equipment acquired under capital lease $ 25,000 $ 0 $ 0 </TABLE> See accompanying notes to financial statements. DIAMOND PALLET, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1994 AND 1995 AND FEBRUARY 15, 1996 (1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS Diamond Pallet, Inc. (the Company) builds, refurbishes, and distributes wooden pallets for use in a variety of industries. The Company is located in Stockton, California and sells its products on an unsecured basis to customers in the area. The Company's ability to collect the amounts due from customers is affected by regional economic conditions. INVENTORIES Inventories are stated at the lower of first in, first out (FIFO) cost or market. DEPRECIATION Depreciation is computed under the straight-line method over the estimated useful lives of assets as follows: <TABLE> <CAPTION> <S> <C> Transportation equipment 5-10 years Other equipment 7-15 years </TABLE> INCOME TAXES The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Under Statement No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS The carrying value of debt approximates market, as the substantial majority of debt carries variable market interest rates. (2) INVENTORIES Inventories consist of the following: <TABLE> <CAPTION> JUNE 30 FEBRUARY 15, 1994 1995 1996 <S> <C> <C> <C> Raw materials $18,272 $14,762 $25,579 Finished goods 11,045 9,541 10,960 $29,317 $24,303 $36,539 </TABLE> (3) SHORT-TERM DEBT The Company has a $75,000 line of credit agreement with its bank. Interest is payable at 2.75% above the prime rate. The note is secured by substantially all assets and is due on demand. Outstanding balances on this line of credit were $37,285, $3,182 and $90 as of June 30, 1994 and 1995, and February 15, 1996, respectively. (4) ACCRUED LIABILITIES Accrued liabilities as of June 30, 1995 and 1994 and February 15, 1996 were as follows: <TABLE> <CAPTION> 1994 1995 1996 <S> <C> <C> <C> Payroll and payroll taxes $10,148 $ 9,717 $13,456 Compensated absences 928 804 302 Insurance 2,587 1,497 440 Repairs and maintenance 8,543 0 0 Sales tax 10,016 2,665 1,493 $32,222 $14,683 $15,691 </TABLE> (5) LONG-TERM DEBT Long-term debt consists of the following: <TABLE> <CAPTION> JUNE 30 FEBRUARY 15, 1994 1995 1996 <S> <C> <C> <C> Note payable to bank in monthly installments of $464, including interest at 9.9%, final payment due August 1997, and secured by automobile $15,123 $10,879 $ 7,808 Note payable to bank in monthly installments of $783 including interest at the bank's prime rate plus 2.75%, final payment due October 1997, and guaranteed by two stockholders 31,306 21,914 15,653 46,429 32,793 23,461 Less current maturities 13,636 9,332 14,497 $32,793 $23,461 $ 8,964 </TABLE> Maturities of long-term debt as of February 15, 1996 are as follows: <TABLE> <CAPTION> Twelve months ending February 15: <S> <C> 1997 $14,497 1998 8,964 $23,461 </TABLE> (6) INCOME TAXES Components of the provision for income taxes are as follows: <TABLE> <CAPTION> CURRENT DEFERRED TOTAL <S> <C> <C> <C> June 30, 1994: Federal $ 0 $16,700 $16,700 State 800 4,400 5,200 $ 800 21,100 21,900 June 30, 1995: Federal 7,493 20,200 27,693 State 1,747 7,100 8,847 $9,240 27,300 36,540 February 15, 1996: Federal 3,650 14,000 17,650 State 3,479 2,000 5,479 $7,129 $16,000 $23,129 </TABLE> <TABLE> <CAPTION> JUNE 30 FEBRUARY 15, 1994 1995 1996 <S> <C> <C> <C> Deferred tax assets: Inventory $ 8,500 $ 7,800 $ 0 Investment 9,300 9,000 9,000 Accounts payable 1,500 0 1,000 Accrued liabilities 12,200 4,500 5,900 Capital lease obligations 9,900 8,000 6,700 Net operating losses 36,700 4,300 0 Miscellaneous credits 0 9,500 0 78,100 43,100 22,600 Deferred tax liabilities: Accounts receivable (6,800) (1,600) (1,700) Prepaid expenses (3,000) (2,500) (2,700) Depreciation (34,900) (31,100) (28,100) Accounts payable 0 (1,800) 0 (44,700) (37,000) (32,500) $ 33,400 $ 6,100 $ (9,900) </TABLE> The provision for income taxes varied from the expected federal statutory rate as follows: <TABLE> <CAPTION> SEVEN AND ONE-HALF MONTH PERIOD ENDED 1994 1995 FEBRUARY 15, 1996 <S> <C> <C> Expected federal tax recovery using rate of 34% $16,305 $27,360 $17,630 Increase (decrease) in taxes resulting from: State taxes, net of federal benefit 4,316 7,242 4,667 Other 1,279 1,938 832 $21,900 $36,540 $23,129 </TABLE> (7) LEASES The Company leases equipment under a capital lease with monthly payments of $531 including imputed interest at 10% through January 1999. The Company also leases its operating facility with monthly payments of $1,200 through December 1996 and $1,000 through December 1997. Minimum lease commitments as of February 15, 1996 are as follow: <TABLE> <CAPTION> CAPITAL OPERATING <S> <C> <C> Twelve months ending February 15: 1997 $ 6,377 $14,000 1998 6,377 10,000 1999 5,314 0 18,068 $24,000 Less amounts representing interest (2,395) 15,673 Less current maturities 5,034 $10,639 </TABLE> Capital leases included in equipment are as follows: <TABLE> <CAPTION> JUNE 30 FEBRUARY 15, 1994 1995 1996 <S> <C> <C> <C> Cost $25,000 $25,000 $25,000 Accumulated depreciation 972 2,639 3,819 $24,028 $22,361 $21,181 </TABLE> Total rent expense under operating leases was $27,228, $25,842, and $12,963 for the years ended December 31, 1994 and 1995 and for the seven and one-half month period ended February 15, 1996, respectively. (8) RELATED PARTY TRANSACTIONS The Company had advances to one of its stockholders in the amount of $24,805, $21,500, and $18,000 as of June 30, 1994 and 1995 and February 15, 1996, respectively. No interest was charged on these advances. (9) SUBSEQUENT EVENT Effective February 16, 1996, the Company was acquired by, and became a wholly owned subsidiary of, Pallet Recycling Associates of North America, Inc., a Minnesota corporation. INDEPENDENT AUDITORS' REPORT Metroplex Wood Products: We have audited the accompanying balance sheets of Metroplex Wood Products as of December 31, 1993, 1994, and 1995, and the related statements of operations and equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Metroplex Wood Products as of December 31, 1993, 1994, and 1995, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Minneapolis, Minnesota February 16, 1996 <TABLE> <CAPTION> METROPLEX WOOD PRODUCTS BALANCE SHEETS ASSETS DECEMBER 31, 1993 1994 1995 <S> <C> <C> <C> Current assets: Cash $ 0 $ 0 $ 1,876 Trade accounts receivable 350,397 360,045 224,490 Employee advances 0 0 4,535 Inventories 88,592 97,997 140,278 Prepaid expenses 155 1,164 1,217 Total current assets 439,144 459,206 372,396 Property and equipment at cost: Furniture and fixtures 0 0 2,990 Equipment 63,664 78,789 78,789 Transportation equipment 0 13,581 21,727 63,664 92,370 103,506 Less accumulated depreciation (13,528) (25,607) (41,310) Net property and equipment 50,136 66,763 62,196 Total assets $489,280 $525,969 $434,592 LIABILITIES AND EQUITY Current liabilities: Checks issued in excess of cash balance $ 58,621 $ 26,723 $ 0 Current maturities of long-term debt 9,244 9,735 4,599 Accounts payable 2,040 29,884 19,777 Accrued liabilities 1,334 5,599 8,413 Total current liabilities 71,239 71,941 32,789 Long-term debt, less current maturities 24,614 14,879 10,280 Equity 393,427 439,149 391,523 Total liabilities and equity $489,280 $525,969 $434,592 </TABLE> See accompanying notes to financial statements. METROPLEX WOOD PRODUCTS STATEMENTS OF OPERATIONS AND EQUITY <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, 1993 1994 1995 <S> <C> <C> <C> Net sales $1,197,422 $1,873,833 $2,135,788 Cost of sales 554,045 1,285,626 1,594,990 Gross profit 643,377 588,207 540,798 Operating expenses: Selling, general, and administrative 14,321 42,368 66,292 Operating income 629,056 545,839 474,506 Other income (expense): Interest expense (2,781) (3,769) (2,135) Miscellaneous, net 0 0 1,297 Total other expense (2,781) (3,769) (838) Net income 626,275 542,070 473,668 Equity -- beginning of year 179,841 393,427 439,149 Draws by owner (412,689) (496,348) (521,294) Equity -- end of year $ 393,427 $ 439,149 $ 391,523 </TABLE> See accompanying notes to financial statements. METROPLEX WOOD PRODUCTS STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, 1993 1994 1995 <S> <C> <C> <C> Cash flows from operating activities: Net income $ 626,275 $ 542,070 $ 473,668 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 5,525 12,079 15,703 Changes in operating assets and liabilities: Trade accounts receivable (218,882) (9,648) 135,555 Employee advances 0 0 (4,535) Inventories (64,330) (9,405) (42,281) Prepaid expenses (155) (1,009) (53) Accounts payable (1,436) 27,844 (10,107) Accrued liabilities (453) 4,265 2,814 Net cash provided by operating activities 346,544 566,196 570,764 Cash flows from investing activities: Purchases of property and equipment (35,458) (28,706) (11,136) Net cash used in investing activities (35,458) (28,706) (11,136) Cash flows from financing activities: Checks issued in excess of cash balances 58,621 (31,898) (26,723) Proceeds from long-term debt 23,247 0 0 Principal payments of long-term debt (7,460) (9,244) (9,735) Draws by owner (412,689) (496,348) (521,294) Net cash used in financing activities (338,281) (537,490) (557,752) Net increase (decrease) in cash (27,195) 0 1,876 Cash at beginning of year 27,195 0 0 Cash at end of year $ 0 $ 0 $ 1,876 Supplemental disclosures of cash flow information: Cash paid during the year for interest $ 2,781 $ 3,769 $ 2,135 </TABLE> See accompanying notes to financial statements. METROPLEX WOOD PRODUCTS NOTES TO FINANCIAL STATEMENTS (1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS Metroplex Wood Products (the Company) builds, refurbishes, and distributes wooden pallets for use in a variety of industries. The Company is located near Fort Worth, Texas and sells its products on an unsecured basis to customers in the area. The Company's ability to collect the amounts due from customers is affected by regional economic conditions. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. INVENTORIES Inventories are stated at the lower of first in, first out (FIFO) cost or market. DEPRECIATION Depreciation is computed under the straight-line method over the estimated useful lives of assets as follows: <TABLE> <CAPTION> <S> <C> Furniture and fixtures 3-5 years Equipment 5-7 years Transportation equipment 5 years </TABLE> INCOME TAXES The Company is a sole proprietorship and, accordingly, is not subject to federal or state income taxes. The Company's taxable income is included in the individual tax returns of its owner. EQUITY The Company is a sole proprietorship for which the owner received compensation in the form of draws on equity. Accordingly, there is no compensation expense related to management of the Company. (2) INVENTORIES Inventories consist of the following: <TABLE> <CAPTION> DECEMBER 31, 1993 1994 1995 <S> <C> <C> <C> Raw materials $50,392 $57,108 $ 73,071 Finished goods 38,200 40,889 67,207 $88,592 $97,997 $140,278 </TABLE> (3) LONG-TERM DEBT Long-term debt consists of the following: <TABLE> <CAPTION> DECEMBER 31, 1993 1994 1995 <S> <C> <C> <C> Note payable in monthly installments of $495, including interest at 10.50%, final payment due November 1998 $22,752 $19,021 $14,879 Note payable in monthly installments of $515, including interest at 18.67%, paid in 1995 10,240 5,593 0 Other 866 0 0 33,858 24,614 14,879 Less current maturities (9,244) (9,735) (4,599) $24,614 $14,879 $10,280 </TABLE> Maturities of long-term debt as of December 31, 1995 are as follows: <TABLE> <CAPTION> <S> <C> 1996 $ 4,599 1997 5,106 1998 5,174 $14,879 </TABLE> (4) SUBSEQUENT EVENT On April 25, 1996, essentially all of the Company's assets were purchased by Pallet Recycling Associates of North America, Inc. (PRANA), a Minnesota corporation. INDEPENDENT AUDITORS' REPORT The Board of Directors Indy Pallet Company, Inc. and Specialty Pallet Company, Inc.: We have audited the accompanying combined balance sheets of Indy Pallet Company, Inc. and Specialty Pallet Company, Inc. as of December 31, 1993, 1994, and 1995, and the related combined statements of operations, stockholders' equity (deficit) and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Indy Pallet Company, Inc. and Specialty Pallet Company, Inc. as of December 31, 1993, 1994, and 1995, and the results of their operations and cash flows for the years then ended in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Minneapolis, Minnesota January 26, 1996 INDY PALLET COMPANY, INC. AND SPECIALTY PALLET COMPANY, INC. COMBINED BALANCE SHEETS ASSETS <TABLE> <CAPTION> DECEMBER 31, JUNE 30, 1993 1994 1995 1996 (UNAUDITED) <S> <C> <C> <C> <C> Current assets: Cash $ 9,899 $ 0 $ 76,337 $ 47,822 Trade accounts receivable 161,834 204,110 150,278 202,813 Employee receivables 1,280 5,314 3,790 0 Inventories (note 2) 64,144 67,172 70,360 59,458 Prepaid expenses 2,467 1,366 1,446 22,198 Total current assets 239,624 277,962 302,211 332,291 Equipment at cost (notes 3 and 4): Equipment 293,544 329,160 327,298 327,298 Transportation equipment 198,646 201,084 200,565 254,577 492,190 530,244 527,863 581,875 Less accumulated depreciation 167,008 155,030 162,223 (174,045) Net equipment 325,182 375,214 365,640 407,830 Non-compete agreement, net of accumulated amortization of $0, $22,222 and $33,332 (unaudited) as of December 31, 1994 and 1995 and June 30, 1996, respectively (note 6) 0 133,334 111,112 100,002 Deposits 3,100 3,100 3,100 3,100 Total assets $567,906 $ 789,610 $782,063 $ 843,223 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Bank overdraft $ 0 $ 7,433 $ 0 $ 0 Current maturities of long-term debt (note 3) 41,863 32,191 22,500 15,000 Current maturities of capital lease obligations (note 4) 0 1,533 1,015 590 Notes payable-related parties (note 6) 82,722 497,887 573,482 553,049 Advances from stockholder (note 6) 30,000 33,000 51,369 36,062 Accrued stockholder distributions 109,122 158,131 0 0 Accounts payable 55,680 50,613 13,494 24,594 Accrued liabilities 42,324 46,322 99,083 105,902 Total current liabilities 361,711 827,110 760,943 735,196 Long-term debt, less current maturities (note 3) 54,690 22,500 0 0 Capital lease obligations, less current maturities (note 4) 0 1,015 0 0 Notes payable-related parties (note 6) 8,940 31,370 6,708 0 Stockholders' equity (deficit) (note 5): Capital stock 13,000 8,000 8,000 8,000 Retained earnings (accumulated deficit) 129,565 (100,385) 6,412 100,027 Total stockholders' equity (deficit) 142,565 (92,385) 14,412 108,027 Commitments and contingencies (note 4) Total liabilities and stockholders' equity (deficit) $567,906 $ 789,610 $782,063 $ 843,223 </TABLE> See accompanying notes to combined financial statements. INDY PALLET COMPANY, INC. AND SPECIALTY PALLET COMPANY, INC. COMBINED STATEMENTS OF OPERATIONS <TABLE> <CAPTION> SIX-MONTH PERIODS ENDED YEARS ENDED DECEMBER 31, JUNE 30, 1993 1994 1995 1995 1996 (UNAUDITED) <S> <C> <C> <C> <C> <C> Net sales $2,591,829 $2,849,638 $2,731,843 $1,524,468 $1,096,099 Cost of sales 1,682,226 1,983,406 1,858,331 1,020,464 774,585 Gross profit 909,603 866,232 873,512 504,004 321,514 Operating expenses: Selling, general, and administrative 527,065 530,900 408,668 206,768 191,668 Operating income 382,538 335,332 464,844 297,236 129,846 Other income (expense): Interest expense (25,671) (22,813) (70,413) (35,322) (36,231) Loss on sale of equipment 0 0 (5,073) 0 0 Miscellaneous, net (26) 6,659 6,740 (11,534) 0 Total other expense, net (25,697) (16,154) (68,746) (46,856) (36,231) Net income $ 356,841 $ 319,178 $ 396,098 $ 250,380 $ 93,615 </TABLE> See accompanying notes to combined financial statements. INDY PALLET COMPANY, INC. AND SPECIALTY PALLET COMPANY, INC. COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) <TABLE> <CAPTION> RETAINED EARNINGS CAPITAL (ACCUMULATED STOCK DEFICIT) TOTAL <S> <C> <C> <C> Balance, December 31, 1992 $13,000 $ 41,846 $ 54,846 Distributions to stockholders 0 (269,122) (269,122) Net income 0 356,841 356,841 Balance, December 31, 1993 13,000 129,565 142,565 Distributions to stockholders 0 (287,462) (287,462) Redemption of stock (note 6) (5,000) (261,666) (266,666) Net income 0 319,178 319,178 Balance, December 31, 1994 8,000 (100,385) (92,385) Distributions to stockholders 0 (289,301) (289,301) Net income 0 396,098 396,098 Balance, December 31, 1995 8,000 6,412 14,412 Net income (unaudited) 0 93,615 93,615 Balance, June 30, 1996 (unaudited) $ 8,000 $ 100,027 $ 108,027 </TABLE> See accompanying notes to financial statements. INDY PALLET COMPANY, INC. AND SPECIALTY PALLET COMPANY, INC. COMBINED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> SIX-MONTH PERIODS ENDED YEARS ENDED DECEMBER 31, JUNE 30, 1993 1994 1995 1995 1996 (UNAUDITED) <S> <C> <C> <C> <C> <C> Cash flows from operating activities: Net income $ 356,841 $ 319,178 $ 396,098 $ 250,380 $ 93,615 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 43,171 48,784 77,742 56,587 38,870 Loss on sale of equipment 0 0 5,073 0 0 Changes in operating assets and liabilities: Trade accounts receivable (47,652) (42,276) 53,832 (29,306) (52,535) Employee receivables 3,394 (4,034) 1,524 5,314 3,790 Inventories (2,877) (3,028) (3,188) 27,397 10,902 Prepaid expenses (726) 1,101 (80) (22,545) (20,752) Deposits 354 0 0 0 0 Accounts payable 14,272 (5,067) (37,119) 30,718 11,100 Accrued liabilities (52,579) 3,998 52,761 25,234 6,819 Net cash provided by operating activities 314,198 318,656 546,643 334,319 91,808 Cash flows from investing activities: Purchases of equipment (55,755) (95,616) (69,950) (16,094) (69,950) Proceeds from sale of equipment 0 0 18,931 0 0 Net cash used in investing activities (55,755) (95,616) (51,019) (16,094) (69,950) Cash flows from financing activities: Bank overdraft 0 7,433 (7,433) 0 0 Proceeds from long-term debt 9,457 0 0 0 0 Principal payments of long-term debt (42,512) (41,862) (32,191) (16,749) (7,500) Payments of capital lease obligations 0 (652) (1,533) (735) (425) Proceeds of notes payable-related parties 22,610 89,558 536,385 (182,490) 0 Principal payments of notes payable -- related parties (35,451) (51,963) (485,452) 0 0 Advances from stockholders 20,000 3,000 18,369 0 (51,369) Distributions to stockholders (257,150) (238,453) (447,432) 0 0 Net cash used in financing activities (283,046) (232,939) (419,287) (199,974) (50,373) Net increase (decrease) in cash (24,603) (9,899) 76,337 128,251 (28,515) Cash at beginning of period 34,502 9,899 0 0 76,337 Cash at end of period $ 9,899 $ 0 $ 76,337 $ 128,251 $ 47,822 Supplemental disclosures of cash flow information: Cash paid during the period for interest $ 26,505 $ 22,799 $ 18,371 $ 9,610 $ 4,231 Supplemental schedule of non-cash investing and financing activities: Equipment acquired under capital lease $ 0 $ 3,200 $ 0 $ 0 $ 0 Redemption of stock through issuance of notes payable -- related parties 0 266,666 0 0 0 Non-compete agreement acquired through issuance of notes payable -- related party 0 133,334 0 0 0 </TABLE> See accompanying notes to combined financial statements. INDY PALLET COMPANY, INC. AND SPECIALTY PALLET COMPANY, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS Indy Pallet Company, Inc. and Specialty Pallet Company, Inc. (collectively, the Company) build, refurbish and distribute wooden pallets for use in a variety of industries. The Company is located in Indianapolis, Indiana and sells its products on an unsecured basis to customers in the area. The Company's ability to collect the amounts due from customers is affected by regional economic conditions. Specialty Pallet Company, Inc. is wholly owned by the sole stockholder of Indy Pallet Company, Inc. PRINCIPLES OF COMBINATION The combined financial statements of the Company include the accounts of Indy Pallet Company, Inc. and Specialty Pallet Company, Inc. after elimination of all significant intercompany accounts and transactions. INVENTORIES Inventories are stated at the lower of first in, first out (FIFO) cost or market. DEPRECIATION Depreciation is computed under the straight-line method over the estimated useful lives of assets as follows: <TABLE> <CAPTION> <S> <C> Equipment 7-15 years Transportation equipment 5-10 years </TABLE> INCOME TAXES Indy Pallet Company, Inc. is incorporated under Subchapter S of the Internal Revenue Code, and as such is not subject to federal or state income taxes. The Company's taxable income is included in the individual tax returns of its stockholders. Specialty Pallet Company, Inc. is incorporated under Subchapter C of the Internal Revenue Code. Accordingly, the results of Specialty Pallet Company, Inc.'s operations were subject to income taxes. Income taxes were not material to Specialty Pallet Company, Inc. as it had minimal net income for financial and income tax purposes. ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS The carrying value of debt approximates market, as the substantial majority of debt carries interest rates that approximate market. UNAUDITED FINANCIAL INFORMATION In the opinion of management, the Company has made all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the financial condition of the Company as of June 30, 1996 and the results of operations and cash flows for the six-month periods ended June 30, 1995 and 1996, as presented in the accompanying unaudited interim financial statements. (2) INVENTORIES Inventories consist of the following: <TABLE> <CAPTION> DECEMBER 31, JUNE 30, 1993 1994 1995 1996 (UNAUDITED) <S> <C> <C> <C> <C> Raw materials $ 6,605 $ 6,605 $ 6,605 $ 6,605 Finished goods 57,539 60,567 63,755 52,853 $64,144 $67,172 $70,360 $59,458 </TABLE> (3) LONG-TERM DEBT Long-term debt consists of the following: <TABLE> <CAPTION> DECEMBER 31, 1993 1994 1995 <S> <C> <C> <C> Note payable to third party in monthly installments of $1,010 including interest at 10.25%, paid in 1994, and secured by automobile $ 8,810 $ 0 $ 0 Note payable to bank in monthly installments of $307 including interest at 9%, paid in 1995, and secured by automobile 7,743 4,691 0 Note payable to bank in monthly installments of $2,500 plus interest at prime plus 2%, final payment due August 1996, and secured by machinery 80,000 50,000 22,500 96,553 54,691 22,500 Less current maturities 41,863 32,191 22,500 $54,690 $22,500 $ 0 </TABLE> (4) LEASES The company leases equipment under a capital lease with monthly payments of $153 including interest imputed at approximately 16% through July, 1996. The Company also leases its operating facility with monthly payments of $4,099 through May, 1999. The Company also leases various trailers on a monthly basis for payments totaling $1,500. Minimum lease commitments as of December 31, 1995 are as follows: <TABLE> <CAPTION> CAPITAL OPERATING <S> <C> <C> Twelve months ending December 31: 1996 $1,071 $ 49,185 1997 0 49,185 1998 0 49,185 1999 0 20,494 1,071 $168,049 Less amounts representing interest 56 $1,015 </TABLE> Capital lease included in equipment is as follows: <TABLE> <CAPTION> DECEMBER 31, 1993 1994 1995 <S> <C> <C> <C> Cost $0 $3,200 $3,200 Accumulated depreciation 0 187 828 $0 $3,013 $2,372 </TABLE> Total rent expense under operating leases was $58,747, $63,586 and $69,465 for the years ended December 31, 1993, 1994 and 1995, respectively. (5) CAPITAL STOCK The capital stock of the Company is as follows: <TABLE> <CAPTION> DECEMBER 31, 1993 1994 1995 <S> <C> <C> <C> Indy Pallet Company, Inc. $10,000 $5,000 $5,000 Specialty Pallet Company, Inc. 3,000 3,000 3,000 $13,000 $8,000 $8,000 </TABLE> Indy Pallet Company, Inc.'s capital stock represents common stock, no par value, in which 1,000 shares have been authorized. As of December 31, 1993, 1994, and 1995, 200 shares, 100 shares, and 100 shares, respectively, were issued and outstanding. Management intends to merge the capital stock of Specialty Pallet Company, Inc. with Indy Pallet Company in 1996. (6) RELATED PARTY TRANSACTIONS The Company had advances from a stockholder in the amount of $30,000, $33,000, and $51,369 as of December 31, 1993, 1994, and 1995, respectively. No interest was charged on these advances. Effective December 31, 1994, the Company redeemed 100 shares of Indy Pallet Company, Inc. common stock by purchasing all the shares of a 50% owner for $266,666. The Company also entered into a non-compete agreement with the former shareholder for a period of six years. The non-compete agreement was recorded as an asset in the amount of $133,334 as of December 31, 1994 and 1995. The Company issued a note payable to the former shareholder at December 31, 1994 in connection with these transactions in the amount of $400,000. Notes payable-related parties consist of the following: <TABLE> <CAPTION> DECEMBER 31 1993 1994 1995 <S> <C> <C> <C> Notes payable to stockholder in connection with equipment purchases, in monthly installments totaling $3,739 including interest ranging from 8.75% to 13.75%, paid in 1993 and 1994, and unsecured $46,662 $ 4,530 $ 0 Note payable to former stockholder in connection with stock redemption and non-compete agreement, due on demand without interest, and unsecured 0 400,000 0 Note payable to former stockholder, due on demand with interest payable at 12%, paid in 1995, and unsecured 22,500 22,500 0 Note payable to stockholder, due on demand with interest payable at 12%, and unsecured 0 0 497,500 Note payable to stockholder, due on demand with interest payable at 12%, and unsecured 22,500 22,500 22,500 Notes payable to stockholder in connection with equipment purchases, in monthly installments totaling $7,063 including interest at 12.5%, expiring through June 1997, and unsecured 0 79,727 60,190 91,662 529,257 580,190 Less current maturities 82,722 497,887 573,482 $ 8,940 $ 31,370 $ 6,708 </TABLE> Maturities of notes payable-related parties as of December 31, 1995 are as follows: <TABLE> <CAPTION> Twelve months ending December 31: <S> <C> 1996 $573,482 1997 6,708 $580,190 </TABLE> (7) SIGNIFICANT EVENT On October 26, 1995, the Company entered into an acquisition agreement with Pallet Recyclers of North America, Inc. (PRANA), a Minnesota corporation. The acquisition agreement closes the Company into escrow and the Company will become a wholly owned subsidiary of PRANA if PRANA completes an initial public offering by October 31, 1996. INDEPENDENT AUDITORS' REPORT The Board of Directors Pallet Outlet Company, Inc.: We have audited the accompanying balance sheets of Pallet Outlet Company, Inc. as of December 31, 1994 and 1995, and the related statements of operations and retained earnings, and cash flows for each of the fiscal years in the three-year period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pallet Outlet Company, Inc. as of December 31, 1994 and 1995, and the results of their operations and cash flows for each of the fiscal years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Minneapolis, Minnesota April 30, 1996 PALLET OUTLET COMPANY, INC. BALANCE SHEETS ASSETS <TABLE> <CAPTION> DECEMBER 31, JUNE 30, 1994 1995 1996 (UNAUDITED) <S> <C> <C> <C> Current assets: Cash $ 72,796 $ 178,929 $ 207,306 Trade accounts receivable 253,923 342,351 431,301 Advances to related parties (note 6) 0 45,623 0 Inventories (note 2) 46,775 69,404 86,755 Prepaid expenses 20,000 20,000 11,000 Total current assets 393,494 656,307 736,362 Equipment, at cost (notes 4 and 5): Transportation equipment 197,318 406,235 394,587 Other equipment 338,729 470,304 614,669 536,047 876,539 1,009,256 Less accumulated depreciation 116,739 180,466 237,921 Net equipment 419,308 696,073 771,335 Total assets $812,802 $1,352,380 $1,507,697 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt (note 4) $ 39,312 $ 90,870 $ 50,614 Current maturities of capital lease obligations (note 5) 32,515 45,600 38,947 Advances from related parties (note 6) 30,507 0 0 Accounts payable 32,282 67,143 41,160 Accrued liabilities (note 3) 33,391 43,293 41,066 Total current liabilities 168,007 246,906 171,787 Long-term debt, less current maturities (note 4) 62,324 143,887 167,349 Capital lease obligations, less current maturities (note 5) 32,528 46,429 36,039 Stockholders' equity: Capital stock--no par value; 10,000 shares authorized, issued and outstanding 10,000 10,000 10,000 Retained earnings 539,943 905,158 1,122,522 Total stockholders' equity 549,943 915,158 1,132,522 Commitments (note 5) Total liabilities and stockholders' equity $812,802 $1,352,380 $1,507,697 </TABLE> See accompanying notes to financial statements. PALLET OUTLET COMPANY, INC. STATEMENTS OF OPERATIONS AND RETAINED EARNINGS <TABLE> <CAPTION> SIX-MONTH PERIODS ENDED YEARS ENDED DECEMBER 31, JUNE 30, 1993 1994 1995 1995 1996 (UNAUDITED) <S> <C> <C> <C> <C> <C> Net sales $1,560,555 $2,472,071 $3,472,801 $1,481,631 $2,141,513 Cost of sales 1,174,604 1,653,988 2,323,284 964,256 1,407,224 Gross profit 385,951 818,083 1,149,517 517,375 734,289 Operating expenses: Selling, general, and administrative 268,226 419,099 557,322 210,753 264,955 Operating income 117,725 398,984 592,195 306,622 469,334 Other income (expense): Interest expense (15,714) (16,894) (19,504) (8,531) (18,057) Gain (loss) on disposal of equipment (2,205) (4,200) (13,267) (6,346) 12,000 Miscellaneous (note 5) (14,803) 13,720 17,191 (4,376) (9,971) Total other income (expense) (32,722) (7,374) (15,580) (19,253) (16,028) Net income 85,003 391,610 576,615 287,369 453,306 Retained earnings, beginning of period 63,330 148,333 539,943 539,943 905,158 Distributions to stockholders 0 0 (211,400) (164,245) (235,942) Retained earnings, end of period $ 148,333 $ 539,943 $ 905,158 $ 663,067 $1,122,522 </TABLE> See accompanying notes to financial statements. PALLET OUTLET COMPANY, INC. STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> SIX-MONTH PERIODS ENDED YEARS ENDED DECEMBER 31, JUNE 30, 1993 1994 1995 1995 1996 (UNAUDITED) <S> <C> <C> <C> <C> <C> Cash flows from operating activities: Net income $ 85,003 $ 391,610 $ 576,615 $ 287,369 $ 453,306 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 36,896 56,149 84,707 34,072 57,455 (Gain) loss on disposal of equipment 2,205 4,200 13,267 6,346 (12,000) Changes in operating assets and liabilities: Trade accounts receivable (6,003) (173,594) (88,428) (55,700) (88,950) Inventories (15,573) (14,642) (22,629) (11,226) (17,351) Prepaid expenses (15,000) (5,000) 0 9,000 9,000 Accounts payable 23,559 (8,207) 34,861 5,906 (25,983) Accrued liabilities 6,170 (2,961) 9,902 8,902 (2,227) Net cash provided by operating activities 117,257 247,555 608,295 284,669 373,250 Cash flows from investing activities: Purchases of equipment (94,136) (170,112) (345,238) (139,850) (122,217) Proceeds from disposal of equipment 3,000 3,000 30,000 13,000 12,000 Net cash used in investing activities (91,136) (167,112) (315,238) (126,850) (110,217) Cash flows from financing activities: Proceeds from long-term debt 19,000 90,900 197,880 47,204 65,000 Principal payments of long-term debt (87,480) (53,023) (64,759) (11,795) (81,794) Payments of capital lease obligations (18,676) (27,436) (32,515) (20,664) (27,543) Net change in related party advances 67,148 (34,445) (76,130) (30,507) 45,623 Distributions to stockholders 0 0 (211,400) (164,245) (235,942) Net cash used in financing activities (20,008) (24,004) (186,924) (180,007) (234,656) Net increase (decrease) in cash 6,113 56,439 106,133 (22,188) 28,377 Cash at beginning of period 10,244 16,357 72,796 72,796 178,929 Cash at end of period $ 16,357 $ 72,796 $ 178,929 $ 50,608 $ 207,306 Supplemental disclosures of cash flow information: Cash paid during the period for interest $ 15,714 $ 16,894 $ 19,504 $ 8,531 $ 18,057 Supplemental schedule of non-cash investing and financing activities: Equipment acquired on credit $ 0 $ 0 $ 6,250 $ 0 $ 0 Equipment acquired under capital lease 54,888 28,000 59,500 14,000 10,500 </TABLE> See accompanying notes to financial statements. PALLET OUTLET COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS Pallet Outlet Company, Inc., (the Company) builds, refurbishes, and distributes wooden pallets for use in a variety of industries. The Company is located in Biglerville, Pennsylvania and sells its products on an unsecured basis to customers in the area. The Company's ability to collect the amounts due from customers is affected by regional economic conditions. REVENUE RECOGNITION The Company recognizes sales and the related cost of sales on the accrual basis of accounting at the time the new, recycled, or repaired pallets or pallet by-products are shipped to or picked up by customers. Brokerage pallet sales are recognized when shipments are received by the customers. INVENTORIES Inventories are stated at the lower of first in, first out (FIFO) cost or market. DEPRECIATION Depreciation is computed under the straight-line method over the estimated useful lives of assets as follows: <TABLE> <CAPTION> <S> <C> Transportation equipment 5-10 years Other equipment 7-15 years </TABLE> INCOME TAXES During 1993, the Company was taxed under Subchapter C of the Internal Revenue Code and was subject to federal and state income tax. Income tax expense for the year ended December 31, 1993 was approximately $12,000 and was included in miscellaneous expense. Effective January 1, 1994, the Company elected to be taxed under Subchapter S of the Internal Revenue Code, and as such is not subject to federal or state income taxes. The Company's taxable income is included in the individual tax returns of its stockholders. ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS The book value of financial instruments shown on the Company's balance sheet approximates fair market value. UNAUDITED FINANCIAL INFORMATION In the opinion of management, the Company has made all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the financial condition of the Company as of June 30, 1996 and the results of operations and cash flows for the six-month periods ended June 30, 1995 and 1996, as presented in the accompanying unaudited interim financial statements. (2) INVENTORIES Inventories consist of the following: <TABLE> <CAPTION> DECEMBER 31, JUNE 30, 1994 1995 1996 (UNAUDITED) <S> <C> <C> <C> Raw materials $24,805 $36,806 $45,981 Finished goods 21,969 32,598 40,774 $46,775 $69,404 $86,755 </TABLE> (3) ACCRUED LIABILITIES Accrued liabilities consist of the following: <TABLE> <CAPTION> DECEMBER 31, 1994 1995 <S> <C> <C> Payroll and related taxes $26,917 $41,580 Sales and other taxes 6,474 1,713 $33,391 $43,293 </TABLE> (4) LONG-TERM DEBT Long-term debt consists of the following: <TABLE> <CAPTION> DECEMBER 31 1994 1995 <S> <C> <C> Note payable to Pennsylvania Loan Fund with monthly payments of $554 including interest at 5%, secured by assets of the stockholders and maturing August 1999 27,198 22,244 Notes payable to banks with monthly payments totaling $9,586 including interest ranging from 7% to 9%, secured by various equipment and maturing through August 2000 74,438 212,513 101,636 234,757 Less current maturities (39,312) (90,870) $ 62,324 $143,887 </TABLE> Maturities of long-term debt as of December 31, 1995 are as follows: <TABLE> <CAPTION> Twelve months ending December 31: <S> <C> 1996 $ 90,870 1997 60,632 1998 36,441 1999 27,122 2000 19,702 $234,757 </TABLE> (5) LEASES The Company leases forklifts under capital leases for monthly payments totaling $776 including interest imputed at approximately 12% and expiring in 1996. The Company also leases several trailers under capital leases for payments totaling $4,341 including interest imputed ranging from approximately 5% to 15% and expiring through March 1999. In October 1995, the Company began leasing a warehouse located in York, Pennsylvania for monthly payments of $10,000 through October 2000. A portion of the warehouse is subleased to a third party through October 1996 for monthly payments of $10,150. Minimum lease commitments as of December 331, 1995 are as follows: <TABLE> <CAPTION> CAPITAL OPERATING <S> <C> <C> Twelve months ending December 31: 1996 $ 56,124 $148,680 1997 32,765 148,680 1998 19,278 148,680 1999 1,000 134,383 2000 0 90,000 109,167 $670,423 Less amounts representing interest (17,138) 92,029 Less current maturities (45,600) $ 46,429 </TABLE> Capital leases included in equipment are as follows: <TABLE> <CAPTION> DECEMBER 31, 1994 1995 <S> <C> <C> Cost $93,890 $144,390 Accumulated depreciation 12,634 22,298 $81,256 $122,092 </TABLE> Total rent expense under third party operating leases was $0, $8,586, and $51,755 for the years ended December 31, 1993, 1994, and 1995, respectively. Total rental income under the sublease was $30,450 and was included in miscellaneous income for the year ended December 31, 1995. (6) RELATED PARTY TRANSACTIONS The Company leases its main operating facility from a partnership owned by the two stockholders of the Company (the Partnership). The lease is on a month-to-month basis and consists of payments on Partnership debt secured by the facility and surrounding property totaling approximately $4,000. Total rent expense under this lease was $30,384, $41,415, and $48,624 for the years ended December 31, 1993, 1994, and 1995, respectively. The Company has also paid for renovations to the property on behalf of the Partnership. These expenditures were recorded as building repairs and maintenance and were $36,351, $107,314, and $152,491 for the years ended December 31, 1993, 1994, and 1995, respectively. In connection with the above transactions the Company also recorded amounts due to and from both the Partnership and its stockholders. Total advances to these related parties were $45,623 as of December 31, 1995. Total advances from these related parties were $30,507 as of December 31, 1994. (7) RETIREMENT PLAN During 1995, the Company established a savings retirement plan for all eligible employees under Section 401(k) of the Internal Revenue Code. An employee becomes eligible after one year of service and attaining age 21. The plan allows employees to defer up to 15% of their compensation, on a pretax basis. The Company contributes an additional 25% of the employees' contribution. The Company's contribution to the plan for 1995 was $3,770. (8) SUBSEQUENT EVENT On June 7, 1996, the Company entered into an acquisition agreement with Pallet Recycling Associates of North America, Inc. (PRANA), a Minnesota corporation. Under the terms of the agreement, the Company will become a wholly owned subsidiary of PRANA upon completion of an initial public offering. PRANA LOCATIONS [MAP] <TABLE> <CAPTION> Recycling Operations Pending Acquisitions Corporate Headquarters On-site Locations <S> <C> <C> <C> Stockton Memphis St. Paul Syracuse Las Vegas Lynchburg Phoenix Cullman, AL Denver New Albany Fort Worth Phoenix Oklahoma City Kansas City St. Paul Springfiled Mansfield Little Rock Indianola Memphis Green Bay Jackson Nashville Indianpolis Summitville Lexington Knoxville Hanceville Birmingham Orlando Buffalo Rochester Syracuse York Biglerville </TABLE> NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. TABLE OF CONTENTS PAGE Prospectus Summary 3 Risk Factors 6 Dilution 10 Use of Proceeds 11 Dividend Policy 11 Capitalization 12 Selected Financial Data 13 Pro Forma Financial Data 14 Management's Discussion and Analysis of Financial Condition and Results of Operations 18 Business 25 Management 32 Certain Transactions 36 Principal Shareholders 39 Description of Capital Stock 40 Description of the Term Loan and Certain Other Outstanding Indebtedness 44 Underwriting 46 Shares Eligible for Future Sale 48 Legal Matters 49 Experts 49 Additional Information 49 Index to Financial Statements F-1 UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 2,750,000 SHARES [LOGO] PRANA PALLET RECYCLING ASSOCIATES OF NORTH AMERICA, INC. COMMON STOCK PROSPECTUS JOHN G. KINNARD AND COMPANY, INCORPORATED ____________ , 1996 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following expenses will be paid by the Company in connection with the distribution of the Common Stock registered hereby and do not include the underwriting discount to be paid to the Underwriters. All of such expenses except for the Securities and Exchange Commission registration fee, the NASD filing fee, and the Nasdaq application fee are estimated. <TABLE> <CAPTION> <S> <C> SEC registration fee $ 5,453 NASD filing fee 2,015 Nasdaq application fee 10,000 Printing expenses 75,000 Legal fees and expenses 200,000 Accounting fees and expenses 150,000 Transfer Agent and Registrar fees 3,000 Blue Sky fees and expenses (including legal fees) 38,000 Miscellaneous 166,532 Total $650,000 </TABLE> ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 302A.521, subd. 2, of the Minnesota Statutes requires the Company to indemnify a person made or threatened to be made a party to a proceeding by reason of the former or present official capacity of the person with respect to the Company, against judgments, penalties, fines, including, without limitation, excise taxes assessed against the person with respect to an employee benefit plan, settlements, and reasonable expenses, including attorneys fees and disbursements, incurred by the person in connection with the proceeding with respect to the same acts or omissions if such person (1) has not been indemnified by another organization or employee benefit plan for the same judgments, penalties or fines; (2) acted in good faith; (3) received no improper personal benefit, and statutory procedure has been followed in the case of any conflict of interest by a director; (4) in the case of a criminal proceeding, had no reasonable cause to believe the conduct was unlawful; and (5) in the case of acts or omissions occurring in the person's performance in the official capacity of director or, for a person not a director, in the official capacity of officer, board committee member or employee, reasonably believed that the conduct was in the best interests of the Company, or, in the case of performance by a director, officer or employee of the company involving service as a director, officer, partner, trustee, employee or agent of another organization or employee benefit plan, reasonable believed that the conduct was not opposed to the best interests of the Company. In addition, Section 302A.521, subd. 3, requires payment by the Company, upon written request, of reasonable expenses in advance of final disposition of the proceeding in certain instances. A decision as to required indemnification is made by a disinterested majority of the Board of Directors present at a meeting at which a disinterest quorum is present, or by a designated committee of the Board, by special legal counsel, by the shareholders, or by a court. Provisions regarding indemnification of officers and directors of the Company are contained in the Company's Amended and Restated Articles of Incorporation (Exhibit 3.1 to this Registration Statement) and the Company's Amended Bylaws (Exhibit 3.2 to this Registration Statement), each of which are incorporated herein by reference. Under Section 6(b) of the Underwriting Agreement filed as Exhibit 1.1 hereto, the Underwriters agreed to indemnify, under certain conditions, the Company, its directors, certain of its officers and persons who control the Company within the meaning of the Securities Act of 1933, as amended, against certain liabilities. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Since April 10, 1993, the Company has had the following sales of its securities: <TABLE> <CAPTION> SHARES OF COMMON STOCK AND COMMON STOCK ISSUABLE BY PURCHASERS OR CLASS OF PURCHASER DATE CONVERSION CONSIDERATION EXEMPTION <S> <C> <C> <C> <C> Executive Officers and Directors of the Company 4/93 750,000 $ 6,000 + Various accredited investors, 8 unaccredited investors including officers and directors of the Company 4/93-10/93 250,000 $1,000,000 + Acquisition of Otto Packaging, Inc. 1/94 145,955 $ 181,976 + Acquisition of BVS, Inc. 2/94 334,704 $ 417,308 + Various accredited investors, including an officer of the Company 3/94-8/94 145,955 $ 100,000 + Acquisition of Harris Supply Company, Inc. 4/94 91,000 $ 113,458 + Acquisition of Pallet City, Inc. 6/94 398,355 $ 496,667 + Acquisition of Pallet Source, Inc. 12/94 162,500 $ 202,604 + Acquisition of Hurt's Pallet & Sales, Inc. 12/94 104,281 $ 130,017 + Acquisition of Quality Pallet, Inc. 12/94 248,215 $ 309,473 + Various accredited investors 3/95 $2,000,000* $2,000,000 + Acquisition of PRANA Oklahoma City, Inc. 4/95 125,000 $ 366,497 + Acquisition of B&B Pallet Supply Company 5/95 204,705 $ 600,190 + Acquisition of Pallet Supply, Inc. 8/95 414,504 $1,635,700 + Pending Acquisition -- down payment 9/95 7,500 $ 30,000 + Acquisition of PRANA Las Vegas, Inc. 10/95 3,000 $ 8,796 + </TABLE> * aggregate principal amount of 10.25% Convertible Subordinated Debentures + All issuances of capital stock and warrants to purchase capital stock have been made by the Company in reliance upon Section 4 (2) of the Securities Act of 1933, as amended. The Company has relied upon such exemption because it believed that each of the purchasers had such knowledge and experience in financial and business matters that it, he or she, as the case may be, was capable of evaluating the merits and risks of the prospective investment. With respect to all of such issuances the Company's imprinted a legend on the certificates representing such securities restricting their transfer. From 9/94-4/95 the Company issued warrants to purchase 18,150 shares of Common Stock to various accredited investors relating to unsecured notes in the amount of $710,000.+ In March 1995, the Company issued warrants to purchase 6,667 shares of Common Stock to the agent of the Convertible Subordinated Debentures.+ From 7/95-1/96 the Company issued warrants to purchase 27,394 shares of Common Stock to various accredited investors relating to unsecured notes in the amount of $1,757,000.+ In June 1995, the Company issued warrants to purchase 2,500 shares of Common Stock to the agent of the unsecured notes.+ In July 1995, the Company issued warrants to purchase 14,347 shares of Common Stock to various noteholders of acquired companies relating to the repurchase of certain shares.+ In April 1995, pursuant to Rule 506 of Regulation D, the Company issued warrants to purchase 300,000 shares of Common Stock to various accredited investors relating to the Secured Notes in the amount of $1,500,000 and 30,000 shares of Common Stock to the agent of the Secured Notes. In June 1996, in connection with an amendment to an agency agreement, the Company issued a warrant to purchase 30,000 shares of Common Stock.+ ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits <TABLE> <CAPTION> EXHIBIT NO. DESCRIPTION METHOD OF FILING <S> <C> <C> 1.1 Form of Underwriting Agreement Filed herewith 3.1 Amended and Restated Articles of Incorporation of the Company Previously filed 3.2 Amended Bylaws of the Company Previously filed 4.1 Specimen form of the Company's Common Stock Certificate Filed herewith 4.2 1995 Long-Term Incentive and Stock Option Plan and form of Option Agreement Previously filed 5.1 Opinion of Dorsey & Whitney LLP Filed herewith 10.1 Lease Agreement dated as of January 1, 1994 between Jeffery E. and Judy M. Otto and Otto Packaging, Inc. Previously filed 10.2 Lease Agreement dated as of June 1, 1995 between James J. Doyle and Pallet Supply Co., Inc. Previously filed 10.3 Lease Agreement dated as of June 1, 1995 between James J. Doyle and Pallet Supply Co., Inc. Previously filed 10.4 Lease Agreement dated as of June 1, 1995 between James J. Doyle and Pallet Supply Co., Inc. Previously filed 10.5 Lease Agreement dated as of June 1, 1995 between James J. Doyle and Pallet Supply Co., Inc. Previously filed 10.6 Lease Agreement dated as of February 9, 1995 between the Company and Everest Investments IV Previously filed 10.7 Employment agreement dated April 1, 1996 between the Company and Bruce C. Faulken Filed herewith 10.8 Employment Agreement dated January 1, 1994 between the Company and Jeffery E. Otto Previously filed 10.9 Employment Agreement dated April 1, 1996 between the Company and Clarence A. Johnson Filed herewith 10.10 Employment Agreement dated February 1, 1994 between the Company and Edward R. Van Previously filed 10.11 Employment Agreement dated April 1, 1996 between the Company and Randy Hines Filed herewith 10.12 Employment Agreement dated April 1, 1996 between the Company and Terry Stewart Filed herewith 10.13 Employment Agreement dated January 1, 1994 between the Company and William L. Alvey Previously filed 10.14 Operating Agreement dated as of August 8, 1995 between the Company, SUTA, L.L.C. and James J. Doyle Previously filed 10.15 Loan Commitment Agreement dated September 6, 1994 between the Company and Robert Klas, Sr. Previously filed 10.16 Loan Commitment Agreement dated as of January 1, 1996 between the Company and Gerald J. Lynam Previously filed 10.17 Subordinated Convertible Debenture dated as of August 8, 1995 between the Company and Machine Specialists, Inc. Previously filed 10.18 Agreement dated July 1, 1995 between the Company, Pallet City, Inc., and Donald J. Matre, Ronald J. Matre, Ronald A. Matre, Thomas R. Matre and Tracy Matre-Waring Previously filed 10.19 Agreement dated August 8, 1995 between the Company, Otto Packaging, Inc. and Jeffery E. Otto and Judy M. Otto Previously filed 10.20 Agreement dated August 4, 1995 between the Company, BVS, Inc. and Orville Roberts, Theodore Shepard and Edward Van Previously filed 10.21 Agreement dated August 4, 1995 between the Company, Hurt's Pallet & Sales, Inc. and Robert F. Jarvis and Judith A. Jarvis Previously filed 10.22 Agreement dated July 1, 1995 between the Company, Harris Supply Company and Charles S. Harris Previously filed 10.23 Agreement dated August 4, 1995 between the Company, Pallet Source, Inc. and George Gustafson Previously filed 10.24 Agreement dated August 1, 1995 between the Company, Quality Pallet, Inc. and James W. Brill and Terry L. Brill Previously filed 10.25 Employment Agreement dated May 1, 1996 between the Company and James J. Doyle Filed herewith 10.26 Term Loan and Security Agreement dated August 8, 1995 between PRANA Holdings, Inc. and Norwest Bank Minnesota, National Association, as amended on April 23, 1996 Filed herewith 10.27 Form of Credit and Security Agreement between various of the Company's Subsidiaries and Norwest Credit, Inc., as amended Filed herewith 21 Subsidiaries of the Registrant Previously filed 23.1 Consent of Dorsey & Whitney LLP Included in Exhibit 5.1 23.2 Report and Consent of KPMG Peat Marwick LLP Filed herewith 23.3 Consent of Schutta Nelson & Zembal, Ltd. Filed herewith 24 Powers of Attorney Set forth on the Signature Page Previously Filed </TABLE> (b) Financial Statement Schedules Schedule II -- Valuation and Qualifying Accounts ITEM 17. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) It will provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. (2) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (3) For purposes of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Amendment to the Registration Statement to be signed on its behalf by the undersigned thereto duly authorized, in the City of Roseville, Minnesota on September 5, 1996. PALLET RECYCLING ASSOCIATES OF NORTH AMERICA, INC. By /S/ JEFFERY OTTO Jeffery E. Otto, Chairman of the Board of Directors and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment to the Registration Statement on Form S-1 has been signed by the following persons in the capacities indicated on September 5, 1996. <TABLE> <CAPTION> SIGNATURE TITLE <S> <C> /S/ JEFFERY E. OTTO Chairman of the Board of Directors and Jeffery E. Otto Chief Executive Officer (principal executive officer) BRUCE C. FAULKEN* President and Chief Operating Officer (principal executive officer) /S/ CLARENCE JOHNSON Vice President, Chief Financial Officer Clarence Johnson (principal financial officer) /S/ STEVEN R. RASMUSSEN Controller (principal accounting officer) Steven R. Rasmussen WILLIAM M. ALVEY* Director REYNOLD P. FLOM* Director ROBERT C. KLAS* Director /S/ THOMAS S. SCHREIER Director Thomas S. Schreier DONALD J. MATRE* Director *By: /S/ JEFFERY E. OTTO Jeffery E. Otto Attorney-in-Fact </TABLE> EXHIBIT INDEX <TABLE> <CAPTION> SEQUENTIALLY NUMBERED EXHIBIT NO. DESCRIPTION PAGE <S> <C> <C> 1.1 Form of Underwriting Agreement 3.1 Amended and Restated Articles of Incorporation of the Company 3.2 Amended Bylaws of the Company 4.1 Specimen form of the Company's Common Stock Certificate 4.2 1995 Long-Term Incentive and Stock Option Plan and form of Option Agreement 5.1 Opinion of Dorsey & Whitney LLP 10.1 Lease Agreement dated as of January 1, 1994 between Jeffery E. and Judy M. Otto and Otto Packaging, Inc. 10.2 Lease Agreement dated as of June 1, 1995 between James J. Doyle and Pallet Supply Co., Inc. 10.3 Lease Agreement dated as of June 1, 1995 between James J. Doyle and Pallet Supply Co., Inc. 10.4 Lease Agreement dated as of June 1, 1995 between James J. Doyle and Pallet Supply Co., Inc. 10.5 Lease Agreement dated as of June 1, 1995 between James J. Doyle and Pallet Supply Co., Inc. 10.6 Lease Agreement dated as of February 9, 1995 between the Company and Everest Investments IV 10.7 Employment agreement dated April 1, 1996 between the Company and Bruce C. Faulken 10.8 Employment Agreement dated January 1, 1994 between the Company and Jeffery E. Otto 10.9 Employment Agreement dated April 1, 1996 between the Company and Clarence A. Johnson 10.10 Employment Agreement dated February 1, 1994 between the Company and Edward R. Van 10.11 Employment Agreement dated April 1, 1996 between the Company and Randy Hines 10.12 Employment Agreement dated April 1, 1996 between the Company and Terry Stewart 10.13 Employment Agreement dated January 1, 1994 between the Company and William L. Alvey 10.14 Operating Agreement dated as of August 8, 1995 between the Company, SUTA, L.L.C. and James J. Doyle 10.15 Loan Commitment Agreement dated September 6, 1994 between the Company and Robert Klas, Sr. 10.16 Loan Commitment Agreement dated as of January 1, 1996 between the Company and Gerald J. Lynam 10.17 Subordinated Convertible Debenture dated as of August 8, 1995 between the Company and Machine Specialists, Inc. 10.18 Agreement dated July 1, 1995 between the Company, Pallet City, Inc., and Donald J. Matre, Ronald J. Matre, Ronald A. Matre, Thomas R. Matre and Tracy Matre-Waring 10.19 Agreement dated August 8, 1995 between the Company, Otto Packaging, Inc. and Jeffery E. Otto and Judy M. Otto 10.20 Agreement dated August 4, 1995 between the Company, BVS, Inc. and Orville Roberts, Theodore Shepard and Edward Van 10.21 Agreement dated August 4, 1995 between the Company, Hurt's Pallet & Sales, Inc. and Robert F. Jarvis and Judith A. Jarvis 10.22 Agreement dated July 1, 1995 between the Company, Harris Supply Company and Charles S. Harris 10.23 Agreement dated August 4, 1995 between the Company, Pallet Source, Inc. and George Gustafson 10.24 Agreement dated August 1, 1995 between the Company, Quality Pallet, Inc. and James W. Brill and Terry L. Brill 10.25 Employment Agreement dated May 1, 1996 between the Company and James J. Doyle 10.26 Term Loan and Security Agreement dated August 8, 1995 between PRANA Holdings, Inc. and Norwest Bank Minnesota, National Association, as amended on April 23, 1996 10.27 Form of Credit and Security Agreement between various of the Company's Subsidiaries and Norwest Credit, Inc., as amended 21 Subsidiaries of the Registrant 23.1 Consent of Dorsey & Whitney LLP 23.2 Report and Consent of KPMG Peat Marwick LLP 23.3 Consent of Schutta Nelson & Zembal, Ltd. 24 Powers of Attorney </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-1.1 <SEQUENCE>2 <TEXT> 2,750,000 SHARES PALLET RECYCLING ASSOCIATES OF NORTH AMERICA, INC. COMMON STOCK UNDERWRITING AGREEMENT __________, 1996 John G. Kinnard and Company, Incorporated As Representative of the Several Underwriters Kinnard Financial Center 920 Second Avenue South Minneapolis, MN 55402 Dear Sirs: Pallet Recycling Associates of North America, Inc. (the "Company") proposes to issue and sell One Million Five Hundred Fifty Thousand (2,750,000) shares of Common Stock, $.01 par value (the "Common Stock"), of the Company subject to the terms and conditions stated herein, to the several underwriters named in Schedule I hereto (the "Underwriters") for whom you are acting as representative (the "Representative"), which 2,750,000 shares are herein called the "Firm Shares." In addition, solely to cover overallotments in connection with the sale of the Firm Shares, the Company proposes, subject to the terms and conditions stated herein, to grant to the Underwriters an option to purchase an additional number of shares not exceeding 412,500. The shares subject to the option are herein called the "Option Shares." The Firm Shares and any Option Shares purchased pursuant to this Underwriting Agreement are herein called the "Shares." As used in this Agreement, the term "Underwriter" includes any party substituted for an Underwriter under Section 9 hereof. As Representative, you have advised the Company (i) that you are authorized to enter into this Underwriting Agreement on behalf of the Underwriters, and (ii) that the Underwriters are willing, acting severally and not jointly, to purchase the numbers of the Firm Shares, aggregating in total 2,750,000 shares, set forth opposite their respective names in Schedule I, plus their pro rata portion of the Option Shares purchased if you elect to exercise the overallotment option in whole or in part for the accounts of the Underwriters. The Company hereby confirms its agreement to issue to the Representative a warrant for the purchase of 275,000 shares of the Company's Common Stock as described in Section 5 hereof (the "Representative's Warrant"), contingent upon the purchase by the Underwriters of the Firm Shares. The shares issuable upon exercise of the Representative's Warrant are referred to as the "Warrant Shares." 1. Representations and Warranties of the Company. The Company represents and warrants to and agrees with each of the Underwriters as follows: (a) A registration statement on Form S-1 with respect to the Shares has been prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "1933 Act"), and the rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder and has been filed with the Commission under the 1933 Act. Copies of the registration statement as amended to date have been delivered by the Company to the Representative. Such registration statement and all prospectuses included as a part thereof, all financial statements included therein, and all schedules and exhibits thereto, as amended at the time when the registration statement shall become effective, is herein referred to as the "Registration Statement," and the term "Prospectus" as used herein shall mean the final prospectus included as a part of the Registration Statement on file with the Commission when it becomes effective (except that if a prospectus is filed by the Company pursuant to Rules 424(b) and 430A under the 1933 Act, the term "Prospectus" as used herein shall mean the prospectus so filed pursuant to Rules 424(b) and 430A). The term "Preliminary Prospectus" as used herein means any prospectus used prior to the Effective Date (as defined in Section 4(a) hereof) and included as a part of the Registration Statement, including any prospectus filed with the Commission pursuant to Rule 424(a). (b) When the Registration Statement shall become effective and at all times subsequent thereto up to each closing date, the Registration Statement and Prospectus and all amendments thereof and supplements thereto, will comply in all material respects with the provisions of the 1933 Act and the Rules and Regulations. The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus, issuing a stop order with respect to the offering of the Shares or requiring the recirculation of a Preliminary Prospectus. When the Registration Statement shall become effective and when any post effective amendment thereto shall become effective, the Registration Statement (as amended, if the Company shall have filed with the Commission any post effective amendments thereto) will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. When the Registration Statement shall become effective and at all times subsequent thereto up to each closing date, the Prospectus (as amended or supplemented, if the Company shall have filed with the Commission any amendment thereof or supplement thereto) will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that none of the representations and warranties in this Subsection 1(b) shall apply to statements in, or omissions from, the Registration Statement or the Prospectus or any amendment thereof or supplement thereto, which are based upon and conform to information furnished to the Company by the Underwriters in writing specifically for use in the preparation of the Registration Statement or the Prospectus or any such amendment or supplement. There is no contract or other document of the Company of a character required by the 1933 Act or the Rules and Regulations to be described in the Registration Statement or Prospectus or to be filed as an exhibit to the Registration Statement, that has not been described or filed as required. (c) The Company has no subsidiaries and is not affiliated with any other company or business entity in any material respect, except as disclosed in the Prospectus. (d) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Minnesota, with full corporate power and authority, to own, lease and operate its properties and conduct its business as described in the Registration Statement and Prospectus. The Company is duly qualified to do business as a foreign corporation in good standing in each jurisdiction in which the ownership or lease of its properties, or the conduct of its business, requires such qualification and in which the failure to be qualified or in good standing would have a material adverse effect on the business of the Company. The Company has all necessary authorizations, approvals and orders of and from all governmental regulatory officials and bodies to own its properties and to conduct its business as described in the Registration Statement and Prospectus and is conducting its business in substantial compliance with all applicable laws, rules and regulations of the jurisdictions in which it is conducting business. (e) The Company holds all licenses, certificates and permits from state, federal and other regulatory authorities necessary for the conduct of its business as described in the Registration Statement and Prospectus. There is not now pending, issued or outstanding, or to the knowledge of the Company threatened, any investigation, Order to Show Cause, Notice of Violation, Notice of Apparent Liability or Notice of Forfeiture or similar action, suit or proceeding, or any complaint against the Company or any of its properties. (f) The Company is not in violation of its Amended and Restated Certificate of Incorporation or Amended Bylaws. The Company is not in default in the performance or observance of any obligation, agreement, covenant or condition contained in any bond, debenture, note or other evidence of indebtedness or in any contract, indenture, mortgage, loan agreement, joint venture or other agreement or instrument to which the Company is a party or by which the Company or any of its properties are bound, which default would have a material adverse effect on the business, prospects, profits or condition of the Company. To the best of the Company's knowledge, the Company is not in violation of any law, order, rule, regulation, writ, injunction or decree of any government, governmental instrumentality or court, domestic or foreign, which violation would have a material adverse effect on the business, prospects, profits or condition of the Company. (g) The Company has full requisite power and authority to enter into this Agreement. This Agreement has been duly authorized, executed and delivered by the Company and will be a valid and binding agreement on the part of the Company, enforceable in accordance with its terms, if and when this Agreement shall have become effective in accordance with Section 8, except as enforceability may be limited by the application of bankruptcy, insolvency, moratorium or similar laws affecting the rights of creditors generally and by judicial limitations on the right of specific performance, and except as the enforceability of the indemnification or contribution provisions hereof may be affected by applicable federal or state securities laws. The performance of this Agreement and the consummation of the transactions herein contemplated will not result in a material breach or violation of any of the terms and provisions of or constitute a material default under (i) any indenture, mortgage, deed of trust, loan agreement, bond, debenture, note, agreement or other evidence of indebtedness, lease, contract or other agreement or instrument to which the Company is a party or by which the property of the Company is bound, (ii) the Company's Amended and Restated Certificate of Incorporation or Amended Bylaws, or (iii) any statute or any order, rule or regulation of any court, governmental agency or body having jurisdiction over the Company. To the best of the Company's knowledge, no consent, approval, authorization or order of any court, governmental agency or body is required for the consummation by the Company of the transactions on its part herein contemplated, except such as may be required under the 1933 Act or under state securities laws. (h) Except as is otherwise expressly stated in the Registration Statement or Prospectus, there are no actions, suits or proceedings pending before any court or governmental agency, authority or body to which the Company is a party or of which the business or property of the Company is the subject which might result in any material adverse change in the condition (financial or otherwise), business or prospects of the Company, materially and adversely affect its properties or assets, or prevent consummation of the transactions contemplated by this Agreement. To the best of the Company's knowledge, no such actions, suits or proceedings are threatened. (i) The authorized and outstanding capital stock of the Company is as set forth under the caption "Capitalization" in the Prospectus. The outstanding Common Stock of the Company is duly authorized and validly issued, fully paid and nonassessable. The Shares conform in substance to the description thereof contained in the Registration Statement and Prospectus. The Shares to be sold by the Company hereunder have been duly authorized and, when issued and delivered pursuant to this Agreement, will be validly issued, fully paid and nonassessable and will conform to the description thereof contained in the Prospectus. No preemptive rights or similar rights of any security holders of the Company exist with respect to the issuance and sale of the Shares by the Company or exercise of the Representative's Warrant. Except as disclosed in the Prospectus, the Company has no agreement with any security holder which gives such security holder the right to require the Company to register under the 1933 Act any securities of any nature owned or held by such person either in connection with the transactions contemplated by this Agreement or after a demand for registration by such holder, or otherwise. Upon payment for and delivery of the Shares to be sold by the Company pursuant to this Agreement, the Underwriters will acquire good and marketable title to such Shares, free and clear of all liens, encumbrances or claims. The form of certificate evidencing the Shares will comply as to form with all applicable provisions of the laws of the State of Minnesota. (j) The Representative's Warrant and the Warrant Shares have been duly authorized. The Representative's Warrant, when issued and delivered to the Representative, will constitute a valid and binding obligation of the Company in accordance with its terms, except as enforceability may be limited by the application of bankruptcy, insolvency, moratorium or similar laws affecting the rights of creditors generally and by judicial limitations on the right of specific performance. The Warrant Shares when issued in accordance with the terms of this Agreement and pursuant to the Representative's Warrant, will be validly issued, fully paid and nonassessable, and subject to no preemptive rights or similar rights on the part of any person or entity. A sufficient number of shares of Common Stock of the Company have been reserved for issuance by the Company upon exercise of the Representative's Warrant. (k) KPMG Peat Marwick LLP, whose report appears in the Prospectus, is a firm of independent accountants within the meaning of the 1933 Act and the Rules and Regulations. The consolidated financial statements of the Company, together with the related notes, forming part of the Registration Statement and Prospectus (the "Financial Statements") fairly present the financial position and the results of operations of the Company at the dates and for the respective periods to which they apply. The Financial Statements filed with the Commission as part of the Registration Statement have been prepared in accordance with generally accepted accounting principles, consistently applied throughout the periods involved, except as may be otherwise stated therein. (l) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus and at any closing date, except as is otherwise disclosed in the Registration Statement or Prospectus, there has not been: (i) any material adverse change in the capital stock or long-term debt (including any capitalized lease obligation), or material increase in the short-term debt of the Company; (ii) any issuance of options, warrants, convertible securities or other rights to purchase the capital stock of the Company; (iii) any material adverse change, or any development involving a material adverse change, in or affecting the business, prospects, properties, management, financial position, stockholders' equity, results of operations or general condition of the Company; (iv) any material transaction entered into by the Company; (v) any material obligation, direct or contingent, incurred by the Company, except obligations incurred in the ordinary course of business that, in the aggregate, are not material; or (vi) any dividend or distribution of any kind declared, paid or made on the Company's capital stock. (m) Except as is otherwise disclosed in the Registration Statement or Prospectus, the Company has good and marketable title to all of the property, real and personal, described in the Registration Statement or Prospectus as being owned by the Company, free and clear of all liens, encumbrances, equities, charges or claims, except as do not materially interfere with the uses made and to be made by the Company of such property or as disclosed in the Financial Statements. Except as is otherwise disclosed in the Registration Statement or Prospectus, the Company has valid and binding leases to the real and personal property described in the Registration Statement or Prospectus as being under lease to the Company, except as to those leases which are not material to the Company or the lack of enforceability of which would not materially interfere with the use made and to be made by the Company of such leased property. (n) The Company has filed all required federal and state income and franchise tax returns and paid all taxes shown as due thereon, except insofar as failure to file all required state income and franchise tax returns would not materially and adversely effect its business, profits or financial condition. The Company has no knowledge of any tax deficiency which either has been or might be asserted against it which would materially and adversely affect the Company's business or properties. (o) No labor disturbance by the employees of the Company exists or, to the best of the Company's knowledge, is imminent which could reasonably be expected to have a material adverse effect on the conduct of the business, operations, financial condition or income of the Company. (p)(i) The Company owns or possesses adequate rights to use all copyrights, patents, trademarks, intellectual property, and proprietary rights or information reasonably necessary for the conduct of its present or intended business as described in the Prospectus. There are no pending legal, governmental or administrative proceedings relating to copyrights, trademarks, intellectual property or proprietary rights or information to which the Company is a party or of which any property of the Company is subject. No such proceedings are, to the best of the Company's knowledge, threatened or contemplated against the Company by any governmental agency or authority or others. (ii) The Company has not received any notice of conflict with asserted rights of others. (iii) To the Company's knowledge, the Company does not infringe upon the rights or claimed rights of any person under or, with respect to, any of the intangible rights referred to in Section 1.(p)(i) above. Except as disclosed in the Prospectus, the Company is not obligated or under any liability whatsoever to make any payments by way of royalties, fees or otherwise to any owner of, licensor of, or other claimant to, any patent, trademark, trade name, copyright or other intangible asset, with respect to the use thereof or in connection with the conduct of its business or otherwise. To the best of the Company's knowledge, the Company is not using any confidential information or trade secrets of any other party. (q) The Company intends to apply the proceeds from the sale of the Shares by it to the purposes and substantially in the manner set forth in the Prospectus. (r) The Company does not have a defined benefit pension plan or other pension benefit plan which is subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended. (s) To the best of the Company's knowledge, no person is entitled, directly or indirectly, to compensation from the Company or the Underwriters for services as a finder in connection with the transactions contemplated by this Agreement. (t) The conditions for use of a registration statement on Form S-1 for the distribution of the Shares have been satisfied with respect to the Company. (u) The Company has not taken and will not take, directly or indirectly, any action (and does not know of any action by its directors, officers, stockholders, or others) which has constituted or is designed to, or which might reasonably be expected to, cause or result in stabilization or manipulation, as defined in the Securities Exchange Act of 1934 (the "1934 Act") or otherwise, of the price of any security of the Company to facilitate the sale or resale of the Common Stock. (v) The Company has not sold any securities in violation of Section 5 of the 1933 Act. (w) The Company maintains insurance, which is in full force and effect, of the types and in amounts which are adequate for its business and in line with the insurance maintained by similar companies and businesses. (x) Except as disclosed by the Company in writing to the Representative, each of the officers, directors and all stockholders who beneficially own 163,000 or more shares of the outstanding Common Stock of the Company (determined on a pre-stock split basis) have entered into a written agreement with the Representative which provides that for 360 days following the Effective Date, such person will not, without the Representative's prior written consent, sell, transfer or otherwise dispose of, or agree to sell, transfer or otherwise dispose of, other than by gift to donees who agree to be bound by the same restriction or by will or the laws of descent, any of his or her Common Stock, or any options, warrants or rights to purchase Common Stock or any shares of Common Stock received upon exercise of any options, warrants or rights to purchase Common Stock, which are beneficially held by such persons during such 360-day period except pursuant to the terms of such written agreement. (y) The Company is not engaged in any negotiations regarding any form of business combination with any other entity. (z) The Company's application for designation of the Shares on the National Association of Securities Dealers Automated Quotations National Market System (the "NASDAQ National Market") has been approved. (aa) To the best of the Company's knowledge, there are no affiliations with the National Association of Securities Dealers, Inc. (the "NASD") among the Company's officers, directors or five percent or greater security holders, except as set forth in the Registration Statement or as otherwise disclosed in writing to the Representative. 2. Purchase, Sale, Delivery and Payment. (a) On the basis of the representations, warranties, and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to sell to each of the Underwriters, and the Underwriters agree, severally and not jointly, to purchase, at a purchase price equal to ________________________ ($____) per share, the respective amount of Firm Shares set forth opposite such Underwriter's name in Schedule I hereto. The Underwriters will collectively purchase all of the Firm Shares if any are purchased. (b) On the basis of the representations and warranties herein contained, but subject to the terms and conditions herein set forth, the Company hereby grants an option to the Underwriters to purchase an aggregate of up to 412,500 Option Shares at the same purchase price as the Firm Shares for use solely in covering any overallotments made by the Underwriters in the sale and distribution of the Firm Shares. The option granted hereunder may be exercised at any time (but not more than once) within 30 days after the Effective Date (as defined in Section 4(a) hereof) upon notice (confirmed in writing) by the Representative to the Company setting forth the aggregate number of Option Shares as to which the Underwriters are exercising the option and the date on which certificates for such Option Shares are to be delivered. Option Shares shall be purchased severally for the account of each Underwriter in proportion to the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto. The option granted hereby may be canceled by the Representative upon notice to the Company as to the Option Shares for which the option is unexercised at any time prior to expiration of the 30-day period. (c) The Company will deliver the Firm Shares to the Representative at the offices of Briggs and Morgan, Professional Association, 2400 IDS Center, Minneapolis, Minnesota 55402, unless some other place is agreed upon, at 10:00 A.M., Minneapolis time, against payment of the purchase price at the same place, on the third full business day after trading of the Shares has commenced, or such earlier time as may be agreed upon by the Representative and the Company such time and place being herein referred to as the "First Closing Date." (d) The Company will deliver the Option Shares being purchased by the Underwriters to the Representative at the above-referenced offices of Briggs and Morgan, Professional Association, set forth in Section 2(c) above, unless some other place is agreed upon, at 10:00 A.M., Minneapolis time, against payment of the purchase price at the same place, on the date determined by the Representative which shall not be earlier than two nor later than three full business days after the exercise of the option as set forth in Section 2(b), or at such other time not later than ten full business days thereafter as may be agreed upon by the Representative and the Company, such time and date being herein referred to as the "Second Closing Date." (e) Certificates for the Shares to be delivered will be registered in such names and issued in such denominations as the Underwriters shall request at least two business days prior to the First Closing Date or the Second Closing Date, as the case may be. The certificates will be made available to the Underwriters in definitive form for the purpose of inspection and packaging at least 24 hours prior to each respective closing date. (f) Payment to the Company for the shares shall be made by wire transfer to an account designated by it or by certified or official bank check or check, payable in immediately available funds, payable to the order of the Company. (g) The Underwriters will make an offering of the Shares directly to the public (which may include selected dealers who are members in good standing of the NASD or foreign dealers not eligible for membership in the NASD but who have agreed to abide by the interpretation of the NASD's Board of Governor's with respect to free-riding and withholding) as soon as the Underwriters deem practicable after the Registration Statement becomes effective at the public offering price set forth in Section 2(a) above, subject to the terms and conditions of this Agreement and in accordance with the Prospectus. Concessions from the public offering price may be allowed selected dealers who are members of the NASD as the Underwriters determine and the Underwriters will furnish the Company with such information about the distribution arrangements as may be necessary for inclusion in the Registration Statement. It is understood that the public offering price and concessions may vary after the public offering. The Underwriters shall offer and sell the Shares only in jurisdictions in which the offering of Shares has been duly registered or qualified, or is exempt from registration or qualification, and shall take reasonable measures to effect compliance with applicable state securities laws. (h) It is understood that the Representative, individually and not as a Representative, may (but shall not be obligated to) make payment on behalf of any Underwriter or Underwriters for the Shares to be purchased by such Underwriter or Underwriters. No such payment by the Representative shall relieve such Underwriter or Underwriters from any of its or their other obligations hereunder. (i) On the First Closing Date, the Company shall issue and deliver to you the Representative's Warrant against payment by you of the purchase price therefor of $50. 3. Further Agreements of the Company. The Company hereby covenants and agrees with the Underwriters as follows: (a) The Company will use its best efforts to cause the Registration Statement and any subsequent amendments thereto to become effective as promptly as possible. It will notify you promptly, after the Company shall receive notice thereof, of the time when the Registration Statement, or any subsequent amendment thereto, has become effective or any supplement to the Prospectus has been filed. It will notify you promptly upon its obtaining knowledge of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the institution of any proceedings for that purpose and will use its best efforts to prevent the issuance of any stop order and, if a stop order is issued, to obtain as soon as possible the withdrawal or lifting thereof. The Company will promptly prepare and file at its own expense with the Commission any amendments of, or supplements to, the Registration Statement and the Prospectus which may be necessary in connection with the distribution of the Shares by the Underwriters. All arrangements for the printing of the Registration Statement, the Prospectus and any related offering materials shall be subject to your reasonable approval. During the period when a Prospectus relating to the Shares is required to be delivered under the Act, the Company will promptly file any amendments of, or supplements to, the Registration Statement and the Prospectus which may be necessary to correct any untrue statement of a material fact or any omission to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The Company will notify you promptly of any request by the Commission for any amendment of, or supplement to, the Registration Statement or the Prospectus or for any additional information. The Company will not file any amendment of, or supplement to, the Registration Statement or Prospectus, whether prior to or after the Effective Date, which shall not previously have been submitted to you and your counsel a reasonable time prior to the proposed filing or to which you shall have reasonably objected. (b) The Company will cooperate with the Representative and its counsel in connection with the registration or qualification of the Shares for sale under the securities laws of such jurisdictions as the Representative and the Company may mutually designate, and the Company will file such consents to service of process or other documents necessary or appropriate in order to effect such qualification or registration. In each jurisdiction in which the Shares shall have been qualified or registered as above provided, the Company will continue such qualifications or registrations in effect for so long as may be required for purposes of the distribution of the Shares and make and file such statements and reports in each year as are or may be reasonably required by the laws of such jurisdiction to permit secondary trading of the same; provided, however, that in no event shall the Company be obligated to qualify to do business in any jurisdiction where it is not now so qualified or to take any action which would subject it to the service of process in suits, other than those arising out of the offering or sale of the Shares, in any jurisdiction where it is not now so subject. (c) The Company will make generally available to its security holders an earnings statement (which need not be audited), in a form complying with Rule 158 under the 1933 Act, as soon as practicable and in any event not later than 45 days after the end of its fiscal quarter in which occurs the first anniversary date of the Effective Date, meeting the requirements of Section 11(a) of the 1933 Act covering a period of at least 12 consecutive months beginning after the Effective Date. (d) The Company will furnish to you, as soon as available, copies of the Registration Statement (one of which will be signed and which shall include all exhibits), each Preliminary Prospectus, the Prospectus and any amendments or supplements to such documents including any prospectus prepared to permit compliance with Section 10(a)(3) of the 1933 Act, all in such quantities as you may from time to time reasonably request. The Company specifically authorizes the Underwriters and all dealers to whom any of the Shares may be sold by the Underwriters to use and distribute copies of such Preliminary Prospectuses and Prospectuses in connection with the sale of the Shares as and to the extent permitted by the federal and applicable state securities laws. (e) For as long as the Company has more than 100 beneficial owners and is otherwise required to file periodic reports in compliance with the Securities Exchange Act of 1934, the Company will mail as soon as practicable to the holders of its Common Stock substantially all of the following documents, which documents shall be in compliance with this Section if they meet the requirements of Section 12 of the 1934 Act: (i) within forty-five days after the end of the first three quarters of each fiscal year, two copies of the quarterly unaudited statement of profit and loss and quarterly unaudited balance sheets of the Company and any material subsidiaries; and (ii) within ninety days after the close of each fiscal year, two copies of the Company's balance sheet and the related statements of operations, stockholders' equity and cash flows, together with notes to the financial statements and a report thereon by a nationally recognized firm of independent accountants. (f) During the five-year period commencing with the Effective Date and for as long as the Company has more than 100 beneficial owners, the Company will furnish to the Representative (i) concurrently with furnishing such reports to its stockholders, the reports described in Section 3(e) hereof, (ii) as soon as they are available, copies of all other reports (financial or otherwise) mailed to security holders; and (iii) as soon as they are available, copies of all reports and financial statements furnished to or filed by the Company with the Commission, the NASD, any securities exchange or any state securities commission or division. During such period, the foregoing financial statements shall be on a consolidated basis to the extent that the accounts of the Company and any subsidiary or subsidiaries are consolidated and shall be accompanied by similar financial statements for any significant subsidiary which is not so consolidated. (g) The Company will not, without the prior written consent of the Representative, sell or otherwise dispose of any capital stock of the Company (other than pursuant to currently outstanding options and warrants) within 180 days after the Effective Date. (h) Subject to the proviso set forth below, the Company shall be responsible for and pay all costs and expenses incident to the performance of its obligations under this Agreement including, without limiting the generality of the foregoing, (i) all costs and expenses in connection with the preparation, printing and filing of the Registration Statement (including financial statements and exhibits), Preliminary Prospectuses, the Prospectus and any amendments thereof or supplements to any of the foregoing; (ii) the issuance and delivery of the Shares, including taxes, if any; (iii) the cost of all certificates representing the Shares; (iv) the fees and expenses of the Transfer Agent for the Shares; (v) the fees and disbursements of counsel for the Company; (vi) all fees and other charges of the independent public accountants of the Company; (vii) the costs of furnishing and delivering to the Underwriters and dealers participating in the offering copies of the Registration Statement (including appropriate exhibits), Preliminary Prospectuses, the Prospectus and any amendments of, or supplements to, any of the foregoing; (viii) the NASD filing fee; (ix) all accountable fees and expenses of counsel for the Representative incurred in qualifying the Shares for sale under the laws of such jurisdictions upon which the Representative and the Company may agree (including filing fees); and (x) the accountable expenses, not to exceed $65,000, of the Representative including but not limited to fees and expenses of the Representative's counsel (excluding the fees and expenses described in (ix) above), costs and expenses of conducting a due diligence investigation of the Company and due diligence meetings, and tombstone advertisements. The Representative acknowledges receipt of a $15,000 advance against the $65,000 accountable expense allowance referred to in the preceding sentence. In the event this Agreement is terminated pursuant to Section 8 below, the Company shall remain obligated to pay the Representative its actual accountable out-of-pocket expenses, not to exceed $65,000, plus any fees and expenses described in (ix) above. (i) The Company will not take, and will use its best efforts to cause each of its officers and directors not to take, directly or indirectly, any action designed to or which might reasonably be expected to cause or result in the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares. (j) For a period of at least three years after the Effective Date, the Company will continue to file with the Commission all reports and other documents as may be required by Section 13 or 15(d) of the 1934 Act. (k) Upon completion of this offering, the Company will use its best efforts to maintain its quotation of the Common Stock in the NASDAQ National Market or any national securities exchange for a period of at least three years. (l) The Company will apply the net proceeds from the sale of the Shares to be sold by it substantially in the manner set forth under "Use of Proceeds" in the Prospectus. (m) The Company will prepare and file with the Commission reports on Form SR in accordance with the 1933 Act and the Rules and Regulations and will supply copies of the Form SR, and any amendments or supplements thereto, to the Representative and its counsel within five days of their filing with the Commission. (n) During the period ending 365 days from the Effective Date, the Company agrees that it will prior to the issuance of any press release affecting a material part of the Company's business, furnish copies thereof to you for your information, but not requiring your review or approval, before the time of the release. (o) Prior to or as of either Closing Date, the Company shall have performed each condition to closing required to be performed by the Company pursuant to Section 4 hereof. (p) The Company will furnish the Representative and its counsel, Briggs and Morgan, Professional Association, with all documents pertaining to the Company as either shall reasonably request, and the Company shall make available for consultation any person connected with the Company's business as the Representative or Briggs and Morgan, Professional Association, may reasonably deem necessary in furtherance of the Representative's due diligence examination of the Company. (q) The Company hereby grants the Representative the right to act as sole selling agent, managing underwriting, or financial representative for the Company in the event the Company proposes to engage an agent in order to execute (i) a private offering of its equity or debt securities, (ii) an underwritten public offering of its equity or debt securities, or (iii) a corporate transaction such as a recapitalization, a merger and/or an acquisition, for the completion of which the Company proposes to engage a financial representative to act on its behalf. If it is reasonably determined by the Representative and the Company that it would be in the best interest of the Company for there to be more than one selling agent, underwriter or financial representative, then the Representative shall cooperate with the Company in taking such actions as shall be reasonably appropriate to add such other selling agent, managing underwriter or financial representative in addition to the Representative, and the Representative will participate on no less than an equal basis with such selling agent, underwriter or financial representative to facilitate the successful completion of the private offering, underwritten public offering or other corporate transaction. The right of first refusal provided hereby shall expire upon the earlier to occur of (i) the closing of the Company's first registered, underwritten public offering of its common stock following completion of this offering, or (ii) three years after the date of this Underwriting Agreement. Notwithstanding anything else contained herein, the right of first refusal provided hereby shall not apply to sales of the Company's equity or debt securities to existing holders of the Company's equity or debt securities; provided, however, that no agent is used to facilitate such sales. 4. Conditions of the Underwriters' Obligations. The respective obligations of the Underwriters to purchase and pay for the Shares as provided herein shall be subject to the accuracy of the representations and warranties of the Company in the case of the Firm Shares as of the date hereof and the First Closing Date (as if made on and as of the First Closing Date), and in the case of the Option Shares, as of the date hereof and the Second Closing Date (as if made on and as of the Second Closing Date), to the performance by the Company of its obligations hereunder, and to the satisfaction of the following additional conditions on or before the First Closing Date in the case of the Firm Shares and on or before the Second Closing Date in the case of the Option Shares: (a) The Registration Statement shall have become effective not later than 5:00 P.M. Minneapolis time, on the first full business day following the date of this Agreement, or such later date as shall be consented to in writing by you (the "Effective Date"). No stop order suspending the effectiveness thereof shall have been issued and no proceeding for that purpose shall have been initiated or, to the knowledge of the Company or you, threatened by the Commission or any state securities commission or similar regulatory body. Any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to the reasonable satisfaction of the Underwriters and their legal counsel. (b) The Representative shall not have advised the Company that the Registration Statement or Prospectus, or any amendment thereof or supplement thereto, contains any untrue statement of a fact which is material or omits to state a fact which is material and is required to be stated therein or is necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading; provided, however, that this Section 4(b) shall not apply to statements in, or omissions from, the Registration Statement or Prospectus or any amendment thereof or supplement thereto, which are based upon and conform to written information furnished to the Company by any of the Underwriters specifically for use in the preparation of the Registration Statement or the Prospectus, or any such amendment or supplement. (c) Subsequent to the Effective Date, there shall not have occurred any change, or any development involving a prospective change, which materially and adversely affects the business or properties of the Company and which, in the reasonable opinion of the Representative, materially and adversely affects the market for the Shares. (d) The Representative shall have received the opinion of Dorsey & Whitney, LLP., counsel for the Company, dated as of such respective closing dates and reasonably satisfactory in form and substance to the Representative and its counsel, substantially to the effect that: (i) The Company (A) has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Minnesota, and (B) has the requisite corporate power to own, lease and operate its properties and conduct its businesses as described in the Prospectus. (ii) The number of authorized and the number of issued and outstanding shares of capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization," and all issued and outstanding capital stock of the Company has been duly authorized and is validly issued, fully paid and nonassessable. To the best knowledge of such counsel after due inquiry, the Company has not granted and is not required to grant any preemptive rights, contractual or otherwise, to securities holders of the Company with respect to the issuance or sale of the Shares by the Company pursuant to this Agreement. To the best knowledge of such counsel after due inquiry, no rights to require registration of shares of Common Stock or other securities of the Company because of the filing of the Registration Statement exist other than those which have been waived. The Shares, Representative's Warrant and Warrant Shares conform as to matters of law in all material respects to the description of these securities made in the Prospectus, and such description accurately sets forth the material legal provisions thereof required to be set forth in the Prospectus. (iii) The Company duly, properly and timely delivered notice to each shareholder of the Company which was entitled to receive such notice for the Company's special meeting of shareholders on April 4, 1996 in accordance with Minnesota law. Each action voted on at such special meeting was duly approved in accordance with Minnesota law. (iv) The Shares have been duly authorized and, upon delivery to the Underwriters against payment therefor, will be validly issued, fully paid and nonassessable. (v) The certificates evidencing the Shares comply as to form with the applicable provisions of the laws of the State of Minnesota. (vi) The Representative's Warrant has been duly authorized, executed and delivered by the Company and is the valid and binding obligation of the Company, enforceable in accordance with its terms, except as enforceability may be limited by the application of bankruptcy, insolvency, moratorium or other laws of general application affecting the rights of creditors generally and by judicial limitations on the right of specific performance and other equitable remedies, and except as the enforceability of indemnification or contribution provisions hereof may be limited by federal or state securities laws. The Warrant Shares when issued in accordance with the terms of this Agreement and pursuant to the Representative's Warrant, will be validly issued, fully paid, nonassessable and subject to no preemptive rights granted or required to be granted by the Company or similar rights on the part of any person or entity. A sufficient number of shares of Common Stock has been reserved for issuance upon exercise of the Representative's Warrant. (vii) The Registration Statement has become effective under the 1933 Act and, to the best knowledge of such counsel after due inquiry, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or contemplated under the 1933 Act. (viii) There are no (A) material legal or governmental proceedings or (B) material statutes, agreements, contracts, leases, or other documents of a character required by the 1933 Act and the Rules and Regulations to be described or referred to in the Registration Statement or Prospectus or to be filed as an exhibit to the Registration Statement that are not described or referred to therein or filed as required. (ix) To the best of such counsel's knowledge after due inquiry, the Company has not received any notice of conflict with the asserted rights of others in respect of any patents, trademarks, service marks, trade names, trademark registrations, service mark registrations, copyrights, licenses, or other intellectual property or similar rights, nor of any threatened actions with respect thereto, which, if determined adversely to the Company, would individually or in the aggregate have a material adverse effect on the general affairs, financial position, net worth or results of operations of the Company. (x) To the best of such counsel's knowledge after due inquiry, there are no legal, governmental or administrative proceedings pending or threatened against the Company that relate to patents, trademarks, copyrights or other intellectual property. (xi) No authorization, approval or consent of any governmental authority or agency is necessary in connection with the issuance and sale of the Shares as contemplated under this Agreement, except as have been obtained or may be required under the 1933 Act or under state or other securities laws in connection with the purchase and distribution of the Shares by the Underwriters. (xii) The Registration Statement and the Prospectus and any amendments thereof or supplements thereto (other than the financial statements and supporting financial and statistical data included or incorporated therein, as to which such counsel need express no opinion) comply as to form in all material respects with the requirements of the 1933 Act and the Rules and Regulations, and the conditions for use of a registration statement on Form S-1 for the distribution of the Shares have been satisfied with respect to the Company. (xiii) This Agreement has been duly authorized by all requisite corporate action, executed and delivered by, and is a valid and binding agreement of the Company, enforceable in accordance with its terms, except as enforceability may be limited by the application of bankruptcy, insolvency, moratorium or similar laws affecting the rights of creditors generally and judicial limitations on the right of specific performance and except as the enforceability of indemnification or contribution provisions hereof may be limited by action of a court interpreting or applying federal or state securities laws or equitable principles. (xiv) The performance of this Agreement and the consummation of the transactions described herein will not result in a violation of or default under, its Amended and Restated Certificate of Incorporation, as amended, or Amended Bylaws. The performance of this Agreement and the consummation of the transactions described herein will not result in a violation of, or a default under, the terms or provisions of (i) any material bond, debenture, note, contract, lease, license, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument to which the Company is a party or by which the Company or any of its properties is bound, or (ii) any law, rule or regulation of the United States or the State of Delaware (other than federal or state securities laws), or any order, or writ, injunction, or decree applicable to the Company known to such counsel of any government, governmental agency or court having jurisdiction over the Company or any of its properties, which violation or default would have a material adverse effect on the business of the Company. (xvi) To the best of such counsel's knowledge after due inquiry, there are no defects in title or leasehold interests, or any liens, encumbrances, equities, charges or claims not disclosed in the Prospectus which would materially affect the present occupancy or use of any of the real or personal property owned or leased by the Company. (xvii) The statements under the captions "Management - Stock Option Plan," "Management - Limitation on Liability and Indemnification Matters," "Certain Transactions," "Description of Capital Stock," "Description of the Term Loan and Certain Other Outstanding Indebtedness" and "Shares Eligible for Future Sale" in the Prospectus, insofar as such statements constitute a summary of documents referred to therein or matters of law, are accurate summaries and fairly and correctly present the information called for with respect to such documents and matters. In expressing the foregoing opinion, as to matters of fact relevant to conclusions of law, counsel may rely, to the extent that they deem proper, upon certificates of public officials and of the officers of the Company. In addition to the matters set forth above, such opinion shall also include a statement to the effect that, although such counsel cannot guarantee the accuracy, completeness or fairness of any of the statements contained in the Registration Statement or Prospectus, in connection with such counsel's representation, investigation and due inquiry of the Company in the preparation of the Registration Statement, nothing has come to the attention of such counsel which causes them to believe that the Registration Statement or Prospectus (except as to the financial and statistical information mentioned in the preceding clause) contains an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading; provided, however, that such opinion of counsel does not require any statement concerning statements in, or omissions from, the Registration Statement or Prospectus or any amendment thereof or supplement thereto, which are based upon and conform to information furnished to the Company by any of the Underwriters in writing specifically for use in the preparation of the Registration Statement or the Prospectus or any such amendment or supplement. (e) The Representative shall have received from Briggs and Morgan, Professional Association, its counsel, such opinion or opinions as the Representative may reasonably require, dated as of each closing date and satisfactory in form and substance to the Representative, with respect to the sufficiency of corporate proceedings and other legal matters relating to this Agreement and the transactions contemplated hereby, and the Company shall have furnished to said counsel such documents as they may have reasonably requested for the purpose of enabling them to pass upon such matters. In connection with such opinion, as to matters of fact relevant to conclusions of law, such counsel may rely, to the extent that they deem proper, upon representations or certificates of public officials and of responsible officers of the Company. (f) The Representative and the Company shall have received letters, dated the date hereof and as of each closing date, from KPMG Peat Marwick LLP, independent public accountants, substantially in the form set forth in Appendix A hereto. (g) The Representative shall have received from the Company a certificate, dated as of each closing date, signed by the principal executive officer and the principal financial or accounting officer of the Company to the effect that: (i) The representations and warranties of the Company in this Agreement are true and correct as if made on and as of each closing date. The Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at, or prior to, such date. (ii) No stop order suspending the effectiveness of the Registration Statement has been issued, and no proceeding for that purpose has been instituted or to the best knowledge of such officers is pending or contemplated under the 1933 Act. (iii) Neither the Registration Statement nor the Prospectus nor any amendment thereof or supplement thereto included any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, and, since the effective date of the Registration Statement, there has occurred no event required to be set forth in an amended or supplemented prospectus which has not been so set forth; provided, however, that such certificate does not require any representation concerning statements in, or omissions from, the Registration Statement or Prospectus or any amendment thereof or supplement thereto, which are based upon and conform to written information furnished to the Company by any of the Underwriters specifically for use in the preparation of the Registration Statement or the Prospectus or any such amendment or supplement. (iv) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus and except as contemplated or referred to in the Prospectus, the Company has not incurred any direct or contingent liabilities or obligations material to the Company, or entered into any material transactions, except liabilities, obligations or transactions in the ordinary course of business, and there has not been any change in the capital stock, short-term debt, or long-term debt of the Company, any material adverse change in the financial position, net worth or results of operations of the Company or declaration or payment of any dividend by the Company. (v) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, the Company has not sustained any material loss of, or damage to, its properties, whether or not insured. (vi) Except as is otherwise expressly stated in the Registration Statement and Prospectus there are no material actions, suits or proceedings pending before any court or governmental agency, authority or body, or, to the best of such officers' knowledge, threatened, to which the Company is a party or of which the business or property of the Company is the subject. (h) The Representative shall have received, dated as of each closing date, from the Secretary of the Company a certificate of incumbency certifying the names, titles and signatures of the officers authorized to execute the resolutions of the Board of Directors of the Company authorizing and approving the execution, delivery and performance of this Agreement, a copy of such resolutions to be attached to such certificate, certifying such resolutions and certifying that the Amended and Restated Certificate of Incorporation of the Company and the Amended Bylaws of the Company have been validly adopted and have not been amended or modified, except as described in the Prospectus. (i) Except as disclosed by the Company in writing to the Representative, the Representative shall have received a written agreement from each of the officers, directors and stockholders who beneficially own __________or more shares of the outstanding Common Stock of the Company, that for 360 days following the Effective Date, such person will not, without the Representative's prior written consent, sell, transfer or otherwise dispose of, or agree to sell, transfer or otherwise dispose of, other than by gift to donees who agree to be bound by the same restriction or by will or the laws of descent, any of his or her Common Stock, or any options, warrants or rights to purchase Common Stock or any shares of Common Stock received upon exercise of any options, warrants or rights to purchase Common Stock, all of which are beneficially held by such persons during the 360-day period except pursuant to the terms of such written agreement. (k) The Company's Common Stock shall have been approved for quotation on the NASDAQ National Market. (l) The Company shall have furnished to the Underwriters, dated as of the date of each closing date, such further certificates and documents as the Representative shall have reasonably required. (m) All such opinions, certificates, letters and documents will be in compliance with the provisions hereof only if they are reasonably satisfactory to the Representative and its legal counsel. All statements contained in any certificate, letter or other document delivered pursuant hereto by, or on behalf of, the Company shall be deemed to constitute representations and warranties of the Company. (n) The Representative may waive in writing the performance of any one or more of the conditions specified in this Section 4 or extend the time for their performance. (o) If any of the conditions specified in this Section 4 shall not have been fulfilled when and as required by this Agreement to be fulfilled, this Agreement and all obligations of the Underwriters hereunder may be canceled at, or at any time prior to, each closing date by the Representative. Any such cancellation shall be without liability of the Underwriters to the Company or to any other party, and shall not relieve the Company of its obligations under Section 3(h) hereof. Notice of such cancellation shall be given to the Company at the address specified in Section 11 hereof in writing, or by facsimile or telephone and confirmed in writing. 5. Representative's Warrant. On the First Closing Date, the Company shall sell to you for $50 the Representative's Warrant, which shall first become exercisable one year after the Effective Date and shall remain exercisable for a period of four years thereafter. The Representative's Warrant shall be subject to certain transfer restrictions and shall be in substantially the form filed as an exhibit to the Registration Statement and attached as Appendix B hereto. 6. Indemnification. (a) The Company agrees to indemnify and hold harmless each Underwriter, and each person, if any, who controls any Underwriter within the meaning of Section 15 of the 1933 Act against any losses, claims, damages or liabilities, joint or several, to which such Underwriter, or each such controlling person may become subject, under the 1933 Act, the 1934 Act, the common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof arise out of, or are based upon, (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, or the omission or alleged omission to state in the Registration Statement or any amendment thereof a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (ii) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus if used prior to the Effective Date of the Registration Statement or in the Prospectus (as amended or as supplemented, if the Company shall have filed with the Commission any amendment thereof or supplement thereto), or the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; or (iii) any untrue statement or alleged untrue statement of a material fact contained in any application or other statement executed by the Company or based upon written information furnished by the Company filed in any jurisdiction in order to qualify the Shares under, or exempt the Shares or the sale thereof from qualification under, the securities laws of such jurisdiction, or the omission or alleged omission to state in such application or statement a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and the Company will reimburse each Underwriter, and each such controlling person for any legal or other expenses reasonably incurred by such Underwriter or controlling person in connection with investigating or defending against any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of, or is based upon, an untrue statement, or alleged untrue statement, omission or alleged omission, made in reliance upon and in conformity with information furnished to the Company by, or on behalf of, any Underwriter in writing specifically for use in the preparation of the Registration Statement or any such post effective amendment thereof, any such Preliminary Prospectus or the Prospectus or any such amendment thereof or supplement thereto; and provided further that the foregoing indemnity agreement is subject to the condition that, insofar as it relates to any untrue statement, alleged untrue statement, omission or alleged omission made in any Preliminary Prospectus but eliminated or remedied in the Prospectus, such indemnity agreement shall not inure to the benefit of any Underwriter (or to the benefit of any person who controls such Underwriter), if the person asserting any loss, claim, damage or liability purchased the Shares from such Underwriter which are the subject thereof, was not sent or given a copy of the Prospectus with, or prior to, the written confirmation of the sale of such Shares to such person. This indemnity agreement is in addition to any liability which the Company may otherwise have. (b) Each Underwriter severally, but not jointly, agrees to indemnify and hold harmless the Company, each of the Company's directors, each of the Company's officers who has signed the Registration Statement, and each person who controls the Company within the meaning of Section 15 of the 1933 Act against any losses, claims, damages or liabilities to which any of the Company or any such director, officer, or controlling person may become subject, under the 1933 Act, the 1934 Act, the common law, or otherwise, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of, or are based upon, (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, or the omission or alleged omission to state in the Registration Statement or any amendment thereof, a material fact required to be stated therein or necessary to make the statements therein not misleading; (ii) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus if used prior to the Effective Date of the Registration Statement or in the Prospectus (as amended or as supplemented, if the Company shall have filed with the Commission any amendment thereof or supplement thereto), or the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; or (iii) any untrue statement or alleged untrue statement of a material fact contained in any application or other statement executed by the Company or by any Underwriter and filed in any jurisdiction in order to qualify the Shares under, or exempt the Shares or the sale thereof from qualification under, the securities laws of such jurisdiction, or the omission or alleged omission to state in such application or statement a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; in each of the above cases to the extent, but only the extent, that such untrue statement, alleged untrue statement, omission or alleged omission, was made in reliance upon and in conformity with information furnished to the Company by, or on behalf of, any Underwriter in writing specifically for use in the preparation of the Registration Statement or any such post-effective amendment thereof, any such Preliminary Prospectus or the Prospectus or any such amendment thereof or supplement thereto, or in any application or other statement executed by the Company or by any Underwriter and filed in any jurisdiction; and each Underwriter will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer or controlling person in connection with investigating or defending against any such loss, claim, damage, liability or action. This indemnity agreement is in addition to any liability which the Underwriters may otherwise have. (c) Promptly after receipt by an indemnified party under this Section 6 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 6, notify in writing the indemnifying party of the commencement thereof. The omission to so notify the indemnifying party will not relieve it from any liability under this Section 6 as to the particular item for which indemnification is then being sought, unless such omission so to notify prejudices the indemnifying party's ability to defend such action. In case any such action is brought against any indemnified party and the indemnified party notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel who shall be reasonably satisfactory to such indemnified party; and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section 6 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation; provided, however, that if, in the reasonable judgment of the indemnified party, it is advisable for such parties and controlling persons to be represented by separate counsel, any indemnified party shall have the right to employ separate counsel to represent it and all other parties and their controlling persons who may be subject to liability arising out of any claim in respect of which indemnity may be sought by the Underwriters against the Company or by the Company against the Underwriters hereunder, in which event the fees and expenses of one firm of such separate counsel shall be borne by the indemnifying party. Any such indemnifying party shall not be liable to any such indemnified party on account of any settlement of any claim or action effected without the consent of such indemnifying party. 7. Contribution. (a) If the indemnification provided for in Section 6 is unavailable under applicable law to any indemnified party in respect of any losses, claims, damages or liabilities referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Underwriters from the offering of the Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the parties in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The Company and the Underwriters agree that contribution determined by per capita allocation (even if the Underwriters were considered a single person) would not be equitable. The respective relative benefits received by the Company on the one hand, and the Underwriters, on the other hand, shall be deemed to be in the same proportion (A) in the case of the Company as the total price paid to it for the Shares by the Underwriters (net of underwriting discount received but before deducting expenses) bears to the aggregate public offering price of the Shares, and (B) in the case of the Underwriters, as the aggregate underwriting discount received by them bears to the aggregate public offering price of the Shares, in each case as reflected in the Prospectus. The relative fault of the parties shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the parties and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages and liabilities referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. Notwithstanding the provisions of this Section 7, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of any untrue or alleged untrue statement or omission or alleged omission in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto. The Underwriters' obligation to contribute pursuant to this section are several and not joint. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 7, each person who controls an Underwriter within the meaning of the 1933 Act or the 1934 Act shall have the same rights to contribution as such Underwriter, each person who controls the Company within the meaning of the 1933 Act or the 1934 Act shall have the same rights to contribution as the Company and each officer of the Company who shall have signed the Registration Statement and each director of the Company shall have the same rights to contribution as the Company. (b) Promptly after receipt by a party to this Agreement of notice of the commencement of any action, suit, or proceeding, such person will, if a claim for contribution in respect thereof is to be made against another party (the "Contributing Party"), notify the Contributing Party of the commencement thereof, but the omission so to notify the Contributing Party will not relieve the Contributing Party from any liability which it may have to any party other than under this Section 7, unless such omission so to notify prejudices the Contributing Party's ability to defend such action. Any notice given pursuant to Section 6 hereof shall be deemed to be like notice hereunder. In case any such action, suit or proceeding is brought against any party, and such person notifies a Contributing Party of the commencement thereof, the Contributing Party will be entitled to participate therein with the notifying party and any other Contributing Party similarly notified. 8. Effective Date of This Agreement and Termination. (a) This Underwriting Agreement shall become effective at 10:00 a.m., Minneapolis time, on the first full business day following the earlier of the Effective Date or the day upon which this Agreement shall have been executed by the Representative, or such earlier time after the Effective Date and the execution of this Agreement as the Underwriters release Shares to the public. By giving notice as hereinafter specified before the time this Underwriting Agreement becomes effective, either the Representative, by notifying the Company, or the Company, by notifying the Representative, may prevent this Underwriting Agreement from becoming effective but the giving of such notice shall not affect the obligations of the Company under Section 3(h) hereof. (b) Until the First Closing Date, this Agreement may be terminated by the Representative, at its option, by giving notice to the Company, if (i) the Company shall have sustained a loss by fire, flood, accident or other calamity which is material with respect to the business of the Company; the Company has become a party to material litigation not disclosed in the Registration Statement or the Prospectus; or the business or financial condition of the Company has become the subject of any material litigation not disclosed in the Registration Statement or the Prospectus, or there shall have been, since the respective dates as of which information is given in the Registration Statement or the Prospectus any material adverse change in the general affairs, business, key personnel, capitalization, financial position or net worth of the Company, whether or not arising in the ordinary course of business, which loss or change, in the reasonable judgment of the Representative, shall render it inadvisable to proceed with the delivery of the Shares, whether or not such loss shall have been insured; (ii) trading in securities generally on the New York Stock Exchange, American Stock Exchange or the over-the-counter market shall have been suspended or minimum prices shall have been established by the Commission or by such exchange; (iii) a general banking moratorium shall have been declared; (iv) there shall have been such a material adverse change in general economic, monetary, political or financial conditions, or the effect of international conditions on the financial markets in the United States shall be such as, in the judgment of the Representative, makes it inadvisable to proceed with the delivery of the Shares; (v) the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of any court or other governmental authority, which in the judgment of the Representative materially and adversely affects or will materially and adversely affect the business or operations of the Company; (vi) there shall be a material outbreak of hostilities or material escalation and deterioration in the political and military situation between the United States and any foreign power or a formal declaration of war by the United States of America shall have occurred. Any such termination shall be without liability of any party to any other party, except as provided in Sections 6 and 7 hereof; provided, however, that the Company shall remain obligated to pay costs and expenses to the extent provided in Section 3(h) hereof. (c) If the Representative elects to prevent this Agreement from becoming effective or to terminate this Agreement as provided in this Section 8, it shall notify the Company promptly by telegram or telephone, confirmed by letter sent to the address specified in Section 11 hereof. If the Company shall elect to prevent this Agreement from becoming effective, it shall notify the Representative promptly by telegram or telephone, confirmed by letter sent to the address specified in Section 11 hereof. 9. Default of Underwriter. If any Underwriter or Underwriters default in their obligation to purchase the Firm Shares hereunder and the aggregate amount of Firm Shares which such defaulting Underwriter or Underwriters agreed but failed to purchase does not exceed 10% of the total amount of Firm Shares, the other Underwriters shall be obligated, severally, in proportion to their respective commitments hereunder, to purchase the Firm Shares which such defaulting Underwriter or Underwriters agreed but failed to purchase. If any Underwriter or Underwriters so defaults and the aggregate amount of Firm Shares with respect to which such default or defaults occur is more than 10% of the total number of Firm Shares and arrangements satisfactory to the Representative and the Company for purchase of such Firm Shares by other persons (who may include one or more of the nondefaulting Underwriters, including the Representative) are not made within 72 hours after such default, this Agreement will terminate without liability on the part of any nondefaulting Underwriter or the Company except for the provisions of Sections 6 and 7 hereof. In such case as a default of an Underwriter occurs but the Agreement is not terminated because a substitute Underwriter is found, either you or the Company shall have the right to postpone the Closing Date, but in no event for more than seven days, in order that the required changes, if any, in the Registration Statement and the Prospectus or any other documents or arrangements may be effected. Nothing herein shall relieve a defaulting Underwriter from liability for its default. 10. Survival of Indemnities, Contribution Agreements, Warranties and Representations. The respective indemnity and contribution agreements of the Company, and the Underwriters contained in Sections 6 and 7, respectively, the representations and warranties of the Company set forth in Section 1 hereof and the covenants of the Company set forth in Section 3 hereof shall remain operative and in full force and effect, regardless of any investigation made by, or on behalf of, the Underwriters, the Company, any of its officers and directors or any controlling person referred to in Sections 6 and 7 and shall survive the delivery of and payment for the Shares. The aforesaid indemnity and contribution agreements shall also survive any termination or cancellation of this Agreement. Any successor of any party or of any such controlling person, or any legal representative of such controlling person, as the case may be, shall be entitled to the benefit of the respective indemnity and contribution agreements. 11. Notices. All notices or communications hereunder, except as herein otherwise specifically provided, shall be in writing and, if sent to the Representative or any of the Underwriters, shall be mailed, delivered, or telecopied and confirmed, to John G. Kinnard and Company, Incorporated, Kinnard Financial Center, 920 Second Avenue South, Minneapolis, Minnesota 55402, Attention: Joseph A. Radecki, with a copy to William T. Dolan, Esq., Briggs and Morgan, Professional Association, 2400 IDS Center, Minneapolis, Minnesota 55402; if sent to the Company, shall be mailed, delivered, or telegraphed, and confirmed, to Pallet Recycling Associates of North America, Inc., 2665 Long Lake Road, Roseville, Minnesota 55113, Attention: Jeffery E. Otto, Chairman and CEO, with a copy to Kenneth L. Cutter, Esq., Dorsey & Whitney LLP, Pillsbury Center South, 220 South Sixth Street, Minneapolis, Minnesota 55402-1498. 12. Information Furnished by the Underwriter. The statements relating to the stabilization activities of the Underwriters and the statements under the caption "Underwriting" in any Preliminary Prospectus and in the Prospectus constitute the information furnished by, or on behalf of, the Underwriters in writing specifically for use with reference to the Underwriters referred to in Section 1(b) and Section 6 hereof. 13. Parties. This Agreement shall inure to the benefit of and be binding upon the Underwriters and the Company, their respective successors and assigns and the officers, directors and controlling persons referred to in Sections 6 and 7. Nothing expressed in this Agreement is intended or shall be construed to give any person or corporation, other than the parties hereto, their respective successors and assigns and the controlling persons, officers and directors referred to in Sections 6 and 7 any legal or equitable right, remedy or claim under, or in respect of, this Agreement or any provision herein contained, this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of the parties hereto and their respective executors, administrators, successors, assigns and such controlling persons, officers and directors, and for the benefit of no other person or corporation. No purchaser of any Shares from the Underwriters shall be construed a successor or assign merely by reason of such purchase. 14. Governing Law. This Agreement shall be construed and enforced in accordance with the laws of the State of Minnesota. If the foregoing is in accordance with your understanding of our agreement, kindly sign and return to us the enclosed counterpart of this Agreement, whereupon it will become a binding agreement between the Company and each of the Underwriters in accordance with its terms. Very truly yours, PALLET RECYCLING ASSOCIATES OF NORTH AMERICA, INC. By _____________________________________ Its _________________________________ The foregoing Underwriting Agreement is hereby confirmed and accepted by the undersigned for itself and as Representative of the Underwriters referred to in the foregoing Agreement as of the date first above written. JOHN G. KINNARD AND COMPANY, INCORPORATED By _____________________________ Its__________________________ SCHEDULE I NAME OF UNDERWRITER NUMBER OF FIRM SHARES John G. Kinnard and Company, Incorporated APPENDIX A FORM OF COMFORT LETTER OF KPMG PEAT MARWICK LLP (1) They are independent public accountants with respect to the Company within the meaning of the Securities Act of 1933, as amended (the "1933 Act"). (2) In their opinion, the financial statements of the Company included in the Registration Statement which are stated therein to have been examined by them conform in all material respects with generally accepted accounting principles. (3) They have carried out specified procedures, which have been agreed to by the Underwriters, with respect to certain information in the Prospectus specified by the Underwriters, and on the basis of such procedures, they have found such information to be in agreement with the accounting records of the Company or with material derived from such records. APPENDIX B WARRANT TO PURCHASE 275,000 SHARES OF COMMON STOCK OF PALLET RECYCLING ASSOCIATES OF NORTH AMERICA, INC. THIS CERTIFIES THAT, for good and valuable consideration, John G. Kinnard and Company, Incorporated (the "Underwriter"), or its registered assigns, is entitled to subscribe for and purchase from Pallet Recycling Associates of North America, Inc., a Minnesota corporation (the "Company"), at any time after ____________, 1997 (one year after Effective Date as defined in the Underwriting Agreement), up to and including ____________, 2001, Two Hundred Seventy-Five Thousand (275,000) fully paid and nonassessable shares of the Common Stock of the Company at the price of $_____ per share (the "Warrant Exercise Price"), subject to the antidilution provisions, and to the provisions of Section 10, of this Warrant. Reference is made to this Warrant in the Underwriting Agreement dated ____________, 1996, by and between the Company and the Underwriter. The shares which may be acquired upon exercise of this Warrant are referred to herein as the "Warrant Shares." As used herein, the term "Holder" means the Underwriter, any party who acquires all or a part of this Warrant as a registered transferee of the Underwriter, or any record holder or holders of the Warrant Shares issued upon exercise, whether in whole or in part, of the Warrant; the term "Common Stock" means and includes the Company's presently authorized common stock, $.01 par value, and shall also include any capital stock of any class of the Company hereafter authorized which shall not be limited to a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends or in the distribution of assets upon the voluntary or involuntary liquidation, dissolution, or winding up of the Company; and the term "Convertible Securities" means any stock or other securities convertible into, or exchangeable for, Common Stock. This Warrant is subject to the following provisions, terms and conditions: 1. Exercise: Transferability. (a) Subject to the provisions of Section 3 hereof, the rights represented by this Warrant may be exercised by the Holder hereof, in whole or in part (but not as to a fractional share of Common Stock), by written notice of exercise (in the form attached hereto) delivered to the Company at the principal office of the Company prior to the expiration of this Warrant and accompanied or preceded by the surrender of this Warrant along with a check in payment of the Warrant Exercise Price for such shares. (b) For a period of one year from the Effective Date, this Warrant may not be sold, assigned, hypothecated, or otherwise transferred, other than by will or pursuant to the operation of law, except to a person who is a stockholder and an officer of the Underwriter. Further, for a period of one year from the Effective Date, this Warrant may not be sold, transferred, assigned, hypothecated or divided into two or more Warrants of smaller denominations, nor may any Warrant shares issued pursuant to exercise of this Warrant be transferred, except as provided in Section 7 hereof. 2. Exchange and Replacement. Subject to Sections 1 and 7 hereof, this Warrant is exchangeable upon the surrender hereof by the Holder to the Company at its office for new Warrants of like tenor and date representing in the aggregate the right to purchase the number of Warrant Shares purchasable hereunder, each of such new Warrants to represent the right to purchase such number of Warrant Shares (not to exceed the aggregate total number purchasable hereunder) as shall be designated by the Holder at the time of such surrender. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction, or mutilation of this Warrant, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and upon surrender and cancellation of this Warrant, if mutilated, the Company will make and deliver a new Warrant of like tenor, in lieu of this Warrant; provided, however, that if the Underwriter shall be such Holder, an agreement of indemnity by such Holder shall be sufficient for all purposes of this Section 2. This Warrant shall be promptly canceled by the Company upon the surrender hereof in connection with any exchange or replacement. The Company shall pay all expenses, taxes (other than stock transfer taxes), and other charges payable in connection with the preparation, execution, and delivery of Warrants pursuant to this Section 2. 3. Issuance of the Warrant Shares. (a) The Company agrees that the shares of Common Stock purchased hereby shall be and are deemed to be issued to the Holder as of the close of business on the date on which this Warrant shall have been surrendered and the payment made for such Warrant Shares as aforesaid. Subject to the provisions of the next section, certificates for the Warrant Shares so purchased shall be delivered to the Holder within a reasonable time, not exceeding fifteen (15) days after the rights represented by this Warrant shall have been so exercised, and, unless this Warrant has expired, a new Warrant representing the right to purchase the number of Warrant Shares, if any, with respect to which this Warrant shall not then have been exercised shall also be delivered to the Holder within such time. (b) Notwithstanding the foregoing, however, the Company shall not be required to deliver any certificate for Warrant Shares upon exercise of this Warrant except in accordance with registrations under applicable securities laws or an opinion of counsel reasonably acceptable to it to the effect that an exemption from the applicable securities registration requirements is available. Nothing herein, however, shall obligate the Company to effect registration under federal or state securities laws, except as provided in Section 9. If registration is not in effect and if the Company has not received an opinion of counsel reasonably acceptable to it to the effect that an exemption is available when the Holder seeks to exercise the Warrant, the Warrant exercise period will be extended, if need be, to prevent the Warrant from expiring, until such time as either registration becomes effective or the Company has received an opinion of counsel reasonably acceptable to it to the effect that an exemption is available, and the Warrant shall then remain exercisable for a period of at least 45 calendar days from the date the Company delivers to the Holder written notice of the availability of such registration or exemption. The Holder agrees to execute such documents and make such representations, warranties, and agreements as may be required solely to comply with the exemptions relied upon by the Company, or the registrations made, for the issuance of the Warrant Shares. 4. Covenants of the Company. The Company covenants and agrees that all Warrant Shares will, upon issuance, be duly authorized and issued, fully paid, nonassessable, and free from all taxes, liens, and charges with respect to the issue thereof. The Company further covenants and agrees that during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized and reserved for the purpose of issue or transfer upon exercise of the subscription rights evidenced by this Warrant a sufficient number of shares of Common Stock to provide for the exercise of the rights represented by this Warrant. 5. Antidilution Adjustments. The provisions of this Warrant are subject to adjustment as provided in this Section 5. (a) The Warrant Exercise Price shall be adjusted from time to time such that in case the Company shall hereafter: (i) pay any dividends on any class of stock of the Company payable in Common Stock or securities convertible into Common Stock; (ii) subdivide its then outstanding shares of Common Stock into a greater number of shares; or (iii) combine outstanding shares of Common Stock, by reclassification or otherwise; then, in any such event, the Warrant Exercise Price in effect immediately prior to such event shall (until adjusted again pursuant hereto) be adjusted immediately after such event to a price (calculated to the nearest full cent) determined by dividing (a) the total number of shares of Common Stock outstanding immediately prior to such event (including the maximum number of shares of Common Stock issuable in respect of any securities convertible into Common Stock), multiplied by the then existing Warrant Exercise Price, by (b) the total number of shares of Common Stock outstanding immediately after such event (including the maximum number of shares of Common Stock issuable in respect of any securities convertible into Common Stock), and the resulting quotient shall be the adjusted Warrant Exercise Price per share. An adjustment made pursuant to this subsection shall become effective immediately after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification. If, as a result of an adjustment made pursuant to this subsection, the Holder of any Warrant thereafter surrendered for exercise shall become entitled to receive shares of two or more classes of capital stock or shares of Common Stock and other capital stock of the Company, the Board of Directors (whose determination shall be conclusive) shall determine the allocation of the adjusted Warrant Exercise Price between or among shares of such classes of capital stock or shares of Common Stock and other capital stock. All calculations under this subsection shall be made to the nearest cent or to the nearest 1/100 of a share, as the case may be. In the event that at any time as a result of an adjustment made pursuant to this subsection, the holder of any Warrant thereafter surrendered for exercise shall become entitled to receive any shares of the Company other than shares of Common Stock, thereafter the Warrant Exercise Price of such other shares so receivable upon exercise of any Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to Common Stock contained in this Section. (b) Upon each adjustment of the Warrant Exercise Price pursuant to Section 5(a) above, the Holder of each Warrant shall thereafter (until another such adjustment) be entitled to purchase at the adjusted Warrant Exercise Price the number of shares, calculated to the nearest full share, obtained by multiplying the number of shares specified in such Warrant (as adjusted as a result of all adjustments in the Warrant Exercise Price in effect prior to such adjustment) by the Warrant Exercise Price in effect prior to such adjustment and dividing the product so obtained by the adjusted Warrant Exercise Price. (c) In case of any consolidation or merger to which the Company is a party other than a merger or consolidation in which the Company is the continuing corporation, or in case of any sale or conveyance to another corporation of the property of the Company as an entirety or substantially as an entirety, or in the case of any statutory exchange of securities with another corporation (including any exchange effected in connection with a merger of a third corporation into the Company), there shall be no adjustment under subsection (a) of this Section above but the Holder of each Warrant then outstanding shall have the right thereafter to convert such Warrant into the kind and amount of shares of stock and other securities and property which he, she or it would have owned or have been entitled to receive immediately after such consolidation, merger, statutory exchange, sale, or conveyance had such Warrant been converted immediately prior to the effective date of such consolidation, merger, statutory exchange, sale, or conveyance and in any such case, if necessary, appropriate adjustment shall be made in the application of the provisions set forth in this Section with respect to the rights and interests thereafter of any Holders of the Warrant, to the end that the provisions set forth in this Section shall thereafter correspondingly be made applicable, as nearly as may reasonably be, in relation to any shares of stock and other securities and property thereafter deliverable on the exercise of the Warrant. The provisions of this subsection shall similarly apply to successive consolidations, mergers, statutory exchanges, sales or conveyances. (d) Upon any adjustment of the Warrant Exercise Price, then and in each such case, the Company shall give written notice thereof, by first-class mail, postage prepaid, addressed to the Holder as shown on the books of the Company, which notice shall state the Warrant Exercise Price resulting from such adjustment and the increase or decrease, if any, in the number of shares of Common Stock purchasable at such price upon the exercise of this Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. 6. No Voting Rights. This Warrant shall not entitle the Holder to any voting rights or other rights as a stockholder of the Company. 7. Notice of Transfer of Warrant or Resale of the Warrant Shares. (a) Subject to the sale, assignment, hypothecation, or other transfer restrictions set forth in Section 1 hereof, the Holder, by acceptance hereof, agrees to give written notice to the Company before transferring this Warrant or transferring any Warrant Shares of such Holder's intention to do so, describing briefly the manner of any proposed transfer. Promptly upon receiving such written notice, the Company shall present copies thereof to the Company's counsel and to counsel to the original purchaser of this Warrant. If in the opinion of each such counsel the proposed transfer may be effected without registration or qualification (under any federal or state securities laws), the Company, as promptly as practicable, shall notify the Holder of such opinion, whereupon the Holder shall be entitled to transfer this Warrant or to dispose of Warrant Shares received upon the previous exercise of this Warrant, all in accordance with the terms of the notice delivered by the Holder to the Company; provided that an appropriate legend may be endorsed on this Warrant or the certificates for such Warrant Shares respecting restrictions upon transfer thereof necessary or advisable in the opinion of counsel and satisfactory to the Company to prevent further transfers which would be in violation of Section 5 of the Securities Act of 1933, as amended (the "1933 Act") and applicable state securities laws; and provided further that the Holder and prospective transferee or purchaser shall execute such documents and make such representations, warranties, and agreements as may be required solely to comply with the exemptions relied upon by the Company for the transfer or disposition of the Warrant or Warrant Shares. (b) If in the opinion of either of the counsel referred to in this Section 7, the proposed transfer or disposition of this Warrant or such Warrant Shares described in the written notice given pursuant to this Section 7 may not be effected without registration or qualification of this Warrant or such Warrant Shares, the Company shall promptly give written notice thereof to the Holder, and the Holder will limit its activities in respect to such as, in the opinion of both such counsel, are permitted by law. 8. Fractional Shares. Fractional shares shall not be issued upon the exercise of this Warrant, but in any case where the holder would, except for the provisions of this Section, be entitled under the terms hereof to receive a fractional share, the Company shall, upon the exercise of this Warrant for the largest number of whole shares then called for, pay a sum in cash equal to the sum of (a) the excess, if any, of the Market Price of such fractional share over the proportional part of the Warrant Exercise Price represented by such fractional share, plus (b) the proportional part of the Warrant Exercise Price represented by such fractional share. For purposes of this Section, the term "Market Price" with respect to shares of Common Stock of any class or series means the last reported sale price or, if none, the average of the last reported closing bid and asked prices on any national securities exchange or quoted in the National Association of Securities Dealers, Inc's Automated Quotations System (NASDAQ), or if not listed on a national securities exchange or quoted in NASDAQ, the average of the last reported closing bid and asked prices as reported by Metro Data Company, Inc. from quotations by market makers in such Common Stock on the Minneapolis-St.Paul local over-the-counter market. 9. Registration Rights. (a) If at any time after ____________, 1996 and prior to the end of the two-year period following complete exercise of this Warrant or ____________, 2003, whichever occurs earlier, the Company proposes to register under the 1933 Act (except by a Form S-4 or Form S-8 Registration Statement or any successor forms thereto) or qualify for a public distribution under Section 3(b) of the 1933 Act, any of its equity securities or debt with equity features, it will give written notice to all Holders of this Warrant, any Warrants issued pursuant to Section 2 and/or Section 3(a) hereof, and any Warrant Shares of its intention to do so and, on the written request of any such Holder given within twenty (20) days after receipt of any such notice (which request shall specify the Warrant Shares intended to be sold or disposed of by such Holder and describe the nature of any proposed sale or other disposition thereof), the Company will use its best efforts to cause all such Warrant Shares, the Holders of which shall have requested the registration or qualification thereof, to be included in such registration statement proposed to be filed by the Company; provided, however, that if a greater number of Warrant Shares is offered for participation in the proposed offering than in the reasonable opinion of the managing underwriter of the proposed offering can be accommodated without adversely affecting the proposed offering, then the amount of Warrant Shares proposed to be offered by such Holders for registration, as well as the number of securities of any other selling stockholders participating in the registration, shall be proportionately reduced to a number deemed satisfactory by the managing underwriter. (b) Further, on a one-time basis during the four-year period commencing ____________, 1997 (one year after the Effective Date as defined in the Underwriting Agreement), upon request by the Holder or Holders of a majority in interest of this Warrant, of any Warrants issued pursuant to Section 2 and/or Section 3(a) hereof, and of any Warrant Shares, the Company will promptly take all necessary steps to register or qualify, on Form S-3, if available, under the 1933 Act and the securities laws of such states as the holders may reasonably request, such number of Warrant Shares issued and to be issued upon exercise of the Warrants requested by such holders in their request to the Company. If Form S-3 is not available the Company will have no obligation to effect the registration provided for by this Section 9(b) until such time as Form S-3 is available. The Company shall keep effective and maintain any registration, qualification, notification, or approval specified in this subparagraph (b) for such period as may be reasonably necessary for such Holder or Holders of such Warrant Shares to dispose thereof and from time to time shall amend or supplement the prospectus used in connection therewith to the extent necessary in order to comply with applicable law. The Company shall pay all costs of the registration provided for in this section 9(b). (c) With respect to each inclusion of securities in a registration statement pursuant to this Section 9, the Company shall bear the following fees, costs, and expenses: all registration, filing and NASD fees, NASDAQ fees, printing expenses, fees and disbursements of counsel and accountants for the Company, fees and disbursements of counsel for the underwriter or underwriters of such securities (if the offering is underwritten and the Company is required to bear such fees and disbursements), all internal expenses, the premiums and other costs of policies of insurance against liability arising out of the public offering, and legal fees and disbursements and other expenses of complying with state securities laws of any jurisdictions in which the securities to be offered are to be registered or qualified. Fees and disbursements of special counsel and accountants for the selling Holders, underwriting discounts and commissions, and transfer taxes for selling Holders and any other expenses relating to the sale of securities by the selling Holders not expressly included above shall be borne by the selling Holders. (d) The Company hereby indemnifies each of the Holders of this Warrant and of any Warrant Shares, and the officers and directors, if any, who control such Holders, within the meaning of Section 15 of the 1933 Act, against all losses, claims, damages, and liabilities caused by (1) any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement or Prospectus (and as amended or supplemented if the Company shall have furnished any amendments thereof or supplements thereto), any Preliminary Prospectus or any state securities law filings; (2) any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, or liabilities are caused by any untrue statement or omission contained in information furnished in writing to the Company by such Holder expressly for use therein; and each such Holder by its acceptance hereof severally agrees that it will indemnify and hold harmless the Company, each of its officers who signs such Registration Statement, and each person, if any, who controls the Company, within the meaning of Section 15 of the 1933 Act, with respect to losses, claims, damages, or liabilities which are caused by any untrue statement or omission contained in information furnished in writing to the Company by such Holder expressly for use therein. (e) Notwithstanding anything contained in this Section 9, Holders requesting inclusion of Warrant Shares in any registration statement shall not be required to exercise the Warrant prior to closing of the offering of Warrant Shares covered by such registration statement. 10. Additional Right to Convert Warrant. (a) The holder of this Warrant shall have the right to require the Company to convert this Warrant (the "Conversion Right") at any time after it is exercisable, but prior to its expiration into shares of the Company's Common Stock as provided for in this Section 10. Upon exercise of the Conversion Right, the Company shall deliver to the holder (without payment by the holder of any Warrant Exercise Price) that number of shares of the Company's Common Stock equal to the result obtained by (a) multiplying (i) the number of warrant shares the holder seeks to convert by (ii) the result of subtracting (x) the Warrant Exercise Price from (y) the Fair Market Value of a share of the Company's Common Stock immediately prior to the exercise of the Conversion Right and (b) dividing the product of (a) above by the Fair Market Value of a share of the Company's Common Stock immediately prior to the exercise of the Conversion Right; provided, however, that in no event shall the number of shares of the Company's Common Stock deliverable to the holder of this Warrant exceed 275,000, subject to adjustment as provided in Section 5. (b) The Conversion Right may be exercised by the holder, at any time or from time to time, prior to its expiration, on any business day by delivering a written notice in the form attached hereto (the "Conversion Notice") to the Company at the offices of the Company exercising the Conversion Right and specifying (i) the total number of shares of Stock the Holder will purchase pursuant to such conversion and (ii) a place and date not less than one or more than 20 business days from the date of the Conversion Notice for the closing of such purchase. (c) At any closing under Section 10(b) hereof, (i) the Holder will surrender the Warrant and (ii) the Company will deliver to the Holder a certificate or certificates for the number of shares of the Company's Common Stock issuable upon such conversion, together with cash, in lieu of any fraction of a share, and (iii) the Company will deliver to the Holder a new warrant representing the number of shares, if any, with respect to which the warrant shall not have been exercised. (d) Fair Market Value of a share of Common Stock as of a particular date (the "Determination Date") shall mean: (i) If the Company's Common Stock is traded on an exchange or is quoted on the Nasdaq Stock Market, then the average closing or last sale prices, respectively, reported for the ten (10) business days immediately preceding the Determination Date, and (ii) If the Company's Common Stock is not traded on an exchange or on the Nasdaq Stock Market, but is traded on the over-the-counter market, then the average closing bid and asked prices reported for the ten (10) business days immediately preceding the Determination Date. IN WITNESS WHEREOF, Pallet Recycling Associates of North America, Inc. has caused this Warrant to be signed by its duly authorized officer and this Warrant to be dated ____________, 1996. PALLET RECYCLING ASSOCIATES OF NORTH AMERICA, INC. By ____________________________ Its ________________________ PALLET RECYCLING ASSOCIATES OF NORTH AMERICA, INC. WARRANT EXERCISE (TO BE SIGNED ONLY UPON EXERCISE OF WARRANT) The undersigned, the holder of the foregoing Warrant, hereby irrevocably elects to exercise the purchase right represented by such Warrant for, and to purchase thereunder, ___________________ shares of the Common Stock of Pallet Recycling Associates of North America, Inc., to which such Warrant relates and herewith makes payment of $____________ therefor in cash or by certified or cashier's check and requests that the certificates for such shares be issued in the name of, and be delivered to ___________________________, whose address is set forth below the signature of the undersigned. If said number of shares shall not be all the shares purchasable under the Warrant, a new Warrant is to be issued in the name of the undersigned for the balance remaining of the shares purchasable thereunder. Name of Warrant Holder: _________________________________________ (Please print) Address of Warrant Holder: _________________________________________ _________________________________________ Tax Identification No. or Social Security No. of Warrant Holder: _________________________________________ Signature _________________________________________ NOTE: THE ABOVE SIGNATURE SHOULD CORRESPOND EXACTLY WITH THE NAME OF THE WARRANT HOLDER AS IT APPEARS ON THE FIRST PAGE OF THE WARRANT OR ON A DULY EXECUTED WARRANT ASSIGNMENT. Dated: __________________________________________ PALLET RECYCLING ASSOCIATES OF NORTH AMERICA, INC. WARRANT ASSIGNMENT (TO BE SIGNED ONLY UPON TRANSFER OF WARRANT) FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ______________________, the assignee, whose address is _____________________________________________, and whose tax identification or social security number is _______________________, the right represented by the foregoing Warrant to purchase ___________________ shares of the Common Stock of Pallet Recycling Associates of North America, Inc., to which the foregoing Warrant relates and appoints ___________________________ attorney to transfer said right on the books of Pallet Recycling Associates of North America, Inc., with full power of substitution in the premises. If said number of shares shall not be all the shares purchasable under the Warrant, a new Warrant is to be issued in the name of the undersigned for the balance remaining of the shares purchasable thereunder. Name of Warrant Holder: _________________________________________ (Please print) Address of Warrant Holder: _________________________________________ _________________________________________ Tax Identification No. or Social Security No. of Warrant Holder: _________________________________________ Signature _________________________________________ NOTE: THE ABOVE SIGNATURE SHOULD CORRESPOND EXACTLY WITH THE NAME OF THE WARRANT HOLDER AS IT APPEARS ON THE FIRST PAGE OF THE WARRANT OR ON A DULY EXECUTED WARRANT ASSIGNMENT. Dated: __________________________________________ </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-4.1 <SEQUENCE>3 <DESCRIPTION>STOCK CERTIFICATE <TEXT> COMMON STOCK COMMON STOCK SEE REVERSE FOR CERTAIN DEFINITIONS PALLET RECYCLING ASSOCIATES OF NORTH AMERICA, INC. INCORPORATED UNDER THE LAWS OF THE STATE OF MINNESOTA THIS CERTIFIES THAT is the owner of FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE, OF PALLET RECYCLING ASSOCIATES OF NORTH AMERICA, INC. transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this certificate properly endorsed. This certificate is not valid unless countersigned by the Transfer Agent and registered by the Registrar. WITNESS the facsimile signatures of its duly authorized officers. Dated: SECRETARY CHIEF EXECUTIVE OFFICER Countersigned and Registered: NORWEST BANK MINNESOTA, N.A. Transfer Agent and Registrar By Authorized Signature PALLET RECYCLING ASSOCIATES OF NORTH AMERICA, INC. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations. TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN - as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT - _____________ Custodian ___________________ (Cust) (Minor) under Uniform Gifts to Minors Act ___________________________ (State) Additional abbreviations may also be used though not in the above list. For value received, _____________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ____________________________________ |____________________________________| - -------------------------------------------------------------------------------- (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING POSTAL ZIP CODE, OF ASSIGNEE) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------Shares of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint - ------------------------------------------------------------------------Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated, ________________________ - -------------------------------------------------------------------------------- NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-5.1 <SEQUENCE>4 <DESCRIPTION>CONSENT <TEXT> Exhibit 5.1 August 30, 1996 Pallet Recycling Associates of North America, Inc. 2665 Long Lake Road, Suite 120 Roseville, Minnesota 55113 Re: Pallet Recycling Associates of North America, Inc. Pre-Effective Amendment No. 1 Registration Statement on Form S-1 (File No. 333-3968) Ladies and Gentlemen: We have acted as special counsel to Pallet Recycling Associates of North America, Inc., a Minnesota corporation (the Company"), in connection with a Registration Statement on Form S-1, as amended by pre-effective amendment No. 1 (the Registration Statement") relating to 3,162,500 shares of the Company's common stock, par value $0.01 per share (the Common Stock"), all of which are authorized but heretofore unissued. We have examined such documents and reviewed such questions of law as we have considered necessary and appropriate for the purposes of our opinion set forth below. In rendering our opinion, we have assumed that the Common Stock will be priced by the Pricing Committee established by the authorizing resolutions adopted by the Company's Board of Directors in accordance with such resolutions and will be issued and sold as described in the Registration Statement. Based on the foregoing, we are of the opinion that the shares of Common Stock to be sold by Company pursuant to the Registration Statement, upon issuance, delivery and payment therefor as described in the Registration Statement, will be, validly issued, fully paid and nonassessable. Our opinions expressed above are limited to the laws of the State of Minnesota and the federal laws of the United States of America. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement, and to the reference to our firm under the heading Legal Matters" in the Prospectus constituting part of the Registration Statement. Very truly yours, DORSEY & WHITNEY LLP /s/Dorsey & Whitney LLP </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.7 <SEQUENCE>5 <DESCRIPTION>EMPLOYMENT AGREEMENT <TEXT> EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT is entered into and made effective as of this 1st day of April, 1996, by and between Pallet Recycling Associates of North America, Inc., a Minnesota Corporation (the "Company"), and Bruce C. Faulken (hereinafter "Employee"). R E C I T A L S The Company desires to employ the Employee pursuant to the terms and conditions of this Agreement and represents and warrants hereby that it has the power to enter into this Agreement and that the officer executing this Agreement has been duly authorized and empowered to do so by its Board of Directors, and the Employee desires to work for the Company under the terms and conditions of this Agreement and represents to the Company that such Employment will not violate any agreement, restriction or obligation to which Employee is a party or is bound. This Agreement replaces all previous understandings and agreements between the parties hereto. NOW, THEREFORE, in consideration of the foregoing and the terms and conditions herein, the Company and the Employee, for themselves and their respective successors-in-interest, do hereby agree as follows: 1. Employment and Term. The Company hereby employs the Employee and the Employee hereby accepts such employment for a term beginning on April 1, 1996 and ending on December 31, 1997. This Agreement automatically shall be renewed for successive one (1) year periods unless either party notifies the other party of its intention not to renew this Agreement, such notice to be given at least thirty (30) days prior to the expiration of the initial term or any renewed term hereunder. This Agreement may be terminated before the end of its term according to the provisions of Section 8 below. This Agreement supersedes and in all respects replaces that certain "Employment Agreement" dated January 1, 1995 between the parties hereto. 2. Title and Duties. The Employee shall serve as the President of the Company. The Employee shall assume such responsibilities, perform such duties and have such authority as from time to time may be assigned, delegated or limited by the Company and such other duties as customarily are performed by a president in comparable companies. 3. Other Activities. The Employee shall be free to engage in any other busines activity so long as it does not violate Employee's agreement set forth in Section 10 below. 4. Compensation and Benefits. The Employee shall receive the following compensation and benefits: a. COMPENSATION. During the initial term of this Agreement, the Employee shall receive an annual salary of One Hundred Thousand Dollars ($100,000). Payment of such salary, less all legally required or Employee-directed deductions, shall occur at such times as the Company pays similary situated employees. In the event that this Agreement is renewed for any one year term, the Employee's compensation for such year shall be such amount as is mutually agreed to between the Company and the Employee. b. BENEFITS. The Employee shall receive the following benefits: (i) BONUS: Such annual bonus, if any, as shall be approved by the Board of Directors of the Company. (ii) VACATION: Employee shall be entitled to six (6) weeks paid vacation per year, such vacation to be taken at appropriate times, given due concern for workload demands. All vacation accrued within any calendar year is to be used before the end of the following calendar year. (iii) HEALTH INSURANCE: Employee shall receive health insurance coverage for himself, his spouse and dependents through such insurer or health care provider as may be selected from time to time by the Company. (iv) LONG TERM DISABILITY BENEFITS: Employee shall be entitled to participate in the Company's group disability income plan, when, and if, one is put into place. (v) AUTOMOBILE: The Company shall furnish the Employee with a suitable automobile at no cost to the Employee and will pay all costs of operating, maintaining and insuring said automobile. 5. Expenses. The Company shall reimburse the Employee for all out-of-pocket expenses incurred by the Employee in connection with his duties hereunder within fifteen (15) days after being presented with such receipts, vouchers, etc. as shall be required by the Company's Board of Directors or Chief Executive Officer. 6. Confidential Information. Except in the normal and proper course of the Employee's duties hereunder, Employee will not use for his own account or disclose to anyone else, during or after the term of this Agreement, any confidential or proprietary material or information relating to the Company's operations or business which the Employee may obtain from the Company or its employees, or otherwise by virtue of his employment by the Company. Confidential or proprietary material shall include, but not be limited to, the following types of material or information, both existing and contemplated, regarding the Company, or any of its subsidiaries or affiliates: corporate information, including sources of pallets, contractual licensing arrangements, plans, strategies, tactics, policies, resolutions, patent, trademark and tradename applications, and any litigation or negotiations; marketing information, including sales or product plans, strategies, tactics, methods, customers, prospects, or market research data; financial information, including cost and performance data, debt arrangement, equity structure, investors and holdings; operational and scientific information, including trade secrets; technical information, including technical drawings and designs; and personnel information, including personnel lists, resumes, personnel data, organizational structure and performance evaluations. 7. Inventions and Discoveries. In the event that the Employee invents or discovers any invention, device, business process, manufacturing process or product during the term of this Agreement, or within one year thereafter, which has any application in the business of pallet recycling or any other business engaged in by the Company at the time of such invention or discovery, the Employee will so notify the Company in writing, stating the specifics of such invention or discovery. In the event such invention or discovery is made solely by the Employee, he hereby acknowledges that such invention or discovery is at all times and shall remain the property of the Company. If such invention or discovery is made in collaboration with another person or entity, then the Employee acknowledges that all of his interest in such invention or discovery (subject to the interest of such other person or entity) is and at all times will remain the property of the Company. Upon request of the Company, the Employee shall immediately turn over to the Company all printed, typewritten, handwritten or otherwise recorded matter of whatever character, including but not limited to, letters, memorandum, telegrams, notes, diaries, datebooks, reports, work papers, diagrams, test data, mechanical or sound recordings or transcripts thereof, computer printouts, mechanical or magnetic storage media concerning or relating to such discovery or invention. 8. Termination. Prior to the termination of this Agreement pursuant to the provisions set forth in Section 1 above, this Agreement shall terminate (a) if the Employee should die; (b) if the Employee should unilaterally terminate this Agreement, provided that the Employee shall give the Company written notice of such termination at least thirty (30) days in advance of such termination; (c) pursuant to the terms of a written mutual agreement between the Employee and the Company; (d) in accordance with the provisions of Section 9(c) hereof or (e) if the Employee is terminated for cause. As used in this Section 8(e), the term "for cause" shall mean: intentional, gross or felonious misconduct which damages the Company. Upon termination of employment for whatever reason, the Employee shall return to the Company all of the property of the Company in his possession, including, but not limited to, all documents and other records relating in any way to the business of the Company. In the event this Agreement is terminated by reason of the death of the Employee, the Employee shall be entitled to compensation as provided in Section 4(a) herein; provided that such compensation shall cease at the end of the month following the month in which the death of the Employee occurred. In the event this Agreement is terminated by reason of the voluntary or involuntary termination of employment, the Employee shall be entitled to that compensation as provided in Section 4(a) herein for that portion of the contract year ending the effective date of such termination. In the event this Agreement is terminated by reason of mutual agreement between the Company and the Employee, the Employee shall be entitled to compensation as provided in Section 4(a) herein as agreed upon by the Company and the Employee in such termination agreement. 9. Incapacity. Subject to the right of the Employee to participate in the Company's group disability income plan as described in Section 4(b)(iv) above, in the event that the Employee is incapacitated, the following terms shall apply: (a) TEMPORARY DISABILITY. In the event that the Employee becomes incapacitated to such an extent that he shall be unable to perform his duties hereunder for a consecutive period of sixty (60) days, and if the Employee should thereafter remain incapacitated, he shall then receive no compensation under Section 4(a) hereof until such time as the Employee resumes performance of his duties under this Agreement. (b) PARTIAL DISABILITY. In the event during any one hundred eighty (180) day consecutive period ("measuring period") the Employee becomes incapacitated to such an extent that he shall be unable in the aggregate to perform his duties hereunder for ninety (90) days during such measuring period, then in such event compensation payable to the Employee under Section 4(a) herein shall be modified as follows: The compensation payable to the Employee under Section 4(a) shall be reduced by fifty percent (50%) thereof for three (3) months beginning on the first day of the calendar month next succeeding the date on which the ninetieth day of such incapacitation during the measuring period shall occur. (c) TERMINATION FOR INCAPACITY. In the event: (I) the Employee becomes incapacitated to such an extent that he shall be unable to perform his duties for a period of one hundred eighty (180) consecutive days, and if the Employee shall thereafter remain incapacitated or (II) the Employee during any consecutive period of three hundred and sixty-five (365) days (termination measuring period) becomes incapacitated to such an extent that he is, in the aggregate, unable to perform his duties hereunder for two hundred and forty (240) days during such termination measuring period, then the Company, as its option, may by written notice to the Employee terminate this Agreement. 10. Non-Competition. Employee agrees that during the term of this Agreement and for two (2) years thereafter, the Employee will not, within the continental United States or Canada, directly or indirectly engage in the business of pallet recycling or in any business competitive with the Company. Directly or indirectly engaging in the business of pallet recycling or in any competitive business shall include engaging in business as owner, partner or agent, or as an employee or consultant of any person, firm or corporation engaged in such business, or being interested directly or indirectly in any such business conducted by any person, firm or corporation. The Employee agrees that the restrictions set forth in this Agreement are reasonable, that he has received adequate consideration for agreeing to said restrictions and that he has consulted legal counsel with respect to said restrictions. 11. Notices. All notices, objections, demands or other communications required or permitted to be given or served under this Agreement shall be in writing and shall be deemed to have been duly given if delivered in person or deposited in the United States mail, postage prepaid, for mailing by certified or registered mail, return receipt requested, as follows: (a) In the case of the Employee, to his last address as shown on the records of the Company; or (b) In the case of the Company, to its registered office in the State of Minnesota. 12. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their assigns, executors, heirs, or successors, provided that the Employee may not assign any right or obligation hereunder, in whole or in part, without the prior written consent of the Company, and any attempt to do so shall be void. 13. Amendment, Modification or Waiver. No amendment, modification or waiver of any condition, provision or term of this Agreement shall be valid or of any effect unless made in writing, signed by the party or parties to be bound or its duly authorized representative and specifying with particularity the nature and extent of such amendment, modification or waiver. Any waiver by any party of a default of the other party shall not affect or impair any right arising from any subsequent default. Nothing herein shall limit the remedies and rights of the parties hereto under and pursuant to this Agreement. 14. Remedies. The parties hereto agree that the failure of a party to perform any obligation or duty which each has agreed to perform shall cause irreparable harm to the party willing to perform the obligations and duties herein, which harm cannot be adequately compensated for by money damages. It is further agreed by the parties hereto that an order of specific performance against a party in default under the terms of this Agreement would be equitable and would not work a hardship on the defaulting party. Accordingly, in the event of a default by a party hereto, the non-defaulting party, in addition to whatever other remedies are available at law or in equity, shall have the right either to obtain injunctive relief against, or to compel specific performance by, the defaulting party of any obligation or duty herein or breach thereof. 15. Severable Provisions. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable under any applicable law or rule in any jurisdiction, such provision will be ineffective only to the extent of such invalidity, illegality, or unenforceability in such jurisdiction, without invalidating the remainder of this Agreement in such jurisdiction or any provision hereof in any other jurisdiction. 16. Entire Agreement. This Agreement contains the entire understanding of the parties hereto in respect of the transactions contemplated hereby and supersedes all prior agreements and understandings between the parties with respect to such subject matter. 17. Captions, Headings or Titles and Reference to Gender. All captions, headings or titles in the paragraphs or sections of this Agreement are inserted for convenience of reference only and shall not constitute a part of this Agreement or as a limitation of the scope of the particular paragraphs or sections to which they apply. Where appropriate, the masculine gender may be read as the feminine gender or the neuter gender, the feminine gender may be read as the masculine gender or the neuter gender and the neuter gender may be read as the masculine gender or the feminine gender. 18. Counterparts. This Agreement may be executed in two (2) or more counterparts, each of which shall be considered one and the same Agreement and shall become effective when one or more counterparts have been signed by each party and delivered to both parties. 19. Minnesota Law to Govern. This Agreement shall be construed and enforced in accordance with the laws of the State of Minnesota. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first set forth above. PALLET RECYCLING ASSOCIATES OF NORTH AMERICA, INC. By ______________________________ Its _____________________________ ______________________________ BRUCE C. FAULKEN </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.9 <SEQUENCE>6 <DESCRIPTION>EMPLOYMENT AGREEMENT <TEXT> EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT is entered into and made effective as of this 1st day of April 1996, by and between Pallet Recycling Associates of North America, Inc., a Minnesota Corporation (the "Company"), and Clarence A. Johnson (hereinafter "Employee"). R E C I T A L S The Company desires to employ the Employee pursuant to the terms and conditions of this Agreement and represents and warrants hereby that it has the power to enter into this Agreement and that the officer executing this Agreement has been duly authorized and empowered to do so by its Board of Directors, and the Employee desires to work for the Company under the terms and conditions of this Agreement and represents to the Company that such Employment will not violate any agreement, restriction or obligation to which Employee is a party or is bound. This Agreement replaces all previous understandings and agreements between the parties hereto. NOW, THEREFORE, in consideration of the foregoing and the terms and conditions herein, the Company and the Employee, for themselves and their respective successors-in-interest, do hereby agree as follows: 1. Employment and Term. The Company hereby employs the Employee and the Employee hereby accepts such employment for a term beginning on April 1, 1996 and ending on December 31, 1997. This Agreement automatically shall be renewed for successive one (1) year periods unless either party notifies the other party of its intention not to renew this Agreement, such notice to be given at least thirty (30) days prior to the expiration of the initial term or any renewed term hereunder. This Agreement may be terminated before the end of its term according to the provisions of Section 8 below. 2. Title and Duties. The Employee shall serve as VicePresident and Chief Financial Officer for the Company. The Employee shall assume such responsibilities, perform such duties and have such authority as from time to time may be assigned, delegated or limited by the Company and such other duties as customarily are performed by a chief financial officer in comparable companies. 3. Other Activities. The Employee shall be free to engage in any other busines activity so long as it does not interfere with Employee's duties hereunder or violate Employee's agreement set forth in Section 10 below. 4. Compensation and Benefits. The Employee shall receive the following compensation and benefits: a. COMPENSATION. During the initial term of this Agreement, the Employee shall receive an annual salary of Ninety-Six Thousand Dollars ($96,000). Payment of such salary, less all legally required or Employee-directed deductions, shall occur at such times as the Company pays similary situated employees. In the event that this Agreement is renewed for any one year term, the Employee's compensation for such year shall be such amount as is mutually agreed to between the Company and the Employee. b. BENEFITS. The Employee shall receive the following benefits: (i) BONUS: Such annual bonus as shall be approved by the Board of Directors of the Company. (ii) VACATION: Employee shall be entitled to three (3) weeks paid vacation per year, such vacation to be taken at appropriate times, given due concern for workload demands. All vacation accrued within any calendar year is to be used before the end of the following calendar year. (iii) HEALTH INSURANCE: Employee shall receive health insurance coverage for himself, his spouse and dependents through such insurer or health care provider as may be selected from time to time by the Company. (iv) LONG TERM DISABILITY BENEFITS: Employee shall be entitled to participate in the Company's group disability income plan, when, and if, one is put into place. 5. Expenses. The Company shall reimburse the Employee for all out-of-pocket expenses incurred by the Employee in connection with his duties hereunder within fifteen (15) days after being presented with such receipts, vouchers, etc. as shall be required by the Company's Board of Directors or Chief Executive Officer. 6. Confidential Information. Except in the normal and proper course of the Employee's duties hereunder, Employee will not use for his own account or disclose to anyone else, during or after the term of this Agreement, any confidential or proprietary material or information relating to the Company's operations or business which the Employee may obtain from the Company or its employees, or otherwise by virtue of his employment by the Company. Confidential or proprietary material shall include, but not be limited to, the following types of material or information, both existing and contemplated, regarding the Company, or any of its subsidiaries or affiliates: corporate information, including sources of pallets, contractual licensing arrangements, plans, strategies, tactics, policies, resolutions, patent, trademark and tradename applications, and any litigation or negotiations; marketing information, including sales or product plans, strategies, tactics, methods, customers, prospects, or market research data; financial information, including cost and performance data, debt arrangement, equity structure, investors and holdings; operational and scientific information, including trade secrets; technical information, including technical drawings and designs; and personnel information, including personnel lists, resumes, personnel data, organizational structure and performance evaluations. 7. Inventions and Discoveries. In the event that the Employee invents or discovers any invention, device, business process, manufacturing process or product during the term of this Agreement, or within one year thereafter, which has any application in the business of pallet recycling or any other business engaged in by the Company at the time of such invention or discovery, the Employee will so notify the Company in writing, stating the specifics of such invention or discovery. In the event such invention or discovery is made solely by the Employee, he hereby acknowledges that such invention or discovery is at all times and shall remain the property of the Company. If such invention or discovery is made in collaboration with another person or entity, then the Employee acknowledges that all of his interest in such invention or discovery (subject to the interest of such other person or entity) is and at all times will remain the property of the Company. Upon request of the Company, the Employee shall immediately turn over to the Company all printed, typewritten, handwritten or otherwise recorded matter of whatever character, including but not limited to, letters, memorandum, telegrams, notes, diaries, datebooks, reports, work papers, diagrams, test data, mechanical or sound recordings or transcripts thereof, computer printouts, mechanical or magnetic storage media concerning or relating to such discovery or invention. 8. Termination. Prior to the termination of this Agreement pursuant to the provisions set forth in Section 1 above, this Agreement shall terminate (a) if the Employee should die; (b) if the Employee should unilaterally terminate this Agreement, provided that the Employee shall give the Company written notice of such termination at least thirty (30) days in advance of such termination; (c) pursuant to the terms of a written mutual agreement between the Employee and the Company; (d) in accordance with the provisions of Section 9(c) hereof or (e) if the Employee is terminated for cause. As used in this Section 8(e), the term "for cause" shall mean: intentional, gross or felonious misconduct which damages the Company. Upon termination of employment for whatever reason, the Employee shall return to the Company all of the property of the Company in his possession, including, but not limited to, all documents and other records relating in any way to the business of the Company. In the event this Agreement is terminated by reason of the death of the Employee, the Employee shall be entitled to compensation as provided in Section 4(a) herein; provided that such compensation shall cease at the end of the month following the month in which the death of the Employee occurred. In the event this Agreement is terminated by reason of the voluntary or involuntary termination of employment, the Employee shall be entitled to that compensation as provided in Section 4(a) herein for that portion of the contract year ending the effective date of such termination. In the event this Agreement is terminated by reason of mutual agreement between the Company and the Employee, the Employee shall be entitled to compensation as provided in Section 4(a) herein as agreed upon by the Company and the Employee in such termination agreement. 9. Incapacity. Subject to the right of the Employee to participate in the Company's group disability income plan as described in Section 4(b)(iv) above, in the event that the Employee is incapacitated, the following terms shall apply: (a) TEMPORARY DISABILITY. In the event that the Employee becomes incapacitated to such an extent that he shall be unable to perform his duties hereunder for a consecutive period of sixty (60) days, and if the Employee should thereafter remain incapacitated, he shall then receive no compensation under Section 4(a) hereof until such time as the Employee resumes performance of his duties under this Agreement. (b) PARTIAL DISABILITY. In the event during any one hundred eighty (180) day consecutive period ("measuring period") the Employee becomes incapacitated to such an extent that he shall be unable in the aggregate to perform his duties hereunder for ninety (90) days during such measuring period, then in such event compensation payable to the Employee under Section 4(a) herein shall be modified as follows: The compensation payable to the Employee under Section 4(a) shall be reduced by fifty percent (50%) thereof for three (3) months beginning on the first day of the calendar month next succeeding the date on which the ninetieth day of such incapacitation during the measuring period shall occur. (c) TERMINATION FOR INCAPACITY. In the event: (i) the Employee becomes incapacitated to such an extent that he shall be unable to perform his duties for a period of one hundred eighty (180) consecutive days, and if the Employee shall thereafter remain incapacitated or (ii) the Employee during any consecutive period of three hundred and sixty-five (365) days (termination measuring period) becomes incapacitated to such an extent that he is, in the aggregate, unable to perform his duties hereunder for two hundred and forty (240) days during such termination measuring period, then the Company, as its option, may by written notice to the Employee terminate this Agreement. 10. Non-Competition. Employee agrees that during the term of this Agreement and for two (2) years thereafter, the Employee will not, within the continental United States or Canada, directly or indirectly engage in the business of pallet recycling or in any business competitive with the Company. Directly or indirectly engaging in the business of pallet recycling or in any competitive business shall include engaging in business as owner, partner or agent, or as an employee or consultant of any person, firm or corporation engaged in such business, or being interested directly or indirectly in any such business conducted by any person, firm or corporation. The Employee agrees that the restrictions set forth in this Agreement are reasonable, that he has received adequate consideration for agreeing to said restrictions and that he has consulted legal counsel with respect to said restrictions. 11. Notices. All notices, objections, demands or other communications required or permitted to be given or served under this Agreement shall be in writing and shall be deemed to have been duly given if delivered in person or deposited in the United States mail, postage prepaid, for mailing by certified or registered mail, return receipt requested, as follows: (a) In the case of the Employee, to his last address as shown on the records of the Company; or (b) In the case of the Company, to its registered office in the State of Minnesota. 12. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their assigns, executors, heirs, or successors, provided that the Employee may not assign any right or obligation hereunder, in whole or in part, without the prior written consent of the Company, and any attempt to do so shall be void. 13. Amendment, Modification or Waiver. No amendment, modification or waiver of any condition, provision or term of this Agreement shall be valid or of any effect unless made in writing, signed by the party or parties to be bound or its duly authorized representative and specifying with particularity the nature and extent of such amendment, modification or waiver. Any waiver by any party of a default of the other party shall not affect or impair any right arising from any subsequent default. Nothing herein shall limit the remedies and rights of the parties hereto under and pursuant to this Agreement. 14. Remedies. The parties hereto agree that the failure of a party to perform any obligation or duty which each has agreed to perform shall cause irreparable harm to the party willing to perform the obligations and duties herein, which harm cannot be adequately compensated for by money damages. It is further agreed by the parties hereto that an order of specific performance against a party in default under the terms of this Agreement would be equitable and would not work a hardship on the defaulting party. Accordingly, in the event of a default by a party hereto, the non-defaulting party, in addition to whatever other remedies are available at law or in equity, shall have the right either to obtain injunctive relief against, or to compel specific performance by, the defaulting party of any obligation or duty herein or breach thereof. 15. Severable Provisions. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable under any applicable law or rule in any jurisdiction, such provision will be ineffective only to the extent of such invalidity, illegality, or unenforceability in such jurisdiction, without invalidating the remainder of this Agreement in such jurisdiction or any provision hereof in any other jurisdiction. 16. Entire Agreement. This Agreement contains the entire understanding of the parties hereto in respect of the transactions contemplated hereby and supersedes all prior agreements and understandings between the parties with respect to such subject matter. 17. Captions, Headings or Titles and Reference to Gender. All captions, headings or titles in the paragraphs or sections of this Agreement are inserted for convenience of reference only and shall not constitute a part of this Agreement or as a limitation of the scope of the particular paragraphs or sections to which they apply. Where appropriate, the masculine gender may be read as the feminine gender or the neuter gender, the feminine gender may be read as the masculine gender or the neuter gender and the neuter gender may be read as the masculine gender or the feminine gender. 18. Counterparts. This Agreement may be executed in two (2) or more counterparts, each of which shall be considered one and the same Agreement and shall become effective when one or more counterparts have been signed by each party and delivered to both parties. 19. Minnesota Law to Govern. This Agreement shall be construed and enforced in accordance with the laws of the State of Minnesota. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first set forth above. PALLET RECYCLING ASSOCIATES OF NORTH AMERICA, INC. By ______________________________ Its _____________________________ ______________________________ CLARENCE A. JOHNSON </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.11 <SEQUENCE>7 <DESCRIPTION>EMPLOYMENT AGREEMENT <TEXT> EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT is entered into and made effective as of this 1st day of April, 1996 by and between Pallet Recycling Associates of North America, Inc., a Minnesota Corporation (the "Company"), and Randy L. Hines (hereinafter "Employee"). R E C I T A L S The Company desires to employ the Employee pursuant to the terms and conditions of this Agreement and represents and warrants hereby that it has the power to enter into this Agreement and that the officer executing this Agreement has been duly authorized and empowered to do so by its Board of Directors, and the Employee desires to work for the Company under the terms and conditions of this Agreement and represents to the Company that such Employment will not violate any agreement, restriction or obligation to which Employee is a party or is bound. This Agreement replaces all previous understandings and agreements between the parties hereto. NOW, THEREFORE, in consideration of the foregoing and the terms and conditions herein, the Company and the Employee, for themselves and their respective successors-in-interest, do hereby agree as follows: 1. Employment and Term. The Company hereby employs the Employee and the Employee hereby accepts such employment for a term beginning on April 1, 1996 and ending on December 31, 1997. This Agreement automatically shall be renewed for successive one (1) year periods unless either party notifies the other party of its intention not to renew this Agreement, such notice to be given at least thirty (30) days prior to the expiration of the initial term or any renewed term hereunder. This Agreement may be terminated before the end of its term according to the provisions of Section 8 below. 2. Title and Duties. The Employee shall serve as VicePresident and Treasurer of the Company. The Employee shall assume such responsibilities, perform such duties and have such authority as from time to time may be assigned, delegated or limited by the Company and such other duties as customarily are performed by a a vice-president and treasurer in comparable companies. 3. Other Activities. The Employee shall be free to engage in any other busines activity so long as it does not interfere with Employee's duties hereunder or violate Employee's agreement set forth in Section 10 below. 4. Compensation and Benefits. The Employee shall receive the following compensation and benefits: a. COMPENSATION. During the initial term of this Agreement, the Employee shall receive an annual salary of seventy-five thousand dollars ($75,000). Payment of such salary, less all legally required or Employee-directed deductions, shall occur at such times as the Company pays similary situated employees. In the event that this Agreement is renewed for any one year term, the Employee's compensation for such year shall be such amount as is mutually agreed to between the Company and the Employee. b. BENEFITS. The Employee shall receive the following benefits: (i) BONUS: Such annual bonus as shall be approved by the Board of Directors of the Company. (ii) VACATION: Employee shall be entitled to three (3) weeks paid vacation per year, such vacation to be taken at appropriate times, given due concern for workload demands. All vacation accrued within any calendar year is to be used before the end of the following calendar year. (iii) HEALTH INSURANCE: Employee shall receive health insurance coverage for himself, his spouse and dependents through such insurer or health care provider as may be selected from time to time by the Company. (iv) LONG TERM DISABILITY BENEFITS: Employee shall be entitled to participate in the Company's group disability income plan, when, and if, one is put into place. 5. Expenses. The Company shall reimburse the Employee for all out-of-pocket expenses incurred by the Employee in connection with his duties hereunder within fifteen (15) days after being presented with such receipts, vouchers, etc. as shall be required by the Company's Board of Directors or Chief Executive Officer. 6. Confidential Information. Except in the normal and proper course of the Employee's duties hereunder, Employee will not use for his own account or disclose to anyone else, during or after the term of this Agreement, any confidential or proprietary material or information relating to the Company's operations or business which the Employee may obtain from the Company or its employees, or otherwise by virtue of his employment by the Company. Confidential or proprietary material shall include, but not be limited to, the following types of material or information, both existing and contemplated, regarding the Company, or any of its subsidiaries or affiliates: corporate information, including sources of pallets, contractual licensing arrangements, plans, strategies, tactics, policies, resolutions, patent, trademark and tradename applications, and any litigation or negotiations; marketing information, including sales or product plans, strategies, tactics, methods, customers, prospects, or market research data; financial information, including cost and performance data, debt arrangement, equity structure, investors and holdings; operational and scientific information, including trade secrets; technical information, including technical drawings and designs; and personnel information, including personnel lists, resumes, personnel data, organizational structure and performance evaluations. 7. Inventions and Discoveries. In the event that the Employee invents or discovers any invention, device, business process, manufacturing process or product during the term of this Agreement, or within one year thereafter, which has any application in the business of pallet recycling or any other business engaged in by the Company at the time of such invention or discovery, the Employee will so notify the Company in writing, stating the specifics of such invention or discovery. In the event such invention or discovery is made solely by the Employee, he hereby acknowledges that such invention or discovery is at all times and shall remain the property of the Company. If such invention or discovery is made in collaboration with another person or entity, then the Employee acknowledges that all of his interest in such invention or discovery (subject to the interest of such other person or entity) is and at all times will remain the property of the Company. Upon request of the Company, the Employee shall immediately turn over to the Company all printed, typewritten, handwritten or otherwise recorded matter of whatever character, including but not limited to, letters, memorandum, telegrams, notes, diaries, datebooks, reports, work papers, diagrams, test data, mechanical or sound recordings or transcripts thereof, computer printouts, mechanical or magnetic storage media concerning or relating to such discovery or invention. 8. Termination. Prior to the termination of this Agreement pursuant to the provisions set forth in Section 1 above, this Agreement shall terminate (a) if the Employee should die; (b) if the Employee should unilaterally terminate this Agreement, provided that the Employee shall give the Company written notice of such termination at least thirty (30) days in advance of such termination; (c) pursuant to the terms of a written mutual agreement between the Employee and the Company; (d) in accordance with the provisions of Section 9(c) hereof or (e) if the Employee is terminated for cause. As used in this Section 8(e), the term "for cause" shall mean: intentional, gross or felonious misconduct which damages the Company. Upon termination of employment for whatever reason, the Employee shall return to the Company all of the property of the Company in his possession, including, but not limited to, all documents and other records relating in any way to the business of the Company. In the event this Agreement is terminated by reason of the death of the Employee, the Employee shall be entitled to compensation as provided in Section 4(a) herein; provided that such compensation shall cease at the end of the month following the month in which the death of the Employee occurred. In the event this Agreement is terminated by reason of the voluntary or involuntary termination of employment, the Employee shall be entitled to that compensation as provided in Section 4(a) herein for that portion of the contract year ending the effective date of such termination. In the event this Agreement is terminated by reason of mutual agreement between the Company and the Employee, the Employee shall be entitled to compensation as provided in Section 4(a) herein as agreed upon by the Company and the Employee in such termination agreement. 9. Incapacity. Subject to the right of the Employee to participate in the Company's group disability income plan as described in Section 4(b)(iv) above, in the event that the Employee is incapacitated, the following terms shall apply: (a) TEMPORARY DISABILITY. In the event that the Employee becomes incapacitated to such an extent that he shall be unable to perform his duties hereunder for a consecutive period of sixty (60) days, and if the Employee should thereafter remain incapacitated, he shall then receive no compensation under Section 4(a) hereof until such time as the Employee resumes performance of his duties under this Agreement. (b) PARTIAL DISABILITY. In the event during any one hundred eighty (180) day consecutive period ("measuring period") the Employee becomes incapacitated to such an extent that he shall be unable in the aggregate to perform his duties hereunder for ninety (90) days during such measuring period, then in such event compensation payable to the Employee under Section 4(a) herein shall be modified as follows: The compensation payable to the Employee under Section 4(a) shall be reduced by fifty percent (50%) thereof for three (3) months beginning on the first day of the calendar month next succeeding the date on which the ninetieth day of such incapacitation during the measuring period shall occur. (c) TERMINATION FOR INCAPACITY. In the event: (i) the Employee becomes incapacitated to such an extent that he shall be unable to perform his duties for a period of one hundred eighty (180) consecutive days, and if the Employee shall thereafter remain incapacitated or (ii) the Employee during any consecutive period of three hundred and sixty-five (365) days (termination measuring period) becomes incapacitated to such an extent that he is, in the aggregate, unable to perform his duties hereunder for two hundred and forty (240) days during such termination measuring period, then the Company, as its option, may by written notice to the Employee terminate this Agreement. 10. Non-Competition. Employee agrees that during the term of this Agreement and for two (2) years thereafter, the Employee will not, within the continental United States or Canada, directly or indirectly engage in the business of pallet recycling or in any business competitive with the Company. Directly or indirectly engaging in the business of pallet recycling or in any competitive business shall include engaging in business as owner, partner or agent, or as an employee or consultant of any person, firm or corporation engaged in such business, or being interested directly or indirectly in any such business conducted by any person, firm or corporation. The Employee agrees that the restrictions set forth in this Agreement are reasonable, that he has received adequate consideration for agreeing to said restrictions and that he has consulted legal counsel with respect to said restrictions. 11. Notices. All notices, objections, demands or other communications required or permitted to be given or served under this Agreement shall be in writing and shall be deemed to have been duly given if delivered in person or deposited in the United States mail, postage prepaid, for mailing by certified or registered mail, return receipt requested, as follows: (a) In the case of the Employee, to his last address as shown on the records of the Company; or (b) In the case of the Company, to its registered office in the State of Minnesota. 12. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their assigns, executors, heirs, or successors, provided that the Employee may not assign any right or obligation hereunder, in whole or in part, without the prior written consent of the Company, and any attempt to do so shall be void. 13. Amendment, Modification or Waiver. No amendment, modification or waiver of any condition, provision or term of this Agreement shall be valid or of any effect unless made in writing, signed by the party or parties to be bound or its duly authorized representative and specifying with particularity the nature and extent of such amendment, modification or waiver. Any waiver by any party of a default of the other party shall not affect or impair any right arising from any subsequent default. Nothing herein shall limit the remedies and rights of the parties hereto under and pursuant to this Agreement. 14. Remedies. The parties hereto agree that the failure of a party to perform any obligation or duty which each has agreed to perform shall cause irreparable harm to the party willing to perform the obligations and duties herein, which harm cannot be adequately compensated for by money damages. It is further agreed by the parties hereto that an order of specific performance against a party in default under the terms of this Agreement would be equitable and would not work a hardship on the defaulting party. Accordingly, in the event of a default by a party hereto, the non-defaulting party, in addition to whatever other remedies are available at law or in equity, shall have the right either to obtain injunctive relief against, or to compel specific performance by, the defaulting party of any obligation or duty herein or breach thereof. 15. Severable Provisions. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable under any applicable law or rule in any jurisdiction, such provision will be ineffective only to the extent of such invalidity, illegality, or unenforceability in such jurisdiction, without invalidating the remainder of this Agreement in such jurisdiction or any provision hereof in any other jurisdiction. 16. Entire Agreement. This Agreement contains the entire understanding of the parties hereto in respect of the transactions contemplated hereby and supersedes all prior agreements and understandings between the parties with respect to such subject matter. 17. Captions, Headings or Titles and Reference to Gender. All captions, headings or titles in the paragraphs or sections of this Agreement are inserted for convenience of reference only and shall not constitute a part of this Agreement or as a limitation of the scope of the particular paragraphs or sections to which they apply. Where appropriate, the masculine gender may be read as the feminine gender or the neuter gender, the feminine gender may be read as the masculine gender or the neuter gender and the neuter gender may be read as the masculine gender or the feminine gender. 18. Counterparts. This Agreement may be executed in two (2) or more counterparts, each of which shall be considered one and the same Agreement and shall become effective when one or more counterparts have been signed by each party and delivered to both parties. 19. Minnesota Law to Govern. This Agreement shall be construed and enforced in accordance with the laws of the State of Minnesota. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first set forth above. PALLET RECYCLING ASSOCIATES OF NORTH AMERICA, INC. By ______________________________ Its _____________________________ ______________________________ RANDY L. HINES </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.12 <SEQUENCE>8 <DESCRIPTION>EMPLOYMENT AGREEMENT <TEXT> EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT is entered into and made effective as of this 1st day of April, 1996 by and between Pallet Recycling Associates of North America, Inc., a Minnesota Corporation (the "Company"), and Terry Stewart (hereinafter "Employee"). R E C I T A L S The Company desires to employ the Employee pursuant to the terms and conditions of this Agreement and represents and warrants hereby that it has the power to enter into this Agreement and that the officer executing this Agreement has been duly authorized and empowered to do so by its Board of Directors, and the Employee desires to work for the Company under the terms and conditions of this Agreement and represents to the Company that such Employment will not violate any agreement, restriction or obligation to which Employee is a party or is bound. This Agreement replaces all previous understandings and agreements between the parties hereto. NOW, THEREFORE, in consideration of the foregoing and the terms and conditions herein, the Company and the Employee, for themselves and their respective successors-in-interest, do hereby agree as follows: 1. Employment and Term. The Company hereby employs the Employee and the Employee hereby accepts such employment for a term beginning on April 1, 1996 and ending on December 31, 1997. This Agreement automatically shall be renewed for successive one (1) year periods unless either party notifies the other party of its intention not to renew this Agreement, such notice to be given at least thirty (30) days prior to the expiration of the initial term or any renewed term hereunder. This Agreement may be terminated before the end of its term according to the provisions of Section 8 below. 2. Title and Duties. The Employee shall serve as Vice-President of Corporate Development and Secretary of the Company. The Employee shall assume such responsibilities, perform such duties and have such authority as from time to time may be assigned, delegated or limited by the Company and such other duties as customarily are performed by a a vice-president and treasurer in comparable companies. 3. Other Activities. The Employee shall be free to engage in any other busines activity so long as it does not interfere with Employee's duties hereunder or violate Employee's agreement set forth in Section 10 below. 4. Compensation and Benefits. The Employee shall receive the following compensation and benefits: a. COMPENSATION. During the initial term of this Agreement, the Employee shall receive an annual salary of seventy-five thousand dollars ($75,000). Payment of such salary, less all legally required or Employee-directed deductions, shall occur at such times as the Company pays similary situated employees. In the event that this Agreement is renewed for any one year term, the Employee's compensation for such year shall be such amount as is mutually agreed to between the Company and the Employee. b. BENEFITS. The Employee shall receive the following benefits: (i) BONUS: Such annual bonus as shall be approved by the Board of Directors of the Company. (ii) VACATION: Employee shall be entitled to three (3) weeks paid vacation per year, such vacation to be taken at appropriate times, given due concern for workload demands. All vacation accrued within any calendar year is to be used before the end of the following calendar year. (iii) HEALTH INSURANCE: Employee shall receive health insurance coverage for himself, his spouse and dependents through such insurer or health care provider as may be selected from time to time by the Company. (iv) LONG TERM DISABILITY BENEFITS: Employee shall be entitled to participate in the Company's group disability income plan, when, and if, one is put into place. 5. Expenses. The Company shall reimburse the Employee for all out-of-pocket expenses incurred by the Employee in connection with his duties hereunder within fifteen (15) days after being presented with such receipts, vouchers, etc. as shall be required by the Company's Board of Directors or Chief Executive Officer. 6. Confidential Information. Except in the normal and proper course of the Employee's duties hereunder, Employee will not use for his own account or disclose to anyone else, during or after the term of this Agreement, any confidential or proprietary material or information relating to the Company's operations or business which the Employee may obtain from the Company or its employees, or otherwise by virtue of his employment by the Company. Confidential or proprietary material shall include, but not be limited to, the following types of material or information, both existing and contemplated, regarding the Company, or any of its subsidiaries or affiliates: corporate information, including sources of pallets, contractual licensing arrangements, plans, strategies, tactics, policies, resolutions, patent, trademark and tradename applications, and any litigation or negotiations; marketing information, including sales or product plans, strategies, tactics, methods, customers, prospects, or market research data; financial information, including cost and performance data, debt arrangement, equity structure, investors and holdings; operational and scientific information, including trade secrets; technical information, including technical drawings and designs; and personnel information, including personnel lists, resumes, personnel data, organizational structure and performance evaluations. 7. Inventions and Discoveries. In the event that the Employee invents or discovers any invention, device, business process, manufacturing process or product during the term of this Agreement, or within one year thereafter, which has any application in the business of pallet recycling or any other business engaged in by the Company at the time of such invention or discovery, the Employee will so notify the Company in writing, stating the specifics of such invention or discovery. In the event such invention or discovery is made solely by the Employee, he hereby acknowledges that such invention or discovery is at all times and shall remain the property of the Company. If such invention or discovery is made in collaboration with another person or entity, then the Employee acknowledges that all of his interest in such invention or discovery (subject to the interest of such other person or entity) is and at all times will remain the property of the Company. Upon request of the Company, the Employee shall immediately turn over to the Company all printed, typewritten, handwritten or otherwise recorded matter of whatever character, including but not limited to, letters, memorandum, telegrams, notes, diaries, datebooks, reports, work papers, diagrams, test data, mechanical or sound recordings or transcripts thereof, computer printouts, mechanical or magnetic storage media concerning or relating to such discovery or invention. 8. Termination. Prior to the termination of this Agreement pursuant to the provisions set forth in Section 1 above, this Agreement shall terminate (a) if the Employee should die; (b) if the Employee should unilaterally terminate this Agreement, provided that the Employee shall give the Company written notice of such termination at least thirty (30) days in advance of such termination; (c) pursuant to the terms of a written mutual agreement between the Employee and the Company; (d) in accordance with the provisions of Section 9(c) hereof or (e) if the Employee is terminated for cause. As used in this Section 8(e), the term "for cause" shall mean: intentional, gross or felonious misconduct which damages the Company. Upon termination of employment for whatever reason, the Employee shall return to the Company all of the property of the Company in his possession, including, but not limited to, all documents and other records relating in any way to the business of the Company. In the event this Agreement is terminated by reason of the death of the Employee, the Employee shall be entitled to compensation as provided in Section 4(a) herein; provided that such compensation shall cease at the end of the month following the month in which the death of the Employee occurred. In the event this Agreement is terminated by reason of the voluntary or involuntary termination of employment, the Employee shall be entitled to that compensation as provided in Section 4(a) herein for that portion of the contract year ending the effective date of such termination. In the event this Agreement is terminated by reason of mutual agreement between the Company and the Employee, the Employee shall be entitled to compensation as provided in Section 4(a) herein as agreed upon by the Company and the Employee in such termination agreement. 9. Incapacity. Subject to the right of the Employee to participate in the Company's group disability income plan as described in Section 4(b)(iv) above, in the event that the Employee is incapacitated, the following terms shall apply: (a) TEMPORARY DISABILITY. In the event that the Employee becomes incapacitated to such an extent that he shall be unable to perform his duties hereunder for a consecutive period of sixty (60) days, and if the Employee should thereafter remain incapacitated, he shall then receive no compensation under Section 4(a) hereof until such time as the Employee resumes performance of his duties under this Agreement. (b) PARTIAL DISABILITY. In the event during any one hundred eighty (180) day consecutive period ("measuring period") the Employee becomes incapacitated to such an extent that he shall be unable in the aggregate to perform his duties hereunder for ninety (90) days during such measuring period, then in such event compensation payable to the Employee under Section 4(a) herein shall be modified as follows: The compensation payable to the Employee under Section 4(a) shall be reduced by fifty percent (50%) thereof for three (3) months beginning on the first day of the calendar month next succeeding the date on which the ninetieth day of such incapacitation during the measuring period shall occur. (c) TERMINATION FOR INCAPACITY. In the event: (i) the Employee becomes incapacitated to such an extent that he shall be unable to perform his duties for a period of one hundred eighty (180) consecutive days, and if the Employee shall thereafter remain incapacitated or (ii) the Employee during any consecutive period of three hundred and sixty-five (365) days (termination measuring period) becomes incapacitated to such an extent that he is, in the aggregate, unable to perform his duties hereunder for two hundred and forty (240) days during such termination measuring period, then the Company, as its option, may by written notice to the Employee terminate this Agreement. 10. Non-Competition. Employee agrees that during the term of this Agreement and for two (2) years thereafter, the Employee will not, within the continental United States or Canada, directly or indirectly engage in the business of pallet recycling or in any business competitive with the Company. Directly or indirectly engaging in the business of pallet recycling or in any competitive business shall include engaging in business as owner, partner or agent, or as an employee or consultant of any person, firm or corporation engaged in such business, or being interested directly or indirectly in any such business conducted by any person, firm or corporation. The Employee agrees that the restrictions set forth in this Agreement are reasonable, that he has received adequate consideration for agreeing to said restrictions and that he has consulted legal counsel with respect to said restrictions. 11. Notices. All notices, objections, demands or other communications required or permitted to be given or served under this Agreement shall be in writing and shall be deemed to have been duly given if delivered in person or deposited in the United States mail, postage prepaid, for mailing by certified or registered mail, return receipt requested, as follows: (a) In the case of the Employee, to his last address as shown on the records of the Company; or (b) In the case of the Company, to its registered office in the State of Minnesota. 12. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their assigns, executors, heirs, or successors, provided that the Employee may not assign any right or obligation hereunder, in whole or in part, without the prior written consent of the Company, and any attempt to do so shall be void. 13. Amendment, Modification or Waiver. No amendment, modification or waiver of any condition, provision or term of this Agreement shall be valid or of any effect unless made in writing, signed by the party or parties to be bound or its duly authorized representative and specifying with particularity the nature and extent of such amendment, modification or waiver. Any waiver by any party of a default of the other party shall not affect or impair any right arising from any subsequent default. Nothing herein shall limit the remedies and rights of the parties hereto under and pursuant to this Agreement. 14. Remedies. The parties hereto agree that the failure of a party to perform any obligation or duty which each has agreed to perform shall cause irreparable harm to the party willing to perform the obligations and duties herein, which harm cannot be adequately compensated for by money damages. It is further agreed by the parties hereto that an order of specific performance against a party in default under the terms of this Agreement would be equitable and would not work a hardship on the defaulting party. Accordingly, in the event of a default by a party hereto, the non-defaulting party, in addition to whatever other remedies are available at law or in equity, shall have the right either to obtain injunctive relief against, or to compel specific performance by, the defaulting party of any obligation or duty herein or breach thereof. 15. Severable Provisions. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable under any applicable law or rule in any jurisdiction, such provision will be ineffective only to the extent of such invalidity, illegality, or unenforceability in such jurisdiction, without invalidating the remainder of this Agreement in such jurisdiction or any provision hereof in any other jurisdiction. 16. Entire Agreement. This Agreement contains the entire understanding of the parties hereto in respect of the transactions contemplated hereby and supersedes all prior agreements and understandings between the parties with respect to such subject matter. 17. Captions, Headings or Titles and Reference to Gender. All captions, headings or titles in the paragraphs or sections of this Agreement are inserted for convenience of reference only and shall not constitute a part of this Agreement or as a limitation of the scope of the particular paragraphs or sections to which they apply. Where appropriate, the masculine gender may be read as the feminine gender or the neuter gender, the feminine gender may be read as the masculine gender or the neuter gender and the neuter gender may be read as the masculine gender or the feminine gender. 18. Counterparts. This Agreement may be executed in two (2) or more counterparts, each of which shall be considered one and the same Agreement and shall become effective when one or more counterparts have been signed by each party and delivered to both parties. 19. Minnesota Law to Govern. This Agreement shall be construed and enforced in accordance with the laws of the State of Minnesota. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first set forth above. PALLET RECYCLING ASSOCIATES OF NORTH AMERICA, INC. By ______________________________ Its _____________________________ ______________________________ TERRY STEWART </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.25 <SEQUENCE>9 <DESCRIPTION>EMPLOYMENT AGREEMENT <TEXT> EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT is entered into and made effective as of this 1st day of May, 1996 by and between Pallet Recycling Associates of North America, Inc., a Minnesota corporation (the "Company"), and James Doyle (hereinafter "Employee"). R E C I T A L S The Company desires to employ the Employee pursuant to the terms and conditions of this Agreement and represents and warrants hereby that it has the power to enter into this Agreement and that the officer executing this Agreement has been duly authorized and empowered to do so by its Board of Directors, and the Employee desires to work for the Company under the terms and conditions of this Agreement and represents to the Company that such Employment will not violate any agreement, restriction or obligation to which Employee is a party or is bound. NOW, THEREFORE, in consideration of the foregoing and the terms and conditions herein, the Company and the Employee, for themselves and their respective successors-in-interest, do hereby agree as follows: 1. Retention of Employee. The Company hereby retains the Employee and the Employee hereby accepts such retention for a term of one year from the date first written above. This Agreement will be renewed automatically for additional one year terms unless either party notifies the other party in writing at least sixty (60) days prior to the expiration of this Agreement or any renewal term of its desire not to renew this Agreement. 2. Duties of Employee. The Employee shall assist the Company in its acquisition of pallet recycling and manufacturing companies by making contacts and visits with such companies, evaluating the merits of acquisitions of said companies and assisting representatives of the Company in consummating such acquisitions. Attached hereto as Exhibit "A" is a list of those companies for which Employee agrees to provide the above-described services and for which Employee will receive the commission compensation described in Section 4 (a) below in the event that the Company consummates an acquisition of any such company. Said Exhibit may be modified from time to time by the parties to add additional companies. Any such modification, when executed by the parties, will become the new Exhibit "A" to this Agreement. In addition, the Employee will accept assignments from the Company to work with subsidiaries or divisions to improve operations. 3. Other Activities. The Employee shall be free to engage in any other business activity so long as it does not interfere with Employee's duties hereunder. 4. Compensation and Benefits. During the term of this Agreement, the Employee shall receive the following compensation and benefits: a.) COMPENSATION. The Employee shall receive an annual salary of $50,000, which salary shall be paid in equal installments, less all legally required or Employee-directed deductions, at such times as the Company pays similarly situated employees in accordance with the Company's normal payroll practices. In addition, the Employee shall receive a commission for all consummated acquisitions of all or substantially all of the assets or capital stock of companies listed on Exhibit "A" for which Employee provides services to the Company in connection therewith, according to the following schedule: IF THE GROSS REVENUES OF A COMPANY THEN THE COMMISSION FOR ITS MOST RECENTLY CONCLUDED FISCAL TO BE PAID TO YEAR ARE: EMPLOYEE IS: Less than $1 million $12,000 $1 million to $2 million 20,000 More than $2 million 30,000 The Employee will be paid a draw against said commissions in the amount of $40,000 annually, which draw shall be paid in equal installments at the same time that the Employee is paid salary. Commissions earned under this Section 4 (a) shall be paid by the Company within thirty (30) days of the closing of any such acquisition. From any said commission payment will be subtracted all draws against commissions to the date of said commission payment. The Employee's total compensation of salary and commissions shall not be less than $90,000 and shall not exceed $150,000 annually. b.) BENEFITS. The Employee shall be entitled to participate in the following benefits: A. BONUS. Such annual bonus as shall be approved by the Company's Board of directors. B. VACATION: Employee shall be entitled to four (4) weeks paid vacation per year, such vacation to be taken at appropriate times, given due concern for workload demands. All vacation accrued within any calendar year is to be used before the end of the following calendar year. 5. Expenses. The Company shall reimburse the Employee for all out-of-pocket expenses incurred by the Employee in connection with his duties hereunder within fifteen (15) days after being presented with such receipts, vouchers, etc. as shall be required by the Company's Board of Directors. 6. Confidential Information. Except in the normal and proper course of the Employee's duties hereunder, Employee will not use for his own account or disclose to anyone else, during or after the term of this Agreement, any confidential or proprietary material or information relating to the Company's operations or business which the Employee may obtain from the Company or its Employees, or otherwise by virtue of his employment by the Company. Confidential or proprietary material shall include, but not be limited to, the following types of material or information, both existing and contemplated, regarding the Company, or any of its subsidiaries or affiliates: corporate information, including sources of pallets, contractual licensing arrangements, plans, strategies, tactics, policies, resolutions, patent, trademark and tradename applications, and any litigation or negotiations; marketing information, including sales or product plans, strategies, tactics, methods, customers, prospects, or market research data; financial information, including cost and performance data, debt arrangement, equity structure, investors and holdings; operational and scientific information, including trade secrets; technical information, including technical drawings and designs; and personnel information, including personnel lists, resumes, personnel data, organizational structure and performance evaluations. As used in this Agreement, "confidential and proprietary information" shall not include: a. information known to Employee prior to the date of disclosure by the Company and not obtained or derived directly or indirectly from the Company, b. information which is or becomes public or available to the general public otherwise than through the act or default of the Employee, or c. information obtained subsequent to any disclosure from a third party who is lawfully in possession of same and which information is not subject to any confidential or non-use obligations owed to the disclosure under this Agreement from a third party who is lawfully in possession of the same and which information is not subject to any confidential or non-use obligations owed to the disclosing party or others. 7. Termination. Prior to the termination of this Agreement pursuant to the provisions set forth in Section 1 above, this Agreement shall terminate (a) if the Employee should die; (b) if the Employee should unilaterally terminate this Agreement, provided that the Employee shall give the Company written notice of such termination at least thirty (30) days in advance of such termination; (c) pursuant to the terms of a written mutual agreement between the Employee and the Company; or (d) if the Employee is terminated for cause. As used in this Section 7(d), the term "for cause" shall mean: intentional misconduct which damages the Company. 8. Notices. All notices, objections, demands or other communications required or permitted to be given or served under this Agreement shall be in writing and shall be deemed to have been duly given if delivered in person or deposited in the United States mail, postage prepaid, for mailing by certified or registered mail, return receipt requested, as follows: (a) In the case of the Employee, to his last address as shown on the records of the Company; or (b) In the case of the Company, to its registered office in the State of Minnesota. 9. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their assigns, executors, heirs, or successors, provided that the Employee may not assign any right or obligation hereunder, in whole or in part, without the prior written consent of the Company, and any attempt to do so shall be void. 10. Amendment, Modification or Waiver. No amendment, modification or waiver of any condition, provision or term of this Agreement shall be valid or of any effect unless made in writing, signed by the party or parties to be bound or its duly authorized representative and specifying with particularity the nature and extent of such amendment, modification or waiver. Any waiver by any party of a default of the other party shall not affect or impair any right arising from any subsequent default. Nothing herein shall limit the remedies and rights of the parties hereto under and pursuant to this Agreement. 11. Remedies. The parties hereto agree that the failure of a party to perform any obligation or duty which each has agreed to perform shall cause irreparable harm to the party willing to perform the obligations and duties herein, which harm cannot be adequately compensated for by money damages. It is further agreed by the parties hereto that an order of specific performance against a party in default under the terms of this Agreement would be equitable and would not work a hardship on the defaulting party. Accordingly, in the event of a default by a party hereto, the non-defaulting party, in addition to whatever other remedies are available at law or in equity, shall have the right either to obtain injunctive relief against, or to compel specific performance by, the defaulting party of any obligation or duty herein or breach thereof. 12. Severable Provisions. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable under any applicable law or rule in any jurisdiction, such provision will be ineffective only to the extent of such invalidity, illegality, or unenforceability in such jurisdiction, without invalidating the remainder of this Agreement in such jurisdiction or any provision hereof in any other jurisdiction. 13. Entire Agreement. This Agreement contains the entire understanding of the parties hereto in respect of the transactions contemplated hereby and supersedes all prior agreements and understandings between the parties with respect to such subject matter. 14. Captions, Headings or Titles and Reference to Gender. All captions, headings or titles in the paragraphs or sections of this Agreement are inserted for convenience of reference only and shall not constitute a part of this Agreement or as a limitation of the scope of the particular paragraphs or sections to which they apply. Where appropriate, the masculine gender may be read as the feminine gender or the neuter gender, the feminine gender may be read as the masculine gender or the neuter gender and the neuter gender may be read as the masculine gender or the feminine gender. 15. Counterparts. This Agreement may be executed in two (2) or more counterparts, each of which shall be considered one and the same Agreement and shall become effective when one or more counterparts have been signed by each party and delivered to both parties. 16. Tennessee Law to Govern. This Agreement shall be construed and enforced in accordance with the laws of the State of Tennessee. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first set forth above. PALLET RECYCLING ASSOCIATES OF NORTH AMERICA, INC. By ______________________________ Its _____________________________ ______________________________ JAMES DOYLE </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.26 <SEQUENCE>10 <DESCRIPTION>TERM LOAN AND SECURITY AGREEMENT <TEXT> EXHIBIT 10.26 TERM LOAN AND SECURITY AGREEMENT Dated as of August ___, 1995 PRANA Holdings, Inc., a Minnesota corporation (the "Borrower"), and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking association (the "Lender"), hereby agree as follows: ARTICLE I. Definitions Section 1.1 Definitions. For all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires: (a) the terms defined in this Article have the meanings assigned to them in this Article, and include the plural as well as the singular; and (b) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles. "Accrual Rate" means nine percent (9.0%) per annum. "Acquisition Documents" has the meaning specified in Section 5.16 hereof. "Advance" means an advance to the Borrower under the Advancing Term Loan Facility. "Advancing Term Loan Facility" means the advancing term loan facility being made available to the Borrower by the Lender pursuant to Article II hereof. "Affiliate" or "Affiliates" means the Guarantor, the Subsidiaries and any other Person controlled by, controlling or under common control with the Borrower, including (without limitation) any Subsidiary of the Borrower. For purposes of this definition, "control," when used with respect to any specified Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise. "Agreement" means this Term Loan and Security Agreement. "Assignment of Seller's Representations and Warranties" means the Assignment of Sellers Representations, Warranties, Covenants and Indemnities of even date herewith by and among the Borrower, the Lender and the Sellers. "Banking Day" means a day other than a Saturday on which banks are generally open for business in Minneapolis, Minnesota. "Base Rate" means the rate of interest publicly announced from time to time by the Lender as its "base rate" or, if the Lender ceases to announce a rate so designated, any similar successor rate designated by the Lender. "Book Net Worth" means, as of the date of determination, Total Assets minus Indebtedness, as determined in accordance with generally accepted accounting principles, consistently applied. "Capital Expenditures" means, for any specified period, the aggregate of all gross expenditures during such period for the purchase or construction of fixed assets, for improvements, replacements, substitutions or additions therefor or thereto, which are required to be capitalized on the balance sheet, including the balance sheet amount of any lease obligations incurred during any such period. "Cash Available for Debt Service" means for any specified period (i) net income (net of any deferred income tax entries) plus (ii) Total Interest, plus (iii) amortization of intangibles, plus (iv) depreciation, minus (v) Upstreamed Cash, and minus (vi) Capital Expenditures (exclusive of all Capital Expenditures to the extent financed by Indebtedness). "Collateral" means all of the Equipment, General Intangibles, Inventory, Receivables, the PRANA Note, the Machine Specialists Note, and the shares of stock and membership interests described in the Collateral Pledge Agreement, and any shares of stock, membership interests or partnership interests acquired by the Borrower at any time in the future, together with all substitutions and replacements for and products of any of the foregoing Collateral and together with proceeds of any and all of the foregoing Collateral and, in the case of all tangible Collateral, together with all accessions and together with (i) all accessories, attachments, parts, equipment and repairs now or hereafter attached or affixed to or used in connection with any such goods, and (ii) all warehouse receipts, bills of lading and other documents of title now or hereafter covering such goods. "Collateral Pledge Agreement" means the collateral pledge agreement executed by the Borrower in favor of the Lender pursuant to which the Borrower grants the Lender a security interest in the PRANA Note, the Machine Specialists Note, the membership interest owned by the Borrower in SUTA, L.L.C., and the stock of the Subsidiaries owned by the Borrower. "Debt Service" means for any specified period, the sum of (i) Total Interest (excluding for purposes of the definition of Debt Service only, interest which accrues on the Term Loan at the Accrual Rate) plus (ii) scheduled principal amortization of all interest bearing Indebtedness, including all mandatory prepayments required under Section 2.5 hereof. "Debt Service Coverage Ratio" means Cash Available for Debt Service divided by Debt Service. "Debt Subordination Agreements" means collectively, the Debt Subordination Agreements executed by John J. Baggett, Tony W. Baggett, Kelley O'Neal, Dan Giger and the Sellers. "Default" means an event that, with giving of notice or passage of time or both, would constitute an Event of Default. "Environmental Laws" has the meaning specified in Section 5.12 hereof. "Equipment" means all of the Borrower's equipment, as such term is defined in the UCC, whether now owned or hereafter acquired, including but not limited to all present and future machinery, vehicles, furniture, fixtures, manufacturing equipment, shop equipment, office and recordkeeping equipment, parts, tools, supplies, and including specifically (without limitation) the goods described in any equipment schedule or list herewith or hereafter furnished to the Lender by the Borrower. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliate" means, any Person who is a member of a "controlled group of corporations" (within the meaning of ERISA) with the Borrower. "Event of Default" has the meaning specified in Section 8.1 hereof. "Excess Cash Flow" means, for any specified period, the sum of (i) net income (net of any deferred income tax entries), plus (ii) interest which accrues on the Term Loan at the Accrual Rate, plus (iii) amortization of intangibles, plus (iv) depreciation, minus (v) Capital Expenditures (exclusive of Capital Expenditures to the extent financed by Indebtedness), minus (vi) scheduled principal amortization of all interest bearing Indebtedness. "Floating Rate" means an annual rate equal to the sum of the Base Rate plus three percent (3.0%), which Floating Rate shall change when and as the Base Rate changes. "General Intangibles" means all of the Borrower's general intangibles, as such term is defined in the UCC, whether now owned or hereafter acquired, including (without limitation) all present and future patents, patent applications, copyrights, trademarks, trade names, trade secrets, customer or supplier lists and contracts, manuals, operating instructions, permits, franchises, the right to use the Borrower's name, and the goodwill of the Borrower's business. "Guarantor" means PRANA. "Guarantor Documents" means the Guaranty, the Option to Purchase Warrant and the Trademark Mortgage as the same may be amended from time to time. "Guaranty" means the guaranty by corporation executed by the Guarantor in favor of the Lender with respect to the Obligations. "Indebtedness" means collectively, (i) all items which in accordance with generally accepted accounting principles, would be included on the liabilities side of a balance sheet as of the date which Indebtedness is to be determined excluding capital stock, surplus capital and retained earnings, (ii) all indebtedness secured by any mortgage, pledge, security interest or lien existing on property owned subject to such mortgage, pledge security interest or lien whether or not the indebtedness secured thereby shall have been assumed, (iii) all amounts representing the capitalization of rentals in accordance with generally accepted accounting principles, and (iv) all guaranties, endorsements and other contingent obligations. "Inventory" means all of the Borrower's inventory, as such term is defined in the UCC, whether now owned or hereafter acquired, whether consisting of whole goods, spare parts or components, supplies or materials, whether acquired, held or furnished for sale, for lease or under service contracts or for manufacture or processing, and wherever located. "Loan Documents" means this Agreement, the Debt Subordination Agreements, the Note, and the Collateral Pledge Agreement, as the same may be amended from time to time. "Machine Specialists" means Machine Specialists, Inc., a Tennessee corporation. "Machine Specialists Note" means that certain Subordinated Convertible Debenture of even date herewith executed by Machine Specialists and payable to the order of the Lender in the original principal amount of $300,000. "Maturity Date" means February 28, 1998. "Merger" means individually and collectively, (i) the merger of PRANA Memphis into Pallet Supply effective on or about the date hereof. "Merger Documents" means the executed agreement and articles of merger merging Pallet Supply and PRANA Memphis, and all agreements attached thereto and executed pursuant thereto. "Note" means the Advancing Term Note of the Borrower payable to the order of the Lender in substantially the form attached hereto as Exhibit A. "Obligations" has the meaning specified in Section 3.1 hereof. "Option to Purchase Warrant" means the option to purchase warrant executed by the Guarantor in favor of the Lender. "Pallet Supply" means Pallet Supply Co., Inc., a Tennessee corporation. "Person" means any individual, corporation, partnership, joint venture, limited liability company, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Plan" means an employee benefit plan or other plan maintained for employees of the Borrower and covered by Title IV of ERISA. "PRANA" means Pallet Recycling Associates of North America, Inc., a Minnesota corporation. "PRANA Memphis" means PRANA Memphis, Inc., a Minnesota corporation. "PRANA Note" means the Demand Promissory Note of even date herewith executed by the Guarantor and payable to the order of the Borrower in the original principal amount of $700,000. "Premises" means all premises where the Borrower conducts its business and has any rights of possession, including (without limitation) the premises located at 2665 Long Lake Road, Suite 120, Roseville, Minnesota 55113. "Receivables" means each and every right of the Borrower to the payment of money, whether such right to payment now exists or hereafter arises, whether such right to payment arises out of a sale, lease or other disposition of goods or other property, out of a rendering of services, out of a loan, out of the overpayment of taxes or other liabilities, or otherwise arises under any contract or agreement, whether such right to payment is created, generated or earned by the Borrower or by some other person who subsequently transfers such person's interest to the Borrower, whether such right to payment is or is not already earned by performance, and howsoever such right to payment may be evidenced, together with all other rights and interests (including all liens and security interests) which the Borrower may at any time have by law or agreement against any account debtor or other obligor obligated to make any such payment or against any property of such account debtor or other obligor; all including but not limited to all present and future accounts, contract rights, loans and obligations receivable, chattel papers, bonds, notes and other debt instruments, tax refunds and rights to payment in the nature of general intangibles. "Release Agreements" means collectively, the agreements executed by Otto Packaging, Inc.; Jeffrey E. Otto and Judy M. Otto; BVS, Inc.; Orville Roberts, Theodore Shepherd and Edward Van; Harris Supply Company, Inc.; Charles S. Harris; Pallet Source, Inc.; George Gustafson; Quality Pallet, Inc.; James W. Brill and Terry L. Brill; Hurt's Pallet & Sales, Inc.; Robert F. Jarvis and Judith A. Jarvis; Pallet City, Inc.; Donald J. Matre, Ronald J. Matre, Ronald A. Matre, Thomas R. Matre and Tracy Matre-Waring, pursuant to which each of said parties agrees to release certain rights of such party to cause an exchange of certain preferred stock of the Guarantor for certain common stock of the subsidiary of the Guarantor described therein and agrees to eliminate certain restrictions with respect to the business and operations of the Guarantor. "Release Notes" means, collectively and individually, the following notes, each of even date herewith, executed by the Guarantor, and payable to the following parties in the following principal amounts: Holder Principal Amount James W. Brill $ 190,811 Terry L. Brill 127,207 Charles S. Harris 50,000 Donald J. Matre 214,820 Ronald J. Matre 102,740 Ronald A. Matre 102,740 Thomas R. Matre 23,350 Tracy Matre-Waring 23,350 "Reportable Event" shall have the meaning assigned to that term in Title IV of ERISA. "Security Interest" has the meaning specified in Section 3.1 hereof. "Sellers" means collectively, James J. Doyle, Lisa B. Doyle, Dawn Christine Crenshaw, Lisa Ann Chayer, James J. Doyle II, Kris Chayer, Gregory B. Crenshaw, Tabitha Doyle Barkley, Teri Leigh Doyle and Clay Barkley. "Subsidiary" means any corporation or limited liability company of which more than 50% of the outstanding shares of capital stock or membership interests, as the case may be, having general voting power under ordinary circumstances to elect a majority of the board of directors of such corporation, of the board of governors of such limited liability company, as the case may be, irrespective of whether or not at the time stock or membership interests, as the case may be, of any other class or classes shall have or might have voting power by reason of the happening of any contingency, is at the time directly or indirectly owned by the Borrower, by the Borrower and one or more other Subsidiaries, or by one or more other Subsidiaries, including, without limitation, the Subsidiaries described on Exhibit B attached hereto. "Term Loan" has the meaning specified in Section 2.1 hereof. "Termination Date" means June 30, 1996. "Total Assets" means, as of the date of the determination, all assets of the Borrower as of such date which should properly be classified as assets on a balance sheet of the Borrower, prepared in accordance with generally accepted accounting principles, consistently applied. Notwithstanding the foregoing definition of Total Assets, all unrealized appreciation, increases in value and loans to officers, shareholders or employees of the Borrower shall be excluded in determining the amount of Total Assets. "Total Interest" means, for any specified period, all interest accrued within such period on all Indebtedness (including, without limitation, interest which accrues on the Term Loan at the Accrual Rate). "Trademark Mortgage" means the trademark mortgage executed by the Guarantor in favor of the Lender with respect to the trademarks described therein. "UCC" means the Uniform Commercial Code as in effect from time to time in the state designated in Section 9.12 hereof as the state whose laws shall govern this Agreement, or in any other state whose laws are held to govern this Agreement or any portion hereof. "Upstreamed Cash" means, for any specified period, (i) all cash transferred, paid or credited to the Guarantor by the Borrower or its Subsidiaries on a consolidated basis, including, without limitation, cash transferred, paid or credited in the form of dividends, loans, advances or management fees, minus (ii) all cash transferred or paid by the Guarantor to the Borrower. ARTICLE II. Amount and Terms of the Advancing Term Loan Facility Section 2.1 Advancing Term Loan. The Lender agrees, on the terms and subject to the conditions herein set forth, to make Advances to the Borrower from time to time during the period from the date hereof to and including the Termination Date or the earlier date of termination in whole of the Advancing Term Loan Facility pursuant to Section 8.2 hereof with the total aggregate amount of such Advances not to exceed $2,600,000, which Advances shall be secured by the Collateral as provided in Article III hereof. The Advancing Term Loan Facility shall be an advancing term loan facility and shall not be a revolving facility. The maximum aggregate amount which the Lender agrees to advance hereunder is $2,600,000 irrespective of whether any Advances are prepaid, provided, that the Lender shall not advance more than $2,400,000 hereunder unless and until either (i) the Guarantor or the Borrower has satisfied its obligation to pay $100,000 to John J. Baggett and $100,000 to Tony W. Baggett pursuant to Section 6.16 hereof, or (ii) the "puts" of said individuals under Section 7.05 of that certain Agreement and Plan of Reorganization dated May 22, 1995 by and between among other parties, said individuals and the Guarantor, have ceased to exist as a result of the completion of an initial public offering of common stock by the Borrower or the Guarantor prior to June 30, 1996 at an initial offering price of no less than $5.00 per share. The Borrower agrees to comply with the following procedures in requesting Advances under this Section 2.1: (a) The Borrower will not request any Advance under this Section 2.1, if, after giving effect to such requested Advance, the total aggregate amount of all Advances under this Section 2.1 or otherwise will exceed $2,600,000; (b) Each request for an Advance under this Section 2.1 shall be made to the Lender prior to 11:00 a.m. (Minneapolis time) three Banking Days prior to the requested date of funding of the Advance by the Borrower. Each request for an Advance shall be made in writing specifying the date of the requested Advance and shall be accompanied by any items required by the Lender pursuant to Section 4.2(2) hereof and by a certificate executed by an officer of the Borrower indicating the Borrower's proposed use of the funds to be advanced pursuant to the requested Advance and shall be by (i) any officer of the Borrower; or (ii) any person designated as the Borrower's agent by any officer of the Borrower in a writing delivered to the Lender; or (iii) any person reasonably believed by the Lender to be an officer of the Borrower or such a designated agent. (c) Upon fulfillment of the applicable conditions set forth in Article IV hereof, the Lender shall disburse loan proceeds by crediting the same to the Borrower's demand deposit account maintained at the Lender unless the Lender and the Borrower shall agreed in writing to another manner of disbursement. The Borrower shall be obligated to repay all Advances under this Section 2.1 notwithstanding the fact that the person requesting the same was not in fact authorized to do so. Any request for an Advance under this Section 2.1 shall be deemed to be a representation by the Borrower that (i) the conditions set forth in Section 2.1(a) hereof has been met, and (ii) the conditions set forth in Section 4.2 hereof have been met as of the time of their request. Section 2.2 Note. All advances made by the Lender under this Article II shall be evidenced by and repayable with interest in accordance with the Note. The principal of the Note shall be due and payable in accordance with Section 2.5 hereof and on or before the Maturity Date or upon acceleration by the Lender pursuant to Section 8.2 hereof. The Borrower may prepay the Note in accordance with Section 2.4 hereof. Section 2.3 Interest. (a) The principal of the Advances outstanding from time to time during any month shall bear interest (computed on the basis of actual days elapsed in a 360-day year) at the Floating Rate; provided that in any event no rate change shall be put into effect which would result in a rate greater than the highest rate permitted by law. Interest accruing at the Floating Rate on the principal balance of the Advances outstanding from time to time shall be due and payable on the last day of each month and on the Maturity Date or earlier upon the earlier of acceleration (pursuant to Section 8.2 hereof) or prepayment in full. (b) In addition to the interest which accrues at the Floating Rate as provided in Section 2.3(a) above, interest shall also accrue on the principal of the Advances outstanding from time to time (computed on the basis of actual days elapsed in a 360 day year) at the Accrual Rate; provided however, that in no event shall the combined rate of interest under Sections 2.3(a) and (b) result in a rate greater than the highest rate permitted by law. Interest accruing at the Accrual Rate on the principal balance of the Advances outstanding from time to time shall be compounded monthly and shall be due and payable on the earlier of (i) the Maturity Date, or (ii) acceleration (pursuant to Section 8.2 hereof), or (iii) upon prepayment in full, or (iv) at the option of the Lender, upon the closing of a private placement of any of the Borrower's or the Guarantor's stock. Section 2.4 Voluntary Prepayment. Except as otherwise provided herein, the Borrower may, in its discretion, prepay the Advances in whole at any time or from time to time in part, provided, however, that the Borrower will give Lender notice of any optional prepayment, said notice to be given not later than five (5) business days prior to the prepayment date and to specify the prepayment date and the proposed amount to be prepaid. Such optional prepayments may be made only on the first business day of any calendar month. Each optional prepayment shall be in integral multiples of $25,000, and in an amount at least equal to $100,000 or, if less, the remaining outstanding balance due. Notwithstanding the foregoing, in the event the Borrower or any Subsidiary enters into any working capital financing arrangement with the Lender or any affiliate of the Lender, no optional prepayments shall be made of the Advances unless no default or event of default exists under any of the documents evidencing any such financing arrangement(s), or would be caused by such prepayment. Section 2.5 Mandatory Prepayment. (a) Without notice or demand, if the sum of the aggregate amount of all Advances shall at any time exceed $2,600,000 (or $2,400,000 during the period of time aggregate Advances are limited to $2,400,000 pursuant to Section 2.1), the Borrower shall immediately prepay the Advances to the extent necessary to reduce the sum of the aggregate amount of all Advances to $2,600,000, or $2,400,000 as the case may be, and the Borrower shall not thereafter be entitled to request any further Advance. (b) Within thirty (30) days after the last day of each of the Borrower's fiscal quarters (commencing with the fiscal quarter ending September 30, 1996) in which any principal indebtedness under the Term Note shall be outstanding, the Borrower shall pay, without demand, mandatory prepayments of principal on the Advances equal to (i) fifty percent (50%) of the Borrower's Excess Cash Flow for such fiscal quarter, minus (ii) any optional prepayments made during such fiscal quarter pursuant to Section 2.4 hereof. The Borrower shall prepay the Advances in full within one (1) Banking Day following the Borrower's or the Guarantor's receipt of the proceeds of an initial public offering of any of the Borrower's or the Guarantor's stock. (c) Any payment received by the Lender under this Section 2.5 or under Section 2.4 may be applied to the Advances, including interest thereon and any fees, commissions, costs and expenses hereunder in such order and in such amounts as the Lender, in its discretion, may from time to time determine. Section 2.6 Payment. All payments of principal of and interest on the Advances shall be made to the Lender in immediately available funds. The Borrower hereby authorizes the Lender to charge against the Borrower's accounts with the Lender an amount equal to the principal and accrued interest from time to time due and payable to the Lender hereunder (and any fees, costs, or expenses or other amounts hereunder or under the Loan Documents or the Guarantor Documents (including, without limitation, any amounts paid by the Lender to John J. Baggett and Tony W. Baggett pursuant to Section 6.16 hereof) and further authorizes the Lender, in its discretion at any time or from time to time without request by the Borrower, to make an Advance under the Advancing Term Loan Facility to the extent necessary to pay any such amounts. Section 2.7 Payment on Non-Banking Days. Whenever any payment to be made hereunder shall be stated to be due on a day which is not a Banking Day, such payment may be made on the next succeeding Banking Day, and such extension of time shall in such case be included in the computation of interest on the Advances or the fees hereunder, as the case may be. Section 2.8 Intentionally Omitted. Section 2.9 Liability Records. The Lender may maintain from time to time, at its discretion, liability records as to the outstanding balance of the Advances made and interest accrued or paid under this Agreement. All entries made on any such record shall be presumed correct until the Borrower establishes the contrary. On demand by the Lender, the Borrower will admit and certify in writing the exact principal balance that the Borrower then asserts to be outstanding to the Lender under this Agreement. Any billing statement or accounting rendered by the Lender shall be conclusive and fully binding on the Borrower unless specific written notice of exception is given to the Lender by the Borrower within 45 days after its receipt by the Borrower. Section 2.10 Setoff. The Borrower agrees that following the occurrence of an Default or an Event of Default, the Lender may at any time or from time to time, at its sole discretion and without demand and without notice to anyone, setoff any liability owed to the Borrower by the Lender, whether or not due, against any Obligations whether or not due. In addition, each other Person holding a participating interest in any Advances made to the Borrower by the Lender shall have the right to appropriate or setoff any deposit or other liability then owed by such Person to the Borrower, whether or not due, and apply the same to the payment of said participating interest, as fully as if such Person had lent directly to the Borrower the amount of such participating interest. Section 2.11 Fees. (a) The Borrower hereby agrees to pay the Lender a fully earned and non-refundable origination fee of $25,190.00 due and payable upon the execution of this Agreement. (b) The Borrower hereby agrees to pay the Lender, on demand, audit fees at the Lender's current standard rate (which is currently $400 per day per auditor as of the date hereof) as the same changes from time to time, in connection with any audits or inspections by the Lender of any collateral or the operations or business of the Borrower, together with all actual out-of-pocket costs and expenses incurred in conducting any such audit or inspection. Section 2.12 Capital Adequacy. If the Lender shall determine that the adoption after the date hereof of any applicable law, rule or regulation regarding capital adequacy, or any change therein after the date hereof, any change after the date hereof in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Lender or its parent corporation with any guideline or request issued after the date hereof regarding capital adequacy (whether nor not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on the Lender's or the Lender's parent corporation's capital as a consequence of the Lender's obligations hereunder to a level below that which the Lender or its parent corporation could have achieved but for such adoption, change or compliance (taking into consideration the Lender's policies with respect to capital adequacy and those of the Lender's parent corporation) by an amount deemed to the Lender or its parent corporation to be material, then from time to time on demand by the Lender, the Borrower shall pay to the Lender such additional amount or amounts as will compensate the Lender or its parent corporation for such reduction. Certificates of the Lender sent to the Borrower from time to time claiming compensation under this Section, stating the reason therefor and setting forth in reasonable detail the calculation of the additional amount or amounts to be paid to the Lender hereunder shall be conclusive absent manifest error. In determining such amounts, the Lender or its parent corporation may use any reasonable averaging and attribution methods. ARTICLE III. Security Interest Section 3.1 Grant of Security Interest. The Borrower hereby assigns and grants to the Lender a security interest (collectively referred to as the "Security Interests") in the Collateral, as security for the payment and performance of each and every debt, liability and obligation of every type and description which the Borrower may now or at any time hereafter owe to the Lender (whether such debt, liability or obligation now exists or is hereafter created or incurred, whether it arises in a transaction involving the Lender alone or in a transaction involving other creditors of the Borrower, and whether it is direct or indirect, due or to become due, absolute or contingent, primary or secondary, liquidated or unliquidated, or sole, joint, several or joint and several, and including specifically, but not limited to, all indebtedness of the Borrower arising under this Agreement or any other loan or credit agreement or guaranty between the Borrower and the Lender, whether now in effect or hereafter entered into; all such debts, liabilities and obligations are herein collectively referred to as the "Obligations"). Section 3.2 Notification of Account Debtors and Other Obligors. The Lender may at any time (before or after the occurrence of an Event of Default) notify any account debtor or other person obligated to pay the amount due that such right to payment has been assigned or transferred to the Lender for security and shall be paid directly to the Lender. The Borrower will join in giving such notice if the Lender so requests. At any time after the Borrower or the Lender gives such notice to an account debtor or other obligor, the Lender may, but need not, in the Lender's name or in the Borrower's name, (a) demand, sue for, collect or receive any money or property at any time payable or receivable on account of, or securing, any such right to payment, or grant any extension to, make any compromise or settlement with or otherwise agree to waive, modify, amend or change the obligations (including collateral obligations) of any such account debtor or other obligor; and (b) as agent and attorney in fact of the Borrower, notify the United States Postal Service to change the address for delivery of the Borrower's mail to any address designated by the Lender, otherwise intercept the Borrower's mail, and receive, open and dispose of the Borrower's mail, applying all Collateral as permitted under this Agreement and holding all other mail for the Borrower's account or forwarding such mail to the Borrower's last known address. Section 3.3 Assignment of Insurance. As additional security for the payment and performance of the Obligations, the Borrower hereby assigns to the Lender any and all monies (including, without limitation, proceeds of insurance and refunds of unearned premiums) due or to become due under, and all other rights of the Borrower with respect to, any and all policies of insurance now or at any time hereafter covering the Collateral or any evidence thereof or any business records or valuable papers pertaining thereto, and the Borrower hereby directs the issuer of any such policy to pay all such monies directly to the Lender. At any time, whether before or after the occurrence of any Event of Default, the Lender may (but need not), in the Lender's name or in the Borrower's name, execute and deliver proof of claim, receive all such monies, endorse checks and other instruments representing payment of such monies, and adjust, litigate, compromise or release any claim against the issuer of any such policy. Section 3.4 Intentionally Omitted. Section 3.5 License. The Borrower hereby grants to the Lender a nonexclusive, worldwide and royalty-free license to use or otherwise exploit all trademarks, franchises, trade names, copyrights and patents of the Borrower for the purpose of selling, leasing or otherwise disposing of any or all Collateral following an Event of Default. ARTICLE IV. Conditions of Lending Section 4.1 Conditions Precedent to the Initial Advance under the Term Loan. The obligation of the Lender to make the initial Advance under the Term Loan shall be subject to the condition precedent that the Lender shall have received all of the following, each in form and substance satisfactory to the Lender: (a) This Agreement, properly executed on behalf of the Borrower. (b) The Note, properly executed on behalf of the Borrower. (c) A true and correct copy of the lease pursuant to which the Guarantor leases the premises located at 2665 Long Lake Road, Suite 120, Roseville, Minnesota 55113. (d) Current searches of appropriate filing offices showing that (i) no state or federal tax liens have been filed and remain in effect against the Borrower, and (ii) no financing statements have been filed and remain in effect against the Borrower, except those financing statements relating to liens permitted pursuant to Section 7.1 hereof and those financing statements filed by the Lender. (e) Current searches of appropriate filings officers showing all financing statements filed of record against the Subsidiaries described on Exhibit B attached hereto. (f) A certificate of the Chief Executive Officer of the Borrower, certifying as to (i) the resolutions of the directors of the Borrower, authorizing the execution, delivery and performance of the Loan Documents, and the documents related thereto; (ii) the articles of incorporation and bylaws of the Borrower, and (iii) the signatures of the officers or agents of the Borrower authorized to execute and deliver the Loan Documents, and the documents related thereto and other instruments, agreements and certificates on behalf of the Borrower. (g) A certificate of the President of the Guarantor, certifying as to (i) the resolutions of the directors of the Guarantor, authorizing the execution, delivery and performance of the Guarantor Documents, and the documents related thereto; (ii) the articles of incorporation and bylaws of the Guarantor, and (iii) the signatures of the officers or agents of the Guarantor authorized to execute and deliver the Guarantor Documents, and the documents related thereto and other instruments, agreements and certificates on behalf of the Guarantor, and (iv) the share designation resolutions adopted by the directors of the Borrower creating the Preferred Stock and the Class Two Preferred Stock of the Borrower. (h) A certificate of good standing (or equivalent certificate) of the Borrower and the Guarantor duly issued (with no exceptions) by the Secretary of State of the State of Minnesota and each and every other state in which the Borrower or the Guarantor, as the case may be, is qualified to do business. (i) True and correct copies of the Release Notes, duly executed by the Borrower. (j) The Release Agreements, duly executed by the parties thereto. (k) An opinion of counsel to the Borrower and the Guarantor, addressed to the Lender. (l) The Option to Purchase Warrant, duly executed by the Guarantor. (m) Certificates of the insurance required hereunder, with all liability insurance with respect to the Borrower, the Subsidiaries and the Guarantor naming the Lender as an additional insured. (n) The Guaranty, properly executed by the Guarantor. (o) A true and correct copy of the Acquisition Documents, together with a certificate executed by the Guarantor and the Sellers which are a party thereto certifying that the closing contemplated by all of the Acquisition Documents has been consummated in accordance with the terms of the Acquisition Documents, without resort to any provision thereof permitting the waiver by any party thereto of any condition, obligation, representation, warranty, covenant or other requirement except as disclosed and consented to by the Lender, and the Lender shall have received such evidence as it shall deem satisfactory to the consummation of the acquisition in accordance with the terms of the Acquisition Documents. (p) A certificate certifying that any and all the documents (including, but not limited to, letters of intent) heretofore executed by the Guarantor with respect to the proposed acquisitions of Summers Pallet Service, Inc., a Texas corporation, American Pallet Recyclers, Inc., a Texas corporation, The Pallet Factory, Inc., a Tennessee corporation, C&C Pallet, Inc., a Missouri corporation, and Central Pallet, Inc., a Missouri corporation, have been assigned to the Borrower, and that there are no other acquisitions proposed by the Guarantor as of the date hereof with respect to which any documents have been executed. Executed copies of such assignments shall also be delivered to the Lender. (q) A true and correct copy of the Merger Documents, together with a certificate certifying that the Merger contemplated by the Merger Documents has been consummated in accordance with the terms of the Merger Documents, without resort to any provision thereof permitting the waiver by any party thereto of any condition, obligation, representation, warranty, covenant or other requirement except as disclosed and consented to by the Lender. (r) The Collateral Pledge Agreement, duly executed by the Borrower, together with the original PRANA Note and the Machine Specialists Note, endorsed to the Lender, and together with the original stock certificates for the shares described therein and the original certificates for the membership interests described therein and duly executed stock powers (and an equivalent document for the membership interests) with respect to each such certificate. (s) A certificate executed by the Borrower certifying as to certain information with respect to the shares of stock and membership interests, as the case may be, owned by the Borrower. (t) UCC-1 financing statements, duly executed by the Borrower and satisfying the requirements of Section 5.14. (u) Payment of the fees due under Section 2.11 hereof and expenses incurred by the Lender through such date and required to be paid by the Borrower under Section 9.7 hereof. (v) The Assignment of Seller's Representations and Warranties duly executed and delivered by the parties thereto. (w) The Debt Subordination Agreements duly executed by the parties thereto and acknowledged by the Borrower. (x) The Trademark Mortgage, duly executed by the Guarantor. (y) A certificate executed by the Borrower indicating the Borrower's proposed use of the funds to be advanced pursuant to the initial Advance. (z) Such other documents as the Lender in its reasonable discretion may require. Section 4.2 Conditions Precedent to all Advances. The Obligation of the Lender to make each Advance shall be subject to the further conditions precedent that on such date: (a) The representations and warranties contained in Article V hereof are correct on and as of the date of such Advance as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date; and (b) No event has occurred and continuing or would result from such Advance which constitutes a Default or an Event of Default; (c) The Borrower has complied in all respects with the provisions of Section 2.1(b) with respect to any Advance other than the initial Advance, and the proposed uses of the funds to be advanced pursuant to such proposed Advance are acceptable to the Lender in its sole discretion; and (d) The Borrower has executed and/or delivered, as the case may be, any and all other documents, instruments, agreements, certificates, materials and information as the Lender may require in its sole discretion. ARTICLE V. Representations and Warranties The Borrower represents and warrants to the Lender as follows: Section 5.1 Corporate Existence and Power; Name; Chief Executive Office; Inventory and Equipment Locations. The Borrower and each Subsidiary in existence as of the date hereof is a corporation duly incorporated, validly existing and in good standing under the laws of, in the case of the Borrower, the State of Minnesota, and, in the case of each Subsidiary, the state of its incorporation, and is or within thirty (30) days of the date hereof will be duly licensed or qualified to transact business in all jurisdictions where the character of the property owned or leased or the nature of the business transacted by it makes such licensing or qualification necessary. The Borrower and each Subsidiary has all requisite power and authority, corporate or otherwise, to conduct its business, to own its properties and the Borrower has all requisite power, corporate or otherwise, execute and deliver, and to perform all of its obligations under, the Loan Documents. During its corporate existence, the Borrower has done business solely under the names set forth in Exhibit B hereto. The chief executive office and principal place of business of the Borrower is located at the address set forth in Exhibit B hereto, and all of the Borrower's records relating to its business or the Collateral are kept at that location. All Inventory and Equipment is located at that location or at one of the other locations set forth in Exhibit B hereto. Section 5.2 Authorization of Borrowing; No Conflict as to Law or Agreements. The execution, delivery and performance by (i) the Borrower of the Loan Documents and the borrowing hereunder, and (ii) PRANA Memphis of the Acquisition Documents and the Merger Documents, have been duly authorized by all necessary corporate action and do not and will not (a) require any authorization, consent or approval by, or registration, declaration or filing with, or notice to, any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, or any third party, except such authorization, consent, approval, registration, declaration, filing or notice as has been obtained, accomplished or given prior to the date hereof, (b) violate any provision of any law, rule or regulation (including, without limitation, Regulation X of the Board of Governors of the Federal Reserve System) or of any order, writ, injunction or decree presently in effect having applicability to the Borrower or PRANA Memphis, as the case may be, or of the Articles of Incorporation or Bylaws of the Borrower or PRANA Memphis, as the case may be, (c) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other material agreement, lease or instrument to which the Borrower, or PRANA Memphis, as the case may be, is a party or by which it or its properties may be bound or affected, or (d) result in, or require, the creation or imposition of any mortgage, deed of trust, pledge, lien, security interest or other charge or encumbrance of any nature (other than the Security Interests) upon or with respect to any of the properties now owned or hereafter acquired by the Borrower or PRANA Memphis, as the case may be. Section 5.3 Legal Agreements. This Agreement constitutes and, upon due execution by the Borrower, the other Loan Documents will constitute the legal, valid and binding obligations of the Borrower, enforceable against the Borrower in accordance with their respective terms. Section 5.4 Subsidiaries. Except as set forth in Exhibit B attached hereto, the Borrower has no Subsidiaries. The Borrower owns, with power to vote, all of the issued and outstanding stock of the Subsidiaries. Section 5.5 Financial Condition; No Adverse Change. The Borrower has heretofore furnished to the Lender consolidated audited financial statements of the Guarantor for the fiscal year ended December 31, 1993, and consolidated unaudited financial statements of the Guarantor for the fiscal year ended December 31, 1994, and for the month and fiscal year-to-date ended May 31, 1995, and those statements fairly present the financial condition of the Guarantor on the dates thereof and the results of their operations and cash flows for the periods then ended and were prepared in accordance with generally accepted accounting principles. Since the date of the most recent financial statements, there has been no material adverse change in the business, properties or condition (financial or otherwise) of the Guarantor or its affiliates, or the Borrower or its Affiliates. Section 5.6 Litigation. There are no actions, suits or proceedings pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower or any of its Affiliates, or the properties of the Borrower or any of its Affiliates, before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which, if determined adversely to such Person, would have a material adverse effect on such Person's financial condition, properties or operations. Section 5.7 Regulation U. Neither the Borrower nor any of its Affiliates is engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System), and no part of the proceeds of any Advance will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock. Section 5.8 Taxes. The Borrower and its Affiliates have paid or caused to be paid to the proper authorities when due all federal, state and local taxes required to be withheld by each of them. The Borrower and its Affiliates have filed all federal, state and local tax returns which to the knowledge of the officers of the Borrower or any Affiliate, as the case may be, are required to be filed, and the Borrower and its Affiliates have paid or caused to be paid to the respective taxing authorities all taxes as shown on said returns or on any assessment received by any of them to the extent such taxes have become due. Section 5.9 Titles and Liens. The Borrower has good and absolute title to all Collateral and all other properties and assets reflected in the latest balance sheet referred to in Section 5.5 hereof and all proceeds thereof, free and clear of all mortgages, security interests, liens and encumbrances, except for (i) mortgages, security interests and liens permitted by Section 7.1 hereof, and (ii) in the case of any such property which is not Collateral or other collateral described in the Loan Documents, covenants, restrictions, rights, easements and minor irregularities in title which do not materially interfere with the business or operations of the Borrower as presently conducted. No financing statement naming the Borrower as debtor is on file in any office except to perfect only security interests permitted by Section 7.1 hereof. Section 5.10 Plans. Except as disclosed on Exhibit F attached hereto, neither the Borrower nor any of its ERISA Affiliates maintains or has maintained any Plan. Neither the Borrower nor any ERISA Affiliate has received any notice or has any knowledge to the effect that it is not in full compliance with any of the requirements of ERISA. No Reportable Event or other fact or circumstance which may have an adverse effect on the Plan's tax qualified status exists in connection with any Plan. Neither the Borrower nor any of its ERISA Affiliates has: (a) Any accumulated funding deficiency within the meaning of ERISA; or (b) Any liability or knows of any fact or circumstances which could result in any liability to the Pension Benefit Guaranty Corporation, the Internal Revenue Service, the Department of Labor or any participant in connection with any Plan (other than accrued benefits which or which may become payable to participants or beneficiaries of any such Plan). Section 5.11 Default. The Borrower and each of its Affiliates is in compliance with all provisions of all agreements, instruments, decrees and orders to which it is a party or by which it or its property is bound or affected, the breach or default of which could have a material adverse effect on the financial condition, properties or operations of the Borrower or such Affiliate, as the case may be. Section 5.12 Environmental Protection. The Borrower and its Affiliates have all obtained all permits, licenses and other authorizations which are required under federal, state and local laws and regulations relating to emissions, discharges, releases of pollutants, contaminants, hazardous or toxic materials, or wastes into ambient air, surface water, ground water or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants or hazardous or toxic materials or wastes ("Environmental Laws") at the Borrower's or such Affiliate's, as the case may be, facilities or in connection with the operation of their respective facilities. The Borrower and its Affiliates and all activities of the Borrower and its Affiliates at their respective facilities comply with all Environmental Laws and with all terms and conditions of any required permits, licenses and authorizations applicable to the Borrower or such Affiliate with respect thereto. The Borrower and its Affiliates are also in compliance with all limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in Environmental Laws or contained in any plan, order, decree, judgment or notice of which the Borrower is aware. The Borrower is not aware of, nor has the Borrower received notice of, any events, conditions, circumstances, activities, practices, incidents, actions or plans which may interfere with or prevent continued compliance with, or which may give rise to any liability for the Borrower or any of its Affiliates under, any Environmental Laws. Section 5.13 Submissions to Lender. All financial and other information provided to the Lender by or on behalf of the Borrower and its Affiliates in connection with the Borrower's request for the credit facilities contemplated hereby is true and correct in all material respects and, as to projections, valuations or proforma financial statements, present a good faith opinion as to such projections, valuations and proforma condition and results. Section 5.14 Financing Statements. The Borrower has provided to the Lender signed financing statement sufficient when filed to perfect the Security Interests and the other security interests created by the Loan Documents. When such financing statements are filed in the offices noted therein, the Lender will have a valid and perfected security interest in all Collateral and all other collateral described in the Loan Documents which is capable of being perfected by filing financing statements. None of the Collateral or other collateral covered by the Loan Documents is or will become a fixture on real estate, unless a sufficient fixture filing is in effect with respect thereto. Section 5.15 Rights to Payment. Each right to payment and each instrument, document, chattel paper and other agreement constituting or evidencing Collateral or other collateral covered by the Loan Documents is (or, in the case of all future Collateral or such other collateral, will be when arising or issued) the valid, genuine and legally enforceable obligation, subject to no defense, setoff or counterclaim, of the account debtor or other obligor named therein or in the Borrower's records pertaining thereto as being obligated to pay such obligation. Section 5.16 Acquisition Documents. The Agreement and Plan of Reorganization by and among PRANA Memphis, the Guarantor and Pallet Supply dated as of June 9, 1995, and all exhibits and schedules thereto and the documents related thereto (collectively, the "Acquisition Documents") and the agreement and articles of merger relating to Pallet Supply and PRANA Memphis, copies of which have been delivered to the Lender, are true and correct and together comprise full and complete copies of all agreements among the parties thereto, with respect to the transactions contemplated by such Acquisition Documents, and there are no oral agreements or understandings not contained therein relating to or modifying the substance thereof. The Acquisition Documents are in full force and effect and have not been further amended, terminated, rescinded or withdrawn, and no material provision has been waived by any party thereto. Section 5.17 Merger Documents. The Merger Documents and all exhibits and schedules thereto, copies of which have been delivered to the Lender, are true and correct copies thereof and together comprise full and complete copies of all agreements among Pallet Supply and PRANA Memphis with respect to the Merger, and there are no oral agreements or understandings not contained therein relating to or modifying the substance thereof. The Merger Documents are or will be as of the date hereof, in full force and effect and have not been further amended, terminated, rescinded or withdrawn and no material provision has been waived by any party thereto, except with the written consent of the Lender. Section 5.18 Prior Activities. Prior to the date hereof, the Borrower did not incur directly or through any Affiliate or Subsidiary, any liabilities or obligations or engage in any transactions other than the transaction contemplated hereby. Section 5.19 Solvency. (a) Immediately following the closing of the transactions contemplated hereby including, without limitation, the Merger, the fair saleable value of the Borrower as a going concern will exceed the amount that will be required to be paid in respect to the existing debts and other liabilities (including all contingent liabilities except those contingent liabilities arising under the Acquisition Documents which have not yet accrued) of the Borrower as they mature. (b) The Borrower does not and will not have, immediately following the closing of the transactions contemplated hereunder, unreasonably small capital to carry out its business as conducted or as proposed to be conducted. (c) The Borrower does not intend to and does not believe that it will incur debts beyond its ability to pay such debts as they mature. Section 5.20 Trademarks and Patents. Except as set forth on Exhibit E attached hereto, the Borrower does not own any interest in any copyrights, patents or trademarks that are registered under either federal or state law. Section 5.21 Ownership of Guarantor. All issued and outstanding capital stock of the Guarantor (whether common or preferred) is held by the Persons and in the amounts set forth on Exhibit G attached hereto. ARTICLE VI. Affirmative Covenants of the Borrower So long as the Note shall remain unpaid or the Advancing Term Loan Facility shall be outstanding, the Borrower will comply with the following requirements, unless the Lender shall otherwise consent in writing: Section 6.1 Reporting Requirements. The Borrower will deliver, or cause to be delivered, to the Lender each of the following, which shall be in form and detail acceptable to the Lender: (a) as soon as available, and in any event within one hundred twenty (120) days after the end of each fiscal year of the Borrower audited financial statements of the Borrower prepared on a consolidating basis with the Guarantor with the unqualified opinion of independent certified public accountants selected by the Borrower and acceptable to the Lender, which annual financial statements shall include the consolidating balance sheets of the Borrower and the Guarantor as at the end of such fiscal year and the related consolidating statements of income, retained earnings and cash flows of the Borrower and the Guarantor for the fiscal year then ended, prepared, if the Lender so requests, on a consolidating and consolidated basis to include any Subsidiary, all in reasonable detail and prepared in accordance with generally accepted accounting principles applied on a basis consistent with the accounting practices applied in the financial statements referred to in Section 5.5 hereof, together with (i) copies of any management letters delivered by the accounting firm in connection with such audited financial statements, (ii) a report signed by such accountants stating that in making the investigations necessary for said opinion they obtained no knowledge, except as specifically stated, of any Default or Event of Default hereunder and all relevant facts in reasonable detail to evidence, and the computations as to, whether or not the Borrower is in compliance with the requirements set forth in Sections 6.11, 6.12, and 7.18, and (iii) a certificate of an authorized officer of the Borrower stating that such financial statements have been prepared in accordance with generally accepted accounting principles applied on a basis consistent with the accounting practices reflected in the annual financial statements referred to in Section 5.5 hereof and whether or not such officer has knowledge of the occurrence of any Default or Event of Default hereunder and, if so, stating in reasonable detail the facts with respect thereto; (b) as soon as available and in any event within twenty-five (25) days after the end of each fiscal month of the Borrower, an unaudited/internal balance sheet and statements of income and retained earnings of the Borrower prepared on a consolidating basis with the Guarantor as of the end of and for such month, prepared, if the Lender so requests, on a consolidating and consolidated basis to include any Subsidiary, in reasonable detail and stating in comparative form the figures for the corresponding date and periods in the previous year, all prepared in accordance with generally accepted accounting principles applied on a basis consistent with the accounting practices reflected in the financial statements referred to in Section 5.5 hereof, subject to year-end audit adjustments; and accompanied by a certificate of an authorized officer of the Borrower, substantially in the form of Exhibit D hereto stating (i) that such financial statements have been prepared in accordance with generally accepted accounting principles applied on a basis consistent with the accounting practices reflected in the financial statements referred to in Section 5.5 hereof, subject to year-end audit adjustments, (ii) whether or not such officer has knowledge of the occurrence of any Default or Event of Default hereunder not theretofore reported and remedied and, if so, stating in reasonable detail the facts with respect thereto, and (iii) all relevant facts in reasonable detail to evidence, and the computations as to, whether or not the Borrower is in compliance with the requirements set forth in Sections 6.11, 6.12 and 7.18 hereof; (c) at least thirty (30) days before the beginning of each fiscal year of the Borrower, the consolidating projected balance sheets and income statements for each month of such year, each in reasonable detail, representing the good faith projections of the Borrower and certified by an authorized officer the Borrower as being the most accurate projections available, together with such supporting schedules and information as the Lender may in its reasonable discretion require; (d) immediately after the commencement thereof, notice in writing of all litigation and of all proceedings before any governmental or regulatory agency affecting the Borrower or any Affiliate of the type described in Section 5.6 hereof or which seek a monetary recovery against the Borrower or such Affiliate in excess of $25,000; (e) as promptly as practicable (but in any event not later than five business days) after an officer of the Borrower obtains knowledge of the occurrence of any breach, default or event of default under any Loan Document or any event which constitutes a Default or Event of Default hereunder, notice of such occurrence, together with a detailed statement by a responsible officer of the Borrower of the steps being taken by the Borrower to cure the effect of such breach, default or event; (f) as soon as possible and in any event within 30 days after the Borrower knows or has reason to know that any Reportable Event with respect to any Plan or with respect to any plan maintained by an Affiliate has occurred, the statement of the president of the Borrower or such Affiliate setting forth details as to such Reportable Event and the action which the Borrower or such Affiliate proposes to take with respect thereto, together with a copy of the notice of such Reportable Event to the Pension Benefit Guaranty Corporation; (g) as soon as possible, and in any event within 10 days after the Borrower or any Affiliate fails to make any quarterly contribution required with respect to any Plan under Section 412(m) of the Internal Revenue Code of 1986, as amended, the statement of the president of the Borrower or such Affiliate setting forth details as to such failure and the action which the Borrower or such Affiliate proposes to take with respect thereto, together with a copy of any notice of such failure required to be provided to the Pension Benefit Guaranty Corporation; (h) promptly upon knowledge thereof, notice of (i) any disputes or claims by customers of the Borrower or any of its Affiliates where the amount of such dispute or claim exceeds $25,000; (ii) any goods returned to or recovered by the Borrower or any Affiliates when the value of the goods so returned exceeds $25,000, and (iii) any change in the persons constituting the officers and directors of the Borrower or any Affiliate; (i) promptly upon knowledge thereof, notice of any material loss of or material damage to any Collateral or other collateral covered by the Loan Documents or of any substantial adverse change in any Collateral or such other collateral or the prospect of payment thereof; (j) promptly upon their distribution, copies of all financial statements, reports and proxy statements which the Borrower or any Affiliate shall have sent to its stockholders; (k) promptly after the sending or filing thereof, copies of all regular and periodic financial reports which the Borrower or any Affiliate shall file with the Securities and Exchange Commission or any national securities exchange; (l) promptly upon knowledge thereof, notice of the violation by the Borrower or any Affiliate of any law, rule or regulation, the non-compliance with which could materially and adversely affect its business or its financial condition; and (m) from time to time, upon request by the Lender, with reasonable promptness, any and all receivables schedules, collection reports, deposit records, equipment schedules, copies of invoices to account debtors, shipment documents and delivery receipts for goods sold, and such other material, reports, records or information. Section 6.2 Books and Records; Inspection and Examination. The Borrower will and will cause all Subsidiaries to keep accurate books of record and account for itself pertaining to the Collateral and pertaining to the Borrower's and all Subsidiaries' respective businesses and financial conditions and such other matters as the Lender may from time to time request in which true and complete entries will be made in accordance with generally accepted accounting principles consistently applied and, upon request of the Lender, will permit any officer, employee, attorney or accountant for the Lender to audit, review, make extracts from or copy any and all corporate and financial books and records of the Borrower or any Subsidiary at all times during ordinary business hours, to send and discuss with account debtors and other obligors requests for verification of amounts owed to the Borrower or any Subsidiary, and to discuss the affairs of the Borrower or any of its Subsidiaries with any of its directors, officers, employees or agents. The Borrower will and will cause all Subsidiaries to permit the Lender, or its employees, accountants, attorneys or agents, to examine and inspect any Collateral, other collateral covered by the Loan Documents or any other property of the Borrower at any time during ordinary business hours. Section 6.3 Account Verification. The Borrower will and will cause all Subsidiaries to at any time and from time to time upon request of the Lender send requests for verification of accounts or notices of assignment to account debtors and other obligors. Section 6.4 Compliance with Laws; Environmental Indemnity. The Borrower will and will cause all Subsidiaries to (a) comply with the requirements of applicable laws and regulations, the non-compliance with which would materially and adversely affect such Person's business or such Person's financial condition, and (b) comply with all applicable Environmental Laws and obtain any permits, licenses or similar approvals required by any such Environmental Laws. The Borrower will use and keep the Collateral, and will require that others use and keep the Collateral, only for lawful purposes, without violation of any federal, state or local law, statute or ordinance. The Borrower will and will cause all Subsidiaries to indemnify, defend and hold the Lender harmless from and against any claims, loss or damage to which the Lender may be subjected as a result of any past, present or future existence, use, handling, storage, transportation or disposal of any hazardous waste or substance or toxic substance by the Borrower or any Subsidiary or on property owned, leased or controlled by the Borrower or any Subsidiary. This indemnification agreement shall survive the termination of this Agreement and payment of the Obligations. Section 6.5 Payment of Taxes and Other Claims. The Borrower will and will cause all Subsidiaries to pay or discharge, when due, (a) all taxes, assessments and governmental charges levied or imposed upon it or upon its income or profits, upon any properties belonging to it (including, without limitation, the Collateral) or upon or against the creation, perfection or continuance of the Security Interests, prior to the date on which penalties attach thereto, (b) all federal, state and local taxes required to be withheld by it, and (c) all lawful claims for labor, materials and supplies which, if unpaid, might by law become a lien or charge upon any properties of the Borrower or any Subsidiary; provided, that the Borrower or such Subsidiary shall not be required to pay any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings. Section 6.6 Maintenance of Properties. (a) The Borrower will keep and maintain the Collateral, the other collateral covered by the Loan Documents and all of its other properties necessary or useful in its business in good condition, repair and working order (normal wear and tear excepted) and will from time to time replace or repair any worn, defective or broken parts; provided, however, that nothing in this Section 6.6 shall prevent the Borrower from discontinuing the operation and maintenance of any of its properties if such discontinuance is, in the judgment of the Lender, desirable in the conduct of the Borrower's business and not disadvantageous in any material respect to the Lender. (b) The Borrower will defend the Collateral against all claims or demands of all persons (other than the Lender) claiming the Collateral or any interest therein. (c) The Borrower will keep all Collateral and other collateral covered by the Loan Documents free and clear of all security interests, liens and encumbrances except the Security Interests and other security interests permitted by Section 7.1 hereof. Section 6.7 Insurance. The Borrower will and will cause all Subsidiaries to obtain and at all times maintain insurance with insurers believed by the Borrower to be responsible and reputable, in such amounts and against such risks as may from time to time be required by the Lender, but in all events in such amounts and against such risks as is usually carried by companies engaged in similar business and owning similar properties in the same general areas in which the Borrower operates. Without limiting the generality of the foregoing, the Borrower will at all times keep all tangible Collateral, if any, insured against risks of fire (including so-called extended coverage), theft, collision (for Collateral consisting of motor vehicles) and such other risks and in such amounts as the Lender may reasonably request, with any loss payable to the Lender to the extent of its interest, and all policies of such insurance shall contain a lender's loss payable endorsement for the benefit of the Lender. All policies of liability insurance required hereunder with respect to the Borrower and the Subsidiaries shall name the Lender as an additional insured. Section 6.8 Preservation of Corporate Existence. The Borrower will and will cause all Subsidiaries to preserve and maintain its corporate existence and all of its rights, privileges and franchises necessary or desirable in the normal conduct of its business and shall conduct its business in an orderly, efficient and regular manner. Section 6.9 Delivery of Instruments, etc. Upon request by the Lender, the Borrower will promptly deliver to the Lender in pledge all instruments, documents and chattel papers constituting Collateral, duly endorsed or assigned by the Borrower. Section 6.10 Performance by the Lender. If the Borrower at any time fails to perform or observe any of the foregoing covenants contained in this Article VI or elsewhere herein, and if such failure shall continue for a period of ten calendar days after the Lender gives the Borrower written notice thereof (or in the case of the agreements contained in Sections 6.5 and 6.7 hereof, immediately upon the occurrence of such failure, without notice or lapse of time), the Lender may, but need not, perform or observe such covenant on behalf and in the name, place and stead of the Borrower (or, at the Lender's option, in the Lender's name) and may, but need not, take any and all other actions which the Lender may reasonably deem necessary to cure or correct such failure (including, without limitation, the payment of taxes, the satisfaction of security interests, liens or encumbrances, the performance of obligations owed to account debtors or other obligors, the procurement and maintenance of insurance, the execution of assignments, security agreements and financing statements, and the endorsement of instruments); and the Borrower shall thereupon pay to the Lender on demand the amount of all monies expended and all costs and expenses (including reasonable attorneys' fees and legal expenses) incurred by the Lender in connection with or as a result of the performance or observance of such agreements or the taking of such action by the Lender, together with interest thereon from the date expended or incurred at the sum of the Floating Rate and the Accrual Rate, but in no event shall the combined Floating Rate and Accrual Rate exceed the highest rate permitted by law. To facilitate the performance or observance by the Lender of such covenants of the Borrower, the Borrower hereby irrevocably appoints the Lender, or the delegate of the Lender, acting alone, as the attorney in fact of the Borrower (which appointment is coupled with an interest) with the right (but not the duty) from time to time to create, prepare, complete, execute, deliver, endorse or file in the name and on behalf of the Borrower any and all instruments, documents, assignments, security agreements, financing statements, applications for insurance and other agreements and writings required to be obtained, executed, delivered or endorsed by the Borrower under this Section 6.10. Section 6.11 Debt Service Coverage Ratio. The Borrower will at all times maintain (calculated on a consolidated basis for the Borrower and its Subsidiaries) a Debt Service Coverage Ratio calculated quarterly as of the last day of each fiscal quarter of the Borrower using the actual results of such quarter, of at least 1.3 to 1.0. Section 6.12 Book Net Worth. The Borrower shall at all times maintain (calculated on a consolidated basis for the Borrower and its Subsidiaries) Book Net Worth calculated quarterly as of the last day of each fiscal quarter of the Borrower of at least $5,300,000. Section 6.13 Merger Certificate. Within three (3) days of the date hereof, the Borrower shall deliver a certificate of merger and certified copies of the filed articles of merger issued by the Secretaries of State of Minnesota and of Tennessee with respect to the merger of PRANA Memphis and Pallet Supply. Section 6.14 Acquisitions. In the event the Lender consents to any proposed acquisition pursuant to Section 7.7 hereof, such acquisition shall be consummated by the Borrower or a future Subsidiary of the Borrower and not by PRANA or any of the Affiliates (other than the Borrower or any future Subsidiary of the Borrower). Section 6.15 Stock of Subsidiaries. The Borrower shall at all times own, with power to vote, all of the issued and outstanding stock of the Subsidiaries. Section 6.16 Payment under Debt Subordination Agreement. If the Borrower or the Guarantor has not completed an initial public offering of the Borrower's or the Guarantor's common stock by June 30, 1996 at an initial offering price of no less than $5.00 per share, and so long as no Default or Event of Default shall occur as a result of such payment, the Borrower shall pay $100,000 to John J. Baggett and $100,000 to Tony W. Baggett on or before June 30, 1996 in order to make the Debt Subordination Agreement executed by John J. Baggett and Tony W. Baggett in favor of the Lender effective pursuant to Paragraph 17 of such agreement. Notwithstanding the foregoing, the Borrower acknowledges that the Lender reserves the right to make any such payments in the Lender's sole discretion, and in the event the Lender elects to make any such payment, the amount of such payment shall be deemed to be an Advance under the Advancing Term Loan Facility. Section 6.17 Insurance. By December 31, 1995, the Borrower shall have added all of the Subsidiaries as additional named insureds to the Borrower's master corporate policies of general liability, excess liability or "umbrella" coverage, property, boiler and machinery, crime, automobile and worker's compesnation insurance; provided that the Borrower shall not be required to add any such Subsidiary as an additional named insured with respect to property or worker's compensation insurance if such Subsidiary maintains such insurance under seprate policies and otherwise in compliance with the terms of this Agreement. Section 6.18 Foreign Trademarks. The Borrower has advised the Lender that it intends to register the "PRANA" trademark and design in Canada and Mexico. The Borrower agrees to advise the Lender from time to time as to the status of such registrations and to execute such documents as the Lender may request pursuant to Section 9.5 hereof to allow the Lender to perfect its Security Interest in such trademarks. ARTICLE VII. Negative Covenants So long as the Note shall remain unpaid or the Advancing Term Loan Facility shall be outstanding, the Borrower agrees that, without the prior written consent of the Lender: Section 7.1 Liens and Capitalized Leases. The Borrower will not and will not permit any Subsidiary to (i) create, incur or suffer to exist any mortgage, deed of trust, pledge, lien, security interest, assignment or transfer upon or of any of its assets, now owned or hereafter acquired, to secure any indebtedness, or (ii) incur any lease obligations which are required to be capitalized on the balance sheet ("Capitalized Lease Obligations"); excluding, however, from the operation of the foregoing: (a) mortgages, deeds of trust, pledges, liens, security interests and assignments in existence on the date hereof and listed in Exhibit C hereto, securing indebtedness for borrowed money permitted under Section 7.2 hereof; (b) the Security Interests; and (c) purchase money security interests (as such term is defined in Section 9-107 of the UCC) or Capitalized Lease Obligations relating to the acquisition of machinery and equipment of the Borrower so long as the Borrower is in, and maintains, compliance with every other provision of this Agreement; (d) liens granted by any Subsidiary to the Lender or any Affiliate of the Lender. Section 7.2 Indebtedness. The Borrower will not and will not permit any Subsidiary to incur, create, assume or permit to exist any indebtedness or liability on account of deposits or advances or any indebtedness for borrowed money, or any other indebtedness or liability evidenced by notes, bonds, debentures or similar obligations or any Capitalized Lease Obligations, except: (a) indebtedness arising hereunder; (b) indebtedness or Capitalized Lease Obligations of the Borrower or any Subsidiary in existence on the date hereof and listed in Exhibit C hereto; and (c) indebtedness or Capitalized Lease Obligations relating to liens permitted in accordance with Section 7.1(c) hereof, so long as the total aggregate amount of all such indebtedness and Capitalized Lease Obligations (whether payable currently or in the future) outstanding at any time does not exceed $200,000; and (d) indebtedness of any Subsidiary to the Lender or any affiliate of the Lender, so long as the total aggregate amount of all such indebtedness of all such Subsidiaries to the Lender and all of its Affiliates outstanding at any time does not exceed $2,300,000. Section 7.3 Guaranties. The Borrower will not and will not permit any Subsidiary to assume, guarantee, endorse or otherwise become directly or contingently liable in connection with any obligations of any other Person, except: (a) the endorsement of negotiable instruments by the Borrower or any Subsidiary for deposit or collection or similar transactions in the ordinary course of business; and (b) guaranties, endorsements and other direct or contingent liabilities in connection with the obligations of other Persons in existence on the date hereof and listed in Exhibit C hereto. Section 7.4 Investments and Subsidiaries. (a) The Borrower will not and will not permit any Subsidiary to purchase or hold beneficially any stock or other securities or evidences of indebtedness of, make or permit to exist any loans or advances to, or make any investment or acquire any interest whatsoever in, any other Person, including specifically but without limitation any partnership or joint venture, except: (1) investments in direct obligations of the United States of America or any agency or instrumentality thereof whose obligations constitute full faith and credit obligations of the United States of America having a maturity of one year or less, commercial paper issued by U.S. corporations rated "A-l" or "A-2" by Standard & Poors Corporation or "P-1" or "P-2" by Moody's Investors Service or certificates of deposit or bankers' acceptances having a maturity of one year or less issued by members of the Federal Reserve System having deposits in excess of $100,000,000 (which certificates of deposit or bankers' acceptances are fully insured by the Federal Deposit Insurance Corporation); (2) travel advances or loans to officers and employees of the Borrower not exceeding at any one time an aggregate of $10,000; and (3) advances in the form of progress payments, prepaid rent or security deposits. (b) The Borrower will not create or permit to exist any Subsidiary, other than any Subsidiary in existence on the date hereof and listed in Exhibit B hereto. Section 7.5 Dividends. Except as permitted in Section 7.18 hereof, the Borrower will not declare or pay any dividends (other than dividends payable solely in stock of the Borrower) on any class of its stock or make any payment on account of the purchase, redemption or other retirement of any shares of such stock or make any distribution in respect thereof, either directly or indirectly. Section 7.6 Sale or Transfer of Assets; Suspension of Business Operations. The Borrower will not and will not permit any Subsidiary to sell, lease, assign, transfer or otherwise dispose of (i) the stock of any Subsidiary, (ii) all or a substantial part of its assets, or (iii) any Collateral or any interest therein (whether in one transaction or in a series of transactions) to any other Person other than the sale of Inventory in the ordinary course of business. The Borrower will not and will not permit any Subsidiary to liquidate, dissolve or suspend business operations. The Borrower will not and will not permit any Subsidiary to in any manner transfer any property without prior or present receipt of full and adequate consideration. Section 7.7 Consolidation and Merger; Asset Acquisitions. The Borrower will not and will not permit any Subsidiary to consolidate with or merge into any Person, or permit any other Person to merge into it, or acquire (in a transaction analogous in purpose or effect to a consolidation or merger) all or substantially all the assets of any other Person other than the Merger, and the Acquisition contemplated by the Acquisition Documents. The Lender agrees that so long as no Default or Event of Default has occurred, its consent to any consolidation, merger or acquisition described in this Section 7.7 shall not be unreasonably withheld. Section 7.8 Sale and Leaseback. The Borrower will not and will not permit any Subsidiary to enter into any arrangement, directly or indirectly, with any other Person whereby the Borrower or such Subsidiary shall sell or transfer any real or personal property owned by the Borrower as of the date hereof, and then or thereafter rent or lease as lessee such property or any part thereof or any other property which the Borrower or such Subsidiary intends to use for substantially the same purpose or purposes as the property being sold or transferred. Section 7.9 Restrictions on Nature of Business. The Borrower will not and will not permit any Subsidiary to engage in any line of business materially different from that presently engaged in by the Borrower or such Subsidiary and will not purchase, lease or otherwise acquire assets not related to its business. Section 7.10 Intentionally Omitted. Section 7.11 Accounting. The Borrower will not and will not permit any Subsidiary to adopt any material change in accounting principles other than as required by generally accepted accounting principles. The Borrower will not and will not permit any Subsidiary to adopt, permit or consent to any change in its fiscal year. Section 7.12 Discounts, etc. The Borrower will not and will not permit any Subsidiary to, after notice from the Lender (which may only be given if a Default or an Event of Default has occurred and continues to exist), grant any discount, credit or allowance to any customer of the Borrower or accept any return of goods sold, or at any time (whether before after notice from the Lender) modify, amend, subordinate, cancel or terminate the obligation of any account debtor or other obligor of the Borrower or such Subsidiary. Section 7.13 Defined Benefit Pension Plans. The Borrower will not and will not permit any Subsidiary to adopt, create, assume or become a party to any defined benefit pension plan. Section 7.14 Other Defaults. The Borrower will not and will not permit any Subsidiary to permit any breach, default or event of default to occur under any note, loan agreement, indenture, lease, mortgage, contract for deed, security agreement or other contractual obligation binding upon the Borrower or such Subsidiary. Section 7.15 Place of Business; Name. The Borrower will not transfer its chief executive office or principal place of business, or move, relocate, close or sell any business location; provided that, the Borrower may move, relocate or close any business location (i) upon thirty (30) days prior written notice to the Lender, and (ii) upon delivery to the Lender of such documents, instruments and agreements as the Lender may require. The Borrower will not permit any tangible Collateral or any records pertaining to the Collateral to be located in any state or area in which, in the event of such location, a financing statement covering such Collateral would be required to be, but has not in fact been, filed in order to perfect the Security Interests. The Borrower will not change its name. Section 7.16 Organizational Documents; S Corporation Status. The Borrower will not and will not permit any Subsidiary to amend its certificate of incorporation, articles of incorporation or bylaws. The Borrower will not and will not permit any Subsidiary to become an S Corporation within the meaning of the Internal Revenue Code of 1986, as amended. Section 7.17 Salaries; Management Fees. The Borrower will not and will not permit any Subsidiary to pay excessive or unreasonable salaries, bonuses, commissions, consultant fees or other compensation; or increase the salary, bonus, commissions, consultant fees or other compensation of any director, officer or consultant who is also a shareholder of the Guarantor, or any member of their families, by more than ten percent (10%) in any one year, either individually or for all such persons in the aggregate, or pay any such increase from any source other than profits earned in the year of payment. Without limiting the generality of the foregoing, the Lender agrees that if the Borrower's or any Affiliate's board of directors approves a bonus or other compensation plan for officers and key employees of the Borrower or any Affiliate and submits such plan to the Lender, the Lender's consent to payments under such plan in excess of the limitations set forth in this Section 7.17 shall not be unreasonably withheld so long as no Default or Event of Default has occurred. Section 7.18 Upstreamed Cash. The Borrower will not (calculated on a consolidated basis for the Borrower and its Subsidiaries) pay, transfer or give credit for Upstreamed Cash during any of the following periods in an amount greater than the lesser of (i) the maximum amount which could be paid, transferred or credited to the Guarantor from the Borrower and its Subsidiaries without causing a violation of the Debt Service Coverage Ratio set forth in Section 6.11 hereof; or (ii) the amount set forth below: For the fiscal quarter ending: Upstreamed Cash ----------------------------- --------------- September 30, 1995 $ 800,000 December 31, 1995 $ 900,000 March 31, 1996 $ 950,000 June 30, 1996 $1,000,000 September 30, 1996 $ 900,000 December 31, 1996 $ 500,000 all quarters thereafter $ 250,000 Notwithstanding the foregoing, following the occurrence of a Default or an Event of Default, the Borrower will not pay, transfer or give credit for any Upstreamed Cash. Section 7.19 Change in Ownership. The Borrower will not issue or sell any stock of the Borrower so as to change the percentage of voting and nonvoting stock owned by each of the Borrower's shareholders, and the Borrower will not permit or suffer to occur the sale, transfer, assignment, pledge or other disposition of any or all of the issued and outstanding stock of the Borrower. Section 7.20 Payment under Debt Subordination Agreement. If a Default or an Event of Default has occurred or will occur as a result of any such payment, or if the Borrower or the Guarantor has completed an initial public offering of the Borrower's or the Guarantor's common stock by June 30, 1996 at an initial offering price of at least $5.00 per share, the Borrower will not pay the $100,000 to either John J. Baggett or Tony W. Baggett necessary to make the Debt Subordination Agreement executed by John J. Baggett and Tony W. Baggett in favor of the Lender effective pursuant to Paragraph 17 of said agreement. Section 7.21 Payment under Release Notes. The Borrower will not prepay any of the Release Notes. If a Default or an Event of Default has occurred or would occur as a result of such payment, the Borrower will not make any payments (whether of principal, interest or otherwise) under the Release Notes. ARTICLE VIII. Events of Default, Rights and Remedies Section 8.1 Events of Default. "Event of Default," wherever used herein, means any one of the following events: (a) Default in the payment of any interest on or principal of the Note when it becomes due and payable; or (b) Default in the payment of any fees, commissions, costs or expenses required to be paid by the Borrower under this Agreement; or (c) Default in the performance, or breach, of any covenant or agreement of the Borrower contained in this Agreement or of the Guarantor contained in the Guarantor Documents or of any Subsidiary or other Affiliate contained in any document, instrument or agreement now or hereafter entered into by such Subsidiary or other Affiliate with the Lender or any affiliate of the Lender; or (d) The Borrower or any Affiliate shall be or become insolvent, or admit in writing its inability to pay its or his debts as they mature, or make an assignment for the benefit of creditors; or the Borrower or any Affiliate shall apply for or consent to the appointment of any receiver, trustee, or similar officer for it or him or for all or any substantial part of its or his property; or such receiver, trustee or similar officer shall be appointed without the application or consent of the Borrower or such Affiliate, as the case may be; or the Borrower or any Affiliate shall institute (by petition, application, answer, consent or otherwise) any bankruptcy, insolvency, reorganization, arrangement, readjustment of debt, dissolution, liquidation or similar proceeding relating to it or him under the laws of any jurisdiction; or any such proceeding shall be instituted (by petition, application or otherwise) against the Borrower or any Affiliate; or any judgment, writ, warrant of attachment, garnishment or execution or similar process shall be issued or levied against a substantial part of the property of the Borrower or any Affiliate; or (e) A petition shall be filed by or against the Borrower or any Affiliate under the United States Bankruptcy Code naming the Borrower as debtor; or (f) Any representation or warranty made by the Borrower in this Agreement or by the Guarantor in any Guarantor Document, or in any agreement, certificate, instrument or financial statement or other statement contemplated by or made or delivered pursuant to or in connection with this Agreement or any Guarantor Document shall prove to have been incorrect in any material respect when deemed to be effective; or (g) The rendering against the Borrower or any Affiliate of a final judgment, decree or order for the payment of money in excess of $25,000 and the continuance of such judgment, decree or order unsatisfied and in effect for any period of 30 consecutive days without a stay of execution; or (h) A default under any bond, debenture, note or other evidence of indebtedness of the Borrower or any Affiliate owed to any Person other than the Lender or under any indenture or other instrument under which any such evidence of indebtedness has been issued or by which it is governed, or under any lease of any of the Premises, and the expiration of the applicable period of grace, if any, specified in such evidence of indebtedness, indenture, other instrument or lease; or (i) Any Reportable Event with respect to the Borrower or any Affiliate, which the Lender determines in good faith might constitute grounds for the termination of any Plan or plan, as the case may be, or for the appointment by the appropriate United States District Court of a trustee to administer any Plan or plan, as the case may be, shall have occurred and be continuing 30 days after written notice to such effect shall have been given to the Borrower or such Affiliate by the Lender; or a trustee shall have been appointed by an appropriate United States District Court to administer any Plan, or plan, as the case may be; or the Pension Benefit Guaranty Corporation shall have instituted proceedings to terminate any Plan or plan, as the case may be, or to appoint a trustee to administer any Plan or plan, as the case may be; or the Borrower or any Affiliate shall have filed for a distress termination of any Plan or plan, as the case may be, under Title IV of ERISA; or the Borrower or any Affiliate shall have failed to make any quarterly contribution required with respect to any Plan or plan, as the case may be, under Section 412(m) of the Internal Revenue Code of 1986, as amended, which the Lender determines in good faith may by itself, or in combination with any such failures that the Lender may determine are likely to occur in the future, result in the imposition of a lien on the assets of the Borrower or such Affiliate in favor of the Plan or plan, as the case may be; or (j) An event of default shall occur under any Loan Document or under any other security agreement, mortgage, deed of trust, assignment or other instrument or agreement securing any obligations of the Borrower hereunder or under any note payable to the order of the Lender; or (k) The Borrower or any Affiliate shall liquidate, dissolve, terminate or suspend its business operations or otherwise fail to operate its business in the ordinary course, or sell all or substantially all of its assets, without the prior written consent of the Lender; or (l) The Borrower or any Affiliate shall fail to pay, withhold, collect or remit any tax or tax deficiency when assessed or due (other than any tax deficiency which is being contested in good faith and by proper proceedings and for which it shall have set aside on its books adequate reserves therefor) or notice of any state or federal tax liens shall be filed or issued; or (m) Default in the payment of any amount owed by the Borrower to the Lender other than any indebtedness arising hereunder; or (n) Any breach, default or event of default by or attributable to any Affiliate under any agreement executed in connection herewith or in any agreement executed in connection with any financial accommodation between such Affiliate or any Affiliate and the Lender; or (o) Any Guarantor shall repudiate, purport to revoke or fail to perform any such Guarantor's obligations under such Guarantor's Guaranty in favor of the Lender, any individual Guarantor shall die or any other Guarantor shall cease to exist; or (p) Any Person shall own or control, directly or indirectly, more than 35% of the issued and outstanding voting stock of the Guarantor. (q) Jeffery E. Otto shall fail to serve as Chief Executive Officer of the Guarantor and as President of the Borrower. (r) The Guarantor shall be in payment default under any of the Release Notes. Section 8.2 Rights and Remedies. Upon the occurrence of an Event of Default or at any time thereafter, the Lender may exercise any or all of the following rights and remedies: (a) The Lender may, by notice to the Borrower, declare the Advancing Term Loan Facility to be terminated, whereupon the same shall forthwith terminate; (b) The Lender may, by notice to the Borrower, declare to be forthwith due and payable the entire unpaid principal amount of the Note then outstanding, all interest accrued and unpaid thereon, all amounts payable under this Agreement and any other Obligations, whereupon the Note, all such accrued interest and all such amounts and Obligations shall become and be forthwith due and payable, without presentment, notice of dishonor, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower; (c) The Lender may, without notice to the Borrower and without further action, apply any and all money owing by the Lender to the Borrower, including without limitation any funds on deposit with the Lender, whether or not matured, to the payment of the Advances, including interest accrued thereon, and of all other sums then owing by the Borrower hereunder; (d) The Lender may, exercise and enforce any and all rights and remedies available upon default to a secured party under the UCC, including, without limitation, the right to take possession of Collateral, or any evidence thereof, proceeding without judicial process or by judicial process (without a prior hearing or notice thereof, which the Borrower hereby expressly waives) and the right to sell, lease or otherwise dispose of any or all of the Collateral, and, in connection therewith, the Borrower will on demand assemble the Collateral and make it available to the Lender at a place to be designated by the Lender which is reasonably convenient to both parties; (e) the Lender may exercise and enforce its rights and remedies under the Loan Documents and under the Guarantor Documents; and (f) the Lender may exercise any other rights and remedies available to it by law or agreement. Notwithstanding the foregoing, upon the occurrence of an Event of Default described in Section 8.1(e) hereof, the entire unpaid principal amount of the Note (whether contingent or funded), all interest accrued and unpaid thereon, all other amounts payable under this Agreement and any other Obligations shall be immediately due and payable automatically without presentment, demand, protest or notice of any kind. Section 8.3 Certain Notices. If notice to the Borrower of any intended disposition of Collateral or any other intended action is required by law in a particular instance, such notice shall be deemed commercially reasonable if given (in the manner specified in Section 9.3) at least ten calendar days prior to the date of intended disposition or other action. ARTICLE IX. Miscellaneous Section 9.1 No Waiver; Cumulative Remedies. No failure or delay on the part of the Lender in exercising any right, power or remedy under the Loan Documents shall operate as a waiver thereof; nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy under the Loan Documents. The remedies provided in the Loan Documents are cumulative and not exclusive of any remedies provided by law. Section 9.2 Amendments, Etc. No amendment, modification, termination or waiver of any provision of any Loan Document or consent to any departure by the Borrower therefrom or any release of a Security Interest shall be effective unless the same shall be in writing and signed by the Lender, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances. Section 9.3 Addresses for Notices, Etc. Except as otherwise expressly provided herein, all notices, requests, demands and other communications provided for under the Loan Documents shall be in writing and shall be (a) personally delivered, (b) sent by first class United States mail, (c) sent by overnight courier of national reputation, or (d) transmitted by telecopy, in each case addressed to the party to whom notice is being given at its address as set forth below and, if telecopied, transmitted to that party at its telecopier number set forth below: If to the Borrower: PRANA Holdings, Inc. 2665 Long Lake Road, Suite 120 Roseville, MN 55113 Telecopier: (612) 635-0680 Attention: Tom Schreier If to the Lender: Norwest Bank Minnesota, National Association Norwest Center Sixth Street and Marquette Avenue Minneapolis, Minnesota 55479-0089 Telecopier: (612) 667-7266 Attention: Heidi H. Samuels or, as to each party, at such other address or telecopier number as may hereafter be designated by such party in a written notice to the other party complying as to delivery with the terms of this Section. All such notices, requests, demands and other communications shall be deemed to have been given on (a) the date received if personally delivered, (b) three (3) days after being deposited in the mail if delivered by mail, (c) one (1) day after the date sent if sent by overnight courier, or (d) the date of transmission if delivered by telecopy, except that notices or requests to the Lender pursuant to any of the provisions of Article II hereof shall not be effective until received by the Lender. Section 9.4 Financing Statement. A carbon, photographic or other reproduction of this Agreement or of any financing statements signed by the Borrower is sufficient as a financing statement and may be filed as a financing statement in any state to perfect the security interests granted hereby. For this purpose, the following information is set forth: Name and address of Debtor: PRANA Holdings, Inc. 2665 Long Lake Road, Suite 120 Roseville, MN 55113 Federal Tax Identification No. 41-1815904 Name and address of Secured Party: Norwest Bank Minnesota, National Association Norwest Center Sixth and Marquette Minneapolis, Minnesota 55479-0089 Section 9.5 Further Documents. The Borrower will from time to time execute and deliver or endorse any and all instruments, documents, conveyances, assignments, security agreements, financing statements and other agreements and writings that the Lender may reasonably request in order to secure, protect, perfect or enforce the Security Interests or the rights of the Lender under this Agreement (but any failure to request or assure that the Borrower executes, delivers or endorses any such item shall not affect or impair the validity, sufficiency or enforceability of this Agreement and the Security Interests, regardless of whether any such item was or was not executed, delivered or endorsed in a similar context or on a prior occasion). Section 9.6 Collateral. This Agreement does not contemplate a sale of accounts, contract rights or chattel paper, and, as provided by law, the Borrower is entitled to any surplus and shall remain liable for any deficiency. The Lender's duty of care with respect to Collateral in its possession (as imposed by law) shall be deemed fulfilled if it exercises reasonable care in physically keeping such Collateral, or in the case of Collateral in the custody or possession of a bailee or other third person, exercises reasonable care in the selection of the bailee or other third person, and the Lender need not otherwise preserve, protect, insure or care for any Collateral. The Lender shall not be obligated to preserve any rights the Borrower may have against prior parties, to realize on the Collateral at all or in any particular manner or order or to apply any cash proceeds of the Collateral in any particular order of application. Section 9.7 Costs and Expenses. The Borrower agrees to pay on demand all costs and expenses, including (without limitation) attorneys' fees, incurred by the Lender in connection with the Obligations, this Agreement, the Loan Documents, the Guarantor Documents, and any other document or agreement related hereto or thereto, and the transactions contemplated hereby, including without limitation all such reasonable costs, expenses and fees incurred in connection with the negotiation, preparation, execution, amendment and administration of the Loan Documents, the Guarantor Documents, and all such documents and agreements and the creation and perfection of the Security Interests and all such costs, expenses and fees incurred in connection with the performance, collection and enforcement of the Obligations and all such documents and agreements and the protection, satisfaction, foreclosure or enforcement of the Security Interests or any security interest granted by the Guarantor Documents. Section 9.8 Indemnity. In addition to the payment of expenses pursuant to Section 9.7 hereof and the environmental indemnity pursuant to Section 6.4 hereof, the Borrower agrees to indemnify, defend and hold harmless the Lender, and any of its participants, parent corporations, subsidiary corporations, affiliated corporations, successor corporations, and all present and future officers, directors, employees and agents of the foregoing (the "Indemnitees"), from and against (i) any and all transfer taxes, documentary taxes, assessments or charges made by any governmental authority by reason of the execution and delivery of this Agreement and the other Loan Documents or the Guarantor Documents, or the making of the Advances and (ii) any and all liabilities, losses, damages, penalties, judgments, suits, claims, costs and expenses of any kind or nature whatsoever (including, without limitation, the reasonable fees and disbursements of counsel) in connection with any investigative, administrative or judicial proceedings, whether or not such Indemnitee shall be designated a party thereto, which may be imposed on, incurred by or asserted against such Indemnitee, in any manner relating to or arising out of or in connection with the making of the Advances, this Agreement, all other Loan Documents or the Guarantor Documents, or the use or intended use of the proceeds of the Advances; provided, however, that Indemnitees shall not be entitled to any indemnification pursuant to this Section 9.8 if such liabilities, losses, damage, penalties, judgments, suits, claims, costs or expense arise solely as a result of the gross negligence of an Indemnitee (the "Indemnified Liabilities"). If any investigative, judicial or administrative proceeding arising from any of the foregoing is brought against any Indemnitee, upon request of such Indemnitee, the Borrower, or counsel designated by the Borrower and reasonably satisfactory to the Indemnitee, will resist and defend such action, suit or proceeding to the extent and in the manner directed by the Indemnitee, at the Borrower's sole cost and expense. Each Indemnitee will use its best efforts to cooperate in the defense of any such action, suit or proceeding. If the foregoing undertaking to indemnify, defend and hold harmless may be held to be unenforceable because it violates any law or public policy, the Borrower shall nevertheless make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. The obligation of the Borrower under this Section 9.8 shall survive the termination of this Agreement and the discharge of the Borrower's other Obligations. Section 9.9 Participants. The Lender and its participants, if any, are not partners or joint venturers, and the Lender shall not have any liability or responsibility for any obligation, act or omission of any of its participants. All rights and powers specifically conferred upon the Lender may be transferred or delegated to any of the participants, successors or assigns of the Lender. Section 9.10 Execution in Counterparts. This Agreement and other Loan Documents may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which counterparts, taken together, shall constitute but one and the same instrument. Section 9.11 Binding Effect; Assignment; Complete Agreement. The Loan Documents shall be binding upon and inure to the benefit of the Borrower and the Lender and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights thereunder or any interest therein without the prior written consent of the Lender. This Agreement, together with the Loan Documents, comprises the complete and integrated agreement of the parties on the subject matter hereof and supersedes all prior agreements, written or oral, on the subject matter hereof. Section 9.12 Governing Law; Jurisdiction, Venue; Waiver of Jury Trial. The Loan Documents shall be governed by and construed in accordance with the substantive laws (other than conflict laws) of the State of Minnesota. Each party consents to the personal jurisdiction of the state and federal courts located in the State of Minnesota in connection with any controversy related to this Agreement, waives any argument that venue in any such forum is not convenient and agrees that any litigation initiated by any of them in connection with this Agreement shall be venued in either the District Court of Hennepin County, Minnesota, or the United States District Court, District of Minnesota, Fourth Division. The parties waive any right to trial by jury in any action or proceeding based on or pertaining to this Agreement. Section 9.13 Severability of Provisions. Any provision of this Agreement which is prohibited or unenforceable shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. Section 9.14 Headings. Article and Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the date first above written. PRANA HOLDINGS, INC. By: Jeffery E. Otto Its: President NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION By: Its: Exhibit A to Term Loan and Security Agreement ADVANCING TERM NOTE $2,600,000.00 Minneapolis, Minnesota August ___, 1995 For value received, the undersigned, PRANA Holdings, Inc., a Minnesota corporation (the "Borrower"), hereby promises to pay on February 28, 1998 to the order of NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking association (the "Lender"), at its main office in Minneapolis, Minnesota, or at any other place designated at any time by the holder hereof, in lawful money of the United States of America and in immediately available funds, the principal sum of TWO MILLION SIX HUNDRED THOUSAND AND NO/100 DOLLARS ($2,600,000.00), or, if less, the aggregate unpaid amount of all principal advances made by the Lender to the Borrower hereunder, together with interest on the principal amount hereunder remaining unpaid from time to time, computed on the basis of the actual number of days elapsed and a 360-day year, from the date hereof until this Note is fully paid at the rate from time to time in effect under the Term Loan and Security Agreement of even date herewith (the "Credit Agreement") by and between the Lender and the Borrower. The principal hereof and interest accruing thereon shall be due and payable as provided in the Credit Agreement. This Note may be prepaid only in accordance with the Credit Agreement. This Note is issued pursuant, and is subject, to the Credit Agreement, which provides, among other things, for acceleration hereof. This Note is the Note referred to in the Credit Agreement. This Note is secured, among other things, pursuant to the Credit Agreement, and may now or hereafter be secured by one or more other security agreements, mortgages, deeds of trust, assignments or other instruments or agreements. The Borrower hereby agrees to pay all costs of collection, including attorneys' fees and legal expenses in the event this Note is not paid when due, whether or not legal proceedings are commenced. Presentment or other demand for payment, notice of dishonor and protest are expressly waived. PRANA HOLDINGS, INC. By: Jeffery E. Otto Its: President Exhibit B to Term Loan and Security Agreement Names PRANA Holdings, Inc. Chief Executive Office/Principal Place of Business 2665 Long Lake Road, Suite 120 Roseville, Minnesota 55113 Other Inventory and Equipment Locations NONE Subsidiaries BVS, Inc. Pallet Exchange of Kansas City, Inc. Otto Packaging, Inc. Harris Supply Company, Inc. Harris Supply Company of Georgia, Inc. Quality Pallet, Inc. Hurt's Pallet & Sales, Inc. Pallet Source, Inc. Pallet City, Inc. PRANA Oklahoma City, Inc. PRANA Denver, Inc. B&B Pallet Supply Company Pallet Supply Co., Inc. Exhibit C to Term Loan and Security Agreement Permitted Liens, Indebtedness and Guaranties Liens See attached. Indebtedness See attached. Guaranties NONE Exhibit D to Term Loan and Security Agreement COMPLIANCE CERTIFICATE In accordance with our Term Loan and Security Agreement dated as of August ___, 1995 (the "Credit Agreement"), attached are the financial statements of PRANA Holdings, Inc. (the "Borrower") as of and for the month and year-to-date period ended __________, 199___ (the "Current Financials"). I certify that the Current Financials have been prepared in accordance with generally accepted accounting principles applied on a basis consistent with the accounting practices reflected in the financial statements referred to in Section 5.5 of the Credit Agreement, subject to year-end audit adjustments. Defaults and Events of Default (check one) |_| I have no knowledge of the occurrence of any Default or Event of Default under the Credit Agreement which has not previously been reported to you and remedied. |_| Attached is a detailed description of all Defaults and Events of Default of which I have knowledge and which have not previously been reported to you and remedied. For the date and periods covered by the Current Financials, the Borrower is in compliance with the covenants set forth in Sections 6.11, 6.12 and 7.18 of the Credit Agreement, except as indicated below. The calculations made to determine compliance are as follows: Covenant Actual Requirement 6.11) Debt Service Coverage Ratio ____ to ____ 1.3 to 1.0 6.12) Book Net Worth $________ $5,300,000 7.18) Upstreamed Cash $_______________ Maximum $_______ ______________________________________, _______________ of PRANA Holdings, Inc. Exhibit E to Term Loan and Security Agreement COPYRIGHTS, PATENTS AND TRADEMARKS NONE Exhibit F to Credit and Security Agreement PLANS Harris Supply Company, Inc. has an SEP/IRA which is for certain qualified employees. It will be terminated on or before December 31, 1995. Exhibit G to Credit and Security Agreement STOCK OWNERSHIP OF THE GUARANTOR See attached. FIRST AMENDMENT TO TERM LOAN AND SECURITY AGREEMENT This Amendment is made as of the ____ day of _____________, 1996 by and between PRANA Holdings, Inc., a Minnesota corporation (the "Borrower"), and Norwest Bank Minnesota, National Association, a national banking association (the "Lender"). Recitals The Borrower and the Lender have entered into the Term Loan and Security Agreement dated as of August 8, 1995 (the "Credit Agreement"). The Lender has agreed to make certain term loan advances to the Borrower pursuant to the terms and conditions set forth in the Credit Agreement. The loan advances under the Credit Agreement are evidenced by the Borrower's advancing term note dated as of August 8, 1995, in the maximum principal amount of $2,600,000 and payable to the order of the Lender (the "Note"). All indebtedness of the Borrower to the Lender is secured pursuant to the terms of the Credit Agreement and all other Loan Documents as defined therein (collectively, the "Security Documents") and is guaranteed and secured pursuant to the unconditional guaranty of the Guarantor and the other "Guarantor Documents" defined therein (collectively, the "Guarantor"). The Borrower has requested that certain amendments be made to the Credit Agreement, which the Lender is willing to make pursuant to the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained, it is agreed as follows: 1. Terms used in this Amendment which are defined in the Credit Agreement shall have the same meanings as defined therein, unless otherwise defined herein. 2. The Credit Agreement is hereby amended as follows: (a) Section 2.1(b) of the Credit Agreement is hereby amended to delete the reference to "Section 4.2(2)" therefrom and to substitute the reference to "Section 4.2" therefor. (b) Section 2.3(b) of the Credit Agreement is hereby amended to add the phrase "at the Accrual Rate" after the word "monthly" and before the word "and" in the second sentence thereof. (c) Section 2.11(a) of the Credit Agreement is hereby amended to delete the numeral "$25,190" therefrom and to substitute the numeral "$26,000" therefor. (d) Section 6.12 of the Credit Agreement is hereby amended in its entirety to read as follows: Section 6.12 Book Net Worth. The Borrower shall at all times maintain (calculated on a consolidated basis for the Borrower and its subsidiaries) Book Net Worth calculated monthly of at least the following amounts as of the following dates: As of Book Net Worth 08/31/95 $4,000,000 09/30/95 4,100,000 10/31/95 4,350,000 11/30/95 4,450,000 12/31/95 4,275,000 01/31/96 4,325,000 As of each month end after January 31, 1996, commencing with the month ending February 29, 1996, the minimum Book Net Worth covenant shall be increased by $50,000 over the covenant level for the previous month. For example, the minimum Book Net Worth covenant for February 29, 1996 shall be $4,375,000, for March 31, 1996 shall be $4,425,000, etc. (e) Section 7.2(d) of the Credit Agreement is hereby amended in its entirety to read as follows: (d) Revolving and Term Indebtedness of Otto Packaging, Inc., B.V.S., Inc., Quality Pallet, Inc. and Pallet Supply Co., Inc. to Norwest Credit, Inc. in the following maximum aggregate amounts: Company Revolving Note Term Note Otto Packaging, Inc. $300,000 $ 228,000 B.V.S., Inc. $400,000 $ 209,000 Quality Pallet, Inc. $400,000 $ 123,000 Pallet Supply Co., Inc. $750,000 $ 748,000 TOTAL, REVOLVING NOTES AND TERM NOTES LISTED ABOVE $3,158,000 So long as the proceeds of such indebtedness are applied as follows: (i) no more than $2,542,000 of the proceeds of such indebtedness may be used by the Subsidiary incurring such indebtedness to refinance existing indebtedness of such Subsidiary; (ii) no more than $616,000 of the proceeds of such indebtedness may be used by the Subsidiary incurring such indebtedness to fund the working capital growth needs at such Subsidiary; and (iii) no more than $300,000 of the proceeds of such indebtedness may be paid upstream by the Subsidiary incurring such indebtedness to the Borrower for the purpose of funding acquisitions by the Borrower (whether directly by the Borrower or through any present or future Subsidiary of the Borrower), provided that no more than $25,000 of the proceeds of such indebtedness may be expended by the Borrower in connection with any single acquisition. 3. Except as explicitly amended by this Amendment, all of the terms and conditions of the Credit Agreement shall remain in full force and effect and shall apply to any advance thereunder. 4. This Amendment shall be effective upon receipt by the Lender of an executed original hereof, together with each of the following, each in substance and form acceptable to the Lender in its sole discretion: (a) The Acknowledgement and Agreement of Guarantors set forth at the end of this Amendment, duly executed by each of the Guarantors. (b) Certificate of the President of the Borrower certifying as to (i) the resolutions of the board of directors of the Borrower approving the execution and delivery of this Amendment, (ii) the fact that the Articles of Incorporation and Bylaws of the Borrower, which were certified and delivered to the Lender pursuant to the Certificate of the Borrower's President dated as of August 8, 1995 in connection with the execution and delivery of the Credit Agreement, continue in full force and effect and have not been amended or otherwise modified except as set forth in the Certificate to be delivered, and (iii) certifying that the officers and agents of the Borrower who have been certified to the Lender, pursuant to the Certificate of the Borrower's President dated as of August 8, 1995, as being authorized to sign and to act on behalf of the Borrower continue to be so authorized or setting forth the sample signatures of each of the officers and agents of the Borrower authorized to execute and deliver this Amendment and all other documents, agreements and certificates on behalf of the Borrower. (c) Opinion of the Borrower's counsel as to the matters set forth in paragraphs 5(a) and (b) hereof and as to such other matters as the Lender shall require. 5. The Borrower hereby represents and warrants to the Lender as follows: (a) The Borrower has requisite power and authority to execute this Amendment and to perform all of its obligations hereunder, and this Amendment has been duly executed and delivered by the Borrower and constitutes the legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms. (b) The execution, delivery and performance by the Borrower of this Amendment have been duly authorized by all necessary corporate action and do not (i) require any authorization, consent or approval by any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, (ii) violate any provision of any law, rule or regulation or of any order, writ, injunction or decree presently in effect, having applicability to the Borrower, or the articles of incorporation or by-laws of the Borrower, or (iii) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which the Borrower is a party or by which it or its properties may be bound or affected. (c) All of the representations and warranties contained in Article V of the Credit Agreement are correct on and as of the date hereof as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date. 6. All references in the Credit Agreement to "this Agreement" shall be deemed to refer to the Credit Agreement as amended hereby; and any and all references in the Security Documents to the Credit Agreement shall be deemed to refer to the Credit Agreement as amended hereby. 7. The execution of this Amendment and acceptance of any documents related hereto shall not be deemed to be a waiver of any Default or Event of Default under the Credit Agreement or breach, default or event of default under any Security Document or other document held by the Lender, whether or not known to the Lender and whether or not existing on the date of this Amendment. 8. The Borrower hereby absolutely and unconditionally releases and forever discharges the Lender, and any and all participants, parent corporations, subsidiary corporations, affiliated corporations, insurers, indemnitors, successors and assigns thereof, together with all of the present and former directors, officers, agents and employees of any of the foregoing, from any and all claims, demands or causes of action of any kind, nature or description, whether arising in law or equity or upon contract or tort or under any state or federal law or otherwise, which the Borrower has had, now has or has made claim to have against any such person for or by reason of any act, omission, matter, cause or thing whatsoever arising from the beginning of time to and including the date of this Amendment, whether such claims, demands and causes of action are matured or unmatured or known or unknown. 9. The Borrower hereby reaffirms its agreement under the Credit Agreement to pay or reimburse the Lender on demand for all costs and expenses incurred by the Lender in connection with the Credit Agreement, the Security Documents and all other documents contemplated thereby, including without limitation all reasonable fees and disbursements of legal counsel. Without limiting the generality of the foregoing, the Borrower specifically agrees to pay all fees and disbursements of counsel to the Lender for the services performed by such counsel in connection with the preparation of this Amendment and the documents and instruments incidental hereto. The Borrower hereby agrees that the Lender may, at any time or from time to time in its sole discretion and without further authorization by the Borrower, make a loan to the Borrower under the Credit Agreement, or apply the proceeds of any loan, for the purpose of paying any such fees, disbursements, costs and expenses and the fee required under paragraph 4 hereof. 10. This Amendment and the Acknowledgment and Agreement of Guarantors may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original and all of which counterparts, taken together, shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the day and year first above written. PRANA HOLDINGS, INC. By: ___________________________________ Jeffery E. Otto Its: President NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION By: ___________________________________ Heidi H. Samuels Its: Assistant Vice President ACKNOWLEDGEMENT AND AGREEMENT OF GUARANTORS The undersigned, a guarantor of the indebtedness of PRANA Holdings, Inc. (the "Borrower") to Norwest Bank Minnesota, National Association (the "Lender") pursuant to a Guaranty by the Corporation dated as of August 8, 1995 (the "Guaranty"), hereby (i) acknowledges receipt of the foregoing Amendment; (ii) consents to the terms and execution thereof; (iii) reaffirms his or its obligations to the Lender pursuant to the terms of his or its Guaranty; and (iv) agrees that Section 7.2(d) of the Credit Agreement (which is incorporated into the Guaranty by reference pursuant to Section 17 of the Guaranty) is amended in the same manner that such Section is amended in the foregoing Amendment; and (v) acknowledges that the Lender may amend, restate, extend, renew or otherwise modify the Credit Agreement and any indebtedness or agreement of the Borrower, or enter into any agreement or extent additional or other credit accommodations, without notifying or obtaining the consent of the undersigned and without impairing the liability of the undersigned under his or its Guaranty for all of the present and future indebtedness of the Borrower to the Lender. PALLET RECYCLING ASSOCIATES OF NORTH AMERICA, INC. By: ________________________________ Jeffery E. Otto Its: President SECOND AMENDMENT TO TERM LOAN AND SECURITY AGREEMENT This Amendment is made as of the ____ day of April, 1996 by and between PRANA Holdings, Inc., a Minnesota corporation (the "Borrower"), and Norwest Bank Minnesota, National Association, a national banking association (the "Lender"). Recitals The Borrower and the Lender have entered into the Term Loan and Security Agreement dated as of August 8, 1995, as amended by an Amendment dated as of April 5, 1996 (as so amended, the "Credit Agreement"). The Lender has agreed to make certain term loan advances to the Borrower pursuant to the terms and conditions set forth in the Credit Agreement. The loan advances under the Credit Agreement are evidenced by the Borrower's advancing term note dated as of August 8, 1995, in the maximum principal amount of $2,600,000 and payable to the order of the Lender (the "Note"). All indebtedness of the Borrower to the Lender is secured pursuant to the terms of the Credit Agreement and all other Loan Documents as defined therein (collectively, the "Loan Documents") and is guaranteed pursuant to the unconditional guaranty of the Guarantor defined therein (the "Guarantor"). The Borrower has requested that certain amendments be made to the Credit Agreement and the Guaranty executed by the Guarantor, which the Lender is willing to make pursuant to the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained, it is agreed as follows: 1. Terms used in this Amendment which are defined in the Credit Agreement shall have the same meanings as defined therein, unless otherwise defined herein. 2. The Credit Agreement is hereby amended as follows: (a) The following definitions set forth in Section 1.1 of the Credit Agreement are hereby amended in their entirety to read as follows: "Maturity Date" means the earlier of February 28, 1998 or one year from the IPO Closing. "Guarantor Documents" means the Guaranty, the Guarantor Security Agreement, the Option to Purchase Warrant, the Trademark Mortgage and the subsidiary security agreements as the same may be amended from time to time. (b) Section 1.1 of the Credit Agreement is hereby amended to add the following definitions thereto: "Bridge Loan" means the indebtedness of the Borrower in the aggregate principal amount of $1,500,000 and more particularly described on Exhibit G attached hereto. "1995 Loan" means the indebtedness of the Borrower in the aggregate principal amount of $1,706,000 and more particularly described on Exhibit H attached hereto. "Cash Flow" means Consolidated Operating Profit of Subsidiaries minus Operating Expenses of Guarantor and Borrower. "IPO Closing" means the date of receipt by the Borrower of at least $6,700,000 in net proceeds of an initial public offering. "Operating Expenses of Guarantor and Borrower" means, as of any date of determination, the combined pre-tax net loss before net interest expense and before gain or loss on the sale of assets and other extraordinary items of the Guarantor and the Borrower, all as determined in accordance with generally accepted accounting principals, consistently applied. "Operating Profit of Subsidiaries" means the combined pre-tax profit before net interest expense and before gain or loss on the sale of assets and other extraordinary items of all subsidiaries, all as determined in accordance with generally accepted accounting principals, consistently applied. "Guarantor Security Agreement" means the Third Party Security Agreement executed by the Guarantor in favor of the Lender with respect to the Obligations. "Subsidiary Security Agreements" means the Third Party Security Agreements executed by each of the Subsidiaries in favor of the Lender with respect to the Obligations. (c) The last sentence of Section 2.3(b) of the Credit Agreement is hereby amended in its entirety to read as follows: Interest accruing at the Accrual Rate on the principal balance of the Advances outstanding from time to time shall be compounded monthly at the Accrual Rate and shall be due and payable on the earlier of (i) the Maturity Date, or (ii) acceleration (pursuant to Section 8.2 hereof), or (iii) upon prepayment in full, or (iv) at the option of the Lender, upon the closing of a private placement of any of the Borrower's or the Guarantor's stock or of securities convertible into or exercisable for shares of stock, or (v) upon the closing of a public offering of any of the Borrower's or the Guarantor's stock or securities convertible into or exercisable for shares of stock. (d) Section 2.5(b) of the Credit Agreement is hereby amended by deleting the last sentence thereof. (e) Section 5.21 of this Credit Agreement is hereby deleted. (f) Section 6.12 of the Credit Agreement is hereby deleted in its entirety and the following is substituted therefore: Section 6.12 Cash Flow. The Borrower will at all times maintain (calculated on a consolidated basis for the Borrower, the Guarantor and its subsidiaries) Cash Flow calculated quarterly as of the last day for such fiscal quarter, using actual results of such fiscal quarter, of at least the following: IF THE IPO IF THE IPO CLOSING HAS CLOSING HAS NOT OCCURRED FOR THE FISCAL OCCURRED DURING DURING SUCH QUARTER ENDING SUCH QUARTER QUARTER June 30, 1996 $300,000 $425,000 September 30, 1996 N/A $600,000 December 31, 1996 N/A $800,000 (and thereafter) (g) The Credit Agreement is hereby amended to add a new Section 6.19 thereto; which shall read as follows: Section 6.19 Subsidiary Third Party Security Agreements. The Borrower shall cause all present and future Subsidiaries to execute and deliver to the Lender Third Party Security Agreements in form and substance acceptable to the Lender, to secure the Obligations; together with any and all UCC Financing Statements which the Lender may require. (h) Section 7.2 of the Credit Agreement is hereby amended in its entirety to read as follows: Section 7.2 Indebtedness. The Borrower will not and permit any Subsidiary to incur, create, assume or permit to exist any indebtedness or liability on account of deposits or advances or any indebtedness for borrowed money, or any other indebtedness or liability evidenced by notes, bonds, debentures or similar obligations or any Capitalized Lease Obligations, except: (a) indebtedness arising hereunder; and (b) indebtedness or Capitalized Lease Obligations of the Borrower or any Subsidiary in existence on the date hereof and listed in Exhibit C hereto. (i) Section 8.1(q) of the Credit Agreement is hereby amended in its entirety to read as follows: (q) Any of the Borrower's existing officers shall fail to serve in their capacity as an officer as of the date hereof. (j) Section 8.1 is hereby amended to delete the "." from the end of clauses (p) and (q) and to replace each "." with "; or". (k) Section 8.1(r) of the Credit Agreement is hereby amended in its entirety to read as follows: (r) The Guarantor shall be in payment default under any present or future indebtedness of the Guarantor including, without limitation, the indebtedness described on Exhibit B to the Guaranty. (l) Section 8.1 is hereby amended to add a new subsection (s) thereto, which shall read as follows: (s) The IPO Closing shall not have occurred by July 31, 1996 with the Borrower receiving at least $6,700,000 in net proceeds thereof or, if the IPO Closing has occurred by such date, the Guarantor shall have failed to pay the following indebtedness in full out of the proceeds of the IPO Closing: (i) the Bridge Loan, (ii) the 1995 Loan, and (iii) payment of all interest accrued at the Accrual Rate as of the date of the IPO Closing; or (m) Section 8.1 is hereby amended to add a new subsection (t) thereto, which shall read as follows: (t) The Borrower shall use the proceeds of the Bridge Loan in any manner other than as follows: (i) at least $750,000 of such proceeds shall be used for acquisitions including, but not limited to, the Borrower's proposed Metroplex acquisition, (ii) no more than $90,000 of such proceeds shall be used to pay fees and expenses incurred in connection with the Bridge Loan, and (iii) no more than $660,000 of the proceeds shall be used for general working capital and expenses; or (n) Section 8.1 is hereby amended to add a new subsection (u) thereto, which shall read as follows: (u) The Guarantor shall issue any shares of stock which include "put" or "unwind" provisions. (o) Exhibit B to the Credit Agreement is hereby replaced by the Exhibit B attached hereto. (p) Exhibit C to the Credit Agreement is hereby replaced by the Exhibit C attached hereto. (q) Exhibit D to the Credit Agreement is hereby replaced by the Exhibit D attached hereto. (r) Exhibit G to the Credit Agreement is hereby replaced by the Exhibit G attached hereto. (s) A new Exhibit H is hereby added to the Credit Agreement in the form attached hereto. 3. Except as explicitly amended by this Amendment, all of the terms and conditions of the Credit Agreement shall remain in full force and effect and shall apply to any advance thereunder. 4. The Lender hereby consents to the following acquisitions by the Borrower: (a) The acquisition by the Borrower of all of the issued and outstanding stock of Diamond Pallet, Inc. (b) The acquisition by PRANA Las Vegas, Inc., a wholly owned subsidiary of the Borrower, of substantially all of the assets of Bluelight Industries, Inc. (c) The acquisition by merger of The Pallet Factory, Inc. so long as (i) such acquisition is closed in accordance with the terms and conditions of that certain agreement and plan of reorganization dated as of September 28, 1995, by and between the Guarantor, the Borrower, The Pallet Factory, Inc. and Michael Doyle (except that the Borrower shall form PRANA of Memphis, Inc. ("Memphis") a Minnesota corporation, as a wholly-owned subsidiary of the Borrower, and Memphis, as opposed to the Borrower, shall merge with The Pallet Factory, Inc. with Memphis being the surviving corporation) (ii) the Borrower delivers to the Lender the original stock certificate(s) evidencing all of the issued and outstanding shares of stock of Memphis, (iii) the Borrower executes and delivers to the Lender a stock power in form and substance acceptable to the Lender with respect to all such stock certificate(s), (iv) Memphis executes and delivers to the Lender a Third Party Security Agreement and one or more UCC-1 financing statements, all in form and substance acceptable to the Lender, pursuant to which Memphis or such subsidiary grants a security interest to the Lender on all of Memphis' assets. (d) The acquisition by merger of Indy Pallet Co., Inc. so long as (i) such acquisition is closed in accordance with the terms and conditions of that certain agreement and plan of reorganization dated as of October 26, 1995, by and between the Guarantor, the Borrower, Indy Pallet Co., Inc. and Patrick Lovett (except that the Borrower shall form PRANA Indianapolis, Inc. ("Indianapolis"), a Minnesota corporation, as a wholly-owned subsidiary of the Borrower, and Indianapolis, as opposed to the Borrower, shall merge with Indy Pallet Co., Inc., with Indianapolis being the surviving corporation), (ii) the Borrower delivers to the Lender the original stock certificate(s) evidencing all of the issued and outstanding shares of stock of Indianapolis, (iii) the Borrower executes and delivers to the Lender a stock power in form and substance acceptable to the Lender with respect to all such stock certificate(s), (iv) Indianapolis executes and delivers to the Lender a Third Party Security Agreement and one or more UCC-1 financing statements, all in form and substance acceptable to the Lender, pursuant to which Indianapolis grants a security interest to the Lender on all of Indianapolis' assets. 5. The Lender hereby consents to the incurrence of the following indebtedness by the Guarantor: (a) The 1995 Loan. (b) The Bridge Loan (c) The indebtedness of the Guarantor evidenced by that certain Promissory Note dated March 20, 1996 executed by the Guarantor and payable to the order of Tony W. Baggett in the original principal amount of $40,941. (d) The indebtedness of the Guarantor evidenced by that certain Promissory Note dated March 20, 1996 executed by the Guarantor and payable to the order of John J. Baggett in the original principal amount of $40,941. 6. The Borrower agrees to pay the Lender as of the date hereof a fully earned, non-refundable fee in the amount of $10,000 in consideration of the execution by the Lender of this Amendment. 7. This Amendment shall be effective upon receipt by the Lender of an executed original hereof, together with each of the following, each in substance and form acceptable to the Lender in its sole discretion: (a) The Acknowledgement and Agreement of Guarantor set forth at the end of this Amendment, duly executed by each of the Guarantor. (b) Certificate of the Secretary of the Borrower certifying as to (i) the resolutions of the board of directors of the Borrower approving the execution and delivery of this Amendment, (ii) the fact that the Articles of Incorporation and Bylaws of the Borrower, which were certified and delivered to the Lender pursuant to the Certificate of the Borrower's Secretary dated as of August 8, 1995 in connection with the execution and delivery of the Credit Agreement continue in full force and effect and have not been amended or otherwise modified except as set forth in the Certificate to be delivered, and (iii) certifying that the officers and agents of the Borrower who have been certified to the Lender, pursuant to the Certificate of the Borrower's Secretary dated as of August 8, 1995, as being authorized to sign and to act on behalf of the Borrower continue to be so authorized or setting forth the sample signatures of each of the officers and agents of the Borrower authorized to execute and deliver this Amendment and all other documents, agreements and certificates on behalf of the Borrower. (c) Opinion of the Borrower's counsel as to the matters set forth in paragraphs 8(a) and (b) hereof and as to such other matters as the Lender shall require. (d) Debt Subordination Agreements from all holders of the any portion of the Bridge Loan with respect to the Borrower and the Guarantor. (e) Legended copies of all notes evidencing the any portion of the Bridge Loan and the security agreements securing the any portion of the Bridge Loan. (f) A Third Party Security Agreement duly executed by the Guarantor in favor of the Lender. (g) UCC-1 Financing Statements duly executed by the Guarantor in favor of the Lender with respect to the security interest granted to the Lender by the Guarantor under the Third Party Security Agreement executed by the Guarantor. (h) An Amendment to Guaranty by Corporation duly executed by the Guarantor. (i) The original stock certificates evidencing all shares owned by the Borrower in PRANA Las Vegas, Inc., Diamond Pallet, Inc., together with duly executed stock powers with respect to each such certificate. (j) Third Party Security Agreements duly executed by each Subsidiary of the Borrower pursuant to which each such Subsidiary grants the Lender a security interest on substantially all of its assets to secure the Obligations (as defined in the Credit Agreement). (k) An Amendment to the Collateral Pledge Agreement duly executed by the Borrower. (l) Amendments to all UCC-1 Financing Statements previously executed by the Borrower in favor of the Lender to add the stock of the new Subsidiaries of the Borrower to the description of the Collateral covered thereby. (m) UCC-1 Financing Statements duly executed by each of the Subsidiaries of the Borrower in connection with the Third Party Security Agreement executed by such Subsidiary pursuant to clause (j) above. (n) A certificate of an officer of the Guarantor and each Subsidiary of the Borrower, certifying as to (i) the resolutions of the directors of each such corporation authorizing the execution, delivery and performance of each document referred to in this paragraph 7 and executed or to be executed by such corporation; (ii) the articles of incorporation and bylaws of each such corporation, and (iii) the signatures of the officers or agents of each such corporation authorize to execute and deliver the documents referred to in paragraph 7 hereof and executed or to be executed by such corporation and other instruments, agreements and certificates on behalf of each such corporation. (o) A release of put rights executed by John and Tony Baggett. 8. The Borrower hereby represents and warrants to the Lender as follows: (a) The Borrower has requisite power and authority to execute this Amendment and the other documents referred to in Paragraph 7 hereof and executed or to be executed by the Borrower and to perform all of its obligations hereunder, and this Amendment and the other documents referred to in Paragraph 7 hereof and executed or to be executed by the Borrower have been duly executed and delivered by the Borrower and constitute the legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms. (b) The execution, delivery and performance by the Borrower of this Amendment and the other documents referred to in Paragraph 7 hereof and executed or to be executed by the Borrower have been duly authorized by all necessary corporate action and do not (i) require any authorization, consent or approval by any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, (ii) violate any provision of any law, rule or regulation or of any order, writ, injunction or decree presently in effect, having applicability to the Borrower, or the articles of incorporation or by-laws of the Borrower, or (iii) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which the Borrower is a party or by which it or its properties may be bound or affected. (c) All of the representations and warranties contained in Article V of the Credit Agreement are correct on and as of the date hereof as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date. 9. All references in the Credit Agreement to "this Agreement" shall be deemed to refer to the Credit Agreement as amended hereby; and any and all references in the Loan Documents to the Credit Agreement shall be deemed to refer to the Credit Agreement as amended hereby. Upon satisfaction of each of the conditions set forth in paragraph 7 hereof, all references to any of the Loan Documents in the Credit Agreement or any of the Loan Documents shall be deemed to refer to the Loan Documents as amended by any of the documents referred to in paragraph 7 hereof. 10. The Borrower hereby acknowledges that the Guarantor was in default of the Book Net Worth Covenant as of December 31, 1995. The Lender hereby waives said Event of Default. Except for the waiver set forth in the immediately preceding sentence, the execution of this Amendment and acceptance of any documents related hereto shall not be deemed to be a waiver of any Default or Event of Default under the Credit Agreement or breach, default or event of default under any Loan Document or other document held by the Lender, whether or not known to the Lender and whether or not existing on the date of this Amendment. 11. The Borrower hereby absolutely and unconditionally releases and forever discharges the Lender, and any and all participants, parent corporations, subsidiary corporations, affiliated corporations, insurers, indemnitor, successors and assigns thereof, together with all of the present and former directors, officers, agents and employees of any of the foregoing, from any and all claims, demands or causes of action of any kind, nature or description, whether arising in law or equity or upon contract or tort or under any state or federal law or otherwise, which the Borrower has had, now has or has made claim to have against any such person for or by reason of any act, omission, matter, cause or thing whatsoever arising from the beginning of time to and including the date of this Amendment, whether such claims, demands and causes of action are matured or unmatured or known or unknown. 12. The Borrower hereby reaffirms its agreement under the Credit Agreement to pay or reimburse the Lender on demand for all costs and expenses incurred by the Lender in connection with the Credit Agreement, the Security Documents and all other documents contemplated thereby, including without limitation all reasonable fees and disbursements of legal counsel. Without limiting the generality of the foregoing, the Borrower specifically agrees to pay all fees and disbursements of counsel to the Lender for the services performed by such counsel in connection with the preparation of this Amendment and the documents and instruments incidental hereto. The Borrower hereby agrees that the Lender may, at any time or from time to time in its sole discretion and without further authorization by the Borrower, make a loan to the Borrower under the Credit Agreement, or apply the proceeds of any loan, for the purpose of paying any such fees, disbursements, costs and expenses and the fee required under paragraph 6 hereof. 13. This Amendment and the Acknowledgment and Agreement of Guarantors may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original and all of which counterparts, taken together, shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the day and year first above written. PRANA HOLDINGS, INC. By: ___________________________________ Its: _________________________________ NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION By: ___________________________________ Its: _________________________________ ACKNOWLEDGEMENT AND AGREEMENT OF GUARANTOR The undersigned, a guarantor of the indebtedness of PRANA Holdings, Inc. (the "Borrower") to Norwest Bank Minnesota, National Association (the "Lender") pursuant to a Guaranty by Corporation each dated as of August 8, 1995 as amended by that certain Amendment to Guaranty of even date herewith (as so amended, the "Guaranty"), hereby (i) acknowledges receipt of the foregoing Amendment; (ii) consents to the terms and execution thereof; (iii) reaffirms his or its obligations to the Lender pursuant to the terms of his or its Guaranty; and (iv) acknowledges that the Lender may amend, restate, extend, renew or otherwise modify the Credit Agreement and any indebtedness or agreement of the Borrower, or enter into any agreement or extent additional or other credit accommodations, without notifying or obtaining the consent of the undersigned and without impairing the liability of the undersigned under his or its Guaranty for all of the present and future indebtedness of the Borrower to the Lender. PALLET RECYCLING ASSOCIATES OF NORTH AMERICA, INC. By: ___________________________________ Its: _________________________________ Exhibit B to Term Loan and Security Agreement Names PRANA Holdings, Inc. Chief Executive Office/Principal Place of Business 2665 Long Lake Road, Suite 120 Roseville, Minnesota 55113 Other Inventory and Equipment Locations NONE Subsidiaries B.V.S., Inc. Pallet Exchange of Kansas City, Inc. Otto Packaging, Inc. Harris Supply Company, Inc. Harris Supply Company of Georgia, Inc. Quality Pallet, Inc. Hurt's Pallet & Sales, Inc. Pallet Source, Inc. Pallet City, Inc. PRANA Oklahoma City, Inc. PRANA Denver, Inc. B&B Pallet Supply Company Pallet Supply Co., Inc. PRANA Las Vegas, Inc. Diamond Pallet, Inc. Exhibit C to Term Loan Security Agreement Permitted Liens, Indebtedness and Guaranties Liens TO BE REVISED BY BORROWER Indebtedness TO BE REVISED BY BORROWER Guaranties NONE Exhibit D to Term Loan and Security Agreement COMPLIANCE CERTIFICATE In accordance with our Term Loan and Security Agreement dated as of August ___, 1995 (the "Credit Agreement"), attached are the financial statements of PRANA Holdings, Inc. (the "Borrower") as of and for the month and year-to-date period ended __________, 199___ (the "Current Financials"). I certify that the Current Financials have been prepared in accordance with generally accepted accounting principles applied on a basis consistent with the accounting practices reflected in the financial statements referred to in Section 5.5 of the Credit Agreement, subject to year-end audit adjustments. Defaults and Events of Default (check one) |_| I have no knowledge of the occurrence of any Default or Event of Default under the Credit Agreement which has not previously been reported to you and remedied. |_| Attached is a detailed description of all Defaults and Events of Default of which I have knowledge and which have not previously been reported to you and remedied. For the date and periods covered by the Current Financials, the Borrower is in compliance with the covenants set forth in Sections 6.11, 6.12 and 7.18 of the Credit Agreement, except as indicated below. The calculations made to determine compliance are as follows: Covenant Actual Requirement 6.11) Debt Service Coverage Ratio ____ to ____ 1.3 to 1.0 6.12) Cash Flow $________ $__________ 7.18) Upstreamed Cash $_______________ Maximum $_______ ______________________________________, _______________ of PRANA Holdings, Inc. Exhibit G to Term Loan and Security Agreement BRIDGE LOAN NOTE DATED PAYABLE TO ORIGINAL PRINCIPAL AMOUNT _______________ ____________________ $_______________ _______________ ____________________ $_______________ _______________ ____________________ $_______________ Total $_______________ Exhibit H to Term Loan and Security Agreement 1995 LOAN NOTE DATED PAYABLE TO ORIGINAL PRINCIPAL AMOUNT _______________ ____________________ $_______________ _______________ ____________________ $_______________ _______________ ____________________ $_______________ Total $_______________ </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.27 <SEQUENCE>11 <DESCRIPTION>CREDIT AND SECURITY AGREEMENT <TEXT> CREDIT AND SECURITY AGREEMENT B.V.S., INC. Dated as of October 30, 1995 B.V.S., Inc., an Arizona corporation (the "Borrower"), and Norwest Credit, Inc., a Minnesota corporation (the "Lender"), hereby agree as follows: ARTICLE I Definitions Section 1.1 Definitions. For all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires: (a) the terms defined in this Article have the meanings assigned to them in this Article, and include the plural as well as the singular; and (b) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles. "Accounts" means the aggregate unpaid obligations of customers and other account debtors to the Borrower arising out of the sale or lease of goods or rendition of services by the Borrower on an open account or deferred payment basis. "Advance" means an advance to the Borrower by the Lender under the Credit Facility. "Affiliate" or "Affiliates" means the Guarantors and any other Person controlled by, controlling or under common control with the Borrower, including (without limitation) any Subsidiary of the Borrower. For purposes of this definition, "control," when used with respect to any specified Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise. "Agreement" means this Credit and Security Agreement. "Availability" means, as of any date of determination, the Borrowing Base minus the sum of the outstanding and unpaid Advances. "Banking Day" means a day other than a Saturday on which banks are generally open for business in Minneapolis, Minnesota. "Base Rate" means the rate of interest publicly announced from time to time by Norwest Bank Minnesota, National Association as its "base rate" or, if such bank ceases to announce a rate so designated, any similar successor rate designated by the Lender. "Book Net Worth" means, as of the date of determination, Total Assets minus Indebtedness. "Borrowing Base" means, at any time and subject to change from time to time in the Lender's sole discretion, the lesser of (a) the Commitment, or (b) the sum of (i) 80% of Eligible Accounts, plus (ii) the lesser of (A) 30% of Eligible Inventory or (B) $75,000. "Capital Expenditures" means, for any specified period, the aggregate of all gross expenditures during such period for the purchase or construction of fixed assets, or for improvements, replacements, substitutions or additions therefor or thereto, which are required to be capitalized on the balance sheet, including the balance sheet amount of any lease obligations incurred during such period. "Capitalized Lease Obligations" has the meaning assigned thereto in Section 7.1 hereof. "Cash Available for Debt Service" means, for any specified period, (i) Net Income, plus (ii) Total Interest, plus (iii) amortization of intangibles, plus (iv) depreciation, minus (v) unfinanced Capital Expenditures. "Collateral" means all of the Equipment, General Intangibles, Inventory, Receivables, and the Holdings Note together with all substitutions and replacements for and products of any of the foregoing and together with proceeds of any and all of the foregoing and, in the case of all tangible collateral, together with all accessions and together with (i) all accessories, attachments, parts, equipment and repairs now or hereafter attached or affixed to or used in connection with any such goods, and (ii) all warehouse receipts, bills of lading and other documents of title now or hereafter covering such goods. "Collateral Account" has the meaning specified in Section hereof. "Collateral Account Agreement" has the meaning specified in Section 4.1(d) hereof. "Collateral Pledge Agreement" means the collateral pledge agreement executed by the Borrower in favor of the Lender pursuant to which the Borrower grants the Lender a security interest in the Holdings Note. "Commitment" means $400,000, unless said amount is reduced pursuant to Section hereof, in which event it means the amount to which said amount is reduced. "Credit Facility" means the credit facility being made available to the Borrower by the Lender pursuant to Article II hereof. "Debt Service" means, for any specified period, the sum of (i) Total Interest, plus (ii) scheduled principal amortization of all interest bearing Indebtedness, plus (iii) scheduled payments of rent under all Capitalized Lease Obligations. "Debt Service Coverage Ratio" means Cash Available for Debt Service divided by Debt Service. "Default" means an event that, with giving of notice or passage of time or both, would constitute an Event of Default. "Default Rate" means at any time two percent (2%) over the Floating Rate or the Term Loan Floating Rate, as the case may be, which Default Rate shall change when and as the Floating Rate changes and as the Term Loan Floating Rate changes. "Eligible Accounts" means all unpaid Accounts, net of any credits, except the following shall not in any event be deemed Eligible Accounts: (1) That portion of Accounts over 90 days past invoice date; (2) That portion of Accounts that are disputed or subject to a claim of offset or a contra account; (3) That portion of Accounts not yet earned by the final delivery of goods or rendition of services, as applicable, by the Borrower to the customer; (4) Accounts owed by any unit of government, whether foreign or domestic (provided, however, that there shall be included in Eligible Accounts that portion of Accounts owed by such units of government with respect to which the Borrower has provided evidence satisfactory to the Lender that (A) the Lender has a first priority perfected security interest and (B) such Accounts may be enforced by the Lender directly against such unit of government under all applicable laws); (5) Accounts owed by an account debtor located outside the United States which are not backed by a bank letter of credit assigned to the Lender, in the possession of the Lender and acceptable to the Lender in all respects, in its sole discretion; (6) Accounts owed by an account debtor that is the subject of bankruptcy proceedings or has gone out of business; (7) Accounts owed by a shareholder, subsidiary, Affiliate, officer or employee of the Borrower; (8) Accounts not subject to a duly perfected security interest in favor of the Lender or which are subject to any lien, security interest or claim in favor of any Person other than the Lender; (9) That portion of Accounts that have been restructured, extended, amended or modified; (10) That portion of Accounts that constitutes finance charges, service charges or sales or excise taxes; (11) Accounts owed by an account debtor, regardless of whether otherwise eligible, if 10% or more of the total amount due under Accounts from such debtor is ineligible under clauses (1), (2) or (9) above; and (12) Accounts, or portions thereof, otherwise deemed ineligible by the Lender in its reasonable discretion. "Eligible Inventory" means all inventory of the Borrower consisting of (i) new lumber and (ii) pallets which have been repaired and are ready for sale, at the lower of cost or market value as determined in accordance with generally accepted accounting principles; provided, however, that the following shall not in any event be deemed Eligible Inventory: (1) Inventory that is: in-transit; located at any warehouse or other premises not approved by the Lender in writing; located outside of the states, or localities, as applicable, in which the Lender has filed financing statements to perfect a first priority security interest in such inventory; covered by any negotiable or non-negotiable warehouse receipt, bill of lading or other document of title; on consignment to or from any other person or subject to any bailment; (2) Supplies, packaging or parts inventory; (3) Work-in-process inventory; (4) Inventory that is damaged, obsolete or not currently saleable in the normal course of the Borrower's operations; (5) Inventory that the Borrower has returned, has attempted to return, is in the process of returning or intends to return to the vendor thereof; (6) Inventory that is subject to a security interest in favor of any Person other than the Lender; (7) Inventory that consists of customer pallets (i.e., pallets owned by customers and delivered to the Borrower for repair and return to the customer), machine pallets (i.e., pallets to be destroyed or dismantled), pallets awaiting repair, and used lumber; (8) Inventory otherwise deemed ineligible by the Lender in its reasonable discretion. "Environmental Laws" has the meaning specified in Section hereof. "Equipment" means all of the Borrower's equipment, as such term is defined in the UCC, whether now owned or hereafter acquired, including but not limited to all present and future machinery, vehicles, furniture, fixtures, manufacturing equipment, shop equipment, office and recordkeeping equipment, parts, tools, supplies, and including specifically (without limitation) the goods described in any equipment schedule or list herewith or hereafter furnished to the Lender by the Borrower. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Event of Default" has the meaning specified in Section hereof. "Floating Rate" means an annual rate equal to the sum of the Base Rate plus one and one-quarter percent (1.25%), which Floating Rate shall change when and as the Base Rate changes. "General Intangibles" means all of the Borrower's general intangibles, as such term is defined in the UCC, whether now owned or hereafter acquired, including (without limitation) all present and future patents, patent applications, copyrights, trademarks, trade names, trade secrets, customer or supplier lists and contracts, manuals, operating instructions, permits, franchises, the right to use the Borrower's name, and the goodwill of the Borrower's business. "Guarantor Security Agreements" means, individually and collectively, the Third Party Security Agreements executed by Pallet Recycling Associates of North America, Inc., Holdings, Otto Packaging, Inc., Quality Pallet, Inc., and Pallet Supply Co., Inc., and delivered to the Lender. "Guarantors" means Pallet Recycling Associates of North America, Inc., Holdings, Pallet Exchange of Kansas City, Inc., Otto Packaging, Inc., Harris Supply, Inc., Harris Supply Company of Georgia, Inc., Quality Pallet, Inc., Hurt's Pallet & Sales, Inc., Pallet Source, Inc., Pallet City, Inc., PRANA Oklahoma City, Inc., PRANA Denver, Inc., B&B Pallet Supply Company, Pallet Supply Co., Inc., and any other Subsidiary of any of the foregoing entities formed or acquired on or after the date hereof. "Guaranty" means, individually and collectively, the guaranty by corporation executed by each of the Guarantors and delivered to the Lender. "Holdings" means PRANA Holdings, Inc., a Minnesota corporation. "Holdings Note" means that certain Promissory Note dated October 30, 1995 executed by Holdings and payable to the order of the Lender in the original principal amount of $_________________. "Indebtedness" means, collectively, (i) all items which, in accordance with generally accepted accounting principles, would be included on the liability side of a balance sheet as of the date on which Indebtedness is to be determined, excluding capital stock, surplus capital and retained earnings, (ii) all indebtedness secured by any mortgage, pledge, security interest or lien existing on property owned subject to such mortgage, pledge, security interest or lien, whether or not the indebtedness secured thereby shall have been assumed, (iii) all amounts representing the capitalization of rentals in accordance with generally accepted accounting principles, and (iv) all guaranties, endorsements and other contingent obligations. "Inventory" means all of the Borrower's inventory, as such term is defined in the UCC, whether now owned or hereafter acquired, whether consisting of whole goods, spare parts or components, supplies or materials, whether acquired, held or furnished for sale, for lease or under service contracts or for manufacture or processing, and wherever located. "Loan Documents" means this Agreement, the Note and the Security Documents. "Lockbox" has the meaning specified in Section 4.1(e) hereof. "Lockbox Agreement" has the meaning specified in Section 4.1(e) hereof. "Management Agreement" means that certain Management Agreement executed by and between the Borrower and Holdings pursuant to which Holdings agrees to provide management services to the Borrower in exchange for payment of certain management fees. "Net Income" means, for any specified period, the Borrower's net after-tax income for such period as determined in accordance with generally accepted accounting principles, consistently applied. "Note" means the Revolving and Term Note. "Obligations" has the meaning specified in Section hereof. "Person" means any individual, corporation, partnership, joint venture, limited liability company, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Plan" means an employee benefit plan or other plan maintained for employees of the Borrower and covered by Title IV of ERISA. "Premises" means all premises where the Borrower conducts its business and has any rights of possession, including (without limitation) the premises legally described in Exhibit attached hereto. "Receivables" means each and every right of the Borrower to the payment of money, whether such right to payment now exists or hereafter arises, whether such right to payment arises out of a sale, lease or other disposition of goods or other property, out of a rendering of services, out of a loan, out of the overpayment of taxes or other liabilities, or otherwise arises under any contract or agreement, whether such right to payment is created, generated or earned by the Borrower or by some other person who subsequently transfers such person's interest to the Borrower, whether such right to payment is or is not already earned by performance, and howsoever such right to payment may be evidenced, together with all other rights and interests (including all liens and security interests) which the Borrower may at any time have by law or agreement against any account debtor or other obligor obligated to make any such payment or against any property of such account debtor or other obligor; all including but not limited to all present and future accounts, contract rights, loans and obligations receivable, chattel papers, bonds, notes and other debt instruments, tax refunds and rights to payment in the nature of general intangibles. "Related Borrowers" means Holdings, Otto Packaging, Inc., Quality Pallet, Inc., Pallet Supply Co., Inc., and any other present or future Affiliate who at any time incurs indebtedness to the Lender or any affiliate of the Lender including, without limitation, Norwest Bank Minnesota, National Association. "Related Debt" means all present and future indebtedness of the Related Borrowers to the Lender and any affiliate of the Lender including, without limitation, the indebtedness of Holdings to Norwest Bank Minnesota, National Association. "Related Loan Documents" means any and all documents, instruments and agreements now or hereafter executed by any Related Borrower in favor of the Lender or any affiliate of the Lender, including, without limitation, the credit and security agreements executed by each of the present Related Borrowers (other than Holdings) in favor of the Lender, the Term Loan and Security Agreement dated August 8, 1995 executed by Holdings and Norwest Bank Minnesota, National Association, and the other "Loan Documents" as defined in each of said credit and security agreements and said Term Loan and Security Agreement, as any of said documents may be or have been amended from time to time. "Reportable Event" shall have the meaning assigned to that term in Title IV of ERISA. "Revolving Note" means the revolving note of the Borrower payable to the order of the Lender in substantially the form attached hereto as Exhibit A-1. "Security Documents" means the Collateral Account Agreement, the Lockbox Agreement and the Collateral Pledge Agreement, each as described in Section hereof or as defined herein. "Security Interest" has the meaning specified in Section hereof. "Subsidiary" means any corporation of which more than 50% of the outstanding shares of capital stock having general voting power under ordinary circumstances to elect a majority of the board of directors of such corporation, irrespective of whether or not at the time stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency, is at the time directly or indirectly owned by the Borrower, by the Borrower and one or more other Subsidiaries, or by one or more other Subsidiaries. "Tangible Net Worth" means, as of the date of determination, the Book Net Worth of the Borrower as of such date after eliminating all intangible assets (as determined under generally accepted accounting principles properly used in the preparation of the financial statements for financial reporting purposes, consistently applied) including, without limitation, good will, franchises, licenses, license rights, patents, trademarks, trade names, copyrights, unamortized organization expense and amounts designated on the balance sheet of the Borrower as a covenant not to compete, leasehold improvements, any amount at which shares of common or preferred stock of the Borrower appear as an asset on the balance sheet of the Borrower, advances or loans to stockholders, directors, officers or employees of the Borrower or any Affiliate, advances or loans by the Borrower to any Affiliate, investments in common or preferred stock or general or limited partnership interests except investments in direct obligations of the United States and commercial bank deposits, intercompany transactions between the Borrower and any Affiliate, or between any Affiliate of the Borrower (including specifically, but not limited to, the Holdings Note), deferred expenses and prepaid expenses, and all other intangible assets designated by the Lender in its sole discretion. "Term Loan" has the meaning specified in Section hereof. "Term Loan Floating Rate" means an annual rate equal to the sum of the Base Rate plus one and three-quarters percent (1.75%), which Term Loan Floating Rate shall change when and as the Base Rate changes. "Term Note" means the term note of the Borrower payable to the order of the Lender in substantially the form attached hereto as Exhibit A-2. "Termination Date" means February 28, 1998. "Total Assets" means, as of the date of determination, all assets of the Borrower as of such date which should properly be classified as assets on a balance sheet of the Borrower, prepared in accordance with generally accepted accounting principles, consistently applied. Notwithstanding the foregoing definition of Total Assets, all unrealized appreciation and all increases in value shall be excluded in determining the amount of Total Assets. "Total Interest" means, for any specified period, all interest accrued within such period on all Indebtedness, as determined in accordance with generally accepted accounting principles, consistently applied. "UCC" means the Uniform Commercial Code as in effect from time to time in the state designated in Section hereof as the state whose laws shall govern this Agreement, or in any other state whose laws are held to govern this Agreement or any portion hereof. ARTICLE II Amount and Terms of the Credit Facility Section 2.1 Advances. The Lender agrees, on the terms and subject to the conditions herein set forth, to make Advances to the Borrower from time to time during the period from the date hereof to and including the Termination Date, or the earlier date of termination in whole of the Credit Facility pursuant to Sections or hereof, in an aggregate amount at any time outstanding not to exceed the Borrowing Base, which Advances shall be secured by the Collateral as provided in Article hereof. The Credit Facility shall be a revolving facility and it is contemplated that the Borrower will request Advances, make prepayments and request additional Advances. The Borrower agrees to comply with the following procedures in requesting Advances under this Section: (a) The Lender will not make any Advance under this Section if, after giving effect to such requested Advance, the sum of the outstanding and unpaid Advances under this Section or otherwise would exceed the Borrowing Base. (b) Each request for an Advance under this Section shall be made to the Lender prior to 11:00 a.m. (Minneapolis time) of the day of the requested Advance by the Borrower. Each request for an Advance may be made in writing or by telephone, specifying the date of the requested Advance and the amount thereof, and shall be by (i) any officer of the Borrower; or (ii) any person designated as the Borrower's agent by any officer of the Borrower in a writing delivered to the Lender; or (iii) any person reasonably believed by the Lender to be an officer of the Borrower or such a designated agent. (c) Upon fulfillment of the applicable conditions set forth in Article hereof, the Lender shall disburse loan proceeds by crediting the same to the Borrower's demand deposit account maintained with Norwest Bank Arizona, National Association unless the Lender and the Borrower shall agree in writing to another manner of disbursement. Upon request of the Lender, the Borrower shall promptly confirm each telephonic request for an Advance by executing and delivering an appropriate confirmation certificate to the Lender. The Borrower shall be obligated to repay all Advances under this Section notwithstanding the failure of the Lender to receive such confirmation and notwithstanding the fact that the person requesting the same was not in fact authorized to do so. Any request for an Advance under this Section , whether written or telephonic, shall be deemed to be a representation by the Borrower that (i) the condition set forth in Section hereof has been met, and (ii) the conditions set forth in Section hereof have been met as of the time of the request. Section 2.2 Term Loan. The Lender agrees, on the terms and subject to the conditions herein set forth, to make a term loan (the "Term Loan") in the aggregate principal amount of $209,000, which Term Loan shall be secured by the Collateral as provided in Article hereof. Upon the Borrower's request and fulfillment of the applicable conditions set forth in Article hereof, the Lender shall disburse loan proceeds, crediting the same to the Borrower's demand deposit account specified in Section hereof unless the Lender and the Borrower shall agree in writing to another manner of disbursement. Section 2.3 Notes. All Advances, if any, made by the Lender under this Article shall be evidenced by and repayable with interest in accordance with the Revolving Note. The Term Loan shall be evidenced by and repayable with interest in accordance with the Term Note. The principal of the Revolving Note shall be payable as provided herein and on the earlier of the Termination Date or acceleration by the Lender pursuant to Section hereof, and shall bear interest as provided herein. The principal of the Term Note shall be payable in 27 equal monthly installments of $4,354.17 each commencing on December 1, 1995 and continuing on the first day of each month thereafter until and including February 1, 1998, and the entire remaining unpaid principal balance of the Term Note shall be due and payable in full on February 28, 1998. The principal of the Term Note shall also be payable earlier upon acceleration by the Lender pursuant to Section 8.2 hereof. The principal of the Term Note shall bear interest as provided herein. Section 2.4 Interest. (a) The principal of the Advances and the Term Loan outstanding from time to time during any month shall bear interest (computed on the basis of actual days elapsed in a 360-day year) at the Floating Rate and at the Term Loan Floating Rate, respectively; provided, however, that from the first day of any month during which any Default or Event of Default occurs or exists at any time, in the Lender's discretion and without waiving any of its other rights and remedies, the principal of the Advances and the Term Loan outstanding from time to time shall bear interest at the Default Rate; and provided, further, that in any event no rate change shall be put into effect which would result in a rate greater than the highest rate permitted by law. Interest accruing on the principal balance of the Advances and the Term Loan outstanding from time to time shall be payable on the first day of the next succeeding month and on the Termination Date or earlier prepayment in full. (b) If any Person shall acquire a participation in the Advances or the Term Loan under this Agreement, the Borrower shall be obligated to the Lender to pay the full amount of all interest calculated under Section hereof, along with all other fees, charges and other amounts due under this Agreement, regardless if such Person elects to accept interest with respect to its participation at a lower rate than the Floating Rate or the Term Loan Floating Rate, or otherwise elects to accept less than its prorata share of such fees, charges and other amounts due under this Agreement. Section 2.5 Voluntary Prepayment; Termination of Agreement by Borrower; Permanent Reduction of Commitment. (a) Except as otherwise provided herein, the Borrower may, in its discretion, prepay the Advances or the Term Loan in whole at any time or from time to time in part. If either the Advances or the Term Loan is paid or prepaid, in whole or in part, from the proceeds of a refinancing with another party (other than the Lender or an affiliate of the Lender) or from any source other than the cash flow from operations of the Borrower, then the Revolving Note and the Term Note shall, at the option of the Lender, be subject to mandatory prepayment in full. If the prepayment is made on or prior to September 30, 1996, a prepayment fee shall be payable to the Lender in an amount equal to two percent (2%) of the sum of (i) the Commitment, plus (ii) the then outstanding principal balance of the Term Loan. If the prepayment is made at any time on or after September 30, 1996, a prepayment fee shall be payable to the Lender in an amount equal to one percent (1%) of the sum of (i) the Commitment, plus (ii) the then outstanding principal balance of the Term Loan. The Borrower acknowledges that the prepayment fee is an integral part of the pricing of the Credit Facility and the Term Loan and has been established in conjunction with the interest rate under the Revolving Note and the Term Note and that establishment of the prepayment fee is in lieu of increasing the margin used to compute the interest rate under the Revolving Note and the Term Note. The Borrower hereby acknowledges that such prepayment premium is reasonable. (b) The Borrower may terminate this Agreement at any time and, subject to payment and performance of all the Borrower's Obligations to the Lender, may obtain any release or termination of the Security Interest to which the Borrower is otherwise entitled by law by (i) giving at least 30 days' prior written notice to the Lender of the Borrower's intention to terminate this Agreement; and (ii) if the Borrower terminates this Agreement effective as of any date other than the Termination Date, paying Lender a prepayment fee which prepayment fee shall be in an amount equal to (i) if the prepayment is made on or prior to September 30, 1996, two percent (2%) of the sum of (a) the Commitment, plus (b) the then outstanding principal balance of the Term Loan; and (ii) if such prepayment is made on or after September 30, 1996, one percent (1%) of the sum of (a) the Commitment, plus (b) the then outstanding principal balance of the Term Loan. Section 2.6 Mandatory Prepayment. Without notice or demand, if the sum of the outstanding principal balance of the Advances shall at any time exceed the Borrowing Base, the Borrower shall immediately prepay the Advances to the extent necessary to reduce the sum of the outstanding principal balance of the Advances to the Borrowing Base. If any obligations of any of the Related Borrowers to the Lender or any affiliate of the Lender (including, without limitation, the Related Debt) pursuant to any present or future documents, instruments or agreements (including, without limitation, the Related Loan Documents) are prepaid in whole or in part, whether such prepayment is voluntary or mandatory, or if any loan or credit facility or agreement between any of the Related Borrowers and the Lender or any affiliate of the Lender is terminated (including, without limitation, the Related Loan Document), whether such termination is voluntary or involuntary on behalf of and Related Borrower, then, at the option of the Lender, the Revolving Note and the Term Note shall be subject to mandatory prepayment in full, and the Borrower shall also pay a prepayment premium calculated pursuant to Section 2.5 hereof. Any payment received by the Lender under this Section or under Section may be applied to the Advances or the Term Loan, including interest thereon and any fees, commissions, costs and expenses hereunder and under the Security Documents, in such order and in such amounts as the Lender, in its discretion, may from time to time determine; provided that any prepayment by the Borrower under Section which is designated as a partial prepayment of the Term Loan shall be applied to principal installments of the Term Loan in inverse order of maturity. Section 2.7 Payment. All payments of principal of and interest on the Advances and the Term Loan shall be made to the Lender in immediately available funds. The Borrower hereby authorizes the Lender, in its discretion at any time or from time to time and without request by the Borrower, to make an Advance to the extent necessary to pay any such amounts and any fees, costs or expenses hereunder or under the Security Documents. Section 2.8 Payment on Non-Banking Days. Whenever any payment to be made hereunder shall be stated to be due on a day which is not a Banking Day, such payment may be made on the next succeeding Banking Day, and such extension of time shall in such case be included in the computation of interest on the Advances, the Term Loan or the fees hereunder, as the case may be. Section 2.9 Intentionally Omitted. Section 2.10 Liability Records. The Lender may maintain from time to time, at its discretion, liability records as to any and all Advances and the Term Loan made or repaid and interest accrued or paid under this Agreement. All entries made on any such record shall be presumed correct until the Borrower establishes the contrary. On demand by the Lender, the Borrower will admit and certify in writing the exact principal balance that the Borrower then asserts to be outstanding to the Lender for Advances and the Term Loan under this Agreement. Any billing statement or accounting rendered by the Lender shall be conclusive and fully binding on the Borrower unless specific written notice of exception is given to the Lender by the Borrower within 30 days after its receipt by the Borrower. Section 2.11 Fees. (a) The Borrower hereby agrees to pay the Lender a fully earned and non-refundable origination fee of $4,567.50, due and payable upon the execution of this Agreement. (b) The Borrower agrees to pay to the Lender a commitment fee at the rate of one-quarter of one percent (.25%) per annum on the average daily unused amount of the Commitment from the date hereof to and including the date on which such facility is terminated, due and payable quarterly in arrears on the first day of each quarter, commencing January 1, 1996, provided that any such commitment fee remaining unpaid upon termination of the Credit Facility or acceleration of the Revolving Note by the Lender pursuant to Section hereof shall be due and payable on the date of such termination or acceleration. Such fee shall be calculated on the basis of actual days elapsed in a 360-day year. (c) The Borrower agrees to pay to the Lender a monitoring fee at the rate of $7,500.00 per year from the date hereof to and including the date on which the Credit Facility is terminated, due and payable quarterly in arrears on the first day of each calendar quarter in an amount equal to $1,875.00 per quarter commencing January 1, 1996, provided that any such monitoring fee remaining unpaid upon termination of the Credit Facility or acceleration of the Revolving Note by the Lender pursuant to Section 8.2 hereof, shall be due and payable on the date of such termination or acceleration. (d) The Borrower hereby agrees to pay the Lender, on demand, the Lender's then current audit fees (which audit fees are currently $400 per day) in connection with any audits or inspections by the Lender of any collateral or the operations or business of the Borrower, together with all actual out-of-pocket costs and expenses incurred in conducting any such audit or inspection. The Lender may at any time and from time to time conduct such audits or inspections of any collateral or the operations or business of the Borrower as the Lender may determine in its sole discretion; provided, however, that prior to the occurrence of a Default or Event of Default, the Borrower shall not be required to pay for more than four (4) such audits or inspections per calendar year. Following the occurrence of a Default or an Event of Default, the Borrower shall pay for any and all audits or inspections which the Lender may determine to conduct in its sole discretion. Section 2.12 Capital Adequacy. If the Lender shall determine that the adoption after the date hereof of any applicable law, rule or regulation regarding capital adequacy, or any change therein after the date hereof, any change after the date hereof in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Lender or its parent corporation with any guideline or request issued after the date hereof regarding capital adequacy (whether nor not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on the Lender's or the Lender's parent corporation's capital as a consequence of the Lender or its parent corporation could have achieved but for such adoption, change or compliance (taking into consideration the Lender's policies with respect to capital adequacy and those of the Lender's parent corporation) by an amount deemed to the Lender or its parent corporation to be material, then from time to time on demand by the Lender, the Borrower shall pay to the Lender such additional amount or amounts as will compensate the Lender or its parent corporation for such reduction. Certificates of the Lender sent to the Borrower from time to time claiming compensation under this Section, stating the reason therefor and setting forth in reasonable detail the calculation of the additional amount or amounts to be paid to the Lender hereunder shall be conclusive absent manifest error. In determining such amounts, the Lender or its parent corporation may use any reasonable averaging and attribution methods. ARTICLE III Security Interest Section 3.1 Grant of Security Interest. The Borrower hereby assigns and grants to the Lender a security interest (together with the security interest granted to the Lender pursuant to the Collateral Pledge Agreement, such security interests are collectively referred to as the "Security Interests") in the Collateral, as security for the payment and performance of each and every debt, liability and obligation of every type and description which the Borrower may now or at any time hereafter owe to the Lender (whether such debt, liability or obligation now exists or is hereafter created or incurred, whether it arises in a transaction involving the Lender alone or in a transaction involving other creditors of the Borrower, and whether it is direct or indirect, due or to become due, absolute or contingent, primary or secondary, liquidated or unliquidated, or sole, joint, several or joint and several, and including specifically, but not limited to, all indebtedness of the Borrower arising under this Agreement, the Note, or any other loan or credit agreement or guaranty between the Borrower and the Lender, whether now in effect or hereafter entered into; all such debts, liabilities and obligations are herein collectively referred to as the "Obligations"). Section 3.2 Notification of Account Debtors and Other Obligors. In addition to the rights of the Lender under Section hereof, with respect to any and all rights to payment constituting Collateral, the Lender may at any time (after the occurrence of an Event of Default) notify any account debtor or other person obligated to pay the amount due that such right to payment has been assigned or transferred to the Lender for security and shall be paid directly to the Lender. The Borrower will join in giving such notice if the Lender so requests. At any time after the Borrower or the Lender gives such notice to an account debtor or other obligor, the Lender may, but need not, in the Lender's name or in the Borrower's name, (a) demand, sue for, collect or receive any money or property at any time payable or receivable on account of, or securing, any such right to payment, or grant any extension to, make any compromise or settlement with or otherwise agree to waive, modify, amend or change the obligations (including collateral obligations) of any such account debtor or other obligor; and (b) as agent and attorney in fact of the Borrower, notify the United States Postal Service to change the address for delivery of the Borrower's mail to any address designated by the Lender, otherwise intercept the Borrower's mail, and receive, open and dispose of the Borrower's mail, applying all Collateral as permitted under this Agreement and holding all other mail for the Borrower's account or forwarding such mail to the Borrower's last known address. Section 3.3 Assignment of Insurance. As additional security for the payment and performance of the Obligations, the Borrower hereby assigns to the Lender any and all monies (including, without limitation, proceeds of insurance and refunds of unearned premiums) due or to become due under, and all other rights of the Borrower with respect to, any and all policies of insurance now or at any time hereafter covering the Collateral or any evidence thereof or any business records or valuable papers pertaining thereto, and the Borrower hereby directs the issuer of any such policy to pay all such monies directly to the Lender. At any time, whether before or after the occurrence of any Event of Default, the Lender may (but need not), in the Lender's name or in the Borrower's name, execute and deliver proof of claim, receive all such monies, endorse checks and other instruments representing payment of such monies, and adjust, litigate, compromise or release any claim against the issuer of any such policy. Section 3.4 Occupancy. (a) The Borrower hereby irrevocably grants to the Lender the right to take possession of the Premises at any time after the occurrence and during the continuance of an Event of Default. (b) The Lender may use the Premises only to hold, process, manufacture, sell, use, store, liquidate, realize upon or otherwise dispose of goods that are Collateral and for other purposes that the Lender may in good faith deem to be related or incidental purposes. (c) The right of the Lender to hold the Premises shall cease and terminate upon the earlier of (i) payment in full and discharge of all Obligations, and (ii) final sale or disposition of all goods constituting Collateral and delivery of all such goods to purchasers. (d) The Lender shall not be obligated to pay or account for any rent or other compensation for the possession, occupancy or use of any of the Premises; provided, however, in the event that the Lender does pay or account for any rent or other compensation for the possession, occupancy or use of any of the Premises, the Borrower shall reimburse the Lender promptly for the full amount thereof. In addition, the Borrower will pay, or reimburse the Lender for, all taxes, fees, duties, imposts, charges and expenses at any time incurred by or imposed upon the Lender by reason of the execution, delivery, existence, recordation, performance or enforcement of this Agreement or the provisions of this Section. Section 3.5 License. The Borrower hereby grants to the Lender a non-exclusive, worldwide and royalty-free license to use or otherwise exploit all trademarks, franchises, trade names, copyrights and patents of the Borrower for the purpose of selling, leasing or otherwise disposing of any or all Collateral following an Event of Default. ARTICLE IV Conditions of Lending Section 4.1 Conditions Precedent to the Initial Advance and the Term Loan. The obligation of the Lender to make the initial Advance or the Term Loan under the Credit Facility shall be subject to the condition precedent that the Lender shall have received all of the following, each in form and substance satisfactory to the Lender: (a) This Agreement, properly executed on behalf of the Borrower. (b) The Note, properly executed on behalf of the Borrower. (c) A true and correct copy of any and all leases pursuant to which the Borrower is leasing the Premises, together with a landlord's disclaimer and consent with respect to each such lease. (d) A Collateral Account Agreement (the "Collateral Account Agreement"), duly executed by the Borrower and a financial institution acceptable to the Lender, pursuant to which the Borrower and the institution establish a depository account (the "Collateral Account") in the name of and under the sole and exclusive control of the Lender, from which such institution agrees to transfer finally collected funds to the Lender for application to the Advances. (e) A Lockbox Agreement (the "Lockbox Agreement"), duly executed by the Borrower and an institution acceptable to the Lender, pursuant to which the Borrower agrees to maintain and direct account debtors to make payment to, and such institution agrees to maintain and process payments received in, a lockbox for the benefit of the Lender (the "Lockbox"), from which Lockbox such institution shall transfer funds to the Collateral Account. (f) Current searches of appropriate filing offices showing that (i) no state or federal tax liens have been filed and remain in effect against the Borrower or any Guarantor executing a Guarantor Security Agreement, (ii) no financing statements have been filed and remain in effect against the Borrower or any Guarantor executing a Guarantor Security Agreement, except, with respect to the Borrower, those financing statements relating to liens permitted pursuant to Section hereof and, with respect to any Guarantor executing a Guarantor Security Agreement, those financing statements filed by the Lender and with respect to any Guarantor execution a Guarantor Security Agreement, those financing statements relating to liens permitted pursuant to the Guarantor Security Agreement executed by such Guarantor, and (iii) the Lender has duly filed all financing statements necessary to perfect the Security Interests granted hereunder and the security interests granted under the Guarantor Security Agreements, to the extent the Security Interests or such security interests, as the case may be, are capable of being perfected by filing. (g) A certificate of the Secretary or an Assistant Secretary of the Borrower, certifying as to (i) the resolutions of the directors and, if required, the shareholders of the Borrower, authorizing the execution, delivery and performance of this Agreement and the Security Documents, (ii) the articles of incorporation and bylaws of the Borrower, and (iii) the signatures of the officers or agents of the Borrower authorized to execute and deliver this Agreement, the Security Documents and other instruments, agreements and certificates, including Advance requests, on behalf of the Borrower. (h) A certificate of the Secretary or an Assistant Secretary of each Guarantor, certifying as to (i) the resolutions of the directors and, if required, the shareholders of such Guarantor, authorizing the execution, delivery and performance of such Guarantor's Guaranty, and, if applicable, such Guarantor's Guarantor Security Agreement, (ii) the articles of incorporation and bylaws of such Guarantor, and (iii) the signatures of the officers or agents of such Guarantor authorized to execute and deliver such Guarantor's Guaranty and, if applicable, such Guarantor's Guarantor Security Agreement, and other instruments, agreements and certificates on behalf of such Guarantor. (i) A current certificate issued by the Secretary of State of the state of the Borrower's and each Guarantor's incorporation, certifying that the Borrower or such Guarantor, as the case may be, is in compliance with all corporate organizational requirements of such state. (j) Evidence that the Borrower and each Guarantor is duly licensed or qualified to transact business in all jurisdictions where the character of the property owned or leased or the nature of the business transacted by it makes such licensing or qualification necessary. (k) An opinion of counsel to the Borrower and each Guarantor, addressed to the Lender. (l) Certificates of the insurance required hereunder and under each Guarantor Security Agreement, with all hazard insurance containing a lender's loss payable endorsement in favor of the Lender and with all liability insurance naming the Lender as an additional insured. (m) The Guaranties, properly executed by each of the Guarantors. (n) The Guarantor Security Agreements, properly executed by the Guarantor executing each such Guarantor Security Agreement. (o) The Related Loan Documents shall have been executed by all of the parties thereto, and all conditions precedent set forth in the Related Loan Documents shall have been satisfied. (p) The Collateral Pledge Agreement, duly executed by the Borrower, together with the original Holdings Note endorsed to the Lender. (q) The Management Agreement, properly executed by the parties thereto. (r) An opening pro forma balance sheet of the Borrower, which balance sheet shall be prepared as if the loans contemplated hereby had been funded as of such date. (s) An equipment appraisal addressed to the Lender prepared by an appraisal firm acceptable to the Lender, which appraisal shall be in form and substance acceptable to the Lender and shall indicate an orderly liquidation value of the Borrower's Equipment of at least $261,250. (t) The original certificates of title for all of the Borrower's vehicles, together with all documents necessary to allow the Lender's security interest to be added to the certificates of title, and to cause the deletion of all other security interests shown thereon, all properly executed by the appropriate parties. (u) Payment of the fees due through the date of the initial Advance or Term Loan under Section hereof and expenses incurred by the Lender through such date and required to be paid by the Borrower under Section hereof. (v) Such other documents as the Lender in its sole discretion may require. Section 4.2 Conditions Precedent to All Advances and the Term Loan. The obligation of the Lender to make each Advance or Term Loan shall be subject to the further conditions precedent that on such date: (a) the representations and warranties contained in Article hereof are correct on and as of the date of such Advance or Term Loan as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date; and (b) no event has occurred and is continuing, or would result from such Advance or Term Loan which constitutes a Default or an Event of Default. ARTICLE V Representations and Warranties The Borrower represents and warrants to the Lender as follows: Section 5.1 Corporate Existence and Power; Name; Chief Executive Office; Inventory and Equipment Locations. The Borrower is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Arizona, and is duly licensed or qualified to transact business in all jurisdictions where the character of the property owned or leased or the nature of the business transacted by it makes such licensing or qualification necessary, except when the failure to be so licensed or qualified would not have a material adverse effect on the financial condition, properties or operations of the Borrower. The Borrower has all requisite power and authority, corporate or otherwise, to conduct its business, to own its properties and to execute and deliver, and to perform all of its obligations under, the Loan Documents. During its corporate existence, the Borrower has done business solely under the names set forth in Exhibit hereto. The chief executive office and principal place of business of the Borrower is located at the address set forth in Exhibit hereto, and all of the Borrower's records relating to its business or the Collateral are kept at that location. All Inventory and Equipment is located at that location or at one of the other locations set forth in Exhibit hereto. The Borrower's tax identification number is correctly set forth in Section. Section 5.2 Authorization of Borrowing; No Conflict as to Law or Agreements. The execution, delivery and performance by the Borrower of the Loan Documents and the borrowings from time to time hereunder have been duly authorized by all necessary corporate action and do not and will not (a) require any consent or approval of the stockholders of the Borrower, (b) require any authorization, consent or approval by, or registration, declaration or filing with, or notice to, any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, or any third party, except such authorization, consent, approval, registration, declaration, filing or notice as has been obtained, accomplished or given prior to the date hereof, (c) violate any provision of any law, rule or regulation (including, without limitation, Regulation X of the Board of Governors of the Federal Reserve System) or of any order, writ, injunction or decree presently in effect having applicability to the Borrower or of the Articles of Incorporation or Bylaws of the Borrower, (d) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other material agreement, lease or instrument to which the Borrower is a party or by which it or its properties may be bound or affected, or (e) result in, or require, the creation or imposition of any mortgage, deed of trust, pledge, lien, security interest or other charge or encumbrance of any nature (other than the Security Interests) upon or with respect to any of the properties now owned or hereafter acquired by the Borrower. Section 5.3 Legal Agreements. This Agreement constitutes and, upon due execution by the Borrower, the other Loan Documents will constitute the legal, valid and binding obligations of the Borrower, enforceable against the Borrower in accordance with their respective terms. Section 5.4 Subsidiaries. Except as set forth in Exhibit attached hereto, the Borrower has no Subsidiaries. Section 5.5 Financial Condition; No Adverse Change. The Borrower has heretofore furnished to the Lender unaudited financial statements of the Borrower for its fiscal year ended December 31, 1994 and unaudited financial statements of the Borrower for the months ended July 31, 1995, and those statements fairly present the financial condition of the Borrower on the dates thereof and the results of its operations and cash flows for the periods then ended and were prepared in accordance with generally accepted accounting principles. Since the date of the most recent financial statements, there has been no material adverse change in the business, properties or condition (financial or otherwise) of the Borrower. Section 5.6 Litigation. There are no actions, suits or proceedings pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower or any of its Affiliates or the properties of the Borrower or any of its Affiliates before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which, if determined adversely to the Borrower or any of its Affiliates, would have a material adverse effect on the financial condition, properties or operations of the Borrower or any of its Affiliates. Section 5.7 Regulation U. The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System), and no part of the proceeds of any Advance or Term Loan will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock. Section 5.8 Taxes. The Borrower and its Affiliates have paid or caused to be paid to the proper authorities when due all federal, state and local taxes required to be withheld by each of them. The Borrower and its Affiliates have filed all federal, state and local tax returns which to the knowledge of the officers of the Borrower or any Affiliate, as the case may be, are required to be filed, and the Borrower and its Affiliates have paid or caused to be paid to the respective taxing authorities all taxes as shown on said returns or on any assessment received by any of them to the extent such taxes have become due. Section 5.9 Titles and Liens. The Borrower has good and absolute title to all Collateral described in the collateral reports provided to the Lender and all other Collateral, properties and assets reflected in the latest balance sheet referred to in Section hereof and all proceeds thereof, free and clear of all mortgages, security interests, liens and encumbrances, except for (i) mortgages, security interests and liens permitted by Section hereof, and (ii) in the case of any such property which is not Collateral or other collateral described in the Security Documents, covenants, restrictions, rights, easements and minor irregularities in title which do not materially interfere with the business or operations of the Borrower as presently conducted. No financing statement naming the Borrower as debtor is on file in any office except to perfect only security interests permitted by Section hereof. Section 5.10 Plans. Except as disclosed to the Lender in writing prior to the date hereof, neither the Borrower nor any of its Affiliates maintains or has maintained any Plan. Neither the Borrower nor any Affiliate has received any notice or has any knowledge to the effect that it is not in full compliance with any of the requirements of ERISA. No Reportable Event or other fact or circumstance which may have an adverse effect on the Plan's tax qualified status exists in connection with any Plan. Neither the Borrower nor any of its Affiliates has: (a) Any accumulated funding deficiency within the meaning of ERISA; or (b) Any liability or knows of any fact or circumstances which could result in any liability to the Pension Benefit Guaranty Corporation, the Internal Revenue Service, the Department of Labor or any participant in connection with any Plan (other than accrued benefits which or which may become payable to participants or beneficiaries of any such Plan). Section 5.11 Default. The Borrower is in compliance with all provisions of all agreements, instruments, decrees and orders to which it is a party or by which it or its property is bound or affected, the breach or default of which could have a material adverse effect on the financial condition, properties or operations of the Borrower. Section 5.12 Environmental Protection. The Borrower has obtained all permits, licenses and other authorizations which are required under federal, state and local laws and regulations relating to emissions, discharges, releases of pollutants, contaminants, hazardous or toxic materials, or wastes into ambient air, surface water, ground water or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants or hazardous or toxic materials or wastes ("Environmental Laws") at the Borrower's facilities or in connection with the operation of its facilities. Except as previously disclosed to the Lender in writing, the Borrower and all activities of the Borrower at its facilities comply with all Environmental Laws and with all terms and conditions of any required permits, licenses and authorizations applicable to the Borrower with respect thereto and except when the failure to so comply would not have a material adverse effect on the Borrower or its properties, assets, business or financial condition. Except as previously disclosed to the Lender in writing, the Borrower is also in compliance with all limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in Environmental Laws or contained in any plan, order, decree, judgment or notice of which the Borrower is aware and except where the failure to so comply would not have a material adverse effect on the Borrower or its properties, assets, business or financial condition. Except as previously disclosed to the Lender in writing, the Borrower is not aware of, nor has the Borrower received notice of, any events, conditions, circumstances, activities, practices, incidents, actions or plans which may interfere with or prevent continued compliance with, or which may give rise to any liability under, any Environmental Laws. Section 5.13 Submissions to Lender. All financial and other information provided to the Lender by or on behalf of the Borrower in connection with the Borrower's request for the credit facilities contemplated hereby is true and correct in all material respects and, as to projections, valuations or proforma financial statements, present a good faith opinion as to such projections, valuations and proforma condition and results. Section 5.14 Financing Statements. The Borrower has provided to the Lender signed financing statement sufficient when filed to perfect the Security Interests and the other security interests created by the Security Documents. When such financing statements are filed in the offices noted therein, the Lender will have a valid and perfected security interest in all Collateral and all other collateral described in the Security Documents which is capable of being perfected by filing financing statements. None of the Collateral or other collateral covered by the Security Documents is or will become a fixture on real estate, unless a sufficient fixture filing is in effect with respect thereto. Section 5.15 Rights to Payment. Each right to payment and each instrument, document, chattel paper and other agreement constituting or evidencing Collateral or other collateral covered by the Security Documents is (or, in the case of all future Collateral or such other collateral, will be when arising or issued) the valid, genuine and legally enforceable obligation, subject to no defense, setoff or counterclaim, of the account debtor or other obligor named therein or in the Borrower's records pertaining thereto as being obligated to pay such obligation. Section 5.16 Trademarks and Patents. Except as set forth on Exhibit F attached hereto, the Borrower does not own any interest in any copyrights, patents or trademarks that are registered under either federal or state law. Section 5.17 Ownership of Borrower. All issued and outstanding capital stock of the Borrower (whether common or preferred) is held by Holdings. Section 5.18 Vehicles. Except as set forth on Exhibit G attached hereto, the Borrower does not own any interest in any certificated vehicles or certificated piece of equipment. Section 5.19 Solvency. (a) The fair salable value of the Borrower as a going concern exceeds the amount that will be required to be paid in respect to the existing debts and other liabilities (including all contingent liabilities) of the Borrower as they mature. (b) The Borrower does not and will not have, immediately following the closing of the transactions contemplated hereunder, unreasonably small capital to carry out its business as conducted or as proposed to be conducted. (c) The Borrower does not intend to and does not believe that it will incur debts beyond its ability to pay such debts as they mature. ARTICLE VI Affirmative Covenants of the Borrower So long as the Note shall remain unpaid or the Credit Facility shall be outstanding, the Borrower will comply with the following requirements, unless the Lender shall otherwise consent in writing: Section 6.1 Reporting Requirements. The Borrower will deliver, or cause to be delivered, to the Lender each of the following, which shall be in form and detail acceptable to the Lender: (a) as soon as available, and in any event within 90 days after the end of each fiscal year of the Borrower, audited financial statements of the Borrower with the unqualified opinion of independent certified public accountants selected by the Borrower and acceptable to the Lender, which annual financial statements shall include the balance sheet of the Borrower as at the end of such fiscal year and the related statements of income, retained earnings and cash flows of the Borrower for the fiscal year then ended, prepared, if the Lender so requests, on a consolidating and consolidated basis to include any Affiliates, all in reasonable detail and prepared in accordance with generally accepted accounting principles applied on a basis consistent with the accounting practices applied in the financial statements referred to in Section hereof, together with (i) a report signed by such accountants stating that in making the investigations necessary for said opinion they obtained no knowledge, except as specifically stated, of any Default or Event of Default hereunder and all relevant facts in reasonable detail to evidence, and the computations as to, whether or not the Borrower is in compliance with the requirements set forth in Sections through and Section hereof; and (ii) a certificate of the chief financial officer of the Borrower stating that such financial statements have been prepared in accordance with generally accepted accounting principles applied on a basis consistent with the accounting practices reflected in the annual financial statements referred to in Section hereof and whether or not such officer has knowledge of the occurrence of any Default or Event of Default hereunder and, if so, stating in reasonable detail the facts with respect thereto; (b) as soon as available and in any event within 30 days after the end of each month, an unaudited/internal balance sheet and statements of income and retained earnings of the Borrower as at the end of and for such month and for the year to date period then ended, prepared, if the Lender so requests, on a consolidating and consolidated basis to include any Affiliates, in reasonable detail and stating in comparative form the figures for the corresponding date and periods in the previous year, all prepared in accordance with generally accepted accounting principles applied on a basis consistent with the accounting practices reflected in the financial statements referred to in Section hereof, subject to year-end audit adjustments; and accompanied by a certificate of the chief financial officer of the Borrower, substantially in the form of Exhibit hereto stating (i) that such financial statements have been prepared in accordance with generally accepted accounting principles applied on a basis consistent with the accounting practices reflected in the financial statements referred to in Section hereof, subject to year-end audit adjustments, (ii) whether or not such officer has knowledge of the occurrence of any Default or Event of Default hereunder not theretofore reported and remedied and, if so, stating in reasonable detail the facts with respect thereto, and (iii) all relevant facts in reasonable detail to evidence, and the computations as to, whether or not the Borrower is in compliance with the requirements set forth in Sections through and Section hereof; (c) on a daily basis, a schedule of assigned receivables, a collection report and such other documents regarding the Borrower's accounts receivable as the Lender may request on forms provided by the Lender; (d) within 20 days after the end of each month, agings of the Borrower's accounts receivable (including a calculation of Eligible Accounts) and its accounts payable and an inventory certification report as at the end of such month; (e) at least 30 days before the beginning of each fiscal year of the Borrower, the projected balance sheets and income statements for each month of such year, each in reasonable detail, representing the good faith projections of the Borrower and certified by the Borrower's chief financial officer as being the most accurate projections available and identical to the projections used by the Borrower for internal planning purposes, together with such supporting schedules and information as the Lender may in its discretion require; (f) immediately after the commencement thereof, notice in writing of all litigation and of all proceedings before any governmental or regulatory agency affecting the Borrower of the type described in Section hereof or which seek a monetary recovery against the Borrower in excess of $10,000; (g) as promptly as practicable (but in any event not later than five business days) after an officer of the Borrower obtains knowledge of the occurrence of any breach, default or event of default under any Security Document or any event which constitutes a Default or Event of Default hereunder, notice of such occurrence, together with a detailed statement by a responsible officer of the Borrower of the steps being taken by the Borrower to cure the effect of such breach, default or event; (h) as soon as possible and in any event within 30 days after the Borrower knows or has reason to know that any Reportable Event with respect to any Plan has occurred, the statement of the chief financial officer of the Borrower setting forth details as to such Reportable Event and the action which the Borrower proposes to take with respect thereto, together with a copy of the notice of such Reportable Event to the Pension Benefit Guaranty Corporation; (i) as soon as possible, and in any event within 10 days after the Borrower fails to make any quarterly contribution required with respect to any Plan under Section 412(m) of the Internal Revenue Code of 1986, as amended, the statement of the chief financial officer of the Borrower setting forth details as to such failure and the action which the Borrower proposes to take with respect thereto, together with a copy of any notice of such failure required to be provided to the Pension Benefit Guaranty Corporation; (j) promptly upon knowledge thereof, notice of (i) any disputes or claims by customers of the Borrower; (ii) any goods returned to or recovered by the Borrower; and (iii) any change in the persons constituting the officers and directors of the Borrower; (k) promptly upon knowledge thereof, notice of any loss of or material damage to any Collateral or other collateral covered by the Security Documents or of any substantial adverse change in any Collateral or such other collateral or the prospect of payment thereof; (l) promptly upon their distribution, copies of all financial statements, reports and proxy statements which the Borrower shall have sent to its stockholders; (m) promptly after the sending or filing thereof, copies of all regular and periodic financial reports which the Borrower shall file with the Securities and Exchange Commission or any national securities exchange; (n) promptly upon knowledge thereof, notice of the violation by the Borrower of any law, rule or regulation, the non-compliance with which could materially and adversely affect its business or its financial condition; and (o) from time to time, with reasonable promptness, any and all receivables schedules, collection reports, deposit records, equipment schedules, copies of invoices to account debtors, shipment documents and delivery receipts for goods sold, and such other material, reports, records or information as the Lender may request. Section 6.2 Books and Records; Inspection and Examination. The Borrower will keep accurate books of record and account for itself pertaining to the Collateral and pertaining to the Borrower's business and financial condition and such other matters as the Lender may from time to time request in which true and complete entries will be made in accordance with generally accepted accounting principles consistently applied and, upon request of the Lender, will permit any officer, employee, attorney or accountant for the Lender to audit, review, make extracts from or copy any and all corporate and financial books and records of the Borrower at all times during ordinary business hours, to send and discuss with account debtors and other obligors requests for verification of amounts owed to the Borrower, and to discuss the affairs of the Borrower with any of its directors, officers, employees or agents. The Borrower will permit the Lender, or its employees, accountants, attorneys or agents, to examine and inspect any Collateral, other collateral covered by the Security Documents or any other property of the Borrower at any time during ordinary business hours. Section 6.3 Account Verification. The Lender may, and Borrower will, at any time and from time to time upon request of the Lender, send requests for verification of accounts or notices of assignment to account debtors and other obligors. Section 6.4 Compliance with Laws; Environmental Indemnity. The Borrower will (a) comply with the requirements of applicable laws and regulations, the non-compliance with which would materially and adversely affect its business or its financial condition, (b) comply with all applicable Environmental Laws and obtain any permits, licenses or similar approvals required by any such Environmental Laws, and (c) use and keep the Collateral, and will require that others use and keep the Collateral, only for lawful purposes, without violation of any federal, state or local law, statute or ordinance. The Borrower will indemnify, defend and hold the Lender harmless from and against any claims, loss or damage to which the Lender may be subjected as a result of any past, present or future existence, use, handling, storage, transportation or disposal of any hazardous waste or substance or toxic substance by the Borrower or on property owned, leased or controlled by the Borrower. This indemnification agreement shall survive the termination of this Agreement and payment of the indebtedness hereunder. Section 6.5 Payment of Taxes and Other Claims. The Borrower will pay or discharge, when due, (a) all taxes, assessments and governmental charges levied or imposed upon it or upon its income or profits, upon any properties belonging to it (including, without limitation, the Collateral) or upon or against the creation, perfection or continuance of the Security Interests, prior to the date on which penalties attach thereto, (b) all federal, state and local taxes required to be withheld by it, and (c) all lawful claims for labor, materials and supplies which, if unpaid, might by law become a lien or charge upon any properties of the Borrower; provided, that the Borrower shall not be required to pay any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings. Section 6.6 Maintenance of Properties. (a) The Borrower will keep and maintain the Collateral, the other collateral covered by the Security Documents and all of its other properties necessary or useful in its business in good condition, repair and working order (normal wear and tear excepted) and will from time to time replace or repair any worn, defective or broken parts; provided, however, that nothing in this Section shall prevent the Borrower from discontinuing the operation and maintenance of any of its properties if such discontinuance is, in the judgment of the Lender, desirable in the conduct of the Borrower's business and not disadvantageous in any material respect to the Lender. (b) The Borrower will defend the Collateral against all claims or demands of all persons (other than the Lender) claiming the Collateral or any interest therein. (c) The Borrower will keep all Collateral and other collateral covered by the Security Documents free and clear of all security interests, liens and encumbrances except the Security Interests and other security interests permitted by Section hereof. Section 6.7 Insurance. The Borrower will obtain and at all times maintain insurance with insurers believed by the Borrower to be responsible and reputable, in such amounts and against such risks as may from time to time be required by the Lender, but in all events in such amounts and against such risks as is usually carried by companies engaged in similar business and owning similar properties in the same general areas in which the Borrower operates. Without limiting the generality of the foregoing, the Borrower will at all times keep all tangible Collateral insured against risks of fire (including so-called extended coverage), theft, collision (for Collateral consisting of motor vehicles) and such other risks and in such amounts as the Lender may reasonably request, with any loss payable to the Lender to the extent of its interest, and all policies of such insurance shall contain a lender's loss payable endorsement for the benefit of the Lender. All policies of liability insurance required hereunder shall name the Lender as an additional insured. Section 6.8 Preservation of Corporate Existence. The Borrower will preserve and maintain its corporate existence and all of its rights, privileges and franchises necessary or desirable in the normal conduct of its business and shall conduct its business in an orderly, efficient and regular manner. Section 6.9 Delivery of Instruments, etc. Upon request by the Lender, the Borrower will promptly deliver to the Lender in pledge all instruments, documents and chattel papers constituting Collateral, duly endorsed or assigned by the Borrower. Section 6.10 Lockbox; Collateral Account. (a) The Borrower will irrevocably direct all present and future Account debtors and other Persons obligated to make payments constituting Collateral to make such payments directly to the Lockbox. All of the Borrower's invoices, account statements and other written or oral communications directing, instructing, demanding or requesting payment of any Account or any other amount constituting Collateral shall conspicuously direct that all payments be made to the Lockbox and shall include the Lockbox address. All payments received in the Lockbox shall be processed to the Collateral Account. (b) The Borrower agrees to deposit in the Collateral Account or, at the Lender's option, to deliver to the Lender all collections on Accounts, contract rights, chattel paper and other rights to payment constituting Collateral, and all other cash proceeds of Collateral, which the Borrower may receive directly notwithstanding its direction to Account debtors and other obligors to make payments to the Lockbox, immediately upon receipt thereof, in the form received, except for the Borrower's endorsement when deemed necessary. Until delivered to the Lender or deposited in the Collateral Account, all proceeds or collections of Collateral shall be held in trust by the Borrower for and as the property of the Lender and shall not be commingled with any funds or property of the Borrower. Amounts deposited in the Collateral Account shall not bear interest and shall not be subject to withdrawal by the Borrower, except after full payment and discharge of all Obligations. All such collections shall constitute proceeds of Collateral and shall not constitute payment of any Obligation. Collected funds from the Collateral Account shall be transferred to the Lender's general account, and the Lender may deposit in its general account or in the Collateral Account any and all collections received by it directly from the Borrower. The Lender may commingle such funds with other property of the Lender or any other person. The Lender from time to time at its discretion may, after allowing 2 Banking Days, apply such funds to the payment of any and all Obligations, in any order or manner of application satisfactory to the Lender. All items delivered to the Lender or deposited in the Collateral Account shall be subject to final payment. If any such item is returned uncollected, the Borrower will immediately pay the Lender, or, for items deposited in the Collateral Account, the bank maintaining such account, the amount of that item, or such bank at its discretion may charge any uncollected item to the Borrower's commercial account or other account. The Borrower shall be liable as an endorser on all items deposited in the Collateral Account, whether or not in fact endorsed by the Borrower. Section 6.11 Performance by the Lender. If the Borrower at any time fails to perform or observe any of the foregoing covenants contained in this Article or elsewhere herein, and if such failure shall continue for a period of ten calendar days after the Lender gives the Borrower written notice thereof (or in the case of the agreements contained in Sections , and hereof, immediately upon the occurrence of such failure, without notice or lapse of time), the Lender may, but need not, perform or observe such covenant on behalf and in the name, place and stead of the Borrower (or, at the Lender's option, in the Lender's name) and may, but need not, take any and all other actions which the Lender may reasonably deem necessary to cure or correct such failure (including, without limitation, the payment of taxes, the satisfaction of security interests, liens or encumbrances, the performance of obligations owed to account debtors or other obligors, the procurement and maintenance of insurance, the execution of assignments, security agreements and financing statements, and the endorsement of instruments); and the Borrower shall thereupon pay to the Lender on demand the amount of all monies expended and all costs and expenses (including reasonable attorneys' fees and legal expenses) incurred by the Lender in connection with or as a result of the performance or observance of such agreements or the taking of such action by the Lender, together with interest thereon from the date expended or incurred at the Floating Rate. To facilitate the performance or observance by the Lender of such covenants of the Borrower, the Borrower hereby irrevocably appoints the Lender, or the delegate of the Lender, acting alone, as the attorney in fact of the Borrower (which appointment is coupled with an interest) with the right (but not the duty) from time to time to create, prepare, complete, execute, deliver, endorse or file in the name and on behalf of the Borrower any and all instruments, documents, assignments, security agreements, financing statements, applications for insurance and other agreements and writings required to be obtained, executed, delivered or endorsed by the Borrower under this Section. Section 6.12 Net Income. The Borrower shall at all times maintain (exclusive of any Subsidiaries or Affiliates unless the Lender specifically consents in writing to their inclusion in such calculation), a fiscal year-to-date Net Income of at least the following, calculated as of the following dates: As of the Last Day of Net Income September, 1995 $175,000.00 October, 1995 175,000.00 November, 1995 175,000.00 December, 1995 200,000.00 January, 1996 0.00 February, 1996 0.00 March, 1996 50,000.00 April, 1996 50,000.00 May, 1996 50,000.00 June, 1996 100,000.00 Section 6.13 Tangible Net Worth. The Borrower shall at all times maintain (exclusive of any Subsidiaries or Affiliates unless the Lender specifically consents in writing to their inclusion in such calculation), a Tangible Net Worth of at least the following, calculated as of the following dates: As of the Last Day of Tangible Net Worth September, 1995 $600,000.00 October, 1995 600,000.00 November, 1995 600,000.00 December, 1995 700,000.00 January, 1996 700,000.00 February, 1996 700,000.00 March, 1996 700,000.00 April, 1996 700,000.00 May, 1996 700,000.00 June, 1996 700,000.00 Section 6.14 Book Net Worth. The Borrower shall at all times maintain (exclusive of any Subsidiaries or Affiliates unless the Lender specifically consents in writing to their inclusion in such calculation), a Book Net Worth of at least the following, calculated as of the following dates: As of the Last Day of Book Net Worth September, 1995 $1,055,000.00 October, 1995 1,055,000.00 November, 1995 1,055,000.00 December, 1995 1,075,000.00 As of the last day of January through June of 1996, the Book Net Worth covenant amount shall be an amount equal to the sum of (i) the greater of the Borrower's actual Book Net Worth as of December 31, 1995 or $1,075,000, plus (ii) for January and February of 1996, zero dollars, for March, April and May of 1996, $50,000, and for June of 1996, $100,000. Section 6.15 Debt Service Coverage Ratio. The Borrower shall at all times maintain (exclusive of any Subsidiaries or Affiliates unless the Lender specifically consents in writing to their inclusion in such calculation), a Debt Service Coverage Ratio, calculated quarterly as of the end of each fiscal quarter of the Borrower, of at least 1.3 to 1.0. Section 6.16 Financial Covenants for Subsequent Periods. The Net Income, Tangible Net Worth, Book Net Worth, and Debt Service Coverage Ratio covenants and any other covenants which the Lender may deem appropriate in the future based upon the financial condition or performance of the Borrower, for the period commencing July 1, 1996 and thereafter, shall be established by the Lender in its sole discretion, based upon projections acceptable to the Lender, delivered to the Lender pursuant to Section 6.1 hereof, but in any event such covenants shall not be any less stringent than the covenants set forth in Sections 6.12, 6.13, 6.14 and 6.15 above. Section 6.17 Future Subsidiaries of Holdings. In the event that Holdings consummates any acquisition subsequent to the date hereof, and if such acquisition results in the creation of a new Subsidiary of Holdings, the Borrower agrees to take any and all action required in order to cause such new Subsidiary of Holdings to execute a guaranty of the Obligations and the Related Debt in form and substance acceptable to the Lender in its sole discretion. The Borrower also agrees that in the event the Lender extends any financial accommodations to any other Subsidiary of Holdings in addition to the financial accommodations extended to the Related Borrowers who are Subsidiaries of Holdings on this date by the Lender pursuant to the Related Loan Documents, the Borrower will, at the request of the Lender, execute a guaranty of such financial accommodations, and execute a security agreement or such other documents as the Lender shall deem necessary in order to grant the Lender a security interest in the assets of the Borrower to secure the payment and performance of the financial accommodations to be extended to such Subsidiary of Holdings by the Lender. Section 6.18 Availability. The Borrower shall at all times maintain Availability of at least $50,000. ARTICLE VII Negative Covenants So long as the Note shall remain unpaid or the Credit Facility shall be outstanding, the Borrower agrees that, without the prior written consent of the Lender: Section 7.1 Liens. The Borrower will not (i) create, incur or suffer to exist any mortgage, deed of trust, pledge, lien, security interest, assignment or transfer upon or of any of its assets, now owned or hereafter acquired, to secure any indebtedness, or (ii) incur any lease obligations which are required to be capitalized on the balance sheet ("Capitalized Lease Obligations"); excluding, however, from the operation of the foregoing: (a) mortgages, deeds of trust, pledges, liens, security interests and assignments in existence on the date hereof and listed in Exhibit hereto, securing indebtedness for borrowed money permitted under Section hereof; (b) the Security Interests; (c) purchase money security interests or Capitalized Lease Obligations relating to the acquisition of machinery and equipment of the Borrower so long as the Borrower is in, and maintains, compliance with every other provision of this Agreement; and (d) liens granted to the Lender or any affiliate of the Lender. Section 7.2 Indebtedness. The Borrower will not incur, create, assume or permit to exist any indebtedness or liability on account of deposits or advances or any indebtedness for borrowed money, or any other indebtedness or liability evidenced by notes, bonds, debentures or similar obligations, except: (a) indebtedness arising hereunder; (b) indebtedness or Capitalized Lease Obligations of the Borrower in existence on the date hereof and listed in Exhibit hereto; and (c) indebtedness or Capitalized Lease Obligations relating to liens permitted in accordance with Section hereof. Section 7.3 Guaranties. The Borrower will not assume, guarantee, endorse or otherwise become directly or contingently liable in connection with any obligations of any other Person, except: (a) the endorsement of negotiable instruments by the Borrower for deposit or collection or similar transactions in the ordinary course of business; and (b) guaranties, endorsements and other direct or contingent liabilities in connection with the obligations of other Persons in existence on the date hereof and listed in Exhibit hereto. Section 7.4 Investments and Subsidiaries. (a) The Borrower will not purchase or hold beneficially any stock or other securities or evidences of indebtedness of, make or permit to exist any loans or advances to, or make any investment or acquire any interest whatsoever in, any other Person, including specifically but without limitation any partnership or joint venture, except: (1) investments in direct obligations of the United States of America or any agency or instrumentality thereof whose obligations constitute full faith and credit obligations of the United States of America having a maturity of one year or less, commercial paper issued by U.S. corporations rated "A-1" or "A-2" by Standard & Poors Corporation or "P-1" or "P-2" by Moody's Investors Service or certificates of deposit or bankers' acceptances having a maturity of one year or less issued by members of the Federal Reserve System having deposits in excess of $100,000,000 (which certificates of deposit or bankers' acceptances are fully insured by the Federal Deposit Insurance Corporation); (2) travel advances or loans to officers and employees of the Borrower not exceeding at any one time an aggregate of $10,000; and (3) advances in the form of progress payments, prepaid rent or security deposits. (b) The Borrower will not create or permit to exist any Subsidiary, other than any Subsidiary in existence on the date hereof and listed in Exhibit hereto. Section 7.5 Dividends. The Borrower will not declare or pay any dividends (other than dividends payable solely in stock of the Borrower) on any class of its stock or make any payment on account of the purchase, redemption or other retirement of any shares of such stock or make any distribution in respect thereof, either directly or indirectly. Section 7.6 Sale or Transfer of Assets; Suspension of Business Operations. The Borrower will not sell, lease, assign, transfer or otherwise dispose of (i) the stock of any Subsidiary, (ii) all or a substantial part of its assets, or (iii) any Collateral or any interest therein (whether in one transaction or in a series of transactions) to any other Person other than the sale of Inventory in the ordinary course of business and will not liquidate, dissolve or suspend business operations. The Borrower will not in any manner transfer any property without prior or present receipt of full and adequate consideration. Section 7.7 Consolidation and Merger; Asset Acquisitions. The Borrower will not consolidate with or merge into any Person, or permit any other Person to merge into it, or acquire (in a transaction analogous in purpose or effect to a consolidation or merger) all or substantially all the assets of any other Person. Section 7.8 Sale and Leaseback. The Borrower will not enter into any arrangement, directly or indirectly, with any other Person whereby the Borrower shall sell or transfer any real or personal property, whether now owned or hereafter acquired, and then or thereafter rent or lease as lessee such property or any part thereof or any other property which the Borrower intends to use for substantially the same purpose or purposes as the property being sold or transferred. Section 7.9 Restrictions on Nature of Business. The Borrower will not engage in any line of business materially different from that presently engaged in by the Borrower and will not purchase, lease or otherwise acquire assets not related to its business. Section 7.10 Capital Expenditures. The Borrower will not expend or contract to expend Capital Expenditures or Capitalized Lease Obligations in an amount greater than $100,000 in the aggregate during any fiscal year. Section 7.11 Accounting. The Borrower will not adopt any material change in accounting principles other than as required by generally accepted accounting principles. The Borrower will not adopt, permit or consent to any change in its fiscal year. Section 7.12 Discounts, etc. The Borrower will not, after notice from the Lender, grant any discount, credit or allowance to any customer of the Borrower or accept any return of goods sold, or at any time (whether before after notice from the Lender) modify, amend, subordinate, cancel or terminate the obligation of any account debtor or other obligor of the Borrower. Section 7.13 Defined Benefit Pension Plans. The Borrower will not adopt, create, assume or become a party to any defined benefit pension plan, unless disclosed to the Lender pursuant to Section hereof. Section 7.14 Other Defaults. The Borrower will not permit any breach, default or event of default to occur under any note, loan agreement, indenture, lease, mortgage, contract for deed, security agreement or other contractual obligation binding upon the Borrower. Section 7.15 Place of Business; Name. The Borrower will not transfer its chief executive office or principal place of business, or move, relocate, close or sell any business location. The Borrower will not permit any tangible Collateral or any records pertaining to the Collateral to be located in any state or area in which, in the event of such location, a financing statement covering such Collateral would be required to be, but has not in fact been, filed in order to perfect the Security Interests. The Borrower will not change its name. Section 7.16 Organizational Documents; S Corporation Status. The Borrower will not amend its certificate of incorporation, articles of incorporation or bylaws. The Borrower will not become an S Corporation within the meaning of the Internal Revenue Code of 1986, as amended. Section 7.17 Salaries. The Borrower will not pay excessive or unreasonable salaries, bonuses, commissions, consultant fees or other compensation; or increase the salary, bonus, commissions, consultant fees or other compensation of any director, officer or consultant, or any member of their families, by more than 10% in any one year, either individually or for all such persons in the aggregate, or pay any such increase from any source other than profits earned in the year of payment. Without limiting the generality of the foregoing, the Lender agrees that if the Borrower's Board of Directors approves a bonus or other compensation planned for officers and key employees of the Borrower and submits such plan to the Lender, the Lender's consent to payments under such plan in excess of the limitation set forth in this Section 7.17 shall not be unreasonably withheld so long as no Default or Event of Default has occurred. Section 7.18 Change in Ownership. The Borrower will not issue or sell any stock of the Borrower so as to change the percentage of voting and non-voting stock owned by each of the Borrower's shareholders, and the Borrower will not permit or suffer to occur the sale, transfer, assignment, pledge or other disposition of any or all of the issued and outstanding shares of stock of the Borrower. Section 7.19 Permitted Payments to Holdings. The Borrower will not make any payments to Holdings of any amounts of money whatsoever for any purpose other than (i) payments of management fees payable pursuant to the Management Agreement so long as such management fees do not exceed an amount equal to five percent (5%) of the Borrower's gross sales in any fiscal year and so long as such payments are treated as an expense item; and (ii) additional loans or advances under the Holdings Note so long as the obligation of Holdings to repay such loans or advances is evidenced by and payable in accordance with the Holdings Note. Section 7.20 Receivables from Affiliates. The Borrower will not allow the aggregate Receivables due to the Borrower from Affiliates at any time to exceed $20,000. ARTICLE VIII Events of Default, Rights and Remedies Section 8.1 Events of Default. "Event of Default", wherever used herein, means any one of the following events: (a) Default in the payment of any interest on or principal of the Note when it becomes due and payable; or (b) Default in the payment of any fees, commissions, costs or expenses required to be paid by the Borrower under this Agreement; or (c) Default in the performance, or breach, of any covenant or agreement of the Borrower contained in this Agreement; or (d) The Borrower or any Guarantor shall be or become insolvent, or admit in writing its inability to pay its or his debts as they mature, or make an assignment for the benefit of creditors; or the Borrower or any Guarantor shall apply for or consent to the appointment of any receiver, trustee, or similar officer for it or him or for all or any substantial part of its or his property; or such receiver, trustee or similar officer shall be appointed without the application or consent of the Borrower or such Guarantor, as the case may be; or the Borrower or any Guarantor shall institute (by petition, application, answer, consent or otherwise) any bankruptcy, insolvency, reorganization, arrangement, readjustment of debt, dissolution, liquidation or similar proceeding relating to it or him under the laws of any jurisdiction; or any such proceeding shall be instituted (by petition, application or otherwise) against the Borrower or any such Guarantor; or any judgment, writ, warrant of attachment, garnishment or execution or similar process shall be issued or levied against a substantial part of the property of the Borrower or any Guarantor; or (e) A petition shall be filed by or against the Borrower or any Guarantor under the United States Bankruptcy Code naming the Borrower or such Guarantor as debtor; or (f) Any representation or warranty made by the Borrower in this Agreement, by any Guarantor in any guaranty delivered to the Lender or by the Borrower (or any of its officers) or any Guarantor in any agreement, certificate, instrument or financial statement or other statement contemplated by or made or delivered pursuant to or in connection with this Agreement or any such guaranty shall prove to have been incorrect in any material respect when deemed to be effective; or (g) The rendering against the Borrower of a final judgment, decree or order for the payment of money in excess of $10,000 and the continuance of such judgment, decree or order unsatisfied and in effect for any period of 30 consecutive days without a stay of execution; or (h) A default under any bond, debenture, note or other evidence of indebtedness of the Borrower owed to any Person other than the Lender, or under any indenture or other instrument under which any such evidence of indebtedness has been issued or by which it is governed, or under any lease of any of the Premises, and the expiration of the applicable period of grace, if any, specified in such evidence of indebtedness, indenture, other instrument or lease; or (i) Any Reportable Event, which the Lender determines in good faith might constitute grounds for the termination of any Plan or for the appointment by the appropriate United States District Court of a trustee to administer any Plan, shall have occurred and be continuing 30 days after written notice to such effect shall have been given to the Borrower by the Lender; or a trustee shall have been appointed by an appropriate United States District Court to administer any Plan; or the Pension Benefit Guaranty Corporation shall have instituted proceedings to terminate any Plan or to appoint a trustee to administer any Plan; or the Borrower shall have filed for a distress termination of any Plan under Title IV of ERISA; or the Borrower shall have failed to make any quarterly contribution required with respect to any Plan under Section 412(m) of the Internal Revenue Code of 1986, as amended, which the Lender determines in good faith may by itself, or in combination with any such failures that the Lender may determine are likely to occur in the future, result in the imposition of a lien on the assets of the Borrower in favor of the Plan; or (j) An event of default shall occur under any Security Document or under any other security agreement, mortgage, deed of trust, assignment or other instrument or agreement securing any obligations of the Borrower hereunder or under any note; or (k) The Borrower shall liquidate, dissolve, terminate or suspend its business operations or otherwise fail to operate its business in the ordinary course, or sell all or substantially all of its assets, without the prior written consent of the Lender; or (l) The Borrower shall fail to pay, withhold, collect or remit any tax or tax deficiency when assessed or due (other than any tax deficiency which is being contested in good faith and by proper proceedings and for which it shall have set aside on its books adequate reserves therefor) or notice of any state or federal tax liens shall be filed or issued; or (m) Default in the payment of any amount owed by the Borrower to the Lender other than any indebtedness arising hereunder; or (n) Any Guarantor shall repudiate, purport to revoke or fail to perform any such Guarantor's obligations under such Guarantor's guaranty in favor of the Lender, any individual Guarantor shall die or any other Guarantor shall cease to exist; or (o) Any breach, default or event of default by or attributable to any Affiliate under any agreement between such Affiliate and the Lender or any affiliate of the Lender (including, without limitation, Norwest Bank Minnesota, National Association) including, without limitation, any Default or Event of Default under any of the Related Loan Documents. Section 8.2 Rights and Remedies. Upon the occurrence of an Event of Default or at any time thereafter, the Lender may exercise any or all of the following rights and remedies: (a) The Lender may, by notice to the Borrower, declare the Credit Facility to be terminated, whereupon the same shall forthwith terminate; (b) The Lender may, by notice to the Borrower, declare to be forthwith due and payable the entire unpaid principal amount of the Note then outstanding, all interest accrued and unpaid thereon, all amounts payable under this Agreement and any other Obligations, whereupon the Note, all such accrued interest and all such amounts and Obligations shall become and be forthwith due and payable, without presentment, notice of dishonor, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower; (c) The Lender may, without notice to the Borrower and without further action, apply any and all money owing by the Lender to the Borrower to the payment of the Advances and the Term Loan, including interest accrued thereon, and of all other sums then owing by the Borrower hereunder; (d) The Lender may, exercise and enforce any and all rights and remedies available upon default to a secured party under the UCC, including, without limitation, the right to take possession of Collateral, or any evidence thereof, proceeding without judicial process or by judicial process (without a prior hearing or notice thereof, which the Borrower hereby expressly waives) and the right to sell, lease or otherwise dispose of any or all of the Collateral, and, in connection therewith, the Borrower will on demand assemble the Collateral and make it available to the Lender at a place to be designated by the Lender which is reasonably convenient to both parties; (e) the Lender may exercise and enforce its rights and remedies under the Loan Documents; and (f) the Lender may exercise any other rights and remedies available to it by law or agreement. Notwithstanding the foregoing, upon the occurrence of an Event of Default described in Section hereof, the entire unpaid principal amount of the Note (whether contingent or funded), all interest accrued and unpaid thereon, all other amounts payable under this Agreement and any other Obligations shall be immediately due and payable automatically without presentment, demand, protest or notice of any kind. Section 8.3 Certain Notices. If notice to the Borrower of any intended disposition of Collateral or any other intended action is required by law in a particular instance, such notice shall be deemed commercially reasonable if given (in the manner specified in Section ) at least ten calendar days prior to the date of intended disposition or other action. ARTICLE IX Miscellaneous Section 9.1 No Waiver; Cumulative Remedies. No failure or delay on the part of the Lender in exercising any right, power or remedy under the Loan Documents shall operate as a waiver thereof; nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy under the Loan Documents. The remedies provided in the Loan Documents are cumulative and not exclusive of any remedies provided by law. Section 9.2 Amendments, Etc. No amendment, modification, termination or waiver of any provision of any Loan Document or consent to any departure by the Borrower therefrom or any release of a Security Interest shall be effective unless the same shall be in writing and signed by the Lender, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances. Section 9.3 Addresses for Notices, Etc. Except as otherwise expressly provided herein, all notices, requests, demands and other communications provided for under the Loan Documents shall be in writing and shall be (a) personally delivered, (b) sent by first class United States mail, (c) sent by overnight courier of national reputation, or (d) transmitted by telecopy, in each case addressed to the party to whom notice is being given at its address as set forth below and, if telecopied, transmitted to that party at its telecopier number set forth below: If to the Borrower: B.V.S., Inc. 801 South 11th Street Phoenix, AZ 85034 Telecopier: (602) 495-1712 Attention: Edward Van If to the Lender: Norwest Credit, Inc. Norwest Center Sixth and Marquette Minneapolis, MN 55479-2058 Telecopier: (612) 341-2472 Attention: Michelle Guetter or, as to each party, at such other address or telecopier number as may hereafter be designated by such party in a written notice to the other party complying as to delivery with the terms of this Section. All such notices, requests, demands and other communications shall be deemed to have been given on (a) the date received if personally delivered, (b) when deposited in the mail if delivered by mail, (c) the date sent if sent by overnight courier, or (d) the date of transmission if delivered by telecopy, except that notices or requests to the Lender pursuant to any of the provisions of Article hereof shall not be effective until received by the Lender. Section 9.4 Financing Statement. A carbon, photographic or other reproduction of this Agreement or of any financing statements signed by the Borrower is sufficient as a financing statement and may be filed as a financing statement in any state to perfect the security interests granted hereby. For this purpose, the following information is set forth: Name and address of Debtor: B.V.S., Inc. 801 South 11th Street Phoenix, AZ 85034 Federal Tax Identification No. 86-0416231 Name and address of Secured Party: Norwest Credit, Inc. Norwest Center Sixth and Marquette Minneapolis, Minnesota 55479-2058 Section 9.5 Further Documents. The Borrower will from time to time execute and deliver or endorse any and all instruments, documents, conveyances, assignments, security agreements, financing statements and other agreements and writings that the Lender may reasonably request in order to secure, protect, perfect or enforce the Security Interests or the rights of the Lender under this Agreement (but any failure to request or assure that the Borrower executes, delivers or endorses any such item shall not affect or impair the validity, sufficiency or enforceability of this Agreement and the Security Interests, regardless of whether any such item was or was not executed, delivered or endorsed in a similar context or on a prior occasion). Section 9.6 Collateral. This Agreement does not contemplate a sale of accounts, contract rights or chattel paper, and, as provided by law, the Borrower is entitled to any surplus and shall remain liable for any deficiency. The Lender's duty of care with respect to Collateral in its possession (as imposed by law) shall be deemed fulfilled if it exercises reasonable care in physically keeping such Collateral, or in the case of Collateral in the custody or possession of a bailee or other third person, exercises reasonable care in the selection of the bailee or other third person, and the Lender need not otherwise preserve, protect, insure or care for any Collateral. The Lender shall not be obligated to preserve any rights the Borrower may have against prior parties, to realize on the Collateral at all or in any particular manner or order or to apply any cash proceeds of the Collateral in any particular order of application. Section 9.7 Costs and Expenses. The Borrower agrees to pay on demand all costs and expenses, including (without limitation) attorneys' fees, incurred by the Lender in connection with the Obligations, this Agreement, the Loan Documents and any other document or agreement related hereto or thereto, and the transactions contemplated hereby, including without limitation all such costs, expenses and fees incurred in connection with the negotiation, preparation, execution, amendment, administration, performance, collection and enforcement of the Obligations and all such documents and agreements and the creation, perfection, protection, satisfaction, foreclosure or enforcement of the Security Interests. Section 9.8 Indemnity. In addition to the payment of expenses pursuant to Section hereof and the environmental indemnity pursuant to Section hereof, the Borrower agrees to indemnify, defend and hold harmless the Lender, and any of its participants, parent corporations, subsidiary corporations, affiliated corporations, successor corporations, and all present and future officers, directors, employees and agents of the foregoing (the "Indemnitees"), from and against (i) any and all transfer taxes, documentary taxes, assessments or charges made by any governmental authority by reason of the execution and delivery of this Agreement and the other Loan Documents or the making of the Advances or the Term Loan, and (ii) any and all liabilities, losses, damages, penalties, judgments, suits, claims, costs and expenses of any kind or nature whatsoever (including, without limitation, the reasonable fees and disbursements of counsel) in connection with any investigative, administrative or judicial proceedings, whether or not such Indemnitee shall be designated a party thereto, which may be imposed on, incurred by or asserted against such Indemnitee, in any manner relating to or arising out of or in connection with the making of the Advances or the Term Loan, this Agreement and all other Loan Documents or the use or intended use of the proceeds of the Advances or the Term Loan (the "Indemnified Liabilities"). If any investigative, judicial or administrative proceeding arising from any of the foregoing is brought against any Indemnitee, upon request of such Indemnitee, the Borrower, or counsel designated by the Borrower and satisfactory to the Indemnitee, will resist and defend such action, suit or proceeding to the extent and in the manner directed by the Indemnitee, at the Borrower's sole cost and expense. Each Indemnitee will use its best efforts to cooperate in the defense of any such action, suit or proceeding. If the foregoing undertaking to indemnify, defend and hold harmless may be held to be unenforceable because it violates any law or public policy, the Borrower shall nevertheless make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. The obligation of the Borrower under this Section shall survive the termination of this Agreement and the discharge of the Borrower's other Obligations. Section 9.9 Participants. The Lender and its participants, if any, are not partners or joint venturers, and the Lender shall not have any liability or responsibility for any obligation, act or omission of any of its participants. All rights and powers specifically conferred upon the Lender may be transferred or delegated to any of the participants, successors or assigns of the Lender. Section 9.10 Execution in Counterparts. This Agreement and other Loan Documents may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which counterparts, taken together, shall constitute but one and the same instrument. Section 9.11 Binding Effect; Assignment; Complete Agreement. The Loan Documents shall be binding upon and inure to the benefit of the Borrower and the Lender and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights thereunder or any interest therein without the prior written consent of the Lender. This Agreement, together with the Loan Documents, comprises the complete and integrated agreement of the parties on the subject matter hereof and supersedes all prior agreements, written or oral, on the subject matter hereof. Section 9.12 Governing Law; Jurisdiction, Venue; Waiver of Jury Trial. The Loan Documents shall be governed by and construed in accordance with the substantive laws (other than conflict laws) of the State of Minnesota. Each party consents to the personal jurisdiction of the state and federal courts located in the State of Minnesota in connection with any controversy related to this Agreement, waives any argument that venue in any such forum is not convenient and agrees that any litigation initiated by any of them in connection with this Agreement shall be venued in either the District Court of Hennepin County, Minnesota, or the United States District Court, District of Minnesota, Fourth Division. The parties waive any right to trial by jury in any action or proceeding based on or pertaining to this Agreement. Section 9.13 Severability of Provisions. Any provision of this Agreement which is prohibited or unenforceable shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. Section 9.14 Headings. Article and Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the date first above written. B.V.S., INC. By____________________________ Its_________________________ NORWEST CREDIT, INC. By____________________________ Its_________________________ SIGNATURE PAGE TO CREDIT AND SECURITY AGREEMENT EXHIBIT A-1 TO CREDIT AND SECURITY AGREEMENT REVOLVING NOTE $400,000.00 Minneapolis, Minnesota October 30, 1995 For value received, the undersigned, B.V.S., Inc., an Arizona corporation (the "Borrower"), hereby promises to pay on February 28, 1998 to the order of Norwest Credit, Inc., a Minnesota corporation (the "Lender"), at its main office in Minneapolis, Minnesota, or at any other place designated at any time by the holder hereof, in lawful money of the United States of America and in immediately available funds, the principal sum of Four Hundred Thousand and no/00 Dollars ($400,000.00) or, if less, the aggregate unpaid principal amount of all Advances made by the Lender to the Borrower under the Credit Agreement (defined below) together with interest on the principal amount hereunder remaining unpaid from time to time, computed on the basis of the actual number of days elapsed and a 360-day year, from the date hereof until this Note is fully paid at the rate from time to time in effect under the Credit and Security Agreement of even date herewith (the "Credit Agreement") by and between the Lender and the Borrower. The principal hereof and interest accruing thereon shall be due and payable as provided in the Credit Agreement. This Note may be prepaid only in accordance with the Credit Agreement. This Note is issued pursuant, and is subject, to the Credit Agreement, which provides, among other things, for acceleration hereof. This Note is the Revolving Note referred to in the Credit Agreement. This Note is secured, among other things, pursuant to the Credit Agreement and the Security Documents as therein defined, and may now or hereafter be secured by one or more other security agreements, mortgages, deeds of trust, assignments or other instruments or agreements. The Borrower hereby agrees to pay all costs of collection, including attorneys' fees and legal expenses in the event this Note is not paid when due, whether or not legal proceedings are commenced. Presentment or other demand for payment, notice of dishonor and protest are expressly waived. B.V.S., INC. By____________________________ Its_________________________ EXHIBIT A-2 TO CREDIT AND SECURITY AGREEMENT TERM NOTE $209,000.00 Minneapolis, Minnesota October 30, 1995 For value received, the undersigned, B.V.S., Inc., an Arizona corporation (the "Borrower"), hereby promises to pay on February 28, 1998 to the order of Norwest Credit, Inc., a Minnesota corporation (the "Lender"), at its main office in Minneapolis, Minnesota, or at any other place designated at any time by the holder hereof, in lawful money of the United States of America and in immediately available funds, the principal sum of Two Hundred Nine Thousand and no/00 Dollars ($209,000.00) together with interest on the principal amount hereunder remaining unpaid from time to time, computed on the basis of the actual number of days elapsed and a 360- day year, from the date hereof until this Note is fully paid at the rate from time to time in effect under the Credit and Security Agreement of even date herewith (the "Credit Agreement") by and between the Lender and the Borrower. The principal hereof and interest accruing thereon shall be due and payable as provided in the Credit Agreement. This Note may be prepaid only in accordance with the Credit Agreement. This Note is issued pursuant, and is subject, to the Credit Agreement, which provides, among other things, for acceleration hereof. This Note is the Term Note referred to in the Credit Agreement. This Note is secured, among other things, pursuant to the Credit Agreement and the Security Documents as therein defined, and may now or hereafter be secured by one or more other security agreements, mortgages, deeds of trust, assignments or other instruments or agreements. The Borrower hereby agrees to pay all costs of collection, including attorneys' fees and legal expenses in the event this Note is not paid when due, whether or not legal proceedings are commenced. Presentment or other demand for payment, notice of dishonor and protest are expressly waived. B.V.S., INC. By____________________________ Its_________________________ EXHIBIT B TO CREDIT AND SECURITY AGREEMENT NAMES B.V.S., Inc. Pallet Exchange PRANA Phoenix, Inc. CHIEF EXECUTIVE OFFICE/PRINCIPAL PLACE OF BUSINESS 801 South 11th Street Phoenix, AZ 85034 OTHER INVENTORY AND EQUIPMENT LOCATIONS 6045 West Washington Phoenix, AZ 85043 SUBSIDIARIES None EXHIBIT C TO CREDIT AND SECURITY AGREEMENT PERMITTED LIENS, INDEBTEDNESS AND GUARANTIES Liens NONE Indebtedness NONE Guaranties Guaranties in favor of the Lender in connection with financial accommodations extended by the Lender to Otto Packaging, Inc., Quality Pallet, Inc. and Pallet Supply Co., Inc. EXHIBIT D TO CREDIT AND SECURITY AGREEMENT COMPLIANCE CERTIFICATE In accordance with our Credit and Security Agreement dated as of October 30, 1995 (the "Credit Agreement"), attached are the financial statements of B.V.S., Inc. (the "Borrower") as of and for the month and year-to-date period ended ______________ __, 199_ (the "Current Financials"). I certify that the Current Financials have been prepared in accordance with generally accepted accounting principles applied on a basis consistent with the accounting practices reflected in the financial statements referred to in Section of the Credit Agreement, subject to year-end audit adjustments. Defaults and Events of Default (check one) |_| I have no knowledge of the occurrence of any Default or Event of Default under the Credit Agreement which has not previously been reported to you and remedied. |_| Attached is a detailed description of all Defaults and Events of Default of which I have knowledge and which have not previously been reported to you and remedied. For the date and periods covered by the Current Financials, the Borrower is in compliance with the covenants set forth in Sections 6.12 through 6.15, 6.17 and 7.10 of the Credit Agreement, except as indicated below. The calculations made to determine compliance are as follows: Covenant Actual Requirement 6.12 Net Income $_____________ $_____________ 6.13 Tangible Net Worth $_____________ $_____________ 6.14 Book Net Worth $_____________ $_____________ 6.15 Debt Service Coverage Ratio _____ to _____ _____ to _____ 6.17 Availability $_____________ $_____________ 7.10 Capital Expenditures Aggregate fiscal year-to-date expenditures $_____________ Maximum $_____________ __________________________________ _______________________________ of B.V.S., Inc. EXHIBIT E TO CREDIT AND SECURITY AGREEMENT PREMISES The Premises referred to in the Credit and Security Agreement are legally described as follows: EXHIBIT F TO CREDIT AND SECURITY AGREEMENT TRADEMARKS, PATENTS AND COPYRIGHTS NONE EXHIBIT G TO CREDIT AND SECURITY AGREEMENT VEHICLES* 1976 Frueh Fbtl VIN FRX636516 1976 Frueh Fbtl VIN FRX636515 1976 Frueh Fbtl VIN FRX636512 1984 Vulca Fbtl VIN 1LZF48207E1001166 1974 Schus Tl VIN G416G22800 1973 Schus Tl VIN K316G31156 1987 Deckk Tl VIN B082 1966 Weste Dptl VIN 16675578 1984 Lufki Fbtl VIN 1L01B4825E1063660 1959 Pike Fbtl VIN 4181 1976 Frueh Fbtl VIN FRX636510 1979 Budd Fbtl VIN 172040L 1979 Trail Fbtl VIN T52538 1976 Trail Fbtl VIN M21585 1960 Utili Fbtl VIN 35536 1975 Lufki Fbtl VIN 45364 1980 Utili Fbtl VIN AZ101860 1979 Aztec Fbtl VIN 4907 1982 Lemon Fbtl VIN 0038 1984 Great Fbtl VIN 1GRDM9027EM052601 1983 Ford St VIN 1FDNF70H1DVA17994 1974 GMC Tt VIN TFH924V562306 1982 Aztec Fbtl VIN A347K 1981 Vanco Vntl VIN 1VVV55201B1000038 1982 Vanco Vntl VIN 1VVV58207C1000953 1972 Ford Tt VIN C70EVP77119 1980 Peter Tt VIN 137929P 1959 Great Tl VIN 17484 1976 Frueh Vntl VIN CHX230132 1976 Frueh Se VIN CHX230164 1976 Frueh Vntl VIN CHX230140 1978 White Tt VIN 2QPCFHI011638 1981 Ford Tt VIN 1FDX96X5BVJ05354 1982 Great Se VIN 1GRDM8829CM020101 1984 Utili Fbtl VIN 1UYFS2454EA187901 *All titled in the State of Arizona FIRST AMENDMENT TO CREDIT AGREEMENT This Amendment is made as of the ____ day of April, 1996 by and between B.V.S., Inc., an Arizona corporation (the "Borrower"), and Norwest Credit, Inc., a Minnesota corporation (the "Lender"). Recitals The Borrower and the Lender have entered into the Credit and Security Agreement dated as of October 30, 1995, (the "Credit Agreement"). The Lender has agreed to make certain loan advances and a term loan to the Borrower pursuant to the terms and conditions set forth in the Credit Agreement. The loan advances under the Credit Agreement are evidenced by the Borrower's revolving note dated as of October 30, 1995, in the maximum principal amount of $400,000 and payable to the order of the Lender (the "Revolving Note"), and the term loan is evidenced by the Borrower's term note dated as of October 30, 1995, in the original principal amount of $209,000 and payable to the order of the Lender (the "Term Note") (the Revolving Note and the Term Note are collectively referred to herein as the "Note"). All indebtedness of the Borrower to the Lender is secured pursuant to the terms of the Credit Agreement and all other Security Documents as defined therein (collectively, the "Security Documents") and by the Guarantor Security Agreements (as defined in the Credit Agreement) and is guaranteed pursuant to the Guaranties (as defined therein) of the Guarantors (as defined therein). The Borrower has requested that certain amendments be made to the Credit Agreement, which the Lender is willing to make pursuant to the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained, it is agreed as follows: 1. Terms used in this Amendment which are defined in the Credit Agreement shall have the same meanings as defined therein, unless otherwise defined herein. 2. The Credit Agreement is hereby amended as follows: (a) The following definitions set forth in Section 1.1 of the Credit Agreement are hereby amended in their entirety to read as follows: "Guarantor Security Agreements" means, individually and collectively, the Third Party Security Agreements executed by Pallet Recycling Associates of North America, Inc., Holdings, Otto Packaging, Inc., Quality Pallet, Inc., Pallet Supply Co., Inc., Pallet City, Inc., and B&B Pallet Supply Company and delivered to the Lender. "Guarantors" means Pallet Recycling Associates of North America, Inc., Holdings, Pallet Exchange of Kansas City, Inc., Otto Packaging, Inc., Harris Supply, Inc., Harris Supply Company of Georgia, Inc., Quality Pallet, Inc., Hurt's Pallet & Sales, Inc., Pallet Source, Inc., Pallet City, Inc., PRANA Oklahoma City, Inc., PRANA Denver, Inc., B&B Pallet Supply Company, Pallet Supply Co., Inc., PRANA Las Vegas, Inc., Diamond Pallet, Inc. and any other Subsidiary of any of the foregoing entities formed or acquired on or after the date hereof. "Note" means the Revolving Note and the Term Note. "Related Borrowers" means Holdings, Otto Packaging, Inc., Quality Pallet, Inc., Pallet Supply Co., Inc., Pallet City, Inc., and B&B Pallet Supply Company and any other present or future Affiliate who at any time incurs indebtedness to the Lender or any affiliate of the Lender including, without limitation, Norwest Bank Minnesota, National Association. (b) Exhibit C to the Credit Agreement is hereby replaced by the Exhibit C attached hereto. 3. Except as explicitly amended by this Amendment, all of the terms and conditions of the Credit Agreement shall remain in full force and effect and shall apply to any advance thereunder. 4. This Amendment shall be effective upon receipt by the Lender of an executed original hereof, together with each of the following, each in substance and form acceptable to the Lender in its sole discretion: (a) The Acknowledgement and Agreement of Guarantors set forth at the end of this Amendment, duly executed by each of the Guarantors. (b) Certificate of the Secretary of the Borrower certifying as to (i) the resolutions of the board of directors of the Borrower approving the execution and delivery of this Amendment, (ii) the fact that the Articles of Incorporation and Bylaws of the Borrower, which were certified and delivered to the Lender pursuant to the Certificate of the Borrower's Secretary dated as of October 30, 1995 continue in full force and effect and have not been amended or otherwise modified except as set forth in the Certificate to be delivered, and (iii) certifying that the officers and agents of the Borrower who have been certified to the Lender, pursuant to the Certificate of the Borrower's Secretary dated as of October 30, 1995, as being authorized to sign and to act on behalf of the Borrower continue to be so authorized or setting forth the sample signatures of each of the officers and agents of the Borrower authorized to execute and deliver this Amendment and all other documents, agreements and certificates on behalf of the Borrower. (c) Opinion of the Borrower's counsel as to the matters set forth in paragraphs 6(a) and (b) hereof and as to such other matters as the Lender shall require. 5. The Borrower hereby represents and warrants to the Lender as follows: (a) The Borrower has requisite power and authority to execute this Amendment and to perform all of its obligations hereunder, and this Amendment has been duly executed and delivered by the Borrower and constitute the legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms. (b) The execution, delivery and performance by the Borrower of this Amendment have been duly authorized by all necessary corporate action and do not (i) require any authorization, consent or approval by any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, (ii) violate any provision of any law, rule or regulation or of any order, writ, injunction or decree presently in effect, having applicability to the Borrower, or the articles of incorporation or by-laws of the Borrower, or (iii) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which the Borrower is a party or by which it or its properties may be bound or affected. (c) All of the representations and warranties contained in Article V of the Credit Agreement are correct on and as of the date hereof as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date. 6. All references in the Credit Agreement to "this Agreement" shall be deemed to refer to the Credit Agreement as amended hereby; and any and all references in the Loan Documents to the Credit Agreement shall be deemed to refer to the Credit Agreement as amended hereby. 7. The execution of this Amendment and acceptance of any documents related hereto shall not be deemed to be a waiver of any Default or Event of Default under the Credit Agreement or breach, default or event of default under any Security Document or other document held by the Lender, whether or not known to the Lender and whether or not existing on the date of this Amendment. 8. The Borrower hereby absolutely and unconditionally releases and forever discharges the Lender, and any and all participants, parent corporations, subsidiary corporations, affiliated corporations, insurers, indemnitors, successors and assigns thereof, together with all of the present and former directors, officers, agents and employees of any of the foregoing, from any and all claims, demands or causes of action of any kind, nature or description, whether arising in law or equity or upon contract or tort or under any state or federal law or otherwise, which the Borrower has had, now has or has made claim to have against any such person for or by reason of any act, omission, matter, cause or thing whatsoever arising from the beginning of time to and including the date of this Amendment, whether such claims, demands and causes of action are matured or unmatured or known or unknown. 9. The Borrower hereby reaffirms its agreement under the Credit Agreement to pay or reimburse the Lender on demand for all costs and expenses incurred by the Lender in connection with the Credit Agreement, the Security Documents and all other documents contemplated thereby, including without limitation all reasonable fees and disbursements of legal counsel. Without limiting the generality of the foregoing, the Borrower specifically agrees to pay all fees and disbursements of counsel to the Lender for the services performed by such counsel in connection with the preparation of this Amendment and the documents and instruments incidental hereto. The Borrower hereby agrees that the Lender may, at any time or from time to time in its sole discretion and without further authorization by the Borrower, make a loan to the Borrower under the Credit Agreement, or apply the proceeds of any loan, for the purpose of paying any such fees, disbursements, costs and expenses and the fee required under paragraph 4 hereof. 10. This Amendment and the Acknowledgment and Agreement of Guarantors may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original and all of which counterparts, taken together, shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the day and year first above written. B.V.S., INC. By: Its: NORWEST CREDIT, INC. By: Its: ACKNOWLEDGEMENT AND AGREEMENT OF GUARANTORS The undersigned, each a guarantor of the indebtedness of Pallet Supply Co., Inc. (the "Borrower") to Norwest Credit, Inc. (the "Lender") pursuant to a separate Guaranty each dated as of October 30, 1995 (each, a "Guaranty"), hereby (i) acknowledges receipt of the foregoing Amendment; (ii) consents to the terms and execution thereof; (iii) reaffirms his or its obligations to the Lender pursuant to the terms of his or its Guaranty; and (iv) acknowledges that the Lender may amend, restate, extend, renew or otherwise modify the Credit Agreement and any indebtedness or agreement of the Borrower, or enter into any agreement or extent additional or other credit accommodations, without notifying or obtaining the consent of the undersigned and without impairing the liability of the undersigned under his or its Guaranty for all of the present and future indebtedness of the Borrower to the Lender. PALLET RECYCLING ASSOCIATES OF NORTH AMERICA, INC. By: Its: PRANA HOLDINGS, INC. By: Its: OTTO PACKAGING, INC. By: Its: HARRIS SUPPLY COMPANY, INC. By: Its: HARRIS SUPPLY COMPANY OF GEORGIA, INC. By: Its: QUALITY PALLET, INC. By: Its: HURT'S PALLET & SALES, INC. By: Its: PALLET SOURCE, INC. By: Its: PALLET CITY, INC. By: Its: PRANA OKLAHOMA CITY, INC. By: Its: PRANA DENVER, INC. By: Its: B&B PALLET SUPPLY COMPANY By: Its: PALLET SUPPLY CO., INC. By: Its: PALLET EXCHANGE OF KANSAS CITY, INC. By: Its: PRANA LAS VEGAS, INC. By: Its: DIAMOND PALLET, INC. By: Its: EXHIBIT C TO CREDIT AND SECURITY AGREEMENT PERMITTED LIENS, INDEBTEDNESS AND GUARANTIES Liens NONE Indebtedness NONE Guaranties Guarantees in favor of the Lender in connection with financial accommodations extended by the Lender to Otto Packaging, Inc., Quality Pallet, Inc., Pallet Supply Co., Inc., Pallet City, Inc. and B&B Pallet Supply Company. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-23.2 <SEQUENCE>12 <DESCRIPTION>INDEPENDANT AUDITORS' CONSENT <TEXT> EXHIBIT 23.2 INDEPENDENT AUDITORS' REPORT AND CONSENT The Board of Directors Pallet Recycling Associates of North America, Inc. The audits referred to in our report dated February 9, 1996, except as to notes 10, 17, 14, 16(c)(iii), 15, 16(a), 16(c)(ii), 16(b), and 16(c)(i), which are as of August 30, 1996, August 30, 1996, August 19, 1996, June 25, 1996, June 7, 1996, April 25, 1996, April 23, 1996, April 4, 1996, and March 4, 1996, respectively, included the related financial statement schedule as of December 31, 1995, and for the period from March 2, 1993 (date of inception) to December 31, 1993 and for the years ended December 31, 1994 and 1995, included in the registration statement. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects, the information set forth therein. Our report dated February 9, 1996, except as to notes 10, 17, 14, 16(c)(iii), 15, 16(a), 16(c)(ii), 16(b), and 16(c)(i), which are as of August 30, 1996, August 30, 1996, August 19, 1996, June 25, 1996, June 7, 1996, April 25, 1996, April 23, 1996, April 4, 1996 and March 4, 1996, respectively, indicates that the Company has incurred net losses since its inception date, has defaulted on the payment of certain notes, and is not in compliance with certain terms of its long-term debt agreements. The combination of these events has put the Company in a working capital deficit position, which raises substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements and financial statement schedule do not include any adjustments that might result from the outcome of that uncertainty. We consent to the use of our reports included herein and to the reference to our firm under the heading "Experts" in the prospectus. KPMG Peat Marwick LLP Minneapolis, Minnesota September 5, 1996 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-23.3 <SEQUENCE>13 <DESCRIPTION>INDEPENDENT AUDITORS' CONSENT <TEXT> EXHIBIT 23.3 INDEPENDENT AUDITORS' CONSENT The Board of Directors Pallet Recylcing Associates of North America, Inc. We consent to the use of our report included herein and to the reference to our firm under the heading "Experts" in the prospectus. SCHUTTA, NELSON & ZEMBAL, LTD. /s/ SCHUTTA, NELSON & ZEMBAL, LTD. Minneapolis, Minnesota August 30, 1996 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>14 <DESCRIPTION>FINANCIAL DATA SCHEDULE <TEXT> <TABLE> <S> <C> <ARTICLE> 5 <S> <C> <C> <PERIOD-TYPE> 6-MOS 6-MOS <FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996 <PERIOD-END> JUN-30-1995 JUN-30-1996 <CASH> 0 152,462 <SECURITIES> 0 0 <RECEIVABLES> 0 3,858,359 <ALLOWANCES> 0 30,273 <INVENTORY> 0 2,714,088 <CURRENT-ASSETS> 0 6,861,875 <PP&E> 0 6,586,144 <DEPRECIATION> 0 894,638 <TOTAL-ASSETS> 0 22,351,571 <CURRENT-LIABILITIES> 0 11,635,660 <BONDS> 0 4,841,631 <PREFERRED-MANDATORY> 0 0 <PREFERRED> 0 21,834 <COMMON> 0 10,813 <OTHER-SE> 0 5,196,033 <TOTAL-LIABILITY-AND-EQUITY> 0 22,351,571 <SALES> 12,263,024 18,424,246 <TOTAL-REVENUES> 12,263,024 18,424,246 <CGS> 9,680,073 14,150,818 <TOTAL-COSTS> 9,680,073 14,150,818 <OTHER-EXPENSES> 2,895,612 4,773,873 <LOSS-PROVISION> 0 0 <INTEREST-EXPENSE> 180,315 731,762 <INCOME-PRETAX> (438,508) (1,240,986) <INCOME-TAX> (20,000) 70,189 <INCOME-CONTINUING> (418,508) (1,311,175) <DISCONTINUED> 0 0 <EXTRAORDINARY> 0 0 <CHANGES> 0 0 <NET-INCOME> (418,508) (1,311,175) <EPS-PRIMARY> (0.18) (.39) <EPS-DILUTED> (0.18) (.39) </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000936929_access_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000936929_access_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Financial Statements of the Company (including the Notes thereto) appearing elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus (i) is adjusted to reflect a one-for-10.4976 reverse stock split with respect to the Common Stock to be effected prior to the consummation of this offering, (ii) gives effect to the conversion upon the consummation of this offering of all outstanding shares of the Company's Series A Convertible Preferred Stock into 142,890 shares of Common Stock (the "Preferred Stock Conversion"), (iii) assumes no exercise of warrants to be issued to the representatives of the Underwriters upon the closing of this offering (the "Representatives' Warrants") and (iv) assumes no exercise of the Underwriters' over-allotment option. THE COMPANY Access TV operates the largest network exclusively dedicated to the cablecast of infomercials and other long-form paid programming in the U.S. The Company currently distributes this programming to cable television operators of approximately 200 cable systems reaching over 18 million U.S. households, representing approximately 26% of the approximately 68 million households in the U.S. which receive cable television, for an average of approximately 11.4 hours a day. The Company has contracted with most of the nation's largest multiple cable system operators ("MSOs"), including Tele-Communications Inc. ("TCI"), Time Warner, Inc. ("Time Warner") and Continental Cablevision Inc. ("Continental"), for blocks of underutilized ("remnant") time. The Company packages this remnant time, which typically exists across several channels at various times of day ("dayparts"), to create a national distribution medium (the "Access Network") for use by producers of infomercial and infotainment content. The Access Network distributes programming via its two digitally compressed satellite feeds for cablecast by local cable television systems over available channels for times ranging from 1/2 hour to 24 hours per day. Customers include major producers and distributors of infomercials, notably those for Nordic Track, Health Rider, Victoria Principal and Lexus. The Access Network, when measured by the quantity and quality of time made available to it, currently reaches the equivalent of approximately five million households on a full-time equivalent ("FTE") basis. FTE is a Company derived measurement which converts the number of households reached part-time by the Access Network into an approximate number of full-time equivalent households taking into account the quantity and the quality of time in the Access Network. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Affiliates and Access Network." The Access Network provides advertisers with a cost-effective way to reach a national cable audience and increases the value of remnant time for local cable television systems by offering a new source of incremental, non-subscriber based revenue. The Company compensates the cable systems participating in the Access Network ("Cable Affiliates") by paying them the greater of a guaranteed minimum or a percentage of the revenues that the Access Network derives from the sale of time to advertisers. By providing an infomercial-based revenue stream to local cable system operators, the Access Network enables cable systems to benefit directly from what has been one of the fastest growing segments of the advertising industry. In 1995, more than $800 million was spent on media advertising by the infomercial industry. National cable networks received 40% of this amount while local cable television systems received only 4%. The Company believes that this disparity is due principally to the administrative burden faced by infomercial producers and distributors in advertising on multiple local cable systems. The Access Network offers local cable television systems the ability to compete for such spending by streamlining the process and providing a single point of purchase for producers and distributors of infomercials to reach the cable audience. In so doing, the Company believes the Access Network will direct an increased percentage of infomercial media spending to local cable television systems. The Company believes that its record of reliable operations, together with the size and sophistication of the Access Network, position the Company to benefit from continued growth in long-form paid programming, the potential expansion of cable systems' channel capacity and the growth of alternative multi-channel video distribution methods. The Company's goal is to become the premier outlet for long-form paid programming. Key elements of the Company's strategy are to: EXPAND THE ACCESS NETWORK. The Company is focused on enhancing the value of the Access Network to advertisers and cable operators. The Company is working with cable operators to: (i) increase its household reach by establishing new, as well as expanding existing, Cable Affiliate relationships; (ii) obtain longer-term affiliate commitments; and (iii) secure the availability of both a greater quantity and a higher quality of time. Currently, the majority of time made available to the Access Network is from midnight to 9:00 a.m. Better time will allow the Company to increase its rates and attract additional infomercial advertisers. BROADEN THE USE OF THE ACCESS NETWORK. The Company is expanding its marketing efforts to producers and distributors of infomercials and other types of long-form paid programming such as image-based advertising and political, charitable and religious programming. The Company believes that the expansion of the Access Network in terms of households, markets and available time will enable the Company to offer advertisers both greater flexibility in distributing their content in specific dayparts and a vehicle for targeted distribution to demographically and geographically distinct cable households. The Company believes that these features will appeal to a broader universe of potential clients and command premium pricing. MAINTAIN STATE-OF-THE-ART TECHNOLOGY. The Company's distribution system includes the placement of compatible state-of-the-art equipment at the headend of Cable Affiliates. The Company believes that there is limited capacity on the part of Cable Affiliates to accommodate the equipment of potential competitors and, therefore, this incumbency provides the Company with a competitive advantage. The Company was formed as a Delaware corporation in January 1993. Access TV is staffed by former cable television executives with extensive experience in marketing and advertising sales. This group includes its Chairman and Chief Executive Officer, William R. Cullen, former head of a multi-system cable television operating division of United Artists Communications, Inc. ("United Artists"), and its President, William H. Bernard, former Director of Advertising Sales for United Artists. The Company's principal executive offices are located at 2600 Michelson Drive, Irvine, California 92715, and its telephone number is (714) 263-9900. The Company maintains a world wide web site on the Internet at http://www.accesstv.com. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company............. shares Common Stock to be outstanding after the offering........................................ shares(1) Use of proceeds................................. For capital expenditures to expand and upgrade the Access Network, for repayment of outstanding indebtedness and for general corporate purposes, including working capital. Proposed Nasdaq National Market Symbol.......... ASTV </TABLE> - -------- (1) Does not include (i) 271,491 shares of Common Stock issuable upon the exercise of outstanding options, at exercise prices ranging from $6.82 to $8.40 per share, (ii) 87,448 additional shares of Common Stock reserved for issuance pursuant to the Company's Equity Incentive Plan and Stock Bonus Plan, (iii) 472,601 shares of Common Stock issuable upon the exercise of outstanding warrants, at exercise prices ranging from $5.25 to $8.40 per share, (iv) 200,000 shares of Common Stock issuable upon the exercise of outstanding warrants, at a per share exercise price equal to the initial public offering price set forth on the cover page of this Prospectus and (v) shares of Common Stock issuable upon the exercise of the Representatives' Warrants. See "Management," "Description of Capital Stock--Warrants" and "Underwriting." SUMMARY FINANCIAL INFORMATION AND OTHER DATA (IN THOUSANDS, EXCEPT SHARE AND HOUSEHOLD DATA) <TABLE> <CAPTION> THREE MONTHS FISCAL YEAR ENDED MARCH 31, ENDED JUNE 30, ------------------------------------ ------------------------ 1994 1995 1996 1995 1996 ---------- ----------- ----------- ----------- ----------- (UNAUDITED) <S> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Revenues............... $ 120 $ 3,921 $ 8,930 $ 1,341 $ 3,016 Net revenues........... 102 3,238 7,595 1,130 2,564 Cable Affiliate fees... 178 4,886 4,510 671 1,757 Income (loss) after Cable Affiliate fees................ (76) (1,648) 3,085 459 807 Operating expenses..... 439 3,622 5,192 1,351 1,523 Loss from operations... (515) (5,270) (2,107) (892) (716) Net loss............... $ (512) $ (5,492) $ (3,143) $ (1,034) $ (1,006) ========== =========== =========== =========== =========== Net loss per common and $ (.34) $ (2.00) $ (.84) $ (.28) $ (.24) equivalent share(1). ========== =========== =========== =========== =========== Weighted average number of shares outstanding......... 1,490,348 2,742,423 3,745,250 3,714,935 4,127,776 OTHER DATA: EBITDA(2).............. $ (498) $ (4,192) $ (751) $ (566) $ (369) Number of households... 1,419,000 11,175,000 16,139,000 11,815,000 18,060,000 Number of FTE households(3)....... -- 2,023,000 4,250,000 2,524,000 5,212,000 Revenues per average FTE households(4)... -- -- $ 2.85 $ .59 $ .64 </TABLE> <TABLE> <CAPTION> AS OF JUNE 30, 1996 ----------------------- AS ACTUAL ADJUSTED(5) --------- ------------ <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents.............................. $ 769 $ Working capital (deficit).............................. (1,880) Total assets........................................... 12,216 Capital lease obligation, including current portion.... 10,103 10,103 Stockholders' equity (deficit)......................... (155) </TABLE> - -------- (1) Net loss per share was calculated by dividing the net loss by the weighted average number of common shares outstanding. Common equivalent shares are excluded from the computation as their effect is anti-dilutive, except that, pursuant to the Securities and Exchange Commission Staff Accounting Bulletin No. 83, common stock and common equivalent shares (stock options and warrants) issued or granted during the 12 month period immediately preceding the initial filing of the proposed public offering have been included in the calculation of the shares used in computing net loss per common and equivalent share as if they were outstanding for all periods presented (using an assumed public offering price of $ per share). (2) EBITDA represents loss from operations plus depreciation and amortization plus, in fiscal 1995, the write-down of machinery and equipment. EBITDA is included herein because management believes that certain investors find it to be a useful valuation parameter; however, EBITDA does not represent cash flow from operations, as defined by generally accepted accounting principles, and should not be considered as a substitute for net earnings as an indicator of the Company's operating performance or cash flow as a measure of liquidity. (3) A Company derived measurement developed in fiscal 1996 which converts the number of households reached part-time by the Access Network into an approximate number of full-time equivalent households taking into account the quantity and the quality of time in the Access Network. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Affiliates and Access Network." (4) Average FTE households represents the average of the number of FTE households at the beginning and end of the fiscal year and fiscal quarter, respectively. (5) As adjusted to reflect the sale of the Common Stock offered by the Company hereby (at an assumed initial public offering price of $ per share) and the application of the net proceeds therefrom as set forth in "Use of Proceeds." See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000936931_sourcecorp_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000936931_sourcecorp_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. See "Risk Factors" for a discussion of certain risks associated with an investment in the Common Stock. Unless the context otherwise requires, the terms "Company" and "F.Y.I." each refer to F.Y.I. Incorporated, a Delaware corporation, and its subsidiaries and predecessors. Unless otherwise indicated, all share and financial information set forth herein assumes no exercise of the Underwriters' over-allotment option. Statements throughout this Prospectus that state the Company's or management's intentions, hopes, beliefs, expectations, strategies, predictions or any other variations thereof or comparable phraseology of the Company's future activities or other future events or conditions are forward-looking statements. It is important to note that the Company's actual results or activities and actual events or conditions could differ materially from those projected in such forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained under "Risk Factors." THE COMPANY F.Y.I. Incorporated was founded in September 1994 to create a national, single source provider of document management services to three primary client segments: healthcare institutions, professional services firms and financial institutions. The Company's primary strategy is to consolidate the highly fragmented document management services industry through acquisitions. In January 1996, F.Y.I. acquired, simultaneously with the closing of its initial public offering (the "IPO"), seven document management services businesses (the "Founding Companies"). Since the IPO, the Company has acquired 15 additional companies (the "Subsequent Acquisitions"). As a result of the Subsequent Acquisitions combined with internal growth, the Company's revenue has increased from $35.5 million for the nine months ended September 30, 1995 to $49.9 million for the nine months ended September 30, 1996 ($65.0 million on a pro forma basis, assuming all significant acquisitions were completed on January 1, 1996). The Company intends to continue to aggressively pursue strategic acquisitions in existing and new markets, cross-sell its full range of services to its current customer base and expand the marketing of its services to new customers. An estimated four trillion documents are generated annually in the United States. The Company's three targeted client segments generate large volumes of documents and require specialized processing, distribution, storage and retrieval of these documents and the information they contain. The Company believes that these client segments will continue to increase their outsourcing of document management services in order to maintain their focus on core operating competencies and revenue generating activities, reduce fixed costs, including labor and equipment costs, and gain access to new technologies without incurring the expense and risk of near-term obsolescence of such technologies. While the document management requirements of each target client segment require relatively unique and specialized services, the Company offers document management services that are transferable across client segments, such as: (i) document and data conversion services, including microfilm and microfiche services and electronic imaging services; (ii) records management services, namely active storage and maintenance of documents and files and archival storage of inactive documents; and (iii) database management and related services, including data entry, direct mail and fulfillment services. In addition, in order to accommodate the document management needs of targeted client segments, the Company also offers industry specific services, such as: (i) medical records release services, namely processing requests for patients' medical records from physicians, insurers, attorneys, healthcare institutions and individuals; and (ii) litigation support services. The Company also derives revenue from the sale of certain micrographic and business imaging products. The Company believes that there are significant opportunities to consolidate the capabilities and resources of a number of existing document management services businesses with the intent of providing customers with a single source document management solution. Accordingly, the Company is pursuing a "fill-in-the-grid" strategy aimed at providing comprehensive document management services based on the demands of the given geographical market. The Company has implemented an aggressive, three-tiered acquisition program consisting of "beachhead acquisitions" to enter additional targeted markets, "service expansion acquisitions" to acquire additional service capabilities within such markets and "tuck-in" acquisitions to gain market share. The Company believes that it will continue to be an attractive acquiror of other document management services companies due to its strategy of retaining selected owners and management of acquired companies, its access to growth capital and its ability to offer sellers cash for their business as well as an ongoing equity stake in the Company. The Company believes that the consolidation of document management services businesses will provide it with a significant competitive advantage over existing smaller competitors. As the Company gains critical mass in certain geographic markets, it expects to be able to capitalize on its existing client relationships, technical expertise, additional operating efficiencies, enhanced marketing initiatives and national account programs to vertically integrate by expanding the services offered to each of its client segments and horizontally integrate by offering certain transferable services to a larger overall customer base. THE OFFERING <TABLE> <S> <C> Common Stock being offered by: The Company........................................ 2,000,000 shares The Selling Stockholders........................... 420,000 shares Common Stock to be outstanding after this Offering... 8,165,450 shares(1) Use of proceeds...................................... To repay indebtedness, for acquisitions, capital expenditures and other general corporate purposes. See "Use of Proceeds." Nasdaq National Market symbol........................ FYII </TABLE> - --------------- (1) Excludes 800,300 shares issuable upon the exercise of currently outstanding stock options and warrants and an additional 344,554 shares reserved for issuance under the Company's employee stock option plan. See "Management -- Stock Option Plan," "Shares Eligible for Future Sale" and Note 11 of Notes to the Consolidated Financial Statements of F.Y.I. Incorporated and Subsidiaries. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) F.Y.I. was founded in September 1994 and effectively began its operations on February 1, 1996 following the completion of the IPO and the acquisitions of the Founding Companies (the "Acquisitions"). The Summary Financial Data set forth below for the periods prior to February 1, 1996 are derived from the Combined Financial Statements of the Founding Companies contained elsewhere in this Prospectus. <TABLE> <CAPTION> COMBINED FOUNDING COMPANIES --------------------------------------------------------------------- ONE MONTH NINE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 1996(4) FISCAL YEARS ENDED DECEMBER 31, ENDED JANUARY -------------------------- ------------------------------------------- SEPTEMBER 30, 31, F.Y.I. 1991 1992 1993 1994 1995 1995 1996(4) INCORPORATED SUPPLEMENTAL ------- ------- ------- ------- ------- ------------- --------- ------------ ------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenue.............. $29,525 $35,696 $38,396 $43,032 $47,626 $35,486 $ 3,916 $ 45,971 $ 49,887 Operating income(1)........ 1,444 2,708 3,401 3,454 4,966 3,929 503 4,522 5,025 Interest and other expense (income), net............ 132 272 248 29 139 159 (45) 232 187 Income before income taxes(1)................. 1,312 2,436 3,153 3,425 4,827 3,770 548 4,290 4,838 Provision for income taxes(2)................. 474 895 1,261 1,256 1,794 1,399 221 1,729 1,950 Net income(1)(2)........... $ 838 $ 1,541 $ 1,892 $ 2,169 $ 3,033 $ 2,371 $ 327 $ 2,561 $ 2,888 ======= ======= ======= ======= ======= ======= ====== ====== ======= Net income per share(1)(2)(3)........... $0.06 $0.47 $0.53 ===== ====== ====== Weighted average shares outstanding(3)........... 5,450 5,450 5,450 </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1996 -------------------------------- ACTUAL AS ADJUSTED(5) ------------- -------------- <S> <C> <C> BALANCE SHEET DATA: Working capital................................................................ $ 5,038 $ 33,037 Total assets................................................................... 59,901 84,400 Long-term obligations, net of current maturities............................... 16,956 2,855 Stockholders' equity........................................................... 28,924 71,024 </TABLE> SUMMARY PRO FORMA FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> PRO FORMA FOR SIGNIFICANT ACQUISITIONS(6) ----------------------------- NINE MONTHS YEAR ENDED ENDED DECEMBER SEPTEMBER 30, 31, 1995 1996 ----------- ------------- <S> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenue...................................................................... $78,160 $64,964 Operating income................................................................... 9,724 7,813 Interest and other expense (income), net........................................... 1,454 827 Income before income taxes......................................................... 8,270 6,986 Provision for income taxes......................................................... 3,172 2,808 Net income......................................................................... $ 5,098 $ 4,178 ======= ======= Net income per share............................................................... $0.87 $0.71 ======= ======= Weighted average shares outstanding(3)............................................. 5,872 5,872 </TABLE> Footnotes to Summary Financial Data appear on following page. Footnotes to Summary Financial Data. (1) For the periods prior to February 1, 1996, gives effect to certain reductions in salaries and benefits of the former owners and key employees of the Founding Companies which were agreed to in connection with the organization of the Company and the IPO (the "Compensation Differential"). See Note 3 of Notes to Combined Financial Statements of the Founding Companies. (2) For the periods prior to February 1, 1996, gives effect to certain tax adjustments related to the taxation of certain Founding Companies as S corporations or sole proprietorships prior to the consummation of the Acquisitions and the tax impact of the Compensation Differential in each period. See Note 3 of Notes to Combined Financial Statements of the Founding Companies. (3) Weighted average shares include: (i) 1,205,682 shares issued by F.Y.I. prior to the consummation of the Acquisitions and the IPO; (ii) 1,878,933 shares issued to the stockholders of the Founding Companies in connection with the Acquisitions; (iii) 2,185,000 shares sold in the IPO; (iv) 15,923 shares of Common Stock determined pursuant to the treasury stock method relating to warrants to purchase 115,000 shares of Common Stock at $10.00 per share; (v) 585,589 shares of Common Stock issued in acquisitions consummated through September 1996; and (vi) 36,200 shares of Common Stock issued upon the exercise of stock options. Does not include (i) options to purchase 635,300 shares of Common Stock currently outstanding under the Company's 1995 Stock Option Plan; and (ii) warrants outstanding to purchase 50,000 shares of Common Stock. (4) The Supplemental Statement of Operations Data for the nine months ended September 30, 1996 represent the combined results of (i) the combined Founding Companies for the one month of operations prior to the consummation of the IPO and the Acquisitions; and (ii) F.Y.I. Incorporated and Subsidiaries for the eight months of operations subsequent to the consummation of the IPO and the Acquisitions. The Supplemental Data are provided for informational purposes only and do not purport to present the results of operations of the Company had the transactions assumed therein occurred on or as of the dates indicated, nor are they necessarily indicative of the results of operations which may be achieved in the future. (5) Gives effect to the sale of 2,000,000 shares of Common Stock offered by the Company hereby and the application of the estimated net proceeds therefrom (assuming a public offering price of $22.50 per share). See "Use of Proceeds."
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Unless otherwise noted, all information in this Prospectus, including financial information, share data and per share data (i) reflects the pro forma conversion into shares of Common Stock of all outstanding shares of the Company's convertible redeemable preferred stock (the "Preferred Stock") upon the closing of this offering, (ii) reflects the pro forma accrual of cumulative dividends on Class A and D Preferred Stock, and (iii) assumes no exercise of the Underwriters' over-allotment option. See "Underwriting." The Company's fiscal year consists of the 52/53-week period that ends on the Thursday nearest to June 30. For convenience of presentation, all fiscal periods in this Prospectus are shown as ending on a calendar month-end. THE COMPANY SeaMED Corporation (the "Company" or "SeaMED") manufactures advanced durable electronic medical instruments for medical technology companies, often as part of systems that also include single-use components. To assist its customers in developing and commercializing their instruments for manufacture by SeaMED, the Company provides a wide range of engineering services and regulatory expertise. In its last fiscal year, SeaMED manufactured or engineered instruments for many established medical technology companies, including Arrow International, Inc., Becton, Dickinson and Company, Boston Scientific Corporation, C.R. Bard, Inc., Guidant Corporation, Johnson & Johnson, Physio-Control Corporation, Sorin Biomedical Inc., St. Jude Medical, Inc. and United States Surgical Corporation. SeaMED's customers also include many emerging medical technology companies such as Aksys Ltd., ArthroCare Corporation, Biofield Corp., CellPro, Incorporated, Gynecare, Inc., Optical Sensors Incorporated, ReSound Corporation and Urologix, Inc. Of these established and emerging companies, C. R. Bard represented in excess of 10% of SeaMED's revenues for fiscal year 1996, each of four such companies represented between 5% and 10% of such revenues, and each of the remaining companies represented less than 5% of such revenues. SeaMED does not have ongoing contracts with all of these companies. See "Business -- Manufacturing Operations." SeaMED's revenues have grown from $8.7 million in fiscal year 1992 to $26.1 million in fiscal year 1996, a compound annual growth rate of 32%, and its operating income has grown from $807,000 in fiscal year 1992 to $2.1 million in fiscal year 1996, a compound annual growth rate of 27%. During this period, the number of manufactured instruments grew from seven to 23. Since 1988, SeaMED has focused its business primarily on manufacturing medical instruments and believes it is the largest independent manufacturer of advanced medical instruments for medical technology companies. As part of its growth strategy, SeaMED continues to expand its engineering expertise, regulatory knowledge and manufacturing capabilities, thereby allowing it to design and manufacture a broader range of medical instruments. During the fourth quarter of fiscal year 1996, SeaMED began manufacturing a nonmedical product for Coinstar, Inc., which accounted for $1.8 million and $2.5 million of SeaMED's revenues in the fourth quarter of fiscal year 1996 and the first quarter of fiscal year 1997, respectively. The demand for health care has grown rapidly in recent years, including demand for medical instruments that can lessen the overall cost of health care while improving patient outcomes. As medical instruments have incorporated the latest developments in computers, electronics, materials and other technologies, and medical technology companies have sought to comply with increasingly stringent regulatory requirements, the cost of product development and the length of the development cycle have increased substantially. The risks in developing and launching new medical products also have increased significantly as competition in the highly fragmented medical technology industry has increased. As a result, many medical technology companies increasingly are focusing their resources on certain critical functions and outsourcing others. SeaMED believes that the trend toward outsourcing engineering and manufacturing of durable medical instruments is in its early stages and will expand significantly. SeaMED provides complete solutions to meet its customers' needs for instrument engineering, prototyping, preproduction and volume manufacturing. SeaMED offers its customers the following advantages: - Broad experience in product development, engineering, manufacturing and regulatory compliance for advanced medical instruments - Reduction of fixed capital and personnel commitments for noncore functions - Demand-driven production flexibility - In-place resources to shorten time-to-market - FDA and ISO 9001 compliant manufacturing facilities - Integrated engineering and manufacturing, improving quality and reducing costs SeaMED, a Washington corporation, was formed in 1976. SeaMED's executive offices are located at 14500 Northeast 87th Street, Redmond, Washington 98052 and its telephone number is (206) 867-1818. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company.............. 1,529,720 shares Common Stock offered by the Selling Shareholders................................... 320,280 shares Common Stock to be outstanding after this offering....................................... 5,136,906 shares(1) Use of proceeds.................................. Repayment of outstanding bank indebtedness, expected to be between $3.5 million and $5.0 million, payment of approximately $1.8 million for cumulative dividends on Preferred Stock, to fund working capital needs and for general corporate purposes. See "Use of Proceeds." Nasdaq National Market symbol.................... SEMD </TABLE> SUMMARY FINANCIAL DATA (in thousands, except per share amounts) <TABLE> <CAPTION> QUARTER YEAR ENDED JUNE 30, ENDED SEPTEMBER 30, ------------------------------- ------------------- 1994 1995 1996 1995 1996 ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> STATEMENT OF INCOME DATA: Revenues................................. $14,720 $17,661 $26,130 $ 5,000 $10,076 Cost of sales............................ 11,965 14,590 21,093 4,207 8,391 Gross margin............................. 2,755 3,071 5,037 793 1,685 Marketing, general and administrative expenses............................... 1,818 1,931 2,937 491 847 Operating income......................... 937 1,140 2,100 302 838 Net income............................... $ 1,007 $ 775 $ 1,240 $ 167 $ 487 ======= ======= ======= ======= ======= Net income per share data(2): Primary................................ $ 0.39 $ 0.25 $ 0.42 $ 0.04 $ 0.17 ======= ======= ======= ======= ======= Fully diluted.......................... $ 0.30 $ 0.21 $ 0.32 $ 0.04 $ 0.12 ======= ======= ======= ======= ======= </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1996 -------------------------- PRO FORMA AS ADJUSTED(3) --------- -------------- <S> <C> <C> BALANCE SHEET DATA: Working capital...................................................... $ 3,747 $ 17,627 Total assets......................................................... 16,538 25,994 Notes payable to bank................................................ 2,246 -- Long-term debt, including current portion............................ 2,119 751 Total shareholders' equity........................................... 5,270 20,069 </TABLE> - --------------- (1) Based on shares outstanding at September 30, 1996. Excludes 529,265 shares of Common Stock issuable upon exercise of stock options and a warrant outstanding at such date, which had a weighted average exercise price of $2.56 per share. Also excludes 96,418 shares reserved for issuance pursuant to future option grants under the Company's stock option plans. See "Management -- Stock Plans" and "Description of Capital Stock." (2) See Note 1 of Notes to Financial Statements for an explanation of the number of shares used in computing net income per share. (3) As adjusted to reflect the sale by the Company of 1,529,720 shares of Common Stock offered hereby at an assumed initial public offering price of $11.00 per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000941552_atlas-air_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000941552_atlas-air_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and consolidated financial statements (including the notes thereto) appearing elsewhere in this Prospectus. Except where otherwise indicated, the information in this Prospectus assumes that the U.S. Underwriters' over-allotment options are not exercised. For a discussion of certain factors to be considered by prospective investors, see "Risk Factors." THE COMPANY Atlas Air, Inc. (the "Company") is a cargo carrier which provides, through its all Boeing 747 fleet, highly reliable airport-to-airport air transportation services throughout the world to major international airlines consisting of China Airlines, KLM, Lufthansa, British Airways, SAS, Swissair, Varig and Emirates under fixed-rate, long-term contracts. As a result of the Company's efficient and cost-effective services and increased airline industry pressure to reduce costs, the Company's customers have determined that outsourcing portions of their air cargo business to the Company can be less costly and offer greater operational flexibility than expanding their cargo operations by purchasing additional aircraft and adding other resources. The Company believes that it has several key advantages which allow it to offer efficient and cost-effective outsourcing services to its customers on a profitable basis: - Long-Term Customer Contracts Which Minimize Revenue and Cost Risks. The Company's contractual arrangements with its customers, which accounted for 97% of the Company's flight hours in 1995, typically provide for its customers to guarantee monthly minimum aircraft utilization levels at fixed hourly rates and are typically in force for periods of one to five years, subject to certain termination provisions. These contracts typically require that the Company supply aircraft, crew, maintenance and insurance ("ACMI") and that its customers bear all other operating expenses, including fuel and fuel servicing; marketing costs associated with obtaining cargo; airport cargo handling; landing fees; ground handling, aircraft push-back and de-icing services; and specific cargo and mail insurance. The Company's customers are also responsible under these contracts for utilizing the cargo capacity of such aircraft. These contracts, therefore, minimize for the Company the load factor and yield risk traditionally associated with the air cargo business. The Company currently has twelve ACMI contracts with at least one aircraft dedicated to each contract and is currently in preliminary discussions with respect to other possible ACMI contracts. All of the Company's revenues and virtually all of its costs are in U.S. dollars, thus avoiding currency risks normally associated with doing business primarily overseas. - Efficient Fleet Configuration of Boeing 747 Aircraft. The Company currently employs a fleet of thirteen Boeing 747-200 aircraft and one Boeing 747-100 aircraft (the "Existing Fleet"). In addition, in January 1996, the Company entered into an agreement to acquire six Boeing 747-200 passenger aircraft (the "Thai Aircraft"), from Thai Airways International Public Company Limited ("Thai Airways"). The Thai Aircraft will be converted to freighter configuration and delivered to the Company over a period beginning in the fourth quarter of 1996 through the fourth quarter of 1997. In addition, the Company has entered into an agreement with Federal Express Corporation ("Federal Express") to lease five Boeing 747-200 freighter aircraft plus spare engines (the "Federal Express Aircraft"). The first Federal Express Aircraft was delivered to the Company in March 1996 (and is included in the Existing Fleet), with the remaining Federal Express Aircraft to be delivered over a four-month period beginning in June 1996, each with a lease term ending in January 1998. The Company is also in preliminary discussions with respect to other possible aircraft purchases. See "Business -- Aircraft." The Company's Existing Fleet, the Thai Aircraft and the remaining four Federal Express Aircraft are, or will be upon delivery to the Company, high gross weight aircraft which, based upon information provided by The Boeing Company ("Boeing"), have a maximum take-off weight ("MTOW") of not less than 812,000 pounds and a maximum range at MTOW of not less than 4,926 statute miles (the EXPLANATORY NOTE This Registration Statement contains two forms of prospectus, one to be used in connection with a United States and Canadian offering (the "U.S. Prospectus") and one to be used in connection with a concurrent international offering outside the United States and Canada (the "International Prospectus"). The two prospectuses will be identical in all respects except for the front cover pages. "High Gross Weight Aircraft"). High Gross Weight Aircraft provide among the highest maximum payload and cubic capacities, as well as the longest range, of any cargo aircraft currently in commercial service in the world. Additionally, the uniformity of the Company's fleet of Boeing 747 aircraft allows for standardization in maintenance and crew training, resulting in substantial cost savings in these areas. As the Company's fleet size increases, the Company expects to realize additional economies of scale. - Outsourcing of Maintenance on a Fixed Cost Basis. The Company has focused its own resources in those areas where it believes it has competitive and cost advantages and has outsourced other services which it believes can be provided by others at a lower cost. In that regard, a significant portion of the regular maintenance of the Company's fleet is provided on a fixed cost per flight hour basis by KLM. The fixed-cost formula of the contract also helps the Company to predict its maintenance costs when negotiating its customer contracts. The Company also has maintenance contracts with HAECO and Alitalia. See "Business -- Maintenance." - Motivated and Productive Work Force. The Company maintains a good working relationship with its employees, in part by providing financial incentives to its personnel which are based on the Company's performance. The Company believes that it operates with lower personnel costs than many established international carriers partially as a result of focusing on profit-based incentives rather than base wages. As of March 1, 1996, the Company had 435 employees, 294 of whom were pilots. None of the Company's employees is subject to a collective bargaining agreement. See "Risk Factors -- Employee Relations." The Company's business strategy is to grow its business profitably by (i) securing long-term ACMI contracts with new customers and expanding its long-term ACMI relationships with its existing customers; (ii) maintaining its own costs at the lowest practicable level and, where feasible, locking in its costs, such as through the outsourcing of a significant portion of its regular aircraft maintenance at a fixed cost per flight hour; and (iii) differentiating itself from other air cargo carriers by not directly or indirectly competing with its customers by offering its services to freight forwarders or shippers with whom its customers deal. By focusing on expanding its ACMI contracts, the Company can obtain minimum annual revenues and more predictable profit margins while minimizing the load factor and yield risks traditionally associated with the air cargo business. Management believes that, as a U.S. certificated "flag" carrier, the Company is well positioned to benefit from the continued lowering of international trade barriers and from growth in the global air cargo markets, particularly in Europe, Asia and the Pacific Rim, where the Company has concentrated a significant portion of its resources, as well as in Latin America, where it has been operating since July 1994 and currently has dedicated one aircraft to serve Varig. The Company also expects to benefit from a trend in the passenger-airline industry toward replacement of existing widebody passenger and cargo-capable aircraft with smaller, more efficient twin-engine aircraft which have more limited cargo space. The Company believes that anticipated growth in the demand for air cargo services, combined with reduced passenger-airline widebody cargo capacity and the continuing pressure on the airline industry to reduce operating costs, should provide the Company with the opportunity to continue to expand its air cargo outsourcing services. *************************************************************************** * * * INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A * * REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED * * WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT * * BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE * * REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT * * CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY * * THE SECURITIES DESCRIBED HEREIN, NOR SHALL THERE BE ANY SALE OF SUCH * * SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR * * SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER * * THE SECURITIES LAWS OF ANY SUCH JURISDICTION. * * * *************************************************************************** PROSPECTUS (Subject to Completion) Issued May 6, 1996 3,000,000 Shares [LOGO] COMMON STOCK ------------------------ OF THE 3,000,000 SHARES OF COMMON STOCK BEING OFFERED, 2,400,000 SHARES ARE BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS AND 600,000 SHARES ARE BEING OFFERED INITIALLY OUTSIDE THE UNITED STATES AND CANADA BY THE INTERNATIONAL UNDERWRITERS. SEE "UNDERWRITERS." OF THE 3,000,000 SHARES OF COMMON STOCK BEING OFFERED HEREBY, 2,000,000 SHARES ARE BEING SOLD BY THE COMPANY AND 1,000,000 SHARES ARE BEING SOLD BY THE SELLING STOCKHOLDER. SEE "PRINCIPAL AND SELLING STOCKHOLDERS." THE COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF THE SHARES BEING SOLD BY THE SELLING STOCKHOLDER. THE COMMON STOCK IS QUOTED ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "ATLS." ON MAY 3, 1996, THE REPORTED LAST SALE PRICE OF THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET WAS $44 3/4 PER SHARE. ------------------------ SEE "RISK FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ PRICE $ A SHARE ------------------------ <TABLE> <CAPTION> UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDER(2) ------------------------------------------------------------------------ <S> <C> <C> <C> <C> Per Share......................... $ $ $ $ Total(3).......................... $ $ $ $ </TABLE> - --------------- (1) The Company and the Selling Stockholder have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. (2) Before deducting expenses payable by the Company and the Selling Stockholder estimated at $450,000 and $225,000, respectively. (3) The Company and the Selling Stockholder have granted the U.S. Underwriters options, exercisable within 30 days of the date hereof, to purchase up to an aggregate of 300,000 and 150,000 additional shares, respectively, at the price to public less underwriting discounts and commissions for the purpose of covering over-allotments, if any. If the U.S. Underwriters exercise such options in full, the total price to public, underwriting discounts and commissions, proceeds to Company and proceeds to Selling Stockholder will be $ , $ , $ and $ , respectively. See "Underwriters." ------------------------ The Shares are offered, subject to prior sale, when, as and if accepted by the Underwriters and subject to approval of certain legal matters by Shearman & Sterling, counsel for the Underwriters. It is expected that delivery of the Shares will be made on or about , 1996, at the office of Morgan Stanley & Co. Incorporated, New York, New York, against payment therefor in immediately available funds. ------------------------ MORGAN STANLEY & CO. Incorporated GOLDMAN, SACHS & CO. SMITH BARNEY INC. , 1996 THE OFFERING <TABLE> <S> <C> Common Stock Offered: Common Stock Offered by the Company........ 2,000,000 shares Common Stock Offered by the Selling Stockholder(1).......................... 1,000,000 shares --------- Total Common Stock Offered......... 3,000,000 shares ========= U.S. Offering.............................. 2,400,000 shares International Offering..................... 600,000 shares Common Stock outstanding after the Offering(2)................................ 21,917,000 shares Use of Proceeds.............................. For working capital and other general corporate purposes including, but not limited to, the acquisition of aircraft. Nasdaq National Market symbol................ "ATLS" </TABLE> - --------------- (1) Includes 200,000 shares to be sold by Mr. Chowdry personally and 800,000 shares to be sold by Chowdry Limited Partnership. See "Principal and Selling Stockholders." (2) Based on the number of shares outstanding at April 25, 1996. Excludes (i) 536,650 shares of Common Stock issuable pursuant to outstanding options and 1,142,780 shares of Common Stock reserved for issuance upon exercise of options that may be granted under the Company's 1995 Long Term Incentive and Share Award Plan (the "1995 Stock Option Plan") and (ii) 1,000,000 shares of Common Stock reserved for issuance pursuant to the Company's Employee Stock Purchase Plan (the "Stock Purchase Plan", together with the 1995 Stock Option Plan, the "Plans"). In addition, the Company's Board of Directors has proposed increasing the number of shares reserved for issuance under the Company's 1995 Stock Option Plan by 300,000, subject to stockholder approval at the Company's annual meeting to be held on June 4, 1996. See "Management -- Employment Contracts," "-- 1995 Stock Option Plan" and "-- Employee Stock Purchase Plan." ------------------------ *************************************************************************** * * * INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A * * REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED * * WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT * * BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE * * REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT * * CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY * * THE SECURITIES DESCRIBED HEREIN, NOR SHALL THERE BE ANY SALE OF SUCH * * SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR * * SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER * * THE SECURITIES LAWS OF ANY SUCH JURISDICTION. * * * *************************************************************************** PROSPECTUS (Subject to Completion) Issued May 6, 1996 3,000,000 Shares [LOGO] COMMON STOCK ------------------------ OF THE 3,000,000 SHARES OF COMMON STOCK BEING OFFERED, 600,000 SHARES ARE BEING OFFERED INITIALLY OUTSIDE THE UNITED STATES AND CANADA BY THE INTERNATIONAL UNDERWRITERS AND 2,400,000 SHARES ARE BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS. SEE "UNDERWRITERS." OF THE 3,000,000 SHARES OF COMMON STOCK BEING OFFERED HEREBY, 2,000,000 SHARES ARE BEING SOLD BY THE COMPANY AND 1,000,000 SHARES ARE BEING SOLD BY THE SELLING STOCKHOLDER. SEE "PRINCIPAL AND SELLING STOCKHOLDERS." THE COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF THE SHARES BEING SOLD BY THE SELLING STOCKHOLDER. THE COMMON STOCK IS QUOTED ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "ATLS." ON MAY 3, 1996, THE REPORTED LAST SALE PRICE OF THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET WAS $44 3/4 PER SHARE. ------------------------ SEE "RISK FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ PRICE $ A SHARE ------------------------ <TABLE> <CAPTION> UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDER(2) ------------------------------------------------------------------------ <S> <C> <C> <C> <C> Per Share......................... $ $ $ $ Total(3).......................... $ $ $ $ </TABLE> - --------------- (1) The Company and the Selling Stockholder have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. (2) Before deducting expenses payable by the Company and the Selling Stockholder estimated at $450,000 and $225,000, respectively. (3) The Company and the Selling Stockholder have granted the U.S. Underwriters options, exercisable within 30 days of the date hereof, to purchase up to an aggregate of 300,000 and 150,000 additional shares, respectively, at the price to public less underwriting discounts and commissions for the purpose of covering over-allotments, if any. If the U.S. Underwriters exercise such options in full, the total price to public, underwriting discounts and commissions, proceeds to Company and proceeds to Selling Stockholder will be $ , $ , $ and $ , respectively. See "Underwriters." The Shares are offered, subject to prior sale, when, as and if accepted by the Underwriters and subject to approval of certain legal matters by Shearman & Sterling, counsel for the Underwriters. It is expected that delivery of the Shares will be made on or about , 1996, at the office of Morgan Stanley & Co. Incorporated, New York, New York, against payment therefor in immediately available funds. ------------------------ MORGAN STANLEY & CO. International GOLDMAN SACHS INTERNATIONAL SMITH BARNEY INC. , 1996 SUMMARY FINANCIAL DATA The summary financial data presented below have been derived from the consolidated financial statements of the Company. The data as of the years ended December 31, 1995, 1994 and 1993, and for the period from April 22, 1992 (inception) through December 31, 1992, were derived from the Company's audited consolidated financial statements and related notes, and other financial information. <TABLE> <CAPTION> THE COMPANY ------------------------------------------------- THE COMPANY AND THREE MONTHS PREDECESSORS(1) ENDED ----------------- MARCH 31, YEARS ENDED DECEMBER 31, APRIL 22, 1992 ----------------- ----------------------------- THROUGH 1996 1995 1995 1994 1993 DECEMBER 31, 1992 ------- ------- -------- -------- ------- ----------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> INCOME STATEMENT DATA: Operating revenues.............. $58,649 $28,938 $171,267 $102,979 $41,263 $19,568 Operating income................ 15,410 3,541 42,674 13,894 446 4,743 Net income (loss)............... 6,203 50 17,831 3,586 (8,023) (9,114) Net income (loss) per share..... .32 .00 1.06 .24 (.53) (.61) Common shares outstanding during the period (weighted average)...................... 19,686 15,000 16,783 15,000 15,000 15,000 </TABLE> <TABLE> <CAPTION> AT DECEMBER 31, 1995 --------------------------- ACTUAL AS ADJUSTED(2) -------- -------------- (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Cash............................................................... $ 96,990 $174,680 Working capital.................................................... 81,022 158,712 Total assets....................................................... 447,323 525,013 Long-term debt (3)................................................. 335,902 335,902 Stockholders' equity............................................... 68,715 146,405 </TABLE> - --------------- (1) For the period April 22, 1992 (inception) through December 31, 1992, the financial information for the Company, which was formed in August 1992, has been combined with the financial information of the Company's predecessors in a manner similar to a pooling-of-interests transaction. The Company received its required Federal Aviation Administration ("FAA") and Department of Transportation ("DOT") operating certificates in February 1993 and began operations under its own name at that time. Prior to February 1993, financial results reflect the costs associated with the formation of the Company and the operating results from the ownership of two Boeing 747 aircraft which were leased to another carrier for operation by such carrier pursuant to leases with China Airlines beginning April 1992 and November 1992, respectively, as well as to the United States military during November and December 1992. (2) Adjusted to reflect the sale of the 2,000,000 shares of Common Stock offered by the Company hereby at an estimated offering price of $41 1/8 per share and the application of proceeds therefrom (after deducting underwriting discounts and commissions and estimated offering expenses). (3) Excludes current maturities. [ATLAS ROUTE MAP] IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS, IF ANY, MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITERS."
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+PROSPECTUS SUMMARY THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED IN THIS PROSPECTUS AND IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT WHEN OTHERWISE INDICATED, ALL SHARE AND PER SHARE INFORMATION CONTAINED IN THIS PROSPECTUS REFLECT A TWO FOR ONE STOCK SPLIT EFFECTIVE MAY 10, 1991 AND A ONE FOR THREE REVERSE STOCK SPLIT EFFECTIVE OCTOBER 21, 1992. THE COMPANY Sigma Alpha Group, Ltd. (the "Company") was incorporated under the Laws of the Commonwealth of Pennsylvania in February 1988 and commenced operations in June 1989, as the successor-in-interest of Sigma Sound Studios, Inc. ("Sigma Sound"). The Company became publicly held upon its merger in January, 1991 with Fabulous Mergers, Inc., an inactive public company incorporated in Nevada. Pursuant to the terms of the merger, Fabulous Mergers, Inc., as the surviving corporation, changed its name to Sigma Alpha Entertainment Group, Ltd., and was subsequently reincorporated in Delaware. In 1995 the Company changed its name to the Sigma Alpha Group, Ltd. In April 1995 the Company acquired 80% of Global Telecommunications of Delaware, Inc. ("Global"), a company engaged in the development and marketing of certain technology pertaining to telecommunication products including a digital voice information pager ("Voice Pager") and a stock market information receiver ("SIR") to be sold in the People's Republic of China ("China"). Since April 1995, the Company has spent approximately $963,000 in developing Global's products and technologies. All references to the Company's products and technologies in this Prospectus relate to products and processes being developed by Global. The Voice Pager is designed to allow for the development and implementation of an inexpensive and effective paging system in countries which lack substantial telecommunication system infrastructures such as China and other emerging markets. The Company's paging system will utilize existing FM radio frequencies to transmit voice messages directly to a subscriber's hand held Voice Pager. The Voice Pager stores a digital voice message for playback immediately upon demand by the subscriber. The Company intends to market and sell Voice Pagers directly to radio stations in China who will then resell the Voice Pager along with paging services to local subscribers. The Company believes that with minimal capital investment, Chinese and other emerging market's radio stations can modify their existing FM Radio transmitters to implement the Company's Voice Pager system and create a Voice Paging service that reduces problems associated with traditional beepers, numeric pagers and alphanumeric pagers currently in use in China. Traditional beepers and numeric paging systems require a paging subscriber to have ready access to a telephone to return or retrieve a message. The Company believes that the lack of easy access to telephones throughout China negatively effects the use of beepers and numeric pagers in China. Chinese character pagers allow for a subscriber to receive a message consisting of numerals and characters that have been input by typists at a central station. The Company believes that its Voice Pager technology affords significant advantages over Chinese character pagers which require the entry of complex and numerous Chinese characters in order for messages to be received correctly. Traditional beepers, numeric pagers and alphanumeric and Chinese character pagers are currently marketed in China. The Chinese Ministry of Posts and Telecommunications has reported that approximately 25,000,000 pagers were in service in China at the end of 1995. The Company believes that its Voice Pager will be competitively priced with Chinese character pagers presently marketed in China. SIGMA ALPHA GROUP, LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Rounded to Nearest Thousand) April 30, July 31, 1996 1995 ----------- --------- (Unaudited) (Audited) ASSETS CURRENT ASSETS Cash and equivalents $ 10,000 $1,423,000 Accounts receivable 2,000 - Receivable from underwriting - 198,000 Prepaid expenses and other current assets 19,000 7,000 --------- --------- 31,000 1,628,000 PROPERTY AND EQUIPMENT 56,000 26,000 OTHER ASSETS Goodwill 62,000 74,000 Patent 10,000 - --------- --------- 72,000 74,000 --------- --------- TOTAL ASSETS $ 159,000 $1,728,000 ========= ========= See accompanying notes [TO BE INSERTED ALONG LEFTHAND SIDE OF PROSPECTUS COVER PAGE] [RED HERRING LEGEND] Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This Prospectus shall not constitute an offer to sell or the solicitation of any offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any State. The Company expects that engineering prototypes of the Voice Pager will be available in October, 1996 and production prototypes in January, 1997. The Company believes that additional funding of approximately $2,000,000 will be necessary in order to meet the foregoing timetable. Accordingly there can be no assurance that the Company will meet its milestones. The Company's SIR system allows for the transmission of stock market information through FM radio frequencies to a subscriber's hand held SIR receiver. The information is transmitted to the SIR in a "scrambled" format and is "unscrambled" by the SIR's proprietary technology. The Company understands that Chinese radio stations currently offer unscrambled stock market information services to subscribers. The Company has been advised that a problem exists in China regarding the sale of unauthorized receivers that can pirate the stock market information transmitted by a radio station without the payment of any fees. The Company believes its SIR system is more secure than existing stock market receivers and reduces the possibility that information could be pirated without the payment of monthly fees. In June 1996 the Company received its first order for SIR from an affiliate of Radio Guangdong for 10,000 SIR units. The Company expects to deliver units related to such order in September 1996. Significant funding will be required to complete the development of the Voice Pager and SIR technology and market same. The Company intends to utilize proceeds raised from this Offering to continue to fund the development, manufacture and marketing of the Voice Pager and SIR Technologies. There can be no assurance, however, that the Company will be able to raise sufficient proceed to successfully develop, manufacture and market its products (see "Business"). The Company's offices are located at 1341 N. Delaware Avenue, Philadelphia, Pennsylvania 19125. The Company's telephone number is (215) 425-8682. Securities Outstanding Prior to Offering(1) Shares of Common Stock 16,058,604 Shares of Series A Preferred Stock 177,606 Shares of Series B Preferred Stock 664,110 Shares of Series C Preferred Stock 97,459 Securities Outstanding After Offering(1) 18,759,728 shares of Common Stock and all shares of Preferred Stock outstanding prior to Offering. Use of Proceeds: The Company intends to use the net proceeds of $4,400,000 raised in this Offering for the further development of its Voice Pager and SIR products, the acquisition of Voice Pager and SIR raw materials and inventories and for general working capital purposes. Risk Factors: An investment in the Company's securities involves a high degree of risk. For a discussion of certain risk factors effecting the Company, see "Risk Factors". SIGMA ALPHA GROUP, LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Rounded to Nearest Thousand) April 30, July 31, 1996 1995 ----------- --------- (Unaudited) (Audited) LIABILITIES CURRENT LIABILITIES Note payable, bank $ - $ 50,000 Loan payable 91,000 - Accounts payable - trade 134,000 173,000 Taxes, other than income taxes 7,000 76,000 Accrued wages - officers 29,000 - Accrued interest - 31,000 Accrued expenses and other current liabilities 71,000 94,000 --------- --------- TOTAL LIABILITIES 332,000 424,000 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY (DEFICIT) PREFERRED STOCK SERIES A, $5.00 CONVERTIBLE, $.001 par value; authorized, 750,000 shares; issued and outstanding, 178,000 shares at April 30, 1996 and July 31, 1995. - - SERIES B, $5.00 CONVERTIBLE, $.001 par value; authorized, 800,000 shares; issued and outstanding, 664,000 shares at April 30, 1996 and 726,000 shares at July 31, 1995. 1,000 1,000 SERIES C, $5.00 CONVERTIBLE, $.001 par value; authorized, 100,000 shares; issued and outstanding, 97,000 shares at April 30, 1996 and 109,000 shares at July 31, 1995. - - ADDITIONAL PAID-IN CAPITAL 4,698,000 5,054,000 COMMON STOCK, $.001 par value; authorized 50,000,000 shares; issued and outstanding, 14,106,000 shares at April 30, 1996 and 12,837,000 at July 31, 1995. 14,000 13,000 COMMON STOCK SUBSCRIBED - 1,499,000 ADDITIONAL PAID-IN CAPITAL 14,856,000 12,664,000 ACCUMULATED DEFICIT (19,742,000) (17,919,000) ---------- ---------- (173,000) 1,312,000 LESS: UNEARNED FUTURE COMPENSATION 0 8,000 ---------- ---------- TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (173,000) 1,304,000 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 159,000 $ 1,728,000 ========== ========== See accompanying notes OTC Common Stock Bulletin Board Symbol: SGAL (1) Unless indicated to the contrary, all references in this Prospectus to the Company's outstanding securities do not give effect to (i) 2,358,332 Shares reserved for issuance upon exercise of outstanding warrants and options (including 100,000 Shares issuable upon exercise of the Warrant); and (ii) Shares reserved for issuance pursuant to the Company's employee stock option plan. SIGMA ALPHA GROUP, LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (Rounded to Nearest Thousand) NINE MONTHS ENDED THREE MONTHS ENDED APRIL 30, APRIL 30, --------------------- ---------------------- 1996 1995 1996 1995 --------- --------- ---------- --------- SALES $ - $ - $ - $ - COST OF SALES - - - - --------- --------- ---------- --------- GROSS PROFIT - - - - --------- --------- ---------- --------- OPERATING EXPENSES: Officers' compensation 392,000 585,000 130,000 321,000 Other salaries and payroll costs 50,000 - 23,000 - Consulting fees 230,000 346,000 67,000 180,000 Professional fees 129,000 363,000 20,000 312,000 Research and development 390,000 - 33,000 - Travel 277,000 104,000 96,000 56,000 Other 406,000 302,000 71,000 186,000 --------- --------- --------- --------- TOTAL OPERATING EXPENSES 1,874,000 1,700,000 440,000 1,054,000 --------- --------- --------- --------- LOSS FROM CONTINUING OPERATIONS BEFORE OTHER INCOME AND EXTRAORDINARY GAIN (1,874,000) (1,700,000) (440,000) (1,054,000) --------- --------- --------- --------- OTHER INCOME (EXPENSE) Royalties 2,000 5,000 1,000 1,000 Interest expense (20,000) (42,000) - 95,000 Interest income 17,000 - - - --------- --------- --------- ---------- (1,000) (37,000) 1,000 96,000 --------- --------- --------- ---------- LOSS BEFORE EXTRAORDINARY GAIN (1,875,000) (1,737,000) (439,000) (958,000) EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT 52,000 433,000 17,000 225,000 --------- --------- --------- --------- NET LOSS $(1,823,000)$(1,304,000) $ (422,000) $ (733,000) ========== ========= ========= ========== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 13,798,000 9,318,000 14,063,000 10,489,000 NET LOSS PER COMMON SHARE Net loss before extraordinary gain $ (0.13) $ (0.19) $ (0.03) $ (0.09) Extraordinary gain on extinguishment of debt 0.00 0.05 0.00 0.02 ---------- --------- --------- --------- NET LOSS PER SHARE $ (0.13) $ (0.14) $ (0.03) $ (0.07) ========== ========= ========= ========= See accompanying notes SUMMARY FINANCIAL INFORMATION The following table summarizes certain selected financial information of the Company and is qualified in its entirety of the more detailed Financial Statement elsewhere and Note thereto indicated in this Prospectus. <TABLE> <CAPTION> For the Years Ended July 31, ---------------------------------------------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> Statement of Operating Data Sales $ -- $ -- $ 666,000 $ 347,000 $ 34,000 Cost of Sales -- -- 337,000 343,000 445,000 ----------- ----------- ----------- ----------- ----------- Gross Profit (Loss) -- -- 329,000 4,000 (411,000) ----------- ----------- ----------- ----------- ----------- Operating Expenses 51,000 417,000 1,651,000 1,275,000 General and Administrative Expenses 1,993,000 1,213,000 2,382,000 3,521,000 2,936,000 ----------- ----------- ----------- ----------- ----------- Total Operating Expenses and General and Administrative Expenses 1,993,000 1,264,000 2,799,000 5,172,000 4,211,000 ----------- ----------- ----------- ----------- ----------- Loss from Continuing Operations before Other Income (Expense) (1,993,000) (1,264,000) (2,470,000) (5,168,000) (4,622,000) Other Income (Expense) (193,000) (295,000) (565,000) (259,000) (278,000) ----------- ----------- ----------- ----------- ----------- Loss from Continuing Operations (2,186,000) (1,559,000) (3,035,000) (5,427,000) (4,900,000) Income (Loss) from Discontinued Studio Operations -- -- -- 4,000 (155,000) Extraordinary Gain 710,000 -- -- -- -- ----------- ----------- ----------- ----------- ----------- Net (Loss) $(1,476,000 $(1,559,000) $(3,035,000) $(5,423,000) $(5,055,000) =========== =========== =========== =========== =========== (Loss) Per Share: Cont. Operations $ (.23) $ (.21) $ (45) $ (.19) $ (.95) Discont. Operations -- -- -- -- (.03) Extraordinary Gain .07 -- -- -- -- ----------- ----------- ----------- ----------- ----------- Loss Per Share $ (.16) $ (21) $ (.45) $ (1.19) $ (.98) =========== =========== =========== =========== =========== Weighted Average Number of Common Stock Outstanding 9,444,000 7,378,000 6,751,000 4,554,000 5,141,000 </TABLE> SIGMA ALPHA GROUP, LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY NINE MONTHS ENDED APRIL 30, 1996 (Rounded to Nearest Thousand) COMMON STOCK -------------------------------------------------------------- COMMON ADDITIONAL NUMBER OF STOCK PAID -IN ACCUMULATED SHARES AMOUNT SUBSCRIBED CAPITAL DEFICIT ---------- ------- ---------- ----------- ------------ BALANCES, JULY 31, 1995 12,837,000 $13,000 $1,499,000 $12,664,000 $(17,919,000) Nine months ended April 30, 1996 (Unaudited): Issuances of common stock Under subscription agreement 884,000 1,000 (1,499,000) 1,600,000 - For interest 8,000 - - 1,000 - Directors fees 200,000 - - 150,000 - Warrant exercise 177,000 - - 441,000 - Net loss - - - - (1,823,000) ---------- ------ --------- ---------- ----------- BALANCES, APRIL 30, 1996 14,106,000 $14,000 $ - $14,856,000 $(19,742,000) ========== ====== ========= ========== ========== See accompanying notes <TABLE> <CAPTION> As of July 31, -------------------------------------------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> Balance Sheet Data Total Assets $ 1,728,000 $ 40,000 $ 30,000 $ 876,000 $ 1,981,000 Working Capital (Deficit) $ 1,204,000 $(6,762,000 $(5,850,000) $(4,111,000) $(3,649,000) Long Term Debt $ -- $ 29,00 $ 29,000 $ 171,000 $ 93,000 Total Stockholders' Equity (Deficiency) $ 1,304,000 $(6,770,000) $ (5,851,00) $(3,832,000) $(2,446,000) </TABLE> PREFERRED STOCK "SERIES A" ----------------------------------- ADDITIONAL NUMBER OF PAID-IN SHARES AMOUNT CAPITAL -------- ------- -------- BALANCES, JULY 31, 1995 AND APRIL 30, 1996 178,000 $ - $ 882,000 ======== ======= ======== PREFERRED STOCK "SERIES B" ---------------------------------- ADDITIONAL NUMBER OF PAID-IN SHARES AMOUNT CAPITAL --------- ------- -------- BALANCES, JULY 31, 1995 726,000 $ 1,000 $3,628,000 Nine months ended April 30, 1996 Issuance of preferred stock for conversion of debt 15,000 - 75,000 Repurchase of shares for retirement (77,000) - (374,000) -------- ------- --------- BALANCES, APRIL 30, 1996 664,000 $ 1,000 $3,329,000 ======== ======= ========= PREFERRED STOCK "SERIES C" ------------------------------------- ADDITIONAL NUMBER OF PAID-IN SHARES AMOUNT CAPITAL -------- ------- ---------- BALANCES, JULY 31, 1995 109,000 $ - $ 544,000 Nine months ended April 30, 1996 Repurchase of shares for retirement (12,000) - (57,000) -------- ------- --------- BALANCES, APRIL 30, 1996 97,000 $ - $ 487,000 ======== ======= ========= See accompanying notes Statement of Operating Data Nine Months Ended Nine Months Ended April 30, 1996 April 30, 1995 ------------------ -------------- Sales $ --- $ --- Cost --- --- Total Operating Expenses 1,874,000 1,700,000 Loss from Continuing Operations Before Other Income (Expense) (1,874,000) (1,700,000) Extraordinary Gain 52,000 433,000 Net (Loss) (1,823,000) (1,300,400) Net Loss Per Share (.13) (.14) Weighted Average Number 13,798,000 9,318,000 of Common Stock Outstanding Balance Sheet Data April 30, 1996 Unaudited Actual Pro Forma (1) As Adjusted (1)(2) ------ ------------- ------------------ Total Assets 159,000 1,867,000 6,267,000 Working Capital (Deficit) (301,000) 1,407,000 5,807,000 Long Term Debt -- -- -- Total Stockholder's Equity (173,000) 1,535,000 5,935,000 (Deficit) (1) Pro Forma Information gives effect to the Company's receipt of net proceeds of $1,708,000 from the exercise of warrants during the period May 1, 1996 through July 31, 1996. (2) Gives effect to the net proceeds to be received by the Company on the sale of all 2,500,000 Shares offered hereby. SIGMA ALPHA GROUP, LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Rounded to Nearest Thousand) NINE MONTHS ENDED APRIL 30, -------------------------- 1996 1995 ----------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(1,823,000) $(1,304,000) Adjustments to reconcile net loss to net cash flows from operating activities: Extraordinary gain on extinguishment of debt (52,000) (433,000) Depreciation of property and equipment and amortization of goodwill 24,000 6,000 Amortization of unearned compensation 8,000 39,000 Issuance of preferred stock for professional services - 15,000 Issuance of common stock for: Board of Directors 150,000 3,000 Consulting - 108,000 Interest - 25,000 Lease obligation - 50,000 Officers' compensation - 201,000 Professional services - 2,000 Subscription services - 267,000 (Increase) decrease in: Accounts receivable (2,000) - Receivable from underwriting 198,000 - Prepaid expenses and other current assets (12,000) - Increase (decrease) in: Accounts payable 1,000 (63,000) Taxes, other than income taxes (56,000) (81,000) Accrued expenses and other current liabilities 1,000 218,000 --------- -------- Net cash used in operating activities (1,563,000) (947,000) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of patent (10,000) - Purchase of equipment (42,000) (1,000) --------- ------- Net cash used in investing activities (52,000) (1,000) --------- ------- See accompanying notes
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000941914_smithway_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000941914_smithway_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Consolidated Financial Statements, including the Notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, (i) all information in this Prospectus assumes that the Underwriters' over- allotment option is not exercised; (ii) all references to the "Company" or "Smithway" in this Prospectus refer to Smithway Motor Xpress Corp., a Nevada corporation ("Smithway-Nevada"), its wholly owned subsidiaries, Smithway Motor Xpress, Inc., an Iowa corporation ("Smithway-Iowa"), Smithway Transportation Brokerage, Inc., an Iowa corporation ("STB"), and Wilmar Truck Leasing, Inc., an Iowa corporation ("Wilmar"); and (iii) all financial information in this Prospectus concerning the Company includes the historical operations of Smithway, STB, Wilmar, and "Smith Leasing," a sole proprietorship lessor of tractors and trailers to Smithway, all of which entities were formerly owned by William G. Smith and Marlys L. Smith (the "Smiths") and are now owned by Smithway. See "Acquisition of Related Companies and Holding Company Formation" and Note 1 to Consolidated Financial Statements. THE COMPANY Smithway is a truckload carrier that transports diversified manufactured and processed products, concentrating primarily on the flatbed segment of the truckload market. The Company uses its "Smithway Network" of computer-connected field offices, commission agencies, and Company-owned terminals to offer comprehensive truckload transportation services to shippers located predominantly between the Rocky Mountains in the West and the Appalachian Mountains in the East, and in eight Canadian provinces. Since 1991, Smithway has: (i) diversified its customer base and freight transported to expand its business beyond the building materials and construction steel relied upon by many flatbed carriers; (ii) implemented proven technology to optimize freight selection, communication, and operating efficiencies; (iii) established its van division in response to customer demand; and (iv) added brokerage, transportation logistics, and dedicated fleet operations. Management believes the Company's transportation capability and reputation for safety and reliability have made it a primary provider of transportation services, or "core carrier," to major customers such as York International, Goodyear, LTV Steel, and General Electric. Smithway's objective is to accelerate the expansion of its operations to take advantage of growth opportunities resulting from the industry trend of shippers utilizing larger, better-capitalized carriers, while maintaining profitability and premium service standards. Since 1991, the Company has positioned itself for growth by focusing upon productivity enhancements, cost reductions, and operating efficiencies. This focus has resulted in 30.0% compounded annual growth in earnings from operations, 67.5% compounded annual growth in net earnings, and 68.2% compounded annual growth in net earnings per share for the five years ended December 31, 1995 (pro forma net earnings, which reflect a provision for C corporation income taxes for consolidated entities which were S corporations and a sole proprietorship in 1991-94, are reflected in this calculation for such periods). The Smithway strategy contains six key elements: . Market Leadership. Smithway strives for market prominence by offering premium service, developing core carrier and dedicated fleet relationships, and providing logistics management. . Diversified Freight. Smithway targets a diversified mix of freight to increase profitability and reduce exposure to business cycles. . Acquisitions. Smithway intends to pursue strategic acquisitions of both flatbed and dry van carriers, focusing primarily on the flatbed sector of the industry. . Return on Equity. Smithway emphasizes return on equity by enhancing asset productivity and limiting capital investment through use of independent contractor equipment and sales agent facilities. . Productivity Incentives. Smithway seeks to create an entrepreneurial environment for its personnel through revenue-based bonuses, profit participation, and stock ownership by a majority of employees. . Operating Efficiencies. Smithway enhances operating efficiency through safety incentives, freight selection software, satellite-based tracking and communication, and late-model revenue equipment. Smithway intends to continue its policy of maintaining a mixed fleet of both Company-owned and independent contractor tractors. Smithway increased its fleet to 720 tractors (403 Company-owned and 317 independent contractors) and 1,175 trailers (957 flatbed and 218 dry vans) at March 31, 1996. Management believes that the Company operates one of the nation's ten largest flatbed fleets. The Company has scheduled new equipment deliveries (net of sales and trades) that would increase Company-owned tractors to 426 by December 31, 1996. Following this offering, management believes the Company will be prepared to expand its operations and capitalize on opportunities created by truckload industry consolidation. The Company, formerly known as Acme Transfer, Inc., an Iowa corporation, was acquired by William G. Smith and his father, Harold C. Smith in 1958. In 1972, the name was changed to Smithway Motor Xpress, Inc. Smithway Motor Xpress Corp. was incorporated in Nevada in January 1995 to serve as a holding company for Smithway-Iowa and related entities. Smithway's headquarters is located at Rural Route #5, Fort Dodge, Iowa 50501, and its telephone number is (515) 576-7418. THE OFFERING <TABLE> <S> <C> Class A Common Stock offered by the Company......... 1,500,000 shares Class A Common Stock offered by the Selling Stockholders....................................... 650,000 shares Common Stock to be outstanding after this offering: Class A Common Stock............................ 3,999,293 shares(1) Class B Common Stock............................ 1,000,000 shares Total....................................... 4,999,293 shares(1)(2) Use of proceeds..................................... To reduce debt. See "Use of Proceeds." Nasdaq National Market Symbol....................... SMXC </TABLE> - -------- (1) Excludes 225,000 shares of Class A Common Stock reserved for issuance to key employees under the Company's Incentive Stock Plan (under which options for 85,000 shares have been awarded) and 25,000 shares of Class A Common Stock reserved for issuance to non-employee directors under the Company's Outside Director Stock Plan. (2) The Class A Common Stock is entitled to one vote per share. The Class B Common Stock, which automatically converts to Class A Common Stock if beneficially owned by persons other than William G. Smith or certain members of his immediate family, is entitled to two votes per share. The Class A and Class B Common Stock vote together as a single class except as required by law, and are substantially identical, except with respect to voting rights. See "Description of Capital Stock."
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Except as otherwise specified, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. THE COMPANY CRA provides field case management and specialized cost containment services designed to reduce workers' compensation costs. Field case management services involve working on a one-on-one basis with injured employees and their various health care professionals, employers and insurance company adjusters to assist in maximizing medical improvement and, where appropriate, to expedite return to work. Specialized cost containment services include various techniques designed to reduce the cost of workers' compensation claims and automobile accident injury claims. The Company operates one of the largest field case management organizations in the United States, consisting of 110 field case management offices with approximately 1,000 field case managers who provide medical management and return to work services in 49 states and the District of Columbia. CRA also provides a broad range of higher margin specialized cost containment services, including utilization management, workers' compensation network management, telephonic case management and retrospective medical bill review services. Revenues from specialized cost containment services comprised approximately 28.5% of revenues for the first quarter of 1996, up from approximately 25.2% for the corresponding period of the prior year. The Company markets its services to workers' compensation insurers, third party administrators, self-insured employers and payors of automobile accident medical claims through a direct sales and marketing organization consisting of over 125 dedicated personnel. CRA currently has over 1,200 customers nationwide. Workers' compensation is a state-mandated, comprehensive insurance program that requires employers to fund medical expenses, lost wages and other costs resulting from work-related injuries and illnesses. According to statistics published in the 1994 Workers' Compensation Year Book, total workers' compensation costs to employers were approximately $60 billion in 1992 (excluding costs associated with productivity losses) and approximately $22.8 billion in 1982. Based upon a combination of statistics published in the 1994 Workers' Compensation Year Book and The Fact Book 1994--Property/Casualty Insurance Facts, the Company estimates that 1992 total workers' compensation costs to employers was comprised of approximately $22 billion related to medical costs, approximately $24 billion related to indemnity costs, including temporary wage replacement and permanent disability payments, and the balance related to other costs such as legal services and claims administration. The Company believes that this growth resulted primarily from (i) broader definitions of work-related injuries and illnesses covered by workers' compensation laws, (ii) the shifting of medical costs from health insurance plans to the workers' compensation system, (iii) an aging work force, (iv) the continued requirement that employers pay all of an employee's cost of medical treatment, without any employee co-payment or deductible, and a significant portion of lost wages and non-medical costs, (v) the overall inflation of medical costs and (vi) the relatively low utilization to date of comprehensive cost containment programs in the workers' compensation system. In response to rising workers' compensation costs, insurance carriers and employers have become increasingly focused on applying managed care techniques to reduce lost work time, medical costs and other costs associated with workers' compensation. The Company estimates that the workers' compensation managed care services industry generated total 1993 revenues of approximately $2.6 billion. While the industry is fragmented with a large number of competitors, CRA believes that it is one of only a small number of companies that offer a comprehensive line of workers' compensation managed care services on a nationwide basis. CRA believes that significant opportunities exist in applying managed care techniques to the workers' compensation marketplace. The Company's objective is to expand its presence as a national provider of comprehensive managed care services to workers' compensation payors. CRA's strategy is to (i) continue its focus on the workers' compensation marketplace where the Company believes that its specialized skills provide it with a significant competitive advantage, (ii) leverage its national organization and local market presence to expand its relationships with national payors who are increasingly seeking national solutions to their workers' compensation problems, (iii) capitalize on its traditional customer base by cross-selling specialized cost containment services to its existing field case management customers, (iv) increase its marketing of early intervention services to identify promptly cases that have the potential to result in significant expenses and to take appropriate measures to control these expenses before they are incurred, (v) take advantage of recent enabling legislation to apply managed care techniques to the automobile insurance market, and (vi) expand its product offerings and enhance its opportunities for growth through strategic acquisitions. RECENT DEVELOPMENTS As part of its strategy to expand its product offerings and enhance its opportunities for growth through strategic acquisitions, the Company has recently completed two acquisitions and has entered into a definitive agreement with respect to a third strategic acquisition. On October 24, 1995, CRA acquired all outstanding capital stock of Alta Pacific Corporation ("Alta Pacific"), a leading provider of case management services in the state of Washington. The acquisition of Alta Pacific provides a platform for the introduction of CRA's specialized cost containment services in the Pacific Northwest, a region where the Company has historically not maintained a presence. On April 2, 1996 CRA acquired all outstanding capital stock of FOCUS Healthcare Management, Inc. ("Focus"), which maintains one of the nation's largest workers' compensation networks of preferred provider organizations ("PPO"). The acquisition of Focus enables the Company to offer its customers access to a specialized PPO controlled by the Company. On May 6, 1996 CRA signed a definitive agreement to acquire all the outstanding capital stock of QMC3, Inc. ("QMC3"), a leading managed care company servicing the automobile insurance market. This acquisition positions CRA to capitalize on the introduction of managed care techniques to the automobile insurance market. See "Recent Developments."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000942787_stormedia_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000942787_stormedia_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..26ae73d8e7019016883f31d0ab7e3a564b008579
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+PROSPECTUS SUMMARY The following summary is qualified by the more detailed information and financial statement and notes thereto appearing elsewhere in this Prospectus. This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. THE COMPANY StorMedia Incorporated (the "Company") is a leading independent supplier of thin film disks for hard disk drives used in portable and desktop computers. The Company designs, develops, manufactures and sells disks in 2 1/2 inch and 3 1/2 inch sizes. Within each size, the Company provides a range of coercivities, fly heights and disk thicknesses to meet specific customer requirements. The Company's strategy is to combine leading disk technology with high volume manufacturing expertise to serve the growing and technologically demanding hard disk drive market. The Company collaborates with customers during the design phase of new disk drives, enhancing its ability to bring new products to market on a timely basis and increasing the likelihood that its disks will be designed into customers' new disk drive products. The Company currently sells its disks primarily to Seagate Technology, Inc. ("Seagate") and Maxtor Corporation ("Maxtor"), two of the leading independent hard disk drive manufacturers. The Company was the first and is the largest independent manufacturer of thin film disks in Singapore where, according to the Singapore Economic Development Board, over 45% of hard disks produced worldwide were manufactured in 1995. RECENT DEVELOPMENTS. In the first quarter of 1996, the Company's net sales were $61.2 million, gross profit was $17.1 million and earnings per share were $0.52 as compared to net sales of $27.9 million, gross profit of $6.1 million and earnings per share of $0.18 in the first quarter of 1995. This represented an increase of 119% in net sales in the first quarter of 1996 as compared to the first quarter of 1995. During the first quarter of 1996, the Company began shipping disks from the first sputter line in its Singapore facility dedicated to Seagate (the "Dedicated Facility"). On May 16, 1996, the Company announced it had begun to establish a facility in Singapore (the "Substrate Facility") to produce substrates for its media operations. The Substrate Facility is scheduled to begin production in the third quarter of 1996 and to be fully operational by year end. THE OFFERING <TABLE> <S> <C> U.S. Offering.......................................... 3,600,000 Shares International Offering................................. 900,000 Shares Total.............................................. 4,500,000 Shares (including 3,000,000 Shares by the Company and 1,500,000 Shares by the Selling Stockholders)(1) Common Stock to be outstanding after the offering...... 20,226,889 Shares(1) Use of proceeds........................................ Capital expenditures, primarily to establish the Substrate Facility in Singapore and to further expand manufacturing capacity, working capital and other general corporate purposes. See "Use of Proceeds." Nasdaq National Market symbol.......................... STMD </TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> COMPANY PREDECESSOR PROFORMA ------------------------------------------ ----------------------------------- PREDECESSOR/ THREE MONTHS COMPANY ENDED YEAR ENDED DECEMBER 31, COMBINED --------------------------- ----------------------------------- YEAR ENDED YEAR ENDED MARCH 31, MARCH 29, 1991 1992 1993(2) 12/31/94(3) 12/31/95 1995 1996 ----------- ------- -------- ----------- ---------- --------- -------------- <S> <C> <C> <C> <C> <C> <C> <C> (UNAUDITED) (UNAUDITED) (UNAUDITED) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales.................... $ 22,476 $56,706 $ 77,145 $81,766 $161,455 $ 27,880 $ 61,156 Gross profit (loss).......... (13,460) 1,749 12,793 16,257 43,628 6,062 17,109 Operating earnings (loss).... (22,972) (9,022) (24,657) 7,364 28,924 3,362 11,351 Net earning (loss)........... (22,962) (9,022) (24,657) 3,895 21,158 2,036 9,469 Earnings per share........... $ 0.35 $ 1.38 $ 0.18 $ 0.52 Shares used in per share computation................ 11,175 15,338 11,175 18,309 </TABLE> <TABLE> <CAPTION> AS OF MARCH 29, 1996 --------------------------- ACTUAL AS ADJUSTED(4) --------- -------------- (UNAUDITED) <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Working capital................................................................................... $ 51,795 $127,020 Total assets...................................................................................... 198,679 273,904 Long-term debt, less current portion.............................................................. 32 32 Total equity...................................................................................... 143,778 219,003 </TABLE> - --------------- (1) Assumes that the Underwriters' over-allotment option is not exercised. See "Underwriters." Based on shares outstanding as of April 30, 1996. Excludes 2,179,482 shares issuable upon exercise of options outstanding as of that date. Includes 12,761,265 shares of Class A Common Stock and 4,362,001 shares of Class B Common Stock. See "Description of Capital Stock -- Class B Common Stock." (2) Results include a restructuring charge of $24.9 million principally reflecting Nashua Corporation's ("Nashua") decision to sell its thin film disk division. See "The Company," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 4 of Notes to Consolidated Financial Statements. (3) Includes the results of operations for (i) the Predecessor for the period from January 1, 1994 through May 19, 1994 and (ii) the Company for the period from May 20, 1994 through December 31, 1994, as if the acquisition of the thin film disk division (the "Acquisition") of Nashua had been consummated on January 1, 1994. See "The Company" and Note 12 of Notes to Consolidated Financial Statements. (4) Adjusted to give effect to the sale of 3,000,000 shares of Class A Common Stock offered by the Company hereby at an assumed public offering price of $26 1/2 per share net of estimated underwriting discounts and commissions and offering expenses. See "Use of Proceeds." Unless otherwise indicated, all information contained in this Prospectus assumes that the Underwriters' over-allotment option is not exercised and gives effect to the three-for-two split of the Common Stock in the form of a stock dividend which will be paid on May 28, 1996 to stockholders of record as of May 13, 1996. See Note 14 of Notes to Consolidated Financial Statements. "Common Stock" as used herein refers collectively and without distinction to the Company's Class A Common Stock and Class B Common Stock. The Company operates on a 13 week fiscal quarter basis with a December 31 fiscal year end. INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. PROSPECTUS (Subject to Completion) Issued May 28, 1996 4,500,000 Shares LOGO CLASS A COMMON STOCK OF THE 4,500,000 SHARES OF CLASS A COMMON STOCK OFFERED HEREBY, 900,000 SHARES ARE BEING OFFERED INITIALLY OUTSIDE OF THE UNITED STATES AND CANADA BY THE INTERNATIONAL UNDERWRITERS AND 3,600,000 SHARES ARE BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS. SEE "UNDERWRITERS." OF THE 900,000 SHARES OF CLASS A COMMON STOCK BEING OFFERED BY THE INTERNATIONAL UNDERWRITERS, 600,000 SHARES ARE BEING SOLD BY THE COMPANY AND 300,000 SHARES ARE BEING SOLD BY THE SELLING STOCKHOLDERS. SEE "PRINCIPAL AND SELLING STOCKHOLDERS." THE COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF SHARES BY THE SELLING STOCKHOLDERS. THE CLASS A COMMON STOCK OF THE COMPANY IS TRADED ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "STMD." ON MAY 24, 1996, THE LAST SALE PRICE OF THE CLASS A COMMON STOCK, AS REPORTED ON THE NASDAQ NATIONAL MARKET, WAS $39 3/4 PER SHARE OR $26 1/2 AS ADJUSTED FOR THE COMPANY'S THREE-FOR-TWO STOCK SPLIT WHICH WILL BE EFFECTIVE AT THE CLOSE OF BUSINESS ON MAY 28, 1996. SEE "PRICE RANGE OF COMMON STOCK." ------------------------ THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON PAGE 4 HEREOF. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ PRICE $ A SHARE ------------------------ <TABLE> <CAPTION> UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS ---------------- ---------------- ---------------- ---------------- <S> <C> <C> <C> <C> Per Share................. $ $ $ $ Total(3).................. $ $ $ $ </TABLE> - ------------ (1) The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriters." (2) Before deducting expenses payable by the Company estimated at $300,000. (3) Certain Selling Stockholders have granted the U.S. Underwriters an option, exercisable within 30 days of the date hereof, to purchase up to 675,000 additional shares of Class A Common Stock at the price to public less underwriting discounts and commissions for the purpose of covering over-allotments, if any. If the U.S. Underwriters exercise such option in full, the total price to public, underwriting discounts and commissions and proceeds to Selling Stockholders will be $ , $ and $ , respectively. See "Underwriters."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000943206_computer_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000943206_computer_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8997ba36c6d8b9c7cc7aa3e8261567cde270476b
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000943206_computer_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION, INCLUDING "RISK FACTORS" AND CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THE COMPANY Computer Learning Centers, Inc. ("CLC" or the "Company") provides information technology and computer-related education and training. The Company designs programs and courses to meet current information technology education needs, offering instruction in rapidly growing technologies such as client/server, databases, networking and object-oriented programming. Through its accredited career programs, the Company offers Associate Degrees and non-degree diplomas in five primary areas of study to adults seeking entry-level jobs in information technology: business applications; electronics, systems and hardware; programming; networking; and business applications with networking. In addition to its traditional career and Associate Degree programs, the Company offers its Advantec Institute ("AI") courses in intensive two- to six-week formats for the continuing education and training of information technology professionals. The Company enrolls over 7,000 students annually at its 11 locations in California, Illinois, Pennsylvania, Texas and Virginia. According to the United States Department of Labor, the percentage of the American workforce using computers on the job increased from 25% in 1984 to 47% in 1993, and the Department of Labor estimates that by 2005 over 5.9 million additional job openings will be created in occupations requiring information technology skills. As business and government organizations become increasingly dependent on information technology and the integration of technology into the work place, the Company believes the demand for information technology education and training will increase significantly. According to International Data Corporation, the United States market for instructor-led information technology education and training was approximately $4.9 billion in 1993 and is expected to increase to $7.8 billion in 1997. The Company believes it is well positioned to take advantage of the increasing demand for information technology education and training. CLC's programs are developed with input from employers and students and are taught by experienced professionals. Each Learning Center is equipped with up-to-date computer hardware and software, and each program requires students to spend at least 50% of their in-school time gaining hands-on experience. CLC offers year-round scheduling flexibility to students through new program start dates each month, as well as morning, afternoon and evening classes that allow students to maintain part-time jobs and to enter the workforce on a full-time basis in as little as eight months. The Company provides efficient access to government-supported financing sources, as well as various forms of private financing. In addition, CLC offers extensive placement services to students and graduates on an ongoing basis. The Company's objective is to strengthen and expand its position as one of the leading providers of information technology education and training and to meet the needs of career-minded adults. The Company's strategy is to establish new Learning Centers throughout the United States, broaden the availability of its existing Associate Degree programs at its Learning Centers and open additional Advantec Institutes. In addition, the Company plans to develop new programs and courses in response to the increasing demand for information technology education and training and to focus on improving student graduation and placement rates. Based on information provided by graduates and employers, approximately 85% of CLC's placeable graduates (i.e., graduates who actively pursued employment and were not prevented from employment due to pregnancy or health-related situations, continuation of education or military service) for the 12 months ended June 30, 1995 obtained employment related to their field of study. Employers of CLC graduates include small technology-oriented companies as well as major corporations and agencies and their affiliates, including America Online, Inc., Aetna Life and Casualty Company, Bell Atlantic Corporation, Electronic Data Systems, Inc., International Business Machines Corporation, McDonnell Douglas Corporation, Sears, Roebuck and Co. and the University of Pennsylvania. THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Company.................. 434,783 shares Common Stock Offered by the Selling Stockholders..... 700,001 shares Common Stock Outstanding after the Offering.......... 5,077,134 shares(1) Use of Proceeds...................................... For working capital and general corporate purposes, including opening new facilities and expansion of the Company's programs. Nasdaq National Market symbol........................ CLCX </TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA (in thousands, except per share amounts) <TABLE> <CAPTION> SIX MONTHS YEAR ENDED JANUARY 31, ENDED JULY 31, ------------------------------- -------------------- <S> <C> <C> <C> <C> <C> 1994 1995 1996 1995 1996 --------- --------- --------- --------- --------- STATEMENT OF OPERATIONS DATA: Revenues.................................................... $ 34,981 $ 39,297 $ 46,081 $ 21,544 $ 28,983 Income before interest...................................... 4,068 3,266 5,093 1,937 3,998 Interest expense (income), net.............................. 1,356 948 96 256 (214) Income before income taxes, discontinued operations, extraordinary item and cumulative effect of accounting change..................................................... 2,712 2,318 4,997 1,681 4,212 Income from continuing operations before discontinued operations, extraordinary item and cumulative effect of accounting change.......................................... $ 1,588 $ 1,187 $ 2,919 $ 909 $ 2,464 Income per share from continuing operations(2).............. $ 0.43 $ 0.77 $ 0.28 $ 0.54 Weighted average number of shares outstanding(2)............ 2,737 3,798 3,248 4,581 </TABLE> <TABLE> <CAPTION> JULY 31, 1996 ------------------------- <S> <C> <C> ACTUAL AS ADJUSTED(3) --------- -------------- BALANCE SHEET DATA: Cash and cash equivalents............................................................... $ 11,294 $ 25,038 Working capital......................................................................... 8,975 23,331 Total assets............................................................................ 48,001 61,745 Long-term liabilities................................................................... 1,698 1,698 Total stockholders' equity.............................................................. 20,247 34,603 </TABLE> - -------------------------- (1) Based on shares outstanding at August 31, 1996. Excludes 402,690 shares of Common Stock issuable upon exercise of options outstanding as of August 31, 1996 and 725,982 additional shares of Common Stock reserved at that date for issuance in the future under the Company's stock plans. See "Management -- Stock Plans."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000943324_conmed_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000943324_conmed_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..32c4e246d95964ef840b2dc88e9eb6a7f73a4e11
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS AND THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE INFORMATION DISCUSSED UNDER "RISK FACTORS." THE COMPANY PACE develops and markets advanced patient care management software systems that enable health care providers to standardize the delivery of care, maximize resource utilization and improve clinical outcomes. The Company's enterprise-wide, client/server applications automate charting, clinical workflow processes and the clinical pathways that are increasingly being incorporated into health care practices. The Company's core system, PACE CMS, is a modular suite of advanced software applications that provides hospitals and integrated delivery systems a comprehensive system for interdisciplinary documentation, nursing care planning, clinical pathway management and enterprise-wide order management, all at the point-of-care. The Company believes that its systems increase productivity of nurses and ancillary labor resources, improve the accuracy and legibility of documentation, reduce clerical tasks such as entering orders for tests, services, consultations and treatments, enhance communications and coordination of care among members of the patient care team, provide real-time access to detailed patient data at the point-of-care, facilitate integration of appropriate clinical pathways into patient care plans and treatment regimes, integrate critical patient care information into enterprise-wide, computer-based patient record systems, and, ultimately, improve the quality of care. Intense pressure to reduce costs of health care delivery has increased the need to manage the delivery of care in a more cost-effective manner and has led to an increased demand for clinical information systems that enable providers to measure, monitor and improve clinical processes. The current use of paper-based hospital records is inherently inefficient due to the difficulty of disseminating information, the inability to immediately incorporate changes in a patient's status into the patient record and the likelihood of transcription errors arising from the amount of redundant data entry. In addition, there is increasing pressure to implement advanced patient care management systems from managed care organizations, accrediting bodies such as the Joint Commission on Accreditation of Health Care Organizations ("JCAHO"), policy-making organizations such as the National Academy of Sciences and the Institute of Medicine, and various federal and state regulatory bodies. Health care providers are also beginning to adopt the use of clinical pathways that employ best practices and continuous quality improvement. By utilizing clinical pathways, caregivers can begin to standardize the provision of care and provide more consistent, higher-quality outcomes. The Company's system and services address the industry's need for advanced point-of-care applications which automate and standardize charting functions, clinical workflow processes and clinical pathways. The Company's open systems architecture allows PACE CMS to be integrated with a health care provider's existing information systems, including financial management, admissions, pharmacy, laboratory and other ancillary systems. One such health care provider which is integrating its existing information system with a portion of the Company's system to provide point-of-care systems, initially to 20 sites over three years, is Continental Medical Systems, Inc., a health care provider with a nationwide network of 37 rehabilitation hospitals. The Company markets its systems through both a direct sales force and through strategic alliances with vendors of complementary products. In May 1996, the Company entered into one such alliance with Sunquest Information Systems, Inc. ("Sunquest"), a leading supplier of clinical information systems with an installed base of over 600 hospitals. The Company believes that strategic alliances such as that with Sunquest will play an important role in its future success in sales of information systems to larger hospitals, integrated delivery systems and multi-entity purchasing groups. PACE's objective is to become a leading supplier of health care information systems for hospitals, rehabilitation care facilities and other long-term care facilities. PACE's strategy includes: (i) providing technologically advanced point-of-care systems; (ii) forging strategic relationships with joint marketing partners; (iii) increasing its investment in sales and marketing; (iv) delivering a total solution to customers; and (v) developing and introducing the PACE Critical Pathway Analyzer. THE OFFERING Common Stock offered by the Company 900,000 shares Common Stock to be outstanding 5,052,199 shares (1) after the offering Use of Proceeds To fund research and development, expansion of sales and marketing, working capital and general corporate purposes. Nasdaq SmallCap symbol PCES (1) All calculations of outstanding shares in the Prospectus, either on the date of this Prospectus or as adjusted for the shares offered hereby, are based on the number of shares outstanding on May 31, 1996. Excludes (i) 868,433 shares of Common Stock issuable upon exercise of certain outstanding warrants issued by the Company at a weighted average exercise price of $3.38 per share and (ii) 545,494 shares of Common Stock reserved for issuance under the Company's 1995 Stock Compensation Plan (the "Plan"). As of May 31, 1996, options for 284,421 shares of Common Stock were outstanding under the Plan at a weighted average exercise price of $3.00 per share. See "Management -- Stock Compensation Plan." SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ----------------------- ------------------ 1991 1992 1993 1994 1995 1995 1996 ---- ---- ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net revenues $ 373 $ 965 $ 697 $ 378 $ 2,081 $ 402 $ 805 Costs and expenses 777 1,395 1,697 3,989 4,620 740 1,460 Net loss (391) (421) (1,024) (3,623) (2,412) (348) (630) Loss per common and common equivalent share (0.38) (0.41) (0.98) (3.39) (0.78) (0.34) (0.15) ====== ====== ======= ======= ======= ====== ====== Pro forma loss per common and common equivalent share(1) (0.65) (0.12) ======= ====== Weighted average number of common and common equivalent shares outstanding 1,026 1,034 1,043 1,069 3,092 1,028 4,152 </TABLE> DECEMBER 31, 1995 MARCH 31, 1996 ----------------- -------------- ACTUAL ACTUAL AS ADJUSTED(2) ------ ------ -------------- BALANCE SHEET DATA: Working capital $2,295 $1,635 $4,295 Total assets 5,680 4,566 7,226 Long-term obligations 48 44 44 Total liabilities 1,274 736 736 Total shareholders' equity 4,406 3,830 6,490 (1) Computed based upon common and common equivalent shares outstanding after giving effect to the conversion of all outstanding Preferred Stock as of January 1, 1995. (2) Adjusted to give effect to the sale of 900,000 shares of Common Stock offered by the Company hereby at an assumed public offering price of $3.25 per share less estimated expenses. See "Use of Proceeds" and "Capitalization." EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS WHICH COULD CAUSE OR CONTRIBUTE SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SECTIONS ENTITLED "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS AND ANY DOCUMENTS INCORPORATED HEREIN BY REFERENCE. RISK FACTORS IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS BUSINESS BEFORE PURCHASING ANY OF THE SHARES OF COMMON STOCK OFFERED HEREBY. QUARTERLY FLUCTUATIONS OF OPERATING RESULTS. The Company believes that its future operating results will be subject to annual and quarterly fluctuations due to a number of factors, some of which are outside the control of the Company. These factors include market acceptance of, and fluctuations in, the average selling prices of the Company's systems and those of its competitors, the timing of significant orders and the duration of the implementation of those orders, the Company's relatively long sales cycle, loss of customers due to consolidation in the health care industry, customers' procurement cycles and changes in customer budgets, investments by the Company in research and development and sales and marketing and other corporate resources, timing of the introduction by the Company and its competitors of new systems and enhancements to existing systems, the relative mix of software, hardware and services sold by the Company, changes in the Company's strategic alliances, changing customer requirements, changes in the regulatory environment and general economic conditions. Historically, a disproportionately large number of sales contracts have been entered into in the second half of the year as a consequence of hospital procurement cycles. Because of the manner in which the Company recognizes revenue, substantial portions of the revenues from such sales contracts are not likely to be recorded in the Company's financial statements until periods subsequent to those in which such contracts are signed. In addition, the Company plans to increase its operating expenses to fund greater levels of research and development, increase its sales and marketing operations, develop new distribution channels and broaden its customer support capabilities. To the extent that such expenses precede or are not subsequently followed by increased revenues, the Company's business, operating results and financial condition will be materially adversely affected. Further, due to the relatively fixed nature of most of the Company's costs, an unanticipated shortfall in revenue in any fiscal quarter would have a material adverse effect on the Company's results of operations in that quarter and could have a material adverse effect on the Company's business and financial condition. As a result of the foregoing, and because PACE CMS has only recently been introduced and only a limited number of systems sold, the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as any indication of future performance. Due to all of the foregoing factors, it is likely that in some future quarter the Company's operating results will be below the expectations of public market analysts and investors. In such event, the price of the Company's Common Stock could be materially adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Sales and Marketing." HISTORY OF OPERATING LOSSES; UNCERTAIN PROFITABILITY. From its inception in 1987 through March 31, 1996, the Company had accumulated net losses of approximately $9.5 million. Losses have resulted principally from costs incurred in research and development of the Company's technologies and from general and administrative costs. These costs have significantly exceeded the Company's revenues which, from the Company's inception through December 1994, were derived primarily from the sale of systems no longer being marketed by the Company. Since January 1995, the Company has focused on the development and marketing of PACE CMS. There can be no assurance that the Company will ever generate substantial revenues or achieve profitability. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." LIMITED INSTALLATION AND USE OF THE COMPANY'S PRODUCTS; MARKET ACCEPTANCE RISK; DEPENDENCE ON THIRD PARTIES. The Company's ability to generate revenues will be dependent upon its success in marketing and selling its systems to hospitals, integrated delivery systems and multi-entity purchasing groups. During 1995, the Company discontinued the marketing and sale of PACE/CIS, the product from which the Company previously had derived substantially all of its revenues, and introduced PACE CMS, a comprehensive care management system representing a significant enhancement to PACE/CIS. PACE CMS, the system from which the Company derives substantially all of its revenues, is currently being further enhanced through the addition of a graphical user interface and a three-tier, client/server, open-system architecture ("Graphical PACE CMS"). Graphical PACE CMS is currently undergoing beta testing and is expected to be available for commercial implementation in early 1997. To date, the Company has successfully marketed and sold only a limited number of PACE systems. There can be no assurance that the Company will be able to successfully implement additional PACE systems or that the delivery of Graphical PACE CMS will occur on a timely basis, or at all. The Company's systems frequently are deployed to large numbers of personnel, many of whom have not previously used software systems such as PACE CMS, and there can be no assurance of such end-users' acceptance of the system. Further, there can be no assurance that PACE systems will achieve market acceptance. Failure of the Company to achieve market acceptance of its systems would have a material adverse effect on the Company's business, financial condition and results of operations. The Company intends to develop strategic alliances with leading providers of health care information systems in order to increase the Company's presence in the larger hospital and integrated delivery system market segment. The Company's ability to generate revenues from such markets is therefore dependent on the success of its strategic alliances, including the alliance with Sunquest. The amount and timing of resources devoted to marketing the Company's systems by these strategic partners are not within the control of the Company. These strategic partners independently could make material marketing and other commercial decisions that could adversely affect the Company's future revenues. Failure of these partners to market the Company's systems successfully could have a material adverse effect on the Company's business, financial conditions and results of operations. There can be no assurance that the Company will be successful in its efforts to market its systems to additional customers. See "Business -- Sales and Marketing" and "-- Strategic Alliances." PRODUCT DEVELOPMENT RISKS. The market for the Company's systems is characterized by frequent new product introductions and enhancements, rapid technological advances and rapid changes in customer requirements and preferences. Accordingly, the Company's future success will depend on its ability to enhance its existing systems, and to develop and market new products on a timely basis that respond to evolving customer requirements, achieve market acceptance and keep pace with technological developments. In particular, the Company believes it is extremely important to complete and commercially implement Graphical PACE CMS, which is currently undergoing beta testing, as well as the PACE Critical Pathway Analyzer ("CPA"), which is in development stages. There can be no assurance that the Company will be successful in developing, introducing on a timely basis and marketing such systems or enhancements, that its software will not contain errors that would delay system introduction, shipment or implementation, or that any such new systems or enhancements will be accepted by the market. The Company is actively marketing Graphical PACE CMS at this time for commercial implementation in early 1997, and there can be no assurance that commercial implementation of Graphical PACE CMS will not be delayed. Software systems as internally complex as those offered by the Company (such as Graphical PACE CMS) frequently contain errors or failures, especially when first introduced or when new versions are released. Although the Company conducts extensive market testing during product development, the Company could be forced to delay commercial implementation of systems to correct software problems or provide enhancements to correct errors in released products. The Company's business, financial condition and results of operations could be negatively impacted as a result of software errors or defects or delays in introduction to the market. Further, errors or delays in system development and enhancement may have a material adverse effect on the market acceptance of the Company's systems and may expose the Company to claims from customers and third parties. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Products" and "-Product Development." DEPENDENCE UPON SINGLE PRODUCT LINE. The Company currently derives substantially all of its revenues from licensing PACE CMS and providing associated implementation, modification, support and consulting services to its customers. There can be no assurance that the Company will be able to broaden or enhance its systems successfully, and any factor adversely affecting the market for the Company's current systems would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Products." LONG SALES AND IMPLEMENTATION CYCLE. How and when to replace paper-based health care information systems or substantially modify an existing information system are major, discretionary decisions for a health care provider, involving extended review and approval processes and substantial capital commitments. Accordingly, the sales cycle for the Company's systems has historically been 12 to 18 months from initial contact to contract execution. During this period, the Company expends substantial time, effort and funds demonstrating the system, preparing a contract proposal and negotiating the contract. In general, the Company does not recognize revenues from sales of systems until after a sales contract has been signed and is being implemented. Any significant failures by the Company to achieve signed contracts, or effectively implement systems, after expending such time, effort and funds would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -Sales and Marketing." DEPENDENCE ON BACKLOG. Due to the long sales cycle for its systems, the Company is unable to predict with certainty whether a contract proposal will be accepted, when an accepted proposal will result in an executed contract and what the implementation schedule will be for the executed contract. Therefore, the Company's future results of operations depend in large part on maintaining an adequate backlog. As of March 31, 1996, the Company had ten contracts under which some or all implementation work remained in backlog for an aggregate of approximately $3.0 million. One of these contracts represents approximately 73% of the total amount in backlog. Generally, backlog includes signed contracts with ongoing implementation obligations and revenues yet to be recognized by the Company. Any significant failure by the Company to manage effectively the introduction of new systems or the sales process in order to maintain an adequate backlog, or the failure of the Company to realize fully the benefits of its backlog with Continental Medical Systems, Inc., could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Backlog." INTENSE COMPETITION. The market for health care information systems is intensely competitive, highly fragmented and rapidly changing. The Company believes that the principal competitive factors in this market include the breadth and quality of product offerings, pricing, the stability of the information systems provider, the features and capabilities of the information systems, availability of technical support and resources for the system, the potential for enhancements and compatibility with existing information systems. Many of the Company's competitors have greater financial, technical, research and development and sales and marketing resources than the Company, and some of these competitors offer products or features, such as financial, billing and collection systems, not offered by the Company. The Company believes that its key competitors include Cerner Corp., Keane Inc., HBO & Company which purchased CliniCom Inc. in 1995, Meditech Management, Inc., PHAMIS, Incorporated, SMS Technologies, Inc., Hewlett-Packard Co., SpaceLabs Medical Inc., CliniComp, and Emtek Health Care Systems Inc., a subsidiary of Motorola, Inc. In addition, other companies, including hospitals, claims-processing agents, third-party administration providers and other entities, all with significant technological, financial and other resources, may enter the market in which the Company competes. Any failure of the Company to develop systems that compete favorably in the marketplace would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Competition." DEPENDENCE ON LARGE LICENSE FEE CONTRACTS AND CUSTOMER CONCENTRATION. To date, a relatively small number of customers have accounted for a significant percentage of the Company's revenues. During 1995, the Company had two customers that accounted for 12.1% and 11.3% of net revenues, respectively, and for the first quarter of 1996, one customer accounted for 63.2% of net revenues. The Company expects that sales of its systems to a limited number of customers will continue to account for a significant percentage of revenues for the foreseeable future. The loss of any major customer or any reduction or delay in orders by any such customer, or the failure of the Company to market successfully its systems to new customers, could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Customers." RISKS ASSOCIATED WITH EXPANDING DISTRIBUTION. To date, the Company has sold its systems primarily through its direct sales force and has supported its customers with its technical and customer support staff. The Company's ability to achieve significant revenue growth in the future will depend in large part on its success in recruiting and training sufficient direct sales, technical and customer support personnel and establishing and maintaining relationships with its strategic partners. Although the Company is currently investing, and plans to continue to invest, significant resources to expand its direct sales force and its technical and customer support staff, and to develop strategic alliances, the Company has at times experienced and continues to experience difficulty in recruiting qualified personnel and in establishing necessary third-party relationships. There can be no assurance that the Company will be able to expand successfully its direct sales force or joint marketing relationships or that any such expansion will result in an increase in revenues. The Company believes the complexity of its products and the large-scale deployments anticipated by its customers will require a number of highly trained customer support personnel. There can be no assurance that the Company will expand successfully its technical and customer support staff to meet customer demands. Any failure by the Company to expand its direct sales force or other distribution channels, or to expand its technical and customer support staff, could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Sales and Marketing." MANAGEMENT OF GROWTH; RECENT MANAGEMENT CHANGES. The Company has experienced a period of rapid operational growth that has placed, and could continue to place, a significant strain on the Company's financial, management and other resources. The Company's ability to manage its growth effectively will require it to continue to improve its manufacturing, operational and financial control systems and infrastructure and management information systems, and to attract, train, motivate, manage and retain key employees. As part of its business strategy, the Company intends to continue to pursue rapid growth in the sale of health care management systems to larger hospitals, integrated delivery systems and multi-entity purchasing groups. To support this effort, the Company also expects to continue to hire additional management, sales and marketing, implementation and support personnel. In addition, the Company may expand its business by acquiring other businesses or product lines, or by entering into additional strategic alliances with other vendors. There can be no assurance that such efforts will be successful. Inability of the Company's management to control and manage these efforts effectively could have a material adverse effect on the Company's business, financial condition and results of operations. Three of the Company's four executive officers have joined the Company since April 1995, including the Chief Executive Officer, the Vice President of Technology and the Vice President of Sales and Marketing. The Company's success depends to a significant extent upon the ability of its new executive officers to operate effectively. See "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Management." DEPENDENCE ON KEY PERSONNEL; ABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL. The Company's future performance is substantially dependent upon the retention of key senior management, sales and marketing, and technical personnel. As of the date hereof, the Company does not have employment agreements with any of these employees. The Company's success will also depend on its ability to attract, retain and motivate highly skilled managerial, sales and marketing, and technical personnel, including project managers, software programmers and systems architects skilled in the environments in which the Company's systems operate. Competition for such personnel in the software and information services industries is intense and is likely to remain so for the foreseeable future. The loss of one or more of its key management, sales and marketing, and technical personnel or the inability to attract, retain and motivate other qualified personnel could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Employees" and "Management." POSSIBLE VOLATILITY OF STOCK PRICE. The Company believes factors such as quarterly fluctuations in results of operations, announcements of new products by the Company or by its competitors, changes in financial estimates by securities analysts, changes in the stock prices of its competitors or technology companies generally or other events or factors may cause the market price of the Common Stock to fluctuate, perhaps substantially. In addition, in recent years the stock market in general, and the shares of technology companies in particular, have experienced extreme price fluctuations that have not been directly related to the operating performance of such companies. These broad market and industry fluctuations may adversely affect the market price of the Common Stock regardless of the Company's operating performance. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation often has been instituted against such company. If instituted, any such litigation could result in substantial costs and a diversion of management's attention and resources and may have a material adverse effect on the Company's business, financial condition and results of operations. PROPRIETARY RIGHTS. The Company's success is dependent, in part, on its ability to maintain the confidential and proprietary nature of the software incorporated in its systems. The Company currently relies on a combination of trade secret and copyright laws, software security measures, license agreements and nondisclosure agreements to establish and protect its proprietary rights. However, there can be no assurance that the legal protections and the precautions taken by the Company will be adequate to prevent misappropriation of the Company's technology. In addition, these protections and precautions do not prevent independent third-party development of competitive technology or products. As of October 19, 1996, JRS Clinical Technologies, Inc. ("JRS"), an entity that developed for the Company a software base for a nursing station documentation system, may distribute to others that software base. Although the Company has modified this software base, a third party that obtained a software base from JRS could gain some benefit toward developing a competitive product. The Company's practice of providing certain of its customers an escrow arrangement for accessing (in certain circumstances) the source code to the Company's software may increase the risk of unauthorized use of such software. Any infringement or misappropriation of the Company's proprietary software could adversely affect the Company's ability to retain and attract new customers could cause the Company to lose revenues or incur substantial litigation expense to enforce the Company's proprietary rights. There can be no assurance that the Company will not become the subject of infringement claims or legal proceedings by third parties with respect to the Company's current or future products and that such claims or proceedings will not have a material adverse effect on the Company's business, financial condition or results of operations. An adverse outcome in litigation or similar adversarial proceedings could subject the Company to significant liabilities to third parties, require expenditure of significant resources to develop non-infringing technology, require disputed rights to be licensed from others or require the Company to cease the marketing or use of certain products, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. As the number of software products in the industry increases and the functionality of these products further overlaps, the Company believes that software developers may become increasingly subject to claims based on intellectual proprietary rights. To the extent the Company wishes or is required to obtain licenses to patents or proprietary rights of others, there can be no assurance that any such licenses will be made available on terms acceptable to the Company, or at all. See "Business -- Intellectual Property." CHANGES IN THE HEALTH CARE INDUSTRY. The health care industry is currently undergoing significant changes, including consolidation of health care providers to form larger health care delivery enterprises as well as market-driven and government initiatives to reform health care. The increased bargaining power of these combined enterprises may lead to a reduction in the gross margins of the Company's systems, which could have a material adverse effect on the Company's business, financial condition and results of operations. As the number of health care delivery enterprises decreases due to further industry consolidation, competition for each sale increases. The Company's business, financial condition and results of operations may be materially and adversely affected in the event that the Company is unable to make sales of PACE CMS to health care providers that are combining, or replacing or substantially modifying their health care information systems. The Company cannot predict what impact, if any, such market or government initiatives might have on its business, financial condition and results of operations. See "Business -- Industry Overview." GOVERNMENT REGULATION. Under the federal Food, Drug and Cosmetic Act (the "FDC Act"), the Food and Drug Administration (the "FDA") has extensive authority to regulate the development, manufacture and sale of medical devices, which generally must receive regulatory clearance or approval prior to commercialization in the United States. In 1989, the FDA promulgated a draft policy addressing the regulation of certain computer products as medical devices under the FDC Act. The Company believes that under that draft policy, the PACE CMS core system either would not be considered to be a medical device subject to FDA regulation or, for those modules that might be deemed medical devices, would be exempt from significant regulatory requirements, including the requirement of premarket clearance or approval, although there can be no assurance that the policy will not be interpreted to cover the Company's systems or that new policies or regulations covering the Company's systems will not be adopted. Certain extensions of the PACE product line currently in development, such as the PACE Critical Pathway Analyzer (the "CPA"), however, may satisfy the FDC Act medical device definition. Certain computer software products, while considered medical devices, are exempt from particular FDA regulatory requirements, including the requirement of FDA premarket clearance or approval. The Company believes that to the extent that any component of the PACE product line is a medical device, it would be exempt from regulation under the draft policy. Nevertheless, such products may still be subject to the FDC Act's general prohibition against adulterated and misbranded devices. The Company expects that the FDA is likely to become increasingly active in regulating computer software intended for use in the health care setting. Furthermore, there can be no assurance that any final FDA policy governing computer hardware and software products, once issued, or other future laws and regulations concerning the manufacture or marketing of medical devices or health care information systems will not increase the cost and time to market new or existing products. If the FDA chooses to regulate any of the Company's systems as medical devices not exempt from regulation, it can impose extensive requirements upon the Company, including the requirement that the Company seek either FDA clearance of a premarket notification submission demonstrating the device's substantial equivalence to a legally marketed predicate device or approval of a premarket approval application establishing the safety and effectiveness of the device. FDA regulations also govern, among other things, the preclinical and clinical testing, manufacture, distribution, labeling and promotion of medical devices. In addition, the Company would be required to comply with the FDC Act's general controls, including establishment registration, device listing, compliance with good manufacturing requirements, reporting of certain device malfunctions and adverse device events. Noncompliance with applicable requirements can result in, among other things, fines, injunctions, civil penalties, recall or service of products, total or partial suspension of production, failure of the government to grant premarket clearance or approval of products, withdrawal of clearances and approvals, and criminal prosecution. See "Business -- Government Regulation." RISK OF PRODUCT LIABILITY CLAIMS; LIMITED LIABILITY INSURANCE. The Company's systems provide information that relates to health care enterprise operations, but do not provide diagnoses of conditions. However, the Company faces an inherent business risk of exposure to product liability claims in the event that the use of its technology or systems is alleged to have failed to have provided adequate and timely clinical information or otherwise resulted in adverse effects. The Company currently maintains product liability insurance, including a $1.0 million per occurrence and a $2.0 million aggregate limit on coverage. There can be no assurance that liability claims will not exceed the coverage limits of such policy or that such insurance will continue to be available at commercially reasonable rates or at all. If the Company does not or cannot maintain sufficient liability insurance, its ability to market its products may be significantly impaired. The Company has not experienced any product liability claims to date. There can be no assurance, however, that the Company will not become subject to such claims, which, if made, could have a material adverse effect on the Company's business, financial condition and results of operations. FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING. The Company believes that the net proceeds to the Company from this offering, combined with its currently available funds, will meet its cash requirements for approximately six months. Thereafter, or sooner if necessary or appropriate, the Company may need to raise additional funds through public or private financings, including equity financings, which may be dilutive to shareholders. There can be no assurance that the Company will be able to raise additional funds if or when its capital resources are exhausted, or that funds will be available on terms attractive to the Company. If adequate funds are not available, the Company may be required to delay, reduce the scope of or eliminate one or more of its research or development programs or projects, which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." NATURE OF IMPLEMENTATION CONTRACTS. Contracts to implement the Company's systems generally provide that the customer may terminate its contract upon a material breach by the Company. Occasionally, however, the customer may negotiate termination provisions that do not relate to the Company's performance or that allow the customer to delay certain aspects of implementation. Certain contracts may contain provisions that allow the customer to reassess and renegotiate the amount or configuration of systems to be purchased after implementation by a customer. Although no customer has acted to terminate an implementation contract to date, there can be no assurance that the Company's customers will not terminate an implementation contract in the future or that any such termination would not have a material adverse effect on the Company's reputation or its business, financial condition and results of operations. The Company's software maintenance contracts are generally renewable at the option of the customer every three to five years and are subject to renegotiation upon renewal. There can be no assurance that the Company's customers will renew their maintenance contracts or that renewal terms will be as favorable to the Company as existing terms. See "Business -- Sales and Marketing." CERTAIN EXISTING CONTRACTS. Certain of the Company's existing customer contracts for PACE systems do not contain specific provisions relating to fees for certain obligations to be provided by the Company. While the Company is working with these customers to better define these obligations, there can be no assurance that the Company will be able to reach satisfactory results in these discussions. The inability of the Company to do so could result in the Company continuing to provide resources to projects for which the Company receives little or no additional compensation. See "Business -- Client Services." LIMITATIONS ON DIRECTOR LIABILITY; INDEMNIFICATION. The Articles of Incorporation of the Company provide that a director shall not be personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, to the fullest extent permitted under the Iowa Business Corporation Act. As a result of these and similar provisions in the Company's Bylaws, the Company's directors may not be liable to the shareholders for negligence or even gross negligence in the performance of their duties as directors. The Articles of Incorporation and Bylaws of the Company also provide that all directors and officers and certain other persons shall be indemnified to the fullest extent permitted by applicable law in connection with each such person's service to the Company. See "Description of Capital Stock -- Indemnification and Limitation of Liability." CONTROL BY DIRECTORS AND AFFILIATES; ANTI-TAKEOVER PROVISIONS. As of May 31, 1996 and assuming the completion of this offering, the Company's officers, directors and principal shareholders, in the aggregate, beneficially owned approximately 42.1% of the Company's outstanding shares of Common Stock (44.4% if stock options and warrants held by officers, directors and principal shareholders were exercised), assuming no purchase of the shares of Common Stock offered hereby by existing officers, directors and principal shareholders. See "Principal Shareholders." As a result, these shareholders acting together would be able to effectively control matters requiring approval by the shareholders of the Company, including the election of directors. The Company's charter provides for 5,000,000 shares of authorized but unissued Preferred Stock, the terms of which may be fixed by the Board of Directors who also have the right to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the shareholders of the Company. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of such Preferred Stock could have the effect of making it more difficult for a third party to acquire control of the outstanding voting stock of the Company. Accordingly, such provisions could have the effect of delaying, deterring or preventing a change of control of the Company. See "Description of Capital Stock." SECURITIES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of the Common Stock in the public market following this offering could have an adverse effect on the price of the Common Stock. The 900,000 shares offered hereby will be subject to a 270-day lock-up agreement. At the present time, approximately 4,076,616 of the Company's outstanding shares are either freely tradeable or may be sold in reliance on Rule 144, subject to compliance with the provisions of that Rule. In addition, warrants to purchase approximately 388,000 shares of Common Stock are presently exercisable, and the holders of such warrants have the right to cause the Company to register the Common Stock received on the exercise of such warrants. If such holders, by exercising their registration rights, cause a large number of shares to be registered and sold in the public market, such sales may have an adverse effect on the market price of the Common Stock. See "Description of Capital Stock -- Registration Rights" and "Securities Eligible for Future Sale." NO DIVIDENDS CONTEMPLATED. The Company does not anticipate that it will pay any dividends on its Common Stock in the foreseeable future. The Company currently intends to retain earnings, if any, to fund the development and growth of its business. See "Dividend Policy." DILUTION. Investors in this offering will incur immediate and substantial dilution in the net tangible book value of the shares of the Common Stock of approximately $1.97 per share based on an assumed public offering price of $3.25. Additional dilution could result from the exercise of certain outstanding options and warrants. See "Dilution." LOCK-UP AGREEMENT AND POSSIBLE TRANSFER RESTRICTIONS. All shares sold in this offering will be subject to a 270-day lock-up pursuant to the Subscription Agreement that must be signed by all purchasers. Securities laws of certain states may require purchasers to acquire the shares in this offering for investment and/or place other restrictions on transfer of the shares. See "Securities Eligible for Future Sale" and "Plan of Distribution." NO MINIMUM OFFERING AMOUNT. The terms of the offering do not require that any minimum number of shares be sold. All funds received for subscriptions will therefore be at the immediate disposal of the Company even if fewer than 900,000 shares are sold. See "Plan of Distribution." THE COMPANY The Company was incorporated in 1987 as an Iowa corporation and changed its name from Health Care Expert Systems, Inc. to PACE Health Management Systems, Inc. in March 1995. The Company's executive offices are located at 1025 Ashworth Road, Suite 420, West Des Moines, Iowa 50265; its main switchboard telephone number is (515) 222-1717; its fax number is (515) 222-0570; its e-mail address is pacesystems.com. The Company maintains an Internet home page. USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock offered by the Company, at an assumed public offering price of $3.25 after deducting estimated expenses payable in connection with this offering, are estimated to be approximately $2.7 million. The Company intends to use the net proceeds of this offering as working capital to finance general corporate purposes, certain anticipated capital expenditures necessary to meet expected growth needs of the Company and to recruit and retain key employees. The primary purposes of this offering are to: accelerate and increase research and development efforts primarily with respect to Graphical PACE CMS and the CPA, expand sales and marketing efforts, expand internal client services staff and to fund general working capital needs. A portion of the net proceeds may also be used for the acquisition of complementary businesses or products. Although the Company frequently evaluates potential acquisitions, the Company currently has no agreements or commitments with respect to any acquisition. Pending application of the net proceeds as described above, the net proceeds of this offering will be placed in interest-bearing bank accounts or invested in United States government securities or other short-term, interest-bearing, investment grade securities. DIVIDEND POLICY The Company has never declared or paid any cash dividends on its capital stock. The Company currently intends to retain any future earnings to fund operations and, therefore, does not anticipate paying any cash dividends in the foreseeable future. CAPITALIZATION The following table sets forth the capitalization of the Company as of March 31, 1996, on an actual basis and as adjusted for the sale of 900,000 shares of Common Stock offered by the Company hereby at an assumed offering price of $3.25 per share after estimated expenses. This table should be read in conjunction with the Company's Financial Statements and Notes thereto included elsewhere in this Prospectus. See "Use of Proceeds." <TABLE> <CAPTION> MARCH 31, 1996 (IN THOUSANDS) -------------- ACTUAL AS ADJUSTED(1) ------ -------------- <S> <C> <C> Current maturities of long-term obligations $ 15 $ 15 ======= ======= Long-term obligations, less current maturities 44 44 ------- ------- Shareholders' equity: Preferred Stock, convertible, no par value; 5,000,000; none issued or outstanding, actual or as adjusted -- -- Common Stock, no par value; 20,000,000 shares authorized; 4,152,199 shares issued and outstanding, actual; 5,052,199 shares issued and outstanding, as adjusted(1) 13,300 15,960 Additional paid-in capital 54 54 Accumulated deficit (9,524) (9,524) ------- ------- Total shareholders' equity 3,830 $ 6,490 ------- ------- Total capitalization $ 3,874 $ 6,534 ======= ======= </TABLE> (1) Excludes, as of March 31, 1996, (i) an aggregate of 868,433 shares of Common Stock issuable upon exercise of outstanding warrants, and (ii) 545,494 shares of Common Stock reserved for issuance under the Company's 1995 Stock Compensation Plan. As of March 31, 1996, options to purchase 284,421 shares of Common Stock were outstanding under the Plan. See "Compensation of Executive Officers and Directors -- Stock Compensation Plan." DILUTION The net tangible book value of the Company as of March 31, 1996 was approximately $3.8 million, or $0.92 per share of Common Stock. Net tangible book value per share represents the amount of the Company's net tangible assets less total liabilities divided by the number of shares of Common Stock outstanding. After giving effect to the sale by the Company of 900,000 shares of Common Stock offered hereby at an assumed offering price of $3.25 per share, and after deducting estimated offering expenses payable by the Company, the Company's net tangible book value at March 31, 1996 would have been approximately $6.5 million, or $1.28 per share. This represents an immediate increase in net tangible book value of $0.36 per share to existing shareholders and an immediate dilution of $1.97 per share to new investors purchasing shares in this offering. The following table illustrates this dilution: Assumed offering price per share $3.25 Net tangible book value per share before the offering $0.92 Increase in net tangible book value per share attributable to new investors 0.36 ----- Pro forma net tangible book value per share after the offering 1.28 ----- Dilution per share to new investor(s) $1.97 ===== The following table summarizes, as of March 31, 1996, the differences between the number of shares of Common Stock owned by existing shareholders and to be purchased by new investors, the effective cash cost therefor, and the average price per share. The table assumes that no shares of Common Stock are purchased in the offering by existing shareholders. To the extent such persons purchase in this offering, their percentage ownership, total consideration, and average consideration per share will be greater than that shown. The following gives effect to the issuance of shares of Common Stock offered hereby, but does not give effect to any other exercise or conversion events relating to the Common Stock. <TABLE> <CAPTION> SHARES PURCHASED TOTAL CONSIDERATION ---------------- ------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ------ ------- ------ ------- --------- <S> <C> <C> <C> <C> <C> Existing Shareholders 4,152,199 82.2% $14,418,992 83.1% $3.47 New Investors 900,000 17.8 2,925,000 16.9 3.25 --------- ----- ----------- ----- ----- Total 5,052,199 100.0% $17,343,992 100.0% $3.43 ========= ===== =========== ===== ===== </TABLE> The foregoing tables assume no exercise of outstanding options or warrants. At March 31, 1996, there were options and warrants outstanding to purchase 1,152,854 shares of Common Stock at a weighted average exercise price of $3.29 per share. As of such date, options and warrants to purchase 571,151 shares of Common Stock were immediately exercisable. To the extent these or additional outstanding options or warrants are exercised, there will be further dilution to new investors. PRICE RANGE OF COMMON STOCK The Company's Common Stock began trading on the Nasdaq SmallCap Market under the symbol "PCES" on April 27, 1995. Prior to that date, there was no public market for the Company's Common Stock. The following table sets forth the high and low bid quotations for the Company's Common Stock as reported on the Nasdaq SmallCap Market for the periods indicated. HIGH LOW ---- --- 1995 Second Quarter (from April 27) $5-3/8 $4-7/8 Third Quarter 5-1/2 4-7/8 Fourth Quarter 5-3/8 2-1/2 1996 First Quarter $6 $2-3/4 Second Quarter 9-5/8 5-1/4 Third Quarter (through July 31, 1996) 7-1/2 4-1/4 On August 5, 1996, the last sale price of the Common Stock, as reported on the Nasdaq SmallCap Market, was $4.00 per share. As of April 2, 1996, there were approximately 900 shareholders of record of the Company's Common Stock. SELECTED FINANCIAL DATA The following selected financial data of the Company as of and for each of the years in the four-year period ended December 31, 1995 have been derived from financial statements audited by McGladrey & Pullen, LLP, independent public accountants. The information set forth below is qualified in its entirety by and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements, related notes thereto as of December 31, 1994 and 1995 and for each of the years in the three-year period ended December 31, 1995, and the independent auditor's report thereon, and other financial information included in this Prospectus. The selected financial data for 1991, as of March 31, 1996 and for the three months ended March 31, 1995 and 1996 are derived from unaudited financial statements of the Company and include all adjustments, consisting of normal recurring accruals, that the Company considers necessary for a fair presentation of the financial position and the results of operations for these periods. Operating results for the three month periods are not necessarily indicative of the results that may be expected for the entire year. The Company has never declared or paid any cash dividends on shares of its capital stock. <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ----------------------- ------------------ 1991 1992 1993 1994 1995 1995 1996 ---- ---- ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> <C> <C> Net revenues: Systems revenues $ 349,337 $ 836,905 $ 435,416 $ 52,346 $ 1,730,705 $ 320,022 $ 705,052 Customer support services 23,631 128,445 262,003 325,487 350,091 81,806 100,144 ---------- ---------- ----------- ----------- ----------- ---------- ---------- 372,968 965,350 697,419 377,833 2,080,796 401,828 805,196 ---------- ---------- ----------- ----------- ----------- ---------- ---------- Costs and expenses: Cost of systems revenues 137,451 476,258 163,432 64,101 621,023 56,992 114,083 Client services 20,686 171,088 253,682 436,384 868,382 149,560 168,918 Product development 131,436 229,421 139,623 2,131,616 980,144 119,542 338,950 Sales and marketing 209,895 269,458 480,916 622,302 865,105 155,243 321,047 General and administrative 277,296 249,155 659,387 734,934 1,285,617 258,917 517,403 ---------- ---------- ----------- ----------- ----------- ---------- ---------- 776,764 1,395,380 1,697,040 3,989,337 4,620,271 740,254 1,460,401 ---------- ---------- ----------- ----------- ----------- ---------- ---------- Loss from operations (403,796) (430,030) (999,621) (3,611,504) (2,539,475) (338,426) (655,205) Other income (expense), net 13,184 9,460 (24,511) (11,657) 126,987 (9,295) 25,085 ---------- ---------- ----------- ----------- ----------- ---------- ---------- Loss before income taxes (390,612) (420,570) (1,024,132) (3,623,161) (2,412,488) (347,721) (630,120) Provision for income taxes -- -- -- -- -- -- -- ---------- ---------- ----------- ----------- ----------- ---------- ---------- Net loss $ (390,612) $ (420,570) $(1,024,132) $(3,623,161) $(2,412,488) $ (347,721) $ (630,120) ========== ========== =========== =========== =========== ========== ========== Loss per common and common equivalent share $ (0.38) $ (0.41) $ (0.98) $ (3.39) $ (0.78) $ (0.34) $ (0.15) ========== ========== =========== =========== =========== ========== ========== Pro forma loss per common and common equivalent share $ (0.65) $ (0.12) =========== ========== Weighted average number of common and common equivalent shares outstanding 1,025,937 1,033,716 1,042,591 1,069,337 3,091,560 1,028,139 4,152,199 </TABLE> <TABLE> <CAPTION> DECEMBER 31, ------------ MARCH 31, 1991 1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> <C> Balance Sheet Data: Working capital (deficit) $482,613 $ 8,986 $ (467,715) $ (23,323) $2,294,560 $1,635,377 Total assets 755,380 910,510 1,377,727 3,784,863 5,679,748 4,565,535 Current maturities of long-term obligations -- -- 30,103 806,733 761,932 14,544 Long-term obligations, less current maturities 122,208 133,207 136,489 854,731 47,663 43,554 Shareholders' equity 583,537 162,967 411,611 1,169,920 4,406,239 3,830,130 </TABLE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HERE. FACTORS WHICH COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THIS SECTION, AS WELL AS IN THE SECTIONS ENTITLED "RISK FACTORS" AND "BUSINESS." GENERAL PACE was organized in 1987 as a computer systems consulting firm. In 1989, the Company began to develop and market a nursing station care plan management system built around a knowledge base or "Clinical Library" developed over a period of 20 years at Carnegie-Mellon and Creighton Universities. In late 1992, the Company recognized what it believed to be a significant opportunity for software applications integrated with the Clinical Library to address the point-of-care clinical information systems market and began to develop the PACE Clinical Information System ("PACE/CIS"). In early 1993, the Company discontinued marketing the nursing station care plan management system as a stand-alone product and focused on development of PACE/CIS. As a result, no new systems were installed during 1994, and no license fee revenues were recorded during that year. The Company discontinued the marketing and sale of PACE/CIS, the system from which the Company had derived substantially all of its revenues in 1995, and introduced PACE CMS, a comprehensive care management system representing a significant enhancement to PACE/CIS. PACE CMS, the system from which the Company derives substantially all of its revenues, is currently being further enhanced through the addition of a graphical user interface and a three-tier, client/server, open-systems architecture ("Graphical PACE CMS"). Graphical PACE CMS is currently undergoing beta testing and is expected to be available for commercial implementation in early 1997. To date, the Company has successfully marketed and sold only a limited number of the PACE systems. There can be no assurance that the Company will be able to implement successfully additional PACE systems or that the delivery of Graphical PACE CMS will occur on a timely basis, or at all. Furthermore, there can be no assurance that PACE systems will achieve market acceptance. From its inception in 1987 through March 31, 1996, the Company has accumulated net losses of approximately $9.5 million. Losses have resulted principally from costs incurred in research and development of the Company's technologies and from general and administrative costs. These costs have significantly exceeded the Company's revenues which, from the Company's inception through December 1994, were derived primarily from the sale of systems no longer being marketed by the Company. Prior to April 1995, the Company financed operations with capital contributed by private investors. In April 1995, the Company completed its initial public offering, selling 1,300,000 shares of Common Stock at $5.00 per share for net proceeds to the Company of approximately $5.5 million. Effective as of the closing of the initial public offering, all outstanding shares of the Company's preferred stock (the "Preferred Stock") issued during previous rounds of private financing were converted to Common Stock on a one-to-one basis. Since April 1995, the Company has added several new members in key positions of its management team. They include Matthew Terstriep, Vice President of Sales and Marketing, Ronald Wunder, Vice President of Technology and, most recently, Mark J. Emkjer as Chief Executive Officer. Mr. Emkjer is also a director of the Company. The Company is continuing to expand its sales, marketing and customer support organizations and is increasing its investment in research and development efforts. See "Business -- Sales and Marketing" and "Management." The Company derives substantially all of its revenues from the sale of PACE systems including: (a) software license fees, (b) implementation fees and (c) hardware sales. Software license fees are generated from contracts that grant clients the right to use the Company's software. These contracts typically provide a one-time software license fee to be paid during implementation. Implementation fees include revenues derived from the installation of hardware and the implementation and training services related to the sale of software licenses. Hardware sales are generated from the sale of third-party manufactured hardware, typically sold in conjunction with the Company's software. Following implementation of the software, the Company also generally receives monthly revenues for customer support services. Customer support services include revenue from maintenance and support services, miscellaneous customization following implementation and consulting services. The Company recognizes revenues in accordance with Statement of Position 91-1, "Software Revenue Recognition," which requires that systems be delivered, collectibility be probable and there be no significant uncertainty about acceptance. The Company generally records software license fees and implementation fees over the period of implementation. Revenues from hardware sales are recorded at the time of delivery and customer support services revenue is recorded monthly. Revenues are not recorded at the time of contract signing, and because of the Company's revenue recognition policy, there is frequently a period of time between the contract signature date and the actual recording of revenues. The Company capitalizes software development costs that relate primarily to either the development of new software or significant enhancements to existing software. Software costs are capitalized in accordance with Statement of Financial Accounting Standards No. 86 "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed," which requires capitalization of expenses following determination of technical feasibility and until the software is ready for general release. The capitalized costs are amortized by the greater of (a) the ratio that current gross revenues for software sales bear to the total of current and anticipated future gross revenues for such software sales, or (b) the straight-line method over the estimated economic life of the software, usually three to seven years. In 1994, the Company capitalized $1.5 million related to software acquired from a third party developer. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain items from the Company's statements of income expressed as a percentage of net revenues. <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ----------------------- ------------------ 1993 1994 1995 1995 1996 ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> Net revenues: Systems revenues 62.4% 13.9% 83.2% 79.6% 87.6% Customer support services 37.6 86.1 16.8 20.4 12.4 ------ ------ ------ ----- ----- 100.0 100.0 100.0 100.0 100.0 ------ ------ ------ ----- ----- Costs and expenses: Cost of systems revenues 23.4 17.0 29.8 14.2 14.2 Client services 36.4 115.5 41.7 37.2 21.0 Product development 20.0 564.2 47.1 29.7 42.1 Sales and marketing 69.0 164.7 41.6 38.6 39.9 General and administrative 94.5 194.5 61.8 64.4 64.3 ------ ------ ------ ----- ----- 243.3 1,055.9 222.0 184.1 181.5 ------ ------ ------ ----- ----- Loss from operations (143.3) (955.9) (122.0) (84.1) (81.5) Other income (expense), net (3.5) (3.1) 6.1 (2.3) 3.1 ------ ------ ------ ----- ----- Loss before income taxes (146.8) (959.0) (115.9) (86.4) (78.4) Provision for income taxes 0.0 0.0 0.0 0.0 0.0 ------ ------ ------ ----- ----- Net loss (146.8)% (959.0)% (115.9)% (86.4)% (78.4)% ====== ====== ====== ===== ===== </TABLE> THREE MONTHS ENDED MARCH 31, 1995 AND 1996 NET REVENUES: Net revenues include systems revenues and customer support services. Net revenues were $401,828 and $805,196 for the three months ended March 31, 1995 and 1996, respectively, representing an increase of 100.4%. Systems revenues comprised 79.6% and 87.6%, of net revenues for the three months ended March 31, 1995 and 1996, respectively. This increase was partially attributable to the sale of larger systems incorporating increased functionality. The Company also began to recognize systems revenues on a 20-site license agreement in the three months ended March 31, 1996, following acceptance of a pilot project from a healthcare provider with a nationwide network of 37 rehabilitation hospitals. Revenue from this healthcare provider accounted for approximately 63.2% of net revenues for the three months ended March 31, 1996. COST OF SYSTEMS REVENUES: Cost of systems revenues includes hardware purchases, commissions and royalties payable to third parties. Cost of systems revenues was $56,992 and $114,083 in the three months ended March 31, 1995 and 1996, respectively, representing an increase of 100.2%, primarily as a result of costs associated with increased net revenues. Cost of systems revenues totaled 14.2% of net revenues for each of the three months ended March 31, 1995 and 1996. Cost of systems revenues as a percentage of net revenues is expected to fluctuate in the future, depending on the relative mix of software and hardware. CLIENT SERVICES: Client services expenses include salaries and expenses related to implementation and support. Client services expenses were $149,560 and $168,918 in the three months ended March 31, 1995 and 1996, respectively, representing an increase of 12.9%. The increase was primarily due to an increase in implementation personnel required to support the increase in systems sold. The Company expects that client services expenses will increase in the future, although client services expenses as a percentage of net revenues may fluctuate from period to period. PRODUCT DEVELOPMENT: Product development expenses include salaries and expenses related to development and documentation of software systems, net of capitalized software development costs. Product development expenses were $119,542 and $338,950 in the three months ended March 31, 1995 and 1996, respectively, representing an increase of 183.5%. This increase was primarily due to increases in personnel and payroll-related expenses related to the Company's expanded development efforts and an increase in amortization of capitalized costs. The Company capitalized $81,144 and $94,217 of product development costs and amortized $13,560 and $60,048 in the three months ended March 31, 1995 and 1996, respectively. The Company expects that product development expenses will increase in the future, although product development expenses as a percentage of revenues may fluctuate from period to period. SALES AND MARKETING: Sales and marketing expenses include salaries, advertising, trade show costs and travel expenses related to the sale and marketing of the Company's systems. Sales and marketing expenses were $155,243 and $321,047 for the three months ended March 31, 1995 and 1996, respectively, representing an increase of 106.8%. This increase was primarily due to increases in personnel and payroll-related expenses as the Company expanded its sales and marketing efforts. The Company expects the level of sales and marketing expenses will increase in the future, although sales and marketing expenses as a percentage of net revenues may fluctuate from period to period. GENERAL AND ADMINISTRATIVE: General and administrative expenses include salaries and expenses for the corporate administration and finance, legal, insurance, rent and depreciation expenses. General and administrative expenses were $258,917 and $517,403 for the three months ended March 31, 1995 and 1996, respectively, representing an increase of 99.8%. The increase was primarily due to one-time costs of approximately $250,000 associated with the recruiting and hiring of the Company's new Chief Executive Officer in March 1996. The Company expects the level of general and administrative expenses to increase in the future, although general and administrative expenses as a percentage of net revenues may fluctuate from period to period. OTHER INCOME (EXPENSE), NET: Other income (expense), net is comprised of interest income and expenses. Other income (expense), net was $(9,295) and $25,085 for the three months ended March 31, 1995 and 1996, respectively, representing a change of $34,380, primarily as a result of interest income associated with higher cash balances following the Company's initial public offering. In addition, interest expense was reduced following the repayment of $500,000 in bridge notes in April 1995, with proceeds from the initial public offering. FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995 NET REVENUES: Net revenues were $377,833 and $2.1 million in 1994 and 1995, respectively, representing an increase of 450.7%. During 1994, the Company was focused primarily on the development of PACE CMS, which was introduced to the marketplace in 1995, and the Company does not expect this rate of revenue growth to continue. Systems revenues as a percentage of net revenues were 13.9% and 83.2% of net revenues in 1994 and 1995, respectively. Customer support services revenues were 86.1% and 16.8% of net revenues in 1994 and 1995, respectively. COST OF SYSTEMS REVENUES: Cost of systems revenues was $64,101 and $621,023 in 1994 and 1995, respectively. The increase was primarily a result of costs associated with increased systems revenue. Cost of systems revenues as a percentage of net revenues was 17.0% and 29.8% in 1994 and 1995, respectively. This increase was a result of a shift in product mix to include a higher percentage of hardware sales, which typically have lower gross margins. CLIENT SERVICES: Client services expenses were $436,384 and $868,382 in 1994 and 1995, respectively, representing an increase of 99.0%. The increase was primarily due to increases in personnel and payroll-related expenses as client services were expanded to support the implementation of new sites in 1995. PRODUCT DEVELOPMENT: Product development expenses were $2.1 million and $980,144 in 1994 and 1995, respectively, representing a decrease of 46.0%. The decrease was attributable to a one-time expenditure in 1994 of $1.5 million related to the development of software by a third party. This decrease was partially offset by an increase in 1995 of personnel and payroll-related expenses attributable to the addition of personnel related to Graphical PACE CMS and, to a lesser extent, an increase in amortization expense. The Company capitalized $1,691,305 and $147,861 of software development costs, and amortized $198,253 and $247,610 in 1994 and 1995, respectively. SALES AND MARKETING: Sales and marketing expenses were $622,302 and $865,105 in 1994 and 1995, respectively, representing an increase of 39.0%. This increase was primarily due to increases in personnel and payroll-related expenses and increases in fees for consulting services paid to a third party. GENERAL AND ADMINISTRATIVE: General and administrative expenses were $734,934 and $1.3 million in 1994 and 1995, respectively, representing an increase of 74.9%. The increase was primarily due to an increase in professional services, an additional allowance for doubtful accounts, an increase in rent expense following the Company's expansion of its office space, and an increase in insurance expense related to the Company's director's and officer's liability coverage. OTHER INCOME (EXPENSE), NET: Other income (expense), net was $(11,657) and $126,987 for 1994 and 1995, respectively, representing a change of $138,644, primarily due to higher invested cash balances resulting from the Company's initial public offering. FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994 NET REVENUES: Net revenues were $697,419 and $377,833 in 1993 and 1994, respectively, representing a decrease of 54.2%. This decrease was primarily the result of the Company's decision in 1993 to discontinue marketing the nursing station care plan management system as a stand-alone product and focus the Company's efforts on developing and marketing PACE/CIS. Due to the long sales cycle for the Company's systems, the first contracts for PACE/CIS were not executed until late 1994, and the Company did not begin to recognize revenue on those contracts until 1995. Systems revenues as a percentage of net revenues were 62.4% and 13.9% in 1993 and 1994, respectively. Customer support services were 37.6% and 86.1% of net revenues in 1993 and 1994, respectively. COST OF SYSTEMS REVENUES: Cost of systems revenues was $163,432 and $64,101 in 1993 and 1994, respectively, representing a decrease of 60.8%. This decrease was primarily a result of lower cost of sales associated with decreased system sales. Cost of systems revenues as a percentage of net revenues was 23.4% and 17.0% in 1993 and 1994, respectively. This decrease was primarily a result of the Company's decision to discontinue the marketing and sale of the nursing station care plan management system and focus on developing and marketing PACE/CIS. CLIENT SERVICES: Client services expenses were $253,682 and $436,384 in 1993 and 1994, respectively, representing an increase of 72.0%. The increase was primarily due to an increase in implementation personnel to support anticipated systems sales. PRODUCT DEVELOPMENT: Product development expenses were $139,623 and $2.1 million in 1993 and 1994, respectively, representing an increase of 1,426.7%. This increase was primarily attributable to an expenditure of $1.5 million in 1994 related to the development of software by a third party. Product development expenditures increased to a lesser extent due to higher personnel and payroll related expenses and an increase in amortization expense. The Company capitalized $260,508 and $1,691,305 of software development costs and amortized $81,859 and $198,253 in 1993 and 1994 respectively. SALES AND MARKETING: Sales and marketing expenses were $480,916 and $622,302 in 1993 and 1994, respectively, representing an increase of 29.4%. This increase was primarily due to increases in personnel and payroll-related expenses attributable to increases in the Company's sales and marketing personnel. GENERAL AND ADMINISTRATIVE: General and administrative expenses were $659,387 and $734,934 in 1993 and 1994 respectively, representing an increase of 11.5%. This increase was primarily due to increases in personnel and payroll-related expenses. OTHER INCOME (EXPENSE), NET: Other income (expense), net was $(24,511) and $(11,657) for 1993 and 1994, respectively, representing a change of $12,854, primarily as a result of a reduction in notes payable as a result of application of proceeds from sales of Preferred Stock. PROVISION FOR INCOME TAXES As of March 31, 1996, no provision for income tax benefit has been recorded due to the Company recording a valuation allowance on the deferred tax assets. NET OPERATING LOSS CARRYFORWARDS At December 31, 1995, the Company had net operating loss ("NOL") carryforwards of approximately $7.2 million to offset future federal taxable income, if any. In accordance with Section 382 of the Internal Revenue Code of 1986, as amended, a change in ownership of the Company of greater than 50% within a three-year period results in an annual limitation of the Company's ability to utilize its NOL carryforwards which accrued during the tax periods prior to the change in ownership. The Company has NOL carryforwards of approximately $4.9 million which are subject to an annual limitation of approximately $1.4 million due to a change in ownership resulting from the Company's initial public offering. The Company has an NOL carryforward of approximately $2.3 million which is not subject to any limitation. The Company does not anticipate that this offering will result in a change of ownership under Section 382 of the Code and accordingly does not anticipate any further NOL carryforward limitation at this time. However, there can be no assurance that any subsequent issue of capital stock by the Company or transfer of capital stock by an existing shareholder would not cause a change in ownership. QUARTERLY RESULTS OF OPERATIONS The following table contains quarterly operating results for the fiscal years ended December 31, 1994 and 1995 and the three month period ended March 31, 1996. This quarterly information is unaudited, has been prepared on the same basis as the annual financial statements and, in the opinion of the Company's management, reflects all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the information for the period presented. Operating results for any quarter are not necessarily indicative of results for any future period. <TABLE> <CAPTION> QUARTER ENDED ---------------------------------------------------------------------------- MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, 1994 1994 1994 1994 1995 1995 ----------- ----------- ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> Net revenues: Systems revenues $ 11,152 $ 16,298 $ 20,464 $ 4,432 $ 320,022 $ 403,158 Customer support services 80,337 84,204 81,955 78,991 81,806 100,337 ----------- ----------- ----------- ----------- ----------- ----------- 91,489 100,502 102,419 83,423 401,828 503,495 ----------- ----------- ----------- ----------- ----------- ----------- Costs and expenses: Cost of systems revenues 9,408 10,408 20,012 24,273 56,992 134,829 Client services 75,572 90,721 113,845 156,246 149,560 204,215 Product development 95,930 97,989 67,643 1,870,054 119,542 209,571 Sales and marketing 133,921 159,226 185,772 143,383 155,243 214,280 General and administrative 190,392 209,410 221,675 113,457 258,917 232,087 ----------- ----------- ----------- ----------- ----------- ----------- 505,223 567,754 608,947 2,307,413 740,254 994,982 ----------- ----------- ----------- ----------- ----------- ----------- Loss from operations (413,734) (467,252) 506,528 (2,223,990) (338,426) (491,487) Other income (expense), net (2,635) (4,510) (2,117) (2,395) (9,295) 37,971 ----------- ----------- ----------- ----------- ----------- ----------- Loss before income taxes (416,369) (471,762) (508,645) (2,226,385) (347,721) (453,516) Provision for income taxes -- -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- Net loss $ (416,369) $ (471,762) $ (508,645) $(2,226,385) $ (347,721) $ (453,516) =========== =========== =========== =========== =========== =========== Loss per common and common equivalent share $ (0.40) $ (0.46) $ (0.49) $ (3.39) $ (0.34) $ (0.14) =========== =========== =========== =========== =========== =========== Weighted average number of common and common equivalent shares 1,047,215 1,028,252 1,028,251 1,069,337 1,028,139 3,140,026 </TABLE> (wide table continued from above) QUARTER ENDED ------------------------------------- SEPT. 30, DEC. 31, MARCH 31, 1995 1995 1996 ----------- ----------- ----------- $ 479,134 $ 528,391 $ 705,052 91,676 76,272 100,144 ----------- ----------- ----------- 570,810 604,663 805,196 ----------- ----------- ----------- 192,918 236,284 114,083 267,330 247,277 168,918 231,531 419,500 338,950 233,416 262,166 321,047 333,607 461,006 517,403 ----------- ----------- ----------- 1,258,802 1,626,233 1,460,401 ----------- ----------- ----------- (687,992) (1,021,570) (655,205) 54,169 44,142 25,085 ----------- ----------- ----------- (633,823) (977,428) (630,120) -- -- -- ----------- ----------- ----------- $ (633,823) $ (977,428) $ (630,120) =========== =========== =========== $ (0.15) $ (0.78) $ (0.15) =========== =========== =========== 4,152,199 4,152,199 4,152,199 The Company believes that its future operating results will be subject to annual and quarterly fluctuations due to a number of factors, some of which are outside the control of the Company. These factors include market acceptance of, and fluctuations in, the average selling prices of the Company's systems and the products of its competitors, the timing of significant orders and the duration of the implementation of those orders, the Company's relatively long sales cycle, loss of customers due to consolidation in the health care industry, customers' procurement cycles and changes in customer budgets, investments by the Company in research and development and sales and marketing and other corporate resources, timing of the introduction by the Company and its competitors of new systems and enhancements to existing systems, the relative mix of systems and services sold by the Company, changes in the Company's strategic alliances, changing customer requirements, changes in the regulatory environment and general economic conditions. Historically, a disproportionately large number of sales contracts have been entered into in the second half of the year as a consequence of hospital procurement cycles. Because of the manner in which the Company recognizes revenue, substantial portions of the revenues from such sales contracts are not likely to be recorded in the Company's financial statements until periods subsequent to those in which such contracts are signed. In addition, the Company plans to increase its operating expenses to fund greater levels of research and development, increase its sales and marketing operations, develop new distribution channels and broaden its customer support capabilities. To the extent that such expenses precede or are not subsequently followed by increased revenues, the Company's business, operating results and financial condition will be materially, adversely affected. Further, due to the relatively fixed nature of most of the Company's costs, any unanticipated shortfall in revenue in any fiscal quarter would have a material adverse effect on the Company's results of operations in that quarter and could have a material adverse effect on the Company's business and financial condition. As a result of the foregoing, and because PACE CMS has only recently been introduced and a limited number of systems sold, the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as any indication of future performance. Due to all of the foregoing factors, it is likely that in some future quarter the Company's operating results will be below the expectations of public market analysts and investors. In such event, the price of the Common Stock could be materially adversely affected. LIQUIDITY AND CAPITAL RESOURCES Since inception in 1987, the Company's primary source of funding for working capital needs, capital expenditures and its operating losses has been from the sale of common and convertible preferred stock. During this time, the Company completed seven private placements, receiving approximately $7.8 million in aggregate net proceeds and also completed its initial public offering in April 1995, receiving approximately $5.5 million in net proceeds. For the three years ending December 31, 1993, 1994 and 1995, the Company reflected net losses of $1.0 million, $3.6 million and $2.4 million, respectively, resulting in net cash used in operations for each of the years of $768,251, $2.5 million and $2.5 million, respectively. During the three months ended March 31, 1995 and 1996, the Company reflected net losses of $347,721 and $630,120, respectively, resulting in net cash used in operations of $346,189 and $345,170, respectively. Net cash used in investing activities totaled $846,463, $292,670 and $483,237 for the years ending December 1993, 1994 and 1995, respectively, and $166,153 and $178,968 for the three months ended March 31, 1995 and 1996, respectively. Cash used in investing activities was primarily for the purchase of furniture and equipment and capitalized software development costs. Cash provided by financing activities totaled $1.6 million, $2.9 million and $5.6 million for the three years ending December 31, 1993, 1994 and 1995, respectively, and $1.0 million for the three months ended March 31, 1995. For the three months ended March 31, 1996, the Company used net cash of $751,497, primarily for the repayment of notes payable and long-term obligations. As of March 31, 1996, the Company had working capital of $1.6 million, including a cash balance of $1.6 million. At that date, the Company did not have material long-term obligations or commitments for capital expenditures. As of May 31, 1996, the Company entered into a $1.0 million unsecured line of credit at a variable interest rate (8.25% as of May 31, 1996) under which no amount was outstanding as of June 15, 1996. The line of credit expires on April 30, 1997. At March 31, 1996, the Company had net accounts receivable of $678,007. Included in accounts receivable are unbilled accounts receivable that were recognized in revenue prior to when payments were due to the Company under the customer contracts. Accounts payable, customer deposits and accrued expenses totaled $677,307 as of March 31, 1996. The Company believes that the net proceeds to the Company from this offering, combined with its currently available funds, will meet its cash requirements for approximately six months. Thereafter, or sooner if necessary or appropriate, the Company may need to raise additional funds through public or private financings, including equity financings, which may be dilutive to shareholders. There can be no assurance that the Company will be able to raise additional funds if or when its capital resources are exhausted, or that funds will be available on terms attractive to the Company. If adequate funds are not available, the Company may be required to delay, reduce the scope of or eliminate one or more of its research or development programs or projects, which could have a material adverse effect on the Company's business, financial condition and results of operation. Although increases in salaries and prices of materials can adversely affect the Company's results of operations, the Company generally believes it will be able to increase its selling prices to offset such increased costs. The Company does not believe that inflation has had a material impact on its results of operations over the past several years. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). SFAS No. 123 establishes a new financial accounting and reporting standard for stock-based employee compensation plans and for transactions in which an entity issues its equity instruments to acquire goods and services from non-employees. The new measurement standard prescribed by SFAS No. 123 is optional for employee awards, and the Company is permitted to account for its employee stock incentive and stock purchase plans under a previously issued accounting standard. The Company does not expect to adopt the new accounting standard; consequently, SFAS No. 123 will not have an impact on the Company's financial condition or results of operations. However, the Company will be subject to certain disclosure requirements imposed by SFAS No. 123. BUSINESS INTRODUCTION PACE develops and markets advanced patient care management software systems that enable health care providers to standardize the delivery of care, maximize resource utilization and improve clinical outcomes. The Company's enterprise-wide, client/server applications automate charting, clinical workflow processes and the clinical pathways that are increasingly being incorporated into health care practices. The Company's core system, PACE CMS, is a modular suite of advanced software applications that provides hospitals and integrated delivery systems a comprehensive system for interdisciplinary documentation, nursing care planning, clinical pathway management and enterprise-wide order management, all at the point-of-care. The Company believes that its systems increase the productivity of nurses and ancillary labor resources, by improving the accuracy and legibility of documentation, reducing clerical tasks such as entering orders for tests, services, consultations and treatments, enhancing communications and coordination of care among members of the patient care team, providing real-time access to detailed patient data at the point of care, facilitating integration of appropriate clinical pathways into patient care plans and treatment regimes, integrating critical patient care information into enterprise-wide, computer-based patient record systems, and, ultimately, improving the quality of care. INDUSTRY OVERVIEW Over the past two decades, health care costs have risen dramatically relative to the overall rate of inflation. Historically, reimbursement for health care organizations has been based on a fee-for-service model of payment. With increasing pressure to reduce costs, managed care organizations and other payors are shifting the economic risk for the delivery of care to providers through alternative reimbursement models, including capitation and fixed fees. This pressure has forced providers to deliver more cost-effective services, while at the same time maintaining or improving the quality of care. The need to manage the delivery of care in a more cost-effective manner has led to an increased demand for clinical information systems that enable providers to measure, monitor and improve clinical processes. The availability of complete, accurate, timely and cost-effective patient information is essential to controlling health care costs while providing high quality patient care. Today, most essential clinical patient care documentation is still stored on paper. The current use of paper-based hospital records is inherently inefficient due to the difficulty of disseminating information throughout an organization, the inability to immediately incorporate changes in a patient's status into the record and the likelihood of transcription errors arising from the redundant data entry. These inefficiencies are driving the growth of point-of-care electronic medical record systems that allow integration from disparate information systems and automate the entry and management of essential patient care data. In addition, the health care industry is moving towards the adoption of computer-based, standardized nursing care plans and clinical pathways. Nursing care plans include the basic steps required in the daily process of delivering patient care including, among others, the routine documentation of vital statistics, administration of medications and patient education. The Company believes that there is increasing pressure to implement these systems from many managed care organizations, accrediting bodies such as the Joint Commission on Accreditation of Health Care Organizations ("JCAHO"), policy making organizations such as the National Academy of Sciences and the Institute of Medicine, and various federal and state regulatory bodies. Clinical pathways include essential elements of daily care required through the entire episode of care, regardless of their impact on outcomes. By utilizing clinical pathways, caregivers can begin to standardize the provision of care and seek to ensure more consistent outcomes. To develop a clinical pathway, health organizations generally appoint a multi-disciplinary committee to analyze the treatment plans and clinical outcomes of many similarly diagnosed patients in order to determine the statistically significant treatment factors necessary to deliver more consistent, higher-quality outcomes. The development of a clinical pathway in such a manner for each diagnosis typically requires up to one year to complete. Once a clinical pathway has been developed, hospitals often experience difficulty implementing the pathway due to the complexities associated with dissemination of such procedures and differing physician practices. In light of these fundamental changes in the health care industry, a need exists for a health care information system that assists clinicians in the management of patient care from hospital admission to follow-up assessment. A comprehensive patient care management system must be able to manage patient information, nursing care plans and clinical pathways for providers. In order to assist providers in improving the delivery of care, a patient care management system must also be able to produce valuable benchmark data and outcomes analyses for health care administrators. THE PACE SOLUTION The Company's systems and services address the industry's need for advanced point-of-care applications which automate and standardize charting functions, clinical workflow processes and clinical pathways. The Company's open systems architecture allows PACE CMS to be integrated with a health care provider's existing information systems, including financial management, admissions, pharmacy, laboratory and other ancillary systems. Key attributes of PACE CMS include: * PACE CMS begins to build a point-of-care electronic medical record during the admissions assessment. PACE CMS provides an extensive reference source for assisting clinicians in establishing nursing care plans for patients, based on the physician's diagnosis. PACE CMS also increases clinical workflow efficiency by automating and standardizing the documentation of patient care, including the recording of vital signs, fluid balances, daily care plan flow sheets, medication administration and patient education. Once an initial physician diagnosis has been established, a clinical pathway can be assigned by the physician. * PACE CMS's point-of-care technology replaces traditional charting and data entry systems, resulting in more accurate, complete and timely patient records. PACE CMS reduces the time required to record patient information, eliminates certain documentation redundancies and errors, reduces medication errors, and improves the general quality, accuracy and availability of patient records. All patient charting can be performed at the point-of-care with automatic updating of the clinical database. Patient data is available on a real-time basis at the point-of-care or at any work station throughout the institution. * Using PACE CMS, health care providers can concurrently monitor the clinical pathway, chart patient care against the clinical pathway, note variances to the clinical pathway and address outcomes from the clinical pathway. The clinical pathway is updated immediately while the clinician is on-line, and reports are generated automatically. In addition, multi-disciplinary clinical pathways may then be integrated with charting and order management components of patient care. * Using PACE CMS to maintain point-of-care electronic medical records and clinical pathways, a health care provider can continually monitor patient outcomes against clinical pathways. This capability allows health care providers to continually update and refine clinical pathways with a goal of improving patient outcomes and increasing clinical efficiencies. The Company believes that PACE systems are differentiated from other health care decision support systems by their breadth of functionality and flexibility in use. The PACE Clinical Library, which is part of the PACE CMS core system, provides an extensive reference source for assisting clinicians in establishing nursing care plans. The modular nature of PACE CMS provides flexibility to tailor the system to the specific needs of the customer. The ability of PACE CMS to provide point-of-care decision support and pathway management from within the system and on a real-time basis is a key advantage of PACE CMS. The Company expects that the user-friendly nature of Graphical PACE CMS, once completed, will further differentiate the Company's systems from its competitors. BUSINESS STRATEGY PACE's objective is to become a leading supplier of health care information systems that provide technologically advanced clinical decision support, workflow enhancement and process automation at the point-of-care. The principal elements of this business strategy include the following: PROVIDE TECHNOLOGICALLY ADVANCED POINT-OF-CARE SYSTEMS. The Company has invested significant resources in the development of its open-system, three-tier, client/server architecture, which allows PACE CMS to be marketed either as a comprehensive solution to health care information needs or as a product complementary to existing information systems. This advanced architecture enables enhanced flexibility and scalability in application and utilizes a graphical user interface, client/server architecture and a relational database. Graphical PACE CMS is currently in beta testing and is expected to be available for commercial implementation in early 1997. The Company is committed to staying at the forefront of technological advances in the health care information area and to applying new computer software technologies to the development, implementation and support of its point-of-care systems. FORGE STRATEGIC ALLIANCES WITH JOINT MARKETING PARTNERS. To increase its market share with large hospitals, integrated health care providers and multi-entity purchasing groups, the Company intends to leverage its direct sales and marketing efforts through the development of strategic alliances with vendors of complementary health care information products. The Company's advanced architecture allows PACE CMS to be interoperable with other health care information systems. The Company believes that relationships such as the one developed with Sunquest, which has an installed customer base of approximately 600 hospitals, will play a significant role in determining the future success of PACE CMS sales to these larger hospitals, integrated delivery systems and multi-entity purchasing groups. INCREASE INVESTMENT IN SALES AND MARKETING. In conjunction with the introduction of Graphical PACE CMS, the Company intends to make significant investments in implementing a comprehensive sales and marketing program to accelerate market penetration. The Company intends to significantly increase the size of its direct sales and client services staff and establish selected numbers of premier sites where a full implementation of Graphical PACE CMS can be demonstrated to prospective customers. In addition, the Company seeks to expand market awareness of PACE CMS through industry forums, trade advertising and directed mailings. DELIVER A TOTAL SOLUTION TO CUSTOMERS. The Company is committed to delivering a total solution to its customer's patient care management system and clinical decision support needs. PACE provides technologically advanced systems, as well as high quality, value-added consulting services to best utilize PACE CMS applications. To that end, the Company intends to augment the expertise of its current customer service staff and offer customers fee-based consultation on methodologies, workflow improvement, and clinical pathway generation and analysis. DEVELOP AND INTRODUCE THE PACE CRITICAL PATHWAY ANALYZER. The Company is developing, in conjunction with Iowa State University, the PACE Critical Pathway Analyzer ("CPA"). The CPA analyzes clinical data stored within a provider's medical records and suggests a critical pathway for a given diagnosis. Using advanced statistical algorithms to develop a critical pathway based on an enterprise's actual practice significantly reduces the time clinical staff spend performing the research and analysis required for pathway development. PRODUCTS The modular configuration of PACE CMS addresses the needs of both large and small hospitals, integrated delivery systems and multi-entity purchasing groups. While PACE CMS has been designed as a comprehensive information system, because of its advanced architecture, it can be easily integrated with products of other leading providers of health care information systems. PACE CMS is comprised of a core system which includes fundamental patient care management functionalities, as well as clinical specialty and companion modules that contain value enhancing applications that may be applicable to a particular provider's system. Clinical specialty and companion modules may be purchased on an add-on basis by PACE clients subsequent to initial implementation of the PACE CMS core system. PACE CARE MANAGEMENT SYSTEM <TABLE> <CAPTION> <S> <C> <C> CORE SYSTEM ** Medical/Surgical System + Admission Assessments + Flow Sheets ** Clinical Library + Care Planning >> Vital Signs ** On-Line Policies & + Nursing Assessments >> Intake & Output Mgmt. Procedures + Daily Cares/Nursing >> Neuro Check ** Patient Education Interventions >> Patient Control ** Physician View Screens + Kardex Analgesic ** Screen & Forms Builder + Patient Acuity Capture >> Hemodialysis >> Dietary </TABLE> CLINICAL SPECIALTY COMPANION MODULES MODULES ** Critical Care/ICU ** Clinical Database ** Emergency Department ** Order Management/Results ** Maternal/Child Reporting ** Pediatrics ** Clinical Pathway Manager ** Peri-Operative ** Critical Pathway Analyzer* ** Rehabilitation Therapies ** On-Line Medication Charting ** Respiratory Therapy * Under development CORE SYSTEM. The PACE CMS core system provides the essential clinical record-keeping, workflow automation and clinical decision support functionality required by most hospitals and integrated delivery systems at the point-of-care. The core system provides point-of-care charting from the admissions assessment stage through post-discharge follow-up. Its functions include more than 1,000 proposed nursing care plans, automatic calculations such as fluid intake and output totals, as well as a variety of flow sheets and other JCAHO care planning standards that are supported throughout the system. The core system helps reduce errors through the use of certain prompts or alerts that appear on the screen upon entry of data, reducing the risk of improper clinical decisions and improving both the quality of care and its documentation. The PACE CMS core system reduces documentation inefficiencies and enhances the standardization of clinical notations and assessments. In addition, using the Screen and Forms Builder, PACE clients can customize data entry screens, files, reports as well as the workflow of the PACE CMS system to meet their specific needs and business practices. PACE CMS clinical specialty and companion modules provide additional, enhanced applications and advanced functionalities to the core system, allowing PACE CMS to cover a broad spectrum of patient care. The Company's companion modules have been designed to be quickly and efficiently integrated with the PACE CMS core system and with other health care information systems. CLINICAL SPECIALTY MODULES. The Company's clinical specialty modules are designed to meet the specific enterprise-wide documentation and functionality needs of various clinical specialties. For example, the Peri-Operative Module has been designed to meet the specific information management needs of the operating room. This module allows for peri-operative data to be efficiently integrated with the charting functions of other clinical disciplines. As a result, patient data collected by other disciplines is readily available to the clinician at the time of surgery, greatly assisting the surgical team in routine as well as emergency situations. Specific prompts and alerts have been designed to reduce risks and improve standards compliance during pre-operative preparation. The Emergency Department Module has been designed to meet the documentation requirements of the emergency room. Critical information obtained at the accident scene by paramedics or others can be entered into the system for immediate access upon the patient's arrival at the hospital. Any previous charts or clinical data relating to the patient are immediately available on-line. Allergies, medical/surgical history and other vital information is available in the system, eliminating the need to contact the medical records department and wait for a response. COMPANION MODULES. The Company's companion modules are designed to provide additional multi-disciplinary functionality to the core system and the clinical specialty modules. For example, the Clinical Pathway Manager Module assists clinicians in managing and monitoring a clinical pathway based upon the patient diagnosis, administration assessment, contract payor or practitioner's pathway preference. Once in place, all clinical disciplines granted the requisite security access, including designated physicians, nurses, therapists and technicians, can concurrently monitor the clinical pathway, chart against the clinical pathway, note variances from the clinical pathway and address outcomes. The clinical pathway is updated immediately while the clinician is on-line and reports are generated automatically. The Clinical Pathway Manager Module provides immediate outcomes analysis and variance documentation, integrates with order management systems and allows for enterprise-wide involvement in clinical pathway charting and monitoring. The Company's On-Line Medication Charting Module allows for point-of-care documentation of medication administration. This module, which can interface directly with a health care provider's existing pharmacy system and provide verification levels for a pharmacist's review and signature, includes procedures for allergy checks and alerts prior to the administration of medication. The On-Line Medication Charting Module also provides a schedule of medication to be administered during each clinician shift, thereby assisting in workflow organization and providing guidance and alerts for past due medication, all of which help improve the quality of patient care. Pricing of PACE CMS systems is based on the size of the project and the number of clinical specialty or companion modules added to the PACE CMS core system. The Company derives revenue from software license fees from PACE CMS purchasers, as well as implementation fees and, to a lesser extent, computer hardware sales. The average price of a PACE CMS system has been approximately $320,000. The Company expects this average price to rise as the size and complexity of the systems increases. TECHNOLOGY The Company has made a significant investment in recent years in modifying and enhancing its system architecture and product line. The most recent enhancement is Graphical PACE CMS, which is currently in beta testing and expected to be available for commercial implementation in early 1997. Anticipating the evolution of emerging standards and products in the rapidly changing computer software environment, the Company believes that its investment in developing an advanced, three-tier, client/server, open-systems architecture will enable the Company to remain flexible to enhance its systems and take advantage of these emerging standards. The Graphical PACE CMS architecture consists of a client tier interface implemented in Microsoft Visual C++; a middle tier comprised of applications and program logic written in C and C++; a server tier comprised of a relational database; and an on-line transaction processor. The addition of the middle tier improves application processing speed, thereby increasing performance and allowing greater flexibility than a two-tier architecture. This allows PACE CMS the flexibility to grow to meet client needs. The graphical interface of Graphical PACE CMS has been developed in conjunction with experts specializing in human cognition and graphical artwork, which the Company believes will enhance the intuitive nature of its system. PACE CMS utilizes Windows 95 or NT for the client operating system and Unix or NT for the server operating system. PACE CMS has been designed to operate on hand-held computers, laptop computers and other computer hardware. PACE CMS has been configured for implementation through the establishment of a local area network, or LAN, thereby allowing for wireless technology and ease of use and mobility throughout an entire health care enterprise. The Company currently supports Proxim, Inc. wireless networks. [GRAPHIC DESCRIBING PACE THREE-TIER ARCHITECTURE] SALES AND MARKETING There are approximately 6,500 hospitals and other health care facilities, such as rehabilitation centers and long-term care facilities, in the United States. The majority of these entities have not yet invested in point-of-care, clinical information management systems. The Company believes that the need for health care providers to control costs, document care, adopt standards of care while maintaining or improving the quality of care will require health care providers to invest in new point-of-care, clinical information systems, such as PACE CMS. The Company markets its systems using both its direct sales force and through strategic alliances with vendors of complementary products. The Company markets PACE CMS to larger health care providers principally through its strategic partners and to small-to-mid-sized health care providers principally through its direct sales force. The Company has recently emphasized the recruitment of experienced health care management system professionals to improve the quality of its internal sales force. Sales efforts are actively supported by a marketing communications program targeted to health care providers, their chief executives, chief information officers, chief financial officers, nursing management, information systems managers and physicians. The Company's communications program includes trade show displays newsletters and videos as well as advertising in trade publications, direct mail campaigns, press releases, speaking engagements, and published articles. In addition, PACE is actively pursuing the establishment of a selected number of premier sites that will allow the Company to better demonstrate to prospective clients the full functionality of Graphical PACE CMS. The Company believes that the establishment of such arrangements will enhance significantly its sales and marketing efforts. The sales cycle for point-of-care health care management systems from an initial sales contact to contract signature is typically twelve to eighteen months, depending on the size and governing structure of the prospective customer. During this period, the Company expends substantial time, effort and funds demonstrating the system, preparing a contract proposal and negotiating the contract. In general, the Company does not recognize revenues from sales of systems until after a sales contract has been signed and implemented. To make health care management systems decisions, prospective customers generally form a committee comprised of personnel from several departments, such as administrative, clinical and information systems. The health care provider may also use industry consultants to assist in the evaluation of the health care management system. This committee (or consultant) identifies vendors who meet the health care provider's requirements by issuing requests for information or requests for proposals. This process requires the Company to write in-depth proposals and conduct demonstrations at the prospective customer's site. The Company must also arrange and conduct a prospective customer's visits to current customer sites. In addition, a prospective customer may also visit Company headquarters for corporate overviews and product presentations. This process typically leads to the selection of a vendor of choice. Contract negotiation and signature completes the sales cycle. Although the Company is currently investing, and plans to continue to invest, significant resources to expand its direct sales force and its technical and customer support staff, and to develop strategic alliances, the Company has at times experienced and continues to experience difficulty in recruiting qualified personnel and in establishing necessary third-party relationships. There can be no assurance that the Company will be able to expand successfully its direct sales force or joint marketing relationships or that any such expansion will result in an increase in revenues. The Company maintains a worldwide web address (the "Web"). Its e-mail address is http:www.pacesystems.com. Information contained on the Company's Web site shall not be deemed a part of this Prospectus. STRATEGIC ALLIANCES The Company intends to develop strategic relationships with leading providers of health care information systems in order to increase the Company's presence in the larger hospital and integrated delivery system market segment. The Company anticipates that these relationships will allow PACE to leverage the significantly larger sales forces of such companies, while providing them with a value-added product to sell into their customer base. In May 1996, the Company entered into a three-year, non-exclusive joint marketing and referral agreement with Sunquest pursuant to which each company is allowed to market to each other's current customer base and sell jointly to prospective new clients. Pursuant to this agreement, the Company is obligated to pay to Sunquest a referral fee based on an agreed upon rate for sales of PACE products effected through referrals from Sunquest. The Company is actively engaged in discussions to develop additional joint marketing relationships. To the extent that the Company determines that other marketing agreements, business acquisitions, partnerships or joint venture business relationships will further its business strategies, it will consider entering into such additional relationships. The amount and timing of resources devoted to marketing the Company's systems by these strategic partners are not within the control of the Company. These strategic partners independently could make material marketing and other commercial decisions that could adversely affect the Company's future revenues. CLIENT SERVICES Since early 1996, PACE has utilized a project manager approach to providing a full range of product and support service capabilities to its customers. New customers are assigned a Project Manager who will oversee the implementation of PACE CMS and will have primary customer service responsibility and accountability for the successful implementation of the PACE system. Project managers work closely with the Company's internal sales force, as well as with PACE technicians who specialize in product implementation. The Company's Client Services group is focused on client project management, long-term client service, client satisfaction and, in that way, generally assisting in the successful marketing of the Company's products. PACE's Client Services group provides clients with access to 24-hour, 7-day-a-week technical support, on-line service and on-site service for critical problems. In addition, the Company uses newsletters, user groups and electronic mail to communicate current, new and future product capabilities to its clients. The Company sells hardware and software maintenance services typically for an initial term of at least three years. For software support services, the Company charges an annual fee of approximately 15% of the list price of each software module maintained. For hardware maintenance services, the Company charges the third party hardware manufacturer's list price and receives a fee from the manufacturer for coordinating hardware service. BACKLOG As of March 31, 1996, the Company had ten contracts under which some or all implementation work remained in backlog for an aggregate of approximately $3.0 million. The contract with Continental Medical Systems, Inc., represents approximately 73% of the total amount in backlog. Generally, backlog includes signed contracts with ongoing implementation obligations and revenues yet to be recognized by the Company. Any significant failure by the Company to effectively manage the introduction of new systems or the sales process in order to maintain an adequate backlog, or the failure of the Company to fully realize the benefits of its backlog contract with Continental Medical Systems, Inc., could have a material adverse effect on the Company's business, financial condition and results of operations. At March 31, 1996, the Company had support and maintenance backlog of approximately $400,000, which represents contract support and maintenance services for a period of twelve months. The Company's backlog is not necessarily indicative of future revenues or earnings. Due to the long sales cycle for its systems, the Company is unable to predict with certainty whether a contract proposal will be accepted, when an accepted proposal will result in an executed contract, and what the implementation schedule will be for the executed contract. Therefore, the Company's future results of operations depend in large part on maintaining an adequate backlog. Any significant failure by the Company to effectively manage the introduction of new systems or the sales process in order to maintain an adequate backlog could have a material adverse effect on the Company's business, financial condition and results of operations. CUSTOMERS The Company's customers include health care providers located throughout the United States, but primarily in the Midwest to date. As of June 15, 1996, the Company had 55 health care provider customers using one or more of its systems. Maria Parham Hospital accounted for 12.1%, and Continental Medical Systems, Inc. accounted for 11.3%, of the Company's net revenues in 1995. For the three months ended March 31, 1996, Continental Medical Systems, Inc. accounted for 63.2% of net revenues. Historically, the Company has focused its marketing efforts on the smaller hospital market, which comprises the substantial majority of its customer base to date. More recently, the Company has expanded its marketing efforts to include larger hospitals, integrated delivery systems and multi-entity purchasing groups. Because the Company has limited experience in such markets, it may find that further modifications to its systems are necessary before they become fully funcational. RESEARCH AND DEVELOPMENT The Company has made a substantial commitment in research and product development essential to the long-term success of its business. The Company is developing applications internally, as well as arranging to resell certain applications from third party vendors. One such application the Company resells is the Logical Data Integrator ("LDI"), which enables PACE applications to interface to one or more data sources in any format and presents the information from these sources to the PACE application in a consistent format. Through a business alliance with Mentor Systems, Inc., the Company was able to further enhance its systems architecture by obtaining reseller rights to the LDI. PACE's current research and development efforts are focused primarily on enhancing PACE CMS through the development and introduction of its graphical user interface client presentation, along with its open-systems, three-tier architecture (i.e., the development and introduction of Graphical PACE CMS). Graphical PACE CMS is currently being marketed for commercial implementation in early 1997. There can be no assurance that the Company willl be successful in developing, introducing on a timely basis and marketing such systems or enhancements, that its software will not contain errors that would delay system introduction, shipment or implementation, or that any such new systems or enhancements will be accepted by the market. Software systems as internally complex as those offered by the Company (such as Graphical PACE CMS) frequently contain errors or failures, especially when first introduced or when new versions are released. Although the Company conducts extensive technical and market testing during product development, the Company could be forced to delay commercial implementation of systems to correct software problems or provide enhancements to correct errors in released products. The Company also is developing, in conjunction with Iowa State University, the PACE Critical Pathway Analyzer ("CPA"). The CPA evaluates the clinical data stored within a provider system's medical records and suggests a critical pathway for a given medical diagnosis, group of symptoms, DRG's, or any other selection made for the defined patient population. The suggested pathway is based upon interventions from best practice models of physicians inclinations that have lead to successful outcomes for patients and the provider system. The CPA uses advanced statistical algorithms to analyze aggregated data captured by PACE products and suggests the elements that are necessary to construct a "critical pathway." Critical pathways are a subset of clinical pathways. While a clinical pathway contains essential elements of daily care required through the entire episode of care, regardless of their impact on outcomes, a critical pathway contains only the vital elements in a treatment regimen that have been proven to influence the clinical and financial outcomes of care. Using traditional approaches, a typical clinical pathway for one diagnosis currently takes an organization's committee of multi-disciplinary clinicians up to one year to develop. Using the CPA to develop a clinical pathway based on a facility's actual practice is expected to reduce significantly the time clinical staff spend performing the research and analysis required for pathway developments. COMPETITION The market for clinical information management systems is extremely competitive and rapidly changing. Most of the Company's revenues are derived from lengthy, time-consuming and competitive RFP processes managed by sophisticated purchasers. The Company believes that the principal competitive factors influencing sales decisions in the health care information market include vendor and product reputation, product architecture, functionality and features, ease of use, quality of client support, product performance and price. While the Company believes that it can compete effectively in these areas, there can be no assurance that it will be able to do so with respect to any of such factors. The Company's competitors, which include other providers of clinical support systems, vary in size and in the scope of the products and services they offer. Many such competitors are larger and more established and have substantially more resources than the Company. Many of them have, or may develop or acquire, substantial, installed customer bases in the health care industry. Among the Company's principal competitors are traditional HIS vendors and clinical information systems vendors. These companies include Cerner Corp., Keane Inc., HBO & Company which purchased CliniCom, Inc. in 1995, Meditech Management, Inc., PHAMIS, Incorporated, SMS Technologies, Inc., Hewlett-Packard Co., SpaceLabs Medical Inc., CliniComp, and Emtek Health Care Systems Inc., a subsidiary of Motorola, Inc. INTELLECTUAL PROPERTY The Company currently relies, in part, on a combination of trade secret and copyright laws, software security measures, license agreements and nondisclosure agreements to establish and protect its proprietary rights. Despite the Company's precautions, it may be possible for unauthorized third parties to copy aspects of, or otherwise obtain and use, the Company's software products and technology without authorization. The Company's practice of providing its customers with the source code to the Company's software may increase this risk. In addition, the Company cannot be certain that others will not develop substantially equivalent or superior proprietary technology, or that equivalent systems will not be marketed in competition with PACE CMS, thereby substantially reducing the value of the Company's proprietary rights. As of October 19, 1996, JRS Clinical Technologies, Inc. ("JRS"), an entity that developed for the Company a software base for a nursing documentation system, may distribute to others that software base. Although the Company has modified this software base, a third party that obtained a software base from JRS could gain some benefit toward developing a competitive product. Furthermore, there can be no assurance that any confidentiality agreements between the Company and its employees and consultants or any license agreements with its customers will provide meaningful protection for the Company's proprietary information in the event of any unauthorized use or disclosure of such proprietary information. The Company is not aware that any of its systems infringes or violates the intellectual property rights of third parties. Nonetheless, there can be no assurance that the Company will not become the subject of infringement claims or legal proceedings by third parties with respect to the Company's current or future systems and that such claims or proceedings will not have a material adverse effect on the Company's business, financial condition and results of operations. Moreover, an adverse outcome in litigation or similar adversarial proceedings could subject the Company to significant liabilities to third parties, require expenditure of significant resources to develop non-infringing technology, require disputed rights to be licensed from others or require the Company to cease the marketing or use of certain products any of which events could have a material adverse effect on the company's business, operating results and financial condition. As the number of software systems in the industry increases and the functionality of these systems further overlaps, the Company believes that software developers may become increasingly subject to claims based on intellectual property rights. To the extent the Company wishes or is required to obtain licenses to patents or proprietary rights of others, there can be no assurance that any such licenses will be made available on terms acceptable to the Company. GOVERNMENT REGULATION Under the FDC Act, the FDA has extensive authority to regulate the development, manufacture and sale of medical devices, which generally must receive regulatory clearance or approval prior to commercialization in the United States. To the extent that computer software products are intended to affect the diagnosis and treatment of patients, they likely will be considered medical devices by the FDA. The Company believes that the PACE CMS core system either would not be considered to be a medical device subject to FDA regulation or, for those modules that might be deemed medical devices, would be exempt from significant regulatory requirements, including the requirement of premarket clearance or approval. Certain extensions of the PACE product line currently in development, such as the PACE CPA however, may satisfy the FDC Act medical device definition. In 1989, the FDA issued a draft policy for the regulation of computer products. The particular regulatory requirements applicable to a computer software product under that draft policy depend on the nature and use of the specific product. Certain computer software products, even when considered medical devices, are nonetheless exempt from particular FDA regulatory requirements, including the requirement of FDA premarket clearance or approval. The Company believes that to the extent that any component of the PACE product line is a medical device, it would be exempt from regulation under the draft policy. Nevertheless, such products may still be subject to the FDC Act's general prohibition against adulteration and misbranding. The Company expects, however, that the FDA is likely to become increasingly active in regulating computer software intended for use in the health care setting. Furthermore, there can be no assurance that any final FDA policy governing computer hardware and software products, once issued, or other future laws and regulations concerning the manufacture or marketing of medical devices or health care information systems will not increase the cost and time to market new or existing products. If the FDA chooses to regulate any of the Company's systems as medical devices not exempt from regulation, it could impose extensive requirements upon the Company, including the requirement that the Company seek either FDA clearance of a premarket notification submission demonstrating the device's substantial equivalence to a legally marketed predicate device or approval of a premarket approval application establishing the safety and effectiveness of the device. FDA regulations also govern, among other things, the preclinical and clinical testing, manufacture, distribution, labeling and promotion of medical devices. In addition, the Company could be required to comply with the FDC Act's general controls, including establishment registration, device listing, compliance with good manufacturing requirements, reporting of certain device malfunctions and adverse device events. Noncompliance with applicable requirements could result in, among other things, fines, injunctions, civil penalties, recall or service of products, total or partial suspension of production, failure of the government to grant premarket clearance or approval of products, withdrawal of clearances and approvals, and criminal prosecution. EMPLOYEES As of August 5, 1996, the Company employed 58 full-time personnel and 2 part-time persons of which 5 are executives, 25 are research and product development employees, 15 are client services employees, 9 are sales and marketing personnel, and 6 are administrative and clerical personnel. None of the Company's employees are covered by a collective bargaining agreement and the Company believes that its relationship with its employees is excellent. FACILITIES The Company occupies approximately 11,500 square feet of space at its headquarters in West Des Moines, Iowa, under a lease expiring in May 1997. In addition, the Company occupies approximately 700 square feet in Charlotte, North Carolina. The Company believes that its facilities are adequate to satisfy its currently anticipated business requirements through May 1997. LEGAL PROCEEDINGS The Company is not currently subject to, and none of its property is subject to, any material legal proceedings. MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The directors and executive officers of the Company are as follows: NAME AGE POSITION - ---- --- -------- Mark J. Emkjer 40 Chief Executive Officer and Director Roger D. Huseman 43 Vice President of Finance & Administration, Chief Financial Officer, Secretary and Treasurer Ronald F. Wunder 46 Vice President of Technology Matthew E. Terstriep 43 Vice President of Sales and Marketing Carl S. Witonsky(2) 58 Chairman of the Board of Directors William W. Childs(2) 56 Director John G. Pappajohn(1) 67 Director R. David Spreng(1) 34 Director Gordon M. Derzon(2) 61 Director (1) Audit Committee member (2) Compensation Committee member MARK J. EMKJER joined the Company in March 1996 as Chief Executive Officer and Director. From 1991 through February 1996 Mr. Emkjer worked for Hospital Cost Consultants Inc. ("HCC"), an international provider of managed care solutions, where he initially served as Vice President of Sales and was promoted to President and Chief Executive Officer in 1992. Prior to joining HCC, Mr. Emkjer held positions with Tecxel Hospital Service Corporation as an Executive Vice President from September 1988 through December 1990 and with Foster Medical from June 1984 through August 1988. ROGER D. HUSEMAN joined the Company as Chief Financial Officer in July 1994 and was appointed Secretary and Treasurer of the Company on January 31, 1995. From 1990 through June 1994 Mr. Huseman operated a financial consulting firm specializing in assisting businesses with financial restructuring and financing needs. For four years prior to that he served as President and Director for NonInvasive Monitoring Systems, Inc., a public company located in Sarasota, Florida. RONALD F. WUNDER joined the Company in July 1995 as Vice President of Technology. From 1989 through 1995 Mr. Wunder worked for First Data Corporation, Health Systems Group, a healthcare information system company, located in Charlotte, North Carolina where he served most recently as Vice President of Systems Architecture and New Development. For the 10 years prior to that time he was employed by McDonnell Douglas Health Systems Company in St. Louis which acquired First Data Corporation in 1989. MATTHEW E. TERSTRIEP joined the Company in April 1995 as Vice President of Sales and Marketing. From 1990 to 1995 Mr. Terstriep worked for Continental Health Systems, a health care information system company, located in Overland Park, Kansas, where he served most recently as Vice President of Sales and Marketing. Prior to his employment with Continental, Mr. Terstriep worked for Shared Medical Systems ("SMS") between 1978 and 1988 where he held a variety of positions in sales management, installation management and customer support. CARL S. WITONSKY has been a director of the Company since April 1994, and Chairman of the Board of Directors since March 15, 1995. From 1992 to date, he has been an independent consultant to investment bankers and health care organizations on health care information matters. He was the Chairman and Chief Executive Officer of Gabrieli Medical Information Systems ("GMIS") from 1989 to 1992. Prior to GMIS, Mr. Witonsky served as Vice President of Systems & Operations of Shared Medical Systems from 1975 to 1988. He is a director of Medicode, a Salt Lake City-based clinical informatics company, and of HealthWorks Alliance, a Wayne, Pennsylvania based health care informatics company. WILLIAM W. CHILDS has been a director of the Company since February 1990. He has been a Senior Vice President of CyCare, an information systems company providing physicians' office software, since April 1995. Prior to that, he was the President and CEO of Health Data Analysis, Inc. from 1984 until May 1995. Mr. Childs was the founder and Editor-in-Chief of HEALTHCARE INFORMATICS, a leading hospital information systems magazine published by Health Data Analysis, Inc. He also is the founder or co-founder of several other magazines, including COMPUTERS IN HEALTHCARE, HEALTHCARE COMPUTING COMMUNICATIONS CANADA, and R.F. DESIGN. He was also one of the founders of Continental Healthcare Systems and TDS Healthcare Systems Corp. JOHN G. PAPPAJOHN has been a director of the Company since January 1994. Since 1969, Mr. Pappajohn has been the sole owner of Pappajohn Capital Resources, a venture capital fund and President of Equity Dynamics, Inc., a financial consulting firm, both located in Des Moines, Iowa. Mr. Pappajohn also serves as a Director of a number of private companies and of the following public companies: GalaGen, Inc.; Drug Screening Systems, Inc.; CORE, Inc.; BioCryst Pharmaceuticals, Inc.; OncorMed, Inc.; Fuisz Technologies Ltd.; and United Systems Technology Inc. R. DAVID SPRENG has been a director of the Company since January 1994. He is the President of IAI Ventures, Inc., the venture capital arm of Investment Advisers, Inc., a $15 billion asset management firm based in Minneapolis, Minnesota. Prior to joining IAI in 1989, Mr. Spreng was a member of the Corporate Finance Departments of Salomon Brothers Inc, New York and Dain Bosworth Incorporated, Minneapolis. Mr. Spreng also serves as a director of GalaGen Inc. and a number of privately held companies. GORDON M. DERZON has been a director of the Company since July 1995. Since 1974, Mr. Derzon has been a faculty member at the University of Wisconsin and Superintendent of the University of Wisconsin Hospital and Clinics. Prior to that time he had served in several hospital Executive Director positions, including seven years at Kings County Hospital in Brooklyn, New York. Mr. Derzon serves on various committees and is currently on the Executive Board for the University Hospital Consortium. He has also served as past Chairman of both the Governing Council of the Public-General Hospital Section and past Chairman of the University Hospital Consortium Service Board. ELECTION OF DIRECTORS The Bylaws and Restated Articles of the Company were amended by the shareholders at the Company's 1995 Annual Meeting to establish a staggered term for the Board of Directors, such that one third of the total number of directors are elected at each annual meeting of shareholders, for a term of three years. All directors hold office until the election and qualification of their successors. COMMITTEES OF THE BOARD OF DIRECTORS The Board has established an Audit Committee and a Compensation Committee that meet regularly during the year. The Compensation Committee proposes, reviews and approves executive management compensation and administers the 1995 Stock Compensation Plan. It met three times during 1995. The Compensation Committee is comprised solely of non-employee directors -- Mr. Childs, Mr. Derzon and Mr. Witonsky. The Audit Committee advises the Board of Directors on questions, policies and general matters of accounting, financing and operating controls and reviews the audit of the Company's financial statements, and selects auditors subject to approval of the full Board and ratification by the shareholders. It met once during 1995. The Audit Committee is made up of Mr. Pappajohn and Mr. Spreng. The Board of Directors as a whole acts as a nominating committee for candidates for the Board of Directors. The Board of Directors of the Company held eight meetings in 1995. Mr. Emkjer was not a director during 1995. All other directors except Mr. Pappajohn and Mr. Childs attended at least 75% of the aggregate number of meetings of the Board of Directors and the Board Committees on which they served. COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS SUMMARY COMPENSATION The following table sets forth certain information concerning the compensation paid or to be paid to the Chief Executive Officer of the Company during the fiscal years ended December 31, 1993, 1994 and 1995 (the "Named Executive Officer"). No executive officer of the Company had a total annual salary and bonus in the year ended December 31, 1995 that exceeded $100,000: SUMMARY COMPENSATION TABLE <TABLE> <CAPTION> LONG TERM ANNUAL COMPENSATION COMPENSATION ------------------- AWARDS ------------ FISCAL OTHER ANNUAL SECURITIES NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION(1) UNDERLYING OPTIONS - --------------------------- ---- ------ --------------- ------------------ <S> <C> <C> <C> <C> Michael J. Vasquez, 1995 $98,250 $4,747 -- President and Chief 1994 90,000 1,608 40,912(3) Executive Officer (2) 1993 83,300 1,908 -- </TABLE> (1) Constitutes costs for insurance and automobile allowance. (2) Mr. Vasquez was President and Chief Executive Officer of the Company until March 15, 1996. (3) All such options were voluntarily terminated as of April 25, 1995. STOCK OPTIONS No stock options or SARs were granted to any Named Executive Officer during the fiscal year ended December 31, 1995. No stock options or SARs were exercised during 1995 by any Named Executive Officer and no stock options or SARs owned by any Named Executive Officer remained unexercised at December 31, 1995. No long term incentive plan awards were made during 1995 to any Named Executive Officer. EMPLOYMENT AGREEMENTS Effective March 15, 1996, Michael J. Vasquez resigned his positions as President, Chief Executive Officer, Director and as an employee of the Company. On April 7, 1996, Mr. Vasquez entered into a consulting agreement with the Company, effective as of March 15, 1996, and also received an option to purchase 40,912 shares of Common Stock of the Company at an exercise price of $3.75 per share. Pursuant to the consulting agreement, for the period ending March 15, 1997, Mr. Vasquez is obligated to provide up to 400 hours of consulting services as requested by the Company. The Company has agreed to pay Mr. Vasquez a consulting fee of $8,250 per month, plus reimbursement for out-of-pocket expenses for the term of the agreement. Pursuant to the option agreement, Mr. Vasquez has the immediate right to exercise 20% of the option for 8,182 shares and the right in one year to exercise an additional 20% of the option for 8,182 shares. The right to exercise any portion of the option, including the vested portion, terminates on June 15, 1997, unless a change of control of the Company occurs before March 15, 1997, in which event Mr. Vasquez would be entitled to purchase all 40,912 shares subject to the option. Effective as of March 15, 1996, Mark J. Emkjer was appointed Chief Executive Officer and was appointed to the Board of Directors of the Company. Mr. Emkjer was elected to a three year term on the Board of Directors of the Company. Mr. Emkjer has entered into an employment agreement with the Company. The employment agreement provides for base compensation of $165,000 per year, a signing bonus of $10,000, and an annual bonus of up to 50% of base compensation based on attainment of goals determined by the Board of Directors with respect to financial performance, stock price appreciation and operating objectives. Mr. Emkjer also received a nonqualified option to purchase 100,000 shares of Common Stock of the Company which vest 20% on the first anniversary date of the grant and 20% on each of the next four anniversary dates of the grant, all of which are exercisable at the price of $2.50 per share. Mr. Emkjer also received a nonqualified option to purchase 110,000 shares of Common Stock of the Company at an exercise price of $1.00 per share, with the option to purchase 35,000 shares vesting upon purchase by Mr. Emkjer of a house and relocation of his family to the Des Moines area, and the balance vesting at the rate of 15,000 per year for five years. In addition, Mr. Emkjer's employment agreement is expected to provide for payment of the selling commission with respect to his existing home in California and moving expenses, estimated to be between $40,000 and $50,000. Mr. Emkjer's employment agreement is also expected to contain severance, change of control and noncompete provisions. COMPENSATION OF DIRECTORS Directors presently receive no compensation for serving on the Board of Directors other than reimbursement of reasonable expenses incurred in attending meetings. However, during 1995, Carl S. Witonsky, currently Chairman of the Board of Directors, was a party to a month-to-month agreement with the Company to provide executive management and consulting services to the Company for a monthly payment of $3,000. Such agreement was approved by the disinterested members of the Board on January 31, 1995. Non-employee directors not affiliated with principal shareholders (only Mr. Childs and Mr. Witonsky) have received nonqualified warrants to purchase Common Stock. Mr. Childs and Mr. Witonsky were each granted warrants to purchase 27,274 shares of Common Stock of the Company granted prior to 1995 as consideration for serving on the Board of Directors. The warrants have an exercise price of at least 85% of the fair market value of the Common Stock, as determined by the Board of Directors, on the date of grant. Subsequent to February 10, 1995, under the 1995 Stock Compensation Plan (the "Plan"), new non-employee directors receive a nondiscretionary grant of nonqualified stock options for 21,820 shares of Common Stock upon their election or appointment to the Board. The Plan provides for automatic grants of nonqualified stock options to new non-employee directors at an exercise price equal to 100% of the fair market value of the shares on the date of grant. One-fifth of such options vest over each of five years from the date of election or appointment of the new non-employee director. The non-employee director options are exercisable for ten years from the date of grant. The Compensation Committee has no discretion regarding the grant or terms of non-employee director options. Mr. Derzon received a nonqualified option to purchase 21,820 shares of Common Stock under the Plan upon appointment as a director in 1995. 1995 STOCK COMPENSATION PLAN On February 10, 1995, the Company's shareholders approved the 1995 Stock Compensation Plan (the "Plan") that had been previously adopted by the Board on December 16, 1994. Awards granted under the Plan ("Awards") are designated as incentive stock options ("ISOs") within the meaning of Section 422 of the Code, non-qualified options, bonus stock, restricted stock or stock appreciation rights ("SARs"). Awards may be granted to consultants, directors (whether or not they are employees of the Company), employees and officers of the Company. No Awards will be granted after February 10, 2005 under the Plan. The Plan is administered by the Compensation Committee made up of disinterested members of the Board as that term is defined by Section 16(b) under the Securities Exchange Act. The Compensation Committee, within the limitations of the Plan, determines the persons to whom Awards will be granted, the number of shares to be covered by each Award, whether the Awards granted are intended to be ISOs, the duration and rate of exercise of each Award, the option purchase price per share and the manner of exercise, the time, manner and form of payment upon exercise of an Award, and whether restrictions such as repurchase rights of the Company are to be imposed on shares subject to Awards except for the non-discretionary grants automatically made to non-employee directors. All stock options granted under the Plan have an exercise price no less than 85% of the fair market value of the Common Stock on the date of grant, except for the automatic grants to non-employee directors which have an exercise price equal to 100% of the fair market value. The Compensation Committee also has the authority to interpret the Plan and any instrument or agreement entered into under the Plan, to establish such rules and regulations relating to the administration of the Plan as it deems appropriate, and to make all other determinations which may be necessary or advisable for the administration of the Plan. With the approval of the Board, the Compensation Committee may terminate, amend, or modify the Plan in a manner consistent with the Plan's provisions, provided such changes do not violate the federal or state securities laws. The Plan provides that 545,494 shares of Common Stock are available for grant under the Plan. If any Award terminates, expires, or lapses, the underlying stock shall again become available for grant. In the event of a change in the Company's corporate structure that affects the shares (for example, a merger, recapitalization, or stock dividend), the Compensation Committee shall make adjustments to the number of shares available to the Plan and to the number and/or price of outstanding Awards to prevent dilution or enlargement of rights. The Plan provides for automatic grants of nonqualified stock options to new non-employee directors at an exercise price equal to 100% of the fair market value of the shares on the date of grant. One-fifth of such options vest over each of five years from the date of election or appointment of the new non-employee director. The non-employee director options are exercisable for ten years from the date of grant. Non-employee directors will receive automatic grants of options to purchase 21,820 shares of Common Stock upon their appointment or election to the Board. The Compensation Committee will have no discretion regarding the grant or terms of non-employee director options. No options under the Plan have been granted to date to non-employee directors. The Plan allows the Compensation Committee to determine whether the Company will accept payment for options in the form of cash or shares of the Company. The Compensation Committee is also empowered to authorize the Company to withhold shares for the payment of income taxes on the exercise of options. The Company may also make loans to Plan participants to allow them to exercise options subject to specified terms, and secured by a pledge of shares. In order to protect all of the participants' rights in the event of a Change in Control (as defined below) of the Company, the Plan provides for the immediate vesting of all outstanding Awards upon the occurrence of a Change in Control. A Change in Control of the Company will be deemed to have occurred if any one or more of the following conditions are fulfilled: (i) any person or entity acquires 35% or more of the voting securities of the Company; (ii) during any period of two consecutive years, a majority of the members of the Board are replaced; (iii) the shareholders approve a materially dilutive merger or consolidation of the Company; or (iv) the shareholders approve a plan of complete liquidation or an agreement for sale of substantially all of the Company's assets. Stock options, SARs, and restricted stock granted to officers or employees of the Company, particularly with terms regarding the effect of a Change of Control of the Company on the rights of holders, may affect the extent to which and the means by which a potential acquiror of the Company may be able to acquire control of the Company and may discourage potential acquirors from making proposals which certain of the Company's shareholders might find attractive due to the increased percentage of ownership of the Company by executive officers and directors. As of March 31, 1996, ISOs for the purchase of a total of 262,601 shares, each with terms of ten years and exercise prices ranging between $2.75 and $3.25 per share, have been granted to 47 employees of the Company. As of March 31, 1996, a total of 21,820 non-qualified non-employee director options have been granted to one director at a price of $3.00 per share. A total of 261,073 shares are presently available for grant as additional Awards under the Plan. Approximately 15,000 ISOs were exercisible as of March 31, 1996. To date, no grants of SARs, or restricted stock have been made under the Plan. See "Compensation of Executive Officers and Directors." NONQUALIFIED EXECUTIVE STOCK COMPENSATION PLAN On March 25, 1996, the Board of Directors adopted a Nonqualified Executive Stock Option Plan which grants executive officers of the Company nonqualified options to purchase shares of Common Stock of the Company. The Board of Directors reserved 200,000 shares for issuance pursuant to the Nonqualified Executive Stock Option Plan. Options may be granted at prices determined by the Board of Directors, which may not be less than 85% of the fair market value of the shares subject to the options as of the date of grant. On March 26, 1996, options for 21,816 shares were granted to certain officers of the Company pursuant to the Nonqualified Executive Stock Option Plan. Options vest at the rate of 20% on the first anniversary date of the grant and 20% on each of the next four anniversary dates of grant, and are exercisable at the price of $2.75 per share. WARRANTS GRANTED TO EMPLOYEES As of March 31, 1996, seventeen employees and former employees of the Company hold warrants to purchase Common Stock in the nature of non-qualified stock options granted for services to the Company prior to the adoption of the Plan. The warrants have an exercise price of at least 85% of the fair market value of the Common Stock, as determined by the Board of Directors, on the date of grant. One group of warrants has a ten-year expiration date and was exercisable one-third annually on a cumulative basis from the anniversary date of the warrant. The second group of warrants vested over five years, with 20% of the warrants vesting each year, starting on the date of grant and expires in five years. As of March 31, 1996, warrants to purchase a total of 115,188 shares were outstanding, having an average exercise price of approximately $3.21 per share. Approximately 112,000 of those warrants are exercisable as of March 31, 1996. WARRANTS GRANTED TO NON-EMPLOYEE DIRECTORS The Company has issued warrants to purchase 54,548 shares of Common Stock to current non-employee directors William W. Childs and Carl S. Witonsky, and warrants to purchase 38,184 shares to former non-employee directors of the Company. Such warrants were granted as consideration for service on the Board of Directors and in lieu of payment of directors' fees. The warrants were issued at an average exercise price of $3.41 per share. The warrants have an exercise price of at least 85% of the fair market value of the Common Stock, as determined by the Board of Directors, on the date of grant. One group of warrants has a ten-year expiration date and was exercisable one-third annually on a cumulative basis from the anniversary date of the warrant. Mr. Childs and all former non-employee directors agreed to amend such warrants to provide for an expiration date ten years after the initial date of the grant. The second group of warrants vests over five years, with 20% of the warrants vesting each year, starting on the date of grant and expires in five years. As of March 31, 1996 warrants to purchase approximately 82,914 shares of Common Stock are exercisable on the effective date of this Prospectus. All current directors of the Company have entered into written lock-up agreements with the Company and the Representative not to sell, transfer or otherwise dispose of, or agree to sell, transfer or otherwise dispose of, any shares of Common Stock that may be acquired upon exercise of such warrants for a period of 120 days after the date of this Prospectus. CERTAIN TRANSACTIONS During 1995, Mr. Witonsky had a month-to-month consulting agreement with the Company to provide executive management and consulting services to the Company for which he received annual compensation of $36,000. The agreement was terminated effective December 31, 1995. Mr. Spreng is President of IAI Ventures, Inc., the venture capital arm of Investment Advisers Inc., which provides investment management services to certain funds which, in the aggregate, beneficially own 785,501 shares of the Common Stock of the Company, and shares voting and investment power with respect thereto, and may be deemed to beneficially own such shares. Investment Advisers Inc. has a one-year consulting agreement with the Company which commenced on August 31, 1995. As consideration for this agreement, certain funds to which Investment Advisers Inc. provides investment management services received warrants to purchase a total of 70,000 shares of Common Stock exercisable at $3.00 per share. It is possible that the investment funds with which Mr. Spreng is affiliated, and/or Mr. Pappajohn and/or Edgewater Private Equity Fund, LP (which presently owns 5.1% of the Company's outstanding stock), will purchase shares in this offering. Any such purchases will be made on the same terms and conditions as purchases by unaffiliated third parties. The Company's management believes that the terms of the transactions set forth herein were no less favorable to the Company than would have been obtained from unaffiliated third parties. Future transactions with officers, employees, directors, five percent shareholders or affiliates of the Company will be on terms no less favorable to the Company than those that are generally available from unaffiliated third parties, and will be ratified by a majority of the independent outside members of the Board of Directors who do not have an interest in the transactions. PRINCIPAL SHAREHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Common Stock of the Company on May 31, 1996, by (i) each person or entity known to the Company to be the beneficial owner of 5% or more of the outstanding shares of Common Stock, (ii) each director of the Company, (iii) each Named Executive Officer of the Company, and (iv) all of the Company's executive officers and directors as a group. Unless otherwise indicated, the person or entity listed in the table is the beneficial owner of the shares and has sole voting and investment power with respect to such shares. <TABLE> <CAPTION> PERCENT OF SHARES NUMBER OF BENEFICIALLY OWNED SHARES ------------------------- BENEFICIALLY PRIOR TO AFTER NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) OFFERING OFFERING(13) - ------------------------------------ -------- -------- ------------ <S> <C> <C> <C> DIRECTORS AND OFFICERS: R. David Spreng(2) 715,501(3) 17.1% 14.0% John G. Pappajohn(4) 353,325 8.5 7.0 Mark J. Emkjer(4) 35,000(5) * * Carl S. Witonsky(4) 25,365(6) * * William W. Childs(4) 22,365(6) * * Gordon Derzon(4) 3,000 * * All directors and executive officers as a group (9 persons) 1,177,666 27.3 22.6 OTHER FIVE PERCENT OR MORE SHAREHOLDERS: IAI Investment Funds 715,501(3) 17.1 14.0 Mutual Ventures of South Dakota(7) 423,825 10.2 8.4 Michael J. Vasquez(8)(9) 261,444(10) 6.3 5.2 Simon Casady(11) 259,879 6.2 5.1 Edgewater Private Equity Fund, LP(12) 212,096 5.1 4.2 </TABLE> *Less than one percent. (1) A person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days upon the exercise of warrants or options. Each beneficial owner's percentage ownership is determined by assuming that options or warrants that are held by such person (but not those held by any other person) and which are exercisable within 60 days after May 31, 1996, have been exercised. (2) The address for R. David Spreng and each of the IAI Funds is 3700 First Bank Place, P.O. Box 357, Minneapolis, Minnesota 55402-0357. (3) Includes 297,140 shares beneficially owned by IAI Investment Fund IV, 297,140 shares beneficially owned by IAI Investment Fund VI and 121,221 shares beneficially owned by IAI Investment Fund VII. (4) Except as noted, the address of each officer and director of the Company is 1025 Ashworth Road, Suite 240, West Des Moines, Iowa 50265. (5) Consists of options granted in 1996 in connection with the employment of Mr. Emkjer as Chief Executive Officer of the Company. (6) Includes 22,365 shares issuable upon the exercise of warrants. (7) Address: 5400 University Avenue, West Des Moines, Iowa 50266. Includes 14,237 shares issuable upon the exercise of warrants. Does not include shares which may be deemed to be owned indirectly by Mutual Ventures of South Dakota as a 7.5% shareholder of Iowa Business Development Finance Corp., which owns approximately 4.3% of the outstanding shares of the Company. (8) Mr. Vasquez was President and Chief Executive Officer of the Company until March 15, 1996. (9) Address: 2909 Southern Hill Circle, Des Moines, Iowa 50321. (10) Includes 8,182 shares issuable upon exercise of warrants. (11) Address: 1238 Fulton, Indianola, Iowa 50125. (12) Address: 666 Grand Avenue, Suite 200, Des Moines, Iowa 50309 Attention: James A. Gordon. (13) Without giving effect to any shares that may be purchased in this offering by the existing officers, directors or principal shareholders. DESCRIPTION OF CAPITAL STOCK GENERAL The following description does not purport to be complete and is qualified in its entirety by this reference to the Company's Restated Articles of Incorporation, as amended (the "Articles"), a copy of which is filed as an exhibit to the Registration Statement of which this Prospectus is a part. The authorized capital stock of the Company consists of 20,000,000 shares of common stock, no par value (the "Common Stock"), and 5,000,000 shares of preferred stock, no par value (the "Preferred Stock"). As of April 2, 1996, there were 4,152,199 shares of Common Stock issued and outstanding, held by approximately 900 holders of record, and no shares of Preferred Stock outstanding. In addition, 1,152,855 shares of Common Stock were reserved for issuance under outstanding options and warrants as of March 31, 1996. Effective March 6, 1995, all outstanding shares of Common Stock were split on an approximately 1-for-1.8 reverse basis. All previously outstanding shares of the Company's preferred stock, no par value per share, designated as Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock, Series G Preferred Stock, and Series H Preferred Stock, were also split on the same basis and were converted into shares of Common Stock on April 27, 1995, upon the completion of the Company's initial public offering. Following the closing of this offering there will be 6,352,199 shares of Common Stock outstanding, excluding warrants and options to acquire shares of Common Stock, and no shares of Preferred Stock will be outstanding. ELECTION OF DIRECTORS The Bylaws and Restated Articles of the Company were amended by the shareholders at the Company's 1995 Annual Meeting to establish a staggered term for the Board of Directors, such that one third of the total number of directors are elected at each annual meeting of shareholders, for a term of three years. All directors hold office until the election and qualification of their successors. COMMON STOCK The Company is authorized to issue 20,000,000 shares of Common Stock, no par value. The holders of Common Stock are entitled to one vote for each share held of record on all matters to be voted on by shareholders. There is no cumulative voting with respect to the election of directors, with the result that the holders of more than 50% of the Common Stock voted for the election of directors can elect all directors nominated. The holders of Common Stock are entitled to receive dividends when, as and if declared by the Board of Directors out of funds legally available therefor. In the event of liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably in all assets remaining available for distribution to them after payment of liabilities and after provision has been made for each class of stock, if any, having preference over the Common Stock. Holders of shares of Common Stock, as such, have no conversion, preemptive or other subscription rights, and there are no redemption provisions applicable to the Common Stock. All of the outstanding shares of Common Stock are, and the shares of Common Stock offered hereby when issued for the consideration set forth in this Prospectus will be, fully paid and nonassessable. PREFERRED STOCK The Company is authorized to issue up to 5,000,000 shares of Preferred Stock with such designation, rights and preferences as may be determined from time to time by the Board of Directors. Accordingly, the Board of Directors is empowered, without shareholder approval, to issue Preferred Stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of the Common Stock. In the event of issuance, the Preferred Stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. Such transactions could be made more difficult to accomplish even if favorable to the interests of the shareholders. The Company is not aware of any person seeking to gain control of the Company. REGISTRATION RIGHTS Following the Company's initial public offering, holders of approximately 2,000,000 shares of Common Stock, which were converted from Preferred Stock, received certain limited rights to require the Company to register their shares of Common Stock under the Securities Act pursuant to the terms of the Stockholder Rights Agreement or the Series H Preferred Stock Stockholder Rights Agreement (the "Rights Agreements") relating to the former of Preferred Stock. In addition, holders of Class A Warrants, Class B Warrants, Agent's Warrants and a warrant granted to the managing underwriter of the Company's initial public offering (collectively the "Warrants") possess certain limited rights to have 387,785 shares issuable upon exercise of such warrants registered by the Company under the Securities Act. (The shares under the Rights Agreements and such warrants are collectively referred to as the "Registrable Securities.") All such holders of Registrable Securities have waived their registration rights in connection with this offering. Under the terms of the Rights Agreements and Warrants, whenever the Company proposes to register any of its securities under the Securities Act, other than pursuant to employee benefit or incentive plans of the Company, the holders of Registrable Securities may require the Company, subject to certain limitations, to include all or part of the Registrable Securities in such registration, with the Company bearing expenses of such registration (other than underwriting discounts and commissions) and subject to certain other limitations. If and when the Company is entitled to register shares of Common Stock on a Form S-3 registration statement, or its equivalent, a specified number of holders of shares under each of the Rights Agreements or holders of the Warrants can require the Company, subject to certain limitations, to file such a registration statement under the Securities Act covering all or part of the Registrable Securities, with the Company bearing the expenses of such registration (other than underwriting discounts and commissions) and subject to certain other limitations. INDEMNIFICATION AND LIMITATION OF LIABILITY The Iowa Business Corporation Act provides that officers and directors of the Company have the right to indemnification from the Company for liability arising out of certain actions. The Company has adopted in its Articles of Incorporation a provision which limits personal liability for breach of fiduciary duty to its directors, to the extent allowed by the Iowa Business Corporation Act. Such provision eliminates the personal liability of directors for monetary damages occasioned by breach of fiduciary duty, except for liability based on a breach of the director's duty of loyalty to the Company, acts or omissions not made in good faith, acts or omissions involving intentional misconduct or a knowing violation of law or a transaction from which the director derives an improper personal benefit, payments of improper dividends and acts occurring prior to the date such provision was adopted. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. TRANSFER AGENT The transfer agent and registrar for the Common Stock of the Company is Norwest Bank Minnesota, N.A. SECURITIES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, the Company will have outstanding an aggregate of 5,052,199 shares of Common Stock, assuming the issuance of 900,000 shares of Common Stock offered hereby. Of the total outstanding shares, all of the 900,000 shares of Common Stock offered hereby and the 1,300,000 shares of Common Stock sold in the initial public offering in April 1995 will be freely tradeable without restriction or further registration under the Securities Act, and will therefore be available for immediate resale in the public market upon expiration or waiver of the lock-up agreement described below, except for shares purchased by an "affiliate" of the Company within the meaning of Rule 144 under the Securities Act (whose sales would be subject to certain volume limitations and other restrictions described below). As defined in Rule 144, an affiliate of an issuer is a person who controls, is controlled by or is under common control with such issuer. All of the shares purchased in this offering will be subject to the Subscription Agreement to be signed by all purchasers. The Subscription Agreement provides in part that a purchaser of shares in this offering will not offer, sell, contract to sell, make any short sale (including, but not limited to, a "short against the box"), pledge or otherwise dispose of, directly or indirectly, any shares purchased in this offering during a 270-day period beginning on the closing of the sale of the shares to such purchaser, without the prior written consent of the Company. This 270-day lock-up agreement takes precedence over any limitations on resale under the Securities Act. The remaining 2,852,199 shares of Common Stock to be outstanding following this offering (the "Restricted Shares") were issued and sold by the Company in private transactions in reliance on certain exemptions from registration afforded by the Securities Act. As such, the Restricted Shares, together with any shares purchased in the initial public offering or this offering by an affiliate of the Company, are "restricted securities" and may not be sold without compliance with the registration requirements of the Securities Act or pursuant to an applicable exemption therefrom, including Rule 144. In general, under Rule 144 as currently in effect, subject to the satisfaction of certain other conditions, a person, including an affiliate of the Company (or persons whose shares are aggregated), who has beneficially owned "restricted securities" (as such term is defined in Rule 144) for at least two years is entitled to sell, within any three-month period, a number of shares of Common Stock that does not exceed the greater of one percent of the total number of then outstanding shares of the Company's Common Stock (5,052,199 shares immediately after this offering) or the average weekly trading volume in the Company's Common Stock during the four calendar weeks preceding the sale. Sales under Rule 144 are also subject to certain restrictions relating to the manner of sale, notice and the availability of current public information about the Company. A person who has not been an affiliate of the Company at any time during the 90 days immediately preceding the sale and who has beneficially owned shares of Common Stock for at least three years is entitled to sell such shares under Rule 144(k) without regard to the volume limitations, manner of sale provisions, notice or other requirements of Rule 144. However, the transfer agent may require an opinion of counsel that a proposed sale of shares comes within the terms of Rule 144 prior to effecting a transfer of such shares. Such opinion, if appropriate, will be provided at the expense of the Company. Under Rule 701, shares issued under certain compensatory stock based plans, such as the Company's 1995 Stock Compensation Plan, may, commencing 90 days after the date of this Prospectus, be resold under Rule 144 by non-affiliates, subject only to the manner of sale requirements and by affiliates, subject to all of the requirements other than the two-year holding period. Common Stock registered under the Securities Act at the time of purchase (including shares sold in this offering) which are owned by affiliates of the Company are eligible for sale under Rule 144 without regard to the two-year holding period described above, but are subject to the restrictions on manner of sale, notice and availability of current public information described above. On the date of this Prospectus, of the 2,852,199 Restricted Shares, approximately 2,776,616 are eligible for immediate sale, subject to compliance with the requirements of Rule 144. Upon the expiration of the 270-day lock-up period for the shares offered hereby, substantially all of the Restricted Shares will be eligible for sale under Rule 144. In addition warrants to purchase approximately 388,000 shares of Common Stock are presently exercisable, and the holders of such warrants have the right to cause the Company to register the Common Stock received on the exercise of such warrants. No prediction can be made as to the effect, if any, that market sales of shares or the availability of shares for sale will have on the market price prevailing from time to time. Sales of substantial numbers of shares of Common Stock could adversely affect prevailing market prices. The Company does not intend to register the shares of Common Stock sold in this offering under any state securities laws, and shares purchased by residents of certain states may be subject to certain restrictions on transferability imposed by such state securities laws. The foregoing discussion assumes there are no such state law restrictions. PLAN OF DISTRIBUTION THE OFFERING The Company is offering up to 900,000 shares of its Common Stock, no par value (the "Shares"), to accredited investors at a price of $3.25 per share. The minimum purchase by any subscriber is 50,000 Shares ($162,500), although the Company, in its sole discretion, may sell less than the minimum number of Shares to a limited number of prospective investors. Investors may subscribe for any number of shares above the 50,000 share minimum. The offering will terminate when all 900,000 Shares have been sold, or 11:00 a.m. C.S.T., August 16, 1996, whichever occurs first, unless extended by the Company. The offering price has been determined by the Company based on discussions with prospective investors and consideration of other relevant factors, including the 270-day lock-up agreements with respect to the Shares. See "Price Range of Common Stock" and "Securities Eligible for Future Sale." The terms of the offering do not require that any minimum number of Shares be sold. All funds received from subscriptions will thus be at the immediate disposal of the Company even if less than the full amount of the offering is purchased by investors, or the Company may determine to return any subscriptions, either at its sole discretion. The Shares will be offered and sold, on behalf of the Company, through the Company's officers and directors. No selling commissions will be paid to any officer or director of the Company in connection with the offer and sale of the Shares. SUBSCRIPTIONS Prospective investors who desire to purchase Shares hereunder must (i) complete and execute a Subscription Agreement (the "Subscription Agreement") in the form distributed herewith, (ii) make a check payable to the order of "PACE Health Management Systems, Inc." for the purchase price and (iii) forward the completed and executed Subscription Agreement along with the check to the Company. The Company reserves the right to reject any Subscription Agreement and to return the purchase price without interest. The Subscription Agreement contains a 270-day lock-up agreement with respect to the shares purchased in this offering. See "Securities Eligible for Future Sale." The Company will issue a certificate representing the Shares purchased by each investor as soon as practicable following any closing with respect to such investor's Shares. INVESTOR QUALIFICATIONS The Shares are offered only to "accredited investors" as defined in Rule 501(a) of Regulation D of the Securities and Exchange Commission. As so defined, "accredited investors" generally include: (a) Most banks and savings institutions, whether acting in their individual or in fiduciary capacities, any broker/dealer registered under the Securities Exchange Act of 1934, most insurance companies, investment companies registered under, any business development company defined in, or any private business development company defined in the Investment Company Act of 1940, Small Business Investment Companies, any state or municipal employee plan with assets exceeding $5,000,000, employee benefit plans subject to the provisions of the Employee Retirement Income Security Act of 1974 which either have total assets in excess of $5,000,000 or as to which investment decisions are made by a fiduciary which is either a bank, insurance company or registered investment adviser; (b) Any (i) corporation, (ii) nonprofit organization qualified under Section 501(c)(3) of the Internal Revenue Code, (iii) business trust, or (iv) partnership, in each case if such entities have assets in excess of $5,000,000 and were not established for purposes of making this investment; (c) Any officer or director of the Company; (d) Any natural person whose net worth, or joint net worth together with such individual's spouse, exceeds $1,000,000; (e) Any natural person whose income exceeded $200,000 or whose joint income with his or her spouse exceeded $300,000 in both 1993 and 1994 and who reasonably expects an income in excess of such amount in 1995; and (f) Any entity each of whose equity owners separately meets any of the criteria set forth above. Each potential investor of the Shares will be required to represent to the Company in the Subscription Agreement that such investor meets one or more of the above criteria for qualification as an accredited investor. In addition, each such investor will be required to represent that such investor is able to bear the economic risk of an investment in the Shares, that together with such investor's purchaser representative, if any, such investor has such knowledge and experience in financial and business matters that such investor is able to evaluate an investment in the Shares, and has been given the opportunity to ask questions and receive answers concerning the terms and conditions of the offering and to obtain additional information which the Company possesses. LEGAL MATTERS The validity of the shares of Common Stock offered hereby will be passed upon for the Company by Dorsey & Whitney LLP, Minneapolis, Minnesota and Des Moines, Iowa. EXPERTS The financial statements of PACE Health Management Systems, Inc. as of December 31, 1994 and 1995, and for each of the three years in the period ended December 31, 1995, included in this Prospectus and Registration Statement have been audited by McGladrey and Pullen, LLP, independent auditors, as stated in their report thereon appearing elsewhere herein, and have been so included in reliance upon the report given upon their authority as experts in accounting and auditing. In December 1994, the Company's Board of Directors decided to retain McGladrey & Pullen, LLP as its independent public accountants and dismissed the Company's former auditors, Ernst & Young, LLP. There were no disagreements with the former auditors on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure at the time of the change or with respect to the Company's financial statements for fiscal year 1993. The report of the former auditors for the year ended December 31, 1993, was unqualified. Prior to retaining McGladrey & Pullen, LLP, the Company had not consulted with McGladrey & Pullen, LLP regarding any issue. ADDITIONAL INFORMATION The Company has filed with the Commission, a Registration Statement on Form S-1 under the Securities Act with respect to the shares of Common Stock offered hereby, of which this Prospectus forms a part. This Prospectus does not contain all of the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and this offering, reference is made to the Registration Statement, including the exhibits filed therewith, which may be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional Offices of the Commission: New York Regional Office, 7 World Trade Center, New York, New York 10048; and Chicago Regional Office, Suite 1400, Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois 60661-2511. Copies of such material may be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Statements contained in this Prospectus as to the contents of any contract or other document are not necessarily complete and, where the contract or other document has been filed as an exhibit to the Statement, each such statement is qualified in all respects by reference to the applicable document filed with the Commission. The Company is subject to the informational requirements of the Securities Exchange Act of 1934 ("Exchange Act"), and, in accordance therewith, files annual and quarterly reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information may be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the regional offices maintained by the Commission at 7 World Trade Center, 13th Floor, New York, New York 10048, and 500 West Madison Street, Room 1400, Chicago, Illinois 60661-2511. Copies of such material may be obtained at prescribed rates from the Public Reference Section of the Commission at 450 Fifth Street, N/W., Room 1024, Washington, D.C. 20549. The Common Stock of the Company is traded on the Nasdaq SmallCap Market. Reports, proxy statements and other information concerning the Company may be inspected at the National Association of Securities Dealers, Inc. at 1735 K Street, N.W., Washington D.C. 10006. PACE HEALTH MANAGEMENT SYSTEMS, INC. INDEX TO FINANCIAL STATEMENTS PAGE ---- Independent Auditor's Report F-2 Balance Sheets F-3 Statements of Operations F-4 Statements of Shareholders' Equity F-5 Statements of Cash Flows F-6 Notes to Financial Statements F-7-11 INDEPENDENT AUDITOR'S REPORT To the Board of Directors PACE Health Management Systems, Inc. West Des Moines, Iowa We have audited the accompanying balance sheets of PACE Health Management Systems, Inc. as of December 31, 1994 and 1995, and the related statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of PACE Health Management Systems, Inc. as of December 31, 1994 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. /s/ McGladrey & Pullen, LLP McGLADREY & PULLEN, LLP Des Moines, Iowa January 19, 1996 PACE HEALTH MANAGEMENT SYSTEMS, INC. BALANCE SHEETS ASSETS <TABLE> <CAPTION> DECEMBER 31, MARCH 31, 1994 1995 1996 ----------- ----------- ----------- (UNAUDITED) <S> <C> <C> <C> Current Assets: Cash (Note 7) $ 112,203 $ 2,831,658 $ 1,556,023 Cash, restricted (Note 3) 500,000 -- -- Accounts receivable, less allowance for doubtful accounts 1994 none; 1995 $80,000 (Note 10) 172,813 628,699 678,007 Stock subscriptions receivable 881,285 -- -- Inventories, primarily computer equipment 49,798 22,993 50,690 Prepaid expenses 20,790 37,056 42,508 ----------- ----------- ----------- Total current assets 1,736,889 3,520,406 2,327,228 ----------- ----------- ----------- Furniture and Equipment, net of accumulated depreciation 1994 $158,680; 1995 $282,939 (Note 3) 167,762 378,879 423,675 ----------- ----------- ----------- Computer Software Development Costs: Purchased 1,516,860 1,516,860 1,548,240 Internally developed 658,197 806,058 868,895 ----------- ----------- ----------- 2,175,057 2,322,918 2,417,135 Less accumulated amortization 294,845 542,455 602,503 ----------- ----------- ----------- 1,880,212 1,780,463 1,814,632 ----------- ----------- ----------- $ 3,784,863 $ 5,679,748 $ 4,565,535 =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Notes payable, bank (Note 3) $ 500,000 $ -- $ -- Current maturities of long-term obligations (Note 3) 806,733 761,932 14,544 Accounts payable 165,161 191,899 188,907 Accrued expenses 95,323 210,142 298,178 Deposits 192,995 61,873 190,222 ----------- ----------- ----------- Total current liabilities 1,760,212 1,225,846 691,851 ----------- ----------- ----------- Long-Term Obligations, less current maturities (Note 3) 854,731 47,663 43,554 ----------- ----------- ----------- Commitments and Contingencies (Note 8) Shareholders' Equity (Note 9): Series A-H preferred stock, no par value; authorized 5,000,000 shares; issued and outstanding 1994 1,720,370 shares; 1995 None; subscribed for but not issued 1994 213,660 shares; 1995 None 7,401,455 -- -- Common stock, no par value; authorized 20,000,000 shares; issued and outstanding 1994 874,136 shares; 1995 4,152,199 shares (Note 4) 250,219 13,300,481 13,300,481 Additional paid-in capital -- -- 54,011 Accumulated deficit (6,481,754) (8,894,242) (9,524,362) ----------- ----------- ----------- 1,169,920 4,406,239 3,830,130 ----------- ----------- ----------- $ 3,784,863 $ 5,679,748 $ 4,565,535 =========== =========== =========== </TABLE> See Notes to Financial Statements. PACE HEALTH MANAGEMENT SYSTEMS, INC. STATEMENTS OF OPERATIONS <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, 1993 1994 1995 1995 1996 ----------- ----------- ----------- ---------- ---------- (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> <C> <C> Net revenues: Systems revenues $ 435,416 $ 52,346 $ 1,730,705 $ 320,022 $ 705,052 Customer support services 262,003 325,487 350,091 81,806 100,144 ----------- ----------- ----------- ---------- ---------- 697,419 377,833 2,080,796 401,828 805,196 ----------- ----------- ----------- ---------- ---------- Costs and expenses (Note 11): Cost of systems revenues 163,432 64,101 621,023 56,992 114,083 Client services 253,682 436,384 868,382 149,560 168,918 Product development (Note 12) 139,623 2,131,616 980,144 119,542 338,950 Sales and marketing 480,916 622,302 865,105 155,243 321,047 General and administrative 659,387 734,934 1,285,617 258,917 517,403 ----------- ----------- ----------- ---------- ---------- 1,697,040 3,989,337 4,620,271 740,254 1,460,401 ----------- ----------- ----------- ---------- ---------- Loss from operations (999,621) (3,611,504) (2,539,475) (338,426) (655,205) ----------- ----------- ----------- ---------- ---------- Other income (expense): Interest income 3,765 4,939 149,783 5,890 25,305 Interest expense (28,276) (16,596) (22,796) (15,185) (220) ----------- ----------- ----------- ---------- ---------- (24,511) (11,657) 126,987 (9,295) 25,085 ----------- ----------- ----------- ---------- ---------- Loss before income taxes (1,024,132) (3,623,161) (2,412,488) (347,721) (630,120) Provision for income taxes (Note 6) -- -- -- -- -- Net loss $(1,024,132) $(3,623,161) $(2,412,488) $ (347,721) $ (630,120) =========== =========== =========== ========== ========== Loss per common and common equivalent share (Note 1) $ (0.98) $ (3.39) $ (0.78) $ (0.34) $ (0.15) =========== =========== =========== ========== ========== Weighted average number of common and common equivalent shares outstanding (Note 1) 1,042,591 1,069,337 3,091,560 1,028,139 4,152,199 </TABLE> See Notes to Financial Statements. PACE HEALTH MANAGEMENT SYSTEMS, INC. STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND THREE MONTHS ENDED MARCH 31, 1996 (UNAUDITED) <TABLE> <CAPTION> SERIES A THROUGH H COMMON ADDITIONAL PREFERRED STOCK PAID-IN ACCUMULATED STOCK ISSUED CAPITAL DEFICIT TOTAL ----------- ----------- ------- ----------- ----------- <S> <C> <C> <C> <C> <C> Balance, December 31, 1992 $ 1,747,209 $ 250,219 $ -- $(1,834,461) $ 162,967 Issuance of Series F Preferred Stock 745,962 -- -- -- 745,962 Issuance of redeemable Series G Preferred Stock 526,814 -- -- -- 526,814 Net loss -- -- -- (1,024,132) (1,024,132) ----------- ----------- ------- ----------- ----------- Balance, December 31, 1993 3,019,985 250,219 -- (2,858,593) 411,611 Issuance of 851,001 shares of redeemable Series G Preferred Stock 3,507,185 -- -- -- 3,507,185 213,660 shares of redeemable Series H Preferred Stock subscribed for 874,285 -- -- -- 874,285 Net loss -- -- -- (3,623,161) (3,623,161) ----------- ----------- ------- ----------- ----------- Balance, December 31, 1994 7,401,455 250,219 -- (6,481,754) 1,169,920 Issuance of 44,033 shares of redeemable Series H Preferred Stock 148,084 -- -- -- 148,084 Conversion of 1,978,063 shares of Series B through H Preferred Stock to Common Stock (Note 9) (7,549,539) 7,549,539 -- -- -- Issuance of 1,200,000 shares of Common Stock (Note 9) -- 5,065,120 -- -- 5,065,120 Issuance of 100,000 shares of Common Stock (Note 9) -- 435,603 -- -- 435,603 Net loss -- -- -- (2,412,488) (2,412,488) ----------- ----------- ------- ----------- ----------- Balance, December 31, 1995 -- 13,300,481 -- (8,894,242) 4,406,239 Compensation expense related to stock option (unaudited) -- -- 54,011 -- 54,011 Net loss (unaudited) -- -- -- (630,120) (630,120) ----------- ----------- ------- ----------- ----------- Balance, March 31, 1996 (unaudited) $ -- $13,300,481 $54,011 $(9,524,362) $ 3,830,130 =========== =========== ======= =========== =========== </TABLE> See Notes to Financial Statements. PACE HEALTH MANAGEMENT SYSTEMS, INC. STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, --------------------------------------- ------------------------ 1993 1994 1995 1995 1996 ----------- ----------- ----------- ---------- ---------- (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(1,024,132) $(3,623,161) $(2,412,488) $ (347,721) $ (630,120) Adjustments to reconcile net loss to net cash (used in) operating activities: Depreciation 35,977 62,258 124,259 22,185 39,955 Amortization 81,859 198,253 247,610 13,560 60,048 Compensation expense recognized upon grant of option -- -- -- -- 54,011 Provision for doubtful accounts -- -- 80,000 -- -- Change in assets and liabilities: (Increase) decrease in accounts receivable 236,886 143,089 (535,886) (98,684) (49,308) (Increase) decrease in inventories 15,294 (27,185) 26,805 (77,146) (27,697) (Increase) in prepaid expenses (6,314) (10,758) (16,266) (231,344) (5,452) Decrease in deposit with software developer -- 500,000 -- -- -- Increase (decrease) in accounts payable and accrued expenses (107,821) 15,960 155,443 345,579 85,044 Increase (decrease) in deposits -- 192,995 (131,122) 27,382 128,349 Net cash (used in) operating activities (768,251) (2,548,549) (2,461,645) (346,189) (345,170) CASH FLOWS FROM INVESTING ACTIVITIES Capitalized computer software development costs (260,508) (191,305) (147,861) (81,144) (94,217) Proceeds from payments on notes receivable 3,016 13,403 -- -- -- Purchase of furniture and equipment (88,971) (114,768) (335,376) (85,009) (84,751) Deposit with software developer (500,000) -- -- -- -- Net cash (used in) investing activities (846,463) (292,670) (483,237) (166,153) (178,968) CASH FLOWS FROM FINANCING ACTIVITIES Payments for expenses of issuing capital stock (27,224) (9,939) (447,864) -- -- Proceeds from notes payable 673,000 -- 500,000 500,000 -- Proceeds from sale of Preferred Stock 1,300,000 3,510,124 71,971 38,434 -- Proceeds from sale of Common Stock -- -- 5,915,050 -- -- Proceeds from collection of subscriptions receivable -- -- 881,285 881,285 -- Principal payments on long-term obligations (346,604) (5,128) (756,105) (376,818) (751,497) Payments on notes payable -- (555,000) (500,000) -- -- Net cash provided by (used in) financing activities 1,599,172 2,940,057 5,664,337 1,042,901 (751,497) Net increase (decrease) in cash (15,542) 98,838 2,719,455 530,559 (1,275,635) CASH Beginning 28,907 13,365 112,203 112,203 2,831,658 Ending $ 13,365 $ 112,203 $ 2,831,658 $ 642,762 $1,556,023 SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION Cash payments of interest $ 14,681 $ 6,185 $ 22,796 $ 15,185 $ 220 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Issuance of Series H Preferred Stock for release of note payable to shareholder $ -- $ -- $ 109,650 $ 109,650 $ -- Computer software development costs financed with long-term obligation -- 1,500,000 -- -- -- Proceeds from note payable assigned as collateral -- 500,000 -- -- -- Subscriptions receivable for Series H Preferred Stock -- 881,285 -- -- -- Accrued interest converted to long-term obligation 11,989 -- 13,886 13,886 -- Repayment of notes payable with proceeds assigned as collateral -- -- 500,000 500,000 -- </TABLE> See Notes to Financial Statements. PACE HEALTH MANAGEMENT SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED.) NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS: The Company develops, markets and supports advanced clinical software which automates the recording, storage and management of patient care information. The software provides complete care management solutions to physicians, nurses and other clinicians in multiple settings at the point of care. The Company extends credit to its customers, located throughout the United States, on an unsecured basis on terms that it establishes for individual customers. One customer accounted for 11.3% of net revenues for 1995 (none in 1994). In 1995, the Company's Board of Directors approved changing its name from Health Care Expert Systems, Inc. to PACE Health Management Systems, Inc. A summary of the Company's significant accounting policies is as follows: INVENTORIES: Inventories are stated at the lower of cost (first-in, first-out method) or market. FURNITURE AND EQUIPMENT: Furniture and equipment are stated at cost. Depreciation of furniture and equipment is computed by straight-line and 200% declining-balance methods over five to seven-year lives. COMPUTER SOFTWARE DEVELOPMENT COSTS: Computer software development costs are capitalized and amortized by the greater of (a) the ratio that current gross revenues for software sales bear to the total of current and anticipated future gross revenues for such software sales or (b) the straight-line method over the estimated economic life, usually three to seven years, of the software. It is reasonably possible that those estimates of anticipated future gross revenues, the estimated economic life of the software, or both will be reduced significantly in the near term. Amortization expense was $81,859, $198,253 and $247,610 in 1993, 1994 and 1995, respectively. REVENUE RECOGNITION: SYSTEMS REVENUES: The Company recognizes revenue from sales of software systems (primarily software license fees, implementation fees and hardware sales) upon installation and implementation of the system to a customer, unless the Company has significant related obligations remaining. When significant obligations remain after the system has been implemented, revenue is not recognized until such obligations have been completed or are no longer significant. Revenues from software systems that require significant customization are recognized on a percentage of completion method, with progress-to-completion measured based upon labor costs incurred or achievement of contract milestones. CUSTOMER SUPPORT SERVICES: Revenue from customer support services, including system updates, is recognized over the period the services are provided. Other customer support services revenue is recognized as services are performed. INCOME TAXES: Deferred taxes are provided for on a liability method, whereby deferred tax assets are recognized for deductible temporary differences and operating loss carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. ACCOUNTING ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. LOSS PER COMMON AND COMMON EQUIVALENT SHARE: Loss per common and common equivalent share is based on the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares consist of stock options and warrants (using the treasury stock method). Common equivalent shares are excluded from the computation if their effect is anti-dilutive, except that, pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83, stock options and warrants granted with exercise prices below the initial public offering price during the twelve-month period preceding the date of the initial filing of the Registration Statement have been included in the computation as if they were outstanding for all years presented. RECENTLY ISSUED ACCOUNTING STANDARD: In October 1995, the FASB Issued SFAS No. 123, Accounting for Stock-Based Compensation, which establishes a fair value based method for financial accounting and reporting for stock-based employee compensation plans and for transactions in which an entity issues its equity instruments to acquire goods and services from non-employees. However, the new standard allows compensation to continue to be measured by using the intrinsic value based method of accounting prescribed by APB No. 25, Accounting for Stock Issued to Employees, but requires expanded disclosures. SFAS No. 123 is effective in fiscal year 1996. The Company has elected to continue to apply the intrinsic value based method of accounting for stock options issued to employees. INTERIM FINANCIAL INFORMATION (UNAUDITED): The financial statements and notes related thereto as of March 31, 1996, and for the three month periods ended March 31, 1995 and 1996, are unaudited, but in the opinion of management include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations. The operating results for the interim periods are not indicative of the operating results to be expected for a full year or for other interim periods. Not all disclosures required by generally accepted accounting principles necessary for a complete presentation have been included. NOTE 2. ROYALTY AGREEMENT In December 1989, the Company entered into an agreement with Creighton University (Creighton) to purchase certain software programs in consideration for payment of a five percent royalty on software program sales, up to a maximum amount of $300,000. Cumulative royalty expense to Creighton through December 31, 1995 was approximately $112,800. NOTE 3. PLEDGED ASSETS AND LONG-TERM OBLIGATIONS AT DECEMBER 31, 1995 The Company's long-term obligations are summarized as follows: <TABLE> <CAPTION> PAYMENTS DUE WITHIN TOTAL ONE YEAR -------- -------- <S> <C> <C> Unsecured note payable, shareholder, due in monthly installments of $824 beginning in June 1996 plus interest at 9%, through May 2001 $ 49,431 $ 5,767 Note payable, financial institution, collateralized by computer equipment with a depreciated cost of approximately $5,200, due in monthly installments of $572 including interest at 9%, through August 1997 10,164 6,165 Unsecured non-interest bearing payable to software developer, balance due January 31, 1996 750,000 750,000 -------- -------- $809,595 $761,932 ======== ======== </TABLE> Approximate aggregate maturities of long-term obligations are as follows as of December 31, 1995: Year ending December 31, 1996 $761,900 1997 13,900 1998 9,900 1999 9,900 2000 9,900 2001 4,095 -------- $809,595 ======== Based on the borrowing rates currently available to the Company for long-term obligation with similar maturities, the fair value of long-term obligations approximates their carrying value at December 31, 1995. At December 31, 1994, the Company had a $500,000 promissory note payable to a bank. The note payable was secured by assignment of a savings account with a balance of $500,000 at December 31, 1994. The note payable was paid in full in January 1995 with funds from the savings account. NOTE 4. COMMON STOCK OPTIONS AND WARRANTS The Company has issued Common Stock purchase warrants to various shareholders, directors, employees, and certain accredited investors. One group of warrants expires ten years after the date of issuance, and is exercisable one-third annually on a cumulative basis from the anniversary date of the warrant. The second group of warrants expires five years after the date of issuance and is 20% exercisable on the date issuance and 20% annually thereafter. The third group of warrants expires five or ten years after the date of issuance and is exercisable in 4 months to one year after the date of issuance. At December 31, 1995, warrants to purchase an aggregate of 292,920 shares were outstanding, and warrants to purchase 207,102 shares were exercisable. The warrants provide for reductions in the exercise price under certain terms and conditions and are exercisable at prices ranging from $.37 to $5.91 per share with an average price per share of approximately $3.16. The Company has issued Class A and Class B warrants to former serial preferred shareholders and certain accredited investors. The warrants were exercisable beginning in April 1995 and expire in January, 2000. The exercise price of the warrants is $3.75. The Class A and Class B warrant holders were granted certain limited piggyback and Form S-3 registration rights with respect to the shares issuable upon exercise of the warrants. At December 31, 1995, Class A warrants to purchase 128,236 shares and Class B warrants to purchase 59,105 shares were outstanding and exercisable. For nominal consideration, the Company has issued a warrant to the underwriter of the initial public offering to purchase 115,445 shares of common stock at an exercise price of $6.00 per share. The warrant is exercisable in April 1996 and expires in April 2000. In addition, in December 1994, the Board of Directors adopted the Health Care Expert Systems, Inc. 1995 Stock Compensation Plan (the "Stock Compensation Plan"). The Stock Compensation Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock, stock bonuses and stock appreciation rights. The Stock Compensation Plan is administered by the Board of Directors which has the authority and discretion to determine: the persons to whom the options will be granted; when the options will be granted; the number of shares subject to each option; the price at which the shares subject to each option may be purchased; and when each option will become exercisable. Options under the Stock Compensation Plan generally expire on the earlier of the tenth anniversary of the date the options were granted or the end of the 30 day period following termination of employment. As of December 31, 1995, the Company had granted options to purchase 218,421 shares with option prices ranging from $2.75 to $3.00 per share, and options to purchase 14,809 shares were exercisable. The Company has reserved 545,494 shares of Common Stock for future issuance under the Stock Compensation Plan described above. NOTE 5. OPERATING LEASES The Company leases its office facilities under an operating lease expiring in May 1997. The lease requires monthly payments of approximately $10,500. The total remaining commitment at December 31, 1995 is approximately $179,000. Rent expense for 1993, 1994 and 1995 was approximately $45,000, $82,000 and $123,000, respectively. NOTE 6. INCOME TAX MATTERS Approximate net deferred tax assets were as follows: DECEMBER 31, 1994 1995 ----------- ----------- Deferred tax assets: Net operating loss carryforwards $ 1,516,000 $ 2,825,900 Computer software development costs 446,100 164,700 Deferred revenue 285,000 163,300 Research and development credits 83,100 92,300 Allowance for doubtful accounts -- 31,200 Accrued vacation 10,800 17,600 Deferred interest income 35,400 17,000 ----------- ----------- 2,376,400 3,312,000 Less valuation allowance (2,376,400) (3,312,000) ----------- ----------- $ -- $ -- =========== =========== The Company recorded valuation allowance of approximately $2,376,400 and $3,312,000 on deferred taxes at December 31, 1994 and 1995, respectively, to reduce the total to an amount that management believes will ultimately be realized. Realization of deferred tax assets is dependent upon sufficient future taxable income during the period that deductible temporary differences and carryforwards are expected to be available to reduce taxable income. The net change in the valuation allowance for deferred tax assets was an increase of approximately $374,000, $1,447,400 and $935,600 during 1993, 1994 and 1995, respectively. At December 31, 1995, the Company had approximately $7,246,000 of net operating loss carryforwards to offset future federal taxable income. This net operating loss carryforward will, if unused, expire in the years 2006 through 2011. Approximately $4,945,000 of the total net operating loss carryforwards available to offset future federal taxable income is annually limited to approximately $1,400,000. NOTE 7. CONCENTRATION OF CREDIT RISK The Company maintains cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. NOTE 8. CONSULTING SERVICES AGREEMENT The Company is a party to a joint employer agreement with Merit Resources, Inc. (Merit), a professional employer organization, whereby Merit provides payroll administration and employee benefits services to the Company for all the Company's employees. As compensation for the above services, the Company is obligated to pay Merit an enrollment set-up fee of $40 per employee and an administrative charge of $41 per employee per month. The term of the agreement is for one year, beginning on the effective date of January 1, 1995, and will be automatically renewed from year to year, unless either party terminates the agreement upon thirty days written notice. Expense for the years ended December 31, 1993, 1994 and 1995 was $12,288, $17,671 and $23,646, respectively. NOTE 9. INITIAL PUBLIC OFFERING, REVERSE STOCK SPLIT, CONVERSION OF PREFERRED STOCK, SUPPLEMENTARY EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE AND STOCK SUBSCRIPTION RECEIVABLE In April 1995, the Company sold, through an underwritten initial public offering, 1,200,000 shares of Common Stock at $5.00 per share, which provided the Company with proceeds of approximately $5,065,120, net of offering expenses. In June 1995, an additional 100,000 shares of Common Stock were sold at $5.00 per share, pursuant to the underwriters' over-allotment provision. Cash provided from the over-allotment sale totaled approximately $435,603, net of offering expenses. As part of the initial public offering, Common Stock and Preferred Stock were adjusted for an approximate 1-for-1.8 reverse stock split and all Preferred Stock outstanding as of the date of the public offering was converted to Common Stock on a 1-for-1 basis. If all Preferred Stock converted to Common Stock would have been converted at the beginning of the year, loss per common and common equivalent share would have been $(0.65) for 1995. In January 1995, the stock subscriptions receivable balance of $881,285 was collected in full. NOTE 10. ACCOUNTS RECEIVABLE Accounts receivable at December 31, 1995 included $100,688 (none at December 31, 1994) in unbilled accounts receivable which, in accordance with generally accepted accounting principles, was recognized in revenue prior to when payments were due to the Company under the sales agreements. NOTE 11. RECLASSIFICATION Certain costs and expenses on the Statements of Operation for the fiscal years ended December 31, 1993, 1994 and 1995 and the three months ended March 31, 1995 (unaudited) have been reclassified with no effect on income. NOTE 12. RESEARCH AND DEVELOPMENT COSTS Total research and development costs charged to product development were approximately $54,500, $1,998,000 and $732,500 for 1993, 1994 and 1995, respectively. NO DEALER, SALES REPRESENTATIVES OR OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES, OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. TABLE OF CONTENTS PAGE ---- Prospectus Summary 3 Risk Factors 5 The Company 12 Use of Proceeds 12 Dividend Policy 12 Capitalization 13 Dilution 14 Price Range of Common Stock 15 Selected Financial Data 16 Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Business 24 Management 35 Compensation of Executive Officers and Directors 37 Certain Transactions 41 Principal Shareholders 42 Description of Capital Stock 43 Securities Eligible for Future Sale 44 Plan of Distribution 46 Legal Matters 47 Experts 47 Additional Information 47 Index to Financial Statements F-1 900,000 SHARES [LOGO] COMMON STOCK PROSPECTUS , 1996 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable in connection with the sale of the Common Stock being registered hereby. ITEM AMOUNT - ---- ------ SEC registration fee $ 5,601 Nasdaq Listing Fee 7,500 Blue Sky fees and expenses 5,000 Printing and engraving expenses 45,000 Legal fees and expenses 150,000 Auditors' accounting fees and expenses 45,000 Transfer Agent and Registrar fees 5,000 Miscellaneous expenses 1,899 -------- Total $265,000 ======== ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Sections 490.850 through 490.858 of the Iowa Business Corporation Act provide for the indemnification of officers and directors in terms sufficiently broad to indemnify officers and directors under certain circumstances for liabilities arising under the Securities Act of 1933, as amended. The Restated Articles of Incorporation, as amended, and amended Bylaws of the Company provide for indemnification and limit the liability of the Company's directors and officers to the fullest extent permitted under Iowa law. Liability under Federal Securities Law is not limited by the Restated Articles of Incorporation, as amended, or action by the Company's Board of Directors. The Company presently carries no directors and officers liability insurance, but may in the future provide such insurance for the benefit of its officers and directors. Reference is made to the following documents filed as exhibits to this Registration Statement regarding relevant indemnification provisions described above and elsewhere herein: EXHIBIT DOCUMENT NUMBER - -------- ------ Registrant's Restated Articles of Incorporation, as amended 3.1 Registrant's Restated Bylaws 3.2 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. The following is a summary of the transactions by Registrant during the last three years involving sales of Registrant's securities that were not registered under the Securities Act of 1933, as amended (the "Securities Act"): Except as noted, there were no underwriting discounts or commissions paid in connection with the issuance of any of these securities. A. On March 25, 1993, the Company sold an aggregate of 181,832 shares of Preferred Stock designated as Series F Preferred Stock to various individuals at a purchase price of $4.12 per share for an aggregate purchase price of $750,002, including: Edgewater Private Equity Fund, L.P. ("Edgewater"), 60,610 shares; IASD Health Services Corp. ("IASD"), 36,367 shares; Iowa Business Development Finance Corp. ("IBDFC"), 36,367 shares; Mutual Ventures of South Dakota ("MVSD"), 36,366 shares; and John Pappajohn, 12,122 shares. B. Between November 15, 1993, and October 14, 1994, the Company sold 984,343 shares of preferred stock designated as Series G Preferred Stock to various individuals at a purchase price of $4.12 per share for an aggregate cash consideration of $4,060,121, including: Edgewater, 60,610 shares; IASD, 24,244 shares; IBDFC, 36,366 shares; MVSD, 72,732 shares; John Pappajohn, 60,610 shares, Iowa Product Development Corporation ("IPDC") 24,244 shares, and IAI Investment Funds IV, VI, and VII, 181,832, 181,831, and 121,221, shares respectively. Holders of Series G Preferred Stock were granted nontransferable Class A Warrants pro rata at the rate of one warrant to acquire 109 shares of Common Stock per every $1,000 previously invested at no additional cost as of February 10, 1995, in part as consideration for their agreement to certain modifications in the terms of the Series G Preferred Stock. The Class A Warrants are exercisable at the lesser of 75% of the per share public offering price, a subsequent private placement price in a single private placement in which the Company receives at least $3,000,000 in gross proceeds, or $4.12 per share. Class A Warrant holders were granted certain limited piggyback and Form S-3 registration rights with respect to the shares issuable upon exercise of the warrants. As of April 25, 1995, holders of Class A Warrants to acquire 430,680 shares of Common Stock voluntarily relinquished all rights to such Warrants. That relinquishment was the result of a request by the Company to all holders of Series G Preferred Stock to voluntarily surrender such rights. Class A warrants to acquire 12,274 shares of Common Stock remained outstanding as of April 25, 1995. C. On December 31, 1994, the Company held subscriptions receivable of $881,285 for the purchase of Series H Preferred Stock at the purchase price of $4.12 per share on substantially the same terms and rights as the Series G Preferred Stock, including nontransferable Class A Warrants to purchase Common Stock at the rate of warrants for 109 shares of Common Stock per every $1,000 invested. Subsequently, the Company received additional subscriptions for the purchase of 44,033 shares of Series H Preferred Stock for $71,971 in cash and for the release of $109,650 in debt owed by the Company to Simon Casady. The Company then issued a total of 257,693 shares of Series H Preferred Stock and Class A Warrants to purchase 115,962 shares of Common Stock for aggregate cash consideration of $1,062,906 as of February 6, 1995, to various individuals, including: Edgewater, 31,639 shares; IBDFC, 17,449 shares; MVSD, 31,639 shares; John Pappajohn, 31,639 shares, IAI Investment Funds IV and VI, 48,488 shares each, and Simon Casady, 26,584 shares. D. On February 8, 1995, the Company issued subordinated notes in an aggregate principal amount of $500,000, and nontransferable Class B Warrants to purchase 54,549 shares of Common Stock to certain accredited investors. The subordinated notes bear interest at the rate of 14% per annum, are secured by a first subordinated lien on certain technology of the Company and matured on the closing of the initial public offering. The placement agent received a cash commission of 5% of the principal amount of the subordinated notes, and received Class B Warrants to purchase 4,555 shares of Common Stock. The Class B Warrants are exercisable at the lesser of 75% of the per share public offering price, a subsequent private placement price in a single private placement in which the Company receives at least $3,000,000 in gross proceeds, or $4.12 per share. Warrant holders were granted certain limited piggyback and Form S-3 registration rights with respect to the shares issuable upon exercise of the warrants. The sales set forth above were made in reliance on Section 3(b) or Section 4(2) of the Securities Act for transactions not involving a public offering. With regard to the reliance by the Company upon the exemptions from registration provided under the Securities Act for the sales of securities disclosed above, certain inquiries were made by the Company to establish that such sales qualified for such exemption from the registration requirements. In particular, the Company confirmed that with respect to the exemption claimed under Section 3(b) or Section 4(2) of the Securities Act (i) all offers of sales and sales were made by personal contact from officers or directors of the Company or other persons closely associated with the Company, (ii) each investor made representations that he or she was sophisticated in relation to this investment or was an "accredited investor" as defined in Rule 501 promulgated under the Securities Act (and the Company has no reason to believe such representations were incorrect), (iii) each purchaser gave assurance of investment intent and the certificates for the shares bear a legend accordingly, and (iv) offers and sales within any offering were made to a limited number of persons. ITEM 16. FINANCIAL STATEMENTS AND EXHIBITS. (a) Exhibits <TABLE> <CAPTION> EXHIBIT DESCRIPTION ------- ----------- <S> <C> 1.1 Form of Subscription Agreement. 3.1 Restated Articles of Incorporation, as amended.(1) 3.2 Restated Bylaws.(1) 4.1 Form of Common Stock Certificate.(1) 4.2 Series G Preferred Stock Purchase Agreement dated December 31, 1993.(1) 4.3 Series G Preferred Stockholders' Rights Agreement dated January 11, 1994.(1) 4.4 Series G Preferred Stock Purchase Agreement dated June 15, 1994, as amended.(1) 4.5 Series G Preferred Stockholders' Rights Agreement dated June 15, 1994, as amended.(1) 4.6 Series H Preferred Stock Purchase Agreement dated January 31, 1995.(1) 4.7 Series H Preferred Stockholders' Rights Agreement dated January 31, 1995.(1) 4.8 Preferred Stock Amendment Agreement dated as of February 10, 1995.(1) 4.9 Form of Class A Warrant Certificate.(1) 4.10 Form of Subordinated Notes dated February 8, 1995.(1) 4.11 Security Agreement Relating to Subordinated Notes dated February 8, 1995.(1) 4.12 Form of Class B Warrant Certificate.(1) 4.13 Form of Agent's Warrant.(1) 4.14 Restated Articles of Incorporation, as amended (See Exhibit 3.1).(1) 4.15 Restated By-Laws (See Exhibit 3.2).(1) 5.1 Opinion of Dorsey & Whitney LLP. 10.1 Employment Agreement for Michael Vasquez, as amended December 16, 1994.(1) 10.2 Employment Agreement for Simon Casady, as amended December 16, 1994.(1) 10.3 1995 Stock Compensation Plan, effective February 10, 1995.(1) 10.4 Form of Incentive Stock Option Agreement.(1) 10.5 Form of Non-Qualified Stock Option Agreement.(1) 10.6 Form of Non-Employee Director Non-qualified Stock Option Agreement.(1) 10.7 Incentive Stock Option Agreement for Michael J. Vasquez dated December 16, 1994.(1) 10.8 Form of Five-year Employee Warrants.(1) 10.9 Form of Three-year Employee Warrants.(1) 10.10 Compensatory Warrants issued to Director Carl S. Witonsky dated April 22, 1994 and December 16, 1994.(1) 10.11 Compensatory Warrants issued to Director William W. Childs dated February 26, 1990, and December 16, 1994.(1) 10.12 Form of Lockup Agreements with Executive Officers, Directors and Shareholders.(1) 10.13 Consulting Services Agreement with Steven Evans dated December 31, 1993.(1) 10.14 Consulting Services Agreement with Carl S. Witonsky dated January 1, 1995.(1) 10.15 Software Purchase Agreement with JRS Clinical Technologies, Inc., dated October 18, 1993, and amendments thereto.(1) 10.16 COMMES Purchase Agreement between the Company and Creighton University dated December 18, 1989.(1) 10.17 Office Lease and Amendments thereto between the Company and Ashworth Plaza Ltd.(1) 10.18 Merit Client Agreement dated January 1, 1995.(1) 10.19 Master Agreement with Customer dated September 30, 1994.(1) 10.20 Nonqualified Executive Stock Option Plan.(1) 10.21 Employment Agreement with Mark J. Emkjer dated February 15, 1996. 11.1 Earnings Per Share Calculation. 16.1 Letter on change in certifying accountant.(1) 23.1 Consent of McGladrey & Pullen, LLP, Independent Auditors. 23.2 Consent of Dorsey & Whitney LLP (contained in Exhibit 5.1 above). 24.1 Power of Attorney (previously included on page II-5 of the Registration Statement). </TABLE> (1) Incorporated by reference to the corresponding exhibit numbers in the Company's Registration Statement on Form SB-2 filed on March 17, 1995, Registration No. 33-90409-C. (2) Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31, 1996, Commission File No. 0-27554. ITEM 17. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described in Item 14, or otherwise, the Registrant has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer of controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the Registrant will treat the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant under Rule 424(b)(1), or(4), or 497(h) under the Securities Act as part of this registration statement as of the time the Commission declares it effective. (2) For purposes of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. SIGNATURES In accordance with the requirement of the Securities Act of 1933, as amended, the Registrant has duly caused this Amendment No. 1 to the Registration Statement on Form S-1 to be signed on its behalf by the undersigned, in the City of West Des Moines, State of Iowa, on the 8th day of August, 1996. PACE HEALTH MANAGEMENT SYSTEMS, INC. By: /s/ MARK J. EMKJER Mark J. Emkjer CHIEF EXECUTIVE OFFICER AND DIRECTOR In accordance with the requirements of the Securities Act of 1933, as amended, this Amendment No. 1 to the Registration Statement was signed by the following persons in the capacities indicated below as of August 8, 1996. <TABLE> <CAPTION> SIGNATURE TITLE DATE <S> <C> <C> /S/ MARK J. EMKJER Chief Executive Officer and Director August 8, 1996 Mark J. Emkjer (Principal Executive Officer) /S/ ROGER D. HUSEMAN Vice President of Finance and Administration, August 8, 1996 Roger D. Huseman Chief Financial Officer and Secretary and Treasurer * Carl S. Witonsky Chairman of the Board and Director August 8, 1996 * John G. Pappajohn Director August 8, 1996 * R. David Spreng Director August 8, 1996 * William W. Childs Director August 8, 1996 * Gordon M. Derzon Director August 8, 1996 </TABLE> By: /s/ MARK J. EMKJER Mark J. Emkjer Attorney-in-Fact INDEX TO EXHIBITS <TABLE> <CAPTION> EXHIBIT DESCRIPTION PAGE <S> <C> <C> 1.1 Form of Subscription Agreement. 5.1 Opinion of Dorsey & Whitney LLP. 10.21 Employment Agreement with Mark J. Emkjer dated February 15, 1996. 11.1 Earnings Per Share Calculation. 23.1 Consent of McGladrey & Pullen, LLP, Independent Auditors. 23.2 Consent of Dorsey & Whitney LLP (contained in Exhibit 5.1 above). </TABLE> </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-1.1 <SEQUENCE>2 <DESCRIPTION>SUBSCRIPTION AGREEMENT <TEXT> IMPORTANT: PLEASE READ CAREFULLY BEFORE SIGNING. SIGNIFICANT REPRESENTATIONS ARE CALLED FOR HEREIN. PARAGRAPH 3 AND PAGES 4 AND 5 REQUIRE COMPLETION SUBSCRIPTION AGREEMENT PACE Health Management Systems, Inc. 1025 Ashworth Road West Des Moines, Iowa 50265 Ladies and Gentlemen: The undersigned hereby tenders this subscription and applies for the purchase of the number of shares of Common Stock, no par value (the "Shares"), of PACE Health Management Systems, Inc., an Iowa corporation (the "Company"), set forth on the signature page below, at a price of $3.25 per Share. By execution of this Subscription Agreement, the undersigned acknowledges that the Company is relying upon the accuracy and completeness of the representations contained herein in complying with its obligations under applicable securities laws. 1. The undersigned acknowledges and represents as follows: (a) That the undersigned has received, carefully reviewed and is familiar with this Subscription Agreement for Common Stock (the "Agreement") and the Prospectus dated August 8, 1996 (together with all appendices and supplements (if any) thereto) (the "Prospectus"); (b) That the undersigned is in a financial position to hold the Shares for an indefinite period of time and is able to bear the economic risk and withstand a complete loss of the undersigned's investment in the Shares; (c) That the undersigned believes the undersigned, either alone or with the assistance of the undersigned's own professional investment advisor, has such knowledge, business acumen and experience in financial and business matters that the undersigned is capable of fully analyzing the financial and other risks applicable to the Company and its business as well as evaluating the merits and risks of the prospective investment in the Shares and has the net worth to undertake such risks; (d) That the undersigned has obtained, to the extent the undersigned deems necessary, the undersigned's own personal professional advice with respect to the risks inherent in the investment in the Shares, and the suitability of an investment in the Shares in light of the undersigned's financial condition and investment needs; (e) That the undersigned believes that the investment in the Shares is suitable for the undersigned based upon the undersigned's investment objectives and financial needs, and the undersigned has adequate means for providing for the undersigned's current financial needs and personal contingencies and has no need for liquidity of investment with respect to the Shares; (f) That the undersigned has been given access to full and complete information regarding the Company and has utilized such access to the undersigned's satisfaction for the purpose of obtaining information in addition to, or verifying information included in the Agreement and the Prospectus and, particularly, the undersigned has either attended or been given reasonable opportunity to attend a meeting with representatives of the Company, including the Company's President, for the purpose of asking questions of, and receiving answers from, such representatives concerning the Company and to obtain any additional information necessary to make an investment decision with respect to the Shares; (g) That the undersigned recognizes that an investment in the Shares involves a high degree of risk, including, but not limited to, the risks set forth in the Prospectus under the caption "Risk Factors"; (h) That the undersigned realizes that (i) the purchase of the Shares is a long-term investment; (ii) the purchaser of the Shares must bear the economic risk of investment for an indefinite period of time because the Shares have not been registered under the securities laws of any state and, therefore, none of such securities can be sold unless they are subsequently registered under said laws or exemptions from such registrations are available; and (iii) the undersigned may not be able to liquidate the undersigned's investment in the event of an emergency or pledge any of such securities as collateral for loans; and (i) That the undersigned certifies, under penalties of perjury, that the undersigned is NOT subject to the backup withholding provisions of Section 3406(a)(i)(C) of the Internal Revenue Code of 1986, as amended (Note: you are subject to backup withholding if (i) you fail to furnish your Social Security number or taxpayer identification number herein; (ii) the Internal Revenue Service notifies the Company that you furnished an incorrect Social Security number or taxpayer identification number; (iii) you are notified that you are subject to backup withholding; or (iv) you fail to certify that you are not subject to backup withholding or you fail to certify your Social Security number or taxpayer identification number.) 2. The undersigned represents and warrants that the undersigned is a bona fide resident of, is domiciled in and received the offer and made the decision to invest in the Shares in the State set forth on the signature page below and that the Shares are being purchased by the undersigned in the undersigned's name solely for the undersigned's own beneficial interest and not as nominee for, or on behalf of, or for the beneficial interest of, or with the intention to transfer to, any other person, trust or organization. 3. The undersigned represents and warrants that the undersigned is an "accredited investor" as defined in Rule 501(a) of Regulation D of the Securities Act of 1933, as amended (the "Securities Act"), because the undersigned meets at least one of the following criteria (please check one): - ----- The undersigned is either (i) a bank as defined in Section 3(a)(2) of the Securities Act, or any savings and loan association or other institution as defined in Section 3(a)(5)(A) of the Securities Act whether acting in its individual or fiduciary capacity, any broker or dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934, (ii) an insurance company as defined in Section 2(13) of the Securities Act, (iii) an investment company registered under the Investment Company Act of 1940 or a business development company as defined in Section 2(a)(48) of such Act, (iv) a Small Business Investment Company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958, or (v) an employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974, if the investment decision is made by a plan fiduciary, as defined in Section 3(21) of such Act, which plan fiduciary is either a bank, savings and loan association, insurance company or registered investment adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons who are accredited investors; or - ----- The undersigned is a private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940; or - ----- The undersigned is a corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the Shares, with total assets in excess of $5,000,000, or an organization described in Section 501(c)(3) of the Internal Revenue Code; or - ----- The undersigned is a director or executive officer of the Company; or - ----- The undersigned is a natural person whose individual net worth, or joint net worth with his or her spouse, exceeds $1,000,000 at the time of the undersigned's purchase; or - ----- The undersigned is a natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with the undersigned's spouse in excess of $300,000 in each of those years and who reasonably expects to reach the same income level in the current year; or - ----- The undersigned is a trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the Shares, whose purchase is directed by a sophisticated person as described in Rule 506(b)(2)(ii) of Regulation D of the Securities Act. - ----- The undersigned is any entity in which all of the equity owners are accredited investors (if this item is checked, a Subscription Agreement and Letter of Investment Intent must be completed for each equity owner of such entity). 4. The undersigned hereby irrevocably agrees that he, she or it will not, without the prior written approval of the Company, offer, sell, contract to sell, make any short sale (including, but not limited to, a "short against the box"), pledge, or otherwise dispose of directly or indirectly, any Shares of Common Stock purchased by the undersigned pursuant to this Agreement for a period of two hundred seventy (270) days following the date on which the Shares are issued to the undersigned pursuant to this Agreement. Notwithstanding the foregoing, any transfer of Shares of Common Stock of the Company which either (i) will not result in any change in beneficial ownership, including, but not limited to, pro rata partnership distributions and transfers into trusts for the benefit of the original holder, or (ii) constitute bona fide gifts of such shares will not require the consent of the Company, provided, that the transferee enters into a lock-up agreement with substantially the same provisions as this Section 4 covering the remainder of the lock-up period hereunder. The undersigned confirms that he, she or it understands that the Company will rely upon the representations set forth in this Agreement in proceeding with the sale and issuance of the Shares hereunder. The undersigned understands that this Agreement is irrevocable and shall be binding on the undersigned and his, her or its respective successors, heirs, personal representative and assigns. The undersigned agrees and consents to the entry of stop transfer instructions with the Company's transfer agent against the transfer of Common Stock or other securities of the Company held by the undersigned except in compliance with this Agreement. 5. Securities laws of certain states may impose requirements in addition to those set forth herein. Acceptance of this subscription by the Company will be contingent on the satisfaction of all such requirements. SIGNATURE PAGE I. The Number of Shares of Common Stock of PACE Health Management Systems, Inc. that I wish to Subscribe for: - ------------------- --------------------------------------------- Number of Shares Payment enclosed ($3.25 multiplied by the number of Shares) (Make checks payable to "PACE Health Management Systems, Inc.") II. Manner in which title is to be held (check the correct box): [ ] Individual [ ] Tenants in Common [ ] Joint Tenants with [ ] Corporation Right of Survivorship [ ] Trust [ ] Partnership [ ] Other (please describe ____________) III. Name in which title is to be held (please print--the certificates will be issued in this name): -------------------------------------------------------------------------- First Name Middle Initial Last Name IV. Addresses (A.) Address of Subscriber's Domicile and Bona Fide Residence -------------------------------------------------------------------------- Street Address or PO Box -------------------------------------------------------------------------- City, State and Zip Code ----------------------------------------- Telephone Number (B.) Address to Which Correspondence Should be Directed (if different from above) -------------------------------------------------------------------------- Street Address or PO Box -------------------------------------------------------------------------- City, State and Zip Code ----------------------------------------- Telephone Number V. Social Security or Tax ID Number ----------------------------------- VI. Signatures: (A) Individual Signatures ----------------------------------- ---------------------------------- Signature Second Signature (If purchasing as joint tenants or tenants in common, both parties must sign) ----------------------------------- Date (B) Corporate, Partnership and other Entities ----------------------------------- ---------------------------------- Print Name of Entity Entity Type (partnership, corporation, etc.) ----------------------------------- ---------------------------------- By (signature of person signing) Its (title of person signing) ----------------------------------- Date This Subscription Agreement and Letter of Investment Intent is accepted as of _______________, 1996. (DAY AND MONTH) PACE HEALTH MANAGEMENT SYSTEMS, INC. By ________________________________ CERTIFICATE OF SIGNATORY (Not to be completed by individuals) I,_______________________________________________________, am the __ __________ (PRINTED NAME OF PERSON SIGNING; FIRST NAME, MI, LAST NAME) (TITLE) of ______________________________________________________________ (the "Entity") (NAME OF ENTITY) I certify that I am empowered and duly authorized by the Entity to execute and carry out the terms of the Subscription Agreement and Letter of Investment Intent and to purchase and hold the Shares, and certify further that the Subscription Agreement and Letter of Investment Intent has been duly and validly executed on behalf of the Entity and constitutes a legal and binding obligation of the Entity. IN WITNESS WHEREOF, I have hereto set my hand this______day of___________, 1996. (DAY) (MONTH) ____________________________________________ (SIGNATURE) </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-5.1 <SEQUENCE>3 <TEXT> EXHIBIT 5.1 [Dorsey & Whitney LLP Letterhead] PACE Health Management Systems, Inc. 1025 Ashworth Road, Suite 420 West Des Moines, IA 50265 Re: Registration Statement on Form S-1 Ladies and Gentlemen: In connection with Amendment No. 1 to the Registration Statement (the "Registration Statement") on Form S-1 filed By PACE Health Management Systems, Inc. (the "Company") with the Securities and Exchange Commission on or about the date hereof relating to an offering of up to 900,000 shares of Common Stock, no par value, of the Company (the "Shares") we have examined such corporate documents and records and reviewed such matters of law as we have deemed necessary or advisable for the purposes of this opinion, and based thereon, we advise you that it is our opinion that: 1. The Company is a validly existing corporation in good standing under the laws of the State of Iowa. 2. The Shares, when issued and paid for as contemplated in the Registration Statement, will be validly issued, fully paid and nonassessable. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to our firm under the heading "Legal Matters" in the Prospectus comprising a part of the Registration Statement. Dated: August 8, 1996 /s/ DORSEY & WHITNEY LLP DJL </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-11.1 <SEQUENCE>4 <TEXT> EXHIBIT 11.1 PACE HEALTH MANAGEMENT SYSTEMS, INC. EARNINGS PER SHARE CALCULATION (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, 1992 1993 1994 1995 1995 1996 ------ ------- ------- ------- ------ ------ (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> Weighted average number of shares outstanding 1,034 1,043 1,069 3,092 1,028 4,152 Net loss available for common and common equivalent shares $ (421) $(1,024) $(3,623) $(2,412) $ (348) $ (630) Loss per common and common equivalent share $(0.41) $ (0.98) $ (3.39) $ (0.78) $(0.34) $(0.15) </TABLE> The above computation has been adjusted to reflect a 1-for-1.8 stock split effected prior to the date of the Company's initial public offering (April 27, 1995). </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.21 <SEQUENCE>5 <DESCRIPTION>EXECUTIVE EMPLOYMENT AGREEMENT <TEXT> EXECUTIVE EMPLOYMENT AGREEMENT THIS AGREEMENT is made effective as of February 15, 1996 by PACE Health Management Systems, Inc., 1025 Ashworth Road, West Des Moines, Iowa 50265, an Iowa corporation (the "Company") and Mark J. Emkjer, 4310 Oakwood Lane, West Des Moines, Iowa 50265 ("Emkjer"). 1. Employment. The Company hereby employs Emkjer as its Chief Executive Officer and as a Director on the Board of Directors for an indefinite term commencing March 18, 1996 (the "Commencement Date"). This employment is full-time, and Emkjer agrees to perform the duties as are customary to these offices, and those duties assigned to him from time-to-time by the Board of Directors. 2. Compensation and Benefits; Reimbursement of Expenses. 2.1 Salary. Emkjer's base salary is $165,000 annually, payable in semi-monthly installments, less required withholdings for taxes, the employee's portion of FICA, et cetera. 2.2 Benefits. Emkjer is entitled to receive the medical, disability, and life insurance coverage, and the vacation, sick leave and holiday benefits, as are made available to the Company's top executive personnel, all in accordance with the Company's benefits program in effect from time to time. 2.3 Signing Bonus. The Company will pay Emkjer on a one time basis $10,000 to compensate him for the incidental expenses associated with moving from California to Iowa, not covered by Section 2.7. 2.4 Annual Bonuses. In addition to Emkjer's base salary, either as set initially by this Agreement, or by the Board after an annual review, Emkjer may receive an annual bonus of up to 50% of his base compensation. Bonuses will be determined by the Board and based on goals determined by the Board in the areas of a) financial performance, b) stock price appreciation, and c) operating objectives. 2.5 Stock Options. The Company grants Emkjer the following stock options: (a) 100,000 shares of common stock of the Company pursuant non-qualified stock options, with an exercise price of $2.50 per share, and with vesting of 20% of the shares on each of the first five anniversaries of the Commencement Date, if Emkjer is still employed on that anniversary. (b) 110,000 shares of common stock of the Company, pursuant to non-qualified stock options, with an exercise price of $1.00 per share, with vesting to take place as follows: (i) 35,000 shares when Emkjer has purchased a home and relocated his family to Des Moines, and (ii) 15,000 shares vesting on each of the first five anniversaries of the Commencement Date, if Emkjer is still employed on that anniversary. Although this option is not issued pursuant to the Company's qualified incentive stock option plan, it must be exercised in accordance with the terms of the Company's qualified incentive stock option plan. 2.6 Reimbursement of Expenses. The Company will reimburse Emkjer for expenses, including those for travel, meals, and entertainment, incurred by Emkjer in connection with and reasonably related to the furtherance of the Company's business. 2.7 One-time Moving Expense Reimbursement. The Company will promptly reimburse Emkjer for the cost of selling his home and relocating his family from San Ramon, California, to Des Moines, Iowa. These costs include, among other things, monthly payments on the loan secured by Emkjer's California residence for each month that Emkjer also is maintaining a home in Iowa (provided Emkjer is taking reasonable steps to sell his California residence), the sales commission on his present home in California, home loan and moving expenses for Emkjer and his family. The Company will reimburse Emkjer for these expenses upon Emkjer providing reasonable documentation regarding the expenses. 2.8 Annual Review of Emkjer's Performance. On each anniversary of the Commencement Date, the Board of Directors of the Company will review Emkjer's employment performance and all elements of his compensation. The Board will consider whether to increase any component of Emkjer's compensation, but in no event will the Board reduce Emkjer's compensation without the written consent of Emkjer. 3. Change of Control. If there is a Change of Control of the Company (as defined below), all unvested options then granted to Emkjer on the date of the Change of Control will be vested immediately. A "Change of Control" of the Company has occurred when: (a) in one transaction or a series of related transactions, the sale or other transfer of voting power (including voting power exercisable on a contingent or deferred basis as well as immediately-exercisable voting power) representing effective control of the Company is made to a person or group of related persons who, on the date of this Agreement, is not affiliated (within the meaning of the Securities Act of 1933) with the Company, whether the sale or transfer results from a tender offer or otherwise; or (b) a merger or consolidation in which the Company is a constituent corporation, and in which the Company's shareholders immediately prior to the merger or consolidation, will beneficially own, immediately after it, securities of the Company or any surviving or new corporation resulting therefrom, having less than a majority of the voting power of the Company or any surviving or new corporation; or (c) a sale, lease, exchange or other transfer or disposition by the Company of all or substantially all its assets to any person or group of related persons. 4. Severance. If the Company discharges Emkjer without cause, then the Company shall pay to Emkjer, as consideration for the post employment covenants herein, on the thirtieth day of each of the 6 months following the termination, an amount equal to Emkjer's then current monthly base salary, provided however, the Company shall no longer be obligated to make such payments if Emkjer has violated the post employment covenants herein. 5. Termination. 5.1 Events of Termination. The employment of Emkjer will terminate on the occurrence of any of the following events, with the last day of Emkjer's employment (whether pursuant to notice or otherwise) being referred to as the "Termination Date": (a) Emkjer dies; (b) The Company, by written notice to Emkjer or his personal representative, discharges Emkjer due to his inability to perform the duties assigned to him for a continuous period exceeding 90 days by reason of injury, physical or mental illness or other disability, which condition has been certified by a physician. But, prior to discharging Emkjer pursuant to this subparagraph, the Company must give a written statement of findings to Emkjer or his personal representative setting forth specifically the nature of the disability and the resulting performance failures. Emkjer will have a period of ten (10) days thereafter to respond in writing to the Board of Directors' findings; (c) Emkjer is discharged by the Board of Directors of the Company for cause. In this Agreement, the term "cause" means: (i) Emkjer's conviction of (or pleading guilty or nolo contendere to) a felony or misdemeanor involving dishonesty or moral turpitude; or (ii) (a) The willful and continued failure of Emkjer to substantially perform his duties with the Company (other than a failure resulting from illness or disability) after a demand for substantial performance is requested by the Company's Board of Directors, which specifically identifies the manner in which it is claimed Emkjer has not substantially performed his duties, or (b) Emkjer is willfully engaged in misconduct which has a direct and material adverse monetary effect on the Company. For purposes of this subpart (ii), no act or failure to act on Emkjer's part shall be considered "willful" unless done, or omitted to be done, by Emkjer in bad faith and without reasonable belief that Emkjer's action or omission was in the best interest of the Company. No termination may occur for cause pursuant to this subpart (ii) unless Emkjer has been provided with specific information as to the acts or omissions which form the basis of the allegation of cause, and Emkjer has had an opportunity to be heard, with counsel if he so desires, before the Board of Directors and the Board determines that Emkjer was guilty of conduct constituting "cause" as defined, specifying the particulars thereof in detail; (d) Emkjer is discharged by the Board of Directors of the Company without cause, which the Company may do at any time after 90 days notice to Emkjer; (e) Emkjer voluntarily terminates his employment due to a default by the Company in the performance of any of its obligations in this Agreement, and the default remains uncured by the Company more than ten days following its receipt of written notice from Emkjer; or (f) Emkjer voluntarily terminates his employment for any reason other than the Company's default, which Emkjer may do at any time after 90 days notice to the Company. 6. Proprietary Information; Developments. Emkjer must not, during his employment by the Company or any time thereafter, disclose any Proprietary Information (as trade secret is defined in the Uniform Trade Secrets Act) to any third party, without the written consent of the Board of Directors. Emkjer hereby assigns all works of authorship, inventions or trade secrets developed by him, either alone or with others, and within the scope of his employment, to the Company. Emkjer also agrees to provide the Company, at the Company's expense, the reasonable effort necessary to perfect or enforce its rights in these assets. 7. Emkjer's Post-Employment Covenants. For a period of one year following the Termination Date, for whatever reason, Emkjer agrees: (a) He will not, directly or indirectly, whether for his own account or as an individual, employee, director, consultant or advisor, or in any other capacity whatsoever, provide services to any person, firm, corporation or other business enterprise that is involved in the conception, development or marketing of any products or services that are or maybe competitive with either (i) the products and services manufactured and/or marketed by Company prior to Emkjer's termination, or (ii) products and/or services which the Company is in the process of developing prior to Emkjer's termination, unless he obtains the prior written consent of the Board of Directors. (b) He will not, directly or indirectly, encourage or solicit, or attempt to encourage or solicit, any individual to leave the Company's employ for any reason, or interfere in any other manner with the employment relationships at the time existing between the Company and its current or prospective employees. (c) He will not induce, or attempt to induce, any customer, supplier, distributor, licensee or any other party having a business relationship with the Company to cease doing business with the Company, or in any way interfere with the existing business relationship between any customer, supplier, distributor, licensee or any other party and the Company. (d) The parties do not intend to interfere with Emkjer's ability to obtain gainful employment after the Termination Date for any period of time unless Emkjer has received payment as required by Section 4 above for the time period in question. Regardless of whether the post employment covenants are applicable Emkjer shall at all times be forbidden from engaging in unfair competition against the Company. 8. Remedy for Breach. Emkjer acknowledges that money damages may not be sufficient to compensate the Company for any loss incurred by reason of a breach of Emkjer of paragraphs 6 or 7 of this Agreement. Therefore, Emkjer agrees that equitable relief, by injunction or otherwise, ought to be available to the Company for any breach by him of paragraph 6 or 7, in addition to any other remedies to which the Company may be entitled. 9. Arbitration. Any dispute between the parties relating in any way to this agreement shall be resolved by binding arbitration of the American Arbitration Association in Des Moines, Iowa in accordance with the Association's commercial rules, and judgment may be entered upon the award by any court having appropriate jurisdiction thereof. Any questions concerning arbitrability shall be determined by the arbitrator. The filling of a lawsuit to obtain injunctive relief shall not be deemed to be a waiver of the right to arbitrate. A petition for a temporary restraining order shall be determined by the court, but issues relating to a preliminary injunction, a permanent injunction and/or damages shall be resolved by the arbitrator. If any restriction imposed on Emkjer by this Agreement is determined to be unreasonably broad, then the arbitrator may limit the scope of the restriction and may enforce the restriction as limited. 10. Attorney Fees. In any arbitration or court proceeding involving any dispute relating to this Agreement, the prevailing parties shall be entitled to reasonable attorneys fees and costs. 11. Miscellaneous. This Agreement is governed, both as to validity and performance, by the laws of the State of Iowa, but, Iowa conflicts laws must not be applied by a court or arbitrator so as to apply the substantive law of another jurisdiction. This is the entire Agreement of the parties, and it merges any prior agreements or understandings of the parties related to the employment of Emkjer by the Company. If any provision of this Agreement is determined by a court or arbitrator of competent jurisdiction to be invalid or unenforceable, the remaining terms of the contract will nevertheless continue, and the parties or a court or arbitrator will endeavor to interpret those terms so as to give effect to the intention of the parties. The failure of a party to enforce any term of this Agreement will not be construed as a wavier of that term, nor will it prevent that party from enforcing that term or any other term of this Agreement. Any lawsuit between the parties relating in any way to this Agreement must be filed only in the State or Federal Court situated in Polk County, Iowa. This Agreement may be amended or supplemented only by a writing signed by each party. This Agreement, or any amendments or supplements to it, may be signed in counterparts. All notices required or permitted by this Agreement must be mailed or sent by facsimile transmission to the party at the address listed in the preamble, except as a party otherwise designates in writing. Notices are deemed received three days after mailing by US mail postpaid, registered or certified, or immediately if sent by facsimile transmission. This Agreement binds the heirs, successors, and assigns of each party, but, the obligations imposed on each party by this Agreement must not be delegated without the written consent of each party, but, the Company may assign all its rights and obligations under this Agreement to a successor by merger or sale of substantially all of its assets. IN WITNESS WHEREOF, the Company and Emkjer have signed this Agreement effective the date written in the preamble. PACE HEALTH MANAGEMENT MARK J. EMKJER SYSTEMS, INC. By:________________________________ /s/ MARK J. EMKJER Date Signed:________________________ Date Signed: February 15, 1996 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-23.1 <SEQUENCE>6 <TEXT> EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS To the Board of Directors PACE Health Management Systems, Inc. 1025 Ashworth Road West Des Moines, IA 50265 We hereby consent to the use in this Registration Statement on Form S-1 of our report, dated January 19, 1996, relating to the financial statements of PACE Health Management Systems, Inc. and to the reference to our Firm under the caption "Experts" in the Prospectus. /s/ McGladrey & Pullen, LLP McGLADREY & PULLEN, LLP Des Moines, Iowa August 8, 1996 </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000943356_shipholdin_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000943356_shipholdin_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY AND SHOULD BE READ IN CONJUNCTION WITH THE MORE DETAILED INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE REQUIRES, "COMPANY" REFERS TO SHIPHOLDING INTERNATIONAL, INC. SHARE NUMBERS HAVE BEEN ADJUSTED TO REFLECT A 1,275 FOR 1 STOCK SPLIT AUTHORIZED IN FEBRUARY 1996. AN INVESTMENT IN THE UNITS OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000943563_dominick_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000943563_dominick_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. For purposes of this Prospectus, unless the context otherwise requires, the "Company" refers to Dominick's Supermarkets, Inc. and its consolidated subsidiaries, including its principal operating subsidiary, Dominick's Finer Foods, Inc. ("Dominick's"). All references to fiscal years in this Prospectus refer to the fiscal year ending on the Saturday closest to October 31st of the year indicated (fiscal 1995 refers to the combined fiscal periods of the Company and its predecessor for the 52 weeks ended October 28, 1995). The Company's fiscal year generally consists of three 12-week quarters and a 16-week third quarter. All references to market share and demographic data in this Prospectus are based upon industry publications and, unless otherwise indicated, all references to numbers of stores are as of October 22, 1996. Unless otherwise indicated, all information in this Prospectus (i) assumes that the over-allotment option granted to the Underwriters is not exercised and (ii) has been adjusted to reflect a 14.638-for-one stock split of the Company's common stock which was effected prior to the date of this Prospectus. THE COMPANY The Company is the second largest supermarket operator in the greater Chicago metropolitan area with 100 stores. Through its 70 years of operation, the Company has developed a valuable and strategically located store base, strong name recognition, customer loyalty and a reputation as a quality and service leader among Chicago-area supermarket chains. The Company operates 83 full-service supermarkets under the Dominick's(R) name, including 22 Fresh Stores, and 17 price impact supermarkets under the Omni name. The Company is the only Chicago-area supermarket chain to operate both full-service and price impact formats, which allows it to serve a broader customer base and tailor its stores to the demographic characteristics of individual store locations. The Company has a well-maintained and modern store base, with approximately 75% of its stores new or remodeled since 1989. While the Company's total number of stores has remained relatively constant since 1989, average selling square feet per store has increased by approximately 27%. The Company has increased its market share among Chicago-area supermarkets from 19.0% in 1989 to 25.4% in 1995. With the exception of Jewel Food Stores, which had a 35.6% market share in 1995, no other supermarket operator in the Chicago area has more than a 5% market share. The Chicago metropolitan area is the nation's third largest Metropolitan Statistical Area with a reported population of approximately 7.7 million people, approximately 2.8 million households and a stable and diverse economic base which includes major manufacturing, transportation, finance and other business centers. According to the U.S. Bureau of the Census, the population of suburban Chicago, where nearly 80% of the Company's stores are located, has grown by approximately 12% since 1986. According to a recent report issued by the U.S. Department of Commerce, by the year 2005 the Chicago area is also expected to have a population of 8.3 million residents and the largest increase in jobs of all of the nation's major metropolitan areas. The Company believes that its existing market share and its plans to add new stores will allow it to benefit from the continuing growth of the Chicago area. DOMINICK'S. The Company's Dominick's stores are full-service supermarkets that emphasize quality, freshness and service. The Company classifies its Dominick's stores into three categories: Conventional Supermarkets. Dominick's 23 conventional supermarkets are typically located in higher density population areas and average approximately 43,100 square feet in size (including approximately 28,900 square feet of selling space). All of the Company's conventional supermarkets include a variety of service departments typically found in full-service supermarkets such as delicatessen, bakery, meat and seafood departments, and a limited selection of health and beauty care products. Many stores also feature salad bars, prepared foods, floral departments, film processing and liquor. Combination Food and Drug Stores. Dominick's 38 combination food and drug stores average approximately 57,600 square feet in size (including approximately 40,300 square feet of selling space). The combination food and drug stores offer all products and services typically found in a conventional supermarket and, by virtue of their large size, include a full-service drug store complete with a pharmacy, a broader line of health and beauty care products and an expanded selection of seasonal merchandise. Fresh Stores. Dominick's 22 Fresh Stores are enhanced combination food and drug stores designed to create a European-style fresh market atmosphere and emphasize the store's visual appeal and quality merchandise perception. The Company's Fresh Stores feature significant upgrades in store design and fixtures and offer an expanded assortment of high quality fresh produce and other perishables, a large selection of restaurant-quality prepared foods for carry-out and in-store dining and a superior line of freshly baked goods and pastry items. Fresh Stores also typically offer expanded delicatessen, bakery, meat, seafood and floral departments and additional service departments such as a gourmet coffee cafe. The first Fresh Store was introduced in 1993 through the conversion of an existing conventional supermarket. A total of 14 stores have been converted to date, resulting in an average increase in customer counts, sales per square foot and store contribution margins for the converted stores over pre-conversion levels. In addition to the 14 Fresh Stores converted, eight new Fresh Stores have been opened, and an estimated 16 additional Fresh Stores are expected to be opened or converted by the end of fiscal 1998. Converted Fresh Stores average approximately 53,000 square feet in size (including approximately 39,300 square feet of selling space) while new Fresh Stores are expected to average approximately 70,000 square feet (including approximately 55,000 square feet of selling space). OMNI. The Company's 17 Omni stores are high-volume, price impact combination food and drug stores emphasizing low prices and a broad selection of products while offering less extensive service departments than traditional full-service supermarkets. Omni stores average approximately 92,300 square feet (including approximately 65,300 square feet of selling space). Omni stores offer modified everyday low prices and compete effectively with warehouse formats and other discount retailers in the Chicago area. Omni stores have an approximate 7.2% market share, giving Omni the third largest market share among Chicago-area supermarkets on a stand-alone basis. GROWTH AND OPERATING STRATEGY The Company was formed by The Yucaipa Companies ("Yucaipa") for the purpose of effecting the acquisition of Dominick's on March 22, 1995 (the "Acquisition"). Yucaipa is a private investment group specializing in the acquisition and management of supermarket chains, and has investments in and currently manages supermarket chains with total combined sales of approximately $11 billion in their most recent fiscal years. Since the Acquisition, the Company has increased its EBITDA margin for each fiscal quarter, achieving a 5.4% margin in the 16-week period ended August 3, 1996 as compared to 4.8% in the same period in fiscal 1995. The Company's senior managers have, on average, over 20 years of experience in the food retailing industry. Management, in conjunction with Yucaipa, has formulated a strategic plan to increase sales and profitability consisting of the following key elements: ACCELERATE NEW STORE PROGRAM. From 1987 until 1993, the Company's store development program was focused primarily on developing combination food and drug stores or converting existing conventional Dominick's stores to the combination format, closing underperforming stores and creating a critical mass of Omni stores. From fiscal 1994 until the Acquisition, the Company's growth plan was focused on the conversion of existing stores to the Fresh Store concept. During that period, only one new store was opened. Since the Acquisition, management and Yucaipa have developed a growth strategy designed to emphasize the expansion of the Dominick's store format in areas currently underserved by the Company. As part of this strategy, management undertook an aggressive plan to identify and develop new store sites and has since opened eight new Fresh Stores during the second half of fiscal 1996. In addition, management expects to continue to grow the Company's store base by opening nine Fresh Stores and one Omni store in fiscal 1997 and seven Fresh Stores and one Omni store in fiscal 1998. EXPAND DOMINICK'S FRESH STORE CONCEPT. The results of the Company's 14 Fresh Store conversions have been highly favorable and have resulted in an average increase in estimated annualized sales of approximately 27% compared to such stores prior to their conversion. It is currently anticipated that substantially all of the Company's new Dominick's combination food and drug stores will be Fresh Stores. A number of existing Dominick's conventional supermarkets and combination food and drug stores will also be converted to Fresh Stores over the next two years. In addition, certain elements of the Fresh Store concept, including expanded produce and perishable departments, are currently being incorporated into many of the remaining Dominick's stores as part of the chain-wide emphasis on high quality perishables. The Company believes that the expansion of its Fresh Store concept through the addition of new stores and the conversion of existing stores should have a favorable impact on the Company's growth in sales and profitability. CONTINUE TO IMPROVE PROFIT MARGINS. At the time of the Acquisition, management and Yucaipa identified areas of opportunity for operating improvements which they believed would result in approximately $23 million of annual cost reductions compared to pre-Acquisition levels. These included: (i) purchasing improvements resulting in part from renegotiating vendor contracts and coordinating its buying efforts with other Yucaipa-managed supermarket chains, (ii) labor productivity improvements resulting from increased automation of labor planning systems and changes in labor processes and procedures, (iii) general and administrative expense and occupancy expense reductions and (iv) other merchandising and buying improvements. The Company believes that, as of the end of the third quarter of fiscal 1996, it had implemented operating improvements which should provide, on an annualized basis, a level of cost savings substantially equal to the $23 million estimated at the time of the Acquisition. The Company believes that approximately $17 million of such cost savings are reflected in its results of operations for the 52-week period ended August 3, 1996. In addition, management has identified additional potential cost savings and efficiencies, including an increase in the percentage of private label sales, which it has begun to implement. The Company believes that these cost savings, combined with the greater number of Fresh Stores, should result in higher overall operating margins than the Company has experienced historically. THE ACQUISITION The Company consummated the Acquisition for an aggregate purchase price of approximately $692.9 million, including $124.5 million of assumed indebtedness (but excluding fees and expenses of $41.2 million). The principal sources of cash to finance the Acquisition were a $330 million senior credit facility (the "Old Credit Facility"), a $150 million senior subordinated credit facility and $105 million of common equity financing provided by Yucaipa and a group of institutional investors, including affiliates of Apollo Advisors, L.P. ("Apollo"), and members of Dominick's management. Yucaipa and such equity investors are parties to a stockholders agreement which, subject to certain conditions, provides Yucaipa and Apollo the right to nominate six and three directors, respectively, to the Company's Board of Directors. See "Description of Capital Stock--Stockholders Agreements." In connection with the Acquisition, Yucaipa received certain warrants and entered into a consulting agreement with the Company which provided for a one-time fee of $14 million and annual payments equal to 2% of Dominick's EBITDA (as defined in such consulting agreement). Upon consummation of the Offering, such consulting agreement will be terminated and replaced with a new management agreement providing for annual management fees of $1 million to be paid to Yucaipa. See "The Acquisition," "Certain Transactions" and "Description of Capital Stock--Yucaipa Warrant." In connection with the Acquisition, the Company also redeemed all outstanding SARS of Dominick's (or exchanged them for Company stock options) and repurchased shares of Dominick's restricted stock held by certain management employees. See "Management" and "Certain Transactions." Prior to the Acquisition, Dominick's had been operated by Dominick DiMatteo, Jr., its founder, and his family for approximately 70 years.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000944402_physicians_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000944402_physicians_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. See "Risk Factors" for information that should be carefully considered by prospective investors.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000945321_languagewa_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000945321_languagewa_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, (A) ALL INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE OVER-ALLOTMENT OPTION GRANTED TO THE UNDERWRITERS BY THE COMPANY IS NOT EXERCISED, (B) ALL REFERENCES TO NUMBERS OF SHARES AND PER SHARE AMOUNTS OF THE COMPANY GIVE EFFECT TO A THREE-FOR-TWO STOCK SPLIT EFFECTED ON JUNE 6, 1996 AND (C) ALL REFERENCES TO THE COMPANY INCLUDE THE COMPANY AND ITS SUBSIDIARIES, INCLUDING ITS MAJORITY-OWNED SUBSIDIARY, AGENTSOFT LTD. THE COMPANY Accent develops, markets and supports multilingual Internet publishing, browsing, e-mail and productivity software. Accent's products address the growing need for organizations and individuals to view, create, edit and exchange information in languages other than English and in multiple languages. WEBTAMER, a soon-to-be-released suite of Internet user productivity tools and the first Accent product utilizing intelligent agent technology, is targeted beyond multilingual and non-English speaking Internet users to the broader market for Internet software applications. Accent's INTERNET WITH AN ACCENT, a leading multilingual suite of Internet tools in terms of functionality and number of languages served, enables users to browse the World Wide Web (the "Web"), author Web pages and send and receive multilingual e-mail in more than 30 languages. Accent is also a leading developer and supplier of multilingual word processing software. Accent's Internet and word processing software is marketed directly by the Company and through distributors in more than 30 countries worldwide including, in the Americas, through Accent Worldwide, the Company's U.S. sales and marketing subsidiary, and in Europe, through Accent Europe. Through the introduction of WEBTAMER, Accent is seeking to establish itself as a leading participant in the emerging market for Internet software based on intelligent agent technology. Intelligent agents are electronic assistants that will help automate the Internet by performing complex, repetitive or time-consuming operations. Accent is also seeking to strengthen its position as a leading provider of multilingual Internet and word processing applications and development tools. To achieve these objectives, Accent's business strategy is to (i) emphasize intelligent agent and software globalization technologies; (ii) leverage its experience in multilingual software development; (iii) add new technologies, including intelligent agents, to its core technology platforms; (iv) increase market share for the Company's products; (v) develop strategic relationships with leading industry participants; and (vi) leverage its investments in distribution networks. As the Internet continues to grow in terms of the number of users, geographic diversity and breadth of information, Accent management believes that demand for software applications in the areas of information access and management, electronic commerce and work-flow management and systems and network management will increase significantly. Accent management believes that many of these software applications will be based on intelligent agent technology. In order to capitalize on the expected growth of this market and to broaden its Internet product line beyond multilingual-based software, in February 1996 Accent established AgentSoft Ltd. ("AgentSoft"), a majority owned subsidiary dedicated to the development of intelligent agent-based technology and applications for the Internet and enterprise Intranet. Accent's products are designed to capitalize on the rapid growth and increasing internationalization of the Internet and the need for users to communicate in languages other than English or in multiple languages. Various industry sources estimate that the Internet had 56 million users at the end of 1995 and that the number of Internet users could grow to between 200 million and one billion by the year 2000. International Data Corporation estimated that in 1995 approximately 22% of Internet users were located outside the United States and forecasted that non-U.S. Internet users will grow from 1995-1999 at a compound rate of 65% versus 25% for U.S. Internet users. The Company believes that a significant portion of the increased growth in Internet use will be driven by users who prefer or need to use languages other than English and by users who need to communicate in more than one language. Accent has used its multilingual software globalization technology as a platform to launch several multilingual Internet products addressing the needs of its target users. By offering an expanded line of multilingual Internet user applications and development tools, Accent will seek to secure a position as the multilingual solution of choice among Internet users, enabling Accent to capitalize on the growth and increased internationalization of the Internet. In December 1995, Accent introduced INTERNET WITH AN ACCENT, which enables users to browse the Web in a wide variety of languages and alphabets independent of the local language version of the Windows operating system and that contains Web authoring tools and e-mail with broad multilingual capabilities. Accent has begun to broaden its Internet product line through the release in June 1996 of NAVIGATE WITH AN ACCENT, a multilingual browser plug-in for Netscape Navigator. In early 1997, Accent plans to release a Pacific Rim version of INTERNET WITH AN ACCENT, supporting the Chinese, Japanese, Korean and Thai languages, ACCENT WEB PUBLISHER PRO, a Web authoring tool designed for corporate users, and the ACCENT GLOBAL DEVELOPMENT KIT, a set of standards and tools that will enable the globalization of any Windows software application. Accent Software International Ltd. is a corporation organized in 1988 under the laws of the State of Israel. The Company's principal executive offices are located at 28 Pierre Koenig Street, Jerusalem 91530, Israel, and its telephone number is 972-2-679-3723. RECENT DEVELOPMENTS As a result of the Company's shareholders' deficit as of September 30, 1996, the Company is no longer in compliance with the maintenance requirements of The Nasdaq SmallCap Market, where its Ordinary Shares are traded. The Company is dependent on the proceeds of the Offering to continue to have the funds necessary for the development of its technology, the marketing of its products and to continue to have its Ordinary Shares traded on The Nasdaq SmallCap Market. In order to fund a portion of its working capital requirements since June 30, 1996, the Company borrowed an aggregate of $1,400,000 from IMR from August 1996 to November 1996, and IMR will provide the Company with additional loans aggregating $100,000 prior to the consummation of the Offering (collectively, the "IMR Notes"). The Company intends to use a portion of the net proceeds of the Offering to repay these loans to IMR. In connection with the Offering, IMR Investments has agreed to purchase up to 178,200 Units offered hereby, at an aggregate purchase price not to exceed $1,500,000. In addition, to the extent that the gross proceeds to the Company from such purchase are less than $1,500,000, IMR has agreed to convert into Ordinary Shares, as of the consummation of the Offering, such amount of outstanding indebtedness owed to it by the Company equal to the difference between $1,500,000 and the gross proceeds to the Company from IMR Investments' purchase of Units offered hereby, at a conversion rate equal to the public offering price per Unit less $0.10. See "Certain Transactions." In response to the Company's recent operating results, the Company has implemented a revised business plan designed to decrease operating expenses and to improve its operating and financial performance while maintaining product development activities. Specifically, the Company has commenced a 30% reduction in the number of its employees which will be substantially completed by the end of this year. In addition, the Company intends, by the end of the first quarter of 1997, to reduce (i) its expenditures on marketing and advertising by approximately 50% and (ii) its other operating expenses by approximately 50% in all areas exclusive of research and development, which expenses will remain relatively level so as to enable the Company to achieve its strategic product development objectives. In addition, Roger R. Cloutier, II, who is currently a vice president of Jacobs Investors, Inc. and of the general partner of IMR and a member of the Company's Board of Directors, has been appointed Chairman of the Board, pursuant to which he will become involved with management to help the Company achieve its revised business and financial management objectives. Mr. Cloutier, along with Elliott Broidy and Mark Tebbe, constitute a newly-formed Executive Committee of the Board of Directors which is responsible for monitoring the implementation of the Company's revised business plan. Furthermore, the Company intends to shift certain sales and management functions to the United States so as to enable such personnel to be more effective in targeting customers and end-users of the Company's products. In connection therewith, the Company also is seeking to enhance its senior management team by hiring one or more additional executives with extensive experience in the software industry. In October 1996, the Company engaged Merrill Lynch & Co. ("Merrill Lynch") to act as a financial advisor with respect to seeking strategic equity investors, joint venture partners or other persons to invest in the Company. There can be no assurance that the Company will be successful in attracting any strategic investor or in engaging in any joint venture or other similar transactions. Certain of the foregoing statements are forward-looking, involving known and unknown risks and uncertainties. There is no assurance that the Company will be successful in improving its operating and financial performance or maintaining its product development activities. For a summary of various factors which may cause the actual results of achievements of the Company to be different from those indicated above, see "Risk Factors." THE OFFERING <TABLE> <S> <C> Securities offered by the Company...... 1,800,000 Units, each Unit consisting of one Ordinary Share and one Warrant. The securities comprising the Units will not be separable or separately transferable prior to , 1997, without the consent of the Representative. See "Description of Securities." Ordinary Shares to be outstanding after the Offering (1)...................... 11,595,902 Ordinary Shares. Warrants Number to be outstanding after the offering(2)........................ 1,800,000 Warrants. Exercise terms....................... Exercisable immediately, each to purchase one Ordinary Share for $ , subject to adjustment in certain circumstances. See "Description of Securities -- Redeemable Warrants." Expiration date...................... , 2001. Redemption........................... Redeemable by the Company upon the consent of the Representative at any time after the Warrants become separable, upon notice of not less than 30 days, at a price of $ per Warrant, provided that the closing bid quotation of the Ordinary Shares on all 20 trading days ending on the third day prior to the day on which the Company gives notice has been at least 130% (currently $ , subject to adjustment) of the then effective exercise price of the Warrants. The Warrants will be exercisable until the close of business on the date fixed for redemption. See "Description of Securities -- Redeemable Warrants." Use of Proceeds........................ The net proceeds of the Offering will be applied to marketing and advertising programs, research and development, repayment of trade payables, repayment of the IMR Notes, and working capital and general corporate purposes. See "Use of Proceeds." Risk Factors........................... The securities offered hereby are speculative and involve a high degree of risk and should not be purchased by investors who cannot afford the loss of their entire investment. See "Risk Factors." Nasdaq SmallCap Market symbol for Ordi- nary Shares........................... ACNTF. Proposed Nasdaq SmallCap Market symbol for the Units.................. ACNTU. </TABLE> - ------------------------ (1) Includes the 1,800,000 Warrants that are a component of the Units offered hereby. Excludes (i) 1,800,000 Ordinary Shares reserved for issuance upon exercise of the Warrants; (ii) an aggregate of 360,000 Ordinary Shares reserved for issuance upon exercise of the Representative's Warrants and the warrants included therein; (iii) 180,000 Ordinary Shares reserved for issuance upon exercise of the IMR Warrants (as defined herein); (iv) an indeterminate number of Conversion Shares; (v) 512,913 Ordinary Shares issuable upon exercise of outstanding warrants (issued (a) in connection with a private placement by the Company in May 1995 and (b) to the underwriter in connection with the Company's initial public offering in July 1995); (vi) 843,375 Ordinary Shares issuable upon exercise of employee and non-employee stock options; (vii) 275,000 Ordinary Shares issuable upon the exercise of founders' options; and (viii) 474,500 Ordinary Shares issuable upon the exercise of warrants issued to directors, officers and other persons associated with the Company. See "Management -- Employment Agreements," "-- Employee Share Option Plan (1995)," "-- Non-Employee Share Option Plan (1995)," "Certain Transactions" and "Description of Securities." (2) Includes the 1,800,000 Warrants that are a component of the Units offered hereby. Does not include any warrants referred to in clauses (ii) and (iii) of Note (1) above. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) Set forth below is certain summary consolidated financial data for the periods and as of the dates indicated. This information is derived from, and should be read in conjunction with, the Consolidated Financial Statements of the Company and the notes thereto appearing elsewhere in this Prospectus. See also "Management's Discussion and Analysis of Financial Condition and Results of Operations." <TABLE> <CAPTION> NINE MONTHS ENDED SEPTEMBER YEAR ENDED DECEMBER 31, 30, ----------------------------------------------------- --------- 1991 1992 1993 1994 1995 1995 --------- --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Net sales............................................. $ 336 $ 255 $ 1,220 $ 1,851 $ 5,135 $ 3,447 Gross profit (loss)................................... 211 7 654 696 2,163 1,285 Operating income (loss)............................... 60 (377) (742) (2,997) (7,685) (4,148) Net income (loss)..................................... 41 (321) (735) (3,134) (7,848) (4,330) Net income (loss) per share (1)....................... $ 0.06 $ (0.48) $ (0.39) $ (0.68) $ (1.22) $ (0.78) Weighted average number of shares and equivalent shares outstanding (1)............................... 664 664 1,893 4,619 6,421 5,564 <CAPTION> 1996 ----------- <S> <C> CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Net sales............................................. $ 4,731 Gross profit (loss)................................... (114) Operating income (loss)............................... (15,678) Net income (loss)..................................... (15,749) Net income (loss) per share (1)....................... $ (1.62) Weighted average number of shares and equivalent shares outstanding (1)............................... 9,698 </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1996 ------------------------ DECEMBER 31, ----------------------------------------------------- 1991 1992 1993 1994 1995 ACTUAL PRO FORMA (2) --------- --------- --------- --------- --------- --------- ------------- <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents............... $ 9 $ -- $ -- $ 78 $ 9,633 $ 407 $ 1,482 Working capital (deficit)............... (217) (563) (1,433) (1,009) 10,329 (4,356) (4,356) Total assets............................ 182 262 1,050 2,503 17,650 7,949 9,024 Short-term borrowings and current maturities of long term debt........... 262 515 979 335 27 1,443 2,518 Long term debt.......................... -- -- 55 1,345 2,331 2,839 2,839 Accumulated deficit..................... (175) (496) (1,232) (4,365) (12,213) (27,962) (27,962) Shareholders' equity (deficit).......... (174) (496) (932) (1,064) 10,133 (4,597) (4,597) <CAPTION> PRO FORMA AS ADJUSTED (3) ----------- <S> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents............... $ 13,926 Working capital (deficit)............... 9,588 Total assets............................ 21,468 Short-term borrowings and current maturities of long term debt........... 1,018 Long term debt.......................... 2,839 Accumulated deficit..................... (27,962) Shareholders' equity (deficit).......... 9,347 </TABLE> - -------------------------- (1) See Note 2 of Notes to the Consolidated Financial Statements for an explanation of the computation of net income (loss) per share and weighted average number of shares and equivalent shares outstanding. (2) Gives effect to the issuance of $1,075,000 principal amount of IMR Notes in October and November 1996. (3) Gives effect to the sale of the 1,800,000 Units offered hereby based on an assumed public offering price of $9.10 per Unit ($9.00 per Ordinary Share, the last reported sale price of the Ordinary Shares on November 18, 1996, and an assumed public offering price of $0.10 per Warrant), after deducting the underwriting discount and estimated offering expenses, and the anticipated application of the estimated net proceeds therefrom (including for the repayment of the IMR Notes in full). See "Use of Proceeds,"
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000945437_sos_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000945437_sos_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus assumes that the Underwriters' over-allotment option is not exercised. THE COMPANY SOS Staffing Services, Inc. ("SOS" or the "Company") is a leading regional provider of temporary staffing services in the Mountain States (Utah, Colorado, Idaho, Wyoming, Arizona, Nevada, New Mexico and Montana). In addition, the Company has recently expanded its office network into other western states (California, Oregon and Texas). The Company serves a broad range of service sectors, including clerical, light industrial, industrial, information technology, technical and other professional sectors. The Company's network consists of 82 offices, including 27 in Colorado, 24 in Utah, eight in Arizona, six in Nevada, five in Idaho, three in each of California and Wyoming, two in each of Oregon and New Mexico, and one in each of Texas and Montana. During the 39 weeks ended September 29, 1996, the Company provided approximately 42,000 temporary staffing employees to approximately 7,000 business, professional and service organizations and government agencies. The temporary staffing industry, which, according to the National Association of Temporary Staffing Services ("NATSS"), reported a compound annual payroll growth rate in excess of 18.0% between 1991 and 1995, continues to benefit from increased competitive pressures on businesses to reduce costs. In recent years, businesses have increasingly used temporary staffing employees as a strategy for converting fixed labor costs to flexible, manageable costs and for meeting specialized or fluctuating employment requirements. According to NATSS, in 1995 the average number of daily temporary staffing employees as a percentage of the total U.S. work force reached approximately 1.8%, up from approximately 1.0% in 1991. In recent years, the Company has benefitted significantly from its location in the Mountain States, which continue to experience strong economic and population growth. Management believes the attraction of the Mountain States results from the region's economic growth, diverse economic base, productive work force and high quality of life. USA Today has forecasted that Nevada, New Mexico, Utah and Idaho will experience four of the five highest state economic growth rates during 1996. Job growth in the Company's regional market continues to be strong. According to the U.S. Bureau of Labor Statistics, the only states in the nation to report nonfarm employment growth rates for August 1995 to August 1996 in excess of 4.0% were Utah, Colorado, Nevada, Arizona, New Mexico, Idaho and Oregon. In addition, each of Montana, California and Washington reported a growth rate between 2.0% and 3.9%. The national rate during the same period was 2.7%. The temporary staffing industry in the states in which the Company operates is also forecasted to experience significant growth in 1996. The Omnicomp Group, an industry consulting organization, projects that in 1996 the total temporary staffing payroll in the Mountain States and the 11 states in which the Company operates will increase by approximately 15.1% and 12.7%, respectively. Management believes the economic strength and projected job growth in the Mountain States will support the Company's anticipated growth in the region and enable the Company to pursue additional growth opportunities in other states. Management believes the Company has substantial opportunities to continue to expand its office network as well as its range of services. The Company's growth strategy is to continue to increase sales, profitability and market share by acquiring additional offices and opening new offices in the Mountain States, and pursuing additional growth opportunities in other western states. Since the completion of its initial public offering in July 1995, the Company has acquired 18 staffing companies and has announced an agreement to acquire an additional company. The acquisitions completed since the Company's initial public offering have expanded the Company's ability to provide specialized services which generally offer higher margins. Through its acquisition of Wolfe & Associates, Inc. ("Wolfe") in November 1996, Impact Staffing in August 1996, and the business and assets of three entities comprising The Performance Group of Denver, Colorado (collectively, "The Performance Group") in July 1996, the Company expanded its services in the rapidly growing information technology segment. In addition, in February 1996 and December 1995, the Company acquired the businesses and assets of Geomine Personnel, Inc., a provider of temporary geologists, hydrologists and engineers to the mining, hydrology and environmental industries ("Geomine"), and PAMS Temporary Service, Inc., Patient Account Management Services, Inc. and National Collex Corporation, three related entities that provide medical administrative support staffing and account collection services (collectively, "PAMS"), respectively. A key element of the Company's growth strategy is the establishment of hub offices in key population areas followed by the clustering of additional offices in existing and surrounding markets. As offices exceed certain thresholds, SOS has determined that dividing such offices into one or more additional offices results in continued growth and greater recruiting capabilities, market penetration and profitability. The Company has successfully employed this strategy to establish significant market share in smaller, often less competitive, markets of the Mountain States. Successful implementation of the Company's hub and spoke strategy has contributed to the Company's achievement of an internal revenue growth rate of 23.0% during the 39-week period ended September 29, 1996, as compared to the same period in the prior year. The Company has also achieved an average internal revenue growth rate of over 20.0% over the past five fiscal years. The Company's business strategies have differentiated its services and enhanced its profitability. SOS actively pursues higher margin accounts and de-emphasizes marketing to lower margin accounts and high risk job classifications. The Company intends to emphasize providing qualified temporary employees to the information technology segment, one of the fastest growing segments of the temporary staffing industry, which offers higher margins than traditional staffing operations. In addition, the Company provides local managers with significant performance incentives and discretion to respond to specific market and customer needs. Local managers are supported by strong centralized marketing, recruiting, risk management, training and management information systems resources. ACQUISITIONS Since completing its initial public offering in July 1995, the Company has opened 16 offices through internal growth, acquired 18 staffing businesses, representing 24 offices, and has announced an agreement to acquire an additional staffing business which, if completed, would add one additional office. The Company's completed and proposed acquisitions during the period are summarized in the following table. See "Unaudited Pro Forma Condensed Consolidated Financial Data" and "Business -- Acquisitions" for additional information concerning these acquisitions. <TABLE> <CAPTION> ESTIMATED ACQUISITION REVENUES(1) ACQUIRED COMPANY DATE (MILLIONS) OFFICES HEADQUARTERS PRIMARY SERVICES - ------------------------------ ---------------- ------------- ------ --------------- ---------------------- <S> <C> <C> <C> <C> <C> ACE(2) Pending $ 1.0 1 Yuma, AZ Clerical/Industrial Wolfe & Associates November 1996 4.0 3 Albuquerque, NM Information Technology R.H.W., Inc. November 1996 0.5 1 Billings, MT Clerical/Industrial Fort Collins, Executive Personnel October 1996 0.2 -- CO Clerical/Industrial Steamboat Temps October 1996 0.3 1 Steamboat, CO Clerical/Industrial A USA Temps October 1996 1.3 1 Prescott, AZ Clerical/Industrial Key Personnel September 1996 1.0 1 Amarillo, TX Clerical/Industrial Performance Plus August 1996 0.6 1 Orem, UT Clerical/Industrial Impact Staffing August 1996 4.0 2 Portland, OR Information Technology Excell Personnel July 1996 0.2 1 Greeley, CO Clerical/Industrial The Performance Group July 1996 3.0 1 Denver, CO Information Technology Allyn Colorado Enterprises July 1996 2.5 4 Aspen, CO Clerical/Industrial VIP Employment Services April 1996 1.5 1 Lakewood, CO Technical Snake River T.E.M.P.S. April 1996 1.0 2 Burley, ID Clerical/Industrial Geomine Personnel February 1996 2.8 1 Sparks, NV Mining/Environmental PAMS December 1995 5.5 2 Phoenix, AZ Medical Support Customized Personnel Services September, 1995 0.2 -- Durango, CO Clerical/Industrial Active Personnel Services September 1995 1.0 1 Phoenix, AZ Clerical/Industrial Add-A-Temp August 1995 3.0 1 Las Vegas, NV Clerical/Industrial -- --- Total $33.6 25 === == </TABLE> - --------------- (1) Represents estimated annualized revenues at the time of each acquisition, which were based on recent operating results of each acquired company, and may not be indicative of future operating results. (2) The Company's proposed acquisition of American Corporate Enterprises, Inc. ("ACE") is subject to the satisfaction of certain conditions. Although the acquisition is presently scheduled to be completed in December 1996, there can be no assurance of such completion. THE OFFERING <TABLE> <S> <C> Common Stock offered By the Company................................... 2,000,000 shares By the Selling Shareholders...................... 200,000 shares Common Stock to be outstanding after this offering......................................... 8,706,020 shares(1) Use of proceeds.................................... To repay debt, to pay earnout obligations associated with recent acquisitions, to finance additional acquisitions, to support continued growth of operations, including opening additional offices and to provide working capital. See "Use of Proceeds." Nasdaq National Market symbol...................... SOSS </TABLE> SUMMARY FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) <TABLE> <CAPTION> 39 WEEKS ENDED ------------------------------------- FISCAL YEAR (52/53 WEEKS) ENDED ----------------------------------------------- OCTOBER 1, 1995 1995(2) SEPTEMBER 29, 1996 ------------------------- ---------- ----------------------- 1993(2) 1994(2) ACTUAL(2) PRO FORMA(3) ACTUAL ACTUAL PRO FORMA(3) ------- ------- --------- ------------ ---------- ------- ------------ <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF INCOME DATA: Service revenues....................... $49,433 $63,740 $87,533 $107,673 $ 63,334 $92,834 $101,906 Gross profit........................... 8,349 12,418 18,180 23,838 13,195 19,099 21,711 Operating income....................... 1,033 2,372 4,321 5,081 3,371 4,815 5,182 Net income............................. $ 1,113 $ 2,427 $ 2,677 $ 2,683 $ 2,092 $ 2,948 $ 2,865 Net income per common share............ $ 0.43 $ 0.40 $ 0.35 $ 0.44 $ 0.42 Weighted average common shares outstanding.......................... 6,229(4) 6,714 6,061 6,760 6,760 OPERATING DATA: Offices at period end................ 22 34 48 44 73 Temporary personnel utilized......... 27,234 32,479 41,854 32,526 42,438 Hours billed (in thousands).......... 5,021 6,326 7,828 5,684 7,815 </TABLE> <TABLE> <CAPTION> SEPTEMBER 29, 1996 ------------------------------------------- PRO FORMA ACTUAL PRO FORMA(5) AS ADJUSTED(6) ------- ------------ -------------- <S> <C> <C> <C> BALANCE SHEET DATA: Working capital................................................................... $11,816 $ 11,691 $ 19,927 Total assets...................................................................... 32,031 36,788 43,655 Total debt........................................................................ 7,825 11,869 -- Shareholders' equity.............................................................. 17,646 17,646 36,382 </TABLE> - --------------- (1) Does not include 272,140 shares of Common Stock reserved for issuance upon the exercise of options outstanding at December 10, 1996 at an average exercise price of $8.52 and 121,840 shares of Common Stock reserved for the future grant of options under the Company's 1995 Stock Incentive Plan. (2) The Company completed its initial public offering in July 1995 and in connection therewith terminated its S Corporation election. Data for fiscal 1995 and the 39 weeks ended October 1, 1995 has been adjusted to reflect a pro forma provision for income taxes. In addition, prior to the initial public offering, the Company compensated its CEO at levels sufficient to pay income taxes associated with its S corporation status. Effective January 1995, the Company entered into a three-year employment contract with the CEO which provides for annual compensation of $195,000. Total CEO compensation for fiscal 1993 and 1994 was $466,000 and $982,000, respectively. (3) Gives effect to the Company's acquisition of certain material businesses, as if such acquisitions were consummated as of the beginning of fiscal 1995. See "Unaudited Pro Forma Condensed Consolidated Financial Data" and "Business -- Acquisitions." (4) Prior to the completion of its initial public offering, the Company distributed approximately $8.0 million of its accounts receivable to its S Corporation shareholders. The weighted average common shares outstanding reflects the issuance of 1,230,769 shares at the initial public offering price of $6.50 per share, as if the distribution had occurred at the beginning of fiscal 1995. (5) Adjusted to give effect to the acquisition of Wolfe as if it were consummated as of September 29, 1996. (6) Adjusted to reflect the sale by the Company of 2,000,000 shares of Common Stock offered hereby at an assumed offering price of $10.125 per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000945524_commodore_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000945524_commodore_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following is a summary of certain information contained in this Prospectus and is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. As used in this Prospectus, (i) all references to "U.S." mean the United States of America, its states, its territories, its possessions and all areas subject to its jurisdiction; (ii) references to a "fiscal" year or references to the Company's operating results and other data in respect of a specific year shall be references to the year ended September 30; and (iii) the source of all industry data except where otherwise indicated is as reported by Cruise Lines International Association ("CLIA"), an industry trade group, without any independent verification. References in this Prospectus to the Company include references to the Company's subsidiaries whenever appropriate. The Company General Commodore Holdings Limited, a Bermuda exempted company (the "Company"), owns two cruise ships, the S/S Enchanted Isle (the "Enchanted Isle") and the S/S Universe Explorer (formerly the S/S Enchanted Seas) (the "Universe Explorer" or the "Enchanted Seas"). The Enchanted Isle offers Caribbean cruises from New Orleans and the Universe Explorer is chartered to Sea-Comm, Ltd., a Liberian corporation ("Sea-Comm"), a joint venture between the Company and Seawise Foundation, Inc. ("Seawise"), which in turn has space-chartered the vessel to Seawise, which operates the educational "Semester at Sea" program during a portion of the year. Sea-Comm will operate cruises to Alaska aboard the Universe Explorer during the balance of the year. The Company acquired the Enchanted Isle and the Enchanted Seas in July 1995 from Commodore Cruise Line Limited, a Cayman Islands Company and certain of its subsidiaries ("Old Commodore"). Since April 1995, the Enchanted Isle has offered seven day cruises from New Orleans to the Western Caribbean with ports-of-call at Cancun, Cozumel, Grand Cayman and Montego Bay (alternately, Key West). It is a 23,395 gross registered ton cruise vessel, has nine passenger decks, a capacity of approximately 729 passengers in 366 cabins (on a double occupancy basis), is of Panamanian registry and was built in 1958. The Enchanted Isle is designed to be a seagoing resort containing a casino, nightclub, movie theater, swimming pool, restaurants, workout room, sundeck and deck activities. Old Commodore acquired the Enchanted Isle in May 1989, and from May 1989 until May 1993, the Enchanted Isle was operated as a cruise ship. From May 1993 until August 1994, Old Commodore chartered the Enchanted Isle to an entity which operated it as a floating hotel in St. Petersburg, Russia. The ship was then removed from service before being renovated between August 1994 and December 1994 and returned to Caribbean cruise service. In December 1994, while on a cruise to Barbados, the cruise vessel caught fire near San Juan, Puerto Rico and was out of service for repair until February 1995 when it began an itinerary from Barbados to ports-of-call in the Caribbean. In April 1995, the Enchanted Isle was repositioned to New Orleans. Revenues from the Enchanted Isle are derived from ticket sales and from certain on-board activities and services operated by the Company including casino gambling, liquor sales in a variety of bars, restaurants, lounges, and a discotheque. Additional revenue is earned from the sale of pre- and post-cruise packages in the vessel's city of embarkation. The Company earns concession revenue from duty-free shops, gift shops, the sale of photographs to passengers, shore excursions and from the beauty salon. See "Business -- On-Board and Other Revenues." The Universe Explorer is a 23,900 gross registered ton cruise vessel, has nine passenger decks, a capacity of approximately 739 passengers in 363 cabins (on a double occupancy basis), is of Panamanian registry and was built in 1958. The Universe Explorer was designed to be a seagoing resort containing a casino, discotheque, movie theater, library, reading room, restaurants, full service communication facilities, two pools, jogging course, aerobic classes, workout room, sun deck areas and deck activities. Old Commodore acquired the Enchanted Seas in May 1989. The Enchanted Seas operated as a cruise ship on different itineraries between May 1989 and April 1995. The Enchanted Seas was then laid up and placed in drydock for maintenance and refurbishing between April 1995 and January 1996. During this time, the Company renovated portions of it to prepare it for use both as a cruise vessel and for use in the Semester at Sea program. The Company removed the vessel's casino to install a library, and installed various partitions so that certain lounges and dining areas could be easily converted to classrooms when needed for the Semester at Sea program and returned to their prior state when used for cruises. The Company also renamed the vessel the "Universe Explorer." See "Business -- The Joint Venture." - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Revenues from the Universe Explorer are derived from charter revenue. Sea-Comm derives revenues from different sources depending on whether the vessel is being used as a cruise vessel or for the Semester at Sea program. Cruise revenues include those from ticket sales and certain on-board activities and services such as beverage sales, shore excursions, and concession revenue. Revenues from the Semester at Sea program are derived from space charter fees and ticket sales to adult (non-student) passengers, who may represent up to 24% of the passengers on each voyage. Seawise has guaranteed ticket sales to 60 adult passengers on each voyage during 1996, which number increases in subsequent years. Additional revenue is earned from beverage and snack bar sales and from other miscellaneous on-board services. See "Business -- The Joint Venture", "Business -- Ticket Revenues" and "Business -- On-Board and Other Revenues." Cruises in general are differentiated primarily by cruise cost, length and itinerary. Segments within the cruise industry include the standard, premium and luxury cruises, each of which, the Company believes, appeals to different population segments and attracts varying demographic groups. The standard market, in which the Company competes, is the largest of the three segments, comprising approximately 55% of industry-wide capacity. See "Business -- Market Position." The Company believes that the Semester at Sea program is unique, and to its knowledge, the Universe Explorer is the only such floating university in the world. The program competes indirectly, however, with land-based semester or year abroad programs offered to college students. See "Business -- Competition." The Company was incorporated in Bermuda on April 13, 1995. The executive offices of the Company are located at 4000 Hollywood Boulevard, Suite 385, South Tower, Hollywood, Florida 33021, and its telephone number is (954) 967-2100. The Commodore Acquisition The Company and its wholly-owned subsidiaries were established for the purpose of acquiring certain assets (the "Commodore Acquisition") of an existing cruise line operation from Old Commodore. The Commodore Acquisition included the trade names "Commodore" and "Commodore Cruise Line" ("Commodore"), as well as certain related trade names and trademarks (collectively, the "Trademarks"), the Enchanted Isle and the Enchanted Seas, and all of Old Commodore's existing operations with regard to the Enchanted Isle and the Enchanted Seas (together the "Cruise Ships"), including certain advance ticket sales, marketing and sales information, and certain shoreside assets (collectively, the "Commodore Assets"). The Company closed the Commodore Acquisition on July 14, 1995 (the "Commodore Closing"). The purchase price for the Commodore Assets was $33,500,000. The Company paid $5,000,000 to Old Commodore, which represented the cash portion of the purchase price. In addition, the Company issued 1,000,000 shares of its convertible series A preference shares (the "Series A Preference Shares") at an agreed value of $4.00 per share to EffJohn International B.V. ("EffJohn"), the parent company of Old Commodore, as partial payment of the purchase price. EffJohn International Cruise Holdings, Inc. (the "Lender"), an affiliate of EffJohn, loaned the balance of the purchase price, $24,500,000, to the Company (the "Loan"), which is secured by substantially all of the assets of the Company's wholly-owned subsidiary New Commodore Cruise Line Limited, a Bermuda exempted company ("New Commodore"), including first preferred ship's mortgages on the Cruise Ships. For additional terms of the Commodore Acquisition, see "Business -- The Commodore Acquisition." References herein to the operations of the Company are to the historical operations of Old Commodore prior to the Commodore Closing and to those of the Company subsequent thereto. The Offering Securities Offered ........... 1,000,000 Units. Each Unit consists of one share of Common Stock and one Warrant to purchase one-half share of Common Stock. See "Description of Securities." Terms of Warrants ............ The Warrants are exercisable only in pairs, with two Warrants entitling the holder to purchase one share of Common Stock for an exercise price of $6.00 per share commencing one year after the date of this Prospectus and terminating five years after the date of this Prospectus (the "Expiration Date"), subject, in certain circumstances, to earlier redemption by the Company. The exercise price and number of shares issuable upon exercise of the Warrants are subject to adjustment in certain circumstances. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The Warrants will be detachable from the Common Stock and separately tradeable upon issuance. See "Description of Securities-- Warrants." Common Stock Outstanding Prior to Offering(1)(2) .... 4,931,933 shares of Common Stock. Common Stock to be Outstanding After the Offering(1)(2)(3) ...... 5,431,933 shares of Common Stock and warrants to purchase 1,575,000 shares of Common Stock (assuming the Underwriter does not exercise the Over-Allotment Option.) See "Management," "Principal Stock-holders" and "Certain Transactions." Warrants Outstanding Prior to Offering(4) ............. 1,075,000 warrants. Warrants to be Outstanding After the Offering(5) ...... 1,000,000 Warrants and 1,075,000 warrants. Series A Preference Shares Outstanding(6) .............. 1,006,979 shares. Use of Proceeds .............. The net proceeds to the Company from the sale of the Units will be $1,665,284, after deducting commissions and expenses of the Offering estimated at $684,716. The Company intends to use the net proceeds of this Offering for renovations to its vessels and for working capital purposes. See "Use of Proceeds." Risk Factors ................. An investment in the Units is speculative and involves a high degree of risk and should not be purchased by anyone who cannot afford the loss of his entire investment. See "Risk Factors" and "Dilution." Nasdaq National Market Symbols(7) .......... Common Stock -- CCLN Warrants -- CCLNW - ----------- (1) Does not include an aggregate of 500,000 shares of Common Stock reserved for issuance upon the exercise of options available for future grant under the Company's stock option plan (the "Plan"). See "Management --Stock Option Plan." (2) Does not include the Series A Preference Shares, which are currently convertible into shares of Common Stock at the conversion rate of the higher of US$4.00 or eight times the annual primary earnings per share of Common Stock for the previous fiscal year. (3) Does not include 225,000 shares of Common Stock issuable upon exercise in full of the Over-Allotment Option and the Warrants and underlying shares of Common Stock included therein, or 150,000 shares of Common Stock issuable upon exercise of the Underwriter's Warrant and the shares of Common Stock underlying the Warrants contained therein. See "Underwriting." (4) These warrants do not contain the same terms as the Warrants offered herein. See "Description of Securities." (5) Does not include 150,000 Warrants underlying the Units in the Over-Allotment Option or 100,000 Warrants underlying the Units in the Underwriter's Warrant. (6) Convertible into Common Stock at the conversion rate of the higher of US$4.00 or eight times the annual primary earnings per share of Common Stock for the previous fiscal year. See "Description of Securities --Series A Preference Shares." (7) The symbols do not imply that a liquid and active market will develop or be sustained for the securities upon completion of the Offering. - --------------------------------------------------------------------------------
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000945764_denbury_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000945764_denbury_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety and should be read in conjunction with the more detailed information and Consolidated Financial Statements and notes thereto included in this Prospectus. Investors should carefully consider the information set forth under "Risk Factors." All dollar amounts in this Prospectus, unless otherwise indicated, are expressed in United States dollars and all financial data is presented in accordance with Canadian generally accepted accounting principles ("GAAP"). All share information contained in this Prospectus has been adjusted to reflect a one-for-two reverse split of the Common Shares, effective on October 10, 1996. The July 1, 1996 estimated proved reserve data included throughout this Prospectus have been prepared by Netherland, Sewell & Associates, Inc. ("Netherland & Sewell"), independent petroleum engineers. Unless otherwise indicated herein, the information contained in this Prospectus assumes that the Underwriters' over-allotment option will not be exercised. The terms "Denbury" and the "Company" refer to Denbury Resources Inc., a Canadian corporation, and all references to the operations and assets of the Company include those of its wholly-owned subsidiaries. Certain terms used herein are defined in the Glossary included elsewhere in this Prospectus. THE COMPANY Denbury is an independent energy company engaged in acquisition, development and exploration activities in the U.S. Gulf Coast region. Since 1993, after having disposed of its Canadian oil and natural gas properties, the Company has focused its operations primarily onshore in Louisiana and Mississippi. Over the last three years, the Company has achieved rapid growth in proved reserves, production and cash flow by concentrating on the acquisition of properties which it believes have significant upside potential and through the efficient development, enhancement and operation of those properties. For the three-year period ended December 31, 1995, the Company increased its proved reserves by 57% per annum, from 5.8 MMBOE at December 31, 1993 to 14.3 MMBOE. As of July 1, 1996, including the Hess and Ottawa Acquisitions (as herein defined), the Company had increased its proved reserves to 22.7 MMBOE, representing a 59% increase over December 31, 1995 reserves. Over the same three-year period, the Company also increased its average daily production by 88% per annum, from 1,194 BOE/d to 4,207 BOE/d. Pro forma for the Hess and Ottawa Acquisitions, production for the first six months of 1996 was 9,323 BOE/d. For the three-year period ended December 31, 1995, Adjusted EBITDA grew at an annual rate of 94%, from $3.0 million to $11.3 million. Pro forma Adjusted EBITDA for the first six months of 1996 was $18.7 million. As of July 1, 1996, the Company had proved reserves of 11.7 MMBbls and 65.8 Bcf. At such date, the PV10 Value was $175.3 million, of which $157.8 million was attributable to proved developed reserves. Denbury operates wells comprising approximately 68% of its PV10 Value. The twelve largest fields owned by the Company constitute approximately 80% of its estimated proved reserves and within these twelve fields, Denbury owns an average working interest of 84%. BUSINESS STRATEGY The Company believes that its growth to date in proved reserves, production and cash flow is a direct result of its adherence to several fundamental principles. The Company seeks to achieve attractive returns on capital through prudent acquisitions, development and exploratory drilling and efficient operations; maintain a conservative balance sheet to preserve maximum financial and operational flexibility; and create strong employee incentives through equity ownership. These fundamental principles are at the core of the Company's long-term growth strategy. REGIONAL FOCUS. By focusing its efforts in the Gulf Coast region, primarily Louisiana and Mississippi, the Company has been able to accumulate substantial geological, reservoir and operating data which it believes provides it with a significant competitive advantage. Given its experience in the Gulf Coast region, the Company believes it is better able to proactively identify and evaluate potential acquisitions, negotiate and close selected acquisitions on favorable terms, and develop and operate the properties in an efficient and low-cost manner once acquired. The Company believes the Gulf Coast represents one of the most attractive regions in North America given the region's prolific production history and the new opportunities that have been created by advanced technologies such as 3-D seismic and various drilling, completion and recovery techniques. Moreover, because of the region's proximity to major pipeline networks serving attractive northeastern U.S. markets, the Company typically realizes natural gas prices in excess of those realized in many other producing regions. DISCIPLINED ACQUISITION STRATEGY. The Company acquires properties where it believes significant additional value can be created. Such properties are typically characterized by: (i) long production histories, (ii) complex geological formations which have multiple producing zones and substantial exploitation potential, (iii) a history of limited operational attention and capital investment, often due to their relatively small size and limited strategic importance to the previous owner and (iv) the potential for the Company to gain control of operations. By maintaining conservative levels of debt, the Company is able to respond quickly to acquisitions that fit within its criteria. The Company believes that due to continuing rationalization of properties, primarily by major integrated and independent energy companies, a strong backlog of acquisition opportunities should continue. In addition, the Company seeks to maintain a well-balanced portfolio of oil and natural gas development, exploitation and exploration projects in order to minimize the overall risk profile of its investment opportunities while still providing significant upside potential. The Company's recent Hess and Ottawa Acquisitions are illustrative of the type of opportunities the Company seeks. OPERATION OF HIGH WORKING INTEREST PROPERTIES. The Company typically seeks to acquire working interest positions that give the Company operational control or which the Company believes may lead to operational control. As the operator of properties comprising approximately 68% of its total PV10 Value, the Company is better able to manage and monitor production and more effectively control expenses, the allocation of capital and the timing of field development. Once a property is acquired, the Company employs its technical and operational expertise in fully evaluating a field for future potential and, if favorable, consolidates working interest positions primarily through negotiated transactions which tend to be attractively priced compared to acquisitions available in competitive situations. The consolidation of ownership allows the Company to: (i) enhance the effectiveness of its technical staff by concentrating on relatively few wells; (ii) increase production while adding virtually no additional personnel; and (iii) increase ownership in a property to the point where the potential benefits of value enhancement activities justify the allocation of Company resources. EXPLOITATION OF PROPERTIES. The Company seeks to maximize the value of its properties by either increasing production, increasing recoverable reserves or reducing operating costs, and often through a combination of all three. The Company utilizes a variety of techniques to achieve this goal, including: (i) undertaking surface improvements such as rationalizing, upgrading or redesigning production facilities; (ii) making downhole improvements such as resizing downhole pumps or reperforating existing production zones; (iii) reworking existing wells into new production zones with additional potential; (iv) conducting developmental drilling to access undrained portions of the field which can only be produced from a new wellbore; and (v) utilizing exploratory drilling, which is frequently based on various advanced technologies such as 3-D seismic. The Company believes that by employing a full range of value enhancement techniques it is better able to extract the maximum value from its properties. PERSONNEL. The Company believes it has assembled a highly competitive team of experienced and technically proficient employees who are motivated through a positive work environment and by ownership in the Company, which is encouraged through the Company's stock option and stock purchase plans. The Company's geological and engineering professionals have an average of over 15 years of experience in the Gulf Coast region. The Company believes that employee ownership is essential for attracting, retaining and motivating quality personnel. Approximately 92% of Denbury's eligible employees were participating in the Company's stock purchase plan as of July 1, 1996. RECENT DEVELOPMENTS TPG INVESTMENTS In December 1995, the Company completed a $40.0 million private placement of securities with the Texas Pacific Group ("TPG") consisting of Common Shares, $10 Convertible First Preferred Shares, Series A ("Convertible Preferred") and warrants to purchase Common Shares (collectively, the "TPG Placement"). The TPG Placement enabled the Company to repay its then outstanding bank debt and facilitated its ability to pursue its long-term growth strategy. See "Interests of Management in Certain Transactions." Concurrent with the Public Offering, the Company will sell an additional 800,000 Common Shares directly to TPG at a price equal to the price to the public less underwriting discounts and commissions. The Public Offering and the TPG Offering are each conditioned on the consummation of the other. CAPITALIZATION ADJUSTMENTS On October 10, 1996, the Company effected a one-for-two reverse split of its outstanding Common Shares. Effective October 15, 1996, all of the Company's outstanding 9 1/2% Convertible Debentures ("Debentures") were converted by their holders in accordance with their terms into 308,642 Common Shares. The holders of the Debentures also received an additional 7,948 Common Shares in lieu of interest which would have been due the holders absent an early conversion of the Debentures. Subsequent to June 30, 1996, the Company issued 187,500 Common Shares for the conversion of the remaining 6 3/4% Convertible Debentures of the Company and 75,000 Common Shares for the exercise of half of the Cdn. $8.40 Warrants ("Warrants"). The Company intends to convert all of the 1,500,000 shares of Convertible Preferred simultaneously with the closing of the Offerings into 2,816,372 Common Shares. Giving effect to the issuance of Common Shares for the Warrants, the Debentures and the 6 3/4% Convertible Debentures, and the subsequent conversion of the Convertible Preferred upon approval by the Board of Directors (collectively, the "Capitalization Adjustments"), as of June 30, 1996 an additional 3,395,462 Common Shares would have been outstanding. ACQUISITION OF HESS PROPERTIES The Company completed several property acquisitions during the first half of 1996, the largest of which was the acquisition of producing oil and natural gas properties in Mississippi, Louisiana and Alabama, plus certain overriding royalty interests in Ohio, from Amerada Hess Corporation ("Amerada Hess") for $37.2 million (the "Hess Acquisition"), effective May 1, 1996. Average daily production during the first half of 1996 from these properties, including the periods when they were not owned by the Company, was approximately 6.6 MMcf/d and 2,230 Bbls/d, or 3,335 BOE/d, net to the interest acquired by Denbury. As of July 1, 1996, the Hess Acquisition properties had estimated net proved reserves of approximately 5.9 MMBOE, consisting of approximately 5.0 MMBbls and 5.6 Bcf, with a PV10 Value of $43.1 million. Approximately 90% of the PV10 Value of the Hess Acquisition was for wells on which Denbury assumed operations with an average working interest of approximately 80%. OTHER ACQUISITIONS In addition to the Hess Acquisition, during the first half of 1996 the Company completed other acquisitions totaling $10.8 million. The largest of these was the acquisition of additional working interests in five Mississippi oil and natural gas properties in which the Company already owned an interest, and certain overriding royalty interests in other areas, which were acquired during April 1996 for approximately $7.5 million from Ottawa Energy, Inc. ("Ottawa"), a subsidiary of Highridge Exploration Ltd. (the "Ottawa Acquisition"). In addition to the Ottawa Acquisition, the Company completed four other acquisitions, primarily in Louisiana, totaling $3.3 million. Average daily production during the first half of 1996 from these acquisitions, including the Ottawa Acquisition and the periods when they were not owned by the Company, was approximately 3.7 MMcf/d and 434 Bbls/d, or 1,048 BOE/d, net to the interest acquired by the Company. As of July 1, 1996, the Company's estimated net proved reserves for these acquisitions totaled approximately 1.1 MMBbls and 13.1 Bcf or 3.3 MMBOE, with a PV10 Value of $24.1 million. NEW CREDIT FACILITY In order to fund these acquisitions, improve the terms and increase the size of the previous credit facility, the Company has entered into a new $150.0 million dollar credit facility (the "Credit Facility") with NationsBank of Texas ("NationsBank"). This refinancing closed during the second quarter of 1996, and has a borrowing base as of October 15, 1996 of $60.0 million. The Credit Facility is a two-year revolving credit facility that converts to a three-year term loan in May 1998, unless renewed or extended. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- New Credit Facility." THE OFFERINGS <TABLE> <S> <C> Common Shares offered by the Company: Public Offering........................................ 3,600,000 shares TPG Offering........................................... 800,000 shares Total.......................................... 4,400,000 shares Common Shares to be outstanding after the Offerings...... 19,498,269 shares(1) Use of Proceeds.......................................... To repay outstanding indebtedness under the Credit Facility incurred primarily in connection with the recent acquisitions. The remainder of the proceeds, if any, will be used to fund future capital expenditures related to exploration, development and acquisition activities, to increase working capital and for general corporate purposes. See "Use of Proceeds." Nasdaq National Market trading symbol.................... DENRF The Toronto Stock Exchange trading symbol................ DNR </TABLE> - --------------- (1) Represents Common Shares outstanding as of October 15, 1996 after giving effect to the Capitalization Adjustments and the Offerings. This total does not include 1,758,750 shares issuable pursuant to outstanding warrants and stock options, of which 1,179,187 were exercisable as of October 15, 1996. SUMMARY OIL AND NATURAL GAS RESERVE DATA The net proved oil and natural gas reserve estimates as of December 31, 1995 and July 1, 1996 have been prepared by Netherland & Sewell, and the net proved oil and natural gas reserve estimates as of December 31, 1993 and 1994 have been prepared by the Scotia Group, Inc., both independent petroleum engineers. For additional information relating to the Company's oil and natural gas reserves, see "Risk Factors -- Uncertainty of Estimates of Oil and Natural Gas Reserves," "Business and Properties -- Oil and Natural Gas Operations," and Note 10 to the Consolidated Financial Statements of the Company. Attached hereto as Appendix A is a letter from Netherland & Sewell relating to their July 1, 1996 reserve report. <TABLE> <CAPTION> AS OF DECEMBER 31, AS OF ----------------------------- JULY 1, 1993 1994 1995 1996 ------- ------- ------- -------- <S> <C> <C> <C> <C> ESTIMATED PROVED RESERVES: Oil (MBbls).......................................... 3,583 4,230 6,292 11,725 Natural gas (MMcf)................................... 13,029 42,047 48,116 65,807 Oil equivalent (MBOE)................................ 5,755 11,238 14,311 22,693 Discounted estimated future net cash flow before income taxes (PV10 Value) (thousands)(1).......... $28,638 $52,691 $96,965 $175,255 Standardized measure of discounted estimated future net cash flow after net income taxes (thousands)(1).................................... $28,465 $46,928 $81,164 $150,160 </TABLE> - --------------- (1) Determined based on period-end unescalated prices and costs in accordance with the guidelines of the Securities and Exchange Commission (the "SEC"), discounted at 10% per annum. The oil prices as of December 31, 1995 and July 1, 1996, respectively, were West Texas Intermediate $18.00 and $20.00 per barrel adjusted by field, and the NYMEX Henry Hub natural gas prices for the same two periods were $2.24 and $2.65 per MMBtu, also adjusted by field. SUMMARY OPERATING DATA The following table sets forth summary data with respect to the production and sales of oil and natural gas by the Company for the periods indicated. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, --------------------------------------- ----------------------------- PRO PRO FORMA FORMA 1993(1) 1994 1995 1995(2) 1995 1996 1996(2) ------- ------ ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> <C> <C> NET AVERAGE DAILY PRODUCTION VOLUMES: Oil (Bbls).......................... 858 1,340 1,995 4,966 1,830 2,894 4,651 Natural gas (Mcf)................... 2,013 9,113 13,271 21,918 12,075 22,518 28,031 Oil equivalent (BOE)................ 1,194 2,859 4,207 8,619 3,843 6,647 9,323 WEIGHTED AVERAGE SALES PRICES: Oil (per Bbl)....................... $13.91 $13.84 $ 14.90 $ 14.64 $ 14.92 $ 17.39 $ 17.33 Natural gas (per Mcf)............... 2.06 1.78 1.90 1.83 1.85 2.80 2.72 UNIT DATA ($ PER BOE): Revenue............................. $13.47 $12.17 $ 13.05 $ 13.09 $ 12.94 $ 17.07 $ 16.84 Production expenses................. (4.75) (4.13) (4.42) (4.87) (4.50) (4.42) (4.64) ------ ------ ------- ------- ------- ------- ------- Production netback.................. 8.72 8.04 8.63 8.22 8.44 12.65 12.20 General and administrative.......... (1.80) (1.12) (1.25) (0.77) (1.40) (1.46) (1.18) Interest, net....................... 0.04 (0.99) (1.26) (0.50) (1.25) (0.19) (0.07) ------ ------ ------- ------- ------- ------- ------- Operating cash flow (3)............. $ 6.96 $ 5.93 $ 6.12 $ 6.95 $ 5.79 $ 11.00 $ 10.95 ====== ====== ======= ======= ======= ======= ======= </TABLE> - --------------- (1) Includes production from Canadian properties sold during 1993. (2) Gives effect to the (i) Capitalization Adjustments, (ii) Hess Acquisition, (iii) Ottawa Acquisition, and (iv) the application of estimated net proceeds of $50.9 million from the Offerings as if such transactions had been consummated as of January 1 of the period presented. See "Use of Proceeds." (3) Represents cash flow provided by operations, exclusive of the net change in non-cash working capital balances. SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA The summary historical financial data set forth below as of and for the years ended December 31, 1993, 1994 and 1995 have been derived from the Company's audited financial statements and notes thereto contained elsewhere in this Prospectus. The financial data for the six-month periods ended June 30, 1995 and 1996 were derived from the unaudited financial statements of the Company, and include in management's opinion, all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the results for such periods. The operating results for such periods are not necessarily indicative of the operating results to be expected for a full fiscal year and none of the data presented below are necessarily indicative of future results. The summary historical and unaudited pro forma financial data for the Company are qualified in their entirety and should be read in conjunction with "Pro Forma Operating Results," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements and Notes. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ---------------------------------------- ----------------------------- PRO PRO FORMA FORMA 1993 1994 1995 1995(1) 1995 1996 1996(1) ------- ------- ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <S> <C> <C> <C> <C> <C> <C> <C> SELECTED INCOME STATEMENT DATA: Revenue: Oil, natural gas and related product sales............................ $ 5,868 $12,692 $20,032 $41,196 $ 8,997 $20,650 $28,574 Interest income.................... 76 23 77 77 21 124 124 ------- ------- ------- ------- ------- ------- ------- Total revenues.............. 5,944 12,715 20,109 41,273 9,018 20,774 28,698 ------- ------- ------- ------- ------- ------- ------- Expenses: Production......................... 2,067 4,309 6,789 15,336 3,128 5,350 7,870 General and administrative......... 782 1,105 1,832 2,332 935 1,656 1,906 Interest........................... 83 1,146 2,085 1,716 927 681 233 Imputed preferred dividends........ -- -- -- -- -- 759 -- Loss on early extinguishment of debt............................. -- -- 200 200 200 440 440 Depletion and depreciation......... 1,898 4,209 8,022 16,521 3,075 7,382 10,099 Franchise taxes.................... -- 65 100 100 42 107 107 ------- ------- ------- ------- ------- ------- ------- Total expenses.............. 4,830 10,834 19,028 36,205 8,307 16,375 20,655 ------- ------- ------- ------- ------- ------- ------- Income before the following: 1,114 1,881 1,081 5,068 711 4,399 8,043 Gain on sale of Canadian properties....................... 966 -- -- -- -- -- -- ------- ------- ------- ------- ------- ------- ------- Income before income taxes........... 2,080 1,881 1,081 5,068 711 4,399 8,043 Provision for federal income taxes... (345) (718) (367) (1,722) (242) (1,804) (2,785) ------- ------- ------- ------- ------- ------- ------- Net income........................... $ 1,735 $ 1,163 $ 714 $ 3,346 $ 469 $ 2,595 $ 5,258 ======== ======== ======== ======== ======== ======== ======== Net income per common share.......... $ 0.35 $ 0.19 $ 0.10 $ 0.28 $ 0.07 $ 0.23 $ 0.27 ======== ======== ======== ======== ======== ======== ======== Weighted average common shares outstanding........................ 4,990 6,240 6,870 11,921 6,536 11,512 19,321 ======== ======== ======== ======== ======== ======== ======== OTHER DATA: Operating cash flow(2)............. $ 3,030 $ 6,185 $ 9,394 $21,880 $ 4,025 $13,303 $18,582 Capital expenditures............... 29,855 16,903 28,524 -- 10,506 60,733 -- Adjusted EBITDA(3)................. 3,019 7,213 11,311 23,428 4,892 13,537 18,691 </TABLE> <TABLE> <CAPTION> AS OF JUNE 30, 1996 AS OF DECEMBER 31, --------------------- ------------------------------- PRO 1993 1994 1995 ACTUAL FORMA(4) ------- ------- ------- -------- -------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Total assets.................................... $35,978 $48,964 $77,641 $132,900 $144,285 Working capital (deficiency).................... (1,410) (1,620) 6,862 (1,184) 10,201 Long-term debt, net of current maturities....... 6,177 16,536 3,474 42,964 34 Convertible preferred stock..................... -- -- 15,000 15,759 -- Shareholders' equity............................ 24,431 25,962 53,501 57,258 127,332 </TABLE> - --------------- (1) Gives effect to the (i) Capitalization Adjustments, (ii) Hess Acquisition, (iii) Ottawa Acquisition, and (iv) the application of estimated net proceeds of $50.9 million from the Offerings as if such transactions had been consummated as of January 1 of the period presented. See "Use of Proceeds."
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements appearing elsewhere in this Prospectus. Capitalized terms used but not defined in this summary are defined elsewhere in this Prospectus. Unless the context otherwise requires, as used in this Prospectus, "EVEREN" and the "Company" mean EVEREN Capital Corporation, a Delaware corporation ("EVEREN Capital") and the issuer of the Common Stock, and its subsidiaries. Unless otherwise indicated, numbers and percentages of shares outstanding in this Prospectus assume (i) no exercise of the Underwriters' over-allotment option and (ii) the consummation of the Transactions (as defined in "Company History"). This Prospectus contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed in the forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. THE COMPANY EVEREN is a full-service securities brokerage firm that provides a broad range of investment services and products primarily to individuals and also to institutions, corporations and municipalities. The Company's core strength is its retail operations which are focused on individual investors and which generated more than 70% of the Company's net revenues in each of the last three years. The Company also engages in capital markets, asset management and clearing activities that complement and capitalize on the strength of the Company's retail operations. In its retail business, the Company focuses on maintaining and developing strong client relationships in local and regional markets while providing the breadth and quality of services and products offered by national brokerage firms. Headquartered in Chicago, the Company operates its retail business through an integrated network of approximately 1,175 investment consultants located in 138 offices in 27 states. As of January 1, 1995, EVEREN was ranked as the eleventh largest brokerage firm in the United States based on number of investment consultants, according to the Securities Industry Association. As of June 30, 1996, EVEREN held over $38 billion of customer assets in more than 430,000 client accounts. EVEREN enjoys strong market positions in targeted regional markets with approximately 73% of its branch offices and 74% of its investment consultants located in the states of Illinois, California, Ohio, Wisconsin, Colorado and Texas. EVEREN's market penetration is primarily the result of the consolidation and integration in 1990 of five prominent predecessor firms to form a network of seasoned investment consultants. Annualized average production for the Company's investment consultants was $310,000 for the eight months ended August 31, 1996 and, at that date, the Company's client assets per investment consultant averaged $28.9 million. Management believes that the experience of, and relationships developed by, its investment consultants help to differentiate the Company from its competitors in its targeted markets and enable the Company to more effectively access and serve clients. As of June 30, 1996, the Company's investment consultants averaged more than eight years of tenure with the Company and 16 years of experience in the securities brokerage industry. Based upon a confidential industry survey conducted by a third party, management believes that the productivity of its investment consultants exceeds that of most regional firms. The Company also provides a full range of equity and fixed income products, investment banking services and other capital markets products and services through approximately 287 professionals located in eleven offices in major cities in the United States. The Company is increasing the coordination of its investment banking, syndicate and trading activities and focusing those activities on middle market and growth companies in selectively targeted industries in which management believes the Company has specialized expertise. In addition, EVEREN is expanding its asset management business through a joint venture with Mentor Investment Group, Inc. ("Mentor"), an asset management company that has approximately $5.7 billion of assets under management. Through its subsidiary, EVEREN Clearing Corp. ("EVEREN Clearing"), the Company also provides securities clearing services to its trading and brokerage businesses and to approximately 30 correspondent firms. In September 1995, the Company became independent when its employees purchased it from Kemper Corporation ("Kemper") in the Buy-Out (as defined herein) for an aggregate cash price of $71.4 million ($55.0 million of which was funded by bank borrowings) plus $30.0 million of Exchangeable Preferred Stock (as defined herein), terms that EVEREN management considered to be attractive. As a result, the Company is currently employee-owned, with approximately 92% of the Company's current employees having an ownership interest. The Company experienced net losses in 1992, 1993, 1994 and 1995 of $38.4 million, $3.7 million, $2.2 million and $15.9 million, respectively. Since the Buy-Out, EVEREN has experienced improved growth and profitability. For the fourth quarter of 1995, its first full quarter as an independent entity, the Company reported net income of $6.2 million on net revenues of $131.3 million compared to net income of $0.7 million on net revenues of $114.2 million in the fourth quarter of 1994. For the six months ended June 30, 1996, the Company generated net income of $49.2 million, including a $30.2 million after-tax gain on the sale of a subsidiary, on net revenues of $282.0 million compared to a net loss of $2.7 million on net revenues of $233.6 million for the first six months of 1995. Management believes that the Company's independence and employee ownership have resulted in high levels of employee motivation, confidence and commitment, which have in turn contributed significantly to the Company's improved performance. The principal purpose of the offering is to increase EVEREN's equity capital and to facilitate its access to the public capital markets. Management believes, based on market indices, volume levels and recent initial public offering activity generally, that favorable conditions currently exist in the public equity markets. Accordingly, the offering is being implemented at this time. The Company is dedicated to expanding its retail brokerage franchise while increasing the proportion of revenues and profits contributed by its capital markets and asset management businesses. The Company continually focuses on enhancing its profitability through revenue growth and strict cost controls. Key elements of the Company's strategy include actions to: . Provide a high level of value-added service to clients. Management seeks to provide its retail investment consultants with a work environment and resources that enable them to offer clients service superior to that provided by most national brokerage firms and a range of products and services broader than those offered by most regional brokerage firms. . Increase penetration in existing markets. The Company targets select local markets in which its presence often equals or exceeds that of national brokerage firms. The Company is focused on achieving target market penetrations in most of its markets to realize operating efficiencies and develop a meaningful presence in such communities. . Grow client assets and increase asset management activity. The Company seeks to increase client wealth maintained at the Company by encouraging existing clients to maintain an increasing proportion of their financial assets with the Company through the introduction of new cash management accounts and by attracting new clients. The Company also intends to offer proprietary mutual fund products through its joint venture with Mentor and otherwise increase its asset management activities. . Expand capital markets activity. The Company intends to increase the origination of equity products primarily by focusing on select industry groups through coordinated research, investment banking, syndicate and trading efforts. . Pursue opportunistic acquisitions consistent with the Company's overall strategy. The Company will selectively pursue acquisition opportunities that either deepen penetration in its existing markets or add new, sufficiently penetrated markets to strengthen its franchise and further leverage its existing infrastructure. . Maintain rigorous cost discipline. The Company seeks to minimize operating costs by closely aligning its compensation structure to profitability targets and cost minimization goals and by converting fixed costs to variable costs where appropriate. . Maintain a conservative risk profile. The Company will continue to control the risks in each of its businesses by minimizing securities inventories, hedging to the extent practicable and subjecting each of its businesses to strict risk management guidelines. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company. 4,000,000 shares U.S. Offering..................... 3,200,000 shares International Offering............ 800,000 shares Common Stock to be outstanding after 15,747,897 shares (1) the offering....................... Dividend policy..................... The Board of Directors intends to pay quarterly dividends of $.09 per share on the outstanding shares of Common Stock commencing in the fourth quarter of 1996. Use of proceeds..................... Approximately $36 million of the net proceeds to the Company from the offering will be used to repay the aggregate principal amount of indebtedness outstanding under the Loan Agreement (as defined herein). The remaining net proceeds will be used for general corporate purposes, including potential future acquisitions. New York Stock Exchange symbol...... EVR </TABLE> - -------- (1) Based on shares outstanding at June 30, 1996. Excludes 1,120,625 shares of Common Stock subject to outstanding stock options as of June 30, 1996, at a weighted average exercise price of $7.48 per share, none of which is currently exercisable. See "Capitalization" and "Company Stock Plans." SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA (IN MILLIONS, EXCEPT PER SHARE DATA) The summary consolidated financial and operating data should be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus and with "Management's Discussion and Analysis of Financial Condition and Results of Operations." Results for interim periods are not necessarily indicative of results to be expected during the remainder of the year or for any future period. <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31, ---------------------- ----------------------------------------------------- 1996 1995 1995 1994 1993 1992 1991 -------- -------- ------ ------ ------ ------ ------ <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenues.......... $300.5 $260.6 $543.2 $530.0 $673.7 $677.5 $663.7 Net revenues............ 282.0 233.6 490.7 485.2 626.8 624.5 600.4 Total non-interest expenses............... 251.0 237.7 512.7(/2/) 497.9 628.3 652.0 593.9 Gain on sale of subsidiary............. 50.2 -- -- -- -- -- -- Income (loss) before taxes and cumulative effect of accounting changes................ 81.2 (4.1) (22.0) (12.7) (1.5) (27.5) 6.5 Net income (loss)....... $ 49.2(/1/) $ (2.7) $(15.9)(/2/) $ (2.2) $ (3.7)(/3/) $(38.4)(/4/) $ 6.2 Earnings per share(/5/). $ 4.98 ======== Pro forma net income (loss) per share(/6/).. $ 3.41 $(1.04) ======== ====== </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 ---------------------------------- PRO PRO FORMA AS ACTUAL FORMA(/7/) ADJUSTED(/8/) --------- ---------- ------------- <S> <C> <C> <C> STATEMENT OF FINANCIAL CONDITION DATA: Total assets................................ $ 1,767.4 $ 1,765.1 $1,797.1 Long-term obligations(/9/).................. 175.2 143.7 143.7 Stockholders' equity........................ 195.9 190.8 258.7 Book value per share of Common Stock outstanding................................ $ 16.23 $ 16.24 $ 16.43 </TABLE> <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, ------------------ --------------------- 1996 1995 1995 1994 1993 -------- -------- ----- ----- ----- <S> <C> <C> <C> <C> <C> OPERATING DATA: After-tax return on average equity........................... 30.1% (1.6)% (10.6)% (1.4)% (2.4)% Compensation and benefits expense as a percentage of net revenues.. 62.3% 65.9% 68.4% 67.6% 61.8% Non-compensation and benefits expense as a percentage of net revenues......................... 26.8% 36.0% 36.1% 35.1% 38.5% Assets in client accounts (at end of period) (in billions)......... $ 38.2 $ 33.0 $36.8 $31.0 $33.9 </TABLE> - -------- (1) Includes a $50.2 million pre-tax ($30.2 million after-tax) gain on sale of subsidiary. See "Company History" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." (2) Includes $33.3 million pre-tax ($22.0 million after-tax) of non-recurring charges incurred in connection with the Buy-Out. See "Company History" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." (3) After cumulative effect at January 1, 1993 of a change in accounting for income taxes of $5.5 million. See Note 2 of Notes to Consolidated Financial Statements. (4) After cumulative effect at January 1, 1992 of a change in accounting for post-retirement benefits of $10.0 million. (5) Earnings per share of Common Stock is not presented for periods other than the most recent period as historical per share information is not indicative of the Company's continuing capital structure. (6) Pro forma net income per share of Common Stock is calculated by dividing net income for the period after eliminating the after-tax interest expense related to the Debentures (as defined herein) by the weighted average number of shares of Common Stock and Common Stock equivalents outstanding from the beginning of the period, adjusted only for the number of shares of Common Stock sold in the offering the proceeds with respect to which will be used to repay indebtedness under the Loan Agreement (as defined herein). (7) Reflects the Transactions. See "Company History" and "Capitalization". (8) Reflects the sale of 4,000,000 shares of Common Stock offered hereby at an assumed initial price to the public of $18.50 per share and the application of the net proceeds therefrom (net of estimated underwriting discounts and commissions and offering expenses). See "Use of Proceeds" and "Capitalization." (9) Consists of the Debentures and collateralized mortgage obligations backed by investments in mortgage-backed certificates. See "Company History."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000945771_viatel-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000945771_viatel-inc_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by and should be read in conjunction with the more detailed information and Consolidated Financial Statements, including the Notes thereto, and other financial data appearing elsewhere in this Prospectus. Except as otherwise indicated, all information in this Prospectus (i) assumes an initial public offering price of $13.50 per share of Common Stock (the midpoint of the range set forth on the cover page of this Prospectus) and no exercise of the Underwriters' over-allotment option and (ii) has been adjusted to give effect to a reverse split of the Common Stock at a ratio of 3-to-2 which will be effective immediately prior to the consummation of the Offerings (the "Reverse Stock Split") and the conversion of all outstanding shares of the Company's non-voting Class A Common Stock, $.01 par value (the "Class A Common Stock") into shares of Common Stock. As used herein, the terms "Company" and "Viatel" refer to Viatel, Inc. and its subsidiaries and predecessor, and the term "Latin America" refers to the United Mexican States, Central America and South America, collectively. All industry data included in this Prospectus, including that of the International Telecommunications Union ("ITU"), has been presented as of 1994, the most recent year for which such data is available. See the "Glossary" appearing elsewhere herein for definitions of certain technical terms used in this Prospectus. THE COMPANY Viatel is a growing provider of international and national long distance telecommunications services principally in Western Europe, Latin America, the United States and the Pacific Rim and offers its services primarily to small and medium-sized businesses, carriers and other resellers. The Company operates a digital, switch-based telecommunications network in Western Europe including a central switching center in London and additional switches in Amsterdam, Barcelona, Brussels, Frankfurt, Madrid, Milan, Paris and Rome connected by leased, digital fiber optic transmission facilities (the "European Network"). In addition, the Company operates a switching center in Omaha, Nebraska which is connected to the central switching center in London by leased, digital fiber optic transmission facilities (together with the European Network, the "Viatel Network"). The Company derives revenue primarily through the provision of competitively priced long distance services with value-added features that are not typically provided by the respective incumbent telecommunications operator ("ITO") in many of the countries in which the Company operates. The Company's services include virtual private networks, dedicated access for high volume users, calling cards, fax service and the provision of switched minutes to wholesale customers. The value-added features include itemized and multicurrency billing, abbreviated dialing and multiple payment methods. Access to the Company's services is obtained through callback, paid access, international toll-free ("ITF"), national toll-free ("NTF") or direct access through a dedicated line. The Company conducts its business on a global basis, with its principal focus on Western Europe. Of the Company's telecommunications revenue for the six months ended June 30, 1996, approximately 42.4% was generated in Western Europe, approximately 29.1% was generated in Latin America, approximately 16.2% was generated in North America, primarily from the Company's wholesale business of selling switched minutes to other carriers, and approximately 11.7% was generated in the Pacific Rim. The remaining .6% was generated in Africa and the Middle East. Historically, significant portions of the Company's telecommunications revenue have been derived from Latin America. Presently, the Company is devoting substantial resources to the deregulating Western European market, and although it expects revenue from Latin America as well as other geographic regions to grow, it expects such revenue to continue to decrease as a percentage of the Company's total telecommunications revenue in the near term. The Company's objective is to be a significant provider of international and national long distance telecommunications services within Western Europe and other deregulating markets. The Company believes it is strategically positioned to take advantage of fundamental changes occurring in the telecommunications industry as a result of global deregulation and rapid advances in technology. In INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. Subject to Completion October 15, 1996 PROSPECTUS 8,667,000 SHARES VIATEL, INC. LOGO COMMON STOCK ($.01 PAR VALUE) All of the shares of common stock (the "Common Stock") offered hereby are being sold by Viatel, Inc. (the "Company" or "Viatel"). Of the 8,667,000 shares of Common Stock offered, 5,200,200 shares are being offered by the U.S. Underwriters (as defined herein) in the United States and Canada (the "U.S. Offering") and 3,466,800 shares are being offered by the International Underwriters (as defined herein), in a concurrent offering outside the United States and Canada (the "International Offering" and together with the U.S. Offering, the "Offerings"), subject to transfers between the U.S. Underwriters and the International Underwriters (collectively, the "Underwriters"). The initial public offering price and the aggregate underwriting discount per share will be identical for the Offerings. See "Underwriting." The closing of the U.S. Offering and the International Offering are conditioned upon each other. Prior to the Offerings, there has been no public market for the Common Stock. It is currently estimated that the initial public offering price per share will be between $12.00 and $15.00. See "Underwriting" for a discussion of the factors considered in determining the initial public offering price. The Company's Common Stock has been approved for quotation on the Nasdaq National Market under the symbol "VYTL," subject to official notice of issuance. SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY POTENTIAL INVESTORS. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- <TABLE> <CAPTION> PROCEEDS PRICE TO UNDERWRITING TO PUBLIC DISCOUNT COMPANY(1) <S> <C> <C> <C> Per Share................................ $ $ $ Total(2)................................. $ $ $ </TABLE> - -------------------------------------------------------------------------------- (1) Before deducting offering expenses payable by the Company, estimated at $1,600,000. (2) The Company has granted the Underwriters a 30-day option to purchase up to an aggregate of 1,300,050 additional shares of Common Stock at the Price to Public, less the Underwriting Discount, solely to cover over-allotments, if any. If the Underwriters exercise such option in full, the total Price to Public, Underwriting Discount and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." The shares of Common Stock are offered subject to receipt and acceptance by the Underwriters, to prior sale and to the Underwriters' right to reject any order in whole or in part and to withdraw, cancel or modify the offer without notice. It is expected that delivery of the shares of Common Stock offered hereby will be made at the office of Salomon Brothers Inc, Seven World Trade Center, New York, New York, or through the facilities of The Depository Trust Company, on or about , 1996. SALOMON BROTHERS INC CS FIRST BOSTON LAZARD FRERES & CO. LLC The date of this Prospectus is , 1996. particular, the Company believes that its early entry into the Western European market as an alternative network operator has positioned it to take advantage of the anticipated implementation of European Union ("EU") directives to eliminate the ITOs' existing monopolies on Voice Telephony (as defined herein), scheduled to occur by 1998 in most EU member states. The Company is currently prohibited from supplying Voice Telephony in most EU member states until 1998. Accordingly, the Company instead provides competitively priced international and national long distance services with value-added features, thus positioning itself to capitalize on anticipated deregulation. Key elements of the Company's business strategy include: (i) focusing on the European market and leveraging the European Network; (ii) capitalizing on the anticipated obsolescence of settlement agreements with ITOs; (iii) maintaining low-cost operations; (iv) focusing on the Company's target market of small and medium-sized businesses; (v) increasing sales of switched minutes to wholesale customers; (vi) continuing the development of the Company's local sales distribution channels; (vii) leveraging the Company's information systems; and (viii) pursuing acquisitions, investments and strategic alliances. The Company believes it is well positioned to achieve its objective as a result of its: (i) switch-based network capabilities; (ii) early entry into the Western European market as an alternative network operator; (iii) focus on international and national long distance telecommunications traffic; (iv) competitively priced services and value-added features; and (v) local sales, marketing and customer service organizations. The Company is a Delaware corporation and is the successor to VIA USA, Ltd. (a Colorado corporation) which was merged into the Company on October 11, 1994 to effectuate a reincorporation within the State of Delaware. The Company is an operating company which renders its services directly and indirectly through subsidiaries in each Western European country in which it currently operates. The Company's principal executive offices are located at 800 Third Avenue, New York, New York 10022. Its telephone number is (212) 935-6800. THE OFFERINGS <TABLE> <S> <C> Common Stock offered hereby: U.S. Offering...................... 5,200,200 shares International Offering............. 3,466,800 shares ----------- Total(1)...................... 8,667,000 shares ----------- ----------- Common Stock outstanding after the Offerings(1)(2)....................... 22,374,648 shares Use of proceeds......................... The net proceeds of the Offerings, estimated to be approximately $107.2 million (approximately $123.5 million if the Underwriters' over-allotment option is exercised in full), will be used by the Company for (i) network upgrade and expansion; (ii) investments in digital undersea fiber optic cable; (iii) acquisitions of customer bases and businesses or for investment in joint ventures or strategic alliances; and (iv) general corporate and working capital purposes, including feasibility studies of the Company's provision of competitive local exchange carrier ("CLEC") services. See "Risk Factors -- Broad Discretion Over Use of Proceeds" and "Use of Proceeds." Nasdaq National Market symbol........... VYTL </TABLE> - --------------- (1) Does not include up to an aggregate of 1,300,050 shares of Common Stock subject to an over-allotment option granted to the Underwriters. See "Underwriting." (2) Excludes (i) 1,833,333 shares of Common Stock reserved for issuance under the Stock Incentive Plan (as defined herein) of which options to purchase 1,075,511 shares of Common Stock, exercisable at prices ranging from $.75 to $5.85 per share, have been granted and are outstanding on the date hereof and (ii) 5,914 other outstanding options to purchase shares of Common Stock exercisable at $.75 per share. See "Management -- Stock Incentive Plan."
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to, and should be read in conjunction with, the more detailed information and financial statements contained elsewhere in this Prospectus. Except as otherwise indicated by the context, references in this Prospectus to the "Company" include Commodore Media, Inc. and its direct and indirect wholly owned subsidiaries. All numbers of shares, per share amounts and related information in this Prospectus have been adjusted to reflect a 7.2-for-1 split of the Common Stock (the "Stock Split"), which will be effected prior to the sale of the Class A Common Stock offered hereby. See "Description of Capital Stock." Unless otherwise indicated, the information contained in this Prospectus assumes no exercise of the Underwriters' over-allotment option. References in this Prospectus to the Company's "pro forma" 1995 operating results and related statistical information give effect to the Recapitalization Transactions, the Offering and the application of the estimated net proceeds therefrom, the Acquisitions and the 1995 Treasure Coast Acquisition (as such terms are defined herein) as if such transactions had occurred on January 1, 1995. See "--Market Data and Certain Definitions," "Unaudited Pro Forma Consolidated Financial Information" and "Use of Proceeds." THE COMPANY Commodore Media, Inc. owns and operates, or provides sales and marketing services for 33 radio broadcasting stations (nineteen FM and fourteen AM stations) in six medium-sized markets. The Company is the leading radio group on a pro forma basis in five of its six markets based on radio advertising revenue and is the leading radio group in each of its six markets based on audience share. The Company's average radio revenue share in its markets was 45.1% in pro forma 1995, which the Company believes is the highest average radio revenue share of any public radio broadcasting company in the United States. The Company's radio stations are located in the following markets: Fairfield County, Connecticut; Allentown, Pennsylvania; Wilmington, Delaware; Westchester/Putnam Counties, New York; Ft. Pierce-Stuart-Vero Beach, Florida (the "Treasure Coast Market") and Huntington, West Virginia/Ashland, Kentucky. The Company's pro forma net revenue and broadcast cash flow for the year ended December 31, 1995 were $42.5 million and $15.3 million, respectively. The Company believes that operating radio stations in medium-sized markets offers significant opportunities to apply its programming, marketing and broadcasting expertise to increase broadcast cash flow and to establish a dominant market position that would be difficult for a competitor to replicate. The Company defines medium-sized markets as markets with approximately $10 million to $35 million of radio advertising revenue, which includes markets ranked between 50 and 150 in terms of radio advertising revenue. The Company believes that medium-sized markets represent attractive operating environments because these markets are generally characterized by (i) a limited number of radio stations, which minimizes the risk of format attack, (ii) fewer alternative advertising media, (iii) undercapitalized owners/operators, (iv) strong station brand identity among listeners that is not typically dependent upon specific on-air talent, (v) a lower cost operating structure and (vi) a high percentage of local advertisers who make advertising decisions based upon relationships and customer service and not solely upon station ratings. The Company believes that these characteristics allow it to capture a greater percentage of a market's total advertising revenue and to achieve broadcast cash flow margins typically higher than industry norms while operating in a more stable competitive environment. In addition, the Company believes that under the recently enacted Telecommunications Act of 1996, which liberalized radio station ownership limits, medium-sized markets offer the Company the greatest opportunity to create dominant, multiple station ownership situations. The Company's objective is to increase shareholder value by enhancing its share of the advertising revenue in each of its markets, increasing the broadcast cash flow of its existing stations and pursuing additional acquisitions both in its existing markets and in new markets in which the Company's operational expertise can be successfully applied to increase broadcast cash flow. Through successful implementation of the Company's operating and acquisition strategies, the Company's net revenue and broadcast cash flow have increased at compound annual growth rates of 21.1% and 29.2%, respectively, from 1991 to pro forma 1995 and the broadcast cash flow margin has increased from 26.0% in 1991 to 36.1% in pro forma 1995. On a same station basis, from 1991 to 1995, the Company successfully increased its net revenue and broadcast cash flow at compound annual growth rates of 13.7% and 20.7%, respectively. The following table sets forth, on a pro forma basis, certain information with respect to the Company and its markets: <TABLE> <CAPTION> COMPANY DATA MARKET DATA ---------------------------------------------------------------- ---------------------------------------------- NUMBER OF 1995 RADIO RADIO REVENUE RADIO RADIO AUDIENCE STATIONS(F) RADIO 1990-1995 REVENUE MARKET SHARE AUDIENCE MARKET SHARE --------- VIABLE REVENUE 1995 RADIO REVENUE MARKET(A) RANK(B) %(C) RANK(D) %(E) AM FM STATIONS(G) RANK(H) REVENUE(I) CAGR % <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Fairfield County, CT 1 33.2% 1 26.3% 3 3 9 60 $ 27,851 9.6% Allentown, PA 1 53.7% 1 47.2% 2 2 8 77 $ 19,300 5.1% Wilmington, DE 2 33.2% 1 42.2% 1 1 5 78 $ 17,800 10.4% Westchester/Putnam Counties, NY(j) 1 34.3% 1 47.3% 2 3 4 115 $ 12,400 N/A Treasure Coast, FL 1 49.7% 1 49.8% 1 5 9 138 $ 9,900 6.5% Huntington, WV/ Ashland, KY 1 66.7% 1 70.4% 5 5 9.5 140 $ 9,800 7.3% </TABLE> - ------------------------------ (a) Actual city of license may be different from metropolitan market served. Market names used in this table are those used by Arbitron for Arbitron Metro Survey Areas or Arbitron Custom Survey Areas for the Company's markets. (b) Radio Revenue Rank in each market is the ranking, by 1995 radio group market revenue share, of each of the Company's radio groups in its market among all other such radio groups in such market. For each of the Company's radio groups, except Fairfield County, Radio Revenue Rank was derived by the Company determining the radio groups in the market and by then calculating group revenue using the market revenue sources described in note (c) below. Fairfield County was ranked in the source as indicated in note (c) below. (c) In each of the markets, except Fairfield County, Radio Revenue Market Share was derived by dividing (1) the total 1995 radio revenues of the Company's stations in the market, by (2) the total 1995 radio revenues in that market as published in BIA's Investing in Radio -- 1996 Market Report (2nd ed.). In Fairfield County, the total 1995 radio revenues in the market were obtained from the January 1996 Fairfield Suburban Market Revenue Report by Miller Kaplan (as hereinafter defined). (d) Ranking of the Company's combined stations versus other radio groups in the market for persons aged 12 and older in the applicable Arbitron Metro Survey Area or Arbitron Custom Survey Areas, Average Quarter Hour Estimates, Monday through Sunday, 6 am to midnight. (e) Radio Audience Market Share was derived by dividing (1) the sum of audience shares from the applicable Arbitron Market Survey of the Company's combined radio stations, by (2) the total sum of audience shares above the line in the local market served. (f) The number of stations for Allentown, Pennsylvania includes WKAP-AM for which the Company is providing certain sales and marketing services pursuant to a JSA; the number of stations for the Treasure Coast Market, Florida includes WPAW-FM for which the Company is providing certain sales and marketing services pursuant to a JSA; and the number of stations for Huntington, West Virginia/Ashland, Kentucky includes WMLV-FM, WHRD-AM, WFXN-FM, WKEE-AM, WKEE-FM, WZZW-AM, WBVB-FM and WIRO-AM, for which the Company is providing certain sales and marketing services pursuant to LMAs pending the consummation of the Huntington Acquisitions. (g) The number of viable radio stations for the Company's Allentown, Wilmington and Huntington/Ashland markets were taken from Duncan's Radio Market Guide (1996 Edition). The number of viable stations for the Company's remaining markets were derived by calculating all radio stations listed home-to-market by Arbitron which received an average quarter hour share of "1" or greater in each of the 1995 Arbitron Surveys for the indicated market. (h) According to BIA's Investing in Radio Market Guide 1996 (2nd ed.) "Revenue Rank." The Fairfield County, CT and Westchester/Putnam Counties, NY Radio Revenue Ranks were estimated using BIA's methodology. (i) Dollars in thousands. (j) Radio Revenue Rank and Radio Revenue Market Share for Westchester/Putnam Counties, NY have been estimated by the Company because no data is available for this sub-market. BUSINESS STRATEGY The Company believes the most effective way to achieve its objective of increasing shareholder value is to dominate medium-sized markets by operating multiple radio stations in each market. Multiple station ownership enables the Company to maintain greater influence over the pricing of radio advertising rates and more effectively compete against alternative forms of media advertising. The Company has the ability to program its multiple stations to provide advertisers with access to a variety of attractive demographic groups in a market and as a result, capture a significant share of the market's radio advertising revenue. In addition, multiple station ownership enables the Company to attract and retain highly qualified personnel as well as to achieve cost savings through eliminating duplicative overhead and consolidating broadcast facilities. The Company's station operating strategy centers upon (i) strategically programming its radio stations to dominate specific demographics and/or provide advertisers a broad spectrum of multiple demographic targets, (ii) conducting extensive market research, (iii) employing a local sales force that utilizes a value-added sales approach designed to form marketing partnerships with advertisers, (iv) employing separate sales forces at each major station in the Company's markets who coordinate the advertising packages presented to its advertisers, (v) controlling station operating costs through consolidation of multiple station facilities and selected use of preprogrammed automation and automated satellite delivered programming, (vi) providing performance based management incentives and (vii) building and maintaining broad station awareness and listener loyalty through strong community involvement. ACQUISITION STRATEGY The Company's acquisition strategy is to selectively acquire underperforming radio stations in medium-sized markets at prices that are attractive relative to the Company's potential to increase the acquired stations' broadcast cash flow. The Company believes that significant opportunities exist in other medium-sized markets for the Company to acquire additional radio stations at attractive prices relative to their broadcast cash flow potential. The Company also believes it can effectively capitalize on its presence in and knowledge of the markets in which it operates to make attractive acquisitions in adjacent markets. The Company may also enter new markets either through acquisitions of radio groups that have multiple station ownership in a market or though acquisitions of individual stations in markets in which the Company believes it can establish itself as the markets' dominant radio group by making additional in-market acquisitions. In analyzing potential acquisitions, the Company considers many factors including: (i) the price and terms of the purchase in relation to the estimated potential broadcast cash flow for the station or stations; (ii) the possibility of obtaining a synergistic combination with additional stations in a given market; (iii) the existing quality and potential quality of the station's broadcast signal and transmission facility and (iv) the radio and other media competition in the market. While the Company continuously evaluates opportunities to make strategic acquisitions, it has no present commitments or agreements with respect to any material acquisitions other than the Huntington Acquisitions. THE ACQUISITIONS The Company has recently made, or entered into agreements to make, the following acquisitions: Fairfield County, Connecticut. In March 1996, the Company acquired radio stations WRKI-FM and WINE-AM in Fairfield County, Connecticut (the "Danbury Acquisition"). In May 1996, the Company acquired radio stations WKHL-FM and WSTC-AM in Stamford, Connecticut (the "Stamford Acquisition"). Westchester/Putnam Counties, New York. As part of the Danbury Acquisition, the Company acquired radio stations WZZN-FM (formerly WVIB-FM), WPUT-AM and WVYB-FM in Westchester/Putnam Counties, New York in March 1996 (the "Westchester Acquisition"). Treasure Coast Market, Florida. In May 1996, the Company acquired radio stations WKQS-FM, WAVW-FM and WAXE-AM in the Treasure Coast Market (the "1996 Treasure Coast Acquisition"). Huntington, West Virginia/Ashland, Kentucky. In April 1996, the Company entered into (i) an agreement to acquire radio stations WKEE-FM and WKEE-AM in Huntington, West Virginia, WZZW-AM in Milton, West Virginia, WBVB-FM in Coal Grove, Ohio and WIRO-AM in Ironton, Ohio and (ii) agreements to acquire radio stations WHRD-AM in Huntington, West Virginia, WFXN-FM in Milton, West Virginia and WMLV-FM in Ironton, Ohio (the "Huntington Acquisitions"). In connection with these agreements, the Company entered into LMAs (as defined below) to provide, on a cooperative basis, the programming, sales, marketing and certain other services to the stations pending the closing of the acquisitions. The term "Acquisitions" as used in this Prospectus collectively refers to the following acquisitions of radio stations by the Company: (i) the Danbury Acquisition, (ii) the Stamford Acquisition, (iii) the Westchester Acquisition, (iv) the 1996 Treasure Coast Acquisition and (v) the pending Huntington Acquisitions. The Company anticipates that the Stamford Acquisition and the 1996 Treasure Coast Acquisition will be consummated in May 1996 and that the Huntington Acquisitions will be consummated during the second half of 1996. However, there can be no assurance that any of such transactions will be consummated. The term "1995 Treasure Coast Acquisition" as used in this Prospectus refers to the acquisition of radio station WQOL-FM and the Company's entry into a JSA with respect to WPAW-FM. Both stations are in the Treasure Coast Market, Florida. The Company's executive offices are located at 500 Fifth Avenue, Suite 3000, New York, New York 10110. The telephone number is (212) 302-2727. THE OFFERING <TABLE> <S> <C> Class A Common Stock offered by the Company................. 2,882,143 shares Class A Common Stock offered by the Selling Shareholders(a)........................................... 1,417,857 shares Total.................................................. 4,300,000 shares Common Stock to be outstanding after the Offering(b) Class A Common Stock...................................... 4,542,554 shares Class B Common Stock...................................... 2,280,690 shares Total.................................................. 6,823,244 shares Use of proceeds............................................. To repay existing indebtedness, to redeem the Company's outstanding shares of Series A Preferred Stock, to finance a portion of the Huntington Acquisitions and to pay deferred compensation. The Company will not receive any proceeds from the sale of shares of Class A Common Stock by the Selling Shareholders. See "Use of Proceeds." Voting rights............................................... Each share of Class A Common Stock is entitled to one vote and each share of Class B Common Stock is entitled to eight votes. After the Offering, the Estate of Carter Burden will own approximately 80% of the total voting power and 28% of the fully-diluted economic interest in the Company. The Estate of Carter Burden will continue to have the ability to control the Company. See "Principal and Selling Shareholders" and "Description of Capital Stock." NASDAQ National Market symbol............................... CMIA </TABLE> - ------------------------------ (a) The Selling Shareholders include the Estate of Carter Burden and William A.M. Burden & Co., L.P. (b) Excludes: (i) options outstanding on the date hereof to purchase approximately 694,368 shares of Class A Common Stock at an exercise price of $6.25 and (ii) warrants outstanding on the date hereof to purchase 597,960 shares of Class A Common Stock at an exercise price of $.01. MARKET DATA AND CERTAIN DEFINITIONS Unless otherwise indicated herein, all markets, audience ratings and audience rankings have been derived for the indicated station or group of stations from surveys of the indicated demographic group listening Monday through Sunday, 6 a.m. to 12 midnight, based on the average of the survey periods for the referenced year, as reported by Arbitron, Radio Market Report, The Arbitron Company ("Arbitron"). Unless otherwise indicated herein, audience share data is expressed as the "local" average quarter hour share for each indicated radio station. A radio station's "local" audience share is derived by comparing the radio station's average quarter hour share to the total average quarter hour share for all stations listed as inside the Metro Survey Area ("MSA") ("home-to-market" or "above the line") by Arbitron. Average quarter hour share is the percentage of the estimated number of persons who listened to a given radio station for a minimum of five minutes within a quarter hour compared to the total number of persons who listened to radio in the market within such quarter hour. The most recent Arbitron survey utilized in this Prospectus is Fall 1995. Unless otherwise indicated herein, metro rank, market ranking by radio advertising revenue and market radio advertising revenue have been obtained from Investing in Radio, 1996 Market Report--Second Edition, BIA Publications Inc. ("BIA"). Revenue share in the Company's markets has been derived from comparing the Company's 1995 total revenue less barter revenue in each market to the estimated market radio advertising revenue for 1995. Revenue rankings in the Company's markets have been derived by comparing the Company's revenue share in each market to the revenue share for the Company's competitors (utilizing the estimated revenue for each competing radio station as provided by BIA). Market radio advertising revenue, revenue share data and revenue rankings in the Company's Fairfield County, Connecticut market have been obtained from Miller, Kaplan Market Revenue Report (published monthly), a publication of Miller, Kaplan, Arase & Co., Certified Public Accountants ("Miller Kaplan"). Market radio advertising revenue, revenue share data and revenue rankings for Westchester County, New York have been estimated by the Company without the benefit of any independent investigation or confirmation, as no published data on this sub-market is available. The terms local marketing agreement ("LMA") and joint sales agreement ("JSA") are referred to in various places in this Prospectus. An LMA refers to an agreement, although it may take various forms, under which a radio station agrees to provide, on a cooperative basis, the programming, sales, marketing and similar services for a different radio station. A JSA refers to an agreement, similar to an LMA, under which a radio station agrees to provide the sales and marketing services for another station while the owner of such other radio station provides the programming for such other radio station. The term "duopoly" is referred to in various places in this Prospectus and refers to the ownership of two or more AM or two or more FM radio stations in the same geographic market. Duopolies, LMAs and JSAs are more fully described in "Business-- Federal Regulation of Radio Broadcasting." SUMMARY CONSOLIDATED FINANCIAL DATA (dollars in thousands) The following table sets forth summary historical consolidated financial data and certain pro forma financial data of the Company for the five years ended December 31, 1995 and the three-month period ended March 26, 1995 and the three-month period ended March 31, 1996. The financial information presented below is qualified in its entirety by, and should be read in conjunction with, "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Company's Consolidated Financial Statements and the Notes thereto, and the other information contained elsewhere in this Prospectus. <TABLE> <CAPTION> THREE MONTHS ENDED ------------------------------ YEAR ENDED DECEMBER 31, MARCH 26, MARCH 31, ----------------------------------------------------------- --------- ------------------ 1995 PRO 1996 PRO 1991 1992 1993 1994 1995 FORMA(A) 1995 1996 FORMA(A) ------- ------- ------- ------- ------- --------- --------- ------- -------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> OPERATING DATA: Total revenue.................. $17,677 $19,578 $21,643 $28,686 $33,653 $46,327 $ 6,507 $ 8,048 $ 9,787 Net revenue.................... 16,335 17,961 19,798 26,225 30,795 42,536 5,967 7,416 9,033 Station operating expenses(b).................. 12,080 12,713 13,509 16,483 19,033 27,185 4,168 5,375 6,274 Corporate expenses............. 1,167 1,602 2,531 2,110 2,051 2,151 461 466 491 Operating income............... 1,482 1,970 1,133 3,307 5,778 7,634 316 1,095 1,384 Net loss....................... (4,183) (2,580) (3,782) (527) (2,240) (2,317) (585) (1,436) (1,060 ) SUPPLEMENTAL INFORMATION: Broadcast cash flow(c)......... $ 4,255 $ 5,248 $ 6,289 $ 9,742 $11,762 $15,351 $ 1,799 $ 2,041 $ 2,759 Broadcast cash flow margin(c).................... 26.0% 29.2% 31.8% 37.1% 38.2% 36.1% 30.1% 27.5% 30.5 % EBITDA(c)...................... 3,088 3,646 3,758 7,632 9,711 13,200 1,338 1,575 2,268 Capital expenditures........... 179 371 333 623 321 42 124 </TABLE> <TABLE> <CAPTION> AT MARCH 31, 1996 ------------------------- ACTUAL PRO FORMA(D) -------- ------------ <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................................................. $ 5,087 $ 1,644 Net working capital....................................................................... 6,050 2,307 Total assets.............................................................................. 63,211 89,043 Total debt (including current maturities)................................................. 75,653 67,153 Stockholders' equity (deficit)............................................................ (19,991) 15,323 </TABLE> - ------------------------------ (a) Pro forma operating data and supplemental information for the year ended December 31, 1995 give effect to the Recapitalization Transactions (as hereinafter defined), the Acquisitions, the Offering and the application of the estimated net proceeds therefrom and the 1995 Treasure Coast Acquisition as if each had occurred on January 1, 1995. The pro forma operating data and supplemental information for the three months ended March 31, 1996 give effect to the Acquisitions and the Offering and the application of the estimated net proceeds therefrom as if each had occurred on January 1, 1995. (b) Station operating expenses exclude depreciation and amortization, corporate expenses, long-term incentive compensation and separation compensation. (c) For purposes of this Prospectus, EBITDA is defined as net income (loss) before (i) extraordinary gain (loss), (ii) income taxes, (iii) other expenses (income), (iv) net interest expense, (v) long-term incentive compensation and separation compensation and (iv) depreciation and amortization. Broadcast cash flow is defined as EBITDA before corporate expenses. Although EBITDA and broadcast cash flow are not measures of performance calculated in accordance with Generally Accepted Accounting Principles ("GAAP"), EBITDA and broadcast cash flow are widely used in the broadcast industry as measures of a radio broadcasting company's operating performance. Neither EBITDA nor broadcast cash flow should be considered in isolation or as a substitute for net income, cash flows from operating activities and other income or cash flow statement data prepared in accordance with GAAP or as a measure of profitability or liquidity. Broadcast cash flow and EBITDA differ from cash flow from operations under GAAP primarily because broadcast cash flow and EBITDA are not reduced by interest expense and income tax expense, changes in the levels of operating assets and liabilities and separation and long-term incentive compensation paid during the period. In addition, broadcast cash flow excludes corporate expenses that are reflected as a reduction in cash flow from operations. Broadcast cash flow and EBITDA are not intended to depict funds available for discretionary uses as they do not reflect the Company's debt service and capital requirements. (d) The pro forma balance sheet data give effect to the 1996 Treasure Coast Acquisition, the Stamford Acquisition and the Huntington Acquisitions and the Offering and the application of the estimated net proceeds therefrom as if each had occurred on March 31, 1996.
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, included elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus assumes that the Underwriter's over-allotment option will not be exercised. In addition, unless otherwise specified, all numbers of shares and per share amounts have been restated to reflect the conversion and reclassification of each outstanding share of common stock of the Company into 98.337 shares of Common Stock, par value $.01 per share, ("Common Stock") effected immediately prior to the Company's initial public offering in August 1995 (the "Initial Public Offering"). Investors should carefully consider the information set forth under "Risk Factors." Oil and gas industry terms used in this Prospectus are defined in "Glossary of Oil and Gas Terms." THE COMPANY Forcenergy Inc ("Forcenergy" or the "Company") is an independent oil and gas company engaged in the development, exploration, acquisition and production of domestic oil and natural gas properties. The Company has experienced significant growth in the last five years, primarily through the acquisition of working interests in producing properties in the Gulf of Mexico. At December 31, 1995, the Company had net proved reserves of 365 Bcfe, 71% of which were located in the Gulf of Mexico. Approximately 60% of the Company's net proved reserves on such date were natural gas and approximately 69% of proved reserves were classified as proved developed. The Company operates approximately 79% of its Gulf of Mexico production. Strategy. The Company's business strategy is to increase its reserves and cash flow through the development, exploration and exploitation of its existing producing properties in the shallow waters (less than 350 feet) of the Gulf of Mexico. Management believes that the Company's acquisitions to date have positioned it for such growth through a program of development and selective exploratory drilling. The Company emphasizes the use of 3-D seismic and computer-aided exploration technology together with geologic and engineering studies of its properties to evaluate and prioritize drilling prospects. Focusing drilling activities on producing properties in a relatively concentrated area in the Gulf of Mexico permits the Company to utilize its base of geological, engineering and production experience in the region to maximize drilling success and to minimize finding and development costs. The Company plans to continue to pursue acquisitions of working interests in producing properties that offer further development potential as well as providing operating synergies with existing properties. Quality of Asset Base; Drilling Prospects. The Company holds interests in or rights to 51 lease blocks in federal and state waters in the Gulf of Mexico, including a 100% working interest in 26 lease blocks and a 50% or greater working interest in 12 other lease blocks. The Company believes it has assembled a three to five year inventory of development, exploitation and exploratory drilling opportunities in the Gulf of Mexico on acreage held by production. Most of the properties comprising this inventory are located in fields which have prolific production histories and which the Company believes will yield significant additional reserves through the application of modern exploration and development technologies. The Company is pursuing the development of these offshore properties through a combination of development drilling, recompletions and workovers and exploratory drilling. During 1995, the Company successfully drilled seven of nine exploratory wells and ten of ten development wells in the Gulf of Mexico and undertook eight recompletions and 24 workover projects resulting in initial net production increases of 4,392 Bbls/d of oil and 27,496 Mcf/d of gas. The Company plans to drill 19 development wells, eight of which have been successfully completed, and undertake 14 recompletions and 16 workover projects on its properties in the Gulf of Mexico during 1996. In addition, ten exploratory wells have been scheduled during the year to provide the Company with exposure to higher risk, higher potential prospects. Two of these wells have been successfully completed. The Company anticipates that approximately $70 million of its $88 million 1996 capital expenditure budget will be spent on these offshore projects, not including acquisition expenditures. Control of Operations and Costs. The Company prefers to operate its offshore properties in order to more effectively manage production performance while controlling operating expenses and the timing and amount of capital expenditures. Forcenergy operates 78 structures and 188 wells in the Gulf of Mexico. Management believes that the operating expertise and experience of its personnel in the Gulf of Mexico have been instrumental in its ability to significantly enhance and improve production rates and cash flow with minimal additional costs. A significant portion of the drilling prospects the Company expects to pursue during the next three to five years are accessible from existing production facilities operated by the Company. This base of operations will enable the Company to reduce its per unit operating costs if higher production volumes are realized. As a result of these factors, the Company improved its lease operating expense from $.86 per Mcfe of production in 1994 to $.70 per Mcfe of production in 1995. Technology. The Company uses advanced technology in its exploration and development activities in order to reduce drilling risks and finding costs and to more effectively prioritize drilling prospects based on return potential. The Company has acquired 3-D seismic surveys on 50 offshore lease blocks and currently has 390 square miles of 3-D seismic data and 1,540 linear miles of 2-D seismic data on its offshore properties. The Company has six geologists/geophysicists with average industry experience of 16 years and has invested in five Landmark geophysical stations for use in interpreting 3-D seismic data. The ability to obtain 3-D seismic data for offshore properties at reasonable costs has enabled the Company to identify multiple development and exploratory prospects in mature producing fields which were not identified through earlier technologies. Recent Acquisitions. During 1995, the Company spent an aggregate of approximately $92.1 million for working interests in 15 different fields that added 121.9 Bcfe of net proved reserves to its reserve base at an average cost of $.76 per Mcfe. Approximately $81.6 million of such expenditures were for interests in 10 properties located in the Gulf of Mexico. In March 1995, the Company acquired working interests in the South Marsh Island 136/137 Field and the northern half of South Marsh Island 106 from Conoco, Inc. (the "Conoco Acquisition") for consideration of $24.5 million. In April 1995, the Company acquired all the remaining working interests in the northern half of South Marsh Island 106. The foregoing acquisitions were particularly attractive because both fields are adjacent to fields in which the Company holds 100% working interests. The Company had an active drilling program in Block 106 in 1995 and will have at least one rig in the block for all of 1996. See "Business -- 1995 Drilling Program." In August 1995 in conjunction with the Initial Public Offering, the Company acquired all of the outstanding capital stock of Ashlawn Energy, Inc. ("Ashlawn") a privately held Company with substantial working interests in the South Pass 24 Field, Vermilion 28 Field and Ship Shoal 26 Field (the "Ashlawn Acquisition"). The purchase price for the Ashlawn Acquisition consisted of 3,000,000 shares of Common Stock, $3.3 million in cash and the assumption of $5.7 million in debt. All of the assumed debt was repaid with the proceeds of the Initial Public Offering. All of the shares included in this offering are being sold by the former stockholders of Ashlawn. The Company conducted an active drilling program on these properties in 1995 and expects to continue to pursue additional development projects on the properties in 1996. See "Business -- 1996 Offshore & Gulf Coast Drilling Activity". In November 1995, the Company acquired an approximate 50% working interest in certain leases in the Howard Glasscock/Snyder fields in Howard County, Texas from Saga Petroleum, Inc. for approximately $3.9 million. The Company's 1996 capital budget includes $1.9 million for its pro rata share of drilling injection wells to initiate a waterflood recovery project in the field. In December 1995, the Company acquired, by purchase and simultaneous swap in two transactions, an approximate 50% working interest in the Vermilion 261 Field (increasing its total working interest ownership in the field to 75%) and a 100% working interest in the Vermilion 262 Field for $830,000 in cash and the exchange of the Company's interest in the Eugene Island 24 Field it acquired in February 1995. In late 1995, the Company acquired a 100% working interest in the Vermilion Block 380 Field, located offshore Louisiana, from Texaco Exploration and Production, Inc. for approximately $650,000. Effective December 1995, the Company also acquired a 100% working interest in the West Cameron 630 Field, located offshore Louisiana and an approximately 51.7% working interest in the Comite Field in East Baton Rouge Parish, Louisiana from Exxon Corporation for approximately $3.9 million. As is customary in the oil and gas industry, the Company from time to time submits bids on oil and gas properties. The Company currently has executed purchase and sale agreements with two parties for the acquisition of properties in the Gulf of Mexico and West Texas for consideration of approximately $11.2 million and $3.6 million, respectively. Such agreements are subject to the completion of satisfactory due diligence by the Company including title and environmental due diligence. There can be no assurance that any of such transactions will be consummated. Onshore Properties. The Company also owns working and royalty interests in approximately 1,328 producing oil and gas wells in over 147 fields in the Rocky Mountain, Gulf Coast, Southwest and Appalachian regions of the United States. Management believes that the Company's stable reserve base of long-lived, primarily non-operated, onshore properties complements the Company's Gulf of Mexico operations by providing an additional source of cash flow which requires limited management involvement. The Company's onshore properties accounted for approximately 29% of net proved reserves at December 31, 1995. During 1995, the Company expended approximately $4.0 million in capital on its onshore properties, including $3.7 million for drilling and recompletion activities. Principal Securityholders. Approximately 49.5% of the Company's Common Stock is held by Forcenergy AB ("FAB"), the B shares of which are listed on the Stockholm (Sweden) Stock Exchange. The Forss family beneficially owns a 48.8% voting interest in FAB. Pursuant to an agreement among FAB, the Company and the holders of the Company's 7% Exchangeable Subordinated Notes (the "Subordinated Notes") and the size of the Company's Board of Directors is fixed at no more than eight persons to consist of (i) two designees of FAB, (ii) three designees of the holders of the Subordinated Notes (the "Note Holders"), (iii) the Company's Chief Executive Officer and (iv) two independent directors nominated by FAB and acceptable to the Note Holders. See "Security Ownership of Certain Beneficial Owners and Management," "Management -- Voting Agreement" and "Description of Capital Stock -- Exchangeable Subordinated Notes." THE OFFERING <TABLE> <S> <C> Selling Stockholders . . . . . . . . . . . . . . . Certain former stockholders of Ashlawn Energy, Inc., a privately held oil and gas company acquired by the Company in August 1995. Common Stock offered by the Selling Stockholders . . . . . . . . . . . . . . . . . . 1,500,000 shares Common Stock to be outstanding after this Offering . . . . . . . . . . . . . . . . . . . . 18,260,447 shares (1) NASDAQ National Market symbol . . . . . . . . . . . "FGAS" Use of Proceeds . . . . . . . . . . . . . . . . . . The Company will not receive any proceeds from the sale of shares by the Selling Stockholders. </TABLE> - -------------------- (1) Does not include (i) 2,343,047 shares of Common Stock issuable upon exchange of the Subordinated Notes and (ii) 2,242,124 shares of Common Stock issuable pursuant to outstanding options and warrants held by the Note Holders, management and others. See "Management -- Value of Unexercised Stock Options," "Description of Capital Stock -- Exchangeable Subordinated Notes" and "-- Warrants." SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA The following table presents certain historical and pro forma financial data as of and for each of the periods indicated. The historical financial data for the years ended December 31, 1993, 1994 and 1995 have been derived from the audited financial statements of the Company. The financial data for the three months ended March 31, 1995 and 1996 are derived from the Company's unaudited financial statements which, in the opinion of management, include all adjustments (which consist only of normal recurring adjustments) necessary for a fair presentation of the financial position and results of operations of the Company for such interim periods. The following information should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Pro Forma Financial Information" and the Financial Statements of the Company and those relating to certain property acquisitions included elsewhere in this Prospectus. <TABLE> <CAPTION> PRO FORMA (1) ------------ YEAR ENDED THREE MONTHS ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 31, ----------------------------------------- ------------ -------------------- 1993 1994 1995 1995 1995 1996 --------- --------- ---------- ------------ --------- --------- (in thousands, except per share data) <S> <C> <C> <C> <C> <C> <C> INCOME STATEMENT DATA: Revenues: Oil and gas sales . . . . . . . . . $ 49,652 (2) $ 58,354 (2) $ 72,147 $ 80,156 $ 16,925 $ 28,342 Other . . . . . . . . . . . . . . . 441 (2) 388 (2) 494 521 114 126 --------- --------- ---------- -------- -------- --------- 50,093 58,742 72,641 80,677 17,039 28,468 --------- --------- ---------- -------- -------- --------- Expenses: Lease operating . . . . . . . . . . 16,632 23,744 24,507 27,103 6,235 8,736 Depreciation, depletion and amortization . . . . . . . . . . . . 19,889 24,572 31,295 34,317 7,786 11,556 Production taxes . . . . . . . . . . 1,560 1,701 1,868 2,420 416 724 General and administrative, net . . 3,166 6,463 5,670 5,770 1,274 1,790 --------- --------- ---------- -------- -------- --------- Total operating expenses . . 41,247 56,480 63,340 69,610 15,711 22,806 --------- --------- ---------- -------- -------- --------- Income from operations . . . . . . . . 8,846 2,262 9,301 11,067 1,328 5,662 Interest and other income (loss) . . . 545 789 (561) (561) 126 111 Interest expense, net of amounts capitalized . . . . . . . . . . . . . . (6,192) (9,529) (11,668) (9,431) (3,069) (2,874) --------- --------- ---------- -------- -------- --------- Income (loss) before income taxes . . . 3,199 (6,478) (2,928) 1,075 (1,615) 2,899 Income tax provision (benefit) . . . . 2,337 (2,403) (1,075) 418 (601) 1,081 Minority interest . . . . . . . . . . . 107 -- -- -- -- -- --------- --------- ---------- -------- -------- --------- Net income (loss) (3) . . . . . . . . . $ 755 $ (4,075) $ (1,853) $ 657 $ (1,014) $ 1,818 ========= ========= ========== ======== ======== ========= Net income (loss) per share (3) . . . . $ (.50) $ (.14) $ .04 $ (.11) $ .10 ========= ========== ======== ======== ========= UNAUDITED PRO FORMA DATA (3): Income before income taxes, including minority interest . . . . . . . . . $ 3,092 Income tax provision . . . . . . . . . 1,207 --------- Net income . . . . . . . . . . . . . . $ 1,885 ========= Net income per share . . . . . . . . . $ .29 ========= Weighted average number of shares outstanding . . . . . . . . . . . . . 6,520 8,188 12,910 18,250 9,040 18,260 </TABLE> - -------------------- (1) Gives effect to (i) the Conoco Acquisition, the Ashlawn Acquisition and other acquisitions by the Company prior to the Company's initial public offering in August 1995, (ii) the application of the net proceeds of the initial public offering and (iii) incremental general and administrative expenses associated with being a public company, as if such transactions had been consummated at January 1, 1995. (2) Natural gas liquid revenues have been reclassified from plant processing and other revenues to oil and gas sales for consistent presentation with 1995 revenues. (3) Prior to September 14, 1993, the Company was exempt from United States federal and certain state income taxes as a result of its partnership status. The unaudited pro forma data reflects the income tax expense that would have been recorded had the Company not been exempt from paying such income taxes. Net income per share data is described as unaudited pro forma because of the Company's former partnership status. SUMMARY OIL AND GAS RESERVE DATA The following table summarizes the estimates of the Company's pro forma net proved oil and gas reserves as of the dates indicated and the present value attributable to these reserves at such dates. The reserve and present value data as of December 31, 1995 for the onshore properties have been estimated by Netherland, Sewell & Associates, Inc., independent petroleum engineering consultants. The reserve and present value data as of December 31, 1995 for the offshore properties have been estimated by Collarini Engineering Inc., independent petroleum engineering consultants. The reserve estimates and present value data as of December 31, 1994 have been audited by Netherland, Sewell & Associates, Inc. and such data and estimates as of December 31, 1993 and 1994 were prepared by Collarini Engineering Inc. and Joe C. Neal & Associates, independent petroleum engineering consultants. For additional information relating to the Company's oil and natural gas reserves, see "Risk Factors - Uncertainty of Reserve Information and Future Net Revenue Estimates,"
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS. THE COMPANY Oakley is an innovation-driven designer, manufacturer and distributor of high-performance sunglasses and goggles. The Company's principal strength is its ability to develop eyewear which combines unique styling with patented technology to provide superior optical performance and comfort. As a result of its focus on innovations for sports applications, Oakley believes it has become the established leader in the sports segment of the sunglass market, and its products are worn by a variety of athletes, such as skiers, cyclists, runners, surfers, golfers, tennis and baseball players and motocross riders. In addition, Oakley products have gained a loyal and growing following among consumers in the larger nonsports, or recreational, segment of the sunglass market. The Company believes it can expand its sales in the nonsports segment of the sunglass market by continuing to introduce products that emphasize superior performance. The Company's products currently include five lines of sunglasses (including M FRAMES, ZEROS, WIRES and JACKETS) and three lines of goggles. As derived from industry sources, the Company estimates that in 1994 it held an approximate 13% market share of the $1.2 billion premium segment (over $30 retail) of the U.S. retail sunglass market. For the year ended December 31, 1995, the Company generated net income, on a pro forma basis as described herein, of $39.6 million on net sales of $172.8 million. From 1992 through 1995, the Company's net sales and net income, on a pro forma basis as described herein, have increased at compound annual growth rates of approximately 31.3% and 33.2%, respectively. The Company's goal is to become the premier manufacturer of high-performance eyewear in the world. Each element of the Company's operating strategy, from design and manufacturing to marketing and distribution, is designed to control, protect and enhance the Oakley brand image. The Company intends to capitalize on its brand recognition by (i) increasing its presence in the nonsports segment of the sunglass market, (ii) expanding penetration in international markets and (iii) introducing new products and identifying new applications for existing products and technology within the sports segment of the sunglass market. The key components of the Company's operating strategy are to distinguish its products through technological and design innovation and to reinforce the Oakley brand image through creative marketing and selective distribution. The Company believes it has one of the most technologically advanced product development capabilities in the sunglass industry. Using state-of-the-art technology, including a three-dimensional CAD-CAM system and liquid laser prototyping, Oakley has dramatically shortened its product development cycle and, as a result, is capable of introducing a new product line within four months of its initial concept. In addition to controlling all aspects of product development, the Company also produces components and performs processes in-house that contribute significantly to gross profit margin, provide protection against piracy of the Company's proprietary information and processes, and enable the Company to manufacture products in accordance with its strict quality control standards. When subjected to industrial standard tests for optical quality, as established by the American National Standards Institute ("ANSI"), Oakley's sports-application sunglasses featuring its patented polaric ellipsoid lens geometry (including M FRAMES and ZEROS) have demonstrated superior optical clarity as compared to similar products of its principal competitors. IN CONNECTION WITH THE OFFERINGS, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. To promote consumer awareness of its technological and design innovation, the Company has developed an effective marketing approach that features influential athletes and eclectic, informative advertising which combine to enhance the Oakley image of high-performance, technologically advanced eyewear. The Company distributes its products in the United States through approximately 7,100 carefully selected accounts comprised primarily of optical stores, sunglass retailers and specialty sports stores. In an effort to preserve and enhance Oakley's brand image, the Company stopped soliciting new customer accounts in the United States, with limited exceptions, in November 1989. The Company's current level of distribution, with the addition of key niche retailers, is expected to be capable of accommodating expanding sales, while maintaining the discoverability of Oakley products by consumers. This distribution philosophy provides retailers with a degree of exclusivity for Oakley products which has increased brand loyalty, improved retailer margins on Oakley products and encouraged retailers to display Oakley products in prominent shelf space and make timely payments. In addition, the Company sells its products in over 65 countries outside the United States. In 1995, international sales accounted for approximately 33.3% of the Company's total net sales. Oakley, Inc. is a Washington corporation formed in March 1994 to succeed to the assets and liabilities of Oakley, Inc., a California corporation, which commenced operations in 1977 and began to sell sunglasses in 1984. The Company's Interplanetary Headquarters are located at 10 Holland, Irvine, California 92718; its telephone number is (714) 951-0991. THE OFFERINGS <TABLE> <S> <C> Common Stock offered hereby (1)............................ 5,000,000 shares Common Stock to be outstanding before and after the Offerings...................... 35,700,000 shares (2) Use of proceeds................. The Company will not receive any proceeds from the Offerings. Listing......................... The Common Stock is listed on the NYSE under the symbol "OO." </TABLE> - ------------------------ (1) Of the 5,000,000 shares of Common Stock to be sold in the Offerings, 4,000,000 shares are being offered in the United States and Canada by the U.S. Underwriters and 1,000,000 shares are being offered in a concurrent offering outside the United States and Canada by the International Managers. (2) Excludes approximately 630,000 shares of Common Stock issuable upon exercise of stock options granted under the Company's 1995 stock incentive plan (the "1995 Stock Incentive Plan"). Substantially all of such options have an exercise price per share of $23.00, the price per share in the Company's initial public offering. Options for less than 4,000 of such shares are exercisable prior to August 1996. See "Management -- Incentive and Bonus Plans." -------------------------- Unless otherwise noted, all Common Stock share amounts, per share data and other information set forth in this Prospectus (i) have been adjusted to reflect a 3,240 for 1 stock split, which was effected on August 1, 1995 and (ii) assume that the Underwriters' over-allotment option has not been exercised. Unless the context requires otherwise, the "Company" or "Oakley," as used in this Prospectus, means Oakley, Inc. and its subsidiaries, including Oakley Europe, Sarl ("Oakley Europe"). See "Corporate History and Reorganization." M FRAME-REGISTERED TRADEMARK-, MUMBO-REGISTERED TRADEMARK-, BLADES-REGISTERED TRADEMARK-, ZEROS-TM-, SUB ZEROS-TM-, FROGSKINS-REGISTERED TRADEMARK-, EYE JACKETS-TM-, T WIRE-TM-, EYESHADES-REGISTERED TRADEMARK-, PLUTONITE-REGISTERED TRADEMARK- , IRIDIUM-REGISTERED TRADEMARK-, RAZOR BLADES-REGISTERED TRADEMARK-, HAMMERS-REGISTERED TRADEMARK-, UNOBTANIUM-REGISTERED TRADEMARK-, HEATER-REGISTERED TRADEMARK-, SWEEP-REGISTERED TRADEMARK-, STRIKE-REGISTERED TRADEMARK-, HYBRID-REGISTERED TRADEMARK-, FACTORY PILOT-REGISTERED TRADEMARK-, VIRGIN SERILIUM-REGISTERED TRADEMARK-, OAKLEY-REGISTERED TRADEMARK-, THERMONUCLEAR PROTECTION-REGISTERED TRADEMARK-, FULL METAL JACKETS-TM-, O-MATTER-TM-, O-FRAME-TM-, PRO-FRAME-TM-, E-FRAME-TM-, L-FRAME-TM- and H2O-TM- are included among the Company's trademarks. SUMMARY FINANCIAL DATA <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ----------------------------------------------------- -------------------- 1991 1992 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> INCOME STATEMENT DATA: Net sales................................ $ 66,319 $ 76,390 $ 92,714 $ 123,952 $ 172,752 $ 36,615 $ 48,706 Gross profit............................. 46,563 56,806 65,047 88,238 122,457 25,259 34,064 Operating income......................... 12,310 15,010 13,707 14,026 53,270 6,436 17,653 Income before provision for income taxes................................... 12,501 15,184 13,638 13,794 52,997 6,406 17,842 Net income............................... 12,175 14,730 13,330 13,535 45,167 6,136 10,973 SUPPLEMENTAL INCOME STATEMENT DATA (1): Income before provision for income taxes................................... 12,501 15,184 13,638 13,794 52,997 6,406 Provision for income taxes............... 5,012 6,065 5,476 5,539 20,854 2,575 --------- --------- --------- --------- --------- --------- Net income............................... $ 7,489 $ 9,119 $ 8,162 $ 8,255 $ 32,143 $ 3,831 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Net income per common and common equivalent share........................ $ .95(2) --------- --------- Weighted average common and common equivalent shares....................... 33,770(2) --------- --------- PRO FORMA AND ACTUAL INCOME STATEMENT DATA (3): Income before provision for income taxes................................... $ 65,298 $ 13,773 $ 17,842 Provision for income taxes............... 25,694 5,507 6,869 --------- --------- --------- Net income............................... $ 39,604 $ 8,266 $ 10,973 --------- --------- --------- --------- --------- --------- Net income per common and common equivalent share........................ $ 1.17(2) $ .31 --------- --------- --------- --------- Weighted average common and common equivalent shares....................... 33,770(2) 35,916 --------- --------- --------- --------- </TABLE> <TABLE> <CAPTION> AT MARCH 31, 1996 ------------------ (IN THOUSANDS) <S> <C> BALANCE SHEET DATA: Working capital............................................................................. $ 47,141 Total assets................................................................................ 116,870 Total debt.................................................................................. -- Shareholders' equity........................................................................ 92,742 </TABLE> - ------------------------------ (1) The Company was an S corporation for Federal and state income tax purposes prior to the Company's initial public offering in August 1995. Amounts reflect adjustments for Federal and state income taxes as if the Company had been taxed as a C corporation for all periods prior to its initial public offering. (2) References to shares are to shares of Oakley, Inc. Amounts reflect the effects of the assumed issuance of 11,435 shares of Common Stock at $23.00 per share (the price per share in the Company's initial public offering) to generate sufficient cash to pay the balance at December 31, 1995 of the notes representing the amounts payable to shareholders for previously earned and undistributed taxable S corporation earnings prior to the Company's conversion to C corporation status (the "S Distribution Notes"). See "Corporate History and Reorganization." See Note 1 to the Consolidated Financial Statements for additional information concerning the calculation of net income per common and common equivalent share. (3) For additional pro forma income statement data for 1993, 1994, 1995 and the three months ended March 31, 1995, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." For periods prior to the Company's initial public offering in August 1995, amounts reflect pro forma adjustments for (i) the elimination of bonuses paid to the two principal executive officers in excess of $2.0 million per year, the bonuses estimated in August 1995 to be payable to the two principal executive officers, (ii) the elimination of depreciation expense of $1.7 million for the year ended December 31, 1995 associated with aircraft owned by the Company which were distributed to the principal shareholders in August 1995, (iii) the elimination of the gain on the disposition of the aircraft distributed to the two principal shareholders as part of the S Corporation Distribution (as defined herein) and (iv) Federal and state income taxes as if the Company had been taxed as a C corporation for all periods prior to the Company's initial public offering. Income statement data for the three months ended March 31, 1996 reflects historical operating results. See "Management -- Incentive and Bonus Plans," "Certain Transactions," "Corporate History and Reorganization" and "Selected Financial Data."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000946428_orthometri_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000946428_orthometri_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS, INCLUDING THE INFORMATION UNDER "RISK FACTORS." THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED UNDER "RISK FACTORS." UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (I) ASSUMES THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED AND (II) REFLECTS A THREE-FOR-TWO STOCK SPLIT (THE "STOCK SPLIT") EFFECTIVE JUNE 14, 1996. SEE "DESCRIPTION OF CAPITAL STOCK" AND "UNDERWRITING." THE COMPANY Norland Medical Systems, Inc. (the "Company") markets, sells and distributes a broad range of bone densitometry systems for use in diagnosing and monitoring bone disorders, particularly osteoporosis, a disease that affects an estimated 25 million people in the United States and 200 million worldwide. Driven by the availability of new FDA-approved therapies for bone disorders, the Company is focusing on bringing affordable, state-of-the-art diagnostic products directly into physician offices. The Company offers two lines of proprietary, lower priced, easy to operate and compact products designed to address the diagnostic needs of gynecologists and family practice physicians. There are approximately 30,000 gynecologists and 450,000 family practice physicians in the United States alone. The Company has exclusive worldwide distribution rights to all present and future diagnostic products developed and manufactured by Norland Corporation ("Norland Corp.") and Stratec Medizintechnik GmbH ("Stratec", and together with Norland Corp., the "Manufacturers"), two leading manufacturers of bone densitometry products. These rights extend through 2015 and may be renewed for additional five-year periods. The Company offers four product lines utilizing three different types of technology. The Company markets a line of bone densitometry products based on dual-energy X-ray ("DXA") technology, which, since 1987, has been a standard for analyzing bone mass reduction, the primary indicator of osteoporosis. The Company's DXA products are highly effective and offer essential features at competitive prices. Because of the cost, space requirements and training required, these systems are generally found in hospitals, large clinics and research institutions, as opposed to physician offices, where patients would benefit from timely and easy access to osteoporosis testing. Recognizing a significant market opportunity for more affordable bone measurement technologies, Norland Corp. and Stratec developed the pDEXA system, a lower priced, high performance desktop system incorporating DXA technology. The pDEXA is targeted primarily at gynecologists and other specialty practitioners. It is the only desktop DXA-based system which has received FDA marketing clearance and was the largest contributor to the Company's revenues in 1995 and the three months ended March 31, 1996. In April 1996, the Company acquired Dove Medical Systems ("Dove"), a manufacturer of low-cost bone densitometry systems. The acquisition of Dove added a new product line of bone densitometers based on single-energy X-ray ("SXA") technology to the Company's product portfolio. Dove's main product, the OsteoAnalyzer SXA3000, utilizes SXA technology with single push-button operation to provide the family physician with the most affordable (under $20,000) densitometer currently on the market. This acquisition solidified the Company's position as a leading provider of low-cost bone densitometry products. The Company also markets a line of products based on peripheral quantitative computed tomography ("pQCT") technology. Unlike the DXA-based densitometers, pQCT systems permit separate, three-dimensional measurements of the cortical and trabecular bone, allowing a more detailed assessment of the biomechanical soundness of the bone. In addition, pQCT permits the detection of minute changes within bone that occur over short periods of time. Research versions of this product have been purchased by large pharmaceutical companies such as Eli Lilly & Co., Sandoz Ltd. and Glaxo to monitor the effectiveness of potential new therapies for the treatment of osteoporosis and related bone disorders. The National Osteoporosis Foundation ("NOF") estimates that osteoporosis affects 25 million people in the United States, 80% of whom are women. In the United States alone, more than 1.3 million fractures are attributed to the disease. As a result, the estimated costs of osteoporosis and associated fractures in the United States during 1987 was more than $10 billion. Historically, treatment for osteoporosis has been inadequate. However, this is changing with the onset of new therapies brought to the market by several large pharmaceutical companies. In October 1995, Merck & Co., Inc. ("Merck") announced the launch of Fosamax, a new therapy for the treatment of osteoporosis. Merck and other pharmaceutical companies have launched extensive educational and marketing campaigns targeting gynecologists and family practice physicians to promote education and awareness that osteoporosis is now a treatable disease. These efforts are increasing the demand for widespread diagnosis and treatment of osteoporosis. The Company believes that over 50 pharmaceutical and biotechnology companies have programs to develop new therapies for the treatment of osteoporosis, and that additional new approved therapies will increase demand for low-cost densitometers. For the United States and Canada, the Company currently employs regional sales managers and third party distributors. The Company intends to increase its network of third party distributors in the United States to target the expanded market of gynecologists and family practice physicians and to increase the number of regional sales managers to supervise and support these distributors. For international markets, the Company uses third party distributors such as Nissho Iwai Corporation ("Nissho") for Japan. The Company typically uses a single distributor in each country in which it markets products, supported by United States-based sales managers. The Company's goal is to be the leading provider of affordable bone densitometry systems. The key elements of the Company's business strategy include: (i) expanding the bone densitometry market with lower priced systems, (ii) establishing strategic relationships with pharmaceutical companies that manufacture drugs to treat osteoporosis, (iii) expanding sales and marketing capabilities, (iv) offering the broadest range of diagnostic systems and (v) establishing pQCT as the leading technology for advanced systems. Following this offering, approximately 28.2% (24.2% if the overallotment option is exercised) of the Company's Common Stock will be owned by persons who control Norland Medical Systems B.V. ("NMS BV"), a holding company that owns the Manufacturers. Certain of the Company's officers and directors are officers and directors of NMS BV and Norland Corp. See "Certain Transactions." There can be no assurance that all arrangements between the Company and the Manufacturers will be as advantageous to the Company as they would be in the absence of the relationships among the officers, directors and controlling stockholders of the Company, NMS BV and the Manufacturers. See "Risk Factors -- Dependence on Norland Corp. and Stratec" and "-- Conflicts of Interest." THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Company.......... 1,500,000 shares Common Stock Offered by Norland Partners, L.P......................................... 750,000 shares Common Stock Outstanding after this Offering.................................... 8,395,788 shares (1) Use of Proceeds.............................. To expand sales and marketing activities, for new product development, to expand manufacturing capabilities and for working capital and general corporate purposes, including potential acquisitions. Nasdaq National Market Symbol................ NRLD Risk Factors................................. The Common Stock offered hereby involves a high degree of risk. See "Risk Factors." </TABLE> - ------------------------------ (1) Excludes an aggregate of 701,250 shares of Common Stock reserved for issuance upon the exercise of options outstanding as of June 1, 1996. Also excludes options for an aggregate of 364,500 shares of Common Stock available for issuance pursuant to the Amended and Restated 1994 Stock Option and Incentive Plan. See "Management -- Stock Option Plan." SUMMARY FINANCIAL DATA <TABLE> <CAPTION> NORLAND MEDICAL SYSTEMS, INC. ------------------------------------------------ OSTECH B.V. (1) THREE MONTHS ENDED --------------- PRO FORMA --------------------------- THREE MONTHS YEAR ENDED ENDED YEARS ENDED DECEMBER 31, MARCH 31, ------------------------------------------ ---------------------- DECEMBER 31, MARCH 31, 1993 1994 1995 1995 1996 1995 (2) 1996 (2) --------------- ----------- ----------- ---------- ---------- ------------ ------------ (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF INCOME (LOSS) DATA: Revenue................. $5,488,095 $10,041,548 $18,243,808 $3,895,921 $5,218,290 $20,104,737 $5,890,981 Cost of revenue......... 4,066,539 6,517,701 12,508,809 2,600,531 3,415,911 13,235,502 3,697,132 One-time distribution agreement costs........ 0 1,922,247 0 0 0 0 0 --------------- ----------- ----------- ---------- ---------- ------------ ------------ Gross profit............ 1,421,556 1,601,600 5,734,999 1,295,390 1,802,379 6,869,235 2,193,849 Operating expenses: Sales and marketing... 1,068,197 973,208 1,651,125 334,553 575,348 1,801,886 671,169 General and administrative....... 399,449 526,364 960,368 225,453 305,716 1,733,019 600,321 --------------- ----------- ----------- ---------- ---------- ------------ ------------ Income (loss) from operations............. (46,090) 102,028 3,123,506 735,384 921,315 3,334,330 922,359 Liquidation loss -- net.................... (326,007) 0 0 0 0 0 0 Other income (expense).. (13,760) (6,984) 412,983 2,515 242,941 416,347 243,731 --------------- ----------- ----------- ---------- ---------- ------------ ------------ Income (loss) before taxes.................. (385,857) 95,044 3,536,489 737,899 1,164,256 3,750,677 1,166,090 Provision for taxes..... 60 27,000 1,436,000 299,587 473,000 1,570,632 486,088 --------------- ----------- ----------- ---------- ---------- ------------ ------------ Net income (loss)....... $ (385,917) $ 68,044 $ 2,100,489 $ 438,312 $ 691,256 $ 2,180,045 $ 680,002 --------------- ----------- ----------- ---------- ---------- ------------ ------------ --------------- ----------- ----------- ---------- ---------- ------------ ------------ Earnings per share...... -- $ 0.02 $ 0.40 $ 0.11 $ 0.10 $ 0.40 $ 0.09 --------------- ----------- ----------- ---------- ---------- ------------ ------------ --------------- ----------- ----------- ---------- ---------- ------------ ------------ Shares used in computing earnings per share (3).................... -- 4,002,000 5,245,235 4,002,000 7,057,010 5,406,773 7,218,548 </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 (UNAUDITED) ----------------------------------------------- PRO FORMA ACTUAL PRO FORMA (4) AS ADJUSTED (4)(5) ----------- ------------- ------------------ <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents.......................................... $17,639,970 $14,207,033 $43,089,533 Working capital.................................................... 21,049,451 17,667,500 46,550,000 Total assets....................................................... 24,687,761 28,330,834 57,213,334 Total stockholders' equity......................................... 21,209,370 24,520,899 53,403,399 </TABLE> - ------------------------------ (1) Figures presented for 1993 are those of Ostech B.V., a subsidiary of NMS BV that ceased all business activities at the end of 1993. In 1993, Ostech B.V. served as exclusive distributor of the Manufacturers' products in certain markets. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview." (2) Presented to give pro forma effect to the Dove acquisition as if such transaction had been consummated on January 1, 1995. See the Unaudited Pro Forma Combined Condensed Financial Statements contained herein. (3) Reflects the 2,000-for-1 split of the Common Stock in June 1995 and a three-for-two stock split of the Common Stock effective June 14, 1996. (4) Presented to give pro forma effect to the Dove acquisition as if such transaction had been consummated on March 31, 1996. See the Unaudited Pro Forma Combined Condensed Financial Statements contained herein. (5) Adjusted to give effect to the receipt of the net proceeds from the sale of the 1,500,000 shares of Common Stock offered by the Company (at an assumed public offering price of $20.75 per share and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by the Company). See "Use of Proceeds."
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+PROSPECTUS SUMMARY The following summary of certain provisions of this Prospectus is intended only for ease of reference, is not a complete presentation of all relevant facts and is qualified in its entirety by reference to the detailed information appearing elsewhere in this Prospectus. The entire Prospectus, including the information set forth under the caption "Risk Factors," should be read and carefully considered by prospective investors. All share and per share amounts in this Prospectus reflect a three-for-two stock dividend paid on April 26, 1996 to holders of record as of April 12, 1996. Solely for the purpose of providing certain information herein which reflects the completion of this Offering and application of the net proceeds thereof to the Chesapeake Acquisition and other corporate purposes, it is assumed that the Offering is completed at a price of $7.50 per share (the "Assumed Share Price"). The actual price per Share in the Offering may be higher or lower than the Assumed Share Price and will be based on the Nasdaq prices for the Common Stock at the time of the Offering. THE COMPANY The Company operates and franchises specialty bagel stores under the Big Apple Bagels brand name featuring daily baked "from scratch" bagels, cream cheeses, coffee and other related products. As of August 31, 1996, the Company operated 9 Company-owned and 123 franchised and licensed Big Apple Bagels stores and one Company-owned and two franchised Brewster's coffee stores located in 22 states and Canada. Concurrently with the closing of this offering, the Company will acquire the assets of Almike Enterprises, Inc. and The American Bagel Company related to the operation and franchising of Chesapeake Bagel Bakery stores ("Chesapeake"), which as of August 31, 1996 operated 9 company-owned and 139 franchised bagel stores located in 31 states and the District of Columbia. See "Recent Acquisitions." Upon completion of the Chesapeake Acquisition, based upon the number of stores in operation at August 31, 1996, the Company believes that it will be the second largest operator and franchisor of bagel stores in the United States and Canada, with 19 Company- operated and 264 franchised and licensed units located in 32 states, the District of Columbia and Canada. Company operations are characterized by the rapid sale and development of franchised bagel stores. The Company opened 32 new franchised Big Apple Bagels stores during the nine months ended August 31, 1996 and 38 new franchised stores during the fiscal year ended November 1995. Chesapeake has experienced similar growth in its franchise operations, opening 45 new franchised Chesapeake Bagel Bakery stores during the eight months ended August 31, 1996 and 65 new franchised bagel stores during calendar year 1995. Both operations have attracted a diverse group of franchisees, capable of effectively entering a variety of markets. The Company also operates as a brand manager, licensing branded food products produced by third-party suppliers to its franchisees and other food service companies. Since May 1996, the Company has distributed par-baked bagel products under the Big Apple Bagels name to hospitality centers and concessions at airports, travel plazas, and similar locations served by Host Marriott Services Corporation ("Host Marriott"). A similar agreement was entered into with Mrs. Fields Development Corporation ("Mrs. Fields Cookies"), which has been offering Big Apple Bagels product to its company-owned and franchise network since July 1996. The Company also distributes Brewster's Coffee, a brand acquired by the Company in February 1996. About 90% of Big Apple Bagels stores serve Brewster's Coffee, and upon completion of the Chesapeake Acquisition, Brewster's Coffee will also be offered to the Chesapeake franchisees. The specialty bagel market is one of the fastest growing food product segments in America. According to NPD National Eating Trends, annual bagel consumption increased 169% between 1984 and 1993 as consumer awareness of the product has increased and consumer perception of bagels has evolved from an ethnic food to a product with a broad appeal. The bagel market is currently geographically highly concentrated, with an estimated 70% of bagel retailers located in New York, New Jersey, Florida and California. Despite the market's geographic concentration, the bagel retailing industry remains highly fragmented and has historically been dominated by single-unit operators. Over the past few years, several companies have developed national expansion plans to meet the increase in consumer demand. The Company intends to become the leading branded operator and franchisor of specialty bagel stores through the continued expansion of the number of franchised and Company-owned stores and development of alternative distribution channels for branded product. The Company plans to achieve this goal through the implementation of its strategic plan which includes: (1) commitment to the growth and financial success of its franchisees; (2) continued focus on maintaining its position as a low cost producer; (3) increasing store operating margins by emphasizing its profitable bulk bagel business; (4) further developing consumer awareness of its multiple brands, including Big Apple Bagels, Chesapeake Bagel Bakery and Brewster's; (5) enhancing revenue through the sale of licensed product; and (6) growth through acquisitions and development of Company-owned stores. The Company believes that implementation of its strategic plan will result in continued rapid growth in fiscal 1997. During fiscal 1997, the Company has estimated that franchise and area developers will open 60 to 70 Big Apple Bagels franchise stores and 60 to 70 Chesapeake Bagel Bakery franchise stores. The Company expects to add eight Big Apple Bagels Company-owned stores during the fourth quarter of fiscal 1996 and an estimated 12 to 14 additional stores in fiscal 1997. In fiscal 1997, total Company revenue is projected to be between $26 and $29 million, and net income per share is projected to be between $0.28 and $0.32. Big Apple Bagels(R) and logo and Brewster's(R) are registered marks of the Company. Chesapeake Bagel Bakery(R) is a registered mark of The American Bagel Company. The Company was incorporated under the laws of the State of Illinois on November 25, 1992. Its corporate office is located at 8501 West Higgins Road, Suite 320, Chicago, Illinois 60631, and its telephone number is (773) 380-6100. Unless otherwise indicated, the term "Company" as used herein refers to BAB Holdings, Inc., its subsidiaries and subsidiaries of its subsidiaries. THE OFFERING <TABLE> <S> <C> Common Stock Offered................. 3,800,000 shares Common Stock to be Outstanding After 11,843,069 shares(1)(2) this Offering....................... Use of Proceeds...................... To finance the Chesapeake Acquisition and to provide working capital. See "Use of Proceeds." Nasdaq symbol........................ BAGL </TABLE> - -------- (1) Includes 900,000 shares to be issued in connection with the Chesapeake Acquisition. (2) Does not include (i) 570,000 shares of Common Stock reserved for issuance under the Company's 1995 Long-Term Incentive and Stock Option Plan (the "Incentive Plan"); (ii) 30,000 shares of Common Stock reserved for issuance under the Company's 1995 Outside Directors Stock Option Plan (the "Directors Plan"); (iii) 255,000 shares of Common Stock issuable upon exercise of a warrant issued to the underwriter of the Company's initial public offering; (iv) 100,000 shares of Common Stock issuable upon exercise of an option issued in the BUI Acquisition; (v) 625,000 shares of Common Stock issuable upon exercise of an option issued in the Strathmore Acquisition; (vi) up to 200,000 shares (subject to upward and downward adjustment) reserved for issuance with exercise of additional options that may be earned in connection with the Strathmore Acquisition; or (vii) shares that may be issued as additional consideration in the Chesapeake Acquisition. Of such shares, 373,000 are subject to options or warrants currently exercisable or becoming exercisable within 60 days of the date of this Prospectus. See "Recent Acquisitions," "Management," "Certain Transactions," and "Description of Securities." SUMMARY CONSOLIDATED FINANCIAL AND STORE DATA The following summary financial information and store data should be read in conjunction with the historical financial statements and pro forma financial statements and the related notes thereto included elsewhere in this Prospectus. <TABLE> <CAPTION> YEAR ENDED NOVEMBER 30, NINE MONTHS ENDED AUGUST 31, ----------------------------------------------- ----------------------------------------- 1993(1) 1994 1995 1995 1996 --------- ---------- ------------------------ ----------- ----------------------- PRO PRO ACTUAL FORMA(3) ACTUAL FORMA(3)(4) ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: REVENUES: Net sales by Company- owned stores........... $ 146,843 $ 459,345 $ 563,211 $ 8,669,675 $ 340,439 $ 1,965,939 $ 7,150,457 Royalty fees from franchised stores...... 466 181,769 767,064 1,962,078 522,868 1,008,398 2,406,843 Franchise and area development fees....... 35,000 333,000 700,000 1,932,923 554,000 808,331 1,988,198 Licensing fees and other revenues............... 4,254 4,938 2,728 540,501 2,469 124,765 479,460 --------- ---------- ----------- ----------- ----------- ----------- ----------- Total revenues....... 186,563 979,052 2,033,003 13,105,177 1,419,776 3,907,433 12,024,958 OPERATING COSTS AND EXPENSES: Food, beverage and paper costs.................. 45,101 149,360 191,415 2,663,093 115,133 686,274 2,413,336 Other store operating expenses............... 86,835 282,972 374,216 4,547,805 190,286 1,097,235 4,176,368 Depreciation and amortization........... 16,374 44,349 77,627 1,611,379 35,152 207,630 1,290,295 Selling, general and administrative expenses............... 351,317 846,589 1,810,323 4,850,805 1,274,609 1,881,439 4,491,194 --------- ---------- ----------- ----------- ----------- ----------- ----------- Total operating costs and expenses........ 499,627 1,323,270 2,453,581 13,673,082 1,615,180 3,872,578 12,371,193 --------- ---------- ----------- ----------- ----------- ----------- ----------- Income (loss) from operations............. (313,064) (344,218) (420,578) (567,905) (195,404) 34,855 (346,235) Interest and other income (expense), net.. 1,698 (3,992) (15,182) (100,498) (20,216) 257,232 265,239 --------- ---------- ----------- ----------- ----------- ----------- ----------- Net income (loss)....... (311,366) (348,210) (435,760) (668,403) (215,620) 292,087 (80,996) Preferred stock dividends accumulated.. (13,400) (23,800) (4,000) (4,000) (4,000) -- -- --------- ---------- ----------- ----------- ----------- ----------- ----------- Net income (loss) attributable to common shareholders........... $(324,766) $ (372,010) $ (439,760) $ (672,403) $ (219,620) $ 292,087 $ (80,996) ========= ========== =========== =========== =========== =========== =========== Net income (loss) attributable to common share, fully diluted... $ (0.13) $ (0.15) $ (0.12) $ (0.08) $ (0.06) $ 0.04 $ (0.01) ========= ========== =========== =========== =========== =========== =========== Average fully diluted number of common shares................. 2,536,260 2,536,260 3,560,256 8,310,256 3,445,797 7,337,226 11,735,395 ========= ========== =========== =========== =========== =========== =========== STORE DATA: System-wide revenues.... $ 156,163 $4,094,725 $15,904,491 $56,267,000 $10,747,059 $22,133,899 $64,552,000 Number of stores in operation at end of period: Company-owned (2)...... 1 1 2 14 1 10 19 Franchise (2).......... 2 21 59 161 51 91 230 Licensed units......... -- -- -- 18 -- 34 34 --------- ---------- ----------- ----------- ----------- ----------- ----------- Total................ 3 22 61 193 52 135 283 ========= ========== =========== =========== =========== =========== =========== </TABLE> <TABLE> <CAPTION> NOVEMBER 30, ------------------------------- 1993 1994 1995 AUG. 31, 1996 -------- --------- ---------- ----------------------------- PRO FORMA ACTUAL AS ADJUSTED(3)(4) ----------- ----------------- <S> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Working capital (deficit).............. $(34,354) $ (69,474) $6,430,514 $ 3,914,857 $ 8,463,918 Total assets............ 464,475 753,619 8,491,632 11,170,398 46,619,387 Long-term debt, less current portion........ -- 374,443 236,294 2,824 2,824 Total liabilities....... 316,341 989,125 1,701,285 1,762,467 4,311,456 Shareholders' equity (deficit).............. 148,134 (235,506) 6,790,347 9,407,931 42,307,931 </TABLE> See Notes on following page. - -------- (1) The Company was incorporated on November 25, 1992. (2) Includes one Company-owned and two franchise Brewster's Coffee stores in 1996 and four stores currently operated as "Just Bagels" stores which are scheduled for conversion to Big Apple Bagels stores during the first quarter of fiscal year 1997. (3) The unaudited pro forma statements of operations for the year ended November 30, 1995 and for the nine months ended August 31, 1996 are presented as if Chesapeake, Strathmore, and BUI were acquired on December 1, 1994 and on December 1, 1995, respectively. Average fully diluted common shares outstanding is adjusted to reflect the shares issued in this Offering and in connection with the Chesapeake Acquisition. The unaudited pro forma balance sheet is presented as if the Chesapeake Acquisition occurred on August 31, 1996. See the pro forma condensed combined financial information appearing elsewhere in this Prospectus. (4) Adjusted to give effect to the sale of the Shares offered hereby at the Assumed Share Price and the application of the estimated net proceeds thereof. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: CERTAIN INFORMATION PROVIDED UNDER "PROSPECTUS SUMMARY," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS", AND "BUSINESS" AND OTHER STATEMENTS WHICH ARE NOT HISTORICAL FACTS CONTAINED IN THIS PROSPECTUS ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, INCLUDING, WITHOUT LIMITATION, THE FOLLOWING: THE EFFECT OF CHANGING ECONOMIC CONDITIONS AND CONSUMER BUYING PATTERNS, ACTUAL RESULTS OF OPERATIONS FOLLOWING THE CHESAPEAKE ACQUISITION, THE PRESENCE IN THE COMPANY'S MARKET AREA OF COMPETITORS WITH GREATER FINANCIAL RESOURCES, AND OTHER RISKS DETAILED UNDER "RISK FACTORS" AND IN OTHER SECTIONS HEREOF AND OTHER DOCUMENTS FILED BY THE COMPANY WITH THE COMMISSION.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000946763_prosource_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000946763_prosource_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements (including the notes thereto) included elsewhere in this Prospectus. Unless the context otherwise requires, as used in this Prospectus, (i) the terms "Company" and "ProSource" mean ProSource, Inc., together with its direct and indirect wholly-owned subsidiaries, (ii) the term "Common Stock" means, collectively, the Class A Common Stock and Class B Common Stock to be outstanding immediately following completion of the offering and (iii) the term "pro forma" or "on a pro forma basis" with respect to financial information for the Company's fiscal year ended December 30, 1995 means such information, as adjusted to give effect to the acquisition by the Company of the National Accounts Division of The Martin-Brower Company and to the consummation of the offering and the application of the estimated net proceeds thereof (assuming an initial public offering price of $15 per share, the midpoint of the range set forth on the cover page of this Prospectus) as if such events had occurred on January 1, 1995. Except as otherwise noted, all information in this Prospectus (i) gives effect to the conversion of all of the Company's outstanding shares of Common Stock into Class B Common Stock and a 100-for-one stock split that will occur prior to the commencement of the offering (the "Recapitalization") and (ii) assumes that the Underwriters' over-allotment option is not exercised. The Company's fiscal year consists of a 52- or 53-week period ending on the last Saturday of each calendar year. Fiscal 1994 consisted of 53 weeks. THE COMPANY ProSource is the nation's leading independent foodservice distributor specializing in distribution to chain restaurants and is one of the largest foodservice distributors in the United States. The Company distributes a wide variety of items, including fresh and frozen meat and poultry, seafood, frozen foods, canned and dry goods, fresh and pre-processed produce, beverages, dairy products, paper goods and cleaning and other supplies. The Company specializes in providing food and food-related products to two segments of the restaurant industry -- limited-menu quick service restaurants, including Burger King, Arby's, Long John Silver's, Sonic, Chick-fil-A, TCBY and Wendy's, and casual dining restaurants, including Red Lobster, Olive Garden, TGIFriday's and Chili's. ProSource is an indirect subsidiary of Onex Corporation. See "Business -- Controlling Stockholder" and "Risk Factors -- Control of the Company; Benefit of the Offering to Controlling Stockholder." The Company was formed in 1992 to acquire Burger King Distribution Services ("BKDS"), the "in-house" distributor for Burger King Corporation ("BKC"), which serviced approximately 4,150 Burger King restaurants. In the four years since the acquisition, ProSource has, through a combination of acquisitions and internal growth, become a leading distributor to chain restaurants, servicing approximately 14,450 restaurants within 18 different restaurant chains. Through a series of acquisitions during 1993 and 1994, the Company added approximately 1,100 of the restaurants included in its current customer base. In March 1995, the Company entered the casual dining segment of the restaurant industry and further expanded its quick service business with the acquisition of the National Accounts Division ("NAD") of The Martin-Brower Company ("Martin-Brower"), which added a total of approximately 8,000 restaurants within 12 chains included in the Company's current customer base. The Company has also been successful in expanding through internally generated sales. For example, since its formation, the Company has added approximately 400 of the Burger King restaurants included in its current customer base through the growth of existing franchisee customers and the addition of new customers. The Company has also added approximately 570 Jenny Craig Weight Loss Centres and 150 Sonic restaurants through internal growth. Since the Company's formation in 1992, net sales have grown from $1.3 billion in 1993 (the first full year of operations) to $4.0 billion in 1995 on a pro forma basis. The Company is a "systems" distributor specializing in distribution to chain restaurants. The Company believes the chain restaurant segment of the foodservice distribution industry is particularly attractive due to (i) the high growth rate of the restaurants in this segment, with compound annual growth of 7% over the past PROSOURCE IS THE NATION'S LEADING INDEPENDENT FOODSERVICE DISTRIBUTOR SPECIALIZING IN DISTRIBUTION TO CHAIN RESTAURANTS. ARTWORK DESCRIPTIONS INSIDE FRONT COVER ARTWORK: Picture of a Company truck on the top of the page. Map of the United States showing the locations of the Company's distribution centers on the bottom of the page. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. three years according to industry sources, primarily due to the growth of existing chain restaurants and the introduction of new chain restaurant concepts, (ii) the uniformity of product offerings and consistency of demand by chain restaurant customers, (iii) the increasingly important focus by chain restaurants on foodservice distributors that can provide consistent quality and reliable service on a nationwide basis to maintain the chain's uniform standards and (iv) the fragmented nature of the foodservice distribution segment serving chain restaurants, with over 3,000 companies operating in the industry. The Company believes that the consolidation in this industry will continue as larger foodservice distributors with nationwide service are better able to meet the need for consistent quality and reliable service by chain restaurants. STRATEGIES The Company believes that it has one of the most comprehensive distribution networks of any independent distributor serving chain restaurants, based on geographic coverage. With net sales of $4.0 billion in 1995 on a pro forma basis, the Company believes, based on its estimates, that it has captured approximately 10% of the $42 billion chain restaurant distribution market in the United States. The Company estimates that the next largest independent systems distributor has a market share of approximately 6%. The Company believes that its size and scale give it an advantage over its competitors with respect to purchasing power and lower distribution costs. The Company plans to strengthen its position as a market leader by continuing to pursue the following strategies for maximizing profitability and enhancing its long-term growth opportunities. Pursue Internal and External Growth Opportunities. The Company intends to continue to grow through a combination of adding new customers and products within the chains that it currently serves, adding new chains and, where appropriate, making selective acquisitions of other foodservice distributors. - Growth With Existing Chains. The chain restaurant segment of the restaurant industry has historically grown faster than the overall industry. As the primary distributor to most of its customers, the Company expects to continue to grow with the chain restaurants it serves. In addition, the Company believes that there is the opportunity for increased "product penetration" by increasing the range of products, including produce, dairy and bakery products, distributed to existing customers. - Growth Through Addition of New Chains. The Company is continually monitoring the marketplace for opportunities to expand the portfolio of chains that it serves. Primary targets include chains offering menu categories not covered by the Company's existing customers, chains operating in geographic areas in which the Company could benefit from increased customer density, and regional chains which could be added to the national chains which have traditionally been the Company's focus. - Selective Acquisitions. The Company believes the fragmented nature of the industry and consolidation activity offer the Company opportunities to supplement internal growth through selective acquisitions. The Company intends to continue to focus its acquisition strategy on systems specialists that distribute principally to limited-menu quick service and casual dining chain restaurants which will expand its customer base or improve geographic customer density. Margin Improvement/Cost Reduction Programs. The Company is undertaking several initiatives to increase margins and reduce its overall cost structure. - Network Optimization. The Company is initiating a major project to restructure its distribution network and create a new national distribution system. Through this process, which is expected to take 3-5 years to complete, the Company intends to consolidate and integrate its existing distribution network of 34 centers into 23 centers consisting of six large regional distribution centers and 17 local distribution centers. The Company estimates the capital investment for this network optimization program will be approximately $35 million and, as a result primarily of reduced miles driven to make deliveries, is projecting cost savings following full implementation of the new system of approximately $20-25 million annually compared to projected network costs under its existing system (assuming, for purposes of determining such cost savings, that the cart delivery program described below has been implemented under both the existing system and the new system). As sales volume increases, the rate of savings (i.e. savings per unit of volume) attributable to the new distribution system is expected to decrease (although the aggregate annual savings would likely increase with increased volume). - Enhanced Delivery Systems. The Company has recently introduced an innovative value-added cart delivery system which the Company estimates should result in restaurant deliveries which are 2-3 times faster than methods currently used in the industry. The Company is currently using cart delivery for approximately 17% of its customers and expects to service approximately 75% through this method within three years. The Company estimates the capital investment required for implementation of the cart delivery system will be approximately $8 million and, as a result primarily of reduced labor costs associated with deliveries, is projecting cost savings to the Company, when fully implemented, of approximately $10 million annually compared to projected costs of conventional delivery methods. The Company believes that cart delivery will also benefit its customers by reducing the disruption caused by deliveries and labor costs associated with unloading. - Corporate Unification Program. The Company is in the process of integrating its preexisting operations with the NAD operations acquired from Martin-Brower into a new corporate support center located in Coral Gables, Florida. The corporate support center will allow the Company to centralize all purchasing, routing, in-bound transportation and operations support functions. This process, which is expected to be completed by mid-1997 at an estimated capital cost of approximately $3 million, should reduce overall personnel levels by 75 positions and, as a result, is expected to yield aggregate cost savings of approximately $5-6 million annually. There can be no assurance that any of the above programs will be completed within the projected time periods or will not have costs or require investment in excess of the amounts anticipated, or that the projected cost savings will be realized. Anticipated capital investment requirements for, and projected cost savings from, the margin improvement/cost reduction programs have been derived from internal analyses. Cost savings estimates have been determined by assuming current sales levels and cost structure and adjusting for savings attributable to (i) projected reductions in miles driven, (ii) lower lease costs and labor costs associated with reduced delivery time and (iii) reduced personnel levels. Realization of such estimated net cost savings could be impacted by a number of factors such as inflation, changes in volume or service levels or, in the case of the network optimization program, the complexity of the new network. The Company intends to finance these initiatives with cash provided from operations, borrowings under its credit facility and through operating leases. Proceeds of the offering will be used, in part, to repay $21.8 million of the $144.6 million outstanding as of June 29, 1996 under the Company's credit facility. See "Risk Factors -- Net Losses," "Risk Factors -- No Assurance of Achieving Anticipated Cost Savings" and "Summary -- Future Non-recurring Charges to Earnings." Establish Position as Preeminent Supply Chain Manager. The Company believes that its size, scale and expertise in foodservice distribution and transportation systems allow it to assist its customers in managing the entire chain of supply, from the vendor location to the customer's storeroom. Emphasis on supply chain management has allowed the Company to identify value-added services (such as the purchasing of non-proprietary products and transportation services from the vendor to the distribution center) which the Company can provide to its customers, resulting in reduced costs for its customers and improved margins for the Company. Technological Leadership. The Company believes that it is a leader within the industry in the application of information technology to its operations. The Company currently has in place a variety of information technology systems, including electronic ordering, inventory management, financial and routing systems. The Company continues to invest in technology. It has budgeted approximately $5 million per year for the next three to five years for new systems and upgrades and intends to invest approximately $5 million to implement radio frequency and bar code scanning technology in its new distribution center management systems. The Company intends to finance these investments with cash provided from operations, borrowings under its credit facility and through operating leases. See "Business -- Strategies -- Technological Leadership," "Business -- Operations and Distribution -- Order Fulfillment" and "Risk Factors -- Net Losses." Among a new generation of information technology being installed are new systems in the area of electronic customer ordering, "order optimization" to manage the Company's purchasing and inventory functions, and freight management. In addition, in connection with its "network optimization" program, the Company intends to put in place new customer ordering and warehouse management systems. Service Quality Program. The Company places a significant emphasis on providing a high level of service to its customers. The Company continuously measures its service performance levels by monitoring the completeness of the order, the timeliness of delivery and the customer's satisfaction. The Company believes it is a leader in the industry in quality and reliability of service to its customers. By providing a high level of service and reliability, the Company believes it can reduce the number of reorders and redeliveries, reducing costs for both the Company and its customers and improving customer loyalty. ------------------------ Although the Company's net sales have grown from $1.3 billion in 1993 (the first full year of operations) to $4.0 billion in 1995 on a pro forma basis, it has sustained consistent losses during this time due to high interest expense, competitive price pressures and costs associated with the addition of new customers and the development of new products and services. In addition, due to certain restructuring charges, losses on impairment in value of long-lived assets and non-recurring charges to earnings, the Company expects to record a net loss for 1996. As a result, the Company had an accumulated deficit of $2.5 million and $20.5 million as of December 30, 1995 and June 29, 1996, respectively. Set forth below are summarized unaudited operating results (in millions except for per share data) of the Company for the three and nine month periods ended September 30, 1995 and September 28, 1996. <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED ----------------------------- ----------------------------- SEPTEMBER 30, SEPTEMBER 28, SEPTEMBER 30, SEPTEMBER 28, 1995 1996 1995 1996 ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> Net sales.................................... $ 1,008.1 $ 1,053.5 $ 2,455.9 $ 3,068.0 Gross profit................................. 78.3 80.7 193.2 235.8 Loss on impairment of long-lived assets...... -- -- -- 15.7 Restructuring charges........................ 0.2 -- 0.3 10.9 Earnings (loss) from operations.............. 3.1 5.8 7.2 (15.5) Net earnings (loss).......................... (0.7) 1.4 (2.7) (16.6) Net earnings (loss) per share................ $ (0.14) $ 0.25 $ (0.64) $ (3.13) Average outstanding shares used in calculation (in thousands)............................. 5,236 5,375 4,242 5,305 </TABLE> THE OFFERING <TABLE> <S> <C> Class A Common Stock offered................. 3,400,000 shares Common Stock to be outstanding after the offering: Class A Common Stock....................... 3,400,000 shares Class B Common Stock(1).................... 5,652,400 shares Total.............................. 9,052,400 shares Use of Proceeds.............................. To prepay a portion of the Company's outstanding indebtedness. Nasdaq National Market Symbol................ "PSDS" Voting Rights; Dividends..................... Each share of Class A Common Stock is entitled to one vote and each share of Class B Common Stock is entitled to ten votes. Except as otherwise required by law, the Class A Common Stock and Class B Common Stock will vote together on all matters submitted to a vote of stockholders, including the election of directors. Following the offering, the outstanding shares of Class A Common Stock will represent approximately six percent of the combined voting power of the outstanding Common Stock (seven percent if the Underwriters' over-allotment option is exercised in full). Each share of Class B Common Stock is convertible into Class A Common Stock on a one-to-one basis at any time at the option of the holder thereof and in certain other circumstances. Class A Common Stock and Class B Common Stock will be entitled to share ratably, as a single class, in any dividends declared by the Company on the Common Stock. See "Description of Capital Stock." </TABLE> - --------------- (1) Includes 350,100 shares of Class B Common Stock to be issued to Onex Corporation (collectively with its affiliates, "Onex"), or an affiliate thereof, upon conversion of $2.5 million of principal and $1.0 million of accrued interest outstanding under a 10% convertible subordinated note due 2002 (the "Onex Convertible Note") immediately prior to the offering. Excludes 1,208,625 shares of Class B Common Stock reserved for issuance (i) upon the exercise of stock options granted under the Company's Amended Management Option Plan (1995) (the "1995 Option Plan"), (ii) upon the exercise of stock options granted under the Company's 1996 Stock Option Plan and (iii) under an outstanding warrant and certain other indebtedness which is convertible into shares of Class B Common Stock at the option of the holder thereof at any time. Also excludes 266,667 shares of Class B Common Stock (assuming an initial public offering price equal to the midpoint of the range set forth on the cover page of this Prospectus) to be issued to Onex in payment of $4 million as consideration for the agreement of Onex to relinquish its right to receive for an indefinite period an annual fee of $0.8 million (subject to an annual inflation adjustment) for management services rendered to the Company. On a fully diluted basis using the treasury stock method (and including the 266,667 shares of Class B Common Stock to be issued to Onex), assuming an initial public offering price equal to the midpoint of the range set forth on the cover page of this Prospectus, the Company will have 6,082,438 shares of Class B Common Stock issued and outstanding after the offering. See "Capitalization," "Executive Compensation and Other Matters -- Option Plans" and "Certain Transactions." SUMMARY CONSOLIDATED FINANCIAL DATA (IN MILLIONS, EXCEPT PER SHARE AND CERTAIN OTHER DATA) <TABLE> <CAPTION> FISCAL YEARS ENDED SIX MONTHS ENDED ------------------------------------------ ---------------------------- DECEMBER 25, DECEMBER 31, DECEMBER 30, JULY 1, JUNE 29, 1993(B) 1994(C) 1995(D) 1995 1996 SIX MONTHS ------------ ------------ ------------ ----------- -------------- ENDED DECEMBER 31, (52 WEEKS) (53 WEEKS) (52 WEEKS) (26 WEEKS) (26 WEEKS) 1992(A) ------------ (26 WEEKS) <S> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales..................... $618.4 $1,329.3 $1,598.1 $3,461.8 $ 1,447.8 $2,014.1 Cost of sales................. 560.0 1,210.9 1,464.5 3,193.3 1,332.9 1,859.0 -------- -------- -------- -------- -------- -------- Gross profit.................. 58.4 118.4 133.6 268.5 114.9 155.1 Operating expenses............ 51.7 114.2 131.0 255.2 110.7 149.8 Loss on impairment of long-lived assets(e)........ -- -- -- -- -- 15.7 Restructuring charges(e)...... -- -- -- 0.7 0.1 10.9 -------- -------- -------- -------- -------- -------- Earnings (loss) from operations.................. 6.7 4.2 2.6 12.6 4.1 (21.3) Interest expense, net......... 3.0 5.5 6.6 13.3 6.3 7.3 -------- -------- -------- -------- -------- -------- Earnings (loss) before income taxes and extraordinary charge...................... 3.7 (1.3) (4.0) (0.7) (2.2) (28.6) Income tax (provision) benefit..................... (1.5) 0.5 1.6 (0.1) 1.0 10.6 -------- -------- -------- -------- -------- -------- Earnings (loss) before extraordinary charge........ 2.2 (0.8) (2.4) (0.8) (1.2) (18.0) Extraordinary charge, net..... -- -- -- (0.8) (0.8) -- -------- -------- -------- -------- -------- -------- Net earnings (loss)........... $ 2.2 $ (0.8) $ (2.4) $ (1.6) $ (2.0) $ (18.0) ======== ======== ======== ======== ======== ======== PER SHARE DATA: Earnings (loss) before extraordinary charge per share(f)......... $ 0.96 $ (0.34) $ (0.99) $ (0.17) $ (0.33) $ (3.39) Net earnings (loss) per share(f).................... $ 0.96 $ (0.34) $ (0.99) $ (0.35) $ (0.53) $ (3.39) Average outstanding shares used in calculation (in thousands).................. 2,311 2,406 2,410 4,491 3,746 5,302 OTHER DATA: EBITDA (g)...................... $ 10.2 $ 12.3 $ 10.8 $ 27.4 $ 10.3 $ 11.5 Net operating asset turnover(h)................... 11.0x 13.6x 16.5x 18.3x 16.9x 18.3x Depreciation and amortization... $ 3.4 $ 7.9 $ 8.0 $ 12.7 $ 5.6 $ 5.3 Capital expenditures............ $ 1.9 $ 3.5 $ 1.4 $ 5.7 $ 1.7 $ 8.0 Number of restaurants served (at end of period)............ 4,184 5,113 6,752 14,562 14,700 14,451 </TABLE> <TABLE> <CAPTION> AT JUNE 29, 1996 DECEMBER 31, DECEMBER 25, DECEMBER 31, DECEMBER 30, ---------------------------- 1992 1993(B) 1994(C) 1995(D) ACTUAL AS ADJUSTED(I) ------------ ------------ ------------ ------------ ----------- -------------- <S> <C> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Working capital............... $ 39.5 $ 42.7 $ 41.6 $ 115.9 $ 113.5 $ 114.0 Total assets.................. 158.1 200.0 218.3 489.2 502.0 501.7 Total debt.................... 61.1 68.5 65.6 163.2 173.4 123.3 Stockholders' equity.......... 24.7 25.3 22.5 49.4 32.7 83.0 </TABLE> - --------------- (a) The Company was formed to effect the acquisition of BKDS on June 30, 1992. (b) Includes the acquisition of certain operating assets of McCabe's Quality Foods, California, Inc. for $3.9 million on February 27, 1993 and the acquisition of certain assets and the assumption of certain liabilities of Valley Food Services, Inc. for $9.3 million on March 27, 1993. (c) Includes the acquisition of certain assets and the assumption of certain liabilities of Malone Products, Inc. for $3.8 million on October 31, 1994. (d) Includes the acquisition of substantially all of the assets and the assumption of certain liabilities of NAD for $170 million on March 31, 1995. (e) Charges resulting from the corporate and network consolidation program, primarily for termination of leases and losses on the sale of furniture, equipment and leasehold improvements, loss on impairment in value of land and owned buildings and certain capitalized software costs. (f) See Note 1 (j) in the Notes to Consolidated Financial Statements. (g) EBITDA represents earnings (loss) before provision for interest expense, income taxes, depreciation, amortization, extraordinary charges, loss on impairment of long-lived assets and restructuring charges. EBITDA is presented to provide additional information about the Company's ability to meet its future debt service, capital expenditure and working capital requirements. EBITDA is one of the measures which determines the Company's ability to borrow under its credit facility. EBITDA should not be considered in isolation or as a substitute for operating income, cash flows from operating activities and other income or cash flow statement data prepared in accordance with generally accepted accounting principles or as a measure of the Company's profitability or liquidity. (h) Annualized net sales divided by the average balance of stockholders' equity plus long-term debt. (i) Includes pro forma adjustments to give effect to (i) the consummation of the offering and (ii) the application of the estimated net proceeds thereof as described in "Use of Proceeds," assuming an initial public offering price equal to the midpoint of the range set forth on the cover page of this Prospectus. FUTURE NON-RECURRING CHARGES TO EARNINGS The Company expects to incur certain non-recurring charges in the quarter in which the offering is consummated. These charges are summarized as follows: Expenses (pre-tax) associated with the amendment or termination of various agreements: - A non-cash charge of $1.5 million, assuming an initial public offering price equal to the midpoint of the range set forth on the cover page of this Prospectus, to record the effect of an amendment to the 1995 Option Plan prior to the offering under which unvested options will vest according to a specified time schedule. Such charge will equal the aggregate difference between the initial public offering price of the Class A Common Stock and the exercise price for such options. Vested options will be unaffected. See "Executive Compensation and Other Matters -- Option Plans." This $1.5 million will be reflected as a charge to operations with a corresponding increase in additional paid-in capital. - A charge of $1.3 million for the termination of a consulting agreement between the Company and certain former owners of Valley Food Services, Inc., which agreement was due to expire on March 28, 1998. - Onex currently receives an annual fee for management services rendered to the Company. Onex has agreed to relinquish its right to receive such fee upon completion of the offering, in consideration for which Onex will receive $4.0 million payable in Class B Common Stock valued at the initial public offering price. See "Certain Transactions -- Onex Management Fees." This $4.0 million will be reflected as a charge to operations with a corresponding increase in Common Stock and additional paid-in capital. Extraordinary charges: - A pre-tax charge of up to $10.0 million associated with prepayment penalties and the write-off of deferred financing costs to the extent that the Company replaces its revolving credit facility and term loans. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000946816_usa_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000946816_usa_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements (including the notes thereto) appearing elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus (a) assumes no exercise of outstanding stock options for 368,145 shares of Common Stock as of March 31, 1996, and (b) has been adjusted to reflect (i) a reorganization of the Company into a Delaware corporation effected in August 1995, (ii) the issuance of approximately 88,167 shares of Common Stock for each share of common stock of the Company's predecessor in connection with the reorganization and (iii) a 3-for-2 stock split effected in the form of a 50% stock dividend paid on February 9, 1996 (the "Stock Split"). Unless the context otherwise requires, the "Company" or "USA Detergents" shall mean USA Detergents, Inc., its wholly-owned subsidiary and its predecessor prior to the reorganization. See "The Company." THE COMPANY USA Detergents is a leading manufacturer and marketer of quality nationally distributed value brand laundry and household cleaning products. The Company currently markets its products in eight laundry and household product categories and features eleven distinct value brands. Three of the Company's brands, XTRA(Registered Trademark), Nice'N FLUFFY(Registered Trademark) and Touch of Glass(Registered Trademark), currently rank among the ten largest brands in their respective product categories in terms of total retail sales in the United States. XTRA(Registered Trademark), Nice'N FLUFFY(Registered Trademark) and Touch of Glass(Registered Trademark) represented 60.6%, 20.1% and 3.2%, respectively, of the Company's net sales in 1995. The Company sells its products to approximately 1,000 retailers with approximately 30,000 retail outlets throughout the United States including mass merchandisers, supermarkets, variety and dollar stores, drug stores and small grocery stores, such as Wal-Mart, Hannaford Bros., Dollar General and Rite Aid. USA Detergents' business strategy is to provide value to retailers by enabling retailers to increase sales and realize attractive profit margins on the Company's value brand products while providing value to consumers and to promote brand and corporate identification of its products. The Company's strategy for continued growth includes further penetration of existing distribution channels and expansion of its product offerings, including expansion into new product categories, in an effort to capture a greater share of the estimated $15 billion annual market for laundry and household cleaning products in the United States. Although prior financial results are not necessarily indicative of future results, the success of the Company's strategy has resulted in the Company's net sales increasing from $5.0 million in 1990 to $104.9 million in 1995, a compound annual growth rate of 83.9%. Net sales in 1995 increased by 52.7% over 1994 net sales of $68.7 million. From 1990 to 1995, income from operations increased from $196,000 to $9.7 million, a compound annual growth rate of 118.3%. Income from operations in 1995 increased by 98.8% over 1994 income from operations of $4.9 million. The Company believes that consumer purchases of laundry and household cleaning products are determined, in large part, by price, with certain consumers willing to pay a premium for leading national brand names and the latest packaging and technology, while other consumers demand value-priced brands incorporating certain features found in premium-priced brands. The Company believes that consumers are increasingly purchasing products at either the premium-priced or value-priced ends of the laundry and household cleaning products market and that the Company will continue to benefit from the consumer trend away from purchasing mid-priced brands due to value brands' better price-value relationship. The Company provides value to retailers by assisting them in profitably optimizing their retail space in traditionally low margin product categories. The Company provides value to consumers by offering attractively-packaged, high quality, brand name laundry and household cleaning products at prices significantly below the leading national brands. The Company believes that it is able to maintain attractive profit margins for retailers while offering consumers a better price-value relationship compared to other leading national brands as a result of the Company's continuing emphasis on (i) significantly lower advertising and promotion expenses, (ii) significantly lower research and development expenditures, (iii) a lower overhead cost structure and (iv) manufacturing high quality products at substantially the same costs as leading national brand manufacturers. THE OFFERING Common Stock Offered by the Company ........... 300,000 shares Common Stock to be Outstanding after the Offering(1) ....... 13,692,372 shares Use of Proceeds ........ To pay down borrowings under the Company's Line of Credit. Remaining net proceeds, if any, will be used to finance capital expenditures, for working capital needs and for general corporate purposes. Nasdaq National Market Symbol ................ "USAD" - ------------ (1) Does not include, as of March 31, 1996, (i) an aggregate of 463,935 shares of Common Stock reserved for issuance under the Company's stock option plans, including outstanding options to purchase 249,000 shares of Common Stock, and (ii) an aggregate of 119,145 shares of Common Stock issuable upon exercise of an outstanding stock option at an exercise price of $2.00 per share. See "Management--Executive and Directors' Compensation" and "--Stock Option Plans." SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------------------------------------ -------------------- 1991(1) 1992 1993 1994 1995 1995 1996 --------- --------- --------- --------- ---------- --------- --------- (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> INCOME STATEMENT DATA: Net sales .......................... $ 5,790 $21,860 $46,939 $68,663 $104,878 $23,255 $34,067 Gross profit ....................... 882 4,919 10,043 17,075 31,957 6,426 11,542 Income (loss) from operations (2) . (69) 628 705 4,893 9,725 1,791 3,590 Earnings (loss) before income taxes (191) 436 322 4,350 9,181 1,603 3,423 Net income (loss) .................. (191) 436 300 4,267 7,025 1,572 2,088 Net income per share ............... $ 0.16 Weighted average number of shares outstanding ....................... 13,392 ========= PRO FORMA INCOME STATEMENT DATA:(3) Pro forma net income ............... $ 5,425 $ 969 Pro forma net income per share .... 0.43 0.08 Weighted average number of shares outstanding ................ 12,494 11,915 </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 ------------------------- ACTUAL AS ADJUSTED(4) --------- -------------- <S> <C> <C> BALANCE SHEET DATA: Working capital ........................ $11,508 $23,708 Total assets ........................... 52,600 54,799 Short-term debt ........................ 10,334 333 Long-term debt ......................... 1,739 1,739 Stockholders' equity ................... 22,380 34,580 <FN> - ------------ (1) The selected financial data for the year ended December 31, 1991, was derived from financial statements audited by Goldstein Golub Kessler & Company, P.C., whose report for that year does not appear in this Prospectus and includes a disclaimer as to the income statement since Goldstein Golub Kessler & Company, P.C. was not present for the taking of physical inventory at the beginning of the year. (2) Includes non-recurring expenses consisting of loss on theft of inventory of $398,000 in 1992, and plant relocation expense of $474,000 and loss on theft of inventory of $419,000 in 1993. (3) Pro forma net income represents net income less a provision for income taxes that would have been required had the Company been taxed as a C corporation during the entire period presented. The Company elected to be treated as a Subchapter S corporation until August 9, 1995, and, as a result, was not subject to federal and certain state income taxes prior to that time. No pro forma adjustments have been made for additional compensation expense paid to the existing stockholders of the Company who are officers of the Company associated with the termination of the Company's S corporation status in connection with its initial public offering or for a reduction in interest expense relating to the pay down of borrowings under the Company's line of credit with the net proceeds of the initial public offering because the net effect of such adjustments is not material. See Note 1 of "Notes to Consolidated Financial Statements" for the years ended December 31, 1993, 1994 and 1995 and "Prior S Corporation Status." (4) Adjusted to reflect the sale of 300,000 shares of Common Stock offered by the Company hereby at an assumed offering price of $41.00 per share and the anticipated application of the estimated net proceeds therefrom. See "Use of Proceeds," and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000946826_moovies_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000946826_moovies_prospectus_summary.txt
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+PROSPECTUS SUMMARY MOOVIES, INC. ACQUIRED 76 VIDEO SPECIALTY STORES AND CERTAIN OTHER RELATED OPERATIONS CONCURRENTLY WITH THE CONSUMMATION OF ITS INITIAL PUBLIC OFFERING IN AUGUST 1995 (THE "INITIAL ACQUISITIONS"). AFTER THE COMPLETION OF THE INITIAL PUBLIC OFFERING, MOOVIES, INC. ACQUIRED AN AGGREGATE OF 53 ADDITIONAL VIDEO SPECIALTY STORES IN SEVEN ACQUISITIONS (THE "RECENT ACQUISITIONS") (THE INITIAL ACQUISITIONS AND THE RECENT ACQUISITIONS COLLECTIVELY, THE "ACQUISITIONS"). THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE REQUIRES, (I) ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION, AND (II) ALL REFERENCES HEREIN TO THE "COMPANY" INCLUDE MOOVIES, INC., ITS PREDECESSOR, TONIGHT'S FEATURE LIMITED PARTNERSHIP II (THE "PREDECESSOR"), AND THE VIDEO SPECIALTY STORES AND RELATED OPERATIONS ACQUIRED IN CONNECTION WITH THE ACQUISITIONS. THE COMPANY The Company currently owns and operates 163 video specialty stores located in Georgia, South Carolina, North Carolina, Virginia, Pennsylvania, New Jersey, New York, Connecticut, Ohio, Iowa and Colorado. In 1995, the Company had pro forma revenues of $79.0 million and pro forma net income of $4.6 million ($22.7 million and $1.5 million, respectively, for the three months ended March 31, 1996). The Company currently operates all of its stores in the "superstore" format (i.e., a video specialty store with more than 7,500 rental videocassettes). The Company believes that, based upon the number of stores operated by it at the end of 1995, it was the fifth largest operator of video specialty stores (with 148 specialty stores) and the third largest operator of video superstores (with 140 superstores) in the United States. The key elements of the Company's business and expansion strategy are (i) to operate video superstores, which the Company believes is the most profitable format for most locations, (ii) to concentrate store openings and acquisitions in areas where the Company believes it can achieve economies of scale in advertising, management and other overhead expenses, (iii) to open and acquire video specialty stores in desirable locations and (iv) to offer a high level of customer service at each store, including a commitment to provide more copies of the newest releases than many of its competitors. The Company anticipates opening approximately 50 new superstores in 1996 and through June 24, 1996, had opened 13 new superstores and signed leases for 14 new store sites, including eight stores that were under construction. The Company estimates that the cash investment required to open each new Moovies superstore generally ranges from $250,000 to $300,000. The Company has designed a visually appealing, customer-friendly and family-oriented store layout which the Company believes distinguishes Moovies superstores from those of its competitors. The Company currently operates approximately 140 of its stores under the Moovies name and logo and expects to convert substantially all of its remaining video specialty stores to the Moovies name and logo by July 31, 1996. According to certain publicly available published reports ("Industry Reports") on the video store industry by independent parties, the domestic video rental and sales industry has grown from $0.7 billion in revenues in 1982 to $14.8 billion in 1995 and is projected to reach $19.1 billion in 2000. According to an Industry Report, the home video market was the largest single source of revenue to movie distributors in 1994, accounting for approximately 46% of movie distributors' worldwide revenues. The Company believes that the retail video industry is highly fragmented and is undergoing consolidation. An Industry Report indicated that in 1994 there were approximately 27,400 video specialty stores, including 6,100 video superstores, in the United States. According to an Industry Report, only nine multiple store businesses operated in excess of 100 stores in 1995. The Company believes that the fragmented nature of the industry and the emergence of the superstore format present attractive opportunities to open and acquire video specialty stores. RECENT DEVELOPMENTS Since the Company's initial public offering, the Company has acquired an aggregate of 53 video specialty stores in seven acquisitions. These acquisitions included the acquisition of the "Movies to Go" chain of 13 stores in September 1995, the "Pic-A-Flick" chain of 23 stores in December 1995, the "Movie Store" chain of eight stores in December 1995, the "Showtime" chain of five stores in March 1996 and several smaller acquisitions. In March 1996, the Company sold its supermarket video business for approximately $1.0 million in order to focus its resources on its video superstores. In April 1996, the Company signed an asset purchase agreement to acquire the "Premiere Video" chain of 23 stores in Minnesota, Iowa, Wisconsin, South Dakota and Nebraska (the "Pending Acquisition"). The Company anticipates closing the Premiere Video acquisition concurrently with the completion of this offering. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company................... 2,800,000 shares Common Stock to be outstanding after offering......... 11,464,040 shares (1) Use of Proceeds....................................... To repay certain outstanding indebtness and to finance the Pending Acquisition. See "Use of Proceeds." Nasdaq Stock Market Symbol............................ MOOV </TABLE> (1) Excludes 803,950 shares of Common Stock reserved for issuance pursuant to outstanding options granted under the Company's 1995 Stock Plan and 529,957 shares of Common Stock issuable upon exercise of outstanding warrants. SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) <TABLE> <CAPTION> HISTORICAL(1) PRO FORMA (2) YEARS ENDED THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, DECEMBER 31, 1993 1994 1995 1995 1996 (3) 1995 <S> <C> <C> <C> <C> <C> <C> (UNAUDITED) STATEMENT OF OPERATIONS DATA: Revenues......................................... $3,889 $4,392 $24,658 $1,223 $19,316 $ 78,959 Operating income................................. 278 382 2,983 74 1,360 8,085 Income before income taxes....................... 235 281 2,811 47 1,038 7,613 Net income....................................... 235 281 1,765 47 623 4,568 Net income per share............................. -- -- $ 0.52 -- $ 0.07 $ 0.39 Shares used in computation....................... -- -- 3,395 -- 8,976 11,760 OPERATING DATA: Number of stores at end of period................ 8 9 148 11 158 176 Increase in same store revenues (4).............. 8.2% 10.5% 1.4% 0.0% 0.0 % -- <CAPTION> THREE MONTHS ENDED MARCH 31, 1996 <S> <C> STATEMENT OF OPERATIONS DATA: Revenues......................................... $ 22,652 Operating income................................. 2,812 Income before income taxes....................... 2,460 Net income....................................... 1,476 Net income per share............................. $ 0.13 Shares used in computation....................... 11,776 OPERATING DATA: Number of stores at end of period................ 181 Increase in same store revenues (4).............. -- </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 AS ACTUAL ADJUSTED (5) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents............................................................................ $ 5,570 $ 5,570 Videocassette rental inventory, net.................................................................. 17,932 19,732 Total assets......................................................................................... 73,132 84,632 Line of credit and other short-term debt............................................................. 13,745 8,961 Long-term debt, less current portion................................................................. 3,698 198 Total liabilities.................................................................................... 35,046 26,762 Stockholders' equity................................................................................. 38,086 57,870 </TABLE> (1) The historical financial data reflect data for the Predecessor during 1993 and 1994, and for a portion of 1995. The Predecessor was a limited partnership and therefore had no income tax liability. (2) The pro forma statement of operations data for the year ended December 31, 1995 gives effect to the Acquisitions, the Company's initial public offering, the Premiere Video acquisition and this offering as if they had occurred as of the beginning of the year. The pro forma statements of operations data for the three months ended March 31, 1996 give effect to this offering and the consummation of the Pending Acquisition and the Showtime acquisition as if they had occurred as of the beginning of the period. See "Use of Proceeds," "The Acquisitions" and "Pro Forma Financial Information." (3) Effective January 1, 1996, the Company adopted an accelerated method of amortizing its videocassette rental inventory, which has been accounted for as a change in accounting estimate effected by a change in accounting principle. The application of the new method of amortizing videocassette rental inventory, including an $860,000 pre-tax charge ($0.06 per share after taxes), increased amortization expense for the quarter ended March 31, 1996 by approximately $1.5 million and reduced net income by approximately $891,000 and earnings per share by $0.10. (4) The increase in same store revenues is computed by comparing on a quarterly basis revenues from stores open during an entire quarter to revenues from stores open during the entire corresponding quarter for the prior year. This calculation includes acquired stores on a pro forma basis, that were owned and operated at the end of the period. (5) Adjusted to reflect the sale of 2,800,000 shares offered by the Company hereby and the use of proceeds therefrom, including the prepayment of certain outstanding indebtedness and the consummation of the Pending Acquisition. See "Capitalization" and "Use of Proceeds".
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000946945_urocor-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000946945_urocor-inc_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION, INCLUDING THE FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE NOTED, THE INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES (I) NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION AND (II) THE AUTOMATIC CONVERSION OF ALL OUTSTANDING SHARES OF THE COMPANY'S PREFERRED STOCK, CLASS A STOCK AND CLASS B STOCK INTO SHARES OF COMMON STOCK IMMEDIATELY PRIOR TO THE CLOSING OF THE OFFERING. THE COMPANY UroCor provides a broad range of diagnostic services for the clinical management of certain urological cancers and diseases. The Company's goal is to complement its diagnostic services with therapeutic products and information systems in order to become the leading disease management company serving the urology market. Through its four business groups, UroDiagnostics, UroSciences, UroTherapeutics and Disease Management Information Systems, the Company is developing an integrated disease management approach to serve the needs of urologists and managed care organizations for the diagnostic, prognostic and therapeutic care of patients throughout a disease cycle. The UroDiagnostics Group provides diagnostic services to over 1,400 urologists nationwide. This group provides comprehensive diagnostic services to detect major urological diseases, predict prognosis of the patient's condition, monitor the patient's therapy and identify recurrence of the disease. The UroSciences Group's goal is to become a leader in the development and application of advanced diagnostic technologies and information resources for managing urological diseases. The UroTherapeutics Group was established to acquire rights to sell through the Company's existing sales force urological pharmaceutical products for use in the urologist's office. The Disease Management Information Systems group is designed to provide urologists and managed care organizations with access to the Company's proprietary urological disease database, disease management models and practice management guidelines in order to improve the diagnosis and treatment of patients. UroCor serves the segment of the United States urology market consisting of over 7,500 office-based urologists, including those affiliated with managed care organizations. These urologists diagnose and treat prostate cancer, bladder cancer, kidney stone disease and other complex urological diseases. An independent survey estimated that in 1993 there were approximately 15 million urology patient visits in the United States. The American Cancer Society estimates that approximately 300,000 new cases of prostate cancer and 52,000 new cases of bladder cancer will be diagnosed in 1996, resulting in medical costs in excess of $5.0 billion. The Company believes that the urology market is particularly well-suited for an integrated disease management approach because of the distinctive characteristics of urological diseases and the multiple roles of the urologist. Urological diseases typically require extensive and prolonged diagnosis, prognosis and monitoring throughout the course of the disease. As a result, unlike most other medical specialties, the urologist often fulfills almost all patient care needs by acting as diagnostician, oncologist and surgeon. UroCor believes that it is the first company focusing solely on the urology market to offer comprehensive products and services necessary to manage urological diseases. To achieve its goal of becoming the leading disease management company in the urology market, the Company is employing these strategies: (i) increase market penetration of office-based urologists, (ii) expand use of existing product lines, (iii) expand total product offering and (iv) strengthen market ties with on-line systems. To achieve increased market penetration and expanded product use, the Company has developed a direct sales force focused on urologists' offices and managed care organizations. To expand its total product offering, the Company intends to develop and license technologies and products. In December 1994, the Company licensed exclusive United States distribution rights from IAF BioVac, Inc., a subsidiary of BioChem Pharma, Inc. ("BioVac") for a strain of BACILLUS Calmette Guerin ("BCG"), a therapeutic product to treat certain types of bladder cancer for which BioVac currently is seeking approval from the United States Food and Drug Administration (the "FDA") for marketing approval. To strengthen its ties with urologists, the Company is developing a urology-focused, secure wide area network that will allow urologists access to patient diagnostic results as well as the Company's proprietary disease management models. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company............... 2,800,000 shares Common Stock to be outstanding after the Offering......................................... 9,365,248 shares(1) Use of proceeds................................... Development of new products, expansion of business lines, certain capital expenditures and working capital and other general corporate purposes Proposed Nasdaq National Market symbol............ UCOR </TABLE> - ------------------------ (1) Excludes 1,487,904 shares of Common Stock issuable upon exercise of outstanding options and warrants. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ----------------------------------------------------- -------------------- 1991 1992 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue.................................... $ 2,145 $ 4,813 $ 9,348 $ 14,531 $ 19,758 $ 4,619 $ 5,908 Operating expenses: Direct cost of services and products..... 1,161 2,019 3,893 5,891 7,354 1,658 2,138 Selling, general and administrative expenses................................ 2,127 3,796 6,308 8,765 9,423 2,255 2,862 Research and development................. 416 552 1,252 1,969 2,267 558 644 --------- --------- --------- --------- --------- --------- --------- Total operating expenses............... 3,704 6,367 11,453 16,625 19,044 4,471 5,644 --------- --------- --------- --------- --------- --------- --------- Income (loss) from operations............ (1,559) (1,554) (2,105) (2,094) 714 148 264 Other income (expense)..................... 93 42 (63) (203) (181) (56) (33) --------- --------- --------- --------- --------- --------- --------- Net income (loss).......................... $ (1,466) $ (1,512) $ (2,168) $ (2,297) $ 533 $ 92 $ 231 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Pro forma net income (loss) per share(1)... $ (.61) $ (.37) $ (.41) $ (.38) $ .07 $ .01 $ .03 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Shares used in computing pro forma net income (loss) per share(1)................ 2,396 4,093 5,233 6,104 7,296 6,588 7,523 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 -------------------------- ACTUAL AS ADJUSTED(2) ---------- -------------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents............................................................. $ 1,301 $ 24,137 Working capital....................................................................... 5,086 27,922 Total assets.......................................................................... 12,034 34,870 Long-term debt........................................................................ 950 950 Accumulated deficit................................................................... (14,124) (14,124) Total stockholders' equity............................................................ 8,702 31,538 </TABLE> - -------------------------- (1) Computed on the basis described in Note 2 to the Financial Statements. (2) Adjusted to reflect the sale of 2,800,000 shares of Common Stock offered hereby at an assumed initial public offering price of $9.00 per share and the receipt of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization".
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000946994_celeris_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000946994_celeris_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial data appearing elsewhere in this Prospectus. Except as otherwise indicated, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. This Prospectus contains forward- looking statements which involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward- looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors." THE COMPANY Summit is a leading provider of clinical outcomes database software and related consulting services for selected medical specialties in the healthcare industry. The Company's customers include specialty physicians, hospitals, physician and hospital networks, managed care organizations and other healthcare payors, and pharmaceutical and medical device firms. Summit's database software enables healthcare providers to record, analyze and report detailed clinical, economic and patient-reported outcomes data on medical procedures, diseases and patient functional status. The Company collaborates with national medical associations, leading hospitals and hospital networks, physicians and medical device firms to design database fields and formats that capture significantly more relevant and complete outcomes data than is available from insurance claims data. The Company's customers use this outcomes data to monitor and manage more effectively the quality and cost of patient care by analyzing resource utilization, costs, provider practice patterns, medical procedure selection and clinical outcomes. This outcomes data is also used for contracting with third party payors and managed care organizations, establishing quality assurance programs and complying with the informational demands of regulatory agencies. To increase the value of its software, the Company offers design, implementation, data management and consulting services to its customers. Currently, approximately 1,700 healthcare organizations use the Company's clinical outcomes database software and services. The Company's clinical outcomes database software products and services give healthcare providers comprehensive and detailed patient clinical information that is necessary to compete effectively in today's healthcare market. The Company's database software includes 39 database software procedure modules for five medical specialties: cardiac and thoracic surgery, cardiology, ophthalmology, urology and orthopedics. During 1996, the Company expects to introduce procedure modules for endoscopy and critical care. The procedure modules allow convenient and accurate data collection and provide meaningful measurements of clinical outcomes. The Company's procedure modules for cardiac surgery include a risk stratification tool that enables providers to analyze retrospectively or to predict the effect of patient-specific risk factors on certain clinical outcomes. The Company intends to develop risk stratification tools for additional specialties. The Company also offers three additional database software modules that measure clinical costs, patient health status and satisfaction, inventory usage, and decision support software that forecasts the rate of return on investments in employee wellness, occupational health and pharmacological programs. Within each medical specialty, Summit's database software modules may be bundled to form an integrated database that combines data on clinical outcomes for several medical procedures, as well as data on clinical costs and patient health status and satisfaction. For example, in cardiology, a heart institute may combine the Company's software modules to capture clinical data on diagnostic tests, such as echocardiography and cardiac catheterization, and therapeutic procedures, such as angioplasty, while also capturing the clinical costs associated with these tests and procedures. In addition, the Company has begun to offer its customers combined information service products that integrate the use of the Company's software and related consulting services. The Company's business strategy is to enter medical specialty markets that have a substantial need for clinical outcomes information and to expand within these markets by developing additional database software applications. As part of this strategy, the Company typically seeks to collaborate with leading national medical associations and leverage its distribution through joint marketing relationships with leading vendors of healthcare products. The Company has established joint marketing arrangements with SciMed Life Systems, Inc. ("SciMed"), a subsidiary of Boston Scientific Corporation ("Boston Scientific"), a worldwide developer, manufacturer and marketer of medical devices and four Boston Scientific divisions: Microvasive Urology, Microvasive Endoscopy, Mansfield EP and Meadox Medicals; as well as with Allergan, Inc. ("Allergan"), a global provider of eye care and other specialty therapeutic products, and Smith & Nephew Richards Inc. ("Smith & Nephew Richards"), a global provider of medical orthopedic devices. The Company also aggregates, manages and reports on the cumulative clinical data generated by users of the Company's software who submit their data to national databases. These national databases provide valuable benchmarks of national practice patterns and clinical outcomes that individual providers can use to compare and relate their own performance against national trends. The Company has database relationships with the Society of Thoracic Surgeons (the "STS"), the American Society of Cataract and Retractive Surgery (the "ASCRS") and the American College of Cardiology (the "ACC" and together with the STS and the ASCRS, collectively, the "Medical Association Partners"). Similarly, the Company develops and manages databases for its joint marketing partners. In addition, the Company has recently established a database for certain hospitals within the Columbia/HCA Healthcare Corporation ("Columbia/HCA") network of more than 300 hospitals. The Company is the sole vendor of cardiac surgery and cardiology outcomes database software to Columbia/HCA. The Company was incorporated in the State of Minnesota in January 1986. Unless the context otherwise requires, references to the "Company" or to "Summit" include Summit Medical Systems, Inc. and its consolidated subsidiaries. The Company's principal executive offices are located at One Carlson Parkway, Minneapolis, Minnesota 55447, and its telephone number is (612) 473-3250. THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Company...... 1,500,000 shares Common Stock Offered by the Selling Shareholders............................ 280,000 shares Common Stock to be Outstanding after the Offering................................ 9,040,810 shares (1) Use of Proceeds.......................... For working capital and other general corporate purposes. See "Use of Proceeds." Nasdaq National Market Symbol............ SUMT </TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, --------------------------------------- -------------- 1991 1992 1993 1994 1995 1995 1996 ------ ------ ------ ------ ------- ------ ------ <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Total revenue........... $1,585 $3,113 $5,405 $9,627 $13,801 $2,624 $3,913 Gross profit............ 847 1,949 3,577 6,627 9,726 1,749 2,679 Purchase of in-process research and development............ -- -- -- -- 7,435 -- -- Total operating expenses............... 1,361 1,983 3,583 7,029 17,970 2,085 3,202 Income (loss) from operations............. (514) (34) (6) (402) (8,244) (336) (523) Net income (loss)....... $ (468) $ (31) $ 1 $ (334) $(7,658) $ (300) $ (281) Net income (loss) per share (2).............. $(0.21) $(0.01) $ 0.00 $(0.08) $ (1.37) $(0.07) $(0.04) Weighted average shares outstanding (2)........ 2,264 2,799 3,372 3,953 5,604 4,446 7,527 </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 ----------------------- ACTUAL AS ADJUSTED (3) ------- --------------- <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments....... $22,509 $57,092 Working capital......................................... 26,034 60,617 Total assets............................................ 30,707 65,290 Total shareholders' equity.............................. 27,623 62,206 </TABLE> - -------- (1) Does not include an aggregate of 1,575,339 shares issuable upon exercise of outstanding stock options and warrants as of June 6, 1996. The weighted average exercise price of these option and warrant shares is $11.46 per share. See "Management--Stock Option Plans" and "Management--Nonqualified Stock Options." (2) Computed on the basis described in Note 2 of Notes to Consolidated Financial Statements. (3) As adjusted to reflect the sale of 1,500,000 shares of Common Stock offered by the Company hereby at an assumed public offering price of $24.75 per share after deducting estimated underwriting discounts and commissions and offering expenses payable by the Company. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000947268_weblink_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000947268_weblink_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and Consolidated Financial Statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless the context otherwise requires, the term "Company" refers to PageMart, Inc. and its consolidated subsidiaries prior to the Reorganization (as defined herein) and PageMart Wireless, Inc. and its consolidated subsidiaries after such Reorganization. The Company has four classes of common stock outstanding. See "Description of Capital Stock." Unless otherwise indicated, the information contained in this Prospectus assumes that the underwriters' over-allotment option will not be exercised. See "Underwriters." Certain of the information contained in this summary and elsewhere in this Prospectus, including information with respect to the Company's plans and strategy for its two-way messaging business and related financing, are forward-looking statements. For a discussion of important factors that could cause actual results to differ materially from the forward-looking statements, see "Risk Factors." THE COMPANY The Company is one of the fastest growing providers of wireless messaging services in the United States. The Company has grown to become the fifth largest paging carrier in the United States, based on 1,374,146 subscribers at March 31, 1996. The Company's number of subscribers has increased at annual growth rates of 180%, 136% and 60% in 1993, 1994 and 1995, respectively, as compared to an average annual growth rate of approximately 31% for 1993 through 1995 for the paging industry. The Company has made no acquisitions, and all subscriber growth has been internally generated. The Company has invested heavily in order to achieve rapid growth in its subscriber base and, as a result, the Company has sustained net losses of $31.1 million, $45.8 million, $53.1 million and $11.6 million for 1993, 1994, 1995 and the three months ended March 31, 1996, respectively. The Company offers local, multi-city, regional and nationwide paging and other one-way wireless services in all 50 states, covering 90% of the population of the United States. The Company also provides services in Puerto Rico, the U.S. Virgin Islands and the Bahamas, and has recently initiated nationwide services in Canada. The Company employs a digital, state of the art transmission network that is 100% FLEX(R) enabled, allowing the use of high speed messaging technology thereby providing increased transmission capacity. OPERATING STRATEGY The Company attributes the significant growth of its paging business to the successful implementation of its six operating principles: (i) diversified distribution channels, (ii) nationwide common frequency, (iii) efficient network architecture, (iv) spectrum-rich frequency position, (v) centralized administration, and (vi) customer service capabilities. DIVERSIFIED DISTRIBUTION CHANNELS. The Company utilizes a number of distribution channels to market its products and services, including retail marketing, private brand strategic alliances and national sales offices. Retail Marketing. The Company believes that it is a leading supplier of paging units to consumers through retail distribution channels. The Company has been selected as the pager supplier for a number of leading retail chains, including Office Depot Inc., Comp USA, Inc., Montgomery Ward Company, Inc., Target Stores, Inc. and Best Buy, Inc. Private Brand Strategic Alliances. The Company was one of the first paging companies to broaden its distribution reach by establishing strategic relationships with large communications providers. The Company has established strategic relationships with GTE Corporation, Southwestern Bell Mobile Systems, AT&T Wireless Services, Ameritech Mobile Services, Inc. and long distance reseller EXCEL Telecommunications, Inc. National Sales Offices. The Company's national sales offices sell equipment and services through three distribution channels: direct sales, third-party resellers and local retailers. The Company has a direct sales force presence in over 75 Metropolitan Statistical Areas ("MSAs") through 65 offices. Management believes that a diversified approach to distribution is important to sustain growth as paging services more deeply penetrate the United States population, especially the consumer market. This diversification is a key element of the Company's strategy of expanding its subscriber base as rapidly as possible to increase cash flow through greater utilization of its nationwide wireless communications network. A diversified distribution strategy also provides a cost effective method for managing disconnection rates. The Company's average monthly disconnection rates for the twelve months ended December 31, 1994, December 31, 1995 and March 31, 1996 were 3.4%, 2.5% and 2.4% per month, respectively. NATIONWIDE COMMON FREQUENCY. The Company has constructed its nationwide messaging network on a common frequency. Use of a common frequency provides the Company with a number of important strategic advantages not available to many of its competitors, which operate on multiple frequencies across markets. The use of a common frequency enables the Company's customers to travel throughout the United States, Canada and the Bahamas while continuing to use the same messaging device. As a result, the Company is able to provide multi-city coverage customized to accommodate the customer's needs ("coverage on demand"). The common frequency also provides a competitive advantage to the Company when marketing its services to regional and national retailers and private brand strategic alliance partners. These distributors are able to buy the paging unit without being limited by where they can distribute the product or by the service they sell with the unit. This allows retailers and strategic partners to offer customers all service options while minimizing the number of stock keeping units ("SKUs") that the distributor must carry, thus reducing inventory carrying costs. EFFICIENT NETWORK ARCHITECTURE. The Company is an industry leader in the implementation of advanced telecommunications technologies, including pioneering the use of direct broadcast satellite ("DBS") technology for paging. The Company's nationwide wireless transmission network is 100% controlled by DBS technology, which gives the Company a flexible, highly reliable and efficient network architecture. The use of DBS technology eliminates the need for expensive terrestrial radio frequency ("Rf") control links and repeater equipment while enabling the Company to provide a wide range of coverage options. The Company's network covers the top 300 MSAs across the United States, or approximately 90% of the total population in the United States, and is designed to serve a significantly larger subscriber base than the one currently served by the Company. The Company's wireless transmission network is 100% FLEX enabled, allowing the use of the high speed FLEX protocol to transmit messages and maximize system capacity. SPECTRUM-RICH FREQUENCY POSITION. The Company ranks among the top four paging carriers in the United States in licensed nationwide frequencies. The Company's exclusive frequency licenses include two nationwide paging frequencies and 150 kHz of nationwide Narrowband Personal Communications Service ("NPCS") frequency (the "NPCS Licenses"). The Company believes that this frequency has important strategic value because it may enable the Company to grow significantly its one-way subscriber base and to provide two-way messaging and other value-added services to its subscribers. As a result, the Company believes its spectrum-rich frequency position enables it to attract private brand strategic alliance partners. CENTRALIZED ADMINISTRATION. The Company has centralized customer service, information systems, inventory control and distribution, credit and collections, accounting and marketing functions. This centralized administration has enabled the Company to become one of the lowest cost providers of paging and other one-way wireless communications services in the United States. In addition, the administrative infrastructure is designed to support a significantly larger customer base than that currently served by the Company, which will allow it to realize additional operating efficiency as the Company continues to grow. CUSTOMER SERVICE CAPABILITIES. Management has focused on developing industry-leading customer service capabilities. The Company employs over 575 highly trained customer service personnel operating in state of the art call center facilities. Management believes that these services are an important factor in supporting and retaining its strategic partners, retailers and subscribers. FINANCIAL STRATEGY The Company's principal financial objectives are to (i) maximize profitability with respect to its existing subscriber base, as measured by operating profit before selling expenses per subscriber and (ii) grow the subscriber base on a cost efficient basis, as measured by selling expenses (including loss on equipment sales) per net subscriber addition. See footnotes (3) and (4) to "-- Summary Financial Information." The Company achieves operating efficiency through its efficient transmission network, its nationwide common frequency and its centralized administration. The Company's operating profit before selling expenses per subscriber per month for the Company's one-way operations was $1.01, $1.45, $1.66 and $2.11 during each quarter of 1995, and was $2.23 during the quarter ended March 31, 1996, although on an overall basis the Company has sustained increasing net losses for each year of its operations. See "Risk Factors -- History of Operating Losses." The Company's selling expenses per net subscriber addition were $91, $81, and $91 in the years ended 1993, 1994 and 1995, respectively and were $86 for the quarter ended March 31, 1996. The Company's operating model is unique in the industry in that it follows a strategy of selling rather than leasing messaging equipment to subscribers. As of March 31, 1996, approximately 99% of the Company's units were Customer Owned and Maintained ("COAM"). This COAM strategy results in the Company having much less capital invested in messaging equipment than other paging carriers, which lease messaging equipment to a majority of their subscribers. The Company believes that its COAM strategy, coupled with its network design, enables it to incur significantly lower capital expenditures, depreciation and amortization, and interest expense associated with serving subscribers than other companies. Management measures capital efficiency by the amount of capital employed per subscriber and believes capital efficiency is an important indicator of its financial performance. The Company's capital employed per subscriber was $42 and $40 at December 31, 1994 and 1995, respectively and was $41 at March 31, 1996. The Company's strategy is to expand its subscriber base as rapidly as possible and, through a combination of scale, operating efficiency and capital efficiency, to provide a significant return on capital employed. TWO-WAY MESSAGING STRATEGY One of the Company's principal strategies is to become a leading provider of two-way messaging services in the United States. Management believes that the introduction of two-way messaging services may present significant future growth opportunities to the Company by enabling it to provide a new generation of advanced messaging services, including data messaging, stored voice messaging and other services, to new and existing subscribers. The Company's two-way messaging strategy is founded on four principal competitive advantages: (i) nationwide spectrum, (ii) incremental introduction of technology, (iii) established diversified distribution channels, and (iv) operating efficiency. NATIONWIDE SPECTRUM. With the acquisition of the NPCS Licenses, the Company became one of four companies with 150 kHz or more of nationwide NPCS frequency. As a result, the Company is positioned to create a high capacity nationwide network capable of delivering local, multi-city, regional, or nationwide data and stored voice messaging services to a large number of subscribers. INCREMENTAL INTRODUCTION OF TECHNOLOGY. The Company intends to introduce two-way messaging technology by initially building upon its one-way transmission network, enabling the Company to minimize the level of capital expenditures and investments. The Company plans to introduce two-way stored voice service paced to the availability of infrastructure equipment, subscriber devices and to meet the market demand for such services. ESTABLISHED DIVERSIFIED DISTRIBUTION CHANNELS. The Company plans to leverage its established diversified distribution channels to achieve efficient marketing of its two-way services. OPERATING EFFICIENCY. The Company expects to utilize its existing one-way network and centralized administration to minimize incremental costs of product and service expansion. Management believes that the Company's centralized customer service, information systems, inventory control and distribution, credit and collections, accounting and marketing organizations will be capable of supporting the Company's two-way strategy. As a result of these operating advantages, the Company plans to provide a complete array of two-way services at affordable prices, including data and stored voice services, that the Company believes should appeal to a large number of potential subscribers. The Company expects to begin testing two-way data and stored voice services in the second quarter of 1996. Upon completion of testing, two-way data services are expected to be marketed on a city-by-city basis beginning in late 1996. Two-way data services may include guaranteed alphanumeric message delivery with acknowledgment and message with response capabilities. In 1997, the Company plans to introduce its VoiceMart(TM) service, which should provide subscribers with the ability to receive stored voice messages directly to their messaging devices. Introduction of the VoiceMart service will be paced to the availability of infrastructure equipment, subscriber devices and market demand. INTERNATIONAL EXPANSION The Company plans to provide messaging services in selected countries on a seamless international network. Management believes that its technology, operational structure and distribution strategies can be replicated in foreign countries to establish nationwide wireless networks. In each country in which the Company plans to offer paging and messaging services, the Company will seek to obtain a nationwide frequency common to at least one of the nationwide frequencies it holds in the United States in order to allow a single messaging device to be used in multiple countries. The Company expects to pursue international opportunities through minority interests in joint venture arrangements whereby the Company would contribute its expertise in designing and managing messaging services with minimal incremental capital investments. The Company's international strategy is initially to pursue opportunities in North America, Latin America, and South America. One of the Company's affiliates, PageMart Canada Limited ("PageMart Canada"), has obtained a nationwide license in Canada based on a frequency common to one of its frequencies in the United States. PageMart Canada began providing service in the largest metropolitan areas in Canada to U.S. subscribers in March 1996 and to Canadian subscribers in April 1996. Through PageMart International, Inc., the Company owns 20% of the voting common stock of PageMart Canada. Additionally, PageMart International Inc. owns 33% of the voting common stock of PageMart Canada Holding ("Canada Holding") which owns the remaining 80% of the voting common stock of PageMart Canada. The Company also provides paging coverage in the Bahamas. As a result of its business strategy, the Company has structured its business into three operating divisions: PageMart One-Way, PageMart Two-Way and PageMart International. The Morgan Stanley Shareholders (as defined herein) currently own approximately 60.4% of the outstanding Common Stock of the Company and approximately 48.9% of the outstanding voting Common Stock. After giving effect to the Offering, the Morgan Stanley Shareholders will own approximately 51.3% of the outstanding Common Stock and 38.9% of the outstanding voting Common Stock (approximately 50.1% and 37.7%, respectively of the outstanding Common Stock and outstanding voting Common Stock if the Underwriters' over-allotment option is exercised in full). The Morgan Stanley Shareholders have informed the Company that they intend, upon the consummation of the Offering, to convert such number of their shares of non-voting Common Stock so that, following such conversion, the Morgan Stanley Shareholders will own, in the aggregate, 49% of the outstanding voting Common Stock of the Company. See "Principal Stockholders." THE OFFERING Class A Common Stock offered hereby.......................... 6,000,000 shares Common Stock to be outstanding after the Offering(1)(2)........ 39,711,675 shares Use of Proceeds................. The net proceeds of the Offering are expected to be used as follows: approximately $50 million to fund the initial construction of the Company's NPCS transmission network; approximately $13 million for the retirement of the Company's vendor debt; with the balance to be used to repay approximately $8 million of loans expected to be outstanding under the Company's revolving credit facility and for other general corporate purposes. See "Use of Proceeds." - --------------- (1) As used herein "Common Stock" collectively refers to the Company's Class A Convertible Common Stock (the "Class A Common Stock"), Class B Convertible Non-Voting Common Stock (the "Class B Common Stock"), Class C Convertible Non-Voting Common Stock (the "Class C Common Stock") and Class D Convertible Non-Voting Common Stock (the "Class D Common Stock"), each class having a par value of $.0001 per share. Class A Common Stock, Class B Common Stock and Class C Common Stock are convertible by certain existing institutional stockholders that are subject to voting control and regulatory restrictions at any time at the option of the holders, in accordance with the terms of the Stockholders Agreement (as defined herein). Class D Common Stock is convertible, at the option of the holder, at any time after this Offering. For a description of each class of Common Stock, see "Description of Capital Stock." (2) Based on approximately 33,711,675 shares of Common Stock outstanding on March 31, 1996. Excludes (i) 2,793,274 shares issuable upon exercise of outstanding stock options at exercise prices ranging from $.08 to $12.00 per share, (ii) 627,900 shares issuable upon exercise of outstanding warrants to purchase Class A Common Stock at an exercise price of $3.26 per share, (iii) 714,286 shares issuable upon conversion of securities held by unaffiliated, third-party Canadian stockholders of Canada Holding, and (iv) 206,748 shares issuable upon exercise of outstanding warrants to purchase Class A Common Stock at an exercise price of $10.00 per share. See "Description of Capital Stock -- Warrants." SUMMARY FINANCIAL INFORMATION The following table sets forth summary historical financial information and operating data of the Company for each of the five fiscal years ended December 31, 1995 and for the three months ended March 31, 1995 and 1996. The financial information and operating data were derived from, and should be read in conjunction with, "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Consolidated Financial Statements of the Company and the notes thereto included elsewhere in this Prospectus. <TABLE> <CAPTION> THREE MONTHS ENDED FISCAL YEAR ENDED DECEMBER 31, MARCH 31, --------------------------------------------------------- ---------------------- 1991 1992 1993 1994 1995 1995 1996 ------- -------- -------- -------- ---------- -------- ---------- (UNAUDITED) (IN THOUSANDS, EXCEPT UNIT, ARPU, PER SUBSCRIBER AND PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Recurring revenues....................... $ 3,298 $ 6,668 $ 24,184 $ 56,648 $ 101,503 $ 20,464 $ 33,743 Equipment sales and activation fees...... 5,380 9,837 26,483 53,185 57,688 12,239 14,802 ------- -------- -------- -------- ---------- -------- ---------- Total revenues........................... 8,678 16,505 50,667 109,833 159,191 32,703 48,545 Cost of equipment sold................... 6,436 10,044 28,230 57,835 63,982 13,378 17,082 Operating expenses....................... 10,844 25,584 47,448 85,322 118,557 26,524 34,704 ------- -------- -------- -------- ---------- -------- ---------- Operating loss........................... (8,602) (19,123) (25,011) (33,324) (23,348) (7,199) (3,241) Interest expense......................... (1,486) (2,456) (6,538) (12,933) (30,720) (6,660) (8,401) Interest income.......................... 97 529 428 858 1,997 498 219 Other.................................... -- -- -- (414) (1,042) (337) (195) ------- -------- -------- -------- ---------- -------- ---------- Net loss................................. $(9,991) $(21,050) $(31,121) $(45,813) $ (53,113) $(13,698) $ (11,6 18) ======= ======== ======== ======== ========== ======== ========== Net loss per common share................ $ (1.02) $ (1.24) $ (1.51) $ (1.72) $ (1.53) $ (0.40) $ (0.33) Pro forma net loss per common share(1)... (1.44) (0.31) Weighted average number of common shares and share equivalents outstanding...... 9,814 16,962 20,627 26,574 34,653 34,532 34,688 BALANCE SHEET DATA (AT PERIOD END): Current assets........................... $23,607 $ 13,365 $ 51,279 $ 44,397 $ 62,535 $ 59,011 $ 53,165 Total assets............................. 28,979 30,772 78,773 142,059 263,829 243,336 262,848 Current liabilities...................... 5,112 14,754 20,198 37,966 56,508 39,861 61,288 Long-term debt, less current maturities............................. 11,956 25,059 78,359 92,632 219,364 200,630 225,210 Stockholders' equity (deficit)........... 11,911 (9,041) (19,784) 11,461 (12,043) 2,845 (23,650) OTHER DATA: Units in service (at period end)......... 52,125 117,034 327,303 772,730 1,240,024 874,944 1,374,146 Net subscriber additions................. 37,812 64,909 210,269 445,427 467,294 102,214 134,122 ARPU(2).................................. $ 8.27 $ 8.66 $ 9.81 $ 8.64 $ 8.62 $ 8.28 $ 8.61 Operating profit (loss) before selling expenses per subscriber per month(3)... (7.78) (12.69) (.98) .90 2.11 1.01 2.23 Selling expenses per net subscriber addition(4)............................ 146 157 91 81 91 95 86 EBITDA(5)................................ (7,378) (16,499) (19,930) (25,219) (10,076) (4,397) 1,007 Capital expenditures..................... 1,741 13,729 10,810 16,719 33,503 10,376 11,779 NPCS Licenses acquired(6)................ -- -- -- 58,885 74,079 74,079 -- Depreciation and amortization............ 1,224 2,624 5,081 8,105 13,272 2,802 4,248 </TABLE> - --------------- (1) Based on the weighted average number of shares and share equivalents outstanding during the period, plus the issuance of 1,000,000 shares of Class A Common Stock offered hereby, representing the number of shares the proceeds of which are to be used to repay the Company's vendor indebtedness. Also assumes such repayment occurred at the beginning of the applicable period. (2) Average monthly revenue per unit ("ARPU") is calculated by dividing (i) recurring revenues, consisting of fees for airtime, voicemail, customized coverage options, excess usage fees and other recurring revenues and fees associated with the subscriber base for the quarter by (ii) the average number of units in service for the quarter. For the fiscal year periods, ARPU is stated as the monthly average for the final quarter of the year. (3) Operating profit (loss) before selling expenses (selling expenses include loss on sale of equipment) per subscriber for the Company's one-way operations is calculated by dividing (i) recurring revenues less technical expenses, general and administrative expenses and depreciation and amortization for the quarter by (ii) the average number of units in service for the quarter. Stated as the monthly average for the final quarter of the year for the fiscal year periods. (4) Selling expenses per net subscriber addition for the Company's one-way domestic operations is calculated by dividing (i) selling expenses, including loss on sale of equipment, for the period by (ii) the net subscriber additions for the period. (5) EBITDA represents earnings (loss) before interest, taxes, depreciation and amortization. EBITDA is a financial measure commonly used in the paging industry. EBITDA is not derived pursuant to generally accepted accounting principles ("GAAP") and therefore should not be construed as an alternative to operating income, as an alternative to cash flows from operating activities (as determined in accordance with GAAP) or as a measure of liquidity. The calculation of EBITDA does not include the commitments of the Company for capital expenditures and payment of debt and should not be deemed to represent funds available to the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of the financial operations and liquidity of the Company as determined in accordance with GAAP. (6) Reflects the acquisition of the NPCS Licenses in the Federal Communications Commission ("FCC") NPCS auctions. See "Business -- Government Regulation."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000947602_grand_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000947602_grand_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..fa12825dba6d1dfc91db1608a8844b5c3292d99f
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000947602_grand_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY - ----------------------------------------------------------------------------- The following summary is qualified in its entirety by the more detailed information, financial statements and notes to the financial statements including the notes thereto appearing elsewhere in this Prospectus. <TABLE> <CAPTION> <S> <C> THE COMPANY. The Company was incorporated in Indiana on April 28, 1995 consolidating activities in the areas of the acquisition of licenses to use trademarks, logos, and photographic likenesses on collectibles, the design of those collectibles, the importation of those collectibles, and the marketing of the collectibles. The Company also serves as a licensing agent and a consultant to manufacturers of other products seeking licenses to use marks, logos and photographic likenesses on their products. See "The Company" and "Business Activities". Prior to April 28, 1995, these activities took place within Grand Slam III, an Indiana limited partnership, which also provided contract advisor, negotiation, career planning and general management services for athletes, entertainers, media personalities and others and planning, management and sponsorship development for events. Grand Slam III remains in existence for those purposes. See "The Company." The Corporation's executive offices are located at 401 Pennsylvania Parkway, Suite 390, Indianapolis, Indiana 46280. Telephone No. (317) 575-5900. See "The Company." DESCRIPTION OF SECURITIES. The Corporation is authorized to issue Fifty Million (50,000,000) Common Shares, $.001 par value. The Corporation authorized a dividend to shareholders of record as of May 15, 1995 of 250 Class A Convertible Preferred Shares ("Class A Preferred") and 800 Class B Convertible Preferred Shares (Class B Preferred"). The Class A Preferred shall be convertible at a rate of 1,000 shares of common stock for each share of Class A Preferred. Conversion will be authorized upon the first fiscal year that the Corporation attains at least $1,000,000 in audited after tax profits. Class B Preferred shall be convertible at a rate of 1,000 shares of common stock for each share of Class B Preferred. The Class B Preferred shall be convertible upon completion of the first fiscal year that the Corporation attains audited after tax profits of at least $3,000,000. See "Certain Transactions" and "Description of Securities." During September, 1995, the Corporation authorized 1,000 Class C Preferred Shares. Each Class C Preferred Share is convertible, after four months from the purchase date, into 100 Common Shares and One "A" Warrant to purchase 10 additional Common Shares at $5.00 per share. The Class C Preferred Stock is not entitled to voting rights or dividends. There are currently 700 Class C Preferred Shares issued and outstanding. See "Description of Securities." Additionally, the Board of Directors of the Corporation authorized a dividend distribution of 200,000 A Warrants on a pro rata basis to the shareholders of record as of May 15, 1996. The A Warrants shall be exercisable for a period of two years from the effective date of the registration statement. The A Warrants shall be exercisable into Common Shares of the Corporation at the exercise price of $5.00 per Common Share. See "Description of Securities" and "Certain Transactions." THE DISTRIBUTION. Securities Being Distributed 65,000 shares of the Company's Common Stock. Purpose of Distribution To enhance the Company's ability to raise additional capital, if necessary, in the future. Shares of Common Stock Outstanding After Distribution 1,329,100 shares of Common Stock. Distributing Company Pratt, Wylce & Lords, Ltd., a Nevada corporation. Distribution Ratio One share of Common Stock for every Forty shares of Pratt Common Stock owned of record on May 31, 1996 (the "Record Date"). See "The Distribution." USE OF PROCEEDS The securities to which this Prospectus relates are being distributed to holders of Pratt Common Stock as a dividend and neither the Company nor Pratt will receive any cash or other proceeds in connection with the Distribution. Additionally this Prospectus relates to securities being registered on behalf of selling securityholders and the Company will not receive any cash or other proceeds in connection with the subsequent sale. Any proceeds received from the subsequent exercise of the A Warrants shall be used as working capital and to expand operations. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000948069_cutter_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000948069_cutter_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..657ceac8427797220f64c8eb4104d780b5ec7747
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000948069_cutter_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS INCLUDES FORWARD LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS AND UNCERTAINTIES AND ACTUAL RESULTS MAY DIFFER MATERIALLY. SEE "RISK FACTORS." UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. THE COMPANY The Company designs, sources and markets its distinctive Cutter & Buck brand sportswear and outerwear predominantly through golf pro shops and resorts, upscale men's specialty stores and corporate sales accounts. The Company has developed a colorful, innovative collection of sportswear apparel targeted to the affluent 30- to 55-year-old men's market, projecting an updated American traditional design evocative of a sporting lifestyle. The products' high-quality fabrics and detailing reinforce the premium image of the brand while the generous fit provides a feeling of comfort and versatility. Product marketing connected with sports and leisure activities, particularly golf, helps the Company create a positive lifestyle image that contributes to the brand's strong appeal for its target consumers. The Company benefits from the trend toward greater acceptance of relaxed standards of dress in the workplace that results in sportswear representing a growing portion of consumer wardrobes. Since its formation on January 5, 1990, the Company has achieved consistent annual sales increases, realizing net sales of $21.6 million and net income of $1.0 million in fiscal 1996, and net sales of $8.0 million and net income of $142,000 in the first quarter of fiscal 1997. The key elements of the Company's strategy to enhance its reputation as a leading, premium brand in the men's sportswear apparel market are to: (i) reinforce the desirability and prestige of the Cutter & Buck brand by blending innovative design with extensive detailing and high-quality product construction in fresh variations season to season while maintaining its signature design identity; (ii) expand distribution of its products through golf pro shops, where the Company believes its time-constrained target consumers are likely to shop before and after playing golf; and (iii) merchandise its products, including knit and woven sport shirts, pants, shorts, sweaters, sweatshirts, outerwear and caps, in its customers' stores as a collection rather than as isolated categories. The Company currently offers its customers two collections a year, spring and fall, composed of FASHION and complementary CLASSIC products. FASHION products incorporate the latest innovations in color, fabric and styling and tend to remain in the line for only one season. CLASSIC products are predominantly solid-color garments with multi-season appeal. The Company presents each season's collections to its customers in three or four groups of distinct, coordinated merchandise. These groups are available for delivery to customers during sequential time periods, typically from May to October for fall collections and from November to April for spring collections. To enhance consistency, quality and on-time delivery of its products, the Company works with a select group of high-quality, reliable foreign and domestic contract manufacturers that are knowledgeable and experienced in the intricate design and manufacturing processes required to produce the Company's products. "CUTTER & BUCK" and the Cutter & Buck pennant logo are registered trademarks of the Company. All other trademarks appearing in this Prospectus are the property of their respective holders. The Company is incorporated in Washington. Its executive offices are located at 2701 First Avenue, Suite 500, Seattle, Washington 98121, and its telephone number is (206) 622-4191. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company............... 1,300,000 shares Common Stock offered by the Selling Shareholders..................................... 100,000 shares Common Stock to be outstanding after this offering......................................... 4,968,241(1) Use of proceeds................................... For working capital purposes, including repayment of all outstanding borrowings under the Company's revolving line of credit and increases in inventory and trade receivables. See "Use of Proceeds." Nasdaq National Market symbol..................... CBUK </TABLE> SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> THREE MONTHS FISCAL YEAR ENDED APRIL 30, ENDED JULY 31, ----------------------------------------------------- -------------------- 1992 1993 1994 1995 1996 1995 1996 --------- --------- --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Net sales............................. $ 5,405 $ 8,036 $ 9,882 $ 13,435 $ 21,645 $ 3,305 $ 8,000 Gross profit.......................... 1,319 2,045 3,438 4,675 7,981 1,228 2,980 License and royalty income............ -- 39 285 497 457 116 96 Net income (loss)..................... $ (730) $ (538) $ 101 $ 239 $ 996 $ (63) $ 142 Net income (loss) per share........... $ 0.05 $ 0.12 $ 0.29 $ (0.02) $ 0.04 Shares used in computation of net income (loss) per share (2).......... 1,933 2,034 3,476 2,539 3,941 </TABLE> <TABLE> <CAPTION> JULY 31, 1996 ------------------------- ACTUAL AS ADJUSTED(3) --------- -------------- <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Working capital....................................................................... $ 12,065 $ 28,220 Total assets.......................................................................... 19,736 33,821 Short-term debt (4)................................................................... 2,148 77 Long-term debt........................................................................ 337 337 Total shareholders' equity............................................................ 14,175 30,330 </TABLE> - ------------------------------ (1) Based on shares outstanding as of July 31, 1996. Excludes 270,574 shares of Common Stock reserved for issuance pursuant to the Company's 1991 Stock Option Plan (the "1991 Plan"), 208,140 shares of Common Stock reserved for issuance pursuant to the Company's 1995 Employee Stock Option Plan (the "1995 Plan"), 46,253 shares of Common Stock reserved for issuance pursuant to the Company's 1995 Nonemployee Director Stock Incentive Plan (the "1995 Director Plan"), and 248,474 shares of Common Stock reserved for issuance pursuant to the Company's 1995 Employee Stock Purchase Plan (the "Stock Purchase Plan"). As of the date of this Prospectus, the Company has granted options for an aggregate of 409,822 shares of Common Stock under these plans at a weighted average exercise price of $5.11 per share. Also excludes 131,531 shares of Common Stock reserved for issuance pursuant to outstanding warrants with an exercise price of $8.40 per share granted in connection with the Company's initial public offering. See "Management -- Benefit Plans," "Description of Capital Stock" and Note 10 of Notes to Consolidated Financial Statements. (2) The basis for determining the number of shares used in computing net income (loss) per share is described in Note 1 of Notes to Consolidated Financial Statements. (3) Adjusted to give effect to the anticipated application of the estimated net proceeds to the Company of this offering based on the assumed public offering price of $13.625 per share. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000948456_uroquest_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000948456_uroquest_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f2709fb686dedf774a261032a6bd964406b99bf1
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000948456_uroquest_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Financial Statements and notes thereto appearing elsewhere in this Prospectus, including the information under "Risk Factors." Except as set forth in the Financial Statements or as otherwise indicated, all information in this Prospectus (i) assumes the Underwriters' over-allotment option is not exercised, (ii) reflects the Company's reincorporation in October 1996 in the State of Delaware (the "Reincorporation"), (iii) assumes a 1-for-3.5 reverse stock split of the outstanding shares of Common Stock and Preferred Stock of the Company and the conversion of all outstanding shares of Non-Voting Common Stock into Common Stock effected in connection with the Reincorporation, (iv) assumes the filing of the Company's Restated Certificate of Incorporation, authorizing a class of 16,000,000 shares of undesignated Preferred Stock, which will be effective upon the closing of this Offering, (v) gives effect to the conversion of all outstanding shares of Preferred Stock into Common Stock upon the closing of this Offering, (vi) assumes the exercise of warrants to purchase a total of 1,428,571 shares of Common Stock by certain of the Company's stockholders upon the closing of this Offering, and (vii) assumes consummation of the proposed acquisition of BMT, Inc. upon the closing of this Offering. See "Description of Capital Stock," "Capitalization," "Underwriting" and "Acquisition of BMT." This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in such forward-looking statements as a result of certain factors discussed under "Risk Factors" and elsewhere in this Prospectus. On-Command(R) is a registered trademark of the Company. This Prospectus also includes trademarks of companies other than the Company. THE COMPANY UroQuest Medical Corporation (the "Company") was formed to design, develop and market advanced products for the management and diagnosis of both male and female urological disorders. The Company's principal product, the On-Command Catheter, is an endourethral (inside the urethra) catheter incorporating a proprietary anchoring system and a proprietary patient controlled, magnetically activated valve used to regulate urine flow. The On-Command Catheter is designed to enable persons with either urinary incontinence or urinary retention to manage their condition without the restricted mobility, medical complications, discomfort and embarrassment generally associated with many of the existing management alternatives, including intermittent, Foley, external and suprapubic catheters, diapers and absorbents, and penile clamps. Clinical trials of the On-Command Catheter have demonstrated the utility of the device in managing male urinary outflow disorders. The results of the clinical trials showed an overall symptomatic urinary tract infection rate of less than 3% for all device insertions during the trials. This rate is significantly lower than the rate of infection generally associated with the use of Foley catheters. See "Business -- Urinary Incontinence." Of the patients included in the trials, approximately 90% found the Male On-Command Catheter maintained continence and was comfortable to wear and easy to use. Urinary outflow dysfunction, or voiding disorders, affects at least 13 million people in the United States, including approximately three million men and ten million women. The Company believes the incidence of urinary outflow dysfunction in other developed countries is also significant. Urinary outflow dysfunction is a problem that affects a large number of both institutionalized (nursing home and hospital care) and community-dwelling individuals, and can be characterized as either incontinence or retention. Urinary incontinence is the inability to control one's urinary function, leading to frequent involuntary urine leakage from the bladder. Urinary retention is the inability to voluntarily and spontaneously empty one's bladder, preventing urine flow even though the bladder continues to fill. More than 50% of the estimated 1.5 million nursing home patients have voiding disorders. Additionally, in contrast to the widely-held notion that voiding disorders are primarily a problem of the institutionalized elderly, a 1986 National Institute on Aging study indicated that 30% of the estimated 40 million community-dwelling population between the ages of 60 to 84 also suffer from some form of urinary outflow dysfunction. The cost associated with the treatment and management of voiding disorders is estimated to exceed $16 billion annually in the United States alone. Despite the development of new treatment options, a recent survey conducted by the National Association for Continence indicated that approximately 56% of treatments for urinary outflow dysfunction produced no improvement or made the patients' conditions worse. Therefore, the majority of sufferers must live with the numerous problems associated with these disorders and seek acceptable management modalities for their symptoms. Clinical trials of the Male On-Command Catheter have been conducted at eight sites in the United States under an Investigational Device Exemption ("IDE") application approved by the United States Food and Drug Administration (the "FDA"). Through August 31, 1996, 70 patients had received a total of 223 male devices, with indwelling periods ranging from three days to 64 days, with an average indwelling period of 25 days per device insertion. The longest trial period on any patient was 32 months, with the patient receiving a total of 30 device insertions. The results, while promising, are preliminary and additional clinical testing is required before any definitive conclusions can be reached concerning the general use of the On-Command Catheter. Consequently, the Company is preparing to conduct a controlled, randomized clinical study under an approved IDE application at three sites that have received Institutional Review Board ("IRB") approval. The predicate device to be used in connection with the study is the Foley catheter. The Company expects to complete the study, which has a targeted enrollment of 60 male patients, in the first quarter of 1997. An IDE application for the Female On-Command Catheter was approved in March 1996 and the Company has obtained IRB approval at two investigational sites and is conducting a non-randomized pilot evaluation prior to initiating a controlled, randomized study. The Company expects to initiate clinical evaluation of the Male On-Command Catheter in Europe pursuant to an arrangement with B. Braun Biotrol S.A. ("Braun"), a Europe-based multinational medical device company. Braun plans to conduct the evaluation and to prepare the necessary regulatory filings in 16 European countries. The clinical evaluation of the Male On-Command Catheter in Europe is expected to begin by the end of 1996 at a total of six investigational sites in France, Germany and Spain. The Company intends to market the On-Command Catheter directly in the United States to physicians and their patients while using marketing collaborations for institutional and international markets. Medical association estimates indicate that there are approximately 9,000 urologists and uro- gynecologists in the United States whom the Company expects to address with a relatively small direct sales force consisting of approximately 20 individuals by the year 1999. The Company anticipates that the On-Command Catheter will be marketed internationally through Braun and other marketing partners and distributors following required clinical testing and necessary regulatory approval. In June 1996, the Company entered into a definitive agreement to acquire BMT, Inc. and its wholly owned subsidiary, Bivona, Inc. (collectively, "BMT"). BMT designs, develops, manufactures and markets a line of proprietary silicone medical device products as well as provides engineering design, development and manufacturing services for silicone products on an OEM basis for other medical device companies. BMT is one of a limited number of specialty manufacturers of silicone catheters in the United States. BMT has been a contract manufacturer for the Company since June 1994 and has manufactured approximately 2,100 Male On-Command Catheters. The acquisition will be effected through a merger of BMT with and into an acquisition subsidiary of the Company pursuant to which shareholders of BMT will receive, in the aggregate, a combination of $10 million cash and 2,500,000 newly issued shares of Common Stock. The acquisition will enable the Company to control its own production source while providing necessary capacity and flexibility in the manufacturing process, as well as expand the Company's limited product line and experience which has focused primarily on the On-Command Catheter. The product development and production expertise of BMT is also anticipated to be utilized by the Company to develop additional On-Command Catheter products and other new devices related to the management and diagnosis of urological disorders.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000948556_united_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000948556_united_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..46ca72278b0f5d958fbfc3384a05b0a69395048e
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0000948556_united_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. See "Disclosure Regarding Forward-Looking Statements." THE COMPANY UDC is a managed dental benefits company that is licensed to operate prepaid dental plans in 25 states and, as of June 30, 1996, provided dental coverage to approximately 1,175,000 members. The Company offers a comprehensive range of prepaid dental plans capable of meeting the needs of employer groups of all sizes as well as individuals. UDC's dentist networks, as of June 30, 1996, consisted of approximately 3,000 general dentists as well as specialist dentists providing a broad range of dental services. The Company markets its services through multiple distribution channels, including a direct sales force of over 70 persons, independent brokers and third-party arrangements with medical health maintenance organizations ("HMOs"). The Company recently entered into agreements to acquire five managed dental benefits companies and a multi-state dental referral plan having approximately 500,000 members in the aggregate at June 30, 1996. See "Pending and Recent Acquisitions." Managed dental benefits plans are usually offered as an alternative to traditional dental indemnity insurance, although the Company has the capability of offering dual choice plans that provide both prepaid and indemnity plans. Industry sources report that prepaid dental plans are typically priced 20% or more below comparable indemnity benefits based on 1992 indemnity-industry statistical information. Prepaid dental plans are offered by employers to employees frequently on a voluntary-participation basis with all or part of the premium being paid by the employee. At the time of enrollment, participating employees and dependents become members of the prepaid dental plan and, under most of the Company's plans, each member is entitled to select his or her own dentist from the dentist network. The Company pays the network dentist a fixed monthly amount, or capitation payment, for each member who selected that dentist, regardless of the services rendered in any particular month. In addition, the dentist is paid a separate fee, or copayment, by the member at the time of service for many of the dental services covered under the plan. Under the prepaid dental plans of the Company, virtually all covered dental services are provided through these capitation arrangements, in which the Company bears little financial risk for either utilization levels or cost of services. Based on data compiled by the U.S. Office of National Health Statistics, total expenditures for dental care in the United States grew from approximately $14.4 billion in 1980 to approximately $43.2 billion in 1993. The number of people with dental benefits was estimated by the National Association of Dental Plans to be approximately 125 million in 1995, of which approximately 16% were covered under a prepaid dental plan. Prepaid dental plans have reportedly grown from approximately 10.4 million covered members in 1991 to an estimated 19.5 million in 1995, an annual compounded growth rate of approximately 17.0%. The Company believes the relatively high growth rate for prepaid dental plans is attributable to: (i) the greater acceptance of managed care by employers and employees; (ii) the significant price advantage of prepaid dental plans relative to indemnity plans; (iii) the cost effectiveness to employers of prepaid dental plans as an employee benefit; and (iv) the growing acceptance of capitated dental plans by dentists, resulting in improved accessibility and convenience for members. The Company believes there will continue to be significant growth for the managed dental benefits industry. The Company's objective is to be the leading managed dental benefits company in the United States by both increasing its market share in its current markets and selectively entering new markets. The Company believes this objective can be achieved by: (i) offering a full range of prepaid dental plan benefits designed to meet the needs of small and large employers as well as individuals; (ii) ensuring quality dental care through a locally managed network of private practice dentists; (iii) utilizing multiple distribution channels to access single-market and multi-state employer groups and members of third-party HMOs; (iv) providing high levels of customer service through local service representatives and regional customer service centers; and (v) acquiring other managed dental benefits companies. Unless the context otherwise requires, references in this Prospectus to "UDC" or the "Company" refer to United Dental Care, Inc. and its subsidiaries. The Company's executive offices are located at 14755 Preston Road, Suite 300, Dallas, Texas 75240, and its telephone number is (972) 458-7474. PENDING AND RECENT ACQUISITIONS The Company recently entered into definitive agreements to acquire five managed dental benefits companies operating prepaid dental plans in New Jersey, Florida, Oklahoma, Missouri, Kansas and Michigan having approximately 440,000 members in the aggregate at June 30, 1996. In addition, the Company recently entered into a definitive agreement to acquire a company operating a multi-state dental referral plan having approximately 60,000 members at June 30, 1996. The companies to be acquired had combined revenues of approximately $35.9 million for the year ended December 31, 1995 and $21.3 million for the six months ended June 30, 1996. Upon completion of the acquisitions, the Company will be licensed to operate prepaid dental plans in four additional states and will be licensed to operate an indemnity plan in one additional state. The acquisitions are subject to various conditions, including receipt of regulatory approvals. There can be no assurance as to whether or when such acquisitions will be completed. The proposed acquisitions are referred to in this Prospectus as the "Pending Acquisitions." Effective February 1, 1996, the Company acquired Associated Health Plans, Inc., a managed dental benefits company that operated prepaid dental plans in Arizona having approximately 220,000 members at the time of the acquisition, and an affiliated management company (collectively, "AHP"). Effective November 1, 1995, the Company acquired U.S. Dental Management, Inc. ("US Dental"), a managed dental benefits company that operated prepaid dental plans in Arizona, New Mexico, Nebraska and Colorado having approximately 163,000 members at the time of the acquisition and that administered a prepaid dental plan owned by a third party in Nevada. See "Pending and Recent Acquisitions."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000949301_speedfam_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000949301_speedfam_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and the Company's consolidated financial statements appearing elsewhere in this Prospectus. Unless the context otherwise requires, the "Company" and "SpeedFam" refer only to SpeedFam International, Inc. and its wholly owned subsidiaries. THE COMPANY SpeedFam designs, develops, manufactures, markets and services high throughput precision surface processing systems used in the fabrication of thin film memory disk media, semiconductor wafers, general industrial components and, more recently, semiconductor devices through chemical mechanical polishing, or "CMP." In addition, the Company markets and distributes polishing liquids (or slurry) and parts and expendables used in its customers' manufacturing processes. The Company's array of processing systems includes polishing, grinding, lapping and pre-deposition cleaning equipment. The process steps performed by the Company's equipment are an integral part of and occur repeatedly throughout the fabrication cycles of thin film memory disk media, semiconductor wafers and advanced semiconductors. Major customers of the Company include AMD, Akashic, Digital Equipment, Hewlett-Packard, HMT, IBM, Komag, MEMC, Mosel Vitelic, Motorola, Rockwell International, Seagate, Siemens, Siltec, StorMedia and Wacker Siltronic. Semiconductor and thin film memory disk manufacturers are rapidly adopting new technologies in response to increasing demand by end users for improved system performance and processing capacity and new features in computing and other electronics applications. Semiconductor device manufacturers are producing devices with smaller geometries and multi-level metal processes. Similarly, thin film memory disk media manufacturers are continually increasing the density of disk media by increasing coercivity (magnetic density) and reducing head flying heights in order to satisfy end user demand for greater storage capacity. In order to meet these evolving specifications, both semiconductor and thin film memory disk manufacturers must tighten tolerances and improve certain surface characteristics of their products. These tightened tolerances necessitate improvements in the semiconductor and thin film memory disk media manufacturing processes in order to increase planarity (flatness) and provide a number of new surface characteristics. The Company has recently developed a system for use in the CMP planarization of semiconductor devices. The Company's multiple head, two polishing table CMP system is designed to provide high throughput, low cost of ownership and attractive levels of process flexibility. The objective of CMP is to reestablish a flat or planar surface that has been degraded by prior deposition steps to a point where it is not possible or feasible to deposit additional levels without first restoring the surface to a planar condition. Reestablishing a planar surface allows semiconductor device manufacturers to produce denser, more complex devices by allowing the addition of a greater number of metal levels and can lead to significant yield and reliability improvements for the device manufacturer. Because of the depth of focus limitations of existing photolithography equipment, global planarization becomes particularly important for devices with design geometries of 0.35 micron or less and three or more metal levels. According to Dataquest Incorporated, the CMP polishing equipment market was estimated at $197 million in 1995 and it currently projects the market to be approximately $680 million in the year 2000. The Company's strategy is to establish and maintain market leadership in high throughput surface processing of thin film memory disk media, advanced semiconductors and other high value-added products. The Company employs dedicated business units focusing on the thin film memory disk media, semiconductor wafer and semiconductor device markets. The Company provides an entire processing solution including process expertise, training, cooperative development, slurry and expendables, along with equipment. During the Company's fiscal year ended May 31, 1995 and the nine months ended February 29, 1996, 54.5% and 75.0%, respectively, of the Company's total revenue was derived from the sale of capital equipment, parts and expendables (including commissions) and 45.5% and 25.0%, respectively, was derived from the sale of slurry and slurry components. The Company owns a 50% interest in SpeedFam Co., Ltd., a joint venture that conducts operations in the Far East (together with its subsidiaries and joint ventures, the "Far East Joint Venture"). Generally, the Far East Joint Venture designs, produces and markets in the Far East equipment similar to that produced by the Company in the U.S. The Far East Joint Venture, which the Company accounts for on the equity method, has had a substantial influence on the results of operations of the Company in the past. THE OFFERING <TABLE> <C> <S> Common Stock to be Offered: By the Company........................... 2,000,000 shares By the Selling Shareholders.............. 660,000 shares ----------- 2,660,000 shares Common Stock Outstanding after the Offering. 12,567,008 shares(1) Use of Proceeds............................. To fund the construction of a new manufacturing and office facility; to repay certain indebtedness; for working capital and general corporate purposes. See "Use of Proceeds." Nasdaq National Market Symbol............... SFAM </TABLE> SUMMARY CONSOLIDATED FINANCIAL INFORMATION (in thousands, except per share data) <TABLE> <CAPTION> YEAR ENDED MAY 31, NINE MONTHS ENDED ------------------------------ ------------------------- FEBRUARY 28, FEBRUARY 29, 1993 1994 1995 1995 1996 ------- ------- ------- ------------ ------------ <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENTS OF EARNINGS DATA: Total revenue.................................. $43,314 $51,381 $59,778 $40,039 $76,394 Gross margin................................... 10,842 12,436 14,284 8,742 24,913 Operating profit............................... 519 1,181 1,596 (653) 5,303 Interest expense............................... (824) (697) (959) (769) (615) Other income, net.............................. 433(3) 974 6 73 440 Income tax expense (benefit)................... 573 (160)(4) 186 (484) 2,002 Earnings (loss) from consolidated companies.... (445) 1,618 457 (865) 3,126 Equity in net earnings (loss) of affiliates(2). (45) 655 1,187 981 3,563 Net earnings (loss)............................ $ (490) $ 2,351 (5) $ 1,644 $ 116 $ 6,689 Net earnings (loss) per share.................. $ (0.06) $ 0.31 $ 0.20 $ 0.01 $ 0.68 Weighted average common and common equivalent shares outstanding............................ 7,615 7,619 8,146 8,148 9,790 </TABLE> <TABLE> <CAPTION> FEBRUARY 29, 1996 ---------------------- ACTUAL AS ADJUSTED(6) ------- -------------- <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Working capital......................................... $29,761 $ 60,563 Total assets............................................ 97,556 127,898 Long-term debt, less current maturities................. 2,783 692 Shareholders' equity.................................... 54,339 87,232 </TABLE> - -------- (1) Based on shares of Common Stock outstanding at May 31, 1996. Includes 52,140 shares issuable upon the exercise of certain stock options which are being exercised concurrently with this offering. Excludes an aggregate of 2,820,192 shares of Common Stock reserved for issuance under the Company's employee benefit plans, of which options to acquire 1,215,928 shares of Common Stock were outstanding at May 31, 1996. (2) Includes ($285,000), $450,000, $1,100,000, $880,000 and $3,397,000 million for the 1993 through 1995 fiscal years and the nine months ended February 28, 1995 and February 29, 1996, respectively, attributable to the Company's share of net earnings (loss) from the Far East Joint Venture, accounted for on the equity method. See "Joint Venture Arrangements," the consolidated financial statements of the Far East Joint Venture and the unaudited interim consolidated financial statements of the Company included elsewhere herein. The remainder represents the Company's share of net earnings (loss) from a separate joint venture. (3) Reflects charges of $300,000 related to the bankruptcy of a subsidiary operating in Switzerland. (4) Reflects income tax benefit of $740,000 related to the bankruptcy of a subsidiary operating in Switzerland. (5) Includes benefit of cumulative effect of accounting change of $78,000. (6) Adjusted to give effect to the sale of the 2,000,000 shares of Common Stock offered by the Company hereby (assuming a public offering price of $17.50 per share) and the application of the net proceeds therefrom, after deducting the estimated underwriting discounts and commissions and offering expenses payable by the Company. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000949699_pharmacycl_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000949699_pharmacycl_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..49d6e4b376a6be4d6c068a7529a66984a96b721b
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and Financial Statements and related notes appearing elsewhere in this Prospectus. Except as otherwise specified, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. This Prospectus contains, in addition to historical information, forward looking statements that involve risks and uncertainties. Investors should carefully consider the information set forth under the heading "Risk Factors." THE COMPANY Pharmacyclics, Inc. is developing patented pharmaceutical products designed to improve radiation and chemotherapy of cancer, enable or improve the photodynamic therapy of certain cancers and atherosclerotic cardiovascular disease, and enhance certain diagnostic imaging techniques. These products address significant market opportunities and are intended to enhance existing medical procedures and improve the ability of physicians to treat or manage life threatening and serious conditions. Such products are derived primarily from Pharmacyclics' core technology in designing and synthesizing small, ring-shaped molecules called expanded porphyrins, which bind metals in a way that allows the resulting molecules to capture and focus energy to perform specific therapeutic and diagnostic functions. The Company's proprietary expanded porphyrins ("texaphyrins") localize in cancer cells and atherosclerotic plaque where they can be exposed to forms of energy that activate the molecules to eliminate diseased tissue. The physical and chemical characteristics of the texaphyrin molecules are determined by the type of metal inserted into the ring and the form of energy applied to activate the molecule. For example, texaphyrins can be synthesized to focus and transform X-ray, chemical or light energy into other forms of energy capable of producing localized destruction of diseased tissue. This forms the basis for the use of texaphyrins as radiation sensitizers, chemosensitizers and photosensitizers. Lutetium-texaphyrin ("Lu-Tex") is being developed as a photosensitizing agent for use in photodynamic therapy of cancer and atherosclerosis, and gadolinium-texaphyrin ("Gd-Tex") is being developed for use as a radiation sensitizer and chemosensitizer. Lu-Tex is in multicenter Phase I clinical testing to evaluate its safety and efficacy in the treatment of certain invasive cancers which are accessible to illumination by externally applied light. Gd-Tex is currently in Phase I and multicenter Phase I/II clinical testing as a radiation sensitizer to improve the efficacy and safety of radiation therapy of certain cancers. Gd-Tex also is being developed to potentiate the activity of certain cancer chemotherapy drugs. Based on the Company's unique metal binding technology, it has developed GADOLITE(R) Oral Suspension product ("GADOLITE") for use as an oral contrast agent in patients undergoing magnetic resonance imaging ("MRI") of the abdomen or pelvis. In September 1995, the Company submitted a New Drug Application ("NDA") with the U.S. Food and Drug Administration ("FDA") for GADOLITE. The target markets for the Company's Gd-Tex product under development include cancer patients receiving radiation therapy or cytotoxic chemotherapy. Over seven million people in the U.S. today have been diagnosed with cancer. Of the approximately 1.3 million newly diagnosed cancer patients each year in the U.S., an estimated 50% are treated with radiation therapy as part of their disease management, and more than 350,000 patients per year receive cytotoxic chemotherapy. The target markets for the Company's Lu-Tex product under development for photodynamic therapy include both patients with cancer and patients with atherosclerosis. Photodynamic therapy is an emerging cancer treatment in which a photosensitizing drug is injected into the patient and light energy is applied to activate the therapeutic effects of the drug. Atherosclerosis, a progressive and degenerative vascular disease, is currently treated through surgery and other techniques, such as atherectomy and angioplasty procedures, aimed at removing or relieving the plaque buildup in blood vessels. Such procedures are currently performed on over 400,000 patients per year in the U.S. The worldwide market for imaging agents exceeded $3 billion in 1993, approximately $250 million of which was associated with MRI. The Company's strategy is to apply its core biometallic chemistry and expanded porphyrin technology to develop a diverse product portfolio. Pharmacyclics is leveraging its core technology and products by establishing relationships with third parties intended to augment its research and development activities and to provide manufacturing capacity and sales and marketing capabilities. To date, the Company has retained worldwide marketing rights for its therapeutic products. The Company also dedicates significant resources to build and protect its intellectual property rights in the U.S. and abroad. In the United States, the Company owns or has exclusive rights to 23 issued patents, 12 allowed patent applications and 41 pending patent applications covering various aspects of its core technology and products under development. Outside the United States, the Company is the owner or exclusive licensee of four counterpart patents, one allowed and 42 pending patent applications.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0000949957_aearo-corp_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0000949957_aearo-corp_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..3e00c09d3c5b4fb2c8702ab877a272988f907ae1
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. As used in this Prospectus, unless the context otherwise requires, references to "Aearo" or the "Company" mean Aearo Corporation together with its wholly-owned subsidiary, Aearo Company (the "Subsidiary"), and all other direct and indirect subsidiaries and the businesses of the Company's predecessors, but only to the extent that such businesses were the subject of the Formation Acquisition (as defined in this Prospectus). Unless otherwise indicated (i) references to financial or operating results of the Company occurring in any fiscal year are to the twelve months ended on September 30 of such indicated fiscal year, and (ii) the information in this Prospectus assumes no exercise of the over-allotment option granted to the Underwriters and gives effect to an 80 for 1 stock split effected on July , 1996. In May 1996, Cabot Safety Holdings Corporation changed its name to Aearo Corporation. THE COMPANY The Company is one of the leaders in the hearing, eye, face, head and respiratory protection segments of the personal protection equipment ("PPE") market worldwide through its safety products operating unit ("Safety Products"), which manufactures and sells hearing protection devices, prescription and non-prescription safety eyewear, face shields, reusable and disposable respirators, hard hats and first aid kits in more than 85 countries under its well-known brand names: AOSafety, E-A-R, Eastern and Peltor. Personal protection equipment encompasses all articles of equipment and clothing worn for the purpose of protecting against bodily injury, including safety eyewear and goggles, ear muffs and ear plugs, respirators, hard hats, gloves, safety clothing and safety shoes. With the acquisition of Peltor AB of Sweden, the Company is a global leader in the industrial market for specialty communications ear muffs. Safety Products accounted for approximately 84% of the Company's net sales in fiscal 1995. The Company attributes its leading market positions to: - Strong, well-recognized brand names - A reputation for providing innovative, quality products - Intensive coverage of multiple distribution channels targeting a wide array of end-users - One of the industry's broadest product offerings - A commitment to providing the highest level of customer service Through its specialty composites operating unit ("Specialty Composites"), the Company manufactures a wide array of energy-absorbing materials which are incorporated into other manufacturers' products to control noise, vibration and shock. Specific product applications for such materials include noise-reducing and vibration-dampening matting used in the lining of transportation equipment such as heavy truck cabs, shock protection parts for electronic devices such as computer disk drives, and durable energy-absorbent and cushioning foams used in footwear. Specialty Composites also produces specially formulated foam used in the manufacture of Safety Products' polyvinylchloride ("PVC") ear plugs. Specialty Composites accounted for approximately 16% of the Company's net sales in fiscal 1995. A 1996 industry study prepared by Frost & Sullivan estimates the size of the U.S. segment of the PPE market in which the Company competes (which excludes safety clothing, gloves and shoes) was approximately $1.0 billion in 1995. Management estimates annual sales outside the United States for the segment of the PPE market in which the Company competes were in excess of $1.0 billion in 1995. Historically, a large number of relatively small, independent manufacturers with limited product lines served the PPE market and the industry remains highly fragmented. (INSIDE FRONT COVER) AEARO CORPORATION... A GLOBAL MANUFACTURER OF A BROAD RANGE OF NAME-BRAND PERSONAL PROTECTION EQUIPMENT... (four-color photo of a broad selection of our products; CSC safety, Peltor and S/C.) Aearo Corporation is one of the world's leading manufacturers and marketers of a broad range of personal protection equipment and energy-absorbing polymer materials. The Company's personal protection products, which are marketed under the brand names AOSafety, E-A-R, Peltor and Eastern are available through a worldwide network of consumer and industrial distribution channels. These products are sold in 85 different countries and are used by industrial workers, healthcare providers, construction workers, the military and consumers throughout the world. The Company's unique energy-absorbing resins, which are marketed under the E-A-R Specialty Composites brand, are custom designed and formulated for a wide variety of OEM applications in the communications, transportation, medical, and recreational markets. (TWO-PAGE FOLD-OUT) ...SOLD THROUGH MULTIPLE DISTRIBUTION CHANNELS TO A WIDE VARIETY OF END-USERS WORLDWIDE. (Channel of distribution diagram.) One of Aearo Corporation's primary strengths is its multiplicity of distribution channels in its safety product business. The Company's broad range of personal protection equipment is available through industrial and safety distributors; home centers, hardware stores, drug stores, and sporting good stores; healthcare distributors; farm supply outlets; catalogs; and a worldwide network of international distributors. The Company believes no other competitor has such a broad and diverse distribution system for its products. (Application photos: Applications should show a variety of industrial, consumer, construction, and agricultural applications with people wearing combinations of hearing protection, eyewear, face shields, head protection, respiratory protection, prescription eyewear) Management believes the primary factors driving the growth of the PPE market are: - Increased employer safety awareness. Management believes that employers are increasingly aware of the rising cost of insurance, the costs and liabilities relating to worker injury and the savings in insurance costs and workers' compensation payouts that can be achieved through consistent use of effective PPE - Continued regulatory enforcement and compliance. Increases in regulatory enforcement and compliance programs through various government agencies (e.g., OSHA, MSHA and NIOSH) could result in significant growth in demand for PPE - Increased user acceptance. Through improvements in comfort, performance and styling, management believes employees will be more likely to use safety products regularly, thereby increasing regulatory compliance and reducing risk of injury - Market expansion opportunities. Management believes significant growth opportunities exist in retail home centers and mass merchandisers which offer a variety of PPE for the consumer/Do-It-Yourself ("DIY") market, and the catalog supply, healthcare and international markets OPERATING STRATEGY The Company's goal is to become the leading safety products company in the world. The Company's strategy to achieve this goal has three components: - Increase market share and profitability through innovative new product development - Increase unit sales through focused sales and marketing programs to penetrate existing and newly developing distribution channels - Grow through strategic acquisitions worldwide INNOVATIVE NEW PRODUCT DEVELOPMENT. The Company believes that an innovative and disciplined new product development effort is critical to its success. The Company's strategy is to increase market share and profitability by focusing on both select, high-impact new products and enhancements to existing products to leverage its strong distribution network and well-recognized brand names. Acceptance of safety products by users, which increases regulatory compliance and reduces the risk of injury, is driven in large part by design improvements, which increase comfort, performance and styling. The Company's product managers work closely with research and development personnel to develop comfortable, high performance and stylish safety products, often incorporating proprietary materials and designs. FOCUSED SALES AND MARKETING PROGRAMS TO PENETRATE EXISTING AND NEWLY DEVELOPING DISTRIBUTION CHANNELS. The Company believes that its strength in managing multiple distribution channels gives it a strategic advantage over more narrowly focused competitors. The Company intends to continue to maximize penetration of existing distribution channels and to develop new channels. In existing distribution channels, the Company has developed and pursued several focused marketing programs, such as the Dialog distributor relations program, aimed at creating a mutually profitable relationship between the Company and a select group of distributors, and the Sales Specialist program, whereby the Company's trained sales representatives call directly on end-users on behalf of its Dialog distributors. The Company has targeted the growing catalog and telemarketing segment of the U.S. distributor market since its emergence. The Company has also implemented its Dispensing Manager Program in which it uses its own employee opticians to dispense prescription eyewear instead of depending on local contract opticians. The Company has aggressively pursued newly developing distribution channels such as consumer/DIY, healthcare and international. STRATEGIC ACQUISITIONS WORLDWIDE. The Company believes that the current structure of the global PPE market is likely to present numerous strategic acquisition opportunities. The Company will continue to focus on opportunities that offer one or more of the following three strategic advantages: - Extension of existing product categories - New product categories - Distribution strength RECENT ACQUISITIONS On May 30, 1996, the Company acquired Peltor AB and its subsidiaries ("Peltor") for approximately $86.0 million (the "Peltor Acquisition"). Peltor is the world's leading manufacturer of ear muff hearing protection devices and markets its products worldwide through safety and industrial distributors in the industrial, government, military and recreational markets. Peltor's headquarters and principal manufacturing facilities are based in Varnamo, Sweden, and Peltor has sales offices in Scandinavia, Germany, France, England and the United States. The Peltor Acquisition significantly broadens the Company's line of ear muff hearing protection devices and adds specialty muffs capable of two-way radio frequency communications and other high-end applications to the Company's product offerings. Management believes that the Peltor Acquisition further establishes the Company as the worldwide leader in all types of hearing protection and a leader in the speciality communications ear muff market. The Company financed the Peltor Acquisition with bank borrowings. See "Acquisition of Peltor." On January 3, 1996 the Company acquired all of the outstanding capital stock of Eastern Safety Equipment Co., Inc. ("Eastern") for approximately $7.8 million (the "Eastern Acquisition"). The Eastern Acquisition substantially increased the Company's market position in the consumer/DIY market by adding Eastern's strength with home centers and mass merchandisers to the Company's established position with hardware wholesalers and purchasing cooperatives. The Eastern Acquisition also added first aid kits as a new product category for the Company. OWNERSHIP In July 1995, Vestar Equity Partners, L.P. (together with certain related persons, "Vestar"), Cabot Corporation ("Cabot") and management effected through the Company the acquisition of substantially all of the assets and certain liabilities of Cabot CSC Corporation ("Old Cabot Safety Corporation"), a wholly-owned subsidiary of Cabot, and certain of its affiliates (the "Formation Acquisition") for $206.1 million. To finance the Formation Acquisition, the Company incurred $47.5 million of senior secured debt, sold $100 million of 12 1/2% senior subordinated notes due 2005 (the "Subordinated Notes"), issued to Vestar and Cabot an aggregate of $45 million of 12 1/2% redeemable preferred stock (the "Redeemable Preferred Stock"), and issued to Vestar, Cabot and certain members of management and key employees of the Company (collectively the "Management Investors") an aggregate of 8,000,000 shares of Common Stock. Of the proceeds from this offering (the "Offering") approximately $39.4 million will be used to prepay publicly traded Subordinated Notes and approximately $25.3 million will be used to redeem one half of the Redeemable Preferred Stock, including accrued dividends, held by Vestar and Cabot. See "Use of Proceeds." Cabot and Vestar have agreed, effective upon the consummation of the Offering, to exchange all of the remaining $25.3 million of Redeemable Preferred Stock, including $2.8 million of accrued dividends since July 1995, for shares of Common Stock at an exchange price equal to the initial public offering price of the Common Stock (1,807,142 shares based on an assumed initial public offering price of $14.00 per share, the mid-point of the range set forth on the cover page of this Prospectus) (the "Exchange Transaction"). See "Certain Relationships and Related Transactions -- The Formation Acquisition." After giving effect to the Offering and the use of proceeds therefrom and the Exchange Transaction, Vestar, Cabot and the Management Investors (without giving effect to shares of Common Stock issuable upon exercise of stock options) will own approximately 28.1%, 28.1% and 7.8%, respectively, of the outstanding Common Stock. <TABLE> The following table summarizes the sources and uses of funds related to the Formation Acquisition. For further details regarding the Formation Acquisition and related transactions see "Certain Relationships and Related Transactions -- The Formation Acquisition." <CAPTION> AMOUNT --------------------- (DOLLARS IN MILLIONS) <S> <C> SOURCES: Senior bank facilities................................... $ 48.6 Subordinated notes....................................... 100.0 Assumed debt............................................. 4.8 Common and preferred stock............................... 64.1 ------ Total................................................. $217.5 ====== USES: Acquisition consideration................................ $206.1 Transaction fees and expenses............................ 11.4 ------ Total................................................. $217.5 ====== </TABLE> <TABLE> The following table sets forth the investment of Vestar, Cabot and the Management Investors (without giving effect to stock options) in equity securities of the Company in connection with the Formation Acquisition, the effect of the Offering and the Exchange Transaction on their investment and the anticipated value of the Common Stock to be owned by them after the Offering. <CAPTION> MANAGEMENT VESTAR CABOT INVESTORS --------- --------- ---------- (DOLLARS IN MILLIONS) <S> <C> <C> <C> Initial investment in Common Stock..... $ 8.5 $ 8.5 $ 3.0 Initial investment in Redeemable Preferred Stock..................... 22.5 22.5 -- Accrued dividends...................... 2.8 2.8 -- --------- --------- --------- Total investment............... 33.8 33.8 3.0 Redeemable Preferred Stock redeemed in the Offering........................ (12.7)(1) (12.7)(1) -- --------- --------- --------- Remaining investment after Offering and Exchange Transaction, at cost....... $ 21.1(2) $ 21.1(2) $ 3.0 ========= ========= ========= Number of shares of Common Stock to be held after the Offering and Exchange Transaction......................... 4,303,571(3) 4,303,571(3) 1,200,000 Value of investment(4)................. $ 60.3 $ 60.3 $ 16.8 <FN> - ------------------------ (1) Includes approximately $1.4 million of accrued dividends. (2) Includes approximately $12.7 million, including $1.4 million of accrued dividends, on account of Redeemable Preferred Stock to be exchanged into Common Stock upon completion of the Offering. (3) Includes an assumed 903,571 shares to be issued upon exchange of $12.7 million of Redeemable Preferred Stock. (4) Based on an assumed initial public offering price of $14.00 per share, the mid-point of the range set forth on the cover page of this Prospectus. Includes shares to be acquired in the Exchange Transaction. </TABLE> DELEVERAGING PLAN The Offering is part of a deleveraging plan that the Company is implementing in order to reduce indebtedness and interest expense, improve operating and financial flexibility and increase common stockholders' equity. The deleveraging plan includes the following components: (i) the exchange of approximately $25.3 million of Redeemable Preferred Stock, including accrued dividends, into Common Stock; (ii) the use of approximately $39.4 million to redeem $35.0 million principal amount of the publicly traded Subordinated Notes at a redemption price equal to 112.5% of principal, plus accrued and unpaid interest; (iii) the use of approximately $25.3 million to redeem outstanding shares of Redeemable Preferred Stock, including accrued dividends since July 1995; and (iv) the reduction of borrowings under the Senior Bank Facilities with the balance of the net proceeds from the Offering. THE OFFERING Common Stock offered......................................... 5,500,000 shares Common Stock to be outstanding after the Offering(1)......... 15,315,142 shares Proposed New York Stock Exchange Symbol...................... AER --------------- [FN] (1) Excludes (i) 400,000 shares of Common Stock issuable upon exercise of outstanding stock options at an exercise price of $7.50 per share, none of which is exercisable as of the date of this Prospectus, (ii) 286,250 shares of Common Stock issuable upon exercise of outstanding stock options at an exercise price equal to the initial public offering price, none of which is immediately exercisable and (iii) an additional 513,750 shares of Common Stock reserved for future issuance pursuant to the Company's stock option plan. See "Management -- Employee Stock and Other Benefit Plans." USE OF PROCEEDS The net proceeds from the Offering, estimated to be approximately $70.3 million, will be used as follows: (i) approximately $39.4 million will be used to redeem $35.0 million principal amount of Subordinated Notes at a redemption price equal to 112.5% of principal, plus accrued interest; (ii) approximately $25.3 million will be used to redeem Redeemable Preferred Stock, including accrued dividends since July 1995; and (iii) the balance will be used to reduce bank debt. See "Use of Proceeds" and "Certain Relationships and Related Transactions."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001000188_enterprise_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001000188_enterprise_prospectus_summary.txt
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@@ -0,0 +1 @@
+SUMMARY This Prospectus contains certain statements of a forward-looking nature relating to future events or the future financial performance of the Company including statements contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Backlog." Prospective investors are cautioned that such statements, which may be identified by words including "anticipate," "believe," "intend," "estimates," "expect" and similar expressions, are only predictions and that actual events or results may differ materially. In evaluating such statements, prospective investors should specifically consider the various factors identified in this Prospectus, including the matters set forth under the caption "Risk Factors," which could cause actual results to differ materially from those indicated by such forward-looking statements. The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the financial statements and notes thereto appearing elsewhere in this Prospectus, including the information under "Risk Factors" beginning on page 6. THE COMPANY Enterprise is a healthcare information services company that develops, markets, installs and services an integrated suite of application software products that assist healthcare providers in managing their operations. These resource management systems focus on cost containment and address a broad range of non-clinical management needs, including materials management, operating room logistics, patient and staff scheduling and financial management. The Company's information systems operate on personal computer networks and make extensive use of electronic data interchange, enabling its customers to redesign their resource management functions to enhance efficiency and productivity. In recent years, governmental and market-driven reform initiatives have produced significant pressures on healthcare providers to control costs. In order to manage the economic risk of healthcare delivery, providers are being forced to change the way they operate and are increasingly focused on measuring and controlling the cost of delivering care. To date, there has been a lack of emphasis on integrated information systems that effectively manage operational costs, which the Company believes constitute a majority of providers' overall costs. Without the necessary information, it has been difficult for healthcare managers to allocate efficiently their resources--people, supplies, facilities, equipment and services--or to understand their costs. Enterprise has developed information systems that address the operational aspects of healthcare delivery. The Company offers an integrated suite of resource management systems that enable healthcare providers to (i) improve productivity through the redesign and automation of operational processes and (ii) obtain the information necessary to measure and control costs. The Company's current product offerings address materials management, operating room logistics, organization-wide patient and staff scheduling and financial management, areas which the Company believes offer significant opportunities for productivity improvement and cost savings. The Company's products are modular in design, share a common database, and may be used independently or bundled together in order to provide an integrated resource management system solution. The Company's business strategy is to strengthen its existing product lines and to expand into additional resource management areas. The Company believes a significant opportunity exists to penetrate further the market of approximately 2,900 large acute care hospitals and 3,100 small hospitals in the United States and Canada. Most of the Company's existing customers do not currently use the Company's entire product line. The Company believes that its high customer retention rate provides an opportunity to sell additional components of its product suite to its existing customers, which include approximately 1,000 acute care hospitals, of which approximately 270 were added as customers when the Company acquired the Matkon materials management division of Continental Healthcare Systems, Inc. in May 1996 (the "Matkon Acquisition"). Of those customers (other than customers of the Matkon division) which have purchased the Company's current products since January 1, 1991, approximately 97% remained customers at July 1, 1996. The Company also intends to expand its limited presence in alternate site markets, including outpatient clinics, ambulatory surgery centers and specialty laboratories. In addition, the Company has entered into joint marketing agreements with group purchasing organizations and hospital management organizations, which typically provide for the Company's products to be recommended on a preferred or exclusive basis. The Company intends to pursue similar agreements, joint ventures or other arrangements (which may include investments by the Company) with certain healthcare information system developers and resellers and certain medical product suppliers. The Company was organized under the laws of the State of Illinois in 1981 and was reincorporated in the State of Delaware in October 1995. The Company's principal executive offices are located at 1400 South Wolf Road, Wheeling, Illinois 60090-6524. The Company's telephone number is (847) 537-4800. RECENT DEVELOPMENTS On January 2, 1996, the Company entered into a distribution agreement with Total Care Technologies, Inc. to distribute a staff scheduling software product known as ESP for Windows. The agreement provides the Company with exclusive territorial rights in the United States healthcare market for an initial term of 26 months with the option to renew thereafter. On March 22, 1996, the Company entered into a license agreement with FlexiInternational Software, Inc. that allows the Company to incorporate the FLEXI general ledger and accounts payable applications into the Company's products for distribution in the United States healthcare market for an initial term of four years with the option to renew thereafter. On May 28, 1996, the Company completed the Matkon Acquisition for a cash purchase price of approximately $13.9 million. The Matkon division develops, markets, installs and services a line of hospital materials management software products which primarily run on a UNIX platform. The Company recorded charges of $8,453,000 in the quarter ended June 30, 1996 for acquired in-process technology in connection with the Matkon Acquisition. See "Recent Developments." THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Company.. 600,000 shares Common Stock Outstanding after the 8,119,581 shares(1) Offering............................ Use of Proceeds...................... For working capital and other general corporate purposes, including potential acquisitions and joint ventures. See "Use of Proceeds." Nasdaq National Market Symbol........ ESIX </TABLE> SUMMARY FINANCIAL DATA (in thousands, except per share data) <TABLE> <CAPTION> SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ------------------------------- ------------------------- PRO PRO FORMA FORMA 1993 1994 1995 1995(2) 1995 1996 1996(2) ------- ------- ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Revenues............... $20,427 $24,712 $33,248 $40,337 $14,440 $21,043 $24,522 Software development expenses.............. 4,237 6,377 7,536 8,973 3,376 4,043 4,783 Sales and marketing expenses.............. 4,455 5,984 8,832 10,078 4,249 5,507 6,224 Acquired in-process technology............ -- -- -- -- (3) -- 8,453 8,453 Total operating costs and expenses.......... 19,141 24,550 31,783 39,265 14,858 28,433 32,071 Income (loss) from operations............ 1,286 162 1,465 1,072 (418) (7,390) (7,549) Net income (loss)...... 749 28 800 478 (360) (4,277) (4,546) Net income (loss) per common share.......... $ 0.15 $ 0.01 $ 0.13 $ 0.08 $ (0.07) $ (0.57) $ (0.61) Shares used in calculation of per share data(4)......... 4,886 5,383 6,279 6,279 5,525 7,459 7,459 </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 ---------------------- ACTUAL AS ADJUSTED(5) ------- -------------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents............................... $ 2,601 $16,086 Working capital......................................... 20,427 33,912 Total assets............................................ 45,553 59,038 Total stockholders' equity.............................. 36,984 50,469 </TABLE> - -------- (1) Based on the number of shares outstanding as of September 1, 1996. Excludes 910,801 shares of Common Stock issuable upon the exercise of stock options outstanding as of September 1, 1996, at a weighted average exercise price of $11.13 per share, and 22,163 shares of Common Stock reserved for grant of future options or direct issuances under the Company's Long-Term Incentive Compensation Plan. See "Management--Compensation Pursuant to Plans." (2) Gives effect to the Matkon Acquisition as if it had occurred as of January 1, 1995. See "Consolidated Pro Forma Financial Information." (3) Does not reflect recorded charges of $8,453,000 in the quarter ended June 30, 1996 for acquired in-process technology in connection with the Matkon Acquisition. See "Recent Developments." (4) Computed on the basis described in Note 2 of Notes to Consolidated Financial Statements. (5) Adjusted to reflect the application of the estimated net proceeds from the sale of 600,000 shares of Common Stock offered by the Company hereby at an assumed public offering price of $24.3125 per share. See "Use of Proceeds." Unless otherwise indicated, all references to the "Company" or "Enterprise" refer to Enterprise Systems, Inc. and its wholly owned subsidiary. See "Description of Capital Stock--Recapitalization."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001000231_healthcare_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001000231_healthcare_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..eece274dfcc4a960ca09bd02d0e8b17a2419a82c
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the detailed information and Consolidated Financial Statements and related Notes thereto appearing elsewhere in this Prospectus. Prospective investors should consider carefully the information discussed under "Risk Factors." Unless otherwise indicated, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. See "Underwriting." References to "Common Stock" include associated preferred stock purchase rights (the "Rights") issuable pursuant to that certain Rights Agreement dated October 23, 1995 providing for the delivery of a Right along with each share of Common Stock issued by the Company. The Company is a leading provider of enterprise-wide clinical information management solutions to emerging integrated healthcare delivery networks ("IDNs"). The Company employs advanced technology to develop the software tools and applications that enable the creation of the computer-based patient record ("CPR") and enterprise-wide decision support systems while leveraging investments in existing information systems. The Company's tools, products and services provide enterprise-wide integration of information systems and indexing of patient records, clinical information integration and decision support at the point-of-care, and management decision support systems based upon access to comprehensive enterprise-wide clinical, financial and other information. The Company's solutions enable its customers to reduce the cost of delivering healthcare through increased productivity and to improve the quality of care through analysis of outcomes and continuous improvement of patient care processes. Over the past two decades, healthcare costs have risen dramatically relative to the overall rate of inflation. With increasing pressure to reduce costs, managed care organizations and other payers are shifting the economic risk of the delivery of care to providers through alternative reimbursement models, including capitation and fixed fees. In response to the changing reimbursement environment, healthcare organizations such as hospitals, multi-specialty physician groups, laboratories, pharmacies, home health services and nursing homes are integrating horizontally and vertically to create IDNs designed to serve all of the healthcare needs of local or regional populations while achieving economies of scale. In order for IDNs to lower healthcare delivery costs while improving the quality of patient care, they need access to detailed clinical and management information that enables providers within the IDN to (i) manage the patient care process across multiple delivery sites; (ii) analyze the appropriateness of diagnoses, treatments and resource utilization; (iii) compare provider performance and clinical outcomes; (iv) monitor performance under managed care contracts; (v) monitor practice patterns of providers; and (vi) support communications among members of the care team. An integral element of this process is the CPR, an electronic patient record that resides in a system specifically designed to support users by providing access to complete and accurate data, alerts, reminders, clinical decision support systems, links to medical knowledge and other aids. With the development of a CPR and related management decision tools, providers will have immediate on-line access to more comprehensive patient care information across multiple delivery sites to guide them in controlling healthcare costs, improving patient care and facilitating responsiveness to competitive and regulatory challenges in the healthcare market. The Company's tools, products and services directly address the healthcare industry's need for the creation of the CPR and decision support systems based on comprehensive, enterprise-wide clinical, financial and other information. The Company's solutions allow its customers to leverage investments in existing information systems, while developing the new capabilities required to implement and manage the emerging IDNs. The Company's use of advanced technology and an open architecture allows customers to employ best-of-breed technology strategies. The Company's tools, products and services fall into three broad areas, each of which represents a critical component of the computer-based patient record: (i) integration tools, which provide enterprise-wide communication and connectivity; (ii) clinical workstation tools, which bring clinical information to the providers at the point-of-care; and (iii) enterprise management tools, which create decision support systems based on comprehensive enterprise-wide clinical, financial and other information. The Company's goal is to become the leading provider of advanced clinical information solutions, performance tools and related services for the evolving healthcare market. The Company's primary strategies to achieve this goal are to (i) capitalize on the emergence of IDNs; (ii) focus on providing its customers with high-value solutions; (iii) expand its three-tiered distribution system; (iv) provide technologically advanced solutions premised upon an open architecture format; and (v) establish new lines of business through acquisitions or internal development. THE OFFERING Common Stock offered by the Company............................. 2,750,000 shares Common Stock to be outstanding after this Offering(1).................... 20,033,419 shares Use of proceeds..................... For satisfaction of a funding commitment to an affiliate, research and development, general sales and marketing, working capital and other general corporate purposes. See "Use of Proceeds." Nasdaq SmallCap Market Symbol....... HDIE Proposed Nasdaq National Market Symbol.............................. HDIE - --------------- (1) Excludes 2,843,462 shares of Common Stock issuable upon exercise of outstanding stock options, of which options to purchase 1,394,678 shares were exercisable on August 31, 1996, and 1,540,241 shares of Common Stock issuable upon conversion of the Company's outstanding convertible debenture due January 2, 1998. SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> INCORPORATION (JUNE 15, SIX MONTHS ENDED 1994) TO YEAR ENDED JUNE 30, DECEMBER 31, DECEMBER 31, ----------------- 1994 1995 1995 1996 ------------ ------------ ------- ------- <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue............................................. $ 153 $ 8,700 $ 3,753 $ 7,267 Gross profit........................................ 88 6,082 2,809 4,732 Operating earnings (loss)........................... (1,270) (8,953) (1,311) 601 Income tax (expense) benefit........................ -- 140 (45) -- Net earnings (loss)................................. (1,265) (9,983) (1,889) 366 Net earnings (loss) per share and common share equivalent........................................ $ (.08) $ (.64) $ (.12) $ .02 Weighted average number of common shares and common share equivalents outstanding..................... 15,500 15,653 15,500 18,689 </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 DECEMBER 31, ------------------------ 1995 ACTUAL AS ADJUSTED(1) ------------ ------- -------------- <S> <C> <C> <C> BALANCE SHEET DATA: Working capital............................................ $ 2,743 $ 2,498 $ 14,923 Total assets............................................... 21,734 22,168 34,593 Long-term debt, excluding current installments............. 5,382 5,306 5,306 Shareholders' equity....................................... 10,929 11,622 24,047 </TABLE> - --------------- (1) Adjusted to give effect to the sale of 2,750,000 shares of Common Stock offered hereby (at an offering price of $5.00 per share after deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company). See "Use of Proceeds" and "Capitalization." --------------------- The discussion in this Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed herein. Factors which could cause or contribute to such differences include, but are not limited to, those discussed in the sections entitled "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," as well as those discussed elsewhere in this Prospectus. Cloverleaf (TM) and COPPS(TM) are trademarks of Healthcare Communications, Inc. and Criterion Health Strategies, Inc., respectively. See "The Company."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001000297_traffix_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001000297_traffix_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..b7dfdb05b2d965bb3e86547d688d44baa4995c26
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and consolidated financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Each prospective investor is urged to read this Prospectus in its entirety. See "Risk Factors", page 6. THE COMPANY Quintel Entertainment, Inc. (the "Company") is engaged in developing and marketing telephone entertainment services, consisting primarily of live conversation and pre-recorded horoscopes and tarot card readings and live psychic and diet/nutrition consultations. The Company also offers enhanced voice-mail services which include various psychic, "personals" and other theme-related entertainment services. The Company's telephone entertainment services are accessed by dialing "900" telephone numbers that are billed at premium per-minute rates. Entertainment services consist primarily of live conversation and pre-recorded horoscopes and tarot card readings and live psychic consultations designed to capitalize on the current popularity of "new age" themes. "New age" refers to astrological and psychic phenomena which can be explained through the use of horoscopes, tarot card and psychic readings and prognostications. The Company currently markets approximately twenty "900" number entertainment services, each offering programs with distinct features. QUINTEL ENTERTAINMENT, INC. ----------------------- CROSS-REFERENCE SHEET ----------------- PURSUANT TO ITEM 501(b) OF REGULATION S-K FORM S-1 ITEM NUMBER AND CAPTION CAPTION IN PROSPECTUS - -------------------------------- --------------------- 1. Forepart of the Registration Outside Front Cover Page Statement and Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Inside Front and Outside Back Cover Pages of Prospectus Cover Pages 3. Summary Information and Risk Prospectus Summary; Risk Factors Factors 4. Use of Proceeds Use of Proceeds 5. Determination of Offering Outside Front Cover Page; Price Risk Factors; Plan of Distribution; Price Range of Common Stock and Dividend Policy 6. Dilution Not Applicable 7. Selling Security Holders Principal and Selling Security Holders 8. Plan of Distribution Outside Front and Outside Back Cover Pages; Inside Front Cover Page; Plan of Distribution 9. Description of the Securities Prospectus Summary; Price to be Registered Range of Common Stock and Dividend Policy; Description of Securities 10. Interest of Named Experts and Legal Matters; Experts Counsel 11. Information with Respect to the Prospectus Summary; Risk Registrant Factors; Use of Proceeds; The Company's live psychic entertainment services permit callers to engage in live one-on-one conversations with psychic operators and to receive personalized information responsive to the caller's requests. The Company also provides live tarot card entertainment services which permit callers to receive a live tarot card reading. Psychic Readers Network, Inc. ("PRN") currently provides the Company with substantially all of its psychic operators and monitors and supervises the quality of independent psychic operators provided to the Company. The Company pays PRN a per minute fee based on caller connection time. See "Certain Relationships and Related Transactions". The Company offers several pre-recorded entertainment services, including horoscopes, tarot card readings and numerology services. Some of such services contain interactive features which permit callers to access a variety of services by responding to pre-recorded messages, such as prompts for birthdates. The Company solicits consumers for its "900" number services by providing access to toll-free "800" numbers for subjects of general interest and as an introduction to the Company's "900" services. The Company's entertainment services are available by calling designated "900" numbers from any telephone, provided that "900 blocking" has not been ordered or imposed for such services from such telephone. Fees are billed by regional carriers on the customers' telephone statements. The Company also currently offers enhanced voice-mail services which provide customers with a network of theme-related entertainment services. The Company currently offers voice-mail networks which include astrological and psychic related entertainment services. These services, which include a variety of live and pre-recorded programs, newsletters and gifts are made available to each subscriber with his or her subscription to the Company's enhanced voice-mail network. For a monthly fee, subscribers are assigned personal voice mailboxes which can be used to communicate with other subscribers, friends and family. Voice mailboxes are accessed by dialing designated "800" numbers which are toll-free. Fees are billed on a monthly basis by regional carriers on the subscribers' telephone statements. Commencing in August 1994, the Company began offering entertainment services similar to those provided with its voice-mail services in a membership club format, pursuant to which members were enrolled in theme-related membership clubs and billed monthly for the term of their membership. In response to Capitalization; Price Range of Common Stock and Dividend Policy; Selected Financial Data of the Company; Capitalization; Shares Eligible for Future Sale; Management's Discussion and Analysis of Financial Condition and Results of Operations; Management; Business; Principal and Selling Security Holders; Executive Compensation; Certain Relationships and Related Transactions; Description of Securities 12. Disclosure of Commission Not Applicable Position on Indemnification for Securities Act Liabilities regional and local carrier constraints, the club format was changed to a voice mail services format. As enrollment in the Company's voice mail networks increased significantly, consumer complaints also increased, causing certain regional and local telephone carriers to discontinue billings. In response to actions by such carriers, the Company repositioned the marketing of the voice-mail network services ("VM Product"). See "Business - Increased Chargebacks and Regional Telephone Carrier Matters." The Company also continues to explore new billing platforms for its entertainment services in order to assure continued acceptance by telephone carriers in the future. In addition, the Company has taken several steps to expand its customer service operations. The Company has recently outsourced the majority of its customer service operations. In March 1995, the Company and PRN formed New Lauderdale L.C. ("New Lauderdale"), a Florida limited liability company, the successor to a joint venture established in December 1994, for the purpose of creating, developing and marketing theme-related membership clubs and related telephone entertainment services. On September 10, 1996, the Company acquired PRN's interest in New Lauderdale in consideration for 3,200,000 shares (the "PRN Shares") of Common Stock of the Company (the "Acquisition"), which shares are included in this Prospectus. Except for certain pro forma financial information, all financial information presented in this prospectus for periods and dates prior to September 10, 1996 represents the Company before the Acquisition, when the Company was only a 50% equity owner of New Lauderdale. The Company was incorporated under the laws of the State of Delaware in November 1993 under the name U.S. Teleconnect, Inc. The Company's executive offices are located at One Blue Hill Plaza, Pearl River, New York 10965, and its telephone number is (914) 620-1212. Unless otherwise indicated, all references in this Prospectus to the Company include Quintel Entertainment, Inc. and its wholly-owned subsidiaries. EXPLANATORY NOTE This Registration Statement contains two prospectuses. The first prospectus relates to the 3,200,000 shares issued to the shareholders of Psychic Readers Network, Inc. ("PRN"), Steven Feder, Thomas Lindsey and Peter Stolz, in connection with the acquisition (the "Acquisition") by a subsidiary of the Company (NL Corp.) of PRN's 50% interest in New Lauderdale, L.C., a Florida limited liability company, of which the Company's subsidiary, Calling Card Co., Inc., owned the remaining 50% interest (the "Prospectus"). The second prospectus (the "Alternate Prospectus") relates to 13,000 shares of the 25,000 shares issued to Feder, Kaszovitz, Isaacson, Weber, Skala & Bass, LLP, counsel to the Company, in consideration for services rendered in connection with the Company's December 1995 initial public offering. The Prospectus and the Alternate Prospectus are identical except that they contain different front cover and back cover pages, different information under the captions "Principal and Selling Security Holders" and "Legal Matters" and certain conforming modifications. THE OFFERING Securities Offered by the Selling Stockholders. . . . . . 3,200,000 shares. Common Stock outstanding as of the date hereof (including the 3,200,000 shares included in this Prospectus). . . . . . . . . . . 18,451,568 shares Use of Proceeds. . . . . . . . . The Company will not receive any proceeds from the sale of the shares. See "Use of Proceeds." Risk Factors . . . . . . . . . . An investment in the shares being registered hereby involves a high degree of risk. See "Risk Factors."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001000661_centerior_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001000661_centerior_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..f4fac127c57239981541cc467d3c4d93f0c53c54
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+Prospectus Summary; Originators/Initial Servicers; Description of the Pooling Agreement and the Series 1996-1 Certificates; Description of the Receivables Purchase Agreement 10. Interests of Named Experts and Counsel Legal Matters 11. Information with Respect to the Registrant Prospectus Summary; RISK FACTORS; Maturity Considerations; The Transferor; The Receivables; Description of the Pooling Agreement and the Series 1996-1 Certificates; Description of the Receivables Purchase Agreement; Certain Legal Aspects of the Receivables. 12. Disclosure of Commission Position on * Indemnification for Securities Act Liabilities </TABLE> ___________________________________ * Answer negative or item inapplicable PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the detailed information appearing elsewhere in this Prospectus. Reference is made to the Glossary for the location herein of the definitions of certain capitalized terms used herein. Securities Offered......... $150,000,000 __% Series 1996-1 Receivables-Backed Investor Certificates (the "Series 1996-1 Certificates" and together with the certificates of other series which may be issued from time to time, the "Investor Certificates"; with each holder of a Series 1996-1 Certificate being a "Series 1996-1 Investor" and each holder of an Investor Certificate being an "Investor"). See "Description of the Pooling Agreement and the Series 1996-1 Certificates." Issuer..................... Centerior Energy Receivables Master Trust (the "Trust"), a New York trust, is the issuer of the Series 1996-1 Certificates. The Trust, as a master trust, from time to time may issue other series of Investor Certificates (each, a "Series") pursuant to the Pooling and Servicing Agreement dated as of May 30, 1996 (the "Pooling Agreement"). Such other Series (i) may have terms significantly different from the Series 1996-1 Certificates and (ii) if required to be registered under the Securities Act, will be effected on one or more new registration statements. The assets of the Trust are expected to change over the life of the Trust as new Receivables are generated and as existing Receivables are collected, charged-off as uncollectible or otherwise adjusted from time to time. See "The Trust" and "Description of the Pooling Agreement and the Series 1996-1 Certificates -- New Issuances; Other Modifications." Transferor................. Centerior Funding Corporation (the "Transferor"), a Delaware corporation, is the transferor of the Receivables and originator of the Trust. The Transferor is a wholly-owned subsidiary of The Cleveland Electric Illuminating Company ("CEI"), an Ohio corporation. The Transferor is not permitted to engage in any activities except acquiring Receivables from the Originators, transferring Receivables and certain related assets to the Trust and certain activities incidental thereto. See "The Transferor." Trustee.................... Citibank, N.A., a national banking association (the "Trustee"). See "The Trustee." Originators................ CEI and The Toledo Edison Company ("TE"), an Ohio corporation, are the originators of the Receivables (each an "Originator," and together the "Originators"). CEI and TE are both wholly-owned subsidiaries of Centerior Energy Corporation, a public utility holding company ("Centerior Energy"). See "Originators/Initial Servicers." Servicers.................. Each of CEI and TE is responsible for servicing and making collections on all Receivables sold by it to the Trust. CEI has been designated as the initial Master Servicer. See "Originators/Initial Servicers." Trust Assets............... The Transferor agreed to purchase from the Originators from time to time until the termination of the Revolving Period pursuant to a Receivables Purchase Agreement, all Receivables existing as of May 30, 1996 (the "Cut-Off Date") and arising from time to time thereafter. Each of the Originators will remain liable for all representations, warranties, covenants and other obligations arising under the Receiv- INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, PRELIMINARY PROSPECTUS DATED JULY 3, 1996 PROSPECTUS DATED , 1996 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CENTERIOR ENERGY RECEIVABLES MASTER TRUST $150,000,000 % SERIES 1996-1 RECEIVABLES-BACKED INVESTOR CERTIFICATES The $150,000,000 % Series 1996-1 Receivables-Backed Investor Certificates (the "Series 1996-1 Certificates") offered hereby represent undivided interests in certain assets of the Centerior Energy Receivables Master Trust (the "Trust") created pursuant to a Pooling and Servicing Agreement among Centerior Funding Corporation, as Transferor (the "Transferor"), The Cleveland Electric Illuminating Company ("CEI") and The Toledo Edison Company ("TE") as Servicers (each an "Originator" under the Receivables Purchase Agreement described herein and a "Servicer" under the Pooling and Servicing Agreement), and Citibank, N.A., as Trustee (the "Pooling Agreement"). The Trust Assets include Receivables (as defined on page 4 below) transferred to the Trust under the Pooling Agreement, funds collected or to be collected in respect of such Receivables, any Enhancement (as defined on page 4 below) issued with respect to any series and monies on deposit in certain accounts of the Trust (the "Trust Assets"). Subject to certain conditions, the Transferor may offer other series of certificates, which series (i) may have terms significantly different from the terms of the Series 1996-1 Certificates offered hereby and (ii) if required to be registered under the Securities Act, will be effected on one or more new registration statements. Certain Trust Assets will be allocated to holders of the Series 1996-1 Certificates, including the right to receive a varying percentage of each month's collections with respect to the Receivables at the times and in the manner described herein. The Transferor will own the remaining interest in the Trust not represented by the Series 1996-1 Certificates and the other certificates issued by the Trust from time to time. Interest with respect to the Series 1996-1 Certificates will accrue from the date of issuance at the applicable interest rate and will be payable semiannually on January 15 and July 15 of each year, commencing on January 15, 1997 (or, if any such day is not a Business Day, the next succeeding Business Day). The Series 1996-1 Certificates will bear interest at % per annum. See "Description of the Pooling Agreement and the Series 1996-1 Certificates-Interest." Principal payments with respect to the Series 1996-1 Certificates are scheduled to commence on July 15, 2001 and, to the extent there are not sufficient funds to reduce the principal balance of the Series 1996-1 Certificates to zero, principal and interest payments will continue on the fifteenth day of each month thereafter until such principal has been paid in full (or, if any such day is not a Business Day, the next succeeding Business Day). Principal with respect to the Series 1996-1 Certificates may be paid earlier or later than such dates under certain limited circumstances described herein. See "Description of the Pooling Agreement and the Series 1996-1 Certificates -- Principal." Employee Benefit Plans and other investors subject to ERISA may be prohibited from acquiring or holding Series 1996-1 Certificates under certain circumstances. See "ERISA Considerations." PROSPECTIVE INVESTORS SHOULD CONSIDER THE FACTORS SET FORTH UNDER "RISK FACTORS" BEGINNING ON PAGE 14 HEREOF. THE SERIES 1996-1 CERTIFICATES WILL REPRESENT INTERESTS IN THE TRUST ONLY AND WILL NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE TRANSFEROR, THE SERVICERS OR ANY OF THEIR RESPECTIVE AFFILIATES. NEITHER THE SERIES 1996-1 CERTIFICATES NOR THE UNDERLYING RECEIVABLES OR ANY COLLECTIONS THEREON ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. <TABLE> <CAPTION> - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNDERWRITING PRICE TO DISCOUNT AND PROCEEDS TO PUBLIC(1) COMMISSIONS THE TRANSFEROR(2) <S> <C> <C> <C> - ------------------------------------------------------------------------------------------------------ Per Certificate..................... % 0.000000% % - ------------------------------------------------------------------------------------------------------ Total............................... >$ $ $ - ------------------------------------------------------------------------------------------------------ - -------------------------------------------------------------------------------- <FN> [(1) Plus accrued interest, if any, calculated from , 1996.] (2) Before deduction of expenses, estimated to be $550,000.00. </TABLE> CITICORP SECURITIES, INC. CHASE SECURITIES INC. CS FIRST BOSTON - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ables Purchase Agreement provided that no Originator will be required to guarantee payment of the Receivables or otherwise provide credit recourse for the inability of an Obligor to pay any Receivable. The Transferor will continue to transfer to the Trust from time to time until the termination of the Revolving Period all of the Receivables so purchased by the Transferor. The "Trust Assets" include the Receivables so transferred to the Trust (collectively the "Receivables"), funds collected or to be collected in respect of such Receivables, any Enhancement issued with respect to any Series (the drawing on or payment of such Enhancement not being available to Investors of any other Series) and monies on deposit in certain accounts of the Trust. "Enhancement" shall mean, with respect to any Series, any letter of credit, surety bond, cash collateral account, spread account, guaranteed rate agreement, tax protection agreement, interest rate hedge agreement or other similar arrangement for the benefit of the Investors of such Series. No Enhancement has been issued with respect to the Series 1996-1 Certificates and no Enhancement will be made available to the Series 1996-1 Investors. The subordination of any series or class or of the Deferred Payment Right to any series or class shall not be deemed to be an Enhancement. The Receivables............ The "Receivables" consist of all of the Originators' United States dollar-denominated accounts receivable or portions thereof, generated from the sales of electricity and/or related services by the Originators in the normal course of their respective businesses to their respective customers ("Obligors"), whether evidenced by an invoice (a "Billed Receivable") or representing Obligors' usage of electricity that will be billed during the next billing cycle (an "Unbilled Receivable"); provided, however, that "Receivables" do not include (i) accounts receivable owing to an Originator from any of its or Centerior Energy's consolidated affiliates, (ii) accounts receivable arising from wholesale electricity sales to other utilities or parties in the business of providing electric power or (iii) accounts receivable owing to an Originator from an Obligor that is not located within the United States. The aggregate unpaid principal balance of the Receivables as of May 31, 1996 was approximately $308,024,916. See "The Receivables" and "Description of the Receivables Purchase Agreement -- Sale of Receivables." Series 1996-1 Investor Certificates............. The Series 1996-1 Certificates will be issued in the aggregate initial principal amount of $150,000,000, in minimum denominations of $250,000 and in integral multiples of $1,000 in excess thereof. The Series 1996-1 Certificates will only be available in book-entry form except in certain limited circumstances as described herein under "Description of the Pooling Agreement and the Series 1996-1 Certificates -- Definitive Certificates." A portion of the Trust Assets will be allocated among the interests of the Investors and the interest of the Transferor, as described below. The Series 1996-1 Certificates will, except as otherwise provided herein, remain fixed at the aggregate initial principal amount thereof. The Investor Certificates collectively represent a fractional undivided beneficial interest in the Trust (the "Aggregate Investors' Interest") and the right to receive funds from the Trust Assets, to the extent of such interest, as repayment of the aggregate outstanding principal amount of the Investor Certificates (the "Aggregate Invested Amount") and payment of interest thereon at the certificate rates applicable thereto. The Aggregate Investors' Interest will be greater than the Aggregate Invested Amount as a percentage of the total Receivables transferred to the Trust and the Investors will, at the conclusion of the "Amortization Period" and from their share of Collections, remit to the Transferor, as additional consideration for the acquisition of the Aggregate Investors' Interest, any excess of the Collections allocable to their interest over the amounts necessary to repay the Aggregate Invested Amount, interest thereon and any other amounts owed to Investors under the Pooling Agreement or the Supplement. Each Series represents a ratable interest in the Aggregate Investors' Interest (with respect to each Series, the "Investors' Interest"), determined based on the outstanding principal amount of such Series (the "Invested Amount" for such Series) compared to the Aggregate Invested Amount. The Investor Certificates represent an interest in the Trust and do not represent interests in, or obligations of the Originators, the Transferor, the Servicers or any Affiliate of any of them. The portion of the Trust Assets allocated to the Investor Certificates will be determined on a daily basis as described under the heading "Investors' Interest" below. Neither the Investor Certificates nor the Receivables are insured or guaranteed by any governmental agency or instrumentality. See "Description of the Pooling Agreement and the Series 1996-1 Certificates." Receivables Purchase Agreement................ The Transferor, as purchaser, has entered into a Receivables Purchase Agreement dated as of May 30, 1996 (the "Receivables Purchase Agreement"), with the Originators, each as seller. Pursuant to the Receivables Purchase Agreement, each Originator sold to the Transferor all of its right, title and interest in and to all Receivables existing on the Cut-Off Date (excluding a certain amount of Receivables contributed by CEI to the capital of the Transferor) and agreed to sell all of its right, title and interest in and to all future Receivables created from time to time thereafter during the Revolving Period. The Transferor in turn transferred those Receivables to the Trust pursuant to the Pooling Agreement. The Transferor also assigned to the Trust certain Receivables contributed to it by the Originators and its rights under the Receivables Purchase Agreement. See "Description of the Receivables Purchase Agreement." Transferor Interest........ The Transferor's interest in the Trust Assets (the "Transferor Interest") consists of an undivided fractional interest in the Trust Assets not allocable to the Aggregate Investors' Interest, which fractional interest is evidenced by a certificate (the "Transferor Revolving Certificate," the principal amount of such certificate, as adjusted from time to time being the "Transferor Revolving Amount") that ranks pari passu with the Investors' Interest. The Transferor Revolving Certificate may not be pledged or transferred without a Tax Opinion. The Transferor also has the right to receive, from the Investors' Interest, as deferred payment from the Investors in consideration of their acquisition of the Investors' Interest (the "Deferred Payment Right"), the excess of the Aggregate Investors' Interest over the amounts necessary to reduce the Investor Certificates to zero and pay all interest thereon. The Deferred Payment Right is not evidenced by any certificate and is subordinate in right of distribution to all Series of the Investor Certificates. Notwithstanding the foregoing, the Transferor agreed pursuant to the Receivables Purchase Agreement to apply all amounts received as the Deferred Payment Right to any unpaid amounts due on the Transferor Revolving Certificate until the Transferor Revolving Certificate is paid in full. The portion of the Trust Assets allocated to the Deferred Payment Right at any time will be equal to (a) the product of the Floating Allocation Percentage times the aggregate unpaid balance of the Receivables minus (b) the Aggregate Invested Amount. See "Description of the Pooling Agreement and the Series 1996-1 Certificates -- Subordination." Investors' Interest........ The fraction that determines the Aggregate Investors' Interest (the "Floating Allocation Percentage") has, as the numerator, the sum of (a) the Net Invested Amount plus (b) the Carrying Cost Reserve and, as the denominator, the Net Receivables Balance minus the Aggregate Required Reserves. The "Net Receivables Balance" shall equal (i) the aggregate unpaid balance of Eligible Receivables (calculated net of the sum of (A) all unapplied collection and security deposits, (B) all credit balances owed to Obligors under the Budget/Balanced Billing Payment Plan, (C) the cumulative amounts of rate increases that are subject to rescission and (D) a reserve to account for collections that pass through the Servicers' processing departments before they are deposited into the Trust Accounts) minus (ii) the Excess Concentration Balances for all Obligors. Such fraction adjusts daily during the Revolving Period to reflect changes in the Base Amount (resulting from the acquisition by the Trust of new Receivables, receipt of Collections, unapplied security deposits, credit balances under a Budget/Balanced Billing Payment Plan, cumulative amounts of rate increases that are subject to rescission, defaults and dilutions) and changes in the Carrying Cost Reserve. Upon commencement of the Amortization Period, the Floating Allocation Percentage will be fixed to equal the Floating Allocation Percentage as of the first day of such Amortization Period and will not fluctuate thereafter. See "Description of the Pooling Agreement and the Series 1996-1 Certificates -- General." Subordination of Certain Future Series of Certificates............. During the Amortization Period, Collections allocated to the Aggregate Investors' Interest will be allocated first to the Series 1996-1 Certificates and to Investor Certificates in any other Classes ranking equal in priority to the Series 1996-1 Certificates (each a "Senior Class") until the outstanding principal amount of the Series 1996-1 Certificates and of any such other Senior Classes has been reduced to zero, then to any other Classes, which are subordinated to the Senior Classes of Investor Certificates (each a "Subordinated Class"). Required Reserves; Carrying Cost Reserve............... The Series 1996-1 Certificates will be entitled to the benefits of Required Reserves and the Carrying Cost Reserve. The "Required Reserves" with respect to any Class or Series of Investor Certificates shall be an amount equal to the "Applicable Reserve Ratio" for such Class or Series times the Net Receivables Balance (the Required Reserves for all Series of Investor Certificates being the "Aggregate Required Reserves"). The Applicable Reserve Ratio for the Series 1996-1 Certificates means, at any time, a percentage calculated in the most recent Determination Date Certificate to be the greater of (a) the Minimum Required Reserve Ratio and (b) the sum of the Loss Reserve Ratio and the Dilution Reserve Ratio. The "Minimum Required Reserve Ratio" is a percentage equal to the higher of (i) 7.5% and (ii) the sum of (a) six times the concentration limit for Obligors which are either non-rated or have ratings which are less than investment grade and (b) the product of the Average Dilution Ratio for the most recently ended Collection Period times the Dilution Horizon Ratio for such Collection Period. The "Carrying Cost Reserve" is the amount, calculated for all Series and Classes as described herein, held for payment of interest on the Investor Certificates of any Series and for payment of certain fees, costs and expenses which are entitled to priority of payment over the Invested Amounts of any Series during the Amortization period. See "Description of the Pooling Agreement and the Series 1996-1 Certificates -- Carrying Cost Account" and "-- Required Reserves." Issuance of Additional Series; Other Modifications............ The Pooling Agreement provides that, pursuant to any one or more supplements thereto (each, a "Supplement"), the Transferor may cause the Trust to issue one or more new Series of Investor Certificates (each, a "Series," and the issuance of any such new Series, a "New Issuance"), which will cause a reduction in the Transferor Interest represented by the Transferor Revolving Certificate (except to the extent that proceeds of such new issuance are placed in a Trust Account as part of a defeasance arrangement). The Pooling Agreement also provides that the Transferor may specify, with respect to any Series, the Principal Terms of such Series. The Transferor may offer any Series to the public or other investors under a prospectus or other disclosure document in transactions either registered under the Securities Act, or to investors in an offering exempt from registration thereunder, in either case directly or through one or more underwriters or placement agents. The proceeds of a New Issuance may be used to pay the outstanding principal balance of the Series 1996-1 Certificates at maturity and to pay or prepay the outstanding principal balance of any other Series of Investor Certificates to the holders thereof. The Series 1996-1 Supplement provides that the Transferor does not have the right to cause the Series 1996-1 Certificates to be prepaid, in full or in part, at any time prior to the Expected Final Payment Date. Under the Pooling Agreement, a New Issuance may only occur upon the fulfillment of certain conditions, including, without limitation, the delivery to the Trustee of the following: (a) a Supplement specifying the Principal Terms of such Series, (b) an opinion of counsel to the effect that, for federal income and state income tax purposes, (i) such issuance will not adversely affect the characterization of the Investor Certificates of any outstanding Series or class as debt of the Transferor and (ii) such new Series will be characterized as debt of the Transferor and (c) a letter from each of the Rating Agencies confirming that the issuance of the new Series will not result in the reduction or withdrawal of their ratings of any Series or Class of Investor Certificates then outstanding (the "Rating Agency Condition"). The Series 1996-1 Certificates will never be subordinated to any other Series and, except to the extent specified in the applicable Series Supplement, no other Series will be subordinated to any other Series. If a Series has more than one Class of Investor Certificates, the related Supplement may specify that one Class will be subordinated to another Class within such Series or in other Series in the manner and to the extent provided therein. Such new Series may include without limitation one or more Series of Investor Certificates designated as "Variable Funding Certificates". In accordance with the terms of the Supplements governing such Investor Certificates, the Invested Amount of the Variable Funding Certificates may be increased and/or reduced from time to time prior to commencement of an Amortization Period. See "Description of the Pooling Agreement and the Series 1996-1 Certificates -- New Issuances; Other Modifications." Certificate Rate........... Each Series 1996-1 Certificate will bear interest from its date of issuance at a "Certificate Rate" equal to % per annum. Interest will accrue on the Invested Amount of the Series 1996-1 Certificates (not reduced by the amount of Cure Funds held in the Reserve Account at such time) from the date of issuance at the Series 1996-1 Certificate Rate (calculated on the basis of a 360-day year of twelve 30-day months) and will be payable (i) semiannually during the Revolving Period on January 15 and July 15 of each year, commencing on January 15, 1997, and (ii) monthly during the Amortization Period on the fifteenth day of each month, commencing (A) in the event that the Amortization Period occurs upon the Scheduled Amortization Date, on July 15, 2001 and (B) in the event that the Amortization Period occurs as a result of an Early Amortization Event, on the first such day which is at least 30 days after the commencement of the Amortization Period; provided, however, that if any such day is not a Business Day, interest will be payable on the next succeeding Business Day (each day on which interest is payable is a "Distribution Date"). Interest for any Distribution Date due but not paid on such Distribution Date will be due on the next succeeding Distribution Date together with additional interest on such amount at the Series 1996-1 Certificate Rate, to the extent such rate is permitted by law. Revolving Period........... The "Revolving Period" for the Series 1996-1 Certificates will commence on the Closing Date and will terminate on the close of business on the earlier to occur of (i) April 15, 2001 (the "Scheduled Amortization Date") and (ii) the date of any Early Amortization Event. So long as the Revolving Period continues, except during any Set-Aside Period, all Collections and other funds received in the Concentration Account will generally be invested in newly originated Receivables, and no amount of any such Collections will be distributed to any Series 1996-1 Investor. Early Amortization Events include the events listed in "Description of the Pooling Agreement and the Series 1996-1 Certificates -- Series 1996-1 Early Amortization Events." On each Business Day during the Revolving Period, all Collections and other funds received in the Trust Accounts will be allocated and applied in the following order of priority: (a) to be deposited in a sub-account of the Concentration Account (the "Carrying Cost Account") maintained in the name of the Trustee for the payment of Carrying Costs until the amount on deposit therein equals the Carrying Cost Amount; (b) if a Set-Aside Period exists, to be set aside in a sub-account of the Concentration Account (the "Reserve Account") until the Net Invested Amount is less than or equal to the Base Amount; (c) if the Base Amount is greater than or equal to the Net Invested Amount, if requested by the Master Servicer and permitted by any Supplement (other than the Series 1996-1 Supplement) or if otherwise required by any Supplement, funds on deposit in the Reserve Account are to be used to reduce the Invested Amount of any Investor Certificates other than the Series 1996-1 Certificates or to deposit in any Defeasance Account; (d) if requested by the Master Servicer and permitted by any Supplement other than the Series 1996-1 Supplement or if required by any Supplement other than the Series 1996-1 Supplement, funds on deposit in the Concentration Account are to be used to deposit in any Defeasance Account or to reduce the Invested Amount of any Investor Certificates other than the Series 1996-1 Certificates; (e) to the extent required by the Pooling Agreement or any Supplement, funds on deposit in the Concentration Account are to be used to pay any other obligations of the Transferor owed to any Investor or the Trustee which are not payable from funds in the Carrying Cost Account; (f) to make payments to the Transferor on such Business Day in respect of the Transferor Interest in an amount equal to the balance of funds on deposit in the Concentration Account after making all payments pursuant to clauses (a) through (e) above. If, on any day prior to the Amortization Date, funds on deposit in the Concentration Account and available for allocation under any of clause (c), (d) and (e) above are less than the amount of the obligations described in such clauses, then the available Collections will be allocated by the Servicers to the holders of such obligations pro rata according to the respective amounts of such obligations held by them (as weighted in accordance with any adjustment factors used in determining their respective Ratable Principal Amounts and after giving effect to any subordination terms applicable to any Class or Series). All other obligations in lower priority categories will remain unsatisfied until the obligations in the preceding category have been satisfied. Funds allocated to the Carrying Cost Amount will be applied in the following order of priority: (1) to the Trustee in payment of the Trustee's Fee; (2) to any Servicer which is not an Originator or an Affiliate of an Originator in payment of the Servicing Fee; (3) to the Investors in payment of accrued and unpaid interest then due and payable on the Aggregate Invested Amount at the applicable Certificate Rates; (4) to the payment of any other fees, costs and/or expenses then due and payable which are included in the calculation of the Carrying Cost Amount; and (5) to any Servicer which is an Originator or an Affiliate of an Originator in payment of the Servicing Fee. To the extent that funds allocated to the Carrying Cost Amount are insufficient to pay in full the amounts described in clauses (1) through (5) above then the amounts described in such clauses (1) through (5), as applicable, shall be distributed ratably to those Persons owed according to the amounts of obligations held by such Persons with amounts owed to Investors being distributed to Investors of Senior Classes before being distributed to Investors in any Subordinated Class. See "Description of the Pooling Agreement and the Series 1996-1 Certificates -- Interest"; "-- Distributions to Investors"; and "-- Carrying Cost Account." Set-Aside Period........... On each Business Day during the Revolving Period, the Transferor computes whether the Net Receivables Balance minus the Aggregate Required Reserves minus the Carrying Cost Reserve (such amount, the "Base Amount") is equal to or greater than the Aggregate Invested Amount (computed as if reduced by (i) the amount of Cure Funds held in the Reserve Account and (ii) any other amounts held in any Defeasance Account to reduce the Invested Amount of any particular series) (such recomputed amount, the "Net Invested Amount"). A "Set-Aside Period" commences on any Business Day on which the Base Amount is less than the Net Invested Amount, and continues until such insufficiency no longer exists; provided that, if such Set-Aside Period continues for more than five consecutive Business Days, then an Amortization Period shall commence for all Series as of the end of such fifth Business Day. During the Set-Aside Period, the Transferor shall, after making any necessary allocations to the Carrying Cost Amount, deposit all remaining Collections and other funds received in the Concentration Account into the Reserve Account on the day collected (all such funds so deposited from time to time by the Transferor being "Cure Funds") until the amount so deposited equals the amount by which the Aggregate Invested Amount exceeds the Base Amount. The Servicers will maintain the Reserve Account which shall be accessible only by the Trustee for the benefit of the Trust. To the extent that funds are on deposit in the Reserve Account and the Base Amount is greater than or equal to the Net Invested Amount, funds up to the amount of such excess may be released from the Reserve Account (i) to reduce the Invested Amount of any Variable Funding Certificates or other Investor Certificates, the terms of which permit or require repayment at such time and/or (ii) to be used by the Transferor to purchase new Receivables or pay other obligations of the Transferor in connection with the Pooling Agreement; provided, that, after making such withdrawal and application of funds, the Base Amount will continue to be greater than or equal to the Net Invested Amount. See "Description of the Pooling Agreement and the Series 1996-1 Certificates -- Set-Aside Period; Reserve Account." Amortization Period........ Upon (i) the occurrence and during the continuation of an Early Amortization Event or (ii) the scheduled termination of the Revolving Period (the period following either such event being the "Amortization Period"), respectively, the Collections and any other Funds allocated to the Aggregate Investors' Interest (after payments of Carrying Costs) will be accumulated in one or more Defeasance Accounts to be distributed to Investors in reduction of the Invested Amount for each Series. If the Amortization Period commences as a result of the scheduled termination of the Revolving Period, funds accumulated in the Defeasance Account for the Series 1996-1 Certificates will be distributed to the Series 1996-1 Investors on July 15, 2001 (the "Expected Final Payment Date") and, to the extent that the Invested Amount of such Series has not been reduced to zero on such date, on each Distribution Date thereafter. If the Amortization Period commences as a result of an Early Amortization Event, funds accumulated in the Defeasance Account for the Series 1996-1 Certificates will be distributed to Investors on each Distribution Date, commencing with the Distribution Date which is at least thirty (30) days from and after the commencement of the Amortization Period. On each Business Day during the Amortization Period, the portion of the Collections and other funds received in the Concentration Account on such date that is allocable to the Aggregate Investors' Interest (i.e., the Floating Allocation Percentage of Collections) will be set aside for the benefit of Investors and will be distributed and/or deposited in one or more Defeasance Accounts to be applied in the following order of priority: (a) to pay Carrying Costs; (b) to reduce the Invested Amount of all Investor Certificates until such Invested Amounts have been reduced to zero; (c) to the payment of unpaid fees and expenses of Trustee or a Servicer. During the Amortization Period, amounts on deposit in the Defeasance Account shall be distributed to reduce the Invested Amounts of any Investor Certificates constituting a Senior Class ratably based on the Ratable Principal Amount of such Investor Certificates until such Invested Amounts have been reduced to zero and thereafter, to reduce the Invested Amounts of any Investor Certificates constituting a Subordinated Class ratably based on the Ratable Principal Amount of such Investor Certificates until their Invested Amounts have been reduced to zero, in each case, together with accrued and unpaid interest thereon. On each Business Day during the Amortization Period, the Transferor Interest in funds received in the Concentration Account shall, after the payment of fees, costs and expenses (other than interest on the Investor Certificates and the Servicing Fee) continue to be remitted to the Transferor in consideration of the Transferor Revolving Certificate. After the Aggregate Invested Amount together with all interest thereon and other amounts owed to Investors has been reduced to zero, the Transferor Revolving Certificate shall also be reduced to zero and all remaining amounts otherwise allocable to the Investors shall be distributed to the Transferor in consideration of the Deferred Payment Right. See "Description of the Pooling Agreement and the Series 1996-1 Certificates -- Principal" and "-- Distribution to Investors." Servicing.................. The Servicers service and administer the Receivables in exchange for a monthly servicing fee (the "Servicing Fee"). If a Servicer Default occurs and is continuing, the Trustee shall, at the direction of Investors holding at least 66 2/3% of the Aggregate Invested Amount, remove both Originators as Servicers. In the event of any such removal, either the Trustee or an eligible third-party shall be appointed as successor Servicer. If either Originator or an Affiliate thereof acts as Servicer, the Servicing Fee will equal 1% per annum (computed on the basis of a 360-day year of twelve 30-day months) times the aggregate outstanding Receivables as of the beginning of the immediately preceding calendar month (each, a "Collection Period"). The Servicing Fee for any Servicer other than the Originators or an Affiliate thereof may be a greater amount but shall not exceed the lesser of (x) 110% of the aggregate reasonable costs and expenses incurred by such Servicer during such Collection Period and (y) 2% per annum times the beginning monthly balance of Receivables as described above. So long as separate Servicers are utilized for the Receivables originated by CEI and TE, respectively, the Servicing Fee shall be allocated between them based on the respective dollar amounts of Receivables sold to the Transferor by each of CEI and TE during the relevant calendar month. The Servicing Fee is payable solely from Collections. See "Description of the Pooling Agreement and the Series 1996-1 Certificates -- Servicing Compensation and Payment of Expenses." Collection Procedures...... The Originators have (i) assigned to the Transferor all of their rights in respect of any designated post office boxes or lockboxes to which any payments in respect of Receivables ("Collections") will be sent and deposited, (ii) assigned to the Transferor all of their rights with respect to any related deposit accounts that will be utilized for receiving the Collections (each such account, a "Transferor Collection Account"), and (iii) assigned to the Transferor all of their rights with respect to any deposit accounts into which third-party collection agents are directed to deposit Collections received by them (each such account, a "Servicer Collection Account" and, together with the Transferor Collection Accounts, the "Collection Accounts"). Each Servicer and each Originator receive all Collections not deposited directly into the Collection Accounts by the Obligors or third-party agents and, on each Business Day, deposit all such other Collections into a Transferor Collection Account. The Servicer Collection Accounts and the Transferor Collection Accounts are used solely for receiving Collections and other funds belonging to the Transferor, do not contain any other funds of the Originators and are held in the name of the Trustee. On each Business Day, each bank with which a Transferor Collection Account is maintained is instructed to wire all Collections received to an account established by, and maintained under the control of, the Trustee for the benefit of the Trust (the "Concentration Account"). Each bank with which a Servicer Collection Account is held is instructed from time to time by the applicable Servicer to send all Collections received to the Transferor Collection Account, but in no event shall any Servicer permit the aggregate amount of Collections on deposit at any such bank at any one time to exceed $100,000. Unless such authority is otherwise revoked by the Trustee after a Servicer Default, the Concentration Account is accessible by the Servicers for the purposes of (i) paying to the Trustee the Collections and other funds allocated to the Investors' Interest and to the payment of interest, costs, fees and expenses owed to the Investors, (ii) paying to the Transferor any Collections or other funds allocated to the Transferor Interest (including amounts being reinvested by the Trust in newly originated Receivables during the Revolving Period) and (iii) during the Revolving Period, paying directly to the Originators any amounts owed by the Transferor under the Receivables Purchase Agreement for the purchase of newly originated Receivables. On a daily basis until the termination of the Trust, a portion of the funds received in the Concentration Account is allocated to the Carrying Cost Account until the amount on deposit therein is equal to the sum of (a) accrued but unpaid (i) interest on the Aggregate Invested Amount, (ii) Servicing Fee, and (iii) any other fees and expenses which are entitled to priority of payment over principal in the allocation of funds in the Concentration Account (such interest, fees and expenses, collectively, the "Carrying Costs") and (b) the amount of Carrying Costs which are estimated to accrue on or before the 15th day of the succeeding calendar month. After allocation to the Carrying Cost Account, the remaining amount of funds allocable to the Investors' Interest is allocated as described above under the headings "Revolving Period," "Set-Aside Period" and "Amortization Period." Rating of Series 1996-1 Certificates...... It is a condition to the issuance of the Series 1996-1 Certificates that the Series 1996-1 Certificates be rated not lower than "AAA" by Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. ("S&P"), and Aaa by Moody's Investors Service, Inc. ("Moody's") (S&P and Moody's are referred to together as the "Rating Agencies"). ERISA Considerations....... Employee benefit plans and other Investors subject to the fiduciary responsibility provisions of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or the provisions of Section 4975 of the Code may be eligible to acquire or hold Series 1996-1 Certificates. See "ERISA Considerations."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001000736_caremark_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001000736_caremark_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..abe079e5cebef87fccefabc9211c650c3c42b958
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0001000736_caremark_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. Unless the context otherwise requires, as used herein, the term "MedPartners" or the "Company" refers collectively to MedPartners, Inc. and its predecessor, also named MedPartners, Inc. (the "Original Predecessor"), and their respective subsidiaries and affiliates. Unless otherwise indicated, the information contained in this Prospectus gives effect to the consummation of the acquisitions (collectively, the "Acquisitions") of Caremark International Inc. ("Caremark") and New Management. See "Business -- Acquisition Program". In September 1996, the Company changed its name from MedPartners/Mullikin, Inc. ("MedPartners/Mullikin") to "MedPartners, Inc."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0001001134_maginet_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001001134_maginet_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..49467dccb81c32445fff29826c221c9b33c208ea
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0001001134_maginet_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Prospectus. THE COMPANY MagiNet is the leading supplier of on-demand interactive video entertainment and information services to the hospitality industry outside of North America. The Company installs integrated video systems that allow hotel guests to order pay-per-view movies on-demand. MagiNet has recently expanded these systems into entertainment and information gateways that offer an increasingly varied range of services, such as on-demand billing summaries, express checkout, personalized messaging, guest surveys and room service ordering. The Company expects to implement additional revenue enhancing services such as in-room casino-style gaming, advertising, video games, financial news, Internet access and in-room shopping in selected markets beginning in 1997. To date, the Company has focused principally on leading hotels in the Pacific Rim. Recently, the Pacific Rim has been experiencing a higher rate of economic expansion and hotel construction than any other region in the world. Leading hotels in this region are generally characterized by high occupancy and room rates. The Company currently has operations and installations in Thailand, Australia, Japan, South Korea, Taiwan, Hong Kong, South Africa, Guam/Saipan, Singapore, Israel, New Zealand and France, and plans to expand its presence in the Pacific Rim, Europe, the Middle East and Africa. MagiNet began installing its systems in 1993 and, between 1993 and 1995, increased its installed base of rooms from 2,087 to 39,122 and increased revenue from $395,000 to $8.7 million. As of September 30, 1996, MagiNet served 169 hotels having 59,529 rooms, with an additional 16,783 rooms in backlog. In November 1996, the Company entered into a definitive agreement to acquire Prodac Prozessdatentechnik GmbH, a German corporation ("Prodac"), which substantially expands the Company's geographic scope and immediately establishes the Company as a leading provider of in-room entertainment services in Europe, the world's largest hotel market. There are approximately two million hotel rooms in MagiNet's current and target markets. The Company's installed base includes certain hotels in the Hilton International, Hyatt International, Inter-Continental, Mandarin Oriental, Marriott, Okura, Regent/Four Seasons, Shangri-La, Sheraton, Southern Pacific Hotel Corporation, Westin and other hotel chains. The Company has preferred vendor status for future installations in hotels within the Hyatt International, Shangri-La and Southern Pacific Hotel Corporation chains. Prodac's installed base includes certain hotels in the Accor, Dorint and Maritim hotel chains, and Prodac has preferred vendor status with the Dorint, Maritim and Novotel hotel chains. In addition, the Company believes there is a substantial opportunity to penetrate the mid-market hotel sector in its target markets. The Company holds an exclusive license to provide the on-demand interactive video system developed by On Command Video Corporation in more than 30 countries outside of North America, and a license to provide the on-demand interactive video system developed by Guestserve Development Group to all countries outside of North America. MagiNet installs its systems in hotels at the Company's cost and receives revenue from guest usage pursuant to five-to- seven year contracts giving MagiNet the exclusive right to provide the hotel with in-room on-demand video entertainment and information services. To date, the Company's principal on-demand video entertainment services have provided a reasonably predictable stream of recurring revenue during the term of these exclusive contracts. The Company believes its new services will appeal to a broader group of hotel guests than traditional purchasers of in-room video entertainment and should increase revenue per installed room. Beginning in early 1996, the Company added several key members to its management team, including Kenneth B. Hamlet, its Chief Executive Officer, and Gordon E. (Ned) Druehl, Jr., its Chief Operating Officer, both having over twenty years of experience in the hospitality industry. Mr. Hamlet and Mr. Druehl, as part of their executive responsibilities at Holiday Inns, Inc., managed a division known as HiNet which provided free-to-guest scheduled broadcast and on-demand video entertainment to Holiday Inns hotels. This management team has further defined the Company's strategy to expand its installed room base by (i) leveraging its strong market position to obtain contracts with other leading hotels, (ii) penetrating existing or new target markets, directly or through acquisition, and (iii) offering services to mid-market hotels in target regions. In addition, this management team was influential in establishing strategic relationships with Bloomberg for information and news television programming and InterGame for in-room casino-style gaming. The Company incorporated in California in July 1991, changed its name from Pacific Pay Video Limited to MagiNet Corporation in August 1995 and reincorporated into Delaware in December 1996. Unless the text otherwise requires, references in this Prospectus to "MagiNet" and the "Company" refer to MagiNet Corporation, a Delaware corporation, and its subsidiaries. The Company's principal executive offices are located at 405 Tasman Drive, Sunnyvale, California 94089, and its telephone number at that address is (408) 752-1000. ACQUISITION OF PRODAC On November 6, 1996, the Company entered into a definitive Share Purchase and Transfer Agreement (the "Acquisition Agreement") to acquire all the outstanding shares of Prodac (the "Prodac Shares"), which is headquartered in Cologne, Germany. Prodac is one of the leading providers of video entertainment and information systems in Europe and develops, manufactures and installs its own proprietary scheduled broadcast and on-demand interactive video entertainment systems. The Company believes that the acquisition of Prodac will provide important competitive and strategic advantages to the Company. Europe represents the world's largest hotel market with approximately 5.5 million rooms, of which approximately 1.1 million represent rooms in the Company's target market of hotels with greater than 100 rooms. MagiNet's acquisition of Prodac will substantially expand the geographic scope of the Company's operations and establish the Company as an industry leader in Europe. In addition, the Company expects the acquisition to enhance its ability to pursue contracts with leading hotels and hotel chains in Europe. As of September 30, 1996, Prodac served 242 hotels with 43,657 installed rooms, the majority of which were located in Germany, and had 10,316 rooms in backlog. Scheduled broadcast equipment represented approximately 87% of Prodac's installations and 70% of its backlog, and the balance of installations and backlog represented installations and backlog of Prodac's Videoquest on-demand system. Pursuant to the Acquisition Agreement, following the closings of the Offerings, the Company will pay the shareholders of Prodac an aggregate consideration of approximately $16.4 million, consisting of approximately $13.1 million in cash (plus interest at the rate of 6% per annum from November 6, 1996 through the date of the payment of the acquisition consideration) and shares of MagiNet Common Stock with an aggregate value of approximately $3.3 million (based on a 10% discount to the initial public offering price). The shareholders of Prodac are also entitled to a distribution of approximately $393,000 to be paid from Prodac's retained earnings, calculated in accordance with German generally accepted accounting principles ("German GAAP"). If the closing of the Offerings occurs after December 31, 1996, such shareholders shall be entitled to any additional retained earnings, calculated in accordance with German GAAP, in excess of such $393,000. In addition, the Company will pay up to an aggregate of approximately $9.8 million in cash and MagiNet Common Stock contingent upon Prodac achieving certain financial targets in fiscal 1997, 1998 and 1999. The cash portion of the acquisition consideration will be paid in Deutsche Marks out of the net proceeds of the Offerings based on the applicable exchange rate on the Frankfurt am Main exchange on the closing date of the Offerings. Any increase in the value of the Deutsche Mark relative to the U.S. Dollar will increase the portion of the net proceeds of the Offerings used in connection with the Prodac acquisition and will result in the Company's issuing a greater number of shares of MagiNet Common Stock to the shareholders of Prodac. See "Use of Proceeds," "Dilution," "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "Acquisition of Prodac." THE OFFERINGS <TABLE> <S> <C> Common Stock initially offered in: The U.S. Offering................. 4,400,000 shares The International Offering........ 1,100,000 shares Total Common Stock offered....... 5,500,000 shares Common Stock to be outstanding 18,531,041 shares(1) after the Offerings............... Use of proceeds.................... System installations, the cash portion of the purchase price for the acquisition of Prodac, working capital and general corporate purposes. See "Use of Proceeds." Nasdaq National Market symbol...... MGNT </TABLE> SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA <TABLE> <CAPTION> NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, --------------------------------------- ------------------------------ 1995 1996 ------------------- ------------------- PRO PRO 1993 1994 ACTUAL FORMA(2) 1995 ACTUAL FORMA(3) ------- ------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA) <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenue................ $ 395 $ 2,342 $ 8,689 $ 19,254 $ 5,655 $ 12,048 $ 23,941 Direct costs........... 294 1,156 3,731 9,903 2,586 6,232 11,792 Depreciation and amortization.......... 171 957 3,682 9,936 2,564 4,747 9,366 Operations expenses, selling, general and administrative........ 1,961 7,170 11,528 13,806 7,808 8,455 10,729 Research and development........... 1,320 856 1,247 1,525 890 1,599 1,809 ------- ------- -------- -------- -------- -------- -------- Operating loss......... (3,351) (7,797) (11,499) (15,916) (8,193) (8,985) (9,755) Interest expense and other, net............ (28) (253) (991) (2,688) (379) (2,083) (4,019) ------- ------- -------- -------- -------- -------- -------- Loss before income taxes and minority interest in net losses of consolidated subsidiaries.......... (3,379) (8,050) (12,490) (18,604) (8,572) (11,068) (13,774) Provision for income taxes ................ -- -- (554) (680) (423) (681) (1,123) Minority interest in net losses of consolidated subsidiaries.......... -- 124 248 248 204 215 215 ------- ------- -------- -------- -------- -------- -------- Net loss............... $(3,379) $(7,926) $(12,796) $(19,036) $ (8,791) $(11,534) $(14,682) ======= ======= ======== ======== ======== ======== ======== Pro forma net loss per share(4).............. $ (1.03) $ (1.48) $ (0.93) $ (1.14) ======== ======== ======== ======== Shares used in computation of pro forma net loss per share(4).............. 12,392 12,847 12,407 12,862 CONSOLIDATED STATEMENT OF CASH FLOWS DATA(5): Net cash used in operating activities.. $(1,753) $(6,137) $ (7,619) $ (6,680) $ (9,510) Net cash used in investing activities.. (3,091) (9,361) (14,897) (10,967) (16,451) Net cash provided by financing activities.. 5,082 25,715 30,656 23,034 14,540 OTHER DATA: EBITDA (In thousands)(6)......... $(3,180) $(6,840) $ (7,817) $ (5,980) $ (5,629) $ (4,238) $ (389) EBITDA margin.......... (805)% (292)% (90)% (31)% (100)% (35)% (2)% New rooms installed.... 2,087 10,929 26,106 37,702 18,075 20,407 33,054 Total rooms served(7).. 2,087 13,016 39,122 70,132 31,091 59,529 103,186 Rooms in backlog(8).... -- 10,941 12,194 15,156 16,783 27,099 Average monthly gross video revenue per room(5)............... -- $ 32.39 $ 29.18 $ 28.74 $ 28.84 </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1996 --------------------------------------- ACTUAL PRO FORMA(9) AS ADJUSTED(10) --------- ------------ --------------- (IN THOUSANDS) <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments.......................... $ 7,251 $ 1,278 $40,798 Working capital (deficit)............. 4,857 (15,879) 23,641 Total assets.......................... 49,484 74,424 113,944 Long-term debt........................ 25,829 40,142 40,142 Accumulated deficit................... (37,008) (49,208) (49,208) Total stockholders' equity............ 15,969 7,069 46,589 </TABLE> - -------- (1) Based on shares outstanding as of September 30, 1996. Excludes as of September 30, 1996, an aggregate of 1,702,080 shares of Common Stock issuable upon exercise of options outstanding under the Company's 1992 Key Personnel Stock Option Plan and 1992 Stock Option Plan at a weighted average exercise price of $2.17. Also excludes as of September 30, 1996 an additional 2,318,728 shares reserved for future issuance under the 1992 Key Personnel Stock Option Plan, the 1996 Director Stock Option Plan and the 1996 Employee Stock Purchase Plan. Includes 455,373 shares of Common Stock to be issued in connection with the Company's acquisition of Prodac within 10 business days after the closing of the Offerings. See "Management--Stock Plans," "Acquisition of Prodac" and Note 5 of Notes to Consolidated Financial Statements. Also excludes 40,000 shares of Common Stock issuable upon exercise of an outstanding warrant issued in connection with the Company's obtaining a commitment letter for up to $10 million of unsecured subordinated debt. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." (2) Pro forma to give effect to the Company's acquisition of Prodac following the closing of the Offerings as if such acquisition had taken place as of January 1, 1995. See "Acquisition of Prodac," the Unaudited Pro Forma Combined Condensed Financial Statements and Note 8 of Notes to Consolidated Financial Statements. (3) Pro forma to give effect to the Company's acquisition of Prodac following the closing of the Offerings as if such acquisition had taken place as of January 1, 1996. See "Acquisition of Prodac," the Unaudited Pro Forma Combined Condensed Financial Statements and Note 8 of Notes to Consolidated Financial Statements. (4) See Note 1 of Notes to Consolidated Financial Statements for a discussion of the computation of net loss per share. (5) Data not available on a pro forma basis. (6) Indicates earnings (loss) before interest expense, income taxes, depreciation and amortization, and minority interest in net losses of consolidated subsidiaries and is not intended to represent an alternative to net income (as determined in accordance with generally accepted accounting principles) as a measure of performance. Management of the Company believes that EBITDA provides an additional perspective on the Company's operating results and its ability to service its long-term debt and fund its operations. The primary differences between EBITDA and net cash used in operating activities are that net cash used in operating activities includes interest expense, income tax expense and changes in operating assets and liabilities, which items are excluded from EBITDA. See "Consolidated Statements of Cash Flows." (7) Includes all rooms installed with Company-owned systems, except for pro forma total rooms served, which also includes Prodac systems. A charge relating to the acquisition of in-process technology of approximately $12.2 million is included in the pro forma balance sheet as a charge to retained earnings. The Company expects to record this charge in its financial results during the three month period ended December 31, 1996. (8) Data not available on a pro forma basis as of December 31, 1995. (9) Pro forma to give effect to the Company's acquisition of Prodac following the closing of the Offerings as if such acquisition had taken place as of September 30, 1996. (10) Adjusted to reflect the net proceeds of the sale of Common Stock offered by the Company hereby at an assumed initial public offering price of $8.00 per share and the application thereof. See "Use of Proceeds." ---------------- Except as set forth in the Consolidated Financial Statements or otherwise indicated herein, all information in this Prospectus (i) reflects the reincorporation of the Company into Delaware effected in December 1996, (ii) reflects the conversion of all the Company's outstanding shares of Preferred Stock into 10,908,878 shares of Common Stock, which will occur automatically upon the closing of the Offerings, (iii) reflects the filing, upon the closing of the Offerings, of the Company's Restated Certificate of Incorporation authorizing 5,000,000 shares of undesignated Preferred Stock, (iv) assumes the net exercise of warrants to acquire up to an aggregate maximum of 3,704,840 shares of Common Stock and Preferred Stock for 1,158,918 shares of Common Stock in connection with the Offerings at an assumed fair market value of $8.00 per share, (v) assumes the approval by the Company's Board of Directors of the acquisition of Prodac and the issuance of 455,373 shares of Common Stock in connection with such acquisition and (vi) assumes that the U.S. Underwriters' and International Managers' over-allotment options are not exercised. See "Description of Capital Stock," "Underwriting," "Acquisition of Prodac" and Note 5 of Notes to Consolidated Financial Statements. For purposes of calculating the U.S. Dollar cash consideration and number of shares issuable pursuant to the Acquisition Agreement in connection with the Prodac acquisition, an assumed exchange rate of DM 1.525 per U.S. Dollar, representing the closing price in New York trading on September 30, 1996, and an assumed initial public offering price of $8.00 per share less a ten percent discount have been used throughout this Prospectus. The exchange rate determined on the Frankfurt am Main Exchange on the date of the closing of the Offerings will be used to determine the actual number of shares initially issued in connection with the Prodac acquisition. See "Dilution" and "Acquisition of Prodac."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001001259_sano-corp_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001001259_sano-corp_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..17f833a3c1800399304d2cb5f65342f85ff62c64
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0001001259_sano-corp_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL FINANCIAL INFORMATION AND SHARE DATA IN THIS PROSPECTUS ASSUME NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION OR OF OPTIONS OR WARRANTS OUTSTANDING AT SEPTEMBER 30, 1996. THIS PROSPECTUS CONTAINS VARIOUS "FORWARD LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), WHICH REPRESENT THE COMPANY'S INTENTIONS, EXPECTATIONS OR BELIEFS CONCERNING FUTURE EVENTS, INCLUDING, BUT NOT LIMITED TO, STATEMENTS REGARDING MANAGEMENT'S EXPECTATIONS WITH RESPECT TO FDA APPROVAL, THE COMMENCEMENT OF SALES AND THE SUFFICIENCY OF THE COMPANY'S CASH FLOW FOR THE COMPANY'S FUTURE LIQUIDITY AND CAPITAL RESOURCE NEEDS. THESE FORWARD LOOKING STATEMENTS ARE QUALIFIED BY IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN THE FORWARD LOOKING STATEMENTS, INCLUDING, WITHOUT LIMITATION, THOSE DISCUSSED IN "RISK FACTORS." SEE "RISK FACTORS." THE COMPANY Sano Corporation ("Sano" or the "Company") develops novel controlled release drug delivery systems for drug therapies licensed from others and for off-patent drugs ("Proprietary Products"). The Company also develops generic versions of branded controlled release products, generally where the advanced nature of the necessary technologies may limit competition from other manufacturers ("Generic Products"). Sano's strategy is to develop a comprehensive line of both Proprietary Products and Generic Products utilizing controlled release technologies. Although to date most of Sano's products have utilized transdermal delivery technologies, the Company is expanding its capabilities to include other delivery methods, such as solid dose controlled release methods. The Company believes that its transdermal and solid dose controlled release technologies and expertise can be applied to a variety of pharmaceutical products. These technologies are designed to reduce the frequency of drug administration, improve efficacy, increase patient compliance, reduce side effects, reduce interaction with other drugs and provide a more consistent and appropriate drug level in the bloodstream. The Company believes these benefits will also contribute to lower overall patient care costs, an increasingly important competitive factor in the managed care environment. Sano has nine transdermal Proprietary Products in development, including transdermal buspirone patches for the treatment of anxiety, depression and attention deficit disorder and patches for the treatment of smoking addiction, alcohol addiction and motion sickness. The objective of the Company's Proprietary Product development program is to develop novel delivery systems for established drugs which have large addressable markets, where clinical and cost benefits can be obtained through the use of Sano's controlled release technology. Sano intends to retain the rights to its Proprietary Products at least until completion of late-stage clinical trials. The Company believes that this element of its strategy allows greater flexibility in determining whether to retain marketing rights with respect to a product or to use a marketing partner. The Company also believes that late-stage licensing will allow it to negotiate more favorable agreements if it chooses to utilize marketing partners. In August 1996, the Company entered into an exclusive worldwide distribution and supply agreement with Bristol-Myers Squibb Company ("BMS") with respect to Sano's proprietary transdermal buspirone patches for anxiety, depression and attention deficit disorder. Sales by BMS of BuSpar/registered trademark/, its oral formulation of buspirone for the treatment of anxiety, exceeded $285 million in 1995 and were approximately $180 million during the first six months of 1996. The patent covering BuSpar/registered trademark/ expires in late 2000. Sano recently received notice of allowance of a United States patent covering the transdermal delivery of buspirone. Under its agreement with BMS, Sano received a $15 million non-refundable license payment and will receive (i) additional payments upon the achievement of certain milestones, (ii) an advance, to be repaid from royalties, to fund the purchase of production equipment and (iii) royalties on sales of the products. BMS has agreed to switch its marketing efforts from BuSpar/registered trademark/ to Sano's transdermal product. In addition, BMS has also agreed to fund and conduct all future clinical trials for anxiety, depression and attention deficit disorder and will be responsible for foreign patent applications and regulatory filings in connection with the Company's transdermal buspirone products for such applications. BMS has not acquired any rights with respect to the Company's other products. Sano has ten transdermal and solid dose Generic Products in development, including a transdermal nicotine patch for smoking cessation, two transdermal nitroglycerin patches for angina pectoris, one transdermal clonidine patch for hypertension and two transdermal estradiol patches for menopausal symptoms and osteoporosis. The Company believes that its Generic Products, due to their generally shorter development period and abbreviated review cycle by the United States Food and Drug Administration (the "FDA"), may enable the Company to achieve revenues from product sales sooner than will typically be the case with its Proprietary Products. The Company has filed an Abbreviated New Drug Application ("ANDA") for each of its nicotine patch and nitroglycerin patches, and in July 1996 successfully completed FDA pre-approval inspections of its facilities and manufacturing processes for all three of these products. The Company has entered into an exclusive distribution agreement with Pharmaceutical Resources, Inc., a generic pharmaceutical company ("PAR"), under which PAR has the right to distribute Sano's transdermal Generic Products in the United States, Canada and certain other markets. The Company recently initiated a pilot study on its first solid dose controlled release Generic Product. This drug delivery system offers benefits similar to transdermal delivery systems, and provides certain benefits of oral administration without some of the disadvantages of immediate release oral dosage forms. Sano currently has four solid dose controlled release Generic Products under development. In addition to its transdermal and solid dose controlled release technologies, Sano is evaluating and may acquire other types of controlled release technology. Sano was incorporated in the State of Florida in May 1991. The Company's executive offices are located at 3250 Commerce Parkway, Miramar, Florida 33025 and its telephone number is (954) 430-3340. THE OFFERING <TABLE> <CAPTION> <S> <C> Common Stock offered by: The Company ........................................ 1,250,000 shares The Selling Shareholders ........................... 900,000 shares Common Stock to be outstanding after the offering .. 10,491,096 shares(1) For research and development, including clinical trials; capital expenditures, principally for manufacturing; licensing products and technologies for product development; and working capital and other Use of proceeds ..................................... general corporate purposes Nasdaq National Market symbol ....................... SANO </TABLE> - ----------------------------------------------------------------------------- (1) Based on shares outstanding as of September 30, 1996. Does not include (i) 1,465,529 shares of Common Stock reserved for issuance upon exercise of outstanding options under the Company's 1993 Nonqualified Stock Option Plan and 1995 Stock Option Plan, including 50,000 shares of Common Stock that will be issued upon the exercise of an option by a Selling Shareholder at the closing of this offering, and an additional 1,250 shares of Common Stock issued upon the exercise of options since September 30, 1996; (ii) 13,890 shares of Common Stock reserved for issuance upon exercise of options available for future grant under the Company's 1993 Nonqualified Stock Option Plan; (iii) 210,500 shares of Common Stock reserved for issuance upon exercise of options available for future grant under the Company's 1995 Stock Option Plan; and (iv) 11,167 shares of Common Stock that will be issued upon exercise of certain warrants by a Selling Shareholder at the closing of this offering. See "Management--Stock Option Plans," "Principal and Selling Shareholders" and "Description of Capital Stock--Warrants." SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE INFORMATION) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ------------------------------------------------------------- 1991(1) 1992 1993 1994 1995 ---------- ---------- ----------- ----------- -------------- <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues ............................. $ -- $ -- $ -- $ -- $ -- ---------- ---------- ----------- ----------- ------------- Operating expenses: Research and development ............ 104 441 1,129 2,680 8,429 General and administrative .......... 74 94 163 790 911 ---------- ---------- ----------- ----------- ------------- Total operating expenses ........... 178 535 1,292 3,470 9,340 Product development fees ............. -- -- -- 228 -- Interest income ...................... 4 4 7 28 335 Interest and other expense ........... -- -- -- (51) (126) ---------- ----------- ----------- ------------- Net income (loss) .................... $ (174) $ (531) $(1,285) $(3,265) $(9,131) ========== ========== =========== =========== =========== Net income (loss) per common share(2) $(0.09) $(0.16) $ (0.31) $ (0.71) $ (1.43) ========== ========== =========== =========== =========== Weighted average shares outstanding . 1,989 3,658 4,478 5,054 6,374 ========== ========== =========== =========== =========== </TABLE> (RESTUBBED TABLE CONTINUED FROM ABOVE) <TABLE> <CAPTION> NINE MONTHS ENDED SEPTEMBER 30, ----------------------- 1995 1996 ----------- ---------- <S> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues ............................. $ -- $15,000 ----------- ---------- Operating expenses: Research and development ............ 6,418 10,162 General and administrative .......... 604 2,694 ----------- ---------- Total operating expenses ........... 7,022 12,856 Product development fees ............. -- -- Interest income ...................... 88 975 Interest and other expense ........... (72) (68) ----------- ---------- Net income (loss) .................... $(7,006) $ 3,051 =========== ========== Net income (loss) per common share(2) $ (1.24) $ 0.29 =========== ========== Weighted average shares outstanding . 6,175 10,402 =========== ========== </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1996 -------------------------- AS ACTUAL ADJUSTED(3) ---------- -------------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents and marketable securities ...................................... $29,036 $49,809 Working capital ................................... 26,476 47,249 Total assets ...................................... 40,464 61,237 Deferred revenue .................................. 3,319 3,319 Note payable(4) ................................... 509 509 Total stockholders' equity ........................ 34,150 54,923 </TABLE> - ----------------------------------------------------------------------------- (1) Information provided for the period from May 16, 1991 (inception) through December 31, 1991. (2) See Note 2 of Notes to Financial Statements for information concerning the computation of net income (loss) per common share. (3) Adjusted to reflect the sale of 1,250,000 shares of Common Stock offered by the Company at an assumed public offering price of $18.06 per share. See "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001001384_lasalle_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001001384_lasalle_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..efd7f1cd63bd6d9fc4eca1614d6db6c4621beb74
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0001001384_lasalle_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and consolidated financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, all financial information presented herein has been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") and the information contained in this Prospectus assumes that the Underwriters' over-allotment option has not been exercised. Certain terms used herein are defined in "Glossary of Selected Insurance and Reinsurance Terms." Unless the context otherwise requires, references herein to the "Company" include LaSalle Re Holdings Limited ("Holdings"), the issuer of the Common Shares offered hereby, LaSalle Re Limited ("LaSalle Re"), the Company's insurance subsidiary, LaSalle Re (Services) Limited ("LaSalle Re Services"), the Company's London representative office, and LaSalle Re Corporate Capital Ltd. ("LaSalle Re Capital"), the Company's subsidiary formed to participate in Lloyd's of London ("Lloyd's") syndicates. THE COMPANY OVERVIEW The Company writes high severity, low frequency reinsurance on a worldwide basis through its subsidiary, LaSalle Re. The Company primarily writes property catastrophe reinsurance and also writes selected other lines of reinsurance when it believes that market conditions are favorable. These lines currently include property risk excess, property pro rata treaty, casualty clash, marine, crop hail, aviation and satellite. The Company believes that these other lines will constitute a growing portion of the Company's total portfolio of reinsurance business, helping to moderate the volatility of its property catastrophe reinsurance exposures. The Company has been successful in attaining a selective and geographically diverse portfolio of property catastrophe reinsurance risks. In the year ended September 30, 1996, 41.7% of the Company's net premiums written represented U.S.-based risks, 11.6% represented continental Europe-based risks, 8.6% represented U.K.-based risks and 36.2% represented risks located in a variety of other geographic zones elsewhere in the world. As a result of long-term relationships between the Company's management and certain clients and brokers, the Company has developed a strong base of regional business in discrete zones within the U.S. This business assists the Company in diversifying its U.S.- based risks and makes more efficient use of its capital by limiting multi-zone exposures. In the year ended September 30, 1996, this regional business represented a significant component of the Company's U.S.-based net premiums written. At September 30, 1996, the Company had total shareholders' equity and minority interest (together, "Combined Equity") of $486.9 million compared to $400.8 million at September 30, 1995. It achieved annualized returns on average Combined Equity of 29.2% and 26.6%, respectively, and combined ratios of 46.0% and 52.6%, respectively, for the years ended September 30, 1996 and 1995. In addition, its loss and loss expense ratios were 26.4% and 35.5% for the same periods. The Company wrote net premiums of $190.2 million and $201.9 million, respectively, for the years ended September 30, 1996 and 1995. There can be no assurance that the Company will achieve similar results in the future. CAPITAL MANAGEMENT STRATEGY The Company has adopted a capital management strategy focused on balancing capital levels with aggregate exposures while seeking to achieve average annualized returns on shareholders' equity of 20% to 25% over time. Consistent with this strategy, in October 1996, the Company adopted a dividend policy pursuant to which it intends to distribute in each fiscal year 50% to 60% of the Company's net income from the prior fiscal year, if any, on a quarterly basis. In 1997, the Company expects to distribute 50% of its fiscal 1996 net income. Based on the Company's net income for the year ended September 30, 1996, the Company currently expects to pay a quarterly dividend of $0.71 per share in January 1997. See "Dividend Policy." In support of its dividend policy and to protect its capital base, the Company currently is negotiating the purchase of non-traditional, multi-year reinsurance protection to reduce earnings volatility resulting from one or more severe catastrophic events over a period of years. There can be no assurance that the Company will be able to obtain such reinsurance on terms acceptable to it. As part of its capital management strategy, the Company also intends to repurchase up to $50 million of Common Shares in open market or privately negotiated transactions from time to time depending on market conditions and the Company's capital and liquidity requirements. The Company expects this share repurchase program to commence in early calendar year 1997. The Company believes that its capital management strategy is attractive to investors, while its level of capital and surplus offers financial security to cedents and demonstrates to brokers and clients a commitment to property catastrophe reinsurance. The Company's ability to implement its capital management strategy in the future will depend on various factors, some of which are beyond its control, and is subject to change at the discretion of the Company's Board of Directors (the "Board"). See "Risk Factors" and "Dividend Policy." OPERATING STRATEGIES The Company pursues the following operating strategies which, in conjunction with its capital management strategy, are intended to maximize return on shareholders' equity: Focus on Property Catastrophe Reinsurance. The Company concentrates on writing property catastrophe reinsurance of risks located throughout the world. For the years ended September 30, 1996 and 1995, the Company derived 86.5% and 88.4%, respectively, of its net premiums written from property catastrophe reinsurance. The high level of severity and frequency of property catastrophe losses from 1987 through 1992 precipitated a general increase in rates and attachment points in this line of reinsurance. Although rates have declined from their highs in 1993 and 1994, the Company believes that property catastrophe reinsurance can still be significantly profitable for a reinsurer, such as the Company, that has the financial strength, flexibility and responsiveness needed to attract quality business and the high level of technical underwriting judgment and skill necessary to price risks appropriately. Selectively Write Other Lines of Business. While property catastrophe reinsurance is the Company's primary focus, the Company also seeks to take advantage of pricing opportunities that may occur in other lines of reinsurance. These lines generally are characterized by a relatively short period between the collection of premium and the notification of loss. These lines currently include property risk excess and pro rata treaty insurance, which constituted 5.1% and 2.6% of the Company's net premiums written in the years ended September 30, 1996 and 1995, respectively. The Company also writes casualty clash, marine, crop hail, aviation and satellite reinsurance. For the years ended September 30, 1996 and 1995, these coverages represented 6.5% and 6.0%, respectively, of the Company's net premiums written. The Company believes that writing these types of reinsurance enhances the utilization of capital because these lines generally do not create additional aggregate exposure for the Company. In addition, the Company has formed LaSalle Re Capital to provide capital support to selected Lloyd's syndicates commencing in January 1997. See "Business--Reinsurance Products." Utilize a Disciplined Underwriting Approach. Underwriting decisions are made following analysis of each reinsurance contract based on the expected incremental return on equity in relation to the Company's overall portfolio of reinsurance contracts. To assess its property catastrophe risks, the Company uses a variety of underwriting techniques, including simulation models, exposure ratings and experience ratings. The Company has developed its proprietary L-CAM(TM) catastrophe analysis model to assess its risks in the U.S. property catastrophe market. The Company controls and monitors its aggregate exposures on a real-time basis using computer-based rating and control systems. The Company is highly selective in accepting risks, extending coverage on approximately 29% and 24% of the contract submissions it received in the years ended September 30, 1996 and 1995, respectively. See "Business-- Underwriting." Maintain and Develop Long-Term Relationships with Clients and Brokers. The Company seeks to maintain and develop long-term relationships with its clients and brokers by providing a high level of service. The Company promptly responds to underwriting submissions, designs customized programs, offers lead terms when circumstances warrant and pays valid claims within an average of five days. The Company retains a substantial portion of its clients from year to year. Retention of clients permits the Company to use its experience regarding a client's underwriting practices and risk management systems to underwrite its own business with greater precision. In addition, the Company's relationships with brokers permit it to obtain business and monitor developments in various lines of reinsurance in order to increase its writings when market conditions in those lines are favorable. See "Business--Marketing." INDUSTRY TRENDS The Company believes that an imbalance between the supply of and demand for property catastrophe reinsurance existed in 1993 and resulted in an increase in premiums from pre-1993 levels. As a result of the increased property catastrophe reinsurance capacity since 1993, the Company believes that supply and demand in the property catastrophe reinsurance market became more stable in 1994 and have remained relatively stable in succeeding years. Based on the Company's marketing efforts, reinsurance contract submissions and publicly available information, the Company believes that property catastrophe rates generally remained at the substantially increased 1993 levels in 1994 and decreased somewhat in 1995 from 1994 levels. On these same bases, the Company believes that rates in 1996 have decreased from levels in 1995. In particular, rates have declined significantly in areas, such as Japan and Europe, where there has been favorable loss experience, while in the U.S. market, where the level of property catastrophe losses has generally been higher than in international markets in recent years, rates have decreased to a lesser degree. Notwithstanding these rate decreases, the Company believes that current rates substantially exceed 1992 levels. If and while favorable loss experience continues and reinsurance capacity does not diminish, the Company expects further downward pressure on rates during 1997. See "Risk Factors--Business Considerations" and "Business--Industry Trends." FORMATION Aon Corporation (together with its affiliates, "Aon"), CNA, Corporate Partners, L.P. (together with its related parties, "Corporate Partners") and certain other investors (together, the "Founding Shareholders") formed LaSalle Re in Bermuda in October 1993 to take advantage of the supply and demand imbalance that they believed existed in the property catastrophe reinsurance market. Affiliates of Aon and CNA provide certain underwriting, investment management and administrative services to the Company pursuant to service agreements. See "Certain Transactions." Holdings was incorporated in Bermuda in September 1995 as a holding company in connection with the Company's recapitalization and initial public offering. Holdings owns 100% of the outstanding voting stock of LaSalle Re, which upon completion of the Offerings will constitute approximately 71% of the outstanding capital stock of LaSalle Re. Certain Founding Shareholders hold exchangeable non-voting shares of LaSalle Re (the "Exchangeable Non-Voting Shares"), which shares are exchangeable, at the option of the holder, for Common Shares of the Company on a one-for-one basis, unless the Board determines such exchange may cause actual or potential adverse tax consequences to the Company or any shareholder. See "Description of Capital Stock--Capital Stock of LaSalle Re--Exchangeable Non- Voting Shares." Upon completion of the Offerings, the Founding Shareholders will own approximately 54% of the Common Shares and approximately 29% of the capital stock of LaSalle Re (51% and 28% if the U.S. Underwriters' over- allotment option is exercised in full). See "Principal and Selling Shareholders."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001001635_saville_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001001635_saville_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..3ea40313ced77ef74f1b7b4a90a83e4d39fdd661
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0001001635_saville_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and consolidated financial statements and notes thereto appearing elsewhere in this Prospectus. Certain of the information contained in this summary and elsewhere in this Prospectus, including under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," including information with respect to the Company's plans and strategies for its business and related financing, are forward-looking statements. For a discussion of important factors that could cause actual results to differ materially from these forward-looking statements, see "Risk Factors." THE COMPANY Saville creates innovative, high quality, customized billing solutions for service providers in the increasingly competitive global telecommunications industry. The Company's billing systems are designed to enable these service providers to quickly bring new offerings in voice, video and data communications to market, while billing accurately and reliably for these services. Working closely with its customers, Saville utilizes its library of proprietary software applications to provide each customer with a customized, flexible and cost-effective billing solution. The Company has typically continued to serve as a billing partner for its customers by implementing new systems as the customer enters new service categories or geographic markets, and by further developing and enhancing the customer's installed systems in response to changes in the customer's service offerings, marketing strategies and network technology. In addition, Saville offers its customers the option of having Saville operate the billing system in one of the Company's in-house service bureaus. The market for telecommunications services is becoming increasingly competitive due to worldwide deregulation and privatization. New entrants are competing for market share with established service providers by providing discounted service access, offering competitive prices and introducing new features and services, such as customized usage-based calling plans. In addition, technological advances are permitting telecommunications service providers to offer a variety of new features and services to their customers such as caller ID, call waiting and voice mail. These and other developments have increased the complexity and variety of telecommunications services, as service providers seek to differentiate themselves by being more responsive to their customers and by expanding the number of telecommunications services and features they offer. These market trends have created the need for sophisticated and flexible billing solutions because telecommunications service providers can compete only if they are able to efficiently and accurately bill customers for the varied services and features they provide. As a result of their multiple and evolving billing needs, many established telecommunications service providers are replacing or augmenting their existing billing systems, which are often difficult and time consuming to modify. In addition, many emerging telecommunications service providers are seeking external billing solutions because efficient, flexible billing software is often too costly and time consuming for them to develop internally. Saville has developed, and continuously refines, its sophisticated base software applications, which it combines and customizes to meet the current and evolving requirements of its customers. The Company's systems are designed to operate in a multiservice environment, capable of billing local exchange, long distance and wireless (cellular, paging and satellite) telecommunications services. These systems are designed to support the discrete service offerings of large telecommunications service providers, including industry-leading customers such as AT&T Corporation ("AT&T") and Sprint Corporation ("Sprint"), or to serve as the complete billing systems of emerging and small- to medium- sized service providers, including customers such as Energis Communications Limited ("Energis"), a United Kingdom long distance telecommunications service provider, and Frontier Communications of Rochester Inc. ("Frontier"), a local exchange carrier. The Company supports its customers through offices in Galway, Ireland; Burlington, Massachusetts; Edmonton, Alberta; and Toronto, Ontario.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001001901_level_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001001901_level_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..17d978a95cd252f6e34ca812a5f4b31df1023462
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0001001901_level_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY - ------------------------------------------------------------------------- The following summary is qualified in its entirety by the more detailed information, financial statements and notes to the financial statements including the notes thereto appearing elsewhere in this Prospectus. THE COMPANY. The Company was incorporated in Florida on October 1, 1993. The total number of shares of Common Stock which the Company was authorized to issue was Five Thousand (5,000), par value $1.00. The Company's Common Stock had no cumulative rights but did originally have preemptive rights. On December 8, 1994, the Articles of Incorporation were amended to increase the authorized Common Shares to Fifty Million (50,000,000), to change the par value to $.001 and to remove any preemptive rights. The Company's executive offices are located at 11800 28th Street North, St. Petersburg, Florida 33716. Telephone No. (813) 571-3545. These offices consist of 13,500 square feet on a month to month lease for $4,000 per month. The Company is a distributor of golf training aids and golf accessories. It is the Company's mission to provide products which help golfers at all levels master their game. <TABLE> <CAPTION> THE DISTRIBUTION. <C> <S> Securities Being Distributed 100,000 shares of the Company's Common Stock. Purpose of Distribution To enhance the Company's ability to raise additional capital, if necessary, in the future. Shares of Common Stock Outstanding After Distribution 2,665,852 shares of Common Stock. Distributing Company Pratt, Wylce & Lords, Ltd., a Nevada corporation. Distribution Ratio One share of Common Stock for every twenty four shares of Pratt Common Stock owned of record on January 2, 1995 (the "Record Date"). Use of Proceeds The securities to which this Prospectus relates are being distributed to holders of Pratt Common Stock as a dividend and neither the Company nor Pratt will receive any cash or other proceeds in connection with the Distribution. Additionally this Prospectus relates to securities being registered on behalf of selling securityholders and the <C> <S> Company will not receive any cash or other proceeds in connection with the subsequent sale. Any proceeds received from the subsequent exercise of the Class A, Class B and Class C Warrants shall be used as working capital and to expand operations. Federal Income Taxes The Distribution will constitute a dividend fully taxable as income to holders of Pratt Common Stock. See "Federal Income Taxes." Certain Factors to be Considered See "Risk Factors." Absence of Dividends; Dividend Policy The Company does not currently intend to pay regular cash dividends on its Common Stock; such policy will be reviewed by the Company's Board of Directors from time to time in light of, among other things, the Company's earnings and financial position. See "Risk Factors." Transfer Agent The Company shall act as its own Transfer Agent until further financing is obtained. </TABLE> SELECTED FINANCIAL INFORMATION;. The selected financial information presented below under the captions and "Balance Sheet" as of September 30, 1994 and 1995 and "Statement of Operations" for the year ended September 30, 1994 and 1995 are derived from the audited financial statements of the Company. The selected financial information presented below under the captions "Balance Sheet" as of March 31, 1996 and Statement of Operations for the six months ended March 31, 1996 and 1995 is derived from the unaudited financial statements of the Company. The Balance Sheet and Statement of Operations have not been audited by independent certified public accountants' however, in the opinion of management, all adjustments (which include only normal recurring adjustments) have been made in order to present fairly the operations for this period. See "Management's Discussion and Analysis of Financial Condition" and "Financial Statements." <TABLE> <CAPTION> BALANCE SHEET September 30 September 30, March 31, 1994 1995 1996 ---- ---- ---- <S> <C> <C> <C> Total Assets $90,704 $188,214 $334,684 Total Liabilities $248,436 $536,226 $574,386 Total Stockholders' Equity (Deficit) $(157,732) $(348,012) $(239,702) Total Liabilities & Stockholders' Equity $90,704 $188,214 $334,684 </TABLE> <TABLE> <CAPTION> STATEMENT OF OPERATIONS For Year For Year For Six Months For Six Months From Inception Ended Ended Ended Ended (Oct. 1, 1993) September 30 September 30, March 31, March 31, to March 31, 1994 1995 1996 1995 1996 ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> Revenues from continuing operations $22,339 $98,474 $167,107 $3,035 $287,920 Income (Loss) from continuing operations (372,744) (1,442,693) (265,530) (390,711) (2,080,967) Nonoperating Income (Expense) (12,382) (30,489) (7,043) (14,432) (49,914) Provision (Credit) For Income Taxes - - - - - Net income (loss) (385,126) (1,473,182) (272,573) (405,143) (2,130,881) Net income (loss) per common share of outstanding stock $ (.24) $ (.74) $ (.10) $ (21) $ (.91) </TABLE> - -------------------------------------------------------------------------
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001001902_intevac_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001001902_intevac_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..eae15598c78b5a4f1c035abb647380c097c22fbb
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0001001902_intevac_prospectus_summary.txt
@@ -0,0 +1 @@
+SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors," and the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Prospectus. This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. THE COMPANY Intevac, Inc. ("Intevac" or the "Company") is a leading supplier of static sputtering systems and related manufacturing equipment used to manufacture thin-film disks for computer hard disk drives. Sputtering is a complex vacuum deposition process used to deposit multiple thin-film layers on a disk. The Company's principal product, the MDP-250B, was introduced in 1994 and is the fourth generation of the Company's Magnetic Disk Processing ("MDP") system. The MDP-250B system enables disk manufacturers to achieve high coercivities, high signal-to-noise ratios, minimal disk defects, durability and uniformity, all of which are necessary in the production of high performance, high capacity disks. Additionally, the Company's static systems allow disk manufacturers to achieve low production costs through high yield, high uptime, and low acquisition, operating and facilities costs. The Company's primary objective is to be the industry leader in supplying disk sputtering equipment by providing disk sputtering systems which have both the highest overall performance and the lowest cost of ownership in the industry. To leverage its expertise in thin-film disk production, the Company has acquired and intends to acquire technologies or businesses that enable it to expand its current product offerings. In addition, the Company believes that its expertise and technology may have applications other than for thin-film disk manufacturing and is in the process of expanding its product offerings to other areas, such as the flat panel display industry. The market for thin-film disks is growing rapidly, driven primarily by growing demand for personal computers and hard disk drives and by increasing requirements for data storage capacity. These requirements for capacity are increasing with the development of more memory intensive software, including complex operating systems such as Windows 95 and programs such as multimedia computing applications and more powerful and faster microprocessors and other computer hardware. Because of the increasing demand for reliable, rapid access storage and the intense competitiveness in the disk drive industry, disk drive manufacturers continually seek to produce higher capacity disk drives at a lower cost per megabyte of storage. Traditionally, thin-film disk manufacturers used in-line systems for disk sputtering. In 1982, Varian formed a business unit to design a disk sputtering system to address certain inherent limitations of the in-line sputtering architecture. That business, acquired by the Company in 1991, developed a single disk, multiple chamber static sputtering system, similar in concept to the single wafer processing machines used by the semiconductor industry. The Company's static systems differ from in-line systems in that static sputtering provides for deposition with no relative movement between the sputtering source and the disk being coated. This provides advantages in disk uniformity and precise control of process parameters. The benefits of the static approach have caused a number of leading disk manufacturers to purchase the Company's static systems. The Company typically sells its static sputtering systems for between $2.5 million and $3.0 million to both captive and merchant thin-film disk manufacturers. Since 1991, Intevac systems have been installed for or ordered by the following customers: Akashic Memories, Fuji Electric, Hitachi, HMT Technology, IBM, Komag, Mitsubishi, Seagate Technology, Trace Storage Technology and Western Digital. Based on data published by TrendFOCUS, an independent market research firm, the Company believes it has the largest number of installed static sputtering systems worldwide. Based upon MDP shipments, the Company believes it had 80 systems installed as of March 30, 1996. The Company sells and markets its products directly in the United States, and through exclusive distributors in Japan, Taiwan and Korea. The Company has established a subsidiary in Singapore to support customers in Southeast Asia. The Company's backlog was $45.6 million at March 30, 1996. <TABLE> <S> <C> THE OFFERING Common Stock offered by the Company................. 1,500,000 shares Common Stock offered by the Selling Shareholders.... 750,000 shares Common Stock outstanding after the Offering......... 13,750,959 shares(1) Use of proceeds..................................... For general corporate purposes, including working capital and possible acquisitions Nasdaq National Market symbol....................... IVAC </TABLE> SUMMARY FINANCIAL DATA (in thousands, except per share data) <TABLE> <CAPTION> THREE MONTHS ENDED PRO FORMA YEAR ENDED DECEMBER 31, --------------------- COMBINED ----------------------------- APRIL 1, MARCH 30, THREE 1993 1994 1995 1995 1996 MONTHS(2) -------- -------- ------- -------- --------- ---------- <S> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net revenues: Disk, flat panel and other........... $ 16,026 $ 18,266 $42,187 $ 4,674 $15,126 $ 17,596 MBE.................................. 6,370 2,185 695 695 -- -- ------- ------- ------- ------- ------- ------- Total net revenues.............. 22,396 20,451 42,882 5,369 15,126 17,596 Cost of net revenues: Disk, flat panel and other........... 9,749 11,799 27,280 3,244 9,203 11,029 MBE.................................. 5,417 858 434 434 -- -- ------- ------- ------- ------- ------- ------- Total cost of net revenues...... 15,166 12,657 27,714 3,678 9,203 11,029 ------- ------- ------- ------- ------- ------- Gross profit........................... 7,230 7,794 15,168 1,691 5,923 6,567 Operating income....................... 192 2,031 8,015 480 2,657 2,903 Income from continuing operations...... 66 1,675 5,765 467 1,897 1,971 Income (loss) from discontinued operations........................... 1,457 (267) 1,335 1,335 -- -- Net income............................. $ 1,523 $ 1,408 $ 7,100 $ 1,802 $ 1,897 $ 1,971 Income per share from continuing operations(3)........................ $ 0.01 $ 0.16 $ .054 $ 0.05 $ 0.15 $ 0.16 Net income per share(3)................ $ 0.15 $ 0.14 $ 0.67 $ 0.18 $ 0.15 $ 0.16 Shares used in per share calculations(3)...................... 10,305 10,285 10,606 10,295 12,631 12,631 </TABLE> <TABLE> <CAPTION> MARCH 30, 1996 ---------- PRO FORMA ACTUAL PRO FORMA(2) AS ADJUSTED(2)(4) ---------- ------------ ----------------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash, cash equivalents and short-term investments...... $ 16,690 $ 6,194 $33,275 Working capital........................................ 19,851 6,787 33,868 Total assets........................................... 58,604 57,246 84,327 Long-term liabilities.................................. 730 730 730 Total shareholders' equity............................. 29,218 23,383 50,464 </TABLE> - --------------- (1) Based on the number of shares outstanding as of March 30, 1996. Excludes 928,304 shares of Common Stock issuable upon exercise of stock options outstanding as of March 30, 1996 at a weighted average exercise price of $4.26 per share. See "Management -- 1995 Stock Option/Stock Issuance Plan," "-- Employee Stock Purchase Plan" and Note 11 of Notes to Consolidated Financial Statements. Subsequent to March 30, 1996 the Company issued options to purchase 312,500 shares of Common Stock at a weighted average exercise price of $9.85 per share. (2) The pro forma condensed combined statement of operations presents the combined results of Intevac, San Jose Technology Corp. ("SJT") and Lotus Technology, Inc. ("Lotus") and assumes the SJT acquisition took place on January 1, 1996 and the Lotus acquisition took place on February 1, 1996. The pro forma condensed combined statement of operations combines the historical statement of operations information for Intevac for the three months ended March 30, 1996 with the historical statement of operations for SJT for the three months ended March 31, 1996 and the historical statement of operations for Lotus for the three months ended April 30, 1996. The $5.8 million charge relating to these acquisitions of in-process technology is excluded from the pro forma condensed combined statement of operations. The pro forma condensed combined balance sheet assumes the acquisition occurred as of March 31, 1996 for SJT and April 30, 1996 for Lotus and combines Intevac's March 30, 1996 balance sheet, SJT's March 31, 1996 balance sheet and Lotus' April 30, 1996 balance sheet. See"Management's Discussion and Analysis of Financial Condition and Results of Operations," and Unaudited Pro Forma Condensed Combined Financial Statements. (3) See Note 2 of Notes to Consolidated Financial Statements. (4) Adjusted to reflect the sale of 1,500,000 shares of Common Stock offered by the Company hereby. See "Capitalization." Unless otherwise indicated, all information contained in this Prospectus assumes that the Underwriters' over-allotment option is not exercised. See "Underwriting."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001002022_innovative_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001002022_innovative_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements appearing elsewhere in this Prospectus. See "Risk Factors" for information that should be considered by prospective investors. The Company PhyMatrix Corp. (the "Company"), a physician practice management company, provides management services to disease specialty and primary care physicians and provides related medical support services. The Company's primary strategy is to develop disease management networks in specific geographic locations by acquiring physician practices and affiliating with disease specialty and primary care physicians. Where appropriate, the Company supports its affiliated physicians with related diagnostic and therapeutic medical support services. The Company's medical support services include radiation therapy, diagnostic imaging, infusion therapy, home health care and lithotripsy services. Since its first acquisition in September 1994, the Company has acquired the practices of and affiliated with 163 physicians and acquired several medical support service companies and a medical facility development company. The Company also owns a 43.75% interest (and has agreed to purchase the remaining interests) in a newly formed management services organization in Connecticut and a 50% interest in a newly formed management services organization in Georgia that provide management services to independent physician associations composed of over 375 multi-specialty physicians. Increasing concern over the cost of health care in the United States has led to numerous changes affecting the physician provider community, including the development of managed care and risk-based contracting arrangements. Based on data from the United States Health Care Financing Administration, industry sources have estimated that in 1995 the nation's 650,000 physicians generated approximately $200 billion in physician service revenues. The Company believes independent physicians are inadequately prepared to respond to the changing health care market because they typically have high operating costs relative to revenue and lack both purchasing power with vendors and sufficient capital to purchase new clinical equipment and management information systems. In order to be competitive, many physicians are seeking affiliations with larger entities, including physician practice management companies. The Company believes that the providers of disease management services in the United States, including cancer care providers, are highly fragmented. There are approximately 6,000 oncologists practicing in the United States, most of whom practice alone or in small groups, and there are hundreds of independent outpatient and free-standing cancer treatment centers. This fragmentation results, in part, from the fact that the treatment of cancer frequently requires a multi-disciplinary approach in a variety of settings involving numerous health care professionals with different specializations. The Company believes that its strategy of acquiring and integrating independent physician practices and medical support services into specialty networks creates synergies, achieves operating efficiencies and responds to the cost-containment initiatives of payors, particularly managed care companies. The Company has focused its disease management efforts on the acquisition of oncology practices and, to date, has acquired the practices of and affiliated with 61 oncologists. The Company also provides comprehensive cancer-related support services at 10 radiation treatment centers and two diagnostic imaging centers and manages infusion therapy services from three regional offices. The Company intends to develop additional disease management services for the treatment of other chronic illnesses such as diabetes, cardiovascular diseases and infectious diseases. In certain targeted markets, the Company organizes its affiliated physicians and related medical support services into integrated clusters of disease specialty and primary care networks, which it terms local provider networks ("LPNs"). LPNs are designed to provide a comprehensive range of physician and medical support services within specific geographic regions. The Company believes that its LPN structure will achieve operating efficiencies and enhance its ability to secure contracts with managed care organizations. The Company currently has contracts with managed care organizations under which the Company and its affiliated physicians provide certain cancer- related health care services to over 200,000 covered lives. To date, the Company has established an LPN in each of the Southeast Florida, Atlanta, Connecticut and Washington, D.C./Baltimore areas. The Company intends to establish additional LPNs by affiliating with IPAs. The Company also provides medical facility development services to related and unrelated third parties for the establishment of health parks, medical malls and medical office buildings. Such services include project finance assistance, project management, construction management, construction design engineering, physician recruitment, leasing and marketing. While the Company incurs certain administrative and other expenses in the course of providing such services, it does not incur costs of construction or risks of project ownership. The Company's strategy in financing its projects is to involve future tenants as significant investors in and owners of the developed medical facilities. Because most of its tenants are physicians and medical support service companies, the Company believes that the relationships that it develops with these parties through its medical facility development efforts will greatly enhance the Company's ability to affiliate with physicians and acquire physician practices and medical support service companies. Further, the Company believes that medical facility development in certain markets will aid in the integration of its affiliated physicians and medical support services. The Company affiliates with physicians through management agreements with physician practices or employment agreements with individual physicians. When affiliating with physicians, the Company generally acquires the assets of the physicians' practices, including its equipment, furniture, fixtures and supplies and, in some cases, goodwill and management service agreements, of the physicians' practices. Currently, the Company manages the practices of 132 physicians and employs another 31 physicians. The Company derives revenues from affiliated physicians through management fees charged to managed physician practices and from charges to third parties for services provided by employed physicians. The Company manages its home health care and lithotripsy services from eight local or regional offices. The Company also operates seven mobile lithotripters which provide services to approximately 70 hospitals and other health care facilities. The Company's objective is to be a leader in the physician practice management industry. The Company plans to achieve this objective by: (i) developing disease management networks in specific geographic locations by acquiring the practices of and affiliating with high profile disease specialty and primary care physicians, multi- specialty physician groups and independent practice associations, (ii) organizing its physician practices and related medical support services into LPNs, (iii) utilizing its medical facility development services to promote its affiliations and acquisitions as well as the integration of its affiliated physicians and medical support services, (iv) pursuing contractual arrangements with managed care organizations, (v) implementing information systems to improve patient care and provide outcome studies and other data and (vi) achieving operating efficiencies through the consolidation of the overhead and administrative functions of its physician practices. The Offering <TABLE> <S> <C> Securities Offered $100,000,000 principal amount of 6-3/4% Convertible Subordinated Debentures due 2003 (the "Debentures") and 3,546,099 shares of Common Stock, $.01 par value (the "Common Stock") issuable upon conversion of the Debentures. Payment of Interest June 15 and December 15, commencing December 15, 1996. Maturity of Debentures June 15, 2003 Conversion The Debentures are convertible into Common Stock of the Company at the option of the holder at any time after August 25, 1996 and at or before maturity, unless previously redeemed, at $28.20 per share, subject to adjustment upon the occurrence of certain events. See "Description of Debentures--Conversion Rights." Subordination Subordinated to all present and future Senior Indebtedness of the Company. At July 31, 1996, the Company had Senior Indebtedness in the amount of approximately $7.3 million. See "Capitalization." The Indenture (as defined herein) contains no limitation on the incurrence of indebtedness (including Senior Indebtedness) or other liabilities by the Company and its subsidiaries. See "Description of Debentures--Subordination." Redemption The Debentures are not redeemable by the Company prior to June 18, 1999. Thereafter, the Debentures are redeemable, in whole or in part, at anytime, at the redemption prices set forth in this Prospectus, together with accrued interest. See "Description of Debentures-- Optional Redemption." Redemption at Holder's Option In the event that there shall occur a Repurchase Event (as defined herein), each holder of the Debentures shall have the right, at the holder's option, to require the Company to repurchase such holder's Debentures at 100% of their principal amount, plus accrued interest. The term Repurchase Event is limited to transactions involving a Change in Control (as defined herein), and does not include other events that might adversely affect the financial condition of the Company or result in a downgrade in the credit rating (if any) of the Debentures. The Company's ability to repurchase the Debentures following a Repurchase Event is dependent upon the Company's having sufficient funds and may be limited by the terms of the Company's Senior Indebtedness or the subordination provisions of the Indenture. There can be no assurance that the Company will be able to repurchase the Debentures upon the occurrence of a Repurchase Event. See "Description of Debentures--Certain Rights to Require Repurchase of Debentures." Use of Proceeds The Company will not receive any proceeds from the sale of the Debentures or the shares of Common Stock hereunder. Trading Prior to the resale thereof pursuant to this Prospectus each of the Debentures was eligible for trading in Private Offerings, Resales and Trading through the PORTAL Market. Debentures sold pursuant to this Prospectus will no longer be eligible for trading in the PORTAL Market. The Company's Common Stock is quoted on The Nasdaq National Market under the Symbol "PHMX." </TABLE> Prospective investors are cautioned that the statements in this Prospectus that are not descriptions of historical facts may be forward-looking statements, including, but not limited to, statements contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations." Such statements reflect management's current views, are based on many assumptions and are subject to risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of factors, including, but not limited to, those discussed in "Risk Factors." SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA (Dollars in thousands, except per share data) <TABLE> <CAPTION> Historical (1) Pro Forma (2) ----------------------------------------------------------------- -------------------------- Combined June 24, 1994 Combined Consolidated Combined Consolidated Consolidated (inception) Year Month Six Six Six Combined to Ended Ended Months Months Months Year December December January Ended Ended Ended Ended 31, 31, 31, June 30, July 31, July 31, December 31, 1994 1995 1996(3) 1995 1996(3) 1996 1995 ----------- ---------- ---------- -------- ---------- ---------- ------------ (Audited) (Audited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) <S> <C> <C> <C> <C> <C> <C> <C> Statement of Operations Data: Net revenue $ 2,447 $ 70,733 $10,715 $19,984 $77,631 $88,211 $150,229 --------- -------- -------- ------ -------- -------- --------- Operating expenses: Cost of affiliated physician management services -- 9,656 2,797 -- 17,412 21,837 44,737 Salaries, wages and benefits 2,142 31,976 3,637 12,202 23,833 26,461 50,306 Depreciation and amortization 107 3,863 535 1,394 3,266 3,678 7,300 Rent 249 4,503 565 1,398 3,441 3,965 7,342 Earn out payment -- 1,271 -- 1,111 -- -- -- Provision for closure loss -- 2,500 -- -- -- -- 2,500 Other 1,098 22,900 3,434 6,847 20,986 23,237 40,762 --------- -------- -------- ------ -------- -------- ---------- 3,596 76,669 10,968 22,952 68,938 79,178 152,947 --------- -------- -------- ------ -------- -------- ---------- Income (loss) from operations (1,149) (5,936) (253) (2,968) 8,693 9,033 (2,718) --------- -------- -------- ------ -------- -------- ---------- Interest expense 95 4,852 812 1,110 810 3,448 6,907 Minority interest 52 806 81 292 58 -- -- Other nonoperating (revenue) expense -- -- -- -- -- -- (48) (Income) loss from investment in affiliates -- (569) 30 (219) (269) (269) (647) --------- -------- -------- ------ -------- -------- ---------- Income (loss) before income taxes (1,296) (11,025) (1,176) (4,151) 8,094 5,854 (8,930) Income tax expense (4) -- -- -- -- 3,032 2,193 -- --------- -------- -------- ------ -------- -------- ---------- Net income (loss) $(1,296) $(11,025) $(1,176) $(4,151) $ 5,062 $ 3,661 $ (8,930) ========= ======== ======== ====== ======== ======== ========== Net income per share (5) $ 0.23 ======== Pro forma income (loss) per share (6) $ 0.16 $ (0.49) ======== ========== Operating Data (Unaudited): Number of Affiliated physicians (7): Cancer -- 55 55 18 61 61 61 Primary care -- 14 14 10 21 21 21 Other speciality -- 34 34 -- 56 81 81 Revenues: Cancer services $ 685 $ 44,905 $ 6,712 $10,667 $44,273 $45,628 $ 81,969 Non-cancer physician services -- 7,705 2,281 1,121 15,873 24,145 45,789 Other medical services 1,762 18,123 1,722 8,196 10,086 11,039 18,842 Medical facility development -- -- -- -- 7,399 7,399 3,629 --------- -------- -------- ------ -------- -------- ---------- Total $ 2,447 $ 70,733 $10,715 $19,984 $77,631 $88,211 $150,229 ========= ======== ======== ====== ======== ======== ========== </TABLE> July 31, 1996 ---------------------------- Actual As Adjusted (8) -------- ---------------- (Unaudited) (Unaudited) Balance Sheet Data: Cash and cash equivalents $111,666 $ 94,726 Working capital 131,566 125,908 Total assets 264,621 277,181 Long-term debt, less current maturities 13,646 13,646 Convertible Subordinated Debentures 100,000 100,000 Total shareholders' equity 132,813 141,313 (1) The Company was incorporated in October 1995 to combine the business operations of certain companies (the "Related Companies") controlled by Abraham D. Gosman, the Company's Chairman, President and Chief Executive Officer. See Note 3 of Notes to Combined Financial Statements of the Company. The business operations of the Related Companies were acquired from third parties in transactions completed since September 1994. Simultaneously with the closing of the Company's initial public offering on January 23, 1996, the Related Companies were transferred to the Company in exchange for 13,307,450 shares of the Company's Common Stock (the "Formation"). The historical combined (representing periods prior to the Formation) or consolidated financial data represents the combined or consolidated financial position and results of operations of the Company and the Related Companies for the periods presented, in each case from the respective dates of acquisition. Each of the Acquisitions (as defined herein), except where noted, was accounted for under the purchase method of accounting. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (2) Gives effect to (i) the Acquisitions, (ii) the sale of the Common Stock offered in the Company's January 1996 initial public offering and the application of the net proceeds therefrom, as if such transactions had occurred as of January 1, 1995, and (iii) the issuance of the Debentures in the Debt Offering and the application of the net proceeds therefrom as if such transactions had occurred as of January 1, 1995. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Acquisition Summary." Adjustments have been made as required to each of the entities' historical results of operations to give effect to the completion of such Acquisitions and the initial public offering. See "Unaudited Pro Forma Financial Information."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001002037_learning_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001002037_learning_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and Consolidated Financial Statements and notes thereto, appearing elsewhere in this Prospectus. This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors." THE COMPANY Learning Tree International, Inc. ("Learning Tree" or the "Company"), is a leading worldwide provider of education and training to professionals responsible for programming, updating and maintaining the technology used to structure, process and communicate information ("information technology" or "IT") in business and government organizations. The Company develops, markets and delivers a broad, proprietary library of instructor-led course titles focused on client/server systems, Internet/intranet technologies, computer networks, operating systems, databases, programming languages, graphical user interfaces, object-oriented technology and IT management. The Company also tests and certifies IT professionals in 18 IT job functions, and its courses are recommended for college credit by the American Council on Education. In addition to its instructor-led courses, the Company has recently developed and is expanding a line of interactive computer-based training courses incorporating audio and graphical elements ("multimedia CBT") that are designed for both stand-alone CD-ROM and network-based delivery. The Company is paid directly by the employers of its course participants and does not receive funding from any government aid or loan programs. As a result, the Company does not depend on government appropriations for those programs and is not subject to certain governmental regulations. The market for IT training is driven by technological change. As the rate of this change accelerates, organizations find themselves increasingly hampered in their ability to exploit the latest information technologies because their IT professionals lack up-to-date knowledge and skills. According to International Data Corporation ("IDC"), the worldwide market for the training of IT professionals was approximately $10 billion in 1995. While much of the training for IT professionals continues to be provided by internal training departments, many organizations are expanding their use of external training providers due to corporate downsizing and the lack of internal trainers experienced in the latest technologies. The choice of training delivery formats and providers generally is made by individual IT professionals or their managers. When choosing an IT training provider, IT professionals and their managers seek a provider who can provide a broad spectrum of course titles and multiple delivery formats which result in efficient high quality education. The Company believes that its approach to IT education and training offers many advantages over other training providers due to the breadth and depth of its course library, the quality and size of its instructor force, its vendor independence and its ability to respond rapidly to customer demands for custom training solutions and timely course delivery. The Company believes its courses provide participants with skills and knowledge that they can immediately apply in their jobs. Its instructor-led courses include extensive hands-on, interactive exercises using networked classroom computers and its multimedia CBT courses provide similarly high levels of interactivity. Learning Tree's instructor-led course events typically deliver the equivalent of two semester hours of college credit in an intensive four-day format, thus minimizing the participants' time away from their jobs. The Company devotes significant resources to expanding and updating its instructor-led course library, which grew from 56 titles in fiscal 1993 to 98 titles as of June 30, 1996. The Company conducts its courses at its eight Education Centers, in hotel and conference facilities, and at customer sites in the United States, United Kingdom, France, Canada, Sweden, Japan and other countries worldwide. The Company's international operations contributed approximately 55% of its revenues in fiscal 1995. The Company's integrated marketing program targets individuals through direct mail marketing to its proprietary mail list of over 1,000,000 IT professionals and managers, and their employers through its direct sales force. In addition, the Company's telemarketing sales force responds to phone, e-mail, Web site and facsimile orders and inquiries. At June 30, 1996, the Company had 494 course instructors, all of whom are technical professionals with an average of 20 years of IT industry experience and possess skills and knowledge that are relevant to the subjects of the courses they teach. The Company's strategy is to strengthen its position as a leading provider of IT training worldwide by continuing to expand its library of proprietary, instructor-led course titles; providing flexible training solutions; expanding its line of proprietary multimedia CBT course titles; leveraging its integrated marketing and sales program; building continuing relationships with its individual course participants and its corporate customers; and leveraging its international operations. Learning Tree has developed a broad customer base focusing on Fortune 1000- level companies, their international equivalents and government organizations worldwide. Since inception, the Company has trained more than half a million participants, and in fiscal 1995, its 60,000 course participants were employed by more than 5,800 organizations around the world, such as AT&T, British Telecom, Ford Motor Company, General Electric, Hewlett-Packard, Intel, JP Morgan, Shell Oil and Xerox. Generally, each of the foregoing organizations purchased training from the Company throughout fiscal 1995 in individual purchase decisions ranging from $2,000 to $20,000 rather than through a single contract, and no organization accounted for more than 2.3% of the Company's revenues in fiscal 1995. The Company began its business in 1974, incorporated in California in 1976 and reincorporated in Delaware in 1995. The Company's principal executive offices are located at 6053 West Century Boulevard, Los Angeles, California 90045-0028, its telephone number is (310) 417-9700 and its address on the World Wide Web is http://www.learningtree.com. Information contained in the Company's Web site shall not be deemed to be part of this Prospectus. The Company is involved in only one business segment. See Note 8 of Notes to Consolidated Financial Statements. THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Company...... 400,000 shares Common Stock Offered by the Selling Stockholders............................ 1,600,000 shares(1) Common Stock Outstanding after the Offering................................ 14,663,012 shares(2) Use of Proceeds.......................... For working capital, other general corporate purposes and possible acquisitions. See "Use of Proceeds." Nasdaq National Market symbol............ LTRE </TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA (in thousands, except per share data) <TABLE> <CAPTION> NINE MONTHS YEAR ENDED SEPTEMBER 30, ENDED JUNE 30, ---------------------------- ----------------- 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues....................... $ 49,329 $ 58,466 $ 78,818 $ 58,091 $ 73,604 Gross profit................... 29,575 34,801 48,087 35,732 45,106 Income (loss) from operations.. (1,360) (365) 8,074 6,329 9,424 Net income (loss).............. (887) (443) 6,480 5,451 7,468 Net income (loss) per common share and common equivalent share......................... (0.08) (0.04) 0.57 0.48 0.55 Weighted average number of common and common equivalent shares outstanding............ 11,478 11,512 11,364 11,363 13,551 </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 ----------------------- ACTUAL AS ADJUSTED (3) ------- --------------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents............................. $46,628 $56,892 Total current assets.................................. 61,802 72,066 Total assets.......................................... 72,170 82,434 Total current liabilities............................. 28,394 28,394 Long-term debt and capital leases, net of current portion ............................................. 164 164 Total stockholders' equity............................ 41,874 52,138 </TABLE> - -------- (1) The Company will not receive any proceeds from the sale of Common Stock offered by the Selling Stockholders. (2) Excludes an aggregate of 1,500,000 shares of Common Stock reserved for issuance pursuant to the Company's 1995 Stock Option Plan. As of the date of this Prospectus, no options have been granted pursuant to that Plan. See "Management--Stock Option Plan." (3) Adjusted to give effect to the sale of 400,000 shares of Common Stock offered by the Company hereby, at an assumed public offering price of $28.25, after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company, and the application of the net proceeds therefrom. See "Use of Proceeds." Unless otherwise indicated, the information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. All share and per share data have been adjusted to reflect a 3.66 to 1 split of the Common Stock effected on October 6, 1995, and the conversion of the two classes of the Company's common stock into a single class on December 6, 1995. See "Description of Capital Stock--Common Stock" and "Underwriting."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001002044_infinium_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001002044_infinium_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Except as otherwise indicated, the information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. THE COMPANY Software 2000 develops, markets and supports enterprise-level business software applications for the financial management, human resource management and materials management functions of organizations in a broad range of industries worldwide. The Company also offers a specialized manufacturing system designed to manage process manufacturing operations. The Company's current line of products has been designed to take full advantage of the IBM AS/400 computing environment in a client/server configuration. The Company is currently developing versions of its principal products designed to run on additional hardware platforms using the UNIX and Microsoft Windows NT operating systems and to take advantage of World Wide Web technologies. The Company's more than 1,300 customers include Abbott Laboratories, Circus Circus Enterprises, Coca-Cola Enterprises, EDS Automotive Retail Group, Samsonite, Starbucks, TRW Information Systems & Services and Warner Bros. Records. See "Business -- Customers." For many years businesses have used packaged software applications to cost-effectively automate back-office accounting and payroll functions. Recently, heightened competitive pressures and rapidly changing market conditions have forced many organizations to reduce costs, increase productivity and become more responsive to customer requirements. In addition, because many business professionals use desktop productivity tools such as spreadsheets, they are requiring similar ease of use in their business applications. As a result, businesses are replacing their traditional mainframe-type accounting and payroll software applications with new, more flexible systems which not only keep track of accounting records but also help management monitor and measure the performance of their business operations and make timely access to performance and record keeping data easy for non-technical business professionals. In response to this shift, there is a corresponding shift occurring in the computing platforms that run these business applications. Centralized host/terminal-type systems ("legacy" systems) with their character-based user interfaces are being replaced by client/server computing platforms. In 1995, the Company released for general availability its first client/server products, Infinium:Human Resources, Infinium:Financial Management and Infinium:Desktop Manager. The Company's Infinium applications utilize object-oriented technology to provide enhanced data access and analysis capabilities that enable non-technical business professionals to "mine" the information contained in the applications' databases using an innovative and intelligent user interface. The goal of this next generation "object-oriented user interface" is to enable end users to spend less time searching for data and to devote more of their time to analysis and decision-making. The Company believes that the Infinium architecture, which allows its existing suite of AS/400 applications to function as either traditional host-based applications or object-oriented client/server applications, provides the Company with a distinct competitive advantage and enables the Company's customers to migrate to client/server computing without replacing their existing AS/400 business applications or investing in new computer systems. The Company's Infinium client/server products accounted for approximately half of the Company's software license revenues during the first six months of fiscal 1996. Software 2000's objective is to deliver leading client/server business solutions on multiple computer hardware, operating system and database platforms, including the AS/400, for enterprise-level use. In addition, the Company intends to expand its international distribution, extend the capabilities of its products through complementary relationships with third parties and build long-term product advantages through investment in the object-oriented Infinium architecture. The Company is currently building extensions to its products and customer support offerings which are designed to take advantage of Internet technologies and allow users to access the Company's applications and services using popular World Wide Web browsers. The Company currently offers its products and services primarily through a direct sales force in the United States, Canada and the United Kingdom and through business partners in other parts of the world. The Company believes that customer selection of its application products is based in part on the quality of consulting, product maintenance and customer support services provided by the Company. The Company was incorporated in Massachusetts in 1981. The Company's executive offices are located at 25 Communications Way, Hyannis, Massachusetts 02601, and its telephone number is (508) 778-2000. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company.......................... 500,000 shares Common Stock offered by the Selling Stockholders............. 2,370,000 shares Common Stock to be outstanding after the offering............ 10,854,242 shares(1) Use of proceeds.............................................. For general corporate purposes, including working capital, product development, capital expenditures and possible acquisitions. See "Use of Proceeds." Nasdaq National Market symbol................................ SFWR </TABLE> - --------------- (1) Based upon the number of shares of Common Stock outstanding on March 31, 1996, plus an additional 449,029 shares to be issued pursuant to the exercise of stock options outstanding at March 31, 1996 by certain Selling Stockholders in connection with this offering. Excludes 2,054,449 shares of Common Stock issuable upon exercise of stock options and 49,412 shares of Common Stock issuable upon exercise of warrants outstanding as of March 31, 1996. See "Capitalization" and "Management -- Stock Plans." <TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <CAPTION> YEAR ENDED ----------------------------------------------------- SIX MONTHS ENDED AUGUST 31, MARCH 31, ------------------------------------- SEPTEMBER 30, ----------------- 1991 1992 1993 1994 1995(1) 1995 1996 ------- ------- ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues.............................. $31,287 $45,128 $49,045 $56,800 $63,163 $27,752 $32,826 Gross profit.......................... 22,632 35,127 36,026 40,559 44,001 18,306 22,897 Income (loss) from operations......... (6,894) 2,354 844 2,241 5,380 765 1,352 Net income (loss)..................... (5,219) 781 539 1,502 3,684 504 1,268 Net income (loss) per share(2)........ $ (0.54) $ 0.08 $ 0.05 $ 0.15 $ 0.40 $ 0.06 $ 0.12 Weighted average common and common equivalent shares outstanding(2)(3)................... 10,071 10,214 10,495 10,825 9,401 9,458 10,805 </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 -------------------------- ACTUAL AS ADJUSTED(4) -------- --------------- <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and marketable securities............................ $29,121 $37,511 Total assets................................................................ 58,294 66,684 Deferred revenues........................................................... 24,651 24,651 Total liabilities........................................................... 38,103 38,103 Stockholders' equity........................................................ 20,191 28,581 <FN> - --------------- (1) The Company changed its fiscal year end from August 31 to September 30 effective with the fiscal year ended September 30, 1995. Accordingly, the September 1994 results are not included in the data presented above. See Note 2 to Consolidated Financial Statements. (2) See Note 2 to Consolidated Financial Statements. (3) The Company repurchased 1,632,000 shares of Common Stock from venture capital investors in September 1994. See Note 8 to Consolidated Financial Statements. (4) Adjusted to give effect to the sale of 500,000 shares of Common Stock offered by the Company hereby, at an assumed public offering price of $15.125 per share, after deducting estimated underwriting discounts and commissions and offering expenses payable by the Company, and the anticipated application of the net proceeds therefrom. Also adjusted to give effect to the issuance of 449,029 shares pursuant to the exercise of stock options outstanding at March 31, 1996 at an average exercise price of $3.48 per share. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001002063_complete_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001002063_complete_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..8ca4d6c8b2d93258ed1ed946f821e2491eee177d
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the financial statements and related notes appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus assumes that the Over-Allotment Option and the Representatives' Warrants are not exercised. Complete Management, Inc. ("CMI") acquired the assets and business of Medical Management, Inc. ("MMI") and Advanced Alliance Management Corp. ("AAMC"), on January 3, 1996 and October 2, 1996, respectively, each through a merger (the "MMI Merger" and the "AAMC Merger," respectively) into wholly owned subsidiaries of CMI. Prior to being acquired by CMI, MMI provided and administratively managed diagnostic imaging equipment in physicians' offices and hospitals and AAMC provided physician practice management services. Unless otherwise indicated, all references to the Company herein include CMI, MMI, AAMC and any of their respective subsidiaries. "MMI and AAMC" refers to those entities before the mergers. THE COMPANY The Company is a physician practice management company. It provides a full range of management services to physicians and hospitals located primarily in the most densely populated area of New York State, including New York City, Long Island and the Hudson Valley region. The Company offers virtually all the business, financial and marketing support required by medical practices. The Company's sophisticated management systems and its high level of professionalism enable its clients to handle the non-medical aspects of their practices effectively. It provides its clients with office space, equipment and supplies and non-medical personnel. It also bills patients and third-party payors, collects receivables and assists in record keeping and compliance with reporting requirements. The Company also advises clients regarding regulatory compliance, consults on marketing and business strategies, and provides financing for expansion. In addition, the Company provides and manages diagnostic imaging equipment used by doctors in their own practices and by hospitals. The Company does not, however, perform any type of medical diagnostic or treatment services. By focusing on the complex, time-consuming and expensive non-medical aspects of medical practices, the Company can offer its clients operating efficiencies that they could not attain on their own. Since July 1, 1996, the Company has made significant progress towards becoming a fully diversified and integrated company serving both primary care and specialty practices. The Company's services are designed to work effectively both in today's fee-for-service environment and the managed care capitated fee environment of the future. Pursuant to the Company's expansion program, it has acquired two medical billing and collection companies, one primarily serving hospitals and one primarily serving medical practices. The Company has also acquired three physician practice management companies serving primary care, neurology, radiology, and community and industrial medicine practices in New York City and Westchester, Orange, Putnam and Dutchess counties of New York State. It has also assisted Greater Metropolitan Medical Services ("GMMS"), its first and largest client, in acquiring a neurology practice with three offices in New York City. With these acquisitions and GMMS' continued growth, the number of physicians to whom the Company provides a full range of services has increased from 16 at December 31, 1995 to 76 at November 15, 1996. More limited services, such as transcribing, billing, collecting and temporary staffing, are provided by the Company to 50 medical practices with more than 820 doctors and to 32 hospitals. The Company believes the practices that it provides with a broad range of services will serve as the nucleus of a network offering both primary care and multi-specialty services throughout New York State. Although managed care has evolved more slowly in New York than in many other States, the penetration rate of managed care is presently increasing rapidly in New York. The Company believes that its network will enable its clients to enter into managed care and capitated fee arrangements with insurance companies and employers. The Company's management is experienced in hospital administration and trains its and clients' staffs to operate with full efficiency. The Company, by standardizing many of its procedures and automating large portions of the business aspects of its clients' practices, offers significant management efficiencies. For example, standardized and automated systems are used to produce and administer the records used to support clients' claims for payment. In addition, the Company has centralized its purchasing and collection functions, and its standard office format permits medical and non-medical personnel and equipment to be shifted among offices as required. Historically, almost all of CMI's revenues have come from GMMS, a single medical practice group. However, if the various mergers and acquisitions consummated before November 15, 1996 had been consummated at January 1, 1995, then, on a pro form combined basis, 62% of 1995 net revenues (27% if the proposed Amedisys Merger (defined below) had been consummated and given effect on such date) would have been received from GMMS. Lawrence Shields, M.D., holds 95% of the stock of GMMS and is a founder of the Company and the Selling Shareholder in this offering. GMMS focuses on the evaluation and treatment of injury-related conditions. Since becoming a client of CMI in early 1993, GMMS has expanded from a neurological practice occupying a single office to a multi-specialty practice with nine offices. Its twenty-one doctors currently perform or supervise procedures at a rate in excess of 200,000 a year. The injury-related conditions treated by GMMS are principally covered by automobile no-fault and workers' compensation insurance. The Company's objective is to become the dominant provider of medical management services in New York State and other selected markets including New Jersey by implementing an aggressive growth strategy. The key elements of the Company's strategy are: o Increase Number of Primary Care Clients. o Assist Clients in Expanding the Scope of their Services. o Expand the Reach of all Medical Practices Under Management. o Create a Network of Physicians to Participate in Managed Care. o Assist Clients in Maintaining High Credibility with Third-Party Payors and other Referral Sources. o Maintain Industry Leadership in Medical Management Systems. CMI was incorporated in New York on December 30, 1992 and commenced operations on April 1, 1993. On January 3, 1996, CMI consummated its initial public offering (the "IPO") of 2,000,000 Common Shares at a price of $9.00 per share and received proceeds net of registration costs and repayment of certain obligations of $13,480,000. On January 3, 1996, it also consummated the acquisition of MMI. In June 1996, it consummated a second public offering (the "First Series Debenture Offering") of $40,250,000 aggregate principal amount of 8% Convertible Subordinated Debentures due August 15, 2003, (the "First Series Debentures") and received net proceeds of $36,144,000. In March and July 1996, the Company borrowed an aggregate of $5,000,000 due March 20, 2001 evidenced by 8% convertible subordinated notes (the "Convertible Subordinated Notes".) On October 17, 1996, CMI entered into a letter of intent (the "Letter of Intent") for the acquisition of Amedisys, Inc. ("Amedisys"). Amedisys provides home health care, supplemental nurse staffing, management services to independent home care agencies and services to physicians. These physician services include physician practice management and the organization, development and management of independent practice associations ("IPAs"). It also operates outpatient ambulatory surgery centers and has recently organized Future Care, Inc., a 51% owned subsidiary to organize and operate a preferred provider network and engage in certain related activities. Amedisys maintains 24 home health care and supplemental staffing offices in eight states, operates two outpatient surgery centers in Texas, and recently opened an ambulatory surgery center in Louisiana. Amedisys also manages home health agencies, physician practices and rural health clinics and is the network manager of the Home Care Alliance of Louisiana. The acquisition of Amedisys, if consummated, will be effected through its merger (the "Amedisys Merger") into a wholly-owned subsidiary of CMI in exchange for approximately 1.44 to 1.84 million Common Shares. Although CMI has no obligation to do so, the Letter of Intent also contemplates that CMI may invest up to $15 million in Amedisys' ambulatory surgery centers now owned or to be acquired and $4,000,000 in other Amedisys operations following the Amedisys Merger, provided such centers and operations meet certain post-merger financial goals. Amedisys has granted CMI an option to purchase 500,000 shares of Amedisys common stock exercisable only upon the occurrence of certain Prohibited Events, as defined in the Letter of Intent. The Letter of Intent is nonbinding, except for the provisions relating to the option and certain other ancillary matters, and is subject to the execution of a definitive agreement, the completion of due diligence and the approval of the Amedisys Merger by the Boards of Directors of both parties and the shareholders of Amedisys. In addition, the Letter of Intent contemplates, and the Company believes, that the Amedisys Merger will be treated, for accounting and financial statement purposes, as a pooling of interests. If the Company determines that the transaction will not be given pooling of interests treatment, whether before or after due diligence and regulatory review, the Company will seek to re-negotiate the terms of the Amedisys Merger. No assurances can be given that the transaction will be given pooling of interests treatment or, if not, whether the Company can reach agreement with Amedisys on a restructured transaction. Accordingly, for the foregoing or other reasons, no assurances can be given that the Amedisys Merger will be consummated. However, since it is not improbable that the Amedisys Merger will occur, certain business and financial information relating to Amedisys and certain new investment considerations which will be applicable to the Company if the Amedisys Merger is consummated are included in this Prospectus. See "Investment Considerations" and "Proposed Amedisys Merger." The Company believes that the Amedisys Merger, if consummated, will provide it with added expertise in obtaining capitated fee contracts for its clients and assisting its clients in operating in a capitated fee environment. The Company believes that such expertise is more limited in New York State. Further, Amedisys will also provide the Company with additional skills in managing large independent physician associations. The Company's principal executive offices are located at 254 West 31st Street, New York, New York 10001 and its telephone number is (212) 868-1188. THE OFFERING SECURITIES OFFERED Debentures .................... $25,000,000 aggregate principal amount of [6 1/2 to 8%] Convertible Subordinated Debentures Due [December] 15, 2003 (the "Debentures") Common Shares ................. 3,000,000 shares, of which 2,500,000 shares are offered by the Company and 500,000 shares by the Selling Shareholder. Debenture Terms Interest Payment Dates ........ [December] 15 and [May] 15, commencing , 199_ Maturity Date.................. [December] 15, 2003 Conversion..................... The Debentures are convertible into Common Shares, par value $.001 per share, at any time prior to maturity, unless previously redeemed, at a conversion price of $ per share [120% to 130% of the closing sale price of the Common Shares on the AMEX on the effective date of this offering], subject to adjustment in certain events. Redemption at Option of the Company...................... The Debentures are not redeemable prior to [three years from the effective date of this offering]. Thereafter, the Debentures are redeemable, in whole or in part, from time to time, at the option of the Company at a redemption price equal to 100% of the principal amount thereof plus accrued interest, provided that the Debentures may not be redeemed prior to maturity unless the closing price for 20 consecutive trading days prior to the date of notice of such redemption has equaled or exceeded $ . [150% of the closing price of the Common Shares on the effective date of this offering] subject to adjustment in certain events. See "Description of Debentures -- Optional Redemption." Redemption at Option of Holders ..................... In the event that a Repurchase Event (as defined) occurs, subject to certain conditions, each holder of a Debenture shall have the right, at the holder's option, to require the Company to purchase all or any part of such holder's Debentures at 100% of the principal amount thereof plus accrued interest. Sinking Fund................... If a sinking fund is established for any indebtedness that is junior or pari passu with the Debentures and which has a maturity or weighted average time to maturity which is on or prior to , 2003, the Debentures will be entitled to an annual sinking fund beginning in the Company's next fiscal year calculated to retire that amount of Debentures equal to the lesser of (i) the same percentage of outstanding Debentures prior to maturity as the percentage of the principal amount of such other indebtedness to be retired prior to maturity on the same payment schedule as such other indebtedness or (ii) such amount of Debentures necessary to result in the Debentures having the same weighted average time to maturity as the other indebtedness. Subordination.................. The Debentures are subordinated in right of payment to all present and future Senior Indebtedness (as defined) of the Company. The Indenture will not restrict the incurrence of additional Senior Indebtedness by the Company or any indebtedness by any Subsidiary. See "Description of Debentures." SECURITIES OUTSTANDING BEFORE THIS OFFERING Common Shares.................. 8,031,471 shares First Series Debentures ....... $40,250,000 aggregate principal amount, convertible into Common Shares at $14.00 per share, subject to adjustment. Convertible Subordinated Notes.. $5,000,000 aggregate principal amount, convertible into Common Shares at $9.00 per share, subject to adjustment. SECURITIES OUTSTANDING AFTER THIS OFFERING Common Shares.................. 10,531,471 shares (1) First Series Debentures........ $40,250,000 aggregate principal amount Convertible Subordinated Notes.. $5,000,000 aggregate principal amount Debentures..................... $25,000,000 aggregate principal amount Use of Proceeds................ To provide added funds for the Company's acquisition program and for working capital and general corporate purposes. See "Use of Proceeds." TRADING SYMBOLS Common Shares.................. "CMI" Debentures..................... Application has been made for listing of the Debentures on the AMEX under the symbol "CMI.B." - ------ (1) Excludes Common Shares reserved for the following purposes: (a) 940,792 Common Shares issuable upon the exercise of options granted under CMI's 1995 Stock Option Plan (the "Option Plan"), of which options for 240,792 shares are subject to approval by shareholders of an increase in the number of shares issuable under such plan; (b) 225,000 shares issuable upon the exercise of options granted to professional and other consultants to the Company; (c) 200,000 shares issuable upon the exercise of warrants ("IPO Representatives' Warrants") issued to the representatives ("IPO Representatives") in the Company's IPO; (d) 250,000 shares issuable upon the exercise of warrants ("First Series Debenture Offering Representative's Warrants") issued to the representative ("First Series Debenture Offering Representative") in the First Series Debenture Offering; (e) 2,875,000 shares issuable upon conversion of the First Series Debentures; (f) 555,555 shares issuable upon conversion of the Convertible Subordinated Notes and (g) 75,334 shares issuable upon exercise of warrants granted in the initial public offering of MMI and assumed by the Company in the MMI Merger. Also excludes shares which may be issued in the proposed Amedisys Merger. SUMMARY OF FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENTS OF INCOME DATA: COMPLETE MANAGEMENT, INC. <TABLE> <CAPTION> For the period from April 1, 1993 Nine Months Ended to December 31, Years Ended December 31, September 30, ------------------ ------------------------ ---------------------- 1993 1994 1995 1995 1996 ------------------ --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> Revenue ..................... $5,283 $10,654 $12,294 $ 9,056 $20,030 Interest discount (1) ....... (865) (1,744) (2,017) (1,482) (1,748) ------------------ --------- --------- --------- --------- Net revenue ................. 4,418 8,910 10,277 7,574 18,282 Operating expenses .......... 2,790 4,520 5,745 3,889 11,467 ------------------ --------- --------- --------- --------- Operating income ............ 1,628 4,390 4,532 3,685 6,815 Interest discount included in income (2) ................. 207 922 1,585 1,144 1,855 Other income/(expense) ...... 62 55 (29) 13 (1,142) ------------------ --------- --------- --------- --------- Income before provision for taxes ...................... 1,897 5,367 6,088 4,842 7,528 Provision for income taxes .. 891 2,522 2,861 2,276 3,613 ------------------ --------- --------- --------- --------- Net income .................. $1,006 $ 2,845 $ 3,227 $ 2,566 $ 3,915 ================== ========= ========= ========= ========= Primary net income per share $ 0.34 $ 0.95 $ 1.08 $ 0.87 $ 0.50 ================== ========= ========= ========= ========= Fully diluted net income per share ...................... N/A N/A N/A N/A $ 0.42 ================== ========= ========= ========= ========= Weighted average number of shares outstanding ......... 2,981 2,981 2,981 2,964 7,840 ================== ========= ========= ========= ========= Ratio of earnings to fixed charges (3) ................ N/A N/A 133.35 N/A 5.71 ================== ========= ========= ========= ========= </TABLE> UNAUDITED PRO FORMA COMBINED <TABLE> <CAPTION> Without Amedisys (4) With Amedisys (4)(5) -------------------------------- -------------------------------- Year Ended Nine Months Year Ended Nine Months December 31, September 30, December 31, September 30, 1995 1996 1995 1996 -------------- -------------- -------------- -------------- <S> <C> <C> <C> <C> Revenue ...................................... $29,335 $27,398 $66,924 $61,046 Interest discount (1) ........................ (2,719) (1,748) (2,719) (1,748) -------------- -------------- -------------- -------------- Net revenue .................................. 26,616 25,650 64,205 59,298 Operating expenses ........................... 21,250 20,346 57,459 52,949 -------------- -------------- -------------- -------------- Operating income ............................. 5,366 5,304 6,746 6,349 Interest discount included in income (2) ..... 2,236 1,855 2,236 1,855 Other (expense) .............................. (213) (1,223) (451) (1,498) -------------- -------------- -------------- -------------- Income before provision for taxes ............ 7,389 5,936 8,531 6,706 Provision for income taxes ................... 3,985 3,097 4,185 3,365 -------------- -------------- -------------- -------------- Net income ................................... $ 3,404 $ 2,839 $ 4,346 $ 3,341 ============== ============== ============== ============== Primary net income per share ................. $ 0.43 $ 0.35 $ 0.46 $ 0.34 ============== ============== ============== ============== Fully diluted net income per share ........... $ -- $ 0.30 $ -- $ 0.30 ============== ============== ============== ============== Weighted average number of shares outstanding 7,964 8,198 9,487 9,721 ============== ============== ============== ============== </TABLE> SUMMARY FINANCIAL INFORMATION (CONTINUED) (IN THOUSANDS) UNAUDITED BALANCE SHEET DATA: <TABLE> <CAPTION> As at September 30, 1996 -------------------------------------------------------------------------------------- Pro Forma ---------------------------------------- As Adjusted CMI, AAMC, -------------------------------- Actual CMI, AAMC, Other Post 9/30/96 CMI, AAMC, --------- Other Post 9/30/96 Acquisition, Other Post 9/30/96 CMI Acquisition Amedisys CMI Acquisition --------- ------------------ ------------------ ---------- ------------------ (6) (7) (8) (9) <S> <C> <C> <C> <C> <C> Cash and cash equivalents ............ $ 11,792 $ 6,502 $ 8,886 $ 68,542 $ 63,252 Marketable securities (10) ........... 25,851 25,851 25,851 25,851 25,851 Accounts receivable, net (11) ........ 39,608 40,894 48,309 39,608 40,894 Purchase price in excess of net assets acquired (12) ....................... 12,068 21,512 21,873 12,068 21,512 Total assets ......................... 105,208 112,905 128,810 164,704 172,401 Current liabilities .................. 10,141 12,171 21,105 10,141 12,171 Long-term obligations, less current .. 1,965 2,029 4,185 1,965 2,029 Convertible subordinated obligations . 45,250 45,250 45,250 70,250 70,250 Shareholders' equity ................. 42,687 48,290 53,086 77,183 82,785 Working capital ...................... 47,215 41,189 42,877 103,965 97,939 </TABLE> - ------ (1) Represents an interest discount taken to reflect the presumed collection of revenues over a period in excess of one year. See "Notes to Consolidated Financial Statements of CMI." (2) Represents interest income included in income as a result of the amortization over three and two year periods of the interest discount on revenues for CMI and MMI, respectively. See "Notes to Consolidated Financial Statements of CMI and MMI."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001002130_contifinan_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001002130_contifinan_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this Prospectus. Unless the context indicates otherwise, all references in this Prospectus to the Company include ContiFinancial Corporation and its subsidiaries, ContiMortgage Corporation ("ContiMortgage"), ContiTrade Services L.L.C. ("ContiTrade"), ContiFinancial Services Corporation ("ContiFinancial Services"), ContiSecurities Asset Funding Corp. ("CSAF"), ContiSecurities Asset Funding Corp. II, ContiSecurities Asset Funding II, L.L.C. and ContiFunding Corporation. For a description of certain terms used in this Prospectus, see "Glossary." THE COMPANY The Company engages in the consumer and commercial finance business by originating and servicing home equity loans and providing financing and asset securitization structuring and placement services to originators of a broad range of loans, leases and receivables. Securitization provides significant benefits, including greater operating leverage and reduced costs of funds, in the financing of assets such as non-conforming home equity loans, equipment leases, home improvement loans, franchise loans, commercial/multi-family loans, sub-prime auto loans and leases, small business loans and timeshare loans. For the year ended March 31, 1996 and the three months ended June 30, 1996, the Company originated or purchased $2.3 billion and $678 million, respectively, of home equity loans through ContiMortgage. In addition, for the same periods, the Company securitized or sold $2.0 billion and $301 million, respectively, of loans and other assets for its clients. Through ContiMortgage, the Company is a leading originator, purchaser, seller and servicer of home equity loans made to borrowers whose borrowing needs may not be met by traditional financial institutions due to credit exceptions or other factors. Loans are made to borrowers primarily for debt consolidation, home improvements, education or refinancing and are primarily secured by first mortgages on one- to four-family residential properties. ContiMortgage is devoting substantial resources and capital to: (i) increasing its market penetration beyond the mid-Atlantic region; (ii) expanding its broker loan network to complement its existing wholesale loan network; (iii) adding new loan products, such as adjustable rate mortgages; (iv) expanding and diversifying its origination sources; and (v) investing in information services and collection technologies. Two distinct factors drive the expansion of the Company's home equity loan business -- growth in volume of loans and access to the capital markets to facilitate the most efficient sale of these loans through securitization. The Company believes it has a competitive advantage because the management of ContiMortgage is able to focus exclusively on expanding the volume of loans originated or purchased, enhancing loan underwriting efficiencies and building its servicing portfolio, while relying upon the professional staff of ContiTrade and ContiFinancial Services to focus exclusively on providing warehouse financing, hedging and securitization structuring and placement services. This specific industry expertise enables the Company to minimize its financing costs and interest rate exposure and maximize the proceeds and profits from its securitizations and its growing servicing portfolio. From April 1, 1991 through June 30, 1996, ContiMortgage completed 23 AAA/Aaa-rated REMIC securitizations totalling $4.9 billion. As of June 30, 1996, ContiMortgage had a servicing portfolio of $4.3 billion. The Company, through its subsidiaries, ContiTrade and ContiFinancial Services, provides financing and asset securitization structuring and placement services. In this area, ContiTrade's management and execution of ContiMortgage's financing, hedging and securitization needs has served as a model for the Company's strategic alliances with originators of a broad range of consumer and commercial loans and other assets ("Strategic Alliances"). The Company offers Strategic Alliance clients complete balance sheet liability management, including warehouse financing, interest rate hedging services and <TABLE> <S> <C> Purchase Premium Refunds............ That portion of the premium paid by the Company to a wholesale originator upon purchase of a loan which is required to be repaid by the originator if the loan prepays before a contractually set time. REMIC............................... Real Estate Mortgage Investment Conduit. REMICs, Owner Trusts and Grantor Trusts.............................. Trusts formed to purchase securitizable assets, issue pass-through certificates and make distributions to investors. Such trusts are organized in accordance with the Internal Revenue Code so as to not be subject to corporate tax at the entity level. Reserve Account..................... A reserve account serves the same purpose as Overcollateralization. However, instead of applying Excess Spread as a payment of principal on the certificates, it is accumulated in an account until a required amount is reached. Funds from this account are available to cover losses realized on loans or other assets held by a trust. Residual Certificates............... Represent Excess Spread Receivables which are subject to change in value due to prepayment rates and credit losses. The Residual Certificates are subordinate certificates and are in a first loss position. Securitization...................... The sale by the Company of loans or other assets it has originated or purchased to a trust (or other special purpose entity). Concurrently, the trust issues securities (usually pass-through certificates) to investors in a private placement or a public offering. The Company is paid a purchase price consisting of cash from the proceeds of the sale of the securities and an interest in the loans or other assets securitized generally in the form of Interest-only Certificates and/or Residual Certificates (i.e., the Excess Spread Receivable). Small Business Loans................ Loans to small businesses collateralized primarily by accounts receivable. Such loans are not guaranteed by the Small Business Administration or any other government agency. Strategic Alliance.................. A relationship between the Company and an originator of consumer and commercial loans, leases and receivables. In the relationship, the Company provides financing and asset securitization expertise (including warehouse financing, interest rate hedging services and the structuring and placement of the asset portfolio in the form of asset-backed securities) to the asset originator and the asset originator provides a consistent flow of securitizable assets to the Company. In certain of its Strategic Alliances, the Company may receive warrants or warrant-like equity participations in Strategic Alliance clients or may otherwise seek to make equity investments in its Strategic Alliance clients. Strategic Alliance Equity Interests........................... Warrants, warrant-like equity participations or other equity investments in Strategic Alliance clients. </TABLE> the structuring and placement of asset portfolios in the form of asset-backed securities. This allows the management of its Strategic Alliance clients to focus on expanding and improving asset origination and servicing. For the years ended March 31, 1995 and 1996, services provided by ContiTrade to Strategic Alliance clients contributed $14.8 million and $108.5 million, respectively, to the total gross income of the Company. ContiFinancial Corporation is a Delaware corporation incorporated on September 29, 1995. The principal executive offices of the Company are located at 277 Park Avenue, New York, New York 10172 and its telephone number is (212) 207-2800. INDUSTRY OVERVIEW The home mortgage loan market is the largest consumer finance market in the United States. Over the past several years, the non-conforming home equity loan sector of the home mortgage loan market, which is relatively fragmented, has grown at a faster rate than the overall market. Industry studies have estimated that non-conforming home equity loan originations grew at an estimated compound annual growth rate of 8.6% from $96 billion in 1990 to $145 billion in 1995. According to studies performed by the David Olson Research Co., a group that has been analyzing the home equity loan industry since 1969, the growth in the volume of non-conforming home equity loans is attributable to, among other factors: (i) a larger number of borrowers seeking to consolidate their revolving credit debt and auto loans for a lower rate and payment; (ii) slow growth in real estate appreciation causing an increase in the number of borrowers seeking to make home improvements; (iii) increased entry into the home equity loan market by commercial banks as well as the growth in the number and size of mortgage brokers making home equity financing more readily available; and (iv) growth in overall consumer awareness of the availability of home equity financing. In addition, the asset-backed securitization market has provided an important source of financing for originators of home equity loans. BUSINESS STRATEGY The Company's strategy is to continue its strong growth through geographic expansion, Strategic Alliance activities, selective acquisition opportunities and investments in origination, servicing and collection information systems and technology. Currently only 10% of the Company's loan volume is originated west of the Mississippi. In accordance with the Company's plans to expand into the western United States, in fiscal 1995, the Company opened two regional offices in California and Arizona and expects that these offices will increase its market share in this region. At the same time, the Company plans on increasing penetration in existing markets on the East Coast by continuing to pursue opportunities to build market share by expanding current relationships with mortgage bankers and brokers. The Company's strategy with respect to Strategic Alliance activities is to replicate its success with ContiMortgage by: (i) targeting classes of consumer and commercial loans, leases and receivables that have the potential to be financed more efficiently through securitization; (ii) identifying and establishing Strategic Alliances with originators of these assets that have experienced management teams, sophisticated systems and a proven track record of originating, underwriting, servicing and collecting consumer and commercial loans, leases, and receivables; and (iii) securing from these originators a consistent flow of securitizable assets. In addition, the Company may, from time to time, make an equity or subordinated debt investment in a Strategic Alliance client. <TABLE> <S> <C> Structured Finance Transactions..... The securitization of consumer and commercial loans, leases and other receivables, including home equity loans, which are sold through REMICs or other trust structures or in whole loan sales. Sub-prime Auto Loans and Leases..... Automobile loans or leases made to credit impaired borrowers. Timeshare Loans..................... Loans made to purchase a real property interest in specific units at vacation resort properties. Typically, the borrowers' rights to use and occupy the real property are subject to limitations. Title I Home Improvement Loans...... Loans to homeowners, a portion of which is guaranteed by the U.S. government, for the purpose of certain pre-qualified home improvements. Warehouse Financing................. Secured loan facilities or purchase commitments provided to asset originators to facilitate the accumulation of securitizable assets prior to securitization. Commitments are typically for one year or less and are designed to fund only securitizable assets. Wholesale Loans..................... Loans purchased by the Company in bulk sales from mortgage bankers and commercial banks. </TABLE> RECENT DEVELOPMENTS SINCE JULY 1, 1996, CONTITRADE HAS COMPLETED TWO ADDITIONAL SECURITIZATIONS CONSISTING OF ONE COMMERCIAL AND ONE HOME EQUITY LOAN TRANSACTION, TOTALLING $242 MILLION AND, IN AUGUST 1996, CONTIMORTGAGE EXPECTS TO COMPLETE AN ADDITIONAL REMIC SECURITIZATION IN THE AMOUNT OF $550 MILLION. RELATIONSHIP WITH CONTINENTAL GRAIN Continental Grain Company ("Continental Grain") currently owns approximately 81% of the Company's outstanding common stock, $.01 par value ("Common Stock"). Prior to the Company's initial public offering of 7,130,000 shares of its Common Stock in February 1996 (the "IPO"), the Company was a wholly-owned subsidiary of Continental Grain. Continental Grain is a privately held, multinational agribusiness company. Continental Grain has advised the Company that its current intention is to continue to hold all the shares of Common Stock beneficially owned by it. However, there can be no assurance that Continental Grain will not sell all or a portion of its holdings at some future date. As a result of its ownership interest, Continental Grain has voting control on all matters submitted to stockholders, including the election of directors and the approval of extraordinary corporate transactions. See "Principal Stockholders." Continental Grain has provided the Company with intercompany financing in the form of the Intercompany Debt (as defined). For a description of the Intercompany Debt and certain other transactions between Continental Grain and the Company, see "Certain Transactions" and "Description of Certain Indebtedness and Financing Arrangements."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001002135_westell_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001002135_westell_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary should be read in conjunction with, and is qualified in its entirety by, the more detailed information, including "Risk Factors" and the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Prospectus. As used in this Prospectus, the terms "Westell" and "Company" include Westell Technologies, Inc. and its subsidiaries, unless the context otherwise indicates. The discussion in this Prospectus contains forward-looking statements which include risks and uncertainties. The Company's actual results could differ materially from those discussed in this Prospectus. Factors that could cause or contribute to such differences include those discussed in the sections entitled "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," as well as those discussed elsewhere in this Prospectus. THE COMPANY Since 1980, Westell Technologies, Inc. ("Westell" or the "Company") has developed telecommunications products that address the needs of telephone companies ("telcos") to upgrade their existing network infrastructures continually in order to deliver advanced data and voice services to their customers. The Company designs, manufactures, markets and services a broad range of digital and analog products used by telcos to deliver services primarily over existing copper telephone wires that connect end users to a telco's central office (the "local access network"). The Company also markets its products and services to other telecommunications and information service providers seeking direct access to end-user customers. The Company's principal customers include all seven Regional Bell Operating Companies (the "RBOCs") as well as GTE, British Telecom and Telecom Italia. In addition, Westell sells products to several other entities, including public telephone administrations located outside the U.S., independent domestic local exchange carriers, competitive access providers, interexchange carriers and the U.S. federal government. Westell is a leading developer and provider of broadband telecommunications access systems using an emerging technology known as Asymmetric Digital Subscriber Line ("ADSL"). ADSL systems will allow telcos to provide interactive multimedia services over existing copper wire, thus offering a more cost-effective and faster deployment alternative to fiber optic cable in the "last mile" of the local access network. ADSL systems enable interactive multimedia services such as advanced data dialtone applications, including high speed Internet access, local area network ("LAN") extension, telecommuting and medical imaging, as well as emerging video dialtone applications, including video-on-demand, distance learning, video conferencing and work at home. Currently, over 30 domestic and international telcos, including Bell Atlantic, GTE, US West !nterprise, British Telecom and Telecom Italia, are conducting technical or marketing trials for new interactive multimedia services that rely on the Company's ADSL systems. The Company's objective is to be a global leader in providing low cost and high quality local access network products that enable telcos to meet the growing demand for service offerings based on digital technology. Westell's strategy is to leverage its leadership position in the ADSL market to capture emerging opportunities as telcos expand their interactive multimedia offerings. With over 15 years of experience in developing products for the local access network, particularly T-1 Network Interface Units ("NIUs"), the Company also intends to capitalize upon its existing customer relationships to continue to develop cost-effective and implementable intelligent network products and access systems. The Company believes that its pursuit of strategic relationships with technology leaders enables it to obtain the emerging technologies required in its product development efforts and to focus on specific product applications for its telco customers. [Inside Front Cover] Besides the text set forth below on this page, the inside cover of this Prospectus consists of a diagram showing the connection of copper wires and fiber cable between a telephone company's central office and a home and a skyscraper where businesses are located. At the telephone company's central office, there are boxes representing the use of Westell's Network Management products and other Westell products. The connection between the telephone company's central office and the home is a line representing copper wire. At the home there are boxes representing the use of Westell's ADSL products. Four pictures near the home (as indicated on the diagram below) show telephone company services that are supported by Westell ADSL products. The pictures are as follows: (i) a boy using a computer for Internet access, (ii) a man working at his home with a computer representing "work at home," (iii) a boy using a television to select a video through video-on-demand, and (iv) a woman and child using a computer screen for distance learning. The connections between the telephone company's central office and the skyscraper are three lines, two representing copper wires using Westell's ADSL and T-1 products and a fiber cable using Westell's fiber products. Near the skyscraper there are boxes representing the use of Westell's ADSL, T-1 and fiber products. Three pictures near the skyscraper (as indicated on the diagram below) show telephone company applications of Westell's products. The pictures are as follows: (i) a man using a computer to obtain data, (ii) a group using a television for video conferencing and (iii) a woman using a telephone. [WESTELL LOGO] Westell Technologies delivers a broad range of analog, digital and fiber telecommunications products used in the "last mile" of the local access network. Westell is a leading provider of products based upon Asymmetric Digital Subscriber Line ("ADSL") technology which enables interactive multimedia services over existing copper wire. TELCO CENTRAL OFFICE NETWORK [PHOTO] [PHOTO] MANAGEMENT DATA [PHOTO] ACCESSVISSION(TM) VIDEO SERVER VIDEO CONFERENCING [PHOTO] [PHOTO] BUSINESS [PHOTO] INTERNET ACCESS [PHOTO] [PHOTO] WORK AT HOME VOICE [PHOTO] VIDEO-ON-DEMAND [PHOTO] HOME [PHOTO] WESTELL LOGO = Westell product Fiber = QuadJack DISTANCE LEARNING ADSL = FlexCAP, FlexVision, EnVision T-1 = Network Interface Unit/ Performance Monitoring PHOTO = Copper wire PHOTO = Fiber optic cable THE OFFERING <TABLE> <S> <C> Class A Common Stock offered by the Company.............. 1,665,000 shares Class A Common Stock offered by the Selling Stockholders........................................... 875,000 shares Common Stock to be outstanding after the offering: Class A Common Stock................................... 15,051,962 shares (1) Class B Common Stock................................... 21,253,020 shares Total............................................... 36,304,982 shares Use of proceeds.......................................... To purchase capital equipment and for general corporate purposes, including working capital and potential acquisitions. Voting rights............................................ The Class A Common Stock and the Class B Common Stock vote as a single class with respect to all matters submitted to a vote of stockholders, with each share of Class A Common Stock entitled to one vote and each share of Class B Common Stock entitled to four votes, except with respect to certain future issuances of Class B Common Stock and as provided by law. Nasdaq National Market symbol............................ WSTL </TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> FISCAL YEAR ENDED MARCH 31, --------------------------------------------------- 1992 1993 1994 1995 1996 ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues....................................... $33,621 $43,221 $51,051 $74,029 $83,236 Gross margin................................... 14,647 17,863 20,801 29,535 32,457 Operating income (loss) from continuing operations................................... 4,907 2,799 (464) (178) (2,254) Net income (loss).............................. 3,029 1,698 213 (508) (2,075) Net income (loss) per share (2)................ $ 0.11 $ 0.06 $ 0.01 $ (0.02) $ (0.07) Average number of common shares outstanding (2).......................................... 26,560 27,620 28,486 28,952 30,846 </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 -------------------------- ACTUAL AS ADJUSTED (3) ------- --------------- <S> <C> <C> BALANCE SHEET DATA: Working capital...................................................... $28,741 $ 88,913 Total assets......................................................... 64,448 124,620 Long-term debt, including current portion............................ 4,427 4,427 Total stockholders' equity........................................... 38,985 99,157 </TABLE> - ------------------------------ (1) Excludes (i) 2,663,426 shares of Class A Common Stock reserved for issuance pursuant to the Company's 1995 Stock Incentive Plan (the "Stock Incentive Plan"), 754,250 of which are subject to outstanding options granted at a weighted average exercise price of $33.92 per share, and (ii) 213,532 shares reserved for issuance under the Company's Employee Stock Purchase Plan (the "Stock Purchase Plan"). See "Management -- Stock Plans." (2) Adjusted to reflect the Stock Split (as defined below). See Notes 1 and 11 of Notes to Consolidated Financial Statements. (3) Adjusted to give effect to the sale of 1,665,000 shares of Class A Common Stock offered by the Company hereby, based upon an assumed public offering price of $38 1/8 per share, and the receipt and application of the net proceeds therefrom. See "Use of Proceeds" and "Capitalization." ------------------------------ Unless otherwise indicated, the information presented in this Prospectus (i) has been adjusted to reflect the two-for-one stock split in the form of a 100 percent stock dividend of both classes of outstanding Common Stock paid on June 7, 1996 to holders of record on May 20, 1996 (the "Stock Split"), and (ii) assumes that the Underwriters' over-allotment option is not exercised.
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information appearing elsewhere in this Prospectus. See "Risk Factors" for considerations relevant to an investment in the Trust Units. THE OFFERING Trust Units offered . . . . . . . . . A total of 6,000 Trust Units is being offered of which only 500 to be issued by Trust-A are being offered by means of this Prospectus. The additional Trust Units will be offered only by this Prospectus when accompanied by a Supplemental Prospectus relating to the Trust in which Trust Units are then being offered. Purchase Price . . . . . . . . . . . $1,000 per Trust Unit with a minimum of Ten (10) Trust Units ($10,000) per investor and a minimum of 500 ($500,000) total Trust Units per Trust. Trust A will consist of 500 Trust Units. Trusts offered later may include additional Trust Units. Production Payment . . . . . . . . . For Trust A, the Production Payment will be equal to a percentage of the Net Cash Flow from the Underlying Properties until Trust A receives $500,000 plus 12 1/2% per annum. For the other Trusts the percentage of Net Cash Flow will vary depending on the estimated future net revenues of the wells selected and the interest rate may vary from 12% to 14%. Use of Proceeds . . . . . . . . . . . 8% commission payable to the selling broker dealer; up to 6% as a reimbursement of offering expenses to National Energy; 86% to the Trust for the purchase of the Production Payment from National Energy. Sponsor . . . . . . . . . . . . . . . National Energy Resources, Inc. 21800 Burbank Blvd., Suite 310 Woodland Hills, California 91364 (800) 201-8666 Trustee . . . . . . . . . . . . . . . Boatmen's Trust Company, an Oklahoma trust company Operator of Underlying Properties . . Blackjack Oil & Gas, Inc. or other independent third parties. Cash Distributions . . . . . . . . . Semi-annual distributions will be made to Trust Unitholders in an amount equal to 12 1/2% per annum on the amount of their investment. The excess of receipts from the Production Payment over the distribution will be used to establish a Reserve Fund to pay the amount of Unitholder's investment upon the termination of the Trust. Trust Term . . . . . . . . . . . . . The Trust will terminate when the Production Payment is paid in full which is expected to occur in 5 years. The Trust will also terminate if National Energy exercises its option to repurchase the Production Payment which may occur at any time after 2 years from the effective date of the Production Payment. Otherwise the Trust will terminate upon vote of a majority of the Unitholders or the lapse of years specified in the Trust Agreement to avoid violation of the rule against perpetuities. Redemption of Trust Units . . . . . . . . . . . . No Trust Units will be redeemed except in connection with the termination of the Trust when all Trust Unitholders will receive distributions in complete payment of their initial investments (or partial payment if cash proceeds of Trust Assets are insufficient to make full payment). Relationship of Parties . . . . . . . National Energy is the sponsor of the Trusts and will be the working interest owner of the Underlying Properties. The Trust will own a Production Payment in the Underlying Properties. The Bank, as Trustee, will receive the monthly payments on the Production Payment, distribute the interest portion to investors, and deposit the principal portion in the Reserve Fund. Investors will be Trust Unitholders and beneficiaries of the Trust. As Trustee, the Bank will have a fiduciary duty to investors. Blackjack, as operator of the Underlying Properties, and any other party who may act as operator, will have a contractual relationship to National Energy as a working interest owner, but there will be no direct relationship between the operator of the wells and the Trust, the Trustee or the Unitholders. NATIONAL ENERGY RESOURCES TRUST SERIES National Energy Resources, Inc. ("National Energy") is the sponsor of a series of trusts offering up to 6,000 units of beneficial interests ("Trust Units"). Certificates evidencing the Trust Units will be issued on the Closing Date of each trust. Each trust will offer a minimum of 500 Trust Units for a possible total of 12 grantor trusts to be formed during the 12 month period following the effective date of registration of the Trust Units. Each trust will be a grantor trust formed pursuant to a Trust Agreement in substantially the form of agreement included in the Registration Statement filed with the SEC. Boatmen's Trust Company will serve as the trustee of each trust and subscribers to Trust Units will be the grantors and the beneficiaries of the trusts. The name of the trusts will be National Energy Resources Trust plus the designation of a letter from A through L to indicate the specific trust. Subscribers to the first 500 Trust Units will be grantors and beneficiaries of National Energy Resources Trust-A ("Trust-A"), subscribers to the second 500 Trust Units will be grantors and beneficiaries of National Energy Resources Trust B and so forth unless in the discretion of National Energy a trust should be formed with more than the minimum 500 Trust Units. In no event will a trust be formed with less than 500 Trust Units. The term "Trust" as used hereafter shall refer to all the trusts together or to a single trust as the context may require. Except for the 500 Trust Units to be issued by Trust-A, no Trust Units are offered by this Prospectus unless it is accompanied by a Supplemental Prospectus relating to the Trust for which Trust Units are then being sold. There is no assurance that any additional Trust Units will be offered after the 500 Trust Units for Trust-A. The Trust will be a passive entity and will not engage in business. The Trustee will have only such powers as are necessary for the collection and distribution of the proceeds received by the fund, the establishment, maintenance and final distribution of a Reserve Fund and the payment of Trust liabilities and expenses. TRUST ASSETS After the completion of the offering for each Trust, the Trust will purchase from National Energy a production payment from a group of oil and gas properties (the "Underlying Properties") which will entitle the Trust to receive a specified percentage of net cash flow from the Underlying Properties until the Trust has received a sum of money equal to the total contributions of Trust Unitholders (at least $500,000 for each trust) plus a specified annual rate of return which is expected to range from 12% to 14%. The annual rate of return for Trust Unitholders in Trust A will be 12 1/2%. The specific terms of the Production Payment, a description of the Underlying Properties from which the Production Payment is carved and an estimate of the reserves attributable to the Underlying Properties as well as to the Production Payment as they relate to a particular Trust will be described in a report to the Trust Unitholders upon identification of the Underlying Properties after the formation of the Trust. The Production Payment owned by the Trust and the Reserve Fund established by the Trustee out of part of the receipts of the Production Payment will be the sole assets of a Trust. The Underlying Properties from which a Production Payment is carved will be completely separate from the Underlying Properties burdened by a Production Payment payable to another Trust. PRODUCTION PAYMENT. A production payment is a right to a specified share of the production from minerals in place or the proceeds from production which has an expected economic life at the time of its creation of shorter duration than the economic life of one or more of the mineral properties burdened by the payment. The share of production may be limited in time by dollar amount or amount of production. The Production Payment owned by a Trust will be limited by the dollar amount of the total contributions ($500,000 or more) to the Trust by its grantors (the subscribers to Trust Units) plus a specified percentage (from 12% to 14%) per annum of the total contributions. The Production Payment will be payable by National Energy out of a specified percentage of the net cash flow from the Underlying Properties. "Net Cash Flow" is defined in the Conveyance of Production Payment as the total revenues received from the sale of production less all costs and expenses, including gross production taxes, lease operating expenses, workover costs, development costs, and any other expenses directly attributable to ownership of the working interest in the Underlying Properties other than Federal and state income tax. National Energy expects to acquire only those Underlying Properties which have estimated reserves sufficient to create a Production Payment which will reach its term in 5 years or less, but there can be no assurances that any Production Payment will be paid in full in the expected time period or any time period. See "Risk Factors." Under the terms of the Conveyance of Production Payment, National Energy will have the right to repurchase the Production Payment at any time after 2 years from the Effective Date at a purchase price equal to an amount sufficient to pay the amount of the total contributions of the Trust Unitholders plus the specified annual rate of return for that Trust, less amounts already distributed to the Unitholders and the amount held in the Reserve Fund. In this event, the Trustee would distribute the cash to the Trust Unitholders and terminate the Trust. UNDERLYING PROPERTIES. National Energy will acquire working interests in a group of oil and gas leases on which are located producing oil and gas wells from Blackjack Oil & Gas, Inc. ("Blackjack") an Oklahoma corporation which is not affiliated with National Energy or the Trust, or from other independent oil and gas operators. Blackjack owns, operates and acquires oil and gas properties located principally in Oklahoma, Texas, Louisiana and Mississippi. A "working interest" is an interest in an oil and gas leasehold which is subject to some portion of the cost of development, operation, or maintenance. Although National Energy will be responsible for development costs, and such costs would be deducted in calculating Net Cash Flow out of which the Production Payment is paid, National Energy will not acquire working interests in Underlying Properties where additional wells are expected to be drilled. There will be, however, some workover costs associated with the wells to be acquired, which will be paid by National Energy and deducted from gross revenues in calculating Net Cash Flow. National Energy will own the Underlying Properties subject to and burdened by the Production Payment, and is entitled to any Net Cash Flow received by reason of such ownership in excess of the percentage of Net Cash Flow paid to the Trust in satisfaction of the Production Payment. RESERVE FUND. The Production Payment owned by a Trust will entitle the Trust to receive a specified percentage of the Net Cash Flow from the Underlying Properties until the Trust has received the total investment in the Trust made by Trust Unitholders plus a specified rate of return (from 12% to 14% per annum). Therefore, a portion of each payment received by the Trust represents a return of capital. That part of the Production Payment which represents a return of capital will be set aside in a separate interest bearing account as a sinking fund (the "Reserve Fund"). Upon the full payment of the Production Payment, the Trust will terminate and amounts in the Reserve Fund will be distributed to Trust Unitholders as a return of their investment. The Trustee will manage the Reserve Fund and will make all investment decisions with regard to the funds; however, National Energy has the right to make recommendations to the Trustee concerning investments of the Reserve Fund. Interest received on the Reserve Fund will be used to pay general and administrative expenses of the Trust and the Trustee's fees. Interest in excess of Trust expenses will reduce the amount owed under the Production Payment and will be distributed to Trust Unitholders upon termination of the Trust. NATIONAL ENERGY RESOURCES TRUST-A National Energy will acquire working interests in properties which are expected to generate Net Cash Flow in sufficient amounts to repay the Production Payment in 5 years from a specified percentage of less than 100% of the Net Cash Flow. The Underlying Properties are expected to be located in Oklahoma, Texas or Louisiana and may consist of oil production, natural gas production or a combination of both oil and gas. The Underlying Properties will be selected for their consistent production history and for estimated future net revenues in the amounts sufficient to return $500,000 plus 12.5% per annum in 5 years without depleting reserves since it is a requirement for production payments that they be paid solely out of reserves in a period less that the life of the properties as estimated at the time the production payment is created. The Company does not intend to acquire any interest in adjacent properties; however, the operator may acquire or own such an interest. The Trusts would not be entitled to participate in any other wells in the area as the Production Payment will be limited to the wells acquired. Oklahoma's spacing laws would prevent the operator from drilling additional wells which would jeopardize production from the Underlying Properties. If drainage occurs, the trusts would have legal rights to damages. NATIONAL ENERGY National Energy Resources, Inc. is a California corporation formed in August, 1994 for the purpose of engaging in the development and ownership of oil and gas and for forming the Trusts and conducting this offering. Its shareholder is Marshall J. Field who owns 100% of the issued and outstanding stock of National Energy. Its only officer is Marshall J. Field. National Energy was formed with minimum capital and its initial capital has been substantially used in the up front costs of the offering for which it will be reimbursed out of the proceeds of sale of Trust Units. The principal executive offices of National Energy are located at 21800 Burbank Blvd., Suite 310, Woodland Hills, California 91364 and its telephone number is (800) 201-8666. See "National Energy." National Energy has no prior experience in the oil and gas industry nor does it have prior experience in sponsoring oil and gas investments such as the Trust Units. SUMMARY OF RISK FACTORS An investment in the Units is subject to certain risk factors that should be evaluated by prospective investors before purchasing the Units. Such risk factors include: Risks associated with the oil and gas industry generally, including: (a) decreased revenues and reduced production due to volatility of oil and natural gas prices; (b) increased production expenses which could result in reduced oil or gas production volumes; (c) reduced value of the Units if the reserve estimates of quantities and values of natural gas differ materially from actual quantities and values of reserves; (d) risks of reduced distributions to Unitholders if production were interrupted for any reason; (e) entities not controlled by National Energy could curtail production on the Underlying Properties or excess production capacity could reduce natural gas prices, either of which could adversely affect the Trust distributions; (f) the amount of cash distributions throughout the year may vary substantially due to the seasonal nature of demand; (g) decisions regarding operations, future development and production levels are made by an independent entity and such decisions may result in decreased cash distributions; and (h) the operator of the Underlying Properties has no contractual or fiduciary duty to protect the interests of the Unitholders. Risks associated with the Trust and the Trust Units in particular, include: (a) Trustee is not personally liable to Unitholders under terms of Trust Agreement unless it acts in bad faith; (b) No Underlying Properties have been identified or selected and therefor, no investor will have an opportunity to evaluate any of the Underlying Properties before investing in the Trust Units. (c) Transfer of Underlying Properties in violation of Conveyance could result in delay of distribution; (d) Portions of Production Payment would be extinguished if a well is abandoned; (e) Trust Unitholders have limited voting rights; (f) No secondary market for Trust Units and illiquid investment; and (g) Trust Unitholders will not participate in revenues in excess of Production Payment. SUMMARY FEDERAL INCOME TAX CONSEQUENCES THE TAX CONSEQUENCES OF AN INVESTMENT IN TRUST UNITS TO A PARTICULAR INVESTOR WILL DEPEND IN PART ON THE INVESTOR'S OWN TAX CIRCUMSTANCES. EACH PROSPECTIVE INVESTOR SHOULD THEREFORE CONSULT HIS OWN TAX ADVISOR ABOUT THE FEDERAL, STATE AND LOCAL TAX CONSEQUENCES TO SUCH INVESTOR IN TRUST UNITS. The following is a summary of certain Federal income tax consequences of acquiring, owning and disposing of Trust Units and is based on the opinion of Robertson & Williams, counsel to National Energy Resources, Inc. ("Counsel"). For a more detailed discussion of these consequences and the qualifications to and limitations of the opinions of Counsel, see "Federal Income Tax Consequences" and "Risk Factors -- Tax Considerations."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001002212_ergo_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001002212_ergo_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and consolidated financial statements appearing elsewhere in this Prospectus. Except as otherwise noted, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. THE COMPANY Ergo Science Corporation is developing novel treatments for metabolic disorders, including Type II diabetes and obesity, and for cancer. The Company's technology uses orally administered neurotransmitter modulating drugs to address abnormalities of the neuroendocrine system. The Company believes that its approach may provide the platform for a new class of treatments for a variety of glucose and lipid metabolic disorders and cancer. The Company's lead drug candidate, ERGOSET(TM), is a low-dose, fast-release, oral tablet formulation of bromocriptine, a dopamine agonist previously approved by the U.S. Food and Drug Administration to treat Parkinson's disease and other conditions. The Company recently completed two Phase III clinical trials of ERGOSET as adjunctive therapy with sulfonylurea agents for the treatment of Type II diabetes. A preliminary analysis of the two completed Phase III clinical trials indicated that ERGOSET improved control of glucose, triglycerides, free fatty acids, and cholesterol in Type II diabetics. The Company anticipates completing a third Phase III clinical trial of ERGOSET as monotherapy for Type II diabetes by the end of 1996. The Company plans to submit a New Drug Application to FDA for ERGOSET to treat Type II diabetes in 1997. Ergo has also conducted clinical trials of ERGOSET for the treatment of obesity and intends to conduct additional obesity clinical trials of ERGOSET by itself and in combination with another product candidate. Ergo currently retains all marketing rights to its drug candidates. Ergo's technology is the result of over 30 years of research by the Company's founding scientists into the regulation of glucose and lipid metabolism through changes in daily patterns of neuroendocrine activity. Ergo's scientists have shown that when vertebrate animals are in a fat, insulin resistant condition, they exhibit a daily neuroendocrine pattern that is distinctly different from their daily neuroendocrine pattern while in a lean, insulin sensitive condition. Ergo's technology is based on observations that, just as animals display changes in daily patterns of neuroendocrine activity to become seasonally fat and insulin resistant to survive adverse environmental conditions, humans display changes in daily neuroendocrine patterns as they develop Type II diabetes. The aging process, as well as changes in the environment of humans such as diet, sedentary lifestyles and artificial lighting, may be causing changes in daily neuroendocrine patterns in humans. Moreover, the Company has demonstrated that the timed administration of drugs can alter daily neuroendocrine patterns and produce desired metabolic changes in animals. The Company believes that its research and clinical trial data indicate that the timed administration of neurotransmitter modulating drugs alters these daily neuroendocrine patterns in humans, producing improvements in glucose and lipid metabolism. The markets for Type II diabetes and obesity are large and not adequately addressed by current treatments. Approximately 15 million people will suffer from Type II diabetes in the United States in 1996, and that number is expected to increase to approximately 32 million by 2010. Obesity affects approximately 35 million Americans, or approximately 26% of the U.S. adult population. Obesity is considered a risk factor for Type II diabetes, cardiovascular disease and other conditions. Ergo's preclinical studies suggest that temporal changes in neuroendocrine activity may also play an important role in the body's regulation of immune function and the body's ability to fight cancer. The Company is currently enrolling patients in a small Phase II clinical trial of two neurotransmitter modulating compounds for the treatment of metastatic breast cancer. Approximately 184,000 women in the United States will be diagnosed with breast cancer in 1996. The Company is also evaluating the use of phototherapeutic dyes in photodynamic therapy to treat various tumors. Ergo's commercialization strategy includes the formation of marketing alliances with large pharmaceutical companies and the establishment of long- term manufacturing agreements for its product supply. Geneva Pharmaceuticals, Inc., a subsidiary of Ciba-Geigy Corporation, has agreed to supply the Company's United States requirements for ERGOSET. RECENT DEVELOPMENTS Summary of Phase III Clinical Trial Results Ergo recently announced the preliminary analysis of its two completed Phase III clinical trials of ERGOSET as adjunctive therapy for Type II diabetes. These double-blinded, placebo-controlled clinical trials investigated the safety and efficacy of ERGOSET in the treatment of approximately 500 Type II diabetics using sulfonylurea therapy at 17 trial sites across the United States. The primary endpoint of these Phase III clinical trials was to achieve a clinically and statistically significant reduction in blood levels of glycated hemoglobin A1c, which is considered a reliable indicator of glycemic control in diabetics. The preliminary analysis indicated that ERGOSET improved control of glucose, triglycerides, free fatty acids, and cholesterol in Type II diabetics. This preliminary analysis also showed that ERGOSET was generally well-tolerated. On an intent-to-treat basis, the two completed trials indicated that ERGOSET improved glycemic control as measured by a reduction in glycated hemoglobin Alc compared with placebo of 0.5% (p less than 0.0001) in one study and 0.6% (p less than 0.0007) in the other study. Serum glucose, triglycerides and free fatty acids were measured throughout the day, and ERGOSET resulted in consistent reductions compared with placebo in each parameter. Average reductions in serum glucose compared with placebo were 21 mg/dl (p less than 0.005) and 23 mg/dl (p less than 0.001) in the two studies. Average reductions in serum triglycerides compared with placebo were 44 mg/dl (p less than 0.05) and 55 mg/dl (p less than 0.003) in the two studies. The average reduction in free fatty acids compared with placebo was 149 u eq/L (p less than 0.03) in the one study for which this parameter is available. In addition, fasting cholesterol levels compared with placebo were reduced by 5.7 mg/dl (p less than 0.09) and 8.0 mg/dl (p less than 0.04). A pre-established responder criterion was designed to identify clinically significant responders to ERGOSET shortly after the initiation of treatment. Responders were defined as those individuals on ERGOSET who had at least a 0.3% decrease in glycated hemoglobin Alc from baseline after eight weeks of treatment. In the responder group, which represented approximately 60% of the subjects, ERGOSET resulted in decreases of glycated hemoglobin A1c of 1.0% (p less than 0.0001) and 1.1% (p less than 0.0001) compared with placebo and decreases in glycated hemoglobin Alc of 0.6% (p less than 0.0001) and 0.8% (p less than 0.0001) compared with baseline. In the responder group, average reductions in serum glucose levels were 39 mg/dl (p less than 0.0001) and 37 mg/dl (p less than 0.0001) compared with placebo, and average reductions were 24 mg/dl (p less than 0.06) and 25 mg/dl (p less than 0.01) compared with baseline. See "Business--ERGOSET for Type II Diabetes--Phase III Clinical Trial Results." Obesity Data in the Leptin-Deficient Ob/Ob Mouse Researchers at Ergo have also used neurotransmitter modulating drugs to achieve significant reductions in body fat in the leptin-deficient ob/ob mouse, a genetically insulin resistant and fat animal model. In a study presented at the 1996 annual meeting of the American Diabetes Association, Ergo's scientists reported that the administration of two neurotransmitter modulating drugs produced a significant (approximately 30%) reduction in food intake and a reduction in body fat of 22% to 32% with no significant decrease in lean body (muscle) mass compared with control animals. The study also showed a 57% reduction in blood glucose levels and a 50% reduction in blood insulin levels, which reflect improved glycemic control. Ergo believes that the selective reduction in body fat and preservation of lean body mass has significant implications for the treatment of obesity because improvement in the lean-to- fat ratio may reduce the cardiovascular risk associated with chronic obesity. -------------- Ergo's principal executive offices are located at Charlestown Navy Yard, 100 First Avenue, Charlestown, Massachusetts 02129-2051. Its telephone number is (617) 241-6800. THE OFFERING <TABLE> <S> <C> Common Stock offered hereby..................... 2,500,000 shares Common Stock to be out- standing after the offering.................. 12,668,080 shares(1) Use of proceeds............ For clinical trials, preclinical studies, research and development, and general corporate purposes Nasdaq National Market symbol..................... ERGO </TABLE> - ------- (1) Excludes 1,256,470 shares of Common Stock issuable upon exercise of outstanding options as of June 30, 1996, with a weighted average exercise price of $5.06 per share. See "Capitalization," "Management--Employee Benefit Plans," and Note 9 of Notes to Consolidated Financial Statements. SUMMARY CONSOLIDATED FINANCIAL DATA <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, -------------------------------------- ------------------------- 1993 1994 1995 1995 1996 ----------- ----------- ------------ ------------ ----------- <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues............... $ 107,710 $ 214,916 $ 94,348 $ 40,408 $ 466,316 Operating expenses: Research and develop- ment................. 2,403,683 4,917,830 8,643,926 4,010,766 6,051,177 Purchase of in-process research and development...... -- -- 7,020,064 5,520,000 168,750 General and adminis- trative.............. 3,165,038 4,256,934 6,580,308 2,901,173 2,241,288 ----------- ----------- ------------ ------------ ----------- Total operating expenses........... 5,568,721 9,174,764 22,244,298 12,431,939 8,461,215 ----------- ----------- ------------ ------------ ----------- Net loss............... $(5,461,011) $(8,959,848) $(22,149,950) $(12,391,531) $(7,994,899) =========== =========== ============ ============ =========== Net loss per common share(1).............. $ (1.52) $ (2.56) $ (8.06) $ (3.35) $ (0.81) Weighted average shares used in computing net loss per share(1)..... 3,857,915 3,857,940 3,966,266 3,887,838 10,157,489 </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 -------------------------- ACTUAL AS ADJUSTED(2) ----------- -------------- <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments... $13,118,935 $ Working capital..................................... 12,528,073 Total assets........................................ 16,000,064 Series D Preferred Stock(3)......................... 4,521,954 Total stockholders' equity.......................... 14,303,284 </TABLE> - ------- (1) See Note 1 of Notes to Consolidated Financial Statements. (2) As adjusted to reflect the estimated net proceeds from the sale of 2,500,000 shares of Common Stock at an assumed public offering price of $ per share. See "Use of Proceeds" and "Capitalization."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0001002455_casino_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001002455_casino_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..90b45043dc260d673d4b2fe3d4cc35f20cc8fa39
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0001002455_casino_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY - ----------------------------------------------------------------- The following summary is qualified in its entirety by the more detailed information, financial statements and notes to the financial statements including the notes thereto appearing elsewhere in this Prospectus. THE COMPANY. The Company was incorporated in Nevada on June 1, 1995. The Company is authorized to issue Fifty Million (50,000,000) Common Shares, $.001 par value. The Company's Common Stock has no cumulative rights and no preemptive rights. On June 4, 1995, the Board of Directors of the Company have authorized a dividend distribution of 100,000 "A" Warrants on a pro rata basis to the shareholders of record as of June 4, 1995. The "A" Warrants shall be exercisable for a period of two years from issuance. The "A" Warrants shall be exercisable into Common Shares of the Company at the exercise price of $4.00 per Common Share. The Board of Directors of the Company have also authorized a dividend distribution of 100,000 "B" Warrants on a pro rata basis to the shareholders of record as of June 4, 1995. The "B" Warrants shall be exercisable for a period of two years from issuance. The "B" Warrants shall be exercisable into Common Shares of the Company at the exercise price of $6.00 per Common Share. There are currently outstanding 99,333 Class "A" and 99,333 Class "B" Warrants issued and outstanding. The Company's executive offices are located at 400 Park Place, #2C, Fort Lee, New Jersey 07024 and its mailing address is 177 Main Street, Suite 312, Fort Lee, New Jersey 07024. Telephone No. (201) 947 - 4642. These offices consist of 1,300 square feet on a five year lease commencing November 1, 1995 for $1,500 per month. <TABLE> <S> <C> THE DISTRIBUTION. Securities Being Distributed 65,000 shares of the Company's Common Stock. Purpose of Distribution To enhance the Company's ability to raise additional capital, if necessary, in the future. Shares of Common Stock Outstanding After Distribution 1,591,834 shares of Common Stock. Distributing Company Pratt, Wylce & Lords, Ltd., a Nevada Company. Distribution Ratio One share of Common Stock for every forty shares of Pratt Common Stock owned of record on July 21, 1995 (the "Record Date"). Use of Proceeds The securities to which this Prospectus relates are being distributed to holders of Pratt Common Stock as a dividend and neither the Company nor Pratt will receive any cash or other proceeds in connection with the Distribution. Page 6 of 57 Pages Additionally this Prospectus relates to securities being registered on behalf of selling securityholders and the Company will not receive any cash or other proceeds in connection with the subsequent sale. Any proceeds received from the subsequent exercise of the Class A and Class B Warrants shall be used as working capital and to expand operations. Federal Income Taxes The Distribution will constitute a dividend fully taxable as income to holders of Pratt Common Stock. See "Federal Income Taxes." Certain Factors to be Considered See "Risk Factors." Absence of Dividends; Dividend Policy The Company does not currently intend to pay regular cash dividends on its Common Stock; such policy will be reviewed by the Company's Board of Directors from time to time in light of, among other things, the Company's earnings and financial position. See "Risk Factors." Transfer Agent The Company shall act as its own Transfer Agent until the effective date of the Registration Statement. </TABLE> Page 7 of 57 Pages SELECTED FINANCIAL INFORMATION. The selected financial information presented below under the captions and "Balance Sheet" as of October 31, 1995 and "Statement of Operations" for the period ended October 31, 1995 are derived from the audited financial statements of the Company. The selected financial information presented below under the captions "Balance Sheet" as of January 31, 1996 and Statement of Operations for the period from November 1, 1995 to January 31, 1996 is derived from the unaudited financial statements of the Company. The Balance Sheet and Statement of Operations have not been audited by independent certified public accountants' however, in the opinion of management, all adjustments (which include only normal recurring adjustments) have been made in order to present fairly the operations for this period. Page 8 of 57 Pages <TABLE> <CAPTION> BALANCE SHEET October 31, January 31, 1995 1996 ---- ---- <S> <C> <C> Total Assets $808,601 $841,448 Total Liabilities $ 19,146 $37,463 Total Stockholders' Equity $789,455 $803,985 Total Liabilities & Stockholders' Equity $808,601 $841,448 <CAPTION> STATEMENT OF OPERATIONS From Inception For Period (June 1, 1995) From Nov. 1, 1995 to to October 31, 1995 January 31, 1996 ---------------- ---------------- <S> <C> <C> Revenues from continuing operations $34,221 $44,657 Income (Loss) from continuing operations $(497,511) $5,108 Nonoperating Income (Expense) $9,372 $9,422 Provision (Credit) For Income Taxes - - Net income (loss) $(488,139) $14,530 Net income (loss) per common share of outstanding stock $(.34) $.01 </TABLE> - -------------------------------------------------------------------------------
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001002518_cks-group_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001002518_cks-group_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e0a8db3da220272a62a750099f9f38bca01d436f
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0001002518_cks-group_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Consolidated Financial Statements and notes thereto appearing elsewhere in this Prospectus. Financial data pertaining to the period prior to December 1994 reflect the consolidated financial data of the Company's three predecessor entities, CKS Partners, Inc., CKS Interactive, Inc. and CKS Pictures, Inc., which combined to form the Company in December 1994. THE COMPANY CKS Group, Inc. ("CKS" or the "Company") specializes in offering a wide range of integrated marketing communication services that help companies market their products, services and messages. The integrated marketing communication services provided by the Company include strategic corporate and product positioning, corporate identity and product branding, new media, packaging, collateral systems, advertising, direct mail, consumer promotions, trade promotions and media placement services. Depending on the scope of the assignment, the Company's services to its clients range from execution of a discrete marketing project, such as designing product packaging, to taking responsibility for the overall marketing message through various methods. When the Company assumes responsibility for the overall marketing message, the Company works with the client to analyze the client's products or services, and the market for those services, and to evaluate the appropriate media to reach the desired market efficiently. The Company is a provider of integrated marketing programs that utilize advanced technology solutions and new media -- which the Company defines as media that deliver content to end users in digital form, including the World Wide Web, the Internet, proprietary online services, CD-ROMs, laptop PC presentations and interactive kiosks. New media services represented approximately 8%, 25% and 32% of the Company's revenues for fiscal years 1994 and 1995 and the six months ended May 31, 1996, respectively. The balance of the Company's revenue for such periods was derived from the Company's other integrated marketing communication services, including strategic corporate and product positioning, corporate identity and product branding, packaging, collateral systems, advertising, direct mail, consumer promotions, trade promotions and media placement services. The Company's overall mission is to consistently deliver integrated marketing communication programs and products to its clients through the creative use of advanced technology, breakthrough design and superior account management. The Company's core strengths include leadership in new media communications, an ability to provide a full range of marketing communication services to its clients and a high level of creative expertise and technological sophistication, which enables the Company to provide marketing communication services and products quickly and efficiently. The Company provides its services to a broad range of clients. The Company believes that it has been and continues to be a leader in the application and development of new media marketing programs. Examples of these new media projects include (i) a point of purchase kiosk for Hewlett-Packard, (ii) the creation of World Wide Web sites for MCI, General Motors, Citibank, Clinique, Prudential, U.S. Robotics, and others, (iii) the creation of a CD-ROM demo for the Apple System 8 operating system and others; and (iv) the United Connection user interface design for United Airlines. With the exception of MCI and Apple Computer, representing approximately 19% and 7% of the Company's revenues, respectively, during the 1995 fiscal year, and 20% and 4% of the Company's revenues, respectively, during the six months ended May 31, 1996, none of the clients named in the prior sentence generated more than 4% of the Company's revenues during either of those periods. CKS is pursuing an acquisition program, primarily focused on providing new and expanded market opportunities by strengthening its management and core competencies, expanding its geographic presence and broadening the range of marketing communication services offered to clients. On June 7, 1996, the Company agreed to acquire Schell/Mullaney, Inc., a New York advertising and marketing firm specializing in servicing technology companies, for initial consideration consisting of Common Stock valued at $5 million and up to $9 million of additional Common Stock if certain performance targets are achieved. The Company is also considering several additional acquisitions of marketing communication services providers with strong existing management teams and attractive client portfolios. The Company was incorporated in California in 1994 and is the successor to three predecessor corporations, CKS Partners, Inc., CKS Pictures, Inc. and CKS Interactive, Inc., which are now wholly owned subsidiaries of the Company. CKS Partners, Inc. originally began business in 1987 with two employees as Cleary Communications. CKS Pictures, Inc. and CKS Interactive, Inc. were incorporated in 1994. The Company was reincorporated in Delaware in December 1995. The Company's Internet address is: http://www.cks.com. Information contained in the Company's World Wide Web site shall not be deemed part of this Prospectus.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0001002536_individual_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001002536_individual_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f9f4d0f3f6cca8fd72db5b0a87c264671d3c9641
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0001002536_individual_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and Financial Statements and Notes thereto, appearing elsewhere in this Prospectus. THE COMPANY Individual develops and markets a suite of customized information services that provide knowledge workers with daily personalized current awareness reports, while offering information providers and advertisers new ways to reach targeted audiences. Leveraging its knowledge processing systems, editorial knowledge bases, and an exclusive license to Cornell University's SMART technology, the Company's intelligent software agents search each day through approximately 10,000 to 20,000 stories drawn from more than 730 broad (e.g., Reuters) and specialized (e.g., PC Week) information sources. The Company's proprietary systems filter incoming information, prepare for each user a highly relevant daily news briefing, and deliver its services across a range of delivery platforms, including facsimile, electronic mail, groupware, intranets, and the Internet. The Company's services enable its more than 138,000 users to track industry developments in a cost-effective, timely and user-friendly manner. The Company believes that its customized information services address the current awareness needs of knowledge workers--individuals whose job productivity and effectiveness depend on the ability to access and analyze current information to make effective decisions. The Company's First! service is targeted to enterprises seeking to gain competitive advantage through current awareness and knowledge sharing. First! is typically delivered electronically to groupware (including Lotus Notes, Folio VIEWS, and Collabra Share) or intranet platforms, is made available for organization-wide redistribution, and enables end-user personalization. The Company's single-user service, HeadsUp, offers knowledge workers a concise abstract of customized daily news items, with full text available through the Company's interactive fulfillment capabilities. HeadsUp has served as a model for other single-user services that the Company now markets. These services are sold to customers on a subscription basis. In April, 1995, the Company launched its award-winning NewsPage site on the Internet's World Wide Web ("Web"). NewsPage users have access to brief abstracts of news items and can link to full-text versions of stories of interest. The Company sells advertising for NewsPage topic areas, enabling corporations to reach micro-targeted audiences. When users review a topic of interest, they are presented with an advertising banner from a related sponsoring company, and can immediately link to the advertiser's Web site to get detailed product information or potentially to conduct a business transaction online. The Company believes that the widespread deployment of the Internet creates opportunities for generating both subscription and advertising revenue from its Web-based information services. In June 1996 the Company acquired FreeLoader, the developer of an offline Web content delivery service. Working in conjunction with Web browsers such as Netscape Navigator, FreeLoader enables the user to specify multimedia Web content to be retrieved and downloaded to the user's hard drive at pre- determined intervals. Once downloaded, the information is accessible to the user at any time. The Company's services address the information needs of multiple market segments ranging from individual knowledge workers to enterprises. To reach these segments, the Company has developed sales expertise in multiple channels. The Company utilizes business relationships with leading corporations, to market its capabilities to a broader user base. Two such corporations, Microsoft and Knight-Ridder, have invested in the Company and also have joint product development and marketing activities with the Company. Existing customers include leading corporations in diverse industry sectors, such as Amoco, Andersen Consulting, AT&T, Chase Manhattan Bank, Cisco Systems, Hewlett- Packard, IBM, Intel, Johnson & Johnson, MCI, Mercedes-Benz, and Xerox. The Company's objective is to build the industry's leading "open information exchange" linking a growing base of knowledge workers to relevant information providers and advertisers. The Company believes that the value of this exchange will increase as the Company enhances its knowledge processing systems and expands its base of participants. An expanding set of information providers will make the services more compelling for knowledge workers. A larger user base will generate additional readership and revenue for information providers. Increased participation of advertisers, who benefit from a larger user base and a growing number of information topics, will help to reduce subscription costs, leading to further expansion of the Company's user base. The Company believes the mutually reinforcing dynamics of its business model are key to sustaining its growth and meeting its strategic objectives. PLAN OF DISTRIBUTION This Prospectus relates to the resale of 1,514,309 shares of Common Stock of the Company received by the Selling Stockholders upon the closing of the FreeLoader Acquisition. Such shares may be offered hereby from time to time by any or all of the Selling Stockholders. The Company will not receive any of the proceeds from the resale of the shares of Common Stock by the Selling Stockholders. See "Selling Stockholders and Plan of Distribution." SUMMARY CONSOLIDATED FINANCIAL DATA (In thousands, except per share data) <TABLE> <CAPTION> PRO FORMA COMBINED(4) (UNAUDITED) ----------- SIX MONTHS ENDED JUNE 30, SIX MONTHS YEAR ENDED DECEMBER 31, (UNAUDITED) ENDED ------------------------------------------- ----------------- JUNE 30, 1991 1992 1993 1994 1995 1995 1996(1) 1996(1)(3) ------- ------- ------- ------- ------- ------- -------- ----------- <S> <C> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenue................. $ 845 $ 1,901 $ 4,105 $ 9,127 $16,733 $ 7,601 $ 10,677 $ 10,677 Gross margin............ 300 818 1,936 5,050 8,950 4,218 5,782 5,782 Loss from operations.... (1,683) (1,729) (3,184) (4,162) (6,232) (3,036) (40,546) (44,210) Net loss................ (1,610) (1,740) (3,020) (4,256) (6,443) (3,040) (40,848) (44,485) Supplemental net loss per common share(2).... $ (0.67) $ (0.32) $ (3.67) $ (3.52) Supplemental weighted average common shares outstanding(2)......... 9,619 9,639 11,134 12,632 </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 (UNAUDITED) ----------- <S> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents......................................... $34,118 Working capital................................................... 26,009 Total assets...................................................... 49,103 Other long-term obligations....................................... 1,128 Stockholders' equity.............................................. 29,398 </TABLE> - ------- (1) Excludes 2,735,424 shares of Common Stock issuable pursuant to stock options outstanding at June 30, 1996 (of which options to purchase 772,535 shares were exercisable) with a weighted average exercise price of $6.93 per share See "Management -- Stock Plans." (2) See Notes to the Interim Condensed Consolidated Financial Statements. (3) Gives effect to the acquisition of FreeLoader, using the purchase method of accounting, as if the acquisition had occurred as of the beginning of the six-month period ending on June 30, 1996 for consolidated statement of operations data, and the issuance by the Company of approximately 1,514,309 shares of Common Stock to the securityholders of FreeLoader (excluding approximately 360,180 shares of Common Stock reserved for issuance upon exercise of outstanding FreeLoader stock options assumed by the Company in the acquisition). The nonrecurring charge of approximately $35,564,000 at June 30, 1996 related to purchased technology determined to be in-process has been reflected in the pro forma combined consolidated statement of operations data. See the Unaudited Pro Forma Combined Condensed Consolidated Financial Statements, appearing elsewhere in this Prospectus. (4) As discussed in the Unaudited Pro Forma Combined Condensed Consolidated Financial Statements, appearing elsewhere in this Prospectus, the operating results of FreeLoader for the year ended December 31, 1995 were not material to the results of operations of Individual and therefore, the pro forma combined consolidated statement of operations data for the year ended December 31, 1995 has not been presented. In addition, the acquisition of FreeLoader was completed on June 28, 1996, and accordingly has been reflected in the Company's June 30, 1996 balance sheet. Therefore, pro forma combined consolidated balance sheet data as of June 30, 1996 has not been presented. Except as otherwise noted, all information in this Prospectus (i) reflects the conversion of all outstanding shares of the Company's Preferred Stock into Common Stock which occurred in March 1996 in connection with the Company's initial public offering and (ii) reflects the 3-for-2 stock split of the Company's Common Stock in the form of a stock dividend effected in March 1996 in connection with the initial public offering. See "Capitalization" and "Description of Capital Stock."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0001002579_extended_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001002579_extended_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a0b002502b1679a8db659f0b82f92e9680c0847c
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0001002579_extended_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to, and should be read in conjunction with, the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless the context suggests otherwise, references in this Prospectus to the "Company" mean Extended Stay America, Inc. and its subsidiaries and references to the year ended December 31, 1995 mean the period from January 9, 1995, the Company's date of inception, through December 31, 1995. On May 9, 1996, the Board of Directors of the Company declared a dividend of one additional share of Common Stock for each share issued as of the close of business on July 5, 1996, to be distributed on July 19, 1996, thereby effecting a 2-for-1 stock split (the "Stock Dividend"). Except as otherwise noted, none of the information contained in this Prospectus reflects the Stock Dividend. THE COMPANY Extended Stay America, Inc. was organized in January 1995 to develop, own, and manage extended stay lodging facilities which are designed to appeal to value-conscious guests. The Company's facilities are designed to offer quality accommodations for guests at substantially lower rates than most other extended stay lodging providers and hotels in the economy segment of the traditional lodging industry. They feature fully furnished rooms which are generally rented on a weekly basis to guests such as business travelers (particularly those with limited expense accounts), professionals on temporary work assignment, persons between domestic situations, and persons relocating or purchasing a home, with most guests staying for multiple weeks. The Company's facilities provide a variety of features that are attractive to the extended stay guest such as a fully-equipped kitchenette, weekly housekeeping with twice-weekly towel service, color television with cable or satellite hook-up, coin laundromat, and telephone service with voice mail messaging. To help maintain affordability of room rates, labor intensive services such as daily cleaning, room service, and restaurants are not provided. The extended stay category is one of the most rapidly evolving sectors of the U.S. lodging industry. From 1992 to 1995, the number of dedicated extended stay rooms increased at a compounded annual growth rate of approximately 3.3%, compared with compounded annual room growth of approximately 1.4% for the overall lodging industry over the same period. However, the vast majority of these rooms have been developed in the high-price end of the category. The economy extended stay sector of the lodging industry appears to present a number of attractive characteristics compared to traditional hotels, including higher occupancy rates and operating margins. Based on published occupancy rates for other participants in the extended stay market, the Company believes that demand in the economy extended stay market is greater, relative to supply, than in the lodging industry generally. The Company is not aware of any operator who serves the economy extended stay market niche on a national level. The Company's goal is to become a national provider of economy extended stay lodging. The Company intends to achieve this goal by rapidly developing properties in selected markets, providing high value accommodations for its guests, actively managing its properties to increase revenues and reduce operating costs, and increasing awareness of the economy extended stay concept. Through June 26, 1996, the Company had developed and opened three facilities, acquired six others, and had agreements to acquire five additional facilities. As of such date, the Company had 34 facilities under construction, 25 of which the Company expects to have opened by the end of 1996. The Company plans to begin construction of approximately 33 additional facilities during the remainder of 1996 and to continue an active development program thereafter. The Company's plans call for the average facility to have approximately 125 extended stay rooms and to take approximately 7-9 months to construct. The Company was founded by George D. Johnson, Jr. and H. Wayne Huizenga, who are the two largest shareholders of the Company. Mr. Johnson, who is the President and Chief Executive Officer of the Company, was formerly the President of the Consumer Products Division of Blockbuster Entertainment Group, a division of Viacom, Inc. Mr. Huizenga, who is the Chairman of the Board of Directors of the Company, is the Chairman and Chief Executive Officer of Republic Industries, Inc. and was formerly Vice-Chairman of Viacom, Inc. and Chairman and Chief Executive Officer of Blockbuster Entertainment Corporation. The Company's management team has extensive experience in the acquisition and development of real estate and the operation of properties on a national scale. The Company was initially capitalized with approximately $60 million in equity from a group of private investors, a number of whom constitute part of the Company's management team. On December 19, 1995, the Company completed an initial public offering of 5,060,000 shares of Common Stock at a price of $13.00 per share (the "IPO") and a concurrent offering to the Company's then existing shareholders of 2,067,825 additional shares of Common Stock at a price of $12.09 per share, being the initial public offering price per share less the underwriting discounts and commissions (the "Concurrent Offering", and, collectively with the IPO, the "December 1995 Offerings"). The net proceeds to the Company from the December 1995 Offerings were approximately $85 million after deduction of the underwriting discounts and commissions and other offering expenses. On June 5, 1996, the Company completed an additional offering of 9,775,000 shares of Common Stock at a price to the public of $31.00 per share (the "June 1996 Offering", and collectively with the December 1995 Offerings, the "Prior Offerings"). The net proceeds to the Company from the June 1996 Offering were approximately $290 million after deduction of the underwriting discounts and commissions and other offering expenses. See "Recent Developments." In addition, pursuant to its mortgage facilities, the Company may be able to borrow up to $400 million to finance its properties. The Company was formed in 1995 as a Delaware corporation and its executive offices are located at 500 E. Broward Boulevard, Ft. Lauderdale, Florida 33394 and its telephone number is (954) 713-1600. SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS Certain statements in this Prospectus Summary and under the captions "Risk Factors," "Recent Developments," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," and elsewhere in this Prospectus constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, the Company's limited operating history and uncertainty as to the Company's future profitability; the ability to meet construction and development schedules and budgets; the ability to develop and implement operational and financial systems to manage rapidly growing operations; the uncertainty as to the consumer demand for economy extended stay lodging; increasing competition in the extended stay lodging market; the ability to integrate and successfully operate acquired properties and the risks associated with such properties; the ability to obtain financing on acceptable terms to finance the Company's growth strategy; and the ability of the Company to operate within the limitations imposed by financing arrangements; and other factors referenced in this Prospectus. See "Risk Factors." SUMMARY FINANCIAL INFORMATION <TABLE> <CAPTION> YEAR ENDED THREE MONTHS ENDED DECEMBER 31, 1995 MARCH 31, 1996 ------------------------- -------------------------- ACTUAL PRO FORMA(1) ACTUAL PRO FORMA(2) <S> <C> <C> <C> <C> OPERATING STATEMENT DATA: Revenue................ $ 877,885 $14,164,414 $ 1,170,829 $ 3,904,359 Operating expenses..... 2,887,091 10,118,595 2,846,928 4,118,518 Depreciation and amortization.......... 146,726 2,193,514 203,343 586,780 Income (loss) from operations............ (2,155,932) 1,852,305 (1,879,442) (800,939) Interest income........ 848,510 804,510 1,450,132 1,425,132 Income taxes........... 0 1,036,000 0 243,000 Net income (loss)...... $(1,307,422) $ 1,620,815 $ (429,310) $ 381,193 =========== =========== ============ ============ Net income (loss) per share(3)................ $ (0.10) $ 0.11 $ (0.02) $ 0.02 Weighted average number of shares of common stock and equivalents outstanding(3).......... 12,652,110 15,260,204 22,467,393 24,785,595 <CAPTION> AS OF MARCH 31, 1996 -------------------------- ACTUAL PRO FORMA(4) <S> <C> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents....................... $104,010,918 $391,358,418 Total assets.................................... 166,369,727 494,692,227 Long-term debt(5)............................... 0 0 Shareholders' equity............................ 164,533,055 492,544,810 </TABLE> - -------------------- (1) Giving pro forma effect to the acquisition of the Norcross, Georgia lodging facility in January 1996, the Norcross, Georgia and Riverdale, Georgia lodging facilities in February 1996, and the Lawrenceville, Georgia lodging facility in June 1996 (the "Gwinnett Facility") (collectively, the "Acquired Facilities"), the acquisition of the Marietta, Georgia lodging facility in August 1995 (the "Marietta Facility"), and the proposed acquisitions of the lodging facility in Lakewood, Colorado (the "KHEC Facility") from Kipling Hospitality Enterprise Corporation ("KHEC") and the four lodging facilities in Las Vegas, Nevada (the "M&M Facilities") as if they all had occurred at the beginning of the period and to the Company operating as a publicly held entity as of such date. See the pro forma financial statements and notes thereto and notes 5 and 14 to the Company's consolidated financial statements, all of which are contained elsewhere herein. (2) Giving pro forma effect to the acquisitions of the Acquired Facilities and the proposed acquisitions of the KHEC Facility and the M&M Facilities as if they had occurred at the beginning of the period. See the pro forma financial statements and notes thereto and notes 5 and 14 to the Company's consolidated financial statements, all of which are contained elsewhere herein. (3) See notes 2, 5, and 14 to the Company's consolidated financial statements contained elsewhere herein. (4) Giving pro forma effect to the acquisition of the Gwinnett Facility and the proposed acquisitions of the KHEC Facility and the M&M Facilities and the June 1996 Offering as if they occurred on March 31, 1996. See the pro forma financial statements and notes thereto contained elsewhere herein. (5) Does not give effect to future borrowings.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001002607_atari-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001002607_atari-inc_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..57b08d9422f7ebc8d5e06c7c3a14ccd7ba7c5219
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+SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and Consolidated Financial Statements and notes thereto, appearing elsewhere in this Prospectus. This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors." THE COMPANY GT Interactive Software Corp. creates, publishes and merchandises interactive entertainment, edutainment and value-priced consumer software for a variety of platforms on a world-wide basis. Similar to major film studios and record companies, the Company employs a portfolio approach to achieve a broad base of products across most major consumer software categories. Recognizing that software distribution capabilities attract publishing content, the Company has used its strong distribution to build its current position as a leader in the consumer software publishing business. According to PC Data, in the first eight months of 1996 the Company had achieved the industry's highest market share in number of units sold in the PC software games category. The Company has experienced significant growth in its published front-line titles, growing from 5 titles released in 1994 to 24 titles released in 1995 to 57 titles released during the nine months ended September 30, 1996. The Company's current strategy is to obtain new software content by blending its in-house development capabilities with the multi-title publishing relationships it has established with independent software developers and content providers. To that end, the Company completed several acquisitions of leading software companies in 1995 and 1996 which have increased its internal software development capabilities and publishing base. In July 1996, the Company acquired Humongous, a premier developer and publisher of award-winning children's software, which has become the centerpiece of its edutainment business. In addition, the Company acquired WizardWorks, a developer and publisher of value-priced software, and FormGen, a publisher of interactive PC shareware and software. These 1996 acquisitions supplemented the Company's 1995 acquisition of Slash, a publisher, purchaser, repackager and distributor of value-priced software. The Company has established multi-title software publishing relationships with a wide range of leading content providers, including id Software, a developer of 3-D action games, such as Quake, Doom, Doom II and Hexen; 3D Realms, the creator of the best-selling Duke Nukem 3D; Williams, an arcade game developer whose titles include Mortal Kombat 3, NBA Hang Time and War Gods; and Scavenger, the developer of Scorcher, Amok and Into The Shadows. The Company has also entered into multi-title relationships with edutainment content providers such as Mercer Mayer, a leading children's author and the creator of The Little Critter books, and Stan and Jan Berenstain, the creators of The Berenstain Bears series. The Company believes that it is currently the largest distributor of consumer software to mass merchants in the United States. The Company is the primary supplier of its own and third party consumer software to approximately 2,245 Wal-Mart stores and approximately 739 Target stores and supplies value-priced software under specially designed programs to approximately 2,149 Kmart stores. In addition, the Company has established direct selling relationships for its own published software with a variety of major retailers, including Sam's Club, Price-Costco, CompUSA, Best Buy, Egghead and Computer City, at approximately 20,000 locations nationwide. The Company believes that significant growth opportunities exist in international markets and across a variety of next generation platforms. In order to exploit international markets, in January 1995, the Company established a software publishing operation in London, England, with responsibility for European markets and is currently publishing, marketing and distributing its consumer software products in over 35 countries world-wide. The Company believes that it is well positioned to take advantage of existing and emerging next generation platforms. Recently, GTIS successfully launched Doom for the Sony PlayStation in Europe and Japan. In addition, the Company released Quake for PCs in Europe in August 1996, where it was the number one selling title upon its release. THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Selling Stockholders................................... 3,458,375 shares Common Stock Outstanding as of November 15, 1996........................................... 66,307,064 shares(1) Use of Proceeds.................................. The Company will receive none of the proceeds from the sale of the Shares by the Selling Stockholders. See "Use of Proceeds." Nasdaq National Market Symbol.................... GTIS </TABLE> SUMMARY CONSOLIDATED FINANCIAL INFORMATION (in thousands, except per share data) <TABLE> <CAPTION> NINE MONTHS ENDED SEPTEMBER YEARS ENDED DECEMBER 31, 30, ---------------------------------------- ------------------------------ PRO PRO FORMA FORMA 1993(3) 1994 1995 1995(4) 1995 1995(4) 1996 ------- -------- -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA(2): Net sales........................................ $19,448 $101,826 $234,461 $253,851 $130,401 $149,791 $230,475 Operating income................................. 630 20,734 32,291 33,731 15,151 16,591 25,397 Provision for (benefit from) income taxes: Federal and state (historical)................. 70 2,427 14,002 14,002 6,836 6,836 11,599 Benefit from change in tax status(5)........... -- -- (3,520) (3,520) (3,520) (3,520) -- Pro forma adjustment to Federal and state taxes (unaudited)(6)............................... -- -- -- 5,461 -- 5,413 -- ------- -------- -------- -------- ------- ------- -------- Total provision for income taxes........... 70 2,427 10,482 15,943 3,316 8,729 11,599 Net income(7).................................... $ 578 $ 18,348 $ 22,604 $ 18,628 $ 12,370 $ 8,442 $ 16,625 Net income per share............................. $ 0.24 Weighted average shares outstanding.............. 68,903 Pro forma net income per share (unaudited)(1)(8).............................. $ 0.30 $ 0.14 Pro forma number of weighted average shares outstanding (unaudited)(1)(8).................. 61,082 59,552 </TABLE> <TABLE> <CAPTION> AS OF SEPTEMBER 30, 1996 ------------------ <S> <C> BALANCE SHEET DATA(2): Cash, cash equivalents and short-term investments............................................... $ 20,911 Working capital................................................................................. 107,630 Total assets.................................................................................... 297,726 Stockholders' equity............................................................................ 142,483 </TABLE> - --------------- (1) Excludes (i) an aggregate of 5,486,349 shares of Common Stock reserved for issuance upon the exercise of options granted as of November 15, 1996, pursuant to the Company's 1995 Stock Incentive Plan, at a weighted average exercise price of $11.31 per share and (ii) 1,459,911 shares of Common Stock reserved for issuance upon exercise of warrants outstanding as of the date of this Prospectus at a weighted average exercise price of $12.01 per share. See "Management -- Stock Incentive Plan" and "Shares Eligible for Future Sale." (2) The summary consolidated financial information presented, except for the pro forma information, is based upon the historical consolidated financial statements, as restated for the acquisitions of WizardWorks, FormGen and Humongous. The pro forma information is unaudited. (3) Information represents only a partial year, as the Company did not commence operations until February 1993. (4) Reflects the Company's acquisition of Slash as if the same had been consummated on January 1, 1995 and the income tax provision that would have been provided had both the Company and Slash been C corporations for the relevant periods. (See Note 2 and Note 8 of the Notes to the Company's Consolidated Financial Statements). (5) The benefit from change in tax status occurred as a result of the transition from an S corporation to a C corporation on March 1, 1995, which allowed the Company to accrue certain tax benefits which would otherwise have flowed to the stockholders of the S corporation. This benefit would not have arisen for the year ended December 31, 1995 had the Company been a C corporation beginning January 1, 1994. (6) Reflects additional income tax provision that would have been provided had both the Company and Slash been C corporations for the relevant periods. (See Note 2 and Note 8 of the Notes to the Company's Consolidated Financial Statements). (7) Net income for the year ended December 31, 1994 would have been $11,250 had the Company been a C corporation for the entire year. (8) Pro forma weighted average number of shares outstanding has been calculated as if all stock issued in the twelve month period prior to the initial public offering (including common stock equivalents such as options and warrants) had been outstanding throughout the periods presented and assuming the proceeds from such issuances (including the assumed exercise prices of options and warrants) had been used to reacquire shares at the initial public offering price at the beginning of the period. Unless otherwise indicated, all information contained in this Prospectus gives effect to the acquisitions of WizardWorks, FormGen and Humongous. RECENT DEVELOPMENTS On December 3, 1996, the Company announced that it expected net revenues for its fourth fiscal quarter ending December 31, 1996 to be below analysts' expectations, and that based on recent sales data, the Company expected net revenues for its fourth quarter to be in a range of between $115 and $125 million. The Company also stated that it expected pre-tax income for the fourth quarter to be below analysts' expectations. The Company cited as major factors for its expectations a widespread weakness in the PC specialty retail market exemplified by the pending Chapter 7 proceeding of Neostar Retail Group, Inc. ("Neostar"); lower-than-anticipated demand for new releases, even those in the "mega-hit" category; and unanticipated delays in the shipment of certain of the Company's software titles which were scheduled to reach the market in the quarter. The Company stated that analysis of recent sales data through Thanksgiving weekend indicated that the specialty retail channel, which comprises a majority of industry sales, is showing an onset of weakness on a scale that is widespread and unexpected and that going into 1997 it is taking a conservative view of the domestic PC market. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Recent Developments."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001002637_millennium_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001002637_millennium_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Financial Statements and Notes thereto appearing elsewhere in this Prospectus, including the information under "Risk Factors". Except as otherwise noted herein or presented in the Financial Statements, all information contained in this Prospectus (i) reflects the conversion, at the closing of this offering, of all outstanding shares of the Company's Series A, B, C and D Convertible Preferred Stock (the "Preferred Stock") into an aggregate of 12,172,221 shares of Common Stock, and (ii) assumes no exercise of the Underwriters' over-allotment option. THE COMPANY Millennium Pharmaceuticals, Inc. ("Millennium" or the "Company") is engaged in the commercial application of genetics, genomics and bioinformatics to discover and develop a broad range of novel therapeutic and diagnostic products. Independently and in strategic alliances with leading pharmaceutical companies, the Company has focused its research efforts on identifying and elucidating the function of genes responsible for diseases that affect millions of individuals and are underserved by current therapeutic alternatives. These diseases include obesity, type II diabetes, atherosclerosis, asthma, cancer and diseases of the central nervous system. The Company's principal objective is to use its technology platform to enable and accelerate the discovery and development of new, proprietary therapeutic and diagnostic products capable of addressing these diseases at their root causes, rather than simply identifying and treating their symptoms. The Company is distinctive in the genomics industry in employing a comprehensive technology platform that couples multiple synergistic approaches for identifying disease genes with a broad set of bench and computational biology technologies for elucidating the function of these genes and their role in disease initiation and progression. This highly automated, computer-enhanced technology platform is designed to enable the Company and its strategic partners to rapidly convert the Company's gene discoveries into useful targets for drug discovery and pharmaceutical intervention. The Company believes that its discoveries will be valuable for the development of therapeutic products (including orally available small molecule drugs, therapeutic proteins, gene therapy and antisense drugs), diagnostic products and services, and disease management programs for a wide range of diseases. Millennium's business strategy has two major components. The first is to establish strategic alliances with leading pharmaceutical companies in order to accelerate product development and commercialization, leverage the Company's technological resources, and minimize operating losses and equity requirements. The Company has secured strategic partners for its five most advanced disease research programs: Hoffmann-La Roche Inc. ("Roche") in obesity and type II diabetes; Eli Lilly and Company ("Lilly") in atherosclerosis and select areas within oncology; and Astra AB ("Astra") in inflammatory respiratory diseases. The Company expects that these strategic alliances will provide a total of approximately $175.0 million in up-front and follow-on payments, equity contributions and research funding (assuming each alliance research program continues for its full five-year term and that the Company achieves certain research objectives), exclusive of any amounts invested by Lilly or an affiliate of Roche in this offering. This amount also excludes additional payments to be made should specified research, product development and associated regulatory milestones be achieved. Equity contributions and revenue earned under these alliances totalled $44.8 million through December 31, 1995. If Millennium and these strategic partners are successful in their collaborative research and development efforts, the Company expects to receive a substantial, diversified stream of royalty and/or profit sharing payments from the sale of resulting products or services commercialized by its strategic partners. Lilly and an affiliate of Roche have indicated their non-binding intention to purchase $3.5 million and $2.0 million, respectively, of Common Stock in this offering. The Company intends to pursue further strategic alliances as appropriate. - ------------------------------------------------------------------------------- INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED MAY 6, 1996 4,500,000 SHARES LOGO MILLENNIUM PHARMACEUTICALS, INC. COMMON STOCK (PAR VALUE $.001 PER SHARE) --------------------- All of the 4,500,000 shares of Common Stock offered hereby are being sold by the Company. Prior to this offering, there has been no public market for the Common Stock. It is currently estimated that the initial public offering price per share will be between $11.00 and $12.00. For factors to be considered in determining the initial public offering price, see "Underwriting". SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR CERTAIN CONSIDERATIONS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK. Two of the Company's strategic alliance partners -- Hoffmann-La Roche Inc. and Eli Lilly and Company -- have indicated their non-binding intention to purchase $2,000,000 and $3,500,000, respectively, of Common Stock in this offering. The Common Stock has been approved for quotation on the Nasdaq National Market under the symbol "MLNM". --------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. --------------------- <TABLE> <CAPTION> INITIAL PUBLIC UNDERWRITING PROCEEDS TO OFFERING PRICE DISCOUNT(1) COMPANY(2) -------------- ------------ ----------- <S> <C> <C> <C> Per Share.................................... $ $ $ Total(3)..................................... $ $ $ <FN> - --------------- (1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. (2) Before deducting estimated expenses of $500,000 payable by the Company. (3) The Company has granted to the Underwriters an option for 30 days to purchase up to an additional 675,000 shares at the initial public offering price per share, less the underwriting discount, solely to cover over-allotments. If such option is exercised in full, the total initial public offering price, underwriting discount and proceeds to Company will be $ , $ and $ , respectively. See "Underwriting". </TABLE> --------------------- The shares offered hereby are offered severally by the Underwriters, as specified herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that certificates for the shares will be ready for delivery in New York, New York, on or about , 1996, against payment therefore in immediately available funds. GOLDMAN, SACHS & CO. ROBERTSON, STEPHENS & COMPANY --------------------- The date of this Prospectus is , 1996. - -------------------------------------------------------------------------------- The second component of Millennium's business strategy is to retain substantial rights to develop and market certain diagnostic and therapeutic applications of the discoveries it makes in its funded strategic alliance research programs. The Company currently is at an early stage of formulating strategies and assembling the resources and capabilities necessary to further develop and exploit these proprietary opportunities. For example, as part of its agreement with Lilly, the Company obtained access to certain combinatorial chemistry libraries and high-throughput screening technologies for the development of small molecule drugs. The Company generally intends to collaborate with pharmaceutical, biotechnology or other companies for the later stages of development and commercialization of these proprietary opportunities; however, the Company may consider developing certain potential proprietary products or services on its own. The Company and its collaborators have recorded significant progress in several disease research programs, highlighted by the following scientific accomplishments: - Discovered the mouse and human versions of tub, a gene which causes obesity in a mouse model that closely mimics human obesity; - Discovered the mouse and human versions of ob-r, the leptin receptor that plays a central role in modulating weight and appetite; - Identified small chromosomal regions surrounding disease genes that predispose individuals to type II diabetes; and - Identified small chromosomal regions surrounding disease genes that predispose individuals to bipolar affective disorder (manic depression). The Company has received two research milestone payments from Roche for discovering the tub and ob-r genes. The Company seeks United States and international patent protection for the genes it discovers, as well as related therapeutic and diagnostic products and processes. As of April 1, 1996, the Company had filed 36 United States patent applications, and several corresponding foreign applications, covering the Company's discoveries. The Company was incorporated in Delaware in 1993. The Company's principal office is located at 640 Memorial Drive, Cambridge, Massachusetts 02139 and its telephone number is (617) 679-7000. <TABLE> THE OFFERING <CAPTION> <S> <C> Common Stock offered by the Company................................ 4,500,000 shares Common Stock to be outstanding after the offering.................. 22,837,678 shares(1) Use of proceeds.................................................... Research and development, working capital and other general corporate purposes Nasdaq National Market symbol...................................... MLNM Risk Factors....................................................... The offering involves a high degree of risk. See "Risk Factors". <FN> - --------------- (1) Includes 2,325,874 shares that were subject to repurchase by the Company as of April 1, 1996 under certain conditions at a weighted average repurchase price of $0.29 per share. Excludes 2,249,073 shares of Common Stock issuable upon exercise of options and warrants outstanding as of April 1, 1996. See "Management -- Stock Plans". </TABLE> - -------------------------------------------------------------------------------- LOGO --------------------- The Company intends to furnish to its stockholders annual reports containing audited financial statements and quarterly reports containing unaudited interim financial information for the first three fiscal quarters of each fiscal year of the Company. --------------------- IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. <TABLE> - ---------------------------------------------------------------------------------------------------- SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <CAPTION> PERIOD FROM JANUARY 13, 1993 (DATE OF INCEPTION) THROUGH YEAR ENDED DECEMBER 31, DECEMBER 31, ------------------- ---------------------- 1993 1994 1995 ---- ---- ---- <S> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Revenue under strategic alliances..................... $ -- $ 7,963 $22,880 Costs and expenses: Research and development............................ 2,859 10,990 17,838 General and administrative.......................... 1,530 3,240 3,292 ------- ------- ------- Income (loss) from operations......................... (4,389) (6,267) 1,750 Interest income (expense), net........................ 101 (105) (466) ------- ------- ------- Net income (loss)..................................... $(4,288) $(6,372) $ 1,284 ======= ======= ======= Pro forma net income per share(1)..................... $ 0.07 ======= Shares used in computing pro forma net income per share(1)............................................ 19,282,205 </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1995 ------------------------ ACTUAL AS ADJUSTED(2) ------- -------------- <S> <C> <C> BALANCE SHEET DATA: Cash, cash equivalents and short-term investments................... $17,847 $68,975 Working capital..................................................... 10,498 61,626 Total assets........................................................ 25,105 76,232 Long-term debt, net of current portion.............................. 1,467 1,467 Capital lease obligations, net of current portion................... 2,499 2,499 Accumulated deficit................................................. (9,376) (9,376) Total stockholders' equity.......................................... 13,096 64,223 <FN> - --------------- (1) Computed on the basis described in Note 2 of Notes to Financial Statements. (2) Gives effect to the automatic conversion of all outstanding shares of Preferred Stock (including 388,888 shares of Series D Convertible Preferred Stock sold at $9.00 per share in February 1996) into shares of Common Stock upon the closing of the offering and the sale of the 4,500,000 shares of Common Stock offered by the Company hereby at an assumed initial offering price of $11.50 per share and the application of the net proceeds therefrom, after deducting the estimated underwriting discount and offering expenses payable by the Company. See "Use of Proceeds" and "Description of Capital Stock".
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001002760_acc_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001002760_acc_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..326f138cad79087d19247afc6d29ec2fabe2d0ca
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and consolidated financial statements, including the notes thereto, appearing elsewhere in this Prospectus or incorporated herein by reference. Unless otherwise indicated, all information set forth herein does not reflect the exercise of the Underwriters' over-allotment option. This Prospectus contains certain statements regarding the Company's plans and objectives for future operations, the Company's future economic performance and assumptions relating to future operations or future economic performance that constitute "forward looking information" under the Securities Litigation Reform Act of 1995. Each of such statements is subject to risks, as set forth under "Risk Factors" that could cause actual results to differ materially from the results included in the forward looking information. Unless the context otherwise requires, all references in this Prospectus to the Company refer to ACC Consumer Finance Corporation, OFL-A Receivables Corp., a wholly-owned special purpose subsidiary of ACC that takes title to all Contracts and is the record lienholder of all financed vehicles and the obligor under the Company's warehouse and other financing facilities ("OFL-A"), and ACC Receivables Corp. ("Receivables"), a wholly-owned special purpose subsidiary of ACC formed in connection with the Company's issuance of asset-backed securities. All references to ACC, unless the context otherwise requires, refer to ACC Consumer Finance Corporation, which is the issuer of the Notes. ACC provides the Contract acquisition and portfolio servicing functions and incurs virtually all of the Company's operating expenses. However, OFL-A and Receivables own substantially all of the earning assets of the Company. THE COMPANY The Company specializes in the indirect financing of automobile installment contracts ("Contracts"), originated primarily by franchised automobile dealers, for consumers who pose credit risks due to past credit problems, limited or no credit histories and/or low incomes ("Non-Prime Borrowers"). These consumers are unlikely to qualify for financing from traditional automobile financing sources such as commercial banks, savings and loans, thrift and loans, credit unions and the captive finance companies of automobile manufacturers. Through its financing program, the Company provides automobile dealers ("Dealers") with a source of financing for Non-Prime Borrowers. ACC was founded by three senior executives with extensive experience in non-prime credit evaluation, asset securitization and collections. ACC has experienced significant growth since its formation in July 1993. From June 30, 1995, to June 30, 1996, the outstanding balance of Contracts serviced by the Company increased from $78 million to $173 million, or 122%. The volume of Contracts purchased by the Company increased from $44 million during the six-month period ended June 30, 1995, to $79 million during the six-month period ended June 30, 1996, or 80%. During the six-month period ended June 30, 1996, ACC reported net income of $1.9 million (with a 42% effective tax rate), compared to net income of $2.3 million (with a 1.5% effective tax rate), for the six-month period ended June 30, 1995. In May 1996, the Company sold 2,000,000 shares -4- Page 7 of 606 <PAGE> of its common stock in an initial public offering that generated net proceeds of approximately $12.6 million. The automobile finance market is one of the largest consumer finance markets in the United States, with $356 billion in outstanding credit as of January 1996. Since its formation, ACC has targeted the highly fragmented non-prime segment of this market which has an estimated $70 billion in outstanding credit. The Company's business plan focuses on the following strategies: Market Focus. The Company targets major metropolitan areas and expands into those markets in which it can recruit salespeople with non-prime lending experience. The Company believes that major metropolitan areas provide concentrations of high volume Dealers which can be effectively serviced by its regional sales managers. The Company attempts to develop a broad Dealer base to avoid dependence on a limited number of Dealers. As of June 30, 1996, the Company directly marketed its program to Dealers in 22 states, and during the six-month period ended June 30, 1996, 65% of the Contracts were purchased from Dealers in the states of California, Florida, Pennsylvania and Texas. During the six-month period ended June 30, 1996, the Company purchased Contracts from 1,055 Dealers. As of June 30, 1996, no Dealer accounted for more than 3% of the Company's Contract portfolio and the ten Dealers from which the Company purchased the most Contracts accounted for approximately 13% of the Company's Contract portfolio, in aggregate. Late-Model Used Vehicle Contracts From Franchised Dealers. The Company's financing program targets the purchase of Contracts for late-model used vehicles that are originated by franchised Dealers. As of June 30, 1996, the median model year in the Company's Contract portfolio was 1993. As of June 30, 1996, approximately 85% of Contracts serviced by the Company financed used vehicles and 97% were acquired from franchised Dealers. The average discount and the weighted average coupon on Contracts purchased during the six-month period ended June 30, 1996, were 5.0% and 20.7%, respectively. The Company believes that late-model used vehicles represent the largest segment of the used vehicle market, while posing less risk of default due to mechanical problems than do older used vehicles. The Company targets franchised Dealers because the financial requirements and customer service standards imposed on these dealers by automobile manufacturers generally result in a high level of financial stability and customer satisfaction. As a result, the Company believes, in general, Contracts from these Dealers expose the Company to less risk of Dealer misrepresentation and lower levels of borrower default. Credit Scoring and Risk Management System. In order to manage the higher risks associated with Non-Prime Borrowers, the Company maintains a database which tracks key underwriting parameters for each Contract purchased. This database is then used to statistically compare the characteristics of performing Contracts to nonperforming Contracts. Using this analysis, the Company periodically refines and enhances the proprietary credit scoring system used by its credit officers. The Company believes that this approach to credit underwriting allows the Company to offer to Dealers a series of different pricing programs tied to the expected economic value of each program to the Company. In addition, the Company has assigned designated lending limits for each credit officer. -5- Page 8 of 606 <PAGE> For the six-month period ended June 30, 1996, net charge-offs as a percentage of average servicing portfolio was 3.8% and as of June 30, 1996, delinquencies of 31 days or more were 4.0% of servicing portfolio. Regional Credit Centers. The Company's regional credit centers in Atlanta, Georgia; Dallas, Texas; Miami, Florida; Newark, Delaware; and San Diego, California process and approve applications from the 22 states in which the Company directly markets its program. The Company believes this regional structure meets the Company's Dealer service objectives without sacrificing economies of scale and operating controls. Centralized Funding and Collection Management. The Company manages all Contract funding and collection activities from its headquarters in San Diego. Through this central operation, the Company conducts an extensive pre-funding verification process on 100% of the Contracts, which generally includes a direct telephone interview with the borrower. The Company typically returns Contract packages that fail to meet its requirements. The Company also monitors the performance of each of its Dealers and conducts a post-funding quality control review of a random sample of 5% of all Contracts purchased by ACC. The Company pursues a collection strategy of early and frequent contact with delinquent borrowers using a high-penetration autodialer to begin contacting borrowers who become six days delinquent. ACC believes that its centralized funding and collection structure allows for maximum operating control and cost efficiency. Asset Securitizations. As of the date of this Prospectus, the Company has issued five asset-backed securities involving Contracts aggregating approximately $232 million. Each of the securities was rated AAA by Standard & Poor's Ratings Group ("S&P") and Aaa by Moody's Investors Service, Inc. ("Moody's"), based on a guaranty by Financial Security Assurance Inc. ("FSA"). The Company issues asset-backed securities to redeploy capital, reduce its interest rate risk and recognize gains from the sale of the Contracts. Warehouse financing is provided by Cargill Financial Services Corporation ("Cargill") under a facility which expires in July 1998. ------------ ACC was incorporated in California on June 3, 1993, under the name of American Credit Corporation, changed its name to ACC Consumer Finance Corporation in October 1995, was reincorporated in Delaware in November 1995 and became a public company in May 1996. ACC's executive offices are located at 12750 High Bluff Drive, Suite 320, San Diego, California 92130, and its telephone number is (619) 793-6300. -6- Page 9 of 606 <PAGE> THE OFFERING Securities Offered ........ $15,000,000 principal amount of ____% Notes due 2003 assuming no exercise of the Underwriters' over-allotment option to purchase up to an additional $2,250,000 principal amount of Notes. The Notes are unsecured, general obligations of the Company. See "Description of the Notes" for a more detailed description of the Notes offered hereby. Maturity .................. ____________, 2003 Interest Payment Dates .... Interest is payable monthly in arrears commencing __________, 1996. Redemption Upon Death of Upon the Death of a Noteholder: Notes tendered by Noteholder ................ the personal representative or surviving joint tenant or tenant in common of a deceased beneficial owner shall be redeemed within 60 days of tender, at par plus accrued interest, subject to the amount limitations set forth below. Amount Limitations: Of the Notes tendered, the Company is only required to redeem, for the period from the date of issuance until _________, 1997, and for each 12-month period ending __________, thereafter, an aggregate maximum of $300,000 per year, subject to a maximum of $25,000 per beneficial owner, per 12-month period. Redemption Upon Occurrence In the event of a Fundamental Structural Change of Certain Events ......... (as that term is defined herein), Noteholder will have the right (through a date within 75 days of occurrence of the event) to require the Company to purchase the holder's Notes at a price equal to par plus accrued interest; provided that such right shall not be exercisable if within 40 days after the occurrence of such event the Notes have received a specified rating from a nationally recognized statistical rating organization. See "Description of the Notes -- Noteholders' Right to Prepayment After Fundamental Structural Change." Redemption at Company's Option .................... The Notes may be redeemed at the Company's option on or after ___________, 1999, at the redemption prices set forth herein. Sinking Fund .............. None. -7- Page 10 of 606 <PAGE> Certain Covenants of In the Indenture, the Company agrees to certain the Company ............... limitations on dividends and additional indebtedness, to maintain certain levels of cash or marketable investment securities, and, unless certain conditions are met to redeem Notes tendered by Noteholders in the event of certain transactions relating to the Company. Use of Proceeds............ The net proceeds from the sale of the Notes will be contributed to OFL-A for use in part to repay temporarily a subordinated debt facility (the "NIM Facility") and for the Company's general working capital purposes. Risk Factors .............. Certain risk factors beginning on page 12 should be considered in connection with the purchase of the Notes. Trustee.................... Norwest Bank Minnesota, National Association. -8- Page 11 of 606 <PAGE> <TABLE> SUMMARY FINANCIAL DATA <CAPTION> Six-Month July 15, 1993 Six Months Ended Transition (Inception) June 30, Year Ended Period Ended Through ------------------------ Dec. 31, Dec. 31, June 30, 1996 1995 1995<F1> 1994<F1> 1994<F1> ------ ------ -------- -------- -------- (unaudited) (unaudited) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net Interest Income Before Provision for Contract Losses $ 2,034,604 $ 2,080,441 $ 3,332,354 $ 2,187,843 $ 606,177 Gain on Sale of Contracts 6,584,609 3,913,477 8,056,136 -- -- Servicing Income and Ancillary Fees 1,811,747 500,717 1,757,257 28,237 6,653 Litigation Settlement Income -- -- -- 325,000 -- ------------ ------------ ------------ ------------ ------------ Total Revenues 10,430,960 6,494,635 13,145,747 2,541,080 612,830 Provision for Contract Losses (348,784) (10,348) (673,802) (902,361) (592,325) Operating Expenses (6,763,069) (4,149,601) (8,796,590) (2,630,925) (2,608,467) ------------ ------------ ------------ ------------ ------------ Income (Loss) Before Taxes 3,319,107 2,334,686 3,675,355 (992,206) (2,587,962) Net Income (Loss) 1,925,107 2,299,686 3,466,355 (992,206) (2,587,962) Preferred Stock Dividends 116,818 96,827 215,419 82,621 152,673 ------------ ------------ ------------ ------------ ------------ Net Income (Loss) Available to Common Shareholders $ 1,808,289 $ 2,202,859 $ 3,250,936 $(1,074,827) $(2,740,635) ============ ============ ============ ============ ============ Primary Income per Common Share<F2> $ 0.29 $ -- $ 0.62 $ -- $ -- Fully Diluted Income per Common Share 0.29 -- 0.55 -- -- Weighted Average Shares Outstanding (Primary) 6,724,938 -- 5,624,305 -- -- Weighted Average Shares Outstanding (Fully Diluted) 6,736,596 -- 6,292,478 -- -- Pro Forma Ratio of Earnings to Fixed Charges<F3> 2.28% -- 1.74% -- -- STATEMENT OF CASH FLOWS DATA: Net Cash Provided By (Used In) Operating Activities $ (4,395,063) $ 7,505,732 $ 771,386 $ (1,588,352) $ (3,397,671) Net Cash Provided By (Used In) Investing Activities 1,597,287 927,556 (808,470) (24,505,335) (16,135,420) Net Cash Provided By (Used In) Financing Activities 2,776,156 (7,964,723) 13,923 26,199,046 19,571,565 (Decrease) Increase In Cash and Cash Equivalents (21,620) 468,565 (23,161) 105,359 38,474 </TABLE> -9- Page 12 of 606 <PAGE> As of As of As of June 30, 1996 Dec. 31, 1995 Dec. 31, 1994 Balance Sheet Data: ------------- ------------- ------------- Total Assets $ 53,942,978 $ 46,908,938 $ 42,331,518 Net Installment Contracts Held-for-Sale 22,365,001 28,187,778 -- Held-for-Investment 220,830 509,388 38,613,239 Allowance for Contract Losses 388,200 476,808 1,181,004 Asset-Backed Securities 6,684,022 3,910,080 -- Excess Servicing Receivables 9,365,618 5,590,878 -- Repurchase Facility, Net 23,598,232 29,708,252 40,492,594 Other Borrowings 2,388,036 7,439,597 -- Total Liabilities 32,721,312 40,624,138 41,433,745 Redeemable Preferred Stock -- 6,279,049 4,358,377 Shareholders' Equity 21,221,666 5,751 (3,460,604) Pro Forma Ratio of Indebtedness to Consolidated Net Worth<F4> 1.82% 7.11% -- Return (Loss) on Average Assets (Annualized) 7.65% 6.92% (6.65)% Return (Loss) on Average Equity (Annualized)<F5> 32.46% 102.37% (160.91)% [FN] <F1> Effective as of January 1, 1995, the Company changed its fiscal year end from June 30 to December 31. Each of the periods ended June 30, 1994, December 31, 1994, and December 31, 1995, is an audited period. <F2> Due to the significant changes in the capital structure of the Company, historical net income (loss) per common share prior to the year ended December 31, 1995, is not presented. <F3> For purposes of calculating the pro forma ratio of earnings to fixed charges, earnings consist of income before income taxes, plus fixed charges. Fixed charges consist of the interest on all indebtedness and the representative interest factor of rent expense. <F4> For purposes of calculating the pro forma ratio of indebtedness to consolidated net worth, as adjusted for the issuance of the Notes, indebtedness excludes secured indebtedness with respect to which the sole recourse of the lender in the event of nonpayment or other default is to the collateral, and consolidated net worth represents consolidated net worth determined in accordance with generally accepted accounting principles, less goodwill. <F5> The calculation of return (loss) on average equity for December 31, 1995 and 1994 includes the redeemable Preferred Stock. -10- Page 13 of 606 <PAGE> SUMMARY OPERATING DATA Three Months Ended --------------------------------------------------- June 30, Mar. 31, Dec. 31, Sept. 30, June 30, 1996 1996 1995 1995 1995 ---- ---- ---- ---- ---- CONTRACT PURCHASE DATA: Amount of Contracts(000's)$ 45,253 $ 33,715 $ 26,478 $ 28,642 $ 24,673 Number of Contracts 3,682 2,746 2,184 2,366 2,058 Average Coupon on Contracts 20.72% 20.65% 20.47% 20.33% 19.93% Average Discount of Contracts<F1> 5.16% 4.87% 5.14% 6.00% 6.98% Average Amount Financed under Contracts $ 12,290 $ 12,278 $ 12,124 $ 12,106 $ 11,989 Average Original Term of Contracts (months) 57 57 58 57 56 Active Dealers<F2> 1,055 813 547 546 472 Number of Regional Sales Managers 35 32 25 19 15 Number of Significant States<F3> 15 13 12 10 7 OPERATING DATA: Principal Balance of Servicing Portfolio at Period End (000's)<F4>$172,562 $139,969 $117,539 $100,028 $ 78,118 Net Charge-offs as a Percentage of Average Servicing Portfolio (annualized)<F5> 3.40% 4.40% 4.53% 3.82% 2.67% Delinquencies 31 days or more as a Percentage of Servicing Portfolio at Period End<F6> 3.96% 2.73% 4.25% 4.11% 2.79% [FN] <F1> Includes acquisition fees. <F2> Active Dealers include any Dealers from which Contracts were purchased within the six months prior to the period end. <F3> Significant States are any states wherein the Company purchased more than $500,000 in Contracts during the period. <F4> All amounts are based on the full amount remaining to be repaid on each Contract at period end. The information in the table represents the principal amount of all Contracts owned and serviced by the Company, including Contracts sold in asset-backed securities. <F5> Net charge-offs are net of recoveries and include the remaining Contract balance at time of charge-off. In the case of repossession, net charge-offs include the remaining Contract balance at the time of repossession less liquidation proceeds (for disposed vehicles), NADA wholesale value (for vehicles repossessed but not sold) or claims receivable under the Company's vendor single interest insurance policy. Net charge-offs do not include repossessions that are less than 120 days delinquent and are not yet charged-off. <F6> The Company considers a Contract delinquent when an obligor fails to make at least 90% of the contractual payment by the stated due date. The period of delinquency is based upon the number of days payments are contractually past due. Contracts not yet 31 days late are not considered to be delinquent. The delinquency rate excludes amounts in repossession. -11- Page 14 of 606 <PAGE>
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001003114_impath-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001003114_impath-inc_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..88374315efea04ca3092e01b928b825970999e8c
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Investors should carefully consider the information set forth under "Risk Factors." Except as otherwise noted, the information in this Prospectus: (i) reflects the conversion of all of the outstanding shares of the Company's convertible preferred stock, $.01 par value (the "Preferred Stock"), into Common Stock; and (ii) reflects an approximate 1-for-2.8 reverse split of the outstanding shares of Common Stock. Certain terms relating to the Company's business which are used in this Prospectus are explained in the Glossary included herein. THE COMPANY IMPATH provides critical information focused exclusively on cancer. The Company provides the expertise to establish correct diagnosis, accurate prognosis, treatment determination and patient follow-up, all of which are essential for making medically optimal and cost-effective cancer management decisions. IMPATH believes it currently performs more specialized analyses to establish correct diagnosis of difficult cancer cases than any other institution in the world. The Company also believes it is the leader in providing the most comprehensive prognostic information essential to the management of breast cancer. IMPATH provided patient-specific prognostic information on over 12% of all such cases in the U.S. last year and over 26% of cases diagnosed in the New York metropolitan area, the Company's largest market. The Company believes that large clinical laboratory companies are in general not prepared to provide the type of intensive, highly technical, patient-specific service that it thinks the market requires. The few university-based medical centers which have the professional expertise and advanced technologies required to perform such analyses do not generally provide the same focus as the Company on service (48 hour turn-around for IMPATH compared with 14 days or more for academic centers) and on delivery of coordinated and integrated information. The Company has capitalized on this competitive advantage to build one of the most significant knowledge bases related to the diagnosis, prognosis and treatment of cancer. In addition, the significant volume of cases the Company reviews is also enabling IMPATH to rapidly grow its diagnostic and prognostic database into one of the largest, most comprehensive cancer databases and tissue libraries in the world, with a specific emphasis on patient outcomes and optimal treatment protocols. Through the use of evolving technologies, IMPATH provides patient- specific diagnostic and prognostic information to pathologists, oncologists, urologists and other physicians specializing in cancer. IMPATH believes that the use of its services is critical in both the optimization of patient care as well as the cost-effective delivery of that care. Historically, the treatment of cancer has frequently used an approach based upon how a particular drug or therapy worked on the population as a whole; if one therapy (i.e., a particular chemotherapy, radiation therapy or other treatment) proved ineffective then another was tried until a successful therapy was found or all possibilities were exhausted. IMPATH provides cancer specialists with the necessary information, based upon a given individual's specific cancer, to diagnose correctly a difficult tumor and very often to know whether a therapy is the optimal one before it is tried, thus targeting only those therapies appropriate to an individual's specific cancer and avoiding the trauma, risk and cost of unnecessary treatment. In a significant number of instances, IMPATH's analysis of particularly difficult cases has helped doctors avoid misdiagnosis. The Company believes its services are significantly more effective than traditional approaches in that they allow oncologists to provide the best and most cost-effective management of cancer. IMPATH's business is based on the premise that providing the information for optimizing treatment at the earliest possible time is not only more beneficial to the patient, it is also inherently more cost- effective. The Company provides its clients, which included over 2,500 physicians in over 1,000 hospitals in 1995, with a single source for a broad range of sophisticated diagnostic and prognostic analyses for cancer. Although the professional expertise and advanced technologies required to perform these analyses are available at a few university-based medical centers, IMPATH believes that the technologies and capabilities are often distributed among various departments. The Company believes that its focus on service and on the delivery of coordinated and integrated information provides the Company's customers with the best means for obtaining a comprehensive analysis for a cancer patient. In addition, by using IMPATH, a community hospital can provide the same sophisticated range of services as a major academic medical center. During 1995, the Company earned $1,043,000 on revenues of $14,714,000. Revenues for the six months ended June 30, 1996 were $9,821,922, compared with $6,714,227 for the six months ended June 30, 1995, and net income was $667,590, compared with $645,848 for the comparable period of the prior year. The market for cancer diagnosis, prognosis and treatment is significant and growing. According to the American Cancer Society, the estimated number of cancer cases diagnosed annually in the United States (excluding certain skin cancers) increased from approximately 782,000 in 1980 to approximately 1,200,000 in 1994, an increase of 53%. This increase is attributable to a number of factors, including a growing and aging population. In addition, earlier diagnosis and better information have led to more effective treatment and increased the relative five-year survival rate of cancer patients from 39% in 1963 to 54% in 1990. As a result, over 8,000,000 Americans alive today have been diagnosed with cancer. The Company anticipates that these trends will continue and that the demand for information regarding cancer will continue to increase. The cost of treating cancer patients is also expected to escalate. The National Cancer Institute estimates that direct medical costs associated with cancer totaled approximately $35 billion in 1994, not including lost productivity and mortality costs. The Company believes that direct medical costs associated with cancer will increase more rapidly than those associated with most other diseases as a result of the growth in the number of cancer patients and the high cost of new therapies. IMPATH intends to capitalize on its competitive advantage as a leader in cancer information by continuing to expand its diagnostic and prognostic database through the acquisition and addition of patient diagnostic data and outcome histories. The Company believes that its substantial knowledge base, case flow and tissue bank will allow it to incorporate and validate new technologies as they become available. IMPATH believes its professional and technical expertise will also allow it to dramatically increase its database through retrospective analyses from patient populations in which outcomes are known. In addition to continuing to develop its database, IMPATH intends to continue to incorporate and apply the latest, evolving technologies to the diagnosis and prognosis of cancer. The Company believes that the experience and distinguished reputation of its scientific and technical staff will continue to be important in this regard. IMPATH's sales and marketing force has been successful in establishing the Company in its target markets and IMPATH intends to capitalize on its current market presence to expand into other geographic areas and to increase its market penetration in existing areas. The Company also intends to aggressively market the cost and patient benefits of its services to expand its managed care relationships. Furthermore, the Company believes that it will be an increasingly important partner to pharmaceutical and biotechnology companies in helping them identify the optimal patient population for newly developed therapies. On July 5, 1996, there were 5,269,837 shares of Common Stock outstanding. The Common Stock of the Company trades on the Nasdaq National Market under the symbol "IMPH." The Company is a Delaware corporation with executive offices at 1010 Third Avenue, Suite 302, New York, New York 10021, and its telephone number at that address is (212) 702-8300. SUMMARY FINANCIAL AND OPERATING DATA The financial data in the following tables have been derived from the financial statements of the Company for the respective periods presented. The financial data should be read in conjunction with the financial statements of the Company and the related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus. <TABLE> <CAPTION> Six Months Year Ended December 31, Ended June 30, -------------------------------------------- ---------------- 1991 1992 1993 1994 1995 1995 1996 ------ ------ ------ ------- ------- ------ ------ (In thousands, except per share data) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenues.................................. $3,462 $4,993 $7,04 $10,014 $14,714 $6,714 $9,822 Operating expenses: Salaries and related costs...................... 1,695 2,668 4,162 4,682 6,830 3,149 4,514 Selling, general and administrative............. 1,805 2,298 3,805 4,351 6,863 2,944 4,501 ------ ------ ------ ------- ------- ------ ------ Total operating expenses.......................... 3,500 4,966 7,967 9,033 13,693 6,093 9,015 ------ ------ ------ ------- ------- ------ ------ Income (loss) from operations..................... (38) 27 (925) 981 1,021 621 807 Other income (expense)............................ 49 29 2 (15) 22 25 364 ------ ------ ------ ------- ------- ------ ------ Income (loss) before income tax expense......................................... 11 56 (923) 966 1,043 646 1,171 Income tax expense................................ 3 24 19 98 0 0 503 ------ ------ ------ ------- ------- ------ ------ Net income (loss)(1).............................. $ 8 $ 32 $ (942) $ 868 $ 1,043 $ 646 $ 668 ====== ====== ====== ======= ======= ====== ====== Pro forma net income per common share(1)(2)..................................... $.31 $.20 $.13 Pro forma weighted average common and common equivalent shares outstanding(2).................................. 3,371 3,184 5,118 ======= ===== ====== </TABLE> - ------------ (1) Does not reflect dividends accrued on the Preferred Stock. Dividends earned prior to February 10, 1995 were forgiven in conjunction with the issuance of Series D Preferred Stock. Dividends accrued from February 10, 1995 in the amount of $560,000 were paid and ceased to accrue upon conversion of the Preferred Stock on February 26, 1996. (2) Pro forma weighted average shares outstanding give effect to the conversion of the outstanding shares of Preferred Stock into shares of Common Stock in accordance with the terms thereof immediately prior to the completion of the Offering and reflects the 1-for-2.8218735 reverse split of the outstanding shares of Common Stock. <TABLE> <CAPTION> Six Months Year Ended December 31, Ended June 30, -------------------------------------------- ---------------- 1991 1992 1993 1994 1995 1995 1996 ------ ------ ------ ------- ------- ------ ------ (Dollars in thousands) <S> <C> <C> <C> <C> <C> <C> <C> SELECTED OPERATING DATA: Revenues.......................................... $ 3,462 $ 4,993 $ 7,042 $10,014 $14,714 $ 6,714 $ 9,822 Number of cases reported.......................... 11,038 15,136 24,812 33,618 43,287 20,507 25,747 Number of hospitals served........................ 728 817 959 1,021 1,118 914 1,056 Cases per hospital served......................... 15 19 26 33 39 22 24 <CAPTION> June 30, 1996 ---------------- (In thousands) <S> <C> BALANCE SHEET DATA: Working capital................................... $30,375 Total assets...................................... 34,680 Long-term liabilities, net of current portion......................................... 1,072 Total stockholders' equity........................ 32,066 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001003382_3-d_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001003382_3-d_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..85304d453668d722527c8440e41331707628e3a1
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0001003382_3-d_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY Unless the context indicates otherwise, all references herein to the "Company" or to "3-D Geophysical" mean 3-D Geophysical, Inc. and its subsidiaries, the principal ones of which operate two seismic data acquisition businesses (the "Operating Subsidiaries") -- Geovaluaciones, S.A. de C.V. ("Geovaluaciones") and Northern Geophysical of America, Inc. ("Northern"). In addition, the Company processes seismic data through another subsidiary, Procesos Interactivos Avanzados, S.A. de C.V. ("PIASA"). Concurrently with the consummation of the Company's initial public offering (the "Initial Public Offering") in February 1996, 3-D Geophysical acquired Geoevaluaciones, Northern, Paragon Geophysical, Inc. ("Paragon") and Kemp Geophysical Corporation ("Kemp"). In December 1996, Paragon and Kemp were merged with and into Northern. Unless the context indicates otherwise, certain technical and other terms used in this Prospectus have the meanings assigned to them in the Glossary appearing elsewhere herein. The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, all information included in this Prospectus assumes that the Underwriters' over-allotment option will not be exercised. In this Prospectus, unless otherwise indicated, references to "dollars" and "$" are to United States dollars, references to "pesos" are to Mexican pesos and references to "Canadian dollars" and "C$" are to Canadian dollars, and the terms "United States" and "U.S." mean the United States of America, its states, territories and possessions and all areas subject to its jurisdiction. THE COMPANY GENERAL 3-D Geophysical, Inc. is one of the leading providers of land-based and shallow water three-dimensional ("3-D") and two-dimensional ("2-D") seismic data acquisition services to the oil and gas industry in the Western Hemisphere. As of October 31, 1996, the Company's nine crews operated land-based and shallow water seismic data acquisition systems, primarily utilizing state-of-the-art, 24-bit equipment, with a total of approximately 12,000 channels, in Alaska, the Rocky Mountain, West Coast and Appalachian regions and in Mexico. The seismic data acquisition services industry is currently experiencing several significant changes, including a continuing consolidation of service providers. The Company believes that this consolidation is due in part to the trend by oil and gas exploration and production companies to rely on third-party seismic contractors to provide increasingly more sophisticated and extensive 3-D seismic surveys. These surveys require a greater number of recording channels and therefore substantial capital expenditures. This trend is rationalizing the seismic services industry and creating a competitive advantage for companies with extensive 3-D channel capacity and greater financial resources. The Company believes that (i) its state-of-the-art systems, (ii) its ability to relocate equipment and crews among the regions in which it operates, (iii) the regional experience of its management and crews in performing 3-D and 2-D surveys, and (iv) the quality of its services and relationships with customers will enable the Company to take advantage of this industry trend. Since the Initial Public Offering, the Company has: - Increased its channel capacity from approximately 7,500 to approximately 12,000 channels; - Expanded its operations in Alaska with seismic data acquisition contracts with Arco Alaska Inc., a subsidiary of Atlantic Richfield Company ("ARCO"), BP Exploration (Alaska) Inc. ("BP Alaska") and Marathon Oil Company ("Marathon"); - Obtained two of the first group of 3-D seismic data acquisition contracts awarded to date by Petroleos Mexicanos ("PEMEX"), Mexico's national oil company; - Established a presence in Peru by opening a branch office and a seismic data processing center and bidding on several contracts to provide seismic data acquisition services in Peru; and - Entered into a stock purchase agreement to acquire J.R.S. Exploration Company Limited ("J.R.S. Exploration"), a seismic data acquisition business that has been operating in Western Canada since 3-D GEOPHYSICAL, INC. provides state-of- the-art seismic data acquisition services to the oil and gas industry in the Western Hemisphere. The Company is an industry leader in 3-D land surveys and in heliportable, conventional, and shallow water operations, with over 12,000 channels of 24-bit recording system capability. [Photograph of helicopter transporting the central electronics unit to a remote site.] [Photograph of boats off the coast of Alaska performing shallow water seismic data acquisition.] [Photograph of crew in heavy forest in Mexico.] The Company has considerable experience in areas ranging from the Arctic icepack to jungle environments. This includes a high level of heliportable expertise that allows the Company to conduct operations in rough terrain, heavy forests, and environmentally sensitive areas. The Company also provides shallow water services in some areas. For more information on 3-D Geophysical, Inc., see the inside back cover. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF THE COMPANY ON NASDAQ IN ACCORDANCE WITH RULE 10b-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING." 1978 using up to four crews utilizing 24-bit seismic data acquisition systems with a total of approximately 2,000 channels. INDUSTRY OVERVIEW Seismic data is the principal source of information used by geoscientists to map potential or existing oil and gas bearing formations and the geologic structures that surround them. Seismic data is acquired over a specified area by deploying a network of electronic cables over the area to which electronic receivers, or geophones, are attached. Once this network is deployed, an energy source, such as truck mounted vibrators ("vibroseis") or dynamite, is used to generate seismic waves over a pre-determined set of frequencies that move through the rock formation under the area and reverberate back to the surface in milliseconds. The geophones capture the changing velocity and character of these seismic waves as they travel down and back through the earth's surface and transmit this information a short distance along an electrical path (a "channel") to a remote signal conditioner. The remote signal conditioner digitizes the analog data and transmits it to a central electronics unit that stores the acquired data. The data is then sent to a processing center where mathematical algorithms are applied to separate signals from interference and to correct distortion. Migration techniques are also applied to produce a spatial representation of the subsurface formations that were surveyed. After processing, the data is transferred to a computer workstation that allows the data to be viewed and reconfigured by a geoscientist who interprets the data with computer-aided exploration techniques in order to plot features and map the structures of the subsurface area. In the past, a 2-D survey was the standard technique utilized to acquire seismic data. 2-D seismic data can be visualized as a single vertical plane of subsurface information. 3-D seismic surveys produce data that is best visualized as a cube of information that can be sliced into numerous planes. Thus, 3-D surveys provide different views of a subsurface geologic structure and much higher resolution of the structure than is available from a 2-D survey and have proven to be more reliable indicators of the oil and gas potential in the area surveyed. As a result, drilling based on 3-D seismic surveys has improved the economics of finding oil and gas. Consequently, demand for 3-D seismic surveys, and for surveys that cover wide areas and utilize a greater number of channels, has increased in the past several years. Furthermore, due to the enhanced information provided, 3-D surveys have proven to be a cost effective and efficient tool for oil and gas exploration and, increasingly, the development of existing reserves. BUSINESS STRATEGY The Company's objective is to capitalize on the consolidation taking place in its industry to enhance its position as one of the leading providers of land-based and shallow water seismic data acquisition services and to become a significant provider of related services to the oil and gas industry in the Western Hemisphere. The Company intends to achieve this objective by: - Optimizing the utilization of its state-of-the-art seismic data acquisition systems by relocating equipment and crews among the regions in which the Company operates; - Expanding its operations in Mexico and elsewhere in Latin America by seeking further contract opportunities with PEMEX and other oil companies operating in Latin America; - Pursuing opportunities in the United States, including Alaska, by attempting to strengthen existing business relationships with multinational companies and their affiliates, such as ARCO, BP Alaska, Marathon and others; - Pursuing strategic acquisitions by seeking to acquire providers of seismic data acquisition and related services, such as J.R.S. Exploration, that complement the Company's geographic market coverage and growth strategy; and - Expanding the Company's data processing and interpretation and reservoir characterization services already being provided to PEMEX in Mexico into other markets. THE OFFERING Common Stock offered....... 4,300,000 shares Common Stock to be outstanding after the Offering(1).............. 11,900,000 shares Use of proceeds............ Of the net proceeds of this Offering, the Company intends to use (i) approximately $17.2 million to purchase additional systems, additional channel capacity for the six 24-bit seismic data acquisition systems it presently owns and related vehicles and equipment to enhance the Company's 3-D seismic data acquisition capacity; (ii) approximately $2.7 million to pay the cash portion of the purchase price for J.R.S. Exploration (and certain related equipment) and approximately $1.3 million to repay debt of J.R.S. Exploration to a commercial bank; (iii) approximately $6.0 million to repay indebtedness incurred in connection with the Company's purchase in May 1996 of two 24-bit seismic data acquisition systems; and (iv) the balance, if any, for working capital and other general corporate purposes. See "Use of Proceeds," "Business -- Capital Expenditures" and "Business -- Proposed Acquisition of J.R.S. Exploration." Nasdaq National Market symbol................... "TDGO" - --------------- (1) Excludes (a) 720,000 shares reserved for issuance upon the exercise of options granted and to be granted under the 3-D Geophysical 1995 Long-Term Incentive Compensation Plan, as amended, of which options for 624,350 shares have been granted as of October 31, 1996, and (b) 265,002 shares reserved for issuance upon the exercise of options granted other than pursuant to such plan to certain directors and key employees of the Company (see "Management -- Director Compensation" and "Management -- Long-Term Incentive Compensation Plan").
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0001003521_home_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001003521_home_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..4dd236b5ba5b20084dad242c0d28c4209653790d
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0001003521_home_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS, EXPECTATIONS AND PLANS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS." UNLESS OTHERWISE INDICATED HEREIN, ALL SHARE AND PER SHARE INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION AND HAS BEEN ADJUSTED TO REFLECT A 30,000-FOR-1 STOCK SPLIT ON NOVEMBER 8, 1995. THE COMPANY COMPLETED THE INITIAL PUBLIC OFFERING OF SHARES OF ITS COMMON STOCK ON JANUARY 23, 1996 (THE "IPO"). THE COMPANY Alrenco, Inc. (the "Company") is a rapidly growing operator of rental-purchase stores that currently has 119 stores in 15 states, primarily located in the midwestern and southern United States. The Company offers high quality, brand-name consumer merchandise under flexible, renewable rental-purchase agreements, also known as rent-to-own agreements. Approximately 75% of the Company's customers make weekly rental payments. The agreements provide customers with the option, but not the obligation, to obtain ownership of the merchandise following a stated number of consecutive rental payments, usually 78 weeks or 18 months. Less than 25% of the Company's customers complete the full term of the agreement. Previously rented merchandise is refurbished and re-rented generally for a reduced term. The Company's target customers are typically low to middle income consumers with limited or no access to traditional credit sources such as bank financing, installment credit and credit cards. The Company also provides its products to consumers who desire only temporary rental of a product. The Company's average store contains approximately 3,800 square feet and is stocked with consumer electronics, appliances, furniture, jewelry and home furnishings accessories in retail showroom displays. Store interiors feature bright colors and custom neon signage in an atmosphere designed to make customers feel comfortable. The Company delivers and installs its products generally the same day at little or no additional cost to the consumer and provides free service throughout the rental period. Management believes that this convenient access to high quality merchandise with minimal initial cash outlay and no long-term obligation makes rental-purchase an attractive alternative for credit-constrained consumers. The Company has continued to refine its operational concept which management believes effectively distinguishes the Company's stores from local and national competitors. The Company seeks to (i) position itself as the "neighborhood rental store" within each of its markets, (ii) emphasize a high level of customer service, (iii) achieve operating efficiencies through clustering its stores within defined market areas, (iv) utilize sophisticated management information systems and (v) enhance employee productivity through incentive-based compensation and formalized training. Management intends to continue to increase the revenue at its existing stores and improve the operations of acquired stores through the application of its operating strategies. These strategies have enabled the Company's stores to operate with a current average of 841 units on rent as compared to an average of 697 units for the largest companies reporting to the Association of Progressive Rental Organizations ("APRO") in 1996. The Company's primary growth strategy is to acquire smaller, profitable, yet undercapitalized chains of stores which can be effectively integrated into the Company's operational structure and target market areas. During 1994 and 1995, the Company acquired a total of 35 stores. Since the IPO, the Company has acquired an additional 59 stores in 15 separate transactions (the "1996 Acquisitions"). Nine of the stores acquired have been consolidated into existing stores. The 1996 Acquisitions have provided the Company with entry into the large Atlanta and Chicago markets and increased the Company's market share in certain of its existing markets, including Birmingham, Cincinnati, Indianapolis, Louisville, Miami and New Orleans. The stores acquired were generally profitable but were operating at levels of revenue and profitability below those of the Company's existing stores. Management believes that an opportunity exists to continue the Company's growth primarily through the acquisition of existing rental-purchase stores. According to APRO, the industry's 7,500 stores generated aggregate annual revenues of $4.0 billion in 1995. The majority of the industry continues to be comprised of chains with fewer than 20 stores. The rental-purchase industry is experiencing consolidation due primarily to the substantial advantages possessed by large operators following the withdrawal of many traditional financing sources for smaller operators and the increased purchasing power and operational efficiences due to economies of scale. Management believes that the industry will continue to experience consolidation and that a number of rental-purchase chains can be acquired on favorable terms. Management believes that the Company can enhance the performance and profitability of acquired stores through a rapid infusion of new merchandise, implementation of effective and innovative marketing and advertising programs and improvement of collection procedures and operational cost controls. The Company was incorporated in 1980 under the laws of the State of Indiana. The Company's principal executive offices are located at 1736 East Main Street, New Albany, Indiana 47150, and its telephone number is (812) 949-3370. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company................ 1,500,000 shares Common Stock to be outstanding after the offering.......................................... 5,924,200 shares (1) Use of proceeds.................................... To repay indebtedness, to fund the acquisition and opening of rental-purchase stores and for general corporate purposes. Nasdaq National Market symbol...................... RNCO Risk factors....................................... See "Risk Factors" for certain factors that should be considered by prospective purchasers of the Common Stock. </TABLE> - ------------------------ (1) Excludes 75,147 shares of Common Stock issuable upon exercise of stock options granted pursuant to the Company's 1995 Stock Incentive Plan (the "Stock Incentive Plan") which are currently exercisable. See "Management -- Stock Incentive Plan." SUMMARY FINANCIAL AND OPERATING DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, -------------------------------------------- -------------------- PRO FORMA 1993 1994 1995 1995 (1) 1995 1996 --------- --------- --------- ----------- --------- --------- <S> <C> <C> <C> <C> <C> <C> STATEMENT OF EARNINGS DATA: Revenue.............................................. $ 22,283 $ 27,800 $ 37,576 $ 69,333 $ 16,834 $ 27,004 Operating expenses................................... 20,270 25,638 34,647 65,031 15,523 24,035 --------- --------- --------- ----------- --------- --------- Operating profit..................................... 2,013 2,162 2,929 4,302 1,311 2,969 Interest expense..................................... 281 461 894 -- 361 182 Gain on sale of investments.......................... -- -- (100) (48) -- -- --------- --------- --------- ----------- --------- --------- 281 461 794 (48) 361 182 --------- --------- --------- ----------- --------- --------- Earnings before income taxes......................... 1,732 1,701 2,135 4,350 950 2,787 Income tax expense................................... 722 739 868 1,808 447 1,144 --------- --------- --------- ----------- --------- --------- Net earnings......................................... $ 1,010 $ 962 $ 1,267 $ 2,542 $ 503 $ 1,643 --------- --------- --------- ----------- --------- --------- --------- --------- --------- ----------- --------- --------- Earnings per common share............................ $ .33 $ .31 $ .41 $ .50 $ .16 $ .39 --------- --------- --------- ----------- --------- --------- --------- --------- --------- ----------- --------- --------- Weighted average common shares outstanding........... 3,105 3,105 3,105 5,046 3,105 4,207 OPERATING DATA: Stores open at end of period......................... 34 53 69 53 100 Comparable store revenue growth (3).................. 8.0% 4.3% 3.3% 2.7% 6.1% <CAPTION> PRO FORMA 1996 (2) ----------- <S> <C> STATEMENT OF EARNINGS DATA: Revenue.............................................. $ 35,545 Operating expenses................................... 32,346 ----------- Operating profit..................................... 3,199 Interest expense..................................... -- Gain on sale of investments.......................... -- ----------- -- ----------- Earnings before income taxes......................... 3,199 Income tax expense................................... 1,364 ----------- Net earnings......................................... $ 1,835 ----------- ----------- Earnings per common share............................ $ .40 ----------- ----------- Weighted average common shares outstanding........... 4,577 OPERATING DATA: Stores open at end of period......................... Comparable store revenue growth (3).................. </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 ------------------------------------------- PRO FORMA ACTUAL PRO FORMA (4) AS ADJUSTED(4)(5) --------- ------------- ----------------- <S> <C> <C> <C> BALANCE SHEET DATA: Rental merchandise, net............................................... $ 20,689 $ 22,203 $ 22,203 Total assets.......................................................... 36,560 43,058 59,088 Total debt............................................................ 9,252 15,219 -- Total liabilities..................................................... 13,963 20,461 5,242 Stockholders' equity.................................................. 22,597 22,597 53,846 </TABLE> - ------------------------------ (1) Adjusted to give effect to the 1995 acquisition of 15 stores and the 1996 acquisition of 49 stores, as if they had been consummated at January 1, 1995, and the sale by the Company of 1,940,656 shares of Common Stock in the IPO and in this Offering and the application of the net proceeds therefrom to repay all outstanding indebtedness under the Company's bank loan agreement. Does not include the results of ten stores acquired in seven transactions in 1996 which were consolidated into existing stores or which are otherwise immaterial to the pro forma presentation. (2) Adjusted to give effect to the 1996 acquisition of 49 stores, as if they had been consummated at January 1, 1995, and the sale by the Company of 370,326 shares of Common Stock in this Offering and the application of the net proceeds therefrom to repay outstanding indebtedness under the Company's bank loan agreement. Does not include the results of ten stores acquired in seven transactions in 1996 which were consolidated into existing stores or which are otherwise immaterial to the pro forma presentation. (3) Comparable store revenue for each period presented includes revenue of stores open at the end of each period and at the end of the prior period. Comparable store revenue growth does not take into account revenue from the 15 stores acquired in 1995 or any of the stores acquired in 1996 which, as of June 30, 1996, had not been operated by the Company for two full six-month periods. The 18 stores acquired in 1994 are included in comparable store revenue beginning in 1996. The Company has made significant acquisitions in 1994, 1995 and 1996 which effect the comparability of the information presented. (4) Adjusted to give effect to the acquisition in August 1996 of Network Rental, Inc. as if it had been consummated at June 30, 1996. (5) Adjusted to give effect to the sale by the Company of 1,500,000 shares of Common Stock in this Offering (at an assumed public offering price of $22.38 per share) and the application of the net proceeds therefrom as described in "Use of Proceeds."
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+SUMMARY OF PROSPECTUS The following summary is qualified in its entirety by reference to the detailed information appearing elsewhere in this Prospectus. See the Index of Principal Definitions for the location herein of certain capitalized terms. Trust...................... WFS Financial 1996-C Owner Trust (the "Trust"). Seller..................... WFS Financial Auto Loans, Inc. (the "Seller"), a wholly owned, limited-purpose operating subsidiary of WFS Financial Inc. The principal executive offices of the Seller are located at 23 Pasteur Road, Irvine, California 92618 and its telephone number is (714) 753-3000. Prior to May 29, 1996, the Seller was known as Western Financial Auto Loans, Inc. See "The Seller." WFS........................ WFS Financial Inc ("WFS" or, in its capacity as Master Servicer, the "Master Servicer"), a majority owned, operating subsidiary of Western Financial Savings Bank, F.S.B. (the "Bank"), a federally chartered savings association. The principal offices of WFS are located at 23 Pasteur Road, Irvine, California 92618 and its telephone number is (714) 753-3000. See "WFS." WII........................ WFS Investments, Inc. ("WII"), a California corporation and a wholly owned operating subsidiary of WFS. The principal office of WII is 23 Pasteur Road, Irvine, California 92618 and its telephone number is (714) 727-1000. See "WII." Securities Offered......... The securities offered are as follows: A. General................. The WFS Financial 1996-C Owner Trust Auto Receivable Backed Notes (the "Notes") will represent obligations of the Trust secured by the assets of the Trust (other than the Certificate Distribution Account and the Certificate Policy). The WFS Financial 1996-C Owner Trust Auto Receivable Backed Certificates (the "Certificates" and, together with the Notes, the "Securities") will represent fractional undivided interests in the Trust. The Trust will issue four Classes of Notes pursuant to an indenture to be dated as of September 1, 1996 (the "Indenture"), between the Trust and Bankers Trust Company, as trustee (the "Indenture Trustee"), as follows: (i) $91,500,000 aggregate principal amount of 5.63% Money Market Auto Receivable Backed Notes, Class A-1 (the "Class A-1 Notes" or the "Money Market Notes"), (ii) $160,000,000 aggregate principal amount of 6.20% Auto Receivable Backed Notes, Class A-2 (the "Class A-2 Notes"), (iii) $165,000,000 aggregate principal amount of 6.55% Auto Receivable Backed Notes, Class A-3 (the "Class A-3 Notes") and (iv) $75,700,000 aggregate principal amount of 6.80% Auto Receivable Backed Notes, Class A-4 (the "Class A-4 Notes"). Payments of principal and interest on the Notes will be made in accordance with the priorities set forth under "Certain Information Regarding the Securities -- Distributions on the Securities." The Trust will issue $42,800,000 aggregate principal amount of 6.90% Auto Receivable Backed Certificates (the "Certificates") pursuant to a trust agreement to be dated as of September 1, 1996 (the "Trust Agreement"), among the Seller, Financial Security Assurance Inc. ("Financial Security"), WII and Chase Manhattan Bank Delaware, as trustee (the "Owner Trustee" and, together with the Indenture Trustee, the "Trustees"). Payments in respect of the Certificates will be subordinated to payments on the Notes to the extent described herein. Each Class of Notes and the Certificates will be issued in minimum denominations of $1,000 and integral multiples of $1,000 in excess thereof. Definitive Securities will be issued only under the limited circumstances described herein. See "Certain Information Regarding the Securities -- Book-Entry Registration" and "-- Definitive Securities." B. Property of the Trust... Each Note will represent an obligation of, and each Certificate will represent a fractional undivided interest in, the Trust. The property of the Trust will primarily include (i) a pool of retail installment sales contracts and installment loans (the "Contracts") secured by the new and used automobiles and light-duty trucks financed thereby (the "Financed Vehicles"); (ii) certain monies due under the Contracts on and after September 1, 1996 (the "Cut-Off Date"); (iii) security interests in the Financed Vehicles; (iv) a financial guaranty insurance policy (the "Note Policy") to be issued by Financial Security for the exclusive benefit of Noteholders, which will unconditionally and irrevocably guarantee payment of the Scheduled Payments on each Distribution Date; (v) a financial guaranty insurance policy (the "Certificate Policy" and, together with the Note Policy, the "Policies") to be issued by Financial Security for the exclusive benefit of Certificateholders, which will unconditionally and irrevocably guarantee payment of the Guaranteed Distributions on each Distribution Date; (vi) amounts on deposit in the Collection Account, the Note Distribution Account, the Certificate Distribution Account, the Spread Account and the Holding Account, including all Eligible Investments therein and all income from the investment of funds therein and all proceeds therefrom; (vii) proceeds from claims under certain insurance policies in respect of individual Financed Vehicles or obligors under the Contracts (the "Obligors"); and (viii) certain rights under the sale and servicing agreement to be dated as of September 1, 1996 (the "Sale and Servicing Agreement"), among the Trust, the Seller and the Master Servicer. Pursuant to the Indenture, the property of the Trust (other than the Certificate Distribution Account and the Certificate Policy) will be held by the Master Servicer for the benefit of the Indenture Trustee and Financial Security on behalf of the holders of the Notes. C. Distribution Dates...... Distributions of interest and principal on the Securities will be made on March 20, June 20, September 20 and December 20 of each year (or, if any such day is not a Business Day, on the next succeeding Business Day) (each, a "Distribution Date"), commencing December 20, 1996. Payments on the Securities on each Distribution Date will be paid to the holders of record of the related Securities on the Business Day immediately preceding such Distribution Date or, in the event that Definitive Securities are issued, as of the 15th day of the month immediately preceding the month in which such Distribution Date occurs (each, a "Record Date"). A "Business Day" will be any day other than a Saturday, a Sunday or a day on which banking institutions in New York, New York, Wilmington, Delaware, or Los Angeles, California are authorized or obligated by law, executive order or government decree to be closed. To the extent not previously paid prior to such dates, the outstanding principal amount of (i) the Class A-1 Notes will be payable on September 20, 1997 (the "Class A-1 Final Distribution Date"), (ii) the Class A-2 Notes will be payable on June 20, 1999 (the "Class A-2 Final Distribution Date"), (iii) the Class A-3 Notes will be payable on December 20, 2000 (the "Class A-3 Final Distribution Date") and (iv) the Class A-4 Notes will be payable on December 20, 2003 (the "Class A-4 Final Distribution Date" and, together with the Class A-1 Final Distribution Date, the Class A-2 Final Distribution Date and the Class A-3 Final Distribution Date, the "Note Final Distribution Dates"). To the extent not previously paid in full prior to such date, the unpaid principal balance of the Certificates will be payable on December 20, 2003 (the "Certificate Final Distribution Date" and, together with the Note Final Distribution Dates, the "Final Distribution Dates"). Terms of the Notes......... The principal terms of the Notes will be as described below: A. Interest Rates.......... Interest will be borne on (i) the Class A-1 Notes at the rate of 5.63% per annum (the "Class A-1 Rate"), (ii) the Class A-2 Notes at the rate of 6.20% per annum (the "Class A-2 Rate"), (iii) the Class A-3 Notes at the rate of 6.55% per annum (the "Class A-3 Rate") and (iv) the Class A-4 Notes at the rate of 6.80% per annum (the "Class A-4 Rate" and, together with the Class A-1 Rate, the Class A-2 Rate and the Class A-3 Rate, the "Interest Rates"). Interest on the Notes will be calculated on the basis of a 360-day year consisting of twelve 30-day months. B. Interest................ Interest on the outstanding principal amount of each Class of Notes will accrue at the related Interest Rate from and including the most recent Distribution Date on which interest has been paid (or from and including the Cut-Off Date with respect to the first Distribution Date) to but excluding the current Distribution Date (each, an "Interest Period"). Interest on the Notes for any Distribution Date due but not paid on such Distribution Date will be due on the next Distribution Date, together with, to the extent permitted by applicable law, interest on such shortfall at the related Interest Rate. See "The Notes -- Payments of Interest" and "Certain Information Regarding the Securities -- Distributions on the Securities." C. Principal............... Principal of the Notes will be payable on each Distribution Date in an amount generally equal to the Note Principal Distributable Amount for such Distribution Date, calculated as described under "Certain Information Regarding the Securities -- Distributions on the Securities -- Deposits to the Distribution Accounts; Priority of Payments." The Note Principal Distributable Amount will include an amount equal to the Accelerated Principal Distributable Amount for such Distribution Date. On each Distribution Date, the Note Principal Distributable Amount will be applied in the following priority: first to reduce the principal amount of the Money Market Notes; second, after the principal amount of the Money Market Notes has been reduced to zero, to reduce the principal amount of the Class A-2 Notes; third, after the principal amount of the Class A-2 Notes has been reduced to zero, to reduce the principal amount of the Class A-3 Notes; and fourth, after the principal amount of the Class A-3 Notes has been reduced to zero, to reduce the principal amount of the Class A-4 Notes. Notwithstanding the foregoing, if the principal amount of a Class of Notes has not been paid in full prior to its Note Final Distribution Date, the Note Principal Distributable Amount for such Note Final Distribution Date will include an amount sufficient to reduce the unpaid principal amount of such Class of Notes to zero on such Note Final Distribution Date. See "The Notes -- Payments of Principal" and "Certain Information Regarding the Securities -- Distributions on the Securities -- Deposits to the Distribution Accounts; Priority of Payments." D. Optional Redemption..... In the event of an Optional Purchase, each Class of outstanding Notes will be redeemed in whole, but not in part, at a redemption price equal to the unpaid principal amount of such Class of Notes plus accrued interest thereon at the related Interest Rate. See "The Notes -- Optional Redemption." E. Mandatory Redemption.... Under certain conditions, the Notes may be accelerated upon the occurrence of an Event of Default under the Indenture. So long as no Insurer Default shall have occurred and be continuing, under certain circumstances Financial Security will have the right (in addition to its obligation to make Scheduled Payments on the Notes in accordance with the terms of the Note Policy) but not the obligation, to elect to accelerate the principal of the Notes and to cause the Master Servicer or the Trustee to sell or otherwise liquidate the property of the Trust and to deliver the proceeds to the Indenture Trustee for distribution in accordance with the terms of the Indenture. See "The Notes -- Events of Default." Terms of the Certificates............... The principal terms of the Certificates will be as described below: A. Interest................ On each Distribution Date, the Owner Trustee or any paying agent as the Owner Trustee may designate from time to time (the "Paying Agent") will distribute pro rata to Certificateholders of record as of the related Record Date accrued interest at the rate of 6.90% per annum (the "Pass-Through Rate") on the Certificate Balance as of the immediately preceding Distribution Date (after giving effect to distributions of principal to be made on such immediately preceding Distribution Date) or, in the case of the first Distribution Date, the Original Certificate Balance. Interest in respect of a Distribution Date will accrue from and including the Cut-Off Date (in the case of the first Distribution Date), or from and including the most recent Distribution Date on which interest has been paid, to but excluding the current Distribution Date. Interest on the Certificates for any Distribution Date due but not paid on such Distribution Date will be due on the next Distribution Date, together with, to the extent permitted by applicable law, interest on such shortfall at the Pass-Through Rate. See "The Certificates -- Distributions of Interest" and "Certain Information Regarding the Securities -- Distributions on the Securities." The "Certificate Balance" will equal $42,800,000 (the "Original Certificate Balance") on the date of initial issuance of the Certificates (the "Closing Date") and on any date thereafter will equal the Original Certificate Balance reduced by all distributions of principal previously made in respect of the Certificates. Distributions on the Certificates will be subordinated to payments of interest and principal on the Notes as described under "The Certificates" and "Certain Information Regarding the Securities -- Distributions on the Securities." B. Principal............... No principal will be paid on the Certificates until the Distribution Date on which the principal amount of the Class A-1, Class A-2 and Class A-3 Notes has been reduced to zero. On such Distribution Date and each Distribution Date thereafter, principal of the Certificates will be payable in an amount equal to the Certificate Principal Distributable Amount for such Distribution Date, calculated as described under "Certain Information Regarding the Securities -- Distributions on the Securities -- Deposits to the Distribution Accounts; Priority of Payments." On each Distribution Date on or after the Distribution Date on which the Class A-4 Notes have been paid in full, any Accelerated Principal Distributable Amount will be included in the Certificate Principal Distributable Amount. If not paid in full prior to the Certificate Final Distribution Date, the remaining Certificate Balance, if any, will be payable on that date. See "The Certificates -- Distributions of Principal." C. Optional Prepayment..... In the event of an Optional Purchase, the Certificates will be repaid in whole, but not in part, at a repayment price equal to the Certificate Balance plus accrued interest thereon at the Pass-Through Rate. See "The Certificates -- Optional Prepayment." Security for the Securities................. The principal security for the Securities will be as described below: A. The Contracts........... The Contracts will consist of retail installment sales contracts and installment loans, secured by liens on the Financed Vehicles, purchased from WFS by the Seller and from the Seller by the Trust, including the right to receive the payments thereunder on and after the Cut-Off Date. The Seller will be required to repurchase certain of the Contracts under certain circumstances if certain representations and warranties made by the Seller are incorrect in a manner that materially and adversely affects the Securityholders, the Indenture Trustee, the Owner Trustee or Financial Security. The Contracts were purchased from new and used car dealers or originated directly from consumers by WFS or, to a lesser extent, by the Bank and were subsequently assigned to WFS. The Contracts were originated in California and 26 other states by new and used car dealers not affiliated with WFS or the Bank, except for a limited number of Contracts originated directly from consumers by WFS or, to a lesser extent, by the Bank and were subsequently assigned to WFS. The Contracts will be selected by WFS from its portfolio of retail installment contracts and installment loans based upon the criteria to be specified in the Sale and Servicing Agreement. As of the Cut-Off Date, the Aggregate Scheduled Balance will be $535,000,000 (the "Cut-Off Date Aggregate Scheduled Balance") and the Contracts will have an expected weighted average annual percentage rate of approximately 15.74% and an expected weighted average remaining maturity of approximately 56 months. See "The Contracts Pool." Approximately 50.1% of the aggregate principal amount of the Contracts will be Rule of 78's Contracts and approximately 49.9% will be Simple Interest Contracts, based upon the anticipated Scheduled Balances of the Contracts as of the Cut-Off Date. All net collections received by the Master Servicer on or in respect of the Contracts, any Advances made by the Master Servicer and all amounts paid under the Policies will be deposited in or credited to the Collection Account or, in certain limited instances, the Holding Account. On each Distribution Date the Indenture Trustee will distribute the amounts on deposit in the Collection Account with respect to such Distribution Date to the Note Distribution Account and, to the extent applicable, the Certificate Distribution Account. All payments to Noteholders will be made from the Note Distribution Account and to Certificateholders from the Certificate Distribution Account. See "Certain Information Regarding the Securities -- The Accounts and Eligible Investments" and "-- Distributions on the Securities." B. The Spread Account...... The Securityholders will be afforded certain limited protection, to the extent described herein, against losses in respect of the Contracts by the establishment of a segregated trust account in the name of the Indenture Trustee for the benefit of the Securityholders (the "Spread Account"). The Spread Account will be part of the Trust. The Spread Account will be created with an initial deposit by the Seller of $16,050,000 (the "Spread Account Initial Deposit"). The funds in the Spread Account will thereafter be supplemented on each Distribution Date by the deposit of any Excess Amounts (as defined below), until the cash on deposit in the Spread Account is at least equal to the Minimum Funded Amount and the sum of the Funded Amount and the Overcollateralization Amount is at least equal to the Specified Spread Account Balance. "Excess Amounts" in respect of a Distribution Date will be calculated as described under "Certain Information Regarding the Securities -- Distributions on the Securities -- Deposits to the Distribution Accounts; Priority of Payments" and will equal the funds on deposit in the Collection Account in respect of such Distribution Date, after giving effect to all distributions required to be made on such Distribution Date. The Specified Spread Account Balance, the Minimum Funded Amount and the Overcollateralization Amount will be calculated as described under "Certain Information Regarding the Securities -- Payment Priorities of the Notes and the Certificates; The Spread Account -- Calculation of Specified Spread Account Balance." On each Distribution Date, funds will be withdrawn from the Spread Account for distribution to Securityholders to cover any shortfalls in interest and principal required to be paid on the Securities (before giving effect to any claim under the Policies). If on the last day of any month (each, a "Calculation Day") or on any Distribution Date the Spread Account is fully funded, any excess cash on deposit therein will be released therefrom and upon such distribution Securityholders will have no further rights in, or claims to, such amounts. See "Certain Information Regarding the Securities -- Withdrawals from the Spread Account." C. The Policies............ On the Closing Date, Financial Security will issue the Note Policy to the Indenture Trustee and the Certificate Policy to the Owner Trustee pursuant to the insurance, indemnity and pledge agreement to be dated as of September 1, 1996 (the "Insurance Agreement"), among Financial Security, the Trust, the Seller, Bankers Trust Company as Collateral Agent for Financial Security, WII and WFS. Pursuant to the Note Policy, Financial Security will unconditionally and irrevocably guarantee to the Noteholders payment of the Scheduled Payments for each Distribution Date. Pursuant to the Certificate Policy, Financial Security will unconditionally and irrevocably guarantee to the Certificateholders payment of the Guaranteed Distributions for each Distribution Date. See "The Policies" and "Financial Security Assurance Inc." Optional Purchase.......... The Seller may, but will not be obligated to, purchase all of the Contracts in the Trust, and thereby cause early retirement of all outstanding Securities, on any Distribution Date as of which (i) the Aggregate Scheduled Balance is 10% or less of the Cut-Off Date Aggregate Scheduled Balance and (ii) the aggregate outstanding principal amount of the Securities is 5% or less of the initial aggregate amount of the Securities (an "Optional Purchase"). See "Certain Information Regarding the Securities -- Termination." The Master Servicer........ WFS, as Master Servicer, will be obligated pursuant to the Sale and Servicing Agreement, subject to the limitations set forth therein, to service the Contracts and to repurchase certain of the Contracts under certain circumstances if certain representations and warranties made by WFS are incorrect or if WFS, as Master Servicer, breaches certain of its servicing obligations under the Sale and Servicing Agreement, in either case in a manner that materially and adversely affects such Contracts. See "The Master Servicer." Ratings.................... It is a condition of issuance that the Class A-1 Notes be rated A-1+ by Standard & Poor's Ratings Services, a division of McGraw-Hill, Inc. ("S&P") and P-1 by Moody's Investors Service, Inc. ("Moody's" and, together with S&P, the "Rating Agencies"), and the Class A-2, Class A-3 and Class A-4 Notes and the Certificates each be rated AAA by S&P and Aaa by Moody's. See "Ratings of the Securities." Tax Status................. In the opinion of counsel to the Seller, for both federal and California income tax purposes, the Notes will be characterized as debt, and the Trust will not be characterized as an association (or a publicly traded partnership) taxable as a corporation. Each Noteholder, by the acceptance of a Note, will agree to treat the Notes as indebtedness, and each Certificateholder, by the acceptance of a Certificate, will agree to treat the Trust as a partnership in which the Certificateholders are partners for federal income tax purposes. See "Certain Federal Income Tax Consequences" and "Certain California Income Tax Consequences." ERISA Considerations....... Subject to the considerations discussed under "ERISA Considerations," the Notes will be eligible for purchase by employee benefit plans that are subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Since the Certificates will be subordinated to the Notes to the extent described herein, employee benefit plans subject to ERISA will not be eligible to purchase the Certificates. Any benefit plan fiduciary considering purchase of the Securities should, among other things, consult with its counsel in determining whether all required conditions have been satisfied. See "ERISA Considerations." Legal Investment........... The Money Market Notes will be eligible securities for purchase by money market funds under Rule 2a-7 under the Investment Company Act of 1940, as amended.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001003846_wfs_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001003846_wfs_prospectus_summary.txt
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+SUMMARY OF PROSPECTUS The following summary is qualified in its entirety by reference to the detailed information appearing elsewhere in this Prospectus. See the Index of Principal Definitions for the location herein of certain capitalized terms. Trust...................... WFS Financial 1996-C Owner Trust (the "Trust"). Seller..................... WFS Financial Auto Loans, Inc. (the "Seller"), a wholly owned, limited-purpose operating subsidiary of WFS Financial Inc. The principal executive offices of the Seller are located at 23 Pasteur Road, Irvine, California 92618 and its telephone number is (714) 753-3000. Prior to May 29, 1996, the Seller was known as Western Financial Auto Loans, Inc. See "The Seller." WFS........................ WFS Financial Inc ("WFS" or, in its capacity as Master Servicer, the "Master Servicer"), a majority owned, operating subsidiary of Western Financial Savings Bank, F.S.B. (the "Bank"), a federally chartered savings association. The principal offices of WFS are located at 23 Pasteur Road, Irvine, California 92618 and its telephone number is (714) 753-3000. See "WFS." WII........................ WFS Investments, Inc. ("WII"), a California corporation and a wholly owned operating subsidiary of WFS. The principal office of WII is 23 Pasteur Road, Irvine, California 92618 and its telephone number is (714) 727-1000. See "WII." Securities Offered......... The securities offered are as follows: A. General................. The WFS Financial 1996-C Owner Trust Auto Receivable Backed Notes (the "Notes") will represent obligations of the Trust secured by the assets of the Trust (other than the Certificate Distribution Account and the Certificate Policy). The WFS Financial 1996-C Owner Trust Auto Receivable Backed Certificates (the "Certificates" and, together with the Notes, the "Securities") will represent fractional undivided interests in the Trust. The Trust will issue four Classes of Notes pursuant to an indenture to be dated as of September 1, 1996 (the "Indenture"), between the Trust and Bankers Trust Company, as trustee (the "Indenture Trustee"), as follows: (i) $ aggregate principal amount of % Money Market Auto Receivable Backed Notes, Class A-1 (the "Class A-1 Notes" or the "Money Market Notes"), (ii) $ aggregate principal amount of % Auto Receivable Backed Notes, Class A-2 (the "Class A-2 Notes"), (iii) $ aggregate principal amount of % Auto Receivable Backed Notes, Class A-3 (the "Class A-3 Notes") and (iv) $ aggregate principal amount of % Auto Receivable Backed Notes, Class A-4 (the "Class A-4 Notes"). Payments of principal and interest on the Notes will be made in accordance with the priorities set forth under "Certain Information Regarding the Securities -- Distributions on the Securities." The Trust will issue $ aggregate principal amount of % Auto Receivable Backed Certificates (the "Certificates") pursuant to a trust agreement to be dated as of September 1, 1996 (the "Trust Agreement"), among the Seller, Financial Security Assurance Inc. ("Financial Security"), WII and Chase Manhattan Bank Delaware, as trustee (the "Owner Trustee" and, together with the Indenture Trustee, the "Trustees"). Payments in respect of the Certificates will be subordinated to payments on the Notes to the extent described herein. Each Class of Notes and the Certificates will be issued in minimum denominations of $1,000 and integral multiples of $1,000 in excess thereof. Definitive Securities will be issued only under the limited circumstances described herein. See "Certain Information Regarding the Securities -- Book-Entry Registration" and "-- Definitive Securities." B. Property of the Trust... Each Note will represent an obligation of, and each Certificate will represent a fractional undivided interest in, the Trust. The property of the Trust will primarily include (i) a pool of retail installment sales contracts and installment loans (the "Contracts") secured by the new and used automobiles and light-duty trucks financed thereby (the "Financed Vehicles"); (ii) certain monies due under the Contracts on and after September 1, 1996 (the "Cut-Off Date"); (iii) security interests in the Financed Vehicles; (iv) a financial guaranty insurance policy (the "Note Policy") to be issued by Financial Security for the exclusive benefit of Noteholders, which will unconditionally and irrevocably guarantee payment of the Scheduled Payments on each Distribution Date; (v) a financial guaranty insurance policy (the "Certificate Policy" and, together with the Note Policy, the "Policies") to be issued by Financial Security for the exclusive benefit of Certificateholders, which will unconditionally and irrevocably guarantee payment of the Guaranteed Distributions on each Distribution Date; (vi) amounts on deposit in the Collection Account, the Note Distribution Account, the Certificate Distribution Account, the Spread Account and the Holding Account, including all Eligible Investments therein and all income from the investment of funds therein and all proceeds therefrom; (vii) proceeds from claims under certain insurance policies in respect of individual Financed Vehicles or obligors under the Contracts (the "Obligors"); and (viii) certain rights under the sale and servicing agreement to be dated as of September 1, 1996 (the "Sale and Servicing Agreement"), among the Trust, the Seller and the Master Servicer. Pursuant to the Indenture, the property of the Trust (other than the Certificate Distribution Account and the Certificate Policy) will be held by the Master Servicer for the benefit of the Indenture Trustee and Financial Security on behalf of the holders of the Notes. C. Distribution Dates...... Distributions of interest and principal on the Securities will be made on 20, 20, 20 and 20 of each year (or, if any such day is not a Business Day, on the next succeeding Business Day) (each, a "Distribution Date"), commencing 20, 199 . Payments on the Securities on each Distribution Date will be paid to the holders of record of the related Securities on the Business Day immediately preceding such Distribution Date or, in the event that Definitive Securities are issued, as of the 15th day of the month immediately preceding the month in which such Distribution Date occurs (each, a "Record Date"). A "Business Day" will be any day other than a Saturday, a Sunday or a day on which banking institutions in New York, New York, Wilmington, Delaware, or Los Angeles, California are authorized or obligated by law, executive order or government decree to be closed. To the extent not previously paid prior to such dates, the outstanding principal amount of (i) the Class A-1 Notes will be payable on 20, 19 (the "Class A-1 Final Distribution Date"), (ii) the Class A-2 Notes will be payable on 20, 19 (the "Class A-2 Final Distribution Date"), (iii) the Class A-3 Notes will be payable on 20, 200 (the "Class A-3 Final Distribution Date") and (iv) the Class A-4 Notes will be payable on 20, 200 (the "Class A-4 Final Distribution Date" and, together with the Class A-1 Final Distribution Date, the Class A-2 Final Distribution Date and the Class A-3 Final Distribution Date, the "Note Final Distribution Dates"). To the extent not previously paid in full prior to such date, the unpaid principal balance of the Certificates will be payable on 20, 200 (the "Certificate Final Distribution Date" and, together with the Note Final Distribution Dates, the "Final Distribution Dates"). Terms of the Notes......... The principal terms of the Notes will be as described below: A. Interest Rates.......... Interest will be borne on (i) the Class A-1 Notes at the rate of % per annum (the "Class A-1 Rate"), (ii) the Class A-2 Notes at the rate of % per annum (the "Class A-2 Rate"), (iii) the Class A-3 Notes at the rate of % per annum (the "Class A-3 Rate") and (iv) the Class A-4 Notes at the rate of % per annum (the "Class A-4 Rate" and, together with the Class A-1 Rate, the Class A-2 Rate and the Class A-3 Rate, the "Interest Rates"). Interest on the Notes will be calculated on the basis of a 360-day year consisting of twelve 30-day months. B. Interest................ Interest on the outstanding principal amount of each Class of Notes will accrue at the related Interest Rate from and including the most recent Distribution Date on which interest has been paid (or from and including the Cut-Off Date with respect to the first Distribution Date) to but excluding the current Distribution Date (each, an "Interest Period"). Interest on the Notes for any Distribution Date due but not paid on such Distribution Date will be due on the next Distribution Date, together with, to the extent permitted by applicable law, interest on such shortfall at the related Interest Rate. See "The Notes -- Payments of Interest" and "Certain Information Regarding the Securities -- Distributions on the Securities." C. Principal............... Principal of the Notes will be payable on each Distribution Date in an amount generally equal to the Note Principal Distributable Amount for such Distribution Date, calculated as described under "Certain Information Regarding the Securities -- Distributions on the Securities -- Deposits to the Distribution Accounts; Priority of Payments." The Note Principal Distributable Amount will include an amount equal to the Accelerated Principal Distributable Amount for such Distribution Date. On each Distribution Date, the Note Principal Distributable Amount will be applied in the following priority: first to reduce the principal amount of the Money Market Notes; second, after the principal amount of the Money Market Notes has been reduced to zero, to reduce the principal amount of the Class A-2 Notes; third, after the principal amount of the Class A-2 Notes has been reduced to zero, to reduce the principal amount of the Class A-3 Notes; and fourth, after the principal amount of the Class A-3 Notes has been reduced to zero, to reduce the principal amount of the Class A-4 Notes. Notwithstanding the foregoing, if the principal amount of a Class of Notes has not been paid in full prior to its Note Final Distribution Date, the Note Principal Distributable Amount for such Note Final Distribution Date will include an amount sufficient to reduce the unpaid principal amount of such Class of Notes to zero on such Note Final Distribution Date. See "The Notes -- Payments of Principal" and "Certain Information Regarding the Securities -- Distributions on the Securities -- Deposits to the Distribution Accounts; Priority of Payments." D. Optional Redemption..... In the event of an Optional Purchase, each Class of outstanding Notes will be redeemed in whole, but not in part, at a redemption price equal to the unpaid principal amount of such Class of Notes plus accrued interest thereon at the related Interest Rate. See "The Notes -- Optional Redemption." E. Mandatory Redemption.... Under certain conditions, the Notes may be accelerated upon the occurrence of an Event of Default under the Indenture. So long as no Insurer Default shall have occurred and be continuing, under certain circumstances Financial Security will have the right (in addition to its obligation to make Scheduled Payments on the Notes in accordance with the terms of the Note Policy) but not the obligation, to elect to accelerate the principal of the Notes and to cause the Master Servicer or the Trustee to sell or otherwise liquidate the property of the Trust and to deliver the proceeds to the Indenture Trustee for distribution in accordance with the terms of the Indenture. See "The Notes -- Events of Default." Terms of the Certificates............... The principal terms of the Certificates will be as described below: A. Interest................ On each Distribution Date, the Owner Trustee or any paying agent as the Owner Trustee may designate from time to time (the "Paying Agent") will distribute pro rata to Certificateholders of record as of the related Record Date accrued interest at the rate of % per annum (the "Pass-Through Rate") on the Certificate Balance as of the immediately preceding Distribution Date (after giving effect to distributions of principal to be made on such immediately preceding Distribution Date) or, in the case of the first Distribution Date, the Original Certificate Balance. Interest in respect of a Distribution Date will accrue from and including the Cut-Off Date (in the case of the first Distribution Date), or from and including the most recent Distribution Date on which interest has been paid, to but excluding the current Distribution Date. Interest on the Certificates for any Distribution Date due but not paid on such Distribution Date will be due on the next Distribution Date, together with, to the extent permitted by applicable law, interest on such shortfall at the Pass-Through Rate. See "The Certificates -- Distributions of Interest" and "Certain Information Regarding the Securities -- Distributions on the Securities." The "Certificate Balance" will equal $ (the "Original Certificate Balance") on the date of initial issuance of the Certificates (the "Closing Date") and on any date thereafter will equal the Original Certificate Balance reduced by all distributions of principal previously made in respect of the Certificates. Distributions on the Certificates will be subordinated to payments of interest and principal on the Notes as described under "The Certificates" and "Certain Information Regarding the Securities -- Distributions on the Securities." B. Principal............... No principal will be paid on the Certificates until the Distribution Date on which the principal amount of the Class A-1, Class A-2 and Class A-3 Notes has been reduced to zero. On such Distribution Date and each Distribution Date thereafter, principal of the Certificates will be payable in an amount equal to the Certificate Principal Distributable Amount for such Distribution Date, calculated as described under "Certain Information Regarding the Securities -- Distributions on the Securities -- Deposits to the Distribution Accounts; Priority of Payments." On each Distribution Date on or after the Distribution Date on which the Class A-4 Notes have been paid in full, any Accelerated Principal Distributable Amount will be included in the Certificate Principal Distributable Amount. If not paid in full prior to the Certificate Final Distribution Date, the remaining Certificate Balance, if any, will be payable on that date. See "The Certificates -- Distributions of Principal." C. Optional Prepayment..... In the event of an Optional Purchase, the Certificates will be repaid in whole, but not in part, at a repayment price equal to the Certificate Balance plus accrued interest thereon at the Pass-Through Rate. See "The Certificates -- Optional Prepayment." Security for the Securities................. The principal security for the Securities will be as described below: A. The Contracts........... The Contracts will consist of retail installment sales contracts and installment loans, secured by liens on the Financed Vehicles, purchased from WFS by the Seller and from the Seller by the Trust, including the right to receive the payments thereunder on and after the Cut-Off Date. The Seller will be required to repurchase certain of the Contracts under certain circumstances if certain representations and warranties made by the Seller are incorrect in a manner that materially and adversely affects the Securityholders, the Indenture Trustee, the Owner Trustee or Financial Security. The Contracts were purchased from new and used car dealers or originated directly from consumers by WFS or, to a lesser extent, by the Bank and were subsequently assigned to WFS. The Contracts were originated in California and 20 other states by new and used car dealers not affiliated with WFS or the Bank, except for a limited number of Contracts originated directly from consumers by WFS or, to a lesser extent, by the Bank and were subsequently assigned to WFS. The Contracts will be selected by WFS from its portfolio of retail installment contracts and installment loans based upon the criteria to be specified in the Sale and Servicing Agreement. As of the Cut-Off Date, the Aggregate Scheduled Balance will be $535,000,000 (the "Cut-Off Date Aggregate Scheduled Balance") and the Contracts will have an expected weighted average annual percentage rate of approximately 15.74% and an expected weighted average remaining maturity of approximately 56 months. See "The Contracts Pool." Approximately 50.1% of the aggregate principal amount of the Contracts will be Rule of 78's Contracts and approximately 49.9% will be Simple Interest Contracts, based upon the anticipated Scheduled Balances of the Contracts as of the Cut-Off Date. All net collections received by the Master Servicer on or in respect of the Contracts, any Advances made by the Master Servicer and all amounts paid under the Policies will be deposited in or credited to the Collection Account or, in certain limited instances, the Holding Account. On each Distribution Date the Indenture Trustee will distribute the amounts on deposit in the Collection Account with respect to such Distribution Date to the Note Distribution Account and, to the extent applicable, the Certificate Distribution Account. All payments to Noteholders will be made from the Note Distribution Account and to Certificateholders from the Certificate Distribution Account. See "Certain Information Regarding the Securities -- The Accounts and Eligible Investments" and "-- Distributions on the Securities." B. The Spread Account...... The Securityholders will be afforded certain limited protection, to the extent described herein, against losses in respect of the Contracts by the establishment of a segregated trust account in the name of the Indenture Trustee for the benefit of the Securityholders (the "Spread Account"). The Spread Account will be part of the Trust. The Spread Account will be created with an initial deposit by the Seller of $ (the "Spread Account Initial Deposit"). The funds in the Spread Account will thereafter be supplemented on each Distribution Date by the deposit of any Excess Amounts (as defined below), until the cash on deposit in the Spread Account is at least equal to the Minimum Funded Amount and the sum of the Funded Amount and the Overcollateralization Amount is at least equal to the Specified Spread Account Balance. "Excess Amounts" in respect of a Distribution Date will be calculated as described under "Certain Information Regarding the Securities -- Distributions on the Securities -- Deposits to the Distribution Accounts; Priority of Payments" and will equal the funds on deposit in the Collection Account in respect of such Distribution Date, after giving effect to all distributions required to be made on such Distribution Date. The Specified Spread Account Balance, the Minimum Funded Amount and the Overcollateralization Amount will be calculated as described under "Certain Information Regarding the Securities -- Payment Priorities of the Notes and the Certificates; The Spread Account -- Calculation of Specified Spread Account Balance." On each Distribution Date, funds will be withdrawn from the Spread Account for distribution to Securityholders to cover any shortfalls in interest and principal required to be paid on the Securities (before giving effect to any claim under the Policies). If on the last day of any month (each, a "Calculation Day") or on any Distribution Date the Spread Account is fully funded, any excess cash on deposit therein will be released therefrom and upon such distribution Securityholders will have no further rights in, or claims to, such amounts. See "Certain Information Regarding the Securities -- Withdrawals from the Spread Account." C. The Policies............ On the Closing Date, Financial Security will issue the Note Policy to the Indenture Trustee and the Certificate Policy to the Owner Trustee pursuant to the insurance, indemnity and pledge agreement to be dated as of September 1, 1996 (the "Insurance Agreement"), among Financial Security, the Trust, the Seller, Bankers Trust Company as Collateral Agent for Financial Security, WII and WFS. Pursuant to the Note Policy, Financial Security will unconditionally and irrevocably guarantee to the Noteholders payment of the Scheduled Payments for each Distribution Date. Pursuant to the Certificate Policy, Financial Security will unconditionally and irrevocably guarantee to the Certificateholders payment of the Guaranteed Distributions for each Distribution Date. See "The Policies" and "Financial Security Assurance Inc." Optional Purchase.......... The Seller may, but will not be obligated to, purchase all of the Contracts in the Trust, and thereby cause early retirement of all outstanding Securities, on any Distribution Date as of which (i) the Aggregate Scheduled Balance is 10% or less of the Cut-Off Date Aggregate Scheduled Balance and (ii) the aggregate outstanding principal amount of the Securities is 5% or less of the initial aggregate amount of the Securities (an "Optional Purchase"). See "Certain Information Regarding the Securities -- Termination." The Master Servicer........ WFS, as Master Servicer, will be obligated pursuant to the Sale and Servicing Agreement, subject to the limitations set forth therein, to service the Contracts and to repurchase certain of the Contracts under certain circumstances if certain representations and warranties made by WFS are incorrect or if WFS, as Master Servicer, breaches certain of its servicing obligations under the Sale and Servicing Agreement, in either case in a manner that materially and adversely affects such Contracts. See "The Master Servicer." Ratings.................... It is a condition of issuance that the Class A-1 Notes be rated A-1+ by Standard & Poor's Ratings Services, a division of McGraw-Hill, Inc. ("S&P") and P-1 by Moody's Investors Service, Inc. ("Moody's" and, together with S&P, the "Rating Agencies"), and the Class A-2, Class A-3 and Class A-4 Notes and the Certificates each be rated AAA by S&P and Aaa by Moody's. See "Ratings of the Securities." Tax Status................. In the opinion of counsel to the Seller, for both federal and California income tax purposes, the Notes will be characterized as debt, and the Trust will not be characterized as an association (or a publicly traded partnership) taxable as a corporation. Each Noteholder, by the acceptance of a Note, will agree to treat the Notes as indebtedness, and each Certificateholder, by the acceptance of a Certificate, will agree to treat the Trust as a partnership in which the Certificateholders are partners for federal income tax purposes. See "Certain Federal Income Tax Consequences" and "Certain California Income Tax Consequences." ERISA Considerations....... Subject to the considerations discussed under "ERISA Considerations," the Notes will be eligible for purchase by employee benefit plans that are subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Since the Certificates will be subordinated to the Notes to the extent described herein, employee benefit plans subject to ERISA will not be eligible to purchase the Certificates. Any benefit plan fiduciary considering purchase of the Securities should, among other things, consult with its counsel in determining whether all required conditions have been satisfied. See "ERISA Considerations." Legal Investment........... The Money Market Notes will be eligible securities for purchase by money market funds under Rule 2a-7 under the Investment Company Act of 1940, as amended.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001003956_wilmar_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001003956_wilmar_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and the notes thereto appearing elsewhere in this Prospectus. Except as otherwise specified, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. This Prospectus contains forward-looking statements which contain risks and uncertainties. Discussions containing such forward-looking statements may be found in the information set forth under the captions "Risk Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Market Overview" and "Business" as well as in the Prospectus generally. Actual events or results may differ materially from those discussed in the forward-looking statements as a result of various factors, including without limitation the risk factors set forth below and the matters set forth in the Prospectus generally. THE COMPANY Wilmar is a rapidly growing national marketer and direct distributor of repair and maintenance products, principally to the apartment housing market. Through its 1,000+ page Wilmar Master Catalog, the Company has become a "one- stop shopping" resource for maintenance managers by offering the industry's most extensive selection of over 15,000 standard and specialty plumbing, hardware, electrical, janitorial and related products. By purchasing directly from domestic and foreign manufacturers in relatively large volumes, Wilmar is able to offer customers competitive prices on both name brand and private label products. The Company seeks to win new accounts and increase sales to existing accounts through a 112-person direct sales force, six full-time outbound telesales representatives, a national accounts sales program, and monthly direct mail flyers. Customer service representatives located at Wilmar's centralized call center use the Company's proprietary software applications to quickly process orders and answer customer inquiries. The Company provides free, next-day delivery in local markets served by its distribution centers and ships by parcel delivery services to other areas. Since 1991, Wilmar has expanded from four distribution centers located in Philadelphia, Washington, D.C., Houston and Indianapolis to 15 distribution centers located throughout the United States. From 1991 to 1995, the Company's net sales increased at a compound annual rate of 35.3%. Since November 1995, Wilmar has acquired four regional repair and maintenance supply companies with total annualized net sales of approximately $40 million. Based on published industry data, the Company estimates that average annual expenditures on repair and maintenance products by the apartment housing market exceed $2.0 billion. This market is highly fragmented, with repair and maintenance products sold through a variety of channels, including (i) numerous local or regional broad-line suppliers that market their products using a direct sales force and catalog, (ii) mail order catalog companies, (iii) retail stores, (iv) specialty suppliers that focus on a single product category (such as plumbing or electrical supplies), and (v) industrial suppliers that focus primarily on other product categories and end markets but include a limited number of repair and maintenance products in their catalogs. Wilmar believes that it is the only national, broad-line supplier offering next-day delivery of an extensive selection of repair and maintenance products to its targeted markets through a direct sales force and catalog. The Company believes it has gained market share due to the advantages of its distinctive business model. The Wilmar Master Catalog, which offers the industry's most extensive product selection at competitive prices in an easy- to-use format, enables customers to consolidate purchases with a single vendor. Wilmar's experienced and knowledgeable sales force provides technical product advice, shop organization assistance and additional customer services not generally available from mail order catalogs, retail stores or specialty suppliers. Wilmar's high in-stock position and growing network of distribution centers permit reliable, next-day delivery to an increasing number of markets in the United States, allowing maintenance managers to reduce on-hand inventory and save time otherwise spent shopping for supplies. The Company believes that the apartment housing market is consolidating and, as the Company adds distribution centers throughout the United States, it will be well-positioned to develop additional regional and national relationships with large property management companies that are increasingly directing their maintenance managers to purchase from preferred or authorized vendors. Wilmar utilizes multiple marketing strategies to establish and solidify customer relationships. The Company provides an updated edition of the Wilmar Master Catalog to its customers twice yearly and, on a monthly basis, sends direct mail flyers to both existing and prospective customers. Senior executives and regional sales managers call on large property management companies to establish national or regional relationships, while the Company's direct sales force calls on local maintenance and property managers in 59 markets, including the 14 markets with a Wilmar distribution center. In other targeted markets not currently served by local sales representatives, Wilmar relies upon outbound telesales representatives to solicit new accounts and service existing customers. The Company believes it garners a greater percentage of its customers' overall spending on repair and maintenance supplies in markets that are served by local Wilmar sales representatives, particularly where the local sales representatives are supported by a nearby distribution center, enabling free, next-day delivery of the Company's entire product line. The key elements of the Company's strategy to increase sales to the apartment housing market are to (i) increase the direct sales force to win new accounts in new and existing markets and to better serve accounts currently supported by telesales, (ii) open new distribution centers and increase line-hauling to expand the geographic range of the Company's next-day delivery capability, particularly of larger items, (iii) increase the use of direct mail flyers and expand the outbound telesales force to win new customers, and (iv) continue to seek the acquisition of local and regional competitors. The Company believes that it can also expand its sales to other end markets that have customer demands and distribution channels similar to those in the apartment housing market. These end markets include hotels and motels, nursing homes, hospitals, prisons, military bases, schools and universities. As in the apartment housing market, on-site maintenance managers in these end markets typically manage large repair and maintenance budgets and need a broad array of products delivered quickly at competitive prices. In 1995, the Company added 3,000 stock keeping units ("SKUs") to its Wilmar Master Catalog and initiated sales efforts to address these new markets. Wilmar's principal executive office is located at 303 Harper Drive, Moorestown, New Jersey 08057, and its telephone number is 609-439-1222.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001004317_iron_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001004317_iron_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this Prospectus. References to "Iron Mountain" and the "Company" include Iron Mountain Incorporated (including predecessor entities) and its consolidated subsidiaries, unless the context otherwise requires. THE COMPANY Iron Mountain is the largest records management company in the United States, as measured by revenues. The Company is a full-service provider of records management and related services, enabling customers to outsource records management functions. Pro forma for the Acquisitions (as defined herein), as of June 30, 1996, the Company managed approximately 29.6 million Cartons* in 103 records centers in 33 markets nationwide. The Company has a diversified base of over 19,000 customer accounts, which includes more than half of the Fortune 500 and numerous legal, banking, healthcare, accounting, insurance, entertainment and government organizations. The Company provides storage and related services for all major media, including paper (which is the dominant form of records retention and which has accounted for approximately 85% of the Company's revenues since 1992), computer disks and tapes, microfilm and microfiche, master audio and video tapes, film and optical disks, X-rays and blueprints. The Company's principal services include filing, retrieval and destruction of records, courier pick-up and delivery, database management and customized reporting. The Company also sells storage materials and provides consulting and other records-related services. The Company continues to capitalize on its leading position in the records management industry and the industry trends of increased records retention, outsourcing of records management and vendor consolidation. As a result, the Company has achieved significant increases in revenues and EBITDA (as defined herein). From 1991 to 1995, Iron Mountain's total revenues increased from $62.8 million to $104.4 million primarily from internal growth, representing a compound annual growth rate ("CAGR") of 13.5%. During the same period, storage revenues grew at a 12.9% CAGR while service and storage material sales revenues grew at a 14.6% CAGR. From 1991 to 1995, the Company's EBITDA grew from $15.0 million to $26.1 million, representing a 14.9% CAGR. Revenues and EBITDA for the six months ended June 30, 1996 increased 27.3% (10.2% from internal growth and 17.1% from acquisitions) and 24.8%, respectively, over the same period in 1995. For a discussion of the significance of EBITDA and other measures of the Company's performance determined in accordance with generally accepted accounting principles ("GAAP") and the Company's sources and applications of cash flow, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview" and "--Liquidity and Capital Resources." Industry Overview According to industry sources, organizations in the United States generate an estimated four trillion documents each year, many of which must be retained and remain available for reference for many years. These records may be generally divided into two categories: active and inactive. Inactive records, which are the principal focus of the records management industry, consist of records that are not needed for immediate access but which must be retained for legal or regulatory reasons or for occasional reference to support ongoing business operations. Based on industry studies, the Company believes that inactive records make up approximately 80% of all records. The Company believes that the volume of inactive records is increasing for a number of reasons, including: (i) the rapid growth of inexpensive document producing technologies such as facsimile, desktop printing and computer networking; (ii) increased regulatory requirements; (iii) concerns over possible future litigation and the resulting increases in volume and holding periods of documentation; (iv) the high cost of reviewing records and deciding whether to retain or destroy them; and (v) the failure of many entities to adopt or follow policies on records destruction. Despite the growth of new "paperless" technologies, such as the Internet and e-mail, management believes that stored information remains predominantly paper-based and that such technologies have promoted the creation of hard copies of such electronic information. - ------------- * The term "Carton" is defined as a measurement of volume equal to a single standard storage carton, approximately 1.2 cubic feet. The number of Cartons stored does not include storage volumes in the Company's vital records services and data protection services, which are described under "Business." The Company believes that it benefits from several industry fundamentals, including: (i) the historically non- cyclical nature of the records management industry; (ii) the continued trend towards corporate outsourcing of records management functions; (iii) the ability of larger records management companies to achieve economies of scale with respect to labor, real estate costs and the utilization of management information systems; and (iv) the ongoing consolidation of the records management industry. The Company believes that it is one of only four records management providers with a national operating presence, the balance being regional or, in most instances, single-city operators. According to the Association of Commercial Records Centers (the "ACRC"), a trade group of approximately 500 members, as of January 1994 (the latest date for which such information is available), approximately 2,600 firms offered records storage and management services in the United States. The Company believes that there is a trend toward consolidation in the records management industry and that such trend will continue to accelerate primarily because of: (i) the opportunities to achieve economies of scale; (ii) the industry's capital requirements for growth; (iii) customer demands for more sophisticated technology-based solutions; and (iv) the preference of certain large, national customers to outsource a significant portion of their records management functions to one vendor with a national presence, such as Iron Mountain. Financial Characteristics of Iron Mountain's Business Iron Mountain's records management business has the following financial characteristics: (bullet)Recurring Revenues. Iron Mountain derives a majority of its revenues from fixed periodic (usually monthly) fees charged to customers for storage of records. Storage revenues have grown for 30 consecutive quarters and have represented approximately 60% of the Company's total revenues in each of the last five years. Once a customer places a record in storage with the Company and until that record is destroyed or permanently removed (for which the Company typically receives a service fee), the Company receives recurring payments of fixed periodic fees without incurring additional labor or marketing expenses or significant capital costs. The stable and growing storage base also provides the foundation for increases in revenues and EBITDA from service activities and sales of storage materials. (bullet)Historically Non-Cyclical Business. Iron Mountain has not experienced a reduction of its business as a result of past general economic downturns, although there can be no assurance that this would be the case in the future. Management believes that the outsourcing of records management may accelerate during economic downturns as companies focus on reducing costs through outsourcing non-core operating functions. In addition, management believes that companies that have outsourced records management are less likely during economic downturns to incur the move-out costs and other expenses associated with switching vendors or moving records management in-house. (bullet)Inherent Growth from Existing Customers. The Company's customers have on average generated additional Cartons at a faster rate than stored Cartons have been destroyed or permanently removed. From 1992 to 1995, net Cartons from existing customers grew at an average annual rate of 6.7%. The Company believes the consistent growth of its storage revenues is the result of a number of additional factors, including: (i) the trend toward increased records retention; (ii) customer satisfaction with the Company's services; and (iii) the costs and inconvenience of moving storage operations in-house or to another provider of records management services. (bullet)Diversified and Stable Customer Base. The Company has over 19,000 customer accounts in a variety of industries. The Company currently provides services to more than half of the Fortune 500 and numerous legal, banking, healthcare, accounting, insurance, entertainment and government organizations. Only one of the Company's customers accounted for more than 3% of revenues in 1993, 1994 or 1995. From 1992 to 1995, average annual permanent removals of Cartons represented only approximately 4% of total Cartons stored. (bullet)Capital Expenditures Related Primarily to Growth. The Company's business requires limited annual maintenance capital expenditures. Maintenance capital expenditures were $1.8 million, $1.2 million and $0.9 million in 1993, 1994 and 1995, respectively. From 1992 to 1995, over 90% of the Company's aggregate capital expenditures were growth-related investments, primarily in racking systems, new buildings and leasehold improvements, equipment for new facilities, management information systems and facilities restructuring. These growth-related capital expenditures are primarily discretionary and create additional capacity for increases in revenues and EBITDA. Business Strategy Iron Mountain's business strategy is to increase revenues and EBITDA while maintaining a low-cost operating structure and providing premium service. The Company intends to generate growth by increasing its storage and service revenues from existing customers, adding new customers and making acquisitions. The Company's strategy is based on the following elements: (bullet)Provide Superior Customer Service. The Company believes it has a reputation for providing reliable, quality service based on its more than 45 years of operations, its commitment to providing premium customer service and the continuity and depth of its management team. The Company has successfully implemented a decentralized management structure that enables the Company to respond quickly and flexibly to local customer needs. Iron Mountain's proprietary Safekeeper(R) system enables it to quickly provide customized records management solutions to its customers, enhancing the quality of its services. In addition, Iron Mountain's national operating presence allows it to better service large organizations that require records management functions at multiple, geographically diverse facilities. (bullet)Capitalize on Operating Efficiencies. Iron Mountain pursues a low-cost operating strategy based primarily on achieving economies of scale in the areas of storage, labor and transportation, general and administrative functions and management information systems. Because occupancy costs are a major component of the Company's cost of sales, its real estate management staff aggressively seeks to minimize per Carton storage costs by designing racking systems and operating space to maximize facility storage efficiency, negotiating favorable facility leases, contracting for facilities to be built to its custom specifications, and leasing larger facilities in order to reduce operating costs per Carton. The Company seeks to increase labor efficiency by offering incentive compensation to all full-time employees based upon achieving specific operating targets. Certain operating costs, such as the maintenance of local delivery fleets, general and administrative costs and management information systems, offer economies of scale, providing the Company with operating leverage and the ability to increase its efficiency through further growth. (bullet)Pursue Acquisition Opportunities. The Company believes that it is well positioned to participate in the further consolidation of the records management industry. Iron Mountain's management team has successfully completed 18 acquisitions since the Company embarked on a proactive acquisition strategy in mid-1994, and one additional acquisition is currently pending. The Company intends to continue to make fold-in acquisitions to augment its operations in existing markets and to make strategic acquisitions in new geographic markets, with an emphasis on the 50 largest markets in the United States and potentially in certain markets outside the United States. Following an acquisition in a new market, the Company seeks to increase its business with the acquired customer base and to supplement that growth both with new customers and through appropriate fold-in acquisitions. In addition, the Company has successfully reduced the cost structure of its acquired operations by implementing its efficient operating strategies and leveraging its centralized administrative resources and management information systems. (bullet)Leverage Proprietary Safekeeper System. The Company pioneered the application of advanced information technology to the records management industry. Iron Mountain's proprietary Safekeeper system provides advanced inventory control and information access, enabling the Company to provide faster, higher quality and more flexible solutions to its customers and to lower the costs of its operations. Safekeeper has been designed to easily and effectively integrate newly acquired records management companies and offer improved levels of customer service and records management capabilities to customers acquired through acquisitions. Iron Mountain's Safekeeper system exploits bar-code technology to provide a comprehensive, standardized approach to tracking, accessing and retrieving records. Safekeeper offers state-of-the-art records management capabilities and ease of access to customers while featuring security functions to protect customer information from unauthorized access. Since 1992, the Company has invested $12.5 million to develop and refine its management information systems, including Safekeeper. THE OFFERING <TABLE> <CAPTION> <S> <C> Securities Offered $150,000,000 principal amount of % Senior Subordinated Notes due 2006 (the "Notes"). Maturity Date , 2006 Interest Payment Dates and of each year, commencing , 1997. Guarantees The Notes will be fully and unconditionally guaranteed on an unsecured senior subordinated and joint and several basis (the "Subsidiary Guarantees") by substantially all of the Company's present and future Restricted Subsidiaries (collectively, the "Guarantors"). Each of the Guarantors has also guaranteed unconditionally the indebtedness outstanding under the Company's existing bank credit facility (the "Credit Agreement") and will guarantee unconditionally the indebtedness outstanding under the new bank credit facility the Company intends to enter into with its lenders (the "New Credit Facility"). See "Description of the Notes--Subsidiary Guarantees." Subordination The Notes will be general unsecured senior subordinated obligations of the Company ranking junior to all existing and future Senior Debt of the Company, including any indebtedness that may be incurred under the Credit Agreement or the New Credit Facility. The Subsidiary Guarantees will rank junior to all existing and future Senior Debt of the Guarantors. As of June 30, 1996, on a pro forma basis after giving effect to the Transactions, the aggregate outstanding principal amount of Senior Debt of the Company and the Guarantors would have been $24.5 million. See "Description of the Notes--Subordination." Optional Redemption Except as described below, the Notes are not redeemable by the Company prior to , 2001. Thereafter, the Notes are redeemable at the option of the Company, in whole or in part, at any time and from time to time, at the redemption prices set forth herein plus accrued and unpaid interest to, but excluding, the date of redemption. In addition, during the first 36 months after the date of issuance of the Notes, the Company, at its option, may redeem up to 35% of the initial principal amount of the Notes with the net proceeds of one or more Qualified Equity Offerings at a redemption price equal to %, plus accrued and unpaid interest to, but excluding, the date of redemption; provided that at least 65% of the initial principal amount of the Notes remains outstanding after each such redemption. See "Description of the Notes--Optional Redemption." Mandatory Redemption Except with respect to required repurchases upon the occurrence of a Change of Control or in the event of certain Asset Sales, the Company is not required to make sinking fund or redemption payments with respect to the Notes at any time prior to maturity. See "Description of the Notes-- Mandatory Redemption." Change of Control Upon the occurrence of a Change of Control, each Holder of Notes may require the Company to repurchase such Notes at 101% of the principal amount thereof, plus accrued and unpaid interest to, but excluding, the date of repurchase. See "Description of the Notes--Repurchase at the Option of Holders--Change of Control." Certain Covenants The Indenture governing the Notes (the "Indenture") will contain covenants restricting or limiting the ability of the Company and its Restricted Subsidiaries to, among other things: (i) incur additional indebtedness, including indebtedness ranking senior to the Notes and junior to any Senior Debt; (ii) pay dividends or make other restricted payments; (iii) make asset dispositions; (iv) permit liens; (v) enter into sale and leaseback transactions; (vi) enter into certain mergers; (vii) make certain investments; and (viii) enter into transactions with related persons. See "Description of the Notes--Certain Covenants." Use of Proceeds The net proceeds of the Offering will be used to repay outstanding bank debt and certain other indebtedness and to fund a portion of the purchase price of the Pending Acquisition. </TABLE> RISK FACTORS For a discussion of certain material factors that should be considered in connection with an investment in the Notes offered hereby, see "Risk Factors" on pages 10 to 14.
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. The term "Company," as used herein, includes the operations of K&G Men's Center, Inc., its subsidiaries and certain entities affiliated with the Company by virtue of the Company's ownership of at least 50% of the outstanding stock of each of them. See Note 2 of Notes to Consolidated Financial Statements. Except as otherwise specified, this Prospectus assumes no exercise of the Underwriters' over-allotment option. The Company has a 52/53-week fiscal year that ends on the Sunday closest to the end of January of each year. As used herein, "fiscal 1993," "fiscal 1994," "fiscal 1995" and "fiscal 1996" refer to the Company's fiscal years ended January 30, 1994, January 29, 1995 and January 28, 1996, and the fiscal year ending February 2, 1997, respectively. THE COMPANY K&G Men's Center, Inc. ("K&G" or the "Company") is a rapidly growing superstore retailer of men's apparel and accessories. K&G's stores offer first- quality, current-season men's apparel comparable in quality to that of traditional department and fine specialty stores, but at everyday low prices 30% to 70% below those typically charged by such stores. The Company's merchandising strategy emphasizes broad and deep assortments across all major menswear categories, including tailored clothing, casual sportswear, dress furnishings, footwear and accessories. This dominant merchandise selection, which includes brand name as well as private label merchandise, positions the Company to attract a wide range of menswear customers in each of its markets. In addition, the Company's philosophy of delivering everyday value distinguishes K&G from other retailers that adopt a more promotional pricing strategy. The Company's 16 stores operating in 11 states are "destination" stores located primarily in low-cost warehouses. The Company's stores are operated under the names "K&G Men's Center" and "K&G MenSmart" east of the Mississippi River and "T&C Men's Center" and "T&C MenSmart" west of the Mississippi River. K&G's stores are open for business on Fridays, Saturdays and Sundays only, except for a limited number of Monday holidays and an expanded schedule for the holiday season when the store is open every day. The Company pioneered the weekend strategy in menswear as a means of responding to its customers' shopping habits and creating a sense of urgency to purchase, while facilitating cost control and inventory replenishment. This strategy is an integral element of the Company's retail formula that emphasizes low operating costs, low mark- ups and high inventory turnover to produce attractive store-level economics. The defining elements of the K&G concept and the Company's strategy are: Customer Orientation. K&G believes it has structured all aspects of its business to be responsive to the needs and desires of its customers. The Company's broad and deep selection of first-quality merchandise provides one-stop shopping convenience. In addition, K&G's commitment to everyday low prices assures customers that they can consistently purchase menswear at prices substantially below those of traditional department and fine specialty stores. Further, the Company's stores are open during those hours when men most frequently shop. Management considers the customer-oriented nature of K&G's merchandising and operating policies the most fundamental element of the Company's business strategy. Broad and Consistent Selection of First-Quality Merchandise. K&G's abundant merchandise offerings consist of all major categories of men's apparel, including business attire (suits, sportcoats, shirts and ties), casual wear (slacks, shorts, polo-style shirts, sweaters and activewear), formal wear (tuxedos and related furnishings), accessories (underwear, socks, belts, gloves and scarves), outerwear and footwear. In each merchandise category other than accessories, the Company strives to offer its customers a dominant selection of "good-better-best" merchandise that enables the customer to make the value/quality decision that best fits his needs. Recognizing the trend toward casual dressing in the workplace, K&G added casual clothing and sportswear to its tailored clothing selection in 1991, and tailored clothing accounted for less than half of the Company's net sales in fiscal 1995. Everyday Low Pricing and Low Mark-Ups. K&G's pricing strategy is to enhance customer value by offering "impossible prices" --everyday low prices (typically 30% to 70% below prices charged by traditional department and fine specialty stores) achieved by minimizing the mark-up added to its merchandise. This pricing strategy is designed to drive sales volume and generate high inventory turnover, and contrasts distinctly with the pricing strategies of many department and specialty stores. These stores add a higher mark-up to their merchandise when it first appears on the selling floor, and then later sell the goods at a promotional price that still typically exceeds K&G's everyday low price. Destination Superstores. K&G's stores are "destination" stores located primarily in low-cost warehouses easily accessible from major highways and thoroughfares. The Company seeks to make an immediate visual impact on customers entering its stores through its presentation of an abundant selection of fresh, first-quality merchandise. K&G instills a sense of urgency for the customer to purchase by opening its stores for business on Fridays, Saturdays and Sundays only, and management believes that a high percentage of customers who come to K&G's stores purchase merchandise during their visit. In addition, by replenishing its stores weekly, the Company encourages customers to shop frequently to seek opportunistic purchases. Low-Cost Operations. The Company seeks to minimize costs throughout its operations. This low-cost philosophy begins with merchandise purchasing, where the Company consistently seeks to obtain the lowest price available from its vendors, rather than asking for special allowances or other concessions. In addition, K&G is able to reduce its rental obligations by locating its stores primarily in low-cost warehouses. K&G's weekend-only format reduces payroll costs and eliminates the need for a central distribution center, enabling the Company's vendors to drop-ship most merchandise directly to the stores. Further, word-of-mouth publicity, combined with the efficient implementation and management of K&G's advertising program, results in below industry average advertising expenditures as a percentage of net sales. Through the use of these strategies, the Company is able to minimize its costs and pass those savings along to its customers. The Company believes that the effect of its merchandising approach and low- cost operating strategy is to significantly influence the buying patterns of menswear consumers in each market it serves. This effect is demonstrated by the Company's historical increases in comparable store sales and by its high inventory turnover (4.2x in fiscal 1995), both of which exceed menswear industry averages. K&G opened its first store in December 1989, and at the end of fiscal 1995 had 11 stores. See "--Summary Consolidated Financial Data." The Company's sales have grown from $7.5 million in fiscal 1990, its first full year of operation, to $60.0 million in fiscal 1995, a 52% compounded annual growth rate. In addition, net income increased from approximately $1.2 million in fiscal 1993 to $3.2 million in fiscal 1995. K&G's expansion strategy is to open stores in metropolitan markets, including those markets with the potential for multiple sites. Clustering multiple stores in a single market permits the Company to capture advertising and management efficiencies. K&G does not utilize a distribution center; accordingly, it is not constrained geographically or by the capacity limits of a central facility, allowing management to concentrate on the best real estate opportunities in targeted markets. Since October 1995, the Company has opened eight stores, doubling its store base to 16 stores. The eight stores included two stores each in the Boston and Washington, D.C. areas and stores in Atlanta, Baltimore, Kansas City, Kansas and Long Island. In the fourth quarter of fiscal 1996, the Company will open a store in Columbus, Ohio. The Company intends to open eight new stores in fiscal 1997 and eight to ten new stores in fiscal 1998. RECENT DEVELOPMENTS Net sales for the nine months ended October 27, 1996 increased 46.7% to $55.5 million compared with net sales of $37.8 million for the nine months ended October 29, 1995. On a comparable store basis, net sales increased 11.1% for the nine months ended October 27, 1996. Comparable store sales for the nine months ended October 29, 1995 were 12.9%. Net sales for the three months ended October 27, 1996 increased 55.1% to $19.7 million compared with net sales of $12.7 million for the three months ended October 29, 1995. On a comparable store basis, net sales increased 11.1% for the three months ended October 27, 1996. Comparable store sales for the three months ended October 29, 1995 were 8.1%. For the nine months ended October 27, 1996, the Company anticipates net income of approximately $2.36 million ($0.37 per common share) compared to net income for the nine months ended October 29, 1995 of $1.82 million ($0.35 per common and common equivalent share), a 29.6% increase. For the three months ended October 27, 1996, the Company anticipates net income of approximately $869,000 ($.14 per common share) compared to net income for the three months ended October 29, 1995 of $631,000 ($0.12 per common and common equivalent share), a 37.7% increase. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company............... 313,850 shares Common Stock offered by the Selling Shareholders.. 886,150 shares Common Stock to be outstanding after the offering. 6,691,350 shares(1) Use of proceeds by the Company.................... To finance new store expansion and for working capital and other general corporate purposes. See "Use of Proceeds." Nasdaq National Market symbol..................... MENS </TABLE> - -------- (1) Excludes (i) 123,325 shares of Common Stock issuable upon the exercise of outstanding stock options and (ii) 489,175 shares available for grant under the Company's stock option plans. See "Management--Stock Option Plan for Directors" and "--Stock Option Plan for Employees."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001004967_pacific_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001004967_pacific_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and Financial Statements and related Notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus (i) gives effect to a 940 to 1 split of the Company's Common Stock effected on October 20, 1995, (ii) assumes no exercise of the Underwriters' over-allotment option and (iii) gives effect to the sale of 1,800,000 shares of the Company's Common Stock to KDD. THE COMPANY Pacific Gateway is a facilities-based international telecommunications carrier which provides international telecommunications services primarily to its target customer base of long distance service providers worldwide, including five of the seven largest U.S.-based long distance carriers. The Company operates an international network consisting of international and domestic switching facilities in Los Angeles and New York, partial ownership interests in 14 digital undersea fiber optic cable systems in the Atlantic, Pacific and Caribbean regions and operating agreements that provide for the exchange of telecommunications traffic with foreign carriers. As of March 31, 1996, Pacific Gateway had operating agreements with 25 foreign carriers in 19 countries around the world, which countries collectively represent approximately 43.3% of U.S.-originated international traffic. The Company is currently negotiating operating agreements with more than 20 prospective foreign partners. The Company's foreign partners include both telecommunications carriers that have been dominant in their home markets which may be wholly or partially government-owned (often referred to as Post Telephone and Telegraphs or "PTTs") and nondominant carriers that may have been recently established as a result of the deregulation of foreign telecommunications markets ("Competitive Carriers"). Industry sources estimate that the international telecommunications services market was approximately $50.6 billion in aggregate carrier revenues in 1994, with approximately $12.4 billion of this traffic originating in the United States, and that aggregate international telecommunications traffic grew at a compound annual rate of 13% during the period from 1990 to 1994, with some sectors in developing countries growing at faster rates. This historical growth rate is approximately twice the growth rate of aggregate U.S. domestic long distance traffic over the same period. The Company believes that the international telecommunications market will continue to experience strong growth for the foreseeable future. The Company's senior management team founded Pacific Gateway in 1991 to capitalize on the significant growth opportunities it believes are being created by the following major trends in the international telecommunications services market: (i) global deregulation and privatization; (ii) increased availability of digital undersea fiber optic cable capacity; (iii) reductions in service costs driven by technological advancements and increased competition; and (iv) economic development and an increasing number of telephones and access lines in service worldwide. Despite the growth and general deregulatory trends in the global telecommunications market, however, the pace of change and emergence of competition in many countries remains slow, with domestic and international traffic still dominated by government-controlled monopoly carriers. The Company believes that U.S.-based international carriers, such as Pacific Gateway, which have already established, or are in negotiations to establish, operating agreements with government-controlled monopoly carriers in many such countries will be well-positioned to capture the benefits of increasing traffic flows as the telecommunications infrastructure in these countries is expanded. The Company's strategy to capitalize on the growing demand for international telecommunications services consists of the following key elements: (i) secure additional operating agreements with foreign carriers, particularly in fast-growing markets in Asia, the Pacific Rim, Latin America and Eastern Europe; (ii) expand and enhance its global network facilities; (iii) pursue strategic alliances, joint ventures and acquisitions to increase both overseas-originated and U.S.-originated traffic; (iv) broaden its offering of higher margin value-added products and services; (v) leverage its existing network facilities through targeted direct marketing of international services to corporate customers located near the Company's switching facilities; and (vi) maintain efficient, low-cost operations. [PACIFIC GATEWAY EXCHANGE LOGO] INTERNATIONAL NETWORK CURRENT AND PENDING FACILITIES [MAP] WORLD MAP NAMING AND LOCATING UNDERSEA FIBER OPTIC CABLES AND GATEWAY SWITCHES DESCRIBED BELOW PACIFIC GATEWAY HAS OWNERSHIP POSITIONS IN 14 DIGITAL UNDERSEA FIBER OPTIC CABLES AND OPERATES TWO INTERNATIONAL GATEWAY SWITCHING FACILITIES IN LOS ANGELES AND NEW YORK. THE COMPANY HAS ALSO MADE PLANS TO INVEST OR LEASE AN INTEREST IN APPROXIMATELY SEVEN ADDITIONAL UNDERSEA FIBER OPTIC CABLES, AS WELL AS AN ADDITIONAL SWITCHING SITE IN DALLAS. THE COMPANY'S OWNED INTERNATIONAL NETWORK, TOGETHER WITH LEASED CAPACITY AND SATELLITE CIRCUITS, ENABLE IT TO TERMINATE TELECOMMUNICATIONS TRAFFIC TO ANY COUNTRY IN THE WORLD THAT HAS DIRECT DIAL SERVICE WITH THE UNITED STATES. LEGEND: <TABLE> <C> <S> - ------- Company-owned undersea fiber optic transmission facilities. - ------- Fiber optic transmission facilities currently in service, under construction or in the planning stages in which the Company has plans to purchase or lease an interest. o Company-owned international gateway switching sites. o Company-owned switching facilities planned for 1996 installation. </TABLE> IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. ------------------------ The Company intends to furnish its stockholders with annual reports containing audited financial statements examined by its independent accountants and quarterly reports containing unaudited financial information for each of the first three quarters of each fiscal year. International long distance traffic is traditionally exchanged pursuant to bilateral operating agreements entered into between international long distance carriers in two countries. The Company believes that it is currently the only U.S.-based international carrier other than AT&T Communications, Inc., MCI Telecommunications Corporation, Sprint Corporation and WorldCom, Inc. to have secured a significant number of traditional switched voice bilateral operating agreements with foreign carriers. Unless a U.S.-based international carrier is able to offer a new business opportunity or a new source of traffic, generally there is little incentive for a foreign carrier to take on the administrative burdens of negotiating a new operating agreement with a U.S.-based carrier, to incur additional capital investment, and to maintain the relationship on an ongoing basis. The Company believes that the combination of the large traffic volume, proven operating performance and personal relationships that traditionally has been required both to establish operating agreements and to secure positions in digital undersea fiber optic cable systems creates a significant barrier to entry in the international telecommunications services market. The Company's target customer base includes the more than 200 U.S.-based long distance carriers with annual revenues of between $50 million and $2 billion and the foreign carriers with which the Company has, or proposes to have, operating agreements. As of March 31, 1996, Pacific Gateway provided its services to approximately 57 U.S.-based long distance carriers and 25 foreign carriers. The Company has been able to increase its revenues by providing service to new U.S.-based customers, by providing its existing customers with direct service to additional countries as it obtains new operating agreements and by terminating increasing volumes of traffic from its foreign carrier partners. The Company believes that the principal reasons its customers select Pacific Gateway to carry their international traffic are (i) the Company's reputation for operating a state-of-the-art network at rates that are comparable to or lower than its competitors; (ii) that the Company's size enables its experienced sales and operating personnel to tailor cost-effective telecommunications services to meet customers' needs and to provide highly responsive, flexible customer service; and (iii) that Pacific Gateway is the only significant U.S. facilities-based international carrier that does not also compete primarily for end-user customers in the domestic long distance market. The Company was incorporated in Delaware on August 8, 1991. The Company's principal executive offices are located at 533 Airport Boulevard, Suite 505, Burlingame, California 94010. Its telephone number is (415) 375-6700. THE OFFERING Common Stock offered by the Company............................. 4,900,000 shares Common Stock offered by the Selling Stockholders...................... 367,000 shares Common Stock to be outstanding after this Offering(1).................... 18,856,440 shares Use of proceeds..................... The net proceeds of this Offering will be used (i) to expand the Company's international network facilities on new and existing routes, (ii) to repay the Company's existing indebtedness to one of its stockholders and to a commercial lender, and (iii) to invest in potential joint ventures, strategic alliances or acquisitions and for working capital and other general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol.............................. PGEX - --------------- (1) Gives effect to the purchase by the Company of 143,560 shares of Common Stock from a former employee in April 1996 and excludes 1,200,000 shares reserved for issuance under the Company's 1995 Stock Option Plan, of which 539,170 shares of Common Stock were issuable upon exercise of outstanding options at March 31, 1996, and 400,000 shares of Common Stock were reserved at March 31, 1996 for issuance under the Company's 1995 Stock Purchase Plan. See "Capitalization" and "Management -- Stock Plans." SUMMARY FINANCIAL DATA <TABLE> <CAPTION> PERIOD FROM INCEPTION(1) THREE MONTHS ENDED THROUGH YEAR ENDED DECEMBER 31, MARCH 31, DECEMBER 31, ------------------------------------------ ------------------- 1991 1992 1993 1994 1995 1995 1996 ------------ ------ ------ ------- -------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AND REVENUES PER MINUTE OF USE AMOUNTS) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues........................... $ 124 $ 800 $5,048 $20,913 $ 76,416 $12,125 $32,240 Cost of long distance services..... 37 587 4,036 17,196 66,346 10,042 29,130 ------- ------ ------ ------- -------- ------- ------- Gross profit..................... 87 213 1,012 3,717 10,070 2,083 3,110 Selling, general and administrative expenses......................... 113 531 1,008 2,273 5,467 992 1,956 Depreciation....................... 1 17 104 410 1,124 189 385 ------- ------ ------ ------- -------- ------- ------- Operating income (loss).......... (27) (335) (100) 1,034 3,479 902 769 Interest expense................... -- -- 12 193 538 111 152 ------- ------ ------ ------- -------- ------- ------- Income (loss) before income taxes.......................... (27) (335) (112) 841 2,941 791 617 Provision for income taxes......... -- -- -- 205 1,155 311 250 ------- ------ ------ ------- -------- ------- ------- Net income (loss)................ $ (27) $ (335) $ (112) $ 636 $ 1,786 $ 480 367 ======= ====== ====== ======= ======== ======= ======= Net income (loss) per share........ $ -- $(0.03) $(0.01) $ 0.04 $ 0.12 $ 0.03 $ 0.03 ======= ====== ====== ======= ======== ======= ======= Weighted average shares outstanding...................... 10,070 11,128 14,300 14,300 14,300 14,300 14,300 OTHER OPERATING DATA: EBITDA(2).......................... $ (26) $ (318) $ 4 $ 1,444 $ 4,603 $ 1,091 $ 1,154 Capital expenditures............... $ 80 $ 66 $1,542 $ 3,745 $ 7,233 $ 242 $ 4,121 Minutes of use..................... N/A N/A 13,580 61,690 252,925 38,667 108,888 Revenues per minute of use......... N/A N/A $ 0.37 $ 0.34 $ 0.30 $ 0.31 $ 0.30 Estimated return traffic revenue backlog(3)....................... -- -- $ 158 $ 986 $ 6,142 $ 2,052 $ 8,400 </TABLE> <TABLE> <CAPTION> AS OF MARCH 31, 1996 ---------------------- AS ACTUAL ADJUSTED(4) ------- ---------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents............................................................... $ 3,691 $ 58,407 Working capital (deficit)............................................................... (6,973) 50,743 Total assets............................................................................ 41,123 95,839 Revolving line of credit................................................................ 3,000 -- Revolving line of credit, related party................................................. 5,420 -- Stockholders' equity.................................................................... 3,257 66,393 </TABLE> - --------------- (1) The Company was incorporated in Delaware and commenced operations on August 8, 1991. (2) EBITDA represents earnings before interest expense, income taxes, depreciation and amortization expense. EBITDA does not represent cash flows as defined by generally accepted accounting principles and does not necessarily indicate that cash flows are sufficient to fund all the Company's cash needs. EBITDA is a financial measure commonly used in the Company's industry and should not be considered in isolation or as a substitute for net income, cash flows from operating activities or other measures of liquidity determined in accordance with generally accepted accounting principles. (3) Represents revenue from delayed proportional return traffic actually received during the six months following the end of the years ended December 31, 1993 and 1994 and the three months ended March 31, 1995. For the year ended December 31, 1995, the amount represents the actual return revenue of $3,042 during the three months ended March 31, 1996 and management's estimate of revenue to be received from delayed proportional return traffic during the three month period ending June 30, 1996. For the three months ended March 31, 1996, this amount represents management's estimate of revenue to be received from delayed proportional return traffic during the six months ending September 30, 1996. Management's estimates of the revenue to be received from delayed proportional return traffic are based on the anticipated ratios between outgoing and incoming traffic and the anticipated settlement rates. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview." (4) Adjusted to reflect the sale of 3,100,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $14.00 per share and 1,800,000 shares of Common Stock offered by the Company hereby to KDD at a price equal to the initial public offering price per share, net of underwriting discounts and commissions, and the application of the estimated net proceeds therefrom. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001004968_first_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001004968_first_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus has been adjusted to give effect to (i) the conversion of the Company's Class B Common Stock into Common Stock on a share for share basis which will be effected upon the consummation of the sale of shares in the Offering, (ii) the exercise of outstanding warrants held by the Selling Stockholders which will be effected immediately prior to the consummation of the sale of the shares in the Offering and (iii) the change of the Company's state of incorporation from Delaware to Illinois, the reclassification of the Company's Class A Common Stock as "Common Stock" and a 1,288.8-for-1 stock split of the Company's capital stock, all effected by a merger which occurred on February 1, 1996. Unless otherwise indicated, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors." THE COMPANY The Company, which operates under the name First Enterprise Acceptance Company, is a specialty finance company engaged primarily in purchasing and servicing installment sales contracts ("installment contracts") originated by automobile dealers ("dealers") for financing the sale of used automobiles, vans and light trucks (collectively, "automobiles"). The Company purchases installment contracts which provide financing for consumers who have limited access to traditional sources of credit as a result of limited credit histories, low incomes or past credit problems ("non-prime consumers"). Various insurance, warranty and other products ("ancillary products") are also offered by the Company, as agent, in conjunction with purchases of installment contracts. The Company commenced operations in 1990 and began purchasing installment contracts in May 1992 through three branch offices. As of March 31, 1996, the Company operated 28 branch offices in eight southeastern states and currently plans to open at least five additional branch offices by the end of 1996. The principal amount of installment contracts owned and/or serviced by the Company (the "Total Portfolio") increased 107.0% from $49.0 million at March 31, 1995 to $101.5 million at March 31, 1996. As of March 31, 1996, the Company owned $60.6 million (the "Owned Portfolio") of the Total Portfolio. Since it began purchasing installment contracts in 1992, the Company has experienced substantial growth in the Total Portfolio. During fiscal 1992, 1993, 1994, 1995 and the three months ended March 31, 1996, the Company purchased installment contracts with aggregate original principal balances of $7.5 million, $19.2 million, $35.1 million, $70.2 million and $32.4 million, respectively. As of March 31, 1996, the Total Portfolio had an average original principal balance of approximately $7,300 per installment contract, a weighted average contract annual percentage rate ("APR") of approximately 25.4%, a weighted average non-refundable contract acquisition discount of approximately 10.8% and a weighted average initial contract term of approximately 32 months. At March 31, 1996, account balances which were 60 or more days past due were 0.88% of the gross amount of the Total Portfolio. The Company's strategy is to grow the Total Portfolio by increasing its penetration of existing markets and by expanding into new market areas. The principal components of the Company's strategy include: - Decentralized Structure. The Company operates with a decentralized branch office network that provides branch managers with a significant degree of autonomy and accountability. Within guidelines set by the Company, branch managers are responsible for the development of dealer relationships, underwriting of installment contract purchases, servicing and collection of accounts and implementation of repossession procedures. Performance goals are established for each branch office, and the branch manager's incentive compensation is tied to the performance results of the branch office. Management believes that its decentralized operational structure (i) enhances dealer service by allowing branch managers and branch personnel to provide localized service to dealers, (ii) results in better portfolio quality through personal knowledge of local market conditions and (iii) improves collection rates by requiring collection activity to be handled through direct local contact with consumers. - Experienced Management Personnel. The Company's growth and profitability have been largely the result of the services of its management at the executive, supervisory and branch levels. The executive officers of the Company have an average of over 33 years of experience in the financial services industry. The Company's regional supervisors and branch managers have an average of 35 years and 24 years of experience, respectively, in the consumer and automobile finance industries. The Company believes that hiring and retaining experienced management personnel, particularly at the branch and supervisory levels, is essential for the Company to accomplish its growth objectives. The Company believes it attracts and retains experienced management personnel by providing competitive compensation, significant autonomy in the Company's decentralized operational structure and equity participation. - Focus on Smaller Markets. The Company generally targets smaller markets with populations of less than 150,000. The Company believes that these markets tend to be less competitive than larger markets and that dealers in such markets are more relationship oriented than in larger markets. Management believes the Company gains a competitive advantage by opening branch offices headed by experienced branch managers who typically have established relationships with local dealers and extensive knowledge of the local market. The Company considers the availability of experienced branch managers with knowledge of the local markets to be the most important factor in selecting additional branch office locations. - Service to Dealers. The Company helps to expand its dealers' customer bases by providing financing to consumers who otherwise might not be able to obtain credit. The Company further assists dealers by promptly responding to credit applications, by providing a consistent source of financing and by typically paying dealers within 24 hours after receiving all required documentation. As of March 31, 1996, the Company had active relationships with 385 dealers in eight southeastern states, and no single dealer accounted for more than 3.1% of the Total Portfolio. - Management Information System. The Company utilizes an on-line, real-time data processing system to process its installment contract transactions, to assist in compliance with its credit policies and certain applicable laws and regulations and to monitor its decentralized branch office network. This system has been customized to meet the Company's processing, compliance and reporting requirements. The executive, operations and branch offices have immediate access to data from the management information system. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company........................ 1,500,000 shares Common Stock offered by the Selling Stockholders........... 386,640 shares Common Stock to be outstanding after the Offering............. 4,964,289 shares(1) Use of proceeds.................. To repay subordinated indebtedness of $8.5 million and to temporarily reduce the outstanding balance under the Company's Credit Facility (as defined in "Use of Proceeds") (approximately $1.4 million). See "Use of Proceeds" and "Certain Transactions." Nasdaq National Market symbol.... FENT </TABLE> - ------------------------- (1) Excludes 1,232,334 shares of Common Stock which may be issued under the Company's 1992 Employee Stock Option Plan, as Amended and Restated, 1995 Nonqualified Director Stock Option Plan and 1995 Employee Stock Purchase Plan, of which 512,947 shares are issuable upon the exercise of stock options granted under the employee stock option plan outstanding as of March 31, 1996. See "Management." SUMMARY FINANCIAL AND OPERATING DATA <TABLE> <CAPTION> THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ----------------------------- -------------------- 1993 1994 1995 1995 1996 ------- ------- ------- ------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> STATEMENT OF INCOME DATA: Automobile portfolio finance charges(1).............. $ 3,002 $ 5,082 $ 9,634 $ 2,156 $ 3,256 Interest from timeshare receivables(1)............... 752 123 11 6 -- ------- ------- ------- ------- --------- Finance charges and interest......................... 3,754 5,205 9,645 2,162 3,256 Interest expense..................................... 1,201 1,576 4,039 871 1,358 ------- ------- ------- ------- --------- Net interest income.................................. 2,553 3,629 5,606 1,291 1,898 Provision for credit losses.......................... -- -- -- -- 400 Other income: Servicing income................................... 227 1,323 3,052 478 1,126 Insurance commissions.............................. 534 550 1,342 275 651 Fees and other income.............................. 169 257 606 96 358 Gain on sale of installment contracts.............. -- -- -- -- 409 ------- ------- ------- ------- --------- Total other income............................... 930 2,130 5,000 849 2,544 Total operating expenses............................. 2,421 5,095 8,172 1,635 2,953 Income taxes(2)...................................... 30 3 60 15 427 Income tax effect of S Corporation termination(2).... -- -- -- -- (267) ------- ------- ------- ------- --------- Net income........................................... $ 1,032 $ 661 $ 2,374 $ 490 $ 929 ======= ======= ======= ======= ========= Per share data: Pro forma net income per share(3).................. $ 0.46 Supplemental pro forma net income per share(4)..... 0.43 0.21 Weighted average shares outstanding (in thousands): Pro forma(3)..................................... 3,245 Supplemental pro forma(4)........................ 5,131 5,397 PORTFOLIO DATA: Total Portfolio...................................... $19,399 $39,724 $80,261 $49,035 $ 101,519 Average Total Portfolio.............................. 12,204 28,553 59,374 44,041 89,235 Average Owned Portfolio.............................. 11,560 19,997 40,153 34,700 57,323 Average indebtedness (5)............................. 18,252 18,480 34,917 30,459 49,877 Number of installment contracts purchased............ 2,685 4,935 10,021 2,152 4,390 Installment contracts purchased...................... $19,248 $35,137 $70,184 $14,341 $ 32,433 OPERATING DATA(6): Owned Portfolio yield(7)............................. 25.97% 25.41% 23.99% 25.20% 22.85% Cost of borrowed funds(5)............................ 6.58 8.53 11.57 11.60 10.95 Net interest spread.................................. 19.39 16.88 12.42 13.60 11.90 Net interest margin(8)............................... 19.98 18.10 13.96 15.09 13.32 Allowance for credit losses as a percentage of Owned Portfolio.......................................... 6.86 7.59 8.42 8.20 8.98 Net charge-offs in the Owned Portfolio as a percentage of average Owned Portfolio.............. 4.35 6.04 7.49 6.90 8.05 Net charge-offs in the Total Portfolio as a percentage of average Total Portfolio.............. 4.12 5.94 6.46 6.12 7.16 Operating expenses as a percentage of average Total Portfolio.......................................... 19.84 17.84 13.76 15.06 13.31 Number of branch offices............................. 8 17 25 19 28 Number of dealers.................................... 187 333 722 414 834 </TABLE> <TABLE> <CAPTION> AT MARCH 31, 1996 -------------------- AS ACTUAL ADJUSTED(9) ------- ----------- <S> <C> <C> BALANCE SHEET DATA: Net principal balance(10)............................ $60,573 $ 60,573 Allowance for credit losses.......................... (5,439) (5,439) Total assets......................................... 60,520 60,881 Senior debt.......................................... 43,034 41,152 Subordinated debt.................................... 8,383 -- Stockholders' equity................................. 3,047 12,852 </TABLE> - ------------------------- (1) In May 1992, the Company changed its business strategy from financing timeshare receivables at resort properties to purchasing and servicing installment contracts originated by automobile dealers for financing the sale of automobiles. (2) For all periods presented except the three month period ended March 31, 1996, the Company was an S Corporation and was not subject to income taxes. See "S Corporation Distributions." Effective January 1, 1996, the Company terminated its Subchapter S status and is subject to federal and state income taxes. Upon termination, and in compliance with SFAS No. 109, the Company recognized a deferred tax benefit of $267,000. (3) Pro forma net income per share represents net income as adjusted for the pro forma provision for income taxes as if the Company had been subject to income for the year ended December 31, 1995 divided by pro forma weighted average shares outstanding. The calculation of pro forma weighted average shares outstanding is based upon the Company's actual weighted average shares and common share equivalents outstanding for the year ended December 31, 1995. See Note M to the Financial Statements. (4) Supplemental pro forma net income per share represents net income, increased by the after-tax interest savings resulting from the repayment of debt as described under "Use of Proceeds," divided by supplemental pro forma weighted average shares outstanding. The calculation of supplemental pro forma weighted average shares outstanding is based upon the number of shares used in the calculation of pro forma earnings per share plus the number of shares to be sold by the Company (at a public offering price of $7.50 per share, less the underwriting discount) and the number of shares issued upon the exercise of warrants to fund the repayment of debt as described under "Use of Proceeds" and to pay estimated offering expenses of $500,000. See Note M to the Financial Statements. (5) Average indebtedness represents the average dollar balance of borrowings outstanding under the Credit Facility and subordinated notes throughout the periods presented. Cost of borrowed funds represents interest expense as a percentage of average indebtedness. Averages were computed using the beginning and ending balances for each month during the periods presented. (6) Ratios for the three months ended March 31, 1995 and 1996 are annualized, which may not necessarily represent comparable data for a full twelve-month period. (7) Represents automobile portfolio finance charges as a percentage of the average Owned Portfolio. (8) Represents net interest income as a percentage of the average Owned Portfolio. Interest expense was allocated to the Owned Portfolio based on the ratio of the average Owned Portfolio to the average total finance receivables (consisting of both the Owned Portfolio and timeshare receivables). (9) Adjusted to reflect the sale by the Company of 1,500,000 shares of Common Stock offered hereby at an assumed initial public offering price of $7.50 per share and application of the estimated net proceeds therefrom. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001004990_ncs_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001004990_ncs_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements appearing elsewhere in this Prospectus. See "Risk Factors" for a discussion of certain factors to be considered by prospective investors. THE COMPANY NCS HealthCare, Inc. ("NCS" or the "Company") is a leading independent provider of pharmacy services to long-term care institutions including skilled nursing facilities, assisted living facilities and other institutional health care settings. The Company purchases and dispenses prescription and non-prescription pharmaceuticals and provides client facilities with related management services, automated medical recordkeeping, drug therapy evaluation and regulatory assistance. The Company also provides a broad array of ancillary health care services to complement its core pharmacy services, including infusion therapy, physical, speech and occupational therapies and nutrition management. NCS currently provides pharmacy services to approximately 81,000 residents at over 975 facilities located in Ohio, Pennsylvania, Indiana, Michigan, Illinois, New Hampshire, Maine, New Jersey, Oregon, Washington and Oklahoma. Based on data from industry sources, the U.S. market for pharmacy services in long-term care facilities exceeded $3.5 billion in 1994. The Company believes that several factors are driving market growth, including the aging of the U.S. population, the increasing number of patients receiving care in non-hospital settings such as long-term care institutions and the increasing acuity levels of patients receiving care in long-term care institutions. The institutional pharmacy services market is highly fragmented and consolidating. Prior to the 1970s, retail pharmacies fulfilled the pharmacy needs of most long-term care institutions. Today, long-term care institutions are typically served by one of three types of providers: retail pharmacies, long-term care facility operators with captive pharmacy companies and independent pharmacy companies, like NCS. The Company believes that retail pharmacies and, to a lesser extent, small independent pharmacy companies, generally lack the sophistication, scale economies, breadth of services and capital necessary to compete in an increasingly competitive and regulated business environment. As a result, the Company believes that the industry will continue to consolidate at the expense of these providers. NCS's strategy is to capitalize on industry trends and Company expertise to strengthen its position as a leading provider of high quality, integrated pharmacy and related services to institutional clients. The Company intends to implement this strategy by identifying and standardizing "best practices," cross marketing its services across its customer base to generate internal growth, utilizing its proprietary technology to deliver information, providing a broad array of ancillary health care services to complement its core pharmacy services and continuing its aggressive acquisition and development program. Since 1986, NCS has completed 19 acquisitions, and since the Company's initial public offering in February 1996, NCS has completed seven acquisitions, as set forth in the table below: <TABLE> <CAPTION> NAME OF ACQUISITION NUMBER OF BEDS/RESIDENTS SERVICE AREA - ------------------------------- ------------------------ ------------------------------ <S> <C> <C> Care Plus Pharmacy............. 1,700 Central Illinois Uni-Care Health Services....... 9,200 New Hampshire, Maine Family Care Nursing Home Services..................... 1,950 Southern Illinois Advanced Rx Services........... 2,800 New Jersey IPAC Pharmacy.................. 6,250 Oregon and Washington Thrifty Medical Systems........ 6,000 Oklahoma Medical Arts Pharmacy.......... 2,160 Central Michigan ------- Total................ 30,060 ======= </TABLE> As a result of these acquisitions the Company has expanded its geographic presence into seven new states. The cumulative purchase price for these seven acquisitions was $52.4 million, payable in a combination of cash, Class A Common Stock and the assumption of debt. The Company intends to continue to expand through acquisitions. THE OFFERING <TABLE> <S> <C> Class A Common Stock being offered by: The Company......................................... 3,000,000 shares(1) The Selling Stockholders............................ 250,000 shares Class A Common Stock outstanding after the offering............................................ 9,098,690 shares(1)(2) Class B Common Stock outstanding after the offering............................................ 6,445,819 shares(3) Use of proceeds....................................... For working capital and general corporate purposes, including acquisitions, and to repay indebtedness Nasdaq National Market symbol......................... NCSS </TABLE> - --------------- (1) Excludes up to 487,500 shares of Class A Common Stock that may be sold by the Company pursuant to the Underwriters' over-allotment option. See "Underwriting." (2) Based upon the number of shares of Class A Common Stock outstanding as of August 26, 1996. Excludes, as of such date, (i) an aggregate of 103,018 shares issuable upon exercise of options granted under the Company's option plans, and (ii) an aggregate of 651,281 shares issuable upon the conversion of convertible debentures. See "Management -- Executive Compensation" and Note 7 of Notes to Consolidated Financial Statements of the Company. (3) Excludes an aggregate of 164,550 shares of Class B Common Stock issuable upon exercise of outstanding options. Each share of Class B Common Stock is entitled to ten votes per share and is convertible at any time into one share of Class A Common Stock. See "Risk Factors -- Potential Effect of Anti-Takeover Provisions and Certain Provisions of Delaware Law" and "Description of Capital Stock." --------------- Unless otherwise indicated, information in this Prospectus assumes no exercise of the Underwriters' option to purchase from the Company up to 487,500 additional shares of Class A Common Stock to cover over-allotments, if any. SUMMARY CONSOLIDATED FINANCIAL DATA (In thousands, except per share and operating data) <TABLE> <CAPTION> YEAR ENDED JUNE 30, --------------------------------------------------------------- 1996 ----------------------- 1992 1993 1994 1995 ACTUAL PRO FORMA(1) ------- ------- ------- ------- -------- ------------ <S> <C> <C> <C> <C> <C> <C> STATEMENT OF INCOME DATA: Revenues........................... $28,478 $33,620 $48,205 $65,602 $113,281 $177,536 Cost of revenues................... 21,106 24,646 34,288 46,570 82,415 130,845 ------- ------- ------- ------- -------- -------- Gross profit....................... 7,372 8,974 13,917 19,032 30,866 46,691 Selling, general and administrative expenses......................... 5,964 7,037 10,531 14,539 22,236 33,749 Special compensation (2)........... -- -- -- -- 2,811 2,811 ------- ------- ------- ------- -------- -------- Operating income................... 1,408 1,937 3,386 4,493 5,819 10,131 Interest expense, net.............. 59 428 525 1,089 1,611 1,605 ------- ------- ------- ------- -------- -------- Income before income taxes......... 1,349 1,509 2,861 3,404 4,208 8,526 Income tax expense................. 632 696 1,327 1,536 1,852 3,750 ------- ------- ------- ------- -------- -------- Net income......................... $ 717 $ 813 $ 1,534 $ 1,868 $ 2,356 $ 4,776 ======= ======= ======= ======= ======== ======== Net income per share............... $ 0.11 $ 0.13 $ 0.24 $ 0.28 $ 0.26 $ 0.38 ======= ======= ======= ======= ======== ======== Shares used in the computation..... 6,303 6,303 6,424 6,764 8,971 12,695 ======= ======= ======= ======= ======== ======== OPERATING DATA (AT END OF PERIOD): Number of beds serviced............ 18,000 20,000 25,000 37,000 63,000 </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 ----------------------- PRO FORMA AS ACTUAL ADJUSTED(3) -------- ------------ <S> <C> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................................ $ 21,460 $ 90,168 Working capital.......................................................... 48,336 121,658 Total assets............................................................. 110,668 218,510 Long-term debt, excluding current portion................................ 1,961 5,049 Convertible subordinated debentures...................................... 6,549 6,549 Stockholders' equity..................................................... 91,100 192,300 </TABLE> - --------------- (1) Gives effect to acquisitions completed subsequent to June 30, 1995 and to the sale by the Company in February 1996 of 4,476,000 shares of Class A Common Stock and the application of the net proceeds therefrom as if such transactions had occurred as of July 1, 1995. See "Pro Forma Consolidated Financial Data" and Note 8 of Notes to Consolidated Financial Statements of the Company. (2) Represents a one-time, non-recurring charge in connection with the termination of certain compensation and performance incentive arrangements with the prior owners of certain acquired businesses. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (3) Gives effect to acquisitions completed subsequent to June 30, 1996 and to the sale of the 3,000,000 shares of Class A Common Stock offered by the Company hereby (at an assumed public offering price of $32.00 per share) and the application of the estimated net proceeds therefrom as described under "Use of Proceeds." See "Pro Forma Consolidated Financial Data."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001005276_mohegan_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001005276_mohegan_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE INDICATED, CERTAIN CAPITALIZED TERMS USED IN THIS PROSPECTUS HAVE THE MEANINGS ASSIGNED TO THEM IN THE GLOSSARY AND INDEX OF DEFINED TERMS BEGINNING ON PAGE 132 HEREOF. THE MOHEGAN SUN CASINO The Mohegan Tribal Gaming Authority (the "Authority"), an instrumentality of the Mohegan Tribe of Indians of Connecticut (the "Tribe"), is developing a gaming and entertainment complex (the "Mohegan Sun Casino") on an approximately 240-acre site located in southeastern Connecticut (the "Site"). The Authority has engaged Trading Cove Associates ("TCA"), an affiliate of Sun International Hotels Limited ("Sun International"), to manage the development, construction, operation and marketing of the Mohegan Sun Casino. The Mohegan Sun Casino, scheduled to open in the fourth quarter of 1996, will include approximately 150,000 square feet of gaming space and is designed to accommodate approximately 3,000 slot machines and 180 table games. The Mohegan Sun Casino is expected to commence operations with a minimum of 2,500 slot machines and 180 table games, and will feature a 600-seat buffet, four specialty theme restaurants, a coffee shop, a food court, several bars, an entertainment area featuring children's recreational facilities and parking for approximately 7,500 cars. Once completed, the Mohegan Sun Casino and the currently operating Foxwoods Resort & Casino ("Foxwoods"), which is owned and operated by the Mashantucket Pequot Tribe (the "Pequot Tribe"), will be the only two casinos offering slot machines and table games in the northeastern United States that are currently legally authorized outside of Atlantic City, New Jersey. The Site for the Mohegan Sun Casino is located approximately one mile from the interchange of Interstate 395 and Connecticut Route 2A (which is expected to be widened to a four-lane expressway), just outside Montville, Connecticut, and approximately 10 miles west of Foxwoods. As part of its integrated development plan, the Authority is constructing a four-lane access road (with its own exit) from Route 2A, giving patrons of the Mohegan Sun Casino direct access to Interstate 395 and to Interstate 95, the main highway connecting Boston, Providence and New York. The Site, together with all buildings constructed and to be constructed thereon and improvements thereto, including the Mohegan Sun Casino, are and will be owned by the United States in trust for the Tribe. Such real property, and the additional parcel of land adjacent to the Site that was acquired by the Tribe in its own name for expansion of the access road leading to the Mohegan Sun Casino, are and will be leased by the Tribe to the Authority under a long-term land lease. The Mohegan Sun Casino will incorporate an historical northeastern Indian theme which will be conveyed through architectural features and the use of natural design elements such as timber, stone and water. Guests will enter the Mohegan Sun Casino through one of four major entrances, each of which will be distinguished by a separate seasonal theme--winter, spring, summer and fall-- emphasizing the importance of the seasonal changes to tribal life. The Authority believes that the Mohegan Sun Casino's location, ease of access and unique design, together with Sun International's development and gaming expertise, should enable the Mohegan Sun Casino to capture a significant share of the gaming market in the northeastern United States. -3- <PAGE> MARKET The market for the Mohegan Sun Casino will be primarily day-trip customers from New England and New York who reside within 150 miles of the Mohegan Sun Casino. According to market research reports, in 1994 there were approximately 2.6 million adults living within 50 miles of the Site, 10.2 million adults within 100 miles of the Site and 21.8 million adults within 150 miles of the Site. The metropolitan areas of Hartford, New Haven, Springfield, Worcester, Boston and Providence are within one to two hours driving time by interstate highway to the Mohegan Sun Casino. The Authority believes that the success of Foxwoods supports the conclusion that the northeastern United States is an attractive market in which to establish a casino. Foxwoods is currently the largest gaming facility in the United States in terms of the number of total gaming positions and, the Authority believes, is one of the most profitable casinos in the United States. THE MANAGER Partners of TCA have been working with the Tribe since 1992 and assisted the Tribe in obtaining federal recognition, negotiating a gaming compact with the State of Connecticut and obtaining numerous governmental approvals for the Mohegan Sun Casino. TCA's partners and their affiliates have extensive experience in the development, construction, marketing and management of casinos and hotels throughout the world. A wholly-owned subsidiary of Sun International is a Managing Partner of, and owns a 50% interest in, TCA. The remaining partners of TCA are primarily engaged in hotel management and real estate development. The senior management of Sun International has been actively engaged in the gaming and lodging industries for the last 25 years. Prior to establishing Sun International in 1993, Mr. Solomon Kerzner, the Chairman and Chief Executive Officer of Sun International, and his management team were responsible for the development and operation of several world-renowned resorts and casinos including Sun City, The Lost City and The Carousel Casino and Entertainment World (the "Carousel") in South Africa. Sun City, which was developed over a 14-year period starting in 1979, currently covers approximately 620 acres and features four hotels with a total of 1,300 rooms and 55,000 square feet of gaming space with 1,300 slot machines and 40 table games. Sun City caters to approximately 2.0 million tourists annually. The most recent addition to Sun City is The Lost City, a highly themed, $300 million destination resort based upon a legend of a lost African civilization. The Carousel, located 65 miles from Johannesburg, is a 500,000 square foot Victorian-themed entertainment facility featuring 65,000 square feet of gaming space with 1,800 slot machines and 70 table games and caters to over 4.0 million visitors annually. In 1993, Mr. Kerzner established Sun International to acquire from Resorts International, Inc. the Paradise Island businesses, which are located in The Commonwealth of the Bahamas and include the Paradise Island Resort and Casino. After acquiring these businesses, Sun International spent approximately $140 million over a seven-month period redeveloping the property into an ocean-themed destination resort that was relaunched as the Atlantis Resort and Casino ("Atlantis"). Atlantis features 1,147 hotel rooms and 30,000 square feet of gaming space with 800 slot machines and 75 table games. Sun International currently owns interests in and operates nine resort and gaming facilities, including Atlantis, four casinos in France and four hotel properties in the Indian Ocean. On March 1, 1996, Sun International redesignated its two series of Ordinary Shares as one series of Ordinary Shares, which trade on the New York Stock Exchange (the "NYSE") under the symbol "SIHLF." Based upon the closing price of its Ordinary Shares on May 1, 1996, Sun International had an equity market capitalization of approximately $1.24 billion. -4- <PAGE> In connection with the Offering, Sun International purchased $40 million of Subordinated Notes. See "--Investment by Sun International." In addition, subject to certain qualifications and limitations, Sun International has undertaken to cause the Mohegan Sun Casino to be Completed (as defined herein) and, pursuant to the Secured Completion Guarantee, has guaranteed the payment of all project costs owing prior to such completion up to a maximum amount of $50 million. To the extent Sun International advances funds under the Secured Completion Guarantee, the Authority will issue to Sun International additional subordinated notes in a principal amount equal to the funds so advanced. All existing and future indebtedness of the Authority to Sun International is, and will be, subordinated to Sun International's obligations under the Secured Completion Guarantee. See "Material Agreements--Secured Completion Guarantee." THE TRIBE AND THE AUTHORITY The Tribe is a federally-recognized Indian tribe, whose federal recognition became effective May 15, 1994. Although it only recently received federal recognition, the Tribe has lived in a cohesive community since time immemorial in what is today southeastern Connecticut. The Tribe historically has cooperated with the United States and is proud of the fact that members of the Tribe have fought on the side of the United States in every war from the Revolutionary War to Desert Storm. The Tribe believes that this philosophy of cooperation exemplifies its approach to developing the Mohegan Sun Casino. This philosophy of cooperation, rather than confrontation, has enabled the Tribe to create a unique alliance among local, state and federal officials to achieve its goal of building the Mohegan Sun Casino. The Tribe established the Authority, which has perpetual life, with exclusive constitutional power to conduct and regulate its gaming activities. Under the Indian Gaming Regulatory Act of 1988, as amended ("IGRA"), federally-recognized Indian tribes are permitted to conduct casino gaming operations on tribal land, subject to, among other things, the negotiation of a tribal-state compact with the affected state. The Tribe and the State of Connecticut have entered into such a compact, which has been approved by the Secretary of the Interior (the "Mohegan Compact"). The Mohegan Compact and related agreements require that certain payments based on slot machine revenues be made to the State of Connecticut. Such payments, however, are not required to be made if the State of Connecticut legalizes any gaming operation with slot machines or other commercial casino games, other than those conducted by the Tribe or the Pequot Tribe on tribal lands. See "Business and Property-- Competition." SOURCES AND USES OF FUNDS The cost of developing, constructing, equipping and opening the Mohegan Sun Casino is expected to total approximately $312.5 million, which consists of $300 million of project development costs and $12.5 million of initial working capital. The estimated sources and uses of funds for the Mohegan Sun Casino through the scheduled opening date in the fourth quarter of 1996, as revised since the Offering to reflect updated cost estimates, are as follows (in millions): <TABLE> <CAPTION> SOURCES ------- <S> <C> Series A Senior Notes . . . . . . . . . . . . . . . . . $175.0 Equipment Financing (a) . . . . . . . . . . . . . . . . 40.0 Subordinated Notes (b) . . . . . . . . . . . . . . . . 40.0 Secured Completion Guarantee (c) . . . . . . . . . . . 45.0 Sources for Project Costs . . . . . . . . . . . . . . . $300.0 -5- <PAGE> Working Capital Financing (d) . . . . . . . . . . . . . 12.5 Total Sources. . . . . . . . . . . . . . . . . . . $312.5 ------ ------ USES (E) -------- Acquisition of the Site. . . . . . . . . . . . . . . . $29.7 Construction Costs . . . . . . . . . . . . . . . . . . 176.0 Furniture, Fixtures and Equipment . . . . . . . . . . . 18.6 Gaming Equipment . . . . . . . . . . . . . . . . . . . 28.1 Capitalized Interest (f) . . . . . . . . . . . . . . . 18.8 Pre-Opening Expenses . . . . . . . . . . . . . . . . . 18.5 Organizational and Financing Fees and Expenses . . . . 10.3 Contingency (g) . . . . . . . . . . . . . . . . . . . . -- Total Project Costs . . . . . . . . . . . . . . . . . . $300.0 ------ ------ Initial Working Capital . . . . . . . . . . . . . . . . 12.5 Total Uses . . . . . . . . . . . . . . . . . . . . $312.5 ------ ------ </TABLE> - -------------- (a) The Authority has entered into an agreement that provides for up to $40 million of equipment financing (the "Equipment Financing") representing financing for approximately 2,500 slot machines and certain other equipment. The Mohegan Sun Casino will be designed to accommodate an additional 500 slot machines, which the Indenture permits to be financed through Additional Lease Financing (as defined in the Indenture). (b) Concurrently with the closing of the Offering, the Subordinated Notes were purchased by Sun International for $38.3 million in cash and the exchange of $1.7 million of outstanding indebtedness of the Authority. (c) Sun International has provided a $50 million secured completion guarantee (the "Secured Completion Guarantee") to fund any cost overruns. The obligations of Sun International under the Secured Completion Guarantee are secured by an irrevocable letter of credit in the amount of $15 million and a pledge of 1,500,000 Ordinary Shares of Sun International. Because the costs of constructing, equipping and opening the Mohegan Sun Casino are expected to exceed the net proceeds of the Offering and the sale of the Subordinated Notes and the $40 million of Equipment Financing available to the Authority, the Authority currently anticipates that approximately $45 million will be drawn under the Secured Completion Guarantee. The Secured Completion Guarantee is subject, however, to a number of important qualifications, exceptions and limitations. See "Risk Factors--Limitations Under the Secured Completion Guarantee." (d) The Authority has entered into an agreement with a third party lender for a $12.5 million senior working capital line of credit for the Mohegan Sun Casino (the "Working Capital Financing"). The Indenture permits the Working Capital Financing to be secured by the Note Collateral on a PARI PASSU basis with the Senior Notes. -6- <PAGE> (e) The Authority believes that the construction budget for the Mohegan Sun Casino, as revised since the Offering to reflect updated cost estimates, changes to the project and unanticipated site conditions (the "Construction Budget"), is reasonable. The Authority has entered into a guaranteed maximum price construction contract for the construction of the Mohegan Sun Casino for a price not in excess of the costs set forth in the Construction Budget. Given the risks inherent in the construction process, however, actual construction costs may be significantly higher. See "Risk Factors-- Potential Inability to Commence Operations as Scheduled." (f) Net of interest income anticipated to be earned on the funds in the Escrow Account (as defined herein). (g) Due to the availability of funds under the Secured Completion Guarantee, no specific funds have been allocated herein as contingency. DEVELOPMENT AND CONSTRUCTION The Authority and TCA have developed a master plan for the Site that integrates all major aspects of gaming and entertainment design. The master plan places particular emphasis on creating direct highway access, providing convenient parking, designing an attractively themed facility and developing a variety of non-gaming entertainment amenities. Morse Diesel International ("Morse Diesel") is serving as general contractor for the Mohegan Sun Casino and the Authority has entered into a guaranteed maximum price contract with Morse Diesel for the construction of the Mohegan Sun Casino. Sun International, which has substantial development experience, is overseeing the development of the Mohegan Sun Casino. Construction of the Mohegan Sun Casino was commenced after the closing of the Offering, at which time the Site was purchased and conveyed to the United States in trust for the Tribe and leased to the Authority. See "Business and Property--Design and Construction." REGULATORY APPROVALS A number of federal, state and tribal governmental licenses and approvals are required to open and operate the Mohegan Sun Casino. Prior to consummation of the Offering, the Tribe's management agreement with TCA (the "Management Agreement") was approved by the Chairman of the National Indian Gaming Commission (the "NIGC") and the documentation related to the Senior Notes was approved by the Bureau of Indian Affairs of the Department of the Interior (the "BIA"). No further approvals from the NIGC are required with respect to the construction, financing, management and operations of the Mohegan Sun Casino; however, the NIGC may have the authority, under certain circumstances, to require modifications of the Management Agreement or to void the Management Agreement if it is not being implemented in accordance with the conditions specified upon approval or if TCA or the Authority fails to comply with applicable laws and regulations. See "Risk Factors--Highly Regulated Industry." Prior to opening the Mohegan Sun Casino, each of the partners of TCA and certain employees of the Mohegan Sun Casino must be licensed by relevant tribal and state authorities. Each of the partners of TCA has applied for and received temporary gaming licenses from the Commissioner of Revenue Services of the State of Connecticut. See "Risk Factors--Transkei Investigation." As each employee who is required to be licensed is hired, the Authority or TCA will cause such employee to apply for all required licenses. A number of federal and state approvals are required to construct the access roads to the Mohegan Sun Casino. The Department of Transportation of the State of Connecticut ("DOT") or the Authority has obtained all requisite permits and approvals for the construction of the access road from Route 2A. -7- <PAGE> The Authority and TCA believe that they will be able to acquire all other necessary licenses, permits and approvals in order to construct, open and operate the Mohegan Sun Casino. However, no assurances can be given that any or all of the licenses, permits and/or approvals described above will be issued or that any or all of such licenses, permits and/or approvals will be issued without certain conditions or restrictions that could adversely affect the construction and operation of the Mohegan Sun Casino or the development of the adjacent roadways. The failure to obtain any of these licenses, permits or approvals in a timely manner may delay, restrict or prevent the Mohegan Sun Casino from opening as contemplated herein. -8- <PAGE> THE EXCHANGE OFFER Registration Rights Agreement. . . To finance the development, construction, equipping and opening of the Mohegan Sun Casino, on September 29, 1995 the Authority sold the Series A Senior Notes to Bear, Stearns & Co. Inc. and Donaldson, Lufkin & Jenrette Securities Corporation, as initial purchasers (the "Initial Purchasers"), for resale to qualified institutional buyers and/or to certain institutional accredited investors within the meaning of Rule 501 under the Securities Act. In connection therewith, the Authority and the Initial Purchasers entered into a Registration Rights Agreement dated as of September 29, 1995 (the "Registration Rights Agreement"), which grants the holders of the Series A Senior Notes certain exchange and registration rights. The Exchange Offer made hereby is intended to satisfy such exchange and registration rights. Each holder who tenders Series A Senior Notes and receives Series B Senior Notes in exchange therefor pursuant to the Exchange Offer shall cease to have any further exchange or registration rights under the Registration Rights Agreement. The Registration Rights Agreement provides that the Authority may be required, under certain circumstances specified therein, in lieu of or in addition to the foregoing, to file with the Commission (and use its best efforts to cause to become effective) a shelf registration statement with respect to the Senior Notes. Holders of Series A Senior Notes, if any, who are not permitted, by law or any policy of the Commission, to participate in the Exchange Offer and who satisfy certain other conditions will be eligible to sell their Series A Senior Notes pursuant to a resale prospectus when and if filed by the Authority as part of an amendment to the Registration Statement of which this Prospectus is a part. See "The Exchange Offer--Registration Rights Agreement," "--Consequences of Failure to Exchange" and "--Resales of the Series B Senior Notes." Liquidated Damages . . . . . . . . The Registration Rights Agreement obligates the Authority to pay liquidated damages to the holders of Senior Notes under certain circumstances if the Authority fails to comply with the registration requirements thereof. Pursuant to the Registration Rights Agreement, the Authority agreed to file a registration statement under the Securities Act to effect the Exchange Offer no later than 30 days after consummation of the Offering. As a result of the Authority's failure to file the Registration Statement of which this Prospectus is a part within such 30-day period and because such Registration Statement was not declared effective by the Commission on or before the Effectiveness Target Date (as defined in the Registration Rights Agreement), in connection with the May 15, 1996, interest payment in respect of the Senior Notes, the -9- <PAGE> Authority paid to the holders of Senior Notes an aggregate of $95,000 (which equals approximately $0.54 per $1,000 principal amount of Senior Notes) in liquidated damages. As of June 5, 1996, the Authority had accrued additional liquidated damages in the amount of $26,250. See "--Interest Payment Dates," "The Exchange Offer-- Registration Rights Agreement." The Exchange Offer . . . . . . . . The Authority is offering to exchange $175 million aggregate principal amount of Series B Senior Notes for an equal principal amount of Series A Senior Notes. The Authority will issue the Series B Senior Notes on the earliest practicable date following the Expiration Date (as defined herein). Expiration Date. . . . . . . . . . The Exchange Offer will terminate at 5:00 p.m., New York City time, on July 12, 1996, unless extended by the Authority in its sole discretion (if and as extended, the "Expiration Date"). Procedures for Tendering Series A Senior Notes. . . . . . . Each holder of Series A Senior Notes wishing to accept the Exchange Offer must complete, sign and date the accompanying Letter of Transmittal in accordance with the instructions contained herein and therein, and mail or otherwise deliver such Letter of Transmittal together with the Series A Senior Notes and any other required documentation to the Exchange Agent (as defined herein) at the address set forth herein. By executing the Letter of Transmittal, a holder will make certain representations to the Authority. See "The Exchange Offer-Registration Rights Agreement" and "-Procedures for Tendering." Special Procedures for Beneficial Owners. . . . . . . . . Any beneficial owner whose Series A Senior Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact such registered holder promptly and instruct such registered holder to tender on such beneficial owner's behalf. A form of Instruction to Registered Holder from Beneficial Owner is enclosed with this Prospectus for the convenience of such beneficial owners. See "The Exchange Offer-- Guaranteed Delivery Procedures." Withdrawal Rights. . . . . . . . . Tenders may be withdrawn at any time prior to the Expiration Date. Acceptance of Series A Senior Notes and Delivery of Series B Senior Notes . . . . . . The Authority will accept for exchange any and all Series A Senior Notes that are properly tendered in the Exchange Offer, and not withdrawn, prior to the Expiration Date. The Series B -10- <PAGE> Senior Notes issued pursuant to the Exchange Offer will be delivered on the earliest practicable date following the Expiration Date. See "The Exchange Offer--Terms of the Exchange Offer." Exchange Agent . . . . . . . . . . First Fidelity Bank, n/k/a First Union Bank of Connecticut, is serving as exchange agent (the "Exchange Agent") in connection with the Exchange Offer. Federal Income Tax Considerations . . . . . . . . The exchange of Series A Senior Notes for Series B Senior Notes pursuant to the Exchange Offer should not be a taxable exchange for federal income tax purposes. See "Material Federal Income Tax Considerations." SERIES B SENIOR NOTES Securities Offered . . . . . . . . $175,000,000 in aggregate principal amount of Series B Senior Secured Notes due 2002. Maturity . . . . . . . . . . . . . November 15, 2002. Fixed Interest . . . . . . . . . . 13 1/2% per annum, payable semi-annually in arrears. Interest Payment Dates . . . . . . May 15 and November 15, commencing May 15, 1996. Cash Flow Participation Interest . . . . . . . . . . . . . Cash Flow Participation Interest (as defined herein) is payable on the Senior Notes, on November 15 and May 15 of each year, in an aggregate amount equal to 5.0% of the Authority's Cash Flow (as defined herein) for the six-month period ending on March 31 and September 30 (each, a "Semi-annual Period") most recently completed prior to such interest payment date, up to a limit, calculated on a cumulative basis with respect to each two consecutive Semi-annual Periods ending on September 30, of $250 million of the Authority's Cash Flow; provided that no Cash Flow Participation Interest shall be payable with respect to any period prior to the earlier of the first day the Mohegan Sun Casino commences operations and October 31, 1996. Payment of all or a portion of any installment of Cash Flow Participation Interest may be deferred if (a) the payment of such portion of Cash Flow Participation Interest will cause the Authority's Fixed Charge Coverage Ratio (as defined herein) for the four consecutive fiscal quarters last completed prior to such interest payment date to be less than 2.0:1 on a pro forma basis after giving effect to the assumed payment of such Cash Flow Participation Interest but before giving effect to any interest on the Subordinated Notes which is then not payable in cash and (b) the principal of the Senior Notes corresponding -11- <PAGE> to such Cash Flow Participation Interest has not then matured and become due and payable (at stated maturity, upon acceleration, upon maturity of repurchase obligation or otherwise). The aggregate amount of Cash Flow Participation Interest payable in any Semi-annual Period will be reduced pro rata for reduction in the outstanding principal amount of Senior Notes prior to the close of business on the record date immediately preceding such payment of Cash Flow Participation Interest. The payment of Cash Flow Participation Interest is subject to certain restrictions set forth herein. See "Description of Senior Notes--Principal, Maturity and Interest." No Sinking Fund. . . . . . . . . . There will be no mandatory sinking fund payments for the Series B Senior Notes. Mandatory Redemption . . . . . . . None. Optional Redemption. . . . . . . . The Series B Senior Notes will not be redeemable at the option of the Authority prior to November 15, 1999 (except as otherwise required by a Gaming Regulatory Authority (as defined herein)). Thereafter, the Series B Senior Notes will be redeemable, in whole or in part, at the option of the Authority at the redemption prices set forth herein, together with accrued and unpaid interest and liquidated damages, if any, through the redemption date. Security . . . . . . . . . . . . . The Series B Senior Notes will be (and the Series A Senior Notes currently are) secured by the Note Collateral, consisting of, among other things (i) a first priority leasehold mortgage (the "Leasehold Mortgage") on the 25-year ground lease from the Tribe to the Authority with respect to the Site (the "Lease"), (ii) a first priority security interest in all of the Authority's furniture, trade fixtures and equipment, accounts receivable, general intangibles, inventory and other personal property (other than personal property permitted to be financed and secured, as described elsewhere herein, or personal property that is not permitted by applicable law to secure the Senior Notes), (iii) a first priority security interest in the proceeds of the Series A Senior Notes which will remain deposited in an escrow account until such proceeds have been disbursed (the "Escrow Account"), (iv) a first priority security interest in all funds at any time on deposit in the Replacement Reserve Account, the Cash Maintenance Account and the Interest and Excess Cash Flow Account (as each is defined herein) and (v) an assignment of material construction contracts pursuant to which the Mohegan Sun Casino is to be constructed. In addition, all cash generated by the Mohegan Sun Casino will be deposited into an account controlled by the Trustee for the benefit of the holders of the Senior Notes (the "Trustee") pending distribution in accordance with the terms of -12- <PAGE> the Indenture for the Senior Notes (the "Indenture"). The payment of any management fee to TCA and distributions to the Tribe (other than a minimum payment of $50,000 per month) will be subordinate to the payment of all interest and principal then due on the Senior Notes. The Leasehold Mortgage excludes any interest in the fee title to the Site, the improvements constructed or to be constructed thereon and any rights appurtenant to the fee title. Upon any foreclosure of the Leasehold Mortgage, the Trustee would succeed to the rights of the Authority under the Lease; however, restrictions under IGRA prohibit the use of the Mohegan Sun Casino as a gaming facility by any person other than the Tribe or an instrumentality of the Tribe, such as the Authority. Certain other limitations on the enforcement of remedies may also make less effective the rights of the holders of the Senior Notes in the event of a default thereunder. See "Risk Factors--Potential Inability to Realize on Note Collateral" and "Material Agreements--Leasehold Mortgage Deed." The Authority may require the Trustee to release portions of the Site from the lien of the Leasehold Mortgage in order to finance or develop amenities and other non-gaming facilities on the Site. Ranking. . . . . . . . . . . . . . The Series B Senior Notes will be senior obligations of the Authority and will rank PARI PASSU in right of payment with other senior indebtedness that the Authority is permitted to incur under the terms of the Indenture, including Series A Senior Notes not tendered in the Exchange Offer. The Indenture prohibits the Authority from incurring any such senior indebtedness, other than up to $40 million of capital lease or purchase money obligations, which includes the Equipment Financing, and up to $25 million of Working Capital Financing, which may be secured by the Note Collateral on a PARI PASSU basis with the Senior Notes. The Senior Notes are and will be senior in right of payment to all subordinated indebtedness of the Authority, including the Subordinated Notes. The Authority may not incur aggregate development costs for the Mohegan Sun Casino in excess of $325 million without further prior approval of the NIGC. Change of Control. . . . . . . . . Upon a Change of Control (as defined herein), subject to certain limitations, each holder of Senior Notes will have the right, at such holder's option, to require the Authority to repurchase such holder's Senior Notes at 101% of the principal amount thereof plus accrued and unpaid interest and liquidated damages, if any, to the date of repurchase. There can be no assurance that sufficient funds will be available at the time a Change of Control occurs to enable the Authority to make all required repurchases. See "Description of Senior -13- <PAGE> Notes--Repurchase at the Option of Holders-- Change of Control." Excess Cash Purchase Offer . . . . Within 120 days after the last day of each fiscal year of the Authority, beginning with the fiscal year ending September 30, 1997, the Authority will be required to make an offer to purchase (an "Excess Cash Purchase Offer") outstanding Senior Notes in an amount equal to the sum of (i) 50% of the Excess Cash Flow (as defined herein) for such fiscal year, (ii) 100% of the amount of the Deferred Subordinated Interest (as defined herein) for such fiscal year and (iii) accrued interest to the purchase date and liquidated damages, if any, on such principal at the purchase prices set forth below (expressed as a percentage of the principal amount). To the extent the Excess Cash Purchase Offer is not accepted by the holders of the Senior Notes, the Authority is required to offer to repurchase outstanding Subordinated Notes in such amount. See "Description of Senior Notes--Repurchase at the Option of Holders-- Excess Cash Purchase Offer." YEAR % ---- ----- 1997 113.5 1998 112.0 1999 110.0 2000 105.0 2001 100.0 Other Offers to Purchase . . . . . Under certain circumstances, the Authority may be required to make an offer to purchase outstanding Senior Notes following certain asset sales. In addition, the Authority may be required to purchase outstanding Senior Notes following certain events of loss. See "Description of Senior Notes--Repurchase at the Option of Holders--Asset Sales" and "-- Event of Loss." Covenants. . . . . . . . . . . . . The Indenture contains restrictions on, among other things, the making of certain payments, the incurrence of liens, incurrence of additional indebtedness, asset sales, the leasing and dedication of leased property, transactions with affiliates, mergers and consolidations or the transfer of all or substantially all of the Authority's assets and business activities. See "Description of Senior Notes--Certain Covenants." Secured Completion Guarantee . . . The completion of the Mohegan Sun Casino and payment of all project costs owing prior to such completion up to an aggregate maximum limitation of $50 million is guaranteed on a secured basis, subject to certain important qualifications and exceptions, by Sun International pursuant to the Secured Completion Guarantee. Sun International's obligation to complete the Mohegan Sun Casino does not take effect until -14- <PAGE> and unless the net proceeds of the Offering, the proceeds from the sale of the Subordinated Notes and the amounts available pursuant to the Equipment Financing and the Working Capital Financing are insufficient to meet the costs of acquiring the Site and developing, constructing and opening the Mohegan Sun Casino. In addition, Sun International's obligations under the Secured Completion Guarantee may be suspended as a result of any force majeure event or other event outside the control of the Authority or Sun International, which makes completion of the Mohegan Sun Casino physically impossible, commercially impracticable or unlawful. The Secured Completion Guarantee terminates on September 30, 1997, or earlier upon the occurrence of certain events. See "Material Agreements--Secured Completion Guarantee." To the extent Sun International advances funds under the Secured Completion Guarantee, the Authority will issue to Sun International additional subordinated notes in a principal amount equal to the funds so advanced. The obligations of Sun International under the Secured Completion Guarantee are secured in part, by an irrevocable letter of credit in the amount of $15 million, the entire amount of which is expected to be drawn to fund the costs of completion. See "--Sources and Uses of Funds." In addition, Sun International Investments Limited, the owner of approximately 55% of Sun International's equity shares ("SIIL"), has secured Sun International's obligations under the Secured Completion Guarantee with a pledge of 1,500,000 Ordinary Shares of Sun International. Based upon the closing price of Sun International's Ordinary Shares on the NYSE on May 1, 1996, such shares had a market value of approximately $64.1 million. The share pledge will be released upon termination of the Secured Completion Guarantee. No assurance can be given that funds available under the Secured Completion Guarantee, including the collateral securing such guarantee, will be sufficient to cover all amounts required to complete the Mohegan Sun Casino. In addition, the value of the pledged shares is subject to fluctuations as market prices change. See "Risk Factors-- Limitations Under the Secured Completion Guarantee." Required Deposits. . . . . . . . . The Indenture requires the Authority to deposit cash on a monthly basis into (i) a Cash Maintenance Account and (ii) an Interest and Excess Cash Flow Account. Up to $6 million per year is required to be deposited into the Cash Maintenance Account up to a maximum deposit of $36 million. The amount equal to the accrued interest on the Senior Notes and the Subordinated Notes and 50% of Excess Cash Flow is required to be deposited into the Interest and Excess Cash Flow -15- <PAGE> Account. The Interest and Excess Cash Flow Account will fund interest payments on the Senior Notes and any Excess Cash Purchase Offers. In addition, pursuant to the Management Agreement the Authority and TCA have agreed to deposit on a monthly basis up to an aggregate of $3 million per year into the Replacement Reserve Account to fund replacement capital expenditures. The cash in each of these accounts will be collateral security for the Senior Notes. See "Risk Factors--Ability to Realize on Note Collateral." INVESTMENT BY SUN INTERNATIONAL As a result of federal Indian gaming law prohibiting any non-Indian entity, including TCA or its partners, from owning an equity interest in an Indian casino, Sun International structured its investment in the Mohegan Sun Casino in the form of a deferred interest subordinated loan. Sun International purchased, concurrently with and as a condition to the closing of the Offering, $40 million in aggregate principal amount of Subordinated Notes. Sun International financed such purchase with borrowings under a bank credit agreement. If, as is currently anticipated, Sun International is required to advance funds under the Secured Completion Guarantee, the Authority will issue to Sun International additional subordinated notes in a principal amount equal to the amount so advanced. Interest on the Subordinated Notes will be deferred and not paid in cash until (i) at least $87.5 million in aggregate principal amount of the Senior Notes have been retired (or offered to be retired pursuant to Excess Cash Purchase Offers) and (ii) the Authority achieves a Fixed Charge Coverage Ratio of at least 2.5:1 for the prior four fiscal quarters. Deferred interest on the Subordinated Notes may be paid only if the current interest may be paid in cash and the Authority achieves a Fixed Charge Coverage Ratio of at least 4.0:1 for the prior four fiscal quarters. Interest may also be paid in connection with any redemption or repurchase described below. The Subordinated Notes may not be accelerated until all obligations under the Senior Notes have been paid in full. Default under the Senior Notes will not of itself constitute a default under the Subordinated Notes. Payment of principal of the Subordinated Notes is subordinate to the prior payment in full of all obligations on all of the Senior Notes, other than (i) certain redemptions required by a Gaming Regulatory Authority if a holder is required to be found suitable and is found unsuitable and (ii) repurchases of Subordinated Notes using funds not accepted by holders of Senior Notes in an Excess Cash Purchase Offer. See "Material Agreements--Note Purchase Agreement."
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+PROSPECTUS SUMMARY The following information is qualified in its entirety by the more detailed information and financial statements appearing elsewhere in this Prospectus. Prospective investors should carefully consider the factors set forth herein under the caption "Risk Factors" and are urged to read this Prospectus in its entirety. Unless otherwise indicated, the information in this Prospectus: (i) assumes and gives effect to the Acquisition (as defined below), except for the historical financial information; and (ii) assumes no exercise of the Underwriters' over-allotment option. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in "Risk Factors" and elsewhere in this Prospectus. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The "Glossary of Technical Terms" appearing elsewhere in this Prospectus contains definitions of certain technical terms used herein. THE COMPANY MindSpring Enterprises, Inc. ("MindSpring" or the "Company") is an Internet access provider that focuses on serving individual subscribers, including individuals with little or no prior on-line experience. MindSpring provides easy-to-use Internet access by offering customized software, reliable network facilities and responsive customer service. MindSpring believes that there is a growing and unsatisfied demand for high quality Internet access for individuals. Trends contributing to this growth in demand include the heightened consumer awareness of the Internet, the increasing number of individuals who have computers with modems and the expanding diversity of information, entertainment and commercial offerings available on the Internet. Management believes that few, if any, of the Company's major competitors have developed a comparable level of service quality and customer support for individual subscribers and that by targeting individual subscribers, rather than attempting to serve all segments of the Internet access market, MindSpring can continue to increase its subscriber base rapidly while maintaining superior quality service. In June 1996, the Company announced its plans to become a nationwide Internet access provider through agreements with PSINet Inc. ("PSINet") to purchase up to 100,000 consumer dial-up subscriber accounts, a customer service facility and certain other related assets, and to obtain access to PSINet's national network of over 200 POPs (the "PSINet Transaction"). Prior to the PSINet Transaction, MindSpring was a regional Internet access provider that offered its services through 40 POPs in the southeastern United States and had grown to approximately 34,500 subscribers from approximately 12,400 subscribers as of December 31, 1995. On a pro forma basis as of June 30, 1996, MindSpring would have had access to approximately 230 POPs (excluding PSINet POPs located in areas served by MindSpring POPs) and would have had approximately 100,500 subscribers, assuming the acquisition of 66,000 subscriber accounts from PSINet. MindSpring's objective is to become a leading national provider of high quality Internet access to individuals by: (i) leveraging the opportunities afforded by the PSINet Transaction and expanding its subscriber base; (ii) maintaining superior service and customer support and providing easy-to-use software and reliable Internet access; (iii) expanding marketing and distribution activities and pursuing strategic alliances with complementary businesses; (iv) focusing on individual subscribers; and (v) engaging in selected acquisitions. Management believes that the PSINet Transaction will enhance the Company's ability to achieve its strategic objectives on a cost-effective and accelerated basis and to realize economies of scale. Management believes that the PSINet Transaction will establish MindSpring as a leading Internet access provider with nationwide coverage, create opportunities for the Company to pursue national marketing and strategic alliances and reduce the need for significant up-front capital expenditures to establish Company-owned POPs. The Company intends, however, to maintain the flexibility to expand, open or close its own POPs or make other capital investments as and where subscriber demand or strategic considerations warrant. The Company was incorporated in Georgia in February 1994 and was reincorporated in Delaware in December 1995. The Company's executive offices are located at 1430 West Peachtree, Suite 400, Atlanta, Georgia 30309. The Company's telephone number is (404) 815-0770. RECENT DEVELOPMENTS On June 28, 1996, the Company entered into a Purchase Agreement with PSINet (as amended, the "Purchase Agreement") pursuant to which the Company agreed to acquire up to 100,000 subscriber accounts and other assets from PSINet (the "Acquisition"). The maximum aggregate purchase price for the Acquisition is $21,129,000 (excluding accrued interest and increases in principal amounts under promissory notes issued to PSINet), assuming the acquisition of 100,000 subscriber accounts. The actual aggregate purchase price will depend on the number of acquired subscriber accounts that remain MindSpring subscriber accounts for a specified period. Management currently expects that approximately 66,000 subscriber accounts will actually be purchased. The Company acquired 15,000 of these subscriber accounts for $1,000,000 in cash and a $2,000,000 one-year promissory note on June 28, 1996. The Company acquired substantially all of the remaining subscriber accounts and related assets as of September 1, 1996, at which time the Company issued an additional one-year promissory note in the amount of $9,929,000. The Company will be required to apply a certain percentage of the net proceeds from the Offering to pay amounts due to PSINet in connection with the Acquisition, depending on the amount of the net proceeds of the Offering. In connection with the Acquisition, the Company and PSINet also entered into a Network Services Agreement (as amended, the "Services Agreement"), which will enable MindSpring to offer nationwide Internet access through PSINet's network of over 200 POPs. Pursuant to the Services Agreement, PSINet agreed, among other things, to provide to the Company: (i) Internet connection services which meet reasonable commercial standards, including with respect to access and reliability; and (ii) access to PSINet's network monitoring systems and subscriber log-in and accounting information. On August 6, 1996, the Company and The News and Observer Publishing Company ("N&O") entered into a definitive agreement, which was amended and restated on September 11, 1996, pursuant to which the Company agreed to acquire certain individual dial-up subscriber accounts in North Carolina (currently expected to number between 4,000 and 6,000) in connection with N&O's Nando.net Internet access business (the "Nando.net Transaction"). The Nando.net Transaction was consummated as of September 30, 1996. See "Recent Transactions." THE OFFERING Common Stock offered by the Company.................... 2,250,000 shares Common Stock to be outstanding after the Offering (1)..... 7,475,793 shares Use of proceeds............... Payment of amounts payable in connection with the Acquisition, the Nando.net Transaction and other subscriber purchases; capital expenditures through the end of 1996 and working capital and general corporate purposes, funding of operating deficits and possible additional strategic acquisitions of subscriber accounts and complementary businesses. See "Use of Proceeds" and "Recent Transactions."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0001005730_moneygram_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001005730_moneygram_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a776c24c76100ed9f12464e669c8a60352d4ee6a
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the financial statements, including the related notes thereto, appearing elsewhere in this Prospectus (the "Financial Statements"). Unless otherwise indicated, the information contained in this Prospectus assumes that the U.S. Underwriters' over-allotment option is not exercised. See "Underwriters." Prospective purchasers of the Common Stock offered hereby should carefully consider the factors set forth under "Risk Factors" as well as the other information contained in this Prospectus. THE COMPANY OVERVIEW The Company is a leading non-bank provider of consumer money wire transfer services, with a strong, well-recognized brand-name. The Company accounted for approximately 16% of all consumer money wire transfer transactions worldwide in 1995. The Company offers customers the ability to transfer funds quickly, reliably, conveniently and at attractive prices through its network of agents (each, a "MoneyGram Agent"), consisting of approximately 17,700 locations in 84 countries worldwide as of September 30, 1996. MoneyGram Agents, representing approximately 68% of the Company's revenues for the first nine months of 1996, are subject to long-term contracts ranging in term from three to six years. MoneyGram targets its services to individuals without traditional banking relationships, expatriates who send money to their country of origin, traditional bank customers in need of emergency money transfer services, tourists without local bank accounts and businesses that need rapid and economical money transfer services. The Company also provides cash advance and express bill payment services (including payments on revolving credit, time and personal loans) through many MoneyGram Agent locations in the United States. The number of MoneyGram Agent locations has grown from 11,600 in 1991 to approximately 17,700 as of September 30, 1996. In 1995 and the first nine months of 1996, the Company processed 5.4 million and 4.4 million transactions, respectively, and transferred $1.6 billion and $1.2 billion total face amount of funds, respectively. In 1995, total revenues were $137.1 million, total revenues from transaction fees excluding foreign exchange revenues and investment income ("Transaction Fee Revenues") were $93.8 million, foreign exchange revenues were $42.8 million and operating income was $29.7 million. In the first nine months of 1996, the Company's total revenues, Transaction Fee Revenues, foreign exchange revenues and operating income were $107.0 million, $83.9 million, $22.8 million and $20.6 million, respectively. Substantially all of the Company's transactions originate in the United States. In 1995, 45% of the Company's transactions were between U.S. locations, 44% were from U.S. to Mexico locations and 11% involved one or more international locations other than Mexico. The Company generates substantially all of its foreign exchange revenue on its U.S. to Mexico transactions based on the difference between the cost of Mexican pesos at wholesale rates and the retail exchange rate charged to customers in such transactions. In addition to receive commissions, the Company pays fees to Banco Nacional de Mexico, S.A. ("Banamex"), the Company's primary receive-only MoneyGram Agent in Mexico, in an amount equal to one-half of the total foreign exchange revenues derived from U.S. to Mexico MoneyGram transactions received at a Banamex location. CUSTOMERS AND MARKETS Consumers sending expatriate remittance funds and individuals without bank accounts are the two largest segments of repetitive money transfer customers. The Federal Reserve Board of Governors estimates that there are approximately 23 million households in the United States without traditional banking relationships. Additionally, industry analysts estimate that there are an increasing number of people who remit funds to their respective countries of origin on a regular basis. Consumer money wire transfer services provide customers with a convenient, rapid and secure method of sending money. The Company believes that consumer money wire transfer service providers and their agent networks offer significant advantages over alternative methods of sending money, including those provided by banks and the postal service, such as reliability and security, global accessibility of agents, speed, convenient hours, individualized services and customer flexibility. Non-bank consumer money wire transfer services are provided primarily by two global companies, MoneyGram and Western Union Financial Services, Inc. ("Western Union"), as well as several niche competitors. The Company estimates that in 1995 the industry processed 33 million non-bank consumer money wire transfer transactions worldwide, an increase of 29% over 1994, and representing a compounded annual growth rate of 22% since 1991. In 1995, the Company processed 5.4 million of the 33 million non-bank consumer money wire transfer transactions worldwide, representing approximately 16% of such transactions. Western Union accounted for approximately 81% of all such transactions worldwide in 1995. The Company believes the gross revenues generated from non- bank consumer money wire transfers in 1995 were $800 million on $9 to $10 billion in face amount of transferred funds. The United States currently originates more consumer money wire transfer transactions than any other country in the world. The Company expects that the majority of the future growth in the United States will occur in transactions that terminate in international locations. Money transfers from the United States to Mexico currently represent an important and growing component of the money transfer industry due to the large number of Mexican immigrants remitting money from the United States to Mexico. The Company believes international consumer money transfers will continue to grow through the end of the decade, primarily due to the combination of increased migration and greater consumer awareness. The Company believes that migration dynamics throughout Latin America, the Caribbean, Europe and Asia provide attractive growth potential for consumer money transfer services. Recently, three international companies, The Thomas Cook Group, the Post Office Counters Ltd., a subsidiary of the UK Post Office, and Consorcio Oriental S.A., representing approximately 2,000 new locations in the aggregate, have indicated their intention to serve as MoneyGram Agents. STRATEGY MoneyGram's objectives are to continue to grow as a leading provider of consumer money wire transfer services by offering competitive pricing and superior service and to develop and introduce other financial services. The Company has developed and has been pursuing the following strategy to capitalize on its competitive position in the growing market for consumer money transfer services: . Target Frequent Users of Money Transfer Services. The Company uses selected agent expansion in high-usage markets to ensure convenient access to its services for its target customers. The Company focuses its advertising and promotional campaigns in these high-usage markets to increase brand awareness and generate consumer trial and repeat usage of the MoneyGram service. . Offer Enhanced Value to Customers. The Company offers value-added features to its customers, including a free three-minute long distance phone call with most transactions and a free 10-word message to the recipient of the funds. As part of its marketing strategy, the Company has maintained its prices 20% to 30% below those of Western Union on frequently sent face amounts. . Increase Brand Recognition and Loyalty. The Company's advertising and promotional campaigns increase brand awareness and generate trial and repeat usage of the MoneyGram service. The Company also will continue to offer its MoneySaver card to increase loyalty to the MoneyGram service by providing frequent users a discount on future transactions. . Expand its Agent Network. The Company seeks to develop relationships with potential MoneyGram Agents that offer the optimal combination of location, existing service mix and commitment. The Company provides its agents with a number of support services, including product training, traffic building and cooperative advertising programs, as well as signage and personal computers for certain MoneyGram Agents. . Grow Internationally. The Company is expanding its presence in international markets, the next significant growth area for money transfer services, by focusing on particular corridors. The Company believes that future growth internationally should occur as migration continues and advertising and promotional efforts increase international awareness of the MoneyGram service. The Company will focus on countries with rapid growth rates or inefficient and expensive delivery systems and, when permissible, countries that currently are subject to U.S. trade embargoes. . Penetrate Additional Retail Network and Other Distribution Channels. The Company seeks to maintain a balanced and diversified MoneyGram Agent network. Potential outlets for U.S. network expansions are check cashers, postal and packaging outlets and supermarkets. The Company expects to expand its international MoneyGram Agent network primarily by adding travel agencies, bureau de change operations and banks. . Develop Other Related Payment Products and Services. The Company currently plans to offer complementary products and services through the MoneyGram Agent network, such as money orders and phone cards, and, in the future, may develop other related products, such as prepaid debit cards, secured credit cards and insurance products. The Company believes that by introducing new products it will generate additional revenues, as well as enhance the attractiveness of the MoneyGram service to potential agents and its target customers. BACKGROUND The Business was started in 1988 by American Express Company ("American Express") and has been managed and operated by First Data Corporation ("First Data"), through its wholly owned subsidiary Integrated Payment Systems Inc. ("IPS"). The Company was incorporated in Delaware in January 1996 and was formed to acquire certain assets related to the Business prior to the consummation of the Offering. The sale of Common Stock offered hereby is being made in order to comply with the terms of the consent decree (the "Consent Decree") entered into between First Data and the Federal Trade Commission (the "FTC") in connection with First Data's merger with First Financial Management Corporation ("FFM"), the parent company of Western Union. The Company will not have conducted any business prior to the Offering. The Company's principal executive offices are located at 7401 West Mansfield Avenue, Lakewood, Colorado 80235 and its telephone number is (303) 716-6800. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Selling Stockholder: U.S. offering.................... 11,571,000 shares International offering........... 2,892,750 shares ------------ Total.......................... 14,463,750 shares ------------ ------------ Common Stock to be outstanding 16,625,000 shares after the Offering(1)............. Use of proceeds.................... The Company will not receive any proceeds from the sale by the Selling Stockholder of the Common Stock in the Offering. New York Stock Exchange symbol..... MNE </TABLE> - -------- (1) Excludes 1,200,000 shares of Common Stock reserved for issuance under the Company's 1996 Stock Option Plan (1,175,000 shares) and 1996 Broad-Based Stock Option Plan (25,000 shares). It is anticipated that options to acquire approximately 1,154,825 shares and 7,750 shares of Common Stock will be granted under the 1996 Stock Option Plan and the 1996 Broad-Based Stock Option Plan, respectively, at an exercise price equal to 100% of the initial public offering price of the Common Stock offered hereby effective upon the consummation of the Offering. See "Management--Stock Plans" and "Shares Eligible for Future Sale." RISK FACTORS PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY CERTAIN MATTERS RELATING TO ANY INVESTMENT IN THE COMPANY. See "Risk Factors" on page 14 for a discussion of: Highly Competitive Industry; Competition with First Data; Dependence on Major MoneyGram Agents; Fluctuation of MoneyGram Agent Network; Factors Relating to Independence and Sale of the Company--Reliance on First Data, -- Conflicts of Interest with First Data, --Absence of Arm's-Length Negotiations, - --Agreements between the Company and Western Union Regarding Certain Service Marks and --Loss of Use of American Express Name; Ability to Grow through New Products and Services; New Management Team; Extensive Regulation; Uncertainty as to Certain Tax Matters; Risk of Loss; Liquidity; Fluctuation in Quarterly Operating Results; Foreign Transactions Risks; Financial Statement Presentation; Antitakeover Matters; Absence of Prior Public Trading Market and Determination of Offering Price; Shares Eligible for Future Sale and IPS Intention to Sell All of its Common Stock; and Dilution. SUMMARY FINANCIAL AND OPERATING DATA The following table sets forth summary financial data presented on a carve- out basis for the Transition and are derived from historical financial data of IPS. The financial data include allocations of operating and general and administrative expenses to the Company from IPS. Such allocations do not necessarily reflect the expenses that would have been or will be incurred by the Company operating as a stand-alone entity. Management of the Company believes that costs have been determined and allocated on a reasonable basis and all costs attributable to conducting the Business have been included in the Company's Financial Statements. In the opinion of management, such expenses would not be materially affected by the Company operating as a stand-alone entity. See Note 1 of the Notes to Financial Statements. The summary financial data below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements appearing elsewhere in this Prospectus. The statement of operations data set forth below with respect to the years ended December 31, 1993, 1994 and 1995 and the balance sheet data at December 31, 1994 and 1995 are derived from, and are qualified by reference to, the audited Financial Statements appearing elsewhere in this Prospectus. Balance sheet data as of December 31, 1993 and September 30, 1995 and the statement of operations data for the nine months ended September 30, 1995 have been derived from audited financial statements not included in this Prospectus. The statement of operations data for the years ended December 31, 1991 and 1992 and balance sheet data as of December 31, 1991 and 1992 are derived from unaudited financial statements not included in this Prospectus. Balance sheet data as of September 30, 1996 and statement of operations data for the nine-month period ended September 30, 1996 are derived from, and are qualified by reference to, unaudited interim financial statements appearing elsewhere in this Prospectus. In the opinion of management, such unaudited interim financial statements include all adjustments (consisting only of normal recurring accruals) necessary for a fair and, except as noted below, consistent presentation, in accordance with generally accepted accounting principles, of such information. The financial and operating results for the nine months ended September 30, 1996 are not necessarily indicative of the Company's results for any future interim period or the entire year. <TABLE> <CAPTION> NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, --------------------------------------------- --------------- 1991 1992 1993 1994 1995 1995 1996 -------- -------- ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA AND PERCENTAGES) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues: Fee and other.......... $ 17,735 $ 30,519 $48,815 $71,015 $94,242 $72,934 $84,154 Foreign exchange....... 594 1,280 3,070 20,373 42,826 33,145 22,821 -------- -------- ------- ------- ------- ------- ------- Total revenues....... 18,329 31,799 51,885 91,388 137,068 106,079 106,975 Income (loss) before income taxes (1)...... (16,681) (10,270) (3,196) 19,411 29,656 29,592 20,573 Net income (loss)...... $(11,009) $ (6,778) $(2,077) $12,176 $18,294 $18,254 $12,715 Pro forma net income (loss) per common share (2)............. $ (.66) $ (.41) $ (.12) $ .73 $ 1.10 $ 1.10 $ .76 BALANCE SHEET DATA (AT END OF PERIOD): Assets restricted to settlement of MoneyGram transactions.......... $ 11,338 $ 11,573 $12,827 $20,927 $26,010 $23,167 $26,059 Fixed assets at cost, net of depreciation... 950 1,123 1,275 3,084 6,000 6,392 6,822 Costs of acquiring Agent Contracts, net of amortization....... 3,369 2,864 1,956 3,401 7,979 8,017 14,840 Total assets........... 16,561 16,009 16,502 28,583 41,618 40,814 49,483 Liabilities relating to unsettled MoneyGram transactions.......... 11,338 11,573 12,827 20,927 26,010 23,167 26,059 Total liabilities...... 15,455 14,996 17,358 35,411 40,449 33,686 41,379 Stockholder's equity (deficit)............. 1,106 1,013 (856) (6,828) 1,169 7,128 8,104 OPERATING DATA: Number of MoneyGram Agent locations (at end of period)........ 11.6 13.1 14.1 16.0 17.2 17.0 17.7 Percentage change...... 11% 13% 8% 13% 8%(3) N/A 4%(3) Number of transactions. 656 1,114 2,040 3,285 5,393 3,824 4,386 Percentage change...... 104% 70% 83% 61% 64% N/A 15% </TABLE> - ------- (1) During the first quarter of 1995, the Company received a $2.5 million commission rebate from Banamex. The fourth quarter of 1995 includes $1.3 million of discretionary promotion-related payments to MoneyGram Agents. In addition, in order to comply with the Consent Decree, the Company spent approximately $6 million more than it otherwise would have for advertising in the fourth quarter of 1995. The Company incurred costs and expenses related to obtaining consents from MoneyGram Agents to permit the assignment of their Agent Contracts to the Company of $375,000 in the fourth quarter of 1995 and $500,000 in the nine-month period ended September 30, 1996. Prior to 1996, the Company recorded advertising and promotion expenses based on transaction volumes for interim reporting purposes. Beginning in 1996, the Company recorded advertising and promotion expenses based on actual expenses incurred during the interim period. If the Company had continued to record advertising and promotion expenses based on transaction volumes, advertising and promotion expenses would have been approximately $100,000 less for the first nine months of 1996. (2) Gives effect to the Company's issuance to IPS of 16,624,900 shares of Common Stock prior to the consummation of the Offering. (3) During the last three months of 1995 and the first three months of 1996, three MoneyGram Agents representing 1,607 locations chose not to renew their Agent Contracts. In addition, the Company's efforts to add new MoneyGram Agents were hampered because, during this period, the Company's sales personnel spent the majority of their time obtaining consents for the assignment of Agent Contracts rather than focusing their efforts on expanding the MoneyGram Agent base.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001005858_west_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001005858_west_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..23ec648155429b72621aa7cf499c72db5693163a
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information included elsewhere herein. Except as otherwise indicated, all information herein (a) gives effect to (i) the Company's issuance of 5,400,000 shares of Common Stock in May 1996 in an initial public offering (the "Public Offering"), (ii) the Company's acquisition of 172 video specialty stores in May 1996 (collectively, the "Recent Acquisitions") and (iii) a 0.340-for-1 reverse split of the Common Stock effective as of May 14, 1996 and (b) assumes exercise of an outstanding warrant (the "Warrant") to acquire 192,308 shares of Common Stock. Unless the context otherwise requires, references to "West Coast" or the "Company" include West Coast Entertainment Corporation and its subsidiaries. References to "system-wide revenues" include the total of Company-owned store revenues and franchised store revenues (as distinct from franchise fees paid by the franchisees to the Company as franchisor). THE COMPANY Immediately following consummation of the Recent Acquisitions in May 1996, West Coast owned and operated 200 video specialty stores and franchised 303 additional stores. The Company believes that it is among the largest video specialty retailers in the United States in terms of pro forma system-wide revenues, number of franchised stores and total franchised store revenues. The Company competes directly against major regional and national video rental stores in most of its markets and believes it is a leading video rental operator, in terms of number of stores, in all of the major markets in which Company-owned stores operate. In addition, the Company believes it is one of only two domestic video specialty franchisors that has existing franchised stores outside North America. System-wide, approximately 60% of the Company's stores are currently operated under the West Coast Video(R) name and the remainder are operated under such names as Videosmith(R) and Palmer Video(TM). The Company intends to apply the West Coast Video(R) name and its registered trademark The Movie Buff's Movie Store(R) to all of its stores. For the fiscal year ended January 31, 1996, the Company's pro forma revenues were $82.2 million and pro forma net income was $4.6 million. For the three months ended April 30, 1996, the Company's pro forma revenues were $22.6 million and pro forma net income was $1.5 million. See "Selected Historical and Pro Forma Combined Financial Data." In order to realize the Company's goal of maximizing revenue and profitability, the Company has adopted a business strategy designed to (i) achieve or maintain market dominance in its chosen markets by acquiring, developing or franchising additional stores, (ii) realize cost savings and efficiencies by using proven management operating systems to integrate the stores acquired, developed or franchised, (iii) operate stores designed to reflect specific local demographics and demonstrated customer preferences and (iv) build customer loyalty and promote additional rentals by offering superior customer service through a highly trained sales force having comprehensive product knowledge. The Company's growth strategy is to (i) pursue the acquisition of video specialty stores in this highly fragmented industry, (ii) continue to acquire its own existing and future franchised stores and (iii) selectively develop new video specialty stores. Consistent with this strategy, the Company has obtained and made borrowings under a $60.0 million bank credit facility (the "Credit Facility"), a portion of which is currently available, subject to certain conditions, for general corporate purposes and future acquisition financing. The Company believes it is well-positioned to benefit from consolidation in the industry among the approximately 28,000 video specialty stores in the United States, approximately half of which are owned by operators of one or two stores. In addition, as one of the largest video specialty franchisors in the United States in terms of pro forma system-wide revenues and one of only two domestic-based franchisors with existing franchised stores outside North America, the Company believes it is uniquely positioned to expand through the acquisition of its existing and future West Coast Video(R) franchisees and the continuation of its international and domestic franchising activities. The Company has had preliminary discussions with numerous video rental store owners at various times regarding the potential acquisition of their stores. Management expects that some of these discussions will result in new Acquisitions, although the Company has no agreements or commitments to acquire stores except as described herein. On June 19, 1996, the Company announced that it had reached agreements in principle with the owners of a total of 72 video retail stores, subject to completion of due diligence and other closing conditions and regulatory approvals. The Company has not entered into definitive agreements in regard to the acquisition of any of such stores, and there can be no assurance that it will do so. The Company's stores are located in 24 states and three foreign countries, with its Company-owned stores concentrated in Ohio, Pennsylvania, New Jersey, Massachusetts and New York. The Company's stores are designed and managed to entertain and satisfy a broad range of customers, including movie and interactive electronic game buffs, and carry between 7,000 and 17,000 videocassettes. Most of the Company's stores are superstores with over 4,000 square feet per store, although some are smaller, custom-designed stores, including some which are formatted as urban boutiques containing a wide variety of older titles ("catalog titles"). The Company believes that its ability to customize stores to reflect local market demographics gives it a competitive advantage over chains with limited variation in format. According to entertainment media analyst Paul Kagan Associates, Inc. ("Kagan Associates"), the domestic video rental and sales industry has grown from approximately $3.6 billion in revenues in 1985 to over $14 billion in 1994 and is projected to reach approximately $22 billion in 2005. Kagan Associates estimates the revenues received by movie distributors from international home video at $3.7 billion in 1995. In 1994, according to Kagan Associates, the home video market was the largest single source of revenue to movie distributors, accounting for approximately 48.6% of movie distributors' total domestic revenues and approximately 46.1% of movie distributors' worldwide revenues. The principal executive offices of the Company are located at 9990 Global Road, Philadelphia, Pennsylvania 19115, and its telephone number is (215) 677-1000. RECENT ACQUISITIONS In May 1996, West Coast acquired a total of 172 owned and operated video specialty stores (including 13 stores owned by franchisees of the Company) plus franchisor's rights in regard to 20 additional stores franchised by one of the acquired companies. The aggregate consideration paid (excluding certain fees and contingent consideration relating to newly opened stores) was approximately $76.4 million, consisting of approximately $52.4 million paid in cash and approximately $24.0 million paid in shares of Common Stock (1,843,720 shares valued for this purpose at the initial public offering price of $13.00 per share). In addition, the Company concurrently repaid approximately $7.0 million of outstanding indebtedness (inclusive of accrued interest and prepayment premium). The Company has recorded approximately $67.9 million of the aggregate purchase price of the Recent Acquisitions as goodwill. See "Business -- Recent Acquisitions" and "Unaudited Pro Forma Combined Condensed Financial Statements." THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company................. 5,000,000 shares(1) Common Stock to be outstanding after this offering.......................................... 17,213,152 shares(2) Use of Common Stock being offered................... To constitute all or a portion of the purchase price of future Acquisitions. See "Use of Proceeds." Nasdaq National Market symbol....................... WCEC </TABLE> - --------------- (1) The Company intends to seek the agreement of recipients of shares of Common Stock in Acquisitions to restrictions on their transfer of such shares for periods ranging from six to 18 months or to structure such transactions to provide for issuance of shares on a deferred basis over periods of six to 18 months. (2) Includes 1,843,720 shares of Common Stock issued to certain sellers as part of the purchase price of the Recent Acquisitions and 192,308 shares issuable upon exercise of the Warrant but excludes shares contingently issuable to certain sellers of newly opened stores. See "Business -- Recent Acquisitions." An additional 525,000 shares of Common Stock have been reserved for future issuance under the Company's 1995 Equity Incentive Plan, 1995 Director Stock Option Plan and 1995 Employee Stock Purchase Plan. See "Management -- Director Compensation" and "-- Employee Stock Plans." SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA (IN THOUSANDS, EXCEPT STORE AND PER SHARE DATA) <TABLE> <CAPTION> HISTORICAL PRO FORMA(1) --------------------------------------------------- -------------------------- THREE MONTHS THREE YEAR ENDED ENDED MONTHS JANUARY 31, APRIL 30, YEAR ENDED ENDED ----------------------------- ----------------- JANUARY 31, APRIL 30, 1994 1995 1996 1995 1996 1996 1996 ------ ------ ------- ------ ------ ------------ --------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue............................... $2,520 $6,503 $14,719 $2,675 $4,722 $ 82,175 $22,596 Operating income (loss)............... (44) 385 1,216 222 451 7,995 2,908 Income (loss) before income taxes..... (86) 267 576 185 175 8,442 2,666 Net income (loss)..................... (72) 204 334 135 101 4,632 1,487 Pro forma net income (loss) per share............................... $(0.07)(2) $ 0.12(2) $ 0.06(2) $ 0.03(2) $ 0.02(2) $ 0.38(3) $ 0.12(3) OTHER DATA: Depreciation and amortization(4)...... $ 870 $1,628 $ 2,585 $ 612 $ 623 $ 19,726 $ 4,629 Purchases of videocassette rental inventory........................... 685 1,430 2,002 537 570 18,246 4,697 STORE DATA: Increase (decrease) in same store revenue(5).......................... (6.1)% 14.2% 4.8% 2.3% 3.5% 1.5% 0.5% Company-owned stores at end of period.............................. 14 28 28 28 28 197 200 Franchised stores at end of period.... -- -- 304 308 296 310 303 ------ ------ ------- ------- ------ ------- ------ Total stores at end of period... 14 28 332 336 324 507 503 ====== ====== ======= ======= ====== ======= ====== </TABLE> <TABLE> <CAPTION> PRO HISTORICAL FORMA(1) ---------- --------- APRIL 30, APRIL 30, 1996 1996 ---------- --------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents............................................................. $ 207 $ 1,158 Videocassette rental inventory, net................................................... 1,693 14,317 Total assets.......................................................................... 18,606 104,779 Long-term debt, less current portion.................................................. 7,505 4,361 Total liabilities..................................................................... 17,962 18,494 Stockholders' equity.................................................................. 644 86,285 </TABLE> - --------------- (1) For a discussion of the assumptions and adjustments underlying the unaudited pro forma combined financial data, see "Unaudited Pro Forma Combined Condensed Financial Statements."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0001005967_hmt_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001005967_hmt_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2edb84bdebcc4d5b61c5a3c4cfc6cc910db19b18
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0001005967_hmt_prospectus_summary.txt
@@ -0,0 +1 @@
+SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors," and the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Prospectus. This Prospectus is being used by the Company to offer 4,000,000 shares of Common Stock and $150 million principal amount of the Notes. Neither the closing of the Common Stock Offering nor the closing of the Note Offering is conditioned on the closing of the other offering. This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors." THE COMPANY HMT is an independent supplier of high-performance thin film disks for high-end, high-capacity hard disk drives, which in turn are used in high-end personal computers ("PCs"), network servers and workstations. The disks currently being shipped by the Company are primarily for disk drives with storage capacities ranging from 1.6 to 9 gigabytes (using three to 12 disks), and all have coercivity levels of 1900 Oe or higher. Since March 1994, the Company has focused on addressing the needs of this high-end, high-capacity segment of the disk drive market. HMT believes that its recent operating results reflect its success in meeting these needs and that its future growth and success depend on its ability to continue to develop and market products that enable its customers to produce high-performance disk drives for high-end data storage applications. The Company provides a range of magnetic density points (coercivities), glide heights and disk thicknesses to match the design and performance requirements of each particular customer. The Company currently focuses all of its production capacity on 3 1/2-inch disks, although it is capable of producing disks in other standard form factors. In fiscal 1996, HMT sold its disks to Maxtor Corporation, Western Digital Corporation, Micropolis Corporation, Quantum Corporation, Iomega Corporation and Hewlett-Packard Company. The Company has also recently begun shipping disks to Samsung Electronics Company Limited. Market demand for disks and disk drives is growing rapidly, stimulated by demand for new computers, upgrades to existing computers and the growing use of sophisticated network servers. The combined demand from the PC and server markets has resulted in strong growth in unit shipments of disk drives, which in turn has stimulated the growth of the thin film disk market. According to Trend Focus, the number of thin film disks produced in 1993 was 134 million, was 256 million in 1995 and is projected to reach 416 million in 1997. The worldwide market for thin film disks is estimated to have been $3.3 billion in 1995. The most significant technological challenges facing disk manufacturers today are associated with market demand for increased storage capacity and durability. An effective implementation of thin film technology to meet these challenges must address various performance-related characteristics, including magnetics, glide height, durability and static friction ("stiction"). HMT focuses on providing value added technological solutions that meet the demands of the high-end, high-capacity disk drive market. The Company develops, manufactures and sells technologically advanced products designed to provide improved performance, principally through achieving higher coercivities and lower glide heights. The Company seeks to be a supplier to disk drive manufacturers with a proven record for technological leadership because these customers have the greatest ability to fully exploit the value of technologically superior disks. HMT believes that its internally developed proprietary manufacturing processes and state-of-the-art equipment, to which it has made proprietary modifications, combined with its extensive expertise, currently provide HMT with a technological advantage over competing independent thin film disk manufacturers. Particularly important to the Company's success are its unique tribology approach, its commitment to developing disks for drives utilizing new head technology and its ability to produce high-coercivity disks using non-precious metal alloys. The key elements of HMT's strategy are as follows: establish and maintain leadership in high-end product technology; develop collaborative relationships with leading head manufacturers and disk drive manufacturers; develop advanced manufacturing processes to support volume production; maintain strict quality control of manufacturing process; and expand manufacturing capacity. The Company has recently announced plans to construct a new production facility at its Fremont, California site, in which it plans to install up to 16 additional production scale sputtering lines. The Company has also recently acquired an aluminum substrate manufacturing facility and related equipment located in Eugene, Oregon, and has announced plans to enlarge that facility in order to increase substrate production and to add nickel plating and polishing capability. THE COMMON STOCK OFFERING <TABLE> <S> <C> Common Stock Offered by the Company.......... 4,000,000 shares Common Stock Outstanding after the Offerings.................................. 43,979,178 shares(1) Nasdaq National Market symbol................ HMTT </TABLE> - --------------- (1) Excludes 4,338,517 shares of Common Stock issuable upon the exercise of outstanding options and warrants as of March 31, 1996. Also excludes shares issuable upon conversion of the Notes. See "Capitalization," "Management -- Option Grants in Last Fiscal Year", "Option Exercises Last Fiscal Year" and "-- Employee Benefit Plans," "Certain Relationships and Related Transactions -- Leveraged Recapitalization" and "Description of Capital Stock." THE NOTE OFFERING Securities Offered............ $150,000,000 principal amount of % Convertible Subordinated Notes due 2003 ($172,500,000 principal amount of the Notes if the over-allotment option is exercised in full). Interest Payment Dates........ and commencing , 1996. Maturity...................... , 2003. Conversion.................... Convertible into Common Stock, $0.001 par value, of the Company at any time through maturity, unless previously redeemed or repurchased, at a conversion price of $ per share, subject to adjustment under certain conditions. See "Description of Notes -- Conversion." Optional Redemption........... The Notes are not redeemable at the option of the Company prior to , 1998. At any time on or after such date, the Notes will be redeemable on at least 20 but not more than 60 days' notice, at the option of the Company, in whole or in part at any time, initially at % and thereafter at prices declining to 100% of the principal amount of the Notes at maturity, together with accrued and unpaid interest to the redemption date, provided, that the Company may not redeem the Notes prior to , 1999 unless the closing price of the Common Stock on the principal stock exchange or market on which the Common Stock is then quoted or admitted to trading equals or exceeds 150% of the conversion price for at least 20 trading days within a period of 30 consecutive trading days ending on the fifth trading day prior to the date the notice of redemption is first mailed to the holders of the Notes. See "Description of Notes -- Optional Redemption by the Company." Repurchase at Option of Holders Upon a Designated Event....................... In the event of a Designated Event (as defined), each holder may require the Company to repurchase all or a portion of such holder's Notes at 100% of the principal amount thereof plus accrued and unpaid interest. See "Description of Notes -- Repurchase at Option of Holders Upon a Designated Event." Subordination................. Subordinate to all existing and future Senior Indebtedness (as defined) of the Company. As of March 31, 1996, the Company had outstanding approximately $8.5 million that would have constituted Senior Indebtedness. The Indenture contains no limitations on the incurrence of additional Senior Indebtedness or other indebtedness by the Company. See "Description of Notes -- Subordination." Trading....................... The Notes are expected to trade in the over-the-counter market. USE OF PROCEEDS Prepayment of $47.0 million of Subordinated Notes (as defined), redemption of $59.0 million of Series A Preferred Stock, capital expenditures, working capital and other general corporate purposes. SUMMARY CONSOLIDATED FINANCIAL DATA (In thousands, except per share data and ratios) <TABLE> <CAPTION> YEAR ENDED MARCH 31, --------------------------------------------------- 1992 1993 1994 1995 1996 -------- -------- -------- ------- -------- <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales.............................................. $ 44,076 $ 70,987 $ 64,242 $72,893 $194,401 Gross profit (loss).................................... (8,787) (5,250) (3,406) 5,354 74,598 Operating income (loss)................................ (16,024) (12,474) (11,302) (2,006) 58,674 Net income (loss) available for common stockholders.... $(21,085) $(17,056) $(17,325) $(8,941) $ 45,222 Net income (loss) available for common stockholders per share................................................ $ (0.61) $ (0.49) $ (0.50) $ (0.26) $ 1.28 Shares used in computing per share amounts(1).......... 34,822 34,822 34,822 34,822 35,224 Ratio of earnings to fixed charges(2).................. -- -- -- -- 5.6x </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 --------------------------- ACTUAL AS ADJUSTED(3) -------- -------------- <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Working capital............................................................. $ 45,899 $196,084 Total assets................................................................ 165,786 320,346 Subordinated promissory notes payable to stockholders....................... 47,000 -- % Convertible Subordinated Notes due 2003................................. -- 150,000 Mandatorily Redeemable Series A Preferred Stock............................. 60,157 -- Total stockholders' equity.................................................. 19,524 131,241 </TABLE> - --------------- (1) See Note 1 of Notes to Financial Statements for an explanation of the basis used to calculate net income per share. (2) The ratio of earnings to fixed charges is computed by dividing (x) the sum of income before provision for income taxes, extraordinary items and fixed charges, less capitalized interest, by (y) fixed charges. Fixed charges consist of interest on all indebtedness, amortization of debt expense and discount or premium relating to indebtedness, including a one-time charge related to debt extinguishment of $1.1 million. Earnings were inadequate to cover fixed charges for all periods prior to fiscal 1996. The deficiencies of earnings were approximately $22.0 million, $17.6 million, $17.4 million and $8.9 million for fiscal 1992, 1993, 1994 and 1995, respectively. (3) Adjusted to reflect (i) the sale by the Company of the 4,000,000 shares of Common Stock offered hereby at an assumed public offering price of $26.00 per share, less underwriting discounts and commissions and estimated offering expenses payable by the Company, (ii) the sale of $150.0 million of the Notes, less underwriting discounts and commissions and estimated offering expenses payable by the Company, (iii) the application of the net proceeds from the Offerings and (iv) the sale of 1,260,000 shares of Common Stock at $10.00 per share on April 12, 1996 pursuant to the over-allotment option of the underwriters for the Company's initial public offering, resulting in net proceeds of approximately $11.7 million (as if the sale occurred on March 31, 1996). See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001006835_siebel_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001006835_siebel_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..234dfea942d6d5e8399ebdc43d052dc2a4a0fbe4
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and the Financial Statements and Notes thereto, appearing elsewhere in this Prospectus. Certain of the statements contained in this Prospectus are forward-looking statements. The Company's actual results could differ materially from those in such forward-looking statements. See "Risk Factors." THE COMPANY Siebel Systems, Inc. ("Siebel," "Siebel Systems" or the "Company") is an industry leading provider of enterprise-class sales and marketing information software systems. The Company designs, develops, markets, and supports Siebel Sales Enterprise, a leading Internet-enabled, object oriented client/server application software product family designed to meet the sales and marketing information system requirements of even the largest multi-national organizations. In today's increasingly competitive global markets, businesses must continuously improve their operations. Having spent considerable effort and resources in previous years automating finance, manufacturing, distribution, human resources management and general office operations, many businesses are now looking to apply the leverage of information technology to their sales and marketing processes. Unlike previous automation projects which have focused on decreasing expenses, sales and marketing information systems focus primarily on increasing revenues. The Siebel Sales Enterprise is comprised of a broad range of advanced client/server application products designed to allow corporations to deploy comprehensive customer information systems, product information systems, competitive information systems, and decision support systems on a global basis. The Company's products provide support for multiple languages and multiple currencies with support for a number of frequently interdependent distribution channels, including direct field sales, telesales, telemarketing, distribution, retail, and Internet-based selling. The Siebel Sales Enterprise is built upon a modern technology foundation including intranet and Internet enablement, client/server, object oriented programming, 32-bit processing, OLE 2 automation, relational database support for Oracle, Sybase, and Informix, and system support for Windows 95, Windows NT, and UNIX. The Siebel Sales Enterprise is designed to scale to meet the needs of large organizations deploying thousands of sales and marketing professionals with very large data storage and retrieval requirements. The Siebel Sales Enterprise is designed to be comprehensive in its scope of functionality and highly configurable, allowing for highly customized industry-specific and company-specific system deployments. The Company's objective is to establish and maintain a global market leadership position in the sales and marketing information systems market. Siebel's position as a market leader has been acknowledged by recognized industry experts, including AberdeenGroup, GartnerGroup and Ovum Ltd., each an independent research organization. The Company's strategy is to provide high-end enterprise client/server sales and marketing applications in a broad range of industries, extend its advanced technology position, achieve universally successful customer implementations of Siebel Sales Enterprise, expand its global sales and support capacity, and continue to leverage strategic alignment with leading third-party technology providers, system integrators, and distributors. See "Business -- Strategy." The Company markets and sells its software through its direct sales force, telebusiness channels, and distributors in the Americas, Asia, Australia and Europe. The Siebel Sales Enterprise has been licensed by customers in a wide range of industries, including transportation, financial services, securities brokerage, manufacturing, computers, communications, chemicals, and computer software. The Company's customers as of June 30, 1996 were American President Companies Ltd., AMP Incorporated, Andersen Consulting LLP, BMC Software, Inc., Charles Schwab & Co., Inc, Cisco Systems, Inc., Digital Equipment Corporation, The Dial Corp, The Dow Chemical Company, Frank Russell Company, Hewlett-Packard Japan, Ltd., Informix Software, Inc., LSI Logic Corporation, Montgomery Securities, Nationwide Mutual Insurance Company, Newbridge Networks, Inc., Platinum Technology, Inc., Pure Software, Inc., The Quaker Oats Company, Texas Commerce Bank National Association, Unisys Corporation and Viking Freight System, Inc. The Company's principal executive offices are located at 1855 S. Grant Street, San Mateo, CA 94402. Its telephone number is (415) 295-5000. Its e-mail address is info@siebel.com. The Company maintains an Internet home page. [GATEFOLD] THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company................... 750,000 shares Common Stock offered by the Selling Stockholders...... 750,000 shares Common Stock to be outstanding after the offering..... 16,735,220 shares(1) Use of proceeds....................................... For general corporate purposes, including working capital Nasdaq National Market symbol......................... SEBL </TABLE> SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> PERIOD FROM YEAR ENDED SIX MONTHS ENDED SEPTEMBER 13, 1993 DECEMBER 31, JUNE 30, (INCEPTION) TO ------------------- ------------------- DECEMBER 31, 1993 1994 1995 1995 1996 ------------------ ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenues......................... $ -- $ 50 $ 8,038 $ 1,314 $12,255 Operating income (loss)................ (114) (1,779) 372 (1,183) 1,269 Net income (loss)...................... (114) (1,766) 317 (678) 899 Pro forma net income per share(2)...... $ .02 $ (.04) $ .05 Shares used in pro forma per share computation(2)....................... 16,340 15,379 16,955 </TABLE> <TABLE> <CAPTION> QUARTER ENDED ----------------------------------------------------------------- MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, 1995 1995 1995 1995 1996 1996 -------- -------- --------- -------- --------- -------- <S> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenues................................. $ 30 $ 1,284 $ 2,564 $ 4,160 $ 4,709 $ 7,546 Operating income (loss)........................ (1,208 ) 25 422 1,133 211 1,058 Net income (loss).............................. (720 ) 42 287 708 198 701 Pro forma net income (loss) per share(2)....... $ (.05 ) $ -- $ .02 $ .04 $ .01 $ .04 Shares used in pro forma per share computation(2)............................... 14,642 16,777 16,856 16,803 16,859 17,081 </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 --------------------------------------- ACTUAL PRO FORMA(3) AS ADJUSTED(4) ------- ------------ -------------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents....................................... $13,870 $ 45,858 $ 76,730 Total assets.................................................... 24,722 56,710 87,582 Total stockholders' equity...................................... 12,632 44,620 75,492 </TABLE> - --------------- (1) Based on shares outstanding as of September 15, 1996. Excludes 4,203,450 shares of Common Stock issuable upon exercise of stock options outstanding as of September 15, 1996 at a weighted average exercise price of $4.95 per share. See "Management -- Equity Incentive Plans" and Notes 4 and 7 of Notes to Financial Statements. (2) See Note 1 of Notes to Financial Statements for a description of the calculation of pro forma net income (loss) per share. (3) Pro forma reflects the closing of the Company's initial public offering on July 3, 1996 and the application of the net proceeds therefrom and the conversion of all outstanding shares of Preferred Stock into shares of Common Stock upon such closing. (4) Adjusted to reflect the sale of 750,000 shares of Common Stock offered by the Company hereby at an assumed public offering price of $43.75 per share after deduction of the estimated underwriting discount and offering expenses payable by the Company. See "Use of Proceeds." ------------------------ Except as otherwise indicated, the information contained in this Prospectus assumes no exercise of the Underwriters' over-allotment option. See "Underwriting."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001006892_jda_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001006892_jda_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..0f589a6d138793977ae701ed5caf4f5b2f5dde65
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+++ b/parsed_sections/prospectus_summary/1996/CIK0001006892_jda_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. THE COMPANY JDA is a leading international provider of comprehensive enterprise-wide software solutions that address the mission-critical business information requirements of retailing organizations. The Company offers two enterprise product lines: Merchandise Management System ("MMS") for the IBM AS/400 platform and Open Database Management System ("ODBMS") for open, client/server environments. MMS is a feature-rich solution that integrates and distributes data throughout the retailing enterprise and enables management to make more informed and timely decisions, respond rapidly to changes in the competitive environment, monitor store-level activity and achieve operational efficiencies. ODBMS, currently in limited beta installations and recently released for general commercial availability, is designed as an open (multi-platform), client/server solution that incorporates the basic functionality of MMS with enhanced adaptability and scalability. The Company's in-store products, Distributed Store System ("DSS") and Windows-based WinDSS, currently in limited beta installations, can be licensed independently or as part of an integrated enterprise-wide system. These in-store systems capture data at the point of sale and leverage valuable enterprise-wide information by bringing it to the store level, the primary point of consumer contact. JDA's products have been licensed to over 215 customers, with the Company's consulting services group performing the substantial majority of the implementations. The Company's consulting services group provides system planning, design and implementation services to tailor the Company's solutions to each retailer's unique specifications and to ensure timely and successful implementation. The Company's solutions have been deployed by a broad range of retail enterprises worldwide including hard and soft line retailers, warehouse stores, superstores and grocery stores. The Company's customers include many of the world's leading specialty retailers such as Bed, Bath and Beyond, CompUSA, Incredible Universe, Kingfisher Group, Lenscrafters, Melville Corporation, Natural Wonders, Office Depot, Staples, Starbucks, Sunglass Hut, West Marine Products and Williams-Sonoma. Revenues from customers outside the U.S. comprised 39% and 43% of total revenues in 1995 and in the first nine months of 1996, respectively. Retailers are recognizing the strategic imperative of employing technology to cut costs, reduce inefficiencies and enhance sales in an environment dominated by intensifying competition and value conscious consumers. As a result, they are increasingly demanding highly functional, easy to use and scalable software applications that can be economically and rapidly adapted for changes in their mission-critical business functions. The Company's strategy is to strengthen its position as a leading supplier of comprehensive software solutions for the retailing marketplace worldwide. Key elements of the Company's strategy are to: leverage its retail application knowledge base; offer a broad line of modular, enterprise-wide solutions; extend its solutions to emerging technology platforms; grow its industry-specific consulting services; leverage its presence in international markets; and expand revenues and distribution through strategic relationships. The Company's principal executive offices are located at 11811 North Tatum Blvd., Suite 2000, Phoenix, AZ 85028, and the telephone number at that address is (602) 404-5500. Unless the context otherwise requires, the "Company" or "JDA" refers to JDA Software Group, Inc. and its consolidated subsidiaries. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company.......... 750,000 shares Common Stock offered by the Selling Stockholders............................... 1,700,000 shares Common Stock to be outstanding after the offering................................... 13,115,237 shares(1) Use of proceeds.............................. General corporate purposes, including product development and working capital. Nasdaq National Market symbol................ JDAS </TABLE> - --------------- (1) Excludes 1,236,242 shares of Common Stock issuable upon the exercise of outstanding options at September 30, 1996 at a weighted average exercise price of $6.98 per share, 532,708 of which were exercisable as of that date. As a result of a Redemption Agreement with certain of the Company's founders, exercise of up to 931,242 of these options outstanding under the Company's 1995 Stock Option Plan will not be dilutive. See "Capitalization," "Management -- Benefit Plans," "Certain Transactions" and Note 8 of Notes to Consolidated Financial Statements. Also excludes 504,000 unissued shares that are the subject of a pending arbitration claim. See "Risk Factors -- Pending Arbitrations" and "Business -- Legal Proceedings." JDA Software Group Integrated Enterprise-Wide Software Solutions for Retailers [Flowchart depicting information flow from corporate headquarters, distribution center and in-store.] [Photograph of office building, photograph of forklift operating and photograph of customer and store clerk.] [Computer screen shots of the Company's ODBMS, WinDSS, DSS and MMS products.] [Text attached to computer screen shots: Open DataBase Merchandising System - ODBMS comprehensive retail enterprise solutions for open, client/server environment. In limited beta release. - Enterprise Database - Data Warehouse - Inventory Control and Reporting - Price and Cost Management - Store Data Interchange - Purchase Order Management and Merchandise Receiving - Automated Replenishment - Retail Stock Ledger - Warehouse/Distribution Center WinDSS Point-of-sale, back office, transaction processing and customer analyzer applications for Windows in-store systems. In limited beta release. Distributed Store System - DSS Point-of-sale, back office, and customer analyzer applications for traditional in-store systems. Merchandise Management System - MMS Comprehensive Retail Enterprise Solution for IBM AS/400 Environments - Enterprise Database - Data Warehouse - Inventory Control and Reporting - Price and Cost Management - Store Data Interchange - Purchase Order Management and Merchandise Receiving - Automated Replenishment - Retail Stock Ledger - Warehouse/Distribution Center - Accounts Payable - General Ledger] Automating the Mission Critical Business Information Requirements of the Retailing Enterprise SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ---------------------------------------------- ----------------- 1991 1992 1993 1994 1995 1995 1996 ------ ------- ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Total revenues........................ $9,649 $15,974 $20,321 $23,829 $30,084 $20,812 $32,354 Gross profit.......................... 6,051 10,354 13,236 16,902 20,144 13,506 20,935 Tax related compensation to S Corporation stockholders(1)......... 1,720 6,900 7,422 0 0 0 0 Income (loss) from operations......... 2,285 (1,262) (401) 9,222 7,504 4,927 8,172 Net income (loss)(1).................. $2,165 $ (951) $(1,438) $ 8,501 $ 5,573 $ 3,829 $ 5,074 PRO FORMA STATEMENTS OF OPERATIONS DATA: Pro forma net income(2)............... $ 4,401 $ 2,874 -- Pro forma net income per share........ $ 0.42 $ 0.27 $ 0.43 Shares used in per share calculation(3)...................... 10,952 10,952 11,884 </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1996 ------------------------ ACTUAL AS ADJUSTED(4) ------- -------------- <S> <C> <C> BALANCE SHEET DATA: Working capital............................................................ $23,128 $ 47,003 Total assets............................................................... 37,047 60,922 Long-term liabilities...................................................... 224 224 Stockholders' equity....................................................... 28,582 52,457 </TABLE> - --------------- (1) Prior to March 30, 1995, certain predecessor companies of the Company elected S Corporation status. The Company's historical statements of operations data, therefore, do not include a provision for U.S. federal income taxes for periods prior to March 30, 1995. In addition, in 1991, 1992 and 1993, these same companies charged to expense compensation paid to their founding stockholders in lieu of S Corporation dividends, in order to reduce state income tax liability. See "Reorganization and Prior S Corporation Status" and Note 1 of Notes to Consolidated Financial Statements. Pro forma net income excluding tax related compensation and including U.S. federal income tax provisions at statutory rates was $2,464, $3,424, $4,313 and $5,564 for 1991 through 1994, respectively. (2) Includes U.S. federal income tax provision at statutory tax rates. (3) Pro forma net income per share includes common and equivalent shares outstanding and the estimated number of shares that would be needed to be issued to repay certain stockholder notes issued in the Reorganization and to redeem the Series B Redeemable Preferred Stock. Pro forma net income has been adjusted for the interest applicable to such notes. See Notes 1 and 2 of Notes to Consolidated Financial Statements. (4) Adjusted to reflect the sale of 750,000 shares of Common Stock offered by the Company hereby at an assumed public offering price of $34.00 per share and the application of the net proceeds therefrom. See "Use of Proceeds." Except as otherwise noted, information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. See "Underwriting."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001006918_trump_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001006918_trump_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..fa9223bd3557bf8d9c60810aa29eed4fb30f6641
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0001006918_trump_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following is a summary of certain information contained elsewhere in this Prospectus and is qualified in its entirety by the more detailed information and financial statements, and notes thereto, contained elsewhere in this Prospectus. Unless otherwise indicated, (i) the term "Trump AC" as used in this Prospectus includes Trump AC and its subsidiaries and gives effect to the Merger Transaction, and (ii) the information in this Prospectus assumes no exercise of the Underwriters' over-allotment option in connection with the Stock Offering. Prospective investors are urged to read this Prospectus carefully in its entirety. This Prospectus contains forward-looking information that involves risks and uncertainties and such information is subject to the assumptions set forth in connection therewith and the information contained herein. TRUMP ATLANTIC CITY ASSOCIATES Upon consummation of the Merger Transaction, Trump Atlantic City Associates ("Trump AC"), an indirect subsidiary of Trump Hotels & Casino Resorts, Inc., will own and operate two "Four Star" Atlantic City casino hotels (the "Atlantic City Properties"): the Trump Taj Mahal Casino Resort (the "Taj Mahal") and Trump Plaza Hotel and Casino ("Trump Plaza"). The Taj Mahal is currently Atlantic City's largest casino, and Trump Plaza will have the largest casino in Atlantic City upon completion of its ongoing expansion program (the "Trump Plaza Expansion"). Through its ownership of two successful land-based casino hotels, Trump AC will have a leading presence in the growing Atlantic City market, which, in terms of gaming revenues, has demonstrated a ten-year compound annual growth rate of approximately 5.8% and a growth rate of approximately 9.5% for calendar year 1995 versus calendar year 1994. After giving effect to the Merger Transaction and the Trump Plaza Expansion, Trump AC will have approximately one-quarter of Atlantic City's casino square footage, slot machines, table games and hotel room inventory. In addition, the combination of the Taj Mahal with Trump Plaza's existing operations will also provide opportunities for operational efficiencies, economies of scale and other benefits from the expertise and experience of management at the two operating entities. Trump AC also plans to undertake an expansion program at the Taj Mahal designed to increase its hotel room inventory and casino floor space and expand its entertainment and parking facilities (the "Taj Mahal Expansion"). Management believes Trump AC will benefit from the following factors: . LEADING ATLANTIC CITY FACILITIES. Upon consummation of the Trump Plaza Expansion, Trump AC will own and operate the two largest casino hotel properties in Atlantic City, both of which are strategically located on The Boardwalk. Trump AC believes that the Atlantic City Properties' prime locations, reputations for high quality amenities and first-class customer service and targeted marketing strategies are ideally suited to capitalize on the expected continued growth in the Atlantic City gaming market. Management believes that its leading size and market share in Atlantic City following the consummation of the Merger Transaction will provide it with a competitive advantage in marketing the Atlantic City Properties, particularly to large convention groups and multi-day stay destination resort visitors. . ATLANTIC CITY PROPERTIES EXPANSION. Trump AC has nearly completed the Trump Plaza Expansion and is developing the plans for the Taj Mahal Expansion, which projects will increase the Atlantic City Properties' gaming space and hotel room capacity, allowing Trump AC to meet both existing demand and the anticipated demand from the increased number of available rooms and infrastructure improvements that are currently under development to enhance further the "vacation destination appeal" of Atlantic City. The following table profiles Trump AC's casino and hotel capacity following the planned expansions at the Atlantic City Properties: <TABLE> <CAPTION> TRUMP TAJ TRUMP PLAZA TAJ MAHAL PLAZA(a) MAHAL EXPANSION(b) EXPANSION(c) TOTAL -------- ------- ------------ ------------ ------- <S> <C> <C> <C> <C> <C> Casino square footage... 75,395 120,000(d) 64,158 60,000 319,553 Slot machines........... 2,368 3,550 1,898 2,500 10,316 Table games............. 97 169 44 -- 310 Hotel rooms............. 555 1,250 849 800 3,454 </TABLE> -------------------- (a) Includes the 2,000 square foot area connecting the existing facility with Trump Plaza East (as defined) and the 75 slot machines included in this area. (b) Includes the 15,000 square foot casino with 400 slot machines and 13 table games and 326 hotel rooms which have already opened at Trump Plaza East. The remaining 14 hotel rooms and suites at Trump Plaza East are scheduled to be opened by the end of April 1996. Also reflects nine super suites scheduled to open early in 1997 and not otherwise included in the "Trump Plaza Expansion." The remaining portion of the Trump Plaza Expansion, Trump World's Fair (as defined), is scheduled to open in the second quarter of 1996. (c) Plans for the Taj Mahal Expansion, scheduled to be completed in phases from the first quarter of 1997 through early 1998, are subject to modification. (d) Excludes a 12,000 square foot poker, keno and race simulcasting room which contains 64 poker tables. . OPERATING SYNERGIES. Trump AC intends to capitalize on the opportunities for efficiencies which can be generated by integrating certain operations of the Atlantic City Properties, which previously have been operated separately. Management has identified cost savings which management estimates, by the end of the second year following the Merger Transaction, to be approximately $18-20 million on an annual basis, although no assurance may be made as to the amount which will be realized. Management believes that it will be able to consolidate certain departments at the Atlantic City Properties, reduce general and administrative expenses through possible personnel reductions and the consolidation of certain marketing efforts, and reduce operating costs through efficiencies that are expected to result from the combined purchasing power of the Atlantic City Properties. . THE "TRUMP" NAME. Trump AC capitalizes on the widespread recognition of the "Trump" name and its association with high quality amenities and first-class service. To this end, Trump AC provides a broadly diversified gaming and entertainment experience consistent with the "Trump" name and reputation for quality. ATLANTIC CITY PROPERTIES Trump Plaza. Management believes that Trump Plaza's "Four Star" Mobil Travel Guide rating and "Four Diamond" American Automobile Association rating reflect the high quality amenities and services that Trump Plaza provides to its casino patrons and hotel guests. These amenities and services include a broad selection of dining choices, headline entertainment, deluxe accommodations, tennis courts and swimming and health spa facilities. Trump Plaza Expansion. Management is seeking to enhance further Trump Plaza's position as an industry leader through the Trump Plaza Expansion, scheduled to be completed in the second quarter of 1996, which involves expanding and renovating Trump Plaza's gaming space, increasing its hotel capacity and constructing retail operations and entertainment venues. As part of the Trump Plaza Expansion, management has renovated and integrated into Trump Plaza a hotel located adjacent to Trump Plaza's main tower ("Trump Plaza East"), the grand opening for which was held on February 16, 1996, and is in the process of renovating and integrating the former Trump Regency Hotel ("Trump World's Fair"), located on The Boardwalk adjacent to the existing Atlantic City Convention Center, which is next to Trump Plaza. In February 1996, Trump Plaza East opened the 15,000 square foot Ocean View Casino and Bar, and has to date opened 326 of its 349 hotel rooms. The Ocean View Casino and Bar is the first gaming room in Atlantic City to combine a casino, bar and entertainment area and features a 70-foot long bar with 27 bar- top slot machines, live entertainment and a 58 square foot video wall. With its high ceilings and windows overlooking the Atlantic Ocean and The Boardwalk, Trump Plaza is creating a new and exciting entertainment environment for its casino patrons. Upon completion of the Trump Plaza Expansion, Trump Plaza's casino floor space will be the largest in Atlantic City, increasing from approximately 75,000 square feet to an aggregate of approximately 140,000 square feet, housing a total of approximately 4,270 slot machines and 140 table games. Trump Plaza's hotel capacity will increase to a total of 1,404 guest rooms from 555 guest rooms, making Trump Plaza's guest room inventory one of the largest in Atlantic City. Management believes the increased hotel capacity as a result of the Trump Plaza Expansion will better enable Trump Plaza to meet demand and accommodate its casino guests, as well as to host additional and larger conventions and corporate meetings. The following table details plans for the Trump Plaza Expansion: <TABLE> <CAPTION> TRUMP TRUMP PLAZA TRUMP WORLD'S FACILITY(a) PLAZA EAST(b) FAIR(c) TOTAL ----------- ------------- ------- ------ <S> <C> <C> <C> <C> Casino square footage................. 75,395 14,886 49,272 139,553 Slot machines......................... 2,368 405 1,493 4,266 Table games........................... 97 12 32 141 Hotel rooms........................... 555 349 500 1,404 </TABLE> - -------------------- (a) Includes the 2,000 square foot area connecting the existing facility with Trump Plaza East (as defined) and the 75 slot machines included in their area. (b) The casino and 326 hotel rooms have already opened. The remaining 14 hotel rooms and suites are scheduled to be opened by the end of April 1996. Also reflects nine super suites scheduled to open early in 1997 and not otherwise included in the "Trump Plaza Expansion." (c) Scheduled to open in the second quarter of 1996. The Trump Plaza Expansion will increase Trump Plaza's prime central frontage on The Boardwalk to nearly a quarter of a mile. Furthermore, Trump World's Fair will add approximately 50,000 square feet of casino floor space, approximately 16,000 of which will be directly accessible from The Boardwalk, and Trump Plaza has been reconfigured to provide a new entranceway to Trump Plaza directly off the Atlantic City Expressway. Management believes that the construction of a new convention center and "tourist corridor" linking the new convention center with The Boardwalk will enhance the desirability of Atlantic City generally and, as a result of Trump Plaza's central location, will benefit Trump Plaza in particular. Trump Plaza's location on The Boardwalk at the end of the main highway into Atlantic City makes it highly accessible for both "drive-in" and "walk-in" patrons. The Taj Mahal. The Taj Mahal currently has the largest casino in Atlantic City and has ranked first among all Atlantic City casinos in terms of total gaming revenues, table revenues and slot revenues since it commenced operations in 1990. The Taj Mahal capitalizes on the widespread recognition and marquee status of the "Trump" name and its association with high quality amenities and first-class service as evidenced by its "Four Star" Mobil Travel Guide rating. Management believes that the breadth and diversity of the Taj Mahal's casino, entertainment and convention facilities and its status as a "must-see" attraction will enable the Taj Mahal to benefit from the expected continued growth in the Atlantic City market. In order to enhance its status as a "must- see" attraction, the Taj Mahal has recently signed agreements for the development of Hard Rock Cafe(R), Rainforest Cafe(R) and All Star Cafe(R) themed restaurants on the property. In addition, in order to continue to attract high end players, the Taj Mahal has recently opened the Dragon Room, a new Asian themed table game area, and plans to open the Sultan's Palace, a new high-end "slots only" lounge and private club in the second quarter of 1996. The Taj Mahal Expansion. The Taj Mahal Expansion is scheduled to be completed in phases from the first quarter of 1997 through early 1998. The Taj Mahal Expansion, the plans for which are subject to modification, involves the construction of an approximately 2,000 space expansion of the Taj Mahal's existing self-parking facilities and a new 10,000 seat arena adjacent to the Taj Mahal, each scheduled to be completed in the first quarter of 1997; the conversion of the current site of the Mark Etess Arena into a new 60,000 square-foot circus-themed casino with 2,500 slot machines, scheduled to be completed in mid-1997; and the construction of an approximately 800 room hotel tower adjacent to the Taj Mahal's existing hotel tower, which is scheduled to be completed early in 1998. THE ATLANTIC CITY MARKET. The Atlantic City gaming market has demonstrated continued growth despite the recent proliferation of new gaming venues across the country. The 12 casino hotels in Atlantic City generated approximately $3.75 billion in gaming revenues in 1995, an approximately 9.5% increase over 1994 gaming revenues of approximately $3.42 billion. During 1995, all 12 casinos experienced increased gaming revenues compared to 1994. The approximately $3.75 billion of gaming revenues produced by the 12 Atlantic City casino hotels in 1995 exceeded the approximately $3.12 billion of gaming revenues produced by the 18 largest (based on net revenues) casino hotels on the Las Vegas Strip for the same period, even though the 12 Atlantic City casino hotels have less than one-quarter the number of hotel rooms of such Las Vegas Strip casino hotels. Management believes, however, that given current high occupancy levels, future casino revenue growth in the Atlantic City market will be dependent in part upon expansion in hotel capacity. Due principally to an improved regulatory environment, the general improvement of economic conditions in 1993, 1994 and 1995 and existing high occupancy rates, significant investment in the Atlantic City market has been initiated and/or announced. For example, Trump Plaza will be located at the end of the planned "tourist corridor" featuring an entertainment and retail complex that will link The Boardwalk with downtown Atlantic City. In addition, The New Jersey Casino Redevelopment Authority ("CRDA") is currently overseeing the development of a new convention center. When completed, the approximately $250 million convention center will be the largest exhibition space between New York City and Washington, D.C. The new convention center, currently scheduled to open in January 1997, will be located at the base of the Atlantic City Expressway. Trump Plaza is adjacent to the existing Atlantic City Convention Center and will also be one of the closest casino hotels to the new convention center, which as currently planned would hold approximately 500,000 square feet of exhibit and pre-function space, 45 meeting rooms, various food-service facilities and a 1,600-car underground parking garage. An additional planned infrastructure improvement is the State of New Jersey's approximately $125 million capital plan to upgrade and expand the Atlantic City International Airport. Trump AC believes that the Taj Mahal's and Trump Plaza's positions as leading Atlantic City attractions will enable them to attract a large portion of any increase in the number of potential casino hotel patrons. THE FIRST MORTGAGE NOTE OFFERING ISSUERs..................... Trump AC and Trump AC Funding as joint and several obligors. PRINCIPAL AMOUNT............ $1,100,000,000 aggregate principal amount of % First Mortgage Notes due 2006. MATURITY.................... April , 2006. INTEREST.................... % per annum, payable in cash, semi-annually in arrears, calculated on the basis of a 360-day year consisting of twelve 30-day months. INTEREST PAYMENT DATES...... April and October , commencing October , 1996. GUARANTORS.................. The First Mortgage Notes will be fully and unconditionally guaranteed on a joint and several, senior secured basis by Plaza Associates, Taj Associates, TTMC and each other present and future majority owned or controlled subsidiary (other than "unrestricted subsidiaries," a "Subsidiary") of Trump AC, other than Trump AC Funding (which is one of the Issuers). OPTIONAL REDEMPTION......... The First Mortgage Notes will be redeemable in cash at the option of the Issuers, in whole or in part, at any time on or after , 2001 at the redemption prices set forth herein, together with accrued and unpaid interest through the redemption date. In addition, the First Mortgage Notes are subject at any time to redemption in accordance with an order of a governmental authority having jurisdiction over Taj Associates or Plaza Associates' casino licenses. SINKING FUND................ None. CHANGE OF CONTROL........... Upon the occurrence of a Change in Control (as defined in "Description of the First Mortgage Notes--Certain Covenants--Repurchase of the First Mortgage Notes at the Option of the Holder Upon a Change in Control"), each holder of First Mortgage Notes may require Trump AC to repurchase such holder's First Mortgage Notes at 101% of the principal amount thereof, together with accrued and unpaid interest to the date of repurchase. SECURITY.................... The First Mortgage Notes will be secured by one or more mortgages (the "Mortgage") representing a first lien and security interest (subject to approximately $3.0 million of indebtedness secured by mortgages) on substantially all of the assets comprising Trump Plaza and the Taj Mahal, including the Specified Parcels (as defined in "--Use of Proceeds") and related facilities. The security interest held by a collateral agent on behalf of, among others, the Trustee also includes assignments of leases and rents and operating assets and encumbers furniture, fixtures, machinery and equipment. However, THCR Holdings' direct and indirect equity interests in Trump Atlantic City and its subsidiaries, including Plaza Associates and Taj Associates, will be pledged exclusively for the benefit of the holders of the 15 1/2% Senior Secured Notes due 2005 issued by THCR Holdings and its subsidiary, Trump Hotels & Casino Resorts Funding, Inc. ("THCR Funding") (the "Senior Notes"). NON-RECOURSE................ No direct or indirect stockholder, partner, employee, officer or director, as such, past, present or future, of either the Issuers, any Guarantor or any successor entity shall have any personal liability in respect of the obligations of the Issuers or any Guarantor under the indenture under which the First Mortgage Notes will be issued (the "First Mortgage Note Indenture"), the First Mortgage Notes or the guarantees thereof by reason of the status as such stockholder, partner, employee, officer or director except to the extent such party is an Issuer or Guarantor. CERTAIN COVENANTS........... The First Mortgage Note Indenture will contain certain covenants which, among other things, will (i) limit Trump AC's and its Subsidiaries' ability to incur certain indebtedness unless, among other things, Trump AC's Consolidated Coverage Ratio (as defined) for the four fiscal quarters immediately preceding such event, taken as one period, would have been at least equal to the ratios set forth in the First Mortgage Note Indenture, subject to certain exceptions; (ii) limit the making of certain dividends, distributions and other restricted payments by Trump AC and its Subsidiaries, (iii) limit the lines of business in which Trump AC and its Subsidiaries may engage to those relating to the casino hotel business in AC; (iv) limit the existence of certain liens on assets of Trump AC and its Subsidiaries; (v) restrict the use of proceeds from certain asset sales by Trump AC and its Subsidiaries; (vi) limit transactions by Trump AC and its Subsidiaries with affiliates of Trump AC (other than wholly-owned Subsidiaries); (vii) restrict Trump AC and its Subsidiaries from engaging in certain leasing activities; (viii) limit the Issuers' ability to merge, sell or consolidate; (ix) limit the obligations of Trump AC Funding to those incident to its obligations under the First Mortgage Note Indenture; (x) prohibit Trump AC and its Subsidiaries from paying services fees under a certain services agreement with a corporation wholly owned by Trump, or any expenses relating thereto, under certain circumstances, including if a Default (as defined) or an Event of Default (as defined) has occurred and is continuing; (xi) prohibit Trump AC and its Subsidiaries from paying any other amounts pursuant to other management, services or similar agreements with Trump; (xii) require the maintenance of insurance; and (xiii) limit the issuing or selling of equity interests by any of Trump AC's Subsidiaries (except to Trump AC or a wholly-owned Subsidiary thereof). EVENTS OF DEFAULT........... Events of Default will include (i) default in payment of interest when due for a period of 30 days; (ii) default in payment of principal or premium, if any, when due; (iii) default in the performance or breach of certain specified covenants, including those relating to merger, consolidation or sale of assets, failure to make or consummate a Change of Control Offer (as defined) or an Asset Sale Offer (as defined) as required; (iv) default in the performance or breach of certain other covenants of the Issuers (other than those specifically covered elsewhere in the First Mortgage Note Indenture) for 30 days after notice; (v) certain events of bankruptcy, insolvency or reorganization relating to the Issuers or significant subsidiaries, which, if involuntary, continue for 60 days, (vi) revocation, suspension or loss of certain permits resulting in a cessation of a substantial portion of the operations of Trump Plaza or the Taj Mahal for more than 90 consecutive days; (vii) acceleration prior to the maturity of certain indebtedness or the default in the payment when due of certain indebtedness of Trump AC or its subsidiaries; (viii) except as permitted by the First Mortgage Note Indenture or the First Mortgage Notes, the cessation of any guarantee in any material respect or the finding by any judicial proceeding that the guarantee is unenforceable or invalid in any material respect or the denial or disaffirmation by any Guarantor of its obligations under its guarantee; and (ix) certain events of default under the documents governing the Mortgage (as defined). An Event of Default under the First Mortgage Note Indenture could permit acceleration of the First Mortgage Notes and acceleration of certain other existing or future indebtedness of the Issuers and their affiliates under other instruments that may contain cross-acceleration or cross-default provisions. See "Risk Factors--Restrictions on Certain Activities."
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. IN MAY 1996, THE COMPANY ACQUIRED INTELLIQUEST COMMUNICATIONS, INC. ("INTELLIQUEST COMMUNICATIONS," FORMERLY KNOWN AS PIPELINE COMMUNICATIONS, INC.) IN A TRANSACTION ACCOUNTED FOR AS A POOLING OF INTERESTS. AS SUCH, THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO HAVE BEEN RESTATED TO INCLUDE THE OPERATING RESULTS AND FINANCIAL CONDITION OF INTELLIQUEST COMMUNICATIONS FOR EACH OF THE PERIODS AND AT EACH OF THE DATES PRESENTED. UNLESS OTHERWISE INDICATED, ALL INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. SUCH FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, THE COMPANY'S EXPECTATIONS REGARDING ITS FUTURE FINANCIAL CONDITION AND OPERATING RESULTS, PRODUCT DEVELOPMENT, BUSINESS AND GROWTH STRATEGY, MARKET CONDITIONS AND COMPETITIVE ENVIRONMENT. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. THE COMPANY IntelliQuest Information Group, Inc. ("IntelliQuest" or the "Company") is a leading provider of quantitative marketing information to technology companies. IntelliQuest supplies customers with timely, objective, accurate and cost-effective information about technology markets, customers and products on both a subscription basis and a proprietary project basis. The Company uses its proprietary databases and software to help technology companies track product performance and customer satisfaction, measure advertising effectiveness, assess brand strength and competitive position, determine price sensitivity, and evaluate new products, markets or other business opportunities. The Company also licenses custom proprietary software applications and associated services to technology manufacturers for customer registration. Since its founding in 1985, IntelliQuest has focused on meeting the specialized market research needs of technology companies and publishers who market to technology advertisers. The Company believes that its ability to cost-effectively provide consistent information regarding both domestic and international technology markets differentiates it from its competitors and enhances the Company's ability to capitalize on the trend among multinational technology vendors to seek worldwide market research. The Company has established relationships with over 55 technology companies and with numerous leading publishers who market to technology advertisers. The Company focuses on providing renewable subscription-based and proprietary products as well as one-time research services. In 1995, 84.7% of the Company's total revenues were generated from the sale of renewable products and services. Due to the strategic value of IntelliQuest's products and services, its innovative use of proprietary technology to collect and analyze information and the Company's reputation for excellent customer service, the Company averaged dollar-weighted renewals for subscription-based products of 84% over the three year period from 1993 through 1995. Eight of the Company's ten largest customers in 1994 were also among its ten largest customers in 1995. The Company has made substantial investments in proprietary technology for survey administration, data collection and data analysis. IntelliQuest was a pioneer in the use of disk-based interactive survey techniques, which are used to gather information from technology purchasers and users. The Company has made a substantial investment in ReplyDisk, its proprietary survey software, which allows the Company to easily create customized interactive, graphical and multi-media survey applications. The Company has also used the ReplyDisk platform to create off-the-shelf survey software applications. The Company is currently developing NetQuest, which will allow the Company to administer interactive surveys on the Internet. While the Company incurred net losses in each of 1993 and 1994, it recorded a net profit in 1995 and has improved operating margins over the past three years by leveraging fixed annual investments in subscription-based products over an increasing subscriber base. The Company has also invested in data collection technologies and panel recruitment to further lower cost of revenues as a percentage of total sales. In 1995, the Company's operating income as a percentage of revenues increased to 6.0%, based on revenues of $19.1 million and operating income of $1.1 million, compared to an operating loss as a percentage of revenues of 5.0% in 1992, based on $3.9 million in revenues and an operating loss of $196,000. The Company's growth strategy is to (i) leverage its expertise and reputation to expand its presence among other business units of existing customers and to capture a portion of the growth in such customers' market research budgets; (ii) extend its product and service offering to new customers within both the Company's current target markets and new target markets such as data communications, on-line services and interactive new media; (iii) expand its recently introduced Internet-based research tools and information services such as Web site surveys and a survey to measure Internet and on-line service usage among technology purchase influencers; (iv) expand marketing services, such as database marketing, associated with electronic customer registration; (v) expand international market research capabilities to meet the demand for consistent worldwide market research; and (vi) pursue strategic business acquisitions of companies that provide products or services not offered by the Company, have strategic customer relationships, are located in attractive geographic locations or have proprietary technologies. RECENT DEVELOPMENTS In May 1996, the Company acquired IntelliQuest Communications, which resulted in IntelliQuest Communications becoming a wholly-owned subsidiary of the Company. IntelliQuest Communications is a leading provider of electronic customer registration and marketing services for a number of leading computer hardware, software and peripheral companies. IntelliQuest Communications has developed a proprietary frame relay network that allows electronic customer registration from over 90 countries and 400 cities worldwide as well as registration via Internet Web sites. The Company's acquisition of IntelliQuest Communications enables the Company to expand its offering of electronic customer registration products. In connection with the acquisition, the Company issued 562,500 shares of Common Stock in exchange for all of the outstanding shares of common stock and outstanding options and warrants of IntelliQuest Communications. The acquisition was accounted for as a pooling of interests and, accordingly, all financial information in this Prospectus has been restated to give effect to the acquisition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto. THE OFFERING <TABLE> <S> <C> Shares Offered by the Company............................... 1,000,000 Shares Offered by the Selling Stockholders.................. 1,881,000 Shares Outstanding Immediately After the Offering........... 8,068,708(1) Use of Proceeds............................................. For general corporate purposes, including working capital and potential acquisitions of complementary businesses, products or technologies. Nasdaq National Market Symbol............................... IQST </TABLE> - ------------------------ (1) Based on the number of shares outstanding as of August 31, 1996. Excludes 331,094 shares of Common Stock issuable upon the exercise of options outstanding as of August 31, 1996. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ----------------------------------------------------- -------------------- 1991 1992 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues: Renewable subscription-based products....... $ 555 $ 1,120 $ 2,055 $ 6,157 $ 8,064 $ 2,216 $ 3,234 Renewable proprietary products.............. -- 1,118 2,055 4,185 8,120 3,150 3,915 Proprietary project research................ 1,650 1,684 2,039 3,647 2,930 1,653 1,617 --------- --------- --------- --------- --------- --------- --------- Total revenues............................ 2,205 3,922 6,149 13,989 19,114 7,019 8,766 Operating income (loss)....................... (149) (196) (916) (274) 1,140 184 279 Net income (loss)............................. (148) (200) (935) (289) 565 46 381 Pro forma information: Net income per share (1)...................... $ 0.10 $ 0.01 $ 0.06 Weighted average number of common and common equivalent shares outstanding (1)............ 5,526 5,512 6,482 </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 -------------------------- ACTUAL AS ADJUSTED (2) --------- --------------- <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Working capital....................................................................... $ 27,620 $ 51,468 Total assets.......................................................................... 35,520 59,368 Total debt............................................................................ -- -- Common stockholders' equity........................................................... 29,648 53,496 </TABLE> - ------------------------------ (1) Pro forma information assumed conversion of the Company's redeemable convertible preferred stock into 1,853,046 shares of Common Stock and the exercise of outstanding warrants to purchase 264,480 shares of Common Stock, which conversion and exercise occurred in connection with the Company's initial public offering in March 1996. See Note 3 to Consolidated Financial Statements. (2) As adjusted to give effect to the sale of the 1,000,000 shares of Common Stock offered by the Company hereby at an assumed public offering price of $25.50 per share and the application of the net proceeds to the Company therefrom. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001007323_excelcom_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001007323_excelcom_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors," and the Consolidated Financial Statements and related Notes appearing elsewhere in this Prospectus. Unless otherwise indicated, all information contained in this Prospectus (i) assumes that the U.S. Underwriters' over-allotment option will not be exercised and (ii) reflects the consummation of the Reorganization (as defined and described in "Recent Developments and Certain Transactions") in January 1996 pursuant to which, among other things, EXCEL Telecommunications, Inc. (which, prior to the Reorganization, conducted all of the business and operations of the Company) formed, and subsequently became an indirect wholly owned subsidiary of, EXCEL Communications, Inc. and, in connection therewith, the former shareholders of EXCEL Telecommunications, Inc. became stockholders of EXCEL Communications, Inc., receiving 1,000 shares of Common Stock for each share of common stock held by them in EXCEL Telecommunications, Inc. Currently, EXCEL Communications, Inc. conducts all of its business and operations through its subsidiaries and, unless the context indicates otherwise, all references to the Company or EXCEL refer to EXCEL Communications, Inc. and include its direct and indirect subsidiaries and predecessors, including its post-Reorganization second-tier subsidiary, EXCEL Telecommunications, Inc. THE COMPANY EXCEL is one of the fastest growing providers of long distance telecommunications services in the United States. At March 31, 1996, the Company provided service to approximately 3.1 million residential and small business subscribers and believes that, based upon domestic residential long distance revenues, it ranks fourth after AT&T Corp. ("AT&T"), MCI Communications Corporation ("MCI"), and Sprint Corporation ("Sprint"). The Company markets its long distance service through a multi-level network marketing system of independent representatives ("IRs"), which has contributed to its significant growth since January 1, 1993. The Company also believes that its network marketing approach provides it with lower net marketing expenses than many of its competitors. The Company's revenues were $30.8 million for 1993, $152.2 million for 1994, $506.7 million for 1995, and $280.8 million for the three months ended March 31, 1996, while net income was $2.4, $15.9, $44.4, and $34.0 million, respectively, for the same periods. The Company's pricing structure is regularly reviewed so that subscribers of the Company's long distance service generally pay less than they would for AT&T, MCI, or Sprint long distance service. In addition, the Company currently provides value-added services to its subscribers, such as calling cards, 800 service, and international telecommunications service. The Company intends to provide nationwide paging services beginning in the third quarter of 1996. According to a 1995 Federal Communications Commission ("FCC") report, revenues of the U.S. long distance telecommunications industry were approximately $67 billion in 1994. The industry is highly competitive and is dominated by four carriers, AT&T, MCI, Sprint, and WorldCom, Inc. ("WorldCom"), which together in 1994 accounted for approximately 88% of the overall market according to such 1995 FCC report. Moreover, according to such 1995 FCC report, while industry revenues grew at a compound annual rate of over 5% during the period from 1989 through 1994, the revenues of all carriers other than AT&T, MCI, Sprint, and WorldCom grew in the aggregate at an annual compound rate of over 16% during the same period. The Company's strategy has been to build a subscriber base without committing capital or management resources to construct its own network and transmission facilities. This strategy has allowed the Company to add subscribers without being limited by the capacity, geographic coverage, or configuration of any particular network that the Company might have developed. In 1990, the Company contracted with Frontier Communications Services, Inc. ("Frontier") (successor to Allnet Communication Services, Inc.) to provide switching services and network transmission of its subscribers' traffic, which has allowed the Company to pursue this strategy. As the volume of the Company's traffic has reached sufficient levels in certain markets, the Company now intends to seek other providers of long distance service and to develop its own long distance network, which may include the acquisition or leasing of its own telecommunications call switching equipment ("switches") and dedicated transmission lines, in those markets to reduce its dependence upon Frontier, provide additional services to its subscribers, and reduce expenses associated with the transmission of long distance calls. The Company's services are marketed nationwide exclusively through a network of IRs. The Company encourages IRs to enroll subscribers with whom the IRs have an ongoing relationship as a result of being a family member, friend, business associate, neighbor, or otherwise. This network marketing system has been selected by the Company because the Company believes it reduces net marketing costs, subscriber acquisition costs, and subscriber attrition. The Company believes that subscribers will be more likely to remain with the Company because they have been enrolled with the Company by someone with whom they have an ongoing relationship. The Company also believes that its network marketing system will continue to build a base of potential subscribers for additional services and products. The Company does not require a person to be an IR in order to be a subscriber, and less than 25% of the Company's subscribers are IRs. The Company's network marketing system is particularly attractive to potential IRs because of the potential for supplemental income and because the IRs are not required to purchase any inventory, have no monthly sales quotas or account collection issues, have minimal paperwork, and have a flexible work schedule. While other long distance carriers such as MCI and LCI International, Inc. ("LCI") market their long distance and paging services through network marketing alliances as part of their marketing strategy, EXCEL utilizes this marketing channel exclusively. The Company believes that because of its focus on the structuring, management, and control of the network marketing program, it has the information and the organizational structure to modify marketing and training programs for the IRs to respond to market changes and maintain the brand allegiance of the IRs. The Company believes that this focus has contributed to the Company's growth and the Company's ability to obtain and maintain IRs who are available and motivated to sell additional communications products. All IR compensation is paid directly by the Company and is based on the acquisition of subscribers and their long distance usage. IRs receive subscriber acquisition commissions only after, among other things, subscribers sign up for the Company's long distance service. IRs receive commissions on the long distance usage of subscribers who they have personally signed up and subscriber acquisition commissions and long distance usage commissions for subscribers signed up by certain other IRs they have recruited directly themselves or indirectly, as in the case of subscribers recruited by other IRs in their downline. The maximum aggregate subscriber acquisition commissions the Company may be required to pay for any new subscriber are approximately $95, but averaged $46.08 for the year ended December 31, 1995 and $48.44 for the three months ended March 31, 1996. The maximum aggregate long distance usage commissions the Company may be required to pay for a single subscriber from such subscriber's long distance usage are 9.75%, but averaged 6.62% for the year ended December 31, 1995 and 6.65% for the three months ended March 31, 1996. The Company offers its subscribers a variety of long distance services and products, which include residential service, commercial service, 800 service, international services, and calling cards. The Company intends to provide nationwide paging services beginning in the third quarter of 1996. The Company believes that controlling the subscriber base through the process of initiating service, customer care, and billing, as well as the maintenance and improvement of service, is key to achieving its long term goals. In that regard, the Company (i) provisions its subscribers directly to the local exchange carriers ("LECs"), (ii) communicates and manages subscriber status with long distance carriers and the LECs via electronic interface, (iii) collects call records from long distance carriers on a daily basis and rates and processes and bills the calls within 24 hours of their occurrence, (iv) operates call centers where advisors utilize automated systems to answer subscriber questions and provide support services to the IRs, and (v) is in the process of migrating its subscribers to the Company's own carrier identification code rather than that of the underlying carrier. As of March 31, 1996, the Company employed approximately 1,500 employees at its Dallas, Texas headquarters to, among other things, support these long distance back office and corporate functions and to provide customer care for its subscribers and support services for the IRs. The Company offers its network of IRs a number of support services in order to aid their success. These include accounting reports regarding their IR organizations, which are currently provided in both a monthly printed format and daily on an automated dial-in interactive voice response system and which the Company intends to provide in the near future on an Internet home page. In addition, the Company provides extensive training, information, and motivational support to the IR network through (i) its nationwide training organization, (ii) monthly newsletters, (iii) a satellite television broadcast four times per week over its Excelevision(TM) network, and (iv) regional rallies. The Company's goal is to be a provider of a wide range of communications products and services. The Company intends to increase revenues from each subscriber, increase the retention of subscribers, and provide additional revenue opportunities for its IR network. The Company intends to achieve this goal by pursuing the following strategy: . Maintain and Expand its Subscriber Base by continuing to offer high quality, competitively-priced products and superior customer care through a highly motivated and growing network of IRs. . Improve and Expand its Core Product Line by continuing to evaluate and negotiate with long distance carriers for products that offer the latest technology, a high level of quality, and prices that reflect the purchasing power of the Company's substantial subscriber base. The Company also intends to develop its own long distance network, which may include, among other things, acquiring or leasing switches and dedicated transmission lines, and intends to provide enhanced, value-added long distance products. . Offer Additional Communications Products by entering into agreements for the resale of additional communications products and services that meet the expanding needs of its subscribers, which may include, among others, paging, wireless cable, home security monitoring and communication, cellular phone service, local phone service, and Internet access. In March 1996, the Company entered into an agreement with PageMart, Inc. ("PageMart") to provide for the nationwide resale of paging products and services to the Company's subscribers, including two-way paging services (also known as narrowband personal communications services ("Narrowband PCS")) when they become available to PageMart's customers. The Company also intends to make strategic acquisitions to expand its product line. . Grow and Develop its Network of Independent Representatives by enhancing the recruiting and training services offered to IRs, continuing to support the marketing efforts of IRs, and introducing new income opportunities for IRs. The Company was formed in December 1988 and commenced operations in 1989. The Company's principal executive office is located at 9101 LBJ Freeway, Suite 800, Dallas, Texas 75243, and its telephone number is (214) 705-5500. THE OFFERING Common Stock Offered <TABLE> <S> <C> By the Company U.S. Offering.................. 6,640,000 shares International Offering......... 1,660,000 shares ------------------ Total........................ 8,300,000 shares By the Selling Stockholders U.S. Offering.................. 1,360,000 shares International Offering......... 340,000 shares ------------------ Total........................ 1,700,000 shares Common Stock to be outstanding af- ter the Offering.................. 107,300,000 shares(1) Use of proceeds.................... Development and/or acquisition of a long distance network, corporate facilities, and information systems; and for general corporate purposes, including working capital and possible acquisitions. See "Use of Proceeds." Proposed NYSE symbol............... "ECI" </TABLE> - -------------------- (1) Excludes 8,910,000 shares of Common Stock reserved for issuance pursuant to the 1995 Stock Option Plan (as defined herein), of which 5,127,325 shares will be issuable upon exercise of stock options previously granted (none of which are vested or exercisable as of the date of this Prospectus). See "Business -- Legal Matters" and "Management -- Benefit Plans."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001007367_tvc_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001007367_tvc_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION, INCLUDING FINANCIAL STATEMENTS AND RELATED NOTES THERETO, THE OTHER FINANCIAL INFORMATION AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS: (I) ASSUMES NO EXERCISE OF THE UNDERWRITER'S OVER-ALLOTMENT OPTION; (II) GIVES EFFECT TO A 144 FOR 1 STOCK SPLIT EFFECTED IN NOVEMBER, 1995; AND (III) GIVES EFFECT TO THE REINCORPORATION OF THE COMPANY IN DELAWARE EFFECTED IN MARCH, 1996. INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS." THE COMPANY Legacy Software, Inc. ("Legacy" or the "Company") develops consumer software products for the rapidly growing "edutainment" CD-ROM market. An edutainment product combines entertainment and education content for home and educational use, in which learning is an integral part of playing a game. Legacy's innovative CAREER SIM-TM- series will simulate various career disciplines by combining the expertise of game designers, educators, subject matter experts, programmers and artists to produce mind stimulating software. The CAREER SIM-TM- series is currently comprised of one title, the EMERGENCY ROOM title, which is being marketed by the Company's co-development partner, International Business Machines Corporation ("IBM"). In addition to the EMERGENCY ROOM title, the Company has entered into a (i) development and license agreement with IBM to develop the contemplated DISTRICT ATTORNEY title, which is tentatively scheduled for release in March 1997, and (ii) non-binding letter of intent with IBM to begin negotiations on a development and license agreement for the contemplated ER CODE BLUE title. Pursuant to a letter agreement with IBM, in March 1996, the Company delivered a design specification for the contemplated CAREER SIM-TM- NEWS FLASH title to IBM. In April 1996, IBM notified the Company of its decision not to proceed with the development of the contemplated NEWS FLASH project, and the Company has initially decided to develop such project without the co-funding assistance of IBM. There can be no assurances that the Company will develop or complete the NEWS FLASH title with or without a co-development partner or affiliate or pursuant to other arrangements. The CAREER SIM-TM- products will be designed to explore realistic career situations in an entertaining and engaging format. Underlying each title will be an expert database of situations or "cases" which progresses from very easy to challenging. In the process of mastering a case, the player will be exposed to information that is typical of a particular discipline, as well as the appropriate procedures and strategies utilized by practitioners of that discipline. The player will learn the logic inherent in a particular career, and the application of facts to the solution of realistic problems. Each case will be presented in a dynamic entertaining format that seamlessly merges information and realistic scenarios. The Company is designing the contemplated DISTRICT ATTORNEY, NEWS FLASH and ER CODE BLUE CD-ROM titles to incorporate online distribution and multiplayer gaming. See "Risk Factors -- Dependence on IBM," "-- Development of New Products; Unproven Acceptance of the Company's Products, Including the EMERGENCY ROOM Title" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The EMERGENCY ROOM title, the Company's only currently marketed CAREER SIM-TM- title, is a multimedia computer simulation designed to provide a realistic and involving experience of what it is like to be an emergency room doctor. The player begins as a medical student and works up the ranks to attending physician by successfully completing 400 different medical cases at five levels of difficulty. The EMERGENCY ROOM player examines, diagnoses and treats patients whose problems range from simple broken bones to gunshot wounds. The simulation integrates live-action video, 3-D graphics and a comprehensive medical database covering all 400 cases in a game format. The EMERGENCY ROOM title began shipping in October, 1995, and is exclusively marketed and distributed by the Consumer Software Division of International Business Machines Corporation ("IBM"), which funded approximately half of the development costs. The Company believes that simulation software combined with multimedia CD-ROM technology, with its capacity for interactivity and reality through graphics, video and sound, offers a new and exciting entertainment medium. Legacy's objective is to exploit this new entertainment medium and establish itself as a leading developer and publisher of mind stimulating edutainment, infotainment and simulation products. The Company's strategy for achieving this objective is to develop the CAREER SIM-TM- series and other families of products, exploit leading-edge technologies and utilize co-development and affiliate label distribution relationships. Legacy's Chairman of the Board of Directors, President and CEO, Ariella J. Lehrer, Ph.D., is a cognitive psychologist with more than twelve years of experience in software consulting and executive management. Total industry multimedia software title revenue has been estimated to reach approximately $1.45 billion in 1995, representing an increase of approximately 85% from $786 million in 1994. Dataquest, a computer market research firm, reported that in 1995 personal computer sales grew nearly 25% worldwide, to 59.7 million, and 21% in the U.S., to 22.5 million. From January through November, 1995, revenue from entertainment computer software titles grew 28% from the same period during 1994. Computer software game titles grew by 27% in terms of units over the same time period during 1994 to total 25.7 million units through November, 1995, representing over 35% of all software units sold through November, 1995. The 28% year-over-year revenue growth represents the highest revenue growth rate of any category of software through November, 1995. Over the first eleven months of 1995, educational software revenues totalled nearly $315 million on approximately 9.8 million units sold, growing by roughly 25% through November, 1995 in terms of both units and revenues. Prior to its CAREER SIM-TM- series, the Company created five children's software edutainment titles, including CHILDREN'S WRITING AND PUBLISHING CENTER (published by The Learning Company), MICKEY'S CROSSWORD PUZZLE MAKER (published by Walt Disney Software), MUTANOID MATH CHALLENGE, MUTANOID WORD CHALLENGE, and MAGIC BEAR'S MASTERPIECES (published by Legacy). These children's software products have won numerous awards, including "The Best Educational Software Program of the Decade" awarded in 1990 for CHILDREN'S WRITING AND PUBLISHING CENTER by TECHNOLOGY AND LEARNING magazine, the nomination in 1992 of MUTANOID WORD CHALLENGE for "Best Educational Software Program" by the Software Publishers Association and the designation in 1993 and 1994 of MAGIC BEAR'S MASTERPIECES as recommended for purchase by the California State Department of Education and the New York City Public Schools Division of Instruction and Professional Development. The Company received a total of $36,399 in software sales revenue from three non-CAREER SIM-TM- titles, MUTANOID MATH CHALLENGE, MUTANOID WORD CHALLENGE and MAGIC BEAR'S MASTERPIECES, during fiscal 1995. The Company received a one-time payment of $475,000 for the development of CHILDREN'S WRITING AND PUBLISHING CENTER from The Learning Company in 1989 and a one-time payment of $75,000 for the development of MICKEY'S CROSSWORD PUZZLE MAKER from Walt Disney Software in 1990. The Company was organized in California in 1989 as a successor to a partnership formed in 1986, and was reincorporated in Delaware in 1996. The principal offices of the Company are located at 8521 Reseda Boulevard, Northridge, California 91324, and its telephone number is 818/885-5773. LEGACY SOFTWARE-REGISTERED TRADEMARK- and MUTANOIDS-REGISTERED TRADEMARK- are registered trademarks of the Company, and EMERGENCY ROOM-TM- is a trademark of the Company. In January 1996, the Company filed a trademark application with the United States Patent and Trademark Office to register CAREER SIM-TM-, which is also a trademark of the Company. This Prospectus also includes trademarks of companies other than the Company. THE OFFERING (1) <TABLE> <S> <C> Common Stock Offered by the Company............................ 1,000,000 shares Common Stock Outstanding Prior to the Public Offering (2)(3)(4)...... 1,282,551 shares Common Stock Outstanding After the Public Offering (3)(4)............. 2,282,551 shares Use of Proceeds.................... To repay indebtedness of $300,000 and to pay a consultant $25,000, with the remainder to be used for working capital and general corporate purposes. See "Use of Proceeds." Proposed Nasdaq SmallCap Market Symbol (5)......................... LGCY Risk Factors....................... An investment in the securities offered hereby involves a high degree of risk and immediate substantial dilution. See "Risk Factors" and "Dilution." </TABLE> - ------------------------ (1) Assumes that the Underwriter's over-allotment is not exercised. See "Underwriting." (2) Based on shares of Common Stock outstanding as of May 10, 1996. (3) Excludes (i) an aggregate of 440,000 shares of Common Stock issuable upon exercise of outstanding stock options, (ii) an aggregate of 131,800 shares of Common Stock reserved for future issuance under the Company's 1995 Stock Option/Stock Issuance Plan (the "1995 Stock Option/ Stock Issuance Plan"), (iii) an aggregate of 150,000 shares of Common Stock reserved for future issuance under the Company's Employee Stock Purchase Plan (the "Purchase Plan"), (iv) 200,000 shares of Common Stock reserved for issuance upon exercise of the Warrants and (v) 92,800 shares underlying that certain warrant exercisable for 92,800 shares of Common Stock to be issued to the Underwriter upon consummation of the Public Offering (the "JBO Warrant"). See "Management -- 1995 Stock Option/Stock Issuance Plan" and "Shares Eligible for Future Sale." (4) Gives effect to the issuance of 534,351 shares upon conversion of $700,000 in principal amount of the Convertible Note at a conversion price per share of $1.31 upon the closing of the Public Offering. (5) The inclusion of the Common Stock on The Nasdaq SmallCap Market does not provide assurance that a public trading market will develop for the Common Stock or, if one does develop, that it will be maintained. See "Risk Factors -- Absence of Public Market; Possible Volatility of Stock Price," "-- Impact of Potential Nasdaq Delisting" and "-- Underwriter's Influence in the Market May Have Adverse Consequences." SUMMARY FINANCIAL INFORMATION The statement of operations data set forth below with respect to the years ended December 31, 1993, 1994 and 1995, and the balance sheet data at December 31, 1994 and 1995, are derived from, and are qualified by reference to, the audited financial statements included elsewhere in this Prospectus. The statement of operations data set forth below with respect to the years ended December 31, 1991 and 1992, and the balance sheet data at December 31, 1991, 1992 and 1993, are derived from unaudited financial information prepared on the same basis as the audited financial statements. In the opinion of management, all unaudited financial information includes all adjustments, consisting of normal recurring adjustments, necessary to present fairly the information presented. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ------------------------------------------------------------------ 1991 1992 1993 1994 1995 ----------- ------------ ----------- ------------ ------------ <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue: Royalties................................ $ 12,272 $ 17,657 $ 34,819 $ 16,809 $ 9,179 Software sales........................... 216,397 158,146 421,715 69,856 36,399 Consulting............................... 0 0 0 100,000 6,000 ----------- ------------ ----------- ------------ ------------ Total.................................. $ 228,669 $ 175,803 $ 456,534 $ 186,665 $ 51,578 ----------- ------------ ----------- ------------ ------------ ----------- ------------ ----------- ------------ ------------ Costs and expenses: Cost of royalties........................ 0 0 0 0 13,939 Cost of software sales................... 98,640 45,754 177,661 46,783 31,528 Product development (1).................. 109,215 193,879 81,959 196,595 72,951 General and administrative............... 61,544 111,643 124,634 133,644 336,457 Selling.................................. 2,265 2,784 31,467 9,829 21,216 ----------- ------------ ----------- ------------ ------------ Total.................................. 271,664 354,060 415,721 386,851 476,091 ----------- ------------ ----------- ------------ ------------ Income (Loss) from operations.............. (42,995) (178,257) 40,813 (200,186) (424,513) Interest expense........................... 11,493 25,251 41,775 51,707 267,005 ----------- ------------ ----------- ------------ ------------ Net loss............................... $ (54,488) $ (203,508) $ (962) $ (251,893) $ (691,518) ----------- ------------ ----------- ------------ ------------ ----------- ------------ ----------- ------------ ------------ Pro forma net loss (2)................. $ (779,768) ------------ ------------ Net loss per common share.................. $ (0.04) $ (0.15) $ 0 $ (0.18) $ (0.49) Pro forma net loss per common share........ $ (0.55) Dividends per share........................ 0 0 0 0 0 Weighted average common stock shares outstanding............................... 1,396,218 1,396,218 1,396,218 1,396,218 1,396,218 <CAPTION> AS OF DECEMBER 31, ------------------------------------------------------------------ 1991 1992 1993 1994 1995 ----------- ------------ ----------- ------------ ------------ <S> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents.................. $ 60,728 $ 756 $ 3,389 $ 20,750 $ 365,190 Working capital (deficiency)............... (160,878) (390,578) 16,631 (186,013) (162,097) Total assets............................... 74,193 24,537 191,601 96,492 710,890 Long-term debt (including current portions)................................. 174,471 378,046 485,673 626,431 1,338,084 Stockholders' deficit...................... (218,532) (422,040) (423,002) (674,895) (824,590) </TABLE> - ------------------------ (1) Product development expenses for the years ended December 31, 1993, 1994, and 1995 are net of co-funding of development expenses of $141,162, $338,058 and $261,410, respectively. (2) Reflects a pro forma adjustment of $88,250 for increased compensation expense as a result of assuming employment agreements entered into during 1995 and 1996 had been in effect as of January 1, 1995.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001008882_phoenix_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001008882_phoenix_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..b0b154cb97d5ed94f5868ab5f2a74296364975dd
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and consolidated financial statements, including notes thereto, appearing elsewhere in this Prospectus. Each prospective investor is urged to read this Prospectus in its entirety. THE COMPANY The Company was incorporated on August 20, 1981 in the State of New Jersey under the name Alcor Energy and Recycling Systems, Inc. ("Alcor") for the purpose of designing, constructing, managing and operating resource recovery facilities. On January 23, 1995 Alcor acquired all of the outstanding shares of Compost America Company of New Jersey, Ltd. ("CANJ"), which had been incorporated on December 17, 1993 in the State of Delaware for similar purposes, and subsequently changed its name to Compost America Holding Company, Inc. The Company conducts its business directly and through its wholly-owned subsidiary CANJ. The Company incorporated Garden Life Sales Company, Inc. in Delaware on March 1, 1996 to handle future sales of compost by the Company. On June 15, 1995 the Company incorporated Compost America Technologies, Inc., a Delaware corporation, as a wholly-owned subsidiary to license certain rights to composting technology. CANJ itself has six subsidiaries, Newark Recycling and Composting Company, Inc., incorporated in Delaware on May 10, 1994, and owned 75% by CANJ and 25% by Prince Georges Contractors, Inc., doing business as Potomac Technologies, Inc. ("PTI"), an unaffiliated company, and five wholly-owned subsidiaries, Monmouth Recycling and Composting Co., Inc., incorporated in Delaware on May 10, 1994, Chicago Recycling and Composting Company, Inc., incorporated in Delaware on August 4, 1995, Gloucester Recycling and Composting Company, Inc., incorporated in Delaware on August 15, 1994, Philadelphia Recycling and Composting Company, Inc., incorporated in Pennsylvania on March 8, 1995 and Miami Recycling and Composting Company, Inc., incorporated in Delaware on November 17, 1995. Unless otherwise indicated, references to the Company includes the Company and its subsidiaries and CANJ and its subsidiaries. The Company is a development stage company which will construct and manage enclosed organic material recycling compost manufacturing plants. Composting is a method of converting the organic portion of garbage (Municipal Solid Waste--"MSW") and sewage sludge into a peat moss like product with agronomic benefits. The Company will be paid fees ("tipping fees"), just as landfills and incinerators are paid, for receiving and processing the organic waste and sewage sludge. The Company also intends to receive revenues from the sale of the compost it produces. The Company hopes to be competitive by locating its plants convenient to urban centers, thus eliminating the need to use local transfer stations and reducing the transportation costs associated with hauling waste to distant out-of-state landfills. The Company's first project will be a 200,000 square foot fully enclosed composting facility in Newark, New Jersey ("Newark Project"), which is 75% owned by the Company through CANJ, and 25% owned by PTI. The Company's executive offices are located at 320 Grand Avenue, Englewood, New Jersey 07631-4355. The Company's telephone number is (201) 541-9393; fax (201) 541-1303. THE OFFERING <TABLE> <S> <C> Securities Offered........................... 1,353,100 shares of Common Stock. See "Description of Securities." Shares of Common Stock outstanding prior to and after the offering....................... 14,563,536 (1) Use of Proceeds.............................. The Company will not realize any proceeds from the sale of the Common Stock offered hereby. Risk Factors................................. Investment in the Common Stock offered hereby involves a high degree of risk. See "Risk Factors". Significant Risk Factors include, among others, No Operating History, Reliance Upon Funding, Reliance Upon Project Financing, Dependence Upon Key Personnel, Possible Obsolescence of Technology and Shares Available for Resale. Bulletin Board Symbol: Common Stock............................... CAHC </TABLE> - ------------ (1) Excludes up to 3,234,012 common shares issuable upon the exercise of certain stock options and warrants. SUMMARY CONSOLIDATED FINANCIAL INFORMATION The summary consolidated financial information set forth below is derived from the consolidated financial statements appearing elsewhere in this Prospectus. Such information should be read in conjunction with the consolidated financial statements, including the Notes thereto. CONSOLIDATED STATEMENTS OF OPERATIONS DATA: <TABLE> <CAPTION> DEC. 17, 1993 NINE MONTHS DECEMBER 17, 1993 YEAR ENDED (INCEPTION) ENDED JAN. 31, (INCEPTION) APRIL 30, TO APRIL 30, ---------------------- TO JAN. 31, 1995 1994 1996 1995 1996 ---------- ------------- --------- --------- <S> <C> <C> <C> <C> <C> Revenues.................... $ 6,500 $ 80,741 $ 3,288 $ 6,500 $ 90,529 Cost of operations.......... 672,687 239,088 457,916 250,162 1,369,691 ---------- ------------- --------- --------- ----------------- Loss from operations........ (666,187) (158,347) (454,628) (243,662) (1,279,162) ---------- ------------- --------- --------- ----------------- Other charges: Interest.................. 10,753 -- 155,110 5,741 165,863 Loss in joint venture and minority interest........... 25,952 -- 24,267 -- 50,219 ---------- ------------- --------- --------- ----------------- 36,705 -- 179,377 5,741 216,082 ---------- ------------- --------- --------- ----------------- Net Loss.................... $ (702,892) $(158,347) $(634,005) $(249,403) $(1,495,244) Net (loss) per share........ $ (0.07) $ (0.03) $ (0.04) $ (0.03) $ (0.10) </TABLE> CONSOLIDATED BALANCE SHEETS DATA AS AT: <TABLE> <CAPTION> JANUARY 31, 1996 ----------------------------- APRIL 30, 1995 ACTUAL AS ADJUSTED(1) -------------- ----------- -------------- <S> <C> <C> <C> Total assets........................................ $ 3,702,143 $ 8,809,394 $ 8,989,902 Working capital (deficit)........................... $ (1,219,916) $(5,596,162) $ (5,212,458) Long-term debt, less current maturities............. $ 414,871 $ 264,871 $ 264,871 Total liabilities................................... $ 1,692,796 $ 6,526,692 $ 6,448,760 Shareholders' Equity................................ $ 2,009,347 $ 2,282,702 $ 2,544,142 </TABLE> - ------------ (1) As adjusted to give effect to the issuance from January 31, 1996 to March 31, 1996 of $185,000 promissory notes, the issuance of 131,000 shares of Common Stock for $329,500 and the results of operations during that period.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001008896_vincam_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001008896_vincam_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..3bbb816a75c0f6f4094a350901d10fd3a1ac5922
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES IN THIS PROSPECTUS TO "VINCAM" AND THE "COMPANY" REFER TO THE VINCAM GROUP, INC. AND ITS CONSOLIDATED SUBSIDIARIES.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001008914_cf-i_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001008914_cf-i_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..8089a9d5cd35bec56a6a8b6875ebf2d48df77de4
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements included and incorporated by reference in this Prospectus. Unless otherwise indicated or the context otherwise requires, (i) all information in this Prospectus assumes that the over-allotment option to purchase up to an additional 900,000 shares of Common Stock granted to the underwriters by the Company in the Common Stock Offering is not exercised and (ii) the terms "Company" and "Oregon Steel" refer to Oregon Steel Mills, Inc. and its consolidated subsidiaries. THE COMPANY Oregon Steel operates two steel minimills and four finishing facilities in the western United States and Canada that produce one of the broadest lines of specialty and commodity steel products of any domestic minimill company. The Company emphasizes the cost-efficient production of higher margin specialty steel products targeted at a diverse customer base located primarily in the western United States, western Canada and the Pacific Rim. The Company's manufacturing flexibility allows it to manage actively its product mix in response to changes in customer demand and individual product cycles. Through strategic acquisitions and selective capital additions, the Company has: - increased shipments of steel products from 762,700 tons in 1991 to 1.4 million tons in 1995 - expanded its range of finished products from plate and large diameter welded pipe in 1991 to eight products currently by adding electric resistance welded ("ERW") pipe, rail, rod, bar, wire and seamless oil country tubular goods ("OCTG") - increased its emphasis on higher margin specialty products - expanded its geographic markets from the western United States to national and international markets The Company is organized into two business units: the Oregon Steel Division and the CF&I Steel Division. The Oregon Steel Division is centered on the Company's steel plate minimill in Portland, Oregon (the "Portland Mill"), which is the only steel plate minimill in the 11 western states and one of only two steel plate production facilities operating in that region. The Oregon Steel Division's steel pipe mill in Napa, California (the "Napa Pipe Mill"), one of only four large diameter pipe mills operating in the United States and the only such mill in the 11 western states, produces large diameter pipe that satisfies the demanding specifications of oil and gas transmission companies. The Oregon Steel Division also produces large diameter pipe and ERW pipe at its 60% owned pipe mill in Camrose, Alberta, Canada (the "Camrose Pipe Mill"), which is strategically located in the Alberta natural gas fields to provide transmission pipe to western Canada's gas industry. The CF&I Steel Division consists of steelmaking and finishing facilities in Pueblo, Colorado (the "Pueblo Mill"). Through the Pueblo Mill, the Company is the sole rail manufacturer west of the Mississippi River and is one of only two rail manufacturers in the United States. During 1995 the Company completed the construction and start-up of a combination rod and bar mill that has an annual capacity of approximately 600,000 tons and the capability to produce specialty bar products and high carbon rod in 6,000-pound coils. The Pueblo Mill is also a producer of wire products and OCTG. Oregon Steel seeks to be a cost-efficient producer of specialty and commodity steel products. The Company strives to reduce costs and improve performance by (i) operating manufacturing facilities capable of responding rapidly to changes in customer demand and individual product cycles, (ii) emphasizing the production of higher margin specialty steel products and (iii) investing in efficient and flexible manufacturing technology. CAPITAL IMPROVEMENT PROGRAM As part of its effort to reduce manufacturing costs, upgrade its steelmaking facilities and improve product quality and product mix, the Company initiated a $410 million (excluding capitalized interest) capital improvement program in late 1993, of which approximately $324 million had been expended as of March 31, 1996. The purpose of the program is to (i) expand and improve the steelmaking and casting capability at the Pueblo Mill from 900,000 tons to 1.2 million tons annually, (ii) reduce the cost of producing rail, rod and bar products at the Pueblo Mill while improving product quality and expanding the specialty grades that can be manufactured there, (iii) reduce the cost and improve the yield of plate rolling and other finishing operations at the Portland Mill while increasing plate rolling capacity from 430,000 tons to 1.2 million tons annually and (iv) reduce dependence on scrap steel. Several of these projects have been completed, and construction of various other projects is scheduled to continue through 1996. As part of its strategy in acquiring the CF&I Steel Division in 1993, the Company initiated significant capital additions to the Pueblo Mill. In 1993 work began on a series of capital improvements, principally to the steelmaking facility, rod and bar mills and rail production facilities. These improvements have been substantially completed except for the installation of equipment capable of producing in-line head hardened rail, which is expected to begin operating in the third quarter of 1996. The new rod and bar mill was completed in July 1995 and is expected to reach full production capacity in the fourth quarter of 1996. Major improvements completed to date include expansion of steelmaking and casting capacity from 900,000 tons to 1.2 million tons annually, upgrading from ingot to continuous casting for rail production, enhancement of the ability to produce specialty grades of steel and construction of a new rod and bar mill. These changes are expected to reduce average production costs at the Pueblo Mill, primarily as a result of increased yields and enhanced production efficiencies, and to improve product quality and allow production of a broader range of products. At the Portland Mill, the Company has begun engineering, site preparation and construction work for installation of a new Steckel combination rolling mill (the "Combination Mill"). When fully operational, the Combination Mill is expected to (i) increase capacity of plate rolling operations from 430,000 tons to 1.2 million tons annually, (ii) reduce the cost and improve the yield of plate rolling and other finishing operations, (iii) provide enhanced manufacturing flexibility, (iv) supply substantially all the Company's requirements for plate used in its manufacturing of large diameter line pipe, (v) add coiled plate to the product mix and (vi) be capable of producing wider steel plate than any such mill currently operating in the world. The Combination Mill is currently scheduled to begin start-up operation in the second half of 1996 and is expected to reach full production capacity by the end of 1997. The Company plans to operate the existing rolling mill at the Portland Mill until the Combination Mill is fully operational. The Company believes the improvements described above will significantly reduce production costs at both the CF&I and Oregon Steel Divisions. The Company estimates that the capital improvements at the Pueblo Mill, when fully operational, should reduce the average production costs of making cast steel for use in its finishing operations by approximately $27 per ton and should reduce the average production costs of making rod and bar products from cast steel by approximately $28 per ton (assuming annual production of approximately 1,000,000 tons of cast steel and approximately 500,000 tons of rod and bar products), in each case compared to average costs for the year ended December 31, 1995. In that regard, average manufacturing costs at the CF&I Steel Division during 1995 were higher than anticipated due to start-up difficulties related to the new rod and bar mill. At the Oregon Steel Division, the Company estimates that the Combination Mill and related improvements, when fully operational and assuming production of approximately 775,000 tons of steel plate and coil product annually, should decrease average rolling costs by approximately $45 per ton, including estimated savings of approximately $11 per ton due to the elimination of transportation costs related to the operations at the Company's plate rolling mill in Fontana, California (the "Fontana Plate Mill"), compared to average plate rolling costs for the year ended December 31, 1994. The Company believes 1994 results are more appropriate than 1995 results for calculating the estimated cost savings at the Oregon Steel Division because of the termination of production at the Fontana Plate Mill in the fourth quarter of 1994. Closure of the Fontana Plate Mill, which was an initial step in the Company's plan to consolidate plate rolling operations at the Portland Mill, reduced the Company's effective plate rolling capacity in 1995 and thereafter by approximately 50%. The Company anticipates that plate rolling capacity lost as a result of the Fontana Plate Mill closure will be restored when the Combination Mill is fully operational. There is no assurance that these estimated cost savings will be realized or that capital improvement projects will be fully operational by the dates anticipated, and actual results will vary from the estimates set forth herein. The estimates of cost savings are based on a number of estimates and assumptions, including completion of the capital improvement program and an assumed increase in production, as a result of the capital improvement program, to the production levels set forth above (which in certain cases are at or near the maximum production levels for the respective facilities); average estimated cost savings per ton would be lower, perhaps substantially, at lower rates of production. In addition, these estimates do not take into account, among other things, estimated increased depreciation expenses resulting from the capital improvement program. Due in large part, however, to the assumed increase in production levels as set forth above, depreciation, if taken into account, would not significantly affect the estimated average cost savings for cast steel, but would reduce the estimated average cost savings for rod and bar to $27 per ton and for steel plate to $35 per ton. Furthermore, following completion of capital improvement projects the Company may continue to experience operational difficulties and delays before those projects become fully operational. As a result, there is no assurance that the new rod and bar mill, the Combination Mill or other capital improvement projects will be fully operational by the dates anticipated, which would delay the realization of benefits from those projects. Moreover, completion of the capital improvement program is subject to a number of uncertainties, including the continued availability of borrowings under the Amended Credit Agreement, and there is no assurance that the program will be completed as planned. See "Risk Factors -- Start-Up Difficulties," "-- Funding for the Capital Improvement Program," "-- Potential Delay in Completion of Capital Improvement Program" and "-- Uncertainty of Benefits of Capital Improvement Program; Increase in Interest and Depreciation Expense" and "Business -- Capital Improvement Program." The Company believes the information set forth in the preceding two paragraphs includes "forward-looking statements" within the meaning of Section 27A of the Securities Act and is subject to the safe harbor created by that section. Certain factors that could cause results to differ materially from those projected in the forward-looking statements are set forth in those paragraphs and in "Risk Factors" and "Business -- Capital Improvement Program." THE REFINANCING The Notes Offering is part of a refinancing (the "Refinancing") which will include (i) the Common Stock Offering and the Notes Offering, (ii) the amendment of the Company's existing bank credit agreement (the "Old Credit Agreement") to establish a $125 million credit facility (the "Amended Credit Agreement") collateralized by accounts receivable and inventory, none of which is expected to be borrowed as of the completion of the Offerings, and (iii) the repayment in full of all of the outstanding indebtedness under the Old Credit Agreement. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Description of Certain Indebtedness." In connection with the proposed Refinancing, Napa Pipe Corporation and Oregon Steel Mills -- Fontana Division, Inc., former subsidiaries of the Company, were merged into the Company in February 1996 (the "Mergers"). The following table sets forth the estimated sources and uses of funds from the Refinancing, assuming a public offering price of $16.00 per share for the Common Stock Offering (in thousands). <TABLE> <S> <C> Sources: Common Stock Offering(1)...................................................... $ 96,000 Notes Offering(1)............................................................. 235,000 Amended Credit Agreement...................................................... -- -------- Total sources......................................................... $331,000 ======== Uses: Repay borrowings under Old Credit Agreement(2)................................ $295,000 Estimated fees and cash expenses(3)........................................... 14,700 Capital expenditures and other general corporate purposes..................... 21,300 -------- Total uses............................................................ $331,000 ======== </TABLE> - --------------- (1) Represents gross proceeds. (2) Estimated outstanding balance upon completion of the Offerings. (3) Includes (i) estimated underwriting discounts and commissions and related expenses of the Offerings and (ii) estimated cash payments in the approximate aggregate amount of $2.6 million to terminate certain interest rate swap agreements related to the Old Credit Agreement. RECENT DEVELOPMENTS On June 7, 1996 the Company announced that a mechanical failure had resulted in the temporary shutdown of the ladle refining furnace (the "LRF") at the Pueblo Mill. The LRF is used to refine the chemistry of the molten steel produced by the electric arc furnaces at the Pueblo Mill. The Company estimates that repairs to the LRF will take approximately 20 days and that, until the LRF is returned to full operation, steel production at the Pueblo Mill will be reduced substantially. There is, however, no assurance that repairs will not take longer. This temporary shutdown of the LRF and the reduction in steel production will increase production costs and adversely affect shipment levels in June and July 1996. The Company estimates that this temporary shutdown will reduce pretax results by approximately $3 million, although the actual effect on results of operations will likely vary from this estimate. The Company has business interruption insurance and is reviewing its coverage under the policy to determine whether it is entitled to any insurance recovery in connection with the LRF shutdown. Although the Company believes there is insurance coverage (subject to a deductible), there is no assurance that the Company will be entitled to any recovery under this policy and, in any event, any recovery would likely occur in a later period. The estimates regarding the length of time it will take to repair the LRF and the effect of the temporary shutdown on results of operations are based on a number of estimates and assumptions and are subject to significant uncertainties. Accordingly, there is no assurance that the LRF will be repaired within the estimated time period set forth above or that the effect of the shutdown on results of operations will not be more adverse than the estimate set forth above. The Company's results of operations for the three months ended March 31, 1996 were favorably affected by strong shipments of rail and OCTG products. Rail sales are expected to decline in the second quarter of 1996, and this decline, together with the need for further adjustment of the product mix at the Pueblo Mill, including rod and bar product mix, is expected to adversely affect results of operations for the second quarter of 1996 compared to the first quarter of 1996. The combined effect of the matters discussed above is expected to have a material adverse effect on the Company's results of operations for the second quarter of 1996 compared to the first quarter of 1996. See "-- Forward-Looking Statements" below.
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements included and incorporated by reference in this Prospectus. Unless otherwise indicated or the context otherwise requires, (i) all information in this Prospectus assumes that the over-allotment option to purchase up to an additional 900,000 shares of Common Stock granted to the underwriters by the Company in the Common Stock Offering is not exercised and (ii) the terms "Company" and "Oregon Steel" refer to Oregon Steel Mills, Inc. and its consolidated subsidiaries. THE COMPANY Oregon Steel operates two steel minimills and four finishing facilities in the western United States and Canada that produce one of the broadest lines of specialty and commodity steel products of any domestic minimill company. The Company emphasizes the cost-efficient production of higher margin specialty steel products targeted at a diverse customer base located primarily in the western United States, western Canada and the Pacific Rim. The Company's manufacturing flexibility allows it to manage actively its product mix in response to changes in customer demand and individual product cycles. Through strategic acquisitions and selective capital additions, the Company has: - increased shipments of steel products from 762,700 tons in 1991 to 1.4 million tons in 1995 - expanded its range of finished products from plate and large diameter welded pipe in 1991 to eight products currently by adding electric resistance welded ("ERW") pipe, rail, rod, bar, wire and seamless oil country tubular goods ("OCTG") - increased its emphasis on higher margin specialty products - expanded its geographic markets from the western United States to national and international markets The Company is organized into two business units: the Oregon Steel Division and the CF&I Steel Division. The Oregon Steel Division is centered on the Company's steel plate minimill in Portland, Oregon (the "Portland Mill"), which is the only steel plate minimill in the 11 western states and one of only two steel plate production facilities operating in that region. The Oregon Steel Division's steel pipe mill in Napa, California (the "Napa Pipe Mill"), one of only four large diameter pipe mills operating in the United States and the only such mill in the 11 western states, produces large diameter pipe that satisfies the demanding specifications of oil and gas transmission companies. The Oregon Steel Division also produces large diameter pipe and ERW pipe at its 60% owned pipe mill in Camrose, Alberta, Canada (the "Camrose Pipe Mill"), which is strategically located in the Alberta natural gas fields to provide transmission pipe to western Canada's gas industry. The CF&I Steel Division consists of steelmaking and finishing facilities in Pueblo, Colorado (the "Pueblo Mill"). Through the Pueblo Mill, the Company is the sole rail manufacturer west of the Mississippi River and is one of only two rail manufacturers in the United States. During 1995 the Company completed the construction and start-up of a combination rod and bar mill that has an annual capacity of approximately 600,000 tons and the capability to produce specialty bar products and high carbon rod in 6,000-pound coils. The Pueblo Mill is also a producer of wire products and OCTG. Oregon Steel seeks to be a cost-efficient producer of specialty and commodity steel products. The Company strives to reduce costs and improve performance by (i) operating manufacturing facilities capable of responding rapidly to changes in customer demand and individual product cycles, (ii) emphasizing the production of higher margin specialty steel products and (iii) investing in efficient and flexible manufacturing technology. CAPITAL IMPROVEMENT PROGRAM As part of its effort to reduce manufacturing costs, upgrade its steelmaking facilities and improve product quality and product mix, the Company initiated a $410 million (excluding capitalized interest) capital improvement program in late 1993, of which approximately $324 million had been expended as of March 31, 1996. The purpose of the program is to (i) expand and improve the steelmaking and casting capability at the Pueblo Mill from 900,000 tons to 1.2 million tons annually, (ii) reduce the cost of producing rail, rod and bar products at the Pueblo Mill while improving product quality and expanding the specialty grades that can be manufactured there, (iii) reduce the cost and improve the yield of plate rolling and other finishing operations at the Portland Mill while increasing plate rolling capacity from 430,000 tons to 1.2 million tons annually and (iv) reduce dependence on scrap steel. Several of these projects have been completed, and construction of various other projects is scheduled to continue through 1996. As part of its strategy in acquiring the CF&I Steel Division in 1993, the Company initiated significant capital additions to the Pueblo Mill. In 1993 work began on a series of capital improvements, principally to the steelmaking facility, rod and bar mills and rail production facilities. These improvements have been substantially completed except for the installation of equipment capable of producing in-line head hardened rail, which is expected to begin operating in the third quarter of 1996. The new rod and bar mill was completed in July 1995 and is expected to reach full production capacity in the fourth quarter of 1996. Major improvements completed to date include expansion of steelmaking and casting capacity from 900,000 tons to 1.2 million tons annually, upgrading from ingot to continuous casting for rail production, enhancement of the ability to produce specialty grades of steel and construction of a new rod and bar mill. These changes are expected to reduce average production costs at the Pueblo Mill, primarily as a result of increased yields and enhanced production efficiencies, and to improve product quality and allow production of a broader range of products. At the Portland Mill, the Company has begun engineering, site preparation and construction work for installation of a new Steckel combination rolling mill (the "Combination Mill"). When fully operational, the Combination Mill is expected to (i) increase capacity of plate rolling operations from 430,000 tons to 1.2 million tons annually, (ii) reduce the cost and improve the yield of plate rolling and other finishing operations, (iii) provide enhanced manufacturing flexibility, (iv) supply substantially all the Company's requirements for plate used in its manufacturing of large diameter line pipe, (v) add coiled plate to the product mix and (vi) be capable of producing wider steel plate than any such mill currently operating in the world. The Combination Mill is currently scheduled to begin start-up operation in the second half of 1996 and is expected to reach full production capacity by the end of 1997. The Company plans to operate the existing rolling mill at the Portland Mill until the Combination Mill is fully operational. The Company believes the improvements described above will significantly reduce production costs at both the CF&I and Oregon Steel Divisions. The Company estimates that the capital improvements at the Pueblo Mill, when fully operational, should reduce the average production costs of making cast steel for use in its finishing operations by approximately $27 per ton and should reduce the average production costs of making rod and bar products from cast steel by approximately $28 per ton (assuming annual production of approximately 1,000,000 tons of cast steel and approximately 500,000 tons of rod and bar products), in each case compared to average costs for the year ended December 31, 1995. In that regard, average manufacturing costs at the CF&I Steel Division during 1995 were higher than anticipated due to start-up difficulties related to the new rod and bar mill. At the Oregon Steel Division, the Company estimates that the Combination Mill and related improvements, when fully operational and assuming production of approximately 775,000 tons of steel plate and coil product annually, should decrease average rolling costs by approximately $45 per ton, including estimated savings of approximately $11 per ton due to the elimination of transportation costs related to the operations at the Company's plate rolling mill in Fontana, California (the "Fontana Plate Mill"), compared to average plate rolling costs for the year ended December 31, 1994. The Company believes 1994 results are more appropriate than 1995 results for calculating the estimated cost savings at the Oregon Steel Division because of the termination of production at the Fontana Plate Mill in the fourth quarter of 1994. Closure of the Fontana Plate Mill, which was an initial step in the Company's plan to consolidate plate rolling operations at the Portland Mill, reduced the Company's effective plate rolling capacity in 1995 and thereafter by approximately 50%. The Company anticipates that plate rolling capacity lost as a result of the Fontana Plate Mill closure will be restored when the Combination Mill is fully operational. There is no assurance that these estimated cost savings will be realized or that capital improvement projects will be fully operational by the dates anticipated, and actual results will vary from the estimates set forth herein. The estimates of cost savings are based on a number of estimates and assumptions, including completion of the capital improvement program and an assumed increase in production, as a result of the capital improvement program, to the production levels set forth above (which in certain cases are at or near the maximum production levels for the respective facilities); average estimated cost savings per ton would be lower, perhaps substantially, at lower rates of production. In addition, these estimates do not take into account, among other things, estimated increased depreciation expenses resulting from the capital improvement program. Due in large part, however, to the assumed increase in production levels as set forth above, depreciation, if taken into account, would not significantly affect the estimated average cost savings for cast steel, but would reduce the estimated average cost savings for rod and bar to $27 per ton and for steel plate to $35 per ton. Furthermore, following completion of capital improvement projects the Company may continue to experience operational difficulties and delays before those projects become fully operational. As a result, there is no assurance that the new rod and bar mill, the Combination Mill or other capital improvement projects will be fully operational by the dates anticipated, which would delay the realization of benefits from those projects. Moreover, completion of the capital improvement program is subject to a number of uncertainties, including the continued availability of borrowings under the Amended Credit Agreement, and there is no assurance that the program will be completed as planned. See "Risk Factors -- Start-Up Difficulties," "-- Funding for the Capital Improvement Program," "-- Potential Delay in Completion of Capital Improvement Program" and "-- Uncertainty of Benefits of Capital Improvement Program; Increase in Interest and Depreciation Expense" and "Business -- Capital Improvement Program." The Company believes the information set forth in the preceding two paragraphs includes "forward-looking statements" within the meaning of Section 27A of the Securities Act and is subject to the safe harbor created by that section. Certain factors that could cause results to differ materially from those projected in the forward-looking statements are set forth in those paragraphs and in "Risk Factors" and "Business -- Capital Improvement Program." THE REFINANCING The Notes Offering is part of a refinancing (the "Refinancing") which will include (i) the Common Stock Offering and the Notes Offering, (ii) the amendment of the Company's existing bank credit agreement (the "Old Credit Agreement") to establish a $125 million credit facility (the "Amended Credit Agreement") collateralized by accounts receivable and inventory, none of which is expected to be borrowed as of the completion of the Offerings, and (iii) the repayment in full of all of the outstanding indebtedness under the Old Credit Agreement. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Description of Certain Indebtedness." In connection with the proposed Refinancing, Napa Pipe Corporation and Oregon Steel Mills -- Fontana Division, Inc., former subsidiaries of the Company, were merged into the Company in February 1996 (the "Mergers"). The following table sets forth the estimated sources and uses of funds from the Refinancing, assuming a public offering price of $16.00 per share for the Common Stock Offering (in thousands). <TABLE> <S> <C> Sources: Common Stock Offering(1)...................................................... $ 96,000 Notes Offering(1)............................................................. 235,000 Amended Credit Agreement...................................................... -- -------- Total sources......................................................... $331,000 ======== Uses: Repay borrowings under Old Credit Agreement(2)................................ $295,000 Estimated fees and cash expenses(3)........................................... 14,700 Capital expenditures and other general corporate purposes..................... 21,300 -------- Total uses............................................................ $331,000 ======== </TABLE> - --------------- (1) Represents gross proceeds. (2) Estimated outstanding balance upon completion of the Offerings. (3) Includes (i) estimated underwriting discounts and commissions and related expenses of the Offerings and (ii) estimated cash payments in the approximate aggregate amount of $2.6 million to terminate certain interest rate swap agreements related to the Old Credit Agreement. RECENT DEVELOPMENTS On June 7, 1996 the Company announced that a mechanical failure had resulted in the temporary shutdown of the ladle refining furnace (the "LRF") at the Pueblo Mill. The LRF is used to refine the chemistry of the molten steel produced by the electric arc furnaces at the Pueblo Mill. The Company estimates that repairs to the LRF will take approximately 20 days and that, until the LRF is returned to full operation, steel production at the Pueblo Mill will be reduced substantially. There is, however, no assurance that repairs will not take longer. This temporary shutdown of the LRF and the reduction in steel production will increase production costs and adversely affect shipment levels in June and July 1996. The Company estimates that this temporary shutdown will reduce pretax results by approximately $3 million, although the actual effect on results of operations will likely vary from this estimate. The Company has business interruption insurance and is reviewing its coverage under the policy to determine whether it is entitled to any insurance recovery in connection with the LRF shutdown. Although the Company believes there is insurance coverage (subject to a deductible), there is no assurance that the Company will be entitled to any recovery under this policy and, in any event, any recovery would likely occur in a later period. The estimates regarding the length of time it will take to repair the LRF and the effect of the temporary shutdown on results of operations are based on a number of estimates and assumptions and are subject to significant uncertainties. Accordingly, there is no assurance that the LRF will be repaired within the estimated time period set forth above or that the effect of the shutdown on results of operations will not be more adverse than the estimate set forth above. The Company's results of operations for the three months ended March 31, 1996 were favorably affected by strong shipments of rail and OCTG products. Rail sales are expected to decline in the second quarter of 1996, and this decline, together with the need for further adjustment of the product mix at the Pueblo Mill, including rod and bar product mix, is expected to adversely affect results of operations for the second quarter of 1996 compared to the first quarter of 1996. The combined effect of the matters discussed above is expected to have a material adverse effect on the Company's results of operations for the second quarter of 1996 compared to the first quarter of 1996. See "-- Forward-Looking Statements" below.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001009242_home_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001009242_home_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary and the selected financial data which follow this summary do not purport to be complete and are qualified in their entirety by the more detailed information and financial statements appearing elsewhere herein. Risk Factors There are certain risk factors relating to the Holding Company and the Bank which should be carefully examined by prospective purchasers of the Common Stock, including risks inherent in the potential impact of changes in interest rates, the potential impact of future changes in or the discontinuance of the business of the Bank's subsidiary, the credit risk relating to the Bank's 90% loan-to-value ratio lending and non-conforming loans, risks associated with the Bank's mobile home lending, risks associated with the Bank's nonresidential and multi-family real estate lending, the disparity between the Savings Association Insurance Fund (the "SAIF") premiums payable by the Bank and the Bank Insurance Fund (the "BIF") premiums payable by commercial banks, the possible dilutive effect of stock-based benefit plans expected to be adopted by the Bank and the Holding Company following the Conversion, the potential benefits to management upon and subsequent to the Conversion, the absence of an established trading market for the Common Stock, competition in the Bank's local market area, the Bank's geographic concentration of loans, the risk of a delayed offering, anti-takeover provisions, regulatory oversight and the possible effects of recent legislation, and the potential income tax consequences of subscription rights. See "Risk Factors." The Holding Company The Holding Company is an Indiana corporation recently organized to acquire all of the common stock of the Bank and act as the Bank's holding company. Pursuant to the Plan of Conversion, the Holding Company will offer the Common Stock to Eligible Account Holders, the ESOP, Supplemental Eligible Account Holders, Other Members, and to the general public. The holding company structure will provide increased flexibility in conducting future business activities related to the Bank. The Holding Company has received the approval of the Board of Governors of the Federal Reserve System (the "FRB") to become a bank holding company through the acquisition of the common stock of the Bank. Prior to the Conversion, the Holding Company will not engage in any material operations. Upon the consummation of the Conversion, the Holding Company will be a bank holding company, the activities of which will be restricted generally by federal law and FRB regulations to activities considered related to banking. See "Regulation - --Bank Holding Company Regulation." Upon consummation of the Conversion, the Holding Company will have no significant assets other than the common stock of the Bank and $2,267,500 of the net Conversion proceeds, a portion of which is expected to be used to lend funds to the ESOP to allow the ESOP to purchase Common Stock in the Conversion. The Holding Company may also use a portion of such funds to pay dividends and repurchase shares of its Common Stock. See "Use of Proceeds." The Holding Company has no current arrangements, negotiations or agreements, written or oral, with respect to any future acquisition. The Holding Company's executive office is located at 279 East Morgan Street, Spencer, Indiana, 47460, and its telephone number is (812) 829-2095. See "Home Financial Bancorp." The Bank The Bank was organized as an Indiana savings and loan association in 1911 under the name Owen County Savings and Loan Association. In 1972, the Bank converted to a federally chartered savings and loan association under the name Owen County Federal Savings and Loan Association, and in 1989, the Bank converted to a federally chartered savings bank known as Owen County Federal Savings Bank. In 1994, the Bank became an Indiana savings bank known as Owen Community Bank, s.b. Conducting business from its main office in Spencer, Indiana, the Bank offers a variety of lending, deposit and other financial services to its retail and commercial customers. See "Business." The Bank's principal market area is Owen County in southern Indiana, approximately 55 miles south of Indianapolis. According to the U.S. Bureau of Census, the city of Spencer, the county seat of Owen County, had a population of 2,537, and Owen County had a population of 17,281, at the time of the 1990 census. See "Market Area." The Bank's deposits are insured up to applicable limits by the FDIC through the SAIF. At December 31, 1995, the Bank had total assets of $33.5 million, deposits of $24.9 million and equity capital of $3.3 million, an amount equal to 9.85% of total assets. For the year ended June 30, 1995, the Bank's net yield on weighted average interest-earning assets was 4.54% compared to 4.42% and 4.43% for each of the years ended June 30, 1994 and 1993, respectively. Historically, the Bank has benefited from its good capital position and favorable interest rate spread <PAGE> which have resulted in a reasonably consistent level of operating earnings. See "Business." The Bank has not made any acquisitions and, accordingly, has no accounting goodwill on its balance sheet nor any other intangible assets. The Bank's capital ratios are now, and on a pro forma basis will be, substantially in excess of all regulatory capital requirements, as prescribed by the FDIC (the "Capital Requirements"). See "Pro Forma Data -- Regulatory Capital Compliance." The Bank has no current arrangements, negotiations, or agreements, written or oral, with respect to any future acquisition. The Bank is the oldest continuously operating financial institution headquartered in Owen County. Management believes the Bank has developed a solid reputation among its loyal customer base because of its commitment to personal service and its strong support of the local community. The Bank is and historically has been a significant residential real estate mortgage lender in Owen County, originating approximately 14.4% of the mortgages recorded in Owen County during the calendar year ended December 31, 1995. The Bank provides a complement of services to its customers and, as a result, has produced the following results: o Profitability. The Bank's net income increased from $65,000 for the year ended June 30, 1991 to $289,000 for the year ended June 30, 1995. The Bank's net income for the six months ended December 31, 1995 was $154,000. The Bank's average return on average assets for the five years ended June 30, 1995 was 0.88%. The Bank's return on average assets for the year ended June 30, 1995 and the six months ended December 31, 1995 was 1.00% and 0.92%, respectively. o Capital Position. At December 31, 1995, the Bank's equity capital was $3.3 million, or 9.85% of total assets. Assuming net proceeds at the midpoint of the Estimated Valuation Range, the Bank's pro forma equity to assets ratio (excluding $2,267,500 of net proceeds to be retained by the Holding Company), at such date, would have been 16.0%. o Mobile Home and Non-Conforming Loans. The Bank has developed a unique niche in its market area by (i) being the primary mobile home lender in Owen County; (ii) originating a significant number of loans with a ratio of the loan amount to the lesser of the current cost or appraised value of the property securing the loan (the "Loan-to-Value Ratio") of 90%; and (iii) extending credit to borrowers with prior credit problems or lower credit quality. By focusing on this unique lending niche, the Bank is able to improve its interest rate spread by charging interest rates above prevailing market rates. See "Business." The Bank's interest rate spread for the six months ended December 31, 1995 was 3.83%, and the Bank's interest rate spread for the years ended June 30, 1995, 1994 and 1993 was 4.19%, 4.11% and 4.11%, respectively. The Bank, however, has been successful in reducing the risks inherent in these types of lending by undertaking diligent collection efforts. At December 31, 1995, only $118,000, or 0.35%, of the Bank's total assets were non-performing assets. At the same date, $659,000, or 1.97%, of the Bank's total assets were delinquent more than thirty days but less than ninety days. See "Business -- Non-Performing and Problem Assets. o Community Orientation. The Bank is committed to meeting the financial needs of the community in which it operates. The Bank believes it is large enough to provide a wide range of personal and business financial services, and yet is small enough to be able to provide such services on a personalized and efficient basis. Management believes that the Bank can be more effective in servicing its customers than many of its non-local competitors because of the Bank's ability to quickly and effectively provide senior management responses to customer needs and inquiries. The Conversion General. The Board of Directors of the Bank unanimously adopted a Plan of Conversion pursuant to which the Bank will convert from an Indiana mutual savings bank to an Indiana stock savings bank. The Plan of Conversion and the Articles of Stock Charter Conversion (the "Charter") will be submitted for the approval of the members of the Bank at a special meeting currently scheduled for June 14, 1996 (the "Special Meeting"). The proceeds from the sale of the Common Stock made as a part of the Conversion will strengthen the Bank's capital position and will allow the Bank to be structured in a corporate form similar to that of most business entities. The Conversion will not adversely affect the Bank's normal business or its existing services to depositors and borrowers. Deposits at the Bank will continue to be insured by the FDIC up to the applicable limits. After the Conversion, the Holding Company will have exclusive voting rights with respect <PAGE> to the Bank and no account holder or borrower will have any voting rights with respect to, or be a member or a shareholder of, the Bank. Holders of shares of Common Stock will have voting rights only with respect to the Holding Company. Stock Pricing and Independent Appraisal. The aggregate purchase price of the Common Stock being sold in the Conversion will be based on the aggregate pro forma market value of the Common Stock, as determined by an independent valuation. Keller, a financial advisory firm experienced in the valuation of savings associations involved in the Conversion process, was retained by the Bank to prepare an appraisal of the estimated pro forma market value of the Bank. Keller's appraisal concluded that as of April 5, 1996, the Estimated Valuation Range was from a minimum of $4,845,000 to a maximum of $6,555,000, with a midpoint of $5,700,000. The aggregate number of shares of the Common Stock to be sold at $10.00 per share will be within the range of 484,500 to 655,500, unless market and financial conditions necessitate a change in the range. The appraisal will be updated shortly before the completion of the Conversion. The Board of Directors reviewed with management Keller's methods and assumptions and accepted Keller's appraisal as reasonable and adequate. The Bank has agreed to pay Keller a fee of $15,000 for its appraisal services. Keller has also prepared a business plan for the Bank for a fee of $4,000. See "The Conversion -- Stock Pricing" and "-- Number of Shares to be Issued." The independent valuation is not intended and must not be construed as a recommendation of any kind as to the advisability of voting to approve the Conversion or of purchasing the shares of the Common Stock. Moreover, because the valuation is necessarily based upon estimates and projections of a number of matters (including certain assumptions as to the amount of net proceeds and the earnings thereon), all of which are subject to change from time to time, no assurance can be given that persons purchasing shares in the Conversion will thereafter be able to sell shares of Common Stock at prices related to the valuation of the pro forma market value. Members Meeting. The sale of shares of Common Stock in the Conversion is conditioned upon approval of the Plan and the adoption of the Charter by a majority of the votes eligible to be cast by the members of the Bank at the Special Meeting. If the Conversion is not approved by the members at the Special Meeting, no shares will be issued, the Conversion will not take place, all subscription funds received will be promptly returned together with interest at the passbook rate, which is currently 3.00% per annum, and all withdrawal authorizations will be canceled. Subscription Offering. Pursuant to the Plan of Conversion, up to 655,500 shares of Common Stock are being offered by the Holding Company at the price of $10.00 per share in the Subscription Offering to the following persons in the following order of priority: (i) savings deposit account holders as of March 31, 1994 with aggregate deposits at the close of business on such date of at least $50.00 ("Eligible Account Holders"); (ii) the Bank's tax-qualified Employee Stock Ownership Plan and Trust (the "ESOP"); (iii) savings deposit account holders as of March 31, 1996 with aggregate deposits at the close of business on such date of at least $50.00 ("Supplemental Eligible Account Holders") who are not Eligible Account Holders; and (iv) deposit account holders and borrowers of the Bank on May 10, 1996, who are not Eligible Account Holders or Supplemental Eligible Account Holders ("Other Members"). The Subscription Offering expires at 5:00 p.m., Spencer time, on June 17, 1996, unless extended by the Bank and the Holding Company. The Subscription Offering may be extended, until 24 months after the Special Meeting, or until June 14, 1998. See "The Conversion - --Subscription Offering." Subscriptions may be paid by check or by withdrawal from accounts at the Bank. Funds authorized for withdrawal from deposit accounts will continue to earn interest at the rate specified for the account until completion of the Conversion. All amounts paid will be placed in a segregated escrow account at the Bank and will earn interest at the Bank's passbook rate from the date of receipt until completion of the Conversion. That rate is currently 3.00%, for an annualized percentage yield of 3.03%. Amounts may be withdrawn from certificate accounts at the Bank to purchase Common Stock in the Conversion without the payment of early withdrawal penalties. However, if the amount withdrawn reduces the balance of the certificate account to less than the applicable required minimum balance, such account after completion of the Conversion will earn interest at the then-current passbook rate. Refunds. In the event that a subscriber's order cannot be filled in full as a result of an oversubscription or the Conversion is not consummated, refunds (including interest at the passbook rate of interest for payments made other than through authorization of withdrawal from deposit accounts) will be made upon closing of the Conversion by check or, if payment was made through authorization of withdrawal from a deposit account, through cancellation of an appropriate portion of such withdrawal authorization. <PAGE> If the Conversion is not completed by August 1, 1996, and the Bank and the Holding Company elect to extend the time required to complete the Conversion, with the DFI's approval, subscribers will be given the right to increase, decrease or rescind their subscriptions as set forth in the Plan of Conversion. If the Bank and the Holding Company decide to extend the Subscription Offering, subscribers will be given the right to have their subscriptions promptly refunded following the conclusion of the current offering (which will end no later than August 1, 1996), and the Bank will return subscriptions with interest unless subscribers affirmatively elect to continue their subscriptions during the period of extension. Direct Community Offering. Commencing concurrently with the Subscription Offering and subject to availability, shares of Common Stock are being offered to the general public, giving preference to residents of Owen County, in a Direct Community Offering. The purchase price in the Direct Community Offering will also be $10.00 per share. The Direct Community Offering may, subject to DFI approval, be extended until 24 months after the Special Meeting, or until June 14, 1998. The Bank reserves the absolute right to reject or accept any orders received in the Direct Community Offering, in whole or in part, either at the time of receipt of an order, or as soon as practicable following the expiration of the Direct Community Offering. The Direct Community Offering may expire as early as June 17, 1996, or at any time thereafter (until August 1, 1996, unless extended by the Bank and the Holding Company) when orders and indications of interest for at least 484,500 shares have been received in the Subscription Offering and the Direct Community Offering. Accordingly, persons wishing to purchase Common Stock in the Direct Community Offering directly from the Holding Company should return the Order Form to the Bank on or before June 17, 1996. If a person waits until after that date, the Direct Community Offering may be terminated prior to the time the Order Form is submitted, and that person may be precluded from purchasing shares of Common Stock in the Direct Community Offering. See "The Conversion --Direct Community Offering." In the event that the Bank, in its sole discretion, elects to use selected dealers to assist with the Direct Community Offering, each such selected dealer will receive commissions at an agreed upon rate, not to exceed 4.0%, for all shares sold by the selected dealer. See "The Conversion -- Selected Dealers." Purchase Limitations. The minimum purchase by any person or entity in the Conversion is 25 shares. The maximum number of shares of Common Stock which may be purchased by any person or entity, including such person's Associates (as hereinafter defined) or group acting in concert is 10,000 (except that the ESOP may purchase in the aggregate not more than 10% of the total number of shares of Common Stock offered in the Conversion), subject to increase or decrease under certain circumstances by the Boards of Directors of the Bank and the Holding Company. See "The Conversion -- Limitations on Common Stock Purchases." Participation of the Agents in the Offerings. The Bank has engaged the Agents as its exclusive sales agents in the sale of Common Stock in both the Subscription Offering and the Direct Community Offering, if any. In addition to assisting in the marketing of the Common Stock, the Agents will assist the Bank by, among other things, training the Bank's employees regarding the mechanics and regulatory requirements of the conversion process, conducting informational meetings for subscribers and other potential purchasers and keeping records of all stock subscriptions. The Agents will only be assisting the Holding Company on a best efforts basis in effecting the sale of its Common Stock directly. The Agents will have no obligation to take or purchase any Common Stock. The Agents may, in the sole discretion of the Bank, use the services of dealers selected by the Bank in the Direct Community Offering, if any. If used, any selected dealers will solicit indications of interest on a best efforts basis from their customers to place orders for Common Stock, which orders will be placed only when and if the Agents and the Bank believe that enough indications of interest and orders have been received in the Subscription Offering and the Direct Community Offering to consummate the Conversion. The Agents will receive a fixed fee of $50,000 for acting as Agents in the Subscription Offering and the Direct Community Offering, if any, and for providing consulting and financial advisory services to the Holding Company and the Bank with respect to the Conversion. The Agents will also be reimbursed for expenses, including legal fees, of up to $30,000. See "The Conversion -- Agents." <PAGE> The engagement of the Agents by the Bank and the Agents' service as sales agents and financial advisors for the Holding Company and the Bank should not be construed as a recommendation of any kind as to the advisability of purchasing Common Stock in the Conversion or as a representation regarding the accuracy or adequacy of this prospectus. No report or opinion has been prepared by the Agents for the Holding Company, the Bank or any other entity in connection with the Conversion or regarding prices at which Common Stock may trade following the Conversion. Shares to be Purchased by Management and the ESOP. Directors and executive officers of the Bank expect to purchase 36,050 shares at $10.00 per share, or 7.4% and 5.5% of the shares of Common Stock offered in the Conversion based upon the minimum and maximum, respectively, of the Estimated Valuation Range. See "Anticipated Management Purchases." Employees of the Bank, including its executive officers, will also participate in the ESOP and be able to vote shares allocated to their accounts under the ESOP, which is expected to purchase a number of shares equal to 8% of the shares of Common Stock issued in the Conversion through a loan from the Holding Company. The ESOP may purchase Common Stock if shares remain available after satisfying the subscriptions of Eligible Account Holders up to $6,555,000, the maximum of the Estimated Valuation Range. Use of Proceeds The net proceeds from the sale of Common Stock offered hereby are estimated at $5.39 million, based upon the sale of 570,000 shares at $10.00 per share. It is anticipated that $2,267,500 of the net Conversion proceeds will be retained by the Holding Company for general corporate purposes, including the payment of dividends and future repurchases of the Holding Company's Common Stock. Additionally, the Holding Company intends to loan a portion of such retained funds to the ESOP to allow the ESOP to purchase shares of Common Stock in the Conversion. Assuming the sale of 570,000 shares of Common Stock in the Conversion and the corresponding purchase of 45,600 shares by the ESOP, the Holding Company will loan $456,000 to the ESOP. The proceeds received by the Bank in the Conversion, estimated to be $3,122,500 at the midpoint of the Estimated Valuation Range, will be used primarily to support the Bank's lending and investment activities and may be used to repay a portion of its $5.2 million in outstanding borrowings from the Federal Home Loan Bank ("FHLB") of Indianapolis at December 31, 1995 which mature on various dates primarily during the years 1996 through 2000 and have interest rates ranging from 6.14% to 6.48%. See "Business --Sources of Funds - --Borrowings." The Bank may also use Conversion proceeds for future renovation and branch expansion. Any remaining net proceeds may be used by the Bank for general corporate purposes, including contributions to the Bank's proposed management recognition and retention plan and trust (the "RRP"). In the interim, the net proceeds at the Holding Company and the Bank will be invested in U.S. government securities, other U.S. agency securities, mortgage-backed securities and equity securities. See "Use of Proceeds." Market for the Common Stock The Holding Company will use its best efforts to develop a public trading market for the Common Stock. The Holding Company has received approval to have its Common Stock quoted on the NASDAQ Small Cap Market under the symbol "HWEN" upon successful closing of the Subscription and Direct Community Offerings, subject to certain conditions which the Holding Company and the Bank believe will be met. It is anticipated that upon the completion of the Conversion at least two market makers will make a market in the Common Stock, although the Holding Company has not yet obtained any market makers and will not do so until the offering is completed. FBR intends to make a market in the Common Stock, although it is under no obligation to do so. There can be no assurance that an active and liquid market for the Common Stock will develop in the foreseeable future or, if such a market does develop, that it will continue. In addition, there can be no assurance that shareholders will be able to sell their shares at or above the Purchase Price after the completion of the Conversion. See "Market for the Common Stock." <PAGE> Dividend Policy Although no decision has been made yet regarding the payment of dividends, the Holding Company may consider a policy of paying cash dividends on the Common Stock following the Conversion. Dividends, when and if paid, will be subject to determination and declaration by the Board of Directors in its discretion, which will take into account the Holding Company's consolidated financial condition and results of operations, tax considerations, industry standards, economic conditions, regulatory restrictions on dividend payments by the Bank to the Holding Company, general business practices and other factors. See "Dividend Policy," "Regulation -- Regulatory Capital," and "-- Dividend Limitations." Executive Compensation and Related Transactions Employment Contracts. Effective as of the effective date of the Conversion, the Bank has entered into three-year employment contracts with two of its key employees. Each contract provides, among other things, for: (i) the payment to the employee of such employee's current base salary, subject to increases as approved by the Bank's Board of Directors, (ii) the employee's participation in other fringe benefit and benefits plans available to the Bank's employees and (iii) the payment of the employee's base compensation under the contract for three additional years in certain circumstances involving the termination of the employee's employment following a change in control (as defined therein). As of date hereof, the cash compensation which would be paid under the contracts to the employees if the contracts were terminated either after a change in control of the Holding Company, without cause by the Bank, or for cause by the employees, would be $141,960 for Kurt J. Meier, the Bank's President, Chief Executive Officer and Treasurer, and $130,260 for Kurt D. Rosenberger, the Bank's Vice President and Chief Financial Officer. The Bank has also entered into a three-year employment agreement with Frank R. Stewart, the Bank's Chairman of the Board, effective as of January 1, 1996. Mr. Stewart's contract provides for the payment to Mr. Stewart of $44,980 in annual compensation, subject to increases as approved by the Bank's Board of Directors. Mr. Stewart's employment agreement also provides that Mr. Stewart will continue to receive such compensation during the then-remaining term of the agreement in the event Mr. Stewart's employment with the Bank is terminated without cause. See "Executive Compensation and Related Transactions -- Employment Contracts." Employee Stock Ownership Plan and Trust. In connection with the Conversion, the Bank has established the ESOP effective January 1, 1996, for eligible employees of the Bank, including executive officers. The ESOP intends to purchase a number of shares equal to 8% of the Common Stock issued in the Conversion for the benefit of its participants. The ESOP intends to borrow the funds necessary to purchase the Common Stock from the Holding Company. See "Executive Compensation and Related Transactions -- Employee Stock Ownership Plan and Trust." <PAGE> RRP. At a meeting of the Holding Company's shareholders to be held at least six months after the completion of the Conversion, the Board of Directors intends to submit for shareholder approval the RRP, and at that time to make certain awards pursuant to the RRP, as a means of providing the directors and employees of the Bank and the Holding Company with an ownership interest in the Holding Company in a manner designed to encourage such persons to remain with the Holding Company and the Bank. If the RRP is approved by the Holding Company's shareholders, the Bank will initially contribute funds to the RRP to enable it to acquire an aggregate amount of Common Stock equal to up to 3.0% of the shares issued in the Conversion, either directly from the Holding Company or on the open market. A number of shares equal to 1.0% of the total number of shares sold in the Conversion will remain available for future issuance under the RRP. Shares awarded under the RRP will vest at a rate of 20% at the end of each full twelve (12) months of service with the Bank after the date of grant, subject to earlier vesting in the event of death or disability. Assuming the shares purchased by the RRP have a market value on the date of grant of $10.00 per share, the shares available for distribution under the RRP would have an aggregate market value of between $193,800 and $262,200, based upon the Estimated Valuation Range. It is anticipated that on the date of the Holding Company's first shareholder meeting following the Conversion, an award of a number of shares equal to 0.5625% of the total number of shares of Common Stock sold in the Conversion (or Common Stock valued at between $27,253 and $36,872, based upon the Estimated Valuation Range and assuming a market value for the Common Stock on such date of $10.00 per share) will be made to each of Mr. Meier and Mr. Stewart, and an award of a number of shares equal to 0.375% of the total number of shares sold in the Conversion (or Common Stock valued at between $18,169 and $24,581, based upon the assumptions described above) will be made to Mr. Rosenberger. It is also anticipated that an award of a number of shares equal to 0.2% of the total number of shares sold in the Conversion (or Common Stock valued at between $9,690 and $13,110, based upon the assumptions described above) will be made at that time to each of the Bank's five outside directors. Other employees of the Bank are expected to receive awards under the RRP equal to an aggregate of 0.5% of the total number of shares sold in the Conversion (or Common Stock valued at between $24,225 and $32,775, based upon the assumptions described above) at that time. See "Executive Compensation and Related Transaction -- RRP." Stock Option Plan. At a meeting of the Holding Company's shareholders to be held at least six months after completion of the Conversion, the Board of Directors intends to submit for shareholder approval a stock option plan (the "Stock Option Plan"), and at that time to make certain awards pursuant to the Stock Option Plan. Options will become exercisable at a rate of 20% at the end of each full twelve (12) months of service with the Bank after the date of award, subject to early vesting in the event of death or disability. If approved by the Holding Company's shareholders, Common Stock in an aggregate amount of 10.0% of the shares issued in the Conversion (or between 48,450 and 65,550 shares, based upon the Estimated Valuation Range) will be reserved for issuance upon the exercise of options granted under the Stock Option Plan. It is anticipated that on the date of the Holding Company's first shareholder meeting following the Conversion, options to purchase a number of shares equal to 1.0% of the total number of shares sold in the Conversion (or between 4,845 and 6,555 shares, based upon the Estimated Valuation Range) will be granted to each of Mr. Meier and Mr. Stewart, and options to purchase a number of shares equal to 0.75% of the total number of shares sold in the Conversion (or between 3,634 and 4,916 shares, based upon the Estimated Valuation Range) will be granted to Mr. Rosenberger. It is also anticipated that options to purchase a number of shares equal to 0.5% of the total number of shares sold in the Conversion (or between 2,423 and 3,278 shares, based on the Estimated Valuation Range) will be granted at that time to each of the Bank's five outside directors. Other employees of the Bank are expected to receive options to purchase an aggregate number of shares equal to 2.25% of the total number of shares sold in the Conversion (or between 10,901 and 14,749 shares, based on the Estimated Valuation Range) at that time. The remaining options available for grant under the Stock Option Plan (2.5% of the total number of shares sold in the Conversion) are expected to be reserved for future issuance to employees and newly appointed directors of the Holding Company and the Bank. Options granted under the Stock Option Plan will have exercise prices per share equal to the fair market value of the shares on the date of grant of the stock options. The ultimate value of any option granted at fair market value will depend, therefore, on future appreciation in the fair market value of the shares to which the option relates. See "Executive Compensation and Related Transactions -- Stock Option Plan." [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] <PAGE> SELECTED CONSOLIDATED FINANCIAL DATA OF OWEN COMMUNITY BANK, s.b. AND SUBSIDIARY The following selected consolidated financial data of the Bank is qualified in its entirety by, and should be read in conjunction with, the consolidated financial statements, including notes thereto, included elsewhere in this Prospectus. Information at December 31, 1995, and for the six months ended December 31, 1995 and 1994 is unaudited. In the opinion of management of the Bank, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of results for and such periods have been included. The results of operations and other data for the six month period ended December 31, 1995 are not necessarily indicative of the results of operations for the fiscal year ended June 30, 1996. <TABLE> <CAPTION> AT DECEMBER 31, AT JUNE 30, 1995 1995 1994 1993 1992 1991 --------------- ------- ------- ------- ------- ------- (Dollars in thousands) <S> <C> <C> <C> <C> <C> <C> Balance Sheet Data: Total assets................................... $33,462 $30,839 $26,008 $23,460 $21,579 $21,535 Loans receivable, net.......................... 27,203 25,547 21,479 19,368 17,124 15,718 Mortgage-backed securities..................... 1,359 1,477 1,636 1,156 1,483 --- Cash and cash equivalents...................... 2,325 1,386 1,237 1,343 1,323 1,764 Securities available for sale.................. 1,259 934 --- --- --- --- Securities held to maturity.................... --- 350 778 677 678 175 Deposits....................................... 24,895 22,500 21,451 20,174 19,151 19,303 Federal Home Loan Bank advances................ 5,200 5,000 1,500 500 --- --- Equity capital - substantially restricted...... 3,295 3,159 2,850 2,589 2,280 2,056 </TABLE> <TABLE> <CAPTION> SIX MONTHS ENDED DECEMBER 31, YEAR ENDED JUNE 30, ------------------ --------------------------------------------------- 1995 1994 1995 1994 1993 1992 1991 ------ ------ ------ ------ ------ ------ ------ (Dollars in thousands) Summary of Operating Results: <S> <C> <C> <C> <C> <C> <C> <C> Interest income ................................... $1,476 $1,147 $2,420 $2,023 $1,958 $1,981 $1,930 Interest expense .................................. 797 535 1,174 949 993 1,224 1,355 ------ ------ ------ ------ ------ ------ ------ Net interest income ............................ 679 612 1,246 1,074 965 757 575 Provision for loan losses ......................... 43 21 36 14 6 -- 3 ------ ------ ------ ------ ------ ------ ------ Net interest income after provision for loan losses ................................. 636 591 1,210 1,060 959 757 572 Other income: Service charges on deposit accounts ............ 18 15 27 23 22 22 19 Gain on sale of real estate acquired for development .............................. 19 11 78 145 117 56 43 Other .......................................... 23 11 43 33 28 21 24 ------ ------ ------ ------ ------ ------ ------ Total other income .......................... 60 37 148 201 167 99 86 ------ ------ ------ ------ ------ ------ ------ Other expense: Salaries and employee benefits ................. 204 176 404 344 254 248 218 Net occupancy and equipment expense ........... 57 52 109 109 91 74 99 Deposit insurance premium ...................... 25 25 49 48 32 42 37 Other .......................................... 155 144 304 306 255 247 195 ------ ------ ------ ------ ------ ------ ------ Total other expense ....................... 441 397 866 807 632 611 549 ------ ------ ------ ------ ------ ------ ------ Income before income taxes and cumulative effect of change in accounting principle ....... 255 231 492 454 494 245 109 Income tax expense ................................ 101 91 203 169 186 85 44 Cumulative effect of change in accounting principle -- -- -- (24) -- -- -- ------ ------ ------ ------ ------ ------ ------ Net income ..................................... $154 $140 $289 $261 $308 $159 $65 ====== ====== ====== ====== ====== ====== ====== </TABLE> (continued on next page) <PAGE> <TABLE> <CAPTION> Supplemental Data: <S> <C> <C> <C> <C> <C> <C> <C> Return on assets (1) .............................. .92% 1.00% 1.00% 1.03% 1.34% .72% .31% Return on equity (2) .............................. 9.35 9.55 9.59 9.46 12.55 7.18 3.25 Interest rate spread (3) .......................... 3.83 4.37 4.19 4.11 4.11 3.25 2.50 Net yield on interest-earning assets (4) .......... 4.21 4.62 4.54 4.42 4.43 3.62 2.91 Other expenses to average assets .................. 2.63 2.82 2.99 3.17 2.75 2.77 2.63 Net interest income to other expenses ............. 1.54x 1.54x 1.44x 1.33x 1.53x 1.24x 1.05x Equity-to-assets (5) .............................. 9.85 10.45 10.24 10.96 11.04 10.57 9.55 Average equity capital to average total assets ........................... 9.68 10.42 10.42 10.85 10.69 10.61 9.59 Average interest-earning assets to average interest-bearing liabilities ................... 1.08x 1.06x 1.13x 1.08x 1.07x 1.06x 1.06x Non-performing assets to total assets ............. .35 .28 .32 .10 -- -- .24 Non-performing loans to total loans ............... .43 .34 .39 .13 -- -- .32 Loan loss allowance to total loans, net ........... .37 .18 .22 .12 .06 .08 .09 Loan loss allowance to non-performing loans ....... 84.75 53.75 57.00 108.33 -- -- 27.45 Net charge-offs to average loans .................. * * .02 * .04 * .02 </TABLE> - ---------- (1) Net income divided by average total assets. (2) Net income divided by average total equity. (3) Interest rate spread is calculated by subtracting combined weighted average interest rate cost from combined weighted average interest rate earned for the period indicated. (4) Net interest income divided by average interest-earning assets. (5) Total equity divided by assets. (*) Less than .01% <PAGE> RECENT FINANCIAL DATA Summarized below are certain selected financial data for the Bank at March 31, 1996 and June 30, 1995 and for the three and nine months ended March 31, 1996 and 1995. Information at and for each of the periods presented is unaudited. In the opinion of management of the Bank, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of results for or at such periods have been included. The results of operations and other data for the three- and nine-month periods ended March 31, 1996, are not necessarily indicative of the results of operations for the fiscal year ended June 30, 1996. March 31, June 30, 1996 1995 ------- ------- (In thousands) Selected Financial Condition Data: Total assets ............................................. $33,999 $30,839 Loans receivable, net .................................... 26,568 25,547 Mortgage-backed securities available for sale ............ 1,281 -- Mortgage-backed securities held to maturity .............. -- 1,477 Cash and cash equivalents ................................ 3,865 1,386 Securities available for sale ............................ 885 934 Securities held to maturity .............................. -- 350 Deposits ................................................. 25,403 22,500 Federal Home Loan Bank advances .......................... 5,200 5,000 Equity capital - substantially restricted ................ 3,350 3,159 Three Months Ended Nine Months Ended March 31, March 31, ------------------ ----------------- 1996 1995 1996 1995 ---- ---- ------ ------ (In thousands) Selected Operations Data: Interest income........................ $742 $612 $2,218 $1,753 Interest expense....................... 398 294 1,196 826 ---- ---- ------ ------ Net interest income............... 344 318 1,022 927 Provision for loan losses.............. 21 7 64 29 ---- ---- ------ ------ Net interest income after provision for loan losses......... 323 311 958 898 Gain on sale of real estate acquired for development.......... 19 33 38 44 Other income........................... 22 15 64 46 Other expense.......................... 245 210 683 609 ---- ---- ------ ------ Income before income taxes............. 119 149 377 379 Income tax expense..................... 48 60 152 151 ---- ---- ------ ------ Net income........................ $ 71 $ 89 $ 225 $ 228 ==== ==== ====== ====== <PAGE> <TABLE> <CAPTION> At or for the At or for the Three Months Ended Nine Months Ended March 31, March 31, ------------------ ----------------- 1996 1995 1996 1995 ------ ------ ---- ---- Selected Financial Ratios and Other Data: <S> <C> <C> <C> <C> Return on assets (ratio of net income to average total assets) (1)........................................... .84% 1.23% .89% 1.07% Return on equity (ratio of net income to average total equity) (1)........................................... 8.51 11.67 9.16 10.23 Interest rate spread (average during period) (1)....................... 3.92 4.05 3.96 4.29 Net yield on interest-earning assets (1)(2)............................ 4.22 4.56 4.22 4.58 Ratio of other expenses to average total assets (1).................... 2.90 2.91 2.71 2.87 Net interest income to other expenses.................................. 1.40x 1.62x 1.48x 1.52x Ratio of average interest-earning assets to average interest-bearing liabilities (1).................................... 107.50 109.69 107.46 107.71 Non-performing assets to total assets, at end of period(3)............................................... .24 .21 .24 .21 Non-performing loans to total loans.................................... .30 .26 .30 .26 Loan loss allowance to non-performing loans(4)......................... 151.00 77.00 151.00 77.00 Loan loss allowance to total loans..................................... .45 .20 .45 .20 Net charge-offs to average loans....................................... * * * * Equity-to-assets, at end of period..................................... 9.85 10.24 9.85 10.24 Average equity capital to average total assets......................... 9.86 10.56 9.75 10.50 Number of full-service offices......................................... 1 1 1 1 </TABLE> - ---------- (1) Ratios are annualized. (2) Net interest income divided by average interest-earnings assets. (3) Non-performing assets consist of non-accruing loans, accruing loans 90 days or more past due, restructured loans and real estate owned. (4) Non-performing loans consist of non-accruing loans, accruing loans 90 days or more past due and restructured loans. (*) Less than .01% <PAGE> Three months ended March 31, 1996 compared to three months ended March 31, 1995 The Bank's total interest income for the three months ended March 31, 1996, was $742,000, an increase of $130,000 or 21%, from $612,000 for the three months ended March 31, 1995. Interest expense was $398,000 for the three months ended March 31, 1996, which was an increase of $104,000, or 35%, from $294,000 recorded for the three months ended March 31, 1995. As a result, net interest income was $344,000 for the three months ended March 31, 1996, an increase of $26,000, or 8%, from $318,000 for the three months ended March 31, 1995. The increase in interest income was primarily due to a 4.8 million, or 17%, increase in average interest-earning assets from $27.9 million for the three months ended March 31, 1995, to $32.7 million for the three months ended March 31, 1996. In addition to the increase in average interest-earning assets, the average yield on interest-earning assets increased from 8.75% to 9.18%. The increase in interest expense was primarily due to an increase in the average rate paid on interest-bearing liabilities from 4.70% to 5.08%. In addition average interest-bearing liabilities increased $5.9 million, or 23%. The provision for losses on loans for the three months ended March 31, 1996, was $21,000. Although no losses were charged to the allowance for loan losses during the first quarter of 1996, a provision was made due to inherent losses that may occur as a result of the continued growth of the loan portfolio. During the first quarter of 1995, no losses were charged to the allowance for loan losses and no provision was considered necessary. At March 31, 1996 and 1995, the allowance was $119,000 and $50,000, respectively, a ratio of 0.45% and 0.20% to total loans at each date, and non-performing loans increased from 0.26% of total loans at March 31, 1995 to .30% at March 31, 1996. Based on the Bank's review of the loan portfolio during these periods, management considered the allowance for loan losses at March 31, 1996 and 1995 to be adequate to cover losses inherent in the loan portfolio. See "Business -- Allowance for Loan Losses." The Bank's net income for the three months ended March 31, 1996, was $71,000, compared to $89,000 for the three months ended March 31, 1995, a decrease of $18,000. As previously discussed, the Bank's net interest income increased by $6,000. Gain on the sale of real estate acquired for development decreased to $19,000 for the 1996 period compared to $33,000 for the 1995 period as a result of lower sales volume. Other income for the first quarter of 1996 increased $7,000 from the first quarter of 1995. This increase in other income result primarily from service charges on deposit accounts. Other expense for the first quarter of 1996 increased $35,000 from the first quarter of 1995. This increase in other expense resulted primarily from increases in salaries and benefits. Nine months ended March 31, 1996 compared to nine months ended March 31, 1995 The Bank's total interest income for the nine months ended March 31, 1996 was $2.2 million compared to $1.8 million for the same period in 1995. The $0.4 million increase primarily resulted from increased loan volume. Total interest expense also increased during the nine months ended March 31, 1996 to $1.2 million from $0.8 million for the nine months ended March 31, 1995 primarily as a result of the $2.9 million increase in interest-bearing deposits. As a result, net interest income increased approximately $0.1 million in the 1996 period compared to the 1995 period. The provision for losses on loans for the period ended March 31, 1996 was $64,000 compared to $29,000 for the 1995 period. There were no significant losses charged off during either nine month period. The increase in the provision for loan losses resulted from the $1 million increase in outstanding loans and management's desire to increase the allowance for loan losses to be more comparable to the level maintained by peer institutions. At March 31, 1996, the allowance for loan losses was 0.45% of total loans compared to 0.20% at March 31, 1995. <PAGE> Gain on sales of real estate acquired for development decreased slightly from $44,000 for the nine months ended in 1995 compared to $38,000 for the same period in 1996. Other income increased $18,000 in the 1996 period compared to the 1995 period primarily as a result of increased service charges on deposit accounts. Other expenses increased to $683,000, or 12%, for the nine months ended March 31, 1996 compared to $609,000 for the same period in 1995. Increases in salaries and benefits, depreciation expense and computer processing expenses accounted for substantially all of the change. Net income for the 1996 period was $225,000 compared to $228,000 for the 1995 period. The increase in net interest income and other income substantially offset the increases in the provision for loan losses and other expenses. March 31, 1996 Balance Sheet compared to June 30, 1995 Balance Sheet The Bank's total assets were $34.0 million at March 31, 1996, an increase of $3.2 million, or 10%, from December 31, 1995. Net loans receivable were $26.6 million at March 31, 1996, an increase of $1.1 million, or 4%, from $25.5 million at June 30, 1995. Cash and investments, consisting of securities available for sale, securities held to maturity and mortgage backed securities, were $6.0 and $4.2 million at March 31, 1996 and June 30, 1995. Deposits increased $2.9 million, or 13% from June 30, 1995. The net unrealized loss on securities available for sale was $23,000 at March 31, 1996 compared to an unrealized gain of $34,000 at June 30, 1995. Asset Quality Total non-performing assets decreased during the nine months ended March 31, 1996, from $100,000 at June 30, 1995, to $79,000 at March 31, 1996. As a result, the percentage of non-performing assets to total assets decreased from 0.32% at June 30, 1995, to 0.24% at March 31, 1996. Total non-performing loans decreased from $100,000 at June 30, 1995, to $79,000 at March 31, 1996. As a result, the percentage of non-performing loans to total loans has decreased from 0.39% at June 30, 1995, to 0.30% at March 31, 1996. During the nine months ended March 31, 1996, loans totalling $2,000 were charged off. The ratio of the allowance for loan losses to non-performing loans has increased from 57% at June 30, 1995, to 151% at March 31, 1996. <PAGE> RISK FACTORS Before investing in shares of the Common Stock offered hereby, prospective investors should consider carefully the matters presented below. Potential Impact of Changes in Interest Rates The Bank's profitability is dependent to a large extent upon its net interest income, which is the difference between its interest income on interest-earning assets, such as loans and investments, and its interest expense on interest-bearing liabilities, such as deposits and other borrowings. At December 31, 1995, based on information provided by Sendero Corporation, Scottsdale, Arizona, it was estimated that the Bank's NPV (the present value of the Bank's cash flows from assets, liabilities, and off-balance sheet items) would increase 3.9% and would decrease 5.1% in the event of 2% and 4% increases in market interest rates, respectively. The Bank's NPV at the same date would decrease 15.3% and 26.0% in the event of 2% and 4% decreases in market rates, respectively. These calculations indicate that the Bank's net portfolio value could be adversely affected by decreases in interest rates but that the Bank's interest rate risk is within the definition of "normal" level of exposure under the new net market value methodology adopted by the Office of Thrift Supervision (the "OTS"), which is 2% of the present value of its assets. As a result, if the Bank had been subject to the OTS' reporting requirements under this methodology, it would not have been required to take a deduction from capital available to calculate its risk-based capital requirement. Currently, the Bank's banking regulatory agencies, the FDIC and the DFI, would not require any reduction in the Bank's capital for interest-rate risk. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Asset/Liability Management." At December 31, 1995, the Bank's total interest-earning assets maturing or repricing within one year exceeded total interest-bearing liabilities maturing or repricing in the same period by $6.1 million, representing a cumulative one year gap (the difference between interest-earning assets anticipated by the Bank to mature or reprice within one year and interest-bearing liabilities anticipated by the Bank to mature or reprice within one year, as a percentage of earning assets) (the "Interest Rate Gap") of a positive 18.1%. As a result, based upon certain assumptions of management, the yield on interest-earning assets of the Bank should adjust to changes in market interest rates at a faster rate than the cost of the Bank's interest-bearing liabilities. Consequently, the Bank's net interest income could be adversely affected during periods of falling interest rates. A negative Interest Rate Gap would have the opposite effect. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Asset/Liability Management." The Bank, like most financial institutions, will continue to be affected by general changes in levels of interest rates and other economic factors beyond its control. Potential Impact of Future Changes in or the Discontinuance of the Business of the Bank's Subsidiary The Bank's service corporation subsidiary, BSF, Inc. ("BSF"), has historically engaged in the purchasing and subdividing of large tracts of land and the selling of the subdivided tracts, primarily on contract. The Bank utilized the sale of BSF's properties to provide an additional source of income. During the fiscal years ended June 30, 1995, 1994, and 1993, the Bank realized net income of $59,000, $91,000, and $79,000, respectively, from the operations of BSF. During the six months ended December 31, 1995, net income from the operations of BSF, Inc. was $26,000. In connection with the Bank's conversion to an Indiana mutual savings bank in May 1994, the FDIC required the Bank to (i) immediately cease BSF's land acquisitions; (ii) divest all non-conforming real estate holdings then owned by BSF within five (5) years or by November 16, 2000, and (iii) maintain its capital at levels sufficient for it to be classified as a well-capitalized institution. See "Regulation -- Regulatory Capital." BSF's mandated discontinuance of land acquisitions and divestiture of real estate holdings has already led to a reduction in net income from BSF's operations and may have a negative impact on the Bank's results of operations in the future. See "Business -- Service Corporation Subsidiary." <PAGE> Credit Risk Relating to 90% Loan-to-Value Ratio Lending and Non-Conforming Loans A significant portion of the Bank's residential mortgage loan portfolio consists of adjustable-rate residential mortgage loans with a Loan-to-Value Ratio of 90%. The Bank began making a significant number of such loans in 1991. While these loans have higher yields than similar loans with lower Loan-to-Value Ratios, this type of lending entails greater risk than conventional residential mortgage lending because such loans are often made to first-time home buyers and other borrowers who lack adequate financial resources to absorb increases in interest rates and who may be adversely affected by a downturn in the local economy. Moreover, in the event of early defaults, the real estate securing such loans may not provide an adequate source of repayment of the outstanding loan balance. Although the Bank has not experienced any significant problems with its 90% Loan-to-Value Ratio loans to date, there can be no assurance that the Bank will not experience losses from such loans in the future. The Bank also makes mortgage loans to borrowers with past credit problems. Lending to borrowers with lower credit quality generally involves higher average loan default rates than is generally experienced with borrowers with higher credit quality. Although the Bank has thus far been successful in managing the risks inherent in lending to borrowers with lower credit quality through its diligent collection efforts, no assurance can be given that the Bank will not experience increased losses from such loans in the future. Mobile Home Lending The Bank originates loans for the purchase of new and used mobile homes and for the purchase of mobile home and land combinations ("Combo Loans"). At December 31, 1995, approximately $1.3 million, or 4.9% of the Bank's portfolio of loans, consisted of mobile home loans and $3.2 million, or 11.5% of the Bank's loan portfolio, consisted of Combo Loans. While mobile home loans have shorter terms to maturity and higher yields than the Bank's residential mortgage loans, mobile home lending entails greater risk than traditional residential mortgage lending. Because Combo Loans are in part secured by mobile loans, Combo Loans also entail greater risk than residential mortgage lending. Loans secured by mobile homes involve more credit risk than residential mortgage loans because of the type and nature of the collateral, the fact that such loans generally are made to borrowers with lower income levels, and the fact that mobile homes tend to rapidly depreciate in value. In many cases, any repossessed collateral for a defaulting loan secured by a mobile home will not provide an adequate source of repayment of the outstanding loan balance because of improper repair and maintenance of the underlying security. As of December 31, 1995, none of the Bank's Combo Loans was delinquent for 90 days or more. As of the same date, only one of the Bank's mobile home loans in the amount of $11,000 was delinquent for 90 days or more. This mobile home has since been repossessed and sold by the Bank at no loss. There can be no assurances, however, that additional delinquencies will not occur in the future, or that the Bank will not experience losses from such loans in the future. Nonresidential and Multi-Family Real Estate Lending The Bank originates loans for the purchase of nonresidential and multi-family real estate, and after the Conversion expects to be more active in the origination of such loans. At December 31, 1995, the Bank's total portfolio of nonresidential real estate and multi-family loans amounted to $1.7 million and $475,000, respectively, or 6.2% and 1.7%, respectively, of the Bank's total loan portfolio. The Bank has historically been restricted in its ability to originate such loans by the loans-to-one borrower limitation because such loans often involve large balances to single borrowers or groups of related borrowers. However, the additional capital that the Bank will have following the Conversion will allow it to be more active in the origination of nonresidential and multi-family real estate loans. Although nonresidential and multi-family real estate loans provide higher interest rates and shorter terms, these loans have higher credit risk than one- to four-family residential loans. Payment experience on loans secured by such properties is typically dependent upon the successful operation of the properties and thus may be subject to a greater extent to adverse conditions in the real estate market or in the general economy. Accordingly, the nature of the loans make them more difficult for management to monitor and evaluate. At December 31, 1995, none of the Bank's nonresidential real estate or multi-family loans was non-performing. There can be no assurance, however, that the Bank will not experience losses from such loans in the future or that the Bank's allowance for loan losses would be adequate to absorb any future losses on such loans. Disparity Between SAIF and BIF Premiums The FDIC is authorized to establish separate annual assessment rates for deposit insurance for members of the BIF and the SAIF. The FDIC may increase assessment rates for either fund if necessary to restore the fund's ratio of reserves to insured deposits to a target level within a reasonable time and may decrease such rates if such target level has been met. The FDIC has established a risk-based assessment system for both SAIF and BIF members. Under such system, assessments may vary depending on the risk the institution poses to its deposit insurance fund. Such risk level is determined by reference to the institution's capital level and the FDIC's level of supervisory concern about the institution. Because of the differing reserve levels of the SAIF and the BIF, deposit insurance assessments paid by healthy BIF-insured institutions were recently reduced significantly below the level paid by healthy SAIF-insured institutions. Assessments paid by healthy SAIF-insured institutions exceeded those paid by healthy BIF-insured institutions by approximately $.19 per $100 in deposits in late 1995 and exceeded them by $.23 per $100 in deposits beginning in 1996. Such premium disparity could have a negative competitive impact on the Bank and other institutions with SAIF deposits. <PAGE> Congress is considering legislation to recapitalize the SAIF and to eliminate the significant premium disparity between the BIF and the SAIF. Currently, the recapitalization plan provides for a special assessment of approximately $.85 per $100 of SAIF deposits held at some time in 1995, in order to increase SAIF reserves to the level required by law. Certain banks holding SAIF-insured deposits would pay a lower special assessment. In addition, the cost of prior thrift failures would be shared by both the SAIF and the BIF. Such cost sharing might increase BIF assessments by $.02 to $.025 per $100 in deposits. SAIF assessments for healthy SAIF-insured institutions would be set at a significantly lower level after the legislation is adopted and could never be reduced below the level set for healthy BIF-insured institutions. The recapitalization plan also provides for the merger of the SAIF and BIF on January 1, 1998. It has also been proposed that the savings association charter be eliminated in connection with such a merger. The Bank had $24.9 million in deposits at December 31, 1995. If the one-time special assessment in the legislative proposal is enacted into law, the Bank will pay an additional assessment of approximately $211,650 (based upon deposits at December 31, 1995), which will reduce capital and earnings for the quarter in which any such assessment is recorded. However, it is expected that quarterly SAIF assessments would be reduced significantly sometime after adoption of the legislation. No assurances can be given that the SAIF recapitalization plan will be enacted into law or in what form it may be enacted. In addition, the Holding Company can give no assurances that the disparity between BIF and SAIF assessments will be eliminated. If the proposed legislation is not adopted, SAIF premiums may increase and the disparity between BIF and SAIF premiums may become greater, with a resulting adverse effect on the Bank's operations. See "Regulation -- Insurance of Deposits." Possible Dilutive Effect of Future Stock Benefit Plans Following the Conversion, it is likely that the Holding Company and the Bank will adopt, subject to shareholder approval, employee and management benefit plans which may involve the issuance of additional shares of Common Stock. In particular, the Holding Company and the Bank anticipate adopting the RRP and the Stock Option Plan following the Conversion, subject to receiving shareholder approval of such plans at a shareholders' meeting to be held at least six months after the completion of the Conversion. Under the RRP, directors and employees could be awarded an aggregate amount of Common Stock equal to 4% of the shares issued in the Conversion. Under the Stock Option Plan, directors and employees could be granted options to purchase an aggregate amount of Common Stock equal to 10% of the shares issued in the Conversion at exercise prices equal to the fair market value of the shares on the date of grant. It is currently anticipated that the shares issued to directors and employees under the RRP will be shares purchased on the open market. However, to the extent shares are not available on the open market or the Holding Company decides not to purchase such shares on the open market, authorized but unissued shares of Common Stock may be issued to recipients of awards under the RRP. If newly issued shares are used, the interests of existing shareholders will be diluted. It is expected that the following awards will be made pursuant to the RRP as of the date of the first shareholder meeting of the Holding Company following the Conversion: (i) a number of shares equal to 0.5625% of the total number of shares sold in the Conversion to each of Mr. Meier and Mr. Stewart; (ii) a number of shares equal to 0.375% of the total number of shares sold in the Conversion to Mr. Rosenberger; (iii) a number of shares equal to 0.2% of the total number of shares sold in the Conversion to each of the Bank's five outside directors; and (iv) an aggregate number of shares equal to 0.5% of the total number of shares sold in the Conversion to other employees of the Bank. A number of shares equal to 1.0% of the total number of shares sold in the Conversion will remain available for future awards under the RRP. See "Executive Compensation and Related Transactions -- RRP." Assuming that 570,000 shares of Common Stock are issued in the Conversion and that all awards under the RRP are from authorized but unissued shares, the Holding Company estimates that the per share book value for the Common Stock would be diluted $0.54 per share, or 3.8%, and earnings per share would be diluted $0.03 per share, or 7.9%, on a pro forma basis as of December 31, 1995. See "Pro Forma Data." <PAGE> It is also expected that options to purchase shares of Common Stock will be granted pursuant to the Stock Option Plan as follows: (i) options to purchase a number of shares equal to 1.0% of the total number of shares sold in the Conversion to each of Mr. Meier and Mr. Stewart; (ii) options to purchase a number of shares equal to 0.75% of the total number of shares sold in the Conversion to Mr. Rosenberger; (iii) options to purchase a number of shares equal to 0.5% of the total number of shares sold in the Conversion to each of the Bank's five outside directors; and (iv) options to purchase an aggregate number of shares equal to 2.25% of the total number of shares sold in the Conversion to other employees of the Bank. Options to purchase a number of shares equal to 2.5% of the total number of shares of Common Stock sold in the Conversion will be reserved for future issuance under the Stock Option Plan to employees and newly appointed directors of the Holding Company and the Bank. The grant of these stock options may also be considered dilutive of the interests of shareholders. Potential Benefits to Management Upon and Subsequent to Conversion ESOP. The Holding Company has adopted the ESOP effective January 1, 1996, for eligible employees of the Holding Company and the Bank, including executive officers. As part of the Conversion, the ESOP intends to borrow funds from the Holding Company and use such funds to purchase a number of shares of Common Stock equal to 8% of the shares issued in the Conversion. Collateral for the loan will be the Common Stock purchased by the ESOP in the Conversion. The loan will be repaid principally from the Bank's discretionary contributions to the ESOP over a period of 10 years. Shares purchased by the ESOP will be held in a suspense account for allocation among participants as the loan is repaid. Assuming shares of Common Stock appreciate in value over time, compensation expense relating to the ESOP will also increase over time. It is impossible to determine at this time the extent of such impact on future net income. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Current Accounting Issues" and "Executive Compensation and Related Transactions -- Employee Stock Ownership Plan and Trust." Stock Options. The Board of Directors of the Holding Company intends to implement the Stock Option Plan, contingent upon receipt of shareholder approval at a meeting to be held at least six months following completion of the Conversion. Assuming 570,000 shares of Common Stock are issued in the Conversion and receipt of the required approval, it is expected that options to purchase 5,700 shares of Common Stock will be granted to each of Mr. Meier and Mr. Stewart, and options to purchase 4,275 shares of Common Stock will be granted to Mr. Rosenberger. In addition, options to purchase 2,850 shares of Common Stock will be granted to each of the Bank's five outside directors assuming the sale of 570,000 shares in the Conversion. Options for 12,825 shares will be awarded to other employees. Options to purchase 14,250 shares that would be available under the Stock Option Plan at the midpoint of the Estimated Valuation Range will be reserved for future issuance under the Stock Option Plan. The exercise price of the options, which would be granted at no cost to the recipient thereof, would be the fair market value of the Common Stock subject to the option on the date the option is granted, which is expected to be the date of the shareholder meeting. RRP. The Board of Directors of the Bank intends to implement the RRP contingent upon receipt of approval from the Holding Company's shareholders at a meeting to be held at least six months following completion of the Conversion. Subject to such approval, the RRP will initially purchase an amount of shares after the Conversion equal to up to 3% of the shares issued in the Conversion (17,100 shares at the midpoint of the Estimated Valuation Range). Assuming 570,000 shares of Common Stock are sold in the Conversion, the Bank's Board of Directors anticipates that upon receipt of the required approval, an award of 3,206 shares will be made to each of Mr. Meier and Mr. Stewart, and an award of 2,138 shares will be made to Mr. Rosenberger. In addition, RRP awards of 1,140 shares will be made to each of the Bank's outside directors, assuming the issuance of 570,000 shares of Common Stock in the Conversion. Awards of 2,850 shares will be made to other employees. 5,700 shares of Common Stock that would be available under the RRP at the midpoint of the Estimated Valuation Range (or 1% of the total number of share issued in the Conversion) will remain available for future issuance to directors and employees of the Bank, including officers of the Bank. Awards under the RRP would be granted at no cost to the recipient thereof. For financial accounting purposes, awards under the proposed RRP will result in the recording of compensation expense over the period of vesting. <PAGE> No Prior Market for Common Stock The Holding Company has never issued Common Stock to the public. Consequently, there is no established market for the Common Stock. The Holding Company has received approval to have its Common Stock quoted on the NASDAQ Small Cap Market under the symbol "HWEN" upon successful completion of the offering, subject to certain conditions which the Holding Company and the Bank believe will be met. The Holding Company anticipates that there will be at least two market makers for the Common Stock upon the completion of the Conversion, depending upon the volume of trading activity in the Common Stock and subject to compliance with applicable provisions for federal and state securities laws and other regulatory requirements. FBR intends to make a market for the Common Stock, but is under no obligation to do so. However, an active and liquid public trading market for the securities of any issuer, including the Holding Company, depends upon the presence in the marketplace of both willing buyers and willing sellers of the securities at any given time. Although the Holding Company has received approval to have its shares quoted on the NASDAQ Small Cap Market, no assurance can be given that an active and liquid trading market will develop or that the trading price per share of the Common Stock will equal or exceed the Purchase Price. Purchasers of Common Stock should consider, therefore, the potentially illiquid and long-term nature of their investment in the shares of Common Stock being offered hereby. Even if a market develops, there can be no assurance that shareholders will be able to sell their shares at or above the Purchase Price after the completion of the Conversion. See "Market for the Common Stock." Competition The Bank experiences strong competition in its local market area in both originating loans and attracting deposits. This competition arises principally from commercial banks. The recent enactment of federal nationwide branching legislation may also increase the Bank's competition in its market. Such competition may limit the Bank's growth in the future. See "Competition." Geographic Concentration of Loans At December 31, 1995, all of the Bank's real estate mortgage loans were secured by properties located in Indiana. A substantial portion of such loans is located in the Bank's primary market area. While the Bank currently believes that its loans are adequately secured or reserved for, in the event that real estate prices in Owen County substantially weaken or economic conditions in the Bank's primary market area deteriorate, reducing the value of properties securing the Bank's loans, it is possible both that some borrowers may default and that the value of the real estate collateral may be insufficient to fully secure the loan. In either event, the Bank may experience increased levels of delinquencies and related losses having an adverse impact on net income. Risk of Delayed Offering The Subscription Offering will expire at 5:00 p.m., Spencer time, on June 17, 1996, unless extended by the Holding Company and the Bank. The Direct Community Offering may expire as early as June 17, 1996, or at any time thereafter (until August 1, 1996, unless extended by the Bank and the Holding Company) when orders for at least 484,500 shares have been received in both the Subscription Offering and the Direct Community Offering. If the Subscription Offering and/or the Direct Community Offering is extended beyond August 1, 1996, all subscribers will have the right to modify or rescind their subscriptions and to have their subscription funds returned promptly with interest. A material delay in the completion of the sale of all unsubscribed shares in the Direct Community Offering may result in a significant increase in the costs of completing the Conversion. Significant changes in the Bank's operations and financial condition, the aggregate market value of the shares to be issued in the Conversion and general market conditions may occur during such material delay. <PAGE> Anti-Takeover Provisions Provisions in the Holding Company's Governing Instruments. The Articles of Incorporation of the Holding Company contain certain provisions which could impede a non-negotiated, unsolicited change in control of the Holding Company, even if desired by a majority of the shareholders. The Articles of Incorporation provide that: (i) no person shall directly or indirectly offer to acquire or acquire the beneficial ownership of more than 10% of any class of equity security of the Holding Company (provided that such limitations shall not apply to the acquisition of equity securities by any one or more tax-qualified employee stock benefit plans maintained by the Holding Company, if the plan or plans beneficially own no more than 25% of any class of such equity security of the Holding Company); and that (ii) shares beneficially owned in violation of the stock ownership restriction described above shall not be entitled to vote and shall not be voted by any person or counted as voting stock in connection with any matter submitted to a vote of the shareholders. For these purposes, a person (including management) who has obtained the right to vote shares of the Common Stock pursuant to revocable proxies shall not be deemed to be the "beneficial owner" of those shares if that person is not otherwise deemed to be the beneficial owner of those shares. See "Restrictions on Acquisition of the Holding Company -- Provisions of the Holding Company's Articles and By-Laws." In addition, the Articles of Incorporation provide for the issuance of serial preferred stock with such designations and preferences as may be determined by the Holding Company's Board of Directors, without obtaining shareholder approval. Such preferred stock could be used by the Holding Company to impede a non-negotiated change of control, even if the change in control might result in shareholders receiving a substantial premium for their shares over then-current market prices. Moreover, Indiana law contains provisions that restrict the acquisition of control of the Holding Company or the Bank. Indiana law specifically authorizes directors, in considering the best interest of the corporation, to consider the effects of any action on shareholders, employees, suppliers, and customers of the corporation, and communities in which offices or other facilities of the corporation are located, and any other factors the directors consider pertinent. Indiana law also provides that directors are not required to approve a business combination or other corporate action if the directors determine in good faith that such approval is not in the best interest of the corporation. See "Restrictions on Acquisition of the Holding Company - --Other Restrictions on Acquisition of the Holding Company and the Bank." Although the Holding Company's Board of Directors believes that the restrictions on acquisition are beneficial to shareholders, the provisions may have the effect of rendering the Holding Company less attractive to potential acquirors thereby discouraging future takeover attempts which would not be approved by the Board of Directors but which certain shareholders might deem to be in their best interest or pursuant to which shareholders might receive a substantial premium for their shares over then current market prices. These provisions will also render the removal of the incumbent Board of Directors and of management more difficult. The Board of Directors has, however, concluded that the potential benefits of these restrictive provisions outweigh the possible disadvantages. Voting Control of Directors and Executive Officers. Directors and executive officers of the Holding Company and the Bank and their Associates expect to purchase 36,050 shares at $10.00 per share, or 7.4% and 5.5% of the shares of Common Stock offered in the Conversion based upon the minimum and maximum, respectively, of the Estimated Valuation Range. Employees of the Bank, including its executive officers, will also be eligible to participate in the ESOP and be able to vote shares allocated to their accounts under the ESOP. See "Executive Compensation and Related Transactions -- Employee Stock Ownership Plan and Trust." Moreover, the Holding Company and the Bank intend to adopt, after the Conversion, stock benefit plans for employees and management of the Bank. See "Executive Compensation and Related Transactions -- RRP" and "-- Stock Option Plan." Accordingly, directors and executive officers of the Holding Company and the Bank as a group may have effective control over an even greater amount of stock in the future. Assuming the sale of 570,000 shares of Common Stock in the Conversion and that all shares awarded under the RRP are purchased on the open market and upon (i) the full vesting of the restricted stock awards to directors and executive officers contemplated under the RRP and (ii) the exercise in full of all options expected to be granted to directors and executive officers under the Stock Option Plan, the Bank's and the Holding Company's directors and executive officers would receive an additional 44,175 shares of Common Stock and would exercise effective control of 13.4% of the outstanding shares of Common Stock. <PAGE> Regulatory Oversight and Recent Legislation The Bank is subject to extensive regulation, supervision and examination by the DFI as its primary state regulator and by the FDIC, which insures its deposits up to applicable limits and which is the primary federal regulator. The Bank is a member of the FHLB of Indianapolis and is subject to certain limited regulation by the FRB. As a bank holding company, the Holding Company will also be subject to regulation and oversight by the FRB. See "Regulation." Such regulation and supervision govern the activities in which an institution can engage and are intended primarily for the protection of the insurance fund and deposits. With a view to strengthening the banking industry, regulatory authorities have been granted extensive discretion in connection with their supervisory and enforcement activities. The assessments, filing fees and other costs associated with reports, examinations and other regulatory matters are significant, and increases in such costs may have an adverse effect on the Holding Company's results of operations. Congress is considering legislation that would consolidate the supervision and regulation of all U.S. financial institutions into one administrative body, would expand the powers of financial institutions, and would provide regulatory relief to financial institutions (the "Legislation"). It cannot be predicted with certainty whether or when the Legislation will be enacted or the extent to which the Holding Company and the Bank would be affected thereby. Under current tax laws, savings banks meeting certain requirements have been able to deduct from income for tax purposes amounts designated as reserved for bad debts. The Senate and the House have each recently passed legislation prospectively repealing the percentage of taxable income method used by savings associations to compute their bad debt deductions and further requiring, generally, that bad debt reserves taken after 1987 using the percentage of taxable income method be included in future taxable income of the savings bank over a six-year period, although a two-year delay may be permitted for institutions meeting a residential mortgage loan origination test. The Legislation requires smaller thifts (i.e., less than $500 million in assets) to use the experience method and larger thrifts (i.e., $500 million in assets or more) to use the charge-off method to compute these tax deductions. The proposed tax legislation could have an adverse effect on the Holding Company, although until such proposal is enacted, the extent of such effect is uncertain. See "Taxation -- Federal Taxation." Income Tax Consequences of Subscription Rights If the subscription rights granted in connection with the Conversion are deemed to have an ascertainable value, receipt of such rights will be taxable to recipients, either as ordinary income or capital gain, in an amount not in excess of such value. In the opinion of Keller, the subscription rights have no ascertainable fair market value. See "The Conversion -- Principal Effects of Conversion -- Tax Effects." <PAGE> HOME FINANCIAL BANCORP The Holding Company was incorporated under the laws of the State of Indiana on February 21, 1996, for the purpose of acquiring all of the common stock of the Bank and acting as the Bank's holding company. As the Holding Company was not incorporated until recently and is currently a shell corporation, no Holding Company financial statements are included herein. The holding company structure will provide increased flexibility in conducting future business activities related to the Bank. The Holding Company has received approval of the FRB to become a bank holding company through the acquisition of all of the common stock of the Bank to be issued upon completion of the Conversion. As an Indiana corporation, the Holding Company is authorized to engage in any activity that is permitted by the Indiana Business Corporation Law, as amended (the "IBCL"). The Board of Directors of the Holding Company anticipates that, after completion of the Conversion, the Holding Company will conduct its business initially as a bank holding company and its activities will be limited to those permitted by FRB regulations. The holding company structure will provide the Holding Company with greater flexibility than the Bank to diversify its business activities, either through newly-formed subsidiaries or through acquisitions. Neither the Bank nor the Holding Company has any arrangements, discussions or agreements, written or oral, regarding any such business activities or acquisitions at this time. However, after the Conversion the Holding Company will be able to take advantage of favorable business or acquisition opportunities that may arise. The assets of the Holding Company will initially consist of the common stock of the Bank and $2,267,500 of the net proceeds of the Conversion. The Holding Company intends to use a portion of such funds to make a loan to the ESOP to allow the ESOP to purchase shares of Common Stock in the Conversion. The Holding Company may also use such funds for general corporate purposes, including the payment of dividends and repurchases of shares of its Common Stock in the future. Any activities of the Holding Company will initially be funded from such net proceeds and through future dividends from the Bank, which are subject to certain limitations. See "Dividend Policy," "Regulation -- Dividend Limitations," and "Use of Proceeds." The executive office of the Holding Company is located at 279 East Morgan Street, P.O. Box 187, Spencer, Indiana, 47460. Its telephone number is (812) 829-2095. <PAGE> OWEN COMMUNITY BANK, s.b. Founded in 1911 under the name Owen County Savings and Loan Association, the Bank is a Spencer, Indiana-based, Indiana mutual savings bank conducting its business from its main office in Spencer. The Bank is the oldest continuously operating financial institution headquartered in Owen County. Management believes the Bank has developed a solid reputation among its loyal customer base because of its commitment to personal service and its strong support of the local community. The Bank is and historically has been a significant residential real estate mortgage lender in Owen County, originating approximately 14.4% of the mortgages recorded in Owen County during the calendar year ended December 31, 1995. The Bank offers a variety of lending, deposit and other financial services to its retail and commercial customers. The Bank attracts deposits from the general public and originates primarily mortgage loans most of which are secured by one-to four-family residential real property in Owen County. The Bank also offers mobile home loans, Combo Loans, multi-family loans, nonresidential real estate loans and consumer loans, including share loans and installment loans. The Bank derives most of the funds for its lending from deposits of its customers consisting primarily of certificates of deposit, savings accounts and checking accounts. The Bank has maintained a good capital position by focusing on residential real estate mortgage, Combo and mobile home lending in Owen County. At December 31, 1995, the Bank had total assets of $33.5 million, deposits of $24.9 million and equity capital of $3.3 million. The Bank has no accounting goodwill or other intangible assets on its balance sheet. For the fiscal year ended June 30, 1995, the Bank had net income of $289,000, a return on assets of 1.00%, and a return on equity of 9.59%. The Bank has experienced very few asset quality problems in its total loan portfolio, and at December 31, 1995, its ratio of non-performing assets to total assets was 0.35%. The Bank charged off only $6,000 of loans during the year ended June 30, 1995. At December 31, 1995, the Bank's equity capital equaled 9.85% of total assets. Assuming net proceeds at the midpoint of the Estimated Valuation Range, the Bank's pro forma equity to assets ratio at December 31, 1995, would have been 16.0%. Assuming net proceeds are allocated to the Bank at the midpoint of the Estimated Valuation Range (except for $2,267,500 retained by the Holding Company), the Bank's pro forma total risk-based capital ratio, Tier I risk-based capital ratio and leverage ratio would have been 28.6%, 28.1% and 14.2%, respectively. The Bank's capital ratios are now, and on a pro forma basis will be, substantially in excess of its Capital Requirements. See "Pro Forma Data - --Regulatory Capital Compliance." <PAGE> MARKET AREA The Bank, located in Spencer, Indiana, attracts deposits primarily from Owen County in southern Indiana. As of December 31, 1995, the Bank's share of deposits among Owen County financial institutions was 16.0%. Spencer, the county seat of Owen County, is approximately 55 miles south of Indianapolis. According to the U.S. Bureau of Census, Spencer had a population of 2,537, and Owen County had a population of 17,281 at the time of the 1990 census. According to the Indiana Department of Employment and Training Services, the total work force in Owen County was 10,520 as of October, 1995. As of the same date, 10,120 persons were employed, resulting in an unemployment rate for Owen County of approximately 3.8%. As of the same date, the unemployment rate for Indiana was 4.2%, and the nationwide unemployment rate was 5.5%. According to the Chamber of Commerce of Spencer and Owen County, Owen County's largest employer with approximately 350 employees is Cook Urological which specializes in the manufacturing of medical instruments. Owen County's second largest employer is Boston Scientific, which employs approximately 250 persons and also specializes in the manufacturing of medical and surgical products. USE OF PROCEEDS All except $2,267,500 of the net Conversion proceeds received from the sale of the Common Stock offered in the Subscription and Direct Community Offerings, or 50.0%, 57.9%, 63.7% and 68.6% of the net Conversion proceeds at the minimum, midpoint, maximum, and 15% above the maximum, respectively, will be used by the Holding Company to purchase all of the common stock to be issued by the Bank in the Conversion. The $2,267,500 retained by the Holding Company constitutes 50.0%, 42.1%, 36.3% and 31.4% of the net Conversion proceeds at the minimum, midpoint, maximum and 15% above the maximum, respectively, and will be used for general corporate purposes, including a loan to the ESOP to permit the ESOP to purchase shares of Common Stock in the Subscription Offering. The Holding Company may also use a portion of such retained proceeds for the payment of dividends and future repurchases of its Common Stock. The funds received by the Bank will be used primarily to support the Bank's lending and investment activities and may be used to repay a portion of its $5.2 million in outstanding borrowings from the FHLB of Indianapolis at December 31, 1995 which mature on various dates primarily during the years 1996 through 2000 and have interest rates ranging from 6.14% to 6.48%. See "Business --Sources of Funds -- Borrowings." The Bank may also use Conversion proceeds for future renovation and branch expansion. As part of its asset/liability management, the Bank will seek to use the proceeds to make adjustable-rate mortgage loans, mobile home loans, Combo Loans, nonresidential real estate loans and consumer loans to the extent there is demand for such loans and subject to market conditions. On an interim basis, the net proceeds will be invested in U.S. government securities, other U.S. agency securities, mortgage-backed securities and equity securities. See "Business -- Investments and FHLB Stock," and "--Lending Activities --Mortgage-Backed Securities." Any remaining net proceeds may be used for general corporate purposes, including contribution to the Bank's proposed RRP. Neither the Holding Company nor the Bank has any current intention to acquire any other financial institutions or other entities. <PAGE> The following table shows estimated gross and net proceeds based upon shares of Common Stock being sold in the Conversion at the minimum, midpoint, maximum and 15% above the maximum of the Estimated Valuation Range. <TABLE> <CAPTION> 15% Above Minimum, Midpoint, Maximum, Maximum, 484,500 570,000 655,500 753,825 Shares Shares Shares Shares Sold at Price Sold at Price Sold at Price Sold at Price of $10.00 of $10.00 of $10.00 of $10.00(2) ------------- ------------- ------------- ------------- (In thousands) <S> <C> <C> <C> <C> Gross Proceeds.......................... $4,845 $5,700 $6,555 $7,538 Less: Estimated Advisory Fees and Other Expenses(1)................ 310 310 310 310 Estimated net Conversion proceeds(1).......................... $4,535 $5,390 $6,245 $7,228 </TABLE> - ---------- (1) In calculating estimated net Conversion proceeds, it has been assumed that no sales will be made through selected dealers. (2) As adjusted to give effect to an increase in the number of shares which could occur due to an increase in the Estimated Valuation Range of up to 15% to reflect changes in market and financial conditions following the commencement of the Subscription and Direct Community Offerings. The actual net proceeds may differ from the estimated net proceeds calculated above for various reasons, including variances in the actual amount of legal and accounting expenses incurred in connection with the Conversion, commissions paid for sales made through other dealers, and the actual number of shares of Common Stock sold in the Conversion. Any variance in the actual net proceeds from the estimates provided in the table above is not expected to be material. <PAGE> DIVIDEND POLICY Upon Conversion, the Board of Directors of the Holding Company will have the authority to declare dividends on the Common Stock, subject to statutory and regulatory requirements. The Board of Directors may consider a policy of paying cash dividends on the Common Stock in the future. However, no decision has been made as to the amount or timing of any such dividends. The declaration and payment of dividends, if any, will depend upon a number of factors, including the Holding Company's then-current and projected consolidated operating results and financial condition, regulatory restrictions, future growth plans and such other factors as the Board of Directors deems relevant. After the Conversion, the Bank will be the sole direct subsidiary of the Holding Company. Initially, the Holding Company will have no independent operations or other subsidiaries to generate income. Consequently, other than the net proceeds of the Conversion that the Holding Company will retain (after funding the loan to the ESOP) and repayments of the ESOP loan, the ability of the Holding Company to accumulate earnings for the payment of cash dividends to its shareholders or possible repurchases of shares of Common Stock will depend upon the ability of the Bank to pay dividends to the Holding Company. In connection with the Conversion, the Bank will establish a liquidation account which will serve to protect Eligible Account Holders and Supplemental Eligible Account Holders in the unlikely event of a liquidation of the Bank. The Bank will not pay dividends to the Holding Company to the extent the liquidation account would be impaired. The balance of the liquidation account will initially be $3,364,000 and will gradually decline. However, the initial amount available for dividends to the Holding Company from the Bank will be approximately equal to the portion of the net proceeds to be paid to the Bank, less adjustments for the ESOP and RRP, or approximately $3.2 million at the maximum of the Estimated Valuation Range. See "The Conversion -- Principal Effects of Conversion --Effect on Liquidation Rights." In addition, the extent to which the Bank may pay dividends or make capital distributions is subject to other regulatory restrictions. Income of the Bank appropriated to bad debt reserves and deducted from gross income for federal income tax purposes is not available for payment of cash dividends or other distributions to the Holding Company without the payment of federal income taxes by the Bank on the amount of such income. At December 31, 1995, approximately $700,000 of the Bank's retained earnings represented bad debt deductions for which no federal income tax provision had been made. See "Taxation -- Federal Taxation." The Bank's unrecorded deferred income tax liability on such accumulated bad debt deduction at December 31, 1995 was $280,000. See Note 9 to the Notes to Consolidated Financial Statements. For a description of proposed legislation concerning deductions for bad debt reserves, see "Taxation -- Federal Taxation." Generally, there is no regulatory restriction on the payment of dividends by the Holding Company. Under FRB supervisory policy, a bank holding company generally should not maintain its existing rate of cash dividends on common shares unless (i) the organization's net income available to common shareholders over the past year has been sufficient to fully fund the dividends and (ii) the prospective rate of earnings retention appears consistent with the organization's capital needs, asset quality, and overall financial condition. The FDIC also has authority under current law to prohibit a bank from paying dividends if, in its opinion, the payment of dividends would constitute an unsafe or unsound practice in light of the financial condition of the bank. Indiana law, however, would prohibit the Holding Company from paying a dividend, if, after giving effect to the payment of that dividend, the Holding Company would not be able to pay its debts as they become due in the usual course of business or the Holding Company's total assets would be less than the sum of its total liabilities plus preferential rights of holders of preferred stock, if any. See "Regulation -- Regulatory Capital" and "-- Dividend Limitations." <PAGE> MARKET FOR THE COMMON STOCK The Holding Company has never issued Common Stock to the public. Consequently, there is no established market for the Common Stock. The Holding Company has received approval to have its Common Stock quoted on the NASDAQ Small Cap Market under the symbol "HWEN" upon successful closing of the offering. The Holding Company anticipates that there will be at least two market makers for its shares upon the completion of the Conversion, depending upon the volume of trading activity in the Common Stock and subject to compliance with applicable provisions of federal and state securities laws and other regulatory requirements. The Holding Company has not yet obtained any market makers and will not do so until the offering is completed. FBR intends to make a market for the Common Stock, but is under no obligation to do so. An active and liquid public trading market for the securities of any issuer, including the Holding Company, depends upon the presence in the marketplace of both willing buyers and willing sellers of the securities at any given time. The Holding Company has received approval to have its shares quoted on the NASDAQ Small Cap Market, subject to certain conditions which the Holding Company and the Bank believe will be met, including having at least 300 holders of Common Stock, at least 100,000 publicly held shares of Common Stock, and two market makers for the Common Stock. However, no assurance can be given that an active and liquid trading market will develop or that the trading price per share of the Common Stock will equal or exceed the Purchase Price. Purchasers of Common Stock should consider the potentially illiquid and long-term nature of their investment in the shares being offered hereby. The aggregate price of the Common Stock is based upon an independent appraisal of the pro forma market value of the Common Stock. However, there can be no assurance that an investor will be able to sell the Common Stock purchased in the Conversion at or above the Purchase Price. <PAGE> ANTICIPATED MANAGEMENT PURCHASES The following table sets forth information as to subscription rights to Common Stock intended at this time to be exercised by each director of the Bank and the one executive officer who is not director of the Bank (including shares to be purchased by their Associates) and all directors and executive officers as a group. For purposes of the following table, it has been assumed that sufficient shares will be available to satisfy subscriptions in all categories and that shares will be sold for $10.00 per share. <TABLE> <CAPTION> Aggregate Amount of Shares Percent of Shares Percent of Shares Percent of Shares Percent of Shares Purchase Proposed to be Assuming Assuming Assuming Assuming Price of Subscribed 484,500 Shares 570,000 Shares 655,500 Shares 753,825 Shares Name and Intended for all in are Sold in the are Sold in the are Sold in the are Sold in the Position Purchases(1) Categories Conversion Conversion Conversion Conversion - ----------------- -------------- ----------------- ----------------- ------------------ ----------------- ------------------ <S> <C> <C> <C> <C> <C> <C> Frank R. Stewart $100,000 10,000 2.06% 1.75% 1.53% 1.32% Chairman Robert W. Raper, 20,000 2,000 0.41 0.35 0.30 0.27 Vice Chairman John T. Gillaspy, 100,000 10,000 2.06 1.75 1.53 1.32 Director Stephen Parrish, 20,000 2,000 0.41 0.35 0.30 0.27 Director Tad Wilson, 100,000 10,000 2.06 1.75 1.53 1.32 Director Charles W. Chambers, 5,000 500 0.11 0.09 0.08 0.07 Director and Secretary Kurt J. Meier, 8,000 800 0.17 0.14 0.12 0.11 Director, President and Treasurer Kurt D. Rosenberger, 7,500 750 0.16 0.13 0.11 0.10 Vice President -------- ------ ---- ---- ---- ---- All directors and $360,500 36,050 7.44% 6.32% 5.50% 4.78% executive officers ======== ====== ==== ==== ==== ==== as a group (8 persons)(2) </TABLE> - ---------- (footnotes on following page) <PAGE> (1) Does not include shares subject to stock options which may be granted under the Stock Option Plan, shares which may be awarded under the RRP, or any shares which may be allocated to officers under the ESOP. (2) Assuming that all shares awarded under the RRP are purchased on the open market and upon (i) the full vesting of the restricted stock awards to directors and executive officers contemplated under the RRP and (ii) the exercise in full of all options expected to be granted to directors and executive officers under the Stock Option Plan, all directors and executive officers as a group would beneficially own 73,599 shares (14.4%), 80,225 shares (13.4%), 86,852 shares (12.6%), and 94,472 shares (11.9%) upon sales at the minimum, midpoint, maximum, and 15% above the maximum of the Estimated Valuation Range, respectively. See "Executive Compensation and Related Transactions -- RRP" and "-- Stock Option Plan." <PAGE> CAPITALIZATION The following table presents the historical capitalization of the Bank at December 31, 1995, and the pro forma consolidated capitalization of the Holding Company as of that date, giving effect to the sale of Common Stock offered by this Prospectus based on the minimum, midpoint, maximum and 15% above the maximum of the Estimated Valuation Range, and subject to the other assumptions set forth below. The pro forma data set forth below may change significantly at the time the Holding Company completes the Conversion due to, among other factors, a change in the Estimated Valuation Range for the shares or a change in the current estimated expenses of the Conversion. If the Estimated Valuation Range changes so that between 484,500 and 753,825 shares are not sold in the Conversion, subscriptions will be returned to subscribers who do not affirmatively elect to continue their subscriptions during the offering at the revised Estimated Valuation Range. <TABLE> <CAPTION> At December 31, 1995 -------------------------------------------------------------------------------- Pro Forma Holding Company Capitalization Based on Sale of ------------------------------------------------------------ 484,500 570,000 655,500 753,825 Shares Shares Shares Shares The Bank's Sold at Sold at Sold at Sold at Historical Price of Price of Price of Price of Capitalization $10.00 $10.00 $10.00 $10.00(6) -------------- -------- --------- -------- --------- (In Thousands) <S> <C> <C> <C> <C> <C> Deposits (1) ..................................... $ 24,895 $ 24,895 $ 24,895 $ 24,895 $ 24,895 Federal Home Loan Bank advances .................. $ 5,200 $ 5,200 $ 5,200 $ 5,200 $ 5,200 Capital and retained earnings: Preferred stock, without par value, 2,000,000 shares authorized, none issued....................... $ -- $ -- $ -- $ -- $ -- Common Stock, without par value, 5,000,000 shares authorized; indicated number of shares assumed outstanding (2) ............. -- 4,535 5,390 6,245 7,228 Retained earnings and net unrealized gain on securities available for sale (3) .......... 3,295 3,295 3,295 3,295 3,295 Less: Common Stock acquired by RRP (4) .............. -- (194) (228) (262) (302) Common Stock acquired by the ESOP (5) ......... -- (388) (456) (524) (603) -------- -------- -------- -------- -------- Total capital and retained earnings .............. $ 3,295 $ 7,248 $ 8,001 $ 8,754 $ 9,618 ======== ======== ======== ======== ======== </TABLE> - ---------- (1) Excludes accrued interest. No effect is given to possible withdrawals from deposit accounts to purchase the Common Stock. (2) The number of shares to be issued in the Conversion may be increased or decreased based on market and financial conditions prior to the completion of the Conversion. Assumes estimated expenses of $310,000. See "Use of Proceeds." (3) Retained earnings are substantially restricted. See Notes 9 and 12 to the Bank's Consolidated Financial Statements. See also "The Conversion -- Principal Effects of Conversion -- Effect on Liquidation Rights." Retained earnings do not reflect the federal income tax consequences of the restoration to income of the Bank's special bad debt reserve for income tax purposes which would be required in the unlikely event of a liquidation or if a substantial portion of retained earnings were otherwise used for a purpose other than absorption of bad debt losses and may be required under certain proposals currently pending in Congress. See "Taxation -- Federal Taxation." Equity capital includes retained earnings increased by net unrealized gain on securities available for sale. (4) Assuming the receipt of shareholder approval at the Holding Company's first meeting of shareholders, the Bank intends to implement the RRP. Assuming such implementation, the RRP will eventually purchase an amount of shares equal to 4.0% of the Common Stock sold in the Conversion for issuance to directors, officers and employees of the Holding Company and the Bank (although its initial grants are expected to be for only 3% of the Common Stock sold in the Conversion). Such shares may be purchased from authorized but unissued shares or on the open market. The Holding Company currently intends that the RRP will purchase the shares on the open market. Under the terms of the RRP, shares will vest at the rate of 20% per year. The Common Stock to be purchased by the RRP represents unearned compensation and is, accordingly, reflected as a reduction to pro forma shareholders' equity. As shares of the Common Stock granted pursuant to the RRP vest, a corresponding reduction in the charge against capital will occur. In the event that authorized but unissued shares are acquired, the interests of existing shareholders will be diluted. Assuming that 570,000 shares of Common Stock are issued in the Conversion and that all awards under the RRP are from authorized but unissued shares, the Holding Company estimates that the per share book value for the Common Stock would be diluted $0.54 per share, or 3.8% and earnings per share would be diluted $0.03 per share, or 7.9% on a pro forma basis as of December 31, 1995. (footnotes continued on following page) <PAGE> (5) Assumes purchases by the ESOP of a number of shares equal to 8% of the shares issued in the Conversion. The funds used to acquire the ESOP shares will be borrowed from the Holding Company. See "Use of Proceeds." The Bank intends to make contributions to the ESOP sufficient to service and ultimately retire its debt. The Common Stock acquired by the ESOP is reflected as a reduction of stockholders' equity. See "Executive Compensation and Related Transactions -- Employee Stock Ownership Plan and Trust." (6) As adjusted to give effect to an increase in the number of shares which could occur due to an increase in the Estimated Valuation Range of up to 15% to reflect changes in market and financial conditions following the commencement of the Subscription and Direct Community Offerings. PRO FORMA DATA Pro forma consolidated net income data of the Holding Company for the six months ended December 31, 1995 and for the year ended June 30, 1995, have been calculated as if the estimated net proceeds of the sale of Common Stock had been received by the Holding Company and the Bank and invested at 4.96% (yield of a six-month U.S. Treasury bill on February 1, 1996). The pro forma after tax yield for the Holding Company and the Bank is assumed to be 3.0% for the reported periods after adjusting for taxes using a federal statutory rate of 34%, and the net effect of the state statutory income tax rate of 5.61%. Historical and pro forma per share amounts have been calculated by dividing historical amounts and the pro forma amounts of the Holding Company by the indicated number of shares of Common Stock assuming that such number of shares had been outstanding during each of the entire periods. Possible withdrawals from deposit accounts to purchase Common Stock are not reflected in the pro forma adjustments. The Holding Company is unable to estimate the potential impact of taking such withdrawals into account. Book value represents the difference between the stated amount of consolidated assets and consolidated liabilities of the Holding Company computed in accordance with generally accepted accounting principles. Book value does not necessarily reflect current market value of assets and liabilities, and does not reflect the effect of the liquidation account to be established in the Conversion, see "The Conversion -- Principal Effects of Conversion -- Effect on Liquidation Rights," or the federal income tax consequences of the restoration to income of the Bank's special bad debt reserves for income tax purposes which would be required in the unlikely event of liquidation and may be required under certain proposals currently pending in Congress. See "Taxation -- Federal Taxation." Pro forma book value includes only net proceeds as of the indicated dates and does not include earnings on the proceeds for the periods then ended. The pro forma net earnings derived from the assumptions set forth above should not be considered indicative of the actual results of operations of the Holding Company that would have been attained for any period if the Conversion had been actually consummated at the beginning of such periods and the assumptions regarding investment yields should not be considered indicative of the actual yield expected to be achieved during any future period. The pro forma book values at the dates indicated should not be considered as reflecting the potential trading value of the Holding Company's stock. There can be no assurance that an investor will be able to sell the Common Stock purchased in the Conversion at prices within the range of the pro forma book values of the Common Stock or at or above the Purchase Price. <PAGE> <TABLE> <CAPTION> 484,500 Shares 570,000 Shares 655,500 Shares 753,825 Shares(1) Sold at Sold at Sold at Sold at $10.00 Per Share $10.00 Per Share $10.00 Per Share $10.00 Per Share ----------------- ------------------ -------------------- ----------------- Six Months Year Six Months Year Six Months Year Six Months Year ended ended ended ended ended ended ended ended 12/31/95 6/30/95 12/31/95 6/30/95 12/31/95 6/30/95 12/31/95 6/30/95 -------- ------- -------- ------- -------- ------- -------- ------- (In thousands, except per share amounts) <S> <C> <C> <C> <C> <C> <C> <C> <C> Gross proceeds...................... $4,845 $4,845 $5,700 $5,700 $6,555 $6,555 $7,538 $7,538 Less offering expenses, advisory fees and commissions ............. (310) (310) (310) (310) (310) (310) (310) (310) ------ ------- ------- ------- ------ ------ ------- ------- Estimated net conversion proceeds (2)................... 4,535 4,535 5,390 5,390 6,245 6,245 7,228 7,228 Less: Common Stock acquired by RRP (4).. (194) (194) (228) (228) (262) (262) (302) (302) Common Stock acquired by ESOP (6). (388) (388) (456) (456) (524) (524) (603) (603) ------ ------- ------- ------- ------ ------ ------- ------- Estimated proceeds available for investment.................... $3,953 $3,953 $4,706 $4,706 $5,459 $5,459 $6,323 $6,323 ====== ======= ======= ======= ====== ====== ======= ======= Consolidated net income: Historical ....................... $154 $289 $ 154 $ 289 $ 154 $ 289 $ 154 $ 289 Pro forma income (3).............. 60 119 71 141 82 164 95 190 Pro forma ESOP adjustment (6)..... (12) (23) (14) (28) (16) (32) (20) (39) Pro forma RRP adjustment (4)...... (12) (23) (14) (28) (16) (32) (20) (39) ------ ------- ------- ------- ------ ------ ------- ------- Pro forma net income ............. $190 $362 $ 197 $ 374 $ 204 $ 389 $ 209 $ 401 ====== ======= ======= ======= ====== ====== ======= ======= Consolidated net income per share (7): Historical ....................... $.34 $ .64 $ .29 $.55 $ .25 $ .48 $ .21 $ .40 Pro forma income (3).............. .13 .26 .13 .27 .13 .27 .13 .26 Pro forma ESOP adjustment (6)..... (.03) (.05) (.03) (.05) (.03) (.05) (.03) (.05) Pro forma RRP adjustment (4)...... (.03) (.05) (.03) (.05) (.03) (.05) (.03) (.05) ------ ------- ------- ------- ------ ------ ------- ------- Pro forma net income per share.... $.41 $ .80 $ .36 $ .72 $ .32 $ .65 $ .28 $ .56 ====== ======= ======= ======= ====== ====== ======= ======= Consolidated book value (5): Historical ....................... $3,29 $3,159 $3,295 $3,159 $3,295 $3,159 $3,295 $3,159 Estimated net conversion proceeds (2) .................... 4,535 4,535 5,390 5,390 6,245 6,245 7,228 7,228 Less: Common Stock acquired by RRP (4). (194) (194) (228) (228) (262) (262) (302) (302) Common Stock acquired by ESOP (6) (388) (388) (456) (456) (524) (524) (603) (603) ------ ------- ------- ------- ------ ------ ------- ------- Pro forma book value ............. $7,248 $7,112 $8,001 $7,865 $8,754 $8,618 $9,618 $9,482 ====== ======= ======= ======= ====== ====== ======= ======= Consolidated book value per share (5)(7): Historical ....................... $ 6.80 $ 6.52 $5.78 $ 5.54 $ 5.03 $ 4.82 $ 4.20 $ 4.03 Estimated net conversion proceeds per share ....................... 9.36 9.36 9.46 9.46 9.53 9.53 9.22 9.22 Less: Common Stock acquired by RRP (4). (.40) (.40) (.40) (.40) (.40) (.40) (.39) (.39) Common Stock acquired by ESOP (6) (.80) (.80) (.80) (.80) (.80) (.80) (.77) (.77) ------ ------- ------- ------- ------ ------ ------- ------- Pro forma book value per share.... $14.96 $ 14.68 $ 14.04 $ 13.80 $13.36 $13.15 $ 12.26 $ 12.09 ====== ======= ======= ======= ====== ====== ======= ======= Offering price to pro forma net income per share ........................ 12.20x 12.50x 13.89x 13.89x 15.63x 15.38x 17.86x 17.86x Offering price as a percentage of pro forma book value per share........ 66.85% 68.12% 71.23% 72.46% 74.85% 76.05% 81.57% 82.71% Number of shares used in calculating EPS................... 449,616 449,616 528,960 528,960 608,304 608,304 727,390 727,390 Number of shares used in calculating book value............ 484,500 484,500 570,000 570,000 655,500 655,500 783,825 783,825 </TABLE> - ------------- (footnotes continued on next page) <PAGE> (1) As adjusted to give effect to an increase in the number of shares which could occur due to an increase in the Estimated Valuation Range of up to 15% to reflect changes in market and financial conditions following commencement of the Subscription and Direct Community Offerings. (2) See "Use of Proceeds" for assumptions utilized to determine the estimated net proceeds of the sale of Common Stock. (3) Calculated based upon estimated proceeds available for investment. (4) Assuming the receipt of shareholder approval at the Holding Company's first meeting of shareholders, the Bank intends to implement the RRP. Assuming such implementation, the RRP will eventually purchase an amount of shares equal to 4.0% of the Common Stock sold in the Conversion for issuance to directors, officers and employees of the Holding Company and the Bank (although its initial grants are expected to be for only 3% of the Common Stock sold in the Conversion). Such shares may be purchased from authorized but unissued shares or on the open market. The Holding Company currently intends that the RRP will purchase the shares on the open market, and the estimated net conversion proceeds have been reduced for the purchase of the shares in determining estimated proceeds available for investment. Under the terms of the RRP, shares will vest at the rate of 20% per year. The Common Stock to be purchased by the RRP represents unearned compensation and is, accordingly, reflected as a reduction to pro forma shareholders' equity. As shares of the Common Stock granted pursuant to the RRP vest, a corresponding reduction in the charge against capital will occur. In the event that authorized but unissued shares are acquired, the interests of existing shareholders will be diluted. Assuming that 570,000 shares of Common Stock are issued in the Conversion and that all awards under the RRP are from authorized but unissued shares, the Holding Company estimates that the per share book value for the Common Stock would be diluted $0.54 per share, or 3.8%, and earnings per share would be diluted $0.03 per share, or 7.9%, on a pro forma basis as of December 31, 1995. (5) Book value represents the excess of assets over liabilities. The effect of the liquidation account is not reflected in these computations. (For additional information regarding the liquidation account, see "The Conversion -- Principal Effects of Conversion -- Effect on Liquidation Rights.") (6) It is assumed that 8% of the shares of Common Stock issued in the Conversion will be purchased by the ESOP. The funds used to acquire the ESOP shares will be borrowed by the ESOP from the Holding Company (see "Use of Proceeds"). The Bank intends to make annual contributions to the ESOP in an amount at least equal to the principal and interest requirements on the debt. The Bank's total annual expense in payment of the ESOP debt is based upon 10 equal annual installments of principal, with an assumed annual interest rate of 8.25%. The pro forma net income assumes: (i) the Bank's total contributions are equivalent to the debt service requirement for the year and were made at the end of the period; (ii) the annual interest rate applicable to the debt was 8.25%; and (iii) the effective tax rate applicable to the debt was 39.61%. Expense for the fiscal year beginning on July 1, 1996 and thereafter will be based on the number of shares committed to be released to participants for the year at the average market value of the shares during the year. Accordingly, the Bank's total annual expense in payment of the ESOP for such years may be higher than that discussed above. The amount borrowed is reflected as a reduction of shareholders' equity. (7) Assuming the receipt of shareholder approval at the Holding Company's first meeting of shareholders, the Holding Company intends to implement the Stock Option Plan. Assuming such implementation, Common Stock in an aggregate amount equal to 10.0% of the shares issued in the Conversion will be reserved for issuance by the Holding Company upon the exercise of the stock options granted under the Stock Option Plan. No effect has been given to the shares of Common Stock reserved for issuance under the Stock Option Plan. Upon the exercise of stock options granted under the Stock Option Plan, the interests of existing shareholders will be diluted. Assuming the issuance of 570,000 shares in the Conversion and the exercise of 57,000 options at an exercise price of $10.00 per share, the Holding Company estimates that the per share book value for the Common Stock would be diluted $.37 per share, or 2.64%, and earnings per share would be diluted $.02 per share, or 5.88%, on a pro forma basis as of December 31, 1995. <PAGE> Regulatory Capital Compliance In connection with the Bank's conversion to a state-chartered savings bank, the FDIC imposed heightened capital requirements on the Bank because of the impermissible real estate development activities of BSF, the Bank's subsidiary. The FDIC currently requires that the Bank maintain capital (after deduction of its investment in BSF) at levels sufficient for the Bank to be classified as a well-capitalized institution. See "Regulation -- Regulatory Capital." The following table compares the Bank's historical and pro forma regulatory capital levels as of December 31, 1995 to the Bank's heightened capital requirements after giving effect to the Conversion. <TABLE> <CAPTION> At December 31, 1995 Pro Forma Capital Based on Sale of 484,500 Shares 570,000 Shares 655,500 Shares 753,825 Shares The Bank Sold at Price of Sold at Price of Sold at Price of Sold at Price of Historical $10.00 $10.00 $10.00 $10.00 (1) ---------- ------ ------ ------ ---------- Amount Ratio(2) Amount Ratio(2) Amount Ratio(2) Amount Ratio(2) Amount Ratio(2) ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- (Dollars in thousands) Equity capital based upon generally accepted <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> accounting principles (3).......... $3,295 9.9% $4,980 14.2% $5,733 16.0% $6,486 17.7% $7,350 19.6% Total risk-based capital (3): Historical or pro forma........................ $2,666 15.0% $4,351 24.4% $5,104 28.6% $5,857 32.9% $6,721 37.7% Required........................... 1,783 10.0 1,783 10.0 1,783 10.0 1,783 10.0 1,783 10.0 Excess........................... $ 883 5.0% $2,568 14.4% $3,321 18.6% $4,074 22.9% $4,938 27.7% Tier I capital (3): Historical or pro forma........................ $2,566 14.4% $4,251 23.8% $5,004 28.1% $5,757 32.3% $6,621 37.1% Required........................... 1,070 6.0 1,070 6.0 1,070 6.0 1,070 6.0 1,070 6.0 Excess........................... $1,496 8.4% $3,181 17.8% $3,934 22.1% $4,687 26.3% $5,551 31.1% Tier I leverage capital (3): Historical or pro forma........................ $2,566 7.8% $4,251 12.4% $5,004 14.2% $5,757 16.0% $6,621 18.0% Required........................... 1,637 5.0 1,721 5.0 1,759 5.0 1,796 5.0 1,840 5.0 Excess........................... $ 929 2.8% $2,530 7.4% $3,245 9.2% $3,961 11.0% $4,781 13.0% - ---------------------- </TABLE> (1) As adjusted to give effect to an increase in the number of shares which could occur due to an increase in the Estimated Valuation Range of up to 15% to reflect changes in market and financial conditions following commencement of the Subscription and Direct Community Offerings. (2) Tier I leverage levels are shown as a percentage of total assets; total risk-based and Tier I capital levels are shown as a percentage of risk-weighted assets. (3) Pro forma capital levels assume receipt by the Bank of all but $2,267,500 of the net Conversion proceeds and proceeds from the ESOP loan invested in zero risk weighted assets, reduced for shares of Common Stock acquired by the RRP. <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The Holding Company was recently formed as an Indiana corporation on February 21, 1996, for the purpose of issuing the Common Stock and owning all of the outstanding common stock of the Bank to be issued in the Conversion as a unitary bank holding company. As a newly formed corporation, the Holding Company has no operating history. The principal business of savings banks, including the Bank, has historically consisted of attracting deposits from the general public and making loans secured by residential real estate. The Bank's earnings are primarily dependent upon its net interest income, the difference between interest income and interest expense. Interest income is a function of the balances of loans and investments outstanding during a given period and the yield earned on such loans and investments. Interest expense is a function of the amount of deposits and borrowings outstanding during the same period and interest rates paid on such deposits and borrowings. The Bank's earnings are also affected by provisions for loan losses, service charges and other non-interest income, operating expenses and income taxes. The Bank is significantly affected by prevailing economic conditions, as well as government policies and regulations concerning, among other things, monetary and fiscal affairs, housing and financial institutions. See "Regulation." Deposit flows are influenced by a number of factors, including interest rates paid on competing investments, account maturities and level of personal income and savings within the Bank's market. In addition, deposit growth is affected by how customers perceive the stability of the financial services industry amid various current events such as regulatory changes, failures of other financial institutions and financing of the deposit insurance fund. Lending activities are influenced by the demand for and supply of housing lenders, the availability and cost of funds and various other items. Sources of funds for lending activities of the Bank include deposits, payments on loans, borrowings and income provided from operations. Current Business Strategy The Bank's business strategy is to operate a well-capitalized, profitable and independent community savings bank dedicated primarily to residential and mobile home lending with an emphasis on personal service. The Bank has sought to implement this strategy by (1) originating mobile home and non-conforming residential mortgage loans with interest rates above prevailing market rates for conforming residential mortgage loans, (2) maintaining asset quality through diligent collection efforts, and (3) maintaining acceptable levels of capital. The highlights of the Bank's business strategy are as follows: o Profitability. Although no assurance can be made regarding future profitability, the Bank has been profitable in each of the past five fiscal years. The Bank had net income of $289,000 in fiscal 1995, $261,000 in fiscal 1994, and $308,000 in fiscal 1993. The Bank's net income for the six months ended December 31, 1995 was $154,000. The Bank's average return on average assets for the five years ended June 30, 1995 was 0.88%. The Bank's return on average assets for the year ended June 30, 1995 and the six months ended December 31, 1995, was 1.00% and 0.92%, respectively. o Mobile Home and Non-Conforming Loans. The Bank has developed a unique niche in its market area by (i) being the primary mobile home lender in Owen County; (ii) originating a significant number of loans with a Loan-to-Value Ratio of 90%; and (iii) extending credit to borrowers with prior credit problems or lower credit quality. By focusing on this unique lending niche, the Bank is able to improve its interest rate spread by charging interest rates above prevailing market rates. The Bank's interest rate spread for the years ended June 30, 1995, 1994 and 1993 was 4.19%, 4.11% and 4.11%, respectively. The Bank's interest rate spread for the six months ended December 31, 1995 was 3.83%. See "Business." <PAGE> o Nonresidential and Multi-Family Real Estate Loans. The Bank anticipates becoming more active in the origination of nonresidential and multi-family real estate loans following the Conversion. At December 31, 1995, the Bank's total portfolio of nonresidential real estate and multi-family loans amounted to $1.7 million and $475,000, respectively, or 6.2% and 1.7%, respectively, of the Bank's total loan portfolio. The Bank has historically been restricted in its ability to originate such loans by the loans-to-one borrower limitation because such loans often involve large balances to single borrowers or groups of related borrowers. However, the additional capital that the Bank will have following the Conversion will allow it to be more active in the origination of nonresidential and multi-family real estate loans. o Asset Quality. Although mobile home loans and loans to borrowers with prior credit problems or lower credit quality are typically riskier than residential mortgage loans to borrowers with higher credit quality, the Bank has been successful in maintaining its asset quality through diligent collection efforts. At December 31, 1995, only $118,000, or 0.35%, of the Bank's total assets, were included in non-performing assets. At the same date, $659,000, or 1.97%, of the Bank's total assets were delinquent more than 30 days but less than 90 days. See "Business -- Non-Performing and Problem Assets." o Capital Position. At December 31, 1995, the Bank exceeded all of its Capital Requirements, and its equity capital was $3.3 million, or 9.85% of total assets. Assuming net proceeds at the midpoint of the Estimated Valuation Range, the Bank's pro forma equity to assets ratio (excluding $2,267,500 of net proceeds to be retained by the Holding Company), at such date, would have been 16.0%. Asset/Liability Management The Bank, like other financial institutions, is subject to interest rate risk to the extent that its interest-earning assets reprice differently than its interest-bearing liabilities. As part of its effort to monitor and manage interest rate risk, the Bank uses the net portfolio value ("NPV") methodology recently adopted by the OTS as part of the OTS' capital regulations. Although the Bank is not subject to the supervision of or regulations promulgated by the OTS, the application of the NPV methodology adopted by the OTS assists the Bank in monitoring its interest rate risk. Generally, NPV is the discounted present value of the difference between incoming cash flows on interest-earning assets and other assets and outgoing cash flows on interest-bearing liabilities and other liabilities. The application of the methodology attempts to quantify interest rate risk as the change in the NPV which would result from a theoretical 200 basis point (1 basis point equals .01%) change in market interest rates. Both a 200 basis point increase in market interest rates and a 200 basis point decrease in market interest rates are considered. If, under the OTS' NPV methodology, an increase or a decrease in market rates would result in a decrease of more than 2% in the present value of an institution's assets and such institution is required to comply with the NPV regulation, the institution must deduct 50% of the amount of the decrease in excess of such 2% in the calculation of the institution's risk-based capital. <PAGE> At December 31, 1995, 2% of the present value of the Bank's assets was approximately $674,000. Because the interest rate risk of a 200 basis point decrease in market interest rates (which was greater than the interest rate risk of a 200 basis point increase) was $520,000 at December 31, 1995, the Bank would not have been required to deduct any dollar amount from its capital under the OTS' methodology. Presented below, as of December 31, 1995, is an analysis prepared by Sendaro Corporation of the Bank's interest rate risk as measured by changes in NPV for instantaneous and sustained parallel shifts of 200 basis point increments in market interest rates. Net Portfolio Value NPV as % of PV of Assets Change --------------------------------------- ------------------------ In Rates $ Amount $ Change % Change NPV Ratio Change - -------- -------- -------- -------- --------- ------ (Dollars in thousands) 400 bp * $3,226 $ (173) (5.09)% 10.19% 11bp + 200 bp 3,530 131 3.85 10.74 66bp 0 bp 3,399 --- --- 10.08 --- - - 200 bp 2,879 (520) (15.30) 8.41 (167bp) - - 400 bp 2,516 (883) (25.98) 7.20 (288bp) Interest Rate Risk Measures: 200 Basis Point (bp) Rate Shock Pre-Shock NPV Ratio: NPV as % of PV of Assets.................. 10.08% Exposure Measure: Post-Shock NPV Ratio......................... 8.41% Sensitivity Measure: Change in NPV Ratio....................... (167bp) Change in NPV as % of PV of Assets............................. 15.30% Interest Rate Risk Capital Component........................... --- - ---------- * Basis points. <PAGE> An additional key element in the Bank's asset/liability plan is to protect net earnings from changes in interest rates by reducing the maturity or repricing mismatch between its interest-earning assets and rate-sensitive liabilities. This assumes that assets reprice based on assumptions indicated below the following table. The Bank's Interest Rate Gap was positive 18.1% as of December 31, 1995. A positive Interest Rate Gap would leave the Bank's earnings vulnerable to periods of declining interest rates because during such periods the interest income earned on assets will generally decrease more rapidly than the interest expense paid on liabilities. Conversely, in a rising interest rate environment, the total income earned on assets will generally increase more rapidly than the interest expense paid on liabilities. A negative Interest Rate Gap would have the opposite effect. The Bank's management believes that the Bank's Interest Rate Gap has generally been maintained within an acceptable range in view of the prevailing interest rate environment. The following table illustrates the projected maturities and the repricing of the major consolidated asset and liability categories of the Bank as of December 31, 1995. Maturity and repricing dates have been projected by applying the assumptions set forth below to contractual maturity and repricing dates. The information presented in the following table is derived from data maintained by the Bank and is not adjusted for prepayments. Since most of the loans are adjustable rate loans which are due to reprice within three years or less, management feels that loan prepayments will not have a significant impact on the results of the table below. <TABLE> <CAPTION> At December 31, 1995 Maturing or Repricing Within ----------------------------------------------------------------------------------------------- 0 to 3 4 to 6 7 to 12 1 to 3 3 to 5 5 to 10 10 to 20 Over 20 Months Months Months Years Years Years Years Years Total ------ ------ ------ ----- ----- ----- ----- ----- ----- (Dollars in Thousands) Interest-earning assets: <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Gross loans receivable (1) .... $4,929 $4,377 $6,567 $ 6,595 $ 2,131 $2,181 $ 646 $ --- $27,426 Securities available for sale (1) ................ 35 500 --- 315 100 300 --- --- 1,250 Mortgage-backed securities available for sale (1) ...... 179 165 305 630 87 --- --- --- 1,366 FHLB stock .................... --- --- --- --- --- --- --- 260 260 Interest-bearing demand deposits ........... 2,056 --- --- --- --- --- --- --- 2,056 ------ ------ ------ ------- ----- ------ ------ ------ ------- Total interest-earning assets ................. 7,199 5,042 6,872 7,540 2,318 2,481 646 260 32,358 ------ ------ ------ ------- ----- ------ ------ ------ ------- Interest-bearing liabilities: Certificates of deposit ....... 3,397 3,647 2,977 6,899 1,742 --- --- --- 18,662 Passbook accounts ............. 361 324 558 1,388 623 439 67 1 3,761 NOW accounts .................. 178 219 377 936 420 296 45 1 2,472 FHLB advances and other borrowed funds .............. 1,020 --- --- --- 4,000 200 --- --- 5,220 Total interest-bearing liabilities............. 4,956 4,190 3,912 9,223 6,785 935 112 2 30,115 ------ ------ ------ ------- ----- ------ ------ ------ ------- Periodic Gap ..................... $2,243 $ 852 $2,960 $(1,683) $(4,467) $1,546 $534 $258 ====== ====== ====== ======= ===== ====== ====== ====== Gap Ratio ..................... 1.45 1.20 1.76 0.82 0.34 2.65 5.77 130.00 Gap Percentage Total .......... 6.70% 2.55% 8.85% (5.03) 4.62% 1.60% 0.77% Cumulative Gap ................... $2,243 $3,095 $6,055 $ 4,372 $ (95) $1,451 $1,985 $2,243 $ 2,243 ====== ====== ====== ======= ===== ====== ====== ====== ======= Gap Ratio ..................... 1.45 1.34 1.46 1.20 1.16 1.20 1.53 1.39 Gap Percentage Total .......... 6.70% 9.25% 18.10% 13.07% (0.28)% 4.34% 5.94% 6.71% </TABLE> - --------------- (1) Excludes undisbursed loans of $123,000 and the unrealized gains on securities available for sale of $2,000. <PAGE> In preparing the above table, it has been assumed: o Zero growth and a constant percentage composition of the balance sheet with respect to volume, mix, and other performance influences. o The maturity composition of assset and liability rollover volumes is defined to approximately replicate current short-term balance sheet structure. o Prepayment rates are those observed from industry data on or about quarter end as tracked by Sendero Corporation. o Prepayment rate input reflects expected future prepayments embedded in quarter end prices of mortgage-backed instruments actively traded in financial markets. o Except where national or regional assumptions are used, unique prepayment rates are input corresponding to Indiana. In assessing the interest rate sensitivity of the Bank's assets, it has been assumed that (i) one year adjustable-rate first mortgage loans on one- to four-family residences will prepay at the rate of 16.0% per year; (ii) three year adjustable-rate first mortgage loans on one- to four-family residences will prepay at the rate of 15.0% per year; (iii) greater than three year adjustable-rate first mortgage loans on one- to four-family residences will prepay at the rate of 16.0% per year; (iv) adjustable-rate first mortgage loans on residential properties of five or more units and nonresidential properties will prepay at the rate of 19.6% per year; (v) fixed-rate first mortgage loans on residential properties of five or more units and nonresidential properties will prepay at the rate of 9.0% per year; (vi) fixed-rate first mortgage loan on one- to four-family residences will prepay at the rate of 18.0% per year; (vii) fixed-rate consumer loans will prepay at a rate of 7.0% per year; and (viii) fixed-rate mortgage-backed securities will prepay annually as follows: Interest Rate Payment Assumption ------------- ------------------ less than 6% 8.0% 7% to 7.99% 19.0% 8% to 8.99% 26.0% <PAGE> Also, it is assumed that fixed maturity deposits are not withdrawn prior to maturity, and that other deposits are withdrawn or reprice as follows: <TABLE> <CAPTION> 0 to 3 4 to 6 7 to 12 1 to 3 3 to 5 5 to 10 10 to 20 Over 20 Months Months Months Years Years Years Years Years ------ ------ ------ ----- ----- ----- ----- ----- <S> <C> <C> <C> <C> <C> <C> <C> <C> Passbook deposits and NOW's........ 9.53% 8.62% 14.85% 36.92% 16.58% 11.68% 1.79% 0.03% </TABLE> As with any method of measuring interest rate risk, certain shortcomings are inherent in the methods of analysis presented above. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could likely deviate significantly from those assumed in calculating the table. <PAGE> Average Balances and Interest Rates and Yields The following tables present at December 31, 1995, and for the six months ended December 31, 1995 and 1994, and for the years ended June 30, 1995, 1994, and 1993, the month-end average balances of each category of the Bank's interest-earning assets and interest-bearing liabilities, and the average yields earned and interest rates paid on such balances. Such yields and costs are determined by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented. <TABLE> <CAPTION> Six Months Ended December 31, At December 31, ------------------------------------------------------- 1995 1995 1994 ------------------ --------------------------- ------------------------- Yield/ Average Yield/ Average Yield/ Balance Cost Balance Interest Cost Balance Interest Cost (Dollars in thousands) Assets: Interest-earning assets: <S> <C> <C> <C> <C> <C> <C> <C> <C> Interest-earning deposits............ $ 2,056 5.43% $ 2,379 $ 66 5.55% $ 1,460 $ 39 5.34% Investment securities (1)............ 1,259 7.82 1,252 44 7.03 867 29 6.69 Mortgage-backed securities (1)....... 1,359 5.92 1,415 42 5.94 1,592 48 6.03 Loans receivable (2)................. 27,303 9.88 26,939 1,314 9.76 22,376 1,024 9.15 Stock in FHLB of Indianapolis........ 260 7.75 258 10 7.75 222 7 6.31 ------ ---- ------ ----- ---- ------ ----- ---- Total interest-earning assets...... 32,237 9.33 32,243 1,476 9.16 26,517 1,147 8.65 Non-interest earning assets, net of allowance for loan losses and including unrealized gain on securities available for sale........ 1,225 1,246 1,615 Total assets....................... $33,462 $33,489 $28,132 ======= ======= ======= Liabilities and retained earnings: Interest-bearing liabilities: Savings accounts..................... $ 3,761 3.00 $ 3,944 60 3.04 $ 4,952 76 3.07 NOW accounts......................... 2,472 2.45 2,260 28 2.48 2,522 32 2.54 Certificates of deposit.............. 18,662 6.01 18,526 545 5.88 14,379 347 4.83 Other borrowings..................... 20 --- 24 1 8.33 121 3 4.96 FHLB advances ....................... 5,200 6.36 5,167 163 6.31 3,000 77 5.13 ------- ------- ------- Total interest-bearing liabilities................... 30,115 5.40 29,921 797 5.33 24,974 535 4.28 Other liabilities....................... 52 326 227 ------- ------- ------- Total liabilities.................. 30,167 30,247 25,201 ------- ------- ------- Equity capital Retained earnings.................... 3,293 3,231 2,927 Unrealized gain on securities available for sale................. 2 11 4 ------- ------- ------- Total equity capital............... 3,295 3,242 2,931 ------- ------- ------- Total liabilities and equity capital................. $33,462 $33,489 $28,132 ======= ======= ======= Net interest-earning assets............. $ 2,122 $ 2,322 $ 1,543 ======= ======= ======= Net interest income..................... $ 679 $ 612 Interest rate spread.................... 3.93% 3.83% 4.37% ==== ==== ==== Net yield on weighted average interest-earning assets.............. 4.21% 4.62% Average interest-earning assets to average interest-bearing liabilities. 107.76% 106.18% </TABLE> <PAGE> <TABLE> <CAPTION> Year Ended June 30, 1995 1994 1993 -------------------------- --------------------------- ------------------------- Average Yield/ Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost Balance Interest Cost ------- -------- ---- ------- -------- ---- ------- -------- ---- (Dollars in thousands) Assets: Interest-earning assets: <S> <C> <C> <C> <C> <C> <C> <C> <C> Interest-earning deposits....... $ 1,298$ 77 5.93% $ 1,178 $ 44 3.74% $ 1,138 $ 39 3.43% Investment securities (1)....... 1,032 67 6.49 775 46 5.94 675 47 6.96 Mortgage-backed securities (1)................ 1,556 93 5.98 1,773 106 5.98 1,306 100 7.66 Loans receivable (2)............ 23,329 2,167 9.29 20,326 1,814 8.92 18,453 1,749 9.48 Stock in FHLB of Indianapolis... 224 16 7.14 222 13 5.86 222 23 10.36 ------ ----- ------ ----- ------ ----- Total interest-earning assets. 27,439 2,420 8.82 24,274 2,023 8.33 21,794 1,958 8.98 Non-interest earning assets, net of allowance for loan losses and including unrealized gain on securities available for sale... 1,495 1,172 1,181 ------- ------- ------- Total assets.................. $28,934 $25,446 $22,975 ======= ======= ======= Liabilities and retained earnings: Interest-bearing liabilities: Savings accounts................ $ 4,460 138 3.09 $ 5,427 166 3.06 $ 5,226 183 3.50 NOW accounts.................... 2,349 62 2.64 2,517 67 2.66 2,385 70 2.94 Certificates of deposit......... 15,145 763 5.04 13,624 680 4.99 12,272 720 5.87 Other borrowings................ 102 10 9.80 109 8 7.34 94 8 8.51 FHLB advances................... 3,321 201 6.05 792 28 3.54 417 12 2.88 ------ ----- ------ --- ------ --- Total interest-bearing liabilities 25,377 1,174 4.63 22,469 949 4.22 20,394 993 4.87 Other liabilities.................. 543 216 126 -------- -------- -------- Total liabilities............. 25,920 22,685 20,520 Equity capital Retained earnings.............. 3,007 2,761 2,455 Unrealized gain on securities available for sale............ 7 --- --- -------- -------- -------- Total equity capital.......... 3,014 2,761 2,455 -------- -------- -------- Total liabilities and equity capital............ $28,934 $25,446 $22,975 ======== ======== ======== Net interest-earning assets........ $ 2,062 $ 1,805 $ 1,400 -------- -------- -------- Net interest income................ $1,246 $1,074 $ 965 Interest rate spread............... 4.19% 4.11% 4.11% ==== ==== ==== Net yield on weighted average interest-earning assets......... 4.54% 4.42% 4.43% ==== ==== ==== Average interest-earning assets to average interest-bearing liabilities.................. 108.13% 108.03% 106.86% </TABLE> - ---------- (1) Yields for investment and mortgage-backed securities available for sale are computed based upon amortized cost. (2) Non-accruing loans have been included in average balances. <PAGE> In the foregoing two tables, no adjustment of interest on tax-exempt securities to a tax-equivalent basis was made since the adjustment was less than $10,000 in each period presented. Interest Rate Spread The Bank's results of operations have been determined primarily by net interest income and, to a lesser extent, fee income, miscellaneous income and general and administrative expenses. Net interest income is determined by the interest rate spread between the yields earned on interest-earning assets and the rates paid on interest-bearing liabilities and by the relative amounts of interest-earning assets and interest-bearing liabilities. The following table sets forth the weighted average effective interest rate earned by the Bank on its loan, investment portfolios and interest-earning assets, the weighted average effective cost of the Bank's deposits and borrowings, the interest rate spread of the Bank, and the net yield on weighted average interest-earning assets for the periods and as of the date shown. Average balances are based on month-end average balances. <TABLE> <CAPTION> Six Months Ended At December 31, December 31, Year Ended June 30, --------------- ------------------ ----------------------------- 1995 1995 1994 1995 1994 1993 ---- ---- ---- ---- ---- ---- Weighted average interest rate earned on: <S> <C> <C> <C> <C> <C> <C> Interest-earning deposits................... 5.43% 5.55% 5.34% 5.93% 3.74% 3.43% Investment securities....................... 7.82 7.03 6.69 6.49 5.94 6.96 Mortgage-backed securities.................. 5.92 5.94 6.03 5.98 5.98 7.66 Loans receivable............................ 9.88 9.76 9.15 9.29 8.92 9.48 Stock in FHLB of Indianapolis............... 7.75 7.75 6.31 7.14 5.86 10.36 Total interest-earning assets............. 9.33 9.16 8.65 8.82 8.33 8.98 Weighted average interest rate cost of: Savings accounts............................ 3.00 3.04 3.07 3.09 3.06 3.50 NOW and money market accounts............... 2.45 2.48 2.54 2.64 2.66 2.94 Certificates of deposit..................... 6.01 5.88 4.83 5.04 4.99 5.87 Other borrowings............................ --- 8.33 4.96 9.80 7.34 8.51 FHLB advances............................... 6.36 6.31 5.13 6.05 3.54 2.88 Total interest-bearing liabilities........ 5.40 5.33 4.28 4.63 4.22 4.87 ---- ---- ---- ---- ---- ---- Interest rate spread (1)....................... 3.93% 3.83% 4.37% 4.19% 4.11% 4.11% ==== ==== ==== ==== ==== ==== Net yield on weighted average interest-earning assets (2)................. 4.21% 4.62% 4.54% 4.42% 4.43% ==== ==== ==== ==== ==== </TABLE> - ---------- (1) Interest rate spread is calculated by subtracting weighted average interest rate cost from weighted average interest rate earned for the period indicated. Interest rate spread figures must be considered in light of the relationship between the amounts of interest-earning assets and interest-bearing liabilities. (2) The net yield on weighted average interest-earning assets is calculated by dividing net interest income by weighted average interest-earning assets for the period indicated. No net yield percentage is presented at December 31, 1995, because the computation of net yield is applicable only over a period rather than at a specific date. <PAGE> The following table describes the extent to which changes in interest rates and changes in volume of interest-related assets and liabilities have affected the Bank's interest income and expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in rate (i.e., changes in rate multiplied by old volume) and (2) changes in volume (i.e., changes in volume multiplied by old rate). Changes attributable to both rate and volume have been allocated proportionally to the change due to volume and the change due to rate. Increase (Decrease) in Net Interest Income ----------------------------------- Total Net Due to Due to Change Rate Volume ------ ---- ------ (In thousands) Six months ended December 31, 1995 compared to six months ended December 31, 1994 Interest-earning assets: Interest-earning deposits................ $ 27 $ 2 $ 25 Investment securities.................... 15 (1) 16 Mortgage-backed securities............... 12 26 (14) Loans receivable......................... 272 55 217 Stock in FHLB of Indianapolis............ 3 2 1 ---- ------ ---- Total.................................. 329 84 245 ---- ------ ---- Interest-bearing liabilities: Savings accounts......................... (16) (1) (15) NOW and money market accounts............ (4) (1) (3) Certificates of deposit.................. 198 85 113 Other borrowings......................... (2) 3 (5) FHLB advances............................ 86 21 65 ---- ------ ---- Total.................................. 262 107 155 ---- ------ ---- Change in net interest income............... $ 67 $ (23) $ 90 ==== ====== ==== Year ended June 30, 1995 compared to Year ended June 30, 1994 Interest-earning assets: Interest-earning deposits................ $ 33 $ 28 $ 5 Investment securities.................... 21 4 17 Mortgage-backed securities............... (13) --- (13) Loans receivable......................... 353 76 277 Stock in FHLB of Indianapolis............ 3 3 --- ---- ------ ---- Total.................................. 397 111 286 ---- ------ ---- Interest-bearing liabilities: Savings accounts......................... (28) 2 (30) NOW and money market accounts............ (5) (1) (4) Certificates of deposit.................. 83 6 77 Other borrowings......................... 2 3 (1) FHLB advances............................ 173 32 141 ---- ------ ---- Total.................................. 225 42 183 ---- ------ ---- Change in net interest income............... $172 $ 69 $103 ==== ====== ==== Year ended June 30, 1994 compared to Year ended June 30, 1993 Interest-earning assets: Interest-earning deposits................ $ 5 $ 4 $ 1 Investment securities.................... (1) (5) 4 Mortgage-backed securities............... 6 (25) 31 Loans receivable......................... 65 (106) 171 Stock in FHLB of Indianapolis............ (10) (10) --- ---- ------ ---- Total.................................. 65 (142) 207 ---- ------ ---- Interest-bearing liabilities: Savings accounts......................... (17) (24) 7 NOW and money market accounts............ (3) (7) 4 Certificates of deposit.................. (40) (114) 74 Other borrowings......................... --- (1) 1 FHLB advances............................ 16 3 13 ---- ------ ---- Total.................................. (44) (143) 99 ---- ------ ---- Change in net interest income............... $109 $ (1) $108 ==== ====== ==== Financial Condition at December 31, 1995 Compared to Financial Condition at June 30, 1995 Total assets increased $2.6 million at December 31, 1995, compared to June 30, 1995. The increase was primarily a result of increases in net loans of $1.7 million, or 6.5%, which was funded by increased deposits and advances from the FHLB of Indianapolis. Total cash and cash equivalents also increased $0.9 million. The increase in net loans was principally in real estate mortgage loans. Average assets increased from $28.9 million for the period ended June 30, 1995, to $33.5 million for the period ended December 31, 1995, an increase of 15.7%. Average interest-earning assets represented 94.8% of average assets for the period ended in June 1995 compared to 96.3% for the period ended December 31, 1995. Although the average of most interest-earning assets increased during the period ended December 1995, average loans experienced the largest increase amounting to $3.6 million compared to the June 1995 period. Average interest-bearing liabilities as a percentage of average interest-earning assets was 92.8% and 92.5% for the respective periods. Total securities decreased approximately $143,000 from June 30, 1995 to December 31, 1995. The primary change relating to the investment portfolio was in the amounts available for sale and held to maturity. The Bank availed itself of the opportunity in December 1995 to transfer all of its remaining held to maturity securities to available for sale securities as permitted by the Financial Accounting Standards Board (the "FASB"). The Bank determined that maintaining all investment securities as available for sale provided the most flexibility in managing the investment portfolio. Loans and Allowance for Loan Losses. Average loans increased $3.6 million from the period ended June 30, 1995, to December 31, 1995. The growth in loans was funded by increased average deposits of $2.8 million and increased average borrowings of $1.8 million. Average loans were $23.3 million for the June 1995 period and $26.9 million for the December 1995 period. The average rates on loans were 9.76% for the December 1995 period and 9.29% for the June 1995 period, an increase of 47 basis points. The allowance for loan losses as a percentage of net loans increased to 0.37% from 0.22% as a result of a larger provision for loan losses and nominal charge-offs. The ratio of the allowance for loan losses to non-performing loans was 84.8% at December 31, 1995 compared to 57.0% at June 30, 1995. Premises and Equipment. Premises and equipment increased slightly, net of depreciation and the disposition of a possible location for future expansion, from June 30, 1995 to December 31, 1995. The largest increase was related to the purchase of a location for future expansion. A location purchased for a loan origination office in a nearby community was sold on contract for a nominal gain after management determined that a full service branch was more desirable. No location for this future branch has been selected. The Bank owns two other properties, one adjacent to and the second across the street from the Bank's main office. These properties are intended to be used for additional customer and employee parking. Approximately one-half of the location adjacent to the main office will be sold to a local business during 1996 with no gain or loss expected. Deposits. Deposits increased $2.4 million from $22.5 million to $24.9 million during the period from June 30, 1995 to December 31, 1995. Increased deposits were utilized to fund loan growth. Savings accounts and NOW accounts remained relatively constant between June 30 and December 31, 1995. Certificates of deposit increased $1.9 million during this period. Average total deposits increased $2.8 million to $24.7 million for the period December 31, 1995 contrasted to $22.0 million for the June 30, 1995 period. Borrowed Funds. Borrowed funds increased $1.9 million from June 30, 1995 to December 31, 1995. Management continued to fund a portion of the Bank's loan growth with advances from the FHLB of Indianapolis. Although interest rates on FHLB advances increased during the period ended December 31, 1995 compared to the June 30, 1995 period, the maturities of these borrowings were longer than local deposits at comparable rates. Average borrowed funds increased to $5.2 million for the December 1995 period compared to $3.4 million for the June 30, 1995 period. Equity Capital. Equity capital increased $136,000 to $3.3 million at December 31, 1995 compared to $3.2 million at June 30, 1995. The increase was essentially due to net income during the period. Financial Condition at June 30, 1995 Compared to Financial Condition at June 30, 1994 Total assets increased $4.8 million at June 30, 1995, compared to June 30, 1994. The increase was primarily a result of increases in net loans of $4.1 million, or 18.9%, which was primarily funded by a $3.5 million increase in advances from the FHLB of Indianapolis. The increase in net loans of $4.1 million resulted primarily from increases in one-to-four family loans, Combo Loans and nonresidential real estate mortgage loans. Average assets increased from $25.4 million for the period ended June 30, 1994, to $28.9 million for the period ended June 30, 1995, an increase of 13.7%. Average interest-earning assets represented 94.8% of average assets for the period ended in 1995 compared to 95.4% for the period ended June 30, 1994. Substantially all of the increase in average earning assets was attributable to growth in the loan portfolio. Average interest-bearing liabilities as a percentage of average interest-bearing assets was 92.5% and 92.6% for 1995 and 1994, respectively. <PAGE> Average balances of securities available for sale and held to maturity increased $347,000, or 14.4%, to $2.7 million for the 1995 period from $2.4 million for the 1994 period due to purchases, while mortgage-backed securities held to maturity decreased slightly as a result of principal repayments. Mortgage-backed securities are purchased on occasion because such instruments offer liquidity and lower credit risk than other types of investments. The primary risk associated with these instruments is that in a declining interest rate environment the prepayment level of the loans underlying these securities will accelerate, which reduces the effective yield and exposes the Bank to interest rate risk on the prepaid amounts. In an increasing rate environment, the primary risk associated with these securities is that the fixed-rate portion of such securities will not adjust to market rates which reduces the Bank's spread. See "Business -- Lending Activities -- Mortgage-Backed Securities." See Note 3 to Consolidated Financial Statements. Loans and Allowance for Loan Losses. Loans increased $4.1 million from June 30, 1994 to June 30, 1995 primarily due to increases in real estate mortgage loans. Average loans increased from $20.3 million to $23.3 million while the average rates earned on such loans increased 37 basis points to 9.29%. This increase in the average rate reflected the general increase in loan rates during the fiscal year ended June 30, 1995. The allowance for loan losses as a percentage of total loans increased to 0.22% from 0.12% as a result of a larger provision for loan losses, increased loans and nominal charge-offs. The allowance for loan losses as a percentage of non-performing loans was 57.0% and 108.3% at June 30, 1995 and 1994, respectively. Non-performing loans were $100,000 and $27,000 at each date, respectively. Premises and Equipment. Premises and equipment increased $115,000, net of depreciation, from June 30, 1994 to June 30, 1995. The increase was primarily related to the purchase of two separate properties for future expansion, the purchase of teller equipment and purchases of various other equipment. One of the properties was originally purchased for establishing a loan origination office in a nearby community. Subsequently, management determined that a full service branch was more desirable than a loan origination office. Since this location was not adequate for a full service branch, it was sold under a contract for sale subsequent to June 30, 1995. The other property is across the street from the Bank's main office and is used for customer and employee parking. Deposits. Deposits increased approximately $1.0 million during the period ended June 30, 1995. NOW and savings accounts decreased $1.8 million while certificates of deposit increased $2.8 million. Increased rates paid on certificates of deposit compared to those paid on NOW and savings accounts were primarily responsible for the transfers and other increases in certificates of deposit. Average deposits increased slightly from $21.6 million for 1994 to $22.0 million for 1995. Borrowed Funds. The growth in loans was funded by additional FHLB of Indianapolis advances of $3.5 million from June 30, 1994 to June 30, 1995. Management elected to utilize FHLB advances available at rates comparable to the cost of acquiring local deposits to partially fund the increase in loans. The maturities of these borrowings were slightly longer than local deposits at similar interest rates. Average borrowed funds increased from $0.9 million for the period ended June 30, 1994 to $3.4 million for the period ended June 30, 1995. Equity Capital. Equity capital increased $310,000 to $3.2 million at June 30, 1995. This increase was primarily due to net income of $289,000. Equity capital also increased during the fiscal year ended June 30, 1995 as a result of the adoption of Statement of Financial Accounting Standard ("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity Securities, which resulted in an unrealized gain on securities available for sale of approximately $20,000, net of taxes, on available-for-sale securities at June 30, 1995. Securities available for sale must be adjusted and carried at market value, with the unrealized gain or loss reported in equity capital. The effect of adjusting securities available for sale to market value can result in positive or negative adjustments to equity and such adjustments may be material. Although management has no present intention to sell these securities, the Bank could report gains from the sales of these securities in the current interest rate environment if it sold these securities. <PAGE> Comparison of Operating Results For Six Months Ended December 31, 1995 and 1994 General. Net income increased $14,000, or 10.3%, to $154,000 for the six months ended December 31, 1995 compared to $140,000 for the six months ended December 31, 1994. Net interest income after provision for losses on loans increased $46,000, or 7.8%, to $636,000 for the period ended December 31, 1995 compared to $590,000 for the comparable 1994 period. This increase was achieved despite an increase in the provision for loan losses of $21,000. The increase in net interest income after provision for loan losses combined with a $23,000 increase in other income more than offset the $45,000 increase in other expenses and the $10,000 increase in income taxes. Interest Income. The Bank's total interest income was $1.5 million for the 1995 period compared to $1.1 million for the 1994 period. Volume accounted for $245,000 of the increase while higher rates accounted for $84,000. Average earning assets increased $5.7 million from $26.5 million for the 1994 period compared to $32.2 million for the 1995 period. The average yield on interest-earning assets increased from 8.65% for the six month period ended December 31, 1994 to 9.16% for the comparable period in 1995, or 51 basis points. Although the average yield on all earning assets increased during the 1995 period, the increase in yield on loans was the primary factor resulting in the increase. Interest Expense. Interest expense increased $262,000 for the six month period ended December 31, 1995 compared to the 1994 period. Average interest-bearing liabilities increased $4.9 million to $29.9 million for the 1995 period compared to $25.0 million during the 1994 period. The average balances of NOW and savings accounts decreased $1.3 million reflecting depositors' desire for higher rates than being offered on these types of deposits. Certificates of deposits averaged $4.1 million more during the 1995 period compared to the 1994 period. Borrowed funds averaged $2.1 million higher in the 1995 period compared to the 1994 period as management continued to use FHLB advances to partially fund loan growth. Net Interest Income. Net interest income increased $67,000 for the 1995 period compared to the 1994 period. The increase was primarily due to the $90,000 increase due to volume increases while lower rates caused a decline of $23,000. The Bank's interest spread was 3.83% for the six months ended December 31, 1995 compared to 4.37% for the comparable 1994 period. Provision for Loan Losses. The Bank's provision for loan losses for the period ended December 31, 1995 was $43,000 compared to $21,000 for the same period in 1994. Although net charge-offs and problem loans have remained nominal, management increased the provision for loan losses primarily due to the substantial increase in outstanding loans. Management also considered the level of the allowance for loan losses maintained by peers. <PAGE> Other Income. Service charges on deposit accounts increased to $19,000 for the six month period ended December 31, 1995 compared to $15,000 for the same period in 1994. Changes in the volume of activity and an increase in the number of accounts subject to service charges resulted in the increase. General increases in the volume of activity resulted in other income increasing from $11,000 for the 1994 period to $23,000 for the 1995 period. Acquiring land for development is the principal business activity of BSF, the Bank's wholly owned subsidiary. Land is acquired, various improvements are made to the land and lots are then sold, primarily on contract. The gain on sale of real estate acquired for development was $19,000 for the 1995 period compared to $11,000 for the same period in 1994. BSF also built residential properties for future sale in the 1995 period. The level of income fluctuates depending on the volume of activity and profits on residential properties. The Bank and BSF will have to cease this activity as a result of the Bank's conversion to a state savings bank in May 1994. BSF's mandated discontinuance of land acquisitions and divestiture of real estate holdings may have a negative impact on the Bank's results of operations in the future. See "Business -- Service Corporation Subsidiary." Salaries and Employee Benefits. Salaries and employee benefits were $204,000 for the six-month period ended December 31, 1995 compared to $176,000 for the 1994 period, an increase of 15.8%. This increase resulted from the addition of an additional full-time employee to the staff, normal increases in employee compensation and increases in related payroll taxes. Net Occupancy and Equipment Expenses. Occupancy and equipment expenses increased approximately $5,000 during the 1995 period compared to the 1994 period. The increase resulted primarily from increased depreciation on new equipment purchased to upgrade the teller line to a personal computer based system and equipment purchased for the Bank's conversion to a new general ledger system. Deposit Insurance Expense. Deposit insurance remained stable during the respective six-month periods ending December 31, 1995 and 1994. Assessment rates were the same during both periods. For a discussion of pending legislation concerning FDIC deposit insurance premiums, see "Regulation -- Insurance of Deposits." Other Expense. Other expenses, consisting primarily of expenses related to computers, supplies, professional fees, advertising, supervisory examination fees, telephone, postage, management fees and insurance expenses increased $11,000 for the 1995 period compared to the 1994 period. Management fees paid to Mr. Stewart in connection with the operations of BSF increased $4,000 during the 1995 period compared to the 1994 period. See "Business -- Service Corporation Subsidiary." The balance of the increase resulted from nominal increases in a variety of expense categories. Income Tax Expense. Income tax expense increased $10,000 during the six months ended December 31, 1995 compared to the 1994 period. The increase was directly related to the increase in taxable income for the period. The effective tax rate was 39.6% and 39.3% for the respective 1995 and 1994 periods. <PAGE> Comparison of Operating Results For Fiscal Years Ended June 30, 1995, 1994 and 1993 General. Net income for the fiscal year ended June 30, 1995 increased $28,000, or 10.8%, to $289,000 compared to $261,000 for the 1994 period. Net income for 1994 was reduced by $24,000 for a cumulative change in accounting for income taxes effective because of the implementation of SFAS No. 109. Income for 1994 before the cumulative effect of the accounting change was $285,000. The Bank's net income for 1993 was $308,000 or $23,000 greater than 1994's income before the accounting method change. Return on average assets for the years ended June 30, 1995, 1994 and 1993 was 1.00%, 1.03% and 1.34%, respectively. Return on average equity was 9.59% for 1995, 9.46% for 1994 and 12.55% for 1993. Interest Income. The Bank's total interest income was $2.4 million for 1995 compared to $2.0 million for 1994. Higher interest rates accounted for $111,000 of the increase while volume increases accounted for $286,000, primarily from loans. Average earning assets increased $3.1 million from $24.3 million to $27.4 million from 1994 to 1995. The increase in average earning assets was accompanied by an increase in average yields to 8.82% in 1995 from 8.33% in 1994. The increase in average loans was the primary factor contributing to these increases. Total interest income increased $65,000 from 1993 to 1994. Although average earning assets increased $2.5 million during this period, the average yield on earning assets decreased 65 basis points to 8.33% from 8.98%. Interest Expense. Interest expense increased $225,000 during the fiscal year ended June 30, 1995 compared to 1994. The increase in interest expense was the result of an increase in interest-bearing liabilities of $2.9 million from $22.5 million to $25.4 million as well as an increase in the average interest cost of interest-bearing liabilities 41 basis points from 4.22% for 1994 to 4.63% for 1995. The average balances of NOW and savings accounts decreased $1.1 million as depositors sought higher rates from alternative sources while certificates of deposit increased $1.5 million during 1995. Borrowed funds averaged $2.5 million higher in 1995 compared to 1994 as the Bank utilized borrowings from the FHLB to meet increased loan and other asset growth. Interest expense decreased $44,000 in 1994 compared to 1993 reflecting decreases in interest rates of $143,000 and volume increases of $99,000. The average cost of interest-bearing liabilities decreased to 4.22% in 1994 from 4.87% in 1993, or 65 basis points. Net Interest Income. Net interest income increased approximately $172,000 for 1995 to approximately $1.3 million compared to $1.1 million for 1994. The increase was primarily due to the $103,000 increase due to volume increases while rate increases accounted for $69,000. Substantially all of the $109,000 increase in 1994 compared to 1993 was the result of an increase in volume. There is no assurance that the Bank can continue to increase volume in the future to the extent attained during the last two years which may negatively affect net interest income. The Bank's interest spread for 1995 was 4.19% compared to 4.11% for both 1994 and 1993. Provision for Loan Losses. The Bank's provision for loan losses for the fiscal year ended June 30, 1995 was $36,000. The 1995 provision and the related increase in the allowance for loan losses was considered adequate, based on total charge-offs of $5,000, the level of the allowance and other factors including the size, condition and components of the loan portfolio. Further, additional consideration was given to the growth in the portfolio and the level of the allowance maintained by peers . The provision of $14,000 for 1994 and $6,600 for 1993 reflected more moderate growth and nominal charge-offs for the two year period. The Bank provides a general allowance that reflects an estimate of inherent losses based upon the types and categories of outstanding loans as well as problem loans. Other Income. Service charges on deposit accounts have remained between $22,000 and $27,000 for each of the last three years reflecting changes in the volume of activity and an increase in the number of accounts subject to such charges. The increases in other income of $10,000 from 1994 to 1995 was primarily a $5,000 increase in late fees on loans and a $4,000 increase in income on other real estate owned. The $5,000 increase in other income from 1993 to 1994 was a general increase in various categories of such income. Gain on sales of real estate acquired for development was $78,000, $145,000 and $117,000 for 1995, 1994 and 1993, respectively. Management utilizes the sale of lots and residences to provide a source of income as well as maintain the mobile home portion of the Bank's loan portfolio. The level of income from this source fluctuates widely since it is dependent on the volume of activity, primarily the number of lots sold, and profits on residential properties. Salaries and Employee Benefits. Salaries and benefits increased 17.2% to $404,000 for the fiscal year ended June 30, 1995 compared to 1994 reflecting primarily increased directors' compensation, a full year's compensation of an officer added to the staff in 1994 and normal increases in officers' and employees' compensation and payroll taxes. These expenses increased 35.7% in 1994 compared to 1993. Approximately one-half of the increase was the result of <PAGE> paying a discretionary bonus to directors, officers and employees in 1994. See "Executive Compensation and Related Transactions -- Benefits -- Bonus Program." The balance of the increase reflected the addition of an officer, increased contributions to the Bank's retirement plans and an increase in the number of full-time equivalent employees. Occupancy and Equipment Expenses. Occupancy and equipment expenses were $109,000 for 1995, $109,000 for 1994 and $91,000 for 1993. While these expense remained constant during 1995 and 1994, the increase from 1993 to 1994 was related to depreciation expense on the replacement of various fully-depreciated equipment. Deposit Insurance Expense. Deposit insurance expense increased slightly from 1994 to 1995 from $48,000 to $49,000 as result of relatively low deposit growth. The increase from 1993 to 1994 resulted from relatively higher deposit levels on assessment dates in 1994 compared to the preceding year. Assessment rates were the same during the three year period. For a discussion of pending legislation concerning FDIC deposit insurance premiums, see "Regulation - --Insurance of Deposits." Other Expenses. Other expenses, consisting primarily of expenses related to computers, supplies, professional fees, advertising, supervisory examination fees, telephone, postage, management fees and insurance expenses, remained constant from 1994 to 1995. The increase from 1993 to 1994 of $51,000 reflected general increases in practically all the expenses in this category including a $16,000 increase in management fees paid to Mr. Stewart for the management of BSF. See "Business -- Service Corporation Subsidiary." Income Tax Expense. Income tax expense was $203,000 for 1995 compared to $168,000 for 1994 and $186,000 for 1993. The level of tax expense was consistent with the level of taxable income in each year. The effective tax rate was 41.3%, 37.2% and 37.6% for 1995, 1994 and 1993, respectively. During fiscal 1994, the Bank adopted SFAS No. 109 and recorded a cumulative effect of a change in method of accounting of $24,000. See Note 1 of the Notes to Consolidated Financial Statements for further explanation. Liquidity and Capital Resources The Bank's primary sources of funds are deposits, proceeds from principal and interest payments on loans and proceeds from maturing securities. While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions, competition and the restructuring of the thrift industry. The primary investing activity of the Bank is the origination of mortgage loans. During the years ended June 30, 1995, 1994 and 1993, the Bank originated mortgage loans in the amounts of $7.1 million, $6.5 million and $7.1 million, respectively. The Bank originated mobile home loans of $286,000, $269,000 and $198,000, and consumer loans of $710,000, $592,000 and $326,000, respectively, during these periods. Loan repayments and other deductions were $3.9 million, $5.4 million and $5.3 million during the respective three one-year periods. During the six month periods ended December 31, 1995 and 1994, the Bank originated mortgage loans of $3.7 million and $3.3 million, respectively. During the same periods, the Bank originated mobile home loans of $63,000 and $189,000, respectively, and consumer loans of $590,000 and $332,000, respectively. Loan repayments and other deductions were $2.7 million and $1.9 million, respectively, during these periods. During the years ended June 30, 1995 and 1994, the Bank purchased securities (including mortgage-backed securities) in the amounts of $0.6 million and $1.1 million, respectively. No securities were purchased during 1993. Maturities and repayments of securities were $0.3 million in 1995, $0.6 million in 1994 and $0.3 million in 1993. There was no significant activity in securities during the six-month periods ended December 31, 1995 and 1994. During each of the three years ended June 30, 1995, deposits grew approximately $1 million each year. The Bank also utilized FHLB advances to fund increases in loans. FHLB advances increased during each of the years in the period. The Bank's cash and cash equivalents remained fairly constant during the three year period ended June 30, 1995 and were comparable at December 31, 1995 and 1994. The Bank had outstanding loan commitments of $123,000 and unused lines of credit of $251,000 at December 31, 1995. The Bank anticipates that it will have sufficient funds from loan repayments to meet its current commitments without borrowing additional funds from the FHLB of Indianapolis. Certificates of deposit scheduled to mature in one year or less at December 31, 1995 totaled $10.0 million. Management believes that a significant portion of such deposits will remain with the Bank based upon historical deposit flow data and the Bank's competitive pricing in its market area. <PAGE> Liquidity management is both a daily and long-term function of the Bank's management strategy. In the event that the Bank should require funds beyond its ability to generate them internally, additional funds are available through the use of FHLB advances and through sales of securities. The Bank regularly monitors its interest rate spread position to determine the appropriate mix between retail and wholesale funds available to fund its loan activities. From time-to-time the Bank offers higher cost deposit products to generate funds for loans. The Bank also relies on advances from the FHLB of Indianapolis to fund its lending activities when the cost of alternative sources of funds makes it prudent to do so. The Bank will continue to monitor its interest rate spread position and its mix of deposits and alternative sources of funds. FHLB advances were $5.2 million at December 31, 1995. The Bank had $22.2 million in eligible assets available as collateral for advances from the FHLB of Indianapolis as of December 31, 1995. Based on the Bank's blanket collateral agreements, advances from the FHLB of Indianapolis must be collateralized by 160% of eligible assets. Therefore, the Bank's eligible collateral would have supported approximately $13.9 million in advances from the FHLB of Indianapolis as of December 31, 1995. However, the Bank's Board of Directors has by resolution limited the amount of authorized borrowings to $7 million at December 31, 1995. The following is a summary of cash flows for the Bank, which are of three major types. Cash flows from operating activities consist primarily of net income generated by cash. Investing activities generate cash flows through the origination and principal collection on loans as well as purchases and sales of securities. Investing activities will generally result in negative cash flows when the Bank is experiencing loan growth. Cash flows from financing activities include savings deposits, withdrawals and maturities and changes in borrowings. The following table summarizes cash flows for the six months ended December 31, 1995 and 1994 and for each of the three years in the period ended June 30, 1995. <TABLE> <CAPTION> Six Months Ended December 31, Year Ended June 30, ------------------ ------------------------------ 1995 1994 1995 1994 1993 (In thousands) <S> <C> <C> <C> <C> <C> Operating activities................ $ 43 $ 88 $ 218 $ 225 $ 265 ----- ----- ----- ----- ----- Investing activities: Investment purchases ............. --- (200) (605) (112) --- Investment maturities ............ --- 25 130 10 Mortgage-backed securities purchases ........... --- --- --- (1,020) --- Mortgage-backed securities maturities .......... 111 73 161 540 327 Changes in loans ................. (1,640) (1,959) (4,134) (2,125) (2,276) Other ............................ (161) (123) (118) 134 160 ----- ----- ----- ----- ----- Total .......................... (1,690) (2,184) (4,566) (2,573) (1,789) ----- ----- ----- ----- ----- Financing activities: Deposit increases ................ 2,395 473 1,049 1,277 1,023 Borrowings ....................... 191 2,067 3,448 965 521 ----- ----- ----- ----- ----- Total .......................... 2,586 2,540 4,497 2,242 1,544 ----- ----- ----- ----- ----- Net change in cash and cash equivalents ................. $939 $444 $149 $(106) $20 ===== ===== ===== ===== ===== </TABLE> During the six-month period ended December 31, 1995 and 1994, cash flows from operating and financing activities provided funds to support loan growth. During the period ended December 31, 1995, deposit increases provided the primary source of funds for increasing the loan portfolio. During the same period in 1994, borrowings provided the most significant source of funds to support loan portfolio growth. During the years ended June 30, 1995, 1994 and 1993, operating and financing activities provided the most significant portion of funds to support growth in the loan portfolio. Deposit increases as well as borrowed funds, particularly in 1995, funded loan growth during this three year period. <PAGE> As of December 31, 1995, management is not aware of any current recommendations by regulatory authorities which, if they were to be implemented, would have, or are reasonably likely to have, a material adverse effect on the Bank's liquidity, capital resources, or results of operations other than the proposed legislation regarding the recapitalization of the SAIF. See "Regulation--Insurance of Deposits." Current Accounting Issues Accounting for Post-Retirement Benefits. In December, 1990, the FASB issued SFAS No. 106, Employers' Accounting for Post-Retirement Benefits Other Than Pensions. SFAS No. 106 requires that employers recognize the cost of providing post-retirement benefits over the employees' active service periods to the date they attain full eligibility for such benefits. SFAS No. 106 was effective for the Bank for the fiscal year commencing July 1, 1995 and did not have a material impact or either the Bank's financial position or results of operations. Fair Value Disclosures. In December, 1991, the FASB issued SFAS No. 107, Disclosures about Fair Value of Financial Instruments. SFAS No. 107 requires all companies, including financial institutions, to disclose in notes to their financial statements the fair value of all financial instruments for which it is practicable to estimate the value. SFAS No. 107 is effective for companies with assets of less than $150 million, including the Bank, for fiscal years ending after December 31, 1995. Accounting for Impairment of Loans. In 1993, the FASB issued SFAS No. 114, Accounting by Creditors for Impairment of a Loan. The purpose of SFAS No. 114 is to eliminate inconsistencies in the accounting among different types of creditors for loans with similar collection problems by requiring a single method for measuring impaired loans. A loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Bank will measure certain impaired loans pursuant to SFAS No. 114 at a discounted amount on the balance sheet based on the present value amount of the expected future cash flows using the loan's effective interest rate. A valuation reserve should be recorded if the present value of the expected cash flows is less than the recorded amount of the loan. Formally restructured loans and loans evaluated as groups or pools of homogeneous loans (e.g., single family residence) are excluded from SFAS No. 114. In October 1994, the FASB issued SFAS No. 118 ("SFAS No. 118"), entitled Accounting by Creditors for Impairment of Loan - Income Recognition and Disclosures. SFAS No. 118 amends the disclosure requirements of SFAS No. 114 to require information about the recorded investment in certain impaired loans and about how a creditor recognizes interest income related to those impaired loans. The effective date of SFAS No. 114 and SFAS No. 118 is for fiscal years beginning after December 31, 1994. The Bank adopted SFAS No. 114 and SFAS No. 118 in the fiscal year ended June 30, 1995, and their adoption did not have a material impact on earnings or financial condition. Accounting for Impairment of Long-Lived Assets to be Disposed Of. SFAS No. 121 establishes guidance for recognizing and measuring impairment losses and requires that the carrying amount of impaired assets be reduced to fair value. SFAS No. 121 requires that the long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. A review is required only if events or circumstances indicate the need. After an impairment is recognized, the reduced carrying value of the asset becomes its new cost. For depreciable assets, this new cost is depreciated over the asset's useful life. Restoration of previously recognized losses is prohibited. <PAGE> An impairment loss for assets to be held and used would be reported as a component of income from continuing operations before income taxes. An entity recognizing an impairment loss would be required to disclose all of the following: o Description of the assets impaired and the facts and circumstances leading to the impairment; o Amount of impairment loss and how fair value was determined; o Which income statement line item the loss is included in, if not presented as a single line item (or parenthetically); and o The business segment affected (for public companies). This Statement is effective for financial statements for fiscal years beginning after December 15, 1995. The Bank believes that SFAS No. 121 will not have a material impact on either the Bank's financial position or results of operations. Accounting for Mortgage Servicing Rights. During 1995, the FASB issued SFAS No. 122, entitled Accounting for Mortgage Servicing Rights. SFAS No. 122 pertains to mortgage banking enterprises and financial institutions that conduct operations that are substantially similar to the primary operations of a mortgage banking enterprise. This Statement eliminates the accounting distinction between mortgage servicing rights that are acquired through loan origination activities and those through purchase transactions. Under this Statement, if a mortgage banking enterprise sells or securitizes loans and retains the mortgage servicing rights, the enterprise must allocate the total cost of the mortgage loans to mortgage servicing rights and loans (without the rights) based on their relative fair values if it is practicable to estimate those fair values. If it is not practicable, the entire cost should be allocated to the mortgage loans and no cost should be allocated to the mortgage servicing rights. An entity would measure impairment of mortgage servicing rights and loans based on the excess of the carrying amount of the mortgage servicing rights portfolio over the fair value of that portfolio. The Statement is to be applied prospectively in fiscal years beginning after December 15, 1995, to transactions in which an entity acquires mortgage servicing rights and to impairment evaluations of all capitalize mortgage servicing rights. The Bank believes that SFAS No. 122 will not have a material impact on either the Bank's financial position or results of operations. Accounting for Stock-based Compensation. SFAS No. 123, Accounting for Stock-based Compensation, establishes a fair value based method of accounting for stock-based compensation plans. The FASB encourages all entities to adopt this method for accounting for all arrangements under which employees receives shares of stock or other equity instruments of the employer, or the employer incurs liabilities to employees in amounts based on the price of its stock. Due to the extremely controversial nature of this project, the Statement permits a company to continue the accounting for stock-based compensation prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. If a company elects that option, pro forma disclosures of net income (and earnings per share, if presented) are required in the footnotes as if the provisions of this Statement had been used to measure stock-based compensation. The disclosure requirements of Opinion No. 25 have been superseded by the disclosure requirements of this Statement. Once an entity adopts the fair value based method for accounting for these transactions, that election cannot be reversed. Equity instruments granted or otherwise transferred directly to an employee by a principal stockholder are stock-based employee compensation to be accounted for in accordance with either Opinion 25 or this Statement, unless the transfer clearly is for a purpose other than compensation. The accounting requirements of this Statement are effective for transactions entered into in fiscal years that begin after December 15, 1995. The disclosure requirements are effective for financial statements for fiscal years beginning after December 15, 1995. Pro forma disclosures required for entities that elect to continue to measure compensation cost using Opinion 25 must include the effects of all awards granted in fiscal years that begin after December 15, 1994. <PAGE> During the initial phase-in period, the effects of applying this Statement are not likely to be representative of the effects on the reported net income for future years because options vest over several years and additional awards generally are made each year. If that situation exists, the entity shall include a statement to that effect. Management has not determined the impact of SFAS No. 123 on either the Bank's financial position or results of operations. Accounting for Employee Stock Plans. In November 1993, AICPA issued Statement of Position ("SOP") 93-6 which addresses the accounting for shares of stock issued to employees by an employee stock ownership plan ("Employee Plan"). SOP 93-6 requires that the employer record compensation expense in an amount equal to the fair value of shares committed to be released to employees from the Employee Plan. SOP 93-6 is effective for fiscal years beginning after December 15, 1993 and relates to shares purchased by an Employee Plan after December 31, 1992. Assuming shares of Common Stock appreciate in value over time, the adoption of SOP 93-6 will likely increase compensation expense relative to the ESOP to be established in connection with the Conversion, as compared with prior guidance which would have required the recognition of compensation expense based on the cost of shares acquired by the ESOP. However, the amount of the increase has not been determined as the expense will be based on the fair value of the shares committed to be released to employees, which is not yet determinable. The AICPA's Accounting Standards Executive Committee has also issued SOP 94-6, Disclosure of Certain Significant Risks and Uncertainties. SOP 94-6 applies to financial statements prepared in conformity with generally accepted accounting principles applicable to nongovernmental entities, and it applies to all entities that issue such statements. SOP 94-6 requires reporting entities to include in their financial statements disclosures about the nature of their operations and the use of estimates in the preparation of financial statements. In addition, if specified disclosure criteria are met, it requires entities to make disclosures about: o Amounts reported in the financial statements or in the notes that are particularly sensitive to change in the near term (for example - inventory subject to rapid technological obsolescence, valuation allowances for commercial and real estate loans, and amounts reported for long-term contacts); and o Concentrations in the volume of business transacted with a particular customer, supplier, lender, grantor or contributor; in revenue from particular products, services or fund-raising events; in the available sources of supply of materials, labor or services, or of licenses or other rights used in the entity's operation; or in the market or geographic area in which an entity conducts its operations. SOP 94-6 is effective for financial statements issued for fiscal years ending after December 15, 1995. Impact of Inflation The consolidated financial statements presented herein have been prepared in accordance with generally accepted accounting principles. These principles require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. The primary assets and liabilities of financial institutions such as the Bank are monetary in nature. As a result, interest rates have a more significant impact on the Bank's performance than the effects of general levels of inflation. Interest rates, however, do not necessarily move in the same direction or with the same magnitude as the price of goods and services, since such prices are affected by inflation. In a period of rapidly rising interest rates, the liquidity and maturities structures of the Bank's assets and liabilities are critical to the maintenance of acceptable performance levels. The principal effect of inflation, as distinct from levels of interest rates, on earnings is in the area of noninterest expense. Such expense items as employee compensation, employee benefits and occupancy and equipment costs may be subject to increases as a result of inflation. An additional effect of inflation is the possible increase in the dollar value of the collateral securing loans made by the Bank. The Bank is unable to determine the extent, if any, to which properties securing the Bank's loans have appreciated in dollar value due to inflation. <PAGE> BUSINESS General The Bank was organized under the name Owen County Savings and Loan Association in 1911. In 1972, the Bank converted to a federally chartered savings and loan and changed its name to Owen County Federal Savings and Loan Association, and in 1989, the Bank converted to a federally chartered savings bank known as Owen County Federal Savings Bank. In 1994, the Bank became an Indiana savings bank known as Owen Community Bank, s.b. The Bank's principal business consists of attracting deposits from the general public and originating long-term adjustable-rate loans secured primarily by first mortgage liens on one- to four-family real estate. The Bank's deposit accounts are insured up to applicable limits by the SAIF of the FDIC. The Bank is the oldest continuously operating financial institution headquartered in Owen County, Indiana. Management believes the Bank has developed a solid reputation among its loyal customer base because of its commitment to personal service and its strong support of the local community. The Bank offers a number of consumer and commercial financial services. These services include: (i) residential real estate loans; (ii) indemnification mortgage loans ("ID Mortgage Loans"); (iii) mobile home loans; (iv) Combo Loans; (v) construction loans; (vi) share loans; (vii) nonresidential real estate loans; (viii) multi-family loans; (ix) installment loans; (x) NOW accounts; (xi) passbook savings accounts; and (xii) certificates of deposit. The Bank conducts business out of its main office located in Spencer, Indiana. The Bank is and historically has been a significant real estate mortgage lender in Owen County, Indiana, originating approximately 14.4% of the mortgages recorded in Owen County during the year ended December 31, 1995. Lending Activities The Bank historically has concentrated its lending activities on the origination of loans secured by first mortgage liens for the purchase, construction or refinancing of one- to four-family residential real property. One- to four-family residential mortgage loans continue to be the major focus of the Bank's loan origination activities, representing 72.1% of the Bank's total loan portfolio at December 31, 1995. The Bank also offers mobile home loans, multi-family mortgage loans, nonresidential real estate loans, Combo Loans and consumer loans. Mobile home loans and Combo Loans totaled approximately 4.9% and 11.5% of the Bank's total loan portfolio at December 31, 1995, respectively. Mortgage loans secured by multi-family properties and nonresidential real estate totaled approximately 1.7% and 6.2%, respectively, of the Bank's total loan portfolio at December 31, 1995. Consumer loans constituted approximately 2.4% of the Bank's total loan portfolio at December 31, 1995. Under Indiana law, the total loans and extensions of credit by an Indiana-chartered savings bank to a borrower outstanding at one time and not fully secured may not exceed 15% of such bank's capital and unimpaired surplus. An additional amount up to 10% of the bank's capital and unimpaired surplus may be loaned to the same borrower if such loan is fully secured by a readily marketable collateral having a market value, as determined by reliable and continuously available price quotations, at least equal to the amount of such additional loans outstanding. As of December 31, 1995, the largest aggregate amount of loans which the Bank had to any one borrower was approximately $475,000. The Bank had no loans outstanding which management believes violate the applicable loans-to-one borrower limits. Although the Bank has historically been restricted in its ability to originate nonresidential and multi-family loans by the loans-to-one borrower limitation, the Bank does not believe that the loans-to-one borrower limits will have a significant impact on its business, operations and earnings following the Conversion because of the additional capital that the Bank anticipates from the Conversion. <PAGE> Loan Portfolio Data. The following table sets forth the composition of the Bank's loan portfolio by loan type and security type as of the dates indicated, including a reconciliation of gross loans receivable after consideration of the allowance for loan losses and loans in process. <TABLE> <CAPTION> At December 31, At June 30, ------------------ ------------------------------------------------------- 1995 1995 1994 1993 ------------------ ---------------- ----------------- ----------------- Percent Percent Percent Percent Amount of Total Amount of Total Amount of Total Amount of Total ------ -------- --------------- ------ -------- ------ -------- (Dollars in thousands) TYPE OF LOAN Mortgage loans: <S> <C> <C> <C> <C> <C> <C> <C> <C> Residential............... $19,764 72.06% $17,841 69.05% $15,621 72.52% $14,458 73.74% Combo..................... 3,166 11.54 2,748 10.64 1,513 7.02 1,400 7.14 Nonresidential............ 1,693 6.17 2,933 11.35 2,346 10.89 1,797 9.16 Multi-family.............. 475 1.73 11 .04 12 .06 13 .07 Mobile home loans............ 1,349 4.92 1,615 6.25 1,464 6.80 1,592 8.12 Commercial and industrial loans.......... 325 1.19 --- --- --- --- --- --- Consumer loans............... 654 2.39 691 2.67 584 2.71 348 1.77 ------- ------ ------- ------ ------- ------ ------- ------ Gross loans receivable.. $27,426 100.00% $25,839 100.00% $21,540 100.00% $19,608 100.00% ======= ====== ======= ====== ======= ====== ======= ====== TYPE OF SECURITY Residential real estate... $19,764 72.06% $17,841 69.05% $15,621 72.52% $14,458 73.74% Mobile home and land...... 3,166 11.54 2,748 10.64 1,513 7.02 1,400 7.14 Nonresidental real estate. 1,693 6.17 2,933 11.35 2,346 10.89 1,797 9.16 Multi-family real estate.. 475 1.73 11 .04 12 .06 13 .07 Mobile home............... 1,349 4.92 1,615 6.25 1,464 6.80 1,592 8.12 Deposits.................. 212 .77 225 .87 159 .74 183 .93 Other security............ 767 2.81 466 1.80 425 1.97 165 .84 ------- ------ ------- ------ ------- ------ ------- ------ Gross loans receivable.. 27,426 100.00 25,839 100.00 21,540 100.00 19,608 100.00 Deduct: Allowance for loan losses.... 100 .36 57 .22 26 .12 12 .06 Loans in process............. 123 .45 234 .91 35 .16 228 1.16 ------- ------ ------- ------ ------- ------ ------- ------ Net loans receivable...... $27,203 99.19% $25,548 98.87% $21,479 99.72% $19,368 98.78% ======= ====== ======= ====== ======= ====== ======= ====== Mortgage Loans: Adjustable-rate........... $17,518 69.80% $17,736 75.37% $15,024 77.08% $14,062 79.59% Fixed-rate................ 7,580 30.20 5,797 24.63 4,468 22.92 3,606 20.41 ------- ------ ------- ------ ------- ------ ------- ------ Total................... $25,098 100.00% $23,533 100.00% $19,492 100.00% $17,668 100.00% ======= ====== ======= ====== ======= ====== ======= ====== </TABLE> <PAGE> The following table sets forth certain information at June 30, 1995, regarding the dollar amount of loans maturing in the Bank's loan portfolio based on the contractual terms to maturity. Demand loans having no stated schedule of repayments and no stated maturity and overdrafts are reported as due in one year or less. This schedule does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses. Management expects prepayments will cause actual maturities to be shorter. <TABLE> <CAPTION> Due during years ended June 30, Balance ------------------------------------------------------------------------- Outstanding 1999 2001 2006 2011 at June 30, to to to and 1995 1996 1997 1998 2000 2005 2010 following ----------- ---- ---- ---- ---- ---- ---- --------- (In thousands) Mortgage loans: <S> <C> <C> <C> <C> <C> <C> <C> <C> Residential..................... $17,841 $ 32 $ 80 $ 9 $112 $2,233 $4,510 $10,865 Combo........................... 2,748 4 4 9 23 274 879 1,555 Nonresidential.................. 2,933 11 21 22 18 249 1,071 1,541 Multi-family.................... 11 --- --- --- --- --- --- 11 Mobile home loans.................. 1,615 --- 75 66 116 1,155 203 --- Commercial and industrial loans.... --- --- --- --- --- --- --- --- Consumer loans..................... 691 334 --- --- 115 83 148 11 ------- ---- ---- ---- ---- ------ ------ ------- Total ............................ $25,839 $381 $180 $106 $384 $3,994 $6,811 $13,983 ======= ==== ==== ==== ==== ====== ====== ======= </TABLE> <PAGE> The following table sets forth, as of June 30, 1995, the dollar amount of all loans due after one year which have fixed interest rates and floating or adjustable rates. Due After June 30, 1996 Fixed Rates Variable Rates Total ----------- -------------- ----- (In thousands) Mortgage loans: Residential..................... $4,694 $13,115 $17,809 Combo........................... 865 1,879 2,744 Nonresidential.................. 1,401 1,521 2,922 Multi-family.................... --- 11 11 Mobile home loans.................. 1,615 --- 1,615 Commercial and industrial loans.... --- --- --- Consumer loans..................... 357 --- 357 ------ ------- ------- Total......................... $8,932 $16,526 $25,458 ====== ======= ======= Residential Loans. Residential loans consist primarily of one- to four-family loans. Approximately $19.8 million, or 72.1% of the Bank's portfolio of loans at December 31, 1995, consisted of one- to four-family residential mortgage loans, of which approximately 70.7% had adjustable rates. Pursuant to federal regulations, such loans must require at least semi-annual payments and be for a term of not more than 40 years, and, if the interest rate is adjustable, they must be correlated with changes in a readily verifiable index. The Bank currently offers three (3) types of adjustable-rate one- to four-family residential mortgage loans ("ARMs"). The Bank offers ARMs which adjust annually and are indexed to the Auction Average of One Year U.S. Treasury Bills as published monthly by the FRB (the "Average 1 Year T-Bill"). The maximum rate adjustment per year and over the life of the loan for the Bank's one-year ARMs are 1%-1.5% and 4%-5%, respectively. These ARMs are generally underwritten for terms of up to 25 years. The Bank also offers three-year and five-year ARMs which are indexed to the National Average Contract Interest Rate for the Purchase of Previously Occupied Homes as published by the Federal Housing Finance Board (the "National Average Contract Rate") and have maximum rate adjustments per adjustment period and over the life of the loan of 3% and 5%, respectively. The Bank's three-year and five-year ARMs are generally underwritten for terms of up to 25 years. The Bank will not lend more than $75,000 for any residential loan with a Loan-to-Value Ratio of 90%. The initial interest rate for each of the Bank's ARM loans is determined by the Executive Committee of the Bank's Board of Directors based upon prevailing rates in the Bank's market area and the Loan-to-Value Ratio. The interest rates for loans with Loan-to-Value Ratios of greater than 80% and less than or equal to 85% are typically 100 basis points higher than the same loans with Loan-to-Value Ratios of 80% or less. The interest rates for loans with Loan-to-Value Ratios of greater than 85% are generally 150 basis points higher than the corresponding loans with Loan-to-Value Ratios of 80% or less. When the initial interest rate is determined for an ARM loan, a margin is calculated by subtracting the then-current index rate (i.e., the Average 1 Year T-Bill for one-year ARMs and the National Average Contract Rate for three-year and five-year ARMs) from the initial interest rate. Interest rate adjustments are thereafter determined based on fluctuations of the index rate with a specific loan's margin remaining constant. Adjustable-rate loans decrease the risk associated with changes in interest rates but involve other risks, primarily because as interest rates rise, the payment by the borrowers may rise to the extent permitted by the terms of the loan, thereby increasing the potential for default. Also, adjustable-rate loans have features which restrict changes in interest rates on a short-term basis and over the life of the loan. At the same time, the market value of the underlying property may be adversely affected by higher interest rates. The Bank also currently offers fixed-rate loans which provide for the payment of principal and interest over a period not to exceed 20 years. At December 31, 1995, 29.3% of the Bank's residential mortgage loans had fixed rates of interest. The Bank does not currently originate residential mortgage loans if the Loan-to-Value Ratio exceeds 90% and does not currently require private mortgage insurance on its residential single-family mortgage loans. The maximum Loan-to-Value Ratio for non-owner occupied one- to four-family residential mortgage loans is 80%. Substantially all of the residential mortgage loans that the Bank originates include "due-on-sale" clauses, which give the Bank the right to declare a loan immediately due and payable in the event that, among other things, the borrower sells or otherwise disposes of the real property subject to the mortgage and the loan is not repaid. <PAGE> The Bank's residential mortgage loans are not originated on terms and conditions and using documentation that conform with the standard underwriting criteria required to sell such loans in the secondary market. The Bank generally retains its loans in its portfolio and does not anticipate the need to sell its non-conforming loans. See "-- Origination, Purchase and Sale of Loans." At December 31, 1995, residential loans amounting to $103,000, or 0.38% of total loans, were included in non-performing assets. See "-- Non-Performing and Problem Assets." The Bank offers mortgage loans for the construction of residential real estate. Such loans are made with respect to owner-occupied residential real estate and, in limited cases, to builders or developers constructing such properties on a speculative investment basis (i.e., before the builder/developer obtains a commitment from a buyer). Substantially all of such loans are made to owners who are to occupy the premises. These loans are written as permanent mortgage loans such that only disbursed principal and interest are payable during the construction phase, which is typically limited to six (6) months. Inspections are made prior to any disbursement under a such a loan. Mortgage loans written for the construction of residential real estate, like construction loans generally, involve a higher level of risk than loans secured by existing properties. For example, if a project is not completed and the borrower defaults, the Bank may have to hire another contractor to complete the project at a higher cost. Also, a house may be completed, but not salable, resulting in the borrower defaulting and the Bank taking title to the house. The Bank also offers ID Mortgage Loans. ID Mortgage Loans are similar to home equity loans in that such loans create a line of credit secured by a real estate mortgage against which a borrower may draw, and are typically written as second mortgage loans. The Bank generally writes its ID Mortgage Loans so that all future indebtedness of a borrower is secured by the ID Mortgage without the necessity of recording an additional security instrument. ID Mortgage loans carry fixed rates and are generally written for terms not exceeding 20 years. The maximum Loan-to-Value Ratio for ID Mortgage Loans is 90% if the subject real estate is not encumbered by another mortgage or the Bank holds the first mortgage on the subject real estate, and 80% if another lender holds the first mortgage on the subject real estate. If an appraisal has been completed on the subject property within 5 years, the Bank does not require a new appraisal. Combo Loans. At December 31, 1995, $3.2. million, or 11.5% of the Bank's total loan portfolio, consisted of Combo Loans, of which approximately 68.9% had adjustable rates. The Bank currently offers three (3) types of adjustable-rate Combo Loans. The Bank's one-year adjustable-rate Combo Loans are indexed to the Average 1 Year T-Bill and have maximum rate adjustments per year and over the life of the loan of 1.5% and 3%, respectively. The Bank also offers three-year and five-year adjustable-rate Combo Loans which are indexed to National Average Contract Rate and have maximum rate adjustments per adjustment period and over the life of the loan of 3% and 5%, respectively. The Bank's Combo Loans are generally underwritten for terms of up to 25 years. The maximum Loan-to-Value Ratio for a Combo Loan is 90%. The initial interest rate for each of the Bank's Combo Loans is determined by the Executive Committee of the Bank's Board of Directors based upon prevailing rates in the Bank's market area and the Loan-to-Value Ratio. The Bank generally establishes its base interest rates for Combo Loans at a level 100 basis points higher than the corresponding rate for a residential ARM loan. The interest rates for Combo Loans with a Loan-to-Value Ratio of more than 80% are typically 100 basis points higher than the same Combo Loans with Loan-to-Value Ratios of 80% or less. An interest rate margin is determined for each Combo Loan in the same manner as described above for residential ARM loans. The Bank also offers fixed-rate Combo Loans with terms of 10 years, 15 years and 20 years. At December 31, 1995, 31.1% of the Bank's Combo Loans had fixed rates of interest. Mobile Home Loans. The Bank originates loans for the purchase of new and used mobile homes. At December 31, 1995, approximately $1.3 million, or 4.9% of the Bank's portfolio of loans, consisted of mobile home loans. The Bank's mobile home loans are fixed-rate loans with maximum terms of 15 years for new mobile homes and 10 years for previously owned mobile homes. The maximum Loan-to-Value Ratio for mobile home loans is 90%. The Bank has emphasized mobile home loans because they generally have shorter terms to maturity and higher yields than the Bank's residential mortgage loans. In addition, the Bank is the primary lender in its market area making mobile home loans, and mobile home lending significantly enhances the Bank's compliance under the Community Reinvestment Act of 1977. The Bank anticipates that it will continue to be an active originator of mobile home loans. <PAGE> Mobile home lending entails greater risk than traditional residential mortgage lending. Loans secured by mobile homes involve more credit risk than residential mortgage loans because of the type and nature of the collateral, the fact that such loans generally are made to borrowers with low income levels, and the fact that mobile homes tend to rapidly depreciate in value. In many cases, any repossessed collateral for a defaulting mobile home loan will not provide an adequate source of repayment of the outstanding loan balance because of improper repair and maintenance of the underlying security. As of December 31, 1995, one of the Bank's mobile home loans amounting to $11,000 was included in non-performing assets. Nonresidential Real Estate Loans. At December 31, 1995, $1.7 million, or 6.2% of the Bank's total loan portfolio, consisted of nonresidential real estate loans, of which $910,000 constituted loans secured by unimproved land only. Of these loans, $40,000 constituted a participation in a loan secured by nonresidential real estate which was purchased from another financial institution. See "-- Origination, Purchase and Sale of Loans." The nonresidential real estate loans included in the Bank's portfolio are primarily secured by real estate such as a motel, a funeral home and several churches. At December 31, 1995, $462,000, or 27.3% of the Bank's nonresidential loan portfolio, was secured by churches. The Bank currently originates nonresidential real estate loans as five-year adjustable-rate loans indexed to the prime rate with a margin of 1% to 2% above such index. In addition, the maximum rate adjustment per adjustment period and over the life of the loan is 3% and 5%, respectively. The Bank underwrites these loans on a case-by-case basis and, in addition to its normal underwriting criteria, the Bank evaluates the borrower's ability to service the debt from the net operating income of the property. The largest nonresidential real estate loan on December 31, 1995 was $242,000. None of the Bank's nonresidential real estate loans was included in non-performing assets at that date. The loans-to-one borrower limitation has historically restricted the Bank's ability to originate nonresidential loans. However, the additional capital from the Conversion will permit the Bank to emphasize nonresidential real estate loans and thus originate more nonresidential real estate loans following the Conversion. Loans secured by nonresidential real estate generally are larger than one-to four-family residential loans and involve a greater degree of risk. Nonresidential real estate loans often involve large loan balances to single borrowers or groups of related borrowers. Payments on these loans depend to a large degree on results of operations and management of the properties and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general. Accordingly, the nature of the loans makes them more difficult for management to monitor and evaluate. Multi-Family Loans. Approximately $475,000, or 1.7% of the Bank's portfolio of loans at December 31, 1995, consisted of a multi-family loan secured by an apartment complex. This multi-family loan was fully performing as of December 31, 1995. The Bank's multi-family loans are written for maximum terms of 20 years, and the Bank does not originate multi-family loans if the Loan-to-Value Ratio exceeds 80%. Consumer Loans. The Bank's consumer loans, consisting primarily of installment and share loans, aggregated $654,000 as of December 31, 1995, or 2.4% of the Bank's total loan portfolio. The Bank consistently originates consumer loans to meet the needs of its customers and to assist in meeting its asset/liability management goals. All of the Bank's consumer loans are fixed-rate loans, and substantially all are secured loans. The Bank's installment loans are fixed-rate loans generally secured by collateral, including automobiles, and are made for maximum terms of up to five years (depending on the collateral). The Bank generally will not make installment loans in amounts greater than $5,000. The Bank's share loans are made up to 80% of the original account balance and accrue at a rate of 2% over the underlying certificate of deposit rate. Interest on share loans is paid semi-annually. Consumer loans may entail greater credit risk than do residential mortgage loans, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles. Further, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. At December 31, 1995, consumer loans amounting to $4,000 were included in non-performing assets. See "--Non-Performing and Problem Assets." There can be no assurances, however, that additional delinquencies will not occur in the future. <PAGE> Origination, Purchase and Sale of Loans. The Bank currently originates its mortgage loans pursuant to its own underwriting standards which are not in conformity with the standard criteria of the Federal Home Loan Mortgage Corporation ("FHLMC") or Federal National Mortgage Association ("FNMA"). If it desired to sell its mortgage loans, the Bank might therefore experience some difficulty selling such loans quickly in the secondary market. The Bank has no intention, however, of attempting to sell such loans. The Bank's ARMs vary from secondary market criteria because, among other things, the Bank does not require current property surveys in most cases, does not require escrow accounts for taxes and insurance and does not permit the conversion of those loans to fixed rate loans in the first three years of their term. The Bank confines its loan origination activities primarily in Owen County. At December 31, 1995, no loans were secured by property located outside of Indiana. The Bank's loan originations are generated from referrals from real estate dealers and existing customers, and newspaper and periodical advertising. All loan applications are processed and underwritten at the Bank's main office. The Bank's loan approval process is intended to assess the borrower's ability to repay the loan, the viability of the loan and the adequacy of the value of the property that will secure the loan. To assess the borrower's ability to repay, the Bank studies the employment and credit history and information on the historical and projected income and expenses of its mortgagors. Mortgage loans up to $150,000 and mobile home loans may be approved by the Executive Committee. All mortgage loans for more than $150,000 must be approved in advance by the Board of Directors. Consumer loans up to $5,000 may be approved by the Bank's Senior Installment Loan Officer. Consumer loans for more than $5,000 must be approved by the Executive Committee. The Bank generally requires appraisals on all property securing its loans and requires title insurance and a valid lien on its mortgaged real estate. Appraisals for residential real property valued at less than $250,000 are performed by an in-house appraiser. Appraisals for residential properties valued in excess of $250,000 and appraisals for all nonresidential real estate are performed by an appraiser who is a state-licensed residential appraiser. The Bank requires fire and extended coverage insurance in amounts at least equal to the principal amount of the loan and requires vandalism coverage on all mobile home loans. It also requires flood insurance to protect the property securing its interest if the property is in a flood plane. The Bank does not require escrow accounts to be established by its borrowers for the payment of insurance premiums or taxes and does not require private mortgage insurance for its loans. The Bank's underwriting standards for consumer loans are intended to protect against some of the risks inherent in making consumer loans. Borrower character, paying habits and financial strengths are important considerations. The Bank historically has sold participations in its mortgage loans on a limited number of occasions to ensure compliance with the loans-to-one borrower restrictions. See "Regulation -- Loans-to-One Borrower." The Bank also occasionally purchases participations in nonresidential real estate and multi-family loans from other financial institutions. At December 31, 1995, the Bank held in its loan portfolio two participations in mortgage loans aggregating $51,700 that it had purchased, both of which were serviced by others. <PAGE> The following table shows loan origination, purchase and repayment activity for the Bank during the periods indicated. <TABLE> <CAPTION> Six Months Ended December 31, Year Ended June 30, ------------------ ------------------------------ 1995 1994 1995 1994 1993 (In thousands) Gross loans receivable <S> <C> <C> <C> <C> <C> at beginning of period........................ $25,839 $21,540 $21,540 $19,608 $17,241 Originations: Mortgage loans: Residential................................. 3,659 3,251 7,099 6,265 6,838 Other....................................... 58 6 48 248 244 ------- ------- ------- ------- ------- Total mortgage loans...................... 3,717 3,257 7,147 6,513 7,082 ------- ------- ------- ------- ------- Mobile home loans............................. 63 189 286 269 198 ------- ------- ------- ------- ------- Consumer loans: Installment................................. 510 297 578 338 226 Share....................................... 80 35 132 254 90 Home equity................................. --- --- --- --- 10 ------- ------- ------- ------- ------- Total consumer loans...................... 590 332 710 592 326 ------- ------- ------- ------- ------- Total originations................... 4,370 3,778 8,143 7,374 7,606 Purchases (sales) of participation loans...... (125) 62 62 --- 40 Repayments and other deductions............... 2,658 1,899 3,906 5,442 5,279 ------- ------- ------- ------- ------- Gross loans receivable at end of period....... $27,426 $23,481 $25,839 $21,540 $19,608 ======= ======= ======= ======= ======= </TABLE> Origination and Other Fees. The Bank realizes income from origination fees, late charges, checking account service charges, and fees for other miscellaneous services. The Bank does not currently charge any points on its loans. However, the Bank currently charges $300 plus closing costs on its mortgage loans. Late charges are generally assessed if payment is not received within a specified number of days after it is due. The grace period depends on the individual loan documents. The Bank does not maintain any automated teller machines ("ATMs") and has not offered ATM cards to its customers. However, during the first quarter of 1996, the Bank began issuing ATM cards to interested customers. The Bank's ATM cards will permit customers to use ATMs operating in the MAC(R) regional network and the CIRRUS(R) nationwide network. The Bank does not expect to derive any income from the ATM cards upon their issuance. Mortgage-Backed Securities. At December 31, 1995, the Bank had $1.4 million of mortgage-backed securities outstanding, all of which were classified as available for sale. These fixed-rate mortgage-backed securities may be used as collateral for borrowings and, through repayments, as a source of liquidity. Mortgage-backed securities generally offer yields above those available for investments of comparable credit quality and duration. <PAGE> The following table sets forth the carrying value and market value of the Bank's mortgage-backed securities at the dates indicated. <TABLE> <CAPTION> At December 31, At June 30, ---------------------------------------- -------------------------------------------------------------- 1995 1994 1995 1994 1993 ------------------ ------------------ ------------------ ------------------ ------------------ Carrying Market Carrying Market Carrying Market Carrying Market Carrying Market Value Value Value Value Value Value Value Value Value Value -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ (In thousands) Mortgage-backed securities: <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Held to maturity........ $ --- $ --- $1,564 $1,460 $1,477 $1,462 $1,636 $1,580 $1,156 $1,210 Available for sale...... 1,359 1,359 --- --- --- --- --- --- --- -- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total mortgage-backed securities............ $1,359 $1,359 $1,564 $1,460 $1,477 $1,462 $1,636 $1,580 $1,156 $1,210 ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== </TABLE> The following table sets forth the amount of mortgage-backed securities which mature during each of the periods indicated and the weighted average yields for each range of maturities at June 30, 1995. Amount at June 30, 1995, which matures in ------------------------------------------- 1998 1999 -------------------- ------------------- Weighted Weighted Carrying Average Carrying Average Value Yield Value Yield -------- ------- -------- ------- (Dollars in thousands) Mortgage-backed securities held to maturity.............. $963 5.29% $514 7.00% <PAGE> The following table sets forth the changes in the Bank's mortgage-backed securities portfolio for the six-month periods ended December 31, 1995 and 1994 and for the years ended June 30, 1995, 1994 and 1993. <TABLE> <CAPTION> For the Six Months For the Year Ended Ended December 31, June 30, -------------------- ------------------------------------------ 1995 1994 1995 1994 1993 ---- ---- ---- ---- ---- (In thousands) <S> <C> <C> <C> <C> <C> Beginning balance................. $1,477 $1,636 $1,636 $1,156 $1,483 Purchases......................... --- --- --- 1,020 --- Sales............................. --- --- --- --- --- Monthly repayments................ (111) (73) (161) (540) (327) Premium and discount amortization, net.............. --- --- 2 --- --- Unrealized loss on securities available for sale............. (7) --- --- --- --- ------ ------ ------ ------ ------ Ending balance.................... $1,359 $1,563 $1,477 $1,636 $1,156 ====== ====== ====== ====== ====== </TABLE> <PAGE> Non-Performing and Problem Assets Mortgage loans are reviewed by the Bank on a regular basis and are placed on a non-accrual status when the loans become contractually past due ninety days or more. It is the policy of the Bank that all earned but uncollected interest on all loans be reviewed monthly to determine if any portion thereof should be classified as uncollectible for any loan past due less than 90 days. Delinquency notices are sent three times per month with respect to all mortgage loans for which payments have not been received. Contact by phone or in person is made, if feasible, with respect to all such loans. When loans are forty days in default, an additional delinquency notice is sent and personal contact is made with the borrower to establish an acceptable repayment schedule. When loans are sixty days in default, contact is again made with the borrower to establish an acceptable repayment schedule. The Bank also provides free in-house credit counseling to all borrowers. Management is authorized to commence foreclosure proceedings for any loan upon making a determination that it is prudent to do so. All loans for which foreclosure proceedings have been commenced are placed on non-accrual status. Non-performing assets. At December 31, 1995, $118,000, or 0.35% of the Bank's total assets, were non-performing assets (loans delinquent more than 90 days and non-accruing loans) compared to $100,000, or 0.32%, of the Bank's total assets at June 30, 1995. At December 31, 1995, residential loans and consumer loans accounted for 87% and 13%, respectively, of non-performing assets. There were no REO or non-accruing investments at December 31, 1995. As of the same date, the Bank held $12,800 of repossessed consumer collateral. The table below sets forth the amounts and categories of the Bank's non-performing assets. <TABLE> <CAPTION> At June 30, At December 31, ------------------------------------------ 1995 1995 1994 1993 --------------- ------ ------- -------- (Dollars in thousands) <S> <C> <C> <C> <C> Non-accruing loans (1)......................... $118 $100 $ 27 $ --- Total non-performing assets.................... $118 $100 $ 27 $ --- Non-performing loans to total loans............ .43% .39% .13% ---% Non-performing assets to total assets.......... .35 .32 .10 --- </TABLE> - --------------- (1) The Bank generally places loans on a non-accruing status when the loans become contractually past due 90 days or more. At December 31, 1995, $103,000 of non-accruing loans were residential loans, $11,000 was a mobile home loan and $4,000 were consumer loans. Additional interest income that would have been recorded had income on nonaccruing loans been considered collectible and accounted for in accordance with their original terms is immaterial for each period. <PAGE> The following table reflects the amount of loans in a delinquent status as of the dates indicated: <TABLE> <CAPTION> June 30, ---------------------------------------------------------------------------- December 31, 1995 1995 1994 1993 ------------------------- ------------------------ ------------------------ ------------------------- Percent Percent Percent Percent of total of total of total of total Number Amount loans Number Amount loans Number Amount loans Number Amount loans ------ ------ ----- ------ ------ ----- ------ ------ ----- ------ ------ ----- (Dollars in thousands) Loans delinquent for (1): <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> 30-89 days.......... 32 $659 2.41% 33 $730 2.85% 42 $1,018 4.73% 35 $833 4.30% 90 days and over.... 7 118 .43 6 100 .39 3 27 .13 1 --- --- -- ------ ---- -- ---- ---- -- ------ ---- -- ---- ---- Total delinquent loans.......... 39 $777(2) 2.84% 39 $830 3.24% 45 $1,045 4.86% 36 $833 4.30% == ====== ==== == ==== ==== == ====== ==== == ==== ==== </TABLE> - ---------- (1) The number of days a loan is delinquent is measured from the day the payment was due under the terms of the loan agreement. (2) Of such amount, $528,000 consists of residential real estate loans and $249,000 consists of nonresidential real estate and consumer loans. Classified assets. The Bank's Asset Classification Policy provide for the classification of loans and other assets such as debt and equity securities considered to be of lesser quality as "substandard," "doubtful" or "loss" assets. An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated "special mention" by management. An insured institution is required to establish general allowances for loan losses in an amount deemed prudent by management for loans classified substandard or doubtful, as well as for other problem loans. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as "loss," it is required either to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or to charge off such amount. At December 31, 1995, the aggregate amount of the Bank's classified assets, and of the Bank's general and specific loss allowances were as follows: At December 31, 1995 -------------------- (In thousands) Substandard loans....................................... $ 439 Doubtful loans.......................................... 2 Loss loans.............................................. --- Special mention loans................................... 113 ----- Total classified loans............................... $ 554 ===== General loss allowances................................. $ 100 Specific loss allowances................................ --- ----- Total allowances..................................... $ 100 ===== <PAGE> The Bank regularly reviews its loan portfolio to determine whether any loans require classification in accordance with applicable regulations. Not all of the Bank's classifed assets constitute non-performing assets. Allowance for Loan Losses The allowance for loan losses is maintained through the provision for loan losses, which is charged to earnings. The provision for loan losses is determined in conjunction with management's review and evaluation of current economic conditions (including those of the Bank's lending area), changes in the character and size of the loan portfolio, loan delinquencies (current status as well as past and anticipated trends) and adequacy of collateral securing loan delinquencies, historical and estimated net charge-offs, and other pertinent information derived from a review of the loan portfolio. In management's opinion, the Bank's allowance for loan losses is adequate to absorb anticipated future losses from loans at December 31, 1995. However, there can be no assurance that regulators, when reviewing the Bank's loan portfolio in the future, will not require increases in its allowances for loan losses or that changes in economic conditions will not adversely affect the Bank's loan portfolio. Summary of Loan Loss Experience. The following table analyzes changes in the allowance for loan losses during the six-month periods ended December 31, 1995 and 1994 and during the past five (5) one-year periods ended June 30, 1995. <TABLE> <CAPTION> Six Months Ended December 31, Year Ended June 30, ----------------- --------------------------------------------------------- 1995 1994 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- ---- ---- (Dollars in thousands) <S> <C> <C> <C> <C> <C> <C> <C> Balance of allowance at beginning of period................................ $ 57 $ 26 $ 26 $ 12 $ 13 $ 14 $14 Less charge offs: Consumer loans........................... --- (6) (6) (1) (8) (3) (8) Add recoveries: Consumer loans........................... --- 2 1 1 --- 2 5 ----- ---- ---- ---- ---- ---- --- Net (charge-offs) recoveries............. --- (4) (5) --- (8) (1) (3) ----- ---- ---- ---- ---- ---- --- Provisions for losses on loans.............. 43 21 36 14 7 --- 3 ----- ---- ---- ---- ---- ---- --- Balance of allowance at end of period....... $100 $ 43 $ 57 $ 26 $ 12 $ 13 $14 ==== ==== ===== ==== ==== ==== === Net charge-offs to total average loans receivable for period............ ---% ---% .02% ---% .04% .01% .02% Allowance at end of period to net loans receivable at end of period (1).......................... .37% .18% .22% .12% .06% .08% .09% Allowance to total non-performing loans at end of period................. 84.75% 53.75% 57.00% 108.33% ---% ---% 27.45% </TABLE> - ---------- (1) Total loans less loans in process. <PAGE> Allocation of Allowance for Loan Losses. The following table presents an analysis of the allocation of the Bank's allowance for loan losses at the dates indicated. <TABLE> <CAPTION> At December 31, At June 30, ---------------------------------- ---------------------------------------------------------------- 1995 1994 1995 1994 1993 ---------------- ---------------- ----------------- -------------------- ------------------- Percent Percent Percent Percent Percent of loans of loans of loans of loans of loans in each in each in each in each in each category category category category category of total of total of total of total of total Amount loans Amount loans Amount loans Amount loans Amount loans ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- (Dollars in thousands) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Balance at end of period applicable to: Residential.....................$ --- 72.06% $--- 73.13% $--- 69.05% $--- 72.52% $--- 73.74% Combo........................... 8 11.54 --- 8.94 7 10.64 --- 7.02 --- 7.14 Nonresidential.................. 4 6.17 --- 8.76 7 11.35 --- 10.89 --- 9.16 Multi-family.................... 5 1.73 --- .05 --- .04 --- .06 --- .07 Mobile home loans............... 13 4.92 --- 6.17 12 6.25 --- 6.80 --- 8.12 Commercial and industrial loans........................ --- 1.19 --- --- --- --- --- --- --- --- Consumer loans.................. 16 2.39 17 2.95 17 2.67 15 2.71 8 1.77 Unallocated..................... 54 --- 26 14 --- 11 --- 4 --- ---- ------ --- ------ --- ------ --- ------ --- ------ Total........................ $100 100.00% $43 100.00% $57 100.00% $26 100.00% $12 100.00% ==== ====== === ====== === ====== === ====== === ====== </TABLE> <PAGE> Investments and FHLB Stock The Bank's Investment Policy, which is established and implemented by the Bank's Executive Committee, is designed primarily to maximize the yield on the investment portfolio subject to minimal liquidity risk, default risk, interest rate risk, and prudent asset/liability management. The Bank's investment portfolio consists of U.S. government agency securities, state and municipal bonds and FHLB stock. At December 31, 1995, approximately $2.9 million, including securities at market value for those classified as available for sale, or 8.6% of the Bank's total assets, consisted of such investments. All of the Bank's securities, except for FHLB stock, were classified as available for sale at December 31, 1995. The following table sets forth the carrying value and market value of the Bank's investments at the dates indicated. <TABLE> <CAPTION> At December 31, At June 30, ---------------------------------------- -------------------------------------------------------------- 1995 1994 1995 1994 1993 ------------------ ------------------- ------------------- ------------------ ----------------- Carrying Market Carrying Market Carrying Market Carrying Market Carrying Market Value Value Value Value Value Value Value Value Value Value -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ (In thousands) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Securities available for sale (1): Federal agencies........ $2,271 $2,271 $ 602 $ 602 $ 934 $ 934 $ --- $ --- $ --- $ --- State and municipal........ 347 347 --- --- --- --- --- --- --- --- Total securities available for sale.. 2,618 2,618 602 602 934 934 --- --- --- --- Securities held to maturity: Federal agencies........ --- --- 1,564 1,460 1,477 1,462 2,137 2,093 1,658 1,753 State and municipal........ --- --- 350 341 350 346 277 272 175 179 Total securities held to maturity.... --- --- 1,914 1,801 1,827 1,808 2,414 2,365 1,833 1,932 FHLB stock (2)............. 260 260 222 222 250 250 222 222 222 222 Total investments..... $2,878 $2,878 $2,738 $2,625 $3,011 $2,992 $2,636 $2,587 $2,055 $2,154 </TABLE> - ---------- (1) Upon adoption of SFAS No. 115 as of July 1, 1994, securities available for sale are recorded at market value in the financial statements. (2) Market value approximates carrying values. <PAGE> The following table sets forth investment securities and FHLB stock which mature during each of the periods indicated and the weighted average yields for each range of maturities at June 30, 1995. <TABLE> <CAPTION> Amount at June 30, 1995, which matures in One One to Five to Over Year or Less Five Years Ten Years Ten Years --------------------- -------------------- ------------------- -------------------- Weighted Weighted Weighted Weighted Carrying Average Carrying Average Carrying Average Carrying Average Value Yield Value Yield Value Yield Value Yield -------- ------- -------- ------- -------- ------- -------- ------- (Dollars in thousands) <S> <C> <C> <C> <C> <C> <C> <C> <C> Securities available for sale : Federal agencies................ $500 7.75 % $ 434 8.23% $ --- --- % $ --- ---% Securities held to maturity: Federal agencies................ --- --- 1,477 5.89 --- --- --- --- State and municipal............. 35 5.90 315 4.42 --- --- --- --- Total securities held to maturity........... 35 5.90 1,792 5.63 --- --- --- --- FHLB stock...................... --- --- --- --- --- --- 250 7.75 Total investments............. $535 7.63 % $2,226 6.14% $ --- --- % $250 7.75% </TABLE> Management intends to temporarily hold the proceeds from the Conversion in U.S. government securities, other U.S. agency securities, equity securities and mortgage-backed securities. See "Use of Proceeds." Sources of Funds General. Deposits have traditionally been the Bank's primary source of funds for use in lending and investment activities. In addition to deposits, the Bank derives funds from scheduled loan payments, loan prepayments, retained earnings and income on earning assets. While scheduled loan payments and income on earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition. Borrowings from the FHLB of Indianapolis may be used in the short-term to compensate for reductions in deposits or deposit inflows at less than projected levels. The Bank rarely borrows on a longer-term basis, for example, to support expanded activities or to assist in its asset/liability management. Deposits. Deposits are attracted, principally from within Owen County, through the offering of a broad selection of deposit instruments including fixed-rate certificates of deposit, NOW and other transaction accounts, and savings accounts. The Bank does not actively solicit or advertise for deposits outside of Owen County. Substantially all of the Bank's depositors are residents of that county. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds remain on deposit and the interest rate. The Bank does not pay a fee for any deposits it receives. Interest rates paid, maturity terms, service fees and withdrawal penalties are established by the Bank on a periodic basis. Determination of rates and terms are predicated on funds acquisition and liquidity requirements, rates paid by competitors, growth goals, and applicable regulations. The Bank relies, in part, on customer service and long-standing relationships with customers to attract and retain its deposits, but also closely prices its deposits in relation to rates offered by its competitors. The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing interest rates and competition. The variety of deposit accounts offered by the Bank has allowed it to be competitive in obtaining funds and to respond with flexibility to changes in consumer demand. The Bank has become more susceptible to short-term fluctuations in deposit flows as customers have become more interest rate conscious. The Bank manages the pricing of its deposits in keeping with its asset/liability management and profitability objectives. Based on its experience, the Bank believes that its passbook, NOW and non-interest-bearing checking accounts are relatively stable sources of deposits. However, the ability of the Bank to attract and maintain certificates of deposit, and the rates paid on these deposits, have been and will continue to be significantly affected by market conditions. <PAGE> An analysis of the Bank deposit accounts by type, maturity, and rate at December 31, 1995, is as follows: <TABLE> <CAPTION> Minimum Balance at Weighted Opening December 31, % of Average Type of Account Balance 1995 Deposits Rate - ----------------------------- ------- ------------ -------- -------- (Dollars in thousands) Withdrawable: <S> <C> <C> <C> <C> Passbook savings accounts......................... $ 10 $ 3,761 15.11% 3.00% NOW and other transaction accounts................ 50 2,472 9.93 2.45 Total withdrawable................................... $ 6,233 25.04 2.79 ------- ------ Certificates (original terms): 91 days........................................... 1,000 88 .35 4.00 6 months.......................................... 1,000 766 3.08 5.00 12 months......................................... 1,000 7,525 30.23 6.44 24 months......................................... 1,000 2,611 10.49 6.24 30 months......................................... 1,000 1,603 6.44 4.58 36 months......................................... 1,000 339 1.36 5.43 48 months......................................... 1,000 1,355 5.44 5.63 60 months......................................... 1,000 4,375 17.57 5.92 ------- ------ Total certificates................................... 18,662 74.96 6.01 ------- ------ Total deposits....................................... $24,895 100.00% 5.18% ======= ====== ==== </TABLE> The following table sets forth by various interest rate categories the composition of time deposits of the Bank's at the dates indicated: At June 30, At December 31, ---------------------------------- 1995 1995 1994 1993 ------- ------- ------- ------- (In thousands) 4.00% and under.......... $ 349 $ 1,169 $ 4,790 $ 3,278 4.01 - 6.00 %............ 11,318 10,053 8,231 5,557 6.01 - 8.00%............. 6,995 5,507 603 2,050 8.01 - 10.00%............ --- --- 283 1,816 ------- ------- ------- ------- Total .................. $18,662 $16,729 $13,907 $12,701 ======= ======= ======= ======= <PAGE> The following table represents, by various interest rate categories, the amounts of time deposits maturing during each of the three years following December 31, 1995, and the total amount maturing thereafter. Matured certificates which have not been renewed as of December 31, 1995, have been allocated based upon certain rollover assumptions: Amounts At December 31, 1995, Maturing in ---------------------------------------------------- One Year Two Three Greater Than or Less Years Years Three Years ------- ----- ----- ----------- (In thousands) 4.00% and under............ $ 349 $ --- $ --- $ --- 4.01 - 6.00 %.............. 5,547 1,575 3,339 857 6.01-8.00%................. 4,125 1,981 --- 889 ------- ------ ------ ------ Total .................... $10,021 $3,556 $3,339 $1,746 ======= ====== ====== ====== The following table indicates the amount of the Bank's certificates of deposit of $100,000 or more by time remaining until maturity as of December 31, 1995. Maturity (In thousands) Three months or less....................................... $ --- Greater than three months through six months.................................... 704 Greater than six months through twelve months................................. 100 Over twelve months......................................... 1,444 Total................................................. $2,248 <PAGE> The following table sets forth the dollar amount of savings in the various types of deposits programs offered by the Bank at the dates indicated, and the amount of increase or decrease in such deposits as compared to the previous period. <TABLE> <CAPTION> Deposit Activity --------------------------------------------------------------------------------- Increase Increase (Decrease) (Decrease) Balance at from Balance at from December 31, % of June 30, June 30, % of June 30, 1995 Deposits 1995 1995 Deposits 1994 ------------ -------- ---- ---- -------- ---- (Dollars in thousands) Withdrawable: <S> <C> <C> <C> <C> <C> <C> Passbook savings accounts............ $ 3,761 15.11% $ 46 $ 3,715 16.51% $(1,412) NOW accounts......................... 2,472 9.93 416 2,056 9.14 (361) ------- ------ ------ ------- ------ ------- Total withdrawable...................... 6,233 25.04 462 5,771 25.65 (1,773) ------- ------ ------ ------- ------ ------- Certificates (original terms): 91 days.............................. 88 .35 14 74 .33 4 6 months............................. 766 3.08 (179) 945 4.20 (213) 12 months............................ 7,525 30.23 441 7,084 31.48 3,682 24 months............................ 2,611 10.49 1,939 672 2.99 367 30 months............................ 1,603 6.44 (223) 1,826 8.12 (796) 36 months............................ 339 1.36 (46) 385 1.71 211 48 months............................ 1,355 5.44 (243) 1,598 7.10 (604) 60 months............................ 4,375 17.57 230 4,145 18.42 171 ------- ------ ------ ------- ------ ------- Total certificates...................... 18,662 74.96 1,933 16,729 74.35 2,822 ------- ------ ------ ------- ------ ------- Total deposits.......................... $24,895 100.00% $2,395 $22,500 100.00% $ 1,049 ======= ====== ====== ======= ====== ======= </TABLE> <PAGE> <TABLE> <CAPTION> Deposit Activity ----------------------------------------------------------------- Increase (Decrease) Balance at from Balance at June 30, % of June 30, June 30, % of 1994 Deposits 1993 1993 Deposits ---------- -------- ---- ---- -------- (Dollars in thousands) Withdrawable: <S> <C> <C> <C> <C> <C> Passbook savings accounts............ $ 5,127 23.90% $ (21) $ 5,148 25.52% NOW accounts......................... 2,417 11.27 92 2,325 11.52 ------- ------ ------- ------- ------ Total withdrawable...................... 7,544 35.17 71 7,473 37.04 ------- ------ ------- ------- ------ Certificates (original terms): 91 days.............................. 70 .33 (42) 112 .56 6 months............................. 1,158 5.40 (49) 1,207 5.98 12 months............................ 3,402 15.86 138 3,264 16.18 24 months............................ 305 1.42 245 60 .30 30 months............................ 2,622 12.22 (711) 3,333 16.52 36 months............................ 174 .81 91 83 .41 48 months............................ 2,202 10.26 (1,415) 3,617 17.93 60 months............................ 3,974 18.53 2,949 1,025 5.08 ------- ------ ------- ------- ------ Total certificates...................... 13,907 64.83 1,206 12,701 62.96 ------- ------ ------- ------- ------ Total deposits.......................... $21,451 100.00% $ 1,277 $20,174 100.00% ======= ====== ======= ======= ====== </TABLE> <PAGE> During 1996, the Bank expects to begin offering to its customers a new deposit product called the "Money Management Account." The Money Management Account will be similar to a money market checking account, but customers will not have check writing privileges. Funds may be transferred from non-interest-bearing accounts or interest-bearing accounts paying lower rates into the Money Management Account. Funds may also be transferred from the Money Management Account into other accounts at the Bank when such funds are needed by the customer. The number of fund transfers per month will be limited by the Bank, and the Money Management Account will have a minimum required balance of $5,000. In the unlikely event of liquidation of the Bank after the Conversion, certain deposit account holders will be entitled to full payment of their accounts prior to any payment being made to the Holding Company as the holder of the Bank's capital stock. See "The Conversion -- Principal Effects of Conversion - -- Effect on Liquidation Rights." Borrowings. The Bank focuses on generating high quality loans and then seeks the best source of funding from deposits, investments or borrowings. At December 31, 1995, the Bank had $5.2 million in borrowings from the FHLB of Indianapolis which mature on various dates primarily during the years 1996 through 2000 and have interest rates ranging from 6.14% to 6.48%. The Bank does not anticipate any difficulty in obtaining advances appropriate to meet its requirements in the future. The Bank had $22.2 million in eligible assets available as collateral for advances from the FHLB of Indianapolis as of December 31, 1995. Based on the Bank's blanket collateral agreements, advances from the FHLB of Indianapolis must be collateralized by 160% of eligible assets. Therefore, the Bank's eligible collateral would have supported approximately $13.9 million in advances from the FHLB of Indianapolis as of December 31, 1995. However, the Bank's Board of Directors has by resolution limited the amount of authorized borrowings to $7 million at December 31, 1995. The following table presents certain information relating to the Bank's borrowings at or for the six months ended December 31, 1995 and 1994 and at or for the year ended June 30, 1995, 1994 and 1993. <TABLE> <CAPTION> At or for the Six Months At or for the Year Ended December 31, Ended June 30, ------------------------ ------------------------------- 1995 1994 1995 1994 1993 ---- ---- ---- ---- ---- (Dollars in thousands) FHLB Advances: <S> <C> <C> <C> <C> <C> Average balance outstanding.......................... $5,167 $3,000 $3,321 $ 752 $ 417 Maximum amount outstanding at any month-end during the period..................... 5,200 4,000 5,000 1,500 5,000 Weighted average interest rate during the period............................... 6.31% 5.13% 6.03% 3.54% 2.88% Weighted average interest rate at end of period................................ 6.36 5.85 6.36 4.53 3.90 </TABLE> <PAGE> Properties The Bank conducts its business from its main office at 279 East Morgan Street, Spencer, Indiana 47460. The Bank owns its main office. The following table provides certain information with respect to the Bank's office as of December 31, 1995: <TABLE> <CAPTION> Net Book Value of Property, Owned or Year Total Furniture & Approximate Description and Address Leased Opened Deposits Fixtures Square Footage - ----------------------- ------ ------ -------- -------- -------------- (Dollars in thousands) <C> <C> <C> <C> <C> <C> 279 East Morgan Street Owned 1987 $24,895 $552 5,100 Spencer, IN 47460 </TABLE> As of December 31, 1995, the Bank also owned a parcel of real estate located across the street from its office which is utilized for employee parking. In January, 1996, the Bank purchased another parcel of real estate located adjacent to its office (the "West Parcel"). The Bank has agreed to sell one-half of the West Parcel to a local insurance agency, and will use the remaining one-half of the West Parcel for additional employee parking. <PAGE> The Bank owns computer and data processing equipment which is used for transaction processing, loan origination, and accounting. The Bank has also contracted for the data processing and reporting services of On-Line Financial Services, Inc. in Oak Brook, Illinois, which was acquired in 1995 by Argo Federal Savings Bank, FSB. The cost of these data processing services is approximately $4,250 per month. Service Corporation Subsidiary BSF, Inc., the Bank's service corporation subsidiary ("BSF"), was organized in 1989 and has historically engaged in the purchasing and developing of large tracts of real estate. After land was acquired, BSF subdivided the real estate into lots, made improvements such as streets and sold individual lots, usually on contract. Each subdivision has separate restrictive covenants, but most permit mobile or modular homes. Each of BSF's subdivisions is described in detail below. On April 6, 1989, BSF purchased the 128 acre 10 O'Clock Line subdivision in Owen County for $110,000. The purchase was funded by a capital infusion from the Bank. At that time, the appraised value of the land was $180,000. The property was divided into 19 separate tracts and sold on contract to buyers. The actual selling price per acre of tracts sold was slightly higher than the original predicted selling price. The total sales price for all tracts of land was over $300,000. At December 31, 1995, seven of the contracts have been paid and title to the respective tracts of land have passed to the buyers. A second piece of property in Owen County totalling approximately 160 acres, the Autumn Hill Subdivision, was purchased on contract by BSF for $96,000 on September 21, 1990. BSF anticipates that the contract for this parcel will be paid in full in December, 1996. The appraised value at the time of sale was $110,000. The area was divided into 23 separate tracts of land, 21 of which had been sold as of December 31, 1995, for an aggregate price of $245,850. On May 21, 1991, BFS purchased a 215 acre tract of heavily wooded land in Greene County, Indiana, now known as the Greene Woods subdivision, for $92,500. BSF divided this tract into sixteen parcels, all of which had been sold on contract at December 31, 1995, and built one large lake and three small lakes in this subdivision. As of December 31, 1995, ten of the Greene Woods contracts had been paid in full, and title to the corresponding parcels had been transferred to the purchasers. The aggregate sales price for the sixteen parcels in the Greene Woods subdivision was $257,605. On May 8, 1992, BFS purchased approximately 60 acres of land now known as the Watkins Farm subdivision for $32,000. This property is also located in Greene County, Indiana. Prior to dividing this parcel into the three existing tracts of land, BSF cleared and sold approximately $26,000 of timber. As of December 31, 1995, BSF had sold one of these tracts for cash and the other two tracts on contract. The aggregate sales price for these three parcels totalled $86,157. On May 21, 1993, BSF purchased approximately 16 acres of land in Owen County for $58,500. BSF divided this property, now known as the County Line East, Phase I subdivision, into thirteen separate parcels and installed underground power, telephone, cable television and water lines. As of December 31, 1995, ten parcels had been sold on contract, all of which had been paid in full, for an aggregate sales price of $308,500. On November 29, 1993, BSF purchased approximately thirty acres of land located in Owen County for $20,359. This land, now known as the Coon Path subdivision, was divided into ten separate tracts of land, eight of which remained unsold at December 31, 1995. The aggregate sales price for the two parcels which had been sold at December 31, 1995 totaled $26,000.00. At December 31, 1995, BSF's total investment in the Coon Path subdivision was approximately $36,175. On February 6, 1992, BSF purchased four contracts with an aggregate balance of $123,875 from an Owen County couple for a discounted principal amount of $87,500. These contracts have contractual interest rates of 11% and are expected to yield BSF approximately 18% on its investment. BSF also holds a fifth contract which was purchased from a probate estate in 1992. BSF also anticipates an 18% return on this purchased contract. BSF, from time to time, keeps a number of its tracts for mobile home repossession. BSF purchases repossessed mobile homes from the Bank at book value. The mobile homes are then placed on the vacant tracts of land and sold by BSF, thereby protecting the Bank from related losses. Currently, the Bank has no mobile homes on lots waiting for sale. <PAGE> BSF pays the Bank rent of $500 per month for the use of its facilities and management and staff support. The operations of BSF are managed by the Bank's Chairman, Frank R. Stewart. As consideration for his services and in addition to the annual salary paid by the Bank, Mr. Stewart has historically been paid 25% of BSF's pretax net income. However, beginning in January, 1996, Mr. Stewart is no longer receiving compensation from BSF. For a description of an employment agreement which the Bank entered into with Mr. Stewart effective January 1, 1996, see "Executive Compensation and Related Transactions -- Employment Contracts." All of the Bank's directors serve as directors of BSF, and BSF's executive officers are as follows: Frank R. Stewart President Robert W. Raper Vice President Charles W. Chambers Secretary and Treasurer In connection with the Bank's conversion to an Indiana mutual savings bank, the FDIC required the Bank to (i) immediately cease BSF's land acquisitions, (ii) divest BSF's non-conforming real estate holdings within five years (or by November 16, 2000), provided, however, the Bank is not precluded from requesting an extension of the divestiture period, and (iii) maintain capital at levels sufficient to classify the Bank as a well-capitalized institution. The FDIC's authorization for the Bank and BSF to undertake the required divestiture of BSF's non-conforming real estate holdings over a five-year period is conditioned on, among other things, BSF continuing to be satisfactorily capitalized and operated separately for the Bank, and the Bank and BSF complying with Sections 23A and 23B of the Federal Reserve Act in connection with future transactions between the Bank and BSF. BSF is currently completing the divestiture of its real estate holdings, and upon such divestiture is expected to dissolve. It is anticipated that this divestiture will be accomplished through the sale of the parcels to BSF's contract purchasers who will obtain mortgage loans from the Bank to facilitate their purchase of the parcels. As parcels are purchased by BSF's contract purchasers, BSF and such purchasers will terminate the corresponding land contracts. The Bank currently anticipates that all non-conforming real estate will be sold prior to November 16, 2000 as required by the FDIC. At December 31, 1995, the Bank's aggregate investment in BSF was $727,302. The consolidated statements of income of the Bank and its subsidiary included elsewhere herein include the operations of BSF. All significant intercompany balances and transactions have been eliminated in the consolidation. The following are a condensed balance sheet for BSF at December 31, 1995 and at June 30, 1995, 1994 and 1993, and a condensed income statement for BSF for the six months ended December 31, 1995 and 1994 and for the years ended June 30, 1995, 1994 and 1993. Condensed Balance Sheet December 31, June 30, 1995 1995 1994 1993 ---- ---- ---- ---- (unaudited) (In thousands) Assets: Cash.............................. $ 54 $ 57 $ 52 $ 27 Loans, net........................ 571 644 693 629 Land acquired for development..... 200 188 153 171 ---- ---- ---- ---- Total assets.................. $825 $889 $898 $827 ==== ==== ==== ==== Liabilities: Other borrowings.................. $ 20 $ 29 $ 80 $115 Other liabilities................. 78 159 176 161 ---- ---- ---- ---- Total liabilities............. 98 188 256 276 Equity Capital: Retained earnings................. 727 701 642 551 ---- ---- ---- ---- $825 $889 $898 $827 ==== ==== ==== ==== <PAGE> <TABLE> <CAPTION> Condensed Income Statement --------------------------------------------------------- Six Months Ended Year Ended December 31, June 30, ------------------ ------------------------------ 1995 1994 1995 1994 1993 ---- ---- ---- ---- ---- (unaudited) (In thousands) <S> <C> <C> <C> <C> <C> Interest income......................... $ 45 $ 43 $ 88 $ 91 $ 70 Interest expense........................ 1 3 9 8 8 ----- ----- ----- ----- ----- Net interest income.................. 44 40 79 83 62 Income from sale of real estate......... 19 7 78 144 117 Non-interest expense: Salaries and employee benefits....... 2 2 4 4 2 Printing and office supplies......... 3 3 7 7 8 Management fees...................... 14 10 33 50 34 Other expenses....................... 1 6 14 19 6 ----- ----- ----- ----- ----- Total non-interest expense....... 20 21 58 80 50 Income before income tax................ 43 26 99 147 129 Income tax expense................... 17 12 40 56 50 ----- ----- ----- ----- ----- Net income....................... $ 26 $ 14 $ 59 $ 91 $ 79 ===== ===== ===== ===== ===== </TABLE> Employees As of January 31, 1996, the Bank employed 14 persons on a full-time basis and 2 persons on a part-time basis. None of the Bank's employees is represented by a collective bargaining group. Management considers its employee relations to be excellent. The Bank's employee benefits for full-time employees include, among other things, a Pentegra (formerly known as Financial Institutions Retirement Fund) defined benefit pension plan ("Pension Plan"), a Pentegra thrift plan, and major medical, dental, and short-term and long-term disability insurance. Employee benefits are considered by management to be competitive with those offered by other financial institutions and major employers in the Bank's area. See "Executive Compensation and Related Transactions." Legal Proceedings Although the Bank, from time to time, is involved in various legal proceedings in the normal course of business, there are no material legal proceedings to which the Bank is a party or to which any of its property is subject. COMPETITION The Bank originates most of its loans to and accepts most of its deposits from residents of Owen County, Indiana. The Bank is the oldest continuously operating financial institution headquartered in Owen County, Indiana. The Bank is subject to competition from various financial institutions, including state and national banks, state and federal savings associations, credit unions, and certain nonbanking consumer lenders that provide similar services in Owen County with significantly larger resources than the Bank. In total, there are three financial institutions located in Owen County, Indiana, including the Bank. The Bank also competes with money market funds with respect to deposit accounts and with insurance companies with respect to individual retirement accounts. Indiana law permits acquisitions of certain federal and state SAIF-insured savings associations and their holding companies ("Savings Associations") located in Indiana, Ohio, Kentucky, Illinois, and Michigan (the "Region") by other Savings Associations located in the Region. Savings Associations with their principal place of business in one of the states in the Region (other than Indiana) may acquire Savings Associations with their principal place of business in Indiana if, subject to certain other conditions, the state of the acquiring association has reciprocal legislation permitting the acquisition of Savings Associations and their holding companies in that state by Indiana Savings Associations. Each of the states in the Region has, at least to a certain degree, reciprocal legislation. The Indiana statute also authorizes Indiana Savings Associations to acquire other Savings Associations in the Region. Following the acquisition, an acquired Indiana Savings Association and any other Indiana Savings Association subsidiary owned by the acquiror must hold no more than 15% of the total Savings Association deposits in Indiana. <PAGE> Indiana laws allow nationwide acquisitions of Indiana banks by bank holding companies on a reciprocal basis as of July 1, 1992. Moreover, Indiana banks are also permitted to acquire other Indiana banks and to establish branches throughout Indiana. In addition, The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act") permits bank holding companies to acquire banks in other states and, with state consent and subject to certain limitations, and effective as of June 1, 1997, allows banks to acquire out-of-state branches either through merger or de novo expansion. The State of Indiana recently passed a law establishing interstate branching provisions for Indiana state-chartered banks consistent with those established by the Riegle-Neal Act (the "Indiana Branching Law"). The Indiana Branching Law authorizes Indiana banks to branch interstate by merger or de novo expansion and authorizes out-of-state banks meeting certain requirements to branch into Indiana by merger or de novo expansion. The Indiana Branching Law became effective March 15, 1996, provided that prior to June 1, 1997 interstate mergers and de novo branches are not permitted to out-of-state banks unless the laws of their home states permit Indiana banks to merge or establish de novo branches on a reciprocal basis. This new legislation may also result in increased competition for the Holding Company and the Bank. Under current law, bank holding companies may acquire savings associations. Savings associations may also acquire banks under federal law. To date, several bank holding company acquisitions of savings associations and savings association acquisitions of banks in Indiana have been completed. Affiliations between banks and savings associations based in Indiana may also increase the competition faced by the Holding Company and the Bank. The primary factors influencing competition for deposits are interest rates, service and convenience of office locations. The Bank competes for loan originations primarily through the efficiency and quality of services it provides borrowers and through interest rates and loan fees it charges. Competition is affected by, among other things, the general availability of lendable funds, general and local economic conditions, current interest rate levels, and other factors that are not readily predictable. <PAGE> MANAGEMENT Directors and Executive Officers of the Holding Company The Board of Directors of the Holding Company currently consists of seven directors, each of whom is also a director of the Bank. The directors of the Holding Company are divided into three classes, and approximately one-third of the Board is to be elected at each annual meeting of the shareholders of the Holding Company. The terms of the directors expire at the Holding Company's first shareholders' meeting, which is anticipated to be held in December, 1996. At that meeting, it is anticipated that the directors will be nominated to serve for the following terms: the terms of Messrs. Raper and Gillaspy will expire in 1997, the terms of Messrs. Chambers and Parrish will expire in 1998, and the terms of Messrs. Meier, Stewart and Wilson will expire in 1999. The executive officers of the Holding Company are identified below. The executive officers of the Holding Company are elected annually by the Holding Company's Board of Directors. Name Position with Holding Company Frank R. Stewart Chairman Robert W. Raper Vice Chairman Kurt J. Meier President, Chief Executive Officer and Treasurer Kurt D. Rosenberger Vice President and Chief Financial Officer Charles W. Chambers Secretary Directors of the Bank The Board of Directors of the Bank currently consists of seven persons. Each director holds office for a term of three years, and approximately one-third of the Board is elected at each annual meeting of the members of the Bank. There are no arrangements or understandings between the Bank and any person pursuant to which that person has been selected a director of the Bank. The Board of Directors of the Bank met 12 times during the fiscal year ended June 30, 1995. No director attended fewer than 75% of the meetings of the Board of Directors held while he served as a director and the meetings of committees on which he served. Tad Wilson is the brother-in-law of Stephen Parrish. Listed below are the directors of the Bank: Director of Position the Bank Expiration with Director Since of Term the Bank - -------- ----- ------- -------- Charles W. Chambers 1978 1998 Director, Secretary John T. Gillaspy 1986 1997 Director Kurt J. Meier 1991 1996 Director, President, Chief Executive Officer and Treasurer Stephen Parrish 1982 1998 Director Robert W. Raper 1970 1997 Vice Chairman Frank R. Stewart 1963 1996 Chairman Tad Wilson 1978 1996 Director Presented below is certain information concerning the directors of the Bank: Charles W. Chambers (age 80) has served as a Staff Appraiser of the Bank since 1991 and as Secretary of the Bank since 1990. John T. Gillaspy (age 68) has served as President and Chief Executive Officer of the Spencer Evening World, Inc., a newspaper based in Spencer, Indiana, for over the past five years. Kurt J. Meier (age 45) has served as President of the Bank since 1994; theretofore, he served as Managing Officer of the Bank since 1990. <PAGE> Stephen Parrish (age 56) has served as a funeral director for the West-Parrish-Pedigo Funeral Home in Spencer, Indiana, for more than five years. Robert W. Raper (age 78) has served as Vice Chairman of the Bank since 1994; theretofore, he served as Vice President of the Bank since prior to 1990. Frank R. Stewart (age 70) has served as Chairman of the Board of the Bank since 1994; theretofore, he served as President of the Bank from 1982 until 1994; he has served as President of BSF, Inc. since its formation in 1989. He has extensive experience in real estate development and sales. Tad Wilson (age 61) is the co-owner of Metropolitan Printing Services, Inc., a printing company based in Bloomington, Indiana, and an owner of a retail book store and rental properties located in Bloomington, Indiana. Executive Officers of the Bank Who Are Not Directors Presented below is certain information regarding the only executive officer of the Bank who is not a director: Name Position ---- -------- Kurt D. Rosenberger Vice President and Chief Financial Officer Kurt D. Rosenberger, age 37, has served as Vice President of the Bank since 1994; theretofore, he served as Senior Financial Analyst for the OTS in Indianapolis, Indiana, since 1990. Committees of the Boards of Directors of the Bank and the Holding Company The Executive Committee is comprised of Directors Raper, Gillaspy and Stewart. It meets weekly and is responsible for taking actions when the full Board cannot meet and making recommendations to the Board of Directors. The Chairman of the Board of Directors of the Bank is required by the Bank's By-Laws to appoint a nominating committee consisting of three members of the Bank 30 days prior to each annual meeting. Such Committee is authorized to make nominations for directors in writing to the Bank's Secretary at least 15 days prior to the annual meeting which nominations are then posted at the Bank's office. Nominations for directors may also be made in writing by members and delivered to the Bank's Secretary at least 10 days prior to the Bank's annual meeting. <PAGE> EXECUTIVE COMPENSATION AND RELATED TRANSACTIONS Remuneration of Named Executive Officer The following table sets forth information as to annual, long-term and other compensation for services in all capacities to the President, Chief Executive Officer and Treasurer of the Bank for the fiscal year ended June 30, 1995. There were no executive officers of the Bank, as of June 30, 1995, who earned over $100,000 in salary and bonuses during that fiscal year. <TABLE> <CAPTION> Summary Compensation Table ---------------------------------------------------------------- Annual Compensation ------------------------------------------------ Name and Principal Fiscal Other Annual All Other Position Year Salary Bonus Compensation(2) Compensation <S> <C> <C> <C> <C> <C> Kurt J. Meier, President 1995 $49,440 (1) $5,600 -- -- Chief Executive Officer and Treasurer </TABLE> - ---------- (1) Includes fees received for service on the Bank's Board of Directors. (2) Mr. Meier received certain perquisites, but the incremental cost of providing such perquisites did not exceed the lesser of $50,000 or 10% of his salary and bonus. Employment Contracts The Bank has entered into three-year employment contracts with each of Messrs. Meier and Rosenberger (together, the "Employees"). The contracts with the Employees, effective as of the effective date of the Conversion, extend annually for an additional one-year term to maintain their three-year term if the Board of Directors of the Bank determines to so extend them, unless notice not to extend is properly given by either party to the contract. Each Employee receives an initial salary under the contract equal to his current salary subject to increases approved by the Board of Directors. Each contract also provides, among other things, for participation in other fringe benefits and benefit plans available to the Bank's employees. Each Employee may terminate his employment upon sixty days' written notice to the Bank. The Bank may discharge each Employee for cause (as defined in the contract) at any time or in certain specified events. If the Bank terminates an Employee's employment for other than cause or if the Employee terminates his own employment for cause (as defined in the contract), the Employee will receive his base compensation under the contract for an additional three years if the termination follows a change of control in the Holding Company (as defined below). In addition, during such period, the Employee will continue to participate in the Bank's group insurance plans and retirement plans, or receive comparable benefits. Moreover, within a period of three months after such termination following a change of control, each Employee will have the right to cause the Bank to purchase any stock options he holds for a price equal to the fair market value (as defined in the contact) of the shares subject to such options minus their option price. If the payments provided for in the contract, together with any other payments made to the Employee by the Bank, are deemed to be payments in violation of the "golden parachute" rules of the Code, such payments will be reduced to the largest amount which would not cause the Bank to lose a tax deduction for such payments under those rules. As of the date hereof, the cash compensation which would be paid under the contracts to the Employees if the contracts were terminated either after a change of control of the Holding Company, without cause by the Bank, or for cause by the Employees, would be $141,960 for Mr. Meier and $130,260 for Mr. Rosenberger. For purposes of these employment contracts, a change of control of the Holding Company is generally an acquisition of control, as defined in regulations issued under the Change in Bank Control Act and the Bank Holding Company Act. <PAGE> The employment contracts provide the Bank protection of its confidential business information and protection from competition by each of the Employees should he voluntarily terminate his employment without cause or be terminated by the Bank for cause. The Bank also entered into a three-year employment contract with Mr. Stewart effective as of January 1, 1996. Mr. Stewart's employment agreement provides for the payment by the Bank to the Mr. Stewart of an annual salary equal to $44,980, subject to increases as determined by the Board of Directors. In the event Mr. Stewart's employment is terminated by the Bank without cause, Mr. Stewart will continue to receive such compensation during the then-remaining term of the contract. The Bank is the owner and beneficiary of $100,000 in key man life insurance on the lives of Mr. Meier and Mr. Rosenberger. Compensation of Directors All directors of the Bank are entitled to receive monthly director fees for their services. Each of Mr. Gillapsy and Mr. Raper receive $650 per month, and Mr. Stewart receives $450 per month. All other directors of the Bank receive $350 per month. Total fees paid to directors of the Bank for the year ended June 30, 1995 were $35,760. Directors of the Holding Company are not currently paid directors' fees. The Holding Company may, if it believes it is necessary to attract qualified directors or otherwise beneficial to the Holding Company, adopt a policy of paying directors' fees. Directors of BSF receive director fees of $150 per meeting. The Board of BSF meets quarterly. Benefits Insurance Plans. The Bank's directors, officers and employees are provided with hospitalization, major medical, major dental, life insurance, short-term and long-term disability insurance, and other insurance benefits under group plans sponsored by the Indiana League of Savings Institutions Group Insurance Trust. Employees of the Bank pay $5 per week for employee coverage and an additional $5 per week for coverage on dependents. Pension Plan. The Bank's full-time employees are included in the Financial Institutions Retirement Fund, a noncontributory multiple employer comprehensive pension plan (the "Pension Plan"). Separate actuarial valuations are not made for individual employer members of the Pension Plan. The Bank's employees are eligible to participate in the plan once they have completed one year of service for the Bank and attained age 21, if they complete 1,000 hours of service in a calendar year. An employee's pension benefits are 100% vested after five years of service. <PAGE> The Pension Plan provides for monthly or lump sum retirement benefits determined as a percentage of the employee's average salary (for his highest five consecutive years of salary) times his years of service. Salary includes base annual salary as of each January 1, exclusive of overtime, bonuses, fees and other special payments. Early retirement, disability, and death benefits are also payable under the Pension Plan, depending upon the participant's age and years of service. The Bank expensed $17,900 for the Pension Plan during the fiscal year ended June 30, 1995. The Bank's expense for the fiscal year ending June 30, 1996 is anticipated to approximate the amount of 1995's expense. The estimated base annual retirement benefits presented on a straight-line basis payable at normal retirement age (65) under the Pension Plan to persons in specified salary and years of service classifications are as follows (benefits noted in the table are not subject to any offset). <TABLE> <CAPTION> Highest 5-Year Years of Service Average ------------------------------------------------------------------------------------------------- Compensation 15 20 25 30 35 40 50 --------------- ------- ------- ------- ------- ------- ------- - ------ <S> <C> <C> <C> <C> <C> <C> <C> $ 40,000 $ 9,000 $12,000 $15,000 $18,000 $21,000 $24,000 $ 30,000 $ 60,000 $13,500 $18,000 $22,500 $27,000 $31,500 $36,000 $ 45,000 $ 80,000 $18,000 $24,000 $30,000 $36,000 $42,000 $48,000 $ 60,000 $100,000 $22,500 $30,000 $37,500 $45,000 $52,500 $60,000 $ 75,000 $120,000 $27,000 $36,000 $45,000 $54,000 $63,000 $72,000 $ 90,000 </TABLE> Benefits are currently subject to maximum Code limitations of $120,000 per year. The years of service credited to Mr. Meier under the Pension Plan as of June 30, 1995, were 14. Thrift Plan. The Bank's employees also participate in Pentegra's Thrift Plan, a contributory multiple employer tax-exempt trust and savings plan. Participants may elect to make monthly contributions up to 15% of their salary. The Bank makes a matching contribution of 50% of the employee's contribution that does not exceed 6% of salary. Contributions may be invested in an equity fund which invests in the widely traded stocks, a fixed income fund which invests in guaranteed investment contract, an equity growth mutual fund that invests in higher risk stocks and/or a fund composed of government agency debt securities. Benefits under the plan vest at the rate of 20% per year beginning after an employee's second year of service. The normal distribution is a lump sum upon termination of employment. Other payment options may be elected. During the fiscal year ended June 30, 1995, the Bank made contributions aggregating $8,600 to this plan, $1,357 of which were allocable to Mr. Meier. Bonus Program. During each of the years ended June 30, 1994 and 1995, the Bank paid discretionary cash bonuses to its officers and other employees pursuant to a bonus program adopted by the Bank's Board of Directors (the "Bonus Program"). The Bonus Program provides that cash bonuses are paid to officers and other employees of the Bank in the discretion of the Board of Directors if the Bank exceeds a targeted 1.00% return on assets for a fiscal year. Bonuses are paid according to an established formula based on employees' salary and years of service with the Bank. The aggregate amount paid to officers and employees pursuant to the Bonus Program is equal to the amount required to reduce the Bank's return on assets to the targeted 1.00% level. For the year ended June 30, 1995, the Bank paid an aggregate of $47,580 in cash bonuses under the Bonus Program. Transactions With Certain Related Persons The Bank has followed a policy of offering to its directors, officers, and employees real estate mortgage loans secured by their principal residence and other loans. These loans are made in the ordinary course of business with the same collateral, interest rates and underwriting criteria as those of comparable transactions prevailing at the time and do not involve more than the normal risk of collectibility or present other unfavorable features. Loans to directors and executive officers totaled approximately $600,000, or 7.5% of pro forma shareholders' equity on a consolidated basis at the midpoint of the Estimated Valuation Range at December 31, 1995. All such loans at December 31, 1995 were secured by the principal residences of directors and executive officers except one loan to an outside director relating to such director's business. <PAGE> Current law requires that all loans or extensions of credit to executive officers, directors, and principal shareholders be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with the general public and must not involve more than the normal risk of repayment or present other unfavorable features. In addition, loans made to a director or executive officer in excess of the greater of $25,000 or 5% of the Bank's capital and surplus (up to a maximum of $500,000) must be approved in advance by a majority of the disinterested members of the Board of Directors. The Bank's policy regarding loans to directors and all employees meets the requirements of current law. All loans to officers, directors and employees of the Bank are and have been approved by a majority of the disinterested members of the Board of Directors. For a discussion regarding compensation paid to Mr. Stewart in connection with his services to BSF, See "Business -- Service Corporation Subsidiary." Employee Stock Ownership Plan and Trust The Bank has established for eligible employees an ESOP effective January 1, 1996, subject to its conversion to stock form. Employees with at least one year of employment with the Bank and who have attained age twenty-one are eligible to participate. As part of the Conversion, the ESOP intends to borrow funds from the Holding Company and use such funds to purchase a number of shares equal to 8% of the Common Stock to be issued in the Conversion. Collateral for the loan will be the Common Stock purchased by the ESOP. The loan will be repaid principally from the Bank's discretionary contributions to the ESOP over a period of 10 years. It is anticipated that the initial interest rate for the loan will be approximately 8.25%. Shares purchased by the ESOP will be held in a suspense account for allocation among participants as the loan is repaid. The ESOP does not currently anticipate any future purchases of Common Stock. Contributions to the ESOP and shares released from the suspense account in an amount proportional to the repayment of the ESOP loan will be allocated among ESOP participants on the basis of compensation in the year of allocation. Benefits generally become 100% vested after five years of credited service. Prior to the completion of five years of credited service, a participant who terminates employment for reasons other than death, retirement, or disability will not receive any benefit under the ESOP. Forfeitures will be reallocated among remaining participating employees upon the earlier of the forfeiting participant's death or after the expiration of at least five years from the date on which such participant's employment was terminated. Benefits may be payable in the form of Common Stock or cash upon death, retirement, early retirement, disability or separation from service. The Bank's contributions to the ESOP are not fixed, so benefits payable under the ESOP cannot be estimated. SOP 93-6 requires the Bank to record compensation expense in an amount equal to the fair market value of the shares released from the suspense account. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - --Current Accounting Issues." In connection with the establishment of the ESOP, the Bank will establish a committee of employees of the Bank to administer the ESOP. Pentegra will serve as corporate trustee of the ESOP. The ESOP Committee may instruct the trustee regarding investment of funds contributed to the ESOP. The ESOP trustee, subject to its fiduciary duty, must vote all allocated shares held in the ESOP in accordance with the instructions of participating employees. Under the ESOP, nondirected shares, and shares held in the suspense account, will be voted in a manner calculated to most accurately reflect the instructions it has received from participants regarding the allocated stock so long as such vote is in accordance with the provisions of ERISA. <PAGE> Stock Option Plan At a meeting of the Holding Company's shareholders to be held at least six months after the completion of the Conversion, the Board of Directors intends to submit for shareholder approval a Stock Option Plan (the "Stock Option Plan") for directors, officers and employees of the Bank and of the Holding Company. If approved by the shareholders, Common Stock in an aggregate amount equal to 10.0% of the shares issued in the Conversion would be reserved for issuance by the Holding Company upon the exercise of the stock options granted under the Stock Option Plan. Assuming the issuance of 570,000 shares in the Conversion, an aggregate of 57,000 shares would be reserved for issuance under the Stock Option Plan. No options would be granted under the Stock Option Plan until the date on which shareholder approval is received. At that time, it is anticipated that options for the following number of shares will be granted to the following directors and executive officers of the Bank and the Holding Company: Percentage of Shares ----------------------------------------------------------------- Optionee Issued in Conversion -------- -------------------- Kurt J. Meier 1.0% Frank R. Stewart 1.0% Kurt D. Rosenberger 0.75% Outside directors of the Bank as a group (5 persons) 2.5% Other employees 2.25% ---- Total 7.5% ==== <PAGE> Options to purchase a number of shares equal to 2.5% of the total number of shares of Common Stock issued in the Conversion are expected to be reserved for future issuance under the Stock Option Plan to employees and newly appointed directors of the Holding Company and the Bank. It is anticipated that these options would be granted for terms of 10 years (in the case of incentive options) or 10 years and one day (in the case of non-qualified options), and at an option price per share equal to the fair market value of the shares on the date of grant of the stock options. Options will become exercisable at a rate of 20% at the end of each twelve (12) months of service with the Bank after the date of grant, subject to early vesting in the event of death or disability. Unless the Holding Company decides to call an earlier special meeting of shareholders, the date of grant of these options would be the date of the Holding Company's annual meeting of shareholders to be held in December, 1996. Each person who is elected as an outside director of the Holding Company (other than persons who were previously employees of the Holding Company or the Bank) after completion of the Conversion will be granted on the date he or she becomes an outside director stock options to purchase a number of shares of Common Stock equal to 0.5% of the shares issued in the Conversion at an option price equal to the fair market value of a share of such Common Stock on the date he or she becomes an outside director. The Stock Option Plan would be administered by a Committee of disinterested directors of the Holding Company's Board of Directors. Options granted under the Stock Option Plan to employees could be "incentive" stock options designed to result in a beneficial tax treatment to the employee but no tax deduction to the Holding Company. Non-qualified stock options could also be granted under the Stock Option Plan. In the event an option recipient terminated his or her employment for reasons other than retirement, disability, or death, the options would terminate during certain specified periods. RRP At a meeting of the Holding Company's shareholders to be held at least six months after the completion of the Conversion, the Board of Directors also intends to submit for shareholder approval a management recognition and retention plan and trust (the "RRP") as a means of providing the directors and employees of the Bank and of the Holding Company with an ownership interest in the Holding Company in a manner designed to encourage such persons to continue their service with the Bank and the Holding Company. The Bank will contribute funds to the RRP from time to time to enable it to acquire an aggregate amount of Common Stock equal to up to 4.0% of the shares of Common Stock issued in the Conversion, either directly from the Holding Company or on the open market. In the event that additional authorized but unissued shares would be acquired by the RRP after the Conversion, the interests of existing shareholders would be diluted. No awards under the RRP would be made until the date the RRP is approved by the Holding Company's shareholders. At that time, it is anticipated that awards of the following number of shares would be made to the following directors, officers and employees of the Holding Company and the Bank: Percentage of Shares Recipient of Issued in Conversion Awards Awards Under RRP ------------ -------------------- Kurt J. Meier............................... 0.5625% Frank R. Stewart............................ 0.5625% Kurt D. Rosenberger......................... 0.375% Outside directors of the Bank as a group (5 persons)...................... 1.0% Other employees............................. 0.5% Total................................... 3.0% <PAGE> A number of shares equal to 1% of the shares issued in the Conversion will remain available for future issuance under the RRP. Awards would be nontransferable and nonassignable, and during the lifetime of the recipient could only be earned by and made to him or her. The shares which are subject to an award would vest and be earned by the recipient at a rate of 20% of the shares awarded at the end of each full twelve (12) months of service with the Bank after the date of grant of the award. Awards are adjusted for capital changes such as stock dividends and stock splits. Notwithstanding the foregoing, awards would be 100% vested upon termination of employment or service due to death or disability. If employment or service were to terminate for other reasons, the grantee's nonvested awards will be forfeited. If employment or service is terminated for cause (as would be defined in the RRP), or if conduct would have justified termination or removal for cause, shares not already delivered under the RRP, whether or not vested, could be forfeited by resolution of the Board of Directors of the Holding Company. When shares become vested and could actually be distributed in accordance with the RRP, the participants would also receive amounts equal to accrued dividends and other earnings or distributions payable with respect thereto. When shares became vested under the RRP, the participant would recognize income equal to the fair market value of the Common Stock earned, determined as of the date of vesting, unless a prior election under ss. 83(b) of the Code to be taxed earlier is made by the recipient of the award. The amount of income recognized by the participant would be a deductible expense for tax purposes for the Holding Company. Shares not yet vested under the RRP will be voted by the Trustee of the RRP, taking into account the best interests of the recipients of the RRP awards. REGULATION Bank Holding Company Regulation The Holding Company is registered as a bank holding company, and is subject to the regulations of the FRB under the Bank Holding Company Act of 1956, as amended ("BHCA"). Bank holding companies are required to file periodic reports with, and are subject to periodic examination by, the FRB. The FRB has issued regulations under the BHCA requiring a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. It is the policy of the FRB that, pursuant to this requirement, a bank holding company should stand ready to use its resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity. Additionally, under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FedICIA"), a bank holding company is required to guarantee the compliance of any insured depository institution subsidiary that may become "undercapitalized" (as defined in the statute) with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency up to the lesser of (i) an amount equal to 5% of the institution's total assets at the time the institution became undercapitalized, or (ii) the amount that is necessary (or would have been necessary) to bring the institution into compliance with all applicable capital standards as of the time the institution fails to comply with such capital restoration plan. Under the BHCA, the FRB has the authority to require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the FRB's determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company. The Holding Company is prohibited by the BHCA from acquiring direct or indirect control of more than 5% of the outstanding shares of any class of voting stock or substantially all of the assets of any bank or merging or consolidating with another bank holding company without prior approval of the FRB. Additionally, the Holding Company is prohibited by the BHCA from engaging in or from acquiring ownership or control of more than 5% of the outstanding shares of any class of voting stock of any company engaged in a nonbanking business unless such business is determined by the FRB to be so closely related to banking as to be a proper incident thereto. Capital Adequacy Guidelines for Bank Holding Companies The FRB is the federal regulatory and examining authority for bank holding companies. The FRB has adopted capital adequacy guidelines for bank holding companies. Bank holding companies are required to comply with the FRB's risk-based capital guidelines which require a minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities such as standby letters of credit) of 8%. At least half of the total required capital must be "Tier I capital," consisting principally of common stockholders' equity, noncumulative perpetual preferred stock, a limited amount of cumulative perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, less certain goodwill items. The remainder ("Tier II capital") may consist of a limited amount of subordinated debt and intermediate-term preferred stock, certain hybrid capital instruments and other debt securities, cumulative perpetual preferred stock, and a limited amount of the general loan loss allowance. In addition to the risk-based capital guidelines, the FRB has adopted a Tier I (leverage) capital ratio under which the bank holding company must maintain a minimum level of Tier I capital to average total consolidated assets of 3% in the case of bank holding companies which have the highest regulatory examination ratings and are not contemplating significant growth or expansion. All other bank holding companies are expected to maintain a ratio of at least 1% to 2% above the stated minimum. <PAGE> Bank Regulation The Bank is organized under the laws of Indiana and as such is subject to the supervision of the DFI, whose examiners conduct periodic examinations of state banks. In 1994, the Bank converted from a federal savings bank to an Indiana savings bank. Prior to such conversion, it was subject to regulation at the federal level primarily by the OTS. The Bank is not a member of the Federal Reserve System, so its principal federal regulator is the FDIC, which also conducts periodic examinations of the Bank. The Bank's deposits continue to be insured by the SAIF administered by the FDIC and are subject to FDIC's rules and regulations respecting the insurance of deposits. See "-- Insurance of Deposits". Both federal and state law extensively regulate various aspects of the banking business such as reserve requirements, truth-in-lending and truth-in-savings disclosure, equal credit opportunity, fair credit reporting, trading in securities and other aspects of banking operations. Current federal law also requires banks, among other things, to make deposited funds available within specified time periods. Insured state-chartered banks are prohibited under FedICIA from engaging as principal in activities that are not permitted for national banks, unless: (i) the FDIC determines that the activity would pose no significant risk to the appropriate deposit insurance fund, and (ii) the bank is, and continues to be, in compliance with all applicable capital standards. As a result of its conversion to an Indiana savings bank, the Bank is required to cease the real estate development operations and divest the non-conforming real estate holdings of BSF. See "Business -- Service Corporation Subsidiary." Federal Home Loan Bank System The Bank is a member of the FHLB System, which consists of 12 regional banks. The Federal Housing Finance Board ("FHFB"), an independent agency, controls the FHLB System including the FHLB of Indianapolis. The FHLB System provides a central credit facility primarily for member savings and loan associations and savings banks and other member financial institutions. The Bank is required to hold shares of capital stock in the FHLB of Indianapolis in an amount at least equal to the greater of 1% of the aggregate principal amount of its unpaid residential mortgage loans, home purchase contracts and similar obligations at the end of each calendar year, 0.3% of its assets or 1/20 (or such greater fraction established by the FHLB) of outstanding FHLB advances, commitments, lines of credit and letters of credit. The Bank is currently in compliance with this requirement. At December 31, 1995, the Bank's investment in stock of the FHLB of Indianapolis was $260,000. In past years, the Bank has received dividends on its FHLB stock. All 12 FHLBs are required by law to provide funds for the resolution of troubled savings associations and to establish affordable housing programs through direct loans or interest subsidies on advances to members to be used for lending at subsidized interest rates for low- and moderate-income, owner-occupied housing projects, affordable rental housing, and certain other community projects. These contributions and obligations could adversely affect the FHLBs' ability to pay dividends and the value of FHLB stock in the future. For the year ended June 30, 1995, dividends paid to the Bank by the FHLB of Indianapolis totaled $15,728, for an annual rate of 7.14%. The FHLB of Indianapolis serves as a reserve or central bank for member institutions within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes advances to members in accordance with policies and procedures established by the FHFB and the Board of Directors of the FHLB of Indianapolis. All FHLB advances must be fully secured by sufficient collateral as determined by the FHLB. Eligible collateral includes first mortgage loans less than 60 days delinquent or securities evidencing interests therein, securities (including mortgage-backed securities) issued, insured or guaranteed by the federal government or any agency thereof, FHLB deposits and, to a limited extent, real estate with readily ascertainable value in which a perfected security interest may be obtained. Other forms of collateral may be accepted as over collateralization or, under certain circumstances, to renew outstanding advances. All long-term advances are required to provide funds for residential home financing and the FHLB has established standards of community service that members must meet to maintain access to long-term advances. Interest rates charged for advances vary depending upon maturity, the cost of funds to the FHLB of Indianapolis and the purpose of the borrowing. <PAGE> Insurance of Deposits Deposit Insurance. The FDIC is an independent federal agency that insures the deposits, up to prescribed statutory limits, of banks and thrifts and safeguards the safety and soundness of the banking and thrift industries. The FDIC administers two separate insurance funds, the BIF for commercial banks and state savings banks and the SAIF for savings associations and banks that have acquired deposits from savings associations. The FDIC is required to maintain designated levels of reserves in each fund. The reserves of the SAIF are currently below the level required by law, primarily because a significant portion of the assessments paid into the SAIF have been used to pay the cost of prior thrift failures, while the reserves of the BIF met the level required by law in May, 1995. Thrifts are generally prohibited from converting from one insurance fund to the other until the SAIF meets its designated reserve level, except with the prior approval of the FDIC in certain limited cases, and provided certain fees are paid. The insurance fund conversion provisions do not prohibit a SAIF member from converting to a bank charter or merging with a bank during the moratorium as long as the resulting bank continues to pay the applicable insurance assessments to the SAIF during such period and as long as certain other conditions are met. Consequently, although the Bank converted to a state savings bank in 1994, the Bank's deposits continue to be insured by the SAIF. Assessments. The FDIC is authorized to establish separate annual assessment rates for deposit insurance for members of the BIF and members of the SAIF. The FDIC may increase assessment rates for either fund if necessary to restore the fund's ratio of reserves to insured deposits to the target level within a reasonable time and may decrease such rates if such target level has been met. The FDIC has established a risk-based assessment system for both SAIF and BIF members. Under this system, assessments vary depending on the risk the institution poses to its deposit insurance fund. Such risk level is determined based on the institution's capital level and the FDIC's level of supervisory concern about the institution. Because of the differing reserve levels of the SAIF and the BIF, deposit insurance assessments paid by healthy BIF-insured institutions were recently reduced significantly below the level paid by healthy SAIF-insured institutions. Assessments paid by healthy SAIF-insured institutions exceeded those paid by healthy BIF-insured institutions by approximately $.19 per $100 in deposits in late 1995 and will exceed them by $.23 per $100 in deposits beginning in 1996. Such premium disparity could have a negative competitive impact on the Bank and other institutions with SAIF deposits. Congress is considering legislation to recapitalize the SAIF and to eliminate the significant premium disparity between the BIF and the SAIF. Currently, the recapitalization plan provides for a special assessment of approximately $.85 per $100 of SAIF deposits held at some time in 1995, in order to increase SAIF reserves to the level required by law. Certain banks holding SAIF-insured deposits would pay a lower special assessment. In addition, the cost of prior thrift failures would be shared by both the SAIF and the BIF. Such cost sharing might increase BIF assessments by $.02 to $.025 per $100 in deposits. SAIF assessments for healthy SAIF-insured institutions would be set at a significantly lower level after the legislation is adopted and could never be reduced below the level set for healthy BIF-insured institutions. The recapitalization plan also provides for the merger of the SAIF and BIF on January 1, 1998. It is also proposed that the savings association charter be eliminated in connection with that merger. The Bank had $24.9 million in deposits at December 31, 1995. If the one-time special assessment in the legislative proposal is enacted into law, the Bank will pay an additional assessment of approximately $211,650 (based upon deposits at December 31, 1995), which will reduce capital and earnings for the quarter in which any such assessment is recorded. However, it is expected that quarterly SAIF assessments would be reduced significantly sometime after adoption of the legislation. No assurances can be given that the SAIF recapitalization plan will be enacted into law or in what form it may be enacted. In addition, the Holding Company can give no assurances that the disparity between BIF and SAIF assessments will be eliminated. If the proposed legislation is not adopted, SAIF premiums may increase and the disparity between BIF and SAIF premiums may become greater, with a resulting adverse effect on the Bank's operations. <PAGE> Regulatory Capital The FDIC has adopted risk-based capital ratio guidelines to which the Bank generally is subject. The guidelines establish a systematic analytical framework that makes regulatory capital requirements more sensitive to differences in risk profiles among banking organizations. Risk-based capital ratios are determined by allocating assets and specified off-balance sheet commitments to four risk weighted categories, with higher levels of capital being required for the categories perceived as representing greater risk. Like the capital guidelines established by the FRB for the Holding Company, these guidelines divide a bank's capital into two tiers. The first tier ("Tier I") includes common equity, certain non-cumulative perpetual preferred stock (excluding auction rate issues) and minority interests in equity accounts of consolidated subsidiaries, less goodwill and certain other intangible assets (except mortgage servicing rights and purchased credit card relationships, subject to certain limitations). Supplementary ("Tier II") capital includes, among other items, cumulative perpetual and long-term limited-life preferred stock, mandatory convertible securities, certain hybrid capital instruments, term subordinated debt and the allowance for loan and lease losses, subject to certain limitations, less required deductions. Banks are required to maintain a total risk-based capital ratio of 8%, of which 4% must be Tier I capital. The FDIC may, however, set higher capital requirements when a bank's particular circumstances warrant. Banks experiencing or anticipating significant growth are expected to maintain capital ratios, including tangible capital positions, well above the minimum levels. In addition, the FDIC established guidelines prescribing a minimum Tier I leverage ratio (Tier I capital to adjusted total assets as specified in the guidelines). These guidelines provide for a minimum Tier I leverage ratio of 3% for banks that meet certain specified criteria, including that they have the highest regulatory rating and are not experiencing or anticipating significant growth. All other banks are required to maintain a Tier I leverage ratio of 3% plus an additional cushion of at least 100 to 200 basis points. In connection with the Bank's conversion to a state savings bank, the FDIC imposed heightened capital requirements on the Bank because of the impermissible real estate development activities of BSF, the Bank's subsidiary. The FDIC currently requires that the Bank maintain capital (after deduction of its investment in BSF) at levels sufficient for the Bank to be classified as a well-capitalized institution (i.e., total risk-based capital ratio of 10% or greater, Tier I risk-based capital ratio of 6% or greater, and leverage capital ratio of 5% or greater). The Bank currently exceeds its heightened Capital Requirements and will increase its capital as a result of the Conversion. <PAGE> Prompt Corrective Regulatory Action FedICIA requires, among other things, federal bank regulatory authorities to take "prompt corrective action" with respect to banks that do not meet minimum capital requirements. For these purposes, FedICIA establishes five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. At December 31, 1995, the Bank was categorized as "well capitalized." An institution is deemed to be "well capitalized" if it has a total risk-based capital ratio of 10% or greater, a Tier I risk-based capital ratio of 6% or greater, and a leverage ratio of 5% or greater, and is not subject to a regulatory order, agreement or directive to meet and maintain a specific capital level for any capital measure. An institution is deemed to be "adequately capitalized" if it has a total risk-based capital ratio of 8% or greater, a Tier I risk-based capital ratio of 4% or greater, and generally a leverage ratio 4% or greater. An institution is deemed to be "undercapitalized" if it has a total risk-based capital ratio of less than 8%, a Tier I risk-based capital ratio of less than 4%, or generally a leverage ratio of less than 4%; and (d) "significantly undercapitalized" if it has a total risk-based capital ratio of less than 6%, a Tier I risk-based capital ratio of less than 3%, or a leverage ratio of less than 3%. An institution is deemed to be "critically undercapitalized" if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2%. "Undercapitalized" banks are subject to growth limitations and are required to submit a capital restoration plan. A bank's compliance with such plan is required to be guaranteed by any company that controls the undercapitalized institution as described above. See "-- Bank Holding Company Regulation." If an "undercapitalized" bank fails to submit an acceptable plan, it is treated as if it is "significantly undercapitalized." "Significantly undercapitalized" banks are subject to one or more of a number of requirements and restrictions, including an order by the FDIC to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cease receipt of deposits from correspondent banks, and restrictions on compensation of executive officers. "Critically undercapitalized" institutions may not, beginning 60 days after becoming "critically undercapitalized," make any payment of principal or interest on certain subordinated debt or extend credit for a highly leveraged transaction or enter into any transaction outside the ordinary course of business. In addition, "critically undercapitalized" institutions are subject to appointment of a receiver or conservator. Dividend Limitations Under FRB supervisory policy, a bank holding company generally should not maintain its existing rate of cash dividends on common shares unless (i) the organization's net income available to common shareholders over the past year has been sufficient to fully fund the dividends and (ii) the prospective rate of earnings retention appears consistent with the organization's capital needs, asset quality, and overall financial condition. The FDIC also has authority under the Financial Institutions Supervisory Act to prohibit a bank from paying dividends if, in its opinion, the payment of dividends would constitute an unsafe or unsound practice in light of the financial condition of the bank. Under Indiana law, the Holding Company is precluded from paying cash dividends if, after giving effect to such dividends, the Holding Company would be unable to pay its debts as they become due or the Holding Company's total assets would be less than its liabilities and obligations to preferential shareholders. <PAGE> Pursuant to the Plan of Conversion, the Bank will establish a liquidation account for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders. See "The Conversion -- Principal Effects of Conversion." The Bank will not be permitted to pay dividends to the Holding Company if its net worth would be reduced below the amount required for the liquidation account. Under Indiana law, the Bank may pay dividends without DFI approval so long as its capital is unimpaired and those dividends in any calendar year do not exceed the net profits of the Bank for that year plus the retained net profits of the Bank for the previous two years. Dividends may not exceed undivided profits on hand (less losses, bad debts and expenses). Additional stringent regulatory requirements affecting dividend payments by the Bank, however, are established by the prompt corrective action provisions of FedICIA, which are discussed above. The Bank's capital levels currently exceed the criteria established to be designated as a "well capitalized" institution. Such institutions are required to have a total risk-based capital ratio of 10% or greater, a Tier I risk-based capital ratio of 6% or greater and a leverage ratio of 5% or greater. At December 31, 1995, the Bank's total risk-based capital, Tier I risk-based capital and leverage capital exceeded the amounts required to be designated "well capitalized" by $883,000, $1.5 million and $929,000, respectively. Repurchase Limitations Regulations promulgated by the FRB provide that a bank holding company must file written notice with the FRB prior to any repurchase of its equity securities if the gross consideration for the purchase, when aggregated with the net consideration paid by the bank holding company for all repurchases during the preceding 12 months, is equal to 10% or more of the bank holding company's consolidated net worth. This notice requirement is not applicable, however, to a bank holding company that exceeds the thresholds established for a well capitalized bank and that satisfies certain other regulatory requirements. Under Indiana law, the Holding Company will be precluded from repurchasing its equity securities if, after giving effect to such repurchase, the Holding Company would be unable to pay its debts as they become due or the Holding Company's assets would be less than its liabilities and obligations to preferential shareholders. Loans-to-One Borrower Under Indiana law, the total loans and extension of credit by an Indiana-chartered savings bank to a borrower outstanding at one time and not fully secured may not exceed 15% of such bank's capital and unimpaired surplus. An additional amount up to 10% of the bank's capital and unimpaired surplus may be loaned to the same borrower if such loan is fully secured by readily marketable collateral having a market value, as determined by reliable and continuously available price quotations, at least equal to the amount of such additional loans outstanding. As of December 31, 1995, the largest aggregate amount of loans which the Bank had to any one borrower was approximately $475,000. The Bank had no loans outstanding which management believes violate the applicable loans-to-one borrower limits. The Bank does not believe that the loans-to-one borrower limits will have a significant impact on its business, operations and earnings following the Conversion. Limitations on Rates Paid for Deposits Regulations promulgated by the FDIC pursuant to FedICIA place limitations on the ability of insured depository institutions to accept, renew or roll over deposits by offering rates of interest which are significantly higher than the prevailing rates of interest on deposits offered by other insured depository institutions having the same type of charter in such depository institution's normal market area. Under these regulations, "well-capitalized" depository institutions may accept, renew or roll such deposits over without restriction, "adequately capitalized" depository institutions may accept, renew or roll such deposits over with a waiver from the FDIC (subject to certain restrictions on payments of rates) and "undercapitalized" depository institutions may not accept, renew or roll such deposits over. The regulations contemplate that the definitions of "well capitalized," "adequately capitalized" and "undercapitalized" will be the same as the definition adopted by the agencies to implement the corrective action provisions of FedICIA. The Bank does not believe that these regulations will have a materially adverse effect on its current operations. Federal Reserve System FRB regulations require savings associations and savings banks to maintain reserves against their transaction accounts (primarily negotiable order of withdrawal accounts) and certain nonpersonal time deposits. The reserve requirements are subject to adjustment by the FRB. As of December 31, 1995, the Bank was in compliance with the applicable reserve requirements of the FRB. <PAGE> Additional Limitations on Activities Recent FDIC law and regulations generally provide that the Bank may not engage as principal in any type of activity, or in any activity in an amount, not permitted for national banks, or directly acquire or retain any equity investment of a type or in an amount not permitted for national banks. The FDIC has authority to grant exceptions from these prohibitions (other than with respect to non-service corporation equity investments) if it determines no significant risk to the insurance fund is posed by the amount of the investment or the activity to be engaged in, and if the Bank is and continues to be in compliance with fully phased-in capital standards. National banks are generally not permitted to hold equity investments other than shares of service corporations and certain federal agency securities. Moreover, the activities in which service corporations are permitted to engage are limited to those of service corporations for national banks. As a result of its conversion to an Indiana savings bank, the Bank is required to cease the real estate development operations and divest the non-conforming real estate holdings of BSF. See "Business -- Service Corporation Subsidiary." Other Indiana Regulations As an Indiana-chartered savings bank, the Bank derives its authority from, and is regulated by, the DFI. The DFI has the right to promulgate rules and regulations necessary for the supervision and regulation of Indiana-chartered savings banks under its jurisdiction and for the protection of the public investing in such institutions. The regulatory authority of the DFI includes, but is not limited to, the establishment of reserve requirements; the regulation of the payment of dividends; the regulation of stock repurchases, the regulation of incorporators, shareholders, directors, officers and employees; the establishment of permitted types of withdrawable accounts and types of contracts for savings programs, loans and investments; and the regulation of the conduct and management of savings banks, chartering and branching of institutions, mergers, conversions and conflicts of interest. The DFI generally conducts regular annual examinations of Indiana-chartered savings banks such as the Bank. The purpose of such examination is to assure that institutions are being operated in compliance with applicable Indiana law and regulations and in a safe and sound manner. In addition, the DFI is required to conduct an examination of any institution as often as it deems necessary. The DFI has the power to issue cease and desist orders if any person or institution is engaging in, or has engaged in, any unsafe or unsound practice in the conduct of its business or has or is violating any other law, rule or regulation and, as to officers and directors of an Indiana savings bank, breached his fiduciary duty as an officer or director. With the approval of the DFI, a savings bank may merge or consolidate with another savings bank, a state bank, a national bank, or a federal or state savings association. In considering whether to approve or disapprove such a merger or consolidation, the DFI is to consider the following factors: (i) whether the institutions are operated in a safe, sound and prudent manner; (ii) whether the financial conditions of any of the institutions will jeopardize the financial stability of the other institutions; (iii) whether the proposed merger or consolidation will result in an institution that has inadequate capital, unsatisfactory management or poor earnings prospects; (iv) whether the management or other principals of the resulting institution are qualified by character and financial responsibility to control and operate in a legal and proper manner the resulting institution; (v) whether the interests of the depositors and creditors of the institutions and the public generally will be jeopardized by the transaction; and (vi) whether in institutions furnish all of the information the DFI requires in reaching the DFI's decision. Acquisitions of control of the Bank by a bank or bank holding company require the prior approval of the DFI. Control is defined as the power, directly or indirectly, (i) to vote 25.0% or more of the voting stock of an Indiana-chartered savings bank or (ii) to exercise a controlling influence over the management or policies of a savings bank. Safety and Soundness Standards On February 2, 1995, the federal banking agencies adopted final safety and soundness standards for all insured depository institutions. The standards, which were issued in the form of guidelines rather than regulations, relate to internal controls, information systems, internal audit systems, loan underwriting and documentation, compensation and interest rate exposure. In general, the standards are designed to assist the federal banking agencies in identifying and addressing problems at insured depository institutions before capital becomes impaired. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan. Failure to submit a compliance plan may result in enforcement proceedings. <PAGE> Transactions with Affiliates The Bank is subject to Sections 22(h), 23A and 23B of the Federal Reserve Act, which restrict financial transactions between banks and affiliated companies. The statute limits credit transactions between a bank and its executive officers and its affiliates, prescribes terms and conditions for bank affiliate transactions deemed to be consistent with safe and sound banking practices, and restricts the types of collateral security permitted in connection with a bank's extension of credit to an affiliate. Federal Securities Law The shares of Common Stock of the Holding Company will be registered with the SEC under the 1934 Act. The Holding Company will be subject to the information, proxy solicitation, insider trading restrictions and other requirements of the 1934 Act and the rules of the SEC thereunder. After three years following the Bank's conversion to stock form, if the Holding Company has fewer than 300 shareholders, it may deregister its shares under the 1934 Act and cease to be subject to the foregoing requirements. Shares of Common Stock held by persons who are affiliates of the Holding Company may not be resold without registration unless sold in accordance with the resale restrictions of Rule 144 under the Securities Act of 1933, as amended (the "1933 Act"). If the Holding Company meets the current public information requirements under Rule 144, each affiliate of the Holding Company who complies with the other conditions of Rule 144 (including the two-year holding period and those that require the affiliate's sale to be aggregated with those of certain other persons) would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of (i) 1% of the outstanding shares of the Holding Company or (ii) the average weekly volume of trading in such shares during the preceding four calendar weeks. Community Reinvestment Act Matters Federal law requires that ratings of depository institutions under the Community Reinvestment Act of 1977 ("CRA") be disclosed. The disclosure includes both a four-unit descriptive rating -- outstanding, satisfactory, needs to improve, and substantial noncompliance -- and a written evaluation of each institution's performance. Each FHLB is required to establish standards of community investment or service that its members must maintain for continued access to long-term advances from the FHLBs. The standards take into account a member's performance under the CRA and its record of lending to first-time home buyers. The examiners have determined that the Bank has a satisfactory record of meeting community credit needs. TAXATION Federal Taxation Savings banks are permitted to compute bad debt deductions using either the bank experience method or the percentage of taxable income method. In the case of the percentage of taxable income method, the portion of taxable income (as specially adjusted for purposes of application of this method) that may be deducted as an addition to a reserve for bad debts is set at 8%. Any savings association which holds 60% of its assets in qualifying assets, defined as loans which are secured by an interest in improved real property or secured by an interest in real property that is to be improved out of the proceeds of the loan, will be eligible for the full 8% of taxable income deduction. The 8% amount must be reduced (but not below zero) by the amount determined to be a reasonable addition to the reserve for losses on nonqualifying loans. Reserves for nonqualifying loans are computed on the basis of a six-year moving average of the institution's own experience. The excess of the percentage of taxable income deduction over the deduction that would have been allowable on the basis of actual experience is treated as a preference item for the purpose of computing the corporate minimum tax. In addition, the bad debt deduction cannot exceed the amount necessary to increase the year end balance in the bad debt reserve accumulated for "qualifying real property loans" to an amount equal to 6% of such loans outstanding at the end of the taxable year. The bad debt reserve deduction is also limited to the amount by which 12% of deposits at year-end exceeds the sum of the institution's surplus, undivided profits, and reserves, as defined for federal income tax purposes, at the beginning of the year. <PAGE> A savings bank organized in stock form that utilizes the percentage method bad debt reserve deduction described above will be subject to recapture taxes on such reserve in the event it makes certain types of distributions to its shareholders. Cash dividends may be paid out of unappropriated retained earnings without the imposition of any tax on a savings bank to the extent that the amounts paid as dividends do not exceed such savings bank's current or accumulated earnings and profits as calculated for federal income tax purposes. Stock redemptions, dividends paid in excess of a savings bank's current or accumulated earnings and profits as calculated for tax purposes, and other distributions made with respect to a savings bank's stock, however, are deemed under applicable provisions of the Code to be made from the savings bank's tax bad debt reserve. To the extent additions to a savings bank's bad debt reserves for "qualifying real property loans" deducted for federal income tax purposes exceed the allowable amount of such reserves computed under the experience method and to the extent of the savings bank's supplemental reserves for losses on loans ("Excess"), such Excess may not, without adverse tax consequences, be utilized for payment of cash dividends or other distributions to a shareholder (including distributions on redemption, dissolution or liquidation) or for any other purpose (except to absorb bad debt losses). Distribution of a cash dividend by a savings bank to a shareholder is treated as made: first out of the savings bank's current and post-1951 accumulated earnings and profits; second out of the Excess; and third out of such other amounts as may be proper. To the extent a distribution to a shareholder by the savings bank is deemed paid out of its Excess under these rules, the Excess would be reduced and the savings bank's gross income for tax purposes would be increased by the amount which, when reduced by the income tax, if any, attributable to the inclusion of such amount in its gross income, equals the amount deemed paid out of the Excess. The amount of tax that would be payable upon any distribution which is being treated as having been made from a savings bank's bad debt reserve could result in a tax which is equal to approximately 40% of the amount of such distributions, unless offset by net operating losses. At December 31, 1995, the Bank had approximately $0.7 million of retained earnings, cash dividends paid from which would cause federal income tax to be paid by the Bank. The House and the Senate have each recently passed legislation prospectively repealing the percentage of taxable income method and further requiring, generally, that reserves taken after 1987 using the percentage of taxable income method must be included in future taxable income of the institution over a six-year period, although a two-year delay may be permitted for institutions meeting a residential mortgage loan origination test. This legislation requires smaller thrifts (i.e., less than $500 million in assets) to use the experience method and larger thrifts (i.e., more than $500 million in assets) to use the charge-off method to compute these deductions. The Holding Company cannot be certain of the impact of the proposed change in tax accounting for bad debt reserves until the legislation requiring such change is enacted. Depending on the composition of its items of income and expense, a savings association may be subject to the alternative minimum tax. A savings association must pay an alternative minimum tax equal to the amount (if any) by which 20% of alternative minimum taxable income ("AMTI"), as reduced by an exemption varying with AMTI, exceeds the regular tax due. AMTI equals regular taxable income increased or decreased by certain tax preferences and adjustments, including depreciation deductions in excess of that allowable for alternative minimum tax purposes, tax-exempt interest on most private activity bonds issued after August 7, 1986 (reduced by any related interest expense disallowed for regular tax purposes), the amount of the bad debt reserve deduction claimed in excess of the deduction based on the experience method and 75% of the excess of adjusted current earnings over AMTI (before this adjustment and before any alternative tax net operating loss). AMTI may be reduced only up to 90% by net operating loss carryovers, but alternative minimum tax paid can be credited against regular tax due in later years. For federal income tax purposes, the Bank has been reporting its income and expenses on the accrual method of accounting. The Bank's federal income tax returns have not been audited in recent years. The Holding Company and the Bank may elect to file a consolidated federal income tax return, which would have the effect of eliminating intercompany distributions, including dividends, in the computation of consolidated taxable income. Income of the Holding Company generally would not be taken into account in determining the bad debt deduction allowed to the Bank, regardless of whether a consolidated tax return is filed. However, certain "functionally related" losses of the Holding Company would be required to be taken into account in determining the permitted bad debt deduction, which, depending upon the particular circumstances, could reduce the bad debt deduction. State Taxation The Bank is subject to Indiana's Financial Institutions Tax ("FIT"), which is imposed at a flat rate of 8.5% on "adjusted gross income." "Adjusted gross income," for purposes of FIT, begins with taxable income as defined by Section 63 of the Code and, thus, incorporates federal tax law to the extent that it affects the computation of taxable income. Federal taxable income is then adjusted by several Indiana modifications. Other applicable state taxes include generally applicable sales and use taxes plus real and personal property taxes. <PAGE> The Bank's state income tax returns have not been audited in recent years. For further information relating to the tax consequences of the Conversion, see "The Conversion -- Principal Effects of Conversion -- Tax Effects." THE CONVERSION THE BOARDS OF DIRECTORS OF THE BANK AND THE HOLDING COMPANY AND THE DFI HAVE APPROVED THE PLAN OF CONVERSION SUBJECT TO APPROVAL BY THE MEMBERS OF THE BANK AND THE SATISFACTION OF CERTAIN OTHER CONDITIONS. DFI APPROVAL DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN BY THE DFI. General On October 24, 1995, the Board of Directors of the Bank adopted a Plan of Conversion pursuant to which the Bank will convert from an Indiana mutual savings bank to an Indiana stock savings bank, all the outstanding shares of which will be held by the Holding Company formed under Indiana law. Certain amendments to the Plan of Conversion were made on February 21, 1996. The Plan has also been approved by the Board of Directors of the Holding Company and by the DFI, subject to approval of the Plan by the Bank's members. A Special Meeting of Members has been scheduled for that purpose on June 14, 1996. Such approval by the DFI does not constitute a recommendation or endorsement of the Plan by the DFI. In connection with the Special Meeting, the Bank has mailed to each person eligible to vote at the Special Meeting a proxy statement (the "Proxy Statement"). The Proxy Statement contains information concerning the business purposes of the Conversion and the effects of the Plan and the Conversion with respect to voting rights, liquidation rights, continuation of the Bank's business and of existing savings accounts, FDIC insurance and loans. The Proxy Statement also describes the manner in which the Plan may be amended or terminated. The following is a summary of all of the pertinent aspects of the Plan, the Subscription Offering, and the Direct Community Offering. The Plan should be consulted for a more detailed description of its terms. Reasons for Conversion As a stock institution, the Bank will be structured in the form used by commercial banks, most business entities, and a growing number of savings associations. Converting to the stock form is intended to have a positive effect on the future growth and performance of the Bank by: (i) affording depositors, other customers and employees of the Bank the opportunity to become shareholders of the Holding Company and thereby participate more directly in both the Bank's and the Holding Company's future; (ii) providing the Holding Company with the flexibility, if deemed appropriate, to engage in new banking-related activities, to improve the breadth of services offered by the Bank, and potentially to expand through mergers and acquisitions by permitting the offering of equity participations to the shareholders of acquired companies; (iii) providing substantially increased net worth and equity capital for investment in its business, thus enabling management to pursue new and additional lending and investment opportunities and to expand operations; and (iv) providing future access to capital markets through the sale of stock of the Holding Company in order to generate additional capital to accommodate or promote future growth. The Bank believes that the increased capital and operating flexibility will enhance its competitiveness with other types of financial services organizations. Although the Bank's current members will, upon Conversion, lose the voting and liquidation rights they presently have as members (except to the limited extent of their rights in the liquidation account established in the Conversion), they are being offered a priority right to purchase shares in the Conversion and thereby obtain voting and liquidation rights in the Holding Company. The net proceeds to the Bank from the sale of Common Stock offered hereby, after retention by the Holding Company of $2,267,500 of the net proceeds, estimated at $3,122,500, based upon the sale of 570,000 shares at $10.00 per share, will increase the Bank's already significant net worth and thus provide an even stronger capital base to support the Bank's lending and investment activities. Although the Bank's regulatory capital at December 31, 1995, exceeded its Capital Requirements, the Bank's Board of Directors believes that it is desirable to increase regulatory capital for the foregoing purposes in view of the competitive and changing financial conditions in which the Bank operates and the new opportunities created and higher levels of regulatory capital required by recent federal legislation. In addition, the Conversion will provide the Bank with new opportunities to attract and retain talented and experienced personnel through offering stock incentive programs. <PAGE> The Board of Directors of the Bank believes that the Conversion to a holding company structure is the best way to enable the Bank to diversify its business activities should it choose to do so. Currently, there are no plans, written or oral, for the Holding Company to engage in any material activities apart from holding the shares of the Bank, and loaning funds to the ESOP to purchase shares of Common Stock in the Conversion, although the Board may determine to expand the Holding Company's activities after the Conversion. The preferred stock and additional Common Stock of the Holding Company being authorized in the Conversion will be available for future acquisitions (although the Holding Company has no current discussions, arrangements or agreements, written or oral, with respect to any acquisition) and for issuance and sale to raise additional equity capital, subject to market conditions and generally without shareholder approval. The Holding Company's ability to raise additional funds through the sale of debt securities to the public or institutional investors should also be enhanced by the increase in its equity capital base provided by the Conversion. Although the Holding Company currently has no plans with respect to future issuances of equity or debt securities, the more flexible operating structure provided by the Holding Company and the stock form of ownership is expected to assist the Bank in competing aggressively with other financial institutions in its market area. The Conversion will also permit the Bank's members who subscribe for shares of Common Stock to become shareholders of the Holding Company, thereby allowing members to indirectly own stock in the financial organization in which they maintain deposit accounts. Such ownership may encourage shareholders to promote the Bank to others, thereby further contributing to the Bank's growth. Principal Effects of Conversion General. Each savings depositor in a mutual savings bank such as the Bank has both a savings account and a pro rata ownership in the net worth of that institution, based upon the balance in his or her savings account, which has no tangible market value separate from the savings account. Any other depositor who opens a savings account obtains a pro rata interest in the net worth of the bank without any additional payment beyond the amount of the deposit. A depositor who reduces or closes his or her account receives a portion or all of the balance in the account but nothing for his or her ownership interest, which is lost to the extent that the balance in the account is reduced. As a result, depositors normally can only realize the value of their ownership in the unlikely event that the mutual bank is liquidated. In such event, the depositors of record at that time, as owners, would share pro rata in any residual retained earnings (any remaining net worth) after other claims are paid. Upon conversion to stock form, the ownership of the bank's net worth will be represented by the outstanding shares of stock to be owned by its holding company. Certificates are issued to evidence ownership of the capital stock. The stock certificates are transferable and, therefore, the shares may be transferred with no effect on any account the seller may hold in the bank. Continuity. While the Conversion is being accomplished, the normal business of the Bank in accepting deposits and making loans will be continued without interruption. After the Conversion, the Bank will continue to provide services for account holders and borrowers under current policies carried on by its present management and staff. The directors serving the Bank at the time of Conversion will continue to serve in such capacity after the Conversion until the expiration of their current terms, and thereafter, if reelected. See "Management -- Directors of the Bank." All executive officers of the Bank at the time of Conversion will retain their positions after the Conversion. Effect on Deposit Accounts. Under the Plan, each holder of a deposit account in the Bank at the time of the Conversion will automatically continue as a deposit account holder in the Bank after the Conversion to stock form, and each such deposit account will remain the same with respect to deposit balance, interest rate and other terms. Each such account will be insured by the FDIC in exactly the same way as before. Depositors will continue to hold their existing certificates, passbooks and other evidence of their accounts. Effect on Loans of Borrowers. No loan from the Bank will be affected by the Conversion. The amount, interest rate, maturity and security for each loan will be unchanged. Effect on Voting Rights of Members. Currently, all savings, demand, and other account holders of the Bank and all borrowers of the Bank are members of, and have voting rights in, the Bank as to all matters requiring membership action. Each savings, demand and other account holder has one vote for each $100, or fraction thereof, of the withdrawal value (deposit balance) of accounts held by such member. Each borrower has one vote. However, no member may cast more than 1,000 votes. <PAGE> Following the Conversion, the Bank's members will cease to be members and will no longer have voting rights in the Bank, and therefore will not be able to elect directors of the Bank or control its affairs. All voting rights in the Bank will be vested in the Holding Company as the sole shareholder of the Bank. Voting rights in the Holding Company will be vested exclusively in its shareholders, with one vote for each share of Common Stock. Neither the Common Stock to be sold in the Conversion nor the capital stock of the Bank will be insured by the FDIC or any other government entity. Effect on Liquidation Rights. If the Bank were to liquidate as a mutual savings bank, all claims of creditors (including those of deposit account holders, to the extent of their deposit balances) would be paid first and, if there were any assets remaining, account holders would then receive such remaining assets, pro rata, based upon the deposit balances in their deposit accounts just prior to liquidation. If the Bank were to liquidate after the Conversion, all claims of creditors (including those of deposit account holders, to the extent of their deposit balances) would also be paid first, followed by distribution of the "liquidation account" to certain deposit account holders (as described below), with any assets remaining thereafter distributed to the Holding Company as the sole shareholder of the Bank. The Plan of Conversion provides for the establishment of a "liquidation account" which is a memorandum account (i.e., an account not appearing on the Bank's balance sheet) for the benefit of its deposit account holders with balances of no less than $50.00 on March 31, 1994 ("Eligible Account Holders"), and its deposit account holders with balances of no less than $50.00 on March 31, 1996 ("Supplemental Eligible Account Holders"), who continue to maintain their accounts in the Bank after Conversion. The liquidation account will be established as a memorandum account (i.e., an account not appearing on the Bank's balance sheet) and will be credited with the net worth of the Bank as reflected in the latest statement of financial condition in the final prospectus used in the Conversion. Each Eligible Account Holder and Supplemental Eligible Account Holder will, with respect to each deposit account held, have a related inchoate interest in a portion of the balance of the liquidation account. This inchoate interest is referred to in the Plan as a "subaccount balance." In the event of a complete liquidation of the Bank after the Conversion (and only in such event), Eligible Account Holders and Supplemental Eligible Account Holders of the Bank would be entitled to a distribution from the liquidation account in an amount equal to the then current adjusted subaccount balance then held, before any liquidation distribution would be made to the Holding Company as sole shareholder of the Bank. Management believes that a liquidation of the Bank is unlikely. Each Eligible Account Holder will have a subaccount balance in the liquidation account for each deposit account held as of March 31, 1994 (the "Eligibility Record Date"). Each Supplemental Eligible Account Holder will have a subaccount balance in the liquidation account for each deposit account held as of March 31, 1996 (the "Supplemental Eligibility Record Date"). Each initial subaccount balance will be the amount determined by multiplying the total opening balance in the liquidation account by a fraction, the numerator of which is the amount of the qualifying deposit (a deposit of at least $50 as of March 31, 1994, or March 31, 1996, respectively) of such deposit account, and the denominator of which is the total of all qualifying deposits on that date. If the amount in the deposit account on any subsequent annual closing date of the Bank is less than the balance in such deposit account on any other annual closing date, or the balance in such account on the Eligibility Record Date or the Supplemental Eligibility Record Date, as the case may be, this interest in the liquidation account will be reduced by an amount proportionate to any such reduction, and will not thereafter be increased despite any subsequent increase in the related deposit account. An Eligible Account Holder's, as well as a Supplemental Eligible Account Holder's, interest in the liquidation account will cease to exist if the deposit account is closed. The liquidation account will never increase and will be correspondingly reduced as the interests in the liquidation account are reduced or cease to exist. In the event of liquidation, any assets remaining after the above liquidation rights of Eligible Account Holders and Supplemental Eligible Account Holders are satisfied will be distributed to the Holding Company as the sole shareholder of the Bank. A merger, consolidation, sale of bulk assets, or similar combination or transaction in which the Bank is not the surviving entity would not be considered to be a "liquidation" under which distribution of the liquidation account could be made, provided the surviving institution is an FDIC-insured institution. In such a transaction, the liquidation account would be assumed by the surviving institution. The creation and maintenance of the liquidation account will not restrict the use of or application of any of the net worth accounts of the Bank, except that the Bank may not declare or pay a cash dividend on or repurchase its capital stock if the effect of such dividend or repurchase would be to cause its net worth to be reduced below the aggregate amount then required for the liquidation account. <PAGE> Tax Effects. The Bank intends to proceed with the Conversion on the basis of an opinion from its special counsel, Barnes & Thornburg, Indianapolis, Indiana, as to certain tax matters. The opinion is based, among other things, on certain representations made by the Bank, including the representation that the exercise price of the subscription rights to purchase Holding Company Common Stock will be approximately equal to the fair market value of the stock at the time of the completion of the Conversion. With respect to the subscription rights, the Bank has received an opinion of Keller which, based on certain assumptions, concludes that the subscription rights to be received by Eligible Account Holders, Supplemental Eligible Account Holders and Other Members do not have any economic value at the time of distribution or the time the subscription rights are exercised, whether or not a Direct Community Offering takes place, and Barnes & Thornburg's opinion is given in reliance thereon. The material aspects of Barnes & Thornburg's opinion are as follows: 1. The change in form of the Bank from a mutual savings bank to a stock savings bank will qualify as a reorganization under Section 368(a)(1)(F) of the Code and no gain or loss will be recognized to the Bank in either its mutual form or its stock form by reason of the Conversion. 2. No gain or loss will be recognized by the converted bank upon receipt of money from the Holding Company for the converted bank's capital stock, and no gain or loss will be recognized to the Holding Company upon the receipt of money for Common Stock of the Holding Company. 3. The basis of the assets of the converted bank will be the same as the basis in the Bank's hands prior to the Conversion. 4. The holding period of the assets of the converted bank will include the period during which the assets were held by the Bank in its mutual form prior to Conversion. 5. No gain or loss will be realized by the deposit account holders of the Bank, upon the constructive issuance to them of withdrawable deposit accounts of the converted bank immediately after the Conversion, interests in the liquidation account, and/or on the distribution to them of nontransferable subscription rights to purchase Holding Company Common Stock. 6. The basis of an account holder's deposit accounts in the converted bank after the Conversion will be the same as the basis of his or her deposit account in the Bank prior to the Conversion. 7. The basis of each account holder's interest in the liquidation account will be zero. The basis of the non-transferable subscription rights will be zero. 8. The basis of the Holding Company Common Stock to its shareholders will be the actual purchase price ($10.00) thereof, and a shareholder's holding period for Holding Company Common Stock acquired through the exercise of subscription rights will begin on the date on which the subscription rights are exercised. 9. No taxable income will be realized by Eligible Account Holders, Supplemental Eligible Account Holders or Other Members as a result of the exercise of the nontransferable subscription rights. 10. The converted bank in its stock form will succeed to and take into account the earnings and profits or deficit in earnings and profits of the Bank, in its mutual form, as of the date of Conversion. <PAGE> The opinion also concludes in effect that: 1. No taxable income will be realized by the Bank on the issuance of subscription rights to eligible subscribers to purchase shares of Holding Company Common Stock at fair market value. 2. The converted bank will succeed to and take into account the dollar amounts of those accounts of the Bank in its mutual form which represent bad debt reserves in respect of which the Bank in its mutual form has taken a bad debt deduction for taxable years on or before the date of the transfer. 3. The creation of the liquidation account will have no effect on the Bank's taxable income, deductions, or additions to bad debt reserves or distributions to shareholders under Section 593 of the Code. Barnes & Thornburg has also issued an opinion stating in essence that the Conversion will not be a taxable transaction to the Holding Company or the Bank under any Indiana tax statute imposing a tax on income, and that the Bank's depositors will be treated under such laws in a manner similar to the manner in which they will be treated under federal income tax law. The opinions of Barnes & Thornburg and Keller, unlike a letter ruling issued by the Internal Revenue Service, are not binding on the Service and the conclusions expressed herein may be challenged at a future date. The Service has issued favorable rulings for transactions substantially similar to the proposed Conversion, but any such ruling may not be cited as precedent by any taxpayer other than the taxpayer to whom the ruling is addressed. The Bank does not plan to apply for a letter ruling concerning the transactions described herein. <PAGE> Offering of Holding Company Common Stock Under the Plan of Conversion, up to 655,500 shares of Common Stock are being offered for sale, initially through the Subscription Offering (subject to a possible increase to 753,825 shares). See "-- Subscription Offering." The Plan of Conversion requires, with certain exceptions, that a number of shares equal to at least 484,500 be sold in order for the Conversion to be effective. Shares will also be offered to the public in a Direct Community Offering which will commence concurrently with the Subscription Offering. The Direct Community Offering may expire as early as June 17, or at any time thereafter (until August 1, unless extended by the Bank and the Holding Company) when orders for at least 484,500 shares have been received in the Subscription Offering and Direct Community Offering. The offering may be extended until 24 months following the members' approval of the Plan of Conversion, or until June 14, 1998. The actual number of shares to be sold in the Conversion will depend upon market and financial conditions at the time of the Conversion, provided that no fewer than 484,500 shares or more than 753,825 shares will be sold in the Conversion. The per share price to be paid by purchasers in the Direct Community Offering for any remaining shares will be $10.00, the same price paid by subscribers in the Subscription Offering. See "-- Stock Pricing." The Subscription Offering expires at 5:00 p.m., Spencer time, on June 17, 1996. The Plan of Conversion requires that the Bank complete the sale of Common Stock within 45 days after the close of the Subscription Offering. This 45-day period expires on August 1, 1996. In the event the Bank is unable to complete the sale of Common Stock within the 45-day period, an extension of this time period may be provided by the Bank and the Holding Company. If an extension is granted, the Bank will promptly notify subscribers of the granting of the extension of time and will promptly return subscriptions unless subscribers affirmatively elect to continue their subscriptions during the period of extension. Such extensions may not be made beyond June 14, 1998. The Plan of Conversion provides that if, for any reason, shares remain unsold after the Subscription Offering and the Direct Community Offering, if any, the Board of Directors of the Bank will seek to make other arrangements for the sale of the remaining shares. Such other arrangements will be subject to the approval of the DFI. If such other purchase arrangements cannot be made, the Plan of Conversion will terminate. In the event that the Conversion is not effected, the Bank will remain a mutual savings bank, all subscription funds will be promptly returned to subscribers with interest earned thereon at the passbook rate, which is currently 3.00% per annum (except for payments to have been made through withdrawal authorizations which will have continued to earn interest at the contractual account rates), and all withdrawal authorizations will be canceled. Subscription Offering Nontransferable rights to subscribe for the purchase of the Holding Company's Common Stock have been granted under the Plan of Conversion to the following persons in the following order of priority: (1) savings, demand, and other account holders of the Bank with balances no less than $50.00 as of March 31, 1994 ("Eligible Account Holders"); (2) the Bank's ESOP; (3) savings, demand, and other account holders of the Bank with balances no less than $50.00 as of March 31, 1996 ("Supplemental Eligible Account Holders"); and (4) depositor and borrower members of the Bank other than Eligible Account Holders and Supplemental Eligible Account Holders, at the close of business on May 10, 1996, the voting record date for the Special Meeting ("Other Members"). All subscriptions received will be subject to the availability of Common Stock after satisfaction of all subscriptions of all persons having prior rights in the Subscription Offering, and to the maximum and minimum purchase limitations set forth in the Plan of Conversion (and described below). The March 31, 1994, date for determination of Eligible Account Holders and the March 31, 1996 date for determination of Supplemental Eligible Account Holders were selected in accordance with FDIC regulations applicable to the Conversion. Category I: Eligible Account Holders. Each Eligible Account Holder will receive, without payment therefor, nontransferable subscription rights to purchase up to 10,000 shares of the Common Stock offered in the Conversion. If sufficient shares are not available in this Category I, shares will be allocated in a manner that will allow each Eligible Account Holder, to the extent possible, to purchase a number of shares sufficient to make his or her allocation consist of the lesser of 100 shares or the amount subscribed for. Thereafter, unallocated shares will be allocated to subscribing Eligible Account Holders in the proportion that the amounts of their respective qualifying deposits bear to the total amount of qualifying deposits of all subscribing Eligible Account Holders. <PAGE> The "qualifying deposits" of an Eligible Account Holder is the amount of the deposit balances (provided such aggregate balance is not less than $50.00) in his or her deposit accounts as of the close of business on March 31, 1994. Subscription rights received by directors and officers in this category based upon their increased deposits in the Bank during the year preceding March 31, 1994, are subordinated to the subscription rights of other Eligible Account Holders. Notwithstanding the foregoing, shares of Common Stock in excess of $6,555,000, the maximum of the Estimated Valuation Range, may be sold to the ESOP before fully satisfying the subscriptions of Eligible Account Holders. Category II: The ESOP. The ESOP will receive, without payment therefor, nontransferable subscription rights to purchase up to 10% of the total number of shares of Common Stock offered in the Conversion on behalf of participants, provided that shares remain available after satisfying the subscription rights of Eligible Account Holders up to the maximum of the Estimated Valuation Range as described above. The ESOP currently intends to purchase 8% of the shares sold in the Conversion. If the ESOP is unable to purchase all or part of the shares of Common Stock for which it subscribes, the ESOP may purchase such shares on the open market or may purchase authorized but unissued shares of the Holding Company. If the ESOP purchases authorized but unissued shares from the Bank, such purchases could have a dilutive effect on the interests of the Holding Company's shareholders. Category III: Supplemental Eligible Account Holders. Each Supplemental Eligible Account Holder will receive, without payment therefor, nontransferable subscription rights to purchase up to 10,000 shares of the Common Stock offered in the Conversion. Such subscription rights will be applicable only to such shares as remain available after the subscriptions of the Eligible Account Holders and the ESOP have been satisfied. Any subscription rights received by a person as a result of his or her status as an Eligible Account Holder will reduce to the extent thereof the subscription rights granted to such person as a result of his or her status as a Supplemental Eligible Account Holder. If sufficient shares are not available in this Category III, shares will be allocated in a manner that will allow each Supplemental Eligible Account Holder, to the extent possible, to purchase a number of shares sufficient to make his or her allocation consist of the lesser of 100 shares or the amount subscribed for. Thereafter, unallocated shares will be allocated to subscribing Supplemental Eligible Account Holders in the proportion that the amounts of their respective qualifying deposits bear to the total amount of qualifying deposits of all subscribing Supplemental Eligible Account Holders. The "qualifying deposits" of a Supplemental Eligible Account Holder is the amount of the deposit balances (provided such aggregate balance is not less than $50) in his or her deposit accounts as of the close of business on March 31, 1996. Category IV: Other Members. The Other Members of the Bank will receive, without payment therefor, nontransferable subscription rights to purchase up to 10,000 shares of the Common Stock offered in the Conversion. Such subscription rights will be applicable only to such shares as remain available after the subscriptions of Eligible Account Holders, the ESOP and Supplemental Eligible Account Holders have been satisfied. If sufficient shares are not available in this Category IV, shares will be allocated pro rata among subscribing Other Members in the same proportion that the number of shares subscribed for by each Other Member bears to the total number of shares subscribed for by all Other Members. Timing of Offering and Method of Payment. The Subscription Offering will expire at 5:00 p.m., Spencer time, on June 17, 1996 (the "Expiration Date"). The Expiration Date may be extended by the Bank and the Holding Company to June 14, 1998. Subscribers must, before the Expiration Date, or such date to which the Expiration Date may be extended, return Order Forms to the Bank, properly completed, together with cash, checks or money orders in an amount equal to the Purchase Price ($10.00 per share) multiplied by the number of shares for which subscription is made. Payment for stock purchases can also be accomplished through authorization on the Order Form of withdrawals from accounts (including a certificate of deposit). The Bank has the right to reject any orders transmitted by facsimile and any payments made by wire transfer. Until completion or termination of the Conversion, subscribers who elect to make payment through authorization of withdrawal from accounts with the Bank will not be permitted to reduce the deposit balance in any such accounts below the amount required to purchase the shares for which they subscribed. In such cases interest will continue to be credited on deposits authorized for withdrawal until the completion of the Conversion. Interest at the passbook rate, which is currently 3.00% per annum, for an annualized percentage yield of 3.03%, will be paid on amounts submitted in cash or by check. Authorized withdrawals from certificate accounts for the purchase of Common Stock will be permitted without the imposition of early withdrawal penalties or loss of interest. However, withdrawals from certificate accounts that reduce the balance of such accounts below the required minimum for specific interest rate qualification will cause the cancellation of the certificate accounts at the effective date of the Conversion, and the remaining balance will earn interest at the passbook savings rate. Stock subscriptions received by the Bank may not be withdrawn by the subscriber before August 1, 1996, and, if accepted by the Bank, are final until that date. <PAGE> Members in Non-Qualified States or Foreign Countries. The Bank and the Holding Company will make reasonable efforts to comply with the securities laws of all states in the United States in which persons entitled to subscribe for stock pursuant to the Plan reside. However, no person will be offered or sold or receive any stock pursuant to the Subscription Offering if such person resides in a foreign country or resides in a state in the United States with respect to which all of the following apply: (i) a small number of persons otherwise eligible to subscribe for shares of Common Stock reside in such state; (ii) the granting of subscription rights or the offer or sale of Common Stock to such persons would require the Bank or the Holding Company or their respective officers and directors, under the securities laws of such state, to register as a dealer, dealer, salesman or selling agent, or to register or otherwise qualify the Common Stock for sale in such state; and (iii) such registration, qualification or filing in the judgment of the Holding Company and the Bank would be impracticable or unduly burdensome for reasons of cost or otherwise. To assist in the Subscription and Direct Community Offerings, the Holding Company has established a Stock Information Center ((812) 829-2095). Callers to the Stock Information Center will be able to request a Subscription and Direct Community Offering Prospectus and other information relating to the offering. Direct Community Offering Commencing concurrently with the Subscription Offering, the Bank is offering shares of Holding Company Common Stock in the Direct Community Offering to the general public, with preference given to residents of Owen County, to the extent such shares remain available after satisfaction of all orders received in the Subscription Offering. The right of any person to purchase shares in the Direct Community Offering is subject to the right of the Bank to accept or reject such purchase in whole or in part. The Bank has the right to terminate the Direct Community Offering as soon as it has received orders for at least the minimum number of shares available for purchase in the Conversion. The Direct Community Offering may expire as early as June 17, 1996, or at any time thereafter (until August 1, 1996, unless extended by the Bank and the Holding Company) when orders for at least 484,500 shares have been received in the Subscription Offering and Direct Community Offering. Accordingly, persons wishing to purchase stock in the Direct Community Offering directly from the Holding Company should return the Order Form on or before June 17, 1996, to the Bank, properly completed, together with cash, check or money order in the amount equal to the Purchase Price ($10.00 per share) multiplied by the number of shares which that person desires to purchase. Order Forms will be accepted in the Direct Community Offering until its completion, which is expected to occur on or after June 17, 1996, and before August 1, 1996. However, as mentioned above, the Bank may terminate the Direct Community Offering as soon as it has received orders for at least the minimum number of shares available for purchase in the Conversion. Therefore, persons who submit a Order Form after June 17, 1996, may be precluded from purchasing stock in the Direct Community Offering because the Direct Community Offering may have been terminated before the Order Form is submitted. If all the Holding Company Common Stock offered in the Subscription Offering is subscribed for, no Holding Company Common Stock will be available for purchase in the Direct Community Offering and all funds submitted pursuant to the Direct Community Offering will be promptly refunded, with interest, as hereafter described. Purchase orders received during the Direct Community Offering will be filled up to a maximum of 2% of the total number of shares of Common Stock issued in the Conversion, with any remaining unfilled purchase orders to be allocated on an equal number of shares basis. If the Direct Community Offering extends beyond 45 days following the expiration of the Subscription Offering, subscribers will have the right to increase, decrease or rescind subscriptions for stock previously submitted. All sales of Holding Company Common Stock in the Direct Community Offering will be at the same price per share as the sales of Holding Company Common Stock in the Subscription Offering. Cash and checks received in the Direct Community Offering will be placed in a special escrow account at the Bank, and will earn interest at the passbook rate, which is currently 3.00% per annum, for an annualized percentage yield of 3.03%, from the date of deposit until completion or termination of the Conversion. In the event that the Conversion is not consummated for any reason, all funds submitted pursuant to the Direct Community Offering will be promptly refunded with interest as described above. <PAGE> Delivery of Certificates Certificates representing shares issued in the Subscription Offering and in the Direct Community Offering pursuant to Order Forms will be mailed to the persons entitled to them at the last addresses of such persons appearing on the books of the Bank or to such other addresses as may be specified in properly completed Order Forms as soon as practicable following consummation of the Conversion. Any certificates returned as undeliverable will be held by the Holding Company until claimed by the person legally entitled to them or otherwise disposed of in accordance with applicable law. Agents To assist the Bank and the Holding Company in marketing the Holding Company Common Stock offered hereby, the Bank has retained the services of Charles Webb & Company and Friedman, Billings, Ramsey & Co., Inc. as its exclusive agents (the "Agents"). Each of the Agents is a broker-dealer registered with the SEC and a member of the National Association of Securities Dealers, Inc. (the "NASD"). The Agents will assist the Bank in the Conversion as follows: (1) in training and educating the Bank's employees regarding the mechanics and regulatory requirements of the conversion process; (2) in conducting informational meetings for subscribers and other potential purchasers; (3) in keeping records of all stock subscriptions; and (4) in obtaining proxies from the Bank's members with respect to the Special Meeting. For providing these services, the Bank has agreed to pay the Agents a fixed fee of $50,000. Offers and sales in the Direct Community Offering will be on a best efforts basis and, as a result, the Agents are not obligated to purchase any shares of the Common Stock. The Bank has also agreed to reimburse the Agents for their out-of-pocket expenses (including legal fees and disbursements) in an amount not to exceed $30,000 without the Bank's consent. The Bank and the Holding Company have also agreed to indemnify the Agents, under certain circumstances, against liabilities and expenses (including legal fees) arising out of the Agents' engagement by the Bank, including liabilities under the 1933 Act. Selected Dealers At the sole discretion of the Bank, the Agents may enter into an agreement with certain dealers chosen by the Bank (together, the "Selected Dealers") to assist in the sale of shares in the Direct Community Offering. FBR, with whom Webb has a joint marketing arrangement, may be used as one such selected dealer. It is anticipated that FBR will provide research coverage and act as a market maker in the Common Stock following the Conversion. Selected Dealers will receive commissions at an agreed upon rate, not to exceed 4.0%, for all shares sold by such Selected Dealers. During the Direct Community Offering, Selected Dealers may only solicit indications of interest from their customers to place orders with the Bank as of a certain date (the "Order Date") for the purchase of shares of Common Stock. When and if the Bank believes that enough indications of interest and orders have been received in the Subscription Offering and Direct Community Offering to consummate the Conversion, the Agent will request, as of the Order Date, Selected Dealers to submit orders to purchase shares for which they have previously received indications of interest from the customers. Selected Dealers will send confirmations of the orders to such customers on the next business day after the Order Date. Selected Dealers will debit the accounts of their customers on the date which will be three business days from the Order Date (the "Settlement Date"). On the Settlement Date, funds received by Selected Dealers will be remitted to the Bank. It is anticipated that the Conversion will be consummated on the Settlement Date. However, if consummation is delayed after payment has been received by the Bank from Selected Dealers, funds will earn interest at the passbook rate, which is currently 3.00% per annum, for an annualized percentage yield of 3.03%, until the completion of the offering. Funds will be returned promptly in the event the Conversion is not consummated. <PAGE> Limitations on Common Stock Purchases The Plan includes a number of limitations on the number of shares of Common Stock which may be purchased during the Conversion. These are summarized below: (1) No fewer than 25 shares may be purchased by any person purchasing shares of Common Stock in the Conversion (provided that sufficient shares are available). (2) No more than 10,000 shares of Common Stock offered in the Conversion may be purchased in the Conversion by any person, including within such limitation, purchases of any Associate (as defined below) or group of persons acting in concert (except for the ESOP which may purchase up to 10% of the total number of shares of Common Stock offered in the Conversion). The Bank's and the Holding Company's Boards of Directors may, however, in their sole discretion, increase the maximum purchase limitation set forth above up to 9.99% of the shares of Common Stock sold in the Conversion, provided that orders for shares exceeding 5% of the shares of Common Stock sold in the Conversion may not exceed, in the aggregate, 10% of the shares sold in the Conversion, except that the ESOP may purchase in the aggregate up to 10% of the shares of Common Stock sold in the Conversion and not be included in the order limit. If the Boards of Directors decide to increase the purchase limitation, all persons who subscribe for the maximum number of shares of Common Stock offered in the Conversion will be, and certain other large subscribers in the sole discretion of the Bank may be, given the opportunity to increase their subscriptions accordingly, subject to the rights and preferences of any person who has priority subscription rights. The overall purchase limitation may be reduced in the sole discretion of the Board of Directors of the Bank. (3) No more than 35% of the shares of Common Stock may be purchased in the Conversion by directors and officers of the Bank and the Holding Company and their Associates (excluding shares allocable to such persons under the ESOP). The term "Associate" of a person is defined to mean (i) any corporation or organization (other than the Bank or its subsidiary or the Holding Company) of which such person is a director, officer, partner or 10% stockholder; (ii) any trust or other estate in which such person has a substantial beneficial interest or serves as trustee or in a similar fiduciary capacity; provided, however that such term shall not include any employee stock benefit plan of the Holding Company or the Bank in which such a person has a substantial beneficial interest or serves as a trustee or in a similar fiduciary capacity, and (iii) any relative or spouse of such person, or relative of such spouse, who either has the same home as such person or who is a director or officer of the Bank or its subsidiary or the Holding Company. Directors are not treated as Associates of one another solely because of their board membership. Compliance with the foregoing limitations does not necessarily constitute compliance with other regulatory restrictions on acquisitions of the Common Stock. For a further discussion of limitations on purchases of the Holding Company Common Stock during and subsequent to Conversion, see "-- Restrictions on Sale of Stock by Directors and Officers," "-- Restrictions on Purchase of Stock by Directors and Officers Following Conversion," and "Restrictions on Acquisition of the Holding Company." <PAGE> Restrictions on Repurchase of Stock by Holding Company Regulations promulgated by the FRB provide that a bank holding company must file written notice with the FRB prior to any repurchase of its equity securities if the gross consideration for the purchase, when aggregated with the net consideration paid by the bank holding company for all repurchases during the preceding 12 months, is equal to 10% or more of the bank holding company's consolidated net worth. This notice requirement is not applicable, however, to a bank holding company that exceeds the thresholds established for a well capitalized bank and that satisfies certain other regulatory requirements. Under Indiana law, the Holding Company will be precluded from repurchasing its equity securities if, after giving effect to such repurchase, the Holding Company would be unable to pay its debts as they become due or the Holding Company's assets would be less than its liabilities and obligations to preferential shareholders. Restrictions on Sale of Stock by Directors and Officers All shares of the Common Stock purchased by directors and officers of the Bank or the Holding Company in the Conversion will be subject to the restriction that such shares may not be sold or otherwise disposed of for value for a period of one year following the date of purchase, except for any disposition of such shares (i) following the death of the original purchaser or (ii) by reason of an exchange of securities in connection with a merger or acquisition approved by the applicable regulatory authorities. Sales of shares of the Common Stock by the Holding Company's directors and officers will also be subject to certain insider trading and other transfer restrictions under the federal securities laws. See "Regulation -- Federal Securities Laws" and "Description of Capital Stock." Each certificate for such restricted shares will bear a legend prominently stamped on its face giving notice of the restrictions on transfer, and instructions will be issued to the Holding Company's transfer agent to the effect that any transfer within such time period of any certificate or record ownership of such shares other than as provided above is a violation of the restriction. Any shares of Common Stock issued pursuant to a stock dividend, stock split or otherwise with respect to restricted shares will be subject to the same restrictions on sale. Restrictions on Purchase of Stock by Directors and Officers Following Conversion For a period of three years following the Conversion, without prior written approval of the DFI, neither directors nor officers of the Bank or the Holding Company nor their Associates may purchase shares of the Common Stock of the Holding Company, except from a dealer registered with the SEC. This restriction does not, however, apply to negotiated transactions involving more than one percent of the Holding Company's outstanding Common Stock, to shares purchased pursuant to stock option or other incentive stock plans approved by the Holding Company's shareholders, or to shares purchased by employee benefit plans maintained by the Holding Company which may be attributable to individual officers or directors. <PAGE> Restrictions on Transfer of Subscription Rights and Common Stock Prior to the completion of the Conversion, the Plan of Conversion prohibits any person with subscription rights, including Eligible Account Holders, Supplemental Eligible Account Holders and Other Members of the Bank, from transferring or entering into any agreement or understanding to transfer the legal or beneficial ownership of the subscription rights issued under the Plan or the shares of Common Stock to be issued upon their exercise. Such rights may be exercised only by the person to whom they are guaranteed and only for his/her account. Each person exercising such subscription rights will be required to certify that he/she is purchasing shares solely for his/her own account and that he/she has no agreement or understanding regarding the sale or transfer of such shares. The Holding Company and the Bank will pursue any and all legal and equitable remedies in the event they become aware of the transfer of subscription rights and will not honor orders known by them to involve the transfer of such rights. Stock Pricing The aggregate purchase price of the Holding Company Common Stock being sold in the Conversion will be based on the appraised aggregate pro forma market value of the Common Stock, as determined by an independent valuation. Keller & Company, Inc. ("Keller"), which is experienced in the valuation and appraisal of business entities, including savings institutions involved in the conversion process, was retained by the Bank to prepare an appraisal. Keller will receive a fee of $15,000 for its appraisal. Keller has also prepared a business plan for the Bank for a fee of $4,000. The Bank has agreed to indemnify Keller, under certain circumstances, against liabilities and expenses (including legal fees) arising out of Keller's engagement by the Bank. Keller has prepared an appraisal of the estimated pro forma market value of the Bank. Keller's appraisal concluded that as of April 5, 1996, the appropriate valuation range (the "Estimated Valuation Range") for the estimated pro forma market value of the Common Stock was from a minimum of $4,845,000 to a maximum of $6,555,000, with a midpoint of $5,700,000. A copy of the appraisal is on file and available for inspection at the offices of the Bank, 279 East Morgan Street, Spencer, Indiana 47460. The appraisal has also been filed as an exhibit to the Holding Company's Registration Statement with the SEC, and may be reviewed at the SEC's public reference facilities. See "Additional Information." The appraisal involved a comparative evaluation of the operating and financial statistics of the Bank with those of other savings institutions. The appraisal also took into account such other factors as the market for savings institutions generally, prevailing economic conditions, both nationally and in Indiana, which affect the operations of savings institutions, the competitive environment within which the Bank operates, and the effect of the Bank becoming a subsidiary of the Holding Company. No detailed individual analysis of the separate components of the Bank's and the Holding Company's assets and liabilities was performed in connection with the evaluation. The Board of Directors reviewed with management Keller's methods and assumptions and accepted Keller's appraisal as reasonable and adequate. The Holding Company, in consultation with Webb, has determined to offer the Common Stock in the Conversion at a price of $10.00 per share. The Holding Company's decision regarding the Purchase Price was based solely on its determination that $10.00 per share is a customary purchase price in conversion transactions. The Estimated Valuation Range may be increased or decreased to reflect market and financial conditions prior to the completion of the Conversion. Promptly after the completion of the Subscription Offering and the Direct Community Offering, if any, Keller will confirm to the Bank that, to the best of Keller's knowledge and judgment, nothing of a material nature has occurred which would cause Keller to conclude that the amount of the aggregate proceeds received from the sale of the Common Stock in the Conversion was incompatible with its estimate of the total pro forma market value of the Bank at the time of the sale. If, however, the facts do not justify such a statement, a new Estimated Valuation Range and price per share may be set. Under such circumstances, the Holding Company may resolicit subscriptions. In that event, subscribers would have the right to modify or rescind their subscriptions and to have their subscription funds returned promptly with interest and holds on funds authorized for withdrawal from deposit accounts would be released or reduced; provided that if the pro forma market value of the Bank upon Conversion has increased to an amount which does not exceed $7,538,250 (15% above the maximum of the Estimated Valuation Range), the Holding Company and the Bank do not intend to resolicit subscriptions. <PAGE> Depending upon market and financial conditions, the number of shares issued may be more or less than the range in number of shares shown above. A change in the number of shares to be issued in the Conversion will not affect subscription rights, which are based on the 655,500 shares being offered in the Subscription Offering. In the event of an increase in the maximum number of shares being offered, persons who exercise their maximum subscription rights will be notified of such increase and of their right to purchase additional shares. Conversely, in the event of a decrease in the maximum number of shares being offered, persons who exercise their maximum subscription rights will be notified of such decrease and of the concomitant reduction in the number of shares for which subscriptions may be made. In the event of a resoliciation, subscribers will be afforded the opportunity to increase, decrease or maintain their previously submitted order. The Holding Company will be required to resolicit if the price per share is changed such that the total aggregate purchase price is not within the minimum and 15% above the maximum of the Estimated Valuation Range. THE INDEPENDENT VALUATION IS NOT INTENDED AND MUST NOT BE CONSTRUED AS A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF VOTING TO APPROVE THE CONVERSION OR OF PURCHASING THE SHARES OF THE COMMON STOCK. MOREOVER, BECAUSE SUCH VALUATION IS NECESSARILY BASED UPON ESTIMATES AND PROJECTIONS OF A NUMBER OF MATTERS (INCLUDING CERTAIN ASSUMPTIONS AS TO THE AMOUNT OF NET PROCEEDS AND THE EARNINGS THEREON), ALL OF WHICH ARE SUBJECT TO CHANGE FROM TIME TO TIME, NO ASSURANCE CAN BE GIVEN THAT PERSONS PURCHASING SHARES IN THE CONVERSION WILL THEREAFTER BE ABLE TO SELL THE SHARES AT PRICES RELATED TO THE FOREGOING VALUATION OF THE PRO FORMA MARKET VALUE. Number of Shares to be Issued It is anticipated that the total offering of Common Stock (the number of shares of Common Stock issued in the Conversion multiplied by the Purchase Price of $10.00 per share) will be within the current minimum and 15% above the maximum of the Estimated Valuation Range. Unless otherwise required by the DFI, no resolicitation of subscribers will be made and subscribers will not be permitted to modify or cancel their subscriptions so long as the change in the number of shares to be issued in the Conversion, in combination with the Purchase Price, results in an offering within the minimum and 15% above the maximum of the Estimated Valuation Range. An increase in the total number of shares of Common Stock to be issued in the Conversion would decrease both a subscriber's ownership interest and the Holding Company's pro forma net worth on a per share basis while increasing (assuming no change in the per share price) pro forma net income and net worth on an aggregate basis. A decrease in the number of shares to be issued in the Conversion would increase both a subscriber's ownership interest and the Holding Company's pro forma net worth on a per share basis while decreasing (assuming no change in the per share price) pro forma net income and net worth on an aggregate basis. For a presentation of the effects of such changes, see "Pro Forma Data." Interpretation and Amendment of the Plan To the extent permitted by law, all interpretations of the Plan by the Bank and the Holding Company will be final. The Plan provides that, if deemed necessary or desirable by the Boards of Directors of the Holding Company and the Bank, the Plan may be substantively amended by the Boards of Directors, as a result of comments from regulatory authorities or otherwise. Moreover, if the Plan of Conversion is so amended, subscriptions which have been received prior to such amendment will not be refunded unless otherwise required by the DFI. Conditions and Termination Completion of the Conversion requires the approval of the Plan by the affirmative vote of not less than a majority of the total number of votes of the members of the Bank eligible to be cast at the Special Meeting and the sale of all shares of the Common Stock within 24 months following approval of the Plan by the members. If these conditions are not satisfied, the Plan will be terminated and the Bank will continue its business in the mutual form of organization. The Plan may be terminated by the Boards of Directors of the Bank and the Holding Company at any time prior to the Special Meeting and, with the approval of the DFI, by such Boards of Directors at any time thereafter. Furthermore, the Plan of Conversion requires that the Holding Company complete the sale of Common Stock within 45 days after the close of the Subscription Offering. The Holding Company and the Bank may extend this time period if necessary, but no assurance can be given that an extension would be undertaken. See "-- Offering of Holding Company Common Stock." <PAGE> RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY General Although the Boards of Directors of the Bank and the Holding Company are not aware of any effort that might be made to obtain control of the Holding Company after the Conversion, the Boards of Directors believe that it is appropriate to include certain provisions in the Holding Company's Articles of Incorporation (the "Articles") to protect the interests of the Holding Company and its shareholders from unsolicited changes in the control of the Holding Company in circumstances under which the Board of Directors of the Holding Company concludes will not be in the best interests of the Bank, the Holding Company or the Holding Company's shareholders. Although the Holding Company's Board of Directors believes that the restrictions on acquisition described below are beneficial to shareholders, the provisions may have the effect of rendering the Holding Company less attractive to potential acquirors thereby discouraging future takeover attempts which would not be approved by the Board of Directors but which certain shareholders might deem to be in their best interest or pursuant to which shareholders might receive a substantial premium for their shares over then current market prices. These provisions will also render the removal of the incumbent Board of Directors and of management more difficult. The Board of Directors has, however, concluded that the potential benefits of these restrictive provisions outweigh the possible disadvantages. The following general discussion contains a summary of the material provisions of the Articles, the Holding Company's Code of By-Laws (the "By-Laws"), and certain other regulatory provisions, that may be deemed to have an effect of delaying, deferring or preventing a change in the control of the Holding Company. The following description of certain of these provisions is general and not necessarily complete, and with respect to provisions contained in the Articles and By-Laws, reference should be made in each case to the document in question, each of which is part of the Holding Company's Registration Statement filed with the SEC. See "Additional Information." Provisions of the Holding Company's Articles and By-Laws Directors. Certain provisions in the Articles and By-Laws will impede changes in majority control of the Board of Directors of the Holding Company. The Articles provide that the Board of Directors of the Holding Company will be divided into three classes, with directors in each class elected for three-year staggered terms. Therefore, it would take two annual elections to replace a majority of the Holding Company's Board. The Articles also provide that the size of the Board of Directors shall range between five and fifteen directors, with the exact number of directors to be fixed from time to time exclusively by the Board of Directors pursuant to a resolution adopted by a majority of the total number of directors of the Holding Company. The Articles provide that any vacancy occurring in the Board of Directors, including a vacancy created by an increase in the number of directors, shall be filled for the remainder of the unexpired term only by a majority vote of the directors then in office. Finally, the By-Laws impose certain notice and information requirements in connection with the nomination by shareholders of candidates for election to the Board of Directors or the proposal by shareholders of business to be acted upon at an annual meeting of shareholders. The Articles provide that a director or the entire Board of Directors may be removed only for cause and only by the affirmative vote of at least 80% of the shares eligible to vote generally in the election of directors. Removal for "cause" is limited to the grounds for termination in the federal regulation relating to employment contracts of federally-insured savings associations. Restrictions on Call of Special Meetings. The Articles provide that a special meeting of shareholders may be called only by the Chairman of the Board of the Holding Company or pursuant to a resolution adopted by a majority of the total number of directors of the Holding Company. Shareholders are not authorized to call a special meeting. No Cumulative Voting. The Articles provide that there shall be no cumulative voting rights in the election of directors. Authorization of Preferred Stock. The Articles authorize 2,000,000 shares of preferred stock, without par value. The Holding Company is authorized to issue preferred stock from time to time in one or more series subject to applicable provisions of law, and the Board of Directors is authorized to fix the designations, powers, preferences and relative participating, optional and other special rights of such shares, including voting rights (if any and which could be as a separate class) and conversion rights. In the event of a proposed merger, tender offer or other attempt to gain control of the Holding Company not approved by the Board of Directors, it might be possible for the Board of <PAGE> Directors to authorize the issuance of a series of preferred stock with rights and preferences that would impede the completion of such a transaction. An effect of the possible issuance of preferred stock, therefore, may be to deter a future takeover attempt. The Board of Directors has no present plans or understandings for the issuance of any preferred stock and does not intend to issue any preferred stock except on terms which the Board of Directors deems to be in the best interests of the Holding Company and its shareholders. Limitations on 10% Shareholders. The Articles provide that: (i) no person shall directly or indirectly offer to acquire or acquire the beneficial ownership of more than 10% of any class of equity security of the Holding Company (provided that such limitation shall not apply to the acquisition of equity securities by any one or more tax-qualified employee stock benefit plans maintained by the Holding Company, if the plan or plans beneficially own no more than 25% of any class of such equity security of the Holding Company); and that (ii) shares beneficially owned in violation of the stock ownership restriction described above shall not be entitled to vote and shall not be voted by any person or counted as voting stock in connection with any matter submitted to a vote of shareholders. For these purposes, a person (including management) who has obtained the right to vote shares of the Common Stock pursuant to revocable proxies shall not be deemed to be the "beneficial owner" of those shares if that person is not otherwise deemed to be a beneficial owner of those shares. Evaluation of Offers. The Articles of the Holding Company provide that the Board of Directors of the Holding Company, when determining to take or refrain from taking corporate action on any matter, including making or declining to make any recommendation to the Holding Company's shareholders, may, in connection with the exercise of its judgment in determining what is in the best interest of the Holding Company, the Bank and the shareholders of the Holding Company, give due consideration to all relevant factors, including, without limitation, the social and economic effects of acceptance of such offer on the Holding Company's customers and the Bank's present and future account holders, borrowers, employees and suppliers; the effect on the communities in which the Holding Company and the Bank operate or are located; and the effect on the ability of the Holding Company to fulfill the objectives of a bank holding company and of the Bank or future savings association subsidiaries to fulfill the objectives of a stock savings bank under applicable statutes and regulations. The Articles of the Holding Company also authorize the Board of Directors to take certain actions to encourage a person to negotiate for a change of control of the Holding Company or to oppose such a transaction deemed undesirable by the Board of Directors including the adoption of so-called shareholder rights plans. By having these standards and provisions in the Articles of the Holding Company, the Board of Directors may be in a stronger position to oppose such a transaction if the Board concludes that the transaction would not be in the best interest of the Holding Company, even if the price offered is significantly greater than the then market price of any equity security of the Holding Company. Procedures for Certain Business Combinations. The Articles require that certain business combinations between the Holding Company (or any majority-owned subsidiary thereof) and a 10% or greater shareholder either be approved (i) by at least 80% of the total number of outstanding voting shares of the Holding Company or (ii) by a majority of certain directors unaffiliated with such 10% or greater shareholder or involve consideration per share generally equal to the higher of (A) the highest amount paid by such 10% shareholder or its affiliates in acquiring any shares of the Common Stock or (B) the "Fair Market Value" (generally, the highest closing bid paid for the Common Stock during the thirty days preceding the date of the announcement of the proposed business combination or on the date the 10% or greater shareholder became such, whichever is higher). Amendments to Articles and Bylaws. Amendments to the Articles must be approved by a majority vote of the Holding Company's Board of Directors and also by a majority of the shares of the Holding Company voting at the applicable shareholder meeting; provided, however, that approval by at least 80% of the outstanding voting shares is required for certain provisions (i.e., provisions relating to number, classification, and removal of directors; amendment of the By-Laws; call of special shareholder meetings; criteria for evaluating certain offers; certain business combinations; and amendments to provisions relating to the foregoing). The provisions concerning limitations on the acquisition of shares may be amended only by an 80% vote of the Holding Company's outstanding shares unless at least two-thirds of the Holding Company's Continuing Directors (directors of the Holding Company on February 21, 1996, or directors recommended for appointment or election by a majority of such directors) approve such amendments in advance of their submission to a vote of shareholders (in which case only a majority vote of shareholders is required). The By-Laws may be amended only by a majority vote of the total number of directors of the Holding Company. <PAGE> Purpose and Effects of the Anti-Takeover Provisions of the Holding Company Articles and By-Laws. The Holding Company's Board of Directors believes that the provisions described above are prudent and will reduce the Holding Company's vulnerability to takeover attempts and certain other transactions which have not been negotiated with and approved by its Board of Directors. These provisions will also assist in the orderly deployment of the Conversion proceeds into productive assets during the initial period after the Conversion. The Board of Directors believes these provisions are in the best interest of the Bank and the Holding Company and its shareholders. In the judgment of the Board of Directors, the Holding Company's Board of Directors will be in the best position to determine the true value of the Holding Company and to negotiate more effectively for what may be in the best interests of the Holding Company and its shareholders. The Board of Directors believes that these provisions will encourage potential acquirors to negotiate directly with the Board of Directors of the Holding Company and discourage hostile takeover attempts. It is also the view of the Board of Directors that these provisions should not discourage persons from proposing a merger or other transaction at prices reflecting the true value of the Holding Company and which is in the best interests of all shareholders. Attempts to take over financial institutions and their holding companies have recently increased. Takeover attempts that have not been negotiated with and approved by the Board of Directors present to shareholders the risk of a takeover on terms that may be less favorable than might otherwise be available. A transaction that is negotiated and approved by the Board of Directors, on the other hand, can be carefully planned and undertaken at an opportune time to obtain maximum value for the Holding Company and its shareholders, with due consideration given to matters such as the management and business of the acquiring corporation and maximum strategic development of the Holding Company's assets. An unsolicited takeover proposal can seriously disrupt the business and management of a corporation and cause it to undertake defensive measures at a great expense. Although a tender offer or other takeover attempt may be made at a price substantially above then current market prices, such offers are sometimes made for less than all of the outstanding shares of a target company. As a result, shareholders may be presented with the alternative of partially liquidating their investment at a time that may be disadvantageous, or retaining their investment in an enterprise which is under different management and whose objective may not be similar to that of the remaining shareholders. The concentration of control, which could result from a tender offer or other takeover attempt, could also deprive the Holding Company's remaining shareholders of the benefits of certain protective provisions of the 1934 Act, if the number of beneficial owners becomes less than the 300 required for continued registration under the 1934 Act. Despite the belief of the Holding Company's Board of Directors in the benefits to shareholders of the foregoing provisions, the provisions may also have the effect of discouraging future takeover attempts which would not be approved by the Board of Directors, but which certain shareholders might deem to be in their best interest or pursuant to which shareholders might receive a substantial premium for their shares over then current market prices. As a result, shareholders who might desire to participate in such a transaction may not have an opportunity to do so. These provisions will also render the removal of the incumbent Board of Directors and of management more difficult. The Board of Directors has, however, concluded that the potential benefits of these restrictive provisions outweigh the possible disadvantages. <PAGE> Other Restrictions on Acquisition of the Holding Company and the Bank State Law. Under Indiana law, no person can acquire effective control (including, without limitation, acquisition of 25% or more of its voting stock) of the Holding Company or the Bank without prior approval of the DFI. Several provisions of the Indiana Business Corporation Law, as amended (the "IBCL"), could also affect the acquisition of shares of the Common Stock or otherwise affect the control of the Holding Company. Chapter 43 of the IBCL prohibits certain business combinations, including mergers, sales of assets, recapitalizations, and reverse stock splits, between corporations such as the Holding Company (assuming that it has over 100 shareholders) and an interested shareholder, defined as the beneficial owner of 10% or more of the voting power of the outstanding voting shares, for five years following the date on which the shareholder obtained 10% ownership unless the acquisition was approved in advance of that date by the board of directors. If prior approval is not obtained, several price and procedural requirements must be met before the business combination can be completed. These requirements are similar to those contained in the Holding Company Articles and described in " -- Provisions of the Holding Company's Articles and By-Laws -- Procedures for Certain Business Combinations". In general, the price requirements contained in the IBCL may be more stringent than those imposed in the Holding Company Articles. However, the procedural restraints imposed by the Holding Company Articles are somewhat broader than those imposed by the IBCL. Also, the provisions of the IBCL may change at some future date, but the relevant provisions of the Holding Company Articles may only be amended by an 80% vote of the shareholders of the Holding Company. In addition, the IBCL contains provisions designed to assure that minority shareholders have some say in their future relationship with Indiana corporations in the event that a person made a tender offer for, or otherwise acquired, shares giving that person more than 20%, 33 1/3%, and 50% of the outstanding voting securities of corporations having 100 or more shareholders (the "Control Share Acquisitions Statute"). Under the Control Share Acquisitions Statute, if an acquiror purchases those shares at a time that the corporation is subject to the Control Share Acquisitions Statute, then until each class or series of shares entitled to vote separately on the proposal, by a majority of all votes entitled to be cast by that group (excluding shares held by officers of the corporation, by employees of the corporation who are directors thereof and by the acquiror), approves in a special or annual meeting the rights of the acquiror to vote the shares which take the acquiror over each level of ownership as stated in the statute, the acquiror cannot vote these shares. An Indiana corporation otherwise subject to the Control Share Acquisitions Statute may elect not to be covered by the statute by so providing in its Articles of Incorporation or By-Laws. The Holding Company, however, will be subject to this statute following the Conversion because of its desire to discourage non-negotiated hostile takeovers by third parties. The IBCL specifically authorizes Indiana corporations to issue options, warrants or rights for the purchase of shares or other securities of the corporation or any successor in interest of the corporation. These options, warrants or rights may, but need not be, issued to shareholders on a pro rata basis. The IBCL specifically authorizes directors, in considering the best interest of a corporation, to consider the effects of any action on shareholders, employees, suppliers, and customers of the corporation, and communities in which offices or other facilities of the corporation are located, and any other factors the directors consider pertinent. As described above, the Holding Company Articles contain a provision having a similar effect. Under the IBCL, directors are not required to approve a proposed business combination or other corporate action if the directors determine in good faith that such approval is not in the best interest of the corporation. In addition, the IBCL states that directors are not required to redeem any rights under or render inapplicable a shareholder rights plan or to take or decline to take any other action solely because of the effect such action might have on a proposed change of control of the corporation or the amounts to be paid to shareholders upon such a change of control. The IBCL explicitly provides that the different or higher degree of scrutiny imposed in Delaware and certain other jurisdictions upon director actions taken in response to potential changes in control will not apply. The Delaware Supreme Court has held that defensive measures in response to a potential takeover must be "reasonable in relation to the threat posed". In taking or declining to take any action or in making any recommendation to a corporation's shareholders with respect to any matter, directors are authorized under the IBCL to consider both the short-term and long-term interests of the corporation as well as interests of other constituencies and other relevant factors. Any determination made with respect to the foregoing by a majority of the disinterested directors shall conclusively be presumed to be valid unless it can be demonstrated that such determination was not made in good faith. Because of the foregoing provisions of the IBCL, the Board will have flexibility in responding to unsolicited proposals to acquire the Holding Company, and accordingly it may be more difficult for an acquiror to gain control of the Holding Company in a transaction not approved by the Board. <PAGE> Federal Limitations. The Change in Bank Control Act provides that no "person," acting directly or indirectly, or through or in concert with one or more persons, other than a company, may acquire control of a bank or of a bank holding company unless at least 60 days prior written notice is given to the FRB and the FRB has not objected to the proposed acquisition. The Bank Holding Company Act also prohibits any "company," directly or indirectly or acting in concert with one or more other persons, or through one or more subsidiaries or transactions, from acquiring control of an insured institution without the prior approval of the FRB. In addition, any company that acquires such control becomes a "bank holding company" subject to registration, examination and regulation as a bank holding company by the FRB. The term "control" for purposes of the Change in Bank Control Act and the Bank Holding Company Act includes the power, directly or indirectly, to vote more than 25% of any class of voting stock of the savings association or to control, in any manner, the election of a majority of the directors of the savings association. It also includes a determination by the FRB that such company or person has the power, directly or indirectly, to exercise a controlling influence over or to direct the management or policies of the savings association. FRB regulations also set forth certain "rebuttable control determinations" which arise upon (a) the acquisition of any voting securities of a state member bank or bank holding company if, after the transaction, the acquiring person (or persons acting in concert) owns, controls, or holds with power to vote 25 percent or more of any class of voting securities of the institution; or (b) the acquisition of any voting securities of a state member bank or bank holding company if, after the transaction, the acquiring person (or persons acting in concert) owns, controls, or holds with power to vote 10 percent or more (but less than 25 percent) of any class of voting securities of the institution, and if (i) the institution has registered securities under Section 12 of the 1934 Act or (ii) no other person will own a greater percentage of that class of voting securities immediately after the transaction. The regulations also specify the criteria which the FRB uses to evaluate control applications. The FRB is empowered to disapprove an acquisition of control if it finds, among other things, that (i) the acquisition would substantially lessen competition, (ii) the financial condition of the acquiring person might jeopardize the institution or its depositors, or (iii) the competency, experience, or integrity of the acquiring person indicates that it would not be in the interest of the depositors, the institution, or the public to permit the acquisition of control by such person. DESCRIPTION OF CAPITAL STOCK The Holding Company is authorized to issue 5,000,000 shares of Holding Company Common Stock, without par value, all of which have identical rights and preferences, and 2,000,000 shares of preferred stock, without par value. The Holding Company expects to issue up to 753,825 shares of Common Stock and no shares of preferred stock in the Conversion. The Holding Company has received an opinion of its counsel that the shares of Common Stock issued in the Conversion will be validly issued, fully paid, and not liable for further call or assessment. This opinion was filed with the SEC as an exhibit to the Holding Company's Registration Statement under the 1933 Act. The following sets forth the material aspects of the Common Stock. Shareholders of the Holding Company will have no preemptive rights to acquire additional shares of Holding Company Common Stock which may be subsequently issued. The Common Stock will represent nonwithdrawable capital, will not be of an insurable type and will not be federally insured by the FDIC or any government entity. Under Indiana law, the holders of the Common Stock will possess exclusive voting power in the Holding Company, unless preferred stock is issued and voting rights are granted to the holders thereof. Each shareholder will be entitled to one vote for each share held on all matters voted upon by shareholders, subject to the limitations discussed under the caption "Restrictions on Acquisition of the Holding Company." In the unlikely event of the liquidation or dissolution of the Bank and the Holding Company, the holders of the Common Stock will be entitled to receive -- after payment or provision for payment of all debts and liabilities of the Holding Company (including all deposits in the Bank and accrued liabilities thereon) and after payment of the liquidation account established in the Conversion for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders who continue their deposit accounts at the Bank -- all assets of the Holding Company available for distribution, in cash or in kind. See "The Conversion -- Principal Effects of Conversion -- Effect on Liquidation Rights." If preferred stock is issued subsequent to the Conversion, the holders thereof may have a priority over the holders of Common Stock in the event of liquidation or dissolution. The Board of Directors of the Holding Company will be authorized to issue preferred stock in series and to fix and state the voting powers, designations, preferences and relative, participating, optional or other special rights of the shares of each such series and the qualifications, limitations and restrictions thereof. Preferred stock may rank prior to the Common Stock as to dividend rights, liquidation preferences, or both, and may have full or limited voting rights. The holders of preferred stock will be entitled to vote as a separate class or series under certain circumstances, regardless of any other voting rights which such holders may have. <PAGE> Except as discussed elsewhere herein, the Holding Company has no specific plans for the issuance of the additional authorized shares of Common Stock or for the issuance of any shares of preferred stock. In the future, the authorized but unissued and unreserved shares of Common Stock will be available for general corporate purposes including, but not limited to, possible issuance as stock dividends or stock splits, in future mergers or acquisitions, under a cash dividend reinvestment and stock purchase plan, or in future underwritten or other public or private offerings. The authorized but unissued shares of preferred stock will similarly be available for issuance in future mergers or acquisitions, in future underwritten public offerings or private placements or for other general corporate purposes. Except as described above or as otherwise required to approve the transaction in which the additional authorized shares of Common Stock or authorized shares of preferred stock would be issued, no shareholder approval will be required for the issuance of these shares. Accordingly, the Holding Company's Board of Directors without shareholder approval can issue preferred stock with voting and conversion rights which could adversely affect the voting power of the holders of Common Stock. The offering and sale of Common Stock in the Conversion will be registered under the 1933 Act. The subsequent sale or transfer of Common Stock is governed by the 1933 Act, which requires that sales or exchanges of subject securities be made pursuant to an effective registration statement or qualified for an exemption from registration requirements of the 1933 Act. Similarly, the securities laws of the various states also require generally the registration of shares offered for sale unless there is an applicable exemption from registration. The Holding Company, as a newly organized corporation, has never issued capital stock, and, accordingly, there is no market for the Common Stock. See "Market for the Common Stock." See "Restrictions on Acquisition of the Holding Company -- Provisions of the Holding Company's Articles and By-Laws" for a description of certain provisions of the Holding Company's Articles and By-Laws which may affect the ability of the Holding Company's shareholders to participate in certain transactions relating to acquisitions of control of the Holding Company. Also, see "Dividend Policy" for a description of certain matters relating to the possible future payment of dividends on the Common Stock. TRANSFER AGENT Fifth Third Bank of Cincinnati, Ohio ("Fifth Third") will act as transfer agent and registrar for the Common Stock. Fifth Third's phone number is (513) 579-5417. REGISTRATION REQUIREMENTS Upon the Conversion, the Holding Company's Common Stock will be registered pursuant to Section 12(g) of the 1934 Act and will not be deregistered for a period of at least three years following the Conversion. As a result of the registration under the 1934 Act, certain holders of Common Stock will be subject to certain reporting and other requirements imposed by the 1934 Act. For example, beneficial owners of more than 5% of the outstanding Common Stock will be required to file reports pursuant to Section 13(d) or Section 13(g) of the 1934 Act, and officers, directors and 10% shareholders of the Holding Company will generally be subject to reporting requirements of Section 16(a) and to the liability provisions for profits derived from purchases and sales of Holding Company Common Stock occurring within a six-month period pursuant to Section 16(b) of the 1934 Act. In addition, certain transactions in Common Stock, such as proxy solicitations and tender offers, will be subject to the disclosure and filing requirements imposed by Section 14 of the 1934 Act and the regulations promulgated thereunder. <PAGE> LEGAL AND TAX MATTERS Barnes & Thornburg, 1313 Merchants Bank Building, 11 South Meridian Street, Indianapolis, Indiana 46204, special counsel to the Bank, will pass upon the legality and validity of the shares of Common Stock being issued in the Conversion. Barnes & Thornburg has issued an opinion concerning certain federal and state income tax aspects of the Conversion and that the Conversion, as proposed, constitutes a tax-free reorganization under federal and Indiana law. Barnes & Thornburg have consented to the references herein to their opinions. Certain legal matters related to this offering will be passed upon for the Agents by Selman & Munson P.C., 111 Congress Avenue, Austin, Texas. EXPERTS The financial statements of the Bank as of and for the years ended June 30, 1995, 1994, and 1993, included herein and elsewhere in the registration statement, have been audited by Geo. S. Olive & Co. LLC, independent certified public accountants, and included herein and in the registration statement in reliance upon the report of Geo. S. Olive & Co. LLC, independent certified public accountants, appearing elsewhere herein, and upon the authority of such firm as experts in accounting and auditing. Keller has consented to the publication of the summary herein of its appraisal report as to the estimated pro forma market value of the Common Stock of the Holding Company to be issued in the Conversion, to the reference to its opinion relating to the value of the subscription rights, and to the filing of the appraisal report as an exhibit to the registration statement filed by the Holding Company under the 1933 Act. ADDITIONAL INFORMATION The Holding Company has filed with the SEC a registration statement under the 1933 Act with respect to the Common Stock offered hereby. As permitted by the rules and regulations of the SEC, this Prospectus does not contain all the information set forth in the registration statement. Such information can be inspected and copied at the Commission's public reference facilities located at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's Regional Offices in New York (Seven World Trade Center, 13th Floor, New York, New York 00048) and Chicago (Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511) and copies of such material can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Holding Company has also filed with the FRB of Chicago an Application to Form a Holding Company on Form FR Y-3. This Prospectus omits certain information contained in such Application. The Application may be inspected at the offices at the FRB of Chicago, 230 South LaSalle Street, Chicago, Illinois 60604-1413. The Bank has filed with the DFI an Application to Convert to an Indiana stock savings bank. This Prospectus omits certain information contained in such Application. The Application may be inspected at the offices of the DFI, 402 West Washington Street, Room W-066, Indianapolis, Indiana 46204. The most recent appraisal report prepared by Keller can be inspected at the Bank's office, 279 East Morgan Street, Spencer, Indiana 47460. <PAGE> Owen Community Bank, s.b. And Subsidiary Index to Consolidated Financial Statements Financial Statements Page Independent auditor's report F-2 Consolidated statement of financial condition--December 31, 1995 (unaudited) and June 30, 1995 and 1994 F-3 Consolidated statement of income--for the six months ended December 31, 1995 and 1994 (unaudited) and the years ended June 30, 1995, 1994, and 1993 F-4 Consolidated statement of changes in equity capital--for the six months ended December 31, 1995 (unaudited) and the years ended June 30, 1995, 1994, and 1993 F-5 Consolidated statement of cash flows--for the six months ended December 31, 1995 and 1994 (unaudited) and the years ended June 30, 1995, 1994, and 1993 F-6 Notes to consolidated financial statements F-7 All schedules are omitted because the required information is not applicable or is included in the consolidated financial statements and related notes. Home Financial Bancorp, the Holding Company, has not commenced operations as of December 31, 1995 and will not commence operations prior to the conversion of Owen Community Bank, s.b. from a state mutual savings bank to a state stock savings bank. Accordingly, the financial statements of the Holding Company have been omitted and are not required. <PAGE> Independent Auditor's Report Board of Directors Owen Community Bank, s.b. Spencer, Indiana We have audited the consolidated statement of financial condition of Owen Community Bank, s.b. (formerly Owen Federal Savings Bank) and subsidiary as of June 30, 1995 and 1994, and the related consolidated statements of income, changes in equity capital and cash flows for each of the three years in the period ended June 30, 1995. These consolidated financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements described above present fairly, in all material respects, the consolidated financial position of Owen Community Bank, s.b. and subsidiary as of June 30, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1995, in conformity with generally accepted accounting principles. As discussed in the notes to the consolidated financial statements, the Bank changed its method of accounting for investments in securities effective July 1, 1994 and income taxes effective July 1, 1993. Geo. S. Olive & Co., llc Indianapolis, Indiana July 21, 1995, except for notes 12 and 13 for which the date is December 31, 1995 <PAGE> Owen Community Bank, s.b. And Subsidiary Consolidated Statement of Financial Condition <TABLE> <CAPTION> June 30, December 31, ------------------------------ 1995 1995 1994 ----------- ----------- ----------- (Unaudited) Assets <S> <C> <C> <C> Cash $ 268,114 $ 259,105 $ 504,360 Short-term interest-bearing deposits 2,056,407 1,126,874 732,594 ----------- ----------- ----------- Total cash and cash equivalents 2,324,521 1,385,979 1,236,954 Securities available for sale 1,259,392 933,962 Mortgage-backed securities available for sale 1,358,963 Securities held to maturity (approximate market value $346,000 and $785,000) 350,000 778,028 Mortgage-backed securities held to maturity (approximate market value ($1,462,000 and $1,580,000) 1,476,914 1,635,916 Loans 27,303,005 25,604,648 21,504,940 Allowance for loan losses (99,967) (57,467) (25,679) ----------- ----------- ----------- Net loans 27,203,038 25,547,181 21,479,261 Real estate acquired for development 199,831 188,385 152,669 Premises and equipment 551,808 471,637 357,123 Federal Home Loan Bank of Indianapolis stock, at cost 260,000 250,000 221,500 Interest receivable 216,208 186,609 111,615 Other assets 87,799 48,506 34,870 ----------- ----------- ----------- Total assets $33,461,560 $30,839,173 $26,007,936 =========== =========== =========== Liabilities Deposits $24,895,146 $22,500,002 $21,451,449 Advances from Federal Home Loan Bank of Indianapolis 5,200,000 5,000,000 1,500,000 Other borrowings 20,005 28,773 80,173 Other liabilities 51,606 151,236 126,726 ----------- ----------- ----------- Total liabilities 30,166,757 27,680,011 23,158,348 ----------- ----------- ----------- Commitments and Contingencies Equity Capital Retained earnings--substantially restricted 3,292,959 3,138,811 2,849,588 Net unrealized gain on securities available for sale 1,844 20,351 ----------- ----------- ----------- Total equity capital 3,294,803 3,159,162 2,849,588 ----------- ----------- ----------- Total liabilities and equity capital $33,461,560 $30,839,173 $26,007,936 =========== =========== =========== </TABLE> See notes to consolidated financial statements. <PAGE> Owen Community Bank, s.b. And Subsidiary Consolidated Statement of Income <TABLE> <CAPTION> Six Months Ended December 31, Year Ended June 30, -------------------------- ----------------------------------------- 1995 1994 1995 1994 1993 ----------- ------------ ------------ ----------- ------------- (Unaudited) Interest Income <S> <C> <C> <C> <C> <C> Loans $ 1,315,656 $ 1,024,861 $ 2,166,726 $ 1,813,706 $ 1,749,029 Mortgage-backed securities 42,337 47,570 93,017 105,584 100,496 Interest-bearing deposits 65,843 38,715 76,678 43,716 37,105 Securities Taxable 35,560 18,417 50,409 37,071 38,092 Tax exempt 8,225 9,841 17,745 9,956 9,828 Other interest and dividend income 10,393 7,118 15,728 12,916 23,341 ----------- ------------ ------------ ----------- ------------- Total interest and dividend income 1,476,014 1,146,522 2,420,303 2,022,949 1,957,891 ----------- ------------ ------------ ----------- ------------- Interest Expense Deposits 633,177 455,074 962,764 913,141 972,912 Federal Home Loan Bank advances 162,837 76,615 201,463 28,244 12,125 Other interest expense 1,132 3,230 9,994 8,101 7,788 ----------- ------------ ------------ ----------- ------------- Total interest expense 797,146 534,919 1,174,221 949,486 992,825 ----------- ------------ ------------ ----------- ------------- Net Interest Income 678,868 611,603 1,246,082 1,073,463 965,066 Provision for losses on loans 42,500 21,428 36,134 14,065 6,627 ----------- ------------ ------------ ----------- ------------- Net Interest Income After Provision for Losses on Loans 636,368 590,175 1,209,948 1,059,398 958,439 ----------- ------------ ------------ ----------- ------------- Other Income Service charges on deposit accounts 18,613 15,000 27,345 23,272 22,354 Gain on sale of real estate acquired for development 18,641 10,631 78,499 144,794 116,921 Other income 22,895 11,095 42,567 32,670 27,848 ----------- ------------ ------------ ----------- ------------- 60,149 36,726 148,411 200,736 167,123 ----------- ------------ ------------ ----------- ------------- Other Expenses Salaries and employee benefits 204,005 176,224 403,787 344,546 253,939 Net occupancy expenses 34,995 36,722 73,761 72,647 68,699 Equipment expenses 21,944 15,134 35,302 36,509 22,142 Deposit insurance expense 25,315 24,694 49,444 47,676 31,987 Computer processing fees 26,784 23,684 47,945 47,506 45,277 Printing and office supplies 14,295 15,459 32,215 31,802 28,993 Legal and professional fees 16,340 15,690 35,125 35,740 45,684 Advertising expense 14,903 12,475 25,518 15,049 18,158 Management fees 14,113 9,772 33,005 49,627 34,093 Other expenses 68,405 66,626 129,824 126,069 82,816 ----------- ------------ ------------ ----------- ------------- 441,099 396,480 865,926 807,171 631,788 ----------- ------------ ------------ ----------- ------------- Income Before Income Tax and Cumulative Effect of Change in Accounting Method 255,418 230,421 492,433 452,963 493,774 Income tax expense 101,270 90,612 203,210 168,421 185,570 ----------- ------------ ------------ ----------- ------------- Income Before Cumulative Effect of Change in Accounting Method 154,148 139,809 289,223 284,542 308,204 Cumulative Effect of Change in Method of Accounting for Income Taxes 23,628 ----------- ------------ ------------ ----------- ------------- Net income $ 154,148 $ 139,809 $ 289,223 $ 260,914 $ 308,204 =========== ============ ============ =========== ============= </TABLE> See notes to consolidated financial statements. <PAGE> Owen Community Bank, s.b. And Subsidiary Consolidated Statement of Changes in Equity Capital <TABLE> <CAPTION> Net Unrealized Gain on Securities Retained Available Earnings For Sale Total ----------- -------- ------------ <S> <C> <C> <C> Balances, July 1, 1992 $ 2,280,470 $ 2,280,470 Net income for 1993 308,204 308,204 Balances, June 30, 1993 2,588,674 2,588,674 Net income for 1994 260,914 260,914 Balances, June 30, 1994 2,849,588 2,849,588 Net income for 1995 289,223 289,223 Cumulative effect of change in method of accounting for securities $ 6,912 6,912 Net change in unrealized gain on securities available for sale, net of taxes of $8,815 13,439 13,439 ----------- -------- ------------ Balances, June, 30, 1995 3,138,811 20,351 3,159,162 Net income for the six months ended December 31, 1995 (unaudited) 154,148 154,148 Net change in unrealized gain on securities available for sale, net of taxes of $12,139 (unaudited) (18,507) (18,507) ----------- -------- ------------ Balances, December 31, 1995 (unaudited) $ 3,292,959 $ 1,844 $ 3,294,803 =========== ======== ============ </TABLE> See notes to consolidated financial statements. <PAGE> Owen Community Bank, s.b. And Subsidiary Consolidated Statement of Cash Flows <TABLE> <CAPTION> Six Months Ended December 31, Year Ended June 30, -------------------------- -------------------------------------- 1995 1994 1995 1994 1993 ----------- ---------- ---------- ---------- ---------- (Unaudited) Operating Activities <S> <C> <C> <C> <C> <C> Net income $154,148 $139,809 $289,223 $260,914 $308,204 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses 42,500 21,428 36,134 14,065 6,627 Securities amortization, net 744 733 683 973 1,211 Depreciation and amortization 28,677 25,200 58,813 55,496 43,097 Deferred income tax (benefit) (18,999) (4,533) (198) 14,624 (11,050) Gain on sale of real estate acquired for development (18,641) (10,631) (78,499) (144,794) (116,921) Gain on sale of other real estate (11,019) (5,537) Change in Interest receivable (29,569) (19,721) (74,994) (2,114) (1,034) Other assets (39,293) (9,257) (13,636) (3,970) 39,784 Other adjustments (76,992) (54,858) 11,360 29,825 ----------- ---------- ---------- ---------- ---------- Net cash provided by operating activities 42,575 88,170 217,867 225,019 264,381 ----------- ---------- ---------- ---------- ---------- Investing Activities Purchases of securities available for sale (100,000) (399,719) (112,231) Purchase of securities held to maturity (100,000) (205,000) Proceeds from maturities of securities held to maturity 25,000 130,000 10,000 Purchases of mortgage-backed securities held to maturity (1,020,000) Payments on mortgage-backed securities held to maturity 93,833 72,630 160,803 540,138 326,865 Payments on mortgage-backed securities available for sale 17,238 Net changes in loans (1,640,357) (1,958,733) (4,134,319) (2,125,354) (2,276,072) Proceeds from real estate owned sales 41,284 25,000 Purchase of premises and equipment (158,348) (19,552) (173,327) (29,123) (27,121) Purchase of real estate acquired for development (29,655) (131,464) (231,464) (152,649) (92,050) Proceeds from sale of real estate acquired for development 36,850 28,047 274,247 316,159 254,617 Purchase of FHLB of Indianapolis stock (10,000) (28,500) ----------- ---------- ---------- ---------- ---------- Net cash used by investing activities (1,690,439) (2,184,072) (4,565,995) (2,573,060) (1,788,761) ----------- ---------- ---------- ---------- ---------- Financing Activities Net change in NOW and savings deposits 462,638 52,011 (1,774,297) 71,941 708,956 Certificates of deposit 1,932,506 420,635 2,822,850 1,205,273 314,018 Advances from Federal Home Loan Bank of Indianapolis 200,000 2,500,000 3,500,000 1,500,000 500,000 Repayment of advances from Federal Home Loan Bank of Indianapolis (500,000) (500,000) Other borrowings 75,000 75,000 45,000 45,000 Payments on other borrowings (8,768) (8,016) (126,400) (79,994) (23,707) ----------- ---------- ---------- ---------- ---------- Net cash provided by financing activities 2,586,376 2,539,630 4,497,153 2,242,220 1,544,267 ----------- ---------- ---------- ---------- ---------- Net Change in Cash and Cash Equivalents 938,512 443,728 149,025 (105,821) 19,887 Cash and Cash Equivalents, Beginning of Year 1,385,979 1,236,954 1,236,954 1,342,775 1,322,888 ----------- ---------- ---------- ---------- ---------- Cash and Cash Equivalents, End of Year $ 2,324,491 $1,680,682 $1,385,979 $1,236,954 $1,342,775 =========== ========== ========== ========== ========== Additional Cash Flows and Supplementary Information Interest paid $797,146 $534,919 $1,174,221 $949,486 $992,825 Income tax paid 129,000 50,719 144,375 225,900 186,000 </TABLE> See notes to consolidated financial statements. <PAGE> Owen Community Bank, s.b. And Subsidiary Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) Note 1 -- Accounting Policies The accounting and reporting policies of Owen Community Bank, s.b. ("Bank") and its wholly owned subsidiary, BSF, Inc., conform to generally accepted accounting principles and reporting practices followed by the thrift industry. The more significant of the policies are described below. Consolidation--The consolidated financial statements include the accounts of the Bank and subsidiary after elimination of all material intercompany transactions and accounts. Description of business--In May, 1994, the Bank received approval to convert from a federal savings bank to an Indiana mutual savings bank. At such time, the Bank changed its name from Owen Federal Savings Bank to Owen Community Bank, s.b. The Bank generates mortgage and consumer loans and receives deposits from customers located primarily in Owen County. The Bank's loans are generally secured by specific items of collateral including real property and consumer assets. BSF, Inc. is involved in the acquisition, development and sale of land for residential housing. Securities--The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity Securities, on July 1, 1994. Debt securities are classified as held to maturity when the Company has the positive intent and ability to hold the securities to maturity. Securities held to maturity are carried at amortized cost. Debt securities not classified as held to maturity are classified as available for sale. Securities available for sale are carried at fair value with unrealized gains and losses reported separately, net of tax, in equity capital. Amortization of premiums and accretion of discounts are recorded using the interest method as interest income from securities. Realized gains and losses are recorded as net security gains (losses). Gains and losses on sales of securities are determined on the specific-identification method. At July 1, 1994, investment securities with an approximate carrying value of $501,000 were reclassified as available for sale. This reclassification resulted in an increase in total equity capital, net of tax, of $6,900. <PAGE> Owen Community Bank, s.b. And Subsidiary Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) Prior to the adoption of SFAS No. 115, investment securities were carried at cost, adjusted for amortization of premiums and discounts. Realized gains and losses on sales were included in other income. Gains and losses on the sale of securities were determined on the specific-identification method. Mortgage-backed securities represent participating interests in pools of long-term first mortgage loans originated and serviced by the issuers of the securities. Mortgage-backed securities available for sale are carried at fair value with unrealized gains and losses reported in equity capital, net of tax. Mortgage-backed securities held to maturity are carried at unpaid principal balances, adjusted for unamortized premiums and discounts, because management has the ability and intent to hold to maturity. Premiums and discounts are amortized using the interest method over the remaining period to contractual maturity, adjusted for anticipated prepayments. Realized gains and losses on the sale of mortgage-backed securities are determined using the specific-identification method and are included in other income. Loans are carried at the principal amount outstanding. Interest income is accrued on the principal balances of loans. Loans are placed in a nonaccrual status when the collection of interest becomes doubtful. Interest income previously accrued but not deemed collectible is reversed and charged against current income. Interest on these loans is then recognized as income when collected. Certain loan fees and direct costs are being deferred and amortized as an adjustment of yield on the loans. When a loan is paid off, any unamortized loan origination fee balance is credited to income. Allowance for loan losses is maintained to absorb potential losses based on management's continuing review and evaluation of the portfolio and its judgment as to the impact of economic conditions on the portfolio. The evaluations by management include consideration of past loss experience, changes in the composition of the portfolio, and the current condition and amount of loans outstanding. Real estate acquired for development is carried at the lower of cost or fair value. Costs relating to development and improvements of property are allocated to individual lots and capitalized, whereas costs relating to holding the property are expensed. Gains on sale of lots are determined on the specific-identification method. Premises and equipment are carried at cost net of accumulated depreciation. Depreciation is computed using the accelerated and straight-line methods based on the estimated useful lives of the assets. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized. Gains and losses on dispositions are included in current operations. <PAGE> Owen Community Bank, s.b. And Subsidiary Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) Federal Home Loan Bank stock is a required investment for institutions that are members of the Federal Home Loan Bank system. The required investment in the common stock is based on a predetermined formula. Pension plan costs are based on actuarial computations and charged to current operations. The funding policy is to pay at least the minimum amounts required by ERISA. Advertising costs are expensed when incurred. Income tax in the consolidated statement of income includes deferred income tax provisions or benefits for all significant temporary differences in recognizing income and expenses for financial reporting and income tax purposes. The Bank has adopted the provisions of SFAS No. 109, Accounting for Income Taxes, for the year ended June 30, 1994. The Bank files consolidated income tax returns with its subsidiary. Reclassifications of certain amounts in the June 30, 1995 and 1994 consolidated financial statements have been made to conform to the December 31, 1995 presentation. Note 2 -- Securities <TABLE> <CAPTION> Gross Gross Approximate Amortized Unrealized Unrealized Market Cost Gains Losses Value Available for sale at December 31, 1995 (unaudited) <S> <C> <C> <C> <C> Federal agencies $ 900 $ 12 $ 912 State and municipals 350 1 $ 4 347 ------- ---- --- ------- Total securities $ 1,250 $ 13 $ 4 $ 1,259 ======= ==== === ======= Available for sale at June 30, 1995 Federal agencies $ 900 $ 34 $ 934 Held to maturity at June 30, 1995 State and municipal 350 1 $ 5 346 ------- ---- --- ------- Total securities $ 1,250 $ 35 $ 5 $ 1,280 ======= ==== === ======= Held to maturity at June 30, 1994 Federal agencies $ 501 $ 12 $ 513 State and municipal 277 1 $ 6 272 ------- ---- --- ------- Total securities $ 778 $ 13 $ 6 $ 785 ======= ==== === ======= </TABLE> <PAGE> Owen Community Bank, s.b. And Subsidiary Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) On December 26, 1995, the Bank transferred certain securities from held to maturity to available for sale in accordance with a transition reclassification allowed by the Financial Accounting Standards Board. Such securities had a carrying value of $350,000 and a fair value of $347,000. Other than the initial adoption of SFAS No. 115 and the December 26, 1995 transfers, there were no transfers or sales of investment securities during the periods presented. The amortized cost and approximate market value of securities held to maturity and available for sale at December 31 and June 30, 1995, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. <TABLE> <CAPTION> Available for Sale Held to Maturity --------------------------- -------------------------- Approximate Approximate Amortized Market Amortized Market Cost Value Cost Value --------- ----------- --------- ----------- Maturity Distribution at December 31, <S> <C> <C> <C> <C> 1995 (unaudited) Due in one year or less $ 535 $ 539 Due after one through five years 715 720 ------- ------- Totals $ 1,250 $ 1,259 ======= ======= Maturity Distribution at June 30, 1995 Due in one year or less $ 500 $ 506 $ 35 $ 35 Due after one through five years $ 400 $ 428 315 311 ------- ------- ----- ------ Totals $ 900 $ 934 $ 350 $ 346 ======= ======= ===== ====== </TABLE> Note 3 -- Mortgage-Backed Securities <TABLE> <CAPTION> Gross Gross Approximate Amortized Unrealized Unrealized Market Cost Gains Losses Value --------- ---------- ---------- ----------- Available for sale at December 31, 1995 (unaudited) <S> <C> <C> <C> <C> Federal Home Loan Mortgage Corporation $ 1,366 $ 11 $ 18 $1,359 ======= ==== ==== ====== Held to maturity at June 30, 1995 Federal Home Loan Mortgage Corporation $ 1,477 $ 9 $ 24 $1,462 ======= ==== ==== ====== Held to maturity at June 30, 1994 Federal Home Loan Mortgage Corporation $ 1,636 $ 4 $ 60 $1,580 ======= ==== ==== ====== </TABLE> On December 26, 1995, the Bank transferred certain mortgage-backed securities from held to maturity to available for sale in accordance with a transition reclassification allowed by the Financial Accounting Standards Board. Such securities had a carrying value of $1,366,000 and a fair value of $1,360,000. Other than the initial adoption of SFAS No. 115 and the December 26, 1995 transfers, there were no transfers or sales of mortgage-backed securities during the periods presented. <PAGE> Owen Community Bank, s.b. And Subsidiary Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) Note 4 -- Loans and Allowance June 30, December 31, ------------------------- 1995 1995 1994 ------------ ---------- ----------- (Unaudited) Loans Real estate mortgage loans Residential $ 19,764 $ 17,841 $ 15,621 Mobile home and land 3,166 2,748 1,513 Nonresidential 1,693 2,933 2,346 Multi-family 475 11 12 Mobile home loans 1,349 1,615 1,464 Commercial and industrial 325 Consumer loans 654 691 584 ---------- --------- ---------- Total loans 27,426 25,839 21,540 Less--undisbursed portion of loans (123) (234) (35) ---------- --------- ---------- $ 27,303 $ 25,605 $ 21,505 ========== ========= ========== <TABLE> <CAPTION> Six Months Ended December 31, Year Ended June 30, -------------------- --------------------------- 1995 1994 1995 1994 1993 --------- ------- ---- ---- ---- (Unaudited) Allowance for loan losses <S> <C> <C> <C> <C> <C> Balances, beginning of period $ 57 $ 26 $ 26 $ 12 $ 13 Provision for loan losses 43 22 36 14 7 Recoveries on loans 1 1 1 Loans charged off (6) (6) (1) (8) ------ ----- ----- ---- ----- Balances, end of period $ 100 $ 43 $ 57 $ 26 $ 12 ====== ===== ===== ==== ===== </TABLE> December 31, June 30, 1995 1995 1994 1993 ------------ ---- ---- ---- (Unaudited) Nonperforming loans Nonaccruing loans $ 118 $ 71 $ 16 Loans contractually past due 90 days or more 29 11 Additional interest income that would have been recorded had income on nonaccruing loans been considered collectible and accounted for in accordance with their original terms is immaterial for each period. The Bank adopted SFAS No. 114 and No. 118, Accounting by Creditors For Impairment of a Loan and Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures, on July 1, 1995. The adoption of SFAS No. 114 and 118 did not have a material impact on the Bank's financial position or results of operations. <PAGE> Owen Community Bank, s.b. And Subsidiary Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) The Bank has entered into transactions with certain directors and officers. Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features. The aggregate amount of loans, as defined, to such related parties were as follows: Balances, June 30, 1994 $ 355 Changes in composition of related parties 60 New loans, including renewals 136 Payments, etc. including renewals (34) ------ Balances, June 30, 1995 517 New loans, including renewals (unaudited) 169 Payments, etc. including renewals (unaudited) (86) ------ Balances, December 31, 1995 (unaudited) $ 600 ====== Note 5 -- Premises and Equipment June 30, December 31, --------------------- 1995 1995 1994 ----------- ----------- ------- (Unaudited) Cost Land $ 189 $ 133 $ 34 Building 601 634 596 Equipment 319 233 197 -------- -------- ------ Total costs 1,109 1,000 827 Accumulated depreciation (557) (528) (470) -------- -------- ------ Net $ 552 $ 472 $ 357 ======== ======== ====== <PAGE> Owen Community Bank, s.b. And Subsidiary Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) Note 6 -- Deposits <TABLE> <CAPTION> December 31, June 30, ------------------------ ------------------------------------------------- 1995 1995 1994 ------------------------ ---------------------- ----------------------- Weighted Weighted Weighted Average Average Average Amount Rate Amount Rate Amount Rate ----------- --------- -------- -------- ----------- -------- (Unaudited) <S> <C> <C> <C> <C> <C> <C> NOW accounts $ 2,472 2.45% $ 2,056 2.55% $ 2,417 2.58% Savings 3,761 3.00 3,715 3.00 5,127 3.00 Certificates of deposit of $100,000 or more 2,248 5.69 1,936 5.68 1,852 4.68 Other certificates 16,414 5.96 14,793 5.80 12,055 4.85 ---------- --------- ---------- ---- Total deposits $ 24,895 5.18% $ 22,500 5.03% $ 21,451 4.14% ========== ==== ========= ==== ========== ==== </TABLE> At June 30, 1995, certificates mature as follows: <TABLE> <CAPTION> Years Ending June 30, ------------------------------------------------------------------------------- 1996 1997 1998 1999 2000 Total ---------- -------- --------- ------- ------ ---------- Certificates by rates <S> <C> <C> <C> <C> <C> <C> 4.00% and under $ 943 $ 226 $ 1,169 4.01 to 6.00% 4,912 851 $ 1,604 $ 2,395 $ 291 10,053 6.01 to 8.00% 4,405 449 32 621 5,507 ---------- -------- --------- -------- ------ ---------- $ 10,260 $ 1,526 $ 1,604 $ 2,427 $ 912 $ 16,729 ========== ======== ========= ======== ====== ========== </TABLE> Interest expense on deposits is summarized as follows: Six Months Ended December 31, Year Ending June 30, --------------------- --------------------------------- 1995 1994 1995 1994 1993 ------ ------ ---- ---- ----- (Unaudited) NOW $28 $33 $62 $67 $70 Savings 60 76 138 166 183 Certificates 545 346 763 680 720 ---- ---- ---- ---- ---- $633 $455 $963 $913 $973 ==== ==== ==== ==== ==== <PAGE> Owen Community Bank, s.b. And Subsidiary Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) Note 7 -- Advances from Federal Home Loan Bank <TABLE> <CAPTION> June 30, December 31, -------------------------------------------------- 1995 1995 1994 --------------------- ----------------------- ---------------------- Weighted Weighted Weighted Average Average Average Amount Rate Amount Rate Amount Rate ------- -------- --------- -------- --------- -------- (Unaudited) Maturities in years ending <S> <C> <C> <C> <C> <C> <C> 1995 $1,000 4.01% 1996 $ 1,000 6.37% $ 1,000 6.79% 1999 3,000 6.14 3,000 6.25 500 5.58 2000 1,000 6.27 1,000 6.27 Thereafter 200 6.48 -------- --------- --------- $ 5,200 6.22% $ 5,000 6.36% $ 1,500 4.53% ======== ========= ========= </TABLE> The terms of the security agreement with the FHLB require the Bank to pledge as collateral for advances qualifying first mortgage loans in an amount equal to at least 170 percent of these advances and all stock in the FHLB. Advances are subject to restrictions or penalties in the event of prepayment. Note 8 -- Other Borrowings During February, 1992, BSF, Inc. obtained a $200,000 line of credit at prime plus 100 basis points from a local financial institution. The line of credit is renewable annually at the option of the lender and borrower, subject to any material changes in the capitalization or operations of either BSF, Inc. or the Bank. At December 31, 1995, June 30, 1995 and 1994, borrowings under this line totalled $0, $0 and $35,000. BSF, Inc. has two mortgage loans payable to individuals. The loans, which have an interest rate of 9%, mature December 1, 1996 and total to $28,773 and $45,173 at June 30, 1995 and 1994. Note 9 -- Income Tax <TABLE> <CAPTION> Six Months Ended December 31, Year Ended June 30, ---------------------- ----------------------------------------- 1995 1994 1995 1994 1993 ------ ------- ----- -------- ------ (Unaudited) Income tax expense Currently payable <S> <C> <C> <C> <C> <C> Federal $ 94 $ 76 $ 153 $ 141 $ 152 State 26 20 50 37 45 Deferred Federal (15) (6) (8) (11) State (4) 1 (2) ------ ----- ------ ------ ------ Total income tax expense $ 101 $ 91 $ 203 $ 168 $ 186 ====== ===== ====== ====== ====== </TABLE> <PAGE> Owen Community Bank, s.b. And Subsidiary Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) 1993 ---- Current benefit relating to Cash to accrual adjustment $ (8) Other (3) Deferred benefit $(11) <TABLE> <CAPTION> Six Months Ended December 31, Year Ended June 30, ---------------- ------------------------- 1995 1994 1995 1994 1993 ---- ----- ------ ------ ----- (Unaudited) Reconciliation of federal statutory to actual tax expense <S> <C> <C> <C> <C> <C> Federal statutory income tax at 34% $ 87 $ 78 $ 167 $ 154 $ 168 Effect of state income taxes 15 13 33 23 30 Tax exempt interest (3) (5) (5) (3) Other 2 5 8 (6) (12) ----- ---- ------ ----- ------ Actual tax expense $ 101 $ 91 $ 203 $ 168 $ 186 ===== ==== ====== ===== ====== </TABLE> If certain conditions are met, the Bank, in determining taxable income, is allowed special bad debt deductions of approximately 8 percent of taxable income before such deductions. Retained earnings at December 31, 1995 (unaudited), June 30, 1995 and 1994, include approximately $700,000 for which no deferred federal income tax liability has been recognized. This amount represents an allocation of income to bad debt deductions for tax purposes only. Reduction of amounts so allocated for purposes other than tax bad debt losses or adjustments arising from carryback of net operating losses would create income for tax purposes only, which income would be subject to the then-current corporate income tax rate. The unrecorded deferred federal income tax liability on the above amounts was approximately $280,000 at December 31, 1995 and June 30, 1995 and 1994. A cumulative net deferred tax liability is included in other liabilities. The components of the liability are as follows: <TABLE> <CAPTION> June 30, December 31, --------------------- 1995 1995 1994 ------------ -------- ------- (Unaudited) <S> <C> <C> <C> Differences in depreciation methods $ (9) $ (9) $ (10) Differences in accounting for loan fees (7) (9) 6 Differences in accounting for loan losses 16 (2) (16) State income tax (2) (1) (1) Unrealized gain on securities available for sale (1) (13) $ (3) $ (34) $ (21) ==== ====== ====== Assets $ 16 $ 6 Liabilities (19) $ (34) (27) ---- ------ ------ $ (3) $ (34) $ (21) ==== ====== ====== </TABLE> <PAGE> Owen Community Bank, s.b. And Subsidiary Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) No valuation allowance was necessary during any time in 1995 and 1994. As of July 1, 1993, the Bank adopted SFAS No. 109, Accounting for Income Taxes. As a result, the beginning deferred tax liability was increased by $23,628, which is reported as the cumulative effect of a change in accounting method. Note 10 -- Commitments and Contingent Liabilities In the normal course of business there are outstanding commitments and contingent liabilities, such as commitments to extend credit, which are not included in the accompanying financial statements. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit is represented by the contractual or notional amount of those instruments. The Bank uses the same credit policies in making such commitments as it does for instruments that are included in the consolidated statement of financial condition. June 30, December 31, ------------------ 1995 1995 1994 ------------ ------- ----- (Unaudited) Financial instruments whose contract amount represents credit risk were as follows: Mortgage loan commitments At variable rates $ 110 $ 395 $ 722 At fixed rates 13 704 305 Unused line of credit 251 151 25 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation. Collateral held varies, but may include residential real estate, or other assets of the borrower. The Bank and subsidiary are also subject to claims and lawsuits which arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate determination of such possible claims or lawsuits will not have a material adverse effect on the consolidated financial position of the Bank. The deposits of the Bank are presently insured by the Savings Association Insurance Fund ("SAIF"), which along with the Bank Insurance Fund ("BIF"), is one of the two insurance funds administered by the FDIC. Financial institutions which are members of the BIF are experiencing substantially lower deposit insurance premiums because BIF has achieved its required level of reserves while SAIF has not yet achieved its required reserves. A recapitalization plan for the SAIF under consideration by Congress reportedly provides for a special assessment of approximately .85% of deposits on all SAIF-insured institutions to enable the SAIF to achieve its required level of reserves. If the proposed assessment of .85% was effected based on deposits as of December 31, 1995, the Bank's special assessment would amount to approximately $212,000 before taxes. Accordingly, this special assessment would significantly increase noninterest expense and adversely affect the Bank's results of operations. Conversely, depending upon the Bank's capital level and supervisory rating, and assuming the insurance premium levels for BIF and SAIF members again equalized, future deposit insurance premiums are expected to decrease significantly, to as low as .04% from the .23% of deposits currently paid by the Bank which would reduce noninterest expense for future periods. <PAGE> Owen Community Bank, s.b. And Subsidiary Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) Note 11 -- Benefit Plans The Bank is a participant in a pension fund known as the Financial Institutions Retirement Fund ("FIRF"). This plan is a multi-employer plan; separate actuarial valuations are not made with respect to each participating employer. According to FIRF administrators, the market value of the fund's assets exceeded the value of vested benefits in the aggregate as of June 30, 1994, the date of the latest actuarial valuation. The plan required contributions in the amount of $10,200 and $7,700 for the six-month periods ended December 31, 1995 and 1994 (unaudited) and $17,900 and $10,000 for the years ended June 30, 1995 and 1994. No contributions to the plan were required for the year ended June 30, 1993. The plan provides pension benefits for substantially all of the Bank's employees. Effective January 1, 1993, the Bank adopted a retirement savings Section 401(k) plan in which substantially all employees may participate. The Bank matches employees' contributions at the rate of 50 percent of the first 6 percent of base salary contributed by participants. The Bank's expense for the plan was $4,700 for each of the six-month periods ended December 31, 1995 and 1994 (unaudited) and $8,550, $6,060 and $2,895 for the years ended June 30, 1995, 1994 and 1993. Note 12 -- Subsequent Event -- Plan of Conversion In October, 1995, the Board of Directors adopted a Plan of Conversion (Plan) whereby the Bank will convert from a state chartered mutual institution to a state chartered stock savings bank. The Plan is subject to approval of regulatory authorities and members at a special meeting. The stock of the Bank will be issued to a holding company formed in connection with the conversion. Pursuant to the Plan, shares of capital stock of the holding company are expected to be offered initially for subscription to eligible members of the Bank and certain other persons as of specific dates subject to various subscription priorities as provided in the Plan. The capital stock will be offered at a price to be determined by the Board of Directors based upon an appraisal to be made by an independent appraisal firm. The exact number of shares to be offered will be determined by the Board of Directors in conjunction with the determination of the subscription price. At least the minimum number of shares offered in the conversion must be sold. Any stock not purchased in the subscription offering will be sold in the community offering to be commenced simultaneously with the subscription offering. The Plan provides that when the conversion is completed, a "liquidation account" will be established in an amount equal to the retained income of the Bank as of the date of the most recent financial statements contained in the final conversion prospectus. The liquidation account is established to provide a limited priority claim to the assets of the Bank to qualifying depositors ("eligible account holders") and other depositors ("supplemental eligible account holders") who continue to maintain deposits in the Bank after conversion. In the unlikely event of a complete liquidation of the Bank, and only in such event, eligible account holders would receive from the liquidation account a liquidation distribution based on their proportionate share of the then total remaining qualifying deposits. <PAGE> Owen Community Bank, s.b. And Subsidiary Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) Current regulations allow the Bank to pay dividends on its stock after the conversion if its regulatory capital would not thereby be reduced below the amount then required for the aforementioned liquidation account. Also, capital distribution regulations limit the Bank's ability to make capital distributions which include dividends, stock redemptions or repurchases, cash-out mergers, interest payments on certain convertible debt and other transactions charged to the capital account based on its capital level and supervisory condition. Costs of conversion will be netted from the proceeds of sale of common stock and recorded as a reduction of additional paid-in capital or common stock. If the conversion is not completed, such costs, totaling $25,475 at December 31, 1995 (unaudited), would be charged to expense. Note 13--Unaudited Financial Statements The accompanying consolidated statement of financial condition as of December 31, 1995, and the consolidated statements of income, changes in equity capital and cash flows for the six-months ended December 31, 1995 and 1994 are unaudited, but management is of the opinion that all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the results of the periods reported, have been included in the accompanying financial statements. The results of operations for the six-months ended December 31, 1995 are not necessarily indicative of those expected for the remainder of the year. <PAGE> ================================================================================ No person has been authorized to give any information or to make any representation other than as contained in this Prospectus and, if given or made, such information or representation must not be relied upon as having been authorized by the Holding Company or the Bank. This Prospectus does not constitute an offer to sell or the solicitation of an offer to buy any security other than the shares Common Stock offered hereby to any person in any jurisdiction in which such offer or solicitation is not authorized, or in which the person making such offer or solicitation is not qualified to do so, or to any person to whom it is unlawful to make such offer or solicitation. Neither the delivery of this Prospectus nor any sale hereunder shall, under any circumstances, create any implication that information herein is correct as of any time subsequent to the date hereof. TABLE OF CONTENTS Page Prospectus Summary......................................................... 5 Selected Consolidated Financial Data of Owen Community Bank, s.b................................................12 Recent Financial Data......................................................13 Risk Factors...............................................................16 Home Financial Bancorp.....................................................21 Owen Community Bank, s.b...................................................22 Market Area................................................................23 Use of Proceeds............................................................23 Dividend Policy............................................................24 Market for the Common Stock................................................25 Anticipated Management Purchases...........................................25 Capitalization.............................................................26 Pro Forma Data.............................................................27 Management's Discussion and Analyis of Financial Condition and Results of Operations...........................31 Business...................................................................47 Competition................................................................63 Management.................................................................65 Executive Compensation and Related Transactions............................66 Regulation.................................................................71 Taxation...................................................................77 The Conversion.............................................................79 Restrictions on Acquisition of the Holding Company.........................90 Description of Capital Stock...............................................94 Transfer Agent.............................................................95 Registration Requirements..................................................95 Legal and Tax Matters......................................................95 Experts....................................................................95 Additional Information.....................................................96 Index to Financial Statements..............................................F-1 ---------- Until August 12, 1996, all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. ================================================================================ <PAGE> ================================================================================ Up to 655,500 Shares [HOME FINANCIAL BANCORP logo] (Holding Company for Owen Community Bank, s.b.) ---------- Common Stock (without par value) ---------- SUBSCRIPTION AND DIRECT COMMUNITY OFFERING PROSPECTUS Charles Webb & Co. Friedman, Billings, Ramsey & Co., Inc. May 14, 1996 ================================================================================ <PAGE> PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution(1). Blue Sky Legal Services and Registration Fees $ 10,000 NASD Filing Fee $ 1,254 Securities and Exchange Commission Registration Fee $ 2,599 Legal Services and Disbursements - Issuer's counsel $100,000 Auditing and Accounting Services $ 50,000 Appraisal fees and expenses $ 15,000 Business plan fees and expenses $ 4,000 Conversion agent fees and expenses $ 5,500 Printing costs $ 25,000 Postage and mailing $ 10,000 Commissions and other offering fees (2) $ 50,000 Expenses of Sales Agents (Including Counsel Fees and Disbursements) $ 30,000 Transfer agent fees $ 2,000 Other expenses $ 4,647 -------- TOTAL (3) $310,000 ======== (1) Costs represented by salaries and wages of regular employees and officers of the Registrant are excluded. (2) Assumes that no shares will be sold through brokers. (3) All the above items, except the SEC Registration and NASD Filing Fees, are estimated. Item 14. Indemnification of Directors and Officers. Section 21 of the Indiana Business Corporation Law, as amended (the "BCL"), grants to each corporation broad powers to indemnify directors, officers, employees or agents against expenses incurred in certain proceedings if the conduct in question was found to be in good faith and was reasonably believed to be in the corporation's best interests. This statute provides, however, that this indemnification should not be deemed exclusive of any other indemnification rights provided by the articles of incorporation, by-laws, resolution or other authorization adopted by a majority vote of the voting shares then issued and outstanding. Section 10.05 and Article 13 of the Articles of Incorporation of the Registrant state as follows: Section 10.05. Limitation of Liability and Reliance on Corporate Records and Other Information. Clause 10.051. General Limitation. No Director, member of any committee of the Board of Directors, or of another committee appointed by the Board, Officer, employee or agent of the Corporation ("Corporate Person") shall be liable for any loss or damage if, in taking or omitting to take any action causing such loss or damage, either (1) such Corporate Person acted (A) in good faith, (B) with the care an ordinarily prudent person in a like position would have exercised under similar circumstances, and (C) in a manner such Corporate Person reasonably believed was in the best interests of the Corporation, or (2) such Corporate Person's breach of or failure to act in accordance with the standards of conduct set forth in Clause 10.051(1) above (the "Standards of Conduct") did not constitute willful misconduct or recklessness. Clause 10.052. Reliance on Corporate Records and Other Information. Any "Corporate Person" shall be fully protected, and shall be deemed to have complied with the Standards of Conduct, in relying in good faith, with <PAGE> respect to any information contained therein, upon (1) the Corporate Records, or (2) information, opinions, reports or statements (including financial statements and other financial data) prepared or presented by (A) one or more other Corporate Persons whom such Corporate Person reasonably believes to be competent in the matters presented, (B) legal counsel, public accountants or other persons as to matters that such Corporate Person reasonably believes are within such person's professional or expert competence, (C) a committee of the Board of Directors or other committee appointed by the Board of Directors, of which such Corporate Person is not a member, if such Corporate Person reasonably believes such committee of the Board of Directors or such appointed committee merits confidence, or (D) the Board of Directors, if such Corporate Person is not a Director and reasonably believes that the Board merits confidence. ARTICLE 13 Indemnification Section 13.01. General. The Corporation shall, to the fullest extent to which it is empowered to do so by the Act, or any other applicable laws, as from time to time in effect, indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative and whether formal or informal, by reason of the fact that he is or was a Director, Officer, employee or agent of the Corporation, or who, while serving as such Director, Officer, employee or agent of the Corporation, is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, whether for profit or not, against expenses (including counsel fees), judgments, settlements, penalties and fines (including excise taxes assessed with respect to employee benefit plans) actually or reasonably incurred by him in accordance with such action, suit or proceeding, if he acted in good faith and in a manner he reasonably believed, in the case of conduct in his official capacity, was in the best interests of the Corporation, and in all other cases, was not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, he either had reasonable cause to believe his conduct was lawful or no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not meet the prescribed standard of conduct. Section 13.02. Authorization of Indemnification. To the extent that a Director, Officer, employee or agent of the Corporation has been successful, on the merits or otherwise, in the defense of any action, suit or proceeding referred to in Section 13.01 of this Article, or in the defense of any claim, issue or matter therein, the Corporation shall indemnify such person against expenses (including counsel fees) actually and reasonably incurred by such person in connection therewith. Any other indemnification under Section 13.01 of this Article (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case, upon a determination that indemnification of the Director, Officer, employee or agent is permissible in the circumstances because he has met the applicable standard of conduct. Such determination shall be made (1) by the Board of Directors by a majority vote of a quorum consisting of Directors who were not at the time parties to such action, suit or proceeding; or (2) if a quorum cannot be obtained under subdivision (1), by a majority vote of a committee duly designated by theBoard of Directors (in which designation Directors who are parties may participate), consisting solely of two or more Directors not at the time parties to such action, suit or proceeding; or (3) by special legal counsel: (A) selected by the Board of Directors or its committee in the manner prescribed in subdivision (1) or (2), or (B) if a quorum of the Board of Directors cannot be obtained under subdivision (1) and a committee cannot be designated under subdivision (2), selected by a majority vote of the full Board of Directors (in which selection Directors who are parties may participate); or (4) by <PAGE> the Shareholders, but shares owned by or voted under the control of Directors who are at the time parties to such action, suit or proceeding may not be voted on the determination. Authorization of indemnification and evaluation as to reasonableness of expenses shall be made in the same manner as the determination that indemnification is permissible, except that if the determination is made by special legal counsel, authorization of indemnification and evaluation as to reasonableness of expenses shall be made by those entitled under subsection (3) to select counsel. Section 13.03. Good Faith Defined. For purposes of any determination under Section 13.01 of this Article 13, a person shall be deemed to have acted in good faith and to have otherwise met the applicable standard of conduct set forth in Section 13.01 if his action is based on information, opinions, reports, or statements, including financial statements and other financial data, if prepared or presented by (1) one or more Officers or employees of the Corporation or another enterprise whom he reasonably believes to be reliable and competent in the matters presented; (2) legal counsel, public accountants, appraisers or other persons as to matters he reasonably believes are within the person's professional or expert competence; or (3) a committee of the Board of Directors of the Corporation or another enterprise of which the person is not a member if he reasonably believes the committee merits confidence. The term "another enterprise" as used in this Section 13.03 shall mean any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise of which such person is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent. The provisions of this Section 13.03 shall not be deemed to be exclusive or to limit in any way the circumstances in which a person may be deemed to have met the applicable standards of conduct set forth in Section 13.01 of this Article 13. Section 13.04. Payment of Expenses in Advance. Expenses incurred in connection with any civil or criminal action, suit or proceeding may be paid for or reimbursed by the Corporation in advance of the final disposition of such action, suit or proceeding, as authorized in the specific case in the same manner described in Section 13.02 of this Article, upon receipt of a written affirmation of the Director, Officer, employee or agent's good faith belief that he has met the standard of conduct described in Section 13.01 of this Article and upon receipt of a written undertaking by or on behalf of the Director, Officer, employee or agent to repay such amount if it shall ultimately be determined that he did not meet the standard of conduct set forth in this Article 13, and a determination is made that the facts then known to those making the determination would not preclude indemnification under this Article13. Section 13.05. Provisions Not Exclusive. The indemnification provided by this Article shall not be deemed exclusive of any other rights to which a person seeking indemnification may be entitled under these Articles of Incorporation, the Corporation's Code of By-Laws, any resolution of the Board of Directors or Shareholders, any other authorization, whenever adopted, after notice, by a majority vote of all Voting Stock then outstanding, or any contract, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a Director, Officer, employee or agent, and shall inure to the benefit of the heirs, executors and administrators of such a person. Section 13.06. Vested Right to Indemnification. The right of any individual to indemnification under this Article shall vest at the time of occurrence or performance of any event, act or omission giving rise to any action, suit or proceeding of the nature referred to in Section 13.01 of this Article 13 and, once vested, shall not later be impaired as a result of any amendment, repeal, alteration or other modification of any or all of these provisions. Notwithstanding the foregoing, the indemnification afforded under this Article shall be applicable to all alleged prior acts or omissions of any individual seeking indemnification hereunder, regardless of the fact that such alleged acts or omissions may have occurred prior to the adoption of this Article. To the extent such prior acts or omissions cannot be deemed to be covered by this Article 13, the right of any individual to indemnification shall be governed by the indemnification provisions in effect at the time of such prior acts or omissions. <PAGE> Section 13.07. Insurance. The Corporation may purchase and maintain insurance on behalf of any person who is or was a Director, Officer, employee or agent of the Corporation, or who is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against any liability asserted against or incurred by the individual in that capacity or arising from the individual's status as a Director, Officer, employee or agent, whether or not the Corporation would have power to indemnify the individual against the same liability under this Article. Section 13.08. Additional Definitions. For purposes of this Article, references to "the Corporation" shall include any domestic or foreign predecessor entity of the Corporation in a merger or other transaction in which the predecessor's existence ceased upon consummation of the transaction. For purposes of this Article, serving an employee benefit plan at the request of the Corporation shall include any service as a Director, Officer, employee or agent of the Corporation which imposes duties on, or involves services by such Director, Officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries. A person who acted in good faith and in a manner he reasonably believed to be in the best interests of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interest of the Corporation" referred to in this Article. For purposes of this Article, "party" includes any individual who is or was a plaintiff, defendant or respondent in any action, suit or proceeding, or who is threatened to be made a named defendant or respondent in any action, suit or proceeding. For purposes of this Article, "official capacity," when used with respect to a Director, shall mean the office of director of the Corporation; and when used with respect to an individual other than a Director, shall mean the office in the Corporation held by the Officer or the employment or agency relationship undertaken by the employee or agent on behalf of the Corporation. "Official capacity" does not include service for any other foreign or domestic corporation or any partnership, joint venture, trust, employee benefit plan, or other enterprise, whether for profit or not. Section 13.09. Payments a Business Expense. Any payments made to any indemnified party under this Article under any other right to indemnification shall be deemed to be an ordinary and necessary business expense of the Corporation, and payment thereof shall not subject any person responsible for the payment, or the Board of Directors, to any action for corporate waste or to any similar action. Under the Act, an Indiana corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another enterprise, against any liability asserted against him or incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of the Act. The Registrant has purchased insurance designed to protect and indemnify the Registrant and its officers and directors in case they are required to pay any amounts arising from certain claims, including claims under the Securities Act of 1933, which might be made against the officers and directors by reason of any actual or alleged act, error, omission, misstatement, misleading statement, neglect, or breach of duty while acting in their respective capacities as officers or directors of the Registrant. Item 15. Recent Sales of Unregistered Securities. Because the Registrant was only recently incorporated to act as a holding company upon the completion of the offering registered by means of this Registration Statement, the Registrant has not yet issued any shares of its capital stock or other securities. Item 16. Exhibits and Financial Statement Schedules. (a) The exhibits furnished with this Registration Statement are listed beginning on page E-l. (b) No financial statement schedules are required. Item 17. Undertakings. (1) The undersigned Registrant hereby undertakes: (a) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii)To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table on the effective registration statement; and (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (b) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (c) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (2) The undersigned Registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. (3) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of an action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. <PAGE> SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this amendment to the registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Spencer, State of Indiana, on May 9, 1996. HOME FINANCIAL BANCORP By /s/ Kurt J. Meier ---------------------------------- Kurt J. Meier President, Chief Executive Officer and Treasurer Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated. Signatures Title Date ---------- ----- ---- (1) Principal Executive Officers: /s/ Frank R. Stewart ) ------------------------ ) Frank R. Stewart Chairman of the Board ) ) ) ) /s/ Kurt J. Meier ) ------------------------ ) Kurt J. Meier President, Chief ) Executive Officer ) and Treasurer ) ) ) ) (2) Principal Financial ) and Accounting Officer: ) ) ) /s/ Kurt D. Rosenberger ) ------------------------ ) Kurt D. Rosenberger Vice President and ) Chief Financial Officer ) ) May 9, 1996 ) (3) The Board of Directors: ) ) CHARLES W. CHAMBERS Director ) ) ) ) JOHN T. GILLASPY Director ) ) ) ) KURT J. MEIER Director ) <PAGE> ) ) STEPHEN PARRISH Director ) ) ) ROBERT W. RAPER Director ) May 9, 1996 ) ) FRANK R. STEWART Director ) ) ) TAD WILSON Director ) ) By: /s/ Kurt J. Meier ) ------------------------ ) Kurt J. Meier Attorney-in-fact <PAGE> EXHIBIT INDEX Exhibit No. Description Page 1 Form of Agency Agreement to be entered into among Registrant, Owen Community Bank, s.b., Charles Webb & Company, and Friedman, Billings, Ramsey & Co., Inc.* 2 Plan of Conversion* 3 (1) Registrant's Articles of Incorporation* (2) Registrant's Code of By-Laws* 4 Form of Stock Certificate* 5 Opinion of Barnes & Thornburg re legality of securities being registered* 8 (1) Opinion of Barnes & Thornburg re tax matters* (2) Opinion of Keller & Company, Inc. re economic value of Subscription Rights* 10 (1) Letter Agreements entered into between Registrant and Keller & Company, Inc. relating to appraisal and business plan* (2) Stock Option Plan* (3) Owen Community Bank, s.b. Recognition and Retention Plan and Trust* (4) Owen Community Bank, s.b. Employee Stock Ownership Plan and Trust Agreement* (5) Employment Agreement between Owen Community Bank, s.b. and Kurt J. Meier* (6) Employment Agreement between Owen Community Bank, s.b. and Kurt D. Rosenberger* (7) Employment Contract between Owen Community Bank, s.b. and Frank R. Stewart* 21 Subsidiaries of the Registrant* 23(1) Consent of Keller & Company, Inc.* (2) Consent of Geo. S. Olive & Co., LLC (3) Consent of Barnes & Thornburg (included in Exhibit 5)* 24 Power of Attorney included on page S-6 of the Registration Statement* 99(1) Appraisal Report of Keller & Company, Inc.* (2) Stock Order Form* ---------- * Previously filed <PAGE> Exhibit 23(2) ------------- CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We consent to the use of our report dated July 21, 1995, except for notes 12 and 13 for which the date is December 31, 1995, on the consolidated financial statements of Owen Community Bank, s.b. and to reference made to us under the caption "Experts" in Amendment No. 2 to the Registration Statement on Form S-1 filed by Home Financial Bancorp with the United States Securities and Exchange Commission. /s/ Geo. S. Olive & Co. LLC Indianapolis, Indiana May 9, 1996 </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001009403_marchfirst_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001009403_marchfirst_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS AND RELATED NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS INDICATED OTHERWISE, THE INFORMATION CONTAINED IN THIS PROSPECTUS: (i) GIVES RETROACTIVE EFFECT TO A 2 FOR 1 SPLIT OF THE SHARES OF COMMON STOCK, $.001 PAR VALUE PER SHARE (THE "COMMON STOCK"), EFFECTED ON DECEMBER 10, 1996 AND A 4 FOR 1 SPLIT OF THE SHARES OF COMMON STOCK EFFECTED ON APRIL 3, 1996, AND (ii) REFLECTS THE CONVERSION OF THE COMPANY'S REDEEMABLE CONVERTIBLE PREFERRED STOCK, $.001 PAR VALUE PER SHARE (THE "REDEEMABLE PREFERRED STOCK"), INTO 1,912,148 SHARES OF COMMON STOCK ON MAY 2, 1996. UNLESS OTHERWISE INDICATED, ALL REFERENCES TO THE "COMPANY" OR "WHITTMAN-HART" INCLUDE THE AFFILIATED ENTITIES INVOLVED IN THE REORGANIZATION DESCRIBED IN "THE COMPANY." THE COMPANY Whittman-Hart, Inc. ("Whittman-Hart" or the "Company") provides strategic information technology ("IT") services designed to improve its clients' productivity and competitive position. The Company offers its clients a single source for a comprehensive range of services required to successfully design, develop and implement integrated computer systems projects in diverse computing environments. Among the services offered by the Company are systems integration, strategic IT planning, software development, packaged software implementation (such as SAP's R/3 client/server application software), business process reengineering, organizational change management, networking and connectivity, conventional and multimedia documentation and training, design and implementation of workgroup solutions (such as Lotus Notes) and design and implementation of electronic commerce solutions (such as intranet/Internet and EDI). Whittman-Hart's marketing efforts focus on middle market companies ranging from $50 million to $500 million in annual revenues and divisions of Fortune 1000 companies. Whittman-Hart serves clients in a broad range of industries, including communications, consumer products, distribution, diversified services, financial services, insurance, manufacturing, pharmaceuticals, professional services, retail and technology. The Company employs consultants with business experience in these areas to enhance its ability to understand industry-specific business issues and develop unbiased IT solutions to address these issues. The number of clients billed by the Company has grown from 338 in 1993 to 492 in 1995. The Company believes that it has established significant ongoing relationships with many of its clients. The demand for IT consulting services has increased rapidly in recent years and is continuing to grow because: (i) businesses and other organizations are becoming more reliant on IT for their competitive success; (ii) companies are migrating from centralized, mainframe-based computer systems to distributed client/server environments; (iii) widespread organizational downsizing requires improved business process efficiencies; (iv) IT solutions have become more complex; and (v) organizations do not generally possess the quantity and variety of IT skills needed to execute complex IT projects. Whittman-Hart has competed successfully in this environment, experiencing a compound annual revenue growth rate of 46% over the past three fiscal years. For fiscal year 1995, the Company's revenues were $49.8 million, an increase of 69% from $29.5 million in fiscal year 1994. Revenues for the nine months ended September 30, 1996 were $62.2 million, an increase of 80% from $34.6 million in the corresponding 1995 period. From September 30, 1995 to September 30, 1996, the number of consultants increased 72% from 476 to 819. Whittman-Hart sells and delivers its services through a network of six branch offices located in Chicago, Indianapolis, Denver, Cincinnati, Milwaukee and Dallas. The Company has developed a national branch expansion strategy and has begun replicating its business model in additional major domestic markets. Expansion plans for 1996 include a Dallas branch, opened in January 1996, and a Cleveland branch is scheduled to open in late 1996 or early 1997. The expansion plans for 1997 include a Columbus branch, scheduled to open in early 1997, and an Atlanta branch scheduled to open mid-1997. In support of its growth strategy, Whittman-Hart has made significant investments in its business and systems infrastructure, recruiting organization, training methodologies and marketing programs, all of which the Company believes will be necessary to support a significantly larger organization. The Company's growth strategy includes the following elements: (i) expanding service capabilities; (ii) increasing client penetration by cross-selling additional services; (iii) acquiring other firms to facilitate entry into new geographic markets or increase technical expertise; and (iv) seeking strategic relationships to share technical and industry knowledge and pursue joint marketing opportunities. SUMMARY FINANCIAL DATA <TABLE> <CAPTION> NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, ----------------------------------------------------- -------------------- 1991 1992 1993 1994 1995 1995 1996 (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: (1) Revenues....................................... $ 17,881 $ 18,632 $ 23,422 $ 29,543 $ 49,822 $ 34,606 $ 62,164 Gross profit................................... 6,849 7,395 9,593 11,816 19,430 13,483 24,960 Operating income............................... 177 713 1,037 1,175 1,713 1,460 4,901 Net income..................................... 8 693 1,100 1,100 1,780 1,409 3,429 Net income per share........................... $0.20 Shares used in computing net income per share......................................... 17,166 Pro forma net income (2)....................... 8 679 1,073 855 1,114 882 Pro forma net income per share (2)(3).......... $0.08 $0.06 Shares used in computing pro forma net income per share (3)................................. 14,130 14,243 Supplementary pro forma net income per share (4)........................................... $0.08 </TABLE> <TABLE> <CAPTION> AS OF SEPTEMBER 30, 1996 ----------------------- (IN THOUSANDS) <S> <C> BALANCE SHEET DATA: Cash and cash equivalents and short-term investments................................. $ 63,596 Working capital...................................................................... 70,750 Total assets......................................................................... 84,242 Total stockholders' equity........................................................... 75,619 </TABLE> - ------------------------ (1) Certain reclassifications have been made to prior year amounts to conform to the 1995 presentation. See Note 2 of Notes to Financial Statements. (2) Reflects federal and additional state income tax expense that would have been required had the Company and its predecessors operated as a C corporation for all periods presented. (3) See Note 2 of Notes to Financial Statements for information concerning the computation of pro forma net income per share. (4) Adjusted to give effect to the retirement of two promissory notes totaling $1,666,500, resulting in a reduction of interest expense of $153,000 (pro forma net income effect of $92,000 assuming a pro forma effective tax rate of 40%) as if the Company's initial public offering had occurred on January 1, 1995. Shares used in computing supplementary pro forma net income per share were increased by 223,992 to approximate the number of shares sold in the Company's initial public offering to yield net proceeds to retire these notes. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001009480_target_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001009480_target_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..c7c1f8a796e1f283972550060a46ee80def02c80
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to, and should be read in conjunction with, the more detailed information and financial statements (including the notes thereto) appearing elsewhere in this Prospectus. Each prospective investor is urged to read this Prospectus in its entirety. Unless otherwise indicated, all share and option amounts have been adjusted to give effect to the surrender of 237,089 shares of Common Stock and options to purchase 396,910 shares of Common Stock effective as of February 7, 1996. See 'Certain Transactions'. THE COMPANY Amertranz Worldwide Holding Corp. ('Company') provides freight forwarding services through its wholly owned subsidiaries, Amertranz Worldwide, Inc. ('Amertranz') and Caribbean Air Services, Inc. ('CAS'). The Company also recently began providing logistics services. Since commencement of its predecessors' operations in 1970, the Company has grown to a network of offices in 25 cities throughout the United States and Puerto Rico. The Company believes that it is one of the dominant freight forwarders between the continental United States and Puerto Rico. The Company combined the operations of Amertranz and CAS in a transaction which occurred in February 1996 ('Combination'). On a pro forma basis for the 12 months ended December 31, 1995, the Company had operating revenues of $62.2 million and incurred operating losses of $3.1 million. The Company's freight forwarding services involve all aspects of transporting customers' freight from the shippers' locations to the designated recipient, including the preparation of shipping documents and the providing of handling, packing and containerization services. The Company concentrates on cargo shipments weighing more than 50 pounds and generally requiring second-day delivery, a segment of the freight forwarding market which the Company believes will experience sustained growth. The Company's logistics services, which are provided to large manufacturing companies, involve coordinating all of the transportation requirements for a customer, including shipment to and from the warehouse, warehousing and maintenance of customer inventory, individual order organizing for shipment, and order packing and shipping. The Company has approximately 2,000 customers. Its principal customers include large manufacturers and distributors of pharmaceuticals, computers and other electronic and high-technology equipment and computer software, and, through its Fashion Air division, businesses in the garment industry. The Company neither owns nor operates any cargo aircraft or significant trucking equipment and relies on independent contractors for the movement of cargo. In this manner, the Company is able to provide customized service without the costs associated with equipment ownership, operation and maintenance. The Company's objective is to become a leading provider of second-day domestic freight forwarding services in all of its markets. Its strategy is to maximize the synergies created by the combination of its Amertranz and CAS businesses by (i) exploiting cross-selling opportunities, and (ii) taking advantage of underutilized operations infrastructure and purchased freight space. The Company also intends to maximize its use of its subsidiaries' existing trucking networks to minimize its reliance on more expensive air freight carriers. BACKGROUND The Company was incorporated in Delaware in January 1996 as the successor to operations commenced in 1970 as the 'Wrangler Aviation' division of Blue Bell, Inc., an apparel manufacturer. The Wrangler Aviation division transported raw material to Blue Bell facilities in Puerto Rico and returned the finished goods to its facilities in Greensboro, North Carolina. In 1988, new owners of Blue Bell, Inc. separately incorporated the division in Delaware as Wrangler Aviation, Inc. ('Wrangler'), and then sold Wrangler in October 1990. At that time, Caribbean Freight System, Inc. ('CFS') was incorporated in Puerto Rico as a wholly owned subsidiary of Wrangler to act as the marketing arm of Wrangler. In December 1991, the owners of Wrangler engaged a new management team following the discovery of certain improprieties performed under the old management. As a result of investigations by the new management, it was determined to reorganize both Wrangler and CFS under Chapter 11 of the United States Bankruptcy Code. CFS and Wrangler both successfully emerged from the Chapter 11 proceedings in November 1992 and June 1993, respectively. In January 1994, Wrangler changed its name to TIA, Inc. ('TIA'). Thereafter, TIA and CFS continued to specialize in the movement of large freight shipments for manufacturers, and maintained sales and/or full offices in Philadelphia, New York, Chicago, Los Angeles, Hartford, and Greensboro, North Carolina, as well as a network of sales persons in Puerto Rico. Amertranz and its predecessor began operations in June 1985 as an independently-owned exclusive agent of a domestic and international air freight forwarder. During the next eight years, Amertranz opened nine offices under its exclusive agency arrangement. In January 1994, Amertranz acquired the domestic air freight forwarding business (i.e., the transport of freight which has both its point of origin and its point of destination within the United States) of the freight forwarder for which Amertranz was acting as an exclusive agent, as a result of the settlement of a lawsuit. Thereafter, Amertranz owned and operated 20 offices primarily focusing on the movement of domestic freight and, in its original nine offices, international air freight. As an independent freight operation, Amertranz established an internal infrastructure, including accounting, data processing and communications departments, to support its 20 office network. In the Combination, the Company continued the freight forwarding businesses of TIA and CFS and acquired Amertranz. See 'Business--Historical Background' and 'Certain Transactions'. Unless otherwise expressly stated, all references to the 'Company' in this Prospectus include the Company, Amertranz and its predecessors-in-operation, Integrity Logistics, Inc. and Amerford Domestic, Inc., and CAS and its predecessors-in-operation the freight forwarding business of TIA, and its subsidiary, CFS. The Company's executive offices are located at 2001 Marcus Avenue, Lake Success, New York 11042, and its telephone number is (516) 326-9000. THE OFFERING <TABLE> <S> <C> Securities Offered....................... 2,000,000 shares of Common Stock and 2,000,000 Warrants. Each Warrant entitles the holder thereof to purchase one share of Common Stock for $6.00 during the four-year period commencing one year from the date of this Prospectus. The Company may redeem the Warrants at a price of $.01 per Warrant at any time after they become exercisable upon not less than 30 days' prior written notice if the last sale price of the Common Stock has been at least $10.00 for each of the 20 consecutive trading days ending on the third day prior to the date on which the notice of redemption is given. See 'Description of Securities'. Common Stock Outstanding Prior to the Offering............................... 3,626,504 shares Common Stock to be Outstanding After the Offering............................... 5,626,504 shares Proposed Nasdaq SmallCap Market Symbols................................ Common Stock: AMTZ Warrants: AMTZW </TABLE> USE OF PROCEEDS The Company intends to apply the net proceeds of the Offering approximately as follows: (i) $4,130,000 for the repayment of principal and accrued interest on the promissory notes issued in connection with the Bridge Financings; (ii) $2,000,000 in partial repayment of a promissory note made in connection with the February 1996 Combination; (iii) $373,000 for the repayment of principal and accrued interest on the promissory notes issued in connection with the Interim Financing; (iv) $700,000 to repay overdue trade payables; and (v) $3,033,000 for working capital and general corporate purposes. See 'Use of Proceeds'.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001009591_trinity_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001009591_trinity_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..5b513b37344c39e98f894a70e99103daad1cbfb0
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY - -------------------------------------------------------------------------- The following summary is qualified in its entirety by the more detailed information, financial statements and notes to the financial statements including the notes thereto appearing elsewhere in this Prospectus. THE CORPORATION. The Corporation was incorporated in Texas on August 1, 1994. The Corporation currently manufactures a variety of productivity enhancement products for desktop computer systems and networks. Multiple product lines exist covering 200 million compatible systems. In the personal computer (PC) market, the Corporation offers the Trinity PowerStacker line of CPU upgrades. These upgrades are capable of delivering increased performance to their targeted systems with 100% compatibility for most 486 and all Pentium based PCs. These products range from the Trinity PowerStacker 5x86 133 Mhz to the Trinity PowerStacker 686 180/200 Mhz Pentium upgrades. For the Macintosh, the Corporation offers CPU (Central Processing Unit) clock booster product line known as the Trinity PowerPak TM and the Trinity PowerTrip. See Business Activities. The Corporation was initially capitalized through a loan from one of its directors and established a relationship with CompUSA Superstores, a large computer reseller, to continue the development of one of its products, Trinity PowerPak TM, a low-cost, clock-oscillator upgrade for Macintosh systems and the PowerStacker line of PC upgrades. In 1995, the Corporation marketed its products through national mail-order companies and regional distributors. The Corporation had three employees in its first year and received only sufficient revenue to meet its expenses. Additional funding through private placement of the Corporation's securities was obtained in the fourth quarter of 1995 and the first quarter of 1996. The Corporation added four additional employees in the second quarter of 1996. The PowerStacker PC product line was introduced in March 1996. These 5x86 and Pentium upgrades are now widely available across the nation and internationally through CompUSA, Computer City, Radio Shack International and other resellers. Additionally, 50,000 Value Added Resellers (VARs) in the United States have access to all of the Corporation's product through TechData Corporation, a large computer distributor throughout the United States and the world. The Corporation's executive offices are located at 12201 Technology Boulevard Suite 145, Austin, Texas 78727. Telephone No. (512) 249-1099. See "The Corporation". THE DISTRIBUTION <TABLE> <S> <C> Securities Being Distributed 104,000 of the Corporation's Common Shares. Purpose of Distribution To enhance the Corporation's ability to raise additional capital, if necessary, in the future. Shares of Common Stock Outstanding After Distribution 2,760,602 Common Shares. Distributing Corporation Pratt, Wylce & Lords, Ltd., a Nevada corporation. Distribution Ratio One Common Share for approximately every twenty five shares of Pratt Common Stock owned of record on January 5, 1996 (the "Record Date"). USE OF PROCEEDS The securities to which this Prospectus relates are being distributed to holders of Pratt Common Stock as a dividend and neither the Corporation nor Pratt will receive any cash or other proceeds in connection with the Distribution. Additionally this Prospectus relates to securities being registered on behalf of selling security holders and the Corporation will not receive any cash or other proceeds in connection with the subsequent sale. Any proceeds received from the subsequent exercise of the A, B and C Warrants shall be used as working capital and to expand operations.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001009869_craig_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001009869_craig_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..46b28e44177b264c6301eba5df37546b304f1437
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0001009869_craig_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors," and financial statements and related notes thereto appearing elsewhere in this Prospectus. Except as otherwise noted, all information in this Prospectus (i) assumes no exercise of the Underwriters' over-allotment option or the Representative's Warrants, and (ii) assumes no exercise of options to purchase up to 525,000 shares of Common Stock which have been reserved for issuance under the Company's 1996 Plan and Non-Statutory Plan (as defined herein), and 365,559 shares issuable to Richard Berger and Richard Miller pursuant to outstanding options. In addition, unless otherwise indicated, all share and per-share data in this Prospectus has been adjusted to reflect the recapitalization of the Company resulting from the conversion of 250,000 shares of Series A Preferred Stock into 1,733,330 shares of Common Stock and a 3.81-to-one reverse stock split of the Common Stock to be effected prior to the date of this Prospectus (the "Recapitalization"). Prospective investors should carefully consider the information discussed under "Risk Factors." THE COMPANY Craig Consumer Electronics, Inc. (the "Company") designs and markets brand name consumer electronic products under its trademark, "Craig."(R) The Company offers value-oriented products with features that the Company believes are comparable to those of its higher-priced competitors. The Company's products are sold through over 200 retailers with approximately 15,000 retail outlets, including major retail chains, such as Best Buy, Circuit City, Thrifty Payless, Rex, Incredible Universe, Nobody Beats the Wiz, and Rite Aid, and other mass merchandisers, such as Montgomery Ward and Price Costco. The Company also sells through catalog and direct marketing organizations, such as QVC Network, Spiegel Catalog, and Amway. In recent years, the Company has emphasized the design and marketing of home and mobile audio electronic products (such as compact music centers and car stereos) and portable audio products (such as "boom boxes" and small personal stereos). The Company has realized gross margins (net sales less the cost of goods sold) exceeding 17% in each of the last three years on sales of its audio electronic products. By contrast, the Company has experienced lower and declining gross margins on sales of its video electronic products over the past three years. As a result, the Company severely limited sales of video products during 1995 and does not anticipate substantial sales of video products in 1996 or for the foreseeable future. The Company will instead devote the principal portion of its resources to the design, sourcing, distribution and sale of audio electronic and related products. Primarily due to its increasing focus on the sale of audio products, the Company's gross profit increased from approximately $11.9 million to $14.3 million to $14.4 million in 1993, 1994, and 1995, respectively, although overall sales were $12.5 million and $16.9 million lower in 1995, when compared to 1993 and 1994, respectively. In spite of the increase in gross profits resulting from the Company's shifting emphasis on audio products, net income went from $1.1 million to $533,000 to $791,000 in 1993, 1994, and 1995, respectively. The failure of net income to increase along with gross profits was primarily due to relatively high levels of general and administrative expenses associated with the expansion of the Company's quality control operations, establishment of a Cerritos reconditioning facility and the establishment of the Hong Kong office, as well as increased interest expense. The following graphs demonstrate the Company's increasing emphasis on sales of audio electronic products: LOGO LOGO The Company's objective is to establish itself as one of the leading suppliers of value-oriented audio electronic and related products. To achieve this objective, the Company intends, to the extent the Company's financial condition allows, to (i) expand the Company's distribution, targeting other channels of distribution; (ii) continue its international expansion; (iii) reduce its higher interest rate indebtedness in order to decrease overall interest expense and enhance cash flow through the application of the proceeds of this Offering; (iv) expand the Company's consumer product lines into telephones and telephone products, and potentially other items; and (v) decrease the costs of reconditioning goods and attempt to increase profitability and cash flow through the use of a Chinese joint venture facility. No assurance can be given that any of these initiatives can be implemented successfully. THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Company............................ 1,262,500 shares(1) Common Stock to Be Outstanding After the Offering................. 3,396,941 shares Use of Proceeds.................... Substantially all of the net proceeds of this Offering will be used for the repayment of debt. See "Use of Proceeds." Risk Factors....................... An investment in the shares of Common Stock offered hereby involves a high degree of risk. Prospective investors should carefully review and consider the risk factors set forth in the section of this Prospectus entitled "Risk Factors," as well as the other information set forth in this Prospectus, before investing in any of the Common Stock offered hereby. Proposed Nasdaq National Market Symbol............................. CREG(2) - --------------- </TABLE> (1) The Company and certain stockholders (the "Selling Stockholders") have granted to the Underwriters a 45-day option to purchase up to 187,500 shares of Common Stock, solely to cover over-allotments, if any. See "Underwriting." (2) While the Common Stock has been approved, subject to official notice of issuance, for listing on the Nasdaq National Market, there is no assurance that a public trading market will develop, or, if developed, will be sustained. See "Risk Factors -- No Prior Public Market for Common Stock; Risk of Limited Market." SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following Summary Financial Data is qualified by reference to the audited financial statements and related notes thereto appearing at page F-1 of this Prospectus, and the unaudited quarterly financial statements and related notes thereto appearing at page F-14 of this Prospectus. <TABLE> <CAPTION> QUARTER ENDED YEAR ENDED DECEMBER 31, MARCH 31, ----------------------------------------------------- ------------------ 1991 1992 1993 1994 1995 1995 1996 ------- ------- -------- -------- ------- ------- ------- (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF INCOME DATA: Audio sales............ $26,897 $34,052 $ 53,029 $ 71,432 $80,710 $13,113 $12,825 Video sales............ 18,791 45,256 48,186 34,207 7,966 4,619 565 ------- ------- -------- -------- ------- ------- ------- Net sales.............. $45,688 $79,308 $101,215 $105,639 $88,676 17,732 13,390 Gross profit........... 7,673 10,016 11,856 14,305 14,352 2,106 1,931 Operating income (loss)............... 1,296 2,198 2,331 2,296 3,152 (287) (277) Net income (loss)...... 517 937 1,073 533 791 (684) (548) Pro-forma net income (loss) per share(1)............. $ 0.33 $ (0.26) Pro-forma weighted average number of shares outstanding(2)....... 2,373 2,134 </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1995 MARCH 31, 1996 ----------------- ----------------------- ACTUAL ACTUAL AS ADJUSTED ----------------- ------- ----------- (UNAUDITED) <S> <C> <C> <C> BALANCE SHEET DATA: Working capital....................................... $ 3,705 $ 3,222 $ 8,922 Total assets.......................................... 32,530 28,239 28,239 Note payable under revolving line of credit........... 15,530 11,336 5,636 Subordinated debt and capital lease obligations, net of current portion.................................. 1,048 1,043 1,043 Stockholders' equity.................................. 4,934 4,386 10,086 </TABLE> - --------------- (1) Pro-forma net income per share gives pro-forma effect to the Recapitalization. See Note 10 to the financial statements. (2) Pro-forma weighted average number of shares outstanding is calculated based on the number of shares outstanding after the Recapitalization, while giving effect to the sale of the shares of Common Stock sold in this Offering and the dilutive effect of outstanding stock options. (3) Adjusted to reflect the sale by the Company of 1,262,500 shares of Common Stock at an offering price of $5.50 per share, and the application of the estimated net proceeds therefrom. See "Use of Proceeds."
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by and should be read in conjunction with the more detailed information and financial statements and related notes thereto appearing elsewhere in this Prospectus. THE COMPANY The Company is a newly formed Georgia corporation organized for the purpose of acting as the holding company for Georgia Blue and its subsidiaries and to engage in certain other health care related activities. Georgia Blue was established in 1937 and through a series of business combinations and subsidiary operations had, by 1985, the largest health insurance company market share in Georgia. As of December 31, 1995, Georgia Blue had over 670,000 insurance and administrative service contracts covering or administering benefits for over 1.4 million members. This represents more than 19% of the total Georgia population and includes approximately 15% of the more than 3.2 million residents of the metropolitan Atlanta area. In connection with the Conversion, Georgia Blue issued all of its shares of common stock to, and became a wholly-owned subsidiary of, the Company. Currently the only business of the Company is the ownership and operation of Georgia Blue and its subsidiaries. In this Prospectus, the term "Company" is sometimes used to describe the Company and its subsidiaries as a single operation on a combined basis. Historically, Georgia Blue's primary source of revenues has come from premiums for traditional indemnity health insurance and services. In response to concerns regarding health care costs and changing trends in the health care industry, beginning in 1992 Georgia Blue implemented a strategy to emphasize managed care products and began to develop its model of integrated service delivery systems called community health partnership networks ("CHPNs"). The Company offers a comprehensive array of insurance products and services, including managed care products and services offered through a health maintenance organization (an "HMO"), a preferred provider organization (a "PPO") and a point of service network plan (a "POS"). The Company's strategic plan entails continued emphasis on and expansion of its managed care products. See "BUSINESS," "BUSINESS -- Strategic Initiatives" and "BUSINESS -- Business Lines and Products." The Company also offers traditional comprehensive indemnity health coverage, third party administrator services and group life insurance products. The Company's insurance and managed care products are offered directly through Georgia Blue and through Georgia Blue's three wholly-owned subsidiaries, HMO Georgia, Inc. ("HMO-Ga"), Greater Georgia Life Insurance Company, Inc. ("GGL") and Group Benefits of Georgia, Inc. ("GBG"). The Company has one of the largest PPO memberships in the State of Georgia, serving over 290,000 members as of December 31, 1995. In addition, the Company served over 130,000 members through HMO-Ga as of December 31, 1995, which provides the Company's HMO and POS products. See "BUSINESS." At present, HMO-Ga is licensed and operational as an HMO in seven markets in Georgia, including Atlanta, Athens, Augusta, Columbus, Macon, Rome and Savannah, which markets represent more than 4.7 million residents. While Atlanta has an HMO market penetration of approximately 28%, Georgia as a whole currently has one of the lowest HMO penetrations in the country, at 13%. Based on industry sources, the five states with the highest HMO penetrations in the country each have HMO penetration in excess of 35%. The Company's HMO and POS products are serviced through networks of primary care physicians, specialist physicians and hospitals that provide services under contracts with HMO-Ga. Beginning on January 1, 1995, HMO-Ga's HMO and POS products also began to be provided in the Atlanta market through contracts with Georgia Blue's first CHPN, Atlanta Health Care Partners, Inc. ("CHPN-Atlanta"). As of December 31, 1995, CHPN-Atlanta provides services to approximately 96,000 people. CHPNs are locally based equity ventures between Georgia Blue and a local physician group or hospital or both. It is anticipated that Georgia Blue, either alone or with a contiguous state's Blue Cross/Blue Shield plan as a joint venture partner, will own at least a 51% equity interest in each of its CHPNs and the physician groups and hospitals will own the remaining equity interest. Clinical services offered under a CHPN are provided by the physician group or hospital partners as well as by other providers with which the CHPN maintains contracts. CERULEAN COMPANIES, INC. CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K <TABLE> <CAPTION> ITEM IN FORM S-1 LOCATION IN PROSPECTUS --------------------------------------------------- ----------------------------------- <C> <S> <C> 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus................... Outside Front Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus....................................... Inside Front Cover Page; Available Information 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges........................ Prospectus Summary; Risk Factors 4. Use of Proceeds.................................... * 5. Determination of Offering Price.................... * 6. Dilution........................................... Risk Factors 7. Selling Security Holders........................... * 8. Plan of Distribution............................... Outside Front Cover Page; Prospectus Summary -- The Offering 9. Description of Securities to be Registered......... Summary; Description of Capital Stock 10. Interests of Named Experts and Counsel............. * 11. Information with Respect to the Registrant......... Prospectus Summary; Risk Factors; Dividends; Capitalization; Selected Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Description of Capital Stock; Financial Statements 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities... * </TABLE> - --------------- * Not Applicable. Georgia Blue provides sales, management and administrative services to the CHPN, including information systems and data management services, through service contracts with the CHPN. Currently, CHPN-Atlanta is the only CHPN in which an entity jointly owned by providers and Georgia Blue has been formed and capitalized. However, in the six other Georgia markets serviced by HMO-Ga, HMO and POS products are being offered through HMO-Ga in collaboration with local providers in connection with the formation of CHPNs in those markets, thus carrying out the CHPN framework. See "BUSINESS -- Strategic Initiatives -- CHPNs." Cerulean Companies, Inc. will derive revenue from dividends from its subsidiaries (Georgia Blue and its subsidiaries as well as any new subsidiaries which the Company may form to conduct new businesses), service and/or management fee arrangements between the Company and its subsidiaries, as well as revenues the Company may derive from other non-regulated services it may provide customers directly in the future. Pursuant to licenses from the Blue Cross and Blue Shield Association ("BCBSA"), a national trade association consisting of 63 Blue Cross and Blue Shield licensees as of March 1, 1996, the Company has the exclusive right to do business under the name "Blue Cross and Blue Shield of Georgia" and to use the Blue Cross and Blue Shield names, trademarks and service marks for all of the indemnity and managed health care products and services it offers in the State of Georgia. The Company's principal executive offices are located at 3350 Peachtree Road, N.E., Atlanta, Georgia 30326, and its telephone number at that address is (404) 842-8000. THE CONVERSION On February 2, 1996, Georgia Blue converted from a non-profit corporation to a for-profit corporation and became a wholly-owned subsidiary of the Company in accordance with a Plan of Conversion (the "Plan of Conversion") approved by the Commissioner in an order issued December 27, 1995 (the "Commissioner's Order"). The principal goal of the Conversion is to allow the Company access to the equity capital markets in order to finance its strategic plan and to enhance its competitive position. See "BUSINESS," "BUSINESS -- Strategic Initiatives" and "BUSINESS -- Business Lines and Products" as well as "RISK FACTORS -- Ability to Successfully Implement Strategic Plan" for a more detailed discussion of the Company's Strategic Plan. Simultaneously with the Conversion, the Company issued 49,901 shares of Preferred Stock. The net proceeds to the Company from the sale of the Preferred Stock were approximately $46.1 million, after deducting estimated offering expenses and certain other expenses of the Conversion payable by the Company, including reimbursement of certain expenses incurred by certain purchasers of the Preferred Stock. The Company currently intends to use the net proceeds from the sale of the Preferred Stock for general corporate purposes, which may include strategic information systems development, medical access point development, management services organization (MSO) acquisitions, other strategic acquisitions and CHPN development and support. At the present time, the Company has no agreement with, or intentions or plans to acquire, any other specific company or entity, and is not in discussion with any company or entity with respect to any such acquisition. As part of the Conversion, the Company issued 800,000 shares of the Class A Stock to SunTrust Bank, Atlanta as Escrow Agent, for distribution to Eligible Subscribers as described herein and is offering to each Eligible Subscriber five Shares of Class A Stock at no cost to the Eligible Subscriber. As of September 1, 1995, there were approximately 160,000 Eligible Subscribers. THE OFFERING General; the Commissioner's Order. As provided in the Plan of Conversion approved by the Commissioner's Order, the Company is offering to each Eligible Subscriber five Shares of Class A Stock at no cost to the Eligible Subscriber. An "Eligible Subscriber" is defined in the Plan of Conversion as a person who was a subscriber of Georgia Blue (within the meaning of the Georgia Insurance Code) on September 1, 1995 and who remained a subscriber on February 1, 1996, and as to whom distribution of the Shares (i) is exempt from registration under the state securities laws of the applicable jurisdictions or (ii) does not violate any applicable law or regulation. While the offering of the Class A Stock is not generally exempt from the registration 800,000 SHARES CERULEAN COMPANIES, INC. CLASS A CONVERTIBLE COMMON STOCK --------------------- Cerulean Companies, Inc. (the "Company") is a newly formed Georgia corporation organized for the purpose of acting as the holding company for Blue Cross and Blue Shield of Georgia, Inc. ("Georgia Blue") and its subsidiaries and to engage in certain other health care related activities. Effective on February 2, 1996, Georgia Blue converted (the "Conversion") from a Georgia non-profit corporation to a Georgia for-profit corporation and became a wholly-owned subsidiary of the Company. See "THE CONVERSION." As part of the Conversion, the Company (i) issued 800,000 shares of Class A Convertible Common Stock (the "Class A Stock") to SunTrust Bank, Atlanta as Escrow Agent for distribution to "Eligible Subscribers" as described herein and (ii) is offering to each Eligible Subscriber five shares (the "Shares") of Class A Stock at no cost to the Eligible Subscriber. An "Eligible Subscriber" is defined in the Plan of Conversion approved by the Georgia Commissioner of Insurance (the "Commissioner") as a person who was a subscriber of Georgia Blue (within the meaning of the Georgia Insurance Code) on September 1, 1995 and who remained a subscriber on February 1, 1996, and as to whom distribution of the Shares (i) is exempt from registration under the state securities laws of the applicable jurisdictions or (ii) does not violate any applicable law or regulation. Each Eligible Subscriber is requested to specify on the attached Stock Election Form whether or not such Eligible Subscriber chooses to accept the Company's offer for the Shares by no later than 5:00 p.m. Atlanta time on August 12, 1996 (the "Termination Time"). All Shares which an Eligible Subscriber has rejected, or has been deemed to have rejected as described herein, at or prior to the Termination Time, will be transferred by the Escrow Agent to the Company for cancellation. ANY ELIGIBLE SUBSCRIBER WHO FAILS TO PROPERLY COMPLETE AND SIGN THE STOCK ELECTION FORM ELECTING TO ACCEPT THE COMPANY'S OFFER OF THE SHARES, OR WHOSE PROPERLY COMPLETED AND SIGNED STOCK ELECTION FORM IS NOT RECEIVED BY THE ESCROW AGENT BY THE TERMINATION TIME, WILL BE DEEMED TO HAVE REJECTED THE COMPANY'S OFFER OF THE SHARES. ANY ELIGIBLE SUBSCRIBER WHO REJECTS THE COMPANY'S OFFER OF THE SHARES OR WHO IS DEEMED TO HAVE REJECTED THE COMPANY'S OFFER WILL FORFEIT ALL OF HIS OR HER RIGHTS TO THE SHARES OFFERED HEREBY, WILL HAVE NO RIGHTS AS A SHAREHOLDER OF THE COMPANY AND WILL HAVE NO RIGHTS TO ANY SUBSEQUENT OFFERING OF THE COMPANY'S OR GEORGIA BLUE'S SECURITIES. An Eligible Subscriber's election to accept or decline the Company's offer of the Shares will not have any impact on such Eligible Subscriber's insurance under any applicable Georgia Blue policy or plan. THERE IS A RISK THAT EACH ELIGIBLE SUBSCRIBER WHO ACCEPTS THE OFFER OF THE SHARES MAY BE REQUIRED TO RECOGNIZE TAXABLE INCOME (TO THE EXTENT OF THE VALUE OF THE SHARES RECEIVED BY SUCH ELIGIBLE SUBSCRIBER) UPON RECEIPT OF THE SHARES AND, AS A RESULT, MAY INCUR FEDERAL INCOME TAX LIABILITY IN CONNECTION WITH HIS OR HER RECEIPT OF THE SHARES. THE COMPANY HAS OBTAINED AN OPINION OF ITS CERTIFIED PUBLIC ACCOUNTANTS THAT ELIGIBLE SUBSCRIBERS WHO ACCEPT THE OFFER FOR THE SHARES SHOULD NOT INCUR FEDERAL INCOME TAX LIABILITY IN CONNECTION WITH THEIR RECEIPT OF THE SHARES; HOWEVER, BECAUSE THIS IS A UNIQUE TRANSACTION IN WHICH THERE ARE NO PRECEDENTIAL AUTHORITIES OUTSTANDING, NO ASSURANCE CAN BE GIVEN THAT THE INTERNAL REVENUE SERVICE WILL NOT CHALLENGE THIS POSITION. THE COMPANY ENCOURAGES EACH ELIGIBLE SUBSCRIBER TO CONSULT HIS OR HER OWN TAX ADVISOR WITH RESPECT TO THIS MATTER. SEE "CERTAIN FEDERAL INCOME TAX CONSEQUENCES -- ISSUANCE OF CLASS A STOCK TO ELIGIBLE SUBSCRIBERS." (Cover continued on next page) SEE "RISK FACTORS" FOR CERTAIN INFORMATION THAT SHOULD BE CONSIDERED, INCLUDING THE POSSIBLE ADVERSE TAX CONSEQUENCES OF ACCEPTANCE OF SHARES. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ANY ELIGIBLE SUBSCRIBER WHO FAILS TO PROPERLY COMPLETE AND SIGN THE STOCK ELECTION FORM ELECTING TO ACCEPT THE COMPANY'S OFFER OF THE SHARES OR WHOSE PROPERLY COMPLETED AND SIGNED STOCK ELECTION FORM IS NOT RECEIVED BY THE ESCROW AGENT BY THE TERMINATION TIME, WILL BE DEEMED TO HAVE REJECTED THE COMPANY'S OFFER FOR THE SHARES. ANY ELIGIBLE SUBSCRIBER WHO REJECTS THE COMPANY'S OFFER OF THE SHARES OR WHO IS DEEMED TO HAVE REJECTED THE COMPANY'S OFFER WILL FORFEIT ALL OF HIS OR HER RIGHTS TO THE SHARES OFFERED HEREBY, WILL HAVE NO RIGHTS AS A SHAREHOLDER OF THE COMPANY AND WILL HAVE NO RIGHTS TO ANY SUBSEQUENT OFFERING OF THE COMPANY'S OR GEORGIA BLUE'S SECURITIES. The date of this Prospectus is , 1996 requirements of state securities laws, the Company has either qualified the Class A Stock for distribution or has confirmed the availability of an exemption for the distribution of the Class A Stock in all states in which there are Eligible Subscribers. As a result, subscribers in states in which such an exemption or qualification is unavailable are not Eligible Subscribers, will have no rights to the Shares offered hereby, will have no rights as shareholders of the Company and will have no rights to any subsequent offering of the Company's or Georgia Blue's securities. See "RISK FACTORS -- Certain Federal Income Tax Consequences" and "CERTAIN FEDERAL INCOME TAX CONSEQUENCES." Terms of Offer; Method of Acceptance. As part of the Conversion, on February 2, 1996, the Company issued a single certificate for 800,000 Shares to SunTrust Bank, Atlanta as Escrow Agent for distribution to Eligible Subscribers. Each Eligible Subscriber is requested to specify on the attached Stock Election Form whether or not such Eligible Subscriber chooses to accept the Company's offer for the Shares by no later than 5:00 p.m. Atlanta time on August 12, 1996 (as such date may be extended in the sole discretion of the Company, the "Termination Time"). Pursuant to the terms of the Company's agreement with the Escrow Agent, on the first day of each calendar month following the related period during which a Stock Election Form is received, the Escrow Agent is required to register or cause to be registered on the books and records of the Company maintained by SunTrust Bank, Atlanta, as Transfer Agent (the "Transfer Agent"), five shares of Class A Stock in the name of each Eligible Subscriber who has delivered a proper Stock Election Form during such period. The Escrow Agent shall not be obligated to register Class A Stock in the name of any Eligible Subscriber if such Eligible Subscriber's Stock Election Form does not conform in all respects to the form provided by the Company. On the first calendar day of each month, the Escrow Agent shall send or cause the Transfer Agent to send, to each new Class A Stockholder, a notification of such registration by first-class mail, postage prepaid; no stock certificates will be issued at any time for Class A Stock. Once registered, each Class A Stockholder shall be deemed a stockholder from and after February 2, 1996, except with respect to matters as to which Class A Stockholders had a right to vote during the period between February 2, 1996 and the date of registration. Georgia law governing the Conversion requires that a health care corporation such as Georgia Blue that issues shares of its capital stock in connection with an initial public offering must first offer the shares to its subscribers. The Commissioner's Order held that the issuance of the Shares offered hereby constitutes an initial public offering within the meaning of the applicable Georgia law and that this offering of the Shares extinguishes all such rights of subscribers under Georgia law. As a result, if either the Company or Georgia Blue issues shares of capital stock in any future public offering, it will not be required to offer any of such shares to its subscribers. DESCRIPTION OF CLASS A STOCK Securities Offered......... 800,000 shares of Class A Convertible Common Stock, no par value per share. Dividends.................. So long as any shares of the Company's Preferred Stock are issued, outstanding and entitled to vote, no dividends may be paid in cash, stock or other property on the Class A Stock without the approval of the Board of Directors of the Company and of the holders of a majority of the shares of Preferred Stock then issued, outstanding and entitled to vote. If no shares of Preferred Stock are issued, outstanding and entitled to vote, dividends may be declared on the Class A Stock at the discretion of the Board of Directors out of funds legally available therefor. On February 2, 1996, the Company issued, and there are currently outstanding, 49,901 shares of Preferred Stock. The Company presently anticipates that shares of Preferred Stock will be issued, outstanding and entitled to vote at all times up to the date the Class A Stock is converted to Common Stock. The Company does not anticipate that any dividends will be paid on Class A Stock. (Cover continued from previous page) Each share of Class A Stock and the Company's Class B Convertible Preferred Stock (the "Preferred Stock") will be convertible automatically into Common Stock, no par value per share, of the Company (the "Common Stock") upon the earlier of (i) December 1, 2001 or (ii) the closing date of a public offering of Common Stock registered under the Securities Act of 1933, as amended (the "Securities Act"). In addition, the Company may at any time, with the approval of the holders of a majority of the then outstanding shares of Preferred Stock, convert all, but no less than all, of the issued and outstanding shares of Class A Stock and Preferred Stock into shares of Common Stock, with the Class A Stock converted on the basis of one share of Common Stock for each share of Class A Stock. Additionally, each share of Class A Stock will be converted into Common Stock immediately preceding any liquidation, dissolution or winding up of the Company if such conversion is approved by the holders of a majority of the then outstanding shares of Preferred Stock. Upon any such conversion, the Class A Stock will be converted into Common Stock on the basis of one share of Common Stock for each share of Class A Stock, and the Preferred Stock will be converted into Common Stock pursuant to the formula described herein under "DESCRIPTION OF CAPITAL STOCK -- Class B Stock -- Conversion." See "DESCRIPTION OF CAPITAL STOCK -- Class A Stock -- Conversion." Upon the registration of shares in the names of Eligible Subscribers and for so long as any shares of both Preferred Stock and Class A Stock are issued and outstanding and no shares of Common Stock are issued and outstanding, the holders of the outstanding shares of Class A Stock, voting as a separate class and to the exclusion of all other classes and series of capital stock of the Company, will be entitled to elect two Directors at each annual meeting of shareholders as described herein, up to a total maximum of six Directors. The remaining Directors, including two Directors nominated by the holders of Preferred Stock and the remaining Directors nominated by the Nominating Committee of the Board of Directors and approved by two-thirds of the Continuing Directors (as defined under "PROSPECTUS SUMMARY -- Description of Class A Stock -- Voting Rights") will be elected by the holders of Preferred Stock so long as any shares of Preferred Stock are outstanding. On all other matters to come before the shareholders other than the election of Directors, the holders of Class A Stock will be entitled to vote as a separate class. If any shares of Common Stock are issued and outstanding, holders of Class A Stock will have no voting rights except as required by Georgia law. In the event no shares of Common Stock or Preferred Stock are outstanding, all rights to vote will be vested in the holders of the outstanding shares of Class A Stock or the Blank Preferred Stock of the Company ("Blank Preferred Stock"). On the date of this Prospectus, there are 49,901 shares of Preferred Stock outstanding and no shares of Common Stock or Blank Preferred Stock outstanding. See "RISK FACTORS -- Election of Directors," "DESCRIPTION OF CAPITAL STOCK -- Class A Stock -- Voting" and "-- Preferred Stock -- Voting." Shares of Class A Stock cannot be sold, transferred, encumbered, pledged or otherwise disposed of prior to December 1, 1998, except by descent and distribution, as required by judicial decree or by operation of law. Subject to the limitations described below, during the period from December 1, 1998 to December 1, 2001, if a holder of shares of Class A Stock desires to sell all or any portion of such Class A Stock, the holder is first required to offer such shares to the Company. The Company may exercise this right of first refusal to acquire up to 2% of the issued and outstanding shares of Class A Stock in any one calendar year, or such greater amount as may be approved by the holders of at least a majority of the Preferred Stock then issued, outstanding and entitled to vote. See "DESCRIPTION OF CAPITAL STOCK -- Class A Stock -- Restrictions on Transfer." Voting Rights.............. Upon the registration of shares in the name of Eligible Subscribers, and for so long as any shares of both Preferred Stock and Class A Stock are issued and outstanding, and no shares of Common Stock are issued and outstanding, the holders of outstanding shares of Class A Stock, voting separately as a single class (with each share being entitled to one vote) and to the exclusion of all other classes and series of capital stock of the Company, shall be entitled to elect two Directors to each of the Company's three classes of Directors ("Class A Designated Directors") (for a total of six of the total of 21 members of the Board of Directors) as follows: Beginning at or prior to the first annual meeting of shareholders, a special nominating committee composed of two Continuing Directors (as defined below) and two Preferred Designated Directors (as defined below) will nominate two Class A Designated Directors to be voted on by all of the holders of the Class A Stock at such annual meeting. At or prior to the annual meeting of shareholders held in the following year, a special nominating committee composed of two Continuing Directors and the two Class A Designated Directors would nominate two additional Class A Designated Directors, again to be voted on by all of the holders of Class A Stock at such annual meeting. At or prior to the annual meeting of shareholders held in the next year, a nominating committee composed of two Continuing Directors and the four Class A Designated Directors would nominate two additional Class A Designated Directors, again to be voted on by all of the holders of the Class A Stock at such annual meeting. At the annual meeting of shareholders held in the next year and at each annual meeting until the occurrence of a Stock Conversion (as defined below), a special nominating committee composed of the six Class A Designated Directors would nominate, and the holders of the Class A Stock would be entitled to elect, two Class A Designated Directors each year to replace the two Class A Designated Directors whose terms expire during such year. Notwithstanding any nomination by a special nominating committee, the holders of the Class A Stock shall be entitled to nominate and elect any eligible individual as a Class A Designated Director each year. "Continuing Directors" are those individuals who: (i) are named as members of the initial Board of Directors of the Company (other than the Preferred Designated Directors), together with any new Directors whose election or nomination to the Board of Directors was approved by a vote of two-thirds of the Directors then still in office who were such Directors or whose election or nomination was previously so approved; (ii) are not beneficial owners of more than five percent of the total shares of any class of equity securities outstanding; and (iii) were not nominated by such a beneficial owner and, prior to such Director's election, did not have any agreement, arrangement, or understanding with any such beneficial owner with respect to any action to be taken by such person as a Director. Notwithstanding the foregoing, in the event shares of Class A Stock and Common Stock are outstanding at the same time, all rights to vote would be vested in the holders of the Common Stock, except (i) the rights of the holders of Preferred Stock to elect Directors (see "DESCRIPTION OF CAPITAL STOCK -- Preferred Stock -- Voting), and (ii) such other voting rights as are provided by the Georgia Business Corporation Code. Accordingly, in the event the Company issues any shares of Common Stock, the holders of Class A Stock will have no voting rights (including the right to elect Class A Designated Directors) except as expressly provided by law. See "DESCRIPTION OF CAPITAL STOCK -- Class A Common Stock -- Voting." In the event no shares of Preferred Stock or Common Stock are outstanding, all rights to vote will be vested in the holders of the outstanding shares of Class A Stock or the Blank Preferred Stock of the Company ("Blank Preferred Stock"). The Company anticipates that the Preferred Stock will be outstanding during all periods the Class A Stock is outstanding. Conversion of Class A Stock...................... Each share of Class A Stock and Preferred Stock will be converted automatically into Common Stock upon the earlier of (i) December 1, 2001 or (ii) the closing date of a public offering of Common Stock registered under the Securities Act of 1933, as amended (the "Securities Act"). In addition, the Company may at any time with the approval of the holders of a majority of the then outstanding shares of Preferred Stock convert all, but not less than all, of the issued and outstanding shares of Class A Stock and Preferred Stock into shares of Common Stock. Additionally, each share of Class A Stock and Preferred Stock will be converted into Common Stock immediately preceding any liquidation, dissolution or winding up of the Company, if such conversion is approved by the holders of a majority of the then outstanding shares of Preferred Stock. Upon any such conversion, the Class A Stock shall be converted into Common Stock on the basis of one share of Common Stock for each share of Class A Stock and the Preferred Stock shall be converted into Common Stock pursuant to the formula described herein under "DESCRIPTION OF CAPITAL STOCK -- Class B Stock -- Conversion." See "DESCRIPTION OF CAPITAL STOCK -- Class A Common Stock -- Conversion." Restrictions on Transfer; Right of First Refusal... Shares of Class A Stock cannot be sold, transferred, encumbered, pledged or otherwise disposed of prior to December 1, 1998, except (i) upon the death of the holder, to an heir taking by law or pursuant to testamentary succession, (ii) by operation of law, or (iii) as required by a final judicial decree. Subject to the limitations described below, during the period from December 1, 1998 to December 1, 2001, if a holder of shares of Class A Stock desires to sell all or any portion of such Class A Stock, the holder must first offer such shares to the Company on the same terms and conditions as the proposed sale. The Company may exercise this right of first refusal to acquire up to 2% of the issued and outstanding shares of Class A Stock in any one calendar year, or such greater amount as may be approved by the holders of more than a majority of the Preferred Stock then issued, outstanding and entitled to vote. See "DESCRIPTION OF CAPITAL STOCK -- Class A Stock -- Restrictions on Transfer." Lock-up Agreement for Conversion Stock......... In addition, Shares of Common Stock issued in exchange for Class A Stock ( "Conversion Stock") upon conversion of Class A Stock into Common Stock, are subject to a "lock-up" arrangement. Under the lock-up, no shares of any holder's Conversion Stock may be transferred for a period of six months following conversion and no more than 50% of such holder's shares of Conversion Stock may be transferred during the period beginning six months following conversion and ending on the date which is one year following the conversion. See "DESCRIPTION OF CAPITAL STOCK -- Class A Stock -- Restrictions on Transfer; Right of First Refusal." The shares of Conversion Stock have not been registered under the Securities Act and until such registration, if any, their transfer by Eligible Subscribers would be subject to the provisions of Rule 144 under the Securities Act. Pursuant to Rule 144, persons receiving shares of Conversion Stock upon conversion of their Class A Stock may be required to hold such Conversion Stock for a two-year period from the time of Conversion or until the earlier registration, if any, of the Conversion Stock. FEDERAL INCOME TAX CONSEQUENCES THERE IS A RISK THAT EACH ELIGIBLE SUBSCRIBER WHO ACCEPTS THE OFFER OF THE SHARES MAY BE REQUIRED TO RECOGNIZE TAXABLE INCOME (TO THE EXTENT OF THE VALUE OF THE SHARES RECEIVED BY SUCH ELIGIBLE SUBSCRIBER) UPON RECEIPT OF THE SHARES AND, AS A RESULT, MAY INCUR FEDERAL INCOME TAX LIABILITY IN CONNECTION WITH HIS OR HER RECEIPT OF THE SHARES. THE COMPANY HAS OBTAINED AN OPINION OF ITS CERTIFIED PUBLIC ACCOUNTANTS THAT ELIGIBLE SUBSCRIBERS WHO ACCEPT THE OFFER OF THE SHARES SHOULD NOT INCUR FEDERAL INCOME TAX LIABILITY IN CONNECTION WITH THEIR RECEIPT OF THE SHARES; HOWEVER, BECAUSE THIS IS A UNIQUE TRANSACTION IN WHICH THERE ARE NO PRECEDENTIAL AUTHORITIES OUTSTANDING, NO ASSURANCE CAN BE GIVEN THAT THE INTERNAL REVENUE SERVICE WILL NOT CHALLENGE THIS POSITION. SEE "CERTAIN FEDERAL INCOME TAX CONSEQUENCES -- ISSUANCE OF CLASS A STOCK TO ELIGIBLE SUBSCRIBERS." THE COMPANY ENCOURAGES EACH ELIGIBLE SUBSCRIBER TO CONSULT HIS OR HER OWN TAX ADVISOR REGARDING THE SPECIFIC FEDERAL INCOME TAX CONSEQUENCES TO SUCH SUBSCRIBER OF THE ACCEPTANCE OF THE COMPANY'S OFFER OF CLASS A STOCK, AS WELL AS ANY TAX CONSEQUENCES TO SUCH SUBSCRIBER ARISING UNDER THE LAWS OF ANY STATE, LOCALITY, FOREIGN COUNTRY OR OTHER JURISDICTION. MARKET FOR CLASS A STOCK There is no public trading market for the Class A Stock. Further, because of the restrictions on transfer of the Class A Stock, it is not anticipated that such a trading market will develop in the future. SUMMARY CONSOLIDATED FINANCIAL INFORMATION The following is summary consolidated financial information of Georgia Blue prior to the Conversion. The information presented below for the years ended as of December 31 has been derived from the Consolidated Financial Statements of Georgia Blue which have been audited by Ernst & Young LLP, independent auditors, whose report for the three years ended December 31, 1995 appears elsewhere in this Prospectus. The following data, prepared in accordance with generally accepted accounting principles, should be read in conjunction with the accompanying Consolidated Financial Statements, the related notes thereto and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" included elsewhere in this Prospectus. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, -------------------------------------------------------- 1991(1) 1992(1) 1993 1994 1995 -------- -------- -------- ---------- ---------- ($ IN THOUSANDS) <S> <C> <C> <C> <C> <C> STATEMENT OF INCOME DATA: Revenues: Premiums............................... $815,863 $914,406 $939,671 $1,038,397 $1,159,476 Investment and other income............ 9,527 8,815 8,524 9,462 11,980 Realized gains......................... 1,379 5,777 4,658 2,512 15,265 -------- -------- -------- ---------- ---------- Total revenues................. 826,769 928,998 952,853 1,050,371 1,186,721 Benefits expense......................... 731,875 831,795 832,908 914,277 1,039,095 Operating expenses....................... 78,135 79,171 89,284 111,012 126,077 -------- -------- -------- ---------- ---------- Operating Income......................... 16,759 18,032 30,661 25,082 21,549 Loss on building repurchase.............. -- -- (7,566) -- -- -------- -------- -------- ---------- ---------- Income before income taxes, minority interest, extraordinary item and cumulative effect of accounting change................................. 16,759 18,032 23,095 25,082 21,549 Income taxes(2).......................... 3,127 3,559 4,796 5,621 3,857 Minority interest in CHPNs............... -- -- -- -- (282) -------- -------- -------- ---------- ---------- Income before extraordinary item and cumulative effect of a change in accounting principle................... 13,632 14,473 18,299 19,461 17,410 Extraordinary item -- reduction of income taxes arising from carryforward of prior years' net operating losses...... 2,746 3,081 -- -- -- Cumulative effect of change in accounting for income taxes....................... -- -- 5,449 -- -- -------- -------- -------- ---------- ---------- Net Income(3)............................ $ 16,378 $ 17,554 $ 23,748 $ 19,461 $ 17,410 ======== ======== ======== ========= ========= </TABLE> - --------------- (1) Years prior to 1993 were restated to conform to the current year presentation. (2) The effective tax rate has been approximately 20% as a result of paying taxes under the alternative minimum tax system. This is the result of a deduction available under Section 833(b) of the Internal Revenue Code (see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Overview"). If the deduction were no longer available, Georgia Blue would be subject to federal income taxes at the regular corporate tax rate, which is currently 35%. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES -- Section 833 of the Code." (3) Earnings per share are omitted because such data are not meaningful at the present time due to the likely dilutive events that will occur prior to the conversion of the Class A Convertible Common Stock or the Class B Convertible Preferred Stock (See "Description of Capital Stock"). <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, -------------------------------------------------------- 1991(1) 1992(1) 1993 1994 1995 -------- -------- -------- ---------- ---------- ($ IN THOUSANDS) <S> <C> <C> <C> <C> <C> OPERATING DATA BY PRODUCT GROUP: Premium Revenues by Product Group: HMO and POS............................ $ 49,613 $ 58,553 $ 76,196 $ 87,532 $ 144,662 Indemnity and PPO...................... 759,799 849,510 857,167 944,156 1,006,524 Life & Other........................... 6,451 6,343 6,308 6,709 8,290 -------- -------- -------- ---------- ---------- Total premium revenues......... $815,863 $914,406 $939,671 $1,038,397 $1,159,476 ======== ======== ======== ========= ========= As a Percentage of Premium Revenues: HMO and POS............................ 6.1% 6.4% 8.1% 8.4% 12.5% Indemnity and PPO...................... 93.1 92.9 91.2 90.9 86.8 Life and Other......................... 0.8 0.7 0.7 0.7 0.7 -------- -------- -------- ---------- ---------- Total premium revenues......... 100.0% 100.0% 100.0% 100.0% 100.0% ======== ======== ======== ========= ========= Percentage of Net Income: HMO and POS............................ 1.6% (4.5)% (0.9)% 4.9% 40.0% Indemnity and PPO...................... 89.6 94.2 92.8 88.4 49.5 Life and Other......................... 8.9 10.4 8.1 6.7 10.5 -------- -------- -------- ---------- ---------- Total.......................... 100.0% 100.0% 100.0% 100.0% 100.0% ======== ======== ======== ========= ========= Loss Ratio (Benefits Expense as a Percentage of Premium Revenues): HMO and POS............................ 92.1% 94.0% 93.2% 89.2% 83.7% Indemnity and PPO...................... 89.9 91.1 88.5 88.2 90.7 Life and Other......................... 51.8 45.4 46.6 52.0 56.5 -------- -------- -------- ---------- ---------- Total loss ratio............... 89.7% 91.0% 88.6% 88.0% 89.6% ======== ======== ======== ========= ========= Operating Expense Ratio (Operating Expenses as a Percentage of Premium Revenues).............................. 9.6% 8.7% 9.5% 10.7% 10.9% ======== ======== ======== ========= ========= Combined Loss Ratio (Benefits Expense and Operating Expenses as a Percentage of Premium Revenues): HMO and POS............................ 99.7% 101.7% 100.4% 98.3% 94.7% Indemnity and PPO...................... 99.3 99.6 98.0 98.8 101.4 Life and Other......................... 92.3 88.1 92.1 94.8 94.9 -------- -------- -------- ---------- ---------- Total Combined Loss Ratio...... 99.3% 99.7% 98.1% 98.7% 100.5% ======== ======== ======== ========= ========= Effective Income tax rate(2)............. 18.7% 19.7% 20.8% 22.4% 17.9% ======== ======== ======== ========= ========= BALANCE SHEET DATA (AT PERIOD END): Cash, equivalents and marketable securities............................. $131,632 $153,711 $177,650 $ 201,976 $ 223,994 Total assets............................. 285,728 318,041 356,241 407,023 417,079 Total estimated benefit liabilities...... 156,454 161,290 153,881 167,895 175,846 Total liabilities........................ 197,291 212,050 226,502 258,353 244,040 Surplus.................................. 88,437 105,991 129,739 148,670 173,039 </TABLE> - --------------- (1) Years prior to 1993 were restated to conform to the current year presentation. (2) The effective tax rate has been approximately 20% as a result of paying taxes under the alternative minimum tax system. This is the result of a deduction available under Section 833(b) of the Internal Revenue Code (see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Overview"). If the deduction were no longer available, Georgia Blue would be subject to federal income taxes at the regular corporate tax rate, which is currently 35%. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES -- Section 833 of the Code."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001010247_fpic_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001010247_fpic_prospectus_summary.txt
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+SUMMARY This summary is qualified by the detailed information and financial data (including the financial statements and the Notes thereto) appearing elsewhere in this Prospectus or incorporated by reference herein. Except as otherwise indicated, (i) all share and per share amounts in this Prospectus have been adjusted to reflect the 100% stock dividend effective December 31, 1994 and the 5 for 1 stock exchange effective June 11, 1996 in connection with the Reorganization (as defined herein) of the Company and (ii) all information set forth in this Prospectus assumes that the Underwriters' over-allotment option has not been exercised by the Underwriters. See "Underwriting." All financial information in this Prospectus is presented in accordance with generally accepted accounting principles ("GAAP") unless otherwise specified. For purposes of this Prospectus, the "Company" refers, at all times prior to the effective date of the Reorganization to Florida Physicians Insurance Company, Inc. ("FPIC") and its subsidiaries, collectively, and at all times on or after such effective date to FPIC Insurance Group, Inc. ("FIG") and its subsidiaries, collectively. See "Reorganization". See "Glossary" for the definitions of certain insurance terms used herein. See "Risk Factors" for a discussion of important factors that should be considered by prospective investors. THE COMPANY FPIC Insurance Group, Inc. is the second largest provider of medical professional liability insurance in Florida, with an approximate 15% market share of direct premium written for physicians for the year ended December 31, 1994. For more than 20 years, the Company and its predecessors have provided medical professional liability insurance to Florida's medical community. The Company has the exclusive endorsement of both the Florida Medical Association ("FMA") and the Florida Dental Association ("FDA"). The Company has increased its number of insured physicians and dentists from 2,460 at year-end 1986 to 5,055 at year-end 1995 and on June 30, 1996 the Company had outstanding policies for 5,408 physicians and dentists. For 1995, the Company had direct premium written of $56.6 million, operating income of $11.5 million and at December 31, 1995 had shareholders' equity of $81.6 million. For the first quarter of 1996, the Company had direct premium written of $22.6 million, operating income of $2.1 million and at March 31, 1996 had shareholders' equity of $80.6 million. The Company has achieved underwriting profitability exceeding industry averages while consistently expanding its policyholder base. The Company's statutory combined ratio was 94.9% in 1993, 93.7% in 1994 and 97.6% in 1995, compared to the Physician Insurers Association of America ("PIAA") industry average of 121.4%, 101.8% and 98.4%, respectively. The Company's after-tax operating income increased from $6.3 million in 1993 to $10.4 million in 1994 and to $11.5 million in 1995. The Company's number of insured physicians and dentists increased from 4,264 on January 1, 1993 to 5,055 on December 31, 1995. Medical professional liability ("MPL"), or medical malpractice insurance, insures the physician, dentist, hospital or other healthcare provider against liabilities arising from the rendering of or failure to render professional healthcare service. Under the typical MPL insurance policy, the insurer also pays the legal costs of defending the claim. Based on data compiled by A.M. Best Company, Inc. ("A.M. Best"), total MPL premium in the U.S. exceeded $5.8 billion in 1994. Florida is the third largest market for MPL insurance in the U.S., based on direct premium written, with more than $370 million of MPL premium written in 1994. The Company believes that its underwriting profitability and historical growth are attributable to several key strengths, which include: - Targeting Profitable Segments. The Company seeks to maximize profitability by targeting segments of the MPL industry that are narrowly-defined by such factors as medical specialty and geographic location. The Company has identified medical specialties in which it feels it has substantial knowledge and experience which have enabled it to generate above-average underwriting profits. The Company selectively underwrites, markets and prices its MPL insurance to attract insureds in these segments. As a result of this strategy, approximately 80% of the increase in the Company's direct premium written during the first five months of 1996 was received from physicians in targeted medical specialties. - Targeting "Claims-Free" Business. The Company endeavors to offer MPL insurance to medical professionals with low levels of previous MPL claims. In 1995, approximately 86% of the Company's insureds with five years or more of practice in Florida received a "Claims-free" credit for having low levels of MPL claims for at least the last five years. In order to attract such "Claims-free" business, the Company offers insureds credits for five or more years of low claims experience and pays agents a higher commission for referring such business. - Capitalizing on Relationships with Medical Societies. In addition to being the exclusively endorsed carrier of the FMA and FDA, the Company also maintains relationships with and receives exclusive endorsements from a number of state and local specialty societies and medical associations. Included among these endorsers are the Florida Chapter, American College of Surgeons, the Florida Obstetric and Gynecologic Society, and the Florida Society of Thoracic and Cardiovascular Surgeons and nine county medical associations. Management believes that these relationships provide the Company knowledge of and insight into its customers and markets and enables the Company to be more responsive to the changing needs of the healthcare community. - Establishing Timely Claims Settlement Procedures. The Company's policy is to refuse settlement of and to defend aggressively all claims that appear to have no merit. However, in those instances where claims may have merit, the Company attempts to settle such claims as expeditiously as possible in a cost efficient manner. As a result, the average life for claims settled by the Company in 1995 was 2.5 years as compared to 3.1 years for claims settled in 1987. The Company's strategy is to pursue future growth and underwriting profitability by: - Increasing Florida Medical Professional Liability Market Share. The Company believes that its primary growth opportunity will be expansion in the Florida MPL market. The Company is expanding its premium base in Florida by attracting additional insureds, primarily in its targeted segments. The Company has been able to achieve this by offering competitive pricing and signing new agents. New agents accounted for 13.7% of the increase in direct premium written in 1995. In addition, the Florida MPL market is highly fragmented, with over 36 insurers currently writing physician MPL business in the state, 15 of which are physicians' mutual protective trusts or other similar entities. The Company believes that this fragmentation provides an opportunity for consolidation. - Entering the Managed Care Market. The Company has entered the evolving managed care marketplace which is undergoing change with the recent emergence of provider-supported organizations, such as independent physician associations ("IPAs"), physician hospital organizations ("PHOs"), and medical service organizations ("MSOs") by capitalizing on its knowledge of the medical community and its relationship with its insureds. The Company is currently marketing managed care liability insurance to these newly-formed organizations and professional and comprehensive general liability insurance to healthcare facilities. The Company believes that by providing insurance to managed care entities and healthcare facilities, it will have an opportunity to cross-sell its MPL insurance to physicians affiliated with such entities and facilities. - Expanding into New States. The Company believes that certain states in the southern region of the U.S. provide the Company an opportunity to profitably increase its premium volume while maintaining its underwriting standards. The Company believes that it could successfully compete with existing insurers in those states by targeting and competitively pricing business from certain specialties and geographic territories and by capitalizing on its ability to develop and maintain strong agent loyalty. The Company, therefore, has opened an Atlanta office, hired personnel, begun enrolling agents and commenced marketing in Georgia. In addition, FPIC has recently obtained a license to do business in Alabama and is contemplating opportunities in other states, principally in the southern region of the U.S. This expansion of the Company's business may also include expansion through the acquisition of, or combination with, MPL insurers or other entities in other states. - Pursuing Cross-Selling Opportunities. In order to further its cross-selling opportunities, on July 1, 1995, the Company, through its subsidiary, McCreary Corporation ("McCreary"), acquired all of the assets of a Florida third party administrator for group health, workers' compensation, general liability, and property insurance. The Company has begun offering McCreary's products to FPIC's insureds and prospective insureds such as hospitals, healthcare facilities and provider-supported organizations. The Company is currently considering the acquisition of an additional Florida third party administrator that had revenue of approximately $1.9 million in fiscal year 1995. FPIC is rated "A- (Excellent)" by A.M. Best, an independent nationally recognized insurance publishing and rating service. An A.M. Best rating is intended to provide an independent opinion of an insurer's ability to meet its obligations to policyholders and should not be considered an investment recommendation. THE REORGANIZATION On June 11, 1996 the shareholders of FPIC approved the formation of a holding company structure that resulted in FPIC becoming a subsidiary of FIG (the "Reorganization"). In connection with the Reorganization, FPIC's shareholders became the shareholders of FIG and received five shares of FIG's Common Stock for each of their shares of FPIC's common stock. The purposes of the Reorganization included providing a more flexible operating structure, increasing financial flexibility and satisfying the liquidity needs of the Company's shareholders. As of May 21, 1996, the Company had 3,407 shareholders, the majority of whom were current or former policyholders of the Company. THE OFFERING <TABLE> <S> <C> Common Stock Offered(1) By the Company........................ 500,000 shares By the Selling Shareholders........... 2,900,000 shares Total......................... 3,400,000 shares Common Stock to be outstanding after the Offering(1)(2)(3)..................... 9,019,420 shares Use of proceeds......................... The principal reasons for the Offering are (i) to further capitalize FIG which is a newly formed holding company, and (ii) to assist the Company's shareholders with selling their shares in an orderly offering. The Company intends to retain the net proceeds for general corporate purposes. The Company may from time to time contribute a portion of the net proceeds to the capital of FPIC or its other subsidiaries and use a portion of the net proceeds for future acquisitions. The Company will not receive any proceeds from the sale of shares by the Selling Shareholders. Dividend policy......................... The Company has no present intention to pay any dividends in the near future. Proposed Nasdaq National Market symbol................................ "FPIC" </TABLE> - --------------- (1) Excludes up to 510,000 shares of Common Stock that may be sold by the Selling Shareholders upon exercise of the Underwriters' over-allotment option. See "Underwriting." (2) Based on the number of shares of Common Stock outstanding as of June 11, 1996. Does not include 665,000 shares of Common Stock issuable upon exercise of options. (3) Includes 379,780 shares of Common Stock that were issued by the Company effective July 19, 1996. See "Risk Factors -- Prior Offering Issuance." SUMMARY CONSOLIDATED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA(1)) <TABLE> <CAPTION> FOR THE THREE MONTHS ENDED MARCH 31, FOR THE YEARS ENDED DECEMBER 31, --------------------- --------------------------------------------------------------- 1996 1995 1995 1994 1993 1992 1991 --------- --------- --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> <C> INCOME STATEMENT DATA: Direct premium written............. $ 22,556 $ 20,127 $ 56,641 $ 52,454 $ 51,568 $ 44,845 $ 45,169 Net premium written................ 20,663 18,254 54,306 47,509 45,426 40,472 40,194 Net premium earned................. 12,922 11,101 52,674 46,836 39,443 40,738 38,123 Net investment income.............. 3,149 2,894 11,987(2) 10,369 8,370 8,853 10,342 Net realized investment gains (losses)......................... (11) (557) 238 (6,657)(3) 3,437 (991) 5,553 Total revenues..................... 17,765 13,866 69,531 52,306 52,685 49,826 55,649 Losses and LAE(4).................. 12,214 10,420 44,839 39,177 34,663 36,740 18,608 Total expenses..................... 14,730 11,647 51,935 43,182 39,057 46,485(5) 24,621 Net income......................... $ 2,075 $ 1,438 $ 11,686 $ 5,877 $ 8,541 $ 2,147 $ 19,645 Net income per share............... $ .25 $ .19 $ 1.47 $ .76 $ 1.10 $ .28 $ 2.54 Operating income(6)................ $ 2,082 $ 1,806 $ 11,529 $ 10,420 $ 6,273 $ 2,801 $ 15,980 Operating income per share......... $ .26 $ .23 $ 1.45 $ 1.34 $ .81 $ .36 $ 2.06 Weighted average number of shares outstanding...................... 8,139,640 7,759,860 7,949,750 7,759,860 7,759,640 7,756,180 7,748,600 CERTAIN FINANCIAL RATIOS:(7) Loss and LAE ratio(4).............. 88.3% 85.4% 83.9% 81.2% 74.7% 90.2% 44.2% Underwriting expense ratio......... 25.7 26.7 13.7 12.5 20.2 13.3 11.9 --------- --------- --------- --------- --------- --------- --------- Combined ratio..................... 114.0% 112.2% 97.6% 93.7% 94.9% 103.5% 56.1% ======== ======== ======== ======== ======== ======== ======== Industry combined ratio(8)......... -- -- 98.4% 101.8% 121.4% 134.2% 103.8% </TABLE> <TABLE> <CAPTION> DECEMBER 31, MARCH 31, --------------------------------------------------------------- 1996 1995 1994 1993 1992 1991 --------- --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Total investments.............................. $221,832 $ 221,604 $ 192,867 $ 180,721 $ 179,872 $ 167,473 Total assets................................... 284,593 276,699 244,266 233,120 206,408 196,383 Loss and LAE reserves.......................... 168,822 164,506 152,268 138,745 126,650 118,993 Total liabilities.............................. 203,979 195,143 182,660 169,199 152,954 147,738 Shareholders' equity........................... 80,614 81,556 61,606 63,921 53,454 48,645 Book value per share........................... $ 9.90 $ 10.02 $ 7.94 $ 8.24 $ 6.89 $ 6.28 Common stock outstanding at end of period...... 8,139,640 8,139,640 7,759,860 7,759,860 7,756,850 7,748,600 </TABLE> - --------------- (1) Per share data has been calculated after giving effect to the 100% stock dividend on December 31, 1994 and the 5 for 1 stock exchange effective June 11, 1996 in connection with the Reorganization. Does not give effect to the sale of Common Stock in the Offering. Excludes 379,780 shares of Common Stock that were issued by the Company effective July 19, 1996. See "Risk Factors -- Prior Offering Issuance."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001010396_pcs_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001010396_pcs_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and consolidated financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless the context otherwise requires, references in this Prospectus to "PCSD" and to the "Company" refer to PCS Development Corporation and its consolidated subsidiaries. This Prospectus contains certain forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from the results anticipated in these forward-looking statements as a result of certain of the factors set forth under "Risk Factors" and elsewhere in this Prospectus. THE COMPANY PCSD intends to become a leading provider of wireless narrowband personal communications services ("PCS") in the United States. Organized in 1994, the Company was one of only five bidders in the FCC's 1994 narrowband PCS auctions that succeeded in acquiring licenses for paired 50 kHz inbound/50 kHz outbound frequencies covering the entire United States and the U.S. territories, including Puerto Rico and the U.S. Virgin Islands (the "Licenses"). PCSD intends to employ the Licenses to offer a full array of two-way wireless advanced messaging services. These services will include stored voice and data messaging utilizing state-of-the-art InFLEXion(TM) technology developed by Motorola, Inc. ("Motorola"). The Company believes that its network, utilizing the InFLEXion(TM) technology, will have significant advantages over traditional one-way paging networks, including increased capacity, higher transmission speed and two-way capability (allowing subscriber units to signal their location to the network). This enhanced technology, in combination with the Company's nationwide coverage, will enable PCSD to offer stored voice messaging, data messaging and other services on a local, regional and nationwide basis. The Company's first service, expected to be commercially available in the second quarter of 1997, will be a stored voice messaging service. This service will allow a subscriber to receive a high quality wireless transmission of a sender's voice on a pager-like subscriber unit where the message can be stored and retrieved for later playback. No other company currently offers this or any other type of service commercially using the InFLEXion(TM) technology. Of the four other companies with licenses for nationwide 50/50 kHz PCS spectrum, only two, Paging Network, Inc. ("PageNet") and PageMart Nationwide, Inc. ("PageMart"), have announced an intention to offer stored voice messaging services. Based on industry studies and the Company's proprietary market research, management believes that stored voice messaging will be one of the most widely accepted new paging services. A 1994 study conducted by FGI, Inc., a leading wireless telecommunications market research firm ("FGI"), indicated that stored voice messaging services could ultimately achieve a 20% penetration of the U.S. population. Moreover, according to a 1995 Motorola study, approximately 84% of current paging subscribers would consider replacing their existing pager for a voice messaging unit. A subsequent, more comprehensive market research study conducted for the Company by FGI in 1996 indicated that 74% of current paging subscribers are likely (40% somewhat likely and 34% very likely) to purchase stored voice messaging at costs within the Company's anticipated price ranges. Finally, management anticipates significant demand for its voice messaging services based on the growing popularity of answering machines in U.S. households and voice mail services in office environments. See "Business -- Potential Market," "Business -- Distribution -- Pricing of Airtime and Subscriber Units" and "Certain Transactions -- Relationship with FGI." Following the commercial introduction of its stored voice messaging service, the Company also plans to introduce in 1998 enhanced InFLEXion(TM) data services. These services will allow subscribers to receive alphanumeric messages of up to several thousand characters, compared to the 80 character limit typical of one-way alphanumeric paging services available today and, eventually, will enable message recipients to initiate brief alphanumeric responses. PCSD plans to market local, regional and nationwide services initially through indirect channels by forming marketing relationships with telecommunications companies, including established paging companies that have installed customer bases but that do not have the capability to deliver over their networks the enhanced services that the Company plans to market. Unlike the other companies that acquired licenses for [INSERT ARTWORK] The Indenture pursuant to which the Notes will be issued (the "Indenture") and the Warrant Agreement pursuant to which the Warrants will be issued (the "Warrant Agreement") will require the Company, and the Company intends, to distribute to the registered holders of the Notes and the registered holders of the Warrants annual reports containing audited consolidated financial statements and a report thereon by the Company's independent public accountants and quarterly reports containing unaudited condensed consolidated financial data for the first three quarters of each fiscal year. --------------------- IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE UNITS, NOTES AND WARRANTS AT LEVELS ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. --------------------- This Prospectus includes product names and trademarks of the Company and of other organizations. nationwide 50/50 kHz PCS spectrum, PCSD does not offer one-way paging services. Consequently, the Company believes that other paging companies desiring to offer narrowband PCS services will be more likely to form marketing relationships with PCSD than with these competitors. Consistent with the Company's indirect marketing strategy, PCSD has formed marketing alliances with A+ Network, Inc. ("A+ Network") and Arch Communications Group, Inc. ("Arch Communications") (collectively, the "Paging Company Investors"), which together own 14.5% of the outstanding capital stock of the Company and have an aggregate of approximately 3 million existing subscribers. In addition, as of July 1, 1996, the Company has signed memoranda of understanding to form marketing relationships with 19 other paging companies that have an aggregate of approximately 13 million existing subscribers. These 16 million subscribers represent approximately one-half of all pagers currently in service in the United States. In addition, the Company believes that other telecommunications companies, such as cellular and long distance service providers, Enhanced Specialized Mobile Radio ("ESMR") operators and Regional Bell Operating Companies ("RBOCs"), will also distribute the Company's services together with their existing product offerings. PCSD is currently designing and constructing its nationwide narrowband PCS network, and is in the process of securing transmitter and receiver sites and purchasing network infrastructure equipment from Motorola and Glenayre Electronics, Inc. ("Glenayre"), two leading providers of paging equipment. The Company has commenced network buildout in its initial test markets, Boston and Atlanta, and anticipates that system tests will begin in the third quarter of 1996. The Company expects to have completed the buildout of its InFLEXion(TM) network in the top ten BTAs (as defined herein) by the time of the commercial introduction of the Company's stored voice messaging service, which is expected to occur in the second quarter of 1997, and to have completed its nationwide network buildout in the first quarter of 1998. To fund the acquisition of the Licenses, the buildout of its nationwide narrowband PCS network and the commercial introduction of its services, PCSD raised approximately $92.7 million in two private equity offerings, obtained relatively low-cost financing from the Federal Communications Commission ("FCC"), and is in the process of entering into the Credit Facility and issuing the Units. The Company raised $37.2 million in November 1994 from the sale of its Common Stock (as defined herein) to the Paging Company Investors and other financial partners and $55.5 million in November 1995 from the sale of Preferred Stock (as defined herein) to an investor group which was led by Chase Capital Partners (formerly Chemical Venture Partners) and which included several of the Company's initial investors. Because the Company was considered a "Small Business" for purposes of the FCC narrowband regional PCS auction, the Company is entitled to pay $72.7 million of the $90.9 million purchase price for the Licenses over ten years at a 7.5% annual interest rate (the "FCC Obligation"). See "Description of FCC Auction Benefits -- "Designated Entity" Status in FCC Narrowband PCS Regional Auction" and "Description of Other Indebtedness -- FCC Obligation." In addition, concurrently with the Offering, a subsidiary of the Company will establish a secured Credit Facility in the amount of $225.0 million. Upon completion of the Offering, the Company believes that its cash balances, together with available borrowings under the Credit Facility, will be adequate to fund the Company's expected capital expenditures necessary to complete the buildout of its nationwide narrowband PCS network, to fund debt service and working capital requirements and to fund other operating expenses until such time as the Company generates sufficient positive cash flow from operations, which is not expected to occur prior to 1999. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." PCSD's strategic objective is to become a leading provider of stored voice and data messaging services in the United States. To achieve this objective, the Company intends to offer competitively priced, easy-to-use voice and data messaging services targeted at broad market segments. Key elements of the Company's strategy include: Nationwide spectrum position. Upon acquiring the Licenses, the Company became one of only five companies with nationwide 50/50 kHz PCS spectrum, thereby positioning itself to create a nationwide network for wireless stored voice and enhanced data messaging services. The geographic scope of the system should enable the Company to achieve significant economies of scale as it attracts a large customer base by offering local, regional and nationwide messaging services. In addition, the Company purchased specialized mobile radio ("SMR") spectrum in 29 major metropolitan areas during the FCC's 900 MHz SMR auction which concluded April 15, 1996 ("SMR Auction Spectrum") and has purchased or intends to purchase from third parties SMR spectrum or options to purchase SMR spectrum in nine other metropolitan areas. Together with the Licenses, the SMR Auction Spectrum and the SMR spectrum purchased or to be purchased from third parties, the Company's network will have at least 175 kHz/175 kHz spectrum capacity in 37 of the 50 largest BTAs, including each of the top nine BTAs. Services with broad market appeal. The Company's stored voice and data messaging services will offer the low-cost, long battery life and portability advantages of current paging services. These services delivered over the Company's InFLEXion(TM) network will also offer improved functionality compared to traditional one-way paging such as high quality transmission of voice messages, confirmation of message receipt to the network, delivery of significantly longer alphanumeric messages and the initiation of brief alphanumeric responses. Established distribution channels. The Company expects to use existing distribution channels to achieve rapid market penetration and minimize marketing and selling expenses. PCSD has formed marketing relationships with established paging companies and cellular operators and plans to form marketing relationships with (i) other established paging companies that have installed customer bases, (ii) other telecommunications companies including cellular and long distance service providers, ESMR operators and RBOCs, (iii) industry "integrators" such as voice mail and e-mail system providers, interconnect dealers and computer industry value added resellers and (iv) consumer mass marketing companies including national retailers, telemarketing companies and commercial on-line services. Rapid network buildout. The Company expects to be among the first to construct a nationwide narrowband PCS network utilizing InFLEXion(TM) technology and to offer enhanced stored voice messaging services through its network on a local, regional and nationwide basis. The Company has already commenced network buildout in its initial test markets of Atlanta and Boston and expects to have completed the buildout of its network in the top ten BTAs by the time of the commercial introduction of the Company's stored voice messaging service, which is expected to occur in the second quarter of 1997. The Company plans to complete its nationwide network buildout in the first quarter of 1998. Low-cost provider. PCSD's network operation, marketing strategy and administrative structure have been designed to support the Company's efforts to be a low cost provider of its services. Management expects that the capacity benefits of its nationwide network and its use of Motorola's state-of-the-art InFLEXion(TM) technology will reduce its cost per unit of network capacity compared to traditional one-way networks. PCSD also expects its indirect distribution strategy to reduce the costs associated with recruiting, training, compensating and managing a large in-house marketing and sales staff. The Company will seek to control administrative costs through a combination of centralized network management, customer service, billing, credit, collections and accounting. The Company has assembled an experienced management team to execute its business strategy. Members of the senior management team have held managerial positions with leading wireless telecommunications companies, including AT&T Corp. ("AT&T"), Dial Page Inc. ("Dial Page"), GeoTek Communications, Inc. ("GeoTek"), MCI Communications, Inc. ("MCI"), Mobile Communications Corporation of America ("MobileComm"), Motorola, PageNet, RAM Mobile Data, Inc. ("RAM Mobile Data"), SkyTel Corporation ("SkyTel"), Sprint Corporation ("Sprint") and USA Mobile Communications Holdings, Inc. ("USA Mobile"). PCSD's executive team brings to the Company extensive experience in the development, design and manufacture of wireless products, the construction and operation of wireless networks and the sale and marketing of wireless services. The Company's principal executive offices are located at 15 South Main Street, Suite 810, Greenville, South Carolina 29601, and its telephone number is (864) 235-0940. THE OFFERING THE UNITS Securities Offered......... Units consisting of $ aggregate principal amount at maturity of % Senior Discount Notes due 2006 and Warrants to purchase shares of Class B Common Stock. Each Unit consists of $1,000 principal amount at maturity of Notes and Warrants to purchase shares of Class B Common Stock. Separability............... The Notes and the Warrants will not be separately transferable until the Separability Date (as defined herein), which shall be no later than , 1996. Use of Proceeds............ The net proceeds from the Offering are estimated to be $157.7 million and will be used, together with borrowings under the Credit Facility and existing cash, principally to fund capital expenditures in connection with the buildout of the Company's nationwide PCS network, including the acquisition of additional radio spectrum, to fund debt service requirements, operating expenses, and for working capital and general corporate purposes. See "Use of Proceeds." THE NOTES Notes Offered.............. $ aggregate principal amount at maturity ($165.0 million initial Accreted Value) of % Senior Discount Notes due 2006. Maturity Date.............. , 2006. Yield and Interest Rate.... % per annum (computed on a semi-annual bond equivalent basis) calculated from , 1996. No interest will accrue on the Notes prior to , 2001. Commencing , 2001, interest on the Notes will accrue at the rate of % per annum and will be payable in cash semi-annually on and , commencing , 2002 to holders of record on the immediately preceding and . See "Description of the Notes -- General." Optional Redemption........ The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after , 2001, at the redemption prices set forth herein plus accrued and unpaid interest, if any, to the date of redemption. Additionally, prior to , 1999, the Company may redeem up to 33% of the aggregate principal amount of the Notes at a redemption price of % of the Accreted Value (as defined herein) thereof, with the net proceeds of either (A) one or more public offerings of Common Stock (as defined in the Indenture) of the Company or (B) a sale by the Company of at least $25.0 million of its Capital Stock (as defined herein) to a Strategic Equity Investor (as defined herein) in a single transaction; provided in each case that at least 67% of the original aggregate principal amount of the Notes remains outstanding immediately after the occurrence of any such redemption. See "Description of the Notes -- Optional Redemption." Mandatory Redemption....... None. Ranking.................... The Notes will be senior, unsecured indebtedness of the Company, ranking pari passu in right of payment with all existing and future unsubordinated unsecured indebtedness of the Company and senior in right of payment to all existing and future subordinated indebtedness of the Company. Although the Notes are titled "senior" securities, the Company has not issued, and does not have any current firm arrangements to issue, any significant indebtedness to which the Notes would be senior, other than the issuance of subordinated indebtedness of the Company upon conversion of the Series A Preferred Stock. The Company is a holding company with no material assets other than the shares of stock of its direct wholly-owned subsidiary. The Notes will be obligations exclusively of the Company; none of the Company's direct and indirect subsidiaries will have any obligation to pay any amounts due with respect to the Notes or to make funds available therefor. As such, the Notes will be structurally subordinated to all liabilities of the Company's direct and indirect subsidiaries, including trade payables, capitalized lease obligations and indebtedness that may be incurred by the Company's subsidiaries under current or future bank credit facilities. At March 31, 1996, the Notes would have been structurally subordinated to approximately $76.4 million of liabilities of the Company's subsidiaries, excluding amounts available under the Credit Facility. Although the Indenture under which the Notes will be issued (the "Indenture") contains certain covenants which limit the ability of the Company and its subsidiaries to take certain actions, these covenants permit the Company and its subsidiaries, in certain circumstances, to incur additional indebtedness and to grant liens on certain assets. See "Risk Factors -- Holding Company Structure; Structural Subordination of the Notes," "Description of the Notes -- Ranking" and "Description of the Notes -- Covenants." Change of Control.......... In the event of a Change of Control (as defined herein), the holders of the Notes will have the right to require the Company to purchase their Notes, in whole or in part, at a price equal to 101% of the Accreted Value thereof, together with accrued and unpaid interest, if any, to the date of any purchase prior to , 2001 or 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of any purchase on or after , 2001. See "Description of the Notes -- Repurchase of Notes upon a Change of Control." Certain Covenants.......... The Indenture will contain certain covenants that, among other things, will limit the ability of the Company and its Restricted Subsidiaries (as defined herein) to incur indebtedness, pay dividends, make investments or other Restricted Payments (as defined herein), issue or sell stock of Restricted Subsidiaries, restrict the ability of Restricted Subsidiaries to pay dividends to the Company, engage in transactions with shareholders and affiliates, create liens, sell assets, undertake sale and leaseback transactions and engage in mergers and consolidations. All of these limitations, however, are subject to a number of important qualifications and exceptions. The term Restricted Subsidiaries will include all of the Company's subsidiaries on the date hereof. See "Corporate Reorganization and Structure" and "Description of the Notes -- Covenants." Original Issue Discount................. The Notes will be issued at a substantial discount from their principal amount and consequently will be issued at an Original Issue Discount for federal income tax purposes. Consequently, purchasers of the Notes generally will be required to include amounts in gross income for federal income tax purposes in advance of receipt of the cash payments attributable to such income. See "Certain Federal Income Tax Considerations." Book-Entry; Delivery and Form................. The Notes will initially be issued in the form of one or more Global Notes held in book-entry form. The Global Notes will be deposited with or on behalf of The Depository Trust Company and registered in the name of Cede & Co., as nominee thereof. See "Description of the Notes -- Book-Entry; Delivery and Form." For additional information concerning the Notes, see "Description of the Notes." THE WARRANTS Securities Offered......... Warrants which entitle the holders thereof to acquire shares of Class B Common Stock (the "Warrant Shares"). Upon consummation of the Offering, the Class B Common Stock issuable upon exercise of the Warrants collectively will represent approximately 2.0% of the Company's outstanding Class A Common Stock and Class B Common Stock (collectively, the "Common Stock") on a fully-diluted basis. The aggregate number of Warrants is an estimate only and is subject to change prior to issuance. Holders of the Company's Class B Common Stock are not entitled to vote at any meeting of stockholders for the election of directors. The holders of the Company's Class A Common Stock are entitled to elect 16 of the 17 members of the Company's Board of Directors and, therefore, exert substantial control over matters that are subject to the discretion of the Board of Directors. However, shares of Class B Common Stock may be exchanged for an equal number of shares of Class A Common Stock immediately upon and after the consummation of an Initial Public Offering (as defined herein). See "Description of Capital Stock." Registration Rights........ Following an Exercise Event (as defined herein), holders of the Warrant Shares will be entitled to certain demand registration rights. Holders of Warrant Shares will also have the right to include such Warrant Shares in any registration statement under the Securities Act filed by the Company (other than a registration statement on Form S-4 or S-8) for sale on the same terms and conditions as the securities of the Company or any other selling securityholder included therein. The foregoing rights will be set forth in the Warrant Registration Rights Agreement between the Underwriters and the Company and will be subject to certain conditions and other provisions. Separation of Notes and Warrants; Exercise... The Warrants will not be transferred separately from the Notes prior to the Separability Date. The "Separability Date" shall be the earliest of (i) , 1996, (ii) such earlier date as may be determined by Lehman Brothers Inc., (iii) the occurrence of a Change of Control and (iv) in the event of an Offer to Purchase in connection with any Asset Sale (each as defined herein), the date the Company mails notice thereof to the holders of the Notes, at which time the Notes and the Warrants will become separately transferable. Each Warrant will entitle the holder thereof to purchase one share of Class B Common Stock, subject to adjustment upon the occurrence of certain events, at an exercise price of $0.01 per share. The Warrants will be exercisable upon the occurrence of an Exercise Event, which shall occur on the earliest of (1) the occurrence of a Change of Control (as defined under "Description of the Warrants"), (2) the consummation of a Public Equity Offering (as defined herein) after which there shall exist a Public Market (as defined herein) and (3) , 2006. See "Description of the Warrants." Expiration Date............ The Warrants will expire 180 days after becoming exercisable, but in any event not later than , 2006. Offer to Repurchase........ Upon the occurrence of an Exercise Event, the Company shall have the right to make an offer to purchase all outstanding Warrants and Warrant Shares in cash at a price equal to the Current Market Value (as defined herein) thereof. For additional information concerning the Warrants, see "Description of the Warrants." For additional information concerning the Class B Common Stock, see "Description of Capital Stock." SUMMARY CONSOLIDATED FINANCIAL DATA The following table presents summary consolidated financial data for the Company as of the dates and for the periods indicated. The consolidated financial data as of December 31, 1994 and 1995 and for the period from September 21, 1994 (date of incorporation) to December 31, 1994 and for the year ended December 31, 1995 were derived from the audited consolidated financial statements of the Company. The consolidated financial data for the Company as of March 31, 1996 and for the three months ended March 31, 1995 and 1996 have been derived from unaudited consolidated financial statements of the Company. In the opinion of management of the Company, such unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements referred to above and include all adjustments necessary for a fair presentation of the financial information for the interim periods. Results of operations for the three months ended March 31, 1996 are not necessarily indicative of the results to be expected for fiscal 1996. The following data should be read in conjunction with "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the Company's consolidated financial statements and related notes thereto included elsewhere in this Prospectus. <TABLE> <CAPTION> PERIOD FROM THREE MONTHS ENDED SEPTEMBER 21, 1994 MARCH 31, (DATE OF INCORPORATION) YEAR ENDED ------------------------ TO DECEMBER 31, 1994 DECEMBER 31, 1995 1995 1996 ------------------------ ----------------- --------- ---------- <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Operating expenses: Sales and marketing.......... $ -- $ 796,100 $ -- $ 756,041 Administrative............... 394,918 1,922,163 317,659 1,236,390 Depreciation................. -- 137,374 472 73,217 Amortization................. 4,058 19,479 4,869 4,869 ------------------------ ----------------- --------- ---------- 398,976 2,875,116 323,000 2,070,517 Interest income(1)............. (23,873) (794,405) (132,613) (414,944) ------------------------ ----------------- --------- ---------- Net loss....................... $ 375,103 $ 2,080,711 $ 190,387 $1,655,573 ================= ============= ========= ========= Net loss per common share(2)... $ 10.08 $ 77.34 $ 5.12 $ 81.96 Ratio of earnings to fixed charges(3)................... -- -- -- -- </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 DECEMBER 31, ----------------------------- ---------------------------- AS 1994 1995 ACTUAL ADJUSTED(4) ----------- ------------ ------------ ------------ <S> <C> <C> <C> <C> BALANCE SHEET DATA: Current assets..................... $ 786,913 $ 26,783,944 $ 30,882,887 $188,582,887 Total assets....................... 10,053,954 126,698,359 142,099,425 307,099,425 Total debt(5)...................... -- 73,801,260 74,100,260 239,100,260 Redeemable convertible preferred stock............................ -- 23,112,325 40,107,923 40,107,923 Stockholders' equity............... 9,563,413 28,658,705 25,623,931 25,623,931 </TABLE> - --------------- (1) Includes interest income from a related party of $22,190, $526,075, $102,867 and $77,308 for the period from September 21, 1994 (date of incorporation) to December 31, 1994, for the year ended December 31, 1995 and for the three months ended March 31, 1995 and 1996, respectively. See "Certain Transactions." (2) Net loss attributable to common stockholders of $2,876,910 for the year ended December 31, 1995 and $3,048,921 for the three months ended March 31, 1996 includes accretion of preferred stock dividends of $796,199 and $1,393,348, respectively. (3) Earnings were insufficient to cover fixed charges by $375,103, $7,725,587, $929,008 and $4,435,788 for the period from September 21, 1994 (date of incorporation) to December 31, 1994, for the year ended December 31, 1995 and for the three months ended March 31, 1995 and 1996, respectively. The ratio of earnings to fixed charges is calculated by adding (i) earnings (loss) before income taxes plus (ii) fixed charges, with the resulting sum divided by fixed charges. Fixed charges consist of interest on all indebtedness, accretion of preferred stock dividends, amortization of debt issuance costs, plus that portion of operating lease rentals representative of the interest factor. (4) As adjusted to give effect to the application of the estimated net proceeds of the Offering prior to allocating the portion of the proceeds of the Offering attributable to the Warrants. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001010550_westwood_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001010550_westwood_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. WESTWOOD HOMESTEAD The Company is an Indiana corporation formed in March FINANCIAL CORPORATION 1996 at the direction of Westwood Homestead for the purpose of becoming a holding company for the Bank as part of the Conversion. The Company is headquartered in Cincinnati, Ohio, and its business activities will initially be limited to the State of Ohio. Prior to the Conversion, the Company will not engage in any material operations. After the Conversion, the Company's primary assets will be the outstanding capital stock of the Bank, a portion of the net proceeds of the Conversion, and a note receivable from the ESOP. THE WESTWOOD HOMESTEAD Westwood Homestead is an Ohio mutual savings bank SAVINGS BANK headquartered in Cincinnati, Ohio that traces its origin back to 1883. The Bank has occupied its main office since 1922 and opened a branch office in the Mount Adams section of Cincinnati, Ohio in June 1996. In 1993, the Bank converted from an Ohio mutual savings and loan association to an Ohio mutual savings bank, and in connection with such conversion, adopted its current name. The Bank is a member of the Federal Home Loan Bank ("FHLB") System and its deposits are insured up to applicable limits by the SAIF, administered by the FDIC. At March 31, 1996, the Bank had total assets of $97.9 million, deposits of $83.0 million, net loans receivable of $75.3 million and retained income of $14.4 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business of the Bank." The Bank is principally engaged in the business of accepting deposits from the general public and originating mortgage loans that are secured by one- to four-family residential properties located in its market area. The Bank also originates multi-family residential loans and non-residential real estate loans, although such lending has decreased in recent years and these loans do not currently represent a significant portion of the Bank's loan originations. To a lesser extent, the Bank originates residential construction and consumer loans. The Bank plans to expand its consumer lending activities within the year following the Conversion. See "Use of Proceeds" and "Business of the Bank -- Consumer Loans." Financial highlights of Westwood Homestead include the following: BUSINESS STRATEGY -- Westwood Homestead's business strategy is to operate a well capitalized, profitable community savings bank dedicated to financing home ownership in its general and surrounding market areas and providing quality service to its customers. The Bank has implemented this strategy by: (i) closely monitoring the needs of customers and providing quality service; (ii) maintaining high asset quality; and (iii) maintaining capital safely in excess of regulatory requirements. COMMUNITY ORIENTATION -- The Bank is committed to meeting the financial needs of the community in which it operates. Management believes that the Bank is of sufficient size to be able to provide a relatively full range of financial services on a personalized and efficient basis. Management believes that Westwood Homestead can be more effective in servicing its customers than many of its nonlocal competitors because of the Bank's ability to quickly and effectively provide responses to customer needs and inquiries. Management plans to continue to emphasize the community orientation of the Bank.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001010607_fortress_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001010607_fortress_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. All references to years, unless otherwise noted, refer to the Company's fiscal year, which ends on December 31 of each year. THE COMPANY The Fortress Group, Inc. ("Fortress" or the "Company") is a national homebuilding company designing, building and selling single family homes in the metropolitan areas surrounding Las Vegas, Nevada; Austin and San Antonio, Texas; Tucson, Arizona; Denver and Fort Collins, Colorado; and Raleigh-Durham, North Carolina. The Company offers high-quality, innovative homes, targeting a diverse range of market segments including the first-time, entry-level buyer, move-up buyer and executive/luxury home buyer. The Company markets a wide range of single family detached and attached homes ranging in size from 1,000 square feet to 5,500 square feet at prices ranging primarily from $80,000 to $600,000. As of March 31, 1996, the average sales price of the Company's homes closed was $192,400. In May 1996, Fortress acquired (the "Acquisitions"), concurrently with the closing of its initial public offering of an aggregate of 3,300,000 shares of its Common Stock (the "Common Stock Offering"), and $100 million aggregate principal amount of its 13.75% Senior Notes due 2003 (the "Senior Notes Offering", together with the Common Stock Offering, the "Offerings"), four established homebuilders (the "Founding Builders") operating in the above markets, each of which, upon consummation of the Offerings, became a wholly- owned subsidiary of Fortress. Substantially all of the former owners of the Founding Builders remain as senior managers of these subsidiaries, subject to employment and non-compete agreements, and own approximately 53% of the outstanding capital stock of the Company. The four Founding Builders which comprise the Company achieved revenue growth from $56.1 million in 1991 to $199.0 million in 1995, representing a compound annual growth rate of 37.2%. The Company attributes this growth principally to the market knowledge and experience of its local management teams and strong economic conditions in these markets. At March 31, 1996, the Company was selling homes in a total of 54 communities, compared to 36 communities at March 31, 1995. On a combined basis from January 1, 1996 through March 31, 1996, the Company had closed 212 homes and as of March 31, 1996, had a backlog of 736 homes under contract. This compares to closings of 206 homes in the first quarter of 1995 and a backlog of 382 homes as of March 31, 1995. The Company was created, and will be managed, with an emphasis on the following key operating strategies: . Maintaining strong market positions in attractive housing markets. The geographic markets in which the Company operates have experienced growth in both population and employment that have been in excess of the national average for the past five years. Each of the geographic markets is forecasted to continue to experience growth in population and employment, as well as housing starts, in excess of the national average through 1999. Within each of these markets, management believes that the Founding Builders have established strong market positions in their respective market segments. Since 1987 the Founding Builders have built a total of approximately 4,750 homes in these markets. . Reducing the risk of cyclicality through geographic and product diversification. By operating in seven geographic markets, the Company believes that it is less subject to the effects of local and regional economic cycles than homebuilders that operate in a single geographic market. By offering homes that range from entry-level to customized luxury models, and by targeting home buyers ranging from young families to "empty-nesters," the Company believes that it mitigates its exposure to economic factors that may disproportionately affect certain income or demographic groups. The Company also believes that its broad selection of innovative home styles, its wide variety of pre-planned and pre-costed options and its willingness to customize homes in some markets differentiates the Company from many other local and national homebuilders and generates improved customer satisfaction while enhancing the Company's overall profit margins. . Enhancing profitability through an improved capital structure and operating synergies. Management expects that the reduced cost of capital and additional cash provided by the Offerings, as well as the Company's new credit facility, will contribute to the Company's profitability by reducing the Founding Builders' average financing cost, which was approximately 18.3% in 1995, and by providing additional cash to fund home construction. The Company also believes that other cost savings will be realized from combining the operations of the Founding Builders in areas such as purchasing, insurance and certain administrative functions. . Combining decentralized operations with experienced management. The Company was founded on the belief that homebuilding is localized and is most successful when managed by experienced and cycle-tested local managers who have developed in-depth market knowledge and strong local relationships. The local managers will control the day-to-day operations in their respective markets and will be principally responsible for the operating companies' profitability and growth. The Company has implemented policies and procedures to insure that the operating subsidiaries are achieving profitability and growth goals. These include strict, centralized financial controls and cash management policies as well as comprehensive planning and reporting systems that require approval by the corporate senior management team of, among other items, all projects and material capital commitments. . Limiting the Company's exposure to real estate-related risks. Management attempts to minimize risks associated with land ownership and maximize return on invested capital by deferring, to the extent practicable, substantial investment in land until the later phases of the land development and construction process. The Company attempts to control a two- to four-year supply of lots based on its expected absorption rates. In some markets, the Company generally acquires fully developed lots pursuant to options or purchase contracts in quantities sufficient to satisfy near-term demands. In other markets, the Company strives to control undeveloped land (through options or contingent purchase contracts) through most of the zoning and land development process, closing on such land as close as possible to the start of home construction. These acquisitions are generally limited to smaller tracts of entitled land that will yield 25 to 100 lots when developed. By limiting its land acquisitions and development activities generally to smaller parcels of land, the Company reduces the financial and market risks associated with owning land during the development period. . Actively pursuing internal and external growth opportunities. The Company intends to implement a growth strategy that focuses on accelerated growth in the Company's current markets through the improved access to capital that will be provided by the Offerings and expansion into new markets through the selective acquisition of other established homebuilding companies. Management believes that, because of the fragmented nature of the homebuilding industry, there are significant opportunities to acquire a number of existing homebuilding companies that satisfy the Company's profitability, investment return and other criteria. Management believes that the Company will be an attractive acquiror of such companies due to, among other factors, (i) the benefits of being part of a larger, publicly-held company, (ii) the attractiveness of the Company's decentralized operating philosophy, and (iii) the combined experience of the Fortress and Founding Builders' management team. In evaluating potential acquisition candidates, the Company seeks homebuilding companies with an established market presence, a profitable track record and an experienced management team. The Company intends to acquire homebuilding companies that the Company believes should have a positive impact on the Company's earnings. SUMMARY FINANCIAL AND OPERATING DATA COMBINED PREDECESSOR COMPANIES(1) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OPERATING DATA) (UNAUDITED) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, --------------------------------------------------------------- 1995 ----------------------------- PRO FORMA FOR PRO FORMA ACQUISI- AS 1991 1992 1993 1994 ACTUAL TIONS(2) ADJUSTED(3) ------- ------- -------- -------- -------- -------- ----------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue......... $56,125 $82,543 $148,269 $174,715 $199,029 $199,029 $199,029 Gross profit.... 5,788 11,060 22,124 28,431 31,595 31,595 34,895 Operating income (loss)......... 348 2,232 4,169 5,411 6,750 6,948 10,248 Income (loss) before provision/benefit for income taxes.......... 847 2,678 4,898 4,828 6,076 6,274 10,303 Net income (loss) (4)..... $ 742 $ 2,349 $ 3,973 $ 4,745 $ 6,055 $ 3,935 $ 6,388 ======= ======= ======== ======== ======== ======== ======== Net income (loss) per share (5).. $ .46 $ .68 ======== ======== <CAPTION> THREE MONTHS ENDED MARCH 31, ---------------------------------------------------------- 1995 1996 ----------------------------- ---------------------------- PRO PRO FORMA PRO FORMA FOR FORMA FOR PRO FORMA ACQUISI- AS ACQUISI- AS ACTUAL TIONS(2) ADJUSTED(3) ACTUAL TIONS(2) ADJUSTED(3) ------- --------- ----------- ------- -------- ----------- <S> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue......... $36,869 $36,869 $36,869 $41,312 $41,312 $41,312 Gross profit.... 5,579 5,579 6,064 6,559 6,559 7,051 Operating income (loss)......... 102 (109) 376 949 535 1,027 Income (loss) before provision/benefit for income taxes.......... 69 (142) 501 986 572 1,169 Net income (loss) (4)..... $ 69 $ (88) $ 311 $ 986 $ 370 $ 725 ======= ========= =========== ======= ======== =========== Net income (loss) per share (5).. $ (.01) $ .03 $ .04 $ .08 ========= =========== ======== =========== </TABLE> <TABLE> <CAPTION> THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, -------------------------------------------- ----------------- 1991 1992 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> OPERATING DATA: Units: New contracts, net of cancellations......... 378 660 870 1,015 1,100 231 489 Closings............... 356 541 838 966 998 206 212 Backlog(6)............. 157 276 308 357 459 382 736 Aggregate sales value of backlog (in thousands)(6).......... $ 26,284 $ 61,378 $ 57,914 $ 78,760 $ 97,242 $ 79,080 $141,076 Average sales price per home closed............ $157,700 $152,600 $171,300 $176,400 $190,700 $179,000 $192,400 </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 --------------------------------------- PRO FORMA FOR PRO FORMA ACTUAL ACQUISITIONS(7) AS ADJUSTED(8) -------- --------------- -------------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash................................... $ 1,697 $ 1,697 $ 15,955 Inventory.............................. 119,559 119,559 119,673 Total assets........................... 133,145 133,145 149,440 13.75% Senior Notes due 2003........... -- -- 100,000 Notes and mortgages payable............ 98,707 98,707 -- Minority interests..................... 1,348 1,348 187 Stockholders' equity................... 10,211 4,332 29,453 </TABLE> (continued on next page) (1) As a result of the substantial continuing interests in the Company of the former stockholders of the Founding Builders and Fortress (the "Combined Predecessor Companies"), the historical financial information of the Combined Predecessor Companies has been combined on a historical cost basis for all periods presented as if these companies had always been members of the same operating group. However, during the periods presented, the Founding Builders were not under common control or management. Additionally, all of the Founding Builders were S corporations through December 31, 1995 with the exception of Buffington which converted to an S corporation effective January 1, 1994. As S corporations, the Founding Builders were not subject to federal income tax. Accordingly, the data presented should not be viewed as comparable to or indicative of the post-combination results to be achieved by the Company. (2) Pro Forma for Acquisitions data reflect adjustments for the Acquisitions including: (i) compensation differentials to former owners and employees of the Founding Builders of $1,857 for 1995 and $0 and $203 for the three months ended March 31, 1996 and 1995, respectively; (ii) incremental selling, general and administrative expenses associated with Fortress corporate activities of $1,659 for 1995 and $414 for each of the three months ended March 31, 1996 and 1995; and (iii) incremental income taxes of $2,318 for 1995 and $202 for the three months ended March 31, 1996 and an income tax benefit of $54 for the three months ended March 31, 1995, which would have resulted if the entities had been combined and subject to the effective federal and state statutory income tax rates. See "Notes to the Pro Forma Combined Financial Statements." (3) Pro Forma as Adjusted data reflect adjustments for the Acquisitions described in footnote (2) and for the Offerings and the application of proceeds therefrom. Specifically, the adjustments assume that the proceeds of the Senior Notes Offering are used to refinance the Company's average debt outstanding of approximately $88.0 million for 1995 and approximately $93.2 million and $88.9 million for the three months ended March 31, 1996 and 1995, respectively, and approximately $7.2 million of the net proceeds of the Common Stock Offering are used to satisfy obligations to the Founding Builders' owners and repurchase a minority interest. These adjustments result in a reduction in interest expense of $3,465 and a reduction in minority interest expense of $609 for 1995 and a reduction of interest expense of $550 and $523 and a reduction in minority interest of $57 and $130 for the three months ended March 31, 1996 and 1995, respectively. Had these pro forma adjustments assumed that (i) all of the net proceeds from the Common Stock Offering were applied to satisfy obligations to the Founding Builders' Owners, repurchase a minority interest and reduce $17.9 million of the average debt outstanding for 1995 and for the three months ended March 31, 1996 and 1995, and (ii) approximately $70.0 million for 1995 and approximately $75.2 million and $71.9 million for the three months ended March 31, 1996 and 1995, respectively, of the proceeds of the Senior Notes Offering were used to refinance the remainder of the Company's average debt outstanding, the pro forma interest expense adjustment would have been $5,439 for 1995 and $861 and $823 for the three months ended March 31, 1996 and 1995, respectively, and the Company's Pro Forma as Adjusted net income would have been $7.5 million and $.64 per share for 1995 and the Company's Pro Forma as Adjusted net income would have been $917 and $497 and $.08 and $.04 per share for the three months ended March 31, 1996 and 1995, respectively. See Note (j) of "Notes to the Pro Forma Combined Financial Statements." (4) Each of the Founding Builders with the exception of Buffington was an S corporation or partnership through March 31, 1996 and, accordingly, was not subject to federal income taxes. Buffington converted from a C corporation to an S corporation effective January 1, 1994. Except for the "Pro Forma" columns, Net income does not give effect to the conversion from S corporation to C corporation status and the resulting imposition of federal income tax. (5) The Pro Forma for Acquisitions weighted average shares outstanding of 8,464,375 consists of: (i) 2,230,500 shares issued by Fortress prior to the Offering; and (ii) 6,233,875 shares to be issued to the stockholders of the Founding Builders in connection with the Acquisitions. The Pro Forma as Adjusted weighted average shares outstanding of 9,413,181 consists of: (i) the 8,464,375 shares described above, plus; (ii) 779,708 shares being sold in the Common Stock Offering to pay the cash portion of the consideration for the Founding Builders; and (iii) 169,098 shares being sold to acquire the Company's minority interest. (6) At end of period and represents homes sold but not closed. (7) Pro Forma for Acquisitions balance sheet data gives effect to the creation of a liability (and a corresponding reduction in stockholders' equity) for the cash consideration of $5,879 to be paid to the stockholders of the Founding Builders. (8) Pro Forma as Adjusted balance sheet data also give effect to the Offerings and the application of the proceeds therefrom. See "Notes to the Pro Forma Combined Financial Statements" for further detail on the pro forma data. FOUNDING BUILDERS SUMMARY FINANCIAL DATA (DOLLARS IN THOUSANDS) <TABLE> <CAPTION> THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ------------------------------------------ ---------------- 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> <C> <C> BUFFINGTON (AUSTIN AND SAN ANTONIO, TEXAS): Total Revenue......... $19,174 $37,483 $52,140 $64,121 $52,774 $10,804 $14,623 Cost of Sales......... 17,589 34,663 43,801 53,523 44,186 9,195 11,960 Gross Profit.......... 1,585 2,820 8,339 10,598 8,588 1,611 2,663 Selling, General and Administrative Ex- pense(1)............. 1,187 1,850 5,931 8,645 8,741 1,767 1,856 Operating Income (Loss)(1)............ 398 970 2,408 1,953 (153) (156) 807 Net Income (Loss)(1).. 283 631 1,529 1,877 (183) (64) 897 CHRISTOPHER (LAS VEGAS, NEVADA)(2): Total Revenue......... $ 3,001 $ 2,710 $17,546 $14,821 $38,612 $ 4,278 $10,481 Cost of Sales......... 2,642 2,201 16,676 12,616 31,834 3,419 8,758 Gross Profit.......... 359 509 870 2,205 6,778 859 1,723 Selling, General and Administrative Ex- pense................ 558 324 2,741 3,062 3,512 792 1,051 Operating Income (Loss)............... (199) 185 (1,872) (857) 3,266 67 672 Net Income (Loss)..... 388 583 (1,208) (498) 3,386 104 680 GENESEE (TUCSON, ARIZO- NA, FT. COLLINS AND DENVER, COLORADO): Total Revenue......... $23,643 $27,320 $57,691 $62,559 $65,030 $13,523 $ 8,901 Cost of Sales......... 21,220 23,501 48,725 53,887 57,620 12,104 8,284 Gross Profit.......... 2,423 3,819 8,966 8,672 7,410 1,409 617 Selling, General and Administrative Ex- pense................ 2,621 3,514 6,000 6,804 6,549 1,580 871 Operating Income (Loss)............... (198) 305 2,966 1,868 861 (161) (784) Net Income (Loss)..... (198) 305 2,966 1,868 861 (161) (784) SUNSTAR (RALEIGH-DURHAM, NORTH CAROLINA): Total Revenue......... $10,307 $15,030 $20,892 $33,214 $42,600 $ 8,264 $ 7,292 Cost of Sales......... 8,886 12,810 16,943 26,258 33,792 6,574 5,751 Gross Profit.......... 1,421 2,220 3,949 6,956 8,808 1,690 1,541 Selling, General and Administrative Ex- pense................ 1,074 1,448 3,282 4,509 6,038 1,335 1,302 Operating Income...... 347 772 620 2,405 2,731 345 231 Net Income............ 269 830 686 1,498 1,985 193 178 </TABLE> - -------- (1) For the years ended December 31, 1994 and 1995, Buffington's financial results reflect payments made to the S Corporation's shareholders in the amounts of $2,626 and $1,857, respectively. See note 11 to the Buffington Combined Financial Statements. (2) In 1991 and 1992, Christopher's homebuilding operations were conducted through various partnerships which were primarily accounted for under the equity method of accounting. As a result, revenues reported in these years are primarily from management fees paid to Christopher for management and supervision services.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001010612_sykes_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001010612_sykes_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and consolidated financial statements (including the notes thereto) contained elsewhere in this Prospectus. Unless otherwise noted, the information in this Prospectus does not give effect to the exercise of the Underwriters' over-allotment option, and gives retroactive effect to a 3-for-2 stock split in the form of a stock dividend effected on July 28, 1996. Except where the context otherwise requires, the terms "SEi" and the "Company" as used in this Prospectus refer to Sykes Enterprises, Incorporated, a Florida corporation, and its subsidiaries. Effective August 1, 1994, the Company changed its fiscal year end from July 31 to December 31. This Prospectus contains forward-looking statements that involve risks and uncertainties. Future events and the Company's actual results could differ materially from the results reflected in these forward-looking statements, as a result of certain of the factors set forth in "Risk Factors" and elsewhere in this Prospectus. THE COMPANY Sykes Enterprises, Incorporated ("SEi" or the "Company") provides a wide array of information technology outsourcing services, including information technology support services and information technology development services and solutions. The Company's services are provided at various stages during the life cycle of computer hardware and software products. Through its state-of-the-art technical support call centers ("IT call centers"), the Company provides information technology support services (i) to leading computer hardware and software companies by providing technical product support services to end users of their products and (ii) to major companies by providing help desk services to their employees. Through its staff of technical professionals, the Company also provides information technology development services and solutions to large corporations, on a contract or temporary staffing basis, including software design, development, integration and implementation; systems support and maintenance; and documentation, foreign language translation and software localization. The integration of these services provides SEi's customers the opportunity to outsource a broad range of their information technology services needs to the Company. Current customers of SEi include Apple, CompuServe, Digital Equipment, Disney, Hewlett Packard, IBM, Monsanto and NationsBank. In 1993, in an effort to capitalize on the trend toward outsourcing information technology services, the Company focused its strategic direction exclusively on the information technology services marketplace and broadened its array of services. Pursuant to this strategy, SEi began providing information technology support services by opening IT call centers and began phasing out its non-information technology services, including administrative services provided to a major customer. The phase-out was substantially completed in 1995. Recently, revenues from information technology support services have grown rapidly through the opening of three IT call centers in 1994 (including an IT call center in Amsterdam, The Netherlands), two in late 1995 and one in 1996. The Company expects continued growth from two additional IT call centers currently under construction which are anticipated to open late in the third and fourth quarters of 1996. SEi's domestic IT call centers are stand-alone facilities, each modeled after the same prototype. The Company's strategy of locating its domestic IT call centers in smaller communities, typically near a college or university, has enabled the Company to benefit from a relatively low cost structure and a technically proficient, stable work force. SEi estimates that its existing IT call centers, including the two IT call centers in Sweden acquired in the Company's July 1996 acquisition of Datasvar Support AB ("Datasvar"), have the capacity to process approximately 72,000 calls per day in the aggregate, up from 7,000 calls per day in January 1994, from users of hardware and software products seeking technical assistance. With the addition of the two new IT call centers currently under construction, SEi expects to have the capacity to process up to 90,000 calls per day by year-end 1996. The Company is committed to providing its customers with the highest quality services. To that end, the Company's IT call center in Sterling, Colorado has received ISO 9002 certification, an international standard for quality assurance and consistency in operating procedures. The Company anticipates that many of its existing and potential customers will soon require evidence of ISO 9002 certification prior to outsourcing their technical product support or help desk functions. Consequently, the Company has modeled each IT call center Various pictures of the people and workstations of one of the Company's IT call centers imposed on top of an external view of the Company's IT call center located in Greeley, Colorado. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS (IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON NASDAQ IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SEE "UNDERWRITING." after ISO 9002 procedures to achieve consistency and quality. Additionally, the Company received the 1995 STAR Award in the highest call volume category. This award has been presented annually since 1988 by the Software Support Professionals Association (SSPA) to the software support company that achieves superior customer satisfaction and call metrics. The Company believes that outsourcing by information technology companies and companies with information technology needs will continue to grow as businesses focus on their core competencies rather than non-revenue producing activities. According to Dataquest Incorporated, an industry research firm, the market for information technology services is expected to increase from $50.7 billion in 1995 to $79.0 billion in 1999 and, in particular, the market for outsourced technical support services is expected to increase from $2.6 billion to $7.2 billion for the same periods. Additionally, rapid technological changes, significant capital requirements for state-of-the-art technology, and the need to integrate and update complex information technology systems spanning multiple generations of hardware and software components make it increasingly difficult for businesses to maintain cost-effective, quality information technology services in-house. To capitalize on this trend toward outsourcing, the Company has developed a strategy which includes the following key elements: (i) rapidly expand information technology support services revenues through additional IT call centers; (ii) market the Company's expanded array of services to existing customers to position SEi as a preferred vendor of outsourced services; (iii) establish a competitive advantage through the Company's proprietary, sophisticated technological capabilities; and (iv) expand its customer base through strategic alliances and selective acquisitions. As a result of the trend toward outsourcing of information technology services and the Company's success in implementing its strategy, the Company's revenues increased 39.9% from $45.1 million in 1994 to $63.1 million in 1995 and increased 63.9% from $27.7 million in the first six months of 1995 to $45.4 million in the first six months of 1996. The majority of these increases came as a result of the Company's opening of additional IT call centers. During 1993, 1994, 1995 and the first six months of 1996, information technology support services provided through IT call centers represented 4.1%, 17.1%, 42.4% and 59.1%, respectively, of the Company's revenues, reflecting the Company's recent emphasis on its information technology support services. RECENT ACQUISITIONS The Company has completed two acquisitions since its initial public offering on April 29, 1996. On July 16, 1996, the Company expanded the information technology support services it provides to the international business community in Europe through its acquisition of Datasvar, which provides technical product support throughout Sweden, Norway, Denmark and Finland from its two IT call centers in Sweden. Datasvar had revenues of $5.3 million and $3.1 million and net income of $1.0 million and $418,000 in 1995 and the six months ended June 30, 1996, respectively. On August 30, 1996, the Company expanded the range of its technical product support capabilities through the acquisition of DiagSoft, Inc. ("DiagSoft"), which develops and markets diagnostic software applications. The Company's strategy is to capitalize on the integration of its IT call centers with DiagSoft's diagnostic software applications by (i) providing quality control solutions to personal computer manufacturers in manufacturing, assembly and product support to reduce warranty claims, (ii) using the software to further enhance the efficiency and quality of the Company's information technology support services, and (iii) enhancing the software's diagnostic capabilities to achieve direct access to broader markets, including the home and small business user. DiagSoft had revenues of $6.2 million and $3.9 million and net income (loss) of ($112,000) and $479,000 in 1995 and the six months ended June 30, 1996, respectively. After accounting for the Datasvar and DiagSoft acquisitions (the "Acquisitions") under the pooling-of-interests method of accounting, the Company had pro forma revenues of $74.6 million and $52.5 million, pro forma net income of $2.2 million and $3.6 million, and pro forma net income per share (after giving effect to the 921,819 shares issued in the Acquisitions) of $0.13 and $0.20 in 1995 and the six months ended June 30, 1996, respectively. THE OFFERING Common Stock offered by the Company..... 1,553,320 shares Common Stock offered by the Selling Shareholders............................ 1,701,680 shares(1) Common Stock to be outstanding after the Offering................................ 21,833,818 shares(2) Use of Proceeds......................... To open additional IT call centers, make additional capital expenditures, and for working capital and general corporate purposes, including possible acquisitions. See "Use of Proceeds." Nasdaq National Market Symbol........... SYKE - --------------- (1) Includes 254,000 shares to be acquired upon the exercise of outstanding options at an exercise price of $4.53 per share. See "Management -- Executive Compensation" and "Principal and Selling Shareholders." (2) Excludes 508,000 shares of Common Stock issuable upon exercise of stock options at an exercise price of $4.53 per share, and 2,050,000 shares of Common Stock reserved for future issuance under the Company's stock option plans, pursuant to which options to purchase 639,894 shares at exercise prices ranging from $10.00 to $40.40 per share will be outstanding after this offering. See "Management -- Executive Compensation." SUMMARY AND PRO FORMA CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, SIX MONTHS ENDED ------------------------------------------------- ---------------------------------------- PRO PRO FORMA FORMA JULY 2, JUNE 30, JUNE 30, 1993 1994 1995 1995(1) 1995 1996 1996(1) ----------- ----------- ------- ----------- ------------ ----------- ----------- <S> <C> <C> <C> <C> <C> <C> <C> (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) STATEMENT OF INCOME DATA: Revenues.................... $50,188 $45,115 $63,097 $74,595 $ 27,677 $45,433 $52,467 Direct salaries and related costs..................... 34,975 30,636 40,845 44,592 18,452 27,000 29,441 General and administrative(2)......... 12,820 11,851 16,187 22,274 7,078 11,541 14,437 Depreciation and amortization.............. 1,190 1,747 2,824 2,958 754 2,225 2,272 ------- ------- ------- ------- ------- ------- ------- Income from operations.... 1,203 881 3,241 4,771 1,393 4,667 6,317 Interest and other income (expense)................. 66 (452) (639) (728) (246) (183) (181) ------- ------- ------- ------- ------- ------- ------- Income before income taxes................... 1,269 429 2,602 4,043 1,147 4,484 6,136 Provision for income taxes(3).................. 583 217 1,271 1,819 540 1,745 2,500 ------- ------- ------- ------- ------- ------- ------- Net income(3)............. $ 686 $ 212 $ 1,331 $ 2,224 $ 607 $ 2,739 $ 3,636 ======= ======= ======= ======= ======= ======= ======= Net income per share(3)..... $ 0.04 $ 0.01 $ 0.08 $ 0.13 $ 0.04 $ 0.16 $ 0.20 ======= ======= ======= ======= ======= ======= ======= Weighted average shares outstanding............... 15,952 15,952 15,952 16,874 15,952 17,385 18,307 REVENUE DATA: Information technology support services.......... $ 2,080 $ 7,719 $26,750 $38,248 $ 9,000 $26,838 $33,872 Information technology services and solutions.... 33,480 27,941 31,873 31,873 15,714 18,265 18,265 Other services(4)........... 14,628 9,455 4,474 4,474 2,963 330 330 ------- ------- ------- ------- ------- ------- ------- Revenues.................. $50,188 $45,115 $63,097 $74,595 $ 27,677 $45,433 $52,467 ======= ======= ======= ======= ======= ======= ======= </TABLE> <TABLE> <CAPTION> AT JUNE 30, 1996 -------------------------------- PRO AS ACTUAL FORMA(1) ADJUSTED(5) ------- -------- ----------- <S> <C> <C> <C> BALANCE SHEET DATA: Working capital....................................................... $34,509 $34,771 $ 105,699 Total assets.......................................................... 74,125 79,850 150,778 Total long-term debt, less current installments....................... -- 257 257 Total shareholders' equity............................................ 52,131 53,404 124,332 </TABLE> - --------------- (1) Adjusted to account for the Acquisitions (which took place after June 30, 1996) under the pooling-of-interests method of accounting. See "Business -- Recent Acquisitions." (2) Includes non-cash compensation expense of $949,960 related to the grant of stock options to an executive officer in 1995. See "Management -- Executive Compensation." Excluding the effect of such expense, income from operations, income before income taxes and net income in 1995 would have been $4.2 million, $3.6 million and $1.9 million, respectively, and net income per share would have been $0.12; pro forma 1995 income from operations, income before income taxes and net income would have been $5.7 million, $5.0 million and $2.8 million, respectively, and pro forma net income per share would have been $0.17. (3) Adjusted as if an affiliate of the Company included in the consolidated financial statements, which was an S corporation for federal income tax purposes, were subject to income taxes for all periods presented, based on the tax laws in effect during the respective periods. See Note 13 of Notes to the Company's Consolidated Financial Statements and Supplemental Consolidated Financial Statements. (4) The phase-out of these services began in 1993 and was substantially completed in 1995. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview." (5) Adjusted to reflect the sale of 1,553,320 shares of Common Stock being offered by the Company at an assumed offering price of $47.375 per share and the exercise by a Selling Shareholder of options to acquire 254,000 shares of Common Stock at an exercise price of $4.53 per share. See "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001010677_netmoves_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001010677_netmoves_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION CONTAINED IN THIS PROSPECTUS (I) ASSUMES NO EXERCISE OF THE OVER-ALLOTMENT OPTION GRANTED TO THE UNDERWRITERS, (II) GIVES EFFECT TO A ONE-FOR-NINE REVERSE STOCK SPLIT OF THE COMMON STOCK EFFECTED ON OCTOBER 7, 1996 OFFERING, (III) REFLECTS THE FILING UPON THE CLOSING OF THIS OFFERING OF THE SIXTH AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF THE COMPANY, WHICH AMONG OTHER THINGS, CHANGES THE AUTHORIZED NUMBER OF SHARES OF CAPITAL STOCK OF THE COMPANY, AND (IV) REFLECTS, UPON THE CLOSING OF THE OFFERING, THE CONVERSION OF ALL OUTSTANDING SHARES OF ALL SERIES OF THE COMPANY'S PREFERRED STOCK INTO AN AGGREGATE OF 7,791,981 SHARES OF COMMON STOCK. THE COMPANY FaxSav Incorporated ("FaxSav" or the "Company") designs, develops and markets a variety of business-to-business facsimile transmission services, including fax-to-fax, desktop-to-fax, enhanced fax and broadcast fax services. FaxSav's services are designed to reduce the cost of sending an international fax while making the process of sending an international fax easier and less time-consuming. Through the use of its integrated Internet-based and telephony-based network and its proprietary software, the Company enables its customers to send documents and images to fax machines worldwide at rates substantially below the international rates charged by traditional long distance carriers. Customers are offered Internet advantaged pricing for facsimile transmissions to targeted markets worldwide while continuing to use their traditional fax machines. In addition, the Company has developed easy to use software enabling customers to transmit documents directly from their computer desktops. FaxSav has built a customer base consisting of over 7,200 customers with international fax needs. In addition, there currently are more than 1,000 registered users of the Company's desktop software. In 1995, the Company transmitted more than 20.4 million minutes of facsimile messages yielding revenues of $11.6 million. During the first six months of 1996, FaxSav transmitted 13.8 million minutes of facsimile messages yielding revenues of $7.4 million, as compared to 9.0 million minutes and $5.0 million in revenue for the same six month period in 1995. The Company historically has provided low cost facsimile services by utilizing pre-negotiated volume based arrangements with various telephony common carriers. To significantly enhance the cost effectiveness of the Company's transmission services, in early 1996 FaxSav began to deploy a global Internet-based network of nodes that enable it to bypass the long distance carriers' networks when sending faxes to or from international areas serviced by these nodes. In June 1996, FaxSav began to utilize this integrated network for commercial transmission of faxes over the Internet. FaxSav has deployed Internet nodes in Bermuda, France, Germany, Hong Kong, South Korea and the United Kingdom and plans to deploy additional Internet nodes in key international telecommunications markets by the end of 1997 to enable the Company to route a majority of its customers' traffic through the Internet. The Company believes that this planned global Internet infrastructure, which is designed to integrate seamlessly with its existing telephony-based network, will enable the Company to bypass long distance carrier networks for transmissions originating and terminating in countries where such nodes have been deployed, thereby reducing its customers' international transmission costs. FaxSav believes that this integrated global network will enable the Company to emerge as a leading supplier of comprehensive, low cost global facsimile services. The Company's services are targeted to customers with international facsimile transmission requirements. FaxSav offers a variety of services designed to meet the individual business requirements of its customers, including real-time, "virtual real-time" (immediate delivery attempt following receipt of the customer's document by the FaxSav network) and broadcast services. Specifically, customers may utilize: FAXSAV, a real-time fax transmission through FaxSav's telephony-based network; FAXSAV ASSURED, a "virtual real-time" enhanced delivery service option which shifts the responsibility for repetitive completion attempts to the FaxSav network; FAXSAV EZ-LIST, a fax-to-fax broadcast service which allows a message to be faxed to multiple recipients by a single transmission to the FaxSav network; FAXSAV PLUS, the Company's new "virtual real-time" service which utilizes a combination of FaxSav's traditional telephony-based network and its growing Internet-based network; and, FAXSAV FOR INTERNET, a suite of services enabling customers to send faxes directly from their computer desktops (either through e-mail or a Windows software application) to fax machines worldwide. FaxSav also provides customized solutions designed for high volume fax applications. Access to the FaxSav network is accomplished easily and does not require any initial investment, installation expense or change in business practices by the customer. Customers connect to the FaxSav network by simply plugging the FAXSAV CONNECTOR, a small proprietary device, between their fax machine and the telephone jack. In the first half of 1996, FaxSav further expanded customer access options by introducing desktop software which can easily be installed on Internet-connected personal computers and which enables customers to send documents and images directly to fax machines worldwide. Customers can deploy FaxSav's services at individual fax machines or desktop locations, across departments or throughout organizations using this modular installation approach. The Company sells its services through multiple sales channels, including direct mail and telemarketing programs, a direct field sales force, an agent and dealer distribution network and promotional activities. FaxSav was incorporated in Delaware on November 29, 1989 under the name Digitran Corporation and changed its name to FaxSav Incorporated on February 28, 1996. The Company's executive offices are located at 399 Thornall Street, Edison, New Jersey 08837 and its telephone number is (908) 906-2000. The Company's Internet address is http://www.faxsav.com. THE OFFERING <TABLE> <CAPTION> Common Stock offered by the Company......................... 1,500,000 shares <S> <C> Common Stock to be outstanding after the offering.............. 9,670,490 shares(1) Use of proceeds................... Expansion of Internet network infrastructure, repayment of existing short-term indebtedness and for general corporate purposes, including working capital. The Company may use a portion of the net proceeds to acquire businesses, services, products or technologies complementary to the Company's current business. See "Use of Proceeds." Nasdaq National Market symbol..... FAXX </TABLE> - --------- (1) Excludes 1,238,619 shares of Common Stock issuable upon the exercise of stock options outstanding at August 31, 1996 with a weighted average exercise price of $0.58 per share. Excludes 555,556 shares of Common Stock available for issuance as of August 31, 1996 pursuant to the Company's 1996 Stock Option/Stock Issuance Plan of which stock options exercisable for 22,222 shares of Common Stock were granted subsequent to August 31, 1996, with an exercise price equal to the initial public offering price. Also excludes 138,385 shares of Common Stock issuable upon exercise of warrants with a weighted average exercise price of $2.77 per share. See "Management--1996 Stock Option/Stock Issuance Plan," and Notes 7 and 8 of Notes to Financial Statements. SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT SHARE DATA) <TABLE> <CAPTION> SIX MONTHS ENDED JUNE YEAR ENDED DECEMBER 31, 30,(1) -------------------------------------- ------------------------- 1993 1994 1995 1995 1996 ----------- ----------- ------------ ----------- ------------ <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues...................................... $ 2,580 $ 3,449 $ 11,649 $ 5,017 $ 7,445 Operating loss................................ (3,298) (3,552) (4,127) (1,983) (3,469) Net loss...................................... (3,260) (3,493) (4,085) (1,885) (3,432) Net loss per common and equivalent share...... $ (5.99) $ (6.39) $ (7.46) $ (3.44) $ (6.17) Weighted average common and equivalent shares outstanding(2).............................. 543,953 546,500 547,444 547,444 555,923 Pro forma net loss per common and equivalent share(2).................................... $ (0.44) $ (0.40) ------------ ------------ ------------ ------------ Shares used in computing pro forma net loss per common and equivalent share(2).......... 9,243,484 8,609,119 ------------ ------------ ------------ ------------ </TABLE> <TABLE> <CAPTION> AS OF JUNE 30, 1996(1) ------------------------- ACTUAL AS ADJUSTED(3) --------- -------------- <S> <C> <C> BALANCE SHEET DATA: Working capital....................................................................... $ 793 $ 10,953 Total assets.......................................................................... 7,916 17,576 Total long-term debt.................................................................. 569 569 Total stockholders' equity............................................................ 3,058 13,218 </TABLE> - --------- (1) See Note 2 of Notes to Financial Statements: "Summary of Significant Accounting Policies -- Interim Financial Information (Unaudited)." (2) See Note 2 of Notes to Financial Statements: "Summary Of Significant Accounting Policies -- Pro Forma Net Loss Per Common and Equivalent Share" and "-- Net Loss Per Common and Equivalent Share." (3) Adjusted to give effect to the sale of 1,500,000 shares of Common Stock offered hereby at the initial public offering price and the application of the net proceeds therefrom. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001010787_american_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001010787_american_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless the context otherwise indicates, (i) the "Company" refers to American States Financial Corporation and its wholly-owned, consolidated subsidiaries; (ii) "ASI" refers to American States Insurance Company, the Company's sole direct wholly-owned subsidiary, and its consolidated subsidiaries; and (iii) the "Subsidiaries" or the "Insurers" refer to the direct and indirect subsidiaries of the Company, which include ASI and its subsidiaries. Unless the context otherwise indicates, the information contained in this Prospectus (a) gives effect to a $300 million dividend of tax-exempt municipal securities from ASI to Lincoln National Corporation, (b) gives effect to a recapitalization whereby ASI became a wholly-owned subsidiary of the Company, (c) assumes that the Underwriters' over-allotment option is not exercised and (d) uses generally accepted accounting principles ("GAAP") for all financial data. See "Glossary of Selected Insurance and Certain Defined Terms" for definitions of certain insurance and other terms used herein. THE COMPANY The Company, through its Subsidiaries, underwrites property and casualty insurance, concentrating on providing commercial insurance to small to medium-sized businesses and preferred personal lines coverages to individuals. Management believes that the Company is the second largest writer of property and casualty insurance to businesses with fewer than 50 employees which, according to the latest statistics of the United States Bureau of the Census, comprise the fastest growing business segment in the United States economy. Geographically, the Company focuses on those areas such as the Midwest and the Pacific Northwest which have relatively modest exposure to catastrophe losses and in which management believes insurers generally have been permitted to manage risk selection and pricing without undue regulatory interference. To efficiently service its distribution network of approximately 4,800 independent agencies in this transaction-intensive target market, the Company makes extensive use of technology. As a complement to its property and casualty operations, the Company also markets life insurance through the same agency network that distributes its property and casualty products. The Insurers have underwritten property and casualty insurance since 1929 and life insurance since 1958. For 1995, property and casualty revenues were $1,934 million and property and casualty net income was $163.8 million, while life insurance revenues were $92 million and life insurance net income was $14.5 million. For the three months ended March 31, 1996, property and casualty revenues were $490 million and property and casualty net income was $43.8 million, while life insurance revenues were $23 million and life insurance net income was $3.1 million. At March 31, 1996, the consolidated assets of the property and casualty Insurers were $5,040 million and the assets of American States Life Insurance Company ("ASLIC"), the Company's indirect life insurance subsidiary, were $566 million. As of March 31, 1996, the Company had approximately 1.6 million property and casualty policies issued and $15.5 billion of life insurance in-force. One or more of the Insurers is licensed in all 50 states and the District of Columbia. Commercial lines operations, which generated $992 million, or 59%, of the Company's property and casualty net premiums written in 1995, focus on small to medium-sized businesses engaged in retail, wholesale, service, contracting and other trade businesses with a relatively low concentration of manufacturing and industrial operations. Unlike larger, more complex accounts, the lower insured values typical of this target market reduce the importance of claim severity and increase the importance of claim frequency as an underwriting consideration. The average annual premium for all commercial business written by the Company is approximately $1,500 per policy. Personal lines operations, which generated $681 million, or 41%, of the Company's property and casualty net premiums written in 1995, focus on the preferred personal automobile and homeowners lines. Combined, these products accounted for approximately 80% of the Company's personal lines business in 1995. In that year, the Company's personal automobile net premiums written were $465 million and its homeowners net premiums written were $189 million. Life insurance operations, which accounted for approximately 8% of the net income in 1995, focus on the sale of universal life and term life policies, although the Company also writes whole life, individual annuities and disability income policies. The Company's strategy is to achieve earnings growth by focusing both on profitable lines of business and favorable geographic areas. To further this strategy, the Company took steps in late 1991 counter to the industry and introduced an aggressive program called "New Directions" to improve its account selection, risk evaluation and pricing. This included an emphasis on maintaining and, when possible, expanding business in those product lines and regions which have historically provided better than industry average results. At the same time, product lines and regions with less profitable experience were de-emphasized and relationships with under-performing agencies were terminated. Approximately 50% of the Company's direct premiums written in property and casualty insurance in 1995 came from the states of Illinois, Indiana, Kansas, Michigan, Missouri, Ohio, Oregon and Washington, which comprise the most significant part of the Company's target market, up from approximately 44% in 1991. In 1995, less than 11% of such direct premiums written came from California and Florida, states which the Company deems to be less favorable for profitable property and casualty business, down from 16% in 1991. Primarily as a result of its focus and the impact of New Directions, the Company's loss ratio, stated in accordance with Statutory Accounting Practices ("SAP"), improved from 71.6% for 1991 to 59.3% for 1995. For the last three, five and ten years, the Company's average SAP combined ratios were 105.1%, 107.7% and 105.7%, respectively, compared with industry average combined ratios of 107.3%, 109.3% and 108.3% for these periods. The SAP loss ratios and SAP combined ratios are not materially different than such ratios computed pursuant to GAAP. In November, 1995, as a follow-up to New Directions, the Company announced a realignment of its field structure designed to reduce expenses, contribute to further improvement of the combined ratio, and enhance growth (the "Realignment"). Under the Realignment, the Company will continue to provide sales, claims, technology support or other agency and customer service functions from approximately 225 locations; and, during 1996 and 1997, it will consolidate the management of those functions and much of its underwriting from 20 division offices into four regional offices, each responsible for a designated geographic area. As part of the Realignment, the Company created 24 Field Executive positions to maintain and enhance its working relationships with its agencies by putting more decision-making authority in the field, close to, and readily accessible by, the agents. The Company intensively uses technology to write and service policies efficiently, while at the same time providing superior service to agents and customers. Its Interaction(TM) system is a proprietary, on-line system, used both by agencies and the Company for automated policy rating, issuance, billing and service support. Management believes this system provides a significant competitive advantage. Approximately 94% of the agencies representing the Company are "online" with Interaction(TM), and approximately 78% of all property and casualty transactions are processed electronically. Management believes that Interaction(TM) is beneficial to agents because it reduces their handling costs on renewals, facilitates prompt issuance of new policies and promotes efficient claims processing. Other automated and knowledge-based systems are also used in claims settlement, the construction of customer information files for cross selling purposes and the life insurance operations. In addition to its focus on those eight Midwest and Pacific Northwest states which comprise the most significant part of its target market, the Company has also targeted a number of other states for increased marketing efforts where management believes its presence and a favorable environment give it potential for additional profitable growth. To promote growth in profitable lines of business and favorable geographic areas, the Company has introduced an enhanced agency bonus plan and targeted incentives. Any significant effect of these new incentives and enhancements is not expected to be realized until the second half of 1996 at the earliest. The Company has also recently developed the Customer Information File. This relational database allows the Company and its agencies to monitor products in-force for its customers and identify potential needs, and allows the Company to support agencies in targeting customers where cross-selling opportunities may exist. The Company was incorporated on February 5, 1996, to serve as the holding company for ASI. On April 22, 1996, ASI declared, and on May 15, 1996, it distributed to Lincoln, a dividend of $300 million, consisting primarily of tax-exempt municipal securities (the "Dividended Assets"). Following the distribution of the Dividended Assets by ASI to Lincoln, on May 16, 1996, Lincoln transferred all of the outstanding shares of ASI to the Company in exchange for 50,000,000 shares of the Company's Common Stock. Concurrently with the transfer of the ASI stock, the Company assumed $100 million of Lincoln debt (the "Assumed Debt") and issued a $200 million note to Lincoln (the "Term Note"). (The (i) transfer by Lincoln of all of the outstanding shares of ASI to the Company in exchange for 50,000,000 shares of the Company's Common Stock, (ii) assumption of the Assumed Debt, and (iii) issuance of the Term Note are hereinafter collectively referred to as the "Recapitalization"). THE OFFERINGS <TABLE> <S> <C> Common Stock offered hereby: U.S. Offering.................... 8,000,000 shares International Offering........... 2,000,000 shares ---------- Total......................... 10,000,000 shares ========== Common Stock outstanding: Before the Offerings............. 50,000,000 shares After the Offerings.............. 60,000,000 shares Use of proceeds.................... The Company intends to contribute approximately $150 million of the net proceeds from the Offerings to ASI to enable it to invest in taxable securities for its investment portfolio to replace the Dividended Assets distributed to Lincoln, which consist primarily of tax-exempt municipal securities. Approximately $75 million of the net proceeds from the Offerings will be retained by the Company for general corporate purposes. See "Use of Proceeds." Dividend policy.................... The Company intends to pay an initial quarterly cash dividend of $.21 per share commencing in the third quarter of 1996. Thereafter, the Company expects to pay regular quarterly cash dividends on its Common Stock, subject to certain regulatory constraints. See "Dividend Policy." New York Stock Exchange symbol..... ASX </TABLE> SUMMARY FINANCIAL AND OPERATING INFORMATION The following table presents certain selected consolidated historical and pro forma financial information of the Company. The consolidated statement of operations data set forth below for each of the five years in the period ended December 31, 1995, and the three-month periods ended March 31, 1995 and 1996, and the consolidated balance sheet data at December 31, 1991, 1992, 1993, 1994, and 1995, and at March 31, 1995 and 1996, were derived from consolidated financial statements of the Company. The table should be read in conjunction with the Consolidated Financial Statements and the notes thereto, and the pro forma information, included elsewhere in this Prospectus. <TABLE> <CAPTION> AS OF AND FOR THE THREE MONTHS ENDED AS OF AND FOR THE YEAR ENDED DECEMBER 31, MARCH 31, ------------------------------------------------------- ---------------------- 1991 1992 1993 1994 1995 1995 1996 -------- -------- -------- -------- ----------- -------- ----------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Premiums............................ $2,177.9 $2,064.7 $1,855.1 $1,746.0 $ 1,746.4 $ 438.7 $ 424.0 Net investment income............... 254.7 266.2 266.8 260.5 266.6 66.5 68.3 Realized gain on investments........ 107.6 65.4 149.9 19.9 41.0 27.2 21.1 Loss on operating properties(1)..... -- -- -- -- (28.4) -- -- ------- ------- ------- ------- ------- ------- ------- Total revenues.................. 2,540.2 2,396.3 2,271.8 2,026.4 2,025.6 532.4 513.4 Benefits and settlement expenses.... 1,756.5 1,683.4 1,386.3 1,272.0 1,242.3 305.4 323.6 Commissions......................... 377.3 359.3 323.0 296.9 291.5 72.1 71.9 Operating and administrative expenses.......................... 212.3 219.4 217.6 208.2 236.8 59.1 51.2 Taxes, licenses and fees............ 57.0 62.4 52.1 49.0 45.9 12.0 11.9 ------- ------- ------- ------- ------- ------- ------- Total benefits and expenses..... 2,403.1 2,324.5 1,979.0 1,826.1 1,816.5 448.6 458.6 ------- ------- ------- ------- ------- ------- ------- Income before federal income taxes and cumulative effect of accounting change................. 137.1 71.8 292.8 200.3 209.1 83.8 54.8 Net income...................... $ 126.7 $ 105.8 $ 206.2 $ 184.6 $ 178.3 $ 65.5 $ 46.9 CONSOLIDATED BALANCE SHEET DATA: Total investments and cash.......... $4,115.3 $4,288.1 $4,641.0 $4,152.3 $ 4,442.9 $4,265.8 $ 4,401.6 Total assets........................ 5,213.1 5,569.8 5,777.8 5,419.3 5,539.2 5,475.4 5,605.3 Policy liabilities and accruals..... 3,463.1 3,801.7 3,677.6 3,603.7 3,546.8 3,605.4 3,646.3 Debt................................ 5.1 5.0 5.0 -- -- -- -- Total liabilities................... 3,742.4 4,082.8 4,065.6 3,950.7 3,870.5 3,900.1 3,997.6 Shareholder's equity................ 1,470.7 1,487.0 1,712.2 1,468.6 1,668.7 1,575.3 1,607.7 CONSOLIDATED PRO FORMA DATA: Net income(2)....................... $ 151.7 $ 40.3 Net income per share(3)............. 2.53 .67 Earnings before realized gain on investments, loss on operating properties and estimated Realignment implementation costs, net of federal income taxes (NON-GAAP DATA)(4)................ 162.4 26.6 Total assets(5)..................... 5,464.2 5,530.3 Debt(5)............................. 300.0 300.0 Shareholders' equity(5)............. 1,293.7 1,232.7 Book value per share(3)............. 21.56 20.55 PROPERTY AND CASUALTY STATUTORY RATIOS AND DATA(6): Loss ratio.......................... 71.6% 70.9% 63.8% 61.1% 59.3% 57.9% 64.9% Loss adjustment expense ratio....... 9.8 10.6 11.4 11.8 11.8 12.0 11.5 Underwriting expense ratio.......... 29.0 30.6 31.7 31.6 32.3 32.6 31.7 Policyholder dividend ratio......... 0.4 0.4 0.2 0.1 0.2 0.1 0.2 ------- ------- ------- ------- ------- ------- ------- Company combined ratio............ 110.8% 112.5% 107.1% 104.6% 103.6% 102.6% 108.3% Industry combined ratio(7).......... 108.8% 115.8% 106.9% 108.5% 106.4% 104.0% N/A Statutory capital and surplus(8).... $1,050.1 $1,038.2 $1,068.4 $ 980.7 $ 1,011.0 $ 990.6 $ 998.6 Net premiums written to surplus (annualized)...................... 2.0x 1.9x 1.6x 1.7x 1.7x 1.7x 1.6x </TABLE> <TABLE> <CAPTION> AS OF AND FOR THE THREE MONTHS ENDED AS OF AND FOR THE YEAR ENDED DECEMBER 31, MARCH 31, ------------------------------------------------------- ---------------------- 1991 1992 1993 1994 1995 1995 1996 -------- -------- -------- -------- ----------- -------- ----------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> OTHER CONSOLIDATED DATA: Earnings before realized gain on investments, loss on operating properties and estimated Realignment costs, net of federal income taxes and the cumulative effect of accounting change in 1993 (NON-GAAP DATA)(9)........... $ 55.7 $ 62.6 $ 150.3 $ 171.7 $ 189.0 $ 48.3 $ 33.2 Common stock dividends declared(10)...................... 16.0 48.0 140.0 180.0 199.0 46.0 46.0 Total employees..................... 4,585 4,232 4,020 3,903 3,750 3,860 3,691 Total agencies...................... 5,715 5,490 5,203 5,050 4,882 5,029 4,822 </TABLE> - ------------------------- (1) Represents an allowance for losses on the contemplated sale of operating properties used for division offices, resulting from the Realignment. See Note 15 to the Consolidated Financial Statements included elsewhere herein. (2) Pro forma net income for the year ended December 31, 1995 and for the three months ended March 31, 1996 reflect the impact of investment income decreasing by $14.3 and $3.5 million, respectively, representing the interest yield on $300 million of tax-exempt municipal securities (the Dividended Assets), interest expense increasing by $20.1 and $5.0 million, respectively, representing the interest on the debt assumed and issued and the tax effect on the foregoing of $(7.8) and $(1.9), respectively. The pro forma net income does not include investment earnings from the proceeds from the Offerings. Based on an assumed initial public offering price of $24.00 per share, the net proceeds to the Company (after deduction of estimated underwriting discounts and offering expenses) would be approximately $225 million. Assuming these proceeds were invested in risk free investments, the investment income of the Company on a pro forma basis would be increased by $13.7 and $3.4 million for the year ended December 31, 1995 and for the three months ended March 31, 1996 and net income would be increased by $8.9 and $2.2 million, respectively. (3) Based on 60,000,000 shares outstanding. (4) Represents net income before (i) realized gain on investments of $41.0 and $21.1 million for the year ended December 31, 1995 and the three months ended March 31, 1996, respectively, net of federal income taxes of $19.5 and $10.0, respectively; (ii) the $28.4 million loss on operating properties in 1995, net of federal income taxes of $9.9 million and (iii) the estimated Realignment implementation costs accrued in 1995 of $21.1 million, net of federal income taxes of $7.4 million. The cumulative effect of the foregoing items were $10.7 and ($13.7), respectively ($.18 and ($.23) per share, respectively). The net effect of these amounts are included to assist the reader in analyzing the Company's results of operations by showing the effect of the listed items. The resulting amounts are not intended to represent net income prepared in accordance with GAAP. (5) Pro forma data reflect the impact of the distribution of $300 million of Dividended Assets, the assumption of $100 million of debt, the issuance of $200 million of debt and the receipt of estimated net proceeds of $225 million from the Offerings. (6) Company statutory data have been derived from the financial statements of the Company's insurance subsidiaries prepared in accordance with SAP and filed with insurance regulatory authorities. The loss, loss adjustment expense, underwriting expense, policyholder dividend and Company combined ratios are not materially different than such ratios computed pursuant to GAAP. (7) The ratios presented are after policyholder dividends. Industry averages for 1991 through 1994 are from A.M. Best Company, Inc. ("A.M. Best") Aggregates & Averages Property-Casualty (1995 edition). The industry combined ratio for 1995 is a published estimate from A.M. Best. (8) Includes life statutory capital and surplus of ASLIC. (9) Represents net income before (i) realized gain on investments, net of federal income taxes of $36.6, $22.2, $53.5, $7.0 and $19.5 million in 1991, 1992, 1993, 1994 and 1995, respectively, and $10.0 and $7.4 million for the three months ended March 31, 1995 and 1996, respectively, (ii) the $28.4 million loss on operating properties in 1995, net of federal income taxes of $9.9 million, (iii) the estimated Realignment implementation costs accrued in 1995 of $21.1 million, net of federal income taxes of $7.4 million, and (iv) the cumulative effect of a change in accounting in 1993. The net effect of these amounts are included to assist the reader in analyzing the Company's results of operations by showing the effect of the listed items. The resulting amounts are not intended to represent net income prepared in accordance with GAAP. (10) Amounts shown represent dividends declared on ASI stock, which were paid to Lincoln. Future ASI dividends are anticipated to be less than historic levels. ASI also declared $.2 million and $.1 million in dividends on publicly held preferred stock in 1991 and 1992, respectively. This stock was called and retired in 1992.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001010838_chester_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001010838_chester_prospectus_summary.txt
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+PROSPECTUS SUMMARY The information set forth below should be read in conjunction with and is qualified in its entirety by the more detailed information and Financial Statements (including the Notes thereto) presented elsewhere in this Prospectus. The purchase of Common Stock is subject to certain risks. See "RISK FACTORS." Chester Bancorp, Inc. The Holding Company is a Delaware corporation organized in March 1996 at the direction of the Savings Bank for the purpose of serving as the holding company of the Converted Savings Bank upon consummation of the Stock Conversion, and of the Converted Bank and the De Novo Bank following consummation of the Bank Conversion and the Bank Formation, respectively. The Holding Company has engaged in organizational activities only to date. The Holding Company has received OTS approval to become a savings and loan holding company through the acquisition of the Converted Savings Bank. The Holding Company also has received approval from the Board of Governors of the Federal Reserve System ("Federal Reserve") to become a bank holding company under the Bank Holding Company Act, as amended ("BHCA"), through the acquisition of the Converted Bank and the De Novo Bank. Immediately following the Stock Conversion, the only significant assets of the Holding Company will be all of the outstanding capital stock of the Converted Savings Bank (and, following the Bank Conversion and the Bank Formation, all of the outstanding capital stock of the Converted Bank and the De Novo Bank), that portion of the Conversion proceeds permitted by the OTS to be retained by the Holding Company and a note receivable from the ESOP. The Holding Company has received approval from the OTS to retain 50% of the net proceeds received in the Conversion, after deducting amounts necessary to fund the ESOP. See "USE OF PROCEEDS." Upon consummation of the Conversion, the Holding Company's principal business will be the business of the Converted Bank and the De Novo Bank. Management believes that the holding company structure and retention of proceeds could facilitate possible geographic expansion and diversification through future acquisitions of other financial institutions and national banks such as other mutual or stock savings institutions and also enable the Holding Company to diversify, should it decide to do so, into a variety of banking-related activities other than transactions described herein. There are no present plans, arrangements, agreements, or understandings, written or oral, regarding any such acquisitions or activities. The holding company structure will also facilitate the repurchase of shares in the open market, subject to regulatory restrictions and market conditions. The principal office of the Holding Company is located at 1112 State Street, Chester, Illinois 62233, and its telephone number is (618) 826-5038. Chester Savings Bank, FSB The Savings Bank is a federally chartered mutual savings bank located in Chester, Illinois, which is approximately 60 miles south of St. Louis, Missouri. Originally chartered in 1919 as an Illinois-chartered mutual savings and loan association under the name "Chester Building and Loan Association," the Savings Bank converted to a federal charter and adopted its current name in 1990. In 1989, the Savings Bank acquired Heritage Federal Savings and Loan Association ("Heritage Federal") which at the time of the acquisition had assets of approximately $50 million and offices in Sparta, Red Bud and Pinckneyville, Illinois. The Savings Bank is regulated by the OTS, its primary federal regulator, and the FDIC, the insurer of its deposits. The Savings Bank's deposits are federally insured by the FDIC under the SAIF. The Savings Bank is a member of the Federal Home Loan Bank ("FHLB")
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the more detailed information and financial statements appearing elsewhere in this Prospectus. Investors should carefully consider the information set forth under the heading "Risk Factors." THE COMPANY Microcide is a biopharmaceutical company founded to discover, develop and commercialize novel antibiotics for the treatment of serious bacterial infections. The Company's discovery and development programs address the growing problem of bacterial drug resistance through two principal themes: (i) Targeted Antibiotics, which focuses on developing novel antibiotics and antibiotic potentiators, and (ii) Targeted Genomics, which utilizes bacterial genetics to discover new classes of antibiotics and other novel treatments for bacterial disease. The Company believes that the antibiotics market provides an attractive opportunity for its research and development activities because (i) it is the third largest pharmaceutical market, totaling $22.9 billion in worldwide sales, including $6.3 billion in the United States, for the twelve months ended September 1995; (ii) there are significant unmet clinical needs, caused by growing bacterial resistance problems, that require new antibacterial therapies; and (iii) the preclinical and clinical development process for antibiotics generally follows an efficient and well-defined path to the market. Microcide's Targeted Antibiotics programs seek to rapidly develop clinically useful antibiotics tailored to treat specific bacterial infections, as well as antibiotic potentiators, which will overcome resistance pathways and restore usefulness to existing antibiotics that have been rendered ineffective. The specific problematic bacteria being addressed by the Company (staphylococci, enterococci, Pseudomonas aeruginosa and Streptococcus pneumoniae) are responsible for 44% of the approximately two million hospital-acquired infections occurring annually in the United States. These infections are estimated to result in approximately eight million days of extended hospital stay and account for more than $4.0 billion in additional health care costs each year. Microcide's Targeted Genomics programs seek to identify the pharmaceutically relevant portion of bacterial genomes that are essential to bacterial viability in vitro (the Essential Genes Program) or to bacterial growth and virulence in vivo (the Pathogenesis Program). In the Essential Genes Program, Microcide has identified approximately 80 essential gene targets which are being incorporated into the Company's high-throughput, multi-channel screening system to discover new classes of antibiotics. In the Pathogenesis Program, Microcide is developing and utilizing new molecular genetics technologies to identify pathogenesis genes in order to discover and develop novel therapeutic agents. The Company has entered into collaborative agreements with three major pharmaceutical companies to enhance certain of its discovery and development programs. To date, the Company's collaborative partners have provided the Company with $11.3 million of license fees and research support payments and $10.0 million in equity investments. Assuming each of the collaborative agreements continues until its scheduled expiration, the Company will be entitled to receive an additional $34.2 million of research support payments. The Company has retained rights to products which may result from its internal programs. Ortho/J&J. Microcide is collaborating with Ortho Pharmaceutical Corporation, a Johnson & Johnson company ("Ortho/J&J"), to discover and develop novel beta-lactam antibiotics, antibiotic potentiators and inhibitors of bacterial signal transduction targeted at problematic Gram-positive bacteria, including staphylococci and enterococci. The Company expects to select with Ortho/J&J its initial product candidate, a Gram-positive beta-lactam, in 1996 and to enter into clinical trials during 1997. If specified research and development milestones are achieved, the Company will be entitled to receive up to $16.5 million for the initial product and up to $15.5 million for each subsequent product developed within the collaboration. Daiichi. Microcide is collaborating with Daiichi Pharmaceutical Co., Ltd. ("Daiichi") to discover and develop bacterial efflux pump inhibitors to be used in combination with Daiichi's quinolone antibiotics to target Gram-negative bacteria, including pseudomonas. The Company expects to select with Daiichi its first quinolone potentiation candidate by mid-1997 for clinical development. If specified research and development milestones are achieved, Microcide will be entitled to receive up to $13.0 million for each product developed within the collaboration. Pfizer. Microcide is collaborating with Pfizer Inc ("Pfizer") to implement its essential gene and multi-channel screening system to discover novel classes of antibiotics. If specified research and development milestones are achieved, Microcide will be entitled to receive milestone payments of up to $32.5 million for each product developed within the collaboration. [GRAPHIC APPEARS HERE] [Narrative description: Graphic description of the stages of the Company's research programs] IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. Microcide(TM), Microcide Pharmaceuticals(TM) and the Microcide logo are claimed as trademarks of the Company. This Prospectus also includes names and marks of companies other than the Company. THE OFFERING <TABLE> <S> <C> Common Stock offered............................. 2,500,000 shares Common Stock to be outstanding after the Offering....................................... 10,256,981 shares(1) Use of proceeds.................................. To fund certain of the Company's research and development activities and for general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol........... MCDE </TABLE> - --------------- (1) Based upon shares of Common Stock outstanding as of March 31, 1996, on a fully converted basis. Excludes 160,187 shares of Common Stock issuable upon exercise of warrants and 690,600 shares of Common Stock issuable upon exercise of options outstanding as of March 31, 1996. See "Business -- Collaborative Agreements," "Management -- Employee Benefit Plans," "Description of Capital Stock," and Note 8 of Notes to Financial Statements. SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> PERIOD FROM INCEPTION THREE MONTHS (DECEMBER 11, YEAR ENDED ENDED 1992) DECEMBER 31, MARCH 31, TO DECEMBER 31, ----------------- ---------------- 1993 1994 1995 1995 1996 ------------------ ------- ------- ------- ------ <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues: License fees............................... $ -- $ -- $ 3,000 $ -- $1,000 Research revenue........................... -- -- 1,985 -- 1,625 ------- ------- ------- Total revenues.......................... -- -- 4,985 -- 2,625 Operating expenses: Research and development................... 1,685 5,180 6,400 1,324 1,780 General and administrative................. 1,251 1,823 2,080 479 526 ------- ------- ------- Total operating expenses................ 2,936 7,003 8,480 1,803 2,306 ------- ------- ------- Income (loss) from operations................ (2,936) (7,003) (3,495) (1,803) 319 Interest income.............................. 32 218 257 85 137 Interest expense............................. (13) (249) (278) (70) (73) ------- ------- ------- Net income (loss)....................... $ (2,917) $(7,034) $(3,516) $(1,788) $ 383 ======= ======= ======= Pro forma net income (loss) per share(1)..... $ (0.44) $ (0.22) $ 0.04 ======= Shares used in computing pro forma net loss per share(1)............................... 8,052 8,039 8,563 </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 ACTUAL AS ADJUSTED(2) ------- -------------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents........................................... $15,093 $ 44,518 Working capital..................................................... 11,020 40,445 Total assets........................................................ 20,691 50,116 Long-term obligations............................................... 1,810 1,810 Deficit accumulated during development stage........................ (13,084) (13,084) Total stockholders' equity.......................................... 14,596 44,021 </TABLE> - --------------- (1) See Note 1 of Notes to Financial Statements for information concerning the calculation of pro forma net loss per share. (2) As adjusted to reflect the sale of 2,500,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $13 per share and the receipt of the estimated net proceeds therefrom. See "Use of Proceeds."
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL DATA APPEARING ELSEWHERE IN THIS PROSPECTUS, INCLUDING INFORMATION UNDER "RISK FACTORS." THE COMPANY STAT Healthcare, Inc. ("STAT" or the "Company") provides a continuum of disease management services primarily to patients with end-stage renal disease ("ESRD" or "chronic kidney failure") and physician practice management services to affiliated physician groups which staff hospital emergency departments. The Company currently operates five kidney dialysis facilities, manages two hyperbaric oxygen ("HBO") therapy facilities and provides home healthcare management and related ancillary services primarily in the Rio Grande Valley of south Texas. Through its affiliated physician groups, STAT also currently provides physician practice management services to 20 hospital emergency departments, 17 of which are in the Houston greater metropolitan area, and has entered into a contract to provide physician practice management services to three additional hospital emergency departments commencing in October 1996. The Company's disease management services consist of a system of care for persons with chronic kidney failure, including kidney dialysis treatment, HBO therapy and related ancillary services. Chronic kidney failure is the state of advanced renal impairment that generally is irreversible and requires routine dialysis treatments an average of three times per week or kidney transplantation in order to sustain life. In addition to the need for dialysis treatment, chronic kidney failure patients frequently suffer from one or more associated medical conditions, including diabetes, non-healing wounds, hypertension, coronary artery disease, anemia and nutritional problems. Qualified patients with chronic kidney failure have been entitled since 1972 to Medicare benefits regardless of age or financial circumstances under the federal ESRD program. The Company estimates that the U.S. market for outpatient and inpatient dialysis services exceeded $3.6 billion in 1994, based on an average of three treatments per week per patient at an average cost of $126 per treatment. STAT believes its integrated approach to kidney disease management is cost-effective and attractive to managed care companies and other third-party payors. STAT also believes there are opportunities to contract with hospital networks to provide inpatient dialysis and other ESRD-related services. Through its affiliated physician groups, the Company also provides physician practice management services for emergency departments at hospitals. Hospitals frequently outsource key departmental functions to third-party management companies in an effort to control and reduce operating costs and focus on their core competencies. There are approximately 5,200 hospitals in the U.S., many of which face numerous problems in managing their emergency departments, including difficulties in recruiting, evaluating, scheduling and retaining qualified emergency physicians, and the inefficient use of emergency departments for routine primary care. The Company intends to continue to focus on strategic relationships and outsourcing opportunities with hospital networks rather than management contracts with individual hospitals. In addition, STAT believes it can provide physician practice management services to other hospital-based physician practices, such as radiology, pathology and anesthesiology. The Company's objective is to be the preferred provider of integrated kidney disease management services and physician practice management services in its current and future market areas. The principal elements of the Company's strategy are to (i) expand its integrated disease management services, (ii) leverage its existing relationships with hospital networks, (iii) expand into new geographic markets and (iv) attract managed care contracts. In June 1996, the Company acquired AmHealth Corporation and its related healthcare entities (collectively, "AmHealth") in exchange (the "Exchange") for 11,200,000 shares of Common Stock, representing approximately 75% of the Common Stock outstanding immediately after the Exchange. AmHealth operated kidney dialysis facilities, managed HBO therapy facilities and provided home healthcare management and related ancillary services primarily in the Rio Grande Valley of south Texas. The Exchange was accounted for as a pooling of interests, and the Company's consolidated financial statements as of and for the years ended December 31, 1993, 1994 and 1995 have been restated to give retroactive effect to the consummation of the Exchange. 3 THE OFFERING Common Stock offered by the Company............................ 3,000,000 shares Common Stock offered by the Selling Stockholders....................... 300,000 shares Common Stock to be outstanding after the offering....................... 17,974,412 shares(1) Use of Proceeds...................... For reduction of indebtedness and general corporate purposes, including working capital and potential acquisitions. Nasdaq National Market symbol........ STHC - ------------------------------ (1) Excludes (i) 1,500,000 shares of Common Stock reserved for issuance under the Company's 1996 Stock Incentive Plan and (ii) 787,226 shares of Common Stock issuable upon the exercise of warrants outstanding at August 23, 1996. See "Management -- 1996 Stock Incentive Plan," "Description of Capital Stock -- Class A Warrants" and "-- Other Warrants" and "Underwriting." SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ------------------------------ -------------------- 1993(1) 1994(2) 1995 1995 1996 ------- ------- --------- --------- --------- <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENTS OF INCOME DATA: Net service revenues................. $10,043 $14,521 $ 23,141 $ 10,375 $ 16,663 ------- ------- --------- --------- --------- Operating expenses: Professional medical fees........ 6,823 7,714 9,241 4,548 6,695 Human resources.................. 1,107 1,949 4,640 1,625 3,516 Supplies......................... 375 1,143 1,818 822 1,136 Billing and collection costs..... 304 795 1,461 697 996 Other costs...................... 784 1,440 2,215 899 1,437 ------- ------- --------- --------- --------- Total operating expenses..... 9,393 13,041 19,375 8,591 13,780 ------- ------- --------- --------- --------- Operating income..................... 650 1,480 3,766 1,784 2,883 Interest and other (income) expense, net................................ 33 5 121 29 133 Reorganization costs................. -- -- -- -- 1,269 ------- ------- --------- --------- --------- Income before income taxes........... 617 1,475 3,645 1,755 1,481 Income taxes......................... -- 65 347 181 (44) ------- ------- --------- --------- --------- Net income........................... $ 617 $ 1,410 $ 3,298 $ 1,574 $ 1,525 ======= ======= ========= ========= ========= Pro forma data(3): Pro forma income taxes........... 210 436 892 416 577 ------- ------- --------- --------- --------- Pro forma net income............. $ 407 $ 974 $ 2,406 $ 1,158 $ 948 ======= ======= ========= ========= ========= Pro forma net income per common share.......................... $ 0.05 $ 0.11 $ 0.20 $ 0.13 $ 0.06 ======= ======= ========= ========= ========= Number of shares used in computing pro forma net income per share...................... 7,458 8,545 11,897 9,078 15,320 ======= ======= ========= ========= ========= </TABLE> JUNE 30, 1996 --------------------------- ACTUAL AS ADJUSTED(4) ------- -------------- CONSOLIDATED BALANCE SHEET DATA: Working capital...................... $ 4,189 $ 21,238 Total assets......................... 13,759 29,558 Long-term debt and capital lease obligations, less current portion............................ 2,282 2,282 Total liabilities.................... 7,099 5,849 Stockholders' equity................. 6,660 23,709 - ------------------------------ (1) Represents consolidated financial data for the Company combined with financial data for its affiliated physician group, South Texas Acute Trauma Physicians, P.A. ("STAT Physicians"). (2) Represents consolidated financial data for the Company for the year ended December 31, 1994 combined with financial data for STAT Physicians for the eight months ended August 31, 1994. (3) Reflects the effects of income taxes not otherwise payable by entities which were partnerships or S corporations prior to the Exchange. (4) Gives effect to the sale of 3,000,000 shares of Common Stock by the Company in the offering at an assumed offering price of $6 3/16 per share, after deducting estimated underwriting discounts and commissions and offering expenses payable by the Company. See "Use of Proceeds." UNLESS OTHERWISE INDICATED HEREIN, ALL INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SUBSTANTIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS." 4 RISK FACTORS IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS IN EVALUATING THE COMPANY AND ITS BUSINESS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE FOLLOWING RISK FACTORS SHOULD BE CAREFULLY CONSIDERED BY POTENTIAL INVESTORS BEFORE PURCHASING COMMON STOCK OFFERED HEREBY: CLIENT CONCENTRATION; DEPENDENCE ON COLUMBIA/HCA HEALTHCARE CORPORATION. During the years ended December 31, 1994 and 1995 and the six months ended June 30, 1996, approximately 46%, 41% and 50% of the Company's net service revenues, respectively, were derived from fee-for-service contracts entered into by the Company's affiliated physician groups with hospitals currently owned by Columbia/HCA Healthcare Corporation ("Columbia"). The Company's affiliated physician groups have contracted to provide physician practice management services at 23 hospital-based emergency departments, 20 of which are owned by Columbia. Fifteen of the Columbia hospitals are covered by a single contract. Several or all of the Columbia hospitals served by the Company in a given region are generally covered by a single contract. Each current Columbia contract has an initial term of two years with provisions for automatic renewal, and may be terminated by Columbia in certain circumstances, including unsatisfactory service by the Company or its affiliated physician groups. During the term of each Columbia contract and for two years thereafter, STAT has agreed not to organize or provide administrative or advisory services to independent physician or similar associations whose practices relate to areas other than emergency medicine and who are located in proximity to specified Columbia medical centers. There can be no assurance that any contract will be renewed, that any contract will be renewed on substantially the same terms and conditions, or that any contract will not be terminated prior to the conclusion of its term. Loss of any Columbia contract covering a substantial number of hospitals would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Operations -- Emergency Physician Practice Management Services -- Hospital Contracts." LIMITED OPERATING HISTORY; INTEGRATION OF OPERATIONS OF AMHEALTH. The Company did not conduct operations as a combined entity with AmHealth until the consummation of the Exchange in June 1996. Accordingly, the Company has a limited operating history upon which an evaluation of its prospects can be based. The integration of the operations of AmHealth will require the dedication of management resources and distract attention from the day-to-day business of the Company, which could adversely affect the Company's business, financial condition and results of operations. There can be no assurance that the Company will not incur additional charges in subsequent quarters to reflect costs associated with the Exchange or that management will be successful in its efforts to integrate the operations of AmHealth. There can also be no assurance that the Company's management will be able to oversee the combined entity and effectively implement the Company's operating and growth strategy. Failure to integrate the operations of AmHealth or to implement the Company's operating and growth strategy successfully could have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON MEDICARE/MEDICAID AND OTHER SOURCES OF REIMBURSEMENT; RISKS OF COLLECTION. The Company's business is dependent upon its ability to obtain and maintain reimbursement from third-party payors, including government programs (such as Medicare and Medicaid) and private insurers, for the Company's dialysis services and medical services provided by its affiliated physician groups. The Company's business is also subject to the collection risks and working capital demands associated with its affiliated physician groups' fee-for-service contracts with hospitals. MEDICARE A significant portion of the Company's net service revenues is derived from its services as a provider of dialysis treatment. The Company is reimbursed for dialysis services primarily at fixed rates established under the ESRD program administered by the U.S. Health Care Financing Administration ("HCFA"). Under this program, once a patient becomes eligible for Medicare reimbursement, Medicare is responsible for payment of 80% of the composite rate determined by HCFA for dialysis treatments and a secondary 5 payor (usually Medicare supplemental insurance or the state Medicaid or ESRD-type program) pays approximately 20% of the composite rate. Since 1972, qualified patients with ESRD have been entitled to Medicare benefits regardless of age or financial circumstances. Since 1983, numerous Congressional actions have resulted in changes in the Medicare composite reimbursement rate. The Medicare ESRD composite reimbursement rate currently ranges from $117 to $138 per treatment, depending on regional wage variations. The Company receives reimbursement for outpatient dialysis services provided to Medicare-eligible patients at rates that are currently $117 per treatment. The Company is not able to predict whether future rate changes will be made. Because the Medicare program represents a substantial portion of the federal budget, Congress takes action in almost every legislative session to modify the Medicare program for the purpose of reducing the amounts payable from the program to healthcare providers. Legislation or regulations may be enacted in the future that may significantly modify the Medicare program or substantially reduce the amount paid for the Company's services. Such actions could have a material adverse effect on the Company's business, financial condition and results of operations. Furthermore, increases in operating costs that are subject to inflation, such as labor and supply costs, without a compensating increase in prescribed rates, may have a material adverse effect on the Company's results of operations in the future. The Company also is unable to predict whether certain ancillary services, for which the Company currently is reimbursed separately, may in the future be included in the Medicare ESRD composite rate. See "Business -- Operations -- Disease Management Services -- Sources of Reimbursement." MEDICAID Texas, the only state in which the Company currently operates, provides Medicaid (or comparable) benefits to qualified recipients to supplement their Medicare entitlement. The Medicaid programs are subject to statutory and regulatory changes, administrative rulings, interpretations of policy and governmental funding restrictions, all of which may have the effect of decreasing program payments, increasing costs or modifying the way the Company operates its business. See "Business -- Operations -- Disease Management Services -- Sources of Reimbursement." OTHER SOURCES OF REIMBURSEMENT Other sources of reimbursement include payments from third-party private payors with whom the Company contracts. Payments from private payors are generally at rates that exceed the Medicare and Medicaid rates. Termination of such private payor agreements could have an adverse effect on the Company. The Company believes that health maintenance organizations ("HMOs") and other managed care providers may have a strong incentive to reduce the costs of healthcare and may seek to reduce amounts paid for the Company's services. The Company is unable to predict whether and to what extent changes in private reimbursement rates may be made in the future. Any reduction in such rates could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, as patient care is increasingly controlled by managed care entities, the Company believes that its success will, in part, be dependent upon the ability of the Company or its affiliated physician groups to negotiate managed care contracts with HMOs and other private third-party payors. Such contracts often shift much of the financial risk of providing care from the payor to the provider. There can be no assurance that satisfactory arrangements with respect to risk sharing can be negotiated or that any managed care contracts entered into will not adversely affect the Company. FEE-FOR-SERVICE REIMBURSEMENT The net service revenues from the Company's emergency physician practice management services are derived under its affiliated physician groups' fee-for-service contracts with hospitals, pursuant to which the Company assumes the financial risks arising from changes in patient volume, payor mix and third-party reimbursement rates. Fee-for-service contractual arrangements also involve a credit risk related to services provided to uninsured individuals. The Company's working capital needs are related to the acquisition of new hospital contracts by its affiliated physician groups. As a result, the Company may require additional working capital in the event of significant growth in emergency physician practice management services. 6 See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." RISKS ASSOCIATED WITH THE COMPANY'S GROWTH STRATEGY. The Company's growth strategy includes the development of new dialysis facilities, the acquisition of existing dialysis facilities and the entry into additional hospital-based HBO therapy and physician practice management contracts, particularly through strategic relationships with hospital networks. Competition for existing dialysis facilities and HBO therapy and physician practice management contracts has increased significantly in recent years and, as a result, the cost of these activities has also increased. There can be no assurance that the Company will be able to develop new dialysis facilities or identify, acquire or successfully integrate acquired dialysis facilities, or that the Company will be able to identify, enter into or successfully integrate additional HBO therapy and physician practice management contracts. In addition, there can be no assurance that dialysis facilities, HBO therapy facilities or physician practices developed, acquired or managed in the future will achieve net service revenues or earnings that justify the Company's investment therein. Such expansion methods involve a number of risks, including diversion of management's attention and dependence on retention, hiring and training of increasing numbers of physicians, nurses and technical personnel, some or all of which could have a material adverse effect on the Company's business, financial condition and results of operations. To the extent the Company is unable to develop or acquire dialysis facilities or enter into additional HBO therapy and physician practice management contracts, or to integrate such facilities and activities successfully, its ability to expand its business would be reduced significantly. See "Business -- Business Strategy." COMPETITION. The markets for dialysis, HBO therapy, home healthcare and physician practice management services are highly competitive. The Company has both local and national competitors in its businesses, many of whom focus solely in a particular segment of the Company's business. The Company is also, in effect, competing against the traditional structure of hospital management and practicing physician management operations. Competition is based on the scope, quality and cost of services provided. Certain of the Company's competitors are significantly larger and have substantially greater financial and other resources available to them than the Company. There can be no assurance that the Company can compete effectively with any such competitor. See "Business -- Competition." LACK OF BROAD ACCEPTANCE OF HBO THERAPY. The Company's growth strategy includes expansion through the management of additional HBO therapy facilities. HBO therapy is recognized as an effective primary treatment for a number of medical conditions, including carbon monoxide poisoning and smoke inhalation, decompression sickness and air embolism. Approximately 85% of the patients treated by the Company's disease management services during 1995 suffer from diabetes or vascular disease, which conditions predispose those patients to problem wounds which fail to respond to established medical/surgical management. Although the Company believes that HBO therapy enhances the healing of selected problem wounds of these patients, and Medicare currently reimburses certain costs of HBO therapy, the general medical community has not historically recognized HBO therapy as primary treatment for such wounds and there can be no assurance that broad acceptance of HBO therapy for problem wounds will be achieved in the future. The reluctance of the general medical community to achieve broad acceptance of HBO therapy to treat problem wounds could adversely affect the Company's ability to expand such business. DEPENDENCE ON AFFILIATED PHYSICIAN GROUPS. The Company has entered into management agreements (the "Management Agreements") with affiliated physician groups which in turn contract to provide emergency medical services to hospitals. The Company receives a management fee pursuant to the Management Agreements, the amount of which is, in part, tied to gross revenues of the affiliated physician group. The affiliated physician groups, in turn, enter into contracts with hospitals for the provision of emergency medical and administrative services. The terms of the hospital contracts are generally two years, with provisions for automatic renewal for additional periods. The termination or failure to renew a significant number of these hospital contracts or a single contract covering a significant number of facilities 7 would have a material adverse impact on the Company. See "Business -- Operations -- Emergency Physician Practice Management Services -- Hospital Contracts." CLASSIFICATION OF PHYSICIANS AS INDEPENDENT CONTRACTORS; POTENTIAL STATE AND FEDERAL TAX LIABILITY. The Company's affiliated physician groups contract with physicians as independent contractors, rather than employees, to fulfill their contractual obligations to hospitals. Therefore, no affiliated physician group currently withholds federal or state income taxes, makes federal or state unemployment tax payments or provides workers compensation insurance with respect to such independent contractors. The payment of applicable taxes is regarded as the responsibility of such independent contractors. The Company believes that classification of physicians as independent contractors is standard industry practice and proper for federal tax purposes. A contrary determination by taxing authorities or a change in existing law could materially adversely affect the Company and its results of operations. See "Business -- Operations -- Emergency Physician Practice Management Services -- Physician Contracts." DEPENDENCE ON MANAGEMENT AND KEY PERSONNEL. The Company is highly dependent upon the active involvement of its key management and executive personnel, in particular Russell D. Schneider, the Company's Chairman and Chief Executive Officer, William H. Rice, M.D., its Vice Chairman, Victor M. Miranda, M.D., its President -- Emergency Physicians, and Ruben A. Perez, its President -- Healthcare Management. Messrs. Schneider and Perez have each enjoyed a long-term relationship with Columbia and Drs. Rice and Miranda have been largely responsible for the development and maintenance of existing relationships with hospital administrators. Accordingly, the Company has entered into employment and non-competition agreements with each of these executive officers. The Company believes that its future success will also be significantly dependent on its ability to recruit and retain qualified physicians to serve as medical directors and to retain independent contractor attending physicians and skilled nurses, for which competition is intense. The loss by the Company of any of its executive officers, or the inability to recruit and retain qualified management personnel, medical directors, and independent contractor physicians or nurses could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Employees and Independent Contractor Physicians" and "Management." DEPENDENCE ON PHYSICIAN REFERRALS. The Company's dialysis facilities are dependent upon referrals of ESRD patients for treatment by physicians specializing in nephrology and practicing in the communities served by the Company's facilities. As is generally true in the dialysis industry, at each facility one or a few physicians account for all or a significant portion of the patient referral base. During 1995, two nephrologists who are also principal stockholders of the Company collectively accounted for approximately 80% of the Company's net service revenues from dialysis services (approximately 27% of the Company's total net service revenues). The loss of one or more key referring physicians at a particular facility could have a material adverse effect on the operations of that facility and could adversely affect the Company's overall results of operations. GOVERNMENT REGULATION. Various state and federal laws regulate the relationships between providers of healthcare services, physicians and other clinicians. These laws include the fraud and abuse provisions of the Social Security Act, which prohibit the solicitation, payment, receipt, or offering of any direct or indirect remuneration for the referral of Medicare or Medicaid patients or for the ordering or providing of Medicare or Medicaid covered services, items or equipment. These laws also impose restrictions on physicians' referrals for designated healthcare services to entities with which they have financial relationships. Violations of these laws may result in substantial civil or criminal penalties for individuals or entities, including large civil monetary penalties and exclusion from participation in the Medicare and Medicaid programs. State law also prohibits physicians from splitting fees with non-physicians and prohibits non-physician entities from practicing medicine. Such exclusion, if applied to the Company or its affiliated physician groups, could result in significant loss of reimbursement to the Company. Although the Company believes its operations as described herein are, and will continue to be, in material compliance with existing applicable laws, the Company's business operations have not been the subject of judicial or regulatory interpretation. There can be no assurance that review of the Company's business by courts or regulatory authorities will not result in determinations that could adversely affect the operations of 8 the Company or that the healthcare regulatory environment will not change so as to restrict the Company's existing operations or their expansion. In addition, the regulatory framework of certain jurisdictions may limit the Company's expansion into, or ability to continue operations within, such jurisdictions if the Company is unable to modify its operational structure to conform with such regulatory framework. Any limitation on the Company's ability to expand its business could have an adverse effect on the Company. In addition to extensive, existing government healthcare regulation, there have been numerous initiatives on the federal and state levels for comprehensive reforms affecting the payment for and availability of healthcare services. The Company believes that such initiatives will continue during the foreseeable future. Aspects of certain of these reforms as proposed in the past, such as further reductions in Medicare and Medicaid payments and additional prohibitions on physician ownership, directly or indirectly, of facilities to which they refer patients, if adopted, could adversely affect the Company's business, financial condition and results of operations. See "Business -- Government Regulation." CORPORATE EXPOSURE TO PROFESSIONAL LIABILITIES. Due to the nature of their businesses, the Company's affiliated physician groups and certain physicians who provide services on their behalf may be the subject of medical malpractice claims, with the attendant risk of substantial damage awards. One of the most significant sources of potential liability in this regard is the alleged negligence of physicians placed by the affiliated physician groups at contract hospitals. To the extent such physicians are regarded as agents of the Company in the practice of medicine, the Company could be held liable for any medical negligence of such physicians. In addition, the Company could be found in certain instances to have been negligent in performing its contract management services for the hospitals even if no agency relationship between the Company, the affiliated physician groups and/or such physician exists. Each affiliated physician group's contracts with hospitals generally require the affiliated physician group to indemnify such other parties for losses resulting from a contracted physician's malpractice. However, there can be no assurance that a future claim or claims will not exceed the scope or limits of available insurance coverage or that such coverage will continue to be available. See "Business -- Corporate Liability and Insurance" and " -- Legal Proceedings." POSSIBLE INSUFFICIENCY OF LIABILITY COVERAGE. The Company maintains professional liability insurance coverage in amounts and coverages as required by certain agreements or deemed appropriate by management. However, there can be no assurance that any claim will be within the scope or limits of the Company's coverage, that any insurer will remain solvent and able to meet its obligations to provide coverage for any claim or claims or that such coverage will continue to be available or available with sufficient limits and at a reasonable cost to adequately and economically insure the Company's operations in the future. See "Business -- Corporate Liability and Insurance." VOTING CONTROL BY MANAGEMENT. Upon completion of the offering, the current executive officers and directors of the Company will in the aggregate beneficially own approximately 55% of the outstanding Common Stock (approximately 53% if the Underwriters' over-allotment option is exercised in full). As a result, management will have significant influence over the outcome of all matters submitted to the Company's stockholders for their approval, including the election of directors and approval of significant corporate transactions. This ownership by the Company's management may delay, defer or prevent a potential change of control of the Company and, consequently, the market price for the Common Stock may be less likely to reflect a "premium" for such potential transactions. See "Principal and Selling Stockholders." ANTI-TAKEOVER PROVISIONS. The Company's Certificate of Incorporation ("Charter") and Bylaws ("Bylaws") and the Delaware General Corporation Law contain certain provisions that may have the effect of discouraging, delaying or preventing a change in control of the Company or unsolicited acquisition proposals that a stockholder might consider favorable, including provisions authorizing the issuance of "blank check" Preferred Stock, establishing a classified Board of Directors, limiting the persons who may call special meetings of stockholders, prohibiting stockholder action by written consent and establishing advance notice requirements for nominations for election to the Board of Directors or for proposing matters 9 that can be acted upon at stockholders meetings. See "Description of Capital Stock -- Certain Anti-Takeover, Limited Liability and Indemnification Provisions." LIMITED MARKET FOR THE COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE. The Common Stock has been quoted on the Nasdaq National Market under the symbol "STHC" since August 23, 1996. The Common Stock was quoted on the Nasdaq SmallCap Market (under the symbol "ERDR" until June 24, 1996 and "STHC" thereafter) from April 21, 1995 to August 22, 1996. Factors such as announcements by the Company or its competitors concerning variations in results of operations, changes in earnings estimates by securities analysts, announcements of material events by the Company or its major strategic partners and proposed government regulations may have a significant effect on the market price of the Company's securities. The stock market has from time to time experienced extreme price and volume fluctuations, particularly among healthcare companies, which have often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the price of the Company's securities. See "Price Range of Common Stock." POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE. Sales of a substantial number of shares of Common Stock after the offering could adversely affect the market price of the Common Stock and could impair the Company's ability to raise capital through the sale of equity securities. Upon completion of the offering, the Company will have outstanding 17,974,412 shares of Common Stock (18,469,412 shares if the Underwriters' over-allotment option is exercised in full), assuming no exercise of outstanding options and warrants after August 23, 1996. Of these shares, (i) 5,359,958 shares, including the 3,300,000 shares offered hereby (5,854,958 shares if the Underwriters' over-allotment option is exercised in full), will be freely tradeable without restriction or further registration under the Securities Act of 1933, as amended (the "Securities Act"), unless purchased by "affiliates" of the Company as that term is defined in Rule 144 promulgated under the Securities Act ("Rule 144"), (ii) 2,866,416 shares will be freely tradeable without restriction or further registration under the Securities Act following the termination of the lock-up arrangements described below, (iii) 9,251,515 shares will be held by "affiliates" and will become available for sale pursuant to the volume and manner of sale provisions of Rule 144 following the termination of the lock-up arrangements, and (iv) 496,523 shares of Common Stock will be "restricted securities" as that term is defined under Rule 144 and will become available for sale beginning on June 24, 1998 pursuant to the volume and manner of sale provisions of Rule 144. An additional 837,226 shares of Common Stock are issuable upon the exercise of currently exercisable options and warrants. Substantially all shares issued following the exercise of such options and warrants will be freely tradeable without restriction or further registration under the Securities Act unless purchased by "affiliates" of the Company or subject to the lock-up arrangements. See "Shares Eligible for Future Sale." In connection with the Exchange, the Company's officers, directors and certain of its stockholders holding in the aggregate 12,921,454 shares of Common Stock entered into lock-up agreements providing that such persons will not sell, assign, pledge, hypothecate or otherwise dispose of, directly or indirectly, such shares of Common Stock, or any shares acquired upon the exercise of any options or warrants until June 24, 1997, without the prior written consent of the Company. The Company has agreed to release such lock-up agreements as they relate to the shares offered by the Selling Stockholders in this offering. In connection with this offering, the Company, and certain of its stockholders holding in the aggregate shares of Common Stock have agreed that they will not offer, sell, or otherwise dispose of any Common Stock for a period of 180 days after effectiveness of the Registration Statement of which this Prospectus is a part without the prior written consent of Pacific Growth Equities, Inc., as the representative of the several underwriters (other than, in the case of the Company, the issuance of securities in connection with acquisitions and pursuant to employee benefit plans existing on the date hereof). In addition, the Company has agreed not to redeem its outstanding Class A redeemable common stock purchase warrants for a period of 180 days after the date of this Prospectus without the prior written consent of Pacific Growth Equities, Inc. See "Shares Eligible for Future Sale" and "Underwriting." DISCRETIONARY USE OF PROCEEDS. The estimated net proceeds from the offering of $17.0 million (after deducting estimated underwriting discounts and commissions and offering expenses payable by the 10 Company) will, following consummation of the offering, be used to repay debt outstanding under the Company's revolving line of credit with a bank, which totaled $1.3 million at June 30, 1996. The balance of the net proceeds (approximately $15.7 million) will be used to fund working capital and for other general corporate purposes. The Company has not identified any specific use of such proceeds and will retain broad discretion to use such proceeds as it deems appropriate to expand the Company's business. See "Use of Proceeds." ABSENCE OF DIVIDENDS. The Company has not declared or paid dividends in the past and does not anticipate declaring or paying any dividends on the Common Stock in the foreseeable future. Certain of the AmHealth entities made and have declared distributions to their shareholders and partners for periods prior to the Exchange. See "Dividend Policy." THE COMPANY STAT provides a continuum of disease management services primarily to patients with chronic kidney failure and also provides physician practice management services to affiliated physician groups which staff hospital emergency departments. The Company currently operates five kidney dialysis facilities, manages two HBO therapy facilities and provides home healthcare management and related ancillary services primarily in the Rio Grande Valley of south Texas. Through its affiliated physician groups, STAT also currently provides physician practice management services to 20 hospital emergency departments, 17 of which are in the Houston greater metropolitan area, and has entered into a contract to provide physician practice management services to three additional hospital emergency departments commencing in October 1996. The Company's predecessor was incorporated in Delaware in July 1994 and completed its initial public offering in April 1995. The Company was incorporated in Delaware in March 1996 to facilitate the reorganization of the Company in connection with the Exchange. In June 1996 pursuant to the consummation of the Exchange, (i) the Company's predecessor merged with a wholly owned subsidiary of the Company, (ii) each outstanding share of common stock of the Company's predecessor was converted into one share of Common Stock and (iii) each option and warrant to purchase common stock of the Company's predecessor was converted into a similar option or warrant, respectively, to purchase shares of Common Stock. The principal executive offices of the Company are located at 12450 Greenspoint Drive, Suite 1200, Houston, Texas 77060 and its telephone number is (713) 872-6900. 11 RECENT DEVELOPMENTS EXCHANGE WITH AMHEALTH CORPORATION AND RELATED ENTITIES In June 1996, (i) AmHealth Corporation, AmHealth Enterprises of the Valley, Inc. and AmHealth Ambulatory Services, Inc., each a Texas corporation (collectively, the "AmHealth Corporations"), were merged into the Company, with the Company as the surviving corporation and (ii) all the general partners and limited partners (excluding limited partners representing a 25% interest in Brownsville Kidney Center, Ltd.) of AmHealth Kidney Centers of the Valley, Ltd., Weslaco Kidney Center, Ltd., Starr Dialysis Center, Ltd., Mission Kidney Center, Ltd., Brownsville Kidney Center, Ltd., AmHealth Medical Management, Ltd., Brownsville Hyperbaric Healthcare, Ltd., Southwestern Infusion Healthcare, Ltd. and AmHealth Ambulatory Healthcare, Ltd., each a Texas limited partnership (collectively, the "AmHealth Partnerships" and, together with the AmHealth Corporations, "AmHealth"), received shares of Common Stock in exchange for their partnership interests in the AmHealth Partnerships (such transactions being collectively referred to as the "Exchange"). The former owners of AmHealth received a total of 11,200,000 shares of Common Stock (representing approximately 75% of the Common Stock outstanding immediately after the Exchange). In connection with the Exchange, Mr. Schneider was elected Chairman of the Board of Directors and Chief Executive Officer of the Company, Mr. R. Perez was elected President -- Healthcare Management, Treasurer and a director of the Company, and Daniel A. Perez was elected Senior Vice President of the Company. Messrs. Schneider, R. Perez and D. Perez, each of whom was an affiliate of AmHealth prior to the Exchange, also entered into employment agreements with the Company. Following the Exchange, Ned E. Chapman, the Company's Chief Financial Officer, resigned from the Company's Board of Directors and Mr. R. Perez was elected to fill the vacancy created by Mr. Chapman's resignation. The number of directors constituting the Board was increased to six persons, and Ann N. James, Ph.D. and David C. Colby, both of whom were designated by former affiliates of AmHealth, were elected to fill the two newly created positions. See "Management," "Certain Transactions" and "Principal and Selling Stockholders." At the time of the Exchange, AmHealth operated kidney dialysis facilities, managed HBO therapy facilities and provided home healthcare management and related ancillary services primarily in the Rio Grande Valley of south Texas. The Exchange was accounted for as a pooling of interests, and the Company's consolidated financial statements as of and for the years ended December 31, 1993, 1994 and 1995 have been restated to give retroactive effect to the consummation of the Exchange. See the Company's Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. COLUMBIA AGREEMENT Effective February 1996, one of the Company's affiliated physician groups entered into an agreement (the "Columbia Agreement") to provide emergency medical services to 15 of Columbia's hospitals in the Houston greater metropolitan area, six of which hospitals were then being served by the Company under individual contracts with hospitals. The Columbia Agreement has an initial term ending in January 1998 with provisions for automatic renewal, and may be terminated by Columbia in certain circumstances, including unsatisfactory service by the Company or its affiliated physician groups. During the term of the Columbia Agreement and for two years thereafter, STAT has agreed not to organize or provide administrative or advisory services to independent physician or similar associations whose practices relate to areas other than emergency medicine and who are located in proximity to specified Columbia medical centers. There can be no assurance that the Columbia Agreement will be renewed at the conclusion of its initial term, that it will be renewed on substantially the same terms and conditions, or that it will not be terminated prior to the conclusion of its term. See "Business -- Operations -- Emergency Physician Practice Management Services -- Hospital Contracts." 12 ACQUISITION OF ASSETS OF AMEDICA, LTD. In February 1996, the Company acquired certain intangible assets of Amedica, Ltd. for a total purchase price of $270,000, consisting of $200,000 in cash and 15,730 shares of Common Stock. These assets consisted of certain contract rights and the right to use the name "Amedica." ACQUISITION OF HEMA CONTRACT In January 1996, in contemplation of the Columbia Agreement, the Company acquired the rights to a contract (the "HEMA Contract") for the provision of physician practice management services at one of Columbia's Houston-area hospitals for a total purchase price of $1.2 million, consisting of $960,000 in cash and 52,174 shares of Common Stock. The Company also agreed to pay to the assignor of the HEMA Contract up to $100,000 in each of the three 12-month periods following the acquisition of the contract depending upon the profits realized by the Company under the HEMA Contract during such periods. The rights to provide services under the HEMA Contract have been incorporated into the Columbia Agreement. USE OF PROCEEDS Based on an assumed offering price of $6 3/16 per share, the Company will receive approximately $17.0 million from the sale of shares of Common Stock to be sold by the Company in the offering (approximately $19.9 million if the Underwriters' over-allotment option is exercised in full) after deducting estimated underwriting discounts and commissions and offering expenses payable by the Company. The Company will not receive any proceeds from the sale of Common Stock by the Selling Stockholders. The Company will use a portion of the net proceeds from the offering to repay all outstanding indebtedness under the Company's revolving line of credit with a commercial bank. At June 30, 1996, $1.3 million was outstanding under the credit agreement at a weighted average interest rate of 7.18% per annum and maturing in April 1997. The balance of such net proceeds will be used for working capital and general corporate purposes, including financing accounts receivable and capital expenditures made in the ordinary course of its business. The Company may also apply a portion of the net proceeds of the offering to acquire businesses that are complementary to those of the Company. Although the Company has not identified any specific businesses that it may acquire, nor are there any current agreements with respect to any such transactions, the Company from time to time evaluates and enters into negotiations regarding such opportunities. Pending such uses, the net proceeds will be invested in government securities and other short-term, investment-grade, interest-bearing instruments. DIVIDEND POLICY To date, the Company has not paid or declared any cash dividends and does not anticipate paying or declaring any dividends on the Common Stock in the foreseeable future. In addition, the Company's revolving line of credit prohibits the payment of dividends. Certain of the AmHealth entities made and have declared distributions to their shareholders and partners for periods prior to the Exchange. Any future change in the Company's dividend policy rests solely within the discretion of the Board of Directors and will depend upon, among other things, the Company's earnings, capital requirements, financial condition and any restrictions under credit agreements, as well as other factors deemed relevant by the Board of Directors. 13 PRICE RANGE OF COMMON STOCK The Common Stock has been quoted on the Nasdaq National Market (under the symbol "STHC") since August 23, 1996, and was quoted on the Nasdaq SmallCap Market (under the symbol "ERDR" until June 24, 1996 and "STHC" thereafter) from April 21, 1995 to August 22, 1996. The following table sets forth the high and low sales prices for the Common Stock as reported by the Nasdaq National Market and the Nasdaq SmallCap Market for the periods indicated: HIGH LOW ----- ----- 1995: Second Quarter (beginning April 21).. $3 13/16 $2 1/8 Third Quarter........................ 3 7/8 2 3/8 Fourth Quarter....................... 5 2 3/4 1996: First Quarter........................ 6 3/4 3 5/8 Second Quarter....................... 9 5/8 5 1/2 Third Quarter (through August 28).... 8 3/8 5 3/4 On May 6, 1996, there were approximately 1,100 beneficial holders of Common Stock. On August 28, 1996, the closing sale price of the Common Stock as reported by the Nasdaq National Market was $6 3/16 per share. 14 CAPITALIZATION The following table sets forth the capitalization of the Company as of June 30, 1996, and such capitalization as adjusted to reflect the sale by the Company of 3,000,000 shares of Common Stock in this offering at an assumed offering price of $6 3/16 per share and the application of the estimated net proceeds therefrom as described in "Use of Proceeds." The following table should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto and Unaudited Consolidated Financial Statements and notes thereto appearing elsewhere in this Prospectus. JUNE 30, 1996 ------------------------ ACTUAL AS ADJUSTED ------- ----------- (IN THOUSANDS) Current portion of long-term debt.... $ 1,486 $ 236 Current portion of capital lease obligations........................ 72 72 Long-term debt....................... 289 289 Long-term capital lease obligations........................ 1,993 1,993 Stockholders equity: Preferred Stock, $.01 par value, 5,000,000 shares authorized, no shares issued.............. -- -- Common Stock, $.01 par value, 40,000,000 shares authorized, 14,902,472 shares issued and outstanding; and 17,902,472 shares issued and outstanding, as adjusted(1).... 149 179 Capital in excess of par value.......................... 4,563 21,582 Retained earnings............... 1,948 1,948 ------- ----------- Total stockholders' equity.................. 6,660 23,709 ------- ----------- Total capitalization..... $10,500 $26,299 ======= =========== - ------------------------------ (1) Excludes (i) 1,500,000 shares of Common Stock reserved for issuance under the Company's 1996 Stock Incentive Plan and (ii) 859,166 shares of Common Stock issuable upon the exercise of warrants outstanding at June 30, 1996. Subsequent to June 30, 1996, 71,940 shares of Common Stock were issued upon the exercise of warrants. See "Management -- 1996 Stock Incentive Plan," "Description of Capital Stock -- Class A Warrants" and "-- Other Warrants" and "Underwriting." 15 SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The following table presents selected consolidated financial data of the Company and its affiliated physician group, STAT Physicians. The data as of and for the years ended December 31, 1993, 1994 and 1995 are derived from the Company's Consolidated Financial Statements and STAT Physicians' Financial Statements included herein. The data as of June 30, 1996 and for the six months ended June 30, 1995 and 1996 are derived from the Company's Unaudited Consolidated Financial Statements included herein. In the opinion of management, such unaudited data reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the financial data for such periods. The results of operations for the six months ended June 30, 1996 are not necessarily indicative of results that may be expected for any future period. The data set forth below include the accounts of the Company and AmHealth, which was acquired in June 1996 in a transaction accounted for as a pooling of interests, as if such businesses had always been members of the same operating group. See "Recent Developments -- Exchange with AmHealth Corporation and Related Entities." The selected consolidated financial data are qualified in their entirety by, and should be read in conjunction with, "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Company's Consolidated Financial Statements and Notes thereto and Unaudited Consolidated Financial Statements and Notes thereto, and STAT Physicians' Financial Statements and Notes thereto appearing elsewhere in this Prospectus. <TABLE> <CAPTION> SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ------------------------------- -------------------- 1993(1) 1994(2) 1995 1995 1996 --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENTS OF INCOME DATA: Net service revenues................. $ 10,043 $ 14,521 $ 23,141 $ 10,375 $ 16,663 --------- --------- --------- --------- --------- Operating expenses: Professional medical fees....... 6,823 7,714 9,241 4,548 6,695 Human resources................. 1,107 1,949 4,640 1,625 3,516 Supplies........................ 375 1,143 1,818 822 1,136 Billing and collection costs.... 304 795 1,461 697 996 Other costs..................... 784 1,440 2,215 899 1,437 --------- --------- --------- --------- --------- Total operating expenses........... 9,393 13,041 19,375 8,591 13,780 --------- --------- --------- --------- --------- Operating income..................... 650 1,480 3,766 1,784 2,883 Interest and other (income) expense, net................................ 33 5 121 29 133 Reorganization costs................. -- -- -- -- 1,269 --------- --------- --------- --------- --------- Income before income taxes........... 617 1,475 3,645 1,755 1,481 Income taxes......................... -- 65 347 181 (44) --------- --------- --------- --------- --------- Net income........................... $ 617 $ 1,410 $ 3,298 $ 1,574 $ 1,525 ========= ========= ========= ========= ========= Pro forma data (3): Pro forma income taxes.......... 210 436 892 416 577 --------- --------- --------- --------- --------- Pro forma net income............ $ 407 $ 974 $ 2,406 $ 1,158 $ 948 ========= ========= ========= ========= ========= Pro forma net income per common share......................... $ 0.05 $ 0.11 $ 0.20 $ 0.13 $ 0.06 ========= ========= ========= ========= ========= Number of shares used in computing pro forma net income per share..................... 7,458 8,545 11,897 9,078 15,320 ========= ========= ========= ========= ========= </TABLE> DECEMBER 31, ------------------------------- JUNE 30, 1993 1994 1995 1996 --------- --------- --------- --------- CONSOLIDATED BALANCE SHEET DATA: Working capital..................... $ 197 $ 1,215 $ 5,618 $ 4,189 Total assets........................ 1,143 4,824 10,575 13,759 Long-term debt and capital lease obligations, less current portion........................... 330 1,194 1,640 2,282 Total liabilities................... 697 3,045 4,203 7,099 Stockholders' equity................ 446 1,779 6,372 6,660 - ------------------------------ (1) Represents consolidated financial data for the Company combined with financial data for STAT Physicians. (2) Represents consolidated financial data for the Company for the year ended December 31, 1994 combined with financial data for STAT Physicians for the eight months ended August 31, 1994. (3) Reflects the effects of income taxes not otherwise payable by entities which were partnerships or S corporations prior to the Exchange. 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. GENERAL The following discussion and analysis reviews consolidated financial data for companies which previously reported separately. The consolidation has been made because of the June 1996 merger of the Company's predecessor ("Old STAT") and AmHealth into the Company in connection with the Exchange. AmHealth is comprised of a group of corporations and partnerships with related ownership which were formed at various dates commencing in October 1992 and which commenced operating activities in April 1993. The Exchange was accounted for as a pooling of interests. Old STAT was incorporated on July 29, 1994, and commenced active operations effective September 1, 1994, pursuant to a Management Agreement with STAT Physicians which had been in effect since January 1, 1986. To provide comprehensive historical operating data, STAT Physicians' operating results for the year ended December 31, 1993 and the eight months ended August 31, 1994, which are reported separately, have been combined in the comparative statements of income data discussed herein. Subsequent to August 1994, STAT Physicians' operating results were reported on a consolidated basis with the results of Old STAT. Historically, Old STAT's operations were limited to a single business segment: emergency medical management services. AmHealth's operations were focused on integrated disease management services comprised of two identifiable segments: kidney dialysis services and medical management services encompassing HBO therapy and home healthcare management services. The following discussion should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. RESULTS OF OPERATIONS For purposes of this discussion, the term "same store" refers to facilities which were open for the duration of each comparable period. SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995 NET SERVICE REVENUES. Net service revenues increased by $6.3 million, or 61%, to $16.7 million in the six months ended June 30, 1996 from $10.4 million in the comparable period of 1995. This increase was comprised of a $3.2 million (93%) increase in disease management revenues and a $3.1 million (45%) increase in emergency medical management revenues. The increase in disease management revenues, to $6.7 million in the six months ended June 30, 1996 from $3.5 million in the comparable period of 1995, was primarily attributable to the introduction of new services and facilities. Kidney dialysis services accounted for approximately $3.8 million of 1996 revenues and approximately $2.6 million of 1995 revenues, while medical management services accounted for $2.9 million of 1996 revenues compared to $0.9 million of 1995 revenues. At June 30, 1996, the Company operated five kidney dialysis facilities compared with three facilties at June 30, 1995. Revenues during 1996 attributable to the new facilities approximated $0.6 million while revenues attributable to facilities open during both periods increased to $3.2 million from $2.6 million or a same store growth rate of approximately 19%. Per patient revenue rates remained relatively constant between the periods. At June 30, 1996, the Company had approximately 270 dialysis patients compared with approximately 185 patients at June 30, 1995. 17 At June 30, 1996, the Company provided management services to one home healthcare agency, which services commenced in June 1995, and managed two HBO therapy facilities, one of which opened in May 1995 and one of which opened in April 1996. The increase in comparative medical management revenues of $2.0 million is attributable to a combination of the short operating history as of June 30, 1995 and the opening of the second HBO therapy facility in April 1996. In July 1996, the Company announced management contracts for three additional HBO therapy facilities which are expected to be opened during the fourth quarter of 1996. The increase in emergency medical management revenues, to $10.0 million in the six months ended June 30, 1996 from $6.9 million in the comparable period of 1995, was primarily attributable to an increase in the number of patients treated in 1996 (approximately 124,000) compared with 1995 (approximately 90,000). The increase in patients relates to an increase in the number of emergency departments being served, 18 as of June 30, 1996 compared with 13 as of June 30, 1995. During the 1996 period, the Company began providing services at nine additional emergency departments. In July 1996, the Company announced contracts for services to five additional emergency departments, two of which commenced July 1 with the remaining three to commence during the fourth quarter of 1996. Services were terminated by the Company at four emergency departments (two in April 1996 and two during the second half of 1995) which were served at June 30, 1995. Also contributing to the increase in revenues is a 5% increase in average revenue per patient to $80.31 in 1996 from $76.27 in 1995. The increase in per patient revenue was due to a pricing increase implemented in February 1996. OPERATING EXPENSES. Operating expenses increased by $5.2 million, or 60%, to $13.8 million in the six months ended June 30, 1996 from $8.6 million in the comparable period of 1995. This percentage increase approximated the comparative increase in net service revenues. Significant elements comprising operating expenses include: (i) professional medical fees which increased $2.1 million or 47%; (ii) human resource costs which increased $1.9 million or 116%; (iii) billing and collection costs which increased $0.3 million or 43%; (iv) supply costs which increased $0.3 million or 38%; and (v) liability insurance which increased $0.2 million or 54%. Other combined costs accounted for the remaining increase of $0.4 million. Comments relating to the five identified costs are as follows: Professional medical fees, liability insurance, and billing and collection costs, which increased by 47%, 54% and 43%, respectively, were all directly related to emergency medical management services, which revenues increased by 45%. The percentage increase in professional medical fees exceeded the percentage increase in related revenues because of rate increases in fees paid to independent contract physicians. The percentage increase in liability insurance exceeded the percentage increase in patients treated (38%) because of an increase in premiums which are paid on a per patient basis. The average cost for 1996 was approximately $4.00 per patient compared to approximately $3.60 per patient in the 1995 period. The increase in billing and collection costs was slightly less than the increase in revenues because of a May 1996 negotiated reduction in the cost of this contracted service which is based on a percentage of collections. The rate of increase in human resource costs exceeded the rate of increase in revenues. Such costs increased by 75% (compared to a revenue increase of 45%) or $0.5 million in emergency medical management services and by 146% (compared to a revenue increase of 93%) or $1.4 million relating to disease management services. The disproportionate percentage increases were attributable to the hiring of administrative and support personnel to accommodate the expanded operations and contracted future business. Additionally, the home healthcare and HBO services businesses which were started late in the 1995 period are highly labor intensive and contributed to an increase in these costs as a percentage of revenues. The 38% increase in supply costs was most directly related to a 46% increase in dialysis net service revenues. These costs did not increase at as great a rate as revenues because of economies of scale in purchasing supplies for expanded operations. REORGANIZATION COSTS. The reorganization costs incurred during the six months ended June 30, 1996 related entirely to the Exchange and consist of legal, accounting and other transactional costs. 18 INCOME TAXES AND PRO FORMA INCOME TAXES. Combined income taxes and pro forma income taxes have been calculated using estimated effective tax rates of 36% for the six months ended June 30, 1996 and 34% for the comparable period of 1995. Because the AmHealth entities were S corporations or partnerships for federal income tax purposes, no income taxes were provided on their pre-Exchange incomes. Pro forma income taxes represent the additional taxes which would have been provided had they been subject to income taxes at the established rates. SHARES USED IN COMPUTING NET INCOME PER SHARE. Shares used in computing net income per share is based on the weighted average common shares and common share equivalents outstanding during the periods presented. For the six months ended June 30, 1996, this includes 14,902,472 shares outstanding plus approximately 418,000 common share equivalents relating to warrants and options. For the comparable period of 1995, there were no common share equivalents because the warrants and options were anti-dilutive. Additionally, shares allocable to AmHealth entities which were not yet operational as of June 30, 1995 were excluded from the 1995 average. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 NET SERVICE REVENUES. Net service revenues increased by $8.6 million, or 59%, to $23.1 million in 1995 from $14.5 million in 1994. This increase was comprised of a $5.0 million (127%) increase in disease management revenues and a $3.6 million (34%) increase in emergency medical management revenues. The increase in disease management revenues, to $9.0 million in 1995 from $5.0 in 1994, was primarily attributable to the introduction of new services and facilities from year to year. Kidney dialysis services accounted for approximately $6.3 million of 1995 revenues and approximately $3.8 million of 1994 revenues, while medical management services accounted for $2.7 million of 1995 revenues compared to $0.2 million of 1994 revenues. At December 31, 1995, the Company operated four kidney dialysis facilities compared with three facilities at December 31, 1994. Two centers were open throughout 1994 and 1995, one center was open for seven months of 1994 and throughout 1995 and the fourth center was opened in August 1995. Of the $2.5 million increase in dialysis revenues, approximately $1.4 million was attributable to new facilities and $1.1 million is attributable to a same store growth rate of approximately 28%. Medical management services consisting of one HBO therapy facility and management and personnel services to a home healthcare agency commenced in May 1995 and June 1995, respectively, and generated approximately $2.6 million of revenues in 1995 with no comparable revenues for 1994. The increase in emergency medical management revenues, to $14.1 million in 1995 from $10.5 million in 1994, was attributable to an 18% increase in patients treated (approximately 180,000 in 1995 compared with approximately 153,000 in 1994) and a 14% increase in average revenue per patient ($78.47 in 1995 compared with $68.94 in 1994). The comparative increase in patients is attributable to new emergency department contracts which commenced in mid-December 1994 and in March 1995. Patient volumes under contracts serviced throughout both periods were mostly unchanged. The increase in average revenue per patient is attributable to the conversion between 1994 and 1995 of additional contracts to fee-for-service arrangements and to increases in levels of service which were required by patients treated. Standard billing rates for medical procedures were identical between the two years. OPERATING EXPENSES. Operating expenses increased by $6.3 million, or 49%, to $19.4 million in 1995 from $13.1 million in 1994. Significant elements comprising this increase included: (i) human resource costs which increased $2.7 million or 138%; (ii) professional medical fees which increased $1.5 million or 20%; (iii) supply costs which increased $0.7 million or 59%; and (iv) billing and collection costs which increased $0.7 million or 84%. Other combined costs accounted for the remaining increase of $0.7 million. Comments relating to the four identified costs follow: Approximately $1.2 million of the increase in human resource costs was attributable to additional personnel associated with the medical management services contracts which commenced operations in May and June 1995. Approximately $0.4 million is attributable to personnel associated with expanded dialysis operations 19 and approximately $0.3 million is associated with a recharacterization of compensation paid to the principal physician stockholders of Old STAT who received higher compensation as contract physicians. The remaining $0.8 million increase was attributable to increases in general administrative personnel required by the expanding operations and general salary increases awarded to employees. The percentage increase in professional medical fees approximates the percentage increase in patients treated between 1995 and 1994. The increase in supply costs was largely attributable to the expansion of the dialysis business which increased at a rate of 66% over 1994. The 84% increase in billing and collection costs, an outsourced service, exceeded the rate of increase in emergency medical management revenues (34%) because of a shift in reimbursement methods from direct hospital payments in 1994 to fee-for-service in 1995. Billing and collection costs were borne by the hospitals under the direct payment arrangements. INTEREST INCOME. Interest income of $1.1 million in 1995 was attributable to the investment of net proceeds received in Old STAT's April 1995 initial public offering. INTEREST EXPENSE. Interest expense of $0.2 million in 1995 was attributable to borrowings associated with equipment for dialysis and HBO therapy facilities and the interest component of capitalized leases. YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993 NET SERVICE REVENUES. Net service revenues increased by $4.5 million, or 45%, to $14.5 million in 1994 from $10.0 million in 1993. This increase is comprised of a $2.8 million (240%) increase in disease management revenues and a $1.7 million (19%) increase in emergency medical management revenues. Disease management revenues for both years were comprised almost entirely of dialysis service revenues which increased to $4.0 million in 1994 from $1.2 million in 1993. This increase is attributable to an expansion of operations and length of time that dialysis services were provided. The three dialysis centers which were operational at December 31, 1994 commenced operations at the following dates: April 1993, November 1993 and June 1994. The increase in emergency medical management revenues, to $10.5 million in 1994 from $8.8 million in 1993, was attributable to an 18% increase in patients treated (approximately 153,000 in 1994 compared with approximately 130,000 in 1993). This increase is attributable to additional emergency department contracts added in 1994. OPERATING EXPENSES. Operating expenses increased by $3.7 million, or 39%, to $13.1 million in 1994 from $9.4 million in 1993. Significant elements comprising this increase included: (i) professional medical fees which increased $0.9 million or 13%; (ii) human resources which increased $0.8 million or 76%; (iii) supply costs which increased $0.8 million or 205%; and (iv) billing and collection costs which increased $0.5 million or 162%. Other combined costs accounted for the remaining increase of $0.7 million. Comments relating to the identified costs are as follows. Professional medical fees increased at a slightly lower rate than the increase in patients treated. This was attributable to increased physician productivity (more patients treated per physician) from 1993 to 1994. Human resources costs increased at a greater rate than revenues because of the need for additional contracts, the staffing of new dialysis centers which had not yet achieved optimum productivity and annual salary increases for personnel working throughout both periods. The increase in supply costs was attributable to the commencement of services at the dialysis centers which are supply cost intensive operations. Billing and collection costs increased at a disproportionate rate compared to emergency medical management revenues because of a shift in 1994 to fee-for-service business from direct reimbursement contracts in 1993 which had no related billing and collection costs. 20 QUARTERLY FINANCIAL RESULTS The following tables set forth unaudited income statement data for the ten quarters ended June 30, 1996, as well as such data expressed as a percentage of the Company's total net service revenues for the periods indicated. This data has been derived from unaudited interim financial statements that, in the opinion of management, have been prepared on a basis consistent with the Company's Consolidated Financial Statements contained elsewhere herein and include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such information when read in conjunction with the Company's Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. The operating results for any quarter are not necessarily indicative of results for any future period. <TABLE> <CAPTION> QUARTER ENDED ------------------------------------------------------------------------------------- 1994 1995 --------------------------------------------- ------------------------------------ MAR 31(1) JUN 30(1) SEP 30(1) DEC 31 MAR 31 JUN 30 SEP 30 DEC 31 --------- --------- --------- ------ ------ ------ ------ ------ <S> <C> <C> <C> <C> <C> <C> <C> <C> (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENTS OF INCOME DATA: Net service revenues................. $ 3,342 $ 3,368 $ 3,718 $4,093 $4,873 $5,502 $6,148 $6,618 --------- --------- --------- ------- ------- ------- ------- ------- Operating expenses: Professional medical fees.......... 1,862 1,918 1,950 1,984 2,200 2,348 2,367 2,326 Human resources.................... 398 424 530 597 696 929 1,352 1,663 Supplies........................... 168 228 334 413 382 440 473 523 Billing and collection costs....... 170 176 199 250 316 381 395 369 Other costs........................ 314 324 389 413 400 499 648 668 --------- --------- --------- ------ ------ ------ ------ ------ Total operating expenses......... 2,912 3,070 3,402 3,657 3,994 4,597 5,235 5,549 --------- --------- --------- ------ ------ ------ ------ ------ Operating income..................... 430 298 316 436 879 905 913 1,069 Interest and other (income) expense, net................................ 30 26 32 (83 ) 30 (1 ) 56 36 Reorganization costs................. -- -- -- -- -- -- -- -- --------- --------- --------- ------ ------ ------ ------ ------ Income before income taxes........... 400 272 284 519 849 906 857 1,033 Income taxes......................... 58 27 29 55 77 104 111 55 --------- --------- --------- ------ ------ ------ ------ ------ Net income........................... $ 342 $ 245 $ 255 $ 464 $ 772 $ 802 $ 746 $ 978 ========= ========= ========= ====== ====== ====== ====== ====== Pro forma data (2): Pro forma income taxes............. 78 66 67 121 212 204 180 296 --------- --------- --------- ------ ------ ------ ------ ------ Pro forma net income............... $ 264 $ 179 $ 188 $ 343 $ 560 $ 598 $ 566 $ 682 ========= ========= ========= ====== ====== ====== ====== ====== Pro forma net income per common share............................ $ 0.04 $ 0.03 $ 0.02 $0.05 $0.07 $0.06 $0.04 $0.05 ========= ========= ========= ====== ====== ====== ====== ====== Number of shares used in computing pro forma net income per share... 6,365 6,766 7,583 7,583 7,583 10,556 14,465 14,823 ========= ========= ========= ====== ====== ======= ======= ======= AS A PERCENTAGE OF NET SERVICE REVENUES: Net service revenues................. 100.0% 100.0% 100.0% 100.0 % 100.0 % 100.0 % 100.0 % 100.0% --------- --------- --------- ------ ------ ------ ------ ------ Operating expenses: Professional medical fees.......... 55.7 56.9 52.4 48.5 45.1 42.7 38.5 35.1 Human resources.................... 11.9 12.6 14.3 14.6 14.3 16.9 22.0 25.1 Supplies........................... 5.0 6.8 9.0 10.1 7.8 8.0 7.7 7.9 Billing and collection costs....... 5.1 5.2 5.4 6.1 6.5 6.9 6.4 5.6 Other costs........................ 9.4 9.6 10.5 10.1 8.2 9.1 10.5 10.1 --------- --------- --------- ------ ------ ------ ------ ------ Total operating expenses......... 87.1 91.1 91.6 89.4 81.9 83.6 85.1 83.8 --------- --------- --------- ------ ------ ------ ------ ------ Operating Income..................... 12.9 8.9 8.4 10.6 18.1 16.4 14.9 16.2 ========= ========= ========= ====== ====== ====== ====== ====== </TABLE> 1996 ---------------- MAR 31 JUN 30 ------ ------ STATEMENTS OF INCOME DATA: Net service revenues................. $7,549 $9,114 ------ ------ Operating expenses: Professional medical fees.......... 2,824 3,871 Human resources.................... 1,747 1,769 Supplies........................... 566 570 Billing and collection costs....... 445 551 Other costs........................ 704 733 ------ ------ Total operating expenses......... 6,286 7,494 ------ ------ Operating income..................... 1,263 1,620 Interest and other (income) expense, net................................ 52 81 Reorganization costs................. -- 1,269 ------ ------ Income before income taxes........... 1,211 270 Income taxes......................... 77 (171) ------ ------ Net income........................... $1,134 $ 441 ====== ====== Pro forma data (2): Pro forma income taxes............. 359 268 ------ ------ Pro forma net income............... $ 775 $ 173 ====== ====== Pro forma net income per common share............................ $0.05 $0.01 ====== ====== Number of shares used in computing pro forma net income per share... 15,180 15,424 ====== ====== AS A PERCENTAGE OF NET SERVICE REVENUES: Net service revenues................. 100.0 % 100.0 % ------ ------ Operating expenses: Professional medical fees.......... 37.4 41.8 Human resources.................... 23.1 19.1 Supplies........................... 7.5 6.2 Billing and collection costs....... 5.9 5.9 Other costs........................ 9.3 8.0 ------ ------ Total operating expenses......... 83.2 81.0 ------ ------ Operating Income..................... 16.8 19.0 ====== ====== - ------------------------------ (1) Represents consolidated financial data for the Company for the year ended December 31, 1994 combined with financial data for STAT Physicians for the eight months ended August 31, 1994. (2) Reflects the effects of income taxes not otherwise payable by entities which were partnerships or S corporations prior to the Exchange. 21 LIQUIDITY AND CAPITAL RESOURCES Capital requirements of the Company relate principally to three areas: (i) funds required to purchase capital assets for dialysis facilities and equipment for the expansion of existing and opening of new HBO therapy facilities; (ii) working capital needs associated with the start-up of new emergency department contracts; and (iii) availability of funds for acquisitions which complement the Company's growth strategy. Management is actively evaluating new markets for the expansion of the Company's disease management services and considers either dialysis facilities or HBO therapy facilities to be the optimum vehicles for market entry. These ventures are the most capital intensive of the Company's businesses and require funds to purchase dialysis and HBO therapy equipment. At June 30, 1996, the Company had commitments for approximately $0.5 million of HBO therapy equipment for new facilities expected to open during the fourth quarter of 1996. In evaluating individual business segments of the Company, working capital needs are most extensive as they relate to increases in emergency department contracts. Experience indicates that upon commencement of new contracts, periods ranging from 90 to 150 days are required to achieve normal cash flows. Accordingly, the more rapidly the Company is able to add new contracts, the greater the working capital needs. In evaluating growth opportunities, management expects to consider acquisitions as well as growth through internal development. Some acquisitions may be accomplished through the issuance of additional stock; however, it is expected that cash will be a significant medium in the Company's acquisition strategy. Historically, capital requirements have been met through a combination of sources including: (i) cash flows from operations; (ii) proceeds from Old STAT's April 1995 initial public offering; and (iii) lease and bank financing. The Company currently has a $1.5 million revolving line of credit with a commercial bank, of which $1.3 million was outstanding at June 30, 1996. The revolving line of credit bears interest at the prime rate, matures in April 1997 and is secured by the Company's accounts receivable. To posture the Company for future growth, the Company has obtained a commitment letter for a $6.5 million Revolving and Term Credit Facility with two commercial banks (the "Revolving and Term Credit Facility"). The revolving portion of the facility will have a borrowing limit of up to $3.0 million, based upon qualified accounts receivable, will bear interest, at the Company's option, at either (i) the prime rate or (ii) the London Interbank Offered Rate plus 1.50% to 2.25% per annum, depending on the Company's debt to cash flow ratio, and will mature in August 1997. The term portion of the facility will have a borrowing limit equal to the lesser of $3.5 million or 75% of new equipment purchases, will bear interest at the prime rate, and will mature in August 1999. Accrued interest will be payable monthly. All borrowings under the term facility must be made prior to August 1997. Until August 1997, outstanding principal under the term facility will be payable monthly in installments equal to 1/36 of the principal then outstanding. After August 1997, principal outstanding under the term facility will be payable in 24 equal monthly installments. In addition, the Company will be required to pay to the banks a quarterly commitment fee of up to 0.25% of the unused revolving credit commitment. The Revolving and Term Credit Facility will also contain customary restrictive covenants, prohibit the payment of dividends, require the Company to maintain certain financial ratios and be guaranteed by all of the Company's subsidiaries and affiliated physician groups. Available capacity under the Revolving and Term Credit Facility will be used to repay the amounts outstanding under the Company's existing revolving line of credit and $0.5 million outstanding under a term note. Discussions recently commenced to increase the borrowing limits of the proposed Revolving and Term Credit Facility. However, no assurances can be made that the Company will be able to achieve this objective. Management believes that cash flows from operations, the net proceeds from this offering and its borrowing capacity should be sufficient to meet its anticipated capital expenditures and other operating requirements and to substantially fund its growth strategy for the next 12 months. However, because future cash flows and the availability of financing are subject to a number of variables, such as the timing and size of dialysis and HBO therapy developments and acquisitions and new emergency medical management contracts, there 22 can be no assurance that the Company's capital resources will be sufficient to maintain currently planned levels of growth. INFLATION Inflation has not had a material impact on the operations or financial condition of the Company during the last three years. NEW ACCOUNTING PRONOUNCEMENTS In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). SFAS No. 123 establishes financial accounting and reporting standards for stock-based employee compensation plans. The financial accounting standards of SFAS No. 123 permit companies to either continue accounting for stock-based compensation under existing rules or adopt SFAS No. 123 and begin reflecting the fair value of stock options and other forms of stock-based compensation in the results of operations as additional expense. The disclosure requirements of SFAS No. 123 require companies which elect not to record the fair value in the statement of operations to provide pro forma disclosures of net income and earnings per share in the notes to the financial statements as if the fair value of stock-based compensation had been recorded. The disclosure requirements of SFAS No. 123 are effective for financial statements for fiscal years beginning after December 15, 1995. The Company will provide the pro forma disclosures beginning with its 1996 Annual Report and will continue accounting for such plans under the existing accounting rules. In March 1995, the Financial Accounting Standards Board issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"). SFAS No. 121 requires that long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The requirements are effective for financial statements for fiscal years beginning after December 15, 1995. STAT does not anticipate that adoption of SFAS No. 121 will have a significant effect on its financial condition or results of operations. FUTURE OUTLOOK In addition to historical information, this Prospectus contains predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties. These risks and uncertainties include the fact that the Company is a relatively young company whose business is still developing. This development will require substantial amounts of funding and the Company will be dependent on debt financing and the equity markets to finance such efforts. Where access to funding is difficult, the Company's stockholders may face significant dilution, and the ability of STAT to proceed with its programs and plans may be significantly and adversely affected. Actions and advances by competitors may also significantly affect STAT's prospects. While this outlook represents management's current judgment on the future direction of the business, these risks and uncertainties are only some of the factors that may ultimately affect STAT's success, and actual results may differ materially from any future performance suggested in this Prospectus. A more detailed explanation of these and other risks is contained under "Risk Factors." 23 BUSINESS GENERAL STAT Healthcare, Inc. ("STAT" or the "Company") provides a continuum of disease management services primarily to patients with end-stage renal disease ("ESRD" or "chronic kidney failure") and physician practice management services to affiliated physician groups which staff hospital emergency departments. The Company currently operates five dialysis facilities, manages two HBO therapy facilities and provides home healthcare management and related ancillary services primarily in the Rio Grande Valley of south Texas. Through its affiliated physician groups, STAT also currently provides physician practice management services to 20 hospital-based emergency departments, 17 of which are in the Houston greater metropolitan area, and has entered into a contract to provide physician practice management services to three additional hospital emergency departments commencing in October 1996. HEALTHCARE INDUSTRY OVERVIEW GENERAL. Healthcare in the U.S. traditionally has been delivered through a fragmented system of healthcare providers. Diverse treatment protocols among providers of chronic disease care have contributed to increased costs. The role of healthcare providers is changing dramatically. Third-party payors, including HMOs, increasingly are turning to specialized disease management companies that offer integrated care solutions to improve quality and reduce costs. In addition, hospital networks are outsourcing departmental functions to specialized management companies to reduce the administrative burdens of providing healthcare and permit hospitals to focus on their core competencies. DISEASE MANAGEMENT SERVICES. Certain chronic diseases, including chronic kidney failure, require frequent and specialized healthcare services to maximize the benefits of advanced treatment protocols. Chronic kidney failure is the state of advanced renal impairment that generally is irreversible and requires routine dialysis treatments an average of three times per week or kidney transplantation in order to sustain life. In addition to the need for dialysis treatment, chronic kidney failure patients frequently suffer from one or more associated medical conditions, including diabetes, non-healing wounds, hypertension, coronary artery disease, anemia and nutritional problems. Qualified patients with chronic kidney failure have been entitled since 1972 to Medicare benefits regardless of age or financial circumstances under the federal ESRD program. Industry sources estimate that diabetes accounts for approximately 36% of all new cases of chronic kidney failure, and that in 1995 there were approximately 16 million diagnosed and undiagnosed cases of diabetes in the U.S. According to the U.S. Health Care Financing Administration ("HCFA"), the number of patients requiring chronic dialysis services in the U.S. has grown at a 9% compounded annual growth rate to 187,000 patients in 1994 from 66,000 in 1982. The Company estimates that the U.S. market for outpatient and inpatient dialysis services exceeded $3.6 billion in 1994 based on an average of three treatments per week per patient at an average cost of $126 per treatment. Advanced-stage diabetics typically have decreased sensation and oxygenation in their lower extremities and, as a result, are predisposed to non-healing, ulcerating lower extremity wounds which can become gangrenous and lead to amputation. Historically, nearly one-third of all diabetics have required lower extremity amputation after chronic kidney failure. HBO therapy is considered an important adjunctive treatment for infected, non-healing wounds and other chronic conditions caused by diminished tissue oxygenation. During HBO therapy, a patient breathes 100% oxygen in a pressurized chamber at two to three times the atmospheric pressure at sea level. There are currently only approximately 260 HBO therapy facilities in the U.S. HBO therapy can help avoid amputation and its costs and complications, and is also considered a vital and primary treatment for resolution of certain emergency situations such as air embolism, decompression sickness, carbon monoxide poisoning and burns. Medicare reimbursement is generally available for all of these conditions other than treatment for burns. The healthcare needs of patients with chronic kidney failure are complex and costly and require frequent, specialized care. When specifically tailored to care for patients with chronic kidney failure, home healthcare helps identify problems early, often reducing the need for more expensive in-patient care. Home healthcare organizations also assist in administering special medical services to persons with ESRD, including the administration of erythropoietin ("EPO") and general nutrition analysis. Management believes that the 24 healthcare needs of patients with chronic kidney failure are better served by an integrated approach including kidney dialysis, HBO therapy and home healthcare and related ancillary services. EMERGENCY PHYSICIAN PRACTICE MANAGEMENT SERVICES. Hospitals frequently outsource key departmental functions, including emergency medicine, radiology, anesthesiology and pathology, to third-party management companies in an effort to control and reduce operating costs and focus on their core competencies. There are approximately 5,200 hospitals in the U.S., many of which face numerous problems in managing their emergency departments, including difficulties in recruiting, evaluating, scheduling and retaining qualified emergency physicians, and the inefficient use of emergency departments for routine primary care. Competitive pressures have focused the attention of many hospital administrators on the need for better management of their emergency departments. Hospitals frequently turn to physician practice management firms with specialized skills to help solve physician contract and scheduling problems, to strengthen the management of their professional medical staff and specific clinical departments, to better control costs, and to assist in meeting their healthcare coverage needs and obligations to patients who are indigent, uninsured or unassigned to a referring private physician. BUSINESS STRATEGY The Company's objective is to be the preferred provider of integrated kidney disease management services and physician practice management services in its current and future market areas.The principal elements of the Company's strategy are as follows: o EXPAND INTEGRATED DISEASE MANAGEMENT SERVICES. The Company is focused on offering a continuum of healthcare services to persons with chronic kidney failure and its associated medical conditions. For example, the Company may expand its disease management services by contracting with hospital networks to provide inpatient dialysis and other ESRD-related services. STAT believes its integrated approach to kidney disease management is cost-effective and attractive to managed care companies and other third-party payors. o LEVERAGE EXISTING RELATIONSHIPS WITH HOSPITAL NETWORKS. Through its affiliated physician groups, the Company has contracted to provide physician practice management services for the emergency departments at 20 hospitals owned by Columbia. STAT believes it can expand its relationship with Columbia into other hospitals owned or operated by Columbia in market areas not currently served by the Company. The Company intends to continue to focus on strategic relationships and outsourcing opportunities with hospital networks, such as Columbia, rather than management contracts with individual hospitals. In addition, the Company believes its existing base of emergency department management contracts provides opportunities for internal growth through the cross-selling of services to other hospital-based physician practices, such as radiology, pathology and anesthesiology. o EXPAND INTO NEW GEOGRAPHIC MARKETS. STAT currently operates primarily in the Rio Grande Valley of south Texas and the Houston greater metropolitan area. The Company intends to expand into other geographical markets by developing new dialysis facilities, acquiring existing dialysis facilities, managing additional hospital-based HBO therapy facilities and entering into additional emergency department management contracts. o ATTRACT MANAGED CARE CONTRACTS. The Company believes that HMOs and other managed care companies will increasingly seek specialty healthcare companies that offer better delivery systems to patients than the managed care companies can offer themselves. STAT's disease management services provide a continuum of care for patients with chronic kidney failure. In addition, STAT's emergency physician practice management services emphasize standard treatment protocols and reduced clinical variation. The Company believes that these factors enable it to deliver high-quality care and reduce overall healthcare costs, thereby giving it a competitive advantage in attracting managed care contracts. 25 OPERATIONS DISEASE MANAGEMENT SERVICES GENERAL. The Company currently operates five dialysis facilities, manages two HBO therapy facilities and provides home healthcare management and related ancillary services primarily in the Rio Grande Valley of south Texas. TREATMENT OPTIONS FOR END-STAGE RENAL DISEASE. Treatment options for chronic kidney failure include hemodialysis, peritoneal dialysis and kidney transplantation. HCFA estimates that as of December 31, 1994, 82% of the ESRD patients in the United States were receiving hemodialysis treatment in outpatient facilities, with the remaining patients being treated in the home either through peritoneal dialysis (17%) or home hemodialysis (1%). Hemodialysis is generally performed on an outpatient basis in a freestanding facility. Hemodialysis uses an artificial kidney, called a dialyzer, to remove certain toxins, fluids and salt from a patient's blood combined with a machine to control external blood flow and to monitor certain vital signs of the patient. A hemodialysis treatment usually lasts approximately three hours and is performed three times per week per patient. Peritoneal dialysis is generally performed by the patient at home. There are several variations of peritoneal dialysis. The most common are continuous ambulatory peritoneal dialysis ("CAPD") and continuous cycling peritoneal dialysis ("CCPD") or automated peritoneal dialysis ("APD"). All forms of peritoneal dialysis use the patient's peritoneal (abdominal) cavity to eliminate fluid and toxins from the patient. Toxins in the blood continuously cross the peritoneal membrane into the dialysis solution. After several hours, the patient drains the used dialysis solution and replaces it with fresh solution. CCPD and APD are performed in a manner similar to CAPD, but use a mechanical device to cycle dialysis solution while the patient is sleeping or at rest. An alternative treatment not provided by the Company is kidney transplantation. While transplantation, when successful, is generally the most desirable form of therapeutic intervention, the shortage of suitable donors limits the availability of this treatment option. The Company currently has transplantation agreements with the University of Texas Medical Branch--Galveston and the University of Texas Health Science Center, San Antonio, to provide assessment and evaluation of the Company's patients for possible kidney transplant services and to facilitate patient transfers. No fees are involved or paid in connection with such relationship. DIALYSIS FACILITIES. STAT currently operates 83 dialysis stations at five facilities. The Company expects to open one additional facility with ten dialysis stations in the fourth quarter of 1996. The following table sets forth certain information as of the date of this Prospectus regarding the Company's dialysis facilities: NO. OF SERVICE INSTALLED STATION COMMENCEMENT FACILITY LOCATION STATIONS CAPACITY(1) DATE - ----------------------------------- ---------- ----------- ------------- McAllen, Texas..................... 27 30 April 1993 Rio Grande City, Texas............. 10 16 November 1993 Weslaco, Texas..................... 20 20 June 1994 Mission, Texas..................... 15 24 August 1995 Brownsville, Texas (2)............. 11 24 May 1996 El Paso, Texas..................... 10 24 (3) -- --- Total......................... 93 138 == === - ------------------------------ (1) Number of dialysis stations for which plumbed, certified space is currently available. (2) Owned by a limited partnership in which physicians hold a non-controlling interest. (3) Operations expected to commence in the fourth quarter of 1996. 26 The Company's dialysis facilities are designed specifically for outpatient hemodialysis and generally contain, in addition to space for dialysis treatments, a nurses' station, a patient weigh-in area, a supply room, a water treatment space used to purify the water used in hemodialysis treatments, a dialyzer reprocessing room (where dialyzers are sterilized for reuse), staff work areas, offices and a staff lounge and kitchen. Many of the Company's facilities also have a designated area for training patients in home dialysis. Each currently installed dialysis unit is generally operated at or near capacity ten to 13 hours per day, six days per week. As demand for dialysis increases, the Company intends to increase capacity by purchasing and installing additional dialysis units in vacant stations and/or expanding operating hours. In accordance with conditions for participation in the Medicare ESRD program, each facility has a qualified physician who serves as medical director and an Administrator who supervises the day-to-day operations of the facility and the staff. Generally, the medical director must be board eligible or board certified in internal medicine and have had at least 12 months of experience or training in the care of patients at ESRD facilities. The staff of each facility typically consists of registered nurses, licensed practical or vocational nurses, patient care technicians, a social worker, a registered dietician, a unit clerk and bio-medical technicians. All of the Company's dialysis facilities offer both high-efficiency and conventional hemodialysis, which physicians practicing at the Company's facilities deem suitable for their patients. The Company considers the equipment installed and supplies utilized at its facilities to be among the most technologically advanced presently available. The Company also offers CAPD and various other forms of home dialysis. Home dialysis services consist of providing equipment and supplies, training, patient monitoring and follow-up assistance to patients who prefer and are able to receive dialysis treatments in their homes. Patients and their families are trained by a registered nurse to perform either CAPD or CCPD at home. HBO THERAPY SERVICES. Approximately 85% of the patients with chronic kidney failure served by the Company during 1995 also suffer from diabetes or vascular disease. These diseases generally cause decreased sensation and oxygenation in the lower extremities. As a result, these individuals are predisposed to problem wounds which fail to respond to established medical/surgical management, including diabetic feet, compromised amputation sites, non-healing traumatic wounds, and vascular insufficiency ulcers. HBO therapy provides a significant increase in tissue oxygenation in the poorly perfused, infected wound. This elevation in oxygen induces significant positive changes in the wound repair process. HBO therapy is prescribed, either as a primary or adjunctive treatment, and only for those physical conditions approved by the Undersea and Hyperbaric Medical Society. In the case of problem wounds, the average treatment consists of approximately 20 treatments, each with a duration of approximately two hours. Specially-trained personnel observe and monitor the entire treatment. Governmental regulations require that HBO therapy be hospital-based. 27 STAT currently manages the operations of six monoplace chambers at two HBO therapy facilities, and expects to open six monoplace chambers at three additional facilities in the fourth quarter of 1996. The following table sets forth certain information as of the date of this Prospectus regarding the HBO therapy facilities managed by the Company: <TABLE> <CAPTION> NO. OF INSTALLED CHAMBER EXPIRATION OF INITIAL FACILITY LOCATION CHAMBERS(1) CAPACITY(2) CONTRACT TERM - ------------------------------------- ----------- ------------ --------------------- <S> <C> <C> <C> Brownsville, Texas................... 3 3 May 2000 Corpus Christi, Texas................ 3 3 April 1999(3) Kingsville, Texas.................... 2 2 Fall 1999(4) Mission, Texas....................... 2 4 Fall 2001(4) Eagle Pass, Texas.................... 2 4 Fall 2001(4) -- -- Total........................... 12 16 == == </TABLE> - ------------------------------ (1) Number of monoplace chambers currently installed or expected to be installed upon commencement of facility operations. (2) Number of monoplace chambers for which plumbed, certified space is currently available. (3) Upon commencement of operations at the Kingsville facility, the contract term of the Corpus Christi facility will restart for a new three-year period. (4) Assumes operations commence as expected in the fourth quarter of 1996. The Company administers HBO therapy to patients in monoplace chambers pursuant to contracts with hospitals, which, except with respect to the Kingsville facility, may be automatically renewed for additional, one-year periods after the initial term. Under the terms of each contract, the Company provides and maintains HBO and related medical equipment at each hospital and furnishes qualified supervising physicians, nurses and medical technicians specially trained in HBO therapy to administer the HBO therapy to patients. The Company receives from the hospitals a fixed fee for each outpatient HBO therapy, with fees for inpatient treatments determined on a case-by-case basis. Each currently installed chamber is generally operated at or near capacity 12 to 14 hours per day, six days per week. As demand for HBO therapy increases, the Company intends to increase capacity by purchasing and installing additional chambers in available space and/or expanding operating hours. HOME HEALTHCARE AND OTHER ANCILLARY SERVICES. Approximately 45% of the patients served by the Company's home health services during 1995 have chronic kidney failure or diabetes. In addition, a number of Company's patients are elderly, are often immobile and have medical conditions requiring frequent at-home healthcare. To serve the special needs of these patients, the Company has entered into a management services agreement with a local provider of home healthcare services. Under the terms of the agreement, the Company furnishes nursing staff to perform basic nursing services as well as a nursing staff specially trained for the care of renal, diabetic, transplant, cancer and cardiac patients. In addition, the Company provides continuing education and training for its employees on an on-going basis and provides a number of administrative, financial and management services to the home health agency such as quality assurance, risk management, employee safety and physician relations services. For its services, the Company receives a fixed fee for each visit made to a patient's home and a fixed hourly management support services fee for other enumerated services. Fees are subject to amendment based on changes in Medicare or Medicaid laws. The agreement expires in December 2002 and contains non-competition provisions throughout its term and for a one-year period thereafter. STAT's dialysis facilities also provide a comprehensive range of related ancillary services to ESRD patients, the most significant of which is the administration of EPO upon a physician's prescription. EPO is a bio-engineered protein which stimulates the production of red blood cells and is used in connection with all forms of dialysis to treat anemia, a medical complication frequently experienced by ESRD patients. Other ancillary services include: (i) certain laboratory tests required by Medicare to determine the effectiveness of dialysis treatments; (ii) general nutrition analysis; (iii) studies to test the degree of bone 28 deterioration; (iv) electrocardiograms; (v) nerve conduction studies to test for deterioration of a patient's nerves; (vi) doppler flow testing to test the effectiveness of a patient's vascular access for dialysis; and (vii) blood transfusions. PHYSICIAN RELATIONSHIPS. A key factor in the success of any of the Company's dialysis facilities is its relationship with local nephrologists. ESRD patients generally seek treatment at a facility near home and where the attending nephrologist has practice privileges. Consequently, the Company's dialysis business relies upon its ability to meet the needs of the referring physicians and the ESRD patients in the communities the Company serves. During 1995, two nephrologists who are also principal stockholders of the Company collectively accounted for approximately 80% of the Company's net service revenues from dialysis services (approximately 27% of the Company's total net service revenues). The medical directors of the Company's dialysis facilities, each of whom is a nephrologist, enter into written contracts with the Company which specify their duties and establish their compensation (which is fixed for periods of three years or more). The compensation of the medical directors and other physicians for services under contract is separately negotiated for each facility and generally depends upon competitive factors in the local market, the physician's professional qualifications and responsibilities and the size and utilization of the facility or relevant program. SOURCES OF REIMBURSEMENT. Under the Medicare ESRD program, Medicare reimburses dialysis providers for the treatment of individuals who are diagnosed to have chronic kidney failure and are eligible for participation in the Medicare program, regardless of age or financial circumstances. For each treatment, Medicare pays 80% of the amount set by the Medicare prospective reimbursement system, and a secondary payor (usually Medicare supplemental insurance or the state Medicaid program) pays approximately 20% of the amount set by the Medicare prospective reimbursement system. Texas (currently the only state where the Company provides dialysis services) provides Medicaid benefits to qualified recipients to supplement their Medicare entitlement. The Medicare and Medicaid programs are subject to statutory and regulatory changes, administrative rulings, interpretations of policy and governmental funding restrictions, some of which may have the effect of decreasing program payments, increasing costs or modifying the way the Company operates its dialysis business. See "-- Medicare Reimbursement," below. Assuming a patient is eligible for participation in the Medicare program, the commencement date of Medicare benefits for ESRD patients electing hemodialysis is dependent on several factors. ESRD patients under 65 years of age who are not covered by an employer group health plan (for example, the uninsured, those covered by Medicaid and those covered by an individual health insurance policy) must wait 90 days after commencing dialysis treatment to be eligible for Medicare benefits. During the first 90 days of treatment, the patient, Medicaid or the private insurer is responsible for payment (and, in the case of the individual covered by private insurance, such responsibility is limited to the terms of the policy, with the patient being responsible for the balance). ESRD patients under 65 years of age who are covered by an employer group health plan must wait 21 months after commencing dialysis treatment before Medicare becomes the primary payor. Medicare generally covers those who are ages 65 and over, except that Medicare coverage is secondary for some patients who have qualifying employer group health insurance. During the first 21 months of treatment, the employer group health plan is responsible for payment at its negotiated rate or, in the absence of such a rate, at the Company's usual and customary rates and the patient is responsible for deductibles and co-payments, if applicable, under the terms of the employer group health plan. If an ESRD patient with an employer group health plan elects home dialysis training during the first 90 days of dialysis, Medicare becomes the primary payor after 18 months. If an ESRD patient without an employer group health plan begins home dialysis training during the first three months of dialysis, Medicare immediately becomes the primary payor. MEDICARE REIMBURSEMENT. The Company is reimbursed by Medicare under a prospective reimbursement system for chronic dialysis services provided to ESRD patients. Under this system, the reimbursement rates are fixed in advance and have been adjusted from time to time by Congress. Although this form of 29 reimbursement limits the allowable charge per treatment, it provides the Company with predictable and recurring per treatment revenues and allows the Company to retain any profit earned. Medicare has established a composite rate set by HCFA that governs the Medicare reimbursement available for a designated group of dialysis services, including the dialysis treatment, supplies used for such treatment, certain laboratory tests and certain medications. The Medicare composite rate is subject to regional differences based upon certain factors, including regional differences in wage earnings. Certain other services and items are eligible for separate reimbursement under Medicare and are not part of the composite rate, including certain drugs (including EPO), blood (for amounts in excess of three units per patient per year), and certain physician-ordered tests provided to dialysis patients. Claims for Medicare reimbursement must generally be presented within 15 to 27 months of treatment depending on the month in which the service was rendered and for Medicaid secondary reimbursement, if applicable, within 60 to 90 days after payment of the Medicare claim. The Company generally submits claims monthly and is usually paid by Medicare within 30 days of the submission. If in the future Medicare were to include in its composite reimbursement rate any of the ancillary services presently reimbursed separately, the Company would not be able to seek separate reimbursement for these services and this would adversely affect the Company's results of operations to the extent a corresponding increase were not provided in the Medicare composite rate. The Company receives reimbursement for outpatient dialysis services provided to Medicare-eligible patients at rates that are currently $117 per treatment. The Medicare ESRD composite reimbursement rate is subject to change by legislation and recommendations by the Prospective Payment Assessment Commission ("PROPAC"). The Medicare ESRD composite reimbursement rate currently ranges from $117 to $138 per treatment, depending on regional wage variations. The Company is unable to predict what, if any, future changes may occur in the rate of reimbursement, or, if made, whether any such changes will have a material effect on the Company's revenues and net earnings. On June 1, 1989, the FDA approved the production and sale of EPO, and HCFA-approved Medicare reimbursement for EPOs use by dialysis patients. EPO stimulates the production of red blood cells and is beneficial in the treatment of anemia, with the effect of reducing or eliminating the need for blood transfusions for dialysis patients. Physicians began prescribing EPO for their patients in the Company's dialysis facilities in April 1993. The Medicare ESRD reimbursement rate for EPO is currently $10 per 1,000 units. Legislation has been enacted in recent years to reduce the Medicare reimbursement rate for EPO, and the reimbursement rate may be further reduced in the future. There can be no assurance that the Company can maintain current operating margins in the future for EPO administrations due to potential reimbursement decreases, or to potential increases in product costs from its sole manufacturer. MEDICAID REIMBURSEMENT. Medicaid programs are state administered programs partially funded by the federal government. These programs are intended to provide coverage for patients whose income and assets fall below state defined levels and who are otherwise uninsured. The programs also serve as supplemental insurance programs for the Medicare co-insurance portion and provide certain coverages (E.G., oral medications) that are not covered by Medicare. State regulations generally follow Medicare reimbursement levels and coverages without any co-insurance amounts. The Company is a licensed ESRD Medicaid provider in Texas. PRIVATE REIMBURSEMENT/CERTAIN PAYOR ARRANGEMENTS. The Company receives reimbursement from private payors for ESRD treatments prior to Medicare becoming a patients primary payor at rates significantly higher than the per treatment rate set by Medicare. After Medicare becomes a patient's primary payor, private secondary payors generally reimburse the Company for 20% of the Medicare per treatment rate. In addition, the Company has entered into non-exclusive contracts with third-party payors, including many leading HMOs in the Company's service areas, to provide dialysis services to their beneficiaries. 30 EMERGENCY PHYSICIAN PRACTICE MANAGEMENT SERVICES GENERAL. STAT also provides physician practice management services to its affiliated physician groups, which in turn provide emergency medical and related services to hospitals. Through the affiliated physician groups, the Company currently provides emergency medical services at 20 hospitals primarily in the Houston greater metropolitan area, with services at three additional hospitals in the Rio Grande Valley of south Texas expected to commence in the fourth quarter of 1996. MANAGEMENT AGREEMENTS WITH AFFILIATED PHYSICIAN GROUPS. Under the Management Agreements between the Company and its affiliated physician groups, which are generally perpetual and without provision for cancellation or termination, the Company identifies, recruits and screens potential candidates to serve as emergency room physicians in hospitals which have contracted with the Company's affiliated physician groups to provide physician contract management services. The affiliated physician groups then enter into contracts with physicians meeting the groups' qualifications and present those physicians as candidates for admission to the hospital's medical staff. The Company also coordinates, on behalf of and with the assistance of the affiliated physician groups, the scheduling of staff physicians to provide coverage on a 24-hour, 365-day-a-year basis for the hospital's emergency departments. In addition, the Company assists the hospital's administration and medical staff in such areas as quality assurance, risk management, departmental accreditation and marketing. The Company also manages and administers the affiliated physician groups' day-to-day business functions, which include but are not limited to, assuring responsibility for the administrative, accounting, payroll and personnel functions related to the practice of medicine. Under the Management Agreements, the Company is also required to bill and collect the professional fees for the medical services provided on behalf of the affiliated physician groups, maintains all files and records, negotiates and administers all hospital contracts, and provides consulting services to the affiliated physician groups in connection with the procurement and administration of professional liability insurance and the employment of personnel. All decisions relating to medical care are solely that of the affiliated physician groups. In consideration of the services provided by the Company under the Management Agreements, each affiliated physician group pays a management fee and provides reimbursement of all related expenses to the Company. Each affiliated physician group has also appointed the Company its attorney-in-fact to act on its behalf for the purposes of collecting and receiving all fees and revenues payable to the affiliated physician groups as a result of professional services rendered and for the purpose of carrying out its management functions under its hospital contracts. 31 HOSPITAL CONTRACTS. The Company's affiliated physician groups currently provide emergency medical services through their independent contracting physicians with the following hospitals: SERVICE COMMENCEMENT FACILITY(1) LOCATION DATE - ------------------------------------- ---------------------- -------------- San Jacinto Methodist Hospital(2).... Baytown, Texas July 1987 Twelve Oaks Hospital(3).............. Houston, Texas May 1989 Fort Bend Hospital................... Missouri City, Texas April 1990 Alvin Community Hospital............. Alvin, Texas February 1991 Parkway Hospital..................... Houston, Texas August 1991 Katy Medical Center.................. Katy, Texas December 1992 Kingwood Plaza Hospital.............. Kingwood, Texas January 1993 Alice Physicians & Surgeons.......... Alice, Texas January 1994 Mainland Regional Health Hospital.... Texas City, Texas December 1994 Conroe Regional Medical Center....... Conroe, Texas February 1996 Springbranch Medical Center.......... Houston, Texas February 1996 Bellaire Hospital.................... Houston, Texas March 1996 Doctors Hospital Airline............. Houston, Texas March 1996 West Houston Medical Center.......... Houston, Texas March 1996 Doctors Hospital East Loop........... Houston, Texas April 1996 Rosewood Medical Center.............. Houston, Texas April 1996 Sunbelt Medical Center............... Houston, Texas April 1996 Brownsville Medical Center(3)........ Brownsville, Texas June 1996 Gulf Coast Medical Center............ Wharton, Texas July 1996 Bayshore Medical Center.............. Bayshore, Texas July 1996 Doctors Hospital..................... Laredo, Texas October 1996 Valley Regional Medical Center....... Brownsville, Texas October 1996 Rio Grande Regional Medical Center... McAllen, Texas October 1996 - ------------------------------ (1) Except as otherwise noted, all hospitals are owned by Columbia. (2) Owned by The Methodist Healthcare Network. (3) Owned by Tenet Health System. Through its affiliated physician groups, the Company provides contract management services to hospitals under fee-for-service contracts. Hospitals entering into fee-for-service contracts agree to authorize the affiliated physician group to bill and collect the professional component of the charges for medical services rendered by the group's contracted physicians. Under fee-for-service arrangements, the affiliated physician groups receive directed disbursements of the amounts collected and, depending on the hospital's patient volume and payor mix, may also receive a stand-by or on-call fee from the hospital. Pursuant to such contracts, the affiliated physician groups assume responsibility for billing and collection and assumes the risks of non-payment, changes in patient volume or payor mix and delays attendant to reimbursement through government programs or third-party payors. All of these factors are taken into consideration by the affiliated physician groups, in consultation with the Company, in arriving at appropriate contractual arrangements with healthcare institutions and professionals. The affiliated physician groups service contracts with hospitals generally have a term of two years, and contain provisions permitting renewal for additional periods. Pursuant to the Columbia Agreement, one of the Company's affiliated physician groups has agreed to be the exclusive provider of emergency medical services to 15 of Columbia's hospitals in the Houston greater metropolitan area. The Columbia Agreement has an initial term ending in January 1998 with provisions for automatic renewal, and may be terminated by Columbia in certain circumstances, including unsatisfactory 32 service by the Company or its affiliated physician group. During the term of the Columbia Agreement and for two years thereafter, STAT has agreed not to organize or provide administrative or advisory services to independent physician or similar associations whose practices relate to areas other than emergency medicine and who are located in proximity to specified Columbia medical centers. There can be no assurance that the Columbia Agreement will be renewed at the conclusion of its initial term, that it will be renewed on substantially the same terms and conditions, or that it will not be terminated prior to the conclusion of its term. PHYSICIAN CONTRACTS. The Company's affiliated physician groups contract with physicians as independent contractors to fulfill their contractual obligations to provide qualified doctors to hospital clients. While each hospital with which each affiliated physician group contracts ultimately determines whether a physician must be board certified in emergency medicine to provide medical services in its emergency room, hospitals generally do not require physicians to be so certified. Each affiliated physician group requires all physicians to be currently licensed to practice medicine and to be Advanced Cardiac Life Support ("ACLS") certified before entering into a contract for the physician's service. Professional fees payable to the physician are disbursed by the Company pursuant to the Management Agreements. As independent contractors, the physicians are responsible for their own income and social security taxes, as well as workers compensation insurance. The contracts with independent contractor physicians can be terminated by the affiliated physician group or the independent contractor physicians with 30 days' notice, or immediately by the affiliated physician group for cause. QUALITY ASSURANCE As part of the Company's continuing efforts to increase the quality of its services and reduce its professional liability exposure with respect to potential negligent acts of its employees and contractors, the Company manages and monitors the quality and performance of its physicians and services. DISEASE MANAGEMENT SERVICES. In order to optimize therapy and improve outcomes, the Company monitors patient outcomes in all of its dialysis facilities. Regular monitoring of the prescribed dialysis treatments and the key physiological parameters of patients (including periodic measurements to assess anemia, nutritional status and adequacy of dialysis) constitutes part of the continuous quality improvement that is conducted as a matter of Company policy. At the dialysis facility level, pursuant to Medicare requirements, each facility has a quality assurance committee that typically includes the facility's medical director, administrator and nurses, as well as other technical personnel. This committee meets regularly to monitor the quality of care in the facility and to assure compliance with applicable regulations. At the patient level, the Company attempts to ensure quality care through the provision of instruction to all ESRD patients before and after the initiation of dialysis treatment. Patients are encouraged to participate in their own care to the fullest extent possible. A comprehensive wound monitoring, measurement and documentation process provides consistency and quality of the wound management systems associated with HBO therapy. Clinical records are monitored to assure compliance with treatment standards, clinical improvements and outcomes. Side effect and infection profiling are also a routine part of the quality monitoring process. The complete quality measurement program of HBO therapy is incorporated into each hospital-wide continuous quality improvement process and is regularly reported. EMERGENCY PHYSICIAN PRACTICE MANAGEMENT SERVICES. STAT employs an ongoing quality management system for its emergency physician practice management services which measures both clinical and non-clinical outcomes. For clinical outcomes, the system is focused on high frequency or high criticality diagnoses with diagnosis-specific standards reported in a physician- and hospital-specific format enabling a very focused feedback to physicians and support staff. For non-clinical outcomes, the system tracks and studies waiting times, interpersonal interactions, and patient perceptions in order to measure overall patient satisfaction and identify areas for improvement. The non-clinical system includes a patient questionnaire 33 program, a patient complaint program, and a patient call-back program and complies with Joint Commission on Accreditation of Healthcare Organizations (JCAHO) standards. Both the clinical and non-clinical portions of the quality management system are incorporated into each individual hospital's continuous quality improvement program and are reported on a monthly basis. MANAGEMENT INFORMATION SYSTEMS The Company has implemented information systems designed to enhance the quality of its disease management and emergency physician practice management services. The Company's management information systems collect and report data regarding patient flow, utilization, physician efficiency, patient demographics, managed care participation and other important data used by the Company, hospital clients and medical directors. In addition to assisting the Company in developing staffing patterns and marketing strategies, the Company believes these systems improve efficiency of service, cost effectiveness and patient outcomes. GOVERNMENT REGULATION GENERAL. The Company's operations are subject to extensive governmental regulations at the federal, state and local levels. These regulations require the Company to meet various standards relating to, among other things, the management of facilities, personnel, maintenance of proper records, equipment and quality assurance programs. The Company's facilities are subject to periodic inspection by state agencies and other governmental authorities to determine if the premises, equipment, personnel and patient care meet applicable standards. Any loss by the Company of its various federal certifications, its authorization to participate in the Medicare or Medicaid programs or its license under the laws of any state or other governmental authority from which a substantial portion of its revenues is derived, or a change resulting from reforms that reduce reimbursement or reduce or eliminate coverage for services would have a material adverse effect on the Company's business. To date, the Company has not had any difficulty in maintaining the required licenses or its Medicare and Medicaid certifications. The healthcare services industry will continue to be subject to intense regulation at the federal and state levels, the scope and effect of which cannot be predicted. No assurance can be given that the activities of the Company will not be reviewed and challenged or that healthcare reform will not result in a material adverse change to the Company's business. FEE-SPLITTING; CORPORATE PRACTICE OF MEDICINE. The laws of many states prohibit physicians from splitting professional fees with non-physicians and prohibit non-physician entities, such as the Company, from practicing medicine and from employing physicians to practice medicine. In the states in which the Company as a dialysis provider conducts or may conduct business, general business corporations are not permitted to practice medicine, exercise control over physicians who practice medicine or engage in certain practices such as fee-splitting with physicians. The corporate practice of medicine refers to the rendering directly, or through employment, of medical services by a business corporation. The laws in most states regarding the corporate practice of medicine have been subject to limited judicial and regulatory interpretation. Management believes the Company's current and planned activities do not constitute fee-splitting or the corporate practice of medicine as contemplated by these statutes or case law interpretations. The Company believes that it is not engaged in the corporate practice of medicine because the nephrologists who provide patient care services do so as independent professionals. Each dialysis unit does have a medical director, who is paid for specific administrative and management services under contracts that meet the accrediting requirements for such centers. These agreements also reserve to the physicians exclusive authority to make all decisions regarding medical care. Based on current interpretations of state law in Texas where the Company now operates, the arrangement does not appear to violate the prohibition against the corporate practice of medicine. However, all such laws are subject to interpretation by the courts as well as administrative agencies, and any restructuring required by such change could be detrimental to the operations of the Company as a dialysis provider. There can be no assurance that future interpretations of such laws will not require structural and organizational modifications of the Company's existing relationships with its affiliated physician groups. 34 SELF-REFERRAL. Certain provisions contained in the Omnibus Budget Reconciliation Act of 1989 ("Stark I") and the Omnibus Budget Reconciliation Act of 1993 ("Stark II"), and subsequent amendments, prohibit physician referrals for clinical laboratory services and certain other "designated health services," including without limitation outpatient prescription drugs, parenteral and enteral nutrients, equipment and supplies, durable medical equipment and supplies, home health services, and inpatient and outpatient hospital services, to entities with which a physician or an immediate family member has a financial relationship (the "Stark Law"). The Stark Law also prohibits entities from presenting or causing to be presented a claim or bill to any individual, third-party payor or other entity for designated health services furnished under a prohibited referral. A violation of the Stark Law may result in significant civil penalties, which may include exclusion or suspension of the physician and entity from future participation in the Medicare and Medicaid programs and substantial fines. In August 1995, HCFA published regulations interpreting Stark I. These regulations only address the original scope of Stark I (clinical laboratories) but representatives of HCFA assert in the preamble to the regulations that these regulations will be used by HCFA as the basis for interpretation of matters involving the other designated health services. The regulations specifically provide that clinical laboratory services that are reimbursed as part of the Medicare composite billing rate for renal dialysis services are excluded from the coverage of Stark I. However, laboratory services not included in the Medicare composite rate could be included within the coverage of Stark I. Although the Company provides a limited number of such laboratory services, the Company believes that it is not a provider of clinical laboratory services subject to the Stark Law. In addition, the Company believes it is not a provider of any designated health services which would subject it to application of Stark II. Based upon the preamble to the regulations, as described above, the Company believes that the provision of other services that are paid for under the composite billing rate is outside of the scope of the Stark Law. The Company believes that EPO and other pharmaceuticals that the Company uses in connection with its dialysis services do not constitute outpatient prescription drugs for purposes of the Stark Law and that, therefore, the Company is not a provider of outpatient prescription drugs as a designated health service. However, if it is determined that the Company is providing a designated health service, then each financial relationship between the Company and any physician who refers Medicare or Medicaid covered patients to the Company for the provision of a designated health service must qualify under an exception to the Stark Law or the Company will be unable to submit a bill for payment for such service. A financial relationship consists of either a compensation arrangement between a physician, a member of the physician's immediate family and the Company or an ownership interest in the Company held by a physician or a member of the physician's immediate family. The Company has entered into medical director agreements with certain physicians who are in a position to refer patients to the Company's dialysis facilities. The Company has structured these medical director agreements to comply with the Stark Law exception for personal service arrangements. The Company has a number of other financial relationships with referring physicians. A determination that the Company provides designated health services and any such financial relationship does not comply with an exception to the Stark Law could have a material adverse effect on the Company's business, financial condition and results of operations. Although HBO therapy services constitute outpatient and inpatient hospital services and are therefore a designated health service, the Company does not own or control such services, but merely administers HBO therapy services, and performs certain non-professional functions related thereto, pursuant to management contracts with hospitals. The hospitals, as the licensed entities, provide and bill for the HBO therapy services. The Company is not a licensed provider of inpatient and outpatient hospital services and has no control over or financial interest in any of these hospitals. The only relationship between the hospital and the Company is through the Company's HBO management agreements. Accordingly, the Company believes its HBO administrative operations fall outside the purview of the Stark Law. Nevertheless, a determination that the Stark Law is applicable to the Company's HBO activities would require that the Company's financial relationships with referring physicians comply with a specified exception set forth in the Stark 35 Law, or that the Company take steps to ensure that the physician does not refer patients covered under the Medicare or Medicaid programs to any hospital with which the Company has an agreement to administer HBO therapy services. The Company also provides nursing staff and certain administrative, financial and management services to a local home healthcare agency that provides home health services to patients, including many of the patients of the Company's dialysis facilities. The home healthcare agency, as the licensed entity, provides and bills for the home health services. Since the Company is not a licensed home healthcare agency and has no control over nor financial interest in this agency other than through the Company's management agreement, the Company believes that it is not a provider of home health services as designated health services under the Stark Law. However, if a court or regulatory or enforcement agent determines that the Stark Law applies to the Company's home health management activities, the Company would have to ensure that each of its financial relationships with referring physicians complies with an exception to the Stark Law. In such event, a determination that the financial relationship between the Company and any of its referring physicians fails to comply with an exception to the Stark Law would have a material adverse effect on the Company's business, financial condition and results of operations. The list of designated health services under the Stark Law does not include the management of a physician healthcare practice such as the Company performs for its affiliated physician groups. The Company does not consider these operations to include the provision of a designated health service. In addition, the Company believes that the Stark Law does not apply to its affiliated physician groups' contracts with hospitals. The affiliated physician groups have entered into agreements with hospitals whereby the hospitals authorize the physician groups to bill and collect the professional component of the charges for medical services rendered by the groups' independent contractor physicians. Depending upon a hospital's patient volume and payor mix, a hospital may pay an affiliated physician group a stand-by or on-call fee. In such an event, the agreement could constitute a financial relationship between the affiliated physician group and the hospital that would prohibit the physicians from referring covered patients to the hospital for designated health services. The Company believes that each of the hospital contracts either does not constitute a financial relationship between the affiliated physician group and the hospital because no remuneration is paid to the group by the hospital, or if the relationship qualifies as a financial relationship, it complies with the Stark Law exception for remuneration paid to a physician by a hospital that does not relate to the provision of designated health services. It is the Company's belief that it does not provide, directly or indirectly, any designated health service and that the Stark Law does not apply to the Company's activities. Because there have been no cases or other interpretations of the Stark Law or regulations applicable to organizations like the Company, the Company cannot ascertain how its activities might be assessed if reviewed. Furthermore, the Company has no ability to obtain advisory opinions from the regulatory and enforcement agencies that govern the Stark Law. If it is determined that the Company is a provider of designated health services, then no physician who owns, or who has an immediate family member who owns, shares of the capital stock of the Company, may refer a Medicare or Medicaid covered patient to the Company for designated health services. Violations of the Stark Law are punishable by civil penalties, which may include exclusion or suspension of the provider from future participation in Medicare and Medicaid programs and substantial fines. A determination that any of the Company's activities constitutes a violation of the Stark Law could have a material adverse effect upon the Company's business, financial condition and results of operations. MEDICARE AND STATE FRAUD AND ABUSE PROVISIONS. Federal law prohibits the offer, payment, solicitation or receipt of any form of remuneration in return for the referral of Medicare or Medicaid program patients or patient care opportunities, or in return for the purchase, lease or order of any item or service that is covered by Medicare or certain other federal and state healthcare programs (the "Anti-Kickback Laws"). Pursuant to the Anti-Kickback Laws, the federal government released a special alert which announced a policy of increased scrutiny of joint ventures and other transactions among healthcare providers in an effort to reduce potential fraud and abuse relating to Medicare and Medicaid costs. The applicability of these provisions to 36 many business transactions in the healthcare industry has not yet been subject to judicial and regulatory interpretation. In 1991, the Inspector General of the U.S. Department of Health and Human Services published "Safe Harbor Regulations" defining safe harbors for certain arrangements that, if complied with, would not violate the Anti-Kickback Laws. A failure to comply with the safe harbors does not, however, mean that a person or entity has violated the Anti-Kickback Laws. Among the safe harbors specifically provided for are safe harbors for ownership interests, personal service contracts, management contracts and space rentals. The Anti-Kickback Laws provide civil and criminal penalties for individuals or entities participating in the Medicare or Medicaid programs who knowingly and willfully offer, pay, solicit or receive remuneration in order to induce referrals for items or services reimbursed under such programs. In addition to federal criminal penalties, the Social Security Act also establishes the intermediate sanctions of excluding violators from participation in the Medicare or Medicaid programs. To prove a violation of the Anti-Kickback Laws, the entity must provide services that are reimbursable under the Medicare or other federal or state healthcare programs, the offer or receipt of remuneration, and the intent to induce referrals. Except for its dialysis services, the Company is not a provider or supplier of services or items reimbursed by Medicare or state healthcare programs. The Company believes its contractual arrangements with physicians are in compliance with the Anti-Kickback Laws, and the Company has no intent to compensate any party for the referral of any patients. No assurance can be made, however, that a court or regulatory or enforcement agency would view these arrangements in a similar manner, and an adverse finding would likely have a material adverse effect on the Company's business, financial condition and results of operations. The Company believes that its medical director agreements for its dialysis centers, HBO therapy operations and affiliated physician groups described above comply with the safe harbor provisions for personal service arrangements. Four of the Company's dialysis facilities are leased from entities in which physicians who refer patients to the facility hold ownership interests. The Company believes that the leases comply with the space rental safe harbor and are in compliance with the Anti-Kickback Laws. The Company is compensated under its various management agreements for providing management services to affiliated physician groups, home health agencies and hospital-based HBO therapy operations. The fees payable under these agreements are intended by the Company to be consistent with fair market value in arms' length transactions for the nature and amount of management services rendered, and therefore, would not constitute unlawful remuneration under the Anti-Kickback Laws. Furthermore, the Company does not believe it is in a position to make or influence referrals of patients or services reimbursed under Medicare or Medicaid programs to any provider of covered services. Consequently, the Company does not believe that the management fees payable to it should be viewed as remuneration for referring or influencing referrals of patients or services covered by such programs as prohibited by the Anti-Kickback Laws. Except for its dialysis services, the Company is not a provider or supplier of services or items reimbursed by Medicare or state healthcare programs. Should any of the Company's business arrangements be deemed to constitute an arrangement designed to induce the referral of Medicare, Medicaid or other covered patients, then such arrangement could be viewed as violating the Anti-Kickback Laws. Noncompliance with the Anti-Kickback Laws can result in exclusion from all such governmental programs as well as civil and criminal penalties. A determination of liability under any such law could have a material adverse effect on the Company's business, financial condition and results of operations. In 1991, Texas enacted a law similar to the federal Anti-Kickback Laws which is referred to as the "Illegal Remuneration Statute" and which covers patients sponsored by private payors as well as governmental programs. The Illegal Remuneration Statute prohibits, among other things, a person from intentionally offering to pay or accepting any remuneration directly or indirectly to or from any person or corporation in 37 exchange for a healthcare referral if the person, at the time of initial contact and at the time of the referral, does not disclose to the patient the person's affiliation with the person for whom the patient is secured and that the person will receive remuneration for securing the patient. The Company believes it is in compliance with the Illegal Remuneration Statute and that none of its business arrangements constitute a payment in exchange for a referral. However, a determination that the Company has violated the Illegal Remuneration Statute could subject the Company to injunctive relief, civil penalties or both, which could have a material adverse effect on the Company's business, financial condition and results of operations. THE FALSE CLAIMS ACT. An increasing number of healthcare providers and other entities are being faced with lawsuits alleging fraudulent billing practices or other claims under the federal Civil False Claims Act. The Civil False Claims Act permits a person (generally employees or former employees of the healthcare provider or other entity) to assert the rights of the government by initiating a qui tam action against a healthcare provider or other entity if such person has or purports to have information that the healthcare provider or other entity submitted a claim to the government for payment that could be false or fraudulent. Upon filing, the government has the opportunity to intervene and assume control of the case. Penalties of up to $10,000 for each false or fraudulent claim presented to the government for payment may be awarded as well as treble damages. Defendants also may be excluded permanently or for a period of time from participation in the Medicare and Medicaid programs. Because of penalties and treble damages, many of these lawsuits involve large monetary claims and substantial defense costs. In the event that the Company as a dialysis provider is named as a defendant in a qui tam action and it is successfully prosecuted, no assurance can be made that such event would not have a material adverse effect on the Company and its operations. MEDICARE. The Medicare program represents a substantial portion of the federal budget, and Congress takes action in almost every legislative session to modify the Medicare program for the purpose of reducing the amounts otherwise payable from the program to healthcare providers. Legislation or regulations may be enacted in the future that may significantly modify the ESRD program or substantially reduce the amount paid for the company's services. Further, statutes or regulations may be adopted which impose additional requirements for the Company to be eligible to participate in the federal and state healthcare payment programs. Such new legislation or regulations may adversely affect the Company's business operations. Recently, HCFA has promulgated regulations to implement the Omnibus Budget Reconciliation Act of 1993 ("OBRA 93") with respect to the coordination-of-benefits period for Medicare beneficiaries. HCFA has established rules for Medicare beneficiaries who are eligible for, or entitled to, Medicare on the basis of ESRD and are also entitled on the basis of age or disability. There are essentially four rules currently in effect for primary payor determination during the coordination-of-benefits period. o The first rule provides that if the 18-month period ended before August 1993, Medicare is primary payor from the first month of dual eligibility entitlement. o The second rule provides that if the first month of ESRD-based eligibility or entitlement and the first month of dual eligibility/entitlement both fall after February 1992 and before August 10, 1993, Medicare is (i) primary payor from the first month of dual eligibility/entitlement through August 9, 1993; (ii) secondary payor from August 10, 1993 through the 18th month of ESRD-based eligibility or entitlement; and (iii) primary payor again after the 18th month of ESRD-based eligibility or entitlement. o The third rule provides that if the first month of dual eligibility or entitlement is after February 1992, and the first month of dual eligibility or entitlement is after August 9, 1993, Medicare is secondary payor during the first 18 months of ESRD-based eligibility or entitlement, and primary payor after the 18th month of ESRD-based eligibility or entitlement. o The fourth rule, and the most controversial, provides in part that Medicare remains the primary payor if a group health plan was already secondary payor for an individual entitled on the basis of age or disability when the individual becomes eligible on the basis of ESRD. 38 Initially, HCFA had interpreted OBRA 93 to require a private plan to become primary payor under these circumstances. HCFA later corrected its interpretation of the statute and issued guidance on April 24, 1995 that Medicare remains the primary payor. On June 6, 1995, a federal court issued a preliminary injunction precluding HCFA from retroactively implementing its corrected program instruction for items and services furnished between August 10, 1993 (the enactment of OBRA 93) and April 24, 1995, pending the courts decision on the merits. HCFA has stated that it will modify the rules if required by the final ruling of the court. If the court determines that Medicare is the primary payor during the period between August 10, 1993 and April 24, 1995, then this decision could have a material adverse effect on the Company in that it would require the Company to refund certain payments to private insurers for services during that time period, and then re-bill the Medicare Program for such payments. This retroactive application of HCFA's April 1995 program instruction could cause the Company to incur a significant amount of cost in terms of work hours and office expenses. If the court maintains its current position that these rules cannot be retroactively applied, then the Company does not anticipate any impact on its earnings from such finding. However, the Company cannot estimate with any certainty, at the present time, the potential impact that any final ruling or interpretation or the timing of same may have upon its earnings. OTHER REGULATIONS. The Company's operations are also subject to various state hazardous waste disposal laws. Those laws as currently in effect do not classify most of the waste produced during the provision of dialysis services to be hazardous, although disposal of non-hazardous medical waste is also subject to regulation. Occupational Safety and Health Administration regulations require employers of workers who are occupationally subject to blood or other potentially infectious materials to provide those workers with certain prescribed protections against bloodborne pathogens. The regulatory requirements apply to all healthcare facilities, including dialysis facilities, and require employers to make a determination as to which employees may be exposed to blood or other potentially infectious materials and to have in effect a written exposure control plan. In addition, employers are required to provide or employ hepatitis B vaccinations, personal protective equipment, infection control training, post-exposure evaluation and follow-up, waste disposal techniques and procedures, and engineering and work practice controls. Employers are also required to comply with certain record-keeping requirements. The Company believes it is in material compliance with the foregoing laws and regulations. Although STAT believes it complies in all material respects with current applicable laws and regulations, the healthcare service industry will continue to be subject to substantial regulation at the federal and state levels, the scope and effect of which cannot be predicted by the Company. No assurance can be given that the Company's activities will not be reviewed or challenged by regulatory authorities. REGULATORY COMPLIANCE AND POSSIBLE NEGATIVE EFFECTS OF PROSPECTIVE HEALTHCARE REFORM. Various plans have been proposed and are being considered on federal, state and local levels to reduce costs in healthcare spending. Although the Company believes it responds to the concerns addressed by such plans, it is not possible to assess the likelihood of whether any of these proposals will be enacted or to assess the impact any of these proposals may have on reimbursement to healthcare providers. Lower rates of reimbursement may reduce the amounts paid by any government payor and, accordingly, may have a material adverse effect on the Company's businesses and the results of its operations. Healthcare reforms may expand the existing Anti-Kickback Law and the Stark Law to apply to all healthcare payors, not just Medicare and Medicaid. It is unclear how any reform legislation would affect healthcare provider networks or other types of managed care arrangements. There can be no assurance that the Company will be able to comply with any new laws. The Company believes it is in material compliance with current applicable laws and regulations. No assurance can be made that in the future the Company's business arrangements, past or present, will not be the subject of an investigation or prosecution by a federal or state governmental authority. Such an investigation or prosecution could result in any, or a combination, of the penalties discussed above depending upon the agency involved in such investigation and prosecution. None of the Company's 39 business arrangements with physicians, vendors, patients or others have been the subject of investigation by any governmental authority. No assurance can be given that the Company's activities will not be reviewed or challenged by regulatory authorities. The Company monitors legislative developments and would seek to restructure a business arrangement if the Company determined that one or more of its business relationships placed it in material noncompliance with such a statute. The Company believes that healthcare regulations will continue to change and, as a result, regularly monitors developments in healthcare law. The Company expects to modify its agreements and operations from time to time as the business and regulatory environment changes. While the Company believes it will be able to structure all its agreements and operations in accordance with applicable law, there can be no assurance that its arrangements will not be successfully challenged. CORPORATE LIABILITY AND INSURANCE The Company's business entails an inherent risk of claims of physician professional and other liability. The Company currently maintains professional liability insurance underwritten by an insurance company unaffiliated with the Company for itself, its affiliated physician groups and its contracted physicians, in amounts it deems to be appropriate, based upon historical claims and the nature and risks of its business. The professional liability insurance coverage is on a claims-made basis (the coverage includes claims reported during the period that the insured was covered by the policy) and includes certain self-insurance retention. There can be no assurance that a future claim for professional liability will not exceed the scope or limits of the Company's available insurance coverage or that such coverage will continue to be available at acceptable costs or at all. Such insurance provides coverage, subject to policy limits, in the event that the Company is held liable as a co-defendant in a lawsuit against an independent contractor physician or hospital or other client. The Company does not control the practice of medicine by physicians or the compliance with certain other regulatory and other requirements directly applicable to physicians or hospitals or other clients. The likelihood that the Company could be held liable for the negligence of a physician would be increased if such physician were determined to be an employee or other agent of the Company. In addition to any potential tort liability of the Company, the affiliated physician groups' contracts with hospitals generally contain provisions under which the Company agrees to indemnify the hospital for losses resulting from the contracted physician's malpractice and the hospital agrees to indemnify the Company for losses resulting from the negligence of the hospital or hospital personnel. See "Risk Factors -- Corporate Exposure to Professional Liabilities." COMPETITION The markets for dialysis, HBO therapy, home healthcare and physician practice management services are highly competitive. The Company competes not only with other national and regional management companies and treatment facilities but also with local physician groups and with hospitals themselves, many of which are also trying to combine their own services with those of physicians into integrated delivery networks. The Company is also, in effect, competing against the traditional structure of practicing physician management and hospital management operations. Competition in the industry is based on the scope, quality, and cost of services provided. Certain of the Company's competitors are significantly larger and have substantially greater financial and other resources available to them than the Company. LEGAL PROCEEDINGS The Company and its affiliated physician groups are involved in various legal proceedings incidental to their business, substantially all of which involve claims related to the alleged medical malpractice of contracted physicians. In the opinion of the Company's management, no individual item of litigation or group of similar items of litigation, taking into account the insurance coverage available to the Company, is likely to have a material adverse effect on the Company's financial position. 40 EMPLOYEES AND INDEPENDENT CONTRACTOR PHYSICIANS At June 30, 1996, the Company had 232 full-time employees, of whom 11 were in general executive positions, 44 were in administration and 177 were registered nurses or technicians. In addition, as of such date approximately 215 physicians were under contract with the Company's affiliated physician groups or were engaged as medical directors of the Company's dialysis operations. None of the Company's employees is represented by a collective bargaining agreement, and the Company considers its employee relations to be satisfactory. PROPERTIES The Company's principal executive offices are located in approximately 10,000 square feet of leased space in Houston, Texas under an agreement terminating in June 1998. All of the Company's operations are conducted from leased facilities. The Company leases four facilities from entities in which referring physicians hold an interest. The leases for the Company's operating facilities generally cover periods from three to ten years and typically contain renewal options of one to five years at the fair rental value at the time of renewal or at rates subject to consumer price index increases since the inception of the lease. The Company's facilities range in size from approximately 900 to approximately 7,200 square feet. The Company considers its physical properties to be in good operating condition and suitable for the purposes for which they are being used. 41 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS Set forth below is certain information concerning each of the executive officers and directors of the Company as of June 30, 1996, including the business experience of each during the past five years: <TABLE> <CAPTION> NAME AGE POSITION WITH THE COMPANY - ------------------------------------- --- --------------------------------------------------- <S> <C> <C> Russell D. Schneider................. 41 Chairman of the Board and Chief Executive Officer (Class II Director) William H. Rice, M.D................. 38 Vice Chairman of the Board (Class I Director) Victor M. Miranda, M.D............... 38 President -- Emergency Physicians and Director (Class II Director) Ruben A. Perez....................... 41 President -- Healthcare Management, Treasurer and Director (Class III Director) Ned E. Chapman....................... 54 Chief Financial Officer and Secretary Daniel A. Perez...................... 34 Senior Vice President Ann N. James, Ph.D. (1).............. 52 Director (Class I Director) David C. Colby (1)................... 43 Director (Class III Director) - ------------------------------ </TABLE> (1) Member of the Audit Committee and the Compensation Committee. RUSSELL D. SCHNEIDER has been Chairman of the Board and Chief Executive Officer of the Company since June 1996 and a director since July 1995. Mr. Schneider co-founded AmHealth Corporation with Messrs. R and D. Perez in October 1992. Mr. Schneider was a co-founder of Columbia/HCA Healthcare Corporation in 1988 and served on its Board of Directors from 1988 to 1993 and as Senior Vice President of Market Development from 1993 to 1994, overseeing Columbia's involvement in physician ventures, mergers, acquisitions and business development. From 1981 to 1988, Mr. Schneider served in various executive positions within The Methodist Healthcare Network. WILLIAM H. RICE, M.D. has been Vice Chairman of the Company's Board of Directors since June 1996. Dr. Rice co-founded STAT Physicians in 1986 with Dr. Miranda and served as Chairman of the Company from its inception in 1994 until the consummation of the Exchange. He is a physician consultant to the Texas Department of Health, is active at the regional and national level with the American College of Emergency Physicians on legislative and clinical issues and is an Affiliate Professor of Medicine at the University of Texas Medical School at Houston. VICTOR M. MIRANDA, M.D. has been President -- Emergency Physicians of the Company since June 1996. Dr. Miranda co-founded STAT Physicians in 1986 with Dr. Rice and served as President of the Company from its inception in 1994 until the consummation of the Exchange. Dr. Miranda is board certified in emergency medicine, the medical director of two emergency medical departments at hospitals within Houston, and an active member of the American College of Emergency Physicians. RUBEN A. PEREZ has been President -- Healthcare Management and Treasurer of the Company since June 1996. Mr. Perez co-founded AmHealth Corporation with Messrs. Schneider and D. Perez in October 1992 and served as President and Secretary of AmHealth Corporation from its inception until the consummation of the Exchange. Mr. Perez was also a co-founder and Senior Vice President of Columbia Hospital Corporation in Fort Worth, Texas from 1988 to 1992 and controller of The Methodist Healthcare Network from 1986 to 1988. NED E. CHAPMAN joined STAT Physicians as Chief Financial Officer in 1992 and has been Chief Financial Officer of the Company since its inception. From 1989 until joining STAT Physicians, Mr. Chapman served as a financial consultant to a number of private and public companies in California's Silicon Valley. Mr. Chapman was formerly Chief Financial Officer of three companies, two of which were public 42 companies (Magnuson Computers and CAS, Inc.). Mr. Chapman is a Certified Public Accountant and was with Price Waterhouse for 11 years, last serving as a senior audit manager. DANIEL A. PEREZ has been Senior Vice President of the Company since June 1996. Mr. Perez was a co-founder of AmHealth Corporation and served as Assistant Secretary of AmHealth Corporation and Chief Operating Officer of AmHealth's Kidney Dialysis Centers from November 1992 until the Exchange. He was a former area administrator for Bio-Medical Applications' South Texas operations, where he gained extensive experience in the development and management of dialysis centers, and served as Administrator of Bio-Medical Applications of the Rio Grande Valley from 1988 to 1991. ANN N. JAMES, PH.D. was appointed to the Board of Directors in June 1996 as a designee of AmHealth following the consummation of the Exchange. Dr. James has been a partner of and the Director of the Health Law Section of the law firm of Jenkens & Gilchrist, L.L.P., Houston, Texas since 1992. Dr. James presently serves on the Board of the Health Law and Policy Institute of the University of Houston, the Advisory Board for the Healthcare Administration Program of the University of Houston, the Board of the Greater Houston Hospital Council Research and Education, and the Board of Directors of the Carondelet Health System. DAVID C. COLBY was appointed to the Board of Directors in June 1996 as a designee of AmHealth following the consummation of the Exchange. Mr. Colby has served as Executive Vice President, Chief Financial Officer and Treasurer of American Medical Response, Inc. since April 1996. Mr. Colby served as the Chief Financial Officer of Columbia/HCA Healthcare Corporation from 1988 to 1996, as Chief Financial Officer of Methodist Hospital from 1983 to 1988 and as a healthcare consultant for Touche Ross & Co. from 1978 to 1983. BOARD OF DIRECTORS The Charter and Bylaws provide that the Board shall be classified with respect to terms of office into three classes. Each class of directors shall consist of an equal, or as near to equal as possible, number of directors. The term of the Class I Directors will expire at the 1997 annual meeting, the term of the Class II Directors will expire at the 1998 annual meeting, and the term of the Class III Directors will expire at the 1999 annual meeting. At each annual meeting, the successor or successors to the class of directors whose terms shall expire in that year shall be elected to hold office for a term of three years, so that the term of office of one class of directors shall expire in each year. Directors who are not employees are paid a fee of $1,000 for each meeting of the Board of Directors that they attend in person and are reimbursed for reasonable out-of-pocket expenses incurred in attending such meetings. In fiscal 1995, the Company granted to Mr. Schneider options to purchase 10,000 shares of Common Stock at an exercise price of $3.00 per share, which was the fair market value of the shares on the date of grant. In addition, directors who are not employees of the Company will also periodically receive automatic grants of non-statutory stock options under the Company's 1996 Stock Incentive Plan. See "-- 1996 Stock Incentive Plan." The Company maintains directors' and officers' liability insurance and its Bylaws provide for mandatory indemnification of directors and officers to the maximum extent permitted by Delaware law. The Charter limits the liability of directors of the Company to the Company or its stockholders to the fullest extent permitted by Delaware law. Prior to the consummation of the offering, the Company will enter into indemnification agreements with each of its directors and executive officers that provide for indemnification and expense advancement to the fullest extent permitted under the Delaware General Corporation Law. See "Description of Capital Stock -- Certain Anti-Takeover, Limited Liability and Indemnification Provisions." The Board has established an Audit Committee and Compensation Committee. The current members of the Audit Committee are Mr. Colby (Chairman) and Dr. James. The Audit Committee's functions include recommending to the Board the engagement of the Company's independent auditors, reviewing with such 43 auditors the plans for and the results and scope of their auditing engagement and certain other matters, including the independence of such auditors. The current members of the Compensation Committee are Dr. James (Chairperson) and Mr. Colby. The Compensation Committee reviews compensation of directors, executive officers and key employees and administers the 1996 Plan. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During 1995, the Company had no compensation committee or other committee of the Board of Directors performing similar functions. Decisions concerning compensation of executive officers were made during such year by Messrs. Schneider and Chapman and Drs. Rice and Miranda, who constituted the Company's Board of Directors during 1995. During 1995, Drs. Rice and Miranda and Mr. Chapman served as the Company's Chairman of the Board, President and Chief Financial Officer, respectively. None of the individuals who served on the Board of Directors during 1995 served as a member of the board of directors or compensation committee of any entity which has one or more executive officers serving as a member of the Company's Board of Directors or Compensation Committee. In June 1996, upon consummation of the Exchange, Mr. Schneider received 2,811,922 shares of Common Stock in exchange for his interests in the AmHealth Corporations and AmHealth Partnerships, was elected Chairman of the Board and Chief Executive Officer of the Company, and entered into an employment agreement with the Company. In October 1995, Drs. Rice and Miranda each borrowed $100,000 from the Company to pay federal income tax obligations arising from the income of STAT Physicians attributable to them. In April 1995, the Company repaid a $400,000 bank loan of STAT Physicians. Drs. Rice and Miranda control STAT Physicians. See "Certain Transactions." EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE. The following table sets forth the cash compensation, as well as certain other compensation paid or accrued, by the Company and STAT Physicians, as identified, to the Company's Vice Chairman of the Board (the chief executive officer during the years presented) and the other executive officers of the Company who had total annual salary and bonus of more than $100,000 (the "named executive officers") for the fiscal years ended December 31, 1995, 1994 and 1993. In June 1996, Mr. Schneider was elected Chairman and Chief Executive Officer and Mr. R. Perez was elected President -- Healthcare Management, and such persons entered into employment agreements pursuant to which they will each receive an annual salary of $120,000. See "-- Employment Agreements," below. <TABLE> <CAPTION> LONG-TERM COMPENSATION ANNUAL COMPENSATION AWARDS --------------------------------------- ------------ OTHER SECURITIES NAME AND ANNUAL UNDERLYING PRINCIPAL POSITION YEAR SALARY COMPENSATION(1) OPTIONS(#) - ---------------------------------------- --------- ---------- --------------- ------------ <S> <C> <C> <C> <C> William H. Rice, M.D.................... 1995 $ 274,999 $ 26,595 21,658 Vice Chairman of the Board 1994 153,467(2) 154,165 -- 1993 195,845(3) 217,372 Victor M. Miranda, M.D.................. 1995 283,281 65,182 109,342 President -- Emergency Physicians 1994 153,467(2) 265,588 -- 1993 196,851(3) 332,583 Ned E. Chapman.......................... 1995 127,265 -- 45,000 Chief Financial Officer 1994 79,846(2) -- -- 1993 68,115 -- -- </TABLE> - ------------------------------ (1) Represents shift pay for Drs. Miranda and Rice when performing services as attending physicians. (2) Includes compensation from STAT Physicians. (3) Represents compensation from STAT Physicians. 44 OPTION/SAR GRANTS TABLE. The following table sets forth certain information concerning stock options granted to the named executive officers during 1995. No stock appreciation rights were granted during 1995. <TABLE> <CAPTION> POTENTIAL REALIZABLE INDIVIDUAL GRANTS VALUE AT ASSUMED - -------------------------------------------------------------------------------------------------------- ANNUAL RATES OF STOCK NUMBER OF PERCENT OF PRICE APPRECIATION SECURITIES TOTAL OPTIONS FOR UNDERLYING GRANTED TO OPTION TERM(3) OPTIONS EMPLOYEES IN EXERCISE PRICE --------------------- NAME GRANTED(1) FISCAL YEAR PER SHARE(2) EXPIRATION DATE 5% 10% - ---------------------------------------- ----------- ------------- -------------- --------------- --------- ---------- <S> <C> <C> <C> <C> <C> <C> William H. Rice, M.D.................... 21,658 7% $ 3.17 10/16/00 $ 10,814 $ 31,625 Victor M. Miranda, M.D.................. 109,342 36 3.17 10/16/00 54,596 159,663 Ned E. Chapman.......................... 45,000 15 2.88 10/16/00 35,744 78,985 - ------------------------------ </TABLE> (1) Each option will become exercisable in four equal annual installments over the optionee's continued service measured from the date of grant. (2) The exercise price must be paid in cash. (3) Potential realizable value is based on the assumption that the price per share of the Common Stock appreciates at the assumed annual rate of stock appreciation for the option term. There is no assurance that the assumed 5% and 10% annual rates of appreciation (compounded annually) will actually be realized over the term of the option. The assumed 5% and 10% annual rates are set forth in accordance with the rules and regulations adopted by the Securities and Exchange Commission and do not represent the Company's estimate of stock price appreciation. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES. The following table sets forth certain information concerning unexercised options held by the named executive officers at December 31, 1995. No options or stock appreciation rights were exercised during 1995, and no options were exercisable and no stock appreciation rights were outstanding at December 31, 1995. <TABLE> <CAPTION> NUMBER OF SECURITIES UNDERLYING VALUES OF UNEXERCISED UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS NAME AT FISCAL YEAR-END AT FISCAL YEAR-END(1) - ---------------------------------------- --------------------- --------------------- <S> <C> <C> William H. Rice, M.D.................... 21,658 $ 36,927 Victor M. Miranda, M.D.................. 109,342 186,428 Ned E. Chapman.......................... 45,000 89,775 </TABLE> - ------------------------------ (1) The estimated fair value per share of Common Stock used to value unexercised, in-the-money options is $4.88 per share. EMPLOYMENT AGREEMENTS For the calendar year 1996, the Company expects that its executive officers earning the highest compensation will be Drs. Rice and Miranda and Messrs. R. Perez, Schneider and Chapman. The employment agreements between these individuals and the Company provide that they will receive annual salaries as follows: Drs. Rice and Miranda, $200,000 each; Messrs. R. Perez and Schneider, $120,000 each; and Mr. Chapman, $114,320. Additionally, each of these officers is entitled to an incentive compensation award in the form of a bonus, the amount of which is at the discretion of the Compensation Committee of the Board of Directors. In addition, subject to the approval of the Board of Directors, each officer is granted the right to participate in the 1996 Stock Incentive Plan. Each of these employment agreements provides for an initial term of employment of three years ending in June 1999, provided that the Company may terminate any of these agreements for cause at any time. In addition, under the terms of each employment agreement, each officer covenants not to compete with, nor to disclose confidential information of, the Company for a period of two years after the termination of the employment agreement. 45 1996 STOCK INCENTIVE PLAN The 1996 Stock Incentive Plan (the "1996 Plan") serves as the successor equity incentive program to the Company's 1994 Stock Option Plan (the "Predecessor Plan"). 1,500,000 shares of Common Stock have initially been authorized for issuance under the 1996 Plan. This initial share reserve is comprised of (i) the shares which remained available for issuance under the Predecessor Plan, including the shares subject to outstanding options thereunder plus (ii) an additional increase of 1,200,000 shares. In addition, the share reserve will automatically be increased on the first trading day of January each calendar year, beginning in January 1997, by a number of shares equal to 1.5% of the number of shares of Common Stock outstanding on the last trading day of the immediately preceding calendar year. However, in no event may any one participant in the 1996 Plan receive option grants or direct stock issuances for more than 300,000 shares in the aggregate. Outstanding options under the Predecessor Plan were incorporated into the 1996 Plan upon the consummation of the Exchange, and no further option grants will be made under the Predecessor Plan. The incorporated options will continue to be governed by their existing terms, unless the Plan Administrator elects to extend one or more features of the 1996 Plan to those options. However, except as otherwise noted below, the outstanding options under the Predecessor Plan contain substantially the same terms and conditions summarized below for the Discretionary Option Grant Program in effect under the 1996 Plan. The 1996 Plan is divided into four separate components: (i) the Discretionary Option Grant Program under which eligible individuals in the Company's employ or service (including officers, non-employee Board members and consultants) may, at the discretion of the Plan Administrator, be granted options to purchase shares of Common Stock at an exercise price not less than 85% of their fair market value on the grant date; (ii) the Stock Issuance Program under which such individuals may, in the Plan Administrator's discretion, be issued shares of Common Stock directly, through the purchase of such shares at a price not less than 85% of their fair market value at the time of issuance or as a bonus tied to the performance of services; (iii) the Salary Investment Option Grant Program under which executive officers and other highly compensated employees may elect to apply a portion of their base salary to the acquisition of special below-market stock option grants; and (iv) the Automatic Option Grant Program under which option grants will automatically be made at periodic intervals to eligible non-employee Board members to purchase shares of Common Stock at an exercise price equal to 100% of their fair market value on the grant date. The Discretionary Option Grant Program and the Stock Issuance Program will be administered by the Compensation Committee of the Board of Directors. The Compensation Committee as Plan Administrator will have complete discretion to determine which eligible individuals are to receive option grants or stock issuances, the time or times when such option grants or stock issuances are to be made, the number of shares subject to each such grant or issuance, the status of any granted option as either an incentive stock option or a non-statutory stock option under the Federal tax laws, the vesting schedule to be in effect for the option grant or stock issuance and the maximum term for which any granted option is to remain outstanding. The administration of the Salary Investment Option Grant and Automatic Option Grant Programs will be self-executing in accordance with the express provisions of each such program. The exercise price for the shares of Common Stock subject to option grants made under the 1996 Plan may be paid in cash or in shares of Common Stock valued at fair market value on the exercise date. The option may also be exercised through a same-day sale program without any cash outlay by the optionee. In addition, the Plan Administrator may provide financial assistance to one or more optionees in the exercise of their outstanding options by allowing such individuals to deliver a full-recourse, interest-bearing promissory note in payment of the exercise price and any associated withholding taxes incurred in connection with such exercise. In the event that the Company is acquired by merger or asset sale, each outstanding option under the Discretionary Option Grant Program which is not to be assumed by the successor corporation will automatically accelerate in full, and all unvested shares under the Stock Issuance Program will immediately vest, except to the extent the Company's repurchase rights with respect to those shares are to be assigned to 46 the successor corporation. The Plan Administrator will have the authority under the Discretionary Option Grant and Stock Issuance Programs to grant options and to structure repurchase rights so that the shares subject to those options or repurchase rights will automatically vest in the event the individual's service is terminated, whether involuntarily or through a resignation for good reason, within 18 months following (i) a merger or asset sale in which those options are assumed or those repurchase rights are assigned or (ii) a hostile change in control of the Company effected by a successful tender offer for more than 50% of the outstanding voting stock or by proxy contest for the election of Board members. Options currently outstanding under the Predecessor Plan will accelerate upon an acquisition of the Company by merger or asset sale, unless those options are assumed by the acquiring entity, but such options are not subject to acceleration upon the termination of the optionee's service following an acquisition in which those options are assumed or a hostile change in control of the Company. Stock appreciation rights are authorized for issuance under the Discretionary Option Grant Program which provide the holders with the election to surrender their outstanding options for an appreciation distribution from the Company equal to the excess of the fair market value of the vested shares of Common Stock subject to the surrendered option over the aggregate exercise price payable for such shares. Such appreciation distribution may be made in cash or in shares of Common Stock. There are currently no outstanding stock appreciation rights under the Predecessor Plan. The Plan Administrator has the authority to effect the cancellation of outstanding options under the Discretionary Option Grant Program (including options incorporated from the Predecessor Plan) in return for the grant of new options for the same or different number of option shares with an exercise price per share based upon the fair market value of the Common Stock on the new grant date. In the event the Plan Administrator elects to activate the Salary Investment Option Grant Program for one or more calendar years, each executive officer and other highly compensated employee of the Company selected for participation may elect, prior to the start of the calendar year, to reduce his or her base salary for that calendar year by a specified dollar amount not less than $10,000 nor more than $50,000. In return, the officer will automatically be granted, on the first trading day in the calendar year for which the salary reduction is to be in effect, a non-statutory option to purchase that number of shares of Common Stock determined by dividing the salary reduction amount by two-thirds of the fair market value per share of Common Stock on the grant date. The option will be exercisable at a price per share equal to one-third of the fair market value of the option shares on the grant date. As a result, the total spread on the option shares at the time of grant will be equal to the salary reduction amount. The option will vest in a series of 12 equal monthly installments over the calendar year for which the salary reduction is in effect and will be subject to full and immediate vesting upon certain changes in the ownership or control of the Company. Under the Automatic Option Grant Program, each individual who first joins the Board after the consummation of the Exchange as a non-employee Board member will receive an option grant for 20,000 shares of Common Stock at the time of his or her commencement of Board service, provided such individual has not otherwise been in the prior employ of the Company. In addition, at each annual stockholders meeting, beginning with the 1997 annual meeting, each individual who is to continue to serve as a non-employee Board member will receive an option grant to purchase 20,000 shares of Common Stock, whether or not such individual has been in the prior employ of the Company. Each automatic grant will have an exercise price equal to the fair market value per share of Common Stock on the grant date and will have a maximum term of ten years, subject to earlier termination following the optionee's cessation of Board service. Each automatic option will be immediately exercisable; however, any shares purchased upon exercise of the option will be subject to repurchase, at the option exercise price paid per share, should the optionee's service as a non-employee Board member cease prior to vesting in the shares. The 20,000-share grant will vest in four equal and successive annual installments over the optionee's period of Board service. Each additional 20,000-share grant will vest upon the optionee's completion of one year of Board service measured from the grant date. However, each outstanding option will immediately 47 vest upon (i) certain changes in the ownership or control of the Company or (ii) the death or disability of the optionee while serving as a Board of Directors member. The Board of Directors may amend or modify the 1996 Plan at any time. The 1996 Plan will terminate on June 24, 2006, unless sooner terminated by the Board of Directors. 401(K) SAVINGS PLAN The Company has established a tax-qualified, deferred compensation plan (the "401(k) Savings Plan") covering all of the Company's eligible full-time employees. Under the plan, participants may elect to contribute, through salary reductions, up to 15% of their annual compensation. The Company may provide additional matching contributions to the plan in a percentage set by the Company prior to the end of each plan year, which the Company currently expects will not exceed 3% of pre-tax compensation. The 401(k) Savings Plan is designed to qualify under Section 401 of the Internal Revenue Code of 1986, as amended, so that contributions by employees or by the Company to the plan, and income earned on plan contributions, are not taxable to employees until withdrawn from the 401(k) Savings Plan, and so that contributions by the Company, if any, will be deductible by the Company when made. Investment decisions are made by the Plan trustee or at the direction of the Plan participants in several investment options. 48 CERTAIN TRANSACTIONS In June 1996, upon consummation of the Exchange, Messrs. R. Perez, Schneider and D. Perez were issued 3,868,915, 2,811,922 and 1,509,231 shares of Common Stock, respectively, in exchange for their interests in the AmHealth Corporations and AmHealth Partnerships. The AmHealth shareholders and partners collectively were issued 11,200,000 shares of Common Stock representing approximately 75% of the Common Stock outstanding immediately after the Exchange. In connection with the Exchange, Mr. Schneider was elected Chairman of the Board of Directors and Chief Executive Officer of the Company, Mr. R. Perez was elected President -- Healthcare Management, Treasurer and a director of the Company, and Mr. D. Perez was elected Senior Vice President of the Company. Messrs. Schneider, R. Perez and D. Perez also entered into employment agreements with the Company. See "Recent Developments -- Exchange with AmHealth Corporation and Related Entities," "Management -- Employment Agreements" and "Principal and Selling Stockholders." Effective as of September 1, 1994, the Company entered into a Management Agreement with STAT Physicians whereby the Company has agreed to manage the business and affairs of STAT Physicians. Effective as of February 1, 1996, the Company entered into a Management Agreement with STAT Physicians, P.A., an affiliated physician group ("STAT P.A."), whereby the Company has agreed to manage the business and affairs of STAT P.A. STAT Physicians and STAT P.A. are controlled by Drs. Rice and Miranda. In addition, Drs. Rice and Miranda have entered into an agreement with the Company restricting any transfer of their interests in STAT Physicians. In April 1995, the Company obtained a $600,000 bank line of credit and borrowed the entire amount available under such line. The proceeds of such line were used, in part, to repay the $400,000 principal amount outstanding under a STAT Physicians line of credit, which amount had been used to finance the operations of the Company. In October 1995, in order to meet federal income tax obligations arising from the income of STAT Physicians attributable to them, Drs. Rice and Miranda each borrowed $100,000 from the Company pursuant to loan agreements bearing interest of 6% per annum and maturing in October 1996. Four facilities leased by the Company for use in its kidney dialysis business are owned in varying percentages by William Restrepo, M.D. and M.K. Razdan, M.D., principal stockholders of the Company, and Mr. R. Perez, a director, executive officer and principal stockholder of the Company. Payments under such leases, which commenced in 1994, totaled $87,000 and $147,000 in 1994 and 1995, respectively, and are estimated to total approximately $238,000 per year in 1996 through 2005. The Company believes that the lease rates for such facilities are comparable to those available from unrelated third-party lessors. All future transactions, including loans between the Company and its officers, directors and principal stockholders and their affiliates, will be approved by a majority of the Board of Directors, including a majority of the independent and disinterested outside directors on the Board of Directors, and will be on terms no less favorable to the Company than could be obtained from unaffiliated third parties. 49 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information known to the Company regarding beneficial ownership of Common Stock as of August 23, 1996, and as adjusted to reflect the sale of shares offered hereby, by (i) each person who owns beneficially more than five percent of the Common Stock, (ii) each of the Company's directors and named officers, (iii) all current executive officers and directors as a group, and (iv) each of the Selling Stockholders. <TABLE> <CAPTION> SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED BEFORE OFFERING(1) NUMBER OWNED AFTER OFFERING(1) ------------------------- OF SHARES ------------------------- BENEFICIAL OWNER NUMBER PERCENTAGE OFFERED NUMBER PERCENTAGE - ------------------------------------- --------- ---------- --------- --------- ---------- <S> <C> <C> <C> <C> <C> Ruben A. Perez(2).................... 3,868,915 25.8% -- 3,868,915 21.5% Russell D. Schneider(3).............. 2,826,922(4) 18.9 -- 2,826,922(4) 15.7 Daniel A. Perez(5)................... 1,509,231 10.1 -- 1,509,231 8.4 William Restrepo, M.D.(6)............ 1,043,018 7.0 108,840 934,178 5.2 M.K. Razdan, M.D.(7)................. 1,026,038 6.9 107,070 918,968 5.1 William H. Rice, M.D.(3)............. 783,756(8) 5.2 -- 783,756(8) 4.4 Victor M. Miranda, M.D.(3)........... 805,677(9) 5.4 84,090 721,587(9) 4.0 Ned E. Chapman(3).................... 90,136(10) * -- 90,136(10) * David C. Colby....................... 20,000(11) * -- 20,000(11) * Ann N. James, Ph.D................... 20,000(11) * -- 20,000(11) * All officers and directors as a group (Eight persons).................... 9,924,637(12) 65.9% 84,090 9,840,547(12) 54.5% </TABLE> - ------------------------------ * Indicates less than 1%. (1) Beneficial ownership is calculated in accordance with the rules of the Securities and Exchange Commission. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of Common Stock subject to options held by that person that are currently exercisable or become exercisable within 60 days following September 30, 1996, which is the assumed effective date of the offering, are deemed outstanding. However, such shares are not deemed outstanding for the purpose of computing the percentage ownership of any other person. Unless otherwise indicated in the footnotes to this table, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. (2) The address for Mr. R. Perez is 8200 I.H. 10 West, Suite 209, San Antonio, Texas 78230. (3) The address for Mr. Schneider, Dr. Rice, Dr. Miranda and Mr. Chapman is 12450 Greenspoint Drive, Suite 1200 Houston, Texas 77060. (4) Includes 10,000 shares purchasable upon the exercise of options. (5) The address for Mr. D. Perez is 1300 North 10th, Suite 220, McAllen, Texas 78501. (6) The address for Dr. Restrepo is 1801 South 5th Street, Suite 209, McAllen, Texas 78503. (7) The address for Dr. Razdan is 222 East Ridge Road, Suite 116 , McAllen, Texas 78503. (8) Includes 5,414 shares purchasable upon the exercise of options and 778,342 shares owned of record by STAT Physicians. Drs. Rice and Miranda each own 50% of the outstanding equity interest in STAT Physicians and share the power to vote and dispose of the shares owned by STAT Physicians. Excludes 778,342 shares attributable to Dr. Rice's equity interest in STAT Physicians, of which Dr. Miranda disclaims beneficial ownership. (9) Includes 27,335 shares purchasable upon the exercise of options and 778,342 shares owned of record by STAT Physicians. Drs. Rice and Miranda each own 50% of the outstanding equity interest in STAT Physicians and share the power to vote and dispose of the shares owned by STAT Physicians. Excludes 778,342 shares attributable to Dr. Miranda's equity interest in STAT Physicians, of which Dr. Rice disclaims beneficial ownership. (10) Includes 11,250 shares purchasable upon the exercise of options. (11) Represents shares purchasable upon the exercise of options. The shares underlying such options are subject to repurchase by the Company. (12) Includes 93,999 shares purchasable upon the exercise of options. The Company will bear all expenses of the offering other than underwriting discounts and commissions relating to shares sold by the Selling Stockholders, which will be borne by the Selling Stockholders. 50 DESCRIPTION OF CAPITAL STOCK The total authorized capital stock of the Company consists of 40,000,000 shares of Common Stock, $0.01 par value per share, and 5,000,000 shares of preferred stock, $0.01 par value per share (the "Preferred Stock"). The following descriptions of the capital stock are qualified in all respects by the Charter and Bylaws, copies of which are available without charge to any person to whom this Prospectus is delivered upon written or oral request to STAT Healthcare, Inc., Attention: Corporate Secretary, 12450 Greenspoint Drive, Suite 1200, Houston, Texas 77060. As of the date of this Prospectus, 14,974,412 shares of Common Stock and no shares of Preferred Stock were issued and outstanding. COMMON STOCK The holders of shares of Common Stock are entitled to one vote per share on all matters to be voted on by stockholders and do not have cumulative voting rights. Subject to preferences that may be applicable to any Preferred Stock that may by issued in the future, the holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available for that purpose. Upon liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably in all assets available for distribution after payment of liabilities, subject to prior distribution rights of holders of shares of Preferred Stock, if any, then outstanding. The Common Stock has no preemptive or conversion rights or other subscriptive rights. There are no redemption or sinking fund provisions applicable to the Common Stock. The shares of Common Stock outstanding are and the shares of Common Stock to be issued by the Company in the offering will be, when issued, fully paid and nonassessable. PREFERRED STOCK The Board of Directors has the authority to issue the Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series or the designation of such series, without further vote or action by the Company's stockholders. The issuance of Preferred Stock may have the effect of delaying, deferring or preventing a change in control of the Company without further action by the stockholders and may adversely affect the voting and other rights of the holders of Common Stock. CLASS A WARRANTS At August 23, 1996, the Company had outstanding 599,726 Class A redeemable common stock purchase warrants (the "Class A Warrants"). Each Class A Warrant entitles its holder to purchase one share of Common Stock at an exercise price of $4.50 per share until April 19, 1998. The Class A Warrants were issued pursuant to a warrant agreement (the "Warrant Agreement"), and are evidenced by warrant certificates in registered form. The exercise price of the Class A Warrants and the number and kind of shares of Common Stock or other securities and property issuable upon exercise of such warrants are subject to adjustment in certain circumstances, including a stock split of, stock dividend on or a subdivision, combination or capitalization of the Common Stock. Additionally, an adjustment will be made upon the sale of all or substantially all of the assets of the Company in order to enable holders of Class A Warrants to purchase the kind and number of shares or other securities or property (including cash) receivable in such event by a holder of the number of shares of Common Stock that might otherwise have been purchased upon exercise of the Class A Warrants. The Class A Warrants do not confer upon the holder any voting or any other rights of a stockholder of the Company. Upon notice to the holders of Class A Warrants, the Company has the right to reduce the exercise price or extend the expiration date of the Class A Warrants. 51 The Class A Warrants may be exercised upon surrender of the warrant certificate evidencing those warrants on or prior to the expiration date (or earlier redemption date) of such warrants at the offices of American Stock Transfer & Trust Company, the warrant agent, with the form of Election to Purchase on the reverse side of the warrant certificate completed and executed as indicated, accompanied by payment of the full exercise price (by certified check payable to the order of the warrant agent) for the number of Class A Warrants being exercised. No Class A Warrant will be exercisable unless at the time of exercise the Company has filed with the Securities and Exchange Commission a current prospectus covering the issuance of shares of Common Stock issuable upon exercise of such warrant and the issuance of shares has been registered or qualified or is deemed to be exempt from registration or qualification under the securities laws of the state of residence of the holder of the warrant. The Company will use its best efforts to maintain a current prospectus relating to the issuance of shares of Common Stock upon the exercise of the Class A Warrants until the expiration of the warrants, subject to the terms of the Warrant Agreement. While it is the Company's intention to maintain a current prospectus, there is no assurance that it will be able to do so. No fractional shares will be issued upon exercise of the Class A Warrants. However, if a holder of a warrant exercises all Class A Warrants then owned of record, the Company will pay to that holder, in lieu of the issuance of a fractional share which would be otherwise issuable, an amount in cash equal to such fractional interest based on the market value of the Common Stock on the last trading day prior to the exercise date. The Class A Warrants are redeemable by the Company at a price of $.05 per warrant, and prior to their expiration, on 30 days' prior written notice to the registered holders of the warrants, provided the closing high bid or sale price per share of the Common Stock (if the Common Stock is then traded on Nasdaq or a national securities exchange, respectively) for a period of 20 consecutive trading days, ending on the third business day prior to the date of any redemption notice, equals or exceeds at least $5.50 (subject to adjustment in certain events). The Class A Warrants shall be exercisable until the close of the business day preceding the date fixed for redemption. In addition, subject to the rules of the National Association of Securities Dealers, Inc., the Company has agreed to engage certain persons as its exclusive warrant solicitation agents, in connection with which such persons would be entitled to a 4% fee upon exercise of the Class A Warrants. STAT has agreed not to redeem the Class A Warrants for a period of 180 days after the date of this Prospectus without the prior written consent of Pacific Growth Equities, Inc. OTHER WARRANTS The Company has outstanding an additional 62,500 warrants, each of which entitles the holders thereof to purchase two shares of Common Stock and one Class A Warrant for an aggregate price of $10.875, subject to anti-dilution provisions, until April 2000. The terms of such warrants grant to the holders thereof certain piggyback registration rights until April 2002 and demand registration rights until April 2000 with respect to the registration under the Securities Act of the securities directly and indirectly issuable upon exercise of such warrants. CERTAIN ANTI-TAKEOVER, LIMITED LIABILITY AND INDEMNIFICATION PROVISIONS Certain provisions of the Charter and Bylaws may have the effect of deterring or preventing hostile takeovers including those that might result in a premium over the then-current trading price or delaying or preventing changes in control or management of the Company. The Board of Directors believes that these provisions are in the best interests of stockholders because they will encourage a potential acquiror to negotiate with the Board of Directors which then will be able to consider the interest of all stockholders in a change of control situation. AUTHORIZED BUT UNISSUED CAPITAL STOCK. The authorization of undesignated Preferred Stock permits the Board of Directors to issue Preferred Stock with voting or other rights or preferences that could impede the success of any attempt to effect a change of control of the Company. There will also be a substantial number of authorized but unissued shares of Common Stock that could be issued for such purpose. 52 CLASSIFIED BOARD OF DIRECTORS. The Charter and Bylaws provide for a classified Board of Directors pursuant to which the Companys directors are divided into three classes as nearly as equal in size as practicable. Each class of directors will be elected once every three years. Therefore, a stockholder that has acquired enough stock to ensure control of the election process can only elect approximately one-third of the directors in each year and must wait at least two elections before electing a majority of directors. LIMITATION ON ACTIONS BY WRITTEN CONSENT. The Bylaws require that any action required or permitted to be taken by stockholders of the Company must be effected at a duly called annual or special meeting of stockholders and may not be effected by written consent. The Bylaws also permit stockholders to call a special meeting of stockholders only if approved by the holders of at least a majority of the outstanding Common Stock. DELAWARE TAKEOVER STATUTE. The Company is subject to the provisions of Section 203 of the Delaware General Corporation Law. This statute generally prohibits, under certain circumstances, a Delaware corporation whose stock is publicly traded, from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder unless: (i) the corporation has elected in its certificate of incorporation or bylaws not to be governed by Section 203 (the Company has not made such an election); (ii) prior to the time the stockholder became an interested stockholder, the board of directors approved either the business combination or the transaction which resulted in the person becoming an interested stockholder; (iii) the stockholder owned at least 85% of the outstanding voting stock of the corporation (excluding shares held by directors who were also officers or held in certain employee stock plans) upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder; or (iv) the business combination was approved by the board of directors and by two-thirds of the outstanding voting stock of the corporation (excluding shares held by the interested stockholders). An "interested stockholder" is a person who, together with affiliates and associates, owns (or any time within the prior three years owned) 15% or more of the corporations outstanding voting stock. The term "business combination" is defined generally to include mergers, consolidations, stock sales, asset based transactions, and other transactions resulting in a financial benefit to the interested stockholder. INDEMNIFICATION OF OFFICERS AND DIRECTORS. The Charter and Bylaws provide for indemnification of each director and officer or former director or officer of another corporation in which the Company owns shares of capital stock or is a creditor. Prior to the consummation of the offering, the Company will enter into indemnification agreements with each of its directors and executive officers that provide for indemnification and expense advancement to the fullest extent permitted under the Delaware General Corporation Law. As of the date of this Prospectus, the Company is not aware of any existing or pending litigation involving a former or current director or officer that will require the indemnification of the Company. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Common Stock and the Class A Warrants is American Stock Transfer & Trust Company, 40 Wall Street, New York, New York 10005. SHARES ELIGIBLE FOR FUTURE SALE No prediction can be made as to the effect, if any, that future sales of Common Stock, or the availability of Common Stock for future sale, will have on the market price of the Common Stock prevailing from time to time. Future sales of substantial amounts of Common Stock in the public market could adversely affect the prevailing market prices and impair the Company's ability to raise capital through the sale of equity securities. The following discussion is based upon shares outstanding as of August 23, 1996. Upon completion of the offering, the Company will have outstanding 17,974,412 shares of Common Stock (18,469,412 shares if the Underwriters' over-allotment option is exercised in full), assuming no exercise of outstanding options and warrants after August 23, 1996. Of these shares, (i) 5,359,958 shares, including the 3,300,000 shares offered hereby (or 5,854,958 shares if the Underwriters' over-allotment option is exercised 53 in full), will be freely tradeable without restriction or further registration under the Securities Act, unless purchased by "affiliates" of the Company as that term is defined in Rule 144 described below, (ii) 2,866,416 shares of Common Stock will be freely tradeable without restriction or further registration under the Securities Act following the termination of the lock-up arrangements described below, (iii) 9,251,515 shares of Common Stock will be held by "affiliates" and will become available for sale pursuant to the volume and manner of sale provisions of Rule 144 following the termination of the lock-up arrangements and (iv) 496,523 shares of Common Stock are restricted securities and will become available for sale beginning on June 24, 1998 pursuant to the volume and manner of sale provisions of Rule 144. An additional 837,226 shares of Common Stock are issuable upon the exercise of currently exercisable options and warrants. Substantially all shares issued following the exercise of such options and warrants will be freely tradeable without restriction or further registration under the Securities Act unless purchased by "affiliates" of the Company or subject to the lock-up arrangements. In connection with the Exchange, the Company's officers, directors and certain of its stockholders holding in the aggregate 12,921,454 shares of Common Stock entered into lock-up agreements providing that such persons will not sell, assign, pledge, hypothecate or otherwise dispose of, directly or indirectly, such shares of Common Stock, or any shares acquired upon the exercise of any options or warrants until June 24, 1997, without the prior written consent of the Company. The Company has agreed to release such lock-up agreements as they relate to the shares offered by the Selling Stockholders in this offering. In connection with this offering, the Company and certain of its stockholders holding in the aggregate approximately shares of Common Stock have agreed that they will not offer, sell, or otherwise dispose of any Common Stock for a period of 180 days after effectiveness of the Registration Statement of which this Prospectus is a part without the prior written consent of Pacific Growth Equities, Inc. (other than, in the case of the Company, the issuance of securities in connection with acquisitions, pursuant to employee benefit plans existing on the date hereof and to the Underwriters in this offering and, in the case of the Selling Stockholders, to the Underwriters in this offering). In addition, STAT has agreed not to redeem the Class A Warrants for a period of 180 days after the date of this Prospectus without the prior written consent of Pacific Growth Equities, Inc. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned shares for at least two years (including the holding period of any prior owner except an affiliate from whom such shares were purchased) is entitled to sell in "broker's transactions" or to market makers, within any three-month period, a number of shares that does not exceed the greater of (i) one percent of the number of shares of Common Stock then outstanding (approximately 179,000 shares immediately after the offering, or approximately 184,000 shares if the Underwriters' over-allotment option is exercised in full), or (ii) the average weekly trading volume in the Common Stock during the four calendar weeks preceding the required filing of a Form 144 with respect to such sale. Sales under Rule 144 are generally subject to the availability of current public information about the Company. Under Rule 144(k), a person who is not deemed to have been an affiliate of the Company at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least three years (including the holding period of any prior owner other than an affiliate from whom such shares were purchased), is entitled to sell such shares without having to comply with the manner of sale, public information, volume limitation or notice provisions of Rule 144. The Commission has proposed to reduce the two- and three-year holding periods of Rule 144 to one and two years, respectively. However, no assurances can be given that such proposal will be adopted or that such proposal will be adopted in the form proposed. The Company intends to file with the Commission a Registration Statement on Form S-8 covering an aggregate of 1,500,000 shares of Common Stock that have been reserved for issuance under the 1996 Plan, thus permitting the resale of such shares in the public market without restriction under the Securities Act, other than shares purchased by "affiliates." 54 UNDERWRITING The Underwriters named below (the "Underwriters"), for whom Pacific Growth Equities, Inc. is acting as representative (the "Representative"), have severally agreed, subject to the terms and conditions set forth in the Underwriting Agreement, to purchase from the Company and the Selling Stockholders the number of shares of Common Stock indicated below opposite its name at the public offering price less underwriting discounts and commissions set forth on the cover page of this Prospectus. The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters are committed to purchase all of the shares if they purchase any. NUMBER OF NAME SHARES - ---------------------------------------- --------- Pacific Growth Equities, Inc............ --------- Total......................... 3,300,000 ========= The Representative has advised the Company and the Selling Stockholders that the Underwriters propose to offer the shares of Common Stock to the public on the terms set forth on the cover page of this Prospectus. The Underwriters may allow to selected dealers a concession of not more than $ per share, and the Underwriters may allow, and such dealers may re-allow, a concession not in excess of $ per share to certain other dealers. The offering price and other selling terms may be changed by the Representative. The Common Stock is offered by the Underwriters when, as and if delivered to and accepted by them and subject to various prior conditions, including its right to reject orders in whole or in part. The Representative has advised the Company that it intends to make a market in the Common Stock after the effective date of this offering. The Company has granted an option to the Underwriters, exercisable during the 30-day period after the date of this Prospectus, to purchase up to a maximum of 495,000 additional shares of Common Stock to cover over-allotments, if any, at the same price per share as the initial shares to be purchased by the Underwriters. To the extent that the Underwriters exercise such option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage thereof that the number of shares of Common Stock to be purchase by it shown in the above table bears to the total shares of Common Stock listed in such table, and the Company will be obligated, pursuant to such option, to sell such shares to the Underwriters. The Underwriters may purchase such shares to cover over-allotments made in connection with this offering. The Underwriting Agreement provides that the Company and the Selling Stockholders will indemnify the Underwriters against certain liabilities, including civil liabilities under the Securities Act, or will contribute to payments the Underwriters may be required to make in respect thereof. The Company and certain of its stockholders holding in the aggregate shares of Common Stock have agreed that they will not offer, sell, or otherwise dispose of any Common Stock for a period of 180 days after effectiveness of the Registration Statement of which this Prospectus is a part without the prior written consent of the Representative (other than, in the case of the Company, the issuance of securities in connection with acquisitions, pursuant to employee benefit plans existing on the date hereof and to the Underwriters in this offering and, in the case of the Selling Stockholders, to the Underwriters in this offering). In addition, STAT has agreed not to redeem the Class A Warrants for a period of 180 days after the date of this Prospectus without the prior written consent of Pacific Growth Equities, Inc. See "Shares Eligible for Future Sale." The Common Stock is quoted and trades on the Nasdaq National Market under the symbol "STHC." 55 LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Brobeck, Phleger & Harrison LLP, Austin, Texas. A member of such firm currently owns or has the right to acquire approximately 25,000 shares of Common Stock. Certain legal matters in connection with the offering will be passed upon for the Underwriters by Alston & Bird, Atlanta, Georgia. EXPERTS The consolidated financial statements and schedule of STAT Healthcare, Inc. and subsidiaries as of December 31, 1994 and 1995 and for the years then ended have been included herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and in reliance upon the report of Long, Chilton, Payte & Hardin, LLP, independent certified public accountants, with respect to the combined financial statements of AmHealth Corporation and its related health care entities as of December 31, 1994 and for the year then ended, and upon the authority of said firms as experts in accounting and auditing. The consolidated financial statements and schedule of STAT Healthcare, Inc. and subsidiaries as of December 31, 1993 and for the year then ended have been included herein and in the Registration Statement in reliance upon the report of Long, Chilton, Payte & Hardin, LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The financial statements of South Texas Acute Trauma Physicians, P.A. as of December 31, 1993 and August 31, 1994 and for the year ended December 31, 1993 and the eight months ended August 31, 1994 have been included herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Commission. These materials can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of these materials can also be obtained from the Commission at prescribed rates by writing to the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. Such filings may also be obtained from the Commission through the Internet at http://www.sec.gov. The Company has filed a Registration Statement on Form S-1 (Reg. No. 333- ) (the "Registration Statement") with the Commission under the Securities Act with respect to the securities covered by this Prospectus. This Prospectus does not contain all of the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. The Registration Statement and any amendments thereto, including exhibits filed as a part thereof, are available for inspection and copying as set forth above. Statements contained in this Prospectus as to the contents of any contract or other document referred to herein are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. For further information with respect to the Company and the securities offered hereby, reference is made to the Registration Statement, including the exhibits filed as a part thereof. 56 INDEX TO FINANCIAL STATEMENTS Page ----------- STAT HEALTHCARE, INC. AND SUBSIDIARIES Independent Auditors' Report.... F-2 Independent Auditors' Report.... F-3 Independent Auditors' Report.... F-4 Consolidated Balance Sheets at December 31, 1993, 1994 and 1995........................... F-5 Consolidated Statements of Income for the years ended December 31, 1993, 1994 and 1995...................... F-6 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1993, 1994 and 1995........ F-7 Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995........................... F-8 Notes to Consolidated Financial Statements..................... F-9 STAT HEALTHCARE, INC. AND SUBSIDIARIES (UNAUDITED) Consolidated Balance Sheet at June 30, 1996 (unaudited)...... F-23 Consolidated Statements of Income for the six months ended June 30, 1995 and 1996 (unaudited).............. F-24 Consolidated Statement of Changes in Stockholders' Equity for the six months ended June 30, 1996 (unaudited)........... F-25 Consolidated Statement of Cash Flows for the six months ended June 30, 1996 (unaudited)...... F-26 Notes to Unaudited Consolidated Financial Statements........... F-27 SOUTH TEXAS ACUTE TRAUMA PHYSICIANS, P.A. Independent Auditors' Report.... F-28 Balance Sheets at December 31, 1993 and August 31, 1994....... F-29 Statements of Income for the year ended December 31, 1993 and the eight months ended August 31, 1994................ F-30 Statements of Changes in Shareholders' Equity for the year ended December 31, 1993 and the eight months ended August 31, 1994................ F-31 Statements of Cash Flows for the year ended December 31, 1993 and the eight months ended August 31, 1994................ F-32 Notes to Financial Statements... F-33 F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors STAT Healthcare, Inc.: We have audited the accompanying consolidated balance sheets of STAT Healthcare, Inc. and subsidiaries (the Company) as of December 31, 1995 and 1994, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the 1994 financial statements of AmHealth Corporation and its related health care entities, a wholly-owned subsidiary, which statements reflect total assets constituting 57% and total net service revenues constituting 52% of the related consolidated totals in 1994. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for AmHealth Corporation and its related health care entities, is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors for 1994 provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors for 1994, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of STAT Healthcare, Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles applicable. KPMG PEAT MARWICK LLP Houston, Texas August 9, 1996 F-2 INDEPENDENT AUDITORS' REPORT The Boards of Directors/Partners AmHealth Corporation and its Related Health Care Entities: We have audited the combined balance sheets of AmHealth Corporation and its related health care entities (collectively referred to as the Company) as of December 31, 1994, and the related combined statements of income, changes in shareholders' equity and partners' capital, and cash flows for the year then ended. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of AmHealth Corporation and its related health care entities as of December 31, 1994, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. LONG, CHILTON, PAYTE & HARDIN, LLP McAllen, Texas February 22, 1995 F-3 INDEPENDENT AUDITORS' REPORT The Board of Directors STAT Healthcare, Inc.: We have audited the accompanying consolidated balance sheet of STAT Healthcare, Inc. and subsidiaries (the Company) as of December 31, 1993, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of STAT Healthcare, Inc. and subsidiaries as of December 31, 1993, and the results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles. LONG, CHILTON, PAYTE & HARDIN, LLP McAllen, Texas August 9, 1996 F-4 STAT HEALTHCARE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1993, 1994 AND 1995 ------------------------------ 1993 1994 1995 ------------ ------------ -------------- ASSETS Cash and cash equivalents............ $ 114,000 $ 470,000 $ 2,538,000 Accounts receivable, net (notes 5 and 8)................................... 339,000 2,382,000 4,565,000 Notes receivable (note 6)............ 8,000 8,000 266,000 Inventories (note 8)................. 32,000 63,000 103,000 Prepaid and other current assets..... 71,000 143,000 709,000 ------------ ------------ -------------- Total current assets....... 564,000 3,066,000 8,181,000 Property and equipment, net (notes 7 and 8)............................... 526,000 1,446,000 2,261,000 Other non-current assets............. 53,000 312,000 133,000 ------------ ------------ -------------- Total assets............... $ 1,143,000 $ 4,824,000 $ 10,575,000 ============ ============ ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current portion of long-term debt (note 8)............................. $ 122,000 $ 470,000 $ 88,000 Current portion of capital lease obligations (note 9)................. 80,000 37,000 48,000 Accrued physicians' fees............. -- 724,000 706,000 Accounts payable..................... 116,000 352,000 925,000 Accrued liabilities.................. 49,000 268,000 513,000 Distributions payable................ -- -- 283,000 ------------ ------------ -------------- Total current liabilities................ 367,000 1,851,000 2,563,000 Long-term debt (note 8).............. 87,000 95,000 156,000 Long-term capital lease obligations (note 9)............................. 243,000 1,099,000 1,484,000 ------------ ------------ -------------- Total liabilities.......... 697,000 3,045,000 4,203,000 ------------ ------------ -------------- Stockholders' equity (notes 8, 11 and 12): Preferred stock, $.01 par value. Authorized 5,000,000 shares; Series A convertible, issued and outstanding 74,000 shares at December 31, 1994.......... -- 370,000 -- Common stock, $.01 par value. Authorized 40,000,000 shares; issued and outstanding 4,165,166, 6,183,552 and 14,823,332 shares, respectively................. 42,000 62,000 148,000 Capital in excess of par value.......................... 269,000 589,000 4,204,000 Retained earnings.............. 135,000 758,000 2,020,000 ------------ ------------ -------------- Total stockholders' equity.................... 446,000 1,779,000 6,372,000 ------------ ------------ -------------- Commitments and contingencies (notes 9, 13 and 15) Total liabilities and stockholders' equity...... $ 1,143,000 $ 4,824,000 $ 10,575,000 ============ ============ ============== See accompanying notes to consolidated financial statements. F-5 STAT HEALTHCARE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 ------------------------------ 1993 1994 1995 ------------ ------------ ------------- Net service revenues (note 4)........ $ 1,170,000 $ 7,645,000 $ 23,141,000 ------------ ------------ ------------- Operating expenses: Professional medical fees....... -- 2,601,000 9,241,000 Human resources................. 394,000 1,424,000 4,640,000 Supplies........................ 336,000 1,127,000 1,818,000 Billing and collection costs.... -- 322,000 1,461,000 Outside services and other...... 226,000 624,000 970,000 Liability insurance............. -- 167,000 706,000 Furniture and equipment......... 59,000 204,000 400,000 Occupancy....................... -- 17,000 139,000 ------------ ------------ ------------- Total operating expenses... 1,015,000 6,486,000 19,375,000 ------------ ------------ ------------- Operating income........... 155,000 1,159,000 3,766,000 Interest income...................... -- -- 75,000 Interest expense..................... (21,000) (143,000) (225,000) Other income......................... 1,000 153,000 29,000 ------------ ------------ ------------- Income before income taxes................... 135,000 1,169,000 3,645,000 Income taxes (note 10)............... -- 65,000 347,000 ------------ ------------ ------------- Net income................. 135,000 1,104,000 3,298,000 Proforma income taxes (note 2)....... 46,000 332,000 892,000 ------------ ------------ ------------- Proforma net income........ $ 89,000 $ 772,000 $ 2,406,000 ============ ============ ============= Proforma net income per common share (note 2)................ $ 0.02 $ 0.11 $ 0.20 ============ ============ ============= Number of shares used in computing proforma net income per common share.............................. 5,257,954 7,079,131 11,897,371 ============ ============ ============= See accompanying notes to consolidated financial statements. F-6 STAT HEALTHCARE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 ------------------------------ <TABLE> <CAPTION> PREFERRED STOCK COMMON STOCK CAPITAL IN TOTAL -------------------- --------------------- EXCESS OF RETAINED STOCKHOLDERS' SHARES AMOUNT SHARES AMOUNT PAR VALUE EARNINGS EQUITY ------- --------- --------- -------- ----------- ---------- ------------- <S> <C> <C> <C> <C> <C> <C> <C> Balances at January 1, 1993.......... -- $ -- 339,604 $ 4,000 $ 18,000 $ -- $ 22,000 Capital contributions................ -- -- 3,825,562 38,000 251,000 -- 289,000 Net income........................... -- -- -- -- -- 135,000 135,000 ------- --------- --------- -------- ----------- ---------- ------------- Balances at December 31, 1993........ -- -- 4,165,166 42,000 269,000 135,000 446,000 Sale of common stock at par.......... -- -- 450,000 5,000 -- -- 5,000 Sale of Series A, Convertible Preferred stock.................... 74,000 370,000 -- -- -- -- 370,000 Sale of common stock at $.10 per share.............................. -- -- 100,000 1,000 9,000 -- 10,000 Sale of common stock at $1.00 per share, net of issuance cost........ -- -- 250,000 2,000 233,000 -- 235,000 Capital contributions................ -- -- 1,218,386 12,000 78,000 -- 90,000 Distributions to shareholders........ -- -- -- -- -- (481,000) (481,000) Net income........................... -- -- -- -- -- 1,104,000 1,104,000 ------- --------- --------- -------- ----------- ---------- ------------- Balances at December 31, 1994........ 74,000 370,000 6,183,552 62,000 589,000 758,000 1,779,000 Initial public offering of common stock, net of issuance cost........ -- -- 1,250,000 12,000 3,243,000 -- 3,255,000 Conversion of 10% secured notes to common stock....................... -- -- 93,332 1,000 17,000 -- 18,000 Conversion of Series A, Convertible Preferred stock to common stock.... (74,000) (370,000) 1,480,000 15,000 355,000 -- -- Capital contributions................ -- -- 5,816,448 58,000 -- (31,000) 27,000 Distributions to shareholders........ -- -- -- -- -- (2,005,000) (2,005,000) Net income........................... -- -- -- -- -- 3,298,000 3,298,000 ------- --------- ---------- -------- ----------- ---------- ------------- Balances at December 31, 1995........ -- $ -- 14,823,332 $148,000 $4,204,000 $2,020,000 $ 6,372,000 ======= ========= ========== ======== =========== ========== ============= </TABLE> See accompanying notes to consolidated financial statements. F-7 STAT HEALTHCARE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 ------------------------------ <TABLE> <CAPTION> 1993 1994 1995 ------------ -------------- -------------- <S> <C> <C> <C> Cash flows from operating activities: Net income............................ $ 135,000 $ 1,104,000 $ 3,298,000 ------------ -------------- -------------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization.... 59,000 196,000 360,000 Changes in assets and liabilities: (Increase) in net accounts receivable................. (337,000) (2,043,000) (2,183,000) (Increase) in inventories..... (32,000) (31,000) (40,000) (Increase) in prepaid and other current assets....... (71,000) (72,000) (566,000) (Increase) in organization and start-up costs............. (59,000) (43,000) (68,000) (Increase) in other non-current assets......... -- -- (9,000) Increase (decrease) in accrued physicians' fees........... -- 724,000 (18,000) Increase in accounts payable.................... 116,000 236,000 573,000 Increase in accrued liabilities................ 49,000 219,000 245,000 Increase in distributions payable.................... -- -- 283,000 ------------ -------------- -------------- Total adjustments............. (275,000) (814,000) (1,423,000) ------------ -------------- -------------- Net cash provided by (used in) operating activities............... (140,000) 290,000 1,875,000 ------------ -------------- -------------- Cash flows from investing activities: Increase in notes receivable.......... (8,000) -- (258,000) Purchase of property and equipment.... (219,000) (186,000) (548,000) ------------ -------------- -------------- Net cash used in investing activities............... (227,000) (186,000) (806,000) ------------ -------------- -------------- Cash flows from financing activities: Capital contributions................. 289,000 90,000 27,000 Proceeds from sale of common stock.... -- 250,000 3,255,000 Proceeds from sale of preferred stock.............................. -- 370,000 -- Proceeds from issuance of convertible secured notes...................... -- 350,000 -- Distributions to shareholders......... -- (481,000) (2,005,000) Issuance of long-term debt............ 220,000 360,000 278,000 Repayment of long-term debt........... (11,000) (354,000) (249,000) Repayment of convertible secured notes.............................. -- -- (332,000) Repayments of capital lease obligations........................ (34,000) (99,000) (209,000) Decrease (increase) in deferred offering costs..................... -- (234,000) 234,000 ------------ -------------- -------------- Net cash provided by financing activities..... 464,000 252,000 999,000 ------------ -------------- -------------- Net increase in cash and cash equivalents............................. 97,000 356,000 2,068,000 Cash and cash equivalents at beginning of year................................. 17,000 114,000 470,000 ------------ -------------- -------------- Cash and cash equivalents at end of year.................................... $ 114,000 $ 470,000 $ 2,538,000 ============ ============== ============== </TABLE> See accompanying notes to consolidated financial statements. F-8 STAT HEALTHCARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993, 1994 AND 1995 ------------------------------ (1) BUSINESS OF THE COMPANY AND ORGANIZATION BUSINESS OF THE COMPANY STAT Healthcare, Inc. (STAT) was incorporated in the state of Delaware on July 29, 1994. STAT provides emergency medical management services. On June 24, 1996, STAT, through a successor entity formed for the purpose of effecting a business combination, acquired all the common stock and partnership interests of AmHealth Corporation and its related health care entities (AmHealth) (see note 3). AmHealth provides disease management services focused primarily on ailments associated with diabetes. STAT and AmHealth merged into the successor entity which became the parent and registrant and which then changed its name to STAT Healthcare, Inc. CONSOLIDATED FINANCIAL STATEMENTS The merger of STAT and AmHealth has been accounted for as a pooling of interests. Accordingly, the consolidated financial statements of STAT Healthcare, Inc. and subsidiaries (the Company) have been restated to include the accounts and results of operations of both STAT and AmHealth for all periods presented. Following the merger, the Company is an integrated disease management and medical services company which provides a continuum of disease management services primarily to patients with end-stage renal disease and also provides physician practice management services to hospital-based emergency departments. OPERATIONS AND ORGANIZATION OF STAT Upon incorporation in July 1994, STAT negotiated a Management Agreement with South Texas Acute Trauma Physicians, P.A. (STAT Physicians). The Management Agreement became effective September 1, 1994 and is perpetual. The Management Agreement has no termination or cancellation provisions. In addition, the Company has the ability to control the designation of physician owner(s) of STAT Physicians. Prior to the merger with AmHealth, the Company's income was derived exclusively from revenues associated with the Management Agreement, less direct expenses paid by the Company on behalf of STAT Physicians, as provided in the Management Agreement and less the operating expenses of the Company. Additionally, on September 1, 1994, the Company assumed the employment of all personnel previously employed at STAT Physicians and the operating costs associated therewith from that date forward. Prior to the merger with AmHealth, the Company operated in a single business segment, emergency medical management services. The Company's principal business related to management and administrative services provided to those engaged in physician staffing of hospital emergency departments. At December 31, 1994 and 1995, the Company managed contracts for physician services with 12 and 11 hospitals, respectively, primarily located in the Houston greater metropolitan area. Under these contracts, 24-hour physician coverage of the emergency departments is provided. Physicians providing services are independent contractors to STAT Physicians and are paid monthly on a basis of fixed hourly rates. As independent contractors, these physicians are responsible for their own income and Social Security taxes as well as workers compensation insurance. The contracts between STAT Physicians and hospitals are generally written for an initial term of two years and automatically renew for extended periods after the initial term. STAT Physicians' contractual arrangements with hospitals are principally fee-for-service contracts under which the Company bills and collects the professional component of medical services on behalf of STAT Physicians. At December 31, 1994, 9 of 12 contracts were fee-for-service contracts, while at December 31, 1995, all contracts were fee-for-service F-9 STAT HEALTHCARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 1993, 1994 AND 1995 ------------------------------ (1) BUSINESS OF THE COMPANY AND ORGANIZATION: (CONTINUED) contracts. Services performed under contracts not subject to fee-for-service arrangements at December 31, 1994 were compensated by the hospitals on a fixed fee basis. OPERATIONS AND ORGANIZATION OF AMHEALTH AmHealth operates in two business segments, kidney dialysis services and healthcare management services. It operates outpatient kidney dialysis facilities, provides management services for hospital-based hyperbaric oxygen therapy facilities, and provides management and personnel services to outpatient home health providers in the Rio Grande Valley of south Texas. The AmHealth entities, their pre-merger structure and their dates of inception are as follows: ENTITY STRUCTURE DATE OF INCEPTION - ------------------------------------- ---------------------- ----------------- Management operations: AmHealth Corporation............ S Corporation Oct 1992 Kidney dialysis center operations: AmHealth Enterprises of the Valley, Inc................... S Corporation Oct 1992 AmHealth Kidney Center of the Valley, Ltd................... Partnership Apr 1993 Starr Dialysis Center, Ltd...... Partnership Nov 1993 Weslaco Kidney Center, Ltd...... Partnership Jun 1994 Mission Kidney Center, Ltd...... Partnership Aug 1995 Brownsville Kidney Center, Ltd........................... Partnership Apr 1996 Healthcare management operations: Southwestern Infusion Healthcare, Ltd............... Partnership Jun 1994 AmHealth Ambulatory Services, Inc........................... C Corporation Apr 1995 AmHealth Ambulatory Healthcare, Ltd........................... Partnership Apr 1995 Brownsville Hyperbaric Healthcare, Ltd............... Partnership May 1995 AmHealth Medical Management, Ltd........................... Partnership Jun 1995 (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of STAT Healthcare, Inc., AmHealth Corporation and its related health care entities (all wholly-owned), and the results of operations of STAT Physicians since September 1, 1994, the effective date of the Company's Management Agreement with STAT Physicians. Because of the existence of a parent-subsidiary relationship by means other than record ownership of STAT Physicians' voting stock and because of the unilateral control, notwithstanding the lack of technical majority ownership, which the Company has over the assets and operation of STAT Physicians, consolidation of its results of operations is necessary to present fairly the results of operations of the Company. All significant intercompany balances and transactions have been eliminated in consolidation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial F-10 STAT HEALTHCARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 1993, 1994 AND 1995 ------------------------------ (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) statements and accompanying notes. Management believes that the estimates utilized in preparing its consolidated financial statements are reasonable and prudent. Actual results could differ from these estimates. CASH EQUIVALENTS Investments in highly liquid, short-term instruments purchased with original maturities of three months or less are deemed to be cash equivalents. SERVICE REVENUES AND ACCOUNTS RECEIVABLE Patient service revenues are recorded at established billing rates, net of an allowance for contractual adjustments and a provision for uncollectible accounts. Management services revenue for hospital and home health agency accounts are recorded net of an allowance for doubtful accounts. Patient accounts receivable are reduced to an estimated realizable value taking into consideration contractual adjustments mandated by payors (Medicare, Medicaid and private insurers) and expected write-offs of uncollectible accounts. These estimates are based upon management judgements and historical experience. INVENTORIES Inventories, consisting primarily of dialysis and pharmacy supplies, are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and are depreciated using the straight-line depreciation method over the estimated useful lives of the assets by class: minor equipment, 3 years; major equipment, 5 years; improvements, 5 years. Equipment under capital lease is stated at the lesser of the present value of the minimum lease payments or the fair value of the leased property at the inception of the lease. Equipment under capital lease is amortized using the straight-line method over the term of the leases which is 4 to 7 years. Buildings and land under capital lease are stated at the fair value of the properties and are amortized using the straight-line method over the term of the leases which is 10 years. ORGANIZATION AND START-UP COSTS Organization and start-up costs have been capitalized and are being amortized using the straight-line method over five years. DEFERRED OFFERING COSTS Deferred offering costs totaling $234,000 at December 31, 1994 were included in other non-current assets. Such assets were combined with additional offering costs incurred during 1995 and were recorded as a reduction of the proceeds from the initial public offering of common stock during 1995. DEFERRED ACQUISITION COSTS Costs incurred to effect an expected pooling of interests business combination are deferred and charged to expense in the period that the business combination is consummated. If a plan of combination is abandoned, F-11 STAT HEALTHCARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 1993, 1994 AND 1995 ------------------------------ (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) costs that have been deferred are expensed. At December 31, 1995, deferred acquisition costs of $134,000 were included in prepaid and other current assets. These costs were combined with additional acquisition costs incurred in 1996 and were expensed in the second quarter of 1996 when the AmHealth merger was consummated. INCOME TAXES The Company utilizes the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Prior to consummation of the merger, each of the AmHealth entities (except AmHealth Ambulatory Services, Inc.) was a partnership or had elected to be treated as an S Corporation. Accordingly, each entity's income or loss was allocated to that entity's shareholders or partners for inclusion in their personal federal income tax returns. No federal income taxes were assessed to any of the entities (except AmHealth Ambulatory Services, Inc.), and accordingly, no provision for federal income taxes for these entities has been reflected in the accompanying consolidated statements of income prior to consummation of the merger. AmHealth Ambulatory Services, Inc. began operations in April 1995. Taxable income of this corporation from its date of inception through December 31, 1995 was not material. NET INCOME PER COMMON SHARE Net income per common share is computed based on the sum of STAT and AmHealth common and common equivalent shares calculated as follows: o STAT. From inception through the date of STAT's initial public offering, the number of common and common equivalent shares is computed as if all shares were outstanding for the entire period, less the number of treasury shares assumed to have been purchased (at the initial offering price of STAT's common stock) from the proceeds of actual sales of stock. Following the initial public offering, the number of common and common equivalent shares is computed based on the weighted average number of common shares outstanding adjusted for the incremental shares attributed to outstanding options and warrants to purchase common stock. o AmHealth. The number of common and common equivalent shares is computed based on the number of shares of the Company's common stock issued to the shareholders or partners of each AmHealth entity upon consummation of the merger, as if such shares were outstanding since the date of inception for each entity. PRO FORMA NET INCOME AND PRO FORMA NET INCOME PER SHARE Pro forma income taxes are calculated to reflect the effect of income taxes not otherwise payable by the AmHealth entities which were partnerships or S Corporations prior to consummation of the merger. The pro forma income taxes are based on an effective rate of 34%. Pro forma net income per share is computed based on the pro forma net income amount. F-12 STAT HEALTHCARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 1993, 1994 AND 1995 ------------------------------ (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) FAIR VALUE OF FINANCIAL INSTRUMENTS Methods and assumptions used to estimate the fair value of each class of financial instruments are as follows: o Cash equivalents, trade accounts receivable, notes receivable and payables -- The carrying amounts approximate fair value because of the short maturity of these instruments. o Long-term debt -- The carrying amount approximates fair value because the notes generally have an adjustable interest rate based on the prime rate. (3) MERGER On June 24, 1996, the Company acquired all the common stock and partnership interests of AmHealth Corporation and its related health care entities (AmHealth) for 11,200,000 shares of the Company's common stock. AmHealth operates outpatient kidney dialysis facilities, provides management services for hospital-based hyperbaric oxygen therapy facilities, and provides management and personnel services to outpatient home health providers in the Rio Grande Valley of south Texas. The transaction has been accounted for as a pooling of interests and, accordingly, the consolidated financial statements for all periods presented have been restated to include the accounts of AmHealth. Separate and combined results of STAT and AmHealth during the years ended December 31, 1993, 1994 and 1995 (periods preceding the merger) were as follows: 1993 1994 1995 ------------ ------------ -------------- Net service revenues: STAT.......................... $ -- $ 3,672,000 $ 14,124,000 AmHealth...................... 1,170,000 3,973,000 9,017,000 ------------ ------------ -------------- Combined................. $ 1,170,000 $ 7,645,000 $ 23,141,000 ============ ============ ============== Net income: STAT.......................... $ -- $ 128,000 $ 674,000 AmHealth...................... 135,000 976,000 2,624,000 ------------ ------------ -------------- Combined................. 135,000 1,104,000 3,298,000 Proforma income taxes......... (46,000) (332,000) (892,000) ------------ ------------ -------------- Proforma net income...... $ 89,000 $ 772,000 $ 2,406,000 ============ ============ ============== (4) NET SERVICES REVENUES Under the contracts between STAT Physicians and the hospitals and under the Company's Management Agreement with STAT Physicians, the Company has the ability, subject to hospital concurrence, to establish the rates to be billed to patients for services provided. Gross service revenues represent the billed value of physician services provided at hospital locations, and patient service and management services revenue recorded at established billing rates. Billings discounts represent the difference between gross service revenues and the amount which is ultimately expected to be received. These discounts relate principally to contractual adjustments mandated by payors such as Medicare and Medicaid and also to contracted F-13 STAT HEALTHCARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 1993, 1994 AND 1995 ------------------------------ (4) NET SERVICES REVENUES: (CONTINUED) arrangements with private insurers. Discounts also include provisions for indigent patients without the means of paying for services provided. Gross service revenues and billings discounts for the years ended December 31, 1993, 1994 and 1995 are as follows: 1993 1994 1995 ------------ -------------- -------------- Gross service revenues........... $ 1,418,000 $ 12,180,000 $ 40,143,000 Billings discounts............... (248,000) (4,535,000) (17,002,000) ------------ -------------- -------------- Net service revenues........ $ 1,170,000 $ 7,645,000 $ 23,141,000 ============ ============== ============== Service revenues have been primarily generated in south Texas and the Houston greater metropolitan area. Although subject to individual contracts, net service revenues derived from hospitals which, at December 31, 1995, were owned by Columbia/HCA Healthcare Corporation accounted for 46% and 41% of 1994 and 1995 net service revenues, respectively. (5) ACCOUNTS RECEIVABLE Accounts receivable at December 31, 1993, 1994 and 1995 are as follows: 1993 1994 1995 ----------- ------------ ------------ Gross patient accounts receivable.... $ 436,000 $ 4,617,000 $ 8,892,000 Allowance for contractual adjustments........................ (81,000) (1,943,000) (2,938,000) ----------- ------------ ------------ Estimated accounts receivable... 355,000 2,674,000 5,954,000 Allowance for doubtful accounts...... (17,000) (539,000) (1,882,000) ----------- ------------ ------------ Net patient accounts receivable.................... 338,000 2,135,000 4,072,000 Other accounts receivable............ 1,000 188,000 371,000 Due from STAT Physicians............. -- 59,000 122,000 ----------- ------------ ------------ Accounts receivable, net........ $ 339,000 $ 2,382,000 $ 4,565,000 =========== ============ ============ (6) NOTES RECEIVABLE Notes receivable at December 1993, 1994 and 1995 are as follows: 1993 1994 1995 --------- --------- ---------- Non interest-bearing note receivable from Mission Medical Properties.... $ -- $ -- $ 50,000 Note receivable from officer/shareholders, interest at 6%, due October 31, 1996........... -- -- 200,000 Other................................ 8,000 8,000 16,000 --------- --------- ---------- Notes receivable................ $ 8,000 $ 8,000 $ 266,000 ========= ========= ========== Mission Medical Properties leases buildings and land under capital leases to the Company and is owned by certain stockholders of the Company. F-14 STAT HEALTHCARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 1993, 1994 AND 1995 ------------------------------ (7) PROPERTY AND EQUIPMENT Property and equipment at December 31, 1993, 1994 and 1995 are as follows: 1993 1994 1995 ---------- ------------ ------------ Land and buildings................... $ -- $ 619,000 $ 969,000 Equipment and furnishings............ 515,000 915,000 1,705,000 Improvements......................... 63,000 142,000 155,000 ---------- ------------ ------------ 578,000 1,676,000 2,829,000 Less accumulated depreciation and amortization................ (52,000) (230,000) (568,000) ---------- ------------ ------------ Property and equipment, net........................ $ 526,000 $ 1,446,000 $ 2,261,000 ========== ============ ============ Depreciation and amortization of property and equipment charged to operations was $52,000, $178,000 and $338,000 during the years ended December 31, 1993, 1994 and 1995, respectively. (8) LONG-TERM DEBT Long-term debt at December 31, 1993, 1994 and 1995 is as follows: 1993 1994 1995 ------------ ------------ ---------- Convertible secured notes; interest at 10%............................. $ -- $ 350,000 $ -- Revolving credit payable to bank, due in quarterly installments of $9,375 plus interest through March 1999; interest at prime plus .5%......... -- -- 122,000 Revolving credit payable to bank; interest at prime plus 1%........... 79,000 75,000 -- Note payable to TransAmerican Insurance Finance, due January 1, 1996; interest at 11.64%........... -- -- 4,000 Note payable to bank, due April 2, 1996; interest at prime plus 1%.... 54,000 27,000 10,000 Noninterest-bearing note payable to Palmco, Inc., for construction allowance on leased building, due April 1, 1996...................... 26,000 15,000 4,000 Note payable to bank, due October 30, 1997; interest at prime plus 1%.... 50,000 38,000 6,000 Note payable to bank, due June 15, 1998; interest at prime plus 1%.... -- 60,000 48,000 Note payable to bank, due November 6, 1999; interest at prime plus 1%.... -- -- 50,000 ------------ ------------ ---------- Total debt...................... 209,000 565,000 244,000 Less current portion............ (122,000) (470,000) (88,000) ------------ ------------ ---------- Long-term debt.................. $ 87,000 $ 95,000 $ 156,000 ============ ============ ========== The convertible secured notes were issued in October and November 1994 in connection with a bridge financing. A total of $332,000 was repaid and the balance of $18,000 was converted to common stock in connection with STAT's initial public offering during 1995. The conversion of convertible secured notes to common stock is a non cash investing and financing transaction and is excluded from the 1995 consolidated statement of cash flows. F-15 STAT HEALTHCARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 1993, 1994 AND 1995 ------------------------------ (8) LONG-TERM DEBT: (CONTINUED) The revolving credit payables to bank and notes payable to bank are secured by the Company's accounts receivable, inventories and equipment. Long-term debt totaling $240,000 at December 31, 1995 was guaranteed by a stockholder of the Company. Future payments of long-term debt at December 31, 1995 are as follows: 1996.................................... $ 88,000 1997.................................... 66,000 1998.................................... 68,000 1999.................................... 22,000 ---------- $ 244,000 ========== Cash paid for interest was $21,000, $126,000 and $214,000 during the years ended December 31, 1993, 1994 and 1995, respectively. (9) LEASE OBLIGATIONS Future minimum lease payments under capital leases, together with the present value of the net minimum lease payments, at December 31, 1995 are as follows: 1996.................................... $ 476,000 1997.................................... 426,000 1998.................................... 341,000 1999.................................... 261,000 2000.................................... 203,000 Later years............................. 781,000 ------------ Total minimum lease payments............ 2,488,000 Less amount representing interest....... (956,000) ------------ Present value of net minimum lease payments.............................. 1,532,000 Less current portion............... (48,000) ------------ Long-term capital lease obligations....................... $ 1,484,000 ============ At December 31, 1995, the Company's capital lease obligations include amounts payable to entities owned or controlled by stockholders of the Company. Total payments to these entities under the capital leases were $87,000 and $147,000 for the years ended December 31, 1994 and 1995, respectively. On September 10, 1995, the Company entered into an agreement to lease a facility located in Brownsville, Texas, to be constructed and owned by an entity owned by stockholders of the Company. Lease payments begin 45 days after completion and are $7,600 per month for a term of 120 months. Based on an estimated fair market value of $490,000 and the terms of the lease, the lease will be a capital lease. F-16 STAT HEALTHCARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 1993, 1994 AND 1995 ------------------------------ (9) LEASE OBLIGATIONS: (CONTINUED) Future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year at December 31, 1995 are as follows: 1996.................................... $ 265,000 1997.................................... 268,000 1998.................................... 121,000 1999.................................... 16,000 ---------- Total minimum lease payments............ $ 670,000 ========== Rental expense under operating leases was $16,000, $31,000 and $60,000 for the years ended December 31, 1993, 1994 and 1995, respectively. Obligations under capital lease incurred for property and equipment were $358,000, $912,000 and $605,000 during the years ended December 31, 1993, 1994 and 1995, respectively. These non cash investing and financing transactions have been excluded from the consolidated statements of cash flows. (10) INCOME TAXES Income taxes for the years ended December 31, 1993, 1994 and 1995 are as follows: 1993 1994 1995 --------- --------- ---------- Federal.............................. $ -- $ 58,000 $ 330,000 State................................ -- 7,000 17,000 --------- --------- ---------- Total................................ $ -- $ 65,000 $ 347,000 ========= ========= ========== The actual income tax expense for the years ended December 31, 1993, 1994 and 1995 differs from the expected federal income tax computed by applying the U.S. corporate rate of 34% to income before income taxes as follows: 1993 1994 1995 ---------- ------------ ------------ Computed "expected" tax expense.... $ 46,000 $ 398,000 $ 1,239,000 Taxes on income earned and reported by shareholders of S corporations and partners of partnerships....... (46,000) (332,000) (892,000) Increase in tax resulting from nondeductible expenses............. -- 1,000 2,000 State tax provision, net of federal benefit............................ -- 4,000 11,000 Other................................ -- (6,000) (13,000) ---------- ------------ ------------ Actual income tax expense................. $ -- $ 65,000 $ 347,000 ========== ============ ============ For the years ended December 31, 1993, 1994 and 1995, there were no significant temporary differences which created deferred tax assets or liabilities. Income taxes payable of $65,000 are included in accrued liabilities at December 31, 1994. Refundable income taxes of $31,000 are included in other current assets at December 31, 1995. No income taxes were paid during the years ended December 31, 1993 and 1994. Income taxes of $440,000 were paid during the year ended December 31, 1995. F-17 STAT HEALTHCARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 1993, 1994 AND 1995 ------------------------------ (11) CAPITAL STOCK Authorized capital stock of the Company consists of 5,000,000 shares of $.01 par value preferred stock and 40,000,000 shares of $.01 par value common stock. In September 1994, STAT sold 74,000 shares of Series A convertible preferred stock (Preferred Stock) to STAT Physicians for $370,000. The Preferred Stock was converted into common stock at a rate of 20 shares of common stock for each share of Preferred Stock (1,480,000 common shares) upon the completion of STAT's initial public offering of common stock in 1995. The conversion of Preferred Stock into common stock is a non cash investing and financing transaction and is excluded from the 1995 consolidated statement of cash flows. At December 31, 1995, shares of common stock are reserved for issuance in connection with the future exercise of Class A warrants to purchase common stock at the price of $4.50 per share (734,166 shares) and underwriter warrants for 125,000 shares of common stock at $5.44 per share. These warrants were issued in connection with STAT's initial public offering of common stock and the related conversion of 10% convertible secured notes. Additionally, at December 31, 1995, 300,000 shares of common stock are reserved for issuance in connection with the Company's stock option plan. (12) STOCK OPTION PLAN The Company has a stock option plan, providing for the granting of incentive stock options or nonqualified stock options, for the benefit of its employees and directors. Under this plan, options may be granted to purchase an aggregate of 300,000 shares of common stock at no less than 100% (90% in the event of a nonqualified stock option) of the fair market value of the common stock at the time of the grant. At December 31, 1995, 10,000 unoptioned shares were available for granting. All options which have been granted expire five years from the date of grant. Information relating to stock options is as follows: NUMBER OF OPTIONS OPTION PRICE PER SHARE --------- ---------------------- Outstanding at December 31, 1994..... -- -- Granted.............................. 290,000 $ 2.88--3.17 --------- Outstanding at December 31, 1995..... 290,000 $ 2.88--3.17 ========= Shares exercisable at December 31, 1995............................... 2,500 $ 3.00 ========= ================= (13) COMMITMENTS AND CONTINGENT LIABILITIES The Company has certain pending and threatened litigation and claims incurred in the ordinary course of business; however, management believes that the probable resolution of such contingencies will not materially affect the liquidity, the financial position, or the results of the Company's operations. The Company procures professional liability insurance on behalf of STAT Physicians which provides coverage on a claims-made basis during the policy period. The coverage is purchased on a "slot" basis and extends to the Company, to STAT Physicians and to contract physicians who perform services. Individual policies are not provided to physicians; however, they must be prequalified for coverage as a routine credentialing process. If a claims-made policy is not renewed or replaced by a new policy which provides coverage retroactively, it becomes necessary to purchase an extended reporting period endorsement. Management intends to renew the existing claims-made policy and in the past has either renewed or successfully purchased retroactive coverage. F-18 STAT HEALTHCARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 1993, 1994 AND 1995 ------------------------------ (13) COMMITMENTS AND CONTINGENT LIABILITIES: (CONTINUED) Although the Company does not directly contract with hospitals or physicians for the provision or procurement of medical services, its contractual relationship with STAT Physicians exposes it to potential claims from litigants. Accordingly, the Company is named as an additional insured under the professional liability coverage of STAT Physicians. Effective October 1, 1995, the Company established a 401(k) plan (the Plan) for its employees. The Plan allows participants with at least one year of prior service to make elective deferrals of up to 15% of their compensation. The Plan also allows discretionary matching employer contributions as well as additional discretionary contributions which shall be allocated to each eligible employee in proportion to his or her compensation as a percentage of the compensation of all eligible employees. Employer contributions vest at the rate of 20% per year of service. No discretionary contributions were made to the Plan by the Company during the year ended December 31, 1995. F-19 STAT HEALTHCARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 1993, 1994 AND 1995 ------------------------------ (14) BUSINESS SEGMENTS The Company operates in three business segments; emergency services, kidney dialysis services and health care management services. Information by business segment as of and for the years ended December 31, 1993, 1994 and 1995 is as follows: 1993 1994 1995 ------------ ------------ -------------- Net service revenues: Emergency services............ $ -- $ 3,672,000 $ 14,124,000 Kidney dialysis............... 1,170,000 3,766,000 6,262,000 Healthcare management......... -- 207,000 2,755,000 ------------ ------------ -------------- Total.................... $ 1,170,000 $ 7,645,000 $ 23,141,000 ============ ============ ============== Operating income: Emergency services............ $ -- $ 202,000 $ 977,000 Kidney dialysis............... 210,000 998,000 1,715,000 Healthcare management......... -- 123,000 1,120,000 General corporate............. (55,000) (164,000) (46,000) ------------ ------------ -------------- Total.................... $ 155,000 $ 1,159,000 $ 3,766,000 ============ ============ ============== Identifiable assets: Emergency services............ $ -- $ 2,094,000 $ 5,860,000 Kidney dialysis............... 1,117,000 2,557,000 3,642,000 Healthcare management......... -- 103,000 970,000 General corporate............. 26,000 70,000 103,000 ------------ ------------ -------------- Total.................... $ 1,143,000 $ 4,824,000 $ 10,575,000 ============ ============ ============== Depreciation and amortization: Emergency services............ $ -- $ -- $ 16,000 Kidney dialysis............... 57,000 192,000 301,000 Healthcare management......... -- 2,000 40,000 General corporate............. 2,000 2,000 3,000 ------------ ------------ -------------- Total.................... $ 59,000 $ 196,000 $ 360,000 ============ ============ ============== Capital expenditures: Emergency services............ $ -- $ -- $ 112,000 Kidney dialysis............... 572,000 1,094,000 742,000 Healthcare management......... -- 4,000 282,000 General corporate............. 5,000 -- 17,000 ------------ ------------ -------------- Total.................... $ 577,000 $ 1,098,000 $ 1,153,000 ============ ============ ============== F-20 STAT HEALTHCARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 1993, 1994 AND 1995 ------------------------------ (15) SUBSEQUENT EVENTS In January 1996 the Company reached an agreement with the Greater Houston Division of Columbia/HCA Healthcare Corporation (Columbia) to provide emergency medicine services to all but one of Columbia's emergency departments in the Greater Houston Division. This agreement will result in the addition of nine hospitals to the Company's service base between February 1 and July 1, 1996 resulting in a total of 18 hospitals served (16 of which are owned by Columbia). The contract for services relating to this agreement was finalized in April 1996. The Houston Division hospitals (15) are covered by this contract which has an initial term of two years and which renews automatically. This contract will account for a significant portion of the Company's net service revenues and operating expenses. On January 31, 1996, and in conjunction with the Columbia agreement noted above, the Company acquired the rights to a one-hospital contract for the provision of emergency department medical services. Consideration paid for the contract and certain non-competition covenants consisted of $960,000 in cash and 52,174 shares of the Company's common stock. Up to an additional $100,000 may be paid in each of the three twelve-month periods following the acquisition of the contract based on profits realized at that hospital. On February 1, 1996, the Company acquired intangible assets of Amedica, Ltd. (Amedica) in a transaction that will be accounted for by the purchase method of accounting. Amedica provides healthcare services relating to the management of independent physician associations. Consideration paid consisted of $200,000 in cash and 15,730 shares of the Company's common stock. Unaudited financial information of Amedica as of December 31, 1995 and for the year then ended is as follows: Balance sheet information: Current assets.................. $ 128,000 Total assets.................... 135,000 Current liabilities............. 25,000 Total liabilities............... 150,000 Partners' capital............... (15,000) =========== Operations information: Revenue......................... $ 439,000 Expenses........................ 518,000 Net loss........................ (79,000) =========== Unaudited proforma results of operations for the year ended December 31, 1995, giving effect to the Amedica acquisition as though it had occurred on January 1, 1995, are as follows: Net service revenues................. $ 23,580,000 Net income........................... 3,222,000 ============== Net income per common share.......... $ 0.20 ============== STAT was advised in May 1996 that the common stock (67,904 shares, with an ascribed value of $310,000) issued in connection with the acquisitions described in this note, may have been issued in violation of Section 5 of the Securities Act. Such a violation would entitle the recipients to recission rights. In July 1996, the Company offered the right of recission, which right included the payment of the ascribed value plus accrued interest from the acquisition dates, to the recipients. The recipients declined such offer and asserted F-21 STAT HEALTHCARE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 1993, 1994 AND 1995 ------------------------------ (15) SUBSEQUENT EVENTS: (CONTINUED) their right to exchange their STAT common stock for common stock of the Company pursuant to the merger and exchange agreement between STAT and AmHealth. Accordingly, the $310,000 will be reported as permanent equity. In June 1996, stockholders of STAT and stockholders and partners of AmHealth approved the New STAT Healthcare, Inc. 1996 Stock Incentive Plan under which 1,500,000 shares of common stock of the Company became reserved for future issuance to officers, employees, consultants and non-employee directors of the Company. The 290,000 options outstanding at December 31, 1995 (see note 12) are considered to be options outstanding under this 1996 plan. On July 22, 1996, the Company signed a commitment letter for a $6,500,000 bank credit facility comprised of a $3,000,000 revolving line of credit and a $3,500,000 three year, non-revolving line of credit. The formal agreement is expected to be finalized during August 1996 and pursuant to the commitment agreement will provide for interest at prime. Borrowings under the lines will be collateralized by security interests in the Company's accounts receivable and in capital assets. F-22 STAT HEALTHCARE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET JUNE 30, 1996 (UNAUDITED) ------------------------------ JUNE 30, 1996 -------------- ASSETS Cash and cash equivalents............ $ 1,324,000 Accounts receivable, net............. 7,109,000 Notes receivable..................... 200,000 Inventories.......................... 78,000 Prepaid and other current assets..... 295,000 -------------- Total current assets....... 9,006,000 Property and equipment, net.......... 3,149,000 Intangible assets, net............... 1,408,000 Other non-current assets............. 196,000 -------------- Total assets............... $ 13,759,000 ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current portion of long-term debt.... $ 1,486,000 Current portion of capital lease obligations........................ 72,000 Accrued physicians' fees............. 1,095,000 Accounts payable..................... 1,194,000 Accrued liabilities.................. 505,000 Distributions payable................ 465,000 -------------- Total current liabilities............... 4,817,000 Long-term debt....................... 289,000 Long-term capital lease obligations........................ 1,993,000 -------------- Total liabilities.......... 7,099,000 -------------- Stockholders' equity: Preferred stock, $.01 par value. Authorized 5,000,000 shares; no shares outstanding......... -- Common stock, $.01 par value. Authorized 40,000,000 shares; issued and outstanding, 14,902,472 shares.............. 149,000 Capital in excess of par value.......................... 4,563,000 Retained earnings............... 1,948,000 -------------- Total stockholders' equity.................... 6,660,000 -------------- Commitments and contingencies Total liabilities and stockholders' equity...... $ 13,759,000 ============== See accompanying notes to unaudited consolidated financial statements. F-23 STAT HEALTHCARE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME SIX MONTHS ENDED JUNE 30, 1995 AND 1996 (UNAUDITED) ------------------------------ SIX MONTHS SIX MONTHS ENDED ENDED JUNE 30, 1995 JUNE 30, 1996 ------------- ------------- Net service revenues................. $ 10,375,000 $ 16,663,000 ------------- ------------- Operating expenses: Professional medical fees....... 4,548,000 6,695,000 Human resources................. 1,625,000 3,516,000 Supplies........................ 822,000 1,136,000 Billing and collection costs.... 697,000 996,000 Liability insurance............. 324,000 499,000 Other costs..................... 575,000 938,000 ------------- ------------- Total operating expenses... 8,591,000 13,780,000 ------------- ------------- Operating income........... 1,784,000 2,883,000 Interest income...................... 31,000 17,000 Interest expense..................... (60,000) (150,000) Reorganization costs................. -- (1,269,000) ------------- ------------- Income before income taxes................... 1,755,000 1,481,000 Income taxes......................... 181,000 (44,000) ------------- ------------- Net income................. 1,574,000 1,525,000 Proforma income taxes................ 416,000 577,000 ------------- ------------- Proforma net income............. $ 1,158,000 $ 948,000 ============= ============= Proforma net income per common share......................... $ 0.13 $ 0.06 ============= ============= Number of shares used in computing proforma net income per common share.............................. 9,077,613 15,320,433 ============= ============= See accompanying notes to unaudited consolidated financial statements. F-24 STAT HEALTHCARE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) ------------------------------ <TABLE> <CAPTION> COMMON STOCK CAPITAL IN TOTAL ------------------------ EXCESS OF RETAINED STOCKHOLDERS' SHARES AMOUNT PAR VALUE EARNINGS EQUITY ------------ ---------- ------------ ------------- ------------- <S> <C> <C> <C> <C> <C> Balances at December 31, 1995........ 14,823,332 $ 148,000 $ 4,204,000 $ 2,020,000 $ 6,372,000 Common stock issued for: Acquisitions.................... 67,904 1,000 309,000 -- 310,000 Compensation.................... 11,236 50,000 -- 50,000 Distributions to shareholders........ -- -- -- (1,597,000) (1,597,000) Net income........................... -- -- -- 1,525,000 1,525,000 ------------ ---------- ------------ ------------- ------------- Balances at June 30, 1996............ 14,902,472 $ 149,000 $ 4,563,000 $ 1,948,000 $ 6,660,000 ============ ========== ============ ============= ============= </TABLE> See accompanying notes to unaudited consolidated financial statements. F-25 STAT HEALTHCARE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) ------------------------------ SIX MONTHS ENDED JUNE 30, 1996 -------------- Cash flows from operating activities: Net income......................... $ 1,525,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................... 238,000 Increase in deferred tax liability...................... 50,000 Changes in assets and liabilities: Increase in net accounts receivable................ (2,544,000) Decrease in inventories.... 25,000 Decrease in prepaid and other current assets...... 464,000 Increase in other non-current assets........ (68,000) Increase in accrued physicians' fees.......... 389,000 Increase in accounts payable................... 269,000 Decrease in accrued liabilities............... (58,000) -------------- Total adjustments.......... (1,235,000) -------------- Net cash provided by operating activities.... 290,000 -------------- Cash flows from investing activities: Repayment of notes receivable...... 66,000 Purchase of HEMA assets............ (960,000) Purchase of Amedica assets......... (200,000) Purchase of property and equipment.......................... (243,000) -------------- Net cash used in investing activities.... (1,337,000) -------------- Cash flows from financing activities: Distributions to stockholders...... (1,415,000) Net borrowings under line of credit agreement.......................... 1,250,000 Issuance of long-term debt......... 285,000 Repayment of long-term debt........ (203,000) Repayments of capital lease obligations........................ (84,000) -------------- Net cash provided by financing activities.... (167,000) -------------- Net decrease in cash and cash equivalents.......................... (1,214,000) Cash and cash equivalents at beginning of period.................. 2,538,000 -------------- Cash and cash equivalents at end of period............................... $ 1,324,000 ============== See accompanying notes to unaudited consolidated financial statements. F-26 STAT HEALTHCARE, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 ------------------------------ (1) FINANCIAL STATEMENT PRESENTATION The accompanying consolidated financial statements of STAT Healthcare, Inc. and subsidiaries (the Company) present financial information as of June 30, 1996, and for the six month periods ended June 30, 1995 and 1996. Because these financial statements are unaudited and do not include all disclosures required by generally accepted accounting principles, they should be read in conjunction with the Company's audited consolidated financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the financial information for the periods reported have been made. Results of operations for the six month period ended June 30, 1996 are not necessarily indicative of the results that may be achieved for the year ending December 31, 1996. (2) NET INCOME PER COMMON SHARE Net income per common share is computed based on the number of common and common equivalent shares of the Company. Equivalent shares are attributable to outstanding warrants and options to purchase common shares. F-27 INDEPENDENT AUDITORS' REPORT The Board of Directors South Texas Acute Trauma Physicians, P.A.: We have audited the accompanying balance sheets of South Texas Acute Trauma Physicians, P.A. (the Company) as of August 31, 1994 and December 31, 1993, and the related statements of income, changes in shareholders' equity and cash flows for the eight months ended August 31, 1994 and the year ended December 31, 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of South Texas Acute Trauma Physicians, P.A. as of August 31, 1994 and December 31, 1993, and the results of its operations and its cash flows for the eight months ended August 31, 1994 and the year ended December 31, 1993, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Houston, Texas March 10, 1995, except as to the last paragraph of note 6, which is as of April 11, 1995 F-28 SOUTH TEXAS ACUTE TRAUMA PHYSICIANS, P.A. BALANCE SHEETS ------------------------------ DECEMBER 31, AUGUST 31, 1993 1994 ------------ ------------ ASSETS Cash and cash equivalents............ $ 10,000 $ 63,000 Accounts receivable (notes 5 and 6): Patient accounts, net........... 840,000 1,312,000 Hospital accounts............... 439,000 316,000 ------------ ------------ Net accounts receivable.... 1,279,000 1,628,000 Prepaid assets....................... 55,000 186,000 ------------ ------------ Total current assets....... 1,344,000 1,877,000 Other assets......................... 8,000 15,000 ------------ ------------ Total assets............... $1,352,000 $ 1,892,000 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current installments of long-term debt (note 6)........................ $ 176,000 $ 210,000 Notes payable to hospitals (note 7)................................... 70,000 203,000 Accrued physicians' fees............. 605,000 681,000 Accrued liabilities.................. 37,000 71,000 Accounts payable..................... 62,000 126,000 Bank overdraft....................... 22,000 -- ------------ ------------ Total current liabilities.................. 972,000 1,291,000 Long-term debt, excluding current liabilities (note 6)............... 3,000 -- ------------ ------------ Total liabilities.......... 975,000 1,291,000 ------------ ------------ Shareholders' equity: Common Stock, $1 par value. Authorized 100,000 shares; issued and outstanding 1,000 shares......................... 1,000 1,000 Retained earnings............... 376,000 600,000 ------------ ------------ Total shareholders' equity....................... 377,000 601,000 Commitments and contingencies (notes 3, 8 and 9) ------------ ------------ Total liabilities and shareholders' equity......... $1,352,000 $ 1,892,000 ============ ============ See accompanying notes to financial statements. F-29 SOUTH TEXAS ACUTE TRAUMA PHYSICIANS, P.A. STATEMENTS OF INCOME ------------------------------ EIGHT MONTHS YEAR ENDED ENDED DECEMBER 31, AUGUST 31, 1993 1994 ------------ ------------ Net service revenue (note 4)......... $8,873,000 $ 6,876,000 Direct expenses: Physicians' fees................ 6,823,000 5,113,000 Liability insurance............. 368,000 314,000 Billing and collection.......... 304,000 473,000 ------------ ------------ Total direct expenses...... 7,495,000 5,900,000 ------------ ------------ Gross profit............... 1,378,000 976,000 ------------ ------------ Operating expenses: Human resources................. 713,000 525,000 Occupancy....................... 38,000 27,000 Furniture and equipment......... 30,000 19,000 Supplies........................ 39,000 16,000 Outside services and other...... 62,000 68,000 ------------ ------------ Total operating expenses... 882,000 655,000 ------------ ------------ Operating income........... 496,000 321,000 Interest expense..................... 14,000 15,000 ------------ ------------ Net income................. 482,000 306,000 Proforma income taxes (note 3)....... 164,000 104,000 ------------ ------------ Proforma net income........ $ 318,000 $ 202,000 ============ ============ See accompanying notes to financial statements. F-30 SOUTH TEXAS ACUTE TRAUMA PHYSICIANS, P.A. STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY ------------------------------ TOTAL COMMON RETAINED SHAREHOLDERS' STOCK EARNINGS EQUITY ------ --------- -------------- Balances at December 31, 1992........ $1,000 $ 58,000 $ 59,000 Net income........................... -- 482,000 482,000 Shareholder distributions............ -- (164,000) (164,000) ------ --------- -------------- Balances at December 31, 1993........ 1,000 376,000 377,000 Net income........................... -- 306,000 306,000 Shareholder distributions............ -- (82,000) (82,000) ------ --------- -------------- Balances at August 31, 1994.......... $1,000 $ 600,000 $ 601,000 ====== ========= ============== See accompanying notes to financial statements. F-31 SOUTH TEXAS ACUTE TRAUMA PHYSICIANS, P.A. STATEMENTS OF CASH FLOWS ------------------------------ EIGHT MONTHS YEAR ENDED ENDED DECEMBER 31, AUGUST 31, 1993 1994 ------------ ------------ Cash flows from operating activities: Net income......................... 482,000 306,000 Adjustments to reconcile net income to net cash used in operating activities: Changes in assets and liabilities: Increase in net accounts receivable............. (669,000) (349,000) Increase in prepaids and other assets........... (42,000) (138,000) Increase in accrued physicians' fees....... 79,000 76,000 Increase in accrued liabilities............ 34,000 34,000 Increase in accounts payable................ 62,000 64,000 ------------ ------------ Total adjustments....... (536,000) (313,000) ------------ ------------ Net cash used in operating activities........... (54,000) (7,000) ------------ ------------ Cash flows from financing activities: Proceeds from issuance of long-term debt............................ 150,000 51,000 Proceeds from issuance of hospital notes........................... 70,000 200,000 Principal payments on long-term debt............................ (37,000) (20,000) Principal payments on hospital notes........................... -- (67,000) Shareholder distributions.......... (164,000) (82,000) Increase (decrease) in bank overdraft....................... 22,000 (22,000) ------------ ------------ Net cash provided by financing activities........... 41,000 60,000 ------------ ------------ Net increase (decrease) in cash and cash equivalents................... (13,000) 53,000 Cash and cash equivalents at beginning of period................ 23,000 10,000 ------------ ------------ Cash and cash equivalents at end of period............................. $ 10,000 $ 63,000 ============ ============ Supplemental disclosure of cash flow information -- cash payments during the period for interest..... $ 8,000 $ 9,000 ============ ============ See accompanying notes to financial statements. F-32 SOUTH TEXAS ACUTE TRAUMA PHYSICIANS, P.A. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1993 AND AUGUST 31, 1994 ------------------------------ (1) THE COMPANY South Texas Acute Trauma Physicians, P.A., dba STAT Physicians (the Company) was incorporated as a professional association in the state of Texas on November 22, 1985. The Company's principal business is the physician staffing of hospital emergency departments. At December 31, 1993 and August 31, 1994, the Company had contracts for physician services with eleven hospitals located in south Texas. Under these contracts the Company provides 24-hour physician coverage of the emergency departments, and one of the Company's physicians acts as the designated Director of Emergency Medicine for each hospital. At December 31, 1993, the Company also provided weekend physician coverage under another contract. The Company terminated this weekend contract effective June 30, 1994 for economic reasons. Physicians providing services on behalf of the Company are independent contractors and are paid monthly on the basis of either a fixed hourly rate or on the basis of a minimum hourly rate which is adjustable upward based on monthly volume. As independent contractors, these physicians are responsible for their own income and Social Security taxes as well as workers compensation insurance. Hospital contracts are generally written for an initial term of two years and automatically renew each year after the initial term. These contracts have cancellation clauses which provide for 90-day cancellation by either party without significant penalty. Certain terms and conditions are routinely modified. The Company's management believes that relations with all hospitals are good and does not anticipate the cancellation of any contracts. Contractual agreements with hospitals are primarily (a) contracts where the Company bills and collects the professional component for the charges for medical services, and (b) contracts where the Company receives fees from the hospital based on a fixed fee, hourly rate or percentage of gross billings. Effective September 1, 1994, the Company entered into a management agreement with STAT Healthcare, Inc. (STAT Healthcare). Under this agreement, the Company assigned all revenues and related accounts receivable from September 1, 1994 forward to STAT Healthcare. In consideration thereof, STAT Healthcare assumed responsibility for collection of receivables and agreed to pay for all direct and operating costs associated with the hospital contracts from September 1, 1994 forward. Additionally, on September 1, 1994 STAT Healthcare employed all administrative personnel previously employed by the Company and assumed responsibility for all administrative matters relating to these contracts, pursuant to a management agreement. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH EQUIVALENTS Cash invested in short-term investments purchased with original maturities of three months or less is deemed to be cash equivalents for financial statement purposes. At December 31, 1993 and August 31, 1994, cash equivalents of $3,000 and $3,000, respectively, consisted of money market funds. SERVICE REVENUES AND ACCOUNTS RECEIVABLE Service revenues under contracts where fees are received from hospitals are recorded at established billing rates, net of amounts to be retained by the hospital. Service revenues under contracts where the Company bills and collects for services provided are recorded at established billing rates, net of contractual adjustments and the provision for uncollectible accounts. F-33 SOUTH TEXAS ACUTE TRAUMA PHYSICIANS, P.A. NOTES TO FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 1993 AND AUGUST 31, 1994 ------------------------------ (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) Patient accounts receivable are reduced to an estimated realizable value taking into consideration contractual adjustments mandated by payors (Medicare, Medicaid and private insurers) and expected write-offs of uncollectible accounts. These estimates are based upon historical experience at individual hospitals. (3) INCOME TAXES For federal income tax purposes, the Company has elected to be treated as an "S corporation." Accordingly, the Company's income is allocated to the Company's shareholders, included in their personal income tax returns and taxed at their respective individual rates. No federal income taxes will be assessed the corporation. The proforma income taxes reflected in the accompanying statements of income are based on an effective corporate rate of 34%. The federal income tax return of the Company for the tax year ended January 31, 1992, is currently under examination by the Internal Revenue Service. Management believes that the examination is routine in nature and does not anticipate any significant adjustments from the examination. (4) NET SERVICE REVENUES Gross service revenues represent the billed value of physician services provided at hospital locations. Under the contracts between the Company and the hospitals, the Company has the ability, subject to hospital concurrence, to establish the rates to be billed to patients for services provided. Billings discounts represent the difference between gross service revenues and the amount which the Company ultimately expects to receive. Net service revenues consist of contractual payments from hospitals and estimated collectible fees from patients and third-party payors where the Company is responsible for billing and collection functions. Net service revenues for the year ended December 31, 1993 and for the eight months ended August 31, 1994 are as follows: 1993 1994 ------------ ------------ Net service revenues: From hospitals..................... $ 6,250,000 $ 2,695,000 From patients...................... 2,623,000 4,181,000 ------------ ------------ $ 8,873,000 $ 6,876,000 ============ ============ Hospital account payments are usually received by the 15th day of the month following service. Some hospitals make partial payments during the service month. Patient accounts are collected over normal collection cycles from a variety of payors including Medicare, Medicaid, private insurers and patients. Gross and net service revenues for the year ended December 31, 1993 and for the eight months ended August 31, 1994 are as follows: 1993 1994 -------------- -------------- Gross service revenues.................. $ 14,900,000 $ 14,369,000 Billings discounts...................... (6,027,000) (7,493,000) -------------- -------------- Net service revenues.................... $ 8,873,000 $ 6,876,000 ============== ============== For the eight months ended August 31, 1994, four hospitals accounted for between 10% and 14% each of net service revenues. F-34 SOUTH TEXAS ACUTE TRAUMA PHYSICIANS, P.A. NOTES TO FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 1993 AND AUGUST 31, 1994 ------------------------------ (5) NET PATIENT ACCOUNTS RECEIVABLE Net patient accounts receivable at December 31, 1993 and at August 31, 1994 are as follows: 1993 1994 -------------- ------------ Gross patient accounts receivable.... $ 1,867,000 $ 3,486,000 Allowance for contractual adjustments........................ (615,000) (1,427,000) -------------- ------------ Estimated accounts receivable........ 1,252,000 2,059,000 Allowance for doubtful accounts...... (412,000) (747,000) -------------- ------------ Net patient accounts receivable...... $ 840,000 $ 1,312,000 ============== ============ (6) LONG-TERM DEBT Long-term debt at December 31, 1993 and at August 31, 1994 is as follows: 1993 1994 ------------ ------------ 13% note payable, due in monthly installments of $1,878 including interest through April 1994. Paid in full in April 1994.. $ 8,000 $ -- 10% note payable, due in monthly installments of $1,616 including interest through February 1995. Paid in full in February 1995...... 21,000 10,000 Revolving credit note (up to $200,000), interest due quarterly at the bank's prime rate (7.75% at August 31, 1994) plus 2%, principal due August 1995.................... 150,000 200,000 ------------ ------------ Total debt........................... 179,000 210,000 Less current installments............ (176,000) (210,000) ------------ ------------ Long-term debt............. $ 3,000 $ -- ============ ============ The notes payable are secured by the Company's accounts receivable. The revolving credit note is secured by the Company's accounts receivable and the corporate guarantee and accounts receivable of STAT Healthcare. Subsequent to August 31, 1994, the bank increased the revolving line of credit to $400,000. On April 11, 1995, the line of credit was repaid by STAT Healthcare and was canceled. (7) NOTES PAYABLE TO HOSPITALS Notes payable to hospitals at December 31, 1993 and at August 31, 1994 are as follows: 1993 1994 ---------- ---------- 8% unsecured note, due in 16 monthly installments of $4,690, including interest, commencing in January 1995............................... $ 70,000 $ 70,000 Noninterest-bearing unsecured note, due in monthly installments of $33,333 through December 1994. Paid in full in December 1994........... -- 133,000 ---------- ---------- $ 70,000 $ 203,000 ========== ========== Notes payable to hospitals arose as unsecured advances designed to provide cash flow assistance during the inception of fee-for-service activities. F-35 SOUTH TEXAS ACUTE TRAUMA PHYSICIANS, P.A. NOTES TO FINANCIAL STATEMENTS, CONTINUED DECEMBER 31, 1993 AND AUGUST 31, 1994 ------------------------------ (8) LEASES The Company leases its office space under a month-to-month lease. The Company also leases certain equipment and vehicles under operating leases. Future minimum lease payments under noncancelable operating leases at August 31, 1994 are as follows: 1994................................. $ 8,000 1995................................. 6,000 1996................................. 4,000 1997................................. 4,000 --------- $ 22,000 ========= Rental expense for the year ended December 31, 1993 and for the eight months ended August 31, 1994 was $27,000 and $17,000 respectively. (9) CONTINGENCIES The Company procures professional liability insurance which provides coverage on a claims-made basis during the policy period. The coverage is purchased on a "slot" basis and extends to the Company and to contract physicians who perform services. Individual policies are not provided to physicians; however, they must be prequalified for coverage as a routine credentialing process. If a claims-made policy is not renewed or replaced by a new policy which provides coverage retroactively, it becomes necessary to purchase an extended reporting period endorsement. Management intends to renew its existing claims-made policy and in the past has either renewed or successfully purchased retroactive coverage. The Company has certain pending and threatened litigation and claims incurred in the ordinary course of business; however, management believes that the probable resolution of such contingencies will not materially affect the liquidity, the financial position, or the results of the Company's operations. F-36 ================================================================================ NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED BY THIS PROSPECTUS, OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY BY ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, IMPLY THAT THE INFORMATION IN THIS PROSPECTUS IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS. ------------------------ TABLE OF CONTENTS PAGE ----- Prospectus Summary...................... 3 Risk Factors............................ 5 The Company............................. 11 Recent Developments..................... 12 Use of Proceeds......................... 13 Dividend Policy......................... 13 Price Range of Common Stock............. 14 Capitalization.......................... 15 Selected Consolidated Financial Data.... 16 Management's Discussion and Analysis of Financial Condition and Results of Operations............................ 17 Business................................ 24 Management.............................. 42 Certain Transactions.................... 49 Principal and Selling Stockholders...... 50 Description of Capital Stock............ 51 Shares Eligible for Future Sale......... 53 Underwriting............................ 55 Legal Matters........................... 56 Experts................................. 56 Additional Information.................. 56 Index to Financial Statements........... F-1 ================================================================================ 3,300,000 SHARES [LOGO FOR STAT HEALTHCARE, INC.] COMMON STOCK PROSPECTUS PACIFIC GROWTH EQUITIES, INC. , 1996 ================================================================================ PART II INFORMATION NOT REQUIRED IN PROSPECTUS All capitalized terms used and not defined in Part II of this Registration Statement shall have the meanings assigned to them in the Prospectus which forms a part of this Registration Statement. ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the registrant in connection with the sale of Common Stock in the offering. All amounts are estimates except the Commission registration fee and the NASD filing fee. Commission registration fee.......... $ 7,893 NASD filing fee...................... 2,789 Printing expenses.................... 50,000 Legal fees and expenses.............. 200,000 Accounting fees and expenses......... 100,000 Blue sky fees and expenses........... 10,000 Transfer agent fees.................. 1,000 Miscellaneous........................ 28,318 ---------- Total........................... $ 400,000 ========== ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Subsection (a) of Section 145 of the General Corporation Law of the State of Delaware empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Subsection (b) of Section 145 empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by right of the corporation to procure a judgment in its favor by reason of the fact that such person acted in any of the capacities set forth above, against expenses (including attorneys fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification may be made in respect to any claim issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. Section 145 further provides that to the extent a director or officer of a corporation has been successful on the merits or otherwise in the defense of any such action, suit or proceeding referred to in subsections (a) and (b) of Section 145 or in the defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith; that the indemnification provided for by Section 145 shall not be deemed exclusive of any other II-1 rights which the indemnified party may be entitled; that indemnification provided by Section 145 shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of such persons heirs, executors and administrators; and empowers the corporation to purchase and maintain insurance on behalf of a director or officer of the corporation against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liabilities under Section 145. Section 102(b)(7) of the General Corporation Law or the State of Delaware provides that a certificate of incorporation may contain a provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of the director (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. Article IX of the Company's Charter provides that "a director of the corporation shall, to the full extent not prohibited by the Delaware General Corporation Law, as the same exists or may hereafter be amended, not be liable to the corporation or its stockholders for monetary damages for breach of his or her fiduciary duty as a director." Article X of the Company's Charter further provides that a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived any improper personal benefit. If the Delaware General Corporation Law is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law as so amended." Article XI of the Company's Bylaws provides that "the corporation shall indemnify its directors and executive officers to the fullest extent not prohibited by the Delaware General Corporation Law; PROVIDED, HOWEVER, that the corporation may limit the extent of such indemnification by individual contracts with its directors and executive officers; and, PROVIDED, FURTHER, that the corporation shall not be required to indemnify any director or executive officer in connection with any proceeding (or part thereof) initiated by such person or any proceeding by such person against the corporation or its directors, officers, employees or other agents unless (i) such indemnification is expressly required to be made by law, (ii) the proceeding was authorized by the Board of Directors of the corporation or (iii) such indemnification is provided by the corporation, in its sole discretion, pursuant to the powers vested in the corporation under the Delaware General Corporation Law." Prior to the consummation of the offering, the Company will enter into indemnification agreements with each of its directors and executive officers that provide for indemnification and expense advancement to the fullest extent permitted under the Delaware General Corporation Law. The registrant maintains $1.0 million of officers' and directors' liability insurance. Reference is made to the form of Underwriting Agreement filed as Exhibit 1.1 hereto, indemnifying officers and directors of the registrant against certain liabilities. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. On June 24, 1996, the registrant issued 672,622 shares of Common Stock to four former shareholders of AmHealth Corporation in connection with the Exchange. These issuances were deemed exempt from registration under the Securities Act in reliance upon Section 4(2) of the Securities Act. In addition, the II-2 recipients of securities in such transaction represented their intentions to acquire the securities for investment only and not with a view to, or for sale in connection with, any distribution thereof and appropriate legends were affixed to the share certificates issued in such transaction. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (A) EXHIBITS The following exhibits are filed as part of this Registration Statement unless otherwise indicated: 1.1* Form of Underwriting Agreement. 2.1# Amended and Restated Agreement and Plan of Reorganization, dated as of March 15, 1996 (the "Reorganization Agreement"), among the registrant, STAT Healthcare, Inc., STAT Acquisition Corp. and the AmHealth Corporations and AmHealth Partnerships named therein (included as Appendix 1 to the registrant's Joint Proxy Statement/Prospectus (the "Joint Proxy Statement/Prospectus") dated May 22, 1996 and filed with the Commission pursuant to Rule 424(b) on May 23, 1996) 2.1.1 First Amendment to the Reorganization Agreement, dated June 24, 1996 3.1 Certificate of Incorporation, as amended 3.2# Bylaws (filed as Exhibit 3.2 to the registrant's Registration Statement on Form S-4 (Reg. No. 333-2486 (the "Form S-4")) 4.1# Form of Common Stock Certificate (filed as Exhibit 4.1 to the Form S-4) 4.2 Warrant Agreement, dated June 24, 1996, among the registrant, American Stock Transfer & Trust Company, as warrant agent, and Network 1 Financial Securities, Inc. 4.3 Form of Class A Warrant Certificate (included as Exhibit A to the Warrant Agreement filed as Exhibit 4.2) 4.4 Form of Representatives' Warrant 5.1* Opinion of Brobeck, Phleger & Harrison LLP 10.1 Form of Form of Employment Agreement between the registrant and William H. Rice, M.D. 10.2 Form of Employment Agreement between the registrant and Victor M. Miranda, M.D. 10.3 Form of Employment Agreement between the registrant and Ned E. Chapman 10.4 Form of Employment Agreement between the registrant and Ruben A. Perez 10.5 Form of Employment Agreement between the registrant and Russell D. Schneider 10.6# Management Agreement, dated as of September 1, 1994, by and between Old STAT, Inc., a wholly owned subsidiary of the registrant previously named STAT Healthcare, Inc. ("Old STAT"), and South Texas Acute Trauma Physicians, P.A. (filed as Exhibit 10.4 to Old STAT's Registration Statement on Form SB-2 (Reg. No. 33-87860) (the "Form SB-2")) 10.6.1# Amendment to Management Agreement (filed as Exhibit 10.4 to the Form SB-2) 10.7# 1996 Stock Incentive Plan (filed as Exhibit 10.7.1 to the Form S-4) 10.8.1# Office lease by and between Old STAT and HCH Gulf Coast Hospital, dated June 5, 1989 (filed as Exhibit 10.8.1 to the Form SB-2) 10.8.2# Sublease Agreement by and between Old STAT and CB Commercial Real Estate Group, Inc. (filed as Exhibit 10.8.3 to the Form SB-2) 10.9# Hospital Contract by and between Old STAT and San Jacinto Methodist Hospital (filed as Exhibit 10.9 to the Form SB-2) 10.10# Hospital Contract by and between Old STAT and Katy Medical Center (filed as Exhibit 10.10 to the Form SB-2) 10.11# Hospital Contract by and between Old STAT and Fort Bend Hospital (filed as Exhibit 10.11 to the Form SB-2) 10.12# Hospital Contract by and between Old STAT and Parkway Hospital (filed as Exhibit 10.12 to the Form SB-2) 10.13# Form of Succession Agreement by and between Old STAT and the stockholders of South Texas Acute Trauma Physicians, P.A. (filed as Exhibit 10.13 to the Form S-4) II-3 10.14# Form of Lock-Up Agreement between the registrant and each of its officers and directors and certain former AmHealth partners and shareholders (included as Exhibit A to the Reorganization Agreement included as Appendix 1 to the Joint Proxy Statement/Prospectus) 10.15# Facility Lease dated as of February 1, 1994 by and between Weslaco Medical Properties Joint Venture and Weslaco Kidney Center, Ltd. (filed as Exhibit 10.15 to the Form S-4) 10.16# Facility Lease dated as of September 10, 1995 by and between Mission Medical Properties Joint Venture and Brownsville Kidney Center, Ltd. (filed as Exhibit 10.16 to the Form S-4) 10.17# Facility Lease dated as of April 22, 1993 by and between Enterprise Real Estate and Starr Dialysis Center, Ltd. (filed as Exhibit 10.17 to the Form S-4) 10.18# Facility Lease dated as of January 9, 1995 by and between Mission Medical Properties Joint Venture and Mission Kidney Center, Ltd. (filed as Exhibit 10.18 to the Form S-4) 10.19# Asset Purchase Agreement made as of January 31, 1996, by and among Old STAT, Houston Emergency Medicine Associates, William Blackstone, M.D., Diana Fite, M.D., and Tue Nguyen, M.D. (filed as Exhibit 2.1 to Old STAT's Current Report on Form 8-K dated January 31, 1996) 10.20# Professional Services Agreement by and between the Greater Houston Division of Columbia HCA Healthcare Corporation and STAT Physicians, P.A., dated February 1, 1996 (filed as Exhibit 10.20 to the Form S-4) 10.21# Form of Affiliate and Shareholder Agreement between the registrant and the former affiliates of AmHealth (included as Exhibit B to the Reorganization Agreement included as Appendix 1 to the Joint Proxy Statement/Prospectus) 10.22# Credit Agreement dated as of April 10, 1995 between Old STAT and Southwest Bank of Texas, N.A. ("SWBT"), as amended by that certain Amendment to Credit Agreement dated effective as of July 3, 1995, and as further amended by that certain Second Amendment to Credit Agreement dated effective as of April 10, 1996 (filed as Exhibit 10.22 to the Form S-4) 10.23# Security Agreement between Old STAT and SWBT made as of April 10, 1995, as amended by that certain First Amendment to Security Agreement made as of April 10, 1996 (filed as Exhibit 10.23 to the Form S-4) 10.24 Management Services Agreement, dated as of February 1, 1996, between Old STAT and STAT Physicians, P.A. 10.25 Form of Indemnification Agreement between the registrant and each of its directors and executive officers 21.1 List of Subsidiaries 23.1* Consent of Brobeck, Phleger & Harrison LLP (included in the opinion filed as Exhibit 5.1) 23.2 Consent of KPMG Peat Marwick LLP, independent auditors of the registrant (included on page S-1 hereof) 23.3 Consent of KPMG Peat Marwick LLP, independent auditors of South Texas Acute Trauma Physicians, P.A. 23.4 Consent of Long, Chilton, Payte & Hardin, LLP, independent auditors of the registrant (included on page S-2 hereof) 24.1 Power-of-attorney pursuant to which amendments to this Registration Statement may be filed (included on the signature page in Part II hereof) - ------------------------------ * To be filed by amendment. # Incorporated herein by reference to the indicated filing. II-4 (B) FINANCIAL STATEMENT SCHEDULES The following financial statement schedule is included in Part II of this Registration Statement: PAGE SCHEDULE NO. - ------------------------------------- ---- Independent Auditors' Report......... S-1 Independent Auditors' Report......... S-2 Schedule II - "Valuation and Qualifying Accounts".............. S-3 All other financial statement schedules have been omitted because the information required to be set forth therein is not required, is not applicable or is shown in the Company's Consolidated Financial Statements or Notes thereto. ITEM 17. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the Delaware General Corporation Law, the Charter or the Bylaws of the registrant, the Underwriting Agreement, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial BONA FIDE offering thereof. II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Houston, State of Texas, on this 29th day of August, 1996. STAT HEALTHCARE, INC. By: /s/ RUSSELL D. SCHNEIDER Russell D. Schneider CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature appears below constitutes and appoints Russell D. Schneider, William H. Rice, M.D. and Ned E. Chapman, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to sign any registration statement for the same offering covered by this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and all post-effective amendments thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or his, her or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED: <TABLE> <CAPTION> NAME TITLE DATE - ------------------------------------ --------------------------------------- ---------------- <C> <S> <C> /s/RUSSELL D. SCHNEIDER Chairman of the Board and Chief August 29, 1996 RUSSELL D. SCHNEIDER Executive Officer (Principal executive officer) /s/WILLIAM H. RICE, M.D. Vice Chairman of the Board August 29, 1996 WILLIAM H. RICE, M.D. /s/VICTOR M. MIRANDA, M.D. President -- Emergency Physicians and August 29, 1996 VICTOR M. MIRANDA, M.D. Director /s/RUBEN A. PEREZ President -- Healthcare Management, August 29, 1996 RUBEN A. PEREZ Treasurer and Director /s/NED E. CHAPMAN Chief Financial Officer and Secretary August 29, 1996 NED E. CHAPMAN (Principal financial and accounting officer) /s/ANN N. JAMES, PH.D. Director August 29, 1996 ANN N. JAMES, PH.D. /s/DAVID C. COLBY Director August 29, 1996 DAVID C. COLBY </TABLE> II-6 INDEPENDENT AUDITORS' REPORT The Board of Directors STAT Healthcare, Inc.: The audits referred to in our report dated August 9, 1996, included the related financial statement schedule as of December 31, 1995 and 1994, and for the years then ended, included in the Registration Statement. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We consent to the use of our reports included herein on the consolidated financial statements of STAT Healthcare, Inc. and subsidiaries as of December 31, 1995 and 1994 and for the years then ended. We also consent to the references to our firm under the heading "Experts" in the Prospectus. KPMG PEAT MARWICK LLP Houston, Texas August 29, 1996 S-1 INDEPENDENT AUDITORS' REPORT The Board of Directors STAT Healthcare, Inc.: The audit referred to in our report dated August 9, 1996, included the related financial statement schedule as of December 31, 1993, and for the year then ended, included in the Registration Statement. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audit. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We consent to the use of our reports included herein on the consolidated financial statements of STAT Healthcare, Inc. and subsidiaries as of December 31, 1993 and for the year then ended. We also consent to the references to our firm under the heading "Experts" in the Prospectus. LONG, CHILTON, PAYTE & HARDIN, LLP McAllen, Texas August 29, 1996 S-2 STAT HEALTHCARE, INC. AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS <TABLE> <CAPTION> ADDITIONS- BALANCE AT CHARGED TO BALANCE BEGINNING COSTS AND DEDUCTIONS- AT END DESCRIPTION OF YEAR EXPENSES WRITE OFFS OF YEAR - ------------------------------------- ----------- -------------- -------------- -------------- <S> <C> <C> <C> <C> 1993: Allowance for contractual adjustments and doubtful accounts.............. $ -- $ 248,000 $ 150,000 $ 98,000 =========== ============== ============== ============== 1994: Allowance for contractual adjustments and doubtful accounts.............. $ 98,000 $ 4,535,000 $ 2,151,000 $ 2,482,000 =========== ============== ============== ============== 1995: Allowance for contractual adjustments and doubtful accounts.............. $ 2,482,000 $ 17,002,000 $ 14,664,000 $ 4,820,000 =========== ============== ============== ============== </TABLE> S-3 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-2.1.1 <SEQUENCE>2 <TEXT> EXHIBIT 2.1.1 FIRST AMENDMENT TO AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION THIS FIRST AMENDMENT (the "Amendment") is made and entered into as of the 13th day of June, 1996, by and among New STAT Healthcare, Inc. ("NEW STAT"), STAT Healthcare, Inc. ("OLD STAT"), STAT Acquisition Corp. ("STAT ACQUISITION"), and AmHealth Corporation, AmHealth Enterprises of the Valley, Inc. and AmHealth Ambulatory Services, Inc. (collectively, the "AMHEALTH CORPORATIONS") and AmHealth Kidney Centers of the Valley, Ltd., Weslaco Kidney Center, Ltd., Starr Dialysis Center, Ltd., Mission Kidney Center, Ltd., Brownsville Kidney Center, Ltd., AmHealth Ambulatory Healthcare, Ltd., Southwestern Infusion Healthcare, Ltd., Brownsville Hyperbaric Healthcare, Ltd., and AmHealth Medical Management, Ltd. (collectively, the "AMHEALTH PARTNERSHIPS"). W I T N E S S E T H: WHEREAS, New STAT, Old STAT, STAT Acquisition and the AmHealth Entities are parties to that certain Amended and Restated Agreement and Plan of Reorganization (the "Agreement") dated as of March 15, 1996 respecting, among other things, the merger of STAT Acquisition with and into Old STAT and the merger of the AmHealth Corporations with and into New STAT; and WHEREAS, the parties thereto desire to revise, supplement and amend the Agreement as provided below. NOW, THEREFORE, the parties hereto, in consideration of certain value received by the respective parties hereto and the mutual promises and agreements hereinafter set forth, agree as follows: 1. DEFINITIONS. Each capitalized term that is used in this Amendment but not otherwise defined herein shall have the meaning assigned thereto in the Agreement. 2. AMENDMENTS TO THE AGREEMENT. The Agreement is hereby amended as follows: (A) All references to the "Closing Date" shall be amended to refer to on or about June 25, 1996. (B) All references to May 27, 1996 in Sections 8.1 (b), (c) and (d) and Section 8.3 (c) shall be amended to read June 30, 1996. (C) All references to May 28, 1996 in Section 8.3(c) shall be amended to read June 30, 1996. 3. COUNTERPARTS. This Amendment to the Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterpart. 4. CONTINUATION OF THE AGREEMENT. Except as amended by this Amendment, all terms and conditions of the Agreement remain in full force and effect. IN WITNESS WHEREOF, the AmHealth Corporations, the AmHealth Partnerships, New STAT, Old STAT and STAT Acquisition have caused this Amendment to be executed and delivered by their respective officers thereunto duly authorized, all as of the date first written above. NEW STAT HEALTHCARE, INC. STAT HEALTHCARE, INC. By: /s/ Ned E. Chapman By: /s/ Ned E. Chapman Title: Chief Financial Officer Title: Chief Financial Officer STAT ACQUISITION CORP. AMHEALTH CORPORATION By: /s/ Ned E. Chapman By: /s/ Ruben A. Perez Title: Chief Financial Officer Title: President AMHEALTH ENTERPRISES OF THE AMHEALTH AMBULATORY VALLEY, INC. SERVICES, INC. By: /s/ Ruben A. Perez By: /s/ Ruben A. Perez Title: President Title: President AMHEALTH KIDNEY CENTERS WESLACO KIDNEY CENTER, LTD. OF THE VALLEY, LTD. By: AmHealth Enterprises of By: AmHealth Enterprises of the Valley, Inc., the Valley, Inc., Its General Partner Its General Partner By: /s/ Ruben A. Perez By: /s/ Ruben A. Perez Its: President Its: President STARR DIALYSIS CENTER, LTD. MISSION KIDNEY CENTER, LTD. By: AmHealth Enterprises of By: AmHealth Enterprises of the Valley, Inc., the Valley, Inc., Its General Partner Its General Partner By: /s/ Ruben A. Perez By: /s/ Ruben A. Perez Its: President Its: President BROWNSVILLE KIDNEY CENTER, LTD. AMHEALTH AMBULATORY HEALTHCARE, LTD. By: AmHealth Enterprises of By: AmHealth Ambulatory the Valley, Inc., Services, Inc., Its General Partner Its General Partner By: /s/ Ruben A. Perez By: /s/ Ruben A. Perez Its: President Its: President SOUTHWESTERN INFUSION HEALTHCARE, LTD. BROWNSVILLE HYPERBARIC HEALTHCARE, LTD. By: AmHealth Ambulatory By: AmHealth Ambulatory Services, Inc., Services, Inc., Its General Partner Its General Partner By: /s/ Ruben A. Perez By: /s/ Ruben A. Perez Its: President Its: President AMHEALTH MEDICAL MANAGEMENT, LTD. By: AmHealth Ambulatory Services, Inc., Its General Partner By: /s/ Ruben A. Perez Its: President </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-3.1 <SEQUENCE>3 <TEXT> EXHIBIT 3.1 CERTIFICATE OF INCORPORATION OF NEW STAT HEALTHCARE, INC. The name of the corporation is New STAT Healthcare, Inc. II. The address of the registered office of the corporation in the State of Delaware is 1209 Orange Street, City of Wilmington, County of New Castle, and the name of the registered agent of the corporation in the State of Delaware at such address is The Corporation Trust Company. III. The purpose of the corporation is to engage in any lawful act or activity for which a corporation may be organized under the Delaware General Corporation Law. IV. The name and mailing address of the incorporator of the corporation is: N. E. Chapman 12450 Greenspoint Dr., Suite 1200 Houston, Texas 77060 V. A. The corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the corporation is authorized to issue is Forty-five Million (45,000,000) shares of which Forty Million (40,000,000) shares shall be Common Stock and Five Million (5,000,000) shares shall be Preferred Stock, each such share with a par value of one cent ($0.01). B. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized, by filing a certificate pursuant to the Delaware General Corporation Law, to fix or alter from time to time the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations and restrictions thereof, including without limitation, the dividend rights, dividend rate, conversion rights, voting rights, rights and terms of redemption (including sinking fund provisions), redemption price or prices, and the liquidation preferences of any wholly unissued series of Preferred Stock, and to establish from time to time the number of shares constituting any such series and the designation thereof, or any of them (a "Preferred Stock Designation"); and to increase or decrease the number of shares of any series subsequent to the issuance of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be decreased in accordance with the foregoing sentence, the shares constituting such decrease shall resume the status of authorized but unissued and undesignated Preferred Stock. If at any time subsequent to the issuance of shares of a particular series, there are no shares of such series remaining outstanding, such series thereupon shall constitute a wholly unissued series and may be altered (including without limitation the elimination of such series) to the full extent as hereinabove provided. The foregoing authority of the corporation's Board of Directors expressly includes the authority to designate series of Preferred Stock with designations, powers, preferences, rights, qualifications, limitations and restrictions senior to, junior to, or on parity with, the designations, powers, preferences, rights, qualifications, limitations and restrictions of the Common Stock or any series of outstanding Preferred Stock. C. The Common Stock shall be subject to the prior and superior rights of the Preferred Stock and any series thereof. Each share of Common Stock shall be equal to every other share of Common Stock. The holders of shares of Common Stock shall be entitled to one vote for each share of such stock upon all matters presented to the stockholders. VI. For the management of the business and for the conduct of the affairs of the corporation, and in further definition, limitation and regulation of the powers of the corporation, of its directors and of its stockholders or any class thereof, as the case may be, it is further provided that: A. The management of the business and the conduct of the affairs of the corporation shall be vested in its Board of Directors. The number of directors which shall constitute the whole Board of Directors shall be fixed in the manner provided in the Bylaws. B. The Board of Directors may from time to time make, amend, supplement or repeal the Bylaws; provided, however, that the stockholders may change or repeal any Bylaw adopted by the Board of Directors by the affirmative vote of the holders of a majority of the voting power of all of the then outstanding shares of the capital stock of the corporation (considered for this purpose as one class), and, provided further, that no amendment or supplement to the Bylaws adopted by the Board of Directors shall vary or conflict with any amendment or supplement thus adopted by the stockholders. C. The directors of the corporation need not be elected by written ballot unless the Bylaws so provide. At each annual meeting of stockholders, directors of the corporation shall be elected to hold office until the expiration of the term for which they are elected, and until their successors have been duly elected and qualified; except that if any such election shall not be so held, such election shall take place at a stockholders' meeting called and held in accordance with the Delaware General Corporation Law. Effective upon the consummation of the transactions contemplated by that certain Amended and Restated Agreement and Plan of Reorganization, dated March 15, 1996, as amended, among the corporation, STAT Healthcare, Inc., the corporations listed on Schedule A thereof and the partnerships listed on Schedule B thereof, the directors of the corporation shall classify its members into three classes as nearly equal in size as is practicable, which shall be hereby designated Class I, Class II and Class III. The term of office of the initial Class I directors shall expire at the 1997 annual meeting of stockholders, the term of office of the initial Class II directors shall expire at the 1998 annual meeting of stockholders and the term of office of the initial Class III directors shall expire at the 1999 annual meeting of stockholders. For the purposes hereof, the initial Class I, Class II and Class III directors are those directors who were so nominated and elected at the first annual meeting of stockholders. At each annual meeting of stockholders thereafter, directors to replace those of a class whose terms expire at such annual meeting shall be elected to hold office until the third succeeding annual meeting and until their respective successors shall have been duly elected and qualified. If the number of directors is hereafter changed, any newly created directorships or decrease in directorships shall be so apportioned among the classes as to make all classes as nearly equal in number as is practicable. The number of directors which constitute the whole Board of Directors of the corporation shall be designated in the bylaws of the corporation or by resolution adopted by the Board of Directors. Vacancies occurring on the Board of Directors for any reason may be filled by vote of a majority of the remaining members of the Board of Directors, although less than a quorum, at any meeting of the Board of Directors. A person so elected by the Board of Directors to fill a vacancy shall hold office until the next succeeding annual meeting of stockholders of the corporation and until his or her successor shall have been duly elected and qualified. D. Advance notice of stockholder nominations for the election of directors and of business to be brought by stockholders before any meeting of the stockholders of the corporation shall be given in the manner provided in the Bylaws of the corporation. VII. In addition to any requirements of law and any other provisions of this Certificate of Incorporation or the terms of any series of Preferred Stock or any other securities of the corporation (and notwithstanding the fact that a lesser percentage may be specified by law, this Certificate of Incorporation or any such terms), the affirmative vote of the holders of a majority in interest of the combined voting power of the then outstanding shares of capital stock of the corporation entitled to vote generally in an annual election (the "Voting Stock"), voting together as a single class, shall be required to: A. Remove a director without cause (for the purposes of this Article VII "cause shall mean the willful and continuous failure of a director to substantially perform such director's duties to the corporation, other than any such failure resulting from incapacity due to physical or mental illness, or the willful engaging by a director in misconduct injurious to the corporation); B. Amend, alter or repeal or adopt any provision inconsistent with Article VI or this Article VII; and C. Amend, alter or repeal or adopt any provisions inconsistent with any provision, other than Article VI or this Article VII contained in this Certificate of Incorporation, unless otherwise approved by a majority of the entire Board of Directors. VIII. Effective upon the consummation of the transactions contemplated by that certain Amended and Restated Agreement and Plan of Reorganization, dated March 15, 1996, as amended, among the corporation, STAT Healthcare, Inc., the corporations listed on Schedule A thereof and the partnerships listed on Schedule B thereof, the stockholders of the corporation may not take action by written consent without a meeting and must take any actions at a duly called annual or special meeting. Meetings of stockholders may be held within or without the State of Delaware as the Bylaws may provide. The books of the corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the corporation. IX. A director of the corporation shall, to the full extent not prohibited by the Delaware General Corporation Law, as the same exists or may hereafter be amended, not be liable to the corporation or its stockholders for monetary damages for breach of his or her fiduciary duty as a director. X. A director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived any improper personal benefit. If the Delaware General Corporation Law is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law as so amended. Any repeal or modification of the foregoing provisions of this Article X by the stockholders of the corporation shall not adversely affect any right or protection of a director of the corporation existing at the time of such repeal or modification. XI. The corporation is to have perpetual existence. XII. The corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon the stockholders herein are granted subject to this right. THE UNDERSIGNED, being the incorporator hereinbefore named, for the purpose of forming a corporation to do business both within and without the State of Delaware and in pursuance of the General Corporation Law of Delaware, does make and file this Certificate, hereby declaring and certifying that the facts herein stated are true, and accordingly has hereunto set his hand this 15th day of March, 1996. \s\ NED E. CHAPMAN N.E. Chapman Incorporator CERTIFICATE OF MERGER OF AMHEALTH CORPORATION, AMHEALTH ENTERPRISES OF THE VALLEY, INC., AND AMHEALTH AMBULATORY SERVICES, INC. INTO NEW STAT HEALTHCARE, INC. The undersigned corporation DOES HEREBY CERTIFY: FIRST: That the name and state of incorporation of each of the constituent corporations of the merger is as follows: STATE OF NAME INCORPORATION AmHealth Corporation, Inc. ("AmHealth") Texas AmHealth Enterprises of the Valley, Inc. ("AEV") Texas AmHealth Ambulatory Services, Inc. ("AAS") Texas New STAT Healthcare, Inc. ("New STAT") Delaware SECOND: That an Amended and Restated Agreement and Plan of Reorganization ("Reorganization Agreement") between AmHealth, AEV, AAS, the AmHealth Partnerships named therein, New STAT, STAT Healthcare, Inc., a Delaware corporation, and STAT Acquisition Corp., a Delaware corporation, has been approved, adopted, certified, executed and acknowledged by each of the constituent corporations in accordance with the requirements of section 252 of the General Corporation Law of Delaware. THIRD: That the name of the surviving corporation of the merger is New STAT Healthcare, Inc. ("STAT"), a Delaware corporation, which shall change its name to be STAT Healthcare, Inc. FOURTH: That the Certificate of Incorporation of New STAT, a Delaware corporation which is surviving the merger, shall be the Certificate of Incorporation of the surviving corporation, except that Article First shall be amended to read as follows: "The name of the corporation shall be STAT Healthcare, Inc." FIFTH: That the executed Reorganization Agreement is on file at the principal place of business of the surviving corporation, the address of which is 12450 Greenspoint Drive, Suite 1200, Houston, Texas 77060. SIXTH: That a copy of the Reorganization Agreement will be furnished by the surviving corporation, on request and without cost, to any stockholder of any constituent corporation. SEVENTH: The authorized capital stock of each foreign corporation which is a party to the merger is as follows: PAR VALUE CORPORATION CLASS NUMBER OF SHARES PER SHARE ----------- ----- ---------------- --------- AmHealth Common Stock 1,000 $1.00 AEV Common Stock 1,000 1.00 AAS Common Stock 1,000 1.00 IN WITNESS WHEREOF, the undersigned corporation has caused this Certificate of Merger to be executed in its corporate name this 24th of June, 1996. NEW STAT HEALTHCARE, INC. By: \s\ NED E. CHAPMAN N.E. Chapman Chief Financial Officer </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-4.2 <SEQUENCE>4 <TEXT> EXHIBIT 4.2 WARRANT AGREEMENT AGREEMENT, dated as of June 24, 1996, by and among STAT HEALTHCARE, INC., a Delaware corporation formerly named "New STAT Healthcare, Inc." (the "Company"), AMERICAN STOCK TRANSFER & TRUST COMPANY, a New York corporation, as Warrant Agent (the "Warrant Agent") and NETWORK 1 FINANCIAL SECURITIES, INC., a Texas corporation ("Network 1" or the "Underwriter"). W I T N E S S E T H WHEREAS, in connection with a public offering pursuant to a registration statement on Form SB-2 declared effective by the Securities and Exchange Commission on April 20, 1995, relating to units ("Old STAT Units") consisting of (i) two (2) shares of common stock, par value $0.01 per share (the "Old STAT Common Stock") of Old STAT, Inc., a Delaware corporation wholly owned by the Company and formerly named "STAT Healthcare, Inc." ("Old STAT"), and (ii) one (1) Class A Redeemable Common Stock Purchase Warrant of Old STAT (the "Old STAT Warrants"), pursuant to an underwriting agreement (the "Underwriting Agreement") dated April 20, 1995 between Old STAT and the Underwriter, (A) Old STAT issued an aggregate of 671,666 Old STAT Warrants and (B) Old STAT issued to the Underwriter or their designees warrants (the "Old STAT Underwriter's Warrants") to purchase up to 62,500 additional Old STAT Units pursuant to which Old STAT may be required to issue up to 125,000 shares of Old STAT Common Stock and 62,500 additional Old STAT Warrants; and WHEREAS, the Company and Old STAT are parties to a certain Amended and Restated Agreement and Plan of Reorganization, dated as of March 15, 1996, as amended (the "Reorganization Agreement"), pursuant to which (a) AmHealth Corporation, AmHealth Enterprises of the Valley, Inc. and AmHealth Ambulatory Services, Inc., each a Texas corporation (collectively, the "AmHealth Corporations"), were merged with and into the Company, with the Company as the surviving corporation, (b) all the general partners and all the limited partners (excluding limited partners representing a 25% interest in Brownsville Kidney Center, Ltd.) (the "AmHealth Partners") of AmHealth Kidney Centers of the Valley, Ltd., Weslaco Kidney Center, Ltd., Starr Dialysis Center, Ltd., Mission Kidney Center, Ltd., Brownsville Kidney Center, Ltd., AmHealth Medical Management, Ltd., Brownsville Hyperbaric Healthcare, Ltd., Southwestern Infusion Healthcare, Ltd. and AmHealth Ambulatory Healthcare, Ltd., each of which is a Texas limited partnership (collectively, the "AmHealth Partnerships") received shares of the Company's common stock, par value $0.01 per share (the "Common Stock"), in exchange for the outstanding general and limited partner interests in the AmHealth Partnerships held by such partners, and (c) Old STAT was merged with STAT Acquisition Corp., a Delaware corporation wholly owned by the Company, with Old STAT as the surviving corporation (such transactions being collectively referred to as the "Exchange"); and WHEREAS, pursuant to the Exchange, (i) the shareholders of the AmHealth Corporations (the "AmHealth Shareholders") and the AmHealth Partners collectively received a total of 11,200,000 shares of Common Stock, (ii) each issued and outstanding share of Old STAT Common Stock was converted into one share of Common Stock, (iii) each outstanding Old STAT Warrant was converted into a Class A Redeemable Common Stock Purchase Warrant of the Company (the "Warrants") exercisable for shares of Common Stock under substantially the same terms and conditions as the Old STAT Warrants and (iv) each outstanding Old STAT Underwriter's Warrant was converted into an Underwriter's Warrant of the Company (the "Underwriter's Warrants") exercisable for units (the "Units") consisting of two (2) shares of Common Stock and one (1) Warrant under substantially the same terms and conditions as the Old STAT Underwriter's Warrants; and WHEREAS, in connection with the Reorganization Agreement and the Exchange, the Company filed a registration statement (the "Registration Statement") on Form S-4 declared effective by the Securities and Exchange Commission on May 22, 1996, registering under the Securities Act of 1933 all shares of Common Stock, Warrants and Underwriter's Warrants (including all underlying Common Stock and Warrants) issuable in the Exchange; and WHEREAS, the Company desires the Warrant Agent to act on behalf of the Company, and the Warrant Agent is willing to so act, in connection with the issuance, registration, transfer, exchange and redemption of the Warrants, the issuance of certificates representing the Warrants, the exercise of the Warrants, and the rights of the holders thereof. NOW THEREFORE, in consideration of the premises and the mutual agreements hereinafter set forth and for the purpose of defining the terms and provisions of the Warrants and the certificates representing the Warrants and the respective rights and obligations thereunder of the Company, the holders of certificates representing the Warrants and the Warrant Agent, the parties hereto agree as follows: SECTION 1. DEFINITIONS.As used herein, the following terms shall have the following meanings, unless the context shall otherwise require: (a) "Common Stock" shall mean the authorized stock of the Company of any class, whether now or hereafter authorized, which has the right to participate in the distribution of earnings and assets of the Company without limit as to amount or percentage, which at the date hereof consists of 40,000,000 shares of Common Stock, $0.01 par value per share. (b) "Corporate Office" shall mean the office of the Warrant Agent (or its successor) at which at any particular time its principal business shall be administered, which office is located on the date hereof at 40 Wall Street, New York, New York 10005. (c) "Exchange Agent" shall mean American Stock Transfer & Trust Company, in its capacity as Exchange Agent under that certain Exchange Agent Agreement, of even date hereof, among American Stock Transfer & Trust Company, the Company and Old STAT. (d) "Exercise Date" shall mean, as to any Warrant, the date on which the Warrant Agent shall have received both (a) the Warrant Certificate representing such warrant, with the exercise form thereon duly executed by the Registered Holder thereof or his attorney duly authorized in writing, and (b) payment in cash, or by official bank or certified check made payable to the Warrant Agent, of an amount in lawful money of the United States of America equal to the applicable Purchase Price. (e) "Initial Warrant Exercise Date" shall mean, as to each Warrant, June 25, 1996. (f) "Purchase Price" shall mean the price to be paid upon exercise of each Warrant in accordance with the terms hereof, which price shall be $4.50, subject to adjustment from time to time pursuant to the provisions of Section 9, and subject to the Company's right to reduce the Purchase Price upon notice to all Warrant Holders. (g) "Redemption Price" shall mean the price at which the Company may, at its option, redeem the Warrants, in accordance with the terms hereof, which price shall be $0.05 per Warrant, subject to adjustment from time to time pursuant to the provisions of Section 9. (h) "Registered Holder" shall mean the person in whose name any certificate representing Warrants shall be registered on the books maintained by the Warrant Agent pursuant to Section 6. (i) "Transfer Agent" shall mean American Stock Transfer & Trust Company, as the Company's transfer agent, or its authorized successor, as such. (j) "Warrant Expiration Date" shall mean, with respect to each Warrant, 5:00 p.m. (New York, New York time) on April 19, 1998, or the Redemption Date as defined in Section 8, whichever is earlier; provided that if such date shall in the State of New York be a holiday or a day on which banks are authorized to close, then 5:00 p.m. (New York, New York time) on the next following day which in the State of New York is not a holiday or a day on which banks are authorized to close. Upon notice to all Warrant Holders, the Company shall have the right to extend the Warrant Expiration Date. SECTION 2. WARRANTS AND ISSUANCE OF WARRANT CERTIFICATES. (a) Each Warrant shall initially entitle the Registered Holder of the Warrant Certificate representing such Warrant to purchase one (1) share of Common Stock upon the exercise thereof, in accordance with the terms hereof, subject to modification and adjustment as provided in Section 9. (b) Pursuant to that certain Exchange Agent Agreement, of even date hereof, among the Exchange Agent, the Company and Old STAT, the Exchange Agent has agreed to issue an aggregate of 671,666 Warrants from time to time hereafter to the holders of Old STAT Warrants in exchange for the Old STAT Warrants. (c) From time to time, up to the Warrant Expiration Date, the Transfer Agent shall countersign and deliver stock certificates in required whole number denominations representing up to an aggregate of 734,166 shares of Common Stock, subject to adjustment as described herein, upon the exercise of Warrants in accordance with this Agreement. (d) From time to time, up to the Warrant Expiration Date, the Warrant Agent shall countersign and deliver Warrant Certificates in required whole number denominations to the persons entitled thereto in connection with any transfer or exchange permitted under this Agreement; provided that no Warrant Certificates shall be issued except (i) those initially issued hereunder, (ii) those issued on or after the Initial Warrant Exercise Date, upon the exercise of fewer than all Warrants represented by any Warrant Certificate, to evidence any unexercised Warrants held by the exercising Registered Holder, (iii) those issued upon any transfer or exchange pursuant to Section 6; (iv) those issued in replacement of lost, stolen, destroyed or mutilated warrant Certificates pursuant to Section 7; (v) those issued pursuant to the Underwriter's Warrants; and (vi) at the option of the Company, in such form as may be approved by its Board of Directors, to reflect any adjustment or change in the Purchase Price, the number of shares of Common Stock purchasable upon exercise of the Warrants or the Redemption Price therefor made pursuant to Section 9. (e) Pursuant to the terms of the Underwriter's Warrants, the Underwriter and their designees may purchase up to an aggregate of 62,500 Units, which include up to 62,500 Warrants. SECTION 3. FORM AND EXECUTION OF WARRANT CERTIFICATES. (a) The Warrant Certificates shall be substantially in the form annexed hereto as Exhibit A and may have such letters, numbers or other marks of identification or designation and such legends, summaries or endorsements printed, lithographed or engraved thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement or as may be required to comply with any law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange on which the Warrants may be listed, or to conform to usage. The Warrant Certificates shall be dated the date of issuance thereof (whether upon initial issuance, transfer, exchange or in lieu of mutilated, lost, stolen, or destroyed Warrant Certificates) and issued in registered form. Warrants shall be numbered serially with the letter W on the Warrants. (b) Warrant Certificates shall be executed on behalf of the Company by its Chairman of the Board, President or any Vice President and by its Secretary or an Assistant Secretary, by manual signatures or by facsimile signatures printed thereon, and shall have imprinted thereon a facsimile of the Company's seal. Warrant Certificates shall be manually countersigned by the Warrant Agent and shall not be valid for any purpose unless so countersigned. In case any officer of the Company who shall have signed any of the Warrant Certificates shall cease to be such officer of the Company before the date of issuance of the Warrant Certificates or before countersignature by the Warrant Agent and issue and delivery thereof, such Warrant Certificates may nevertheless be countersigned by the Warrant Agent, issued and delivered with the same force and effect as though the person who signed such Warrant Certificates had not ceased to be such officer of the Company. After countersignature by the Warrant Agent, Warrant Certificates shall be delivered by the Warrant Agent to the Registered Holder without further action by the Company, except as otherwise provided by Section 4(a). SECTION 4. EXERCISE (a) Each Warrant may be exercised by the Registered Holder thereof at any time on or after the Initial Warrant Exercise Date, but not after the Warrant Expiration Date, upon the terms and subject to the conditions set forth herein and in the applicable Warrant Certificate. A warrant shall be deemed to have been exercised immediately prior to the close of business on the Exercise Date and the person entitled to receive the securities deliverable upon such exercise shall be treated for all purposes as the holder upon exercise thereof as of the close of business on the Exercise Date. As soon as practicable on or after the Exercise Date, the Warrant Agent shall deposit the proceeds received from the exercise of a Warrant and shall notify the Company in writing of the exercise of the Warrants. Promptly following, and in any event within five (5) days after the date of such notice from the Warrant Agent, the Warrant Agent, on behalf of the Company, shall cause to be issued and delivered by the Transfer Agent, to the person or persons entitled to receive the same, a certificate or certificates for the securities deliverable upon such exercise (plus a Warrant Certificate for any remaining unexercised Warrants of the Registered Holder) unless prior to the date of issuance of such certificates the Company shall instruct the Warrant Agent to refrain from causing such issuance of certificates pending clearance of checks received in payment of the Purchase Price pursuant to such Warrants. Notwithstanding the foregoing, in the case of payment made in the form of a check drawn on an account of Network 1 or such other investment banks and brokerage houses as the Company shall approve in writing to the Warrant Agent, certificates shall immediately be issued without prior notice to the Company or any delay. Upon the exercise of any Warrant and clearance of the funds received, the Warrant Agent shall promptly remit the payment received for the Warrant to the Company or as the Company may direct in writing. (b) If, at the Exercise Date in respect of the exercise of any Warrant at any time on or after the first anniversary of the date hereof (i) the market price of the Company's Common Stock is greater than the then Purchase Price of the Warrant, (ii) the exercise of the Warrant was solicited by a member of the National Association of Securities Dealers, Inc. ("NASD"), (iii) the Warrant was not held in a discretionary account, (iv) disclosure of compensation arrangements was made both at the time of the original offering and at the time of exercise; and (v) the solicitation of the exercise of the Warrant was not in violation of Rule 10b-6 (as such rule or any successor rule as may be in effect as of such time of exercise) promulgated under the Securities Exchange Act of 1934, as amended, then the Warrant Agent, simultaneously with the distribution of proceeds to the Company received upon exercise of the Warrant(s) so exercised shall, on behalf of the Company, pay from the proceeds received upon exercise of the Warrant (s), a fee of four (4%) percent of the Purchase Price to the Underwriter (of which a percentage may be reallowed to the dealer who solicited the exercise, which dealer may also be Network 1). Within five days after the exercise the Warrant Agent shall send to the Underwriter a copy of the reverse side of each Warrant exercised. The Underwriter shall reimburse the Warrant Agent, upon request, for its reasonable expenses relating to compliance with this Section 4(b). In addition, the Underwriter and the Company may at any time during business hours, examine the records of the Warrant Agent, including its ledger of original Warrant certificates returned to the Warrant Agent upon exercise of Warrants. The provisions of this paragraph may not be modified, amended or deleted without the prior written consent of the Underwriter and the Company. SECTION 5. RESERVATION OF SHARES; LISTING; PAYMENT OF TAXES; ETC. (a) The Company covenants that it will at all times reserve and keep available out of its authorized Common Stock, solely for the purpose of issuance upon exercise of Warrants, such number of shares of Common Stock as shall then be issuable upon the exercise of all outstanding Warrants. The Company covenants that all shares of Common Stock which shall be issuable upon exercise of the Warrants shall, at the time of delivery, be duly and validly issued, fully paid, nonassessable and free from all taxes, liens and charges with respect to the issuance thereof (other than those which the Company shall promptly pay or discharge) and that upon issuance such shares shall be listed on each national securities exchange, if any, on which the other shares of outstanding Common Stock of the Company are then listed. (b) The Company covenants that if any securities to be reserved for the purpose of exercise of Warrants hereunder require registration with, or approval of, any governmental authority under any federal securities law before such securities may be validly issued or delivered upon such exercise, then the Company will in good faith and as expeditiously as reasonably possible, endeavor to secure such registration or approval. The Company will use reasonable effort to obtain appropriate approvals or registrations under state "blue sky" securities laws with respect to any such securities. However, Warrants may not be exercised by, or shares of Common Stock issued to, any Registered Holder in any state in which such exercise would be unlawful. (c) The Company shall pay all documentary, stamp or similar taxes and other governmental charges that may be imposed with respect to the issuance of Warrants, or the issuance or delivery of any shares upon exercise of the Warrants; provided, however, that if the shares of Common Stock are to be delivered in a name other than the name of the Registered Holder of the Warrant Certificate representing any Warrant being exercised, then no such delivery shall be made unless the person requiring the same has paid to the Warrant Agent the amount of transfer taxes or charges incident thereto, if any. (d) The Warrant Agent is hereby irrevocably authorized to requisition the Company's Transfer Agent from time to time for certificates representing shares of Common Stock required upon exercise of the Warrants, and the Company will authorize the Transfer Agent to comply with all such proper requisitions. The Company will file with the Warrant Agent a statement setting forth the name and address of the Transfer Agent of the Company for shares of Common Stock issuable upon exercise of the Warrants, unless the Warrant Agent and the Transfer Agent are the same entity. SECTION 6. EXCHANGE AND REGISTRATION OF TRANSFER (a) Warrant Certificates may be exchanged for other Warrant Certificates representing an equal aggregate number of Warrants of the same class or may be transferred in whole or in part. Warrant Certificates to be exchanged shall be surrendered to the Warrant Agent at its Corporate Office, and upon satisfaction of all the terms and provisions hereof, the Company shall execute and the Warrant Agent shall countersign, issue and deliver in exchange therefor the Warrant Certificate or Certificates which the Registered Holder making the exchange shall be entitled to receive. (b) The Warrant Agent shall keep at its office books in which, subject to such reasonable regulations as it may prescribe, it shall register Warrant Certificates and the transfer thereof in accordance with its regular practice. Upon due presentment for registration of transfer of any Warrant Certificate at such office, the Company shall execute and the Warrant Agent shall issue and deliver to the transferee or transferees a new Warrant Certificate or Certificates representing an equal aggregate number of Warrants of the same class. (c) With respect to all Warrant Certificates presented for registration or transfer, or for exchange or exercise, the subscription form on the reverse thereof shall be duly endorsed, or be accompanied by a written instrument or instruments of transfer and subscription, in form satisfactory to the Company and the Warrant Agent, duly executed by the Registered Holder or his attorney-in-fact duly authorized in writing. (d) A service charge may be imposed by the Warrant Agent for any exchange or registration of transfer of Warrant Certificates. In addition, the Company may require payment by such holder of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. (e) All Warrant Certificates surrendered for exercise or for exchange in case of mutilated Warrant Certificates shall be promptly canceled by the Warrant Agent and thereafter retained by the Warrant Agent until termination of this Agreement or resignation as Warrant Agent, or, with the prior written consent of the Underwriter, disposed of or destroyed, at the direction of the Company. (f) Prior to due presentment for registration of transfer thereof, the Company and the Warrant Agent may deem and treat the Registered Holder of any Warrant Certificate as the absolute owner thereof and of each Warrant represented thereby (notwithstanding any notations of ownership or writing thereon made by anyone other than a duly authorized officer of the Company or the Warrant Agent) for all purposes and shall not be affected by any notice to the contrary. The Warrants will be immediately transferable separately from the Common Stock. SECTION 7. LOSS OR MUTILATION. Upon receipt by the Company and the Warrant Agent of evidence satisfactory to them of the ownership of and loss, theft, destruction or mutilation of any Warrant Certificate and (in case of loss, theft or destruction) of indemnity satisfactory to them, and (in the case of mutilation) upon surrender and cancellation thereof, the Company shall execute and the Warrant Agent shall (in the absence of notice to the Company and/or Warrant Agent that the Warrant Certificate has been acquired by a BONA FIDE purchaser) countersign and deliver to the Registered Holder in lieu thereof a new Warrant Certificate of like tenor representing an equal aggregate number of Warrants. Applicants for a substitute Warrant Certificate shall comply with such other reasonable regulations and pay such other reasonable charges as the Warrant Agent may prescribe. SECTION 8. REDEMPTION (a) Commencing on the date hereof, on not less than thirty (30) days' prior written notice, the Warrants may be redeemed, at the option of the Company, at a redemption price of $0.05 per Warrant, provided the closing bid price of the Old STAT Common Stock or the Company's Common Stock on The Nasdaq Stock Market as reported by the National Quotation Bureau, Incorporated exceeds $5.50 for at least 20 consecutive trading days ending on the third business day prior to the date of the notice of redemption. All Warrants must be redeemed if any of the Warrants are redeemed. (b) In case the Company shall desire to exercise its right to so redeem the Warrants, it shall request the Warrant Agent or the Underwriter to mail a notice of redemption to each of the Registered Holders of the Warrants to be redeemed, first class, postage prepaid, not later than the thirtieth (30th) day before the date fixed for redemption (the "Redemption Date"), at their last address as shall appear on the records of the Warrant Agent. Any notice mailed in the manner provided herein shall be conclusively presumed to have been duly given whether or not the Registered Holder receives such notice. (c) The notice of redemption shall specify (i) the redemption price, (ii) the date fixed for redemption, (iii) the place where the Warrant Certificates shall be delivered and the redemption price paid, (iv) that Network 1 will assist each Registered Holder of a Warrant in connection with the exercise thereof (if Network 1 has conducted, or caused to be conducted, the mailing) and (v) that the right to exercise the Warrant shall terminate at 5:00 p.m. (New York, New York time) on the business day immediately preceding the Redemption Date. No failure to mail such notice nor any defect therein or in the mailing thereof shall affect the validity of the proceedings for such redemption except as to a holder (a) to whom notice was not mailed or (b) whose notice was defective. An affidavit of the Warrant Agent or of the Secretary or an Assistant Secretary of Network 1 or the Company that notice of redemption has been mailed shall, in the absence of fraud, be PRIMA FACIE evidence of the facts stated therein. (d) Any right to exercise a Warrant that has been called for redemption shall terminate at 5:00 p.m. (New York, New York time) on the business day immediately preceding the Redemption Date. On and after the Redemption Date, Holders of the redeemed Warrants shall have no further rights except to receive, upon surrender of the redeemed Warrant, the Redemption Price. (e) From and after the Redemption Date, the Company shall, at the place specified in the notice of redemption, upon presentation and surrender to the Company by or on behalf of the Registered Holder thereof of one or more Warrants to be redeemed, deliver or cause to be delivered to or upon the written order of such Holder a sum in cash equal to the redemption price of each such Warrant. From and after Redemption Date and upon the deposit or setting aside by the Company of a sum sufficient to redeem all the Warrants called for redemption, such Warrants shall expire and become void and all rights hereunder and under the Warrant Certificates, except the right to receive payment of the redemption price, shall cease. SECTION 9. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES OF COMMON STOCK OR WARRANTS. (a) Subject to the exceptions referred to in Section 9(g), in the event the Company shall, at any time or from time to time after the date hereof, sell any shares of Common Stock for a consideration per share less than the then current Purchase Price or issue any shares of Common Stock as a stock dividend to the holders of Common Stock, or subdivide or combine the outstanding shares of Common Stock into a greater or lesser number of shares (any such sale, issuance, subdivision or combination being herein called a "Change of Shares"), then, and thereafter upon each further Change of Shares, the applicable Purchase Price in effect immediately prior to such Change of Shares shall be changed to a price (including any applicable fraction of a cent) determined by multiplying the Purchase Price in effect immediately prior thereto by a fraction, the numerator of which shall be the sum of (a) the total number of shares of Common Stock outstanding immediately prior to such Change of Shares and (b) the number of shares of Common Stock which the aggregate consideration received by the Company upon such sale, issuance, subdivision or combination (determined in accordance with subsection (f)(vi) below) could have purchased at the then current Purchase Price, and the denominator of which shall be the total number of shares of Common Stock outstanding immediately after such Change of Shares. Upon each adjustment of applicable Purchase Price pursuant to this Section 9, the total number of shares of Common Stock purchasable upon the exercise of each Warrant shall (subject to the provisions contained in Section 9(b)) be such number of shares (calculated to the nearest tenth) purchasable at the applicable Purchase Price immediately prior to such adjustment multiplied by a fraction, the numerator of which shall be the applicable Purchase Price in effect immediately prior to such adjustment and the denominator of which shall be the applicable Purchase Price in effect immediately after such adjustment. (b) The Company may elect, upon any adjustment of the applicable Purchase Price hereunder, to adjust the number of Warrants outstanding, in lieu of adjusting the number of shares of Common Stock purchasable upon the exercise of each Warrant as hereinabove provided, so that each Warrant outstanding after such adjustment shall represent the right to purchase one share of Common Stock. Each Warrant held of record prior to such adjustment of the number of Warrants shall become that number of Warrants (calculated to the nearest tenth) determined by multiplying the number one by a fraction, the numerator of which shall be the applicable Purchase Price in effect immediately prior to such adjustment and the denominator of which shall be the applicable Purchase Price in effect immediately after such adjustment. Upon each such adjustment of the number of Warrants, the Redemption Price in effect immediately prior to such adjustment also shall be adjusted by multiplying such Redemption Price by a fraction, the numerator of which shall be the Purchase Price in effect immediately after such adjustment and the denominator of which shall be the Purchase Price in effect immediately prior to such adjustment. Upon each adjustment of the number of Warrants pursuant to this Section 9, the Company shall, as promptly as practicable, cause to be distributed to each Registered Holder of Warrant Certificates on the date of such adjustment Warrant Certificates evidencing, subject to Section 10, the number of additional Warrants, if any, to which such Holder shall be entitled as a result of such adjustment or, at the option of the Company, cause to be distributed to such Holder in substitution and replacement for the Warrant Certificates held by him prior to the date of adjustment (and upon surrender thereof, if required by the Company) new Warrant Certificates evidencing the number of warrants to which such Holder shall be entitled after such adjustment. (c) In case of any reclassification, capital reorganization or other change of outstanding shares of Common Stock, or in case of any consolidation or merger of the Company with or into another corporation (other than a consolidation or merger in which the Company is the continuing corporation and which does not result in any reclassification, capital reorganization or other change of outstanding shares of Common Stock) , or in case of any sale or conveyance to another corporation of the property of the Company as, or substantially as, an entirety (other than a sale/leaseback, mortgage or other financing transaction), the Company shall cause effective provision to be made so that each holder of a Warrant then outstanding shall have the right thereafter, by exercising such Warrant, to purchase the kind and number of shares of stock or other securities or property (including cash) receivable upon such reclassification, capital reorganization or other change, consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock that might have been purchased upon exercise of such warrant, immediately prior to such reclassification, capital reorganization or other change, consolidation, merger, sale or conveyance. Any such provision shall include provision for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 9. The foregoing provisions shall similarly apply to successive reclassifications, capital reorganizations and other changes of outstanding shares of Common Stock and to successive consolidations, mergers, sales or conveyances. (d) Irrespective of any adjustments or changes in the Purchase Price or the number of shares of Common Stock purchasable upon exercise of the Warrants, the Warrant Certificates theretofor and thereafter issued shall, unless the Company shall exercise its option to issue new Warrant Certificates pursuant to Section 2(f), continue to express the applicable Purchase Price per share, the number of shares purchasable thereunder and the Redemption Price therefor as the Purchase Price per share, the number of shares purchasable thereunder and the Redemption Price therefor as were expressed in the Warrant Certificates when the same were originally issued. (e) After each adjustment of the Purchase Price pursuant to this Section 9, the Company will promptly prepare a certificate signed by the Chairman or President, and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary, of the Company setting forth: (i) the applicable Purchase Price as so adjusted, (ii) the number of shares of Common Stock purchasable upon exercise of each Warrant after such adjustment, and, if the Company shall have elected to adjust the number of Warrants, the number of Warrants to which the registered holder of each Warrant shall then be entitled, and the adjustment in Redemption Price resulting therefrom, and (iii) a brief statement of the facts accounting for such adjustment. The Company will promptly file such certificate with the Warrant Agent and cause a brief summary thereof to be sent by ordinary first class mail to the Underwriter and to each Registered Holder of Warrants at his last address as it shall appear on the registry books of the Warrant Agent. No failure to mail such notice nor any defect therein or in the mailing thereof shall affect the validity thereof except as to the holder to whom the Company failed to mail such notice, or except as to the holder whose notice was defective. The affidavit of an officer of the Warrant Agent or the Secretary or an Assistant Secretary of the Company that such notice has been mailed shall, in the absence of fraud, be PRIMA FACIE evidence of the facts stated therein. (f) For purposes of Section 9(a) and 9(b) hereof, the following provisions (i) to (vi) shall also be applicable: (i) The number of shares of Common Stock outstanding at any given time shall include shares of Common Stock owned or held by or for the account of the Company and the sale or issuance of such treasury shares or the distribution of any such treasury shares shall not be considered a Change of Shares for purposes of said sections. (ii) No Adjustment of the Purchase Price shall be made unless such adjustment would require an increase or decrease of at least $0.05 in such price; provided that any adjustments which by reason of this clause (ii) are not required to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment which, together with any adjustment(s) so carried forward, shall require an increase or decrease of at least $0.05 in the Purchase Price then in effect hereunder. (iii) In case of (1) the sale by the Company solely for cash of any rights or warrants to subscribe for or purchase, or any options for the purchase of, Common Stock or any securities convertible into or exchangeable for Common Stock without the payment of any further consideration other than cash, if any (such convertible or exchangeable securities being herein called "Convertible Securities"), or (2) the issuance by the Company, without the receipt by the Company of any consideration therefor, of any rights or warrants to subscribe for or purchase, or any options for the purchase of, Common Stock or Convertible Securities, in each case, if (and only if) the consideration payable to the Company upon the exercise of such rights, warrants or options shall consist solely of cash, whether or not such rights, warrants or options, or the right to convert or exchange such Convertible Securities, are immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such rights, warrants or options or upon the conversion or exchange of such Convertible Securities (determined by dividing (x) the minimum aggregate consideration payable to the Company upon the exercise of such rights, warrants or options, plus the consideration received by the Company for the issuance or sale of such rights, warrants or options, plus, in the case of such Convertible Securities, the minimum aggregate amount of additional consideration, if any, other than such Convertible Securities, payable upon the conversion or exchange thereof, by (y) the total maximum number of shares of Common Stock issuable upon the exercise of such rights, warrants or options or upon the conversion or exchange of such Convertible Securities issuable upon the exercise of such rights, warrants or options) is less than the then current Purchase Price immediately prior to the date of the issuance or sale of such rights, warrants or options, then the total maximum number of shares of Common Stock issuable upon the exercise of such rights, warrants or options or upon the conversion or exchange of such Convertible Securities (as of the date of the issuance or sale of such rights, warrants or options) shall be deemed to be outstanding shares of Common Stock for purposes of Sections 9(a) and 9(b) hereof and shall be deemed to have been sold for cash in an amount equal to such price per share. (iv) In case of the sale by the Company solely for cash of any Convertible Securities, whether or not the right of conversion or exchange thereunder is immediately exercisable, and the price per share for which Common Stock is issuable upon the conversion or exchange of such Convertible Securities (determined by dividing (x) the total amount of consideration received by the Company for the sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, other than such Convertible Securities, payable upon the conversion or exchange thereof, by (y) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of such Convertible Securities) is less than the then Purchase Price immediately prior to the date of the sale of such Convertible Securities, then the total maximum number of shares of Common Stock issuable upon the conversion or exchange of such Convertible Securities (as of the date of the sale of such Convertible Securities) shall be deemed to be outstanding shares of Common Stock for purposes of Sections 9(a) and 9(b) hereof and shall be deemed to have been sold for cash in an amount equal to such price per share. (v) If the exercise or purchase price provided for in any right, warrant or option referred to in clause (iii) above, or the rate at which any Convertible Securities referred to in clause (iii) or (iv) above are convertible into or exchangeable for Common Stock, shall change at any time (other than under or by reason of provisions designed to protect against dilution), the Purchase Price then in effect hereunder shall forthwith be readjusted to such Purchase Price as would have been obtained (1) had the adjustments made upon the issuance or sale of such rights, warrants, options or Convertible Securities been made upon the basis of the issuance of only the number of shares of Common Stock theretofor actually delivered (and the total consideration received therefor) upon the exercise of such rights, warrants or options or upon the conversion or exchange of such Convertible Securities, (2) had adjustments been made on the basis of the Purchase Price as adjusted under clause (1) for all transactions (which would have affected such adjusted Purchase Price) made after the issuance or sale of such rights, warrants, options or Convertible Securities, and (3) had any such rights, warrants, options or Convertible Securities then still outstanding, been originally issued or sold at the time of such change. On the expiration of any such right, warrant or option or the termination of any such right to convert or exchange any such Convertible Securities, the Purchase Price then in effect hereunder shall forthwith be readjusted to such Purchase Price as would have obtained (a) had the adjustments made upon the issuance or sale of such rights, warrants, options or Convertible Securities been made upon the basis of the issuance of only the number of shares of Common Stock theretofor actually delivered (and the total consideration received therefor) upon the exercise of such rights, warrants or options or upon the conversion or exchange of such Convertible Securities and (b) had adjustments been made on the basis of the Purchase Price as adjusted under clause (a) for all transactions (which would have affected such adjusted Purchase Price) made after the issuance or sale of such rights, warrants, options or Convertible Securities. (vi) In case of the sale for cash of any shares of Common Stock, any Convertible Securities, any rights or warrants to subscribe for or purchase, or any options for the purchase of, Common Stock or Convertible Securities, the consideration received by the Company therefore shall be deemed to be the gross sales price therefor without deducting therefrom any expense paid or incurred by the Company or any underwriting discounts or commissions or concessions paid or allowed by the Company in connection therewith. (g) No adjustment to the Purchase Price or to the number of shares of Common Stock purchasable upon the exercise of each Warrant will be made, however: (i) upon the grant or exercise of any other options which have heretofor been or may hereafter be granted or exercised under any employee benefit plan of Old STAT or the Company as described in the Registration Statement; or (ii) upon the sale or exercise of the Warrants, including without limitation the sale or exercise of any of the Warrants underlying the Underwriter's Warrants; or (iii) upon the issuance or sale of Common Stock or Convertible Securities upon the exercise of any rights or warrants to subscribe for or purchase, or any options for the purchase of, Common Stock or Convertible Securities, outstanding on the date hereof; (iv) upon the issuance or sale of Common Stock upon conversion or exchange of any Convertible Securities outstanding on the date hereof, whether or not any adjustment in the Purchase Price was made or required to be made upon the issuance or sale of such Convertible Securities; (v) upon any amendment to or change in the terms of any rights or warrants to subscribe for or purchase, or options for the purchase of, Common Stock or Convertible Securities or in the terms of any Convertible Securities, including, but not limited to, any extension of any expiration date of any such right, warrant or option, any change in any exercise or purchase price provided for in any such right, warrant or option, any extension of any date through which any Convertible Securities are convertible into or exchangeable for Common Stock or any change in the rate at which any Convertible Securities are convertible into or exchangeable for Common Stock (other than rights, warrants, options or Convertible Securities issued or sold after the close of business on the date of the original issuance of the Old STAT Units (i) for which an adjustment in the Purchase Price then in effect was theretofor made or required to be made, upon the issuance or sale thereof, or (ii) for which such an adjustment would have been required had the exercise or purchase price of such rights, warrants or options at the time of the issuance or sale thereof or the rate of conversion or exchange of such Convertible Securities, at the time of the sale of such Convertible Securities, or the issuance or sale of rights or warrants to subscribe for or purchase, or options for the purchase of, such Convertible Securities, been the price or rate as changed, in which case the provisions of Section 9(f)(v) hereof shall be applicable if, but only if, the exercise or purchase price thereof, as changed, or the rate of conversion or exchange thereof, as changed, consists solely of cash or requires the payment of additional consideration, if any, consisting solely of cash or requires the payment of additional consideration, if any, consisting solely of cash and the Company did not receive any consideration other than cash, if any, in connection with such change); or (vi) upon the issuance of Common Stock to the Old STAT stockholders, the AmHealth Shareholders and the AmHealth Partners pursuant to the Reorganization Agreement and the Exchange. (h) As used in this Section 9, the term "Common Stock" shall mean and include the Company's Common Stock authorized on the date hereof and shall also include any capital stock of any class of the Company thereafter authorized which shall not be limited to a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends and in the distribution of assets upon the voluntary liquidation, dissolution or winding up of the Company; provided, however, that the shares issuable upon exercise of the Warrants shall include only shares of such class designated in the Company's Certificate of Incorporation as Common Stock on the date hereof or (i), in the case of any reclassification, change, consolidation, merger, sale or conveyance of the character referred to in Section 9(c) hereof, the stock, securities or property provided for in such section, or (ii) in the case of any reclassification or change in the outstanding shares of Common Stock issuable upon exercise of the Warrants as a result of a subdivision or combination or consisting of a change in par value, or from par value to no par value, or from no par value to par value, such shares of Common Stock as so reclassified or changed. (i) Any determination as to whether an adjustment in the Purchase Price in effect hereunder is required pursuant to Section 9, or as to the amount of any such adjustment, if required, shall be binding upon the holders of the Warrants and the Company if made in good faith by the Board of Directors of the Company. (j) If and whenever the Company shall grant to the holders of Common Stock, as such, rights or warrants to subscribe for or to purchase, or any options for the purchase of, Common Stock or securities convertible into or exchangeable for or carrying a right, warrant or option to purchase Common Stock, the Company shall concurrently therewith grant to each of the then Registered Holders of the Warrants all of such rights, warrants or options to which each such holder would have been entitled if, on the date of determination of stockholders entitled to the rights, warrants or options being granted by the Company, such holder were the holder of record of the number of whole shares of Common Stock then issuable upon exercise (assuming, for purposes of this Section 9 (j) , that exercise of Warrants is permissible during periods prior to the Initial Warrant Exercise Date) of his Warrants. Such grant by the Company to the holders of the Warrants shall be in lieu of any adjustment which otherwise might be called for pursuant to this Section 9. SECTION 10. FRACTIONAL WARRANTS AND FRACTIONAL SHARES. If the number of shares of Common Stock purchasable upon the exercise of each Warrant is adjusted pursuant to Section 9 hereof, the Company shall nevertheless not be required to issue fractions of shares, upon exercise of the Warrants or otherwise, or to distribute certificates that evidence fractional shares. With respect to any fraction of a share called for upon any exercise hereof, the Company shall pay to the Holder an amount in cash equal to such fraction multiplied by the current market value of such fractional share, determined as follows: (i) If the Common Stock is listed on a National Securities Exchange or admitted to unlisted trading privileges on such exchange or listed for trading on the Nasdaq National Market, the current value shall be the last reported sale price of the Common Stock on such exchange on the last business day prior to the date of exercise of the Warrant, or if no such sale is made on such day, the average of the closing bid and asked prices for such day on such exchange; or (ii) If the Common Stock is not listed or admitted to unlisted trading privileges, the current value shall be the mean of the last reported bid and asked prices reported by the National Quotation Bureau, Inc. on the last business day prior to the date of the exercise of the Warrant; or (iii) If the Common Stock is not so listed or admitted to unlisted trading privileges and bid and asked prices are not so reported, the current value shall be an amount determined in such reasonable manner as may be prescribed by the Board of Directors of the Company. SECTION 11. WARRANT HOLDERS NOT DEEMED STOCKHOLDERS. No holder of Warrants shall, as such, be entitled to vote or to receive dividends or be deemed the holder of Common Stock that may at any time be issuable upon exercise of such Warrants for any purpose whatsoever, nor shall anything contained herein be construed to confer upon the holder of Warrants, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issue or reclassification of stock, change of par value or change of stock to no par value, consolidation, merger or conveyance or otherwise), or to receive notice of meetings, or to receive dividends or subscription rights, until such Holder shall have exercised such Warrants and been issued shares of Common Stock in accordance with the provisions hereof. SECTION 12. RIGHTS OF ACTION. All rights of action with respect to this Agreement are vested in the respective Registered Holders of the Warrants, and any Registered Holder of a Warrant, without consent of the Warrant Agent or of the holder of any other Warrant, may, in his own behalf and for his own benefit, enforce against the Company his right to exercise his Warrants for the purchase of shares of Common Stock in the manner provided in the Warrant Certificates and this Agreement. SECTION 13. AGREEMENT OF WARRANT HOLDERS. Every holder of a Warrant, by his acceptance thereof, consents and agrees with the Company, the Warrant Agent and every other holder of a Warrant that: (a) The Warrants are transferable only on the registry books of the Warrant Agent by the Registered Holder thereof in person or by his attorney duly authorized in writing and only if the Warrant Certificates representing such Warrants are surrendered at the office of the Warrant Agent, duly endorsed or accompanied by a proper instrument of transfer satisfactory to the Warrant Agent and the Company in their sole discretion, together with payment of any applicable transfer taxes; and (b) The Company and the Warrant Agent may deem and treat the person in whose name the Warrant Certificate is registered as the holder and as the absolute, true and lawful owner of the Warrants represented thereby for all purposes, and neither the Company nor the Warrant Agent shall be affected by any notice or knowledge to the contrary, except as otherwise expressly provided in Section 7 hereof. SECTION 14. CANCELLATION OF WARRANT CERTIFICATES. If the Company shall purchase or acquire any Warrant or Warrants, the Warrant Certificate or Warrant Certificates evidencing the same shall thereupon be delivered to the Warrant Agent and canceled by it and retired. The Warrant Agent shall also cancel Warrant Certificates following exercise of any or all of the Warrants represented thereby or delivered to it for transfer, split-up, combination or exchange. SECTION 15. CONCERNING THE WARRANT AGENT. The Warrant Agent acts hereunder as agent and in a ministerial capacity for the Company, and its duties shall be determined solely by the provisions hereof. The Warrant Agent shall not, by issuing and delivering Warrant Certificates or by any other act hereunder be deemed to make many representations as to the validity, value or authorization of the Warrant Certificates or the Warrants represented thereby or of any securities or other property delivered upon exercise of any Warrant or whether any stock issued upon exercise of any warrant is fully paid and nonassessable. The Warrant Agent shall not at any time be under any duty or responsibility to any holder of Warrant Certificates to make or cause to be made any adjustment of the Purchase Price or the Redemption Price provided in this Agreement, or to determine whether any fact exists which may require any such adjustments, or with respect to the nature or extent of any such adjustment, when made, or with respect to the method employed in making the same. It shall not (i) be liable for any recital or statement of facts contained herein or for any action taken, suffered or omitted by it in reliance on any Warrant Certificate or other document or instrument believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties, (ii) be responsible for any failure on the part of the Company to comply with any of its covenants and obligations contained in this Agreement or in any Warrant Certificate, or (iii) be liable for any act or omission in connection with this Agreement except for its own negligence or willful misconduct. The Warrant Agent may at any time consult with counsel satisfactory to it (who may be counsel for the Company or for the Underwriter) and shall incur no liability or responsibility for any action taken, suffered or omitted by it in good faith in accordance with the opinion or advice of such counsel. Any notice, statement, instruction, request, direction, order or demand of the Company shall be sufficiently evidenced by an instrument signed by the Chairman of the Board, President, any Vice President, its Secretary, or Assistant Secretary (unless other evidence in respect thereof is herein specifically prescribed). The Warrant Agent shall not be liable for any action taken, suffered or omitted by it in accordance with such notice, statement, instruction, request, direction, order or demand believed by it to be genuine. The Company agrees to pay the Warrant Agent reasonable compensation for its services hereunder and to reimburse it for its reasonable expenses hereunder; it further agrees to indemnify the Warrant Agent and save it harmless against any and all losses, expenses and liabilities, including judgments, costs and counsel fees, for anything done or omitted by the Warrant Agent in the execution of its duties and powers hereunder except losses, expenses and liabilities arising as a result of the Warrant Agent's negligence or willful misconduct. In the event of a dispute under this Agreement between the Company and the Underwriter regarding proceeds received by the Warrant Agent from the exercise of the Warrants, the Warrant Agent shall have the right, but not the obligation, to bring an interpleader action to resolve such dispute. The Warrant Agent may resign its duties and be discharged from all further duties and liabilities hereunder (except liabilities arising as a result of the Warrant Agent's own negligence or willful misconduct), after giving 30 days' prior written notice to the Company. At least 15 days prior to the date such resignation is to become effective, the Warrant Agent shall cause a copy of such notice of resignation to be mailed to the Registered Holder of each Warrant Certificate at the Company's expense. Upon such resignation, or any inability of the Warrant Agent to act as such hereunder, the Company shall appoint a new warrant agent in writing. If the Company shall fail to make such appointment within a period of 15 days after it has been notified in writing of such resignation by the resigning Warrant Agent, then the Registered Holder of any Warrant Certificate may apply to any court of competent jurisdiction for the appointment of a new warrant agent. Any new warrant agent, whether appointed by the Company or by such a court shall be a bank or trust company having a capital and surplus as shown by its last published report to its stockholders, of not less than Ten Million ($10,000,000.00) Dollars, or a stock transfer company. After acceptance in writing of such appointment by the new warrant agent is received by the Company, such new warrant agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named herein as the Warrant Agent, without any further assurance, conveyance, act or deed; but if for any reason it shall be necessary or expedient to execute and deliver any further assurance, conveyance, act or deed, the same shall be done at the expense of the Company and shall be legally and validly executed and delivered by the resigning Warrant Agent. Not later than the effective date of any such appointment the Company shall file notice thereof with the resigning Warrant Agent and shall forthwith cause a copy of such notice to be mailed to the Registered Holder of each Warrant Certificate. Any corporation into which the Warrant Agent or any new warrant agent may be converted or merged or any corporation resulting from any consolidation to which the Warrant Agent or any new warrant agent shall be a party or any corporation succeeding to the trust business of the Warrant Agent shall be a successor warrant agent under this Agreement without any further act, provided that such corporation is eligible for appointment as successor to the Warrant Agent under the provisions of the preceding paragraph. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed to the Company and to the Registered Holder of each Warrant Certificate. The Warrant Agent, its subsidiaries and affiliates, and any of its or their officers or directors, may buy and hold or sell Warrants or other securities of the Company and otherwise deal with the Company in the same manner and to the same extent and with like effects as though it were not Warrant Agent. Nothing herein shall preclude the Warrant Agent from acting in any other capacity for the Company or for any other legal entity. SECTION 16. MODIFICATION OF AGREEMENT. Subject to the provisions of Section 4(b), the Warrant Agent and the Company may by supplemental agreement make any changes or corrections in this Agreement (i) that they shall deem appropriate to cure any ambiguity or to correct any defective or inconsistent provision or manifest mistake or error herein contained; or (ii) that they may deem necessary or desirable and which shall not adversely affect the interests of the holders of Warrant Certificates; provided, however, that this Agreement shall not otherwise be modified, supplemented or altered in any respect except with the consent in writing of the Registered Holders of Warrant Certificates representing not less than 50% of the Warrants then outstanding; and PROVIDED, FURTHER, that no change in the number or nature of the securities purchasable upon the exercise of any Warrant, or the Purchase Price therefor, or the acceleration of the Warrant Expiration Date, shall be made without the consent in writing of the Registered Holder of the Warrant Certificate representing such Warrant, other than such changes as are specifically prescribed by this Agreement as originally executed. SECTION 17. NOTICES. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been made when delivered or mailed first class registered or certified mail, postage prepaid as follows: if to the Registered Holder of a Warrant Certificate, at the address of such holder as shown on the registry books maintained by the Warrant Agent; if to the Company, at 12450 Greenspoint Drive, Suite 1200, Houston, Texas 77060, Attention: Chief Financial Officer, or at such other address as may have been furnished to the Warrant Agent in writing by the Company; if to the Warrant Agent, at 40 Wall Street, New York, New York 10005; and, if to Network 1, at Network 1 Financial Securities, Inc., Galleria Building 2, Penthouse Suite, 2 Bridge Avenue, Red Bank, New Jersey 07701, Attention: William Hunt. SECTION 18. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without reference to principles of conflict of laws. SECTION 19. BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of the Company, the Warrant Agent and the Underwriter, and their respective successors and assigns, and the holders from time to time of the Warrant Certificates. Nothing in this Agreement is intended or shall be construed to confer upon any other person any right, remedy or claim, in equity or at law, or to impose upon any other person any duty, liability or obligation. SECTION 20. TERMINATION.This Agreement shall terminate at the close of business on the Expiration Date of all the Warrants or such earlier date upon which all Warrants have been exercised, except that the Warrant Agent shall account to the Company for cash held by it and the provisions of Section 15 hereof shall survive such termination. SECTION 21. COUNTERPARTS. This Agreement may be executed in several counterparts, which taken together shall constitute a single document. SECTION 22. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement, including the exhibits attached hereto, by and among the Company, the Warrant Agent and the Underwriter, and shall supercede that certain Warrant Agreement by and among the parties hereto, dated April 20, 1995. IN WITNESS WHEREOF, the parties hereto have caused this Warrant Agreement to be duly executed as of the date first above written. STAT HEALTHCARE, INC. (formerly New STAT Healthcare, Inc.) By: /s/ NED E. CHAPMAN Authorized Officer AMERICAN STOCK TRANSFER & TRUST COMPANY By: /s/ HERBERT R. LEMMER, VICE PRESIDENT Authorized Officer NETWORK 1 FINANCIAL SECURITIES, INC. By: /s/ WILLIAM R. HUNT Authorized Officer EXHIBIT A [FORM OF FACE OF WARRANT CERTIFICATE] No. SW_____________ __________________ (______) Warrants VOID AFTER April 19, 1998 CLASS A REDEEMABLE COMMON STOCK WARRANT CERTIFICATE FOR PURCHASE OF COMMON STOCK OF NEW STAT HEALTHCARE, INC. This certifies that FOR VALUE RECEIVED ___________________________________ or registered assigns (the "Registered Holder") is the owner of the number of Class A Redeemable Common Stock Purchase Warrants (the "Warrants") specified above. Each Warrant initially entitles the Registered Holder to purchase, subject to the terms and conditions set forth in this Certificate and the Warrant Agreement (as hereinafter defined), one fully paid and nonassessable share of Common Stock, $0.01 par value, of STAT Healthcare, Inc., a Delaware corporation formerly named "New STAT Healthcare, Inc." (the "Company"), at any time between June 24, 1996 and the Expiration Date (as hereinafter defined), upon the presentation and surrender of this Warrant Certificate with the Subscription Form on the reverse hereof duly executed, at the corporate office of American Stock Transfer & Trust Company as Warrant Agent, or its successor (the "Warrant Agent"), accompanied by payment of $4.50 per share (the "Purchase Price") in lawful money of the United States of America in cash or by official bank or certified check made payable to the Warrant Agent. This Warrant Certificate and each Warrant represented hereby are issued pursuant to and are subject in all respects to the terms and conditions set forth in the Warrant Agreement (the "Warrant Agreement"), dated as of June 24, 1996, by and among the Company, the Warrant Agent and Network 1 Financial Securities, Inc. In the event of certain contingencies provided for in the Warrant Agreement, the Purchase Price or the number of shares of Common Stock subject to purchase upon the exercise of each Warrant represented hereby are subject to modification or adjustment. Each Warrant represented hereby is exercisable at the option of the Registered Holder, but no fractional shares of Common Stock will be issued. In the case of the exercise of less than all the Warrants represented hereby, the Company shall cancel this Warrant Certificate upon the surrender hereof and shall execute and deliver a new Warrant Certificate or Warrant Certificates of like tenor, which the Warrant Agent shall countersign, for the balance of such Warrants. The term "Expiration Date," shall mean, with respect to each Warrant, 5:00 p.m. (New York, New York time) on April 19, 1998, or the Redemption Date as defined in Section 8, whichever is earlier; provided that if such date shall in the State of New York be a holiday or a day on which banks are authorized to close, then 5:00 p.m. (New York, New York time) on the next following day which in the State of New York is not a holiday or a day on which banks are authorized to close. Upon notice to all Warrant Holders, the Company shall have the right to extend the Expiration Date. The Company shall not be obligated to deliver any securities pursuant to the exercise of this Warrant unless a registration statement under the Securities Act of 1933, as amended, with respect to such securities is effective. The Company has covenanted and agreed that it will file a registration statement and will use its best efforts to cause the same to become effective and to keep such registration statement current while any of the Warrants are outstanding. This Warrant shall not be exercisable by a Registered Holder in any state where such exercise would be unlawful. This Warrant Certificate is exchangeable, upon the surrender hereof by the Registered Holder at the corporate office of the Warrant Agent, for a new Warrant Certificate or Warrant Certificates of like tenor representing an equal aggregate number of Warrants, each of such new Warrant Certificates to represent such number of Warrants as shall be designated by such Registered Holder at the time of such surrender. Upon due presentment together with any tax or other governmental charge imposed in connection therewith, for registration of transfer of this Warrant Certificate at such office, a new Warrant Certificate or Warrant Certificates representing an equal aggregate number of Warrants will be issued to the transferee in exchange therefor, subject to the limitations provided in the Warrant Agreement. Prior to the exercise of any Warrant represented hereby, the Registered Holder shall not be entitled to any rights of a stockholder of the Company, including, without limitations the right to vote or to receive dividends or other distributions, and shall not be entitled to receive any notice of any proceedings of the Company, except as provided in the Warrant Agreement. Commencing June 24, 1996, this Warrant may be redeemed at the option of the Company, at a redemption price of $0.05 per Warrant, provided the closing bid price of the Common Stock of the Company or the common stock of the Company's wholly owned subsidiary, Old STAT, Inc. (formerly named "STAT Healthcare, Inc."), on The Nasdaq Stock Market as reported by the National Quotation Bureau, Incorporated exceeds $5.50 for at least 20 consecutive trading days ending on the third business day prior to the date of the notice of redemption. Notice of redemption shall be given not later than the thirtieth (30th) day before the date fixed for redemption, all as provided in the Warrant Agreement. On and after the date fixed for redemption, the Registered Holder shall have no rights with respect to this Warrant except to receive the $0.05 per Warrant upon surrender of this Certificate. Prior to due presentment for registration of transfer hereof, the Company and the Warrant Agent may deem and treat the Registered Holder as the absolute owner hereof and of each Warrant represented hereby (notwithstanding any notations of ownership or writing hereon made by anyone other than a duly authorized officer of the Company or the Warrant Agent) for all purposes and shall not be affected by any notice to the contrary. The Company has agreed to pay a fee of four (4%) percent of the Purchase Price upon certain conditions as specified in the Warrant Agreement upon the exercise of this Warrant. This Warrant Certificate shall be governed by and construed in accordance with the laws of the State of New York. This Warrant Certificate is not valid unless countersigned by the Warrant Agent. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed, manually or in facsimile by two (2) of its officers thereunto duly authorized and a facsimile of its corporate seal to be imprinted hereon. Dated: STAT HEALTHCARE, INC. (formerly New STAT Healthcare, Inc.) By: Chairman By: Secretary [seal] Countersigned: AMERICAN STOCK TRANSFER & TRUST COMPANY By: Authorized officer [FORM OF REVERSE OF WARRANT CERTIFICATE] SUBSCRIPTION FORM To Be Executed by the Registered Holder in order to Exercise Warrants The undersigned Registered Holder hereby irrevocably elects to exercise ____________ (__________) Warrants represented by this Warrant Certificate, and to purchase the securities issuable upon the exercise of such Warrants, and requests that certificates for such securities shall be issued in the name of PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER [please print or type name and address] and be delivered to [please print or type name and address] and if such number of Warrants shall not be all the Warrants evidenced by this Warrant Certificate, that a new Warrant Certificate for the balance of such Warrants be registered in the name of, and delivered to, the Registered Holder at the address stated below. The undersigned represents that the exercise of the within Warrant was solicited by a member of the National Association of Securities Dealers, Inc. ("NASD"). If not solicited by an NASD member, please write "unsolicited" in the space below. Unless otherwise indicated by listing the name of another NASD member firm, it will be assumed that the exercise was solicited by Network 1 Financial Securities, Inc. Name of NASD Member if other than Network 1 Financial Securities, Inc. Dated: Signature Street Address City, State and Zip Code Taxpayer ID Number Signature Guaranteed: ASSIGNMENT To Be Executed by the Registered Holder in Order to Assign Warrants FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER [please print or type name and address] _________________________________________________ (__________________) of the Warrants represented by this Warrant Certificate, and hereby irrevocably constitutes and appoints Attorney to transfer this Warrant Certificate on the books of the Company, with full power of substitution in the premises. Dated: Signature Guaranteed: THE SIGNATURE MUST BE GUARANTEED BY A MEDALLION BANK. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-4.4 <SEQUENCE>5 <TEXT> EXHIBIT 4.4 RW- ___ N REPRESENTATIVES' WARRANT Dated: June 24, 1996 THIS CERTIFIES THAT ______________________________ (the "Holder") is entitled to purchase from STAT HEALTHCARE, INC., a Delaware corporation (the "Company") formerly named "New STAT Healthcare, Inc.", ________ units (the "Units") at a purchase price of $10.875 per Unit (the "Exercise Price"), subject to adjustment as provided in paragraph 8 hereof, at any time commencing on the date hereof and ending on April 19, 2000. Each Unit consists of two (2) shares of the Company's common stock, par value $0.01 per share (the "Common Stock"), and one (1) redeemable common stock purchase warrant to purchase one share of Common Stock (the "Redeemable Warrants") at an initial exercise price of $4.50 per share (the "Redeemable Warrant Exercise Price"). This Representatives' Warrant (the "Representatives' Warrant") is one of a series of Representatives' Warrants to purchase, in the aggregate, up to 62,500 Units and issued in exchange for certain warrants, dated April 20, 1995 (the "Old STAT Warrants"), issued by Old STAT, Inc., a Delaware corporation ("Old STAT") wholly owned by the Company and formerly named as "STAT Healthcare, Inc." On June 24, 1996, pursuant to an Amended and Restated Agreement and Plan of Reorganization, dated March 15, 1996, as amended (the "Reorganization Agreement"), among other things, (i) Old STAT was merged with STAT Acquisition Corp., a wholly owned subsidiary of the Company, (ii) each issued and outstanding share of Old STAT's common stock, par value $0.01 per share (the "Old STAT Common Stock"), was converted into one share of Common Stock and (iii) each outstanding warrant and option to purchase Old STAT Common Stock was converted into a right to purchase Common Stock. This Representatives' Warrant is issued in exchange for a similar warrant of Old STAT (the "Old STAT Representatives' Warrant") pursuant to the Reorganization Agreement and paragraph 8(a) of the Old STAT Representatives' Warrant. The Old STAT Representatives' Warrants were issued pursuant to an Underwriting Agreement, dated April 20, 1995, among Old STAT, Network 1 Financial Securities, Inc. ("Network 1") and Rothschild Global Investments, Inc. ("RGI" and, collectively with Network 1, the "Representatives") as representatives of the several underwriters (the "Underwriters"), in connection with a public offering, through the Underwriters, of 625,000 units of Old STAT (the "Old STAT Units") as therein described and in consideration of $10.00 received by Old STAT for the Old STAT Representatives' Warrants. Each Old STAT Unit consisted of two shares of Old STAT Common Stock and a redeemable common stock purchase warrant to purchase one share of Old STAT Common Stock (the "Old STAT Public Warrants"). Except as specifically otherwise provided herein, the shares of Common Stock and Redeemable Warrants included in the Units issuable pursuant to the Representatives' Warrants shall have the same terms and conditions as the Common Stock and the Redeemable Warrants, respectively, as described under the caption "Description of Securities of New STAT" in the Company's Registration Statement on Form S-4 (Reg. No. 333-2486) (the "Registration Statement"). 1. The rights represented by this Representatives' Warrant shall be exercised at the price, subject to adjustment in accordance with paragraph 8 hereof, and during the periods as follows: (a) During the period from the date hereof to April 19, 2000 (the "Expiration Date") inclusive, the Holder shall have the option to purchase Units hereunder at a price of $10.875 per Unit (145% of the initial public offering price of the Old STAT Units), subject to adjustment as provided in paragraph 8 hereof. (b) After the Expiration Date, the Holder shall have no right to purchase any Units hereunder. 2. (a) The rights represented by this Representatives' Warrant may be exercised at any time within the period above specified, in whole or in part, by (i) the surrender of the Representatives' Warrant (with the purchase form at the end hereof properly executed) at the principal executive office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the Holder at the address of the Holder appearing on the books of the Company); (ii) payment to the Company of the exercise price then in effect for the number of Units specified in the above-mentioned purchase form together with applicable stock transfer taxes, if any; and (iii) delivery to the Company of a duly executed agreement signed by the person(s) designated in the purchase form to the effect that such person(s) agree(s) to be bound by the provisions of paragraph 6 and subparagraphs (b), (c) and (d) of paragraph 7 hereof. The Representatives' Warrant shall be deemed to have been exercised, in whole or in part to the extent specified, immediately prior to the close of business on the date the Representatives' Warrant is surrendered and payment is made in accordance with the foregoing provisions of this paragraph 2, and the person or persons in whose name or names the certificates for shares of Common Stock and Redeemable Warrants shall be issuable upon such exercise shall become the holder or holders of record of such Common Stock and Redeemable Warrants at that time and date. Certificates representing the Common Stock and Redeemable Warrants so purchased shall be delivered to the Holder within a reasonable time, not exceeding ten (10) days, after the rights represented by this Warrant shall have been so exercised. (b) Notwithstanding anything to the contrary contained in subparagraph (a) of paragraph 2, the Holder may elect to exercise this Representatives' Warrant in whole or in part by receiving Units equal to the value (as determined below) of this Representatives' Warrant at the principal office of the Company together with notice of such election in which event the Company shall issue to the Holder a number of Units computed using the following formula: X = Y(A-B) ------ A Where: X = the number of Units to be issued to the Holder; Y = the number of Units to be exercised under this Representatives' Warrant; A = the current fair market value of one Unit (calculated as described below); and B = the Exercise Price. As used herein, the current fair market value of one Unit shall mean (I) two X the greater of (x) the average of the closing prices per share of the Company's Common Stock or the Old STAT Common Stock sold on all securities exchanges on which the Common Stock or the Old STAT Common Stock may at the time be listed and the NASDAQ National Market, or, if there have been no sales on any such exchange or the NASDAQ National Market on such day, the average of the highest bid and lowest asked price per share on such day on The Nasdaq Stock Market or otherwise in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization (the "Market Price"), on the trading day immediately preceding the date notice of exercise of this Representatives' Warrant is given or (y) the average of the Market Price per share of Common Stock or the Old STAT Common Stock for the five trading days immediately preceding the date notice of exercise of this Representatives' Warrant is given PLUS (II) the greater of (x) the average of the closing prices per warrant of the Redeemable Warrants or the Old STAT Public Warrants sold on all securities exchanges on which the Redeemable Warrants or the Old STAT Public Warrants may at the time be listed and the NASDAQ National Market, or, if there have been no sales on any such exchange or the NASDAQ National Market on such day, the average of the highest bid and lowest asked price per share on such day on The Nasdaq Stock Market or otherwise in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization (the "Market Price"), on the trading day immediately preceding the date notice of exercise of this Representatives' Warrant is given or (y) the average of the Market Price per warrant of the Redeemable Warrants or the Old STAT Public Warrants for the five trading days immediately preceding the date notice of exercise of this Representatives' Warrant is given. If on any date for which the Market Price per share of Common Stock or Old STAT Common Stock or per Redeemable Warrant or Old STAT Public Warrant is to be determined, the Common Stock, the Old STAT Common Stock, the Redeemable Warrants or the Old STAT Public Warrants, as the case may be, are not listed on any securities exchange or quoted on the NASDAQ National Market or on The Nasdaq Stock Market or otherwise in the over-the-counter market, the Market Price per share of Common Stock or Old STAT Common Stock or per Redeemable Warrant or Old STAT Public Warrant shall be the highest price per share or per warrant, as the case may be, which the Company could then obtain from a willing buyer (not a current employee or director) for shares of Common Stock sold by the Company from authorized but unissued shares or for Redeemable Warrants, as determined in good faith by the Board of Directors of the Company, unless prior to such date the Company has become subject to a merger, acquisition or other consolidation pursuant to which the Company is not the surviving party, in which case the Market Price per share of Common Stock or Redeemable Warrant shall be deemed to be the value received by the holders of the Company's Common Stock and the Redeemable Warrants for each share or warrant, as the case may be, pursuant to the Company's acquisition. 3. The Representatives' Warrant shall not be transferred, sold, assigned, or hypothecated during the period prior to October 19, 1996 (the "Initial Period") except that it may be transferred to successors of the Holder, and may be assigned in whole or in part to any person who is an officer of the Holder or to any Underwriter or member of the selling group and/or the officers or partners thereof during such period. Any such assignment shall be effected by the Holder by (i) executing the form of assignment at the end hereof and (ii) surrendering the Representatives' Warrant for cancellation at the office or agency of the Company referred to in paragraph 2 hereof, accompanied by a certificate (signed by an officer of the Holder if the Holder is a corporation), stating that each transferee is a permitted transferee under this paragraph 3; whereupon the Company shall issue, in the name or names specified by the Holder (including the Holder) a new Representatives' Warrant or Warrants of like tenor and representing in the aggregate rights to purchase the same number of Units (consisting of the same number of shares of Common Stock and Redeemable Warrants) as are purchasable hereunder. 4. The Company covenants and agrees that all shares of Common Stock which may be purchased hereunder or upon exercise of the Redeemable Warrants will, upon issuance against payment of the purchase price therefor, be duly and validly issued, fully paid and nonassessable, and no personal liability will attach to the holder thereof. The Company further covenants and agrees that, during the periods within which the Representatives' Warrant may be exercised, the Company will at all times have authorized and reserved a sufficient number of shares of its Common Stock to provide for the exercise of the Representatives' Warrant and the Redeemable Warrants. 5. The Representatives' Warrant shall not entitle the Holder to any voting rights or other rights as stockholders of the Company. 6. (a)(i)The Company shall advise the Holder or its transferees, whether the Holder holds the Representatives' Warrant or has exercised the Representatives' Warrant and hold shares of Common Stock and/or Redeemable Warrants by written notice at least four weeks prior to the filing of any post-effective amendment to the Registration Statement or of any new registration statement or post-effective amendment thereto under the Securities Act of 1933, as amended (the "Act"), covering any securities of the Company, for its own account or for the account of others, except for any registration statement filed on Form S-4 or S-8, and will, for a period of seven years from April 20, 1995, upon the request of the Holder, and subject to subparagraph (a) (ii) of this paragraph 6, include in any such post-effective amendment to the Registration Statement or in any new registration statement such information as may be required to permit a public offering of the Representatives' Warrant, the Common Stock issuable upon the exercise thereof or upon exercise of the Redeemable Warrants or the Redeemable Warrants (collectively, the "Registrable Securities"). The Company shall supply prospectuses and such other document as the Holder may reasonably request in order to facilitate the public sale or other disposition of the Registrable Securities, use its best efforts to register and qualify any of the Registrable Securities for sale in such states as the Holder designates and do any and all other acts and things which may be necessary or desirable to enable the Holder to consummate the public sale or other disposition of the Registrable Securities, all at no expense to the Holder or the Representatives, and furnish indemnification in the manner provided in paragraph 7 hereof. The Holder shall furnish information and indemnification as set forth in paragraph 7. (ii) If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holder as a part of the written notice given pursuant to subparagraph (a)(i) of this paragraph 6. If the managing underwriter determines that a limitation of the number of shares to be underwritten is required, the underwriter may exclude some or all Registrable Securities from such registration (the "Excluded Registrable Securities"); provided, however, that no other security-holder may include any such securities in such registration statement if any of the Registrable Securities have been excluded from such registration; and further provided that the Company will file a new registration statement covering the Excluded Registrable Securities, at the Company's expense, within six months after the completion of such underwritten offering. (b) If any 50% Holder (as defined below) shall give notice to the Company at any time to the effect that such Holder desires to register under the Act any or all of the Registrable Securities under such circumstances that a public distribution (within the meaning of the Act) of any such securities will be involved, then the Company will promptly, but no later than four weeks after receipt of such notice, file a post-effective amendment to the current Registration Statement or a new registration statement pursuant to the Act, so that such designated Registrable Securities may be publicly sold under the Act as promptly as practicable thereafter and the Company will use its best efforts to cause such registration to become and remain effective (including the taking of such steps as are necessary to obtain the removal of any stop order) within 90 days after the receipt of such notice, provided, that such Holder shall furnish the Company with appropriate information in connection therewith as the Company may reasonably request in writing. The 50% Holder may, at its option, request the filing of a post-effective amendment to the current Registration Statement or a new registration statement under the Act on two occasions during the four-year period beginning April 20, 1996. The 50% Holder may, at its option, request the registration of the Representatives' Warrants and/or any of the securities underlying the Representatives' Warrants in a registration statement made by the Company as contemplated by subparagraph (a) of this paragraph 6 or in connection with a request made pursuant to this subparagraph (b) of paragraph 6 prior to acquisition of the shares of Common Stock and Redeemable Warrants issuable upon exercise of the Representatives' Warrants. The 50% Holder may, at its option, request such post-effective amendment or new registration statement during the described period with respect to the Representatives' Warrants, or separately as to the Common Stock and Redeemable Warrants issuable upon the exercise of the Representatives' Warrants, and such registration rights may be exercised by the 50% Holder prior to or subsequent to the exercise of the Representatives' Warrants. Within ten days after receiving any such notice pursuant to this subparagraph (b) of paragraph 6, the Company shall give notice to any other Holder of the Representatives' Warrants, advising that the Company is proceeding with such post-effective amendment or registration statement and offering to include therein the securities underlying that part of the Representatives' Warrants held by the other Holders, provided that they shall furnish the Company with such appropriate information (relating to the intentions of such Holders) in connection therewith as the Company shall reasonably request in writing. All costs and expenses of the first post-effective amendment or new registration statement shall be borne by the Company, except that the Holder(s) shall bear the fees of their own counsel and any underwriting discounts or commissions applicable to any of the securities sold by them. All costs and expenses of the second such post-effective amendment or new registration statement shall be borne by the Holder(s). The Company will maintain such registration statement or post-effective amendment current under the Act for a period of at least six months (and for up to an additional three months if requested by the Holder(s)) from the effective date thereof. The Company shall provide prospectuses, and such other documents as the Holder(s) may request in order to facilitate the public sale or other disposition of the Registrable Securities, use its best efforts to register and qualify any of the Registrable Securities for sale in such states as such Holder(s) designate and furnish indemnification in the manner provided in paragraph 7 hereof. (c) The term "50% Holder" as used in this paragraph 6 shall mean the Holder(s) of at least 50% of the Representatives' Warrants and/or the Common Stock underlying the Representatives' Warrants and the Redeemable Warrants and shall include any owner or combination of owners of such securities, which ownership shall be calculated by determining the number of shares of Common Stock held by such owner or owners as well as the number of shares then issuable upon exercise of the Representatives' Warrants and the Redeemable Warrants. (d) If at any time prior to the effectiveness of the registration statement filed in connection with an offering pursuant to this paragraph 6 the 50% Holder shall determine not to proceed with the registration, upon notice to the Company and the payment to the Company by the 50% Holder of the Company's expenses, if any, theretofore incurred in connection with the registration statement, the 50% Holder may terminate its participation in the offering, and the registration statement previously filed shall not be counted against the number of demand registrations permitted under this paragraph 6. The 50% Holder need not pay to the Company its expenses incurred in connection with the registration statement, however, if such 50% Holder shall have determined not to proceed because of material adverse developments on the part of the Company of which such 50% Holder obtained knowledge subsequent to the giving to the Company of the written request to register Registrable Securities pursuant to this paragraph 6. (e) Notwithstanding the foregoing, if the Company shall furnish to such 50% Holder a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors it would be seriously detrimental to the Company or its stockholders for a registration statement to be filed in the near future containing the disclosure of material information required to be included therein by reason of the federal securities laws, then the Company's obligation to use its best efforts to file a registration statement shall be deferred for a period during which such disclosure would be seriously detrimental, provided that this period will not exceed 30 days and provided further, that the Company shall not defer its obligation in this matter more than once in any 12-month period. 7. (a) Whenever pursuant to paragraph 6 a registration statement relating to the Representatives' Warrants or any Common Stock issued or issuable upon the exercise of the Representatives' Warrants or the Redeemable Warrants, or any Redeemable Warrants is filed under the Act, amended or supplemented, the Company will indemnify and hold harmless each Holder of the securities covered by such registration statement, amendment or supplement (such Holder being hereinafter called the "Distributing Holder"), and each person, if any, who controls (within the meaning of the Act) the Distributing Holder, and each underwriter (within the meaning of the Act) of such securities and each person, if any, who controls (within the meaning of the Act) any such underwriter, against any losses, claims, damages or liabilities, joint or several, to which the Distributing Holder, any such controlling person or any such underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities, or actions in respect thereof, arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any such registration statement or any preliminary prospectus or final prospectus constituting a part thereof or any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading and will reimburse the Distributing Holder or such controlling person or underwriter in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in said registration statement, said preliminary prospectus, said final prospectus or said amendment or supplement in reliance upon and in conformity with written information furnished by such Distributing Holder or any other Distributing Holder for use in the preparation thereof. (b) The Distributing Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed said registration statement and such amendments and supplements thereto, and each person, if any, who controls the Company (within the meaning of the Act) against any losses, claims, damages or liabilities, joint or several, to which the Company or any such director, officer or controlling person may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities, or actions in respect thereof, arise out of or are based upon any untrue or alleged untrue statement of any material fact contained in said registration statement, said preliminary prospectus, said final prospectus, or said amendment or supplement, or arises cut of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in said registration statement, said preliminary prospectus, said final prospectus or said amendment or supplement in reliance upon and in conformity with written information furnished by such Distributing Holder for use in the preparation thereof; and will reimburse the Company or any such director, officer or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action. (c) Promptly after receipt by an indemnified party under this paragraph 7 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party, give the indemnifying party notice of the commencement thereof, but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this paragraph 7. (d) In case any such action is brought against any indemnified party, and it notified an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this paragraph 7 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. 8. The Exercise Price in effect at any time and the number and kind of securities purchasable upon the exercise of each Warrant shall be subject to adjustment from time to time upon the happening of certain events hereinafter described; provided, however, that no adjustment shall be required in respect of the Redeemable Warrants. (a) In case the Company shall (i) declare a dividend or make a distribution on its outstanding shares of Common Stock in shares of Common Stock, (ii) subdivide or reclassify its outstanding shares of Common Stock into a greater number of shares, or (iii) combine or reclassify its outstanding shares of Common Stock into a smaller number of shares, or (iv) the outstanding shares of Common Stock of the Company are at any time changed into or exchanged for a different number or kind of shares or other security of the Company or of another corporation through reorganization, merger, consolidation, liquidation or recapitalization, then appropriate adjustments in the number and kind of such securities subject to this Warrant shall be made and the Exercise Price in effect at the time of the record date for such dividend or distribution or of the effective date of such subdivision, combination, reclassification, reorganization, merger, consolidation, liquidation or recapitalization shall be proportionately adjusted so that the Holder of this Warrant exercised after such date shall be entitled to receive the aggregate number and kind of securities which, if this Warrant had been exercised by such Holder immediately prior to such date, they would have owned upon such exercise and been entitled to receive upon such dividend, distribution, subdivision, combination, reclassification, reorganization, merger, consolidation, liquidation or recapitalization. For example, if the Company declares a 2 for 1 stock distribution and the Exercise Price immediately prior to such event was $10.875 per Unit and the number of Units purchasable upon exercise of this Warrant was 1,000, the adjusted Exercise Price immediately after such event would be $5.4375 per Unit and the adjusted number of Units purchasable upon exercise of this Warrant would be 2,000. Such adjustment shall be made successively whenever any event listed above shall occur. (b) In case the Company shall hereafter distribute without consideration to all holders of its Common Stock evidence of its indebtedness or assets (excluding cash dividends or distributions and dividends or distributions referred to in subparagraph (a) of this paragraph 8, or subscription rights or warrants, then in each such case the Exercise Price in effect thereafter shall be determined by multiplying the number of Units issuable upon exercise of the Representatives' Warrant by the Exercise Price in effect immediately prior thereto, multiplied by a fraction, the numerator of which shall be the total number of shares of Common Stock then outstanding multiplied by the current Exercise Price, less the fair market value (as determined by the Company's Board of Directors) of said assets, or evidence of indebtedness so distributed or of such rights or warrants, and the denominator of which shall be the total number of shares of Common Stock outstanding multiplied by the current Exercise Price. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date for the determination of stockholders entitled to receive such distribution. (c) In case the Company shall issue shares of its Common Stock excluding shares issued (i) in any of the transactions described in subparagraphs (a) or (b) of this paragraph 8; (ii) upon conversion or exchange of securities convertible into or exchangeable for Common Stock, (iii) upon exercise of options granted under the Company's 1996 Stock Incentive Plan, as amended to date, if such shares would otherwise be included in this subsection (c), (iv) upon exercise of the Representatives' Warrants or the Redeemable Warrants or the Units, (v) upon exercise of rights or warrants issued to the holders of the Common Stock, but only if no adjustment is required pursuant to this paragraph 8 (without regard to subsection (g) of this paragraph 8) with respect to the transaction giving rise to such rights or (vi) to the Old STAT stockholders, AmHealth Shareholders or AmHealth Partners pursuant to the Reorganization Agreement) for a consideration per share less than the current Redeemable Warrant Exercise Price on the date the Company fixes the offering price of such additional shares, the Exercise Price shall be adjusted immediately thereafter so that it shall equal the price determined by multiplying the Exercise Price in effect immediately prior thereto by a fraction, of which the numerator shall be the total number of shares of Common Stock outstanding immediately prior to the issuance of such additional shares plus the number of shares of Common Stock which the aggregate consideration received (determined as provided in subparagraph (f) of this paragraph 8) for the issuance of such additional shares would purchase at the current Redeemable Warrant Exercise Price, and of which the denominator shall be the number of shares of Common Stock outstanding immediately after the issuance of such additional shares. Such adjustment shall be made successively whenever such an issuance is made. (d) In case the Company shall issue any securities convertible into or exchangeable for its Common Stock (excluding securities issued in transactions described in subparagraph (b) of paragraph 8) for a consideration per share of Common Stock initially deliverable upon conversion or exchange of such securities (determined as provided in subparagraph (f) of paragraph 8) less than the current Redeemable Warrant Exercise Price in effect immediately prior to the issuance of such securities, the Exercise Price shall be adjusted immediately thereafter so that it shall equal the price determined by multiplying the Exercise Price in effect immediately prior thereto by a fraction, of which the numerator shall be the number of shares of Common Stock outstanding immediately prior to the issuance of such securities plus the number of shares of Common Stock which the aggregate consideration received (determined as provided in subparagraph (f) of paragraph 8) for such securities would purchase at the current Redeemable Warrant Exercise Price, and of which the denominator shall be the number of shares of Common Stock outstanding immediately prior to such issuance plus the maximum number of shares of Common stock of the Company deliverable upon conversion of or in exchange for such securities at the initial conversion or exchange price or rate. Such adjustment shall be made successively whenever such an issuance is made. (e) Whenever the Exercise Price payable upon exercise of the Representatives' Warrants is adjusted pursuant to subparagraphs (a), (b), (c) or (d) of paragraph 8, the number of shares of Common Stock purchasable upon exercise of this Representatives' Warrant shall simultaneously be adjusted by multiplying the number of shares of Common Stock issuable upon exercise of this Representatives' Warrant by the Exercise Price in effect on the date hereof and dividing the product so obtained by the Exercise Price, as adjusted. (f) For purposes of any computation respecting consideration received pursuant to subparagraphs (c) and (d) of paragraph 8, the following shall apply: (i) in the case of the issuance of shares of Common Stock for cash, the consideration shall be the amount of such cash, provided that in no case shall any deduction be made for any commissions, discounts or other expenses incurred by the Company for any underwriting of the issue or otherwise in connection therewith; (ii) in the case of the issuance of shares of Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair market value thereof as determined in good faith by the Board of Directors of the Company (irrespective of the accounting treatment thereof), whose determination shall be conclusive; and (iii) in the case of the issuance of securities convertible into or exchangeable for shares of Common Stock, the aggregate consideration received therefor shall be deemed to be the consideration received by the Company for the issuance of such securities plus the additional minimum consideration, if any, to be received by the Company upon the conversion or exchange thereof (the consideration in each case to be determined in the same manner as provided in clauses (i) and (ii) of this subparagraph (f) of paragraph 8). (g) No adjustment in the Exercise Price shall be required (i) in the event of the sale of the Company's securities in a future bona fide underwritten public offering; or (ii) unless such adjustment would require an increase or decrease of a east five cents ($0.05) in such price; provided, however, that any adjustments which by reason of this subparagraph (g) are not required to be made shall be carried forward and taken into account in any subsequent adjustment required to be made hereunder. All calculations under this paragraph 8 shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. Anything in this Section 8 to the contrary notwithstanding, the Company shall be entitled, but shall not be required, to make such changes in the Exercise Price, in addition to those required by this Section 8, as it shall determine, in its sole discretion, to be advisable in order that any dividend or distribution in shares of Common Stock, or any subdivision, reclassification or combination of Common Stock, hereafter made by the Company shall not result in any federal income tax liability to the holders of Common Stock or securities convertible into Common Stock (including the Redeemable Warrants issuable upon exercise of the Representatives' Warrant). (h) Whenever the Exercise Price is adjusted, as herein provided, the Company shall promptly cause a notice setting forth the adjusted Exercise Price and adjusted number of shares of Common Stock or other securities purchasable upon exercise of the Representatives' Warrant to be mailed to the Holder, at the addresses listed on the books of the Company, and shall cause a certified copy thereof to be mailed to the Company's transfer agent, if any. The Company may retain a firm of independent certified public accountants selected by the Board of Directors (who may be the regular accountants employed by the Company) to make any computation required by this paragraph 8, and a certificate signed by such firm shall be conclusive evidence of the correctness of such adjustment. (i) In the event that at any time, as a result of an adjustment made pursuant to the provisions of this paragraph 8, the Holder of the Representatives' Warrant thereafter shall become entitled to receive any securities of the Company, other than Common Stock and the Redeemable Warrants included in the Units, thereafter the number of such other securities so receivable upon exercise of the Representatives' Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in subparagraphs (a) to (g), inclusive of this paragraph 8. 9. This Agreement shall be governed by and in accordance with the laws of the State of New York. IN WITNESS WHEREOF, STAT HEALTHCARE, INC. has caused this Representatives' Warrant to be signed by its duly authorized officers, and this Representatives' Warrant to be dated June 24, 1996. STAT HEALTHCARE, INC. By: Name: Ned E. Chapman Title: Chief Financial Officer PURCHASE FORM (To be signed only upon exercise of Warrant) The undersigned, the holder of the foregoing Representatives' Warrant, hereby irrevocably elects to exercise the purchase rights represented by such Warrant for, and to purchase thereunder, _____________ Units of STAT HEALTHCARE, INC., each Unit consisting of two (2) shares of Common Stock, par value $0.01 per share, and one (1) Class A Redeemable Common Stock Purchase Warrant to purchase one (1) share of Common Stock, and herewith makes payment of $______________ therefor (or hereby surrenders and delivers that portion of the Representatives' Warrant having equivalent value (as determined in accordance with the provisions of subparagraph (b) of paragraph 2 of the Representatives' Warrant)), and requests that the certificates for shares of Common Stock and Redeemable Warrants be issued in the name(s) of, and delivered to the undersigned, whose address(es) is (are): ________________________________________ ________________________________________ (Address) Dated:______________, 199_ Signature (Print name under signature) (Signature must conform in all respects to the name of the holder specified on the face of the Representatives' Warrant) (Insert Social Security or Other Identifying Number of Holder) FORM OF ASSIGNMENT (To be executed by the registered holder if such holder desires to transfer the Warrant) FOR VALUE RECEIVED ___________________________________________________ ______________________________ hereby sells, assigns and transfers unto_____ ____________________________________________________________________________ (Please print name and address of transferee) this Warrant, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint _____________________ Attorney, to transfer the within Warrant on the books of STAT HEALTHCARE, INC., with full power of substitution. Dated: Signature (Print name under signature) (Signature must conform in all respects to the name of holder as specified on the face of the Representatives' Warrant). (Insert Social Security or other Identifying Number of Holder) </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.1 <SEQUENCE>6 <TEXT> EXHIBIT 10.1 EMPLOYMENT AGREEMENT WILLIAM H. RICE, M.D. This Employment Agreement (hereinafter referred to as the "Agreement") is made and entered into this 24th day of June, 1996 (the "Effective Date") by and between New STAT Healthcare, Inc., a Delaware corporation, (hereinafter referred to as "Employer") and William H. Rice, M.D. (hereinafter referred to as "Employee"). WHEREAS, Employer is engaged in healthcare services businesses and has, pursuant to an Amended and Restated Agreement and Plan of Reorganization dated as of March 15, 1996, acquired all of the outstanding stock of STAT Healthcare, Inc. ("Old STAT"); WHEREAS, Employee has previously been employed by Old STAT; WHEREAS, subject to the terms and conditions hereinafter provided, Employer desires to employ Employee and Employee desires to be employed by Employer; and NOW, THEREFORE, in consideration of the employment of Employee and the compensation to be paid by Employer to Employee, the Employee hereby accepts employment hereunder subject to the terms and conditions stated below including the agreement of Employee not to enter into certain competitive activities with the Employer, as follows: 1. TERM. This Agreement shall commence on the Effective Date and shall continue for a period of three years or until terminated in accordance with the provisions set forth herein. 2. DUTIES. The Employee shall perform the following duties pursuant to this Agreement: a. Employee shall be employed at Employer's office in Houston, Texas, or at such other location(s) as may be determined by the Board of Directors. b. Employee shall be actively involved in Employer's day-to-day activities and will have the duties assigned to Employee from time to time by the Employer. c. Employee shall be available to assist the Employer and its subsidiaries and related entities in any way deemed appropriate, commensurate with the duties of a corporate executive. d. Employee acknowledges that Employer is an equal opportunity employer, and that it is Employer's established policy not to discriminate on the basis of age, marital status, race, color, sex, religion or national origin, or to violate any federal or state anti-discrimination law. Employee shall be responsible for carrying out and implementing the foregoing policy throughout the operations and activities of Employer. 3. COMPENSATION PACKAGE. For all services provided, Employee shall be compensated as follows: a. ANNUAL SALARY. Effective as of the Effective Date, Employer shall pay Employee an annual salary of $200,000, payable in equal monthly installments on the last day of each month. b. INCENTIVE COMPENSATION. Employee shall be entitled to receive a bonus, the amount of which shall be determined by the compensation committee of the Board of Directors of the Employer. 4. STOCK OPTION. The Employee shall be entitled to participate in the 1996 Incentive Stock Option Plan of Employer and upon the approval of the Board of Directors and in accordance with the terms of the Plan shall be granted stock options in the discretion of the Board. 5. SOLE EMPLOYMENT. During the term of this Agreement, the Employee shall devote his entire time, attention and best efforts to advancing the business and good reputation of Employer, and shall not during the term of his employment provide personal services for compensation , whether received directly or indirectly, to any other business or commercial enterprise, either alone, or as a member of a partnership, or an officer, director, shareholder or employee of any other corporation or business, or as a consultant or independent contractor. This Section shall not prevent Employee from making passive investments, so long as such investments do not require Employee to perform any services which interfere with the performance of Employee's duties under this Agreement. 6. CONFIDENTIALITY, NON-DISCLOSURE AND OWNERSHIP OF CONFIDENTIAL INFORMATION. The Employee acknowledges that during his employment, he will gain access to, or possession or knowledge of, numerous trade secrets, confidential information and other valuable properties, including, but not limited to, hospital and healthcare facility client lists, client files and records, lists of potential clients, prospects or targets, and/or other market and marketing data and plans, price books, promotional devices and methods, business methods, manuals and plans, business and sales techniques and research and development (hereinafter referred to collectively as "Confidential Information"). Confidential Information shall not include information in the public domain or attainable from information generally available to the public. Employee acknowledges that such Confidential Information is unique and a valuable asset which is owned solely by Employer and is to be used only for Employer's benefit. Employee shall not, during or after the term of employment, disclose, divulge, reveal, transfer, reproduce, sell, capitalize upon or take advantage of such Confidential Information and in addition, Employee shall exercise all reasonable efforts and precautions to protect such Confidential Information from misappropriation, misuse, disclosure, breach of confidentiality, or other conduct or action inconsistent with Employer's rights. Upon termination, Employee shall return immediately to Employer all Employer's property (including, without limitation, Confidential Information) in Employee's possession or control. 7. CONFIDENTIAL INFORMATION; COVENANT NOT TO COMPETE. a. Employer acknowledges that Employee has previously been involved in an executive capacity for a long period of time in the healthcare services business and that Employee has acquired substantial knowledge concerning that business as a result of such experience. Employee acknowledges that his contact with physicians and medical institutions as a result of his employment by Employer will result in a personal relationship being established between Employee and such physicians and/or the administration of such medical institutions whereby Employee could influence the future actions of such medical institutions and/or physicians relative to the renewal or cancellation of contractual relationships between Employer, its subsidiaries and/or affiliates and such medical institutions and/or physicians. Furthermore, Employee acknowledges and agrees that Employee's employment by Employer will result in the acquisition by Employee of confidential information concerning the method of operation and administration of Employer and its subsidiaries and affiliates and of medical institutions and physicians with whom Employer and its subsidiaries and affiliates transact business, including, but not limited to, fee schedules, formulas and special client requirements. Employee acknowledges and agrees that such confidential information would create an unfair advantage in the event Employee were to attempt to solicit or provide services of a similar nature to a medical client of Employer and its subsidiaries and/or affiliates. Accordingly, Employee agrees not to disclose Confidential Information and agrees not to interfere with the contractual relationship between Employer, its subsidiaries, and/or affiliates and any medical institution and/or physician for a period of two (2) years after termination of employment. b. Employee agrees, during the term hereof, and for a period of two (2) years following the termination of employment hereunder, that he will not, directly or indirectly, by himself, or as a shareholder, employee, director, officer, partner, contractor or agent of another, enter into any business or activity anywhere within the State of Texas during the term hereof in competition with Employer or its subsidiaries that would involve the following: (i) the solicitation of hospitals or other healthcare facilities to provide emergency department, kidney dialysis, or healthcare management services or other contract physician services similar to or in competition with such services provided by Employer or any of its subsidiaries or affiliates providing similar services; or (ii) the solicitation of hospitals or other healthcare facilities that are clients or prospective clients (potential clients as to which a marketing presentation has been made within six (6) months of the date of termination of this Agreement) of Employer to provide any physician staffing, recruitment or management services similar to or in competition with services provided by Employer or its subsidiaries and with which Employee was associated. Notwithstanding the foregoing, Employee may own up to 5% of the outstanding equity or debt securities of any publicly traded entity which engages in such activities without a breach of this Agreement. c. Employee acknowledges that Employer is a party to that certain Professional Services Agreement with Columbia/HCA Healthcare Corporation ("Columbia") dated as of February 1, 1996 (the "Columbia Agreement") whereby Employer provides services to certain Columbia facilities ("Facilities"). Employee agrees that, for a period of two (2) years following termination of the Columbia Agreement, he will not, without prior written approval of Columbia, either individually or as an employee, agent, officer or director of a third party, directly or indirectly (i) render any professional, administrative, advisory or consulting services to or for any physician clinic, independent physician organization or similar physician organization within a ten mile radius of any hospital or similar facility to which Employer is provided services under the Columbia Agreement, or (ii) solicit, raid, entice or induce any person who is (or was at any time within the one year period immediately preceding such termination) an employee or independent contractor of any Facility to (y) terminate his employment or contract with the Facility, or (z) become employed by or contract with any other person, firm, or corporation, and Employee will not approach any such employee or independent contractor for such purpose or authorize or knowingly approve the taking of such actions by any other persons. 8. SOLICITATION OF OTHER EMPLOYEES. Employee shall not, until two (2) years subsequent to the termination of employment, solicit or seek to influence, either directly or indirectly, any employee or any physician or healthcare provider under contract with Employer or any of its subsidiaries or affiliates, to enter into any employment agreements, independent contractor arrangement, or any other contractual arrangement whereby such individual would perform services for compensation, either directly or indirectly, for any person, firm, corporation or other entity or business that provides products or services in competition with the Employer or any of its subsidiaries or affiliates. 9. BREACH AND REMEDIES. Employee acknowledges that the breach or threatened breach of any of the covenants set forth in this Agreement will result in immediate and irreparable injury to Employer. Accordingly, Employee agrees that in addition to any rights or remedies available to Employer for a breach or threatened breach by Employee of any of the provisions set forth above, Employer shall be entitled to injunctive relief to enforce the obligations of Employee contained therein. Nothing herein shall be construed as prohibiting Employer from pursuing any other legal or equitable remedies that may be available to it for any such breach or threatened breach, including the recovery of damages from Employee. In the event that any of the provisions of this Agreement are found to be unenforceable or void (either in whole or in part), then the offending portion shall be construed as valid and enforceable only to the extent permitted by law and the balance of this Agreement shall remain in full force and effect. 10. BENEFITS. Employee shall be eligible to participate in all corporate benefit programs provided by Employer for its employees of comparable status in accordance with the personnel policies of Employer as such are in effect from time to time. 11. TERMINATION. This Agreement may be terminated as follows: a. VOLUNTARY TERMINATION. Either party may terminate this Agreement without cause at any time upon sixty (60) days prior written notice to the other; provided, however, the agreement has been in place for three (3) complete years commencing on the Effective Date. b. TERMINATION FOR CAUSE. This Agreement may be terminated by Employer at any time for cause upon written notice to Employee, which notice shall specify the reason for termination. For purposes of this Section, cause shall include the following: fraud; substantial and continuous non-performance of assigned duties and unlawful activities for which Employee is convicted in a jurisdiction of the United States; and material breach of an express term of this Agreement. c. TERMINATION UPON DEATH OR DISABILITY. This Agreement shall terminate upon the death or permanent disability of Employee. Employee shall be deemed to be disabled if he qualifies as such for purposes of receiving long term or permanent disability payments under the group disability insurance program of Employer or in the event that he is unable to regularly and consistently perform his normal duties as contemplated hereunder for a continuous period of twelve (12) months. 12. CONFIDENTIALITY. Employee agrees to keep this Agreement and its terms confidential except to the extent that disclosure is required by a lawfully constituted judicial or governmental authority or to the extent that such disclosure is authorized by the prior written consent of Employer and/or Employee. 13. ENTIRE AGREEMENT. This Agreement supersedes and cancels any employment agreement previously executed by the Employee and STAT Healthcare, Inc. This Agreement contains the entire understanding between the parties hereto and supersedes and cancels any prior oral or written understanding and/or agreements between them respecting any subject matter of this Agreement. This Agreement may be amended or modified only in writing signed by both parties hereto. 14. SEVERABILITY. If any provision, term, condition or clause of this Agreement or the application thereof shall be invalid or unenforceable to any extent, the remainder of this Agreement shall not be affected thereby and shall be enforced to the greatest extent permitted by law. 15. GOVERNING LAW. THIS AGREEMENT IS MADE AND ENTERED INTO IN THE STATE OF TEXAS AND IS TO BE CONSTRUED IN ACCORDANCE WITH AND TAKE EFFECT UNDER THE LAWS OF THE STATE OF TEXAS. 16. ASSIGNMENT. No party shall have any right to assign, mortgage, pledge, hypothecate or encumber this Agreement, in whole or in part, or any benefit or any rights accruing hereunder, without in any such case first obtaining the prior written consent of the other party hereto, except that Employer may assign this Agreement to a subsidiary of Employer, provided that in the event of such an assignment, Employer shall remain responsible for its obligations hereunder. All rights hereunder are personal to the Employee and shall cease upon the termination of this Agreement. 17. NOTICE. Any notice, or other written communication to be given pursuant to this Agreement for whatever reason shall be deemed duly given and received (a) if delivered personally, from the date of delivery, or (b) by certified mail, postage prepaid, return receipt requested, three (3) days after the date of mailing, addressed to the below parties as follows: TO: New STAT Healthcare, Inc. 12450 Greenspoint Drive Suite 1200 Houston, Texas 77060 TO: William H. Rice, M.D. 78 Pascal Lane Austin, Texas 78746 18. MISCELLANEOUS. Any protection, benefits, rights or other provisions given to Employer in this Agreement shall also be deemed to apply to, protect and inure to the benefit of any subsidiary, affiliate or other business or person related or connected to Employer. All rights of the Employer expressed in this Agreement are in addition to any rights available under the common law or other legal principles. Section or paragraph titles or captions contained in this Agreement are inserted only as matter of convenience and for reference and in no way define, limit, extend or describe the scope of this Agreement or the intent of any provision hereof. All pronouns and any variation thereof shall be deemed to refer to the masculine, feminine, neuter, singular or plural as the identity of person or persons, firm or firms, corporation or corporations, and as context may require. IN WITNESS WHEREOF, the parties have duly executed this Agreement. NEW STAT HEALTHCARE, INC. By: /s/ NED E. CHAPMAN Title:Chief Financial Officer /s/ WILLIAM H. RICE WILLIAM H. RICE, M.D. 7 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.2 <SEQUENCE>7 <TEXT> EXHIBIT 10.2 EMPLOYMENT AGREEMENT VICTOR M. MIRANDA, M.D. This Employment Agreement (hereinafter referred to as the "Agreement") is made and entered into this 24th day of June, 1996 (the "Effective Date") by and between New STAT Healthcare, Inc., a Delaware corporation, (hereinafter referred to as "Employer") and Victor M. Miranda, M.D. (hereinafter referred to as "Employee"). WHEREAS, Employer is engaged in healthcare services businesses and has, pursuant to an Amended and Restated Agreement and Plan of Reorganization dated as of March 15, 1996, acquired all of the outstanding stock of STAT Healthcare, Inc. ("Old STAT"); WHEREAS, Employee has previously been employed by Old STAT; WHEREAS, subject to the terms and conditions hereinafter provided, Employer desires to employ Employee and Employee desires to be employed by Employer; and NOW, THEREFORE, in consideration of the employment of Employee and the compensation to be paid by Employer to Employee, the Employee hereby accepts employment hereunder subject to the terms and conditions stated below including the agreement of Employee not to enter into certain competitive activities with the Employer, as follows: 1. TERM. This Agreement shall commence on the Effective Date and shall continue for a period of three years or until terminated in accordance with the provisions set forth herein. 2. DUTIES. The Employee shall perform the following duties pursuant to this Agreement: a. Employee shall be employed at Employer's office in Houston, Texas, or at such other location(s) as may be determined by the Board of Directors. b. Employee shall be actively involved in Employer's day-to-day activities and will have the duties assigned to Employee from time to time by the Employer. c. Employee shall be available to assist the Employer and its subsidiaries and related entities in any way deemed appropriate, commensurate with the duties of a corporate executive. d. Employee acknowledges that Employer is an equal opportunity employer, and that it is Employer's established policy not to discriminate on the basis of age, marital status, race, color, sex, religion or national origin, or to violate any federal or state anti-discrimination law. Employee shall be responsible for carrying out and implementing the foregoing policy throughout the operations and activities of Employer. 3. COMPENSATION PACKAGE. For all services provided, Employee shall be compensated as follows: a. ANNUAL SALARY. Effective as of the Effective Date, Employer shall pay Employee an annual salary of $200,000, payable in equal monthly installments on the last day of each month. b. INCENTIVE COMPENSATION. Employee shall be entitled to receive a bonus, the amount of which shall be determined by the compensation committee of the Board of Directors of the Employer. 4. STOCK OPTION. The Employee shall be entitled to participate in the 1996 Incentive Stock Option Plan of Employer and upon the approval of the Board of Directors and in accordance with the terms of the Plan shall be granted stock options in the discretion of the Board. 5. SOLE EMPLOYMENT. During the term of this Agreement, the Employee shall devote his entire time, attention and best efforts to advancing the business and good reputation of Employer, and shall not during the term of his employment provide personal services for compensation , whether received directly or indirectly, to any other business or commercial enterprise, either alone, or as a member of a partnership, or an officer, director, shareholder or employee of any other corporation or business, or as a consultant or independent contractor. This Section shall not prevent Employee from making passive investments, so long as such investments do not require Employee to perform any services which interfere with the performance of Employee's duties under this Agreement. 6. CONFIDENTIALITY, NON-DISCLOSURE AND OWNERSHIP OF CONFIDENTIAL INFORMATION. The Employee acknowledges that during his employment, he will gain access to, or possession or knowledge of, numerous trade secrets, confidential information and other valuable properties, including, but not limited to, hospital and healthcare facility client lists, client files and records, lists of potential clients, prospects or targets, and/or other market and marketing data and plans, price books, promotional devices and methods, business methods, manuals and plans, business and sales techniques and research and development (hereinafter referred to collectively as "Confidential Information"). Confidential Information shall not include information in the public domain or attainable from information generally available to the public. Employee acknowledges that such Confidential Information is unique and a valuable asset which is owned solely by Employer and is to be used only for Employer's benefit. Employee shall not, during or after the term of employment, disclose, divulge, reveal, transfer, reproduce, sell, capitalize upon or take advantage of such Confidential Information and in addition, Employee shall exercise all reasonable efforts and precautions to protect such Confidential Information from misappropriation, misuse, disclosure, breach of confidentiality, or other conduct or action inconsistent with Employer's rights. Upon termination, Employee shall return immediately to Employer all Employer's property (including, without limitation, Confidential Information) in Employee's possession or control. 7. CONFIDENTIAL INFORMATION; COVENANT NOT TO COMPETE. a. Employer acknowledges that Employee has previously been involved in an executive capacity for a long period of time in the healthcare services business and that Employee has acquired substantial knowledge concerning that business as a result of such experience. Employee acknowledges that his contact with physicians and medical institutions as a result of his employment by Employer will result in a personal relationship being established between Employee and such physicians and/or the administration of such medical institutions whereby Employee could influence the future actions of such medical institutions and/or physicians relative to the renewal or cancellation of contractual relationships between Employer, its subsidiaries and/or affiliates and such medical institutions and/or physicians. Furthermore, Employee acknowledges and agrees that Employee's employment by Employer will result in the acquisition by Employee of confidential information concerning the method of operation and administration of Employer and its subsidiaries and affiliates and of medical institutions and physicians with whom Employer and its subsidiaries and affiliates transact business, including, but not limited to, fee schedules, formulas and special client requirements. Employee acknowledges and agrees that such confidential information would create an unfair advantage in the event Employee were to attempt to solicit or provide services of a similar nature to a medical client of Employer and its subsidiaries and/or affiliates. Accordingly, Employee agrees not to disclose Confidential Information and agrees not to interfere with the contractual relationship between Employer, its subsidiaries, and/or affiliates and any medical institution and/or physician for a period of two (2) years after termination of employment. b. Employee agrees, during the term hereof, and for a period of two (2) years following the termination of employment hereunder, that he will not, directly or indirectly, by himself, or as a shareholder, employee, director, officer, partner, contractor or agent of another, enter into any business or activity anywhere within the State of Texas during the term hereof in competition with Employer or its subsidiaries that would involve the following: (i) the solicitation of hospitals or other healthcare facilities to provide emergency department, kidney dialysis or healthcare management services or other contract physician services similar to or in competition with such services provided by Employer or any of its subsidiaries or affiliates providing similar services; or (ii) the solicitation of hospitals or other healthcare facilities that are clients or prospective clients (potential clients as to which a marketing presentation has been made within six (6) months of the date of termination of this Agreement) of Employer to provide any physician staffing, recruitment or management services similar to or in competition with services provided by Employer or its subsidiaries and with which Employee was associated. Notwithstanding the foregoing, Employee may own up to 5% of the outstanding equity or debt securities of any publicly traded entity which engages in such activities without a breach of this Agreement. c. Employee acknowledges that Employer is a party to that certain Professional Services Agreement with Columbia/HCA Healthcare Corporation ("Columbia") dated as of February 1, 1996 (the "Columbia Agreement") whereby Employer provides services to certain Columbia facilities ("Facilities"). Employee agrees that, for a period of two (2) years following termination of the Columbia Agreement, he will not, without prior written approval of Columbia, either individually or as an employee, agent, officer or director of a third party, directly or indirectly (i) render any professional, administrative, advisory or consulting services to or for any physician clinic, independent physician organization or similar physician organization within a ten mile radius of any hospital or similar facility to which Employer is provided services under the Columbia Agreement, or (ii) solicit, raid, entice or induce any person who is (or was at any time within the one year period immediately preceding such termination) an employee or independent contractor of any Facility to (y) terminate his employment or contract with the Facility, or (z) become employed by or contract with any other person, firm, or corporation, and Employee will not approach any such employee or independent contractor for such purpose or authorize or knowingly approve the taking of such actions by any other persons. 8. SOLICITATION OF OTHER EMPLOYEES. Employee shall not, until two (2) years subsequent to the termination of employment, solicit or seek to influence, either directly or indirectly, any employee or any physician or healthcare provider under contract with Employer or any of its subsidiaries or affiliates, to enter into any employment agreements, independent contractor arrangement, or any other contractual arrangement whereby such individual would perform services for compensation, either directly or indirectly, for any person, firm, corporation or other entity or business that provides products or services in competition with the Employer or any of its subsidiaries or affiliates. 9. BREACH AND REMEDIES. Employee acknowledges that the breach or threatened breach of any of the covenants set forth in this Agreement will result in immediate and irreparable injury to Employer. Accordingly, Employee agrees that in addition to any rights or remedies available to Employer for a breach or threatened breach by Employee of any of the provisions set forth above, Employer shall be entitled to injunctive relief to enforce the obligations of Employee contained therein. Nothing herein shall be construed as prohibiting Employer from pursuing any other legal or equitable remedies that may be available to it for any such breach or threatened breach, including the recovery of damages from Employee. In the event that any of the provisions of this Agreement are found to be unenforceable or void (either in whole or in part), then the offending portion shall be construed as valid and enforceable only to the extent permitted by law and the balance of this Agreement shall remain in full force and effect. 10. BENEFITS. Employee shall be eligible to participate in all corporate benefit programs provided by Employer for its employees of comparable status in accordance with the personnel policies of Employer as such are in effect from time to time. 11. TERMINATION.This Agreement may be terminated as follows: a. VOLUNTARY TERMINATION. Either party may terminate this Agreement without cause at any time upon sixty (60) days prior written notice to the other; provided, however, the agreement has been in place for three (3) complete years commencing on the Effective Date. b. TERMINATION FOR CAUSE. This Agreement may be terminated by Employer at any time for cause upon written notice to Employee, which notice shall specify the reason for termination. For purposes of this Section, cause shall include the following: fraud; substantial and continuous non-performance of assigned duties and unlawful activities for which Employee is convicted in a jurisdiction of the United States; and material breach of an express term of this Agreement. c. TERMINATION UPON DEATH OR DISABILITY. This Agreement shall terminate upon the death or permanent disability of Employee. Employee shall be deemed to be disabled if he qualifies as such for purposes of receiving long term or permanent disability payments under the group disability insurance program of Employer or in the event that he is unable to regularly and consistently perform his normal duties as contemplated hereunder for a continuous period of twelve (12) months. 12. CONFIDENTIALITY. Employee agrees to keep this Agreement and its terms confidential except to the extent that disclosure is required by a lawfully constituted judicial or governmental authority or to the extent that such disclosure is authorized by the prior written consent of Employer and/or Employee. 13. ENTIRE AGREEMENT. This Agreement supersedes and cancels any employment agreement previously executed by the Employee and STAT Healthcare, Inc. This Agreement contains the entire understanding between the parties hereto and supersedes and cancels any prior oral or written understanding and/or agreements between them respecting any subject matter of this Agreement. This Agreement may be amended or modified only in writing signed by both parties hereto. 14. SEVERABILITY. If any provision, term, condition or clause of this Agreement or the application thereof shall be invalid or unenforceable to any extent, the remainder of this Agreement shall not be affected thereby and shall be enforced to the greatest extent permitted by law. 15. GOVERNING LAW. THIS AGREEMENT IS MADE AND ENTERED INTO IN THE STATE OF TEXAS AND IS TO BE CONSTRUED IN ACCORDANCE WITH AND TAKE EFFECT UNDER THE LAWS OF THE STATE OF TEXAS. 16. ASSIGNMENT. No party shall have any right to assign, mortgage, pledge, hypothecate or encumber this Agreement, in whole or in part, or any benefit or any rights accruing hereunder, without in any such case first obtaining the prior written consent of the other party hereto, except that Employer may assign this Agreement to a subsidiary of Employer, provided that in the event of such an assignment, Employer shall remain responsible for its obligations hereunder. All rights hereunder are personal to the Employee and shall cease upon the termination of this Agreement. 17. NOTICE. Any notice, or other written communication to be given pursuant to this Agreement for whatever reason shall be deemed duly given and received (a) if delivered personally, from the date of delivery, or (b) by certified mail, postage prepaid, return receipt requested, three (3) days after the date of mailing, addressed to the below parties as follows: TO: New STAT Healthcare, Inc. 12450 Greenspoint Drive Suite 1200 Houston, Texas 77060 TO: Victor M. Miranda, M.D. 11807 Taylor Crest Houston, Texas 77024 18. MISCELLANEOUS. Any protection, benefits, rights or other provisions given to Employer in this Agreement shall also be deemed to apply to, protect and inure to the benefit of any subsidiary, affiliate or other business or person related or connected to Employer. All rights of the Employer expressed in this Agreement are in addition to any rights available under the common law or other legal principles. Section or paragraph titles or captions contained in this Agreement are inserted only as matter of convenience and for reference and in no way define, limit, extend or describe the scope of this Agreement or the intent of any provision hereof. All pronouns and any variation thereof shall be deemed to refer to the masculine, feminine, neuter, singular or plural as the identity of person or persons, firm or firms, corporation or corporations, and as context may require. IN WITNESS WHEREOF, the parties have duly executed this Agreement. NEW STAT HEALTHCARE, INC. By: /s/ NED E. CHAPMAN Title: Chief Financial Officer /s/ VICTOR M. MIRANDA VICTOR M. MIRANDA, M.D. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.3 <SEQUENCE>8 <TEXT> EXHIBIT 10.3 EMPLOYMENT AGREEMENT NED E. CHAPMAN This Employment Agreement (hereinafter referred to as the "Agreement") is made and entered into this 24th day of June, 1996 (the "Effective Date") by and between New STAT Healthcare, Inc., a Delaware corporation, (hereinafter referred to as "Employer") and Ned E. Chapman (hereinafter referred to as "Employee"). WHEREAS, Employer is engaged in healthcare services businesses and has, pursuant to an Amended and Restated Agreement and Plan of Reorganization dated as of March 15, 1996, acquired all of the outstanding stock of STAT Healthcare, Inc. ("Old STAT"); WHEREAS, Employee has previously been employed by Old STAT; WHEREAS, subject to the terms and conditions hereinafter provided, Employer desires to employ Employee and Employee desires to be employed by Employer; and NOW, THEREFORE, in consideration of the employment of Employee and the compensation to be paid by Employer to Employee, the Employee hereby accepts employment hereunder subject to the terms and conditions stated below including the agreement of Employee not to enter into certain competitive activities with the Employer, as follows: 1. TERM. This Agreement shall commence on the Effective Date and shall continue for a period of three years or until terminated in accordance with the provisions set forth herein. 2. DUTIES. The Employee shall perform the following duties pursuant to this Agreement: a. Employee shall be employed at Employer's office in Houston, Texas, or at such other location(s) as may be determined by the Board of Directors. b. Employee shall be actively involved in Employer's day-to-day activities and will have the duties assigned to Employee from time to time by the Employer. c. Employee shall be available to assist the Employer and its subsidiaries and related entities in any way deemed appropriate, commensurate with the duties of a corporate executive. d. Employee acknowledges that Employer is an equal opportunity employer, and that it is Employer's established policy not to discriminate on the basis of age, marital status, race, color, sex, religion or national origin, or to violate any federal or state anti-discrimination law. Employee shall be responsible for carrying out and implementing the foregoing policy throughout the operations and activities of Employer. 3. COMPENSATION PACKAGE. For all services provided, Employee shall be compensated as follows: a. ANNUAL SALARY.Effective as of the Effective Date, Employer shall pay Employee an annual salary of $114,320, payable in equal monthly installments on the last day of each month. b. INCENTIVE COMPENSATION. Employee shall be entitled to receive a bonus, the amount of which shall be determined by the compensation committee of the Board of Directors of the Employer. 4. STOCK OPTION. The Employee shall be entitled to participate in the 1996 Incentive Stock Option Plan of Employer and upon the approval of the Board of Directors and in accordance with the terms of the Plan shall be granted stock options in the discretion of the Board. 5. SOLE EMPLOYMENT. During the term of this Agreement, the Employee shall devote his entire time, attention and best efforts to advancing the business and good reputation of Employer, and shall not during the term of his employment provide personal services for compensation , whether received directly or indirectly, to any other business or commercial enterprise, either alone, or as a member of a partnership, or an officer, director, shareholder or employee of any other corporation or business, or as a consultant or independent contractor. This Section shall not prevent Employee from making passive investments, so long as such investments do not require Employee to perform any services which interfere with the performance of Employee's duties under this Agreement. 6. CONFIDENTIALITY, NON-DISCLOSURE AND OWNERSHIP OF CONFIDENTIAL INFORMATION. The Employee acknowledges that during his employment, he will gain access to, or possession or knowledge of, numerous trade secrets, confidential information and other valuable properties, including, but not limited to, hospital and healthcare facility client lists, client files and records, lists of potential clients, prospects or targets, and/or other market and marketing data and plans, price books, promotional devices and methods, business methods, manuals and plans, business and sales techniques and research and development (hereinafter referred to collectively as "Confidential Information"). Confidential Information shall not include information in the public domain or attainable from information generally available to the public. Employee acknowledges that such Confidential Information is unique and a valuable asset which is owned solely by Employer and is to be used only for Employer's benefit. Employee shall not, during or after the term of employment, disclose, divulge, reveal, transfer, reproduce, sell, capitalize upon or take advantage of such Confidential Information and in addition, Employee shall exercise all reasonable efforts and precautions to protect such Confidential Information from misappropriation, misuse, disclosure, breach of confidentiality, or other conduct or action inconsistent with Employer's rights. Upon termination, Employee shall return immediately to Employer all Employer's property (including, without limitation, Confidential Information) in Employee's possession or control. 7. CONFIDENTIAL INFORMATION; COVENANT NOT TO COMPETE. a. Employer acknowledges that Employee has previously been involved in an executive capacity for a long period of time in the healthcare services business and that Employee has acquired substantial knowledge concerning that business as a result of such experience. Employee acknowledges that his contact with physicians and medical institutions as a result of his employment by Employer will result in a personal relationship being established between Employee and such physicians and/or the administration of such medical institutions whereby Employee could influence the future actions of such medical institutions and/or physicians relative to the renewal or cancellation of contractual relationships between Employer, its subsidiaries and/or affiliates and such medical institutions and/or physicians. Furthermore, Employee acknowledges and agrees that Employee's employment by Employer will result in the acquisition by Employee of confidential information concerning the method of operation and administration of Employer and its subsidiaries and affiliates and of medical institutions and physicians with whom Employer and its subsidiaries and affiliates transact business, including, but not limited to, fee schedules, formulas and special client requirements. Employee acknowledges and agrees that such confidential information would create an unfair advantage in the event Employee were to attempt to solicit or provide services of a similar nature to a medical client of Employer and its subsidiaries and/or affiliates. Accordingly, Employee agrees not to disclose Confidential Information and agrees not to interfere with the contractual relationship between Employer, its subsidiaries, and/or affiliates and any medical institution and/or physician for a period of two (2) years after termination of employment. b. Employee agrees, during the term hereof, and for a period of two (2) years following the termination of employment hereunder, that he will not, directly or indirectly, by himself, or as a shareholder, employee, director, officer, partner, contractor or agent of another, enter into any business or activity anywhere within the State of Texas during the term hereof in competition with Employer or its subsidiaries that would involve the following: (i) the solicitation of hospitals or other healthcare facilities to provide emergency department, kidney dialysis or healthcare management services or other contract physician services similar to or in competition with such services provided by Employer or any of its subsidiaries or affiliates providing similar services; or (ii) the solicitation of hospitals or other healthcare facilities that are clients or prospective clients (potential clients as to which a marketing presentation has been made within six (6) months of the date of termination of this Agreement) of Employer to provide any physician staffing, recruitment or management services similar to or in competition with services provided by Employer or its subsidiaries and with which Employee was associated. Notwithstanding the foregoing, Employee may own up to 5% of the outstanding equity or debt securities of any publicly traded entity which engages in such activities without a breach of this Agreement. c. Employee acknowledges that Employer is a party to that certain Professional Services Agreement with Columbia/HCA Healthcare Corporation ("Columbia") dated as of February 1, 1996 (the "Columbia Agreement") whereby Employer provides services to certain Columbia facilities ("Facilities"). Employee agrees that, for a period of two (2) years following termination of the Columbia Agreement, he will not, without prior written approval of Columbia, either individually or as an employee, agent, officer or director of a third party, directly or indirectly (i) render any professional, administrative, advisory or consulting services to or for any physician clinic, independent physician organization or similar physician organization within a ten mile radius of any hospital or similar facility to which Employer is provided services under the Columbia Agreement, or (ii) solicit, raid, entice or induce any person who is (or was at any time within the one year period immediately preceding such termination) an employee or independent contractor of any Facility to (y) terminate his employment or contract with the Facility, or (z) become employed by or contract with any other person, firm, or corporation, and Employee will not approach any such employee or independent contractor for such purpose or authorize or knowingly approve the taking of such actions by any other persons. 8. SOLICITATION OF OTHER EMPLOYEES. Employee shall not, until two (2) years subsequent to the termination of employment, solicit or seek to influence, either directly or indirectly, any employee or any physician or healthcare provider under contract with Employer or any of its subsidiaries or affiliates, to enter into any employment agreements, independent contractor arrangement, or any other contractual arrangement whereby such individual would perform services for compensation, either directly or indirectly, for any person, firm, corporation or other entity or business that provides products or services in competition with the Employer or any of its subsidiaries or affiliates. 9. BREACH AND REMEDIES. Employee acknowledges that the breach or threatened breach of any of the covenants set forth in this Agreement will result in immediate and irreparable injury to Employer. Accordingly, Employee agrees that in addition to any rights or remedies available to Employer for a breach or threatened breach by Employee of any of the provisions set forth above, Employer shall be entitled to injunctive relief to enforce the obligations of Employee contained therein. Nothing herein shall be construed as prohibiting Employer from pursuing any other legal or equitable remedies that may be available to it for any such breach or threatened breach, including the recovery of damages from Employee. In the event that any of the provisions of this Agreement are found to be unenforceable or void (either in whole or in part), then the offending portion shall be construed as valid and enforceable only to the extent permitted by law and the balance of this Agreement shall remain in full force and effect. 10. BENEFITS. Employee shall be eligible to participate in all corporate benefit programs provided by Employer for its employees of comparable status in accordance with the personnel policies of Employer as such are in effect from time to time. 11. TERMINATION. This Agreement may be terminated as follows: a. VOLUNTARY TERMINATION. Either party may terminate this Agreement without cause at any time upon sixty (60) days prior written notice to the other; provided, however, the agreement has been in place for three (3) complete years commencing on the Effective Date. b. TERMINATION FOR CAUSE. This Agreement may be terminated by Employer at any time for cause upon written notice to Employee, which notice shall specify the reason for termination. For purposes of this Section, cause shall include the following: fraud; substantial and continuous non-performance of assigned duties and unlawful activities for which Employee is convicted in a jurisdiction of the United States; and material breach of an express term of this Agreement. c. TERMINATION UPON DEATH OR DISABILITY. This Agreement shall terminate upon the death or permanent disability of Employee. Employee shall be deemed to be disabled if he qualifies as such for purposes of receiving long term or permanent disability payments under the group disability insurance program of Employer or in the event that he is unable to regularly and consistently perform his normal duties as contemplated hereunder for a continuous period of twelve (12) months. 12. CONFIDENTIALITY. Employee agrees to keep this Agreement and its terms confidential except to the extent that disclosure is required by a lawfully constituted judicial or governmental authority or to the extent that such disclosure is authorized by the prior written consent of Employer and/or Employee. 13. ENTIRE AGREEMENT. This Agreement supersedes and cancels any employment agreement previously executed by the Employee and STAT Healthcare, Inc. This Agreement contains the entire understanding between the parties hereto and supersedes and cancels any prior oral or written understanding and/or agreements between them respecting any subject matter of this Agreement. This Agreement may be amended or modified only in writing signed by both parties hereto. 14. SEVERABILITY. If any provision, term, condition or clause of this Agreement or the application thereof shall be invalid or unenforceable to any extent, the remainder of this Agreement shall not be affected thereby and shall be enforced to the greatest extent permitted by law. 15. GOVERNING LAW. THIS AGREEMENT IS MADE AND ENTERED INTO IN THE STATE OF TEXAS AND IS TO BE CONSTRUED IN ACCORDANCE WITH AND TAKE EFFECT UNDER THE LAWS OF THE STATE OF TEXAS. 16. ASSIGNMENT. No party shall have any right to assign, mortgage, pledge, hypothecate or encumber this Agreement, in whole or in part, or any benefit or any rights accruing hereunder, without in any such case first obtaining the prior written consent of the other party hereto, except that Employer may assign this Agreement to a subsidiary of Employer, provided that in the event of such an assignment, Employer shall remain responsible for its obligations hereunder. All rights hereunder are personal to the Employee and shall cease upon the termination of this Agreement. 17. NOTICE.Any notice, or other written communication to be given pursuant to this Agreement for whatever reason shall be deemed duly given and received (a) if delivered personally, from the date of delivery, or (b) by certified mail, postage prepaid, return receipt requested, three (3) days after the date of mailing, addressed to the below parties as follows: TO: New STAT Healthcare, Inc. 12450 Greenspoint Drive Suite 1200 Houston, Texas 77060 TO: Ned E. Chapman 1902 Windy Park Drive Kingwood, Texas 77339 18. MISCELLANEOUS.Any protection, benefits, rights or other provisions given to Employer in this Agreement shall also be deemed to apply to, protect and inure to the benefit of any subsidiary, affiliate or other business or person related or connected to Employer. All rights of the Employer expressed in this Agreement are in addition to any rights available under the common law or other legal principles. Section or paragraph titles or captions contained in this Agreement are inserted only as matter of convenience and for reference and in no way define, limit, extend or describe the scope of this Agreement or the intent of any provision hereof. All pronouns and any variation thereof shall be deemed to refer to the masculine, feminine, neuter, singular or plural as the identity of person or persons, firm or firms, corporation or corporations, and as context may require. IN WITNESS WHEREOF, the parties have duly executed this Agreement. NEW STAT HEALTHCARE, INC. By: /s/ WILLIAM H. RICE Title: Chairman /s/ NED E. CHAPMAN NED E. CHAPMAN </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.4 <SEQUENCE>9 <TEXT> EXHIBIT 10.4 EMPLOYMENT AND NON-COMPETITION AGREEMENT OF RUBEN A. PEREZ This Employment and Non-Competition Agreement (hereinafter referred to as the "Agreement") is made and entered into this 24th day of June, 1996 (the "Effective Date") by and between New STAT Healthcare, Inc., a Delaware corporation (hereinafter referred to as "Employer") and Ruben A. Perez (hereinafter referred to as "Employee"). WHEREAS, Employer is engaged in healthcare services businesses and has, pursuant to an Amended and Restated Agreement and Plan of Reorganization dated as of March 15, 1996, engaged in a statutory merger and stock exchange with AmHealth Corporation and its related entities (collectively, "AmHealth"); WHEREAS, Employee has previously been employed by AmHealth; and WHEREAS, subject to the terms and conditions hereinafter provided, Employer desires to employ Employee and Employee desires to be employed by Employer. NOW, THEREFORE, in consideration of the employment of Employee and the compensation to be paid by Employer to Employee, Employee hereby accepts employment hereunder subject to the terms and conditions stated below including the agreement of Employee not to enter into certain competitive activities with Employer, as follows: 1. TERM. This Agreement shall commence on the Effective Date and shall continue for a period of three years or until terminated in accordance with the provisions set forth herein. 2. DUTIES. Employee shall perform the following duties pursuant to this Agreement: a. Employee shall be employed at Employer's office in San Antonio, Texas, or at such other location(s) as may be determined by the Board of Directors. b. Employee shall be actively involved in Employer's day-to-day activities and will have the duties assigned to Employee from time to time by Employer. c. Employee shall be available to assist Employer and its subsidiaries and related entities in any way deemed appropriate, commensurate with the duties of a corporate executive. d. Employee acknowledges that Employer is an equal opportunity employer, and that it is Employer's established policy not to discriminate on the basis of age, marital status, race, color, sex, religion or national origin, or to violate any federal or state anti-discrimination law. Employee shall be responsible for carrying out and implementing the foregoing policy throughout the operations and activities of Employer. 3. COMPENSATION PACKAGE. For all services provided by Employee, Employee shall be compensated as follows: a. ANNUAL SALARY. Effective as of the Effective Date, Employer shall pay Employee an annual salary of $120,000, payable in equal monthly installments on the last day of each month. b. INCENTIVE COMPENSATION. Employee shall be entitled to receive a bonus, the amount of which shall be determined by the compensation committee of the Board of Directors of Employer. 4. STOCK OPTION. Employee shall be entitled to participate in the 1996 Incentive Stock Option Plan of Employer and upon the approval of the Board of Directors and in accordance with the terms of the Plan shall be granted stock options at the discretion of the Board. 5. PART-TIME EMPLOYMENT. During the term of this Agreement, Employee shall devote an average of ten hours per week to advancing the business and good reputation of Employer. Employer recognizes that Employee may undertake other business ventures contemporaneously with Employee's employment with Employer, and, subject to the provisions of paragraphs 6 and 7 of this Agreement, Employer waives any right to asset that Employee's activities on behalf of himself or others constitutes a conflict of interest under the terms of this Agreement. 6. CONFIDENTIALITY, NON-DISCLOSURE AND OWNERSHIP OF CONFIDENTIAL INFORMATION. Employee acknowledges that during his employment, he will gain access to, or possession or knowledge of, numerous trade secrets, confidential information and other valuable properties, including, but not limited to, hospital and healthcare facility client lists, client files and records, lists of potential clients, prospects or targets, and/or other market and marketing data and plans, price books, promotional devices and methods, business methods, manuals and plans, business and sales techniques and research and development (hereinafter referred to collectively as "Confidential Information"). Confidential Information shall not include information in the public domain or attainable from information generally available to the public. Employee acknowledges that such Confidential Information is unique and a valuable asset which is owned solely by Employer and is to be used only for Employer's benefit. Employee shall not, during or after the term of employment, disclose, divulge, reveal, transfer, reproduce, sell, capitalize upon or take advantage of such Confidential Information and in addition, Employee shall exercise all reasonable efforts and precautions to protect such Confidential Information from misappropriation, misuse, disclosure, breach of confidentiality, or other conduct or action inconsistent with Employer's rights. Upon termination, Employee shall return immediately to Employer all Employer's property (including, without limitation, Confidential Information) in Employee's possession or control. 7. CONFIDENTIAL INFORMATION; COVENANT NOT TO COMPETE. Upon Employee's termination of employment, Employee shall not disclose Confidential Information or compete with Employer's business pursuant to the following terms: a. Employer acknowledges that Employee has previously been involved in an executive capacity for a long period of time in the healthcare services business and that Employee has acquired substantial knowledge concerning that business as a result of such experience. Employee acknowledges that his contact with physicians and medical institutions as a result of his employment by Employer will result in a personal relationship being established between Employee and such physicians and/or the administration of such medical institutions whereby Employee could influence the future actions of such medical institutions and/or physicians relative to the renewal or cancellation of contractual relationships between Employer, its subsidiaries and/or affiliates and such medical institutions and/or physicians. Furthermore, Employee acknowledges and agrees that Employee's employment by Employer will result in the acquisition by Employee of Confidential Information concerning the method of operation and administration of Employer and its subsidiaries and affiliates and of medical institutions and physicians with whom Employer and its subsidiaries and affiliates transact business, including, but not limited to, fee schedules, formulas and special client requirements. Employee acknowledges and agrees that such Confidential Information would create an unfair advantage in the event Employee were to attempt to solicit or provide services of a similar nature to a medical client of Employer and its subsidiaries and/or affiliates. Accordingly, Employee agrees not to disclose Confidential Information and agrees not to interfere with the contractual relationship between Employer, its subsidiaries, and/or affiliates and any medical institution and/or physician for a period of two (2) years after termination of employment. b. Employee agrees, during the term hereof, and for a period of two (2) years following the termination of employment hereunder, that he will not, directly or indirectly, by himself, or as an employee, director, officer, contractor or agent of another, enter into any business or activity anywhere within the State of Texas during the term hereof in competition with Employer, its subsidiaries and/or affiliates that would involve the following: (i) the solicitation of hospitals or other healthcare facilities to provide emergency department, kidney dialysis or healthcare management services or other contract physician services similar to or in competition with such services provided by Employer or any of its subsidiaries or affiliates providing similar services; or (ii) the solicitation of hospitals or other healthcare facilities that are clients or prospective clients (potential clients as to which a marketing presentation has been made within six (6) months of the date of termination of this Agreement) of Employer to provide any physician staffing, recruitment or management services similar to or in competition with services provided by Employer, its subsidiaries and/or affiliates and with which Employee was associated. Notwithstanding the foregoing, Employee may own up to 5% of the outstanding equity or debt securities of any publicly traded entity which engages in such activities without a breach of this Agreement. 8. SOLICITATION OF OTHER EMPLOYEES. Employee shall not, until two (2) years subsequent to the termination of employment, solicit or seek to influence, either directly or indirectly, any employee or any physician or healthcare provider under contract with Employer or any of its subsidiaries or affiliates, to enter into any employment agreements, independent contractor arrangement, or any other contractual arrangement whereby such individual would perform services for compensation, either directly or indirectly, for any person, firm, corporation or other entity or business that provides products or services in competition with the Employer or any of its subsidiaries or affiliates. 9. BREACH AND REMEDIES. Employee acknowledges that the breach or threatened breach of any of the covenants set forth in this Agreement will result in immediate and irreparable injury to Employer. Accordingly, Employee agrees that in addition to any rights or remedies available to Employer for a breach or threatened breach by Employee of any of the provisions set forth above, Employer shall be entitled to injunctive relief to enforce the obligations of Employee contained therein. Nothing herein shall be construed as prohibiting Employer from pursuing any other legal or equitable remedies that may be available to it for any such breach or threatened breach, including the recovery of damages from Employee. In the event that any of the provisions of this Agreement are found to be unenforceable or void (either in whole or in part), then the offending portion shall be construed as valid and enforceable only to the extent permitted by law and the balance of this Agreement shall remain in full force and effect. 10. BENEFITS. Employee shall be eligible to participate in all corporate benefit programs provided by Employer for its employees of comparable status in accordance with the personnel policies of Employer as such are in effect from time to time. 11. TERMINATION. This Agreement may be terminated as follows: a. VOLUNTARY TERMINATION. Either party may terminate this Agreement without cause at any time upon sixty (60) days prior written notice to the other; provided, however, the Agreement has been in place for three (3) complete years commencing on the Effective Date. b. TERMINATION FOR CAUSE. This Agreement may be terminated by Employer at any time for cause upon written notice to Employee, which notice shall specify the reason for termination. For purposes of this Section, cause shall include the following: fraud; substantial and continuous non-performance of assigned duties and unlawful activities for which Employee is convicted in a jurisdiction of the United States; and material breach of an express term of this Agreement. c. TERMINATION UPON DEATH OR DISABILITY. This Agreement shall terminate upon the death or permanent disability of Employee. Employee shall be deemed to be disabled if he qualifies as such for purposes of receiving long-term or permanent disability payments under the group disability insurance program of Employer or in the event that he is unable to regularly and consistently perform his normal duties as contemplated hereunder for a continuous period of twelve (12) months. 12. CONFIDENTIALITY. Employee agrees to keep this Agreement and its terms confidential except to the extent that disclosure is required by a lawfully constituted judicial or governmental authority or to the extent that such disclosure is authorized by the prior written consent of Employer and/or Employee. 13. ENTIRE AGREEMENT. This Agreement contains the entire understanding between the parties and supersedes and cancels any prior oral or written understanding and/or agreements between them respecting any subject matter of this Agreement. This Agreement may be amended or modified only in writing signed by both parties. 14. SEVERABILITY. If any provision, term, condition or clause of this Agreement or the application thereof shall be invalid or unenforceable to any extent, the remainder of this Agreement shall not be affected thereby and shall be enforced to the greatest extent permitted by law. 15. GOVERNING LAW. THIS AGREEMENT IS MADE AND ENTERED INTO IN THE STATE OF TEXAS AND IS TO BE CONSTRUED IN ACCORDANCE WITH AND TAKE EFFECT UNDER THE LAWS OF THE STATE OF TEXAS. 16. ASSIGNMENT. No party shall have any right to assign, mortgage, pledge, hypothecate or encumber this Agreement, in whole or in part, or any benefit or any rights accruing hereunder, without in any such case first obtaining the prior written consent of the other party hereto, except that Employer may assign this Agreement to a subsidiary of Employer, provided that in the event of such an assignment, Employer shall remain responsible for its obligations hereunder. All rights hereunder are personal to Employee and shall cease upon the termination of this Agreement. 17. NOTICE. Any notice, or other written communication to be given pursuant to this Agreement for whatever reason shall be deemed duly given and received (a) if delivered personally, from the date of delivery, or (b) by certified mail, postage prepaid, return receipt requested, three (3) days after the date of mailing, addressed to the parties below as follows: TO: New STAT Healthcare, Inc. 12450 Greenspoint Drive, Suite 1200 Houston, Texas 77060 TO: Ruben A. Perez 7734 Battle Intense Fair Oaks Ranch, Texas 78006 18. MISCELLANEOUS. Any protection, benefits, rights or other provisions given to Employer in this Agreement shall also be deemed to apply to, protect and inure to the benefit of any subsidiary, affiliate or other business or person related or connected to Employer. All rights of Employer expressed in this Agreement are in addition to any rights available under the common law or other legal principles. Section or paragraph titles or captions contained in this Agreement are inserted only as matter of convenience and for reference and in no way define, limit, extend or describe the scope of this Agreement or the intent of any provision hereof. All pronouns and any variation thereof shall be deemed to refer to the masculine, feminine, neuter, singular or plural as the identity of person or persons, firm or firms, corporation or corporations, and as context may require. IN WITNESS WHEREOF, the parties have duly executed this Agreement. NEW STAT HEALTHCARE, INC. By: /S/ NED E. CHAPMAN Title: Chief Financial Officer /s/RUBEN A. PEREZ RUBEN A. PEREZ </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.5 <SEQUENCE>10 <TEXT> EXHIBIT 10.5 EMPLOYMENT AND NON-COMPETITION AGREEMENT OF RUSSELL D. SCHNEIDER This Employment Agreement (hereinafter referred to as the "Agreement") is made and entered into this 24th day of June, 1996 (the "Effective Date") by and between New STAT Healthcare, Inc., a Delaware corporation (hereinafter referred to as "Employer") and Russell D. Schneider (hereinafter referred to as "Employee"). WHEREAS, Employer is engaged in healthcare services businesses and has, pursuant to an Amended and Restated Agreement and Plan of Reorganization dated as of March 15, 1996, engaged in statutory merger and stock exchange with AmHealth Corporation and its related entities (collectively, "AmHealth"); and WHEREAS, subject to the terms and conditions hereinafter provided, Employer desires to employ Employee and Employee desires to be employed by Employer. NOW, THEREFORE, in consideration of the employment of Employee and the compensation to be paid by Employer to Employee, Employee hereby accepts employment hereunder subject to the terms and conditions stated below including the agreement of Employee not to enter into certain competitive activities with Employer, as follows: 1. TERM. This Agreement shall commence on the Effective Date and shall continue for a period of three years or until terminated in accordance with the provisions set forth herein. 2. DUTIES. Employee shall perform the following duties pursuant to this Agreement: a. Employee shall be employed at Employer's office in Houston, Texas, or at such other location(s) as may be determined by the Board of Directors. b. Employee shall be actively involved in Employer's day-to-day activities and will have the duties assigned to Employee from time to time by Employer. c. Employee shall be available to assist Employer and its subsidiaries and related entities in any way deemed appropriate, commensurate with the duties of a corporate executive. d. Employee acknowledges that Employer is an equal opportunity employer, and that it is Employer's established policy not to discriminate on the basis of age, marital status, race, color, sex, religion or national origin, or to violate any federal or state anti-discrimination law. Employee shall be responsible for carrying out and implementing the foregoing policy throughout the operations and activities of Employer. 3. COMPENSATION PACKAGE. For all services provided, Employee shall be compensated as follows: a. ANNUAL SALARY. Effective as of the Effective Date, Employer shall pay Employee an annual salary of $120,000, payable in equal monthly installments on the last day of each month. b. INCENTIVE COMPENSATION. Employee shall be entitled to receive a bonus, the amount of which shall be determined by the compensation committee of the Board of Directors of Employer. 4. STOCK OPTION. Employee shall be entitled to participate in the 1996 Incentive Stock Option Plan of Employer and upon the approval of the Board of Directors and in accordance with the terms of the Plan shall be granted stock options at the discretion of the Board. 5. PART TIME EMPLOYMENT. During the term of this Agreement, Employee shall devote an average of ten hours per week to advancing the business and good reputation of Employer. Employer recognizes that Employee may undertake other business ventures contemporaneously with Employee's employment with Employer, and, subject to the provisions of paragraph 6 and 7 of this Agreement, Employer waives any right to assert that Employee's activities on behalf of himself or others constitutes a conflict of interest under the terms of this Agreement. 6. CONFIDENTIALITY, NON-DISCLOSURE AND OWNERSHIP OF CONFIDENTIAL INFORMATION. Employee acknowledges that during his employment, he will gain access to, or possession or knowledge of, numerous trade secrets, confidential information and other valuable properties, including, but not limited to, hospital and healthcare facility client lists, client files and records, lists of potential clients, prospects or targets, and/or other market and marketing data and plans, price books, promotional devices and methods, business methods, manuals and plans, business and sales techniques and research and development (hereinafter referred to collectively as "Confidential Information"). Confidential Information shall not include information in the public domain or attainable from information generally available to the public. Employee acknowledges that such Confidential Information is unique and a valuable asset which is owned solely by Employer and is to be used only for Employer's benefit. Employee shall not, during or after the term of employment, disclose, divulge, reveal, transfer, reproduce, sell, capitalize upon or take advantage of such Confidential Information and in addition, Employee shall exercise all reasonable efforts and precautions to protect such Confidential Information from misappropriation, misuse, disclosure, breach of confidentiality, or other conduct or action inconsistent with Employer's rights. Upon termination, Employee shall return immediately to Employer all Employer's property (including, without limitation, Confidential Information) in Employee's possession or control. 7. CONFIDENTIAL INFORMATION; COVENANT NOT TO COMPETE. Upon Employee's termination of employment, Employee shall not disclose Confidential Information or compete with Employer's business pursuant to the following terms: a. Employer acknowledges that Employee has previously been involved in an executive capacity for a long period of time in the healthcare services business and that Employee has acquired substantial knowledge concerning that business as a result of such experience. Employee acknowledges that his contact with physicians and medical institutions as a result of his employment by Employer will result in a personal relationship being established between Employee and such physicians and/or the administration of such medical institutions whereby Employee could influence the future actions of such medical institutions and/or physicians relative to the renewal or cancellation of contractual relationships between Employer, its subsidiaries and/or affiliates and such medical institutions and/or physicians. Furthermore, Employee acknowledges and agrees that Employee's employment by Employer will result in the acquisition by Employee of Confidential Information concerning the method of operation and administration of Employer and its subsidiaries and affiliates and of medical institutions and physicians with whom Employer and its subsidiaries and affiliates transact business, including, but not limited to, fee schedules, formulas and special client requirements. Employee acknowledges and agrees that such Confidential Information would create an unfair advantage in the event Employee were to attempt to solicit or provide services of a similar nature to a medical client of Employer and its subsidiaries and/or affiliates. Accordingly, Employee agrees not to disclose Confidential Information and agrees not to interfere with the contractual relationship between Employer, its subsidiaries, and/or affiliates and any medical institution and/or physician for a period of two (2) years after termination of employment. b. Employee agrees, during the term hereof, and for a period of two (2) years following the termination of employment hereunder, that he will not, directly or indirectly, by himself, or as an employee, director, officer, contractor or agent of another, enter into any business or activity anywhere within the State of Texas during the term hereof in competition with Employer, its subsidiaries and/or affiliates that would involve the following: (i) the solicitation of hospitals or other healthcare facilities to provide emergency department, kidney dialysis or healthcare management services or other contract physician services similar to or in competition with such services provided by Employer or any of its subsidiaries or affiliates providing similar services; or (ii) the solicitation of hospitals or other healthcare facilities that are clients or prospective clients (potential clients as to which a marketing presentation has been made within six (6) months of the date of termination of this Agreement) of Employer to provide any physician staffing, recruitment or management services similar to or in competition with services provided by Employer, its subsidiaries and/or affiliates and with which Employee was associated. Notwithstanding the foregoing, Employee may own up to 5% of the outstanding equity or debt securities of any publicly traded entity which engages in such activities without a breach of this Agreement. c. Employee acknowledges that Employer is a party to that certain Professional Services Agreement with Columbia/HCA Healthcare Corporation ("Columbia") dated as of February 1, 1996 (the "Columbia Agreement") whereby Employer provides services to certain Columbia facilities ("Facilities"). Employee agrees that, for a period of two (2) years following termination of the Columbia Agreement, he will not, without prior written approval of Columbia, either individually or as an employee, agent, officer or director of a third party, directly or indirectly (i) render any professional, administrative, advisory or consulting services to or for any physician clinic, independent physician organization or similar physician organization within a ten mile radius of any hospital or similar facility to which Employer is provided services under the Columbia Agreement, or (ii) solicit, raid, entice or induce any person who is (or was at any time within the one year period immediately preceding such termination) an employee or independent contractor of any Facility to (y) terminate his employment or contract with the Facility, or (z) become employed by or contract with any other person, firm, or corporation, and Employee will not approach any such employee or independent contractor for such purpose or authorize or knowingly approve the taking of such actions by any other persons. 8. SOLICITATION OF OTHER EMPLOYEES. Employee shall not, until two (2) years subsequent to the termination of employment, solicit or seek to influence, either directly or indirectly, any employee or any physician or healthcare provider under contract with Employer or any of its subsidiaries or affiliates, to enter into any employment agreements, independent contractor arrangement, or any other contractual arrangement whereby such individual would perform services for compensation, either directly or indirectly, for any person, firm, corporation or other entity or business that provides products or services in competition with the Employer or any of its subsidiaries or affiliates. 9. BREACH AND REMEDIES. Employee acknowledges that the breach or threatened breach of any of the covenants set forth in this Agreement will result in immediate and irreparable injury to Employer. Accordingly, Employee agrees that in addition to any rights or remedies available to Employer for a breach or threatened breach by Employee of any of the provisions set forth above, Employer shall be entitled to injunctive relief to enforce the obligations of Employee contained therein. Nothing herein shall be construed as prohibiting Employer from pursuing any other legal or equitable remedies that may be available to it for any such breach or threatened breach, including the recovery of damages from Employee. In the event that any of the provisions of this Agreement are found to be unenforceable or void (either in whole or in part), then the offending portion shall be construed as valid and enforceable only to the extent permitted by law and the balance of this Agreement shall remain in full force and effect. 10. BENEFITS. Employee shall be eligible to participate in all corporate benefit programs provided by Employer for its employees of comparable status in accordance with the personnel policies of Employer as such are in effect from time to time. 11. TERMINATION.This Agreement may be terminated as follows: a. VOLUNTARY TERMINATION. Either party may terminate this Agreement without cause at any time upon sixty (60) days prior written notice to the other; provided, however, the Agreement has been in place for three (3) complete years commencing on the Effective Date. b. TERMINATION FOR CAUSE. This Agreement may be terminated by Employer at any time for cause upon written notice to Employee, which notice shall specify the reason for termination. For purposes of this Section, cause shall include the following: fraud; substantial and continuous non-performance of assigned duties and unlawful activities for which Employee is convicted in a jurisdiction of the United States; and material breach of an express term of this Agreement. c. TERMINATION UPON DEATH OR DISABILITY. This Agreement shall terminate upon the death or permanent disability of Employee. Employee shall be deemed to be disabled if he qualifies as such for purposes of receiving long-term or permanent disability payments under the group disability insurance program of Employer or in the event that he is unable to regularly and consistently perform his normal duties as contemplated hereunder for a continuous period of twelve (12) months. 12. CONFIDENTIALITY. Employee agrees to keep this Agreement and its terms confidential except to the extent that disclosure is required by a lawfully constituted judicial or governmental authority or to the extent that such disclosure is authorized by the prior written consent of Employer and/or Employee. 13. ENTIRE AGREEMENT. This Agreement contains the entire understanding between the parties and supersedes and cancels any prior oral or written understanding and/or agreements between them respecting any subject matter of this Agreement. This Agreement may be amended or modified only in writing signed by both parties. 14. SEVERABILITY. If any provision, term, condition or clause of this Agreement or the application thereof shall be invalid or unenforceable to any extent, the remainder of this Agreement shall not be affected thereby and shall be enforced to the greatest extent permitted by law. 15. GOVERNING LAW. THIS AGREEMENT IS MADE AND ENTERED INTO IN THE STATE OF TEXAS AND IS TO BE CONSTRUED IN ACCORDANCE WITH AND TAKE EFFECT UNDER THE LAWS OF THE STATE OF TEXAS. 16. ASSIGNMENT. No party shall have any right to assign, mortgage, pledge, hypothecate or encumber this Agreement, in whole or in part, or any benefit or any rights accruing hereunder, without in any such case first obtaining the prior written consent of the other party hereto, except that Employer may assign this Agreement to a subsidiary of Employer, provided that in the event of such an assignment, Employer shall remain responsible for its obligations hereunder. All rights hereunder are personal to Employee and shall cease upon the termination of this Agreement. 17. NOTICE. Any notice, or other written communication to be given pursuant to this Agreement for whatever reason shall be deemed duly given and received (a) if delivered personally, from the date of delivery, or (b) by certified mail, postage prepaid, return receipt requested, three (3) days after the date of mailing, addressed to the parties below as follows: TO: New STAT Healthcare, Inc. 12450 Greenspoint Drive, Suite 1200 Houston, Texas 77060 TO: Russell D. Schneider 3 Pastoral Pond Circle The Woodlands, Texas 77380 18. MISCELLANEOUS. Any protection, benefits, rights or other provisions given to Employer in this Agreement shall also be deemed to apply to, protect and inure to the benefit of any subsidiary, affiliate or other business or person related or connected to Employer. All rights of Employer expressed in this Agreement are in addition to any rights available under the common law or other legal principles. Section or paragraph titles or captions contained in this Agreement are inserted only as matter of convenience and for reference and in no way define, limit, extend or describe the scope of this Agreement or the intent of any provision hereof. All pronouns and any variation thereof shall be deemed to refer to the masculine, feminine, neuter, singular or plural as the identity of person or persons, firm or firms, corporation or corporations, and as context may require. IN WITNESS WHEREOF, the parties have duly executed this Agreement. NEW STAT HEALTHCARE, INC. By: /s/ NED E. CHAPMAN Title:Chief Financial Officer /s/ RUSSELL D. SCHNEIDER RUSSELL D. SCHNEIDER </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.24 <SEQUENCE>11 <TEXT> EXHIBIT 10.24 MANAGEMENT SERVICES AGREEMENT BETWEEN STAT HEALTHCARE, INC. AND STAT PHYSICIANS, P.A. <PAGE> TABLE OF CONTENTS Page I. RESPONSIBILITIES OF PROFESSIONAL ASSOCIATION......................... 2 1.1 Sole Responsibility for All Medical and Professional Matters... 2 1.2 Contracted Providers........................................... 2 1.3 Fees, Charges and Payor Agreements............................. 2 1.4 Compliance with Law............................................ 3 1.5 Practice Sites; Availability................................... 3 1.6 Quality Assurance.............................................. 3 1.7 Patient Referrals.............................................. 3 1.8 Professional Dues and Education Expenses....................... 3 1.9 Professional Insurance Eligibility............................. 3 1.10 Fees for Professional Services................................. 4 II. RESPONSIBILITIES OF MANAGEMENT COMPANY............................... 4 2.1 General Responsibility......................................... 4 2.2 Responsibilities with Regard to Selected Patient-Related Matters....................................................... 4 (a) Patient Relations........................................ 4 (b) Quality Assurance........................................ 4 2.3 Responsibilities with Regard to Selected Financial Matters..... 5 (a) Billing.................................................. 5 (b) Cash Management.......................................... 6 (c) Accounting............................................... 6 (d) Reporting................................................ 6 2.4 Responsibilities for Financial Planning and Goals.............. 7 (a) Preparation of Budget.................................... 7 (b) Expansion of the Practice................................ 8 (c) Development of New Services.............................. 9 (d) Capital Investment and Support........................... 9 2.5 Data Processing................................................ 9 2.6 Other Responsibilities......................................... 9 (a) Marketing................................................ 9 (b) Insurance................................................ 10 (i) Professional Errors and Omissions Coverage......... 10 (ii) Premium Amounts.................................... 10 (iii) Malpractice Insurance.............................. 10 (iv) Copies of Insurance Policies....................... 10 (c) Personnel................................................ 10 (d) Managed Care Agreements.................................. 11 III. FINANCIAL ARRANGEMENTS............................................... 11 3.1 Management Company's Compensation.............................. 11 (a) Calculation.............................................. 11 (b) Payment.................................................. 13 3.2 Definitions.................................................... 14 3.3 Accounts Receivable............................................ 14 IV. COVENANTS............................................................ 15 4.1 Covenants and Warranties of Professional Association........... 15 4.2 Covenants and Warranties of Management Company................. 16 V. TERM AND TERMINATION................................................. 16 5.1 Term........................................................... 16 5.2 Events of Default.............................................. 16 5.3 Termination.................................................... 17 5.4 Duties upon Termination or Expiration of This Agreement........ 17 VI. RESTRICTIVE COVENANTS................................................ 17 6.1 Covenant Regarding Proprietary Information..................... 17 6.2 Covenants Not to Compete During the Term....................... 18 (a) Restrictive Covenants by Professional Association........ 18 (b) Restrictive Covenants by Contracted Physicians........... 19 6.3 Covenant Not to Compete Following Termination.................. 19 6.4 Covenant Not to Solicit........................................ 19 VII. INFORMATION AND RECORDS.............................................. 20 7.1 Ownership of Records........................................... 20 7.2 Professional Association's Business and Financial Records...... 20 7.3 Access to Records.............................................. 20 7.4 Confidentiality of Records..................................... 20 7.5 Limitations on Use of Management Information System............ 20 VIII. MISCELLANEOUS........................................................ 21 8.1 Independent Contractor Status of Parties....................... 21 8.2 No Waiver...................................................... 21 8.3 Notices........................................................ 21 8.4 Assignment..................................................... 22 8.5 Successors and Assigns......................................... 22 8.6 Severability................................................... 22 8.7 Third Parties.................................................. 22 8.8 Headings....................................................... 22 8.9 Time of the Essence............................................ 22 8.10 Governing Law.................................................. 22 8.11 Confidentiality................................................ 22 8.12 Contract Modifications for Prospective Legal Events............ 23 8.13 Language Construction.......................................... 23 8.14 Communications................................................. 23 8.15 Indemnification................................................ 23 8.16 Entire Agreement............................................... 24 8.17 Incorporation by Reference..................................... 24 8.18 Amendments only in Writing..................................... 24 8.19 Counterparts................................................... 24 8.20 Commercial Impracticability.................................... 24 8.21 Election of Remedies........................................... 24 8.22 Attorneys' Fees and Expenses................................... 24 8.23 Survival....................................................... 25 Schedules 1.2 List of Contracted Providers and Physician Assistant Employees 1.3(a) Fee Schedule 1.3(b) Payor Schedule 1.5 Practice Sites MANAGEMENT SERVICES AGREEMENT This Management Services Agreement ("Agreement") is entered into as of February 1, 1996 ("Effective Date") by and between STAT Healthcare, Inc., a Delaware corporation ("Management Company"), and STAT Physicians, P.A., a Texas professional association ("Professional Association"). RECITALS A. Professional Association is a Texas professional association that engages in the business of providing or arranging for the provision of emergency department medical services ("Emergency Services"). B. Professional Association contracts with physicians to provide professional medical care at the emergency department of various hospitals and healthcare facilities pursuant to written agreements ("Practice Sites"). A listing of the Practice Sites is set forth at SCHEDULE 1.5, attached hereto and incorporated herein by reference. C. Professional Association has entered into independent contractor agreements with various physicians and other health care professionals licensed to practice in the State of Texas ("Contracted Providers") to assist Professional Association in providing or arranging for the provision of health care services to patients of Professional Association ("Patients"), and may enter into employment agreements with physician assistants licensed to practice with the State of Texas to perform services for Patients ("Physician Assistants"). D. Management Company engages in the business of providing certain administrative and support services to emergency physician practices. E. Professional Association desires to secure certain administrative services from Management Company in connection with its operation of the Practice. F. Professional Association and Management Company desire to enter into a written agreement for the provision by Management Company, on an exclusive basis, of administrative services to Professional Association with respect to the Practice, so as to permit Professional Association to devote its efforts on a concentrated and continuous basis to the rendering of medical services to its patients. NOW, THEREFORE, in consideration of the mutual covenants and conditions contained herein, the parties agree as follows: I. RESPONSIBILITIES OF PROFESSIONAL ASSOCIATION 1.1 SOLE RESPONSIBILITY FOR ALL MEDICAL AND PROFESSIONAL MATTERS. All medical and professional matters relating to the operations of the Practice and the performance of services for Patients of Professional Association shall be the sole responsibility of Professional Association. Professional Association expressly acknowledges that the emergency physician or practices conducted at these facilities shall be conducted solely by physicians associated with Professional Association as Contracted Providers. 1.2 CONTRACTED PROVIDERS. Professional Association shall have complete control of and responsibility for the hiring, engagement, compensation, supervision, evaluation, and termination of all Contracted Providers who will provide patient care services, although at the request of Professional Association, Management Company shall consult with Professional Association respecting such matters. With respect to physicians, Professional Association shall only contract with licensed physicians meeting applicable credentialling guidelines established by Professional Association. Professional Association may enter into employment agreements with Physician Assistants licensed to practice in the State of Texas to perform services for Patients. Professional Association shall be responsible for the payment of salaries and wages, compensation, payroll taxes, employee benefits, and all other taxes and charges now or hereafter applicable to Contracted Providers and Physician Assistant employees, all of which shall be in conformity with the applicable Professional Association Budget described in Section 2.4(a). A list of all Contracted Providers and Physician Assistant employees is set forth at SCHEDULE 1.2, attached hereto and incorporated herein by reference. Prior to making any changes to the list of Contracted Providers, or licensed or health care professional employees set forth at SCHEDULE 1.2, Professional Association shall consult with Management Company. Professional Association shall also consult with Management Company with regard to the terms of contracts entered into between Professional Association and Contracted Providers, or licensed Physician Assistant employees, and the terms and conditions of their employment or engagement as independent contractors, as applicable. 1.3 FEES, CHARGES AND PAYOR AGREEMENTS. Professional Association shall, after consultation with Management Company, determine the fees, charges, premiums, or other amounts due in connection with its delivery of Emergency Services to Patients. Such fees, charges, premiums, or other amounts - regardless of whether determined on a fee-for-service, capitated, prepaid, or other basis - shall be reasonable and consistent with the fees, charges, premiums, and other amounts due to health care providers for similar services within the community under the type of reimbursement program involved. Professional Association shall deliver to Management Company a schedule of fees for all of Professional Association's charges ("Fee Schedule") at the Effective Date, a copy of which is set forth at SCHEDULE 1.3(A), attached hereto and incorporated herein by reference, along with a schedule of all agreements between Professional Association and Payors or their agents for the provision of health care services ("Payor Schedule"), a copy of which is set forth at SCHEDULE 1.3(B), attached hereto and incorporated herein by this reference. Professional Association shall, after consultation with Management Company, give Management Company at least thirty (30) days' prior written notice of any changes in the Fee Schedule or Payor Schedule, or of any changes in the agreements with Payors identified in the Payor Schedule. For the purposes of this Agreement, the term "Payor" shall mean insurers, Health Maintenance Organizations, and other third party payors. 1.4 COMPLIANCE WITH LAW. Professional Association shall require in its contractual relationships with all of its Contracted Providers that they comply with all laws, regulations, and ethical and professional standards applicable to the practice of medicine. Physicians providing medical services shall at all times be licensed to practice medicine in the State of Texas. 1.5 PRACTICE SITES; AVAILABILITY. Professional Association shall conduct its practice from the emergency departments of contracted hospitals and care centers ("Practice Sites") set forth in SCHEDULE 1.5 as may be amended from time to time. Any additional or substitute Practice Site shall be deemed to be part of the Practice for the purposes of this Agreement. Contracted Providers shall be available at Practice Sites to provide Emergency Services twenty-four (24) hours per day, seven (7) days per week. Contracted Providers shall provide Emergency Services to Patients in a courteous and prompt fashion, be available and accessible to Patients, provide Patients with full and meaningful information, and render Emergency Services in a manner that assures continuity of care. 1.6 QUALITY ASSURANCE. Professional Association shall monitor and develop quality assurance programs and performance standards, shall monitor utilization and quality of services provided by Contracted Providers, and shall take all steps necessary to remedy any and all deficiencies in the efficiency or the quality of medical care provided. 1.7 PATIENT REFERRALS. The parties agree that the benefits to Professional Association hereunder do not require, are not payment for, and are not in any way contingent upon the admission, referral or any other arrangements for the provision of any item or service offered by Management Company or any affiliate of Management Company to any of Professional Association's patients in any facility or laboratory controlled, managed or operated by Management Company or any affiliate of Management Company. 1.8 PROFESSIONAL DUES AND EDUCATION EXPENSES. Professional Association and its Contracted Providers shall be solely responsible for the cost of membership in professional associations and continuing professional education. Professional Association shall ensure that each of its Contracted Providers participates in such continuing medical education as is necessary for such provider to remain current with professional licensure and community standards. 1.9 PROFESSIONAL INSURANCE ELIGIBILITY. Professional Association shall cooperate in the obtaining and retaining of professional liability insurance by assuring that either its Contracted Providers are insurable or instituting proceedings to terminate any Contracted Provider who is not insurable or loses his or her insurance eligibility. Termination shall be effective no more than thirty (30) days from such determination. Professional Association shall require all Contracted Providers to participate in an on-going risk management program. 1.10 FEES FOR PROFESSIONAL SERVICES. Professional Association shall be solely responsible for legal, accounting and other professional services fees incurred by Professional Association. II. RESPONSIBILITIES OF MANAGEMENT COMPANY 2.1 GENERAL RESPONSIBILITY. Management Company shall have general respon sibility for providing fiscal services, management information services, and other support services to Professional Association with respect to the Practice, except as otherwise provided in this Agreement. Management Company shall perform all required functions in accordance with sound management techniques. Notwithstanding Management Company's general and specific rights and responsibilities set forth in this Agreement, Professional Association shall have full authority and control with respect to all medical, professional and ethical determinations over the Practice to the extent required by federal, state and city law and regulation. Management Company shall not engage in activities which constitute the practice of medicine under applicable law. Management Company shall neither exercise control over nor interfere with the physician-patient relationship, which shall be maintained strictly between the physicians of Professional Association and their Patients. 2.2 RESPONSIBILITIES WITH REGARD TO SELECTED PATIENT-RELATED MATTERS. (a) PATIENT RELATIONS. Management Company shall assist Professional Association in maintaining positive Patient relations by, among other things: responding to Patient grievances and complaints in matters other than medical evaluation, diagnosis, and treatment; and establishing and maintaining Patient transfer arrangements to expedite referrals where medically necessary, as determined and requested by the attending physician. (b) QUALITY ASSURANCE. Management Company shall assist Professional Association, in accordance with criteria established by Professional Association, in the development and implementation of appropriate quality assurance programs, including development of performance and utilization standards, sampling techniques for case review, and preparation of appropriately documented studies. Notwithstanding the foregoing, Management Company shall not perform any duties that constitute the corporate practice of medicine. 2.3 RESPONSIBILITIES WITH REGARD TO SELECTED FINANCIAL MATTERS. (a) BILLING. Management Company shall submit on a timely basis all bills and necessary documentation required by Patients and Payors in order to obtain payment in connection with Professional Association's delivery of health care services at the Practice or its arrangement for the delivery of such services. In seeking such payment, Management Company shall act as Professional Association's agent in billing and collecting professional fees, charges, premiums, or other amounts owed to Professional Association. In such billing, Management Company shall indicate on its billhead that it is billing in the name of Professional Association and shall only bill under Professional Association's provider number. In this connection, Professional Association hereby appoints Management Company, during the term of this Agreement, as Professional Association's true and lawful attorney-in-fact, with power of substitution, for the following purposes relating to the Practice: (i) To bill Professional Association's Patients in Professional Association's name and on Professional Association's behalf for all billable medical services provided by Professional Association. (ii) To bill in Professional Association's name and on Professional Association's behalf, all claims for reimbursement or indemnification from insurance companies, Medicare, Medicaid and all other Payors or fiscal intermediaries for all covered billable medical services provided by Professional Association to Patients. (iii) To collect accounts receivable generated by such billings in Professional Association's name and on Professional Association's behalf, including, where deemed appropriate by Management Company and approved in advance by Professional Association, settling and compromising claims, assigning such accounts receivable to a collection agency or the bringing of legal action against a Patient or Payor on Professional Association's behalf. (iv) To receive all payments in Professional Association's name and on behalf of Professional Association from Patients and Payors. After receipt of such payments, Management Company shall endorse in the name of Professional Association and, in the name of Professional Association pursuant to Section 3.4, deposit all such payments directly into a depository account with a banking institution selected by Management Company and approved by Professional Association, such approval not to be unreasonably withheld, and shall apply such payments in accordance with the terms of this Agreement. (v) To write checks against or otherwise withdraw funds depos ited in Professional Association's bank account for the purposes and only for the purposes described in this Agreement. Except as otherwise provided herein, in no event shall Management Company commingle funds of Professional Association with its own funds or utilize Professional Association's funds or other assets for the benefit of Management Company or any of its directors, officers, employees or agents. (b) CASH MANAGEMENT. In addition to the billing, collecting, and payment services referenced in Section 2.3(a), Management Company shall manage the cash and cash equivalents of Professional Association. Management Company shall be entitled (and is hereby authorized) to transfer such cash to the accounts of Management Company or its Affiliates and to use such cash for such purposes as Management Company or its Affiliates deem appropriate, without any interest charge to Management Company or its Affiliates. Management Company may subcontract with a third party for the performance of all or a portion of the foregoing services. (c) ACCOUNTING. Management Company shall direct and maintain the operation of an appropriate accounting system with respect to Professional Association's operation of the Practice which shall perform all bookkeeping and accounting services required for the operation of the Practice, including the maintenance, custody and supervision of business records, ledgers and reports; the establishment, administration and implementation of accounting procedures, controls and systems; and implementation and management of computer-based management information systems. Such accounting system shall allow Management Company to prepare the reports specified in Section 2.3(c). Professional Association and its authorized representatives shall have the right to review the financial books and records maintained by Management Company relating to the operation of the Practice, and Management Company shall, upon reasonable advance written notice from Professional Association, allow Professional Association and its authorized representatives access to all information and documents required for such review. (d) REPORTING. Management Company shall present to Professional Association reports on the financial condition of Professional Association on the basis set forth below in clauses (i) and (ii) and such other reports that Professional Association may reasonably request, including daily activity reports, weekly analyses, alternative delivery system reports, backlog reports and the like. Management Company also shall provide such reports as may be required by any regulatory agency having jurisdiction over the operations of Professional Association. The reports initially required to be delivered to Professional Association under this Section 2.3(c) with respect to the Practice are as follows: (i) As soon as possible after the close of each month, a balance sheet and a related statement of revenues and expenses showing the results of Professional Association's operations for the preceding month of the fiscal year and the year to date. (ii) As soon as possible after the close of each fiscal year, a balance sheet and related statement of revenues and expenses showing the results of Professional Association's operations during that fiscal year. Professional Association, at its option and expense, may have such annual financial statement reviewed by an independent certified public accounting firm selected by Professional Association and acceptable to Management Company. 2.4 RESPONSIBILITIES FOR FINANCIAL PLANNING AND GOALS. (a) PREPARATION OF BUDGET. Management Company shall prepare the Professional Association Budget and the Management Company Budget for each Budget Period in accordance with the provisions of this SECTION 2.4(A). The Professional Association Budget and the Management Company Budget for the first Budget Period, each dated as of the Effective Date, will be in form and substance as mutually agreed by the parties hereto prior to the Effective Date. For the purposes of this Agreement, "Budget Period" shall mean each fiscal year of Professional Association which shall be a calendar year, and any partial fiscal year of Professional Association that occurs either during 1996 or immediately prior to the Termination Date. With respect to each Budget Period following the initial Budget Period, the Management Company shall prepare a preliminary draft Professional Association Budget and the Management Company Budget, and shall deliver a preliminary draft of each such budget to the Professional Association, with a copy to Professional Association, at least 120 days prior to the commencement of the Budget Period to which such budget relates. The Professional Association shall provide any comments or required changes to such preliminary drafts to the Management Company within 15 days after receipt thereof. The Management Company shall then submit a revised Professional Association Budget and Management Company Budget to the Professional Association, with a copy to Professional Association, for approval by the Professional Association no later than 15 days after the end of the 15-day period referred to in the immediately preceding sentence. The foregoing time periods during which drafts of the Professional Association Budget and Management Company Budget are to be delivered and approved shall be subject to adjustment from time to time as determined appropriate by the Professional Association. If, prior to the commencement of any Budget Period, either the Professional Association or the Professional Association board of directors has not yet approved the Professional Association Budget, or the Professional Association has not yet approved the Management Company Budget, then the Management Company and Professional Association will work diligently in good faith to obtain such approvals, and until such approvals are obtained, with respect to the Professional Association Budget and the Management Company Budget, (i) as to any disputed line items, the immediately preceding Budget Period's budget shall be controlling until such time, if any, as agreement is reached on the amounts to be allocated to such disputed line items, specifically as follows: (A) non-recurring extraordinary items shall not be continued from the budget for the immediately preceding Budget Period, (B) if the previous budget was for a Budget Period of less than 12 months, it shall be annualized, (C) if items such as rents or taxes are subject to an automatic increase, such increases shall be effective at the increased rate, (D) for items such as employee salaries, the total salary number shall be adjusted to take into account changes in the number of employees, but individual salaries shall not increase and (E) Provider compensation and purchased medical services, collectively, shall be decreased to the extent that Professional Association's gross revenues decline in the new Budget Period and shall be increased to the extent that Professional Association's gross revenues increase in the new Budget Period (in each case as compared to the immediately preceding Budget Period) so that the sum of Provider compensation and purchased medical services as a percentage of Professional Association's gross revenues remains constant between the two Budget Periods; and (ii) as to any line items which are not in dispute, the revised budgets submitted by the Management Company shall control. (b) EXPANSION OF THE PRACTICE. Management Company shall assist Professional Association in its efforts to expand the Practice by the addition of new physicians through recruitment, or through the merger with or acquisition of other physician groups, as may be economically justified and provided for in the Professional Association Budget. The Professional Association Budget may be adjusted as required to accurately reflect such mergers or acquisitions, anticipated mergers or acquisitions, or other changes in the number of Contracted Providers. Such services shall include, without limitation, performance of the following services on behalf of Professional Association: (i) Preparing and sending mass mailing recruitment literature and materials; (ii) Accepting and reviewing applications of prospective independent contractor physicians and Support Personnel; (iii) Reviewing and verifying references and D.E.A. numbers of prospective independent contractor physicians and/or Support Personnel; (iv) Reviewing and verifying licensing status and requirements with respect to prospective independent contractor physicians and/or Support Personnel; (v) Preparing and reviewing all necessary tax forms and related information applicable to prospective independent contractor physicians and/or other licensed or certified persons with whom Professional Association contracts for the provision of ancillary services ("Support Personnel"); (vi) Interviewing prospective independent contractor physicians and/or Support Personnel; (vii) Assisting in scheduling meetings between hospitals and/or medical facilities and prospective independent contractor physicians and/or Support Personnel, as may be necessary or required by such hospitals and/or medical facilities; (viii)Negotiating and preparing documents as may be necessary to establish appropriate contractual relationships between (a) independent contractor physicians and/or Support Personnel and/or (b) Professional Association and/or any entities related thereto; and (ix) Performing any and all other services relating to and arising out of the recruitment of independent contractor physicians and/or Support Personnel. (x) Soliciting proposals from the emergency departments of hospitals and care centers and negotiating and entering into contracts with such entities in the name of and on behalf of Professional Association and subject to Professional Association's approval. (c) DEVELOPMENT OF NEW SERVICES. Management Company will exercise its good faith business judgment to add new services or to supplement existing services, subject to Section 3.1(d) below, as may be economically justified and provided for in the Professional Association Budget. The parties agree that expansion of the Practice and development of new services will depend on, among other things, physician composition, anticipated volume, type and level of reimbursement available, the number and the specialty mix of physicians in the Practice, the level of physician support, the overall performance of the Practice, and the requirements of applicable leases and subleases. (d) CAPITAL INVESTMENT AND SUPPORT. The parties acknowledge that the addition of new services, the provision of working capital support, the merger or acquisition of assets of other physician groups, building improvements, the purchase of new or replacement equipment, and the provision of space, facilities and equipment for new physicians (without limitation, "Capital Investments") together may require substantial capital investment by Management Company. Management Company will exercise its good faith business judgment to provide the appropriate level of capital support and management services to accomplish the financial goals of Professional Association. 2.5 DATA PROCESSING. Management Company shall provide, operate, supervise and direct the development of appropriate and efficient electronic data processing systems with respect to Professional Association's operation of the Practice. 2.6 OTHER RESPONSIBILITIES. (a) MARKETING. (i) Management Company shall provide all services reasonably necessary for marketing Professional Association's health care services and shall submit any marketing programs for prior review and revision, if necessary, and approval by Professional Association, which approval shall not be unreasonably withheld. Such marketing shall comply with applicable laws and regulations governing the use of advertising by the medical profession and with applicable standards of medical ethics. (ii) Management Company may make recommendations and assist in developing patient education materials and programs. Prior to instituting any such programs, Management Company shall obtain the approval of Professional Association, which approval shall not be unreasonably withheld. (b) INSURANCE. (i) PROFESSIONAL ERRORS AND OMISSIONS COVERAGE. Management Company shall obtain and maintain during the term of this Agreement, on behalf of itself and Professional Association, if available on commercially reasonable terms as determined by Management Company, professional errors and omissions insurance and general liability insurance, with coverage in amounts to be agreed upon. To the extent obtainable without incurring additional material expense, the policies providing coverage to Management Company shall name Professional Association as an additional insured, and the policies providing coverage to Professional Association shall name Management Company as an additional insured. (ii) PREMIUM AMOUNTS. The amount of the premiums for all insurance provided under this Agreement for Professional Association shall be included, either separately or as part of the line-item for leasehold expenses, in Professional Association Budget as an expense to Professional Association. (iii) MALPRACTICE INSURANCE. It is understood that Professional Association and its Contracted Providers shall, at Professional Association's cost, at all times be covered by malpractice insurance with coverage in amounts to be agreed upon. (iv) COPIES OF INSURANCE POLICIES. Management Company shall, upon request, promptly provide Professional Association with copies of all policies of insurance that it procures under this Agreement. Each such policy shall provide that it cannot be modified or terminated except after thirty (30) days written notice to Professional Association. (c) PERSONNEL. To the extent such personnel are not provided by the relevant hospital, Management Company shall furnish the services of all personnel required for the operation of the Practice. Except as specifically provided in this Section 2.6(c), Management Company has the power to recruit, hire, train, promote, assign, set the compensation level for, and discharge all nonmedical personnel. Physician Assistants who provide direct patient care shall provide such services under the exclusive direction, supervision and control of Professional Association, while all other services of Management Company personnel shall be performed under the exclusive direction, supervision and control of Management Company. Notwithstanding the foregoing, if the activities of any of the nonprofessional personnel affects the delivery of medical care by Professional Association, Professional Association shall direct and supervise the provision of such activities to ensure that the best possible medical care is provided to Professional Association's patients and such activities shall not be subject to any direction or control by Management Company except as may be specifically authorized by Professional Association. If Professional Association is dissatisfied with the services of any such personnel, Professional Association shall consult with Management Company. Management Company shall in good faith determine whether the performance of that employee could be brought to acceptable levels through counsel and assistance, or whether such employee should be terminated. All of Management Company's obligations regarding staff shall be governed by the goal of supporting Professional Association in its provision of high quality medical care. Employee assignments shall be made with the intention of assuring consistent and continued rendering of high quality medical support services and to ensure prompt availability and accessibility of individual medical support personnel to physicians in order to develop constant, familiar and routine working relationships between individual physicians and individual members of the medical support personnel. (d) MANAGED CARE AGREEMENTS. Management Company shall negotiate and administer all Payor agreements in the name of and on behalf of Professional Association and subject to Professional Association's approval and Management Company shall consult with Professional Association on all professional and clinical matters relating thereto. III. FINANCIAL ARRANGEMENTS 3.1 MANAGEMENT COMPANY'S COMPENSATION. In consideration for the services furnished by the Management Company to Professional Association hereunder, Professional Association shall pay the Management Company a management fee (the "Management Fee"), which shall be calculated and paid as follows: (a) CALCULATION. (i) The Management Fee for any period shall be equal to the sum of (x) the Base Fee for such period and (y) the Incentive Fee, if any, for such period. (ii) For purposes of this Agreement: (A) The term "Base Fee" shall mean, for any period, all expenses of the Management Company of any kind whatsoever with respect to any period in providing the services contemplated under this Agreement (including any depreciation expense), other than Excluded Expenses. For purposes of this Agreement, the term "Excluded Expenses" shall mean (1) any interest expense on money which is borrowed by the Management Company from a third party (not including under this clause (1) interest expense on indebtedness incurred by Management Company or its Affiliates to finance any of its obligations hereunder or services provided hereunder, or interest which may accrue on any accounts payable of the Management Company generated in providing the services contemplated under this Agreement, which interest shall be included in the Base Fee) and (2) any federal or state income tax expenses of the Management Company. The Management Company shall be entitled, at its option, to include as an expense of the Management Company for purposes of the Base Fee a reasonable hourly fee for any specialist or professional employed by Management Company or one of its Affiliates (such as a management systems specialist, an insurance consultant, a lawyer, etc.) who provides services to the Management Company for specific projects in connection with Management Company's obligations hereunder, provided that such fees are not in excess of comparable fees that would be charged by unaffiliated parties providing a comparable quality of service. (B) The term "Incentive Fee" shall mean, for any period, an amount, if any, equal to the lesser of (i) gross revenues of Professional Association minus the sum of (x) the Professional Association Operating Expenses, plus (y) the Base Fee, or (ii) the Capital Return Amount. (iii) The calculation of the "Capital Return Amount", for purposes of Section 3.1(a)(ii)(B) for any period, shall be made by multiplying the Managed Capital for such period by the Capital Return Percentage applicable to such period. The Managed Capital and the Capital Return Percentage shall be determined as follows: (A) The Management Company's managed capital ("Managed Capital") on the Effective Date shall be deemed to be $5,000,000. From and after the Effective Date, such Managed Capital shall be subject to adjustment and calculation as follows: (1) Managed Capital shall be (a) increased dollar for dollar by (A) any additional cash and the fair market value of other property contributed by the Management Company from and after the Effective Date, and (B) the Net Income of the Management Company for any period, and (b) decreased dollar for dollar by any cash or the fair market value of other property distributed to the Management Company or any Affiliate of the Management Company from and after the Effective Date, other than in exchange for goods or services acquired by the Management Company from such Affiliate or as otherwise provided in this Agreement or in reduction of any liabilities of the Management Company. Managed Capital shall not be reduced by any Net Loss of the Management Company. The terms "Net Income of the Management Company" and "Net Loss of the Management Company" shall mean the net income or net loss of the Management Company, determined in accordance with GAAP and the customary accounting practices of the Management Company, PROVIDED, HOWEVER, that the calculation of such net income or net loss shall not take into account any provision for income tax expense or any other Excluded Expense. (2) Any funds which are provided by the Management Company or its Affiliates to the Management Company shall be deemed to be additional cash contributions to, and not debt obligations of, the Management Company for purposes of this calculation, whether or not such contributions are otherwise characterized by Management Company or its Affiliates for other purposes as inter-company losses. (3) Managed Capital for purposes of this Section 3.1 shall be determined as of the end of each quarter during a Budget Period. However, the cash balance of the Management Company included as of the end of each quarter shall be the sum of the daily cash balance for the Management Company for each day during such quarter, divided by the number of days during such quarter. (B) The "Capital Return Percentage" shall initially mean 33.1%. The Capital Return Percentage was calculated by dividing an agreed upon after-tax percentage of 20% by 0.605 (i.e., assuming the Management Company was a separate legal entity and would be subject to an approximately 35% rate for U.S. federal or state franchise or income tax, as applicable, and a 4.5% rate (after giving effect to the U.S. federal income tax benefit) for state income tax purposes) and may be adjusted for increases in federal or state income tax rates. However, commencing on the fifth anniversary of the Effective Date, and for each year thereafter, the Management Fee shall be subject to reasonable increase, at the discretion of the Management Company, to reflect profitability, expansion and improvements in operations of the System. (b) PAYMENT. The Management Fee for any Budget Period shall be paid as follows: (i) The Management Fee for such Budget Period shall be paid as determined by the parties. (ii) The Management Fee will be reconciled on a quarterly basis with respect to three-month periods ending March 31, June 30, September 30 and December 31 of each year. 3.2 DEFINITIONS. For the purposes of this Article III, the following definitions shall apply: (a) An "Affiliate" of an entity means (i) any person or entity directly or indirectly controlled by such entity, (ii) any person or entity directly or indirectly controlling such entity, (iii) any subsidiary of such entity if the entity has a fifty percent (50%) or greater ownership interest in the subsidiary, or (iv) such entity's parent entity if the parent has a fifty percent (50%) or greater ownership interest in the entity. For purposes of this Article III, Professional Association is not an Affiliate of Management Company. (b) "Professional Association Operating Expenses" shall mean the amount set forth in the applicable Professional Association Budget as Professional Association Operating Expense, which shall include the budgeted cost and expense for the following items: (i) payments and compensation to be made by or on behalf of Professional Association to Contracted Providers; (ii) compensation, employment-related benefits and applicable payroll and other deductions, withholdings or payments of Physician Assistants, if any, in consideration for the provision of professional medical or other health care services; (iii) professional liability insurance, to the extent paid by Professional Association; (iv) arranging health care services for patients covered by Payor Contracts where such health care services are not provided by Professional Association; and (v) such other items as the parties agree. It is the intention of Professional Association and Management Company that, for the administrative convenience of Professional Association, the Professional Association Budget will generally consist of only the budgeted cost and expense of any additional items which legally or practically cannot be supplied by Management Company. 3.3 ACCOUNTS RECEIVABLE. On approximately the tenth of each month, Management Company may purchase the accounts receivable of Professional Association, arising during the previous month, by transferring the amount set forth below by wire transfer into an account of Professional Association at such place and by such method as may be designated by Professional Association. The consideration for such purchase would be an amount equal to all fees recorded each month (net of uncollectible accounts, discounts, Medicare, Medicaid, Worker's Compensation, employee/dependent healthcare benefit programs, professional courtesies and other activities that do not generate a collectible fee (together "Adjustments"), less the Management Fee. In the event Management Company exercises its right to purchase pursuant to this Section 3.3, it is the intention of the parties that Management Company would thereby become owner of the accounts receivable of Professional Association. However, in case such purchase shall be ineffective for any reason, concurrently with any exercise by Management Company of its right to purchase, the parties shall execute a Security Agreement, in a form acceptable to Management Company, to grant a security interest in the accounts receivable to Management Company. In addition, in the event Management Company exercises its right to purchase, Professional Association shall cooperate with Management Company to execute all necessary documents in connection with the pledge of such accounts receivable to Management Company, or at Management Company's option, its lenders. All collections in respect of such accounts receivable shall be deposited in a bank account at a bank designated by Management Company. To the extent Professional Association comes into possession of any payments in respect of such accounts receivable, Professional Association shall direct such payments to Management Company for deposit in bank accounts designated by Management Company. IV. COVENANTS 4.1 COVENANTS AND WARRANTIES OF PROFESSIONAL ASSOCIATION. Professional Association covenants with and warrants to Management Company as follows: (a) Professional Association is and shall remain during the term of this Agreement a professional association duly organized, validly existing and in good standing under the laws of the State of Texas, actively engaged in the practice of medicine, and possessing full power and authority to own its properties and to conduct the business in which it engages. (b) Professional Association has full power and authority to execute and deliver this Agreement and to engage in the transactions and obligations contemplated by this Agreement. Upon its execution, this Agreement shall constitute a valid and binding obligation of Professional Association, enforceable in accordance with its terms, except as limited by applicable bankruptcy, insolvency, moratorium, or other similar laws affecting generally the rights of creditors and by principles of equity. The party executing this Agreement on behalf of Professional Association is duly authorized to do so. (c) The consummation of the transactions contemplated by this Agree ment will not: result in a breach of the terms, provisions, or conditions of or constitute a default under the Articles of Association, Bylaws or other enabling or governing instruments of Professional Association or any agreement to which Professional Association is a party or by which it is bound; or, to the best knowledge of Professional Association, constitute a violation of any applicable law or regulation. 4.2 COVENANTS AND WARRANTIES OF MANAGEMENT COMPANY. Management Company covenants with and warrants to Professional Association as follows: (a) Management Company is and shall remain during the term of this Agreement a corporation which is duly organized, validly existing and in good standing under the laws of the State of Texas, possessing full corporate power and authority to own its prop erties and to conduct the business in which it engages. (b) Management Company has full corporate power and authority to execute and deliver this Agreement and to engage in the transactions and obligations contemplated by this Agreement. Upon its execution, this Agreement shall constitute a valid and binding obligation of Management Company, enforceable in accordance with its terms, except as limited by applicable bankruptcy, insolvency, moratorium, or other similar laws affecting generally the rights of creditors and by principles of equity. The party executing this Agreement on behalf of Management Company is duly authorized to do so. (c) The consummation of the transactions contemplated by this Agree ment will not: result in any breach of the terms, provisions or conditions of or constitute a default under the Articles of Incorporation, Bylaws or other enabling or governing instruments of Management Company or any agreement to which Management Company is a party or by which it is bound; or, to the best knowledge of Management Company, constitute a violation of any applicable law or regulation. V. TERM AND TERMINATION 5.1 TERM. This Agreement shall commence on Effective Date and shall continue in effect in perpetuity, unless sooner terminated pursuant to this Article V. 5.2 EVENTS OF DEFAULT. Each of the following shall constitute an "Event of Default" (the party causing such default is referred to as the "Breaching Party"): (a) The Breaching Party fails to make any payment required under this Agreement. (b) The Breaching Party admits in writing its inability to pay its debts as they mature, makes any general assignment for the benefit of creditors, or seeks to avail itself of any law for the release of insolvent debtors. (c) Insolvency, bankruptcy, dissolution, liquidation, or receivership proceedings are commenced by or with the consent of the Breaching Party, or are pending for more than sixty (60) days against the Breaching Party. (d) The Breaching Party fails to observe or otherwise breaches any material term, condition, covenant, or warranty of this Agreement. 5.3 TERMINATION. Subject to the provisions of this Article V, the non-Breaching Party may terminate this Agreement upon the occurrence of an Event of Default in accordance with the following: (a) In the event of the occurrence of an Event of Default referred to in Section 5.2(a) above, upon the expiration of thirty (30) days after written notice, which notice shall specify the nature and extent of such Event of Default to the Breaching Party, unless the amount due is paid within such thirty (30) days. (b) In the event of the occurrence of any other Event of Default, upon the expiration of ninety (90) days after written notice, which notice shall specify the nature and extent of such Event of Default to the Breaching Party. However, in the case of a remediable Event of Default, the Breaching Party shall have the opportunity to remedy such Event of Default within such ninety (90) days. 5.4 DUTIES UPON TERMINATION OR EXPIRATION OF THIS AGREEMENT. If this Agreement is terminated upon expiration of its term, or earlier as provided in Sections 5.3 or 8.12: (a) Neither party shall be released or discharged from any obligation, debt or liability which has previously accrued or been incurred and remains to be performed upon the date of termination or expiration; (b) Any sums of money owing by one party to the other shall be paid immediately; (c) Each party shall return to the other party all originals and copies of the Proprietary Information of any of the Protected Parties (as those terms are defined in Article VI) which are in the possession of such party or any other person or entity to whom it has delivered such originals and copies; and (d) Damages and any other remedies available at law or in equity may be sought and collected from the Breaching Party in the event of a termination resulting from an Event of Default. VI. RESTRICTIVE COVENANTS 6.1 COVENANT REGARDING PROPRIETARY INFORMATION. In the course of the relationship created pursuant to this Agreement, Professional Association will have access to certain methods, trade secrets, processes, ideas, systems, procedures, inventions, discoveries, concepts, software in various stages of development, designs, drawings, specifications, models, data, documents, diagrams, flow charts, research, economic and financial analysis, developments, procedures, know-how, policy manuals, form contracts, marketing and other techniques, plans, materials, forms, copyrightable materials and trade information (all of which is referred to in this Agreement as "Proprietary Information") regarding the operations of Management Company and/or of its Affiliates (collectively, the "Protected Parties"). Professional Association shall maintain all such Proprietary Information in strict secrecy and shall not divulge such information to any third parties, except as may be necessary for the discharge of their obligations under this Agreement. Professional Association shall take all necessary and proper precautions against disclosure of any Proprietary Information to unauthorized persons by any of its officers, directors, employees or agents. All officers, directors, employees, and agents of Professional Association who will have access to all or any part of the Proprietary Information may be required to execute an agreement, at the reasonable request of the other party, valid under the law of the jurisdiction in which such agreement is executed, and in a form acceptable to Management Company and its counsel, committing themselves to maintain the Proprietary Information in strict confidence and not to disclose it to any unauthorized person or entity. The Protected Parties not party to this Agreement are hereby specifically made third party beneficiaries of this Section 6.1, with the power to enforce the provisions hereof. Upon termination of this Agreement for any reason, Professional Association and each of its Contracted Providers shall cease all use of any of the Proprietary Information and, at the request of Management Company, shall execute such documents as may be necessary to evidence Professional Association's abandonment of any claim thereto. The parties recognize that a breach of this Section 6.1 cannot be adequately compensated in money damages and therefore agree that injunctive relief shall be available to the Protected Parties as their respective interests may appear. The obligations of Professional Association under this Section 6.1 shall not apply to information: (i) which is a matter of public knowledge on or becomes a matter of public knowledge after the Effective Date of this Agreement, other than as a breach of the confidentiality terms of this Agreement or as a breach of the confidentiality terms of any other agreement between Professional Association and Management Company or its Affiliates; or (ii) was lawfully obtained by Professional Association on a non-confidential basis other than in the course of performance under this Agreement and from some entity other than Management Company or its Affiliates or from some person other than one employed or engaged by Management Company or its Affiliates, which entity or person has no obligation of confidentiality to Management Company or its Affiliates. 6.2 COVENANTS NOT TO COMPETE DURING THE TERM. The parties recognize that the services to be provided by Management Company shall be feasible only if Professional Association operates an active emergency physician practice to which Professional Association and Contracted Physicians devote full time and attention. To that end: (a) RESTRICTIVE COVENANTS BY PROFESSIONAL ASSOCIATION. During the term of this Agreement, Professional Association shall not establish, operate or provide physician or other health care services at any hospital, medical office, clinic or other health care facility providing services substantially similar to those provided by Professional Association pursuant to this Agreement anywhere other than at the Practice Sites and as may be approved in writing by Management Company. Professional Association shall also not enter into any management or administrative services agreement or arrangement with any person or entity other than Management Company without Management Company's prior written approval. (b) RESTRICTIVE COVENANTS BY CONTRACTED PHYSICIANS. Professional Association may obtain and enforce formal agreements with its Contracted Physicians not to establish, operate or provide physician or other health care services, during the term of this Agreement pursuant to such terms and language as the parties agree. 6.3 COVENANT NOT TO COMPETE FOLLOWING TERMINATION. For three (3) years following the termination of this Agreement by Management Company pursuant to Section 5.3 or by either party pursuant to Section 8.12, Professional Association shall not enter into any management or administrative services agreement or any similar arrangement with any person or entity for the provision of the same or similar services as Management Company provides to Professional Association under this Agreement, or who otherwise competes with Management Company within such area as the parties agree surrounding any location where Management Company or any of its Affiliates is conducting the same or similar business. 6.4 COVENANT NOT TO SOLICIT. For three (3) years following the termination of this Agreement, Professional Association shall not: (a) Directly or indirectly solicit, recruit or hire, or induct any party to solicit, recruit or hire any person who is an employee of, or who has entered into an independent contractor arrangement with, Management Company or any Affiliate of Management Company; (b) Directly or indirectly, whether for itself or for any other person or entity, call upon, solicit, divert or take away, or attempt to solicit, call upon, divert or take away any Management Company's customers, business, or clients; or (c) Directly or indirectly solicit, or induce any party to solicit, any of Management Company's contractors or the contractors of any Affiliate of Management Company, to enter into the same or a similar type of contract with any other party; or (d) Disrupt, damage, impair or interfere with the business of Management Company. VII. INFORMATION AND RECORDS 7.1 OWNERSHIP OF RECORDS. At all times during and after the term of this Agreement, including any extensions or renewals hereof, all business records, including but not limited to, business agreements, books of account, general administrative records and all information generated under or contained in the management information system pertaining to Management Company's obligations hereunder, and other business information of any kind or nature, except for patient medical records and Professional Association's Records (as defined in Section 7.2 below), shall be and remain the sole property of Management Company; provided that after termination of this Agreement Professional Association shall be entitled to reasonable access to such records and information, including the right to obtain copies thereof, for any purpose related to patient care or the defense of any claim relating to patient care or the business of Management Company or Professional Association. 7.2 PROFESSIONAL ASSOCIATION'S BUSINESS AND FINANCIAL RECORDS. At all times during and after the term of this Agreement, the financial, corporate and personnel records and information relating exclusively to the business and activities of Professional Association, as distinguished from the business and activity of Management Company, hereinafter referred to as "Professional Association's Records," shall be and remain the sole property of Professional Association. 7.3 ACCESS TO RECORDS. Each party shall be entitled, upon request and with reasonable advance notice, to obtain access to all records of the other party directly related to the performance of such party's obligations pursuant to this Agreement; provided, however, that such right shall not allow for access to records that must necessarily be kept confidential. Either party, at its expense, shall have the right to make copies of any records to which it has access pursuant to this Section. 7.4 CONFIDENTIALITY OF RECORDS. Management Company and Professional Association shall adopt procedures for maintaining the confidentiality of the records relating to the operations of Management Company and Professional Association, including but not limited to all statistical, financial and personnel data related to the operations of Management Company or Professional Association, which information is not otherwise available to third parties publicly or by law, and shall comply with all applicable federal and state statutes and regulations relating to such records. Patient medical records and other privileged patient information shall not be disclosed or utilized by Professional Association or Management Company or their agents or employees except as required or permitted by applicable laws and regulations. 7.5 LIMITATIONS ON USE OF MANAGEMENT INFORMATION SYSTEM. Professional Association shall use all software and hardware provided or arranged for by Management Company pursuant to this Agreement in accordance with and subject to the terms and conditions of any license, sublicense, lease or other agreement applicable thereto and shall not allow or permit any person to use the software or hardware or any portion thereof in violation of any such license, sublicense, lease or other agreement. VIII. MISCELLANEOUS 8.1 INDEPENDENT CONTRACTOR STATUS OF PARTIES. In the performance of the work, duties and obligations under this Agreement, it is mutually understood and agreed that each party is at all times acting and performing as an independent contractor with respect to the other and that no relationship of partnership, joint venture or employment is created by this Agreement. Neither party, nor any other person performing services on behalf of such party pursuant to this Agreement, shall have any right or claim against the other party for Social Security benefits, workers' compensation benefits, disability benefits, unemployment insurance benefits, health benefits, vacation pay, sick leave or any other employee benefits of any kind. 8.2 NO WAIVER. The waiver by any party to this Agreement of any breach of any term or condition of this Agreement shall not constitute a waiver of subsequent breaches. No waiver by any party of any provision of this Agreement shall be deemed to constitute a waiver of any other provision. 8.3 NOTICES. If, at any time after the execution of this Agreement, it shall become necessary or convenient for one of the parties to serve any notice, demand or communication upon the other party, such notice, demand, or communication shall be in writing and shall be served personally, by facsimile transmission, with voice confirmation and receipt confirmed, overnight courier which provides confirmation of delivery, or by depositing the same in the United States mail, registered or certified, return receipt requested, postage prepaid and, (a) If intended for Professional Association, then the notice shall be addressed: STAT Physicians, P.A. 12450 Greenspoint Drive, Suite 1200 Houston, Texas 77060 Attn: President (b) If intended for Management Company, then the notice shall be addressed: STAT Healthcare, Inc. 12450 Greenspoint Drive, Suite 1200 Houston, TX 77060 Attn: Ned E. Chapman or to such other address as either party may have furnished to the other party in writing as the place for the service of notice. Any notice so mailed shall be deemed to have been given three (3) days after the same has been deposited in the United States mail; any notice given personally, by facsimile or overnight courier shall be deemed to have been given upon receipt of the notice. 8.4 ASSIGNMENT. Neither party may sell, transfer, assign, or otherwise convey its rights or obligations under this Agreement without the prior written consent of the other; which consent shall not be unreasonably withheld. Notwithstanding the foregoing, Management Company shall have the limited right to delegate or subcontract for the performance of any and all duties required to be performed by Management Company as set forth herein. In effecting any such subcontract or delegation, Management Company must assure that the subcontractor or delegee is qualified and will be compensated for the subcontracted or delegated services in an amount no greater than the fair market value of such services as paid for comparable services charged by other persons or entities in the same geographic area. 8.5 SUCCESSORS AND ASSIGNS. Subject to the provisions of this Agreement respecting assignment, the terms, covenants and conditions contained herein shall be binding upon and inure to the benefit of the successors and permitted assigns of the parties hereto. 8.6 SEVERABILITY. If any provision of this Agreement other than Article III is or becomes invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. 8.7 THIRD PARTIES. Except as provided in Article VII, nothing in this Agreement shall be construed to create any duty to, any standard of care with reference to or any liability to anyone not a party to this Agreement. 21. 8.8 HEADINGS. The headings used in this Agreement are for convenience of reference only and shall have no force or effect in the construction or interpretation of the provisions of this Agreement. 8.9 TIME OF THE ESSENCE. Time is of the very essence of each and all of the agreements, covenants and conditions of this Agreement. 8.10 GOVERNING LAW. This Agreement shall be interpreted in accordance with and governed by the laws of the State of Texas, to the jurisdiction of which each of the parties hereby submits. 8.11 CONFIDENTIALITY. Except for disclosure to its bankers, underwriters or lenders, or as necessary or desirable for conduct of business, including negotiations with other acquisition candidates, neither party hereto shall disseminate or release to any third party any information regarding any provision of this Agreement, or any financial information regarding the other (past, present or future) that was obtained by the other in the course of the negotiations of this Agreement or in the course of the performance of this Agreement, without the other party's written approval; provided, however, the foregoing shall not apply to information which (i) is generally available to the public other than as a result of a breach of confidentiality provisions; (ii) becomes available on a non-confidential basis from a source other than the other party or its Affiliates or agents, which source was not itself bound by a confidentiality agreement, or (iii) which is required to be disclosed by law including securities laws, or pursuant to court order. 8.12 CONTRACT MODIFICATIONS FOR PROSPECTIVE LEGAL EVENTS. The parties acknowledge that Management Company is not authorized or qualified to engage in any activity which may be construed or deemed to constitute the practice of medicine. Professional Association and Management Company shall amend this Agreement if (i) any act or service required of Management Company in this Agreement is interpreted by judicial decision, a regulatory agency or legal counsel of both parties in such a manner as to indicate that such act or service constitutes the practice of medicine; or (ii) the structure of this Agreement is in violation of state or federal laws or regulations, now existing or enacted or promulgated after the effective date of this Agreement. Such amendment shall, to the maximum extent possible, preserve the underlying economic and financial arrangements between Professional Association and Management Company. The parties agree that such amendment may require reorganization of Professional Association or Management Company, or both, and may require either or both parties to obtain appropriate regulatory licenses and approvals. If an amendment is not possible, either party shall have the right to terminate this Agreement. 8.13 LANGUAGE CONSTRUCTION. The language in all parts of this Agreement shall be construed, in all cases, according to its fair meaning, and not for or against either party hereto. The parties acknowledge that each party and its counsel have reviewed and revised this Agreement and that the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement. 8.14 COMMUNICATIONS. Professional Association and Management Company agree that good communication between the parties is essential to the successful performance of this Agreement, and each pledges to communicate fully and clearly with the other on matters relating to the successful operation of Professional Association's practice. 8.15 INDEMNIFICATION. Professional Association shall indemnify, hold harmless and defend Management Company, its officers, directors, shareholders, employees, agents and independent contractors from and against any and all liabilities, losses, damages, claims, causes of action, and expenses (including reasonable attorneys' fees and disbursements), whether or not covered by insurance, caused or asserted to have been caused, directly or indi rectly, by or as a result of the performance of medical services or any other acts or omissions by Professional Association and/or its partners, agents, employees and/or subcontractors (other than Management Company) during the term hereof. Management Company shall indemnify, hold harmless and defend Professional Association, its officers, directors, partners, employees, agents and independent contractors from and against any and all liabilities, losses, damages, claims, causes of action, and expenses (including reasonable attorneys' fees and disbursements), whether or not covered by insurance, caused or asserted to have been caused, directly or indirectly, by or as a result of the performance of any acts or omissions by Management Company and/or its shareholders, agents, employees and/or subcontractors during the terms of this Agreement. 8.16 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior and contemporaneous agreements, understandings, negotiations and discussion, whether written or oral, between the or among parties regarding the subject matter of this Agreement. 8.17 INCORPORATION BY REFERENCE. All exhibits and other attachments to this Agreement are incorporated by reference into this Agreement by such reference. 8.18 AMENDMENTS ONLY IN WRITING. This Agreement may not be amended or modified in any respect whatsoever, except by an instrument in writing signed by the parties hereto. 8.19 COUNTERPARTS. This Agreement may be executed in one or more counter parts, each of which shall be considered an original and all of which shall constitute one and the same agreement. This Agreement shall not become effective until it has been executed by all of the parties hereto. 8.20 COMMERCIAL IMPRACTICABILITY. No party to this Agreement shall be liable for any failure to perform its obligations hereunder where such failure results from any cause beyond that party's reasonable control, including, for example, an act of God, labor disturbance such as a strike or walkout, war, riot, fire, storm, accident, government regulation or interference, or mechanical, electronic or communications failure. 8.21 ELECTION OF REMEDIES. The respective rights of the parties to this Agree ment shall be cumulative. Each party shall have all other rights and remedies not inconsistent with this Agreement as law and equity may provide. No exercise by any party of any one right or remedy shall be deemed to be an exclusive election of rights or remedies. 8.22 ATTORNEYS' FEES AND EXPENSES. In the event of any arbitration or action or proceeding at law or in equity between the parties to enforce any provision of this Agreement or to protect or establish any right or remedy of either party hereunder, the substantially unsuccessful party to such arbitration or litigation shall be obligated to pay to the substantially prevailing party all costs and expenses, including reasonable attorneys' fees, incurred therein by such prevailing party, and if such prevailing party shall receive an award or recover judgment in any such action or proceeding, such costs, expenses and attorneys' fees shall be included in and as a part of such award or judgment. 8.23 SURVIVAL. The provisions of Articles III, IV, V, VI, VII and VIII shall survive any termination of this Agreement. IN WITNESS WHEREOF, Management Company and Professional Association have caused this Agreement to be executed by their duly authorized respective officers as of the Effective Date. STAT Healthcare, Inc. /s/ NED E. CHAPMAN By: Ned E. Chapman Its: Chief Financial Officer STAT Physicians, P.A. /s/ WILLIAM H. RICE By: William H. Rice, M.D. Its: Chairman </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-10.25 <SEQUENCE>12 <TEXT> EXHIBIT 10.25 INDEMNIFICATION AGREEMENT THIS AGREEMENT is made and entered into this ____ day of _______________, 1996 between STAT Healthcare, Inc., a Delaware corporation ("Corporation"), and ("Indemnitee"). RECITALS: WHEREAS, Indemnitee performs a valuable service in the capacity of ________________________ of Corporation; and WHEREAS, the Bylaws (the "Bylaws") of Corporation provide that Corporation shall indemnify the officers, directors, agents and employees of Corporation to the maximum extent authorized by Section 145 of the Delaware General Corporation Law, as amended ("DGCL"); and WHEREAS, the Bylaws and the DGCL, by their non-exclusive nature, permit contracts between Corporation and each of its officers and directors with respect to indemnification of such persons; and WHEREAS, in accordance with the authorization as provided by the DGCL, Corporation has purchased a policy of Directors and Officers Liability Insurance ("D & O Insurance"), covering certain liabilities which may be incurred by its directors and officers in the performance as directors and officers, respectively, of Corporation; and WHEREAS, as a result of developments affecting the terms, scope, and availability of D & O Insurance there exists general uncertainty as to the extent of protection afforded officers and members of the Board of Directors by such D & O Insurance and by statutory and Bylaw indemnification provisions; and WHEREAS, in order to induce Indemnitee to continue to serve as an officer or member of the Board of Directors of Corporation, Corporation has determined and agreed to enter into this contract with Indemnitee; NOW, THEREFORE, in consideration of Indemnitee's continued service as an officer or director of Corporation after the date hereof, the parties hereto agree as follows: 1. INDEMNITY OF INDEMNITEE. Corporation hereby agrees to hold harmless and indemnify Indemnitee to the fullest extent authorized or permitted by the provisions of the DGCL, as may be amended from time to time. 2. ADDITIONAL INDEMNITY. Subject only to the exclusions set forth in Section 3 hereof, Corporation hereby further agrees to hold harmless and indemnify Indemnitee: (a) against any and all expenses (including attorneys' fees), witness fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by Indemnitee in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (including an action by or in the right of Corporation) to which Indemnitee is, was or at any time becomes a party, or is threatened to be made a party, by reason of the fact that Indemnitee is, was or at any time becomes a director, officer, employee or agent of Corporation, or is or was serving or at any time serves at the request of Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise; and (b) otherwise to the fullest extent as may be provided to Indemnitee by Corporation under the non-exclusivity provisions of Article XI, Section 42(f) of the Bylaws of Corporation and the DGCL. 3. LIMITATIONS ON ADDITIONAL INDEMNITY. No indemnity pursuant to Section 2 hereof shall be paid by Corporation: (a) except to the extent the aggregate of losses to be indemnified thereunder exceeds the sum of such losses for which Indemnitee is indemnified pursuant to Section 1 hereof or pursuant to any D & O Insurance purchased and maintained by Corporation; (b) in respect to remuneration paid to Indemnitee if it shall be determined by a final judgment or other final adjudication that such remuneration was in violation of law; (c) on account of any suit in which judgment is rendered against Indemnitee for an accounting of profits made from the purchase or sale by Indemnitee of securities of Corporation pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any federal, state or local statutory law; (d) on account of Indemnitee's conduct which is finally adjudged to have been knowingly fraudulent or deliberately dishonest, or to constitute willful misconduct; (e) on account of Indemnitee's conduct which is the subject of an action, suit or proceeding described in Section 7(c)(ii) hereof; (f) on account of any action, claim, or proceeding (other than a proceeding referred to in Section 8(b) hereof) initiated by Indemnitee unless such action, claim, or proceeding was authorized in the specific case by action of the Board of Directors; (g) for any amounts paid in settlement of any action or claim without Corporation's written consent; or (h) if a final decision by a Court having jurisdiction in the matter shall determine that such indemnification is not lawful (and, in this respect, both Corporation and Indemnitee have been advised that the Securities and Exchange Commission believes that indemnification for liabilities arising under the federal securities laws is against public policy and is, therefore, unenforceable and that claims for indemnification should be submitted to appropriate courts for adjudication). 4. CONTRIBUTION. If the indemnification provided in Sections 1 and 2 hereof is unavailable by reason of a Court decision described in Section 3(h) hereof based on grounds other than any of those set forth in paragraphs (b) through (g) of Section 3 hereof, then in respect of any threatened, pending, or completed action, suit or proceeding in which Corporation is jointly liable with Indemnitee (or would be if joined in such action, suit, or proceeding), Corporation shall contribute to the amount of expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred and paid or payable by Indemnitee in such proportion as is appropriate to reflect (i) the relative benefits received by Corporation on the one hand and Indemnitee on the other hand from the transaction from which such action, suit, or proceeding arose, and (ii) the relative fault of Corporation on the one hand and of Indemnitee on the other in connection with the events which resulted in such expenses, judgments, fines, or settlement amounts, as well as any other relevant equitable considerations. The relative fault of Corporation on the one hand and of Indemnitee on the other shall be determined by reference to, among other things, the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent the circumstances resulting in such expenses, judgments, fines, or settlement amounts. Corporation agrees that it would not be just and equitable if contribution pursuant to this Section 4 were determined by pro rata allocation or any other method of allocation which does not take account of the foregoing equitable considerations. 5. CONTINUATION OF OBLIGATIONS. All agreements and obligations of Corporation contained herein shall continue during the period Indemnitee is a director, officer, employee or agent of Corporation (or is or was serving at the request of Corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise) and shall continue thereafter so long as Indemnitee shall be subject to any possible claim, or threatened, pending or completed action, suit or proceeding, whether civil, criminal or investigative, by reason of the fact that Indemnitee was a director of Corporation or serving in any other capacity referred to herein. 6. NOTIFICATION AND DEFENSE OF CLAIM. Not later than thirty (30) days after receipt by Indemnitee of notice of the commencement of any action, suit, or proceeding, Indemnitee will, if a claim in respect thereof is to be made against Corporation under this Agreement, notify Corporation of the commencement thereof; but the omission so to notify Corporation will not relieve it from any liability which it may have to Indemnitee otherwise than under this Agreement. With respect to any such action, suit, or proceeding as to which Indemnitee notifies Corporation of the commencement thereof: (a) Corporation will be entitled to participate therein at its own expense; (b) except as otherwise provided below, to the extent that it may wish, Corporation jointly with any other indemnifying party similarly notified will be entitled to assume the defense thereof, with counsel reasonably satisfactory to Indemnitee. After notice from Corporation to Indemnitee of its election so as to assume the defense thereof, Corporation will not be liable to Indemnitee under this Agreement for any legal or other expenses subsequently incurred by Indemnitee in connection with the defense thereof other than reasonable costs of investigation or as otherwise provided below. Indemnitee shall have the right to employ its counsel in such action, suit, or proceeding but the fees and expenses of such counsel incurred after notice from Corporation of its assumption of the defense thereof shall be at the expense of Indemnitee unless (i) the employment of counsel by Indemnitee has been authorized by Corporation, (ii) Indemnitee shall have reasonably concluded that there may be a conflict of interest between Corporation and Indemnitee in the conduct of the defense of such action, or (iii) Corporation shall not in fact have employed counsel to assume the defense of such action, in each of which cases the fees and expenses of Indemnitee's separate counsel shall be at the expense of Corporation. Corporation shall not be entitled to assume the defense of any action, suit, or proceeding brought by or on behalf of Corporation or as to which Indemnitee shall have made the conclusion provided for in (ii) above; and (c) Corporation shall be permitted to settle any action except that it shall not settle any action or claim in any manner which would impose any penalty or limitation on Indemnitee without Indemnitee's written consent. Neither Corporation nor Indemnitee will unreasonably withhold its consent to any proposed settlement. 7. ADVANCEMENT AND REPAYMENT OF EXPENSES. (a) In the event that Indemnitee employs his or her own counsel pursuant to Section 6(b)(i) through (iii) above, Corporation shall advance to Indemnitee, prior to any final disposition of any threatened or pending action, suit, or proceeding, whether civil, criminal, administrative, or investigative, any and all reasonable expenses (including legal fees and expenses) incurred in investigating or defending any such action, suit, or proceeding within ten (10) days after receiving copies of invoices presented to Indemnitee for such expenses. (b) Indemnitee agrees that Indemnitee will reimburse Corporation for all reasonable expenses paid by Corporation in defending any civil or criminal action, suit, or proceeding against Indemnitee in the event and only to the extent it shall be ultimately determined by a final judicial decision (from which there is no right of appeal) that Indemnitee is not entitled, under the provisions of the DGCL, the Bylaws, this Agreement, or otherwise, to be indemnified by Corporation for such expenses. (c) Notwithstanding the foregoing, Corporation shall not be required to advance such expenses to Indemnitee if Indemnitee (i) commences any action, suit, or proceeding as a plaintiff unless such advance is specifically approved by a majority of the Board of Directors, or (ii) is a party to an action, suit, or proceeding brought by Corporation and approved by a majority of the Board which alleges willful misappropriation of corporate assets by Indemnitee, disclosure of confidential information in violation of Indemnitee's fiduciary or contractual obligations to Corporation, or any other willful and deliberate breach in bad faith of Indemnitee's duty to Corporation or its stockholders. 8. ENFORCEMENT. (a) Corporation expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on Corporation hereby in order to induce Indemnitee to continue as an officer or director of Corporation, and acknowledges that Indemnitee is relying upon this Agreement in continuing in such capacity. (b) In the event Indemnitee is required to bring any action to enforce rights or to collect moneys due under this Agreement and is successful in such action, Corporation shall reimburse Indemnitee for all Indemnitee's reasonable fees and expenses in bringing and pursuing such action. 9. SUBROGATION. In the event of payment under this agreement, Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable Corporation effectively to bring suit to enforce such rights. 10. NON-EXCLUSIVITY OF RIGHTS. The rights conferred on Indemnitee by this Agreement shall not be exclusive of any other right which Indemnitee may have or hereafter acquire under any statute, provision of Corporation's Certificate of Incorporation or Bylaws, agreement, vote of stockholders or directors, or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding office. 11. SURVIVAL OF RIGHTS. The rights conferred on Indemnitee by this Agreement shall continue after Indemnitee has ceased to be a director, officer, employee, or other agent of Corporation and shall inure to the benefit of Indemnitee's heirs, executors, and administrators. 12. SEPARABILITY. Each of the provisions of this Agreement is a separate and distinct agreement and independent of the others, so that if any or all of the provisions hereof shall be held to be invalid or unenforceable for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of the other provisions hereof or the obligation of the Corporation to indemnify the Indemnitee to the full extent provided by the Bylaws or the DGCL. 13. GOVERNING LAW. This Agreement shall be interpreted and enforced in accordance with the laws of the State of Delaware. 14. BINDING EFFECT. This Agreement shall be binding upon Indemnitee and upon Corporation, its successors and assigns, and shall inure to the benefit of Indemnitee, his or her heirs, personal representatives, and assigns and to the benefit of Corporation, its successors and assigns. 15. AMENDMENT AND TERMINATION. No amendment, modification, termination, or cancellation of this Agreement shall be effective unless in writing signed by both parties hereto. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the day and year first above written. STAT HEALTHCARE, INC. By: Name: Title: INDEMNITEE: Name: Address: </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-21.1 <SEQUENCE>13 <TEXT> EXHIBIT 21.1 SUBSIDIARIES NAME JURISDICTION OF INCORPORATION - ------------------------- ---------------------------- Old STAT Healthcare, Inc. ................................ Deleware STAT Dialysis Corp. ...................................... Deleware STAT Management Corp. .................................... Deleware </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-23.3 <SEQUENCE>14 <TEXT> EXHIBIT 23.3 CONSENT OF INDEPENDENT AUDITORS The Board of Directors South Texas Acute Trauma Physicians, P.A.: We consent to the use of our report included herein on the financial statements of South Texas Acute Trauma Physicians, P.A. as of August 31, 1994 and December 31, 1993, and for eight months ended August 31, 1994 and the year ended December 31, 1993. We also consent to the references to our firm under the heading "Experts" in the Prospectus. /s/KPMG PEAT MARWICK LLP KPMG PEAT MARWICK LLP Houston, Texas August 29, 1996 </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and consolidated and combined financial statements, including the notes thereto, appearing elsewhere in this Prospectus. This Prospectus contains certain forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in "Risk Factors" and elsewhere in this Prospectus. Unless the context suggests otherwise, references in this Prospectus to the "Company" or "Sunrise" mean Sunrise Assisted Living, Inc. and its subsidiaries and predecessor entities. Unless otherwise indicated, information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. THE COMPANY Sunrise Assisted Living, Inc. ("Sunrise" or the "Company") is a leading provider of assisted living services to the elderly. The Company currently operates 32 facilities in 11 states with a capacity of approximately 2,800 residents, including 21 facilities wholly owned by the Company, seven facilities in which it has ownership interests and four facilities managed for third parties. The Company had revenues of $37.3 million in 1995 and $21.0 million for the six months ended June 30, 1996, and incurred net losses of $10.1 million and $4.1 million, respectively, for these periods. Approximately 99% of these revenues were derived from private pay sources. The Company's three-year growth objective is to develop and own at least 55 new Sunrise assisted living facilities with a capacity of approximately 4,950 residents. To date, the Company has obtained zoning approval for 25 new facilities with a total resident capacity of 2,215, including 16 facilities currently under construction. The Company has also entered into contracts to purchase 15 additional sites and to lease two additional sites, and is negotiating purchase terms for 11 additional identified sites. Since the first Sunrise facility opened in 1981, the Company has developed 24 facilities, 16 of which it currently owns, and has completed all but one of the facilities for which it obtained zoning approval. In addition to its construction and development plans, the Company plans to acquire up to 10 additional facilities over the next three years. The Company believes that the assisted living industry is emerging as a preferred alternative to meet the growing demand for a cost-effective setting in which to care for the elderly who do not require the more intensive medical attention provided by a skilled nursing facility but cannot live independently due to physical or cognitive frailties. In general, assisted living represents a combination of housing and 24-hour a day personal support services designed to aid elderly residents with activities of daily living, such as bathing, eating, personal hygiene, grooming and dressing. Certain assisted living facilities may also provide assistance to residents with low acuity medical needs, or may offer higher levels of personal assistance for incontinent residents or residents with Alzheimer's disease or other forms of dementia. The assisted living industry is highly fragmented and characterized by numerous small operators. The Company believes that few assisted living operators provide a comprehensive range of assisted living services which permit elderly residents to "age in place." Annual expenditures in the assisted living industry have been estimated to be approximately $12 billion, including facilities ranging from "board and care" to full-service assisted living facilities such as those operated by the Company. The Company believes that consumer preference and demographic trends will allow assisted living to remain one of the fastest growing segments of elder care. The Company's objective is to capitalize on its 15-year history as a pioneer and leading provider in the assisted living industry and on the growing demand for assisted living as the preferred setting for elderly care. The Company's strategy is to: (i) provide high-quality personalized resident care and services; (ii) provide a full range of assisted living services; (iii) rapidly develop the Sunrise model in targeted markets; (iv) maintain the depth and quality of its management team; (v) pursue acquisitions and contract management opportunities; (vi) achieve the benefits of regional density by clustering facilities; and (vii) develop strategic alliances with integrated health care delivery systems. RECENT DEVELOPMENTS ACQUISITION OF SOUTHEAST PROPERTIES On October 8, 1996, the Company completed its acquisition from Laing Properties & Subsidiaries, Inc. of five facilities located in the southeast United States (the "Southeast Properties") for an aggregate purchase price of $34.0 million in cash with no debt assumed. The Southeast Properties consist of 498 total units providing primarily independent and assisted living services. One of the facilities also has a 26-bed skilled nursing floor. These facilities had combined revenues of $9.9 million in 1995 and $5.4 million for the six months ended June 30, 1996, and had combined net (losses) income of ($32,000) and $195,000, respectively, for these periods. After giving effect to the acquisition of the Southeast Properties at the beginning of the respective periods, the Company had a pro forma net loss of $8.5 million and $3.1 million for 1995 and for the first six months of 1996, respectively. See "Recent Developments," "Selected Financial, Operating and Pro Forma Data" and "Unaudited Pro Forma Consolidated Financial Statements." AFFILIATION AGREEMENT WITH JEFFERSON HEALTH SYSTEM On October 8, 1996, the Company entered into an affiliation agreement with Jefferson Health System ("JHS"), an integrated health care system located in Philadelphia, Pennsylvania, pursuant to which JHS has agreed to provide residents of Sunrise facilities located in the Philadelphia metropolitan region, on a preferred (but non-exclusive) basis, with access to certain health care services offered by JHS. Such health care services may include hospital services, physician services, rehabilitation services, home health services and products and mental health services. See "Recent Developments." CREDIT FACILITY On October 3, 1996, a subsidiary of the Company received from GMAC Commercial Mortgage Corporation a commitment for a $51.0 million revolving construction credit facility. The credit facility provides for construction and interim loans to finance the development of up to seven assisted living facilities. The Company has agreed to guarantee the repayment of all amounts outstanding under this credit facility. The credit facility is for a term of five years and is secured by cross-collateralized first mortgages on the real property and liens on receivables. Advances under the credit facility bear interest at rates ranging from LIBOR plus 2.25% to 2.60%. See "Recent Developments." CONTINGENT ACQUISITION OF CALIFORNIA PROPERTIES On October 8, 1996, the Company entered into a purchase and sale agreement subject to certain conditions, including satisfactory completion by the Company of financial, accounting, regulatory and property due diligence over the next 60 days, to acquire two facilities located in Southern California (the "California Properties") for $30.8 million in cash. The two facilities consist of 258 total units providing independent and assisted living services. Assuming the Company elects to proceed with the transaction following the completion of its due diligence review, the closing of the transaction would likely take place in the first quarter of 1997. Given the contingent nature of the purchase and sale agreement, there can be no assurance that the acquisition will be consummated. See "Recent Developments." INITIAL PUBLIC OFFERING On June 5, 1996, the Company completed its initial public offering selling 5,700,000 shares of Common Stock at $20.00 per share. The net proceeds to the Company from the offering were approximately $104.3 million. The net proceeds have been used as follows: $16.6 million in partial payment of the Company's long-term debt; $10.2 million to redeem the outstanding shares of Series B Exchangeable Preferred Stock; $34.0 million to acquire the Southeast Properties; and the balance to fund continued development of Sunrise facilities, as well as for working capital and general corporate purposes. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company................ 4,000,000 shares(1) Common Stock offered by the Selling Stockholders... 1,000,000 shares Common Stock to be outstanding after the Offering......................................... 18,259,568 shares(1)(2) Use of Proceeds.................................... To finance the development and acquisition of additional assisted living facilities and for working capital and other general corporate purposes. See "Use of Proceeds." Nasdaq National Market symbol...................... SNRZ </TABLE> - --------------- (1) Excludes 750,000 shares of Common Stock (including up to 203,333 shares subject to options held by certain officers that will be exercised and the underlying shares sold if the Underwriters exercise their over-allotment option) that may be issued by the Company pursuant to the Underwriters' over-allotment option. See "Underwriting." (2) Does not include (i) 1,625,657 shares of Common Stock subject to outstanding options at October 21, 1996 at a weighted average exercise price of $11.01 per share, (ii) outstanding warrants for 50,000 shares of Common Stock at an exercise price per share of $17.00, and (iii) shares having a fair market value of $200,000 which the Company intends to issue in a private placement in satisfaction of a $200,000 non-interest bearing loan made to one of the Company's predecessor entities. Under the treasury stock method of computation based on the last sale price on October 21, 1996 of $27 1/4 per share, outstanding options and warrants represent 987,881 common stock equivalents. See "Management -- 1996 Directors' Stock Option Plan," "-- 1995 Stock Option Plan," "-- 1996 Stock Option Plan" and "-- Non-Plan Stock Option Grant" and "Description of Capital Stock -- Warrants." SUMMARY FINANCIAL, OPERATING AND PRO FORMA DATA <TABLE> <CAPTION> SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, ------------------------------------------------------------------ --------------------------------- PRO FORMA PRO FORMA 1991 1992 1993 1994 1995 1995(8) 1995 1996 1996(8) (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA(1): Operating revenue: Resident fees......... $10,358 $15,801 $23,994 $32,139 $ 34,752 $ 44,696 $17,075 $ 19,458 $ 24,839 Management services income.............. 605 1,078 1,604 1,830 2,506 2,506 1,212 1,542 1,542 ------- ------- ------- ------- --------- ------- ------- --------- 10,963 16,879 25,598 33,969 37,258 47,202 18,287 21,000 26,381 Operating expenses: Facility operating expenses............ 8,386 11,824 17,761 17,983 21,010 28,359 10,269 12,608 16,500 Facility development and pre-opening expenses............ 189 231 474 263 1,172 1,172 433 650 650 General and administrative...... 993 1,655 2,034 4,183 6,875 6,875 2,719 4,413 4,413 Depreciation and amortization........ 618 1,355 2,799 3,160 3,009 3,999 1,479 1,803 2,298 ------- ------- ------- ------- --------- ------- ------- --------- Income from operations............ 777 1,814 2,530 8,380 5,192 6,797 3,387 1,526 2,520 Interest income....... 267 350 317 566 1,229 1,229 606 700 700 GECC mortgage interest expense(2).......... -- -- -- (5,529) (15,295) (15,295) (4,971) (4,807) (4,807) Other interest expense............. (1,115) (2,212) (3,808) (3,060) (1,261) (1,261) (556) (615) (615) Equity in (losses) earnings on investments in unconsolidated partnerships.......... (754) (299) (104) 33 (9) (9) 48 6 6 Minority interest...... 87 176 428 172 7 7 (19) 83 83 Unusual charge(3)...... -- -- -- -- -- -- -- (981) (981) ------- ------- ------- ------- --------- ------- ------- --------- (Loss) income before extraordinary item.... (738) (171) (637) 562 (10,137) (8,532) (1,505) (4,088) (3,094) Extraordinary item..... -- -- -- 850 -- -- -- -- ------- ------- ------- ------- --------- ------- ------- --------- Net (loss) income...... $ (738) $ (171) $ (637) $ 1,412 $ (10,137) $ (8,532) $(1,505) $ (4,088) $ (3,094) ======= ======= ======= ======= ========= ======= ======= ========= NET LOSS PER SHARE DATA(4): Net loss per common equivalent shares..... $ (0.97) $ (0.69) $ (0.35) ======= ======= ========= Weighted average number of common and common equivalent shares outstanding........... 8,826,127 7,625,366 9,720,604 ======= ======= ========= OPERATING AND OTHER DATA: Facilities (at end of period): Owned(5).............. 9 14 16 19 20 25 20 23 28 Managed............... 2 5 7 9 8 8 8 7 7 ------- ------- ------- ------- --------- ------- ------- --------- Total............... 11 19 23 28 28 33 28 30 35 ======= ======= ======= ======= ========= ======= ======= ========= Resident capacity (at end of period): Owned(5).............. 575 1,067 1,289 1,473 1,557 2,019 1,557 1,873 2,371 Managed............... 143 549 652 772 712 712 596 712 712 ------- ------- ------- ------- --------- ------- ------- --------- Total............... 718 1,616 1,941 2,245 2,269 2,731 2,153 2,585 3,083 ======= ======= ======= ======= ========= ======= ======= ========= Occupancy rate(6)...... -- -- 94.0% 94.8% 91.7% -- 91.8% 92.5% -- </TABLE> <TABLE> <CAPTION> AT JUNE 30, 1996 -------------------------------------------- PRO FORMA ACTUAL PRO FORMA(8) AS ADJUSTED(9) (IN THOUSANDS) -------------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash and short-term investments(7)............................................... $ 72,713 $ 38,261 $141,211 Working capital.................................................................. 66,360 31,909 134,859 Total assets..................................................................... 223,968 223,968 326,918 Total debt....................................................................... 120,712 120,712 120,712 Total stockholders' equity....................................................... 92,883 92,883 195,833 </TABLE> - --------------- (1) The historical financial data for years prior to 1995 represent combined historical financial data for the Company's predecessor entities. See Note 1 of Notes to Consolidated and Combined Financial Statements. (2) See Note 8 of Notes to Consolidated and Combined Financial Statements. (3) In June 1996, the Company made a $1.0 million cash payment to the third-party limited partner in two facilities in exchange for the transfer to the Company by the third-party of additional 1% partnership interests in each facility (with a total book value of $18,700) and the elimination of any requirement under the management contracts for these facilities for Paul J. Klaassen, the Company's Chairman of the Board, President, Chief Executive Officer and co-founder, and Teresa M. Klaassen, the Company's Executive Vice President and co-founder (collectively, the "Founders"), to maintain a specified ownership interest in the Company. (4) See Notes 3 and 18 of Notes to Consolidated and Combined Financial Statements. (5) Includes all facilities wholly owned by the Company or in which the Company owns interests. Prior to 1994, several of the owned facilities were leased from predecessor entities. (6) Based on monthly occupancy for owned facilities operated for at least 12 months, excluding facilities with temporary vacancies due to renovations or resident relocation. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Government Regulation."
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+SUMMARY This summary is qualified in its entirety by the more detailed information and the Financial Statements of the Savings Bank appearing elsewhere in this Prospectus. PRESTIGE BANCORP, INC. Prestige Bancorp, Inc. is a Pennsylvania corporation organized in March, 1996 by the Savings Bank for the purpose of acquiring all of the capital stock of the Savings Bank to be issued in the Conversion. Immediately following the Conversion, the only significant assets of the Company will be the capital stock of the Savings Bank, the Company's loan to the ESOP, and the balance of the net Conversion proceeds retained by the Company. The business of the Company initially will consist of the business of the Savings Bank and the investment of the net Conversion proceeds retained by the Company. See "Use of Proceeds," "Business of the Savings Bank" and "Regulation--The Company". PRESTIGE BANK, A FEDERAL SAVINGS BANK The Savings Bank is a Federally chartered mutual savings bank which conducts business from offices located in Allegheny County, Pennsylvania. The Savings Bank's operations date back to 1935 with the incorporation of First Federal Savings and Loan Association of Mt. Oliver in Allegheny County, Pennsylvania which, in March, 1991, converted its charter from a Federal mutual savings and loan association to a Federal mutual savings bank and took the name Prestige Bank, A Federal Savings Bank. The Savings Bank's deposits are insured by the Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC") to the maximum extent permitted by law. At December 31, 1995, the Savings Bank had $91.8 million in total assets, $80.7 million in total deposits and $7.2 million in total equity. The Savings Bank is a community oriented savings institution providing mortgage loans and other traditional services to its local community. The Savings Bank is primarily engaged in attracting deposits from the general public through its offices and using those and other available sources of funds to originate loans secured by one-to-four family residences primarily located in Allegheny, Washington and Westmoreland Counties, and to a lesser extent, Butler and Greene Counties, all of which counties are located in Western Pennsylvania. Loans secured by one-to-four family residences were $55.4 million or 89.7% of the total loan portfolio at December 31, 1995. To a lesser extent, the Savings Bank originates other loans secured by commercial real estate and consumer loans, home equity loans and commercial loans which, in the aggregate, amounted to $6.4 million or 10.3% of the total loan portfolio at December 31, 1995. The Savings Bank also has a securities portfolio primarily consisting of U.S. Treasury and Federal government agency obligations and mortgage-backed securities. These securities in the aggregate amounted to $22.6 million or 24.6% of the Savings Bank's total assets at December 31, 1995. In addition, as of the same date, cash and cash equivalents totaled $4.4 million or 4.8% of total assets. The emphasis of the Savings Bank on one-to-four residential mortgages has contributed to the reduction in the interest rate spread experienced by the Savings Bank. Fixed rate mortgages, which at December 31, 1995 amounted to $25.5 million of the Savings Bank's one-to-four residential mortgages, are priced once and are not match funded. Therefore, increases in interest rates and the amount paid by the Savings Bank to attract certificates of deposit and to borrow funds from the FHLB of Pittsburgh will increase cutting into, or eliminating, the profit on some or all of the fixed rate mortgages. Adjustable rate mortgages, which at December 31, 1995 amounted to $29.9 million of the Savings Bank's one-to-four mortgages reprice periodically but there can be no assurance that the index used to readjust interest rates on mortgages will reflect the rate of any increase in yields on certificates of deposit or in rates charged by the FHLB of Pittsburgh. In periods of declining interest rates, adjustable rate mortgages may adjust more quickly than the certificates of deposit previously issued by the Savings Bank, which was the case during 1995. The decision of management to seek out opportunities to originate commercial and consumer loans has been made in an effort to improve the interest rate margins of the Savings Bank. The Management of the Savings Bank has also determined to offer a variety of fixed rate mortgage products such as ten year mortgages, five, seven and ten-year balloon mortgages. Through the Conversion, the board of directors seeks to raise additional capital which will enable the Savings Bank to explore other lines of banking business which focus on fee income for services rather than the heavy reliance on interest income to generate net income of the Savings Bank. Increased capital will also support the Savings Bank's efforts to grow the commercial and consumer loan portfolio. The Savings Bank generally has sought to enhance its financial stability and preserve its equity by, among other things, focusing on residential lending and maintaining its asset quality. This has enabled the Savings Bank to exceed its regulatory capital requirements and to report net income during each of the last five years ended December 31, 1995. The Savings Bank's market area is primarily located in the southern portion of the Pittsburgh metropolitan area. The largest employers in the Pittsburgh area include the U.S. Government, the Pennsylvania State Government, USAir Group, Inc., the University of Pittsburgh Medical Center, Westinghouse Electric Corp., the University of Pittsburgh and Mellon Bank Corp. Financial characteristics of the Savings Bank include: - - Capital. The Savings Bank currently exceeds all minimum regulatory capital requirements of the OTS. At December 31, 1995, it had tangible, core, and risk-based capital ratios of 7.87%, 7.87% and 19.39%, respectively. Assuming the sale of Common Stock at the midpoint of the Estimated Valuation Range and the net proceeds assumptions set forth herein under the Pro Forma Data, the Savings Bank will have tangible, core, and risk-based capital ratios of 11.29%, 11.29% and 27.29%, respectively. - - Asset Quality. Management of the Savings Bank believes that high asset quality is the key to long-term financial strength. As a result, the Savings Bank's loans and investments are intended to maintain asset quality and control credit risk. At December 31, 1995, one-to-four family residential loans comprised $55.4 million, 89.7%, of the Savings Bank's total loan portfolio, and total nonperforming assets were .38% of total assets. - - Retail Deposit Base. The Savings Bank has three branch offices located in Allegheny County, Pennsylvania. It provides a full range of deposit products and other services to its customers through this branch network. At December 31, 1995, $34.9 million, 43.2%, of the Savings Bank's deposit base of $80.7 million, consisted of core deposits, which include passbook, money market, NOW accounts and non-interest bearing checking accounts. - - Declining Profitability Trends. The Savings Bank has been profitable each year since 1981. Net income totalled $161,000, $548,000, and $685,000 for the fiscal years ended December 31, 1995, 1994 and 1993, respectively. The Savings Bank's net income is primarily the result of net interest income which was $2.3 million, $2.7 million and $2.8 million for the years December 31, 1995, 1994 and 1993, respectively. The 20% decline in net income from 1993 to 1994 and 71% decline from 1994 to 1995 was primarily as a result of the Savings Bank's decline in net interest income, interest rate spread and interest rate margin. See Management's Discussion and Analysis of Financial Condition and Results of Operation--Results of Operations. These net income figures resulted in (i) return on average assets for the years ending December 31, 1995, 1994 and 1993 of .18%, .64% and .85% respectively, and (ii) return on average equity for years ending December 31, 1995, 1994 and 1993 of 2.26%, 8.08% and 11.11%. See "Selected Financial and Other Data". See "Risk Factors--Business Strategy and Additional Business Lines" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Operating Strategy." The Savings Bank is subject to examination and comprehensive regulation by the OTS which is the Savings Bank's chartering authority. The Savings Bank is also regulated by the FDIC, the administrator of the SAIF. The Savings Bank is subject to certain reserve requirements established by the Board of Governors of the Federal Reserve System ("FRB") and is a member of the FHLB of Pittsburgh, which is one of the 12 regional banks comprising the Federal Home Loan Bank System (the "FHLB System"). THE CONVERSION AND THE SUBSCRIPTION AND COMMUNITY OFFERINGS On February 14, 1996, the Board of Directors of the Savings Bank adopted the Plan of Conversion pursuant to which the Savings Bank is converting from a Federally chartered mutual savings bank to a Federally chartered stock savings bank, all the common stock of which will be acquired by the Company in exchange for 50% of the net Conversion proceeds. The other 50% of the net Conversion proceeds will be retained by the Company. The Conversion and the Offerings are subject to OTS approval, which has been received and are subject to approval of the Savings Bank's members at a special meeting to be called for this purpose on June 19, 1996. See "Use of Proceeds" and "The Conversion--General". The Savings Bank is converting to increase its capital and structure itself in a form used by many other thrift institutions and all commercial banks and most other business entities. The Conversion will enhance the Savings Bank's ability to access capital markets and diversify into other financial services to the extent allowable by applicable law and regulation. See "The Conversion--Purposes of Conversion". The existence of the Savings Bank as a stock charted institution also affords the Savings Bank the opportunity to use an ESOP, stock grants and stock options as tools to attract and retain employees and directors. Common Stock is being offered in the Subscription Offering with non-transferable subscription rights being granted, in the following order of priority, to: (i) Eligible Account Holders; (ii) the ESOP; (iii) Supplemental Eligible Account Holders; (iv) Other Members, and (v) Directors, Officers and Employees. SUBSCRIPTION RIGHTS WILL EXPIRE IF NOT EXERCISED BY 12:00 NOON, EASTERN TIME, ON JUNE 19, 1996, UNLESS EXTENDED. Subject to the prior rights of holders of subscription rights, Common Stock not subscribed for in the Subscription Offering is being offered in the Community Offering to certain members of the general public to whom a copy of this Prospectus is delivered, with preference given to natural persons residing in the Local Community. It is anticipated that shares not subscribed for in the Subscription and Community Offerings will be offered to certain members of the general public in the Syndicated Community Offering. The Company reserves the absolute right to reject or accept any orders in the Community Offering or the Syndicated Community Offering, in whole or in part, either at the time of receipt of an order or as soon as practicable following the Expiration Date. Payments for subscriptions made by cash, check, bank draft or money order will be placed in a segregated account at the Savings Bank and will earn interest at the Savings Bank's stated rate on passbook accounts from the date of receipt until the Conversion is completed or terminated. Payments authorized by withdrawal from deposit accounts at the Savings Bank will continue to earn interest at the contractual rate until the Conversion is completed or terminated; these funds will be otherwise unavailable to the depositor until such time. Early withdrawal penalties will be waived for stock purchases in the Conversion. ORDERS SUBMITTED ARE IRREVOCABLE UNTIL THE COMPLETION OF THE CONVERSION; PROVIDED THAT, IF THE CONVERSION IS NOT COMPLETED WITHIN THE 45 DAY PERIOD REFERRED TO ABOVE, UNLESS SUCH PERIOD HAS BEEN EXTENDED WITH THE CONSENT OF THE OTS, IF NECESSARY, ALL SUBSCRIBERS WILL HAVE THEIR FUNDS RETURNED PROMPTLY WITH INTEREST, AND ALL WITHDRAWAL AUTHORIZATIONS WILL BE CANCELLED. IF AN EXTENSION OF TIME HAS BEEN GRANTED, ALL SUBSCRIBERS WILL BE NOTIFIED IN WRITING OF SUCH EXTENSION, AND OF ANY RIGHTS TO CONFIRM THEIR SUBSCRIPTIONS, OR TO MODIFY OR RESCIND THEIR SUBSCRIPTIONS AND HAVE THEIR FUNDS RETURNED PROMPTLY WITH INTEREST. If a subscriber does not notify the Savings Bank and the Company during the resolicitation, his or her order will be rescinded and all funds will be promptly returned with interest. The Savings Bank and the Company have retained Ryan, Beck as consultant and advisor in connection with the Offerings and to assist in soliciting subscriptions in the Offerings. Ryan, Beck may also manage a selling group of broker-dealers in the Syndicated Community Offering to facilitate the Offering. See "The Conversion--Subscription Offering and Subscription Rights," "--Community Offering" and "--Marketing and Underwriting Agreements". RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES Prior to the completion of the Conversion, no person may transfer or enter into any agreement or understanding to transfer the legal or beneficial ownership of the subscription rights issued under the Plan or the shares of Common Stock to be issued upon their exercise. Each person exercising subscription rights will be required to certify that a purchase of Common Stock is solely for the purchaser's own account and that there is no agreement or understanding regarding the sale or transfer of such shares. SUBSCRIPTION RIGHTS ARE NONTRANSFERABLE AND PERSONS FOUND TO BE ATTEMPTING TO TRANSFER SUBSCRIPTION RIGHTS WILL BE SUBJECT TO THE FORFEITURE OF SUCH RIGHTS AND POSSIBLE FURTHER SANCTIONS AND PENALTIES IMPOSED BY THE REGULATORY AUTHORITIES. The Company reserves the right to cancel the subscription rights of, or to rescind any purchase by, any individual or entity attempting to transfer subscription rights to a third party or to report such party to the OTS for possible legal enforcement by the OTS. Following the Conversion, there generally will be no restrictions on the transfer or sale of shares by purchasers other than affiliates of the Company and the Savings Bank and members, and their associates, of the National Association of Securities Dealers, Inc. ("NASD"). See "The Conversion--Restrictions on Transfer of Subscription Rights and Shares". The Company and the Savings Bank will pursue any and all legal and equitable remedies in the event they become aware of the transfer of subscription rights and will not honor orders believed by them to involve the transfer of such rights. PURCHASE LIMITATIONS The minimum purchase is 25 shares. With the exception of the ESOP, which intends to purchase up to an aggregate of 8% of the number of shares of Common Stock issued in the Conversion (which amount includes any increase in the event of an increase in the Estimated Valuation Range of up to 15%), no person or entity (including any Eligible Account Holder, Supplemental Eligible Account Holder, Other Member or Director, Officer or Employee) may purchase in the Conversion more than $50,000 of aggregate value of shares of Common Stock offered in the Conversion (which amount generally shall not be increased in the event of an increase in the Estimated Valuation Range of up to 15%); no person, together with associates of and persons acting in concert with such person, may purchase in the Conversion, in the aggregate, more than $150,000 of the aggregate value of shares of Common Stock offered in the Conversion (which amount generally shall not be increased in the event of an increase in the Estimated Valuation Range of up to 15%). At any time during the Offerings, and without further approval by the Savings Bank's members, the Company and the Savings Bank may in their sole discretion decrease the maximum purchase limitation below the $50,000 and $150,000 amounts permitted to be purchased in the Subscription Offering and the Community Offering. Additionally, at any time during the Offerings, the Company and the Savings Bank may in their sole discretion increase any of the purchase limitations up to 5% of the shares offered. In the event of an increase in a purchase limitation, the Company and the Savings Bank shall permit any person who subscribed for the maximum number of shares of Common Stock to purchase additional shares up to the new limit established, subject to the rights and preferences of any person who has priority subscription rights. Under such circumstances, the Savings Bank may also permit other persons who placed significant orders to increase their subscription levels. See "The Conversion--Limitations on Common Stock Purchases". In the event of an oversubscription, shares will be allocated in accordance with the Plan as described in "The Conversion--Subscription Offering and Subscription Rights" and "Community Offering". Increases in the purchase limits could occur in the situation where interest in the Common Stock is not broad enough and management seeks to increase the amount of the Common Stock sold. Decreases in the purchase limits could occur if there is substantial interest in the Common Stock and the Company seeks a wider distribution of the Common Stock. STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED IN THE CONVERSION Applicable regulations require the aggregate purchase price of the Common Stock to be issued in the Conversion to be consistent with an independent appraisal of the estimated pro forma market value of the Common Stock following the Conversion. FinPro, an independent appraiser, has advised the Savings Bank that in its opinion, dated March 5, 1996, the Estimated Valuation Range ranged from $8.5 million to $11.5 million with a midpoint of $10 million. In the process of appraising the Savings Bank, the appraisal included, but was not limited to, consideration that the Savings Bank was less competitive to other publicly traded thrifts, that were considered its peers, in various financial areas including balance sheet data, balance sheet growth, asset quality and profitability. A copy of the Conversion Valuation Appraisal Report of FinPro may be obtained without charge by calling the Savings Bank at (412) 655-1190. THIS APPRAISAL OF THE COMMON STOCK IS NOT INTENDED AND SHOULD NOT BE CONSTRUED AS A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING SUCH STOCK NOR CAN ANY ASSURANCE BE GIVEN THAT PURCHASERS OF THE COMMON STOCK IN THE CONVERSION WILL BE ABLE TO SELL SUCH SHARES AFTER THE CONVERSION AT OR ABOVE THE PURCHASE PRICE. See "Additional Information". All shares of Common Stock issued in the Conversion will be sold at the Purchase Price, as determined by the Savings Bank and approved by the Company. The actual number of shares to be issued in the Conversion will be determined by the Company and the Savings Bank based upon the final updated valuation of the estimated pro forma market value of the Common Stock, giving effect to the Conversion, at the completion of the Offerings. The number of shares to be issued is expected to range from a minimum of 850,000 shares to a maximum of 1,150,000 shares. Subject to approval of the OTS, the Estimated Valuation Range may be increased or decreased to reflect market and economic conditions prior to the completion of the Conversion or to fill the subscription request of the ESOP, and under such circumstances the Company may increase or decrease the number of shares of Common Stock to be issued in the Conversion. No resolicitation of subscribers will be made and subscribers will not be permitted to modify or cancel their subscriptions unless the gross proceeds from the sale of the Common Stock are less than the minimum or more than 15% above the maximum of the current Estimated Valuation Range. An affirmative response to any resolicitation must be received by the Savings Bank in order to confirm subscriptions. In connection with a resolicitation, to the extent that subscriptions are cancelled, rescinded or reduced, all funds delivered to the Company or the Savings Bank will be returned with interest earned from the date of receipt, and withdrawal authorizations will be reduced or cancelled. See "Pro Forma Data," "Risk Factors--Possible Increase in Number of Shares Issued" and "The Conversion--Stock Pricing and Number of Shares to be Issued". POTENTIAL BENEFITS OF CONVERSION TO OFFICERS AND DIRECTORS GENERAL. In connection with the Conversion the directors and officers of the Company and the Savings Bank will directly purchase shares of Common Stock and the officers of the Company and the Savings Bank will benefit as participants in the ESOP. In addition, the Company presently intends to adopt a Management Recognition and Retention Plan and Trust (the "Recognition Plan") and a stock option plan (the "Stock Option Plan") within a one-year period following the Conversion. The first annual meeting of the shareholders of the Company is anticipated to be April , 1997. The Company and the Savings Bank also intend to enter into employment agreements with its key management personnel. See "Risk Factors--Possible Dilutive Effect of Stock Options and Effect of Purchases by the Recognition Plan and ESOP". OFFICERS AND DIRECTORS. In connection with the Conversion, the Company's directors and executive officers as a group (8 persons) have proposed to purchase 66,500 shares of Common Stock, or 7.8% and 5.8% of the Common Stock at the minimum and maximum of the Estimated Valuation Range, respectively. See "Subscriptions by Directors and Executive Officers" for more details, including the number of shares that each such director and executive officer desires to purchase. THE ESOP. In connection with the Conversion, the Company and the Savings Bank intend to adopt the ESOP, a tax-qualified benefit plan for officers and employees of the Company and the Savings Bank, which intends to purchase 8% of the shares of Common Stock offered in the Conversion, or 68,000 shares and 92,000 shares at the minimum and maximum of the Estimated Valuation Range, respectively. See "Management of the Savings Bank--Benefits--Employee Stock Ownership Plan and Trust". STOCK OPTION PLAN. At a meeting of stockholders to be held not earlier than six months following the Conversion, the Company intends to seek stockholder approval of the Stock Option Plan for the benefit of the directors, officers and employees of the Company and the Savings Bank. If the Stock Option Plan is approved by stockholders, an amount equal to 10% of the Common Stock issued in the Conversion, or 85,000 and 115,000 shares at the minimum and maximum of the Estimated Valuation Range, respectively, will be reserved for future issuance pursuant to stock options granted under the Stock Option Plan to officers, directors and employees of the Company and the Savings Bank. Although no specific award determinations have been made, the Company anticipates that, if stockholder approval is obtained, it will provide formula awards to its non-employee directors and discretionary awards to officers and employees to the extent permitted by applicable regulation. The option price for shares of Common Stock to be granted under the Stock Option Plan will be no less than the fair market value of the Common Stock on the date of the grant, which cannot be predicted at this time. See "Management of the Savings Bank--Benefits--Stock Option Plan". RECOGNITION PLAN. In addition, at a meeting of stockholders to be held not earlier than six months following the Conversion, the Company intends to seek stockholder approval of the Recognition Plan, which is a non-tax-qualified restricted stock plan the Company intends to adopt for the benefit of directors, officers and key employees of the Company and the Savings Bank. It is expected that the Recognition Plan will be submitted to stockholders for approval at the same time as the Stock Option Plan. Upon the receipt of such approval, the Recognition Plan is expected to acquire Common Stock either from the authorized but unissued shares of the Company or in the open market in an amount equal to 4% of the Common Stock issued in the Conversion, or 34,000 shares and 46,000 shares at the minimum and maximum of the Estimated Valuation Range, respectively. Although no specific award determinations have been made, the Company anticipates that, if stockholder approval is obtained, it will provide formula awards to its non-employee directors and discretionary awards to its officers and employees to the extent permitted by applicable regulation. These shares will be awarded at no cost to the recipient as a form of incentive compensation. See "Management of the Savings Bank--Benefits--Recognition and Retention Plan and Trust". EMPLOYMENT AGREEMENTS. The Company and the Savings Bank intend to enter into employment agreements with Mr. Robert S. Zyla, President of the Company and President, Treasurer and Chief Executive Officer of the Savings Bank, Ms. Patricia A. White, Secretary and Treasurer of the Company and Executive Vice President and Secretary of the Savings Bank, and Mr. James M. Hein, Controller of the Company and Chief Financial Officer of the Savings Bank. Each of the agreements will be for a term of two years, and will be extended annually for an additional one-year term unless a determination not to extend the agreements is made by either the Company, the Savings Bank or the employee, or unless the employee's employment has been previously terminated. The employment agreements are terminable with or without cause by the Company or the Savings Bank. All of the agreements provide for severance benefits in the event that, among other things, the employee's employment is terminated by the employers without cause, the employee terminates employment due to the failure of the employers to comply with any material provision of the agreement or, under certain circumstances, the employee voluntarily terminates employment following a change in control of the Company. See "Management of the Savings Bank--Benefits--Employment Agreements". PROSPECTUS DELIVERY AND PROCEDURE FOR PURCHASING SHARES To ensure that each purchaser receives a Prospectus at least 48 hours prior to the Expiration Date in accordance with Rule 15c2-8 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), no Prospectus will be mailed any later than five days prior to such date or hand delivered any later than two days prior to such date. Execution of the order form will confirm receipt or delivery of the Prospectus in accordance with Rule 15c2-8. Order forms will only be distributed with a Prospectus. The Savings Bank will accept for processing only orders submitted on original order forms. Executed copies of order forms will not be accepted nor will order forms unaccompanied by an executed acknowledgment form. Payment by check, money order, bank draft, cash or debit authorization to an existing account at the Savings Bank must accompany the order form. No wire transfers will be accepted. There are two exceptions to the immediate payment requirement set forth above. In the event that the ESOP subscribes to Common Stock during the Subscription offering, the ESOP will not be required to pay for the shares at the time its subscribes but rather may pay for such Common Stock upon consummation of the Conversion. In addition, the Company shall have the right, in its sole discretion, to permit institutional investors to submit contractually irrevocable orders in the Community or Syndicated Community Offering and to thereafter submit payment for the Common Stock for which they are purchasing in the Community or Syndicated Community Offering at any time prior the completion of the Conversion. In order to ensure that Eligible Account Holders, Supplemental Eligible Account Holders and Other Members are properly identified as to their stock purchase priorities, depositors as of the close of business on the Eligibility Record Date (December 31, 1994), and March 31, 1996 (the "Supplemental Eligibility Record Date") and the Voting Record Date (April 30, 1996), must list all accounts on the stock order form, giving all names on each account and the account numbers. See "The Conversion--Procedure for Purchasing Shares in Subscription and Community Offerings". USE OF PROCEEDS Net proceeds from the sale of the Common Stock are estimated to be between $8.0 million and $11.0 million, depending on the number of shares sold and the expenses of the Conversion. See "Pro Forma Data". The Company will purchase all of the capital stock of the Savings Bank to be issued upon Conversion in exchange for 50% of the net Conversion proceeds. The other 50% of the net Conversion proceeds will be retained by the Company. Funds retained by the Company will be used for general business activities, including a loan by the Company directly to the ESOP. Based on the sale of 8% of the Common Stock to the ESOP in the Conversion, the Company expects to loan the ESOP between $680,000 and $920,000 to acquire such shares at the minimum and maximum of the Estimated Valuation Range, respectively. See "Pro Forma Data" and "Management of the Savings Bank--Benefits--Employee Stock Ownership Plan and Trust". Subject to applicable limitations, such funds may also be used in the future for the payment of dividends and repurchases of Common Stock. See "Dividend Policy". Such funds may also be used to expand related financial services activities through additional subsidiaries possibly in the areas of a trust company and a title insurance company. Funds held at the Company level may also be invested in securities permitted by law to be held by a savings association holding company. Funds received by the Savings Bank from the Company's purchase of its capital stock will be used for general business purposes. The Savings Bank may also use such funds to expand operations through acquisitions of additional branch offices or other financial institutions or other financial services companies. Neither the Savings Bank nor the Company has any pending agreements or understandings regarding acquisitions of any specific financial services institutions or companies nor have criteria been established to identify potential candidates for acquisition. It is expected that the net proceeds will initially be invested in short-term investment securities and, subsequently, in investments that are qualifying thrift investments. See "Use of Proceeds". DIVIDENDS Upon completion of the Conversion, the Board of Directors of the Company will have the authority to declare dividends on the Common Stock, subject to statutory and regulatory requirements. The Board of Directors does not presently intend to declare dividends on the Common Stock. The Board of Directors intends to review on a quarterly basis a policy of paying cash dividends on the Common Stock. However, no decision has been made as to the amount or timing of such dividends, if any. Declarations of dividends by the Board of Directors will depend upon a number of factors, including investment opportunities available to the Company or the Savings Bank, capital requirements, regulatory limitations, the Company's or the Savings Bank's financial condition and results of operations, tax consideration and general economic conditions. The Company intends to retain 50% of the net Conversion proceeds, which would be available for future payment of dividends, if any. No assurance can be made that the Company will make any such distribution to the stockholders of a dividend. See "Dividend Policy".
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001011154_lamaur_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001011154_lamaur_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. ALL INFORMATION IN THIS PROSPECTUS GIVES EFFECT TO THE MERGER, EFFECTIVE ON MARCH 18, 1996, OF ELECTRONIC HAIR STYLING, INC., A WASHINGTON CORPORATION ("OLD EHS"), WITH AND INTO ITS WHOLLY-OWNED SUBSIDIARY, ELECTRONIC HAIR STYLING, INC., A DELAWARE CORPORATION (THE "COMPANY"), AND THE ISSUANCE OF .660 SHARES OF COMMON STOCK OF THE COMPANY IN EXCHANGE FOR EACH ISSUED AND OUTSTANDING SHARE OF COMMON STOCK OF OLD EHS. THE TERM "COMPANY" AS USED IN THIS PROSPECTUS INCLUDES THE COMPANY, ITS PREDECESSORS AND ITS LAMAUR AND EHS LABORATORIES DIVISIONS ("LAMAUR" AND "EHS LABORATORIES," RESPECTIVELY). UNLESS OTHERWISE INDICATED, ALL SHARE, PER SHARE AND FINANCIAL INFORMATION SET FORTH HEREIN ASSUMES AN INITIAL PUBLIC OFFERING PRICE OF $9.00 PER SHARE, THE MIDPOINT OF THE RANGE SET FORTH ON THE COVER PAGE OF THIS PROSPECTUS, AND ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. THE COMPANY The Company develops, formulates, manufactures and markets personal hair care products, consisting of shampoos, conditioners, hair sprays, permanent wave products and other styling aids, for both the consumer and professional markets. These products are distributed through its recently-acquired Lamaur division to consumer retail outlets, professional salons and specialty shops. The Company's brand names include PERMASOFT-REGISTERED TRADEMARK-, SALON STYLE-REGISTERED TRADEMARK-, STYLE-REGISTERED TRADEMARK-, PATIVA-TM-, NUCLEIC A-REGISTERED TRADEMARK-, APPLE PECTIN-REGISTERED TRADEMARK- and VITA/E-REGISTERED TRADEMARK-. The Company also contract manufactures a variety of household cleaning and hair care aerosol sprays and liquid products. The Company believes its Lamaur division was among the ten largest manufacturers in the United States in 1995 (based on domestic revenues) in three categories of hair care products -- shampoos, conditioners and styling aids. The Company's EHS Laboratories division is engaged in the early stages of research and development with respect to a new hair styling concept. Based on patented technology licensed by the Company from an affiliate, the product is intended to combine electronics and chemicals to style, color and condition hair quickly, without the damaging side effects often experienced with most chemical-based hair styling products. The Company had pro forma total net sales, substantially all in the United States, from its Lamaur division of approximately $117.8 million in the year ended December 31, 1995. The Company's objective is to become a leading worldwide developer and marketer of advanced hair care products through a strategy that combines the stability provided by Lamaur's established hair care products business, which the Company intends to return to profitability, and the growth opportunities available through acquisitions, strategic relationships and the development of EHS Laboratories' technology. To implement this strategy, the Company has installed a new senior management team with significant experience in the personal care products industry. Key features of the Company's turnaround strategy include emphasizing marketing and sales efforts while maintaining the Company's strong production base and research capabilities, in addition to refining the cost-cutting program introduced by prior management. The Company plans to increase its market share by expanding its national marketing program, broadening its base of exclusive distributors for its PATIVA-TM- line of products and increasing sales to Mexico, Canada and other international markets. Since January 1, 1996, the Company has obtained significant contract manufacturing orders from new customers, with deliveries commencing in the second quarter, and intends to continue to increase the level of its contract manufacturing activities by obtaining additional orders from both existing and new customers. In addition, the Company intends to explore opportunities for acquisitions or strategic relationships that may enable it to expand its hair care products line or diversify its business into other segments of the personal care market. The Company believes that these initiatives, all of which will require significant financial resources, will enable the Company to respond effectively to the competitive factors it faces, which presently include primarily the need to introduce and promote (i) high-end products in the professional market, (ii) higher-quality, professional-type products and more natural products in the retail market, and (iii) line extensions of styling aids. In November 1995, the Company acquired Lamaur (previously PCD, the Personal Care Division of DowBrands L.P.) for an aggregate acquisition cost of approximately $30.2 million. The assets and operations of Lamaur were purchased from DowBrands Inc. ("Dow"), an affiliate of The Dow Chemical Company, and include a modern, automated 438,000 square foot administrative, manufacturing, warehousing and laboratory facility located on 25 acres in the Minneapolis metropolitan area. As part of the acquisition purchase price, Dow received an equity interest in the Company (17.3% after giving effect to this Offering). Lamaur has been a leading domestic producer and marketer of a broad range of hair care products for over 60 years and was an independent publicly-traded company, listed on the New York Stock Exchange, until its acquisition by Dow in 1987. Worldwide retail sales of hair care products (excluding hair care appliances) in 1994 were approximately $25.0 billion, of which approximately $4.5 billion represented sales in North America. It is estimated that by 2000, worldwide retail sales of hair care products will reach approximately $32.8 billion, with approximately $5.6 billion attributable to sales in North America. The Company believes that the absence of any fundamental change in the technology underlying hair care products for several decades, combined with the substantial global market for hair care products, presents an opportunity for new technologically oriented products. The Company is engaged in early stage research and development activities related to hair styling applications of its licensed proprietary technology, ELECTRONIC CHEMISTRY-TM-. The technology is based on the belief that structural and cosmetic changes in hair can be achieved by applying an electromagnetic signal, accompanied by the application of chemicals and/or mechanical stress. The Company's objective is to develop products that will apply the technology to electronically style, color and condition hair quickly and without the damaging side effects often experienced with the harsh chemicals and heat treatments associated with most traditional hair care products. Substantial additional steps will need to be taken before the Company can commercially introduce any ELECTRONIC CHEMISTRY-TM- products. It does not expect to introduce any prototype product before the second half of 1998 at the earliest. See "Business--Research and Development--EHS Laboratories' Technology." The Company's principal executive offices are located at One Lovell Avenue, Mill Valley, California 94941. The telephone number at that location is (415) 380-8200, and the fax number at that location is (415) 380-8170. The Company is a Delaware corporation and the successor by merger to Old EHS. THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Company................ 2,600,000 shares Common Stock to be Outstanding after the Offering........................................... 5,560,495 shares (1) Use of Proceeds.................................... To initially repay approximately $8.0 million principal amount of revolving credit indebtedness incurred in connection with the November 1995 acquisition of Lamaur and for working capital and general corporate pur- poses. Risk Factors and Dilution.......................... Prospective investors should carefully consider the matters set forth under the captions "Risk Factors" and "Dilution." An investment in the shares of Common Stock offered hereby involves a high degree of risk and immediate and substantial dilution. Nasdaq National Market Symbol...................... "EHST" </TABLE> ------------------------ (1) Excludes 2,899,085 shares, consisting of (i) 660,000 shares of Common Stock reserved for issuance upon conversion of the Company's Series A Convertible Preferred Stock held by Dow, which must be converted into Common Stock if the market price of the Common Stock equals or exceeds $21.21 for a period of 30 consecutive business days, (ii) 503,910 shares of Common Stock reserved for issuance upon conversion of the Company's Series B Preferred Stock that will be issued upon the conversion of the Dow Convertible Note in connection with the consummation of this Offering, (iii) 1,400,925 shares of Common Stock reserved for future issuance under the Company's stock incentive plans, (iv) 152,250 shares of Common Stock reserved for issuance upon exercise of outstanding warrants, and (v) 182,000 shares of Common Stock reserved for issuance upon exercise of warrants issued to the Representatives of the Underwriters. See "Underwriting." SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) Set forth below are (i) selected financial data with respect to the statements of operations of the Company for the period from April 1, 1993 (Inception) to December 31, 1993, for the twelve months ended December 31, 1994, and 1995, and for the three months ended March 31, 1995 and 1996, and the balance sheets of the Company at December 31, 1995, and March 31, 1996, (ii) selected financial data with respect to the unaudited pro forma statement of operations for the Company for the twelve months ended December 31, 1995, presenting the combined results of operations of the Company as if the acquisition of Lamaur was effective as of January 1, 1995, and (iii) selected financial data with respect to the statements of operations for Lamaur (previously PCD, the Personal Care Division of DowBrands L.P., an affiliate of Dow) for each of the four years ended December 31, 1994, and for the period from January 1, 1995 to November 30, 1995 (the effective date of the acquisition for financial reporting purposes), and the balance sheets of Lamaur at December 31, 1991, 1992, 1993 and 1994. FINANCIAL DATA OF THE COMPANY <TABLE> <CAPTION> HISTORICAL THREE ------------------------------------------- MONTHS YEAR ENDED DECEMBER ENDED APRIL 1, 1993 31, PRO FORMA MARCH 31, (INCEPTION) TO ---------------------- YEAR ENDED --------- DECEMBER 31, 1993 1994 1995 (1) DECEMBER 31, 1995 (2) 1995 ------------------- --------- ----------- ---------------------- --------- <S> <C> <C> <C> <C> <C> SELECTED STATEMENTS OF OPERATIONS DATA: Total net sales............................ $ -- $ -- $ 8,070 $ 117,766 $ -- Gross margin............................... -- -- 2,414 46,371 -- Operating loss............................. (1,565) (557) (1,082) (9,759)(3) (93) Interest expense........................... (40) (59) (300) (1,554) (18) Net loss................................... $ (1,605) $ (616) $ (1,382) $ (11,212)(3) $ (111) ------- --------- ----------- ---------- --------- ------- --------- ----------- ---------- --------- Net loss per share......................... $ (.43) $ (.15) $ (.33) $ (2.71) $ (.03) ------- --------- ----------- ---------- --------- ------- --------- ----------- ---------- --------- Weighted average shares outstanding........ 3,701 4,130 4,130 4,130 4,130 SUPPLEMENTAL PRO FORMA DATA (4): Net loss................................... $ (10,432) ---------- ---------- Net loss per share......................... $ (2.05) ---------- ---------- Weighted average shares outstanding........ 5,086 <CAPTION> 1996 --------- <S> <C> SELECTED STATEMENTS OF OPERATIONS DATA: Total net sales............................ $ 28,480 Gross margin............................... 10,526 Operating loss............................. (317) Interest expense........................... (414) Net loss................................... $ (723) --------- --------- Net loss per share......................... $ (.18) --------- --------- Weighted average shares outstanding........ 4,130 SUPPLEMENTAL PRO FORMA DATA (4): Net loss................................... Net loss per share......................... Weighted average shares outstanding........ </TABLE> <TABLE> <CAPTION> AT MARCH 31, 1996 AT DECEMBER 31, 1995 -------------------------- ACTUAL ACTUAL AS ADJUSTED (5) --------------------- --------- --------------- <S> <C> <C> <C> SELECTED BALANCE SHEET DATA: Working capital............................................................ $ 10,346 $ 9,817 $ 22,674 Total assets............................................................... 42,967 42,806 55,663 Long-term debt, less current portion....................................... 20,350 20,271 7,271 Stockholders' equity....................................................... 6,594 6,048 31,905 </TABLE> FINANCIAL DATA OF LAMAUR <TABLE> <CAPTION> PERIOD FROM YEAR ENDED DECEMBER 31, JANUARY 1, 1995 ------------------------------------------ THROUGH 1991 1992 1993 1994 NOVEMBER 30, 1995 (6) --------- --------- --------- --------- ---------------------- <S> <C> <C> <C> <C> <C> SELECTED STATEMENTS OF OPERATIONS DATA: Total net sales.......................................... $ 136,946 $ 124,288 $ 112,031 $ 121,277 $ 109,696 Gross margin............................................. 58,075 46,675 40,970 49,542 42,608 Operating expenses....................................... 53,912 56,014 53,851 57,830 42,344 Write-down of assets..................................... -- -- -- 120,100 11,000 Operating income (loss).................................. 4,163 (9,339) (12,881) (128,388) (10,736) Net loss................................................. $ (3,094) $ (15,722) $ (19,207) $(133,488) $ (12,238) --------- --------- --------- --------- ---------- --------- --------- --------- --------- ---------- </TABLE> <TABLE> <CAPTION> AT DECEMBER 31, ------------------------------------------ 1991 1992 1993 1994 --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> SELECTED BALANCE SHEET DATA: Working capital.......................................... $ 17,079 $ 16,517 $ 11,457 $ 16,787 Total assets............................................. 197,380 190,605 180,376 58,021 Net invested capital..................................... 184,265 179,654 169,058 47,493 </TABLE> <TABLE> <CAPTION> PERIOD FROM YEAR ENDED DECEMBER 31, JANUARY 1, 1995 ------------------------------------------ THROUGH 1991 1992 1993 1994 NOVEMBER 30, 1995 (6) --------- --------- --------- --------- ---------------------- <S> <C> <C> <C> <C> <C> OTHER FINANCIAL DATA: Earnings (loss) before interest and non-cash charges (7).................................................... $ 11,583 $ (2,184) $ (5,174) $ (59) $ 2,375 --------- --------- --------- --------- ---------- --------- --------- --------- --------- ---------- </TABLE> ---------------------------------- (1) Includes the results of operations of Lamaur for the month of December 1995 following its acquisition by the Company. (2) Pro forma data gives effect to the acquisition of Lamaur as if it had occurred on January 1, 1995 and is based on available information and contains certain assumptions and adjustments. See Notes To Unaudited Pro Forma Combined Statement of Operations on page 15. (3) Includes an $11.0 million write-down of assets required to adjust the carrying value of Lamaur to its net realizable value in connection with Dow's decision to sell Lamaur. Future significant charges are not expected as all assets and liabilities were recorded at their estimated fair values at the date of the Company's acquisition of Lamaur. (4) Reflects the conversion of the Dow Convertible Note into Series B Convertible Preferred Stock (which will automatically occur upon the Offering), the issuance of 956,000 shares of Common Stock to fund the repayment of $8.0 million of debt (as described under "Use of Proceeds"), and the related inclusion of dividends and reduction of interest expense. (5) Adjusted to reflect the receipt and application by the Company of estimated net proceeds from the issuance of 2,600,000 shares and the conversion of the Dow Convertible Note into 763,500 shares of Series B Convertible Preferred Stock. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001011221_peoples_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001011221_peoples_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following information is not complete and is qualified in its entirety by the detailed information and the financial statements and accompanying notes appearing elsewhere in this Prospectus: PEOPLES FINANCIAL CORPORATION PFC was incorporated under Ohio law in November 1995 at the direction of Peoples Federal for the purpose of purchasing all of the capital stock of Peoples Federal to be issued in connection with the Conversion. PFC has not conducted and will not conduct any business before the completion of the Conversion other than business related to the Conversion. Upon the consummation of the Conversion, PFC will be a unitary savings and loan holding company, the principal assets of which initially will be the capital stock of Peoples Federal, a loan to the ESOP and the investments made with 50% of the net proceeds retained from the sale of PFC shares in connection with the Conversion. See "USE OF PROCEEDS." The main office of PFC is located at 211 Lincoln Way East, Massillon, Ohio 44646, and its telephone number is (330) 832-7441. PEOPLES FEDERAL SAVINGS AND LOAN ASSOCIATION HISTORICAL PERSPECTIVE. Peoples Federal is a mutual savings and loan association which has served the Massillon, Ohio, area since 1892. Organized in 1892 under Ohio law as Peoples Building and Loan Company, Peoples Federal converted to a federally chartered savings and loan association in 1941, at which time the name Peoples Federal Savings and Loan Association of Massillon was adopted. As a federal savings and loan association, Peoples Federal is subject to supervision and regulation by the OTS and the FDIC and is a member of the Federal Home Loan Bank (the "FHLB") of Cincinnati. The deposits of Peoples Federal are insured up to applicable limits by the FDIC in the Savings Association Insurance Fund (the "SAIF"). See "REGULATION." At March 31, 1996, $32.2 million, or approximately 79.3% of Peoples Federal's loan portfolio, consisted of loans secured by first mortgages on one- to four-family homes, virtually all of which were located within Stark County, Ohio, and adjacent counties. See "BUSINESS OF PEOPLES FEDERAL - Lending Activities -- One- to Four-Family Real Estate Loans." Peoples Federal's capital exceeds by a substantial margin all regulatory requirements. At March 31, 1996, Peoples Federal's tangible and core capital were $9.5 million, or 12.2% of assets, amounts which exceeded the minimum tangible and core capital requirements by approximately $8.3 million and $7.2 million, respectively. On a pro forma basis, assuming the sale of 1,300,000 shares (the mid-point of the Valuation Range) and the retention by PFC of 50% of the net proceeds from such sale, Peoples Federal's tangible and core capital ratios will both be 17.5%. See "REGULATORY CAPITAL COMPLIANCE," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PEOPLES FEDERAL - Liquidity and Capital Resources," and "REGULATIONS - OTS Regulations -- Regulatory Capital Requirements." Peoples Federal conducts business from its main office and one full-service branch office, both located in Massillon, Ohio, and a lending office located in the Belden Village area of North Canton, Ohio. Peoples Federal's primary market area consists of Stark County, Ohio, and adjacent counties. The main office of Peoples Federal is located at 211 Lincoln Way East, Massillon, Ohio 44646, and its telephone number is (330) 832-7441. CURRENT STRATEGY. During the past two years, the earnings of Peoples Federal have been below the average earnings of similar thrifts. The reason for the low level of earnings centers primarily on the decline in the net interest margin of Peoples Federal from 3.18% for the fiscal year ended September 30, 1993, to 2.70% for the six months ended March 31, 1996. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PEOPLES FEDERAL." The net interest margin declined during such period because competition for deposits forced Peoples Federal to offer accounts with interest rates which were above market and because the interest received by Peoples Federal on interest-earning assets decreased due to a shift in Peoples Federal's available investable funds from higher yielding mortgage loans to lower yielding mortgage-backed securities. See "RISK FACTORS - Low Return on Assets and Low Return on Equity." PFC has received approval to have the Common Shares quoted on the Nasdaq Small Cap under the symbol "PFFC" upon the closing of the Conversion, subject to certain conditions which PFC and Peoples Federal believe will be satisfied, although no assurance can be provided that the conditions will be met. In connection with such approval, McDonald & Company has informed Peoples Federal that McDonald & Company intends to make a market in the Common Shares. No assurance can be given, however, that an active or liquid market for the Common Shares will develop after the completion of the Conversion or, if such a market does develop, that it will continue. Investors should consider, therefore, the potentially illiquid and long-term nature of an investment in the Common Shares. POSSIBLE INADEQUACY OF THE ALLOWANCE FOR LOAN LOSSES Peoples Federal maintains an allowance for loan losses based upon a number of relevant factors, including, but not limited to, trends in the level of non-performing assets and classified loans, current and anticipated economic conditions in the lending area, past loss experience, possible losses arising from specific problem assets and changes in the composition of the loan portfolio. While the Board of Directors believes that it uses the best information available to determine the amount of the allowance for loan losses, unforeseen market conditions could result in material adjustments, and net income could be significantly adversely affected, if circumstances differ substantially from the assumptions used in making the determination of the allowance for loan losses. LEGISLATION AND REGULATION WHICH MAY ADVERSELY AFFECT PEOPLES FEDERAL'S EARNINGS Peoples Federal is subject to extensive regulation by the OTS and the FDIC and is periodically examined by such regulatory agencies to test compliance with various regulatory requirements. As a savings and loan holding company, PFC will also be subject to regulation and examination by the OTS. Such supervision and regulation of Peoples Federal and PFC are intended primarily for the protection of depositors and not for the maximization of shareholder value and may affect the ability of PFC to engage in various business activities. The assessments, filing fees and other costs associated with reports, examinations and other regulatory matters are significant and may have an adverse effect on PFC's net earnings. See "REGULATION." The FDIC is authorized to establish separate annual assessment rates for deposit insurance each for members of the Bank Insurance Fund (the "BIF") and the SAIF. The FDIC may increase assessment rates for either fund if necessary to restore the fund's ratio of reserves to insured deposits to its target level within a reasonable time and may decrease such rates if such target level has been met. The reserves of the SAIF are below the level required by law because a significant portion of the assessments paid into the SAIF are used to pay the cost of prior thrift failures. The BIF has, however, met its required reserve level. The assessments paid by healthy savings associations exceeded those paid by healthy BIF members by approximately $.19 per $100 in deposits for 1995, and no BIF assessments will be required of healthy commercial banks in 1996 except a $2,000 minimum fee. The disparity in the premiums paid between savings associations and commercial banks could have a negative competitive impact on Peoples Federal and other savings associations. Congress is considering legislation to recapitalize the SAIF and eliminate the significant premium disparity. Currently, the recapitalization plan provides for a special assessment of approximately $.85 per $100 of SAIF deposits held at some date in 1995, currently March 31, 1995, in order to increase SAIF reserves to the level required by law. Certain associations holding SAIF-insured deposits would pay a lower special assessment. In addition, the cost of prior thrift failures would be shared by both the SAIF and the BIF, which might increase BIF assessments by $.02 to $.025 per $100 in deposits. SAIF assessments for healthy savings associations would initially be set at a significantly lower level, but could never be reduced below the level set for healthy BIF institutions. Peoples Federal had $65.7 million in deposits at March 31, 1995. If a special assessment of $.85 per $100 in deposits is imposed, Peoples Federal will pay an additional assessment of approximately $559,000. Such assessment should be tax-deductible, but will reduce earnings and capital for the quarter in which it is recorded by approximately $.56 per $100 in deposits, or $369,000 based upon $65.7 million in deposits. The recapitalization plan also provides for the merger of the SAIF and the BIF on January 1, 1998. The SAIF recapitalization legislation currently eliminates the thrift charter or separate thrift regulation under federal law prior to the merger of the deposit insurance funds. As a result, Peoples Federal would be regulated as a bank under federal law and Such shift can be attributed generally to a change in the early 1990s from Peoples Federal's historic emphasis on mortgage lending. With increased competition for loans from a rapidly growing number of lenders offering a vast array of different loan products, Peoples Federal found that its traditional methods of attracting mortgage lending business were not producing the volume of mortgage loans which Peoples Federal previously processed and closed. See "RISK FACTORS -Low Return on Assets and Low Return on Equity." When the impact of the decline in mortgage lending on the net interest margin became clear in late 1994 and 1995, Peoples Federal began a search for a lending officer to revitalize its lending program. In January 1996, Peoples Federal hired William P. Hart, an individual with over 24 years of experience in mortgage lending, as Vice President of Lending. Before January 1996, Mr. Hart served as the Vice President of Loan Originations for Citizens Savings Bank, Canton, Ohio, where he supervised consumer and mortgage loan officers and processors, created and implemented new mortgage loan programs, and managed the underwriting of all mortgage, consumer and college loans. Since January 1996, Mr. Hart, in conjunction with the Board of Directors and management, has reorganized the Loan Department of Peoples Federal in a manner by which contacts with the community, including realtors, have been particularly emphasized. In addition, Peoples Federal recently applied to the Federal Home Loan Mortgage Corporation ("FHLMC") and the Federal National Mortgage Association ("FNMA") for approval as a seller of mortgage loans to FHLMC and FNMA and introduced several new loan products, including a 95% LTV loan, which requires a minimum down payment of 5% of the value of the real estate and improvements; a "reduced rate" plan, which rewards borrowers for making down payments of 30% or more by giving them reduced interest rates; and an "equity advance" plan, which provides equity financing for borrowers who wish to buy or build a new house with the equity from their existing house. Other new loan programs are currently being planned and implemented. In addition, on June 3, 1996, Peoples Federal opened for business a new lending office in the Belden Village area of North Canton. Peoples Federal has taken the foregoing and other steps to revitalize its lending program under the leadership of the Board of Directors, management and Mr. Hart. With new loan programs planned and implemented, Peoples Federal expects to invest the proceeds from the Conversion in loans and hopes to increase the net interest margin as a result. There can be no assurance, however, that the net interest margin will increase. See "RISK FACTORS - Low Return on Assets and Low Return on Equity." As the only remaining savings association in Stark County and as an institution with strong capital and asset quality, Peoples Federal believes that the opportunity to become the locally preferred community bank for the residents of Stark and surrounding counties is significant. THE CONVERSION On October 16, 1995, the Board of Directors of Peoples Federal unanimously approved the Plan of Conversion. The OTS approved the Plan, subject to the approval of the Plan by Peoples Federal's voting members at a special meeting to be held at ____ _.m., Eastern Time, on ____________, 1995, at the offices of Peoples Federal at 211 Lincoln Way East, Massillon, Ohio 44646. THE SUBSCRIPTION AND COMMUNITY OFFERINGS The Plan provides for the formation of PFC for the purpose of acquiring all of the capital stock to be issued by Peoples Federal in the Conversion. Pursuant to the Plan, subscription rights to purchase Common Shares are hereby offered at a price of $10 per share to (a) depositors of Peoples Federal with Qualifying Deposits as of September 30, 1994 (the "Eligibility Record Date"), (b) the ESOP, (c) depositors of Peoples Federal with Qualifying Deposits as of March 31, 1996 (the "Supplemental Eligibility Record Date"), and (d) account holders of Peoples Federal having savings deposits of record on ____ (the "Voting Record Date") and borrowers of record on the Voting Record Date whose loans were outstanding on April 25, 1996 (such deposits and borrowers as of April 25, 1996, collectively, the "Voting Members"). See "THE CONVERSION - Subscription Offering." Common Shares not subscribed for in the Subscription Offering are hereby being concurrently offered to those members of the general public receiving this Prospectus in the Community Offering in which preference will be given to natural persons residing in Stark County, Ohio. See "THE CONVERSION - Community Offering." The Plan authorizes the Board of Directors of PFC and Peoples Federal to establish limits on the number of Common Shares that may be purchased by various categories of persons. The Plan also permits the Board of Directors of PFC and Peoples Federal, subject to any required regulatory approval and the requirements of applicable laws and regulations, to increase or decrease such purchase limitations in their sole discretion. Pursuant to such authority, the would be subjected to the more restrictive activity limits imposed on national banks. If required to convert to a bank charter, Peoples Federal would be required to recapture as income, before taxes, over a six-year period the approximately $500,000 of its bad debt reserve taken after 1987, for which deferred taxes have been provided. In addition, Peoples Federal's proposed holding company would become a bank holding company, which would become subject to more restrictive activity limits and capital requirements similar to those imposed on Peoples Federal. Congress is considering legislation requiring, generally, that even if a savings association does not convert to a bank, bad debt reserves taken after 1987 using the percentage of taxable income method must be included in future taxable income of the association over a six-year period, although a two-year delay may be permitted for institutions meeting a residential mortgage loan origination test. No assurance can be given that the SAIF recapitalization plan or the proposed tax legislation will be enacted into law or in what form either may be enacted. Moreover, Peoples Federal can give no assurance that the disparity between BIF and SAIF assessments will be eliminated. Finally, Peoples Federal cannot predict the impact of conversion to, or regulation as, a bank until the legislation requiring such change is enacted. CONTROLLING INFLUENCE OF MANAGEMENT AND ANTI-TAKEOVER PROVISIONS WHICH MAY DISCOURAGE SALES OF COMMON SHARES FOR PREMIUM PRICES The Articles of Incorporation and Code of Regulations of PFC and the Amended Charter of Peoples Federal contain certain provisions that could deter or prohibit non-negotiated changes in the control of PFC and Peoples Federal. Such provisions include a restriction on the acquisition of more than 10% of the outstanding shares of PFC by any person during the five-year period following the effective date of the Conversion, the ability to issue additional common shares and a supermajority voting requirement for certain transactions. See "DESCRIPTION OF AUTHORIZED SHARES" and "RESTRICTIONS ON ACQUISITION OF PEOPLES FEDERAL AND PFC AND RELATED ANTI-TAKEOVER PROVISIONS." The Articles of Incorporation of PFC provide that for five years after the effective date of the Conversion, no person, except the ESOP, may acquire the beneficial ownership of more than 10% of any class of outstanding equity securities of PFC. If such a prohibited acquisition occurs, the securities owned by such person in excess of the 10% limit may not be voted on any matter submitted to the shareholders of PFC. Such provision may not be waived by management. The ability of management or any other person to solicit revocable proxies from shareholders and vote on behalf of such shareholders will not be restricted by such 10% limit. The Articles of Incorporation of PFC also provide that if the Board of Directors recommends that shareholders approve certain matters, including mergers, acquisitions of a majority of the shares of PFC or the transfer of substantially all of the assets of PFC, the affirmative vote of the holders of only a majority of the voting shares of PFC is required to approve such matter. If, however, the Board of Directors recommends against the approval of any such matter, the affirmative vote of the holders of at least 75% of the voting shares of PFC is required to approve such matters. The existence of such 75% provision in the Articles of Incorporation of PFC may make more difficult actions which certain shareholders deem to be in their best interests. Officers and directors of PFC are expected to purchase approximately 7.35% of the shares issued in connection with the Conversion at the mid-point of the Valuation Range. In addition, the ESOP intends to purchase approximately 4% of the shares issued in connection with the Conversion. The ESOP trustee must vote shares allocated under the ESOP as directed by the participants to whom the shares are allocated and vote unallocated shares in his sole discretion in the best interest of the participants. The RRP may acquire Common Shares in the open market or acquire authorized but unissued common shares from PFC following approval of the RRP by the shareholders of PFC at the first annual meeting of the shareholders in an amount equal to up to 4% of the Common Shares issued in connection with the Conversion. The RRP trustees, who are expected to be two directors of PFC, will vote shares awarded but not distributed under the RRP in their discretion. In view of the various provisions of the Articles of Incorporation and the stock benefit plans of PFC and Peoples Federal, the aggregate ownership by the ESOP, the RRP and the directors and officers of PFC and Peoples Federal may have the effect of facilitating the perpetuation of current management and discouraging proxy contests and takeover attempts. Thus, officers and directors, who are anticipated to be allocated or awarded shares under such plans, will have a significant influence over the vote on such a transaction and may be able to defeat such a proposal. The Boards of Directors Boards of Directors have established the preliminary limitation that, generally, a depositor of Peoples Federal with a Qualifying Deposit on the Eligibility Record Date (an "Eligible Account Holder") or with a Qualifying Deposit on the Supplemental Eligibility Record Date (a "Supplemental Eligible Account Holder") may purchase in the Subscription Offering a number of Common Shares equal to the greater of (i) 1% of the Common Shares sold in connection with the Conversion (17,192 Common Shares at the maximum of the Valuation Range, as adjusted) or (ii) 15 times the product (rounded down to the next whole number) obtained by multiplying the total number of Common Shares to be sold in connection with the Conversion by a fraction, the numerator of which is the amount of such Eligible Account Holder's or Supplemental Eligible Account Holder's Qualifying Deposit and the denominator of which is the total amount of Qualifying Deposits of all Eligible Account Holders or Supplemental Eligible Account Holders, as the case may be. A Voting Member in the Subscription Offering or any person in the Community Offering, in the latter case together with any Associates (hereinafter defined) or persons Acting in Concert (hereinafter defined), may purchase 1% of the Common Shares sold in connection with the Conversion (17,192 Common Shares at the maximum of the Valuation Range, as adjusted). Such limitation does not apply to the ESOP, which intends to purchase 4% of the Common Shares sold in connection with the Conversion. The ESOP may purchase Common Shares if shares remain available after satisfying the subscriptions of Eligible Account Holders up to $14,950,000, the maximum of the Valuation Range. If Common Shares in excess of the maximum of the Valuation Range are sold, the ESOP will have the first right to purchase such excess Common Shares. If the ESOP is unable to purchase all or part of the Common Shares for which it subscribes, the ESOP may purchase Common Shares in the open market or may purchase authorized but unissued Common Shares from PFC. If the ESOP purchases authorized but unissued Common Shares from PFC, such purchases could have a dilutive effect on the interest of PFC's shareholders. No person together with his or her Associates and other persons Acting in Concert with him or her may purchase more than 2% of the Common Shares sold in connection with the Conversion. Subject to applicable regulations, the purchase limitation may be increased or decreased after the commencement of the Offering in the sole discretion of the Boards of Directors. See "THE CONVERSION Limitations on Purchases of Common Shares" and "RESTRICTIONS ON ACQUISITION OF PFC AND PEOPLES FEDERAL." The sale of Common Shares pursuant to subscriptions or offers received in the Offering will be subject to the approval of the Plan by the voting members of Peoples Federal at the Special Meeting, to the sale of the requisite number of Common Shares and to certain other conditions. See "THE CONVERSION - Subscription Offering; - Community Offering; and - Pricing and Number of Common Shares to be Sold." Peoples Federal has retained McDonald & Company and Trident to consult, advise and assist in the sale of the Common Shares in the Subscription Offering and in the Community Offering. McDonald & Company and Trident will be paid a commission equal to 2% of the aggregate amount received by PFC in the Subscription Offering, excluding any amounts paid for Common Shares by Peoples Federal's directors, executive officers and employee benefit plans and any of the associates of Peoples Federal's directors and executive officers. McDonald & Company and Trident will also receive a commission equal to 2.5% of the aggregate purchase price paid for Common Shares sold in the Community Offering. No commission will be paid, however, on Common Shares sold in excess of the mid-point of the final Valuation Range. Peoples Federal will reimburse McDonald & Company and Trident for legal and out-of-pocket expenses up to $45,000. See "THE CONVERSION - Plan of Distribution." The Subscription Offering will terminate at _:__ _.m., Eastern Time, on ___________, 1996 (the "Subscription Expiration Date"). The Community Offering may be terminated at any time after orders for at least 1,719,250 shares have been received, but in no event later than __________, 1996, unless extended. If the Community Offering extends beyond 45 days after the Subscription Expiration Date, persons who have subscribed for Common Shares in the Subscription Offering or in the Community Offering will receive a notice that, until a date specified in the notice, they have the right to affirm, increase, decrease or rescind their subscriptions or orders for Common Shares. Any person who does not affirmatively elect to continue his subscription or order or elects to rescind his subscription or order during such time will have all of his funds promptly refunded with interest. Any person who elects to decrease his subscription or order will have the appropriate portion of his funds promptly refunded with interest. The sale of Common Shares pursuant to subscriptions or orders received in the Subscription Offering and the Community Offering will be subject to the approval of the Plan by the voting members of Peoples Federal at the Special Meeting, to the determination by the Board of Directors of PFC of the total number of Common Shares to be sold and to the satisfaction or waiver of certain other conditions. See "THE CONVERSION - Subscription Offering; - Community Offering; and - Pricing and Number of Common Shares to be Sold." Assuming 1,300,000 Common Shares are sold in connection with the Conversion, all directors and executive officers of PFC and Peoples Federal and their Associates (hereinafter defined) intend to purchase an aggregate of 95,500 Common Shares in connection with the Conversion, which would constitute 7.35% of the Common Shares sold. The aggregate number of Common Shares proposed to be purchased by the directors, the executive officers and the ESOP is of PFC and Peoples Federal believe that such provisions will be in the best interests of shareholders by encouraging prospective acquirers to negotiate a proposed acquisition with the directors. Such provisions could, however, adversely affect the market value of the Common Shares or deprive shareholders of the opportunity to sell their shares for premium prices. Federal and Ohio law also restrict the acquisition of control of PFC and Peoples Federal. Any or all of these provisions may facilitate the perpetuation of current management and discourage proxy contests or takeover attempts not first negotiated with the Board of Directors. See "RESTRICTIONS ON ACQUISITION OF PEOPLES FEDERAL AND PFC AND RELATED ANTI-TAKEOVER PROVISIONS." Regulations of the OTS also restrict the ability of any person to acquire the beneficial ownership of more than 10% of any class of voting equity security of Peoples Federal or PFC without the prior written approval of or lack of objection by the OTS. Such restrictions could restrict the use of revocable proxies. See "RESTRICTIONS ON ACQUISITION OF PEOPLES FEDERAL AND PFC AND RELATED ANTI-TAKEOVER PROVISIONS." POSSIBLE ADVERSE EFFECTS IF PREFERRED SHARES ARE ISSUED The PFC Articles of Incorporation authorize the issuance of one million preferred shares. The Board of Directors is authorized to issue, without shareholder approval, preferred shares and to fix the designations, preferences or other special rights of such shares and the qualifications, limitations and restrictions thereof. If preferred shares are issued, each holder of preferred shares will be entitled to one vote for each preferred share held of record on all matters submitted to a vote of shareholders. The issuance of preferred shares and any conversion rights which may be specified by the Board of Directors for the preferred shares could adversely affect the voting power of holders of the common shares. In addition, if the purchase price of the preferred shares is less than the book value of the common shares, the book value of the common shares could be adversely affected. No preferred shares will be issued in connection with the Conversion, and the Board of Directors has no present intention to issue any of the preferred shares. See "DESCRIPTION OF AUTHORIZED SHARES" and "RESTRICTIONS ON ACQUISITION OF PEOPLES FEDERAL AND PFC AND RELATED ANTI-TAKEOVER PROVISIONS - Articles of Incorporation of PFC -- Ability of the Board of Directors to Issue Additional Shares." RISK OF DELAYED OFFERING PFC and Peoples Federal expect to complete the Conversion by ___, 1996. It is possible, however, that adverse market, economic or other factors could delay the completion of the Conversion. If the Community Offering is extended beyond ________, 1996, each subscriber will be given a notice of such delay and the right to affirm, increase, decrease or rescind his subscription. In such event, any person who does not affirmatively elect to continue his subscription or elects to rescind his subscription will have all of his funds promptly refunded with interest. Any person who elects to decrease his subscription will have the appropriate portion of his funds promptly refunded with interest. If the Community Offering is extended, the cost of the Conversion could increase and the valuation of Peoples Federal could change. Extensions of the Community Offering will not extend past __________, 1998. DILUTIVE EFFECT OF INCREASE IN VALUATION RANGE The number of Common Shares to be sold in the Conversion may be as much as 15% greater than the maximum of the Valuation Range due to changes in market and financial conditions following the commencement of the Offering. An increase in the number of Common Shares sold will decrease net earnings per share and shareholders' equity per share on a pro forma basis. See "CAPITALIZATION" and "PRO FORMA DATA." DILUTIVE EFFECT OF PURCHASES BY THE ESOP AND THE RRP If the ESOP is unable to purchase Common Shares in the Conversion due to an oversubscription by eligible depositors as of the Eligibility Record Date, the ESOP may purchase authorized but unissued shares from PFC or purchase in the open market a number of shares equal to up to 4% of the Common Shares issued in connection with the Conversion. If the ESOP shares are purchased from authorized but unissued shares, shareholders would experience a dilution of their ownership interests of up to 3.85%. In addition, the RRP may purchase authorized but unissued shares from PFC or purchase in the open market a number of shares equal to 4% of the Common Shares issued in connection with the 147,500, which would constitute 11.35% of the Common Shares sold. See "THE CONVERSION -- Shares to be purchased by Management Pursuant to Subscription Rights." NON-TRANSFERABILITY OF SUBSCRIPTION RIGHTS Federal regulations prohibit any person from transferring or entering into any agreement or understanding before the completion of the Conversion to transfer the ownership of the subscription rights issued in the Conversion or the shares to be issued upon the exercise of such subscription rights. Persons attempting to violate such provision may lose their rights to purchase Common Shares in the Conversion and may be subject to penalties imposed by the OTS. Each person exercising subscription rights will be required to certify that a purchase of Common Shares is solely for the subscriber's own account and that there is no agreement or understanding regarding the sale or transfer of such Common Shares. PRICING OF THE COMMON SHARES Keller, an independent firm experienced in valuing thrift institutions, has prepared a valuation of the estimated pro forma market value of Peoples Federal, as converted. Keller's valuation of the estimated pro forma market value of Peoples Federal, as converted, is $13,000,000 as of March 8, 1996 (the "Pro Forma Value"). PFC will issue the Common Shares at a fixed price of $10 per share and, by dividing the price per share into the Pro Forma Value, will determine the number of shares to be issued. Applicable regulations require, however, that Peoples Federal establish a range of 15% above and below the Valuation Range to allow for fluctuations in the aggregate value of the Common Shares due to changes in the market for thrift shares and other factors from the time of the commencement of the Subscription Offering until the completion of the offering of the Common Shares. Based on the Pro Forma Value of Peoples Federal as of March 8, 1996, the Valuation Range is $11,050,000 to $14,950,000, resulting in the offer of between 1,105,000 and 1,495,000 Common Shares at a purchase price of $10 per share. The actual number of Common Shares sold in connection with the Conversion will be determined in the discretion of PFC's Board of Directors upon the completion of the Subscription Offering and the Community Offering, if any, and will be based upon the final valuation of Peoples Federal, as converted. The final valuation will be determined by Keller at the time of the closing of this Offering. If the final valuation is within the Valuation Range, or does not exceed the maximum of the Valuation Range by more than 15%, the number of Common Shares to be issued in connection with the Conversion will not be less than 1,105,000 or more than 1,719,250. If, due to changing market conditions, the final valuation is not between the minimum of the Valuation Range and 15% above the maximum of the Valuation Range, subscribers will be given the opportunity to affirm, increase, decrease or rescind their subscriptions. See "THE CONVERSION Pricing and Number of Common Shares to be Sold." USE OF PROCEEDS PFC will retain 50% of the net proceeds from the sale of the Common Shares, or $6,210,000 at the mid-point of the Valuation Range, including the value of a promissory note from the ESOP which PFC intends to accept in exchange for the issuance of Common Shares to the ESOP. Such proceeds will be used to fund the Peoples Financial Corporation Recognition and Retention Plan (the "RRP") and will be invested in short-term and intermediate-term government securities. The remainder of the net proceeds received from the sale of the Common Shares, $6,210,000 at the mid-point of the Valuation Range, will be invested by PFC in the capital stock to be issued by Peoples Federal to PFC as a result of the Conversion. Such investment will increase the regulatory capital of Peoples Federal and will permit Peoples Federal to expand its lending and investment activities and to enhance customer services. Enhancements of customer services may include automated teller machine and card services. Peoples Federal has also expanded its hours of operation and established a loan origination office in the fastest growing area of Stark County, Ohio. Peoples Federal anticipates that such net proceeds initially will be invested in short-term interest-bearing deposits. Eventually, however, Peoples Federal will attempt to use such net proceeds to originate loans. Although PFC and Peoples Federal could use the increase in capital to acquire other financial institutions or for PFC to purchase its own outstanding shares, PFC and Peoples Federal have no current intentions to do so. No assurance can be given that any dividends, special or otherwise, will be paid. See "USE OF PROCEEDS." OFFICER AND DIRECTOR BENEFITS In connection with the Conversion, PFC will establish the ESOP. Common Shares will be purchased by the ESOP in the Conversion with a loan from PFC. The ESOP intends to repay the loan with discretionary contributions made by Conversion. The purchase of authorized but unissued shares by the RRP would have a dilutive effect on the ownership interests of PFC's shareholders of up to 3.85%. See "CAPITALIZATION" and "PRO FORMA DATA." PEOPLES FINANCIAL CORPORATION PFC was incorporated under Ohio law in November 1995 at the direction of Peoples Federal for the purpose of serving as a holding company for Peoples Federal. PFC has not conducted and will not conduct any business other than business related to the Conversion prior to the completion of the Conversion. PFC has received approval of the OTS to acquire the capital stock to be issued by Peoples Federal in the Conversion. Upon the consummation of the Conversion, PFC will be a unitary savings and loan holding company, and its principal assets initially will be the capital stock of Peoples Federal and the investments made with the proceeds retained by PFC from the sale of Common Shares. See "USE OF PROCEEDS." As a savings and loan holding company, PFC will be required to register with, and will be subject to examination and supervision by, the OTS. See "REGULATION - OTS Regulations -- Holding Company Regulation." The types of business activities in which a unitary savings and loan holding company may engage are virtually unrestricted. See, however, "RISK FACTORS - Legislation and Regulation Which May Adversely Affect Peoples Federal's Earnings." The main office of PFC is located at 211 Lincoln Way East, Massillon, Ohio, 44646, and its telephone number is (330) 832-7441. PEOPLES FEDERAL SAVINGS AND LOAN ASSOCIATION OF MASSILLON Peoples Federal is a mutual savings and loan association which has served the Massillon, Ohio, area since 1892. Organized under Ohio law as Peoples Building and Loan Company, Peoples Federal converted to a federally chartered savings and loan association in 1941, at which time the name Peoples Federal Savings and Loan Association of Massillon was adopted. As a savings association chartered under the laws of the United States, Peoples Federal is subject to supervision and regulation by the OTS and the FDIC and is a member of the FHLB of Cincinnati. The deposits of Peoples Federal are insured up to applicable limits by the FDIC in the SAIF. See "REGULATION." Peoples Federal is principally engaged in the business of making permanent first mortgage loans secured by oneto four-family residential real estate located within Stark County, Ohio, and adjacent counties and investing in U.S. government agency obligations, interest-bearing deposits in other financial institutions, mortgage-backed and related securities, automobile pass-through certificates and municipal securities. Peoples Federal also makes construction loans and loans secured by multifamily real estate (over four units) and nonresidential real estate. The origination of consumer loans constitutes a small part of the lending activity of Peoples Federal. Loan funds are obtained primarily from savings deposits and loan repayments. See "THE BUSINESS OF PEOPLES FEDERAL - Lending Activities; and - Investment Activities." Interest on loans, mortgage-backed and related securities and investments is Peoples Federal's primary source of income. The principal expense of Peoples Federal is interest paid on deposit accounts. Operating results are dependent to a significant degree on the net interest income of Peoples Federal, which is the difference between interest earned on loans, mortgage-backed and related securities and other investments and interest paid on deposits. Like most thrift institutions, Peoples Federal's interest income and interest expense are significantly affected by general economic conditions and by the policies of various regulatory authorities. See "RISK FACTORS" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." Peoples Federal conducts business from its main office and a full-service branch office, both located in Massillon, Ohio. Peoples Federal's primary market area consists of Stark County, Ohio, and adjacent counties. The main office of Peoples Federal is located at 211 Lincoln Way East, Massillon, Ohio 44646, and its telephone number is (330) 832-7441. See "THE BUSINESS OF PEOPLES FEDERAL." Peoples Federal to the ESOP. As the loan is repaid, the Common Shares held by the ESOP will be allocated to the accounts of employees of Peoples Federal and PFC, including executive officers. See "MANAGEMENT OF PEOPLES FEDERAL - Employee Stock Ownership Plan." The Boards of Directors of PFC and Peoples Federal also intend to adopt and present to the shareholders for approval at the first annual meeting of the shareholders of PFC following the consummation of the Conversion the Peoples Financial Corporation RRP and the Peoples Financial Corporation 1996 Stock Option and Incentive Plan (the "Stock Option Plan"). If the RRP is approved at such meeting, PFC will form a trust (the "RRP Trust") to which PFC will contribute sufficient amounts for the purchase by the RRP Trust of an unspecified number of PFC common shares equal to up to 4% of the number of Common Shares sold in the Conversion. Such PFC common shares may be purchased after shareholder approval of the RRP in the open market or from the authorized, but unissued common shares of PFC, and will be awarded by a committee of the PFC Board of Directors to the officers and directors of PFC and Peoples Federal for services rendered to Peoples Federal. See "MANAGEMENT OF PEOPLES FEDERAL - Stock Option Plan; and - Recognition and Retention Plan and Trust." If the Stock Option Plan is approved at the first annual meeting of shareholders following the Conversion, directors, officers and employees of PFC and Peoples Federal will be granted options to purchase, in the aggregate, a number of Common Shares equal to up to 10% of the Common Shares sold in the Conversion. The exercise price for options granted will equal the PFC market price on the date of grant. The grant of such options, in combination with purchases of Common Shares by such officers and directors and certain anti-takeover provisions in the Articles of Incorporation and Regulations of PFC and the Amended Charter of Peoples Federal, may facilitate the perpetuation of current management and discourage proxy contests and takeover attempts. See "RESTRICTIONS ON ACQUISITIONS OF PEOPLES FEDERAL AND PFC AND RELATED ANTI-TAKEOVER PROVISIONS." Assuming the purchase by directors and executive officers of 7.35% of the Common Shares sold in the Conversion, the purchase by the RRP of a number of Common Shares equal to 4% of the Common Shares sold in the Conversion, the exercise by directors and executive officers of all options authorized pursuant to the Stock Option Plan and the control by directors and executive officers of the 4% of the Common Shares purchased by the ESOP in the Conversion, directors and executive officers could own or control up to 23.04% of the outstanding common shares of PFC. See "RISK FACTORS-Controlling Influence of Management and Anti-Takeover Provisions which May Discourage Sales of Common Shares for Premium Prices." MARKET FOR THE COMMON SHARES There is presently no market for the Common Shares. The aggregate offering price for the Common Shares is based upon an independent appraisal of Peoples Federal. The appraisal is not a recommendation as to the advisability of purchasing Common Shares. See "THE CONVERSION - Pricing and Number of Common Shares to be Sold." No assurance can be given that persons purchasing Common Shares will thereafter be able to sell such shares at a price at or above the offering price. PFC has received approval to have the Common Shares quoted on the Nasdaq Small Cap under the symbol "PFFC" upon the closing of the Conversion, subject to certain conditions which PFC and Peoples Federal believe will be satisfied, although no assurance can be provided that the conditions will be met. In connection with such approval, McDonald & Company has informed Peoples Federal that McDonald & Company intends to make a market in the Common Shares. No assurance can be given, however, that an active or liquid market for the Common Shares will develop after the completion of the Conversion or, if such a market does develop, that such market will continue. Investors should consider, therefore, the potentially illiquid and long-term nature of an investment in the Common Shares. See "RISK FACTORS - Market for the Common Shares." DIVIDEND POLICY The declaration and payment of dividends by PFC will be subject to the discretion of the Board of Directors of PFC and will be based on the earnings and financial condition of PFC and general economic conditions. Other than the earnings on the investment of proceeds retained by PFC, the only source of income of PFC will be dividends periodically declared and paid by the Board of Directors of Peoples Federal on the common stock of Peoples Federal held by PFC. The payment of dividends by Peoples Federal to PFC will be subject to various regulatory restrictions. On a pro forma basis, as of March 31, 1996, assuming (i) receipt by Peoples Federal of $6.2 million of net conversion proceeds, (ii) the investment of such net proceeds in assets having a risk weighting of 20% and (iii) the establishment of a Liquidation Account in the amount of $10.0 million (the regulatory capital of Peoples Federal at March 31, 1996), Peoples Federal would have $6.1 million available for the payment of dividends to PFC. In an effort to manage the capital of PFC, the Board of Directors of PFC may determine that the payment of a regular or a special cash dividend or both may be prudent. No assurance can be USE OF PROCEEDS The following table presents the estimated gross and net proceeds from the sale of the Common Shares in connection with the Conversion based on the Valuation Range: <TABLE> <CAPTION> Minimum Mid-point Maximum Maximum <S> <C> <C> <C> <C> Gross proceeds $11,050,000 $13,000,000 $14,950,000 $17,192,500 Less estimated expenses 543,000 580,000 580,000 580,000 ----------- ----------- ----------- ----------- Total net proceeds $10,507,000 $12,420,000 $14,370,000 $16,612,500 =========== =========== =========== =========== </TABLE> The net proceeds from the sale of the Common Shares may be outside the Valuation Range, depending upon financial and market and regulatory conditions at the time of the completion of the offering. See "THE CONVERSION - Pricing and Number of Common Shares to be Sold." The expenses are estimated assuming that (a) all of the indicated number of Common Shares are sold in the Subscription Offering; (b) the directors, officers and their associates purchase 91,600, 95,500, 99,400 and 103,880 shares at the minimum, mid-point, maximum and maximum, as adjusted, of the Valuation Range; and (c) the ESOP purchases 4% of the Common Shares sold. Actual expenses may be more or less than estimated. See "THE CONVERSION - Plan of Distribution." PFC will retain 50% of the net proceeds from the sale of the Common Shares, or $6,210,000 at the mid-point of the Valuation Range, including the value of a promissory note from the ESOP, which PFC intends to accept in exchange for the issuance of Common Shares to the ESOP. Such proceeds will be used to fund the RRP and will be invested in short-term and intermediate-term government securities. The remainder of the net proceeds received from the sale of the Common Shares, $6,210,000 at the mid-point of the Valuation Range, will be invested by PFC in the capital stock to be issued by Peoples Federal to PFC as a result of the Conversion. Such investment will increase the regulatory capital of Peoples Federal and will permit Peoples Federal to expand its lending and investment activities and to enhance customer services. Enhanced customer services may include automated teller machine and card services. Peoples Federal has also expanded its hours of operation and established a loan origination office in the fastest growing area of Stark County. Peoples Federal anticipates that such net proceeds initially will be invested in short-term interest-bearing deposits in other financial institutions. Eventually, however, Peoples Federal will attempt to use the net proceeds to originate loans, with a particular emphasis on increasing the percentage of adjustable-rate mortgage loans in its portfolio. Such use will be consistent with Peoples Federal's effort to improve its interest rate risk position as well as increase its income. See "BUSINESS OF PEOPLES FEDERAL - General." Although PFC and Peoples Federal could use the increase in capital to acquire other financial institutions or for PFC to repurchase its own outstanding shares, PFC and Peoples Federal have no current plans or agreements, written or oral, and are not negotiating, to acquire any other institution and have no current plans for PFC to repurchase any of its shares. MARKET FOR COMMON SHARES There is presently no market for the Common Shares. The aggregate offering price for the Common Shares is based upon an independent appraisal of Peoples Federal. The appraisal is not a recommendation as to the advisability of purchasing Common Shares. See "THE CONVERSION - Pricing and Number of Common Shares to be Sold." No assurance can be given that persons purchasing Common Shares will thereafter be able to sell such shares at a price at or above the offering price. PFC has received approval to have the Common Shares quoted on the Nasdaq Small Cap under the symbol "PFFC" upon the closing of the Conversion, subject to certain conditions which PFC and Peoples Federal believe will be satisfied, although no assurance can be provided that the conditions will be met. In connection with such approval, McDonald & Company has informed Peoples Federal that McDonald & Company intends to make a market in the Common Shares. No assurance can be given, however, that an active or liquid market for the Common Shares will develop after the completion of the Conversion or, if such a market does develop, that such market will continue. Investors should consider, therefore, the potentially illiquid and long-term nature of an investment in the Common Shares. See "RISK FACTORS - Market for the Common Shares." DIVIDEND POLICY The declaration and payment of dividends by PFC will be subject to the discretion of the Board of Directors of PFC and will be based on the earnings and financial condition of PFC and general economic conditions. In an effort to manage the capital of PFC, the Board of Directors may determine that the payment of a regular or special cash dividend or both may be prudent. No assurance can be given that any dividend will be declared or that any dividend, if declared, will continue in the future. Other than earnings on the investment of the proceeds retained by PFC, the only source of income of PFC will be dividends periodically declared and paid by the Board of Directors of Peoples Federal on the common stock of Peoples Federal held by PFC. The declaration and payment of dividends by Peoples Federal to PFC will be subject to the discretion of the Board of Directors of Peoples Federal, to the earnings and financial condition of Peoples Federal, to general economic conditions and to federal restrictions on the payment of dividends by thrift institutions. Under regulations of the OTS applicable to converted associations, Peoples Federal will not be permitted to pay a cash dividend on its capital stock after the Conversion if its regulatory capital would, as a result of the payment of such dividend, be reduced below the amount required for the Liquidation Account or the applicable regulatory capital requirement prescribed by the OTS. See "THE CONVERSION - Principal Effects of the Conversion - -- Liquidation Account" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PEOPLES FEDERAL - Liquidity and Capital Resources." Peoples Federal may not pay a dividend unless such dividend also complies with a regulation of the OTS limiting capital distributions by savings associations. Capital distributions, for purposes of such regulation, include, without limitation, payments of cash dividends, repurchases and certain other acquisitions by an association of its shares and payments to stockholders of another association in an acquisition of such other association. The capital distribution regulation adopts a 3-tier classification of associations based upon their capital immediately before and, on a pro forma basis, after giving effect to the capital distribution. A tier 1 association is an association which has capital immediately before and after giving effect to a proposed capital distribution that is equal to or greater than the amount of its fully phased-in capital requirement. A tier 2 association is an association which has capital immediately before and after giving effect to a capital distribution which is equal to or in excess of its minimum capital requirement, but is less than the amount of its fully phased-in capital requirement. A tier 3 association is an association which fails to meet its minimum capital requirement immediately before or after giving effect to a capital distribution. A tier 1 association may make capital distributions equal to up to the higher of (1) 100% of its net earnings to date during the calendar year in which the distribution is made, plus the amount that would reduce by one-half its "surplus capital ratio" at the beginning of the calendar year or (2) 75% of its net income over the most recent four-quarter period. The "surplus capital ratio" is the percentage by which an association's capital-to-assets ratio exceeds the association's ratio of fully phased-in capital requirement to assets. A tier 2 association may make capital distributions up to 75% of its net earnings over the most recent four-quarter period, if the association meets the current risk-based capital standard. A tier 3 association may make capital distributions only with the prior written approval of the District Director of the OTS or in accordance with an approved capital plan. If an association meeting the tier 1 criteria has been notified by the OTS that the association requires more than normal supervision, such association will be treated as a tier 2 or tier 3 association, unless the OTS determines that such treatment is not necessary to ensure the association's safe and sound operation. Moreover, the OTS may prohibit any capital distribution otherwise permitted by the regulation if the OTS determines that such distribution would constitute an unsafe or unsound practice. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PEOPLES FEDERAL - Liquidity and Capital Resources." At March 31, 1996, Peoples Federal met the fully phased-in capital requirement. Other than the earnings on the investment of proceeds retained by PFC, the only source of income of PFC will be dividends periodically declared and paid by the Board of Directors of Peoples Federal on the common stock of Peoples Federal held by PFC. The payment of dividends by Peoples Federal will be subject to various regulatory restrictions. On a pro forma basis, as of March 31, 1996, assuming (i) receipt by Peoples Federal of $6.2 million of net conversion proceeds, (ii) the investment of such net proceeds in assets having a risk weighting of 20% and (iii) the establishment of a Liquidation Account in the amount of $10.0 million (the regulatory capital of Peoples Federal at March 31, 1996), Peoples Federal would have $6.1 million available for the payment of dividends to PFC. See "REGULATORY CAPITAL COMPLIANCE."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001011255_primix_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001011255_primix_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary should be read in conjunction with, and qualified in its entirety by, the more detailed information and the Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Except as otherwise noted, all information contained in this Prospectus, including share and per share information, (i) assumes no exercise of the Underwriters' over-allotment option, (ii) reflects the conversion upon the consummation of this offering of all outstanding shares of the Company's Series B Redeemable Convertible Preferred Stock ("Series B Preferred Stock") and Series C Convertible Preferred Stock ("Series C Preferred Stock") into 1,775,194 shares of Common Stock, and (iii) reflects a two-for-three reverse stock split of the Company's Common Stock effected in May 1996. THE COMPANY OneWave, Inc., formerly Business@Web, Inc. ("OneWave" or the "Company"), is a provider of "Web-enabled" software for the development and deployment of mission-critical business applications across an organization's disparate information technology ("IT") systems and the extension of those applications to Intranets and the Internet. The Company's OpenScape products enable organizations to extend their current IT capabilities to conduct new, dynamic and interactive communication and transactions with key audiences in their "extended enterprise", including customers, suppliers, distributors and business partners. OpenScape products provide the high-volume and real-time performance capabilities required by businesses through the utilization of standard Internet protocols, component-based, object-oriented technology, a scaleable, multi-tier architecture and an intuitive point-and-click development environment. The Company believes that its products will enable organizations to achieve significant competitive advantages by increasing responsiveness to changing business conditions, and exploiting the low cost, flexibility and ease-of-use of Internet technologies. In response to increased competitive pressures, businesses have engaged in the reengineering of critical business processes in an attempt to realize productivity and efficiency gains. A critical enabler of these reengineering efforts has been the strategic use of information technology, such as legacy and client/server systems. To date, the development and deployment of effective enterprise-wide business applications have been limited by the proliferation of multiple IT systems. The recent emergence of the World Wide Web and Internet technologies offers businesses the opportunity to significantly improve collaboration and communication both within the enterprise and with the extended enterprise. Accordingly, organizations are increasingly seeking a cost-effective IT solution which maximizes the value of their existing IT infrastructure, while simultaneously capturing the strategic business benefits of the Internet. Organizations are able to address this need through the use of the Company's OpenScape development environment and its Distributed WebEngine, WebEngine Client and OpenExtension products. The Company's objective is to be a leading provider of software which supports the development and deployment of Web-enabled business applications. The Company intends to integrate emerging technologies in future OpenScape product releases and to continually introduce additional OpenExtensions, specific preconfigured add-on products which enable communications with proprietary environments. The Company also intends to develop multiple distribution channels, focusing primarily on the Company's direct sales force, and its strategic relationships with leading technology companies including BBN, Baan, Deloitte & Touche/ICS, Hewlett-Packard, Informix, NEC, PeopleSoft and SAP. The Company was incorporated in Delaware in January 1994. The Company's executive offices are located at One Arsenal Marketplace, Watertown, MA 02172 and its telephone number is (617) 923-6500. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company.................... 3,000,000 shares Common Stock offered by the Selling Stockholders....... 750,000 shares Common Stock to be outstanding after the offering...... 14,844,890 shares(1) Proposed Nasdaq National Market symbol................. OWAV Use of proceeds........................................ For working capital, repayment of debt and other general corporate purposes, including possible acquisitions. </TABLE> SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> JANUARY 19, 1994 (INCEPTION) TO YEAR ENDED THREE MONTHS DECEMBER 31, 1994 DECEMBER 31, 1995 ENDED MARCH 31, ----------------- ----------------- ---------------- 1995 1996 ------- -------- <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenues.......... $ -- $6,070 $ 416 $ 2,381 Gross profit............ -- 2,669 222 1,118 Operating loss.......... (1,180) (2,621) (290) (8,497) Net loss................ (1,180) (2,698) (290) (8,515) Pro forma net loss per common and common equivalent share(2).... $(.21) $ (.65) Pro forma weighted average number of common and common equivalent shares outstanding(2)......... 12,871 13,141 </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 ------------------------------------ PRO FORMA AS ACTUAL PRO FORMA(3) ADJUSTED(3)(4) ------- ----------- -------------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents.................. $ 4,822 $ 4,792 $42,752 Working capital (deficit).................. (925) (955) 37,005 Total assets............................... 8,939 8,909 46,869 Redeemable preferred stock................. 7,380 -- -- Stockholders' equity (deficit)............. (6,933) 417 38,377 </TABLE> - -------- (1) Based upon the number of shares of Common Stock outstanding as of June 24, 1996 after giving effect to the conversion of all outstanding shares of Series C Preferred Stock into 799,994 shares of Common Stock and all outstanding shares of Series B Preferred Stock into 975,200 shares of Common Stock, in each case upon the consummation of this offering and, with respect to the Series B Preferred Stock, assuming an initial public offering price of $14.00 per share. If the initial public offering price varies from $14.00 per share, the number of shares of Common Stock issuable upon conversion of the Series B Preferred Stock is subject to adjustment from a maximum of 1,103,137 shares of Common Stock (in the event that the initial public offering price is $12.375 per share or less) to a minimum of 888,085 shares of Common Stock (in the event that the initial public offering price is $15.375 per share or greater). Excludes (i) 4,150,000 shares of Common Stock reserved for issuance pursuant to the Company's stock option plans, under which options for the purchase of an aggregate of 3,356,600 shares were outstanding as of June 24, 1996, (ii) 150,000 shares of Common Stock reserved for issuance pursuant to the Company's Employee Stock Purchase Plan and (iii) 23,333 shares of Common Stock that may be issued upon the exercise of an outstanding Common Stock purchase warrant. See "Management--Stock Plans", "Description of Capital Stock--Authorized and Outstanding Capital Stock", "--Employee Stock Purchase Plan" and "-- Warrant" and Note 6 of Notes to Financial Statements. (2) See Note 1(k) of Notes to Financial Statements for an explanation of the determination of the number of shares used in computing pro forma net loss per common and common equivalent share. (3) Presented on a pro forma basis to give effect to (i) the sale subsequent to March 31, 1996 of 1,200,000 shares of Series C Preferred Stock and the receipt of $5,970,000 in net proceeds therefrom, (ii) the repurchase and retirement subsequent to March 31, 1996 of 800,000 shares of Common Stock for $6,000,000 and (iii) the automatic conversion of all outstanding shares of Series B Preferred Stock and Series C Preferred Stock into 1,775,194 shares of Common Stock upon the consummation of this offering. See "Description of Capital Stock--Authorized and Outstanding Capital Stock".
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001011290_99-cents_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001011290_99-cents_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..46daaaa601f918ea684401a9a6198c8b7756d070
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL DATA, INCLUDING THE FINANCIAL STATEMENTS AND NOTES THERETO, INCLUDED ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION PRESENTED ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION TO PURCHASE UP TO 637,500 ADDITIONAL SHARES OF COMMON STOCK. SEE "UNDERWRITING." THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS." THE COMPANY 99 CENTS Only Stores-Registered Trademark- is a leading deep-discount retailer of primarily name-brand, close-out and regularly available general merchandise at an affordable, single price point. The Company operates a chain of 38 value-priced 99 CENTS Only Stores in Southern California and also distributes merchandise through its Bargain Wholesale-SM- division. The Company believes that it operates the nation's oldest existing one-price general merchandise chain and that it was the first chain to sell all merchandise at a 99 CENTS or $1.00 single price point. 99 CENTS Only Stores are attractively merchandised, clean, full-service "destination" locations that offer customers significant value on their everyday household needs in an exciting shopping environment. Bargain Wholesale distributes products at prices generally below normal wholesale to both small and large domestic retailers, other distributors and exporters. Bargain Wholesale complements the Company's retail operation by allowing the Company to purchase in larger volume at more favorable pricing and to generate additional net sales with relatively small incremental increases in operating expenses. In 1995, the Company recognized record pro forma net income of $9.6 million on record revenues of $152.8 million and record operating income of $16.9 million. During the three-month period ended March 31, 1996, the Company recognized pro forma net income of $2.5 million on revenues of $42.3 million and operating income of $4.4 million. From its first store opening in 1982, the Company's growing chain of 99 CENTS Only Stores has expanded to 38 stores. The Company's 99 CENTS Only Stores operations accounted for $122.0 million (or approximately 80%) of the Company's net sales in 1995. The Company plans to open 7 or 8 new stores in each of 1996 and 1997. Of the stores planned for 1996, the Company has already opened 2 stores and has signed leases for 2 additional stores as of the date of this Prospectus. Bargain Wholesale, which commenced operations in 1976, accounted for $30.3 million (or approximately 20%) of the Company's net sales in 1995. Bargain Wholesale's recent growth is primarily attributable to an increased focus on large domestic and international accounts and expansion into new geographic markets. The Company believes that its attractive store-level economics will facilitate its planned expansion. The average investment per new store opened in 1994, including capital expenditures and inventory on-hand (as of December 31, 1994) but excluding pre-opening expenses, was approximately $561,000. New stores opened in 1994 had average net sales of approximately $4.2 million during the first year of operation. In 1995, the Company's operating margin was 11.0%. The Company sells consumer items in staple product categories including beverages and food, health and beauty aids, household products (cleaning supplies, paper goods, ETC.), housewares (glassware, kitchen items, ETC.) and hardware. The Company purchases most of its merchandise directly from the manufacturer. The Company's suppliers include many of the nation's leading consumer product companies. During 1995, the Company purchased merchandise from more than 999 suppliers, including Colgate-Palmolive Company, The Dial Corp., Eveready Battery Company, Inc., General Electric Company, Gerber Products Company, The Gillette Company, Hershey Foods Corporation, Johnson & Johnson, Kraft General Foods Inc., Lever Brothers Company, Mattel, Inc., The Mead Corporation, Nabisco, Inc., Nestle, The Pillsbury Company, The Procter & Gamble Company, Revlon, Inc. and SmithKline Beecham Corporation. The Company's 99 CENTS Only Stores offer customers quality merchandise generally at a significant discount from normal retail. The Company believes that word-of-mouth advertising and its affordable, single price point help attract new customers. The Company also believes that frequent repeat visits and impulse purchases are encouraged by the value and quality of the Company's merchandise, the wide mix of consistently available everyday consumables and the continuously changing selection of name-brands and other quality close-outs. 99 CENTS Only Stores are typically either free-standing buildings or anchor locations in an outdoor shopping center. The existing 99 CENTS Only Stores average over 12,000 gross square feet. Since 1993, the Company has opened 11 new stores (including 2 relocations in 1995) that average over 16,000 gross square feet. The Company currently targets new store locations ranging from 15,000 to 23,000 gross square feet. The Company believes that its larger 99 CENTS Only Stores allow it to fully display its wide assortment of merchandise in a more attractive format, carry deeper stock positions and provide customers with a more inviting and convenient environment that encourages longer shopping. The Company's decision to target larger stores reflects the higher average annual store revenues typically achieved by these stores. Except for three relocations to larger, nearby sites and one store closure as the result of a fire, the Company has never closed one of its 99 CENTS Only Stores. The Company's near-term retail expansion strategy continues to focus on Southern California, as the Company believes that this region offers substantial opportunities for continued profitable growth. Clustering stores in this geographic area also permits the Company to take advantage of management, distribution and advertising efficiencies. The Company expects that expansion in its wholesale division will be driven by its continued focus on large domestic and international accounts and the expansion of its geographic markets. The Company maintains an 880,000 square foot single-story warehouse and distribution facility located in Los Angeles County, California. The Company's corporate offices are also located in this facility. The Company believes its current warehouse facility will support distribution to more than 99 stores in Southern California. The Company is a California corporation. Its executive offices are located at 4000 East Union Pacific Avenue, City of Commerce, California 90023, and its telephone numbers are (213) LUCKY-99 and (213) JUST-BUY. THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Company........................ 4,250,000 shares (1) Common Stock to be outstanding after the Offering.................... 14,179,135 shares (2) Use of Proceeds......................... To fund a distribution of $39.9 million to pay notes issued and dividends payable declared to the Existing Shareholders in connection with the termination of the Company's S corporation status, to expand retail operations and for general corporate purposes. See "Use of Proceeds." Proposed New York Stock Exchange Symbol................................ "NDN" </TABLE> - --------------- (1) Assumes no exercise of the over-allotment option granted by the Company to the Underwriters. (2) Excludes 500,000 shares of Common Stock reserved for future issuance pursuant to options outstanding under the Company's 1996 Stock Option Plan. Under the treasury stock method of computing earnings per share, these options represent 42,083 equivalent shares. See "Management -- Stock Option Plan." SUMMARY FINANCIAL AND CERTAIN OPERATING DATA The following information should be read in conjunction with the Company's Financial Statements and the notes thereto and "Management's Discussion and Analysis of Results of Operations and Financial Condition" included elsewhere in this Prospectus. See also "Selected Financial Data." <TABLE> <CAPTION> THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, --------------------------------------------------------------- ------------------------ 1991 1992 1993 1994 1995 1995 1996 ----------- ----------- ----------- ----------- ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE AND SALES PER SQUARE FOOT DATA AND NUMBER OF STORES) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENTS OF INCOME DATA: Net sales: 99 CENTS Only Stores......... $ 89,967 $ 95,873 $ 101,828 $ 110,724 $ 121,998 $ 27,092 $ 32,256 Other retail operations (1)........................ 3,104 3,125 3,093 2,097 492 327 -- Bargain Wholesale............ 19,544 21,938 18,028 18,916 30,337 6,138 10,020 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total...................... 112,615 120,936 122,949 131,737 152,827 33,557 42,276 Gross profit................... 37,626 41,188 41,469 43,692 50,667 11,127 13,466 Selling, general and administrative expenses...... 23,482 29,060 32,081 32,661 33,809 7,753 9,066 Operating income............... 14,144 12,128 9,388 11,031 16,858 3,374 4,400 Special litigation provision (reversal) (2)............... 2,100 -- -- (2,900) -- -- -- Income before pro forma provision for income taxes (3).......................... 12,083 12,178 9,343 13,167 16,103 3,185 4,211 Pro forma net income (unaudited) (3).............. 7,236 7,439 5,866 8,004 9,594 1,947 2,492 Pro forma earnings per common share (unaudited) (3)(4)....................... $ 0.72 $ 0.19 Pro forma weighted average number of common shares outstanding (unaudited) (3)(4)....................... 13,298 13,298 COMPANY OPERATING DATA: 99 CENTS Only Stores net sales growth....................... 17.1 % 6.6 % 6.2 % 8.7 % 10.2 % 19.1 % Bargain Wholesale net sales growth............. 50.4 % 12.2 % (17.8)% 4.9 % 60.4 % 63.2 % Total Company net sales growth....................... 21.9 % 7.4 % 1.7 % 7.1 % 16.0 % 26.0 % Gross margin................... 33.4 % 34.1 % 33.7 % 33.2 % 33.2 % 33.2 % 31.9 % Operating margin............... 12.6 % 10.0 % 7.6 % 8.4 % 11.0 % 10.1 % 10.4 % Pro forma net income margin.... 6.4 % 6.2 % 4.8 % 6.1 % 6.3 % 5.8 % 5.9 % RETAIL OPERATING DATA (5): Number of stores open at end of period............. 24 30 31 34 36 34 38 Change in comparable stores net sales (6)................ (0.3)% (8.6)% (3.5)% (1.4)% (0.2)% 6.2 % Change in comparable stores net sales, as adjusted (7)... (0.2)% 2.2 % 6.3 % Average net sales per store open for the full period..... $ 3,826 $ 3,550 $ 3,349 $ 3,267 $ 3,467 $ 797 $ 875 Average net sales per estimated saleable square foot (8)..... $ 462 $ 417 $ 388 $ 396 $ 397 $ 92 $ 97 </TABLE> <TABLE> <CAPTION> AT MARCH 31, 1996 ------------------------- PRO FORMA AS ADJUSTED ACTUAL (9) --------- -------------- <S> <C> <C> BALANCE SHEET DATA: Working capital (deficit)............................................................... $ (5,043) $ 34,179 Total assets............................................................................ 58,838 66,942 Long-term debt.......................................................................... -- -- Capitalized lease obligation, including current portion................................. 9,828 9,828 Total shareholders' equity.............................................................. 2,353 45,820 </TABLE> - --------------- SEE NOTES ON FOLLOWING PAGE. (1) The Company operated stores during the periods presented under different tradenames pending conversion to the 99 CENTS Only Stores format or their eventual closing. Only one such store was operated by the Company in 1995, and that store was closed in May 1995. See "Business -- Store Locations." (2) See "Business -- Legal Proceedings" and Note 7 to "Notes to Financial Statements." (3) Prior to May 1, 1996, the Company was treated as an S corporation for federal and state income tax purposes. See "Termination of S Corporation Status." The pro forma presentation reflects a provision for income taxes as if the Company had always been a C corporation, at an assumed effective tax rate of 40.1% in 1991 and 1992, 41.0% in 1993, 1994 and 1995 and for the three-month periods ended March 31, 1995 and 1996, plus the effect of deferred taxes and tax credits. (4) Pro forma earnings per common share have been computed by dividing pro forma net income by the pro forma weighted average number of common shares and common stock equivalents outstanding. Pro forma weighted average common equivalent shares include 3,327,000 shares offered hereby at an assumed price of $12.00 per share to fund certain notes issued and dividends payable declared to the Existing Shareholders, in connection with the termination of the Company's S Corporation status. Common stock equivalents include all outstanding stock options and warrants after applying the treasury stock method. All currently outstanding options have been considered outstanding for all fiscal years presented and are included in the calculation of the weighted average number of common shares and common stock equivalents outstanding for pro forma earnings per common share computations in accordance with the rules of the Securities and Exchange Commission (the "Commission"). (5) Includes retail operating data solely for the Company's 99 CENTS Only Stores. (6) Change in comparable stores net sales compares net sales for stores open for the entire two periods compared. (7) Excludes the Company's Fairfax/Wilshire # 1 store, which remained open after a larger new store (Fairfax/Wilshire #2) was opened fewer than 500 feet away in August 1994. For a discussion of the Company's strategy of opening larger new stores in close proximity to existing stores, see "Management's Discussion and Analysis of Results of Operations and Financial Condition -- General."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001011340_sunquest_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001011340_sunquest_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..56a8e4bee32221b0863e8e126fc0bc301daa5753
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and Combined Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Prospective investors should consider carefully the information discussed under "Risk Factors." Certain terms used in this Prospectus are defined under "Glossary of Selected Terms." THE COMPANY Sunquest provides health care information systems to large and mid-sized hospitals, clinics and other facilities, including integrated delivery networks ("IDNs") comprised of multi-entity, multi-site health care organizations. Sunquest was established in 1979 and has become a market leader in the sale of laboratory information systems ("LISs") that integrate disparate equipment and data sources in order to automate a laboratory department's specialized processes and manage its large volumes of clinical data. As of December 31, 1995, the Company had an installed LIS base of more than 600 sites in the United States, Canada and the United Kingdom. Sunquest is applying its open systems, integration and clinical experience to develop and service enterprise- wide clinical repository and managed care systems targeted at the information needs of the emerging IDN market. The Company's clinical repository systems are currently being implemented on an enterprise-wide basis at the Company's primary beta site, a multi-entity, 812-bed IDN. In order to lower health care delivery costs while improving the quality of patient care, IDNs need detailed clinical and management information that enables providers within the IDN to manage: (i) the patient care process across multiple delivery sites; (ii) the appropriateness of diagnoses, treatments and resource utilizations; (iii) provider performance and clinical outcomes; and (iv) performance under managed care contracts. A comprehensive clinical repository addresses these information needs by integrating clinical and financial data from various information systems of the IDN's clinical departments and administrative areas. A clinical repository forms the foundation for a computerized patient record ("CPR"), which offers providers throughout an IDN immediate on-line access to more complete patient data across multiple delivery sites. Significant market opportunities exist for health care information systems vendors offering open architecture clinical repository systems. These systems permit IDNs to select and integrate best-of-fit information systems by either retaining existing legacy systems or selecting from an array of new and existing systems from different vendors. Sunquest offers three suites of information systems: departmental clinical systems, clinical repository systems and managed care systems. The Company's departmental clinical systems consist of laboratory and radiology information systems. These systems capture departmental information, communicate with patient care areas and other information systems, provide comprehensive management reports and incorporate rules-based decision tools for ordering tests and analyzing results. Sunquest estimates that it has installed in its LIS client base over 6,500 interfaces that were developed for approximately 350 separate instruments and 550 health care information systems of other vendors. The Company's clinical repository systems are comprised of a clinical database, an interface engine, and integration and access tools. These systems collect clinical data from legacy departmental systems and then organize, index and store these data in a relational database. With these clinical repository systems, a clinician can access, from a single source, a comprehensive record of prior illnesses, treatments, orders, results and diagnoses for which data have been stored in the clinical repository. The Company's managed care systems support the administrative functions of managed care organizations, such as health maintenance organizations and managed care entities within IDNs, and are designed to meet the demands of the evolving capitation and fixed fee reimbursement structures. Sunquest's business strategy is to leverage its position as a leading LIS vendor in order to become a strategic supplier of clinical repository systems to the emerging enterprise-wide CPR market. The key elements of this strategy are to build upon Sunquest's experience implementing and interfacing complex LISs to develop best-of-fit clinical repository systems, and to cross-sell its clinical repository systems to its installed LIS client base. The Company also intends to diversify and expand its systems and service offerings to meet the rapidly changing needs of IDNs and managed care organizations, while increasing and refocusing its sales and marketing efforts to target the enterprise-wide information needs of these emerging markets. Sunquest's clients include The Cleveland Clinic Foundation, Intermountain Health Care, Kaiser Foundation Health Plan of Colorado, Moses Cone Health System, St. Lukes-Roosevelt Hospital Center and The University of Illinois at Chicago Medical Center. Upon completion of this offering, Dr. Sidney A. Goldblatt, the President and Chief Executive Officer of the Company, and three trusts for the benefit of his children will own approximately 79.9% of the outstanding Common Stock of the Company. THE OFFERING <TABLE> <C> <S> Common Stock offered hereby..................... 3,000,000 shares Common Stock to be outstanding after this offering........................................ 14,904,000 shares(1) Use of proceeds................................. Shareholder distributions and general corporate purposes, including working capital and potential acquisitions Nasdaq National Market symbol................... SUNQ </TABLE> SUMMARY COMBINED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, --------------------------------------- ---------------- 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF INCOME DATA: Total revenues......... $56,144 $57,970 $63,459 $62,618 $61,532 $13,564 $16,717 Operating income (loss)................ 5,951 6,411 4,869 7,253 4,841 (645) 1,677 Income (loss) before income taxes.......... 6,094 4,677 4,918 6,305 3,862 (875) 1,566 Net income (loss)(2)... 6,094 4,677 4,842 6,214 3,789 (858) 1,535 Pro forma net income (loss)(3)............. 2,015 850 Pro forma net income per common share(3)... $ 0.16 $ 0.07 Pro forma weighted average number of common shares outstanding(3)....... 12,888 12,980 </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 ----------------------------------- PRO FORMA ACTUAL PRO FORMA(4) AS ADJUSTED(5) ------- ------------ -------------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................ $ 966 $ 966 $28,192 Working capital (deficiency)............. 5,738 (7,759) 33,278 Total assets............................. 45,441 46,444 70,004 Obligations under capital leases from related party, net of current portion.. 6,254 6,254 6,254 Total shareholders' equity............... 22,150 4,218 42,278 </TABLE> - -------- (1) Excludes up to 790,000 shares of Common Stock issuable upon exercise of stock options to be granted on the date of this Prospectus at an exercise price equal to the initial public offering price. (2) Since January 1, 1990, the Company has operated as an S corporation and, accordingly, has not been subject to federal or certain state income taxes. The Company's S corporation status will terminate on the date of this Prospectus. See "S Corporation Distributions and Termination of S Corporation Status." (3) Pro forma net income has been computed assuming the elimination of related party interest income and using an estimated income tax rate of 43%. Pro forma net income per common share has been computed giving effect to the assumed issuance, as of the beginning of the pro forma periods presented, of the number of shares of Common Stock necessary to replace the equity distributed as a result of the First S Corporation Distribution (as defined below). See "Use of Proceeds" and Note 2 of Notes to Combined Financial Statements. (4) Reflects: (i) the non-cash expense for deferred income taxes (estimated at $1,132,000) that will be recognized in the second quarter of 1996 as a result of the termination of the Company's S corporation status; (ii) the declaration of the S Corporation Distributions (as defined below); and (iii) the capital contribution to Sunquest of all of the outstanding stock of Sunquest Europa Limited and Sunquest Germany GmbH. See "Capitalization" and Note 2 of Notes to Combined Financial Statements. (5) Adjusted to give effect to the sale of the shares of Common Stock offered hereby at an assumed initial public offering price of $14.00 per share, the application of the estimated net proceeds thereof and the receipt of payment of certain notes from a related party. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001011449_suburban_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001011449_suburban_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to, and should be read in conjunction with, the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless the context suggests otherwise, (i) references in this Prospectus to the "Company" or "Suburban" mean Suburban Lodges of America, Inc. and its subsidiaries, and (ii) all information in this Prospectus assumes that the Underwriters' over-allotment option is not exercised. THE COMPANY Suburban Lodges of America, Inc. develops, owns, manages and franchises Suburban Lodge(@) facilities, which are economy extended stay lodging facilities designed to appeal to value-conscious guests seeking to "Lodge for Less."SM The Company believes that the Suburban Lodge chain is one of the largest lodging chains (based on number of guest rooms and facilities) devoted to serving the economy extended stay market. Suburban Lodge guest rooms are fully furnished and include a combination living room and bedroom, a bathroom and a fully equipped kitchenette. Weekly maid and linen service, access to cable or satellite television and coin-operated laundromats are also provided to allow guests to stay comfortably for extended periods. Suburban Lodge facilities offer clean, comfortable and attractive accommodations to guests at substantially lower rates than most traditional and other extended stay lodging facilities. Although daily rates are available, substantially all guests pay the Company's weekly rates, which currently range from $139 to $169 per week for single occupancy and from $153 to $189 per week for double occupancy, for the Company's standard size rooms. The extended stay segment of the lodging industry, which includes economy extended stay facilities, is a relatively small but growing segment of the lodging industry. Of the approximately 3.3 million guest rooms available in the U.S. lodging industry at the end of August 1996, there were approximately 53,000, or 1.6%, dedicated extended stay guest rooms at approximately 460 properties. Based upon the high occupancy rates of the existing Suburban Lodge facilities, published occupancy rates for other participants in the extended stay market and industry sources, the Company believes that demand for extended stay lodging facilities compares favorably to the existing supply of facilities in this segment of the market. According to industry sources, non-convention stays of five nights or longer accounted for 259 million, or 29.8%, of the 868 million total hotel room nights used in 1995. The Company believes that Suburban Lodge facilities appeal to an underserved and growing segment of guests in the extended stay market, including business travelers (particularly those with limited or no expense accounts), individuals on temporary work assignments, persons between domestic situations, persons relocating or purchasing a home, tourists and other value-conscious customers desiring low-cost, longer-term, quality accommodations with fully equipped kitchenettes. Suburban believes that the extended stay market offers a number of attractive investment characteristics compared to traditional hotels, including higher than industry average occupancy rates and operating margins. The Company owns and operates 12 Suburban Lodge facilities and franchises 10 additional Suburban Lodge facilities located in five southeastern states (collectively, the "Existing Facilities"). The Existing Facilities contain an aggregate of 2,873 guest rooms, have an average of 131 guest rooms and average approximately 2.7 years in age. The Company anticipates that an additional five Suburban Lodge facilities, four Company-owned and one franchised, will open during the remainder of 1996 resulting in an aggregate of 27 Suburban Lodge facilities by year-end. The Company intends to continue the growth of the Suburban Lodge chain in 1997 by opening approximately 38 additional Suburban Lodge facilities (20 Company-owned facilities and 18 franchised facilities), which would result in a total of 65 Suburban Lodge facilities by the end of 1997. There are currently 15 facilities under construction (nine Company-owned and six franchised, the "Construction Facilities"), and sites have been acquired or are under contract for 29 facilities (13 Company-owned and 16 franchised, the "Development Facilities"). There can be no assurance that the Company and its franchisees will be able to complete the development of all of these facilities. One of the Company's franchisees with three open facilities, one under construction and two under development has informed the Company of its intention to terminate its franchise agreements in order to operate its extended stay facilities independent of the Company. See "-- Forward-Looking Statements," "-- Recent Developments" and "Risk Factors -- Development Risks." The Company's business objective is to become a national provider of economy extended stay lodging facilities. Suburban's growth strategy is to develop additional Company-owned facilities and to franchise the Suburban Lodge concept to independent developers and operators as well as to passive investors who may retain the Company to develop and manage their Suburban Lodge facilities. The Company's principal operating strategies are to (i) provide its guests with clean, comfortable and attractive accommodations at weekly rates substantially lower than those offered by most traditional and other extended stay lodging facilities; (ii) control operating costs at each of its facilities and maintain above industry average operating margins and (iii) ensure guest satisfaction through a commitment to customer service. The Company believes that the depth and experience of its senior management team will be an important factor in executing its growth and operating strategies. The Company believes that the following features differentiate the Suburban Lodge system and its facilities from, and provide a competitive advantage over, many traditional hotels and other extended stay lodging facilities: - LOW WEEKLY RATES. Suburban Lodge facilities offer weekly rates substantially lower than those offered by most traditional and other extended stay lodging facilities. The average weekly rate at the nine Existing Facilities open during the year ended December 31, 1995 (the "Nine Mature Facilities") was $139.69, compared to an equivalent average weekly rate (average daily rate multiplied by seven) of $546.21 for extended stay hotels and $239.96 for lower economy hotels. The average weekly rate at the 12 facilities open during the entire nine months ended September 30, 1996 was $155.56. - KITCHENETTES. Each Suburban Lodge guest room contains a fully equipped kitchenette, including a refrigerator, two-burner stove-top, microwave oven and cooking and eating utensils. - LONGER GUEST STAYS. Suburban designs, markets and prices its guest rooms to appeal to guests staying one week or longer. The Company believes that this strategy results in longer guest stays and higher occupancies. The average guest stay at the 12 facilities open during the entire nine months ended September 30, 1996 was approximately five and one-half weeks. - HIGHER OCCUPANCY. Average occupancy at the Nine Mature Facilities during 1995 was 97.6%, which compares favorably to the average occupancy of 81.2% for extended stay hotels and 64.3% for lower economy hotels during the same period. Average occupancy at the 12 facilities open during the entire nine months ended September 30, 1996 was 95.8%. - OPERATING EFFICIENCIES. The Company seeks to minimize costs throughout its operations. Suburban believes that long-term guest stays, weekly rather than daily housekeeping, limited office hours and a small on-site staff produce significant operating efficiencies. - STANDARD DESIGN AND LOW CONSTRUCTION COSTS. Suburban Lodge facilities are designed and built to uniform plans and specifications developed and periodically refined since 1987. The Company believes that standardization lowers construction costs and establishes consistent quality. The average total investment in the five Company-owned Existing Facilities opened during 1996 was approximately $3.4 million with a range of approximately $23,100 to $26,100 per guest room, including building structures, improvements, furniture, fixtures, equipment, land and pre-opening costs. The Company believes that its construction costs are relatively low due to a number of factors, including careful site selection, smaller room sizes, economical and durable exterior and interior finishes and room furnishings and refined building systems and processes. - ATTRACTIVE UNIT ECONOMICS. Suburban believes its facilities have achieved attractive unit level economics. For the two most recently completed Company-owned Existing Facilities that have been open at least one year, facility level earnings before interest, taxes and depreciation for the 12 months ended September 30, 1996, constituted 25.5% and 26.6%, respectively, of their total development and construction costs, including building structures, improvements, furniture, fixtures, equipment, land and pre-opening costs. The Company believes that its facilities' favorable unit economics are due, in part, to the fact that Suburban Lodge facilities reach stabilization in a relatively short period after opening. In the past, Suburban Lodge facilities have reached 90% occupancy within, on average, 90 days of opening (except for two of the most recently opened facilities in the Atlanta metropolitan area which were adversely impacted by the 1996 Summer Olympic Games (the "Olympics")). - FRANCHISING OPPORTUNITIES. Suburban believes that the combination of its experience in franchising, its relationships with 11 of its 12 franchisee groups (seven existing franchisees and five prospective franchisees which are defined as those having a site under contract and a signed preliminary agreement for a license to develop a Suburban Lodge facility) and the potential attractive return on investment for Suburban Lodge facilities will facilitate the expansion of the Suburban Lodge chain throughout the country. Since 1987, the Suburban Lodge system has increased to 22 facilities and has achieved attractive growth, operating results and returns on investment. From December 31, 1991 through December 31, 1995, for facilities open at least one year, (i) average occupancy increased from 90.3% to 97.6%; (ii) average weekly rates increased from $110.38 to $139.69, representing a compound annual growth rate of approximately 6.1% and (iii) weekly revenue per available room ("Weekly REVPAR") increased from $99.72 to $136.39, representing a compound annual growth rate of 8.1%. For the nine months ended September 30, 1996, average occupancy, average weekly rates and Weekly REVPAR for the 12 facilities open for the entire nine month period were 95.8%, $155.56 and $149.14, respectively. Average weekly rate is determined by dividing room revenue by the number of guest room days sold and multiplying by seven. Weekly REVPAR is determined by dividing room revenue by the number of guest room days available for the period and multiplying by seven. The Company was incorporated in Georgia in 1987, and its executive offices are located at 1000 Parkwood Circle, Suite 850, Atlanta, Georgia 30339, and its telephone number is (770) 951-9511. RECENT DEVELOPMENTS Since the Company's initial public offering of its Common Stock in May 1996 (the "IPO"), the Company and its franchisees have opened four Company-owned and four franchised Suburban Lodge facilities which contain an aggregate of 1,095 guest rooms, representing a 61.6% increase over the total number of guest rooms at the time of the IPO. The Company and its franchisees have also started construction of an additional 13 Suburban Lodge facilities, of which seven are Company-owned, and development of 29 new Suburban Lodge facilities, of which 13 are Company-owned. The Company has also accelerated its expansion plans and now intends to have 65 rather than 54 Suburban Lodge facilities open by the end of 1997. In order to facilitate the Company's expansion, the Company has, among other things, developed an interior corridor prototype facility suitable for use in cold weather climates and launched a nationwide advertising campaign in industry publications to promote Suburban Lodge franchising opportunities. In addition to these developments, the Company has obtained a preliminary commitment from its lender to increase the commitment on the Line of Credit from $50 million to $100 million, which is subject to obtaining other participating leaders, although there can be no assurance that such lenders will be obtained. Furthermore, the Company recently commenced development of the first Suburban Lodge facility for a passive investor who has retained the Company to develop and manage the facility. One of the Company's franchisees informed the Company on November 15, 1996, of its intention to terminate its franchise agreements. The franchisee, which owns three open facilities, one under construction and two under development, has not alleged any breach of the franchise agreements by the Company that would provide a legal basis for such a termination. Suburban intends to pursue its full legal rights under the franchise agreements. Management believes it has a good relationship with its other franchisees and does not believe that the termination of its franchise relationship with any one of its franchisees, if it should occur, would have a material adverse effect on its financial condition, results of operations or its development plans. See "Risk Factors -- Competition for and Dependence on Franchisees." THE OFFERING <TABLE> <S> <C> Common Stock offered: By the Company................................ 2,977,983 By the Selling Shareholders................... 22,017 ---------- Total........................................... 3,000,000 Common Stock to be outstanding after the Offering(1)................................... 11,525,812 Use of proceeds................................. To finance the development of additional Suburban Lodge facilities. See "Use of Proceeds." Nasdaq Stock Market symbol...................... SLAM </TABLE> - --------------- (1) Excludes (i) 750,000 shares of Common Stock reserved for issuance under the Company's 1996 Stock Option and Incentive Award Plan (the "1996 Plan") pursuant to which options to purchase 400,000 shares have been granted and (ii) 100,000 shares reserved for issuance under the Company's Non-Employee Directors' Stock Option and Fee Plan (the "Directors' Plan") pursuant to which options to purchase 4,500 shares have been granted. See "Management -- 1996 Stock Incentive Plans." FORWARD-LOOKING STATEMENTS Certain statements in this Prospectus Summary, including projections with respect to the number of facilities, and under the captions "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere in this Prospectus constitute "forward- looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, uncertainty as to the Company's future profitability; the ability to meet construction and development schedules and budgets and, in particular, to locate and purchase suitable sites for new facilities at satisfactory prices; the ability to develop and implement operational and financial systems to manage rapidly growing operations; uncertainty as to the consumer demand for economy extended stay lodging; increasing competition in the extended stay lodging market; the ability to obtain financing on acceptable terms to finance the Company's growth strategy; the ability of the Company to operate within the limitations imposed by financing arrangements; and other factors referenced in this Prospectus. See "Risk Factors." COMBINED SUBURBAN LODGES OF AMERICA, INC. AND AFFILIATED ENTITIES SUMMARY HISTORICAL COMBINED AND PRO FORMA FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT SHARE AND CERTAIN OPERATING DATA) The following table sets forth: (i) combined historical financial information for Suburban Lodges of America, Inc. and the partnerships and limited liability companies previously owned in whole or in part by certain affiliates of the Company from whom the Company acquired seven Existing Facilities and four Construction Facilities (the "Affiliated Entities") and (ii) pro forma financial information for the Company presented as if the acquisition of facilities in conjunction with the IPO (the "Corporate Organization"), the IPO and the use of the net proceeds therefrom had occurred on January 1, 1995. Such information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operation," the combined financial statements of Suburban Lodges of America, Inc. and Affiliated Entities, the pro forma financial information for the Company and the notes thereto which are contained elsewhere in this Prospectus. The pro forma information does not purport to represent what the Company's financial position or results of operations actually would have been if such transactions had, in fact, occurred on such date or to project the Company's financial position or results of operations at any future date or for any future period. <TABLE> <CAPTION> NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, --------------------------------------------------- -------------------- 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- ------- --------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS: Revenue: Room revenue..................................... $ 2,055 $ 2,184 $ 2,893 $ 3,904 $ 4,431 $ 3,171 $ 5,329 Other facility revenue........................... 146 173 223 290 296 210 381 Franchise and other revenue...................... 51 194 247 151 460 315 703 ------- ------- ------- ------- ------- ------- --------- Total revenue.............................. 2,252 2,551 3,363 4,345 5,187 3,696 6,413 ------- ------- ------- ------- ------- ------- --------- Expenses: Facility operating expenses...................... 937 1,058 1,364 1,768 2,072 1,519 2,578 Corporate operating expenses..................... 336 378 429 737 883 554 974 Related party consulting fees.................... -- -- -- -- 17 9 10 Depreciation and amortization.................... 375 323 372 416 460 299 438 ------- ------- ------- ------- ------- ------- --------- Total expenses............................. 1,648 1,759 2,165 2,921 3,432 2,381 4,000 ------- ------- ------- ------- ------- ------- --------- Operating income.................................. 604 792 1,198 1,424 1,755 1,315 2,413 Interest income................................... -- -- -- -- -- -- 347 Interest expense.................................. (782) (614) (725) (936) (1,098) (688) (554) ------- ------- ------- ------- ------- ------- --------- Income (loss) before income taxes and extraordinary income............................ (178) 178 473 488 657 627 2,206 Income taxes (benefit)(1)......................... -- -- -- (14) (20) -- 586 Extraordinary income from early extinguishment of debt.......................................... -- -- -- 130 -- -- -- ------- ------- ------- ------- ------- ------- --------- Net income (loss).......................... $ (178) $ 178 $ 473 $ 632 $ 677 $ 627 $ 1,620 ======= ======= ======= ======= ======= ======= ========= Pro forma net income per share(2)................. $ 0.23 ========= Pro forma weighted average shares outstanding(2)................................... 5,918,623 CASH FLOW DATA: EBITDA(3)......................................... $ 979 $ 1,115 $ 1,570 $ 1,840 $ 2,215 $ 1,614 $ 2,851 Cash flows provided by (used in): Operating activities............................. (143) 399 879 929 1,305 927 2,158 Investing activities............................. (129) (15) (2,349) (651) (4,791) (3,168) (26,236) Financing activities............................. 348 (273) 1,561 (238) 3,707 2,446 43,100 OPERATING DATA(4): Number of facilities open at end of period: Company-owned.................................... 3 3 5 5 6 6 11 Franchised....................................... 1 3 3 4 6 5 8 ------- ------- ------- ------- ------- ------- --------- System-wide.................................... 4 6 8 9 12 11 19 ======= ======= ======= ======= ======= ======= ========= Company-owned facilities(5): Occupancy........................................ 90.9% 92.9% 95.5% 97.7% 95.8% 97.8% 92.4% Average weekly rate.............................. $111.34 $116.59 $121.96 $128.69 $136.77 $134.81 $ 157.88 Weekly REVPAR(6)................................. $101.26 $108.27 $116.47 $125.74 $130.93 $131.42 $ 143.45 Franchised facilities(5): Occupancy........................................ 88.4% 85.9% 96.8% 98.9% 93.2% 99.4% 90.7% Average weekly rate.............................. $107.42 $119.15 $123.21 $131.03 $146.34 $142.14 $ 166.58 Weekly REVPAR(6)................................. $ 94.96 $101.57 $119.23 $129.59 $135.44 $141.36 $ 149.94 <CAPTION> COMPANY PRO FORMA --------------------------------------- NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, ----------------------- 1995 1995 1996 ------------ --------- --------- <S> <C> <C> <C> STATEMENT OF OPERATIONS: Revenue: Room revenue..................................... $ 5,282 $ 3,814 $ 5,724 Other facility revenue........................... 345 247 413 Franchise and other revenue...................... 351 261 669 --------- ------- --------- Total revenue.............................. 5,978 4,322 6,806 --------- ------- --------- Expenses: Facility operating expenses...................... 2,458 2,029 2,903 Corporate operating expenses..................... 1,276 849 1,138 Related party consulting fees.................... 17 9 10 Depreciation and amortization.................... 697 479 585 --------- ------- --------- Total expenses............................. 4,448 3,366 4,636 --------- ------- --------- Operating income.................................. 1,530 956 2,170 Interest income................................... -- -- 347 Interest expense.................................. -- -- -- --------- ------- --------- Income (loss) before income taxes and extraordinary income........................... 1,530 956 2,517 Income taxes (benefit)(1)......................... 574 359 944 Extraordinary income from early extinguishment of debt............................................. -- -- -- --------- ------- --------- Net income (loss).......................... $ 956 $ 597 $ 1,573 ========= ======= ========= Pro forma net income per share(2)................. $ 0.14 $ 0.21 ========= ========= Pro forma weighted average shares outstanding(2)................................... 6,622,251 7,496,873 CASH FLOW DATA: EBITDA(3)......................................... -- -- -- Cash flows provided by (used in): Operating activities............................. -- -- -- Investing activities............................. -- -- -- Financing activities............................. -- -- -- OPERATING DATA(4): Number of facilities open at end of period: Company-owned.................................... 7 7 11 Franchised....................................... 5 4 8 --------- ------- --------- System-wide.................................... 12 11 19 ========= ======= ========= Company-owned facilities(5): Occupancy........................................ 96.3% 98.1% 92.7% Average weekly rate.............................. $ 135.91 $134.31 $ 157.59 Weekly REVPAR(6)................................. $ 130.76 $131.33 $ 143.57 Franchised facilities(5): Occupancy........................................ 91.6% 99.5% 90.1% Average weekly rate.............................. $ 150.54 $145.49 $ 167.28 Weekly REVPAR(6)................................. $ 137.01 $144.77 $ 149.91 </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1996 ---------------------- AS ACTUAL ADJUSTED(7) -------- ----------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents......................... $ 19,709 $ 72,337 Total assets...................................... 61,219 113,847 Long-term debt.................................... -- -- Shareholders' equity.............................. 58,641 111,270 </TABLE> (Notes on following page) - --------------- (1) Historical financial data does not include a provision for income taxes for Affiliated Entities because such entities were limited liability companies or partnerships not subject to income taxes. Income taxes or income tax benefits have been provided for Suburban Lodges of America, Inc. and its subsidiaries where appropriate under Statement of Financial Accounting Standards ("SFAS") 109, "Accounting for Income Taxes." Federal and state income taxes have been provided for the Company on a pro forma basis at a combined effective tax rate of 37.5%. See Note 8 to the Combined Financial Statements. (2) Earnings per share information for the historical nine months ended September 30, 1996 has been calculated by dividing net income, adjusted to provide for income taxes (approximately $827,000 for the nine months ended September 30, 1996), by the weighted average number of common shares outstanding during the period assuming that the shares issued in the Corporate Organization and the related stock split were issued on January 1, 1996. Pro forma earnings per share information for the year ended December 31, 1995 assumes that 6,622,251 shares were issued in connection with the Corporate Organization, the related stock split and the IPO on January 1, 1995. Shares outstanding for purposes of the calculation exclude 1,925,578 shares issued in the IPO relative to proceeds used for general corporate purposes. Pro forma earnings per share information for the pro forma nine months ended September 30, 1996 has been calculated by dividing pro forma net income by the weighted average number of common shares outstanding for the historical nine months ended September 30, 1996, adjusted to reflect the estimate of shares in the IPO on January 1, 1996 for which the proceeds were used for other than general corporate purposes. Outstanding shares of Suburban Lodges of America, Inc. differ substantially on a historical basis prior to the IPO from the shares of Common Stock outstanding after the IPO. Accordingly, the Company believes that the presentation of historical per share information for periods prior to the nine months ended September 30, 1996 is not meaningful. (3) EBITDA represents income (loss) before interest expense, income taxes (if applicable) and depreciation and amortization. EBITDA is a commonly used financial analysis tool for measuring and comparing lodging companies and other companies with significant amortization and depreciation expense and for analyzing operating performance, leverage and liquidity of such companies. Such data are not a measure of financial performance under generally accepted accounting principles and should not be considered as an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flow as a measure of liquidity. (4) Pro forma operating data includes the Forest Park facility, which was acquired from a third party in May 1996, as a Company-owned facility as if the acquisition had occurred on January 1, 1995. (5) Information for the nine month periods ended September 30, 1995 and 1996 is provided from the beginning of the first calendar month following the date of opening or acquisition of each facility, and all other information is presented from the date of opening or acquisition. (6) Weekly REVPAR is determined by dividing room revenue by the number of guest room days available for the period and multiplying by seven. (7) The as adjusted balance sheet data is presented as if the sale of 2,977,983 shares offered hereby by the Company and the application of the net proceeds therefrom had occurred on September 30, 1996. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001011451_mechanical_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001011451_mechanical_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Except as otherwise noted herein, all information in this Prospectus assumes that (1) the Company's capital structure was restructured as follows: (a) each outstanding share of Preferred Stock was converted into 1.36585 shares of Class A Common Stock (the "Preferred Conversion"); (b) each outstanding share of Class B Common Stock was converted into one share of Class A Common Stock (the "Class B Conversion"); (c) the "Class A" designation on the Common Stock was eliminated; and (d) a 1.5 for 1 share stock split of the Common Stock was completed (the "Stock Split"); and (2) the Underwriters' over-allotment option has not been exercised. See "Underwriting." THE COMPANY Mechanical Dynamics, Inc. ("MDI" or the "Company") is a leader in developing, marketing and supporting virtual prototyping solutions. MDI's virtual prototyping software allows the engineer or designer to design a complete product by simulating, both visually and mathematically, a product in motion. The Company's software products help engineers and designers create optimal designs before the physical testing process begins, improving the engineer's or designer's ability to create a design that will meet or exceed the initial product specifications. MDI's virtual prototyping software can reduce the requirement of building and testing numerous physical prototypes and can lead to significant cost savings as well as critical reductions in time-to-market. The traditional product development process consists of the design of a product followed by physical prototyping to test whether the product performs according to design specifications. Physical prototypes are constructed, tested under expected operating conditions to assist the engineer or designer in the visualization and validation of the product in motion and redesigned based on test data. The process is repeated until the performance of the physical prototype is acceptable to the engineer or designer, at which point the design is finalized and full scale production can commence. Companies typically find the physical prototyping process to be costly, time consuming and unreliable. MDI's virtual prototyping software simulates the many varied and complex component interactions and operating environments that companies face when designing their products, reducing the need for multiple physical prototypes. The Company's primary software product is the ADAMS Full Simulation Package, which can be used as self-contained software or with additional modules developed by the Company or with third party software. The Company also provides consulting, training and technical support services to assist its customers in integrating the Company's virtual prototyping software into their design and quality control processes. MDI's objective is to remain a leader in providing virtual prototyping solutions. The Company intends to maintain its core technology leadership, institutionalize virtual prototyping within companies, address vertical markets with customized packages and leverage its existing customer base and established distribution channels. The Company markets its products through direct sales in North America and in Europe, approximately 15 value-added resellers throughout North America, a group of international distributors in over 20 countries and through reselling alliances with certain computer-aided design, computer-aided manufacturing and computer-aided engineering software vendors. The Company's customers are from a wide variety of industries, including automotive, aerospace, electronics, biomechanical, general machinery and automobile racing. The following are customers from each of these categories from whom the Company received the most revenue in 1995: BMW, Borg-Warner Automotive, Inc., Ford Motor Company, The Goodyear Tire & Rubber Company, Lockheed Martin Corp., TRW Inc., Hitachi, Ltd., Mitsubishi Electric Corp., Johnson & Johnson, Komatsu and Williams Grand Prix Engineering, Ltd. The Company's principal offices are located at 2301 Commonwealth Blvd., Ann Arbor, Michigan 48105, and its telephone number at that address is (313) 994-3800. The Company can be reached on the World Wide Web at http://www.adams.com. [TRADITIONAL DESIGN PHOTO] [CONCEPT PHOTO] [DESIGN PHOTO] [PHYSICAL PROTOTYPE PHOTO] [FINISHED DESIGN PHOTO] [VIRTUAL PROTOTYPING PHOTO] [CONCEPT PHOTO] [VIRTUAL PROTOTYPING PHOTO] [DESIGN VERIFICATION PHOTO] [PHYSICAL PROTOTYPE & TESTING PHOTO] [FINISHED DESIGN PHOTO] Traditionally, an engineering team would build and test a series of physical prototypes before arriving at a satisfactory design -- typically a long labor-intensive effort. Using Mechanical Dynamics' ADAMS(R) software, an engineering team can cut time from this process. By modeling and testing their designs using Mechanical Dynamics' software, users can quickly examine multiple design iterations and arrive at a superior design before building physical prototypes. ------------------------ IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company...................................... 1,500,000 shares Common Stock offered by the Selling Shareholders......................... 875,000 shares Common Stock outstanding after the Offering(1)(2)........................ 5,379,637 shares Use of Proceeds.......................................................... For working capital and general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market Symbol................................... MDII </TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, --------------------------------------------------- ----------------- 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- ------ ------ (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENTS OF INCOME DATA: Revenue: Software licenses.................... $10,133 $ 8,980 $10,394 $ 9,478 $12,338 $2,688 $3,841 Services............................. 1,690 2,588 4,480 6,789 8,918 1,957 2,207 ------- ------- ------- ------- ------- ------ ------ Total revenue................. 11,823 11,568 14,874 16,267 21,256 4,645 6,048 Gross profit........................... 10,671 10,013 12,194 11,859 15,334 3,264 4,487 Operating income (loss)................ 667 (281) 1,804 635 1,666 194 573 Net income (loss)...................... $ 277 $ (686) $ 1,354 $ 450 $ 1,381 $ 163 $ 371 Accretion of value of warrants......... -- -- -- 664 234 51 -- Net income (loss) available to common shareholders......................... $ 277 $ (686) $ 1,354 $ (214) $ 1,147 $ 112 $ 371 ======= ======= ======= ======= ======= ====== ====== Pro forma net income (loss) per common share(2)............................. $ 0.09 $ (0.20) $ 0.38 $ (0.06) $ 0.30 $ 0.03 $ 0.10 ======= ======= ======= ======= ======= ====== ====== Pro forma weighted average common and common equivalent shares(2).......... 3,241 3,438 3,576 3,694 3,850 3,823 3,879 </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 ------------------------------------------ PRO FORMA ACTUAL PRO FORMA(2) AS ADJUSTED(3) ------ ------------ -------------- <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash.................................................... $1,518 $1,518 $ 14,588 Total assets............................................ 9,609 9,609 22,679 Long-term debt, less current portion.................... -- -- -- Redeemable common stock................................. 859 859 334 Total shareholders' equity.............................. 1,776 1,776 15,371 </TABLE> - --------------- (1) Based on the number of shares outstanding as of March 31, 1996. Does not include 76,671 shares issuable upon exercise of outstanding stock options, at exercise prices ranging from $0.25 to $0.93 per share, with a weighted average exercise price of $0.80 per share, under the Company's 1995 Amended and Restated Stock Purchase Plan and the Company's 1993 Stock Option Plan. All but 7,500 shares subject to options are immediately exercisable. The remaining 7,500 shares subject to options will become exercisable in April 1997. In April 1996, all four non-employee directors of the Company each received options to purchase 5,000 shares of the Company's Common Stock at an exercise price equal to the per share price to the public in connection with the Offering. These options all become fully exercisable and fully vested in April 1997 and expire in April 2001. In addition, in April 1996, 43 employees of the Company were granted options to purchase an aggregate of 82,500 of the Company's Common Stock. These options all become fully exercisable and fully vested in April 1997 at $9.00 per share and expire in April 2001. (2) Assumes completion of (i) the Preferred Conversion, (ii) the Class B Conversion, and (iii) the Stock Split. See Note 1 of Notes to Consolidated Financial Statements for an explanation of the method used to determine the number of shares used to compute per share amounts. (3) Adjusted to give effect to (i) the sale by the Company of the 1,500,000 shares of Common Stock offered hereby at an assumed initial public offering price of $10.00 per share and the application of the estimated net proceeds therefrom and (ii) the termination of redemption privileges for 65,644 shares of redeemable common stock upon the sale of this stock in the Offering. These shares were received by the holder in connection with the acquisition of certain European subsidiaries. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001011582_digene_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001011582_digene_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..ba39f264cc39ad03b3daaeb8376f0bc525833076
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Financial Statements and Notes thereto appearing elsewhere in this Prospectus, including the information under "Risk Factors." This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed under "Risk Factors." THE COMPANY Digene develops, manufactures and markets DNA testing systems for the screening, monitoring and diagnosis of human diseases. The Company's products are designed to help improve clinical outcomes and reduce the overall cost of disease management. Digene's lead product, the Hybrid Capture HPV DNA test, detects the presence of human papillomavirus ("HPV"), the primary cause of cervical cancer, which is the second most common cancer among women worldwide. The Company's HPV test for the follow-up screening of women with equivocal Pap smears is the first HPV test to have been approved for marketing in the United States by the U.S. Food and Drug Administration (the "FDA"). The Company's objective is to establish its HPV test as the new standard of care for cervical cancer screening. Virtually all cervical cancer is preventable if detected in the precancerous stage. To enable the early detection of cervical cancer, gynecologists typically recommend annual Pap smear tests. More than 50 million Pap smears are performed annually in the United States, and the Company believes that an equivalent number are performed in the rest of the world. Although the Pap smear has been successful in reducing deaths due to cervical cancer in the United States, Pap smears have significant limitations. These limitations include a substantial number of Pap smears which yield inconclusive results ("equivocal" Pap smears) or which are misinterpreted as normal ("false negatives"). Many women with equivocal Pap smears are treated as if they have abnormal Pap smears even though only an estimated 25% to 35% of these women actually have cervical disease. As a result, many women with equivocal Pap smears undergo unnecessary, invasive and expensive follow-up procedures. False negative diagnoses may result in the failure to detect cervical cancer at an early stage. The resultant delays in treatment may allow the disease to progress further, thereby increasing the need for invasive and costly treatments, reducing the efficacy of available therapies and reducing the likelihood of patient survival. The Company's HPV test is a rapid, accurate, objective and non-invasive method to screen women for the presence of HPV. Clinical studies indicate that Digene's HPV test is capable of detecting cervical disease in up to 92% of the cases in which cervical disease is present. This represents a significant improvement over the Pap smear's estimated sensitivity of 60% to 80%. In addition, studies indicate that when used in conjunction with Pap smear testing, the Company's HPV test can detect 95% to 100% of high grade lesions and virtually all instances of cervical cancer. The Company believes that the sensitivity of its HPV test has the potential to significantly reduce the number of false negative diagnoses. In addition, the Company believes that testing for HPV has considerable predictive value. In one study, approximately 80% of women with a history of normal Pap smears who tested positive for cancer-causing types of HPV developed clinically significant cervical lesions within four years. The Company incorporates proprietary DNA sequences for certain HPV types into its HPV test. The Company believes that for a competing HPV test to be commercially viable, it must be able to detect the HPV types for which the Company has non-exclusive proprietary rights covering the DNA sequences. The Company has recently commenced marketing its HPV test for the follow-up screening of the approximately 3.5 million women in the United States each year with equivocal Pap smears. By testing these women for the presence of cancer-causing types of HPV, clinicians will be able to identify those women who are most at risk for having or developing cervical disease at a fraction of the cost of most other follow-up procedures. Only those women who test positive for cancer-causing types of HPV would go on to receive more costly and invasive follow-up procedures. The Company intends to seek FDA approval in the future to market its HPV test as a primary cervical cancer screen either in conjunction with or separate from Pap smear testing. The Company currently markets its HPV test through distributors in the United Kingdom, Germany, France, Spain, Italy and Brazil. In many countries outside the United States, Pap smears are not widely used or are unavailable. The Company intends to seek regulatory approval to market its HPV test internationally as a primary cervical cancer screening test either in conjunction with or separate from Pap smear testing. The Company is also developing a test to detect the presence of cytomegalovirus ("CMV"). CMV infection is a serious and growing health care problem. Active CMV infection causes blindness in many AIDS patients and is a major cause of infection and mortality in organ transplant recipients. An estimated $1 billion is spent annually in the United States on the prevention and treatment of CMV-related diseases. All of the current methods available to detect the presence of CMV have significant limitations. The Company's Hybrid Capture CMV DNA test provides clinicians with an accurate and timely means of diagnosing and monitoring CMV infection. The Company is currently conducting clinical trials of its CMV test at The Mayo Clinic and The Cleveland Clinic. The Company expects to complete these trials in the third quarter of 1996 and submit a 510(k) premarket notification to the FDA by the end of 1996. There can be no assurance that the Company will receive such clearance. The key elements of the Company's business strategy include (i) establishing HPV testing as the new standard of care for cervical cancer screening by working closely with clinical reference laboratories, third-party payors and health care providers; (ii) focusing the Company's initial marketing efforts on the use of its HPV test for the follow-up screening of women with equivocal Pap smears; (iii) expanding the Company's sales and marketing capabilities; (iv) pursuing strategic alliances to increase market acceptance of its products and to expand marketing efforts; and (v) capitalizing on its core technology and expertise to develop a wide range of DNA diagnostic and monitoring tests. The basis for the Company's HPV and CMV tests is its proprietary Hybrid Capture technology. The Company believes that its Hybrid Capture system is a significant improvement over existing technologies because of its specificity, shortened processing time, ease of use and greater accuracy. The Company is also using its Hybrid Capture technology as a platform to develop a wide range of DNA diagnostic and monitoring tests for blood viruses, sexually transmitted diseases and opportunistic infections. Digene was incorporated under Delaware law in 1987, succeeding to the business of a partnership organized in 1985. The Company's principal executive office is located at 2301-B Broadbirch Drive, Silver Spring, Maryland 20904, and its telephone number is (301) 470-6500.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001011586_geoscience_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001011586_geoscience_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..325d4976dc0fd1a3f7aac60d2e5103ec292aa1f7
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE SPECIFIED, REFERENCES IN THIS PROSPECTUS TO "GEOSCIENCE" OR THE "COMPANY" SHALL MEAN GEOSCIENCE CORPORATION AND ITS CONSOLIDATED SUBSIDIARIES AND THEIR PREDECESSORS. UNLESS OTHERWISE INDICATED, INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE OVER-ALLOTMENT OPTION GRANTED TO THE UNDERWRITERS IS NOT EXERCISED. THE COMPANY GeoScience Corporation is a designer, developer and manufacturer of seismic data acquisition systems, geoscientific software and related products. The Company's products are used worldwide in the oil and gas exploration and production industry to identify, define and visualize subsurface geologic structures, primarily to predict the existence and location of oil and gas reserves. The Company's seismic data acquisition systems are used to collect seismic data in marine, transition zone (shallow water and marsh) and land environments, and are well-suited for advanced three-dimensional ("3-D") data collection techniques, including use in connection with time-lapsed 3-D ("4-D") reservoir monitoring activities. The Company's geoscientific software is used primarily by geologists and geophysicists to process and interpret seismic data and to visualize geological structures in three dimensions. The Company's principal customers are major, independent and foreign national oil and gas companies, seismic contractors, geophysical contractors and government agencies around the world. During 1995, approximately 70% of the Company's revenue was attributable to customers outside the United States. Seismic surveys and the analysis of seismic and geological data play an essential role in oil and gas exploration and development. Recent improvements in advanced 3-D seismic data acquisition systems, seismic survey techniques and interpretation and visualization capabilities of geoscientific software have significantly increased the quality and quantity of data available to geoscientists, thereby improving the cost-effectiveness of large-scale 3-D seismic data acquisition and geoscientific interpretation projects. In addition, the use of advanced 3-D seismic surveys has increased the drilling success rate experienced by many oil and gas companies. As a result, 3-D projects utilizing these advanced technologies have been accepted in the oil and gas industry as an exploration risk management tool and for field development and are increasingly employed in reservoir monitoring activities. SEISMIC DATA ACQUISITION SYSTEMS. The Company's broad range of seismic data acquisition systems, which are manufactured and marketed by the Company's subsidiary Syntron, Inc. ("Syntron"), include systems designed for use in conducting seismic surveys in marine, transition zone and land environments. These systems collect acoustic energy produced by air guns, dynamite and other sound sources that are reflected from subsea or underground geological formations. The acoustic energy is collected by remote sensors in the water, on the ocean floor or on land and converted to digital signals that are transmitted by wireline or radio telemetry to a recording unit. The recording unit simultaneously records the digital signals collected from the multiple sensors to produce integrated seismic data in a form that can be processed and interpreted. The Company is a leading designer and manufacturer of seismic data acquisition systems utilized in deepwater marine and ocean bottom environments. The Company's SYNTRAK 480 marine system can be configured to simultaneously record more than 5,000 channels of seismic data that are collected and transmitted through up to 12 towed streamer arrays. The Company believes that this capability is the most technologically advanced in the industry. The Company's OCEAN BOTTOM CABLE System can also simultaneously record more than 5,000 channels of seismic data that are collected and transmitted by cables positioned on the floor of the ocean or other body of water. These cables may be positioned temporarily for a single seismic survey or positioned permanently for purposes of 4-D seismic surveys 3 in connection with advanced reservoir monitoring activities. The Company has recently introduced its SYNTRAK 480 24-bit data acquisition module as the successor to its 16-bit module for use in the Company's marine and ocean bottom seismic data acquisition systems. The new SYNTRAK 480 24-bit module has fewer components, improved reliability, smaller size and improved system performance, including lower distortion and a higher instantaneous dynamic range than the previous module. The 24-bit module is designed to be incorporated with the Company's marine seismic data acquisition systems as a replacement for the 16-bit module, and the Company believes there is a significant replacement market for the 24-bit module from the Company's existing customer base. The Company has also recently introduced the POLYSEIS System, a 24-bit radio telemetry data acquisition system designed for use in transition zones and on land. This system utilizes remote data acquisition modules that may be configured to use radio or wireline telemetry, or a combination of both, to permit the simultaneous acquisition of seismic data from transition zone and land environments. The ability to utilize radio telemetry is especially useful in difficult terrain such as swamps or mountains or in environmentally sensitive areas where wireline telemetry methods are not desirable. GEOSCIENTIFIC SOFTWARE. The Company, operating through its subsidiary CogniSeis Development, Inc. ("CogniSeis"), develops, markets and supports a full line of applications software for use in processing seismic data and interpreting and visualizing geophysical and geological data, such as seismic data and well logs. Since its introduction in 1980, the Company's applications software for processing seismic data has gained wide acceptance among major, independent and foreign national oil and gas companies and seismic processing contractors. The Company has continued to introduce improved seismic processing software, including FOCUS 3D, an application that provides interactive 3-D processing for computer workstations as well as special interpretation and graphical capabilities. The Company also designs and markets seismic interpretation and visualization software for use by geologists and geophysicists, including the SEISX software designed by the Company's subsidiary Photon Systems Ltd. The Company has recently introduced several new products designed to integrate the processing and interpretation of 3-D seismic data as well as to provide enhanced 3-D visualization. A significant percentage of the Company's software customers pay fees that entitle them to software upgrades and maintenance support. The Company believes that this program promotes continued customer loyalty. GROWTH STRATEGY The Company's growth strategy is focused on (i) the development of technologically advanced products, (ii) the integration of seismic data acquisition, seismic data processing and geological interpretation and (iii) the acquisition of product lines or businesses to complement internal product development. These key elements of the Company's growth strategy can be summarized as follows: o DEVELOPMENT OF TECHNOLOGICALLY ADVANCED PRODUCTS. The Company is committed to developing technologically advanced products through extensive new product development activities. The Company devoted $9.8 million, $10.4 million and $12.8 million to research and development in 1993, 1994 and 1995, respectively (or 16.2%, 16.4% and 15.2% of revenue for these periods, respectively). These efforts have resulted in the development of new and improved products, including the SYNTRAK 480 24-bit module, the POLYSEIS System and FOCUS 3D. The Company intends to continue to focus on the development of products for use in reservoir monitoring activities. In addition, the Company is developing a seismic data acquisition system utilizing the existing radio telemetry technology of the POLYSEIS System that would be capable of simultaneously recording a significantly greater number of channels than existing systems for use in connection with large scale 3-D seismic surveys conducted on land. o INTEGRATION OF DATA ACQUISITION, PROCESSING AND INTERPRETATION. The Company has developed products that allow the Company's customers to integrate the acquisition of seismic data with 4 seismic processing and geologic interpretation to decrease the overall cycle time involved with these processes and to ensure the quality of data through compatibility of systems. The Company has also developed the ability to process seismic data in the field simultaneously with the acquisition of seismic data, which allows the Company's customers to utilize the data more efficiently. In addition, the Company is proceeding with the integration of its various seismic processing, geological interpretation and visualization software programs to facilitate the manipulation of data and to decrease the cycle time necessary to process, interpret and visualize data. The Company believes that the integration of these processes will increase the demand for its products in exploration, development drilling and reservoir monitoring activities. o STRATEGIC ACQUISITIONS. The Company has recently completed several acquisitions that complement and expand its product lines. In June 1995, the Company completed the acquisition of CogniSeis, a company that designs, develops and markets geoscientific software and related products. In August 1995, the Company acquired the rights to develop, market and sell VOXELGEO, a computer software program used by geologists and geophysicists to interpret and visualize seismic data on a 3-D basis. In September 1995, the Company acquired Photon Systems Ltd., a company that develops, markets and licenses seismic and geologic interpretation systems. In October 1995, the Company expanded its product line to include fiber optic and copper wire seismic cables and associated connectors by acquiring the business and assets of Primatek Industries, Inc. The Company continues to evaluate potential acquisitions of businesses and product lines that the Company believes would complement its existing business. EXECUTIVE OFFICES The Company's executive offices are located at 10500 Westoffice Drive, Suite 200, Houston, Texas 77042-5391 and its telephone number is (713) 785-7790. TECH-SYM CORPORATION The Company is currently wholly owned by Tech-Sym Corporation ("Tech-Sym"), the common stock of which is publicly traded on the New York Stock Exchange. Tech-Sym is a diversified electronics engineering and manufacturing company primarily involved, through its subsidiaries, in the design, development and production of products used for communications and defense systems. Tech-Sym is also involved, through the Company, in the design, development and production of seismic data acquisition systems, geoscientific software and related products. Following the Offering, Tech-Sym will own approximately 79.4% of the Company's outstanding Common Stock (77.0% if the Underwriters over-allotment option is exercised in full). In addition, Tech-Sym and the Company have entered into several agreements governing their relationship following the Offering. See "Relationship with Tech-Sym." MULTITRAK(TM), SYNTRAK(TM), SYNTRAK 480(TM), SYNTRON(TM), GEOSEC(TM) AND COGNISEIS DEVELOPMENT, INC.(TM) ARE REGISTERED UNITED STATES TRADEMARKS OF THE COMPANY. APPLICATION HAS BEEN MADE TO REGISTER TERRACUBE AND SYNTRAK 480-24 AS UNITED STATES TRADEMARKS. 5 THE OFFERING Shares of Common Stock Offered....... 2,000,000 shares Shares of Common Stock to be Outstanding after the Offering..... 9,700,000 shares(1) Use of Proceeds...................... To retire indebtedness and for general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market Symbol............................. GSCI - ------------ (1) Does not include 300,000 shares subject to the Underwriters' over-allotment option and 1,500,000 shares reserved for issuance under the Company's 1996 Equity Incentive Plan. See "Management -- Equity Incentive Plan."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001011661_ss-c_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001011661_ss-c_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..98f89fe0d0c5b66ba9374818cf08a8c2f7ec1104
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors," and the financial statements and related notes appearing elsewhere in this Prospectus. THE COMPANY SS&C Technologies, Inc. ("SS&C" or the "Company") is a leading provider of client/server-based software solutions, and related consulting services, designed to improve the efficiency and effectiveness of the investment management function within a broad range of organizations in the financial services industry. The Company has developed a family of software products that provides a full range of mission-critical information management and analysis, accounting, reporting and compliance tools to help high-level investment professionals make informed, real-time decisions and automate many operational functions in today's increasingly complex and fast-moving financial markets. The Company's products are focused on improving the effectiveness of decision making through open, fully integrated access to the quantitative analysis of transactions-based data, allowing investment professionals to manage and analyze large amounts of data both in the aggregate and in detail on a timely basis. The financial services industry, which comprises organizations such as asset managers, insurance companies, banks, mutual funds, public and private pension funds, hedge funds, corporate treasuries and government agencies, is characterized by rapidly changing market conditions, increasing trading and monetary transaction volumes, asset and securities products proliferating both in number and complexity and regulation by a range of governmental and self- regulatory organizations. These characteristics have created an increasing gap between the amount and complexity of data that must be managed and analyzed by investment professionals and the resources currently available to effectively meet their requirements. The legacy computing applications maintained by many financial service organizations require large MIS departments, are expensive to implement, support and modify, and have limited interoperability with the variety of information resources and systems in today's computing environment, limiting and isolating their effectiveness to support critical information management and analysis. The Company's family of client/server-based software products includes CAMRA, a comprehensive application for the integrated management of asset portfolios; FILMS, which supports the integrated management of mortgage loan portfolios; PTS, an asset/liability management and pricing product for use by insurance and other financial service organizations; FOTOS, for the automation of order processing; and quantitative analysis tools such as Allocator Plus, which supports portfolio managers and custodians in the TBA (To Be Announced) mortgage-backed securities markets. The Company provides products and services to over 300 organizations worldwide, with aggregate assets under management in excess of $685 billion, and its customers include Bankers Trust Company, Commercial Union, Conning & Company, The Guardian, John Hancock Mutual Life, Kemper Financial Services, Liberty Mutual, Merrill Lynch Insurance Group, The St. Paul Companies, Walt Disney and the states of Florida, Kentucky, Michigan and Texas. The Company believes that its ability to offer a broad range of highly functional software applications is a key competitive advantage, and it intends to build upon this base by continuing to enhance the functionality and interoperability of its existing products and broadening the adoption of its products by additional organizations within various segments of the financial services industry. The Company will continue to emphasize its comprehensive consulting and support services to facilitate the timely installation and implementation of its products, as well as its outsourcing of investment analysis and management functions. The Company also intends to further leverage its reputation and product base by expanding international operations and by pursuing strategic opportunities, including acquisitions, alliances or other partnerships, in order to increase the breadth of its product offerings, establish new sales and marketing channels and exploit evolving market opportunities. The Company believes that a direct sales organization is essential to the implementation of its business strategy of becoming the leading worldwide provider of client/server-based software solutions, and related consulting services, that automate and simplify the management and analysis of the vast amounts of information being delivered to, or produced by, financial service organizations. The Company therefore maintains a sales and support staff of 31 persons in 12 offices worldwide, and intends to continue to expand this network in 1996. The Company, which was formerly known as Securities Software & Consulting, Inc., was organized as a Connecticut corporation in March 1986 and reincorporated in Delaware in April 1996. The Company's principal office is located at Corporate Place, 705 Bloomfield Avenue, Bloomfield, Connecticut 06002, and its telephone number is (860) 242-7887. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company......... 3,026,250 shares Common Stock offered by the Selling Stockholders............................... 723,750 shares Common Stock to be outstanding after the offering................................... 12,120,420 shares(1) Use of Proceeds............................. Working capital and other general corporate purposes. See "Use of Proceeds." Nasdaq National Market symbol............... SSNC </TABLE> - -------- (1) Based upon the number of shares outstanding as of April 30, 1996. Excludes 1,642,000 shares of Common Stock issuable upon the exercise of outstanding options on that date, of which options to purchase 352,063 shares were then exercisable, at exercise prices ranging from $.07 to $9.00 per share. See "Management--Executive Compensation." SUMMARY CONSOLIDATED FINANCIAL INFORMATION (in thousands, except per share data) <TABLE> <CAPTION> THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ------------------------------------- ----------------- 1991 1992 1993 1994 1995(2) 1995(2) 1996 ------ ------- ------ ------ ------- -------- ------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenues.......... $3,926 $ 2,656 $5,226 $9,268 $18,802 $ 2,633 $ 6,880 Operating income (loss)................. 253 (1,691) 869 1,556 (7,397) (7,898) 533 Net income (loss)....... $ 128 $(1,414) $ 551 $ 883 $(4,349) $ (4,631) $ 313 Pro forma net income (loss) per common and common equivalent share(1)............... $ (.49) $ .03 Pro forma weighted average number of shares outstanding(1).. 8,911 10,126 </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 ---------------------- ACTUAL AS ADJUSTED(3) ------- -------------- <S> <C> <C> BALANCE SHEET DATA: Working capital.......................................... $ 1,948 $46,279 Total assets............................................. 21,102 65,433 Long-term debt........................................... 450 450 Total stockholders' equity............................... 9,807 54,138 </TABLE> - -------- (1) See Note 2 of Notes to the Company's Consolidated Financial Statements. (2) Reflects a write-off of approximately $7.9 million of in-process research and development incurred in connection with the Company's acquisition of substantially all of the assets and operations of Chalke Incorporated on March 31, 1995. The write-off of in-process research and development, after tax, increased 1995 net loss and net loss per common and common equivalent share by $4.8 million and $.80, respectively. See "Certain Transactions" and Notes 2 and 11 of Notes to the Company's Consolidated Financial Statements. (3) Adjusted to give effect to the sale by the Company of 3,026,250 shares of Common Stock offered hereby (at an assumed public offering price of $16.00 per share and after deducting the estimated underwriting discounts and commissions and estimated offering expenses) and the application of the net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001011693_harborside_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001011693_harborside_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary should be read in conjunction with, and is qualified in its entirety by reference to, the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Prospective investors should carefully consider the information set forth under the heading "Risk Factors." Unless otherwise indicated, the information in this Prospectus assumes (i) the consummation of the transactions relating to the formation of the Company described herein under the heading "The Reorganization" (such transactions are hereinafter referred to as the "Reorganization") and (ii) that the Underwriters' over-allotment option is not exercised. References in this Prospectus to the "Company" or "Harborside Healthcare" refer to Harborside Healthcare Corporation, its combined affiliates and partnerships and their predecessors, or any of them, depending on the context. THE COMPANY Harborside Healthcare provides high quality long-term care, subacute care and other specialty medical services in four principal regions: the Southeast (Florida), the Midwest (Ohio and Indiana), New England (New Hampshire) and the Mid-Atlantic (New Jersey and Maryland). Within these regions, the Company operates 26 licensed long-term care facilities (9 owned and 17 leased) with a total of approximately 3,000 licensed beds. After giving effect to the pending acquisition of four facilities in Ohio (the "Ohio Facilities"), the Company will operate 30 long-term care facilities (13 owned and 17 leased) with a total of 3,700 licensed beds. The Company provides traditional skilled nursing care, a wide range of subacute care programs (such as orthopedic, cerebrovascular accident ("CVA")/stroke, cardiac, pulmonary and wound care), as well as distinct programs for the provision of care to Alzheimer's and hospice patients. In addition, the Company provides certain rehabilitation therapy and behavioral health services both at Company-operated and non-affiliated facilities. The Company seeks to position itself as the long-term care provider of choice to managed care and other private referral sources in its target markets by achieving a strong regional presence and by providing a full range of high quality, cost effective nursing and specialty medical services. Since commencing operations in 1988, the Company has experienced significant growth through strategic acquisitions in states it believes possess favorable demographic and regulatory environments, as well as through the expansion of subacute care and other specialty medical services provided at its long-term care facilities. Since 1993 and after giving effect to the recent and pending transactions, the Company increased its overall patient capacity by approximately 1,550 licensed beds, or 72.2%. During the same period, the Company also improved its overall quality mix (defined as net patient service revenues derived from Medicare, commercial insurance and other private payors) from 61.1% to 65.4% of net patient service revenues for the years ended December 31, 1993 and 1995, respectively, primarily as a result of the Company's rapid expansion of its subacute care and other specialty medical services. For the three months ended March 31, 1996, during which the Company began leasing six additional long-term care facilities in New Hampshire with approximately 540 beds (the "New Hampshire Facilities"), the Company's quality mix was 60.1% (31.8% private and other and 28.3% Medicare) and its average occupancy rate was 91.3%. The Company believes that its quality mix and its average occupancy rate have consistently been among the highest in the long- term care industry. The Company intends to continue to grow by (i) selectively acquiring additional long-term care facilities in its existing and in new geographic regions, (ii) expanding the range of subacute care provided, including the addition of distinct COMPASS (COMprehensive Patient Active Subacute Systems) subacute care units, (iii) expanding its existing rehabilitation therapy and behavioral healthcare businesses, (iv) developing and acquiring new ancillary service operations, such as institutional pharmacy, home healthcare and infusion therapy and (v) expanding its Alzheimer's and hospice care programs. In keeping with its growth strategy, starting in January 1996, the Company began leasing the New Hampshire Facilities. Subsequently, the Company also entered into an agreement to acquire the four Ohio Facilities with approximately 700 licensed beds pursuant to a capital lease transaction (the "Ohio Transaction"), thereby further strengthening its existing Midwest regional presence. Collectively, the New Hampshire and Ohio transactions represented approximately $54.3 million in combined total net revenues for the year ended December 31, 1995. Since 1994, the Company has also successfully implemented subacute care programs at 24 of its long-term care facilities, added approximately 170 distinct COMPASS beds, expanded the number of distinct Alzheimer's and hospice care beds to 132 and expanded its rehabilitation therapy business to include 35 contracts with non-affiliated long-term care facilities. The Company believes that its strategy of concentrating its operations in selected geographic markets and complementing its long-term care platform with a wide range of specialty medical and other ancillary services will enable it to benefit from economies of scale and improve its ability to penetrate regional managed care markets. Although the Company is continuously discussing with third parties the possible acquisition of additional long-term care facilities, the Company does not at this time have any firm commitments to make any material acquisitions of long-term care facilities other than the Ohio Transaction, nor has it identified any material, specific ancillary business acquisitions. The Company believes that it is favorably positioned to benefit from trends impacting the healthcare industry, including favorable demographic shifts, advances in medical technology and continuing public and private pressures to contain growing healthcare costs. At the same time, government restrictions and high construction and start-up costs are expected to continue to constrain the supply of long-term care and subacute facilities. The Company further believes that an increasingly complex operating environment is motivating smaller, less efficient long-term care facility operators to combine with or sell to established operators. Harborside Healthcare expects that such recent trends toward industry consolidation will continue and will provide it with future acquisition opportunities. THE OFFERING <TABLE> <S> <C> Common Stock offered............... 3,600,000 shares Common Stock to be outstanding after the Offering(1)............. 8,000,000 shares Use of Proceeds.................... The Company will use the net proceeds from the Offering as follows: (i) approximately $26.7 million to repay mortgage indebtedness, including a related prepayment penalty (the "Debt Repayment"); (ii) $3.8 million to partially fund an option to purchase the Ohio Facilities at the end of the capital lease term; (iii) approximately $960,000 for payments to certain of the Company's key employees under existing plans and arrangements; and (iv) the remainder for general corporate purposes, including working capital and acquisitions. See "Use of Proceeds," and "Management--Employment Agreements and Change of Control Arrangements." New York Stock Exchange Symbol..... "HBR" </TABLE> - -------- (1) Excludes 800,000 shares of Common Stock reserved for issuance pursuant to the Company's stock and stock option plans, under which, upon consummation of the Offering, options to purchase 420,000 shares at an exercise price equal to the initial public offering price will be granted and options to purchase 80,000 shares at an exercise price of $8.15 per share will be granted in substitution for previously granted options to purchase interests in one of the Company's predecessors. See "Management--Stock Option Plans" and "Description of Capital Stock." SUMMARY COMBINED FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT SHARE, PER SHARE AND OTHER DATA) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31, --------------------------------------------------------- ----------------------------------------------- 1995 PRO FORMA AS ADJUSTED 1996 PRO FORMA AS ADJUSTED ----------------------------- ----------------------------- BEFORE OHIO INCLUDING OHIO BEFORE OHIO INCLUDING OHIO 1993 1994 1995 TRANSACTION(2) TRANSACTION(3) 1995 1996 TRANSACTION(4) TRANSACTION(5) ------- ------- -------- -------------- -------------- ------- ------- -------------- -------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA(1): Total net revenues(6)...... $75,101 $86,376 $109,425 $ 131,381 $ 163,698 $23,777 $34,931 $ 34,931 $ 43,203 ------- ------- -------- --------- --------- ------- ------- --------- --------- Expenses: Facility operating........ 57,412 68,951 89,378 106,584 131,244 19,734 28,120 28,120 34,463 General and administrative... 3,092 3,859 5,076 5,958 6,638 1,141 2,235 2,235 2,405 Service charges paid to affiliate........ 746 759 700 700 700 177 185 185 185 Depreciation and amortization..... 4,304 4,311 4,385 2,155 3,350 1,043 539 539 838 Facility rent.... 525 1,037 1,907 9,882 9,882 392 2,545 2,545 2,545 ------- ------- -------- --------- --------- ------- ------- --------- --------- Total expenses.. 66,079 78,917 101,446 125,279 151,814 22,487 33,624 33,624 40,436 ------- ------- -------- --------- --------- ------- ------- --------- --------- Income from operations....... 9,022 7,459 7,979 6,102 11,884 1,290 1,307 1,307 2,767 Interest expense, net.............. (4,740) (4,609) (5,107) (1,343) (5,692) (1,264) (975) (295) (1,382) Loss on investment in limited partnership(7)... -- (448) (114) (114) (114) (81) (127) (127) (127) Other, net....... (2,297) (2,028) (1,524) -- -- (185) -- -- -- ------- ------- -------- --------- --------- ------- ------- --------- --------- Net income (loss)........... 1,985 374 1,234 4,645 6,078 (240) 205 885 1,258 Pro forma data: Pro forma income taxes(8)......... 774 146 481 1,812 2,371 (94) 80 345 491 ------- ------- -------- --------- --------- ------- ------- --------- --------- Pro forma net income (loss)(8)........ $ 1,211 $ 228 $ 753 $ 2,833 $ 3,707 $ (146) $ 125 $ 540 $ 767 ======= ======= ======== ========= ========= ======= ======= ========= ========= Pro forma net income per share(8)......... $ 0.35 $ 0.46 $ 0.07 $ 0.10 Pro forma weighted average shares outstanding(9)... 8,052,160 8,052,160 8,052,160 8,052,160 OTHER DATA(1): Facilities (as of end of period): Owned(10)(11).... 15 16 9 9 13 9 9 9 13 Leased(11)....... 2 3 11 17 17 10 17 17 17 ------- ------- -------- --------- --------- ------- ------- --------- --------- Total............ 17 19 20 26 30 19 26 26 30 Licensed beds (as of end of period): Owned(10)(11).... 1,860 1,976 1,028 1,028 1,720 1,022 1,028 1,028 1,720 Leased(11)....... 289 389 1,443 1,980 1,980 1,343 1,980 1,980 1,980 ------- ------- -------- --------- --------- ------- ------- --------- --------- Total............ 2,149 2,365 2,471 3,008 3,700 2,365 3,008 3,008 3,700 Average occupancy rate(12)......... 92.5% 91.5% 91.5% 91.9% 92.2% 90.9% 91.3% 91.3% 91.8% Sources of net patient service revenues(13): Private and other(14)........ 39.9% 37.1% 32.3% 33.0% 32.9% 34.2% 31.8% 31.8% 31.8% Medicare......... 21.2% 24.9% 33.1% 27.4% 27.0% 30.6% 28.3% 28.3% 27.3% Medicaid......... 38.9% 38.0% 34.6% 39.6% 40.1% 35.2% 39.9% 39.9% 40.9% </TABLE> <TABLE> <CAPTION> AS OF MARCH 31, --------------------------------------- 1996 PRO FORMA AS ADJUSTED ------------------------------- BEFORE OHIO INCLUDING OHIO 1996 TRANSACTION(15) TRANSACTION(16) ------- --------------- --------------- <S> <C> <C> <C> BALANCE SHEET DATA(1): Cash and cash equivalents............... $10,000 $23,090 $ 17,590 Working capital......................... 12,395 26,266 17,164 Total assets............................ 63,378 76,396 133,935 Total debt.............................. 43,422 18,422 75,961 Stockholders' equity.................... 5,001 43,019 43,019 </TABLE> - ------ (1) Harborside Healthcare has been created in anticipation of the Offering in order to combine under its control the operations of the long-term care facilities and ancillary businesses that are currently under the control of The Berkshire Companies Limited Partnership ("Berkshire") and its affiliates. See "The Reorganization." The Company's financial and operating data above combine the historical results of these business entities. (2) Gives effect to the consummation of (i) the lease of the New Hampshire Facilities by the Company on January 1, 1996 (the "New Hampshire Transaction"); (ii) the sale by Krupp Yield Plus Limited Partnership ("KYP") of seven long-term care facilities (the "Seven Facilities") to Meditrust, a real estate investment trust ("Meditrust"), on December 31, 1995 and the subsequent distribution of $33,493,000 payable to the limited partners of KYP (the "KYP Unitholders") as of December 31, 1995 in connection with the liquidation of that partnership (the "Distribution"); (iii) the lease of the Seven Facilities by the Company on December 31, 1995 (the "1995 REIT Lease"); and (iv) the Offering and the application of the net proceeds therefrom (assuming an initial public offering price of $12.50 per share), as if such transactions had occurred on January 1, 1995. (3) Gives effect to the transactions described in Note (2) above and the pending Ohio Transaction as if such transactions had occurred on January 1, 1995. The Ohio Transaction will be accounted for as a capital lease as a result of the bargain purchase option granted at the end of the lease term. This accounting treatment will result in an increase in depreciation and amortization expense of $1,195,000 and an increase in interest expense, net, of $4,349,000. The Company expects to complete the Ohio Transaction in the third quarter of 1996, subject to the satisfaction of certain customary conditions, including the satisfactory completion of the Company's due diligence review and receipt of regulatory and other approvals. (4) Gives effect to the consummation of the Offering and the application of the net proceeds therefrom (assuming an initial public offering price of $12.50 per share), as if the Offering had occurred on January 1, 1995. (5) Gives effect to (i) the consummation of the Offering and the application of the net proceeds therefrom (assuming an initial public offering price of $12.50 per share), and (ii) the pending Ohio Transaction, as if the transactions had occurred on January 1, 1995. The Ohio Transaction will result in an increase in depreciation and amortization expense for the period of $299,000 and an increase in interest expense, net, for the period of $1,087,000. (6) Total net revenues include net patient service revenues from the Company's facilities and revenues from ancillary services provided at non-affiliated long-term care facilities. Total net revenues exclude net patient service revenues from the Larkin Chase Nursing and Restorative Center (the "Larkin Chase Center"), but include management fees and rehabilitation therapy service revenues from such facility. See "Business--Properties" and Note F to the Company's audited combined financial statements included elsewhere in this Prospectus. (7) Represents the Company's allocation of operating results for the Larkin Chase Center which the Company accounts for using the equity method. See "Business--Properties" and Note F to the Company's audited combined financial statements included elsewhere in this Prospectus. (8) Prior to the Reorganization, the Company's predecessors operated under common control but were not subject to Federal or state income taxation and, accordingly, no provision for income taxes has been made in the Company's audited combined financial statements. Following the Reorganization, these predecessors will be subject to Federal and state income taxes. Pro forma net income (loss) and pro forma net income per share reflect the combined income tax expense that the Company's predecessors would have incurred had they been subject to such taxation during each of the periods indicated. (9) Pro forma weighted average shares outstanding include 52,160 dilutive common equivalent shares (stock options issued within one year prior to the Offering calculated using the treasury stock method and an assumed initial public offering price of $12.50 per share) as if they were outstanding for all periods presented. (10) Includes the Larkin Chase Center commencing in 1994. (11) On December 31, 1995, the Seven Facilities were reclassified as "leased" following the sale and concurrent 1995 REIT Lease. See Note (2) above. The Ohio Facilities are classified as "owned" reflecting the treatment of the Ohio Transaction as a capital lease. (12) "Average occupancy rate" is computed by dividing the number of occupied licensed beds by the total number of available licensed beds during each of the periods indicated. (13) Net patient service revenues exclude all management fees and all rehabilitation therapy service revenues and the net patient service revenues of the Larkin Chase Center. See "Business--Properties."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001011695_rifkin_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001011695_rifkin_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and notes thereto appearing elsewhere in the Registration Statement of which this Prospectus is a part. As used in this Prospectus, the "Partnership" refers to Rifkin Acquisition Partners, L.L.L.P., a Colorado limited liability limited partnership that directly or indirectly controls and operates cable television systems in Georgia, Tennessee, Illinois and Michigan; "RAP L.P." refers to Rifkin Acquisition Partners, L.P., a Colorado limited partnership and the predecessor entity to the Partnership prior to the Recapitalization (as defined); "General Partner" refers to Rifkin Acquisition Management, L.P., a Colorado limited partnership which serves as the general partner of the Partnership; and "Rifkin & Associates" refers to Rifkin & Associates, Inc., a Colorado corporation that is owned and controlled solely by Monroe M. Rifkin. Pursuant to a management agreement, Rifkin & Associates serves as the manager of the cable television systems owned by the Company. Unless the context otherwise requires, the "Company" refers to the Partnership and its subsidiaries, including its predecessors. See "Risk Factors" for a discussion of certain risks associated with an investment in the Notes. THE COMPANY The Company owns, operates and develops cable television systems in Georgia, Tennessee, Illinois and Michigan (the "Other Systems"). Systems serving 45% of the Company's basic subscribers as of December 31, 1995, pro forma for the Acquisitions, were located in counties in Georgia and Tennessee with populations that grew at an average compound annual rate of 4.0% from 1991 to 1995, according to data from Market Statistics, Demographics USA 1995. Annual population growth over the same period in Georgia, Tennessee and for the United States as a whole was 1.9%, 1.3% and 1.1%, respectively. Since commencing operations in 1989, the Company has demonstrated an ability to take advantage of the favorable demographics in its markets to increase its basic and premium subscribers through innovative marketing, selective upgrades and extensions of its cable television systems and superior customer service. As a result, the Other Systems have experienced growth in homes passed, basic subscribers and Adjusted EBITDA/1/ between January 1, 1991 and December 31, 1995 of 18.9%, 37.3% and 47.9%, respectively, despite having incurred losses under generally accepted accounting principles during the years ended December 31, 1991, 1992, 1993, 1994 and 1995 of $17.9 million, $16.9 million, $16.3 million, $12 million, and $10.7 million, respectively (such losses being primarily attributable to depreciation and amortization expenses resulting from the initial acquisitions of the Other Systems, as well as subsequent capital additions and interest expense). At December 31, 1995, the Other Systems passed approximately 174,100 homes and served approximately 132,300 basic subscribers. On March 1, 1996, the Company acquired certain cable television systems of Mid-Tennessee Cable Limited Partnership (the "Mid-Tennessee Systems"). In addition, on April 1, 1996 the Company acquired the cable television systems of Rifkin Cablevision of Tennessee, Ltd. (the "RCT Systems" and, together with the Mid-Tennessee Systems, the "New Tennessee Systems"). The acquisition of the Mid-Tennessee Systems (the "Mid-Tennessee Acquisition") and the acquisition of the RCT Systems (the "RCT Acquisition" and, together with the Mid-Tennessee Acquisition, the "Acquisitions"), which are proximate to the Company's other systems in Tennessee (the "Other Tennessee Systems" and, together with the New Tennessee Systems, the "Tennessee Systems"), furthers the Company's strategy of clustering its cable systems to achieve economies of scale and operating efficiencies. Rifkin & Associates has managed the New Tennessee Systems since 1986 and these systems have experienced growth in homes passed, basic subscribers and Adjusted EBITDA between January 1, 1991 and December 31, 1995 of 12.3%, 21.7% and 10.4%, respectively, despite having incurred losses under generally accepted accounting principles during the years ended December 31, 1991, 1992, 1993, 1994 and 1995 of $3.7 million, $2.6 million, $2.2 million, $2.6 million and $2.4 million, respectively (such losses being primarily attributable to depreciation and amortization expenses resulting from the initial acquisitions of these cable systems and subsequent capital additions and interest expense). At December 31, 1995, the New Tennessee Systems passed approximately 56,800 homes and served approximately 45,600 basic subscribers. At December 31, 1995, pro forma for the Acquisitions, the Other Systems and the New Tennessee Systems (collectively, the "Systems") passed approximately 230,800 homes and served approximately 177,900 basic - -------- 1. See footnote (b) on p. 17. subscribers, for a basic penetration level of 77.1%. The Company is one of the largest multiple system operators ("MSO") in Tennessee, based on information provided by The Tennessee Cable Television Association as of December 31, 1995 regarding the number of basic subscribers served. The Company believes that its strategy of clustering of these systems to achieve economies of scale and operating efficiencies will create opportunities to improve customer service and marketing, reduce administrative costs and deploy new technologies more cost-effectively. For the year ended December 31, 1995, pro forma for the Acquisitions, the Company had revenue of approximately $65.6 million and, Adjusted EBITDA/1/ of approximately $30.1 million. MANAGEMENT AND OWNERSHIP The Systems are managed by Rifkin & Associates, which was founded in 1982 by Monroe M. Rifkin, its Chairman and Chief Executive Officer. At December 31, 1995, Rifkin & Associates managed 81 cable television systems in the United States serving over 341,000 basic subscribers. For the period from January 1, 1991 to December 31, 1995, the cable television systems managed by Rifkin & Associates experienced an aggregate growth in basic subscribers of 23.9%. Substantially all of this growth was generated through increases in basic penetration levels and homes passed. Prior to establishing Rifkin & Associates in 1982, Mr. Rifkin founded and served as Chairman and Chief Executive Officer of American Television and Communications Corporation ("ATC"). ATC was the second largest cable television company in the United States in 1978, when it was purchased by Time Incorporated. Mr. Rifkin and the other senior officers of Rifkin & Associates have an average of 15 years of experience in the construction, acquisition, ownership, management and operation of cable television systems. The Company believes that the depth and experience of the management team of Rifkin & Associates is a key asset which significantly enhances the Company's operating and financial performance. See "Management-- Director and Executive Officers of Rifkin & Associates; Advisory Committee of the Company." In August 1995, the Company effected a recapitalization (the "Recapitalization") in which a group led by VS&A Communications Partners II, L.P. ("VS&A"), an investment fund affiliated with Veronis, Suhler & Associates Inc. (an investment banking firm specializing in the media and communications industry) and further comprised of Greenwich Street (RAP) Partners I, L.P. ("Greenwich"), IEP I Holdings LLC, an affiliate of ING Equity Partners L.P. I, and PaineWebber Capital, Inc. (collectively, the "VS&A Group") acquired the interests of certain limited partners in RAP L.P. for approximately $39.4 million in cash and invested approximately $41.6 million in cash as new equity in the Partnership. In connection with the Recapitalization, Mr. Rifkin, certain trusts controlled by Mr. Rifkin (the "Rifkin Trusts") and certain current and former members of management of Rifkin & Associates (collectively, the "Rifkin Group") exchanged their then-existing limited partnership interests in RAP L.P., which for purposes of the Recapitalization were valued at approximately $9.1 million, for limited partnership interests in the Partnership (the "Equity Rollover"). In addition, the Rifkin Trusts invested $600,950 in cash as new equity in the Partnership. In January 1996, as a condition to issuance of the Old Notes, the VS&A Group and the Rifkin Group (collectively, the "Investor Group") invested $15 million in cash as additional equity in the Partnership (the "New Equity"). As a result, the Investor Group has invested an aggregate of $57.2 million in cash in addition to the $39.4 million paid to the prior limited partners of RAP L.P. for their partnership interests and the Equity Rollover for its ownership interest in the Partnership. As a result of these transactions, the VS&A Group and the Rifkin Group hold 89.2% and 9.8% limited partnership interests in the Partnership, respectively, and the General Partner continues to hold its 1% general partnership interest in the Partnership. See "Principal Security Holders" and "Certain Relationships and Related Transactions." As a condition to the investment in the Partnership made by the VS&A Group, in connection with the Recapitalization, the Partnership also assumed from RAP L.P. a subordinated note in the principal amount of $3 million payable to Monroe M. Rifkin (the "Old Rifkin Note"). In connection with the Old Notes Offering, the Old Rifkin Note was amended and restated to rank pari passu with the Notes (the "New Rifkin Note"). See "Certain Relationships and Related Transactions--Senior Subordinated Debt Held by Monroe M. Rifkin." Finally, as part of the Recapitalization, the fee payable by the Partnership to Rifkin & Associates for management services was reduced from 5.0% to 3.5% of the Partnership's revenue. - -------- 1. See footnote (b) on p. 17. THE SYSTEMS Certain information regarding the Systems is presented below as of December 31, 1995: <TABLE> <CAPTION> NEW TENNESSEE ALL OTHER SYSTEMS SYSTEMS SYSTEMS ---------------------------------------------- ----------------- ------- OTHER TOTAL MID- GEORGIA TENNESSEE ILLINOIS MICHIGAN OTHER TENNESSEE RCT SYSTEMS SYSTEMS SYSTEMS SYSTEMS SYSTEMS SYSTEMS SYSTEMS ------- --------- -------- -------- ------- --------- ------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Homes Passed............ 66,307 58,289 35,469 13,989 174,054 42,448 14,320 230,822 Basic Subscribers(1).... 48,925 48,128 24,269 10,949 132,271 33,407 12,230 177,908 Basic Penetration....... 73.8% 82.6% 68.4% 78.3% 76.0% 78.7% 85.4% 77.1% Premium Service Units(2)............... 34,651 25,401 13,555 6,778 80,385 20,800 7,140 108,325 Premium Penetration..... 70.8% 52.8% 55.9% 61.9% 60.8% 62.3% 58.4% 60.9% CAGR:(3) Homes Passed........... 5.8% 3.8% 0.0% 2.3% 3.5% 3.5% (0.7)% 3.2% Basic Subscribers...... 11.1% 4.8% 2.9% 5.5% 6.5% 5.1% 1.3% 5.9% Premium Service Units.. 13.0% 10.0% 14.8% 10.1% 12.0% 12.4% 11.6% 12.1% Capacity in Mhz......... 450 312-450 300-450 318-400 300-450 286-400 450 286-450 Channel Capacity........ 61 37-60 35-60 38-53 35-61 33-53 60 33-61 Revenue (in millions)(4)........... $19.8 $17.6 $8.9 $3.9 $50.2 $11.7 $3.7 $65.6 </TABLE> - -------- (1) A home with one or more television sets connected to a cable system is counted as one basic subscriber. Bulk accounts are included on a "basic subscriber equivalent" basis in which the total basic monthly bill for the account is divided by the basic monthly charge for a single residential outlet in the applicable system. (2) Premium Service Units represents the number of subscriptions to premium channels. (3) CAGR represents the compound annual growth rate for the period from January 1, 1991 to December 31, 1995. (4) Revenue is presented for the year ended December 31, 1995. OTHER SYSTEMS The Georgia Systems. The Georgia Systems serve communities in northeast Gwinnett County, including the cities of Lawrenceville, Duluth, Suwanee, Buford, Sugar Hill and Dacula, and the city of Roswell in Fulton County. All of the communities served by the Georgia Systems are suburbs of Atlanta. At December 31, 1995, these systems passed approximately 66,300 homes and served approximately 48,900 basic subscribers. Since 1985, Gwinnett County's population has grown at a compound annual rate of over 5.7% according to the Atlanta Regional Commission (the "ARC"), which tracks growth for road development and other governmental uses. The ARC estimates that Gwinnett County's population will continue to grow from approximately 410,000 in 1994 to approximately 541,000 by the year 2000, which implies a compound annual growth rate of 4.7%. According to the ARC, the population of the census tracts within the Company's Gwinnett County service area is projected to grow through the year 2000 at a compound annual growth rate of 5.0%. The Roswell system serves a population of 54,000 and, according to United States 1990 Census data, residents of Roswell had one of the highest per capita incomes in the Atlanta metropolitan area. The Other Tennessee Systems. The Other Tennessee Systems serve the communities of Columbia, Cookeville, Paris and Tullahoma, located in central Tennessee, proximate to Nashville. At December 31, 1995, these systems passed approximately 58,300 homes and served approximately 48,100 basic subscribers. Columbia, the largest of the Other Tennessee Systems, principally serves Maury County which, according to the Tennessee State Planning Office, has experienced compound annual population growth of 3.5% since 1990. This growth is largely the result of the construction of the General Motors Saturn plant in Spring Hill, Tennessee (a community served by the Columbia System) and related new business formation. The Illinois Systems. The Illinois Systems serve communities in southern Illinois. At December 31, 1995, these systems passed approximately 35,500 homes and served approximately 24,300 basic subscribers. These communities generally receive poor off-air reception from St. Louis and require cable service to receive high quality broadcast signals. Nearly 60% of the subscribers served by the Illinois Systems are in the Mt. Vernon and Centralia systems. The Michigan Systems. The Michigan Systems serve the cities of Bridgeport/Frankenmuth, Bad Axe, Gagetown, Harbor Beach and Reese. At December 31, 1995, these systems passed approximately 14,000 homes and served approximately 10,900 basic subscribers. The Bridgeport/Frankenmuth system, which is located between the industrial cities of Flint and Saginaw, represents approximately two-thirds of the subscribers served by the Michigan Systems. Bridgeport is home to numerous manufacturing plants which support the automobile industry, while the other communities served by the Michigan Systems have economies based primarily on tourism. THE NEW TENNESSEE SYSTEMS Mid-Tennessee Systems. The Mid-Tennessee Systems serve Lebanon and McMinnville, which are proximate to the Company's Other Tennessee Systems, and communities in the Tri-Cities area in northeast Tennessee (the "Hickory Hill System"). At December 31, 1995, the Mid-Tennessee Systems passed approximately 42,500 homes and served approximately 33,400 basic subscribers. The Lebanon system serves a growing suburban area east of Nashville. The McMinnville system serves communities proximate to Nashville in central Tennessee. The Hickory Hill System serves communities near the Tri-Cities of Bristol, Johnson City and Kingsport in northeast Tennessee. A major Bridgestone tire plant was recently completed in McMinnville and the Company expects businesses serving the automobile industry to continue to develop in the region. RCT Systems. The RCT Systems, located in south central Tennessee, are proximate to the Company's Columbia system and serve the communities of Pulaski, Lawrenceburg and Fayetteville. At December 31, 1995, the RCT Systems passed approximately 14,300 homes and served approximately 12,200 basic subscribers. These communities enjoy diverse employment in manufacturing, farming and light industry. Homes in this area generally receive limited off- air reception and require cable to receive high quality broadcast signals and a greater variety of television programming. BUSINESS STRATEGY The Company's business strategy includes the following key elements intended to enhance its operating and financial performance: Consolidating Operations/Strategic Acquisitions. The Company believes that consolidating operations will increase Adjusted EBITDA/1/ by allowing for efficiencies in such areas as administration, marketing, customer service and advertising sales. The Company will also explore opportunities to consolidate headends in order to reduce maintenance costs as well as the cost of adding new channels and implementing new technologies and services. The Company has consolidated and intends to further consolidate certain of the operations of the New Tennessee Systems with the Other Tennessee Systems. Future acquisition efforts are expected to focus on acquiring systems in close proximity to existing systems, or on systems of sufficient size to serve as cores for new operating clusters. The Company has identified three potential acquisitions, none of which is of a material size. The Company will also consider divesting systems on an opportunistic basis. Innovative Marketing. The Company aggressively markets and promotes its cable television systems with the objective of increasing penetration and average revenue per subscriber. The Company actively markets its basic and premium program packages through innovative marketing tactics that include direct mail and telemarketing efforts targeted to specific subscriber and non-subscriber demographic profiles, newspaper and television advertising and door-to-door sales. In selected markets, the Company is also expanding its sources of revenue from services such as pay-per-view and new services such as the Sega Channel. In addition, the Company also recently entered into an agency relationship with Sprint Communications Company, L.P. to market Sprint long distance telephone services in certain markets. System Enhancements. The Company is committed to maintaining and enhancing the technical integrity and channel capacity of its cable systems as demonstrated by the fact that all of the Systems have capacities of 30 or more channels. Within the next five years, the Company intends to rebuild nearly all of the Systems such that the Systems will have a minimum bandwidth of 450 MHz (60 analog channel capacity) and a number of the Systems will have bandwidth of 750 MHz (110 analog channel capacity or a combination of 93 analog channel capacity and 100 MHz of digital channel capacity). Additionally, the Company is committed to extending its distribution system to keep pace with the growth in the communities it serves as well as making continuous investments that improve picture quality and plant reliability. - -------- 1. See footnote (b) on p. 17. Subscriber Value. The Company uses a high quality, well-trained staff of customer service representatives and local field technicians which Management believes provides exceptional customer service. To this end, the Company continues to invest resources in training its customer service representatives and field technicians. In addition, the Company regularly evaluates the programming offered by its systems in order to offer its subscribers innovative packages of basic and premium services, including locally originated programming. ACQUISITIONS AND FINANCING PLAN Acquisitions. On March 1, 1996, the Company acquired the Mid-Tennessee Systems from Mid-Tennessee Cable Limited Partnership ("MTCLP"). On April 1, 1996 the Company acquired the RCT Systems, from Rifkin Cablevision of Tennessee, Ltd. Both MTCLP and Rifkin Cablevision of Tennessee, Ltd. are affiliates of Monroe M. Rifkin. See "Risk Factors--Conflicts of Interest; Affiliate Transactions." The purchase price for the Mid-Tennessee Systems (including approximately $1.1 million of assumed liabilities), which remains subject to certain post-closing adjustments, was $62 million. The Company acquired the Mid-Tennessee Systems pursuant to a right of first refusal exercised by Rifkin/MT Management, L.P., an entity controlled by Monroe M. Rifkin following the acceptance by MTCLP of an offer from an unrelated third party to acquire such systems. The right to acquire the Mid-Tennessee Systems pursuant to such right of first refusal was subsequently assigned to the Company. In connection with such assignment, the Company paid a fee of approximately $619,000 to Rifkin & Associates. The purchase price for the RCT Systems of $10.2 million (including approximately $500,000 of assumed liabilities) which remains subject to certain post-closing adjustments, was reached through negotiations with the principal limited partner that controlled such systems and is unaffiliated with the Company and Monroe M. Rifkin. ORGANIZATIONAL CHART -------------------- [Organizational Chart of the Company appears here in courtesy copy provided to the S.E.C.] The Financing Plan. On January 31, 1996, the Issuers completed the Old Notes Offering, as part of a plan (the "Financing Plan") designed to enable the Company to complete the Acquisitions and to provide the Company with long term fixed rate financing. Under the Financing Plan, (i) the Issuers issued the Old Notes in the Old Notes Offering, (ii) the Company received $15 million of New Equity from the Investor Group, (iii) the Company's prior credit agreement was amended (as amended, the "Amended and Restated Credit Agreement") to provide ongoing borrowing availability, including availability to finance Permitted Acquisitions (as defined), provided the Company satisfies certain requirements and (iv) the $3 million Old Rifkin Note was amended and restated to, among other things, provide that such indebtedness shall rank pari passu with the Notes and have an interest rate and scheduled maturity identical to that of the Notes. Proceeds of the Offering and the New Equity were used to complete the Acquisitions, to pay transaction costs and expenses related to the Financing Plan and the Acquisitions (collectively, the "Transactions") and to reduce outstanding indebtedness under the Amended and Restated Credit Agreement. The following table presents the sources and uses of funds under the Financing Plan assuming the Transactions had occurred on December 31, 1995: <TABLE> <CAPTION> SOURCES OF FUNDS - ---------------- <S> <C> Senior Subordinated Notes... $125,000,000 New Equity Contributions.... 15,000,000 ------------ Total Sources........... $140,000,000 ============ </TABLE> <TABLE> <CAPTION> USES OF FUNDS - ------------- <S> <C> Acquisitions(1): The Mid-Tennessee Acquisition........................................... $ 60,877,000 The RCT Acquisition..................................................... 9,699,000 Repayment of borrowings under the Amended and Restated Credit Agreement.. 63,424,000 Transaction costs and expenses........................................... 6,000,000 ------------ Total Uses........................................................... $140,000,000 ============ </TABLE> - -------- (1) The aggregate cash consideration payable for the New Tennessee Systems is subject to certain adjustments for working capital as contemplated by the respective purchase agreements. Such adjustments are assumed to reduce the aggregate cash purchase price for the Acquisitions by $1.6 million for purposes hereof based on the current assets and liabilities of the New Tennessee Systems as of December 31, 1995. See "Unaudited Pro Forma Condensed Consolidated Financial Data." After giving effect to the Transactions as of December 31, 1995, the Company would have had total unused commitments under the Amended and Restated Credit Agreement of $73.9 million, $13.9 million of which would have been available for general corporate purposes. See "Description of Amended and Restated Credit Agreement." RECENT REGULATORY DEVELOPMENTS On February 8, 1996, the President signed into law the Telecommunications Act of 1996 ("1996 Telecom Act"). This new law alters federal, state and local laws and regulations regarding telecommunications providers and cable television service providers, including the Company. See "Legislation and Regulation in the Cable Television Industry." The 1996 Telecom Act deregulates the rates for "small cable operators" for cable programming service tiers. On April 5, 1996, the FCC issued a Notice of Proposed Rulemaking and adopted interim rules under which the Company would generally qualify as a "small cable operator." Management anticipates that it will qualify as a "small cable operator" when the rulemaking is concluded and final rules are issued. It is the Company's understanding, that based on such interim rules, the Company qualifies as a "small cable operator" and its systems are subject to the specific rules for "small cable operators." Under the FCC's interim rules, the Company's systems are immediately relieved from any rate regulation on cable programming service tiers. Although the Company is unable to predict the precise outcome of the impact of the "small cable operator" rules, the Company believes these rules will have a positive impact on the financial condition of the Company, as the Company will have the flexibility to price its cable programming service tiers, appropriate to market conditions, without artificial rate restraints. The 1996 Telecom Act did not change the existing streamlined rate regulation rules for small cable systems adopted by the FCC in 1995. Additionally, the 1996 Telecom Act removed all barriers to telephone company and electric utility company entry into the cable television business. Further, the 1996 Telecom Act allows for potentially significant pole rental attachment increases commencing in five years, with such increases being phased-in over the succeeding five year period. For a detailed review of the 1996 Telecom Act, see "Legislation and Regulation in the Cable Television Industry." Regarding the rate regulation of basic cable service, on June 5, 1995, the Federal Communications Commission (the "FCC") issued an order (the "Small Systems Order") adopting new rules to reduce the substantive and procedural burdens of rate regulation applicable to small cable systems (serving 15,000 or fewer subscribers) owned by cable companies which operate multiple systems serving fewer than 400,000 subscribers. Under the Small Systems Order, the regulatory benefits accruing to such systems remain effective even if such systems are later acquired by MSOs which serve in excess of 400,000 subscribers. All of the Systems qualify as "small cable systems" under the Small Systems Order, except for the systems serving northeast Gwinnett County, Georgia and Columbia, Tennessee, which had approximately 34,500 and 17,200 basic subscribers, respectively, as of September 30, 1995, representing approximately 29% of the total basic subscribers in the Systems. The Company has applied to the FCC to have the Columbia system characterized as a small system, but is unable to predict the timing or outcome of such application. See "Legislation and Regulation in the Cable Television Industry--Rate Regulation." TRANSACTIONS RELATED TO THE OLD NOTES OFFERING In connection with the offering of the Old Notes (the "Old Notes Offering"), the following transactions (together with the Old Notes Offering and the use of proceeds thereof, collectively, the ("Transactions") occurred or will occur: Escrow Account; Mid-Tennessee Acquisition. Concurrently with the closing of the Old Notes Offering, the net proceeds of the Old Notes Offering were placed in an escrow account maintained by the Trustee (the "Escrow Account"). All of the funds in such Escrow Account, together with any interest earned thereon were released on March 1, 1996, and were used to finance the New Tennessee Acquisitions, to reduce outstanding indebtedness under the Amended and Restated Credit Agreement. See "Acquisitions", "Use of Proceeds," "Capitalization," "Description of Amended and Restated Credit Agreement" and "Description of Exchange Notes." THE EXCHANGE OFFER The Exchange Offer........ The Company is offering to exchange (the "Exchange Offer") up to $125,000,000 aggregate principal amount of its new 11 1/8% Senior Subordinated Notes due 2006 (the "Exchange Notes") for up to $125,000,000 aggregate principal amount of its outstanding 11 1/8% Senior Subordinated Notes due 2006 that were issued and sold in a transaction exempt from registration under the Securities Act (the "Old Notes") and, together with the Exchange Notes, the "Notes"). The form and terms of the Exchange Notes are substantially identical (including principal amount, interest rate, maturity, security and ranking) to the form and terms of the Old Notes for which they may be exchanged pursuant to the Exchange Offer, except that the Exchange Notes are freely transferable by holders thereof except as provided herein (see "The Exchange Offer--Terms of the Exchange" and "--Terms and Conditions of the Letter of Transmittal") and are not entitled to certain registration rights and certain additional interest provisions which are applicable to the Old Notes under a registration rights agreement dated as of January 31, 1996 (the "Registration Rights Agreement") among the Partnership, RACC, the Guarantors and BT Securities Corporation, Smith Barney, Inc., First Union Capital Markets Corp. and PaineWebber Incorporated as initial purchasers (collectively, the "Initial Purchasers"). Exchange Notes issued pursuant to the Exchange Offer in exchange for the Old Notes may be offered for resale, resold and otherwise transferred by holders thereof (other than any holder which is (i) an Affiliate of the Company, (ii) a broker-dealer who acquired Old Notes directly from the Company or (iii) a broker-dealer who acquired Old Notes as a result of market-making or other trading activities), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such Exchange Notes are acquired in the ordinary course of such holders' business and such holders are not engaged in, and do not intend to engage in, and have no arrangement or understanding with any person to participate in, a distribution of such Exchange Notes. Minimum Condition......... The Exchange Offer is not conditioned upon any minimum aggregate principal amount of Old Notes being tendered or accepted for exchange. Expiration Date........... The Exchange Offer will expire at 5:00 p.m., New York City time, on June 18, 1996, unless extended (the "Expiration Date"). Exchange Date............. The first date of acceptance for exchange for the Old Notes will be the first business day following the Expiration Date. Conditions to the The obligation of the Company to consummate the Exchange Offer........... Exchange Offer is subject to certain conditions. See "The Exchange Offer--Conditions to the Exchange Offer." The Company reserves the right to terminate or amend the Exchange Offer at any time prior to the Expiration Date upon the occurrence of any such condition. Withdrawal Rights......... Tenders of Old Notes pursuant to the Exchange Offer may be withdrawn at any time prior to the Expiration Date. Any Old Notes not accepted for any reason will be returned without expense to the tendering holders thereof as promptly as practicable after the expiration or termination of the Exchange Offer. Procedures for Tendering See "The Exchange Offer--How to Tender." Old Notes................ Federal Income Tax The exchange of Old Notes for Exchange Notes by Consequences............. tendering holders will not be a taxable exchange for federal income tax purposes, and such holders should not recognize any taxable gain or loss as a result of such exchange. Use of Proceeds........... There will be no cash proceeds to the Company from the exchange pursuant to the Exchange Offer. Effect on Holders of Old As a result of the making of this Exchange Offer, Notes.................... and upon acceptance for exchange of all validly tendered Old Notes pursuant to the terms of this Exchange Offer, the Company will have fulfilled a covenant contained in the terms of the Old Notes and the Registration Rights Agreement, and, accordingly, the holders of the Old Notes will have no further registration or other rights under the Registration Rights Agreement, except under certain limited circumstances. See "Old Notes Registration Rights." Holders of the Old Notes who do not tender their Old Notes in the Exchange Offer will continue to hold such Old Notes and will be entitled to all the rights and limitations applicable thereto under the Indenture. All untendered, and tendered but unaccepted, Old Notes will continue to be subject to the restrictions on transfer provided for in the Old Notes and the Indenture. To the extent that Old Notes are tendered and accepted in the Exchange Offer, the trading market, if any, for the Old Notes not so tendered could be adversely affected. See "Risk Factors--Consequences of Failure to Exchange Old Notes." TERMS OF THE EXCHANGE NOTES The Exchange Offer applies to $125,000,000 aggregate principal amount of Old Notes. The form and terms of the Exchange Notes are substantially identical to the form and terms of the Old Notes, except that the Exchange Notes have been registered under the Securities Act and, therefore, will not bear legends restricting the transfer thereof. The Exchange Notes will evidence the same debt as the Old Notes and will be entitled to the benefits of the Indenture. See "Description of Exchange Notes." Securities Offered........ $125,000,000 aggregate principal amount of 11 1/8% Senior Subordinated Notes due 2006. Issuers................... The Notes are joint and several obligations of Rifkin Acquisition Partners, L.L.L.P. and Rifkin Acquisition Capital Corp. ("RACC"). Maturity Date............. January 15, 2006. Interest Payment Dates.... Interest on the Notes will accrue from the date of issuance, January 26, 1996 (the "Issue Date"), at the rate of 11 1/8 % per annum and will be payable in cash semi-annually in arrears on January 15 and July 15 of each year, commencing July 15, 1996. Optional Redemption....... The Notes will be redeemable at the Issuers' option, in whole or in part, at any time on or after January 15, 2001, at the redemption prices set forth herein, together with accrued and unpaid interest, if any, to the date of redemption. In addition, at any time on or prior to January 15, 1999, the Issuers, at their option, may redeem up to 25% of the aggregate principal amount of the Notes originally issued with the net proceeds of one or more Public Equity Offerings or Strategic Equity Investments in which the Issuers receive proceeds of not less than $25 million, at a redemption price equal to 111 1/8% of the principal amount thereof, together with accrued and unpaid interest, if any, to the date of redemption; provided, however, that after any such redemption the aggregate principal amount of the Notes outstanding must equal at least 75% of the aggregate principal amount of the Notes originally issued. Change of Control......... Upon the occurrence of a Change of Control, each holder of the Notes will have the right to require the Issuers to purchase all or a portion of such holder's Notes at 101% of the principal amount thereof, together with accrued and unpaid interest, to the date of purchase. An acquisition of control of the Company by Monroe M. Rifkin, VS&A or any of their respective affiliates would not constitute a Change of Control under the Indenture governing the Notes. See "Description of Exchange Notes--Change of Control." Ranking................... The Notes will represent senior subordinated obligations of the Issuers and will be subordinated in right of payment to all existing and future Senior Debt of the Issuers. As of December 31, 1995, on a pro forma basis after giving effect to the Transactions, the Issuers would have had $71.1 million of Senior Debt outstanding (excluding unused commitments of $73.9 million under the Amended and Restated Credit Agreement) and $3 million of indebtedness outstanding that ranks pari passu with the Notes. See "Risk Factors-- Substantial Leverage and Risk of Inability to Service Debt." Subsidiary Guarantees..... The Notes will be jointly and severally guaranteed on a senior subordinated basis by the Guarantors. The Guarantees will be general unsecured obligations of the Guarantors and will be subordinated in right of payment to all existing and future Senior Debt of the Guarantors. As of December 31, 1995, on a pro forma basis after giving effect to the Transactions, the Guarantors would have had no Senior Debt outstanding (excluding guarantees of Senior Debt of the Company). See "Risk Factors--Subordination of Notes and the Subsidiary Guarantees; Asset Encumbrances." Certain Covenants......... The Indenture contains certain covenants, including, but not limited to, covenants with respect to the following matters: (i) limitations on additional indebtedness and issuance of certain additional equity interests; (ii) limitations on restricted payments; (iii) limitations on transactions with affiliates; (iv) limitations on asset sales; (v) limitations on the incurrence of liens; (vi) limitations on the creation of restrictions on the ability of certain subsidiaries to make certain distributions and payments to the Company; (vii) limitations on the transfer of certain assets to subsidiaries; and (viii) restrictions on mergers, consolidations and the transfer of all or substantially all of the assets of the Company to another person. These covenants are subject to important exceptions and qualifications. See "Description of Exchange Notes--Covenants." EXCHANGE OFFER; REGISTRATION RIGHTS; ADDITIONAL INTEREST Pursuant to the Registration Rights Agreement, the Issuers and the Subsidiary Guarantors have agreed (i) to file the Registration Statement on or prior to April 10, 1996 with respect to the Exchange Offer, and (ii) to use their best efforts to cause such registration statement to become effective under the Securities Act on or prior to June 10, 1996. If the Issuers and the Subsidiary Guarantors do not comply with their registration obligations in a timely manner, the Issuers will be required to pay additional interest (in addition to the scheduled payment of interest) during the first 90-day period of such default in an amount equal to 0.50% per annum. The amount of the additional interest will increase by an additional 0.50% per annum for each subsequent 90-day period until such obligations are complied with, up to a maximum amount of additional interest of 2.0% per annum. See "Transactions Related to the Old Notes Offering--The Exchange Offer--Effect on Holders of Old Notes."
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS OF THE COMPANY, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION PRESENTED IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION AND HAS BEEN ADJUSTED TO REFLECT (I) THE REINCORPORATION OF THE COMPANY IN OHIO AND THE CORRESPONDING 422.57:1 SPLIT OF THE COMMON SHARES PRIOR TO THE OFFERING MADE HEREBY (THE "OFFERING"); (II) AN INCREASE IN THE AUTHORIZED NUMBER OF COMMON SHARES TO 40,000,000; AND (III) THE CANCELLATION OF AN OUTSTANDING WARRANT TO PURCHASE 2,483,537 COMMON SHARES AND THE EXERCISE OF AN OUTSTANDING WARRANT TO PURCHASE 167,227 COMMON SHARES. REFERENCES IN THIS PROSPECTUS TO THE "COMPANY" REFER COLLECTIVELY TO AIRNET SYSTEMS, INC. AND ITS PREDECESSOR ENTITIES. THE COMPANY AirNet Systems, Inc. operates a fully integrated national air transportation network that operates between 85 cities in more than 40 states and delivers over 13,000 time-critical shipments each working day. The Company's U.S. Check-Registered Trademark- division, which generates approximately 86% of the Company's revenues, is the leading transporter of canceled checks and related information for the U.S. banking industry, meeting more than 1,100 daily deadlines. The Company's TIMEXPRESS-Registered Trademark- division, which generates approximately 12% of the Company's revenues, provides specialized, high-priority delivery service for customers requiring a reliable late pick-up and early delivery service combined with prompt, on-line delivery information. The Company's People Dedicated to Quality ("PDQ") division offers retail aviation fuel sales and related ground services for customers in Columbus, Ohio. The Company currently operates a fleet of 81 aircraft (23 Learjet and 58 light twin engine aircraft), which fly approximately 85,000 miles per night, primarily Monday through Thursday. The Company also provides ground pick-up and delivery services throughout the nation, utilizing a fleet of 87 Company-owned ground vehicles as well as a ground transportation network of over 350 independent contractors. The Company uses its own air transportation network as well as commercial airlines, when appropriate, to provide same-day and same-night delivery services for itself, as well as for certain major overnight document and parcel delivery companies. Later pick-ups and earlier deliveries than those offered by other national carriers are the differentiating characteristics of the Company's time-critical delivery network. In addition, the Company offers other value- added services to its customers, such as on-line delivery information. The Company consistently has achieved on-time performance levels exceeding 95%. In order to maintain this performance, the Company utilizes a number of proprietary customer service and management information systems to track, sort, dispatch and control the flow of checks and small packages throughout the Company's delivery system. Delivery times and certain shipment information are available on-line and on the Internet. For example, ComCheck-SM-, a unique proprietary software system, provides bank customers access to delivery time, shipment information and retrieval of historical proof-of-delivery information, critical data that enable banks to manage their cash position and maximize float revenue. OnTime-SM- and Ship-Link-SM-, Company-developed software programs, provide scheduling and pricing information, as well as on-line delivery and shipper acknowledgment data for small package customers. The Company also has developed several internal software programs to enhance dispatch monitoring, cost control and customer service functions. The Company believes that the market for reliable, time-critical deliveries is growing as a result of a number of global trends, including: (i) corporations requiring just-in-time inventory parts; (ii) medical laboratories requiring same-day deliveries; (iii) consolidating ground-based small package couriers requiring a national air delivery network; and (iv) global air freight forwarders requiring a domestic connection for their international networks that can deliver on a same-day/same-night or pre-8:00 a.m. basis. As the Company's banking customers typically require services four nights per week, there exists substantial available flight time and aircraft for the Company to pursue these business opportunities. The Company believes its flexible and reliable air transportation network and its demonstrated expertise in providing time-critical deliveries position the Company to provide such additional services at premium prices. BUSINESS STRATEGY The principal components of the Company's operating and growth strategy are as follows: FOCUS ON UNIQUE AIRCRAFT TYPE AND ROUTE STRUCTURE. The Company's fast and reliable fleet of 23 Learjets and 58 light twin engine aircraft is positioned around a highly efficient and flexible national route structure designed to facilitate late pick-up and early delivery times, minimize delays and simplify flight scheduling. The Company's hub-and-spoke system, with a primary hub in Columbus and several mini-hubs across the nation, enables the Company to match the varying load capacities of its aircraft with the shipment weight and volume of each destination city and to consolidate shipments at its mini-hubs and primary hub. ATTRACT, RETAIN AND MOTIVATE THE HIGHEST QUALITY PERSONNEL AVAILABLE. Central to the Company's high service-oriented culture is a commitment to hiring, retaining and motivating exceptionally talented associates who are focused on a set of core values designed by the Company to provide a working environment where integrity, accountability, open communication, team management and responsibility and quality performance are explicitly stated goals. The Company believes that its current compensation and benefits packages, proposed stock ownership incentives and corporate culture will continue to provide a competitive advantage in attracting and motivating its associates. EXPAND U.S. CHECK-REGISTERED TRADEMARK- POSITION IN THE BANKING INDUSTRY. The Company intends to strengthen its leadership position in the transportation of canceled bank checks by adding routes and aircraft to its air transportation network to facilitate even more late pick-up and early delivery times covering a greater number of cities. These capabilities, combined with the Company's value-added services (such as ComCheck-SM-) not currently offered by competing canceled bank check delivery companies, should enable the Company to expand its position in this market. GROW TIMEXPRESS-Registered Trademark- PACKAGE DELIVERY SERVICE. The Company believes that its TIMEXPRESS-Registered Trademark- service offers a more flexible pick-up and delivery schedule for small packages than those offered by other national carriers, and appeals to customers with time-sensitive delivery requirements. To date, growth in the Company's TIMEXPRESS-Registered Trademark-business has been constrained by limited load capacity on existing U.S. Check-Registered Trademark- routes. The Company intends to purchase aircraft to provide additional capacity for the delivery of canceled bank checks and small packages. The Company believes significant opportunities exist for expanding its small package delivery business by more aggressively marketing the TIMEXPRESS-Registered Trademark- brand-name and by contracting to deliver for some of the national overnight package delivery companies whose infrastructures cannot be easily modified to meet same-day/same-night or pre-8:00 a.m. delivery deadlines. PURSUE STRATEGIC ACQUISITION OPPORTUNITIES. The fragmented nature of the air and ground package delivery industry, outside of the major national carriers, provides the Company with opportunities for strategic acquisitions. The Company believes it is well-positioned to consolidate regional air freight operators and ground couriers by acquiring high-quality candidates. The Company believes it has a demonstrated expertise in evaluating acquisition opportunities based on the potential for revenue growth and profitability, as well as a proven track record for efficiently integrating such acquisitions. HISTORY AND OFFERING RELATED TRANSACTIONS The Company was founded in 1974 and began transporting canceled checks on a point-to-point basis out of Pontiac, Michigan. In 1980, the Company established its primary hub in Columbus, Ohio to serve as the central point for its nationwide air distribution system. In 1984, the Company formed TIMEXPRESS-Registered Trademark- and began to deliver small package freight on a national scale. In 1988, the Company entered into a non-competition agreement (the "Wright Agreement") with Wright International Express, Inc. ("WIE") and its sole shareholder Donald W. Wright, Sr., and acquired certain key assets of WIE. WIE was the Company's primary private sector competitor in the canceled check transportation business. In 1989, the Company completed the acquisition of Air Continental, Inc., the other principal private sector competitor engaged in the interstate transportation of canceled checks. Today, the Company's only significant competitor in the transportation of canceled checks is the Interdistrict Transportation System (the "ITS") operated by the Federal Reserve System (the "Federal Reserve"). As part of the Wright Agreement, as amended, the Company agreed to pay a percentage of the Company's cash flow on an on-going basis to Donald Wright and granted him a warrant to purchase 2,483,537 Common Shares (the "Donald Wright Warrant") and a warrant to Jeffrey Wright, Donald Wright's son, to purchase 167,227 Common Shares (the "Jeffrey Wright Warrant" and, collectively with the Donald Wright Warrant, the "Wright Warrants"), which warrants are exercisable upon the closing of the Offering. The Company has agreed to repurchase the Donald Wright Warrant upon the closing of the Offering for $29.9 million, or the equivalent of $12.04 per Common Share underlying such warrant, and will cancel the Donald Wright Warrant upon its repurchase. Gerald G. Mercer, the Company's Chairman and Chief Executive Officer, has agreed to purchase the Jeffrey Wright Warrant upon the closing of the Offering for $2.0 million, or the equivalent of $12.04 per Common Share underlying such warrant, and will exercise the Jeffrey Wright Warrant immediately following such purchase. Upon the repurchase by the Company of the Donald Wright Warrant, the Wright Agreement will be terminated in its entirety, and no further payments will be made. In connection with the repurchase and cancellation of the Donald Wright Warrant, the Company expects to receive a tax benefit asset of approximately $7.0 million. The benefit from this asset will be realized as cash savings by offsetting income taxes otherwise payable on future taxable income. The tax benefit will have no effect on the Company's income statement currently or for any future period; however, the tax benefit will be reflected as additional paid-in capital on the Company's balance sheet. In connection with offering related transactions, the Company will incur non-recurring, non-cash expenses in the quarter in which the Company completes the Offering totaling approximately $19.8 million (assuming an initial public offering price of $13.00 per share). Approximately $15.0 million of such $19.8 million results from the termination of certain Stock Purchase Agreements between the Company and seven executive officers, pursuant to which the executive officers purchased an aggregate of 1,484,908 Common Shares. In addition, if the initial public offering price is less than $12.95 per share, the Company will incur an additional non-recurring expense in the fiscal quarter in which the Company completes the Offering in connection with the repurchase and cancellation of the Donald Wright Warrant and the purchase of the Jeffrey Wright Warrant equal to the difference between $12.95 and the initial public offering price multiplied by 2,650,764, the number of Common Shares underlying the Wright Warrants. The Company's principal executive offices are located at 3939 International Gateway, Columbus, Ohio 43219 and its telephone number is (614) 237-9777. THE OFFERING <TABLE> <S> <C> Common Shares offered....................... 5,600,000 Common Shares to be outstanding after the Offering................................... 11,477,835(1) Use of proceeds............................. To repay certain indebtedness incurred in connection with the payment of undistributed S Corporation earnings to the Company's existing shareholders, to repurchase and cancel the Donald Wright Warrant and to repay certain bank indebtedness. See "Use of Proceeds," "Certain Relationships and Related Party Transactions" and "Prior S Corporation Status." Proposed Nasdaq National Market symbol...... ANSY </TABLE> -------------------------- (1) Does not include 1,150,000 Common Shares reserved for issuance under the Company's Incentive Stock Plan. See "Management -- Incentive Stock Plan."
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and notes thereto appearing elsewhere in the Registration Statement of which this Prospectus is a part. As used in this Prospectus, the "Partnership" refers to Rifkin Acquisition Partners, L.L.L.P., a Colorado limited liability limited partnership that directly or indirectly controls and operates cable television systems in Georgia, Tennessee, Illinois and Michigan; "RAP L.P." refers to Rifkin Acquisition Partners, L.P., a Colorado limited partnership and the predecessor entity to the Partnership prior to the Recapitalization (as defined); "General Partner" refers to Rifkin Acquisition Management, L.P., a Colorado limited partnership which serves as the general partner of the Partnership; and "Rifkin & Associates" refers to Rifkin & Associates, Inc., a Colorado corporation that is owned and controlled solely by Monroe M. Rifkin. Pursuant to a management agreement, Rifkin & Associates serves as the manager of the cable television systems owned by the Company. Unless the context otherwise requires, the "Company" refers to the Partnership and its subsidiaries, including its predecessors. See "Risk Factors" for a discussion of certain risks associated with an investment in the Notes. THE COMPANY The Company owns, operates and develops cable television systems in Georgia, Tennessee, Illinois and Michigan (the "Other Systems"). Systems serving 45% of the Company's basic subscribers as of December 31, 1995, pro forma for the Acquisitions, were located in counties in Georgia and Tennessee with populations that grew at an average compound annual rate of 4.0% from 1991 to 1995, according to data from Market Statistics, Demographics USA 1995. Annual population growth over the same period in Georgia, Tennessee and for the United States as a whole was 1.9%, 1.3% and 1.1%, respectively. Since commencing operations in 1989, the Company has demonstrated an ability to take advantage of the favorable demographics in its markets to increase its basic and premium subscribers through innovative marketing, selective upgrades and extensions of its cable television systems and superior customer service. As a result, the Other Systems have experienced growth in homes passed, basic subscribers and Adjusted EBITDA/1/ between January 1, 1991 and December 31, 1995 of 18.9%, 37.3% and 47.9%, respectively, despite having incurred losses under generally accepted accounting principles during the years ended December 31, 1991, 1992, 1993, 1994 and 1995 of $17.9 million, $16.9 million, $16.3 million, $12 million, and $10.7 million, respectively (such losses being primarily attributable to depreciation and amortization expenses resulting from the initial acquisitions of the Other Systems, as well as subsequent capital additions and interest expense). At December 31, 1995, the Other Systems passed approximately 174,100 homes and served approximately 132,300 basic subscribers. On March 1, 1996, the Company acquired certain cable television systems of Mid-Tennessee Cable Limited Partnership (the "Mid-Tennessee Systems"). In addition, on April 1, 1996 the Company acquired the cable television systems of Rifkin Cablevision of Tennessee, Ltd. (the "RCT Systems" and, together with the Mid-Tennessee Systems, the "New Tennessee Systems"). The acquisition of the Mid-Tennessee Systems (the "Mid-Tennessee Acquisition") and the acquisition of the RCT Systems (the "RCT Acquisition" and, together with the Mid-Tennessee Acquisition, the "Acquisitions"), which are proximate to the Company's other systems in Tennessee (the "Other Tennessee Systems" and, together with the New Tennessee Systems, the "Tennessee Systems"), furthers the Company's strategy of clustering its cable systems to achieve economies of scale and operating efficiencies. Rifkin & Associates has managed the New Tennessee Systems since 1986 and these systems have experienced growth in homes passed, basic subscribers and Adjusted EBITDA between January 1, 1991 and December 31, 1995 of 12.3%, 21.7% and 10.4%, respectively, despite having incurred losses under generally accepted accounting principles during the years ended December 31, 1991, 1992, 1993, 1994 and 1995 of $3.7 million, $2.6 million, $2.2 million, $2.6 million and $2.4 million, respectively (such losses being primarily attributable to depreciation and amortization expenses resulting from the initial acquisitions of these cable systems and subsequent capital additions and interest expense). At December 31, 1995, the New Tennessee Systems passed approximately 56,800 homes and served approximately 45,600 basic subscribers. At December 31, 1995, pro forma for the Acquisitions, the Other Systems and the New Tennessee Systems (collectively, the "Systems") passed approximately 230,800 homes and served approximately 177,900 basic - -------- 1. See footnote (b) on p. 17. subscribers, for a basic penetration level of 77.1%. The Company is one of the largest multiple system operators ("MSO") in Tennessee, based on information provided by The Tennessee Cable Television Association as of December 31, 1995 regarding the number of basic subscribers served. The Company believes that its strategy of clustering of these systems to achieve economies of scale and operating efficiencies will create opportunities to improve customer service and marketing, reduce administrative costs and deploy new technologies more cost-effectively. For the year ended December 31, 1995, pro forma for the Acquisitions, the Company had revenue of approximately $65.6 million and, Adjusted EBITDA/1/ of approximately $30.1 million. MANAGEMENT AND OWNERSHIP The Systems are managed by Rifkin & Associates, which was founded in 1982 by Monroe M. Rifkin, its Chairman and Chief Executive Officer. At December 31, 1995, Rifkin & Associates managed 81 cable television systems in the United States serving over 341,000 basic subscribers. For the period from January 1, 1991 to December 31, 1995, the cable television systems managed by Rifkin & Associates experienced an aggregate growth in basic subscribers of 23.9%. Substantially all of this growth was generated through increases in basic penetration levels and homes passed. Prior to establishing Rifkin & Associates in 1982, Mr. Rifkin founded and served as Chairman and Chief Executive Officer of American Television and Communications Corporation ("ATC"). ATC was the second largest cable television company in the United States in 1978, when it was purchased by Time Incorporated. Mr. Rifkin and the other senior officers of Rifkin & Associates have an average of 15 years of experience in the construction, acquisition, ownership, management and operation of cable television systems. The Company believes that the depth and experience of the management team of Rifkin & Associates is a key asset which significantly enhances the Company's operating and financial performance. See "Management-- Director and Executive Officers of Rifkin & Associates; Advisory Committee of the Company." In August 1995, the Company effected a recapitalization (the "Recapitalization") in which a group led by VS&A Communications Partners II, L.P. ("VS&A"), an investment fund affiliated with Veronis, Suhler & Associates Inc. (an investment banking firm specializing in the media and communications industry) and further comprised of Greenwich Street (RAP) Partners I, L.P. ("Greenwich"), IEP I Holdings LLC, an affiliate of ING Equity Partners L.P. I, and PaineWebber Capital, Inc. (collectively, the "VS&A Group") acquired the interests of certain limited partners in RAP L.P. for approximately $39.4 million in cash and invested approximately $41.6 million in cash as new equity in the Partnership. In connection with the Recapitalization, Mr. Rifkin, certain trusts controlled by Mr. Rifkin (the "Rifkin Trusts") and certain current and former members of management of Rifkin & Associates (collectively, the "Rifkin Group") exchanged their then-existing limited partnership interests in RAP L.P., which for purposes of the Recapitalization were valued at approximately $9.1 million, for limited partnership interests in the Partnership (the "Equity Rollover"). In addition, the Rifkin Trusts invested $600,950 in cash as new equity in the Partnership. In January 1996, as a condition to issuance of the Old Notes, the VS&A Group and the Rifkin Group (collectively, the "Investor Group") invested $15 million in cash as additional equity in the Partnership (the "New Equity"). As a result, the Investor Group has invested an aggregate of $57.2 million in cash in addition to the $39.4 million paid to the prior limited partners of RAP L.P. for their partnership interests and the Equity Rollover for its ownership interest in the Partnership. As a result of these transactions, the VS&A Group and the Rifkin Group hold 89.2% and 9.8% limited partnership interests in the Partnership, respectively, and the General Partner continues to hold its 1% general partnership interest in the Partnership. See "Principal Security Holders" and "Certain Relationships and Related Transactions." As a condition to the investment in the Partnership made by the VS&A Group, in connection with the Recapitalization, the Partnership also assumed from RAP L.P. a subordinated note in the principal amount of $3 million payable to Monroe M. Rifkin (the "Old Rifkin Note"). In connection with the Old Notes Offering, the Old Rifkin Note was amended and restated to rank pari passu with the Notes (the "New Rifkin Note"). See "Certain Relationships and Related Transactions--Senior Subordinated Debt Held by Monroe M. Rifkin." Finally, as part of the Recapitalization, the fee payable by the Partnership to Rifkin & Associates for management services was reduced from 5.0% to 3.5% of the Partnership's revenue. - -------- 1. See footnote (b) on p. 17. THE SYSTEMS Certain information regarding the Systems is presented below as of December 31, 1995: <TABLE> <CAPTION> NEW TENNESSEE ALL OTHER SYSTEMS SYSTEMS SYSTEMS ---------------------------------------------- ----------------- ------- OTHER TOTAL MID- GEORGIA TENNESSEE ILLINOIS MICHIGAN OTHER TENNESSEE RCT SYSTEMS SYSTEMS SYSTEMS SYSTEMS SYSTEMS SYSTEMS SYSTEMS ------- --------- -------- -------- ------- --------- ------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Homes Passed............ 66,307 58,289 35,469 13,989 174,054 42,448 14,320 230,822 Basic Subscribers(1).... 48,925 48,128 24,269 10,949 132,271 33,407 12,230 177,908 Basic Penetration....... 73.8% 82.6% 68.4% 78.3% 76.0% 78.7% 85.4% 77.1% Premium Service Units(2)............... 34,651 25,401 13,555 6,778 80,385 20,800 7,140 108,325 Premium Penetration..... 70.8% 52.8% 55.9% 61.9% 60.8% 62.3% 58.4% 60.9% CAGR:(3) Homes Passed........... 5.8% 3.8% 0.0% 2.3% 3.5% 3.5% (0.7)% 3.2% Basic Subscribers...... 11.1% 4.8% 2.9% 5.5% 6.5% 5.1% 1.3% 5.9% Premium Service Units.. 13.0% 10.0% 14.8% 10.1% 12.0% 12.4% 11.6% 12.1% Capacity in Mhz......... 450 312-450 300-450 318-400 300-450 286-400 450 286-450 Channel Capacity........ 61 37-60 35-60 38-53 35-61 33-53 60 33-61 Revenue (in millions)(4)........... $19.8 $17.6 $8.9 $3.9 $50.2 $11.7 $3.7 $65.6 </TABLE> - -------- (1) A home with one or more television sets connected to a cable system is counted as one basic subscriber. Bulk accounts are included on a "basic subscriber equivalent" basis in which the total basic monthly bill for the account is divided by the basic monthly charge for a single residential outlet in the applicable system. (2) Premium Service Units represents the number of subscriptions to premium channels. (3) CAGR represents the compound annual growth rate for the period from January 1, 1991 to December 31, 1995. (4) Revenue is presented for the year ended December 31, 1995. OTHER SYSTEMS The Georgia Systems. The Georgia Systems serve communities in northeast Gwinnett County, including the cities of Lawrenceville, Duluth, Suwanee, Buford, Sugar Hill and Dacula, and the city of Roswell in Fulton County. All of the communities served by the Georgia Systems are suburbs of Atlanta. At December 31, 1995, these systems passed approximately 66,300 homes and served approximately 48,900 basic subscribers. Since 1985, Gwinnett County's population has grown at a compound annual rate of over 5.7% according to the Atlanta Regional Commission (the "ARC"), which tracks growth for road development and other governmental uses. The ARC estimates that Gwinnett County's population will continue to grow from approximately 410,000 in 1994 to approximately 541,000 by the year 2000, which implies a compound annual growth rate of 4.7%. According to the ARC, the population of the census tracts within the Company's Gwinnett County service area is projected to grow through the year 2000 at a compound annual growth rate of 5.0%. The Roswell system serves a population of 54,000 and, according to United States 1990 Census data, residents of Roswell had one of the highest per capita incomes in the Atlanta metropolitan area. The Other Tennessee Systems. The Other Tennessee Systems serve the communities of Columbia, Cookeville, Paris and Tullahoma, located in central Tennessee, proximate to Nashville. At December 31, 1995, these systems passed approximately 58,300 homes and served approximately 48,100 basic subscribers. Columbia, the largest of the Other Tennessee Systems, principally serves Maury County which, according to the Tennessee State Planning Office, has experienced compound annual population growth of 3.5% since 1990. This growth is largely the result of the construction of the General Motors Saturn plant in Spring Hill, Tennessee (a community served by the Columbia System) and related new business formation. The Illinois Systems. The Illinois Systems serve communities in southern Illinois. At December 31, 1995, these systems passed approximately 35,500 homes and served approximately 24,300 basic subscribers. These communities generally receive poor off-air reception from St. Louis and require cable service to receive high quality broadcast signals. Nearly 60% of the subscribers served by the Illinois Systems are in the Mt. Vernon and Centralia systems. The Michigan Systems. The Michigan Systems serve the cities of Bridgeport/Frankenmuth, Bad Axe, Gagetown, Harbor Beach and Reese. At December 31, 1995, these systems passed approximately 14,000 homes and served approximately 10,900 basic subscribers. The Bridgeport/Frankenmuth system, which is located between the industrial cities of Flint and Saginaw, represents approximately two-thirds of the subscribers served by the Michigan Systems. Bridgeport is home to numerous manufacturing plants which support the automobile industry, while the other communities served by the Michigan Systems have economies based primarily on tourism. THE NEW TENNESSEE SYSTEMS Mid-Tennessee Systems. The Mid-Tennessee Systems serve Lebanon and McMinnville, which are proximate to the Company's Other Tennessee Systems, and communities in the Tri-Cities area in northeast Tennessee (the "Hickory Hill System"). At December 31, 1995, the Mid-Tennessee Systems passed approximately 42,500 homes and served approximately 33,400 basic subscribers. The Lebanon system serves a growing suburban area east of Nashville. The McMinnville system serves communities proximate to Nashville in central Tennessee. The Hickory Hill System serves communities near the Tri-Cities of Bristol, Johnson City and Kingsport in northeast Tennessee. A major Bridgestone tire plant was recently completed in McMinnville and the Company expects businesses serving the automobile industry to continue to develop in the region. RCT Systems. The RCT Systems, located in south central Tennessee, are proximate to the Company's Columbia system and serve the communities of Pulaski, Lawrenceburg and Fayetteville. At December 31, 1995, the RCT Systems passed approximately 14,300 homes and served approximately 12,200 basic subscribers. These communities enjoy diverse employment in manufacturing, farming and light industry. Homes in this area generally receive limited off- air reception and require cable to receive high quality broadcast signals and a greater variety of television programming. BUSINESS STRATEGY The Company's business strategy includes the following key elements intended to enhance its operating and financial performance: Consolidating Operations/Strategic Acquisitions. The Company believes that consolidating operations will increase Adjusted EBITDA/1/ by allowing for efficiencies in such areas as administration, marketing, customer service and advertising sales. The Company will also explore opportunities to consolidate headends in order to reduce maintenance costs as well as the cost of adding new channels and implementing new technologies and services. The Company has consolidated and intends to further consolidate certain of the operations of the New Tennessee Systems with the Other Tennessee Systems. Future acquisition efforts are expected to focus on acquiring systems in close proximity to existing systems, or on systems of sufficient size to serve as cores for new operating clusters. The Company has identified three potential acquisitions, none of which is of a material size. The Company will also consider divesting systems on an opportunistic basis. Innovative Marketing. The Company aggressively markets and promotes its cable television systems with the objective of increasing penetration and average revenue per subscriber. The Company actively markets its basic and premium program packages through innovative marketing tactics that include direct mail and telemarketing efforts targeted to specific subscriber and non-subscriber demographic profiles, newspaper and television advertising and door-to-door sales. In selected markets, the Company is also expanding its sources of revenue from services such as pay-per-view and new services such as the Sega Channel. In addition, the Company also recently entered into an agency relationship with Sprint Communications Company, L.P. to market Sprint long distance telephone services in certain markets. System Enhancements. The Company is committed to maintaining and enhancing the technical integrity and channel capacity of its cable systems as demonstrated by the fact that all of the Systems have capacities of 30 or more channels. Within the next five years, the Company intends to rebuild nearly all of the Systems such that the Systems will have a minimum bandwidth of 450 MHz (60 analog channel capacity) and a number of the Systems will have bandwidth of 750 MHz (110 analog channel capacity or a combination of 93 analog channel capacity and 100 MHz of digital channel capacity). Additionally, the Company is committed to extending its distribution system to keep pace with the growth in the communities it serves as well as making continuous investments that improve picture quality and plant reliability. - -------- 1. See footnote (b) on p. 17. Subscriber Value. The Company uses a high quality, well-trained staff of customer service representatives and local field technicians which Management believes provides exceptional customer service. To this end, the Company continues to invest resources in training its customer service representatives and field technicians. In addition, the Company regularly evaluates the programming offered by its systems in order to offer its subscribers innovative packages of basic and premium services, including locally originated programming. ACQUISITIONS AND FINANCING PLAN Acquisitions. On March 1, 1996, the Company acquired the Mid-Tennessee Systems from Mid-Tennessee Cable Limited Partnership ("MTCLP"). On April 1, 1996 the Company acquired the RCT Systems, from Rifkin Cablevision of Tennessee, Ltd. Both MTCLP and Rifkin Cablevision of Tennessee, Ltd. are affiliates of Monroe M. Rifkin. See "Risk Factors--Conflicts of Interest; Affiliate Transactions." The purchase price for the Mid-Tennessee Systems (including approximately $1.1 million of assumed liabilities), which remains subject to certain post-closing adjustments, was $62 million. The Company acquired the Mid-Tennessee Systems pursuant to a right of first refusal exercised by Rifkin/MT Management, L.P., an entity controlled by Monroe M. Rifkin following the acceptance by MTCLP of an offer from an unrelated third party to acquire such systems. The right to acquire the Mid-Tennessee Systems pursuant to such right of first refusal was subsequently assigned to the Company. In connection with such assignment, the Company paid a fee of approximately $619,000 to Rifkin & Associates. The purchase price for the RCT Systems of $10.2 million (including approximately $500,000 of assumed liabilities) which remains subject to certain post-closing adjustments, was reached through negotiations with the principal limited partner that controlled such systems and is unaffiliated with the Company and Monroe M. Rifkin. ORGANIZATIONAL CHART -------------------- [Organizational Chart of the Company appears here in courtesy copy provided to the S.E.C.] The Financing Plan. On January 31, 1996, the Issuers completed the Old Notes Offering, as part of a plan (the "Financing Plan") designed to enable the Company to complete the Acquisitions and to provide the Company with long term fixed rate financing. Under the Financing Plan, (i) the Issuers issued the Old Notes in the Old Notes Offering, (ii) the Company received $15 million of New Equity from the Investor Group, (iii) the Company's prior credit agreement was amended (as amended, the "Amended and Restated Credit Agreement") to provide ongoing borrowing availability, including availability to finance Permitted Acquisitions (as defined), provided the Company satisfies certain requirements and (iv) the $3 million Old Rifkin Note was amended and restated to, among other things, provide that such indebtedness shall rank pari passu with the Notes and have an interest rate and scheduled maturity identical to that of the Notes. Proceeds of the Offering and the New Equity were used to complete the Acquisitions, to pay transaction costs and expenses related to the Financing Plan and the Acquisitions (collectively, the "Transactions") and to reduce outstanding indebtedness under the Amended and Restated Credit Agreement. The following table presents the sources and uses of funds under the Financing Plan assuming the Transactions had occurred on December 31, 1995: <TABLE> <CAPTION> SOURCES OF FUNDS - ---------------- <S> <C> Senior Subordinated Notes... $125,000,000 New Equity Contributions.... 15,000,000 ------------ Total Sources........... $140,000,000 ============ </TABLE> <TABLE> <CAPTION> USES OF FUNDS - ------------- <S> <C> Acquisitions(1): The Mid-Tennessee Acquisition........................................... $ 60,877,000 The RCT Acquisition..................................................... 9,699,000 Repayment of borrowings under the Amended and Restated Credit Agreement.. 63,424,000 Transaction costs and expenses........................................... 6,000,000 ------------ Total Uses........................................................... $140,000,000 ============ </TABLE> - -------- (1) The aggregate cash consideration payable for the New Tennessee Systems is subject to certain adjustments for working capital as contemplated by the respective purchase agreements. Such adjustments are assumed to reduce the aggregate cash purchase price for the Acquisitions by $1.6 million for purposes hereof based on the current assets and liabilities of the New Tennessee Systems as of December 31, 1995. See "Unaudited Pro Forma Condensed Consolidated Financial Data." After giving effect to the Transactions as of December 31, 1995, the Company would have had total unused commitments under the Amended and Restated Credit Agreement of $73.9 million, $13.9 million of which would have been available for general corporate purposes. See "Description of Amended and Restated Credit Agreement." RECENT REGULATORY DEVELOPMENTS On February 8, 1996, the President signed into law the Telecommunications Act of 1996 ("1996 Telecom Act"). This new law alters federal, state and local laws and regulations regarding telecommunications providers and cable television service providers, including the Company. See "Legislation and Regulation in the Cable Television Industry." The 1996 Telecom Act deregulates the rates for "small cable operators" for cable programming service tiers. On April 5, 1996, the FCC issued a Notice of Proposed Rulemaking and adopted interim rules under which the Company would generally qualify as a "small cable operator." Management anticipates that it will qualify as a "small cable operator" when the rulemaking is concluded and final rules are issued. It is the Company's understanding, that based on such interim rules, the Company qualifies as a "small cable operator" and its systems are subject to the specific rules for "small cable operators." Under the FCC's interim rules, the Company's systems are immediately relieved from any rate regulation on cable programming service tiers. Although the Company is unable to predict the precise outcome of the impact of the "small cable operator" rules, the Company believes these rules will have a positive impact on the financial condition of the Company, as the Company will have the flexibility to price its cable programming service tiers, appropriate to market conditions, without artificial rate restraints. The 1996 Telecom Act did not change the existing streamlined rate regulation rules for small cable systems adopted by the FCC in 1995. Additionally, the 1996 Telecom Act removed all barriers to telephone company and electric utility company entry into the cable television business. Further, the 1996 Telecom Act allows for potentially significant pole rental attachment increases commencing in five years, with such increases being phased-in over the succeeding five year period. For a detailed review of the 1996 Telecom Act, see "Legislation and Regulation in the Cable Television Industry." Regarding the rate regulation of basic cable service, on June 5, 1995, the Federal Communications Commission (the "FCC") issued an order (the "Small Systems Order") adopting new rules to reduce the substantive and procedural burdens of rate regulation applicable to small cable systems (serving 15,000 or fewer subscribers) owned by cable companies which operate multiple systems serving fewer than 400,000 subscribers. Under the Small Systems Order, the regulatory benefits accruing to such systems remain effective even if such systems are later acquired by MSOs which serve in excess of 400,000 subscribers. All of the Systems qualify as "small cable systems" under the Small Systems Order, except for the systems serving northeast Gwinnett County, Georgia and Columbia, Tennessee, which had approximately 34,500 and 17,200 basic subscribers, respectively, as of September 30, 1995, representing approximately 29% of the total basic subscribers in the Systems. The Company has applied to the FCC to have the Columbia system characterized as a small system, but is unable to predict the timing or outcome of such application. See "Legislation and Regulation in the Cable Television Industry--Rate Regulation." TRANSACTIONS RELATED TO THE OLD NOTES OFFERING In connection with the offering of the Old Notes (the "Old Notes Offering"), the following transactions (together with the Old Notes Offering and the use of proceeds thereof, collectively, the ("Transactions") occurred or will occur: Escrow Account; Mid-Tennessee Acquisition. Concurrently with the closing of the Old Notes Offering, the net proceeds of the Old Notes Offering were placed in an escrow account maintained by the Trustee (the "Escrow Account"). All of the funds in such Escrow Account, together with any interest earned thereon were released on March 1, 1996, and were used to finance the New Tennessee Acquisitions, to reduce outstanding indebtedness under the Amended and Restated Credit Agreement. See "Acquisitions", "Use of Proceeds," "Capitalization," "Description of Amended and Restated Credit Agreement" and "Description of Exchange Notes." THE EXCHANGE OFFER The Exchange Offer........ The Company is offering to exchange (the "Exchange Offer") up to $125,000,000 aggregate principal amount of its new 11 1/8% Senior Subordinated Notes due 2006 (the "Exchange Notes") for up to $125,000,000 aggregate principal amount of its outstanding 11 1/8% Senior Subordinated Notes due 2006 that were issued and sold in a transaction exempt from registration under the Securities Act (the "Old Notes") and, together with the Exchange Notes, the "Notes"). The form and terms of the Exchange Notes are substantially identical (including principal amount, interest rate, maturity, security and ranking) to the form and terms of the Old Notes for which they may be exchanged pursuant to the Exchange Offer, except that the Exchange Notes are freely transferable by holders thereof except as provided herein (see "The Exchange Offer--Terms of the Exchange" and "--Terms and Conditions of the Letter of Transmittal") and are not entitled to certain registration rights and certain additional interest provisions which are applicable to the Old Notes under a registration rights agreement dated as of January 31, 1996 (the "Registration Rights Agreement") among the Partnership, RACC, the Guarantors and BT Securities Corporation, Smith Barney, Inc., First Union Capital Markets Corp. and PaineWebber Incorporated as initial purchasers (collectively, the "Initial Purchasers"). Exchange Notes issued pursuant to the Exchange Offer in exchange for the Old Notes may be offered for resale, resold and otherwise transferred by holders thereof (other than any holder which is (i) an Affiliate of the Company, (ii) a broker-dealer who acquired Old Notes directly from the Company or (iii) a broker-dealer who acquired Old Notes as a result of market-making or other trading activities), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such Exchange Notes are acquired in the ordinary course of such holders' business and such holders are not engaged in, and do not intend to engage in, and have no arrangement or understanding with any person to participate in, a distribution of such Exchange Notes. Minimum Condition......... The Exchange Offer is not conditioned upon any minimum aggregate principal amount of Old Notes being tendered or accepted for exchange. Expiration Date........... The Exchange Offer will expire at 5:00 p.m., New York City time, on June 18, 1996, unless extended (the "Expiration Date"). Exchange Date............. The first date of acceptance for exchange for the Old Notes will be the first business day following the Expiration Date. Conditions to the The obligation of the Company to consummate the Exchange Offer........... Exchange Offer is subject to certain conditions. See "The Exchange Offer--Conditions to the Exchange Offer." The Company reserves the right to terminate or amend the Exchange Offer at any time prior to the Expiration Date upon the occurrence of any such condition. Withdrawal Rights......... Tenders of Old Notes pursuant to the Exchange Offer may be withdrawn at any time prior to the Expiration Date. Any Old Notes not accepted for any reason will be returned without expense to the tendering holders thereof as promptly as practicable after the expiration or termination of the Exchange Offer. Procedures for Tendering See "The Exchange Offer--How to Tender." Old Notes................ Federal Income Tax The exchange of Old Notes for Exchange Notes by Consequences............. tendering holders will not be a taxable exchange for federal income tax purposes, and such holders should not recognize any taxable gain or loss as a result of such exchange. Use of Proceeds........... There will be no cash proceeds to the Company from the exchange pursuant to the Exchange Offer. Effect on Holders of Old As a result of the making of this Exchange Offer, Notes.................... and upon acceptance for exchange of all validly tendered Old Notes pursuant to the terms of this Exchange Offer, the Company will have fulfilled a covenant contained in the terms of the Old Notes and the Registration Rights Agreement, and, accordingly, the holders of the Old Notes will have no further registration or other rights under the Registration Rights Agreement, except under certain limited circumstances. See "Old Notes Registration Rights." Holders of the Old Notes who do not tender their Old Notes in the Exchange Offer will continue to hold such Old Notes and will be entitled to all the rights and limitations applicable thereto under the Indenture. All untendered, and tendered but unaccepted, Old Notes will continue to be subject to the restrictions on transfer provided for in the Old Notes and the Indenture. To the extent that Old Notes are tendered and accepted in the Exchange Offer, the trading market, if any, for the Old Notes not so tendered could be adversely affected. See "Risk Factors--Consequences of Failure to Exchange Old Notes." TERMS OF THE EXCHANGE NOTES The Exchange Offer applies to $125,000,000 aggregate principal amount of Old Notes. The form and terms of the Exchange Notes are substantially identical to the form and terms of the Old Notes, except that the Exchange Notes have been registered under the Securities Act and, therefore, will not bear legends restricting the transfer thereof. The Exchange Notes will evidence the same debt as the Old Notes and will be entitled to the benefits of the Indenture. See "Description of Exchange Notes." Securities Offered........ $125,000,000 aggregate principal amount of 11 1/8% Senior Subordinated Notes due 2006. Issuers................... The Notes are joint and several obligations of Rifkin Acquisition Partners, L.L.L.P. and Rifkin Acquisition Capital Corp. ("RACC"). Maturity Date............. January 15, 2006. Interest Payment Dates.... Interest on the Notes will accrue from the date of issuance, January 26, 1996 (the "Issue Date"), at the rate of 11 1/8 % per annum and will be payable in cash semi-annually in arrears on January 15 and July 15 of each year, commencing July 15, 1996. Optional Redemption....... The Notes will be redeemable at the Issuers' option, in whole or in part, at any time on or after January 15, 2001, at the redemption prices set forth herein, together with accrued and unpaid interest, if any, to the date of redemption. In addition, at any time on or prior to January 15, 1999, the Issuers, at their option, may redeem up to 25% of the aggregate principal amount of the Notes originally issued with the net proceeds of one or more Public Equity Offerings or Strategic Equity Investments in which the Issuers receive proceeds of not less than $25 million, at a redemption price equal to 111 1/8% of the principal amount thereof, together with accrued and unpaid interest, if any, to the date of redemption; provided, however, that after any such redemption the aggregate principal amount of the Notes outstanding must equal at least 75% of the aggregate principal amount of the Notes originally issued. Change of Control......... Upon the occurrence of a Change of Control, each holder of the Notes will have the right to require the Issuers to purchase all or a portion of such holder's Notes at 101% of the principal amount thereof, together with accrued and unpaid interest, to the date of purchase. An acquisition of control of the Company by Monroe M. Rifkin, VS&A or any of their respective affiliates would not constitute a Change of Control under the Indenture governing the Notes. See "Description of Exchange Notes--Change of Control." Ranking................... The Notes will represent senior subordinated obligations of the Issuers and will be subordinated in right of payment to all existing and future Senior Debt of the Issuers. As of December 31, 1995, on a pro forma basis after giving effect to the Transactions, the Issuers would have had $71.1 million of Senior Debt outstanding (excluding unused commitments of $73.9 million under the Amended and Restated Credit Agreement) and $3 million of indebtedness outstanding that ranks pari passu with the Notes. See "Risk Factors-- Substantial Leverage and Risk of Inability to Service Debt." Subsidiary Guarantees..... The Notes will be jointly and severally guaranteed on a senior subordinated basis by the Guarantors. The Guarantees will be general unsecured obligations of the Guarantors and will be subordinated in right of payment to all existing and future Senior Debt of the Guarantors. As of December 31, 1995, on a pro forma basis after giving effect to the Transactions, the Guarantors would have had no Senior Debt outstanding (excluding guarantees of Senior Debt of the Company). See "Risk Factors--Subordination of Notes and the Subsidiary Guarantees; Asset Encumbrances." Certain Covenants......... The Indenture contains certain covenants, including, but not limited to, covenants with respect to the following matters: (i) limitations on additional indebtedness and issuance of certain additional equity interests; (ii) limitations on restricted payments; (iii) limitations on transactions with affiliates; (iv) limitations on asset sales; (v) limitations on the incurrence of liens; (vi) limitations on the creation of restrictions on the ability of certain subsidiaries to make certain distributions and payments to the Company; (vii) limitations on the transfer of certain assets to subsidiaries; and (viii) restrictions on mergers, consolidations and the transfer of all or substantially all of the assets of the Company to another person. These covenants are subject to important exceptions and qualifications. See "Description of Exchange Notes--Covenants." EXCHANGE OFFER; REGISTRATION RIGHTS; ADDITIONAL INTEREST Pursuant to the Registration Rights Agreement, the Issuers and the Subsidiary Guarantors have agreed (i) to file the Registration Statement on or prior to April 10, 1996 with respect to the Exchange Offer, and (ii) to use their best efforts to cause such registration statement to become effective under the Securities Act on or prior to June 10, 1996. If the Issuers and the Subsidiary Guarantors do not comply with their registration obligations in a timely manner, the Issuers will be required to pay additional interest (in addition to the scheduled payment of interest) during the first 90-day period of such default in an amount equal to 0.50% per annum. The amount of the additional interest will increase by an additional 0.50% per annum for each subsequent 90-day period until such obligations are complied with, up to a maximum amount of additional interest of 2.0% per annum. See "Transactions Related to the Old Notes Offering--The Exchange Offer--Effect on Holders of Old Notes."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001011745_q-clubs_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001011745_q-clubs_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..01ed5a9ba605fc19d65c9daf39497995276a9d38
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0001011745_q-clubs_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the consolidated financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Except as otherwise noted, all of the information in this Prospectus assumes: (i) no exercise of the Underwriters' over-allotment option; (ii) a 19.65165-for-one stock split to be effected immediately prior to the completion of the offering; (iii) the conversion of all outstanding shares of Series A Preferred Stock into Common Stock on a one-for-one basis and Series B Preferred Stock into Common Stock on a 1.379-for-one basis immediately prior to the completion of the offering; and (iv) the exercise of all but 58,130 of the outstanding warrants to purchase Common Stock. Prospective investors should carefully read the entire Prospectus and should consider, among other things, the matters set forth in "Risk Factors." THE COMPANY Q Clubs Inc. operates large (approximately 44,000 to 47,000 square foot), high quality, full-service health clubs at attractive prices under the name "Q The Sports Club." The Company opened its first Q Club in November 1990 and currently operates 16 Q Clubs. It anticipates opening approximately four additional Q Clubs during the remainder of 1996 and approximately 13 additional clubs in 1997. In developing its Q Club concept, the Company has sought to capitalize on the increasing health and exercise commitment of older deconditioned Americans by designing and marketing its Q Clubs to appeal to a target segment composed of individuals in the 35 and older age group, who generally have higher disposable incomes. The Company's objective is to establish itself as the first nationwide operator of commercial health clubs employing a large, standardized facility and uniform operations under a highly recognizable brand name. The health club industry is highly fragmented. The Company estimates that there are less than 15 companies that own and operate more than 25 facilities. In a 1996 report, the International Health, Racquet and Sportsclub Association ("IHRSA"), a trade association comprised of higher-end sports and fitness clubs, estimates that there are approximately 12,000 commercial fitness centers in the United States and that revenue generated from membership fees from such facilities approximates $8.25 billion. American Sports Data, Inc. ("ASDI"), a consumer panel research organization, reported in its most recent industry study in 1994 that health club memberships have grown 64% for the 35 to 54 year old age group and 70% for the 55 and older age group (which groups together represent the Company's target market segment) between the years 1987 and 1994. This compares to a 26% growth in memberships among the 18 to 34 year old age group. The majority of Q Club members fall within the targeted segment and the median age of a Q Club member is approximately 37 years old. ASDI further reports that approximately 20 million Americans, or 8.6% of the total U.S. population, are currently members of a health club. Based on the ASDI report, the Company estimates that among Americans with incomes greater than $50,000, 15.4% have health club memberships. The Company's strategy is to offer its members health and fitness services including a large assortment of exercise options and ancillary programs in a state-of-the-art facility supported by a large, customer-oriented staff at economical membership prices. This operating strategy is based on the substantial experience of the Company's management team and its analysis of the competitive environment. The key components of this strategy are: - Developing a Unique, Branded Concept -- Q The Sports Club. Q Clubs are designed to attract people who may not otherwise be drawn to more typical health club facilities by creating a more enjoyable and comfortable environment for club members and their families. The Q Club concept is especially designed to address and overcome commonly perceived shortcomings of traditional health and fitness clubs, such as overcrowding, inconvenient location, high membership costs and intimidating atmosphere. - Building Uniform, High-Capacity Clubs. The Company has designed its prototype Q Club to provide members with the convenience of a large variety of exercise options and services at a single location. The Company believes, based on IHRSA data, that the Q Club's efficient design, which can accommodate more than 2,000 users per day, permits utilization of its space (in mature clubs) at more than double industry averages in terms of memberships per square foot. The prototype Q Club is specifically designed to achieve membership levels at maturity (usually four to five years after opening) ranging from 9,000 to 14,000 members per Q Club as compared to the industry average of 1,500 to 3,200 members per club. - Providing a Broad Array of Services at Attractive Prices. The Company seeks to provide its members with excellent value by offering them high quality health and fitness services at prices that it believes are substantially less than health clubs that offer comparable amenities. Each Q Club offers a variety of innovative and specialized programs to its members in addition to providing them with a state-of-the-art exercise facility. For instance, each Q Club offers a supervised fitness and child care facility, known as Q 4 Kids, where members can leave their children while exercising at the club. - Utilizing an Advanced Sales and Marketing Program. One of the Company's key marketing strategies is to establish a dominant presence and maintain a high level of brand name recognition in its markets. To create brand awareness and identify prospective members, the Company maintains extensive advertising and marketing programs in each of its markets. These programs include local television advertisements and direct response sales activities which generate substantial new member activity at the opening of clubs and help to grow the membership base over time. - Employing a Highly-Trained, Service-Oriented Staff. Each Q Club has a staff of approximately 90 full-and part-time employees, including personal trainers, fitness instructors, massotherapists, sales associates and maintenance personnel. Through a variety of training programs, the Company seeks to instill in its employees the Q Club's emphasis on service. Each staff member completes in-house training and each personal trainer must be certified by an accredited health institution and hold a Bachelor's degree in exercise or another health-related discipline. The Company's unique operating strategy and standardized design for each of its facilities provides economies of scale in construction, advertising, marketing and staffing. The Company is typically able to open a new Q Club in less than six months after acquiring the necessary real estate. The Company currently plans to expand only through the construction of new Q Clubs in order to ensure its ability to replicate its well-established physical design and operating procedures at each site. The Company's expansion strategy, including its strict criteria for selecting sites, has been implemented in the Phoenix, Houston and Dallas markets. The Company's founder, Frank M. Leonesio, has 28 years of experience in the health club industry. In 1972, Mr. Leonesio founded, developed, managed and subsequently sold a successful company that operated 35 clubs. He used a portion of the proceeds to found the Company, for which he organized a management team of individuals with an average tenure in the industry of over 16 years. The Company was incorporated in Delaware in April 1993 under the name Sports & Fitness Clubs, Inc. to serve as a holding company for the Company's principal operating subsidiary, Sports & Fitness Clubs of America, Inc., an Ohio corporation ("SFCA"), which was formed in January 1990. On April 1, 1996, the Company's name was changed to Q Clubs Inc. The Company's principal executive offices are located at 395 Springside Drive, Akron, Ohio 44333, and its telephone number is (330) 665-1281. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company.......... 2,000,000 shares Common Stock to be outstanding after the Offering(1)................................ 7,537,035 shares Use of Proceeds.............................. To repay certain bank and shareholder indebtedness, to pay certain preferred stock dividends, to finance the construction of new Q Clubs and for general working capital purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol....... QCLB </TABLE> - --------------- (1) Excludes 161,631 shares of Common Stock issuable upon the exercise of outstanding management stock options granted under the Company's 1994 Stock Option Plan and 58,130 shares of Common Stock reserved for issuance upon the exercise of warrants. See "Management -- 1994 Stock Option Plan." SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARES, PER SHARE AMOUNTS AND SELECTED OPERATING DATA) <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, THREE MONTHS ENDED --------------------------------------------------------- MARCH 31, 1991 1992 1993 1994 1995 --------------------- --------- --------- --------- --------- --------- 1995 1996 --------- --------- (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> INCOME STATEMENT DATA: Net revenues.................. $ 9,619 $ 12,007 $ 15,012 $ 32,642 $ 53,624 $ 14,221 $ 24,331 Operating income.............. 1,102 2,105 2,349 2,952 3,836 1,285 3,988 Interest expense.............. 1,042 1,298 1,211 1,992 3,633 1,313 1,699 Income (loss) before income taxes....................... 60 807 1,138 960 203 (28) 2,289 Pro forma net income (loss)(1)................... $ 37 $ 495 $ 698 $ 577 $ 125 $ (11) $ 1,379 Pro forma net income (loss) per common share(2)............. $ 0.02 $ (--) $ 0.23 Shares used for purposes of computing pro forma net income per share(2)......... 5,883,813 5,883,813 5,883,813 SELECTED OPERATING DATA: Q Clubs open at end of period...................... 3 3 4 9 13 11 16 Membership contracts at end of period(3)................... 15,133 22,249 28,792 44,367 74,436 54,847 91,458 Club operating months(4)...... 28 36 39 70 132 31 45 Average age of Q Clubs (in months)(4).................. 9.7 21.7 26.0 19.3 23.5 18.8 22.1 </TABLE> <TABLE> <CAPTION> AT MARCH 31, 1996 --------------------------- PRO FORMA AS ADJUSTED(5) -------------- ACTUAL (UNAUDITED) -------- (UNAUDITED) <S> <C> <C> BALANCE SHEET DATA: Working capital (deficit)................................................. $ (4,387) $ (3,287) Total assets.............................................................. 123,013 123,013 Total debt................................................................ 57,644 34,651 Redeemable Convertible Preferred Stock.................................... 28,682 -- Shareholders' equity...................................................... 3,712 55,387 </TABLE> - --------------- (1) On May 1, 1993, the Company changed its tax status from an S to a C corporation for income tax purposes. As an S corporation, the Company was not subject to federal income taxes. As a result of this change, deferred income tax liabilities of $761,000 related to the cumulative effect of changing from an S to a C corporation were recorded in the second quarter of 1993. The pro forma information has been computed as if the Company had been subject to corporate income taxes for the periods 1991 through 1993, based upon the tax laws in effect during the respective periods. (2) The number of shares used in the pro forma net income per share computation include shares of outstanding Common Stock, shares of Common Stock to be issued upon the conversion of outstanding Series A and Series B Preferred Stock, the issuance of 81,639 shares of Common Stock for the payment of $1.1 million of stock dividends on the Series A Preferred Stock, 167,651 shares of Common Stock that would be required to be issued to fund the $2.3 million cash dividend on the Series B Preferred Stock (using $14.00 per share, the mid-point of the assumed initial public offering range), shares of Common Stock to be issued upon the exercise of all but 58,130 of the outstanding warrants to purchase Common Stock and the common equivalent shares underlying stock options and 58,130 of the outstanding warrants (using the treasury stock method). All share information has been adjusted to reflect the 19.65165-for-one split of Common Stock and such shares are considered outstanding for all periods presented. (3) May include more than one member per contract. (4) Aggregate number of full months of operation during the given year for the clubs open at the end of such year. (5) Adjusted to reflect the application of the net proceeds from the sale by the Company of 2,000,000 shares of Common Stock offered hereby using $14.00 per share, the mid-point of the assumed initial public offering range. See "Use of Proceeds."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0001011888_diatide_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001011888_diatide_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2cfb4bf065fb96ff004fda51faf481f7b4251870
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0001011888_diatide_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Financial Statements and Notes thereto appearing elsewhere in this Prospectus, including the information under "Risk Factors." Except as otherwise specified, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option and reflects (i) the conversion of all outstanding shares of the Company's Convertible Preferred Stock into an aggregate of 7,531,140 shares of Common Stock at the closing of this offering and (ii) a 6-for-10 reverse stock split of the Common Stock of the Company effected on June 6, 1996. THE COMPANY Diatide is engaged in the discovery and development of proprietary radiopharmaceuticals for use in nuclear medicine imaging procedures. The Company is applying its proprietary peptide and radiolabelling technologies to the development of technetium-99m labelled synthetic peptides ("Techtides") as medical imaging agents for life-threatening and chronic diseases and conditions. Because Techtides are designed to bind selectively with molecular targets that localize or proliferate as disease is developing, the Company believes that Techtides have the potential to produce images based on the process of disease rather than the anatomical result of disease, which may alter patient treatment protocols. The Company believes that its Techtides will permit a number of clinically important new diagnostic procedures to be performed using the large installed base of nuclear medicine imaging equipment and that nuclear medicine imaging with Techtides may be more accurate, more cost-effective, less invasive and/or safer than alternative imaging modalities for certain diseases and conditions. In August 1995, the Company entered into a comprehensive strategic alliance relating to its Techtides with Nycomed Imaging ASA (together with its United States subsidiary, "Nycomed"), one of the world's leading producers of medical imaging agents. The Company has four Techtides and one non-peptide-based therapeutic product candidate currently undergoing clinical trials: - P280 for Deep Vein Thrombosis and Carotid Thrombus. P280 is a Techtide for nuclear medicine imaging of deep vein thrombosis ("DVT") and carotid thrombus. P280 targets the glycoprotein ("GP") IIb/IIIa receptor on platelets involved in blood clot formation. The Company is conducting Phase III clinical trials of P280 for nuclear medicine imaging of DVT and recently completed a Phase II clinical trial of P280 for nuclear medicine imaging of carotid thrombus. - P829 for Neuroendocrine and Other Tumors. P829 is a Techtide for nuclear medicine imaging of neuroendocrine and other tumors that overexpress the receptor for the hormone somatostatin, such as melanomas and lung and certain breast tumors. The Company is conducting Phase III clinical trials of P829 for nuclear medicine imaging of neuroendocrine tumors and plans to initiate additional clinical trials of P829 for nuclear medicine imaging of melanomas and lung and certain breast tumors. - P748 for Pulmonary Embolism. P748 is a Techtide for nuclear medicine imaging of pulmonary emboli. As with P280, P748 targets the GP IIb/IIIa receptor on platelets involved in blood clot formation. The Company is initiating Phase II clinical trials of P748. - P483H for Inflammation Due to Infection. P483H is a Techtide for nuclear medicine imaging of inflammation due to infection, such as post-surgical infection and occult (hidden) infection. The Company is conducting Phase I clinical trials of P483H. - Sn-117m DTPA for Reduction of Pain Due to Metastatic Cancer to the Bone. Sn-117m DTPA is a compound comprised of the tin radioisotope Sn-117m, which has an affinity for bone, combined with DTPA, a common chelating (binding) agent. This compound is intended to reduce pain due to metastatic cancer to the bone. The Company has licensed the exclusive rights to Sn-117m DTPA from Associated Universities, Inc., the operator of Brookhaven National Laboratories ("BNL"), which completed a Phase II clinical trial of this compound. - -------------------------------------------------------------------------------- INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED JUNE 12, 1996 2,200,000 SHARES DIATIDE COMMON STOCK The 2,200,000 shares of common stock, par value $0.001 per share (the "Common Stock"), offered hereby are being offered by Diatide, Inc. ("Diatide" or the "Company"). Prior to this offering there has been no public market for the Common Stock. It is currently estimated that the initial public offering price will be between $8.00 and $9.00 per share. See "Underwriting" for the factors considered in determining the initial public offering price. The Common Stock has been approved for quotation on the Nasdaq National Market under the symbol "DITI." AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. FOR A DISCUSSION OF CERTAIN RISKS OF AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY, SEE "RISK FACTORS" ON PAGES 6 TO 16. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ <TABLE> <CAPTION> UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS* COMPANY+ <S> <C> <C> <C> Per Share............................... $ $ $ Total++................................. $ $ $ <FN> - --------------- * The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. See "Underwriting." + Before deducting expenses of the offering payable by the Company estimated to be $800,000. ++ The Company has granted the Underwriters a 30-day option to purchase up to 330,000 additional shares of Common Stock on the same terms per share solely to cover over-allotments, if any. If such option is exercised in full, the total price to public will be $ , the total underwriting discounts and commissions will be $ and the total proceeds to Company will be $ . See "Underwriting." </TABLE> ------------------------ The Common Stock is being offered by the Underwriters as set forth under "Underwriting" herein. It is expected that the delivery of certificates therefor will be made at the offices of Dillon, Read & Co. Inc., New York, New York, on or about , 1996, against payment therefor in New York funds. The Underwriters include: DILLON, READ & CO. INC. OPPENHEIMER & CO., INC. The date of this Prospectus is , 1996 - -------------------------------------------------------------------------------- The Company believes that medical images produced with Techtides may provide physicians with information concerning the physiology of diseased cells, tissues and organs, rather than only the anatomical information generally provided by other imaging modalities. The Company believes that this information may permit a more definitive diagnosis of disease, thereby avoiding the costs and delays incident to additional diagnostic tests or an inappropriate course of therapy, and may facilitate diagnosis at an earlier stage of disease development, when therapy can more favorably alter the outcome. Nuclear medicine involves the use of radioisotopes, either by themselves or attached to carriers ("radiopharmaceuticals"), for the diagnosis and treatment of disease. In nuclear medicine imaging, the signal emitted by the radiopharmaceutical is detected with a gamma camera. There are approximately 9,600 gamma cameras in hospitals and other clinical facilities in the United States. In 1994, approximately 9,100,000 nuclear medicine imaging examinations were performed in the United States. Nuclear medicine imaging is distinguishable from other imaging modalities in two significant respects. First, other modalities use the imaging device as the principal component of the procedure, employing contrast agents to improve image quality. Nuclear medicine imaging uses radiopharmaceuticals as the principal component of the procedure; the gamma camera is only a means to record the signal emitted by the radiopharmaceutical. Second, other modalities generally only provide a visualization of the anatomy of an organ or other tissue, while nuclear medicine imaging can provide important information about the physiology of cells, tissues and other organs. Although nuclear medicine images are not as anatomically clear as images from other modalities, such as magnetic resonance imaging ("MRI") or computerized tomography ("CT"), the Company believes that nuclear medicine imaging currently is the only modality with the capability to enable imaging of pathology at the microscopic level. Techtides consist of two principal components, synthetic peptides, which are small molecules that are designed to bind with high specificity and affinity with certain molecular targets on diseased tissues, and technetium-99m ("technetium"), a commonly-used radioisotope which emits signals that can be detected using widely available nuclear medicine diagnostic equipment. Diatide applies its expertise in peptide engineering and radiolabelling chemistry to design its Techtides to selectively locate and tightly bind with their molecular targets, to label these compounds with technetium in a manner that preserves the selectivity and binding characteristics of the peptide and to optimize the pharmacokinetics of the radiopharmaceutical. Key elements of the Company's strategy are to: (i) establish the clinical utility and advantages of Techtides, (ii) exploit the large installed base of nuclear medicine equipment and know-how and (iii) leverage strong marketing collaborations. The Company also intends to utilize its proprietary peptide technology and understanding of radiopharmaceuticals to develop radiopharmaceuticals that specifically target diseased tissue as cancer therapies. Under the Company's strategic alliance with Nycomed, Nycomed is required to provide the Company with research and development support, and the Company has granted Nycomed options to co-promote Techtides in the United States and to distribute and license Techtides in Europe, South Africa and certain countries in the Middle East. At the time the alliance was established, Nycomed made a $10 million equity investment in the Company. In December 1995 and May 1996, Nycomed exercised its co-promotion and licensing options with respect to P280 and P829, respectively. Nycomed is one of the world's leading producers of medical imaging agents, with worldwide revenues from medical imaging operations of approximately $800 million in 1995. The collaboration with Diatide represents the commencement of Nycomed's nuclear medicine imaging activities. - -------------------------------------------------------------------------------- [A picture of a man with four blown-up pictures showing the images produced by nuclear medicine imaging with the Company's product candidates of (i) carotid artery thrombus in the neck, (ii) pulmonary embolus imaged in the left lung, (iii) deep vein thrombosis in the thigh and knee and (iv) deep vein thrombosis in the calf appear here] The images above are from clinical trials of Diatide's cardiovascular product candidates for nuclear medicine imaging of thrombosis. These product candidates are currently being evaluated in clinical trials and have not received marketing approval from the FDA. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. As a result of this offering, the Company will become subject to the information and reporting requirements of the Securities Exchange Act of 1934, as amended, and in accordance therewith will file periodic reports, proxy statements and other information with the Securities and Exchange Commission. The Company intends to furnish to its stockholders annual reports containing financial statements audited by an independent public accounting firm and quarterly reports containing unaudited financial statements for the first three quarters of each fiscal year. - -------------------------------------------------------------------------------- <TABLE> THE OFFERING <CAPTION> <S> <C> Common Stock offered by the Company....................... 2,200,000 shares Common Stock to be outstanding after the offering......... 10,205,255 shares(1) Use of proceeds........................................... To fund research and product development, preclinical studies and clinical trials, to repay bank debt and for general corporate purposes. Nasdaq National Market symbol............................. DITI Risk Factors.............................................. The offering involves a high degree of risk. See "Risk Factors." <FN> - --------------- (1) Reflects the conversion of all outstanding shares of Convertible Preferred Stock into an aggregate of 7,531,140 shares of Common Stock at the closing of this offering. Does not include 770,472 shares reserved for issuance upon the exercise of outstanding options and warrants as of March 31, 1996 at a weighted average exercise price of $1.12 per share. See "Dilution," "Capitalization" and "Description of Capital Stock." </TABLE> <TABLE> SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <CAPTION> THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ---------------------------------------------------- ------------------- 1991 1992 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- -------- -------- (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues..................... $ -- $ -- $ 301 $ 208 $ 1,519 $ -- $ 500 Costs and expenses: Research and development........... 1,430 2,600 2,989 4,445 6,556 1,107 2,529 General and administrative........ 365 838 1,217 1,714 1,636 407 439 Net loss..................... $(1,812) $(3,349) $(3,979) $(5,759) $(6,413) $(1,509) $(2,361) ======= ======= ======= ======= ======= ======= ======= Pro forma net loss per share(1)................... $ (0.90) $ (0.29) ======= ======= Shares used in computing pro forma net loss per share(1)................... 7,149 8,196 </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 ---------------------------- ACTUAL AS ADJUSTED(2) -------- --------------- <S> <C> <C> BALANCE SHEET DATA: Cash, cash equivalents and marketable securities............. $ 6,897 $ 23,488 Working capital.............................................. 5,666 22,257 Total assets................................................. 8,547 25,138 Long-term debt, net of current portion....................... 37 37 Deficit accumulated during the development stage............. (24,709) (24,709) Stockholders' equity......................................... 7,006 23,597 <FN> - --------------- (1) See Note 2 to Notes to Financial Statements for information concerning the computation of pro forma net loss per share and shares used in computing pro forma net loss per share. (2) Reflects the conversion of all outstanding shares of Convertible Preferred Stock into an aggregate of 7,531,140 shares of Common Stock at the closing of this offering and the sale of the 2,200,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $8.50 per share and the application of net proceeds therefrom, after deducting the underwriting discounts and commissions and offering expenses payable by the Company. See "Use of Proceeds" and "Capitalization."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0001012099_teleport_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001012099_teleport_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8fe166ec0bf8981dbdb4566674920d91a40c8643
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the financial statements (including the notes thereto) appearing elsewhere in this Prospectus. Unless the context otherwise requires, the information set forth in this Prospectus gives effect to the transactions described herein under "The Reorganization," and "TCGI" refers to Teleport Communications Group Inc. and its consolidated subsidiaries and "TCG" and the "Company" refer to TCGI and its consolidated partnerships after giving effect to such transactions. Unless otherwise indicated, the information set forth in this Prospectus does not give effect to the exercise of the Underwriters' over- allotment options. See "Glossary" for definitions of certain other terms used in this Prospectus. THE COMPANY Teleport Communications Group Inc., the first and largest competitive local exchange carrier in the United States, offers a wide range of local telecommunications services in major metropolitan markets nationwide. The Company competes with incumbent local exchange carriers as "The Other Local Phone Company" SM by providing high quality, integrated local telecommunications services, primarily over fiber optic digital networks, to meet the voice, data and video transmission needs of its customers. TCG's customers are principally telecommunications-intensive businesses, long distance carriers and resellers, and wireless communications companies. TCG offers these customers technologically advanced local telecommunications services, as well as superior customer service, flexible pricing and vendor and route diversity. For over 10 years, TCG has developed, operated and expanded its local telecommunications networks. The Company currently operates high capacity state-of-the-art digital networks in 48 metropolitan markets, including 17 of the 20 largest metropolitan areas. The Company operates networks in metropolitan New York/New Jersey, Los Angeles, Chicago, San Francisco, Boston, Detroit, Baltimore/Washington, D.C., Dallas, Houston, Miami/Ft. Lauderdale, Seattle, San Diego, St. Louis, Pittsburgh, Phoenix, Denver, Milwaukee, Indianapolis, Hartford and Omaha, and is developing networks in Cleveland, Portland (Oregon), Salt Lake City, Nashville, Chattanooga, Knoxville and Birmingham. As of March 31, 1996, the Company's networks spanned over 5,500 route miles, contained over 257,000 fiber miles and served approximately 5,300 buildings. TCG has grown rapidly over the last several years, expanding its existing networks, developing new networks and increasing its service offerings. On a pro forma basis, after giving effect to the Reorganization, the Company's revenues were approximately $184.9 million for 1995, substantially all of which were derived from the provision of local telecommunications services. Total revenues from the local telecommunications market in the United States were estimated to have been approximately $96 billion in 1995. In the past, competitive access providers, including the Company, were limited to serving only the dedicated services portion of this market, which was estimated to have been approximately $5 billion in 1995, whereas the local switched services portion of this market for business customers was estimated to have been approximately $55 billion. The Company has expanded into the switched services market in a number of states over the last five years by constructing switched networks and obtaining the necessary regulatory authorizations and interconnection arrangements. With the passage of the Telecommunications Act of 1996 (the "1996 Act"), the Company believes that it is well positioned to address a significantly larger portion of the local telecommunications market and to improve its operating margins in the switched and dedicated services markets by expanding its networks, installing additional high capacity digital switches and offering new products and services. TCG has benefited substantially from its relationships with the parents of its four stockholders, TCI Communications, Inc. (together with its consolidated subsidiaries, "TCI"), Cox Communications, Inc. (together with its consolidated subsidiaries, "Cox"), Comcast Corporation (together with its consolidated subsidiaries, "Comcast") and Continental Cablevision, Inc. (together with its consolidated subsidiaries, "Continental") (collectively, the "Cable Stockholders"), which are among the largest cable television companies in the United States. Through such relationships, the Company has been able to utilize rights-of-way, obtain fiber optic facilities and share the cost of building new fiber optic networks, thereby allowing the Company to achieve significant economies of scale and scope through capital efficiencies in extending its existing networks in a rapid, efficient and cost-effective manner. As of March 31, 1996, after giving pro forma effect to the Reorganization, the Cable Stockholders had invested approximately $770 million in the Company. See "The Reorganization." The Company believes that it has several advantages that enable it to compete successfully in the new competitive local telecommunications marketplace, including (i) extensive, technologically advanced networks located in major metropolitan markets nationwide, (ii) strategic relationships with cable television operators, (iii) state-of-the-art information systems and (iv) an experienced management team with significant operational, technical, financial and regulatory expertise in the local telecommunications industry. BUSINESS STRATEGY As a premier competitive local telecommunications carrier, the key elements of the Company's business strategy are to: . PROVIDE A WIDE RANGE OF LOCAL TELECOMMUNICATIONS SERVICES. The Company provides a broad array of local telecommunications services to meet the voice, data and video transmission needs of its customers, including basic local exchange telephone services, enhanced switched services, dedicated services, high speed switched data services and video channel transmission services. In 1995, approximately 36% of the Company's revenues were generated from switched services. The Company expects a growing portion of its revenues to be derived from basic local exchange telephone services, enhanced switched services and high speed switched data services as it deploys digital switches in all of its markets. As of March 31, 1996, the Company had 21 digital telephone switches and 27 asynchronous transfer mode ("ATM") switches in operation. On a pro forma basis, after giving effect to the Reorganization, the Company's revenues from switched services, which include local dial tone and local calling, grew by approximately 59% to $63.9 million in 1995 from $40.2 million in 1994. . FOCUS ON BUSINESS CUSTOMERS AND TELECOMMUNICATIONS CARRIERS. The Company's networks serve large metropolitan markets, which have significant concentrations of telecommunications-intensive businesses. The Company's customers in these markets include financial services firms, media and health care companies, long distance carriers and resellers, Internet service providers, wireless communications companies and an increasing number of small and medium-sized business customers. The national scope of the Company's local networks allows it to offer high volume business customers and long distance carriers uniformity of services, pricing, quality standards and customer service. In addition, the Company has arrangements with other telecommunications providers, including shared tenant services providers, cable television companies and long distance carriers, to resell TCG's services. Currently, certain major long distance carriers are conducting trials of the resale of TCG's local exchange services under such long distance carriers' brand names. In 1995, approximately 62% of the Company's revenues were generated from business customers and approximately 38% were generated from long distance carrier customers. . EXPAND GEOGRAPHIC REACH AND DENSITY OF EXISTING NETWORKS AND ENTER NEW MARKETS. The Company plans to increase the geographic reach and density of its existing networks by deploying additional fiber optic rings and connecting additional customers to its networks. The Company anticipates that making significant capital expenditures over the next several years to expand its existing networks and to develop new networks will lead to significant increases in revenue opportunities. As a facilities-based carrier, the Company utilizes a variety of means to expand geographically, including rights-of-way, easements, poles, ducts and conduits that are available from cable television operators, incumbent local exchange carriers, railways and subways, electric, gas and water utilities and municipal, state and federal street and highway authorities. In the course of expanding its networks, the Company also has the ability to reach TCG customers by reselling a portion of the telecommunications services offered by certain incumbent local exchange carriers. However, the Company believes that the extensive geographic reach and density of its networks make it less reliant than other competitive local exchange carriers on the networks of the incumbent local exchange carriers. In addition, where appropriate, the Company has the ability to link customers to its network through the use of microwave, including 38 GHz milliwave, services. The Company plans to expand into additional metropolitan markets, which the Company believes will further broaden its customer base and enhance its ability to attract national business accounts for its services. . BENEFIT SUBSTANTIALLY FROM RELATIONSHIPS WITH CABLE TELEVISION OPERATORS. As of December 31, 1995, the cable television facilities of the Cable Stockholders collectively passed approximately 47% of the country's 94 million homes passed by cable television facilities. Through its relationships with cable television operators, the Company has been able to utilize existing rights-of-way, obtain fiber optic facilities and share the cost of building new fiber optic networks, thereby allowing the Company to achieve significant economies of scale and scope through capital efficiencies in extending its existing networks in a rapid, efficient and cost-effective manner. The Company is currently engaged in technical trials with certain cable television operators, including Cable Stockholders, for the provision of residential telephony services over the cable television operators' hybrid fiber-coaxial networks with TCG providing switching, call processing, calling features and ancillary services. The Company believes such trials will evolve into commercial offerings by cable companies and that TCG may become a provider of switching, call processing and other services to such cable companies. . OFFER HIGH QUALITY NETWORKS AND SUPERIOR CUSTOMER SERVICE. TCG believes that it offers cost and service quality advantages over the incumbent local exchange carriers as a result of its integrated operations, customer support, network monitoring and management systems and state-of-the-art technology deployed in the Company's digital networks. TCG consults closely with its customers to develop competitively priced telecommunications services that are tailored to their particular needs. The Company's centrally managed customer support operations are also designed to facilitate the processing of orders for changes and upgrades in services. TCG believes that it provides greater attention and responsiveness to its customers than do the incumbent local exchange carriers. . SPEARHEAD REGULATORY REFORM. As the first and largest competitive local exchange carrier, TCG has been at the forefront of industry efforts for over a decade to introduce competition to the local telecommunications market. The Company has aggressively pursued the goal of making competitive local exchange services economically, technically and operationally feasible by working for legislative and regulatory reform and through negotiations with incumbent local exchange carriers. The Company will continue its regulatory reform activities in an effort to ensure that the 1996 Act is implemented and interpreted in a manner that promotes fair competition for local exchange services. . CAPITALIZE ON MANAGEMENT TEAM EXPERIENCE. TCG's management team is comprised of executives who are recognized as leaders in the development of the competitive local telecommunications industry. This management team has extensive operational, technical, financial and regulatory expertise as well as a proven track record in a rapidly changing marketplace. The Company was incorporated in the State of Delaware in 1983. The Company's principal executive offices are located at One Teleport Drive, Staten Island, New York 10311-1011, and its telephone number is (718) 355-2000. THE REORGANIZATION Teleport Communications Group Inc. or "TCGI" is the issuer of the Class A Common Stock offered hereby. Prior to the Offerings, the local telecommunications business managed by TCGI has been owned by the Cable Stockholders (TCI (30%), Cox (30%), Comcast (20%), and Continental (20%)). The business was operated through TCGI and, beginning in 1992, TCG Partners, which is a New York general partnership owned by the Cable Stockholders in the same percentages as TCGI and managed by TCGI. TCG Partners was formed for tax purposes to invest, with TCGI, the Cable Stockholders and other cable operators, in partnerships (the "Local Market Partnerships") to develop and operate local telecommunications networks. The 14 Local Market Partnerships are managed by TCGI, and each Local Market Partnership is owned by TCGI, TCG Partners, the Cable Stockholders which have cable operations in the particular market and in some cases other cable operators in the market. To simplify this complex ownership structure, TCGI and the Cable Stockholders have agreed to consolidate the ownership of TCG Partners and of the Local Market partnerships as subsidiaries of TCGI. As part of this process, certain of the other cable operators agreed to sell their interest in Local Market Partnerships to TCGI directly or through a Cable Stockholder. Ownership and Organization of the Business of TCG Prior to the Reorganization. As of June 3, 1996, the ownership and organization of TCGI, TCG Partners and the Local Market Partnerships was as set forth below: [ORGANIZATIONAL CHART HERE] Reorganization Transactions Prior to or in Connection With the Offerings. In connection with the Offerings, TCGI and the Cable Stockholders have entered into a reorganization agreement (the "Reorganization Agreement") pursuant to which TCGI, TCG Partners and the Local Market Partnerships will be reorganized (the "Reorganization"). The principal transactions comprising the Reorganization that will occur prior to or in connection with the consummation of the Offerings are: . the acquisition by TCGI of TCG Partners in exchange for Class B Common Stock issued to the Cable Stockholders, . the acquisition by TCGI of all of the interests in 12 of the 14 Local Market Partnerships in exchange for Class B Common Stock issued to the Cable Stockholders and Class A Common Stock issued to other cable operators, . the contribution to TCGI of $269.0 million aggregate principal amount of indebtedness, plus accrued interest from May 1995, owed by TCGI to the Cable Stockholders (except that TCI will retain a $26 million subordinated note of TCGI) in exchange for Class B Common Stock issued to the Cable Stockholders, and . in connection with Continental's recently announced proposed merger with U S WEST, Inc., the redemption by TCGI of 7,807,881 shares (out of 25,761,330 shares) of Class B Common Stock owned by Continental (7,975,738 shares if the Underwriters' over-allotment options are exercised in full) at a price per share equal to the initial public offering price of the Class A Common Stock offered hereby, less the applicable underwriting discount and a pro rata portion of the registration fees (representing an aggregate redemption price of $118.5 million ($121.0 million if the Underwriters' over-allotment options are exercised in full)). Consummation of the Offering is contingent on the consummation of the above- described transactions, except that the redemption of Continental's shares will be consummated shortly after the Offerings with a portion of the net proceeds thereof. In consideration of the transfer by each of the Cable Stockholders of its interests in TCG Partners and the Local Market Partnerships and the contribution to TCGI of the indebtedness described above, the Company will issue immediately prior to the Offerings 69,250,230 shares of Class B Common Stock to the Cable Stockholders. Immediately prior to the consummation of the Offerings, the ownership and organization of TCGI, TCG Partners and the Local Market Partnerships will be as set forth below: [ORGANIZATIONAL CHART HERE] Upon consummation of the Offerings and the principal transactions comprising the Reorganization that will occur prior thereto or in connection therewith, the ownership and organization of TCGI, TCG Partners and the local Market Partnerships will be as set forth below: [ORGANIZATIONAL CHART HERE] Reorganization Transactions After the Offerings. Pursuant to the Reorganization, TCG Partners and 12 of the 14 Local Market Partnerships will become wholly owned subsidiaries of TCGI. In addition, TCI has agreed to transfer its interests in TCG Seattle and TCG San Francisco to the Company at the earliest time such transfers can be accomplished, which in each case is January 1, 1997. Furthermore, TCI has entered into an agreement to acquire the 22.9% and 22.2% minority partnership interests in TCG San Francisco and TCG Seattle, respectively, held by Viacom Telecom, Inc., which interests TCI will be required to transfer to TCGI upon acquisition. The issuance of shares of Class B Common Stock to TCI assumes that, subsequent to the Offerings, TCI will contribute its current partnership interests in TCG Seattle and TCG San Francisco, and that TCI will acquire and contribute to TCGI the partnership interest of Viacom Telecom, Inc. in TCG Seattle and TCG San Francisco, respectively. In the event TCI does not subsequently acquire and contribute to TCGI the partnership interests currently held by Viacom Telecom, Inc., TCI will be required, at its option, to return shares of Class B Common Stock or make certain payments to TCGI. See "The Reorganization." THE STOCK OFFERINGS Class A Common Stock Offered: U.S. Offering............... International Offering ..... 18,800,000 shares 4,700,000 shares Total..................... 23,500,000 shares Common Stock to be outstanding after the Stock Offerings: Class A Common Stock........ 24,715,125 shares(1)(2) Class B Common Stock........ 131,442,489 shares Total..................... 156,157,614 shares(1)(2) Use of Proceeds............... The net proceeds of the Stock Offerings, together with the net proceeds of the Notes Offerings, are estimated to be $1,253.2 million. The Company intends to use such proceeds (i) to redeem up to 7,807,881 shares (7,975,738 shares if the Underwriters' over- allotment options are exercised in full) of Class B Common Stock held by a subsidiary of Continental for $118.5 million ($121.0 million if the Underwriters' over-allotment options are exercised in full), representing $16 per share, less the applicable underwriting discount and a pro rata portion of the registration fees, (ii) to repay approximately $155.0 million of bank indebtedness of a subsidiary of the Company, which amounts may be reborrowed, (iii) to expand and develop existing and new networks and for other general corporate and working capital purposes, which may include acquisitions; provided, however, that in the event of a Special Redemption Event (as defined in the Indenture for the Senior Discount Notes) with respect to certain regulatory authorizations, up to approximately $256 million of the net proceeds of the Offerings will be used to redeem a portion of the Senior Discount Notes. See "Risk Factors--Limitation on Incurrence of Debt Under New York and New Jersey Regulatory Authorizations" and "Use of - -------- Proceeds." (1) Includes 285,750 shares and 290,513 shares of Class A Common Stock to be issued to Booth Telecable, Inc. and Time Warner Entertainment-Advance Newhouse Partnership, respectively, in consideration for their partnership interests in TCG Detroit, which share amounts have been calculated on the basis of an aggregate acquisition price of approximately $9.2 million. Also includes 638,862 shares of Class A Common Stock to be issued to TCI upon its transfer to the Company of a partnership interest in TCG San Francisco acquired from an unaffiliated minority partner (MicroNet, Inc.). See "The Reorganization." (2) Excludes (i) 10,931,033 shares of Class A Common Stock reserved for issuance under the TCG 1993 Stock Option Plan (under which options to purchase approximately 2,538,063 shares had been granted and were outstanding as of December 31, 1995, at a weighted average exercise price per share of $8.03, options to purchase 1,497,517 shares have been granted at an exercise price per share equal to the initial public offering price of the Class A Common Stock and options to purchase 343,589 shares have been granted at an exercise price per share equal to 135% of the initial public offering price of the Class A Common Stock), (ii) 745,000 shares of Class A Common Stock reserved for issuance under the TCG Employee Stock Purchase Plan, (iii) 637,792 shares of Class A Common Stock to be reserved for issuance under the TCG Equity Incentive Plan and (iv) 372,666 shares of Class A Common Stock to be issued to TCI upon its transfer to TCG of the partnership interest of InterMedia Partners in TCG San Francisco, which TCI has informed TCG it expects to acquire by the end of July 1996, subject to normal closing conditions and the consent of local franchising authorities. See "The Reorganization" and "Management--Executive Compensation--1993 Stock Option Plan; --Employee Stock Purchase Plan;--Equity Incentive Plan." Of the approximately 4,380,000 shares of Class A Common Stock underlying the options granted under the Stock Option Plan, options representing 302,264 shares have vested as of March 31, 1996. Voting Rights................. Holders of Class A Common Stock are entitled to one vote per share and holders of Class B Common Stock are entitled to 10 votes per share on all matters submitted to a vote of stockholders. The holders of the Class A Common Stock and the Class B Common Stock vote together as a single class on all matters submitted to a vote of stockholders, except as otherwise required by law and except that only the holders of the Class B Common Stock, voting separately as a class, are entitled to vote on certain matters relating to the scope of the business of the Company. Immediately following the completion of the Stock Offerings and after giving effect to the Reorganization, the Cable Stockholders will have approximately 98.2% of the combined voting power of the Company's outstanding Common Stock and generally will have the collective ability to control all matters requiring stockholder approval, including the election of directors. See "Principal Stockholders" and "Description of Capital Stock." Concurrent Notes Offerings.... Concurrent with the Stock Offerings, the Company will offer $300 million of 9 7/8% Senior Notes due 2006, and $625 million gross proceeds of 11 1/8% Senior Discount Notes due 2007. The Senior Discount Notes will be issued at a substantial discount from their principal amount. See "Description of Certain Indebtedness--The Notes."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001012121_cycle-sat_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001012121_cycle-sat_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. THE COMPANY Cycle:Sat, Inc. ("Cycle:Sat" or the "Company") distributes broadcast quality advertising to television stations, cable television systems and radio stations nationwide. The Company believes that it is the leading provider of national spot television advertising distribution services for advertisers and their agencies on both a dollar and unit volume basis and that it is one of the leading distributors of national spot radio advertising. The Company distributes advertising for significant national accounts, including packaged goods companies, automobile manufacturers, telecommunications companies, motion picture studios and advertising agencies. The Company operates a point-to-multi-point communications network delivering video, audio and data transmissions using a patented satellite distribution network, a fiber optic network linking Company facilities, and multiple-format video and audio tape duplication facilities combined with air and ground courier services. The Company's delivery network and facilities are designed to cost-effectively serve the time-sensitive distribution needs of the advertising industry and provide the platform for offering additional distribution services. Founded in 1985, the Company was the first in the advertising services industry to deploy an automated satellite-based delivery network to television stations nationwide. The Company's network includes a full-time, long-term leased satellite transponder, uplink facilities located strategically across the United States, an earth station and network operations center in Forest City, Iowa, an earth station and tape duplication center in Memphis, Tennessee, and the Company's proprietary Cyclecypher satellite receivers, which are leased for a nominal amount to approximately 550 television stations throughout the United States. The Company believes there are approximately 750 television stations that receive more than 90% of all national spot television advertising deliveries. The Company's installed base of Cyclecypher receivers includes approximately 65% of these stations. Cycle:Sat is converting its analog satellite network to a digital network to provide enhanced services to its existing customers and to offer new services in additional markets. The digital conversion will quadruple transmission capacity, provide state-of-the-art video quality, allow increased television station penetration, permit additional satellite network downlinks and, with the addition of file servers linked to the Company's Cyclecyphers, further accelerate delivery time. Although other companies have announced systems for delivering video and audio content electronically or via satellite that use subcontracted, on-demand service, the Company believes that the anticipated completion of its conversion in early calendar year 1997 to an operational, large-scale, automated, fully-digital satellite communications network will continue the Company's leading technology position in the industry. The digital conversion will provide the opportunity to use a single satellite transponder for simultaneous delivery of multiple broadcast quality signals and will substantially reduce the Company's installation and equipment cost of adding downlinks to new network participants. To offer a complete delivery solution for its customers and to access television stations not linked to its satellite network, the Company operates what it believes is the largest production volume broadcast video tape duplication facility in the industry, located near the Memphis hub of Federal Express Corp. ("FedEx"). Overnight satellite delivery and the Memphis location extend the Company's deadline for next-day delivery of time-sensitive television commercials, a service advantage available to the Company over many of its competitors, although two competitors also operate tape duplication facilities near the hubs of express delivery facilities. The low variable cost of satellite delivery and the economies of scale at the Memphis duplication facility also provide Cycle:Sat a significant cost advantage. The Company offers complementary services to its advertiser and agency customers, including in-house post-production services, video and audio master archiving and warehousing, and distribution of advertising promotional material. In addition, the Company's Satellite Shuttle service provides delivery of broadcast quality video and audio content between most major U.S. cities in under two hours. The Company's Memphis facility is also used for radio advertising duplication and distribution services. In March 1995, the Company acquired the Tape Film Industries division ("TFI") of MPO Videotronics, Inc. ("MPO"). This acquisition increased the Company's delivery volume and diversified its customer base, while also expanding its services to include computerized archiving, warehousing and rapid delivery of video advertising materials, and the distribution of printed advertising and other promotional materials. Cycle:Sat will continue to evaluate strategic acquisition opportunities to increase its market share and economies of scale. The Company may also enter into strategic relationships to develop new network delivery service opportunities. According to the Television Bureau of Advertising, 1994 television advertising expenditures totaled $34.2 billion, including the national network, national spot, local market, national syndication and cable advertising segments. National spot advertising is commercial air time sold by a television or radio station or cable system to advertisers located outside of its local market. The national spot television advertising market, totaling $9.0 billion in 1994, is currently the most important source of Cycle:Sat revenues. Radio advertising expenditures in 1994 totaled $10.5 billion, of which $1.9 billion represented the national spot advertising segment. The Company estimates that the delivery services market associated with national spot television, cable and radio advertising is in excess of $125 million annually. The Company's business strategy is (i) to continue to provide industry leading satellite delivery technology, (ii) to continue its market leading position in the delivery of national spot television advertising, (iii) to increase its installed network of television stations, (iv) to expand its delivery volume of syndicated and other programming, (v) to maintain its low cost position, and (vi) to continue its tradition of providing superior customer service. Through this strategy, the Company anticipates continued market share gains in television and radio spot advertising distribution coupled with new revenue opportunities resulting from conversion of its satellite network to a digital format. The conversion to a digital format will allow the expansion of the Company's business into syndicated and other programming delivery services, a market the Company estimates to be $125 million annually. Although the majority of syndicated programming is delivered by satellite carriers, the Company believes that those systems lack the automation and dedicated downlink equipment characteristic of the Company's network. Other new revenue opportunities include management of private video, voice and data communication networks, and growth of the Company's satellite network to include radio stations and large local cable system operators. In several of its identified new market segments, the Company believes that a leading market share position is available due to the fragmented nature of those markets. After the offering, Winnebago Industries, Inc. will continue to own 56% of the Company's outstanding Common Stock.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001012128_dupont_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001012128_dupont_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION, INCLUDING "RISK FACTORS," AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. ALL REFERENCES HEREIN, UNLESS THE CONTEXT OTHERWISE REQUIRES, TO (I) THE "COMPANY" OR "DPI" MEAN DUPONT PHOTOMASKS, INC. AND ASSUME THE COMPLETION OF THE COMPANY'S ACQUISITION OF THE PHOTOMASK BUSINESSES AS DESCRIBED HEREIN UNDER "TRANSACTIONS AND RELATIONSHIP BETWEEN THE COMPANY AND DUPONT -- REALIGNMENT OF PHOTOMASK BUSINESS;" (II) "DUPONT" MEAN E.I. DU PONT DE NEMOURS AND COMPANY; AND (III) "DCEO" MEAN DUPONT CHEMICAL AND ENERGY OPERATIONS, INC., A WHOLLY OWNED SUBSIDIARY OF DUPONT. UNLESS THE CONTEXT OTHERWISE REQUIRES, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS DO NOT EXERCISE THEIR OVERALLOTMENT OPTION. SEE "UNDERWRITERS." THE COMPANY'S FISCAL YEAR ENDS JUNE 30. THE COMPANY Based on worldwide sales, DuPont Photomasks, Inc. is the largest U.S. photomask manufacturer and one of the two largest photomask manufacturers in the world. Photomasks are high-purity quartz or glass plates containing precision images of integrated circuits and are used as masters by semiconductor manufacturers to optically transfer these images onto semiconductor wafers. The Company develops and uses advanced technology to manufacture a broad range of photomasks based on customer-supplied design data, including photomasks that meet the tightest design specifications required by semiconductor manufacturers today. Since 1991, DPI has operated globally with established manufacturing facilities in North America, Europe and Asia. The Company is the only photomask manufacturer in the world that also manufactures and markets both photoblanks and pellicles, the principal components of photomasks, facilitating the Company's ability to ensure an adequate supply of quality components. The Company sells its products to approximately 200 customers in 20 different countries. The Company believes that it is the principal merchant photomask supplier for many of its customers, including AMD, Delco/General Motors, Digital, Hyundai, LG Semicon, Lucent Technologies Inc. (formerly AT&T), Micron Technology, Motorola, National Semiconductor, Philips, Samsung, Seagate and SGS-Thomson. The Company serves its global customer base from eight ISO 9002-qualified manufacturing facilities and numerous customer service centers. The market for photomasks consists primarily of semiconductor manufacturers in North America, Europe and Asia. Growth in the photomask market has not always correlated with increases in semiconductor sales. During the mid-1980's through the early 1990's, the photomask industry experienced an extended period of slow growth, primarily as a result of several advances in semiconductor and photomask design and production methods that significantly reduced the number of masks as well as the precision requirements of masks required to produce a semiconductor device. The Company believes that the efficiencies gained from these advances in semiconductor and photomask design and production methods have been largely realized. In the last two years, growth in demand for photomasks has resumed. The Company expects that growth in semiconductor design activity, which has been driven by accelerating trends in the semiconductor industry toward customization of semiconductor designs and the proliferation of semiconductor applications, will substantially increase the demand for photomasks. Furthermore, increasing device complexity and decreasing feature size of semiconductor designs are changing the nature of the photomask industry and its role in the semiconductor manufacturing process. The Company believes that photomasks are reemerging as a critical and enabling technology in the semiconductor manufacturing process. According to industry sources, the total worldwide market for photomasks was approximately $1.3 billion in 1995. The photomask market in North America, Europe and non-Japan Asia is estimated to have been approximately 50% of the worldwide market over the last five years, and merchant photomask sales in these regions are estimated to have been in excess of $375 million in 1995. DuPont entered the photomask market in 1986. Its strategy focused on establishing a global presence that would enable it to respond to the needs of multinational semiconductor manufacturers. As part of this strategy, DuPont (i) purchased assets of numerous captive photomask operations, (ii) acquired merchant photomask companies and (iii) constructed its own "greenfield" manufacturing sites in Round Rock, Texas and Ichon, Republic of Korea ("Korea"). DPI is also the majority owner of a joint venture that is constructing a new photomask manufacturing facility in Shanghai, China, which will expand the Company's capacity to serve the growing needs of semiconductor manufacturers in Asia. In addition, the Company is planning to construct a photomask manufacturing facility on a "greenfield" site near Glasgow, Scotland primarily to meet the growing needs of semiconductor manufacturers in the United Kingdom and the Republic of Ireland. The Company believes that it is one of the two largest merchant suppliers in North America and the largest merchant supplier in Europe and non-Japan Asia. The Company has consistently been an industry leader in developing the most advanced photomasks and believes it is the principal merchant supplier, outside Japan, of leading edge photomasks. The Company intends to strengthen its position as a leading supplier of photomasks by providing the finest service and most advanced technology. To achieve this objective, the Company intends to capitalize on its global manufacturing presence, advance its technological leadership, expand strategic relationships with its customers, leverage its integrated position and pursue strategic relationships with key suppliers. RELATIONSHIP WITH DUPONT DuPont, through its wholly owned subsidiary DCEO, currently owns 100% of the Company's outstanding Common Stock. Upon completion of the Offering, DuPont will continue to own indirectly approximately 72% (or 70% if the Underwriters' overallotment option is exercised in full), of the Company's outstanding Common Stock. See "Principal Stockholder and Stock Ownership." As a result of its ownership interest, DuPont will be able to control the vote on most matters submitted to stockholders, including the election of directors and the approval of extraordinary corporate transactions. See "Risk Factors -- Control by and Relationship with DuPont." DuPont has advised the Company that it expects to reduce its ownership interest in the Company over time, subject to prevailing market and other conditions. See "Risk Factors -- Effect of Sales of Substantial Amounts of Common Stock" and "Shares Eligible for Future Sale." Historically, the Company has derived certain tangible and intangible benefits from being a subsidiary of DuPont. The Company and DuPont have entered into a number of agreements for the purpose of defining their ongoing relationship. While these agreements will continue to provide the Company with certain benefits, the Company is only entitled to the ongoing assistance of DuPont for a limited time and it may not enjoy benefits from its relationship with DuPont beyond the term of the agreements. See "Risk Factors -- No Independent Operating History Prior to the Offering" and "Transactions and Relationship Between the Company and DuPont." THE OFFERING <TABLE> <S> <C> Common Stock offered................ 4,000,000 shares Common Stock to be outstanding after the Offering....................... 14,500,000 shares (1) Use of Proceeds..................... The Company will retain an amount, currently estimated at $9.1 million, of the estimated net proceeds of the Offering; such that, upon the consummation of the Offering, it will have approximately $18 million in cash and cash equivalents, which will be available for general corporate purposes, including working capital and capital expenditures. The Company will use the remaining $46.0 million as well as the net proceeds from any exercise of the Underwriters' overallotment option to repay indebtedness owed to DCEO. See "Use of Proceeds." Nasdaq Symbol....................... DPMI </TABLE> - ------------------------ (1) Excludes shares of Common Stock granted under the Company's employee benefit plans. SUMMARY COMBINED FINANCIAL DATA <TABLE> <CAPTION> PRO FORMA, AS PRO FORMA, AS ADJUSTED, FOR NINE MONTHS ENDED ADJUSTED, FOR THE NINE YEAR ENDED JUNE 30 MARCH 31 THE YEAR MONTHS ENDED ------------------------------- -------------------- ENDED JUNE MARCH 31, 1993 1994 1995 1995 1996 30, 1995 (1) 1996 (1) --------- --------- --------- --------- --------- ------------- ------------- <S> <C> <C> <C> <C> <C> <C> <C> (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Total Sales..................... $ 118,896 $ 134,548 $ 161,514 $ 116,670 $ 152,192 $ 161,514 $ 152,192 Cost of Goods Sold.............. 112,224 107,456 117,022 85,745 98,717 115,368 97,724 Selling, General and Administrative Expense......... 18,630 20,750 21,803 16,017 18,164 22,585 19,214 Research and Development Expense -- Net......................... 8,337 8,131 8,777 6,385 6,955 7,260 6,113 Other Operating (Income) Expense -- Net......................... 8,497 2,940 3,490 2,317 3,219 3,156 2,941 --------- --------- --------- --------- --------- ------------- ------------- Operating Profit (Loss)......... (28,792) (4,729) 10,422 6,206 25,137 13,145 26,200 Interest Expense................ 9,196 5,814 6,957 5,054 5,091 59 102 Exchange (Gain) Loss............ (430) 322 (493) (476) 228 (665) (68) --------- --------- --------- --------- --------- ------------- ------------- Income (Loss) Before Income Taxes and Minority Interest.... (37,558) (10,865) 3,958 1,628 19,818 13,751 26,166 Provision for Income Taxes...... -- -- -- -- 1,899 3,712 9,158 --------- --------- --------- --------- --------- ------------- ------------- Income (Loss) Before Minority Interest....................... (37,558) (10,865) 3,958 1,628 17,919 10,039 17,008 Minority Interest in Income (Loss) of Majority Owned Joint Venture........................ -- -- (161) (82) (483) (161) (483) --------- --------- --------- --------- --------- ------------- ------------- Net Income (Loss)............... $ (37,558) $ (10,865) $ 4,119 $ 1,710 $ 18,402 $ 10,200 $ 17,491 --------- --------- --------- --------- --------- ------------- ------------- --------- --------- --------- --------- --------- ------------- ------------- Pro Forma Net Income Per Share.. $ 0.70 $ 1.20 Pro Forma Weighted Average Shares Outstanding............. 14,620 14,620 </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 ---------------------------------------- PRO FORMA, AS ACTUAL PRO FORMA (1) ADJUSTED (1) --------- ------------- -------------- <S> <C> <C> <C> (IN THOUSANDS) STATEMENT OF FINANCIAL POSITION DATA: Cash and Cash Equivalents............................................... $ 8,891 $ 8,891 $ 18,000 Working Capital......................................................... 13,250 25,818 34,927 Net Property, Plant and Equipment....................................... 114,231 114,231 114,231 Total Assets............................................................ 190,347 194,849 203,958 Long Term Borrowings.................................................... 8,987 8,987 8,987 DuPont Master Notes..................................................... 162,320 46,031 -- Owner's Net Investment/Shareholders' Equity............................. (36,472) 86,517 141,657 Unrealized Holding Gains................................................ 9,350 9,350 9,350 </TABLE> - ------------------------------ (1) The Summary Combined Pro Forma Financial Data are derived from the Company's Pro Forma Combined Financial Statements appearing elsewhere in this Prospectus. The Pro Forma Combined Financial Statements were prepared by the Company to illustrate the estimated effects of the Offering and related transactions described in the Notes to the Pro Forma Combined Financial Statements as if they had occurred as of July 1, 1994 for purposes of the pro forma combined statements of operations and as of March 31, 1996 for purposes of the pro forma combined statement of financial position. See "Pro Forma Combined Financial Statements."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001012131_novt-corp_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001012131_novt-corp_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..054807af9832fe916fdccad946e863282a55f362
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by and should be read in conjunction with the more detailed information and the Financial Statements and the Notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, all information in the Prospectus assumes no exercise of the Underwriters' over-allotment option. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors." THE COMPANY Novoste Corporation ("Novoste" or the "Company") is developing the King Beta- Cath System, an intraluminal beta radiation catheter delivery system designed to reduce the frequency of restenosis subsequent to percutaneous transluminal coronary angioplasty ("PTCA"). The King Beta-Cath System ("KBC System") applies localized beta radiation to the site of the vascular injury caused by a PTCA procedure and is designed to inhibit long-term cell proliferation ("hyperplasia") and vascular remodeling, each primary causes of restenosis. The KBC System was developed in collaboration with certain physicians at Emory University Hospital, including its Director of Interventional Cardiology, Dr. Spencer B. King, III. The Company is conducting a human clinical trial at Emory under an Investigational Device Exemption ("IDE") granted by the U.S. Food and Drug Administration ("FDA") to determine the clinical safety of the KBC System for use in coronary arteries. As of May 10, 1996, 11 of the 15 patients to be included in the trial had been enrolled and treated without any adverse events or complications. More than 13 million people in the United States currently have been diagnosed with coronary artery disease, the leading cause of death in the United States. Coronary artery disease is characterized by the progressive accumulation of plaque, which narrows the coronary artery and reduces blood flow to the heart muscle. Coronary artery bypass graft surgery ("CABG"), in which blood vessel grafts are used to bypass the site of a blocked artery, has been shown to be highly effective in treating coronary artery disease. However, CABG is a highly invasive, traumatic and expensive surgical procedure. PTCA, in which a small balloon catheter is inflated in the narrowed section of a coronary artery, has emerged as a highly effective, less invasive alternative to CABG. In 1995, approximately 400,000 CABG and approximately 500,000 PTCA procedures were performed in the United States. The principal limitation of PTCA is a high rate of restenosis, a renarrowing of the treated artery often requiring reintervention. Studies have shown restenosis to affect between 25% to 45% of PTCA patients within six months after the procedure. The use of coronary stents (expandable, implantable metal devices) to reduce the rate of restenosis has grown rapidly as an adjunctive therapy to PTCA. Recent studies have concluded that the rate of restenosis in patients who receive coronary stents following PTCA is approximately 30% lower than in patients treated only by PTCA. Restenosis can occur shortly after a PTCA procedure due to elastic recoil, or over a longer period of time due to cell proliferation ("hyperplasia") or geometric remodeling of the arterial segment. Stents appear to be effective in reducing the frequency of restenosis resulting from elastic recoil and appear to limit vascular remodeling, but they may increase, rather than decrease, hyperplasia. The KBC System targets the primary causes of restenosis by attempting to prevent or inhibit hyperplasia and long-term vascular remodeling by applying localized beta radiation to the treated site in the coronary artery immediately following PTCA. Radiation has been used therapeutically in medicine for almost 50 years and is used extensively for the treatment of proliferative cell diseases, such as cancer. The KBC System has been designed to use beta radiation because the Company believes it is well-suited for intraluminal use following PTCA, where the objective is to treat the wall of an artery with minimal radiation exposure to adjacent tissue. The KBC System is designed to be safe and to fit well with techniques currently employed by interventional cardiologists in the cardiac catheterization lab. The Company expects that the KBC System will provide significant cost savings, principally by reducing the costs associated with reintervention required following PTCA and coronary stenting. While the Company's current clinical trial seeks to demonstrate the safety and efficacy of the KBC System alone to reduce the frequency of restenosis following PTCA, pre-clinical studies have suggested that the KBC System may also be effective in reducing the frequency of restenosis as a combination therapy with coronary stenting. The Company's objective is to become the leader in the commercialization of intravascular radiation devices for the treatment of restenosis. Key elements of the Company's strategy include (i) achieving first to market position in the United States, (ii) establishing beta radiation therapy as the standard therapy to reduce the frequency of restenosis following PTCA, (iii) seeking early commercialization in countries with favorable regulatory environments, and (iv) leveraging the Company's core catheter and radioactive isotope technologies to expand its product offerings to include peripheral angioplasty and other potential applications. Novoste, a development stage company with minimal revenues to date, was incorporated in Florida in January 1987 and was capitalized and commenced operations in May 1992. The Company's principal executive offices are located at 4350-C International Blvd., Norcross, Georgia 30093, and its telephone number is (770) 717-0904. ---------------- Unless otherwise indicated, all references in this Prospectus to the Company's authorized and outstanding securities, other than in the Financial Statements and the Notes thereto, give pro forma effect to (i) the conversion of all shares of Class B Common Stock outstanding on May 10, 1996 into 1,611,269 shares of Common Stock, (ii) the cashless exercise of certain outstanding stock purchase warrants for an aggregate of 861,300 shares of Common Stock, assuming an offering price of $13.00 per share, (iii) the exercise of the balance of all outstanding stock purchase warrants for an aggregate of 47,104 shares of Common Stock at an aggregate exercise price of $208,219, (iv) the conversion of all outstanding convertible notes and accrued interest into an aggregate of 497,349 shares of Common Stock, assuming a closing date of this Offering of May 30, 1996, (v) the conversion of accrued salaries into 100,195 shares of Common Stock and (vi) an amendment to the Company's Articles of Incorporation to remove the Company's existing Class B Common Stock and to create a class of authorized but undesignated Preferred Stock. The actions described in this paragraph shall occur on or immediately prior to the closing of this Offering and are collectively referred to as the "Recapitalization." THE OFFERING Common Stock offered by the Company..... 2,000,000 shares Common Stock to be outstanding after 7,648,275 shares(1) the Offering........................... Use of proceeds......................... To fund human clinical trials, to establish sales and marketing capabilities, to expand manufacturing activities, to conduct further research and development projects and for general corporate purposes, including repayment of debt and working capital. Proposed Nasdaq National Market symbol................................. NOVT SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> THREE MONTHS ENDED MARCH YEAR ENDED DECEMBER 31, 31, ------------------------- --------------- PERIOD FROM INCEPTION (MAY 22, 1992) THROUGH MARCH 31, 1993 1994 1995 1995 1996 1996 ------- ------- ------- ------ ------- -------------- <S> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues.............. $ -- $ 70 $ 3 $ 1 $ -- $ 273 Costs and expenses: General and administrative...... 724 924 1,327 251 372 4,067 Research and development......... 500 1,094 1,659 313 741 4,185 Depreciation and amortization........ 106 204 227 61 70 632 Other income (expense)............ 5 (44) (8) (4) (28) (66) ------- ------- ------- ------ ------- ------- Net loss.............. $(1,325) $(2,196) $(3,218) $ (628) $(1,211) $(8,677) ======= ======= ======= ====== ======= ======= Net loss per share(2)............. $ (0.38) $ (0.54) $ (0.69) $(0.14) $ (0.24) ======= ======= ======= ====== ======= Shares used to compute net loss per share(2)............. 3,443 4,031 4,671 4,541 4,947 </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 ------------------------------------ PRO FORMA AS ACTUAL PRO FORMA(3) ADJUSTED(3)(4) ------- ------------ -------------- <S> <C> <C> <C> BALANCE SHEET DATA: Working capital (deficit)............... $(1,954) $ 416 $24,121 Total assets............................ 3,005 3,975 25,880 Deficit accumulated during development stage.................................. (8,677) (8,700) (8,700) Total shareholders' equity (deficit).... (599) 1,771 25,476 </TABLE> - -------- (1) Based on the number of shares of Common Stock outstanding on May 10, 1996. Excludes 1,831,575 shares of Common Stock issuable upon exercise of options outstanding on such date, which had a weighted average exercise price of $1.69 per share. Also excludes (i) 350,750 shares available for future grant under the Company's Stock Option Plan and (ii) 826 shares subject to issuance upon completion of consulting services. See "Management--Executive Compensation" and "Certain Transactions." (2) See Note 1 of the Notes to the Financial Statements for an explanation of the method used to determine the number of shares to compute net loss per share. (3) Gives effect to (i) the issuance in April 1996 of promissory notes of approximately $761,700 and (ii) the Recapitalization. (4) Gives effect to the sale of the shares of Common Stock offered hereby, at an assumed offering price of $13.00 per share, and the application of the estimated net proceeds therefrom (including the repayment of $1.5 million of promissory notes issued in March and April 1996, and $300,000 of bank indebtedness), and after deducting underwriting discounts and commissions and estimated offering expenses. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001012134_imagyn_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001012134_imagyn_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8c32cafa1a2d902f294fcca16e67c4e0dd6767d9
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0001012134_imagyn_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS, INCLUDING THE INFORMATION UNDER "RISK FACTORS." EXCEPT AS SET FORTH IN THE FINANCIAL STATEMENTS OR OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (I) ASSUMES THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED, (II) ASSUMES THE COMPANY'S REINCORPORATION IN THE STATE OF DELAWARE, WHICH WILL BE COMPLETED PRIOR TO THE CLOSING OF THIS OFFERING, (III) REFLECTS A 1-FOR-1.4814 REVERSE STOCK SPLIT EFFECTED IN APRIL 1996, (IV) ASSUMES THE FILING OF THE COMPANY'S RESTATED CERTIFICATE OF INCORPORATION, AUTHORIZING A CLASS OF 5,000,000 SHARES OF UNDESIGNATED PREFERRED STOCK AND INCREASING THE NUMBER OF SHARES OF AUTHORIZED COMMON STOCK TO 50,000,000, WHICH WILL BE EFFECTIVE UPON THE CLOSING OF THIS OFFERING, AND (V) GIVES EFFECT TO THE CONVERSION OF ALL OUTSTANDING SHARES OF THE COMPANY'S PREFERRED STOCK INTO COMMON STOCK UPON THE CLOSING OF THIS OFFERING. SEE "DESCRIPTION OF CAPITAL STOCK," "CAPITALIZATION" AND "UNDERWRITING." THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS OF OPERATIONS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. The Company Imagyn Medical, Inc. ("Imagyn" or the "Company") designs, develops and markets micro-invasive, cost-effective devices for diagnosis and treatment of gynecological and reproductive disorders. The Company's proprietary technology platform based on micro-optics and micro-access devices provides physicians with the ability to atraumatically access and visualize the abdominal cavity, the uterus and the fallopian tubes. Imagyn's proprietary micro-optics enable physicians to visualize a patient's internal anatomy with the resolution and light efficiency of larger, more invasive devices commonly used today. Imagyn's proprietary, disposable micro-access devices enable physicians to perform certain procedures outside the hospital without the need for general anesthesia. The Company's principal product systems based on these core technologies are the MicroLap microlaparoscopy system, the MicroSpan microhysteroscopy system and the Ovation systems for infertility indications. Compared to traditional procedures, the Company's product systems facilitate earlier definitive diagnosis and treatment, significantly lower the procedure cost associated with more invasive surgery and reduce patient discomfort, recovery time and morbidity. To date, the Company has sold over 850 MicroLap microlaparoscopes and over 6,000 Ovation catheters. Imagyn's diagnostic and operative micro-invasive product systems address a broad continuum of gynecological and reproductive disorders affecting a large number of women, including pelvic pain, uterine disorders and infertility, and provide a less invasive procedure for tubal sterilization. Because of the high incidence of these disorders and the popularity of tubal sterilization as a contraceptive method, large markets exist for devices that treat such disorders and that facilitate tubal sterilization. First, pelvic pain affects approximately 6 million women in the United States and can be caused by a number of serious conditions, including endometriosis, adhesions and pelvic inflammatory disease. Second, uterine disorders affect approximately 25 million women in the United States and may lead to significant complications including uterine bleeding, acute pain and infertility. Third, infertility is an increasingly common and often emotionally traumatic condition which affects approximately 5 million women in the United States. Finally, tubal sterilization is chosen as a permanent contraceptive method by approximately 800,000 women annually in the United States. Despite the large size of these markets, there can be no assurance that the Company's product systems will be accepted and will compete effectively in any of these markets. Market acceptance of the Company's product systems will be dependent upon, among other things, physicians' determinations that the Company's product systems and the procedures in which they are intended to be used are safe and effective alternatives to current hospital-based procedures and demonstrate clincial utility, and can be used in a cost-effective manner. The Company's product systems enable physicians to access and visualize all of the organs of a woman's reproductive system outside the hospital without the need for general anesthesia. The MicroLap system, which enables the physician to access the abdominal cavity without the need for post-operative sutures, includes a 2 millimeter-diameter microlaparoscope with resolution and light efficiency characteristics which the Company believes are comparable to those of standard 10 millimeter-diameter laparoscopes. The MicroSpan system incorporates a new high resolution microhysteroscope and a new uterine access device to enable the physician to atraumatically access and visualize the interior of the uterus. The MicroLap and MicroSpan systems enable physicians to access the abdominal cavity and the uterus for treatment with the Company's microsurgical instruments. The Ovation systems are designed to enable the physician to atraumatically access, navigate and visualize the entire length of the fallopian tubes. Imagyn's product systems are designed to offer significant advantages for physicians, patients and health care payors. For physicians, Imagyn's systems facilitate improved diagnosis and enhanced practice management. The Company believes that the MicroLap and MicroSpan systems require limited training for physicians familiar with standard laparoscopy and hysteroscopy techniques, although more training will be required for use of the Ovation systems. For patients, Imagyn's systems reduce trauma and the risk of complications and shorten recovery times as compared to traditional, more invasive procedures. For payors, Imagyn's systems can reduce cost, provide earlier, definitive diagnosis and increase patient satisfaction. Due to the small size of the Company's micro-access devices, the Company's product systems are generally not appropriate for use in procedures which involve the removal of substantial amounts of tissue or organs, such as the laparoscopic removal of the gall bladder. In addition, procedures using the Company's product systems should be avoided with patients who have a heightened risk of uncontrollable bleeding, are pregnant, have advanced cardiovascular disease or are excessively obese. The Company's marketing and distribution strategy consists of two key elements: (i) focusing its direct sales and marketing resources on gynecology group practices, surgery centers and infertility specialists and (ii) establishing strategic marketing alliances with major medical products companies to accelerate sales growth, increase geographic market coverage and access particular markets and customers that can be more effectively addressed by the sales organizations of these companies. To date, the Company has entered into two strategic marketing alliances, an exclusive international and co-exclusive domestic distribution agreement with United States Surgical Corporation ("USSC") for the MicroLap system and an agreement with Terumo Corporation ("Terumo") for Japanese distribution and manufacturing rights for the Ovation systems. To date, the Company has received United States Food and Drug Administration ("FDA") 510(k) clearances for the MicroLap system for diagnostic and/or operative use for pelvic pain, tubal sterilization and other indications. The Company has submitted 510(k) clearance applications for the MicroSpan system to the FDA. The Ovation tubal recanalization system, which unblocks occluded fallopian tubes, recently received Japanese regulatory approval. The Ovation falloposcopy system, which is designed to enable physicians to visually diagnose the interior of fallopian tubes, is undergoing clinical trials in the United States under an investigational device exemption ("IDE") issued by the FDA. The Company anticipates completion of the clinical trials, with a targeted enrollment of 100 patients, in 1996. There can be no assurance that the MicroSpan system or the Ovation systems will be cleared or approved by the FDA for their intended uses on a timely basis, if at all. Risk Factors An investment in the shares of Common Stock offered hereby involves a significant degree of risk, including the risk that the Company's product systems may not gain market acceptance, the Company's limited manufacturing capacity and experience, the Company's dependence upon sole and limited source suppliers and strategic marketing alliances, the Company's limited sales and marketing experience, fluctuations in the Company's results of operations and risks associated with government regulation and the regulatory approval process. Investors should refer to "Risk Factors" set forth at pages 5 to 15. The Company will not be able to market the MicroSpan microhysteroscopy system or the Ovation falloposcopy system in the United States unless and until it obtains clearance or approval from the FDA and there can be no assurance that the Company will obtain FDA clearance or approval for such product systems on a timely basis, if at all. The Offering <TABLE> <S> <C> Common Stock Offered by the Company......... 2,500,000 shares Common Stock Outstanding after this Offering................................... 7,244,155 shares(1) Use of Proceeds............................. To fund product introduction, sales and marketing, research and development, capital expenditures and for working capital and general corporate purposes Proposed Nasdaq National Market Symbol...... IGYN </TABLE> Summary Consolidated Financial Data (in thousands, except per share data) <TABLE> <CAPTION> Three Months Ended Year ended December 31, March 31, ----------------------------------------------------- --------- 1991 1992 1993 1994 1995 1995 --------- --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> Consolidated Statements of Operations Data: Net sales.............................................. $ 15 $ 1,238 $ 1,047 $ 1,005 $ 2,243 $ 335 Gross profit (loss).................................... 4 536 41 (263) 432 70 Other operating income................................. -- 1,000 -- -- 3,500 -- Loss from operations................................... (2,549) (3,406) (5,177) (5,485) (2,428) (1,066) Interest income (expense), net......................... 56 178 337 175 (217) 16 Net loss............................................... (2,493) (3,228) (4,840) (5,311) (2,645) (1,050) Net loss per share(2).................................. $ (0.59) $ (0.76) $ (1.16) $ (1.26) $ (0.59) $ (0.25) Shares used in computing net loss per share(2)......... 4,233 4,233 4,240 4,263 4,573 4,252 <CAPTION> 1996 --------- <S> <C> Consolidated Statements of Operations Data: Net sales.............................................. $ 1,467 Gross profit (loss).................................... 245 Other operating income................................. -- Loss from operations................................... (1,687) Interest income (expense), net......................... 120 Net loss............................................... (1,569) Net loss per share(2).................................. $ (0.29) Shares used in computing net loss per share(2)......... 5,334 </TABLE> <TABLE> <CAPTION> March 31, 1996 ---------------------------- Pro Forma(3) As Adjusted(4) ----------- --------------- <S> <C> <C> Consolidated Balance Sheet Data: Cash, cash equivalents and short term investments.............................................. $ 7,772 $ 39,522 Working capital................................................................................ 8,796 40,546 Total assets................................................................................... 11,368 42,959 Accumulated deficit............................................................................ (22,112) (22,112) Stockholders' equity........................................................................... 8,403 40,153 </TABLE> - ------------------------------ (1) Excludes 665,059 shares of Common Stock reserved for issuance pursuant to stock options outstanding as of April 1, 1996. Also excludes 1,081,872 shares of Common Stock reserved for future issuance under the Company's 1995 Stock Plan, 1996 Director Option Plan and 1996 Employee Stock Purchase Plan. See Notes 12 and 18 of Notes to Consolidated Financial Statements, "Management-- Stock Plans" and "Description of Capital Stock." (2) See Note 14 of Notes to Consolidated Financial Statements for information concerning the computation of net loss per share. (3) Pro forma stockholders' equity assumes the conversion of all outstanding shares of Preferred Stock into Common Stock. (4) Adjusted to give effect to the receipt of the net proceeds from the sale of the 2,500,000 shares of Common Stock offered hereby (at an assumed initial public offering price of $14.00 per share and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by the Company).
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0001012248_vision_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001012248_vision_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2ff6c26235a2812c1c6b3187fea5721205373a61
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0001012248_vision_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following is a summary of certain information contained elsewhere in this Prospectus. Reference is made to, and this summary is qualified in its entirety by, the more detailed information and financial statements, including the notes thereto, contained elsewhere in this Prospectus. Except where otherwise indicated, all share and per share data in this Prospectus have been adjusted to reflect a stock split of 1.75 shares for each share of Common Stock effective as of March 15, 1996. The Company Vision Care, Inc. ("VCI") was formed as a non-stock, not-for-profit Florida corporation in 1968 to engage in the management, administration and provision of prepaid vision care services in Florida and is now the largest prepaid vision care service provider in Florida. With ever increasing emphasis being placed on cost containment and the efficient delivery of health services, a group of officers and directors of VCI determined that VCI's business could be best furthered through a for- profit enterprise. Such officers and directors concluded that the most effective way to respond to those competitive pressures was to emphasize cost-effective access to health care, build on VCI's reputation for delivering vision health care services efficiently and effectively, and to expand services. The ability to achieve these goals is significantly enhanced by a for-profit corporate structure which provides a corporation with flexibility that a not-for-profit entity does not have, including, among other things, the ability to raise capital through stock offerings. As a result, Vision Health Care, Inc. (the "Company") was formed in May 1995 as a for-profit Florida corporation for the purpose of purchasing substantially all of the assets of VCI. The Company and VCI entered into a purchase agreement in March 1996, which was negotiated on behalf of VCI by a special committee whose members are neither officers, directors nor shareholders of the Company. The proceeds of the Offering (together with borrowed funds, if necessary) will be used to pay the purchase price of VCI's assets at a price equal to their appraised value as of year-end 1995 ($5 million), plus any increase or decrease in VCI's book value through the end of the calendar month immediately preceding the closing. As of April 30, 1996, there was an increase in VCI's book value of $334,668. As a result, had the closing occurred in May 1996, the purchase price would have been $5,334,668. There is no limit on the amount of the book value adjustments to the purchase price. The closing, which is subject to consummation of the Offering, receipt of all applicable regulatory approvals and the satisfaction of certain other conditions, is expected to take place on or about August 31, 1996. Following the closing, the Company, which anticipates hiring all of VCI's existing employees, will continue VCI's business as a for-profit enterprise. VCI's prepaid vision care plans, which offer specified services and products at predetermined prices (the "Plans"), are offered under the name "VSP" under license from Vision Service Plan, formally known as California Vision Service ("Vision Service Plan"), which operates directly or through license arrangements in other states, or under VCI's internally developed program known as Primary Plus, which is targeted at health maintenance organizations ("HMOs"). VCI contracts with public and private employers, HMOs, preferred provider organizations ("PPOs"), health insurance carriers, self-insured corporations, unions and other associations (collectively, the "Sponsors") to provide prepaid group vision care services to members, clients or employees of the Sponsors who choose to participate in a Plan (the "Participants"). Under agreements with Plan Sponsors, VCI is paid a fixed fee for each Participant which entitles Participants to obtain eye health examinations and corrective lenses and frames through VCI's network of more than 1,000 eye care specialists for no additional payment, unless there is a deductible or a required co- payment. The vast majority of VCI's contracts with its Sponsors are assignable by VCI without the consent of the Sponsor which will enable the Company to continue services to current Sponsors. In those few cases where Sponsors must approve the assignment, the Company does not anticipate any problem in obtaining such approvals because it believes that VCI has developed loyal relationships with its Sponsors by providing the Sponsors' employees, members and clients with quality vision care products and services. Substantially all of VCI's revenues are derived from the Plans offered under the "Vision Service Plan" or "VSP" names pursuant to VCI's license agreement with Vision Service Plan, the largest vision care network in the United States. Under the license agreement, VCI also receives revenues for providing reciprocal services through its network of licensed doctors of optometry or ophthalmology (the "Providers") to participants in other VSP plans who happen to reside in Florida, but whose sponsors are based outside the state. VSP Plan prepaid and reciprocal program revenues (net of claim costs) accounted for approximately 87.2% and 1.5%, respectively, of VCI's revenues in 1995. Vision Service Plan has notified VCI that it intends to terminate the license agreement at the end of 1997. While the reason for the notification was not disclosed by Vision Service Plan, VCI has advised that it believes Vision Service Plan is considering offering vision care service plans directly in Florida. If the Company is not successful in negotiating a continuation of the agreement, such termination is likely to have a material adverse effect on the Company, if it is not successful in transferring Sponsors to non-VSP Plans. See "Risk Factors -- Possible Termination of Vision Service Plan License Agreement." Primary Plus was created by VCI in 1993 to take advantage of the additional revenue potential generated by the shift in emphasis in health care to HMOs and managed care. It serves as a proprietary vehicle for Plans marketed to HMOs, which generally use Providers who traditionally have not been panel Providers under the VSP Plans. Primary Plus Plans include surgical and medical eye care as well as routine eye examinations, eyeglasses and contact lenses. While revenues from VCI's Primary Plus products have grown from $22,000 in 1993 to $900,000 in 1995, they accounted for less than 6% of VCI's total revenues in 1995. Revenues generated from Primary Plus Plans are lower than those generated from VSP Plans due to the competitive nature of the managed care market and the less expensive benefit packages offered to Primary Plus Participants. Primary Plus is able to compete in this market by directing patient volume to Providers who are willing to accept lower reimbursements and negotiating competitive lab arrangements that lower Primary Plus' corresponding expense levels. The Company believes current market conditions in vision care favor companies which provide meaningful cost containment to the buyer and that there are significant niches within each market offering attractive opportunities for companies which are responsive to consumer demand for affordable vision care. To take advantage of these market conditions, the Company's business strategy will be to emphasize cost effective access to health care, build on VCI's managed care reputation and capabilities, and expand VCI's lines of products and services. The Offering Common Stock offered hereby . . . . . . . . 504,000 Shares Common Stock to be outstanding after the Offering . . . . . . . . . . . . . . 630,000 Shares(1) Use of proceeds by the Company . . . . . . To purchase substantially all of VCI's assets. _______________ (1) Assumes the sale of all 504,000 shares offered hereby. Excludes 157,500 shares reserved for issuance under the Company's Stock Option Plan, of which 131,906 shares are subject to outstanding options (with a term of 10 years and an exercise price of $.29 per share) as of the date of this Prospectus. See "Management -- Option Plan." Summary Selected Financial and Operating Data The following table sets forth selected financial information (A) on a pro forma basis for the Company for the year ended December 31, 1995, and the three months ended March 31, 1996, and (B) on a historical basis for VCI for the five years ended December 31, 1995, and the three months ended March 31, 1996. The financial information for the years ended December 31, 1995, December 31, 1994, and December 31, 1993 have been derived from VCI's financial statements for such years, which have been prepared in accordance with generally accepted accounting principles and audited by Dwight Darby & Company, independent certified public accountants, and are included elsewhere in this Prospectus. The financial information for the years ended December 31, 1992 and December 31, 1991 have been computed from VCI's financial statements for such years, which were prepared in accordance with statutory accounting principles promulgated by the Florida Department of Insurance and audited by Dwight Darby & Company, and which are not included in this Prospectus. The amounts presented in the financial information for the years ended December 31, 1992 and December 31, 1991 would not have been significantly different if prepared under generally accepted accounting principles. The information should be read in conjunction with (i) the financial statements and notes, and (ii) Management's Discussion and Analysis of Financial Condition and Results of Operations, which are included elsewhere in this Prospectus. Pro forma operating information is presented as if the acquisition of VCI's business and the Offering had occurred on January 1, 1996, and January 1, 1995, for the pro forma periods ended March 31, 1996, and December 31, 1995, respectively. The pro forma balance sheet data is presented as if these transactions had occurred on March 31, 1996. The pro forma information incorporates certain assumptions that are included in the notes to the pro forma financial statements included elsewhere in this Prospectus. The pro forma information does not purport to represent what the Company's financial position or results of operations would actually have been if these transactions had, in fact, occurred on the dates indicated, or to project the Company's financial position or results of operations at any future date or for any future period. <TABLE> <CAPTION> Three Months Ended March 31, Year Ended December 31, Pro VCI Pro Forma Historical Forma Vision Care, Inc. Historical 1996(1) 1996 1995(1) 1995 1994 1993 1992 1991 (Dollars in thousands, except per share and other data) <S> <C> <C> <C> <C> <C> <C> <C> <C> Statement of Income Data: Prepaid programs revenues $ 3,965 $ 3,965 $13,449 $13,449 $11,960 $10,097 $ 8,248 $ 6,778 Total revenues 4,622 4,679 15,249 15,424 13,237 11,045 8,988 7,388 Cost of benefits provided 2,923 2,923 10,681 10,681 8,355 7,356 6,100 5,270 General and administrative expenses 1,272 1,268 4,036 4,032 2,870 2,282 1,872 1,490 Net income (loss) 348 443 (3,838)(3) (3,523)(3) 2,393 1,800 1,417 1,120 Pro forma net income(2) 217 276 (2,395)(3) (2,198)(3) 1,492 1,123 884 699 Pro forma net income per common share(2) $ 0.53 n/a $(5.90)(3) Weighted average shares outstanding(4) 406,000 0 406,000 Other Data: Number of Sponsors 492 492 494 494 423 371 296 252 Number of Participants 523,600 523,600 513,000 513,000 416,400 348,978 275,175 229,728 <CAPTION> March 31, December 31, Pro VCI Forma Historical Vision Care, Inc. Historical 1996(1) 1996 1995 1994 1993 1992 1991 (Dollars in thousands, except per share and other data) <S> <C> <C> <C> <C> <C> <C> <C> Balance Sheet Data: Cash and investments $ 6,100 $ 9,833 $ 9,772 $ 7,827 $ 6,215 $ 4,416 $ 2,743 Total assets 9,889 13,365 12,698 10,585 7,923 5,890 3,835 Professional fees refundable 2,000(5) 5,157 5,129 0 0 0 0 Liability for outstanding claims 2,328 2,328 2,192 1,785 1,671 1,445 886 Equity(6) 2,524 5,352 4,908 8,369 6,038 4,238 2,821 <FN> ______________ (1) Assumes the sale of the minimum 250,000 shares of Common Stock offered hereby and the application of the net proceeds therefrom, which are estimated to be approximately $2.4 million (after deducting estimated offering expenses), and the net proceeds of a $2.5 million loan bearing interest at an annual rate of 5.49% with interest payable monthly and principal due in twelve months. (2) VCI is a not-for-profit corporation for federal and state income tax purposes. The pro forma information has been computed as if VCI were subject to federal and state income taxes for all periods presented, based on the tax laws in effect during the respective periods. (3) The loss reflects a one time expense in 1995 of professional fees withheld in prior years of $4,085,542 of which approximately $3.1 million is to be refunded in 1996. See Notes 7 and 11 of Notes to Financial Statements. Had this expense not been incurred in 1995, pro forma net income for the pro forma period ended December 31, 1995 would have been $154,000 ($.38 per share) and VCI's historical pro forma net income for the period ended December 31, 1995 would have been $350,858. (4) Weighted average number of shares has been computed using the treasury stock method which includes dilutive common stock equivalents as if outstanding during the respective periods. (5) Reflects anticipated payment of $3.1 million to be made prior to the closing of the Offering. (6) Historical amounts for VCI, which is a not-for-profit corporation, represent net assets rather than shareholders' equity. </TABLE>
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001012367_cardiac_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001012367_cardiac_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the financial statements and notes thereto appearing elsewhere in this Prospectus. Prospective investors should consider carefully the information discussed under "Risk Factors." Except as set forth in the financial statements or as otherwise indicated herein, all information in this Prospectus (i) reflects an increase in the authorized shares of Common Stock to 30,000,000 shares effected in May 1996, (ii) reflects the two-for-three reverse split of the Company's Common Stock and Preferred Stock effected in May 1996, (iii) gives effect to the reincorporation of the Company from California to Delaware effected in May 1996, (iv) assumes that an outstanding warrant to purchase 6,667 shares of Common Stock that expires upon the closing of this offering is exercised,(v) reflects the conversion of all of the Company's outstanding shares of Preferred Stock into shares of Common Stock, which will occur automatically upon the closing of this offering, (vi) reflects the filing, upon the closing of this offering, of a Restated Certificate of Incorporation authorizing 5,000,000 shares of undesignated Preferred Stock, and (vii) assumes that the Underwriters' over-allotment option is not exercised. See "Description of Capital Stock," "Underwriters" and Notes 1, 4 and 14 of Notes to Consolidated Financial Statements. THE COMPANY Cardiac Pathways Corporation (the "Company") designs, develops and manufactures minimally invasive systems to diagnose and treat cardiac tachyarrhythmias (abnormally rapid heart rhythms) which, if untreated, can cause palpitations, fainting and sudden cardiac arrest (a fatal heart rhythm). The Company is developing products designed to provide integrated system solutions for the successful diagnosis and treatment of ventricular tachycardia and atrial fibrillation, two of the most serious and prevalent types of abnormally rapid heart rhythms. The Company's products consist of systems for diagnostic mapping, or locating the source of the tachyarrhythmia within the heart, and for performing ablation treatment, a nonsurgical, minimally invasive technique for neutralizing heart tissue responsible for starting or maintaining a dangerous heart rhythm. Current mapping and ablation procedures can take many hours to complete. The Company believes its systems will substantially shorten mapping and ablation procedure time and provide safe and more effective treatments of ventricular tachycardia and atrial fibrillation than other current forms of therapy. Ventricular tachycardia is a life-threatening condition marked by the ventricles beating at an abnormally rapid rate, significantly interfering with the pumping of oxygenated blood throughout the body. The currently prescribed therapies for ventricular tachycardia are not curative and in many instances have undesirable side effects. For diagnostic mapping of ventricular tachycardia, the Company has developed the Arrhythmia Mapping System, consisting of a high density mapping catheter that assesses electrical conduction throughout the left ventricle and a computer workstation that analyzes and displays the data gathered by the mapping catheter. The Company believes that the Arrhythmia Mapping System will allow the electrophysiologist to quickly locate high rate ventricular tachycardia at multiple sites thus providing a significant improvement over currently used single point mapping techniques. The Company believes that this ability to locate the ventricular tachycardia will enable a larger population of patients to receive a successful ablation treatment using the Company's Ventricular Tachycardia Ablation System. For ablation treatment of ventricular tachycardia, the Company has developed the Ventricular Tachycardia Ablation System, consisting of an ablation catheter that is cooled by the circulation of fluid during radiofrequency energy delivery and an integrated generator and programmable fluid pump that delivers radiofrequency energy and fluid to the ablation catheter. The circulation of fluid draws heat away from the ablation catheter's metal electrode and from the electrode-to-tissue interface, which the Company believes will allow the delivery of higher radiofrequency energy levels without excessive heating. The delivery of higher energy levels allows for the creation of wider and deeper lesions than those created with lower energy levels, increasing the likelihood of a successful ablation. Atrial fibrillation is a condition in which the regular pumping function of the atria is replaced by a disorganized, ineffective quivering caused by chaotic conduction of electrical signals through the upper chambers of the heart. Although not immediately life threatening, atrial fibrillation may cause up to a 30% reduction in cardiac output and can lead to more serious conditions, including the formation of blood clots in the atria that can dislodge and travel to the brain resulting in stroke. Currently, the only curative treatment for atrial fibrillation is a rarely performed open heart procedure (the surgical maze procedure) in which the surgeon makes several incisions in the right and left atria creating scar tissue to electrically isolate portions of the atria. None of the widely prescribed alternative therapeutic options is curative and most have undesirable side effects. For ablation treatment of atrial fibrillation, the Company is developing the Atrial Fibrillation Ablation System which the Company believes will produce, in a less invasive manner, a continuous line of block through the heart tissue with lesions similar to those created with the surgical maze procedure. For diagnostic mapping of atrial fibrillation, the Company is developing a variation of the Arrhythmia Mapping System designed to assess the effectiveness of the ablation procedure in treating the patient's atrial fibrillation. The Company believes that a mapping system for the atria will be important in reducing the procedure time for ablation treatment of atrial fibrillation. The Company initiated clinical trials for the Ventricular Tachycardia Ablation System in the United States and Europe in November 1995 under an investigational device exemption ("IDE") approved by the United States Food and Drug Administration ("FDA"). The clinical trials are being conducted at a maximum of 16 clinical sites and will involve a total of approximately 200 patients randomized using the Ventricular Tachycardia Ablation System versus antiarrhythmic drugs. As of May 20, 1996, 17 patients had been enrolled in the clinical trial, of whom eight had received ablation treatment. Pursuant to a compassionate use protocol, as of May 20, 1996, 15 additional patients in the United States and Europe had received ablation treatment in procedures unrelated to the clinical trial. At the conclusion of the clinical trials, the Company plans to file a premarket approval ("PMA") application for approval to market the Ventricular Tachycardia Ablation System and its component catheters and equipment in the United States. In February 1996, the Company received FDA approval to conduct an IDE feasibility study to evaluate the safety of the Arrhythmia Mapping System for diagnostic mapping of ventricular tachycardia. The feasibility study is being conducted at two clinical sites in the United States and will involve a total of 12 patients. The Company is also testing the Mercator Left Ventricular Mapping Basket and Arrhythmia Mapping System in Europe. At the conclusion of the feasibility study, currently expected to occur in early calendar 1997, the Company intends to submit an IDE to the FDA to perform additional clinical trials for the Mercator Left Ventricular Mapping Basket. The Company has also developed and is currently marketing products for the diagnosis and treatment of supraventricular tachycardia. Supraventricular tachycardias affect ventricular rate from an origin above the ventricles. The two most common types of supraventricular tachycardias are readily treatable using standard radiofrequency catheter ablation techniques. The Company's Trio/Ensemble diagnostic catheters and Radii supraventricular tachycardia mapping and ablation catheters are used for electrophysiological diagnostic mapping and ablation of supraventricular tachycardia. The Company believes the Ensemble catheter is the world's smallest general purpose electrophysiology diagnostic catheter. Arrow International, Inc. ("Arrow") received 510(k) clearance for the Trio/Ensemble diagnostic catheters in December 1995. Arrow distributes the product in the United States and Arrow and a limited number of other distributors market the product in certain international markets. The Radii mapping and ablation catheters are distributed internationally by Arrow and other international distributors. The Company believes that its investment in basic research of mapping and ablation methods, its strong research team and its technological expertise have positioned it to take advantage of the need for safe and more effective treatments of ventricular tachycardia and atrial fibrillation. The Company's strategy is to establish its Ventricular Tachycardia Ablation System, Arrhythmia Mapping Systems and Atrial Fibrillation Ablation System as the preferred means for the diagnosis and the treatment of ventricular tachycardia and atrial fibrillation. The key elements of the Company's strategy are to demonstrate clinical efficacy and safety of these systems, to build upon relationships with electrophysiologists, to provide integrated system solutions for diagnosing and treating ventricular tachycardia and atrial fibrillation, to maintain technological leadership and achieve market leadership and to protect and enhance its proprietary technology position. [ARTWORK] THE OFFERING <TABLE> <S> <C> Common Stock offered......................... 2,500,000 shares Common Stock to be outstanding after the 9,086,909 shares(1) offering................................... Use of proceeds.............................. For funding research and development, including clinical trials, marketing and sales, general and administrative support, capital expenditures and working capital. See "Use of Proceeds." Proposed Nasdaq National Market symbol....... CPWY </TABLE> - ------------ (1) Based on shares outstanding as of March 31, 1996. Excludes (i) 1,217,548 shares of Common Stock issuable upon exercise of options outstanding as of March 31, 1996, with a weighted average exercise price of $1.66 per share, (ii) 107,971 shares of Common Stock issuable upon exercise of warrants outstanding as of March 31, 1996, with a weighted average exercise price of $12.50 per share and (iii) 287,810 shares of Common Stock, as of March 31, 1996, issuable upon conversion of an outstanding convertible promissory note at a conversion rate equal to $18.00 per share. Also excludes 383,735 additional shares of Common Stock reserved for future issuance under the Company's stock plans as of March 31, 1996. See "Management -- Stock Plans," "Description of Capital Stock" and Notes 3, 4 and 14 of Notes to Consolidated Financial Statements. SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> PERIOD FROM APRIL 24, 1991 NINE MONTHS (INCEPTION) YEAR ENDED JUNE 30, ENDED MARCH 31, THROUGH ------------------------------------- ----------------- JUNE 30, 1991 1992 1993 1994 1995 1995 1996 -------------- ------- ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales..................... $ -- $ -- $ -- $ -- $ 115 $ 92 $ 1,079 Loss from operations.......... (85) (1,196) (3,717) (7,687) (9,816) (7,492) (6,767) Net loss...................... (85) (1,024) (3,485) (7,430) (9,660) (7,340) (6,732) Pro forma net loss per share(1)................... $ (1.39) $ (0.97) Shares used in computing pro forma net loss per share(1)................... 6,959 6,975 </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 ------------------------ AS ACTUAL ADJUSTED(2) -------- ----------- <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments................... $ 12,485 $ 53,293 Working capital..................................................... 11,548 52,356 Total assets........................................................ 15,820 56,628 Long-term obligations, net of current portion....................... 8,825 8,825 Accumulated deficit................................................. (28,416) (28,416) Stockholders' equity................................................ 5,376 46,184 </TABLE> - ------------ (1) Common equivalent shares from stock options and warrants and convertible Preferred Stock are excluded from the computation of pro forma net loss per share as their effect is antidilutive, except that common and common equivalent shares issued during the twelve-month period prior to the initial filing of the proposed public offering have been included in the calculation as if they were outstanding for all periods presented. The computation also gives effect to the automatic conversion of convertible Preferred Stock upon the closing of this offering. See Notes 1 and 4 of Notes to Consolidated Financial Statements. (2) Adjusted to reflect the sale of 2,500,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $18.00 per share and after deducting estimated underwriting discounts and commissions and offering expenses payable by the Company and the exercise of a warrant to purchase 6,667 shares of Common Stock at an exercise price of $8.70 per share. See "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001012369_donna_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001012369_donna_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements (including the notes thereto) appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus gives effect to the Reorganization (as defined in "Reorganization"). As used in this Prospectus, references to the "Company" mean the DK Companies (as defined in "Reorganization") as of dates and periods prior to the closing of the Offering and, thereafter, collectively, Donna Karan International Inc. and its subsidiaries. See "Reorganization." The financial information of the Company contained herein includes the Intermediate Entities (as defined in "Reorganization"). References herein to a specific year refer to the Company's fiscal year, which is the 52- or 53-week period ending on the Sunday nearest December 31. Certain capitalized terms used in this Prospectus are defined in the Glossary included herein. THE COMPANY Donna Karan International Inc. is one of the world's leading international fashion design houses. The Company designs, contracts for the production of, markets, and distributes "designer" and "bridge" collections of men's and women's clothing, sportswear, accessories, and shoes under the Donna Karan New York(R) and DKNY(R) brand names, respectively. The Company also develops, contracts for the production of, markets, and distributes collections of men's and women's fragrance, bath and body, and treatment products under the DK Men(TM) and Donna Karan New York(TM) brand names, respectively. In addition, the Company selectively has granted licenses for the manufacture and distribution of certain other products under the Donna Karan New York(R) and DKNY(R) brand names, including hosiery, intimate apparel, eyewear, and, most recently, a license for children's apparel under the DKNY(R) brand name in Europe and the Middle East. In 1995, the Company's net revenues were $510.1 million and its operating income was $42.5 million, representing a 21.4% and 46.7% increase, respectively, over 1994 net revenues and operating income. The Company's net income in 1995 was $53.7 million. On a pro forma basis, after giving effect to the Reorganization, the Offering, and certain other adjustments, the Company's net revenues were $504.6 million, its operating income was $30.1 million, and its net income was $18.4 million for 1995. The Company's products have significant international appeal, and in 1995, approximately 33.9% of the Company's net revenues (excluding net revenues generated from outlet stores and licensing) were to customers in international markets. The Company's net revenues (in millions) for 1995 were distributed as follows: <TABLE> <CAPTION> PRODUCT CATEGORIES - ------------------ <S> <C> Donna Karan New York(R) collections for women(1).... $ 77 DKNY(R) collections for women(1).................... 271 Donna Karan New York(R) collections for men(1)...... 40 DKNY(R) collections for men(1)...................... 37 Beauty products.............. 30 Outlet stores and licensing.. 55 </TABLE> <TABLE> <CAPTION> GEOGRAPHIC MARKETS - ------------------ <S> <C> United States(2)............ $301 Japan....................... 64 Europe and the Middle East.. 57 Asia (excluding Japan)...... 23 Other markets............... 10 </TABLE> - -------- (1) Includes apparel, accessory, and shoe collections. (2) Excludes in the United States $55 million of net revenues from outlet stores and licensing. The Company has achieved its success through the implementation of the following operating strategies: . building the global name recognition and the distinctive brand image of Donna Karan New York(R) in the exclusive designer market and the DKNY(R) brand in the larger bridge market; . establishing successful designer collections and then leveraging the success of those collections and the depth of its design talent in the larger bridge market; . expanding on a worldwide basis, including in the United States, Europe and the Middle East, Japan, and other parts of Asia; . maintaining exclusivity of the brand image through coordinated global advertising and marketing, selective licensing arrangements, and controlled retail distribution; and . offering a "head-to-toe" assortment of complementary luxury product categories designed to satisfy the lifestyle needs of its customers. Founded in 1984 on the talents of Ms. Donna Karan, a leading fashion designer, the Company's initial focus was the Donna Karan New York(R) Collection of women's designer apparel and accessories. The original collection was based on Ms. Karan's concept of "seven easy pieces"--a collection of bodysuits and tights, dresses, skirts, blouses, jackets, pants, and accessories--that when layered in combinations achieved a consistent, but varied, high fashion look. The Donna Karan New York(R) Collection for women continues to represent high fashion apparel, made primarily with exclusively- developed luxury fabrics and designed with an emphasis on comfort and fit. The Donna Karan New York(R) Collection for women is recognized worldwide as one of the premier women's designer collections. Each of the spring and fall collections is introduced at major fashion shows which generate extensive coverage in the domestic and international fashion press, as well as the general media. The Donna Karan New York(R) Collection for women established the Company as a leading international fashion design house. The initial success of the Donna Karan New York(R) Collection for women made possible the launch of the DKNY(R) bridge collection of women's apparel and accessories in 1989. DKNY(R) was established as a separate brand name to create a distinct and more casual fashion identity at lower prices while retaining an association with the Donna Karan New York(R) designer image. The Company was able to leverage the depth within its design team, as well as its sourcing capabilities and distribution strength to successfully address the market opportunity in the larger bridge market, thereby increasing its customer base and range of products. Today, the women's apparel, accessory, and shoe collections sold under the DKNY(R) brand name constitute the Company's largest division, representing 53.1% of net revenues in 1995. Consistent with its operating philosophy and leveraging its name recognition and its strengths in design, sourcing, and distribution, the Company introduced the Donna Karan New York(R) Collection for men in 1991 and the DKNY(R) men's collection in 1992. The Donna Karan New York(R) Collection of designer apparel for men is sophisticated, elegant, comfortable, and made of luxury fabrics. The DKNY(R) men's collection is innovative, modern, relaxed, and made of lightweight, tactile fabrics. The combined men's collections, which include apparel and shoes, accounted for 15.0% of the Company's 1995 net revenues and experienced a 68.2% increase in net revenues from 1994 to 1995. To further leverage its strong brand name and image, in 1992 the Company launched the Donna Karan New York(R) fragrance for women. Based upon the success of that launch, the Company introduced men's and women's fragrance, bath and body, and treatment products. Sales of the Beauty Division have grown at a 96.0% compound annual growth rate since 1993 and represented 5.9% of the Company's net revenues in 1995. The Company intends to introduce a new women's fragrance under the Donna Karan New York(R) brand name in the second half of 1996. The Company also plans to introduce a DKNY(TM) women's fragrance in 1998 and a DKNY(TM) men's fragrance in 1999 with an appeal to a broader consumer base. Due to the global recognition of the Donna Karan New York(R) and DKNY(R) brands, the Company has been able to expand its sales internationally. In 1995, the Company's net revenues in Japan, Europe and the Middle East, and other parts of Asia represented 14.1%, 12.4%, and 5.1%, respectively, of net revenues (excluding net revenues generated from outlet stores and licensing). International sales increased from 1991 to 1995 from 14.4% to 33.9% of such net revenues. Management believes international sales will continue to grow as a percentage of the overall business and is focused on continuing to build the infrastructure to support the growth of its brands worldwide. To preserve the exclusivity of its brands, the Company maintains tight control over advertising, marketing, distribution, and licensing. All worldwide advertising, public relations, and marketing programs are managed on a centralized basis through the Company's Creative Services and Public Relations Departments in New York, which promote a consistent global image. In addition to expenditures by its product licensees, expenditures by the Company on advertising, public relations, and marketing of the Company's products totaled $33.8 million in 1995 (and cumulatively, $101.8 million since 1993). Similarly, the Company has been very selective in pursuing licensing opportunities and has maintained strict control over design, quality, advertising, marketing, and distribution in its five existing product licensing arrangements. To reinforce its exclusive image and appeal, the Company sells its products in the United States through a limited number of stores, including better department stores and large specialty stores, such as Bloomingdale's, Macy's, Saks Fifth Avenue, Neiman Marcus, Bergdorf Goodman, and Nordstrom, and better boutiques catering to fashion-conscious customers. Management believes sales of the Company's products typically rank among the leading fashion houses in terms of revenues in the department and large specialty stores in which they are sold. The Company sells its products internationally through better department and specialty stores and boutiques, as well as full-price, free-standing retail stores operated by third parties under the names Donna Karan New York(TM), DKNY(TM), and Donna Karan(TM) (the "International Retail Stores"). These free- standing retail stores exclusively showcase the Company's products. As of March 1, 1996, 29 free-standing International Retail Stores were located in 16 countries in Europe, the Middle East, and Asia. In March 1995, the Company entered into a retail agreement (the "Retail Agreement") with Hotel Properties Limited, a Singapore public company ("HPL"), and a corporation owned by a private investor with a substantial interest in HPL, providing for the establishment by HPL of an aggregate of 29 free-standing International Retail Stores, in Hong Kong, The People's Republic of China, The Philippines, South Korea, Taiwan, and Japan by December 31, 2000, the first of which opened in Hong Kong in January 1996. The Company has continued to develop additional products which address the lifestyle needs of its customers. During the past five years, the Company has expanded its product offerings to include the Donna Karan New York(R) Essentials and DKNY(R) Essentials collections for women, the Donna Karan New York(R) Signature collection for men, the DKNY(R) jeans and petite collections for women, DK Men(TM) and Donna Karan New York(TM) men's and women's beauty products, respectively, as well as DKNY(R) men's and women's shoes. By expanding its collections, the Company establishes a larger potential customer base by offering a "head-to-toe" product assortment. The Company's goals are to continue to leverage its strong brand name and image by expanding its current product offerings and to increase its presence in domestic and international markets. The principal elements of the Company's growth strategy are to: . Increase number of doors. During 1996, the Company expects selectively to increase the number of domestic doors (a "door" is a single retail outlet) through which its more recently-introduced products, including its beauty products and men's apparel, will be sold and to increase the number of international doors through which the Company's products are sold. One of the Company's goals is to approximately double the 1995 sales generated by its DKNY(R) menswear business in 1996, although there can be no assurance that the Company will be successful in attaining this goal. . Increase number of free-standing retail stores. The Company anticipates that 10 additional free-standing International Retail Stores will be opened in 1996 (including five stores to be opened under the Retail Agreement with HPL) and currently is considering a strategy for the opening of full-price, free-standing retail stores by or in arrangements with third parties in select locations in the United States. . Continue product segmentation and expansion. By continuing to segment and expand its collections, the Company provides a greater "head-to-toe" product assortment to better satisfy the lifestyle needs of existing customers and to appeal to new customers. In addition, expanding its product offerings allows the Company to increase sales through existing doors. The Company intends to launch a new women's fragrance under the Donna Karan New York(R) brand name in the second half of 1996, to add casual sportswear to its Donna Karan New York(R) men's collection, and to expand the range of the current activewear offerings included within the DKNY(R) women's collection for spring 1997. As a result of this expansion, the Company is considering the establishment of a new DKNY(R) activewear division. In addition, the Company intends to increase the product range of its Donna Karan New York(R) Essentials collection for women under its new Donna Karan New York(R) Signature label for spring 1997. . Broaden customer base. The Company plans to target broader market opportunities at lower prices than its apparel products with additional luxury products in categories such as beauty and accessories. . Expand licensing efforts. Having successfully established its brands worldwide, the Company now intends to expand its licensing efforts through the selective granting of new product licenses, which may include licenses relating to jeanswear and related apparel, swimwear, DKNY(R) underwear, watches, and home furnishings. There can be no assurance that the Company will enter into such licenses or of the terms thereof. Ms. Karan, the Company's Chairman, Chief Executive Officer, Chief Designer, and a substantial stockholder, has been designing fashion-forward apparel for over 25 years and is recognized as one of the world's preeminent fashion designers. Mr. Ruzow, the Company's President and Chief Operating Officer, has over 30 years of experience in the apparel industry. The Company's other executive officers and division presidents have significant experience in the fashion industry, with an average of over 20 years of experience. The principal executive offices of the Company are located at 550 Seventh Avenue, New York, New York 10018. Its telephone number is (212) 789-1500. THE OFFERING COMMON STOCK OFFERED: U.S. Offering............. 7,525,000 Shares International Offering.... 3,225,000 Shares Total..................... 10,750,000 Shares Common Stock to be Outstanding After the 21,487,934 Shares Offering(1)(2)(3).......... Use of Proceeds(3).......... The Company intends to use the net proceeds of the Offering as follows: (i) to pay approximately $116.0 million to members of the Takihyo Group (as defined herein) and members of the Karan/Weiss Group (as defined herein) in satisfaction of the Distribution Notes (as defined herein) previously issued (including accrued interest thereon), representing cumulative undistributed taxable income on which taxes previously have been paid; (ii) to pay approximately $80.0 million to the Company's lenders in satisfaction of the term loans and the revolving line of credit under the Company's Credit Agreement (as defined herein), which amount represents the outstanding balance as of June 10, 1996; (iii) to pay $5.0 million to Stephen L. Ruzow, the President of the Company, representing a one-time payment pursuant to his employment agreement; (iv) to pay approximately $5.0 million to Gabrielle Studio (as defined herein), representing a one-time payment made in connection with the License Agreement (as defined herein) (which by its terms will amend previously existing licensing arrangements that could in certain circumstances, including the Offering, provide for higher royalty payments to Gabrielle Studio than those under the License Agreement); and (v) for general corporate purposes. See "Reorganization," "Use of Proceeds," "Capitalization," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Management--Compensation Arrangements," and "Certain Relationships and Related Transactions--License Agreement for Principal Trademarks." New York Stock Exchange symbol...................... "DK" - -------- (1) Includes 125,000 shares of Common Stock which the Company expects to award to certain employees of the Company pursuant to the 1996 Stock Incentive Plan on the effective date of the Offering. Excludes an aggregate of 1,475,000 shares of Common Stock reserved for issuance under the Company's 1996 Stock Incentive Plan. The Company expects to grant options for shares of Common Stock to certain employees of the Company pursuant to the 1996 Stock Incentive Plan at the initial offering price on the effective date of the Offering. Also excludes an aggregate of 100,000 shares of Common Stock reserved for issuance under the Company's 1996 Non-Employee Director Stock Option Plan. See "Management--1996 Stock Incentive Plan" and "--1996 Non-Employee Director Stock Option Plan." (2) Excludes 18 shares of Class A Common Stock and two shares of Class B Common Stock held by members of the Karan/Weiss Group and members of the Takihyo Group, respectively, which will be outstanding after the Offering. See "Reorganization" and "Description of Capital Stock." (3) Assumes an initial public offering price of $21.50 and no exercise of the Underwriters' over-allotment option. SUMMARY COMBINED FINANCIAL DATA The following table sets forth, for the periods and at the dates indicated, summary combined financial data for the Company. Such data have been derived from the audited and unaudited Predecessor Combined Financial Statements of the Company included elsewhere herein. See "Selected Combined Financial Data." The following table also includes certain unaudited pro forma combined statement of income data for 1995 and 1996 which give effect to the Reorganization, the Offering, and certain other adjustments as if they occurred on January 2, 1995. In addition, the unaudited pro forma combined balance sheet data gives effect to the Reorganization, the Offering, and certain other adjustments as if they occurred on March 31, 1996. See "Pro Forma Combined Financial Information." <TABLE> <CAPTION> FISCAL YEAR ENDED FISCAL QUARTER ENDED ---------------------------------------------------------- ---------------------- DECEMBER 28, JANUARY 2, JANUARY 2, JANUARY 1, DECEMBER 31, APRIL 2, MARCH 31, 1991(1) 1993 1994 1995 1995 1995 1996 ------------ ---------- ---------- ---------- ------------ ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF INCOME DATA: Net revenues........... $196,570 $259,947 $364,705 $420,164 $ 510,126 $ 120,693 $ 159,585 Gross profit........... 64,496 92,309 130,475 148,992 179,437 44,203 52,861 Selling, general, and administrative expenses.............. 54,544 63,933 102,748 119,995 136,906 33,041 39,411 -------- -------- -------- -------- ---------- ---------- ---------- Operating income....... 9,952 28,376 27,727 28,997 42,531 11,162 13,450 Equity in earnings of affiliate(2).......... -- -- -- -- 2,519 -- 988 Interest expense, net.. (82) (892) (4,063) (8,862) (7,650) (1,701) (2,047) Other expense(3)....... -- -- (2,980) (2,651) -- -- -- Gain on sale of interests in affiliate(2).......... -- -- -- -- 18,673 18,673 -- -------- -------- -------- -------- ---------- ---------- ---------- Income before provision for certain state, local, and foreign income taxes.......... 9,870 27,484 20,684 17,484 56,073 28,134 12,391 Provision for certain state, local, and foreign income taxes.. 2,187 3,522 1,312 1,139 2,398 1,408 690 -------- -------- -------- -------- ---------- ---------- ---------- Net income............. $ 7,683 $ 23,962 $ 19,372 $ 16,345 $ 53,675 $ 26,726 $ 11,701 ======== ======== ======== ======== ========== ========== ========== PRO FORMA STATEMENT OF INCOME DATA (UNAUDITED)(4)(5)(6): Net revenues.......................................................... $ 504,605 $ 115,172 $ 159,585 Gross profit.......................................................... 159,817 34,468 48,699 Selling, general, and administrative expenses......................... 129,761 27,634 38,661 ---------- ---------- ---------- Operating income...................................................... 30,056 6,834 10,038 Equity in earnings of affiliate....................................... 2,913 394 988 Interest expense, net................................................. (839) (32) (94) ---------- ---------- ---------- Income before provision for income taxes.............................. 32,130 7,196 10,932 Provision for income taxes............................................ 13,705 3,108 4,721 ---------- ---------- ---------- Net income............................................................ $ 18,425 $ 4,088 $ 6,211 ========== ========== ========== Pro forma per share information(7).................................... $ .88 $ .19 $ .31 ========== ========== ========== Number of common shares assumed outstanding(7)........................ 16,584,708 16,584,708 16,584,708 ========== ========== ========== </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 ----------------------- PRO FORMA, AS ADJUSTED(8) ACTUAL (UNAUDITED) -------- -------------- (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Working capital....................................... $118,766 $134,617 Total assets.......................................... 226,267 254,277 Total long-term debt, including current portion....... 72,724 514 Stockholders' equity and partners' capital............ 91,791 172,992 </TABLE> (1) Selling, general, and administrative expenses for 1991 included payments of and accruals for consulting fees to the Principals (as defined herein) of $14.0 million in addition to amounts paid to certain executives pursuant to their then existing employment arrangements. Excluding these consulting fees, operating income and net income would have been $24.0 million and $21.7 million, respectively. (2) On March 31, 1995, the Company sold 70% of its interest in the operations of Donna Karan Japan to a nonaffiliated party. The Company recognized a gain on this transaction, net of transaction costs, of $18.7 million. Subsequent to the sale, the Company has accounted for its remaining 30% interest in the operations of Donna Karan Japan using the equity method of accounting. Equity in earnings of affiliate amounted to $2.5 million and $1.0 million for the year ended December 31, 1995 and the quarter ended March 31, 1996, respectively. See Note 9 to Notes to Predecessor Combined Financial Statements. (3) Other expenses represent charges, primarily legal and other professional fees, related to a proposed initial public offering in 1993 amounting to $3.0 million and a proposed debt offering in 1994 amounting to $2.7 million. (4) The unaudited pro forma statement of income data for the fiscal year ended December 31, 1995 reflects the Reorganization, the Offering, and the following adjustments as if they had occurred on January 2, 1995: (a) royalties of $12.8 million to be paid to Gabrielle Studio pursuant to the License Agreement; (b) a decrease in aggregate compensation from $4.3 million to $2.0 million for two of the Company's executives pursuant to their new employment agreements; (c) a reduction in interest costs of $6.2 million assuming the application of up to $75.7 million (which amount represents the maximum amount outstanding during the year) of the proceeds from the Offering to reduce the actual outstanding indebtedness under the Credit Agreement; (d) a reduction of $0.6 million in amortization of deferred financing costs, which costs would have been written off in connection with repayment of outstanding indebtedness under the Credit Agreement; and (e) an increase of $11.3 million for income taxes based upon pro forma pre-tax income as if the Company had been subject to Federal and additional state income taxes. In addition, the unaudited pro forma statement of income data reflects adjustments arising from the sale of the Company's 70% interest in the operations of Donna Karan Japan, as if it had occurred on January 2, 1995. (5) The unaudited pro forma statement of income data for the fiscal quarters ended April 2, 1995 and March 31, 1996 reflect the Reorganization, the Offering, and the following adjustments as if they had occurred on January 2, 1995: (a) royalties of $2.9 million and $4.2 million in 1995 and 1996, respectively, payable to Gabrielle Studio pursuant to the License Agreement; (b) a decrease in aggregate compensation from $1.1 million to $0.5 million in 1995, and from $1.3 million to $0.5 million in 1996 for two of the Company's executives pursuant to their new employment agreements; (c) a reduction in interest costs of $1.5 million and $1.6 million in 1995 and 1996, respectively, assuming the application of up to $73.2 million and $87.4 million in 1995 and 1996, respectively, (which amounts represent the maximum amount outstanding during the periods) of the proceeds from the Offering to reduce the actual outstanding indebtedness under the Credit Agreement; (d) a reduction of $0.1 million and $0.3 million in 1995 and 1996, respectively, in amortization of deferred financing costs, which costs would have been written off in connection with repayment of outstanding indebtedness under the Credit Agreement; and (e) an increase of $1.7 million and $4.0 million in 1995 and 1996, respectively, for income taxes based upon pro forma pre-tax income as if the Company had been subject to Federal and additional state income taxes. In addition, the unaudited pro forma statement of income data for the quarter ended April 2, 1995 reflects adjustments arising from the sale of the Company's 70% interest in the operations of Donna Karan Japan, as if it had occurred on January 2, 1995. (6) The pro forma statement of income data does not include the non-recurring pre-tax charge of approximately $20.3 million (approximately $11.6 million on an after-tax basis) which the Company expects to accrue immediately following the closing of the Offering, relating to (a) the anticipated consolidation of the Company's warehouse facilities ($5.0 million), (b) a one-time payment to the President of the Company pursuant to his employment agreement ($5.0 million), (c) a one-time payment to Gabrielle Studio in connection with the License Agreement (approximately $5.0 million), (d) the write-off of deferred financing costs related to the Company's Credit Agreement ($2.7 million), and (e) a one-time charge of approximately $2.7 million in connection with the award of 125,000 shares of Common Stock to certain employees pursuant to the Company's 1996 Stock Incentive Plan. In addition, the unaudited pro forma statement of income data does not include a deferred tax asset of approximately $15.6 million at December 31, 1995 and $15.5 million at March 31, 1996, in addition to certain state and local deferred tax assets recorded on a historical basis, which the Company will record concurrently with becoming subject to Federal and additional state and local income taxes. (7) Pro forma per share information is based on 10,612,934 shares of Common Stock outstanding prior to the Offering, increased by the sale of 5,846,774 shares of Common Stock assuming an offering price of $21.50 per share ($19.84, net of expenses), the proceeds of which would be necessary to pay approximately $116.0 million in satisfaction of the Distribution Notes and 125,000 shares of Common Stock which the Company expects to award to certain employees pursuant to the Company's 1996 Stock Incentive Plan. The net income used in the calculation of pro forma per share information for the year ended December 31, 1995 excludes the reduction of interest costs of $6.2 million in (4)(c) above and the reduction in amortization of deferred financing costs of $0.6 million noted in (4)(d) above, and the related tax effect of $2.9 million. The net income used in the calculation of pro forma per share information for the quarters ended April 2, 1995 and March 31, 1996 excludes the reduction of interest costs of $1.5 million and $1.6 million in 1995 and 1996, respectively, in (5)(c) above and the reduction in amortization of deferred financing costs of $0.1 million and $0.3 million in 1995 and 1996, respectively, in (5)(d) above, and the related tax effect of $0.7 million and $0.8 million in 1995 and 1996, respectively. Supplementary pro forma per share information for the year ended December 31, 1995, and quarters ended April 2, 1995 and March 31, 1996 are $.91, $.20, and $.31, respectively, based on 10,612,934 shares of Common Stock outstanding prior to the Offering, increased by (a) the sale of 5,846,774 shares of Common Stock assuming an offering price of $21.50 per share ($19.84, net of expenses), the proceeds of which would be necessary to pay approximately $116.0 million in satisfaction of the Distribution Notes, (b) the sale of 3,639,113 shares of Common Stock assuming an offering price of $21.50 per share ($19.84, net of expenses), the proceeds of which would be necessary to repay approximately $72.2 million to the Company's lenders for the term loans under the Company's credit facility and to reduce the amount outstanding under the Company's revolving line of credit at March 31, 1996, and (c) 125,000 shares of Common Stock which the Company expects to award to certain employees pursuant to the Company's 1996 Stock Incentive Plan. The net income used in the calculation of supplementary pro forma per share information is $18.4 million, $4.1 million, and $6.2 million for the year ended December 31, 1995 and the quarters ended April 2, 1995 and March 31, 1996, respectively. (8) The unaudited pro forma, as adjusted, balance sheet data reflects (a) the Reorganization, (b) the issuance of the Distribution Notes, (c) the sale of the shares of Common Stock offered by the Company hereby assuming an initial public offering price of $21.50 per share and no exercise of the Underwriters' over-allotment option, (d) the application of the estimated net proceeds received by the Company therefrom to pay the Distribution Notes, to pay the amount outstanding under the Company's credit facility at March 31, 1996, to pay Stephen L. Ruzow a one-time payment pursuant to his employment agreement, to pay to Gabrielle Studio a one-time payment in connection with the License Agreement, and for general corporate purposes, (e) the non-recurring pre-tax charge of approximately $20.3 million (approximately $11.6 million on an after-tax basis) which the Company expects to accrue immediately following the closing of the Offering as described in note 6 above, and (f) a deferred tax asset of approximately $15.5 million described in note 6 above. In the second quarter of 1996, the Company made distributions subsequent to March 31, 1996 of $4.7 million with respect to taxes on 1995 and prior years' income which were payable in 1996, $7.7 million with respect to 1996 taxable income, $4.6 million of cash held in Intermediate Entities, and $5.8 million of taxes payable in connection with the sale of 70% of the Company's interest in the operations of Donna Karan Japan, for a total of $22.8 million.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001012441_united_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001012441_united_prospectus_summary.txt
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+SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the financial statements (including notes thereto) appearing elsewhere in the Prospectus. Unless otherwise indicated or the context otherwise requires, all information in this Prospectus with regard to the capital stock of the Company, including share and per share data, (i) has been adjusted to give effect to the conversion of the outstanding preferred stock of the Company (the "Principal Preferred Stock") into shares of Common Stock immediately prior to the completion of this Offering, (ii) assumes that the Underwriters' over-allotment option will not be exercised and (iii) assumes an initial price to the public of the Common Stock offered hereby of $16.00 per share. THE COMPANY BUSINESS OPERATIONS United Payors & United Providers, Inc. (the "Company" or "UP&UP") serves as an intermediary between health care payors, such as insurance companies, and health care providers, such as hospitals, by entering into contractual arrangements designed generally to produce cost savings and other benefits for payors and increased liquidity and improved efficiency in claims submissions for providers. The Company derives its revenues primarily from a portion of the price concessions offered by the providers under such contractual arrangements. The Company enters into contracts with both providers of medical services ("Contracting Providers") and payors of medical claims ("Payor Clients"). The Company's contracts with Contracting Providers, consisting primarily of hospitals and, to a lesser extent, other health care providers, establish price concessions on the charges for medical services rendered by the Contracting Providers to beneficiaries covered by medical plans of Payor Clients. These Contracting Providers collectively constitute the "UP&UP Network." The Contracting Providers are not prohibited by the Company's contracts from entering into discounted service arrangements with others, but are subject to a contract clause providing for automatic annual renewal of the contract for successive one-year terms unless the Contracting Provider gives written notice of termination, typically at least 90 days prior to the renewal date. In partial consideration for the price concessions furnished by the Contracting Providers, the Company offers these Contracting Providers the option of receiving a prepayment of a portion of the annual claims volume that such Contracting Providers have with Payor Clients (the "Prepayment Option"). The Prepayment Option is typically equal to one-twelfth of a Contracting Provider's claims volume for the preceding twelve-month period. As of June 1, 1996, the UP&UP Network consisted of 1,288 Contracting Providers, of which 841 were hospitals and 447 were other health care providers. The Company's contracts with Payor Clients, such as insurance companies, third party administrators ("TPAs") acting as agents for other payors, self- insured employers and unions, and government health plans, provide for specified reductions in the amounts ordinarily payable by the Payor Clients on medical claims submitted by Contracting Providers. The Company believes that, consistent with representations generally made by Payor Clients to their respective state insurance commissioners, plan beneficiaries receive the same proportionate reduction on any co-insurance portion of the medical claims payable by such beneficiaries under the terms of those plans. As of June 1, 1996, the Company had 35 Payor Clients. Agreements with Payor Clients provide for automatic annual renewals. Such contracts generally may be terminated by either party upon 90 days' notice. The Company has sophisticated information systems capabilities, which facilitate claims data transmission and cost repricing pursuant to UP&UP Network price concessions. In addition, the Company conducts extensive data analyses of encounter and cost data by specific service areas for Payor Clients. The Company also maintains an extensive, proprietary database of provider charges for certain medical procedures by geographic area, which is offered to both its Payor Clients and Contracting Providers. The Company's systems also enable claims payments to be forwarded to certain Contracting Providers by electronic funds transfer ("EFT") through an arrangement with The Chase Manhattan Bank, N.A. ("Chase Manhattan Bank"). STRATEGY The Company's strategy is: . To increase overall claims volume by expanding the UP&UP Network of Contracting Providers and the number of Payor Clients; . To develop new services which allow national and other large Payor Clients to compete more effectively in the marketplace, including the development of capitated networks for Payor Clients; and . To establish a national clearinghouse for claims transmissions and EFTs by building upon its existing capabilities to promote efficiencies in the relationships between national and other large payors and local and regional providers. The Company intends to pursue this strategy by: (i) marketing the Prepayment Option and enhanced ancillary services, including claims transmissions for Contracting Providers; (ii) developing a national network of capitated providers by pursuing strategic alliances with physician networks ("Physician Networks") comprised of independent practice associations ("IPAs") and physician hospital organizations ("PHOs"); (iii) offering capitated providers sophisticated information systems that will permit them to manage and allocate capitation payments from national payors among the various providers in a local health care delivery system; (iv) expanding the Company's proprietary database of provider charges and other encounter and cost data; and (v) promoting the use of a multifunction co-branded card that serves as both a health insurance identification card and a VISA credit card. The Company will also seek to acquire businesses that offer services or technologies that would expand or supplement the Company's current business. ORGANIZATIONAL HISTORY The Company is a Delaware corporation and the successor to an Iowa corporation organized in January 1995. Its business operations include the operations of Initial Managers and Investors, Inc. ("IM&I") and certain operations (the "Transferred Client Group") transferred from America's Health Plan, Inc. ("AHP"). AHP is an indirect wholly-owned subsidiary of Principal Mutual Life Insurance Company ("Principal Mutual"), which will directly or indirectly own approximately 40.0% of the Common Stock following the Offering. IM&I was owned by Thomas L. Blair, the founder of the Company, who will own approximately 20.2% of the Common Stock following the Offering. The Company also has two subsidiaries: (i) IM&I-NEWCO, Inc., a Delaware corporation ("NEWCO"), which administers the Continued Health Care Benefit Program ("CHCBP") for the United States Department of Defense and (ii) America's Health Card Services, Inc. ("AHCS"), an Iowa corporation, which is 90% owned by the Company and promotes a multifunction co-branded health insurance identification card and credit card for distribution by payors. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company(1).. 2,200,000 shares Common Stock to be outstanding after the Offering(1)............................ 11,000,000 shares Use of Proceeds......................... The net proceeds from the Offering are expected to be used (i) to fund payments due upon exercise of Prepayment Options granted to Contracting Providers, and (ii) for general corporate purposes, including possible acquisitions. Nasdaq National Market symbol........... UPUP </TABLE> - -------- (1) Excludes (i) 330,000 shares of Common Stock that may be issued pursuant to the Underwriters' over-allotment option. (See "Underwriting"), and (ii) shares issuable to EDICOMM, Inc. ("EDICOMM") equal to $150,000 valued at the initial offering price. See "Business--Strategy--Establish a National Clearinghouse."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001012442_diamond_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001012442_diamond_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY AND SHOULD BE READ IN CONJUNCTION WITH THE MORE DETAILED INFORMATION, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE NOTED OR CONTAINED IN THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED HEREIN, ALL INFORMATION IN THIS PROSPECTUS HAS BEEN ADJUSTED TO GIVE EFFECT TO THE RECLASSIFICATION AND STOCK SPLIT OF EACH OUTSTANDING SHARE OF THE COMPANY'S CLASS A VOTING COMMON STOCK AND CLASS B NONVOTING COMMON STOCK INTO 50 SHARES OF COMMON STOCK, $.001 PAR VALUE (THE "COMMON STOCK"), EFFECTIVE JUNE 17, 1996. SEE "CAPITALIZATION," "CERTAIN TRANSACTIONS" AND "DESCRIPTION OF CAPITAL STOCK." UNLESS THE CONTEXT OTHERWISE INDICATES, AS USED HEREIN, THE DEFINED TERMS "COMPANY" OR "DIAMOND" SHALL MEAN DIAMOND HOME SERVICES, INC. TOGETHER WITH ITS WHOLLY-OWNED SUBSIDIARIES, DIAMOND EXTERIORS, INC., MARQUISE FINANCIAL SERVICES, INC. AND SOLITAIRE HEATING AND COOLING, INC. UNLESS THE CONTEXT OTHERWISE INDICATES, AS USED HEREIN, THE DEFINED TERM "GLOBE" SHALL MEAN GLOBE BUILDING MATERIALS, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES. THE COMPANY The Company is a leading national marketer and contractor of installed home improvement products, including roofing, gutters, doors and fencing. The Company markets its home improvement products and services directly to consumers primarily under the "Sears" name pursuant to a three-year non-exclusive license agreement with Sears, Roebuck and Co. ("Sears"), which expires December 31, 1998. Sears has been in business for over 100 years and is a nationally recognized name in the installed home improvement industry. The Company is one of the largest third-party licensees of Sears home improvement products and services. The Company currently markets its products directly to residential customers in 44 states through a combination of national and local advertising and its approximately 700 sales managers and sales representatives (collectively referred to herein as "Sales Associates"). The Company has 76 sales offices located in major cities across the U.S., providing the Company with a presence in markets covering approximately 77% of the owner-occupied households in the U.S. The Company installs its products through a network of over 1,300 qualified independent contractors and purchases its products through local and regional independent distributors. The Company was formed in May 1993 by a group consisting primarily of six former Sears home improvement managers and Globe, a manufacturer of roofing products, to participate in the consolidation of the installed home improvement industry. The installed home improvement industry is large and fragmented. According to the U.S. Department of Commerce, total expenditures for residential improvements and repairs grew at an annual compounded rate of 5.7% from approximately $97.5 billion in 1991 to approximately $115.0 billion in 1994. The Company's competitors are typically small, family-owned independent contractors, which are facing increasingly complex regulations, additional capital requirements and the need for more sophisticated sales and marketing resources. The Company believes that its ability to compete favorably in the installed home improvement market has been enhanced by several factors, including its ability to market and sell its premium products and services through targeted advertising and formal in-home product presentations to prospective customers by the Company's trained Sales Associates. Under its license to use the nationally recognized "Sears" name, the Company provides consumers primarily "need-based" products and services which are used to improve and repair portions of a home or prevent potential problems, such as a damaged roof or a broken garage door. A customer's decision to purchase "need-based" products and services tends to be less discretionary than the decision to purchase other home improvement products, since a decision to purchase a "need-based" product is typically in response to a problem that needs to be promptly remedied. The Company provides readily available financing to qualified customers through Sears and its affiliates or through Marquise Financial Services, Inc. ("Marquise Financial"), the Company's newly-formed consumer finance subsidiary. The Company is committed to superior product offerings and customer service, as reflected in its extensive labor and product warranty coverage. Additionally, the Company believes its established relationships with independent contractors assure reliable and superior product installation. The license agreement with Sears provides for immediate termination by Sears for various reasons, including the Company's failure to comply with any material provision of the license agreement or the receipt by Sears of an excessive number of complaints regarding the Company. The license agreement is not exclusive by its terms; however, historically, Sears has not licensed the same home improvement products to multiple licensees within the same market. Notwithstanding the foregoing, there can be no assurance that Sears will not license the same home improvement products to other licensees within the Company's markets. The Company is not owned or controlled by, or under common control with, Sears. Since commencement of the Company's operations in June 1993, the Company's net sales have increased to $124.8 million for the year ended December 31, 1995. The Company intends to continue its growth in net sales and profitability by increasing penetration in existing markets through the addition of new Sales Associates and sales offices and the generation of additional sales leads. The Company also intends to add new installed product lines, including proprietary products and other maintenance-related, "need-based" products and services, and to increase its conversion rate of sales leads into sales. The Company believes that the availability of an alternative source of financing for its customers through Marquise Financial will lead to increased product sales and profitability. THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Selling Stock- holder....................................... 750,000 shares Common Stock to be Outstanding After the Offering..................................... 9,074,900 shares (1) Nasdaq National Market Symbol................. DHMS </TABLE> - ------------------------ (1) Excludes 670,000 shares of Common Stock reserved for issuance under the Company's stock option plans, of which 275,000 shares are subject to options outstanding as of July 31, 1996. See "Management -- Stock Option Plans." ------------------------ The Company was incorporated in Delaware on May 13, 1993 and commenced operations on June 1, 1993. Diamond Exteriors, Inc. ("Exteriors"), a wholly-owned subsidiary of the Company, was incorporated in Delaware on May 15, 1995. Marquise Financial and Solitaire Heating and Cooling, Inc. ("Solitaire") were incorporated in Delaware, as wholly-owned subsidiaries of Exteriors, on July 13, 1995 and November 27, 1995, respectively. The Company's principal executive and administrative office is located at 222 Church Street, Diamond Plaza, Woodstock, Illinois 60098, and its telephone number is (815) 334-1414. Effective April 18, 1996, the Company transferred substantially all of its assets and liabilities to Exteriors, its wholly-owned subsidiary. Simultaneous with such transfer, Exteriors paid a dividend to the Company consisting of all of the issued and outstanding capital stock of Marquise Financial and Solitaire. On June 17, 1996, the Company reclassified and split each outstanding share of its Class A Voting Common Stock and Class B Nonvoting Common Stock into 50 shares of Common Stock in connection with the Company's initial public offering. SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OPERATING DATA) <TABLE> <CAPTION> YEARS ENDED DECEMBER SIX MONTHS ENDED PERIOD FROM JUNE 1 31, JUNE 30, TO ---------------------- -------------------- DECEMBER 31, 1993(1) 1994 1995 1995 1996 -------------------- --------- ----------- --------- --------- <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales................................... $ 20,548 $ 94,186 $ 124,848 $ 53,496 $ 68,482 Gross profit................................ 7,960 38,047 52,603 22,418 30,348 Operating income (loss)..................... (1,179) 2,951 6,795 1,936 3,947 Net income (loss)........................... (1,179) 1,995 3,735 893 2,268 Net income (loss) per share................. $ (0.12) $ 0.22 $ 0.60 $ 0.14 $ 0.36 Weighted average common shares and common equivalents outstanding.................... 10,000 9,062 6,250 6,250 6,330 SELECTED OPERATING DATA: Number of sales offices (2)................. 38 55 70 67 76 Number of Sales Associates (2).............. 260 496 631 644 722 Number of installed jobs.................... 7,294 37,510 55,261 23,470 29,305 </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 --------- <S> <C> BALANCE SHEET DATA (2): Working capital...................................................................................... $ 18,021 Total assets......................................................................................... 56,148 Total debt........................................................................................... 1,829 Common stockholders' equity.......................................................................... 31,985 </TABLE> - ------------------------ (1) Period from inception of the Company's operations to December 31, 1993. (2) Calculated at the end of the period shown.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001012459_uscs_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001012459_uscs_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THE COMPANY USCS is a leading provider of customer management software and services to the global communications industry. The Company's clients include providers of cable television, wireless and land-line telephony, direct-broadcast satellite ("DBS") and multiple communications services in the U.S. and 13 other countries. The Company's software-based solutions enable its clients to manage critical customer relationship functions, including new account set-up, order processing, customer support, management reporting and marketing analysis. The Company also provides bill presentment services, which include generation of high quality, customized billing statements that are produced in automated facilities designed to minimize turnaround time and mailing costs. USCS also offers a variety of complementary professional services, including consulting, application development and client training, as well as statement design services that allow clients to use the billing statement as a communication and marketing tool. The Company's clients typically enter into contracts with terms ranging from three to seven years. Clients are billed monthly, generally based on the number of end-users they serve. As a result, a significant portion of the Company's revenue is recurring and increases as the service provider's customer base grows. In 1995, the Company's revenue totaled $229.3 million, of which 73% was generated from companies that have been clients of USCS for three or more years. USCS has been providing comprehensive customer management software and services to the cable television industry for more than 25 years and has been profitable in every year since 1973. The Company's software currently supports 53% of U.S. cable television subscribers and is used by 15 of the 20 largest cable television service providers in the U.S., including Adelphia Communications Corporation ("Adelphia"), Cablevision Systems Corporation ("Cablevision Systems"), Comcast Cable Communications, Inc. ("Comcast"), Tele-Communications, Inc. ("TCI") and Time Warner, Inc. ("Time Warner"). The Company provides bill presentment services to clients serving 53% of U.S. cable television subscribers, 33% of U.S. cellular users and 9% of U.S. land-line telephony customers and to a variety of other service providers. The Company's bill presentment clients include substantially all of its domestic customer management software clients and other service providers such as AirTouch Paging ("AirTouch"), Ameritech Corporation ("Ameritech") and Frontier Corporation ("Frontier"). The Company currently processes over 60 million bills per month and is the largest centralized first class mailer in the U.S., responsible for generating more than 1.5% of the total volume of all U.S. first class mail, including customer remittance volume. Bill presentment services are generally provided to software clients in bundled contracts and are also sold separately. The Company has extended its leadership position by introducing products and services that address the rapidly changing global communications market. Technological advances, regulatory changes and international growth are transforming the structure and competitive dynamics of the industry. Markets that were once segmented by service and geographic location are converging into a single global communications market, which includes traditional service providers and new entrants offering a combination of services. The rapidly shifting and increasingly complex nature of the converging communications market has increased the need among service providers for sophisticated and flexible customer management software and services. In 1993, the Company deployed Intelecable, which the Company believes is the first customer management software product designed for providers of multiple communications services ("multi-service providers"). The Company also believes that Intelecable is the only integrated multi-service customer management software system currently operational and commercially available. Intelecable is presently installed for 17 clients worldwide, including combined cable/telephony service providers in the U.K., a combined cable/wireless cable/DBS provider in Australia and two interactive video providers in the U.S., including BellSouth Interactive Media Services, Inc. ("BellSouth Interactive"). The Company has also expanded its bill presentment services to support multi-service providers by offering consolidated billing statements that combine data from multiple services, such as wireless and land-line telephony, into a single integrated billing statement. Since its founding, the Company has been a leader in providing customer management software and services. The Company's record of achievement includes what USCS believes is: - The first customer management software system for multi-service providers, including support of combined cable/telephony sites; - The first contract with a regional bell operating company ("RBOC") to outsource all bill presentment functions for telephony services; and - The first installation and operation of customer management software for interactive video trials in the U.S. The Company's strategy to maintain and enhance its industry position includes the following key elements: (i) focus on recurring revenue, (ii) focus on the needs of multi-service providers, (iii) increase international revenue, (iv) expand bill presentment market opportunities, (v) increase professional and strategic services revenue, and (vi) continue to develop leading-edge software and services. The Company conducts its business primarily through two wholly-owned subsidiaries: CableData, Inc. and International Billing Services, Inc. The Company's principal executive offices are located at 2969 Prospect Park Drive, Rancho Cordova, California 95670, and its telephone number is (916) 636-4500. The Company's international headquarters are located at Spectrum Point, 279 Farnborough Road, Farnborough, Hampshire GU14 7LS England, U.K. U.S. Computer Services, the predecessor to USCS International, Inc., was incorporated under California law on November 18, 1969. USCS International, Inc., which was incorporated under Delaware law on April 10, 1996, succeeded to the business of the California corporation pursuant to a reincorporation effective May 31, 1996. Unless the context otherwise requires, all references in this Prospectus to "USCS" or the "Company" refer to USCS International, Inc., a Delaware corporation, its predecessor, U.S. Computer Services, a California corporation, and their consolidated subsidiaries. THE OFFERING <TABLE> <S> <C> Common Stock offered by: The Company................................... 2,763,855 Shares The Selling Stockholders...................... 2,036,145 Shares Common Stock to be outstanding after this 22,235,574 Shares (1) offering........................................ Use of proceeds................................. Repayment of certain indebtedness (approximately $38.0 million as of March 31, 1996) and working capital and other general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol.......... USCS </TABLE> - ------------------------------ (1) Based on shares outstanding as of May 20, 1996. Excludes an aggregate of 5,178,119 shares reserved as of May 20, 1996 for future issuance under the Company's 1988 Incentive Stock Option Plan, 1990 Nonstatutory Stock Option Plan, 1993 Incentive Stock Option Plan, 1996 Incentive Stock Option Plan, 1996 Directors' Stock Option Plan and Employee Stock Purchase Plan. See "Management -- Employee and Director Plans." SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ---------------------------------------------------------- -------------------- 1991 1992 1993 1994 1995 1995 1996 ---------- ---------- ---------- ---------- ---------- --------- --------- (AUDITED) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenue.................................... $ 143,513 $ 146,087 $ 166,064 $ 188,805 $ 229,263 $ 53,012 $ 60,255 Gross profit............................... 51,754 53,086 61,745 66,283 82,023 19,498 22,094 Operating income (1)....................... 12,905 16,299 13,494 15,787 22,106 4,937 5,443 Income before income taxes and cumulative effect of accounting change (2)........... 8,160 11,250 8,885 11,503 17,140 3,769 4,237 Income before cumulative effect of accounting change (2)..................... 5,053 6,895 4,555 6,169 10,370 2,281 2,563 Net income................................. 5,053 6,895 6,963 6,169 10,370 2,281 2,563 Income before cumulative effect of accounting change per share (3)........... $ 0.20 $ 0.30 $ 0.20 $ 0.28 $ 0.49 $ 0.11 $ 0.12 Net income per share (3)................... $ 0.20 $ 0.30 $ 0.31 $ 0.28 $ 0.49 $ 0.11 $ 0.12 Shares used in per share computation (3)... 25,149 22,675 22,129 21,882 21,138 21,494 20,659 </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 -------------------------- ACTUAL AS ADJUSTED(4) ---------- -------------- (UNAUDITED) <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash.................................................................................. $ 5,930 $ 7,556 Working capital....................................................................... 28,343 29,969 Total assets.......................................................................... 182,824 184,450 Long-term debt less current portion (5)............................................... 53,090 15,090 Stockholders' equity.................................................................. 49,087 88,713 </TABLE> - ------------------------------ (1) In 1993, the Company charged to expense $4.1 million for the consolidation of customer support activities and relocation expenses. (2) In 1993, the Company adopted SFAS 109 resulting in an accumulated credit to income for an adjustment in the calculation of income tax expense. (3) Per share data is based on the weighted average number of shares of Common Stock and dilutive common equivalent shares from stock options outstanding during the period using the treasury stock method. Pursuant to certain Securities and Exchange Commission Staff Accounting Bulletins, common and common equivalent shares issued during the 12-month period prior to the date of the initial filing of the Registration Statement have been included in the calculation as if they were outstanding for all periods prior to their issuance. See Note 2 of Notes to Consolidated Financial Statements. (4) Adjusted to give effect to the sale of 2,763,855 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $16.00 per share and the anticipated application of the estimated net proceeds therefrom. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001012466_bigmar-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001012466_bigmar-inc_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information, including the financial statements and notes thereto, appearing elsewhere in this Prospectus. In this Prospectus, all references to 'Dollars' or '$' are to U.S. Dollars. The information in this Prospectus gives effect to the following events: (i) a contribution to the Company on April 8, 1996 of 99% of the shares of Common Stock then owned by the stockholders of the Company ('Contribution'); (ii) a stock-for-stock exchange on April 9, 1996 whereby Bigmar Pharmaceuticals SA ('Bigmar Pharmaceuticals') and Bioren SA ('Bioren') became subsidiaries of the Company ('Exchange'); (iii) a 2.105263-for-1 reverse stock split of the outstanding shares of Common Stock effected on April 16, 1996 ('Reverse Split'); and (iv) an increase in the number of authorized shares of Common Stock from 10,000,000 to 15,000,000 effected on April 16, 1996. Except where otherwise indicated, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option or the Representative's Warrants. Certain technical terms used in this Prospectus are defined in the 'Glossary.' For more information, see 'The Company,' 'Management's Discussion and Analysis of Financial Condition and Results of Operations,' 'Certain Transactions' and 'Description of Capital Stock.' THE COMPANY The Company is currently engaged in manufacturing and marketing 14 types of intravenous infusion solutions ('IV Solutions') in Switzerland and Lichtenstein and marketing in Germany raw materials used to manufacture medications for the treatment of prostate enlargement ('Prostate Materials') and two generic oncological products, mercaptopurine and calcium leucovorin. Over the next 24 months, the Company's strategy is to manufacture, in its state-of-the-art facilities in Switzerland, and market generic oncological drugs. In addition, the Company is in the process of preparing to market certain licensed proprietary oncological and biotechnological products. The Company markets IV Solutions through its own sales force to health care providers and third-party payors and markets Prostate Materials, mercaptopurine and calcium leucovorin to pharmaceutical companies. The Company does not intend to market its other products directly to the public. For the year ended December 31, 1995, on a pro forma basis after giving effect to the Bioren Acquisition (as defined below) as if the transaction had occurred on January 1, 1995, the Company's sales of IV Solutions and antibiotics were approximately $6.5 million, sales of medical products, including Prostate Materials, were approximately $1.4 million, and sales of generic oncological products were approximately $670,000. For the three months ended March 31, 1996, sales of these products aggregated approximately $1.4 million, $319,000 and $210,000, respectively. In 1995, the Company obtained distribution rights to, among other products, sodium leucovorin and five generic oncological products, including methotrexate and calcium leucovorin, from Sapec ('Sapec'), a division of Cerbios Pharma SA, a privately-held Swiss pharmaceutical company ('Cerbios Pharma'), and approximately 20 generic oncological products, including mercaptopurine, calcium leucovorin and methotrexate, from AB Cernelle ('Cernelle'), a privately-held Swedish pharmaceutical company. Sodium leucovorin is designed to alleviate certain side effects associated with chemotherapy more effectively than its currently distributed counterpart, calcium leucovorin. The Company has received approval for the marketing in Switzerland of two generic oncological products, methotrexate and doxorubicin, and expects to begin marketing these products during the second half of 1996. The Company also expects that all regulatory approvals for the sale of sodium leucovorin in Germany will be obtained during the second half of 1996 and that the marketing of this product will begin shortly thereafter. There can be no assurance, however, that such regulatory approvals will be obtained during these time periods, or that such approvals will ever be obtained. In addition, the Company has also obtained the rights to use, manufacture and market, among other products, a form of recombinant urokinase from Bioferment ('Bioferment'), a division of Cerbios Pharma. Recombinant urokinase is a biotechnological product used in the treatment of cardiovascular disease. The Company has entered into exclusive arrangements with the following non-affiliated pharmaceutical companies to market certain proprietary and generic oncological or biotechnological products, manufactured or licensed by the Company, in various territories: Medac GmbH ('Medac') in Germany and the United Kingdom; Boehringer Mannheim Italia Spa ('Boehringer') in Italy; Laevosan International AG ('Laevosan') in Switzerland; Laboratories Vita SA ('Vita') in Spain; and Protyde Pharmaceuticals, Inc. ('Protyde') worldwide, except for certain major European countries. Medac, Boehringer, Laevosan and Vita are established pharmaceutical companies. Protyde is a development stage company. The Company's business strategy over the next 24 months is to: manufacture and market approximately seven injectable and lyophilized oncological products, including sodium leucovorin; manufacture and market additional oncological products as the patents relating to the products expire; increase the number of pharmaceutical companies in Europe through which the Company's oncological products are marketed and the territories in which they are distributed; market recombinant urokinase; and expand the marketing of IV Solutions in Switzerland through the Company's own sales force. For the past 25 years, John G. Tramontana, the Company's Chairman of the Board, President and Chief Executive Officer, a United States citizen, served in various senior executive positions at a number of privately-held pharmaceutical companies including Adria Laboratories Inc. (acquired by Pharmacia & Upjohn, Inc.), a company specializing in the manufacture of oncological products, Ben Venue Laboratories, Inc., a company specializing in the manufacture of sterile, injectable pharmaceutical products, Sapec, a division specializing in the manufacture of pharmaceutical products, and Bioferment, a division engaged in the research and development of biotechnological products. At the time of the negotiation and execution of the Company's agreements with Sapec, Cernelle and Bioferment, Mr. Tramontana was the chief operating officer and a director of Cerbios Pharma, chairman of the board of Cernelle and a director of Chemholding SA ('Chemholding'), a principal stockholder of the Company. Chemholding is the sole stockholder of Cerbios Pharma and Cerbios Pharma is the sole stockholder of Cernelle. In March 1996, Mr. Tramontana resigned from all of his positions with Chemholding, Cerbios Pharma and Cernelle. There can be no assurance that the Company will continue its arrangements with Sapec, Cernelle or Bioferment or any other collaborators. See 'Risk Factors -- Reliance on Collaborative Arrangements; Management Affiliations with Collaborators.' The Company was incorporated in Delaware in September 1995 and has three wholly-owned subsidiaries, Bigmar Pharmaceuticals, a Swiss corporation formed in January 1992, Bigmar Therapeutics, Inc., a Delaware corporation formed in September 1995 ('Bigmar Therapeutics'), and Bioren, a Swiss corporation formed in July 1986. In June 1995, Bigmar Pharmaceuticals purchased all of the outstanding capital stock of Bioren ('Bioren Acquisition') and simultaneously sold 50% of the outstanding capital stock of Bioren to certain stockholders of Bigmar Pharmaceuticals. On April 9, 1996, in the Exchange, all of the stockholders of Bigmar Pharmaceuticals exchanged all of their shares of capital stock in Bigmar Pharmaceuticals for an aggregate of 2,000,938 shares of Common Stock of the Company and all of the stockholders of Bioren, other than Bigmar Pharmaceuticals, exchanged all of their shares of capital stock in Bioren for an aggregate of 350,312 shares of Common Stock of the Company. See 'The Company' and 'Certain Transactions.' Unless the context indicates otherwise, the term 'Company' as used in this Prospectus refers to the Company and its subsidiaries as a whole. The Company's principal executive offices are located at 6660 Doubletree Avenue, Columbus, Ohio 43229, and its telephone number is (614) 848-8380. THE OFFERING <TABLE> <CAPTION> Common Stock Offered............................... 1,250,000 shares <S> <C> Common Stock Outstanding before the Offering....... 2,375,000 shares(1) Common Stock Outstanding after the Offering........ 3,625,000 shares(1) Use of Proceeds.................................... Net proceeds from the Offering will be used to acquire, test and/or manufacture oncological and biotechnological products; to repay debt; and for general corporate purposes, including working capital. See 'Use of Proceeds.' Risk Factors....................................... An investment in the Common Stock offered hereby involves a high degree of risk and immediate substantial dilution to the public investors. See 'Risk Factors' and 'Dilution.' Trading Symbols: Nasdaq SmallCap MarketSM...................... 'BGMR' Boston Stock Exchange......................... 'BIG' </TABLE> - ------------ (1) Does not include: (i) 300,000 shares of Common Stock reserved for issuance under the Company's 1996 stock option plan ('Option Plan'); (ii) 50,000 shares of Common Stock reserved for issuance under the Company's director option plan ('Director Option Plan'); (iii) up to 187,500 shares of Common Stock issuable upon exercise of the Underwriters' over-allotment option; and (iv) 125,000 shares of Common Stock issuable upon exercise of the Representative's Warrants. See 'Management -- Option Plan and -- Director Option Plan,' 'Description of Capital Stock' and 'Underwriting.' SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA The following table sets forth summary historical financial data for (i) Bioren SA (predecessor company) for the years ended December 31, 1993 and 1994 and for the six months ended June 30, 1995, and (ii) Bigmar, Inc. for the years ended December 31, 1993, 1994 and 1995 and for the three months ended March 31, 1995 and 1996 (after giving effect to the reorganization described in Note 1 to the Company's financial statements). The summary historical financial data of Bioren and Bigmar, Inc. has been derived from the audited financial statements (and notes thereto) of the respective companies included elsewhere in this Prospectus. The summary financial data presented as of March 31, 1995 and 1996 and for the three months ended March 31, 1995 and 1996 are derived from the unaudited financial statements of the Company which appear elsewhere in this Prospectus. In the opinion of management, the summary financial data for the three months ended March 31, 1995 and 1996 have been prepared on the same basis as the audited financial statements and reflect all adjustments, which are of a normal recurring nature, necessary to present fairly the financial data for the periods presented. The results of operations for any interim period are not necessarily indicative of the Company's results of operations for the full fiscal year. The summary historical financial data should be read in conjunction with the financial statements (and notes thereto) of Bioren and Bigmar, Inc. and 'Management's Discussion and Analysis of Financial Condition and Results of Operations' included elsewhere in this Prospectus. The following table also sets forth pro forma operating data of the Company as if the Bioren Acquisition had occurred as of January 1, 1995. The unaudited pro forma financial data is for informational purposes only, does not purport to represent what the Company's results of operations would have been if such transaction had in fact occurred as of such date and is not necessarily indicative of the Company's future results of operations. <TABLE> <CAPTION> BIOREN SA (PREDECESSOR COMPANY) BIGMAR, INC.(1) -------------------------------------- ---------------------------------------------------------- SIX MONTHS THREE MONTHS YEARS ENDED DECEMBER 31, ENDED ENDED JUNE 30, YEARS ENDED DECEMBER 31, MARCH 31, ------------------------- ---------- -------------------------------- ----------------------- 1993 1994 1995 1993 1994 1995(1) 1995 1996 ----------- ----------- ---------- -------- -------- ---------- ---------- ---------- <S> <C> <C> <C> <C> <C> <C> <C> <C> OPERATING DATA: Net sales..................... $ 4,103,921 $ 5,879,685 $2,928,965 $264,077 $707,627 $5,600,362 $1,185,710 $1,898,002 Cost of sales................. 3,558,350 4,479,243 1,694,290 182,075 611,040 4,001,891 1,059,955 1,151,099 ----------- ----------- ---------- -------- -------- ---------- ---------- ---------- Gross profit.................. 545,571 1,400,442 1,234,675 82,002 96,587 1,598,471 125,755 746,903 ----------- ----------- ---------- -------- -------- ---------- ---------- ---------- Operating Expenses: Research and development expense................... 61,297 40,736 26,671 -- -- 23,144 -- 88,394 Selling, general and administrative expense.... 1,572,903 1,858,192 1,060,049 50,810 16,269 1,493,055 21,452 547,463 Loss on abandonment of building improvements and machinery................. 830,912 2,295,850 -- -- -- -- -- -- ----------- ----------- ---------- -------- -------- ---------- ---------- ---------- Total operating expenses...... 2,465,112 4,194,778 1,086,720 50,810 16,269 1,516,199 21,452 635,857 ----------- ----------- ---------- -------- -------- ---------- ---------- ---------- Operating income (loss)....... (1,919,541) (2,794,336) 147,955 31,192 80,318 82,272 104,303 111,046 Other income (expense)........ 115,349 (190,066) (28,644) (7,909) (1,660) (179,476) (13,532) (59,365) ----------- ----------- ---------- -------- -------- ---------- ---------- ---------- Income (loss) before extraordinary item.......... (1,804,192) (2,984,402) 119,311 23,283 78,658 (97,204) 90,771 51,681 Extraordinary item............ -- 1,468,429 -- -- -- -- -- -- ----------- ----------- ---------- -------- -------- ---------- ---------- ---------- Net income (loss)............. $(1,804,192) $(1,515,973) $ 119,311 $ 23,283 $ 78,658 $ (97,204) $ 90,771 $ 51,681 ----------- ----------- ---------- -------- -------- ---------- ---------- ---------- ----------- ----------- ---------- -------- -------- ---------- ---------- ---------- PER SHARE DATA: Net income (loss)..................................................... $.06 $.20 $(.07) $.23 $.02 Weighted average number of shares outstanding......................... 400,188 400,188 1,337,292 400,188 2,375,000 -------- -------- ---------- ---------- ---------- -------- -------- ---------- ---------- ---------- </TABLE> <TABLE> <CAPTION> BIGMAR, INC. ----------------------------------- PRO FORMA THREE MONTHS PRO FORMA ENDED YEAR ENDED MARCH 31, 1995 DECEMBER 31, 1995 -------------- ----------------- <S> <C> <C> PRO FORMA OPERATING DATA: Net sales..................... $2,702,351 $ 8,529,327 Cost of sales................. 1,984,306 5,696,181 -------------- ----------------- Gross profit.................. 718,045 2,833,146 -------------- ----------------- Research and development expense..................... 10,855 49,815 Selling, general and administrative expense(2)... 575,186 2,570,104 -------------- ----------------- Total operating expenses...... 586,041 2,619,919 -------------- ----------------- Operating income (loss)....... 132,004 213,227 Other income (expense)........ (31,133) (208,120) -------------- ----------------- Net income.................... $ 100,871 $ 5,107 -------------- ----------------- -------------- ----------------- PER SHARE DATA: Net income.................. $0.04 $0.00 Weighted average number of shares outstanding........ 2,375,000 1,510,942 (table continued on next page) </TABLE> (table continued from previous page) <TABLE> <CAPTION> BIGMAR, INC. ----------------------------- MARCH 31, 1996 ----------------------------- HISTORICAL AS ADJUSTED(3) ----------- -------------- <S> <C> <C> BALANCE SHEET DATA: Working capital............... $ (137,433) $ 8,160,141 Total assets.................. 19,300,275 25,578,091 Long-term obligations......... 10,839,442 10,839,442 Retained earnings............. 56,619 56,619 Stockholders' equity.......... 3,845,877 11,970,877 </TABLE> - ------------ (1) On April 9, 1996, a reorganization of companies under common control took place whereby the Company acquired 100% of Bigmar Pharmaceuticals and 50% of Bioren. Accordingly, the financial statements of the Company include the results of operations of Bigmar Pharmaceuticals for all periods presented and the results of operations of Bioren from July 1, 1995 (the date of acquisition). (2) Effective upon consummation of the Offering, John G. Tramontana, the Company's Chairman of the Board, President and Chief Executive Officer, will begin to receive an annual base salary of $200,000, subject to adjustment, plus a bonus of at least 25% of his base salary and Gerald T. Sweeney, the Company's Chief Financial Officer and Vice President -- Finance, will begin to receive an annual base salary of $80,000, subject to adjustment, plus a bonus of 15% of his base salary. The pro forma operating data does not reflect such salaries or bonuses (if any). See 'Management.'
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001012482_netopia_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001012482_netopia_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the consolidated financial statements and notes thereto appearing elsewhere in this Prospectus. THE COMPANY Farallon develops, markets and supports complete, easy-to-use, plug-and-play Internet connectivity and networking solutions and real-time collaboration software. The Company's products are designed to increase the productivity and efficiency of Internet, Intranet and LAN users and to target small businesses, geographically dispersed facilities of large enterprises, home offices, mobile users, schools and other small organizations that may not have access to sophisticated technical support. The Company's Internet/Intranet products include its Netopia routers and modems, which provide high-speed Internet connectivity for individuals and workgroups, and its Timbuktu Pro collaboration software, which enables real-time, peer-to-peer collaboration on the Internet, Intranets and LANs. To assist users in configuring the Netopia products and in arranging service from Internet and telecommunications service providers, the Company offers its Up & Running, Guaranteed! program, which serves as a single source for complete Internet connectivity. The Company's LAN networking solutions, a substantial majority of which have been sold to MacOS customers, include its EtherWave family of products, which enable users to easily and cost-effectively create Ethernet networks with or without a hub. Organizations and individuals are increasingly using networks of computers to enhance productivity, access information and communicate more effectively. The continuing advancement of networking technologies and the increasing scale, scope and functionality of network communications and computing have resulted in a corresponding increase in the complexity of these systems. Headquarters offices of large enterprises that have access to sophisticated technical support have generally managed this complexity and realized the benefits of effective network communications. However, individuals and smaller organizations typically do not have access to the skills or resources required to manage the complexity of advanced networking systems. As a result, these users are increasingly seeking networking solutions that are complete, easy-to- use and cost-effective. The Company's objective is to become the leading provider of complete, high- speed Internet connectivity solutions and real-time, peer-to-peer Internet/Intranet collaboration software for segments of the networking market that industry sources have identified as the most rapidly growing and that typically do not have access to sophisticated technical support. Netopia products enable plug-and-play Internet connectivity for multiple users through a single ISDN connection at substantially greater speed than traditional analog-based Internet connections. Timbuktu Pro expands the functionality of the Internet beyond e-mail and Web browsing, enabling users to collaborate in real-time with other Timbuktu Pro users--viewing other users' screens, revising information, transferring files, controlling other computers and remotely accessing network resources. The Company intends to leverage its expertise in developing easy-to-use, plug-and-play LAN networking solutions, its well- established distribution channels and its customer service and support infrastructure to more rapidly penetrate the market for Internet/Intranet products. The Company's marketing strategy is to achieve broad market penetration by utilizing multiple distribution channels, including direct sales, Internet service providers, value-added resellers and two-tier distributors as well as mail order and electronic merchandising. The Company sells its products through approximately 70 distributors in 58 countries. The Company's on-line electronic marketing initiatives include the development and maintenance of a Web server containing in excess of 1,000 pages, hyperlinked with over 1,000 Web sites, and electronic distribution of Timbuktu Pro software. The Company has also established strategic alliances with Cisco, Shiva, PSINet and NetManage for the distribution of Farallon products. The Company was incorporated in California in 1986 as Farallon Computing, Inc. and will be reincorporated in Delaware prior to the completion of this offering. The Company's principal executive offices are located at 2470 Mariner Square Loop, Alameda, California 94501. Its telephone number is (510) 814-5100. THE OFFERING <TABLE> <S> <C> Common Stock offered: By the Company.................... 1,500,000 shares By the Selling Stockholders....... 500,000 shares Common Stock to be outstanding after the offering................ 10,807,085 shares (1) Use of proceeds.................... For general corporate purposes, including working capital and potential acquisitions. See "Use of Proceeds." Proposed Nasdaq National Market symbol ........................... FRLN </TABLE> SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> SIX MONTHS YEARS ENDED SEPTEMBER 30, ENDED MARCH 31, CONSOLIDATED STATEMENT OF ----------------------------------------- --------------- 1991 1992 1993 1994 1995 1995 1996 OPERATIONS DATA: ------- ------ ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> <C> <C> Revenues Internet/Intranet products.............. $ -- $ -- $ -- $ 5,310 $ 6,569 $ 3,188 $ 6,442 LAN products........... 43,904 48,038 48,425 51,691 50,620 26,359 23,003 ------- ------ ------- ------- ------- ------- ------- Total revenues........ 43,904 48,038 48,425 57,001 57,189 29,547 29,445 Gross profit............ 24,847 25,084 24,123 26,186 27,673 14,510 14,265 Operating income (loss) ....................... (1,797) (575) (1,662) 2,304 2,665 2,235 527 Net income (loss) (2) .. $(1,893) $ (500) $(1,414) $ 2,187 $ 2,506 $ 1,843 $ 2,875 Net income per share ... $ 0.25 $ 0.19 $ 0.27 Shares used in per share computations (3)....... 9,891 9,841 10,477 </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 ---------------------- ACTUAL AS ADJUSTED(4) CONSOLIDATED BALANCE SHEET DATA: ------- -------------- <S> <C> <C> Working capital......................................... $23,976 $42,706 Total assets............................................ 36,234 54,964 Long-term liabilities, net of current portion .......... 131 131 Total stockholders' equity.............................. 27,295 46,158 </TABLE> - ---------------- (1) Based on the number of shares outstanding as of March 31, 1996. Excludes 1,372,050 shares of Common Stock issuable upon exercise of outstanding options as of March 31, 1996 with a weighted average exercise price of $1.46 per share under the Company's 1987 Restated Stock Option Plan. See "Management--1996 Stock Option Plan" and Note 6 of Notes to Consolidated Financial Statements. (2) At March 31, 1996, the Company reversed a full valuation allowance that it had previously provided against its deferred tax assets, resulting in a non-recurring income tax benefit of approximately $2.3 million. (3) See Note 1 of Notes to Consolidated Financial Statements. (4) Adjusted to reflect the sale by the Company of 1,500,000 shares of Common Stock offered hereby at an assumed initial public offering price of $14.00 per share and after deducting the estimated underwriting discount and offering expenses payable by the Company, and the application of the net proceeds therefrom. See "Capitalization" and "Use of Proceeds." ---------------- Farallon, the Farallon logo, Timbuktu, EtherWave and PhoneNET are registered trademarks and Netopia, Look@Me and FlashNote are trademarks of the Company. All other trademarks or trade names referred to in this Prospectus are the property of their respective owners. ---------------- Except as otherwise noted herein, information in this Prospectus (i) reflects a one-for-two reverse split of the Common Stock, which will occur prior to the effective date of this offering, (ii) assumes no exercise of the Underwriters' over-allotment option, (iii) except in the Consolidated Financial Statements, reflects the conversion of all outstanding shares of Preferred Stock of the Company into an aggregate of 5,591,207 shares of Common Stock upon the closing of this offering, and (iv) assumes the reincorporation of the Company from California to Delaware, which will occur prior to the effective date of this offering, and the associated changes in the Company's charter documents. See "Description of Capital Stock" and "Underwriting."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001012548_unifrax_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001012548_unifrax_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary information is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements included elsewhere in this Prospectus. Unless otherwise indicated, all information in the Prospectus assumes that the over-allotment option is not exercised. As used herein, unless the context otherwise requires, the term "Company" refers to Unifrax Acquisition Inc. and its subsidiaries, and its predecessor, the unincorporated North American ceramic fiber division of Unifrax (formerly known as The Carborundum Company) and its overseas sales affiliates (collectively, the "North American Fibers Business"), and the term "BP" refers either to The British Petroleum Company p.1.c. or one of its subsidiaries (other than Unifrax or either of its overseas sales affiliates). THE COMPANY The Company believes that it is the leading North American manufacturer of ceramic fiber with a market share in excess of 40% of the ceramic fiber sold in the North American market as measured by volume. Historically, the Company's sales growth has been driven by several factors, including the use of ceramic fiber as a lower cost or higher performance substitute for traditional hard brick refractories and other insulating materials, the introduction of new ceramic fiber product applications, and the general economic expansion of primary ceramic fiber markets. During the four-year period ended December 31, 1995, the Company's net sales and income before income taxes have increased at a compound annual rate of approximately 12% and 35%, respectively. The growth rate in income before income taxes has exceeded the growth rate in net sales during this period due to higher profit margins resulting from several factors, including a sales mix shift to higher value-added product forms and applications, improved manufacturing efficiency, higher capacity utilization, and marketing and administrative cost control. During each of the four years ended December 31, 1995, the Company's sales of product forms and applications which were commercialized within the previous five years comprised over 20% of the Company's net sales. The Company believes that it has the following product, manufacturing, and marketing strengths which provide competitive advantages in the North American ceramic fiber market. - The Company manufactures one of the broadest lines of ceramic fiber products sold in North America. - The Company's product forms are recognized by customers for their high quality, technical sophistication, and consistency. - The Company has demonstrated the ability to introduce successfully new, higher value-added product forms and applications for both traditional and niche markets. - The Company maintains both higher volume facilities for the low cost production of bulk, blanket, and paper product forms and lower volume, highly flexible facilities for the production of higher value-added product forms. - The Company has developed one of the industry's most advanced technology bases in furnacing, fiberizing, and process control and has obtained the scale of operations necessary to protect its position as a low cost manufacturer in the North American market. - The Company is able to serve a broad range of markets through a combination of direct and distributor sales. The Company's growth strategy is to maintain its strong position in the furnace-related markets while building on its leadership position in higher growth niche markets through the development of new, higher value-added product forms and applications. The largest percentage of the Company's sales historically has been to furnace-related markets for use in furnace and kiln linings. However, sales to niche markets have experienced more rapid growth than sales to the Company's furnace-related markets in recent years and now account for the majority of the Company's sales. Such markets for the Company's products include the automotive (safety airbag inflation filters, catalytic converter supports), power generation (duct and stack linings, pumpable joint-filling material), and fire protection (commercial kitchen exhaust duct and cable coverings, hazardous material containers) industries. The Company continues to devote significant resources to developing new product forms and applications in order to support growth. Ceramic fiber is a white glassy fibrous material belonging to a class of materials called man-made vitreous fibers. Ceramic fiber was developed by the Company in 1942 and was identified quickly as a material with commercially attractive performance properties. These properties include stability at very high temperatures (generally up to 2,300(++)F, but up to 3,000(++)F in certain product forms), exceptionally light weight compared to other heat-resistant materials, and extremely low heat transmission, making it a superior insulating material at very high temperatures. In addition, ceramic fiber exhibits high levels of chemical stability and resistance to attack from most corrosive materials. Man-made fibers such as ceramic fiber, fiberglass, and mineral wool have been categorized as "possibly carcinogenic in humans" and "probably carcinogenic in humans" by various government agencies and health organizations. Substantially all of the Company's products contain ceramic fiber, and the Company's dependence on ceramic fiber represents a substantial contingent liability of the Company. See "Risk Factors -- Dependence on Ceramic Fiber; Health and Safety Issue", "Management's Discussion and Analysis of Financial Condition and Results of Operations", and "Business -- Health and Product Safety Issues". The Company manufactures and markets one of the broadest lines of ceramic fiber products sold in North America. The Company's ceramic fiber is produced in numerous forms, including bulk fiber, blankets and modules, boards, papers and felts, textiles, and a variety of other higher value-added product forms. These product forms are used in thermal management applications where heat resistance, light weight, and low heat storage are required. Many of the Company's product applications were created as a result of working closely with customers in a number of industries to fulfill specialized requirements. As a result, the Company's product line has evolved into products with capabilities tied closely to, and qualified for, specific customer applications. The Company's ceramic fiber is sold to a number of industries and is used in many different applications. The metals production, petrochemical, ceramic and glass, automotive, power generation, fire protection, and commercial insulation industries are the major consumers of ceramic fiber. The most common application in North America for ceramic fiber has traditionally been to line industrial furnaces, where high temperature processes require ceramic fiber's heat-resistant characteristics. Significant newer product applications have also developed in the automotive and fire protection industries. These newer applications generally rely on ceramic fiber's heat-resistant characteristics combined with other compositional and dimensional qualities to satisfy more highly engineered requirements. Examples of these newer applications include porosity-controlled paper for use in automotive safety airbag inflation systems and duct wrap systems used in commercial insulation. For the year ended December 31, 1995, approximately 44% of the Company's sales were derived from furnace-related markets, 31% from automotive-related markets, and 25% from other markets. THE TRANSACTION Unifrax Acquisition Inc. is a newly organized Delaware corporation which was formed to acquire substantially all of the assets and liabilities of the North American Fibers Business from Unifrax and other indirect wholly owned subsidiaries of The British Petroleum Company p.1.c. BP's decision to sell the North American Fibers Business is part of its stated intention to concentrate its resources on the development of its core integrated hydrocarbon and chemicals businesses. The Company has operated as a business division within a larger entity since inception. Prior to February 29, 1996, Unifrax, then known as The Carborundum Company ("Carborundum"), owned and operated a number of high performance ceramic product businesses. On February 29, 1996, BP completed the sale of substantially all of Carborundum's businesses other than the North American Fibers Business to Societe Europeenne des Produits Refractaires ("SEPR") and various other affiliates of Compagnie de Saint-Gobain, a multinational French manufacturing company. In connection with that sale (the "Saint-Gobain Sale"), Carborundum changed its name to Unifrax Corporation, and the Company entered into a series of agreements which govern market and business relationships between the Company and SEPR. These agreements with SEPR affect how the Company conducts business outside of the United States, Canada, and Mexico (the "North American Market") and will restrict the Company's ability to expand its sales outside of the North American Market. As used herein, SEPR refers either to SEPR or one of its affiliates, unless the context otherwise requires. See "Relationship with SEPR" and "Management's Discussion and Analysis of Financial Condition and Results of Operations". Immediately prior to the consummation of the Offering, the Company will acquire the North American Fibers Business and obtain a five-year covenant not to compete from BP (the "Covenant Not To Compete") in exchange for notes in the aggregate principal amount of $55 million (collectively, the "Selling Stockholder Note"), and 8,000,000 shares of Common Stock of the Company (or 100% of the issued and outstanding shares of the Common Stock), all of which shares are being sold in the Offering. Consummation of the Offering is conditioned upon the Company's acquisition of the North American Fibers Business. Unifrax Acquisition Inc. will change its name to Unifrax Corporation either shortly before or shortly after the consummation of the Offering. In addition, the Company will borrow approximately $10.5 million under the New Credit Facility and $45 million through the issuance of the Senior Notes (each as defined in "Financing Plan"). Of the proceeds from these borrowings, $55 million, along with any other required funds of the Company, will be paid to BP as repayment of the Selling Stockholder Note. The consummation of the Offering is conditioned upon the closing of the offering of the Senior Notes and the New Credit Facility. As used herein, the term "Transaction" refers to the acquisition of the North American Fibers Business by the Company, the Offering, and the related financings described herein under "Financing Plan". After giving effect to the Transaction, the Company's long-term debt as of March 31, 1996, would have been approximately $55.5 million (approximately 63% of total capitalization). See "Capitalization", "The Transaction", "Financing Plan", and "Pro Forma Financial Data". THE OFFERING COMMON STOCK OFFERED BY THE SELLING STOCKHOLDERS.................................... 8,000,000 shares COMMON STOCK TO BE OUTSTANDING AFTER THE OFFERING(1)..................................... 8,000,000 shares USE OF PROCEEDS................................. The Company will not receive any proceeds from the Offering other than the proceeds, if any, from any exercise of the over-allotment option. If the over-allotment option is exercised, the net proceeds from the sale of such option shares will be used by the Company for general corporate purposes. See "Use of Proceeds". DIVIDEND POLICY................................. The Company currently expects to pay regular quarterly cash dividends of $.13 per share on its Common Stock, commencing in the fourth quarter of 1996, subject to declaration by the Company's Board of Directors (a majority of which will not be appointed until after the consummation of the Offering) and compliance with provisions contained in the Company's New Credit Facility and Senior Notes. See "Dividend Policy" and "Financing Plan". PROPOSED NASDAQ SYMBOL.......................... FRAX - --------------- (1) Excludes 1,000,000 shares of Common Stock which will be reserved for issuance under a stock option plan to be adopted prior to the Offering, including approximately 375,000 shares of Common Stock subject to options expected to be granted to employees of the Company prior to consummation of the Offering. See "Management -- Stock Option and SAR Grants, Exercises and Year-End Values". SUMMARY FINANCIAL AND OTHER DATA The following table sets forth summary financial data of the Company for the five years ended December 31, 1995 and for the three-month periods ended March 31, 1995 and March 31, 1996, and certain pro forma data for the year ended December 31, 1995 and the three-month period ended March 31, 1996. The historical data set forth below for 1993, 1994, and 1995 have been derived from, and should be read in conjunction with, the Company's audited financial statements and the notes thereto appearing elsewhere in this Prospectus. The historical financial data set forth below for 1992 have been derived from audited financial statements which are not included herein. The historical financial data set forth below for 1991 have been derived from unaudited financial statements of the Company which, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such data. The historical financial data for the three-month periods ended March 31, 1995, and March 31, 1996, have been derived from, and should be read in conjunction with, the unaudited financial statements of the Company for such periods which are also included herein. Such financial statements reflect, in the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such data. Operating results for the three-month period ended March 31, 1996 are not necessarily indicative of the results to be expected for the year ended December 31, 1996. The pro forma statement of income data for 1995 and for the three-month period ended March 31, 1996, assume that the Transaction and the Saint-Gobain Sale occurred on January 1, 1995. The pro forma balance sheet data as of March 31, 1996, give effect to the Transaction as if it had occurred on March 31, 1996. The pro forma financial data do not purport to represent what the Company's financial condition or results of operations would actually have been had the Transaction and the Saint-Gobain Sale in fact occurred on the assumed date, or to project the Company's financial condition or results of operations for any future period or date. The following table should be read in conjunction with "Selected Financial Data", "Pro Forma Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations". <TABLE> <CAPTION> THREE-MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ------------------------------- -------------------------------------------------------------- PRO FORMA PRO FORMA COMBINED COMBINED 1991 1992 1993 1994 1995 1995 1995 1996 1996 ------- ------- ------- ------- ------- ---------- ------- -------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF INCOME DATA: Net sales...................... $53,540 $64,565 $67,692 $76,246 $84,064 $ 83,588 $21,384 $21,581 $ 21,502 Cost of goods sold............. 27,620 33,099 34,153 37,590 40,630 40,377 10,551 10,642 10,600 ------- ------- ------- ------- ------- ---------- ------- -------- ---------- Gross profit................... 25,920 31,466 33,539 38,656 43,434 43,211 10,833 10,939 10,902 Selling and distribution....... 9,462 10,370 9,932 10,688 11,579 12,186 3,028 3,134 3,181 Administration................. 5,701 5,212 5,415 6,279 6,189 8,206 1,811 1,737 2,214 Allocated corporate charges (a).......................... 2,900 2,600 2,800 2,300 2,700 -- 675 356 -- Research and development....... 2,106 2,955 2,747 2,772 2,950 2,950 854 699 699 Restructuring charges.......... -- 480 155 -- -- -- -- -- -- ------- ------- ------- ------- ------- ---------- ------- -------- ---------- Operating income............... 5,751 9,849 12,490 16,617 20,016 19,869 4,465 5,013 4,808 Interest expense............... -- -- -- -- -- (4,276) -- -- (984) Other income................... 541 555 549 591 932 519 196 87 19 ------- ------- ------- ------- ------- ---------- ------- -------- ---------- Income before income taxes and accounting change............ 6,292 10,404 13,039 17,208 20,948 16,112 4,661 5,100 3,843 Provision for income taxes..... 2,511 4,152 5,407 7,052 8,539 6,567 1,894 2,100 1,587 ------- ------- ------- ------- ------- ---------- ------- -------- ---------- Income before accounting change....................... 3,781 6,252 7,632 10,156 12,409 9,545 2,767 3,000 2,256 Accounting change.............. -- -- (2,658)(e) -- -- -- -- -- -- ------- ------- ------- ------- ------- ---------- ------- -------- ---------- Net income..................... $ 3,781 $ 6,252 $ 4,974 $10,156 $12,409 $ 9,545 $ 2,767 $ 3,000 $ 2,256 ======= ======= ======= ======= ======= ========== ======= ========= ========== Net income per common share(b)..................... $ 1.19 $ 0.28 ========== ========== Weighted average shares outstanding(b)............... 8,000 8,000 OTHER DATA: EBITDA (c)..................... $ 9,515 $14,001 $17,010 $21,428 $25,249 $ 24,689 $ 5,714 $ 6,076 $ 5,803 Depreciation and amortization................. 3,223 3,597 3,971 4,220 4,301 4,301 1,053 976 976 Capital expenditures........... 2,751 3,669 3,032 2,670 3,404 3,404 572 1,160 1,160 BALANCE SHEET DATA (AT PERIOD END): Working capital................ $11,103 $11,301 $12,991 $15,800 $13,579 $17,811 $17,163 $ 17,469 Total assets................... 53,453 54,531 55,513 57,509 55,055 58,769 59,507 105,795 Long-term debt................. -- -- -- -- -- -- -- 55,500 Total liabilities.............. 15,414 16,388 19,634 20,443 20,815 20,173 21,298 73,343 Parent company investment (d).......................... 38,039 38,143 35,879 37,066 34,240 38,596 38,209 -- Stockholders' equity........... -- -- -- -- -- -- -- 32,452 </TABLE> - --------------- (a) Certain administrative services and research and development activities were provided to all businesses of Unifrax, including the Company, on a centralized basis. Indirect administrative expenses were allocated to the businesses either based on the level of service provided or based on the overall cost structure of Unifrax. In the opinion of management of the Company, charges and allocations have been determined on a reasonable basis; however, they are not necessarily indicative of the level of expenses which might have been incurred had the Company been operating as a stand-alone entity. (b) Historical earnings per share are not presented, as the historical capital structure of the Company prior to the Transaction is not comparable with the capital structure that will exist subsequent to the Transaction. Pro forma earnings per share are based on the assumption that 8,000,000 shares of Common Stock were outstanding for each period, which represents the total number of shares that will be outstanding following consummation of the Transaction. (c) "EBITDA" means earnings from operations before interest expense, taxes, depreciation, amortization, and cumulative effect of change in accounting principle. EBITDA is included because it is commonly used by certain investors and analysts as one measure of an issuer's ability to fund operations and meet its financial obligations. EBITDA should not be considered in isolation from, as a substitute for or as being more meaningful than net income, cash flows from operating activities or other income or cash flow statement data prepared in accordance with generally accepted accounting principles as a measure of the Company's profitability or liquidity. (d) The North American Fibers Business was accounted for as a division of Unifrax rather than as a subsidiary. The North American Fibers Business (prior to consummation of the Transaction) had no separately identifiable equity other than an amount equal to its net assets captioned as "parent company investment." In connection with the Transaction, this investment will be eliminated and replaced by stockholders' equity comprised of the Company's newly issued common stock at par value and a residual amount of additional paid-in capital. (e) Represents the cumulative effect of a change in accounting principle made in 1993 related to the accounting for postretirement benefits other than pensions.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001012549_gyncor-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001012549_gyncor-inc_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the financial statements and notes thereto appearing elsewhere in this Prospectus. See "Risk Factors" for information that should be carefully considered by prospective investors. THE COMPANY GynCor, Inc. (the "Company") provides comprehensive management and clinical support services to integrated networks of physicians specializing in the field of reproductive medicine, primarily subspecialties of obstetrics and gynecology and related areas of human reproduction. The Company currently manages integrated networks of 17 reproductive medicine centers ("Centers") and 28 physicians in the Chicago, New York City and Tampa/St. Petersburg metropolitan areas. This includes the results of two acquisitions completed by the Company on May 1, 1996 for consideration totalling 212,069 shares of Common Stock, including 32,935 shares subject to the completion of this offering. In addition, the Company plans to add two physicians to its network in Florida and to establish an additional network of one Center and two physicians in Syracuse, New York in connection with medical school affiliations for which the Company has entered into letters of intent. The Company anticipates that each of these pending affiliations will be entered into by the date of the final Prospectus. The Company also has entered into a lease for an additional Center in New York City. The first Center was opened in 1981 as an exclusive faculty affiliation with Mount Sinai Hospital and Medical Center in Chicago. Since September 1990, when independent operations began, the Company has grown from one Center and three physicians and scientists with doctoral degrees to 19 Centers and 41 physicians and scientists after giving effect to the pending affiliations and new Centers in New York and Florida. Upon completion of these pending affiliations, the Company's affiliated physicians will be on staff at approximately 26 hospitals, including several of the country's leading teaching hospitals. Reproductive medicine encompasses several medical disciplines which focus on male and female reproductive systems and processes. Within the field of reproductive medicine, there are several subspecialties such as obstetrics and gynecology which apply only to women and certain subspecialties, such as reproductive endocrinology, infertility and urology, which apply to both women and men. The Centers provide reproductive medicine services principally relating to the subspecialties of obstetrics and gynecology, reproductive endocrinology and infertility, including traditional drug therapy and surgical therapies, assisted reproductive technologies ("ART") and specialized laboratory services, as well as perinatal services (treatment of patients with high risk pregnancies). The Company intends to expand the range of obstetrics and gynecology, women's health care and reproductive medicine services offered at the Centers beyond those currently offered to include the provision of comprehensive obstetrics and gynecology services. The Company believes that the addition of these services, coupled with the Company's planned growth and capitated market experience, will contribute to the Company's ability to negotiate national and regional shared-risk arrangements with managed care payors. The physician practices that the Company currently manages provide reproductive endocrinology and infertility services to patients insured by 48 third party payors, and maintain three exclusive capitated managed care contracts covering approximately 478,000 lives. The largest of these contracts covers approximately 441,000 lives and is with HMO-Illinois, the state's largest HMO, owned by Blue Cross Blue Shield of Illinois. A subsidiary of Blue Cross Blue Shield of Illinois owns a Convertible Note which is convertible into 5% of the outstanding Common Stock of the Company. In addition, one of the Company's managed practices holds what the Company believes is one of the few capitated managed care contracts for comprehensive obstetrics and gynecology services. Certain of the managed practices provide perinatal services to patients insured by seven third party payors in the Chicago area, and certain of the managed practices also maintain an exclusive managed care contract relating to the provision of perinatal services. The Health Care Financing Administration estimated that national health expenditures in 1995 were over $1 trillion, and, according to industry sources, expenditures related to infertility services, one of several subspecialties of reproductive medicine, exceeded $1 billion. Concerns over the accelerating costs of health [GYNCOR INC. LOGO] Clinic Locations LOCATIONS OF OPERATIONS AND PENDING TRANSACTIONS [Map of the United States] CHR-Illinois -------------- -River North Concourse-Chicago -Howard-Chicago -Downers Grove -Evergreen Park -Glenview -Hoffman Estates -Lake Forest -Naperville -Oakbrook -Schaumburg -Merrillville, Indiana *Pursuant to pending affiliation with medical school program CHR-New Jersey -------------- -Park Ridge CHR-Florida ----------- -Clearwater -St. Petersburg -Tampa CHR-New York ------------ -Columbia University -SUNY, Syracuse* -Rockland THE CENTER FOR HUMAN REPRODUCTION (TM) CLINICAL CARE-RESEARCH-EDUCATION The Company intends to furnish its stockholders with annual reports containing financial statements audited by independent public accountants and quarterly reports for the first three quarters of each fiscal year containing unaudited financial information. --------------- IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ STOCK MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. care have resulted in an increased emphasis on managed care and capitation arrangements and has placed small to mid-sized physician groups, including physicians practicing medicine in the subspecialties of obstetrics and gynecology, at a significant disadvantage when competing for patients. As a result, physicians are increasingly abandoning traditional, independent private practice in favor of affiliation with larger organizations which manage most of the nonmedical tasks related to the provision of health care services, including contracting with payors. By providing capital and informational, managerial and administrative resources, these organizations enable physicians to concentrate on providing medical services, thereby providing quality health care at lower costs. The Company seeks to establish integrated physician networks through acquisitions of the nonmedical assets, such as accounts receivable, supplies, instruments, equipment, furniture, proprietary data and contract rights, of targeted physician practices. The targeted physicians then enter into long-term employment agreements with a medical practice managed by the Company under a long-term management services agreement. The typical management services agreement between the Company and a managed practice has a term of 40 years and cannot be terminated by the managed practice without cause. In states that prohibit the splitting of physician fees, the Company receives a fixed management fee, payable monthly and subject to periodic adjustment if it is determined that the fee is not commensurate with factors such as costs incurred and past utilization levels. In other states, the Company agrees to pay all of the managed practice's expenses, including the physicians' base compensation and performance-based bonuses, and the Company, in turn, receives the economic benefit of revenues in excess of expenses generated by the managed practice. In establishing its presence in the Chicago metropolitan area, the Company has developed a clinical and academic affiliation with the University of Illinois College of Medicine in Chicago. Similarly, as part of its strategy for developing integrated networks in the New York and Tampa/St. Petersburg areas, the Company has established an affiliation with Columbia University Medical School and has entered into letters of intent for affiliations with State University of New York-Upstate Medical Center in Syracuse, New York and the University of South Florida in Tampa, Florida. The Company also has entered into a letter of intent for an affiliation with Mount Sinai Medical Center in New York City. However, in light of the recently announced potential merger between Mount Sinai and New York University Medical Center, the Company is uncertain as to the likelihood or timing of its possible affiliation with Mount Sinai. A medical school affiliation generally provides that certain faculty members of the medical school who specialize in reproductive medicine, infertility and ART medicine provide such services at a Center operated by the local managed practice and engage in joint research and educational programs with the managed practice. The Company provides management and administrative services to the faculty physicians under the management services agreement with the managed practice. The medical school is reimbursed for the services of the faculty physicians, and the managed practice receives revenues generated by the faculty physicians for such services. The Company does not pay any initial consideration for the establishment of the affiliation. References in this Prospectus to "transactions" may include both acquisitions of nonmedical assets of physician practices and affiliations with medical school programs. The Company's strategy is to develop integrated networks for reproductive medicine services through practice affiliations that provide high quality, cost-effective care in targeted geographic markets. The principal elements of this strategy include: (i) affiliating with leading physician practices by capitalizing on the professional reputation and experience of the Company and its affiliated physicians and their relationships with general obstetricians and gynecologists, primary care physicians and other professionals and academics in the reproductive medicine field; (ii) developing locally integrated specialty networks of physicians, including expansion of the range of services offered by newly affiliated practices; (iii) using the Company's capitated contract experience and proprietary information system to pursue national and regional managed care contracts, including capitated contracts; (iv) encouraging the Company's managed practices to explore and develop ways to improve the delivery of medical services by improving outcomes and reducing costs of high quality treatment; and (v) providing a proprietary information system which integrates all managed practices and enhances the Company's ability to collect and analyze clinical, patient, administrative and financial data, control expenses, effectively manage utilization rates, maximize reimbursements and effectively price and attract managed care contracts. THE OFFERING <TABLE> <S> <C> Common Stock offered by: The Company........................................ 2,000,000 shares(1)(2) The Selling Stockholders........................... 220,000 shares Common Stock to be outstanding after this offering... 6,654,509 shares(1)(3) Use of Proceeds...................................... To repay certain indebtedness and for general corporate purposes, including future acquisitions, expansion of operations and working capital. Proposed Nasdaq National Market symbol............... GYNC </TABLE> - ------------------------- (1) Does not include up to 333,000 shares of Common Stock that may be sold by the Company pursuant to the Underwriters' over-allotment option. See "Underwriting." (2) At an assumed public offering price of $14.00 per share, the net proceeds to the Company from this offering are estimated to be approximately $24.6 million (approximately $29.0 million if the Underwriters over-allotment is exercised in full). (3) Gives effect to (i) the conversion of $2,500,000 principal amount of the Company's 10% Subordinated Convertible Promissory Note in the original aggregate principal amount of $5,000,000 due December 1, 2000 (the "Convertible Note"), and (ii) the exercise of an option to purchase 96,000 shares held by Vishvanath Karande, M.D., a selling stockholder. Does not include up to 100,667 shares, 708,333 shares and 41,666 shares reserved for issuance pursuant to a stock option held by Dr. Karande, the Company's Incentive Compensation Plan and Directors' Stock Option Plan, respectively. As of June 1, 1996, options to acquire 635,833 shares were outstanding under the Incentive Compensation Plan and 9,999 shares will automatically be granted on the effective date of this offering under the Directors' Stock Option Plan. See "Management -- Incentive Compensation Plan," and "-- Directors' Compensation -- Directors' Option Plan." SUMMARY COMBINED AND PRO FORMA FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) <TABLE> <CAPTION> HISTORICAL(1)(2) --------------------------------------------------------------------------------------------------------------- PREDECESSOR PREDECESSOR ---------------------------------------------- TWELVE ------------ TWELVE MONTHS ENDED MONTHS SIX MONTHS SIX MONTHS THREE MONTHS ENDED ---------------------------------------------- ENDED ENDED ENDED ------------------------ JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31, 1991 1992 1993 1994 1995 1994 1995 1995 1996 ----------- ----------- --------- --------- --------- ------------ ------------ ----------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net patient service revenue............. $2,280 $2,260 $5,545 $8,785 $13,882 $6,382 $12,060 $ 2,603 $ 5,979 ------- ------ --------- --------- --------- ------ --------- --------- --------- Operating expenses: Physicians' salaries(4)....... 247 573 760 1,812 3,014 987 2,954 690 3,674 Clinic salaries, wages and benefits.......... 407 440 1,041 1,916 3,883 1,675 2,625 761 1,291 Clinic rent and lease expense..... 273 472 302 307 1,083 423 881 310 497 Clinic supplies..... 323 299 1,356 2,338 3,531 1,748 1,842 952 791 Other clinic expenses.......... 261 177 303 574 1,054 658 861 127 367 General corporate expenses.......... 1,030 493 1,167 1,448 3,215 1,030 2,604 1,128 1,231 Depreciation and amortization...... 117 156 96 144 651 286 365 131 215 ------- ------ --------- --------- --------- ------ --------- --------- --------- Total operating expenses........ 2,658 2,610 5,025 8,539 16,431 6,807 12,132 4,099 8,066 ------- ------ --------- --------- --------- ------ --------- --------- --------- Operating income (loss).............. (378) (350) 520 246 (2,549) (425) (72) (1,496) (2,087) Other (income) expense............. (31) -- (37) (357) 32 -- -- (30) -- Net interest expense............. 53 30 46 68 232 68 165 71 183 ------- ------ --------- --------- --------- ------ --------- --------- --------- Income (loss) before income taxes........ (400) (380) 511 535 (2,813) (493) (237) (1,537) (2,270) Income taxes (benefit)........... (158) (137) 192 73 (454) (34) -- (186) -- ------- ------ --------- --------- --------- ------ --------- --------- --------- Net income (loss)(5)........... $ (242) $ (243) $ 319 $ 462 $(2,359) $ (459) $ (237) $(1,351) $(2,270) ======= ====== ========= ========= ========= ====== ========= ========= ========= Net income (loss) per share............... $ 0.09 $ 0.14 $ (.64) $ (.05) $ (.36) $ (.52) ========= ========= ========= ========= ========= ========= Weighted average outstanding shares.............. 3,365,444 3,365,444 3,703,619 4,336,884 3,798,627 4,337,185 ========= ========= ========= ========= ========= ========= OPERATING DATA: (at end of period) Number of affiliated physicians and scientists.......... 3 3 4 6 18 11 23 16 27 Number of Centers.... 1 3 5 7 11 7 11 7 11 <CAPTION> PRO FORMA(1)(3) ------------------------- TWELVE THREE MONTHS ENDED MONTHS DECEMBER 31, ENDED MARCH 1995 31, 1996 ------------ ----------- (UNAUDITED) (UNAUDITED) STATEMENT OF OPERATIONS DATA: <S> <C> <C> Net patient service revenue............. $25,522 $ 7,342 --------- --------- Operating expenses: Physicians' salaries(4)....... 7,216 4,175 Clinic salaries, wages and benefits.......... 6,054 1,542 Clinic rent and lease expense..... 1,890 514 Clinic supplies..... 4,010 897 Other clinic expenses.......... 1,431 400 General corporate expenses.......... 5,453 1,526 Depreciation and amortization...... 741 218 --------- --------- Total operating expenses........ 26,795 9,272 --------- --------- Operating income (loss).............. (1,273) (1,930) Other (income) expense............. 7 -- Net interest expense............. 161 35 --------- --------- Income (loss) before income taxes........ (1,441) (1,965) Income taxes (benefit)........... (233) 92 --------- --------- Net income (loss)(5)........... $(1,208) $(2,057) ========= ========= Net income (loss) per share............... $ (.19) $ (.31) ========= ========= Weighted average outstanding shares.............. 6,403,407 6,535,161 ========= ========= OPERATING DATA: (at end of period) Number of affiliated physicians and scientists.......... 39 41 Number of Centers.... 19 19 </TABLE> <TABLE> <CAPTION> MARCH 31, 1996(1) ----------------------------- ACTUAL PRO FORMA(6) ----------- ------------- (UNAUDITED) (UNAUDITED) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents.............................................................. $ 655 $ 655 Working capital (deficit).............................................................. (1,735) (1,470) Total assets........................................................................... 13,938 16,482 Long-term debt and capital lease obligations, less current portion..................... 1,238 1,731 Subordinated convertible debt.......................................................... 5,000 5,000 Total stockholders' equity (net capital deficiency).................................... (1,972) (547) <CAPTION> PRO FORMA AS ADJUSTED(7) ------------ (UNAUDITED) BALANCE SHEET DATA: <S> <C> Cash and cash equivalents.............................................................. $ 18,743 Working capital (deficit).............................................................. 21,039 Total assets........................................................................... 33,566 Long-term debt and capital lease obligations, less current portion..................... 1,096 Subordinated convertible debt.......................................................... -- Total stockholders' equity (net capital deficiency).................................... 26,593 </TABLE> (See footnotes on following page) (1) All of the Company's financial information set forth in this Prospectus includes the operations of the Company and CHR-Illinois, CHR-Endoscopic and CHR-Perinatal (the "Illinois Practices"). The Company was formed in January 1995 as part of the Reorganization. See "The Company." From the Reorganization through March 31, 1996, the Company and the Illinois Practices were operated under common control. Accordingly, the combined financial data as of June 30, 1995, for the six months ended June 30, 1995 (included in the combined financial data for the twelve months ended June 30, 1995) and as of and for the six months and twelve months ended December 31, 1995 and the three months ended March 31, 1996, has been prepared to reflect the combination of business entities which have been operated under common control. Effective April 1, 1996, the Company entered into a 40-year management services agreement with each of the Illinois Practices under which the Company, as opposed to affiliates of the Company, will have perpetual, unilateral control over the assets and operations of the Illinois Practices (other than the practice of medicine). Accordingly, notwithstanding the lack of technical majority ownership of the stock of such entities, consolidation of the Illinois Practices and the entities formed in connection with the Recent Acquisitions will be necessary to present fairly the financial position and results of operations of the Company because of control by means other than ownership of stock. See Note 17 of Notes to Audited Combined Financial Statements of the Company. (2) In 1995, the Company changed its year-end for financial reporting purposes from June 30 to December 31. Additionally, The Center for Human Reproduction Northwest, M.D.S.C., an Illinois medical corporation ("CHR-NW"), was acquired in June 1994 and was merged into CHR-Illinois effective January 1995. The 1994 balance sheet data includes the accounts of CHR-Illinois and CHR-NW, and the 1994 and 1993 statement of operations data includes only the accounts of CHR-Illinois. See Note 1 of Notes to Audited Combined Financial Statements of the Company. (3) Gives effect to (i) the sale of the 2,000,000 shares of Common Stock offered by the Company hereby (at an assumed public offering price of $14.00 per share) and the application of the net proceeds therefrom as described under "Use of Proceeds," (ii) the acquisitions of the nonmedical assets of the Fertility Center of Northern New Jersey, P.A. in New Jersey and A Center for Gynecology, P.A. in Florida (the "Recent Acquisitions"), (iii) the conversion of $2.5 million principal amount of the Convertible Note, and (iv) the exercise of an option to purchase 96,000 shares held by Vishvanath Karande, M.D., a selling stockholder, as if all such events had occurred on January 1, 1995. The pro forma combined statement of operations data for 1995 does not purport to represent what the Company's results of operations would have been if such events had actually occurred on January 1, 1995. Pro forma operating data relating to the number of affiliated physicians and scientists and the number of Centers also gives effect to the medical school affiliation entered into as of June 1, 1996, the two pending medical school affiliations (Florida and Syracuse) and the additional Center to be opened in New York City. In light of the uncertainty caused by the recently announced potential merger between Mount Sinai Medical Center and New York University Medical Center, the pro forma operations data does not give effect to the possible affiliation with Mount Sinai. The pro forma financial information is presented for the twelve month period ended December 31, 1995 because, effective December 31, 1995, the Company changed its year end for financial reporting purposes from June 30 to December 31. See Notes 1 and 17 of Notes to Audited Combined Financial Statements of the Company. (4) For the three months ended March 31, 1996, physicians' salaries includes a charge of approximately $2.0 million attributable to the Company as a result of the restructuring of an option among the Company's principal stockholders. See "Certain Transactions -- Restructuring of Miller Option"
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the financial statements and notes thereto appearing elsewhere in this Prospectus. In this Prospectus, except as otherwise specified herein, (i) the term the "Company" refers to Interstate Hotels Company, a Pennsylvania corporation, its subsidiaries and its predecessors and certain of their affiliates, (ii) all information assumes that the Underwriters' over-allotment options will not be exercised, (iii) all statistics relating to the Company's portfolio hotels are as of October 15, 1996, and (iv) all lodging industry statistics (other than Company statistics) are from, or derived from, information published or provided by Smith Travel Research, an independent industry research organization. Smith Travel Research has not provided any form of consultation, advice or counsel regarding the Offering contemplated hereby, and Smith Travel Research is in no way associated with the Offering. THE COMPANY The Company is the largest independent hotel management company in the United States based on total portfolio hotel revenues and number of guestrooms and properties managed. The Company manages or performs related services for 161 hotels, with 36,631 rooms, located in 28 states in the United States and in the District of Columbia, Canada, Mexico, Israel, the Caribbean, Thailand, Panama and Russia. The Company owns or has a controlling interest in 23 of these properties (the "Owned Hotels"), all of which are upscale or luxury hotels. The Company completed its initial public offering (the "IPO") in June 1996 and acquired 14 Owned Hotels in connection therewith (the "IPO Acquisitions"). Since the IPO the Company has aggressively pursued acquisitions of new hotels and management contracts, acquiring nine full service upscale or luxury hotels containing a total of 2,223 rooms for a total acquisition cost, including estimated closing costs, capital expenditures and initial working capital ("Total Acquisition Cost"), of $198.2 million (the "Post-IPO Acquisitions") and entering into agreements to acquire two additional full service upscale hotels containing a total of 655 rooms for a Total Acquisition Cost of $66.0 million. The Company has also acquired a hotel management business consisting of management contracts and leases covering 56 mid-scale and upper economy hotels containing a total of 6,587 rooms. The Company believes that its competitive advantages, including its ability to source acquisition opportunities, its flexible branding strategy, the strength and depth of its management team, and its ability to access additional capital, position it to take advantage of continued growth opportunities as the lodging industry in the United States continues to consolidate. For the nine months ended September 30, 1996, 83.8% of the Company's net management revenues were derived from upscale or luxury hotels and resorts, including the Owned Hotels. The Company is the largest franchisee of upscale hotels in the Marriott(R) system, owning, managing or providing services to 39 hotels, with 13,517 rooms, bearing the Marriott(R) flag. Consistent with the Company's multiple branding strategy, the Company also manages hotels under many other major full service brand names, including Doubletree(TM), Embassy Suites(R), Hilton(TM), Holiday Inn(R), Radisson(TM), Sheraton(TM) and Westin(TM), as well as under the Company's own Colony(R) trade name. Among the well-known hotels managed by the Company are: The Charles Hotel at Harvard Square in Cambridge, Massachusetts; the Don CeSar Beach Resort in St. Petersburg Beach, Florida; the Hay-Adams Hotel in Washington, D.C.; the Westin Bonaventure in Los Angeles, California; Marriott's Casa Marina Resort in Key West, Florida; the Marriott at Sawgrass Resort in Ponte Vedra Beach, Florida; and the Westin Resort Miami Beach (formerly the Doral Ocean Beach Resort) in Miami Beach, Florida. The Company also operates in the mid-scale, upper economy and budget segments of the lodging industry. Since its founding in 1961 to own and operate a single motor lodge in northwestern Pennsylvania, the Company has achieved consistent annual growth, even through industry downturns. The total revenues of the hotels to which the Company provided management or related services increased from $514 million in 1991 to almost $1.1 billion in 1995, an average annual compound growth rate of 19.7%, and were $982.5 million for the first nine months of 1996 as compared to $779.2 million for the first nine months of 1995. Since 1991, the Company's portfolio of hotels has increased from 49 to 161. The Company's management and related revenues grew from $17.6 million in 1991 to $45.0 million in 1995, an average annual compound growth rate of 26.5%, and were $35.8 million for the first nine months of 1996 as compared to $32.9 million for the first nine months of 1995. Pro forma total revenues for the Company's 23 Owned Hotels were $201.4 million for the first nine months of 1996 as compared to $184.4 million for the first nine months of 1995. The Company's net INTERSTATE HOTELS COMPANY CROSS REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K AND RULE 404 <TABLE> <CAPTION> ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS BY CAPTION ----------------------- --------------------------------- <C> <S> <C> 1. Forepart of Registration Statement and Outside Front Cover Page of Prospectus............................. Forepart of Registration Statement and Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus.......................... Inside Front and Outside Back Cover Pages of Prospectus 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges........... Prospectus Summary; Risk Factors 4. Use of Proceeds.......................... Prospectus Summary; Use of Proceeds; Capitalization 5. Determination of Offering Price.......... Outside Front Cover Page of Prospectus; Underwriting 6. Dilution................................. * 7. Selling Security Holders................. * 8. Plan of Distribution..................... Outside Front Cover Page of Prospectus; Underwriting 9. Description of Securities to be Registered............................. Prospectus Summary; Description of Capital Stock 10. Interests of Named Experts and Counsel... * 11. Information with Respect to the Registrant............................. Outside Front Cover Page of Prospectus; Inside Front Cover Page of Prospectus; Prospectus Summary; Risk Factors; The Company; Recent Developments; Dividend Policy; Price Range of Common Stock; Capitalization; Selected Financial and Other Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Indebtedness of the Company, Business and Properties; Management; Principal Shareholders; Certain Relationships and Related Transactions; Description of Capital Stock; Shares Eligible for Future Sale; Underwriting 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities........................ * </TABLE> - ------------------ * Such item is inapplicable, or the answer thereto is in the negative, and is omitted from the Prospectus. income before income tax and extraordinary and non-recurring items increased at an average annual compound growth rate of 69.8% from $1.9 million in 1991 to $15.8 million in 1995, and was $22.3 million for the first nine months of 1996 as compared to $12.5 million for the first nine months of 1995. The Company attributes its steady growth to the disciplined pursuit of four core strategies: (i) adding new hotels to the Company's portfolio of upscale and luxury properties through acquisitions; (ii) adding new management contracts and selectively acquiring hotel management businesses; (iii) maximizing the profitability of the Company's acquired hotels by repositioning them within their local markets and applying to them the Company's proven management techniques; and (iv) providing superior, innovative hotel management services, resulting in increased investment value for the hotel owner. The Company believes that its prospects for continuing sustainable growth are enhanced by a number of competitive advantages, including: (i) a proven ability to source management contract and property acquisition opportunities resulting from the Company's large and geographically diverse hotel portfolio; (ii) excellent relationships with hotel investors and owners due to the Company's disciplined management techniques and its track record of improving the profitability of the hotels it manages; (iii) the Company's flexible branding strategy, which permits the Company to own and operate multiple hotels under different brands within the same geographic market and to operate more opportunistically within existing and new markets than hotel companies committed to particular flags; (iv) the Company's corporate infrastructure and the operational synergies resulting therefrom, which permit the Company to lower the unit costs of its services and assure the implementation of quality management systems on a Company-wide basis; (v) the strength and depth of its management team, the senior members of which have an average tenure of 23 years in the lodging industry and 12 years with the Company; (vi) the stability of the Company's cash flow resulting from the Company's large portfolio of hotel contracts and the Owned Hotels; and (vii) the Company's conservative capitalization and ability to access additional equity and debt capital to finance future growth on a cost-effective basis. The Company's Owned Hotels consist of 23 geographically diverse upscale hotels, containing an aggregate of 6,621 rooms and operating under the Embassy Suites(R), Hilton(TM), Holiday Inn(R), Marriott(R), Radisson(TM) and Westin(TM) trade names principally in major metropolitan markets such as Atlanta, Boston, Chicago, Denver, Fort Lauderdale, Houston, Los Angeles, Miami, Philadelphia, Phoenix and Washington, D.C. The Owned Hotels produced superior operating results in the first nine months of 1996, achieving an average occupancy rate of 74.9%, an average daily rate ("ADR") of $93.79, and room revenue per available room ("REVPAR") of $70.23, as compared to an average occupancy rate of 74.1%, ADR of $86.25 and REVPAR of $63.90 for the first nine months of 1995. The Company expects further improvement in the results of operations of the Owned Hotels as the effects of the repositioning of certain of them, and the application of the Company's practices to all of them, are realized. The Company's principal executive offices are located at Foster Plaza Ten, 680 Andersen Drive, Pittsburgh, Pennsylvania 15220, and its telephone number is (412) 937-0600. RECENT DEVELOPMENTS In June 1996, the Company completed its IPO, which included the sale of approximately 12.5 million shares of Common Stock at $21.00 per share. The net proceeds of the IPO of $240.5 million, together with the net proceeds of a new term loan, were used to acquire the IPO Acquisitions and two Post-IPO Acquisitions, to repay existing indebtedness and for general corporate purposes. Since the IPO, significant developments have included the following: Post-IPO Acquisitions. The Company has acquired nine full service upscale or luxury hotels containing 2,223 total rooms. The Total Acquisition Cost of the Post-IPO Acquisitions was $198.2 million. These hotels are operated under franchise affiliations with Embassy Suites(R), Hilton(TM), Holiday Inn(R), Marriott(R), Radisson(TM) and Westin(TM). The Company expects the operating results of the Post-IPO Acquisitions to benefit from renovations, capital expenditures and market repositionings, the estimated cost of which is included in the Total Acquisition Cost. The Company believes that all of the Post-IPO Acquisitions represent attractive investments because they (i) are located in major metropolitan or growing secondary markets and are well located within these markets, (ii) were acquired at an average cost of $88,235 per room excluding initial working capital, which the Company believes represents at least a 30% discount to replacement cost, and (iii) have attractive current returns and potential for significant revenue and cash flow growth through EXPLANATORY NOTE This Registration Statement covers shares of Common Stock to be offered in a public offering in the United States and Canada (the "U.S. Offering") and shares of Common Stock to be offered in a concurrent public offering outside the United States and Canada (the "International Offering"). The complete form of prospectus relating to the U.S. Offering (the "U.S. Prospectus") follows immediately after this explanatory note. The form of prospectus relating to the International Offering (the "International Prospectus") will be identical in all respects to the U.S. Prospectus, except that the International Prospectus contains different front and back cover pages and the section titled "Underwriting." The form of the U.S. Prospectus included herein is followed by those pages to be used in the International Prospectus which differ from those in the U.S. Prospectus. Each of such pages included herein is labeled "Alternate Page for International Prospectus." rebranding, rehabilitating and/or repositioning of the hotels and application of the Company's disciplined management techniques. Pending Acquisitions. The Company has entered into agreements to purchase the Burlington Radisson in Burlington, Vermont and the Washington Vista in Washington, D.C. for a Total Acquisition Cost of $66.0 million (the "Pending Acquisitions"). The Burlington Radisson is an upscale hotel containing 255 rooms located in downtown Burlington on the waterfront of Lake Champlain. The Washington Vista is an upscale hotel containing 400 rooms located in the heart of Washington, D.C. The Company plans to reflag the hotel as a Westin(TM) as part of its repositioning strategy for the hotel. The Company expects to complete both of the Pending Acquisitions in the fourth quarter of this year. A portion of the net proceeds of the Offering will be used to consummate the Pending Acquisitions. The Company also has other acquisitions under letters of intent which are subject to the satisfaction of due diligence and other conditions to closing and is evaluating other hotels for acquisition. Equity Inns Transaction. On November 15, 1996, the Company acquired for 1,957,895 shares of Common Stock the hotel management business affiliated with Equity Inns, Inc., a publicly traded real estate investment trust ("Equity Inns"). This business, which consists of management contracts for eight mid-scale and upper economy hotels containing 776 rooms, and long-term leases for 48 mid-scale and upper economy hotels containing 5,811 rooms owned by an affiliate of Equity Inns, was conducted by Trust Management, Inc. ("Trust Management") and Trust Leasing, Inc. ("Trust Leasing") prior to the closing of the transaction (the "Equity Inns Transaction"). Of these hotels, 14 were acquired or opened by Equity Inns in 1995 and 11 were acquired or opened by Equity Inns in 1996. The pro forma statement of income data included herein give effect to the results of operations of these hotels only from the date of acquisition or opening by Equity Inns and not as of January 1, 1995. Equity Inns is obligated through November 15, 2001 generally to offer the Company the right to lease and manage any hotel acquired or developed by Equity Inns. Many of the hotels managed and leased by the Company as a result of the Equity Inns Transaction are quality mid-scale and upper economy service and extended stay hotels. The hotels are operated under premium franchise brands including Hampton Inns(TM), Residence Inn(TM), Holiday Inn(R), Comfort Inn(TM) and Homewood Suites(TM). Upon consummation of the Equity Inns Transaction, the Company became the largest franchisee and independent manager in the Hampton Inns(R) system, providing services to 39 hotels, with 4,624 rooms, bearing the Hampton Inns(TM) flag. Financing Activities. In October 1996, the Company's existing bank credit facilities were amended to (i) increase the acquisition facility (the "Acquisition Facility") from $100 million to $200 million, (ii) increase the term loan from $195 million to $295 million, and (iii) increase the Company's permitted nonrecourse and subordinated indebtedness to fund acquisitions from $50 million to $250 million. THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Company U.S. Offering............................. 3,400,000 shares International Offering.................... 600,000 shares Total................................ 4,000,000 shares (1) Common Stock to be Outstanding after the Offering.................................... 34,639,296 shares (1)(2) Use of Proceeds............................... The net proceeds of the Offering, together with cash on hand, will be used to finance the Pending Acquisitions, to repay existing indebtedness, to finance other possible acquisitions and for general corporate purposes. New York Stock Exchange symbol................ IHC </TABLE> - ------------------ (1) Does not include up to 600,000 shares of Common Stock subject to over-allotment options granted to the Underwriters. See "Underwriting." (2) Does not include 2,370,449 shares of Common Stock reserved for issuance under the Company's equity incentive plans and 850,000 shares reserved for issuance under other compensation plans. See "Management--Director Compensation," "--Stock Option Grants" and "--Compensation Plans and Arrangements." INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION OF THESE SECURITIES UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED DECEMBER 6, 1996 PROSPECTUS [LOGO] 4,000,000 SHARES INTERSTATE HOTELS COMPANY COMMON STOCK ------------------------ All of the shares of Common Stock of Interstate Hotels Company (the "Company") are being offered by the Company. Of the 4,000,000 shares of Common Stock offered, 3,400,000 shares are being offered hereby in the United States and Canada by the U.S. Underwriters and 600,000 shares are being offered in a concurrent offering outside the United States and Canada by the International Underwriters. The offering price and aggregate underwriting discount per share are identical for both offerings (the "Offering"). The Common Stock is listed on the New York Stock Exchange (the "NYSE") under the trading symbol "IHC." On November 12, 1996, the last reported sale price of the Common Stock on the NYSE was $25 5/8 per share. ------------------------ SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. <TABLE> <CAPTION> =========================================================================================================== UNDERWRITING PROCEEDS TO PRICE TO PUBLIC DISCOUNT(1) COMPANY(2) - ----------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Per Share................................... $ $ $ - ----------------------------------------------------------------------------------------------------------- Total(3).................................... $ $ $ =========================================================================================================== </TABLE> (1) The Company has agreed to indemnify the several Underwriters against certain liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses payable by the Company estimated at $ . (3) The Company has granted the several U.S. Underwriters and the several International Underwriters 30-day options to purchase up to an additional 510,000 and 90,000 shares of Common Stock, respectively, to cover over-allotments. If all such shares of Common Stock are purchased, the total Price to Public, Underwriting Discount and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ------------------------ The shares of Common Stock are offered by the several Underwriters subject to prior sale, when, as and if issued to and accepted by them, subject to approval of certain legal matters by counsel to the Underwriters. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of the shares of Common Stock will be made in New York City on or about , 1996. ------------------------ MERRILL LYNCH & CO. MONTGOMERY SECURITIES MORGAN STANLEY & CO. INCORPORATED SMITH BARNEY INC. CREDIT LYONNAIS SECURITIES (USA) INC. ------------------------ The date of this Prospectus is , 1996. SUMMARY FINANCIAL AND OTHER DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND HOTEL DATA) The following table sets forth summary historical financial data of the Company as of and for each of the years ended December 31, 1991, 1992, 1993, 1994 and 1995 and as of and for the nine months ended September 30, 1995 and 1996, summary pro forma financial data for the Company for the year ended December 31, 1995 and as of and for the nine months ended September 30, 1996, and certain other data. The summary financial data of the Company as of December 31, 1994 and 1995 and for each of the years ended December 31, 1993, 1994 and 1995 have been derived from audited combined financial statements of the Company included elsewhere in this Prospectus. The summary financial data of the Company as of December 31, 1991, 1992 and 1993 and for each of the years ended December 31, 1991 and 1992 have been derived from audited combined financial statements of the Company which are not required to be included in this Prospectus. The summary historical financial data of the Company as of and for the nine months ended September 30, 1995 and 1996 have been derived from unaudited financial statements of the Company and, in the opinion of the Company, reflect all adjustments (which include normal recurring adjustments) necessary to present fairly the information set forth therein. The interim results are not necessarily indicative of fiscal year performance because of the impact of seasonal and short-term variations. The summary financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the pro forma financial information and the combined financial statements and notes thereto included elsewhere in this Prospectus. See "Index to Financial Statements." <TABLE> <CAPTION> NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------------------------------------------- -------------------------------- PRO FORMA PRO FORMA 1991 1992 1993 1994 1995 1995 (1) 1995 1996 1996 (1) -------- -------- -------- -------- ---------- ---------- -------- -------- ---------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF INCOME DATA: Revenues: Lodging revenues..... $ -- $ -- $ -- $ -- $ -- $ 332,003 $ -- $ 57,983 $ 286,338 Management and related fees (2)... 17,645 19,873 25,564 36,726 45,018 41,295 32,888 35,788 32,954 -------- -------- -------- -------- ---------- ---------- -------- -------- ---------- Total revenues..... 17,645 19,873 25,564 36,726 45,018 373,298 32,888 93,771 319,292 Expenses: Lodging expenses..... -- -- -- -- -- 233,641 -- 38,875 185,965 Operating expenses and other (3)...... 12,350 12,999 15,384 20,708 25,077 33,229 17,587 31,371 27,561 Lease expense........ -- -- -- -- -- 24,101 -- -- 28,883 Depreciation and amortization....... 3,286 3,352 3,282 3,659 4,201 29,835 2,963 7,762 22,264 Interest, net........ 101 (98) (12) (30) (99) 27,640 (191) 5,315 19,607 -------- -------- -------- -------- ---------- ---------- -------- -------- ---------- Income before income tax expense.......... 1,908 3,620 6,910 12,389 15,839 24,852 12,529 10,448 35,012 Income tax expense (4).................. -- -- -- -- -- 9,444 -- 11,145 13,305 -------- -------- -------- -------- ---------- ---------- -------- -------- ---------- Income (loss) before extraordinary item... 1,908 3,620 6,910 12,389 15,839 15,408 12,529 (697) 21,707 Extraordinary item (5).................. -- -- -- -- -- -- -- (7,643) -- -------- -------- -------- -------- ---------- ---------- -------- -------- ---------- Net income (loss)...... $ 1,908 $ 3,620 $ 6,910 $ 12,389 $ 15,839 $ 15,408 $ 12,529 $ (8,340) $ 21,707 ======== ======== ======== ======== ========= ========= ======== ======== ========= Pro forma net income per common share (6).................. $ .45 $ .64 ========= ========= Pro forma common shares outstanding (6)...... 34,178,704 34,178,704 ========== ========== BALANCE SHEET DATA (AT PERIOD END): Cash and cash equivalents............ $ 2,997 $ 4,461 $ 4,520 $ 6,702 $ 14,035 $ 8,356 $ 24,300 $ 18,712 Total assets............. 25,146 24,270 24,436 30,741 61,401 37,571 591,817 750,742 Current portion of long-term debt......... 2,092 576 600 673 363 362 6,421 9,021 Long-term debt, excluding current portion........ 76 1,500 1,209 3,217 35,907 2,906 287,870 314,520 Total equity............. 18,360 16,685 16,627 18,858 9,256 20,805 248,053 377,728 </TABLE> PORTFOLIO OF HOTELS - ------------------------------------------------------------------------------ (AS OF OCTOBER 15, 1996) Map of the continental United States, Mexico and the Caribbean denoting the Company's headquarters, hotels owned at IPO, hotels acquired since the IPO and managed/serviced hotels. Map of Central America denoting a Managed/Serviced Hotel of the Company Map of Russia denoting a Managed/Serviced Hotel of the Company Map of Israel denoting a Managed/Serviced Hotel of the Company Map of Thailand denoting a Managed/Serviced Hotel of the Company Map of Hawaii denoting seven Managed/Serviced Hotels of the Company IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. <TABLE> <CAPTION> NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------------------------------------------- -------------------------------- PRO FORMA PRO FORMA 1991 1992 1993 1994 1995 1995 (1) 1995 1996 1996 (1) -------- -------- -------- -------- ---------- ---------- -------- -------- ---------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> OTHER FINANCIAL DATA: EBITDA (7)............... $ 5,295 $ 6,874 $ 10,180 $ 16,018 $ 19,930 $ 82,731 $ 15,301 $ 23,419 $ 78,279 Net cash provided by operating activities... 3,668 7,332 10,389 15,318 25,328 16,652 14,710 23,048 Net cash (used in) investing activities... (726) (481) (3,088) (3,852) (22,858) (3,794) (246,071) (364,464) Net cash (used in) provided by financing activities............. (2,571) (5,387) (7,242) (9,285) 4,863 (11,204) 241,626 330,306 TOTAL PORTFOLIO HOTEL DATA: (8) Total portfolio hotel revenues............... $513,907 $584,344 $760,766 $858,986 $1,056,279 $779,242 $982,538 Number of hotels (9)..... 49 53 82 136 150 140 159 Number of rooms (9)...... 17,386 18,985 24,202 31,502 35,044 31,960 36,037 COMPARABLE HOTEL OPERATING DATA: (10) Occupancy percentage (11)................... 74.9% 75.4% 76.6% 78.1% 79.2% ADR (12)................. $83.73 $86.96 $91.78 $92.00 $98.72 REVPAR (13).............. $62.74 $65.60 $70.31 $71.87 $78.16 Gross operating profit margin (14)............ 28.2% 30.0% 31.5% 32.3% 33.9% </TABLE> - ------------------ (1) The pro forma financial data give effect to all issuances of Common Stock prior to and in connection with the IPO, the IPO Acquisitions, the Post-IPO Acquisitions, the Pending Acquisitions, the Equity Inns Transaction and the assumed issuance at $25 5/8 per share of 3,448,000 of the 4,000,000 shares of Common Stock offered in this Offering, which represents the portion of the Offering that would result in sufficient net proceeds, together with cash on hand, to finance the Pending Acquisitions and to repay $24,100 of indebtedness, as if all such transactions had occurred as of January 1, 1995, except that (i) the pro forma balance sheet data give effect to the acquisition of the two Owned Hotels acquired since September 30, 1996, the Pending Acquisitions and the assumed issuance of 3,448,000 shares of Common Stock as if each had occurred on September 30, 1996 and (ii) the pro forma statement of income data give effect to the results of operations of the 25 hotels acquired or opened by Equity Inns after January 1, 1995 as of their respective dates of acquisition or opening and not as of January 1, 1995. The pro forma financial data presented is not necessarily indicative of what the actual financial position and results of operations of the Company would have been as of and for the periods indicated, nor does it purport to represent the Company's future financial position and results of operations. (2) Pro forma management and related fees are adjusted to reflect consolidation of the Owned Hotels and the resultant pro forma elimination of $4,544 and $3,438 of management and related fees actually derived from the Owned Hotels in 1995 and the nine months ended September 30, 1996, respectively. (3) Includes non-recurring, non-cash compensation of $11,896 for the nine months ended September 30, 1996. (4) Until immediately prior to the consummation of the IPO, the Company operated as an S corporation and, accordingly, was not subject to federal and certain state income taxes. The Company recorded income tax expense of $6,261 to establish deferred income taxes as of the date of the Company's change in tax status from an S corporation to a C corporation. The pro forma statement of income data have been computed as if the Company had been subject to federal and state income taxes, based on the applicable statutory tax rates then in effect. (5) Represents an extraordinary loss resulting from the early extinguishment of indebtedness, net of a deferred tax benefit of $3,937. (6) Based on 34,087,296 shares of Common Stock outstanding on a pro forma basis after the Offering plus an additional 91,408 shares of Common Stock to reflect the dilutive effect of outstanding options. PHOTO EMBASSY SUITES PHOENIX NORTH PHOENIX, ARIZONA (OWNED) PHOTO PHOTO THE CHARLES HOTEL HOTEL TVERSKAYA CAMBRIDGE, MASSACHUSETTS (MANAGED) MOSCOW, RUSSIA (MANAGED) PHOTO DON CESAR BEACH RESORT ST. PETERSBURG BEACH, FLORIDA (MANAGED WITH A MINORITY INTEREST) (7) EBITDA represents earnings before interest, income taxes, depreciation and amortization, minority interests and extraordinary item. Management believes that EBITDA is a useful measure of operating performance because it is industry practice to evaluate hotel properties based on operating income before interest, depreciation and amortization, which is generally equivalent to EBITDA, and EBITDA is unaffected by the debt and equity structure of the property owner. EBITDA does not represent cash flow from operations as defined by generally accepted accounting principles ("GAAP"), is not necessarily indicative of cash available to fund all cash flow needs and should not be considered as an alternative to net income under GAAP for purposes of evaluating the Company's results of operations. (8) Represents all hotels, including the Owned Hotels, to which the Company provides management or related services. (9) As of the end of the periods presented. (10) The comparable hotel data set consists of all of the hotels (35 hotels containing a total of 12,771 rooms) managed continuously by the Company from January 1, 1993 through September 30, 1996. (11) Represents total rooms occupied by hotel guests on a paid basis divided by total available rooms. Total available rooms represents the number of rooms available for rent multiplied by the number of days in the reported period. (12) Represents total room revenues divided by the total number of rooms occupied by hotel guests on a paid basis. (13) Represents room revenues divided by total available rooms. (14) Represents gross operating profit divided by total revenues. "Gross operating profit" represents total revenues less departmental expenses and undistributed operating expenses, excluding management fees. PHOTO COLORADO SPRINGS, COLORADO (OWNED) PHOTO PHOTO DENVER HILTON SOUTH WESTIN RESORT MIAMI BEACH GREENWOOD VILLAGE, COLORADO (OWNED) MIAMI BEACH, FLORIDA (OWNED) PHOTO RADISSON PLAZA HOTEL SAN JOSE AIRPORT SAN JOSE, CALIFORNIA (OWNED) PHOTO WARNER CENTER AIRPORT WOODLAND HILLS, CALIFORNIA (OWNED)
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION, INCLUDING THE FINANCIAL STATEMENTS AND THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. ECHOSTAR SATELLITE BROADCASTING CORPORATION, A COLORADO CORPORATION, WAS FORMED FOR THE PURPOSE OF THE OFFERING OF THE OLD NOTES (THE "OLD NOTES OFFERING") BY ITS PARENT, ECHOSTAR COMMUNICATIONS CORPORATION, A NEVADA CORPORATION, THE CLASS A COMMON STOCK OF WHICH IS QUOTED ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "DISH." AS USED IN THIS PROSPECTUS, UNLESS THE CONTEXT OTHERWISE REQUIRES, "ECHOSTAR" REFERS TO ECHOSTAR COMMUNICATIONS CORPORATION AND ITS SUBSIDIARIES AND "ISSUER" REFERS TO ECHOSTAR SATELLITE BROADCASTING CORPORATION AND ITS SUBSIDIARIES. ECHOSTAR COMMUNICATIONS CORPORATION EchoStar, which successfully launched its first direct broadcast satellite ("DBS"), EchoStar I, in December 1995, is one of only two companies with United States licensed operational capacity sufficient to provide comprehensive nationwide DBS programming service in 1996. Currently, EchoStar offers over 100 channels of high quality digital video and audio programming. Additionally, on March 1, 1996, EchoStar received short-term authority from the Federal Communications Commission ("FCC") to operate approximately 30 additional video channels on EchoStar I for approximately 180 days (the "STA"). The STA expires August 31, 1996 unless extended. EchoStar's DBS service (the "DISH Network-SM-") is expected to expand to approximately 200 digital video and audio channels following the successful launch of a second DBS satellite this fall. However, there can be no assurance that the launch of EchoStar's second DBS satellite this fall will be successful. See "Risk Factors -- Risk of Satellite Defect, Loss or Reduced Performance." EchoStar will target approximately 110 million potential subscribers in the continental United States, including approximately 96 million television households. DISH Network-SM- subscribers can choose from a variety of programming packages which EchoStar believes have a better price-to-value relationship than packages currently offered by most pay television providers. For example, the entry level DISH Network-SM- programming package ("America's Top 40-SM-") is priced at $19.99 per month and consists of 40 of the top "expanded basic cable" channels, including a conventional premium service, The Disney Channel-Registered Trademark-. EchoStar will also offer various regional sports networks, numerous premium services, pay-per-view programming and, following the launch of a second satellite, additional premium services and expanded pay-per-view offerings. EchoStar has negotiated affiliation agreements with major content providers, giving it the right to broadcast substantially all of the most popular programming, including ESPN-Registered Trademark-, MTV-Registered Trademark-, Nickelodeon-Registered Trademark-, VH-1-Registered Trademark-, Showtime Network-Registered Trademark-, The Disney Channel-Registered Trademark-, USA Network-Registered Trademark-, CNN-Registered Trademark-, Headline News-Registered Trademark-, TNT-SM-, CNN International-SM-, Turner Classic Movies-Registered Trademark-, The Discovery Channel-Registered Trademark-, A&E-SM-, HBO-Registered Trademark-, Cinemax-Registered Trademark-, Lifetime Television-SM-, The Family Channel-Registered Trademark-, C-Span-Registered Trademark-, CNBC-Registered Trademark- and many other programming services. EchoStar believes that it will have access to more U.S. licensed DBS frequencies than any of its competitors. EchoStar controls, or will control (subject to certain FCC approvals and findings), as many as 90 such frequencies, including 21 frequencies at one of the three U.S. licensed orbital slots currently capable of providing nationwide DBS service. See "Business -- Industry Overview -- DBS Industry." EchoStar believes that access to this substantial amount of DBS spectrum will enable it to achieve higher subscriber penetration and higher revenue per subscriber than it would otherwise attain with its 200 channel service. EchoStar currently plans to use this spectrum to offer a substantial number of additional video channels, including alternate time zone feeds of popular expanded basic cable programming, multiplexed premium movie services, frequent start pay-per-view, local programming for the largest U.S. television markets, niche and foreign language programming, professional and college sporting events, high definition television ("HDTV"), business and educational programming and high-speed transmission of Internet data. The introduction of DBS receivers is widely regarded as the most successful introduction of a consumer electronics product in U.S. history, surpassing the rollout of color televisions, VCRs and compact disc players. During the 18 months ended December 31, 1995, approximately 2.2 million U.S. households subscribed to digital direct-to-home ("DTH") satellite service. According to industry estimates, 85% of all consumers are satisfied with DBS picture quality, compared to a consumer satisfaction level of approximately 47% for cable. Of the approximately 96 million television households in the United States, it is estimated that approximately 60 million subscribers pay an average of $33 per month for multichannel programming services. EchoStar believes that there is significant unsatisfied demand for high quality, reasonably priced television programming. Although primary markets for the EchoStar DBS System are likely to include the approximately 11.0 million households not passed by cable television systems and the approximately 20.4 million households currently passed by cable television systems with relatively limited channel capacity, EchoStar also expects to target cable subscribers in urban and suburban areas who are dissatisfied with the quality or price of their cable programming. DISH Network-SM- programming is available to any subscriber who purchases or leases an EchoStar receiver system, which consists of an 18-inch satellite dish, a digital satellite receiver, a user-friendly remote control and related components (an "EchoStar Receiver System"). The suggested retail price of an EchoStar Receiver System is currently between approximately $499 and $599, depending on the model selected by the customer, among other factors. Dealer incentives and EchoStar sponsored promotions may reduce the actual cost of an EchoStar Receiver System below the suggested retail price. The initial capital cost required to receive DISH Network-SM- programming may reduce the demand for EchoStar Receiver Systems, since EchoStar Receiver Systems must be purchased, while cable and certain of EchoStar's satellite competitors lease their equipment to the consumers with little if any initial hardware payment required. EchoStar is currently test marketing a special promotion in a limited number of markets pursuant to which customers are able to purchase a discounted package, including an annual programming package for $300 (which is comparable to the price for a similar package of cable programming), and an EchoStar Receiver System for $199. If EchoStar elects to expand the promotion nationwide for an extended period, or if market conditions force it to do so, the initial capital investment relative to cable will be greatly reduced. In this event, EchoStar's subscriber acquisition costs will increase substantially, potentially resulting in a significant negative impact on EchoStar's liquidity and net income. The EchoStar Receiver System is fully compatible with MPEG-2, the world digital standard for computers and consumer electronics products, and provides image and sound quality superior to current analog cable or MMDS television services. EchoStar intends to market EchoStar Receiver Systems through its nationwide network of approximately 3,000 independent distributors and retailers. EchoStar is also currently engaged in discussions with brand name consumer electronics equipment manufacturers for the production and distribution of EchoStar Receiver Systems through national consumer electronics retailer networks. EchoStar is also negotiating with a number of mass merchandisers, direct sales organizations and consumer electronics retailers for other distribution paths for EchoStar Receiver Systems. EchoStar's primary objective is to become one of the leading providers of pay television services in the United States. EchoStar's strategy to achieve this objective is to: - Provide subscribers with more quality programming at lower price points than other pay television providers. - Utilize its large and established independent retail network to obtain substantial market share in rural areas and areas served by cable systems with relatively limited channel capacity. - Employ world standard MPEG-2 digital technology to achieve lower manufacturing costs and assure superior product capability, including compatibility with other consumer electronics products. - Expand consumer electronics retail distribution through relationships with major retailers or through licensing arrangements with brand name consumer electronics manufacturers. - Provide superior customer service by furnishing a single source to purchase DISH Network-SM- hardware and programming and to obtain financing, installation and customer care. - Deploy satellites at additional DBS orbital slots to expand EchoStar's product offerings with complementary video, data and interactive products. DBS is the most efficient, least capital intensive means of reaching the largest number of U.S. television households. EchoStar's first two satellites will transmit high quality, digital television to the entire continental United States for a capital cost of less than $500 million, or approximately $5 per television household, permitting profitability with relatively low market penetration. EchoStar believes that its strategy, together with the ability to exploit the more favorable cost structure and the lower invested capital requirements of DBS relative to other pay television providers, will enable EchoStar to achieve its objectives. In addition to the DBS business, EchoStar is engaged in the design, manufacture, distribution and installation of DTH products, domestic distribution of DTH programming and consumer financing of EchoStar's domestic DTH products and services. During the six years ended December 31, 1995, EchoStar sold over 1.7 million DTH receivers worldwide. EchoStar's principal offices are located at 90 Inverness Circle East, Englewood, Colorado 80112-5300, and its telephone number is (303) 799-8222. SUMMARY OF RISK FACTORS The deployment and operation of the EchoStar DBS System is highly complex and involves substantial risks. These risks include the competition from DBS and other satellite system operators and cable television, EchoStar's ability to integrate advanced and unproven technologies, the potential loss or damage to EchoStar's satellites during launch or while in orbit, the potential for impaired commercial operation resulting from incorrect orbital placement, affect on cash flow resulting from subscriber acquisition costs, EchoStar's ability to obtain insurance on favorable terms, the potential for delay and cost overruns and effects of government regulation on the communications industry generally. The inability of EchoStar to successfully deploy the EchoStar DBS System would adversely affect EchoStar's operations and would impair EchoStar's ability to make payments with respect to the Exchange Notes. Risks related to the Exchange Notes include the fact that there may be an absence of a public market for the Exchange Notes. Risks related to EchoStar include the fact that EchoStar is highly leveraged, which leverage makes EchoStar vulnerable to adverse changes in the economy generally which could adversely affect EchoStar's ability to make payments with respect to the Exchange Notes. These and certain other risks are described in more detail under "Risk Factors" commencing on page 20. RECENT DEVELOPMENTS During January 1996, the FCC held an auction for 28 frequencies at the 110 DEG. WL orbital slot and 24 frequencies at the 148 DEG. WL orbital slot (the "FCC Auction"). At the FCC Auction, EchoStar entered the winning bid of approximately $52.3 million for 24 frequencies at the 148 DEG. WL orbital slot. EchoStar has made the required 20% down payment for these frequencies, and will be required to remit the remaining $41.8 million upon grant of the construction permit, which could occur as early as June 1996. Also, at the FCC Auction MCI Communications Corp. ("MCI") entered the winning bid of $682.5 million for 28 of 32 frequencies at the 110 DEG. WL orbital slot. EchoStar's license for frequencies at 119 DEG. WL, which were obtained at minimal cost, provides comprehensive nationwide DBS coverage similar to that available from the 110 DEG. WL orbital slot. On March 1, 1996, EchoStar received the STA from the FCC to operate the remaining five frequencies (approximately 30 additional video channels for a total of approximately 100 video channels) on EchoStar I until August 31, 1996. There can be no assurance the STA will be extended. EchoStar has entered into a contract for the launch of DirectSat I ("EchoStar II") with Arianespace, Inc. ("Arianespace") during September 1996, and a contract with Lockheed Martin Commercial Launch Services, Inc. ("Lockheed") for the launch of DBSC I ("EchoStar III") during the period from September 1997 through November 1997. Pursuant to the Arianespace contract, as of June 7, 1996, EchoStar has paid approximately $43.4 million to Arianespace. Pursuant to the Lockheed contract, as of June 7, 1996, EchoStar has paid $5.0 million to Lockheed. Substantial additional payments are expected to be expended in 1996. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." EchoStar owns approximately 40% of the outstanding common stock of Direct Broadcasting Satellite Corporation, a Delaware corporation ("DBSC"), whose stockholders have approved a merger of DBSC with a subsidiary of EchoStar (the "DBSC Merger"). DBSC holds a conditional construction permit for 11 DBS frequencies at 61.5 DEG. WL and 11 DBS frequencies at 175 DEG. WL. EchoStar has filed an application with the FCC for approval of the DBSC Merger. The deadline for filing petitions and oppositions regarding approval by the FCC of the DBSC Merger passed on March 15, 1996, and EchoStar is aware of only one opposition, which was filed by the Consumer Project on Technology ("CPT"). EchoStar believes that the FCC has previously considered and rejected issues similar to the arguments made in this opposition, and that filing of the CPT opposition does not materially decrease the likelihood that the FCC will approve the DBSC Merger. THE EXCHANGE OFFER <TABLE> <S> <C> The Exchange Offer................ The Issuer is offering to exchange (the "Exchange Offer") up to $580,000,000 aggregate principal amount of its new 13 1/8% Senior Secured Discount Notes due 2004 (the "Exchange Notes") for up to $580,000,000 aggregate principal amount of its outstanding 13 1/8% Senior Secured Discount Notes due 2004 that were issued and sold in a transaction exempt from registration under the Securities Act (the "Old Notes" and, together with the Exchange Notes, the "Notes"). The form and terms of the Exchange Notes are substantially identical (including principal amount, interest rate, maturity, security and ranking) to the form and terms of the Old Notes for which they may be exchanged pursuant to the Exchange Offer, except that the Exchange Notes are freely transferable by holders thereof except as provided herein (see "The Exchange Offer -- Terms of the Exchange" and "-- Terms and Conditions of the Letter of Transmittal") and are not entitled to certain registration rights and certain liquidated damages which are applicable to the Old Notes under a registration rights agreement dated as of March 25, 1996 (the "Registration Rights Agreement") among the Issuer, EchoStar, Dish, Ltd. ("Dish, Ltd."), and Direct Broadcasting Satellite Corporation ("New DBSC") and Donaldson, Lufkin & Jenrette Securities Corporation and Smith Barney Inc., as initial purchasers (collectively, the "Initial Purchasers"). See Description of Exchange Notes -- Old Notes' Registration Rights; Liquidated Damages. Exchange Notes issued pursuant to the Exchange Offer in exchange for the Old Notes may be offered for resale, resold and otherwise transferred by holders thereof (other than any holder which is: (i) an Affiliate of the Issuer; (ii) a broker-dealer who acquired Old Notes directly from the Issuer; or (iii) a broker-dealer who acquired Old Notes as a result of market-making or other trading activities), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such Exchange Notes are acquired in the ordinary course of such holders' business and such holders are not engaged in, do not intend to engage in, and have no arrangement or understanding with any person to participate in, a distribution of such Exchange Notes. Minimum Condition................. The Exchange Offer is not conditioned upon any minimum aggregate principal amount of Old Notes being tendered or accepted for exchange. Expiration Date................... The Exchange Offer will expire at 5:00 p.m., New York City time, on , 1996, unless extended (the "Expiration Date"). Exchange Date..................... The first date of acceptance for exchange of the Old Notes will be the first business day following the Expiration Date. Conditions to the Exchange The obligation of the Issuer to consummate the Exchange Offer............................. Offer is subject to certain conditions. See "The Exchange Offer -- Conditions to the Exchange Offer." The Issuer </TABLE> <TABLE> <S> <C> reserves the right to terminate or amend the Exchange Offer at any time prior to the Expiration Date upon the occurrence of any of those conditions. Withdrawal Rights................. Tenders of Old Notes pursuant to the Exchange Offer may be withdrawn at any time prior to the Expiration Date. Any Old Notes not accepted for any reason will be returned without expense to the tendering holders thereof as promptly as practicable after the expiration or termination of the Exchange Offer. Procedures for Tendering Old See "The Exchange Offer -- How to Tender." Notes............................. Federal Income Tax Consequences... The exchange of Old Notes for Exchange Notes by tendering holders will not be a taxable exchange for federal income tax purposes, and such holders should not recognize any taxable gain or loss or any interest income as a result of such exchange. See "Certain United States Federal Income Tax Considerations." Use of Proceeds................... There will be no cash proceeds to the Issuer from the exchange pursuant to the Exchange Offer. Effect on Holders of Old Notes.... As a result of the making of this Exchange Offer, and upon acceptance for exchange of all validly tendered Old Notes pursuant to the terms of this Exchange Offer, the Issuer will have fulfilled a covenant contained in the terms of the Old Notes and the Registration Rights Agreement, and, accordingly, the holders of the Old Notes will have no further registration or other rights under the Registration Rights Agreement, except under certain limited circumstances. See "Description of Exchange Notes -- Old Notes' Registration Rights; Liquidated Damages." Holders of the Old Notes who do not tender their Old Notes in the Exchange Offer will continue to hold such Old Notes and will be entitled to all the rights and limitations applicable thereto under the 1996 Indenture. All untendered, and tendered but unaccepted, Old Notes will continue to be subject to the restrictions on transfer provided for in the Old Notes and the 1996 Indenture. To the extent that Old Notes are tendered and accepted in the Exchange Offer, the trading market, if any, for the Old Notes not so tendered is likely to be adversely affected. See "Risk Factors -- Consequences of Failure to Exchange Old Notes." </TABLE> TERMS OF THE EXCHANGE NOTES The Exchange Offer applies to $580,000,000 aggregate principal amount of Old Notes. The form and terms of the Exchange Notes are substantially identical to the form and terms of the Old Notes, except that the Exchange Notes have been registered under the Securities Act and, therefore, will not bear legends restricting the transfer thereof. The Exchange Notes will evidence the same debt as the Old Notes and will be entitled to the benefits of the 1996 Indenture. See "Description of Exchange Notes." <TABLE> <S> <C> Securities Offered................ $580,000,000 principal amount of 13 1/8% Senior Secured Discount Notes due 2004 (the "Exchange Notes"). Maturity Date..................... March 15, 2004. </TABLE> <TABLE> <S> <C> Interest Payment Dates............ Interest will accrete from March 25, 1996, the date of issuance of the Old Notes, at the rate per annum set forth on the cover page of this Prospectus but will not be payable prior to March 15, 2000. Thereafter, interest will be payable semi-annually in cash on March 15 and September 15 of each year, commencing September 15, 2000. Ranking........................... The Notes will rank senior in right of payment to all subordinated indebtedness of the Issuer and PARI PASSU in right of payment with all senior indebtedness of the Issuer. See "Description of Exchange Notes -- Security." Optional Redemption............... Except as set forth below, the Notes will not be redeemable at the Issuer's option prior to March 15, 2000. Thereafter, the Notes will be subject to redemption at the option of the Issuer, in whole or in part, at the redemption prices set forth herein. In addition, at any time prior to March 15, 1999, the Issuer may redeem Notes at a redemption price equal to 112.125% of the Accreted Value (as defined herein) on the repurchase date with the net proceeds of one public or private sale of certain Equity Interests (as defined herein) of EchoStar, provided that: (a) at least two-thirds in aggregate principal amount of Notes originally issued remain outstanding immediately after the occurrence of such redemption; and (b) such redemption occurs within 120 days of the date of the closing of any such sale. Change of Control................. Upon the occurrence of a Change of Control (as defined herein), the Issuer will be required to make an offer to each holder of Exchange Notes to repurchase all or any part of such holder's Notes at a purchase price equal to 101% of the Accreted Value thereof on the date of purchase (if prior to March 15, 2000) or 101% of the principal amount thereof, together with accrued and unpaid interest thereon to the date of purchase (if on or after March 15, 2000). Offer to Purchase................. Upon the occurrence of certain events described under "Description of Exchange Notes -- Offer to Purchase upon the Occurrence of Certain Events," the Issuer will be required to offer to repurchase a specified amount of Notes at a purchase price equal to 101% of the Accreted Value thereof on the date of purchase (if prior to March 15, 2000) or 101% of the principal amount thereof, together with accrued and unpaid interest thereon to the date of purchase (if on or after March 15, 2000). Significant Transactions.......... EchoStar and its subsidiaries will be permitted to engage in certain transactions, notwithstanding the fact that such transactions would otherwise be prohibited, PROVIDED that: (i) such transactions are for fair market value in the opinion of an investment banking firm of national standing and the Board of Directors; and (ii) prior to consummation of such transactions, the Issuer makes an offer to each holder of Notes to repurchase all or any part of such holder's Notes at a purchase price equal to 101% of the Accreted Value thereof on the date of purchase (if prior to March 15, 2000) or 101% of </TABLE> <TABLE> <S> <C> the principal amount thereof, together with accrued and unpaid interest thereon to the date of purchase (if on or after March 15, 2000). See "Description of Exchange Notes -- Significant Transactions." Escrow Account.................... The Issuer has placed the portion (approximately $177.3 million) of the net proceeds of the Old Notes Offering related to the purchase of frequencies at 148 DEG. WL and satellite construction, launch and insurance for EchoStar III and EchoStar IV in the Escrow Account. Funds may be disbursed from the Escrow Account only upon satisfaction of certain conditions set forth in the Escrow and Disbursement Agreement (as defined herein). The Escrow Account serves as collateral for the Notes. See "Description of Exchange Notes -- Disbursement of Funds -- Escrow Account." Security.......................... Initially, the Notes are secured by: (i) a pledge of all of the issued and outstanding capital stock of EchoStar DBS Corporation (which pledge will be released following consummation of the DBSC Merger (as defined herein) or the Substitute DBSC Transaction (as defined herein)) and Dish, Ltd.; (ii) a pledge of all of the stock of DBSC held by EchoStar; (iii) a pledge of certain notes of DBSC held by EchoStar; and (iv) a first priority security interest in the Escrow Account. In addition, upon consummation of the DBSC Merger, the Notes will be secured by: (i) a first priority security interest, when launched, in EchoStar III; (ii) a collateral assignment of all contracts relating to the construction, launch (other than with Great Wall), insurance and TT&C of EchoStar III; and (iii) a pledge of all of the issued and outstanding capital stock of DBSC. If the DBSC Merger is not consummated but the Substitute DBSC Transaction is consummated, the Notes will be secured by a collateral assignment of all contracts and agreements relating to the Substitute DBSC Transaction. See "Description of Exchange Notes -- Security." Guarantees........................ The Notes are guaranteed by EchoStar on a subordinated basis. On and after the Dish Guarantee Date (as defined herein), the Notes will be guaranteed by Dish, Ltd., which guarantee will rank PARI PASSU with all senior unsecured indebtedness of Dish, Ltd. On and after the date upon which the DBSC Merger is consummated, the Notes will be guaranteed by DBSC, which guarantee will RANK PARI passu with all senior unsecured indebtedness of DBSC. See "Description of Exchange Notes -- Affiliate Guarantees." Maintenance of Insurance.......... The Indenture relating to the Notes (the "1996 Indenture") requires the Issuer to obtain Launch Insurance (as defined herein) for EchoStar III (or any replacement thereof) in an amount equal to or greater than the cost of construction and launch of and insurance on EchoStar III (or any replacement thereof). The 1996 Indenture also requires the Issuer to maintain In-orbit Insurance (as defined herein) for EchoStar III (or any replacement thereof) in an amount equal to or greater than the cost of construction, launch and insurance of EchoStar III (or any replacement thereof). </TABLE> <TABLE> <S> <C> Certain Other Covenants........... The 1996 Indenture restricts, among other things, the payment of dividends, the repurchase of stock and subordinated indebtedness of the Issuer and the making of certain other Restricted Payments (as defined herein), the incurrence of indebtedness and the issuance of preferred stock, certain asset sales, the creation of certain liens, certain mergers and consolidations, and transactions with Affiliates (as defined herein). Registration Rights; Liquidated Damages........................... Pursuant to the Registration Rights Agreement, the Issuer and the Guarantors agreed: (i) to file the Registration Statement on or prior to April 24, 1996, with respect to the Exchange Offer; and (ii) to use their best efforts to cause the Registration Statement to be declared effective by the Commission on or prior to June 23, 1996. In certain very limited circumstances, the Issuer and the Guarantors will be required to provide a shelf registration statement (the "Shelf Registration Statement") to cover resales of the Old Notes by the holders thereof. If the Issuer and the Guarantors do not comply with their obligations under the Registration Rights Agreement, they will be required to pay Liquidated Damages to holders of the Notes under certain circumstances. See "Description of Exchange Notes -- Old Notes' Registration Rights; Liquidated Damages." Transfer Restrictions............. The Old Notes have not been registered under the Securities Act and are subject to certain restrictions on transfer. The Exchange Notes and Old Notes registered pursuant to an effective registration statement will generally be freely transferable. See "Notice to Investors." The Issuer does not intend to apply for listing of the Notes on any securities exchange or for quotation through the National Association of Securities Dealers Automated Quotation System. </TABLE> SUMMARY FINANCIAL DATA The Issuer was formed in January 1996 for the purpose of the Old Notes Offering. EchoStar contributed all of the outstanding capital stock of its wholly owned subsidiary, Dish, Ltd., to the Issuer. This transaction has been accounted for as a reorganization of entities under common control. Accordingly, Dish, Ltd. has been treated as the predecessor to the Issuer and the historical financial statements of the Issuer are those of Dish, Ltd. The following summary financial data and the selected financial data presented elsewhere in this Prospectus for the five years ended December 31, 1995, are derived from the Combined and Consolidated Financial Statements of Dish, Ltd. The data provided for the three months ended March 31, 1995 and 1996 are derived from the supplemental quarterly financial statements and condensed notes thereto of the Issuer, which includes the consolidated accounts of Dish, Ltd. Combined and Consolidated Financial Statements of EchoStar and the Notes thereto are included elsewhere in this Prospectus. In addition, condensed parent only financial statements and financial data of EchoStar are also included elsewhere in this Prospectus, (see Note 16 of Notes to Combined and Consolidated Financial Statements of Dish, Ltd. as of December 31, 1995). See also "Management's Discussion and Analysis of Financial Condition and Results of Operations." <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------------------------------------- ---------------------- 1991 1992 1993 1994 1995 1995 1996 --------- --------- --------- --------- ----------- --------- ----------- (IN THOUSANDS, EXCEPT RATIOS AND SATELLITE RECEIVERS (UNAUDITED) SOLD) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF INCOME DATA: Revenue...................... $ 139,613 $ 165,088 $ 220,941 $ 190,983 $ 163,890 $ 40,413 $ 41,026 Operating income (loss)...... 5,406 11,286 18,204 13,216 (7,949) (698) (8,908) Net income (loss)............ 6,192 10,833 20,118 90 (12,361) (2,240) (7,654) Ratio of earnings to fixed charges (1)................. 4.36x 7.32x 9.63x 1.02x 0.64x 0.70x 0.15x Pro forma net income (2)..... 4,468 7,529 12,272 OTHER DATA: EBITDA (3)................... $ 12,818(4) $ 12,329 $ 19,881 $ 15,459 $ (4,891) $ (335) $ (5,578) Cumulative investment in the EchoStar DBS System......... 114 3,345 21,796 139,500 341,232(5) 181,573 368,749(5) Satellite receivers sold (in units): Domestic................... 113,000 116,000 132,000 114,000 131,000 27,000 45,000 International.............. 45,000 85,000 203,000 289,000 331,000 85,000 76,000 --------- --------- --------- --------- ----------- --------- ----------- Total.................. 158,000 201,000 335,000 403,000 462,000 112,000 121,000 --------- --------- --------- --------- ----------- --------- ----------- --------- --------- --------- --------- ----------- --------- ----------- </TABLE> <TABLE> <CAPTION> AS OF DECEMBER 31, 1995 ------------------------- ACTUAL AS ADJUSTED(6) --------- -------------- MARCH 31, 1996 ------------ (UNAUDITED) <S> <C> <C> <C> BALANCE SHEET DATA: Cash, cash equivalents and marketable investment securities............ $ 113,850(7) $ 450,896 $ 438,350(13) Working capital........................................................ 31,115 368,161 200,577 Total assets........................................................... 559,295 896,341 899,357 Long-term debt (less current portion).................................. 415,662 765,709 778,644 Total stockholders' equity............................................. 92,890 92,891 85,007 </TABLE> SUMMARY SATELLITE DATA <TABLE> <CAPTION> ECHOSTAR II ECHOSTAR III ECHOSTAR I (8) (9)(10) ECHOSTAR IV (10) ------------- -------------- ------------------ ---------------- <S> <C> <C> <C> <C> Expected launch date....................... Launched Fall 1996 Fall 1997 Spring 1998 Orbital slot............................... 119 DEG. WL 119 DEG. WL 61.5 DEG. WL 148 DEG. or 175 DEG. WL Transponders (11).......................... 16 @ 24 Mhz 16 @ 24 Mhz 16/32 @ 24MHz 16/32 @ 24MHz Approximate channel capacity (11).......... 100 channels 100 channels 100/200 channels 100/200 channels Output power............................... 130 Watts 130 Watts 240/120 Watts 240/120 Watts Expected end of commercial life (12)....... 2011 2011 2012 2013 Satellite coverage area.................... Continental U.S. and certain Eastern and Western and regions of Central U.S. Central U.S. Canada and Mexico Alaska and Hawaii </TABLE> - ------------------------------ (1) For purposes of the ratio of earnings to fixed charges, earnings consist of earnings from continuing operations before income taxes, plus fixed charges. Fixed charges consist of interest incurred on all indebtedness and rental expense under non-cancelable operating leases. (2) Dish, Ltd.'s subsidiaries operated under Subchapter S of the Code, and comparable provisions of applicable state income tax laws, until December 31, 1993. The amounts shown reflect net income as if Dish, Ltd. had been subject to corporate federal and state income taxes during such periods. See Notes 2 and 7 of Notes to Dish, Ltd.'s Financial Statements. (3) EBITDA represents earnings before interest income, interest expense, net of other income and expenses, income taxes, depreciation and amortization. EBITDA is commonly used in the telecommunications industry to analyze companies on the basis of operating performance, leverage and liquidity. EBITDA is not intended to represent cash flows for the period, nor has it been presented as an alternative to operating income as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. See Dish, Ltd.'s Financial Statements contained elsewhere in this Prospectus. (4) Excludes $6.3 million in non-recurring charges. (5) Includes approximately $20.8 million and $26.6 million paid by EchoStar towards the launch of EchoStar III and EchoStar IV and capitalized interest on these payments as of December 31, 1995 and March 31, 1996, respectively. (6) Gives effect to the Old Notes less underwriting discounts and commissions and estimated offering expenses, including approximately $177.3 million initially placed in the Escrow Account. (7) Includes $84.7 million of cash restricted under the 1994 Indenture pursuant to which Dish, Ltd. issued the 1994 Notes and $15.0 million of restricted cash in an escrow account related to the manufacture of EchoStar Receiver Systems. (8) The conditional permit for this satellite ("DirectSat I") is held by DirectSat Corporation, a wholly-owned subsidiary of Dish, Ltd. The DirectSat I satellite is referred to hereinafter in this Prospectus as EchoStar II. (9) The conditional permit for this satellite ("DBSC I") is held by DBSC. EchoStar owns approximately 40% of the outstanding common stock of DBSC, whose shareholders have approved a merger of DBSC with a subsidiary of EchoStar. Assuming approval of this merger by the FCC, EchoStar will be the parent of DBSC. The DBSC I satellite is referred to in this Prospectus as EchoStar III. (10) The transponders on each of these satellites can be independently switched to provide a range from 16 transponders operating at 240 Watts each to 32 transponders operating at 120 Watts each. (11) EchoStar's DBS permits cover: (i) 11 of the 16 transponders (approximately 65 of 100 channels) on EchoStar I; and (ii) 10 of the 16 transponders (approximately 60 of 100 channels) on EchoStar II. EchoStar also expects to receive FCC authority for: (iii) 11 of the 16 transponders (approximately 65 of 100 channels) on EchoStar III; and (iv) 24 of the 32 transponders (approximately 150 of 200 channels) on EchoStar IV (or 32 transponders if the satellite is positioned at 175 DEG. WL and certain approvals are obtained). See "Business -- Operation of the EchoStar DBS System -- DBS and Other Permits." EchoStar has also received an STA from the FCC to operate the remaining five frequencies (approximately 30 additional video channels) on EchoStar I for approximately 180 days. There can be no assurance the STA will be extended. (12) The expected end of commercial life of each satellite has been estimated by EchoStar based on each satellite's actual or expected launch date and the terms of the construction and launch contracts. The minimum design life is 12 years. (13) Includes $245.0 million of cash restricted under the 1994 and 1996 Indentures pursuant to which Dish, Ltd. and the Issuer issued the 1994 Notes and the Old Notes, respectively. Also included is $15.0 million and $15.5 million of restricted cash in escrow accounts related to the manufacture of EchoStar Receiver Systems and for the purpose of cash collateralizing certain standby letters of credit, respectively. THE ECHOSTAR ORGANIZATION The following chart illustrates where significant DBS assets and rights are, or are expected to be, held: [CHART] The Old Notes are, and the Exchange Notes will be, secured by: - A pledge of the capital stock of EchoStar DBS Corporation (which pledge will be released following consummation of the DBSC Merger) and Dish, Ltd., and in the event the DBSC Merger is not consummated, a substitute transaction which provides similar benefits to EchoStar (the "Substitute DBSC Transaction"). - A pledge of the stock of DBSC held by EchoStar. - A pledge of certain notes of DBSC held by EchoStar. - A first priority security interest in the Escrow Account. Additionally, following consummation of the DBSC Merger, the Notes will be secured by: - A first priority security interest, when launched, in EchoStar III. - A collateral assignment of certain construction, launch and insurance contracts relating to EchoStar III. - A pledge of all of the issued and outstanding capital stock of DBSC. In the event that the DBSC Merger is not consummated, following consummation of the Substitute DBSC Transaction, the Notes will be secured by: - A collateral assignment of all contracts and agreements relating to the Substitute DBSC Transaction. - ------------------------ * Subject to FCC approvals and findings (see "Summary Satellite Data" and "Prospectus Summary -- Recent Developments"). ** EchoStar has also received an STA for the remaining five frequencies on EchoStar I for approximately 180 days. There can be no assurance that the STA will be extended.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001012710_karrington_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001012710_karrington_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS. SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS TO BE CONSIDERED BY PROSPECTIVE INVESTORS. THE COMPANY The Company develops, owns and operates private pay, assisted living residences. Assisted living residences provide housing and care for elderly or frail individuals who, although generally ambulatory, need assistance with one or more activities of daily living, such as bathing, grooming, dressing, eating or personal hygiene. The Company has developed 15 residences in its target markets, six of which are open and nine of which are under construction and scheduled to open in late 1996 or the first half of 1997. These 15 residences are located in Ohio, Pennsylvania, Indiana, Colorado and New Mexico. As part of its nationwide expansion strategy, the Company has sites for 13 residences under contract in these states, as well as in Michigan and North Carolina. The Company has begun predevelopment activities in New York, Kentucky and Illinois. The prototypical Karrington assisted living model, which has been developed and refined by the Company since its first residence was opened in 1992, is a mansion-style residence which houses 60 to 80 residents. Each residence is typically located in a middle- to upper-income community which has a well-established population of individuals 75 years of age and older. The Karrington model combines quality housing, personal care and support services to provide a cost-effective alternative for individuals with physical frailties or cognitive disorders, such as Alzheimer's disease, who do not require the regular skilled medical services provided by nursing facilities. The Karrington model allows the Company to control development costs, maintain consistent quality and improve operational effectiveness, while also creating "brand" awareness in the Company's markets. The Company has been successful in implementing the Karrington model, with residences open for one year or more having an average occupancy rate of between 94% and 99% for the 12 months ended December 31, 1994 and 1995 and for the three months ended March 31, 1996. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations." Karrington residences typically are staffed with licensed nurses on a 24-hour basis and are designed to permit residents to "age in place" within the residence as they develop further physical or cognitive frailties. The Company believes that it is able to care for individuals with higher acuity levels (i.e., those needing greater assistance with activities of daily living) than is typical in the assisted living industry. In addition to its own development activities, the Company has entered into a joint development relationship with Sisters of Charity Health Care System ("SCHCS"), a not-for-profit corporation of which the sole member is Catholic Health Initiatives ("CHI"). CHI is a large, not-for-profit health organization formed by the recent consolidation of Catholic Health Corporation, SCHCS and Franciscan Health Systems. CHI operates 61 hospitals and 50 long-term care facilities in 20 states and has revenues exceeding $4 billion. The Company and CHI currently intend to develop and operate assisted living residences with CHI's health care system. See "Business -- Relationship with CHI." By the end of 1999, the Company plans to open approximately 45 new Company-owned residences. The Company also intends to develop a significant number of jointly-owned residences with CHI, of which five are in various stages of development. In addition, the Company plans to develop and operate Karrington Place residences, which are assisted living residences specifically designed for individuals with Alzheimer's disease and other cognitive disorders, in a substantial portion of its markets. The Company estimates that newly developed residences will generally range in cost from $6.0 to 7.5 million. The Company believes the net proceeds from the offering, existing and future financing commitments and funds from operations will be sufficient to fund its development plan. See "Management's Discussion and Analysis of Financial Condition and Results of Operation -- Liquidity and Capital Resources." The assisted living industry has developed over the past decade to provide a cost-effective residential alternative for elderly individuals who do not require the intensive medical attention provided by a skilled nursing facility but who cannot, or choose not to, live independently due to physical frailty or cognitive disorders. The assisted living industry has estimated annual revenues of $12 billion, according to industry analysts, and includes facilities ranging from "board and care" to full-service assisted living facilities such as those operated by the Company. The number of individuals in the United States 85 years of age and older is expected to increase by approximately 43% during the 1990s, from 3.0 million in 1990 to an estimated 4.3 million in 2000, as compared to total U.S. population growth of approximately 11% during the same period. It is further estimated that approximately 57% of the population of persons over age 85 currently need assistance with activities of daily living and that more than one-half of seniors are likely to develop Alzheimer's disease or other cognitive disorders by age 85. The principal components of the Company's operating and growth strategy are to: (i) develop Karrington model residences in currently-served and new communities; (ii) expand joint development relationships with major health care systems across the United States; (iii) continue its focus on providing a broad range of services to higher acuity residents; and (iv) acquire residences for conversion to the Karrington model. THE OFFERING <TABLE> <S> <C> Common Shares being offered by: The Company................................ 2,350,000 shares (1) The Selling Shareholder.................... 650,000 shares (1) Common Shares outstanding after the offering..................................... 6,700,000 shares (2) Use of proceeds.............................. To finance the development and acquisition of additional assisted living residences, to repay certain indebtedness to the Selling Shareholder and for working capital and other general corporate purposes. See "Use of Proceeds" and "Certain Transactions." Nasdaq National Market symbol................ KARR </TABLE> - ------------------------ (1) Excludes up to 225,000 Common Shares that may be sold by the Company and up to 225,000 Common Shares that may be sold by the Selling Shareholder pursuant to the Underwriters' over-allotment option. See "Underwriting." (2) Does not include (i) up to 225,000 Common Shares that may be sold by the Company pursuant to the Underwriters' over-allotment option and (ii) 550,000 Common Shares reserved for issuance under the Company's Incentive Stock Plan. See "Management -- Incentive Stock Plan" and "Underwriting." ------------------------ UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (I) ASSUMES NO EXERCISE OF THE UNDERWRITERS' OPTION TO PURCHASE FROM THE COMPANY AND THE SELLING SHAREHOLDER UP TO AN AGGREGATE OF 450,000 ADDITIONAL COMMON SHARES TO COVER OVER-ALLOTMENTS, IF ANY, AND (II) HAS BEEN ADJUSTED TO REFLECT THE COMPLETION OF THE REORGANIZATION TRANSACTIONS (AS DESCRIBED UNDER "HISTORY AND ORGANIZATION -- REORGANIZATION TRANSACTIONS"). REFERENCES IN THIS PROSPECTUS TO THE "COMPANY" REFER COLLECTIVELY TO KARRINGTON HEALTH, INC., ITS SUBSIDIARIES AND ITS PREDECESSOR ENTITIES. SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> THREE MONTHS ENDED MARCH YEAR ENDED DECEMBER 31, 31, ------------------------ -------------- 1993 1994 1995 1995 1996 ------ ------- ------- ------ ------ STATEMENT OF OPERATIONS DATA: <S> <C> <C> <C> <C> <C> Revenues: Residence operations.............................................................. $2,288 $ 4,977 $ 6,220 $1,390 $1,822 Development and project management fees........................................... 18 287 524 69 122 ------ ------- ------- ------ ------ Total........................................................................... 2,306 5,264 6,744 1,459 1,944 Expenses: Residence operations.............................................................. 1,908 3,454 4,380 1,069 1,327 General and administrative........................................................ 170 634 1,705 268 575 Depreciation and amortization..................................................... 505 844 980 216 294 Write-off of intangible asset..................................................... -- -- 492 -- -- ------ ------- ------- ------ ------ Total........................................................................... 2,583 4,932 7,557 1,553 2,196 ------ ------- ------- ------ ------ Operating income (loss)............................................................. (277) 332 (813) (94) (252) Interest expense.................................................................... (707) (1,350) (1,023) (248) (315) Equity in net earnings (loss) of unconsolidated entity.............................. -- (17) (105) (51) 16 ------ ------- ------- ------ ------ Net loss............................................................................ $ (984) $(1,035) $(1,941) $ (393) $ (551) ------ ------- ------- ------ ------ ------ ------- ------- ------ ------ Pro forma net loss per common share (1)............................................. $ (.45) $ (.13) Pro forma weighted average number of common shares outstanding (in thousands) (1)... 4,350 4,350 OTHER OPERATING DATA: Residences (end of period) (2) Open or under construction........................................................ 4 5 10 5 11 Under contract.................................................................... 1 2 8 2 12 Number of units (end of period) (2) Open or under construction........................................................ 213 272 515 272 576 Under contract.................................................................... 59 128 509 128 784 </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 ---------------------------------------- PRO FORMA, ACTUAL PRO FORMA (3) AS ADJUSTED (4) ------- ------------- --------------- BALANCE SHEET DATA: <S> <C> <C> <C> Working capital (deficit)....................................................... $(2,300) $(2,300) $ 1,139 Total assets.................................................................... 30,252 30,252 63,557 Long-term obligations and deferred taxes, less current portion.................. 21,753 22,853 21,790 Equity.......................................................................... 5,290 4,190 38,558 </TABLE> - ------------------------ (1) Based upon the 4,350,000 pre-offering Common Shares that will be outstanding following completion of the Reorganization Transactions but prior to this offering. (2) Includes residences jointly-owned by the Company and CHI. (3) Adjusted to reflect the pro forma recognition of a net deferred tax liability of $1.1 million resulting from the Reorganization Transactions. See Note 10 to the Company's Consolidated Financial Statements. (4) Adjusted to reflect the offering made hereby (assuming an initial public offering price of $16 per share) and the use of the estimated net proceeds therefrom as described under "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001012771_fbl_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001012771_fbl_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c83a82b8569d6161fae2f71c0f0b424ad87ea388
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+++ b/parsed_sections/prospectus_summary/1996/CIK0001012771_fbl_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. SEE "GLOSSARY OF SELECTED INSURANCE TERMS" FOR DEFINITIONS OF CERTAIN INSURANCE TERMS USED HEREIN. UNLESS OTHERWISE INDICATED, THE FINANCIAL INFORMATION SET FORTH HEREIN HAS BEEN PREPARED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP), AND ALL OF THE INFORMATION INCLUDED HEREIN ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED AND REFLECTS THE 2,000-FOR-1 STOCK SPLIT EFFECTIVE MARCH 19, 1996, EXCEPT WHERE OTHERWISE INDICATED. UNLESS THE CONTEXT REQUIRES OTHERWISE, ALL REFERENCES IN THIS PROSPECTUS TO THE COMPANY INCLUDE ALL OF ITS DIRECT AND INDIRECT SUBSIDIARIES, INCLUDING ITS PRIMARY LIFE INSURANCE COMPANY SUBSIDIARIES, FARM BUREAU LIFE INSURANCE COMPANY (FARM BUREAU LIFE) AND WESTERN FARM BUREAU LIFE INSURANCE COMPANY (WESTERN LIFE) (TOGETHER THE LIFE COMPANIES) AND ITS PROPERTY-CASUALTY SUBSIDIARY, UTAH FARM BUREAU INSURANCE COMPANY (UTAH INSURANCE). THE COMPANY The Company through its subsidiaries underwrites, markets and distributes life insurance, annuities, property-casualty insurance and mutual funds to individuals and small businesses in 15 midwestern and western states. The Company has exclusive marketing arrangements with the state Farm Bureau Federations in its territory and targets sales to approximately 700,000 Farm Bureau member families and other rural, small town and suburban residents through an exclusive agency force. Through acquisitions of Rural Security Life Insurance Company (Rural Security Life) in 1993 and Western Life in 1994, the Company expanded its operations to 15 states, including Wisconsin and the eight-state Western Life area (the Western Life states). Prior to 1993 the Company operated only in Iowa, Nebraska, Minnesota, South Dakota and Utah, and in Kansas sold mutual funds only. All of the state Farm Bureau Federations in the Company's marketing area are associated with the American Farm Bureau Federation. With approximately 4.6 million member families in all 50 states, the American Farm Bureau Federation is the largest grass roots farm and ranch organization in the United States. The primary goal of the American Farm Bureau Federation is to improve net farm income and the quality of life of farmers, ranchers and other rural residents through education and representation with respect to public policy issues. Management believes that the Company's relationship with the state Farm Bureau Federations places it in a unique position to serve the insurance and financial needs of farmers, ranchers, rural and suburban residents, and related individuals and businesses. Farm Bureau organizations in the Company's territories tend to be well known and long established, have active memberships and provide a number of benefits other than financial services. See "The Company - -- Company History and Farm Bureau Affiliation." Management believes the strength of these organizations provides enhanced prestige and brand awareness for the Company's products and increased access to Farm Bureau members. Many of the Company's customers are self-employed individuals who are responsible for providing for their own insurance and retirement needs. Management believes that Farm Bureau insurance customers tend to be financially conservative and stable, which management believes has led to persistency greater than industry averages. The Company's life insurance products are currently available for sale both to Farm Bureau members and to non-members. Most of the Company's property-casualty insurance products are available for sale only to Farm Bureau members. The Company sells its insurance and mutual fund products through an exclusive Farm Bureau distribution system comprised of approximately 1,795 agents. All of the Company's agents are independent contractors who sell only Farm Bureau sponsored or authorized products. See "Business -- Marketing -- Exclusive Agency Force." Approximately 635 agents located in Iowa, Minnesota, South Dakota and Utah (the multi-line states) sell both life and property-casualty products offered only through the Company. Approximately 1,160 agents located in the eight Western Life states and three other states (collectively, the life-only states) sell only the Company's life insurance, annuity and mutual fund products (in Kansas only the Company's variable products) and offer property-casualty products of Farm Bureau property-casualty insurance companies not managed by the Company. Approximately 76% of all agents are licensed to sell variable life insurance, variable annuities and mutual funds. The Company offers a full range of life insurance products including universal life, variable universal life, whole life, term life and disability income insurance, together with variable and traditional annuity products. The Company is establishing variable universal life as its lead product. In the three month period ended March 31, 1996 and the year ended December 31, 1995, variable universal life accounted for 36.4% and 37.0%, respectively, of first year direct life insurance premiums collected. Since its acquisition of Western Life in 1994, the Company has pursued an aggressive program of training and licensing the agents in the Western Life states to enable them to market the Company's variable universal life insurance, variable annuities and mutual funds. The Company has recently ceased offering medical insurance products but makes those products available to its agents through affiliations with other carriers. The Company also provides a portfolio of mutual funds and asset management services to third parties. The Company's property-casualty insurance products include automobile, homeowners, farm and ranch owners and crop insurance and workers' compensation. Property-casualty business written in Utah through Utah Insurance is pooled with the business written in Iowa, Minnesota and South Dakota through two Farm Bureau related mutual insurance companies, Farm Bureau Mutual Insurance Company (Farm Bureau Mutual) and South Dakota Farm Bureau Mutual Insurance Company (South Dakota Mutual) (the Farm Bureau Mutual pool). All of the companies participating in the Farm Bureau Mutual pool are managed by the Company. The current participation of Utah Insurance in the Farm Bureau Mutual pool, which had net premiums written of $57.2 million in the three month period ended March 31, 1996 and $235.6 million in the year ended December 31, 1995, is 8%. Management anticipates that during the second quarter of 1996 the share of Utah Insurance in the Farm Bureau Mutual pool will be increased to 20% retroactive to January 1, 1996. Effective January 1, 1996, the Farm Bureau Mutual pool participates through a loss pooling agreement in business written in Arizona and New Mexico by Farm Bureau affiliated companies managed by the Company, thereby providing further geographic diversification of risk. During the three month period ended March 31, 1996, the Company had total premiums and product charges of $37.4 million, total revenues of $93.3 million, adjusted operating income of $10.8 million and net income of $10.9 million and, during the year ended December 31, 1995, the Company had total premiums and product charges of $148.0 million, total revenues of $406.0 million, adjusted operating income of $41.6 million and net income of $59.6 million. At March 31, 1996, the investment portfolio of the Company had an aggregate carrying value of $2.7 billion, and the Company's total assets and stockholders' equity were $3.1 billion and $556.0 million, respectively. For information relating to the Company's adjusted operating income, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations -- Adjusted Operating Income." Farm Bureau Life is rated "A+ (Superior)", Western Life is rated "A (Excellent)", and the Farm Bureau Mutual pool is rated "Ap (Excellent)" by A.M. Best Company, Inc. (A.M. Best). A.M. Best ratings consider the claims paying ability of the rated Company and are not a rating of the investment worthiness of the rated Company. See "Glossary of Selected Insurance Terms -- A.M. Best rating." BUSINESS STRATEGY The Company's current management team which was appointed in 1991 has initiated a strategy focused on enhancing profitability and expanding its market territory. The Company's strategy is designed to capitalize on the Company's exclusive association with state Farm Bureau federations in its operating territory. Key components of the Company's strategy include: ENHANCING PRODUCT PROFITABILITY. The Company is focusing on improving its margins by analyzing its product portfolio for competitiveness and profitability. In 1994, the Company exited the unprofitable medical insurance business. Currently, the Company is reviewing its allocation of capital by product line, policyholder dividend and interest rate crediting policies, modifying its systems to accommodate alternative product designs and considering possible changes in product structure. INCREASING SALES. The Company has significant opportunity to increase its sales through cross selling life insurance products to Farm Bureau members who already own property-casualty policies offered by the Company or other Farm Bureau affiliated property-casualty companies. For example, in Iowa approximately 29% of Farm Bureau members own at least one of the Company's life products, 53% own at least one of the Company's property-casualty products, and approximately 20% own both, providing significant opportunity for cross selling. Prior to 1996, agents selling the Company's life insurance products in the Western Life states were not able to sell the Company's variable life insurance and variable annuity products. In March 1996, the Company introduced a uniform portfolio of life insurance and annuity products throughout its market territory. This portfolio improves the products available to many agents and expands the offering of variable products into all states in the Company's territory. Additionally, the Company seeks to enhance agent productivity through a restructured incentive compensation program and more effective and increased training. GROWING THROUGH ACQUISITIONS AND JOINT VENTURES. Since 1993, the Company has consolidated operations with two Farm Bureau affiliated insurance companies, resulting in a significant expansion of marketing area and revenue base. The Company will continue to pursue growth opportunities through acquisitions and mergers with Farm Bureau related and other companies. Management believes the Company's position as a publicly traded Farm Bureau affiliated insurance company will increase its attractiveness as a merger partner. Additionally, the Company seeks to leverage its position as the only Farm Bureau company with variable product expertise by entering into joint ventures and other marketing arrangements with Farm Bureau and other organizations. REDUCING OPERATING EXPENSES. The Company has focused on reducing operating expenses through reengineering projects and consolidation of operations and systems. These efforts have resulted in significant cost savings and a 25% reduction in job positions over the last three years. Management intends to seek further expense improvements from continuing reengineering efforts. THE SERIES A EXCHANGE The Company has offered, subject to completion of the Offering, 5,000,000 shares of Series A Preferred Stock in exchange for 5,000,000 shares of Class A Common Stock (the Series A Exchange). The Series A Exchange was offered on a pro rata basis to its existing shareholders, all of whom are Farm Bureau organizations. The Iowa Farm Bureau Federation has agreed to exchange shares of Class A Common Stock for all of the shares of Series A Preferred Stock, none of which was taken up by other existing shareholders in the Series A Exchange. Each share of Series A Preferred Stock is entitled to one vote, so long as it is held by a Farm Bureau organization, and will vote together with the Class A Common Stock as one voting group. The Series A Preferred Stock is cumulative, will pay an annual dividend of $1.00 per share and has a liquidation preference of $20.00 per share. THE OFFERING <TABLE> <S> <C> Class A Common Stock offered hereby.......... 4,000,000 shares Common Stock to be outstanding after the Offering (1): Class A.................................. 17,666,810 shares Class B.................................. 1,192,990 shares --------- Total.................................. 18,859,800 shares --------- --------- </TABLE> <TABLE> <S> <C> Relative rights of holders of Class A Common Stock and Class B Common Stock.............. The holders of Class A Common Stock vote as a group with the holders of Series A Preferred Stock to elect three Class A Directors and on all other matters. The holders of Class B Common Stock elect 18 Class B Directors. All of the Class B Common Stock is held by Farm Bureau organizations and automatically converts to Class A Common Stock upon transfer to any person which is not a Farm Bureau organization. Use of proceeds.............................. The Company will not receive any of the proceeds from the sale of Shares in the Offering. Dividend policy.............................. Subject to the Company's financial results and declaration by the Company's Board of Directors, the Company currently intends to pay a quarterly cash dividend on its Common Stock of $0.07 per share commencing the first full fiscal quarter following the Offering. NYSE symbol.................................. FFG </TABLE> - ------------------------ (1) Based on shares outstanding as of April 30, 1996, assuming consummation of the Series A Exchange, and not including an estimated 1,750,000 shares of Class A Common Stock reserved for issuance under the Company's Stock Option Plan or 1,192,990 shares of Class A Common Stock reserved for issuance upon conversion of Class B Common Stock. See "Management Compensation -- 1996 Class A Common Stock Compensation Plan" and "Description of Capital Stock."
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+PROSPECTUS SUMMARY THE FOLLOWING INFORMATION IS NOT COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS AND ACCOMPANYING NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. FOUNDATION BANCORP, INC. The Holding Company was incorporated under Ohio law in April 1996 at the direction of the Bank for the purpose of purchasing all of the capital stock of the Bank to be issued in connection with the Conversion. The Holding Company has not conducted and will not conduct any business before the completion of the Conversion other than business related to the Conversion. Upon the consummation of the Conversion, the Holding Company will be a unitary savings and loan holding company, the principal assets of which initially will be the capital stock of the Bank, the investments made with the net proceeds retained from the sale of Common Shares in connection with the Conversion and a loan to be made by the Holding Company to the ESOP to facilitate the ESOP's purchase of Common Shares in the Conversion. See "USE OF PROCEEDS." The office of the Holding Company is located at 25 Garfield Place, Cincinnati, Ohio 45202, and its telephone number is (513) 721-0120. FOUNDATION SAVINGS BANK The Bank is a mutual savings and loan association which was organized under Ohio law in 1888. As an Ohio savings and loan association, the Bank is subject to supervision and regulation by the OTS and the Division. The Bank is a member of the Federal Home Loan Bank (the "FHLB") of Cincinnati, and the deposits of the Bank are insured up to applicable limits by the FDIC in the Savings Association Insurance Fund (the "SAIF"). See "REGULATION." The Bank conducts business from its office at 25 Garfield Place in Cincinnati, Ohio. The principal business of the Bank is the origination of permanent mortgage loans secured by first mortgages on one- to four-family residential real estate located in Hamilton County, Ohio and the contiguous Ohio counties of Clermont, Butler and Warren and the Kentucky counties of Boone and Kenton. The Bank also originates mortgage loans secured by multifamily real estate (over four units) and nonresidential real estate in its primary market area. See "THE BUSINESS OF THE BANK -- Lending Activities." In addition to real estate lending, the Bank originates a limited number of secured and unsecured consumer loans. For liquidity and interest rate risk management purposes, the Bank invests in interest-bearing deposits in other financial institutions, U.S. Government and agency obligations, mortgage-backed securities and other investments permitted by applicable law. See "THE BUSINESS OF THE BANK -- Investment Activities." Funds for lending and other investment activities are obtained primarily from savings deposits, which are insured up to applicable limits by the FDIC, and principal repayments on loans. Advances from the FHLB of Cincinnati are utilized from time to time when other sources of funds are inadequate to fund loan demand. See "THE BUSINESS OF THE BANK -- Deposits and Borrowings." In 1994, the Bank changed its operating strategy to become less reliant on retirement deposits and to increase its loan originations. The Bank now has a full-time loan originator who solicits mortgage loan applications. Loans originated by the Bank are underwritten in accordance with national secondary mortgage market standards. Depending on market conditions, the Bank either sells or portfolios its loans. The Bank attempts to maintain an adequate net interest margin, control expenses and enhance earnings with fee income and gains on the sale of loans. Although the Bank intends to pursue a policy of prudent growth in assets and deposits, its downtown location is not conducive to attracting lower cost deposits such as checking and passbook accounts. Some of the results of this strategy are summarized as follows: - MORTGAGE LENDING. Approximately 50% of the Bank's mortgage loan portfolio at March 31, 1996, consists of loans originated during the period from January 1, 1994, to March 31, 1996. During such period, the Bank increased its total investment in mortgage loans from $18.5 million to $21.3 million, an increase of $2.8 million, or 15.2%. At March 31, 1996, approximately $19.0 million, or 88.9%, of the Bank's total loans were secured by one- to four-family real estate. See "THE BUSINESS OF THE BANK -- Lending Activities -- Loans Secured by One- to Four-Family Real Estate." - ASSET QUALITY. Maintaining a high level of asset quality is a top priority of the board and management of the Bank. The Bank's efforts to control non-performing assets begin with prudent lending policies and stringent underwriting standards. The Bank moves quickly to resolve delinquencies and to dispose of real estate acquired through foreclosure. At April 30, 1996, the Bank had only one loan, with a principal balance of approximately $2,000, delinquent in excess of sixty days and no real estate owned acquired through foreclosure. See "THE BUSINESS OF THE BANK -- Lending Activities -- Delinquent Loans, Nonperforming Assets and Classified Assets." - CAPITAL POSITION. At March 31, 1996, the Bank's equity to assets ratio was 8.73%. In addition, the Bank's ratio of tangible capital to total assets and its risk-based capital ratio were 8.73% and 19.59%, respectively, both of which substantially exceed the OTS requirements. See "REGULATION -- Office of Thrift Supervision -- Regulatory Capital Requirements." - ASSET AND DEPOSIT GROWTH. From January 1, 1994, through March 31, 1996, there was little or no change in the Bank's asset and deposit growth, with assets remaining at approximately $31.7 million and deposits at approximately $27.8 million. Although total assets and total deposits have remained relatively constant over that period, the mix of the assets and deposits has changed significantly as the Bank has focused on loan originations. Cash and equivalents declined by $1.0 million, or 20.0%, and mortgage-backed securities declined by $1.7 million, or 25.4%, with the proceeds invested primarily in mortgage loans, which increased $2.8 million, or 15.2%. Retirement accounts, which totalled approximately 60% of deposits at January 1, 1994, had been reduced to 40% of deposits at March 31, 1996. During such period, capital increased $353,000, or 14.6%. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and "THE BUSINESS OF THE BANK." - NET INCOME. The Bank's net income decreased approximately $25,000, from $66,100 for the nine months ended March 31, 1996, compared to the same period in 1995, and decreased $70,000 for the fiscal year ended June 30, 1995, compared to 1994. Such decreases are attributable to various factors. During the nine-month period, a decline in net interest income accounted for nearly all of the decrease in net income as the Bank's liabilities repriced more quickly than its assets during the recent period of rising interest rates. The decline in net income from the 1994 to the 1995 fiscal year was primarily attributable to a decline in other income. Net income for 1994 was favorably affected by a gain on sale of investments. See "MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." - PROFITABILITY. The Bank's return on assets was .62%, .41% and .28% for the fiscal years ended June 30, 1994 and 1995, and the nine months ended March 31, 1996, respectively. Such ratios have been, on average, 33 basis points below the Bank's peer group average, as compiled by the OTS. The Bank's return on average equity for the fiscal years June 30, 1994 and 1995, and the nine months ended March 31, 1996, averaged 5.28%. The Bank's cost of deposits has been, on average, 69 basis points higher than the Bank's peer group average. The higher cost of deposits has been partially offset by general and administrative expenses approximately 19 basis points lower than the peer group. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." THE CONVERSION GENERAL. The Boards of Directors of the Holding Company and the Bank have unanimously approved the Plan. The Plan provides for the Conversion of the Bank from a mutual savings and loan association to a permanent capital stock savings and loan association incorporated under the laws of the State of Ohio. The OTS and the Division have approved the Plan, subject to the approval of the Plan by the Bank's voting members at the Special Meeting and the satisfaction of certain other conditions. See "THE CONVERSION -- Conditions and Termination." The principal factors considered by the Bank's Board of Directors in reaching the decision to pursue a mutual-to-stock conversion are the numerous competitive disadvantages which the Bank faces if it maintains its mutual form. These disadvantages relate to a variety of factors, including growth opportunities, employee retention and regulatory uncertainty. The Conversion will also provide the Bank with additional capital which will support future growth. See "THE CONVERSION -- Reasons for the Conversion." THE SUBSCRIPTION AND COMMUNITY OFFERINGS. Pursuant to the Plan, subscription rights to purchase Common Shares at a price of $10 per share are hereby offered to (a) each account holder who has one or more deposit accounts with an aggregate balance of $50 or more (a "Qualifying Deposit") with the Bank at the close of business on the Eligibility Record Date (the "Eligible Account Holders"), (b) the ESOP and (c) Other Eligible Members. See "THE CONVERSION -- Subscription Offering." Concurrently with the Subscription Offering, the Common Shares not subscribed for in the Subscription Offering are hereby offered to the general public in the Community Offering, in which preference will be given to natural persons residing in Hamilton County, Ohio. The Boards of Directors of the Holding Company and the Bank have the right to reject, in whole or in part, any subscription for Common Shares submitted in the Community Offering. See "THE CONVERSION -- Community Offering." The Plan authorizes the Boards of Directors of the Holding Company and the Bank to establish limits on the amount of Common Shares which may be purchased by various categories of persons. Pursuant to the Plan, the Boards of Directors have set the preliminary limitation that (i) no Eligible Account Holder, Supplemental Eligible Account Holder, if any, or Other Eligible Member may purchase in the Offering more than 2.5% of the total Common Shares sold in the Offering, (ii) no person, together with his or her Associates (hereinafter defined) and other persons acting in concert with him or her, may purchase in the Community Offering more than 2.5% of the total Common Shares sold in the Offering, and (iii) no person, together with his or her Associates and other persons acting in concert with him or her, may purchase more than 5% of the total Common Shares sold in the Offering. In connection with the exercise of subscription rights arising from a deposit account or a loan account in which two or more persons have an interest, the aggregate maximum number of Common Shares which the persons having an interest in such account may purchase is 2.5% of the total Common Shares sold in the Offering. Such limitations do not apply to the ESOP, which intends to purchase up to 8% of the Common Shares sold in the Offering. Subject to applicable regulations, the purchase limitation may be increased or decreased after the commencement of the Offering in the sole discretion of the Boards of Directors. See "THE CONVERSION -- Limitations on Purchases of Common Shares." In addition to the purchase limitations established by the Plan, OTS regulations impose restrictions on the acquisition of more than 10% of the outstanding shares of the Bank by any person or company individually or acting in concert with others. See "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY AND THE BANK." The sale of Common Shares pursuant to subscriptions received in the Offering will be subject to the approval of the Plan by the voting members of the Bank at the Special Meeting, to the determination by the Boards of Directors of the Holding Company and the Bank of the total number of Common Shares to be sold and to certain other conditions. See "THE CONVERSION -- Subscription Offering; -- Community Offering; and -- Pricing and Number of Common Shares to be Sold." The Subscription Offering will terminate and subscription rights will expire if not exercised by .m., Eastern Time, on , 1996. The Community Offering may be terminated at any time after orders for at least 462,875 shares have been received, but in no event later than , 1996, unless extended. Any extension of the Community Offering beyond , 1996, will require the consent of the OTS and the Division, and persons who have subscribed for Common Shares in the Offering will be given notice that they have the right to increase, decrease or rescind their subscriptions for Common Shares. Persons who do not affirmatively elect to continue their subscription or who elect to rescind their subscriptions during any such extension will have all of their funds promptly refunded with interest. Persons who elect to decrease their subscriptions will have the appropriate portion of their funds promptly refunded with interest. See "THE CONVERSION -- Pricing and Number of Common Shares to be Sold." NON-TRANSFERABILITY OF SUBSCRIPTION RIGHTS. Federal and Ohio regulations provide that subscription rights are non-transferable. OTS regulations specifically prohibit any person from transferring or entering into any agreement or understanding before the completion of the Conversion to transfer the ownership of the subscription rights issued in the Conversion or the shares to be issued upon the exercise of such subscription rights. Persons attempting to violate such provision may lose their rights to purchase Common Shares in the Conversion and may be subject to penalties imposed by the OTS. Each person exercising subscription rights will be required to certify that a purchase of Common Shares is solely for the subscriber's own account and that there is no agreement or understanding regarding the sale or transfer of such Common Shares. PARTICIPATION OF WEBB IN THE OFFERINGS. The Holding Company and the Bank have retained Charles Webb & Company ("Webb") to consult, advise and assist in the sale of the Common Shares in the Offering on a "best efforts" basis. Webb will receive a financial advisory fee in the amount of $50,000. In addition, the Holding Company will reimburse Webb for certain expenses, including reasonable legal fees. Such expenses shall not exceed $30,000. If the Holding Company and Webb deem necessary, Webb may enter into agreements ("Selected Dealers Agreements") with other National Association of Securities Dealers, Inc. ("NASD") member firms ("Selected Dealers") for assistance in the sale of Common Shares. Selected Dealers will receive fees equal to 4% of the purchase price of Common Shares sold, if any, pursuant to Selected Dealer Agreements. Webb is not obligated to purchase any Common Shares. PRICING OF THE COMMON SHARES. Keller & Company, Inc. ("Keller"), a Columbus, Ohio, firm experienced in valuing thrift institutions, has prepared an independent valuation of the estimated pro forma market value of the Bank, as converted. Keller's valuation of the estimated pro forma market value of the Bank, as converted, is $3,500,000 as of May 14, 1996 (the "Pro Forma Value"). Based on the Pro Forma Value of the Bank, the Valuation Range established in accordance with the Plan is $2,975,000 to $4,025,000. In the event that Keller determines at the close of the Offering that the aggregate pro forma value of the Bank is higher or lower than the Pro Forma Value, but is within the Valuation Range, the Holding Company will make an appropriate adjustment by raising or lowering the total number of Common Shares sold in the Conversion consistent with the final valuation. The total number of Common Shares sold in the Conversion will be determined by the Board of Directors consistent with the final valuation. If, due to changing market conditions, the final valuation is outside the Valuation Range, subscribers will be given notice of such final valuation and the right to increase, decrease or rescind their subscriptions. Any person who does not affirmatively elect to continue his subscription or elects to rescind his subscription before the date specified in the notice will have all of his funds promptly refunded with interest. Any person who elects to decrease his subscription will have the appropriate portion of his funds promptly refunded with interest. See "THE CONVERSION -- Pricing and Number of Common Shares to be Sold." USE OF PROCEEDS. The Holding Company will retain up to 50% of the net proceeds from the sale of the Common Shares, estimated to be $1.62 million at the midpoint of the Valuation Range. The balance of the net proceeds will be used to purchase all of the capital stock to be issued by the Bank and will increase the regulatory capital of the Bank. The Bank anticipates that the net proceeds will initially be invested in short-term U.S. Government and agency obligations and will be available for general corporate purposes, including loan originations. See "USE OF PROCEEDS." The funds retained by the Holding Company will be used by the Holding Company to make a loan to the ESOP and will be available for general corporate purposes, including the payment of dividends. The funds retained by the Holding Company will be available for the repurchase of shares, although the Holding Company has no current intentions to pursue stock repurchases. OTS regulations generally prohibit stock repurchases in the first six months following the completion of the Conversion without OTS prior approval. See "THE CONVERSION -- Restrictions on Repurchase of Common Shares." TAX CONSEQUENCES The consummation of the Conversion is expressly conditioned upon the receipt by the Holding Company and the Bank of a private letter ruling from the Internal Revenue Service or an opinion of counsel to the effect that the Conversion will constitute a tax-free reorganization as defined in Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"). The Holding Company and the Bank intend to proceed with the Conversion based upon an opinion received from Vorys, Sater, Seymour and Pease, special counsel to the Bank and the Holding Company, that states, in part, that (1) no gain or loss will be recognized by the Bank in connection with the Conversion or the receipt from the Holding Company of proceeds from the sale of the Common Shares, and (2) assuming that the subscription rights received by deposit account holders in connection with the Conversion have no ascertainable fair market value, no gain or loss will be recognized to the deposit account holders of the Bank upon issuance to them of subscription rights or interests in the Liquidation Account (hereinafter defined) and no taxable income will be realized by deposit account holders as a result of their exercise of such subscription rights. Although the Internal Revenue Service (the "IRS") could challenge the assumption that the subscription rights have no ascertainable fair market value, the Holding Company and the Bank have received an opinion from Keller supporting such assumption. See "THE CONVERSION -- Principal Effects of the Conversion -- Tax Consequences." MARKET FOR THE COMMON SHARES There is presently no market for the Common Shares. The existence of a market in the Common Shares upon the completion of the Conversion will depend upon the presence in the marketplace of both willing buyers and willing sellers at any given time. It is expected that the Common Shares will be traded in the over-the-counter market and will be quoted through brokers participating on the Nation Daily Quotation Service (the "NDQS"). Because of the limited size of the Offering, however, it is unlikely that an active market for the Common Shares will develop after the completion of the Conversion or, if such market does develop, that it will continue. See "RISK FACTORS -- Limited Market for the Common Shares" and "MARKET FOR THE COMMON SHARES." DIVIDEND POLICY The declaration and payment of dividends by the Holding Company will be subject to the discretion of the Board of Directors of the Holding Company, to the earnings and financial condition of the Holding Company and to general economic conditions. If the Board of Directors of the Holding Company determines in the exercise of its discretion that the net income, capital and consolidated financial condition of the Holding Company and the general economy justify the declaration and payment of dividends by the Holding Company, the Board of Directors of the Holding Company may authorize the payment of dividends on the Common Shares, subject to the limitation under Ohio law that a corporation may pay dividends only out of surplus. There can be no assurance that dividends will be paid on the Common Shares or, if paid, will continue to be paid. BENEFITS OF THE CONVERSION TO DIRECTORS, OFFICERS AND EMPLOYEES OF THE HOLDING COMPANY AND THE BANK GENERAL. Among the factors considered by the Board of Directors of the Bank in making the decision to pursue the Conversion is the ability of the Holding Company and the Bank to utilize various types of stock benefit plans to attract and retain qualified directors and employees. See "THE CONVERSION -- Reasons for the Conversion." EMPLOYEE STOCK OWNERSHIP PLAN. In connection with the Conversion, the Holding Company has established the ESOP, which intends to purchase 8.0% of the Common Shares issued in the Conversion. All full-time employees of the Holding Company and the Bank who meet certain age and years of service criteria will be eligible to participate in the ESOP. See "MANAGEMENT -- Stock Benefit Plans -- Employee Stock Ownership Plan." STOCK OPTION PLAN. After the Conversion, the Holding Company intends to establish a stock option and incentive plan (the "Stock Option Plan"). Under OTS regulations, the Stock Option Plan cannot be implemented for at least six months after the completion of the Conversion. See "MANAGEMENT -- Stock Benefit Plans - -- Stock Option Plan." The Board of Directors of the Holding Company anticipates that a number of shares equal to 10% of the Common Shares issued in the Conversion will be reserved for issuance to directors, officers and employees under the Stock Option Plan. The Stock Option Plan will be administered by a committee comprised of three directors who are not employees of the Holding Company (the "Committee"). Persons eligible for Awards under the Stock Option Plan will consist of directors and managerial and other key employees of the Holding Company or the Bank who hold positions with significant responsibilities or whose performance or potential contribution, in the judgment of the Committee, will benefit the future success of the Holding Company or the Bank. The Committee will consider the position, duties and responsibilities of the directors and employees of the Holding Company and the Bank, the value of their services to the Holding Company and the Bank and any other factors the Committee may deem relevant. No determination has been made with respect to option recipients. Based on the purchase price of $10 per share in the Conversion, the aggregate market value of shares which could be issued under the Stock Option Plan would be between $297,500 and $462,875, based on the Valuation Range. Under OTS regulations, if the Stock Option Plan is implemented during the first year after the Conversion, the following restrictions will apply: (i) the number of shares that may be awarded under the Stock Option Plan to directors who are not full-time employees of the Holding Company or the Bank cannot exceed 5% of the plan shares per person and 30% of the plan shares in the aggregate, or $23,144 and $138,863, respectively, based on a per share value of $10 and the adjusted maximum of the Valuation Range; (ii) the number of shares that may be awarded to any individual who is a full-time employee of the Holding Company or the Bank may not exceed 25% of the plan shares, or $115,720 based on a per share value of $10 and the adjusted maximum of the Valuation Range; and (iii) stock options must be awarded with an exercise price of at least fair market value at the time of grant. The ultimate value of any option granted at fair market value will depend on future appreciation in the fair market value of the shares to which the option relates. No decision has been made as to anticipated awards under the Stock Option Plan. RECOGNITION AND RETENTION PLAN. The Bank intends to establish a recognition and retention plan (the "RRP") after the Conversion. Under OTS regulations, the RRP cannot be implemented for at least six months after the completion of the Conversion. See "MANAGEMENT -- Stock Benefit Plans -- Recognition and Retention Plan." The Board of Directors of the Bank anticipates that a number of shares equal to 4.0% of the Common Shares sold in the Conversion will be purchased by or issued to the RRP. Shares held in the RRP will be available for awards to selected directors, officers and employees of the Bank. The RRP will be administered by a committee comprised of three directors who are not employees of the Bank (the "RRP Committee"). In selecting the directors and employees to whom awards will be granted and the number of shares covered by such awards, the RRP Committee will consider the position, duties and responsibilities of the directors and employees, the value of their services to the Bank and any other factors the RRP Committee may deem relevant. No determination has been made with respect to RRP award recipients. Assuming the purchase of a number of shares equal to 4.0% of the Common Shares issued in the Conversion at a purchase price of $10 per share, the shares available for distribution under the RRP would have an aggregate market value of between $119,000 and $185,150, based on the Valuation Range. See "PRO FORMA DATA" for a discussion of the impact of the RRP on pro forma earnings per share. Under OTS regulations, if the RRP is implemented during the first year after the Conversion, the number of shares that could be awarded under each plan to directors who are not full-time employees of the Holding Company cannot exceed 5% of the plan shares per person and 30% of the plan shares in the aggregate, or $9,258 and $55,545, respectively, based on a per share value of $10 at the adjusted maximum of the Valuation Range, and the number of shares that could be awarded to any individual who is a full-time employee of the Holding Company or its subsidiaries could not exceed 25% of the plan shares, or $46,288 based on a per share value of $10 at the adjusted maximum of the Valuation Range. No decision has been made as to anticipated awards under the RRP. EMPLOYMENT AGREEMENT. In connection with the Conversion, the Bank will enter into an employment agreement with Laird L. Lazelle, the President of the Bank. The employment agreement with Mr. Lazelle will be for a term of three years, with a salary not less than his current salary, which is $65,000. The employment agreement also will provide for severance payments if the agreement is terminated prior to the expiration of the term upon a change of control of the Bank or for any reason other than just cause, as defined therein. The payment that would have been made to Mr. Lazelle pursuant to the proposed employment agreement, assuming termination of his employment agreement at March 31, 1996, following a change of control of the Bank, would have been approximately $195,000. See "MANAGEMENT -- Employment Agreement."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001012884_rutherford_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001012884_rutherford_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. CERTAIN OIL AND GAS RELATED TERMS ARE DEFINED UNDER "CERTAIN DEFINITIONS." UNLESS OTHERWISE NOTED HEREIN, THE INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES THE U.S. UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED. AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK, AND INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS." UNLESS THE CONTEXT INDICATES OTHERWISE, REFERENCES IN THIS PROSPECTUS TO "RMOC" OR THE "COMPANY" ARE TO RUTHERFORD-MORAN OIL CORPORATION, A DELAWARE CORPORATION, AND ITS SUBSIDIARIES, AFTER GIVING EFFECT TO THE TRANSACTIONS DESCRIBED UNDER "THE TRANSACTIONS." THE COMPANY Rutherford-Moran Oil Corporation, a Delaware corporation ("RMOC" or the "Company"), is an independent energy company engaged in the acquisition, exploration, development and production of oil and gas properties in Southeast Asia. Currently the Company's exploration and development activities are entirely in the Gulf of Thailand and are conducted through its subsidiary, Thai Romo Limited, a limited liability company existing under the laws of Thailand ("Thai Romo"). The Company is one of four concessionaires in Block B8/32 (sometimes referred to as the "Block" or the "Concession") currently covering approximately 1.3 million acres in the central portion of the Gulf of Thailand. Subsidiaries of Pogo Producing Company ("Pogo") and Maersk Olie og Gas AS ("Maersk") and The Sophonpanich Co. Limited ("Sophonpanich") are currently the other concessionaires (together with the Company, the "Concessionaires") in the Block. The Company was instrumental in identifying the Block as a viable prospect and organizing the Concessionaires to submit a joint bid for the Block. The Company and two of the Concessionaires, Pogo and Sophonpanich (collectively the "Tantawan Concessionaires"), own all of the interests in the Tantawan production area (the "Tantawan Field"), which is located on the eastern border of the Block. The Company, as a non-operator, owns a 46.34% interest in the Tantawan Field and a 31.66% interest in the remainder of the Block. The other Concessionaires own interests in the Tantawan Field and the remainder of the Block equal to or smaller than those of the Company. As of January 1, 1996, the Company had net proved undeveloped reserves of 246 Bcfe, 74% of which were in the southern portion of the Tantawan Field. Appraisal wells drilled by the Concessionaires in three established areas within the Block (Tantawan, Benchamas and Pakakrong) have tested at prolific flow rates of hydrocarbons and established the potential for significant additional reserves in those areas. The Tantawan Concessionaires have entered into a 30-year Gas Sales Agreement (the "GSA") with the Petroleum Authority of Thailand ("PTT"), and production is expected to commence in January 1997. BUSINESS STRATEGY The Company's business strategy is to increase its reserve base and production through exploration, development and acquisition primarily in Southeast Asia. The Company focuses its exploration efforts in countries and areas that offer: (i) large reserve potential, (ii) manageable geologic risk, (iii) proximity to infrastructure, (iv) growing local market demand for petroleum products and (v) favorable business climates. The Company believes the characteristics of the Block fit well within the Company's strategy of seeking properties with large reserve potential. Block B8/32 is situated within the Pattani Basin, which has seen major hydrocarbon discoveries over the past 24 years. The surface area of Block B8/32 currently covers an area of approximately 1.3 million acres, subject to relinquishment of unexplored acreage, unless extended before August 1, 1997. A comparison to the U.S. Gulf of Mexico would result in an equivalent acreage position of approximately 260 Federal Offshore Louisiana Blocks. Management believes Block B8/32 contains significant unexplored areas that provide the Company with additional exploration opportunities and potential reserve growth for the foreseeable future. In addition, the Company believes that the close proximity of the Block to infrastructure, its long-term natural gas marketing arrangements already in place, the growing Thai demand for petroleum products and the favorable business climate of Thailand are all consistent with the Company's strategy. Management believes its role as one of the leaders of the Block B8/32 project, its knowledge of the geology of the area, its important Thai relationships developed over the past decade, its large ownership interest, and its close working relationships with its co-Concessionaires will allow the Company to continue to have considerable influence on the exploration and development activities in the Block. See "Business and Properties--History of the Company's Gulf of Thailand Block B8/32 Operations." BUSINESS ACTIVITIES The Company has identified a number of exploration and development prospects within Block B8/32, which include the Tantawan and Benchamas fields and the Pakakrong prospect. TANTAWAN. Through May 31, 1996, the Company has participated in drilling a total of 14 exploration wells and 15 development wells in the Tantawan Field, all but one of which have encountered hydrocarbons. Of the 28 wells that encountered hydrocarbons, 24 are deemed capable of commercial flow rates. All of these successful wells have been drilled in the southern portion of the Tantawan Field, and have encountered an average of 170 feet of net pay. As of January 1, 1996, net proved undeveloped reserves for the Tantawan Field were 181 Bcfe. Cumulatively, a total of 28 zones have been tested and have yielded 254.4 MMcfd of natural gas and 21.4 Mbpd of oil and condensate. A sixteenth development well is currently being drilled, and an additional four development wells and five appraisal wells are currently planned to be drilled in 1996. Approval to produce oil and gas from the Tantawan Field (covering approximately 68,000 acres) was given by the Thai Petroleum Committee and the Ministry of Industry in August 1995. All gas from the Tantawan Field will be sold to PTT under the GSA. Under the GSA, PTT is required to purchase from the Tantawan Concessionaires at least 75 MMcfd of gas for the first year of production (expected to commence in January 1997) rising to at least 85 MMcfd in the second year. An oil sales agreement with PTT is under negotiation, and the Tantawan Concessionaires expect that all oil produced will be sold to PTT. Under the development plan for the Tantawan Field, two platforms and production facilities will be installed by August 1996, with installation of additional platforms after first production. The oil and gas will be separated on each platform and processed on a Floating Production, Storage and Offloading vessel ("FPSO") currently under construction and scheduled for delivery in December 1996. Oil will be exported via tankers, and gas will be transported through a 33-mile spur pipeline currently under construction by PTT and expected to be completed in July 1996. Production is expected to commence in January 1997. BENCHAMAS. Through May 31, 1996, the Concessionaires have drilled a total of four exploration wells in the Benchamas field, all of which have encountered hydrocarbons. Additional appraisal wells are currently planned to be drilled in 1996. To date, all wells drilled by the Concessionaires along an 18 mile North-South axis of the Benchamas field have identified reserves. The four successful wells have encountered an average of 225 feet of net pay. As of January 1, 1996, net proved undeveloped reserves of 65 Bcfe were assigned to two of the successful wells. Cumulatively, a total of 12 zones have been tested and have yielded 103.3 MMcfd of natural gas and 17.5 Mbpd of oil and condensate. The Concessionaires acquired a 104 square mile 3-D seismic survey of the Benchamas field in 1993, and in August 1996 will acquire additional 3-D seismic data, which the Company expects will better define the extent of the northern portion of the Benchamas field. Thereafter, the Company plans to participate in drilling additional appraisal wells and refine a development plan for the Benchamas field. The Company's preliminary plan of development for the Benchamas field avails itself of the infrastructure of the nearby Tantawan Field and contemplates the installation of satellite wellhead platforms and a central processing facility platform with a daily capacity of 150 MMcf of natural gas, 25 MBbl of oil and condensate and 25 MBbl of water. The Company expects that the Concessionaires will apply for approval to develop the Benchamas field in late 1996 with production to commence in 1998. PAKAKRONG AND OTHER AREAS WITHIN BLOCK B8/32. Exploration efforts also continue on those portions of the Block outside the Tantawan and Benchamas fields. Through May 31, 1996, the Concessionaires have drilled three exploration wells outside the Tantawan and Benchamas fields, all of which encountered hydrocarbons, including two wells on the Pakakrong structure that are deemed capable of commercial flow rates. Widespread seismic anomalies that are associated with the same sequence identified as productive in the Benchamas field are present in Pakakrong. Additionally, the Pakakrong wells encountered and tested hydrocarbons at depths considerably shallower than found to date by the Concessionaires elsewhere within Block B8/32. In addition to the Benchamas field and the Pakakrong prospect, the Concessionaires have identified several other potentially promising seismic structures on the approximately 1.2 million acres currently outside the Tantawan Field. OTHER ACTIVITIES. In the future, the Company intends to capitalize on its experience in the Block by identifying and prudently pursuing additional oil and gas investment opportunities in the Gulf of Thailand. The Company also is currently reviewing exploratory prospects in other parts of Southeast Asia.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0001012887_boston_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001012887_boston_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..3a44d8dd6e1437accc0119c9919f2d4568448c6c
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. THE COMPANY Boston Communications Group develops, markets and provides innovative call processing and customer support services to wireless telephone carriers. The Company's services are designed to enable wireless telephone carriers to focus internal resources on their core business activities, while increasing revenues, improving service quality and reducing costs. To date, the Company's principal service offerings have included its ROAMERplus calling service and its carrier support services. The Company's ROAMERplus service provides carriers with the ability to cost-effectively generate revenues from subscribers who are not covered under traditional roaming agreements by arranging payment for roaming calls and paying carriers for the air time used. BCG is the leading provider of roaming services to the unregistered roaming market. The Company's carrier support services allow wireless carriers to outsource all or a portion of their customer service activities, and are designed to help wireless carriers retain subscribers, reduce costs and manage growth. In early 1996, BCG introduced its prepaid wireless service that will enable wireless carriers to offer their services on a prepaid basis. The Company is in the process of deploying its C/2/C Network to support delivery of this service on a nationwide basis. Wireless telephone service has been one of the fastest growing segments of the telecommunications industry over the last ten years. The Cellular Telecommunications Industry Association estimates that the number of cellular subscribers in the United States increased from approximately 340,000 in December 1985 to approximately 33.7 million in December 1995. Significant growth in the wireless telephone market is expected to continue in the future, particularly given the emergence of personal communications service ("PCS") as a new form of wireless telephone service. Industry sources have projected that the number of cellular and PCS subscribers will grow to 80 million by the end of the year 2000. BCG's objective is to be a leader in providing high-quality, innovative call processing and customer support services to wireless telephone carriers. A key element of the Company's strategy is to identify and develop additional value- added services that wireless telephone carriers either have not identified or have found difficult or uneconomical to provide on their own. The Company seeks to establish and maintain long-term relationships with its carrier customers in order to understand evolving customer needs and continue to develop new service offerings. The Company believes that the experience, relationships and knowledge of its management team provide it with a competitive advantage in addressing the needs of wireless telephone carriers. The Company's ROAMERplus service was introduced in 1991 and by 1995 was being used by approximately 95 cellular carriers that collectively hold licenses for over 1,100 markets in the United States, Canada and Mexico, including nine of the 10 largest cellular carriers, by population covered, in the United States. Cellular carriers can offer ROAMERplus service without significant additional investment in equipment, technology or personnel. The Company introduced its carrier support services in 1993 and currently provides these services to 12 cellular carriers. The Company's carrier support services allow a carrier's subscribers to make billing inquiries, initiate address and rate plan changes, obtain instructions on roaming features and promotions and receive other customer assistance. The experience, economies of scale and rapid response time that the Company brings to meeting its customers' needs can make the Company's per-minute fee for support services a strategic and economic choice for cellular carriers. The Company believes that its ability to provide high quality carrier support services may also be attractive to emerging PCS providers seeking to quickly establish and service a subscriber base. The Company is in the process of deploying its C2C Network, which uses proprietary software and switching technology, to support delivery of its recently introduced prepaid and enhanced wireless services. The Company believes that this prepaid service will be attractive to cellular carriers seeking to cost-effectively penetrate untapped market segments, such as subscribers who cannot or do not want to receive service under traditional monthly billing arrangements. BCG recently completed a trial use of its prepaid wireless service by the cellular division of one of the Regional Bell Operating Companies ("RBOCs"). The Company has entered into a contract with that carrier and expects commercial use of its prepaid service by that carrier to begin in the second quarter of 1996. The Company has entered into contracts with three additional cellular carriers and is in discussions with a number of other carriers to provide its prepaid service to them. The Company charges for its services primarily on a per minute or per call basis, or a combination thereof. The Company receives payment for its ROAMERplus service from cellular subscribers using the service and receives payment for its carrier support services from the applicable carrier. The Company has achieved significant growth in revenues over the past three years, with revenues increasing from $8.7 million for the year ended December 31, 1993 to $34.2 million for the year ended December 31, 1995. This growth resulted primarily from an increase in the number of the Company's carrier customers, the introduction of carrier support services in 1993 and an increase in demand for the Company's services due to the general growth in the cellular industry. The Company was organized as a Massachusetts corporation in August, 1988. The Company's principal office is located at One McKinley Square, Boston, Massachusetts 02109 and its telephone number is (617) 476-3570. As used in this Prospectus, the terms "BCG" and "the Company" refer to Boston Communications Group, Inc. and its wholly-owned subsidiaries, Voice Systems Technology Inc. and Cellular Express, Inc., unless the context otherwise requires. Cellular Express is a registered trademark, and Boston Communications Group, C/2/C, DEBITplus, REVENUEguard, ROAMalert, ROAMERcare and ROAMERplus are trademarks of Boston Communications Group, Inc. All other trademarks or trade names referred to in this Prospectus are the property of their respective owners. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company....... 3,500,000 shares Common Stock offered by the Selling Share- holders.................................. 325,000 shares Common Stock to be outstanding after the offering................................. 12,223,812 shares(1) Use of proceeds........................... For the redemption of Redeemable Preferred Stock (including accumulated dividends), investment in the C/2/C Network infrastructure and other general corporate purposes, including working capital. Proposed Nasdaq National Market symbol.... BCGI </TABLE> - -------- (1) Excludes 984,741 shares of Common Stock issuable upon the exercise of options outstanding as of April 15, 1996 at a weighted average exercise price per share equal to $4.80. Also excludes 689,567 shares of Common Stock issuable upon the exercise of options to be granted under the Company's 1996 Stock Option Plan on the effective date of this offering, all at an exercise price per share equal to the Price to Public shown on the cover page of this Prospectus. See "Management--Executive Compensation--Stock Plans." SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> PRO FORMA PRO FORMA THREE MONTHS THREE MONTHS YEAR ENDED ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31, ------------------------------------------ ------------ --------------- ------------ 1991 1992 1993 1994 1995 1995(1) 1995 1996 1996(1) ------- ------- ------ ------- ------- ------------ ------ ------- ------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Service revenues: Calling services....... $ 809 $ 6,275 $8,236 $16,005 $25,446 $25,446 $4,606 $ 7,214 $ 7,214 Carrier support services.............. -- -- 458 2,329 8,774 8,774 1,312 3,847 3,847 System revenues......... -- -- -- -- -- 2,068 -- 92 248 ------- ------- ------ ------- ------- ------- ------ ------- ------- Total revenues......... 809 6,275 8,694 18,334 34,220 36,288 5,918 11,153 11,309 Operating income (loss)................. (1,216) 291 (269) 405 2,129 1,833 35 735 568 Income (loss) from continuing operations(2).......... (1,528) 259 (332) 289 3,009 2,674 17 429 303 Income (loss) from discontinued operations............. (2,750) (1,196) (92) 1,506 (166) (166) -- Net income (loss)....... (4,278) (937) (424) 1,795 2,843 (149) 429 Accretion of dividends on redeemable preferred stock.................. -- (1,030) (1,030) (1,016) (950) (237) (237) Net income (loss) available to common shareholders........... (4,278) (1,967) (1,454) 779 1,893 (386) 192 Net income (loss) available to common shareholders per common share(3): Continuing operations.. $ (0.51) $ (0.26) $(0.42) $ (0.08) $ 0.22 $ 0.19 $(0.02) $ 0.02 $ 0.01 Net income (loss)...... $ (1.42) $ (0.65) $(0.45) $ 0.09 $ 0.21 $(0.04) $ 0.02 Shares used in computing net income (loss) per share.................. 3,012 3,012 3,235 8,848 9,179 9,179 9,179 9,179 9,179 Supplemental net income available to common shareholders per common share(4): Continuing operations.. $ 0.29 $ 0.26 $ 0.04 $ 0.03 Net income ............ $ 0.27 $ 0.04 Shares used in computing supplemental net income per share.............. 10,503 10,503 10,565 10,565 </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 ----------------------- ACTUAL AS ADJUSTED(5) ------- -------------- <S> <C> <C> CONSOLIDATED BAL- ANCE SHEET DATA: Cash............... $ 353 $22,305 Working capital.... 700 22,652 Total assets....... 18,787 40,739 Redeemable Pre- ferred Stock...... 16,133 -- Shareholders' eq- uity (defi- cit)(6)........... (6,489) 31,596 </TABLE> - ------- (1) In February 1996, the Company acquired Voice Systems Technology Inc. ("VST") for Common Stock and cash with an aggregate value of approximately, $2.5 million. The reduction in net income arising in the pro forma results of operations is primarily attributable to a non-cash charge related to amortization of goodwill arising from the acquisition. See unaudited Pro Forma Condensed Consolidated Financial Statements. (2) In 1995, the Company reversed the deferred tax asset valuation allowance, resulting in a tax benefit of $1.8 million. In addition, in 1994 and 1995, the Company realized benefits from net operating loss carryforwards of $382,000 and $840,000, respectively. See Note 6 of Notes to Consolidated Financial Statements. (3) See Note 2 of Notes to Consolidated Financial Statements. (4) Supplemental net income available to common shareholders per common share reflects the use of proceeds to redeem Redeemable Preferred Stock and to repay borrowings outstanding under the Company's Account Purchase Agreement. The Company will pay $4.5 million of dividends to holders of Redeemable Preferred Stock out of the proceeds of this offering, of which $3.8 million will be paid to affiliates. See "Use of Proceeds" and Note 2 of Notes to Consolidated Financial Statements. (5) Adjusted to give effect to the sale by the Company of 3,500,000 shares of Common Stock offered hereby (at an assumed initial public offering price of $12.00 per share and after deducting underwriting discounts and commissions and estimated offering expenses) and the application of the net proceeds therefrom. Approximately 1,344,425 shares of Common Stock are offered hereby to fund the redemption of the Redeemable Preferred Stock. See "Use of Proceeds" and "Capitalization."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0001012956_advancepcs_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001012956_advancepcs_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..67cfa85ca6438d311dab285e875d39204a97ca11
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0001012956_advancepcs_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THE COMPANY Advance ParadigM, Inc. (the "Company") is a leading independent provider of pharmacy benefit management ("PBM") services to health benefit plan sponsors, based on the over nine million health plan members enrolled in the Company's programs. The Company's primary focus is on the delivery of cost-effective, high quality, integrated PBM services. In addition, the Company has developed and is expanding its clinical expertise and disease management services to meet the specialized needs of its plan members, particularly those requiring costly, long-term and recurring therapies. These services are designed to inform and educate health benefit plan sponsors, their members and participating physicians of nationally recognized practice guidelines for various disease states. This encourages physician and member conformance, improves compliance with recognized standards and, in turn, improves member health while reducing cost of care. The Company's PBM services include clinical and benefit design consultation, formulary and rebate administration, electronic point-of-sale pharmacy claims processing, mail pharmacy distribution, pharmacy network management, drug utilization review ("DUR") and data information reporting. The Company administers a pharmacy network that includes over 46,000 retail pharmacies throughout the United States. In 1994, in response to increasing cost-containment pressures from payors, the Company began to utilize its clinical and information systems capabilities to develop health benefit management ("HBM") services. The Company's HBM services include disease management, recommendation of clinical guidelines, patient and physician profiling, case finding and compliance and outcome measurement. In 1995, the Company began marketing its HBM services to health benefit plan sponsors, pharmaceutical manufacturers and contract research organizations, and as a result, initiated programs with selected customers. In addition, the Company intends to leverage its existing capabilities and relationships by acquiring companies which have, or are developing, innovative HBM services in order to provide a centralized care management alternative for its customers. It is currently estimated that annual outpatient pharmaceutical expenditures account for approximately 7% or $70 billion, of the $1 trillion health care market, and that third-party prescriptions managed by PBMs represent a steadily increasing proportion of this amount. In response to escalating health care costs, cost containment efforts have led to rapid growth in managed care. Despite these efforts, continued advances in medical technology and new drug development have led to significant increases in drug utilization and related costs, creating a need for more efficient, cost-effective, drug delivery mechanisms. In addition, there is rapidly growing demand among payors for comprehensive disease management programs as cost containment becomes more dependent on improvements in the quality of care. According to industry sources, approximately 77% of large employers said they would likely adopt some form of disease management program over the next two years. HBM services are being developed to address this demand through the use of traditional PBM services combined with clinical expertise and sophisticated information systems. The Company believes its clinical expertise and information systems combined with its PBM services provide the Company with a competitive advantage in the evolving market for HBM services. The Company's strategy is to maintain its position as a leading independent provider of PBM services and expand its presence as a provider of HBM services by (i) expanding its core PBM customer base, (ii) expanding its HBM services, (iii) pursuing strategic acquisitions and (iv) continuing to establish strategic relationships with its major customers and suppliers. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company............................ 2,000,000 shares Common Stock offered by the Selling Stockholders............... 647,114 shares Common Stock to be outstanding after the Offering.............. 7,403,750 shares(1) Use of proceeds................................................ For retirement of debt, capital expenditures, possible acquisitions, working capital and general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol......................... ADVP </TABLE> ------------------------------ SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED MARCH 31, JUNE 30, ------------------------------- -------------------- 1994 1995 1996 1995 1996 --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues...................................................... $ 34,970 $ 91,306 $ 125,333 $ 25,692 $ 49,809 Cost of revenues.............................................. 32,612 85,532 117,788 24,445 47,454 Selling, general and administrative expenses.................. 2,330 4,963 6,158 1,442 1,714 Operating income.............................................. 28 811 1,387 (195) 641 Net income (loss)............................................. $ (395) $ 24 $ 1,037 $ (335) $ 669 Pro forma:(2) Net income per share........................................ $ .25 $ .12 Weighted average shares outstanding......................... 7,037 7,037 </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 ----------------------------------------- PRO FORMA ACTUAL PRO FORMA (3) AS ADJUSTED (4) --------- ------------- --------------- <S> <C> <C> <C> BALANCE SHEET DATA: Working capital........................................................ $ 10,432 $ 10,432 $ 19,672 Total assets........................................................... 72,091 72,091 81,331 Long-term debt to related parties...................................... 7,000 7,000 -- Series A redeemable preferred stock.................................... 12,099 -- -- Stockholders' equity................................................... 8,966 21,065 37,305 </TABLE> <TABLE> <CAPTION> YEAR ENDED MARCH 31, ------------------------------- 1994 1995 1996 --------- --------- --------- <S> <C> <C> <C> SUPPLEMENTAL DATA:(5) Pharmacy network claims processed................................................. 816 1,527 9,375 Mail pharmacy prescriptions filled................................................ 228 383 536 Estimated health plan members (at period end)..................................... 3,745 5,208 9,040 </TABLE> - ------------------------------ (1) Excludes (i) 1,310,250 shares of Common Stock reserved for future issuance pursuant to options outstanding under the Company's stock option plans with a weighted average exercise price of $5.21 per share, (ii) 392,750 shares of Common Stock underlying outstanding warrants with a weighted average exercise price of $4.29 per share and (iii) 1,111,111 shares of Common Stock issuable upon conversion of the outstanding shares of Series B Preferred Stock, assuming an initial public offering price of $9.00 per share. Includes 3,000 shares of Common Stock issued subsequent to June 30, 1996, pursuant to the exercise of stock options. See "Management--Stock Option Plans" and "Description of Capital Stock." (2) Computed on the basis described in Note 2 of Notes to Consolidated Financial Statements. (3) Gives effect to the automatic conversion of each share of the Series A Preferred Stock into 250 shares of Common Stock immediately prior to the closing of this Offering. (4) Adjusted to give effect to the sale of Common Stock offered hereby at an assumed initial public offering price of $9.00 and the application of the net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001013036_drilex_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001013036_drilex_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary should be read in conjunction with the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, (i) information in this Prospectus assumes that the Underwriters' over-allotment option is not exercised, (ii) all share and per share data in this Prospectus have been adjusted to reflect an approximately 1.81-for-one stock split of the Common Stock effected in May 1996, and (iii) industry data relating to the worldwide drilling industry or precision drilling segment excludes the Commonwealth of Independent States and China. The pro forma amounts set forth in this Prospectus, unless otherwise indicated, reflect the pro forma effects of the Sharewell Acquisition and the ENSCO Technology Acquisition (each as defined herein) on the operations of the Company on the basis set forth in the Unaudited Pro Forma Condensed Consolidated Statement of Income of the Company included in this Prospectus. THE COMPANY BUSINESS OVERVIEW Drilex is a leading provider of products and services used in directional, horizontal and other precision drilling of oil and gas wells, oilfield workover operations, environmental remediation applications, and trenchless pipeline and cable laying applications. Precision drilling involves the combined use of a steerable downhole positive displacement drilling motor and a guidance system to enable the controlled placement of a borehole through predetermined locations. Drilex employs this technology to drill to depths ranging from near surface to more than four miles. The Company's products and services include comprehensive computerized well planning and engineering services, supervision of drilling operations and project management, a full range of high performance downhole positive displacement motor systems, guidance systems (such as measurement-while-drilling ("MWD") instrument systems and steering tools), and other related downhole tools. Oilfield applications accounted for approximately 86% of the Company's revenues (on a pro forma basis) in 1995. The Company currently operates from 23 locations around the world and has approximately 390 employees. Drilex was one of the pioneers in the development of downhole drilling motors in the early 1980s and is now a worldwide leader in the design and manufacture of high-performance, multi-lobed positive displacement drilling motors. A positive displacement drilling motor, one of the key components in a precision drilling project, is hydraulically powered by the drilling fluids pumped into the wellbore during normal drilling operations. In addition to providing directional control, a downhole drilling motor provides the primary rotational power to the drill bit, in contrast to conventional vertical drilling, in which spinning the drillstring at the surface is the primary method for rotating the drill bit. The Company employs its drilling motors in its own service operations and also provides motors for sale or rent under the internationally recognized "Drilex" brand name to oil and gas exploration and development companies and oilfield service contractors. Drilex has designed its drilling motors to optimize flexibility, power and reliability, resulting in some of the highest power and quality ratings in the industry. Drilex believes it is the only independent company focused on providing precision drilling services that designs and manufactures the primary components of its own drilling motors. The Company believes that its ability to design and manufacture its own drilling motors provides it with distinct competitive advantages, both in terms of the performance characteristics of its motors and the quality of service that Drilex is able to provide to its customers. Industry Overview. Oilfield applications currently comprise the largest part of the precision drilling market, which is a relatively new segment of the overall drilling industry. Based on industry sources, the Company estimates that the number of oil and gas wells drilled in the United States using precision drilling technology increased 56% from 2,110 in 1990 to 3,288 in 1995. As a result of an overall decrease in oil and gas drilling activity, this growth has resulted in the proportion of oil and gas wells drilled in the United States employing DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR THE ACCOUNTS OF OTHERS IN THE COMMON STOCK PURSUANT TO EXEMPTIONS FROM RULES 10B-6, 10B-7 AND 10B-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934. precision drilling technology increasing from 7% in 1990 to 17% in 1995. This growth has been driven primarily by the substantial cost savings, improvements to drilling efficiency and enhancements to reservoir production that precision drilling can provide to oilfield operators. The Company believes that these factors will continue to produce growth in the market for precision drilling services. Precision drilling can be used to develop a field with multiple wells drilled from the same offshore platform or, in environmentally sensitive areas (such as the Alaskan North Slope), from fewer surface facilities than conventional drilling would require. In addition, by drilling horizontally through a formation characterized by multiple vertical fractures, well productivity can be significantly increased and drilling costs can be reduced substantially (because fewer wells are required compared to a vertical development program). Recent developments in multilateral technology, which allow two or more horizontal wells to be drilled from the same vertical wellbore, have further enhanced well productivity and development efficiency. The technological and operational advantages of precision drilling combined with advances in the identification and location of hydrocarbons have made many marginal or otherwise uneconomical or depleted reservoirs economically feasible to produce. In addition, new "extended-reach" precision drilling technology allows many smaller offshore reservoirs, which may not be economic to develop on a stand-alone basis, to now be developed from existing offshore platforms. Advances in subsurface geological analysis (such as 3-D seismic technologies and computer-aided exploration ("CAEX") techniques), which have enhanced the identification and location of hydrocarbon deposits, combined with recent improvements in precision drilling technologies, are creating new opportunities for precision drilling services. In addition, new "slim-hole" precision drilling technology used in conjunction with small-diameter drill pipe or coiled tubing (a substitute for drill pipe) is permitting operators to re-enter old wells and drill from the existing wellbore to develop previously untapped deposits. The Company believes that North and South America currently represent a majority of the worldwide market for oilfield precision drilling services (excluding the Commonwealth of Independent States and China). The Company's oilfield activities are primarily focused on the major precision drilling markets in the United States (including the Austin Chalk formation and the U.S. Gulf of Mexico), Venezuela, the North Sea, Argentina and Canada. The Company has a significant presence in each of these markets. Oilfield Precision Drilling Applications. The Company provides comprehensive precision drilling services for oil and gas drilling and workover applications, including computerized well planning, on-site drilling supervision, maintenance and support, and post-well analysis. In many oilfield applications, precision drilling techniques offer significant economic advantages over conventional vertical drilling techniques, such as reduced drilling time and expense, increased well production and enhanced reservoir recovery. The high torque, speed and performance offered by current-generation downhole drilling motors permit the use of precision drilling techniques as a practical alternative to conventional drilling even for vertically drilled wells. Customers for oilfield precision drilling services are concentrated primarily among major and large independent oil and gas companies. Because of the complexity involved in precision drilling, these customers typically rely on specialized precision drilling service contractors to manage the entire process of drilling the horizontal or directional portion of a well. Precision drilling services require high performance drilling motors, sophisticated guidance systems and analytical tools, and an experienced staff of wellsite and technical support personnel. The Company's drilling motors operate in conjunction with various guidance systems (including MWD instrument systems and steering tools) provided by the Company or other oilfield service companies. While the Company has its own line of steering instruments, which it assembles from sub-assemblies obtained from various third parties, Drilex currently obtains its MWD instrument systems from third-party manufacturers. Environmental Remediation and Trenchless Applications. The Company has applied its technical drilling capabilities to the development of new services for the emerging environmental remediation and trenchless services markets. Drilex has become a leader in the use of shallow well horizontal drilling for remediation applications, with a particular focus on groundwater remediation activities. Horizontal drilling provides total cost and performance advantages to conventional vertical drilling of sampling and treatment wells, primarily because horizontal drilling requires fewer wells and surface installation facilities and allows contaminants beneath fixed structures to be reached. The Company's customers for environmental remediation services include environmental service contractors, engineering consulting firms, petrochemical companies, hydrocarbon transportation companies and military and other governmental organizations. The Company also provides precision drilling services and equipment and related surveying services for trenchless pipeline and cable laying applications, which primarily involve horizontal boring underneath city streets and structures to enable the "trenchless" delivery of conduits in densely built areas, as well as subsurface crossings of rivers, streams and other bodies of water. Applications for trenchless services include subsurface installations of fiber optics lines, cable systems and utility pipelines and wiring. Customers for the Company's trenchless services include telephone and other utilities, as well as general contractors. The Company's environmental remediation and trenchless services operations accounted for approximately 14% of the Company's revenues (on a pro forma basis) in 1995. The Company believes the markets for these services offer significant opportunities for growth, and they are not subject to the same degree of cyclicality that affects the oil and gas exploration and development market. Product Rentals and Sales. In addition to manufacturing drilling motors for use in its own service operations, the Company provides its full line of manufactured drilling motors and related products for rent and for sale directly to end users. Customers for product rentals and sales include oil and gas exploration and development companies, environmental service contractors and contractors engaged in providing trenchless services. The Company's third- party rental revenues currently represent approximately 20% of the Company's total revenues. Sales of drilling motors and other products to third parties also currently account for approximately 20% of total revenues. BUSINESS STRATEGY The Company's business strategy is built upon Drilex's premier line of downhole positive displacement drilling motors and emphasizes (i) providing the highest quality oilfield precision drilling and related customer support services in key geographic markets where demand for precision drilling services is concentrated, (ii) maximizing delivery of its core products, either through sales, rentals or alliance arrangements, into other geographic markets where the Company does not focus its service efforts, and (iii) capitalizing on its technical strengths by developing opportunities to deliver its core products and services into emerging oilfield and non-oilfield markets where the Company's technical expertise can provide significant advantages. The Company also intends to explore additional opportunities for external growth through acquisitions of businesses to complement the Company's existing operations. Drilex intends to maintain its position as the leading independent provider of oilfield precision drilling services by continuing its emphasis on delivering responsive, reliable and high quality services in key geographic markets. The Company currently concentrates its activities in the Austin Chalk formation (a large formation extending from South Texas to parts of Louisiana), the Gulf of Mexico, Venezuela, the North Sea, Argentina and Canada. Each of these markets is characterized by substantial field development activity (as opposed to new exploration activity) and a relatively high number of technically challenging situations that require high quality precision drilling operations. A recent independent market study conducted for the Company confirmed the Company's belief that service quality, reliability of equipment, localized knowledge of drilling conditions and experience and expertise of field personnel are the most important factors in competing for business in these markets. The Company believes that maintaining control over the entire design, engineering and manufacturing processes for its drilling motors provides the Company with distinct advantages in providing high quality service. The Company designs and builds its motors to optimize precision, power and reliability. Drilex also maintains a flexible manufacturing process that includes a continuous improvement program, which produces quality and performance improvements that enable Drilex to meet the leading-edge needs of its customers. In addition, the Company concentrates its service activities in its key geographic markets in order to develop and capitalize on the Company's local knowledge and to take advantage of the regional experience and expertise of its drilling supervisors and other technical field personnel, as well as to achieve scale operating efficiencies. Furthermore, the high level of activity conducted by the Company in concentrated geographic areas permits a focused application engineering effort, which allows the Company to refine its products and services to meet the needs of its customers on a more effective basis. The Company also utilizes other distribution channels to maximize delivery of its products to areas outside of its key geographic markets. Since its inception, the Company has successfully marketed its drilling motors on a sale and rental basis to oil and gas exploration and development companies and other oilfield service contractors under the internationally recognized "Drilex" brand name. These efforts have been particularly successful in the North Sea market, where the Company has become an established provider of drilling motors to operators and other service companies for various directional drilling and coiled tubing applications. The Company intends to strengthen its existing distribution channels and expand its product distribution in those markets where the Company is not a significant service competitor. In particular, the Company is in the process of establishing alliance arrangements with several large oilfield service companies, which would permit these companies to include Drilex motors in their comprehensive offerings of oilfield products and services in certain markets where the Company does not focus its service efforts. The Company plans to continue to build upon its technical drilling capabilities by further developing opportunities in emerging markets where the Company's expertise can provide competitive advantages. In particular, the Company believes that the development and rapid growth in the use of coiled tubing for oilfield workover, redrilling and recompletion operations has provided a significant opportunity for growth in the use of precision drilling technology for slim-hole applications. The Company has become the leading supplier of smaller diameter drilling motors and related equipment for coiled tubing operations and intends to maintain this leadership position as coiled tubing operations increasingly become a substitute for conventional drilling operations. Drilex has also been successful in developing opportunities for precision drilling in the environmental remediation and trenchless services markets, which the Company believes offer significant opportunities for growth. The Company is focusing its efforts on the high-end segments of these markets and is pursuing long-term relationships with large customers that generate substantial demand for services that can be provided by Drilex. The Company continually reviews opportunities for growth through the acquisition of other businesses to complement its existing operations. The recent Cobb and ENSCO Technology Acquisitions expanded the Company's presence in certain of its key geographic markets for oilfield precision drilling services and provided the Company with significant opportunities to expand its distribution of Drilex-manufactured motors by employing them in the newly acquired operations. In addition, the ENSCO Technology Acquisition significantly expanded the Company's MWD capabilities, providing the Company additional opportunities to deploy its products and services. The Sharewell Acquisition also provided the opportunity to expand the Company's product distribution and significantly increased the Company's service capabilities in the emerging environmental remediation and trenchless services markets. The Company will continue to explore opportunities involving acquisitions of other businesses to expand distribution of the Company's products and services, to add key technologies, to gain access to attractive industry niches, and to otherwise enhance its market presence. THE OFFERING <TABLE> <S> <C> Shares of Common Stock offered: By the Company......... 2,000,000 By the Selling Stockholder........... 361,962* Shares of Common Stock outstanding: Before the Offering.... 4,391,778 After the Offering..... 6,753,740 Use of Proceeds to the Company................. To repay long-term indebtedness, a substantial portion of which was incurred in connection with acquisitions, and for general corporate purposes. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001013050_printrak_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001013050_printrak_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..8b713d0f850e6b90329ac2a6fb925de65f789611
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION, INCLUDING "RISK FACTORS," AND CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THE COMPANY The Company designs, develops and manufactures automated fingerprint identification systems (AFIS) primarily for use in law enforcement applications, as well as in emerging applications in civil and commercial markets. The Company believes that it is a leading worldwide supplier of AFIS systems, that it has developed some of the most advanced AFIS technology in the industry, and that it has sold systems which control more AFIS databases than any other company in the world. Printrak has been a leader in the development of AFIS technology since its inception as a division of Rockwell International, delivering the world's first commercially available automated fingerprint systems to the FBI in 1975, and launching a series of product innovations since that time, including the development and introduction of the world's first distributed real-time AFIS systems in 1994. The Company's AFIS systems have been sold in over 20 countries and are being utilized by over 150 local, state and federal agencies. For the fiscal year ended March 31, 1996, the Company had total revenues of $45.7 million. The Company seeks to offer full spectrum solutions that automate law enforcement workflow, from investigation to suspect booking through identification, legal processing, incarceration and release. The Company believes that its AFIS 2000 series of products provides customers with previously unavailable, real-time search and identification capabilities. An increasing number of law enforcement agencies have specified a requirement for systems which provide positive identification of suspects within five minutes after initiating a search. The Company believes that the law enforcement market considers this capability to be "real-time." The Company's sixth generation system, the AFIS 2000, represents a comprehensive fully integrated systems architecture for the capture and input of images, image processing, search processing, and database management and is comprised of: (i) WORKSTATIONS, for fingerprint input from hard copy or live-scan, and for data input, verification, latent search, and mugshot capture; (ii) NETWORKS, which connect these remote devices to central sites; (iii) IMAGE PROCESSING TECHNOLOGY, for extracting searchable features from raw fingerprints; (iv) SCALABLE SEARCH PROCESSING TECHNOLOGY, for matching these features against existing databases; and (v) SYSTEMS FOR STORAGE AND MANAGEMENT OF VERY LARGE DATABASES, ranging in size from hundreds of gigabytes to multiple terabytes, containing compressed fingerprint and other image data. The Company believes that it is the only provider of such a comprehensive, integrated AFIS system from a single source. In practical terms, the Company believes that the improved work flow and quicker identification provided by its systems can result in reduced costs and increased efficiency for law enforcement and civil and commercial agencies, as well as improved safety for the public. According to a 1995 report by G2 Research Inc., an independent market research firm, the U.S. market for law enforcement information systems was approximately $700 million in 1995 and is projected to grow to $1.6 billion by the year 2000. The market for law enforcement information systems is highly fragmented and is characterized by the increasing volatility of technology and by the emergence of standards on a national level. Demand for AFIS systems in this market is driven by the widespread existence of databases, the lack of integration among existing law enforcement databases, and the inadequacy of conventional batch processing methodologies. The Company's strategy is to capitalize on the growing market for law enforcement information systems and to complement this growth by: delivering configurable full-spectrum solutions from a single source; selling additional products and periodic system upgrades to its existing customer base; creating new applications within the law enforcement market which can benefit from access to centralized databases through existing infrastructure; extending AFIS technology into non-law enforcement markets; advancing its technological leadership through continued new product development efforts; and pursuing selective acquisitions of companies with complementary technologies or customer bases. THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Company................... 2,000,000 shares Common Stock Offered by the Selling Stockholders...... 500,000 shares Common Stock Outstanding after the Offering........... 9,473,200 shares (1) Use of Proceeds by the Company........................ To repay certain indebtedness, to undertake capital expenditures, to pursue acquisitions and to increase funds available for working capital purposes. See "Use of Proceeds." Nasdaq National Market Symbol......................... AFIS </TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA (In thousands, except per share data) <TABLE> <CAPTION> YEAR ENDED MARCH 31, ------------------------------------------------------- 1992(2) 1993 1994 1995 1996 ----------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues: System................................................. $ 5,821 $ 19,711 $ 17,910 $ 17,553 $ 35,806 Maintenance............................................ 5,760 7,327 8,208 9,246 9,911 ----------- --------- --------- --------- --------- Total revenues....................................... 11,581 27,038 26,118 26,799 45,717 Cost of system revenues (3).............................. 3,471 11,612 9,213 10,465 21,158 Cost of maintenance revenues............................. 3,114 4,032 4,228 4,810 4,963 ----------- --------- --------- --------- --------- Gross profit............................................. 4,996 11,394 12,677 11,524 19,596 Operating expenses: Research, development and engineering.................. 2,488 686 3,630 4,301 8,558 Selling, general and administrative.................... 3,513 5,722 7,028 7,320 9,776 ----------- --------- --------- --------- --------- Total operating expenses............................. 6,001 6,408 10,658 11,621 18,334 Operating income (loss).................................. (1,005) 4,986 2,019 (97) 1,262 Other income, net........................................ 189 1,046 984 1,341 940 Income before provision for income taxes and cumulative effect of accounting change.................. (816) 6,032 3,003 1,244 2,202 Provision for income taxes............................... 233 244 1,001 218 366 ----------- --------- --------- --------- --------- Income before cumulative effect of accounting change..... (1,049) 5,788 2,002 1,026 1,836 Cumulative effect of accounting change (4)............... -- -- 5,750 -- -- ----------- --------- --------- --------- --------- Net income (loss)........................................ $ (1,049) $ 5,788 $ 7,752 $ 1,026 $ 1,836 ----------- --------- --------- --------- --------- ----------- --------- --------- --------- --------- Net income (loss) per share.............................. $ (0.15) $ 0.80 $ 1.08 $ 0.14 $ 0.24 ----------- --------- --------- --------- --------- ----------- --------- --------- --------- --------- Pro forma net income (5)................................. $ 2,344 --------- --------- Pro forma net income per share (5)....................... $ 0.28 --------- --------- </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 -------------------------- ACTUAL AS ADJUSTED (6) --------- --------------- <S> <C> <C> BALANCE SHEET DATA: Cash, cash equivalents and short-term investments................................... $ 3,518 $ 15,597 Working capital..................................................................... 10,916 23,796 Total assets........................................................................ 32,945 45,024 Long-term liabilities............................................................... 5,614 219 Total stockholders' equity.......................................................... 14,428 32,703 </TABLE> - ------------------------------ (1) As of March 31, 1996, there were 1,261,009 shares of Common Stock issuable upon exercise of outstanding stock options, of which 356,529 were then exercisable at a weighted average exercise price of $5.79 per share, none of which are included except for options to purchase 150,000 shares at an exercise price of $2.50 per share which will be exercised concurrent with this Offering. Officers and directors own 97.6% and will own 71.6% of the shares of the Company, respectively, before and after the Offering. See "Principal and Selling Stockholders." (2) Period covered is from May 10, 1991 through March 31, 1992. (3) Amount in 1996 includes additional amortization of $832,000 due to a change in the estimated useful life of capitalized software development costs. See Note 2 of Notes to Consolidated Financial Statements. (4) Effective April 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES. The cumulative effect of the adoption of this statement resulted in the recognition of a $5,750,000 gain during the year ended March 31, 1994. See Note 2 of Notes to Consolidated Financial Statements. (5) Pro forma net income and pro forma net income per share have been presented to reflect the effect of the elimination of interest expense, net of tax, associated with the repayment of $6.2 million of outstanding bank indebtedness and the reduction in compensation paid to Richard M. Giles by $450,000 to reflect the reconciliation of compensation paid to Mr. Giles in fiscal 1996 to that payable under Mr. Giles' Employment Agreement in fiscal 1997. See Note 2 of Notes to Consolidated Financial Statements. (6) Adjusted to reflect the sale of the 2,000,000 shares of Common Stock offered by the Company hereby and the application of the net proceeds therefrom and the exercise by two selling stockholders of stock options covering 150,000 shares of Common Stock, 110,000 of which are being sold in this Offering. See "Capitalization" and "Use of Proceeds." UNLESS OTHERWISE INDICATED, ALL INFORMATION PRESENTED IN THIS PROSPECTUS REFLECTS THE SALE OF THE 2,000,000 SHARES OF COMMON STOCK OFFERED BY THE COMPANY HEREBY AT AN ASSUMED PUBLIC OFFERING PRICE OF $10.00 PER SHARE AND THE APPLICATION OF NET PROCEEDS THEREFROM AFTER DEDUCTING UNDERWRITING DISCOUNTS AND COMMISSIONS AND ESTIMATED OFFERING EXPENSES PAYABLE BY THE COMPANY, AND ASSUMES THE UNDERWRITERS' OVER-ALLOTMENT IS NOT EXERCISED. SEE "DESCRIPTION OF CAPITAL STOCK" AND "UNDERWRITING."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001013148_xybernaut_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001013148_xybernaut_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..3de999fe28ef3076bf0f3f44a77ee12288e6e7c6
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, the information contained in this Prospectus assumes (i) no exercise of the Representative's Over-Allotment Option, and (ii) issuance of the Exchange Units for the Debentures. For a description of the various risks associated with purchase of the Company's Common Stock, see "Risk Factors." THE COMPANY The Company is engaged in the research, development and commercialization of mobile computer systems and related software solutions designed to enhance all aspects of personal productivity, especially in commercial, industrial and military applications. The Company's first mobile computing product is the patented Mobile Assistant(R), which is a full function body-worn, voice-controlled personal computer with a head-mounted video display providing true computing mobility through hands-free operation. With the speed, memory, data processing, multimedia and communications capabilities of a desktop PC in a lightweight unit, the Mobile Assistant(R) combines full function PC features with simultaneous user mobility. The Mobile Assistant(R) with application software is designed to allow workers with minimal training to perform complex and time consuming tasks such as maintenance, repair and inspection of complex technological and mechanical systems, retrieval and analysis of medical information from remote locations, and coordination of remote commercial and industrial activities and military field operations, in a more efficient manner than current technology allows. Purchasers of Mobile Assistants(R) have included, among others, AT&T, Rockwell International Corporation, Eaton Corporation, Martin Marietta (now Lockheed Martin), SRI International and the United States Army. Recently, Rockwell International Corporation, which manufactures the computing unit utilized in the Mobile Assistant(R), licensed from the Company the right to manufacture and market mobile computers utilizing the intellectual property and related technical know-how which has been developed by the Company. Since the introduction of the first large mainframe computers in the 1950's, there has been an ongoing evolution in the computer industry which has resulted in both reductions in the size of computer hardware and significant increases in the number and scope of software applications. The Company believes the next phase in this evolution will be the commercialization of mobile, body-worn computers which will combine portability with new and expanded software applications. Based upon the current size and projected growth of the market for all types of portable computers (i.e., less than eight pounds), the Company believes that there exists the potential to develop a substantial market for mobile computer systems and related software. The Company also believes that, with the advent of hands-free mobile computing, the Mobile Assistant(R) can be used to capitalize on the development of new markets by providing computer capability in environments and applications where computer capability previously was unavailable due to environmental constraints and hardware and software limitations. The Mobile Assistant(R) utilizes technologically advanced features such as real time, two-way video and audio communications through radio frequency transmissions, integrated cellular linkups and conventional telephone lines, global positioning system tracking capabilities, and access to information through the Internet and World Wide Web. The head-mounted display unit includes a two-way audio system, weighs less than 16 ounces and presents a monochrome image that is approximately equivalent to that of a 14" VGA monitor. The body-worn computing unit is designed with a case allowing operation in environmental extremes in which conventional portable computers could not previously operate, weighs less than three pounds and is capable of running software applications designed for Microsoft Windows and Windows 95, DOS and SCO UNIX. The Company intends to utilize its software development expertise acquired through custom programming, including development of a graphical user interface and neutral data storage systems for United States intelligence agencies, to create standard and custom software toolkits for commercial applications. Software toolkits provide a cost-effective platform for user customized programs for the storage, processing and retrieval of information necessary for specific commercial, industrial, military and other applications. The Company is the exclusive licensee for body-worn applications of the Mobile Inspector(TM), its first custom software toolkit, which develops protocols and procedures to facilitate inspection of commercial, industrial and military facilities and equipment. The Company intends to integrate its hardware and software capabilities to provide total mobile computing solutions, thereby capitalizing on all aspects of the Company's expertise. Front: Pictures of Mobil Assistant hardware and of workers utilizing the Mobil Assistant while performing technical tasks. The Company is developing mobile computing systems to provide simultaneous "hands-free" access to computerized data and information to technical personnel while working in various applications including: - Commercial maintenance: There are over 5,460,000 mechanics and technicians (U.S. Bureau of Labor, 1996) in the United States alone engaged in the maintenance and repair of equipment in such industries as construction, transportation and telecommunications. - Military: The Mobile Assistant(R) has been tested by United States Army technicians for the maintenance and repair of the AH64 Apache Attack helicopter. The Army also is performing feasibility studies on more specialized versions of body-worn computers, including components of the Mobile Assistant(R), for coordination of personnel movement and artillery support. There are an estimated 700,000 mechanics in the U.S. Armed Forces. - Emergency healthcare: The Mobile Assistant(R) is designed to provide a direct voice, video and data link between emergency medical personnel and emergency room physicians to facilitate the remote diagnosis and treatment of patients and can transmit global positioning and patient information to medical helicopters and other evacuation vehicles transporting the critically ill and injured. The Company's objective is to become a leading supplier of integrated mobile computing systems for use in a broad variety of commercial, industrial and military applications. The Company intends to achieve this objective by (i) continuing development of the functions and capabilities of the Mobile Assistant(R), (ii) achieving market penetration for planned application development software toolkit products, (iii) expanding and developing specific software applications for the Mobile Assistant(R) through introduction of custom software toolkits, such as the Mobile Inspector(TM), (iv) initiating a sustained marketing program for its hardware and software products through value added resellers ("VARs") and original equipment manufacturers ("OEMs"), and (v) establishing technological leadership through continuous systems innovation to meet the needs of a broad range of end users. Through these strategies, the Company believes it will be well positioned to take advantage of anticipated growth and expansion of the mobile computing industry. THE OFFERING <TABLE> <S> <C> Securities offered...................... 2,000,000 Units, each Unit consisting of one share of Common Stock and one Warrant. Each Warrant entitles the holder to purchase one share of Common Stock at a price of $9.00 per share at any time from the date hereof until , 1999, subject to the Company's right to redeem the Warrants under certain circumstances. See "Description of Securities -- Warrants." Common stock outstanding prior to this offering(1)........................... 10,387,789 shares Common stock outstanding after this offering(1)(2)........................ 13,819,218 shares Use of Proceeds......................... The net proceeds of the offering will be used for: (i) marketing and sales, (ii) acquisition of inventory for the Mobile Assistant, (iii) research and development, (iv) capital expenditures, (v) repayment of indebtedness, (vi) acquisition of an affiliate, and (vii) working capital, including general and administrative expenses. See "Use of Proceeds." </TABLE> <TABLE> <CAPTION> PROPOSED SYMBOLS NASDAQ - --------------------------------------------------------------------------------- -------- <S> <C> Units............................................................................ XYBRU Common Stock..................................................................... XYBR Warrants......................................................................... XYBRW </TABLE> - --------------- (1) Includes 1,800,000 shares of Common Stock held in escrow and subject to release upon the Company achieving certain objectives in the 12-month periods ending September 30, 1997, 1998 and 1999. Does not include 300 shares of Tech Virginia. See "Principal Stockholders -- Escrowed Shares." (2) Excludes (i) 921,530 shares of Common Stock issuable upon the exercise of currently outstanding options and warrants, (ii) 2,000,000 shares of Common Stock issuable upon the exercise of the Warrants and 1,431,429 shares of Common Stock issuable upon exercise of the Exchange Warrants, (iii) 600,000 shares of Common Stock issuable upon exercise of the Over-Allotment Option and the shares issuable upon the exercise of the Warrants underlying the Units in such Option, and (iv) up to 400,000 shares of Common Stock issuable upon full exercise of the Representative's Unit Purchase Option (as hereinafter defined) and Warrants included in the Unit Purchase Option. See "Management" and "Underwriting." [FOUR COLOR PICTURES TO COME] Mobile Assistant(R) is a registered trademark, and Mobile Inspector(TM) is a trademark, of Xybernaut Corporation. This Prospectus also contains trademarks of other companies. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE UNITS, COMMON STOCK AND WARRANTS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. On the effective date of the Registration Statement of which this Prospectus forms a part, the Company will become a "reporting company" under the Securities Exchange Act of 1934 (the "1934 Act"). The Company intends to register the Units, Common Stock and Warrants under the 1934 Act as of the effective date of the Registration Statement. The Company is a "small business issuer" as defined under Regulation S-B adopted under the Act and will file reports with the Commission pursuant to the 1934 Act on forms applicable to small business issuers. The Company intends to furnish its stockholders with annual reports containing audited financial statements and such other periodic reports as the Company may from time to time deem appropriate or as may be required by law. SUMMARY COMBINED FINANCIAL DATA <TABLE> <CAPTION> NINE MONTHS ENDED THREE MONTHS ENDED MARCH YEAR ENDED MARCH 31, DECEMBER 31, 31, ------------------------- ------------------------- ------------------------- 1994 1995 1994 1995 1995 1996 ----------- ----------- ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> Statement of Operations Data(1): Revenues...................... $ 16,981 $ 79,324 $ 52,250 $ 352,648 $ 27,074 $ 315,371 Operating expenses............ 56,541 1,325,715 873,472 2,211,675 452,243 769,580 Cost of sales................. 8,155 61,301 35,544 263,621 25,757 228,289 Net loss...................... (47,352) (1,303,892) (853,249) (2,141,190) (450,643) (699,386) Net loss per share............ -- $ (0.12) $ (0.08) $ (0.18) $ (0.04) $ (0.06) Weighted average shares outstanding................. 10,200,244 11,164,748 10,984,499 11,793,120 11,715,505 11,803,618 </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 ----------------------------------------------------------- DECEMBER 31, 1995 ACTUAL PRO FORMA(2) ADJUSTED(3) ----------------- ----------------- ----------------- ----------------- <S> <C> <C> <C> <C> Balance Sheet Data: Working capital (deficit)...................... $ (38,534) $ (535,174) $ 324,826 $ 8,474,826 Total assets................................... 1,393,538 1,093,255 2,233,255 9,671,964 Total liabilities.............................. 2,486,491 2,882,594 4,022,594 1,222,836 Stockholders' equity (deficit)................. (1,092,953) (1,789,339) (1,789,339) 8,449,128 </TABLE> - --------------- (1) The Company changed from a fiscal year ended March 31 to a calendar year ended December 31 effective for the transition period ended December 31, 1995. (2) In April 1996 the Company sold $1,000,000 in principal amount of the Debentures. Pro forma balance sheet information was prepared assuming these Debentures were outstanding as of March 1996. See Note 13 to Combined Financial Statements. (3) Adjusted to give effect to the sale of 2,000,000 Units offered hereby at an assumed offering price of $5.00 per Unit, and the application of the estimated net proceeds therefrom. See "Use of Proceeds." The Company was incorporated in Virginia in October 1990 and was reincorporated in Delaware in April 1996. The Company's principal executive offices are located at 12701 Fair Lakes Circle, Suite 550, Fairfax, Virginia, 22033, and its telephone number is (703) 631-6925. As used herein, the term "Company" includes references to Xybernaut Corporation and Tech International of Virginia, Inc., an affiliate of the Company. See "Certain Transactions -- Tech International and Tech Virginia."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001013149_ict-group_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001013149_ict-group_prospectus_summary.txt
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+SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and Financial Statements and Notes thereto, appearing elsewhere in this Prospectus. THE COMPANY ICT Group, Inc. ("ICT" or the "Company") is an independent provider of call center teleservices, which consist of outbound and inbound telemarketing and customer support services, together with related value-added services such as marketing, research and consulting services, to businesses domestically and internationally. The Company's call center management experience, technological leadership and expertise in target industries enable it to provide its clients with high quality, cost-effective call center services. In addition to supporting customers' teleservices programs from its own call centers, ICT is pursuing opportunities to manage clients' call centers on a contract basis. The Company believes there is a trend by businesses to outsource many of their internal telephone sales, customer service and product support functions. In order to capitalize on this trend, the Company is incurring certain startup costs and expenses (the amount of which has not been material to date). Although the Company has recently entered into two call center management contracts, as of March 31, 1996, the Company had not received any revenues from the contracts. The Company believes it was among the first teleservices firms to establish international call centers with multilingual capabilities, which it intends to further expand to meet the global needs of multinational clients. In articles published by Telemarketing and Call Center Solutions magazine in March and April 1996, the Company was recognized as the 8th largest outbound and the 20th largest inbound independent telemarketing service agency in the country, for the 12-month period through November 1995. With 24 domestic and international call centers utilizing 1,648 automated workstations, ICT has grown significantly since becoming an independent company in 1987, and its net revenues increased by more than 50% per year in each of the last two years, from $22.3 million in 1993 to $52.1 million in 1995. The Company's current customers include Mass Marketing Insurance Group ("MMIG"), which represented approximately 43% of the Company's revenues in 1995, and Advanta, Alpha Software, Bertelsmann Music Group, Citibank, Greater Atlantic Health Service, MBNA, MCI, J.C. Penney Life Insurance Company, Providian, SmithKline Beecham, Sun Microsystems, TV Guide and the United States Army. No customer, other than MMIG, accounted for more than 4.5% of the Company's revenues in 1995. In general, the Company's customers have written agreements with the Company that are typically terminable with 30 days notice. Direct Marketing magazine estimates that telemarketing industry expenditures in the United States were approximately $77 billion in 1995. The Company believes that all but a small percentage of this spending was incurred for services performed by in-house call centers. The call center teleservices industry is highly fragmented, consisting primarily of in-house sales and service organizations but also including numerous independent call center operations, many of which are technologically unsophisticated and provide only a limited range of services. Telemarketing and other call center services have evolved rapidly in recent years, as businesses have increasingly turned to outside specialists that have industry-specific expertise and utilize highly personalized and technologically sophisticated services, to target and support consumer and business customers. At the same time, the use of telemarketing and other call center services has expanded and is continuing to expand to include more complex applications, new industries and broader geographic markets. ICT directly addresses the growing demand for cost-effective, comprehensive teleservices by providing its clients with high quality services, expertise in target industries, marketing, research, consulting and other value-added services, multilingual capabilities and international presence. The Company believes its technology leadership and focus on a limited number of industries enable it to provide its clients with highly effective marketing and customer service capabilities. ICT has expanded beyond its traditional markets of insurance, financial services, publishing and telecommunications to include the pharmaceutical, health care services and computer software and hardware industries, which are emerging as areas of rapid growth in the use and outsourcing of call center teleservices. The Company believes that its focus on a limited number of target industries, combined with its innovative technology and operations experience, has positioned it to secure call center management relationships. ICT has successfully completed and integrated several key acquisitions and entered into joint ventures to broaden its range of teleservices capabilities, including inbound teleservices, research data collection, telebanking and international multilingual telemarketing services targeted at non-English speaking markets in the United States, Europe, Latin America and Canada. The Company intends to pursue continued expansion through a combination of internal growth, strategic alliances, and acquisitions of domestic and international businesses that provide teleservices that are complementary to ICT's core telemarketing expertise. THE OFFERING <TABLE> <CAPTION> <S> <C> Common Stock offered by the Company ................. 2,411,552 shares Common Stock offered by the Selling Shareholders ..... 88,448 shares Common Stock to be outstanding after this offering ... 11,500,000 shares(1) Use of Proceeds ...................................... To repay indebtedness, to pay a distribution of S corporation earnings, and for working capital and other general corporate purposes, including possible future acquisitions. Proposed Nasdaq National Market symbol ............... ICTG </TABLE> SUMMARY FINANCIAL DATA (In thousands, except per share data) <TABLE> <CAPTION> Three Months Ended Year Ended December 31, March 31, ---------------------------------------------------------- --------------------- 1991 1992 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- -------- --------- <S> <C> <C> <C> <C> <C> <C> <C> Statement of Operations Data: Net revenues ........... $16,019 $17,502 $22,271 $34,123 $52,116 $9,294 $16,220 Operating income ....... 702 388 895 1,409 2,404 226 657 Net income before taxes . 336 50 569 898 1,570 62 424 Pro forma net income(2) . 903 254 Pro forma net income per share(2) .............. $ .09 $ .03 Shares used in computing pro forma net income per share(2) .............. 9,697 9,697 </TABLE> <TABLE> <CAPTION> March 31, 1996 -------------------------------------------- Pro Forma As Actual Pro Forma(3) Adjusted(3)(4) ---------- ------------ --------------- <S> <C> <C> <C> Balance Sheet Data: Working capital (deficit) ............................. $(2,484) $(5,078) $20,821 Total assets .......................................... 21,418 21,418 36,366 Long-term debt, less current maturities ............... 705 705 -- Capitalized lease obligations, less current maturities . 1,811 1,811 -- Shareholders' equity .................................. 4,294 658 29,073 </TABLE> (1) Excludes shares of Common Stock issuable upon the exercise of outstanding options. As of the date of this Prospectus, there were 1,121,602 shares of Common Stock reserved for issuance upon the exercise of outstanding options with a weighted average exercise price of $.37 per share (excluding 88,448 shares of Common Stock underlying options to be exercised by the Selling Shareholders in connection with this offering) and 1,150,000 shares of Common Stock reserved for future issuance under the Company's stock plans. See "Management -- Employee Benefit Plans."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001013159_telco_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001013159_telco_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information, including risk factors and consolidated financial statements and notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus (i) assumes an estimated initial public offering price equal to $16 (the midpoint of the range shown on the cover page of this Prospectus) and that the U.S. Underwriters' and the Managers' over-allotment options are not exercised, (ii) has been adjusted to give effect to a 425- for-1 stock split to occur immediately prior to the consummation of the Offerings (the "Stock Split") and (iii) reflects the consummation of the "Reorganization" as defined below and described in "Management's Discussion and Analysis of Financial Condition and Results of Operations--The Reorganization." References in this Prospectus to the "Company" and "Telco" refer to Telco Communications Group, Inc. and its subsidiaries, except where the context otherwise requires. THE COMPANY Telco is a rapidly growing switch-based provider of domestic and international long distance telecommunication services primarily to residential customers in the United States. Substantially all of the Company's customers access its network by dialing a unique carrier identification code ("CIC Code") before dialing the number they are calling. Using a CIC Code to access the Company's network is known as "casual calling" because customers can use the Company's services at any time without changing their existing long distance carrier. The Company markets its long distance services under two brands, each with a unique CIC Code: Dial & Save (CIC Code 10457) and the Long Distance Wholesale Club (CIC Code 10297), and prices its services at a discount to the basic "1 plus" rates offered by the three major long distance carriers: AT&T Corp. ("AT&T"), MCI Communications Corporation ("MCI") and Sprint Corporation ("Sprint"). During May 1996, the Company provided long distance services to approximately 2.6 million customers (switched access lines) in 37 states and the District of Columbia. The Company plans to expand its marketing efforts in these states and to offer service in one additional New England and 10 additional western states during 1996. Since the Company began operations in November 1993, its revenues and net income have grown to approximately $215.4 million and $10.8 million, respectively, for the year ended December 31, 1995, and to $91.9 million and $3.3 million, respectively, for the three months ended March 31, 1996. Although casual calling has been in existence since the mid-1980s, only recently have companies such as Telco begun to aggressively pursue this market opportunity. The Company markets its services primarily through direct mail and inbound telesales and marketing, and believes that this marketing strategy enables the Company to attract residential customers in a cost effective manner. Because casual calling customers are not required to cancel or change their presubscribed long distance carrier, the Company believes that aggressive "win-back" and other customer acquisition programs prevalent in the residential long distance market have a limited impact on the Company's business. See "Risk Factors--Response Rates; Customer Attrition." The Company bills its casual calling customers through local exchange carrier ("LEC") billing and collection agreements which enable the Company to place its charges on the monthly local phone bills of its residential casual calling customers. The Company has entered into billing and collection agreements with LECs, including all of the Regional Bell Operating Companies ("RBOCs"), that cover approximately 96% of the switched access lines in the United States. The Company believes that these billing arrangements are the most effective mechanism for billing its residential customers, because of the convenience to its customers of receiving one bill for both local and long distance service and the benefits derived from the LECs' extensive collections infrastructure. The Company's billing information systems and services are provided by Tel Labs, Inc. ("Tel Labs"), a telecommunications billing company organized in 1991 by Telco's Chairman of the Board. During May 1996, Tel Labs processed approximately 98 million call records for 17 telecommunications companies, including Telco. Concurrently with the completion of the Offerings, Telco will acquire all of the outstanding capital stock of Tel Labs. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--The Reorganization." To increase its volume of call traffic, Telco has begun to sell its excess daytime capacity on a wholesale basis to other long distance carriers and has created a Commercial Division to target business customers. Because the Company's existing customer base is primarily residential, the majority of the Company's current calls are handled during off-peak evening and weekend periods. The Company's switch-based network currently consists of six Digital Switch Corporation ("DSC") DEX 600S, 600 and 600E switches located in Washington, D.C.; Fort Lauderdale, Florida; Davenport, Iowa; Chattanooga, Tennessee; and Austin, Texas, with one DEX 600E switch which recently became operational in Las Vegas, Nevada. Additionally, the Company has made a committment to install a DEX 600E switch in the New York City metropolitan area by the first quarter of 1997. The Company's state-of-the-art digital switching and cross-connect systems are designed to optimize traffic routing and provide for automatic traffic re-routing in the event of a network failure. The Company leases transmission lines from a variety of facilities-based long distance service providers. The Company's sophisticated switch-based network (i) enables it to control proprietary information such as customer call records and (ii) positions it to take advantage of competitive rates for local access from Competitive Local Exchange Carriers ("CLECs"), such as MFS Communications Company, Inc. ("MFS") and Teleport Communications Group, Inc. ("Teleport"). The Company's strategy is to achieve continued growth by providing a broad array of competitively priced long distance services. The Company's primary objectives in pursuing this strategy are to (i) continue to increase the number of its casual calling distribution channels and further establish brand loyalty through remarketing activities in its existing markets and expansion into new markets; (ii) target business customers to more fully utilize its network's daytime capacity by developing a direct sales force as part of its Commercial Division; (iii) expand the Company's network while continuing to focus on providing low cost nationwide origination and termination capabilities; and (iv) offer innovative products and services to new and existing customers by leveraging the Company's network and operating infrastructure and billing and information systems. The address of the Company's principal place of business is 4219 Lafayette Center Drive, Chantilly, Virginia 20151, and its phone number is (703) 631- 5600. THE OFFERINGS Common Stock to be sold by the Company: <TABLE> <S> <C> U.S. Offering.................. 4,880,000 shares International Offering......... 1,220,000 shares ----------------- Total........................ 6,100,000 shares Common Stock to be sold by Selling Shareholders(1): U.S. Offering.................. 2,080,000 shares International Offering......... 520,000 shares ----------------- Total........................ 2,600,000 shares Common Stock to be Outstanding after the Offerings............. 34,273,411 shares(2) Use of Proceeds.................. To repay outstanding indebtedness and for working capital and other general corporate purposes, including expansion of the Company's Commercial Division. The Company will not receive any proceeds from the sale of Common Stock by the Selling Shareholders. Nasdaq National Market Symbol.... TCGX </TABLE> - -------- (1) Includes 682,082 shares to be sold by one of the Selling Shareholders, Signet Media Capital Group, which will be purchased by it immediately prior to sale in the Offerings through the exercise in full of an outstanding warrant to purchase such shares for a nominal exercise price (the "Signet Warrant"). See "Description of Capital Stock--The Signet Warrant." (2) Includes 593,334 shares of Common Stock to be issued concurrently with the consummation of the Offerings in exchange for all of the outstanding common stock of Tel Labs and the 5,102,125 shares of Common Stock which were issued during the second quarter of 1996 in exchange for the remaining minority interest in Long Distance Wholesale Club ("LDWC") (such exchanges are collectively referred to as the "Reorganization"). See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- The Reorganization." Also includes 649,198 shares of Common Stock issued pursuant to the exercise of options on June 21, 1996 at a weighted average exercise price of $0.44 per share, 112,996 shares of Common Stock to be issued pursuant to options that will be exercised concurrently with the Offerings at a weighted average exercise price of $2.12 per share and 169,575 shares to be issued concurrently with the consummation of the Offerings upon the exercise of options by Natalie J. Marine-Street at an exercise price of $1.76 per share (which shares will not be sold in the Offerings). Excludes 2,693,560 shares of Common Stock issuable upon the exercise of currently outstanding options of which options for 1,004,163 shares of Common Stock are currently exercisable. Immediately prior to the Offerings, the Company intends to grant to approximately 30 non-executive employees options to purchase up to an aggregate of 600,000 shares of Common Stock at an exercise price equal to the initial public offering price per share, which options will vest in one-third increments on the first, second and third anniversaries of the date of grant. See "Description of Capital Stock--Stock Option Plan" and "Management--Amended and Restated 1994 Stock Option Plan." SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL DATA <TABLE> <CAPTION> PERIOD FROM YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31, INCEPTION(1) ------------------------------ ---------------------------- THROUGH HISTORICAL PRO FORMA, HISTORICAL PRO FORMA, DECEMBER 31, ----------------- AS ADJUSTED ---------------- AS ADJUSTED 1993 1994 1995 1995(2) 1995 1996 1996(2) ------------ ------- --------- ----------- ------- -------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER MINUTE AMOUNTS) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues, net........... $ 1,135 $44,707 $ 215,376 $217,011 $45,277 $ 91,928 $ 92,392 Cost of services....... 993 27,736 133,728 134,384 28,079 54,730 55,005 Gross margin............ 142 16,971 81,648 82,627 17,198 37,198 37,387 Selling, general and administrative........ 1,310 12,018 55,936 56,118 10,186 27,863 27,605 Depreciation and amortization.......... 54 496 3,326 5,006 452 1,433 1,856 Operating income (loss)................. (1,222) 4,457 22,386 21,503 6,560 7,902 7,926 Interest expense....... 25 897 2,952 -- 591 1,066 -- Other income (expense)............. -- 15 (92) (68) 4 13 57 Provision for income taxes................. -- 1,432 7,531 9,046 2,326 3,135 3,743 Minority interest...... -- 137 1,046 -- 109 433 -- Net income (loss)....... $(1,247) $ 2,006 $ 10,765 $ 12,389 3,538 3,281 4,240 Net income (loss) per share(3)(4)............ $ (0.05) $ 0.07 $ 0.38 $ 0.38 $ 0.12 $ 0.12 $ 0.13 Weighted average number of shares outstanding (in thousands)(3)(4)... 26,149 27,129 28,442 32,752 28,434 28,502 32,812 BALANCE SHEET DATA (AT PERIOD END): Cash and cash equivalents............ $ 140 $ 475 $ 937 $ 1,300 $ 37,564 Total assets............ 2,051 33,533 87,124 108,928 191,147 Total debt (including capital lease obligations)........... 1,559 18,884 44,410 54,437 -- Minority interest....... -- 137 1,183 1,617 -- Shareholders' equity (deficit).............. (376) 1,655 12,420 15,701 153,519 OTHER OPERATING DATA: Minutes of use (in thousands)(5).......... 1,384,300 653,123 Revenue per minute of use(6)................. $ 0.156 $ 0.141 Cost of services per minute of use(7)....... $ 0.097 $ 0.084 </TABLE> - -------- (1) The Company was incorporated in Virginia on July 21, 1993, and commenced operations in November 1993. (2) Adjusted to give pro forma effect to (a) the Offerings and the application of the proceeds therefrom and (b) the Reorganization. See "Use of Proceeds," "Pro Forma Consolidated Financial Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations-- The Reorganization." (3) Historical net income per share and weighted average number of shares outstanding give effect to the 425-for-1 stock split, an offering price of $16 per share, which price is used to measure the potentially dilutive effect of options granted since June 13, 1995, and the issuance of 5,102,125 shares of Common Stock in connection with the acquisition of all outstanding shares of LDWC (excluding shares held by the Company). The consolidated financial statements of the Company included elsewhere in this document assume an offering price of $15. See "Description of Capital Stock--Stock Option Plan" and "Management--Amended and Restated 1994 Stock Option Plan." (4) The net proceeds from the sale of approximately 3,716,000 shares of Common Stock offered by the Company hereby will be used to repay certain indebtedness. Pro forma as adjusted net income per share is calculated assuming that only these shares had been issued and the indebtedness repaid as of the beginning of the period. Pro Forma as adjusted net income per share also reflects the issuance of 593,334 shares of Common Stock in connection with the acquisition of all outstanding shares of Tel Labs. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--The Reorganization."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001013170_silicon_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001013170_silicon_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..07a03cdbff39b6f7627f54c8d7c81578d79f7629
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+++ b/parsed_sections/prospectus_summary/1996/CIK0001013170_silicon_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the information, including financial information, appearing elsewhere in this Prospectus. Except as otherwise noted, all information in this Prospectus, including financial information, shares and per share data: (i) gives effect to a 2-for-3 reverse stock split to be effected prior to or concurrently with this offering; (ii) reflects the automatic conversion of the Company's outstanding Redeemable Preferred Stock (other than the Series A1 and Series B1 Redeemable Preferred Stock) into an aggregate of 3,528,349 shares of Common Stock upon the completion of this offering; and (iii) assumes that the Underwriters' over- allotment option is not exercised. See "Underwriting." THE COMPANY Silicon Gaming, Inc. ("SGI" or the "Company"), a development stage company, is engaged in the design and development of what it believes will be the next generation of interactive slot machines for use in casinos and other gaming establishments. The Company's product combines an advanced multimedia gaming platform with software-based games that the Company believes will be more engaging and entertaining than other gaming devices currently available and will, as a result, generate increased gaming revenue per device ("win per machine") for the casino operator. The Company has manufactured several fully functioning prototypes and has applied for product approval in Nevada, and, if approved, expects to be able to ship its first product for commercial trial in late 1996. As of July 3, 1996, the Company had received nonbinding commitments to install and evaluate its gaming platform from Bally's Las Vegas, Boulder Station Hotel & Casino, Caesars Palace Las Vegas, Circus Circus Hotel & Casino, Excalibur Hotel Casino, the Flamingo Hilton, Grand Casino Biloxi, Grand Casino Gulfport, Grand Casino Tunica, Hard Rock Hotel & Casino, Harrah's Las Vegas, ITT Sheraton Desert Inn, Sheraton Tunica, Luxor Hotel Casino, MGM Grand Hotel/Casino, New York-New York Hotel/Casino, Palace Station Hotel & Casino, Station Casino Kansas City, St. Charles Riverfront Station, Stratosphere Hotel & Casino and Texas Station, each of which has agreed to install and evaluate from eight to 30 of the Company's machines. Collectively, these casinos have agreed to install approximately 400 units. Notwithstanding these nonbinding commitments, SGI has generated no revenues to date and does not expect to become profitable until at least the third quarter of 1998. The Company's gaming platform features high resolution video presented across the full surface of a large touchscreen display. The games feature high quality animation, video clips, digital sound and a level of visual appeal and interactivity that the Company believes is unattainable by the current generation of slot machines. The Company is attempting to maximize the entertainment value offered by the two-dimensional surface of the video screen by providing multiple levels of achievement within the same game, so that, through successful play over a period of time, a player may advance to a bonusing sequence and win additional jackpots. Utilizing these features, SGI believes that its products will encourage longer and more frequent periods of play by existing slot machine customers and attract new gaming customers who are seeking greater entertainment value than that offered by the current generation of slot machines. In addition, the Company has designed its machines with a number of features, such as play stoppage entertainment, modular components, and the Company's Machine Management System software, which provides easy-to-use diagnostics designed to minimize player inconvenience and machine down-time. HISTORY The Company was founded in 1993 by executives in the high technology and multimedia entertainment industries who believed that existing "hardware dominant" slot machines were not fully utilizing available technology and entertainment capabilities. These founders believed that the slot machine experience, enhanced by the application of multimedia technology and production practices, would be more entertaining to slot players, resulting in longer and more frequent periods of play and thus greater win per machine for casino operators. In October 1994, the Company hired Andrew S. Pascal from The Mirage Hotel and Casino, where he served as Director of Slot Operations and Marketing. Based on his experience, Mr. Pascal agreed that SGI had identified a significant market opportunity that was not being addressed by existing slot machine vendors. Since joining the Company, Mr. Pascal has had principal responsibility for the design specifications of the Company's game platform and has supervised development of the various games that will be offered on the Company's machines. In June 1995, the Company hired its first full-time Chief Executive Officer, Donald J. Massaro, a founder and Chief Executive Officer of several technology companies. In the course of its development, SGI has built relationships with a number of organizations and individuals in the high technology and gaming industries. In addition, the Company has attracted investment capital from venture capital firms and institutional investors including Kleiner Perkins Caufield & Byers, Technology Partners, Benchmark Capital Management and Capital Research and Management Company. Investors from relevant industries include Station Casinos, Inc. and International Game Technology, Inc. ("IGT") from the gaming industry, The Interpublic Group of Companies, Inc. from the advertising industry and RSA Data Security, Inc. from the data security industry. IGT, a competitor of the Company, will own approximately 2.5% of the Company's Common Stock after this offering. STRATEGY Although the gaming industry has enjoyed significant growth over the past five years, the Company believes that most of the investment over this period has been made in physical assets such as large hotels and themed attractions, and that comparatively little has been invested in further developing the actual casino games which, in the aggregate, account for a majority of the average casino's revenue. In contrast, the Company has focused its resources primarily on developing what it believes will be the next generation of interactive slot machines and on implementing its strategy of providing a gaming platform that offers slot machine players a more entertaining and engaging experience than is available from current gaming machines. The Company believes that its machines will encourage casino patrons to play more frequently and for longer periods of time and will also attract new gaming customers, particularly younger patrons who typically are not attracted to current generation slot machines. The Company believes that, as a result, its machines will outperform most existing machines in win per machine and thus motivate casino operators to supplement or replace existing slot machines with SGI products. SGI intends initially to sell its hardware platform bundled with a suite of six gaming options, play stoppage entertainment and the Company's Machine Management System. The Company believes that over time, as casino operators reach the target mix of SGI machines within their slot portfolios, software sales and upgrades will constitute an increasing percentage of its overall sales. If this occurs, the Company believes that its corporate and financial profile will resemble that of a software developer more than that of a hardware manufacturer. THE SGI PRODUCT The majority of today's slot machines are "hardware dominant," consisting of a fixed and unvarying game played out on spinning reels or a small video screen mounted within a large metal box. By contrast, the Company's products are "software dominant," in that the attraction and entertainment value of its machines is created by software programs that run SGI's games. SGI's platform is expected to offer the player a selection of different games on a single machine. Furthermore, the Company's 26-inch-diagonal touchscreen display serves both as the play field when the machine is in use and as a source of attraction by displaying sample game highlights and information, when the machine is not in use. Another benefit of a "software dominant" machine is that casino operators can quickly and easily change or upgrade games. The Company expects that casino operators will be able to upgrade SGI's machines simply by installing new software, rather than by replacing an entire slot machine. The SGI machine features a number of sophisticated technology components, including a 133-mhz Pentium processor, a 4-gigabyte hard disk drive, state-of- the-art video processing devices and a high speed PCI bus. The software powering the Company's machines is significantly more complex and flexible than the software driving the current generation of slot machines and video gaming devices. The Company believes that the programs driving current generation gaming devices utilize approximately 0.1 megabytes of information. By contrast, each of the Company's games utilizes several hundred megabytes of information, requiring storage on a high capacity hard drive. The Company has completed development of one game, Fort Knox, and expects that, by the time it is approved to ship product in late 1996, it will have completed a suite of six gaming options that are currently in various stages of development, play stoppage entertainment and its Machine Management System. The Company's product strategy is initially to develop sophisticated and entertaining highly-themed versions of traditional reel-based slot and video poker machines and SGI versions of other traditional casino games, such as blackjack, craps, roulette and keno, in order to minimize intimidation or confusion of players due to an unfamiliar game format. The Company believes that products currently offered (or, to its knowledge, under development) by other vendors offer few of the multimedia features or game complexity that the Company's games will offer. The Company also intends, over the longer term, to offer sports games such as golf and horse racing and to develop new games that have not previously been presented in a gaming environment. In addition to the six gaming options it expects to have completed by late 1996, the Company currently intends to develop at least six new games per year, beginning in 1997. The Company has developed a number of proprietary product attributes and is seeking patent protection for some of them. Although licensing such technologies is not an integral part of the Company's business plan, the Company believes that it may be able to enter into business relationships with other organizations that might want to use these technologies. The Company believes that the proprietary nature of certain of these attributes, particularly its game authentication method, may provide some protection from competitors seeking to use software-based games to replicate the gaming experience offered by the Company's machine. THREE-PHASE PRODUCT INTRODUCTION The Company intends to introduce its product and begin its marketing and sales efforts in a controlled and deliberate manner, following a three-phase program through 1998: 1996: The Company's first objective will be to complete development of the product and have it licensed and available for sale in one or more jurisdictions before year-end. The Company has received nonbinding commitments to install and evaluate its gaming platform from several leading Las Vegas casinos, subject to prior receipt of regulatory approval. 1997: The Company intends to sell a limited number of machines in 1997 so that it can carefully monitor the reactions of casino patrons and operators to the Company's platform, game software and product support features, while building a sales and support infrastructure in gaming markets nationwide in preparation for a full roll-out in 1998. During this year, the Company also intends to seek licensing in additional jurisdictions. 1998: The Company intends to broaden the marketing and distribution of its platform and software games in 1998. Because of the restraints imposed by its product introduction program, the Company currently believes that 1998 will be the first year in which a reasonable assessment of the commercial potential of its products can be made. SGI was incorporated in California on July 27, 1993. Its principal offices are located at 2800 W. Bayshore Road, Palo Alto, California 94303. The Company's telephone number is (415) 842-9000. ---------------- The Silicon Gaming logo and name are trademarks of the Company. This Prospectus also includes trade names, trademarks and service marks of other companies. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company......... 3,500,000 shares Common Stock to be outstanding after this offering................................... 10,619,638 shares(1)(2) Common Stock to be outstanding after this offering, assuming conversion of Series A1 and Series B1 Redeemable Preferred Stock... 14,875,953 shares(2) Use of proceeds............................. Continued development, marketing, introduction and roll-out of the Company's products and general corporate purposes. See "Use of Proceeds." Nasdaq National Market Symbol............... SGIC </TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA (In thousands, except per share data) <TABLE> <CAPTION> PERIOD FROM THREE CUMULATIVE INCEPTION YEAR NINE MONTHS MONTHS ENDED(3) FROM INCEPTION (JULY 27, 1993) ENDED ENDED ------------------ (JULY 27, 1993) THROUGH MARCH 31, DECEMBER 31, JUNE 30, MARCH 31, THROUGH MARCH 31, 1994 1995 1995(3) 1995 1996 MARCH 31, 1996 --------------- --------- ------------ -------- --------- --------------- <S> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Operating Expenses: Research and development............ $ 79 $ 1,539 $ 3,137 $ 584 $ 1,565 $ 6,320 Selling, general and administrative......... 61 312 922 168 772 2,067 ----- ------- ------- ------ ------- ------- Loss from operations.... (140) (1,851) (4,059) (752) (2,337) (8,387) Interest income (expense).............. -- (15) 85 17 1 71 ----- ------- ------- ------ ------- ------- Net loss................ $(140) $(1,866) $(3,974) $ (735) $(2,336) $(8,316) ===== ======= ======= ====== ======= ======= Pro forma net loss per share.................. $ (0.48) $(0.09) $ (0.26) ======= ====== ======= Shares used in computation(4)......... 8,292 7,986 9,002 ======= ====== ======= </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 ------------------------------------ PRO FORMA ACTUAL PRO FORMA(5) AS ADJUSTED(6) ------- ------------ -------------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash and equivalents..................... $ 7,657 $14,866 $49,421 Working capital.......................... 7,154 14,363 48,918 Total assets............................. 9,130 16,339 50,894 Long-term debt........................... 706 706 706 Redeemable convertible preferred stock... 15,996 6,455 6,455 Deficit accumulated during the development stage....................... (8,316) (8,316) (8,316) Total shareholders' equity (deficiency).. (8,277) 8,473 43,028 </TABLE> - -------- (1) Assumes no conversion of the outstanding Series A1 and Series B1 Redeemable Preferred Stock, which may be converted into an aggregate of 4,256,315 shares of Common Stock at the option of the holders with 75 days' notice to the Company. (2) Assumes no exercise of options or warrants after March 31, 1996. As of May 31, 1996, there were outstanding options and warrants to purchase 607,270 shares of Common Stock at a weighted average exercise price of $3.22 per share. The Company has also agreed to issue the Representatives' Warrants. (3) Effective April 1, 1995, the Company changed its fiscal year end from March 31 to December 31. (4) See Note 1 of Notes to Consolidated Financial Statements for an explanation of the method used to determine the number of shares used in the computation of pro forma net loss per share. (5) The pro forma balance sheet data gives effect to the April and May 1996 sales of 1,542,000 shares of Series C Redeemable Preferred Stock, the subsequent conversion of 1,998,332 shares of Series A and 4,386,141 shares of Series B Redeemable Preferred Stock on a one-for-one basis into shares of Series A1 and Series B1 Redeemable Preferred Stock, respectively, and the automatic conversion upon the closing of this offering of all outstanding shares of Redeemable Preferred Stock, other than Series A1 and Series B1 Redeemable Preferred Stock, into 3,528,349 shares of Common Stock. (6) The pro forma as adjusted balance sheet takes into account the pro forma adjustments described in footnote 5 above as adjusted to reflect the sale of 3,500,000 shares of Common Stock at an assumed offering price of $11.00 per share, less estimated underwriting discount and offering expenses.
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, financial statements, including the notes thereto, and pro forma financial information and notes thereto appearing elsewhere in this Prospectus. Prospective investors should consider carefully the information set forth under "Risk Factors." Unless the context otherwise requires, references made to the "Company" or "ALS" shall mean Alternative Living Services, Inc., its "Predecessor," as described in the Notes to Summary Consolidated Financial and Operating Data, and its subsidiaries. Unless otherwise indicated, all share and per share data (i) assumes the Underwriters' over-allotment option will not be exercised and (ii) gives effect to the 1,812.55 for one stock split with respect to the Common Stock effected on May 17, 1996 (the "Stock Split"). This Prospectus contains certain forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from the results anticipated in these forward-looking statements as a result of certain of the factors set forth under "Risk Factors" and elsewhere in this Prospectus. THE COMPANY Alternative Living Services, Inc. is a leading national assisted living company operating 57 residences with an aggregate capacity of approximately 2,500 residents. Of these total residences, the Company owns 17, leases 23, holds equity interests in and operates eight and manages an additional nine. The Company provides a full range of assisted living services in its residences for the frail elderly and free-standing specialty care residences for individuals with Alzheimer's disease and other dementias. ALS and its predecessor have operated assisted living residences since 1981 including specialty dementia care residences since 1985. See "Business -- Residences" for a description of the Company's ownership interests in the residences operated by the Company. The Company provides a broad continuum of personal care (such as assistance with bathing, toileting, dressing, eating and ambulation), support services (such as housekeeping, laundry and transportation) and health care (such as medication administration and health monitoring) to its residents. In addition, the Company offers a wide range of specialized services, including behavior management and environmental adaptation programs, to residents who suffer from Alzheimer's disease and other dementias. All of these services are provided on a 24-hour basis in "home-like" settings which emphasize privacy, individual choice and independence. The Company operates four distinct assisted living product lines, each serving a particular segment of the private pay elderly population. Each assisted living product line is designed to permit residents to age in place by meeting their personal and health care needs across a range of pricing options. - Clare Bridge -- These specially designed free-standing residences serve the programmatic needs of individuals with Alzheimer's disease and other dementias. This upper-income model accommodates 24 to 52 residents and is primarily located in metropolitan and suburban markets. The average amount paid by residents for the month of March 1996 was approximately $3,090 (or $103 per day). - Wynwood -- Designed to serve primarily upper-income frail elderly individuals, these larger, multi-story residences are typically located in metropolitan and suburban markets. The capacity of this model ranges from 50 to 72 residents. The average amount paid by residents for the month of March 1996 was approximately $2,530 (or $84 per day). - Crossings -- These residences provide supportive services and personal care to elderly individuals in apartment-style settings. This model typically accommodates 60 to 80 residents and is generally located in metropolitan areas. The average monthly amount paid by residents for the month of March 1996 was approximately $1,600 (or $53 per day). - WovenHearts -- These smaller residences serve primarily moderate-income frail elderly individuals. This model accommodates 20 residents and has been expanded to accommodate 26 residents and is primarily located in smaller communities and rural markets. The average monthly amount paid by residents for the month of March 1996 was approximately $1,560 (or $52 per day). Since 1993, the Company has experienced significant growth through its aggressive development program and several strategic acquisitions. During this period the Company has developed or acquired 48 residences with an aggregate capacity of approximately 2,400 residents. The Company intends to continue its development strategy and is currently constructing 19 residences (i.e., construction activities have commenced and [Map of the United States with markings indicating the Company's operating residences and residences in progress. Also includes a montage of photographs depicting a Company residence under construction. The Company's logo will appear on the top of this page.] --------------------- Crossings(R) and WovenHearts(R) are registered service marks of the Company and the Company claims service mark protection in the marks Wynwood(SM) and Clare Bridge(SM). --------------------- FOR UNITED KINGDOM PURCHASERS: The shares of Common Stock offered hereby may not be offered or sold in the United Kingdom other than to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments, whether as principal or agent (except in circumstances that do not constitute an offer to the public within the meaning of the Public Offers of Securities Regulations 1995 or the Financial Services Act 1986), and this Prospectus may only be issued or passed on to any person in the United Kingdom if that person is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995 or a person to whom this Prospectus may otherwise lawfully be passed on. IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK EXCHANGE, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. are ongoing) and is developing 24 residences (i.e., the site is under control and development activities such as site permitting, preparation of surveys and architectural plans and negotiation of construction contracts have commenced). Of these residences, 15 to 21 are expected to open during 1996. The Company also intends to continue to pursue strategic acquisitions of assisted living operations. In keeping with its acquisition strategy, in May 1996, the Company acquired New Crossings International Corporation ("Crossings"), an assisted living company which operated 15 residences with a capacity of approximately 1,420 residents throughout the Western United States. This strategic merger provides the Company with access to several new geographic markets and complements its existing assisted living product lines with the addition of apartment-style assisted living residences. In January 1996, the Company acquired Heartland Retirement Services, Inc. ("Heartland"), an assisted living company which operated 20 WovenHearts residences throughout Wisconsin. As a result of this transaction, the Company has broadened its assisted living product lines to serve frail elderly individuals in moderate income markets and rural communities. The Company's management team has extensive operational and strategic experience in the health care industry. The Company's President and Chief Executive Officer, William F. Lasky, founded the Company's predecessor and has been actively involved in the assisted living industry for over 15 years. Mr. Lasky currently serves as Chairman of the Assisted Living Facilities Association of America ("ALFAA"), the nation's largest dedicated assisted living trade organization. The Company's Chairman, William G. Petty, Jr., has held senior management positions and has managed strategic investments in companies in the long-term care, assisted living and senior living industries. Mr. Petty served as the Chairman, Chief Executive Officer and President of Evergreen Healthcare, Inc. ("Evergreen"), a NYSE-listed operator of long-term care facilities, from June 1993 until July 1995, when Evergreen merged with GranCare, Inc. ("GranCare"), for which he now serves as Vice Chairman. See "Management." The assisted living industry is a rapidly growing segment within the long term care industry. The Company's target market, which consists of seniors age 75 and older, is one of the fastest growing segments of the United States population. According to the United States Census Bureau, this age group is expected to grow by 33.5% between 1990 and 2000. The Company believes that the market for assisted living services, including dementia care services, will continue to grow due to (i) the aging of the U.S. population, (ii) rising public and private cost containment pressures, (iii) declining availability of traditional nursing home beds given nursing home operators' increasing focus on higher acuity patients, (iv) quality of life advantages of assisted living residences over traditional skilled nursing homes and (v) the decreasing availability of family care as an option for elderly family members. The Company believes that it is well positioned to capitalize on these trends given its growth, operating strategies and extensive experience in the assisted living industry. THE OFFERING Common Stock offered by: The Company............................... 3,187,500 shares The Selling Stockholders.................. 2,812,500 shares(1) Total Common Stock offered.............. 6,000,000 shares Common Stock to be outstanding after the Offering.................................. 12,710,849 shares(2) Use of proceeds to the Company............ For repayment of $15.3 million of indebtedness and accrued interest, including $8.7 million in bridge financing provided by an affiliate in connection with the Heartland acquisition, for the development, construction and possible acquisition of assisted living residences and for general corporate purposes, including working capital. See "Use of Proceeds." American Stock Exchange Symbol............ ALI - --------------- (1) In the event the over-allotment option is exercised in full, an additional 131,142 shares will be sold by the Company and an additional 768,858 shares will be sold by the Selling Stockholders. (2) Excludes 789,149 shares of Common Stock issuable upon the exercise of options to purchase Common Stock outstanding as of June 30, 1996 at a weighted average exercise price of $6.08, including options granted under the Company's 1995 Incentive Compensation Plan (the "1995 Plan"). See "Capitalization" and "Management." SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA The following summary consolidated financial and operating data of the Company is qualified in its entirety by the more detailed information in the financial statements and the pro forma financial information (including the notes thereto), appearing elsewhere in this Prospectus. <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31, ------------------------------------------------------ ------------------------------------------ PRO FORMA PRO FORMA PRO FORMA AS ADJUSTED PRO FORMA AS ADJUSTED 1993(1) 1994 1995 1995(2) 1995(2)(3)(6) 1995 1996(4) 1996(5) 1996(3)(6) ------- ------ ------- --------- ------------- ------ ------- --------- ----------- (IN THOUSANDS, EXCEPT PER SHARE AND OTHER OPERATING DATA) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Operating revenue............ $2,788 $4,956 $10,464 $38,153 $38,153 $2,081 $ 4,325 $11,609 $11,609 Operating loss............... (124 ) (390) (1,046) (2,642) (2,642) (420) (1,352) (1,110) (1,110) Interest expense, net........ (56 ) (301) (813) (3,595) (2,208) (180) (391) (921) (574) Equity in income (losses) of unconsolidated affiliates................. -- (1) (438) (47) (47) 39 (85) (28) (28) Minority interest in losses of consolidated subsidiaries............... -- 49 112 125 125 23 45 45 45 Net loss before extraordinary items...................... $ (180 ) $ (643) $(1,746) $(5,978) $(4,591) $ (538) $(1,804) $(2,026) $(1,679) ====== ====== ======= ======== ============ ====== ======= ======== ========= Net loss..................... $ (180 ) $ (643) $(1,746) $ (538) $(1,804) ====== ====== ======= ====== ======= Net loss before extraordinary items per share............ $(0.22) $ (0.30) $ (0.72) $ (0.40) $(0.18) $ (0.22) $ (0.20) $ (0.13) ====== ======= ======== ============ ====== ======= ======== ========= Net loss per share........... $(0.22) $ (0.30) $(0.18) $ (0.22) ====== ======= ====== ======= Weighted average shares outstanding................ 2,959 5,863 8,304 11,358 2,959 8,060 10,240 13,294 ====== ======= ======== ============ ====== ======= ======== ========= OTHER OPERATING DATA (END OF PERIOD)(7): Number of residences......... 12 13 19 52 52 15 41 56 56 Total resident capacity...... 160 340 616 2,368 2,368 474 1,060 2,482 2,482 </TABLE> <TABLE> <CAPTION> AT MARCH 31, 1996 --------------------------------------- PRO FORMA AS ACTUAL PRO FORMA(5) ADJUSTED(3)(5) ------- ------------ -------------- (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents...................................................... $ 6,816 $ 10,449 $ 38,615 Working capital (deficit)...................................................... 5,672 (4,657) 29,537 Total assets................................................................... 53,824 93,048 121,214 Long term debt, less current installments...................................... 30,632 41,624 32,952 Redeemable common stock(8)..................................................... 1,500 3,000 -- Stockholders' equity........................................................... 17,850 29,179 75,045 </TABLE> - --------------- (1) The Company was organized December 14, 1993. In connection with the initial capitalization of the Company, substantially all of the tangible assets of two operating companies were contributed to the Company (collectively referred to herein as the "Predecessor"). For purposes of this summary financial data, amounts for the year ended December 31, 1993 represent the sum of: (i) the results of operations of the Predecessor for the period from January 1, 1993 through December 13, 1993; and (ii) the results of operations of the Company for the period from December 14, 1993 through December 31, 1993. Per share amounts for 1993 are not presented as they would not provide comparable or meaningful information. See "History and Organization -- The Company and its Predecessor." (2) Gives effect to the following transactions (collectively, the "1996 Transactions") as if such transactions had occurred on January 1, 1995 with respect to statement of operations and other operating data for the year ended December 31, 1995: (a) the January 26, 1996 acquisition by the Company (effective as of January 1, 1996) of all outstanding shares of common stock of Heartland for cash and shares of Common Stock; (b) the January 1996 sale and leaseback of two of the Company's residences; (c) the May 24, 1996 private placement of shares of Common Stock; (d) the May 24, 1996 acquisition of the remaining general and limited partnership interests not owned by the Company in various partnerships comprising the operations of ALS-Midwest (as defined herein) for a combination of cash, notes and shares of Common Stock; and (e) the May 24, 1996 merger with Crossings pursuant to which all outstanding capital stock of Crossings was exchanged for shares of Common Stock. See "Pro Forma Financial Information." (3) Gives effect to the sale by the Company of 3,187,500 shares of Common Stock (assuming an initial public offering price of $15.00 and the application of the net proceeds therefrom), as if such transaction had occurred on January 1, 1995 and 1996 with respect to statement of operations for the year ended December 31, 1995 and for the quarter ended March 31, 1996, respectively, and as of March 31, 1996 with respect to the balance sheet data. See "Pro Forma Financial Information" and "Use of Proceeds." (4) The results of the Company for the three months ended March 31, 1996 include the operations of Heartland, which was acquired effective as of January 1, 1996. See "History and Organization -- Acquisition of Heartland Retirement Services, Inc."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001013229_first_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001013229_first_prospectus_summary.txt
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+SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the consolidated financial statements and the notes thereto contained elsewhere in this Prospectus. All information regarding HFFC (as defined herein) and Home Federal (as defined herein) was prepared solely in reliance on the periodic and other reports filed by HFFC with the SEC pursuant to the Exchange Act and has not been independently verified by the Issuer. An index of defined terms used in this Prospectus (other than certain terms defined under 'Description of the Notes') begins on page 148. THE ISSUER The Issuer The Issuer is a holding company with no business operations of its own. The Issuer's only significant asset is its ownership of 80% of the common stock of First Nationwide Holdings, a holding company which owns all of the common stock of First Nationwide Bank, which is the seventh largest thrift in the United States, in terms of assets, as of June 30, 1995. As such, the Issuer's principal business operations are conducted by First Nationwide Bank and its subsidiaries, and its only source of cash to pay interest on and principal of the Notes is expected to be distributions with respect to its 80% ownership interest in First Nationwide Holdings from the net earnings generated by First Nationwide Bank, after payment by First Nationwide Holdings of amounts due on its outstanding indebtedness and certain other expenses. First Nationwide Bank First Nationwide Bank's principal business consists of operating retail deposit branches and originating and/or purchasing residential real estate loans and, to a lesser extent, certain consumer loans, and is conducted primarily in California, Florida and Texas. First Nationwide Bank also actively manages its portfolio of commercial real estate loans acquired through acquisitions and is active in mortgage banking and loan servicing. These operating activities are financed principally with customer deposits, secured short-term and long-term borrowings, collections on loans, asset sales and retained earnings. As of December 31, 1995, First Nationwide Bank had approximately $14.6 billion in assets and approximately $10.2 billion in deposits. As of December 31, 1995, after giving effect to the SFFed Acquisition, the Branch Sales, the LMUSA 1996 Purchase and the FN Holdings Subordinated Notes Offering, First Nationwide Bank would have had approximately $18.7 billion in assets and $8.6 billion in deposits. First Nationwide Bank is chartered as a federal stock savings bank under the Home Owners' Loan Act ('HOLA') and regulated by the Office of Thrift Supervision ('OTS') and the Federal Deposit Insurance Corporation ('FDIC'), which, through the Savings Association Insurance Fund ('SAIF'), insures the deposit accounts of First Nationwide Bank, up to applicable limits. First Nationwide Bank is also a member of the Federal Home Loan Bank System ('FHLBS'). Business Strategy First Nationwide Bank's business strategy is to augment its position as a leading thrift in California, principally through a combination of selective acquisitions of high quality assets and deposits, expansion of its mortgage banking and servicing operations and continued increases in its operating efficiency. The key elements of this business strategy include: o Expanding First Nationwide Bank's retail branch network in California through acquisitions of additional branches and other operations. Management believes that the West Coast region, and California in particular, offers attractive opportunities to continue to build franchise value. o Expanding and improving the efficiency of First Nationwide Bank's mortgage banking operations while increasing origination of residential loans, continuing to retain servicing on loans that it sells and evaluating opportunities to increase its servicing portfolio through purchases. o Protecting the credit quality of the assets of First Nationwide Bank through, among other things, continuing to originate single-family loans and consumer loans in accordance with stringent underwriting standards and actively managing its existing portfolio of commercial real estate loans. o Increasing First Nationwide Bank's operating efficiency by, among other things, expanding its customer base, increasing transaction account volumes and reducing costs through consolidation of certain administrative and managerial functions. o Identifying new opportunities to serve the needs of the communities in which First Nationwide Bank is located. Since October 1994, First Nationwide Bank has been active in implementing this strategy and, in connection therewith, has consummated or entered into agreements to consummate the transactions described below. See 'Strategic Acquisitions and Dispositions.' o On February 1, 1996, First Nationwide Bank acquired SFFed Corp. ('SFFed') and its wholly owned subsidiary San Francisco Federal Savings and Loan Association ('San Francisco Federal'), which, as of December 31, 1995, had approximately $4.0 billion in assets and approximately $2.7 billion in deposits (the 'SFFed Acquisition'). In connection with the SFFed Acquisition, First Nationwide Holdings issued (the 'FN Holdings Subordinated Notes Offering') $140.0 million aggregate principal amount of 9 1/8% Senior Subordinated Notes Due 2003 (the 'FN Holdings Subordinated Notes') and contributed the net proceeds therefrom to First Nationwide Bank as additional paid-in capital, which augmented First Nationwide Bank's regulatory capital to maintain its 'well capitalized' status after the SFFed Acquisition. o On December 19, 1995, First Nationwide Bank entered into a merger agreement with Home Federal Financial Corporation ('HFFC') to acquire HFFC and its wholly owned federally chartered savings association subsidiary, Home Federal Savings and Loan Association of San Francisco ('Home Federal'), which, as of December 31, 1995, had approximately $718 million in assets and $625 million in deposits and operated 15 branches in Northern California (the 'Home Federal Acquisition'). o In April 1995, First Nationwide Bank acquired approximately $13 million in deposits located in Tiburon, California from East-West Federal Bank, a federal savings bank (the 'Tiburon Purchase'). In August 1995, First Nationwide Bank acquired three retail branches located in Orange County, California with deposit accounts totalling approximately $356 million from ITT Federal Bank, fsb (the 'ITT Purchase'). On December 8, 1995, First Nationwide Bank consummated the purchase of four retail branches located in Sonoma County, California with associated deposit accounts of approximately $143.5 million from Citizens Federal Bank, a Federal Savings Bank (the 'Sonoma Purchase' and, collectively with the Tiburon Purchase and the ITT Purchase, the 'Branch Purchases'). o From September through December of 1995, First Nationwide Bank entered into contracts for the sale of its retail branches in Ohio, New York, New Jersey and Michigan (collectively, the 'Branch Sales') at prices which represent an average premium of 7.82% of the deposits sold. o On February 28, 1995, First Nationwide Bank (through its wholly owned mortgage bank operating subsidiary, First Nationwide Mortgage Corporation ('FNMC')), acquired a 1-4 unit residential mortgage loan servicing portfolio of approximately $11.4 billion and other assets and liabilities (the 'Maryland Acquisition'). o On October 2, 1995, FNMC purchased from Lomas Mortgage USA, Inc. ('LMUSA') a loan servicing portfolio of approximately $11.1 billion, $2.9 billion of mortgage servicing rights ('MSRs'), which are rights to service mortgages held by others, which MSRs are owned by third parties who have contracted with FNMC to monitor the performance, and consolidate the reporting, of various other servicers (a 'master servicing portfolio') and other assets, (the 'LMUSA 1995 Purchase'). On January 31, 1996, FNMC purchased LMUSA's remaining loan servicing portfolio which, as of December 31, 1995, totalled $14.1 billion, a master servicing portfolio of $2.7 billion and other assets (the 'LMUSA 1996 Purchase' and, together with the LMUSA 1995 Purchase, the 'LMUSA Purchases'). Management believes that these transactions have significantly increased First Nationwide Bank's presence on the West Coast, providing additional economies of scale and diversity of operations within its target California markets. As a result of these transactions, 70% of the Bank's total deposits will be located in California. Management anticipates that the SFFed Acquisition, the Branch Sales and the Home Federal Acquisition will enable First Nationwide Bank to enhance the value of its franchise and improve its operating efficiency through the consolidation or elimination of duplicative back office operations and administrative and management functions. The efficiency of a financial institution is often measured by its efficiency ratio, which represents the ratio of noninterest expense to net interest income and noninterest income. First Nationwide Bank has improved its efficiency ratio from approximately 62.2% on an annualized basis during the fourth quarter of 1994 to approximately 56.0% on an annualized basis during the fourth quarter of 1995. The Maryland Acquisition and the LMUSA Purchases will provide First Nationwide Bank with the opportunity to increase its noninterest income through fees generated from its mortgage servicing operations. First Nationwide Bank's excess servicing capacity and existing servicing expertise enabled it to accommodate the loan servicing portfolios acquired in these transactions without the need for significant additional investment. First Nationwide Bank applies stringent underwriting standards in originating single-family residential loans and consumer loans, as well as in evaluating acquisition opportunities. First Nationwide Bank has a specialized credit risk management group that is charged with the development of credit policies and performing credit risk analyses for all asset portfolios. Since October 1994, First Nationwide Bank has also used the Put Agreement (as defined herein) to mitigate credit losses on certain acquired assets, thereby improving the overall credit quality of its loan portfolio. Background First Nationwide Bank was organized as 'First Gibraltar Bank, FSB' ('First Gibraltar'), in December 1988 to acquire substantially all of the assets and certain liabilities of five insolvent Texas thrifts (the 'Texas Closed Banks') in a federally assisted transaction pursuant to an Assistance Agreement, as amended (the 'Assistance Agreement'), by and among First Nationwide Bank, FSLIC Resolution Fund (the 'FSLIC/RF') (as successor to the Federal Savings and Loan Insurance Corporation (the 'FSLIC')), First Gibraltar Holdings Inc. ('First Gibraltar Holdings') (the parent company of the Issuer) and MacAndrews & Forbes Holdings Inc. ('MacAndrews Holdings'). On December 31, 1992, First Gibraltar sold a substantial portion of its business operations in Oklahoma, consisting of approximately $3 million of loans and 27 branches with $809 million in deposits (the 'First Gibraltar Oklahoma Sale'). On February 1, 1993, First Gibraltar sold to Bank of America Texas, N.A. and Bank of America Corporation (collectively, 'BankAmerica') $829 million in loans and 130 branches with approximately $6.9 billion in deposits (the 'First Gibraltar Texas Sale'), and First Gibraltar changed its name to 'First Madison Bank, FSB' ('First Madison'). Following the First Gibraltar Texas Sale, and through September 1994, First Madison's principal business was the funding of the assets acquired from the Texas Closed Banks (the 'Covered Assets') and the performance of its obligations under the Assistance Agreement. On April 14, 1994, First Nationwide Bank entered into an Asset Purchase Agreement (the 'FNB Asset Purchase Agreement') with First Nationwide Bank, A Federal Savings Bank ('Old FNB'), an indirect subsidiary of Ford Motor Company ('Ford Motor'). On October 3, 1994, effective immediately after the close of business on September 30, 1994, First Nationwide Bank acquired substantially all of the assets (other than certain non-performing and other excluded assets) and certain of the liabilities (the 'FNB Acquired Business') of Old FNB (the 'FN Acquisition'). Effective on October 1, 1994, First Nationwide Bank changed its name from 'First Madison Bank, FSB' to 'First Nationwide Bank, A Federal Savings Bank.' In connection with the FN Acquisition, First Nationwide Bank entered into a Non-Performing Asset Sale Agreement (the 'Put Agreement') with Granite Management and Disposition, Inc. ('Granite'), a subsidiary of Ford Motor, pursuant to which First Nationwide Bank has the right through November 30, 1996 to require Granite to purchase up to $500 million of principally non-performing assets acquired from Old FNB. In the event that, as of November 30, 1996, First Nationwide Bank has not required Granite to purchase $500 million of non- performing assets, it may require Granite to purchase any qualifying assets of First Nationwide Bank, other than assets which previously were eligible to be put to Granite and which First Nationwide Bank did not require Granite to purchase, up to such $500 million maximum. At December 31, 1995, the remaining available balance under the Put Agreement was approximately $112.4 million. Of the approximately $220 million in non-performing assets at December 31, 1995, approximately $13.5 million were eligible to be sold to Granite under the Put Agreement. The Issuer expects that First Nationwide Bank will use the full capacity available under the Put Agreement for such non-performing and other qualifying assets. See 'Business--Other Activities--The Put Agreement.' First Nationwide Bank financed the FN Acquisition with: (i) a capital contribution by First Nationwide Holdings funded with the net proceeds of (a) the issuance of $200.0 million aggregate principal amount of First Nationwide Holdings' 12 1/4% Senior Notes Due 2001 (the 'FN Holdings Senior Notes' and collectively with the FN Holdings Subordinated Notes, the 'FN Holdings Notes') and (b) the issuance of First Nationwide Holdings' class C common stock to the Issuer, (ii) the net proceeds from the issuance of the First Nationwide Bank Preferred Stock and (iii) existing cash and proceeds from securities sold under agreements to repurchase. Ownership The Issuer is indirectly wholly owned by MacAndrews Holdings, a corporation wholly owned through Mafco Holdings Inc. ('Mafco Holdings' and, together with MacAndrews Holdings, 'MacAndrews & Forbes'), by Ronald O. Perelman. See 'Ownership of Common Stock.' The Issuer's principal executive offices are located at 38 East 63rd Street, New York, New York 10021, and its telephone number is (212) 572-8500. The Issuer was incorporated in 1994 under the laws of the State of Delaware. The following sets forth a summary organizational chart of the Issuer and its subsidiaries. Ronald O. Perelman | 100% | | Mafco Holdings Inc. ("Mafco Holdings") | 100% | | MacAndrews & Forbes Holding Inc. ("MacAndrews Holdings") | 100% | | Trans Network Insurance Services Inc. ("TNIS") (formerly "First Gibraltar (Parent) Holdings Inc.") | 100% | | First Gibraltar Holdings Inc. ("First Gibraltar Holdings") | 100% | | FIRST NATIONWIDE (PARENT) HOLDINGS INC. (the "Issuer") | 80%* | | Hunter's Glen/Ford Ltd. | ("Hunter's Glen") | | | 20%* |-------------| | First Nationwide Holdings Inc. ("First Nationwide Holdings") | 100% | | First Nationwide Bank A Federal Savins Bank ("First Nationwide Bank") - ------------------ * Hunter's Glen, a limited partnership controlled by Gerald J. Ford, Chairman of the Board, Chief Executive Officer and a director of First Nationwide Bank and President and a director of the Issuer, owns 100% of the class B common stock of First Nationwide Holdings, representing 20% of its voting common stock (representing approximately 15% of the voting power of its common stock), and the Issuer owns 100% of the class A common stock of First Nationwide Holdings, representing 80% of its voting common stock (representing approximately 85% of the voting power of its common stock), and 100% of the class C common stock of First Nationwide Holdings. See 'Certain Transactions--Transactions with Mr. Ford.' THE EXCHANGE OFFER <TABLE> <S> <C> Securities Offered........................ Up to $455,000,000 principal amount of 12 1/2% Senior Exchange Notes due 2003, which have been registered under the Securities Act. The terms of the New Notes and the Old Notes are identical in all material respects, except for certain transfer restrictions and registration rights relating to the Old Notes and except that, if the Exchange Offer is not consummated by September 16, 1996, the rate per annum at which the Old Notes bear interest will be 13% per annum from and including September 16, 1996 until but excluding the date of consummation of the Exchange Offer. The Exchange Offer........................ The New Notes are being offered in exchange for a like principal amount of Old Notes. The issuance of the New Notes is intended to satisfy obligations of the Issuer contained in the Registration Agreement. For procedures for tendering, see 'The Exchange Offer.' Tenders, Expiration Date; Withdrawal...... The Exchange Offer will expire at 5:00 p.m., New York City time, on June 17, 1996, or such later date and time to which it is extended. The tender of Old Notes pursuant to the Exchange Offer may be withdrawn at any time prior to the Expiration Date. Any Old Note not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Exchange Offer. Federal Income Tax Consequences........... The exchange pursuant to the Exchange Offer should not result in gain or loss to the holders or the Issuer for federal income tax purposes. See 'Certain Federal Income Tax Consequences.' Use of Proceeds........................... There will be no proceeds to the Issuer from the exchange pursuant to the Exchange Offer. Exchange Agent............................ The Bank of New York is serving as exchange agent (the 'Exchange Agent') in connection with the Exchange Offer. </TABLE> CONSEQUENCES OF EXCHANGING OLD NOTES Holders of Old Notes who do not exchange their Old Notes for New Notes pursuant to the Exchange Offer will continue to be subject to the provisions in the Indenture regarding transfer and exchange of the Old Notes and the restrictions on transfer of such Old Notes as set forth in the legend thereon as a consequence of the issuance of the Old Notes pursuant to exemptions from, or in transactions not subject to, the registration requirements of the Securities Act and applicable state securities laws. In general, the Old Notes may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. The Issuer does not currently anticipate that it will register Old Notes under the Securities Act. See 'Description of the Notes--Registration Rights.' Based on interpretations by the staff of the SEC, as set forth in no-action letters issued to third parties, the Issuer believes that New Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be offered for resale, resold or otherwise transferred by holders thereof (other than any holder which is an 'affiliate' of the Issuer within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such New Notes are acquired in the ordinary course of such holders' business and such holders have no arrangement with any person to participate in the distribution of such New Notes. However, the Issuer does not intend to request the SEC to consider, and the SEC has not considered, the Exchange Offer in the context of a no-action letter and there can be no assurance that the staff of the SEC would make a similar determination with respect to the Exchange Offer as in such other circumstances. Each holder, other than a broker-dealer, must acknowledge that it is not engaged in, and does not intend to engage in, a distribution of New Notes and has no arrangement or understanding to participate in a distribution of New Notes. Each broker-dealer that receives New Notes for its own account in exchange for Old Notes must acknowledge that such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities and that it will deliver a prospectus in connection with any resale of such New Notes. See 'Plan of Distribution.' In addition, to comply with the state securities laws, the New Notes may not be offered or sold in any state unless they have been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied with. The offer and sale of the New Notes to 'qualified institutional buyers' (as such term is defined under Rule 144A of the Securities Act) is generally exempt from registration or qualification under the state securities laws. The Issuer currently does not intend to register or qualify the sale of the New Notes in any state where an exemption from registraiton or qualification is required and not available. See 'The Exchange Offer--Consequences of Exchanging Old Notes' and 'Description of the Notes--Registration Rights.' SUMMARY DESCRIPTION OF THE NEW NOTES The terms of the New Notes and the Old Notes are identical in all material respects, except for certain transfer restrictions and registration rights relating to the Old Notes and except that, if the Exchange Offer is not consummated by September 16, 1996, the rate per annum at which the Old Notes bear interest will be 13% per annum from and including September 16, 1996 until but excluding the date of consummation of the Exchange Offer. The New Notes will bear interest from the most recent date to which interest has been paid on the Old Notes or, if no interest has been paid on the Old Notes, from April 17, 1996. Accordingly, if the relevant record date for interest payment occurs after the consummation of the Exchange Offer registered holders of New Notes on such record date will receive interest accruing from the most recent date to which interest has been paid or, if no interest has been paid, from April 17, 1996. If, however, the relevant record date for interest payment occurs prior to the consummation of the Exchange Offer registered holders of Old Notes on such record date will receive interest accruing from the most recent date to which interest has been paid or, if no interest has been paid, from April 17, 1996. Old Notes accepted for exchange will cease to accrue interest from and after the date of consummation of the Exchange Offer, except as set forth in the immediately preceding sentence. Holders of Old Notes whose Old Notes are accepted for exchange will not receive any payment in respect of interest on such Old Notes otherwise payable on any interest payment date the record date for which occurs on or after consummation of the Exchange Offer. <TABLE> <S> <C> Securities Offered........................ Up to $455,000,000 aggregate principal amount of 12 1/2% Senior Exchange Notes due 2003, which have been registered under the Securities Act. Maturity Date............................. April 15, 2003. Interest Payment Dates.................... April 15 and October 15, of each year, commencing October 15, 1996. Optional Redemption....................... The Notes will be redeemable, at the option of the Issuer, in whole or in part, at any time on or after April 15, 2000, at the redemption prices set forth herein plus accrued and unpaid interest, if any, to the date of redemption. In addition, at any time prior to April 15, 2000, the Notes may be redeemed at the option of the Issuer, in whole but not in part, at an aggregate redemption price equal to the sum of: (i) 100% of the then outstanding principal amount of the Notes; (ii) accrued and unpaid interest to the date of redemption; and (iii) the Applicable Premium. See 'Description of the Notes--Optional Redemption.' </TABLE> <TABLE> <S> <C> Change of Control Put..................... Upon the occurrence of a Change of Control Put Event, each holder of the Notes will have the right to require the Issuer to repurchase all or a portion of such holder's Notes at a price equal to 103% of the principal amount thereof plus accrued and unpaid interest to the date of repurchase. The Issuer's ability to purchase the Notes may be limited by the amount of available cash and other factors. See 'Risk Factors--Holding Company Structure; Restrictions on Ability of Subsidiaries to Pay Dividends,' 'Risk Factors--Indebtedness and Ability to Pay Principal of the Notes' and 'Description of the Notes--Change of Control Put Event.' Ranking and Holding Company Structure..... The Old Notes are, and the New Notes will be, senior unsecured obligations of the Issuer and will rank pari passu in right of payment with all other future senior debt of the Issuer, if any is issued, and senior to all future subordinated debt of the Issuer, if any is issued. The Issuer is a holding company and therefore the Old Notes are, and the New Notes will be, effectively subordinated to (i) all existing and future liabilities, including deposits, indebtedness and trade payables, of the Issuer's subsidiaries, including First Nationwide Holdings and First Nationwide Bank and (ii) all preferred stock issued by the Issuer's subsidiaries, including the First Nationwide Bank Preferred Stock. The Notes will also be effectively subordinated to the obligations of First Nationwide Holdings under the FN Tax Sharing Agreement (as defined herein). As of December 31, 1995, after giving effect to the the SFFed Acquisition, the Branch Sales, the LMUSA 1996 Purchase and the FN Holdings Subordinated Notes Offering, the outstanding interest-bearing liabilities, including deposits, of such subsidiaries would have been approximately $17.1 billion, the other outstanding liabilities of such subsidiaries, including trade payables and accrued expenses, would have been approximately $488 million, and there would have been approximately $301 million aggregate liquidation value of First Nationwide Bank Preferred Stock outstanding. The aggregate amount of indebtedness, other liabilities and preferred stock of the Issuer's subsidiaries were not affected by the Offering or the application of the net proceeds therefrom. See 'Risk Factors--Holding Company Structure; Restrictions on Ability of Subsidiaries to Pay Dividends,' 'Risk Factors--Subordination to Subsidiary Liabilities and Preferred Stock,' 'Use of Proceeds' and 'Description of the Notes.' Certain Covenants......................... The Indenture contains certain covenants that, among other things, will limit: (i) the issuance of additional debt by the Issuer and its subsidiaries, (ii) the payment of dividends on the capital stock of the Issuer, and the redemption or repurchase of the capital stock of the Issuer, (iii) the making of certain investments, (iv) transactions with affiliates, (v) the creation of liens on the assets of the Issuer, (vi) the termination or amendment of the FN Tax Sharing Agreement, (vii) the ability of the Issuer or any subsidiary to restrict dividends or distributions from subsidiaries, (viii) sales or issuances of capital stock of First Nationwide Holdings, (ix) consolidations, mergers and transfers of all or substantially all of the Issuer's or First Nationwide </TABLE> <TABLE> <S> <C> Holdings' assets and (x) other business activities of the Issuer and First Nationwide Holdings. All these limitations and prohibitions, however, are subject to a number of important qualifications. See 'Description of the Notes--Certain Covenants.' Use of Proceeds........................... The Issuer will not receive any proceeds from the Exchange Offer. The net proceeds from the Offering were approximately $432 million, which were distributed to the Issuer's parent, First Gibraltar Holdings, and used to repay indebtedness of affiliates of the Issuer, other than the Issuer or its subsidiaries. None of the net proceeds were available to the Issuer or its subsidiaries. Exchange Offer; Registration Rights....... Holders of New Notes are not entitled to any registration rights with respect to the New Notes. Pursuant to the Registration Agreement, the Issuer agreed to file, at its cost, a registration statement with respect to the Exchange Offer. The Registration Statement of which this Prospectus is a part constitutes the registration statement for the Exchange Offer. See 'Description of the Notes--Registration Rights.'
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Film Roman, Inc. ("Film Roman Holdings") was incorporated in Delaware in May 1996 in order to acquire all of the outstanding capital stock of Film Roman, Inc., a California corporation ("Film Roman California") in the Reorganization (as defined below). Unless otherwise indicated herein and except as otherwise set forth in the financial statements contained in this Prospectus, (a) the terms the "Company" and "Film Roman" refer collectively to Film Roman Holdings and Film Roman California, (b) the term "Offering" refers to the offering of common stock, $.01 par value, of Film Roman Holdings ("Common Stock") made hereby, and (c) the information in this Prospectus gives effect to the Reorganization (in which each share of common stock of Film Roman California will be converted into 1.25 shares of Common Stock). Unless otherwise stated, all information in this Prospectus assumes that the Underwriters' over-allotment option is not exercised. Certain animation and film industry terms used in this Prospectus are defined in a Glossary beginning on page 58. THE COMPANY Film Roman creates, develops, produces and distributes high quality, family- oriented animated television programming. Since the Company was founded by Phil Roman in 1984, it has become the leading independent animation studio in North America by producing more animated series for broadcast on the U.S. television networks during the 1996-1997 television season than any other independent animation studio. Film Roman productions include The Simpsons, Garfield & Friends, Bobby's World, Felix the Cat, Mighty Max, The Critic and The Mask. The Company is currently producing 10 animated series (totalling 161 episodes, 67 of which are "proprietary" programs) and one special, and recently completed the production of one additional special, all of which are scheduled to air on ABC, CBS, FOX or the USA Network, as well as in first-run syndication, during the 1996-97 television season. The Company has produced at least three series each season for the television networks since 1990 and, in so doing, has successfully competed against other independent studios, as well as the major studios which have financial and other resources greater than the Company. The Company recently commenced production of 13 episodes of Blues Brothers: The Animated Series (based on the Dan Aykroyd and John Belushi characters) currently scheduled to be aired in prime-time on UPN during the 1997-98 broadcast season. The Company has retained certain rights to this animated series, including distribution and licensing and merchandising rights. The Company believes that it has a reputation within the entertainment industry as a reliable producer of high-quality animated programming, making it one of a select group of suppliers of animated programming to the television networks. This reputation in the animation industry is critical because animated series are ordered for production without the benefit of a pilot episode. As a result, programmers rely to a significant degree on a studio's track record for producing high quality programming that is delivered on schedule and within budget. As of June 30, 1996, the Company had produced 470 episodes of animated programming. At the conclusion of the 1996-97 broadcast season, the Company projects that it will have produced in excess of 600 episodes of animated programming; there is, however, no assurance that all of the episodes scheduled to be aired will be televised. Historically, the Company has produced substantially all of its programming for third parties on a "fee-for-services" basis. Increasingly, the Company is producing programming for which it controls the "proprietary rights" associated with such programming (including, for example, international distribution and licensing and merchandising rights). The Company's strategy is to build a library of proprietary characters and programs which it can exploit through a variety of means, including domestic and international television and home video distribution, licensing and merchandising of consumer products (including toys, apparel, school supplies and books), feature films and interactive software. The Company has retained proprietary rights to four of the ten series it is producing for the 1996-97 television season (Felix the Cat (CBS), C-Bear & Jamal (FOX), BRUNO the Kid (syndication) and Mortal Kombat (USA Network)). The Company will produce 67 episodes of such proprietary programming for the upcoming television season compared to 16 episodes produced last season. In order to implement its strategy, the Company expanded its internal creative development of characters and program concepts and established an international distribution division and a licensing and merchandising division to support the exploitation of its proprietary rights. As a result of these initiatives, the Company has incurred additional overhead and other costs. The Company reported net losses of $1.7 million and $0.7 million for the year ended December 31, 1995 and the six months ended June 30, 1996, respectively. The Company believes that, through the retention and exploitation of proprietary rights, it can over time earn an attractive return on its investment and, at the same time, build a library of characters and programs that will have lasting value. There is no assurance, however, that the Company will be able to achieve this goal. The Company's principal executive offices are located at 12020 Chandler Boulevard, Suite 200, North Hollywood, California 91607, and its telephone number is (818) 761-2544. THE REORGANIZATION Film Roman Holdings was incorporated in Delaware in May 1996 in order to hold all of the outstanding capital stock of Film Roman California. Film Roman Holdings currently conducts no operations. A reorganization will be effected immediately prior to the closing of the Offering (the "Reorganization") pursuant to which (i) a wholly-owned subsidiary of Film Roman Holdings will merge with and into Film Roman California; (ii) each outstanding share of common stock, no par value, of Film Roman California ("California Common Stock") will be converted into 1.25 shares of Common Stock (including shares of California Common Stock to be issued immediately prior to such merger upon exercise of certain outstanding warrants to purchase California Common Stock and upon conversion of all outstanding shares of Class B convertible preferred stock, $.01 par value, of Film Roman California ("Convertible Preferred Stock")), (iii) each outstanding share of Class A redeemable preferred stock, $.01 par value, of Film Roman California ("California Redeemable Preferred Stock") will be converted into one share of Series A redeemable preferred stock, $.01 par value, of Film Roman Holdings ("Redeemable Preferred Stock"); and (iv) all outstanding employee options and certain warrants for the purchase of California Common Stock will, pursuant to the anti-dilution provisions thereof, become options and warrants to purchase shares of Common Stock. As a result of the Reorganization, Film Roman California will become a wholly-owned subsidiary of Film Roman Holdings and the stockholders of Film Roman California will become the stockholders of Film Roman Holdings. Immediately following the Reorganization and the closing of the Offering, Film Roman Holdings will redeem for cash $7.5 million liquidation preference of Redeemable Preferred Stock and, if the underwriters' over-allotment option is exercised, will redeem for cash additional Redeemable Preferred Stock to the extent of the net proceeds (less accrued dividends on such Redeemable Preferred Stock) received by the Company from the exercise of such over-allotment option (the "Cash Redemption"). In the event the underwriters' over-allotment option is not exercised in full, any shares of Redeemable Preferred Stock that have not been redeemed for cash will be redeemed for Common Stock (at a redemption price of 1.3072 shares of Common Stock for each share of Redeemable Preferred Stock) (the "Non-Cash Redemption"). Accrued dividends on the Redeemable Preferred Stock and Convertible Preferred Stock will be paid to the date of redemption and conversion, respectively. See "Certain Transactions--Reorganization." THE OFFERING <TABLE> <C> <S> Shares offered by the Company.... 3,275,364 Shares offered by the Selling Stockholders.................... 24,636 Shares outstanding immediately after the Offering.............. 8,448,236(1) Use of Proceeds to the Company... To pay accumulated but unpaid dividends on the Redeemable Preferred Stock and the Convertible Preferred Stock, to redeem for cash a portion of the Redeemable Preferred Stock (or all of the Redeemable Preferred Stock if the Underwriters' over-allotment option is exercised in full), to repay short-term borrowings, to fund the production of animated programming and for general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market Symbol.......................... ROMN. </TABLE> - -------------------- (1) Pro forma for the Reorganization in which 4,584,636 shares of Common Stock will be issued as a result of the conversion of (i) 1,713,000 shares of outstanding California Common Stock, (ii) 1,204,709 shares of California Common Stock to be issued upon exercise of warrants for shares of California Common Stock and (iii) 750,000 shares of California Common Stock to be issued upon conversion of Convertible Preferred Stock and further for the Non-Cash Redemption in which 588,236 shares of Common Stock will be issued upon the redemption of $4.5 million liquidation preference of Redeemable Preferred Stock. In the event the Underwriters' over-allotment option is exercised in full, all Redeemable Preferred Stock will be redeemed for cash, the Non-Cash Redemption will not occur and the total number of shares of Common Stock outstanding immediately after the Offering will be 8,355,000 (assumes 495,000 shares will be issued upon exercise of the over-allotment option). Excludes 1,227,695 shares of Common Stock issuable upon the exercise of options granted or to be granted under the Company's Stock Option Plan (as defined below), of which 859,375 had been granted at the date of this Prospectus, and 72,066 shares of Common Stock issuable upon the exercise of certain warrants (the "New Warrants") issued pursuant to the 1996 Commitment (as defined herein). See "Management--Stock Option Plan" and "Certain Transactions--1996 Commitment." SUMMARY FINANCIAL INFORMATION <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, -------------------------------------------- ------------------ 1991 1992 1993 1994 1995 1995 1996 (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue................ $9,642 $21,943 $27,867 $36,201 $ 34,341 $13,359 $ 13,716 Expenses: Cost of revenue........ 9,021 20,716 25,675 33,190 33,156 12,613 12,928 Selling, general and administrative expenses.............. 266 699 1,368 1,829 2,963 1,178 1,594 ------ ------- ------- ------- --------- ------- --------- Operating income (loss)................ 355 528 824 1,182 (1,778) (432) (806) Interest income (expense), net........ 1 (16) (21) (28) 89 (26) 64 ------ ------- ------- ------- --------- ------- --------- Net income (loss)...... 356 512 803 1,154 (1,689) (458) (742) Pro forma data: Pro forma provision for income taxes(1)....... $ (142) $ (205) $ (321) $ (462) $ 574 $ 156 $ -- ------ ------- ------- ------- --------- ------- --------- Pro forma net income (loss)(1)............. $ 214 $ 307 $ 482 $ 692 $ (1,115) $ (302) $ (742) ====== ======= ======= ======= ========= ======= ========= Pro forma net income (loss) attributable to common stock(2)....... $ 214 $ 307 $ 482 $ 692 $ (2,000) $ (302) $ (1,707) ====== ======= ======= ======= ========= ======= ========= Pro forma net income (loss) per common share, giving effect to the Reorganization(2)(3).. $ (0.41) $ (0.35) ========= ========= Pro forma weighted average number of shares outstanding, giving effect to the Reorganization(2)(3).. 4,824,519 4,824,519 ========= ========= </TABLE> <TABLE> <CAPTION> AS OF AS OF DECEMBER 31, 1995 JUNE 30, 1996 ----------------------- ----------------------- ACTUAL ACTUAL AS ADJUSTED(4) (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents..... $ 5,176 $ 4,794 $23,771 Film costs, net of amortization................. 12,379 19,012 19,012 Total assets.................. 18,950 26,975 45,952 Debt.......................... 1,737 1,241 -- Redeemable Preferred Stock.... 6,749 7,232 -- Stockholder's equity (deficiency)................. 1,832 (175) 28,705 </TABLE> - -------------------- (1) The Company operated as an S Corporation until August 4, 1995. As an S Corporation, the Company was subject to no federal income taxes and only minimum state taxes. Pro forma amounts reflect adjustments for additional income taxes that would have been reported if the Company had been a C Corporation based upon an estimated statutory rate of 40% in 1991, 1992, 1993 and 1994, and 34% in 1995. (2) For the year ended December 31, 1995, the pro forma net loss attributable to common stock gives effect to the accretion of the difference between the carrying value and the liquidation value of the Redeemable Preferred Stock of $484,829 and to the accrual of dividends of $400,000 on the Redeemable Preferred Stock. For the six months ended June 30, 1996, the pro forma net loss attributable to common stock gives effect to the accretion of the difference between the carrying value and the liquidation value of the Redeemable Preferred Stock of $484,828 and to the accrual of dividends of $480,000 on the Redeemable Preferred Stock. (3) The pro forma net income (loss) per common share and pro forma weighted average number of shares outstanding give effect to the Reorganization. Does not give effect to the Cash Redemption or the Non-Cash Redemption. (4) Adjusted to reflect the sale by the Company of 3,275,364 shares of Common Stock in the Offering and the application of the net proceeds therefrom and the Non-Cash Redemption. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001013273_compressan_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001013273_compressan_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the more detailed information and the financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, information in this Prospectus, including share and per share data, assumes no exercise of (i) the Underwriter's Over-allotment Option and (ii) the Warrants. THE COMPANY The Company, a development stage company organized in August 1994, is developing products to allow the facsimile transmission of color images from computers equipped with the Company's software programs. Such color facsimiles can then be viewed on the receiving computer's screen, stored and printed on a color printer. Recipients equipped with black and white electronic fax software or a black and white fax machine can still receive faxes sent via the software; the faxes will simply appear in black and white. There are millions of computers equipped with appropriate fax modems or boards, but such computers lack software programs which will enable them to send and receive color fax images. The Company believes that the recent price reductions of color peripherals will result in substantial demand for the ability to transmit and receive color facsimiles. The Company's initial color fax software product, not yet named but being developed under the working name CHROMAFAX, is in the final stages of development at this time. The Company expects to begin internal testing of the finished product in September 1996 and release it for third party testing in October 1996, with product release in the fourth quarter of 1996. Color images contain very large quantities of data requiring a considerable amount of a computer's data storage resources and resulting in a long transmission time. In order to fax color images over standard phone lines in a short amount of time, the data must be compressed. The International Telecommunications Union (ITU) has recently recommended a standard for color image facsimile transmission (the "International Standard"). The standard allows all machines meeting the standard to communicate with each other. The Company believes that the success of facsimile transmission today is primarily due to the ability of International Standard-compliant machines to communicate with each other regardless of manufacturer and that any system which requires non-standard-compliant software to be on the sending and receiving machines will not achieve widespread success. The Company's color fax software will incorporate the new International Standard for color faxing. Use of the International Standard is anticipated to result in transmission times of 4-8 minutes per typical page. The Company's second color fax product with the working name, CHROMAFAX PLUS, which is currently in development, in addition to complying with the International Standard for faxing, will contain the Company's proprietary processes which will enable large quantities of color picture data to be reduced by a significant factor, resulting in significantly reduced file sizes and thereby making color fax transmission and storage more efficient. When communicating with other computers equipped with CHROMAFAX PLUS software, the Company's proprietary process will be used. The Company anticipates that with its proprietary process CHROMAFAX PLUS software will be more efficient than the International Standard and projects a transmission time under 2 minutes for a typical page. The advanced features of the CHROMAFAX PLUS product, compression and color correction, require additional development efforts. The compression feature is currently being optimized to reduce its complexity and increase its speed. The color correction feature is still being written. The Company's color facsimile software products integrate new and existing components into a system that the Company believes will provide competitively priced, color facsimile capabilities. The Company is not aware of any competing color fax products in distribution or under development which comply with the International Standard but assumes that others, including software and hardware companies, are working on International Standard-compliant color fax products. See "Business of the Company -- Competition". However, there currently exists products which allow the transmission of color images between computers. The procedure of transmitting the image is generically known as "Binary File Transfer" (BFT). Some companies provide BFT capabilities claiming to use facsimile format, however, these programs are not International Standard-compliant. Examples of such products are View Office Power Suite by Max Vision, Color Link by Laser Today International and Hot Fax also by Laser Today International. Although these products are advertised as providing color faxing, the products use proprietary formats for the file transfer and, therefore, require that their particular software be installed both at the sending and receiving computer. Since PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the more detailed information and the financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, information in this Prospectus, including share and per share data, assumes no exercise of (i) the Underwriter's Over-allotment Option and (ii) the Warrants. THE COMPANY The Company, a development stage company organized in August 1994, is developing products to allow the facsimile transmission of color images from computers equipped with the Company's software programs. Such color facsimiles can then be viewed on the receiving computer's screen, stored and printed on a color printer. Recipients equipped with black and white electronic fax software or a black and white fax machine can still receive faxes sent via the software; the faxes will simply appear in black and white. There are millions of computers equipped with appropriate fax modems or boards, but such computers lack software programs which will enable them to send and receive color fax images. The Company believes that the recent price reductions of color peripherals will result in substantial demand for the ability to transmit and receive color facsimiles. The Company's initial color fax software product, not yet named but being developed under the working name CHROMAFAX, is in the final stages of development at this time. The Company expects to begin internal testing of the finished product in September 1996 and release it for third party testing in October 1996, with product release in the fourth quarter of 1996. Color images contain very large quantities of data requiring a considerable amount of a computer's data storage resources and resulting in a long transmission time. In order to fax color images over standard phone lines in a short amount of time, the data must be compressed. The International Telecommunications Union (ITU) has recently recommended a standard for color image facsimile transmission (the "International Standard"). The standard allows all machines meeting the standard to communicate with each other. The Company believes that the success of facsimile transmission today is primarily due to the ability of International Standard-compliant machines to communicate with each other regardless of manufacturer and that any system which requires non-standard-compliant software to be on the sending and receiving machines will not achieve widespread success. The Company's color fax software will incorporate the new International Standard for color faxing. Use of the International Standard is anticipated to result in transmission times of 4-8 minutes per typical page. The Company's second color fax product with the working name, CHROMAFAX PLUS, which is currently in development, in addition to complying with the International Standard for faxing, will contain the Company's proprietary processes which will enable large quantities of color picture data to be reduced by a significant factor, resulting in significantly reduced file sizes and thereby making color fax transmission and storage more efficient. When communicating with other computers equipped with CHROMAFAX PLUS software, the Company's proprietary process will be used. The Company anticipates that with its proprietary process CHROMAFAX PLUS software will be more efficient than the International Standard and projects a transmission time under 2 minutes for a typical page. The advanced features of the CHROMAFAX PLUS product, compression and color correction, require additional development efforts. The compression feature is currently being optimized to reduce its complexity and increase its speed. The color correction feature is still being written. The Company's color facsimile software products integrate new and existing components into a system that the Company believes will provide competitively priced, color facsimile capabilities. The Company is not aware of any competing color fax products in distribution or under development which comply with the International Standard but assumes that others, including software and hardware companies, are working on International Standard-compliant color fax products. See "Business of the Company -- Competition". However, there currently exists products which allow the transmission of color images between computers. The procedure of transmitting the image is generically known as "Binary File Transfer" (BFT). Some companies provide BFT capabilities claiming to use facsimile format, however, these programs are not International Standard-compliant. Examples of such products are View Office Power Suite by Max Vision, Color Link by Laser Today International and Hot Fax also by Laser Today International. Although these products are advertised as providing color faxing, the products use proprietary formats for the file transfer and, therefore, require that their particular software be installed both at the sending and receiving computer. Since they do not comply with the recommended standard from the International Telecommunications Union, they are not able to communicate with other International Standard-compliant facsimile machines or computers using International Standard-compliant programs. Of course, since these other programs are proprietary and do not adhere to any standard, especially to the proposed International Standard, they also do not communicate with each other. Even if non-International Standard-compliant products could communicate with each other, as a matter of coincidence, there would be no assurance, lacking adherence to a standard, that future versions of the products would retain the communications capability. The Company has not sold or licensed any of its products or technologies. The Company's prospects must be considered in light of the risks associated with the establishment of a new business in the evolving computer industry, as well as further risks encountered in the shift from development to commercialization of new products based on innovative technology. There can be no assurance that the Company will be able to generate revenues or achieve profitable operations. See "Risk Factors," "Business" and "Financial Statements." The Company was incorporated under the laws of Florida on August 26, 1994. The Company's corporate offices are located at 2105 Hamilton Avenue, Suite 140, San Jose, California 95125. The Company's telephone number is (408) 879-6600. SECURITIES OFFERED The Offering............... 1,000,000 shares of Common Stock and 1,000,000 Warrants to purchase 1,000,000 shares of Common Stock. See "Description of Securities" and "Underwriting." Offering price............. $6.00 per share of Common Stock and $.125 per Warrant. Common Stock outstanding: Prior to the Offering...... 3,772,000 shares of Common Stock After the Offering(1)...... 4,922,000 shares of Common Stock Warrants outstanding after the Offering(2)............ 1,000,000 warrants Exercise price of Warrants offered hereby........... $6.00 per share, subject to adjustment in certain circumstances. See, "Description of Securities -- Redeemable Warrants". Exercise period of Warrants offered hereby........... The three year period from the effective date hereof. Redemption of Warrants..... Redeemable by the Company at any time after the date hereof on not less than 30 days prior written notice to the holders of the Warrants, provided the average closing bid quotation of the Common Stock as reported on the OTC Bulletin Board or NASDAQ Stock Market, if traded thereon, or if not traded thereon, the average closing sale price of the Common Stock if listed on a national securities exchange (or other reporting system that provides last sale prices), has been at least $12.00 for a period of 30 consecutive trading days ending within 10 days prior to the date on which the Company gives notice of redemption. The Warrants may not be redeemed during the first year from the effective date without the written consent of Barron Chase Securities, Inc. The Warrants will be exercisable until the close of business on the day immediately preceding the date fixed for redemption. See "Description of Securities Redeemable Warrants." The Company is required to maintain an effective registration statement with respect to the Common Stock underlying the Warrants prior to redemption of the Warrants. Use of Proceeds............ The net proceeds to the Company, aggregating approximately $5,202,288, will be applied to redeem Preferred Stock for $450,000 and for research and development; marketing; the purchase of equip- they do not comply with the recommended standard from the International Telecommunications Union, they are not able to communicate with other International Standard-compliant facsimile machines or computers using International Standard-compliant programs. Of course, since these other programs are proprietary and do not adhere to any standard, especially to the proposed International Standard, they also do not communicate with each other. Even if non-International Standard-compliant products could communicate with each other, as a matter of coincidence, there would be no assurance, lacking adherence to a standard, that future versions of the products would retain the communications capability. The Company has not sold or licensed any of its products or technologies. The Company's prospects must be considered in light of the risks associated with the establishment of a new business in the evolving computer industry, as well as further risks encountered in the shift from development to commercialization of new products based on innovative technology. There can be no assurance that the Company will be able to generate revenues or achieve profitable operations. See "Risk Factors," "Business" and "Financial Statements." The Company was incorporated under the laws of Florida on August 26, 1994. The Company's corporate offices are located at 2105 Hamilton Avenue, Suite 140, San Jose, California 95125. The Company's telephone number is (408) 879-6600. SECURITIES OFFERED The Offering............... 1,000,000 shares of Common Stock and 1,000,000 Warrants to purchase 1,000,000 shares of Common Stock. See "Description of Securities" and "Underwriting." Offering price............. $6.00 per share of Common Stock and $.125 per Warrant. Common Stock outstanding: Prior to the Offering...... 3,772,000 shares of Common Stock After the Offering(1)...... 4,922,000 shares of Common Stock Warrants outstanding after the Offering(2)............ 1,000,000 warrants Exercise price of Warrants offered hereby........... $6.00 per share, subject to adjustment in certain circumstances. See, "Description of Securities -- Redeemable Warrants". Exercise period of Warrants offered hereby........... The three year period from the effective date hereof. Redemption of Warrants..... Redeemable by the Company at any time after the date hereof on not less than 30 days prior written notice to the holders of the Warrants, provided the average closing bid quotation of the Common Stock as reported on the OTC Bulletin Board or NASDAQ Stock Market, if traded thereon, or if not traded thereon, the average closing sale price of the Common Stock if listed on a national securities exchange (or other reporting system that provides last sale prices), has been at least $12.00 for a period of 30 consecutive trading days ending within 10 days prior to the date on which the Company gives notice of redemption. The Warrants may not be redeemed during the first year from the effective date without the written consent of Barron Chase Securities, Inc. The Warrants will be exercisable until the close of business on the day immediately preceding the date fixed for redemption. See "Description of Securities Redeemable Warrants." The Company is required to maintain an effective registration statement with respect to the Common Stock underlying the Warrants prior to redemption of the Warrants. Use of Proceeds............ The net proceeds to the Company, aggregating approximately $5,202,288, will be applied to redeem Preferred Stock for $450,000 and for research and development; marketing; the purchase of equip- ment and inventory; and the balance for working capital and general corporate purposes. See "Use of Proceeds." Risk Factors............... The securities offered hereby involve a high degree of risk and substantial immediate dilution to new investors. Only investors who can bear the risk of their entire investment should invest. See "Risk Factors" and "Dilution". Proposed OTC Bulletin Board(3) symbols........... CFAX -- Common Stock CFAXW -- Warrants - --------------- (1) Includes 1,000,000 shares of Common Stock offered hereby and 150,000 shares of Common Stock issuable upon redemption of the Company's outstanding Preferred Stock. Excludes (i) 1,000,000 shares of Common Stock reserved for issuance upon exercise of the Warrants; (ii) an aggregate of 200,000 shares of Common Stock reserved for issuance upon exercise of the Underwriter's Warrants and the warrants included therein; (iii) 150,000 shares of Common Stock issuable upon exercise of the Underwriter's Over-allotment Option; and (iv) 458,000 shares reserved for issuance upon exercise of other outstanding options. See "Management -- Employment Agreements," "Certain Transactions," "Description of Securities" and "Underwriting." (2) Includes (i) 1,000,000 Warrants offered hereby. Excludes (i) 100,000 Underwriter's Warrants to be issued to the Underwriter upon closing of the Offering; and (ii) 150,000 Warrants issuable upon exercise of the Underwriter's Over-allotment Option. (3) The OTC Bulletin Board is an electronic quotation and trading system for over-the-counter securities. Inclusion of these securities on the OTC Bulletin Board does not imply that an established public trading market will develop therefor or, if developed, that such market will be sustained. See "Risk Factors -- No Assurance of Public Market; Determination of Public Offering Price; Lack of Liquidity; Possible Volatility of Market Price of Common Stock and Warrants." SUMMARY FINANCIAL INFORMATION The summary financial data set forth below is derived from and should be read in conjunction with the financial statements, including the notes thereto, appearing elsewhere in this Prospectus. STATEMENT OF OPERATIONS DATA OF CABLE-SAT SYSTEMS, INC., A DEVELOPMENT STAGE COMPANY: <TABLE> <CAPTION> FROM INCEPTION (AUGUST 26, 1994) THROUGH JUNE 30, 1996 ---------------------- (UNAUDITED) <S> <C> Revenues (interest income)............................................... $ 8,674 Net loss................................................................. $ (1,579,275) Net loss per common share(1)............................................. $ (0.83) Weighted average number of shares(1)..................................... 1,907,724 </TABLE> BALANCE SHEET DATA OF CABLE-SAT SYSTEMS, INC., A DEVELOPMENT STAGE COMPANY: <TABLE> <CAPTION> JUNE 30, 1996 ----------------------------- PRO FORMA ACTUAL ADJUSTED(2) ----------- --------------- (UNAUDITED) (UNAUDITED) <S> <C> <C> Working capital.................................................. $ 918,117 $ 5,670,405 Total assets..................................................... $ 1,138,508 $ 5,890,796 Total liabilities................................................ $ 96,530 $ 96,530 Deficit accumulated during the development stage................. $(1,579,275) $(1,579,275) Stockholders' equity............................................. $ 1,041,978 $ 5,794,266 </TABLE> - --------------- (1) The net loss per common share has been computed in accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 64 ("SAB 64"). SAB 64 requires the net loss per common share to be computed based on the weighted average number of shares of common stock outstanding, increased for certain shares or stock options, including shares of Common Stock to be issued upon redemption of the Preferred Stock, issued within one year or in contemplation of the Company's filing of its registration statement, and that such shares be treated as if outstanding for all periods presented. (2) Gives effect to the sale of the Common Stock and Warrants offered hereby and the application of a portion of the estimated net proceeds therefrom to redeem the Preferred Stock. See "Use of Proceeds." ment and inventory; and the balance for working capital and general corporate purposes. See "Use of Proceeds." Risk Factors............... The securities offered hereby involve a high degree of risk and substantial immediate dilution to new investors. Only investors who can bear the risk of their entire investment should invest. See "Risk Factors" and "Dilution". Proposed OTC Bulletin Board symbols(3)............... CFAX -- Common Stock CFAXW -- Warrants - --------------- (1) Includes 1,000,000 shares of Common Stock offered hereby and 150,000 shares of Common Stock issuable upon redemption of the Company's outstanding Preferred Stock. Excludes (i) 1,000,000 shares of Common Stock reserved for issuance upon exercise of the Warrants; (ii) an aggregate of 200,000 shares of Common Stock reserved for issuance upon exercise of the Underwriter's Warrants and the warrants included therein; (iii) 150,000 shares of Common Stock issuable upon exercise of the Underwriter's Over-allotment Option; and (iv) 458,000 shares reserved for issuance upon exercise of other outstanding options. See "Management -- Employment Agreements," "Certain Transactions," "Description of Securities" and "Underwriting." (2) Includes (i) 1,000,000 Warrants offered hereby. Excludes (i) 100,000 Underwriter's Warrants to be issued to the Underwriter upon closing of the Offering; and (ii) 150,000 Warrants issuable upon exercise of the Underwriter's Over-allotment Option. (3) The OTC Bulletin Board is an electronic quotation and trading system for over-the-counter securities. Inclusion of these securities on the OTC Bulletin Board does not imply that an established public trading market will develop therefor or, if developed, that such market will be sustained. See "Risk Factors -- No Assurance of Public Market; Determination of Public Offering Price; Lack of Liquidity; Possible Volatility of Market Price of Common Stock and Warrants." SUMMARY FINANCIAL INFORMATION The summary financial data set forth below is derived from and should be read in conjunction with the financial statements, including the notes thereto, appearing elsewhere in this Prospectus. STATEMENT OF OPERATIONS DATA OF CABLE-SAT SYSTEMS, INC., A DEVELOPMENT STAGE COMPANY: <TABLE> <CAPTION> FROM INCEPTION (AUGUST 26, 1994) THROUGH JUNE 30, 1996 ---------------------- (UNAUDITED) <S> <C> Revenues (interest income)............................................... $ 8,674 Net loss................................................................. $ (1,579,275) Net loss per common share(1)............................................. $ (0.83) Weighted average number of shares(1)..................................... 1,907,724 </TABLE> BALANCE SHEET DATA OF CABLE-SAT SYSTEMS, INC., A DEVELOPMENT STAGE COMPANY: <TABLE> <CAPTION> JUNE 30, 1996 ----------------------------- PRO FORMA ACTUAL ADJUSTED(2) ----------- --------------- (UNAUDITED) (UNAUDITED) <S> <C> <C> Working capital.................................................. $ 918,117 $ 5,670,405 Total assets..................................................... $ 1,138,508 $ 5,890,796 Total liabilities................................................ $ 96,530 $ 96,530 Deficit accumulated during the development stage................. $(1,579,275) $(1,579,275) Stockholders' equity............................................. $ 1,041,978 $ 5,794,266 </TABLE> - --------------- (1) The net loss per common share has been computed in accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 64 ("SAB 64"). SAB 64 requires the net loss per common share to be computed based on the weighted average number of shares of common stock outstanding, increased for certain shares or stock options, including shares of Common Stock to be issued upon redemption of the Preferred Stock, issued within one year or in contemplation of the Company's filing of its registration statement, and that such shares be treated as if outstanding for all periods presented. (2) Gives effect to the sale of the Common Stock and Warrants offered hereby and the application of a portion of the estimated net proceeds therefrom to redeem the Preferred Stock. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001013322_webhire_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001013322_webhire_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and the financial statements and notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus (i) assumes no exercise of the Underwriters' over-allotment option and the automatic conversion of all outstanding shares of Convertible Preferred Stock into an aggregate of 2,502,696 shares of Common Stock upon the closing of this offering and (ii) has been adjusted to reflect a three-for-one stock split of the Common Stock effected as a stock dividend in May 1995 and a three-for-two stock split of the Common Stock effected as a stock dividend in May 1996. THE COMPANY Restrac, Inc. ("Restrac" or the "Company") designs, develops, markets, implements and supports human resource ("HR") staffing software to automate the recruitment, selection and placement of an organization's workforce. The Company's staffing software enables organizations to strategically manage their human capital by reducing hiring and placement costs, decreasing time to fill positions and providing more effective skills management and worker deployment. The Company's products -- Restrac Hire and Resume Reader for PeopleSoft -- provide HR departments with client/server solutions to quickly and efficiently build and search comprehensive "pools" of resume skills data to find the workers they need, while also managing the workflow of the staffing process. The management of human capital is increasingly being viewed as a business imperative and has emerged in recent years as a key element of corporate strategy. Recruiting and deploying the most qualified employees is now being recognized as critical to an organization's long-term success. In addition, the development of distributed client/server computing and the emergence of the Internet have provided the technological framework for organizations to automate and disseminate a process that was historically centralized on systems designed for other record-keeping functions, such as payroll processing, accounting and reporting. As a result, demand has grown for a new generation of HR staffing systems that provide HR departments with the ability to rapidly build and search comprehensive pools of candidate skills data and automate the staffing process. The Company's current software offerings are open, client/server applications that utilize standard industry communications protocols, such as TCP/IP, allowing for high performance, scalable implementations across local area networks, wide area networks, the Internet and Intranets (Internet-based networks within an enterprise). The Company's software supports industry standards, such as Microsoft Windows and most leading relational databases (including Oracle, Microsoft SQLServer and Sybase), server platforms (including Windows NT and many UNIX variants), e-mail systems (including Microsoft Mail and Lotus cc:Mail) and desktop productivity tools (including Lotus Notes). This open architecture has facilitated integration with other systems providing customers with integrated, multi-vendor solutions to meet their specific needs. Since the introduction of Restrac Hire in 1993, the Company has licensed its client/server, Windows-based staffing software to approximately 200 customers. Approximately 250 other organizations continue to license the Company's earlier DOS-based recruiting and succession planning products. Within these 450 organizations, there are over 4,000 licensed users of the Company's products. The Company's products are primarily licensed by large corporate employers experiencing accelerated growth, significant reorganization or downsizing or a scarcity of skilled labor, or by companies reengineering their HR function to reduce costs. Due to its flexible skills management and search capabilities, the Company's software is also licensed by consulting firms and providers of full-time, contract or temporary labor. Twenty-eight of the 50 most profitable U.S. companies cited in Fortune magazine's 1996 "Fortune 1000" report use the Company's software. The Company's customer base includes Hewlett-Packard, American Express, British Telecom, AT&T, Intel, Johnson & Johnson and Levi Strauss. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company................. 1,500,000 shares Common Stock offered by the Selling Stockholders.... 1,000,000 shares Common Stock to be outstanding after this Offering.......................................... 7,874,383 shares(1) Use of Proceeds..................................... Working capital and other general corporate purposes Proposed Nasdaq National Market symbol.............. RTRK </TABLE> SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> SIX MONTHS ENDED FISCAL YEAR ENDED SEPTEMBER 30, MARCH 31, -------------------------------------------- --------------- 1991 1992 1993 1994 1995 1995 1996 ------ ------ ------ ------- ------- ------ ------ <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue...................................... $2,325 $3,879 $5,670 $ 9,737 $15,014 $6,211 $9,903 Non-recurring charge(2)...................... -- -- -- -- 1,011 -- -- Income (loss) from operations................ (189) 54 172 871 537 583 835 Net income (loss)............................ (213) 13 89 606 401 387 527 Pro forma net income per common and common equivalent share(3)............. $ .06 $ .08 Pro forma weighted average number of common and common equivalent shares outstanding... 6,949 6,938 </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 ---------------------------------- PRO FORMA PRO FORMA(4) AS ADJUSTED(4)(5) ------------ ----------------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents........................................... $ 4,313 $21,299 Working capital..................................................... 2,094 19,629 Total assets........................................................ 10,084 27,070 Total liabilities................................................... 6,587 6,038 Stockholders' equity................................................ 3,497 21,032 </TABLE> - --------------- (1) Based upon shares outstanding as of May 8, 1996. Excludes 641,844 shares of Common Stock which were subject to outstanding options under the Company's 1994 Stock Option Plan (the "1994 Stock Option Plan") as of May 8, 1996 at a weighted average exercise price of approximately $2.65 per share. See "Capitalization," "Management -- Stock Option Plans" and Note 6 of Notes to Financial Statements. (2) Related to the buy-out of certain product distribution rights. Income (loss) from operations before non-recurring charge for the year ended September 30, 1995 totalled $1,548,000. See Note 2 of Notes to Financial Statements. (3) Computed on the basis described in Note 1 of Notes to Financial Statements. (4) Gives effect to the conversion of all then outstanding shares of Convertible Preferred Stock into an aggregate of 2,502,696 shares of Common Stock upon the closing of this offering and the accrual of accumulated dividends due upon conversion of the Convertible Preferred Stock. (5) Adjusted to give effect to the receipt of the net proceeds from the sale of the 1,500,000 shares of Common Stock offered by the Company hereby (at an assumed initial public offering price of $13.00 per share), after deducting the estimated underwriting discount and offering expenses and the payment of dividends due upon conversion of the Convertible Preferred Stock. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001013355_trusted_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001013355_trusted_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements included elsewhere in this Prospectus. As used herein, the terms "Company" and "TIS," unless otherwise indicated, refer to Trusted Information Systems, Inc. and its subsidiaries. Except as otherwise noted or the context otherwise requires, all information in this Prospectus (i) assumes no exercise of the Underwriters' over-allotment option and (ii) reflects an effective 24.538-for-1 stock split of the Common Stock. THE COMPANY Trusted Information Systems, Inc., founded in 1983, provides comprehensive security solutions for protection of computer networks, including global Internet-based systems, internal networks and individual workstations and laptops and is a leading provider of firewall products. The Company develops, markets, licenses and supports the Gauntlet family of firewall products. These products allow customers to create "trusted" networks that are protected from access, theft and damage by unauthorized users from "untrusted" networks such as the Internet and also enable the creation of virtual private networks ("VPNs") through the encrypted transmission of information across untrusted networks. The Company emphasizes the robustness of its security solutions, its long experience with computer security and cryptography issues and its ability to provide comprehensive solutions to customers. The Company also emphasizes its strong reputation with corporate and government computer security professionals in the United States and abroad as a pioneer in the field of computer network security. The Company's Gauntlet Internet Firewall, introduced in 1994, was derived from the TIS Internet Firewall Toolkit which has been available on the Internet since 1993 and has been downloaded more than 34,000 times to more than 15,000 discrete locations worldwide. To date, more than 1,700 Gauntlet Internet Firewalls have been licensed to customers, including the following or subsidiaries thereof: Chrysler Corporation, Microsoft Corporation, NationsBank Corporation, Royal Dutch Petroleum Co. and Swiss Bank Corporation. In January 1996, the Company initiated a telemarketing program to upgrade TIS Internet Firewall Toolkit users to the Gauntlet family of firewall products. These products use a proxy-based application gateway system rather than a filtering gateway system, thus assuring a higher level of security by prohibiting direct connections between networks and by permitting only specifically approved application data to flow into and out of the trusted network. Additionally, the Gauntlet family of firewall products is built on an operating system that has been modified or "hardened" for greater system security. TIS employs a "Crystal Box" approach in which source code is distributed to allow for assurance reviews by the Company's customers, resellers and other experts. The Gauntlet Internet Firewall is available on an Intel Pentium-based platform as well as other platforms such as Hewlett-Packard, Silicon Graphics and Sun Microsystems workstations. The Company expects that its Gauntlet Internet Firewall versions supporting Sun Microsystems' Solaris and Microsoft's Windows NT Server will be commercially available by the end of 1996. The Gauntlet family of firewall products also includes the recently introduced Gauntlet Intranet Firewall for internal networks, Gauntlet Net Extender for remote sites and Gauntlet PC Extender for desktop or mobile computer users. Initially, the Company focused on consulting to major corporations such as Digital Equipment Corporation, International Business Machines Corporation ("IBM") and MCI Communications Corporation, and it has continued to provide computer security consulting to major corporations throughout its history. The Company's commercial consulting practice offers expert technology research services, consultation on security issues associated with products and services, corporate information security policy development, architectural and diagnostic security analysis, firewall configuration and maintenance support and training for corporate network and security administration personnel. These services are carried out by a staff of 12 persons who average more than 15 years of information security experience in both commercial and government organizations. The Company believes that full commercial utilization of the Internet has been hampered by lack of security and the vulnerability of the Internet and private networks connected to the Internet. The very openness of the Internet means that transmitted information and data stored in connected hosts are exposed to other users who are able, in the absence of effective security measures, to gain access to, manipulate and divert the data. This fundamental weakness requires that organizations and individuals weigh security concerns against the perceived commercial opportunities presented by millions of Internet users. To satisfy an organization's desire both to conduct commerce on public networks and to keep hackers and viruses outside of its trusted network, firewalls are designed to monitor and regulate the traffic passing into and out of the trusted network. Organizations are vulnerable not only to unauthorized access to information resources by outsiders, but also to abuse by employees within their own organizations. The Company believes that firewalls and encryption are key elements in providing solutions to these security issues. International Data Corporation has recently forecast that revenues from new licenses of firewall software will grow from approximately $160 million in 1995 to approximately $980 million in 2000. To capitalize on this opportunity, the Company is pursuing a focused marketing strategy to achieve greater market penetration through complementary domestic and international distribution channels, including direct sales, resellers and telesales. The Company's direct sales force markets its products and services to Fortune 500 corporations and organizations with complex information security needs, such as telecommunications companies, finance and banking institutions, petrochemical companies and pharmaceutical companies. The Company's more than 50 resellers include Internet service providers such as BBN Internet Service Corp., Demon Internet Limited, PSINet, Inc., Unipalm Limited and UUNet Technologies, Inc.; value added resellers and hardware vendors such as Bull Enterprise Systems, Data General Corporation, HITACHI Ltd., Silicon Graphics, Inc. and Sumitomo Electric Systems Company, Ltd.; system integrators such as AvantComp Oy, Conjungi Corporation, Fujitsu Systems Business of Canada, Inc. and Media Communications STM AB; and security product vendors such as Hanil Telecom Co., Ltd., Mergent International, Inc. and Virtual Open Network Environment Corporation ("V-One"). Prior to founding TIS in 1983, Stephen T. Walker spent 20 years working on computer security issues at the National Security Agency ("NSA"), the Advanced Research Projects Agency ("ARPA") and the Office of the Secretary of Defense. While working for the U.S. Department of Defense, Mr. Walker was responsible for the development of network security standards and policies, as well as for the establishment of the Department of Defense Computer Security Initiative, the first comprehensive attempt in the Department of Defense at managing computer security systems solutions. Mr. Walker is widely recognized as a pioneer in the field of computer network security. He has testified before Congress as an expert witness on these issues on numerous occasions and has played an instrumental role in assisting the U.S. government to formulate encryption export policy. Mr. Walker's experience is complemented by other members of the Company's senior management team who average over 20 years of experience working on computer security and networking issues in industry and government. In 1987, TIS began to perform consulting and research and development projects for government agencies, including the NSA and ARPA. These activities have contributed to the Company's in-depth understanding of the technologies, threats and user requirements in computer security and have contributed to the development of the TIS Internet Firewall Toolkit and the Gauntlet family of firewall products. The Company continues to provide research and development and consulting services to government agencies in areas such as next generation firewalls, distributed trusted operating systems, Internet domain name services, international cryptography and advanced cryptographic key handling and recovery techniques. The Company's position as an adviser and supplier to industry and the government has enabled it to become a leader in developing a key recovery solution, based on its proprietary technology generally known as RecoverKey or Key Recovery Technology ("KRT") ("RecoverKey/KRT"), to permit the export of products with strong cryptography while protecting the interests of security and law enforcement agencies. The Clinton administration policy, as outlined by the Vice President on July 12, 1996 and October 1, 1996, links the relaxation of export controls to systems that include the use of key recovery. The Company has incorporated its RecoverKey-International solution (formerly known as Commercial Key Escrow ("CKE")) into its Gauntlet Internet Firewall. In January 1996, the U.S. government granted the Company an export license for a particular transaction involving the Gauntlet Internet Firewall using the DES algorithm (56 bits). This was the first export license granted because the encryption is combined with a key recovery system. In June 1996, the U.S. government granted the Company several export licenses to sell the Gauntlet Internet Firewall in order to provide Global Virtual Private Network services. The Company was incorporated in Maryland in 1983 and was reincorporated in Delaware in 1996. The Company's principal executive offices are located at 3060 Washington Road, Glenwood, Maryland 21738. Its telephone number is (301) 854-6889. The Company's home page on the World Wide Web is www.tis.com. THE OFFERING COMMON STOCK OFFERED................ 2,900,000 shares COMMON STOCK OUTSTANDING AFTER THE OFFERING............................ 10,442,447(1) USE OF PROCEEDS..................... Working capital and other general corporate purposes including expansion of distribution capabilities, further development of products and technology, expansion of service and support capabilities, repayment of short-term borrowings and potential acquisitions. DIVIDEND POLICY..................... The Company intends to retain its earnings to fund development of its business and does not anticipate paying cash dividends in the foreseeable future. See "Dividend Policy." RISK FACTORS........................ For a discussion of certain considerations relevant to an investment in the Common Stock, see "Risk Factors." PROPOSED NASDAQ NATIONAL MARKET SYMBOL.............................. "TISX" - --------------- (1) Excludes 1,314,355 shares of Common Stock reserved for issuance under outstanding stock options as of September 15, 1996. See "Management -- Employee Stock Options Plans" and "-- Directors' Stock Option Plan" and Note 5 of Notes to Consolidated Financial Statements. SUMMARY FINANCIAL DATA The following table sets forth summary financial data derived from the consolidated financial statements of the Company. The data should be read in conjunction with the consolidated financial statements and notes thereto and other financial information included elsewhere in this Prospectus. <TABLE> <CAPTION> -------------------------------------------------------------- FISCAL YEAR(1) FIRST HALF(1) In thousands, except per share data 1991 1992 1993 1994 1995 1995 1996 ------ ------ ------ ------- ------- ------ ------ (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA Revenues Government contracts......................... $5,191 $6,262 $8,343 $11,258 $12,327 $6,042 $5,352 Commercial products.......................... -- -- -- 1,003 4,271 1,412 3,732 Commercial consulting services............... 834 568 448 856 1,492 835 534 ------ ------ ------ ------- ------- ------ ------ Total revenues............................. 6,025 6,830 8,791 13,117 18,090 8,289 9,618 Gross profit................................... 2,343 2,454 2,972 4,914 7,225 2,931 4,226 Income (loss) from operations.................. 213 262 192 1,271 2,353 787 (1,459) Net income (loss).............................. 38 74 35 675 1,344 471 (920) Net income (loss) per share.................... $ -- $ .01 $ -- $ .08 $ .15 $ .05 $ (.11) Weighted average shares outstanding............ 8,563 8,419 8,369 8,526 8,885 8,750 8,110 </TABLE> <TABLE> <CAPTION> -------------------------------------- JUNE 28, 1996 DECEMBER 29, AS 1995 ACTUAL ADJUSTED(2) ------------ ------- ------------- (UNAUDITED) <S> <C> <C> <C> BALANCE SHEET DATA Cash, cash equivalents and marketable securities.................. $ 54 $ 5,653 $33,412 Working capital................................................... 210 1,278 32,717 Total assets...................................................... 10,222 19,424 47,184 Total debt........................................................ 3,264 6,799 3,119 Shareholders' equity.............................................. 2,407 5,089 36,528 </TABLE> - --------------- (1) The ending dates of these fiscal years are December 27, 1991, December 25, 1992, December 31, 1993, December 30, 1994 and December 29, 1995. The ending dates of these first halves are June 30, 1995 and June 28, 1996. (2) Adjusted to reflect the sale of 2,900,000 shares of Common Stock offered hereby (assuming an initial public offering price of $12.00 per share) and the application of a portion of the estimated net proceeds therefrom to repay short-term borrowings. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001013460_tsr_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001013460_tsr_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..f265b9e3550c45537e0798106a00415cdb74f151
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless the context otherwise requires, references in this Prospectus to 'TSR Paging' or the 'Company' refer to TSR Paging Inc. Unless otherwise stated, the information in this Prospectus assumes that the Underwriters' over-allotment options are not exercised. THE COMPANY TSR Paging is a leading regional provider of wireless messaging products and services and believes that it is one of the fastest growing, low-cost wireless messaging companies in the United States. From 1991 to 1995, the Company's subscriber base grew at an average compound annual growth rate of 92.4% from 44,304 units in service to 607,725 units in service. During this period, all of the Company's growth has been internally generated. At March 31, 1996, the Company's subscriber base had grown to 696,623 units in service and the Company was ranked as the 12th largest paging company in the United States, according to industry sources. The Company focuses its business efforts on densely populated major metropolitan markets and population corridors which exhibit the size and demographic trends that the Company believes should offer significant demand for the Company's products and services. The Company seeks to maximize its returns on capital and leverage its operating cost structure by achieving a sufficient base of subscribers on a regional basis. The Company's operations are currently organized into two operating regions: (i) the Northeast, including certain metropolitan markets in New York, Connecticut, New Jersey, Massachusetts, eastern Pennsylvania, Maryland and Washington, D.C.; and (ii) the West, including certain metropolitan markets in California, Arizona and Nevada. The Company's long term operating objectives are to continue to aggressively grow its base of subscribers throughout the U.S. at the same time as achieving its operating profitability and cash flow growth targets. The Company's strategy to achieve these objectives involves two distinct components: (i) operating strategy and (ii) geographic expansion strategy. The Company applies a focused, market-specific operating strategy to each of the markets in which it operates. The key common elements of this strategy include: (i) increasing its market penetration through the reseller distribution channel, (ii) expanding its distribution through Company-owned stores, (iii) continuing to maintain its low-cost provider status; (iv) providing a high level of customer service, (v) focusing on selling as opposed to leasing pagers to customers, and (vi) developing strategic alliances with other providers of communications services. See 'Business -- Business Objectives -- Operating Strategy.' The Company's geographic expansion strategy incorporates two key elements: (i) the continued build-out of its existing regional networks in the Northeast (anchored by New York City) and the West (anchored by Los Angeles), and (ii) the development of networks in new markets, including the formation of two new operating regions, covering the Midwest (anchored by Chicago) and the Southeast (anchored by Miami/Ft. Lauderdale). During 1996, the Company commenced construction in its new Midwest and Southeast regions. In addition, the Company expanded service within its existing West region to the San Francisco and San Jose markets. See 'Business -- Business Objectives -- Geographic Expansion Strategy.' The Company primarily targets the consumer segment of the market. Industry sources expect this segment to grow at a faster rate than the industry average. The Company believes this strong consumer growth is attributable to a combination of factors including declining costs of service, expanding channels of distribution and greater consumer awareness of the benefits offered by wireless communications technology. In addition, the Company believes the consumer market is less capital intensive and more profitable than the commercial market, primarily because consumers typically buy rather than lease pagers and also because the consumer is generally less sensitive to the price of wireless messaging services than the commercial subscriber. The Company strives to develop close ties with its subscribers by providing high quality customer service and post-sales support in order to lower subscriber disconnect rates and position the Company as a likely distributor of other wireless products, such as cellular and wireless personal communication services ('PCS'). The Company seeks to maximize its penetration of the consumer market by distributing its services primarily through the reseller channel and through stores owned and operated by the Company. Through the use of resellers, the Company is able to efficiently market its services to a broad population base and achieve higher network utilization with lower incremental capital, sales and administrative costs. The reseller channel allows the Company to rapidly gain a presence in newly opened markets and increase its penetration in existing markets. In addition, the Company is able to reach the consumer at a lower incremental cost, primarily because the Company does not incur the selling, marketing, administrative and disconnection expenses associated with these subscribers. See 'Business -- Wireless Messaging Operations.' The Company has been operating its own stores since July 1993 and at March 31, 1996 had 67 stores in operation in eight states. As the appeal of wireless messaging services to the consumer market grows, the Company believes that it will be able to capture an increasingly significant share of this market through a targeted retail distribution strategy that emphasizes Company-owned stores. The Company's control of this distribution outlet enables it to control the quality of sales personnel, ensure that subscribers make educated purchase decisions and maintain high quality customer service. The Company expects to continue to develop this channel and plans to open stores in markets in which the Company provides regional wireless messaging services. The Company believes that it has one of the lowest operating costs per pager in the wireless messaging industry. The Company's average monthly operating costs per pager were $5.71, $4.50 and $3.81 for the years ended 1993, 1994 and 1995, respectively. The Company attributes its low operating cost structure to a combination of factors, including its (i) high quality customer service and resultant lower rate of disconnections, (ii) focus on the reseller distribution channel whereby the reseller absorbs a significant portion of the operating expenses per pager, (iii) increasing penetration of its existing markets and ability to realize economies of scale, (iv) efficient allocation and productivity of personnel, and (v) volume purchase arrangements with suppliers. The Company has historically distinguished itself from other wireless messaging operators by providing high quality customer service in each of its markets. Substantially all of the Company's wireless messaging systems are 900 MHz systems which utilize Motorola's FLEX'tm' technology. FLEX'tm' technology enables the Company to more efficiently use its bandwidth by increasing the number of messages transmitted per minute and thereby increase the number of pagers in service which can be supported on its systems. As a result, the Company's wireless messaging systems experience little delay in transmitting messages and are highly reliable. As part of its commitment to 'full service,' the Company strives to provide direct subscribers with high quality post-sale maintenance, including 24-hour on-call repair and next-day replacement of lost or damaged equipment. In addition, unlike many of its competitors, the Company provides its reseller distributors with a high level of service by, among other things, allowing resellers to integrate their billing and activation systems with those of the Company. BACKGROUND AND REORGANIZED CORPORATE STRUCTURE The Company's current business was established in 1987 by Leonard DiSavino and Philip Sacks. Until 1995, all of the common stock and partnership interests of the Company were owned by Leonard DiSavino, Philip Sacks and certain trusts for the benefit of their respective children (collectively, the 'Founding Stockholders'). See 'The Company.' In July 1995, a group of investors led by TA Associates, Inc. (collectively, the 'Investors') purchased from Leonard DiSavino and Philip Sacks (i) discount notes for $34 million with an aggregate face value of $70.0 million (the 'Notes'), which are the non-recourse obligations of Messrs. DiSavino and Sacks and (ii) an option (the 'Option') for $1 million to purchase 40.66% of the fully-diluted common stock of the Company from the Founding Stockholders in exchange for a portion of the Notes. The Investors intend to exercise the Option simultaneously with the consummation of the Offerings. In addition, a portion of the proceeds from the Offerings will be used to pay a dividend of $35 million (the 'Dividend') to the Founding Stockholders, which payment will be used by Messrs. DiSavino and Sacks to repay in part the Notes. The obligations under the Notes will be satisfied in connection with the exercise of the Option. See 'Use of Proceeds' and 'Certain Relationships and Related Party Transactions.' Prior to the Offerings, the Company was an S Corporation subject to taxation under Subchapter S of the Internal Revenue Code of 1986, as amended (the 'Internal Revenue Code'). As a result, the net income of the Company prior to the Offerings, for federal (and some state) income tax purposes, has been reported by, and taxed directly to, the Company's stockholders rather than to the Company. The Company's S Corporation status will terminate immediately prior to the consummation of the Offerings and the Company will become a C Corporation subject to corporate income taxation. No adverse tax consequences to the persons who become stockholders in the Offerings are expected to result from termination of the Company's S Corporation status. See 'Certain Relationships and Related Party Transactions -- Tax Indemnification Agreement.' THE OFFERINGS <TABLE> <S> <C> Common Stock Offered by the Company U.S. Offering................................. 3,520,000 shares International Offering........................ 880,000 shares Total......................................... 4,400,000 shares (1) Common Stock to be outstanding after the Offerings..................................... 14,988,232 shares (1)(2) Use of Proceeds................................. The net proceeds to the Company from the Offerings are estimated to be approximately $68.8 million, after deducting underwriting discounts and commissions and the estimated offering expenses payable by the Company (assuming an initial public offering price of $17.00 per share). The Company will use approximately $35.0 million of the net proceeds of the Offerings to pay the Dividend and the remainder for capital expenditures in connection with system and geographic expansion, potential acquisitions, working capital and general corporate purposes. Pending the use of funds for geographic and system expansion and other general corporate uses, the Company will use approximately $33.8 million of the net proceeds of the Offerings to repay indebtedness under the Company's revolving credit facility. Nasdaq National Market Symbol................... The Common Stock has been approved for listing on the Nasdaq National Market, subject to official notice of issuance, under the symbol 'BEEP.' </TABLE> - ------------ (1) Excludes up to 660,000 shares of Common Stock that may be issued upon the exercise of the over-allotment options granted to the Underwriters. (2) Excludes 316,407 shares of Common Stock reserved for issuance upon exercise of stock options outstanding upon consummation of the Offerings at a weighted average exercise price of $8.50 per share at the date of this Prospectus. See 'Management -- 1995 Phantom Stock Plan' and ' -- Non- Employee Director Stock Option Plan.' SUMMARY FINANCIAL AND OPERATING DATA The following table sets forth summary financial data for the years ended December 31, 1991 and December 31, 1992, which have been derived from the Company's financial statements audited by Cummings & Carroll, P.C., independent public accountants, and for the years ended December 31, 1993, December 31, 1994 and December 31, 1995 which have been derived from the Company's financial statements audited by Arthur Andersen LLP, independent public accountants, whose report thereon is included elsewhere in this Prospectus. The following summary financial data for the three months ended March 31, 1995 and March 31, 1996 have been derived from the Company's unaudited condensed financial statements which, in the opinion of management, contain all adjustments (consisting of normal and recurring adjustments) necessary to present fairly the Company's financial position and results of operations at such dates and for such periods. The interim results are not necessarily indicative of the results of operations for the entire year. The data presented below should be read in conjunction with, and is qualified in its entirety by reference to, the financial statements of the Company and the related notes thereto appearing elsewhere in this Prospectus and 'Management's Discussion and Analysis of Financial Condition and Results of Operations.' <TABLE> <CAPTION> THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, -------------------------------------------------- ------------------- 1991 1992 1993 1994 1995 1995 1996 ------- ------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Revenues: Services, rent and maintenance.............. $ 7,130 $ 8,500 $ 11,119 $ 17,954 $ 28,908 $ 6,308 $ 9,937 Product sales............................... 809 1,586 8,481 14,088 18,615 3,931 4,954 Cost of products sold....................... (453) (857) (5,098) (10,520) (14,549) (3,094) (3,949) ------- ------- -------- -------- -------- -------- -------- Net revenues.............................. 7,486 9,229 14,502 21,522 32,974 7,145 10,942 Services, rent and maintenance expenses....... 1,678 1,888 2,748 4,592 7,060 1,575 2,308 Selling and marketing expenses................ 1,562 1,810 1,814 3,332 5,399 1,178 1,771 General and administrative expenses........... 2,295 2,560 3,377 5,165 8,719 1,943 3,422 Depreciation and amortization................. 1,977 2,741 6,758 7,578 10,870 2,179 2,892 Non-cash compensation expense(1).............. 0 0 0 0 0 0 747 ------- ------- -------- -------- -------- -------- -------- Operating income (loss)....................... (26) 230 (195) 855 926 270 (198) Other expense................................. 0 0 0 0 163 0 0 Interest expense.............................. 600 548 517 1,024 2,484 522 638 Unusual item(2)............................... 0 0 0 590 564 0 0 Income tax provision.......................... 0 0 0 32 49 0 5 ------- ------- -------- -------- -------- -------- -------- Loss from continuing operations before discontinued operations and extraordinary item........................................ (626) (318) (712) (791) (2,334) (252) (841) Discontinued operations and extraordinary item(3)..................................... 0 0 0 0 612 0 0 ------- ------- -------- -------- -------- -------- -------- Net loss...................................... $ (626) $ (318) $ (712) $ (791) $ (2,946) $ (252) $ (841) ------- ------- -------- -------- -------- -------- -------- ------- ------- -------- -------- -------- -------- -------- Pro forma loss from continuing operations before discontinued operations and extraordinary item(4)....................... $ (2,284) $ (836) Pro forma loss per common share from continuing operations before discontinued operations and extraordinary item(4)........ $ (0.18) $ (0.07) Weighted average shares outstanding........... 12,805 12,805 OTHER DATA: EBITDA(5)..................................... $ 1,951 $ 2,971 $ 6,563 $ 8,433 $ 11,796 $ 2,449 $ 3,441 EBITDA margin(6).............................. 26.1% 32.2% 45.3% 39.2% 35.8% 34.3% 31.4% Average monthly revenue per unit(7)........... $ 17.65 $ 12.77 $ 8.00 $ 6.18 $ 5.20 $ 6.11 $ 5.08 Average monthly operating expense per unit(8)..................................... 11.70 9.40 5.71 4.50 3.81 4.55 3.83 Units in service (at end of period)........... 44,304 66,674 164,883 319,687 607,725 368,767 696,623 Units in service per employee (at end of period)(9).................................. 642 901 1,633 1,648 1,905 1,748 1,819 Selling and marketing expenses per net subscriber additions(10).................... $157.03 $ 80.91 $ 18.47 $ 21.52 $ 18.74 $ 24.00 $ 19.92 Capital expenditures.......................... 2,234 4,288 10,969 13,160 20,643 2,777 7,252 </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 --------------------------- PRO FORMA ACTUAL AS ADJUSTED(11) -------- --------------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents............................................................. $ 116 $33,930 Total assets.......................................................................... 42,456 76,270 Total long-term debt (including current maturities)................................... 43,750 43,750 Total stockholders' equity (deficit).................................................. (11,824) 21,643 </TABLE> (Footnotes on following page) (1) During 1992 and 1993, the Company granted to certain employees equity interests which were to be realized upon the occurrence of certain events. Effective January 1, 1996, these equity interests were cancelled and such employees were issued 168,900 units under the Phantom Stock Plan at a strike price of $0, vest over a five-year period from the original date of grant in 1992 or 1993, as applicable, and had a grant date value of $6 per unit. The employees received credit for vesting through the date of cancellation of the equity interests. In addition, on January 1, 1996, 150,350 units were issued under the Phantom Stock Plan, at a strike price of $6 per unit and vest over a five-year period. As determined by an independent investment bank valuation and the Company's Compensation Committee the per unit value on January 1, 1996 was $6. As a result, the financial statements for the three months ended March 31, 1996 reflect non-cash compensation expense of $747,000 (which amount includes the cumulative effect of the vesting from 1992 forward) with a corresponding credit to additional paid-in-capital. The remaining non-cash compensation expense of $266,000 will be recognized by the Company over the next two years. In connection with the Offerings, the above units will be converted to options under the TSR Paging Inc. Employee Option Plan. Assuming an initial public offering price of $17.00 per share, the units will convert to a total of 316,407 options at an exercise price of $8.50 per share. (2) The unusual item of $590,000 in 1994 primarily consists of certain financing costs associated with the commencement of an initial public offering which was terminated prior to completion. The unusual item of $564,000 in 1995 primarily consists of costs related to certain merger activity. (3) The discontinued operations charge of $300,000 consists of costs related to the discontinuation of the Company's telephone answering service operations. The extraordinary item of $312,000 is related to the write-off of deferred financing costs following the refinancing of the Credit Agreement. (4) Following termination of the Company's status as an S corporation upon consummation of the Offerings, the Company will be subject to corporate income taxation. Accordingly, pro forma loss reflects Federal and state income taxes as if the Company has been a C corporation based on the tax rates that were in effect during the periods presented. See 'The Company.' The pro forma statement of operations data does not reflect (i) distributions to Messrs. DiSavino and Sacks that, if the Company were a C corporation, would be recorded as compensation expense by the Company and (ii) reductions in interest expense relating to the paydown of borrowings under the Company's revolving credit facility, as it is anticipated that the Company will reborrow such amounts to fund its expansion strategy. Pro forma loss including discontinued operations before extraordinary item would have been $(.20) per share and $(.07) per share for the year ended December 31, 1995 and the three months ended March 31, 1996, respectively. Pro forma loss including discontinued operations and extraordinary item would have been $(.23) per share and $(.07) per share for the year ended December 31, 1995 and the three months ended March 31, 1996, respectively. (5) EBITDA represents operating income plus depreciation and amortization and non-cash compensation expense. EBITDA is a financial measure commonly used in the Company's industry and is not intended to represent cash flows for the period, nor has it been presented as an alternative to operating income or as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. EBITDA is not determined in accordance with generally accepted accounting principles. See 'Management's Discussion and Analysis of Financial Condition and Results of Operations' and the Financial Statements and the Notes thereto appearing elsewhere in this Prospectus. (6) EBITDA margin is calculated by dividing (a) EBITDA by (b) net revenues. EBITDA margin is a measure commonly used in the Company's industry as an indicator of the efficiency of the Company's operations. (7) Average monthly revenue per unit ('ARPU') is calculated by dividing (a) services, rent and maintenance revenues for the period by (b) the applicable number of months in the period, and dividing the result by (c) the average number of units in service for the period. (8) Average monthly operating expense per unit ('EXPU') is calculated by dividing (a) total operating expenses before depreciation and amortization and non-cash compensation expense for the period by (b) the applicable number of months in the period, and dividing the result by (c) the average number of units in service for the period. (9) Employees at the end of the period includes all full-time employees plus part-time employees divided by two, excluding employees associated with the Company's discontinued operations. (10) Selling and marketing expenses per net subscriber additions is calculated by dividing (a) selling and marketing expenses for the period by (b) the net change in units in service during such period. (11) The Pro Forma As Adjusted amounts reflect (i) the consummation of the Offerings, (ii) the payment of the Dividend and (iii) the recording of a deferred tax liability of $347,000 to reflect differences between book and tax accounting for depreciation, inventory and certain reserves as a result of the conversion of the Company from an S corporation to a C corporation. It has been assumed that the net proceeds have been applied to cash and cash equivalents pending the use of such proceeds to fund geographic and system expansion. RISK FACTORS Prospective investors should consider carefully, together with all of the information contained in this Prospectus, the following factors. EXPANSION INTO NEW MARKETS; CAPITAL REQUIREMENTS AND START-UP COSTS The Company is in the process of implementing a significant expansion program which involves the Company's entry into new geographic markets and compliance with the construction requirements imposed by the Federal Communications Commission ('FCC') pursuant to numerous authorizations issued by the FCC on the frequency 929.2125 MHz (collectively, the Company's 'System Licenses'). Currently, the Company does not offer inter-regional or nationwide coverage to its subscribers. Thus for example, a subscriber in the Northeast region would not be able to receive messages in the Midwest or West region. The Company estimates that its expansion program will require approximately $60.0 million in aggregate capital expenditures during 1996 and 1997. The Company expects to fund these capital requirements from a combination of a portion of the net proceeds from the Offerings, available funds under the Company's bank financing agreements and cash flow from its operations. However, there can be no assurance that the Company will be able to complete its expansion program as scheduled, generate sufficient cash flow from operations to meet a portion of its capital requirements or obtain additional debt or equity financing, on reasonable terms or at all. In addition, the Company will incur substantial start-up costs in connection with expanding its operations into new markets, which will result in initial operating losses in those markets. Any such operating losses could have a material adverse effect on the Company's results of operations for such periods. Based upon historical positive cash flow and available borrowings under a credit facility, the Company believes that it has adequate resources to sustain its current operations. See ' -- History of Net Losses.' COMPETITION; CONSOLIDATION OF INDUSTRY The wireless messaging industry is a highly competitive industry, with price being the primary means of differentiation among providers of numeric messaging services (which account for the majority of the Company's current revenues). Companies in the industry also compete on the basis of coverage area, enhanced services, transmission quality, system reliability and customer service. The Company faces competition from other wireless communications companies in all markets in which it operates. Certain of the Company's competitors, which include public and private telecommunications companies and regional and national wireless messaging companies, possess greater financial, technical, marketing and other resources than the Company. If any of such companies were to devote additional resources to the numeric or other wireless messaging businesses, the Company's results of operations could be adversely affected. Some of these larger competitors may also be able to use their substantial financial resources to increase the already competitive pricing in the markets in which the Company operates, which may have an adverse effect on the Company's results of operations. In addition, other entities offering wireless two-way communications technology, including cellular telephone, PCS and specialized mobile radio services ('SMR'), also compete with the wireless messaging services that the Company provides. There can be no assurance that additional competitors will not enter markets served by the Company or that the Company will be able to compete successfully. See 'Business -- Competition.' The paging industry is currently undergoing significant consolidation as various participants seek to accomplish growth through acquisitions. Consolidation allows larger companies to garner economies of scale and thus makes it more difficult for smaller companies to compete successfully. There can be no assurance that the Company will not be adversely affected by such consolidation. TECHNOLOGICAL CHANGE The wireless communications industry is characterized by rapid technological change. Technological advances in the wireless communications industry may result in the availability of new services or products competitive with the wireless messaging services provided, or to be developed by, the Company. Recent and proposed regulatory changes by the FCC are aimed at encouraging such new services and products. Moreover, changes in technology could lower the cost of competitive services and products to a level where the Company's services and products would become less competitive or to where the Company would be required to reduce the prices of its services and products. There can be no assurance that the Company will be able to develop or introduce new services and products to remain competitive or that the Company will not be adversely affected in the event of such technological developments. See 'Business -- Competition.' Several wireless two-way communication technologies, including cellular telephone service, broadband and narrowband PCS, SMR, low-speed data networks and mobile satellite services, are currently in use or under development. Although these technologies are currently more expensive than wireless messaging services or are not yet broadly available, future technological improvements could result in increased capacity and efficiency for wireless two-way communication and, accordingly, could result in increased competition for the Company. Some of these service providers are bundling wireless messaging services with two-way service in a combined handset. Large manufacturers dominate technological development in the wireless communications industry, and changes in their methods of distributing one-way wireless messaging products could reduce the Company's access to technology and may have an adverse effect on the Company's operations. There can be no assurance that the Company will not be adversely affected by such technological change. See 'Business -- Competition.' REGULATORY CONSIDERATIONS Government Regulation. The Company's wireless messaging operations are subject to regulation by the FCC and, to a lesser extent, by various state regulatory agencies. From time to time, legislation and regulations which could potentially adversely affect the Company are proposed by federal and state legislators and regulators. Moreover, FCC approval and authorization is subject to challenge prior to issuance and appeal after issuance. However, there can be no assurance that Federal or other state legislation will not be adopted, or that the FCC or the various state agencies will not adopt regulations or take other actions, whether in connection with challenges, appeals or otherwise, that would adversely affect the business of the Company. In addition, the Company's wireless messaging facilities are also subject to certain Federal Aviation Administration regulations with respect to the construction, marking and lighting of wireless messaging transmitter towers and antennas. See 'Business -- Regulation.' Required Auctions Under the Omnibus Budget Reconciliation Act of 1993 (the 'Budget Act'). The Omnibus Budget Reconciliation Act of 1993 (the 'Budget Act') authorized the FCC to implement procedures which will require that new or modified licenses for portions of the radio spectrum used by the Company be awarded by an auction process. The FCC has enacted general regulations regarding the conduct of such auctions and the FCC has already proceeded to assign certain licenses pursuant to auctions. Since these procedures are new to the wireless communications industry, the Company cannot predict their impact on its licensing practices, although the Company believes that, to the extent the Company seeks to expand its radio spectrum licenses in the future, these procedures may make such expansion of the Company's operations more costly. The Budget Act also created a new regulatory category called 'commercial mobile radio services' ('CMRS'), which includes most paging providers currently operating as either radio common carriers ('RCCs') or private carrier paging operators ('PCPs'), including the Company. CMRS licensees make service (i) available to the public, (ii) on a for-profit basis and (iii) through interconnection with the public switched telephone network. 'Private Mobile Radio Service' ('PMRS') licensees provide service that is neither CMRS nor the functional equivalent of CMRS, i.e., service that does not meet one or more of the elements of the CMRS definition. The FCC has adopted rules to govern regulation of this new category, which have become effective, except that certain Private Mobile systems, including PCP systems, will continue to be regulated as PMRS until August 1996, at which time such systems will become subject to CMRS regulation. In addition, in February 1996, the FCC adopted a Notice of Proposed Rulemaking ('NPRM') in which the FCC proposed to utilize a geographic licensing process in place of the current site-specific licensing process and to sell geographic licenses at auction. There can be no assurance that such auctions, if implemented, would not materially increase the cost of licenses which may be sought by the Company in the future. Moreover, in a First Report and Order and Public Notice adopted by the FCC in May 1996, the FCC failed to identify the frequency 929.2125 MHz for which the Company holds the System Licenses as a nationwide exclusive CMRS paging frequency that will be excluded from geographic licensing and exempt from interim rules including a freeze on filing certain types of paging applications. The Company has sought reconsideration and stay of these decisions and it is the Company's position that 929.2125 MHz should be considered a nationwide exclusive CMRS frequency that is exempt from geographic licensing. The FCC has not yet acted on the Company's reconsideration request, its stay request, or the final rules that will determine whether 929.2125 MHz will be subject to geographic licensing. Failure to have the Company's 929.2125 MHz frequency for which the Company holds the System Licenses identified as a nationwide exclusive CMRS paging frequency (and, as a result of such identification, excluded from geographic licensing and exempt from the freeze on filing certain types of paging applications) could result in a material adverse effect on the Company. The Company can give no assurances that the FCC will act in accordance with the Company's position. See 'Business -- Regulation.' In light of the FCC's ability to utilize auctions to select from among competing CMRS applications, and as a result of the FCC's proposal to institute geographic licensing through auctions for one-way paging frequencies, there can be no assurance that the Company will be able to procure additional frequencies, or expand its existing paging networks operating on frequencies for which the Company is currently licensed into new geographic areas. The Company also believes that the use of auctions for paging licenses may increase the number of competitors who have significant financial resources and may provide an added incentive to build out authorized systems rapidly. Regulation of Foreign Ownership. Under existing law, no more than 20% of the Company's capital stock may be owned, directly or indirectly, or voted by non-U.S. citizens or their representatives, a foreign government or its representatives, or a foreign corporation, and foreign ownership in excess of these limits could place the Company's licenses in jeopardy. The Company's certificate of incorporation authorizes the Board of Directors to adopt such provisions as it deems necessary in order to ensure compliance with the rules, regulations and policies of the FCC (the 'FCC Rules'). These restrictions on foreign ownership could also adversely affect the ability of the Company to attract additional equity financing from entities that are, or are owned by, non-U.S. persons. Currently, there are no foreign holders of the Company's Common Stock. The Offerings consist of two tranches, an international tranche and a domestic tranche. It is anticipated that 880,000 shares will be sold to foreign investors in the international tranche. Upon exercise of the Option and consummation of the Offerings (assuming that 880,000 shares are sold to foreign investors), it is expected that approximately 8.6% of the outstanding shares will be owned by foreign holders. While the Company intends to comply with all FCC requirements, there can be no assurance as to the level of foreign ownership of the Common Stock as a result of secondary trading. See 'Business -- Regulation.' SHIFTING MIX OF DISTRIBUTION CHANNELS Since 1992, the Company has significantly shifted its mix of distribution channels to resellers and Company-owned stores from direct sales. The shift towards the reseller channel in particular has in part led to a decline in the Company's ARPU (calculated by dividing services, rent and maintenance revenues for the period by the applicable number of months in the period and dividing the result by the average number of units in service for the period) over the last three years since the Company charges wholesale service prices to resellers rather than the higher retail prices charged to end users. This decrease has historically been partially offset by lower EXPU (calculated by dividing total operating expenses before depreciation and amortization and non-cash compensation expense for the period by the applicable number of months in the period and dividing the result by the average number of units in service for the period) resulting from the reseller bearing a significant portion of the costs of selling, marketing, administration and disconnections related to their customers. To the extent that the Company's EXPU does not decline at a rate similar to ARPU, the Company's financial results may be adversely affected. The Company has also experienced a decline in the net margin on product sales (defined as product sales less cost of products sold) over the last three years. In addition to increased competition in the industry, the Company attributes this decline in part to its increased use of the reseller distribution channel through which the Company has less flexibility in terms of the prices it charges on the sale of pagers. See 'Management's Discussion and Analysis of Financial Conditions and Results of Operations' and 'Business -- Competition.' As part of its expansion plans, the Company intends to continue to expand its distribution through Company-owned stores. The establishment of numerous additional Company-owned stores would represent a divergence from the Company's historical operating policy and experience and there can be no assurance that the Company's recent success in this channel of distribution will be maintained. Because the Company plans to sell an increasing number of its units through Company-owned stores, the Company's overall rate of disconnections may increase since the Company expects that subscribers who purchase pagers through retail outlets may cancel their subscriptions at a higher rate than subscribers obtained through other distribution channels. ABILITY TO MANAGE GROWTH The Company has historically grown at a faster rate than the average for the wireless messaging industry. From 1991 to 1995, the Company's subscriber base grew at an average compound annual growth rate of approximately 92%, from 44,304 units in service to 607,725 units in service. During the same period, the paging industry as a whole grew at an average compound annual growth rate of 26%, from approximately 12 million units in service to 30 million units in service. However, there can be no assurance that the Company will be able to continue to achieve its historical growth rate. The Company's continued expansion will depend on, among other things, the Company's ability to access new markets and customers, install facilities and open new Company-owned stores, each in a timely manner, at reasonable cost and on terms acceptable to the Company. The Company's expansion will also depend on, among other things, its access to funds for required capital expenditures, the ability to attract and retain skilled employees, the adaptability of the Company's decentralized operating structure to more regions as the Company implements its expansion plan, and on the ability of the Company's officers and key employees to manage successfully rapid growth and to implement appropriate management information systems and controls. The Company's inability to manage its expansion effectively, or to attract and retain skilled employees and implement appropriate systems and controls, could have a material adverse effect on the Company's operations. See 'Business' and 'Management.' Historically, the Company has grown internally. The Company may in the future make strategic acquisitions to expand its markets and take advantage of the consolidation trend in the wireless messaging industry. There can be no assurance that future acquisitions can be consummated on acceptable terms or that any acquired companies will be successfully integrated into the Company's operations. SUBSCRIBER TURNOVER The results of operations of wireless messaging service providers such as the Company are significantly affected by subscriber disconnections, which commonly are measured based upon a percentage of the Company's customer base. In order to realize net growth in subscriber units in service, disconnected subscribers must be replaced and additional subscribers must be added. However, because the sales and marketing costs associated with attracting new subscribers are substantial relative to the costs of providing service to existing subscribers, disconnections adversely affect the Company's results of operations. The Company's average monthly disconnect rate during the year ended December 31, 1995 and the three months ended March 31, 1996 was approximately 1.1% and 1.3%, respectively, of its subscriber base for each period. The average monthly disconnect rate for the paging industry during the year ended December 31, 1995 was approximately 2.8%. Although the Company believes that its disconnect rate is below the industry average, there can be no assurance that the Company will not experience an increase in its disconnect rate which may adversely affect the Company's results of operations. In addition, because the Company plans to sell an increasing number of its units through Company-owned stores, the Company's overall rate of disconnections may increase since the Company expects that subscribers who purchase pagers through such retail outlets may tend to cancel their subscriptions at a higher rate than subscribers obtained through other distribution channels. See 'Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview.' HISTORY OF NET LOSSES The Company sustained net losses of $0.8 million, $2.9 million and $0.1 million for the years ended December 31, 1994 and 1995 and for the three months ended March 31, 1996, respectively, and expects to incur additional losses in the future. The Company's losses have resulted primarily from interest expense and depreciation expense associated with capital investments. In addition, the Company had an accumulated deficit of approximately $12.9 million as of December 31, 1995. There can be no assurance that the Company will be able to operate profitably in the future. See 'Selected Consolidated Financial Data' and 'Management's Discussion and Analysis of Financial Condition and Results of Operations.' CONTROL BY PRINCIPAL STOCKHOLDERS Upon completion of the Offering, Leonard DiSavino and Philip Sacks, the founders of the Company, will beneficially own an aggregate of approximately 41.1% of the outstanding shares of Common Stock (39.3% if the Underwriters' over-allotment options are exercised in full). In addition, the Investors will own in aggregate approximately 29.6% of the outstanding shares of Common Stock (28.3% if the Underwriters' over-allotment options are exercised in full). Pursuant to an agreement with the Investors entered into in connection with purchase and sale of the Notes and the Option (the 'Investment Agreement'), Messrs. DiSavino and Sacks and the Investors have agreed to vote their shares of Common Stock in order to elect to the Board of Directors (i) four persons designated by Messrs. DiSavino and Sacks and (ii) three persons designated by certain of the Investors. Thus, the Investment Agreement gives the Investors and Messrs. DiSavino and Sacks control of the Board of Directors of the Company. Furthermore, the Investors will give Messrs. DiSavino and Sacks an irrevocable proxy to vote approximately 17.3% of the Common Stock of the Company held by the Investors. As a result of the foregoing, such parties will be in a position to control the affairs and management of the Company. See 'Management' and 'Principal Stockholders.' DEPENDENCE ON KEY PERSONNEL The success of the Company will depend to a significant extent upon the active participation and experience of its management. The loss of the services of any of Leonard DiSavino, the Company's President and Chief Executive Officer, Philip Sacks, the Company's Chief Operating Officer, or Mitchell Sacks, the Company's Executive Vice President -- Operations and Chief Financial Officer, could adversely affect the Company's business. Prior to or concurrently with the closing of the Offerings, the Company will enter into employment agreements and has already entered into non-competition agreements with these officers. The Company has not obtained key-man life insurance on any of its key management employees. See 'Management.' DEPENDENCE ON KEY SUPPLIERS The Company does not manufacture any of the pagers, transmitters or switches used in its operations. The Company currently obtains substantially all of its pagers from Motorola, Inc. ('Motorola'), the worldwide leading pager manufacturer. The Company purchases its transmitters from Motorola and Glenayre Electronics, Inc. ('Glenayre'), a leading manufacturer of wireless messaging equipment, and substantially all of its computerized messaging switches from Glenayre. Although pagers, transmitters and switches are available from a number of vendors, the Company concentrates its purchases with certain vendors in order to achieve purchasing economies, which results in its dependence on Motorola and Glenayre for the timely delivery of its pager inventory and transmitter and switching equipment. To date, the Company has not experienced significant delays in obtaining pagers, transmitters or wireless messaging switches, but there can be no assurance that it will not experience such delays in the future. The Company cannot predict what impact, if any, such delays may have on its ability to compete in its markets. DILUTION The Company's existing stockholders acquired their shares of Common Stock at a cost substantially below the initial public offering price. The Dividend paid to the Founding Stockholders and the accrual of deferred tax liabilities in connection with the conversion of the Company from an S Corporation to a C Corporation will result in a decrease in the net tangible book value of the Company. Accordingly, purchasers of the shares of Common Stock will experience immediate dilution in net tangible book value per share of Common Stock of $15.68 from the initial public offering price per share. See 'Dilution.' SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offerings, the Company will have 14,988,232 shares of Common Stock outstanding. Of these shares, the 4,400,000 shares sold in the Offerings (5,060,000 shares if the Underwriters' over-allotment options are exercised in full) will be freely tradeable. The remaining 10,588,232 shares will continue to be 'restricted shares' as defined in Rule 144 under the Securities Act of 1933, as amended (the 'Securities Act'). Any person (or persons whose shares are aggregated) who is not deemed to have been an affiliate of the Company at any time during the 90 days preceding a sale, and who has beneficially owned shares for at least three years (including any period of ownership of preceding non-affiliated holders), will be entitled to sell such shares under Rule 144(k) without regard to the volume limitations, manner of sale provisions, public information requirements or notice requirements of Rule 144. Such shares may not be resold in the absence of registration under the Securities Act or pursuant to exemptions from such registration, including, among others, the exemption provided by Rule 144 under the Securities Act. Certain stockholders have registration rights with respect to all of the shares owned by them and management has been granted certain incidental registration rights. The Company, the Investors and certain holders of approximately 10,588,232 shares, including all holders who are directors or officers of the Company, have agreed, subject to certain exceptions, not to sell, offer to sell, grant any option for the sale of or otherwise dispose of any shares of Common Stock or securities convertible into or exercisable or exchangeable for Common Stock (except for the shares offered hereby) for a period of 180 days after the date of this Prospectus without the written consent of Lehman Brothers Inc. See 'Underwriting' and 'Shares Eligible for Future Sale.' No prediction can be made as to the effect, if any, that future sales of shares, or the availability of shares for future sale, will have on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock (including shares issued upon the exercise of stock options), or the perception that such sales could occur, could adversely affect prevailing market prices for the Common Stock. If such sales reduce the market price of the Common Stock, the Company's ability to raise additional capital in the equity markets could be adversely affected. NO PRIOR MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE Prior to the Offerings there has been no public market for the Common Stock. Although application has been made to list the Common Stock on the Nasdaq National Market, there can be no assurance that an active trading market will develop or be sustained. The initial public offering price will be determined by negotiations among the Company and representatives of the Underwriters and may not be indicative of the price at which the Common Stock will trade after completion of the Offerings. See 'Underwriting.' There can be no assurances that a purchaser of Common Stock in the Offerings will be able to resell the Common Stock at or above the initial public offering price. In addition, factors such as variations in the Company's actual and anticipated operating results, announcements by the Company or others and developments affecting the Company, could cause the market price of the Common Stock to fluctuate significantly. Broad market fluctuations, market changes in the wireless communications sector, interest rate changes and general economic and political conditions, among other factors, also may adversely affect the market price of the Common Stock, regardless of the Company's performance. ANTI-TAKEOVER EFFECT AND OTHER PROVISIONS OF THE CERTIFICATE OF INCORPORATION Certain provisions of the Company's Certificate of Incorporation (the 'Certificate of Incorporation') and By-laws (the 'By-laws'), as well as provisions of the Delaware General Corporate Law, may have the effect of discouraging or preventing certain types of transactions involving an actual or potential change in control of the Company, including transactions in which the stockholders might otherwise receive a premium for their shares over then current market prices. Upon consummation of the Offerings, the Certificate of Incorporation of the Company will contain a provision that divides the Board of Directors into three classes, with one class having a term of one year, one class having a term of two years and one class having a term of three years. At each annual meeting of stockholders, directors will be elected to succeed those directors whose terms have expired, and each newly elected director will serve for a three-year term. Such classified board provision would decrease the ability to remove incumbent directors from their positions on the Board of Directors in the event of a takeover of the Company. The Certificate of Incorporation also restricts alien ownership and voting of the capital stock of the Company. Finally, the Board of Directors has the authority to fix the rights and preferences of and issue shares of preferred stock, which may have the effect of delaying or preventing a change in control of the Company without action by the stockholders. See 'Description of Capital Stock -- Delaware Law and Certain Certificate of Incorporation and By-law Provisions.' DIVIDEND POLICY Except for the Dividend and certain distributions to stockholders during the period it was an S Corporation for the payment of tax liabilities, in lieu of salaries or to provide the Founding Stockholders with a return of their capital, the Company has not paid any dividends on its Common Stock, intends to retain all future earnings for the operation and expansion of its business and does not anticipate declaring and paying cash dividends on the Common Stock at any time in the foreseeable future. Any future determination as to the payment of cash dividends will depend upon the Company's results of operations, financial condition and capital requirements, as well as such other factors as the Board of Directors may consider. In addition, the Company's revolving credit and term loan agreement contains certain covenants which restrict the payment of dividends by the Company or any of its subsidiaries. See 'Dividend Policy' and 'Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources.' FORWARD-LOOKING STATEMENTS This Prospectus contains certain forward-looking statements concerning the Company's operations, economic performance and financial condition, including, in particular, the likelihood of the Company's success in developing and expanding its business. These statements are based upon a number of assumptions and estimates which are inherently subject to significant uncertainties and contingencies, many of which are beyond the control of the Company, and reflect future business decisions which are subject to change. Some of these assumptions inevitably will not materialize, and unanticipated events will occur which will affect the Company's results. Consequently, actual results will vary from the statements contained herein and such variance may be, and is likely to be, material. Prospective investors are therefore cautioned not to place undue reliance on this information. THE COMPANY Background. The Company's predecessor, Tri-State Radio Corporation, was formed in 1974 by the Company's founders, Leonard DiSavino and Philip Sacks, to acquire a wireless communications company which operated primarily in Pennsylvania, New Jersey and Delaware. The Company's current business was established by Messrs. DiSavino and Sacks in 1987 following the sale of the majority of the Company's original operations. Since 1987, the Company has operated primarily in two regions, the Northeast, including metropolitan markets in New York, Connecticut, New Jersey, Massachusetts, eastern Pennsylvania, Maryland and Washington, D.C., and the West, including certain metropolitan markets in California, Arizona and Nevada. Until 1995, the Company conducted its business through a number of related subchapter S Corporations and a partnership, all of the common stock and partnership interests of which were owned by Leonard DiSavino and Philip Sacks and certain trusts for the benefit of their respective children. In July 1995, the Investors purchased from Leonard DiSavino and Philip Sacks (i) the Notes, which are the non-recourse obligations of Messrs. DiSavino and Sacks, and (ii) the Option for $1 million to purchase 40.66% of the fully-diluted common stock of the Company from the Founding Stockholders in exchange for a portion of the Notes. The Investors intend to exercise the Option simultaneously with the consummation of the Offerings. A portion of the proceeds from the Offerings will be used to pay the $35.0 million Dividend to the Founding Stockholders, and all of such $35.0 million payment will be used by Messrs. DiSavino and Sacks to repay in part the Notes. After such payment, the remaining obligations under the Notes will be satisfied in connection with the exercise of the Option. See 'Use of Proceeds' and 'Certain Relationships and Related Party Transactions.' In September 1995, all of the related S Corporations and the partnership were merged (the 'Merger') with or into the Company, with the Company as the surviving S Corporation. In connection with the Merger, the Company changed its name to TSR Paging Inc. The Company is a Delaware corporation. The Company's principal offices are located at 400 Kelby Street, Fort Lee, New Jersey 07024, and its telephone number is (201) 947-5300. Reorganized Corporate Structure and S Corporation Status. Prior to the Offerings, the Company was an S Corporation subject to taxation under Subchapter S of the Internal Revenue Code. As a result, the net income of the Company, for federal (and some state) income tax purposes, has been reported by, and taxed directly to, the Company's stockholders rather than to the Company. The Company's S Corporation status will terminate immediately prior to the consummation of the Offerings and the Company will become a C Corporation subject to corporate income taxation. In connection with the Company's change in status to a C Corporation, the Company will incur a one-time charge to stockholders' equity for deferred tax liabilities of approximately $347,000 reflecting differences between book and tax accounting for depreciation, inventory and certain reserves. No adverse tax consequences to the persons who become stockholders in the Offerings are expected to result from termination of the Company's S corporation status. The Company (including the related subchapter S corporations) has paid distributions to its stockholders to enable them to pay their income tax liability as a result of the Company's status as an S corporation, in lieu of salaries and, from time to time, to provide them with a return on their capital. The aggregate amounts of these distributions were $747,436, $1,326,275 and $1,321,374 in each of the years ended December 31, 1993, 1994 and 1995, respectively. Effective October 1, 1995, the salaries of Messrs. DiSavino and Philip Sacks were established at $300,000 per annum with subsequent salary amounts based on the Company's budget as approved by the Board of Directors. Payments with respect to the Company's income (as measured under the rules governing S corporations under the Code) may be made to the Founding Stockholders pursuant to a tax indemnification agreement or, under certain circumstances, the Founding Stockholders could be required to make payments to the Company pursuant to such agreement. See 'Certain Relationships and Related Party Transactions -- Tax Indemnification Agreement.'
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and the Consolidated Financial Statements, including the Notes thereto, appearing elsewhere in this Prospectus. THE COMPANY ANSYS, Inc. (the "Company") develops, markets and supports software solutions for design analysis and optimization. Engineering analysts and design engineers use the Company's software to accelerate product time to market, reduce production costs, improve engineering processes and optimize product quality and safety for a variety of manufactured products, ranging from basic consumer goods to satellite tracking systems. The ANSYS product family features open, flexible architecture that permits easy integration into its customers' enterprise-wide engineering systems and facilitates effective implementation of process-centric engineering. Since its founding in 1970 as Swanson Analysis Systems, Inc. ("Swanson Analysis"), the Company has become a technology leader in the market for computer-aided engineering ("CAE") analysis software. The Company has long- standing relationships with customers in many industries, including automotive, aerospace and electronics. Using the Company's products, engineers can construct computer models of structures, compounds, components or systems to simulate performance conditions and physical responses to varying levels of stress, pressure, temperature and velocity. This helps reduce the time and expense of physical prototyping and testing. The Company's software has been developed and enhanced to help customers meet several of the major challenges faced by businesses today, including increasing global competition and the need and ability to solve more complex product design problems. The Company believes that these factors, combined with the decreasing cost of computer hardware, are accelerating the demand for design analysis software solutions and have created an expanding marketplace, described by the Company as the design analysis and optimization market. This market includes a base of engineering analysts who use the Company's CAE analysis software to validate product design, as well as the broader group of design engineers who use analysis tools integrated within their computer-aided design ("CAD") systems to optimize and evaluate products much earlier in the development cycle. The Company's objectives are to increase market share among the traditional base of engineering analysts, to extend its product line to meet the demands of the broader group of design engineers and to increase the adoption of its products by new users, such as engineers in the biomedical and food processing industries. The Company's strategy focuses on maintaining and enhancing its technology leadership; offering an open and flexible software product family; pursuing a customer driven sales, services and marketing approach; capitalizing on its established global distribution and support network; and leveraging strategic relationships with leading CAD suppliers and third party providers of complementary hardware and software. The Company's product line ranges from ANSYS/Multiphysics, a sophisticated multi-disciplinary CAE tool for engineering analysts, to AutoFEA, a CAD- integrated design optimization product for design engineers. The Company's product family features a unified database, a wide range of analysis functionality, a consistent, easy-to-use graphical user interface, support for multiple hardware platforms and operating systems (including Windows 95, Windows NT and Unix), effective user customization tools and integration with leading CAD systems. The Company's products are developed using the Company's ISO 9001-certified quality system. The Company markets its products principally through its global network of 35 independent regional ANSYS Support Distributors, which have 68 offices in 27 countries. More than 4,000 companies throughout the world use ANSYS products, including 61 of the Global Fortune Industrial 100 companies and each of the top 10. On March 14, 1994, the Company acquired substantially all of the assets of Swanson Analysis for approximately $48.0 million in cash (the "1994 Acquisition"). The 1994 Acquisition was funded through the incurrence of $28.0 million of senior secured indebtedness (the "1994 Loan") and $15.0 million of 10% Subordinated Notes (the "Subordinated Notes") and the issuance of $4.0 million of 10% Redeemable Preferred Stock (the "Redeemable Preferred Stock") and approximately $1.0 million of Common Stock. The equity and subordinated indebtedness funding was contributed principally by investment funds associated with TA Associates, Inc., a private equity firm based in Boston, Massachusetts (the "TA Investors"), Chestnut III Limited Partnership and Chestnut Capital International III L.P. (collectively the "Chestnut Investors"), and Dr. John A. Swanson, the founder of the Company. See "Certain Transactions." The indebtedness and preferred stock issued to finance the 1994 Acquisition will be repaid and redeemed with the net proceeds from this offering, and the goodwill and capitalized software resulting from the 1994 Acquisition will be fully amortized in March 1997. As a result, the Company's interest and amortization expenses will decrease substantially. The Company was incorporated under the laws of the State of Delaware on January 12, 1994. The Company's principal executive offices are located at 201 Johnson Road, Houston, Pennsylvania 15342-1300, and its telephone number is (412) 746-3304.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001013467_remedytemp_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001013467_remedytemp_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..de91e6adac5874082f41f205ac40b9cbf8577f69
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0001013467_remedytemp_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and Financial Statements of the Company, including the Notes thereto, appearing elsewhere in this Prospectus. Except as otherwise indicated, the information presented in this Prospectus assumes no exercise of the Underwriters' over-allotment option, and gives effect to a 1.812 for 1 split of the Common Stock to be effected in connection with this offering of shares of Class A Common Stock (the "Offering"). References to "fiscal" years by date generally refer to the fiscal year ending on the Sunday closest to September 30 of that calendar year. THE COMPANY The Company is a rapidly growing national provider of clerical and light industrial temporary staffing services to industrial and service companies, professional organizations and governmental agencies. The Company provides its services in 34 states through a network of 156 offices, of which 67 are Company-owned and 89 are independently-managed. During the twelve months ended December 31, 1995, the Company placed approximately 93,000 temporary workers, known as "associates," and provided over 24.4 million hours of staffing services to over 13,000 clients. From the beginning of fiscal 1993 through the end of fiscal 1995, the Company added 61 offices and increased revenues and income before taxes at compound annual growth rates of 30.6% and 63.7%, respectively, to $209.0 million and $6.5 million, respectively. The Company has positioned itself to take advantage of trends in the temporary staffing industry, such as increased integration of temporary workers as a significant, long-term workforce component in both manufacturing and service-oriented companies and increased outsourcing by companies of certain staffing functions. The Company focuses on the clerical and light industrial sectors of the nation's temporary workforce, which together comprise approximately 60% of the nation's temporary staffing industry revenues, according to Staffing Industry Analysts, Inc. ("SIA"), an independent staffing industry publication company. Through the use of innovative technologies and value-added services, the Company strives to partner with its clients to deliver total solutions to their temporary staffing needs. The Company's expertise in providing associates who possess the skills and attitudinal characteristics necessary to "fit" into clients' organizations and perform at a superior level distinguishes the Company as a premium provider of temporary staffing services. Over the past three years, the Company has invested significant human and financial resources in the development of proprietary technologies designed to enable the Company to provide its clients with premium temporary workers and unique value-added services. The Company's proprietary technologies are maintained in three interactive systems: Human Performance Technology ("HPTSM"), an innovative series of multimedia evaluations used to profile the attitudinal characteristics of the Company's associates; IntellisearchSM, a computer database used to classify, search and fit the Company's associates to job openings using parameters based upon client needs; and Employee Data Gathering and Evaluation ("EDGESM"), a turn-key, proprietary computer system installed at client locations to coordinate scheduling and track job performance of a client's entire temporary workforce and to customize invoices and utilization reports. Management believes that these technologies give the Company advantages over competing temporary staffing companies that do not provide similar value-added services. BUSINESS STRATEGY The key components of the Company's business strategy are as follows: Focus on Core Business Segments. The Company focuses on the clerical and light industrial segments, which according to SIA are the two largest segments of the temporary staffing industry (comprising 33% and 27%, respectively, of total industry revenues) and have been growing at compound annual growth rates of 16% and 24%, respectively, since 1991. [GRAPHICS] IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. Expand Revenues and Profitability. The Company seeks to maximize revenues and profitability by opening new offices and targeting clients in the middle market (as opposed to the largest national accounts) where there is less competition and price cutting. In addition, the Company can support premium pricing by providing value-added services that are not currently offered by all competitors. As a result, the Company's revenues grew at a compound annual rate of 30.6% over the last three fiscal years, and its pretax income margin has expanded from 1.5% to 3.1%. Deliver Quality Associates. The Company utilizes a three-step approach to staffing temporary workers, which enables the Company to provide quality associates who are well-suited to clients' particular requirements. This approach involves: Client Needs Assessment, a detailed study of clients' temporary staffing requirements; HPTSM, an evaluative profile of the skills and attitudinal characteristics of the Company's associates; and IntellisearchSM, a screen of the Company's local databases used to fit appropriate associates with clients' particular staffing needs. Provide Value-Added Workforce Support. Clients look increasingly to temporary staffing companies not only to provide workers, but to deliver total staffing solutions that include certain human resource functions. To take advantage of this trend, the Company has developed and installed with clients a proprietary on-site employee management system, called EDGESM, that coordinates scheduling and tracks job performance of temporary workers provided to clients by the Company and other staffing companies. To meet clients' after-hours needs, the Company is implementing Remedy Non-StopSM, a service initially available in California that allows clients to contact the Company's national headquarters for staffing assistance when most other temporary staffing companies are closed. Invest in Innovative Technologies. Since the early 1990s, the Company has made significant investments in technologies designed to provide superior client services and position the Company as the "intelligent staffing" provider in the temporary workforce industry. This investment has produced the HPT(SM), Intellisearch(SM), and EDGE(SM) systems, which have enabled the Company to offer total solutions to clients' temporary workforce needs and establish closer client relationships by providing value-added services. The Company intends to market its technological advantages more aggressively, using a multimedia sales approach to attract new clients and offer expanded services to existing clients. Future innovations include an expanded Internet site and a new World Wide Web site for client marketing and associate recruiting and screening. Provide Strong Support to Nationwide Office Network. The Company strives to enhance the success of both the Company-owned and the independently-managed offices by combining a decentralized and entrepreneurial environment with strong headquarters support at the corporate and regional levels. The Company provides operating procedures and capital, growth management, training, marketing, legal and technical support to assure consistent delivery of quality services to clients throughout its nationwide office network. The Company believes it can continue to achieve growth by: (i) expanding its national presence by opening additional offices in both new and existing markets, (ii) marketing its proprietary technologies in a differentiated sales approach, and (iii) developing additional partnering relationships with its clients. Founded in 1965, the Company is incorporated in California and its principal executive offices are located at 32122 Camino Capistrano, San Juan Capistrano, California 92675. The Company's telephone number is (714) 661-1211. THE OFFERING <TABLE> <S> <C> Class A Common Stock offered by the Company.............................. 1,715,000 shares Class A Common Stock offered by Selling Shareholders........................ 1,385,000 shares(1) ------------------ Total Class A Common Stock offered....... 3,100,000 shares ------------------ ------------------ Common Stock to be outstanding after the Offering............................... 8,510,000 shares(2)(3) Use of proceeds by the Company............... To finance distributions to the Pre-Offering Shareholders of previously undistributed Company earnings for periods prior to the Offering, and for general corporate and working capital purposes, which are expected to include branch network expansion and enhancement of technologies and management information systems. See "Use of Proceeds." Voting Rights................................ Holders of Class A Common Stock are entitled to one vote per share on all matters submitted to a shareholder vote and holders of Class B Common Stock are entitled to no voting rights except with respect to certain amendments of the Company's Articles of Incorporation, certain mergers and as otherwise required by law. Class B Common Stock automatically converts into Class A Common Stock on a share-for-share basis upon the earliest to occur of (i) certain transfers to non-affiliates of the holder thereof, (ii) the death or legal incapacity of Robert E. McDonough, Sr., Chairman of the Company, and (iii) the tenth anniversary of the closing of the Offering. Except with respect to voting rights and convertibility as described above, the Class A Common Stock and Class B Common Stock have identical rights. See "Description of Capital Stock--Common Stock." Proposed Nasdaq National Market symbol....... REMX </TABLE> - --------- (1) Offered by Robert E. McDonough, Sr. and R. Emmett McDonough and their related trusts (the "Selling Shareholders"). These shares are Class B Common Stock as long as they are held by the Selling Shareholders, but automatically convert into Class A Common Stock upon sale in the Offering. See "Certain Transactions--Reclassification of Common Stock" and "Description of Capital Stock--Common Stock." (2) Excludes 450,000 shares issuable upon exercise of stock options granted as of the closing of the Offering to employees and non-employee directors of the Company under the Company's 1996 Stock Incentive Plan. See "Management--1996 Stock Incentive Plan." (3) Consisting of 5,365,000 shares of Class A Common Stock and 3,145,000 shares of Class B Common Stock (8,665,000 shares, consisting of 5,830,000 shares of Class A Common Stock and 2,835,000 shares of Class B Common Stock, if the Underwriters' over-allotment option is exercised in full). Upon the closing of the Offering and assuming no exercise of the Underwriters' over-allotment option, all of the Class B Common Stock and 2,265,000 shares of the Class A Common Stock will be beneficially owned by Robert E. McDonough, Sr. (Chairman of the Company), Paul W. Mikos (Chief Executive Officer, President and a director of the Company, and the son-in-law of Robert E. McDonough, Sr.), Susan McDonough Mikos (a director of the Company, the daughter of Robert E. McDonough, Sr. and wife of Paul W. Mikos), and R. Emmett McDonough and his wife (the son and daughter-in-law of Robert E. McDonough, Sr.), and various trusts for the benefit of these individuals and their children (the "Pre-Offering Shareholders"). See "Principal and Selling Shareholders."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0001013556_commodore_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001013556_commodore_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aecd3c64d830893c0cf797366b5da5d67bad2feb
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0001013556_commodore_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified by, and must be read in conjunction with, the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, all share and per share information in this Prospectus does not give effect to (i) any exercise of the Underwriters' Over-allotment Option, (ii) the issuance of up to 5,000,000 shares of Common Stock upon exercise of the Warrants, (iii) the issuance of up to 500,000 shares of Common Stock and 500,000 Warrants upon exercise of the Representative's Warrants, (iv) the issuance of up to 500,000 shares of Common Stock upon exercise of Warrants underlying the Representative's Warrants, (v) the issuance of up to 1,352,500 shares of Common Stock upon exercise of stock options outstanding as of the date of this Prospectus, and (vi) the issuance of up to 647,500 additional shares of Common Stock reserved for issuance upon exercise of additional stock options that may be granted under the Company's 1996 Stock Option Plan. As used herein, the term "Company" refers to Commodore Applied Technologies, Inc. and its subsidiaries. See "Executive Compensation -- Stock Options" and "Underwriting." THE COMPANY Commodore Applied Technologies, Inc. is an environmental technology company which has developed and intends to commercialize its patented process known as AGENT 313.(TM) Based on the results of its extensive testing, the Company believes that AGENT 313 is capable of effectively treating and decontaminating soils and other materials, including sludges, sediments, oils and other hydrocarbon liquids, metals and porous and non-porous structures and surfaces, by destroying polychlorinated biphenyls ("PCBs"), pesticides, dioxins, chlorinated substances, chemical and biological phosphates and other toxic contaminants to an extent sufficient to satisfy current federal environmental guidelines. The Company also believes that, based on the results of its additional tests, AGENT 313 is capable of neutralizing chemical weapons materials and warfare agents and of concentrating certain radioactive wastes for more effective disposal. Tests of AGENT 313 have been conducted since 1989 and have been financed to date by the Company principally from borrowings and investments from its stockholders. AGENT 313 is based upon solvated electron chemistry, in which solvents such as anhydrous liquid ammonia are mixed with various active metals to produce a solvated electron solution. On March 15, 1996, the United States Environmental Protection Agency ("EPA") issued to the Company a Nationwide Permit for PCB Disposal, which allows the Company to use AGENT 313 on-site to treat PCB-contaminated soils and metallic surfaces. In order to obtain such permit, the Company underwent a monitored evaluation by the EPA and was successful in demonstrating that AGENT 313 was capable of treating PCB-contaminated materials to residual PCB levels at or below regulatory-required limits. Based on the EPA's listing of national operating permits, the Company believes that it possesses the only non-thermal PCB treatment technology for multiple applications currently permitted under the EPA's Alternate Destruction Technology Program. On April 3, 1996, the Company was selected by the U.S. Department of Commerce as one of nine companies to participate in the Rapid Commercialization Initiative ("RCI"), which is a component of the Clinton Administration's efforts to streamline the commercialization process for new environmental technologies, and to build cooperative interactions between business and government to bring environmental technologies to market more rapidly and efficiently. Under the RCI, the Company intends to form "working partnerships" with the EPA and other governmental agencies for the purpose of developing and implementing policies and strategies for the commercialization of AGENT 313. Although there is no funding through the RCI, it is expected that under the program the EPA and other governmental agencies will provide permitting and siting assistance to facilitate and expedite the issuance of permits for site specific demonstrations of AGENT 313 and verification assistance to certify and publish the on-site test results of the demonstrations. Most of the other available environmental treatment and disposal methods for toxic substances involve safety risks with respect to air pollution and transportation of hazardous materials. In addition, these other methods may not produce a permanent solution, as certain of these processes result in large volumes of residual waste which may require further treatment prior to disposal. A number of these methods are also encountering increased public resistance and added regulatory oversight. According to the Environmental Business Journal, the global market for environmental products and services was approximately $420 billion in 1995 and is expected to reach $500 billion annually by the year 2000. Additionally, the treaty adopted by the Chemical Weapons Convention of 1993, which has been ratified by 49 nations to date, mandates the worldwide destruction of all chemical weapon stocks within ten years after final approval of the treaty by a total of 65 nations. While neither the United States nor Russia has yet ratified the treaty, the United States Senate Foreign Relations Committee recommended Senate ratification on April 25, 1996, and the ratification vote of the full Senate is expected to occur in late spring or early summer 1996. In reports released by the United States Department of Defense, the United States military and other government agencies have estimated that approximately $12 billion will be spent over the next ten years for the destruction of domestic stockpile and non-stockpile chemical weapons and chemical warfare agents. The Company's business strategy is to establish collaborative joint working and marketing arrangements with established engineering and environmental service organizations. The Company intends to enter into these relationships (i) in projects involving specific applications throughout the marketplace or in projects involving specific industries, or (ii) as licensing arrangements with third parties. The Company is currently negotiating potential working arrangements with several companies, including Teledyne Brown Engineering, Inc., a subsidiary of Teledyne Inc. ("Teledyne Brown"), and Sverdrup Corporation ("Sverdrup"), and is bidding, in collaboration with such companies, for certain decontamination projects. See "Business." Although the Company believes that it will be able to enter into one or more definitive agreements with collaborative partners and be awarded contracts to use AGENT 313 in decontamination projects, there can be no assurance that any of these discussions will result in collaborative agreements or contract awards. Even if such contracts are awarded, AGENT 313 has never been utilized on a large-scale basis, and there is no assurance that AGENT 313 will perform successfully on a large-scale commercial basis or that it will be profitable to the Company. There can also be no assurance that AGENT 313 will not be superseded by other competing technologies. See "Risk Factors." THE CAPITALIZATION Unless otherwise indicated, this Prospectus gives effect to the following transactions: (a) on March 29, 1996, the Company's sole stockholder, Commodore Environmental Services, Inc. ("Commodore"), in exchange for the issuance of 15,000,000 shares of Common Stock, capitalized the Company by (i) contributing 90.05% of the outstanding common stock of Commodore Laboratories, Inc. ("Commodore Labs"), and 100% of the outstanding capital stock of four related subsidiaries of Commodore to the Company, (ii) assigning all right, title and interest in its contracts, assets and properties relating to AGENT 313 to the Company, and (iii) contributing to the Company $3,000,000 of a promissory note payable by the Company to Commodore in the outstanding amount of $8,925,426 as of December 31, 1995, representing loans and advances made to or for the benefit of the Company to fund the development of AGENT 313 (the "Commodore Funding Note"); and (b) upon completion of this Offering, (i) Commodore will acquire the remaining 9.95% of the outstanding shares of common stock of Commodore Labs from Albert E. Abel, the Company's Senior Vice President and Chief Scientist, for $3,000,000 and contribute such shares to the Company for no additional consideration, and the Company will, from the net proceeds of this Offering, settle all outstanding obligations for compensation payable to Mr. Abel and for amounts receivable by the Company from Mr. Abel in the approximate net amount of $120,000, (ii) $4,000,000 of the Commodore Funding Note will be converted into a new five-year 8% promissory note to be issued by the Company to Commodore (the "New Commodore Note"), and (iii) the balance of the Commodore Funding Note in the amount of $1,925,426 will be repaid by the Company from the net proceeds of the Offering (collectively, the "Offering Transactions"). See "Use of Proceeds," "Capitalization" and "Certain Relationships and Related Transactions -- Organization and Capitalization of the Company." THE OFFERING Securities Offered ............ 5,000,000 shares of Common Stock and 5,000,000 Warrants. Terms of Warrants.............. Each Warrant entitles the holder thereof to purchase, at any time commencing June 28, 1997 until June 28, 2001, one share of Common Stock at a price of $8.40 per share, subject to adjustment. Commencing December 28, 1997, the Warrants are subject to redemption by the Company, in whole but not in part, at $.01 per Warrant on 30 days' prior written notice provided that the average closing sale price of the Common Stock as reported on the AMEX equals or exceeds $18.00 per share, subject to adjustment, for any 20 trading days within a period of 30 consecutive trading days ending on the fifth trading day prior to the date of the notice of redemption. See "Description of Securities." Common Stock outstanding prior to the Offering.............. 15,000,000 shares of Common Stock. Securities to be outstanding after the Offering........... 20,000,000 shares of Common Stock and 5,000,000 Warrants. Use of Proceeds................ The Company intends to apply the net proceeds of this Offering to fund proposed collaborative ventures; additional research and development costs; lease and equip an additional facility; repayment of an outstanding bank line of credit and intercompany indebtedness; collateralization of a bank loan of Commodore; and for working capital and general corporate purposes. In the event and to the extent that the Over-allotment Option is exercised, Commodore has the right to require the application of any net proceeds from the Over-allotment Option to the prepayment of all or a portion of the New Commodore Note. See "Use of Proceeds."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0001013564_farm_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001013564_farm_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f95614d48a69789bb8174c45de27be60b263c3e0
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0001013564_farm_prospectus_summary.txt
@@ -0,0 +1 @@
+Prospectus Summary........................................................ 3 Risk Factors.............................................................. 12 The Company............................................................... 18 The Reorganization........................................................ 19 Option to Acquire Life Company............................................ 26 Use of Proceeds........................................................... 30 Dividend Policy........................................................... 30 Capitalization............................................................ 31 Selected Consolidated Financial Data...................................... 32 Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................. 34 Business.................................................................. 40 Management................................................................ 60 Certain Relationships and Related Transactions............................ 67 Stock Ownership of Management............................................. 73 Description of Capital Stock.............................................. 76 Shares Eligible for Future Sale........................................... 79 Legal Matters............................................................. 79 Experts................................................................... 79 Glossary of Selected Insurance Terms...................................... 80 Index to Financial Statements............................................. F-1 </TABLE> ------------------- UNTIL AUGUST 4, 1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 3,000,000 SHARES FARM FAMILY HOLDINGS, INC. COMMON STOCK ($.01 PAR VALUE) PROSPECTUS DATED MAY 6, 1996 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- <PAGE> PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The estimated expenses of the issuance and distribution, all of which are payable by the Registrant, are as follows: <TABLE> <S> <C> SEC Registration Fee............................................ $ 21,725 NASD Fee........................................................ 6,800 Stock Exchange Listing.......................................... 89,870 Printing and Engraving.......................................... 316,000 Accounting Fees and Expenses.................................... 100,000 Legal Fees and Expenses......................................... 525,000 Blue Sky Fees and Expenses...................................... 15,000 Transfer Agent and Escrow Agent's Fees and Expenses............. 135,000 Miscellaneous Expenses.......................................... 25,000 ---------- Total......................................................... $1,234,395 </TABLE> ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES (a) Exhibits <TABLE> <C> <C> <S> *2.1 -- Plan of Reorganization and Conversion, dated February 14, 1996, as amended by Amendment No. 1, dated April 23, 1996 (Exhibits A, B and C to Exhibit 2.1 are included as Exhibits 10.1, 3.1 and 3.2, respectively, to this Registration Statement) *3.1 -- Certificate of Incorporation of Farm Family Holdings, Inc. *3.2 -- Bylaws of Farm Family Holdings, Inc. *4.1 -- Form of Certificate for shares of Common Stock *5.1 -- Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P. *8.1 -- Tax Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P. *10.1 -- Option Purchase Agreement, dated February 14, 1996, among Farm Family Holdings, Inc. and The Shareholders of Farm Family Life Insurance Company Listed Therein *10.2 -- Expense Sharing Agreement, made effective as of January 1, 1996, by and between Farm Family Mutual Insurance Company and Farm Family Life Insurance Company *10.3 -- Indenture of Lease, made the 1st day of January 1988, between Farm Family Life Insurance Company and Farm Family Mutual Insurance Company as amended by the Amendment to Lease, effective January 1, 1994 *10.4 -- Underlying Multi-Line Per Risk Reinsurance Contract, effective January 1, 1995, issued to Farm Family Mutual Insurance Company by The Subscribing Reinsurer(s) Executing the Interests and Liabilities Agreement(s) Attached Thereto, as amended by Addendum No. 1, effective January 1, 1996 </TABLE> II-1 <PAGE> <TABLE> <C> <C> <S> *10.5 -- Umbrella Quota Share Reinsurance Contract, effective January 1, 1995, issued to Farm Family Mutual Insurance Company and United Farm Family Insurance Company, as amended by Addendum No. 1, effective January 1, 1995 *10.6 -- Excess Catastrophe Reinsurance Contract effective January 1, 1996, issued to Farm Family Mutual Insurance Company *10.7 -- Assumption Agreement, commencing January 1, 1995, between Farm Family Mutual Insurance Company and United Farm Family Insurance Company *10.8 -- Service Agreement, made effective as of July 25, 1988, by and between Farm Family Mutual Insurance Company and United Farm Family Insurance Company *10.9 -- Form of Membership List Purchase Agreement between Farm Family Mutual Insurance Company and each of the Farm Bureaus *10.10 -- Farm Family Mutual Insurance Company 8% Subordinated Surplus Certificate, as amended by Certificate of Amendment No. 1 and Trust Indenture, dated as of December 29, 1976 relating to the 8% Subordinated Surplus Certificates *10.11 -- Farm Family Mutual Insurance Company 5% Debenture, as amended by Certificate of Amendment, effective January 1, 1969, Certificate of Amendment No. 2, effective January 1, 1979, Certificate of Amendment No. 3 and Supplemental Trust Indenture, dated as of August 25, 1955, Amending Trust Indenture Dated as of May 16, 1955 Relating to The 5% Debentures, as amended by Certificate of Amendment, dated as of August 25, 1955, Certificate of Amendment No. 2, dated as of August 25, 1955, Certificate of Amendment No. 3, dated as of August 25, 1955 *10.12 -- Farm Family Mutual Insurance Company Officer Severance Pay Plan, adopted effective August 1, 1994 *10.13 -- Farm Family Mutual Insurance Company Supplemental Employee Retirement Plan, adopted as of January 1, 1994 *10.14 -- Escrow Agreement between Farm Family Holdings, Inc. and The Bank of New York, dated as of April 26, 1996 *21.1 -- List of Subsidiaries *23.1 -- Consent of Coopers & Lybrand L.L.P. *23.2 -- Consent of LeBoeuf, Lamb, Greene & MacRae, L.L.P. (contained in their Opinion filed as Exhibit 5) *24.1 -- Power of Attorney (included with the signatures in Part II of this Registration Statement) *28.1 -- Information from reports furnished to State insurance regulatory authorities *99.1 -- Form of Subscription Order Form for Subscription Policyholders *99.2 -- Form of Subscription Order Form for Participating Surplus Note Holders </TABLE> - -------- * Previously filed. (b) Financial Statement Schedule Schedule VI--Reinsurance Schedule X--Supplemental Information Concerning Property/Casualty Insurance Operations ITEM 17. UNDERTAKINGS (a) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such II-2 <PAGE> indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction on the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (b) The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as a part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rules 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (c) The undersigned Registrant hereby undertakes to supplement the prospectus, after the expiration of the subscription period, to set forth the results of the subscription offer, the transactions by the Underwriters during the subscription period, the amount of unsubscribed securities to be purchased by the Underwriters, and the terms of any subsequent reoffering thereof. If any public offering by the Underwriters is to be made on terms differing from those set forth on the cover page of the prospectus, a post-effective amendment will be filed to set forth the terms of such offering. (d) The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement. (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post- effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. II-3 <PAGE> SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Amendment No. 1 to the Registration Statement to be signed on its behalf by the Undersigned, thereunto duly authorized, in the Town of Bethlehem, State of New York on May 6, 1996. FARM FAMILY HOLDINGS, INC. By: /s/ Philip P. Weber ---------------------------------- Philip P. Weber President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment No. 1 to the Registration Statement has been signed below on May 6, 1996 by the following persons in the capacities indicated. <TABLE> <CAPTION> SIGNATURE TITLE --------- ----- <S> <C> * - ------------------------------------- Chairman of the Board of Directors WILLIAM M. STAMP, JR. * - -------------------------------------- Vice Chairman of the Board of JOHN W. LINCOLN Directors /s/ Philip P. Weber President and Chief Executive - -------------------------------------- Officer (Principal Executive Officer) PHILIP P. WEBER * - -------------------------------------- Executive Vice President and CHARLES E. SIMON Treasurer (Principal Financial and Accounting Officer) * - -------------------------------------- Director ROBERT L. BAKER * - -------------------------------------- Director FRED G. BUTLER, SR. * - -------------------------------------- Director RANDOLPH C. BLACKMER, JR. * - -------------------------------------- Director JOSEPH E. CALHOUN * - -------------------------------------- Director JAMES V. CRANE * - -------------------------------------- Director STEPHEN J. GEORGE * - -------------------------------------- Director GORDON H. GOWEN </TABLE> II-4 <PAGE> <TABLE> <CAPTION> SIGNATURE TITLE --------- ----- <S> <C> * - ---------------------------------- Director JON R. GREENWOOD * - ---------------------------------- Director CLARK W. HINSDALE III * - ---------------------------------- Director RICHARD A. JEROME * - ---------------------------------- Director ARTHUR D. KEOWN, JR. * - ---------------------------------- Director DANIEL R. LAPOINTE * - ---------------------------------- Director WAYNE A. MANN * - ---------------------------------- Director JOHN P. MOSKOS * - ---------------------------------- Director NORMA R. O'LEARY * - ---------------------------------- Director JOHN I. RIGOLIZZO, JR. * - ---------------------------------- Director HARVEY T. SMITH * - ---------------------------------- Director HOWARD T. SPROW * - ---------------------------------- Director RICHARD D. TRYON * - ---------------------------------- Director CHARLES A. WILFONG * - ---------------------------------- Director TYLER P. YOUNG </TABLE> *By: /s/ Philip P. Weber ------------------------------ Philip P. Weber as attorney-in-fact for each of the persons indicated II-5 <PAGE> [LETTERHEAD OF LEBOEUF, LAMB, GREENE & MACRAE, L.L.P. APPEARS HERE] May 6, 1996 VIA EDGAR FILING - ---------------- Robert F. Bartelmes Securities and Exchange Commission Room 3068 450 Fifth Street, N.W. Washington, D.C. 20549 Attention: Document Control -- EDGAR Re: Farm Family Holdings, Inc. -- Registration Statement on Form S-1 (File No. 333-4446) ------------------------------ Dear Mr. Bartelmes: On behalf of Farm Family Holdings, Inc. (the "Holding Company"), we hereby submit for filing in electronic form a form of Amendment No. 1 ("Amendment No. 1") to the above-captioned Registration Statement (the "Registration Statement") relating to the registration under the Securities Act of 1933, as amended, of 3,000,000 shares of common stock, $0.01 par value, of the Holding Company. Defined terms used herein have the meanings given such terms in Amendment No. 1. In accordance with our conversation with the staff on May 3, 1996, we are submitting only the pages of Amendment No. 1 which contain changes from the Registration Statement as filed on May 3, 1996. The Company plans to initiate the Subscription Offering promptly as soon as the printing and preparation of the mailing packages is completed. The Subscription Offering is on a best efforts basis. Thank you for your assistance in this matter. The staff may direct any comments or questions about this Amendment No. 1 by telephone to Lars Bang-Jensen at (212) 424-8005 or to the undersigned at (212) 424-8330, by telecopier to (212) 424-8500 or to the address above. Sincerely yours, Robert E. D. Hawkins cc: Victoria M. Stanton Mario P. Torsiello David P. Schieldrop Peter J. Gordon Denise Marbach Alexander M. Dye </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001013595_ryerson_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001013595_ryerson_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the more detailed information appearing elsewhere in this Prospectus. Unless otherwise indicated, all information contained in this Prospectus assumes that the offerings by the Company of an aggregate of 5,220,000 shares of its Class A Common Stock, par value $1.00 per share (the "Class A Common Stock"), in the United States and outside the United States (the "Common Stock Offerings"), have been consummated and that the over-allotment options granted to the Underwriters in connection with the Common Stock Offerings have not been exercised. In addition, unless the context requires otherwise, (i) "Ryerson Tull" or "Company" refers to Ryerson Tull, Inc. and its consolidated subsidiaries, (ii) "ISI" refers to Inland Steel Industries, Inc. and its consolidated subsidiaries and (iii) "Offering" refers to the offering of $150 million aggregate principal amount of the Company's % Notes due , 2001 (the " % Notes") and $100 million aggregate principal amount of the Company's % Notes due , 2006 (the " % Notes" and, together with the % Notes, the "Notes"). The Class A Common Stock and the Company's Class B Common Stock, par value $1.00 per share (the "Class B Common Stock"), are sometimes collectively referred to in this Prospectus as the "Common Stock." Unless otherwise noted, information set forth in this Prospectus assumes that the recapitalization on June 10, 1996 (the "Recapitalization") pursuant to which the two outstanding shares of the Company's common stock, par value $1.00 per share, were exchanged for 34,000,000 shares of Class B Common Stock was effected on December 31, 1995. THE COMPANY The Company, through its wholly-owned operating subsidiaries, Joseph T. Ryerson & Son, Inc. ("Ryerson") and J. M. Tull Metals Company, Inc. ("Tull"), is a general line metals service center and processor of metals. The Company believes that it is the largest metals service center in the United States based on sales revenue, with 1995 sales of $2.5 billion and a current U.S. market share of approximately 9%, more than twice the U.S. market share of its nearest competitor, based on the Company's analysis of Steel Service Center Institute (the "SSCI") data. The Company distributes and processes metals and other materials throughout the continental United States and is among the largest purchasers of steel in the United States. With 52 interconnected facilities that place it within several hundred miles of most of its customers, the Company is able to be responsive to specific customer requests and is generally able to make deliveries of stock items within 24 hours of receipt of a customer's order. Utilizing this network of facilities and the Company's regionalized management systems, the Company believes it can be responsive to individual customers while providing a broad range of products and services. The Company also owns a 50% interest in Ryerson de Mexico, S.A. de C.V. ("Ryerson de Mexico"), a general line metals service center and processor with 18 facilities in Mexico. Ryerson Tull was incorporated under the laws of the state of Delaware in March 1986 as Inland Steel Services Holding, Inc., and its name was changed from Inland Materials Distribution Group, Inc. to Ryerson Tull, Inc. in May 1996. Ryerson, the predecessor of the Company, was founded in 1842. The Company's principal executive offices are located at 2621 West 15th Place, Chicago, Illinois 60608, telephone number (312) 762-2121. INDUSTRY OVERVIEW The Company believes that the U.S. metals service center industry (the "Industry") occupies a growing niche between primary producers of carbon, alloy and stainless steels, aluminum and other metals and purchasers of those products, including manufacturers and intermediate processors. Metals service centers, including the Company, provide services not typically available from primary producers, such as more reliable deliveries, smaller order sizes, the convenience of dealing with a smaller number of suppliers, just-in-time inventory management and customer-specific, value-added processing. The Company believes that the role of metals service centers is expanding as a result of a number of factors, including the increased outsourcing of inventory management functions and metals processing operations by manufacturers and the lower cost and more reliable service available from service centers as compared to primary producers. The Industry is cyclical (with periods of strong demand and higher prices followed by periods of weaker demand and lower prices), principally due to the cyclical nature of the industries in which the largest consumers of metals operate. Any significant slowdown in one or more of those industries could have a material adverse effect on the demand for metals, resulting in lower prices for metals and reduced profitability for metals service centers, including the Company. Metals prices and metals service center profitability improve as metal-consuming industries experience recoveries following economic downturns. OPERATIONS The Company is organized along regional and product lines into five business units: Ryerson East, Ryerson West, Ryerson Central, Tull/AFCO and Ryerson Coil Processing. This structure enables the Company to centralize certain administrative support services while maintaining local organizations that are responsive to the needs of specific customers and markets. Each of the Company's facilities maintains a wide variety of inventory that varies depending on the facility's size and customer demand, including carbon, alloy and stainless steels, aluminum, red metals (such as brass and copper), nickel and plastics. The Company purchases inventories from a number of producers, primarily domestic. The Company purchases the majority of its inventories in the open market at prevailing market prices, although occasionally the Company enters into long-term, fixed-price supply contracts in order to minimize its financial exposure to long-term, fixed-price sales contracts. Purchases are typically made in large lots and held in distribution centers until sold, usually in smaller quantities. These materials are inventoried in a number of shapes, including coils, sheets, rounds, hexagons, square and flat bars, plate, structurals and tubing. The Company uses techniques such as sawing, slitting, blanking, pickling, cutting to length, levelling, flame cutting, laser cutting, edge trimming, edge rolling, fabricating and grinding to process materials to specified thickness, length, width, shape and surface quality pursuant to specific customer orders. More than one-half of the material sold by the Company is processed. The Company's services include special stocking programs, just-in-time delivery, inventory management (which includes the placement of Company employees at customer sites), kits ready for assembly, programs that provide customers at their places of business with Company-owned material which can be used as needed by the customer, technical advice on part design and material specification, and early stage material processing and fabrication. The Company typically ships inventory between its facilities and products to customers by Company trucks and by common carrier. BUSINESS STRATEGY The Company's strategy is to expand its market leadership position as a nationwide general line metals service center and processor of metals by providing its customers with high quality products and services at competitive prices. The Company believes that increasing its market share will be an effective means of increasing its profitability. One of the Company's goals is to enhance its competitive position through the aggressive pursuit of organic growth, strategic acquisitions, ongoing unit cost reductions and increased asset productivity, although there can be no assurance that the Company will achieve this goal. As part of its overall business strategy, the Company has made substantial investments in management information systems that link its operations and enhance interactions between the Company and its customers and suppliers. Based on its size, which leads to cost efficiencies, the trend towards consolidation in the number of suppliers used by customers, strategic plant locations, broad product and service offerings and management's acquisition strategy, the Company believes that it is well positioned to take advantage of the anticipated growth and consolidation in the Industry. See "Business--Industry Overview." ORGANIC GROWTH One of the Company's goals is to expand its market leadership position within the Industry through competitive pricing, broad product and service offerings and the use of technology to improve customer service. The Company's large size, buying power and competitive cost structure enable it to negotiate favorable prices for raw materials and to take advantage of producer economies of scale resulting in lower costs of material purchased, allowing it to offer its products and services at competitive prices. In addition, the Company's broad product and service offerings provide customers one-stop shopping, positioning the Company to capitalize on what it believes to be a continuing trend towards consolidation in the number of suppliers used by customers. To this end, the Company has initiated a national accounts program targeting customers that purchase metal from a number of suppliers throughout the country. The Company believes it can better serve these customers by providing competitive pricing and superior delivery and quality. The Company's goal is to differentiate itself from its competitors by providing materials and services on a more timely basis and with fewer rejections than its competitors through increased emphasis on quality control. The Company has received International Standards Organization 9002 ("ISO 9002") certification for five facilities and will seek certification for additional facilities in the future. ISO 9002 is a series of international standards for quality management and assurance. The Company believes that certain major customers seek suppliers with such certification and that such certification helps differentiate it from its competitors. STRATEGIC ACQUISITIONS The Company believes that the fragmented nature of the Industry, combined with the Company's strong national reputation, nationwide operations, market leadership position and experience in integrating facility operations, make the Company well situated to become a strategic buyer of service center assets. The Company will seek selective acquisitions of businesses that complement, or strategically extend, the Company's existing businesses. Acquired companies can be either integrated into the Company's network or, depending on the circumstances, operated as stand-alone facilities. In either case, the Company believes that such acquisitions could enable it to realize further economies of scale (particularly in operating cost, asset utilization and purchasing leverage) and could better utilize the Company's existing facilities and systems capability. Although the Company from time to time discusses potential acquisitions with other service center operators, the Company currently has no understandings, agreements or commitments to make any acquisitions. UNIT COST REDUCTIONS AND INCREASED PRODUCTIVITY Another of the Company's goals is to decrease unit costs through initiatives which include increasing volume, thereby taking advantage of economies of scale, and increasing asset and employee productivity. The Company has made and will continue to make investments in computer-based and automated systems that track profitability by customer, product and cost of process, allowing the Company to determine where changes can be made to reduce cost and increase profitability. The Company intends to increase its emphasis on the use of electronic links known as electronic data interfaces or "EDIs" with its suppliers and customers to reduce the paperwork and administrative costs associated with customer orders, shipment tracking, billing and remittance processing. The Company continues to re-engineer its various work processes through benchmarking analyses across its 52 facilities. Re-engineering enables the Company to increase output without increasing its labor force by increasing the efficiency with which work processes are performed. COMPETITIVE STRENGTHS The Company has a number of competitive strengths that it believes will facilitate the implementation of the Company's strategy, including its market leadership position and its management systems and practices. MARKET LEADERSHIP POSITION ECONOMIES OF SCALE. Because of the Company's large size, its costs of operations can be spread across a large base of sales, resulting in lower fixed costs per ton sold. However, in times of decreasing sales, the Company's fixed costs must be spread across a smaller base of sales resulting in higher fixed costs per ton sold. The Company believes that available capacity at many of its plants will allow it to achieve further economies of scale to the extent it increases sales in the future. Of the Company's 52 facilities, six are currently operating one shift, 31 are operating two shifts and 15 are operating three shifts. In addition, the size of the Company's material purchases enables its suppliers to realize economies of scale and thereby provide the Company with competitive prices. SCOPE OF PRODUCTS AND SERVICES. The Company's broad product and service offerings provide customers one-stop shopping for most of their metals needs. In addition, the Company believes that its 52 facilities located throughout the continental United States, generally within one day's delivery time of almost all U.S. manufacturing centers, position it to target national customers that currently buy metals from a variety of suppliers in different locations. The Company's ability to transfer inventory among facilities enables it to have available specialized items at regional locations throughout its network and to provide such inventory on a timely basis more profitably than if it were required to maintain inventory of all products at each location. RELATIONSHIPS WITH SUPPLIERS. The Company is among the largest purchasers of steel in the United States and is also a significant purchaser of aluminum in the United States. The Company buys from and has developed relationships with many U.S. steel producers as well as other metal producers. The Company's relationships with numerous metal producers provide it access to high quality metals, timely delivery and new product and service ideas from many suppliers. In addition, because the Company purchases large volumes of metals, it can negotiate competitive prices from its suppliers. In part because of its buying power, the Company has been able to secure product from primary manufacturers during times of tight supply. MANAGEMENT SYSTEMS AND PRACTICES The Company's management information systems have allowed management to develop an internal benchmarking system and to track profitability by customer, product and cost of process. This detailed information enables management to make continuous improvements such as reallocating slow-moving inventory to different locations to increase inventory turns, improving purchasing, targeting customers or changing suppliers as needed. The Company's 52 facilities provide it with a large base for testing, comparing and implementing new management practices. RELATIONSHIP WITH ISI ISI beneficially owns all of the outstanding Class B Common Stock, representing approximately 96.3% of the aggregate voting power of all of the Company's Common Stock, and consequently controls the Company. ISI will retain more than 50% of the voting control of the Company until the number of shares of Class B Common Stock outstanding represents less than 50% of the total number of shares of Class A Common Stock and Class B Common Stock outstanding, at which time the outstanding Class B Common Stock will convert into an equal number of shares of Class A Common Stock. ISI also owns Inland Steel Company ("ISC"), the sixth largest steel producer in the United States based upon the number of tons shipped. The Company purchases steel from ISI and its affiliates. The Company also purchases support functions from and has a tax sharing arrangement with ISI. The Company intends to continue these relationships after the Offering. Ryerson is the guarantor of an obligation of the Inland Steel Industries Thrift Plan ESOP Trust (the "ESOP Trust"), and the Company's employees participate in the employee benefit plans of ISI other than the Inland Steel Industries Pension Plan (the "ISI Pension Plan"). Effective April 30, 1996, that portion of the ISI Pension Plan covering the Company's current and former employees was separated and became a new and separate plan sponsored by the Company (the "Pension Plan"). See "Relationship with ISI." RATIONALE FOR THE OFFERING AND COMMON STOCK OFFERINGS The Company and ISI consummated the Common Stock Offerings and are pursuing the Offering to assist them in realizing the following strategic and financial objectives that the managements of the Company and ISI have established for their respective businesses. The Company has historically been dependent on cash flow from operations, limited borrowings from third party lenders and contributions from ISI to fund its growth. The Company believes that consummation of the Common Stock Offerings and the Offering, which will establish public trading markets for the Company's equity and debt securities, should provide the Company with access to the public markets to raise additional capital to fund its future growth. Consummation of the Offering and the Common Stock Offerings will permit ISI to retire debt, which will reduce ISI's interest expense and eliminate certain burdensome restrictive covenants. As a result of the transactions described below, ISI will receive all of the proceeds of the Common Stock Offerings and the Offering. Prior to the consumation of the Common Stock Offerings, the Company will declare a dividend payable in cash in an amount equal to the estimated net proceeds from the Common Stock Offerings (estimated to be $84.4 million at an assumed initial offering price of $17.50 per share, the mid-point of the offering range set forth on the cover page of the Common Stock Offerings Prospectus), and a dividend consisting of a $293.8 million note payable to ISI (the "Note Payable") maturing five years from the date of issuance and bearing interest at a specified prime rate. The Note Payable may be prepaid without penalty at the option of the Company. The estimated net proceeds from the Common Stock Offerings were used to pay the cash dividend to ISI and are not available to the Company. All of the net proceeds from the Offering, together with a portion of the Company's available cash and/or borrowings under credit facilities, will be used to discharge the Note Payable to ISI. On May 20, 1996, the Company paid to ISI a dividend in the amount of $75 million in cash (the "May 1996 Dividend" and, together with the dividends declared in connection with the Common Stock Offerings, the "Dividends"). ISI used $63.2 million of the proceeds from the May 1996 Dividend to repay intercompany indebtedness owed by ISI to the Company arising out of a corporate-wide cash management program. After the repayment of such indebtedness, the Company ceased participation in such program and the Company's cash will no longer be held in ISI's accounts. ISI has informed the Company that ISI intends to use the remaining proceeds from the Dividends to retire ISI and ISC indebtedness and for general corporate purposes. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001013608_tv-filme_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001013608_tv-filme_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..8a926d0391de3755d029ee48986b2a023e22ddd0
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+PROSPECTUS SUMMARY This following summary is qualified in its entirety by the more detailed information and Consolidated Financial Statements and notes thereto of the Company (the "Consolidated Financial Statements") appearing elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus (i) assumes no exercise of the Underwriters' over-allotment option and (ii) gives effect to the Restructuring referred to below. Except as otherwise noted, financial information has been presented in U.S. dollars throughout this Prospectus. The Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States ("United States GAAP") in U.S. dollars. For this purpose, and for purposes of the presentation of other financial data in this Prospectus, amounts in Brazilian currency have been remeasured into U.S. dollars in accordance with the methodology set forth in Statement of Financial Accounting Standards No. 52 ("SFAS No. 52"), as it applies to entities operating in highly inflationary economies. Unless the context otherwise requires, references to the "Company" (i) mean for all periods prior to the Restructuring TV Filme, Inc., ITSA-- Intercontinental Telecomunicacoes S.A. ("ITSA"), TV Filme Goiania Servicos de Telecomunicacoes Ltda. ("TV Filme Goiania"), TV Filme Belem Servicos de Telecomunicacoes Ltda. ("TV Filme Belem") and TV Filme Servicos de Telecomunicacoes S.A. ("TV Filme Servicos"), and their predecessors as though they had been part of the Company for all such periods presented and (ii) mean as of the Restructuring TV Filme, Inc., ITSA, TV Filme Goiania, TV Filme Belem, TV Filme Brasilia Servicos de Telecomunicacoes Ltda. ("TV Filme Brasilia") and their predecessors and successors. See "Business--Restructuring." Unless the context otherwise requires, references to "ITSA" (i) mean for all periods prior to the Restructuring ITSA--Intercontinental Telecomunicacoes S.A. and (ii) mean as of the Restructuring ITSA--Intercontinental Telecomunicacoes Ltda. Unless the context otherwise requires, references to "TV Filme Servicos" (i) mean for all periods prior to the Restructuring TV Filme Servicos de Telecomunicacoes S.A. and (ii) mean as of the Restructuring TV Filme Servicos de Telecomunicacoes Ltda. Certain terms used in this Prospectus are defined under "Glossary." Pursuant to the Restructuring, the stockholders of ITSA will exchange their outstanding equity interests in ITSA for proportionate interests in the Common Stock of the Company and will exchange their warrants in ITSA for proportionate amounts of warrants in the Company, following which transactions ITSA will be a wholly-owned subsidiary of the Company. In addition, a majority voting interest in TV Filme Servicos, the subsidiary of the Company which holds the Company's wireless cable licenses, will be transferred to a newly-formed Brazilian entity, all of which will be owned by certain stockholders of ITSA who are Brazilian nationals. See "Business--Restructuring." THE COMPANY OVERVIEW The Company develops, owns and operates subscription television systems in mid-sized markets in Brazil. The Company has established wireless cable operating systems in the cities of Brasilia, Goiania and Belem, which together have a total population of approximately 5,200,000 and encompass approximately 1,215,000 households, an estimated 1,054,000 of which can be served by the line-of-sight ("LOS") transmission utilized by the Company's wireless cable systems. The 10-year renewable licenses to operate such systems are granted on an exclusive basis within a 25 kilometer radius of the Company's transmission sites, although the Company serves customers beyond this range. Applications have been made for the Company to operate wireless cable systems in an additional 19 markets in Brazil having an aggregate population of approximately 9,000,000 and encompassing approximately 2,000,000 households, although there can be no assurance as to the grant of any such licenses or as to the timing thereof. Since 1993, the Company has experienced substantial subscriber growth, increasing from 135 subscribers at the beginning of 1993 to 47,066 subscribers as of March 31, 1996 and more than 55,000 subscribers as of May 31, 1996. For the first quarter of 1996, average monthly revenue per subscriber was $40.45 and average monthly churn was less than 1%. For the first quarter of 1996, the Company generated revenues of $5,852,000, an operating loss of $139,000, a net loss of $459,000 and EBITDA (operating income plus depreciation, amortization and non-cash compensation) of $959,000. The Company's largest operating system, the Brasilia System, generated revenues of $3,910,000, operating income of $747,000 and EBITDA of $1,410,000 during this period. The Company targets mid-sized markets with demographics, competitive environments and topographies that it believes offer the Company the opportunity to become the leading provider of subscription television services in those markets. Significant portions of the Company's current and targeted markets are not served by hardwire cable providers. The Company estimates that the percentage of homes unpassed by traditional hardwire cable as of March 31, 1996 is approximately 70% in each of Brasilia and Goiania. There is no hardwire cable provider in Belem. Of the approximately 1,215,000 households in Brasilia, Goiania and Belem, the Company estimates that 985,000 households, or approximately 80% of such households, are currently unpassed by hardwire cable. The Brazilian hardwire cable industry and wireless cable industry both began developing in 1989. As of December 1994, Brazil had an estimated 34,500,000 television households, making it the largest television market in South America, representing approximately 50% of total South American television households. The Company believes that as of March 1996, Brazil had approximately 1,250,000 subscription television subscribers, representing less than 5% penetration of total television households in Brazil. The Ministry of Communications of Brazil (the "Ministry of Communications") has forecast that there will be 16,500,000 subscription television subscribers in Brazil by the year 2003. The Company believes that wireless cable technology is well suited to its current and targeted markets and is an attractive alternative to existing television choices. Wireless cable transmission provides immediate coverage of entire markets to locations that are in the unobstructed path of the transmission tower. Wireless cable service can be deployed at a significantly lower system capital cost per installed subscriber than alternative technologies. The Company believes that subscribers to television services in Brazil are concerned with such features as programming, service, reliability and price and are generally indifferent to the delivery methodology. See "Business--Company Overview" and "--Brazilian Subscription Television Industry." The Company may in the future offer additional communications services, although it has no current plan or proposal to do so. See "Business--Company Overview." The table below provides information regarding the Company's markets as of March 31, 1996: <TABLE> <CAPTION> ESTIMATED TOTAL HOUSEHOLDS ESTIMATED ESTIMATED ESTIMATED NUMBER UNPASSED BY TOTAL TOTAL LOS OF NUMBER OF LAUNCH HARDWIRE POPULATION HOUSEHOLDS(1) HOUSEHOLDS(2) CHANNELS(3) SUBSCRIBERS DATE CABLE ---------- ------------- ------------- ----------- ----------- --------- ----------- <S> <C> <C> <C> <C> <C> <C> <C> OPERATING MARKETS: Brasilia................ 1,800,000 431,000 401,000 22 32,139 Feb. 1994(4) 70% Goiania(5).............. 1,600,000 414,000 320,000 21 6,686 Jan. 1995 70% Belem................... 1,800,000 370,000 333,000 21 8,241 Feb. 1995 100% --------- --------- --------- ------ Total in Operating Markets:.............. 5,200,000 1,215,000 1,054,000 47,066 80% ========= ========= ========= ====== 19 APPLICATION MARKETS:(6)............ 9,000,000 2,000,000 ========= ========= </TABLE> - -------- (1) Represents the Company's estimate of the number of total households within a 25 kilometer radius in the particular signal coverage area (subject to Note (5)). The Company's exclusive coverage territory is a 25 kilometer radius in its operating markets. The Company's estimates are based on data from the 1991 Census conducted by the Brazilian Institute of Geography and Statistics ("IBGE") as adjusted to reflect total household growth of 3.13% per year in Brasilia, 2.33% per year in Goiania and 2.65% per year in Belem based on IBGE data. (2) Represents the Company's estimate of the number of Estimated Total Households that can receive an adequate signal from the Company (eliminating from the Estimated Total Households those homes that the Company estimates are unable to receive service due to certain physical characteristics of the particular signal coverage area, such as terrain and foliage, although some of these households can be served with the aid of signal repeaters). (3) Includes six local off-air VHF/UHF channels in Brasilia and five local off- air VHF/UHF channels in each of Goiania and Belem which are offered to the Company's subscribers in addition to the subscription channels. (4) Date when the Brasilia System increased its channel offering from four channels to eight channels. The Brasilia System began service with one channel in 1990. (5) Includes 6,600 Estimated LOS Households of the 66,000 Estimated Total Households in the City of Anapolis, all of which fall outside the Company's 25 kilometer exclusive coverage territory, but within the Goiania signal coverage area. See "Business--Regulatory Environment--License Procedures." (6) Represents markets for which the Company has applied for licenses with the Ministry of Communications. There can be no assurance as to the grant of any such licenses or as to the timing of grants, if any. BACKGROUND The Company's predecessor was founded in 1989 by members of the Company's current senior management team. In September 1989, the Company was granted a license to operate a wireless cable system in Brasilia, the capital of Brazil, and commenced operations in 1990 with a one channel offering. The Company raised an aggregate of $16,751,000 through a series of private equity placements in 1993, 1994, 1995 and 1996 in the respective amounts of $1,300,000, $5,000,000, $3,300,000 and $7,151,000, to Tevecap S.A. ("Tevecap") (a subsidiary of Abril S.A., one of Brazil's two largest media companies), Warburg, Pincus Investors, L.P. ("Warburg, Pincus") and certain other investors. With the proceeds from such private placements, the Company expanded its subscriber base, increased the channel offerings in Brasilia and launched new wireless cable systems in Goiania and Belem. Licenses to operate the Goiania and Belem systems were acquired in 1994 from TVA Sistema de Televisao S.A. ("TVA"), a subsidiary of Tevecap, one of the largest subscription television operators and program suppliers in Brazil, and these systems commenced operations in early 1995. The Company has exclusive rights to TVA programming via wireless and hardwire cable in areas where the Company currently operates. See "Business--Company Background." OPERATING STRATEGY The Company's objective is to become a leading provider of subscription television services in mid-sized markets in Brazil and to become the largest provider of subscription television services in each of its markets. The Company believes Brazil offers significant opportunities for subscription television providers because (i) there is significant demand among television viewers in Brazil for additional programming choices, (ii) there is limited competition among subscription television providers and (iii) the penetration rate for subscription television services is less than 5% of the television households. As demonstrated by the Company's experience in rapidly growing its subscriber base, the Company believes it is well positioned to take advantage of these opportunities. As part of its strategy, the Company focuses on (i) targeting mid-sized markets for expansion, (ii) developing TV Filme brand name recognition through exclusive programming, (iii) increasing penetration of existing markets, (iv) providing superior customer service, (v) minimizing the rate of subscriber turnover ("churn") and (vi) implementing a consistent operating model. These elements of the Company's strategy are discussed below: Target Mid-sized Markets for Expansion. The Company targets markets with populations from approximately 100,000 to 2,500,000, and with demographics, competitive environments and topographies favorable for the Company's subscription television services. The Company believes that these markets are currently underserved by subscription television service providers. In addition to its three operating markets, applications have been made for the Company to operate wireless cable systems in an additional 19 markets in Brazil representing a total of approximately 2,000,000 households and an aggregate population of approximately 9,000,000. Develop TV Filme Brand Name Recognition through Exclusive Programming. The Company offers exclusive programming which it believes is superior to that of its competitors. In its current operating markets, the Company has exclusive rights to transmit, via wireless and hardwire cable, programming offered by Tevecap and its subsidiaries which, in turn, are the exclusive providers of certain channels, including HBO Brazil, ESPN Brazil and Country Music Television. In addition to such programming, the Company seeks to secure exclusive television rights to important regional events. For example, the Company owns the right to broadcast the Goias State Soccer Championship matches, which the Company offers to its subscribers in Goiania. The Company emphasizes its exclusive programming in its marketing activities and believes that its programming line-up, including its local content, gives the Company a competitive advantage in its markets and enhances the TV Filme brand name. Increase Penetration of Existing Markets. The Company builds its subscriber base by (i) extensive marketing tied to regional events such as soccer matches, (ii) neighborhood promotional events featuring large screen broadcasts of its channel offerings, (iii) direct mailings, (iv) telemarketing, (v) television and newspaper advertisements, (vi) prewiring arrangements with residential housing developers and (vii) other promotional marketing activities, including referral programs and gifts. Provide Superior Customer Service. The Company believes that it delivers high levels of customer service to its subscribers. Customer satisfaction is emphasized for all employees, including the telemarketing, installation and customer service teams. The Company's proprietary management information systems greatly facilitate customer service by providing customer service representatives immediate access to relevant customer records, including correspondence history. The Company seeks to install service promptly in a customer's home or business, and service calls are typically responded to in less than 48 hours. Minimize Subscriber Churn. The Company focuses on minimizing churn, and its average monthly churn rate has been less than 1% for the last two years. The Company has developed proprietary management information systems which enable it to provide superior customer service to its clients while monitoring customer payment patterns. The Company also provides customer service through a "call-back unit" that attempts to resolve any individual customer concerns. In addition, the Company identifies and targets areas underserved by hardwire cable. The Company also charges installation fees ranging from $80 to $250 per subscriber to discourage subscribers from disconnecting. Implement Consistent Operating Model. The Company believes that its implementation of consistent processes supported by proprietary systems, such as the Company's automated installation scheduling and billing systems, facilitates the effective development of new markets and rapid subscriber growth. The Company implements specific marketing plans, conducts employee training programs and uses a sophisticated intra-company telecommunications network and proprietary management information systems to implement best practices across its marketing, customer service, operations and control functions. See "Business--Operating Strategy." THE OFFERING <TABLE> <S> <C> Common Stock offered hereby................. 2,500,000 shares Common Stock to be outstanding after this offering............... 9,791,176 shares(1) Use of proceeds......... Of the estimated $24,075,000 of net proceeds to be received by the Company in connection with the sale of the shares of Common Stock offered hereby, the Company intends to use approximately $16 million of such net proceeds to finance the expansion of the Company's current operating systems, approximately 75% of which is expected to be used to fund installation costs and the purchase of decoders and related equipment. The Company intends to use the remaining net proceeds to fund working capital needs, including the repayment of certain short-term borrowings of approximately $2.5 million from Abril S.A. and certain of its affiliates, and the launching or acquisition of new operating systems to the extent the Company obtains the right to operate or acquire such new systems. Such short-term borrowings, the proceeds of which are used for working capital purposes, are payable on demand and bear interest at the Brazilian interbank rate ("CDI") or at CDI plus 0.8%. On July 15, 1996, the CDI rate was 2.47% per month. The Company has no pending or probable acquisitions, and in the event that the Company does not obtain the right to operate or acquire new systems, the Company intends to use the remaining net proceeds to fund working capital needs and for other general corporate purposes. See "Use of Proceeds." Nasdaq National Market symbol................. PYTV </TABLE> - -------- (1) Excludes (i) 936,432 shares of Common Stock reserved for issuance upon the exercise of stock options available for grant under the Company's 1996 Stock Option Plan pursuant to which options to purchase 407,000 shares of Common Stock shall be granted upon the consummation of this offering, 297,000 of which shall be exercisable at the initial public offering price and 110,000 of which shall be exercisable at $11.00 per share, and which generally shall vest 20% per year for five years beginning on the first anniversary of consummation of this offering and (ii) 794,764 shares of Common Stock issuable upon the exercise of warrants (the "1996 Warrants"), all of which are currently exercisable. See "Management--Stock Options-- 1996 Stock Option Plan" and "Description of Capital Stock--Warrants."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001013610_cafeteria_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001013610_cafeteria_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following is a summary of certain information contained elsewhere in this Prospectus. It is not, and is not intended to be complete. Reference is made to, and this summary is qualified in its entirety by, the more detailed information contained elsewhere in this Prospectus. Unless otherwise defined, capitalized terms used in this Summary have the meanings ascribed to them elsewhere in this Prospectus. Prospective purchasers are encouraged to read carefully all of the information contained in this Prospectus in its entirety. THE COMPANY Cafeteria Operators, L.P., a Delaware limited partnership (the "Company"), was formed on June 22, 1987. The Company's sole general partner is Furr's/Bishop's, Incorporated, a Delaware corporation (the "Parent") and its sole limited partner is Furr's/Bishop's Cafeterias, L.P., a Delaware limited partnership and indirect wholly owned partnership subsidiary of the Parent ("FBLP"). The principal executive offices of the Company and the Parent are located at 6901 Quaker Avenue, Lubbock, Texas 79413, and the telephone number is (806) 792-7151. Unless the context otherwise requires, all references in this Prospectus to the "Company" include the Company and its subsidiaries. The Company is one of the largest operators of family-style cafeteria restaurants in the United States (based on the number of cafeterias operated). The Company believes that its cafeterias and buffets, which are operated under the "Furr's" and "Bishop's" names, are well recognized in their regional markets for their value, convenience, food quality and friendly service. The Company's 110 cafeterias and one buffet are located in thirteen states in the Southwest, West and Midwest. The Company also operates two specialty restaurants in Lubbock, Texas under the name Zoo-Kini's Soups, Salads and Grill. In addition, the Company operates Dynamic Foods, its food preparation, processing and distribution division in Lubbock, Texas. Dynamic Foods provides approximately 85% of the food and supply requirements of the Company's cafeteria and buffet restaurants. Dynamic Foods also sells pre-cut produce, bakery items, meats and seafood and various prepared foods to the restaurant, food service and retail markets. See "Business." BACKGROUND; THE RESTRUCTURING The Parent and the Company recently completed a comprehensive restructuring of their financial obligations (the "Restructuring"). As part of the Restructuring, the Company executed the Amended and Restated Indenture (the "Indenture") dated as of November 15, 1995 between the Company and Fleet National Bank of Massachusetts (f/k/a Shawmut Bank, N.A.), as trustee (the "Trustee"), pursuant to which, among other things, the terms of $40.0 million aggregate principal amount outstanding under the Company's 11% Senior Secured Notes due June 30, 1998 (the "11% Notes") issued pursuant to the Indenture dated as of March 27, 1992 between the Company and Shawmut Bank, N.A., as collateral agent (the "Old Indenture"), were amended, with the consent of holders of the 11% Notes at such time (the "Original 11% Noteholders"), to constitute $40.0 million (subject to the issuance of additional Notes in payment of the first interest installment) aggregate principal amount of Notes issued pursuant to the Indenture. In addition, the Company issued a Note in the original principal amount of $1.7 million to the Trustees of General Electric Pension Trust ("GEPT") in settlement of a $5.4 million (plus interest) judgment against FBLP. As part of the Restructuring, Wells Fargo Bank, National Association ("Wells Fargo") received an option to purchase 2.5% of the outstanding Common Stock (the "Wells Fargo Option") in satisfaction of approximately $6.1 million principal amount (plus approximately $1.6 million of accrued and unpaid interest) of indebtedness of a subsidiary of the Parent. As a result of the Restructuring, indebtedness of the Company in the amount of approximately $153 million aggregate principal amount (plus approximately $46.6 million in accrued and unpaid interest) outstanding under the Old Indenture was exchanged by holders on January 2, 1996 of the 11% Notes (the "Exchanging 11% Noteholders" and together with the Original 11% Noteholders, the "former 11% Noteholders") for an aggregate of 95% of the limited partnership interests of the Company and the right to put such limited partnership interests to the Parent in exchange for 95% of the outstanding Common Stock (the "Put Option"). In addition, outstanding warrants to purchase Common Stock held by certain of the Exchanging 11% Noteholders were cancelled. On March 12, 1996, a majority of the Exchanging 11% Noteholders exercised the Put Option and, accordingly, all Exchanging 11% Noteholders put their limited partnership interests to the Parent in exchange for 95% of the outstanding Common Stock. On March 15, 1996, Wells Fargo exercised the Wells Fargo Option, thereby becoming the beneficial owner of 2.5% of the outstanding Common Stock. As of the date of this Prospectus, the Exchanging 11% Noteholders no longer own any limited partnership interests of the Company; however, they and their successors and assigns own an aggregate of 95.0% of the outstanding Common Stock of the Parent. See "Background; The Restructuring" and "Risk Factors -- Ownership of the Parent."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001013613_albany_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001013613_albany_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING INFORMATION IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. AS USED HEREIN, UNLESS THE CONTEXT OTHERWISE REQUIRES, THE "COMPANY" MEANS GRAY COMMUNICATIONS SYSTEMS, INC. AND ITS SUBSIDIARIES. THE COMPANY HAS NOT YET CONSUMMATED THE PHIPPS ACQUISITION (AS DEFINED) AND THERE CAN BE NO ASSURANCE THAT THE PHIPPS ACQUISITION WILL BE CONSUMMATED. HOWEVER, EXCEPT WITH RESPECT TO HISTORICAL FINANCIAL STATEMENTS AND UNLESS THE CONTEXT INDICATES OTHERWISE, THE PHIPPS BUSINESS (AS DEFINED) IS INCLUDED IN THE DESCRIPTION OF THE COMPANY. SEE "THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING." UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION GRANTED BY THE COMPANY TO THE UNDERWRITERS IN THE CONCURRENT OFFERING IS NOT EXERCISED. ALL INFORMATION IN THIS PROSPECTUS HAS BEEN ADJUSTED TO GIVE EFFECT TO A 3-FOR-2 SPLIT OF THE CLASS A COMMON STOCK, EFFECTED IN THE FORM OF A STOCK DIVIDEND DECLARED ON OCTOBER 2, 1995. UNLESS OTHERWISE INDICATED, ALL STATION RANK, IN-MARKET SHARE AND TELEVISION HOUSEHOLD DATA IN THIS PROSPECTUS ARE DERIVED FROM THE NIELSEN STATION INDEX, VIEWERS IN PROFILE, DATED NOVEMBER 1995, AS PREPARED BY A.C. NIELSEN COMPANY ("NIELSEN"). THE COMPANY The Company owns and operates seven network-affiliated television stations in medium-size markets in the southeastern United States, six of which are ranked number one in their respective markets (which includes two television stations that are part of the Phipps Business). Five of the stations are affiliated with the CBS Television Network, a division of CBS, Inc. ("CBS") and two are affiliated with the NBC Television Network, a division of the National Broadcasting Company, Incorporated ("NBC"). In connection with the Phipps Acquisition (described below), the Company will be required under current regulations of the Federal Communications Commission (the "FCC") to divest its NBC affiliates in Albany, Georgia and Panama City, Florida. For a discussion of the Company's plans regarding such divestiture, see "Risk Factors -- FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." The Company also owns and operates three daily newspapers, two weekly, advertising only publications ("shoppers"), and a paging business (which is part of the Phipps Business), all located in the Southeast. The Company derives significant operating advantages and cost saving synergies through the size of its television station group and the regional focus of its television and publishing operations. These advantages and synergies include (i) sharing television production facilities, equipment and regionally oriented programming, (ii) the ability to purchase television programming for the group as a whole, (iii) negotiating network affiliation agreements on a group basis and (iv) purchasing newsprint and other supplies in bulk. In addition, the Company believes that its regional focus can provide advertisers with an efficient network through which to advertise in the fast-growing Southeast. In 1993, after the acquisition of a large block of Class A Common Stock by a new investor, the Company implemented a strategy to foster growth through strategic acquisitions. Since 1994, the Company's significant acquisitions have included three television stations and two newspapers, all located in the Southeast. As a result of the Company's acquisitions and in support of its growth strategy, the Company has added certain key members of management and has greatly expanded its operations in the television broadcasting and newspaper publishing businesses. On September 10, 1996, J. Mack Robinson, a director of the Company, was appointed President and Chief Executive Officer of the Company on an interim basis, to succeed Ralph W. Gabbard, who had died suddenly. The Company expects to commence a search to locate a new President as soon as practicable following this Offering. On September 11, 1996, Robert S. Prather, Jr., a director of the Company, was appointed Executive Vice President-Acquisitions on an interim basis. In January 1996, the Company acquired (the "Augusta Acquisition") WRDW-TV ("WRDW"), a CBS affiliate serving Augusta, Georgia (the "Augusta Business"). In December 1995, the Company entered into an asset purchase agreement to acquire (the "Phipps Acquisition") two CBS-affiliated stations, WCTV-TV ("WCTV") serving Tallahassee, Florida/Thomasville, Georgia and WKXT-TV ("WKXT") in Knoxville, Tennessee, a satellite broadcasting business and a paging business (collectively, the "Phipps Business"). The Company believes that the Phipps Acquisition will further enhance the Company's position as a major regional television broadcaster and is highly attractive for a number of reasons, including (i) the stations' strategic fit in the Southeast, (ii) WCTV's leading station market position and WKXT's significant growth potential, (iii) strong station broadcast cash flows, (iv) opportunities for revenue growth utilizing the Company's extensive management expertise with medium-size stations and (v) opportunities for synergies between WCTV and WKXT and the Company's existing stations with regard to revenue enhancement and cost controls. The consummation of the Phipps Acquisition is currently expected to occur by September 30, 1996, although there can be no assurance with respect thereto. In August 1996, the Company sold the assets (the "KTVE Sale") of KTVE Inc. ("KTVE"), a television station serving Monroe, Louisiana/El Dorado, Arkansas for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing. For the year ended December 31, 1995, on a pro forma basis, the Company had net revenues, Media Cash Flow (the sum of broadcast cash flow, publishing cash flow and paging cash flow), operating cash flow and net (loss) of $90.6 million, $30.3 million, $28.1 million and $(3.6) million, respectively. For the six months ended June 30, 1996, on a pro forma basis, the Company had net revenues, Media Cash Flow, operating cash flow and net income of $47.3 million, $17.9 million, $16.3 million and $251,000, respectively. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the year ended December 31, 1995 increased 148.2%, 188.4% and 227.9%, respectively, while net income decreased 230.3% from the historical amounts for the year ended December 31, 1994. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the six months ended June 30, 1996 increased 67.1%, 114.7% and 122.8%, respectively, while net income decreased 78.7% from the historical amounts for the six months ended June 30, 1995. The Company's pro forma net income for its television stations for the year ended December 31, 1995 and for the six months ended June 30, 1996 was $1.6 million and $1.4 million, respectively. The following table sets forth certain information for each of the Company's television stations. <TABLE> <CAPTION> ------------------------------------------------------------------------------------------------------------------ PRO FORMA --------------------------------------- IN-MARKET YEAR ENDED DECEMBER SIX MONTHS ENDED STATION SHARE OF 31, 1995 JUNE 30, 1996 RANK HOUSEHOLDS ------------------- ------------------ NETWORK YEAR DMA CHANNEL/ IN VIEWING NET OPERATING NET OPERATING STATION AFFILIATION MARKET ACQUIRED RANK(1) FREQUENCY DMA(2) TV REVENUES INCOME(6) REVENUES INCOME(6) - -------- ------- ------------- ------- -------- --------- -------- --------- --------- -------- -------- -------- (IN THOUSANDS) (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> WKYT CBS Lexington, KY 1994 68 27/UHF(3) 1 33% $15,553 $5,247 $7,845 $2,701 WYMT CBS Hazard, KY 1994 68 57/UHF(3) 1(4) 24 3,721 831 2,107 530 WRDW CBS Augusta, GA 1996 111 12/VHF 1 36 8,888 1,853 4,489 1,149 WALB (5) NBC Albany, GA 1954 152 10/VHF 1 80 9,445 4,795 5,099 2,658 Panama City, WJHG (5) NBC FL 1960 159 7/VHF 1 53 3,843 270 2,409 476 PHIPPS ACQUISITION WKXT CBS Knoxville, TN 62 8/VHF 3 22 9,269 2,204 4,387 903 Tallahassee, WCTV CBS FL/ 116 6/VHF 1 60 11,862 4,229 6,212 2,254 Thomasville, GA </TABLE> - ------------------------------ (1) Ranking of designated market area as defined by Nielsen ("DMA") served by a station among all DMAs is measured by the number of television households within the DMA based on the November 1995 Nielsen estimates. (2) Represents station rank in DMA as determined by November 1995 Nielsen estimates of the number of television sets tuned to the Company's station as a percentage of the number of television sets in use in the market for the Sunday through Saturday 6 a.m. to 2 a.m. time period. (3) All stations in the market are UHF stations. (4) The market area served by WYMT is an 18-county trading area, as defined by Nielsen, and is included in the Lexington, Kentucky DMA. WYMT's station rank is based upon its position in the 18-county trading area. (5) The Company will be required under current FCC regulations to divest WALB and WJHG in connection with the Phipps Acquisition. For a discussion of the Company's plans, see "Risk Factors-FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." (6) Represents pro forma income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes. The Company's three newspapers, THE ALBANY HERALD, THE ROCKDALE CITIZEN and the GWINNETT DAILY POST and two shoppers had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $21.9 million and $660,000, respectively, for the year ended December 31, 1995, and $11.3 million and $1.3 million for the six months ended June 30, 1996, respectively. The satellite broadcasting business and paging business, which are a part of the Phipps Business, had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $6.2 million and $542,000 for the year ended December 31, 1995 and $3.5 million and $467,000 for the six months ended June 30, 1996, respectively. BUSINESS STRATEGY The Company's business strategy includes the following key elements: - STRONG LOCAL PRESENCE. Each of the Company's television stations seeks to achieve a distinct identity through its emphasis on local programming. A key objective is to build audience loyalty through the development of a strong local news franchise. Strong local news generates high viewership and results in higher ratings for programs both preceding and following the news, which increases revenues and Media Cash Flow. - REGIONAL FOCUS. The Company believes its regional focus has competitive advantages, including the ability to purchase and produce programming that can be used by multiple Company-owned stations as well as the opportunity to sell advertising on multiple stations as a single buy. In addition, the proximity of the Company's operations allows the sharing of equipment, management and marketing expertise. - TARGETED MARKETING. The Company seeks to increase its advertising revenues and Media Cash Flow by expanding existing relationships with local and national advertisers and by attracting new advertisers through targeted marketing techniques and carefully tailored programming. The Company works closely with advertisers to develop advertising campaigns that match specifically targeted audience segments including sponsoring and staging various special events such as fishing tournaments, boat shows and bridal expositions. - COST CONTROLS. Through its strategic planning and annual budgeting processes, the Company continually seeks to identify and implement cost savings opportunities at each of its stations and publications in order to increase Media Cash Flow. The Company's ownership of multiple stations and publications also benefits each operation in negotiating favorable terms with programming syndicators, newsprint suppliers, national sales representatives and other vendors. - SELECTIVE ACQUISITIONS. The Company has focused on acquiring television stations where the Company believes there is the potential for improvements in revenue share, audience share and cost control. The Company focuses on southeastern markets of medium size because the Company believes these markets offer superior opportunities in terms of projected population and economic growth, leading to higher advertising and circulation revenues. In assessing acquisitions, the Company targets stations and publications where it sees specific opportunities for revenue enhancement while controlling expenditures, utilizing management's significant experience with local and national advertising sales and in operating similar businesses. In appropriate circumstances, the Company will dispose of assets that it deems non-essential to its operating or growth strategy. THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING The Company has entered into an agreement to acquire WCTV and WKXT, a satellite broadcasting business and a paging business in the Southeast. The purchase price for the Phipps Acquisition is approximately $185 million, including fees, expenses and working capital and other adjustments. The consummation of the Phipps Acquisition is expected to occur by September 30, 1996, although there can be no assurance with respect thereto. See "Risk Factors -- Possible Non-Consummation of the Phipps Acquisition." Pursuant to an agreement, dated as of May 15, 1996 (the "KTVE Agreement"), with GOCOM Television of Ouachita, L.P., in August 1996, the Company sold the assets of KTVE for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing (approximately $870,000), to the extent collected by the buyer, to be paid to the Company 150 days following the date of closing. For the year ended December 31, 1995, KTVE had net revenues, Media Cash Flow and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) of $4.2 million, $916,000 and $437,000, respectively, and $2.3 million, $598,000 and $360,000, respectively, for the six months ended June 30, 1996. The Company estimates that the gain, net of estimated taxes, on the KTVE Sale was approximately $2.8 million. In addition to the KTVE Sale and the consummation of this Offering, the Concurrent Offering and the Phipps Acquisition, the Company intends to implement a financing plan (the "Financing") to increase liquidity and improve operating and financial flexibility. Pursuant to the Financing, the Company will (i) retire approximately $49.5 million aggregate principal amount of outstanding indebtedness under its senior secured bank credit facility (the "Old Credit Facility"), together with accrued interest thereon, (ii) retire approximately $25.0 million aggregate principal amount of outstanding indebtedness under its senior note due 2003 (the "Senior Note"), together with accrued interest thereon and a prepayment fee, (iii) issue $10.0 million liquidation preference of its Series A preferred stock (the "Series A Preferred Stock") in exchange for its outstanding $10.0 million aggregate principal amount 8% subordinated note (the "8% Note") issued to Bull Run Corporation ("Bull Run"), a principal shareholder of the Company, (iv) issue to Bull Run, J. Mack Robinson, the President, Chief Executive Officer and a director of the Company, and certain of his affiliates $10.0 million liquidation preference of its Series B preferred stock (the "Series B Preferred Stock" and together with the Series A Preferred Stock, the "Preferred Stock") with warrants to purchase up to 500,000 shares of Class A Common Stock (representing 10.1% of the currently issued and outstanding Class A Common Stock after giving effect to the exercise of such warrants) for cash proceeds of $10.0 million and (v) enter into a new senior secured bank credit facility (the "Senior Credit Facility") to provide for a term loan and revolving credit facility aggregating $125.0 million. The cash required for the consummation of the Phipps Acquisition, the repayment of indebtedness and related transaction costs will be provided by the net proceeds of this Offering, the Concurrent Offering and the sale of the Series B Preferred Stock and the warrants, borrowings under the Senior Credit Facility and the Company's working capital. For a description of the Senior Credit Facility and the Preferred Stock, see "Description of Certain Indebtedness" and "Management--Compensation Committee Interlocks and Insider Participation-Issuances of Preferred Stock." The consummation of this Offering and the placement of funds into escrow are conditioned upon the issuance of the Series A Preferred Stock in exchange for the 8% Note, the issuance of the Series B Preferred Stock and the entering into of the Senior Credit Facility. The consummation of this Offering and the placement of the net proceeds thereof into escrow are not conditioned upon the consummation of the Concurrent Offering or the Phipps Acquisition or the other elements of the Financing. However the release of the net proceeds hereof from escrow is conditioned, among other things, upon the satisfaction of the Minimum Equity Condition, the retirement of the Senior Note and the Old Credit Facility and the consummation of the Phipps Acquisition. The Notes are subject to a mandatory redemption on the Special Redemption Date at the Special Redemption Price if either the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996. See "Description of the Notes-Redemption-Special Redemption." The Senior Credit Facility will provide that no borrowings may be made thereunder until the closing of the Phipps Acquisition. Accordingly, if the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied, the Notes will be redeemed by the Company, the Old Credit Facility will remain in place and the Company will not borrow under the Senior Credit Facility. The following table sets forth the estimated sources and uses of funds relating to this Offering, the Concurrent Offering, the Phipps Acquisition and the Financing: <TABLE> <CAPTION> ---------- (IN MILLIONS) AMOUNT ---------- <S> <C> SOURCES OF FUNDS: The Notes offered hereby $160.0 The Concurrent Offering (1) 73.5 Sale of Series B Preferred Stock and Warrants 10.0 Borrowings under the Senior Credit Facility 22.9 Working capital (2) 9.5 ---------- TOTAL $275.9 ---------- ---------- USES OF FUNDS: Consummation of Phipps Acquisition $185.0 Retire indebtedness under the Old Credit Facility (3) 49.5 Retire indebtedness under the Senior Note (4) 25.0 Fees and expenses (5) 16.4 ---------- TOTAL $275.9 ---------- ---------- </TABLE> - ------------------------------ (1) Assumes estimated gross proceeds from the Concurrent Offering of $73.5 million and estimated net proceeds therefrom of $67.6 million. It is a condition of the release from escrow of the net proceeds of this Offering that the Company shall have consummated one or more equity offerings having gross proceeds of not less than $65.0 million. To the extent that the gross proceeds of any such equity offerings are less than $73.5 million, the Company intends to borrow such difference under its Senior Credit Facility. It is anticipated that there will not be a significant interval between the closing of this Offering and the closing of the Concurrent Offering. (2) The source of these funds was the KTVE Sale. (3) Borrowings under the Old Credit Facility bear interest at formula rates based upon the applicable London inter-bank offered rate ("LIBOR") or prime rate at the time of borrowing plus a fixed spread and have a final maturity of 2003. As of June 30, 1996, the weighted average interest rate was 8.94%. (4) The indebtedness under the Senior Note bears interest at 10.7%. (5) Fees and expenses include underwriting costs for the Notes and the Concurrent Offering, fees payable in connection with the negotiation and execution of the Senior Credit Facility, fees payable in connection with the retirement of the Senior Note and legal, accounting and other transaction fees. Prior to the consummation of the Phipps Acquisition and the satisfaction of the Minimum Equity Condition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes. The Trust Funds will be invested in cash equivalents. The proceeds of the Concurrent Offering will be used to repay indebtedness under the Old Credit Facility, to retire the Senior Note and to provide funds for the Phipps Acquisition. THE OFFERING <TABLE> <S> <C> SECURITIES OFFERED.......................... $160,000,000 aggregate principal amount of % Senior Subordinated Notes due 2006. MATURITY DATE............................... , 2006. INTEREST PAYMENT DATES...................... and , commencing , 1997. SPECIAL REDEMPTION BY THE COMPANY........... If the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996, the Company will be required to redeem (the "Special Redemption") the Notes on or prior to December 31, 1996 (the "Special Redemption Date") at a redemption price (the "Special Redemption Price") equal to 101% of the principal amount of the Notes plus accrued and unpaid interest to the Special Redemption Date. At any time prior to December 23, 1996, if the Phipps Acquisition has not been consummated or the Minimum Equity Condition is not satisfied, the Company may, at its option, redeem the Notes, in whole but not in part, at a redemption price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date fixed for redemption. Prior to the consummation of the Phipps Acquisition and the satisfaction of the Minimum Equity Condition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes and the obligation of the Company to consummate the Special Redemption will be secured by such funds (the "Trust Funds"). </TABLE> <TABLE> <S> <C> OPTIONAL REDEMPTION BY THE COMPANY.......... The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after , 2001, at the redemption prices set forth herein, plus accrued and unpaid interest to the date fixed for redemption. In addition, at any time prior to , 1999, the Company, at its option, may redeem up to 35% of the aggregate principal amount of the Notes originally issued with the cash proceeds received by the Company from one or more Public Equity Offerings, other than the Concurrent Offering, at any time or from time to time, at a redemption price equal to % of the principal amount thereof, plus accrued and unpaid interest to the date fixed for redemption; PROVIDED, HOWEVER, that at least $104.0 million in aggregate principal amount of the Notes remain outstanding immediately after any such redemption. CHANGE OF CONTROL OFFER..................... Upon a Change of Control, the Company has the obligation to offer to purchase all the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. See "Description of the Notes -- Change of Control" for a discussion of the circumstances in which the Company may not be required to make a Change of Control Offer (as defined). OFFERS TO PURCHASE.......................... In the event of certain asset sales, the Company will be required to offer to repurchase the Notes at 100% of their principal amount plus accrued and unpaid interest, if any, to the date of repurchase with the net proceeds of such asset sales. SUBORDINATION............................... The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company, including all indebtedness of the Company under the Senior Credit Facility. As of June 30, 1996, on a pro forma basis after giving effect to this Offering, the Concurrent Offering, the KTVE Sale, the Financing and the application of the net proceeds therefrom, and to the Phipps Acquisition, the Company would have had approximately $183.6 million of indebtedness outstanding, of which $23.6 million would be Senior Debt. SUBSIDIARY GUARANTEES....................... The Notes will be guaranteed, jointly and severally, fully and unconditionally, on a senior subordinated basis by the Subsidiary Guarantors (the "Subsidiary Guarantees"). The obligations of any Subsidiary Guarantor with respect to its Subsidiary Guarantee will be subordinated in right of payment, to the same extent as the obligations of the Company in respect of the Notes, to all existing and future Guarantor Senior Debt of such Subsidiary Guarantor, which will include any guarantee by such Subsidiary Guarantor of the Company's indebtedness under the Senior Credit Facility. </TABLE> <TABLE> <S> <C> PRINCIPAL COVENANTS......................... The Indenture for the Notes (the "Indenture") will impose certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt or Guarantor Senior Debt and senior in right of payment to the Notes or any Subsidiary Guarantee, incur liens, impose restrictions on the ability of a subsidiary to pay dividends or make certain payments to the Company, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. USE OF PROCEEDS............................. The Company intends to use the proceeds from the sale of the Notes, together with the proceeds of the Concurrent Offering, the other proceeds of the Financing and the Company's working capital, to (i) consummate the Phipps Acquisition, (ii) retire indebtedness under the Old Credit Facility and the Senior Note and (iii) pay related fees and expenses. However, in the event the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996, the Company will be obligated to redeem the Notes. See "The Phipps Acquisition, the KTVE Sale and the Financing" and "Description of the Notes-Redemption-Special Redemption."
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+PROSPECTUS SUMMARY THE FOLLOWING INFORMATION IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. AS USED HEREIN, UNLESS THE CONTEXT OTHERWISE REQUIRES, THE "COMPANY" MEANS GRAY COMMUNICATIONS SYSTEMS, INC. AND ITS SUBSIDIARIES. THE COMPANY HAS NOT YET CONSUMMATED THE PHIPPS ACQUISITION (AS DEFINED) AND THERE CAN BE NO ASSURANCE THAT THE PHIPPS ACQUISITION WILL BE CONSUMMATED. HOWEVER, EXCEPT WITH RESPECT TO HISTORICAL FINANCIAL STATEMENTS AND UNLESS THE CONTEXT INDICATES OTHERWISE, THE PHIPPS BUSINESS (AS DEFINED) IS INCLUDED IN THE DESCRIPTION OF THE COMPANY. SEE "THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING." UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION GRANTED BY THE COMPANY TO THE UNDERWRITERS IN THE CONCURRENT OFFERING IS NOT EXERCISED. ALL INFORMATION IN THIS PROSPECTUS HAS BEEN ADJUSTED TO GIVE EFFECT TO A 3-FOR-2 SPLIT OF THE CLASS A COMMON STOCK, EFFECTED IN THE FORM OF A STOCK DIVIDEND DECLARED ON OCTOBER 2, 1995. UNLESS OTHERWISE INDICATED, ALL STATION RANK, IN-MARKET SHARE AND TELEVISION HOUSEHOLD DATA IN THIS PROSPECTUS ARE DERIVED FROM THE NIELSEN STATION INDEX, VIEWERS IN PROFILE, DATED NOVEMBER 1995, AS PREPARED BY A.C. NIELSEN COMPANY ("NIELSEN"). THE COMPANY The Company owns and operates seven network-affiliated television stations in medium-size markets in the southeastern United States, six of which are ranked number one in their respective markets (which includes two television stations that are part of the Phipps Business). Five of the stations are affiliated with the CBS Television Network, a division of CBS, Inc. ("CBS") and two are affiliated with the NBC Television Network, a division of the National Broadcasting Company, Incorporated ("NBC"). In connection with the Phipps Acquisition (described below), the Company will be required under current regulations of the Federal Communications Commission (the "FCC") to divest its NBC affiliates in Albany, Georgia and Panama City, Florida. For a discussion of the Company's plans regarding such divestiture, see "Risk Factors -- FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." The Company also owns and operates three daily newspapers, two weekly, advertising only publications ("shoppers"), and a paging business (which is part of the Phipps Business), all located in the Southeast. The Company derives significant operating advantages and cost saving synergies through the size of its television station group and the regional focus of its television and publishing operations. These advantages and synergies include (i) sharing television production facilities, equipment and regionally oriented programming, (ii) the ability to purchase television programming for the group as a whole, (iii) negotiating network affiliation agreements on a group basis and (iv) purchasing newsprint and other supplies in bulk. In addition, the Company believes that its regional focus can provide advertisers with an efficient network through which to advertise in the fast-growing Southeast. In 1993, after the acquisition of a large block of Class A Common Stock by a new investor, the Company implemented a strategy to foster growth through strategic acquisitions. Since 1994, the Company's significant acquisitions have included three television stations and two newspapers, all located in the Southeast. As a result of the Company's acquisitions and in support of its growth strategy, the Company has added certain key members of management and has greatly expanded its operations in the television broadcasting and newspaper publishing businesses. On September 10, 1996, J. Mack Robinson, a director of the Company, was appointed President and Chief Executive Officer of the Company on an interim basis, to succeed Ralph W. Gabbard, who had died suddenly. The Company expects to commence a search to locate a new President as soon as practicable following this Offering. On September 11, 1996, Robert S. Prather, Jr., a director of the Company, was appointed Executive Vice President-Acquisitions on an interim basis. In January 1996, the Company acquired (the "Augusta Acquisition") WRDW-TV ("WRDW"), a CBS affiliate serving Augusta, Georgia (the "Augusta Business"). In December 1995, the Company entered into an asset purchase agreement to acquire (the "Phipps Acquisition") two CBS-affiliated stations, WCTV-TV ("WCTV") serving Tallahassee, Florida/Thomasville, Georgia and WKXT-TV ("WKXT") in Knoxville, Tennessee, a satellite broadcasting business and a paging business (collectively, the "Phipps Business"). The Company believes that the Phipps Acquisition will further enhance the Company's position as a major regional television broadcaster and is highly attractive for a number of reasons, including (i) the stations' strategic fit in the Southeast, (ii) WCTV's leading station market position and WKXT's significant growth potential, (iii) strong station broadcast cash flows, (iv) opportunities for revenue growth utilizing the Company's extensive management expertise with medium-size stations and (v) opportunities for synergies between WCTV and WKXT and the Company's existing stations with regard to revenue enhancement and cost controls. The consummation of the Phipps Acquisition is currently expected to occur by September 30, 1996, although there can be no assurance with respect thereto. In August 1996, the Company sold the assets (the "KTVE Sale") of KTVE Inc. ("KTVE"), a television station serving Monroe, Louisiana/El Dorado, Arkansas for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing. For the year ended December 31, 1995, on a pro forma basis, the Company had net revenues, Media Cash Flow (the sum of broadcast cash flow, publishing cash flow and paging cash flow), operating cash flow and net (loss) of $90.6 million, $30.3 million, $28.1 million and $(3.6) million, respectively. For the six months ended June 30, 1996, on a pro forma basis, the Company had net revenues, Media Cash Flow, operating cash flow and net income of $47.3 million, $17.9 million, $16.3 million and $251,000, respectively. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the year ended December 31, 1995 increased 148.2%, 188.4% and 227.9%, respectively, while net income decreased 230.3% from the historical amounts for the year ended December 31, 1994. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the six months ended June 30, 1996 increased 67.1%, 114.7% and 122.8%, respectively, while net income decreased 78.7% from the historical amounts for the six months ended June 30, 1995. The Company's pro forma net income for its television stations for the year ended December 31, 1995 and for the six months ended June 30, 1996 was $1.6 million and $1.4 million, respectively. The following table sets forth certain information for each of the Company's television stations. <TABLE> <CAPTION> ------------------------------------------------------------------------------------------------------------------ PRO FORMA --------------------------------------- IN-MARKET YEAR ENDED DECEMBER SIX MONTHS ENDED STATION SHARE OF 31, 1995 JUNE 30, 1996 RANK HOUSEHOLDS ------------------- ------------------ NETWORK YEAR DMA CHANNEL/ IN VIEWING NET OPERATING NET OPERATING STATION AFFILIATION MARKET ACQUIRED RANK(1) FREQUENCY DMA(2) TV REVENUES INCOME(6) REVENUES INCOME(6) - -------- ------- ------------- ------- -------- --------- -------- --------- --------- -------- -------- -------- (IN THOUSANDS) (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> WKYT CBS Lexington, KY 1994 68 27/UHF(3) 1 33% $15,553 $5,247 $7,845 $2,701 WYMT CBS Hazard, KY 1994 68 57/UHF(3) 1(4) 24 3,721 831 2,107 530 WRDW CBS Augusta, GA 1996 111 12/VHF 1 36 8,888 1,853 4,489 1,149 WALB (5) NBC Albany, GA 1954 152 10/VHF 1 80 9,445 4,795 5,099 2,658 Panama City, WJHG (5) NBC FL 1960 159 7/VHF 1 53 3,843 270 2,409 476 PHIPPS ACQUISITION WKXT CBS Knoxville, TN 62 8/VHF 3 22 9,269 2,204 4,387 903 Tallahassee, WCTV CBS FL/ 116 6/VHF 1 60 11,862 4,229 6,212 2,254 Thomasville, GA </TABLE> - ------------------------------ (1) Ranking of designated market area as defined by Nielsen ("DMA") served by a station among all DMAs is measured by the number of television households within the DMA based on the November 1995 Nielsen estimates. (2) Represents station rank in DMA as determined by November 1995 Nielsen estimates of the number of television sets tuned to the Company's station as a percentage of the number of television sets in use in the market for the Sunday through Saturday 6 a.m. to 2 a.m. time period. (3) All stations in the market are UHF stations. (4) The market area served by WYMT is an 18-county trading area, as defined by Nielsen, and is included in the Lexington, Kentucky DMA. WYMT's station rank is based upon its position in the 18-county trading area. (5) The Company will be required under current FCC regulations to divest WALB and WJHG in connection with the Phipps Acquisition. For a discussion of the Company's plans, see "Risk Factors-FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." (6) Represents pro forma income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes. The Company's three newspapers, THE ALBANY HERALD, THE ROCKDALE CITIZEN and the GWINNETT DAILY POST and two shoppers had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $21.9 million and $660,000, respectively, for the year ended December 31, 1995, and $11.3 million and $1.3 million for the six months ended June 30, 1996, respectively. The satellite broadcasting business and paging business, which are a part of the Phipps Business, had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $6.2 million and $542,000 for the year ended December 31, 1995 and $3.5 million and $467,000 for the six months ended June 30, 1996, respectively. BUSINESS STRATEGY The Company's business strategy includes the following key elements: - STRONG LOCAL PRESENCE. Each of the Company's television stations seeks to achieve a distinct identity through its emphasis on local programming. A key objective is to build audience loyalty through the development of a strong local news franchise. Strong local news generates high viewership and results in higher ratings for programs both preceding and following the news, which increases revenues and Media Cash Flow. - REGIONAL FOCUS. The Company believes its regional focus has competitive advantages, including the ability to purchase and produce programming that can be used by multiple Company-owned stations as well as the opportunity to sell advertising on multiple stations as a single buy. In addition, the proximity of the Company's operations allows the sharing of equipment, management and marketing expertise. - TARGETED MARKETING. The Company seeks to increase its advertising revenues and Media Cash Flow by expanding existing relationships with local and national advertisers and by attracting new advertisers through targeted marketing techniques and carefully tailored programming. The Company works closely with advertisers to develop advertising campaigns that match specifically targeted audience segments including sponsoring and staging various special events such as fishing tournaments, boat shows and bridal expositions. - COST CONTROLS. Through its strategic planning and annual budgeting processes, the Company continually seeks to identify and implement cost savings opportunities at each of its stations and publications in order to increase Media Cash Flow. The Company's ownership of multiple stations and publications also benefits each operation in negotiating favorable terms with programming syndicators, newsprint suppliers, national sales representatives and other vendors. - SELECTIVE ACQUISITIONS. The Company has focused on acquiring television stations where the Company believes there is the potential for improvements in revenue share, audience share and cost control. The Company focuses on southeastern markets of medium size because the Company believes these markets offer superior opportunities in terms of projected population and economic growth, leading to higher advertising and circulation revenues. In assessing acquisitions, the Company targets stations and publications where it sees specific opportunities for revenue enhancement while controlling expenditures, utilizing management's significant experience with local and national advertising sales and in operating similar businesses. In appropriate circumstances, the Company will dispose of assets that it deems non-essential to its operating or growth strategy. THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING The Company has entered into an agreement to acquire WCTV and WKXT, a satellite broadcasting business and a paging business in the Southeast. The purchase price for the Phipps Acquisition is approximately $185 million, including fees, expenses and working capital and other adjustments. The consummation of the Phipps Acquisition is expected to occur by September 30, 1996, although there can be no assurance with respect thereto. See "Risk Factors -- Possible Non-Consummation of the Phipps Acquisition." Pursuant to an agreement, dated as of May 15, 1996 (the "KTVE Agreement"), with GOCOM Television of Ouachita, L.P., in August 1996, the Company sold the assets of KTVE for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing (approximately $870,000), to the extent collected by the buyer, to be paid to the Company 150 days following the date of closing. For the year ended December 31, 1995, KTVE had net revenues, Media Cash Flow and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) of $4.2 million, $916,000 and $437,000, respectively, and $2.3 million, $598,000 and $360,000, respectively, for the six months ended June 30, 1996. The Company estimates that the gain, net of estimated taxes, on the KTVE Sale was approximately $2.8 million. In addition to the KTVE Sale and the consummation of this Offering, the Concurrent Offering and the Phipps Acquisition, the Company intends to implement a financing plan (the "Financing") to increase liquidity and improve operating and financial flexibility. Pursuant to the Financing, the Company will (i) retire approximately $49.5 million aggregate principal amount of outstanding indebtedness under its senior secured bank credit facility (the "Old Credit Facility"), together with accrued interest thereon, (ii) retire approximately $25.0 million aggregate principal amount of outstanding indebtedness under its senior note due 2003 (the "Senior Note"), together with accrued interest thereon and a prepayment fee, (iii) issue $10.0 million liquidation preference of its Series A preferred stock (the "Series A Preferred Stock") in exchange for its outstanding $10.0 million aggregate principal amount 8% subordinated note (the "8% Note") issued to Bull Run Corporation ("Bull Run"), a principal shareholder of the Company, (iv) issue to Bull Run, J. Mack Robinson, the President, Chief Executive Officer and a director of the Company, and certain of his affiliates $10.0 million liquidation preference of its Series B preferred stock (the "Series B Preferred Stock" and together with the Series A Preferred Stock, the "Preferred Stock") with warrants to purchase up to 500,000 shares of Class A Common Stock (representing 10.1% of the currently issued and outstanding Class A Common Stock after giving effect to the exercise of such warrants) for cash proceeds of $10.0 million and (v) enter into a new senior secured bank credit facility (the "Senior Credit Facility") to provide for a term loan and revolving credit facility aggregating $125.0 million. The cash required for the consummation of the Phipps Acquisition, the repayment of indebtedness and related transaction costs will be provided by the net proceeds of this Offering, the Concurrent Offering and the sale of the Series B Preferred Stock and the warrants, borrowings under the Senior Credit Facility and the Company's working capital. For a description of the Senior Credit Facility and the Preferred Stock, see "Description of Certain Indebtedness" and "Management--Compensation Committee Interlocks and Insider Participation-Issuances of Preferred Stock." The consummation of this Offering and the placement of funds into escrow are conditioned upon the issuance of the Series A Preferred Stock in exchange for the 8% Note, the issuance of the Series B Preferred Stock and the entering into of the Senior Credit Facility. The consummation of this Offering and the placement of the net proceeds thereof into escrow are not conditioned upon the consummation of the Concurrent Offering or the Phipps Acquisition or the other elements of the Financing. However the release of the net proceeds hereof from escrow is conditioned, among other things, upon the satisfaction of the Minimum Equity Condition, the retirement of the Senior Note and the Old Credit Facility and the consummation of the Phipps Acquisition. The Notes are subject to a mandatory redemption on the Special Redemption Date at the Special Redemption Price if either the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996. See "Description of the Notes-Redemption-Special Redemption." The Senior Credit Facility will provide that no borrowings may be made thereunder until the closing of the Phipps Acquisition. Accordingly, if the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied, the Notes will be redeemed by the Company, the Old Credit Facility will remain in place and the Company will not borrow under the Senior Credit Facility. The following table sets forth the estimated sources and uses of funds relating to this Offering, the Concurrent Offering, the Phipps Acquisition and the Financing: <TABLE> <CAPTION> ---------- (IN MILLIONS) AMOUNT ---------- <S> <C> SOURCES OF FUNDS: The Notes offered hereby $160.0 The Concurrent Offering (1) 73.5 Sale of Series B Preferred Stock and Warrants 10.0 Borrowings under the Senior Credit Facility 22.9 Working capital (2) 9.5 ---------- TOTAL $275.9 ---------- ---------- USES OF FUNDS: Consummation of Phipps Acquisition $185.0 Retire indebtedness under the Old Credit Facility (3) 49.5 Retire indebtedness under the Senior Note (4) 25.0 Fees and expenses (5) 16.4 ---------- TOTAL $275.9 ---------- ---------- </TABLE> - ------------------------------ (1) Assumes estimated gross proceeds from the Concurrent Offering of $73.5 million and estimated net proceeds therefrom of $67.6 million. It is a condition of the release from escrow of the net proceeds of this Offering that the Company shall have consummated one or more equity offerings having gross proceeds of not less than $65.0 million. To the extent that the gross proceeds of any such equity offerings are less than $73.5 million, the Company intends to borrow such difference under its Senior Credit Facility. It is anticipated that there will not be a significant interval between the closing of this Offering and the closing of the Concurrent Offering. (2) The source of these funds was the KTVE Sale. (3) Borrowings under the Old Credit Facility bear interest at formula rates based upon the applicable London inter-bank offered rate ("LIBOR") or prime rate at the time of borrowing plus a fixed spread and have a final maturity of 2003. As of June 30, 1996, the weighted average interest rate was 8.94%. (4) The indebtedness under the Senior Note bears interest at 10.7%. (5) Fees and expenses include underwriting costs for the Notes and the Concurrent Offering, fees payable in connection with the negotiation and execution of the Senior Credit Facility, fees payable in connection with the retirement of the Senior Note and legal, accounting and other transaction fees. Prior to the consummation of the Phipps Acquisition and the satisfaction of the Minimum Equity Condition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes. The Trust Funds will be invested in cash equivalents. The proceeds of the Concurrent Offering will be used to repay indebtedness under the Old Credit Facility, to retire the Senior Note and to provide funds for the Phipps Acquisition. THE OFFERING <TABLE> <S> <C> SECURITIES OFFERED.......................... $160,000,000 aggregate principal amount of % Senior Subordinated Notes due 2006. MATURITY DATE............................... , 2006. INTEREST PAYMENT DATES...................... and , commencing , 1997. SPECIAL REDEMPTION BY THE COMPANY........... If the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996, the Company will be required to redeem (the "Special Redemption") the Notes on or prior to December 31, 1996 (the "Special Redemption Date") at a redemption price (the "Special Redemption Price") equal to 101% of the principal amount of the Notes plus accrued and unpaid interest to the Special Redemption Date. At any time prior to December 23, 1996, if the Phipps Acquisition has not been consummated or the Minimum Equity Condition is not satisfied, the Company may, at its option, redeem the Notes, in whole but not in part, at a redemption price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date fixed for redemption. Prior to the consummation of the Phipps Acquisition and the satisfaction of the Minimum Equity Condition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes and the obligation of the Company to consummate the Special Redemption will be secured by such funds (the "Trust Funds"). </TABLE> <TABLE> <S> <C> OPTIONAL REDEMPTION BY THE COMPANY.......... The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after , 2001, at the redemption prices set forth herein, plus accrued and unpaid interest to the date fixed for redemption. In addition, at any time prior to , 1999, the Company, at its option, may redeem up to 35% of the aggregate principal amount of the Notes originally issued with the cash proceeds received by the Company from one or more Public Equity Offerings, other than the Concurrent Offering, at any time or from time to time, at a redemption price equal to % of the principal amount thereof, plus accrued and unpaid interest to the date fixed for redemption; PROVIDED, HOWEVER, that at least $104.0 million in aggregate principal amount of the Notes remain outstanding immediately after any such redemption. CHANGE OF CONTROL OFFER..................... Upon a Change of Control, the Company has the obligation to offer to purchase all the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. See "Description of the Notes -- Change of Control" for a discussion of the circumstances in which the Company may not be required to make a Change of Control Offer (as defined). OFFERS TO PURCHASE.......................... In the event of certain asset sales, the Company will be required to offer to repurchase the Notes at 100% of their principal amount plus accrued and unpaid interest, if any, to the date of repurchase with the net proceeds of such asset sales. SUBORDINATION............................... The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company, including all indebtedness of the Company under the Senior Credit Facility. As of June 30, 1996, on a pro forma basis after giving effect to this Offering, the Concurrent Offering, the KTVE Sale, the Financing and the application of the net proceeds therefrom, and to the Phipps Acquisition, the Company would have had approximately $183.6 million of indebtedness outstanding, of which $23.6 million would be Senior Debt. SUBSIDIARY GUARANTEES....................... The Notes will be guaranteed, jointly and severally, fully and unconditionally, on a senior subordinated basis by the Subsidiary Guarantors (the "Subsidiary Guarantees"). The obligations of any Subsidiary Guarantor with respect to its Subsidiary Guarantee will be subordinated in right of payment, to the same extent as the obligations of the Company in respect of the Notes, to all existing and future Guarantor Senior Debt of such Subsidiary Guarantor, which will include any guarantee by such Subsidiary Guarantor of the Company's indebtedness under the Senior Credit Facility. </TABLE> <TABLE> <S> <C> PRINCIPAL COVENANTS......................... The Indenture for the Notes (the "Indenture") will impose certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt or Guarantor Senior Debt and senior in right of payment to the Notes or any Subsidiary Guarantee, incur liens, impose restrictions on the ability of a subsidiary to pay dividends or make certain payments to the Company, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. USE OF PROCEEDS............................. The Company intends to use the proceeds from the sale of the Notes, together with the proceeds of the Concurrent Offering, the other proceeds of the Financing and the Company's working capital, to (i) consummate the Phipps Acquisition, (ii) retire indebtedness under the Old Credit Facility and the Senior Note and (iii) pay related fees and expenses. However, in the event the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996, the Company will be obligated to redeem the Notes. See "The Phipps Acquisition, the KTVE Sale and the Financing" and "Description of the Notes-Redemption-Special Redemption."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0001013615_walb-tv_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001013615_walb-tv_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING INFORMATION IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. AS USED HEREIN, UNLESS THE CONTEXT OTHERWISE REQUIRES, THE "COMPANY" MEANS GRAY COMMUNICATIONS SYSTEMS, INC. AND ITS SUBSIDIARIES. THE COMPANY HAS NOT YET CONSUMMATED THE PHIPPS ACQUISITION (AS DEFINED) AND THERE CAN BE NO ASSURANCE THAT THE PHIPPS ACQUISITION WILL BE CONSUMMATED. HOWEVER, EXCEPT WITH RESPECT TO HISTORICAL FINANCIAL STATEMENTS AND UNLESS THE CONTEXT INDICATES OTHERWISE, THE PHIPPS BUSINESS (AS DEFINED) IS INCLUDED IN THE DESCRIPTION OF THE COMPANY. SEE "THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING." UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION GRANTED BY THE COMPANY TO THE UNDERWRITERS IN THE CONCURRENT OFFERING IS NOT EXERCISED. ALL INFORMATION IN THIS PROSPECTUS HAS BEEN ADJUSTED TO GIVE EFFECT TO A 3-FOR-2 SPLIT OF THE CLASS A COMMON STOCK, EFFECTED IN THE FORM OF A STOCK DIVIDEND DECLARED ON OCTOBER 2, 1995. UNLESS OTHERWISE INDICATED, ALL STATION RANK, IN-MARKET SHARE AND TELEVISION HOUSEHOLD DATA IN THIS PROSPECTUS ARE DERIVED FROM THE NIELSEN STATION INDEX, VIEWERS IN PROFILE, DATED NOVEMBER 1995, AS PREPARED BY A.C. NIELSEN COMPANY ("NIELSEN"). THE COMPANY The Company owns and operates seven network-affiliated television stations in medium-size markets in the southeastern United States, six of which are ranked number one in their respective markets (which includes two television stations that are part of the Phipps Business). Five of the stations are affiliated with the CBS Television Network, a division of CBS, Inc. ("CBS") and two are affiliated with the NBC Television Network, a division of the National Broadcasting Company, Incorporated ("NBC"). In connection with the Phipps Acquisition (described below), the Company will be required under current regulations of the Federal Communications Commission (the "FCC") to divest its NBC affiliates in Albany, Georgia and Panama City, Florida. For a discussion of the Company's plans regarding such divestiture, see "Risk Factors -- FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." The Company also owns and operates three daily newspapers, two weekly, advertising only publications ("shoppers"), and a paging business (which is part of the Phipps Business), all located in the Southeast. The Company derives significant operating advantages and cost saving synergies through the size of its television station group and the regional focus of its television and publishing operations. These advantages and synergies include (i) sharing television production facilities, equipment and regionally oriented programming, (ii) the ability to purchase television programming for the group as a whole, (iii) negotiating network affiliation agreements on a group basis and (iv) purchasing newsprint and other supplies in bulk. In addition, the Company believes that its regional focus can provide advertisers with an efficient network through which to advertise in the fast-growing Southeast. In 1993, after the acquisition of a large block of Class A Common Stock by a new investor, the Company implemented a strategy to foster growth through strategic acquisitions. Since 1994, the Company's significant acquisitions have included three television stations and two newspapers, all located in the Southeast. As a result of the Company's acquisitions and in support of its growth strategy, the Company has added certain key members of management and has greatly expanded its operations in the television broadcasting and newspaper publishing businesses. On September 10, 1996, J. Mack Robinson, a director of the Company, was appointed President and Chief Executive Officer of the Company on an interim basis, to succeed Ralph W. Gabbard, who had died suddenly. The Company expects to commence a search to locate a new President as soon as practicable following this Offering. On September 11, 1996, Robert S. Prather, Jr., a director of the Company, was appointed Executive Vice President-Acquisitions on an interim basis. In January 1996, the Company acquired (the "Augusta Acquisition") WRDW-TV ("WRDW"), a CBS affiliate serving Augusta, Georgia (the "Augusta Business"). In December 1995, the Company entered into an asset purchase agreement to acquire (the "Phipps Acquisition") two CBS-affiliated stations, WCTV-TV ("WCTV") serving Tallahassee, Florida/Thomasville, Georgia and WKXT-TV ("WKXT") in Knoxville, Tennessee, a satellite broadcasting business and a paging business (collectively, the "Phipps Business"). The Company believes that the Phipps Acquisition will further enhance the Company's position as a major regional television broadcaster and is highly attractive for a number of reasons, including (i) the stations' strategic fit in the Southeast, (ii) WCTV's leading station market position and WKXT's significant growth potential, (iii) strong station broadcast cash flows, (iv) opportunities for revenue growth utilizing the Company's extensive management expertise with medium-size stations and (v) opportunities for synergies between WCTV and WKXT and the Company's existing stations with regard to revenue enhancement and cost controls. The consummation of the Phipps Acquisition is currently expected to occur by September 30, 1996, although there can be no assurance with respect thereto. In August 1996, the Company sold the assets (the "KTVE Sale") of KTVE Inc. ("KTVE"), a television station serving Monroe, Louisiana/El Dorado, Arkansas for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing. For the year ended December 31, 1995, on a pro forma basis, the Company had net revenues, Media Cash Flow (the sum of broadcast cash flow, publishing cash flow and paging cash flow), operating cash flow and net (loss) of $90.6 million, $30.3 million, $28.1 million and $(3.6) million, respectively. For the six months ended June 30, 1996, on a pro forma basis, the Company had net revenues, Media Cash Flow, operating cash flow and net income of $47.3 million, $17.9 million, $16.3 million and $251,000, respectively. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the year ended December 31, 1995 increased 148.2%, 188.4% and 227.9%, respectively, while net income decreased 230.3% from the historical amounts for the year ended December 31, 1994. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the six months ended June 30, 1996 increased 67.1%, 114.7% and 122.8%, respectively, while net income decreased 78.7% from the historical amounts for the six months ended June 30, 1995. The Company's pro forma net income for its television stations for the year ended December 31, 1995 and for the six months ended June 30, 1996 was $1.6 million and $1.4 million, respectively. The following table sets forth certain information for each of the Company's television stations. <TABLE> <CAPTION> ------------------------------------------------------------------------------------------------------------------ PRO FORMA --------------------------------------- IN-MARKET YEAR ENDED DECEMBER SIX MONTHS ENDED STATION SHARE OF 31, 1995 JUNE 30, 1996 RANK HOUSEHOLDS ------------------- ------------------ NETWORK YEAR DMA CHANNEL/ IN VIEWING NET OPERATING NET OPERATING STATION AFFILIATION MARKET ACQUIRED RANK(1) FREQUENCY DMA(2) TV REVENUES INCOME(6) REVENUES INCOME(6) - -------- ------- ------------- ------- -------- --------- -------- --------- --------- -------- -------- -------- (IN THOUSANDS) (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> WKYT CBS Lexington, KY 1994 68 27/UHF(3) 1 33% $15,553 $5,247 $7,845 $2,701 WYMT CBS Hazard, KY 1994 68 57/UHF(3) 1(4) 24 3,721 831 2,107 530 WRDW CBS Augusta, GA 1996 111 12/VHF 1 36 8,888 1,853 4,489 1,149 WALB (5) NBC Albany, GA 1954 152 10/VHF 1 80 9,445 4,795 5,099 2,658 Panama City, WJHG (5) NBC FL 1960 159 7/VHF 1 53 3,843 270 2,409 476 PHIPPS ACQUISITION WKXT CBS Knoxville, TN 62 8/VHF 3 22 9,269 2,204 4,387 903 Tallahassee, WCTV CBS FL/ 116 6/VHF 1 60 11,862 4,229 6,212 2,254 Thomasville, GA </TABLE> - ------------------------------ (1) Ranking of designated market area as defined by Nielsen ("DMA") served by a station among all DMAs is measured by the number of television households within the DMA based on the November 1995 Nielsen estimates. (2) Represents station rank in DMA as determined by November 1995 Nielsen estimates of the number of television sets tuned to the Company's station as a percentage of the number of television sets in use in the market for the Sunday through Saturday 6 a.m. to 2 a.m. time period. (3) All stations in the market are UHF stations. (4) The market area served by WYMT is an 18-county trading area, as defined by Nielsen, and is included in the Lexington, Kentucky DMA. WYMT's station rank is based upon its position in the 18-county trading area. (5) The Company will be required under current FCC regulations to divest WALB and WJHG in connection with the Phipps Acquisition. For a discussion of the Company's plans, see "Risk Factors-FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." (6) Represents pro forma income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes. The Company's three newspapers, THE ALBANY HERALD, THE ROCKDALE CITIZEN and the GWINNETT DAILY POST and two shoppers had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $21.9 million and $660,000, respectively, for the year ended December 31, 1995, and $11.3 million and $1.3 million for the six months ended June 30, 1996, respectively. The satellite broadcasting business and paging business, which are a part of the Phipps Business, had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $6.2 million and $542,000 for the year ended December 31, 1995 and $3.5 million and $467,000 for the six months ended June 30, 1996, respectively. BUSINESS STRATEGY The Company's business strategy includes the following key elements: - STRONG LOCAL PRESENCE. Each of the Company's television stations seeks to achieve a distinct identity through its emphasis on local programming. A key objective is to build audience loyalty through the development of a strong local news franchise. Strong local news generates high viewership and results in higher ratings for programs both preceding and following the news, which increases revenues and Media Cash Flow. - REGIONAL FOCUS. The Company believes its regional focus has competitive advantages, including the ability to purchase and produce programming that can be used by multiple Company-owned stations as well as the opportunity to sell advertising on multiple stations as a single buy. In addition, the proximity of the Company's operations allows the sharing of equipment, management and marketing expertise. - TARGETED MARKETING. The Company seeks to increase its advertising revenues and Media Cash Flow by expanding existing relationships with local and national advertisers and by attracting new advertisers through targeted marketing techniques and carefully tailored programming. The Company works closely with advertisers to develop advertising campaigns that match specifically targeted audience segments including sponsoring and staging various special events such as fishing tournaments, boat shows and bridal expositions. - COST CONTROLS. Through its strategic planning and annual budgeting processes, the Company continually seeks to identify and implement cost savings opportunities at each of its stations and publications in order to increase Media Cash Flow. The Company's ownership of multiple stations and publications also benefits each operation in negotiating favorable terms with programming syndicators, newsprint suppliers, national sales representatives and other vendors. - SELECTIVE ACQUISITIONS. The Company has focused on acquiring television stations where the Company believes there is the potential for improvements in revenue share, audience share and cost control. The Company focuses on southeastern markets of medium size because the Company believes these markets offer superior opportunities in terms of projected population and economic growth, leading to higher advertising and circulation revenues. In assessing acquisitions, the Company targets stations and publications where it sees specific opportunities for revenue enhancement while controlling expenditures, utilizing management's significant experience with local and national advertising sales and in operating similar businesses. In appropriate circumstances, the Company will dispose of assets that it deems non-essential to its operating or growth strategy. THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING The Company has entered into an agreement to acquire WCTV and WKXT, a satellite broadcasting business and a paging business in the Southeast. The purchase price for the Phipps Acquisition is approximately $185 million, including fees, expenses and working capital and other adjustments. The consummation of the Phipps Acquisition is expected to occur by September 30, 1996, although there can be no assurance with respect thereto. See "Risk Factors -- Possible Non-Consummation of the Phipps Acquisition." Pursuant to an agreement, dated as of May 15, 1996 (the "KTVE Agreement"), with GOCOM Television of Ouachita, L.P., in August 1996, the Company sold the assets of KTVE for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing (approximately $870,000), to the extent collected by the buyer, to be paid to the Company 150 days following the date of closing. For the year ended December 31, 1995, KTVE had net revenues, Media Cash Flow and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) of $4.2 million, $916,000 and $437,000, respectively, and $2.3 million, $598,000 and $360,000, respectively, for the six months ended June 30, 1996. The Company estimates that the gain, net of estimated taxes, on the KTVE Sale was approximately $2.8 million. In addition to the KTVE Sale and the consummation of this Offering, the Concurrent Offering and the Phipps Acquisition, the Company intends to implement a financing plan (the "Financing") to increase liquidity and improve operating and financial flexibility. Pursuant to the Financing, the Company will (i) retire approximately $49.5 million aggregate principal amount of outstanding indebtedness under its senior secured bank credit facility (the "Old Credit Facility"), together with accrued interest thereon, (ii) retire approximately $25.0 million aggregate principal amount of outstanding indebtedness under its senior note due 2003 (the "Senior Note"), together with accrued interest thereon and a prepayment fee, (iii) issue $10.0 million liquidation preference of its Series A preferred stock (the "Series A Preferred Stock") in exchange for its outstanding $10.0 million aggregate principal amount 8% subordinated note (the "8% Note") issued to Bull Run Corporation ("Bull Run"), a principal shareholder of the Company, (iv) issue to Bull Run, J. Mack Robinson, the President, Chief Executive Officer and a director of the Company, and certain of his affiliates $10.0 million liquidation preference of its Series B preferred stock (the "Series B Preferred Stock" and together with the Series A Preferred Stock, the "Preferred Stock") with warrants to purchase up to 500,000 shares of Class A Common Stock (representing 10.1% of the currently issued and outstanding Class A Common Stock after giving effect to the exercise of such warrants) for cash proceeds of $10.0 million and (v) enter into a new senior secured bank credit facility (the "Senior Credit Facility") to provide for a term loan and revolving credit facility aggregating $125.0 million. The cash required for the consummation of the Phipps Acquisition, the repayment of indebtedness and related transaction costs will be provided by the net proceeds of this Offering, the Concurrent Offering and the sale of the Series B Preferred Stock and the warrants, borrowings under the Senior Credit Facility and the Company's working capital. For a description of the Senior Credit Facility and the Preferred Stock, see "Description of Certain Indebtedness" and "Management--Compensation Committee Interlocks and Insider Participation-Issuances of Preferred Stock." The consummation of this Offering and the placement of funds into escrow are conditioned upon the issuance of the Series A Preferred Stock in exchange for the 8% Note, the issuance of the Series B Preferred Stock and the entering into of the Senior Credit Facility. The consummation of this Offering and the placement of the net proceeds thereof into escrow are not conditioned upon the consummation of the Concurrent Offering or the Phipps Acquisition or the other elements of the Financing. However the release of the net proceeds hereof from escrow is conditioned, among other things, upon the satisfaction of the Minimum Equity Condition, the retirement of the Senior Note and the Old Credit Facility and the consummation of the Phipps Acquisition. The Notes are subject to a mandatory redemption on the Special Redemption Date at the Special Redemption Price if either the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996. See "Description of the Notes-Redemption-Special Redemption." The Senior Credit Facility will provide that no borrowings may be made thereunder until the closing of the Phipps Acquisition. Accordingly, if the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied, the Notes will be redeemed by the Company, the Old Credit Facility will remain in place and the Company will not borrow under the Senior Credit Facility. The following table sets forth the estimated sources and uses of funds relating to this Offering, the Concurrent Offering, the Phipps Acquisition and the Financing: <TABLE> <CAPTION> ---------- (IN MILLIONS) AMOUNT ---------- <S> <C> SOURCES OF FUNDS: The Notes offered hereby $160.0 The Concurrent Offering (1) 73.5 Sale of Series B Preferred Stock and Warrants 10.0 Borrowings under the Senior Credit Facility 22.9 Working capital (2) 9.5 ---------- TOTAL $275.9 ---------- ---------- USES OF FUNDS: Consummation of Phipps Acquisition $185.0 Retire indebtedness under the Old Credit Facility (3) 49.5 Retire indebtedness under the Senior Note (4) 25.0 Fees and expenses (5) 16.4 ---------- TOTAL $275.9 ---------- ---------- </TABLE> - ------------------------------ (1) Assumes estimated gross proceeds from the Concurrent Offering of $73.5 million and estimated net proceeds therefrom of $67.6 million. It is a condition of the release from escrow of the net proceeds of this Offering that the Company shall have consummated one or more equity offerings having gross proceeds of not less than $65.0 million. To the extent that the gross proceeds of any such equity offerings are less than $73.5 million, the Company intends to borrow such difference under its Senior Credit Facility. It is anticipated that there will not be a significant interval between the closing of this Offering and the closing of the Concurrent Offering. (2) The source of these funds was the KTVE Sale. (3) Borrowings under the Old Credit Facility bear interest at formula rates based upon the applicable London inter-bank offered rate ("LIBOR") or prime rate at the time of borrowing plus a fixed spread and have a final maturity of 2003. As of June 30, 1996, the weighted average interest rate was 8.94%. (4) The indebtedness under the Senior Note bears interest at 10.7%. (5) Fees and expenses include underwriting costs for the Notes and the Concurrent Offering, fees payable in connection with the negotiation and execution of the Senior Credit Facility, fees payable in connection with the retirement of the Senior Note and legal, accounting and other transaction fees. Prior to the consummation of the Phipps Acquisition and the satisfaction of the Minimum Equity Condition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes. The Trust Funds will be invested in cash equivalents. The proceeds of the Concurrent Offering will be used to repay indebtedness under the Old Credit Facility, to retire the Senior Note and to provide funds for the Phipps Acquisition. THE OFFERING <TABLE> <S> <C> SECURITIES OFFERED.......................... $160,000,000 aggregate principal amount of % Senior Subordinated Notes due 2006. MATURITY DATE............................... , 2006. INTEREST PAYMENT DATES...................... and , commencing , 1997. SPECIAL REDEMPTION BY THE COMPANY........... If the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996, the Company will be required to redeem (the "Special Redemption") the Notes on or prior to December 31, 1996 (the "Special Redemption Date") at a redemption price (the "Special Redemption Price") equal to 101% of the principal amount of the Notes plus accrued and unpaid interest to the Special Redemption Date. At any time prior to December 23, 1996, if the Phipps Acquisition has not been consummated or the Minimum Equity Condition is not satisfied, the Company may, at its option, redeem the Notes, in whole but not in part, at a redemption price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date fixed for redemption. Prior to the consummation of the Phipps Acquisition and the satisfaction of the Minimum Equity Condition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes and the obligation of the Company to consummate the Special Redemption will be secured by such funds (the "Trust Funds"). </TABLE> <TABLE> <S> <C> OPTIONAL REDEMPTION BY THE COMPANY.......... The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after , 2001, at the redemption prices set forth herein, plus accrued and unpaid interest to the date fixed for redemption. In addition, at any time prior to , 1999, the Company, at its option, may redeem up to 35% of the aggregate principal amount of the Notes originally issued with the cash proceeds received by the Company from one or more Public Equity Offerings, other than the Concurrent Offering, at any time or from time to time, at a redemption price equal to % of the principal amount thereof, plus accrued and unpaid interest to the date fixed for redemption; PROVIDED, HOWEVER, that at least $104.0 million in aggregate principal amount of the Notes remain outstanding immediately after any such redemption. CHANGE OF CONTROL OFFER..................... Upon a Change of Control, the Company has the obligation to offer to purchase all the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. See "Description of the Notes -- Change of Control" for a discussion of the circumstances in which the Company may not be required to make a Change of Control Offer (as defined). OFFERS TO PURCHASE.......................... In the event of certain asset sales, the Company will be required to offer to repurchase the Notes at 100% of their principal amount plus accrued and unpaid interest, if any, to the date of repurchase with the net proceeds of such asset sales. SUBORDINATION............................... The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company, including all indebtedness of the Company under the Senior Credit Facility. As of June 30, 1996, on a pro forma basis after giving effect to this Offering, the Concurrent Offering, the KTVE Sale, the Financing and the application of the net proceeds therefrom, and to the Phipps Acquisition, the Company would have had approximately $183.6 million of indebtedness outstanding, of which $23.6 million would be Senior Debt. SUBSIDIARY GUARANTEES....................... The Notes will be guaranteed, jointly and severally, fully and unconditionally, on a senior subordinated basis by the Subsidiary Guarantors (the "Subsidiary Guarantees"). The obligations of any Subsidiary Guarantor with respect to its Subsidiary Guarantee will be subordinated in right of payment, to the same extent as the obligations of the Company in respect of the Notes, to all existing and future Guarantor Senior Debt of such Subsidiary Guarantor, which will include any guarantee by such Subsidiary Guarantor of the Company's indebtedness under the Senior Credit Facility. </TABLE> <TABLE> <S> <C> PRINCIPAL COVENANTS......................... The Indenture for the Notes (the "Indenture") will impose certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt or Guarantor Senior Debt and senior in right of payment to the Notes or any Subsidiary Guarantee, incur liens, impose restrictions on the ability of a subsidiary to pay dividends or make certain payments to the Company, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. USE OF PROCEEDS............................. The Company intends to use the proceeds from the sale of the Notes, together with the proceeds of the Concurrent Offering, the other proceeds of the Financing and the Company's working capital, to (i) consummate the Phipps Acquisition, (ii) retire indebtedness under the Old Credit Facility and the Senior Note and (iii) pay related fees and expenses. However, in the event the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996, the Company will be obligated to redeem the Notes. See "The Phipps Acquisition, the KTVE Sale and the Financing" and "Description of the Notes-Redemption-Special Redemption."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0001013616_wjhg-tv_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001013616_wjhg-tv_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..234efb1522b03b62881985b1b1a5693f2c1937cb
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING INFORMATION IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. AS USED HEREIN, UNLESS THE CONTEXT OTHERWISE REQUIRES, THE "COMPANY" MEANS GRAY COMMUNICATIONS SYSTEMS, INC. AND ITS SUBSIDIARIES. THE COMPANY HAS NOT YET CONSUMMATED THE PHIPPS ACQUISITION (AS DEFINED) AND THERE CAN BE NO ASSURANCE THAT THE PHIPPS ACQUISITION WILL BE CONSUMMATED. HOWEVER, EXCEPT WITH RESPECT TO HISTORICAL FINANCIAL STATEMENTS AND UNLESS THE CONTEXT INDICATES OTHERWISE, THE PHIPPS BUSINESS (AS DEFINED) IS INCLUDED IN THE DESCRIPTION OF THE COMPANY. SEE "THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING." UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION GRANTED BY THE COMPANY TO THE UNDERWRITERS IN THE CONCURRENT OFFERING IS NOT EXERCISED. ALL INFORMATION IN THIS PROSPECTUS HAS BEEN ADJUSTED TO GIVE EFFECT TO A 3-FOR-2 SPLIT OF THE CLASS A COMMON STOCK, EFFECTED IN THE FORM OF A STOCK DIVIDEND DECLARED ON OCTOBER 2, 1995. UNLESS OTHERWISE INDICATED, ALL STATION RANK, IN-MARKET SHARE AND TELEVISION HOUSEHOLD DATA IN THIS PROSPECTUS ARE DERIVED FROM THE NIELSEN STATION INDEX, VIEWERS IN PROFILE, DATED NOVEMBER 1995, AS PREPARED BY A.C. NIELSEN COMPANY ("NIELSEN"). THE COMPANY The Company owns and operates seven network-affiliated television stations in medium-size markets in the southeastern United States, six of which are ranked number one in their respective markets (which includes two television stations that are part of the Phipps Business). Five of the stations are affiliated with the CBS Television Network, a division of CBS, Inc. ("CBS") and two are affiliated with the NBC Television Network, a division of the National Broadcasting Company, Incorporated ("NBC"). In connection with the Phipps Acquisition (described below), the Company will be required under current regulations of the Federal Communications Commission (the "FCC") to divest its NBC affiliates in Albany, Georgia and Panama City, Florida. For a discussion of the Company's plans regarding such divestiture, see "Risk Factors -- FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." The Company also owns and operates three daily newspapers, two weekly, advertising only publications ("shoppers"), and a paging business (which is part of the Phipps Business), all located in the Southeast. The Company derives significant operating advantages and cost saving synergies through the size of its television station group and the regional focus of its television and publishing operations. These advantages and synergies include (i) sharing television production facilities, equipment and regionally oriented programming, (ii) the ability to purchase television programming for the group as a whole, (iii) negotiating network affiliation agreements on a group basis and (iv) purchasing newsprint and other supplies in bulk. In addition, the Company believes that its regional focus can provide advertisers with an efficient network through which to advertise in the fast-growing Southeast. In 1993, after the acquisition of a large block of Class A Common Stock by a new investor, the Company implemented a strategy to foster growth through strategic acquisitions. Since 1994, the Company's significant acquisitions have included three television stations and two newspapers, all located in the Southeast. As a result of the Company's acquisitions and in support of its growth strategy, the Company has added certain key members of management and has greatly expanded its operations in the television broadcasting and newspaper publishing businesses. On September 10, 1996, J. Mack Robinson, a director of the Company, was appointed President and Chief Executive Officer of the Company on an interim basis, to succeed Ralph W. Gabbard, who had died suddenly. The Company expects to commence a search to locate a new President as soon as practicable following this Offering. On September 11, 1996, Robert S. Prather, Jr., a director of the Company, was appointed Executive Vice President-Acquisitions on an interim basis. In January 1996, the Company acquired (the "Augusta Acquisition") WRDW-TV ("WRDW"), a CBS affiliate serving Augusta, Georgia (the "Augusta Business"). In December 1995, the Company entered into an asset purchase agreement to acquire (the "Phipps Acquisition") two CBS-affiliated stations, WCTV-TV ("WCTV") serving Tallahassee, Florida/Thomasville, Georgia and WKXT-TV ("WKXT") in Knoxville, Tennessee, a satellite broadcasting business and a paging business (collectively, the "Phipps Business"). The Company believes that the Phipps Acquisition will further enhance the Company's position as a major regional television broadcaster and is highly attractive for a number of reasons, including (i) the stations' strategic fit in the Southeast, (ii) WCTV's leading station market position and WKXT's significant growth potential, (iii) strong station broadcast cash flows, (iv) opportunities for revenue growth utilizing the Company's extensive management expertise with medium-size stations and (v) opportunities for synergies between WCTV and WKXT and the Company's existing stations with regard to revenue enhancement and cost controls. The consummation of the Phipps Acquisition is currently expected to occur by September 30, 1996, although there can be no assurance with respect thereto. In August 1996, the Company sold the assets (the "KTVE Sale") of KTVE Inc. ("KTVE"), a television station serving Monroe, Louisiana/El Dorado, Arkansas for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing. For the year ended December 31, 1995, on a pro forma basis, the Company had net revenues, Media Cash Flow (the sum of broadcast cash flow, publishing cash flow and paging cash flow), operating cash flow and net (loss) of $90.6 million, $30.3 million, $28.1 million and $(3.6) million, respectively. For the six months ended June 30, 1996, on a pro forma basis, the Company had net revenues, Media Cash Flow, operating cash flow and net income of $47.3 million, $17.9 million, $16.3 million and $251,000, respectively. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the year ended December 31, 1995 increased 148.2%, 188.4% and 227.9%, respectively, while net income decreased 230.3% from the historical amounts for the year ended December 31, 1994. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the six months ended June 30, 1996 increased 67.1%, 114.7% and 122.8%, respectively, while net income decreased 78.7% from the historical amounts for the six months ended June 30, 1995. The Company's pro forma net income for its television stations for the year ended December 31, 1995 and for the six months ended June 30, 1996 was $1.6 million and $1.4 million, respectively. The following table sets forth certain information for each of the Company's television stations. <TABLE> <CAPTION> ------------------------------------------------------------------------------------------------------------------ PRO FORMA --------------------------------------- IN-MARKET YEAR ENDED DECEMBER SIX MONTHS ENDED STATION SHARE OF 31, 1995 JUNE 30, 1996 RANK HOUSEHOLDS ------------------- ------------------ NETWORK YEAR DMA CHANNEL/ IN VIEWING NET OPERATING NET OPERATING STATION AFFILIATION MARKET ACQUIRED RANK(1) FREQUENCY DMA(2) TV REVENUES INCOME(6) REVENUES INCOME(6) - -------- ------- ------------- ------- -------- --------- -------- --------- --------- -------- -------- -------- (IN THOUSANDS) (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> WKYT CBS Lexington, KY 1994 68 27/UHF(3) 1 33% $15,553 $5,247 $7,845 $2,701 WYMT CBS Hazard, KY 1994 68 57/UHF(3) 1(4) 24 3,721 831 2,107 530 WRDW CBS Augusta, GA 1996 111 12/VHF 1 36 8,888 1,853 4,489 1,149 WALB (5) NBC Albany, GA 1954 152 10/VHF 1 80 9,445 4,795 5,099 2,658 Panama City, WJHG (5) NBC FL 1960 159 7/VHF 1 53 3,843 270 2,409 476 PHIPPS ACQUISITION WKXT CBS Knoxville, TN 62 8/VHF 3 22 9,269 2,204 4,387 903 Tallahassee, WCTV CBS FL/ 116 6/VHF 1 60 11,862 4,229 6,212 2,254 Thomasville, GA </TABLE> - ------------------------------ (1) Ranking of designated market area as defined by Nielsen ("DMA") served by a station among all DMAs is measured by the number of television households within the DMA based on the November 1995 Nielsen estimates. (2) Represents station rank in DMA as determined by November 1995 Nielsen estimates of the number of television sets tuned to the Company's station as a percentage of the number of television sets in use in the market for the Sunday through Saturday 6 a.m. to 2 a.m. time period. (3) All stations in the market are UHF stations. (4) The market area served by WYMT is an 18-county trading area, as defined by Nielsen, and is included in the Lexington, Kentucky DMA. WYMT's station rank is based upon its position in the 18-county trading area. (5) The Company will be required under current FCC regulations to divest WALB and WJHG in connection with the Phipps Acquisition. For a discussion of the Company's plans, see "Risk Factors-FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." (6) Represents pro forma income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes. The Company's three newspapers, THE ALBANY HERALD, THE ROCKDALE CITIZEN and the GWINNETT DAILY POST and two shoppers had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $21.9 million and $660,000, respectively, for the year ended December 31, 1995, and $11.3 million and $1.3 million for the six months ended June 30, 1996, respectively. The satellite broadcasting business and paging business, which are a part of the Phipps Business, had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $6.2 million and $542,000 for the year ended December 31, 1995 and $3.5 million and $467,000 for the six months ended June 30, 1996, respectively. BUSINESS STRATEGY The Company's business strategy includes the following key elements: - STRONG LOCAL PRESENCE. Each of the Company's television stations seeks to achieve a distinct identity through its emphasis on local programming. A key objective is to build audience loyalty through the development of a strong local news franchise. Strong local news generates high viewership and results in higher ratings for programs both preceding and following the news, which increases revenues and Media Cash Flow. - REGIONAL FOCUS. The Company believes its regional focus has competitive advantages, including the ability to purchase and produce programming that can be used by multiple Company-owned stations as well as the opportunity to sell advertising on multiple stations as a single buy. In addition, the proximity of the Company's operations allows the sharing of equipment, management and marketing expertise. - TARGETED MARKETING. The Company seeks to increase its advertising revenues and Media Cash Flow by expanding existing relationships with local and national advertisers and by attracting new advertisers through targeted marketing techniques and carefully tailored programming. The Company works closely with advertisers to develop advertising campaigns that match specifically targeted audience segments including sponsoring and staging various special events such as fishing tournaments, boat shows and bridal expositions. - COST CONTROLS. Through its strategic planning and annual budgeting processes, the Company continually seeks to identify and implement cost savings opportunities at each of its stations and publications in order to increase Media Cash Flow. The Company's ownership of multiple stations and publications also benefits each operation in negotiating favorable terms with programming syndicators, newsprint suppliers, national sales representatives and other vendors. - SELECTIVE ACQUISITIONS. The Company has focused on acquiring television stations where the Company believes there is the potential for improvements in revenue share, audience share and cost control. The Company focuses on southeastern markets of medium size because the Company believes these markets offer superior opportunities in terms of projected population and economic growth, leading to higher advertising and circulation revenues. In assessing acquisitions, the Company targets stations and publications where it sees specific opportunities for revenue enhancement while controlling expenditures, utilizing management's significant experience with local and national advertising sales and in operating similar businesses. In appropriate circumstances, the Company will dispose of assets that it deems non-essential to its operating or growth strategy. THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING The Company has entered into an agreement to acquire WCTV and WKXT, a satellite broadcasting business and a paging business in the Southeast. The purchase price for the Phipps Acquisition is approximately $185 million, including fees, expenses and working capital and other adjustments. The consummation of the Phipps Acquisition is expected to occur by September 30, 1996, although there can be no assurance with respect thereto. See "Risk Factors -- Possible Non-Consummation of the Phipps Acquisition." Pursuant to an agreement, dated as of May 15, 1996 (the "KTVE Agreement"), with GOCOM Television of Ouachita, L.P., in August 1996, the Company sold the assets of KTVE for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing (approximately $870,000), to the extent collected by the buyer, to be paid to the Company 150 days following the date of closing. For the year ended December 31, 1995, KTVE had net revenues, Media Cash Flow and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) of $4.2 million, $916,000 and $437,000, respectively, and $2.3 million, $598,000 and $360,000, respectively, for the six months ended June 30, 1996. The Company estimates that the gain, net of estimated taxes, on the KTVE Sale was approximately $2.8 million. In addition to the KTVE Sale and the consummation of this Offering, the Concurrent Offering and the Phipps Acquisition, the Company intends to implement a financing plan (the "Financing") to increase liquidity and improve operating and financial flexibility. Pursuant to the Financing, the Company will (i) retire approximately $49.5 million aggregate principal amount of outstanding indebtedness under its senior secured bank credit facility (the "Old Credit Facility"), together with accrued interest thereon, (ii) retire approximately $25.0 million aggregate principal amount of outstanding indebtedness under its senior note due 2003 (the "Senior Note"), together with accrued interest thereon and a prepayment fee, (iii) issue $10.0 million liquidation preference of its Series A preferred stock (the "Series A Preferred Stock") in exchange for its outstanding $10.0 million aggregate principal amount 8% subordinated note (the "8% Note") issued to Bull Run Corporation ("Bull Run"), a principal shareholder of the Company, (iv) issue to Bull Run, J. Mack Robinson, the President, Chief Executive Officer and a director of the Company, and certain of his affiliates $10.0 million liquidation preference of its Series B preferred stock (the "Series B Preferred Stock" and together with the Series A Preferred Stock, the "Preferred Stock") with warrants to purchase up to 500,000 shares of Class A Common Stock (representing 10.1% of the currently issued and outstanding Class A Common Stock after giving effect to the exercise of such warrants) for cash proceeds of $10.0 million and (v) enter into a new senior secured bank credit facility (the "Senior Credit Facility") to provide for a term loan and revolving credit facility aggregating $125.0 million. The cash required for the consummation of the Phipps Acquisition, the repayment of indebtedness and related transaction costs will be provided by the net proceeds of this Offering, the Concurrent Offering and the sale of the Series B Preferred Stock and the warrants, borrowings under the Senior Credit Facility and the Company's working capital. For a description of the Senior Credit Facility and the Preferred Stock, see "Description of Certain Indebtedness" and "Management--Compensation Committee Interlocks and Insider Participation-Issuances of Preferred Stock." The consummation of this Offering and the placement of funds into escrow are conditioned upon the issuance of the Series A Preferred Stock in exchange for the 8% Note, the issuance of the Series B Preferred Stock and the entering into of the Senior Credit Facility. The consummation of this Offering and the placement of the net proceeds thereof into escrow are not conditioned upon the consummation of the Concurrent Offering or the Phipps Acquisition or the other elements of the Financing. However the release of the net proceeds hereof from escrow is conditioned, among other things, upon the satisfaction of the Minimum Equity Condition, the retirement of the Senior Note and the Old Credit Facility and the consummation of the Phipps Acquisition. The Notes are subject to a mandatory redemption on the Special Redemption Date at the Special Redemption Price if either the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996. See "Description of the Notes-Redemption-Special Redemption." The Senior Credit Facility will provide that no borrowings may be made thereunder until the closing of the Phipps Acquisition. Accordingly, if the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied, the Notes will be redeemed by the Company, the Old Credit Facility will remain in place and the Company will not borrow under the Senior Credit Facility. The following table sets forth the estimated sources and uses of funds relating to this Offering, the Concurrent Offering, the Phipps Acquisition and the Financing: <TABLE> <CAPTION> ---------- (IN MILLIONS) AMOUNT ---------- <S> <C> SOURCES OF FUNDS: The Notes offered hereby $160.0 The Concurrent Offering (1) 73.5 Sale of Series B Preferred Stock and Warrants 10.0 Borrowings under the Senior Credit Facility 22.9 Working capital (2) 9.5 ---------- TOTAL $275.9 ---------- ---------- USES OF FUNDS: Consummation of Phipps Acquisition $185.0 Retire indebtedness under the Old Credit Facility (3) 49.5 Retire indebtedness under the Senior Note (4) 25.0 Fees and expenses (5) 16.4 ---------- TOTAL $275.9 ---------- ---------- </TABLE> - ------------------------------ (1) Assumes estimated gross proceeds from the Concurrent Offering of $73.5 million and estimated net proceeds therefrom of $67.6 million. It is a condition of the release from escrow of the net proceeds of this Offering that the Company shall have consummated one or more equity offerings having gross proceeds of not less than $65.0 million. To the extent that the gross proceeds of any such equity offerings are less than $73.5 million, the Company intends to borrow such difference under its Senior Credit Facility. It is anticipated that there will not be a significant interval between the closing of this Offering and the closing of the Concurrent Offering. (2) The source of these funds was the KTVE Sale. (3) Borrowings under the Old Credit Facility bear interest at formula rates based upon the applicable London inter-bank offered rate ("LIBOR") or prime rate at the time of borrowing plus a fixed spread and have a final maturity of 2003. As of June 30, 1996, the weighted average interest rate was 8.94%. (4) The indebtedness under the Senior Note bears interest at 10.7%. (5) Fees and expenses include underwriting costs for the Notes and the Concurrent Offering, fees payable in connection with the negotiation and execution of the Senior Credit Facility, fees payable in connection with the retirement of the Senior Note and legal, accounting and other transaction fees. Prior to the consummation of the Phipps Acquisition and the satisfaction of the Minimum Equity Condition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes. The Trust Funds will be invested in cash equivalents. The proceeds of the Concurrent Offering will be used to repay indebtedness under the Old Credit Facility, to retire the Senior Note and to provide funds for the Phipps Acquisition. THE OFFERING <TABLE> <S> <C> SECURITIES OFFERED.......................... $160,000,000 aggregate principal amount of % Senior Subordinated Notes due 2006. MATURITY DATE............................... , 2006. INTEREST PAYMENT DATES...................... and , commencing , 1997. SPECIAL REDEMPTION BY THE COMPANY........... If the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996, the Company will be required to redeem (the "Special Redemption") the Notes on or prior to December 31, 1996 (the "Special Redemption Date") at a redemption price (the "Special Redemption Price") equal to 101% of the principal amount of the Notes plus accrued and unpaid interest to the Special Redemption Date. At any time prior to December 23, 1996, if the Phipps Acquisition has not been consummated or the Minimum Equity Condition is not satisfied, the Company may, at its option, redeem the Notes, in whole but not in part, at a redemption price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date fixed for redemption. Prior to the consummation of the Phipps Acquisition and the satisfaction of the Minimum Equity Condition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes and the obligation of the Company to consummate the Special Redemption will be secured by such funds (the "Trust Funds"). </TABLE> <TABLE> <S> <C> OPTIONAL REDEMPTION BY THE COMPANY.......... The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after , 2001, at the redemption prices set forth herein, plus accrued and unpaid interest to the date fixed for redemption. In addition, at any time prior to , 1999, the Company, at its option, may redeem up to 35% of the aggregate principal amount of the Notes originally issued with the cash proceeds received by the Company from one or more Public Equity Offerings, other than the Concurrent Offering, at any time or from time to time, at a redemption price equal to % of the principal amount thereof, plus accrued and unpaid interest to the date fixed for redemption; PROVIDED, HOWEVER, that at least $104.0 million in aggregate principal amount of the Notes remain outstanding immediately after any such redemption. CHANGE OF CONTROL OFFER..................... Upon a Change of Control, the Company has the obligation to offer to purchase all the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. See "Description of the Notes -- Change of Control" for a discussion of the circumstances in which the Company may not be required to make a Change of Control Offer (as defined). OFFERS TO PURCHASE.......................... In the event of certain asset sales, the Company will be required to offer to repurchase the Notes at 100% of their principal amount plus accrued and unpaid interest, if any, to the date of repurchase with the net proceeds of such asset sales. SUBORDINATION............................... The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company, including all indebtedness of the Company under the Senior Credit Facility. As of June 30, 1996, on a pro forma basis after giving effect to this Offering, the Concurrent Offering, the KTVE Sale, the Financing and the application of the net proceeds therefrom, and to the Phipps Acquisition, the Company would have had approximately $183.6 million of indebtedness outstanding, of which $23.6 million would be Senior Debt. SUBSIDIARY GUARANTEES....................... The Notes will be guaranteed, jointly and severally, fully and unconditionally, on a senior subordinated basis by the Subsidiary Guarantors (the "Subsidiary Guarantees"). The obligations of any Subsidiary Guarantor with respect to its Subsidiary Guarantee will be subordinated in right of payment, to the same extent as the obligations of the Company in respect of the Notes, to all existing and future Guarantor Senior Debt of such Subsidiary Guarantor, which will include any guarantee by such Subsidiary Guarantor of the Company's indebtedness under the Senior Credit Facility. </TABLE> <TABLE> <S> <C> PRINCIPAL COVENANTS......................... The Indenture for the Notes (the "Indenture") will impose certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt or Guarantor Senior Debt and senior in right of payment to the Notes or any Subsidiary Guarantee, incur liens, impose restrictions on the ability of a subsidiary to pay dividends or make certain payments to the Company, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. USE OF PROCEEDS............................. The Company intends to use the proceeds from the sale of the Notes, together with the proceeds of the Concurrent Offering, the other proceeds of the Financing and the Company's working capital, to (i) consummate the Phipps Acquisition, (ii) retire indebtedness under the Old Credit Facility and the Senior Note and (iii) pay related fees and expenses. However, in the event the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996, the Company will be obligated to redeem the Notes. See "The Phipps Acquisition, the KTVE Sale and the Financing" and "Description of the Notes-Redemption-Special Redemption."
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+PROSPECTUS SUMMARY THE FOLLOWING INFORMATION IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. AS USED HEREIN, UNLESS THE CONTEXT OTHERWISE REQUIRES, THE "COMPANY" MEANS GRAY COMMUNICATIONS SYSTEMS, INC. AND ITS SUBSIDIARIES. THE COMPANY HAS NOT YET CONSUMMATED THE PHIPPS ACQUISITION (AS DEFINED) AND THERE CAN BE NO ASSURANCE THAT THE PHIPPS ACQUISITION WILL BE CONSUMMATED. HOWEVER, EXCEPT WITH RESPECT TO HISTORICAL FINANCIAL STATEMENTS AND UNLESS THE CONTEXT INDICATES OTHERWISE, THE PHIPPS BUSINESS (AS DEFINED) IS INCLUDED IN THE DESCRIPTION OF THE COMPANY. SEE "THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING." UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION GRANTED BY THE COMPANY TO THE UNDERWRITERS IN THE CONCURRENT OFFERING IS NOT EXERCISED. ALL INFORMATION IN THIS PROSPECTUS HAS BEEN ADJUSTED TO GIVE EFFECT TO A 3-FOR-2 SPLIT OF THE CLASS A COMMON STOCK, EFFECTED IN THE FORM OF A STOCK DIVIDEND DECLARED ON OCTOBER 2, 1995. UNLESS OTHERWISE INDICATED, ALL STATION RANK, IN-MARKET SHARE AND TELEVISION HOUSEHOLD DATA IN THIS PROSPECTUS ARE DERIVED FROM THE NIELSEN STATION INDEX, VIEWERS IN PROFILE, DATED NOVEMBER 1995, AS PREPARED BY A.C. NIELSEN COMPANY ("NIELSEN"). THE COMPANY The Company owns and operates seven network-affiliated television stations in medium-size markets in the southeastern United States, six of which are ranked number one in their respective markets (which includes two television stations that are part of the Phipps Business). Five of the stations are affiliated with the CBS Television Network, a division of CBS, Inc. ("CBS") and two are affiliated with the NBC Television Network, a division of the National Broadcasting Company, Incorporated ("NBC"). In connection with the Phipps Acquisition (described below), the Company will be required under current regulations of the Federal Communications Commission (the "FCC") to divest its NBC affiliates in Albany, Georgia and Panama City, Florida. For a discussion of the Company's plans regarding such divestiture, see "Risk Factors -- FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." The Company also owns and operates three daily newspapers, two weekly, advertising only publications ("shoppers"), and a paging business (which is part of the Phipps Business), all located in the Southeast. The Company derives significant operating advantages and cost saving synergies through the size of its television station group and the regional focus of its television and publishing operations. These advantages and synergies include (i) sharing television production facilities, equipment and regionally oriented programming, (ii) the ability to purchase television programming for the group as a whole, (iii) negotiating network affiliation agreements on a group basis and (iv) purchasing newsprint and other supplies in bulk. In addition, the Company believes that its regional focus can provide advertisers with an efficient network through which to advertise in the fast-growing Southeast. In 1993, after the acquisition of a large block of Class A Common Stock by a new investor, the Company implemented a strategy to foster growth through strategic acquisitions. Since 1994, the Company's significant acquisitions have included three television stations and two newspapers, all located in the Southeast. As a result of the Company's acquisitions and in support of its growth strategy, the Company has added certain key members of management and has greatly expanded its operations in the television broadcasting and newspaper publishing businesses. On September 10, 1996, J. Mack Robinson, a director of the Company, was appointed President and Chief Executive Officer of the Company on an interim basis, to succeed Ralph W. Gabbard, who had died suddenly. The Company expects to commence a search to locate a new President as soon as practicable following this Offering. On September 11, 1996, Robert S. Prather, Jr., a director of the Company, was appointed Executive Vice President-Acquisitions on an interim basis. In January 1996, the Company acquired (the "Augusta Acquisition") WRDW-TV ("WRDW"), a CBS affiliate serving Augusta, Georgia (the "Augusta Business"). In December 1995, the Company entered into an asset purchase agreement to acquire (the "Phipps Acquisition") two CBS-affiliated stations, WCTV-TV ("WCTV") serving Tallahassee, Florida/Thomasville, Georgia and WKXT-TV ("WKXT") in Knoxville, Tennessee, a satellite broadcasting business and a paging business (collectively, the "Phipps Business"). The Company believes that the Phipps Acquisition will further enhance the Company's position as a major regional television broadcaster and is highly attractive for a number of reasons, including (i) the stations' strategic fit in the Southeast, (ii) WCTV's leading station market position and WKXT's significant growth potential, (iii) strong station broadcast cash flows, (iv) opportunities for revenue growth utilizing the Company's extensive management expertise with medium-size stations and (v) opportunities for synergies between WCTV and WKXT and the Company's existing stations with regard to revenue enhancement and cost controls. The consummation of the Phipps Acquisition is currently expected to occur by September 30, 1996, although there can be no assurance with respect thereto. In August 1996, the Company sold the assets (the "KTVE Sale") of KTVE Inc. ("KTVE"), a television station serving Monroe, Louisiana/El Dorado, Arkansas for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing. For the year ended December 31, 1995, on a pro forma basis, the Company had net revenues, Media Cash Flow (the sum of broadcast cash flow, publishing cash flow and paging cash flow), operating cash flow and net (loss) of $90.6 million, $30.3 million, $28.1 million and $(3.6) million, respectively. For the six months ended June 30, 1996, on a pro forma basis, the Company had net revenues, Media Cash Flow, operating cash flow and net income of $47.3 million, $17.9 million, $16.3 million and $251,000, respectively. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the year ended December 31, 1995 increased 148.2%, 188.4% and 227.9%, respectively, while net income decreased 230.3% from the historical amounts for the year ended December 31, 1994. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the six months ended June 30, 1996 increased 67.1%, 114.7% and 122.8%, respectively, while net income decreased 78.7% from the historical amounts for the six months ended June 30, 1995. The Company's pro forma net income for its television stations for the year ended December 31, 1995 and for the six months ended June 30, 1996 was $1.6 million and $1.4 million, respectively. The following table sets forth certain information for each of the Company's television stations. <TABLE> <CAPTION> ------------------------------------------------------------------------------------------------------------------ PRO FORMA --------------------------------------- IN-MARKET YEAR ENDED DECEMBER SIX MONTHS ENDED STATION SHARE OF 31, 1995 JUNE 30, 1996 RANK HOUSEHOLDS ------------------- ------------------ NETWORK YEAR DMA CHANNEL/ IN VIEWING NET OPERATING NET OPERATING STATION AFFILIATION MARKET ACQUIRED RANK(1) FREQUENCY DMA(2) TV REVENUES INCOME(6) REVENUES INCOME(6) - -------- ------- ------------- ------- -------- --------- -------- --------- --------- -------- -------- -------- (IN THOUSANDS) (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> WKYT CBS Lexington, KY 1994 68 27/UHF(3) 1 33% $15,553 $5,247 $7,845 $2,701 WYMT CBS Hazard, KY 1994 68 57/UHF(3) 1(4) 24 3,721 831 2,107 530 WRDW CBS Augusta, GA 1996 111 12/VHF 1 36 8,888 1,853 4,489 1,149 WALB (5) NBC Albany, GA 1954 152 10/VHF 1 80 9,445 4,795 5,099 2,658 Panama City, WJHG (5) NBC FL 1960 159 7/VHF 1 53 3,843 270 2,409 476 PHIPPS ACQUISITION WKXT CBS Knoxville, TN 62 8/VHF 3 22 9,269 2,204 4,387 903 Tallahassee, WCTV CBS FL/ 116 6/VHF 1 60 11,862 4,229 6,212 2,254 Thomasville, GA </TABLE> - ------------------------------ (1) Ranking of designated market area as defined by Nielsen ("DMA") served by a station among all DMAs is measured by the number of television households within the DMA based on the November 1995 Nielsen estimates. (2) Represents station rank in DMA as determined by November 1995 Nielsen estimates of the number of television sets tuned to the Company's station as a percentage of the number of television sets in use in the market for the Sunday through Saturday 6 a.m. to 2 a.m. time period. (3) All stations in the market are UHF stations. (4) The market area served by WYMT is an 18-county trading area, as defined by Nielsen, and is included in the Lexington, Kentucky DMA. WYMT's station rank is based upon its position in the 18-county trading area. (5) The Company will be required under current FCC regulations to divest WALB and WJHG in connection with the Phipps Acquisition. For a discussion of the Company's plans, see "Risk Factors-FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." (6) Represents pro forma income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes. The Company's three newspapers, THE ALBANY HERALD, THE ROCKDALE CITIZEN and the GWINNETT DAILY POST and two shoppers had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $21.9 million and $660,000, respectively, for the year ended December 31, 1995, and $11.3 million and $1.3 million for the six months ended June 30, 1996, respectively. The satellite broadcasting business and paging business, which are a part of the Phipps Business, had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $6.2 million and $542,000 for the year ended December 31, 1995 and $3.5 million and $467,000 for the six months ended June 30, 1996, respectively. BUSINESS STRATEGY The Company's business strategy includes the following key elements: - STRONG LOCAL PRESENCE. Each of the Company's television stations seeks to achieve a distinct identity through its emphasis on local programming. A key objective is to build audience loyalty through the development of a strong local news franchise. Strong local news generates high viewership and results in higher ratings for programs both preceding and following the news, which increases revenues and Media Cash Flow. - REGIONAL FOCUS. The Company believes its regional focus has competitive advantages, including the ability to purchase and produce programming that can be used by multiple Company-owned stations as well as the opportunity to sell advertising on multiple stations as a single buy. In addition, the proximity of the Company's operations allows the sharing of equipment, management and marketing expertise. - TARGETED MARKETING. The Company seeks to increase its advertising revenues and Media Cash Flow by expanding existing relationships with local and national advertisers and by attracting new advertisers through targeted marketing techniques and carefully tailored programming. The Company works closely with advertisers to develop advertising campaigns that match specifically targeted audience segments including sponsoring and staging various special events such as fishing tournaments, boat shows and bridal expositions. - COST CONTROLS. Through its strategic planning and annual budgeting processes, the Company continually seeks to identify and implement cost savings opportunities at each of its stations and publications in order to increase Media Cash Flow. The Company's ownership of multiple stations and publications also benefits each operation in negotiating favorable terms with programming syndicators, newsprint suppliers, national sales representatives and other vendors. - SELECTIVE ACQUISITIONS. The Company has focused on acquiring television stations where the Company believes there is the potential for improvements in revenue share, audience share and cost control. The Company focuses on southeastern markets of medium size because the Company believes these markets offer superior opportunities in terms of projected population and economic growth, leading to higher advertising and circulation revenues. In assessing acquisitions, the Company targets stations and publications where it sees specific opportunities for revenue enhancement while controlling expenditures, utilizing management's significant experience with local and national advertising sales and in operating similar businesses. In appropriate circumstances, the Company will dispose of assets that it deems non-essential to its operating or growth strategy. THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING The Company has entered into an agreement to acquire WCTV and WKXT, a satellite broadcasting business and a paging business in the Southeast. The purchase price for the Phipps Acquisition is approximately $185 million, including fees, expenses and working capital and other adjustments. The consummation of the Phipps Acquisition is expected to occur by September 30, 1996, although there can be no assurance with respect thereto. See "Risk Factors -- Possible Non-Consummation of the Phipps Acquisition." Pursuant to an agreement, dated as of May 15, 1996 (the "KTVE Agreement"), with GOCOM Television of Ouachita, L.P., in August 1996, the Company sold the assets of KTVE for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing (approximately $870,000), to the extent collected by the buyer, to be paid to the Company 150 days following the date of closing. For the year ended December 31, 1995, KTVE had net revenues, Media Cash Flow and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) of $4.2 million, $916,000 and $437,000, respectively, and $2.3 million, $598,000 and $360,000, respectively, for the six months ended June 30, 1996. The Company estimates that the gain, net of estimated taxes, on the KTVE Sale was approximately $2.8 million. In addition to the KTVE Sale and the consummation of this Offering, the Concurrent Offering and the Phipps Acquisition, the Company intends to implement a financing plan (the "Financing") to increase liquidity and improve operating and financial flexibility. Pursuant to the Financing, the Company will (i) retire approximately $49.5 million aggregate principal amount of outstanding indebtedness under its senior secured bank credit facility (the "Old Credit Facility"), together with accrued interest thereon, (ii) retire approximately $25.0 million aggregate principal amount of outstanding indebtedness under its senior note due 2003 (the "Senior Note"), together with accrued interest thereon and a prepayment fee, (iii) issue $10.0 million liquidation preference of its Series A preferred stock (the "Series A Preferred Stock") in exchange for its outstanding $10.0 million aggregate principal amount 8% subordinated note (the "8% Note") issued to Bull Run Corporation ("Bull Run"), a principal shareholder of the Company, (iv) issue to Bull Run, J. Mack Robinson, the President, Chief Executive Officer and a director of the Company, and certain of his affiliates $10.0 million liquidation preference of its Series B preferred stock (the "Series B Preferred Stock" and together with the Series A Preferred Stock, the "Preferred Stock") with warrants to purchase up to 500,000 shares of Class A Common Stock (representing 10.1% of the currently issued and outstanding Class A Common Stock after giving effect to the exercise of such warrants) for cash proceeds of $10.0 million and (v) enter into a new senior secured bank credit facility (the "Senior Credit Facility") to provide for a term loan and revolving credit facility aggregating $125.0 million. The cash required for the consummation of the Phipps Acquisition, the repayment of indebtedness and related transaction costs will be provided by the net proceeds of this Offering, the Concurrent Offering and the sale of the Series B Preferred Stock and the warrants, borrowings under the Senior Credit Facility and the Company's working capital. For a description of the Senior Credit Facility and the Preferred Stock, see "Description of Certain Indebtedness" and "Management--Compensation Committee Interlocks and Insider Participation-Issuances of Preferred Stock." The consummation of this Offering and the placement of funds into escrow are conditioned upon the issuance of the Series A Preferred Stock in exchange for the 8% Note, the issuance of the Series B Preferred Stock and the entering into of the Senior Credit Facility. The consummation of this Offering and the placement of the net proceeds thereof into escrow are not conditioned upon the consummation of the Concurrent Offering or the Phipps Acquisition or the other elements of the Financing. However the release of the net proceeds hereof from escrow is conditioned, among other things, upon the satisfaction of the Minimum Equity Condition, the retirement of the Senior Note and the Old Credit Facility and the consummation of the Phipps Acquisition. The Notes are subject to a mandatory redemption on the Special Redemption Date at the Special Redemption Price if either the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996. See "Description of the Notes-Redemption-Special Redemption." The Senior Credit Facility will provide that no borrowings may be made thereunder until the closing of the Phipps Acquisition. Accordingly, if the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied, the Notes will be redeemed by the Company, the Old Credit Facility will remain in place and the Company will not borrow under the Senior Credit Facility. The following table sets forth the estimated sources and uses of funds relating to this Offering, the Concurrent Offering, the Phipps Acquisition and the Financing: <TABLE> <CAPTION> ---------- (IN MILLIONS) AMOUNT ---------- <S> <C> SOURCES OF FUNDS: The Notes offered hereby $160.0 The Concurrent Offering (1) 73.5 Sale of Series B Preferred Stock and Warrants 10.0 Borrowings under the Senior Credit Facility 22.9 Working capital (2) 9.5 ---------- TOTAL $275.9 ---------- ---------- USES OF FUNDS: Consummation of Phipps Acquisition $185.0 Retire indebtedness under the Old Credit Facility (3) 49.5 Retire indebtedness under the Senior Note (4) 25.0 Fees and expenses (5) 16.4 ---------- TOTAL $275.9 ---------- ---------- </TABLE> - ------------------------------ (1) Assumes estimated gross proceeds from the Concurrent Offering of $73.5 million and estimated net proceeds therefrom of $67.6 million. It is a condition of the release from escrow of the net proceeds of this Offering that the Company shall have consummated one or more equity offerings having gross proceeds of not less than $65.0 million. To the extent that the gross proceeds of any such equity offerings are less than $73.5 million, the Company intends to borrow such difference under its Senior Credit Facility. It is anticipated that there will not be a significant interval between the closing of this Offering and the closing of the Concurrent Offering. (2) The source of these funds was the KTVE Sale. (3) Borrowings under the Old Credit Facility bear interest at formula rates based upon the applicable London inter-bank offered rate ("LIBOR") or prime rate at the time of borrowing plus a fixed spread and have a final maturity of 2003. As of June 30, 1996, the weighted average interest rate was 8.94%. (4) The indebtedness under the Senior Note bears interest at 10.7%. (5) Fees and expenses include underwriting costs for the Notes and the Concurrent Offering, fees payable in connection with the negotiation and execution of the Senior Credit Facility, fees payable in connection with the retirement of the Senior Note and legal, accounting and other transaction fees. Prior to the consummation of the Phipps Acquisition and the satisfaction of the Minimum Equity Condition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes. The Trust Funds will be invested in cash equivalents. The proceeds of the Concurrent Offering will be used to repay indebtedness under the Old Credit Facility, to retire the Senior Note and to provide funds for the Phipps Acquisition. THE OFFERING <TABLE> <S> <C> SECURITIES OFFERED.......................... $160,000,000 aggregate principal amount of % Senior Subordinated Notes due 2006. MATURITY DATE............................... , 2006. INTEREST PAYMENT DATES...................... and , commencing , 1997. SPECIAL REDEMPTION BY THE COMPANY........... If the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996, the Company will be required to redeem (the "Special Redemption") the Notes on or prior to December 31, 1996 (the "Special Redemption Date") at a redemption price (the "Special Redemption Price") equal to 101% of the principal amount of the Notes plus accrued and unpaid interest to the Special Redemption Date. At any time prior to December 23, 1996, if the Phipps Acquisition has not been consummated or the Minimum Equity Condition is not satisfied, the Company may, at its option, redeem the Notes, in whole but not in part, at a redemption price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date fixed for redemption. Prior to the consummation of the Phipps Acquisition and the satisfaction of the Minimum Equity Condition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes and the obligation of the Company to consummate the Special Redemption will be secured by such funds (the "Trust Funds"). </TABLE> <TABLE> <S> <C> OPTIONAL REDEMPTION BY THE COMPANY.......... The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after , 2001, at the redemption prices set forth herein, plus accrued and unpaid interest to the date fixed for redemption. In addition, at any time prior to , 1999, the Company, at its option, may redeem up to 35% of the aggregate principal amount of the Notes originally issued with the cash proceeds received by the Company from one or more Public Equity Offerings, other than the Concurrent Offering, at any time or from time to time, at a redemption price equal to % of the principal amount thereof, plus accrued and unpaid interest to the date fixed for redemption; PROVIDED, HOWEVER, that at least $104.0 million in aggregate principal amount of the Notes remain outstanding immediately after any such redemption. CHANGE OF CONTROL OFFER..................... Upon a Change of Control, the Company has the obligation to offer to purchase all the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. See "Description of the Notes -- Change of Control" for a discussion of the circumstances in which the Company may not be required to make a Change of Control Offer (as defined). OFFERS TO PURCHASE.......................... In the event of certain asset sales, the Company will be required to offer to repurchase the Notes at 100% of their principal amount plus accrued and unpaid interest, if any, to the date of repurchase with the net proceeds of such asset sales. SUBORDINATION............................... The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company, including all indebtedness of the Company under the Senior Credit Facility. As of June 30, 1996, on a pro forma basis after giving effect to this Offering, the Concurrent Offering, the KTVE Sale, the Financing and the application of the net proceeds therefrom, and to the Phipps Acquisition, the Company would have had approximately $183.6 million of indebtedness outstanding, of which $23.6 million would be Senior Debt. SUBSIDIARY GUARANTEES....................... The Notes will be guaranteed, jointly and severally, fully and unconditionally, on a senior subordinated basis by the Subsidiary Guarantors (the "Subsidiary Guarantees"). The obligations of any Subsidiary Guarantor with respect to its Subsidiary Guarantee will be subordinated in right of payment, to the same extent as the obligations of the Company in respect of the Notes, to all existing and future Guarantor Senior Debt of such Subsidiary Guarantor, which will include any guarantee by such Subsidiary Guarantor of the Company's indebtedness under the Senior Credit Facility. </TABLE> <TABLE> <S> <C> PRINCIPAL COVENANTS......................... The Indenture for the Notes (the "Indenture") will impose certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt or Guarantor Senior Debt and senior in right of payment to the Notes or any Subsidiary Guarantee, incur liens, impose restrictions on the ability of a subsidiary to pay dividends or make certain payments to the Company, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. USE OF PROCEEDS............................. The Company intends to use the proceeds from the sale of the Notes, together with the proceeds of the Concurrent Offering, the other proceeds of the Financing and the Company's working capital, to (i) consummate the Phipps Acquisition, (ii) retire indebtedness under the Old Credit Facility and the Senior Note and (iii) pay related fees and expenses. However, in the event the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996, the Company will be obligated to redeem the Notes. See "The Phipps Acquisition, the KTVE Sale and the Financing" and "Description of the Notes-Redemption-Special Redemption."
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+PROSPECTUS SUMMARY THE FOLLOWING INFORMATION IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. AS USED HEREIN, UNLESS THE CONTEXT OTHERWISE REQUIRES, THE "COMPANY" MEANS GRAY COMMUNICATIONS SYSTEMS, INC. AND ITS SUBSIDIARIES. THE COMPANY HAS NOT YET CONSUMMATED THE PHIPPS ACQUISITION (AS DEFINED) AND THERE CAN BE NO ASSURANCE THAT THE PHIPPS ACQUISITION WILL BE CONSUMMATED. HOWEVER, EXCEPT WITH RESPECT TO HISTORICAL FINANCIAL STATEMENTS AND UNLESS THE CONTEXT INDICATES OTHERWISE, THE PHIPPS BUSINESS (AS DEFINED) IS INCLUDED IN THE DESCRIPTION OF THE COMPANY. SEE "THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING." UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION GRANTED BY THE COMPANY TO THE UNDERWRITERS IN THE CONCURRENT OFFERING IS NOT EXERCISED. ALL INFORMATION IN THIS PROSPECTUS HAS BEEN ADJUSTED TO GIVE EFFECT TO A 3-FOR-2 SPLIT OF THE CLASS A COMMON STOCK, EFFECTED IN THE FORM OF A STOCK DIVIDEND DECLARED ON OCTOBER 2, 1995. UNLESS OTHERWISE INDICATED, ALL STATION RANK, IN-MARKET SHARE AND TELEVISION HOUSEHOLD DATA IN THIS PROSPECTUS ARE DERIVED FROM THE NIELSEN STATION INDEX, VIEWERS IN PROFILE, DATED NOVEMBER 1995, AS PREPARED BY A.C. NIELSEN COMPANY ("NIELSEN"). THE COMPANY The Company owns and operates seven network-affiliated television stations in medium-size markets in the southeastern United States, six of which are ranked number one in their respective markets (which includes two television stations that are part of the Phipps Business). Five of the stations are affiliated with the CBS Television Network, a division of CBS, Inc. ("CBS") and two are affiliated with the NBC Television Network, a division of the National Broadcasting Company, Incorporated ("NBC"). In connection with the Phipps Acquisition (described below), the Company will be required under current regulations of the Federal Communications Commission (the "FCC") to divest its NBC affiliates in Albany, Georgia and Panama City, Florida. For a discussion of the Company's plans regarding such divestiture, see "Risk Factors -- FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." The Company also owns and operates three daily newspapers, two weekly, advertising only publications ("shoppers"), and a paging business (which is part of the Phipps Business), all located in the Southeast. The Company derives significant operating advantages and cost saving synergies through the size of its television station group and the regional focus of its television and publishing operations. These advantages and synergies include (i) sharing television production facilities, equipment and regionally oriented programming, (ii) the ability to purchase television programming for the group as a whole, (iii) negotiating network affiliation agreements on a group basis and (iv) purchasing newsprint and other supplies in bulk. In addition, the Company believes that its regional focus can provide advertisers with an efficient network through which to advertise in the fast-growing Southeast. In 1993, after the acquisition of a large block of Class A Common Stock by a new investor, the Company implemented a strategy to foster growth through strategic acquisitions. Since 1994, the Company's significant acquisitions have included three television stations and two newspapers, all located in the Southeast. As a result of the Company's acquisitions and in support of its growth strategy, the Company has added certain key members of management and has greatly expanded its operations in the television broadcasting and newspaper publishing businesses. On September 10, 1996, J. Mack Robinson, a director of the Company, was appointed President and Chief Executive Officer of the Company on an interim basis, to succeed Ralph W. Gabbard, who had died suddenly. The Company expects to commence a search to locate a new President as soon as practicable following this Offering. On September 11, 1996, Robert S. Prather, Jr., a director of the Company, was appointed Executive Vice President-Acquisitions on an interim basis. In January 1996, the Company acquired (the "Augusta Acquisition") WRDW-TV ("WRDW"), a CBS affiliate serving Augusta, Georgia (the "Augusta Business"). In December 1995, the Company entered into an asset purchase agreement to acquire (the "Phipps Acquisition") two CBS-affiliated stations, WCTV-TV ("WCTV") serving Tallahassee, Florida/Thomasville, Georgia and WKXT-TV ("WKXT") in Knoxville, Tennessee, a satellite broadcasting business and a paging business (collectively, the "Phipps Business"). The Company believes that the Phipps Acquisition will further enhance the Company's position as a major regional television broadcaster and is highly attractive for a number of reasons, including (i) the stations' strategic fit in the Southeast, (ii) WCTV's leading station market position and WKXT's significant growth potential, (iii) strong station broadcast cash flows, (iv) opportunities for revenue growth utilizing the Company's extensive management expertise with medium-size stations and (v) opportunities for synergies between WCTV and WKXT and the Company's existing stations with regard to revenue enhancement and cost controls. The consummation of the Phipps Acquisition is currently expected to occur by September 30, 1996, although there can be no assurance with respect thereto. In August 1996, the Company sold the assets (the "KTVE Sale") of KTVE Inc. ("KTVE"), a television station serving Monroe, Louisiana/El Dorado, Arkansas for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing. For the year ended December 31, 1995, on a pro forma basis, the Company had net revenues, Media Cash Flow (the sum of broadcast cash flow, publishing cash flow and paging cash flow), operating cash flow and net (loss) of $90.6 million, $30.3 million, $28.1 million and $(3.6) million, respectively. For the six months ended June 30, 1996, on a pro forma basis, the Company had net revenues, Media Cash Flow, operating cash flow and net income of $47.3 million, $17.9 million, $16.3 million and $251,000, respectively. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the year ended December 31, 1995 increased 148.2%, 188.4% and 227.9%, respectively, while net income decreased 230.3% from the historical amounts for the year ended December 31, 1994. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the six months ended June 30, 1996 increased 67.1%, 114.7% and 122.8%, respectively, while net income decreased 78.7% from the historical amounts for the six months ended June 30, 1995. The Company's pro forma net income for its television stations for the year ended December 31, 1995 and for the six months ended June 30, 1996 was $1.6 million and $1.4 million, respectively. The following table sets forth certain information for each of the Company's television stations. <TABLE> <CAPTION> ------------------------------------------------------------------------------------------------------------------ PRO FORMA --------------------------------------- IN-MARKET YEAR ENDED DECEMBER SIX MONTHS ENDED STATION SHARE OF 31, 1995 JUNE 30, 1996 RANK HOUSEHOLDS ------------------- ------------------ NETWORK YEAR DMA CHANNEL/ IN VIEWING NET OPERATING NET OPERATING STATION AFFILIATION MARKET ACQUIRED RANK(1) FREQUENCY DMA(2) TV REVENUES INCOME(6) REVENUES INCOME(6) - -------- ------- ------------- ------- -------- --------- -------- --------- --------- -------- -------- -------- (IN THOUSANDS) (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> WKYT CBS Lexington, KY 1994 68 27/UHF(3) 1 33% $15,553 $5,247 $7,845 $2,701 WYMT CBS Hazard, KY 1994 68 57/UHF(3) 1(4) 24 3,721 831 2,107 530 WRDW CBS Augusta, GA 1996 111 12/VHF 1 36 8,888 1,853 4,489 1,149 WALB (5) NBC Albany, GA 1954 152 10/VHF 1 80 9,445 4,795 5,099 2,658 Panama City, WJHG (5) NBC FL 1960 159 7/VHF 1 53 3,843 270 2,409 476 PHIPPS ACQUISITION WKXT CBS Knoxville, TN 62 8/VHF 3 22 9,269 2,204 4,387 903 Tallahassee, WCTV CBS FL/ 116 6/VHF 1 60 11,862 4,229 6,212 2,254 Thomasville, GA </TABLE> - ------------------------------ (1) Ranking of designated market area as defined by Nielsen ("DMA") served by a station among all DMAs is measured by the number of television households within the DMA based on the November 1995 Nielsen estimates. (2) Represents station rank in DMA as determined by November 1995 Nielsen estimates of the number of television sets tuned to the Company's station as a percentage of the number of television sets in use in the market for the Sunday through Saturday 6 a.m. to 2 a.m. time period. (3) All stations in the market are UHF stations. (4) The market area served by WYMT is an 18-county trading area, as defined by Nielsen, and is included in the Lexington, Kentucky DMA. WYMT's station rank is based upon its position in the 18-county trading area. (5) The Company will be required under current FCC regulations to divest WALB and WJHG in connection with the Phipps Acquisition. For a discussion of the Company's plans, see "Risk Factors-FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." (6) Represents pro forma income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes. The Company's three newspapers, THE ALBANY HERALD, THE ROCKDALE CITIZEN and the GWINNETT DAILY POST and two shoppers had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $21.9 million and $660,000, respectively, for the year ended December 31, 1995, and $11.3 million and $1.3 million for the six months ended June 30, 1996, respectively. The satellite broadcasting business and paging business, which are a part of the Phipps Business, had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $6.2 million and $542,000 for the year ended December 31, 1995 and $3.5 million and $467,000 for the six months ended June 30, 1996, respectively. BUSINESS STRATEGY The Company's business strategy includes the following key elements: - STRONG LOCAL PRESENCE. Each of the Company's television stations seeks to achieve a distinct identity through its emphasis on local programming. A key objective is to build audience loyalty through the development of a strong local news franchise. Strong local news generates high viewership and results in higher ratings for programs both preceding and following the news, which increases revenues and Media Cash Flow. - REGIONAL FOCUS. The Company believes its regional focus has competitive advantages, including the ability to purchase and produce programming that can be used by multiple Company-owned stations as well as the opportunity to sell advertising on multiple stations as a single buy. In addition, the proximity of the Company's operations allows the sharing of equipment, management and marketing expertise. - TARGETED MARKETING. The Company seeks to increase its advertising revenues and Media Cash Flow by expanding existing relationships with local and national advertisers and by attracting new advertisers through targeted marketing techniques and carefully tailored programming. The Company works closely with advertisers to develop advertising campaigns that match specifically targeted audience segments including sponsoring and staging various special events such as fishing tournaments, boat shows and bridal expositions. - COST CONTROLS. Through its strategic planning and annual budgeting processes, the Company continually seeks to identify and implement cost savings opportunities at each of its stations and publications in order to increase Media Cash Flow. The Company's ownership of multiple stations and publications also benefits each operation in negotiating favorable terms with programming syndicators, newsprint suppliers, national sales representatives and other vendors. - SELECTIVE ACQUISITIONS. The Company has focused on acquiring television stations where the Company believes there is the potential for improvements in revenue share, audience share and cost control. The Company focuses on southeastern markets of medium size because the Company believes these markets offer superior opportunities in terms of projected population and economic growth, leading to higher advertising and circulation revenues. In assessing acquisitions, the Company targets stations and publications where it sees specific opportunities for revenue enhancement while controlling expenditures, utilizing management's significant experience with local and national advertising sales and in operating similar businesses. In appropriate circumstances, the Company will dispose of assets that it deems non-essential to its operating or growth strategy. THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING The Company has entered into an agreement to acquire WCTV and WKXT, a satellite broadcasting business and a paging business in the Southeast. The purchase price for the Phipps Acquisition is approximately $185 million, including fees, expenses and working capital and other adjustments. The consummation of the Phipps Acquisition is expected to occur by September 30, 1996, although there can be no assurance with respect thereto. See "Risk Factors -- Possible Non-Consummation of the Phipps Acquisition." Pursuant to an agreement, dated as of May 15, 1996 (the "KTVE Agreement"), with GOCOM Television of Ouachita, L.P., in August 1996, the Company sold the assets of KTVE for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing (approximately $870,000), to the extent collected by the buyer, to be paid to the Company 150 days following the date of closing. For the year ended December 31, 1995, KTVE had net revenues, Media Cash Flow and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) of $4.2 million, $916,000 and $437,000, respectively, and $2.3 million, $598,000 and $360,000, respectively, for the six months ended June 30, 1996. The Company estimates that the gain, net of estimated taxes, on the KTVE Sale was approximately $2.8 million. In addition to the KTVE Sale and the consummation of this Offering, the Concurrent Offering and the Phipps Acquisition, the Company intends to implement a financing plan (the "Financing") to increase liquidity and improve operating and financial flexibility. Pursuant to the Financing, the Company will (i) retire approximately $49.5 million aggregate principal amount of outstanding indebtedness under its senior secured bank credit facility (the "Old Credit Facility"), together with accrued interest thereon, (ii) retire approximately $25.0 million aggregate principal amount of outstanding indebtedness under its senior note due 2003 (the "Senior Note"), together with accrued interest thereon and a prepayment fee, (iii) issue $10.0 million liquidation preference of its Series A preferred stock (the "Series A Preferred Stock") in exchange for its outstanding $10.0 million aggregate principal amount 8% subordinated note (the "8% Note") issued to Bull Run Corporation ("Bull Run"), a principal shareholder of the Company, (iv) issue to Bull Run, J. Mack Robinson, the President, Chief Executive Officer and a director of the Company, and certain of his affiliates $10.0 million liquidation preference of its Series B preferred stock (the "Series B Preferred Stock" and together with the Series A Preferred Stock, the "Preferred Stock") with warrants to purchase up to 500,000 shares of Class A Common Stock (representing 10.1% of the currently issued and outstanding Class A Common Stock after giving effect to the exercise of such warrants) for cash proceeds of $10.0 million and (v) enter into a new senior secured bank credit facility (the "Senior Credit Facility") to provide for a term loan and revolving credit facility aggregating $125.0 million. The cash required for the consummation of the Phipps Acquisition, the repayment of indebtedness and related transaction costs will be provided by the net proceeds of this Offering, the Concurrent Offering and the sale of the Series B Preferred Stock and the warrants, borrowings under the Senior Credit Facility and the Company's working capital. For a description of the Senior Credit Facility and the Preferred Stock, see "Description of Certain Indebtedness" and "Management--Compensation Committee Interlocks and Insider Participation-Issuances of Preferred Stock." The consummation of this Offering and the placement of funds into escrow are conditioned upon the issuance of the Series A Preferred Stock in exchange for the 8% Note, the issuance of the Series B Preferred Stock and the entering into of the Senior Credit Facility. The consummation of this Offering and the placement of the net proceeds thereof into escrow are not conditioned upon the consummation of the Concurrent Offering or the Phipps Acquisition or the other elements of the Financing. However the release of the net proceeds hereof from escrow is conditioned, among other things, upon the satisfaction of the Minimum Equity Condition, the retirement of the Senior Note and the Old Credit Facility and the consummation of the Phipps Acquisition. The Notes are subject to a mandatory redemption on the Special Redemption Date at the Special Redemption Price if either the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996. See "Description of the Notes-Redemption-Special Redemption." The Senior Credit Facility will provide that no borrowings may be made thereunder until the closing of the Phipps Acquisition. Accordingly, if the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied, the Notes will be redeemed by the Company, the Old Credit Facility will remain in place and the Company will not borrow under the Senior Credit Facility. The following table sets forth the estimated sources and uses of funds relating to this Offering, the Concurrent Offering, the Phipps Acquisition and the Financing: <TABLE> <CAPTION> ---------- (IN MILLIONS) AMOUNT ---------- <S> <C> SOURCES OF FUNDS: The Notes offered hereby $160.0 The Concurrent Offering (1) 73.5 Sale of Series B Preferred Stock and Warrants 10.0 Borrowings under the Senior Credit Facility 22.9 Working capital (2) 9.5 ---------- TOTAL $275.9 ---------- ---------- USES OF FUNDS: Consummation of Phipps Acquisition $185.0 Retire indebtedness under the Old Credit Facility (3) 49.5 Retire indebtedness under the Senior Note (4) 25.0 Fees and expenses (5) 16.4 ---------- TOTAL $275.9 ---------- ---------- </TABLE> - ------------------------------ (1) Assumes estimated gross proceeds from the Concurrent Offering of $73.5 million and estimated net proceeds therefrom of $67.6 million. It is a condition of the release from escrow of the net proceeds of this Offering that the Company shall have consummated one or more equity offerings having gross proceeds of not less than $65.0 million. To the extent that the gross proceeds of any such equity offerings are less than $73.5 million, the Company intends to borrow such difference under its Senior Credit Facility. It is anticipated that there will not be a significant interval between the closing of this Offering and the closing of the Concurrent Offering. (2) The source of these funds was the KTVE Sale. (3) Borrowings under the Old Credit Facility bear interest at formula rates based upon the applicable London inter-bank offered rate ("LIBOR") or prime rate at the time of borrowing plus a fixed spread and have a final maturity of 2003. As of June 30, 1996, the weighted average interest rate was 8.94%. (4) The indebtedness under the Senior Note bears interest at 10.7%. (5) Fees and expenses include underwriting costs for the Notes and the Concurrent Offering, fees payable in connection with the negotiation and execution of the Senior Credit Facility, fees payable in connection with the retirement of the Senior Note and legal, accounting and other transaction fees. Prior to the consummation of the Phipps Acquisition and the satisfaction of the Minimum Equity Condition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes. The Trust Funds will be invested in cash equivalents. The proceeds of the Concurrent Offering will be used to repay indebtedness under the Old Credit Facility, to retire the Senior Note and to provide funds for the Phipps Acquisition. THE OFFERING <TABLE> <S> <C> SECURITIES OFFERED.......................... $160,000,000 aggregate principal amount of % Senior Subordinated Notes due 2006. MATURITY DATE............................... , 2006. INTEREST PAYMENT DATES...................... and , commencing , 1997. SPECIAL REDEMPTION BY THE COMPANY........... If the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996, the Company will be required to redeem (the "Special Redemption") the Notes on or prior to December 31, 1996 (the "Special Redemption Date") at a redemption price (the "Special Redemption Price") equal to 101% of the principal amount of the Notes plus accrued and unpaid interest to the Special Redemption Date. At any time prior to December 23, 1996, if the Phipps Acquisition has not been consummated or the Minimum Equity Condition is not satisfied, the Company may, at its option, redeem the Notes, in whole but not in part, at a redemption price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date fixed for redemption. Prior to the consummation of the Phipps Acquisition and the satisfaction of the Minimum Equity Condition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes and the obligation of the Company to consummate the Special Redemption will be secured by such funds (the "Trust Funds"). </TABLE> <TABLE> <S> <C> OPTIONAL REDEMPTION BY THE COMPANY.......... The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after , 2001, at the redemption prices set forth herein, plus accrued and unpaid interest to the date fixed for redemption. In addition, at any time prior to , 1999, the Company, at its option, may redeem up to 35% of the aggregate principal amount of the Notes originally issued with the cash proceeds received by the Company from one or more Public Equity Offerings, other than the Concurrent Offering, at any time or from time to time, at a redemption price equal to % of the principal amount thereof, plus accrued and unpaid interest to the date fixed for redemption; PROVIDED, HOWEVER, that at least $104.0 million in aggregate principal amount of the Notes remain outstanding immediately after any such redemption. CHANGE OF CONTROL OFFER..................... Upon a Change of Control, the Company has the obligation to offer to purchase all the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. See "Description of the Notes -- Change of Control" for a discussion of the circumstances in which the Company may not be required to make a Change of Control Offer (as defined). OFFERS TO PURCHASE.......................... In the event of certain asset sales, the Company will be required to offer to repurchase the Notes at 100% of their principal amount plus accrued and unpaid interest, if any, to the date of repurchase with the net proceeds of such asset sales. SUBORDINATION............................... The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company, including all indebtedness of the Company under the Senior Credit Facility. As of June 30, 1996, on a pro forma basis after giving effect to this Offering, the Concurrent Offering, the KTVE Sale, the Financing and the application of the net proceeds therefrom, and to the Phipps Acquisition, the Company would have had approximately $183.6 million of indebtedness outstanding, of which $23.6 million would be Senior Debt. SUBSIDIARY GUARANTEES....................... The Notes will be guaranteed, jointly and severally, fully and unconditionally, on a senior subordinated basis by the Subsidiary Guarantors (the "Subsidiary Guarantees"). The obligations of any Subsidiary Guarantor with respect to its Subsidiary Guarantee will be subordinated in right of payment, to the same extent as the obligations of the Company in respect of the Notes, to all existing and future Guarantor Senior Debt of such Subsidiary Guarantor, which will include any guarantee by such Subsidiary Guarantor of the Company's indebtedness under the Senior Credit Facility. </TABLE> <TABLE> <S> <C> PRINCIPAL COVENANTS......................... The Indenture for the Notes (the "Indenture") will impose certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt or Guarantor Senior Debt and senior in right of payment to the Notes or any Subsidiary Guarantee, incur liens, impose restrictions on the ability of a subsidiary to pay dividends or make certain payments to the Company, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. USE OF PROCEEDS............................. The Company intends to use the proceeds from the sale of the Notes, together with the proceeds of the Concurrent Offering, the other proceeds of the Financing and the Company's working capital, to (i) consummate the Phipps Acquisition, (ii) retire indebtedness under the Old Credit Facility and the Senior Note and (iii) pay related fees and expenses. However, in the event the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996, the Company will be obligated to redeem the Notes. See "The Phipps Acquisition, the KTVE Sale and the Financing" and "Description of the Notes-Redemption-Special Redemption."
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+PROSPECTUS SUMMARY THE FOLLOWING INFORMATION IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. AS USED HEREIN, UNLESS THE CONTEXT OTHERWISE REQUIRES, THE "COMPANY" MEANS GRAY COMMUNICATIONS SYSTEMS, INC. AND ITS SUBSIDIARIES. THE COMPANY HAS NOT YET CONSUMMATED THE PHIPPS ACQUISITION (AS DEFINED) AND THERE CAN BE NO ASSURANCE THAT THE PHIPPS ACQUISITION WILL BE CONSUMMATED. HOWEVER, EXCEPT WITH RESPECT TO HISTORICAL FINANCIAL STATEMENTS AND UNLESS THE CONTEXT INDICATES OTHERWISE, THE PHIPPS BUSINESS (AS DEFINED) IS INCLUDED IN THE DESCRIPTION OF THE COMPANY. SEE "THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING." UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION GRANTED BY THE COMPANY TO THE UNDERWRITERS IN THE CONCURRENT OFFERING IS NOT EXERCISED. ALL INFORMATION IN THIS PROSPECTUS HAS BEEN ADJUSTED TO GIVE EFFECT TO A 3-FOR-2 SPLIT OF THE CLASS A COMMON STOCK, EFFECTED IN THE FORM OF A STOCK DIVIDEND DECLARED ON OCTOBER 2, 1995. UNLESS OTHERWISE INDICATED, ALL STATION RANK, IN-MARKET SHARE AND TELEVISION HOUSEHOLD DATA IN THIS PROSPECTUS ARE DERIVED FROM THE NIELSEN STATION INDEX, VIEWERS IN PROFILE, DATED NOVEMBER 1995, AS PREPARED BY A.C. NIELSEN COMPANY ("NIELSEN"). THE COMPANY The Company owns and operates seven network-affiliated television stations in medium-size markets in the southeastern United States, six of which are ranked number one in their respective markets (which includes two television stations that are part of the Phipps Business). Five of the stations are affiliated with the CBS Television Network, a division of CBS, Inc. ("CBS") and two are affiliated with the NBC Television Network, a division of the National Broadcasting Company, Incorporated ("NBC"). In connection with the Phipps Acquisition (described below), the Company will be required under current regulations of the Federal Communications Commission (the "FCC") to divest its NBC affiliates in Albany, Georgia and Panama City, Florida. For a discussion of the Company's plans regarding such divestiture, see "Risk Factors -- FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." The Company also owns and operates three daily newspapers, two weekly, advertising only publications ("shoppers"), and a paging business (which is part of the Phipps Business), all located in the Southeast. The Company derives significant operating advantages and cost saving synergies through the size of its television station group and the regional focus of its television and publishing operations. These advantages and synergies include (i) sharing television production facilities, equipment and regionally oriented programming, (ii) the ability to purchase television programming for the group as a whole, (iii) negotiating network affiliation agreements on a group basis and (iv) purchasing newsprint and other supplies in bulk. In addition, the Company believes that its regional focus can provide advertisers with an efficient network through which to advertise in the fast-growing Southeast. In 1993, after the acquisition of a large block of Class A Common Stock by a new investor, the Company implemented a strategy to foster growth through strategic acquisitions. Since 1994, the Company's significant acquisitions have included three television stations and two newspapers, all located in the Southeast. As a result of the Company's acquisitions and in support of its growth strategy, the Company has added certain key members of management and has greatly expanded its operations in the television broadcasting and newspaper publishing businesses. On September 10, 1996, J. Mack Robinson, a director of the Company, was appointed President and Chief Executive Officer of the Company on an interim basis, to succeed Ralph W. Gabbard, who had died suddenly. The Company expects to commence a search to locate a new President as soon as practicable following this Offering. On September 11, 1996, Robert S. Prather, Jr., a director of the Company, was appointed Executive Vice President-Acquisitions on an interim basis. In January 1996, the Company acquired (the "Augusta Acquisition") WRDW-TV ("WRDW"), a CBS affiliate serving Augusta, Georgia (the "Augusta Business"). In December 1995, the Company entered into an asset purchase agreement to acquire (the "Phipps Acquisition") two CBS-affiliated stations, WCTV-TV ("WCTV") serving Tallahassee, Florida/Thomasville, Georgia and WKXT-TV ("WKXT") in Knoxville, Tennessee, a satellite broadcasting business and a paging business (collectively, the "Phipps Business"). The Company believes that the Phipps Acquisition will further enhance the Company's position as a major regional television broadcaster and is highly attractive for a number of reasons, including (i) the stations' strategic fit in the Southeast, (ii) WCTV's leading station market position and WKXT's significant growth potential, (iii) strong station broadcast cash flows, (iv) opportunities for revenue growth utilizing the Company's extensive management expertise with medium-size stations and (v) opportunities for synergies between WCTV and WKXT and the Company's existing stations with regard to revenue enhancement and cost controls. The consummation of the Phipps Acquisition is currently expected to occur by September 30, 1996, although there can be no assurance with respect thereto. In August 1996, the Company sold the assets (the "KTVE Sale") of KTVE Inc. ("KTVE"), a television station serving Monroe, Louisiana/El Dorado, Arkansas for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing. For the year ended December 31, 1995, on a pro forma basis, the Company had net revenues, Media Cash Flow (the sum of broadcast cash flow, publishing cash flow and paging cash flow), operating cash flow and net (loss) of $90.6 million, $30.3 million, $28.1 million and $(3.6) million, respectively. For the six months ended June 30, 1996, on a pro forma basis, the Company had net revenues, Media Cash Flow, operating cash flow and net income of $47.3 million, $17.9 million, $16.3 million and $251,000, respectively. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the year ended December 31, 1995 increased 148.2%, 188.4% and 227.9%, respectively, while net income decreased 230.3% from the historical amounts for the year ended December 31, 1994. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the six months ended June 30, 1996 increased 67.1%, 114.7% and 122.8%, respectively, while net income decreased 78.7% from the historical amounts for the six months ended June 30, 1995. The Company's pro forma net income for its television stations for the year ended December 31, 1995 and for the six months ended June 30, 1996 was $1.6 million and $1.4 million, respectively. The following table sets forth certain information for each of the Company's television stations. <TABLE> <CAPTION> ------------------------------------------------------------------------------------------------------------------ PRO FORMA --------------------------------------- IN-MARKET YEAR ENDED DECEMBER SIX MONTHS ENDED STATION SHARE OF 31, 1995 JUNE 30, 1996 RANK HOUSEHOLDS ------------------- ------------------ NETWORK YEAR DMA CHANNEL/ IN VIEWING NET OPERATING NET OPERATING STATION AFFILIATION MARKET ACQUIRED RANK(1) FREQUENCY DMA(2) TV REVENUES INCOME(6) REVENUES INCOME(6) - -------- ------- ------------- ------- -------- --------- -------- --------- --------- -------- -------- -------- (IN THOUSANDS) (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> WKYT CBS Lexington, KY 1994 68 27/UHF(3) 1 33% $15,553 $5,247 $7,845 $2,701 WYMT CBS Hazard, KY 1994 68 57/UHF(3) 1(4) 24 3,721 831 2,107 530 WRDW CBS Augusta, GA 1996 111 12/VHF 1 36 8,888 1,853 4,489 1,149 WALB (5) NBC Albany, GA 1954 152 10/VHF 1 80 9,445 4,795 5,099 2,658 Panama City, WJHG (5) NBC FL 1960 159 7/VHF 1 53 3,843 270 2,409 476 PHIPPS ACQUISITION WKXT CBS Knoxville, TN 62 8/VHF 3 22 9,269 2,204 4,387 903 Tallahassee, WCTV CBS FL/ 116 6/VHF 1 60 11,862 4,229 6,212 2,254 Thomasville, GA </TABLE> - ------------------------------ (1) Ranking of designated market area as defined by Nielsen ("DMA") served by a station among all DMAs is measured by the number of television households within the DMA based on the November 1995 Nielsen estimates. (2) Represents station rank in DMA as determined by November 1995 Nielsen estimates of the number of television sets tuned to the Company's station as a percentage of the number of television sets in use in the market for the Sunday through Saturday 6 a.m. to 2 a.m. time period. (3) All stations in the market are UHF stations. (4) The market area served by WYMT is an 18-county trading area, as defined by Nielsen, and is included in the Lexington, Kentucky DMA. WYMT's station rank is based upon its position in the 18-county trading area. (5) The Company will be required under current FCC regulations to divest WALB and WJHG in connection with the Phipps Acquisition. For a discussion of the Company's plans, see "Risk Factors-FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." (6) Represents pro forma income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes. The Company's three newspapers, THE ALBANY HERALD, THE ROCKDALE CITIZEN and the GWINNETT DAILY POST and two shoppers had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $21.9 million and $660,000, respectively, for the year ended December 31, 1995, and $11.3 million and $1.3 million for the six months ended June 30, 1996, respectively. The satellite broadcasting business and paging business, which are a part of the Phipps Business, had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $6.2 million and $542,000 for the year ended December 31, 1995 and $3.5 million and $467,000 for the six months ended June 30, 1996, respectively. BUSINESS STRATEGY The Company's business strategy includes the following key elements: - STRONG LOCAL PRESENCE. Each of the Company's television stations seeks to achieve a distinct identity through its emphasis on local programming. A key objective is to build audience loyalty through the development of a strong local news franchise. Strong local news generates high viewership and results in higher ratings for programs both preceding and following the news, which increases revenues and Media Cash Flow. - REGIONAL FOCUS. The Company believes its regional focus has competitive advantages, including the ability to purchase and produce programming that can be used by multiple Company-owned stations as well as the opportunity to sell advertising on multiple stations as a single buy. In addition, the proximity of the Company's operations allows the sharing of equipment, management and marketing expertise. - TARGETED MARKETING. The Company seeks to increase its advertising revenues and Media Cash Flow by expanding existing relationships with local and national advertisers and by attracting new advertisers through targeted marketing techniques and carefully tailored programming. The Company works closely with advertisers to develop advertising campaigns that match specifically targeted audience segments including sponsoring and staging various special events such as fishing tournaments, boat shows and bridal expositions. - COST CONTROLS. Through its strategic planning and annual budgeting processes, the Company continually seeks to identify and implement cost savings opportunities at each of its stations and publications in order to increase Media Cash Flow. The Company's ownership of multiple stations and publications also benefits each operation in negotiating favorable terms with programming syndicators, newsprint suppliers, national sales representatives and other vendors. - SELECTIVE ACQUISITIONS. The Company has focused on acquiring television stations where the Company believes there is the potential for improvements in revenue share, audience share and cost control. The Company focuses on southeastern markets of medium size because the Company believes these markets offer superior opportunities in terms of projected population and economic growth, leading to higher advertising and circulation revenues. In assessing acquisitions, the Company targets stations and publications where it sees specific opportunities for revenue enhancement while controlling expenditures, utilizing management's significant experience with local and national advertising sales and in operating similar businesses. In appropriate circumstances, the Company will dispose of assets that it deems non-essential to its operating or growth strategy. THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING The Company has entered into an agreement to acquire WCTV and WKXT, a satellite broadcasting business and a paging business in the Southeast. The purchase price for the Phipps Acquisition is approximately $185 million, including fees, expenses and working capital and other adjustments. The consummation of the Phipps Acquisition is expected to occur by September 30, 1996, although there can be no assurance with respect thereto. See "Risk Factors -- Possible Non-Consummation of the Phipps Acquisition." Pursuant to an agreement, dated as of May 15, 1996 (the "KTVE Agreement"), with GOCOM Television of Ouachita, L.P., in August 1996, the Company sold the assets of KTVE for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing (approximately $870,000), to the extent collected by the buyer, to be paid to the Company 150 days following the date of closing. For the year ended December 31, 1995, KTVE had net revenues, Media Cash Flow and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) of $4.2 million, $916,000 and $437,000, respectively, and $2.3 million, $598,000 and $360,000, respectively, for the six months ended June 30, 1996. The Company estimates that the gain, net of estimated taxes, on the KTVE Sale was approximately $2.8 million. In addition to the KTVE Sale and the consummation of this Offering, the Concurrent Offering and the Phipps Acquisition, the Company intends to implement a financing plan (the "Financing") to increase liquidity and improve operating and financial flexibility. Pursuant to the Financing, the Company will (i) retire approximately $49.5 million aggregate principal amount of outstanding indebtedness under its senior secured bank credit facility (the "Old Credit Facility"), together with accrued interest thereon, (ii) retire approximately $25.0 million aggregate principal amount of outstanding indebtedness under its senior note due 2003 (the "Senior Note"), together with accrued interest thereon and a prepayment fee, (iii) issue $10.0 million liquidation preference of its Series A preferred stock (the "Series A Preferred Stock") in exchange for its outstanding $10.0 million aggregate principal amount 8% subordinated note (the "8% Note") issued to Bull Run Corporation ("Bull Run"), a principal shareholder of the Company, (iv) issue to Bull Run, J. Mack Robinson, the President, Chief Executive Officer and a director of the Company, and certain of his affiliates $10.0 million liquidation preference of its Series B preferred stock (the "Series B Preferred Stock" and together with the Series A Preferred Stock, the "Preferred Stock") with warrants to purchase up to 500,000 shares of Class A Common Stock (representing 10.1% of the currently issued and outstanding Class A Common Stock after giving effect to the exercise of such warrants) for cash proceeds of $10.0 million and (v) enter into a new senior secured bank credit facility (the "Senior Credit Facility") to provide for a term loan and revolving credit facility aggregating $125.0 million. The cash required for the consummation of the Phipps Acquisition, the repayment of indebtedness and related transaction costs will be provided by the net proceeds of this Offering, the Concurrent Offering and the sale of the Series B Preferred Stock and the warrants, borrowings under the Senior Credit Facility and the Company's working capital. For a description of the Senior Credit Facility and the Preferred Stock, see "Description of Certain Indebtedness" and "Management--Compensation Committee Interlocks and Insider Participation-Issuances of Preferred Stock." The consummation of this Offering and the placement of funds into escrow are conditioned upon the issuance of the Series A Preferred Stock in exchange for the 8% Note, the issuance of the Series B Preferred Stock and the entering into of the Senior Credit Facility. The consummation of this Offering and the placement of the net proceeds thereof into escrow are not conditioned upon the consummation of the Concurrent Offering or the Phipps Acquisition or the other elements of the Financing. However the release of the net proceeds hereof from escrow is conditioned, among other things, upon the satisfaction of the Minimum Equity Condition, the retirement of the Senior Note and the Old Credit Facility and the consummation of the Phipps Acquisition. The Notes are subject to a mandatory redemption on the Special Redemption Date at the Special Redemption Price if either the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996. See "Description of the Notes-Redemption-Special Redemption." The Senior Credit Facility will provide that no borrowings may be made thereunder until the closing of the Phipps Acquisition. Accordingly, if the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied, the Notes will be redeemed by the Company, the Old Credit Facility will remain in place and the Company will not borrow under the Senior Credit Facility. The following table sets forth the estimated sources and uses of funds relating to this Offering, the Concurrent Offering, the Phipps Acquisition and the Financing: <TABLE> <CAPTION> ---------- (IN MILLIONS) AMOUNT ---------- <S> <C> SOURCES OF FUNDS: The Notes offered hereby $160.0 The Concurrent Offering (1) 73.5 Sale of Series B Preferred Stock and Warrants 10.0 Borrowings under the Senior Credit Facility 22.9 Working capital (2) 9.5 ---------- TOTAL $275.9 ---------- ---------- USES OF FUNDS: Consummation of Phipps Acquisition $185.0 Retire indebtedness under the Old Credit Facility (3) 49.5 Retire indebtedness under the Senior Note (4) 25.0 Fees and expenses (5) 16.4 ---------- TOTAL $275.9 ---------- ---------- </TABLE> - ------------------------------ (1) Assumes estimated gross proceeds from the Concurrent Offering of $73.5 million and estimated net proceeds therefrom of $67.6 million. It is a condition of the release from escrow of the net proceeds of this Offering that the Company shall have consummated one or more equity offerings having gross proceeds of not less than $65.0 million. To the extent that the gross proceeds of any such equity offerings are less than $73.5 million, the Company intends to borrow such difference under its Senior Credit Facility. It is anticipated that there will not be a significant interval between the closing of this Offering and the closing of the Concurrent Offering. (2) The source of these funds was the KTVE Sale. (3) Borrowings under the Old Credit Facility bear interest at formula rates based upon the applicable London inter-bank offered rate ("LIBOR") or prime rate at the time of borrowing plus a fixed spread and have a final maturity of 2003. As of June 30, 1996, the weighted average interest rate was 8.94%. (4) The indebtedness under the Senior Note bears interest at 10.7%. (5) Fees and expenses include underwriting costs for the Notes and the Concurrent Offering, fees payable in connection with the negotiation and execution of the Senior Credit Facility, fees payable in connection with the retirement of the Senior Note and legal, accounting and other transaction fees. Prior to the consummation of the Phipps Acquisition and the satisfaction of the Minimum Equity Condition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes. The Trust Funds will be invested in cash equivalents. The proceeds of the Concurrent Offering will be used to repay indebtedness under the Old Credit Facility, to retire the Senior Note and to provide funds for the Phipps Acquisition. THE OFFERING <TABLE> <S> <C> SECURITIES OFFERED.......................... $160,000,000 aggregate principal amount of % Senior Subordinated Notes due 2006. MATURITY DATE............................... , 2006. INTEREST PAYMENT DATES...................... and , commencing , 1997. SPECIAL REDEMPTION BY THE COMPANY........... If the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996, the Company will be required to redeem (the "Special Redemption") the Notes on or prior to December 31, 1996 (the "Special Redemption Date") at a redemption price (the "Special Redemption Price") equal to 101% of the principal amount of the Notes plus accrued and unpaid interest to the Special Redemption Date. At any time prior to December 23, 1996, if the Phipps Acquisition has not been consummated or the Minimum Equity Condition is not satisfied, the Company may, at its option, redeem the Notes, in whole but not in part, at a redemption price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date fixed for redemption. Prior to the consummation of the Phipps Acquisition and the satisfaction of the Minimum Equity Condition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes and the obligation of the Company to consummate the Special Redemption will be secured by such funds (the "Trust Funds"). </TABLE> <TABLE> <S> <C> OPTIONAL REDEMPTION BY THE COMPANY.......... The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after , 2001, at the redemption prices set forth herein, plus accrued and unpaid interest to the date fixed for redemption. In addition, at any time prior to , 1999, the Company, at its option, may redeem up to 35% of the aggregate principal amount of the Notes originally issued with the cash proceeds received by the Company from one or more Public Equity Offerings, other than the Concurrent Offering, at any time or from time to time, at a redemption price equal to % of the principal amount thereof, plus accrued and unpaid interest to the date fixed for redemption; PROVIDED, HOWEVER, that at least $104.0 million in aggregate principal amount of the Notes remain outstanding immediately after any such redemption. CHANGE OF CONTROL OFFER..................... Upon a Change of Control, the Company has the obligation to offer to purchase all the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. See "Description of the Notes -- Change of Control" for a discussion of the circumstances in which the Company may not be required to make a Change of Control Offer (as defined). OFFERS TO PURCHASE.......................... In the event of certain asset sales, the Company will be required to offer to repurchase the Notes at 100% of their principal amount plus accrued and unpaid interest, if any, to the date of repurchase with the net proceeds of such asset sales. SUBORDINATION............................... The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company, including all indebtedness of the Company under the Senior Credit Facility. As of June 30, 1996, on a pro forma basis after giving effect to this Offering, the Concurrent Offering, the KTVE Sale, the Financing and the application of the net proceeds therefrom, and to the Phipps Acquisition, the Company would have had approximately $183.6 million of indebtedness outstanding, of which $23.6 million would be Senior Debt. SUBSIDIARY GUARANTEES....................... The Notes will be guaranteed, jointly and severally, fully and unconditionally, on a senior subordinated basis by the Subsidiary Guarantors (the "Subsidiary Guarantees"). The obligations of any Subsidiary Guarantor with respect to its Subsidiary Guarantee will be subordinated in right of payment, to the same extent as the obligations of the Company in respect of the Notes, to all existing and future Guarantor Senior Debt of such Subsidiary Guarantor, which will include any guarantee by such Subsidiary Guarantor of the Company's indebtedness under the Senior Credit Facility. </TABLE> <TABLE> <S> <C> PRINCIPAL COVENANTS......................... The Indenture for the Notes (the "Indenture") will impose certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt or Guarantor Senior Debt and senior in right of payment to the Notes or any Subsidiary Guarantee, incur liens, impose restrictions on the ability of a subsidiary to pay dividends or make certain payments to the Company, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. USE OF PROCEEDS............................. The Company intends to use the proceeds from the sale of the Notes, together with the proceeds of the Concurrent Offering, the other proceeds of the Financing and the Company's working capital, to (i) consummate the Phipps Acquisition, (ii) retire indebtedness under the Old Credit Facility and the Senior Note and (iii) pay related fees and expenses. However, in the event the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996, the Company will be obligated to redeem the Notes. See "The Phipps Acquisition, the KTVE Sale and the Financing" and "Description of the Notes-Redemption-Special Redemption."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0001013620_wrdw-tv_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001013620_wrdw-tv_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING INFORMATION IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. AS USED HEREIN, UNLESS THE CONTEXT OTHERWISE REQUIRES, THE "COMPANY" MEANS GRAY COMMUNICATIONS SYSTEMS, INC. AND ITS SUBSIDIARIES. THE COMPANY HAS NOT YET CONSUMMATED THE PHIPPS ACQUISITION (AS DEFINED) AND THERE CAN BE NO ASSURANCE THAT THE PHIPPS ACQUISITION WILL BE CONSUMMATED. HOWEVER, EXCEPT WITH RESPECT TO HISTORICAL FINANCIAL STATEMENTS AND UNLESS THE CONTEXT INDICATES OTHERWISE, THE PHIPPS BUSINESS (AS DEFINED) IS INCLUDED IN THE DESCRIPTION OF THE COMPANY. SEE "THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING." UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION GRANTED BY THE COMPANY TO THE UNDERWRITERS IN THE CONCURRENT OFFERING IS NOT EXERCISED. ALL INFORMATION IN THIS PROSPECTUS HAS BEEN ADJUSTED TO GIVE EFFECT TO A 3-FOR-2 SPLIT OF THE CLASS A COMMON STOCK, EFFECTED IN THE FORM OF A STOCK DIVIDEND DECLARED ON OCTOBER 2, 1995. UNLESS OTHERWISE INDICATED, ALL STATION RANK, IN-MARKET SHARE AND TELEVISION HOUSEHOLD DATA IN THIS PROSPECTUS ARE DERIVED FROM THE NIELSEN STATION INDEX, VIEWERS IN PROFILE, DATED NOVEMBER 1995, AS PREPARED BY A.C. NIELSEN COMPANY ("NIELSEN"). THE COMPANY The Company owns and operates seven network-affiliated television stations in medium-size markets in the southeastern United States, six of which are ranked number one in their respective markets (which includes two television stations that are part of the Phipps Business). Five of the stations are affiliated with the CBS Television Network, a division of CBS, Inc. ("CBS") and two are affiliated with the NBC Television Network, a division of the National Broadcasting Company, Incorporated ("NBC"). In connection with the Phipps Acquisition (described below), the Company will be required under current regulations of the Federal Communications Commission (the "FCC") to divest its NBC affiliates in Albany, Georgia and Panama City, Florida. For a discussion of the Company's plans regarding such divestiture, see "Risk Factors -- FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." The Company also owns and operates three daily newspapers, two weekly, advertising only publications ("shoppers"), and a paging business (which is part of the Phipps Business), all located in the Southeast. The Company derives significant operating advantages and cost saving synergies through the size of its television station group and the regional focus of its television and publishing operations. These advantages and synergies include (i) sharing television production facilities, equipment and regionally oriented programming, (ii) the ability to purchase television programming for the group as a whole, (iii) negotiating network affiliation agreements on a group basis and (iv) purchasing newsprint and other supplies in bulk. In addition, the Company believes that its regional focus can provide advertisers with an efficient network through which to advertise in the fast-growing Southeast. In 1993, after the acquisition of a large block of Class A Common Stock by a new investor, the Company implemented a strategy to foster growth through strategic acquisitions. Since 1994, the Company's significant acquisitions have included three television stations and two newspapers, all located in the Southeast. As a result of the Company's acquisitions and in support of its growth strategy, the Company has added certain key members of management and has greatly expanded its operations in the television broadcasting and newspaper publishing businesses. On September 10, 1996, J. Mack Robinson, a director of the Company, was appointed President and Chief Executive Officer of the Company on an interim basis, to succeed Ralph W. Gabbard, who had died suddenly. The Company expects to commence a search to locate a new President as soon as practicable following this Offering. On September 11, 1996, Robert S. Prather, Jr., a director of the Company, was appointed Executive Vice President-Acquisitions on an interim basis. In January 1996, the Company acquired (the "Augusta Acquisition") WRDW-TV ("WRDW"), a CBS affiliate serving Augusta, Georgia (the "Augusta Business"). In December 1995, the Company entered into an asset purchase agreement to acquire (the "Phipps Acquisition") two CBS-affiliated stations, WCTV-TV ("WCTV") serving Tallahassee, Florida/Thomasville, Georgia and WKXT-TV ("WKXT") in Knoxville, Tennessee, a satellite broadcasting business and a paging business (collectively, the "Phipps Business"). The Company believes that the Phipps Acquisition will further enhance the Company's position as a major regional television broadcaster and is highly attractive for a number of reasons, including (i) the stations' strategic fit in the Southeast, (ii) WCTV's leading station market position and WKXT's significant growth potential, (iii) strong station broadcast cash flows, (iv) opportunities for revenue growth utilizing the Company's extensive management expertise with medium-size stations and (v) opportunities for synergies between WCTV and WKXT and the Company's existing stations with regard to revenue enhancement and cost controls. The consummation of the Phipps Acquisition is currently expected to occur by September 30, 1996, although there can be no assurance with respect thereto. In August 1996, the Company sold the assets (the "KTVE Sale") of KTVE Inc. ("KTVE"), a television station serving Monroe, Louisiana/El Dorado, Arkansas for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing. For the year ended December 31, 1995, on a pro forma basis, the Company had net revenues, Media Cash Flow (the sum of broadcast cash flow, publishing cash flow and paging cash flow), operating cash flow and net (loss) of $90.6 million, $30.3 million, $28.1 million and $(3.6) million, respectively. For the six months ended June 30, 1996, on a pro forma basis, the Company had net revenues, Media Cash Flow, operating cash flow and net income of $47.3 million, $17.9 million, $16.3 million and $251,000, respectively. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the year ended December 31, 1995 increased 148.2%, 188.4% and 227.9%, respectively, while net income decreased 230.3% from the historical amounts for the year ended December 31, 1994. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the six months ended June 30, 1996 increased 67.1%, 114.7% and 122.8%, respectively, while net income decreased 78.7% from the historical amounts for the six months ended June 30, 1995. The Company's pro forma net income for its television stations for the year ended December 31, 1995 and for the six months ended June 30, 1996 was $1.6 million and $1.4 million, respectively. The following table sets forth certain information for each of the Company's television stations. <TABLE> <CAPTION> ------------------------------------------------------------------------------------------------------------------ PRO FORMA --------------------------------------- IN-MARKET YEAR ENDED DECEMBER SIX MONTHS ENDED STATION SHARE OF 31, 1995 JUNE 30, 1996 RANK HOUSEHOLDS ------------------- ------------------ NETWORK YEAR DMA CHANNEL/ IN VIEWING NET OPERATING NET OPERATING STATION AFFILIATION MARKET ACQUIRED RANK(1) FREQUENCY DMA(2) TV REVENUES INCOME(6) REVENUES INCOME(6) - -------- ------- ------------- ------- -------- --------- -------- --------- --------- -------- -------- -------- (IN THOUSANDS) (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> WKYT CBS Lexington, KY 1994 68 27/UHF(3) 1 33% $15,553 $5,247 $7,845 $2,701 WYMT CBS Hazard, KY 1994 68 57/UHF(3) 1(4) 24 3,721 831 2,107 530 WRDW CBS Augusta, GA 1996 111 12/VHF 1 36 8,888 1,853 4,489 1,149 WALB (5) NBC Albany, GA 1954 152 10/VHF 1 80 9,445 4,795 5,099 2,658 Panama City, WJHG (5) NBC FL 1960 159 7/VHF 1 53 3,843 270 2,409 476 PHIPPS ACQUISITION WKXT CBS Knoxville, TN 62 8/VHF 3 22 9,269 2,204 4,387 903 Tallahassee, WCTV CBS FL/ 116 6/VHF 1 60 11,862 4,229 6,212 2,254 Thomasville, GA </TABLE> - ------------------------------ (1) Ranking of designated market area as defined by Nielsen ("DMA") served by a station among all DMAs is measured by the number of television households within the DMA based on the November 1995 Nielsen estimates. (2) Represents station rank in DMA as determined by November 1995 Nielsen estimates of the number of television sets tuned to the Company's station as a percentage of the number of television sets in use in the market for the Sunday through Saturday 6 a.m. to 2 a.m. time period. (3) All stations in the market are UHF stations. (4) The market area served by WYMT is an 18-county trading area, as defined by Nielsen, and is included in the Lexington, Kentucky DMA. WYMT's station rank is based upon its position in the 18-county trading area. (5) The Company will be required under current FCC regulations to divest WALB and WJHG in connection with the Phipps Acquisition. For a discussion of the Company's plans, see "Risk Factors-FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." (6) Represents pro forma income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes. The Company's three newspapers, THE ALBANY HERALD, THE ROCKDALE CITIZEN and the GWINNETT DAILY POST and two shoppers had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $21.9 million and $660,000, respectively, for the year ended December 31, 1995, and $11.3 million and $1.3 million for the six months ended June 30, 1996, respectively. The satellite broadcasting business and paging business, which are a part of the Phipps Business, had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $6.2 million and $542,000 for the year ended December 31, 1995 and $3.5 million and $467,000 for the six months ended June 30, 1996, respectively. BUSINESS STRATEGY The Company's business strategy includes the following key elements: - STRONG LOCAL PRESENCE. Each of the Company's television stations seeks to achieve a distinct identity through its emphasis on local programming. A key objective is to build audience loyalty through the development of a strong local news franchise. Strong local news generates high viewership and results in higher ratings for programs both preceding and following the news, which increases revenues and Media Cash Flow. - REGIONAL FOCUS. The Company believes its regional focus has competitive advantages, including the ability to purchase and produce programming that can be used by multiple Company-owned stations as well as the opportunity to sell advertising on multiple stations as a single buy. In addition, the proximity of the Company's operations allows the sharing of equipment, management and marketing expertise. - TARGETED MARKETING. The Company seeks to increase its advertising revenues and Media Cash Flow by expanding existing relationships with local and national advertisers and by attracting new advertisers through targeted marketing techniques and carefully tailored programming. The Company works closely with advertisers to develop advertising campaigns that match specifically targeted audience segments including sponsoring and staging various special events such as fishing tournaments, boat shows and bridal expositions. - COST CONTROLS. Through its strategic planning and annual budgeting processes, the Company continually seeks to identify and implement cost savings opportunities at each of its stations and publications in order to increase Media Cash Flow. The Company's ownership of multiple stations and publications also benefits each operation in negotiating favorable terms with programming syndicators, newsprint suppliers, national sales representatives and other vendors. - SELECTIVE ACQUISITIONS. The Company has focused on acquiring television stations where the Company believes there is the potential for improvements in revenue share, audience share and cost control. The Company focuses on southeastern markets of medium size because the Company believes these markets offer superior opportunities in terms of projected population and economic growth, leading to higher advertising and circulation revenues. In assessing acquisitions, the Company targets stations and publications where it sees specific opportunities for revenue enhancement while controlling expenditures, utilizing management's significant experience with local and national advertising sales and in operating similar businesses. In appropriate circumstances, the Company will dispose of assets that it deems non-essential to its operating or growth strategy. THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING The Company has entered into an agreement to acquire WCTV and WKXT, a satellite broadcasting business and a paging business in the Southeast. The purchase price for the Phipps Acquisition is approximately $185 million, including fees, expenses and working capital and other adjustments. The consummation of the Phipps Acquisition is expected to occur by September 30, 1996, although there can be no assurance with respect thereto. See "Risk Factors -- Possible Non-Consummation of the Phipps Acquisition." Pursuant to an agreement, dated as of May 15, 1996 (the "KTVE Agreement"), with GOCOM Television of Ouachita, L.P., in August 1996, the Company sold the assets of KTVE for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing (approximately $870,000), to the extent collected by the buyer, to be paid to the Company 150 days following the date of closing. For the year ended December 31, 1995, KTVE had net revenues, Media Cash Flow and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) of $4.2 million, $916,000 and $437,000, respectively, and $2.3 million, $598,000 and $360,000, respectively, for the six months ended June 30, 1996. The Company estimates that the gain, net of estimated taxes, on the KTVE Sale was approximately $2.8 million. In addition to the KTVE Sale and the consummation of this Offering, the Concurrent Offering and the Phipps Acquisition, the Company intends to implement a financing plan (the "Financing") to increase liquidity and improve operating and financial flexibility. Pursuant to the Financing, the Company will (i) retire approximately $49.5 million aggregate principal amount of outstanding indebtedness under its senior secured bank credit facility (the "Old Credit Facility"), together with accrued interest thereon, (ii) retire approximately $25.0 million aggregate principal amount of outstanding indebtedness under its senior note due 2003 (the "Senior Note"), together with accrued interest thereon and a prepayment fee, (iii) issue $10.0 million liquidation preference of its Series A preferred stock (the "Series A Preferred Stock") in exchange for its outstanding $10.0 million aggregate principal amount 8% subordinated note (the "8% Note") issued to Bull Run Corporation ("Bull Run"), a principal shareholder of the Company, (iv) issue to Bull Run, J. Mack Robinson, the President, Chief Executive Officer and a director of the Company, and certain of his affiliates $10.0 million liquidation preference of its Series B preferred stock (the "Series B Preferred Stock" and together with the Series A Preferred Stock, the "Preferred Stock") with warrants to purchase up to 500,000 shares of Class A Common Stock (representing 10.1% of the currently issued and outstanding Class A Common Stock after giving effect to the exercise of such warrants) for cash proceeds of $10.0 million and (v) enter into a new senior secured bank credit facility (the "Senior Credit Facility") to provide for a term loan and revolving credit facility aggregating $125.0 million. The cash required for the consummation of the Phipps Acquisition, the repayment of indebtedness and related transaction costs will be provided by the net proceeds of this Offering, the Concurrent Offering and the sale of the Series B Preferred Stock and the warrants, borrowings under the Senior Credit Facility and the Company's working capital. For a description of the Senior Credit Facility and the Preferred Stock, see "Description of Certain Indebtedness" and "Management--Compensation Committee Interlocks and Insider Participation-Issuances of Preferred Stock." The consummation of this Offering and the placement of funds into escrow are conditioned upon the issuance of the Series A Preferred Stock in exchange for the 8% Note, the issuance of the Series B Preferred Stock and the entering into of the Senior Credit Facility. The consummation of this Offering and the placement of the net proceeds thereof into escrow are not conditioned upon the consummation of the Concurrent Offering or the Phipps Acquisition or the other elements of the Financing. However the release of the net proceeds hereof from escrow is conditioned, among other things, upon the satisfaction of the Minimum Equity Condition, the retirement of the Senior Note and the Old Credit Facility and the consummation of the Phipps Acquisition. The Notes are subject to a mandatory redemption on the Special Redemption Date at the Special Redemption Price if either the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996. See "Description of the Notes-Redemption-Special Redemption." The Senior Credit Facility will provide that no borrowings may be made thereunder until the closing of the Phipps Acquisition. Accordingly, if the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied, the Notes will be redeemed by the Company, the Old Credit Facility will remain in place and the Company will not borrow under the Senior Credit Facility. The following table sets forth the estimated sources and uses of funds relating to this Offering, the Concurrent Offering, the Phipps Acquisition and the Financing: <TABLE> <CAPTION> ---------- (IN MILLIONS) AMOUNT ---------- <S> <C> SOURCES OF FUNDS: The Notes offered hereby $160.0 The Concurrent Offering (1) 73.5 Sale of Series B Preferred Stock and Warrants 10.0 Borrowings under the Senior Credit Facility 22.9 Working capital (2) 9.5 ---------- TOTAL $275.9 ---------- ---------- USES OF FUNDS: Consummation of Phipps Acquisition $185.0 Retire indebtedness under the Old Credit Facility (3) 49.5 Retire indebtedness under the Senior Note (4) 25.0 Fees and expenses (5) 16.4 ---------- TOTAL $275.9 ---------- ---------- </TABLE> - ------------------------------ (1) Assumes estimated gross proceeds from the Concurrent Offering of $73.5 million and estimated net proceeds therefrom of $67.6 million. It is a condition of the release from escrow of the net proceeds of this Offering that the Company shall have consummated one or more equity offerings having gross proceeds of not less than $65.0 million. To the extent that the gross proceeds of any such equity offerings are less than $73.5 million, the Company intends to borrow such difference under its Senior Credit Facility. It is anticipated that there will not be a significant interval between the closing of this Offering and the closing of the Concurrent Offering. (2) The source of these funds was the KTVE Sale. (3) Borrowings under the Old Credit Facility bear interest at formula rates based upon the applicable London inter-bank offered rate ("LIBOR") or prime rate at the time of borrowing plus a fixed spread and have a final maturity of 2003. As of June 30, 1996, the weighted average interest rate was 8.94%. (4) The indebtedness under the Senior Note bears interest at 10.7%. (5) Fees and expenses include underwriting costs for the Notes and the Concurrent Offering, fees payable in connection with the negotiation and execution of the Senior Credit Facility, fees payable in connection with the retirement of the Senior Note and legal, accounting and other transaction fees. Prior to the consummation of the Phipps Acquisition and the satisfaction of the Minimum Equity Condition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes. The Trust Funds will be invested in cash equivalents. The proceeds of the Concurrent Offering will be used to repay indebtedness under the Old Credit Facility, to retire the Senior Note and to provide funds for the Phipps Acquisition. THE OFFERING <TABLE> <S> <C> SECURITIES OFFERED.......................... $160,000,000 aggregate principal amount of % Senior Subordinated Notes due 2006. MATURITY DATE............................... , 2006. INTEREST PAYMENT DATES...................... and , commencing , 1997. SPECIAL REDEMPTION BY THE COMPANY........... If the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996, the Company will be required to redeem (the "Special Redemption") the Notes on or prior to December 31, 1996 (the "Special Redemption Date") at a redemption price (the "Special Redemption Price") equal to 101% of the principal amount of the Notes plus accrued and unpaid interest to the Special Redemption Date. At any time prior to December 23, 1996, if the Phipps Acquisition has not been consummated or the Minimum Equity Condition is not satisfied, the Company may, at its option, redeem the Notes, in whole but not in part, at a redemption price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date fixed for redemption. Prior to the consummation of the Phipps Acquisition and the satisfaction of the Minimum Equity Condition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes and the obligation of the Company to consummate the Special Redemption will be secured by such funds (the "Trust Funds"). </TABLE> <TABLE> <S> <C> OPTIONAL REDEMPTION BY THE COMPANY.......... The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after , 2001, at the redemption prices set forth herein, plus accrued and unpaid interest to the date fixed for redemption. In addition, at any time prior to , 1999, the Company, at its option, may redeem up to 35% of the aggregate principal amount of the Notes originally issued with the cash proceeds received by the Company from one or more Public Equity Offerings, other than the Concurrent Offering, at any time or from time to time, at a redemption price equal to % of the principal amount thereof, plus accrued and unpaid interest to the date fixed for redemption; PROVIDED, HOWEVER, that at least $104.0 million in aggregate principal amount of the Notes remain outstanding immediately after any such redemption. CHANGE OF CONTROL OFFER..................... Upon a Change of Control, the Company has the obligation to offer to purchase all the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. See "Description of the Notes -- Change of Control" for a discussion of the circumstances in which the Company may not be required to make a Change of Control Offer (as defined). OFFERS TO PURCHASE.......................... In the event of certain asset sales, the Company will be required to offer to repurchase the Notes at 100% of their principal amount plus accrued and unpaid interest, if any, to the date of repurchase with the net proceeds of such asset sales. SUBORDINATION............................... The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company, including all indebtedness of the Company under the Senior Credit Facility. As of June 30, 1996, on a pro forma basis after giving effect to this Offering, the Concurrent Offering, the KTVE Sale, the Financing and the application of the net proceeds therefrom, and to the Phipps Acquisition, the Company would have had approximately $183.6 million of indebtedness outstanding, of which $23.6 million would be Senior Debt. SUBSIDIARY GUARANTEES....................... The Notes will be guaranteed, jointly and severally, fully and unconditionally, on a senior subordinated basis by the Subsidiary Guarantors (the "Subsidiary Guarantees"). The obligations of any Subsidiary Guarantor with respect to its Subsidiary Guarantee will be subordinated in right of payment, to the same extent as the obligations of the Company in respect of the Notes, to all existing and future Guarantor Senior Debt of such Subsidiary Guarantor, which will include any guarantee by such Subsidiary Guarantor of the Company's indebtedness under the Senior Credit Facility. </TABLE> <TABLE> <S> <C> PRINCIPAL COVENANTS......................... The Indenture for the Notes (the "Indenture") will impose certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt or Guarantor Senior Debt and senior in right of payment to the Notes or any Subsidiary Guarantee, incur liens, impose restrictions on the ability of a subsidiary to pay dividends or make certain payments to the Company, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. USE OF PROCEEDS............................. The Company intends to use the proceeds from the sale of the Notes, together with the proceeds of the Concurrent Offering, the other proceeds of the Financing and the Company's working capital, to (i) consummate the Phipps Acquisition, (ii) retire indebtedness under the Old Credit Facility and the Senior Note and (iii) pay related fees and expenses. However, in the event the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996, the Company will be obligated to redeem the Notes. See "The Phipps Acquisition, the KTVE Sale and the Financing" and "Description of the Notes-Redemption-Special Redemption."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001013621_ktve-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001013621_ktve-inc_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..234efb1522b03b62881985b1b1a5693f2c1937cb
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING INFORMATION IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. AS USED HEREIN, UNLESS THE CONTEXT OTHERWISE REQUIRES, THE "COMPANY" MEANS GRAY COMMUNICATIONS SYSTEMS, INC. AND ITS SUBSIDIARIES. THE COMPANY HAS NOT YET CONSUMMATED THE PHIPPS ACQUISITION (AS DEFINED) AND THERE CAN BE NO ASSURANCE THAT THE PHIPPS ACQUISITION WILL BE CONSUMMATED. HOWEVER, EXCEPT WITH RESPECT TO HISTORICAL FINANCIAL STATEMENTS AND UNLESS THE CONTEXT INDICATES OTHERWISE, THE PHIPPS BUSINESS (AS DEFINED) IS INCLUDED IN THE DESCRIPTION OF THE COMPANY. SEE "THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING." UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION GRANTED BY THE COMPANY TO THE UNDERWRITERS IN THE CONCURRENT OFFERING IS NOT EXERCISED. ALL INFORMATION IN THIS PROSPECTUS HAS BEEN ADJUSTED TO GIVE EFFECT TO A 3-FOR-2 SPLIT OF THE CLASS A COMMON STOCK, EFFECTED IN THE FORM OF A STOCK DIVIDEND DECLARED ON OCTOBER 2, 1995. UNLESS OTHERWISE INDICATED, ALL STATION RANK, IN-MARKET SHARE AND TELEVISION HOUSEHOLD DATA IN THIS PROSPECTUS ARE DERIVED FROM THE NIELSEN STATION INDEX, VIEWERS IN PROFILE, DATED NOVEMBER 1995, AS PREPARED BY A.C. NIELSEN COMPANY ("NIELSEN"). THE COMPANY The Company owns and operates seven network-affiliated television stations in medium-size markets in the southeastern United States, six of which are ranked number one in their respective markets (which includes two television stations that are part of the Phipps Business). Five of the stations are affiliated with the CBS Television Network, a division of CBS, Inc. ("CBS") and two are affiliated with the NBC Television Network, a division of the National Broadcasting Company, Incorporated ("NBC"). In connection with the Phipps Acquisition (described below), the Company will be required under current regulations of the Federal Communications Commission (the "FCC") to divest its NBC affiliates in Albany, Georgia and Panama City, Florida. For a discussion of the Company's plans regarding such divestiture, see "Risk Factors -- FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." The Company also owns and operates three daily newspapers, two weekly, advertising only publications ("shoppers"), and a paging business (which is part of the Phipps Business), all located in the Southeast. The Company derives significant operating advantages and cost saving synergies through the size of its television station group and the regional focus of its television and publishing operations. These advantages and synergies include (i) sharing television production facilities, equipment and regionally oriented programming, (ii) the ability to purchase television programming for the group as a whole, (iii) negotiating network affiliation agreements on a group basis and (iv) purchasing newsprint and other supplies in bulk. In addition, the Company believes that its regional focus can provide advertisers with an efficient network through which to advertise in the fast-growing Southeast. In 1993, after the acquisition of a large block of Class A Common Stock by a new investor, the Company implemented a strategy to foster growth through strategic acquisitions. Since 1994, the Company's significant acquisitions have included three television stations and two newspapers, all located in the Southeast. As a result of the Company's acquisitions and in support of its growth strategy, the Company has added certain key members of management and has greatly expanded its operations in the television broadcasting and newspaper publishing businesses. On September 10, 1996, J. Mack Robinson, a director of the Company, was appointed President and Chief Executive Officer of the Company on an interim basis, to succeed Ralph W. Gabbard, who had died suddenly. The Company expects to commence a search to locate a new President as soon as practicable following this Offering. On September 11, 1996, Robert S. Prather, Jr., a director of the Company, was appointed Executive Vice President-Acquisitions on an interim basis. In January 1996, the Company acquired (the "Augusta Acquisition") WRDW-TV ("WRDW"), a CBS affiliate serving Augusta, Georgia (the "Augusta Business"). In December 1995, the Company entered into an asset purchase agreement to acquire (the "Phipps Acquisition") two CBS-affiliated stations, WCTV-TV ("WCTV") serving Tallahassee, Florida/Thomasville, Georgia and WKXT-TV ("WKXT") in Knoxville, Tennessee, a satellite broadcasting business and a paging business (collectively, the "Phipps Business"). The Company believes that the Phipps Acquisition will further enhance the Company's position as a major regional television broadcaster and is highly attractive for a number of reasons, including (i) the stations' strategic fit in the Southeast, (ii) WCTV's leading station market position and WKXT's significant growth potential, (iii) strong station broadcast cash flows, (iv) opportunities for revenue growth utilizing the Company's extensive management expertise with medium-size stations and (v) opportunities for synergies between WCTV and WKXT and the Company's existing stations with regard to revenue enhancement and cost controls. The consummation of the Phipps Acquisition is currently expected to occur by September 30, 1996, although there can be no assurance with respect thereto. In August 1996, the Company sold the assets (the "KTVE Sale") of KTVE Inc. ("KTVE"), a television station serving Monroe, Louisiana/El Dorado, Arkansas for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing. For the year ended December 31, 1995, on a pro forma basis, the Company had net revenues, Media Cash Flow (the sum of broadcast cash flow, publishing cash flow and paging cash flow), operating cash flow and net (loss) of $90.6 million, $30.3 million, $28.1 million and $(3.6) million, respectively. For the six months ended June 30, 1996, on a pro forma basis, the Company had net revenues, Media Cash Flow, operating cash flow and net income of $47.3 million, $17.9 million, $16.3 million and $251,000, respectively. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the year ended December 31, 1995 increased 148.2%, 188.4% and 227.9%, respectively, while net income decreased 230.3% from the historical amounts for the year ended December 31, 1994. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the six months ended June 30, 1996 increased 67.1%, 114.7% and 122.8%, respectively, while net income decreased 78.7% from the historical amounts for the six months ended June 30, 1995. The Company's pro forma net income for its television stations for the year ended December 31, 1995 and for the six months ended June 30, 1996 was $1.6 million and $1.4 million, respectively. The following table sets forth certain information for each of the Company's television stations. <TABLE> <CAPTION> ------------------------------------------------------------------------------------------------------------------ PRO FORMA --------------------------------------- IN-MARKET YEAR ENDED DECEMBER SIX MONTHS ENDED STATION SHARE OF 31, 1995 JUNE 30, 1996 RANK HOUSEHOLDS ------------------- ------------------ NETWORK YEAR DMA CHANNEL/ IN VIEWING NET OPERATING NET OPERATING STATION AFFILIATION MARKET ACQUIRED RANK(1) FREQUENCY DMA(2) TV REVENUES INCOME(6) REVENUES INCOME(6) - -------- ------- ------------- ------- -------- --------- -------- --------- --------- -------- -------- -------- (IN THOUSANDS) (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> WKYT CBS Lexington, KY 1994 68 27/UHF(3) 1 33% $15,553 $5,247 $7,845 $2,701 WYMT CBS Hazard, KY 1994 68 57/UHF(3) 1(4) 24 3,721 831 2,107 530 WRDW CBS Augusta, GA 1996 111 12/VHF 1 36 8,888 1,853 4,489 1,149 WALB (5) NBC Albany, GA 1954 152 10/VHF 1 80 9,445 4,795 5,099 2,658 Panama City, WJHG (5) NBC FL 1960 159 7/VHF 1 53 3,843 270 2,409 476 PHIPPS ACQUISITION WKXT CBS Knoxville, TN 62 8/VHF 3 22 9,269 2,204 4,387 903 Tallahassee, WCTV CBS FL/ 116 6/VHF 1 60 11,862 4,229 6,212 2,254 Thomasville, GA </TABLE> - ------------------------------ (1) Ranking of designated market area as defined by Nielsen ("DMA") served by a station among all DMAs is measured by the number of television households within the DMA based on the November 1995 Nielsen estimates. (2) Represents station rank in DMA as determined by November 1995 Nielsen estimates of the number of television sets tuned to the Company's station as a percentage of the number of television sets in use in the market for the Sunday through Saturday 6 a.m. to 2 a.m. time period. (3) All stations in the market are UHF stations. (4) The market area served by WYMT is an 18-county trading area, as defined by Nielsen, and is included in the Lexington, Kentucky DMA. WYMT's station rank is based upon its position in the 18-county trading area. (5) The Company will be required under current FCC regulations to divest WALB and WJHG in connection with the Phipps Acquisition. For a discussion of the Company's plans, see "Risk Factors-FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." (6) Represents pro forma income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes. The Company's three newspapers, THE ALBANY HERALD, THE ROCKDALE CITIZEN and the GWINNETT DAILY POST and two shoppers had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $21.9 million and $660,000, respectively, for the year ended December 31, 1995, and $11.3 million and $1.3 million for the six months ended June 30, 1996, respectively. The satellite broadcasting business and paging business, which are a part of the Phipps Business, had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $6.2 million and $542,000 for the year ended December 31, 1995 and $3.5 million and $467,000 for the six months ended June 30, 1996, respectively. BUSINESS STRATEGY The Company's business strategy includes the following key elements: - STRONG LOCAL PRESENCE. Each of the Company's television stations seeks to achieve a distinct identity through its emphasis on local programming. A key objective is to build audience loyalty through the development of a strong local news franchise. Strong local news generates high viewership and results in higher ratings for programs both preceding and following the news, which increases revenues and Media Cash Flow. - REGIONAL FOCUS. The Company believes its regional focus has competitive advantages, including the ability to purchase and produce programming that can be used by multiple Company-owned stations as well as the opportunity to sell advertising on multiple stations as a single buy. In addition, the proximity of the Company's operations allows the sharing of equipment, management and marketing expertise. - TARGETED MARKETING. The Company seeks to increase its advertising revenues and Media Cash Flow by expanding existing relationships with local and national advertisers and by attracting new advertisers through targeted marketing techniques and carefully tailored programming. The Company works closely with advertisers to develop advertising campaigns that match specifically targeted audience segments including sponsoring and staging various special events such as fishing tournaments, boat shows and bridal expositions. - COST CONTROLS. Through its strategic planning and annual budgeting processes, the Company continually seeks to identify and implement cost savings opportunities at each of its stations and publications in order to increase Media Cash Flow. The Company's ownership of multiple stations and publications also benefits each operation in negotiating favorable terms with programming syndicators, newsprint suppliers, national sales representatives and other vendors. - SELECTIVE ACQUISITIONS. The Company has focused on acquiring television stations where the Company believes there is the potential for improvements in revenue share, audience share and cost control. The Company focuses on southeastern markets of medium size because the Company believes these markets offer superior opportunities in terms of projected population and economic growth, leading to higher advertising and circulation revenues. In assessing acquisitions, the Company targets stations and publications where it sees specific opportunities for revenue enhancement while controlling expenditures, utilizing management's significant experience with local and national advertising sales and in operating similar businesses. In appropriate circumstances, the Company will dispose of assets that it deems non-essential to its operating or growth strategy. THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING The Company has entered into an agreement to acquire WCTV and WKXT, a satellite broadcasting business and a paging business in the Southeast. The purchase price for the Phipps Acquisition is approximately $185 million, including fees, expenses and working capital and other adjustments. The consummation of the Phipps Acquisition is expected to occur by September 30, 1996, although there can be no assurance with respect thereto. See "Risk Factors -- Possible Non-Consummation of the Phipps Acquisition." Pursuant to an agreement, dated as of May 15, 1996 (the "KTVE Agreement"), with GOCOM Television of Ouachita, L.P., in August 1996, the Company sold the assets of KTVE for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing (approximately $870,000), to the extent collected by the buyer, to be paid to the Company 150 days following the date of closing. For the year ended December 31, 1995, KTVE had net revenues, Media Cash Flow and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) of $4.2 million, $916,000 and $437,000, respectively, and $2.3 million, $598,000 and $360,000, respectively, for the six months ended June 30, 1996. The Company estimates that the gain, net of estimated taxes, on the KTVE Sale was approximately $2.8 million. In addition to the KTVE Sale and the consummation of this Offering, the Concurrent Offering and the Phipps Acquisition, the Company intends to implement a financing plan (the "Financing") to increase liquidity and improve operating and financial flexibility. Pursuant to the Financing, the Company will (i) retire approximately $49.5 million aggregate principal amount of outstanding indebtedness under its senior secured bank credit facility (the "Old Credit Facility"), together with accrued interest thereon, (ii) retire approximately $25.0 million aggregate principal amount of outstanding indebtedness under its senior note due 2003 (the "Senior Note"), together with accrued interest thereon and a prepayment fee, (iii) issue $10.0 million liquidation preference of its Series A preferred stock (the "Series A Preferred Stock") in exchange for its outstanding $10.0 million aggregate principal amount 8% subordinated note (the "8% Note") issued to Bull Run Corporation ("Bull Run"), a principal shareholder of the Company, (iv) issue to Bull Run, J. Mack Robinson, the President, Chief Executive Officer and a director of the Company, and certain of his affiliates $10.0 million liquidation preference of its Series B preferred stock (the "Series B Preferred Stock" and together with the Series A Preferred Stock, the "Preferred Stock") with warrants to purchase up to 500,000 shares of Class A Common Stock (representing 10.1% of the currently issued and outstanding Class A Common Stock after giving effect to the exercise of such warrants) for cash proceeds of $10.0 million and (v) enter into a new senior secured bank credit facility (the "Senior Credit Facility") to provide for a term loan and revolving credit facility aggregating $125.0 million. The cash required for the consummation of the Phipps Acquisition, the repayment of indebtedness and related transaction costs will be provided by the net proceeds of this Offering, the Concurrent Offering and the sale of the Series B Preferred Stock and the warrants, borrowings under the Senior Credit Facility and the Company's working capital. For a description of the Senior Credit Facility and the Preferred Stock, see "Description of Certain Indebtedness" and "Management--Compensation Committee Interlocks and Insider Participation-Issuances of Preferred Stock." The consummation of this Offering and the placement of funds into escrow are conditioned upon the issuance of the Series A Preferred Stock in exchange for the 8% Note, the issuance of the Series B Preferred Stock and the entering into of the Senior Credit Facility. The consummation of this Offering and the placement of the net proceeds thereof into escrow are not conditioned upon the consummation of the Concurrent Offering or the Phipps Acquisition or the other elements of the Financing. However the release of the net proceeds hereof from escrow is conditioned, among other things, upon the satisfaction of the Minimum Equity Condition, the retirement of the Senior Note and the Old Credit Facility and the consummation of the Phipps Acquisition. The Notes are subject to a mandatory redemption on the Special Redemption Date at the Special Redemption Price if either the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996. See "Description of the Notes-Redemption-Special Redemption." The Senior Credit Facility will provide that no borrowings may be made thereunder until the closing of the Phipps Acquisition. Accordingly, if the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied, the Notes will be redeemed by the Company, the Old Credit Facility will remain in place and the Company will not borrow under the Senior Credit Facility. The following table sets forth the estimated sources and uses of funds relating to this Offering, the Concurrent Offering, the Phipps Acquisition and the Financing: <TABLE> <CAPTION> ---------- (IN MILLIONS) AMOUNT ---------- <S> <C> SOURCES OF FUNDS: The Notes offered hereby $160.0 The Concurrent Offering (1) 73.5 Sale of Series B Preferred Stock and Warrants 10.0 Borrowings under the Senior Credit Facility 22.9 Working capital (2) 9.5 ---------- TOTAL $275.9 ---------- ---------- USES OF FUNDS: Consummation of Phipps Acquisition $185.0 Retire indebtedness under the Old Credit Facility (3) 49.5 Retire indebtedness under the Senior Note (4) 25.0 Fees and expenses (5) 16.4 ---------- TOTAL $275.9 ---------- ---------- </TABLE> - ------------------------------ (1) Assumes estimated gross proceeds from the Concurrent Offering of $73.5 million and estimated net proceeds therefrom of $67.6 million. It is a condition of the release from escrow of the net proceeds of this Offering that the Company shall have consummated one or more equity offerings having gross proceeds of not less than $65.0 million. To the extent that the gross proceeds of any such equity offerings are less than $73.5 million, the Company intends to borrow such difference under its Senior Credit Facility. It is anticipated that there will not be a significant interval between the closing of this Offering and the closing of the Concurrent Offering. (2) The source of these funds was the KTVE Sale. (3) Borrowings under the Old Credit Facility bear interest at formula rates based upon the applicable London inter-bank offered rate ("LIBOR") or prime rate at the time of borrowing plus a fixed spread and have a final maturity of 2003. As of June 30, 1996, the weighted average interest rate was 8.94%. (4) The indebtedness under the Senior Note bears interest at 10.7%. (5) Fees and expenses include underwriting costs for the Notes and the Concurrent Offering, fees payable in connection with the negotiation and execution of the Senior Credit Facility, fees payable in connection with the retirement of the Senior Note and legal, accounting and other transaction fees. Prior to the consummation of the Phipps Acquisition and the satisfaction of the Minimum Equity Condition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes. The Trust Funds will be invested in cash equivalents. The proceeds of the Concurrent Offering will be used to repay indebtedness under the Old Credit Facility, to retire the Senior Note and to provide funds for the Phipps Acquisition. THE OFFERING <TABLE> <S> <C> SECURITIES OFFERED.......................... $160,000,000 aggregate principal amount of % Senior Subordinated Notes due 2006. MATURITY DATE............................... , 2006. INTEREST PAYMENT DATES...................... and , commencing , 1997. SPECIAL REDEMPTION BY THE COMPANY........... If the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996, the Company will be required to redeem (the "Special Redemption") the Notes on or prior to December 31, 1996 (the "Special Redemption Date") at a redemption price (the "Special Redemption Price") equal to 101% of the principal amount of the Notes plus accrued and unpaid interest to the Special Redemption Date. At any time prior to December 23, 1996, if the Phipps Acquisition has not been consummated or the Minimum Equity Condition is not satisfied, the Company may, at its option, redeem the Notes, in whole but not in part, at a redemption price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date fixed for redemption. Prior to the consummation of the Phipps Acquisition and the satisfaction of the Minimum Equity Condition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes and the obligation of the Company to consummate the Special Redemption will be secured by such funds (the "Trust Funds"). </TABLE> <TABLE> <S> <C> OPTIONAL REDEMPTION BY THE COMPANY.......... The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after , 2001, at the redemption prices set forth herein, plus accrued and unpaid interest to the date fixed for redemption. In addition, at any time prior to , 1999, the Company, at its option, may redeem up to 35% of the aggregate principal amount of the Notes originally issued with the cash proceeds received by the Company from one or more Public Equity Offerings, other than the Concurrent Offering, at any time or from time to time, at a redemption price equal to % of the principal amount thereof, plus accrued and unpaid interest to the date fixed for redemption; PROVIDED, HOWEVER, that at least $104.0 million in aggregate principal amount of the Notes remain outstanding immediately after any such redemption. CHANGE OF CONTROL OFFER..................... Upon a Change of Control, the Company has the obligation to offer to purchase all the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. See "Description of the Notes -- Change of Control" for a discussion of the circumstances in which the Company may not be required to make a Change of Control Offer (as defined). OFFERS TO PURCHASE.......................... In the event of certain asset sales, the Company will be required to offer to repurchase the Notes at 100% of their principal amount plus accrued and unpaid interest, if any, to the date of repurchase with the net proceeds of such asset sales. SUBORDINATION............................... The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company, including all indebtedness of the Company under the Senior Credit Facility. As of June 30, 1996, on a pro forma basis after giving effect to this Offering, the Concurrent Offering, the KTVE Sale, the Financing and the application of the net proceeds therefrom, and to the Phipps Acquisition, the Company would have had approximately $183.6 million of indebtedness outstanding, of which $23.6 million would be Senior Debt. SUBSIDIARY GUARANTEES....................... The Notes will be guaranteed, jointly and severally, fully and unconditionally, on a senior subordinated basis by the Subsidiary Guarantors (the "Subsidiary Guarantees"). The obligations of any Subsidiary Guarantor with respect to its Subsidiary Guarantee will be subordinated in right of payment, to the same extent as the obligations of the Company in respect of the Notes, to all existing and future Guarantor Senior Debt of such Subsidiary Guarantor, which will include any guarantee by such Subsidiary Guarantor of the Company's indebtedness under the Senior Credit Facility. </TABLE> <TABLE> <S> <C> PRINCIPAL COVENANTS......................... The Indenture for the Notes (the "Indenture") will impose certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt or Guarantor Senior Debt and senior in right of payment to the Notes or any Subsidiary Guarantee, incur liens, impose restrictions on the ability of a subsidiary to pay dividends or make certain payments to the Company, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. USE OF PROCEEDS............................. The Company intends to use the proceeds from the sale of the Notes, together with the proceeds of the Concurrent Offering, the other proceeds of the Financing and the Company's working capital, to (i) consummate the Phipps Acquisition, (ii) retire indebtedness under the Old Credit Facility and the Senior Note and (iii) pay related fees and expenses. However, in the event the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996, the Company will be obligated to redeem the Notes. See "The Phipps Acquisition, the KTVE Sale and the Financing" and "Description of the Notes-Redemption-Special Redemption."
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Consolidated Financial Statements and notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus assumes (i) the conversion immediately prior to the consummation of this offering of all of the shares of Series A Preferred Stock (as defined herein) and Class B Stock (as defined herein) of the Company into shares of Common Stock, (ii) no exercise of the Stock Purchase Warrants (as defined herein), (iii) a 5.361849-for-one reverse stock split of the Common Stock immediately prior to the consummation of this offering and (iv) no exercise of the Underwriters' over-allotment option. See "Capitalization" and "Certain Transactions." Unless the context indicates otherwise, all references in this Prospectus to the "Company" or "UtiliMed" include UtiliMed, Inc., its predecessors and its wholly-owned subsidiaries, UtiliMed C I, Inc. and UtiliMed P II, Inc. THE COMPANY UtiliMed is the nation's leading manager of diagnostic imaging services, based on its own market research. The Company contracts with large healthcare payors to manage the provision of diagnostic imaging services to members of payors' healthcare plans with the goal of reducing the costs and improving the quality and utilization of diagnostic imaging services. Current clients include payors such as Blue Cross Blue Shield, Cigna Healthcare, Inc. and United Healthcare, Inc. At March 31, 1996, the Company managed diagnostic imaging services for 16 clients representing over 2.5 million lives in 13 states. In addition, the Company signed a new contract in March 1996 covering approximately 88,000 lives which was implemented in June 1996. Founded in December 1989, the Company has achieved rapid growth, with revenues growing from approximately $2.6 million in 1991 to $96.4 million in 1995 and covered lives increasing from 102,000 at December 31, 1991 to over 2.5 million at March 31, 1996. The Company estimates that approximately eight to ten percent of payors' medical expenditures are for diagnostic imaging services. Accordingly, the Company believes a significant opportunity exists for payors to reduce costs while maintaining quality through more effective management of diagnostic imaging services. As the leading manager of diagnostic imaging services, the Company believes that it is well positioned to take advantage of what Company data indicates is the relatively unpenetrated market for outsourced management of such services. The Company has two core products, CDIP and RMP (defined below), which are designed to meet its clients' objectives of reducing the cost and improving the quality of diagnostic imaging services. UtiliMed does not provide diagnostic imaging services. Rather, it utilizes CDIP and RMP to manage the provision of such services to payors' members by radiologists, physicians and other specialists. The core elements of the Company's two products include: (i) Assessment. UtiliMed provides a systematic review of the facility or office of each provider affiliated with a client, assessing the integrity of the provider's equipment, the quality and training of its personnel, and its policies and procedures pertaining to quality and patient safety. (ii) Privileging. The Company uses its expertise to recommend to its clients that certain diagnostic imaging procedures be performed by specific providers. (iii) Precertification. Precertification is a process whereby referring physicians are required to certify diagnostic imaging procedures with UtiliMed before they are performed by providers. The Company's precertification process aims to maintain or enhance the quality of care while reducing overutilization of diagnostic imaging services. UtiliMed emphasizes precertification for more expensive procedures such as MRI, CT and nuclear medicine, which according to UtiliMed's data, account for approximately 11.0 percent of the volume of diagnostic imaging performed but approximately 42.2 percent of the cost of diagnostic imaging. (iv) Retrospective Utilization Reporting. The Company maintains an extensive database of both clinical information and claims data. Using the information in its database, the Company produces a series of utilization management reports in which it analyzes (a) the diagnostic imaging services that referring physicians order and the frequency with which particular services are ordered and (b) the practice patterns of providers. The Company focuses its utilization management reporting and analysis on optimizing the use of diagnostic imaging procedures by allowing clients to evaluate affiliated providers and enabling such providers to benchmark themselves against their peer physicians. (v) Physician Education. UtiliMed uses its expertise in diagnostic imaging and information derived from its database to educate physicians affiliated with its clients concerning developments in diagnostic imaging and procedures that enhance the efficient delivery of diagnostic imaging services. UtiliMed offers its clients an at risk or capitated product, Capitated Diagnostic Imaging Program ("CDIP") and a non-capitated product, Resource Management Program ("RMP"). Both products incorporate the core elements described above. In its CDIP product, UtiliMed contracts with its clients to establish and maintain networks of diagnostic imaging providers. The client pays the Company a network management fee and a per member per month ("pmpm") fee and the Company assumes the responsibility for processing the claims and paying the costs of diagnostic imaging services provided to the client's members by diagnostic imaging providers. In its recently introduced RMP product, in return for a fee, the Company manages the diagnostic imaging services provided to a client's members by diagnostic imaging providers but does not assume the responsibility for processing the claims and paying the costs of services provided. Use of UtiliMed's CDIP product can result in cost savings of approximately 20 percent to clients within the first year and the Company anticipates its RMP product will result in comparable savings to its clients in the first year. A core element of the Company's products is its database of claims data, clinical reports, and assessment information which is an important tool for network and utilization management. At March 31, 1996, the database contained claims data for over eight million lives, assessment data for over 10,000 imaging sites and over one million clinical reports. The number of monthly clinical reports added to the database has grown from approximately 35,000 in March 1995 to approximately 54,000 in March 1996. The database enables the Company to develop protocols, produce outcomes and benchmarking analyses (both provider-specific and diagnosis-specific) and to create educational programs for physicians and other providers. The Company believes that its database and analytical reports give it a competitive advantage in providing a comprehensive approach to managing the cost, quality and utilization of diagnostic imaging services. UtiliMed's objective is to enhance its leading position in diagnostic imaging managed care services and continue its growth by pursuing a wide range of significant new opportunities. The Company sees opportunities for growth both in establishing new client relationships and expanding relationships with existing clients--by extending coverage to additional local health plans of regional and national payors and by serving additional membership populations of existing clients, such as members covered under Medicare and Medicaid programs. The Company will also seek to market RMP to payors other than HMOs, such as self-funded employers and indemnity insurers, and to market its products directly to large employer groups, benefits administrators, and benefits consulting groups. The Company believes its ability to combine utilization management, quality management, outcomes management and network management provides an attractive alternative for payors in managing diagnostic imaging services. COMPANY DEVELOPMENT Since November 1994, the Company has experienced significant change in its capitalization, operations and management. In November 1994, the Company redeemed shares of capital stock from the founders of the Company who were also management. To finance this transaction, the Company issued debt and equity, including convertible preferred stock, to certain private equity investors. The redemption and investment (together, the "Recapitalization") were intended to provide limited liquidity for the founders, and to provide organizational and structural benefits to the Company as a private company. While the Company's revenues continued to grow, the operating results contemplated by the Recapitalization for 1994 and the first half of 1995 were not realized and the Company continued to experience negative cash flow. Consequently, the capitalization, management and operating plan contemplated by the Recapitalization were changed in a transaction in September 1995 (the "1995 Transaction") between the founders and the private equity investors. In connection with the 1995 Transaction, a new management team was assembled which is implementing business initiatives designed to improve financial condition and results of operations. The Company believes that, while no assurance can be given, the implementation of these initiatives together with this offering will position the Company for improved operating and financial performance. See "Risk Factors," "The Company" and "Certain Transactions." THE OFFERING <TABLE><CAPTION> <S> <C> Common Stock offered......................... 2,500,000 shares Common Stock to be outstanding after this offering(1).................................. 6,762,147 shares Use of Proceeds.............................. $17.6 million to repay indebtedness, $1 million for computer hardware enhancements, and $ to achieve a positive working capital position to support the Company's growth strategy. See "Use of Proceeds" and "Certain Transactions." Proposed American Stock Exchange Symbol...... MED </TABLE> - ------------ (1) Excludes 57,745 shares of Common Stock issuable upon exercise of outstanding employee stock options under the Company's Time Accelerated Restricted Stock Option Plan for Certain Employees ("TARSOP"), 55,108 shares of Common Stock issuable upon exercise of outstanding stock options, shares of Common Stock reserved for issuance under the Company's 1996 Employee Stock Option Plan (the "1996 Option Plan") and shares of Common Stock reserved for issuance under the Company's 1996 Employee Stock Purchase Plan (the "Employee Plan"). See "Management--Executive Compensation," "Management--TARSOP," "Management--1996 Option Plan" and "Management--Employee Stock Purchase Plan." Also excludes 112,770 shares of Common Stock issuable upon the exercise of the Stock Purchase Warrants, which are exercisable in limited circumstances, including (i) the consummation of this offering if the initial offering price is at least $24.90 per share and (ii) on or prior to June 30, 1997 (or, under certain conditions, September 30, 1997), a sale of the capital stock of the Company in a merger, consolidation or other business combination in which certain shareholders of the Company receive proceeds in excess of $75 million (the "Stock Purchase Warrants"). See "Risk Factors-- Dilution" and "Certain Transactions--1995 Transaction" and "Certain Transactions--Stock Purchase Warrants." SUMMARY FINANCIAL INFORMATION <TABLE><CAPTION> THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ----------------------------------------------------- --------------------- 1991 1992 1993 1994 1995 1995 1996 ------- ------- --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> SUMMARY OF OPERATIONS DATA: Contract revenues: Continuing contracts....... $ 2,573 $ 8,063 $ 19,308 $ 50,882 $ 76,457 $ 18,130 $ 24,055 Terminated contracts(1).... -- 2,285 7,079 15,697 19,960 8,626 -- ------- ------- --------- --------- --------- --------- --------- Total contract revenues.................... $ 2,573 $10,348 $ 26,387 $ 66,579 $ 96,417 $ 26,756 $ 24,055 ------- ------- --------- --------- --------- --------- --------- ------- ------- --------- --------- --------- --------- --------- Cost of services: Continuing contracts....... $ 2,138 $ 6,883 $ 16,916 $ 49,792 $ 72,365 $ 17,859 $ 20,628 Terminated contracts(1).... -- 1,753 5,781 16,696 18,437 8,975 -- ------- ------- --------- --------- --------- --------- --------- Total cost of services... $ 2,138 $ 8,636 $ 22,697 $ 66,488 $ 90,802 $ 26,834 $ 20,628 ------- ------- --------- --------- --------- --------- --------- ------- ------- --------- --------- --------- --------- --------- Net loss.................... $ (354) $ (106) $ (2,608) $ (13,879) $ (18,774) $ (5,390) $ (1,440)(2) ------- ------- --------- --------- --------- --------- --------- ------- ------- --------- --------- --------- --------- --------- Pro forma net loss per share(3).................... $ (0.57) $ (3.05) $ (4.37) $ (1.25) $ (0.33) Number of shares used in pro forma per share computations(3)............. 4,568,824 4,547,914 4,296,439 4,303,522 4,375,823 <CAPTION> MARCH 31, 1996 -------------------------- DECEMBER 31, 1995 ACTUAL AS ADJUSTED(4) ----------------------- -------- -------------- (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Working capital (deficit)....................... $ (18,644) $(19,766) $ 5,330 Total assets.................................... 10,090 16,768 Payables to plans and providers................. 20,552 22,304 22,304 Total debt...................................... 10,499 17,775 506 Shareholders' equity (deficit).................. (61,267) (62,865) <CAPTION> AS OF DECEMBER 31, AS OF MARCH 31, ----------------------------------------------------- --------------------- 1991 1992 1993 1994 1995 1995 1996 ------- ------- --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> <C> STATISTICAL DATA:(5) Covered lives: CDIP.......................... 102,000 202,000 485,000 1,035,000 1,152,000 1,098,000 1,380,000 RMP........................... -- -- -- -- 1,111,000 -- 1,166,000 Number of contracts: CDIP.......................... 4 5 9 12 12 12 13 RMP........................... -- -- -- -- 3 -- 3 Medical loss ratio-capitated(6)............. 83.1% 85.4% 87.6% 97.9% 96.9% 98.5% 94.0% </TABLE> - ------------ (1) Represents seven CDIP contracts that were terminated in the third and fourth quarters of 1995 (the "Terminated Contracts"). Five of the Terminated Contracts were unprofitable contracts terminated by the Company's new management team as part of the initiatives being implemented subsequent to the 1995 Transaction (as defined herein). These unprofitable contracts were entered into without establishment of appropriate provider networks, thereby placing the Company at significant financial risk. The other two Terminated Contracts were terminated prior to their completion by mutual agreement of the Company and the clients. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Clients; Capitation Contracts and Provider Contracts; RMP Contracts." (2) Net loss includes $593,000 for stock based compensation expense which is a non-cash charge. Of this amount $527,000 is non-recurring. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Three Months Ended March 31, 1996 and 1995." (3) Net loss per share is computed by dividing net loss by the number of common and common equivalent shares outstanding during the periods in accordance with the applicable rules of the Securities and Exchange Commission (the "Commission"). All stock options and restricted common stock issued have been considered as outstanding common stock equivalents for all periods presented, even if anti-dilutive, under the treasury stock method (based on initial public offering price). Shares of Common Stock issuable upon conversion of the Series A Preferred Stock and Class B Stock are assumed to be common stock equivalents for all periods presented. (4) Adjusted to reflect the sale by the Company of 2,500,000 shares of Common Stock offered hereby and the application of the net proceeds therefrom as described under "Use of Proceeds." (5) The information set forth in Statistical Data reflects only continuing CDIP and RMP contracts. Including the Terminated Contracts, the number of capitated lives were 102,000, 314,000, 625,000, 1,514,000 and 1,152,000 and the number of CDIP contracts were 4, 6, 11, 17 and 12 at December 31, 1991, 1992, 1993, 1994 and 1995, respectively, and the number of RMP contracts at December 31, 1995 was three. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
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+PROSPECTUS SUMMARY The following information is qualified in its entirety by reference to, and should be read in conjunction with, the more detailed information and financial statements and related notes appearing elsewhere in this Prospectus. Prior to the consummation of the Offerings, the ownership interests in the Company and BCC Holding will be reorganized. See "The Reorganization." The information set forth in this Prospectus assumes that the reorganization has occurred. Operating income before depreciation and amortization and loss on disposal of obsolete plant ("EBITDA") as used in this Prospectus is not the defined term used in the Indenture governing the Notes, but is included as supplemental disclosure because it is a widely accepted financial indicator of a company's ability to incur and service debt. EBITDA, however, is not a measure determined in accordance with generally accepted accounting principles ("GAAP") and should not be considered in isolation or as a substitute for or an alternative to net income (loss), cash flow from operating activities or other income or cash flow data prepared in accordance with GAAP or as a measure of a company's operating performance or liquidity. THE COMPANY Bresnan Communications Company Limited Partnership (the "Company" or "Bresnan") owns, acquires, develops and operates cable television systems in the Midwest and Southeast United States. The Company's focus is on operating cable television systems in "classic" markets, where subscribers generally require cable television to receive a broad array of broadcast television signals. As of March 31, 1996, the Company's cable television systems passed approximately 311,400 homes and served approximately 210,500 basic subscribers. The total number of basic subscribers served by the Company includes approximately 118,300 basic subscribers in Michigan and northeastern Wisconsin (the "Michigan Region"), approximately 61,000 basic subscribers in Minnesota and northwestern Wisconsin (the "Minnesota Region") and approximately 31,200 basic subscribers in Georgia and Mississippi (the "Southeast Region"). The Company's cable television services are marketed under the names "Bresnan Communications" and "Bresnan." William J. Bresnan and Tele-Communications, Inc. ("TCI"), through their respective affiliates, effectively own approximately 20% and 78%, respectively, of the outstanding partnership interests of the Company. Mr. Bresnan, a cable television pioneer with nearly 40 years of industry experience, founded the Company in 1984 and, in partnership with TCI, has developed the Company through internal growth and acquisitions. TCI is the largest cable television operator in the United States, with consolidated systems serving approximately 12.5 million domestic subscribers. Management believes that its affiliation with TCI provides substantial benefits to the Company, including (i) the ability to purchase various programming and certain equipment at rates approximating those available to TCI, (ii) access to technological developments and (iii) access to various TCI alternative methods of distribution. See "Certain Relationships and Related Transactions." The Company has initiated a significant capital spending program (the "Capital Improvement Program"), which continues the planned upgrade of substantially all of its cable television plant to high-capacity, broadband hybrid fiber optic/coaxial cable plant. Management believes that the Capital Improvement Program will provide the Company with the core platform to offer enhanced and new telecommunications services, including additional channels and tiers, pay-per-view (including near video-on-demand), high-speed data services and Internet access, digital advertisement insertion, interactive services and telephony (including personal communications services ("PCS")). The Capital Improvement Program is underway and is scheduled to be completed by the end of 1997. Assuming no change in the Company's subscriber base and system composition subsequent to March 31, 1996, following the completion of the Capital Improvement Program, management believes that approximately 90% of the Company's basic subscribers will be served by hybrid fiber optic/coaxial cable television plant and approximately 79% will be served by plant with a bandwidth of 750 MHz and will be able to receive the equivalent of 80 or more analog channels. Bresnan's operating strategy includes the following elements: - Clustering in Targeted Markets. The Company seeks to operate cable television systems in small- and medium-sized cities and towns that have attractive competitive characteristics and that have residents who management believes possess a strong sense of community. The Company's primary focus is on operating in "classic" markets, where subscribers generally require cable television to receive a broad array of broadcast television signals. In addition, subscribers in small-and medium-sized cities and towns may have fewer entertainment alternatives than urban subscribers. Management believes that there are significant opportunities to generate revenue by providing enhanced and new telecommunications services in these markets due to the Company's high levels of penetration and the limited number of competitors in these markets. Within its targeted markets, the Company continues to seek to take advantage of the strategic and operational benefits of having its subscribers concentrated in regions and clusters. Management believes that the Company can derive significant operating efficiencies and revenue opportunities from the clustering of cable television systems. These operating efficiencies may include centralized management, billing, marketing, customer service, technical support and administrative functions. Management believes that clustering will provide the Company with additional revenue opportunities, including the ability to offer regional programming and advertising. The Company intends to continue to acquire cable television systems in markets that meet its target criteria and to cluster the systems in such markets. - Upgrading the Company's Cable Television Systems. Management believes that adhering to high technical standards is integral to increasing programming choices, improving customer satisfaction and developing enhanced and new revenue sources. The Capital Improvement Program is intended to create state-of-the-art systems that will afford the Company opportunities to realize cash flow growth. Management believes that the Capital Improvement Program will provide the Company with the core platform to offer enhanced and new telecommunications services, including additional channels and tiers, pay-per-view (including near-video-on-demand), high-speed data services and Internet access, digital advertisement insertion, interactive services and telephony (including PCS). - Maintaining Strong Community Relations. Management believes that maintaining strong community relations will continue to be important to Bresnan's long-term success. The Company's community-oriented initiatives include educational programs and the sponsorship of programs and events recognizing outstanding local citizens. In addition, certain members of the Company's management team, including William J. Bresnan, host community events for political and business leaders as well as representatives of the local media where they discuss the operations of the Company and any recent developments in the telecommunications industry which may have an impact on their communities. Management believes that its ongoing community relations initiatives result in consumer and governmental goodwill and name recognition, which have increased customer loyalty and will likely facilitate future efforts to provide new telecommunications services. - Emphasizing Customer Satisfaction. The Company strives to provide quality customer service and attractive programming choices at reasonable rates. The Company has established stringent internal customer service standards, which management believes meet and, in certain respects, exceed those established by the National Cable Television Association ("NCTA"). The Company has been repeatedly recognized by the industry for its commitment to innovative customer service programs. In March of 1996, the Company was the recipient of its fourth Beacon Award from the Cable Television Public Affairs Association (the "CTPAA"). This year's award recognized Bresnan's "On Time Program" as the outstanding customer relations program by a multiple system operator (an "MSO") in the United States. Management believes that its customer service efforts have contributed to its subscriber growth and ongoing patronage by existing subscribers. - Emphasizing Sales and Marketing. The Company seeks to increase penetration levels for its basic services, "preferred basic" services, premium services and ancillary services through a variety of promotions and marketing strategies. For example, the Company has recently introduced a marketing campaign with Sprint Corporation to offer a combination of cable television and long distance services. The Company also intends to continue to offer periodically previews and promotional pricing of premium services. In addition, the Company is able to market its products and services to its customers at Company offices as a high percentage of its customers, relative to the industry, pay their cable television bills in person. Management believes that its experience in sales and marketing will be valuable as the Company markets new products and services in the future. Bresnan Capital Corporation, a Delaware corporation ("BCC"), is a wholly owned subsidiary of the Company formed solely for the purpose of serving as an issuer of the Notes. The Notes will be joint and several obligations of the Company and BCC, although the Company will receive all of the net proceeds of the Offering. Certain financial statements of BCC have not been provided herein because BCC was formed on April 25, 1996 and has not conducted any operations since that date. The Notes are not obligations of, and are not guaranteed by, either the partners of the Company or their respective affiliates, including William J. Bresnan and TCI. THE OFFERING NOTES OFFERED................. $100.0 million principal amount of % Senior Notes Due 2006. ISSUERS....................... Bresnan Communications Company Limited Partnership, a Michigan limited partnership, and Bresnan Capital Corporation, a Delaware corporation. MATURITY...................... The Notes will mature on , 2006. INTEREST PAYMENT DATES........ Interest on the Notes is payable semiannually on each and , commencing , 1996. OPTIONAL REDEMPTION........... The Notes will be redeemable at the option of the Issuers, in whole or in part, at any time on or after , , at the redemption prices set forth herein, plus accrued and unpaid interest, if any, to the date of redemption. SINKING FUND.................. None. CHANGE OF CONTROL............. Upon a Change of Control, the Issuers will be required to make an offer to purchase the Notes at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase. See "Description of Notes -- Purchase at the Option of Holders Upon a Change of Control." RANKING....................... The Notes will be senior unsecured obligations of the Issuers and will rank pari passu in right of payment with all existing and future senior indebtedness of the Issuers, including indebtedness under the Bank Credit Facility. The Notes will rank senior in right of payment to any future subordinated indebtedness of the Issuers. BCC has nominal assets and does not conduct any operations. As of March 31, 1996, after giving effect to the Offerings and the application of the net proceeds thereof, the total indebtedness of the Issuers would have been approximately $109.7 million and the total consolidated indebtedness of BCC Holding would have been approximately $209.7 million. As of such date, after giving effect to the Offerings and the application of the net proceeds thereof, the Issuers would have had approximately $2.2 million of indebtedness subordinated to the Notes. See "Risk Factors -- Substantial Leverage," "Capitalization" and "Description of Notes." CERTAIN COVENANTS............. The Indenture (as defined herein) for the Notes will contain limitations on, among other things, (a) the incurrence of additional indebtedness, (b) the payment of dividends and other distributions with respect to Equity Interests of the Company and the purchase, redemption or retirement of Equity Interests of the Company, (c) the incurrence of certain Liens, (d) transactions with Affiliates and (e) certain consolidations, mergers and transfers of assets. During any period of time the ratings assigned to the Notes are Investment Grade Ratings, the foregoing covenants will cease to be in effect with the exception of the covenants which contain limitations on, among other things, (a) the incurrence of certain Liens and (b) certain consolidations, mergers and transfers of assets. All of these limitations are subject to a number of important qualifications. See "Description of Notes -- Certain Covenants." CONCURRENT BCC HOLDING OFFERING...................... Concurrently with the Offering, BCC Holding, the general partner of the Company, and BCC Holding Capital Corporation, a wholly owned subsidiary of BCC Holding, are jointly offering, by means of a separate prospectus, $100.0 million aggregate principal amount of their % Senior Debentures Due 2008. The net proceeds from the BCC Holding Offering will be contributed to the Company by BCC Holding. The Offering is conditioned upon, and is a condition to, the consummation of the BCC Holding Offering. See "Concurrent BCC Holding Offering." USE OF PROCEEDS............... The net proceeds of the Offerings, including the net proceeds from the BCC Holding Offering to be contributed to the Company by BCC Holding (together, approximately $195.0 million), will be used to repay amounts outstanding under the Bank Credit Facility (approximately $156.2 million, including accrued interest), to repay indebtedness outstanding under a subordinated promissory note (the "TCID Note") in favor of TCID of Michigan, Inc. ("TCID"), an affiliate of TCI (approximately $37.3 million, including accrued interest), and for general purposes. See "Use of Proceeds," "Certain Relationships and Related Transactions" and "Description of Bank Credit Facility." RISK FACTORS.................. See "Risk Factors" for a discussion of certain factors that should be considered by prospective purchasers of the Notes. SUMMARY FINANCIAL AND OPERATING DATA (DOLLARS IN THOUSANDS EXCEPT PER SUBSCRIBER DATA) The summary financial data as of and for each of the years in the five-year period ended December 31, 1995 set forth below have been derived from the audited financial statements of the Company. The summary financial data as of and for the three-month period ended March 31, 1996 set forth below have been derived from the unaudited financial statements of the Company. The Company acquired cable television systems serving (i) Ontonagon, Michigan on December 31, 1991; (ii) Grenada, Mississippi on December 3, 1992; (iii) Hinesville, Georgia on December 1, 1993; (iv) Mankato, Marshall and Montevideo, Minnesota on July 25, 1994; (v) Bruce, Mississippi on January 31, 1995; and (vi) Crosby, Minnesota on August 1, 1995. Each of the acquisitions made by the Company was accounted for pursuant to the purchase method of accounting; accordingly, the Company's financial and operating data include the financial and operating data of these cable television systems since the dates of their respective acquisitions. <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, -------------------------------------------------------- -------------------- 1991 1992 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue............................. $ 41,914 $ 46,347 $ 51,902 $ 61,380 $ 70,389 $ 16,692 $ 18,302 Operating costs and expenses: Cost of service................... 5,124 5,807 6,681 8,126 9,219 2,121 2,251 Programming expense............... 8,933 9,059 10,185 13,012 15,902 3,849 4,323 Selling, general and administrative.................. 9,574 10,359 12,111 14,459 16,713 3,838 4,343 Depreciation and amortization .... 14,636 15,006 14,844 16,843 21,930 5,293 5,575 Loss on disposal of obsolete plant........................... 1,368 176 5,493 43 275 -- 156 -------- -------- -------- -------- -------- -------- -------- Total operating costs and expenses.................... 39,635 40,407 49,314 52,483 64,039 15,101 16,648 -------- -------- -------- -------- -------- -------- -------- Operating income.................... 2,279 5,940 2,588 8,897 6,350 1,591 1,654 Other (income) expense: Interest.......................... 11,691 8,578 7,571 12,557 16,063 4,091 3,786 Gain on investment................ -- (1,348) -- -- (390) (390) -- -------- -------- -------- -------- -------- -------- -------- Net loss............................ $ (9,412) $ (1,290) $ (4,983) $ (3,660) $ (9,323) $ (2,110) $ (2,132) ======== ======== ======== ======== ======== ======== ======== BALANCE SHEET DATA (end of period): Total assets........................ $ 93,105 $ 99,158 $117,587 $150,619 $143,992 $148,533 $141,244 Total debt.......................... 130,950 134,227 156,598 187,798 185,480 187,998 186,345 Partners' (deficit)................. (52,080) (53,370) (58,353) (62,013) (71,336) (64,123) (73,468) FINANCIAL RATIOS AND OTHER DATA: EBITDA(a)........................... $ 18,283 $ 21,122 $ 22,925 $ 25,783 $ 28,555 $ 6,884 $ 7,385 Capital expenditures................ 6,945 11,742 11,982 6,323 14,640 2,106 3,133 Ratio of total debt to EBITDA(b).... 7.16x 6.35x 6.83x 7.28x 6.50x 6.83x 6.30x Monthly revenue per average basic subscriber........................ $ 23.94 $ 25.27 $ 26.09 $ 27.16 $ 28.47 $ 27.27 $ 29.05 Annual EBITDA per average basic subscriber(b)..................... 125.30 138.18 138.29 136.91 138.58 134.97 140.68 Annual capital expenditures per average basic subscriber(b)....... 47.60 76.81 72.28 33.58 71.05 41,29 59.68 SUMMARY SUBSCRIBER DATA (end of period): Homes passed........................ 224,078 231,710 267,096 297,763 310,093 300,094 311,359 Basic subscribers................... 148,201 157,553 174,009 202,636 209,459 205,374 210,500 Basic penetration................... 66.1% 68.0% 65.1% 68.1% 67.5% 68.4% 67.6% Premium units....................... 63,645 73,013 109,450 136,179 142,299 138,300 140,267 Pay-to-basic ratio(c)............... 42.9% 46.3% 62.9% 67.2% 67.9% 67.3% 66.8% </TABLE> - --------------- (a) EBITDA represents operating income before depreciation and amortization and loss on disposal of obsolete plant. EBITDA is presented because it is a widely accepted financial indicator of a company's ability to incur and service debt. EBITDA, however, is not a measure determined in accordance with GAAP and should not be considered in isolation or as a substitute for or an alternative to net income (loss), cash flow from operating activities or other income or cash flow data prepared in accordance with GAAP or as a measure of a company's operating performance or liquidity. EBITDA as used in this Prospectus is not the defined term used in the Indenture governing the Notes. (b) With respect to the three months ended March 31, 1995 and 1996, EBITDA and capital expenditures have been annualized for comparative purposes. (c) Pay-to-basic ratio measures premium units as a percentage of basic subscribers and, as a result of the competitive pricing of premium service packages, does not correspond to a proportionate increase in operating income or EBITDA.
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+PROSPECTUS SUMMARY The following information is qualified in its entirety by reference to, and should be read in conjunction with, the more detailed information and financial statements and related notes appearing elsewhere in this Prospectus. Prior to the consummation of the Offerings, the ownership interests in the Company and BCC Holding will be reorganized. See "The Reorganization." The information set forth in this Prospectus assumes that the reorganization has occurred. Operating income before depreciation and amortization and loss on disposal of obsolete plant ("EBITDA") as used in this Prospectus is not the defined term used in the Indenture governing the Notes, but is included as supplemental disclosure because it is a widely accepted financial indicator of a company's ability to incur and service debt. EBITDA, however, is not a measure determined in accordance with generally accepted accounting principles ("GAAP") and should not be considered in isolation or as a substitute for or an alternative to net income (loss), cash flow from operating activities or other income or cash flow data prepared in accordance with GAAP or as a measure of a company's operating performance or liquidity. THE COMPANY Bresnan Communications Company Limited Partnership (the "Company" or "Bresnan") owns, acquires, develops and operates cable television systems in the Midwest and Southeast United States. The Company's focus is on operating cable television systems in "classic" markets, where subscribers generally require cable television to receive a broad array of broadcast television signals. As of March 31, 1996, the Company's cable television systems passed approximately 311,400 homes and served approximately 210,500 basic subscribers. The total number of basic subscribers served by the Company includes approximately 118,300 basic subscribers in Michigan and northeastern Wisconsin (the "Michigan Region"), approximately 61,000 basic subscribers in Minnesota and northwestern Wisconsin (the "Minnesota Region") and approximately 31,200 basic subscribers in Georgia and Mississippi (the "Southeast Region"). The Company's cable television services are marketed under the names "Bresnan Communications" and "Bresnan." William J. Bresnan and Tele-Communications, Inc. ("TCI"), through their respective affiliates, effectively own approximately 20% and 78%, respectively, of the outstanding partnership interests of the Company. Mr. Bresnan, a cable television pioneer with nearly 40 years of industry experience, founded the Company in 1984 and, in partnership with TCI, has developed the Company through internal growth and acquisitions. TCI is the largest cable television operator in the United States, with consolidated systems serving approximately 12.5 million domestic subscribers. Management believes that its affiliation with TCI provides substantial benefits to the Company, including (i) the ability to purchase various programming and certain equipment at rates approximating those available to TCI, (ii) access to technological developments and (iii) access to various TCI alternative methods of distribution. See "Certain Relationships and Related Transactions." The Company has initiated a significant capital spending program (the "Capital Improvement Program"), which continues the planned upgrade of substantially all of its cable television plant to high-capacity, broadband hybrid fiber optic/coaxial cable plant. Management believes that the Capital Improvement Program will provide the Company with the core platform to offer enhanced and new telecommunications services, including additional channels and tiers, pay-per-view (including near video-on-demand), high-speed data services and Internet access, digital advertisement insertion, interactive services and telephony (including personal communications services ("PCS")). The Capital Improvement Program is underway and is scheduled to be completed by the end of 1997. Assuming no change in the Company's subscriber base and system composition subsequent to March 31, 1996, following the completion of the Capital Improvement Program, management believes that approximately 90% of the Company's basic subscribers will be served by hybrid fiber optic/coaxial cable television plant and approximately 79% will be served by plant with a bandwidth of 750 MHz and will be able to receive the equivalent of 80 or more analog channels. Bresnan's operating strategy includes the following elements: - Clustering in Targeted Markets. The Company seeks to operate cable television systems in small- and medium-sized cities and towns that have attractive competitive characteristics and that have residents who management believes possess a strong sense of community. The Company's primary focus is on operating in "classic" markets, where subscribers generally require cable television to receive a broad array of broadcast television signals. In addition, subscribers in small-and medium-sized cities and towns may have fewer entertainment alternatives than urban subscribers. Management believes that there are significant opportunities to generate revenue by providing enhanced and new telecommunications services in these markets due to the Company's high levels of penetration and the limited number of competitors in these markets. Within its targeted markets, the Company continues to seek to take advantage of the strategic and operational benefits of having its subscribers concentrated in regions and clusters. Management believes that the Company can derive significant operating efficiencies and revenue opportunities from the clustering of cable television systems. These operating efficiencies may include centralized management, billing, marketing, customer service, technical support and administrative functions. Management believes that clustering will provide the Company with additional revenue opportunities, including the ability to offer regional programming and advertising. The Company intends to continue to acquire cable television systems in markets that meet its target criteria and to cluster the systems in such markets. - Upgrading the Company's Cable Television Systems. Management believes that adhering to high technical standards is integral to increasing programming choices, improving customer satisfaction and developing enhanced and new revenue sources. The Capital Improvement Program is intended to create state-of-the-art systems that will afford the Company opportunities to realize cash flow growth. Management believes that the Capital Improvement Program will provide the Company with the core platform to offer enhanced and new telecommunications services, including additional channels and tiers, pay-per-view (including near-video-on-demand), high-speed data services and Internet access, digital advertisement insertion, interactive services and telephony (including PCS). - Maintaining Strong Community Relations. Management believes that maintaining strong community relations will continue to be important to Bresnan's long-term success. The Company's community-oriented initiatives include educational programs and the sponsorship of programs and events recognizing outstanding local citizens. In addition, certain members of the Company's management team, including William J. Bresnan, host community events for political and business leaders as well as representatives of the local media where they discuss the operations of the Company and any recent developments in the telecommunications industry which may have an impact on their communities. Management believes that its ongoing community relations initiatives result in consumer and governmental goodwill and name recognition, which have increased customer loyalty and will likely facilitate future efforts to provide new telecommunications services. - Emphasizing Customer Satisfaction. The Company strives to provide quality customer service and attractive programming choices at reasonable rates. The Company has established stringent internal customer service standards, which management believes meet and, in certain respects, exceed those established by the National Cable Television Association ("NCTA"). The Company has been repeatedly recognized by the industry for its commitment to innovative customer service programs. In March of 1996, the Company was the recipient of its fourth Beacon Award from the Cable Television Public Affairs Association (the "CTPAA"). This year's award recognized Bresnan's "On Time Program" as the outstanding customer relations program by a multiple system operator (an "MSO") in the United States. Management believes that its customer service efforts have contributed to its subscriber growth and ongoing patronage by existing subscribers. - Emphasizing Sales and Marketing. The Company seeks to increase penetration levels for its basic services, "preferred basic" services, premium services and ancillary services through a variety of promotions and marketing strategies. For example, the Company has recently introduced a marketing campaign with Sprint Corporation to offer a combination of cable television and long distance services. The Company also intends to continue to offer periodically previews and promotional pricing of premium services. In addition, the Company is able to market its products and services to its customers at Company offices as a high percentage of its customers, relative to the industry, pay their cable television bills in person. Management believes that its experience in sales and marketing will be valuable as the Company markets new products and services in the future. Bresnan Capital Corporation, a Delaware corporation ("BCC"), is a wholly owned subsidiary of the Company formed solely for the purpose of serving as an issuer of the Notes. The Notes will be joint and several obligations of the Company and BCC, although the Company will receive all of the net proceeds of the Offering. Certain financial statements of BCC have not been provided herein because BCC was formed on April 25, 1996 and has not conducted any operations since that date. The Notes are not obligations of, and are not guaranteed by, either the partners of the Company or their respective affiliates, including William J. Bresnan and TCI. THE OFFERING NOTES OFFERED................. $100.0 million principal amount of % Senior Notes Due 2006. ISSUERS....................... Bresnan Communications Company Limited Partnership, a Michigan limited partnership, and Bresnan Capital Corporation, a Delaware corporation. MATURITY...................... The Notes will mature on , 2006. INTEREST PAYMENT DATES........ Interest on the Notes is payable semiannually on each and , commencing , 1996. OPTIONAL REDEMPTION........... The Notes will be redeemable at the option of the Issuers, in whole or in part, at any time on or after , , at the redemption prices set forth herein, plus accrued and unpaid interest, if any, to the date of redemption. SINKING FUND.................. None. CHANGE OF CONTROL............. Upon a Change of Control, the Issuers will be required to make an offer to purchase the Notes at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase. See "Description of Notes -- Purchase at the Option of Holders Upon a Change of Control." RANKING....................... The Notes will be senior unsecured obligations of the Issuers and will rank pari passu in right of payment with all existing and future senior indebtedness of the Issuers, including indebtedness under the Bank Credit Facility. The Notes will rank senior in right of payment to any future subordinated indebtedness of the Issuers. BCC has nominal assets and does not conduct any operations. As of March 31, 1996, after giving effect to the Offerings and the application of the net proceeds thereof, the total indebtedness of the Issuers would have been approximately $109.7 million and the total consolidated indebtedness of BCC Holding would have been approximately $209.7 million. As of such date, after giving effect to the Offerings and the application of the net proceeds thereof, the Issuers would have had approximately $2.2 million of indebtedness subordinated to the Notes. See "Risk Factors -- Substantial Leverage," "Capitalization" and "Description of Notes." CERTAIN COVENANTS............. The Indenture (as defined herein) for the Notes will contain limitations on, among other things, (a) the incurrence of additional indebtedness, (b) the payment of dividends and other distributions with respect to Equity Interests of the Company and the purchase, redemption or retirement of Equity Interests of the Company, (c) the incurrence of certain Liens, (d) transactions with Affiliates and (e) certain consolidations, mergers and transfers of assets. During any period of time the ratings assigned to the Notes are Investment Grade Ratings, the foregoing covenants will cease to be in effect with the exception of the covenants which contain limitations on, among other things, (a) the incurrence of certain Liens and (b) certain consolidations, mergers and transfers of assets. All of these limitations are subject to a number of important qualifications. See "Description of Notes -- Certain Covenants." CONCURRENT BCC HOLDING OFFERING...................... Concurrently with the Offering, BCC Holding, the general partner of the Company, and BCC Holding Capital Corporation, a wholly owned subsidiary of BCC Holding, are jointly offering, by means of a separate prospectus, $100.0 million aggregate principal amount of their % Senior Debentures Due 2008. The net proceeds from the BCC Holding Offering will be contributed to the Company by BCC Holding. The Offering is conditioned upon, and is a condition to, the consummation of the BCC Holding Offering. See "Concurrent BCC Holding Offering." USE OF PROCEEDS............... The net proceeds of the Offerings, including the net proceeds from the BCC Holding Offering to be contributed to the Company by BCC Holding (together, approximately $195.0 million), will be used to repay amounts outstanding under the Bank Credit Facility (approximately $156.2 million, including accrued interest), to repay indebtedness outstanding under a subordinated promissory note (the "TCID Note") in favor of TCID of Michigan, Inc. ("TCID"), an affiliate of TCI (approximately $37.3 million, including accrued interest), and for general purposes. See "Use of Proceeds," "Certain Relationships and Related Transactions" and "Description of Bank Credit Facility." RISK FACTORS.................. See "Risk Factors" for a discussion of certain factors that should be considered by prospective purchasers of the Notes. SUMMARY FINANCIAL AND OPERATING DATA (DOLLARS IN THOUSANDS EXCEPT PER SUBSCRIBER DATA) The summary financial data as of and for each of the years in the five-year period ended December 31, 1995 set forth below have been derived from the audited financial statements of the Company. The summary financial data as of and for the three-month period ended March 31, 1996 set forth below have been derived from the unaudited financial statements of the Company. The Company acquired cable television systems serving (i) Ontonagon, Michigan on December 31, 1991; (ii) Grenada, Mississippi on December 3, 1992; (iii) Hinesville, Georgia on December 1, 1993; (iv) Mankato, Marshall and Montevideo, Minnesota on July 25, 1994; (v) Bruce, Mississippi on January 31, 1995; and (vi) Crosby, Minnesota on August 1, 1995. Each of the acquisitions made by the Company was accounted for pursuant to the purchase method of accounting; accordingly, the Company's financial and operating data include the financial and operating data of these cable television systems since the dates of their respective acquisitions. <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, -------------------------------------------------------- -------------------- 1991 1992 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue............................. $ 41,914 $ 46,347 $ 51,902 $ 61,380 $ 70,389 $ 16,692 $ 18,302 Operating costs and expenses: Cost of service................... 5,124 5,807 6,681 8,126 9,219 2,121 2,251 Programming expense............... 8,933 9,059 10,185 13,012 15,902 3,849 4,323 Selling, general and administrative.................. 9,574 10,359 12,111 14,459 16,713 3,838 4,343 Depreciation and amortization .... 14,636 15,006 14,844 16,843 21,930 5,293 5,575 Loss on disposal of obsolete plant........................... 1,368 176 5,493 43 275 -- 156 -------- -------- -------- -------- -------- -------- -------- Total operating costs and expenses.................... 39,635 40,407 49,314 52,483 64,039 15,101 16,648 -------- -------- -------- -------- -------- -------- -------- Operating income.................... 2,279 5,940 2,588 8,897 6,350 1,591 1,654 Other (income) expense: Interest.......................... 11,691 8,578 7,571 12,557 16,063 4,091 3,786 Gain on investment................ -- (1,348) -- -- (390) (390) -- -------- -------- -------- -------- -------- -------- -------- Net loss............................ $ (9,412) $ (1,290) $ (4,983) $ (3,660) $ (9,323) $ (2,110) $ (2,132) ======== ======== ======== ======== ======== ======== ======== BALANCE SHEET DATA (end of period): Total assets........................ $ 93,105 $ 99,158 $117,587 $150,619 $143,992 $148,533 $141,244 Total debt.......................... 130,950 134,227 156,598 187,798 185,480 187,998 186,345 Partners' (deficit)................. (52,080) (53,370) (58,353) (62,013) (71,336) (64,123) (73,468) FINANCIAL RATIOS AND OTHER DATA: EBITDA(a)........................... $ 18,283 $ 21,122 $ 22,925 $ 25,783 $ 28,555 $ 6,884 $ 7,385 Capital expenditures................ 6,945 11,742 11,982 6,323 14,640 2,106 3,133 Ratio of total debt to EBITDA(b).... 7.16x 6.35x 6.83x 7.28x 6.50x 6.83x 6.30x Monthly revenue per average basic subscriber........................ $ 23.94 $ 25.27 $ 26.09 $ 27.16 $ 28.47 $ 27.27 $ 29.05 Annual EBITDA per average basic subscriber(b)..................... 125.30 138.18 138.29 136.91 138.58 134.97 140.68 Annual capital expenditures per average basic subscriber(b)....... 47.60 76.81 72.28 33.58 71.05 41,29 59.68 SUMMARY SUBSCRIBER DATA (end of period): Homes passed........................ 224,078 231,710 267,096 297,763 310,093 300,094 311,359 Basic subscribers................... 148,201 157,553 174,009 202,636 209,459 205,374 210,500 Basic penetration................... 66.1% 68.0% 65.1% 68.1% 67.5% 68.4% 67.6% Premium units....................... 63,645 73,013 109,450 136,179 142,299 138,300 140,267 Pay-to-basic ratio(c)............... 42.9% 46.3% 62.9% 67.2% 67.9% 67.3% 66.8% </TABLE> - --------------- (a) EBITDA represents operating income before depreciation and amortization and loss on disposal of obsolete plant. EBITDA is presented because it is a widely accepted financial indicator of a company's ability to incur and service debt. EBITDA, however, is not a measure determined in accordance with GAAP and should not be considered in isolation or as a substitute for or an alternative to net income (loss), cash flow from operating activities or other income or cash flow data prepared in accordance with GAAP or as a measure of a company's operating performance or liquidity. EBITDA as used in this Prospectus is not the defined term used in the Indenture governing the Notes. (b) With respect to the three months ended March 31, 1995 and 1996, EBITDA and capital expenditures have been annualized for comparative purposes. (c) Pay-to-basic ratio measures premium units as a percentage of basic subscribers and, as a result of the competitive pricing of premium service packages, does not correspond to a proportionate increase in operating income or EBITDA.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001013696_channell_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001013696_channell_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, (i) all information, including financial data, in this Prospectus has been adjusted to give pro forma effect to the transactions described below under "Reorganization and Termination of S Corporation Status," including the merger of Channell Commercial Corporation, a California corporation (the "Predecessor"), into Channell Commercial Corporation, a Delaware corporation (the "Company"), (ii) all references in this Prospectus to the Company include the Company and the Predecessor, and (iii) the information in this Prospectus assumes that the Underwriters' over-allotment option is not exercised. For a definition of certain terms used herein, see "Glossary of Terms" on page G-1 hereof. THE COMPANY The Company is a leading designer, manufacturer and marketer of precision- molded thermoplastic enclosures used by cable television ("CATV") operators and local telephone companies worldwide. The Company believes it was the first to design, manufacture and market thermoplastic enclosure products for use in the communications industry on a wide scale, and the Company believes it currently supplies a substantial portion of the enclosure product requirements of a number of major CATV and telephone company operators. The Company's products house, protect and provide access to advanced telecommunications electronics and transmission media, including coaxial cable, copper wire and optical fibers, used in the delivery of CATV and telephone services. The products are deployed within the portion of the local signal delivery network, commonly known as the "outside plant," that connects the network provider's signal origination office with residences and businesses. Enclosure products are critical components of outside plants, providing protection against weather and vandalism, access for technicians who maintain and manage the outside plant and, in some cases, dissipation of heat created by active electronic hardware. CATV operators and local telephone companies rely significantly on manufacturers of protective enclosures because any material damage to the signal delivery networks is likely to disrupt communication services. The Company also designs and manufactures a series of termination blocks, brackets and cable management devices that are mounted inside its enclosure products, and the Company markets a variety of complementary products manufactured by third parties, including grade level boxes and cable-in-conduit, in order to provide a full system solution to meet its customers' outside plant requirements. From 1991 to 1995, the Company's net sales increased from $15.9 million to $41.0 million, a compounded annual growth rate of 26.7%. During the same period, after giving pro forma effect to certain transactions to be consummated in connection with the Offering, the Company's adjusted net income increased from $0.5 million to $6.4 million, a compounded annual growth rate of 90.1%. The Company's net sales and adjusted net income increased from $9.2 million and $1.1 million, respectively, in the first quarter of 1995 to $10.3 million and $1.6 million, respectively, in the first quarter of 1996. The Company has a leading share of the CATV market for enclosures in the United States and Canada (based upon the portion of enclosure product requirements of major CATV operators sold by the Company) and markets a wide range of products to local telephone companies. In the last few years, the Company began to expand its marketing efforts internationally, with product sales in South America, the Pacific Rim, the Middle East and Europe. As part of its strategy, the Company expects to continue to expand its international presence in the future. During 1995, the Company shipped products to more than 4,000 customer locations. The Company's customers include many of the largest CATV operators and local telephone companies in the world. In the United States, major customers (determined based upon the level of sales to the customers by the Company) include BellSouth, Comcast, Continental Cablevision, GTE, TCI and Time Warner. Of these, TCI and Time Warner were the only customers representing more than 10% of the Company's net sales in 1995. In international markets, the Company's major customers (determined in the same manner) in its principal geographic markets include Bricast/VisionStream (Australia), Cable Systems Media (Israel) and Rogers Communications (Canada) (none of which represented more than 10% of the Company's net sales in 1995). The communications industry is experiencing rapid expansion, both domestically and internationally, in response to a number of factors, including (i) developments in high-speed communications technologies for video, voice and data transmission and internet access via cable modem, (ii) the convergence occurring within the CATV and telecommunications industries, (iii) consumer demand for enhanced communications services, and (iv) a changing regulatory and competitive environment. The Company's customers are responding to these changes by expanding, rebuilding and upgrading their signal delivery networks. These activities generate demand for the types of highly engineered enclosures and related outside plant products offered by the Company. The Company's enclosure products are designed to provide superior environmental sealing and protection, heat dissipation, easy access for cable routing and network management by technicians who maintain outside plant facilities, compatibility with a variety of signal delivery network architectures, versatility to accommodate network growth, security and aesthetic appeal. The Company believes that it offers the broadest line of enclosure products for use in the CATV industry. Many of the Company's thermoplastic enclosure products are now considered state-of-the-industry, having received field testing and other approvals and standardization certifications from major CATV and telephone company operators, and are often used to replace enclosure products constructed of sheet metal and other materials that previously had been the industry standard. Examples of innovative products developed by the Company include its low profile (i.e., close to the ground) enclosures that permit 360 degree access by technicians and pedestals that provide for mechanical sealing that is maintained without the need for gels, compounds or heat shrinkage. Such features, in addition to other product improvements developed by the Company over many years, received U.S. patent protection and improve the performance and ease of use of the Company's products in its customers' outside plant systems. The Company's products are sold primarily through a direct sales force of technically trained salespeople who use an application-based, complete system approach in marketing to customers. The Company's products are manufactured at its custom designed, 160,000 square foot facility in Temecula, California, which was originally constructed in 1989. An adjacent 100,000 square foot building is also being constructed and is expected to be completed in July 1996, which the Company will lease. The Company's vertically integrated and modern manufacturing processes enable the Company to control each step in the manufacturing process, including product design and engineering, custom tool and die construction, molding, wiring, assembly and packaging. The Company's vertical integration and manufacturing expertise enable it to tailor its products to satisfy customer demands rapidly and efficiently. In particular, the Company's in-house product design and engineering together with its manufacturing expertise enable the Company to provide timely solutions to its customers' product design and engineering needs at a lower cost than would be incurred if outside design and engineering services were required to be employed. The Company's strategy is to capitalize on opportunities in the growing and changing global communications industry by providing enclosures and complementary products to meet the needs of its customers' evolving communications networks. The Company's wide range of products, manufacturing expertise, application-based sales and marketing approach and reputation for high quality products address key requirements of its customers. Principal elements of the Company's strategy include the following: CONTINUE TO FOCUS ON CORE CATV BUSINESS. The Company intends to capitalize on its position as a leading designer, manufacturer and marketer of broadband enclosures for the CATV industry in the United States and Canada through new product development for both domestic and international market applications. The Company has positioned itself to participate in continued CATV network construction and upgrades that are designed to improve service quality and expand network capacity in order to prepare CATV operators for new competition in the broadband services market. These expansions and upgrades will enable CATV operators to accommodate increased consumer demand for internet access via cable modem, telephony and enhanced video services. From 1993 to 1995, the Company's net sales to the CATV industry increased from $20.4 million to $35.4 million, representing a compounded annual growth rate of 31.7%. INCREASE SALES TO LOCAL TELEPHONE COMPANIES. The Company seeks to leverage its in-depth knowledge of, and expertise in, the broadband telecommunications and telephone markets to provide innovative enclosure solutions for the telephone industry. From 1993 to 1995, the Company's net sales to local telephone companies increased from $3.3 million to $5.6 million, representing a compounded annual growth rate of 29.7%. The Company intends to continue to invest in the development of a broader range of products designed specifically for telephone market applications. The Company has already achieved significant success in marketing its traditional CATV/broadband products to local telephone companies which have been designing and deploying broadband networks to deliver competitive video and data services. The Company will continue to target this market for growth. EXPAND INTERNATIONAL PRESENCE. Management believes that international markets offer significant opportunities for increased sales in both the CATV and telephone segments. From 1993 to 1995, the Company's international net sales increased from $3.4 million to $6.1 million, representing a compounded annual growth rate of 34.4%. Trends expected to result in international growth opportunities include the deregulation and privatization of telecommunications in many international markets, the focus of numerous countries on building, expanding and enhancing their communications systems in order to participate fully in the information-based global economy, and multi-national expansion by many U.S.-based network carriers. The Company will concentrate on expansion in international markets that are characterized by deregulation or privatization of telecommunications and the availability of capital for the construction of signal delivery networks. DEVELOP NEW PRODUCTS AND ENTER NEW BUSINESS SEGMENTS. The Company continues to leverage its core capabilities by developing innovative products that meet the changing needs of its customers. The Company has a proven record in designing, developing and manufacturing "next generation" products that provide solutions for its customers and offer differential advantages over other suppliers to the industry. In addition, the Company will seek to diversify its customer base by developing new products for customers outside the communications industry that require enclosure products, such as the utility industry. THE OFFERING <TABLE> <S> <C> Common Stock offered by: The Company...................... 2,700,000 shares The Selling Stockholder.......... 400,000 shares Common Stock to be outstanding after the Offering................ 8,837,000 shares(1) Use of Proceeds.................... Distributions and payments to Existing Stockholders in connection with the termination of the Company's S corporation status, new product development, repayment of indebtedness and general corporate purposes. Nasdaq National Market symbol...... CHNL </TABLE> - -------- (1) Excludes approximately 525,000 shares of Common Stock subject to stock options to be issued to certain of the Company's employees and directors (including 100,000 stock options being issued to William H. Channell, Jr., the Company's President) under the Company's 1996 Incentive Stock Plan at the time of the Offering with an exercise price equal to the initial public offering price per share. These options become exercisable in three equal annual installments beginning on the first anniversary of the date of issuance. See "Management--1996 Incentive Stock Plan." SUMMARY HISTORICAL, PRO FORMA AND OTHER FINANCIAL INFORMATION (amounts in thousands, except per share data) The following data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements and the notes thereto included in this Prospectus. Data for the Company's fiscal years ended December 31, 1993, 1994 and 1995 are derived from the Company's audited Financial Statements and the notes thereto included in this Prospectus. Data for the Company's fiscal years ended December 31, 1991 and 1992 and the three months ended March 31, 1995 and 1996 are derived from unaudited financial statements, which the Company believes contain all necessary adjustments, consisting only of normal recurring adjustments, necessary to present fairly, and in accordance with generally accepted accounting principles, the Company's financial position and results of operations for the periods presented. Financial results for the three months ended March 31, 1995 and 1996 presented below are not necessarily indicative of results of operations for a full fiscal year. <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------------------------- ---------------------- 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- --------- ------------ <S> <C> <C> <C> <C> <C> <C> <C> OPERATING DATA: Net sales............... $15,893 $19,006 $23,713 $34,504 $40,972 $ 9,225 $10,279 Gross profit............ 4,381 6,465 8,879 14,754 17,913 3,738 4,541 License fees(1)......... 602 690 1,039 1,560 2,035 458 531 Income from operations.. 778 2,130 3,173 7,183 9,171 1,633 2,189 Income before income taxes.................. 542 1,890 3,007 7,027 8,832 1,543 2,124 Pro forma net income(2). 296 1,099 1,816 4,129 5,377 927 1,279 Pro forma net income per share(3)............... 0.72 0.17 Pro forma weighted average shares outstanding(3)......... 7,451 7,451 OTHER DATA: Gross margin(4)......... 27.6% 34.0% 37.4% 42.8% 43.7% 40.5% 44.2% Operating margin(5)..... 4.9 11.2 13.4 20.8 22.3 17.7 21.3 EBITDA(6)............... $ 1,389 $ 2,785 $ 3,949 $ 8,255 $10,583 $ 2,048 $ 2,591 Capital expenditures.... 917 1,172 1,480 5,851 2,160 1,030 472 ADJUSTED FINANCIAL DATA(7): Net sales (as historically reported). $19,006 $23,713 $34,504 $40,972 $ 9,225 $10,279 Adjusted EBITDA(8)...... 1,716 3,200 4,713 9,540 12,343 2,437 3,053 Adjusted income from operations............. 1,105 2,545 3,937 8,468 10,931 2,022 2,651 Adjusted operating margin(9).............. 7.0% 13.4% 16.6% 24.5% 26.7% 21.9% 25.8% Adjusted net income..... $ 492 $ 1,349 $ 2,274 $ 4,899 $ 6,431 $ 1,149 $ 1,555 Adjusted net income per share(10).............. 0.86 0.21 <CAPTION> MARCH 31, 1996 ------------------------------- PRO AS ACTUAL FORMA(11) ADJUSTED(12) ------- --------- ------------ <S> <C> <C> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Current assets.......... $10,004 $10,206 $23,766 Total assets............ 20,655 21,529 35,089 Long-term obligations (including current maturities)............ 2,883 2,883 -- Stockholders' equity (deficit).............. 13,263 (988) 31,055 </TABLE> NOTES TO SUMMARY HISTORICAL, PRO FORMA AND OTHER FINANCIAL INFORMATION (amounts in thousands, except per share data) (1) License fees represent the amounts paid by the Company to William H. Channell, Sr., the Company's Chairman of the Board and Chief Executive Officer, for the use of the Channell Patents (as defined below). Prior to the consummation of the Offering, these patents will be sold to the Company, the license fee arrangement with Mr. Channell, Sr. will be terminated and, thereafter, the Company will no longer pay any license fees with respect to the Channell Patents. See "Reorganization and Termination of S Corporation Status." (2) Prior to the Offering, the Company was an S corporation for federal and state income tax purposes. The pro forma presentation reflects a provision for income taxes as if the Company had always been a C corporation, at an assumed effective tax rate of approximately 41% less tax credits. Such presentation does not reflect the adjustments set forth in note (7) below. The effect of the Company's use of a portion of the net proceeds of the Offering to repay outstanding bank indebtedness (see "Use of Proceeds") has not been reflected in pro forma net income or pro forma net income per share because the impact is not material. (3) Pro forma net income per share has been computed by dividing pro forma net income by the pro forma weighted average shares outstanding. Pro forma weighted average shares outstanding include 1,314 of the shares offered hereby by the Company at an assumed price of $13.00 per share, the net proceeds of which will be used to fund the distributions and payments in connection with the Termination of the Company's S Corporation Status (as defined below). See "Reorganization and Termination of S Corporation Status." (4) Gross margin is gross profit as a percentage of net sales. (5) Operating margin is income from operations as a percentage of net sales. (6) EBITDA represents income from operations before interest and income taxes, plus depreciation and amortization expense. EBITDA is not intended to represent cash flow, operating income or any other measure of performance in accordance with generally accepted accounting principles, but is included here because management believes that certain investors find it to be a useful tool for measuring a company's ability to service its debt. (7) The adjusted financial data reflects, in addition to the pro forma adjustments referred to in note (2) above, (i) the elimination of the expense for the license fees payable to Mr. Channell, Sr., and related income tax impact, which license fees are being terminated as part of the Termination of the Company's S Corporation Status, and (ii) an increase in Mr. Channell, Sr.'s annual base salary from $225 to $500 in connection with the Offering. See "Reorganization and Termination of S Corporation Status" and "Management--Employment Contracts." Upon consummation of the Offering, the Company also intends to increase the base salary of William H. Channell, Jr., the Company's President, from $350 to $500 (which increase has not been reflected in the adjusted financial data because Mr. Channell, Jr.'s actual total compensation in 1995 exceeded $500) and to grant a cash bonus of $200 to each of Gary W. Baker, the Company's Chief Financial Officer, Dale C. Wooding, the Company's Vice President, Manufacturing, and Edward J. Burke, the Company's Vice President, Engineering, which bonus will be earned and payable in three equal installments on each of December 31, 1997, 1998 and 1999, provided such executive officer remains employed by the Company and subject to continued payment in the event of the death of the executive officer. See "Management--Executive Compensation."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001013698_symons_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001013698_symons_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and consolidated financial statements, and the notes thereto, appearing elsewhere in this Prospectus. Unless the context indicates otherwise, (i) the "Company" or "SIG" refers to Symons International Group, Inc., an Indiana corporation, and its subsidiaries, (ii) the "Subsidiaries" refer to the direct and indirect subsidiaries of the Company, (iii) the "Insurers" refer to IGF Insurance Company, an Indiana property and casualty insurance company and a wholly-owned subsidiary of the Company ("IGF"), and, through the Company's 52% ownership interest in GGS Management Holdings, Inc. ("GGS Holdings"), Pafco General Insurance Company, an Indiana property and casualty insurance company ("Pafco"), and Superior Insurance Company, a Florida property and casualty insurance company, together with its subsidiaries ("Superior") and (iv) "Goran" refers to Goran Capital Inc. and its subsidiaries, other than the Company and the Subsidiaries. See "Glossary of Selected Insurance and Certain Defined Terms" for the definitions of certain insurance and other terms used herein. Unless otherwise indicated, (i) all data in this Prospectus (a) takes into effect the 7,000-for-1 stock split of the Company's Common Stock that has recently been completed, and (b) assumes that the Underwriters' over-allotment option is not exercised; and (ii) all financial information and operating statistics applicable to the Company and Superior set forth in this Prospectus are based on generally accepted accounting principles ("GAAP") and not statutory accounting practices ("SAP"). In conformity with industry practice, data derived from A.M. Best Company, Inc. ("A.M. Best") and the National Association of Insurance Commissioners ("NAIC") sources, generally used herein for industry comparisons, are based on prescribed SAP. THE COMPANY Symons International Group, Inc., a specialty property and casualty insurer, underwrites and markets nonstandard private passenger automobile insurance and crop insurance. The Company believes that it has demonstrated an ability to acquire under-performing niche insurance businesses and develop them toward their full potential. Through its Subsidiaries, the Company writes business in the U.S. exclusively through independent agencies and seeks to distinguish itself by offering high quality, technology based services for its agents and policyholders. For the twelve months ended June 30, 1996, the Company had consolidated gross premiums written of approximately $175.8 million (including gross premiums written of $25.2 million for Superior for two months of 1996). The Company writes nonstandard automobile insurance through approximately 4,500 independent agencies in 18 states and writes crop insurance through approximately 1,200 independent agencies in 31 states. Based on a Company analysis of gross premiums written in 1995 as reported by A.M. Best, the Company believes that the combination of Pafco and Superior makes the Company's nonstandard automobile group the sixteenth largest underwriter of nonstandard automobile insurance in the United States. Based on premium information compiled in 1995 by the Federal Crop Insurance Corporation ("FCIC") and National Crop Insurance Services, Inc. ("NCIS"), the Company believes that IGF is the fifth largest underwriter of Multi-Peril Crop Insurance ("MPCI") in the United States. Nonstandard automobile insurance products are designed for drivers who are unable to obtain coverage from standard market carriers. These drivers are normally charged higher premium rates than the rates charged for preferred or standard risk drivers and generally purchase lower liability limits than preferred or standard risk policyholders. According to statistical information derived from insurer annual statements compiled by A.M. Best, the nonstandard automobile market accounted for $17.4 billion in annual premium volume for 1995. In June, 1995, the Company entered into a letter of intent to acquire Superior from Fortis, Inc. ("Fortis") and, in January, 1996, obtained a commitment from the GS Funds to invest the equity capital needed to finance the acquisition of Superior (the "Acquisition"). GGS Holdings, which is 52% owned by the Company and 48% owned by the GS Funds, was formed (the "Formation Transaction") to focus on the growth and development of the nonstandard automobile insurance business. As part of this strategy, the Company contributed Pafco and its right to acquire Superior to GGS Holdings, which completed the Acquisition on April 30, 1996. The Acquisition has allowed the Company to expand its nonstandard automobile business through wider geographic distribution and a broader range of products. Pafco writes business primarily in the Midwest and Colorado, and Superior writes business primarily in the Southeast (particularly Florida) and in California. GGS Holdings plans to pursue additional acquisition opportunities to take advantage of a consolidation trend in the nonstandard automobile insurance industry. There can be no assurance that any suitable acquisition opportunities will arise. IGF Insurance Company ("IGF") is a wholly-owned subsidiary of the Company located in Des Moines, Iowa. IGF underwrites MPCI, crop hail insurance and other named peril crop insurance. MPCI is a federally-subsidized program administered by the FCIC, which is a federally chartered corporation operated through the United States Department of Agriculture ("USDA"). MPCI is designed to provide farmers who suffer an insured crop loss due to the weather or other natural perils with the funds needed to continue operations and plant crops for the next growing season. For the year ended December 31, 1995, the Company wrote approximately $53.4 million in MPCI Premiums (as defined herein) and $17.0 million in crop hail gross premiums. In addition to premium revenues, for the same period, the Company received from the FCIC: (i) CAT Coverage Fees (as defined herein) in the amount of $1.3 million, (ii) Buy-up Expense Reimbursement Payments (as defined herein) in the amount of $16.4 million and (iii) CAT LAE Reimbursement Payments (as defined herein) and MPCI Excess LAE Reimbursement Payments (as defined herein) in the aggregate amount of $3.4 million. IGF uses proprietary software to write and service policies. The Company uses employee claims adjusters rather than relying solely on part-time, independent contractor adjusters as do many of its competitors. Management believes that the approaches adopted by IGF's management team in the information technology, claims handling and underwriting aspects of its business are innovations which provide IGF with a competitive advantage in the crop insurance industry. For a discussion of the accounting treatment of the Company's MPCI business, see "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company -- Overview." The Federal Crop Insurance Reform Act of 1994 (the "1994 Reform Act") required farmers for the first time to purchase at least a basic level of MPCI coverage ("CAT Coverage") in order to be eligible for other federally-sponsored farm benefits, including but not limited to low interest loans and crop price supports. The 1994 Reform Act also authorized for the first time the marketing and selling of CAT Coverage by local USDA offices. Partly as a result of the increase in the size of the MPCI market resulting from the 1994 Reform Act, the Company's MPCI Premiums increased to $53.4 million in 1995 from $44.3 million in 1994 and the fees and reimbursement payments received by the Company from its MPCI business increased to $21.1 million in 1995 from $14.0 million in 1994. However, the Federal Agriculture Improvement and Reform Act of 1996 (the "1996 Reform Act"), signed into law by President Clinton in April, 1996, limits the role of the USDA offices in the delivery of MPCI coverage beginning in July, 1996, which is the commencement of the 1997 crop year, and also eliminates the linkage between CAT Coverage and qualification for certain federal farm program benefits. The limitation of the USDA's role in the delivery system for MPCI should provide the Company with the opportunity to realize increased revenues from the distribution and servicing of its MPCI product. As a result of this limitation, the FCIC has transferred to the Company approximately 8,900 insureds for CAT Coverage who previously purchased such coverage from USDA field offices. The Company has not experienced any material negative impact in 1996 from the delinkage mandated by the 1996 Reform Act. The Company believes that any future potential negative impact of the delinkage mandated by the 1996 Reform Act will be mitigated by, among other factors, the likelihood that farmers will continue to purchase MPCI to provide basic protection against natural disasters since ad hoc federal disaster relief programs have been reduced or eliminated. There can, however, be no assurance as to the ultimate effect which the 1996 Reform Act may have on the business or operations of the Company. The Company has multiple strategies to achieve profitable growth including the following: - The Company will continue to develop its two niche product lines: nonstandard automobile insurance and crop insurance. - Through GGS Holdings, the Company intends to take advantage of acquisition opportunities in the consolidating nonstandard automobile insurance industry. - The Company will use the Superior acquisition to market its automobile insurance products to additional markets and to expand the multi-tiered marketing approach currently employed by Superior. - The Company will continue to emphasize providing quality, cost efficient services to its independent agencies together with a commission structure designed to encourage those agencies to place a high volume of profitable business with its insurance subsidiaries. - The Company will continue to develop and enhance its relationship with its crop agencies by using an electronic communications network that enables agencies to communicate directly with the Company's central computer system, thereby limiting agencies' handling costs. - The Company will seek to enhance the underwriting profits and reduce the volatility of its crop insurance business through geographic diversification and the effective use of federal and third-party catastrophic reinsurance arrangements. The Company is continually reviewing potential acquisition opportunities. As of the date of this Prospectus, the Company has not entered into a letter of intent or agreement in principle with any potential acquisition targets. The Company is a wholly-owned subsidiary of Goran. The ordinary shares of Goran are traded on the Toronto Stock Exchange under the symbol "GNC" and on the Nasdaq National Market under the symbol "GNCNF." Following the Offering, Goran will hold approximately 70% of the Common Stock, assuming no exercise of the Underwriters' over-allotment option. Goran engages, through subsidiaries other than the Company, in certain reinsurance and surplus lines underwriting operations. These subsidiaries of Goran have certain business relationships with the Company which the Company expects will continue after consummation of the Offering. The Company's state of incorporation is Indiana; its principal executive offices are located at 4720 Kingsway Drive, Indianapolis, Indiana; and its telephone number is (317) 259-6300. RECENT DEVELOPMENTS The Company's condensed results of operations for the three and nine month periods ended September 30, 1995 and 1996 are as follows: <TABLE> <CAPTION> THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS ENDED ENDED ENDED ENDED SEPTEMBER 30, 1995(1) SEPTEMBER 30, 1996(1) SEPTEMBER 30, 1995(1) SEPTEMBER 30, 1996(1) --------------------- --------------------- --------------------- --------------------- (UNAUDITED) (IN THOUSANDS) <S> <C> <C> <C> <C> Gross premiums written.............. $16,978 $71,813 $ 112,737 $ 218,763 Net premiums earned.... 14,868 69,094 37,657 128,160 Net income............. 1,464 4,589 3,470 8,893 Earnings per share..... $ 0.21 $ 0.66 $ 0.50 $ 1.27 Shares outstanding..... 7,000 7,000 7,000 7,000 </TABLE> - ------------------------- (1) The Company's consolidated results of operations for the nine months ended September 30, 1996 include five months results of operations of Superior subsequent to the Acquisition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company -- Overview" for a discussion of the accounting treatment accorded to the crop insurance business. The increases in gross premiums written and net premiums earned for the three and nine months ended September 30, 1996 as compared to the corresponding periods of the prior year are the result of increased premium volume in both the nonstandard auto and crop segments. The increased premiums in the nonstandard auto segment is the result of the acquisition of Superior and elimination in 1996 of quota share reinsurance previously in effect as well as internal growth. The increased premiums in the crop segment were the result of higher volume in both crop hail insurance and MPCI premiums. The increases in net income for the three and nine months ended September 30, 1996 as compared to the corresponding periods of the prior year are the result of improved earnings in both the nonstandard auto and crop segments. These improved earnings were due to increased premium volume in both segments, lower loss and LAE and expense ratios in the nonstandard auto segment, improved loss and LAE ratio for crop hail and greater MPCI underwriting gains. THE OFFERING <TABLE> <S> <C> Common Stock being offered by the Company.... 3,000,000 shares Common Stock outstanding (1) Before the Offering........................ 7,000,000 shares After the Offering......................... 10,000,000 shares Use of Proceeds.............................. The Company intends to apply the net proceeds from the Offering as follows: (i) to contribute approximately $9.0 million to IGF to increase its statutory surplus to provide support for the writing of additional crop insurance coverages; (ii) to repay certain bank indebtedness of the Company in the amount of $7.5 million; (iii) to retire a note in the principal amount of approximately $3.5 million issued to Pafco by one of the Company's wholly-owned Subsidiaries; (iv) to retire the Company's indebtedness to Goran (the aggregate outstanding balance of which is approximately $7.5 million (the "Parent Indebtedness")); (v) to pay a dividend to Goran in the amount of $3.5 million; and (vi) to apply the remainder of the net proceeds for general corporate purposes, including acquisitions. See "The Company" and "Use of Proceeds." Proposed Nasdaq National Market Symbol....... SIGC </TABLE> - ------------------------- (1) Excluding 1,000,000 shares reserved for issuance pursuant to certain employment agreements with officers of IGF and the Company's 1996 Stock Option Plan, of which options for 830,000 shares have been granted. See "Management -- Executive Compensation -- Employment Contracts and Termination of Employment -- IGF" and "-- Stock Option Plans -- SIG 1996 Stock Option Plan." SUMMARY COMPANY CONSOLIDATED FINANCIAL DATA <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ----------------------------------------------------------------- --------------------------------- PRO FORMA PRO FORMA FOR THE FOR THE TRANSACTIONS TRANSACTIONS AND THE AND THE OFFERING OFFERING 1991 1992 1993 1994 1995 1995(1) 1995 1996(2) 1996(1) ------- -------- ------- -------- -------- ------------ ------- -------- ------------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: (3) Gross premiums written... $91,974 $109,219 $88,936 $103,134 $124,634 $214,275 $95,759 $146,950 $190,943 Net premiums written..... 31,543 35,425 31,760 35,139 53,447 142,978 30,855 77,042 120,660 Net premiums earned...... 30,388 35,985 31,428 32,126 49,641 143,682 22,789 59,066 98,453 Net investment income.... 1,370 1,319 1,489 1,241 1,173 8,262 636 1,533 3,985 Other income............. -- -- 886 1,622 2,174 6,345 997 4,062 6,279 Net realized capital gain (loss)............ 381 486 (119) (159) (344) 1,610 79 228 257 ------- -------- ------- -------- -------- -------- ------- -------- -------- Total revenues....... 32,139 37,790 33,684 34,830 52,644 159,899 24,501 64,889 108,974 ------- -------- ------- -------- -------- -------- ------- -------- -------- Net income (loss) (4).... $ 1,770 $ 817 $ (323) $ 2,117 $ 4,821 $ 6,701 $ 2,006 $ 4,304 $ 5,928 Net income (loss) per common share (4)....... $ 0.25 $ 0.12 $ (0.05) $ 0.30 $ 0.69 $ 0.65 $ 0.29 $ 0.61 $ 0.58 Weighted average shares outstanding............ 7,000 7,000 7,000 7,000 7,000 10,280 7,000 7,000 10,280 GAAP RATIOS: (3)(5) Loss and LAE ratio....... 76.1% 76.6% 79.8% 82.4% 72.5% 73.4% 69.1% 76.7% 73.1% Expense ratio............ 20.8 23.4 31.5 21.7 18.6 31.0 25.4 22.9 26.4 ------- -------- ------- -------- -------- -------- ------- -------- -------- Combined ratio........... 96.9% 100.0% 111.3% 104.1% 91.1% 104.4% 94.5% 99.6% 99.5% </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 ---------------------- DECEMBER 31, AS ADJUSTED -------------------------------------------------- FOR THE 1991 1992 1993 1994 1995 ACTUAL OFFERING(1) ------- -------- ------- -------- -------- -------- ----------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: (3) Investments................... $26,049 $ 27,941 $21,497 $ 18,572 $ 25,902 $161,205 $ 175,768 Total assets.................. 78,749 75,001 81,540 66,628 110,516 378,673 393,236 Losses and loss adjustment expenses.................... 38,607 38,616 54,143 29,269 59,421 93,628 93,628 Total debt.................... 9,009 11,528 9,341 10,683 11,776 63,287 48,250 Minority interest............. 466 55 -- 16 -- 17,723 17,723 Total shareholders' equity.... 484 1,193 2,219 4,255 9,535 17,757 47,357 Book value per share.......... $ 0.07 $ 0.17 $ 0.32 $ 0.61 $ 1.36 $ 2.54 $ 4.74 STATUTORY CAPITAL AND SURPLUS: (6) Pafco......................... $ 8,251 $ 10,363 $ 8,132 $ 7,848 $ 11,875 $ 14,872 $ 14,872 IGF........................... $ 5,277 $ 6,400 $ 2,789 $ 4,512 $ 9,219 $ 11,559 $ 20,559 Superior...................... $ 48,036 $ 48,036 </TABLE> - ------------------------- (1) Results of operations of Superior for the years ended December 31, 1993, 1994 and 1995 and for the six months ended June 30, 1995 and 1996 are presented herein in "Selected Consolidated Historical Financial Data of Superior Insurance Company." The pro forma consolidated statement of operations data for the year ended December 31, 1995 and for the six months ended June 30, 1996 present results for the Company as if the Formation Transaction, the Acquisition, and the other transactions described in "The Company -- Formation of GGS Holdings; Acquisition of Superior" (collectively, the "Transactions") and the Offering had occurred as of January 1, 1995 and eliminate all of the operations related to the commercial business ceded to Granite Reinsurance Company Ltd., a subsidiary of Goran ("Granite Re"), for the year ended December 31, 1995. See "Unaudited Pro Forma Consolidated Statements of Operations" for a discussion of pro forma statement of operations adjustments. The as adjusted consolidated balance sheet data as of June 30, 1996 gives effect to the Offering as if it had occurred as of June 30, 1996. The as adjusted consolidated balance sheet data reflects a per share offering price of $12.50 per share and 3,000,000 shares issued less estimated issuance costs of $4,400,000 and the application of the net proceeds of the Offering. See "Use of Proceeds." (2) The Company's consolidated results of operations for the six months ended June 30, 1996 include the two months results of operations of Superior subsequent to the Acquisition. (3) See "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company -- Overview" for a discussion of the accounting treatment accorded to the crop insurance business. (4) In 1993, the Company recognized an increase to net income as a result of a cumulative effect of a change in accounting principle of $1,175,000. The net income per share for 1993 excluding this cumulative effect was $(0.20). (5) The loss and LAE ratio is calculated by dividing losses and loss adjustment expenses by net premiums earned. The expense ratio is calculated by dividing the sum of policy acquisition and general and administrative expenses and interest expense by net premiums earned. The combined ratio is the sum of the loss and LAE and expense ratios. As a result of the unique accounting treatment accorded to the MPCI business, the Company's GAAP loss and LAE, expense and combined ratios are not comparable to the ratios for other property and casualty insurers. (6) Statutory capital and surplus is calculated under SAP and is relevant for insurance regulatory purposes in determining the amount of business an insurance company may write. Among the differences between SAP and GAAP capital and surplus are the following: SAP does not recognize as assets deferred acquisition costs, certain assets such as furniture and fixtures, agents' balances in excess of 90 days, and deferred tax assets or liabilities. In addition, the historical capital and surplus of an acquired entity carries over for statutory purposes. The statutory surplus of Pafco includes Pafco's share of IGF's statutory surplus prior to April 30, 1996. Pafco owned the following percentages of IGF at December 31 for each of the following years: 1991, 87.9%; 1992, 98.2%; 1993, 98.2%; 1994, 98.8%; 1995, 100%. At April 30, 1996, Pafco transferred IGF Holdings to SIG. Prior to the Transfer (as defined below), IGF Holdings also paid a dividend to Pafco in the form of cash of $7,500,000 and a promissory note with a principal amount of $3,500,000. See "The Company -- Formation of GGS Holdings; Acquisition of Superior."
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+PROSPECTUS SUMMARY Vitaquest International Inc. (the "Company" or "Vitaquest") was incorporated on April 16, 1996 and is the successor by merger to Garden State Nutritionals, Inc., Windmill Marketing Services, Inc. and Cel-Mark International, Inc. (collectively the "Predecessor Companies"). The following summary is qualified in its entirety by the more detailed information and consolidated financial statements (including the Notes thereto) appearing elsewhere in this Prospectus. Unless otherwise noted, the information contained in this Prospectus does not give effect to the exercise of the Underwriters' over-allotment option and reflects the completion of the merger referred to above and of a 95.67808219-for-1 stock dividend prior to the date hereof. Unless the context indicates otherwise, references in this Prospectus to the "Company" or "Vitaquest" mean Vitaquest International Inc., its subsidiary and the Predecessor Companies. In 1993, Garden State Nutritionals, Inc. and Windmill Marketing Services, Inc. elected to be treated as S corporations for Federal income tax purposes and, accordingly, to change their fiscal year end from August 31, to December 31. The financial information presented herein relates to the three month periods ended March 31, 1996 and 1995, the fiscal years ended December 31, 1995 and 1994 ("Fiscal 1995" and "Fiscal 1994", respectively), the fiscal years ended August 31, 1993, 1992 and 1991 ("Fiscal 1993", "Fiscal 1992" and "Fiscal 1991", respectively) and the four month period ended December 31, 1993. THE COMPANY The Company is a custom developer, manufacturer and marketer of vitamins and nutritional supplements, as well as specialty nutritional systems. Specialty nutritional systems include weight loss and sports nutrition kits containing groups of vitamins and nutritional supplements with instructions for use. The Company focuses on adding value for its customers through innovative product development and brand creation. In the first quarter of 1996, the Company manufactured in excess of 1,500 products and marketed in excess of 2,500 products (i) to over 100 marketers of vitamins, nutritional supplements and specialty nutritional systems who sell to their customers through many different channels of distribution, (ii) to various companies who reach their customers and sell their products through electronic media (such as the Home Shopping Network) and (iii) under its own brand names to over 3,000 independent pharmacies, as well as drug store, supermarket and discount department store chains and to health food stores (such as GNC, which has over 2,000 stores). In Fiscal 1995 and in the first quarter of 1996, more than 50% of the Company's net sales resulted from products which were custom developed by the Company. As a custom developer, the Company formulates and manufactures products designed to meet the needs of individual customers. In addition, the Company assists a significant number of these customers with value added services, such as product development, brand creation, package design and marketing support services. The Company believes that these services add value for its customers by assisting customers in developing product lines for their marketing concepts and by making available to such customers the Company's technical and marketing experience and knowledge. These services are considered by the Company to be key components of its strategy to attract customers in the direct marketing and electronic media distribution channels, which accounted for approximately 35% of the Company's net sales in Fiscal 1995 and in the first quarter of 1996. The Company operates its business in three divisions: the Garden State Nutritionals division, the Celebrity Marketing division and the Windmill Marketing division. THE GARDEN STATE NUTRITIONALS DIVISION The Garden State Nutritionals division ("Garden State Nutritionals") manufactures and packages vitamins and nutritional supplements for distribution by the Company's customers as well as by the Celebrity Marketing and Windmill Marketing divisions. The Company believes that Garden State Nutritionals differentiates itself from many of its competitors by providing value added services to its customers. In addition to product development, brand creation, package design and marketing support services, these services include initial market research, as well as technical and compliance support. For direct selling companies, Garden State Nutritionals also provides various consulting services such as assistance in product presentations by Garden State Nutritionals sales and marketing executives to the selling representatives of these companies. In Fiscal 1995, Garden State Nutritionals produced several thousand custom formulations of vitamins and nutritional supplements for over 100 companies in more than 25 countries. Garden State Nutritionals' customers sell such products through a variety of distribution channels including independent pharmacies, discount department and health food stores, electronic media, direct selling and direct response. Garden State Nutritionals' customers are primarily branded vitamin companies (such as GT Merchandising & Licensing Corp., a marketer of Richard Simmons endorsed products), direct selling companies (such as Avon (Malaysia) and BeautiControl), health food retailers (such as Hi-Health Supermarket Corp.), specialty retailers (such as Allison Andrews Corporation d/b/a Vitamin Health Centers) and direct response including mail order companies (such as Montgomery Ward Enterprises Inc.). In Fiscal 1995 and in the first quarter of 1996, less than 5% of this division's sales were to retailers for sale under their private label. Net sales in this division were $39.6 million in Fiscal 1995 and $10.3 million in the first quarter of 1996, representing 65.4% and 57.0% of the Company's aggregate net sales, respectively. THE CELEBRITY MARKETING DIVISION The Celebrity Marketing division ("Celebrity Marketing") develops and markets custom nutrition and health related products for sale by its customers through various forms of electronic media, including television home shopping networks and infomercials, as well as other direct response media, using endorsements of celebrities and health and nutrition authorities. In addition to product development, brand creation, package design and marketing support services, value added services offered by Celebrity Marketing to its customers include training and supervision of celebrities and health and nutrition authorities, promotional and merchandising assistance, and technical and compliance support. In Fiscal 1995 and in the first quarter of 1996, most of this division's products were manufactured by Garden State Nutritionals. The principal customers of the Celebrity Marketing division are the Home Shopping Network, Frankie Avalon Products, Value Vision and Telebrands. Over the past three years this division has experienced substantial sales growth of products marketed through electronic media (such as the Home Shopping Network). Net sales in this division were $9.6 million in Fiscal 1995 and $4.1 million in the first quarter of 1996, representing 15.8% and 23.1% of the Company's aggregate net sales, respectively. THE WINDMILL MARKETING DIVISION The Windmill Marketing division ("Windmill Marketing") primarily sells the Company's own branded products such as Windmill(R) and Foods Plus(R) products to over 3,000 independent pharmacies generally located in the Northeast, Southeast, Mid-Atlantic and Midwest regions of the United States. The Company expanded Windmill Marketing's target market in Fiscal 1994 by introducing branded specialty nutritional supplements to drug store and supermarket chains including Walgreens, Osco, Revco and Pathmark, as well as to health food stores including GNC. These new products include Hi-Ener-G(TM), a ginseng based energy enhancing product, Citri-Life(TM), a weight loss nutritional supplement, and Super Juice(TM), a phyto-nutrient product derived from fruits and vegetables. The Windmill Marketing division distributes over 500 branded products including a full line of multi- and single vitamins and nutritional supplements, as well as function-specific products. As part of its strategy, this division has targeted specialty nutrition markets through sales of its herbal formulations and weight management products. For example, the Windmill Marketing division recently launched a new line of specialty weight management products called Diet Works(TM) to be sold through GNC, other health food stores and independent pharmacies. This line includes products marketed under the Company's Lipo-Stat(TM), ZeroFat(TM) and Seven Day Cleansing Diet(TM) trademarks. Net sales in this division were $11.4 million in Fiscal 1995 and $3.6 million in the first quarter of 1996, representing 18.8% and 19.9% of the Company's aggregate net sales, respectively. The Company believes it is well positioned to capitalize on the growth of the nutritional supplement market. According to a 1994 survey conducted by Packaged Facts, an independent consumer market research firm (the "Packaged Facts Survey"), estimated retail sales of vitamins, minerals and other nutritional supplements has grown at a compounded annual rate of greater than 12% from $3.3 billion in 1991 to $4.6 billion in 1994. The Company believes several factors account for the growth of the vitamin and nutritional supplements market, including increasing interest by many individuals in taking better care of themselves, increased consumer awareness of the health benefits of vitamins and nutritional supplements, emphasis on the promotion of preventative care strategies by health officials to address rising health care costs and favorable demographic trends toward older Americans who are more likely to consume vitamins and mineral supplements. In addition, over the past several years, a number of successful targeted nutritional products and systems have been introduced, including function specific products for weight loss, sports nutrition, menopause, energy and mental function. These products and systems use a number of innovative nutritional ingredients, such as ginseng, ginkgo biloba and chromium picolinate. The Company's aggregate net sales and operating earnings have grown from $26.9 million and $2.9 million in Fiscal 1991 to $60.6 million and $12.6 million in Fiscal 1995, resulting in compounded annual growth rates of 20.6% and 40.4%, respectively. The Company's strategy for growth incorporates the following key aspects: (i) targeting profitable growth across several channels of distribution; (ii) broadening its product line and expanding value added services; (iii) maintaining technologically advanced manufacturing facilities; (iv) leveraging its product line across a diverse customer base; and (v) making strategic acquisitions. The Company has no current arrangements or agreements with respect to any particular acquisition. The Company believes that its experienced management group, including four of its most senior operations executives who have an average of 20 years of experience in the vitamin and nutritional supplements industry, will continue to be instrumental in implementing the Company's growth strategy. Prior to the merger of the Predecessor Companies with and into the Company, Windmill Marketing Services, Inc., Garden State Nutritionals, Inc. and Cel-Mark International Inc. had been in business since 1977, 1979 and 1990 respectively. Immediately prior to the merger, the Predecessor Companies were under the common control of the Selling Stockholders. The Company's principal executive offices are located at 100 Lehigh Drive, Fairfield, New Jersey 07004, and its telephone number is (201) 575-9200. THE OFFERING <TABLE> <S> <C> Common Stock offered By the Company.......................... 2,400,000 shares By the Selling Stockholders............. 4,800,000 shares Total................................ 7,200,000 shares Common Stock outstanding after the 16,566,000 shares(1) Offering................................ Use of proceeds........................... To fund capital expenditures associated with the build-out of the Company's new production, distribution and office facility, to purchase certain machinery and equipment and for general corporate purposes. A substantial portion of the net proceeds may be used by the Company for strategic acquisitions. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources". Nasdaq National Market symbol............. VITQ </TABLE> - --------------- (1) Excludes 1,300,000 shares of Common Stock reserved for issuance under the Company's 1996 Stock Option Plan, of which 615,000 shares are subject to options issued as of the date hereof, exercisable at the initial public offering price per share. See "Management -- 1996 Stock Option Plan". Includes 51,000 shares of Common Stock issued by the Company to certain employees prior to the date of this Offering. See "Management -- Non-Competition, Confidentiality and Other Employee Arrangements". SUMMARY CONSOLIDATED FINANCIAL DATA The following table sets forth summary consolidated financial data for the Company for Fiscal 1993, the four month period ended December 31, 1993, Fiscal 1994, Fiscal 1995 and the three month periods ended March 31, 1995 and 1996 and at December 31, 1995 and March 31, 1996. Such data should be read in conjunction with the "Selected Consolidated Financial Data" and the Consolidated Financial Statements and related Notes thereto included elsewhere in this Prospectus. Results for the three months ended March 31, 1996 are not necessarily indicative of the results to be expected for the related full fiscal year. <TABLE> <CAPTION> FISCAL YEAR FOUR MONTHS FISCAL YEAR ENDED THREE MONTHS ENDED ENDED ENDED DECEMBER 31, MARCH 31, AUGUST 31, DECEMBER 31, ------------------- --------------------- 1993 1993 1994 1995 1995 1996 ----------- ------------ ------- --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) OPERATING DATA Net sales..................... $35,584 $13,617 $50,192 $60,633 $14,365 $18,028 Costs of goods sold........... 20,525 7,675 27,392 31,728 7,759 8,973 ------- ------- ------- ------- Gross profit................ 15,059 5,942 22,800 28,905 6,606 9,055 Selling, general and administrative expenses..... 11,465 4,070 13,992 16,343 3,712 4,160 ------- ------- ------- ------- Operating earnings.......... 3,594 1,872 8,808 12,562 2,894 4,895 Other income (expense)........ 64 (62) 134 83 6 (40) ------- ------- ------- ------- Earnings before income taxes.................... 3,658 1,810 8,942 12,645 2,900 4,855 Income taxes.................. 1,575 180 268 224 82 123 ------- ------- ------- ------- Net earnings................ $ 2,083 $ 1,630 $ 8,674 $12,421 $ 2,818 $ 4,732 ======= ======= ======= ======= PRO FORMA DATA Historical earnings before income taxes............. $12,645 $ 2,900 $ 4,855 Compensation differential(1).......... 1,791 308 -- Income taxes(2)............. (5,926) (1,317) (1,996) ------- Net earnings........ $ 8,510 $ 1,891 $ 2,859 ======= ======= ======= Net earnings per share(3)... $ .58 $ .13 $ .20 ======= ======= ======= Weighted averaged number of common shares outstanding.............. 14,618,209 14,618,209 14,618,209 ========== ========== ========== </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1995 MARCH 31, 1996 ----------------- --------------------------------------- ACTUAL ACTUAL PRO FORMA(4) AS ADJUSTED(5) ------- ------------ -------------- <S> <C> <C> <C> <C> BALANCE SHEET DATA Working capital........................... $12,740 $13,395 $ 9,762 $ 44,862 Total assets.............................. 28,454 28,928 25,328 60,428 Long-term debt............................ 8,960 8,667 8,667 8,667 Stockholders' equity...................... 10,411 12,138 8,505 43,605 </TABLE> - --------------- (1) The Company has entered into employment agreements with Messrs. Edward and Keith Frankel which provide that their salaries will be $500,000 each in 1996. Had those agreements been in place in Fiscal 1995, the Company would have paid $1.8 million less in compensation in Fiscal 1995 and $308,000 less in compensation in the three months ended March 31, 1995. Aggregate compensation to Messrs. Edward and Keith Frankel in Fiscal 1993 and 1994 was $2.5 million and $2.8 million greater than the aggregate salary payable to these executives pursuant to such agreements in 1996. Such agreements provide that beginning in 1997 the base salary is subject to annual increases of the greater of 5% or the percentage increase in the Consumer Price Index and that the Compensation Committee may determine to award bonuses to such executives on the basis of operating results. See "Management -- Employment Agreements". (2) For the four month period ended December 31, 1993, Fiscal 1994 and 1995 and the three month periods ended March 31, 1995 and 1996, the Predecessor Companies were S corporations for Federal income tax purposes and, accordingly, were not subject to Federal income taxes. The Predecessor Companies were subject to Federal income taxes in Fiscal 1993, 1992 and 1991. For the four month period ended December 31, 1993, Fiscal 1994 and 1995 and the three month periods ended March 31, 1995 and 1996, Garden State Nutritionals, Inc. and Windmill Marketing Services, Inc., and for Fiscal 1995 and the three month periods ended March 31, 1995 and 1996, Cel-Mark International, Inc., were S corporations for state income tax purposes. The pro forma data have been presented as if the Company were subject to corporate income taxes for Fiscal 1995 and the three month periods ended March 31, 1995 and 1996, based on the tax laws in effect during such periods. See Note A of Notes to Consolidated Financial Statements. (3) Earnings per share reflects the effect of issuing 51,000 shares of Common Stock to certain employees prior to this Offering, as well as 452,209 shares deemed to be outstanding. Shares deemed outstanding represent the approximate number of shares deemed to be sold by the Company (at an assumed initial public offering price of $16.00 per share) to fund the estimated distributions to stockholders in excess of net earnings during the twelve month period ending June 30, 1996. See "S Corporation Distributions" and "Management -- Non-Competition, Confidentiality and Other Employee Arrangements". (4) The Company's presentation of unaudited pro forma balance sheet data at March 31, 1996 reflects the effect of a $3.7 million S corporation distribution to the stockholders at such date of all previously undistributed S corporation earnings as well as the recording of a deferred tax liability as if the S corporation status of the Company terminated immediately prior to March 31, 1996 and reflects the effect of issuing 51,000 shares of Common Stock to certain employees prior to this Offering. In connection with the issuance of shares to such employees, the Company will recognize aggregate deferred compensation expense of $765,000 which will be amortized over five years beginning in fiscal 1997. All earnings of the Company and the Predecessor Companies from April 1, 1996 to a date prior to the date of this Offering, up to $5.0 million, will be distributed to those persons who were stockholders of the Company and the Predecessor Companies at such date. See "S Corporation Distributions", "Management -- Non-Competition, Confidentiality and other Employee Arrangements" and Notes A and M of Notes to Consolidated Financial Statements. (5) Adjusted to give effect to this Offering and the application of the net proceeds therefrom and to the pro forma adjustments described in footnote (4) above. See "Use of Proceeds".
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001013736_claremont_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001013736_claremont_prospectus_summary.txt
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+SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION, INCLUDING "RISK FACTORS," AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. Claremont Technology Group, Inc. ("Claremont" or the "Company"), provides enterprise-wide information technology ("IT") solutions that re-engineer mission-critical business processes such as customer service, order processing, billing and logistics. Claremont delivers its services, including IT planning, systems integration and development and outsourcing, through a project management methodology that can employ reusable object oriented software modules and transferable design frameworks on a fixed-price, fixed-delivery-schedule basis or a time and materials basis. Claremont provides solutions to large organizations in select IT intensive, vertical markets including communications, financial services and pension/retirement services. Claremont's clients consist of large corporations and government organizations in the United States and certain foreign markets including Canada, the United Kingdom, Saudi Arabia and New Zealand. Claremont provides its services to organizations within industries where technology-enabled change and re-engineering of business processes can have a significant competitive impact. The Company's focus on select vertical markets is complemented by its expertise with the particular customer interface within these markets and its dedication to partner with clients to co-develop large scale business solutions. Claremont believes its industry specific expertise and its partnership approach to client relationships gives it a competitive advantage in marketing additional services to its clients and results in high client retention levels. Clients representing 94% of Claremont's fiscal 1995 revenue continue as clients today. The Company's clients include: AT&T and its subsidiaries, Fred Meyer, Inc., Lucent Technologies, Ohio State Teachers Retirement System and PacifiCorp. Claremont's Total Information Systems Engagement ("TISE") three-phase methodology provides a structure through which the Company's skills and knowledge can be effectively deployed. TISE begins with an intensive design phase in which Claremont works with its clients to define their business problem and to develop a high level system design. In the systems development and integration phase, Claremont's consultants can draw from its previously developed reusable object oriented software modules and transferable design frameworks to cost-effectively co-develop and quickly deploy applications solutions. Claremont's approach emphasizes the replacement of outdated and inflexible legacy code as part of the re-engineering process rather than the mere addition of new interfaces. In the final phase of TISE, the Company can provide outsourcing services for ongoing system maintenance and enhancement. To achieve its objective of becoming a leading provider of enterprise-wide solutions, the Company intends to expand its client base by leveraging its vertical market expertise, increasing penetration of its existing clients, capitalizing on the benefits of its TISE methodology and providing expertise in high demand, leading edge technologies. Further, Claremont's strategy is to attract and retain superior, highly innovative IT professionals. The Company also plans to expand its geographic presence, industry expertise and technical scope through strategic acquisitions. To facilitate its delivery of technological expertise, Claremont has developed working relationships with companies such as Arbor Software Corporation, Forte Software, Inc., Hewlett Packard Company, International Business Machines Corp. ("IBM"), Microsoft Corporation, Netscape Communications Corporation, Oracle Technology, Inc., Silicon Graphics, Inc. and Sybase, Inc. THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Company.................. 1,750,000 shares Common Stock Offered by the Selling Shareholders..... 1,050,000 shares Common Stock Outstanding after the Offering.......... 6,855,611 shares (1) Use of Proceeds...................................... For repayment of principal and interest on revolving line of credit; working capital and general corporate purposes. Nasdaq National Market Symbol........................ CLMT </TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA (In thousands, except per share data) <TABLE> <CAPTION> NINE MONTHS ENDED YEAR ENDED JUNE 30, MARCH 31, ----------------------------------------------------- -------------------- 1991 1992 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenue.............................. $ 4,057 $ 9,368 $ 15,667 $ 15,713 $ 27,292 $ 18,988 $ 33,675 Income (loss) from operations.............. (185) 125 2,774 2,393 3,432 2,790 3,879 Net income (loss).......................... (135) 102 1,591 1,452 2,147 1,743 2,205 Net income (loss) per common share (2)..... $ (.03) $ .02 $ .28 $ .24 $ .31 $ .25 $ .29 Weighted average number of common and common equivalent shares outstanding (2).. 4,532 4,544 5,796 6,269 7,319 7,215 7,662 </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 ------------------------- ACTUAL AS ADJUSTED(3) --------- -------------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents.............................................................. $ 80 $ 23,693 Working capital........................................................................ 3,066 26,679 Total assets........................................................................... 18,278 41,891 Long-term debt, excluding current installments......................................... 1,756 1,756 Shareholders' equity................................................................... 8,129 31,742 </TABLE> - ------------ (1) Includes 64,516 shares of Common Stock issued from March 31, 1996 through July 1, 1996 pursuant to the exercise of stock options, and 273,913 shares of Common Stock to be issued upon the exercise of currently outstanding options upon completion of this offering. Excludes 2,853,397 shares of Common Stock reserved for issuance upon exercise of currently outstanding options at a weighted average exercise price of $1.87 per share, of which 1,124,830 are currently exercisable. Also excludes 400,000 shares of Common Stock issuable upon exercise of an outstanding warrant at an exercise price of $10.33 per share. See "Management -- Stock Option Plans" and "Certain Transactions."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001013749_north_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001013749_north_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..52df89a12693bff45173cdc0cbbb22bb76970d5a
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. AS USED IN THIS PROSPECTUS, UNLESS THE CONTEXT OTHERWISE REQUIRES, THE TERMS "THE NORTH FACE" AND "COMPANY" INCLUDE THE NORTH FACE, INC. AND ITS SUBSIDIARIES AND THEIR RESPECTIVE OPERATIONS, AND INCLUDE THE BUSINESS OF THE COMPANY'S PREDECESSOR. UNLESS OTHERWISE INDICATED, ALL INFORMATION INCLUDED IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED AND HAS BEEN RETROACTIVELY ADJUSTED TO GIVE EFFECT TO THE FOLLOWING TRANSACTIONS, ALL OF WHICH WERE COMPLETED IN OR PRIOR TO JULY 1996: (I) STOCK SPLITS WHICH RESULTED IN EACH SHARE OF COMMON STOCK BEING SPLIT INTO 4.44 SHARES AND (II) THE CONVERSION OF EACH SHARE OF THE COMPANY'S SERIES A CONVERTIBLE PREFERRED STOCK (THE "PREFERRED STOCK"), INCLUDING SHARES OF PREFERRED STOCK ISSUED AS CUMULATIVE DIVIDENDS ON THE PREFERRED STOCK, INTO APPROXIMATELY 1.7743 SHARES OF COMMON STOCK . THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE FEDERAL SECURITIES LAWS. ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS DUE TO A NUMBER OF FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0001013763_muzak_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001013763_muzak_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..a4b32c704422ce032210081e64dfc0f19ca2e115
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless the context otherwise requires, all references to the "Company" include Muzak Limited Partnership and its consolidated subsidiary, Muzak Capital Corporation ("Capital Corp."). THE COMPANY The Company is the leading provider of business music in the United States, based on the number of customer locations served. The Company and its franchisees serve approximately 180,000 customer locations in the United States, representing a market share of approximately 50% of the estimated number of domestic locations currently served by business music providers and approximately twice the estimated number of locations served by its nearest competitor. Through a network of distributors, the Company also provides business music to subscribers outside the United States. In addition, the Company offers its customers a range of non-music services, including broadcast data delivery, video, audio marketing and in-store advertising services, and sells, installs and services related equipment. The Company markets business music in a variety of formats, including (i) its well-known proprietary Environmental Music(R) (or "background" music) and (ii) over 100 "foreground" music formats ranging from top-of-the-charts hits to contemporary jazz, country music and classical music. Internal and third-party studies sponsored by the Company have indicated that properly programmed music can have a favorable impact on listeners in business and retail environments. The broadcasting of music, including the rebroadcasting of commercial music, in such locations is not permitted without licenses and the payment of royalties. Environmental Music(R), which is principally comprised of instrumental versions of popular songs that have been adapted and rerecorded by the Company, is generally used in business offices and manufacturing facilities to improve employee concentration and reduce stress. Foreground music, consisting principally of original artist recordings, is most commonly used in public areas, such as restaurants and retail establishments, primarily as a sales enhancement tool. The Company distributes 30 of its channels by broadcast media (principally direct broadcast satellite ("DBS") transmission) and supplies the balance to subscribers in the form of long-playing audio tapes. Since 1991, the total number of domestic customer locations served by the Company and its franchisees has grown from 134,000 to 180,000, with the number of domestic customer locations served by the Company growing from approximately 32,000 to approximately 62,000 and the number of domestic customer locations served by the Company's franchisees growing from approximately 102,000 to approximately 118,000. Over the same period, the Company's total revenues and earnings before interest, taxes, depreciation, amortization and other income/expense ("EBITDA") have grown from $56.0 million and $12.6 million in 1991, respectively, to $86.9 million and $20.0 million in 1995, respectively, and the Company's net losses from operations have decreased from approximately $9.5 million in 1991 to approximately $5.7 million in 1995. COMPETITIVE STRENGTHS The Company believes that it possesses a number of attributes that have allowed it to become the leading provider of business music in the nation (based on number of customer locations served), including: Broad Appeal to Diverse Customer Base. The Company's music products have been programmed to appeal to a variety of end users, including business offices, manufacturing facilities, retail establishments and restaurants. The Company's salesforce markets over 100 different music formats, allowing each customer to select a format appropriate for its line of business and customer base. The Company's major national customers include national restaurant chains, such as Taco Bell, McDonald's and Boston Market, and specialty retailers, such as Nordstrom, Crate & Barrel, Kroger, Staples, Hallmark and Wal-Mart, as well as a large number of local and regional accounts, none of which represents more than 3% of the Company's consolidated revenues and the top five of which represent in the aggregate less than 10% of consolidated revenues. The Company believes that the geographic dispersion of its customers, and the diversity of businesses in which they are engaged minimizes the impact to the Company of a cyclical downturn in any one area of the country or in any one sector of the economy. Attractive Economics to Customers and the Company. The Company believes that its services are highly cost effective, providing an important business tool to its customers for a low monthly cost. On average, the Company receives approximately $45 of revenue per month per subscriber location, net of licensing fee and applicable royalties, for which it makes an investment per subscriber location (including sales commission) of approximately $950 for medium-powered DBS subscribers (substantially lower for local broadcast technology subscribers). This allows the Company to recover its capital costs within two years. The Company's customers typically enter into long-term contracts, which are generally for a period of five years with an automatic renewal option. The Company's annual cancellation rate is less than 10% of music and other business services revenues, which equates to an average length of service per customer of approximately ten years. Full Line of Audio, Video and Data Products and Services. The Company can provide its customers with an integrated package of services including: (i) over 100 different music formats including both background and foreground music; (ii) customized audio messages inserted in regular programming; (iii) e- mail and computer bulk data transfer; (iv) on-premise music videos; (v) customized messages for use with "on-hold" business telephone systems; and (vi) "point of purchase" audio advertising and merchandising services. The ability to deliver a package of music and non-music services over a common transmission system has been a critical factor in enabling the Company to generate incremental revenues from its customers at little or no additional cost, gain new customers and protect existing customers from competitive business music providers that do not offer such a broad line of products and services. Multiple Delivery Systems. The Company believes that its ability to distribute its services through each of high-powered and medium-powered DBS transmission, local radio broadcast transmission, telephone lines and audio tapes enables it to effectively serve customers with either single or multiple locations as well as those having varied music or service needs. The number of domestic subscriber locations served by medium-powered DBS transmission has grown from approximately 26,000 at the end of 1991 to approximately 120,000 at June 30, 1996. In addition, the Company has recently entered into a unique distribution arrangement with EchoStar Satellite Corporation ("EchoStar"). The Company anticipates that its agreements with EchoStar will enable it to: (i) attract additional business music subscribers by offering an expanded array of DBS-delivered music programming; (ii) deliver music services to residential subscribers for the first time; and (iii) deliver television programming, such as CNN(R), MTV(R) and ESPN(R), to business music subscribers in packages specifically designed for businesses (i.e., news, entertainment or lifestyles). In addition, the EchoStar agreements provide the Company with high-powered DBS transmission capability to supplement its existing medium-powered DBS system, reduced equipment installation costs and an opportunity to shift certain equipment costs to the subscriber. Integrated Sales Network. The Company believes that its 35 sales offices in the United States, its 81 franchisees, whose sales territories cover the remaining market in the United States, and its 20 international distributors in 15 foreign countries, comprise the largest network of customer sales and service offices among business music providers in the United States. The Company further believes that this network allows the Company, among other things, to more effectively market to and support its national and international accounts. OPERATING STRATEGY The Company believes it has opportunities to achieve growth in revenues and cash flow by: Increasing U.S. Market Penetration. The Company intends to increase its penetration of the U.S. market by expanding its local and national account sales force, offering more music formats (including up to 60 broadcast formats with the EchoStar agreements), developing sales strategies focused on underserved market segments and aggressively marketing its services as part of a unique bundled package. 1993 census data indicate that there are approximately 6.4 million business locations in the United States, including approximately 1.1 million retail outlets and 450,000 restaurant and other food service locations. Of the total 6.4 million business locations, only about 5% are currently believed by the Company to subscribe to a business music service. Pursuing Strategic Relationships and Acquisitions. The Company intends to pursue additional strategic relationships, acquisitions and joint ventures, such as the Company's recent distribution agreements with EchoStar and its 1994 acquisition of the assets of Comcast Sound Communications Inc. ("Comcast"), then the Company's largest franchisee, in order to: (i) increase the breadth of its programming offerings; (ii) further diversify its distribution channels; and (iii) take advantage of certain economies of scale. Expanding in International Markets. The Company plans to continue its expansion in Europe primarily through strategic relationships and joint ventures, such as Muzak Europe B.V. ("Muzak Europe"), a joint venture formed in 1995 between the Company and Alcas Holdings B.V. ("Alcas"), a leading European business music provider. This joint venture couples the Company's broadcast technology skills with Alcas' market knowledge and marketing expertise and further permits the Company to leverage its assets and programming expertise and diversify its sources of revenue. The Company also intends to expand into Latin America and Asia by establishing similar strategic relationships in those markets. Exploiting New Market Opportunities. The Company intends to continue to leverage its music programming expertise and its extensive recorded music library into new products and markets. For example, the Company has recently developed and begun operating its proprietary MusicServer SM service, which permits real-time delivery of digitized song samples over the Internet to music retailers and others (including companies such as CDnow!, Tower Records and Microsoft) that require access to a large library of recorded music. Enhancing Operating Margins. The Company seeks to enhance operating margins through continued centralization of operations and leveraging fixed expenses over a wider customer base. The Company strives to exploit less costly transmission technologies and to reduce the capital required to initiate service to a customer. The Company was formed in September 1992 by Centre Capital Investors L.P. ("CCI"), a private investment partnership of which Centre Partners L.P. ("Centre Partners") is the general partner, to acquire substantially all of the assets and business of the Company (the "1992 Acquisition") from a predecessor entity (the "Predecessor"). MLP Holdings L.P. ("MLP"), an affiliate of CCI, and the Management Investors (as defined herein) beneficially own approximately 62.9% and 9.7%, respectively, of the outstanding partnership interests of the Company. Capital Corp., a Delaware corporation, is acting as co-obligor for the Senior Notes. Capital Corp. is a wholly-owned subsidiary of the Company which has nominal assets and will not conduct any operations. Certain institutional investors that might otherwise be limited in their ability to invest in securities offered by partnerships by reason of the investment laws of their states of organization or their charter documents may be able to invest in the Senior Notes because Capital Corp. is a corporation. A portion of the net proceeds from the Offering will be used to retire indebtedness incurred in the 1992 Acquisition. THE OFFERING Securities Offered........ $100,000,000 in aggregate principal amount of % Senior Notes due 2003 (the "Senior Notes"). Maturity Date............. , 2003. Interest Payment Dates.... and of each year, commencing , 1997. Optional Redemption....... The Senior Notes will be redeemable at the option of the Issuers, in whole or in part, at any time on or after , 2000, in cash at the redemption prices set forth herein, plus accrued and unpaid interest, if any, thereon to the date of redemp- tion. In addition, during the first 36 months after the date of this Prospectus, the Issuers may on any one or more occasions redeem up to 35% of the ini- tially outstanding aggregate principal amount of Senior Notes at a redemption price equal to % of the principal amount thereof, plus accrued and un- paid interest, if any, thereon to the redemption date, with the net proceeds of one or more equity offerings of the Issuers; provided that at least 65% of the initially outstanding aggregate princi- pal amount of Senior Notes remains outstanding im- mediately after the occurrence of any such redemp- tion. See "Description of the Senior Notes--Op- tional Redemption." Change of Control......... Upon the occurrence of a Change of Control, each holder of Senior Notes will have the right to re- quire the Issuers to repurchase all or any part of such holder's Senior Notes at an offer price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, thereon to the date of purchase. See "De- scription of the Senior Notes--Repurchase at the Option of Holders--Change of Control." There can be no assurance that, in the event of a Change of Con- trol, the Issuers would have sufficient funds to purchase all Senior Notes tendered. See "Risk Fac- tors--Risk of Inability to Satisfy Change of Con- trol Offer." Ranking................... The Senior Notes will represent unsecured senior obligations of the Issuers, will rank senior in right of payment to all Subordinated Indebtedness of the Issuers and will rank pari passu in right of payment with all senior indebtedness of the Is- suers. At June 30, 1996, on a pro forma basis after giving effect to the Offering and the application of the estimated net proceeds therefrom, the Is- suers would have had approximately $1.1 million of total indebtedness, other than the Senior Notes. The Senior Notes will be guaranteed on a senior ba- sis by all future Domestic Subsidiaries of the Com- pany (other than Capital Corp.). As of the date hereof, the Company has no subsidiaries other than Capital Corp., which will be a Restricted Subsidi- ary. The Indenture will limit the ability of the Company and its Restricted Subsidiaries to incur additional indebtedness; however, the Company and its Restricted Subsidiaries will be permitted to incur certain indebtedness, which may be secured. See "Description of the Senior Notes--General" and "--Certain Covenants." Certain Covenants......... The Indenture will contain certain covenants that will limit, among other things, the ability of the Company and its Restricted Subsidiaries to (i) pay dividends or make certain other restricted payments or investments, (ii) incur additional indebtedness or issue preferred equity interests, (iii) merge, consolidate or sell all or substantially all of their assets, (iv) create liens on assets, (v) en- ter into certain transactions with affiliates or related persons and (vi) engage in other lines of business. See "Description of the Senior Notes-- Certain Covenants."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001013786_zones-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001013786_zones-inc_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..9aafe726d5125eaf5789f5e0f0ef87050b8ca573
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and Consolidated Financial Statements, including the Notes thereto, appearing elsewhere in this Prospectus. See "Risk Factors" for information prospective investors should consider. THE COMPANY Multiple Zones International, Inc. (the "Company") is a leading international direct marketer of microcomputer hardware, software, peripherals and accessories for users of Apple Macintosh-compatible ("Mac") and IBM-compatible ("PC") computers through two flagship catalogs, THE MAC ZONE and THE PC ZONE. During 1995, over 29 million catalogs were distributed by the Company domestically, with additional circulation by its subsidiaries and licensees through operations located in 26 other countries worldwide, more countries than any other catalog retailer of microcomputer products. The Company offers a broad selection of over 18,000 microcomputer products at competitive prices primarily through its distinctive catalogs, as well as through major trade publications and an outbound telemarketing sales team focused on small and medium-sized corporate, governmental and educational accounts. The Company tailors its catalogs and targets specific customers based on individual customer records in the Company's proprietary database. This targeted marketing, coupled with the Company's knowledgeable sales assistance and superior customer service, has produced an established base of satisfied customers. The Company believes that a substantial portion of its revenues represent sales to repeat customers. The Company has achieved strong growth in both sales and profitability. Net sales grew at a compound annual growth rate of 50.9% to $242.6 million in 1995 from $46.8 million in 1991. Principally as a result of increased sales of microcomputer hardware products, the Company's average order size grew to $336 in the three months ended March 31, 1996 from $201 in 1993. The Company's net income increased to $3.2 million in 1995 from $468,000 in 1991, and increased to $2.2 million in the three months ended March 31, 1996 from $234,000 in the comparable prior period. According to industry data, direct marketing is expected to be the fastest growing major distribution channel for microcomputer products, with a domestic market share that is projected to more than double from its 1994 level to over 15% of total domestic microcomputer product sales in 1998. The Company believes this projected growth is attributable to consumers' increasing familiarity with microcomputers, the emergence of component "plug-and-play" compatibility, and manufacturers' growing recognition of the cost-effectiveness of marketing microcomputer products through catalogs. Annual domestic sales of microcomputer products are also projected to more than double from their 1994 level to over $120 billion in 1998. The Company believes the international market for microcomputer products should experience similar growth trends, due primarily to an increasing installed base of microcomputers and expansion by manufacturers seeking additional markets for their products. As a leading participant in the direct marketing channel, the Company believes it is well positioned to capitalize on the anticipated growth of the markets for microcomputer products. Over the past three years, the Company has made significant investments in its operating infrastructure to capitalize on its position in this rapidly growing market. The Company has devoted considerable resources to building a highly qualified management team to guide its anticipated growth; developing one of the channel's largest databases of purchasers and prospective purchasers of microcomputer products; installing sophisticated systems to provide the Company with real-time access to information on customer purchase histories, inventory availability, and product specifications, benefits and features; developing in-house catalog design and production capability; and establishing international operations. The Company intends to leverage its operating infrastructure to strengthen and expand its offerings of PC products to meet increasing customer demand; increase the circulation of its flagship catalogs; increase the proportion of the Company's sales to business accounts through its outbound sales team; expand sales through its international operations; and enhance the Company's presence on the World Wide Web of the Internet. In addition, the Company will strive to enhance growth and profitability by expanding the breadth of its product offerings; increasing inventory depth to improve in-stock positions; increasing its emphasis on sales of hardware products in order to increase average order size and gross profit dollars; purchasing more products directly from manufacturers at more favorable prices; and more aggressively pursuing first-to-market, end-of-life-cycle and other higher-margin product offerings. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company........... 2,200,000 shares Common Stock outstanding after the 12,493,710 shares offering(1)................................. Use of proceeds............................... Repayment of borrowings, working capital requirements and other general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol........ MZON </TABLE> - --------------- (1) Does not include 1,127,560 shares of Common Stock issuable upon exercise of stock options and warrants outstanding at May 31, 1996, and an additional 1,062,750 shares of Common Stock reserved for future issuance under the Company's stock option and employee stock purchase plans. See "Management -- Benefit Plans," "-- Certain Transactions -- Benaroya-Bessemer Financing" and Notes 10 and 11 of Notes to Consolidated Financial Statements. ------------------------ The Company was incorporated on November 23, 1988 as a Washington corporation. Unless the context otherwise requires, the term "Company" refers to Multiple Zones International, Inc. and its direct and indirect subsidiaries. The Company's principal executive offices are located at 15815 S.E. 37th Street, Bellevue, Washington 98006-1800 and its telephone number is (206) 603-2400. THE MAC ZONE(R) and THE PC ZONE(R) are registered service marks of the Company. All other trademarks or service marks appearing in this Prospectus are trademarks or registered trademarks of the respective companies that utilize them. ------------------------ Unless otherwise indicated, all information in this Prospectus: (i) assumes that the Underwriters' over-allotment option will not be exercised; (ii) reflects a 50,000-for-9 stock split effected June 7, 1993, a 2-for-1 stock split effected February 9, 1994, and a 1.5-for-1 stock split effected June 3, 1996; (iii) reflects the conversion of all outstanding shares of the Company's Series A Convertible Preferred Stock ("Series A Preferred Stock") into 1,874,999 shares of Common Stock in October 1995; and (iv) reflects the conversion of all outstanding shares of the Company's Series B Convertible Preferred Stock ("Series B Preferred Stock"), which were issued in October 1995, into 918,711 shares of Common Stock upon consummation of the offering. This Prospectus contains forward-looking statements within the meaning of the federal securities laws. There are many factors that could cause actual events and results to differ materially from those expressed in or implied by these statements, including those set forth in "Risk Factors" and elsewhere in this Prospectus. SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ----------------------------------------------------- -------------------- 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- -------- -------- ------- -------- (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales...................... $46,834 $77,023 $80,515 $113,456 $242,587 $46,228 $100,927 Gross profit................... 7,483 9,868 11,217 15,245 31,550 6,301 13,963 Income (loss) from operations................... 526 (1,953) 631 834 6,125 543 3,885 Net income (loss)(1)........... $ 468 $(2,065) $ 451 $ 412 $ 3,192 $ 234 $ 2,173 Pro forma earnings per share(1)..................... $ 0.31 $ 0.02 $ 0.21 Shares used in computation of pro forma earnings per share(1)..................... 10,386 10,363 10,380 SELECTED OPERATING DATA(2): Catalogs distributed........... 6,900,000 8,000,000 15,000,000 29,000,000 8,000,000 9,500,000 Number of shipments(3)......... 395,000 415,000 522,000 859,000 198,000 283,000 Average order size(3).......... $ 211 $ 201 $ 212 $ 273 $ 229 $ 336 Customer and inquirer database(4).................. 1,626,000 1,908,000 1,711,000 2,023,000 </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 -------------------------- ACTUAL AS ADJUSTED(5) ------- -------------- (UNAUDITED) <S> <C> <C> BALANCE SHEET DATA: Working capital............................................................... $ 8,498 $ 38,328 Total assets.................................................................. 92,701 110,741 Short-term debt............................................................... 12,970 1,180 Long-term debt, net of current portion........................................ 1,497 1,497 Series B Preferred Stock...................................................... 6,691 -- Total shareholders' equity.................................................... 6,706 43,227 </TABLE> - --------------- (1) During the period from its inception through June 5, 1993, the Company elected to be treated as an S Corporation for federal income tax purposes and accordingly made no provision for federal income taxes on income earned, and derived no federal income tax benefit from any losses incurred, during that period. See Note 8 of Notes to Consolidated Financial Statements. If the Company had been subject to federal income taxes for all of 1993 at the statutory rates in effect for that year, its pro forma net income for 1993 would have been $299,600. The pro forma earnings per share and pro forma average number of common shares outstanding data are unaudited and assume that all options and warrants exercisable for Common Stock, and all securities convertible into Common Stock, issued by the Company since May 3, 1995 were issued and exercised or converted on January 1, 1993. (2) Selected operating data are unaudited and exclude international operating data. (3) Number of shipments is the number of outbound shipments to customers from the third-party distribution center utilized by the Company. Average order size is calculated by dividing domestic gross sales by the number of shipments. (4) The database includes customer and inquirer records. Customers are people who have purchased or received products from the Company. Inquirers are people who have requested a catalog or product information from the Company. Due to a change in the Company's customer and inquirer database, data for 1992 and 1993 are not comparable to the data for more recent periods and accordingly have been omitted. (5) As adjusted to give effect to the: (i) conversion of all outstanding shares of Series B Preferred Stock upon consummation of the offering; (ii) sale of the 2,200,000 shares of Common Stock being offered hereby at an assumed initial public offering price of $15.00 per share less Underwriting Discounts and Commissions and estimated expenses of the offering; and (iii) application of the estimated net proceeds of the offering. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001013795_simulation_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001013795_simulation_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Investors should carefully consider the information set forth under the heading "Risk Factors." THE COMPANY Simulation Sciences Inc. ("SimSci" or the "Company") is a leading provider of commercial simulation software and related services to the process industries, including the petroleum, petrochemical and industrial chemicals process industries and the engineering and construction firms that support those industries. The Company's windows-based graphical user interface and simulation software products are designed to provide the information necessary to increase profitability by reducing capital investment costs, improving plant yields and enhancing management decision making. In addition, the Company's Open Simulation Application Framework ("OSAF"), a SimSci software architecture utilized by the Company's PROVISION product, enables companies in the process industries to integrate their internally developed software and third-party software with the Company's software, thereby helping customers maximize the value of investments in existing technology. SimSci has over 500 customers throughout the process industries and has offices in seven countries supporting sales in over 70 countries worldwide. In February 1996, the Company entered into a joint development agreement with Shell Oil Company to develop a new, real-time simulation and optimization software product. According to industry sources, companies in the process industries operate more than 14,000 processing facilities worldwide. Companies in these capital-intensive industries must continually seek ways to increase the efficiency of their plant designs and production operations to increase profitability and improve return on investment. Process industry plant operations are comprised of a series of distinct process steps that involve different chemical reactions and physical processes. The chemistry and physics of these individual process steps can be modeled in software using sophisticated mathematical techniques. Because plants in these industries process very large volumes of materials, even slight increases in efficiency may result in significant increases in profitability. Furthermore, increasingly intense global competition and stringent environmental and safety regulations have placed additional pressure on these industries to optimize the conversion of raw materials into finished products. Today's process industry managers are increasingly seeking to use software modeling for process design, to improve the efficiency of their ongoing operations and to manage their overall plants more profitably. PRO/II, the Company's leading steady-state simulation program, enables process design engineers to rigorously model a wide range of organic and inorganic chemical processes, such as those found in the oil and gas, chemical and petrochemical industries. Engineers use PRO/II to design new processes or to troubleshoot, debottleneck and retrofit existing operations to make them operate more efficiently and profitably. SimSci's products are designed to run on industry-standard platforms and software environments, including 32-bit Windows and UNIX, and utilize an easy-to-use graphical user interface. The Company's PROVISION graphical environment enables third-party and in-house software to interoperate with the Company's simulation software through OSAF. The Company also offers a number of other products to simulate various aspects of process industry operations. The Company currently has over 500 customers across the major process industries. In 1995 and the six months ended June 30, 1996, 64% and 65%, respectively, of the Company's total revenue was generated from customers outside of the United States. Customers include Amoco Corporation, Arco, BP Oil Company, Chevron U.S.A. Inc., Citgo Petroleum Company, Conoco Inc., Exxon Oil Corporation, Mobil Oil Corporation, Royal Dutch Shell Oil Company, Sun Company Inc., Texaco Refining and Marketing, Inc., Unocal Corporation, Allied Signal Corporation, Hoechst A.G., Imperial Chemical Industries PLC, Mitsubishi Chemical Corporation, Nippon Sanso Corporation, Novacor Chemical Corp., Saudi Basic Industries Corp., Bechtel Corporation, Brown & Root, Inc., Fluor Daniel, Inc., Nippon Oil Engineering and Construction, Raytheon Engineers & Construction and Snamprogetti SpA. The Company's strategy is to expand and extend the use of its simulation technology and solutions for design, optimization and management functions throughout the process industries by leveraging core simulation technology, integrating core products into its OSAF architecture, expanding on-line modeling capabilities, penetrating additional process industries and promoting strategic relationships. The Company markets its products and services through its direct sales organization complemented by sales agents and distributors. As of June 30, 1996, the Company's global direct sales force included 26 sales personnel located in three sales and support offices in the United States and international sales offices in the United Kingdom, Germany, Egypt, Japan, Singapore and Venezuela. SimSci also markets its products at a substantial discount to universities for use in teaching and research, participates in industry trade shows, conducts direct mail campaigns and sponsors industry conferences and seminars. The Company was incorporated in California in 1967 and reincorporated in Delaware in September 1996. The Company's principal offices are located at 601 Valencia Avenue, Suite 100, Brea, California 92823 and its telephone number at that location is (714) 579-0412. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company................. 2,700,000 shares Common Stock offered by the Selling Stockholders.... 850,000 shares Common Stock to be outstanding after the offering... 9,421,803 shares(1) Use of proceeds..................................... For working capital and other general corporate purposes. See "Use of Proceeds." Nasdaq National Market symbol....................... SMCI </TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> SIX MONTHS ENDED FISCAL YEAR ENDED DECEMBER 31, JUNE 30, ----------------------------------------------- ----------------- 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Total revenue................... $21,513 $23,940 $28,144 $28,252 $33,119 $15,246 $21,791 Gross profit.................... 17,769 19,855 24,014 21,564 26,359 12,147 18,460 Total operating expenses........ 17,527 19,009 21,857 23,965 24,152 11,362 17,250 Income (loss) from operations... 242 846 2,157 (2,401) 2,207 784 1,210 Net income (loss)............... 114 536 1,604 (1,642) 1,355 620 810 Pro forma net income per share......................... $ .17 $ .10 Pro forma weighted average common shares(2).............. 7,789 7,789 </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 ------------------------------- PRO FORMA(2) AS ADJUSTED(3) ------------ -------------- <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Working capital.............................................. $ 2,316 $ 24,291 Total assets................................................. 22,596 44,007 Total liabilities............................................ 11,874 11,686 Total stockholders' equity................................... 10,722 32,321 </TABLE> - --------------- (1) Excludes (i) 1,514,166 shares of Common Stock issuable upon the exercise of outstanding options at June 30, 1996 under the Company's 1994 Stock Option Plan at a weighted average exercise price of $4.26 per share, (ii) options to purchase an additional 26,667 shares granted after June 30, 1996 and the cancellation of options for 55,034 shares after June 30, 1996 and (iii) 438,598 shares issuable upon the exercise of outstanding warrants at $2.85 per share. Includes 29,300 shares of Common Stock issued upon the exercise of options after June 30, 1996. (2) Reflects the conversion of all outstanding shares of Preferred Stock into shares of Common Stock at the closing of this offering. See "Capitalization" and Note 4 of Notes to Consolidated Financial Statements. The Company has not declared or paid any cash dividends on the Common Stock for more than five years and does not presently intend to pay cash dividends on the Common Stock in the foreseeable future. See "Dividend Policy." (3) Adjusted to give effect to the sale of the 2,700,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $9.00 per share after deducting the estimated underwriting discount and estimated offering expenses payable by the Company. See "Use of Proceeds" and "Capitalization." ------------------------ Except as otherwise specified, all information in this Prospectus (i) assumes no exercise of the Underwriters' over-allotment option; (ii) reflects the conversion of all of the Company's outstanding shares of Preferred Stock into shares of Common Stock, which will occur automatically at the closing of this offering; (iii) reflects a one-for-three reverse stock split effected in October 1996; and (iv) reflects the reincorporation of the Company in the State of Delaware in September 1996. See "Underwriting."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001013836_capital_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001013836_capital_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..073e3a0ab167648d4e951ddff9754a6c3bf16b2e
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION SET FORTH HEREIN (I) ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED, AND (II) GIVES EFFECT TO A 10,000-FOR-1 STOCK SPLIT EFFECTED ON JULY 1, 1996. REFERENCES IN THIS PROSPECTUS TO THE "COMPANY" INCLUDE CAPITAL FACTORS HOLDING, INC. ("HOLDING"), AND ITS DIRECT AND INDIRECT SUBSIDIARIES, INCLUDING CAPITAL FACTORS, INC. ("FACTORS"), THE PRIMARY OPERATING COMPANY. THE COMPANY The Company is a specialized financial services company principally engaged in providing receivables-based commercial financing and related fee-based credit, collection and management information services. The Company's clients are primarily small to medium size companies in various industries, including textile and apparel and furniture manufacturing and, recently, entities involved in the healthcare industry. The Company operates through four offices located in New York City, Los Angeles, Charlotte and its headquarters in South Florida. The Company generally provides financing to its clients through the purchase of accounts receivable owed to the Company's clients by the clients' customers, usually on a non-recourse basis, as well as by guaranteeing amounts due under letters of credit issued to the Company's clients which are collateralized by such accounts receivable and other assets. The purchase of accounts receivable is known as "factoring" and results in the payment by the client of a factoring fee, generally equal to 0.5% to 2% of the factored sales volume. No money is paid to the client at the time the Company purchases the client's receivables. Payment for receivables which are credit-approved by the Company is made to the client after collection from the client's customer or, if the receivable was not paid based solely on the customer's financial inability to pay, payment is made to the client within 120 days after the due date of the receivable. In some cases, the Company does not guarantee payment of the receivable, in which case payment is made to the client only upon collection of the receivable. Frequently, the Company also advances funds to its clients prior to collection of receivables, charges interest on such advances (in addition to any factoring fees) and satisfies such advances from receivables collections. In late 1994, the Company began to expand its asset-based lending business. Factoring has been a method of working capital financing in the United States for over 200 years. The factoring industry has undergone considerable consolidation over the past several years; as a result the industry is characterized by a small number of very large factors operating nationally, with a multitude of small companies generally operating on a local or regional basis. In a recent survey, the largest fourteen factoring companies reported factoring volume in 1995 of $60.9 billion, an increase of 48% over reported volume in 1988. The Company had a 3.3% share of this reported volume for 1995. The Company has grown significantly in size and profitability, with compounded annual growth rates in operating revenues and net income of 23.6% and 50.0%, respectively, during the period 1991 through 1995, and a compounded annual growth rate in factored sales volume of 24.8% for the same period. For 1995, the Company's operating revenues, net income and factored sales volume increased by 28.5%, 42.7% and 30.2%, respectively, over 1994 and increased by 24.7%, 1.1% and 27.8%, respectively, in the three month period ended March 31, 1996 as compared to the same period in 1995. The Company's operating strategy includes (i) managing credit risk to ensure consistent and stable growth, (ii) increasing market penetration through offices in key factoring centers, (iii) recruiting and retaining experienced personnel who use a team approach to provide quality service, and (iv) diversifying by product and industry, especially in healthcare financing, which management believes has significant growth potential. In 1994, the Company became the first company to effect a securitization of factored advances (the "Securitized Financings"). The advances ("Advances") are collateralized by accounts receivable from customers of the Company's clients and, in certain cases, by cash, letters of credit, inventory or other collateral. The Company has not employed gain-on-sale accounting in its Securitized Financings. The Company has completed two additional securitizations of factored advances since 1994. See "Business-- Background of the Company." Holding is a wholly owned subsidiary of Capital Bank, a Florida commercial bank ("Capital Bank"), which is a wholly owned subsidiary of Capital Bancorp ("Bancorp"). The Company's principal executive offices are located at 1799 West Oakland Park Boulevard, Fort Lauderdale, Florida 33311, and its telephone number is (954) 730-2900. RECENT DEVELOPMENTS The Company's operating revenues and net income for the two months ended May 31, 1996 were approximately $7.3 million and approximately $1.7 million, respectively, as compared to approximately $5.5 million and approximately $1.3 million, respectively, for the same two month period ended May 31, 1995, a 32.2% and 30.8% increase, respectively. The Company's operating revenues and net income for the five month period ended May 31, 1996 were approximately $16.9 million and approximately $3.6 million, respectively, as compared to approximately $13.2 million and approximately $3.2 million, respectively, for the same period ended May 31, 1995, a 27.8% and 13.4% increase, respectively. Factored sales increased from approximately $745.3 million for the five months ended May 31, 1995 to approximately $983.1 million for the five months ended May 31, 1996, an increase of 31.9%, with factoring fees increasing 27.6% from approximately $7.6 million to approximately $9.8 million, respectively, for the same five month periods. The provision for credit losses increased from approximately $800,000 for the 5 month period ended May 31, 1995 to approximately $1.8 million for the same period ended May 31, 1996. The provision as a percentage of factored sales increased from 0.11% to 0.18%, respectively, for the same five month periods, compared to 0.20% for the three months ended March 31, 1996. In May 1996, the Company's direct wholly-owned subsidiary CF One, Inc. ("CF One"), sold $10 million of subordinated notes (the "CF One Notes") which are collateralized by subordinated certificates that were issued in connection with the Company's Securitized Financings. The CF One Notes, which are due and payable in July 2001, bear interest at an annual fixed rate of 7.95% and are rated "BBB" by both Duff & Phelps Credit Rating Company and Fitch Investors Services, Inc. The principal purpose for the issuance of the CF One Notes was to allow CF One to obtain additional financing by taking advantage of the favorable financing terms resulting from an increase in the value of the subordinated certificates held by CF One which are collateralized by assets held by a trust established in connection with the Securitized Financings. The Company has executed a letter of intent in connection with a proposed acquisition of the assets of a specialized financial services company principally engaged in providing receivables-based commercial financing and related fee-based credit, collection and management information services to temporary employment and home healthcare agencies. Pursuant to the letter of intent, the purchase price would be $900,000 over the book value of the assets acquired (estimated by the seller to be between $7 and $10 million), plus an additional amount up to $900,000 payable over 3 years if certain contingencies are met. The Company expects that the purchase price will be funded by the Company's revolving line of credit from its sole shareholder, Capital Bank. The proposed seller provides certain services not presently provided by the Company, including billing, payroll processing, payroll tax, payroll reporting and other payroll services and insurance reporting, some of which may require regulatory approval prior to being engaged in by the Company. No assurances can be given that the Company will consummate this proposed acquisition. THE OFFERING Common Stock Offered by the Company.... 2,000,000 SHARES Common Stock outstanding after this offering ................... 12,000,000 shares(1) Use of proceeds ........................ To reduce indebtedness(2) Nasdaq symbol ................. "CAPF" - ------------ (1) Does not include 800,000 shares of Common Stock reserved for issuance upon exercise of stock options granted under the Company's stock option plan. See "Management--Company Stock Option Plan." (2) The proceeds from the offering will be used to reduce the Company's indebtedness to its sole shareholder, Capital Bank. SUMMARY CONSOLIDATED FINANCIAL DATA (Dollars in thousands, except per share data) <TABLE> <CAPTION> THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ------------------------------------------------------------ ---------------------- 1991 1992 1993 1994 1995 1995 1996 -------- ---------- ---------- ---------- ---------- --------- -------- INCOME STATEMENT DATA: (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> Factoring fees .......................... $ 9,870 $ 12,482 $ 15,376 $ 17,371 $ 19,519 $ 4,565 $ 5,524 Interest income ......................... 11,482 11,450 13,511 17,628 28,211 6,004 7,574 Interest expense ........................ (7,720) (7,005) (7,842) (10,329) (16,361) (3,553) (4,556) Net interest income ................... 3,762 4,445 5,669 7,299 11,850 2,451 3,018 Letter of credit and other fees ......... 378 665 1,128 1,238 2,040 351 754 Other income ............................ 1,092 905 1,303 1,541 1,849 324 291 -------- ---------- ---------- ---------- ---------- --------- -------- Operating revenues .................... 15,l02 18,497 23,476 27,449 35,258 7,691 9,587 Provision for credit losses ............. 2,550 3,150 2,645 2,235 2,235 450 1,100 Operating expenses ...................... 9,594 11,316 13,072 14,137 18,457 4,102 5,289 -------- ---------- ---------- ---------- ---------- --------- -------- Total expenses ........................ 12,144 14,466 15,717 16,372 20,692 4,552 6,389 Income before income taxes(1) ........... 2,958 4,031 7,759 11,077 14,566 3,139 3,198 Net income .............................. 1,716 2,304 4,305 6,092 8,693 1,883 1,903 Net income per share .................... $ 0.17 $ 0.23 $ 0.43 $ 0.61 $ 0.87 $ 0.19 $ 0.19 PRO FORMA INCOME STATEMENT DATA(2): Pro forma interest income ............... $ 28,211 $ 7,574 Pro forma interest expense .............. (14,590) (4,137) ---------- -------- Pro forma net interest income ......... $ 13,621 $ 3,437 ---------- -------- Pro forma net income .................... 9,750 2,152 Pro forma net income per share .......... 0.81 0.18 OPERATING RATIOS AND OTHER DATA(3): Factored sales .......................... $825,116 $1,057,846 $1,326,802 $1,536,960 $2,001,364 $441,211 $563,989 Factoring fees to factored sales ........ 1.20% 1.18% 1.16% 1.13% 0.98% 1.03% 0.98% Net interest income to factored sales ... 0.46% 0.42% 0.43% 0.47% 0.59% 0.56% 0.54% Letter of credit and other fees to factored sales ......................... 0.05% 0.06% 0.09% 0.08% 0.10% 0.08% 0.13% Other income to factored sales .......... 0.13% 0.09% 0.09% 0.10% 0.09% 0.07% 0.05% -------- ---------- ---------- ---------- ---------- --------- -------- 1.84% 1.75% 1.77% 1.79% 1.76% 1.74% 1.70% Provision for credit losses to factored sales ........................ 0.31% 0.30% 0.20% 0.15% 0.11% 0.10% 0.20% Operating expenses to factored sales .... 1.16% 1.07% 0.99% 0.92% 0.92% 0.93% 0.94% -------- ---------- ---------- ---------- ---------- --------- -------- Total expenses to factored sales ........ 1.47% 1.37% 1.18% 1.07% 1.03% 1.03% 1.13% Income before income taxes to factored sales ........................ 0.36% 0.38% 0.58% 0.72% 0.73% 0.71% 0.57% Return on equity(4) ..................... 15.63% 17.78% 26.57% 28.80% 30.20% 29.58%(6) 22.27%(6) Return on assets(4) ..................... 1.23% 1.32% 1.99% 2.35% 2.51% 2.57%(6) 1.86%(6) Average funds employed(5) ............... $ 89,700 $ 108,300 $ 131,800 $ 153,600 $ 210,900 $188,800 $243,000 Net interest income to average funds employed ........................ 4.19% 4.10% 4.30% 4.75% 5.62% 5.26%(6) 5.04%(6) Net charge-offs to factored sales volume .......................... 0.16% 0.30% 0.20% 0.17% 0.05% 0.05% 0.25% Accounts receivable turnover in days(7) ............................ 53 54 52 53 53 50 51 Average number of employees ............. 118 140 153 162 193 177 222 Average factored sales per employee ..... $ 6,158 $ 7,246 $ 8,672 $ 9,487 $ 10,370 $ 9,971(6) 10,162(6) </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1995 MARCH 31, 1996 ------------------ --------------------------- AS ACTUAL ACTUAL ADJUSTED(8) ------------------ ----------- -------------- BALANCE SHEET DATA: (UNAUDITED) <S> <C> <C> <C> Receivables, net ........................ $354,821 $394,780 $394,780 Total assets ............................ 399,471 425,160 425,160 Due to factoring clients ................ 128,578 141,578 141,578 Borrowings .............................. 227,260 244,754 224,794 Due to Affiliates and other liabilities 10,293 3,585 3,585 Shareholders' equity .................... 33,340 35,243 55,203 </TABLE> (1) The results of operations of the Company are included in the consolidated Federal income tax returns filed by Capital Bancorp, the parent of Capital Bank. Capital Bank, the Company's sole shareholder, allocates income taxes to the Company calculated on a separate return basis. See "Certain Transactions." (2) Pro forma income statement data reflects (i) the issuance of 2,000,000 shares of Common Stock offered hereby as if such issuance had occurred on January 1, 1995 or January 1, 1996, at an assumed initial public offering price of $11.00 per share, net of issuance costs, and the use of the net proceeds therefrom to repay indebtedness as described in "Use of Proceeds," and (ii) reduction of interest expense related to such indebtedness, net of income taxes, as if the repayment occurred on January 1, 1995 or January 1, 1996. (3) For purposes of the ratios and data below for 1994 and 1995, factored sales include certain receivables which are pledged as collateral for those asset-based loans for which the Company provides factoring-type services. (4) Computed using average monthly balances. (5) Computed using average monthly balances of funds employed (receivables less amounts due to factoring clients). (6) Computed on an annualized basis. (7) Computed by dividing 365 by the quotient of (i) factored sales volume for the periods indicated and (ii) the average monthly accounts receivable balance for the periods indicated. (8) Adjusted to give effect to the sale of the Common Stock offered hereby (at an assumed initial public offering price of $11.00 per share) and the application of the estimated net proceeds therefrom. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001013856_sendx_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001013856_sendx_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..427499e92025c0de62f669d7d540c661aeaed508
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. THE FOLLOWING SUMMARY AND CERTAIN PORTIONS OF THIS PROSPECTUS INCLUDE FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS PREDICTED BY SUCH FORWARD-LOOKING STATEMENTS DUE TO VARIOUS FACTORS, INCLUDING BUT NOT LIMITED TO THOSE DISCUSSED IN "RISK FACTORS." EXCEPT AS OTHERWISE SPECIFIED, ALL INFORMATION IN THIS PROSPECTUS REFLECTS (I) THE REINCORPORATION OF THE COMPANY IN DELAWARE, (II) THE AUTOMATIC CONVERSION OF EACH OUTSTANDING SHARE OF PREFERRED STOCK INTO COMMON STOCK UPON THE CLOSING OF THIS OFFERING, (III) NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION AND (IV) A ONE-FOR-THREE REVERSE SPLIT OF THE COMMON STOCK OF THE COMPANY EFFECTED PRIOR TO THE EFFECTIVE DATE OF THIS OFFERING. SenDx Medical, Inc. ("SenDx" or the "Company") develops, manufactures and markets blood analysis systems that provide cost-effective measurement of critical diagnostic parameters at the point-of-care ("POC"). POC devices are used by attending clinicians in the patient setting to obtain rapid test results. The Company's SenDx 100 is a portable system which utilizes a single multi-use disposable sensor cassette to accurately and simultaneously measure any combination of seven blood tests frequently ordered for critical care patients in a simple, less than 90 second procedure. The panel of tests performed by the SenDx 100 includes blood gases (oxygen, carbon dioxide and pH), electrolytes (sodium, potassium and ionized calcium) and hematocrit. The Company estimates that the worldwide market for blood gas and electrolyte tests exceeds $1 billion per year. The Company believes that the list prices of the disposable elements for comparable test panels from POC competitors range from $4 to $18, and is positioning the SenDx 100 to offer per test panel prices at or below the low end of this range. The Company believes the combination of low per test pricing and other features, such as ease-of-use, multi-use disposables and extensive data management, all in a portable self-contained unit, differentiate the SenDx 100 from competing POC blood analyzers. Clinicians in the critical care areas of hospitals, including intensive care units, operating rooms and emergency departments, require frequent and timely analysis of key blood parameters on acutely-ill patients to facilitate appropriate therapeutic intervention. When the first blood gas test instruments were introduced in the 1960's, the tests were performed exclusively in hospital central laboratories. The clinical need for faster turnaround times resulted in establishment during the 1970's of smaller specialized laboratories, called satellite or "stat" laboratories, located closer to the patient. While this has generally decreased turnaround times for blood analyses compared to the central laboratory, delays can still occur. In addition, the per test cost in stat laboratories is significantly higher than in central laboratories, as stat laboratories generally have lower testing volumes but require duplication of expensive, maintenance-intensive equipment and skilled operating personnel. The need for faster turnaround times and lower per test costs has led to commercial introduction of specialized diagnostic equipment for use by attending clinicians at the POC. However, these devices have had certain limitations, including relatively high costs per test, technique-dependent operation and limited data management capabilities. The SenDx 100 utilizes proprietary sensor and calibration technologies that will enable clinicians to easily perform commonly required blood chemistry analyses on a whole blood sample of approximately 170 microliters (less than three drops). The SenDx 100 automatically aspirates the blood sample directly from the sampling syringe into the sensor cassette, performs the analysis, flushes and recalibrates, and records, displays and prints the data, all in less than 90 seconds. The SenDx 100 is comprised of a modular electronic base instrument and multi-use disposables, consisting of a sensor cassette and calibrant pack, both of which are easily inserted into the instrument and can be used for up to one hundred test panels. The multi-use disposables enable a broad measurement capability at a low per test cost. Additional features of the SenDx 100 include ease-of-use, broad data management capability and enhanced compliance with the Clinical Laboratory Improvement Amendments of 1988 ("CLIA '88"), which are federal statutes regulating medical laboratory practice. The Company received U.S. Food and Drug Administration ("FDA") clearance for the SenDx 100 in December 1995, 68 days from the date of submission of its 510(k) premarket notification. The notification was supported by test data obtained at five hospitals, including nationally recognized teaching hospitals, which compared the SenDx 100 to commonly used central laboratory instruments. The SenDx 100 was first exhibited at the annual meeting of the American Association of Critical Care Nurses in May 1996 and the Company currently expects to commence commercial shipments of the SenDx 100 during the fourth quarter of 1996. The Company is the successor to the Medical Sensors business unit of PPG Industries, Inc. ("PPG"). The Medical Sensors unit was founded in 1988 to develop POC blood analysis systems for the critical care segments of the worldwide hospital market. In 1992, Medical Sensors introduced the StatPal II, one of the first portable instruments for measurement of blood gases at the patient's bedside. The StatPal II, like other competing products, requires multi-step operation, has a limited test menu and limited data management capabilities, and has a relatively high per test cost. Due partly to these factors, the StatPal II and competing products have not captured a significant share of the blood analysis market. The SenDx 100 has been designed to address these factors. The Company has gained significant knowledge and experience from the StatPal II with respect to sensor and calibrant technology, manufacturing techniques, regulatory matters and the needs of the blood analysis market in general, which facilitated development of the SenDx 100. The Company's goal is to become the leading global supplier addressing POC blood analysis needs of the critical care market with a cost-effective, easy-to-use system. In the United States, the Company is initially marketing the SenDx 100 to the critical care departments in the 2,000 largest hospitals, which conduct over 70% of the blood gas tests, by deploying a direct sales force of experienced medical sales professionals. The Company is arranging to place SenDx 100 units at selected leading medical centers in the United States and Europe which will serve as reference centers to increase market awareness of the SenDx 100. The Company also plans to seek multi-year agreements with major proprietary hospital chains, group purchasing organizations and managed healthcare delivery networks. Internationally, the Company plans to market the SenDx 100 through strategic partnerships and distributors. THE OFFERING <TABLE> <S> <C> Common Stock offered.............. 2,400,000 shares Common Stock outstanding after the Offering......................... 8,638,978 shares (1) Use of Proceeds................... To finance increased sales and marketing activities, to repay debt, to fund increased research and development activities, and for working capital and general corporate purposes. Proposed Nasdaq National Market Symbol........................... SNDX </TABLE> - ------------------------ (1) Excludes (i) 1,448,365 shares of Common Stock issuable upon exercise of outstanding warrants and stock options as of May 31, 1996, and (ii) up to 35,812 additional shares of Common Stock which would be issuable to CIBC Wood Gundy Ventures, Inc. in the event the public offering price is less than $11.81 per share. See "Capitalization," "Management -- Executive Compensation," "Certain Transactions" and Note 7 of Notes to Financial Statements. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ----------------------------------------------------- -------------------- 1991 1992 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> <C> Statement of Operations Data: Net sales................................. $ 29 $ 258 $ 190 $ 154 $ 1,251 $ 377 $ 826 Cost of goods sold........................ 10 146 127 76 3,320 786 902 --------- --------- --------- --------- --------- --------- --------- Gross profit (loss)....................... 19 112 63 78 (2,069) (409) (76) Operating expenses:....................... Research and development................ 516 665 877 814 2,219 585 618 Write-off of acquired in-process technology............................. -- -- -- 3,362 -- -- -- General and administrative.............. 468 691 810 962 1,615 369 361 Sales and marketing..................... 56 224 139 100 1,039 339 366 --------- --------- --------- --------- --------- --------- --------- Total operating expenses.............. 1,040 1,580 1,826 5,238 4,873 1,293 1,345 --------- --------- --------- --------- --------- --------- --------- Loss from operations...................... (1,021) (1,468) (1,763) (5,160) (6,941) (1,702) (1,421) Interest expense, net..................... (20) 23 (77) (139) (871) (228) (189) --------- --------- --------- --------- --------- --------- --------- Net loss.................................. $ (1,041) $ (1,445) $ (1,839) $ (5,299) $ (7,813) $ (1,930) $ (1,610) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Pro forma net loss per share (1).......... $ (1.59) $ (0.32) --------- --------- --------- --------- Pro forma shares used in per share computations................... 4,919 4,967 --------- --------- --------- --------- </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 ------------------------ AS ACTUAL ADJUSTED (2) --------- ------------- <S> <C> <C> Balance Sheet Data: Cash and cash equivalents............................................................... $ 9,252 $ 29,110 Working capital......................................................................... 5,960 29,062 Total assets............................................................................ 13,948 33,806 Notes payable and current portion of long-term debt, including accrued interest......... 3,244 -- Long-term debt, including accrued interest.............................................. 5,522 893 Total stockholders' equity.............................................................. 4,259 31,990 </TABLE> - ------------------------ (1) See Note 1 of Notes to Financial Statements for a description of the computation of pro forma net loss per share. In addition to the pro forma net loss per share described in Note 1, assuming the Company had used a portion of the proceeds of this Offering to repay debt, supplemental pro forma loss per share would have been $(1.25) and $(.25), for the periods ended December 31, 1995 and March 31, 1996, respectively. Supplemental pro forma loss per share shows what the loss per share would have been if the retirement of debt in the amount of $7,873,000 had taken place at the beginning of the respective periods. The number of additional shares issued is based on the related proceeds used to retire the debt and are included in this calculation. (2) Adjusted to reflect the (i) sale of the 2,400,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $12.50 per share after deducting underwriting discounts and estimated offering expenses, (ii) the automatic conversion of all outstanding shares of the Company's Preferred Stock into Common Stock upon the closing of this Offering and (iii) the repayment of short-term debt obligations of $3,244,000 and of long-term debt obligations payable to PPG of $4,629,000 ($4,348,000 after a 5% prepayment discount on amounts payable to PPG). See "Use of Proceeds," "Capitalization" and Note 4 of Notes to Financial Statements.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001014041_sri_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001014041_sri_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and Financial Statements (including the Notes thereto) appearing elsewhere in this Prospectus. THE COMPANY Sterile Recoveries, Inc. ("SRI" or the "Company") provides hospitals and surgery centers with a comprehensive surgical procedure-based delivery and retrieval service for reusable gowns, towels, drapes, and basins and provides other disposable products necessary for surgery. At seven regional facilities, SRI collects, sorts, cleans, inspects, packages, sterilizes, and delivers its reusable products on a just-in-time basis. SRI offers an integrated "closed-loop" reprocessing service that uses two of the most technologically advanced reusable textiles: (i) a GORE(R) Surgical Barrier Fabric for gowns and drapes that is breathable yet liquidproof and provides a viral/bacterial barrier and (ii) an advanced microfiber polyester surgical fabric for gowns and drapes that is liquid and bacterial resistant. The Company believes that its reusable surgical products made from these fabrics provide protection and comfort that are superior to disposable alternatives. The Company currently serves a growing customer base of approximately 200 hospitals and surgery centers located in 17 states, including Duke University Medical Center (Durham), Henry Ford Hospital (Detroit), Johns Hopkins Medical Center (Baltimore), St. Luke's Episcopal Hospital (Houston), Jackson Memorial Hospital (Miami), IHC Hospitals, Inc. (Salt Lake City), and Hospital of the Good Samaritan (Los Angeles). None of the foregoing customers individually accounts for a material portion of the Company's revenues. The Company's comprehensive delivery and retrieval service enables its customers to outsource a costly and burdensome function to SRI. The Company believes that its reusable surgical product delivery and retrieval service is a superior and competitively priced alternative to disposable surgical products or to operating an in-house reusable program for surgical products. The Company's delivery service offers savings to hospitals by reducing the costs associated with: (i) the disposal of biohazardous wastes, (ii) carrying an inventory of disposable surgical products, and (iii) in-house processing of reusable surgical products. In addition to these cost savings, the Company's liquidproof and liquid resistant gowns offer surgeons and surgical staff enhanced protection against transmission of blood-borne pathogens, including the HIV and hepatitis viruses. The Company believes that a service that provides daily delivery of substantially better quality surgical products without any capital investment, thereby reducing employee and space needs, should become an attractive managed care option for hospitals. Several developments have created a market opportunity for the kind of cost competitive reusable surgical product delivery and retrieval services SRI offers. These factors include: increasing pressure on hospitals to contain costs and increase productivity; heightened concern regarding the transmission of infectious diseases; concern regarding the handling and disposal of biohazardous waste; and increased outsourcing of hospital functions that do not involve patient care. SRI purchased the assets of its business from AMSCO Sterile Recoveries, Inc., an indirect wholly-owned subsidiary of AMSCO International, Inc., on July 31, 1994 (the "Acquisition"). Since the Acquisition, SRI has reduced its variable cost by more efficiently servicing increased revenue levels with reduced labor hours. From December 31, 1994 to March 31, 1996, SRI retained in excess of 85% of its customers. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company.......... 2,000,000 shares(1) Common Stock to be outstanding after the Offering............................... 5,367,089 shares(2) Use of Proceeds.............................. For repayment of debt, capital expenditures, working capital, and general corporate purposes. See "Use of Proceeds." Nasdaq National Market symbol................ STRC </TABLE> SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> FIVE MONTHS THREE MONTHS ENDED YEAR ENDED ENDED DECEMBER 31, DECEMBER 31, MARCH 31, ------------ ------------- ------------------------------ 1994(3) 1995(3) 1995 1996 ------------ ------------- ------------ --------------- (UNAUDITED) <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues.............................. 9,285 25,320 5,817 7,330 Cost of revenues...................... 6,550 17,659 4,181 5,024 ------------ ------------- ------------ --------------- Gross profit........................ 2,735 7,661 1,636 2,306 Distribution expenses................. 1,032 2,801 694 722 Selling and administrative expenses... 2,162 3,975 1,014 1,067 ------------ ------------- ------------ --------------- Income (loss) from operations....... (459) 885 (72) 517 Interest expense...................... 735 1,489 379 347 ------------ ------------- ------------ --------------- Net income (loss)................... $ (1,194) $ (604) $ (451) $ 170 ============ ============ ============ ============== Pro forma net income (loss)(4)........ $ (1,194) $ (604) $ (451) $ 170 ============ ============ ============ ============== Pro forma net income (loss) per common share(4)(5)......................... $ (0.34) $ (0.17) $ (0.13) $ 0.05 ============ ============ ============ ============== Weighted average common shares outstanding......................... 3,513 3,513 3,513 3,513 </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 ------------------------------ ACTUAL AS ADJUSTED(6) ------------ --------------- (UNAUDITED) <S> <C> <C> BALANCE SHEET DATA: Reusable surgical products............ $ 5,413 $ 5,413 Total assets.......................... 15,635 24,387 Total indebtedness.................... 11,790 1,134 Shareholders' equity.................. 1,211 20,621 </TABLE> <TABLE> <CAPTION> THREE MONTHS ENDED ------------------------------------------------------------------------ MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, 1995 1995 1995 1995 1996 --------- ------------ ------------- ------------ -------------- (UNAUDITED) <S> <C> <C> <C> <C> <C> QUARTERLY STATEMENT OF OPERATIONS DATA: Revenues.............................. 5,817 6,063 6,527 6,913 7,330 Cost of revenues...................... 4,181 4,222 4,464 4,792 5,024 --------- ------------ ------------- ------------ ------- Gross profit........................ 1,636 1,841 2,063 2,121 2,306 Distribution expenses................. 694 691 690 726 722 Selling and administrative expenses... 1,014 1,011 962 988 1,067 --------- ------------ ------------- ------------ ------- Income (loss) from operations....... (72) 139 411 407 517 Interest expense...................... 379 374 371 365 347 --------- ------------ ------------- ------------ ------- Net income (loss)................... $ (451) $ (235) $ 40 $ 42 $ 170 --------- ------------ ------------- ------------ ------- Pro forma net income(loss)(4)......... $ (451) $ (235) $ 40 $ 42 $ 170 ========= ============ ============ ============ ============== Pro forma net income (loss) per common share(4)(5)......................... $ (0.13) $(0.07) $ 0.01 $ 0.01 $ 0.05 ========= ============ ============ ============ ============== Weighted average common shares outstanding......................... 3,513 3,513 3,513 3,513 3,513 OTHER DATA: Average daily revenue(7).............. 91 95 104 110 115 </TABLE> - --------------- (1) The Company has granted to the Underwriters a 30-day option to purchase up to 150,000 additional shares of Common Stock and shareholders Richard T. Isel, Wayne R. Peterson, and James T. Boosales have granted to the Underwriters a 30-day option to purchase an aggregate of up to 150,000 additional shares of Common Stock. The Company will not receive any proceeds from the sale of any shares by these shareholders. (2) Excludes 180,000 shares of Common Stock issuable upon exercise of outstanding stock options, 219,500 shares of Common Stock issuable on exercise of options to be granted immediately on the completion of the offering, and 128,205 shares of Common Stock issuable on partial conversion of a Convertible Demand Promissory Note dated March 1, 1996, of the Company (which is not redeemable). (3) The Company operates on a 52-53 week fiscal year ending the Sunday nearest December 31. (4) As an S Corporation for federal income tax purposes, the Company has not been subject to corporate income tax. On a pro forma basis, assuming the Company had been subject to corporate income tax for all periods presented, the Company would not have recognized any corporate income tax in the relevant periods. See Notes B and K of Notes to Financial Statements. (5) Supplemental pro forma net income per common share for the year ended December 31, 1995 and the three months ended March 31, 1996, giving effect to the payment of debt from a portion of the offering's proceeds and the increased number of shares, is $0.18 and $0.11 per common share (assuming 4,508,000 and 4,412,000 weighted average common shares outstanding). See "Use of Proceeds." (6) Adjusted to reflect the sale of 2,000,000 shares of Common Stock being offered by the Company hereby (assuming an initial public offering price of $11.00) and the application of the net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001014061_american_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001014061_american_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the more detailed information and the Consolidated Financial Statements of American Craft Brewing International Limited, which include the results of operations of the South China Brewing Company Limited, a Hong Kong company ('South China'), and SCBC Distribution Company Limited, a Hong Kong company ('SCBC,' and collectively with South China, the 'South China Brewery'), and Notes thereto included elsewhere in this Prospectus. Except as set forth in the Consolidated Financial Statements and unless otherwise indicated in this Prospectus, all information in this Prospectus reflects, effective prior to the date of this Prospectus, (i) the exchange (the 'Share Exchange'), of substantially all of the issued and outstanding shares of capital stock of South China and SCBC, by the stockholders thereof for 23,750 shares of capital stock of American Craft Brewing International Limited, a British Virgin Islands company ('Craft'), (ii) the issuance of 1,250 shares of capital stock of Craft to certain investors in Hong Kong (the 'Hong Kong Placement'), (iii) the eighty-for-one stock split by Craft (the 'Share Split') and (iv) the amalgamation of Craft into the Company (the 'Merger', and together with the Share Exchange, the Hong Kong Placement and the Share Split, the 'Reorganization'). The information in this Prospectus also assumes that none of the Over-allotment Option, the Warrants or the Representative's Warrants will be exercised. See 'The Company' and Note 16 of Notes to the Consolidated Financial Statements. Unless otherwise required by the context, the terms 'AmBrew International' and the 'Company' refer to American Craft Brewing International Limited and its subsidiaries. All references in this Prospectus to '$' shall mean United States dollars. The Securities offered hereby involve a high degree of risk and immediate substantial dilution. See 'Risk Factors' and 'Dilution.' THE COMPANY AmBrew International owns and operates the South China Brewery, the first in a series of international breweries based on the concept of American-style micro-breweries. The South China Brewery, the first American-style micro-brewery in Hong Kong, produces fresh, high-quality, preservative-free, hand-crafted beers using state-of-the-art American-manufactured brewing equipment. Hand-crafted beers are distinguishable by their full flavor which results from traditional brewing styles. The Company believes that American-style micro-brewing has growth potential in other key world markets and that the South China Brewery is a model that can be adapted to other markets. The American-style micro-brewery concept has developed over the past ten years into the fastest growing segment of the American beer industry. American-style micro-breweries produce less than 15,000 barrels per year of hand-crafted beers in a variety of styles. The Company believes that the growing demand for micro-brewed beers in the United States is part of a broader shift in preferences on the part of a certain segment of consumers away from mass-produced products and toward high-quality, distinctive foods and beverages. While craft beers currently account for less than 2% of total United States beer consumption, sales volume of these beers grew by 50% in 1995 and had an annual growth rate of approximately 47% during the period from 1985 through 1994. AmBrew International believes that the demand for craft beers is not limited to the United States and is committed to the production of a variety of craft beers designed to appeal to a growing number of consumers in global markets. The Company exported the American-style micro-brewery concept to Hong Kong with the establishment of the South China Brewery in June 1995. With only one head brewer and six other employees, the South China Brewery produces, distributes and markets two full-flavored beers marketed under South China's own brand names, Crooked Island Ale and Dragon's Back India Pale Ale, and custom produces beers for local Hong Kong establishments in accordance with their individual specifications to market under their own labels. One of these custom-produced beers, Delaney's Ale, won a Gold Award at the Association of Brewers' World Beer Cup in June 1996. The South China Brewery is designed to permit small and economical production runs of differentiated products to meet special tastes or other custom requirements and for sale in niche markets. Increased consumer demand for high quality, full-flavored beers has allowed the South China Brewery to achieve a price premium relative to mass-produced domestic beer producers and to set its prices at the upper end of the premium import market. The Company's senior management and Board of Directors have extensive experience in the international beverage alcohol industry. The Company expects to utilize this experience to identify new markets receptive to the American-style micro-brewery concept and to seek out strategic local partners to co-invest in new micro-breweries in such markets. The Company plans to establish and operate, either through wholly-owned subsidiaries or through majority-owned joint venture arrangements with strategic local partners, a series of micro-breweries similar in concept to the South China Brewery. The Company expects that these partners will use their knowledge of local regulation and markets to facilitate the establishment and acceptance of the Company's micro-breweries and their products. In pursuing its expansion strategy, the Company will move into both markets dominated by mass-market breweries and markets in which high-quality beer producers will be the Company's primary competition. In markets where mass-produced beers are sold to a broad consumer profile, AmBrew International intends to develop craft beers as locally produced premium product alternatives. In markets in which there are already a number of traditional high-quality beer producers, the Company intends to produce distinctive micro-brewed products for niche market segments. The Company has preliminarily identified seven locations in which it is considering establishing breweries by the end of 1997, subject to more extensive feasibility studies: Zurich, Dublin, Shanghai, Tecate (Mexico), Budapest, Singapore and Warsaw. The Company expects to achieve greater economies of scale as it expands. For example, the Company intends to enter into a contract with Micro Brew Systems Company, Limited ('Micro Brew Systems') which supplied the equipment for the South China Brewery, or another comparable provider of state-of-the-art brewing equipment, to purchase, at discounted prices, the necessary brewing equipment for its proposed new breweries. In addition, the Company believes that it can benefit from volume discounts on purchases of equipment and ingredients. Based on the growth of its South China Brewery to date, the Company believes it is well-positioned to establish similar American-style micro-breweries in other markets. THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND SUBSTANTIAL AND IMMEDIATE DILUTION TO NEW INVESTORS. SEE 'RISK FACTORS' AND 'DILUTION.' THE OFFERING <TABLE> <S> <C> Securities Offered.................................... 1,333,333 Shares and 1,333,333 Warrants. Each Warrant entitles the registered holder thereof to purchase one share of Common Stock. The Shares and the Warrants may be purchased separately and will be transferable separately immediately following completion of this Offering. See 'Description of Securities' and 'Underwriting.' Offering Price........................................ $[ ] per Share and $[ ] per Warrant Common Stock Outstanding: Prior to the Offering(1)......................... 2,000,000 shares of Common Stock After the Offering(2)............................ 3,446,060 shares of Common Stock Warrant Exercise Price................................ $ per Share [125% of the initial public offering price per Share], subject to adjustment in certain circumstances. See 'Description of Securities -- Warrants.' Warrant Exercise Period............................... The period commencing six months after the date of this Prospectus and terminating five years from the date of this Prospectus. Redemption............................................ Commencing 18 months after the date of this Prospectus, the Company may redeem all, but not less than all, of the Warrants at a price of $0.10 per Warrant, on not less than 30 days' prior written notice to current holders, if the per Share closing bid quotation as reported on Nasdaq equals or exceeds $ per Share [300% of the initial public offering price per Share] for any twenty (20) trading days within a period of thirty (30) consecutive trading days ending on the fifth trading day prior to the date on which the Company gives notice of redemption. The Warrants will be exercisable until the close of business on the day immediately preceding the date fixed for redemption in such notice. See 'Description of Securities -- Warrants.' Use of Proceeds....................................... To repay up to $637,000 in debt; for capital expenditures of approximately $5 million relating to the establishment of proposed expansion breweries, including $2.8 million for the purchase of micro-brewing equipment; and for working capital and general corporate purposes. See 'Use of Proceeds,' 'Business -- Proposed Expansion Markets' and 'Certain Transactions.' </TABLE> <TABLE> <S> <C> Proposed Nasdaq Symbols............................... Shares -- 'ABRE' Warrants -- 'ABREW' Proposed BSE Symbols.................................. Shares -- 'BRW' Warrants -- 'BRWW' </TABLE> - ------------ (1) Excludes (i) 300,000 shares of Common Stock reserved for future issuance pursuant to options available for grant under the Company's 1996 Stock Option Plan (the 'Stock Option Plan'), and (ii) 500,000 shares of Common Stock reserved for future issuance pursuant to $370,000 principal amount of notes issued to certain investors in Singapore and Hong Kong (the 'Bridge Notes') and warrants issued in connection with the Bridge Notes (the 'Bridge Warrants'). See 'Management -- Stock Option Plan,' 'Certain Transactions' and 'Underwriting.' (2) Includes the issuance of 112,727 shares of Common Stock upon the consummation of this Offering assuming an initial public offering price per Share of $5.50 pursuant to the terms of the Bridge Notes and excludes 300,000 shares of Common Stock reserved for future issuance pursuant to options available for grant under the Stock Option Plan and 112,727 shares of Common Stock reserved for future issuance pursuant to the Bridge Warrants assuming an initial public offering price per Share of $5.50. See 'Certain Transactions.' ------------------------ THE COMPANY IS ORGANIZED UNDER THE LAWS OF THE ISLANDS OF BERMUDA. CERTAIN OF THE COMPANY'S DIRECTORS, OFFICERS AND CONTROLLING PERSONS, AS WELL AS CERTAIN OF THE EXPERTS NAMED IN THIS PROSPECTUS, RESIDE OUTSIDE THE UNITED STATES. ALL OR A SUBSTANTIAL PORTION OF THEIR ASSETS AND THE ASSETS OF THE COMPANY ARE LOCATED OUTSIDE THE UNITED STATES. AS A RESULT, IT MAY NOT BE POSSIBLE FOR INVESTORS TO EFFECT SERVICE OF PROCESS WITHIN THE UNITED STATES UPON SUCH PERSONS OR TO ENFORCE JUDGMENTS AGAINST THE COMPANY OR SUCH PERSONS OBTAINED IN UNITED STATES COURTS PREDICATED UPON THE CIVIL LIABILITY PROVISIONS OF THE FEDERAL OR STATE SECURITIES LAWS OF THE UNITED STATES. THE COMPANY HAS BEEN ADVISED BY APPLEBY, SPURLING & KEMPE, BERMUDA COUNSEL TO THE COMPANY, THAT THE ENFORCEMENT OF JUDGMENTS OF UNITED STATES COURTS OBTAINED IN ACTIONS AGAINST THE COMPANY OR SUCH PERSONS PREDICATED UPON THE CIVIL LIABILITY PROVISIONS OF THE FEDERAL OR STATE SECURITIES LAWS AND THE ENFORCEABILITY, IN ORIGINAL ACTIONS, OF LIABILITIES AGAINST THE COMPANY OR SUCH PERSONS PREDICATED SOLELY UPON THE FEDERAL OR STATE SECURITIES LAWS OF THE UNITED STATES WOULD REQUIRE THE COMMENCEMENT OF A SEPARATE ACTION IN THE BERMUDA COURTS. THERE IS UNCERTAINTY AS TO WHETHER THE COURTS OF BERMUDA WOULD (I) ENFORCE JUDGEMENTS OF UNITED STATES COURTS OBTAINED AGAINST THE COMPANY OR SUCH PERSONS PREDICATED UPON THE CIVIL LIABILITY PROVISIONS OF THE FEDERAL SECURITIES LAWS OF THE UNITED STATES OR (II) ENTERTAIN ORIGINAL ACTIONS BROUGHT IN BERMUDA COURTS AGAINST THE COMPANY OR SUCH PERSONS PREDICATED UPON THE FEDERAL SECURITIES LAWS OF THE UNITED STATES. THE COMPANY HAS IRREVOCABLY APPOINTED CT CORPORATION SYSTEM, 1633 BROADWAY, NEW YORK, NEW YORK 10019, AS ITS AUTHORIZED AGENT TO RECEIVE SERVICE OF PROCESS IN ANY LEGAL ACTION OR PROCEEDING AGAINST IT BASED UPON THE FEDERAL OR STATE SECURITIES LAWS OF THE UNITED STATES AND/OR ARISING OUT OF OR RELATING TO THIS OFFERING, AND WILL IRREVOCABLY SUBMIT TO THE NON-EXCLUSIVE JURISDICTION OF ANY FEDERAL OR STATE COURT LOCATED IN THE CITY OF NEW YORK, NEW YORK. SUMMARY CONSOLIDATED FINANCIAL DATA The following table presents summary consolidated financial data of the Company. For a description of the Consolidated Financial Statements from which the following financial data have been derived, see the introduction to 'Selected Consolidated Financial Data.' The summary consolidated financial data set forth below should be read in conjunction with 'Management's Discussion and Analysis of Financial Condition and Results of Operations' and the Consolidated Financial Statements and Notes thereto included elsewhere in this Prospectus. <TABLE> <CAPTION> YEAR ENDED SIX MONTHS ENDED SIX MONTHS ENDED OCTOBER 31, 1995 OCTOBER 31, 1995 APRIL 30, 1996 ---------------- ---------------------- ---------------- <S> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales.............................................. $ 63,707 $ 63,707 $ 244,753 Cost of sales.......................................... (38,960) (38,960) (43,055) ---------------- ----------- ---------------- Gross profit....................................... 24,747 24,747 201,698 Selling, general and administrative expenses........... (292,888) (195,846) (207,094) Interest expense, net.................................. (17,838) (16,059) (24,908) Other expenses, net.................................... (2,265) (2,265) (888) ---------------- ----------- ---------------- Loss before income taxes........................... (288,244) (189,423) (31,192) Income tax benefit..................................... 47,560 31,255 5,147 ---------------- ----------- ---------------- Net loss........................................... $ (240,684) $ (158,168) $ (26,045) Net loss per common share.............................. $ (0.12) $ (0.08) $ (0.01) Number of shares outstanding(1)........................ 2,067,273 2,067,273 2,067,273 Pro forma net loss per common share(2)................. $ (0.13) $ -- $ (0.02) Pro forma number of shares outstanding(2).............. 2,184,773 -- 2,184,773 <CAPTION> APRIL 30, 1996 ------------------------------------------------------------------ PRO FORMA, AS ACTUAL PRO FORMA(3) ADJUSTED(3)(4) ---------------- ---------------------- ---------------- <S> <C> <C> <C> BALANCE SHEET DATA: Total current assets................................... $109,382 $ 479,382 $5,713,382 Total assets........................................... $893,013 $1,263,013 $6,497,013 Total current liabilities.............................. $587,194 $ 957,194 $ 70,194 Total long-term liabilities............................ $ 24,864 $ 24,864 $ 24,864 Total liabilities...................................... $612,058 $ 982,058 $ 95,058 Total shareholders' equity............................. $280,955 $ 280,955 $6,401,955 </TABLE> - ------------ (1) Assumes the consummation of the Reorganization and excludes (i) 300,000 shares of Common Stock reserved for future issuance pursuant to options available for grant under the Stock Option Plan and (ii) 500,000 shares of Common Stock reserved for future issuance pursuant to the Bridge Notes and the Bridge Warrants. See 'Management -- Stock Option Plan,' 'Certain Transactions' and 'Underwriting.' (2) Pro forma net loss per common share is computed by dividing pro forma net loss for each period by 2,184,773 which is based on the historical weighted average number of shares outstanding plus the additional number of shares required to be issued at the assumed net offering price of $4.40 per share to obtain funds for the repayment of the outstanding principal amounts of indebtedness aggregating $517,000. See Note 16 of Notes to Consolidated Financial Statements. (3) Gives pro forma effect to the issuance of $370,000 principal amount of Bridge Notes. See 'Certain Transactions.' (4) Adjusted to give effect to (at an assumed initial public offering price of $5.50 per Share and $0.10 per Warrant) (i) the receipt of the estimated net proceeds of this Offering and the initial application of such estimated net proceeds as described herein, (ii) the repayment of $120,000 of Bridge Notes from the net proceeds of this Offering, (iii) the issuance to a Bridge Note holder of 21,818 shares of Common Stock and Bridge Warrants to purchase an equal number of shares of Common Stock at no additional cost (in accordance with the terms of such note), (iv) the conversion of $250,000 principal amount of Bridge Notes into 90,909 shares of Common Stock (in accordance with the terms of such notes) and the issuance of Bridge Warrants to purchase an equal number of shares of Common Stock, and (v) the recognition of a non-recurring, non-cash interest expense of $265,000 for the unamortized portion of the original issue discount relating to the repayment of the Bridge Notes. See 'Use of Proceeds' and 'Certain Transactions.'
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001014136_synergy_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001014136_synergy_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..87cc755a6ef4c507ffbf498f94a7d46769a4bc90
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@@ -0,0 +1 @@
+SUMMARY This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth in "Risk Factors" and elsewhere in this Prospectus. The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Prospectus. THE COMPANY Synergy Semiconductor Corporation ("Synergy" or the "Company") designs, develops, manufactures and markets high-performance digital and mixed-signal integrated circuits ("ICs") using its proprietary Bipolar and BiCMOS processes. The Company's products include high-speed digital logic for advanced system applications, precision mixed-signal time-clock generators for high-performance workstations and telecommunication systems and mixed-signal communications circuits for local and wide area networks. Synergy's proprietary design and process technologies facilitate the development and production of high- performance ICs. The Company's products are designed by an internal design team, and the Company possesses in-house wafer fabrication and advanced wafer probing and product test capabilities. Designers and manufacturers of electronic systems face increasing market pressure to develop and commercially introduce faster, smaller and higher performance systems that operate with lower power. To achieve these performance improvements, system designers must integrate more functions on a single IC. One particularly difficult challenge is the integration of both analog and digital circuitry, known as mixed-signal, on a single IC while meeting the high speed, reliability, small form factor and efficient use of power required by advanced system designs. In addition, as design and product life cycles for many electronic systems continue to decrease, electronic systems manufacturers are under pressure to decrease the time to market of new products. Synergy utilizes its proprietary design methodologies and ASSET process technology to design and manufacture mixed-signal ICs operating at frequencies above 100 MHz and at data processing rates above 100 Mbps. The Company's ASSET process technology is scalable and utilizes a device architecture that the Company believes results in smaller, higher density devices with higher speeds and improved performance. In addition, Synergy has developed a series of base arrays--arrays of components that only need to be metalized to complete the fabrication process, greatly reducing the time from receipt of order to shipment. The Company believes that these technologies combined with its in- house wafer fabrication facility provide it with the ability to quickly design and manufacture new products and product enhancements, thereby enabling the Company to quickly respond to changing customer requirements. Synergy supplies high-speed, digital and mixed-signal ICs to makers of a variety of systems including public network equipment, LAN and WAN private network equipment, high-performance workstations and automatic test equipment ("ATE"). Synergy offers three principal product families: high-speed logic, ClockWorks and SuperCOM. The Company's high-speed digital logic products operate at high frequencies, have low power consumption and provide high voltage protection. The Company's ClockWorks products are used to solve critical timing problems generated at operating frequencies above 100 MHz such as clock generation and distribution that are difficult to meet with crystal oscillators. The Company's SuperCOM products provide a high level of integration with cost and performance advantages relative to discrete or alternative IC solutions. These telecommunication products are compatible with several LAN and WAN protocols, including 100 BaseTX, 100 BaseFX, Fast Ethernet, FDDI, SONET, SDH and ATM. In North America, the Company sells its products through independent sales representatives and three distributors with 30 locations in the United States and Canada. Internationally, Synergy primarily utilizes its joint venture in Germany and a distributor in Japan. The Company's customers include leading electronic system manufacturers such as Hitachi, NORTEL, Ross Technology, Schlumberger, Sun Microsystems and Texas Instruments. THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Company........ 3,600,000 shares Common Stock Offered by the Selling 1,800,000 shares Shareholders.............................. Common Stock Outstanding after the 17,672,179 shares(1) Offering.................................. Use of Proceeds............................ Facility relocation, retire certain indebtedness, working capital and other general corporate purposes. Proposed Nasdaq National Market Symbol..... SYNS </TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA (in thousands, except per share data) <TABLE> <CAPTION> THREE MONTHS YEAR ENDED DECEMBER 31, ENDED ------------------------ ----------------- APR. 2, MARCH 31, 1993 1994 1995 1995 1996 ------- ------- ------- ------ --------- <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net revenues: Product sales................... $10,553 $15,395 $23,344 $4,511 $ 9,389 Contract engineering............ 503 1,750 1,041 49 198 License fees.................... 3,302 1,975 1,300 -- -- ------- ------- ------- ------ ------- Total net revenues................ 14,358 19,120 25,685 4,560 9,587 Gross margin...................... 5,448 9,409 14,866 2,309 4,821 Income (loss) from operations..... (4,256) 173 3,163 (280) 1,526 Net income (loss)................. 164 4 2,653 (416) 1,434 Net income per share(2)........... $ 0.20 $ 0.10 Shares used in per share calculations(2).................. 13,309 14,668 </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 ----------------------- ACTUAL AS ADJUSTED(3) ------- -------------- <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents............................. $ 2,307 Working capital....................................... 4,955 Total assets.......................................... 14,272 Long-term obligations................................. 885 Accumulated deficit................................... (32,807) Total shareholders' equity............................ 6,384 </TABLE> - -------- (1) Based on the number of shares outstanding as of March 31, 1996. Excludes 790,273 shares of Common Stock issuable upon exercise of stock options outstanding as of March 31, 1996 at a weighted average exercise price of $1.88 per share and 431,611 shares of Common Stock issuable upon exercise of warrants outstanding as of March 31, 1996. See "Management--1996 Stock Option/Stock Issuance Plan" and "--Employee Stock Purchase Plan" and Note 5 of Notes to Consolidated Financial Statements. (2) See Note 1 of Notes to Consolidated Financial Statements. (3) Adjusted to reflect the sale of 3,600,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $ per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization." Unless otherwise indicated, all information contained in this Prospectus (i) assumes that the Underwriters' over-allotment option is not exercised, and (ii) reflects the conversion of all of the Company's outstanding Preferred Stock into Common Stock. See "Underwriting."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001014210_experian_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001014210_experian_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements, and the related notes thereto, included elsewhere in this Prospectus. As used in this Prospectus, unless the context otherwise requires, the "Company," for periods prior to the Recapitalization (as described herein) refers to the combined operations of TRW Information Services, IS&S International, Inc., TRW REDI Property Data ("TRW REDI"), IS&S Staff, TRW Business Credit Services, TRW Hotel Company Inc. and Information Systems and Services, Inc. (collectively, "TRW IS&S"), which are business groups, divisions, majority-owned general partnerships, or wholly owned subsidiaries of TRW Inc. ("TRW"), and for periods after the Recapitalization refers to IS&S (which is expected to be renamed Experian Information Solutions, Inc.) and its subsidiaries, after giving effect to the Transactions (as defined herein). TRW will not have any obligations with respect to the Notes or the sale thereof. See "The Recapitalization, Financing and Related Transactions." The Company will have certain rights to use the TRW name for a limited period of time following the Recapitalization. See "Certain Relationships and Related Transactions." THE COMPANY OVERVIEW The Company is a leading provider of credit, marketing and real estate information on individuals, businesses and properties in the United States. The Company's products and services play a key role in financial risk management as well as customer identification, acquisition and retention for businesses in a wide range of industries including financial services, retail, real estate, telecommunications and utilities. For the latest twelve-month period ended June 30, 1996, the Company generated pro forma sales of $554.8 million and pro forma EBITDA (as defined) of $176.7 million. Increased demand for the Company's core products and expanded applications for reliable credit and marketing information have contributed to the Company's growth and profitability. Over the last 25 years, the Company has developed expertise in collecting, screening and organizing volumes of data into its five proprietary databases (the "Databases"). The Databases--consumer credit, business credit, consumer demographic, business marketing and real estate--contain information on over 190 million people, 93% of households and 12 million businesses in the United States. The Company updates the Databases with an average of over 40 million pieces of information daily from credit grantors, public records and proprietary sources. Management believes that the Databases represent the broadest and most current collection of such information in the United States. The Company utilizes the Databases to create a variety of products and services designed to address the information needs of its customers and continually seeks to improve the quality and breadth of its product offerings. In June 1996, the Company implemented a new relational database system ("File One") for its consumer credit database which the Company believes (among other benefits) will enhance and expedite product development in a cost-effective manner. The Company sells three major categories of information products and services: credit, marketing and real estate. The Company's over 500-person direct sales force emphasizes a consultative selling approach for the Company's larger customers, substantially all of whom have had relationships with the Company for more than a decade. In addition, the Company services smaller customers through telemarketing facilities and through resellers, brokers and credit bureaus. Credit Information Credit products and services are critical to issuers of credit because they identify credit extension risks and provide a cost-effective method of monitoring outstanding credit portfolios. Customers use the Company's credit products and services in a variety of applications including the issuance and monitoring of credit cards, mortgages, small business loans and trade credit. These products and services include credit profile reports, credit scoring services, customized account management, on-line support for instant credit decisions, accounts receivable evaluations and fraud detection. The Company believes that it is one of the two largest providers of consumer credit information and the second largest provider of business credit information in the United States. Marketdata Enterprises estimates that the consumer credit reporting industry has grown from approximately $1.37 billion in revenues in 1992 to approximately $1.63 billion in revenues in 1995, a compound annual growth rate of 5.9%. Management believes that the portion of the market in which the Company competes was approximately $875 million in revenues in 1995. Furthermore, Marketdata Enterprises estimates the business credit reporting industry has grown from approximately $920 million in revenues in 1992 to approximately $1 billion in revenues in 1995, a compound annual growth rate of 2.8%. Management believes that the portion of the market in which the Company competes was approximately $600 million in revenues in 1995. Marketing Information Marketing products and services enable businesses to identify, retain and cross-sell both new and existing customers in a targeted, cost-effective manner. The Company uses selected credit and demographic data to develop and sell prescreened lists of individuals and businesses to whom financial institutions and retailers extend pre-approved offers of credit. Additionally, the Company uses its demographic and real estate data, enhanced by the non- restricted information (primarily name, address, telephone number and social security number) in its credit databases, to develop and sell targeted marketing products and services to financial institutions, consumer products companies, retailers, telecommunications companies and other consumer and business-to-business marketers. Targeted marketing products and services include the development of lists of potential customers, value-added enhancements to customer lists, the creation of marketing databases and other analytical tools. The Company believes it is the largest provider of prescreen services in North America, an industry which the Company believes had revenues of approximately $200 million in 1995, and which has grown at a compound annual growth rate of 39% since 1992. According to a 1995 study commissioned by the Direct Marketing Association, total direct mail related expenditures were estimated to be approximately $31 billion in 1995, up from approximately $23 billion in 1990, a compound annual growth rate of 5.9%. Management believes that the portion of the market in which the Company competes was approximately $5 billion in 1995. Real Estate Information Real estate products and services provide appraisers, realtors, lenders, government agencies and title companies with property, title and tax information necessary for the property transfer and financing process. The Company has detailed property data for 349 counties nationwide, and property title and tax data for 80 counties in eight western states, representing approximately 55% and 17%, respectively, of the U.S. population. The Company is the national leader in both property data and title information services. Management believes that the Company's 1995 sales of real estate products and services were twice as large as the sales of its nearest competitors. The following table summarizes key characteristics of the Company's three categories of products and services: <TABLE> <CAPTION> CREDIT INFORMATION MARKETING INFORMATION REAL ESTATE INFORMATION ------------------ --------------------- ----------------------- <S> <C> <C> <C> 1995 COMPANY SALES...... $315 million $134 million $92 million Credit Profile Reports Prescreen Services Property Characteristics REPRESENTATIVE PRODUCTS............... Credit Scoring Services Targeted Lists Tax/Title Data Customized Account List Enhancement Sales Activity Reports Management Marketing Databases Appraisal Models On-Line Instant Credit Support Analytical Tools Accounts Receivable Evaluations Fraud Detection PRIMARY USERS........... Commercial Banks Credit Card Issuers Mortgage Lenders Retailers Financial Service Title Companies Consumer Finance Companies Companies Appraisers Business Credit Issuers List Brokers Realtors Telecom Providers Direct Marketers Government Agencies Utilities Retailers GROWTH FACTORS.......... New Credit Issuance Credit Solicitations Property Sales Activity Portfolio Monitoring Target Marketing Trends Lending Process New Products/Applications New Products/Applications Automation </TABLE> OPERATING STRENGTHS The Company believes its operating strengths include its (i) unique collection of proprietary Databases; (ii) extensive database expertise; (iii) leading market positions; (iv) large base of established customers and comprehensive network of sales channels; (v) reputation for integrity, quality and reliability; and (vi) experienced management team and employees. The Company believes that it can leverage its strengths to capitalize on continuing growth in fundamental demand for credit and marketing information. OPERATING STRATEGY The Company has developed a customer-focused operating strategy to capitalize on its strengths, the growing demand and expanding applications for its products and economies of scale in the information services industry. The key elements of this strategy include continuing to (i) maintain, expand and enhance the Databases; (ii) develop new products and enter growing end-use markets; (iii) exploit new delivery systems for its products, including client- server networks, CD ROM and the Internet; (iv) improve operating efficiencies; and (v) pursue strategic acquisitions and alliances. THE RECAPITALIZATION, FINANCING AND RELATED TRANSACTIONS The Offering is part of the Recapitalization which is being effected pursuant to the Recapitalization Agreement dated as of February 9, 1996 among TRW, certain TRW subsidiaries and a Delaware corporation owned by the Investors described below ("Experian Corporation"). TRW owns all of the outstanding stock of IS&S Holdings, Inc. ("Holdings"), and Holdings owns all of the outstanding stock of IS&S. IS&S will own substantially all of the assets of TRW IS&S and will issue a demand promissory note to TRW in the face amount of approximately $755.0 million (the "TRW Note"). The other principal components of the Recapitalization, which will be consummated concurrently with the Offering, include the following: . Bain Capital, Inc. and its affiliates (collectively "Bain"), Thomas H. Lee Company and its affiliates (collectively, "THL") and certain other investors (Bain, THL and such other investors are collectively referred to as the "Investors") will invest $255.0 million (the "Equity Investment") in Experian Corporation. Experian Corporation owns all of the outstanding capital stock of Experian. Bain and THL are two of the most active private equity investors in the United States. . Experian Corporation will merge into Holdings, and Experian will merge into IS&S (the "IS&S Merger") with IS&S becoming liable for the Notes. After the IS&S Merger, IS&S is expected to change its name to Experian Information Solutions, Inc. Neither Experian nor Experian Corporation will have any operations prior or subsequent to the consummation of the Recapitalization. . The proceeds of the Offering, together with estimated initial borrowings by the Company of $560.0 million under the Credit Facilities and the proceeds from the Equity Investment, will be used to (i) repay the TRW Note; (ii) pay TRW $255.0 million in connection with the redemption of certain stock of TRW in Holdings; and (iii) pay an estimated $55.0 million of fees and expenses relating to the Recapitalization, the Offering, the Credit Facilities, the Equity Investment and the other transactions contemplated by the Recapitalization Agreement (collectively, the "Transactions"). Upon completion of the Recapitalization, Holdings will own all of the outstanding capital stock of the Company. Bain will own approximately 33.6% of the voting power of Holdings, THL will own approximately 33.6% of the voting power of Holdings, TRW will retain securities entitled to approximately 19.6% of the voting power of Holdings and certain other investors will own approximately 13.2% of the voting power of Holdings. See "Risk Factors-- Controlling Stockholders," "Ownership of Capital Stock" and "Certain Relationships and Related Transactions." The Company will have certain rights to use the TRW name for a limited time following the Recapitalization. See "Risk Factors--Effects of the Recapitalization" and "Certain Relationships and Related Transactions." THE TRANSACTIONS The following table sets forth the pro forma sources and uses of funds for the Transactions as of June 30, 1996.(/1/) <TABLE> <CAPTION> AMOUNTS --------------------- (DOLLARS IN MILLIONS) <S> <C> SOURCES Credit Facilities: Revolving Facility (2)............................... $ 10.0 Tranche A Term Loan.................................. 200.0 Tranche B Term Loan.................................. 175.0 Tranche C Term Loan.................................. 175.0 Senior Subordinated Notes............................. 250.0 Equity Investment..................................... 255.0 -------- Total Sources....................................... $1,065.0 ======== USES Distribution to existing shareholder (3).............. $1,010.0 Fees and expenses related to the Transactions (4)..... 55.0 -------- Total Uses.......................................... $1,065.0 ======== </TABLE> - ------------ (1) The direct continuing equity interests of TRW in Holdings are excluded from the table above, and consist of $47.2 million liquidation preference of Voting Preferred Stock of Holdings ("Voting Preferred"), $27.8 million liquidation preference of Non-voting Preferred Stock of Holdings ("Non- voting Preferred," and together with the Voting Preferred, the "Preferred Stock") and $15.0 million of Common Stock of Holdings, representing in the aggregate 19.6% of the voting power of Holdings subsequent to the Recapitalization. See "The Recapitalization, Financing and the Related Transactions" and "Ownership of Capital Stock." (2) Represents the drawn portion under the $75.0 million Revolving Facility. (3) Consists of the repayment of the TRW Note of approximately $755.0 million and the redemption of certain stock of TRW in Holdings for aggregate consideration of $255.0 million. The face amount of the TRW Note is subject to adjustment based upon working capital of the business at the date of consummation of the Transactions (the "Closing Date"). (4) The estimated fees and expenses consist of underwriting fees, bank fees, financial advisory fees and legal, accounting and other professional fees. Certain affiliates of the Investors will receive compensation for their services in connection with the Transactions. See "Certain Relationships and Related Transactions." THE OFFERING Issuer................ Experian Information Solutions, Inc. will issue the Notes and will merge into IS&S in connection with the Recapitalization, with IS&S becoming liable for the Notes. After the merger, IS&S is expected to change its name to Experian Information Solutions, Inc. Securities Offered.... $250,000,000 aggregate principal amount of % Senior Subordinated Notes due 2006. Maturity.............. The Notes will mature on , 2006. Interest Payment Interest on the Notes is payable on and , Dates................. commencing , 1997. Sinking Fund.......... None. Optional Redemption... The Notes are redeemable, in whole or in part, at the option of the Company on or after , 2001, at the redemption prices set forth herein plus accrued and unpaid interest, if any, to the date of redemption. In addition, prior to , 1999, the Company, at its option, may redeem up to 40% of the aggregate principal amount of the Notes originally issued in the Offering with the net cash proceeds of one or more Equity Offerings, at a redemption price equal to % of the principal amount thereof plus accrued and unpaid interest, if any, to the date of redemption; provided that at least $125 million of the original principal amount of Notes remains outstanding after any such redemption. Change of Control..... Upon a Change of Control Triggering Event, the Company will be required to make an offer to repurchase the Notes at a price equal to 101% of the principal amount thereof, together with accrued and unpaid interest, if any, to the date of repurchase. There can be no assurance that the Company would have the financial resources necessary to repurchase the Notes upon a Change of Control Triggering Event. The occurrence of certain of the events which would constitute a Change of Control Triggering Event as well as the failure to repurchase the Notes upon a Change of Control Triggering Event would constitute a default under the Credit Facilities. As of June 30, 1996, on a pro forma basis after giving effect to the issuance of the Notes and the consummation of the Transactions, the aggregate indebtedness that would have become due upon the occurrence of a Change of Control Triggering Event under the Indenture and a default under the Credit Facilities was $812.5 million. Ranking............... The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Indebtedness of the Company. The Notes will rank pari passu with any future Senior Subordinated Indebtedness of the Company and will rank senior to all future subordinated indebtedness of the Company. As of June 30, 1996, on a pro forma basis after giving effect to the Transactions, the Company would have had approximately $561.6 million of Senior Indebtedness. The Indenture permits the Company to incur indebtedness in addition to the Notes of up to approximately $ million (including the Credit Facilities) and certain other indebtedness as described in the definition of "Permitted Indebtedness", as well as an additional amount pursuant to a fixed charge coverage ratio test that as of June 30, 1996, on a pro forma basis after giving effect to the issuance of the Notes and the consummation of the Transactions, would have permitted the incurrence of an additional approximately $ of indebtedness. See "Description of Notes--Limitation on Incurrence of Additional Indebtedness." The Indenture permits all of such additional indebtedness to be Senior Indebtedness or Secured Indebtedness. Restrictive The Indenture will contain certain covenants that limit Covenants............. the ability of the Company and certain of its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Indebtedness and senior in right of payment to the Notes, incur liens, impose restrictions on the ability of a subsidiary to pay dividends or make certain payments to the Company and its subsidiaries, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. The Indenture permits the Company to incur substantial additional indebtedness under certain circumstances. See "Ranking" above. Future Guarantees..... The Indenture will provide that any subsidiary of the Company which guarantees the Company's indebtedness under the Credit Facilities will guarantee the Notes, on an unsecured senior subordinated basis. Use of Proceeds....... The Company intends to use the proceeds from the Offering, together with estimated initial borrowings of approximately $560.0 million under the Credit Facilities and the proceeds of the Equity Investment as follows: (i) approximately $755.0 million will be applied to repay the TRW Note; (ii) approximately $255.0 will be paid to TRW in connection with the redemption of certain stock of TRW in Holdings; and (iii) an estimated $55.0 million will be applied to pay fees and expenses relating to the Transactions. See "Use of Proceeds" and "The Recapitalization, Financing and Related Transactions." For additional information regarding the Notes, see "Description of Notes."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001014538_cardiopulm_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001014538_cardiopulm_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..60143652eff4d056aa6dbaa998580841bc67fbb1
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements (including the notes thereto) appearing elsewhere in this Prospectus. The Company is a development stage company completing the development and testing of its initial product. To date the Company has made no commercial sales of any product nor has it produced any product in commercial quantities. THE COMPANY Cardiopulmonary Corp. designs, develops and assembles advanced, software-driven ventilators which it believes represent a new generation of life support technology for the treatment of intensive care and anesthesia patients. The Company's first product, the Venturi ventilator, incorporates proprietary "smart" software and pneumatic hardware to continuously control patient airway flow and pressure throughout all phases of the respiratory cycle, including the active control of exhalation. These unique features enable continuous automatic adjustment within and between individual breaths to tune therapy to patient-specific demands and to supplement the patient's spontaneous breathing efforts without suppressing or mechanically overriding the patient's natural drive to breathe. The Company believes that these features will fundamentally change the practice of applied respiratory care by reducing the work of breathing, accelerating weaning from mechanical ventilatory support and reducing ventilator dependence. As a result, the Company believes the Venturi will improve clinical results, shorten the length of hospital stays and reduce treatment costs. Respiratory dysfunction represents one of the most prevalent and costly conditions in healthcare. The National Center for Health Statistics reports that lung disease affects some 25 million people and is the third leading cause of death in the United States. Furthermore, the cumulative effects of air pollution, smoking, and the increasing incidence of the acquired immunodeficiency syndrome (AIDS), together with the aging of the United States population, are expected to cause a significant increase in the need for respiratory care. Mechanical ventilation is required for the treatment of acute respiratory failure due to primary lung disease and for a variety of secondary causes of respiratory failure, including heart attacks, circulatory failure, strokes, sepsis and trauma. In addition, patients undergoing general anesthesia and surgery require temporary ventilation to sustain breathing during surgery and/or in the immediate post-operative period. The American Society of Anesthesiology estimates that 22 million surgical procedures are performed in the United States each year; a significant portion of these procedures requires general anesthesia. The Company has entered into an exclusive distribution agreement with Kontron Instruments Ltd. for the promotion, sales, servicing and distribution of Venturi products in Europe and certain other jurisdictions. Kontron is a subsidiary of Kontron Instruments Holding N.V., a leading manufacturer and distributor of medical and scientific instruments with over $175 million in annual sales and an established critical care sales force which includes approximately 60 European sales representatives. To date, Kontron has funded most of the expenditures relating to European regulatory approvals for the Venturi, and through direct investments owns approximately 12% of the Company prior to this offering. Subject to certain termination rights, the distribution agreement with Kontron calls for Kontron to purchase specified quantities of the Venturi ventilator through the end of 1997, after which time the parties have agreed to negotiate in good faith concerning a new purchase schedule. In addition, Kontron has agreed to expend a total of at least $1,000,000 for promotion, advertisement and selling of the Venturi, the timing of which expenditure is based on the receipt by the Company of certain regulatory approvals for the Venturi. The Company currently is supplying demonstration units to Kontron and expects to begin commercial sales efforts through Kontron in the second half of 1996. See "Business--Distribution Agreement with Kontron." The Company's objective is to become a leading provider of advanced ventilatory support and other critical care systems in the United States and internationally. The important elements of the Company's strategy are to (i) establish the Company's Venturi system as a new standard of care in advanced ventilatory support, (ii) focus initial sales efforts on leading teaching hospitals and clinical opinion leaders, (iii) initiate clinical marketing studies to validate certain key benefits of the Venturi, (iv) establish international presence through Kontron and other strategic alliances, (v) establish a direct sales force and selected distributor network in the United States, and (vi) leverage core ventilation technologies to create new products and maintain product leadership. The Venturi has received Section 510(k) pre-market clearance from the U.S. Food and Drug Administration and has passed IEC 601 safety tests administered by the British Standards Institution. As a result, the Company may begin commercial sales of the Venturi in the United States and most European countries other than Germany and France, where specific regulatory applications are pending. The European and United States product launches for the Venturi presently are scheduled for the second half of 1996. In addition, the Venturi's software and hardware have been specifically designed as a platform to accommodate future enhancements for ventilation, patient monitoring and anesthesia delivery, subject to regulatory approval. Cardiopulmonary Corp. was incorporated under the laws of Delaware in March 1988. The Company's executive offices and manufacturing facilities are located at 200 Cascade Boulevard, Milford, Connecticut 06460 and its telephone number is (203) 877-1999. THE OFFERING Common Stock offered .............................. 2,000,000 shares Common Stock outstanding after offering ........... 5,892,166 shares (1) Use of proceeds ................................... Development of future products; working capital to finance production of ventilators for sale to Kontron and other purchasers; establishing a marketing and sales force; expanding production facilities; and for other general corporate purposes. Proposed Nasdaq National Market symbol ............ CPCP - ---------- (1) Based upon shares outstanding as of June 27, 1996. Excludes 600,000 shares reserved for issuance under the Company's 1994 Stock Option Plan and 100,000 shares reserved for issuance under the Company's Stock Option Plan for Non-Employee Directors. As of June 27, 1996, options to purchase an aggregate of 398,400 shares of Common Stock had been granted under the Company's 1994 Stock Option Plan at a weighted average exercise price of $2.43 per share. As of June 27, 1996, 110,300 of these options were vested; the remainder are subject to vesting restrictions which lapse at various times from 1996 to 2000. As of June 27, 1996, options to purchase 40,000 shares of Common Stock had been granted under the Non-Employee Director Stock Option Plan at an exercise price of $0.63 per share, all of which are subject to vesting restrictions which lapse at various times from 1996 to 2000. See "Management -- Stock Options." Also excludes 475,300 shares reserved for issuance upon exercise of outstanding warrants exercisable for $5.00 per share, 4,000 shares reserved for issuance upon exercise of warrants issued in connection with the Company's bank financing and 100,000 shares reserved for issuance upon exercise of warrants to be issued to the Representatives of the Underwriters exercisible at 120% of the initial public offering price (the "Representatives' Warrants"). See "Underwriting." Except as otherwise indicated, all information in this Prospectus (i) gives effect to a five-into-two reverse stock split effected in May 1996, (ii) gives effect to the automatic conversion upon the closing of this offering of all outstanding shares of the Company's Series A Convertible Preferred Stock, Series B Convertible Preferred Stock and Series C Convertible Preferred Stock into 2,612,407 shares of Common Stock and (iii) assumes no exercise of the Underwriters' over-allotment option. See "Description of Capital Stock" and "Underwriting." SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> FOR PERIOD THREE MONTHS ENDED FROM INCEPTION YEAR ENDED DECEMBER 31, MARCH 31, (MARCH 4, 1988) ------------------------- ------------------ THROUGH 1993 1994 1995 1995 1996 MARCH 31, 1996 ---- ---- ---- ---- ---- -------------- <S> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Costs and expenses: Research and development ................ $542 $1,075 $1,718 $301 $525 $5,930 General and administrative .............. 72 184 580 127 272 2,104 ---- ------ ------ ---- ---- ------ Loss from operations ..................... 614 1,259 2,298 428 797 8,034 Net interest (income) expense ............ 79 (38) 32 (4) 102 221 ---- ------ ------ ---- ---- ------ Net loss ................................. $693 $1,221 $2,330 $424 $899 $8,255 ==== ====== ====== ==== ==== ====== Unaudited pro forma net loss per share (1) ........................... $ 0.55 $0.10 $0.19 ====== ===== ===== Shares used in computing unaudited pro forma net loss per share (1) ........ 4,109 4,109 4,109 ====== ===== ===== </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 -------------------------- ACTUAL AS ADJUSTED (2) ------ --------------- BALANCE SHEET DATA: <S> <C> <C> Cash and cash equivalents ..................................... $ 525 $19,375 Total assets .................................................. 1,081 19,922 Long-term obligations and redeemable convertible preferred stock .................................. 7,344 6 Accumulated (deficit) ......................................... (8,879) (8,924) Common stock and other stockholders' equity (deficit)(3)....... (8,313) 19,097 </TABLE> - ---------- (1) Unaudited pro forma net loss per share is determined by dividing the net loss attributable to common stockholders by the weighted average number of shares of Common Stock and Common Stock equivalents outstanding during the period, assuming the automatic conversion of all outstanding shares of Preferred Stock into 2,612,407 shares of Common Stock upon the closing of this offering. See Note 1 of Notes to the Company's Financial Statements. The Company has entered into employment agreements with certain management members, effective upon the closing of this offering. Had these agreements been in effect since January 1, 1995, unaudited pro forma net loss per share would have been $0.59 for 1995 and $0.11 and $0.20 for the three months ended March 31, 1995 and 1996, respectively. (2) Reflects the issuance of convertible notes in the aggregate principal amount of $80,000 in April 1996, of which $18,320 was ascribed to detachable warrants issued in conjunction with such notes, the issuance of 177,000 shares of Common Stock and the conversion of all outstanding notes into 298,300 shares of Common Stock on May 20, 1996. See Note 8 and Note 10 of Notes to the Company's Financial Statements. Also reflects the conversion of all outstanding shares of Preferred Stock into 2,612,407 shares of Common Stock upon the closing of this offering. See Note 9 of Notes to the Company's Financial Statements. Also gives effect to the sale of 2,000,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $10.00 per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by the Company. See "Use of Proceeds" and "Capitalization."
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Investors should carefully consider the risk factors related to the purchase of Common Stock of the Company. See "Risk Factors." THE COMPANY Xionics Document Technologies, Inc. ("Xionics" or the "Company") designs, develops and markets advanced embedded systems technology for use in mainstream office devices such as printers, copiers and scanners. The Company offers integrated, modular software products, along with firmware and silicon technology products, that enable the high-speed capture, processing, printing, copying and display of complex electronic documents both locally and across networks. Xionics provides standards-based technology around which its customers can design, develop and market differentiated products in a timely manner. Electronic devices for handling paper -- printers, copiers, scanners and fax machines -- are ubiquitous in the office environment today. According to Giga Information Group, United States sales of these office devices exceeded $28 billion in 1995 and are expected to grow to more than $32 billion by 1998. End users are demanding greater speed and throughput, higher-quality output, color capability and network connectivity, all at lower costs. In addition, manufacturers of office devices have an increasing need to meet de facto industry standards in areas such as page rendering, networking and Internet protocols. In order to meet user demands and comply with industry standards within a fiercely competitive market, the Company believes that these OEMs increasingly rely on outside suppliers to provide core, enabling software and hardware technologies around which the OEMs can develop differentiated products. Currently, the Company markets both printer software and image accelerator products. The Company's IPS-Print software products allow printers to convert commands generated by a software application such as a word-processing program into marks on the printed page; this page description language software is compatible with the industry's PostScript and PCL standards. IPS-Print provides the Company's OEM customers with a number of key benefits including improved price/performance, reduced time and risk to market and architectural efficiencies. In addition to IPS-Print, Xionics markets a family of scan, display and print accelerators. These products incorporate imaging technologies such as data compression/decompression, digital signal processing and digital image enhancement, and are used to accelerate the high-volume scanning, display and printing of business transaction records. See "Business -- The Xionics Solution." Building on its core competencies in the areas of print and imaging and on its existing relationships with office device manufacturers, the Company is developing an expanded version of IPS into what it believes will be an advanced comprehensive solution that meets design requirements for higher-performance and cost-effective controllers for multifunction peripheral devices ("MFPs"). MFPs combine several paper-handling functions (e.g. printing, copying, scanning and/or faxing) in one device. Currently, the market for MFP devices has been limited by the technical inability of OEMs to produce a device meeting mainstream office requirements for price, performance and quality. The Company markets and sells its products worldwide primarily through a direct sales force and through value-added resellers and distributors. As of August 1, 1996, the Company had licensed its printer software products to over 35 OEMs including Hewlett-Packard Company, Seiko Epson Corporation, Sharp Corporation and Xerox Corporation, and had more than 20 distributors of its imaging products. In March 1996, the Company expanded its relationship with Hewlett-Packard by licensing certain of its page description technology, including its version of the PostScript page description language, to Hewlett- Packard. The Company will continue to cultivate relationships with other major OEMs in an effort to leverage the OEMs' ability to bring significant investment and marketing resources to the distribution of new products. As of August 1, 1996 the Company had 168 full-time employees, including 101 in product development. See "Business -- Sales and Marketing," "-- Customers" and "-- Employees." - -------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- THE OFFERING <TABLE> <S> <C> Common Stock offered by: The Company ................................. 2,500,000 shares The Selling Stockholder ..................... 500,000 shares Common Stock to be outstanding after the offering........................................ 10,044,923 shares(1)(2) Use of proceeds................................... Net proceeds to the Company estimated to be approximately $24.6 million, to be used to repay certain indebtedness of the Company, for working capital and other general corporate purposes. See "Use of Proceeds." Nasdaq National Market symbol..................... XION <FN> - --------------- (1) Based on the number of shares of Common Stock outstanding as of July 31, 1996. Excludes 3,817,790 shares of Common Stock reserved for issuance under the Company's stock option and purchase plans, of which 2,529,472 shares were subject to outstanding options as of July 31, 1996 at a weighted average exercise price of $0.66 per share. See "Capitalization" and "Management -- Stock Option Plans." (2) Reflects the conversion, upon the completion of this offering, of all outstanding shares of the Company's Convertible Preferred Stock into 5,823,989 shares of Common Stock. </TABLE> <TABLE> SUMMARY CONSOLIDATED FINANCIAL INFORMATION <CAPTION> YEAR ENDED JUNE 30, ----------------------------------------------------- 1992 1993 1994 1995 1996 ------- ------- ------ ------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net revenue................................... $ 8,078 $8,691 $9,131 $15,577 $23,809 Cost of revenue............................... 3,615 3,895 2,896 4,681 5,791 ------- ------ ------ ------- ------- Gross profit.................................. 4,463 4,796 6,235 10,896 18,018 Operating expenses: Research and development.................... 682 958 1,308 6,235 10,037 Selling, general and administrative......... 5,700 3,755 4,674 6,901 9,395 Charge for purchased research and development................................ -- -- -- 3,492 -- ------- ------ ------ ------- ------- Income (loss) from operations................. (1,919) 83 252 (5,733) (1,414) Other income (expense), net................... 346 5 (9) (292) (119) ------- ------ ------ ------- ------- Net income (loss)............................. $(1,573) $ 88 $ 243 $(6,025) $(1,533) ======= ====== ====== ======= ======= Pro forma net loss per common and common equivalent share(1)......................... $ (0.18) ======= Pro forma weighted average number of common and common equivalent shares outstanding.... 8,308 ======= Supplemental pro forma net loss per common and common equivalent share(2).................. $ (0.16) ======= Supplemental pro forma weighted average number of common and common equivalent shares outstanding................................. 8,521 ======= </TABLE> - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- <TABLE> <CAPTION> JUNE 30, 1996 ------------------------------------------- PRO FORMA ACTUAL PRO FORMA(3) AS ADJUSTED(4) ------- ------------ -------------- (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents............................ $ 2,116 $2,116 $26,600 Working capital...................................... 992 992 25,525 Total assets......................................... 9,905 9,905 34,389 Long-term debt, net of current maturities............ 2,658 2,658 564 Redeemable preferred stock........................... 8,231 -- -- Stockholders' equity (deficit)....................... (6,570) 1,661 26,236 <FN> - --------------- (1) Computed on the basis described in Note 1 of Notes to Consolidated Financial Statements included elsewhere in this Prospectus. (2) Computed on the basis described in Note 1 of Notes to Consolidated Financial Statements, adjusted for the increase in the number of shares of Common Stock issued pursuant to the proposed offering sufficient to generate proceeds for the payment of $2.2 million of a secured promissory note payable upon the consummation of the offering. (3) Adjusted to give effect to the transactions and events described in the last paragraph of this Prospectus Summary. In addition, the pro forma statements reflect the credit to additional paid-in capital of all accumulated dividends on the Class C Redeemable Convertible Preferred Stock and the Class D Preferred Stock. See "Certain Transactions." (4) Adjusted to give effect to the sale of 2,500,000 shares of Common Stock by the Company offered hereby at an assumed initial public offering price of $11.00 per share and the application of the estimated net proceeds therefrom to the repayment of $2.1 million in principal amount and $90,000 of accrued interest payable on the secured promissory note payable to Phoenix Technologies Ltd. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001014599_ameriking_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001014599_ameriking_prospectus_summary.txt
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+SUMMARY The following summary is qualified in its entirety by reference to and should be read in conjunction with the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus gives effect to the recapitalization of the Company's capital stock, including the 1,000-for-1 stock split that will occur in connection with the Offerings (the "Recapitalization"). See "Description of Capital Stock--The Recap italization." References to a fiscal year refer in each case to the year ended December 31, except that references to fiscal 1995 refer to the fiscal year ended January 1, 1996. Unless the context indicates or requires otherwise, references in this Prospectus to the "Company" or "AmeriKing" are to AmeriKing, Inc. and its subsidiaries. THE COMPANY AmeriKing is the second largest independent Burger King franchisee in the United States with 183 restaurants located primarily in eleven Midwestern and Southern states. The Company's strategy is to capitalize on its significant presence in targeted markets, the predictable operating performance of Burger King restaurants and management's extensive experience to (i) make fill-in acquisitions and develop new restaurants in existing markets to enhance its operating leverage and (ii) make acquisitions in new markets that offer significant potential and provide the critical mass necessary to achieve operating efficiencies. For the twelve months ended September 30, 1996, the Company generated pro forma restaurant sales and EBITDA (as defined) of $201.7 million and $23.3 million, respectively. The Company believes it is well positioned to capitalize on attractive acquisition opportunities within the growing, highly fragmented Burger King system. According to information publicly filed by Grand Metropolitan PLC ("Grand Met"), the parent corporation of Burger King Corporation ("BKC"), BKC is the second largest restaurant franchisor in the world, with system-wide restaurant sales of $8.4 billion for its fiscal year ended September 30, 1995. There are more than 8,000 Burger King restaurants worldwide, of which over 90% are operated by approximately 1,500 independent franchise groups. Management believes that, based upon publicly available information, the five largest franchisees in the Burger King system operate less than 12% of all domestic Burger King restaurants. The Burger King system has experienced considerable success in recent years, as evidenced by the 30% growth in the number of Burger King restaurants from 1991 to 1995. In addition, Burger King's share of the quick-service hamburger restaurant market grew from 16% in 1993 to 18% in 1995. Furthermore, according to market surveys conducted for BKC by National Adult Tracking in 1996, consumers preferred Burger King to all other quick-service hamburger brands. The Company believes its successful operating strategy, combined with the attractive economics of Burger King restaurants, minimizes the risks of new restaurant development and future acquisitions. Management believes the operating cash flow of its Burger King restaurants is highly predictable and consistent due to the proven success of the Burger King concept and the stringent evaluation criteria adhered to by the Company in assessing new development opportunities and acquisitions. On a pro forma basis, the Company's comparable restaurant sales have increased each fiscal year since 1992. For the twelve months ended September 30, 1996 on a pro forma basis, the Company generated average restaurant sales of $1,132,000 and average restaurant operating cash flow of $174,000 (15.4% margin). For the same period, approximately 98% of the Company's restaurants generated positive operating cash flow. The Company believes that each of its currently owned restaurants will generate positive operating cash flow in fiscal 1997. Furthermore, the Company currently leases each of its properties, minimizing its cost to develop restaurants. The Company has budgeted approximately $355,000 to develop each new Burger King restaurant in fiscal 1997. Based on the results of restaurants developed by the Company, management expects its newly developed restaurants to generate cash-on-cash returns in excess of 35% in the first year of operations. Since the introduction of quick-service restaurants in the mid-1950s, the percentage of the average family's food budget spent on meals consumed "away from home" has grown significantly, from approximately 25% of the food budget in 1955 to approximately 44% in 1995, according to the National Restaurant Association. The National Restaurant Association estimates that sales at quick-service restaurants will reach approximately $100 billion in 1996, representing an inflation-adjusted growth rate of 4.5% over 1995, more than double the 2.0% projected growth rate of full-service restaurants. According THE UNITS OFFERING UNITS: Securities Offered ... Units, consisting of an aggregate of 1,200,000 shares of Senior Preferred Stock of the Company with an aggregate liquidation preference of $30,000,000 and 46,817 shares of Common Stock of the Company. Each Unit will consist of 40 shares of Senior Preferred Stock and 1.561 shares of Common Stock. Separability ......... The Senior Preferred Stock and the Common Stock will not be separately transferrable until the Separation Date (as defined). Use of Proceeds ...... The proceeds from the Offerings will be used to repay borrowings under the Credit Agreement, to repay outstanding Subordinated Debt (as defined) (including a prepayment penalty and a warrant redemption payment), to repay certain senior debt, to pay the fees and expenses of the Offerings and for general corporate purposes. See "Use of Proceeds" and "Description of Certain Indebtedness." PREFERRED STOCK: Securities Offered ... 1,200,000 shares of % Senior Exchangeable Preferred Stock due 2008 of the Company. Dividends ............ Dividends on the Senior Preferred Stock will accrue in each period ending on March 1, June 1, September 1 and December 1of each year at a rate of % per annum of the liquidation preference. On or before December 1, 2001 the Company may, at its option, pay dividends in cash or in additional fully paid and non-assessable shares of Senior Preferred Stock having an aggregate liquidation preference equal to the amount of such dividends. Thereafter, dividends may be paid in cash only. Liquidation Preference ........... $25 per share. Ranking .............. The Senior Preferred Stock will rank senior in right of payment with respect to all Junior Securities (as defined) and pari passu in right of payment with respect to all Parity Securities (as defined). In addition, the Company's obligations under the Senior Preferred Stock are subject to the terms of the BKC Intercreditor Agreement. See "Risk Factors--Subordination as a Result of BKC Intercreditor Agreement," "Business--Obligations to Burger King Corporation" and "Description of Securities--Senior Preferred Stock--BKC Intercreditor Agreement." Optional Redemption .. The Senior Preferred Stock will be redeemable at the option of the Company, in whole or in part, at any time on or after December 1, 2001 at the redemption prices set forth herein, plus an amount in cash equal to all accumulated and unpaid dividends per share to the date of redemption. general liability insurance. For example, the Company achieved significant operating improvements in the 68 restaurants it acquired from BKC in September 1994. From the twelve month period ended July 31, 1994, prior to the close of the acquisition, to the twelve month period ended September 30, 1996, restaurant operating cash flow for these restaurants increased 48% from $7.4 million to $11.1 million, or from 10.4% of sales to 15.1% of sales. o Capitalize on Strong Support from Burger King Corporation. The Company believes that it realizes significant benefits from its affiliation with BKC as a result of: (i) the widespread recognition of the Burger King name and products; (ii) BKC's management of the proven, successful Burger King concept, including new product development, quality assurance and strategic planning; (iii) the size and market penetration of BKC's current $200 million annual media budget; and (iv) the expected continued growth of the Burger King system. During BKC's fiscal year ended September 30, 1995, a record number of 657 new restaurants were added to the Burger King system. o Leverage Sophisticated Management Information System. The Company's customized integrated management information system, REMACs, typically not affordable by smaller Burger King franchisees and other smaller quick-service restaurant chains, provides management with the ability to identify and quickly capitalize on restaurant sales enhancement and profit opportunities. The Company utilizes its management information system to: (i) minimize shrinkage and control labor costs; (ii) efficiently schedule labor; (iii) effectively manage inventory; (iv) analyze product mix and various promotional programs using point-of-sale information; and (v) quickly integrate accounting systems following acquisitions. o Consistently Provide High Quality Products and Superior Customer Service. As the number of restaurants that the Company owns in a particular market increases, the Company has a greater ability to (i) ensure overall customer satisfaction in that market through consistency in food quality, service and restaurant appearance and (ii) coordinate and influence local Burger King advertising and promotional programs and pricing policies. In addition, the large number of restaurants that the Company owns and the corresponding professional development opportunities permit the Company to attract and retain strong regional, district and individual restaurant management. Most of these managers receive significant incentive compensation based on compliance with Burger King's restaurant operating guidelines and restaurant profitability. RECENT RESULTS Based on preliminary unaudited results, for the four-week period and the twelve-month period ended October 28, 1996, the Company's comparable restaurant sales increased by 10.7% and 0.5%, respectively, over the same period for the prior fiscal year on a pro forma basis, based upon the sales of the Company's restaurants including the periods in 1995 during which certain of those restaurants where operated by their prior owners. THE NOTES OFFERING Securities Offered ..... $100.0 million aggregate principal amount of % Senior Notes due 2006. Maturity ............... December 1, 2006. Interest ............... The Senior Notes will bear interest at a rate of % per annum, payable semi-annually in cash in arrears on each June 1 and December 1, commencing on December 1, 1997. Optional Redemption .... On or after , 2001, the Senior Notes will be redeemable at the option of the Company, in whole or in part, at the redemption prices set forth herein, plus accrued and unpaid interest to the date of redemption. Notwithstanding the forego- ing, at any time prior to December 1, 1999, the Company may redeem up to 35% of the original aggregate principal amount of the Senior Notes with the net proceeds of one or more Equity Offerings (as defined) at a redemption price equal to % of the principal amount thereof, plus accrued and unpaid interest to the date of redemption. See "Description of Securities--Senior Notes--Redemption of Senior Notes--Optional Redemption." Change of Control ...... Upon the occurrence of a Change of Control (as defined), each holder of Senior Notes will have the right to require the Company to purchase such holder's Senior Notes pursuant to an Offer (as defined) at a purchase price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest to the date of purchase. Certain transactions with affiliates of the Company may not be deemed to be a Change of Control. Except as described under "Description of Securities--Senior Notes--Mandatory Offers to Purchase Senior Notes--Change of Control," the indenture pursuant to which the Senior Notes will be issued (the "Indenture") does not contain provisions that permit the holder of Senior Notes to require the Company to purchase or redeem the Senior Notes in the event of a takeover, recapitalization or similar restructuring, including an issuer recapitalization or similar transaction with management. Consequently, the Change of Control provisions will not afford any protection in a highly leveraged transaction, including such a transaction initiated by the Company, management of the Company or an affiliate of the Company, if such transaction does not result in a Change of Control. See "Description of Securities--Senior Notes--Mandatory Offers to Purchase Senior Notes--Change of Control" and "--Senior Notes--Certain Definitions." Ranking ................ The Senior Notes will be senior unsecured obligations of the Company, ranking pari passu in right of payment with all other Senior Indebtedness (as defined) of the Company and senior to all Subordinated Indebtedness (as defined) of the Company, and will effectively rank junior to any secured Indebtedness (as defined) of the Company and to all Indebtedness of the Company's subsidiaries, including Indebtedness incurred under the Credit Agreement (as defined). As of September 30, 1996, on a pro forma basis after giving effect to the Offerings and the application of the net proceeds therefrom, the aggregate principal amount of outstanding secured Indebtedness of the Company and Indebtedness of the Company's subsidiaries to which the Senior Notes would have been effectively ranked junior would have been approximately $8.0 million. In addition, the Company's obligations under the Senior Notes are subject to the terms of the BKC Intercreditor Agreement (as defined). The Indenture will permit the Company and its subsidiaries to incur additional Indebtedness, including secured Indebtedness, subject to certain limitations. See "Risk Factors--Subordination as a Result of BKC Intercreditor Agreement," "Business-- Obligations to Burger King Corporation" and "Description of Securities--Senior Notes--BKC Intercreditor Agreement," "--Certain Covenants" and "Description of Certain Indebtedness." Certain Covenants ...... The Indenture will contain certain covenants that, among other things, limit the ability of the Company and its Restricted Subsidiaries (as defined) to pay dividends or make certain other Restricted Payments (as defined), including Restricted Investments (as defined), to incur additional Indebtedness, to encumber or sell assets, to enter into transactions with affiliates, to enter into certain guarantees of Indebtedness, to merge or consolidate with any other entity and to transfer or lease all or substantially all of their assets. In addition, under certain circumstances, the Company will be required to offer to purchase Senior Notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase, with the proceeds of certain Asset Sales (as defined). See "Description of Securities--Senior Notes--Certain Covenants" and "--Senior Notes--Mandatory Offers to Purchase Senior Notes--Asset Sales." Use of Proceeds ........ The proceeds from the Offerings will be used to repay borrowings under the Credit Agreement, to repay outstanding Subordinated Debt (as defined) (including a prepayment penalty and a warrant redemption payment), to repay certain senior debt, to pay the fees and expenses of the Offerings and for general corporate purposes. See "Use of Proceeds" and "Description of Certain Indebtedness." For a discussion of the terms of the Senior Notes, see "Description of Securities--Senior Notes" and for a discussion of certain matters that should be considered by prospective purchasers in connection with an investment in the Senior Notes, see "Risk Factors." CONCURRENT OFFERING Concurrent with the Notes Offering, the Company is offering $30,000,000 of Units, consisting of Senior Preferred Stock and Common Stock, to the public. The Senior Preferred Stock will be exchangeable, at the option of the Company, into the Company's % Subordinated Exchange Debentures due 2008 (the "Exchange Debentures"), subject to the ability of the Company to incur such indebtedness under the Credit Agreement and the Indenture. The Notes Offering is contingent upon the consummation of the Units Offering, and there can be no assurance that the Units Offering will be consummated. The Company was incorporated in the State of Delaware on August 17, 1994 as NRE Holdings, Inc. On May 10, 1996, the Company changed its name to "AmeriKing, Inc." Its principal executive offices are located at 2215 Enterprise Drive, Suite 1502, Westchester, Illinois 60154, and its telephone number is (708) 947-2150.
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. At the time of the Transaction, the Company will change its name to Sterling Chemicals Holdings, Inc., Chemicals will change its name to Sterling Chemicals, Inc. and the Company's operating assets will be conveyed to Chemicals. See "The Transaction." As used herein, the term "STX Acquisition" refers to STX Acquisition Corp. prior to the consummation of the Transaction, and the term "Holdings" refers to the surviving corporation in the Merger. The term "Company" refers both to Sterling Chemicals, Inc. and its subsidiaries prior to the consummation of the Transaction and, thereafter, to Holdings and its subsidiaries. The term "Chemicals" refers to STX Chemicals Corp., which after the Transaction will be a wholly owned subsidiary of Holdings known as Sterling Chemicals, Inc. Certain operating and industry terms are defined in the Glossary included herein. This Prospectus contains certain forward-looking statements with respect to the business of the Company and the industry in which it operates. These forward-looking statements are subject to certain risks and uncertainties which may cause actual results to differ significantly from such forward-looking statements. See "Risk Factors." THE COMPANY The Company is one of North America's leading producers of selected commodity petrochemicals, used in the production of a wide array of consumer goods and industrial products, and pulp chemicals used in paper manufacturing. The Company ranks among the top three North American producers in terms of rated production capacity for each of its primary products, including styrene, acrylonitrile, acetic acid and sodium chlorate. Other products manufactured by the Company include methanol, plasticizers, tertiary butylamine, sodium cyanide and sodium chlorite. The Company manufactures all of its petrochemicals at a single facility in Texas City, Texas (the "Texas City Plant"), and believes that the large scale of this facility and its location on the U.S. Gulf Coast provides it with certain cost advantages. The Company's pulp chemicals are currently produced at four plants in Canada. A fifth plant, under construction in Valdosta, Georgia, is scheduled to begin production in late 1996. The Company believes that its pulp chemical plants benefit from their proximity to key customers in the pulp industry and their access to competitively priced electricity, which represents the most significant production cost in sodium chlorate manufacturing. In recent years, the Company has pursued a strategy of growth and product diversification. In 1992, the Company acquired its pulp chemicals business which has current sodium chlorate production capacity of 350,000 tons. In 1995, the Company began a three-year, $200 million capacity expansion and upgrade program, which is expected to be approximately 80% complete by the end of fiscal 1996. Through this program, the Company will have expanded its total petrochemical production capacity by approximately 1.4 billion pounds, including capacity additions of 200 million pounds of styrene, 200 million pounds of acetic acid and 150 million gallons (approximately 995 million pounds) of methanol. In addition, the Company is expanding its sodium chlorate production capacity by 110,000 tons, or 30%, by constructing a new facility in Valdosta, Georgia. Through this strategy, the Company has sought to capitalize on the continuing secular growth in global demand for its key products, while reducing its sensitivity to the cyclicality of the markets for any particular product. The following table sets forth the total revenues for the Company by its primary products. <TABLE> <CAPTION> NINE MONTHS YEAR ENDED ENDED SEPTEMBER 30, JUNE 30, ---------------- --------- 1993 1994 1995 1995 1996 ---- ---- ------ ---- ---- (DOLLARS IN MILLIONS) <S> <C> <C> <C> <C> <C> Petrochemicals: Styrene............................................ $144 $288 $ 467 $398 $249 Acrylonitrile...................................... 124 138 251 210 124 Acetic acid........................................ 64 76 94 75 50 Other.............................................. 68 76 74 54 64 ---- ---- ------ ---- ---- 400 578 886 737 487 Pulp Chemicals....................................... 119 123 144 106 114 ---- ---- ------ ---- ---- Total.............................................. $519 $701 $1,030 $843 $601 ==== ==== ====== ==== ==== </TABLE> Styrene. The Company is the third largest North American producer of styrene, a chemical intermediate utilized in the production of plastic and synthetic rubbers used in packaging, housewares, automotive components, luggage, toys and building products. The Company's styrene unit is one of the largest in the world and has an annual rated production capacity of 1.7 billion pounds, following a recent debottlenecking, which represents approximately 12% of total North American capacity. In fiscal 1995, the styrene unit operated at an average utilization rate of 96% and generated revenues of $467 million, which represented approximately 45% of the Company's total revenues. Acrylonitrile. The Company is the second largest global producer of acrylonitrile, the principal raw material for acrylic fibers used in textiles and industrial applications. The Company's acrylonitrile unit has an annual rated production capacity of 740 million pounds, which represents approximately 21% of total North American capacity. In fiscal 1995, the acrylonitrile unit operated at an average utilization rate of 96% and generated revenues of $251 million, which represented approximately 24% of the Company's total revenues. Acetic Acid. The Company is the third largest North American producer of acetic acid, a product made from carbon monoxide and methanol. Acetic acid is primarily used in the manufacture of intermediate products, such as vinyl acetate monomer, which are used to produce various consumer products, including adhesives, glue, cigarette filters and surface coatings. Following a 200 million pound capacity expansion completed in June 1996, the Company's acetic acid unit has an annual rated production capacity of approximately 800 million pounds, which represents approximately 17% of total North American capacity. In fiscal 1995, the acetic acid unit operated at an average utilization rate of 107% and generated revenues of $94 million, which represented approximately 9% of the Company's total revenues. Sodium Chlorate. Upon completion of its Valdosta, Georgia plant, the Company will be the second largest North American producer of sodium chlorate, which is converted to chlorine dioxide for use in the pulp bleaching process. The Company's four sodium chlorate plants have an aggregate annual rated production capacity of 350,000 tons, and the Valdosta, Georgia plant, scheduled to begin production in late 1996, will increase the Company's total annual capacity by 30% to approximately 460,000 tons. Following completion of the Valdosta plant, the Company will account for approximately 22% of North American sodium chlorate capacity. In addition, the Company's ERCO Systems Group is the worldwide leader in the design, sale and technical service of large scale chlorine dioxide generators, which are used to convert sodium chlorate to chlorine dioxide. Since the mid-1980s, North American demand for sodium chlorate has grown at an average annual rate of approximately 10%, as pulp manufacturers are substituting chlorine dioxide for elemental chlorine in bleaching applications in anticipation of environmental regulations that would eliminate the use of elemental chlorine in pulp manufacturing. In fiscal 1995, the Company's sodium chlorate plants operated at a weighted average utilization rate of 97% and its pulp chemicals business generated revenues of $144 million, which represented approximately 14% of the Company's total revenues. RECENT TRENDS The primary markets in which the Company competes, especially styrene and acrylonitrile, are cyclical and sensitive to changes in the balance between supply and demand, the price of feedstocks and the level of general economic activity. Historically, these markets have experienced alternating periods of tight supply and rising prices and profit margins, followed by periods of large capacity additions resulting in oversupply and declining prices and margins. Global styrene and acrylonitrile markets experienced strong demand growth and rising prices and profit margins from the end of fiscal 1994 through most of fiscal 1995. During the fourth quarter of fiscal 1995 and into the first half of fiscal 1996, styrene and acrylonitrile prices declined as a result of a general slowdown in global economic growth, inventory drawdowns by customers and reduced imports of petrochemicals and plastics by China, a major merchant market purchaser. In recent months, however, prices for styrene and acrylonitrile have stabilized after declines in the first six months of fiscal 1996, and the Company anticipates that pricing and profitability for its styrene and acrylonitrile products will be relatively stable for the remainder of fiscal 1996. Thereafter, anticipated expansions in worldwide production capacity of styrene in 1997 and 1998 are expected to affect pricing of this product for a period until global demand increases sufficiently to absorb such additional production capacity. The Company currently expects acrylonitrile market conditions to remain relatively stable through fiscal 1997. Sodium chlorate sales prices and profit margins strengthened throughout fiscal 1995 and into fiscal 1996 as a result of strong demand growth. In recent months, weakness in the pulp and paper markets has resulted in somewhat slower demand growth for sodium chlorate. However, sodium chlorate demand in the remainder of fiscal 1996 and in fiscal 1997 is expected to benefit from the anticipated promulgation of environmental regulations which would mandate the elimination of elemental chlorine use in pulp bleaching applications. The Company believes that it has developed an operating strategy to allow it to compete effectively in periods of both rising and declining product prices. During periods of peak demand, the experience and skill of its management has allowed the Company to operate its petrochemical units at utilization rates above its rated capacities, enhancing the Company's earnings generation during favorable market conditions. During cyclical downturns, the Company believes that the profitability of its operations is supported by its long-term sales contracts and conversion agreements which accounted for approximately 53% of its petrochemical sales volumes in fiscal 1995, as well as management's emphasis on minimizing fixed costs such as selling, general and administrative expenses. BUSINESS STRATEGY The Company's business strategy is to capitalize on its competitive market position to take advantage of periods of tight supply and high prices and margins for its primary products, which historically have occurred on a cyclical basis, and to expand its production capacity to capture future growth opportunities in the petrochemical and pulp chemical industries. Key elements of the Company's business strategy are to: (i) maintain a competitive cost position in petrochemicals by investing in new technology and equipment; (ii) pursue low cost expansions in petrochemicals, such as its recent 30% expansion of acetic acid capacity and construction of a world-scale 150 million gallon methanol plant; (iii) pursue growth opportunities in pulp chemicals through the current construction of additional capacity; (iv) continue to build strong industry partnerships in petrochemicals through securing long-term supply contracts with key customers; and (v) implement a focused acquisition strategy, targeting chemical businesses and assets which would strengthen the Company's existing market positions, provide upstream or downstream integration or produce complementary chemical products. THE TRANSACTION The proceeds of the Offerings will provide a portion of the funding required for the acquisition by the stockholders of STX Acquisition, including an investor group formed by TSG and Unicorn, of a controlling interest in the Company. Pursuant to an Amended and Restated Agreement and Plan of Merger dated as of April 24, 1996 (the "Merger Agreement") between STX Acquisition and the Company, STX Acquisition will be merged with and into the Company (the "Merger"). Current stockholders of the Company will have the option with respect to each share of common stock, par value $.01 per share, of the Company ("Company Common Stock") to elect to receive $12.00 cash or to retain their Company Common Stock ("Rollover Shares"). The aggregate number of Rollover Shares is limited to 5.0 million, the maximum number of Rollover Shares. Consequently, stockholders who elect to retain their shares of Company Common Stock may be subject to proration. Certain stockholders of the Company executed an Inducement Agreement with the Company (the "Inducement Agreement") which provides that such stockholders will make elections to receive Rollover Shares rather than cash (amounting to an aggregate of approximately 2.3 million Rollover Shares, the minimum number of Rollover Shares). Consummation of the Merger is subject to numerous conditions, including the consummation of the Offerings and the other financing transactions described herein. The Merger and the related financings are referred to herein as the "Transaction." See "The Transaction." The sale of the Securities offered hereby is subject to the consummation of the Merger, the closing of a bank credit facility and a private placement of equity and the conveyance to Chemicals of the operating assets of the Company, all of which will occur concurrently. Seven putative class action complaints have been filed relating to the proposed Merger and the events leading up to the recommendation of the approval thereof by the Board of Directors of the Company. The complaints generally allege that the course of conduct taken by the directors in considering the Company's strategic alternatives and in recommending the Merger was in violation of their fiduciary duties to the Company's stockholders and seek injunctive relief and unspecified damages. The Company believes that these actions are without merit and has instructed legal counsel to vigorously defend such actions. See "Business--Legal Proceedings--Shareholder Lawsuits." Credit Facility. Upon consummation of the Merger, Chemicals will enter into a bank credit facility (the "Credit Facility") with a syndicate of lenders led by Texas Commerce Bank National Association, as administrative agent, and Credit Suisse and Chase Securities Inc. as co-arrangers. The Credit Facility will consist of (i) a six and one half year $100.0 million revolving credit facility (the "Revolving Credit Facility"), (ii) a six and one half year $200.0 million term loan and an eight year $150.0 million term loan (collectively, the "Term Loans") and (iii) a four year $6.5 million term loan (the "ESOP Term Loan") to fund a new Employee Stock Ownership Plan (the "New ESOP"). See "Management-- Compensation of Executive Officers" and "Description of the Credit Facility." Equity Private Placement. Upon consummation of the Merger, STX Acquisition will complete a private placement of shares of its Common Stock (the "Equity Private Placement"), which will represent an equity contribution of approximately $103.1 million, assuming the minimum number of Rollover Shares. Purchasers of shares in the Equity Private Placement are expected to include an investor group formed by TSG and Unicorn and the New ESOP. The New ESOP will acquire its shares with the proceeds from a $6.5 million loan from Chemicals (the "Chemicals ESOP Loan"). Upon consummation of the Transaction, the investors in the Equity Private Placement, including principals of TSG and Unicorn, and certain principal stockholders of the Company will control the Company through the ownership of at least approximately 75% of the outstanding shares of Holdings Common Stock, assuming the maximum number of Rollover Shares. The following table sets forth the estimated sources and uses of funds to effect the Merger, as if the Merger had occurred on June 30, 1996. <TABLE> <CAPTION> SOURCES OF FUNDS DOLLARS IN MILLIONS ---------------- ------------------- <S> <C> Revolving Credit Facility............................. $ 5.4 Term Loans............................................ 350.0 ESOP Term Loan........................................ 6.5 Notes offered hereby.................................. 275.0 Units offered hereby.................................. 100.0 Equity Private Placement (a).......................... 103.1 ------ Total............................................... $840.0 ====== <CAPTION> USES OF FUNDS ------------- <S> <C> Purchase of Company Common Stock (b).................. $640.7 Purchase of other equity interests (c)................ 14.6 Refinance outstanding debt............................ 138.2 Chemicals ESOP Loan (d)............................... 6.5 Estimated Transaction expenses and fees (e)........... 40.0 ------ Total............................................... $840.0 ====== </TABLE> - -------- (a) Represents proceeds from the sale of STX Acquisition Common Stock to investors in the Equity Private Placement, assuming the minimum number of Rollover Shares. The amount of cash provided through the Equity Private Placement may be reduced to $70.7 million if the maximum number of Rollover Shares is retained by existing stockholders. (b) Represents the funding of the purchase of Company Common Stock, at $12.00 per share, from stockholders who elect to receive cash in the Merger, assuming the minimum number of Rollover Shares. The amount of funding required to purchase the Company Common Stock may be reduced to $608.3 million if the maximum number of Rollover Shares is retained by existing stockholders. (c) Pursuant to the terms of the Merger Agreement, stock appreciation rights, phantom stock and restricted stock will be converted at the time of consummation of the Merger into rights to receive cash. See "The Transaction-- The Merger." (d) For a description of the Chemicals ESOP Loan, see "Management--Compensation of Executive Officers." (e) Estimated expenses and fees include Underwriters' discounts, advisory fees, bank fees, legal and accounting fees, printing costs and other Transaction expenses. ORGANIZATIONAL CHART The following chart depicts the summary organizational structure of the Company and its operating entities after the Transaction and the sources of financing for the Merger, assuming the minimum number of Rollover Shares. [Organizational chart depicting Sterling Chemicals Holdings, Inc.; Sterling Chemicals, Inc.; Sterling Canada Inc.; and Sterling Pulp Chemicals, Ltd.] THE OFFERINGS NOTES: Issuer...................... Sterling Chemicals, Inc. (a subsidiary of Sterling Chemicals Holdings, Inc. and formerly STX Chemicals Corp.). Securities Offered.......... $275,000,000 aggregate principal amount of % Senior Subordinated Notes Due 2006. Maturity Date............... , 2006. Interest Payment Dates...... and of each year, commencing , 1997. Optional Redemption......... The Notes will be redeemable at the option of Chemicals, in whole or in part, at any time on or after , 2001 at the redemption prices set forth herein, plus accrued interest to the date of redemption. In addition, Chemicals may, at its option, redeem prior to , 1999, up to 35% of the original principal amount of the Notes at % of the principal amount thereof, plus accrued interest to the date of redemption, with the net proceeds of one or more Public Equity Offerings. Ranking..................... The Notes will constitute unsecured senior subordinated indebtedness of Chemicals and will be subordinated in right of payment to all present and future Senior Debt of Chemicals, including borrowings under the Credit Facility. Chemicals has not issued, and does not have any firm arrangements to issue, any significant Debt that would be subordinate to the Notes. As of June 30, 1996, after giving pro forma effect to the Transaction, Chemicals would have had approximately $361.9 million in Senior Debt. In addition, the holders of the Notes will effectively rank junior to all creditors of Chemicals' subsidiaries, including trade creditors. Change of Control........... Upon a Change of Control (as defined herein), Chemicals will be required to make an offer to purchase the Notes at 101% of the principal amount thereof, plus accrued interest to the date of purchase. There can be no assurance that Chemicals will be able to raise sufficient funds to meet this obligation should it arise. Certain Covenants........... The Notes Indenture (as defined herein) will contain certain covenants that, among other things, limit the ability of Chemicals to pay dividends or make certain other restricted payments, incur additional indebtedness, engage in transactions with affiliates, incur liens and engage in asset sales. The Notes Indenture will also restrict Chemicals' ability to consolidate or merge with, or transfer all or substantially all of its assets to another person. See "Description of the Notes--Certain Covenants." Use of Proceeds............. The proceeds from the Notes Offering will be used to fund, in part, the Merger. UNITS: Issuer...................... Sterling Chemicals Holdings, Inc. (the survivor of the merger of Sterling Chemicals, Inc. and STX Acquisition Corp.). Securities Offered.......... Units consisting of $100,000,000 in initial proceeds and $ in aggregate principal amount at maturity of Senior Secured Discount Notes Due 2008 and Warrants to purchase shares of Holdings Common Stock. Each Unit consists of $1,000 principal amount at maturity of Discount Notes and Warrants to purchase shares of Holdings Common Stock. Separability................ The Discount Notes and the Warrants will not become separately transferable until the earlier of (i) 30 days following the Closing Date and (ii) such date as the Underwriters may, in their discretion, deem appropriate. Use of Proceeds............. The proceeds from the Units Offering will be used to fund, in part, the Merger. Discount Notes: Discount Notes Offered...... $ million aggregate principal amount at maturity of % Senior Secured Discount Notes Due 2008 ($ million aggregate initial Accreted Value). Maturity Date............... , 2008. Interest Payment Dates...... The Discount Notes will be issued at a substantial discount from their principal amount at maturity, and there will not be any payment of interest on the Discount Notes prior to , 2002. From and after , 2001, the Discount Notes will bear cash interest at the rate per annum set forth on the cover page of this Prospectus, payable semi-annually on each and . For the nine months ended June 30, 1996, on a pro forma basis after giving effect to the Transaction, Holdings would have had a ratio of earnings to fixed charges of 1.1 to 1.0. There can be no assurance that Holdings will have adequate cash available at the time of the scheduled interest payments. Original Issue Discount..... For federal income tax purposes, the Discount Notes will be issued with original issue discount. Each holder of a Discount Note must include in gross income for federal income tax purposes a portion of such original issue discount for each day during each taxable year on which a Discount Note is held, even though cash interest does not begin to accrue until , 2001 and no cash interest will be payable until , 2002. As a result, holders of Discount Notes will accrue amounts in gross income before receiving cash payments attributable to such gross income. See "Certain United States Federal Income Tax Consequences." Optional Redemption......... The Discount Notes will be redeemable, at the option of Holdings, in whole or in part, at any time after , 2001 at the redemption prices set forth herein, plus accrued interest to the date of redemption. In addition, Holdings may, at its option, redeem prior to , 1999, up to 35% of the Accreted Value of the Discount Notes at % of the Accreted Value thereof, plus accrued interest to the date of redemption, with the net proceeds of one or more Public Equity Offerings. Security.................... The Discount Notes will be secured, on a second priority basis, by a pledge of all of the capital stock of Chemicals. Lenders under the Credit Facility will have a first priority lien on the capital stock of Chemicals. Ranking..................... The Discount Notes will be senior secured obligations of Holdings and will rank pari passu in right of payment with all senior indebtedness of Holdings and will be senior in right of payment to any future subordinated indebtedness of Holdings. Holdings has not issued, and does not have any firm arrangement to issue, any significant Debt that would be subordinate to the Discount Notes. As a result of the holding company structure after the Merger, the holders of the Discount Notes will effectively rank junior to all creditors of Chemicals and its subsidiaries, including the lenders under the Credit Facility, holders of the Notes and trade creditors. As of June 30, 1996, on a pro forma basis after giving effect to the Transaction, the Discount Notes would have been effectively subordinate to $697.5 million of aggregate liabilities (consisting of Debt and trade payables) of Chemicals and its subsidiaries. In addition, in the event of a default or similar occurrence there can be no assurance that the second priority security interest in the capital stock of Chemicals will be available or sufficient to satisfy claims by holders of the Discount Notes. Change of Control........... Upon a Change of Control (as defined), Holdings will be required to make an offer to purchase the Discount Notes at 101% of the Accreted Value thereof, plus accrued interest, if any, to the date of purchase. There can be no assurance that Holdings will be able to raise sufficient funds to meet this obligation should it arise. Certain Covenants........... The Discount Notes Indenture (as defined herein) will contain certain covenants that, among other things, limit the ability of Holdings to pay dividends or make certain other restricted payments, incur additional indebtedness, engage in transactions with affiliates, incur liens, engage in asset sales and engage in sale and leaseback transactions. The Discount Notes Indenture will also restrict Holdings' ability to consolidate or merge with, or transfer all or substantially all of its assets to another person. See "Description of the Units-- Description of Discount Notes--Certain Covenants." Warrants: Exercise Price.............. $.01 per share of Holdings Common Stock. Expiration.................. The Warrants are exercisable beginning on the first anniversary of the Closing Date and at any time thereafter prior to , 2008. Anti-Dilution............... The number of shares of Holdings Common Stock to be acquired upon exercise of each Warrant will be adjusted upon, among other things, certain dividends or other distributions of Holdings Common Stock and a combination or reclassification of Holdings. Voting Rights............... Warrant holders will have no voting rights. SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OTHER INFORMATION The summary consolidated financial information set forth below has been derived from previously published consolidated financial statements of the Company, certain of which appear elsewhere in this Prospectus, and should be read in conjunction with, and is qualified in its entirety by reference to, such consolidated financial statements and their accompanying notes. The consolidated financial information set forth below (i) as of year end and for each of the years in the five-year period ended September 30, 1995 has been derived from audited consolidated financial statements of the Company and (ii) as of June 30, 1995 and June 30, 1996 and for the nine-month periods then ended has been derived from unaudited consolidated financial statements of the Company, which, in the opinion of management, have been prepared on a basis consistent with the audited consolidated financial statements of the Company and contain all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the interim financial position and results of operations. <TABLE> <CAPTION> NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30, JUNE 30, --------------------------------------- ------------- 1991 1992 1993 1994 1995 1995 1996 ------ ------ ------ ------ -------- ------ ------ (DOLLARS IN MILLIONS) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues................ $542.7 $430.5 $518.8 $700.8 $1,030.2 $843.1 $600.7 Cost of goods sold...... 472.4 402.6 477.9 606.9 758.6 597.7 508.7 ------ ------ ------ ------ -------- ------ ------ Gross profit.......... 70.3 27.9 40.9 93.9 271.6 245.4 92.0 Selling, general and administrative expenses............... 9.7 10.3 25.5 24.4 31.7 24.5 23.8 SAR program expense (benefit).............. -- -- -- 21.8 (2.8) 1.6 6.2 ------ ------ ------ ------ -------- ------ ------ Income from operations............ 60.6 17.6 15.4 47.7 242.7 219.3 62.0 Interest and debt related expenses, net of interest income..... 6.1 8.4 22.4 22.1 14.6 12.7 4.4 Other (income) expense.. -- -- -- (2.6) -- -- 3.7 ------ ------ ------ ------ -------- ------ ------ Income (loss) before taxes and extraordinary item... 54.5 9.2 (7.0) 28.2 228.1 206.6 53.9 Provision (benefit) for income taxes........... 17.7 4.7 (1.6) 9.1 75.0 68.5 18.3 ------ ------ ------ ------ -------- ------ ------ Income (loss) before extraordinary item and change in accounting principle. 36.8 4.5 (5.4) 19.1 153.1 138.1 35.6 Cumulative effect of change in accounting for post-retirement benefits other than pensions............... -- (10.4) -- -- -- -- -- Extraordinary item, loss on early extinguishment of debt, net of tax.... -- -- -- -- (3.1) (3.1) -- ------ ------ ------ ------ -------- ------ ------ Net income (loss)..... $ 36.8 $ (5.9) $ (5.4) $ 19.1 $ 150.0 $135.0 $ 35.6 ====== ====== ====== ====== ======== ====== ====== OTHER DATA: EBITDA (a).............. $ 78.5 $ 41.0 $ 52.5 $108.6 $ 281.4 $251.7 $ 99.6 Depreciation and amortization (b)....... 17.9 23.4 37.1 39.1 41.5 30.8 31.4 Capital expenditures.... 34.4 16.0 12.2 12.3 54.0 26.8 73.0 OPERATING DATA: Revenues: Styrene................ $ 257 $ 151 $ 144 $ 288 $ 467 $ 398 $ 249 Acrylonitrile.......... 155 137 124 138 251 210 124 Acetic acid............ 69 66 64 76 94 75 50 Sodium chlorate........ -- 9 81 83 102 73 82 Annual capacity at period end (MM lbs): Styrene................ 1,500 1,500 1,500 1,500 1,500 1,500 1,700 Acrylonitrile.......... 700 700 700 700 740 740 740 Acetic acid............ 600 600 600 600 600 600 800 Sodium chlorate (000 tons)................. -- 340 340 340 350 340 350 Sales volume (MM lbs): Styrene................ 1,495 1,213 1,191 1,460 1,433 1,150 1,295 Acrylontrile........... 663 573 528 668 739 604 475 Acetic acid............ 557 620 578 599 635 487 346 Sodium chlorate (000 tons)................. -- 26 248 294 336 248 233 </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, JUNE 30, ---------------------------------- ------------- 1991 1992 1993 1994 1995 1995 1996 ------ ------ ------ ------ ------ ------ ------ (DOLLARS IN MILLIONS) <S> <C> <C> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Working capital............... $ 28.6 $ 56.8 $ 31.0 $ 20.8 $ 74.6 $ 88.3 $ 83.0 Net property, plant and equipment.................... 230.6 343.8 314.3 291.1 309.1 289.0 350.8 Total assets.................. 362.5 608.5 546.8 580.9 609.9 620.6 659.0 Total long-term debt (including current portion).. 78.7 326.5 291.9 226.4 121.4 128.6 138.2 Stockholders' equity.......... 112.2 87.3 70.3 89.7 239.3 222.2 273.1 </TABLE> - -------- (a) EBITDA represents income from operations before taking into consideration depreciation and amortization and the impact of accruals for the Company's stock appreciation rights ("SAR") program. See footnote (b). The SAR program will not be continued after the Transaction. EBITDA is presented because it is a widely accepted financial indicator of a company's ability to incur and service debt. EBITDA should not be considered by an investor as an alternative to net income or income from operations, as an indicator of the operating performance of the Company or as an alternative to cash flows as a measure of liquidity. (b) Depreciation and amortization expense included herein excludes the amortization of deferred debt financing costs which is included in interest expense. SUMMARY PRO FORMA FINANCIAL DATA The pro forma statement of operations presented below for the year ended September 30, 1995 and the nine months ended June 30, 1996 have been derived from the unaudited pro forma financial statements included elsewhere herein, and give effect to the Transaction as if it had occurred on October 1, 1994. The pro forma consolidated balance sheet data at June 30, 1996 presented below has been derived from the unaudited pro forma consolidated balance sheet of Chemicals and Holdings included elsewhere herein and give effect to the Transaction as if it had occurred on June 30, 1996. The summary pro forma financial data do not necessarily represent what Chemicals' or Holdings' financial position and results of operations would have been if the Transaction had actually been completed as of the dates indicated and are not intended to project Chemicals' and Holdings' financial position or results of operations for any future period. The summary pro forma financial data should be read in conjunction with the historical consolidated financial statements of the Company, the pro forma financial statements of Chemicals and Holdings, "Selected Historical Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein. The pro forma adjustments were applied to the respective historical financial statements to reflect and account for the Transaction as a recapitalization. Accordingly, the historical basis of the Company's assets and liabilities has not been impacted by the Transaction. <TABLE> <CAPTION> CHEMICALS HOLDINGS ---------------------- ---------------------- NINE NINE MONTHS MONTHS YEAR ENDED ENDED YEAR ENDED ENDED SEPTEMBER 30, JUNE 30, SEPTEMBER 30, JUNE 30, 1995 1996 1995 1996 ------------- -------- ------------- -------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues......................... $1,030.2 $600.7 $1,030.2 $600.7 Cost of goods sold............... 759.0 509.0 759.0 509.0 -------- ------ -------- ------ Gross profit..................... 271.2 91.7 271.2 91.7 Selling, general and administrative expenses......... 31.7 23.8 31.7 23.8 -------- ------ -------- ------ Income from operations.......... 239.5 67.9 239.5 67.9 Interest expense, net............ 65.4 47.3 79.1 57.6 Other expense.................... -- 3.7 -- 3.7 -------- ------ -------- ------ Income from continuing operations before income taxes. 174.1 16.9 160.4 6.6 Provision for income taxes....... 56.1 5.3 51.3 1.7 -------- ------ -------- ------ Income from continuing operations.................... $ 118.0 $ 11.6 $ 109.1 $ 4.9 ======== ====== ======== ====== Earnings per share from continuing operations........... $ 10.54 $ 0.47 OTHER DATA: EBITDA........................... $ 281.4 $ 99.6 $ 281.4 $ 99.6 Depreciation and amortization.... 41.9 31.7 41.9 31.7 Cash interest expense, net....... 61.4 44.3 61.4 44.3 Ratio of EBITDA to interest expense, net.................... 4.3x 2.1x 3.6x 1.7x Ratio of EBITDA to cash interest expense, net.................... 4.6x 2.2x 4.6x 2.2x Ratio of earnings to fixed charges......................... 3.5x 1.3x 2.9x 1.1x BALANCE SHEET DATA: Working capital.................. $103.7 $103.7 Net property, plant and equipment....................... 350.8 350.8 Total assets..................... 691.4 694.4 Total long-term debt (including current portion)................ 636.9 736.9 Total stockholders' equity....... (179.2) (276.2) </TABLE>
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. At the time of the Transaction, the Company will change its name to Sterling Chemicals Holdings, Inc., Chemicals will change its name to Sterling Chemicals, Inc. and the Company's operating assets will be conveyed to Chemicals. See "The Transaction." As used herein, the term "STX Acquisition" refers to STX Acquisition Corp. prior to the consummation of the Transaction, and the term "Holdings" refers to the surviving corporation in the Merger. The term "Company" refers both to Sterling Chemicals, Inc. and its subsidiaries prior to the consummation of the Transaction and, thereafter, to Holdings and its subsidiaries. The term "Chemicals" refers to STX Chemicals Corp., which after the Transaction will be a wholly owned subsidiary of Holdings known as Sterling Chemicals, Inc. Certain operating and industry terms are defined in the Glossary included herein. This Prospectus contains certain forward-looking statements with respect to the business of the Company and the industry in which it operates. These forward-looking statements are subject to certain risks and uncertainties which may cause actual results to differ significantly from such forward-looking statements. See "Risk Factors." THE COMPANY The Company is one of North America's leading producers of selected commodity petrochemicals, used in the production of a wide array of consumer goods and industrial products, and pulp chemicals used in paper manufacturing. The Company ranks among the top three North American producers in terms of rated production capacity for each of its primary products, including styrene, acrylonitrile, acetic acid and sodium chlorate. Other products manufactured by the Company include methanol, plasticizers, tertiary butylamine, sodium cyanide and sodium chlorite. The Company manufactures all of its petrochemicals at a single facility in Texas City, Texas (the "Texas City Plant"), and believes that the large scale of this facility and its location on the U.S. Gulf Coast provides it with certain cost advantages. The Company's pulp chemicals are currently produced at four plants in Canada. A fifth plant, under construction in Valdosta, Georgia, is scheduled to begin production in late 1996. The Company believes that its pulp chemical plants benefit from their proximity to key customers in the pulp industry and their access to competitively priced electricity, which represents the most significant production cost in sodium chlorate manufacturing. In recent years, the Company has pursued a strategy of growth and product diversification. In 1992, the Company acquired its pulp chemicals business which has current sodium chlorate production capacity of 350,000 tons. In 1995, the Company began a three-year, $200 million capacity expansion and upgrade program, which is expected to be approximately 80% complete by the end of fiscal 1996. Through this program, the Company will have expanded its total petrochemical production capacity by approximately 1.4 billion pounds, including capacity additions of 200 million pounds of styrene, 200 million pounds of acetic acid and 150 million gallons (approximately 995 million pounds) of methanol. In addition, the Company is expanding its sodium chlorate production capacity by 110,000 tons, or 30%, by constructing a new facility in Valdosta, Georgia. Through this strategy, the Company has sought to capitalize on the continuing secular growth in global demand for its key products, while reducing its sensitivity to the cyclicality of the markets for any particular product. The following table sets forth the total revenues for the Company by its primary products. <TABLE> <CAPTION> NINE MONTHS YEAR ENDED ENDED SEPTEMBER 30, JUNE 30, ---------------- --------- 1993 1994 1995 1995 1996 ---- ---- ------ ---- ---- (DOLLARS IN MILLIONS) <S> <C> <C> <C> <C> <C> Petrochemicals: Styrene............................................ $144 $288 $ 467 $398 $249 Acrylonitrile...................................... 124 138 251 210 124 Acetic acid........................................ 64 76 94 75 50 Other.............................................. 68 76 74 54 64 ---- ---- ------ ---- ---- 400 578 886 737 487 Pulp Chemicals....................................... 119 123 144 106 114 ---- ---- ------ ---- ---- Total.............................................. $519 $701 $1,030 $843 $601 ==== ==== ====== ==== ==== </TABLE> Styrene. The Company is the third largest North American producer of styrene, a chemical intermediate utilized in the production of plastic and synthetic rubbers used in packaging, housewares, automotive components, luggage, toys and building products. The Company's styrene unit is one of the largest in the world and has an annual rated production capacity of 1.7 billion pounds, following a recent debottlenecking, which represents approximately 12% of total North American capacity. In fiscal 1995, the styrene unit operated at an average utilization rate of 96% and generated revenues of $467 million, which represented approximately 45% of the Company's total revenues. Acrylonitrile. The Company is the second largest global producer of acrylonitrile, the principal raw material for acrylic fibers used in textiles and industrial applications. The Company's acrylonitrile unit has an annual rated production capacity of 740 million pounds, which represents approximately 21% of total North American capacity. In fiscal 1995, the acrylonitrile unit operated at an average utilization rate of 96% and generated revenues of $251 million, which represented approximately 24% of the Company's total revenues. Acetic Acid. The Company is the third largest North American producer of acetic acid, a product made from carbon monoxide and methanol. Acetic acid is primarily used in the manufacture of intermediate products, such as vinyl acetate monomer, which are used to produce various consumer products, including adhesives, glue, cigarette filters and surface coatings. Following a 200 million pound capacity expansion completed in June 1996, the Company's acetic acid unit has an annual rated production capacity of approximately 800 million pounds, which represents approximately 17% of total North American capacity. In fiscal 1995, the acetic acid unit operated at an average utilization rate of 107% and generated revenues of $94 million, which represented approximately 9% of the Company's total revenues. Sodium Chlorate. Upon completion of its Valdosta, Georgia plant, the Company will be the second largest North American producer of sodium chlorate, which is converted to chlorine dioxide for use in the pulp bleaching process. The Company's four sodium chlorate plants have an aggregate annual rated production capacity of 350,000 tons, and the Valdosta, Georgia plant, scheduled to begin production in late 1996, will increase the Company's total annual capacity by 30% to approximately 460,000 tons. Following completion of the Valdosta plant, the Company will account for approximately 22% of North American sodium chlorate capacity. In addition, the Company's ERCO Systems Group is the worldwide leader in the design, sale and technical service of large scale chlorine dioxide generators, which are used to convert sodium chlorate to chlorine dioxide. Since the mid-1980s, North American demand for sodium chlorate has grown at an average annual rate of approximately 10%, as pulp manufacturers are substituting chlorine dioxide for elemental chlorine in bleaching applications in anticipation of environmental regulations that would eliminate the use of elemental chlorine in pulp manufacturing. In fiscal 1995, the Company's sodium chlorate plants operated at a weighted average utilization rate of 97% and its pulp chemicals business generated revenues of $144 million, which represented approximately 14% of the Company's total revenues. RECENT TRENDS The primary markets in which the Company competes, especially styrene and acrylonitrile, are cyclical and sensitive to changes in the balance between supply and demand, the price of feedstocks and the level of general economic activity. Historically, these markets have experienced alternating periods of tight supply and rising prices and profit margins, followed by periods of large capacity additions resulting in oversupply and declining prices and margins. Global styrene and acrylonitrile markets experienced strong demand growth and rising prices and profit margins from the end of fiscal 1994 through most of fiscal 1995. During the fourth quarter of fiscal 1995 and into the first half of fiscal 1996, styrene and acrylonitrile prices declined as a result of a general slowdown in global economic growth, inventory drawdowns by customers and reduced imports of petrochemicals and plastics by China, a major merchant market purchaser. In recent months, however, prices for styrene and acrylonitrile have stabilized after declines in the first six months of fiscal 1996, and the Company anticipates that pricing and profitability for its styrene and acrylonitrile products will be relatively stable for the remainder of fiscal 1996. Thereafter, anticipated expansions in worldwide production capacity of styrene in 1997 and 1998 are expected to affect pricing of this product for a period until global demand increases sufficiently to absorb such additional production capacity. The Company currently expects acrylonitrile market conditions to remain relatively stable through fiscal 1997. Sodium chlorate sales prices and profit margins strengthened throughout fiscal 1995 and into fiscal 1996 as a result of strong demand growth. In recent months, weakness in the pulp and paper markets has resulted in somewhat slower demand growth for sodium chlorate. However, sodium chlorate demand in the remainder of fiscal 1996 and in fiscal 1997 is expected to benefit from the anticipated promulgation of environmental regulations which would mandate the elimination of elemental chlorine use in pulp bleaching applications. The Company believes that it has developed an operating strategy to allow it to compete effectively in periods of both rising and declining product prices. During periods of peak demand, the experience and skill of its management has allowed the Company to operate its petrochemical units at utilization rates above its rated capacities, enhancing the Company's earnings generation during favorable market conditions. During cyclical downturns, the Company believes that the profitability of its operations is supported by its long-term sales contracts and conversion agreements which accounted for approximately 53% of its petrochemical sales volumes in fiscal 1995, as well as management's emphasis on minimizing fixed costs such as selling, general and administrative expenses. BUSINESS STRATEGY The Company's business strategy is to capitalize on its competitive market position to take advantage of periods of tight supply and high prices and margins for its primary products, which historically have occurred on a cyclical basis, and to expand its production capacity to capture future growth opportunities in the petrochemical and pulp chemical industries. Key elements of the Company's business strategy are to: (i) maintain a competitive cost position in petrochemicals by investing in new technology and equipment; (ii) pursue low cost expansions in petrochemicals, such as its recent 30% expansion of acetic acid capacity and construction of a world-scale 150 million gallon methanol plant; (iii) pursue growth opportunities in pulp chemicals through the current construction of additional capacity; (iv) continue to build strong industry partnerships in petrochemicals through securing long-term supply contracts with key customers; and (v) implement a focused acquisition strategy, targeting chemical businesses and assets which would strengthen the Company's existing market positions, provide upstream or downstream integration or produce complementary chemical products. THE TRANSACTION The proceeds of the Offerings will provide a portion of the funding required for the acquisition by the stockholders of STX Acquisition, including an investor group formed by TSG and Unicorn, of a controlling interest in the Company. Pursuant to an Amended and Restated Agreement and Plan of Merger dated as of April 24, 1996 (the "Merger Agreement") between STX Acquisition and the Company, STX Acquisition will be merged with and into the Company (the "Merger"). Current stockholders of the Company will have the option with respect to each share of common stock, par value $.01 per share, of the Company ("Company Common Stock") to elect to receive $12.00 cash or to retain their Company Common Stock ("Rollover Shares"). The aggregate number of Rollover Shares is limited to 5.0 million, the maximum number of Rollover Shares. Consequently, stockholders who elect to retain their shares of Company Common Stock may be subject to proration. Certain stockholders of the Company executed an Inducement Agreement with the Company (the "Inducement Agreement") which provides that such stockholders will make elections to receive Rollover Shares rather than cash (amounting to an aggregate of approximately 2.3 million Rollover Shares, the minimum number of Rollover Shares). Consummation of the Merger is subject to numerous conditions, including the consummation of the Offerings and the other financing transactions described herein. The Merger and the related financings are referred to herein as the "Transaction." See "The Transaction." The sale of the Securities offered hereby is subject to the consummation of the Merger, the closing of a bank credit facility and a private placement of equity and the conveyance to Chemicals of the operating assets of the Company, all of which will occur concurrently. Seven putative class action complaints have been filed relating to the proposed Merger and the events leading up to the recommendation of the approval thereof by the Board of Directors of the Company. The complaints generally allege that the course of conduct taken by the directors in considering the Company's strategic alternatives and in recommending the Merger was in violation of their fiduciary duties to the Company's stockholders and seek injunctive relief and unspecified damages. The Company believes that these actions are without merit and has instructed legal counsel to vigorously defend such actions. See "Business--Legal Proceedings--Shareholder Lawsuits." Credit Facility. Upon consummation of the Merger, Chemicals will enter into a bank credit facility (the "Credit Facility") with a syndicate of lenders led by Texas Commerce Bank National Association, as administrative agent, and Credit Suisse and Chase Securities Inc. as co-arrangers. The Credit Facility will consist of (i) a six and one half year $100.0 million revolving credit facility (the "Revolving Credit Facility"), (ii) a six and one half year $200.0 million term loan and an eight year $150.0 million term loan (collectively, the "Term Loans") and (iii) a four year $6.5 million term loan (the "ESOP Term Loan") to fund a new Employee Stock Ownership Plan (the "New ESOP"). See "Management-- Compensation of Executive Officers" and "Description of the Credit Facility." Equity Private Placement. Upon consummation of the Merger, STX Acquisition will complete a private placement of shares of its Common Stock (the "Equity Private Placement"), which will represent an equity contribution of approximately $103.1 million, assuming the minimum number of Rollover Shares. Purchasers of shares in the Equity Private Placement are expected to include an investor group formed by TSG and Unicorn and the New ESOP. The New ESOP will acquire its shares with the proceeds from a $6.5 million loan from Chemicals (the "Chemicals ESOP Loan"). Upon consummation of the Transaction, the investors in the Equity Private Placement, including principals of TSG and Unicorn, and certain principal stockholders of the Company will control the Company through the ownership of at least approximately 75% of the outstanding shares of Holdings Common Stock, assuming the maximum number of Rollover Shares. The following table sets forth the estimated sources and uses of funds to effect the Merger, as if the Merger had occurred on June 30, 1996. <TABLE> <CAPTION> SOURCES OF FUNDS DOLLARS IN MILLIONS ---------------- ------------------- <S> <C> Revolving Credit Facility............................. $ 5.4 Term Loans............................................ 350.0 ESOP Term Loan........................................ 6.5 Notes offered hereby.................................. 275.0 Units offered hereby.................................. 100.0 Equity Private Placement (a).......................... 103.1 ------ Total............................................... $840.0 ====== <CAPTION> USES OF FUNDS ------------- <S> <C> Purchase of Company Common Stock (b).................. $640.7 Purchase of other equity interests (c)................ 14.6 Refinance outstanding debt............................ 138.2 Chemicals ESOP Loan (d)............................... 6.5 Estimated Transaction expenses and fees (e)........... 40.0 ------ Total............................................... $840.0 ====== </TABLE> - -------- (a) Represents proceeds from the sale of STX Acquisition Common Stock to investors in the Equity Private Placement, assuming the minimum number of Rollover Shares. The amount of cash provided through the Equity Private Placement may be reduced to $70.7 million if the maximum number of Rollover Shares is retained by existing stockholders. (b) Represents the funding of the purchase of Company Common Stock, at $12.00 per share, from stockholders who elect to receive cash in the Merger, assuming the minimum number of Rollover Shares. The amount of funding required to purchase the Company Common Stock may be reduced to $608.3 million if the maximum number of Rollover Shares is retained by existing stockholders. (c) Pursuant to the terms of the Merger Agreement, stock appreciation rights, phantom stock and restricted stock will be converted at the time of consummation of the Merger into rights to receive cash. See "The Transaction-- The Merger." (d) For a description of the Chemicals ESOP Loan, see "Management--Compensation of Executive Officers." (e) Estimated expenses and fees include Underwriters' discounts, advisory fees, bank fees, legal and accounting fees, printing costs and other Transaction expenses. ORGANIZATIONAL CHART The following chart depicts the summary organizational structure of the Company and its operating entities after the Transaction and the sources of financing for the Merger, assuming the minimum number of Rollover Shares. [Organizational chart depicting Sterling Chemicals Holdings, Inc.; Sterling Chemicals, Inc.; Sterling Canada Inc.; and Sterling Pulp Chemicals, Ltd.] THE OFFERINGS NOTES: Issuer...................... Sterling Chemicals, Inc. (a subsidiary of Sterling Chemicals Holdings, Inc. and formerly STX Chemicals Corp.). Securities Offered.......... $275,000,000 aggregate principal amount of % Senior Subordinated Notes Due 2006. Maturity Date............... , 2006. Interest Payment Dates...... and of each year, commencing , 1997. Optional Redemption......... The Notes will be redeemable at the option of Chemicals, in whole or in part, at any time on or after , 2001 at the redemption prices set forth herein, plus accrued interest to the date of redemption. In addition, Chemicals may, at its option, redeem prior to , 1999, up to 35% of the original principal amount of the Notes at % of the principal amount thereof, plus accrued interest to the date of redemption, with the net proceeds of one or more Public Equity Offerings. Ranking..................... The Notes will constitute unsecured senior subordinated indebtedness of Chemicals and will be subordinated in right of payment to all present and future Senior Debt of Chemicals, including borrowings under the Credit Facility. Chemicals has not issued, and does not have any firm arrangements to issue, any significant Debt that would be subordinate to the Notes. As of June 30, 1996, after giving pro forma effect to the Transaction, Chemicals would have had approximately $361.9 million in Senior Debt. In addition, the holders of the Notes will effectively rank junior to all creditors of Chemicals' subsidiaries, including trade creditors. Change of Control........... Upon a Change of Control (as defined herein), Chemicals will be required to make an offer to purchase the Notes at 101% of the principal amount thereof, plus accrued interest to the date of purchase. There can be no assurance that Chemicals will be able to raise sufficient funds to meet this obligation should it arise. Certain Covenants........... The Notes Indenture (as defined herein) will contain certain covenants that, among other things, limit the ability of Chemicals to pay dividends or make certain other restricted payments, incur additional indebtedness, engage in transactions with affiliates, incur liens and engage in asset sales. The Notes Indenture will also restrict Chemicals' ability to consolidate or merge with, or transfer all or substantially all of its assets to another person. See "Description of the Notes--Certain Covenants." Use of Proceeds............. The proceeds from the Notes Offering will be used to fund, in part, the Merger. UNITS: Issuer...................... Sterling Chemicals Holdings, Inc. (the survivor of the merger of Sterling Chemicals, Inc. and STX Acquisition Corp.). Securities Offered.......... Units consisting of $100,000,000 in initial proceeds and $ in aggregate principal amount at maturity of Senior Secured Discount Notes Due 2008 and Warrants to purchase shares of Holdings Common Stock. Each Unit consists of $1,000 principal amount at maturity of Discount Notes and Warrants to purchase shares of Holdings Common Stock. Separability................ The Discount Notes and the Warrants will not become separately transferable until the earlier of (i) 30 days following the Closing Date and (ii) such date as the Underwriters may, in their discretion, deem appropriate. Use of Proceeds............. The proceeds from the Units Offering will be used to fund, in part, the Merger. Discount Notes: Discount Notes Offered...... $ million aggregate principal amount at maturity of % Senior Secured Discount Notes Due 2008 ($ million aggregate initial Accreted Value). Maturity Date............... , 2008. Interest Payment Dates...... The Discount Notes will be issued at a substantial discount from their principal amount at maturity, and there will not be any payment of interest on the Discount Notes prior to , 2002. From and after , 2001, the Discount Notes will bear cash interest at the rate per annum set forth on the cover page of this Prospectus, payable semi-annually on each and . For the nine months ended June 30, 1996, on a pro forma basis after giving effect to the Transaction, Holdings would have had a ratio of earnings to fixed charges of 1.1 to 1.0. There can be no assurance that Holdings will have adequate cash available at the time of the scheduled interest payments. Original Issue Discount..... For federal income tax purposes, the Discount Notes will be issued with original issue discount. Each holder of a Discount Note must include in gross income for federal income tax purposes a portion of such original issue discount for each day during each taxable year on which a Discount Note is held, even though cash interest does not begin to accrue until , 2001 and no cash interest will be payable until , 2002. As a result, holders of Discount Notes will accrue amounts in gross income before receiving cash payments attributable to such gross income. See "Certain United States Federal Income Tax Consequences." Optional Redemption......... The Discount Notes will be redeemable, at the option of Holdings, in whole or in part, at any time after , 2001 at the redemption prices set forth herein, plus accrued interest to the date of redemption. In addition, Holdings may, at its option, redeem prior to , 1999, up to 35% of the Accreted Value of the Discount Notes at % of the Accreted Value thereof, plus accrued interest to the date of redemption, with the net proceeds of one or more Public Equity Offerings. Security.................... The Discount Notes will be secured, on a second priority basis, by a pledge of all of the capital stock of Chemicals. Lenders under the Credit Facility will have a first priority lien on the capital stock of Chemicals. Ranking..................... The Discount Notes will be senior secured obligations of Holdings and will rank pari passu in right of payment with all senior indebtedness of Holdings and will be senior in right of payment to any future subordinated indebtedness of Holdings. Holdings has not issued, and does not have any firm arrangement to issue, any significant Debt that would be subordinate to the Discount Notes. As a result of the holding company structure after the Merger, the holders of the Discount Notes will effectively rank junior to all creditors of Chemicals and its subsidiaries, including the lenders under the Credit Facility, holders of the Notes and trade creditors. As of June 30, 1996, on a pro forma basis after giving effect to the Transaction, the Discount Notes would have been effectively subordinate to $697.5 million of aggregate liabilities (consisting of Debt and trade payables) of Chemicals and its subsidiaries. In addition, in the event of a default or similar occurrence there can be no assurance that the second priority security interest in the capital stock of Chemicals will be available or sufficient to satisfy claims by holders of the Discount Notes. Change of Control........... Upon a Change of Control (as defined), Holdings will be required to make an offer to purchase the Discount Notes at 101% of the Accreted Value thereof, plus accrued interest, if any, to the date of purchase. There can be no assurance that Holdings will be able to raise sufficient funds to meet this obligation should it arise. Certain Covenants........... The Discount Notes Indenture (as defined herein) will contain certain covenants that, among other things, limit the ability of Holdings to pay dividends or make certain other restricted payments, incur additional indebtedness, engage in transactions with affiliates, incur liens, engage in asset sales and engage in sale and leaseback transactions. The Discount Notes Indenture will also restrict Holdings' ability to consolidate or merge with, or transfer all or substantially all of its assets to another person. See "Description of the Units-- Description of Discount Notes--Certain Covenants." Warrants: Exercise Price.............. $.01 per share of Holdings Common Stock. Expiration.................. The Warrants are exercisable beginning on the first anniversary of the Closing Date and at any time thereafter prior to , 2008. Anti-Dilution............... The number of shares of Holdings Common Stock to be acquired upon exercise of each Warrant will be adjusted upon, among other things, certain dividends or other distributions of Holdings Common Stock and a combination or reclassification of Holdings. Voting Rights............... Warrant holders will have no voting rights. SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OTHER INFORMATION The summary consolidated financial information set forth below has been derived from previously published consolidated financial statements of the Company, certain of which appear elsewhere in this Prospectus, and should be read in conjunction with, and is qualified in its entirety by reference to, such consolidated financial statements and their accompanying notes. The consolidated financial information set forth below (i) as of year end and for each of the years in the five-year period ended September 30, 1995 has been derived from audited consolidated financial statements of the Company and (ii) as of June 30, 1995 and June 30, 1996 and for the nine-month periods then ended has been derived from unaudited consolidated financial statements of the Company, which, in the opinion of management, have been prepared on a basis consistent with the audited consolidated financial statements of the Company and contain all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the interim financial position and results of operations. <TABLE> <CAPTION> NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30, JUNE 30, --------------------------------------- ------------- 1991 1992 1993 1994 1995 1995 1996 ------ ------ ------ ------ -------- ------ ------ (DOLLARS IN MILLIONS) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues................ $542.7 $430.5 $518.8 $700.8 $1,030.2 $843.1 $600.7 Cost of goods sold...... 472.4 402.6 477.9 606.9 758.6 597.7 508.7 ------ ------ ------ ------ -------- ------ ------ Gross profit.......... 70.3 27.9 40.9 93.9 271.6 245.4 92.0 Selling, general and administrative expenses............... 9.7 10.3 25.5 24.4 31.7 24.5 23.8 SAR program expense (benefit).............. -- -- -- 21.8 (2.8) 1.6 6.2 ------ ------ ------ ------ -------- ------ ------ Income from operations............ 60.6 17.6 15.4 47.7 242.7 219.3 62.0 Interest and debt related expenses, net of interest income..... 6.1 8.4 22.4 22.1 14.6 12.7 4.4 Other (income) expense.. -- -- -- (2.6) -- -- 3.7 ------ ------ ------ ------ -------- ------ ------ Income (loss) before taxes and extraordinary item... 54.5 9.2 (7.0) 28.2 228.1 206.6 53.9 Provision (benefit) for income taxes........... 17.7 4.7 (1.6) 9.1 75.0 68.5 18.3 ------ ------ ------ ------ -------- ------ ------ Income (loss) before extraordinary item and change in accounting principle. 36.8 4.5 (5.4) 19.1 153.1 138.1 35.6 Cumulative effect of change in accounting for post-retirement benefits other than pensions............... -- (10.4) -- -- -- -- -- Extraordinary item, loss on early extinguishment of debt, net of tax.... -- -- -- -- (3.1) (3.1) -- ------ ------ ------ ------ -------- ------ ------ Net income (loss)..... $ 36.8 $ (5.9) $ (5.4) $ 19.1 $ 150.0 $135.0 $ 35.6 ====== ====== ====== ====== ======== ====== ====== OTHER DATA: EBITDA (a).............. $ 78.5 $ 41.0 $ 52.5 $108.6 $ 281.4 $251.7 $ 99.6 Depreciation and amortization (b)....... 17.9 23.4 37.1 39.1 41.5 30.8 31.4 Capital expenditures.... 34.4 16.0 12.2 12.3 54.0 26.8 73.0 OPERATING DATA: Revenues: Styrene................ $ 257 $ 151 $ 144 $ 288 $ 467 $ 398 $ 249 Acrylonitrile.......... 155 137 124 138 251 210 124 Acetic acid............ 69 66 64 76 94 75 50 Sodium chlorate........ -- 9 81 83 102 73 82 Annual capacity at period end (MM lbs): Styrene................ 1,500 1,500 1,500 1,500 1,500 1,500 1,700 Acrylonitrile.......... 700 700 700 700 740 740 740 Acetic acid............ 600 600 600 600 600 600 800 Sodium chlorate (000 tons)................. -- 340 340 340 350 340 350 Sales volume (MM lbs): Styrene................ 1,495 1,213 1,191 1,460 1,433 1,150 1,295 Acrylontrile........... 663 573 528 668 739 604 475 Acetic acid............ 557 620 578 599 635 487 346 Sodium chlorate (000 tons)................. -- 26 248 294 336 248 233 </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, JUNE 30, ---------------------------------- ------------- 1991 1992 1993 1994 1995 1995 1996 ------ ------ ------ ------ ------ ------ ------ (DOLLARS IN MILLIONS) <S> <C> <C> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Working capital............... $ 28.6 $ 56.8 $ 31.0 $ 20.8 $ 74.6 $ 88.3 $ 83.0 Net property, plant and equipment.................... 230.6 343.8 314.3 291.1 309.1 289.0 350.8 Total assets.................. 362.5 608.5 546.8 580.9 609.9 620.6 659.0 Total long-term debt (including current portion).. 78.7 326.5 291.9 226.4 121.4 128.6 138.2 Stockholders' equity.......... 112.2 87.3 70.3 89.7 239.3 222.2 273.1 </TABLE> - -------- (a) EBITDA represents income from operations before taking into consideration depreciation and amortization and the impact of accruals for the Company's stock appreciation rights ("SAR") program. See footnote (b). The SAR program will not be continued after the Transaction. EBITDA is presented because it is a widely accepted financial indicator of a company's ability to incur and service debt. EBITDA should not be considered by an investor as an alternative to net income or income from operations, as an indicator of the operating performance of the Company or as an alternative to cash flows as a measure of liquidity. (b) Depreciation and amortization expense included herein excludes the amortization of deferred debt financing costs which is included in interest expense. SUMMARY PRO FORMA FINANCIAL DATA The pro forma statement of operations presented below for the year ended September 30, 1995 and the nine months ended June 30, 1996 have been derived from the unaudited pro forma financial statements included elsewhere herein, and give effect to the Transaction as if it had occurred on October 1, 1994. The pro forma consolidated balance sheet data at June 30, 1996 presented below has been derived from the unaudited pro forma consolidated balance sheet of Chemicals and Holdings included elsewhere herein and give effect to the Transaction as if it had occurred on June 30, 1996. The summary pro forma financial data do not necessarily represent what Chemicals' or Holdings' financial position and results of operations would have been if the Transaction had actually been completed as of the dates indicated and are not intended to project Chemicals' and Holdings' financial position or results of operations for any future period. The summary pro forma financial data should be read in conjunction with the historical consolidated financial statements of the Company, the pro forma financial statements of Chemicals and Holdings, "Selected Historical Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein. The pro forma adjustments were applied to the respective historical financial statements to reflect and account for the Transaction as a recapitalization. Accordingly, the historical basis of the Company's assets and liabilities has not been impacted by the Transaction. <TABLE> <CAPTION> CHEMICALS HOLDINGS ---------------------- ---------------------- NINE NINE MONTHS MONTHS YEAR ENDED ENDED YEAR ENDED ENDED SEPTEMBER 30, JUNE 30, SEPTEMBER 30, JUNE 30, 1995 1996 1995 1996 ------------- -------- ------------- -------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues......................... $1,030.2 $600.7 $1,030.2 $600.7 Cost of goods sold............... 759.0 509.0 759.0 509.0 -------- ------ -------- ------ Gross profit..................... 271.2 91.7 271.2 91.7 Selling, general and administrative expenses......... 31.7 23.8 31.7 23.8 -------- ------ -------- ------ Income from operations.......... 239.5 67.9 239.5 67.9 Interest expense, net............ 65.4 47.3 79.1 57.6 Other expense.................... -- 3.7 -- 3.7 -------- ------ -------- ------ Income from continuing operations before income taxes. 174.1 16.9 160.4 6.6 Provision for income taxes....... 56.1 5.3 51.3 1.7 -------- ------ -------- ------ Income from continuing operations.................... $ 118.0 $ 11.6 $ 109.1 $ 4.9 ======== ====== ======== ====== Earnings per share from continuing operations........... $ 10.54 $ 0.47 OTHER DATA: EBITDA........................... $ 281.4 $ 99.6 $ 281.4 $ 99.6 Depreciation and amortization.... 41.9 31.7 41.9 31.7 Cash interest expense, net....... 61.4 44.3 61.4 44.3 Ratio of EBITDA to interest expense, net.................... 4.3x 2.1x 3.6x 1.7x Ratio of EBITDA to cash interest expense, net.................... 4.6x 2.2x 4.6x 2.2x Ratio of earnings to fixed charges......................... 3.5x 1.3x 2.9x 1.1x BALANCE SHEET DATA: Working capital.................. $103.7 $103.7 Net property, plant and equipment....................... 350.8 350.8 Total assets..................... 691.4 694.4 Total long-term debt (including current portion)................ 636.9 736.9 Total stockholders' equity....... (179.2) (276.2) </TABLE>
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+SUMMARY OF PROSPECTUS THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY IS INTENDED ONLY TO HIGHLIGHT CERTAIN INFORMATION CONTAINED IN THIS PROSPECTUS. IT IS NOT INTENDED TO BE COMPLETE IN ITSELF, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE DETAILED INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. PROSPECTIVE PURCHASERS OF THE NOTES ARE URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY. FOR A DISCUSSION OF CERTAIN RISK FACTORS IN CONNECTION WITH THE OFFERING, SEE "RISK FACTORS". THE COMPANY Harveys Casino Resorts ("Harveys" or the "Company") is an established owner, operator and developer of high-quality hotel/casinos in the state of Nevada and new gaming jurisdictions. The Company owns and operates Harveys Resort Hotel/Casino ("Harveys Resort"), the Lake Tahoe area's largest hotel/casino. Harveys Resort, in operation since 1944, is situated on the south shore of scenic Lake Tahoe on the Nevada/ California state line. The Company owns and operates Harveys Wagon Wheel Hotel/Casino in Central City, Colorado ("Harveys Wagon Wheel"), which opened in December 1994 as the first major hotel/casino serving the greater Denver area. Harveys owns and operates a riverboat casino and is in the process of constructing a hotel/convention center, scheduled to open in mid-1996, in Council Bluffs, Iowa ("Harveys Casino/Hotel") across the Missouri River from Omaha, Nebraska. The Harveys Casino/Hotel riverboat casino opened on January 1, 1996 and is one of only three operators in the Omaha/Council Bluffs gaming market, which also includes one other riverboat casino and a slot machine operator at the local dogtrack. In addition, through a joint venture between Harveys and the Hard Rock Cafe co-founder Peter A. Morton, Harveys owns 40% of and manages the Hard Rock Hotel and Casino in Las Vegas, Nevada (the "Hard Rock Hotel"), which opened in March 1995. For the twelve months ended February 29, 1996, Harveys generated net revenues and earnings before interest, taxes, depreciation and amortization ("EBITDA") of $184.3 million and $38.5 million, respectively. See note 3 of "Summary Financial Data". BUSINESS STRATEGY The Company's business strategy is to develop premium hotel/casino facilities in markets in which the Company believes it can establish and maintain a prominent or niche position. Each of Harveys' properties offers casino gaming and a full array of amenities in a friendly atmosphere that caters to middle- and upper-middle income customers. The Company's strategy focuses on five key components: high-quality facilities and superior customer service, strategic locations, a targeted customer base, effective marketing and an emphasis on slot play. Harveys' properties are strategically located on highly visible sites or near regional population centers. The Company seeks to attract customers with higher disposable incomes by offering well-appointed rooms, quality food and beverages, and an array of gaming and non-gaming amenities. The Company also has established extensive customer databases and uses sophisticated player-tracking systems to develop and monitor playing habits of its customers. In response to customer preferences at certain of the Company's properties, the Company has changed its mix of games at such properties to increase the number of slot machines. Compared to table games, slot machines are less labor-intensive, require less square footage and generate higher profit margins. The Company monitors payment percentages closely and ensures that its slot machine payouts are competitive. Each of Harveys' properties is aggressively promoted through advertising campaigns tailored to its targeted customer base in each market. The Company promotes each property through various combinations of newspaper and broadcast advertisements, billboards, regular promotions and sweepstakes, as well as point-of-sale material in nearby hotels, restaurants and visitor attractions. As part of its commitment to ensuring a high level of customer satisfaction, Harveys is dedicated to ensuring customer loyalty by providing attentive customer service in a friendly environment. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. HARVEYS RESORT Harveys Resort, the largest hotel/casino in the Lake Tahoe area, is located on approximately 19.8 acres on U.S. Highway 50, the main route through South Lake Tahoe. The hotel/casino, situated on the south shore of Lake Tahoe with a panoramic view of the lake and surrounding mountains, is among Lake Tahoe's most modern facilities. The main structure is an all-glass 17-story tower which was completed in 1991, connected to a 12-story tower which was completely re-built in 1982. Harveys Resort features 740 rooms, 36 of which are luxury suites, and an 88,000 square foot casino containing approximately 2,100 slot machines, 105 table games, a 15-table poker area, a race and sports book and a keno lounge. Other amenities include 23,000 square feet of convention space, 2,967 parking spaces, the 280-seat Emerald Theater and Cabaret, a wedding chapel, restaurants, retail shops, a pool, a health club and a video arcade. Harveys Resort's eight restaurants offer a wide variety of high quality food and consist of a coffee shop, a Mexican restaurant, a seafood and pasta restaurant, a pizzeria, a premier steakhouse, a buffet, a burger emporium and Llewellyn's, Harveys Resort's award-winning restaurant that features top quality food and a spectacular view of Lake Tahoe. In recognition of the outstanding quality of the facility and its excellent service, Harveys Resort has received both the Mobil Four Star and AAA Four Diamond Awards every year for the last 15 years. Management has allocated a total of $20.0 million for capital improvements to be made to Harveys Resort through 1997 to increase the Company's market share and to position the Company to benefit from the ongoing South Lake Tahoe Redevelopment Project. The South Lake Tahoe gaming market generated approximately $320 million in gaming revenues in each of the last three years. The Lake Tahoe area is a unique gaming location because of its natural surroundings and variety of year-round outdoor recreational activities, including skiing, boating, fishing and golfing. The South Lake Tahoe area draws tourists primarily from nearby Reno and Northern California. There are four major casinos in this market to serve the approximately 2 million annual visitors. Existing environmental regulations prevent the addition of new gaming facilities or the expansion of existing hotel/ casinos. Management seeks to attract middle- to upper-middle income customers to Harveys Resort by offering well-appointed rooms and a "party" atmosphere for those seeking nightlife and entertainment. The Company has increased its share of gaming revenues in South Lake Tahoe to approximately 27% in 1995 from approximately 24% in 1989 due largely to its effective marketing campaigns. Management believes that by continuing to focus its efforts on the maintenance of customer relationships and the Harveys image, it will increase its share of higher-income customers in the South Lake Tahoe market. In response to the increased popularity of slot machines over the past several years, Harveys Resort has shifted its gaming mix toward slot machines. Harveys Resort now includes a greater percentage of $1 and higher denominated machines to appeal to the higher-income gaming clientele of Harveys Resort, including $5, $25 and $100 slot machines offered within a premium player section. This increase in higher denominated machines increased win per unit at Harveys Resort by approximately 19% between 1988 and 1994. HARVEYS WAGON WHEEL Through Harveys Wagon Wheel, which opened in December 1994, the Company established the first major hotel/casino serving the greater Denver area. Harveys Wagon Wheel is located on a highly visible site in Central City, Colorado, a picturesque mountain town approximately 35 miles west of Denver. Unlike most existing gaming facilities in the Central City area, which offer no overnight accommodations, scarce on-site parking and few non-gaming amenities, Harveys Wagon Wheel includes approximately 40,000 square feet of casino space, 850 slot machines (approximately 250 more than are currently offered by any other gaming facility in the area), 18 table games, a nine-table poker area, a 118-room hotel and 195 on-site parking spaces. Other amenities include a 220-seat coffee shop/buffet, a snack bar, an entertainment lounge and a children's arcade. No other casino in Central City/Black Hawk currently offers all of these amenities. In 1995, the Central City/Black Hawk market hosted approximately 3 million visitors and generated gaming revenues of more than $290.7 million, an increase of 18.7% over gaming revenues of $244.9 million in 1994. Harveys Wagon Wheel targets middle- to upper-income customers from the greater Denver area who seek a quality gaming experience, convenient parking and overnight accommodations. By offering a facility with overnight accommodations and more amenities than are offered by other casinos in the Central City/ Black Hawk market, Harveys Wagon Wheel has been successfully building a loyal customer base. The Company attracts customers to Harveys Wagon Wheel by aggressively promoting the facility's hotel rooms, on-site parking, quality dining facilities and varied entertainment activities in a market in which such amenities are a distinct competitive advantage. On April 30, 1996, the Company exchanged 382,500 shares of the Company's common stock, par value $.01 per share ("Common Stock"), for (i) 30% of the equity interests of Harveys Wagon Wheel Casino Limited Liability Company ("HWW"), an entity in which the Company held a 70% equity interest prior to the consummation of the acquisition and which owns Harveys Wagon Wheel, (ii) the rights to an approximately $3.0 million priority return from HWW and (iii) an option to acquire an additional 5% of the equity interests of HWW (the "Minority Interest"). Upon consummation of the acquisition, HWW and Harveys Wagon Wheel became wholly-owned by the Company. In addition, on such date the Company exchanged $8.0 million in principal amount of the Company's Subordinated Notes due December 31, 2000 (the "Subordinated Notes") and $6.0 million cash for $11.9 million in aggregate principal amount of HWW 12% Senior Notes due 1997 (the "HWW Notes"), constituting all of the outstanding HWW Notes, and $1.9 million of unpaid interest accrued thereon. A portion of the proceeds of the Offering will be used to redeem the Subordinated Notes. HARVEYS CASINO/HOTEL On January 1, 1996, the Company opened, as the first phase of Harveys Casino/Hotel, a 1,700-passenger riverboat casino berthed on the Missouri River directly across from Omaha, Nebraska in Council Bluffs, Iowa. The riverboat casino has more than 23,500 square feet of casino space on two decks and contains 883 slot machines and 51 table games. Land-based amenities at Harveys Casino/Hotel include surface parking for approximately 1,100 cars, and will include a 14-story, 251-room hotel with a 21,000 square foot convention center by mid-1996 and additional surface parking for approximately 500 cars. Harveys Casino/Hotel is within a ten-minute drive from the Omaha/Council Bluffs regional airport and is located directly off of Interstate 29, Interstate 80 and Interstate 480. Harveys Casino/Hotel is located on a 60-acre parcel of land which the Company acquired from the City of Council Bluffs. Approximately 20 acres of the site are occupied by a municipal nine-hole golf course, which is leased to the City of Council Bluffs for a nominal fee. This arrangement allows Harveys the option of using this land for future expansion needs. In addition, the Company has acquired an adjacent 44-acre site to accommodate future expansion or support facilities. Harveys Casino/Hotel's target market is the approximately 650,000 residents in the greater Omaha metropolitan area and the nearly 3 million adults within a three-hour drive of the facility. In addition, the casino, hotel and convention facilities will be marketed to the estimated 2.5 million visitors and tourists who visit the Omaha metropolitan area annually. Harveys Casino/Hotel markets itself as "The Preferred Place to Play" in the Omaha/Council Bluffs market through the extensive use of television and newspaper advertisement, billboards, regular promotions and sweepstakes as well as point-of-sale materials located in local hotels, restaurants and other visitor attractions. Harveys Casino/Hotel targets frequent, mid-level players from Omaha, Council Bluffs and the surrounding areas. The Company anticipates that the hotel and convention facilities that are currently under construction and are scheduled to open in mid-1996 will attract new players by capturing overnight guests and meeting and small convention business. In addition, by positioning the property as the "Preferred Place to Play", management believes that Harveys Casino/Hotel will attract a large percentage of the gaming revenues generated by the Omaha/Council Bluffs regional population and visitors to the Omaha/Council Bluffs area. HARD ROCK HOTEL AND CASINO The Company, through a joint venture with Peter A. Morton, co-founder of the Hard Rock Cafes, developed the Hard Rock Hotel, which opened in March 1995 in Las Vegas, Nevada. The Company owns a 40% equity interest in and manages this unique first-class facility which is modeled after the highly successful Hard Rock Cafe concept and targets younger and higher-income gaming patrons. Under the terms of a management agreement relating to the Hard Rock Hotel, the Company receives a management fee equal to 4% of the adjusted gross revenues derived from the Hard Rock Hotel plus additional incentive compensation of up to 2% of adjusted gross revenues if certain performance targets are achieved by the Hard Rock Hotel. Located three blocks from the Las Vegas Strip and five minutes from McCarran International Airport, the 339-room hotel and casino houses 28,000 square feet of casino space containing 802 slot machines, 39 table games and a sports and race book. The Hard Rock Hotel features the Hard Rock Beach Club offering lush landscaping, whirlpools, luxury cabanas and a sandy beach, and "The Joint", a live music venue with a 1,400-person capacity. Additional amenities include a health club, retail store, and two restaurants, a 24-hour casual dining coffee shop and Mortoni's, an Italian fine dining room, with a view of the Hard Rock Beach Club, offering indoor and garden patio dining. The hotel/casino also provides parking spaces for approximately 1,285 cars. The Hard Rock Hotel is located adjacent to the Hard Rock Cafe on approximately 16 acres of land with 1,200 feet of frontage near the intersection of Paradise Road and Harmon Avenue. The site is conveniently located at one of the busiest intersections in Las Vegas and is a short distance from the Las Vegas Convention Center, three non-gaming full service hotels with a combined total of approximately 850 rooms and the New Four Corners, which includes major casinos such as the MGM Grand Casino Hotel and Theme Park. The Hard Rock Hotel hosts special events such as award presentations to rock stars and other celebrities, film premiere parties and fundraising and other charitable activities, as well as frequently-scheduled live entertainment, in order to attract its target customers, who tend to be younger and have higher disposable incomes than the average Las Vegas visitor. The Company believes that the Hard Rock Hotel appeals to higher income patrons because of the Hard Rock theme, upscale hotel facilities and the wide variety of special events designed to maintain the image of the facility in the mind of the Hard Rock Hotel customer base. THE OFFERING <TABLE> <S> <C> Notes......................... $150,000,000 principal amount of % Senior Subordinated Notes Due 2006 (the "Notes"). Maturity Date................. , 2006. Interest Payment Dates........ and , commencing , 1996. Guarantees.................... The Notes will be fully and unconditionally guaranteed (the "Guarantees") jointly and severally by the Company's Restricted Subsidiaries (as defined herein). Optional Redemption........... The Notes are redeemable at the option of the Company, in whole or in part, at any time on or after , 2001 at the redemption prices set forth herein, plus accrued interest to the date of redemption. See "Description of the Notes -- Optional Redemption". Special Redemption............ The Notes are subject to redemption requirements imposed by gaming laws and regulations of the state of Nevada. See "Description of the Notes -- Optional Redemption". Subordination................. The Notes are general unsecured obligations of the Company, subordinated in right of payment to all existing and future Senior Debt (as defined herein) of the Company. Each Guarantee will be a general unsecured obligation of the guaranteeing Restricted Subsidiary (each a "Guarantor" and collectively the "Guarantors"), subordinated in right of payment to all existing and future Senior Debt of such Guarantor. As of February 29, 1996, on a PRO FORMA basis after giving effect to the Exchange Offer and the offering of the Notes made hereby (the "Offering") and application of the net proceeds therefrom, the Company and its subsidiaries would have had approximately </TABLE> <TABLE> <S> <C> $14 million of indebtedness outstanding that would have constituted Senior Debt and approximately $28.8 million of trade payables and accrued liabilities. Change of Control............. Upon a Change of Control (as defined herein), each holder of the Notes will have the right to require the Company to repurchase such holder's Notes at 101% of the principal amount thereof, plus accrued interest to the repurchase date. The Company's ability to make such a repurchase may be limited by its financial condition at the time, covenants in Senior Debt documents or its inability to finance such a repurchase. Such a repurchase may cause cross defaults under existing or future indebtedness and would make a takeover of the Company more expensive to a potential acquirer and accordingly may make such a takeover less likely. In any event, the Company must comply with all applicable laws, including Section 14(e) of the Securities Exchange Act of 1934, as amended, and the rules thereunder, in the event that it is required to offer to repurchase any Notes upon a Change of Control. See "Risk Factors" and "Description of the Notes -- Repurchase at the Option of Holders". Certain Covenants............. The indenture governing the Notes (the "Indenture") contains certain covenants that impose limitations on, among other things, (i) the incurrence of additional indebtedness by the Company or any Restricted Subsidiary (as defined herein), (ii) the payment of dividends, (iii) the repurchase of capital stock and the making of certain other Restricted Payments and Restricted Investments (each as defined herein) by the Company or any Restricted Subsidiary, (iv) mergers, consolidations and sales of assets by the Company or any Restricted Subsidiary, (v) the creation or incurrence of liens on the assets of the Company or any Restricted Subsidiary and (vi) transactions by the Company or any of its subsidiaries with Affiliates (as defined herein). These limitations are subject to a number of important qualifications and exceptions. See "Description of the Notes". Use of Proceeds............... The net proceeds of the Offering, estimated to be approximately $144.5 million, will be used by the Company to repay (i) approximately $107.1 million of indebtedness incurred under the Company's reducing revolving credit facility (the "Credit Facility"); (ii) $7.8 million to redeem the entire $8.0 million principal amount outstanding of the Subordinated Notes; (iii) a $10.0 million promissory note evidencing indebtedness incurred by the Company to fund construction of a parking garage adjacent to Harveys Wagon Wheel (the "Promissory Note"); and (iv) approximately $19.6 million of indebtedness incurred to finance the purchase of the riverboat casino at Harveys Casino/ Hotel (the "Iowa Loan"). See "Use of Proceeds". </TABLE> SUMMARY FINANCIAL DATA The following table sets forth selected summary financial data of the Company for the years ended November 30, 1991 through November 30, 1995 and the three months ended February 28, 1995 and February 29, 1996. The income statement and balance sheet data for the years ended November 30, 1991 through November 30, 1995 are derived from the Company's audited consolidated financial statements for such periods which, except for 1991 and 1992, are included elsewhere in this Prospectus. The Summary Financial Data are not necessarily indicative of the Company's future results of operations or financial condition, and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements of the Company, including the notes thereto, and the other financial and statistical information appearing elsewhere in this Prospectus. The Summary Financial Data presented below as of and for the three months ended February 28, 1995 and February 29, 1996 are derived from unaudited consolidated financial statements of the Company; however, in the opinion of the Company, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the Company's financial position and result of operations for such periods have been included. Operating results for the three months ended February 28, 1995 and February 29, 1996 are not necessarily indicative of the results that may be expected for future periods, including the entire year ending November 30, 1996. The Summary Financial Data include operating results for Harveys Wagon Wheel from its opening on December 2, 1994, for the Hard Rock Hotel from its opening on March 9, 1995 and for Harveys Casino/Hotel from the opening of the riverboat casino on January 1, 1996. <TABLE> <CAPTION> THREE MONTHS ENDED FISCAL YEARS ENDED NOVEMBER 30, ------------------------------- ------------------------------------------------ FEBRUARY 28, FEBRUARY 29, 1991 1992 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- -------------- -------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF INCOME DATA: Net revenues............................ $127,517 $132,482 $132,259 $128,286 $173,200 $ 38,337 $ 49,474 Depreciation and amortization........... 11,027 10,786 10,300 9,704 12,333 3,015 3,561 Pre-opening expense..................... -- -- -- -- 2,147 2,147 3,590 Operating income (loss)................. 11,247 14,754 12,193 10,382 18,354 (528) 895 Interest expense, net (1)............... (6,091) (5,084) (4,256) (2,886) (7,960) (1,725) (1,954) Net income (loss) (2)................... $ 3,197 $ 7,612 $ 4,809 $ 5,138 $ 9,345 $ (1,117) $ (576) -------- -------- -------- -------- -------- -------------- -------------- -------- -------- -------- -------- -------- -------------- -------------- OTHER OPERATING DATA: EBITDA (3).............................. $ 22,274 $ 25,540 $ 24,327 $ 20,458 $ 35,080 $ 4,634 $ 8,046 Net cash provided by (used in): Operating activities.................. 18,878 25,656 15,563 14,106 14,270 6,225 10,917 Investing activities (4).............. (8,518) (15,585) (25,592) (33,505) (74,244) (13,532) (29,488) Financing activities.................. (5,618) (3,938) (730) 15,506 63,021 14,393 23,156 Capital expenditures (5)................ 8,690 10,034 10,648 35,593 70,709 9,549 29,655 PRO FORMA DATA (6): Interest expense, net (1)....................................................... $ 12,460 N/A $ 2,720 EBITDA/Interest expense, net (1)................................................ 2.8x N/A 3.0x </TABLE> <TABLE> <CAPTION> AT FEBRUARY 29, 1996 ------------------------- ACTUAL AS ADJUSTED (7) -------- --------------- (UNAUDITED) <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents............... $ 15,078 $ 15,078 Total assets............................ 346,855 352,164 Long-term debt.......................... 147,362 161,461 Stockholders' equity.................... 131,780 138,680 </TABLE> - - ------------------------------ (1) Net of amounts capitalized and interest income. (2) For fiscal 1992, net income includes approximately $1.6 million of nonrecurring income items (approximately $1.1 million net of tax). (3) EBITDA (operating income (loss) plus depreciation and amortization) should not be construed as an indicator of the Company's operating performance, or as an alternative to cash flows from operating activities as a measure of liquidity. The Company has presented EBITDA solely as supplemental disclosure because the Company believes that it enhances the understanding of the financial performance of companies with substantial depreciation and amortization. For fiscal 1993, EBITDA excludes approximately $1.8 million of nonrecurring compensation charges, for fiscal 1995, EBITDA excludes approximately $2.1 million of pre-opening expenses, and for fiscal 1994 and 1995, EBITDA includes approximately $371,000 and $2.2 million, respectively, of life insurance benefits. (4) Net cash used in investing activities includes amounts expended by the Company for capital expenditures. (5) Of amounts shown, approximately $3.6 million in fiscal 1991, $2.8 million in fiscal 1992, $6.5 million in fiscal 1993, $4.4 million in fiscal 1994, $4.6 million in fiscal 1995, $1.3 million for the three months ended February 28, 1995 and $0.9 million for the three months ended February 29, 1996 related to recurring capital expenditures for maintenance of the current facilities. (6) The PRO FORMA data gives effect to (i) the Exchange Offer, (ii) the incurrence of indebtedness under the Iowa Loan, (iii) the incurrence of indebtedness under the Promissory Note and (iv) the Offering and the application of the proceeds therefrom to repay certain indebtedness, in each case as if such transaction had occurred or such indebtedness had been incurred on the first day of the period presented. (7) Adjusted to give effect to the Exchange Offer and the Offering and the application of the proceeds therefrom to repay certain indebtedness, in each case as if such transaction had occurred as of February 29, 1996.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001014724_harveys-c_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001014724_harveys-c_prospectus_summary.txt
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+SUMMARY OF PROSPECTUS THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY IS INTENDED ONLY TO HIGHLIGHT CERTAIN INFORMATION CONTAINED IN THIS PROSPECTUS. IT IS NOT INTENDED TO BE COMPLETE IN ITSELF, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE DETAILED INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. PROSPECTIVE PURCHASERS OF THE NOTES ARE URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY. FOR A DISCUSSION OF CERTAIN RISK FACTORS IN CONNECTION WITH THE OFFERING, SEE "RISK FACTORS". THE COMPANY Harveys Casino Resorts ("Harveys" or the "Company") is an established owner, operator and developer of high-quality hotel/casinos in the state of Nevada and new gaming jurisdictions. The Company owns and operates Harveys Resort Hotel/Casino ("Harveys Resort"), the Lake Tahoe area's largest hotel/casino. Harveys Resort, in operation since 1944, is situated on the south shore of scenic Lake Tahoe on the Nevada/ California state line. The Company owns and operates Harveys Wagon Wheel Hotel/Casino in Central City, Colorado ("Harveys Wagon Wheel"), which opened in December 1994 as the first major hotel/casino serving the greater Denver area. Harveys owns and operates a riverboat casino and is in the process of constructing a hotel/convention center, scheduled to open in mid-1996, in Council Bluffs, Iowa ("Harveys Casino/Hotel") across the Missouri River from Omaha, Nebraska. The Harveys Casino/Hotel riverboat casino opened on January 1, 1996 and is one of only three operators in the Omaha/Council Bluffs gaming market, which also includes one other riverboat casino and a slot machine operator at the local dogtrack. In addition, through a joint venture between Harveys and the Hard Rock Cafe co-founder Peter A. Morton, Harveys owns 40% of and manages the Hard Rock Hotel and Casino in Las Vegas, Nevada (the "Hard Rock Hotel"), which opened in March 1995. For the twelve months ended February 29, 1996, Harveys generated net revenues and earnings before interest, taxes, depreciation and amortization ("EBITDA") of $184.3 million and $38.5 million, respectively. See note 3 of "Summary Financial Data". BUSINESS STRATEGY The Company's business strategy is to develop premium hotel/casino facilities in markets in which the Company believes it can establish and maintain a prominent or niche position. Each of Harveys' properties offers casino gaming and a full array of amenities in a friendly atmosphere that caters to middle- and upper-middle income customers. The Company's strategy focuses on five key components: high-quality facilities and superior customer service, strategic locations, a targeted customer base, effective marketing and an emphasis on slot play. Harveys' properties are strategically located on highly visible sites or near regional population centers. The Company seeks to attract customers with higher disposable incomes by offering well-appointed rooms, quality food and beverages, and an array of gaming and non-gaming amenities. The Company also has established extensive customer databases and uses sophisticated player-tracking systems to develop and monitor playing habits of its customers. In response to customer preferences at certain of the Company's properties, the Company has changed its mix of games at such properties to increase the number of slot machines. Compared to table games, slot machines are less labor-intensive, require less square footage and generate higher profit margins. The Company monitors payment percentages closely and ensures that its slot machine payouts are competitive. Each of Harveys' properties is aggressively promoted through advertising campaigns tailored to its targeted customer base in each market. The Company promotes each property through various combinations of newspaper and broadcast advertisements, billboards, regular promotions and sweepstakes, as well as point-of-sale material in nearby hotels, restaurants and visitor attractions. As part of its commitment to ensuring a high level of customer satisfaction, Harveys is dedicated to ensuring customer loyalty by providing attentive customer service in a friendly environment. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. HARVEYS RESORT Harveys Resort, the largest hotel/casino in the Lake Tahoe area, is located on approximately 19.8 acres on U.S. Highway 50, the main route through South Lake Tahoe. The hotel/casino, situated on the south shore of Lake Tahoe with a panoramic view of the lake and surrounding mountains, is among Lake Tahoe's most modern facilities. The main structure is an all-glass 17-story tower which was completed in 1991, connected to a 12-story tower which was completely re-built in 1982. Harveys Resort features 740 rooms, 36 of which are luxury suites, and an 88,000 square foot casino containing approximately 2,100 slot machines, 105 table games, a 15-table poker area, a race and sports book and a keno lounge. Other amenities include 23,000 square feet of convention space, 2,967 parking spaces, the 280-seat Emerald Theater and Cabaret, a wedding chapel, restaurants, retail shops, a pool, a health club and a video arcade. Harveys Resort's eight restaurants offer a wide variety of high quality food and consist of a coffee shop, a Mexican restaurant, a seafood and pasta restaurant, a pizzeria, a premier steakhouse, a buffet, a burger emporium and Llewellyn's, Harveys Resort's award-winning restaurant that features top quality food and a spectacular view of Lake Tahoe. In recognition of the outstanding quality of the facility and its excellent service, Harveys Resort has received both the Mobil Four Star and AAA Four Diamond Awards every year for the last 15 years. Management has allocated a total of $20.0 million for capital improvements to be made to Harveys Resort through 1997 to increase the Company's market share and to position the Company to benefit from the ongoing South Lake Tahoe Redevelopment Project. The South Lake Tahoe gaming market generated approximately $320 million in gaming revenues in each of the last three years. The Lake Tahoe area is a unique gaming location because of its natural surroundings and variety of year-round outdoor recreational activities, including skiing, boating, fishing and golfing. The South Lake Tahoe area draws tourists primarily from nearby Reno and Northern California. There are four major casinos in this market to serve the approximately 2 million annual visitors. Existing environmental regulations prevent the addition of new gaming facilities or the expansion of existing hotel/ casinos. Management seeks to attract middle- to upper-middle income customers to Harveys Resort by offering well-appointed rooms and a "party" atmosphere for those seeking nightlife and entertainment. The Company has increased its share of gaming revenues in South Lake Tahoe to approximately 27% in 1995 from approximately 24% in 1989 due largely to its effective marketing campaigns. Management believes that by continuing to focus its efforts on the maintenance of customer relationships and the Harveys image, it will increase its share of higher-income customers in the South Lake Tahoe market. In response to the increased popularity of slot machines over the past several years, Harveys Resort has shifted its gaming mix toward slot machines. Harveys Resort now includes a greater percentage of $1 and higher denominated machines to appeal to the higher-income gaming clientele of Harveys Resort, including $5, $25 and $100 slot machines offered within a premium player section. This increase in higher denominated machines increased win per unit at Harveys Resort by approximately 19% between 1988 and 1994. HARVEYS WAGON WHEEL Through Harveys Wagon Wheel, which opened in December 1994, the Company established the first major hotel/casino serving the greater Denver area. Harveys Wagon Wheel is located on a highly visible site in Central City, Colorado, a picturesque mountain town approximately 35 miles west of Denver. Unlike most existing gaming facilities in the Central City area, which offer no overnight accommodations, scarce on-site parking and few non-gaming amenities, Harveys Wagon Wheel includes approximately 40,000 square feet of casino space, 850 slot machines (approximately 250 more than are currently offered by any other gaming facility in the area), 18 table games, a nine-table poker area, a 118-room hotel and 195 on-site parking spaces. Other amenities include a 220-seat coffee shop/buffet, a snack bar, an entertainment lounge and a children's arcade. No other casino in Central City/Black Hawk currently offers all of these amenities. In 1995, the Central City/Black Hawk market hosted approximately 3 million visitors and generated gaming revenues of more than $290.7 million, an increase of 18.7% over gaming revenues of $244.9 million in 1994. Harveys Wagon Wheel targets middle- to upper-income customers from the greater Denver area who seek a quality gaming experience, convenient parking and overnight accommodations. By offering a facility with overnight accommodations and more amenities than are offered by other casinos in the Central City/ Black Hawk market, Harveys Wagon Wheel has been successfully building a loyal customer base. The Company attracts customers to Harveys Wagon Wheel by aggressively promoting the facility's hotel rooms, on-site parking, quality dining facilities and varied entertainment activities in a market in which such amenities are a distinct competitive advantage. On April 30, 1996, the Company exchanged 382,500 shares of the Company's common stock, par value $.01 per share ("Common Stock"), for (i) 30% of the equity interests of Harveys Wagon Wheel Casino Limited Liability Company ("HWW"), an entity in which the Company held a 70% equity interest prior to the consummation of the acquisition and which owns Harveys Wagon Wheel, (ii) the rights to an approximately $3.0 million priority return from HWW and (iii) an option to acquire an additional 5% of the equity interests of HWW (the "Minority Interest"). Upon consummation of the acquisition, HWW and Harveys Wagon Wheel became wholly-owned by the Company. In addition, on such date the Company exchanged $8.0 million in principal amount of the Company's Subordinated Notes due December 31, 2000 (the "Subordinated Notes") and $6.0 million cash for $11.9 million in aggregate principal amount of HWW 12% Senior Notes due 1997 (the "HWW Notes"), constituting all of the outstanding HWW Notes, and $1.9 million of unpaid interest accrued thereon. A portion of the proceeds of the Offering will be used to redeem the Subordinated Notes. HARVEYS CASINO/HOTEL On January 1, 1996, the Company opened, as the first phase of Harveys Casino/Hotel, a 1,700-passenger riverboat casino berthed on the Missouri River directly across from Omaha, Nebraska in Council Bluffs, Iowa. The riverboat casino has more than 23,500 square feet of casino space on two decks and contains 883 slot machines and 51 table games. Land-based amenities at Harveys Casino/Hotel include surface parking for approximately 1,100 cars, and will include a 14-story, 251-room hotel with a 21,000 square foot convention center by mid-1996 and additional surface parking for approximately 500 cars. Harveys Casino/Hotel is within a ten-minute drive from the Omaha/Council Bluffs regional airport and is located directly off of Interstate 29, Interstate 80 and Interstate 480. Harveys Casino/Hotel is located on a 60-acre parcel of land which the Company acquired from the City of Council Bluffs. Approximately 20 acres of the site are occupied by a municipal nine-hole golf course, which is leased to the City of Council Bluffs for a nominal fee. This arrangement allows Harveys the option of using this land for future expansion needs. In addition, the Company has acquired an adjacent 44-acre site to accommodate future expansion or support facilities. Harveys Casino/Hotel's target market is the approximately 650,000 residents in the greater Omaha metropolitan area and the nearly 3 million adults within a three-hour drive of the facility. In addition, the casino, hotel and convention facilities will be marketed to the estimated 2.5 million visitors and tourists who visit the Omaha metropolitan area annually. Harveys Casino/Hotel markets itself as "The Preferred Place to Play" in the Omaha/Council Bluffs market through the extensive use of television and newspaper advertisement, billboards, regular promotions and sweepstakes as well as point-of-sale materials located in local hotels, restaurants and other visitor attractions. Harveys Casino/Hotel targets frequent, mid-level players from Omaha, Council Bluffs and the surrounding areas. The Company anticipates that the hotel and convention facilities that are currently under construction and are scheduled to open in mid-1996 will attract new players by capturing overnight guests and meeting and small convention business. In addition, by positioning the property as the "Preferred Place to Play", management believes that Harveys Casino/Hotel will attract a large percentage of the gaming revenues generated by the Omaha/Council Bluffs regional population and visitors to the Omaha/Council Bluffs area. HARD ROCK HOTEL AND CASINO The Company, through a joint venture with Peter A. Morton, co-founder of the Hard Rock Cafes, developed the Hard Rock Hotel, which opened in March 1995 in Las Vegas, Nevada. The Company owns a 40% equity interest in and manages this unique first-class facility which is modeled after the highly successful Hard Rock Cafe concept and targets younger and higher-income gaming patrons. Under the terms of a management agreement relating to the Hard Rock Hotel, the Company receives a management fee equal to 4% of the adjusted gross revenues derived from the Hard Rock Hotel plus additional incentive compensation of up to 2% of adjusted gross revenues if certain performance targets are achieved by the Hard Rock Hotel. Located three blocks from the Las Vegas Strip and five minutes from McCarran International Airport, the 339-room hotel and casino houses 28,000 square feet of casino space containing 802 slot machines, 39 table games and a sports and race book. The Hard Rock Hotel features the Hard Rock Beach Club offering lush landscaping, whirlpools, luxury cabanas and a sandy beach, and "The Joint", a live music venue with a 1,400-person capacity. Additional amenities include a health club, retail store, and two restaurants, a 24-hour casual dining coffee shop and Mortoni's, an Italian fine dining room, with a view of the Hard Rock Beach Club, offering indoor and garden patio dining. The hotel/casino also provides parking spaces for approximately 1,285 cars. The Hard Rock Hotel is located adjacent to the Hard Rock Cafe on approximately 16 acres of land with 1,200 feet of frontage near the intersection of Paradise Road and Harmon Avenue. The site is conveniently located at one of the busiest intersections in Las Vegas and is a short distance from the Las Vegas Convention Center, three non-gaming full service hotels with a combined total of approximately 850 rooms and the New Four Corners, which includes major casinos such as the MGM Grand Casino Hotel and Theme Park. The Hard Rock Hotel hosts special events such as award presentations to rock stars and other celebrities, film premiere parties and fundraising and other charitable activities, as well as frequently-scheduled live entertainment, in order to attract its target customers, who tend to be younger and have higher disposable incomes than the average Las Vegas visitor. The Company believes that the Hard Rock Hotel appeals to higher income patrons because of the Hard Rock theme, upscale hotel facilities and the wide variety of special events designed to maintain the image of the facility in the mind of the Hard Rock Hotel customer base. THE OFFERING <TABLE> <S> <C> Notes......................... $150,000,000 principal amount of % Senior Subordinated Notes Due 2006 (the "Notes"). Maturity Date................. , 2006. Interest Payment Dates........ and , commencing , 1996. Guarantees.................... The Notes will be fully and unconditionally guaranteed (the "Guarantees") jointly and severally by the Company's Restricted Subsidiaries (as defined herein). Optional Redemption........... The Notes are redeemable at the option of the Company, in whole or in part, at any time on or after , 2001 at the redemption prices set forth herein, plus accrued interest to the date of redemption. See "Description of the Notes -- Optional Redemption". Special Redemption............ The Notes are subject to redemption requirements imposed by gaming laws and regulations of the state of Nevada. See "Description of the Notes -- Optional Redemption". Subordination................. The Notes are general unsecured obligations of the Company, subordinated in right of payment to all existing and future Senior Debt (as defined herein) of the Company. Each Guarantee will be a general unsecured obligation of the guaranteeing Restricted Subsidiary (each a "Guarantor" and collectively the "Guarantors"), subordinated in right of payment to all existing and future Senior Debt of such Guarantor. As of February 29, 1996, on a PRO FORMA basis after giving effect to the Exchange Offer and the offering of the Notes made hereby (the "Offering") and application of the net proceeds therefrom, the Company and its subsidiaries would have had approximately </TABLE> <TABLE> <S> <C> $14 million of indebtedness outstanding that would have constituted Senior Debt and approximately $28.8 million of trade payables and accrued liabilities. Change of Control............. Upon a Change of Control (as defined herein), each holder of the Notes will have the right to require the Company to repurchase such holder's Notes at 101% of the principal amount thereof, plus accrued interest to the repurchase date. The Company's ability to make such a repurchase may be limited by its financial condition at the time, covenants in Senior Debt documents or its inability to finance such a repurchase. Such a repurchase may cause cross defaults under existing or future indebtedness and would make a takeover of the Company more expensive to a potential acquirer and accordingly may make such a takeover less likely. In any event, the Company must comply with all applicable laws, including Section 14(e) of the Securities Exchange Act of 1934, as amended, and the rules thereunder, in the event that it is required to offer to repurchase any Notes upon a Change of Control. See "Risk Factors" and "Description of the Notes -- Repurchase at the Option of Holders". Certain Covenants............. The indenture governing the Notes (the "Indenture") contains certain covenants that impose limitations on, among other things, (i) the incurrence of additional indebtedness by the Company or any Restricted Subsidiary (as defined herein), (ii) the payment of dividends, (iii) the repurchase of capital stock and the making of certain other Restricted Payments and Restricted Investments (each as defined herein) by the Company or any Restricted Subsidiary, (iv) mergers, consolidations and sales of assets by the Company or any Restricted Subsidiary, (v) the creation or incurrence of liens on the assets of the Company or any Restricted Subsidiary and (vi) transactions by the Company or any of its subsidiaries with Affiliates (as defined herein). These limitations are subject to a number of important qualifications and exceptions. See "Description of the Notes". Use of Proceeds............... The net proceeds of the Offering, estimated to be approximately $144.5 million, will be used by the Company to repay (i) approximately $107.1 million of indebtedness incurred under the Company's reducing revolving credit facility (the "Credit Facility"); (ii) $7.8 million to redeem the entire $8.0 million principal amount outstanding of the Subordinated Notes; (iii) a $10.0 million promissory note evidencing indebtedness incurred by the Company to fund construction of a parking garage adjacent to Harveys Wagon Wheel (the "Promissory Note"); and (iv) approximately $19.6 million of indebtedness incurred to finance the purchase of the riverboat casino at Harveys Casino/ Hotel (the "Iowa Loan"). See "Use of Proceeds". </TABLE> SUMMARY FINANCIAL DATA The following table sets forth selected summary financial data of the Company for the years ended November 30, 1991 through November 30, 1995 and the three months ended February 28, 1995 and February 29, 1996. The income statement and balance sheet data for the years ended November 30, 1991 through November 30, 1995 are derived from the Company's audited consolidated financial statements for such periods which, except for 1991 and 1992, are included elsewhere in this Prospectus. The Summary Financial Data are not necessarily indicative of the Company's future results of operations or financial condition, and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements of the Company, including the notes thereto, and the other financial and statistical information appearing elsewhere in this Prospectus. The Summary Financial Data presented below as of and for the three months ended February 28, 1995 and February 29, 1996 are derived from unaudited consolidated financial statements of the Company; however, in the opinion of the Company, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the Company's financial position and result of operations for such periods have been included. Operating results for the three months ended February 28, 1995 and February 29, 1996 are not necessarily indicative of the results that may be expected for future periods, including the entire year ending November 30, 1996. The Summary Financial Data include operating results for Harveys Wagon Wheel from its opening on December 2, 1994, for the Hard Rock Hotel from its opening on March 9, 1995 and for Harveys Casino/Hotel from the opening of the riverboat casino on January 1, 1996. <TABLE> <CAPTION> THREE MONTHS ENDED FISCAL YEARS ENDED NOVEMBER 30, ------------------------------- ------------------------------------------------ FEBRUARY 28, FEBRUARY 29, 1991 1992 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- -------------- -------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF INCOME DATA: Net revenues............................ $127,517 $132,482 $132,259 $128,286 $173,200 $ 38,337 $ 49,474 Depreciation and amortization........... 11,027 10,786 10,300 9,704 12,333 3,015 3,561 Pre-opening expense..................... -- -- -- -- 2,147 2,147 3,590 Operating income (loss)................. 11,247 14,754 12,193 10,382 18,354 (528) 895 Interest expense, net (1)............... (6,091) (5,084) (4,256) (2,886) (7,960) (1,725) (1,954) Net income (loss) (2)................... $ 3,197 $ 7,612 $ 4,809 $ 5,138 $ 9,345 $ (1,117) $ (576) -------- -------- -------- -------- -------- -------------- -------------- -------- -------- -------- -------- -------- -------------- -------------- OTHER OPERATING DATA: EBITDA (3).............................. $ 22,274 $ 25,540 $ 24,327 $ 20,458 $ 35,080 $ 4,634 $ 8,046 Net cash provided by (used in): Operating activities.................. 18,878 25,656 15,563 14,106 14,270 6,225 10,917 Investing activities (4).............. (8,518) (15,585) (25,592) (33,505) (74,244) (13,532) (29,488) Financing activities.................. (5,618) (3,938) (730) 15,506 63,021 14,393 23,156 Capital expenditures (5)................ 8,690 10,034 10,648 35,593 70,709 9,549 29,655 PRO FORMA DATA (6): Interest expense, net (1)....................................................... $ 12,460 N/A $ 2,720 EBITDA/Interest expense, net (1)................................................ 2.8x N/A 3.0x </TABLE> <TABLE> <CAPTION> AT FEBRUARY 29, 1996 ------------------------- ACTUAL AS ADJUSTED (7) -------- --------------- (UNAUDITED) <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents............... $ 15,078 $ 15,078 Total assets............................ 346,855 352,164 Long-term debt.......................... 147,362 161,461 Stockholders' equity.................... 131,780 138,680 </TABLE> - - ------------------------------ (1) Net of amounts capitalized and interest income. (2) For fiscal 1992, net income includes approximately $1.6 million of nonrecurring income items (approximately $1.1 million net of tax). (3) EBITDA (operating income (loss) plus depreciation and amortization) should not be construed as an indicator of the Company's operating performance, or as an alternative to cash flows from operating activities as a measure of liquidity. The Company has presented EBITDA solely as supplemental disclosure because the Company believes that it enhances the understanding of the financial performance of companies with substantial depreciation and amortization. For fiscal 1993, EBITDA excludes approximately $1.8 million of nonrecurring compensation charges, for fiscal 1995, EBITDA excludes approximately $2.1 million of pre-opening expenses, and for fiscal 1994 and 1995, EBITDA includes approximately $371,000 and $2.2 million, respectively, of life insurance benefits. (4) Net cash used in investing activities includes amounts expended by the Company for capital expenditures. (5) Of amounts shown, approximately $3.6 million in fiscal 1991, $2.8 million in fiscal 1992, $6.5 million in fiscal 1993, $4.4 million in fiscal 1994, $4.6 million in fiscal 1995, $1.3 million for the three months ended February 28, 1995 and $0.9 million for the three months ended February 29, 1996 related to recurring capital expenditures for maintenance of the current facilities. (6) The PRO FORMA data gives effect to (i) the Exchange Offer, (ii) the incurrence of indebtedness under the Iowa Loan, (iii) the incurrence of indebtedness under the Promissory Note and (iv) the Offering and the application of the proceeds therefrom to repay certain indebtedness, in each case as if such transaction had occurred or such indebtedness had been incurred on the first day of the period presented. (7) Adjusted to give effect to the Exchange Offer and the Offering and the application of the proceeds therefrom to repay certain indebtedness, in each case as if such transaction had occurred as of February 29, 1996.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001014725_harveys_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001014725_harveys_prospectus_summary.txt
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+SUMMARY OF PROSPECTUS THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY IS INTENDED ONLY TO HIGHLIGHT CERTAIN INFORMATION CONTAINED IN THIS PROSPECTUS. IT IS NOT INTENDED TO BE COMPLETE IN ITSELF, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE DETAILED INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. PROSPECTIVE PURCHASERS OF THE NOTES ARE URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY. FOR A DISCUSSION OF CERTAIN RISK FACTORS IN CONNECTION WITH THE OFFERING, SEE "RISK FACTORS". THE COMPANY Harveys Casino Resorts ("Harveys" or the "Company") is an established owner, operator and developer of high-quality hotel/casinos in the state of Nevada and new gaming jurisdictions. The Company owns and operates Harveys Resort Hotel/Casino ("Harveys Resort"), the Lake Tahoe area's largest hotel/casino. Harveys Resort, in operation since 1944, is situated on the south shore of scenic Lake Tahoe on the Nevada/ California state line. The Company owns and operates Harveys Wagon Wheel Hotel/Casino in Central City, Colorado ("Harveys Wagon Wheel"), which opened in December 1994 as the first major hotel/casino serving the greater Denver area. Harveys owns and operates a riverboat casino and is in the process of constructing a hotel/convention center, scheduled to open in mid-1996, in Council Bluffs, Iowa ("Harveys Casino/Hotel") across the Missouri River from Omaha, Nebraska. The Harveys Casino/Hotel riverboat casino opened on January 1, 1996 and is one of only three operators in the Omaha/Council Bluffs gaming market, which also includes one other riverboat casino and a slot machine operator at the local dogtrack. In addition, through a joint venture between Harveys and the Hard Rock Cafe co-founder Peter A. Morton, Harveys owns 40% of and manages the Hard Rock Hotel and Casino in Las Vegas, Nevada (the "Hard Rock Hotel"), which opened in March 1995. For the twelve months ended February 29, 1996, Harveys generated net revenues and earnings before interest, taxes, depreciation and amortization ("EBITDA") of $184.3 million and $38.5 million, respectively. See note 3 of "Summary Financial Data". BUSINESS STRATEGY The Company's business strategy is to develop premium hotel/casino facilities in markets in which the Company believes it can establish and maintain a prominent or niche position. Each of Harveys' properties offers casino gaming and a full array of amenities in a friendly atmosphere that caters to middle- and upper-middle income customers. The Company's strategy focuses on five key components: high-quality facilities and superior customer service, strategic locations, a targeted customer base, effective marketing and an emphasis on slot play. Harveys' properties are strategically located on highly visible sites or near regional population centers. The Company seeks to attract customers with higher disposable incomes by offering well-appointed rooms, quality food and beverages, and an array of gaming and non-gaming amenities. The Company also has established extensive customer databases and uses sophisticated player-tracking systems to develop and monitor playing habits of its customers. In response to customer preferences at certain of the Company's properties, the Company has changed its mix of games at such properties to increase the number of slot machines. Compared to table games, slot machines are less labor-intensive, require less square footage and generate higher profit margins. The Company monitors payment percentages closely and ensures that its slot machine payouts are competitive. Each of Harveys' properties is aggressively promoted through advertising campaigns tailored to its targeted customer base in each market. The Company promotes each property through various combinations of newspaper and broadcast advertisements, billboards, regular promotions and sweepstakes, as well as point-of-sale material in nearby hotels, restaurants and visitor attractions. As part of its commitment to ensuring a high level of customer satisfaction, Harveys is dedicated to ensuring customer loyalty by providing attentive customer service in a friendly environment. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. HARVEYS RESORT Harveys Resort, the largest hotel/casino in the Lake Tahoe area, is located on approximately 19.8 acres on U.S. Highway 50, the main route through South Lake Tahoe. The hotel/casino, situated on the south shore of Lake Tahoe with a panoramic view of the lake and surrounding mountains, is among Lake Tahoe's most modern facilities. The main structure is an all-glass 17-story tower which was completed in 1991, connected to a 12-story tower which was completely re-built in 1982. Harveys Resort features 740 rooms, 36 of which are luxury suites, and an 88,000 square foot casino containing approximately 2,100 slot machines, 105 table games, a 15-table poker area, a race and sports book and a keno lounge. Other amenities include 23,000 square feet of convention space, 2,967 parking spaces, the 280-seat Emerald Theater and Cabaret, a wedding chapel, restaurants, retail shops, a pool, a health club and a video arcade. Harveys Resort's eight restaurants offer a wide variety of high quality food and consist of a coffee shop, a Mexican restaurant, a seafood and pasta restaurant, a pizzeria, a premier steakhouse, a buffet, a burger emporium and Llewellyn's, Harveys Resort's award-winning restaurant that features top quality food and a spectacular view of Lake Tahoe. In recognition of the outstanding quality of the facility and its excellent service, Harveys Resort has received both the Mobil Four Star and AAA Four Diamond Awards every year for the last 15 years. Management has allocated a total of $20.0 million for capital improvements to be made to Harveys Resort through 1997 to increase the Company's market share and to position the Company to benefit from the ongoing South Lake Tahoe Redevelopment Project. The South Lake Tahoe gaming market generated approximately $320 million in gaming revenues in each of the last three years. The Lake Tahoe area is a unique gaming location because of its natural surroundings and variety of year-round outdoor recreational activities, including skiing, boating, fishing and golfing. The South Lake Tahoe area draws tourists primarily from nearby Reno and Northern California. There are four major casinos in this market to serve the approximately 2 million annual visitors. Existing environmental regulations prevent the addition of new gaming facilities or the expansion of existing hotel/ casinos. Management seeks to attract middle- to upper-middle income customers to Harveys Resort by offering well-appointed rooms and a "party" atmosphere for those seeking nightlife and entertainment. The Company has increased its share of gaming revenues in South Lake Tahoe to approximately 27% in 1995 from approximately 24% in 1989 due largely to its effective marketing campaigns. Management believes that by continuing to focus its efforts on the maintenance of customer relationships and the Harveys image, it will increase its share of higher-income customers in the South Lake Tahoe market. In response to the increased popularity of slot machines over the past several years, Harveys Resort has shifted its gaming mix toward slot machines. Harveys Resort now includes a greater percentage of $1 and higher denominated machines to appeal to the higher-income gaming clientele of Harveys Resort, including $5, $25 and $100 slot machines offered within a premium player section. This increase in higher denominated machines increased win per unit at Harveys Resort by approximately 19% between 1988 and 1994. HARVEYS WAGON WHEEL Through Harveys Wagon Wheel, which opened in December 1994, the Company established the first major hotel/casino serving the greater Denver area. Harveys Wagon Wheel is located on a highly visible site in Central City, Colorado, a picturesque mountain town approximately 35 miles west of Denver. Unlike most existing gaming facilities in the Central City area, which offer no overnight accommodations, scarce on-site parking and few non-gaming amenities, Harveys Wagon Wheel includes approximately 40,000 square feet of casino space, 850 slot machines (approximately 250 more than are currently offered by any other gaming facility in the area), 18 table games, a nine-table poker area, a 118-room hotel and 195 on-site parking spaces. Other amenities include a 220-seat coffee shop/buffet, a snack bar, an entertainment lounge and a children's arcade. No other casino in Central City/Black Hawk currently offers all of these amenities. In 1995, the Central City/Black Hawk market hosted approximately 3 million visitors and generated gaming revenues of more than $290.7 million, an increase of 18.7% over gaming revenues of $244.9 million in 1994. Harveys Wagon Wheel targets middle- to upper-income customers from the greater Denver area who seek a quality gaming experience, convenient parking and overnight accommodations. By offering a facility with overnight accommodations and more amenities than are offered by other casinos in the Central City/ Black Hawk market, Harveys Wagon Wheel has been successfully building a loyal customer base. The Company attracts customers to Harveys Wagon Wheel by aggressively promoting the facility's hotel rooms, on-site parking, quality dining facilities and varied entertainment activities in a market in which such amenities are a distinct competitive advantage. On April 30, 1996, the Company exchanged 382,500 shares of the Company's common stock, par value $.01 per share ("Common Stock"), for (i) 30% of the equity interests of Harveys Wagon Wheel Casino Limited Liability Company ("HWW"), an entity in which the Company held a 70% equity interest prior to the consummation of the acquisition and which owns Harveys Wagon Wheel, (ii) the rights to an approximately $3.0 million priority return from HWW and (iii) an option to acquire an additional 5% of the equity interests of HWW (the "Minority Interest"). Upon consummation of the acquisition, HWW and Harveys Wagon Wheel became wholly-owned by the Company. In addition, on such date the Company exchanged $8.0 million in principal amount of the Company's Subordinated Notes due December 31, 2000 (the "Subordinated Notes") and $6.0 million cash for $11.9 million in aggregate principal amount of HWW 12% Senior Notes due 1997 (the "HWW Notes"), constituting all of the outstanding HWW Notes, and $1.9 million of unpaid interest accrued thereon. A portion of the proceeds of the Offering will be used to redeem the Subordinated Notes. HARVEYS CASINO/HOTEL On January 1, 1996, the Company opened, as the first phase of Harveys Casino/Hotel, a 1,700-passenger riverboat casino berthed on the Missouri River directly across from Omaha, Nebraska in Council Bluffs, Iowa. The riverboat casino has more than 23,500 square feet of casino space on two decks and contains 883 slot machines and 51 table games. Land-based amenities at Harveys Casino/Hotel include surface parking for approximately 1,100 cars, and will include a 14-story, 251-room hotel with a 21,000 square foot convention center by mid-1996 and additional surface parking for approximately 500 cars. Harveys Casino/Hotel is within a ten-minute drive from the Omaha/Council Bluffs regional airport and is located directly off of Interstate 29, Interstate 80 and Interstate 480. Harveys Casino/Hotel is located on a 60-acre parcel of land which the Company acquired from the City of Council Bluffs. Approximately 20 acres of the site are occupied by a municipal nine-hole golf course, which is leased to the City of Council Bluffs for a nominal fee. This arrangement allows Harveys the option of using this land for future expansion needs. In addition, the Company has acquired an adjacent 44-acre site to accommodate future expansion or support facilities. Harveys Casino/Hotel's target market is the approximately 650,000 residents in the greater Omaha metropolitan area and the nearly 3 million adults within a three-hour drive of the facility. In addition, the casino, hotel and convention facilities will be marketed to the estimated 2.5 million visitors and tourists who visit the Omaha metropolitan area annually. Harveys Casino/Hotel markets itself as "The Preferred Place to Play" in the Omaha/Council Bluffs market through the extensive use of television and newspaper advertisement, billboards, regular promotions and sweepstakes as well as point-of-sale materials located in local hotels, restaurants and other visitor attractions. Harveys Casino/Hotel targets frequent, mid-level players from Omaha, Council Bluffs and the surrounding areas. The Company anticipates that the hotel and convention facilities that are currently under construction and are scheduled to open in mid-1996 will attract new players by capturing overnight guests and meeting and small convention business. In addition, by positioning the property as the "Preferred Place to Play", management believes that Harveys Casino/Hotel will attract a large percentage of the gaming revenues generated by the Omaha/Council Bluffs regional population and visitors to the Omaha/Council Bluffs area. HARD ROCK HOTEL AND CASINO The Company, through a joint venture with Peter A. Morton, co-founder of the Hard Rock Cafes, developed the Hard Rock Hotel, which opened in March 1995 in Las Vegas, Nevada. The Company owns a 40% equity interest in and manages this unique first-class facility which is modeled after the highly successful Hard Rock Cafe concept and targets younger and higher-income gaming patrons. Under the terms of a management agreement relating to the Hard Rock Hotel, the Company receives a management fee equal to 4% of the adjusted gross revenues derived from the Hard Rock Hotel plus additional incentive compensation of up to 2% of adjusted gross revenues if certain performance targets are achieved by the Hard Rock Hotel. Located three blocks from the Las Vegas Strip and five minutes from McCarran International Airport, the 339-room hotel and casino houses 28,000 square feet of casino space containing 802 slot machines, 39 table games and a sports and race book. The Hard Rock Hotel features the Hard Rock Beach Club offering lush landscaping, whirlpools, luxury cabanas and a sandy beach, and "The Joint", a live music venue with a 1,400-person capacity. Additional amenities include a health club, retail store, and two restaurants, a 24-hour casual dining coffee shop and Mortoni's, an Italian fine dining room, with a view of the Hard Rock Beach Club, offering indoor and garden patio dining. The hotel/casino also provides parking spaces for approximately 1,285 cars. The Hard Rock Hotel is located adjacent to the Hard Rock Cafe on approximately 16 acres of land with 1,200 feet of frontage near the intersection of Paradise Road and Harmon Avenue. The site is conveniently located at one of the busiest intersections in Las Vegas and is a short distance from the Las Vegas Convention Center, three non-gaming full service hotels with a combined total of approximately 850 rooms and the New Four Corners, which includes major casinos such as the MGM Grand Casino Hotel and Theme Park. The Hard Rock Hotel hosts special events such as award presentations to rock stars and other celebrities, film premiere parties and fundraising and other charitable activities, as well as frequently-scheduled live entertainment, in order to attract its target customers, who tend to be younger and have higher disposable incomes than the average Las Vegas visitor. The Company believes that the Hard Rock Hotel appeals to higher income patrons because of the Hard Rock theme, upscale hotel facilities and the wide variety of special events designed to maintain the image of the facility in the mind of the Hard Rock Hotel customer base. THE OFFERING <TABLE> <S> <C> Notes......................... $150,000,000 principal amount of % Senior Subordinated Notes Due 2006 (the "Notes"). Maturity Date................. , 2006. Interest Payment Dates........ and , commencing , 1996. Guarantees.................... The Notes will be fully and unconditionally guaranteed (the "Guarantees") jointly and severally by the Company's Restricted Subsidiaries (as defined herein). Optional Redemption........... The Notes are redeemable at the option of the Company, in whole or in part, at any time on or after , 2001 at the redemption prices set forth herein, plus accrued interest to the date of redemption. See "Description of the Notes -- Optional Redemption". Special Redemption............ The Notes are subject to redemption requirements imposed by gaming laws and regulations of the state of Nevada. See "Description of the Notes -- Optional Redemption". Subordination................. The Notes are general unsecured obligations of the Company, subordinated in right of payment to all existing and future Senior Debt (as defined herein) of the Company. Each Guarantee will be a general unsecured obligation of the guaranteeing Restricted Subsidiary (each a "Guarantor" and collectively the "Guarantors"), subordinated in right of payment to all existing and future Senior Debt of such Guarantor. As of February 29, 1996, on a PRO FORMA basis after giving effect to the Exchange Offer and the offering of the Notes made hereby (the "Offering") and application of the net proceeds therefrom, the Company and its subsidiaries would have had approximately </TABLE> <TABLE> <S> <C> $14 million of indebtedness outstanding that would have constituted Senior Debt and approximately $28.8 million of trade payables and accrued liabilities. Change of Control............. Upon a Change of Control (as defined herein), each holder of the Notes will have the right to require the Company to repurchase such holder's Notes at 101% of the principal amount thereof, plus accrued interest to the repurchase date. The Company's ability to make such a repurchase may be limited by its financial condition at the time, covenants in Senior Debt documents or its inability to finance such a repurchase. Such a repurchase may cause cross defaults under existing or future indebtedness and would make a takeover of the Company more expensive to a potential acquirer and accordingly may make such a takeover less likely. In any event, the Company must comply with all applicable laws, including Section 14(e) of the Securities Exchange Act of 1934, as amended, and the rules thereunder, in the event that it is required to offer to repurchase any Notes upon a Change of Control. See "Risk Factors" and "Description of the Notes -- Repurchase at the Option of Holders". Certain Covenants............. The indenture governing the Notes (the "Indenture") contains certain covenants that impose limitations on, among other things, (i) the incurrence of additional indebtedness by the Company or any Restricted Subsidiary (as defined herein), (ii) the payment of dividends, (iii) the repurchase of capital stock and the making of certain other Restricted Payments and Restricted Investments (each as defined herein) by the Company or any Restricted Subsidiary, (iv) mergers, consolidations and sales of assets by the Company or any Restricted Subsidiary, (v) the creation or incurrence of liens on the assets of the Company or any Restricted Subsidiary and (vi) transactions by the Company or any of its subsidiaries with Affiliates (as defined herein). These limitations are subject to a number of important qualifications and exceptions. See "Description of the Notes". Use of Proceeds............... The net proceeds of the Offering, estimated to be approximately $144.5 million, will be used by the Company to repay (i) approximately $107.1 million of indebtedness incurred under the Company's reducing revolving credit facility (the "Credit Facility"); (ii) $7.8 million to redeem the entire $8.0 million principal amount outstanding of the Subordinated Notes; (iii) a $10.0 million promissory note evidencing indebtedness incurred by the Company to fund construction of a parking garage adjacent to Harveys Wagon Wheel (the "Promissory Note"); and (iv) approximately $19.6 million of indebtedness incurred to finance the purchase of the riverboat casino at Harveys Casino/ Hotel (the "Iowa Loan"). See "Use of Proceeds". </TABLE> SUMMARY FINANCIAL DATA The following table sets forth selected summary financial data of the Company for the years ended November 30, 1991 through November 30, 1995 and the three months ended February 28, 1995 and February 29, 1996. The income statement and balance sheet data for the years ended November 30, 1991 through November 30, 1995 are derived from the Company's audited consolidated financial statements for such periods which, except for 1991 and 1992, are included elsewhere in this Prospectus. The Summary Financial Data are not necessarily indicative of the Company's future results of operations or financial condition, and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements of the Company, including the notes thereto, and the other financial and statistical information appearing elsewhere in this Prospectus. The Summary Financial Data presented below as of and for the three months ended February 28, 1995 and February 29, 1996 are derived from unaudited consolidated financial statements of the Company; however, in the opinion of the Company, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the Company's financial position and result of operations for such periods have been included. Operating results for the three months ended February 28, 1995 and February 29, 1996 are not necessarily indicative of the results that may be expected for future periods, including the entire year ending November 30, 1996. The Summary Financial Data include operating results for Harveys Wagon Wheel from its opening on December 2, 1994, for the Hard Rock Hotel from its opening on March 9, 1995 and for Harveys Casino/Hotel from the opening of the riverboat casino on January 1, 1996. <TABLE> <CAPTION> THREE MONTHS ENDED FISCAL YEARS ENDED NOVEMBER 30, ------------------------------- ------------------------------------------------ FEBRUARY 28, FEBRUARY 29, 1991 1992 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- -------------- -------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF INCOME DATA: Net revenues............................ $127,517 $132,482 $132,259 $128,286 $173,200 $ 38,337 $ 49,474 Depreciation and amortization........... 11,027 10,786 10,300 9,704 12,333 3,015 3,561 Pre-opening expense..................... -- -- -- -- 2,147 2,147 3,590 Operating income (loss)................. 11,247 14,754 12,193 10,382 18,354 (528) 895 Interest expense, net (1)............... (6,091) (5,084) (4,256) (2,886) (7,960) (1,725) (1,954) Net income (loss) (2)................... $ 3,197 $ 7,612 $ 4,809 $ 5,138 $ 9,345 $ (1,117) $ (576) -------- -------- -------- -------- -------- -------------- -------------- -------- -------- -------- -------- -------- -------------- -------------- OTHER OPERATING DATA: EBITDA (3).............................. $ 22,274 $ 25,540 $ 24,327 $ 20,458 $ 35,080 $ 4,634 $ 8,046 Net cash provided by (used in): Operating activities.................. 18,878 25,656 15,563 14,106 14,270 6,225 10,917 Investing activities (4).............. (8,518) (15,585) (25,592) (33,505) (74,244) (13,532) (29,488) Financing activities.................. (5,618) (3,938) (730) 15,506 63,021 14,393 23,156 Capital expenditures (5)................ 8,690 10,034 10,648 35,593 70,709 9,549 29,655 PRO FORMA DATA (6): Interest expense, net (1)....................................................... $ 12,460 N/A $ 2,720 EBITDA/Interest expense, net (1)................................................ 2.8x N/A 3.0x </TABLE> <TABLE> <CAPTION> AT FEBRUARY 29, 1996 ------------------------- ACTUAL AS ADJUSTED (7) -------- --------------- (UNAUDITED) <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents............... $ 15,078 $ 15,078 Total assets............................ 346,855 352,164 Long-term debt.......................... 147,362 161,461 Stockholders' equity.................... 131,780 138,680 </TABLE> - - ------------------------------ (1) Net of amounts capitalized and interest income. (2) For fiscal 1992, net income includes approximately $1.6 million of nonrecurring income items (approximately $1.1 million net of tax). (3) EBITDA (operating income (loss) plus depreciation and amortization) should not be construed as an indicator of the Company's operating performance, or as an alternative to cash flows from operating activities as a measure of liquidity. The Company has presented EBITDA solely as supplemental disclosure because the Company believes that it enhances the understanding of the financial performance of companies with substantial depreciation and amortization. For fiscal 1993, EBITDA excludes approximately $1.8 million of nonrecurring compensation charges, for fiscal 1995, EBITDA excludes approximately $2.1 million of pre-opening expenses, and for fiscal 1994 and 1995, EBITDA includes approximately $371,000 and $2.2 million, respectively, of life insurance benefits. (4) Net cash used in investing activities includes amounts expended by the Company for capital expenditures. (5) Of amounts shown, approximately $3.6 million in fiscal 1991, $2.8 million in fiscal 1992, $6.5 million in fiscal 1993, $4.4 million in fiscal 1994, $4.6 million in fiscal 1995, $1.3 million for the three months ended February 28, 1995 and $0.9 million for the three months ended February 29, 1996 related to recurring capital expenditures for maintenance of the current facilities. (6) The PRO FORMA data gives effect to (i) the Exchange Offer, (ii) the incurrence of indebtedness under the Iowa Loan, (iii) the incurrence of indebtedness under the Promissory Note and (iv) the Offering and the application of the proceeds therefrom to repay certain indebtedness, in each case as if such transaction had occurred or such indebtedness had been incurred on the first day of the period presented. (7) Adjusted to give effect to the Exchange Offer and the Offering and the application of the proceeds therefrom to repay certain indebtedness, in each case as if such transaction had occurred as of February 29, 1996.
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+SUMMARY OF PROSPECTUS THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY IS INTENDED ONLY TO HIGHLIGHT CERTAIN INFORMATION CONTAINED IN THIS PROSPECTUS. IT IS NOT INTENDED TO BE COMPLETE IN ITSELF, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE DETAILED INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. PROSPECTIVE PURCHASERS OF THE NOTES ARE URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY. FOR A DISCUSSION OF CERTAIN RISK FACTORS IN CONNECTION WITH THE OFFERING, SEE "RISK FACTORS". THE COMPANY Harveys Casino Resorts ("Harveys" or the "Company") is an established owner, operator and developer of high-quality hotel/casinos in the state of Nevada and new gaming jurisdictions. The Company owns and operates Harveys Resort Hotel/Casino ("Harveys Resort"), the Lake Tahoe area's largest hotel/casino. Harveys Resort, in operation since 1944, is situated on the south shore of scenic Lake Tahoe on the Nevada/ California state line. The Company owns and operates Harveys Wagon Wheel Hotel/Casino in Central City, Colorado ("Harveys Wagon Wheel"), which opened in December 1994 as the first major hotel/casino serving the greater Denver area. Harveys owns and operates a riverboat casino and is in the process of constructing a hotel/convention center, scheduled to open in mid-1996, in Council Bluffs, Iowa ("Harveys Casino/Hotel") across the Missouri River from Omaha, Nebraska. The Harveys Casino/Hotel riverboat casino opened on January 1, 1996 and is one of only three operators in the Omaha/Council Bluffs gaming market, which also includes one other riverboat casino and a slot machine operator at the local dogtrack. In addition, through a joint venture between Harveys and the Hard Rock Cafe co-founder Peter A. Morton, Harveys owns 40% of and manages the Hard Rock Hotel and Casino in Las Vegas, Nevada (the "Hard Rock Hotel"), which opened in March 1995. For the twelve months ended February 29, 1996, Harveys generated net revenues and earnings before interest, taxes, depreciation and amortization ("EBITDA") of $184.3 million and $38.5 million, respectively. See note 3 of "Summary Financial Data". BUSINESS STRATEGY The Company's business strategy is to develop premium hotel/casino facilities in markets in which the Company believes it can establish and maintain a prominent or niche position. Each of Harveys' properties offers casino gaming and a full array of amenities in a friendly atmosphere that caters to middle- and upper-middle income customers. The Company's strategy focuses on five key components: high-quality facilities and superior customer service, strategic locations, a targeted customer base, effective marketing and an emphasis on slot play. Harveys' properties are strategically located on highly visible sites or near regional population centers. The Company seeks to attract customers with higher disposable incomes by offering well-appointed rooms, quality food and beverages, and an array of gaming and non-gaming amenities. The Company also has established extensive customer databases and uses sophisticated player-tracking systems to develop and monitor playing habits of its customers. In response to customer preferences at certain of the Company's properties, the Company has changed its mix of games at such properties to increase the number of slot machines. Compared to table games, slot machines are less labor-intensive, require less square footage and generate higher profit margins. The Company monitors payment percentages closely and ensures that its slot machine payouts are competitive. Each of Harveys' properties is aggressively promoted through advertising campaigns tailored to its targeted customer base in each market. The Company promotes each property through various combinations of newspaper and broadcast advertisements, billboards, regular promotions and sweepstakes, as well as point-of-sale material in nearby hotels, restaurants and visitor attractions. As part of its commitment to ensuring a high level of customer satisfaction, Harveys is dedicated to ensuring customer loyalty by providing attentive customer service in a friendly environment. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. HARVEYS RESORT Harveys Resort, the largest hotel/casino in the Lake Tahoe area, is located on approximately 19.8 acres on U.S. Highway 50, the main route through South Lake Tahoe. The hotel/casino, situated on the south shore of Lake Tahoe with a panoramic view of the lake and surrounding mountains, is among Lake Tahoe's most modern facilities. The main structure is an all-glass 17-story tower which was completed in 1991, connected to a 12-story tower which was completely re-built in 1982. Harveys Resort features 740 rooms, 36 of which are luxury suites, and an 88,000 square foot casino containing approximately 2,100 slot machines, 105 table games, a 15-table poker area, a race and sports book and a keno lounge. Other amenities include 23,000 square feet of convention space, 2,967 parking spaces, the 280-seat Emerald Theater and Cabaret, a wedding chapel, restaurants, retail shops, a pool, a health club and a video arcade. Harveys Resort's eight restaurants offer a wide variety of high quality food and consist of a coffee shop, a Mexican restaurant, a seafood and pasta restaurant, a pizzeria, a premier steakhouse, a buffet, a burger emporium and Llewellyn's, Harveys Resort's award-winning restaurant that features top quality food and a spectacular view of Lake Tahoe. In recognition of the outstanding quality of the facility and its excellent service, Harveys Resort has received both the Mobil Four Star and AAA Four Diamond Awards every year for the last 15 years. Management has allocated a total of $20.0 million for capital improvements to be made to Harveys Resort through 1997 to increase the Company's market share and to position the Company to benefit from the ongoing South Lake Tahoe Redevelopment Project. The South Lake Tahoe gaming market generated approximately $320 million in gaming revenues in each of the last three years. The Lake Tahoe area is a unique gaming location because of its natural surroundings and variety of year-round outdoor recreational activities, including skiing, boating, fishing and golfing. The South Lake Tahoe area draws tourists primarily from nearby Reno and Northern California. There are four major casinos in this market to serve the approximately 2 million annual visitors. Existing environmental regulations prevent the addition of new gaming facilities or the expansion of existing hotel/ casinos. Management seeks to attract middle- to upper-middle income customers to Harveys Resort by offering well-appointed rooms and a "party" atmosphere for those seeking nightlife and entertainment. The Company has increased its share of gaming revenues in South Lake Tahoe to approximately 27% in 1995 from approximately 24% in 1989 due largely to its effective marketing campaigns. Management believes that by continuing to focus its efforts on the maintenance of customer relationships and the Harveys image, it will increase its share of higher-income customers in the South Lake Tahoe market. In response to the increased popularity of slot machines over the past several years, Harveys Resort has shifted its gaming mix toward slot machines. Harveys Resort now includes a greater percentage of $1 and higher denominated machines to appeal to the higher-income gaming clientele of Harveys Resort, including $5, $25 and $100 slot machines offered within a premium player section. This increase in higher denominated machines increased win per unit at Harveys Resort by approximately 19% between 1988 and 1994. HARVEYS WAGON WHEEL Through Harveys Wagon Wheel, which opened in December 1994, the Company established the first major hotel/casino serving the greater Denver area. Harveys Wagon Wheel is located on a highly visible site in Central City, Colorado, a picturesque mountain town approximately 35 miles west of Denver. Unlike most existing gaming facilities in the Central City area, which offer no overnight accommodations, scarce on-site parking and few non-gaming amenities, Harveys Wagon Wheel includes approximately 40,000 square feet of casino space, 850 slot machines (approximately 250 more than are currently offered by any other gaming facility in the area), 18 table games, a nine-table poker area, a 118-room hotel and 195 on-site parking spaces. Other amenities include a 220-seat coffee shop/buffet, a snack bar, an entertainment lounge and a children's arcade. No other casino in Central City/Black Hawk currently offers all of these amenities. In 1995, the Central City/Black Hawk market hosted approximately 3 million visitors and generated gaming revenues of more than $290.7 million, an increase of 18.7% over gaming revenues of $244.9 million in 1994. Harveys Wagon Wheel targets middle- to upper-income customers from the greater Denver area who seek a quality gaming experience, convenient parking and overnight accommodations. By offering a facility with overnight accommodations and more amenities than are offered by other casinos in the Central City/ Black Hawk market, Harveys Wagon Wheel has been successfully building a loyal customer base. The Company attracts customers to Harveys Wagon Wheel by aggressively promoting the facility's hotel rooms, on-site parking, quality dining facilities and varied entertainment activities in a market in which such amenities are a distinct competitive advantage. On April 30, 1996, the Company exchanged 382,500 shares of the Company's common stock, par value $.01 per share ("Common Stock"), for (i) 30% of the equity interests of Harveys Wagon Wheel Casino Limited Liability Company ("HWW"), an entity in which the Company held a 70% equity interest prior to the consummation of the acquisition and which owns Harveys Wagon Wheel, (ii) the rights to an approximately $3.0 million priority return from HWW and (iii) an option to acquire an additional 5% of the equity interests of HWW (the "Minority Interest"). Upon consummation of the acquisition, HWW and Harveys Wagon Wheel became wholly-owned by the Company. In addition, on such date the Company exchanged $8.0 million in principal amount of the Company's Subordinated Notes due December 31, 2000 (the "Subordinated Notes") and $6.0 million cash for $11.9 million in aggregate principal amount of HWW 12% Senior Notes due 1997 (the "HWW Notes"), constituting all of the outstanding HWW Notes, and $1.9 million of unpaid interest accrued thereon. A portion of the proceeds of the Offering will be used to redeem the Subordinated Notes. HARVEYS CASINO/HOTEL On January 1, 1996, the Company opened, as the first phase of Harveys Casino/Hotel, a 1,700-passenger riverboat casino berthed on the Missouri River directly across from Omaha, Nebraska in Council Bluffs, Iowa. The riverboat casino has more than 23,500 square feet of casino space on two decks and contains 883 slot machines and 51 table games. Land-based amenities at Harveys Casino/Hotel include surface parking for approximately 1,100 cars, and will include a 14-story, 251-room hotel with a 21,000 square foot convention center by mid-1996 and additional surface parking for approximately 500 cars. Harveys Casino/Hotel is within a ten-minute drive from the Omaha/Council Bluffs regional airport and is located directly off of Interstate 29, Interstate 80 and Interstate 480. Harveys Casino/Hotel is located on a 60-acre parcel of land which the Company acquired from the City of Council Bluffs. Approximately 20 acres of the site are occupied by a municipal nine-hole golf course, which is leased to the City of Council Bluffs for a nominal fee. This arrangement allows Harveys the option of using this land for future expansion needs. In addition, the Company has acquired an adjacent 44-acre site to accommodate future expansion or support facilities. Harveys Casino/Hotel's target market is the approximately 650,000 residents in the greater Omaha metropolitan area and the nearly 3 million adults within a three-hour drive of the facility. In addition, the casino, hotel and convention facilities will be marketed to the estimated 2.5 million visitors and tourists who visit the Omaha metropolitan area annually. Harveys Casino/Hotel markets itself as "The Preferred Place to Play" in the Omaha/Council Bluffs market through the extensive use of television and newspaper advertisement, billboards, regular promotions and sweepstakes as well as point-of-sale materials located in local hotels, restaurants and other visitor attractions. Harveys Casino/Hotel targets frequent, mid-level players from Omaha, Council Bluffs and the surrounding areas. The Company anticipates that the hotel and convention facilities that are currently under construction and are scheduled to open in mid-1996 will attract new players by capturing overnight guests and meeting and small convention business. In addition, by positioning the property as the "Preferred Place to Play", management believes that Harveys Casino/Hotel will attract a large percentage of the gaming revenues generated by the Omaha/Council Bluffs regional population and visitors to the Omaha/Council Bluffs area. HARD ROCK HOTEL AND CASINO The Company, through a joint venture with Peter A. Morton, co-founder of the Hard Rock Cafes, developed the Hard Rock Hotel, which opened in March 1995 in Las Vegas, Nevada. The Company owns a 40% equity interest in and manages this unique first-class facility which is modeled after the highly successful Hard Rock Cafe concept and targets younger and higher-income gaming patrons. Under the terms of a management agreement relating to the Hard Rock Hotel, the Company receives a management fee equal to 4% of the adjusted gross revenues derived from the Hard Rock Hotel plus additional incentive compensation of up to 2% of adjusted gross revenues if certain performance targets are achieved by the Hard Rock Hotel. Located three blocks from the Las Vegas Strip and five minutes from McCarran International Airport, the 339-room hotel and casino houses 28,000 square feet of casino space containing 802 slot machines, 39 table games and a sports and race book. The Hard Rock Hotel features the Hard Rock Beach Club offering lush landscaping, whirlpools, luxury cabanas and a sandy beach, and "The Joint", a live music venue with a 1,400-person capacity. Additional amenities include a health club, retail store, and two restaurants, a 24-hour casual dining coffee shop and Mortoni's, an Italian fine dining room, with a view of the Hard Rock Beach Club, offering indoor and garden patio dining. The hotel/casino also provides parking spaces for approximately 1,285 cars. The Hard Rock Hotel is located adjacent to the Hard Rock Cafe on approximately 16 acres of land with 1,200 feet of frontage near the intersection of Paradise Road and Harmon Avenue. The site is conveniently located at one of the busiest intersections in Las Vegas and is a short distance from the Las Vegas Convention Center, three non-gaming full service hotels with a combined total of approximately 850 rooms and the New Four Corners, which includes major casinos such as the MGM Grand Casino Hotel and Theme Park. The Hard Rock Hotel hosts special events such as award presentations to rock stars and other celebrities, film premiere parties and fundraising and other charitable activities, as well as frequently-scheduled live entertainment, in order to attract its target customers, who tend to be younger and have higher disposable incomes than the average Las Vegas visitor. The Company believes that the Hard Rock Hotel appeals to higher income patrons because of the Hard Rock theme, upscale hotel facilities and the wide variety of special events designed to maintain the image of the facility in the mind of the Hard Rock Hotel customer base. THE OFFERING <TABLE> <S> <C> Notes......................... $150,000,000 principal amount of % Senior Subordinated Notes Due 2006 (the "Notes"). Maturity Date................. , 2006. Interest Payment Dates........ and , commencing , 1996. Guarantees.................... The Notes will be fully and unconditionally guaranteed (the "Guarantees") jointly and severally by the Company's Restricted Subsidiaries (as defined herein). Optional Redemption........... The Notes are redeemable at the option of the Company, in whole or in part, at any time on or after , 2001 at the redemption prices set forth herein, plus accrued interest to the date of redemption. See "Description of the Notes -- Optional Redemption". Special Redemption............ The Notes are subject to redemption requirements imposed by gaming laws and regulations of the state of Nevada. See "Description of the Notes -- Optional Redemption". Subordination................. The Notes are general unsecured obligations of the Company, subordinated in right of payment to all existing and future Senior Debt (as defined herein) of the Company. Each Guarantee will be a general unsecured obligation of the guaranteeing Restricted Subsidiary (each a "Guarantor" and collectively the "Guarantors"), subordinated in right of payment to all existing and future Senior Debt of such Guarantor. As of February 29, 1996, on a PRO FORMA basis after giving effect to the Exchange Offer and the offering of the Notes made hereby (the "Offering") and application of the net proceeds therefrom, the Company and its subsidiaries would have had approximately </TABLE> <TABLE> <S> <C> $14 million of indebtedness outstanding that would have constituted Senior Debt and approximately $28.8 million of trade payables and accrued liabilities. Change of Control............. Upon a Change of Control (as defined herein), each holder of the Notes will have the right to require the Company to repurchase such holder's Notes at 101% of the principal amount thereof, plus accrued interest to the repurchase date. The Company's ability to make such a repurchase may be limited by its financial condition at the time, covenants in Senior Debt documents or its inability to finance such a repurchase. Such a repurchase may cause cross defaults under existing or future indebtedness and would make a takeover of the Company more expensive to a potential acquirer and accordingly may make such a takeover less likely. In any event, the Company must comply with all applicable laws, including Section 14(e) of the Securities Exchange Act of 1934, as amended, and the rules thereunder, in the event that it is required to offer to repurchase any Notes upon a Change of Control. See "Risk Factors" and "Description of the Notes -- Repurchase at the Option of Holders". Certain Covenants............. The indenture governing the Notes (the "Indenture") contains certain covenants that impose limitations on, among other things, (i) the incurrence of additional indebtedness by the Company or any Restricted Subsidiary (as defined herein), (ii) the payment of dividends, (iii) the repurchase of capital stock and the making of certain other Restricted Payments and Restricted Investments (each as defined herein) by the Company or any Restricted Subsidiary, (iv) mergers, consolidations and sales of assets by the Company or any Restricted Subsidiary, (v) the creation or incurrence of liens on the assets of the Company or any Restricted Subsidiary and (vi) transactions by the Company or any of its subsidiaries with Affiliates (as defined herein). These limitations are subject to a number of important qualifications and exceptions. See "Description of the Notes". Use of Proceeds............... The net proceeds of the Offering, estimated to be approximately $144.5 million, will be used by the Company to repay (i) approximately $107.1 million of indebtedness incurred under the Company's reducing revolving credit facility (the "Credit Facility"); (ii) $7.8 million to redeem the entire $8.0 million principal amount outstanding of the Subordinated Notes; (iii) a $10.0 million promissory note evidencing indebtedness incurred by the Company to fund construction of a parking garage adjacent to Harveys Wagon Wheel (the "Promissory Note"); and (iv) approximately $19.6 million of indebtedness incurred to finance the purchase of the riverboat casino at Harveys Casino/ Hotel (the "Iowa Loan"). See "Use of Proceeds". </TABLE> SUMMARY FINANCIAL DATA The following table sets forth selected summary financial data of the Company for the years ended November 30, 1991 through November 30, 1995 and the three months ended February 28, 1995 and February 29, 1996. The income statement and balance sheet data for the years ended November 30, 1991 through November 30, 1995 are derived from the Company's audited consolidated financial statements for such periods which, except for 1991 and 1992, are included elsewhere in this Prospectus. The Summary Financial Data are not necessarily indicative of the Company's future results of operations or financial condition, and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements of the Company, including the notes thereto, and the other financial and statistical information appearing elsewhere in this Prospectus. The Summary Financial Data presented below as of and for the three months ended February 28, 1995 and February 29, 1996 are derived from unaudited consolidated financial statements of the Company; however, in the opinion of the Company, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the Company's financial position and result of operations for such periods have been included. Operating results for the three months ended February 28, 1995 and February 29, 1996 are not necessarily indicative of the results that may be expected for future periods, including the entire year ending November 30, 1996. The Summary Financial Data include operating results for Harveys Wagon Wheel from its opening on December 2, 1994, for the Hard Rock Hotel from its opening on March 9, 1995 and for Harveys Casino/Hotel from the opening of the riverboat casino on January 1, 1996. <TABLE> <CAPTION> THREE MONTHS ENDED FISCAL YEARS ENDED NOVEMBER 30, ------------------------------- ------------------------------------------------ FEBRUARY 28, FEBRUARY 29, 1991 1992 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- -------------- -------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF INCOME DATA: Net revenues............................ $127,517 $132,482 $132,259 $128,286 $173,200 $ 38,337 $ 49,474 Depreciation and amortization........... 11,027 10,786 10,300 9,704 12,333 3,015 3,561 Pre-opening expense..................... -- -- -- -- 2,147 2,147 3,590 Operating income (loss)................. 11,247 14,754 12,193 10,382 18,354 (528) 895 Interest expense, net (1)............... (6,091) (5,084) (4,256) (2,886) (7,960) (1,725) (1,954) Net income (loss) (2)................... $ 3,197 $ 7,612 $ 4,809 $ 5,138 $ 9,345 $ (1,117) $ (576) -------- -------- -------- -------- -------- -------------- -------------- -------- -------- -------- -------- -------- -------------- -------------- OTHER OPERATING DATA: EBITDA (3).............................. $ 22,274 $ 25,540 $ 24,327 $ 20,458 $ 35,080 $ 4,634 $ 8,046 Net cash provided by (used in): Operating activities.................. 18,878 25,656 15,563 14,106 14,270 6,225 10,917 Investing activities (4).............. (8,518) (15,585) (25,592) (33,505) (74,244) (13,532) (29,488) Financing activities.................. (5,618) (3,938) (730) 15,506 63,021 14,393 23,156 Capital expenditures (5)................ 8,690 10,034 10,648 35,593 70,709 9,549 29,655 PRO FORMA DATA (6): Interest expense, net (1)....................................................... $ 12,460 N/A $ 2,720 EBITDA/Interest expense, net (1)................................................ 2.8x N/A 3.0x </TABLE> <TABLE> <CAPTION> AT FEBRUARY 29, 1996 ------------------------- ACTUAL AS ADJUSTED (7) -------- --------------- (UNAUDITED) <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents............... $ 15,078 $ 15,078 Total assets............................ 346,855 352,164 Long-term debt.......................... 147,362 161,461 Stockholders' equity.................... 131,780 138,680 </TABLE> - - ------------------------------ (1) Net of amounts capitalized and interest income. (2) For fiscal 1992, net income includes approximately $1.6 million of nonrecurring income items (approximately $1.1 million net of tax). (3) EBITDA (operating income (loss) plus depreciation and amortization) should not be construed as an indicator of the Company's operating performance, or as an alternative to cash flows from operating activities as a measure of liquidity. The Company has presented EBITDA solely as supplemental disclosure because the Company believes that it enhances the understanding of the financial performance of companies with substantial depreciation and amortization. For fiscal 1993, EBITDA excludes approximately $1.8 million of nonrecurring compensation charges, for fiscal 1995, EBITDA excludes approximately $2.1 million of pre-opening expenses, and for fiscal 1994 and 1995, EBITDA includes approximately $371,000 and $2.2 million, respectively, of life insurance benefits. (4) Net cash used in investing activities includes amounts expended by the Company for capital expenditures. (5) Of amounts shown, approximately $3.6 million in fiscal 1991, $2.8 million in fiscal 1992, $6.5 million in fiscal 1993, $4.4 million in fiscal 1994, $4.6 million in fiscal 1995, $1.3 million for the three months ended February 28, 1995 and $0.9 million for the three months ended February 29, 1996 related to recurring capital expenditures for maintenance of the current facilities. (6) The PRO FORMA data gives effect to (i) the Exchange Offer, (ii) the incurrence of indebtedness under the Iowa Loan, (iii) the incurrence of indebtedness under the Promissory Note and (iv) the Offering and the application of the proceeds therefrom to repay certain indebtedness, in each case as if such transaction had occurred or such indebtedness had been incurred on the first day of the period presented. (7) Adjusted to give effect to the Exchange Offer and the Offering and the application of the proceeds therefrom to repay certain indebtedness, in each case as if such transaction had occurred as of February 29, 1996.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001014920_optika-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001014920_optika-inc_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Prospective investors should consider carefully the information discussed under "Risk Factors." This Prospectus contains forward-looking statements which involve substantial risks and uncertainties. The Company's actual results could differ materially from the results discussed in these forward-looking statements. Factors that could cause or contribute to such differences include those discussed in "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" and elsewhere in this Prospectus. THE COMPANY Optika Imaging Systems, Inc. ("Optika" or the "Company") is a leading provider of high-performance, client/server, integrated imaging software designed to meet the needs of paper intensive industries such as healthcare, financial services, insurance and retail. The Company's FilePower Suite is comprised of server software, which provides core imaging functions, application software for document image management, computer output to laser disc ("COLD") and automated workflow transaction processing, and associated development tools. The FilePower Suite is easy to install, use and integrate with end-users' existing information systems and is designed to be deployed at the departmental or workgroup level and then scale throughout the enterprise. The Company believes that the FilePower Suite enables end-users to reduce costs, improve operational productivity and enhance customer service. The Company has licensed over 27,000 seats to its end-users, which include John Hancock Mutual Life Insurance Company, Merrill Lynch, Pierce, Fenner & Smith Inc., Mitsubishi Finance International Plc, Pascack Valley Hospital, Price Costco, Inc. and St. Elizabeth Medical Center. The open client/server architecture of the FilePower Suite enables it to be tailored for industry-specific applications. The Company believes it is one of the leading providers of imaging solutions to the healthcare industry, based on over 80 installations of the FilePower Suite, although healthcare revenues compromised approximately 9% of the Company's total revenue during the first six months of 1996. The Company is seeking to capitalize on the size of the installed base of the FilePower Suite in the healthcare industry through the development of an integrated patient accounting and medical records software suite (the "MediPower Suite") designed to enable hospitals and other healthcare organizations to manage large amounts of patient related documents. The MediPower Suite incorporates document image management, COLD and automated workflow transaction processing technologies and is designed to provide fast and efficient access to patient information from workstations located throughout the enterprise, including the point of patient care. The growth of the market for document image processing systems is being driven by: (i) improved price/performance characteristics of client/server distributed computing systems, (ii) the widespread deployment of client/server computing systems connected to an infrastructure of local and wide area networks ("LANS" and "WANS") and (iii) increased competitive pressures for businesses to improve productivity and reduce costs, especially in paper- intensive industries. The production segment of the document imaging market includes applications that handle large volumes of paper and perform structured business functions such as patient records management, insurance claim processing, loan processing and accounts payable processing. According to a study by BIS Strategic Decisions, the software component of the North American production imaging segment has grown from approximately $264 million in 1993 to approximately $366 million in 1995 and is projected to grow to approximately $682 million by 1998. The Company distributes its products through a two-tiered distribution model consisting of a worldwide network of approximately 170 value-added resellers ("VARs"), distributors and systems integrators referred to as Business Solutions Partners ("BSPs") and three original equipment manufacturers ("OEMs"), Lanier Worldwide, Inc., Alltel Healthcare Information Services, Inc. and Anacomp, Inc. The Company's BSPs and OEMs are responsible for identifying potential end-users, selling the Company's products to end-users as part of a complete hardware and software solution, customizing and integrating the Company's products at the end-users' sites and supporting end-users following the sale. The Company's software products operate on a variety of open computing platforms, including Windows 3.x, Windows 95 and Windows NT on the client desktop, Windows NT and Novell Netware as servers and UNIX for SQL database support. The Company's strategy is to extend its position as a technology leader in developing and marketing open architecture, client/server imaging software solutions, strengthen its network of BSPs and OEMs in targeted domestic and international markets, focus on scalable solutions, lower the cost of ownership to its customers and capitalize on opportunities in the healthcare and other vertical markets. THE OFFERING <TABLE> <S> <C> Common Stock offered by: The Company............................... 2,200,000 shares The Selling Stockholders.................. 700,000 shares Common Stock to be outstanding after this offering................................... 6,547,494 shares(1) Use of proceeds............................. Repayment of indebtedness, working capital and other general corporate purposes. See "Use of Proceeds." Nasdaq National Market symbol............... OPTK </TABLE> - -------- (1) Based on the number of shares outstanding as of June 30, 1996. Excludes 1,981,370 shares of Common Stock issuable upon exercise of stock options and warrants outstanding as of June 30, 1996 at a weighted average exercise price of $2.08 per share, and 545,431 shares of Common Stock reserved for grant of future options as of June 30, 1996 under the Company's 1994 Stock Option/Issuance Plan (the "1994 Stock Plan"). Since June 30, 1996, the Company has not granted additional options to purchase Common Stock or issued any shares of Common Stock. Also excludes 250,000 shares of Common Stock reserved for issuance pursuant to the Employee Stock Purchase Plan. See "Capitalization," "Management," "Description of Capital Stock" and Notes 7 and 10 of Notes to Consolidated Financial Statements. SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, -------------------------------------- ---------------- 1991 1992 1993 1994 1995(2) 1995 1996 ------ ------ ------ ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA(1): Revenues................ $2,686 $4,771 $9,043 $ 9,252 $10,468 $ 4,433 $ 6,960 Gross profit............ 2,359 3,883 6,499 6,950 8,329 3,487 5,816 Income (loss) from operations............. 152 118 545 (1,875) (522) (720) 48 Net income (loss)....... 101 (39) 27 (1,732) (962) (756) 45 Pro forma net income (loss) per common share(3)............... $ (0.20) $ (0.16) $ 0.01 Pro forma weighted average number of common shares outstanding(3)......... 4,811 4,787 5,730 </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 ----------------------- PRO FORMA ACTUAL AS ADJUSTED(4) -------- -------------- <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA(1): Cash.................................................... $ 603 $ 13,775 Working capital......................................... 1,839 15,123 Total assets............................................ 7,022 20,194 Long-term debt, excluding current portion............... 341 303 Convertible preferred stock............................. 4,804 -- Total stockholders' equity (deficit).................... (1,916) 16,210 </TABLE> - -------- (1) All financial information reflects the merger of TEAMWorks Technologies, Inc. in January 1994, which was accounted for as a pooling of interests. (2) In December 1995, the Company purchased certain assets and assumed certain liabilities from IPRS Asia (S) Pte Ltd., a Singapore company, and Intuit Development Limited, a Hong Kong company. The results of operations for such companies are included in the Company's consolidated results of operations since the date of the acquisitions. (3) See Note 1 of Notes to Consolidated Financial Statements for an explanation of the calculation of the pro forma weighted average number of common shares outstanding. (4) Pro forma as adjusted to reflect the sale of 2,200,000 shares of Common Stock by the Company, the application of the estimated net proceeds therefrom and the automatic conversion of all outstanding shares of the Series A, B and C Convertible Preferred Stock into 1,500,464 shares of Common Stock. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001014955_excelon_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001014955_excelon_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..88b880ac220a1e83ec2a381adb2a2c4ca47b9b36
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the consolidated financial statements and notes thereto appearing elsewhere in this Prospectus.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001014959_index_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001014959_index_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..f135b1390aad756db381f2e8ba538c4d694c3a02
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and Financial Statements and notes thereto appearing elsewhere in this Prospectus. Except as otherwise indicated, the information set forth in this Prospectus assumes no exercise of the Underwriters' over-allotment option. References to share amounts issued and outstanding prior to this Offering have been adjusted for a .662-for-one reverse stock split effected in May 1996 and assume conversion to Common Stock of all shares of preferred stock outstanding prior to this Offering. THE COMPANY Index Stock Photography, Inc. ("Index Stock" or the "Company") is both a leading still image provider to traditional users of stock photography and an Internet content provider. The Company has developed a proprietary system for image storage, retrieval and transmission (the "Telephoto System") that allows its employees and customers to find, select and receive images electronically, using either keyword- or category-based search techniques. Index Stock licenses its library of more than one million images for fees based upon the type and nature of their use. Since its inception, the Company has licensed images to more than 50,000 customers in 35 countries worldwide. These images are provided to commercial users of stock photography, such as advertisers, graphic designers and publishers, as well as to emerging new markets of multimedia producers, consumer users and desktop publishers in the growing small office / home office ("SOHO") market. The Company distributes images to professional users through two offices in the United States and 21 independent foreign agents and to the consumer and SOHO markets via on-line networks, such as CompuServe, Prodigy, and the World Wide Web portion of the Internet. Index Stock has also developed image selection and layout tools that allow users to search for, select and manipulate electronic versions of down-loaded images. The Company promotes its images using printed and CD-ROM catalogs, direct sales, direct mail, print advertising and public appearances. Companies in the $500 million per year traditional stock photography industry provide a cost-and time-efficient alternative to hiring a professional photographer by providing film-based still images for commercial use in print and video advertisements, and for packages, calendars, greeting cards, magazines, books and newspapers. Rapid technological change, resulting in widespread availability of powerful and inexpensive personal computers and desktop publishing software, is contributing to the consolidation of the stock photography industry. The Company has taken advantage of this trend by acquiring selected assets of four agencies to establish and expand its base of images and photographers. During April 1996, the Company began providing selected customers a secure Internet link to the Telephoto System and believes that direct access to its images via the Internet will continue to be attractive to its professional customer base. Index Stock believes that its Telephoto System gives it a strategic advantage over competitors in the traditional stock photography market. The Company's decision in 1991 to commit fully to digitize and automate its library using electronic imaging and communication technology has also allowed it to expand into the rapidly developing new multimedia, consumer and SOHO markets through on-line services and the Internet. Index Stock believes that these new markets represent its largest opportunity as consumer on-line services and Internet use grow, coupled with the popularity of desktop publishing. Since November 1994, the Company has licensed images directly to consumers through its on-line service, Photos to Go(TR) (available both on CompuServe and the World Wide Web), for use in presentations, school reports, screen savers and as illustrations on both personal and corporate "websites." Consumers can also access and license images through Sprint's TPX system, through Knight-Ridder's PressLink system, and through Infonautics' Electric Library service (available currently on Prodigy, the Microsoft Network, and the World Wide Web). The Company has also published sets of images on CD-ROM discs that are distributed by Corel Corporation and PhotoDisc. Unlike many Internet content providers, Index Stock's consumer market business will not be dependent upon its ability to generate revenues from the sale of advertising. Index Stock's Telephoto System allows it to scan, categorize, store and retrieve thousands of still images in a more cost-effective, timely, and convenient manner than has previously been possible. The Company's library contains images contributed by over 400 independent photographers and graphic artists who are affiliated with the Company, and by 21 other independent still image suppliers, who in turn represent many additional artists. To date, it has stored information on more than 150,000 images in the Telephoto System. With development assistance from companies, including Microsoft, Apple Computer, Netscape, Adobe and Accusoft, who provide technical support, pre-release versions of software, and code libraries, the Company has created a system that can search for and retrieve more than 60 images per minute over a 28.8 kbps modem. The Company's objective is to be the leading provider of still images to both traditional advertising and publishing users and to new consumer and SOHO users. The Company's strategy includes the following key elements: (i) maintain leading edge technology; (ii) develop new multimedia, consumer and SOHO markets; (iii) expand international presence; (iv) expand the Company's image collection by continuing to add photographers, acquire additional collections and affiliate with other sources of still images; and (v) develop and introduce new products and services, including delivery of content other than still images. Index Stock was incorporated in Delaware in April 1991. Its principal executive offices are located at 126 Fifth Avenue, New York, New York 10011 and its telephone number is (212) 929-4644. The Company's Internet mail address is infoindexstock.com. Its address on the World Wide Web is http://www.indexstock.com. THE OFFERING Securities offered ................ 1,000,000 shares Securities outstanding prior to the Offering(1) .................. 1,366,523 shares Securities to be outstanding after the Offering(1) ............ 2,366,523 shares Use of Proceeds ................... To repay certain indebtedness and for general corporate purposes, including working capital - ------ (1) Does not include: (i) 131,076 shares underlying outstanding options to purchase shares under the Company's 1992 Non-qualified Stock Option Plan at exercise prices ranging from $.88 to $4.53 per share; (ii) 132,400 shares underlying warrants exercisable at $6.04 per share issued by the Company in a private financing in April 1996; (iii) 9,930 shares underlying a warrant exercisable at $4.98 per share issued by the Company in a private financing in January 1996; and (iv) 100,000 shares issuable upon the exercise of the Representative's Warrants. SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> Six months Year ended October 31 ended April 30 ----------------------------------- -------------------- 1993 1994 1995 1995 1996 --------- --------- ---------- -------- -------- <S> <C> <C> <C> <C> <C> Statement of Operations Data: Revenues ........................... $ 1,386 $ 1,732 $ 2,215 $ 993 $1,242 Commission expense ................. (410) (512) (705) (291) (419) Selling, general and administrative expenses .......................... (1,066) (1,071) (1,488) (743) (897) Research and development expenses .. (255) (388) (424) (198) (260) --------- --------- ---------- -------- -------- Income (loss) from operations ...... (345) (239) (402) (239) (334) Net income (loss) .................. (358) (255) (421) (245) (357) Accretion of Series A and Series B Preferred Stock ................... (392) (510) (666) (333) (372) Net income (loss) attributable to common stockholders(1) ............ $ (750) $ (765) $(1,087) $ (578) $ (729) ========= ========= ========== ======== ======== Net income (loss) per share attributable to common stockholders(1) .................... $ (0.54) $ (0.52) $ (0.72) $ (.39) $ (.47) ========= ========= ========== ======== ======== Weighted average number of shares used in calculation of income (loss) per share(2) .......................... 1,392 1,478 1,520 1,484 1,550 </TABLE> April 30, 1996 ------------------------------------ Actual As Adjusted(3) -------- -------------- Balance Sheet Data: Working capital ........... $(267) $7,133 Total assets .............. 798 7,698 Long-term liabilities ..... 63 63 Total stockholders' equity . (23) 7,377 - ------ (1) Net income (loss) attributable to common stockholders represents net income (loss) after deducting the accretion of Series A and Series B Preferred Stock. Although the Series A and Series B Preferred Stock will be automatically converted to Common Stock effective with the closing of this Offering, the carrying values of the Preferred Stock have been increased by periodic accretions, based on the interest method, of the difference between the fair value at the dates of issuance and the redemption dates, at which time both amounts would be equivalent. (2) The weighted average number of shares used in calculation of net income (loss) per share includes all shares of Common Stock outstanding during each year and 441,334 shares of Common Stock attributable to the automatic conversion of the Series A and Series B Preferred Stock to Common Stock effective with the closing of this Offering. The 441,334 shares are presumed to be outstanding since the issue date of the Series A and Series B Preferred Stock. In addition, Common Stock and common stock equivalents issued by the Company at prices below the initial public offering price during the twelve month period prior to this Offering have been included in the calculation as if they were outstanding for all periods presented. (3) Adjusted to give effect to (a) the sale of 1,000,000 shares of Common Stock hereby at an assumed initial public offering price of $9 per share (the midpoint of the range of the estimated initial public offering price) and the application of the net proceeds therefrom, after deducting the estimated underwriting discounts and commissions and offering expenses payable by the Company and (b) the automatic conversion of the Company's outstanding Preferred Stock effective with the closing of this Offering. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001014960_telespectr_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001014960_telespectr_prospectus_summary.txt
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+PROSPECTUS SUMMARY Simultaneously with the closing of the offering made by this Prospectus (the "Offering"), TeleSpectrum Worldwide Inc. will acquire, in separate transactions (the "Acquisitions"), a number of telemarketing, market research and direct mail and fulfillment businesses (collectively, the "Operating Businesses") for an aggregate consideration of $160.8 million, which consists of: (i) $90.9 million in cash to be paid to the Sellers of the Operating Businesses described in this Prospectus upon the consummation of the Offering; (ii) forgiveness of a $0.5 million promissory note from one of the Operating Businesses; (iii) the $44.7 million estimated fair value of 4,403,863 shares of Common Stock to be issued to the Sellers; (iv) the $2.1 million estimated fair value of warrants to purchase 593,400 shares of Common Stock at the assumed initial public offering price of $15.00 per share to be issued in connection with the Acquisitions; (v) the $18.7 million deemed value for accounting purposes of the CRW Lender Warrants and CRW Management Warrants as discussed in this Prospectus to purchase 2,272,562 shares of Common Stock currently owned by CRW Financial, Inc. ("CRW Financial") at $1.50 per share; and (vi) estimated transaction costs of $3.9 million. The estimated purchase price for the Acquisitions is subject to certain purchase price adjustments at closing and earn-out arrangements. See "Certain Relationships and Related Party Transactions--The Acquisitions" and "--CRW Transactions." Unless otherwise indicated, all references herein to the "Company" include the Operating Businesses after the effectiveness of the Acquisitions, and references herein to "TeleSpectrum Worldwide" shall mean TeleSpectrum Worldwide Inc. prior to the effectiveness of the Acquisitions. The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, all share, per share and financial information set forth herein: (i) has been adjusted to give effect to the Acquisitions and a 8.510137-for-1 stock split effected through a stock dividend in May 1996; (ii) assumes an initial public offering price of $15.00 per share, which is the midpoint of the range of anticipated public offering prices set forth on the cover page of this Prospectus; and (iii) assumes no exercise of the Underwriters' over-allotment option. In addition, all references to years, unless otherwise noted, refer to the Company's fiscal year, which ends on December 31. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. THE COMPANY TeleSpectrum Worldwide was founded in April 1996 to create a premier provider of integrated teleservices solutions. With the capabilities of the Operating Businesses, the Company can offer its clients complete direct marketing solutions that build upon a foundation of outbound and inbound telemarketing and include inbound customer service, market research, direct mail and fulfillment and other direct marketing services. The Company operates over 1,700 "workstations" (each of which consists of a telephone- and computer- equipped work area designed to accommodate one employee) in 23 call centers located primarily in the eastern United States, and currently has the capacity to handle over 300 million calls per year. The Company focuses on providing teleservices to major clients in the telecommunications, insurance, financial services, pharmaceuticals and healthcare, consumer products and high technology industries. The Company's pro forma revenues were $88.0 million for 1995 (of which the Company estimates that approximately 60% was derived from outbound telemarketing) and $57.7 million for the six months ended June 30, 1996, and its pro forma net income was $2.6 million for 1995 and $2.5 million for the six months ended June 30, 1996. The teleservices industry facilitates the direct communication of marketing information to and from current and prospective customers by telephone. Direct marketing methods, such as telemarketing and direct mail, employ a "one-to-one" approach to deliver a marketing message directly to a specific current or prospective customer and to elicit immediate customer response. As businesses seek greater returns from their investments in marketing activities, they are increasingly coupling traditional indirect marketing methods such as advertising with direct marketing methods such as telemarketing. Advances in computer and telecommunications technology are helping telemarketers to more accurately identify and contact prospective customers, and are providing call center representatives ("CCRs") with more complete on-line guidance and support. Improvements in the scale and speed of computer and telecommunications networking capabilities allow teleservices providers to implement larger and more complex programs for their clients. As the trend toward outsourcing continues, the Company believes, based upon management's experience in the teleservices industry and in other industries which provide or use outsourced services, that businesses will increasingly seek to reduce the number of vendors they utilize, and may prefer single-source providers of integrated solutions drawing upon a variety of related teleservices capabilities. Moreover, the Company believes that further opportunities may emerge for an integrated teleservices provider that can assemble and offer other value-added teleservices, such as inbound customer service, market research, direct mail and fulfillment, training, consulting, call center management and electronic order processing. See "Business--Industry Overview" and "--Competition." The Company's goal is to become the premier provider of integrated teleservices solutions. To attain this goal, the Company intends to provide a single source for complete, integrated solutions to its clients' direct marketing and customer service needs, establish long-term relationships with major clients, add new clients in its targeted industries and pursue strategic acquisitions that will enable the Company to broaden its market reach. See "Business-- Strategy" and "--Sales, Marketing and Clients." The Company is being formed by the Acquisitions of substantially all of the assets of the following Operating Businesses from the entities described below and their affiliates (the "Sellers"): The SOMAR Business ("SOMAR")--Headquartered in Salisbury, North Carolina, SOMAR, Inc. operates 712 workstations in seven call centers located in North Carolina and West Virginia. SOMAR currently focuses on outbound services and has a diverse portfolio of clients in the insurance, financial services, telecommunications and retail industries. The NBG Business ("NBG")--Headquartered in Cambridge, Massachusetts, NBG Services, Inc. operates 314 workstations in seven call centers located in Massachusetts and Arizona. NBG provides outbound telemarketing services to clients in the high technology, financial services and telecommunications industries. NBG also provides market research, database development and account management services. The Harris Businesses ("Harris")--Harris Direct Marketing, Inc. ("HDM"), headquartered in Philadelphia, Pennsylvania, and Harris Fulfillment, Inc. ("HFI"), headquartered in King of Prussia, Pennsylvania, comprise a regional vertically-integrated direct mail and fulfillment organization. Harris provides its services primarily to companies in the pharmaceuticals and healthcare, financial services and insurance industries. In addition, Harris operates an automated inbound call center to provide fulfillment services to a client in the pharmaceuticals and healthcare industry. The Reich Business ("Reich")--Headquartered in Philadelphia, Pennsylvania, The Reich Group, Inc. and its affiliates comprise a fully-integrated direct marketing company with expertise in strategic planning, marketing, telemarketing and database development services. Reich, which operates 320 workstations in three call centers, specializes in providing services to companies in the financial services, telecommunications and insurance industries. The TeleSpectrum Business ("TeleSpectrum")--Headquartered in Annapolis, Maryland, TeleSpectrum, Inc. provides inbound and outbound telemarketing and fulfillment services. TeleSpectrum operates 307 workstations in four call centers and focuses on providing inbound customer services to companies in the high technology, pharmaceuticals and healthcare and consumer products industries. In addition, TeleSpectrum's affiliate provides call center management outsourcing and telemarketing consulting and training services for businesses. The Response Center Business ("The Response Center")--Headquartered in Upper Darby, Pennsylvania, The Response Center, Inc. and its affiliate provide custom market research, data tabulation, analysis and consulting, principally to clients in the telecommunications, financial services, utilities and pharmaceuticals and healthcare industries. The Response Center operates 130 workstations in one call center. The Company maintains its principal executive offices at 443 South Gulph Road, King of Prussia, Pennsylvania 19406, and has facilities in Arizona, California, Delaware, Maryland, Massachusetts, North Carolina, Pennsylvania and West Virginia. The telephone number of its principal executive offices is (610)-962- 5140. See "Business--TeleSpectrum Worldwide Facilities." THE OFFERING COMMON STOCK OFFERED: <TABLE> <S> <C> By the Company....................... 10,286,000 shares By the Selling Stockholder........... 334,000 shares TOTAL OFFERING(1) ..................... 10,620,000 shares COMMON STOCK OUTSTANDING AFTER THE OFFERING(2)(3)........................ 23,200,000 shares USE OF PROCEEDS BY THE COMPANY......... To pay the cash portion of the purchase price for the Operating Businesses, to repay indebtedness assumed in connection with the Acquisitions, to make certain capital expenditures and to fund general corporate purposes, including working capital and possible acquisitions. See "Use of Proceeds." DIVIDEND POLICY........................ The Company intends to retain its earnings to fund development of its business and does not anticipate paying cash dividends in the foreseeable future. See "Dividend Policy." RISK FACTORS........................... For a discussion of certain considerations relevant to an investment in the Common Stock, see "Risk Factors." NASDAQ NATIONAL MARKET SYMBOL.......... "TLSP" </TABLE> - -------- (1)Assumes that the Underwriters' over-allotment option for up to 1,593,000 shares of Common Stock is not exercised. See "Underwriting." (2)Includes 4,403,863 shares of Common Stock to be issued in connection with the closing of the Acquisitions. Excludes additional shares of Common Stock which may be issued to three of the Sellers pursuant to earn-out arrangements. See "Certain Relationships and Related Party Transactions--The Acquisitions." (3)Excludes 1,436,100 shares of Common Stock issuable upon the exercise of options to be granted on the date of this Prospectus under the TeleSpectrum Worldwide Inc. 1996 Equity Compensation Plan (the "1996 Stock Incentive Plan") and 593,400 shares of Common Stock issuable upon the exercise of warrants to be granted on the date of this Prospectus. All of such options and warrants have a per share exercise price equal to the initial public offering price. Also excludes 400,000 shares that would be issuable upon the exercise of options that the Company is to grant, pursuant to employment agreements with two of its executive officers, ratably over the course of the next four years. As of the date of this Prospectus, 863,900 additional shares are reserved for future issuance under the 1996 Stock Incentive Plan (463,900 shares, if all of the options to be granted to two of its executive officers over the next four years were to be granted). See "Certain Relationships and Related Party Transactions--The Acquisitions" and "Management--Employment Agreements" and "-- 1996 Stock Incentive Plan." SUMMARY PRO FORMA COMBINED FINANCIAL DATA TeleSpectrum Worldwide will acquire, simultaneously with and as a condition to the consummation of the Offering, the Operating Businesses. These Acquisitions will be recorded using the purchase method of accounting. The Summary Pro Forma Combined Financial Data assume the consummation of the Acquisitions and the consummation of the Offering. See "Certain Relationships and Related Party Transactions--The Acquisitions," "Pro Forma Combined Financial Statements" and "Notes to Pro Forma Combined Financial Statements." <TABLE> <CAPTION> ---------------------------------------- PRO FORMA YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, 1995 1995 1996 Dollars in thousands, except per share data ------------ ------------ ------------ <S> <C> <C> <C> PRO FORMA STATEMENT OF INCOME DATA(1): Revenues $87,954 $42,588 $57,706 Cost of services 59,597 27,337 39,317 Selling, general and administrative expense(2) 17,525 8,657 10,956 Goodwill amortization(3) 5,860 2,930 2,930 ------- ------------ ------------ Operating income 4,972 3,664 4,503 Interest income 158 28 103 Interest expense(4) (94) (34) (49) ------- ------------ ------------ Income before income taxes 5,036 3,658 4,557 Income taxes(5) 2,407 1,749 2,060 ------- ------------ ------------ Net income $ 2,629 $ 1,909 $ 2,497 ------- ------------ ------------ Net income per share(6) $ 0.12 $ 0.09 $ 0.12 ======= ============ ============ </TABLE> <TABLE> <S> <C> <C> <C> Shares used in computing pro forma net income per share (6) 21,200,000 21,200,000 21,200,000 ----------- ---------- ---------- </TABLE> <TABLE> <CAPTION> ----------------------- AT JUNE 30, 1996 PRO FORMA, ACTUAL AS ADJUSTED(1) Dollars in thousands ------- -------------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents $ -- $ 32,384 Working capital (deficit) (1,506) 45,819 Goodwill -- 146,505 Total assets 22,446 218,175 Long-term debt, less current maturities -- -- Stockholders' equity 20,440 208,310 </TABLE> - -------- (1)Assumes that the closings of the Acquisitions and the Offering had occurred as of January 1, 1995, in the case of the pro forma statement of income data, and as of June 30, 1996, in the case of the pro forma balance sheet data. The pro forma combined financial data are based upon preliminary estimates, available information and certain assumptions that management deems appropriate. The pro forma combined financial data presented herein are not necessarily indicative of the results the Company would have obtained had such events occurred at the beginning of the period or of the future results of the Company. The pro forma combined financial data should be read in conjunction with the other financial data and notes thereto included elsewhere in this Prospectus. The aggregate consideration for the Acquisitions is $160.8 million, which consists of: (i) $90.9 million of cash to be paid to the Sellers upon the consummation of the Offering; (ii) forgiveness of a $0.5 million promissory note from one of the Operating Businesses; (iii) the $44.7 million estimated fair value of 4,403,863 shares of Common Stock to be issued to the Sellers; (iv) the $2.1 million estimated fair value of warrants to purchase 593,400 shares of Common Stock at the assumed initial public offering price of $15.00 per share to be issued in connection with the Acquisitions; (v) the $18.7 million deemed value for accounting purposes of the CRW Lender Warrants and CRW Management Warrants as discussed in this Prospectus to purchase 2,272,562 shares of Common Stock currently owned by CRW Financial at $1.50 per share; and (vi) estimated transaction costs of $3.9 million. The estimated purchase price for the Acquisitions is subject to certain purchase price adjustments at closing and earn-out arrangements. See "Certain Relationships and Related Party Transactions--The Acquisitions" and "--CRW Transactions."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001014964_south_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001014964_south_prospectus_summary.txt
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+SUMMARY The following summary does not purport to be complete and is qualified in its entirety by the more detailed information and financial statements appearing elsewhere herein. Certain terms used in this summary are defined elsewhere herein. South Street Financial Corp. The Holding Company is a North Carolina corporation recently organized by the Board of Directors of Home to acquire all of the capital stock that Home will issue upon its conversion from the mutual to stock form of ownership. The conversion of Home to stock form, the issuance of Home's capital stock to the Holding Company, and the offer and sale of the Common Stock of the Holding Company are referred to in this Prospectus as the "Conversion". The Holding Company has not as yet engaged in any business. Upon completion of the Conversion, its business will initially consist of owning Home, investing the proceeds of the Conversion that are retained by the Holding Company and holding the indebtedness to be outstanding from the ESOP. The Holding Company has received the approval of the Administrator and the Board of Governors of the Federal Reserve System (the "Federal Reserve") to acquire Home. The executive office of the Holding Company is located at 155 West South Street, Albemarle, North Carolina, and its telephone number is (704) 982-9184. Home Savings Bank of Albemarle, S.S.B. Home is a North Carolina-chartered mutual savings bank and has been in operation since 1911. Home has been a member of the Federal Home Loan Bank ("FHLB") system since 1954. Its deposits have been federally insured since 1954 and are now insured by the Savings Association Insurance Fund (the "SAIF") of the FDIC to the maximum amount permitted by law. Home conducts business through its main office in Albemarle, North Carolina and its branch office in Locust, North Carolina. Its primary market area is Stanly County, North Carolina. At March 31, 1996, Home had total assets of $167.0 million, net loans of $106.7 million, deposits of $144.3 million and equity of $20.7 million which is 12.39% of total assets. Home is primarily engaged in the business of attracting retail deposits from the general public and using those deposits to make mortgage loans secured by one-to-four family residential real estate located in Home's primary market area. Home also makes home equity line of credit loans and other subordinate lien loans, loans secured by improved nonresidential real property, loans secured by undeveloped real property and construction loans. See "BUSINESS OF HOME". Home has been and intends to continue to be a community-oriented financial institution offering a variety of financial services to meet the needs of the communities it serves. Highlights of Home's financial condition and operations include: . Profitability. For the six months ended March 31, 1996, and for the fiscal years ended September 30, 1995, 1994 and 1993, Home had net income of $299,000, $1.9 million, $2.0 million and $3.3 million, respectively, and a return on average assets of 0.36%, 1.23%, 1.63% and 2.12%, respectively. Future profitability of Home may be affected by changes in market interest rates and other factors. See "RISK FACTORS -- Potentially Adverse Impact of Changes in Interest Rates". . Capital Position. As of March 31, 1996, Home's ratios of Tier I capital to total assets and total capital to risk-weighted assets were 12.39% and 30.99%, respectively, which substantially exceeded the FDIC's requirements. On such date, Home's ratio of net worth to total assets, calculated under the Administrator's regulations, was 12.65%, which substantially exceeded North Carolina requirements. See "SUPERVISION AND REGULATION -- Regulation of Home -- Capital Requirements Applicable to Home". . Level of Nonperforming Assets. On March 31, 1996 and March 31, 1995, Home's ratio of nonperforming assets to total assets was 0.46% and 0.64%, respectively. As of the end of each of its last five fiscal years, Home's ratio of nonperforming assets to total assets has not exceeded 0.76%. See "RISK FACTORS -- Risks Related to Illiquidity of Home's Loan Portfolio" and "BUSINESS OF HOME -- Lending Activities -- Nonperforming Assets and Asset Classification". . Interest Rate Risk. Home's management measures interest rate risk using gap, net portfolio value, and net interest income analyses. As of March 31, 1996, Home's interest-earning assets less interest-bearing liabilities maturing or repricing within one year as a percentage of total interest-earning assets was a negative 41.58%. At March 31, 1996, Home had a three- year cumulative negative gap of 55.73%. As a result a significant increase in market interest rates would affect Home's results of operations adversely. As of March 31, 1995, $10.5 million of Home's $106.7 million in loans outstanding were to mature or reprice within one year or less. See "RISK FACTORS -- Potentially Adverse Impact of Changes in Interest Rates" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND OPERATING RESULTS --Asset/Liability Management". . Community Orientation. Home historically has been committed to meeting the financial needs of the communities in which it operates. Management believes Home is large enough to provide a range of personal and business financial services, and yet small enough to be able to provide such services on a personalized and efficient basis. The Conversion Home has been studying its strategic options for several years. As a result of its analysis of the existing regulatory environment, the competition it faced and other factors, the Board of Directors of Home decided to pursue the possibility of combining with another financial institution with greater assets and similar management philosophies in a "merger-conversion" transaction. On May 27, 1993, Home entered into an Agreement and Plan of Reorganization (the "Agreement") with BB&T Financial Corporation ("BB&T") pursuant to which Home would convert to the stock form of ownership and simultaneously be merged with Branch Banking and Trust Company, a wholly-owned, North Carolina-chartered commercial bank subsidiary of BB&T. After the FDIC objected to certain aspects of the proposed merger- conversion transaction, Home and BB&T jointly terminated the Agreement on June 20, 1994. Home has continued to evaluate its strategic options, and the existing management of Home now believes that it will be in the best interest of Home to remain an independent financial institution. As a result, its Board of Directors has adopted a Plan of Holding Company Conversion (the "Plan of Conversion") providing for the conversion of Home from a North Carolina-chartered mutual savings bank to a North Carolina-chartered stock savings bank, the concurrent acquisition by the Holding Company of all of the capital stock of Home issued in its conversion from mutual to stock form and the offer and sale by the Holding Company of the Common Stock in the Subscription Offering and, if any shares remain, in the Community Offering and in the Syndicated Community Offering. The Plan of Conversion must be approved by a majority of the votes eligible to be cast by the members of Home at a special meeting to be held on September 17, 1996 (the "Special Meeting"). Consummation of the Conversion is also contingent upon receipt of the approvals of the Administrator and the Federal Reserve which are necessary for the Holding Company to acquire Home and the approvals of the FDIC and the Administrator which are necessary for Home to convert from mutual to stock form. The Administrator has conditionally approved the Conversion and the Holding Company's acquisition application, subject to approval by Home's members and satisfaction of certain other conditions. The Federal Reserve has conditionally approved the Holding Company's acquisition application, subject to the satisfaction of certain conditions. The FDIC has issued a conditional notification that it does not intend to object to the Conversion, subject to certain conditions. See "THE CONVERSION -- General". If the Conversion is not approved by the members at the Special Meeting or an adjournment thereof, no Common Stock will be issued, Home will remain a North Carolina-chartered mutual savings bank, all subscription funds will be returned promptly, with interest at Home's passbook savings rate, and all deposit withdrawal authorizations will be canceled without any action on the part of subscribers or purchasers. The Offerings Pursuant to the Plan of Conversion, between 2,890,000 shares and 3,910,000 shares of Common Stock are being offered by the Holding Company at the price of $10.00 per share in the Subscription Offering to the following persons in the following order of priority: (i) Eligible Account Holders ; (ii) the ESOP; (iii) Supplemental Eligible Account Holders; (iv) Other Members who are not Eligible Account Holders or Supplemental Eligible Account Holders; and (v) directors, officers and employees of Home who are not Eligible Account Holders, Supplemental Eligible Account Holders or Other Members. See "THE CONVERSION -- Subscription Offering". Shares of Common Stock not subscribed for in the Subscription Offering will be offered in a Community Offering to members of the general public, with first priority given to natural persons or trusts of natural persons who are residents of Stanly County, North Carolina and with second priority given to natural persons or trusts of natural persons who are residents of the Surrounding Counties, including IRAs, Keogh accounts and similar retirement accounts established for the benefit of natural persons who are residents of Stanly County and the Surrounding Counties. The Holding Company and Home have the absolute right to reject orders in the Community Offering in whole or in part. See "THE CONVERSION -- Community Offering". If there is a Community Offering, it is anticipated that all shares of Common Stock not subscribed for in the Community Offering will be offered for sale by the Holding Company to the general public in the Syndicated Community Offering. See "THE CONVERSION-- Syndicated Community Offering". The Subscription Offering and Subscription Rights in the Subscription Offering expire at the Expiration Time, which is 12:00 noon, local time, on September 17, 1996, unless extended. The Community Offering, if any, may begin at any time following commencement of the Subscription Offering and may terminate on any day after the Expiration Time at the discretion of Home without prior notice, but not later than November 1, 1996, unless extended with the approval of the Administrator. The Offerings may not be extended beyond September 17, 1998. Stock Purchase Limitations The maximum aggregate number of shares of Common Stock which may be purchased in the Conversion by any person or entity (or persons or entities exercising Subscription Rights through a single account), or group of persons or entities acting in concert (other than the ESOP), is 40,000 shares (or an aggregate dollar amount of $400,000). In addition, no person or entity, or group of persons or entities acting in concert, together with any associates, may subscribe for more than 100,000 shares of Common Stock sold in the Conversion. Home's Board of Directors has the right, at any time prior to completion of the Conversion, to decrease the 40,000 share maximum purchase limitation to an amount not less than 1% of the number of shares issued in the Conversion or increase such 40,000 share limitation to an amount of up to 5% of the shares issued in the Conversion. Any decrease or increase in the 40,000 share limitation will be without notice to, or resolicitation of, subscribers and without a resolicitation of proxies in connection with the Special Meeting. No person or entity may subscribe for less than 50 shares of Common Stock, or an aggregate dollar amount of less than $500. See "THE CONVERSION --Minimum and Maximum Purchase Limitations". Restrictions on Transfer of Subscription Rights Prior to the completion of the Conversion, no person may transfer or enter into any agreement or understanding to transfer the legal or beneficial ownership of the Subscription Rights issued under the Plan of Conversion or the shares of Common Stock to be issued upon their exercise. Each person exercising Subscription Rights will be required to certify that the purchase of Common Stock is solely for the purchaser's own account and that there is no agreement or understanding regarding the sale or transfer of such shares. See "THE CONVERSION -- Certain Restrictions on Transfer of Subscription Rights; False or Misleading Order Forms" in this Prospectus. Subscription Rights are nontransferable and persons found to be attempting to transfer Subscription Rights will be subject to the forfeiture of such rights and possible further sanctions. The Holding Company and Home will refer to the Administrator any situations that they believe may involve a transfer of Subscription Rights and will not honor orders known or believed by them to involve the transfer of such rights. Appraisal The Plan of Conversion requires that the aggregate purchase price of the Common Stock be based upon an independent valuation of the estimated aggregate pro forma market value of the Holding Company and Home. Ferguson, an independent financial consulting firm, has advised Home and the Holding Company that in its opinion, at April 30, 1996, the Valuation Range of the aggregate estimated pro forma market value of the Holding Company and Home was from $28,900,000 to $39,100,000. The appraisal will be reviewed and, if appropriate, revised by Ferguson upon conclusion of the Offerings. Any change in the total dollar amount of the Offerings outside of the current Valuation Range will be subject to the receipt of an updated appraisal confirming such valuation and regulatory approval. The appraisal by Ferguson is not intended and should not be construed as a recommendation of any kind as to the advisability of purchasing the Common Stock. See "MARKET FOR COMMON STOCK", "PRO FORMA DATA" and "THE CONVERSION -- Purchase Price of Common Stock and Number of Shares Offered". Stock Pricing and Number of Shares to be Offered The purchase price of the Common Stock offered in the Subscription Offering and the price at which the Common Stock is sold in the Community and Syndicated Community Offerings, if any, will be $10.00 per share. The aggregate dollar amount of Common Stock that may be sold in the Conversion will be determined by the Board of Directors of Home and the Holding Company based upon the independent appraisal of the aggregate pro forma market value of the Holding Company and Home prepared by Ferguson. Depending on market and financial conditions following commencement of the Subscription Offering, the number of shares offered and sold in the Conversion may be increased or decreased. However, the aggregate dollar amount of Common Stock that may be sold in the Conversion will not be more than $44,965,000 or less than $28,900,000 without a resolicitation of subscribers. Any change in the total dollar amount of the Offerings outside of the current Valuation Range will be subject to the receipt of an updated appraisal confirming such valuation and regulatory approvals. With the consent of the Administrator and the FDIC and in order to reflect changes in market and financial conditions following commencement of the Subscription Offering, the aggregate purchase price of the shares of Common Stock issued in the Conversion may be increased up to 15% above the maximum of the Valuation Range without any resolicitation of subscriptions or right to cancel, rescind or change subscription orders. See "THE CONVERSION -- Purchase Price of Common Stock and Number of Shares Offered". Use of Proceeds The net proceeds from the sale of the Common Stock in the Conversion, including shares purchased by the ESOP with funds loaned by the Holding Company, are estimated to be between $27,836,000 and $37,840,000 depending upon the actual expenses of the Conversion and other factors. See "PRO FORMA DATA". The Holding Company intends to use approximately 8% of the gross proceeds of the Offerings (between $2,312,000 and $3,128,000 assuming the issuance of between 2,890,000 and 3,910,000 shares) to fund the loan made to the ESOP to purchase shares of Common Stock in the Conversion. After deducting the amount of such loan from the proceeds, the Holding Company is expected to retain approximately 50% of the remaining net proceeds from the issuance of the Common Stock. The Holding Company will invest these proceeds primarily in interest-bearing deposits, U.S. government and federal agency securities with terms of up to five years. See "USE OF PROCEEDS". The remainder of the net proceeds from the sale of the Common Stock will be paid by the Holding Company to Home in exchange for all of the capital stock of Home. The net proceeds paid to Home will become part of Home's general funds, and will be invested in mortgage and other loans and investments consisting primarily of U.S. government and federal agency obligations in accordance with Home's lending and investment policies. Net proceeds will also be used for other general corporate purposes, including, possibly, opening another branch office, although Home has no existing plans to open any additional office in the immediate future. The relative amounts to be invested in each of these types of investments will depend upon loan demand, rates of return and asset/liability matching considerations at the time the investments are made. Management is not able to predict the yields which will be produced by the investment of the proceeds of the Offerings because such yields will be significantly influenced by general economic conditions and the interest rate environment existing at the time the investments are made. If Home's proposed Management Recognition Plan (the "MRP") is approved by the stockholders of the Holding Company, the MRP will acquire a number of shares of Common Stock equal to 4% of the number of shares issued in the Conversion. See "MANAGEMENT OF HOME -- Proposed Management Recognition Plan". Such shares may either be acquired in the open market or acquired through the Holding Company's issuance of authorized but unissued shares. In either event, it is expected that the MRP will acquire such shares reasonably promptly after the MRP is approved by the stockholders. In the event shares are acquired in the open market, the funds for such purchase may be provided by Home from the proceeds of the Conversion. It is estimated that between 115,600 and 156,400 shares will be acquired by the MRP, assuming the issuance of between 2,890,000 and 3,910,000 shares in the Conversion. If all such shares were acquired by the MRP in the open market, and if such shares were acquired at a price of $10.00 per share, Home would contribute between $1,156,000 and $1,564,000, respectively, to the MRP for this purpose. Additional shares would be acquired if the number of shares issued in the Conversion exceeds 3,910,000, and the price per share paid by the MRP could be more or less than $10.00 per share, which would change the total contribution to the MRP accordingly. See "RISK FACTORS -- Cost and Possible Dilutive Effect of the MRP and Stock Option Plan" and "MANAGEMENT OF HOME -- Proposed Management Recognition Plan." If the Holding Company's proposed Stock Option Plan and Trust (the "Stock Option Plan") is approved by the stockholders of the Holding Company, the Stock Option Plan could acquire in the open market a number of shares equal to 10% of the number of shares issued in the Conversion, which shares will be held to satisfy options granted under such plan. Such shares could be acquired after options are granted under the Stock Option Plan. To the extent the Stock Option Plan does not acquire sufficient shares in the open market to satisfy options granted under the Stock Option Plan, the Holding Company will reserve authorized by unissued shares for this purpose. See "MANAGEMENT OF HOME -- Proposed Stock Option Plan." The funds for any purchases in the open market may be provided by the Holding Company or Home from the proceeds of the Conversion. It is estimated that between 289,000 and 391,000 shares will be acquired by the Stock Option Plan in the open market and/or reserved for issuance by the Holding Company, assuming the issuance of between 2,890,000 and 3,910,000 shares in the Conversion. If shares are acquired in the open market, the Holding Company or Home would contribute between $2,890,000 and $3,910,000, respectively, to the Stock Option Plan for this purpose, assuming such shares are acquired at a price of $10.00 per share. Additional shares would be acquired if the number of shares issued in the Conversion exceeds 3,910,000, and the price could be more or less than $10.00 per share, which would change the contribution to the Stock Option Plan accordingly. See "RISK FACTORS -- Cost and Possible Dilutive Effect of the MRP and Stock Option Plan" and "MANAGEMENT OF HOME -- Proposed Stock Option Plan." Dividends The Board of Directors of the Holding Company currently intends to establish a dividend policy following the Conversion to pay a regular quarterly cash dividend at a rate to be determined. Payment of dividends will be subject to determination and declaration by the Holding Company's Board of Directors. The Board of Directors will periodically review its dividend policy in view of the operating results and financial condition of the Holding Company and Home, net worth and capital requirements, regulatory restrictions, tax consequences, industry standards, and general economic conditions, and it will authorize cash dividends to be paid if it deems such payment appropriate and in compliance with applicable law. In addition, the Board of Directors may determine from time to time that it is prudent to pay special cash dividends. Special cash dividends, if paid, may be in addition to, or in lieu of, regular cash dividends. The Board will determine whether to pay special cash dividends based upon its review of the Holding Company's current and anticipated needs for capital and its current and anticipated levels of capital and earnings. Special dividends will not be paid during periods when the Board determines that the Holding Company needs funds or that it can deploy funds at desirable levels of profitability. On the other hand, the Board of Directors may decide to pay special dividends at times when the Board determines that payment of such dividends uses such funds to greater advantage than deploying them in the Holding Company's operations. There can be no assurance that any dividends will in fact be paid on the Common Stock or that, if paid, any such dividends will not be reduced or eliminated in future periods. The Holding Company and Home have agreed with the FDIC that any cash dividends paid to stockholders during the twelve-month period following the closing of the Conversion will be paid out of accumulated earnings and profits (as computed for federal income tax purposes) and will not constitute or be treated for tax purposes as returns of capital to stockholders. See "DIVIDEND POLICY". The ability of the Holding Company to pay dividends may be dependent upon the Holding Company's receipt of dividends from Home. Under current North Carolina regulations, Home could not declare or pay a cash dividend if the effect thereof would be to reduce its net worth to an amount which is less than the minimum required by the FDIC and the Administrator. In addition, for a period of five years after consummation of the Conversion, Home will be required, under existing regulations, to obtain the prior written approval of the Administrator before it can declare and pay a cash dividend on its capital stock in an amount in excess of one- half the greater of (i) its net income for the most recent fiscal year or (ii) the average of its net income after dividends for the most recent fiscal year and not more than two of the immediately preceding fiscal years, if applicable. See "SUPERVISION AND REGULATION -- Regulation of Home --Restrictions on Dividends and Other Capital Distributions". In addition, see "TAXATION" for a discussion of federal income tax provisions that may limit the ability of Home to pay dividends to the Holding Company without incurring a recapture tax. Market for Common Stock The Holding Company, as a newly organized company, has never issued capital stock, and consequently, there is no market for the Common Stock at this time. The Holding Company has received conditional approval to have the Common Stock listed on the Nasdaq National Market System ("Nasdaq") under the symbol "SSFC". There can be no assurance that the Common Stock will in fact be listed, or will trade, on Nasdaq. A public market having the desirable characteristics of depth, liquidity and orderliness will depend upon the presence in the market place of both willing buyers and willing sellers at any given time. There can be no assurances that an active trading market will develop and be maintained. See "MARKET FOR COMMON STOCK ". Stock Ownership by Management The directors and executive officers of the Holding Company and of Home and their associates currently anticipate subscribing for Common Stock in the aggregate amount of $920,000, or 92,000 shares. As a result, such persons anticipate subscribing for 2.35% to 3.18% of the shares of Common Stock issued in the Conversion based upon the maximum and minimum of the Valuation Range, respectively. See "ANTICIPATED STOCK PURCHASES BY MANAGEMENT". In addition, it is expected that the ESOP will subscribe for 8% of the shares of Common Stock issued in the Conversion (between 231,200 and 312,800 shares, assuming the issuance of between 2,890,000 and 3,910,000 shares). See "MANAGEMENT OF HOME -- Employee Stock Ownership Plan". It is expected that directors and certain employees of the Holding Company and Home also will receive restricted stock grants under the MRP for a number of shares of Common Stock equal to 4% of the number of shares issued in the Conversion and will receive options under the Stock Option Plan to purchase a number of shares of Common Stock equal to 10% of the number of shares issued in the Conversion, if such plans are approved by the stockholders of the Holding Company at a meeting of stockholders following the Conversion. See "MANAGEMENT OF HOME --Proposed Management Recognition Plan" and "-- Proposed Stock Option Plan." If (i) the Stock Option Plan is approved by the stockholders of the Holding Company and all of the stock options which could be granted under the Stock Option Plan are granted and exercised, (ii) the MRP is approved by the stockholders of the Holding Company and all of the MRP shares which could be granted are granted and issued, and (iii) the Holding Company did not issue any additional shares of its Common Stock, the shares held by directors and executive officers and their associates as a group, (including (a) shares purchased outright in the Conversion, (b) shares purchased pursuant to the Stock Option Plan and (c) shares granted under the MRP), would give such persons effective control over as much as 12.28% or 11.45%, at the minimum and maximum of the Valuation Range, respectively, of the Common Stock issued and outstanding. In addition, the other employees of Home may be granted restricted shares under the MRP and options under the Stock Option Plan, giving such persons effective control over as much as 4.9%, at both the minimum and the maximum of the Valuation Range, of the Common Stock issued and outstanding. Thus, including the shares purchased by the ESOP, the directors, executive officers and other employees of Home have the potential of controlling 25.18% or 24.35%, at the minimum and maximum of the Valuation Range, respectively, of the Common Stock issued and outstanding (not including shares purchased in the open market by any such person and not including shares which may be purchased in the Offerings by Home employees other than the executive officers). See "-- Benefits to Directors and Officers" and "MANAGEMENT OF HOME -- Proposed Management Recognition Plan" and "-- Proposed Stock Option Plan" and "RISK FACTORS -- Articles of Incorporation and Bylaw Provisions, Statutory Provisions, Agreements with Employees and Voting Control Issues That Could Discourage Hostile Acquisitions of Control -- Voting Control of Officers, Directors and Employees". Benefits to Directors and Officers In connection with the Conversion, certain benefits will be provided to directors, officers and employees of Home. Employment Agreements. In connection with the Conversion, Home will enter into employment agreements with Carl M. Hill, the President and Chief Executive Officer of Home, and R. Ronald Swanner, Executive Vice President of Home. The employment agreements provide for initial annual salaries of $157,320 for Mr. Hill and $101,160 for Mr. Swanner. See "MANAGEMENT OF HOME-- Employment Agreements". Restricted Stock Grants. Pursuant to the proposed MRP, which the Boards of Directors of the Holding Company and Home intend to approve, and which is subject to stockholder approval, directors, officers and certain employees of Home would receive restricted stock grants of a number of shares of Common Stock equal to 4% of the shares issued in the Conversion (between 115,600 and 156,400 shares, assuming the issuance of between 2,890,000 and 3,910,000 shares). Assuming that the shares issued pursuant to the MRP have a value of $10.00 per share, such shares would have a value of between $1,156,000 and $1,564,000. No officer may receive more than 25%, and non-employee directors may not receive more than 5% individually, or 30% in the aggregate, of shares issued by the MRP. It is currently expected that 5% of the shares available under the MRP will be granted to each non-employee director. If 3,910,000 shares were issued in the Conversion, each non- employee director would receive restricted stock grants of 7,820 shares which, assuming such shares had a value of $10.00 per share, would have a value of $78,200. It is currently expected that Home's two executive officers, Carl M. Hill and R. Ronald Swanner, will be granted 25% and 20%, respectively, of the shares available under the MRP. If 3,910,000 shares were issued in the Conversion and if such shares had a value of $10.00 per share, Mr. Hill and Mr. Swanner would receive restricted stock grants of 39,100 shares and 31,280 shares, respectively, having a value of $391,000 and $312,800, respectively. Upon approval of the MRP, all of the other employees of Home will be granted, in the aggregate, 35% of the shares available under the MRP. Assuming the issuance of 3,910,000 shares in the Conversion, the other employees would receive an aggregate of 54,740 shares which, assuming such shares had a value of $10.00 per share, would have a value of $547,400. If the MRP is submitted to and approved by the stockholders of the Holding Company at a meeting of the stockholders to be held no sooner than six months following the Conversion, the MRP will provide that shares granted under the MRP will be forfeited unless recipients of grants satisfy certain vesting requirements. If the MRP is submitted to and is approved by the stockholders of the Holding Company at a meeting of stockholders held no sooner than one year following the Conversion, the MRP will provide that, under certain conditions, the grants may vest on an accelerated basis. Grants of restricted stock under the MRP will be made at no cost to recipients. See "MANAGEMENT OF HOME -- Proposed Management Recognition Plan". Stock Options. Pursuant to the proposed Stock Option Plan, which the Boards of Directors of the Holding Company and Home intend to approve, and which is subject to stockholder approval, directors and employees of Home would receive options to purchase a number of shares of Common Stock equal to 10% of the shares issued in the Conversion (between 289,000 and 391,000 shares, assuming the issuance of between 2,890,000 and 3,910,000 shares). No officer may receive more than 25%, and non-employee directors may not receive more than 5% individually or 30% in the aggregate, of stock options granted under the Stock Option Plan. It is currently expected that 5% of the shares available under the proposed Stock Option Plan, will be granted to each non-employee director. If 3,910,000 shares were issued in the Conversion, each non-employee director would receive options to purchase 19,550 shares. It is currently expected that Mr. Hill and Mr. Swanner will be granted options to purchase 25% and 20%, respectively, of the shares available under the Stock Option Plan. If 3,910,000 shares were issued in the Conversion, Mr. Hill and Mr. Swanner would receive options to purchase 97,750 shares and 78,200 shares, respectively. Under the proposed Stock Option Plan, the other 11 officers of Home will be granted, in the aggregate, options to purchase 35% of the shares available under the Stock Option Plan. Assuming the issuance of 3,910,000 shares in the Conversion, the other officers would receive options to purchase an aggregate of 136,850 shares. If the Stock Option Plan is submitted to and approved by the stockholders of the Holding Company at a meeting of the stockholders to be held no sooner than six months following the Conversion, the provisions of the Stock Option Plan will provide that options granted under the Stock Option Plan will be forfeited unless recipients of grants satisfy certain vesting requirements. If the Stock Option Plan is submitted to and approved by the stockholders of the Holding Company at a meeting of stockholders held no sooner than one year following the Conversion, the provisions of the Stock Option Plan will provide that under certain conditions, the grants may vest on an accelerated basis. The exercise price of the options will be the fair market value of the Common Stock at the time the options are granted (which will be after the Stock Option Plan is approved by the Holding Company's stockholders), and the options will have terms of 10 years or less. Options would be issued at no cost to recipients. See "MANAGEMENT OF HOME -- Proposed Stock Option Plan". ESOP. In connection with the Conversion, Home has established the ESOP. As part of the Conversion, the ESOP intends to borrow funds from the Holding Company and to use such funds to purchase 8% of the shares of Common Stock to be issued in the Conversion, estimated to be between 231,200 and 312,800 shares, assuming the issuance of between 2,890,000 and 3,910,000 shares. Home anticipates contributing approximately $312,800 plus interest annually to the ESOP (assuming 3,910,000 shares are issued in the Conversion and assuming the ESOP acquires its shares at $10 a share) to enable the ESOP to meet its principal and interest obligations under the loan. It is expected the ESOP loan will be repaid within 10 years. During such period, net income of Home will be reduced by an amount equal to the funds contributed by Home to the ESOP, less the tax benefit to Home resulting from such payments. In accordance with Statement of Position ("SOP") 93-6 "Employers' Accounting for Employee Stock Ownership Plans" issued by the American Institute of Certified Public Accountants, the amount expensed by Home will be based upon the fair value of the ESOP shares, although such accounting treatment will not affect the actual out-of-pocket cost to Home of the ESOP. See "RISK FACTORS--Cost of ESOP and Its Effect on Results of Operations and Pro Forma Stockholders' Equity" and "MANAGEMENT OF HOME--Employee Stock Ownership Plan". Anti-Takeover Provisions The Articles of Incorporation and Bylaws of the Holding Company and Home contain certain restrictions that are intended to discourage non-negotiated attempts to acquire control of the Holding Company or Home. The Board of Directors of the Holding Company believes that these provisions encourage potential acquirors to negotiate directly with the Board of Directors. However, these provisions may discourage an attempt to acquire control of the Holding Company which a majority of the stockholders might deem to be in their best interests or in which they might receive a premium over the then market price of their shares. These provisions may also render the removal of a director or the entire Board of Directors of the Holding Company more difficult and may deter or delay changes in control which have not received the requisite approval of the Holding Company's Board of Directors. See " RISK FACTORS -- Articles of Incorporation and Bylaw Provisions, Statutory Provisions, Agreements with Employees and Voting Control Issues That Could Discourage Hostile Acquisitions of Control" and "ANTI-TAKEOVER PROVISIONS AFFECTING THE HOLDING COMPANY AND HOME". Risk Factors Special attention should be given to the "RISK FACTORS" section of this Prospectus, which discusses the possible effects of changes in interest rates on Home and the thrift industry in general, the anticipated low return on equity following the Conversion, certain risks associated with the illiquidity of Home's loan portfolio, the cost of the ESOP, the cost and possible dilutive effect of the proposed MRP and proposed stock option plan, the potential disparity between SAIF and Bank Insurance Fund ("BIF") insurance premiums, risks associated with Home's primary market area, potential financial institution regulation and legislation, competition, certain anti-takeover considerations, the limited market for the Common Stock, restrictions on dividends, income tax consequences of Subscription Rights, voting control of officers, directors and employees and certain other matters that potential purchasers should consider before deciding whether to subscribe for the Common Stock offered hereby. Recommendation of Management The Boards of Directors and management of Home and the Holding Company make no recommendation concerning whether any person or entity should purchase shares of Common Stock. Subscribers are urged to consult with their own financial advisors with respect to suitability of an investment in the Common Stock.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001014982_source_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001014982_source_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus assumes (i) a 2.9-for-one stock split in the form of a stock dividend effected in June 1996 and (ii) no exercise of the Underwriters' over-allotment option. This Prospectus contains certain forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from the results anticipated in these forward-looking statements as a result of certain of the factors set forth under "Risk Factors" and elsewhere in this Prospectus. THE COMPANY Source Services Corporation (the "Company") is a specialty staffing services firm that provides flexible staffing, traditionally known as temporary staffing, and permanent placement of professional and skilled personnel primarily in the areas of information technology, accounting and finance, and engineering and manufacturing. The Company has recently expanded its service offerings to include the staffing of professional and skilled personnel in the areas of health care and legal services. The Company believes that the ability to provide both flexible staffing and permanent placement of professional and skilled personnel in a broad spectrum of fields enables it to present integrated solutions to its clients' staffing needs and to attract qualified candidates. It further believes that the staffing of professional and skilled personnel in specialty niches generally includes longer term assignments than typical clerical temporary placement and offers the Company the opportunity for greater growth and higher profitability. The Company has offices in 52 markets throughout the United States and one in Canada. Founded in 1962, the Company began its operations as a provider of permanent placement services to the information technology industry. Using the resources and relationships that it developed as a leading provider of permanent placement services, the Company in 1991 shifted the focus of its service offerings to flexible staffing services. Today, the Company's flexible staffing business benefits greatly from the Company's experience in providing permanent placement services. Over its 34 years, the Company has developed expertise in the recruitment and selection of professional and skilled personnel to satisfy client requests. The Company currently maintains a database of over one million potential candidates and uses proprietary technology to match these candidates with its clients' specific needs. In addition, each of the Company's sales associates has a background in one of the Company's areas of specialization, thereby promoting a better understanding of the needs of the Company's clients and providing the Company an advantage in its recruiting efforts. The Company had net service revenue of $141.8 million in 1995, an increase of 57.5% from 1994. The Company has experienced significant growth as net service revenue has increased at a compounded annual rate of approximately 46.5% over the past three years. This growth has resulted primarily from an increase in the Company's net service revenue from flexible staffing, which has grown at a compounded annual rate of approximately 70.0% for the past three years. During 1995, approximately 60.7% of the Company's net service revenue was derived from its flexible staffing services. The Company also continues to benefit from its experience in information technology. Information technology net service revenue has grown at a compounded annual rate of approximately 54.7% for the past three years and accounted for approximately 68.1% of total net service revenue in 1995. STRATEGY The Company's strategy is to focus on providing flexible staffing of professional and skilled personnel. While permanent placement will remain an important part of the Company's business, the Company believes that specialty flexible staffing offers greater growth and profit potential than other segments of the staffing services industry due to changing practices of employers today. The Company seeks to differentiate itself from other providers of specialty staffing services by recruiting highly qualified candidates and focusing on client needs. The Company strives to achieve these service objectives primarily by employing sales associates with EXPERIENCE ON DEMAND(SM) [MAP] [ ] Indicates markets served by the Company. A market, as defined by the Company, is a geographic area that can be efficiently served through at least one branch office. Source Services Corporation(R) has a 34-year history of providing EXPERIENCE ON DEMAND(SM) through professional and highly skilled personnel. With offices in 52 markets across the United States and one in Canada, and a current national database of more than one million potential candidates, Source(SM) consults with clients to provide integrated solutions for their specialty staffing needs. [SOURCE SERVICES LOGO] ---------------------- IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. backgrounds in the Company's areas of specialization, developing and using proprietary technology and maintaining a database of over one million professional or skilled candidates. The Company intends to expand its business by focusing on the following growth strategies: - Leveraging existing relationships by promoting the full range of its service offerings to existing clients. - Expanding service offerings in existing markets. - Opening offices in new geographic markets. - Introducing new areas of specialization. - Pursuing strategic acquisitions. THE STAFFING SERVICES INDUSTRY The staffing industry has experienced rapid growth in the last decade with industry revenues preliminarily estimated to have exceeded $60 billion in 1995, according to Staffing Industry Analysts,* a staffing services industry publication. Staffing Industry Analysts preliminarily estimated that the temporary help sector reached $41.2 billion in revenues for 1995, which the Company estimates, based on preliminary data provided by Staffing Industry Analysts, to represent an average annual growth rate of 17.7% over the past four years. In addition, Staffing Industry Analysts preliminarily estimated that flexible staffing personnel accounted for approximately 1.8% of the United States workforce in 1995 as compared to 1.0% in 1991. Information technology, which comprised 68.1% of the Company's 1995 net service revenue, has become one of the fastest growing sectors of the staffing services industry according to Staffing Industry Analysts. Staffing Industry Analysts preliminarily estimated that revenues from the information technology sector of the staffing services industry reached $8.9 billion in 1995 and increased 25% from 1994. Over the last decade the increased use of technology has led to a dramatic rise in demand for technical project support, software development and other computer-related services. Businesses have outsourced many of these functions and have used employees of specialty staffing firms in an attempt to meet the increased demand for computer-skilled personnel. THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Company....... 1,563,431 shares Common Stock Offered by the Selling Stockholders............................ 936,569 shares Common Stock to be Outstanding after this Offering................................ 8,759,828 shares Use of Proceeds........................... The net proceeds will be used to repay certain indebtedness, to make capital improvements, to support growth, including potential acquisitions, and for working capital and other general corporate purposes. See "Use of Proceeds." Nasdaq National Market Symbol............. SRSV </TABLE> - --------------- * Staffing Industry Analysts estimates are based upon data obtained from the U.S. Bureau of Labor Statistics, the U.S. Bureau of the Census, The Omnicomp Group, National Association of Temporary and Staffing Services data from DRI/McGraw-Hill and Lauer, Lalley, Victoria, Inc. surveys, National Technical Services Association data from Harbridge House, industry participants, and Staffing Industry Analysts internal forecasts. These estimates are preliminary and may be refined in the future. Such estimates should not be taken as more than gross estimates of the overall relative size of and growth trends in the staffing industry and its subsegments. SUMMARY FINANCIAL AND OPERATING DATA The following table sets forth summary financial data for each of the fiscal years in the five-year period ended December 31, 1995 and the quarters ended April 2, 1995 and March 31, 1996. <TABLE> <CAPTION> YEAR ENDED(1) QUARTER ENDED(1) -------------------------------------------------------- --------------------- DEC. 31, DEC. 31, JAN. 2, JAN. 1, DEC. 31, APRIL 2, MARCH 31, 1991 1992 1994 1995 1995 1995 1996 -------- -------- -------- -------- -------- -------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> Income Statement Data: Net service revenue....... $ 45,888 $ 45,109 $ 53,835 $ 90,067 $141,832 $ 29,942 $40,833 Gross profit.............. 37,897 32,503 33,908 54,656 78,780 16,245 22,298 Operating income (loss)... (5,731) (2,660) 1,679 5,414 7,262 1,055 1,454 Net income (loss)......... (4,371) (2,138) 817 3,247 4,175 614 802 Net income (loss) per share.................. $ (1.31) $ (0.50)(2) $ 0.11 $ 0.45 $ 0.58 $ 0.09 $ 0.11 Weighted average shares outstanding............ 3,330 4,255 7,386 7,250 7,178 7,192 7,153 </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 ------------------------ ACTUAL AS ADJUSTED(3) ------- -------------- <S> <C> <C> Balance Sheet Data: Working capital..................................................... $14,702 $ 35,162 Total assets........................................................ 31,744 51,404 Total long term debt................................................ 65 65 Stockholders' equity................................................ 18,108 40,568 Other Data: Net service revenue by areas of specialization: Information technology........... 56.9% 57.7% 58.9% 65.1% 68.1% 66.6% 67.4% Accounting and finance.............. 37.4 36.3 35.5 29.3 26.1 28.5 25.7 Other.................. 5.7 6.0 5.6 5.6 5.8 4.9 6.9 ------- ------- ------- ------- -------- ------- ------- 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% ======= ======= ======= ======= ======== ======= ======= Net service revenue by service type: Flexible staffing...... 25.0% 38.5% 49.3% 54.7% 60.7% 62.5% 63.4% Permanent placement.... 75.0 61.5 50.7 45.3 39.3 37.5 36.6 ------- ------- ------- ------- -------- ------- ------- 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% ======= ======= ======= ======= ======== ======= ======= Number of markets at period end............. 51 49 45 48 53 51 53 </TABLE> - --------------- (1) The Company's fiscal year ends on the Sunday closest to December 31, and the Company's fiscal quarters end on the Sunday closest to the end of each calendar quarter. (2) Includes net income per share of $0.02 attributed to cumulative effect on prior years of change in accounting for income taxes. (3) Adjusted to reflect the sale of 1,563,431 shares of Common Stock offered by the Company hereby and the anticipated application of the net proceeds therefrom. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001015104_chadwicks_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001015104_chadwicks_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..05ae0f1ec4fb8abc4fa62d2da0b265a70e5c76c7
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated or the context otherwise requires: (i) all references to a year in connection with statements concerning the Company's financial or operating results means the Company's fiscal year which ends on the last Saturday in January in the following calendar year (e.g., "1995" means the fiscal year ended January 27, 1996); (ii) the information contained in this Prospectus assumes that the Exchange Transaction (as defined and described below under "Relationship with TJX") occurred prior to all relevant periods presented herein; (iii) the information contained in this Prospectus assumes no exercise of the Underwriters' over-allotment option; and (iv) the "Company" or "Chadwick's" refers to Chadwick's of Boston, Ltd., its subsidiary, Chadwick's, Inc. and its subsidiary, and "TJX" refers to The TJX Companies, Inc. and its subsidiaries. THE COMPANY Chadwick's of Boston, Ltd. is the nation's first and largest catalog retailer of off-price women's apparel and one of the largest participants in women's apparel catalog retailing. The Company offers a broad selection of high quality branded and private label apparel at prices typically 25% to 50% below the regular prices of department and specialty retail stores. The Company believes that it has developed a strong and unique franchise and a well recognized brand name by consistently delivering exceptional value while satisfying its customers' wardrobe needs for career, casual and social wear, all in a broad selection of colors, styles and sizes. Chadwick's believes that its success in executing this merchandising strategy is the result of its thorough understanding of the Company's target customer, extensive off-price merchandising experience, powerful catalog presentation, strong product development and worldwide sourcing capabilities. As a result, Chadwick's has increased sales at a compound annual growth rate of 28.0%, from $173.4 million in 1991 to $465.6 million in 1995. The Company believes that Chadwick's of Boston is one of the most well recognized brand names in women's apparel catalog retailing, and that its customer list is one of the largest and most valuable in the women's apparel industry. Chadwick's has over 10 million names on its customer list, more than six million of which are active customers, having made one or more purchases in the preceding 18 months. Management believes that its brand name and customer list provide the Company with distinct competitive advantages that can be neither easily nor cost-effectively replicated. The Company's target customers are middle to upper middle income women between the ages of 25 and 55, who the Company believes represent approximately one-third of the adult female population in the United States or approximately 33 million women. The overall women's apparel industry generated approximately $81 billion in sales in 1995, of which catalog sales represented approximately 9.4% or $7.6 billion. While sales in the overall women's apparel industry grew by approximately one percent from 1994 to 1995, catalog sales of women's apparel grew by 6.1% during the same period. The Company believes that catalog sales of women's apparel will continue to increase because the busy lifestyles of today's women demand the convenience and time savings afforded by catalog shopping. From 1987 through 1993, the Company's net sales grew at a compound annual growth rate of 46.7%. By the fall of 1994, the Company's order fulfillment and customer service operations were unable to keep pace with its rapid sales growth, resulting in a decline in sales growth, an increase in operating expenses and a substantial decline in profitability. In response, the Company reorganized its management team in the first quarter of 1995. This new management team implemented a series of initiatives to increase operational efficiencies and improve customer service to levels necessary to support the Company's strong and established merchandising organization. Catalog circulation - -------------------------------------------------------------------------------- was reduced and improvements were made in fulfillment center and telemarketing operations, inventory management and coordination among all facets of the business. The Company's initiatives produced substantial and rapid improvement. Between 1994 and 1995, the initial fulfillment rate (percentage of merchandise available to be shipped at the time of order) increased from 57.1% to a Company record of 72.3% and the final fulfillment rate (percentage of total merchandise orders filled) increased from 86.5% to 90.5%. Over the same period, gross margin increased from 37.2% to 40.1% and selling, general and administrative expenses as a percentage of net sales declined from 35.9% to 34.4%. These initiatives, together with an expansion of the Company's deferred billing program, increased profits, sales and average order value. Income before extraordinary items grew from $1.3 million in 1994 to $11.7 million in 1995, and, over the same time period, average order value increased from $81 to $86 and net sales increased 7.6%, from $432.7 million to $465.6 million, despite a 16.6% reduction in catalog circulation, from 235.0 million to 196.1 million. This strong performance continued into the first quarter of 1996, as net income increased from $2.1 million in the first quarter of 1995 to $6.7 million and net sales increased 13.2%, to $132.0 million. The Company believes that its new operational structure, combined with strong customer acceptance of its value-oriented merchandise, provides a solid foundation for future growth. The Company intends to capitalize on opportunities to increase sales to both existing and new customers, continue improvements in operating efficiencies and increase leveraging of operating expenses through the following strategies: EXPAND THE COMPANY'S CORE WOMEN'S APPAREL BUSINESS. The Company believes it has a substantial opportunity to increase sales to existing customers by capturing a greater share of their apparel purchases. The Company plans to expand its offering of women's apparel by increasing average page count in its existing catalogs by approximately 20% over the next three years. EXPAND THE COMPANY'S COMPLEMENTARY PRODUCT OFFERINGS. The Company plans to build on its success in women's apparel by expanding its offering of complementary products to existing and new customers. These products, which have been tested and offered on a limited basis, include men's apparel, children's apparel, women's special sizes, accessories, gifts and cosmetics. Since the Company began offering complementary products in 1992, sales of these products have grown to represent 16.2% of total net sales in 1995. The Company believes that a significant opportunity exists to further increase sales of these products. DEVELOP AND GROW NEW CATALOG CONCEPTS. The Company intends to offer in separate and distinct catalogs complementary products and new product concepts that have the potential for significant sales growth. In May 1996, the Company mailed Bridgewater, its first new concept catalog, which offers an assortment of classic fashions for men and women. To date, customer response to Bridgewater has exceeded the Company's expectations. CONTINUE TO REFINE CATALOG MAILING SEGMENTATION TECHNIQUES. The Company plans to further develop and refine its statistical models and analyses to better target its catalog mailings and more profitably capitalize on its current customer list of over 10 million names. By refining its catalog mailing segmentation techniques, the Company hopes to be able to increase its response rate and the dollar amount of purchases for each catalog mailed. EXPAND THE COMPANY'S CUSTOMER BASE. Chadwick's intends to grow its customer base through its aggressive name acquisition program, including the rental of customer lists and the implementation of advertising campaigns specifically designed to add new customers. INCREASE THE COMPANY'S DEFERRED BILLING PROGRAM. The Company intends to expand the use of its "buy now, pay later" deferred billing program which it initiated in 1995. The Company believes that its deferred billing program has contributed to an increase in average order value and net sales. CONTINUE TO IMPROVE ORDER FULFILLMENT OPERATIONS AND INVENTORY MANAGEMENT. The Company plans to make additional improvements in the areas of order fulfillment and inventory management. Chadwick's believes continued opportunity exists to increase operating efficiencies. ENHANCE TELEMARKETING, CUSTOMER SERVICE AND MANAGEMENT INFORMATION SYSTEMS. The Company intends to continue to upgrade its telemarketing and management information systems that will enhance its ability to increase sales, operating efficiency and overall customer service. THE OFFERING <TABLE> <S> <C> Common Stock offered by TJX(1)....... 9,260,000 shares Common Stock outstanding after the Offering(2)........................ 15,178,847 shares Use of Proceeds...................... The Company will not receive any of the proceeds from the sale of the shares of Common Stock offered hereby. All proceeds will be received by TJX. Listing.............................. The Company's Common Stock has been approved for listing on the NYSE. NYSE Symbol.......................... CWK </TABLE> - --------------- (1) Assumes the Underwriters' over-allotment option is not exercised. (2) Exclusive of 850,000 shares that will be reserved for issuance upon exercise of stock options and similar awards under the Company's 1996 Equity Incentive Plan and the 1996 Stock Option Plan for Non-Employee Directors. For a description of stock options to be issued contemporaneously with this Offering, see "Executive Compensation -- Equity Incentive Plan." RELATIONSHIP WITH TJX The Chadwick's of Boston catalog was established by TJX in 1983. The Company's assets are held by Chadwick's, Inc. which, prior to the Offering, has been a wholly-owned subsidiary of TJX. In connection with the Offering, TJX will exchange all of the outstanding shares of common stock of Chadwick's, Inc. for 15,178,847 shares of Common Stock of the Company (the "Exchange Transaction"), 9,260,000 shares of which are being offered hereby by TJX. Concurrently with the closing of the Offering (the "Closing"), TJX will contribute $20.0 million to the equity of the Company and the Company will repay to TJX the balance of outstanding intercompany indebtedness over the equity contribution at such time, which balance is currently estimated to be approximately $50 million (such repayment, together with the related equity contribution, is hereinafter referred to as the "Debt Repayment"). The Company expects to generate the funds for the repayment of this indebtedness entirely from credit facilities which it will establish prior to the Offering. See "Risk Factors -- Financing Requirements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Upon completion of the Offering, TJX will own approximately 39% of the Company's outstanding Common Stock (approximately 30% if the Underwriters exercise their over-allotment option in - ------------------------------------------------------------------------------- full), and likely will be the Company's largest stockholder. As a result of its ownership interest, TJX could have effective control of the vote on matters submitted to stockholders following completion of the Offering, including the election of directors and the approval of extraordinary corporate transactions. TJX has advised the Company that it expects to reduce its ownership interest in the Company over time, subject to prevailing market and other conditions. See "Relationship with TJX." Currently, two of the four members of the Company's Board of Directors (the "Board") are officers and directors of TJX. Either simultaneously with the completion of the Offering or within six months thereafter, the Company anticipates that the Board will be increased to seven members through the addition of three persons who are neither affiliates of TJX nor employees ("associates") or officers of the Company. To the extent the Company has in the past had excess inventory which it wished to liquidate in bulk, it has sold this inventory to TJX and others. During 1994 and 1995, the Company liquidated approximately $14.4 million and $10.6 million, respectively, of its total inventory liquidations through TJX, representing in each year more than half of such liquidations. To continue and formalize this mutually advantageous arrangement, the Company and TJX have entered into an Inventory Purchase Agreement expiring on January 29, 2000. See "Relationship with TJX -- Liquidation." As part of their ongoing relationship following the Offering, TJX and the Company will enter into a number of other agreements including a Services Agreement and a Tax Sharing and Separation Agreement. See "Relationship with TJX." ------------------------ Chadwick's[Registered Trademark] and Chadwick's of Boston, Ltd.[Registered Trademark] are federally registered trademarks owned by the Company. Bridgewater[Trademark] is a trademark owned by the Company. - -------------------------------------------------------------------------------- <TABLE> - ------------------------------------------------------------------------------------------------------------------------- SUMMARY FINANCIAL DATA The following summary financial data is qualified by and should be read in conjunction with the Company's Combined Financial Statements and Pro Forma Combined Financial Statements and the notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus. <CAPTION> PRO FORMA(1) HISTORICAL ------------------ -------------------------------------------------------------------------- FISCAL THIRTEEN THIRTEEN YEAR WEEKS FISCAL YEAR ENDED WEEKS ENDED ENDED ENDED ---------------------------------------------------- ------------------- -------- -------- JAN. 25, JAN. 30, JAN. 29, JAN. 28, JAN. 27, APR. 29, APR. 27, JAN. 27, APR. 27, 1992 1993(2) 1994 1995 1996 1995 1996 1996 1996 -------- -------- -------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, NET SALES PER CATALOG AND AVERAGE ORDER VALUE) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> INCOME STATEMENT DATA: Net sales............. $173,374 $295,532 $424,276 $432,660 $465,598 $116,611 $131,996 $465,598 $131,996 -------- -------- -------- -------- -------- -------- -------- -------- -------- Gross profit........ 67,263 112,346 155,043 160,786 186,730 47,467 58,696 186,730 58,696 Selling, general and administrative expenses, including catalog and order processing costs.... 55,656 90,366 131,439 155,329 160,282 42,387 45,831 161,982 46,231 -------- -------- -------- -------- -------- -------- -------- -------- -------- Income from operations........ 11,607 21,980 23,604 5,457 26,448 5,080 12,865 24,748 12,465 -------- -------- -------- -------- -------- -------- -------- -------- -------- Income before extraordinary items and cumulative effect of accounting changes............. $ 7,108 $ 13,184 $ 12,285 $ 1,262 $ 11,674 $ 2,116 $ 6,697 $ 11,332 $ 6,664 ======== ======== ======== ======== ======== ======== ======== ======== ======== Net income(3)......... $ 7,108 $ 13,184 $ 12,665 $ 1,070 $ 8,336 $ 2,116 $ 6,697 $ 7,994 $ 6,664 ======== ======== ======== ======== ======== ======== ======== ======== ======== PRO FORMA EARNINGS PER COMMON SHARE: Income before extraordinary items and cumulative effect of accounting changes............. $ .74 $ .44 ======== ======== Net income............ $ .52 $ .44 ======== ======== BALANCE SHEET DATA: Total assets.......... $ 70,673 $121,094 $156,095 $177,625 $199,215 $210,540 $199,648 $186,401 Long-term debt(4)..... 7,580 22,152 52,154 47,391 70,769 81,712 60,277 30,000 Stockholder's equity.............. 21,420 34,604 47,269 48,339 56,675 50,455 63,372 83,372 OTHER FINANCIAL AND OPERATING DATA: EBITDA(5)............. $ 13,580 $ 25,116 $ 28,109 $ 11,156 $ 33,160 $ 6,717 $ 14,524 $ 31,460 $ 14,124 Total catalog circulation......... 78,555 123,064 213,168 234,973 196,073 64,150 48,487 Net sales per catalog(6).......... $ 2.21 $ 2.40 $ 1.99 $ 1.84 $ 2.37 $ 1.82 $ 2.72 Average order value(7)............ $ 84 $ 83 $ 81 $ 81 $ 86 $ 78 $ 94 <FN> - --------------- (1) The pro forma financial data for the year ended January 27, 1996 and for the thirteen weeks ended April 27, 1996, have been derived from, and should be read in conjunction with the unaudited pro forma combined financial statements of the Company and the notes thereto (including a description of the assumptions used in the pro forma data) included elsewhere in this Prospectus. (2) 53 week period. (3) Net income includes a credit of $380,000 for the cumulative effect of accounting changes in the fiscal year ended January 29, 1994 and includes extraordinary charges for the early retirement of debt of $192,000 in the fiscal year ended January 28, 1995 and $3.3 million in the fiscal year ended January 27, 1996. (4) Includes loans and advances from TJX. (5) Earnings before interest, taxes, depreciation and amortization. (6) Net sales per catalog equals net sales divided by total catalog circulation. (7) Average order value equals total value of orders received divided by the number of orders received. - -------------------------------------------------------------------------------------------------------------------------- </TABLE>
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, included elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus assumes that the Underwriters' over-allotment option will not be exercised. In addition, unless otherwise specified, all numbers of shares and per share amounts have been restated to reflect the reclassification of each outstanding share of common stock of the Company into 2.47 shares of Common Stock, par value $.01 per share ("Common Stock"), to be effected immediately prior to the offering made hereby (the "Offering"). Prior to the Offering, all of the outstanding shares of Common Stock of the Company have been owned by a wholly-owned subsidiary of The Brooklyn Union Gas Company ("Brooklyn Union"). The Company was incorporated in December 1985, and has focused since its inception primarily upon natural gas and oil exploration and development offshore in the Gulf of Mexico. In February 1996, Brooklyn Union implemented a reorganization of its exploration and production assets by transferring to the Company certain onshore producing properties and developed and undeveloped acreage previously held by Fuel Resources, Inc., another Brooklyn Union subsidiary. Unless otherwise indicated, all information set forth in this Prospectus gives effect to such reorganization. Unless otherwise indicated, the December 31, 1995 reserve and acreage and the current production data included in this Prospectus includes the pro forma net reserves, acreage and production attributable to (i) properties acquired by the Company in July 1996 from TransTexas Gas Corporation and (ii) properties that the Company will acquire from Smith Offshore Exploration Company in an acquisition that will close concurrently with this Offering. Investors should carefully consider the information set forth under "Risk Factors." Oil and gas industry terms used in this Prospectus are defined in "Glossary of Oil and Gas Terms." THE COMPANY The Houston Exploration Company ("Houston Exploration" or the "Company") is an independent natural gas and oil company engaged in the exploration, development and acquisition of domestic natural gas and oil properties. The Company's offshore properties are located in the shallow waters (up to 600 feet) of the Gulf of Mexico, and its onshore properties are located in South Texas, the Arkoma Basin, East Texas and West Virginia. The Company has grown its Gulf of Mexico reserves and production through exploratory drilling and subsequent development of prospects originally generated utilizing in-house geological and geophysical expertise. The Company has grown its onshore reserves and production through successful acquisitions and subsequent exploitation and development of low risk, long-lived reserves. The Company believes that these lower risk projects and the stable production from its longer-lived onshore properties complement its high potential exploratory prospects in the Gulf of Mexico by balancing risk and reducing volatility. The Company believes that its primary strengths are its high quality reserves, its substantial inventory of exploration and development opportunities, its expertise in generating new prospects and its geographic focus and low-cost operating structure. At December 31, 1995, the Company had net proved reserves of 346 Bcfe. Approximately 98% of the Company's net proved reserves on such date were natural gas and approximately 73% of proved reserves were classified as proved developed. The Company operates approximately 82% of its Gulf of Mexico production and approximately 92% of its onshore production. The geographic focus of the Company's operations in the Gulf of Mexico and core onshore areas of operation enable it to manage a large asset base with a relatively small number of employees and to add production at relatively low incremental cost. The Company achieved pro forma lease operating expenses of $0.25 per Mcfe of production and pro forma general and administrative expenses of $0.08 per Mcfe of production for the year ended December 31, 1995. STRATEGY. The Company's strategy is to expand its reserves and increase its cash flow through the exploration of Gulf of Mexico prospects which are internally generated by the Company, the continued development of its existing offshore and onshore properties and the selective acquisition of additional properties both offshore and onshore. The Company implements its strategy by focusing on the following key strengths: o High potential exploratory drilling in the Gulf of Mexico o Low risk exploitation and development drilling in core onshore areas of operation o Use of advanced technology for in-house prospect generation o Opportunistic acquisitions with additional exploratory and/or development potental o High percentage of operated properties to control operations and costs o Geographically focused operations HIGH POTENTIAL EXPLORATORY DRILLING IN THE GULF OF MEXICO. The Company plans to drill at least five additional exploratory wells in the Gulf of Mexico in the remainder of 1996, the successful completion of any one of which could substantially increase the Company's reserves. The Company believes it has assembled a three year inventory of exploration and development drilling opportunities in the Gulf of Mexico. The Company holds interests in 49 lease blocks, representing 230,531 gross (147,180 net) acres, in federal and state waters in the Gulf of Mexico, of which 28 have current operations. The Company has a 100% working interest in 16 of these lease blocks and a 50% or greater working interest in 17 other lease blocks. During 1994 and 1995, the Company drilled five successful exploratory wells and 11 successful development wells in the Gulf of Mexico, resulting in added net proved reserves of approximately 61 Bcfe. During the first half of 1996, the Company drilled three successful exploratory wells and one successful development well. The Company anticipates that approximately $50 million of its $63 million 1996 capital expenditure budget (excluding acquisitions) will be spent on offshore projects. In addition, the Company intends to continue its participation in federal lease sales and to actively pursue attractive farm-in opportunities as they become available. During July 1996, average net production from the Company's Gulf of Mexico properties was approximately 52,900 Mcfe per day. LOW RISK EXPLOITATION AND DEVELOPMENT DRILLING ONSHORE. The Company owns significant onshore natural gas and oil properties in South Texas, the Arkoma Basin of Oklahoma and Arkansas, East Texas and West Virginia, accounting for approximately 63% of its net proved reserves as of December 31, 1995. Since the beginning of 1994, the Company has drilled or participated in the drilling of 25 successful development wells and three successful exploratory wells onshore. The Company plans to drill 16 development wells onshore during the remainder of 1996. The Company believes that these lower risk projects and the stable production from its longer-lived onshore properties complement its higher potential Gulf of Mexico operations and reserve base. The Company's onshore properties represent interests in 1,060 gross (657 net) wells, and 138,385 gross (93,419 net) acres. The Company anticipates that approximately $13 million of its $63 million 1996 capital expenditure budget (excluding acquisitions) will be spent on onshore projects. In addition, the Company anticipates that it will continue to acquire onshore properties with exploitation and development potential in its core areas of operation as opportunities arise. During July 1996, average net production from the Company's onshore properties was approximately 69,300 Mcfe per day. USE OF ADVANCED TECHNOLOGY FOR IN-HOUSE PROSPECT GENERATION. The Company generates virtually all of its Gulf of Mexico exploration prospects utilizing in-house geological and geophysical expertise. The Company uses advanced technology, including 3-D seismic and in-house computer-aided exploration technology, to reduce risks, lower costs and prioritize drilling prospects. The Company has acquired approximately 1,100 square miles of 3-D seismic data, including 3-D seismic surveys on 29 of its offshore lease blocks and on possible lease and acquisition prospects, and 60,500 linear miles of 2-D seismic data on its offshore properties. The Company has 12 geologists/geophysicists with average industry experience of approximately 30 years and five geophysical workstations for use in interpreting 3-D seismic data. The availability of 3-D seismic data for Gulf of Mexico properties at reasonable costs has enabled the Company to identify multiple exploration and development prospects in the Company's existing inventory of properties and to define possible lease and acquisition prospects. OPPORTUNISTIC ACQUISITIONS. Although the Company's primary strategy is to grow its reserves through the drillbit, the Company anticipates making opportunistic acquisitions in the Gulf of Mexico with exploratory potential and in core areas of operation onshore with exploitation and development potential. The Company has a successful track record of building its reserves through opportunistic acquisitions in the Gulf of Mexico and onshore. In this regard the Company recently acquired significant onshore properties in South Texas and has agreed to acquire additional interests in offshore properties in the Gulf of Mexico. HIGH PERCENTAGE OF OPERATED PROPERTIES. The Company prefers to operate its properties in order to manage production performance while controlling operating expenses and the timing and amount of capital expenditures. Properties operated by the Company account for 82% of its Gulf of Mexico production and approximately 92% of its onshore production. Houston Exploration operates 16 platforms and 64 wells in the Gulf of Mexico and 924 wells onshore. The Company also pursues cost savings through the use of outside contractors for much of its offshore field operations activities and administrative work. As a result of these and other factors, the Company achieved pro forma lease operating expense of $0.25 per Mcfe of production and pro forma general and administrative expense of $0.08 per Mcfe of production for the year ended December 31, 1995. GEOGRAPHICALLY FOCUSED OPERATIONS. Focusing drilling activities on properties in a relatively concentrated area in the Gulf of Mexico permits the Company to utilize its base of geological, engineering, exploration and production experience in the region. The geographic focus of the Company's operations allows it to manage a large asset base with a relatively small number of employees and enables the Company to add production at relatively low incremental costs. Management believes that the Gulf of Mexico area remains attractive for future exploration and development activities due to the availability of geologic data, remaining reserve potential and the infrastructure of gathering systems, pipelines, platforms and providers of drilling services and equipment. The Company's onshore strategy is to make opportunistic acquisitions of low risk, long-lived natural gas reserves of sufficient size to provide a core area of operation and to use that base to develop additional acquisition opportunities and exploitation drilling at little or no incremental overhead cost. RECENT ACQUISITION. On July 2, 1996, the Company acquired certain natural gas and oil properties and associated gathering pipelines and equipment located in Zapata County, Texas (the "TransTexas Acquisition") from TransTexas Gas Corporation and TransTexas Transmission Corporation (together, "TransTexas"). The properties acquired in the TransTexas Acquisition represent approximately 113 Bcfe of the Company's net proved reserves of 346 Bcfe as of December 31, 1995. The Company acquired a 100% working interest (95% after the exercise by James G. Floyd, the Company's President and Chief Executive Officer, of his right to purchase a 5% working interest) in the approximately 156 wells on such properties. The purchase price of $62.2 million ($59.1 million after giving effect to the exercise of Mr. Floyd's purchase option) for the TransTexas Acquisition is subject to adjustment based upon production and expenses related to the assets between the May 1, 1996 effective date of the TransTexas Acquisition and the July 2, 1996 closing date. The purchase price for the TransTexas Acquisition was paid in cash, financed by borrowings under the Company's credit facility. The properties acquired by the Company are subject to two judgment liens imposed on substantially all of TransTexas' properties in the aggregate amount of $20 million. TransTexas has agreed to indemnify the Company against any loss arising from such judgment liens. TransTexas has appealed the judgments to which such liens relate, and has posted bonds secured by a letter of credit and cash in the full aggregate amount of such judgments. One of the judgments, in the amount of $18 million, has been reversed, a decision which, if upheld, will result in the release of the related judgment lien. As a result, the Company believes that the properties purchased in the TransTexas Acquisition are not subject to any material risk as a result of such judgment liens. PENDING ACQUISITION. On July 1, 1996, the Company entered into an asset purchase agreement with Smith Offshore Exploration Company ("Soxco"), providing for the acquisition by the Company of substantially all of the natural gas and oil properties and related assets of Soxco, representing approximately 32 Bcfe of the Company's net proved reserves of 346 Bcfe as of December 31, 1995 (the "Soxco Acquisition"). Soxco's natural gas and oil properties consist solely of working interests in producing properties and developed and undeveloped acreage located in the Gulf of Mexico that are operated by the Company or in which the Company also has a working interest. Pursuant to the Soxco Acquisition, the Company will pay Soxco cash in the aggregate amount of $23.7 million (subject to certain adjustments), and issue to Soxco a number of shares of Common Stock (estimated to be approximately 844,071 shares) with an aggregate value (determined by reference to the initial public offering price) of $11.8 million. The cash portion of the purchase price will be funded with the proceeds of this Offering. In addition to the foregoing, the Company will pay Soxco a deferred purchase price of up to $17.6 million payable in two installments, on January 31, 1997 and January 31, 1998. The amount of the deferred purchase price installments will be determined by the amount of the probable reserves of Soxco as of December 31, 1995 (approximately 17.6 Bfce) that are produced prior to or classified as proved as of December 31, 1996 and December 31, 1997, respectively, provided that Soxco will be entitled to receive a minimum deferred purchase price of $8.8 million. The amounts so determined will be paid in shares of Common Stock based upon the fair market value of such stock at the time of issuance. The Soxco Acquisition will close concurrently with, is conditioned upon and is a condition to the completion of this Offering. PRINCIPAL STOCKHOLDER. The Company is currently an indirect wholly-owned subsidiary of Brooklyn Union. Brooklyn Union distributes gas in an area of New York City with a population of four million. Upon completion of this Offering and giving effect to the Soxco Acquisition, a wholly-owned subsidiary of Brooklyn Union will own approximately 68% of the outstanding shares of Common Stock (approximately 65% if the Underwriters' over-allotment option is exercised in full). Brooklyn Union believes that Houston Exploration will provide a competitive vehicle with a stand-alone capital structure through which Brooklyn Union can continue to participate in the exploration for and production of natural gas and oil to maximize the long-term value of its substantial investment in that business. Brooklyn Union has advised the Company that it does not currently intend to engage in the domestic exploration for and production of natural gas and oil except through its ownership of Common Stock of the Company. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company.................... 6,200,000 shares Common Stock to be outstanding after this Offering..... 22,500,000 shares (1) Proposed New York Stock Exchange symbol................ "THX" Use of Proceeds........................................ To repay outstanding indebtedness under the Company's Credit Facility and to pay the cash portion of the purchase price for the Soxco Acquisition. </TABLE> - --------------- (1) Assumes 844,071 shares to be issued in connection with the Soxco Acquisition and 160,714 shares to be issued to the Company's President and Chief Executive Officer in connection with the Offering (based upon an assumed initial public offering price of $14.00 per share). Does not include (i) 1,125,000 shares of Common Stock (1,171,500 shares if the Underwriters' over-allotment option is exercised in full) issuable pursuant to options that will be granted to management and other employees upon completion of the Offering, at an exercise price per share equal to the initial public offering price, or (ii) shares of Common Stock with a fair market value at the time of issuance of up to $17.6 million issuable as the deferred purchase price for the Soxco Acquisition. See "Management -- 1996 Stock Option Plan" and "Soxco Acquisition." SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA The following table presents certain historical and pro forma financial data of the Company as of and for each of the periods indicated. The historical financial data for the years ended December 31, 1993, 1994 and 1995 have been derived from the audited financial statements of the Company. The historical financial data for the six months ended June 30, 1995 and 1996 and as of June 30, 1996 are derived from unaudited financial statements of the Company. The results for the six months ended June 30, 1996 are not necessarily indicative of results for the full year. The following information should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Pro Forma Financial Information," the Financial Statements of the Company and Soxco and the Historical Summaries to the properties acquired from TransTexas included elsewhere in this Prospectus. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, --------------------------------------- ----------------------------- PRO FORMA PRO FORMA 1993 1994 1995 1995(1) 1995 1996 1996(1) ------- ------- ------- --------- ------- ------- --------- (IN THOUSANDS EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> INCOME STATEMENT DATA: Revenues: Natural gas and oil revenues..... $37,462 $41,755 $39,431 $75,263 $20,324 $21,252 $41,055 Other............................ 799 467 1,778 1,778 825 535 535 ------- ------- ------- --------- ------- ------- --------- Total revenues............ 38,261 42,222 41,209 77,041 21,149 21,787 41,590 Expenses: Lease operating.................. 4,477 5,344 5,468 11,580 2,875 3,634 7,036 Depreciation, depletion and amortization................... 23,225 25,365 21,969 45,859 11,662 11,571 20,324 General and administrative, net............................ 2,454 3,460 3,486 3,701 1,754 2,702 2,796 Nonrecurring charge(2)........... -- -- 12,000 12,000 -- -- -- ------- ------- ------- --------- ------- ------- --------- Total operating expenses................ 30,156 34,169 42,923 73,140 16,291 17,907 30,156 ------- ------- ------- --------- ------- ------- --------- Income (loss) from operations...... 8,105 8,053 (1,714) 3,901 4,858 3,880 11,434 Interest expense, net.............. 1,764 2,102 2,398 2,453 1,319 1,118 1,097 ------- ------- ------- --------- ------- ------- --------- Income (loss) before income taxes.. 6,341 5,951 (4,112) 1,448 3,539 2,762 10,337 Income tax provision (benefit)..... 1,790 597 (3,809) (1,863) 514 (27) 2,624 ------- ------- ------- --------- ------- ------- --------- Net income (loss).................. $ 4,551 $ 5,354 $ (303) $ 3,311 $ 3,025 $ 2,789 $ 7,713 ======= ======= ======= ======== ======= ======= ======== Net income (loss) per share........ $ 0.30 $ 0.35 $ (0.02) $ 0.15 $ 0.20 $ 0.18 $ 0.34 Weighted average shares outstanding...................... 15,295 15,295 15,295 22,500 15,295 15,295 22,500 </TABLE> <TABLE> <CAPTION> AT JUNE 30, 1996 ------------------------ PRO HISTORICAL FORMA(3) ---------- ----------- (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Property, plant and equipment, net........................................... $234,211 $ 339,764 Total assets................................................................. 263,842 372,639 Long-term debt............................................................... 77,853 84,534 Stockholders' equity......................................................... 116,318 209,609 </TABLE> - --------------- (1) Gives effect to the TransTexas Acquisition, the Soxco Acquisition and the application of the net proceeds from the Offering as if such transactions had been consummated as of January 1, 1995. (2) Represents an accrual for a nonrecurring charge incurred in connection with the reorganization effective in February 1996. See Note 10 of Notes to Combined Financial Statements. (3) Gives effect to the TransTexas Acquisition, the Soxco Acquisition and the application of the net proceeds from the Offering as if such transactions had been consummated on June 30, 1996. SUMMARY NATURAL GAS AND OIL RESERVE DATA The following table summarizes the estimates of the Company's historical and pro forma net proved natural gas and oil reserves as of the dates indicated and the present value attributable to these reserves at such dates. The reserve and present value data as of December 31, 1993, 1994 and 1995 have been prepared by Ryder Scott Company, Netherland, Sewell & Associates, Inc., Huddleston & Co., Inc. and Miller and Lents, Ltd., independent petroleum engineering consultants. For additional information relating to the Company's natural gas and oil reserves, see "Business -- Natural Gas and Oil Reserves" and Note 13 of the Notes to the Combined Financial Statements of the Company included elsewhere in this Prospectus. Summaries of the December 31, 1995 reserve reports and the letters of the independent petroleum engineering consultants with respect thereto are included as Appendix A to this Prospectus. <TABLE> <CAPTION> AS OF DECEMBER 31, --------------------------------------------- PRO FORMA 1993 1994 1995 1995(1) -------- -------- -------- --------- ($ IN THOUSANDS) <S> <C> <C> <C> <C> Proved Reserves: Natural gas (Mmcf)........................... 118,118 145,945 195,946 338,529 Oil (Mbbls).................................. 536 636 889 1,234 Total (Mmcfe)................................ 121,334 149,761 201,280 345,933 Present value of future net revenues before income taxes(2).............................. $119,326 $135,869 $206,574 $ 326,346 Standardized measure of discounted future net cash flows(3)................................ $106,061 $118,434 $171,459 $ 282,066 </TABLE> - --------------- (1) Gives effect to the TransTexas Acquisition and the Soxco Acquisition. (2) The present value of future net revenues attributable to the Company's reserves was prepared using prices in effect as of the end of the respective periods presented, discounted at 10% per annum on a pre-tax basis. Such amounts reflect the effects of the Company's hedging contracts and do not reflect the effects of Section 29 tax credits. (3) The standardized measure of discounted future net cash flows represents the present value of future net revenues after income tax discounted at 10%. Such amounts reflect the effects of the Company's hedging contracts. SUMMARY OPERATING DATA <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, --------------------------------------- --------------------------- PRO FORMA PRO FORMA 1993 1994 1995 1995(1) 1995 1996 1996(1) ------- ------- ------- --------- ------ ------ --------- <S> <C> <C> <C> <C> <C> <C> <C> Production: Natural gas (Mmcf)......... 22,555 22,437 21,077 45,940 10,604 11,498 20,956 Oil (Mbbls)................ 101 102 100 130 68 41 51 Total (Mmcfe).............. 23,161 23,049 21,677 46,720 11,012 11,744 21,262 Average sales prices: Natural gas (per Mcf)(2)... $ 1.58 $ 1.79 $ 1.79 $ 1.59 $ 1.81 $ 1.78 $ 1.91 Oil (per Bbl).............. 16.96 15.85 16.54 16.65 16.97 18.93 18.69 Expenses (per Mcfe): Lease operating............ $ 0.19 $ 0.23 $ 0.25 $ 0.25 $ 0.26 $ 0.31 $ 0.32 Depreciation, depletion and amortization............ 1.00 1.10 1.01 0.98 1.06 0.99 0.96 General and administrative, net..................... 0.11 0.15 0.16 0.08 0.16 0.23 0.13 </TABLE> - --------------- (1) Gives effect to the TransTexas Acquisition and the Soxco Acquisition as if such transactions had been consummated as of January 1, 1995. (2) Reflects the effects of hedging. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Marketing and Customers."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001015298_alyn-corp_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001015298_alyn-corp_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus gives effect to the merger, effective on May 2, 1996, of Alyn Corporation, a California corporation ("Old Alyn"), with and into Alyn Corporation, a Delaware corporation formerly named AC Acquisition Corp. ("Alyn" or the "Company"), and the issuance of 0.026111 shares of Common Stock of the Company in exchange for each issued and outstanding share of common stock of Old Alyn (the "Merger"), and an 80-for-one stock split of the Common Stock effective on July 16, 1996. Unless the context otherwise requires, the term "the Company" as used in this Prospectus includes the Company and its predecessor, Old Alyn. For the definition of certain technical terms used herein, see the "Glossary of Certain Technical Terms." Unless otherwise indicated, all share, per share and financial information set forth herein assumes no exercise of the Underwriters' over-allotment option. Each prospective investor is urged to read this Prospectus in its entirety. THE COMPANY Alyn designs, develops, manufactures and markets consumer and industrial products utilizing its proprietary advanced metal matrix composite materials, which it believes have a superior combination of physical properties, including strength, light weight, stiffness, hardness and fracture resistance, for a variety of selected markets. The Company has developed technology, for which it obtained a patent in January 1996, for the application of boron carbide in combination with aluminum in lightweight metal matrix composites under the name Boralyn(R). Boron carbide, a principal component of Boralyn(R), is an advanced ceramic that is the third hardest material in the world, and the hardest material available at a commercially reasonable cost. The Company believes that no other material offers a range of properties comparable to those Boralyn(R) provides. Boralyn(R) is lighter and can be more easily fabricated than titanium; has a higher specific stiffness than titanium, aluminum or specialty steel; is one-third the density of many steels; has a hardness and resistance to wear greater than aluminum and comparable to specialty steel and titanium; is more resistant to corrosion than aluminum; is highly fracture resistant; and exhibits minimal resonance over a wide range of rotational speeds. Boralyn(R) is available in a range of grades with varying properties to satisfy specific customer requirements and is easily welded, cast, bent, coated and extruded with conventional equipment and tools. The Company believes that Boralyn(R) is a highly effective replacement for many existing premium-priced metal and composite products, such as those used in high-end sporting goods, high- capacity disks for computer hard disk drives, neutron shielding and other applications. The Company is focusing its initial marketing efforts on the use of Boralyn(R) in applications where its unique combination of properties will justify an appropriate price premium. These applications include the following: HIGH-END SPORTING GOODS. The Company has targeted premium-priced golf club heads and shafts and high-end lightweight bicycle frames and components as a primary market for Boralyn(R)-based products. Golf Club Heads and Shafts. The U.S. wholesale market for premium-priced golf clubs was estimated by industry sources to be approximately $890 million in 1994, reflecting a 23% increase over the prior year. The Company believes that the higher specific stiffness, higher specific strength and ease of fabrication of Boralyn(R), compared with titanium, allow the design and manufacture of golf club heads with a larger "sweet spot" and better mass distribution compared with titanium heads, thus yielding what golfers term a "more forgiving" golf club. In an independent third-party's comparison test against two premium- priced titanium golf club heads, a Boralyn(R) golf club head drove the ball longer distances. The higher specific stiffness of Boralyn(R) compared with graphite composite, a commonly used golf club shaft material, also should permit stiffer shafts to be made with Boralyn(R). The Company has entered into an agreement with Taylor Made Golf Company, Inc. ("Taylor Made") under which Taylor Made will purchase Boralyn(R) golf club metalwood heads between July 1, 1997, and June 30, 1999, and pursuant to which Taylor Made has been granted an exclusive world-wide license regarding Boralyn(R) metalwood golf club heads through June 30, 1999, subject to its meeting certain minimum annual and quarterly order volume requirements. If Taylor Made does not purchase Boralyn(R) metalwood golf club heads in those minimum volumes, the Company's sole remedy is to terminate the exclusivity of Taylor Made's license rights. The Company and Taylor Made are developing club head designs, molds, manufacturing, tooling and production and promotional programs in order to permit deliveries of Boralyn(R) metalwood club heads by July 1, 1997, and Taylor Made has delivered its first purchase order under the agreement for $2.25 million of metalwood golf club heads, for sale in the quarter ending September 30, 1997. Products delivered under the agreement will independently display the "Boralyn(R)" name. The Company anticipates that the Boralyn(R)-based metalwood golf club heads manufactured for Taylor Made will be a premium-priced product. The agreement also provides the framework for ongoing discussions between the Company and Taylor Made and between the Company and Taylor Made's parent, France-based Salomon Group, regarding an extension of their relationship and the possible inclusion of Boralyn(R) in additional golf club equipment and in other sporting goods made by members of Salomon Group. There can be no assurance that the Company will enter into any other agreements or receive any additional production or purchase orders from Taylor Made, or will enter into any agreement with any other golf club producer or any other member of Salomon Group. Bicycle Components and Frames. The U.S. retail market for bicycles, bicycle components and related products and services was estimated by industry sources to be approximately $5 billion in 1994. The Company believes that approximately 220,000 premium-priced (over $600 at retail) bicycles were sold in 1995. The Company has received orders for prototype components or frames from Campagnolo S.R.L., Cannondale Corporation and Trek Bicycle Corporation, each a leading manufacturer of bicycle components and/or frames, and from several smaller bicycle component and/or frame manufacturers. The higher specific strength and specific stiffness of Boralyn(R) compared to aluminum and specialty steel allows for the production of lighter bicycle components and frames with no decrease in strength or stiffness, or if weight is not a dominant consideration, for stiffer components and frames with no increase in weight. These characteristics improve riding efficiency. Other potential sporting goods applications where strength and stiffness are important include baseball bats, tennis and other sports racquets, and arrows. The Company has received orders from Worth, Inc., for prototype baseball bats, and from Spalding Sports Worldwide, Inc., a division of Spalding & Evenflo Cos., Inc., for prototype racquetball and tennis racquets. COMPUTER HARD DISKS. The U.S. wholesale market for computer hard disk substrates was estimated by industry sources to be approximately 247 million units in 1996. The Company believes that disks for high-speed, high-capacity drives, which the Company is targeting in its marketing efforts, represent between 5% and 10% of the total market. The Company is producing preliminary sample disk substrates of Boralyn(R) for evaluation by several major disk drive manufacturers, and has received a small prototype order from Seagate Technology, Inc. Unlike conventional aluminum and glass substrates in use as disks in computer hard drives, Boralyn(R) disks exhibit minimal resonance over the entire range of rotational speeds, from initial spin-up to current maximum speeds of existing substrates, as well as at substantially higher rotational speeds. Lower resonance disks will permit hard disk drives to be designed for closer head-to-disk distances and higher rotational speeds, characteristics that will allow for greater storage capabilities and faster data transfer rates. The Company does not anticipate production orders for hard disk applications prior to the second half of 1997, as a result of stringent testing requirements, substantial marketing efforts and the redesign of computer hard disk drives by disk drive manufacturers that would be necessary to realize the benefits of disks based on Boralyn(R), and there can be no assurance that any production orders will be obtained. OTHER INDUSTRIAL APPLICATIONS. Other industrial applications of Boralyn(R) include its use in components for the aerospace/defense sector, where the Company is producing prototype satellite component samples for Endgate Corporation, prototype engine components for Pratt & Whitney, Inc., and prototype sensor housings for Rosemount Aerospace, a division of BF Goodrich, Inc.; assembly equipment, where the Company is producing prototypes for Cartesian Data, Inc. and Speedfam Corporation, a subsidiary of Famtec International, Inc.; automotive and motorcycle components, where the Company is producing prototype motorcycle brake drums for Honda R&D North America, Inc. and prototype connecting rods for Maverick Racing; marine applications, where the Company is producing prototype drive shafts for Power Ski International, Inc. and prototype underwater pressure vessels for Scripps Institute of Technology; semiconductor packaging, where the Company is producing prototypes for Motorola, Inc.; speakers, where the Company is producing prototypes for Peavy Electronics Corp.; and armor for government and military vehicles and for personal protection. NEUTRON SHIELDING. Materials traditionally used for neutron absorption in nuclear reactors and disposal containers for radioactive products and waste require a separate neutron-absorbing material such as boron carbide, encased in layers of metallic alloy such as aluminum supported by steel, in order to provide stiffness and structural integrity. The metal matrix structure of Boralyn(R), combined with its boron carbide ingredients, provides acceptable neutron absorption characteristics as well as stiffness in an homogeneous, single structure, with advantages in ease of use and fabrication. Although the Company has had preliminary discussions with an international nuclear plant construction company concerning prototype disposal containers, the Company has elected to defer delivering prototypes in the neutron shielding field in order that it may concentrate its efforts currently on high-end sporting goods, computer hard disks and other industrial applications. The Company does not anticipate production orders for neutron shielding applications until at least late 1997, and there can be no assurance that any production orders will be obtained. The Company has also developed what it believes to be a superior manufacturing process that benefits from the characteristics of Boralyn(R). The Company recently filed a patent application for its soluble core method of manufacturing metal matrix composite die-cast metal structures, which allows for forming complex hollow chambers and passages, often within a one-piece structure, without the need for welding together separate components or other secondary manufacturing processes. Many of the Company's claims with respect to the physical characteristics of Boralyn(R) have been subjected to studies and testing, performed by independent laboratories, universities and other testing facilities, of its various properties such as specific strength, specific stiffness, density, hardness, resonance and neutron absorption. The results of those tests have verified and supported many of the Company's claims with respect to Boralyn(R). See "Business--Characteristics of Boralyn(R)." Alyn's objective is to become a leader in advanced metal matrix composite products and establish significant market share and brand awareness for Boralyn(R) in niche markets, such as higher-priced consumer products and specialized uses, where value-added premiums can be obtained. The Company intends to do so by capitalizing on its existing proprietary technology and patented process for producing Boralyn(R) through the direct manufacture and sale of Boralyn(R)-based products to consumer and industrial product manufacturers and distributors, and, to a lesser extent, to producers of military products. The Company believes that its focus on marketing Boralyn(R) for use in higher-priced consumer and commercial products and applications where its properties provide performance advantages will afford it the best opportunity for meaningful market penetration. The Company anticipates commencing production in late 1996, for shipment in early 1997, of Boralyn(R) in commercial quantities at its newly-leased 48,000 square foot facility in Irvine, California, which is expected to be operational in the fourth quarter of 1996. The new facility will include sintering, casting (including soluble core) and extrusion capabilities. Until production commences at the new facility, production and shipment of Boralyn(R) will continue to be undertaken by unaffiliated subcontractors. The Company has been engaged in the sale of boron carbide powder since 1990, but the Company has been unprofitable since its commencement of operations through the year ended December 31, 1995, and expects to incur significant operating losses for the year ended December 31, 1996, as a result of start-up expenses in anticipation of production orders. No production revenues for Boralyn(R) have been recognized since late 1994, and none are anticipated prior to the second quarter of 1997. The Company has received a definitive production order from Taylor Made but, in view of pre-production requirements, will not achieve significant sales of Boralyn(R) prior to the third quarter of 1997, and there can be no assurance that any significant sales from other customers will be achieved. The Company's principal executive offices are currently located at 16761 Hale Avenue, Irvine, California 92606, where its telephone number is (714) 475-1525, and its fax number is (714) 475-1531. THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Compa- ny............................... 2,750,000 shares Common Stock to be Outstanding af- ter the Offering................. 10,750,000 shares(1) Use of Proceeds................... Approximately (i) $12.6 million for capital expenditures for new production facilities, equipment and tooling and management infor- mation systems; (ii) $4.7 million to repay approximately $4.6 million principal amount of stockholder loans and accrued interest as of September 30, 1996 (including approx- imately $3.4 million principal amount of loans held by certain existing stockholders who intend to purchase, for their respec- tive accounts, approximately 440,000 of the shares of Common Stock offered hereby for an aggregate purchase price of approxi- mately $5.5 million (based on the mid-point of the estimated initial public offering price range set forth on the cover page of this Prospectus)), and (iii) $3.0 million for marketing activities for Boralyn(R) products. The remainder of the net proceeds will be used for working capital and gen- eral corporate purposes. See "Use of Pro- ceeds." Risk Factors and Dilution......... Prospective investors should carefully con- sider the matters set forth under the cap- tions "Risk Factors--Emerging Technology; Substantial Risk of Uncertain Market Ac- ceptance;--Limited Operating History; Prior Losses;--No Manufacturing Experience; Reli- ance on Manufacturing Facilities;--Rapid Technological Change and New Product Devel- opment;--Dependence on Patents;--Product Liability Risks;--Dependence on Manage- ment;--Need for Additional Management In- formation Systems;--Competition;--Need for Future Capital;--Dependence on Trademarks for Current and Future Markets;--Dependence on Principal Suppliers;--Possible Depen- dence on Significant Customers;--Quarterly Fluctuations in Operating Results;--Control by Existing Stockholders; Anti-takeover Provisions;--Dilution; Benefits of the Pub- lic Offering to the Company's Affiliates and Principal Stockholders;--Use of Pro- ceeds for Repayment of Stockholder Indebt- edness;--Shares Eligible for Future Sale;-- Absence of Prior Public Market;--Possible Volatility of Stock Price," and "Dilution." </TABLE> <TABLE> <S> <C> An investment in the shares of Common Stock offered hereby involves a high degree of risk and immediate and substantial dilution. Nasdaq National Market Symbol...... "ALYN" </TABLE> - -------------------- (1) Does not include 1,211,000 shares of Common Stock, consisting of (i) 1,000,000 shares of Common Stock reserved for future issuance under the Company's stock incentive plan, and (ii) 211,000 shares of Common Stock reserved for issuance upon the exercise of warrants issued to Furman Selz LLC. See "Management--The 1996 Stock Incentive Plan" and "Underwriting." Also assumes no exercise of the Underwriters' over-allotment option. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) Set forth below are selected financial data with respect to the statements of operations of the Company for the three years ended December 31, 1993, 1994, and 1995, and for the six months ended June 30, 1995, for the period from January 1, 1996 to May 1, 1996 and the period from May 2, 1996 to June 30, 1996, and the balance sheet of the Company at June 30, 1996. The financial data as of and for the years ended December 31, 1993, 1994, and 1995 have been derived from financial statements of the Company contained elsewhere herein, which have been audited by Price Waterhouse LLP. The financial data as of June 30, 1996, and for the six months ended June 30, 1995, for the period from January 1, 1996 to May 1, 1996 and the period from May 2, 1996 to June 30, 1996, have been derived from interim financial statements of the Company contained elsewhere herein, which are unaudited. The unaudited financial data includes all adjustments, which were of a normal recurring nature, that the Company considers necessary to present fairly, in all material respects, the financial position and the results of operations for these periods. Operating results for the period from January 1, 1996 to May 1, 1996 and the period from May 2, 1996 to June 30, 1996, are not indicative of the results that may be expected for the entire year ending December 31, 1996, as the Company anticipates incurring a substantial operating loss for the entire 1996 year. The data should be read in conjunction with the audited financial statements and the unaudited interim financial statements included herein. The Company is the successor by merger to Old Alyn. From 1990 to May 1, 1996, Old Alyn conducted its operations as Alyn Corporation, a California corporation, with 2,000,000 shares outstanding as of April 1996. Old Alyn repurchased 200,000 of its shares of Common Stock in April 1996, leaving 1,800,000 shares outstanding. In April 1996, certain prospective investors formed AC Acquisition Corp., a Delaware corporation, in order to facilitate their investment in and loans to Old Alyn, and were issued 53,000 shares of AC Acquisition Corp.'s common stock. In May 1996, Old Alyn was merged into AC Acquisition Corp., and each share of Old Alyn was exchanged for 0.026111 shares of Common Stock of AC Acquisition Corp. (the "Merger"), with 47,000 shares in the aggregate being issued to shareholders of Old Alyn. AC Acquisition Corp.'s name was changed to Alyn Corporation, which had 100,000 of shares of common stock issued and outstanding following the Merger. In July 1996, the Company effected an 80-for-one stock split, resulting in 8,000,000 shares being issued and outstanding. The pro forma financial information set forth below presents the Company's results as if the Merger had occurred as of January 1, 1995. See Note (1) below. <TABLE> <CAPTION> OLD ALYN ALYN ------------------------------------------- ----------- PERIOD FROM PERIOD FROM YEARS ENDED SIX MONTHS JANUARY 1, MAY 2, DECEMBER 31, ENDED 1996 TO 1996 TO ------------------- JUNE 30, MAY 1, JUNE 30, 1993 1994 1995 1995 1996 1996 ----- ----- ----- ---------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net revenue............. $ 540 $ 309 $ 319 $216 $104 $ 32 Costs and expenses: Cost of goods sold..... 265 92 203 102 34 7 General and administra- tive.................. 259 352 219 89 53 337 Selling and marketing.. 114 143 52 10 23 31 Research and develop- ment.................. 24 180 79 19 7 19 ----- ----- ----- ---- ---- ------ Total costs and ex- penses................ 662 767 553 220 117 394 ----- ----- ----- ---- ---- ------ Operating loss........ (122) (458) (234) (4) (13) (362) Other income (expense), net.................... (3) (11) (10) (6) (2) (20) ----- ----- ----- ---- ---- ------ Loss before provision for income taxes....... (125) (469) (244) (10) (15) (382) Provision for income taxes.................. 1 1 1 1 1 1 ----- ----- ----- ---- ---- ------ Net loss................ $(126) $(470) $(245) $(11) $(16) $ (383) ===== ===== ===== ==== ==== ====== Net loss per share(1)... $(0.05) ====== Weighted average common shares outstanding(1).. 8,000 ====== </TABLE> <TABLE> <CAPTION> OLD ALYN ALYN ---------------------------------------- ----------- PERIOD FROM PERIOD FROM YEARS ENDED SIX MONTHS JANUARY 1, MAY 2, DECEMBER 31, ENDED 1996 TO 1996 TO ---------------- JUNE 30, MAY 1, JUNE 30, 1993 1994 1995 1995 1996 1996 ---- ---- ------ ---------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> Pro forma net loss(1).... $ (322) $ (42) ====== ====== Pro forma net loss per share(1)................ $(0.04) $(0.01) ====== ====== Pro forma weighted aver- age common shares out- standing(1)............. 8,000 8,000 ====== ====== Supplemental net loss(2)................. $ (356) ====== Supplemental net loss per share(2)................ $(0.04) ====== Supplemental weighted average number of common shares outstanding(2)... 8,247 ====== </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 ------------------- AS ACTUAL ADJUSTED(3) ------ ----------- (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Working capital............................................. $1,078 $29,453 Total assets................................................ 2,650 31,025 Long-term obligations....................................... 2,794 0 Total stockholders' equity (deficit)........................ (378) 30,791 </TABLE> - -------------------- (1) Presented on a pro forma basis to reflect the change of Old Alyn's status for federal income tax purposes from an "S" corporation to a "C" corporation as a result of the Merger. The effect of such change in status was not material. As discussed above, this data reflects the Merger, including the amortization of intangible assets of $77,000 and $26,000 for the year ended December 31, 1995 and the period from January 1, 1996 to May 1, 1996, respectively, and the 80-for-one stock split. See Notes to Financial Statements. (2) Presented on a supplemental basis to reflect the reduction in the net loss for the interest accrued of $27,000 on the credit facility from stockholders for the period from May 2, 1996 to June 30, 1996 and to reflect the increase of the weighted average shares outstanding by 246,513 for the assumed repayment of the credit facility from stockholders assuming shares were sold at the initial public offering price at May 2, 1996. See Notes to Financial Statements. (3) As adjusted to reflect the sale of 2,750,000 shares of Common Stock offered hereby and the application of the net proceeds therefrom, after giving pro forma effect to the Merger. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001015313_survivalin_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001015313_survivalin_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..27f8c4724f4657e537cf39c8458cefe1133231fd
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS OF THE COMPANY, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION PRESENTED IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. THE COMPANY The Company has developed and is marketing an automated external defibrillator ("AED") which is used to treat victims of sudden cardiac arrest ("SCA"), one of the leading causes of death in the United States. The Company began marketing the VivaLink AED (the "VivaLink") following receipt of 510(k) marketing clearance by the U.S. Food and Drug Administration in February 1995. The VivaLink incorporates proprietary technologies which make it easy to use, inexpensive and lightweight. In addition, the unit's automatic daily self-testing feature ensures operational readiness. The Company believes that the VivaLink, which is currently used by a broad range of minimally-trained rescuers ("first responders"), such as firefighters, police officers and basic life support ambulance personnel, is the easiest to use AED on the market. To date, more than 20 lives have been saved using the VivaLink. Sudden cardiac arrest, which based on a study conducted between 1980 and 1985 is estimated to result in more than 350,000 deaths in the United States annually, is caused by disturbances of the heart's electrical signals. As a consequence, blood flow stops, resulting in death if not treated within minutes. Over 80% of SCAs are caused by severe heart attacks. Other causes of SCA include electrocution, drowning and suffocation. The only effective treatment for SCA is the prompt administration of an electric shock with a device known as a defibrillator. Timely defibrillation, with an AED or other type of defibrillator is the most critical factor in rescuing an individual from SCA. Published studies, including one study involving the use of the VivaLink, have indicated that survival rates for out-of-hospital SCAs can exceed 50% if defibrillation is administered within the first few minutes of SCA. Since response times by paramedics and emergency medical technicians equipped with defibrillators are often more than ten minutes, the average SCA survival rate in the United States is only 7%. In order to improve survival rates, the American Heart Association and other organizations have recommended widespread deployment of AEDs to first responders and ultimately the public. Despite the automated features of AEDs and the benefits of early defibrillation, AEDs have only achieved limited market acceptance and deployment. The Company believes that this is due to the high maintenance requirements, relative complexity, large size and high cost of other currently available AEDs. The Company believes the VivaLink overcomes these limitations. The VivaLink incorporates a number of proprietary technological advances that make it suitable for use by minimally-trained rescuers. It is small, weighs 7.75 pounds and incorporates a patented electrode packaging system that is preconnected to the unit. The VivaLink is the only AED currently available that automatically conducts daily self-tests of all major systems, including the electrodes. The unit also incorporates voice prompts and one-button operation for ease-of-use. The VivaLink's proprietary algorithm makes the decision as to whether or not a shock is warranted, thereby contributing to patient and operator safety. The unit is also designed for low-cost production, and the Company believes that the VivaLink is currently the lowest-priced AED on the market. The Company is developing its next-generation product, the VivaLink II, which is based on its versatile high voltage circuit. The VivaLink II is capable of delivering monophasic and biphasic waveform shocks with delivered energy ranging from less than 50 Joules up to 360 Joules. The Company focuses its marketing and sales efforts on first responders and out-of-hospital medical facilities. The Company believes that the initial markets for its AEDs include approximately 537,800 sites. To date, the Company has sold units to first responders, hospitals, other medical facilities and industrial and commercial sites. In the United States, the Company currently markets the VivaLink through a seven person internal sales force and through 39 distributors and six manufacturer's representatives. Internationally, the Company has signed a worldwide, non-exclusive agreement with a distributor of electromedical equipment, which is currently selling the Company's products in the United Kingdom and certain other countries. The Company continues to significantly expand its distribution network by adding internal sales personnel, distributors and manufacturer's representatives. The Company was incorporated in the State of Minnesota in April 1992. Its principal office is located at 5420 Feltl Road, Minnetonka, Minnesota 55343, and its telephone number is (612) 939-4181. THE OFFERING Common Stock offered hereby ....... 2,000,000 shares Common Stock to be outstanding after the offering ................ 6,196,257 shares (1) Use of proceeds ................... To fund expansion of the Company's marketing and distribution capabilities, introduction of new products, research and development and acquisition of manufacturing equipment; to repay debt; and for general corporate purposes. See "Use of Proceeds." Nasdaq National Market symbol ..................... SVLK (1) Does not include 1,479,033 shares issuable upon exercise of options and warrants outstanding at the date of this Prospectus. See "Management -- Stock Options" and "Description of Capital Stock -- Stock Options and Warrants."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001015360_dailey_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001015360_dailey_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and consolidated financial statements, including the notes thereto, appearing elsewhere in this Prospectus. References in this Prospectus to the "Company" or "Dailey" shall mean Dailey Petroleum Services Corp., its predecessors and its and their subsidiaries, unless the context otherwise requires. Unless otherwise noted herein, the information contained in this Prospectus gives effect to the Reorganization and assumes the Underwriters' over-allotment option will not be exercised. THE COMPANY Dailey Petroleum Services Corp. provides directional drilling services and designs, manufactures and rents technologically-advanced downhole tools for oil and gas drilling and workover applications. Founded in 1945 as a fishing tool company, Dailey began offering directional drilling services in 1984 and currently provides such services in the Gulf of Mexico, the United States Gulf Coast region, and most recently, Venezuela and the Austin Chalk formation in Texas and Louisiana. The Company's directional drilling services include computer-aided planning of optimum well path and drilling procedures, on-site supervision, measurement-while-drilling ("MWD") services and sourcing and supply of MWD equipment and related drilling tools. The Company offers an array of downhole tools, which it selectively markets in every major oil and gas exploration and production region in the world. Dailey introduced its first drilling jar to the oil and gas industry in 1965 and currently is the leading supplier of drilling jars to the rental tool market worldwide. In addition to drilling jars, the Company's other downhole tools include hydraulic fishing jars, coiled tubing jars, MWD equipment, downhole drilling motors, thrusters for directional drilling and drilling shock absorbers. The Company manufactures certain of its tools, purchases others, and rents others from third-parties. Recent advances in directional drilling technologies combined with advances in the identification and location of oil and gas reserves have made many marginal or otherwise uneconomical reservoirs economically feasible to produce. In many oilfield applications, directional drilling techniques, which include directional and horizontal drilling, extended-reach drilling and short-radius drilling, offer significant economic advantages over conventional drilling, such as reduced drilling time and expense, accelerated production rates and enhanced reservoir recovery. The Company offers drilling services for directional and horizontal applications and offers its downhole tools for all advanced drilling techniques. The Company believes its products and services improve drilling efficiency, reduce the risk that expensive drilling components will be lost downhole and enhance overall exploration and development economics. Dailey traditionally has marketed its downhole tools directly to the end-user through its direct sales force and agents, rather than rely on third-party distribution of its products and subcontracting of its services. The Company believes this strategy has resulted in higher profit margins and intends to continue this marketing strategy. In addition, this direct interaction with the end-user assists the Company in identifying demand for new and improved products and better enables it to design and develop such products in a timely manner. The Company also believes that its reputation for quality and reliability has resulted in worldwide industry recognition of the Dailey(R) name. Furthermore, the proprietary designs of many of the Company's principal products, its ability to attract and retain highly-qualified and experienced personnel, and its ability to design, develop and market new and complementary products and services are believed by the Company to be important competitive advantages. BUSINESS STRATEGY The Company's strategy is to broaden the scope of the premium downhole tools and services it provides to the oil and gas industry. The Company believes this strategy is responsive to its customers' preferences to purchase as broad a range of products and services as possible from a single provider and that the ability to offer related services enhances the Company's marketing of its downhole tools. The Company intends to implement this strategy by (i) expanding its directional drilling services and related product offerings, (ii) introducing new products and services through technological innovation and (iii) acquiring complementary businesses and assets. Expand Directional Drilling Services and Related Product Offerings. The Company's immediate strategy is to implement a significant expansion of its directional drilling business, both in the geographic scope and in types of drilling services it offers. Directional drilling services are becoming increasingly important to the Company's business because a growing percentage of the Company's downhole tools are rented in connection with providing such services. Introduce New Products and Services through Technological Innovation. The Company believes that its emphasis on distribution of its downhole tools directly to its customers has enhanced its ability to identify, design, develop and market to these customers new products and improved products that are responsive to its customers' needs. Dailey will continue to emphasize direct interaction with its customers as a method of identifying new product opportunities to keep pace with changing drilling technology trends and as a means of refining its existing downhole tools, which the Company believes will protect and expand its reputation for quality downhole tools and directional drilling services. Acquire Complementary Businesses and Assets. The Company is actively seeking strategic acquisitions that will provide additional and complementary products and services. The Company believes that acquisition candidates are available that will allow Dailey to increase market share for its downhole tools in existing markets, add new and complementary products and services and expand marketing and distribution channels for its downhole tools and directional drilling services. The directional drilling services industry recently has experienced consolidation in response to increased demand for companies offering a broad range of advanced drilling tools and services. The Company believes that this trend will continue and will present opportunities for Dailey to increase the breadth and geographic scope of its directional drilling services through strategic acquisitions. In addition, the Company believes that it can expand the scope of the products and services it offers through the purchase or manufacture of complementary tools and technology and by hiring experienced service personnel. THE OFFERING <TABLE> <S> <C> Class A Common Stock............................. 3,200,000 shares Common Stock outstanding after the Offering: Class A Common Stock(1)(2)..................... 3,560,000 shares Class B Common Stock(2)........................ 5,000,000 shares Use of Proceeds.................................. Of the net proceeds from the Offering, the Company intends to use approximately $15.0 million for capital expenditures for downhole tools; approximately $1.5 million for repayment of indebtedness to Lawrence; approximately $5.1 million for repayment of indebtedness to a subsidiary of Lawrence; and the balance for working capital and other general corporate purposes. See "Use of Proceeds". Nasdaq National Market Symbol.................... DALY </TABLE> - --------------- (1) Includes 360,000 shares to be issued contemporaneously with the Offering as restricted stock awards to certain key employees pursuant to the Company's 1996 Key Employee Stock Plan, but excludes 540,000 additional shares reserved for issuance under such plan. Also excludes 100,000 shares reserved for issuance under the Company's 1996 Non-Employee Director Stock Plan. See "Management -- 1996 Key Employee Stock Plan" and "Management -- 1996 Non-Employee Director Stock Plan". (2) Class A Common Stock is substantially identical to Class B Common Stock except with respect to voting rights. Each share of Class A Common Stock entitles the holder thereof to one vote per share, and each share of Class B Common Stock entitles the holder thereof to seven votes per share in all matters submitted to the stockholders for a vote. In addition, shares of Class B Common Stock may be converted into an equal number of shares of Class A Common Stock at any time upon election of the holder thereof. Shares of Class B Common Stock convert automatically into an equal number of shares of Class A Common Stock in the event such shares of Class B Common Stock are transferred to a person or entity that is not a member of the Lawrence Group (as defined in the Company's Restated Certificate of Incorporation). See "Risk Factors -- Special Voting Rights of Class B Common Stock; Relationship with Lawrence", "Certain Relationships and Related Transactions" and "Description of Capital Stock -- Class A and B Common Stock". PRINCIPAL STOCKHOLDER Prior to the Offering, the Company was owned by a wholly-owned subsidiary of Lawrence Industries, Inc. References in this Prospectus to "Lawrence" shall mean Lawrence Industries, Inc. and its subsidiaries, other than the Company. Following the Offering, Lawrence will own 100% of the Company's outstanding Class B Common Stock, which will represent 58% of the total outstanding Common Stock (55% if the Underwriters' over-allotment option is exercised in full) and 91% of the total voting power of the Company's outstanding Common Stock (90% if the Underwriters' over-allotment option is exercised in full) and thus will be able to elect the Company's directors and control its management. Historically, the Company financed certain of its working capital requirements through periodic advances, and a $3.3 million long-term note payable (the "Lawrence Note") relating to advances prior to fiscal 1994, from Lawrence. During the past three fiscal years, however, the Company has internally financed its working capital requirements and has paid to (received from) Lawrence net amounts of approximately $(52,000), $711,000 and $538,000 during fiscal 1994, 1995 and 1996, respectively. The Company also has made principal and interest payments on the Lawrence Note, the outstanding balance of which will be repaid utilizing proceeds from the Offering, totalling $306,000, $880,000 and $842,000 during fiscal 1994, 1995 and 1996, respectively. The Company does not expect Lawrence to be a source of working capital in the future. On June 27, 1996, the Company declared and paid to a subsidiary of Lawrence a dividend in the form of a $10.0 million promissory note (the "Dividend Note"). On August 13, 1996, $5.0 million of the outstanding principal of the Dividend Note was contributed to the capital of the Company by this subsidiary. See "Risk Factors", "The Company", "Management's Discussion and Analysis of Financial Condition and Results of Operations", and "Certain Relationships and Related Transactions". SUMMARY CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data for each of the fiscal years in the five-year period ended April 30, 1996, have been derived from audited consolidated financial statements of the Company. The Consolidated Statement of Operations Data for the years ended April 30, 1994, 1995 and 1996, and the Consolidated Balance Sheet Data as of April 30, 1996, are derived from the Company's audited consolidated financial statements appearing elsewhere in this Prospectus. This information should be read in conjunction with "Selected Consolidated Financial Data", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements of the Company and the notes thereto, included elsewhere in this Prospectus. <TABLE> <CAPTION> FISCAL YEAR ENDED APRIL 30, ----------------------------------------------------------------------- 1992 1993 1994 1995 1996 ---------- ---------- ---------- ---------- ----------- <S> <C> <C> <C> <C> <C> (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues: Rental income................................... $ 30,591 $ 28,746 $ 32,393 $ 36,691 $ 42,987 Sales of products and services.................. 11,180 8,742 11,422 12,172 15,952 ---------- ---------- ---------- ---------- ---------- Total revenues................................ 41,771 37,488 43,815 48,863 58,939 Cost of rentals and services: Cost of rentals................................. 26,268 25,078 27,384 29,685 33,019 Cost of products and services................... 5,116 4,003 5,124 6,889 7,927 ---------- ---------- ---------- ---------- ---------- Total cost of rentals and services............ 31,384 29,081 32,508 36,574 40,946 Selling, general and administrative expenses...... 7,422 6,783 7,085 9,607 12,083 Research and development expenses................. 1,224 1,262 736 775 728 ---------- ---------- ---------- ---------- ---------- Operating income.................................. 1,741 362 3,486 1,907 5,182 Interest expense, net............................. 29 285 513 1,001 863 Other (income) expense, net....................... 78 (435) (225) 190 39 Foreign exchange (gain) loss...................... 111 228 122 (90) 239 ---------- ---------- ---------- ---------- ---------- Income before income taxes and extraordinary item............................................ 1,523 284 3,076 806 4,041 Income tax expense................................ 1,101 898 1,075 838 1,427 Extraordinary income(1)........................... 1,535 -- -- -- -- ---------- ---------- ---------- ---------- ---------- Net income (loss)................................. $ 1,957 $ (614) $ 2,001 $ (32) $ 2,614 ========== ========== ========== ========== ========== Earnings (loss) per share(2)...................... $ .37 $ (.11) $ .37 $ (.01) $ -- Pro forma earnings per share(3)................... -- -- -- -- $ .40 Average common and common equivalent shares outstanding(3).................................. 5,360,000 5,360,000 5,360,000 5,360,000 6,610,000 OTHER DATA: Depreciation and amortization..................... $ 3,600 $ 4,114 $ 4,323 $ 5,428 $ 5,726 </TABLE> <TABLE> <CAPTION> AS OF APRIL 30, 1996 -------------------------- ACTUAL AS ADJUSTED(4) ------- -------------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Total assets.............................................................................. $55,878 $ 72,176 Working capital........................................................................... 7,477 24,435 Long-term debt, less current portion and long-term debt payable to affiliate.............. 6,866 6,866 Long-term debt payable to affiliate, less current portion................................. 1,100 -- Stockholders' equity...................................................................... 35,641 53,699 </TABLE> - --------------- (1) Relates to proceeds received by the Company in settlement of a lawsuit. (2) Adjusted to give effect to the Reorganization. See "The Company -- Reorganization; Relationship with Lawrence".
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+PROSPECTUS SUMMARY The following summary of certain pertinent information is qualified in its entirety by reference to the detailed information appearing elsewhere in this Prospectus. Reference is made to the Index of Defined Terms for the location herein of the definitions of certain capitalized terms. ISSUER........................... The Household Consumer Loan Trust, Series 1996-2 (the "Issuer"), a Delaware business trust to be formed by the Seller and the Owner Trustee pursuant to the Trust Agreement (the "Trust Agreement"). SECURITIES ISSUED BY THE ISSUER........................... The Class A-1 Notes, Class A-2 Notes, Class A-3 Notes and Class B Notes and the Certificates. The Notes will be issued pursuant to the Indenture and will be secured by the Trust Assets (as defined below). Pursuant to the terms of the Indenture the Class B Notes will be subordinate to the Class A Notes, the Class A-3 Notes will be subordinate to the Class A-2 and Class A-1 Notes and the Class A-2 Notes will be subordinate to the Class A-1 Notes. The Certificates will be issued by the Issuer pursuant to the Trust Agreement. The Certificates will be subordinate to the Notes pursuant to the terms of the Indenture. The Notes represent obligations solely of the Issuer and do not represent interests in or obligations of the Seller, the Servicer, the Deposit Trustee, the Owner Trustee, the Indenture Trustee or any affiliate thereof, except to the extent described herein. None of the Notes, the Series 1996-2 Participation or the Credit Lines are insured or guaranteed by any governmental agency or instrumentality. Only the Notes are offered hereby. A. THE CLASS A-1 NOTES......... $794,000,000 Consumer Loan Asset Backed Notes, Series 1996-2 (the "Class A-1 Notes"). THE CLASS A-2 NOTES......... $52,240,000 Consumer Loan Asset Backed Notes, Series 1996-2 (the "Class A-2 Notes"). THE CLASS A-3 NOTES......... $67,900,000 Consumer Loan Asset Backed Notes, Series 1996-2 (the "Class A-3 Notes"). Collectively, the Class A-1 Notes, Class A-2 Notes and the Class A-3 Notes are referred to herein as the "Class A Notes". The Class A Notes will be issued pursuant to the Indenture (the "Indenture") between the Issuer and The Bank of New York, as indenture trustee (the "Indenture Trustee"). B. THE CLASS B NOTES........... $49,370,000 Consumer Loan Asset Backed Notes, Series 1996-2 (the "Class B Notes"). The Class B Notes will be issued pursuant to the Indenture. C. THE CERTIFICATES............ Consumer Loan Asset Backed Certificates, Series 1996-2 (the "Certificates"). The Certificates will be issued pursuant to the Trust Agreement and will represent fractional undivided beneficial interests in the Issuer. TRUST ASSETS..................... The "Trust Assets" include (i) a participation interest (the "Series 1996-2 Participation") in (x) the Receivables arising under the Credit Lines and the proceeds thereof, and (y) the preferred stock of the Seller held by the Deposit Trustee (the "Preferred Stock") and (ii) monies on deposit in certain accounts of the Issuer for the benefit of Securityholders. In addition to the Trust Assets, the Overcollateralization Amount, and the subordination of certain classes of Notes to other classes of Notes and of the Certificates to the Notes support payments to Noteholders, to the extent described herein. See "Description of the Deposit Trust" herein for a description of the Preferred Stock of the Seller held by the Deposit Trust. SELLER........................... Household Consumer Loan Corporation is a corporation organized under the laws of the State of Nevada and is a wholly-owned special purpose subsidiary of Household Finance Corporation ("HFC"). The Seller purchases Receivables from the Subservicers (as defined below). The Seller then sells the Receivables and all rights with respect thereto to the Deposit Trust. See "Description of the Deposit Trust -- Assignment of Receivables" herein. DEPOSIT TRUST.................... Household Consumer Loan Deposit Trust I (the "Deposit Trust") is a common law trust. Texas Commerce Bank National Association acts as trustee for the Deposit Trust. The Deposit Trust previously issued two participation interests in the pool of Receivables in connection with the issuance of two series of asset-backed securities, a participation interest to the Seller (the "Seller's Interest") and is expected to issue additional interests in the pool of Receivables from time to time (each such interest, a "Series Participation Interest"). See "Annex II: Prior Issuance of Series Participation Interests" for a summary of the Series Participation Interests previously issued by the Deposit Trust. Each Series Participation Interest will be issued in connection with the issuance of a series of securities (each, a "Series"). The Series 1996-2 Participation will be the only Series Participation Interest held by the Issuer. SERVICER......................... HFC, a subsidiary of Household International, Inc., is the servicer of the Credit Lines pursuant to the Pooling and Servicing Agreement dated as of September 1, 1995 (the "Pooling and Servicing Agreement") among the Seller, the Deposit Trustee and the Servicer. Each Credit Line is subserviced by the appropriate Subservicer (as defined below) on behalf of HFC as Servicer. SUBSERVICERS..................... Household Realty Corporation, Household Finance Corporation of California, Household Finance Corporation II, Household Finance Corporation III, Household Finance Industrial Loan Company, Household Finance Realty Corporation of New York, Household Financial Center Inc., Household Finance Corporation of Nevada, Household Finance Realty Corporation of Nevada, Household Industrial Loan Company of Kentucky, Household Finance Industrial Loan Company of Iowa, Household Finance Consumer Discount Company, Household Industrial Finance Company and Mortgage One Corporation (collectively, the "Subservicers" and each individually, a "Subservicer"), are wholly-owned subsidiaries of HFC, licensed to make and service consumer loans in the states in which the Credit Lines were originated. The Subservicers originated the Credit Lines or purchased them from third parties. ADMINISTRATOR.................... HFC is the Administrator pursuant to an Administration Agreement dated as of August 1, 1996 (the "Administration Agreement") among HFC, the Seller, the Issuer and the Owner Trustee. Pursuant to the Administration Agreement, HFC will perform certain duties of the Issuer, Owner Trustee and Seller under the Indenture and Trust Agreement. See "Description of the Securities -- Administration Agreement" herein. THE CREDIT LINES................. The Credit Lines which generate the Receivables held by the Deposit Trust consist of a portion of the total pool of revolving consumer credit lines originated or purchased by the Subservicers (and any other consumer lending affiliates of HFC that become Subservicers) from time to time (the "Portfolio"). The Credit Lines are designated to the Deposit Trust and are required to satisfy the criteria set forth in the Pooling and Servicing Agreement for Eligible Credit Lines (as defined herein). The Receivables arising under each Credit Line, whether existing on the applicable Cut-Off Date (as defined herein) for such Receivables or thereafter generated have been or will be sold by the Subservicers to the Seller, which has sold or will sell such Receivables to the Deposit Trust. The Credit Lines are not being sold or transferred to the Seller or to the Deposit Trust and will continue to be held and administered by the Subservicers. See "Risk Factors -- Change in Loan Terms; Decrease in Finance Charges", "Description of the Deposit Trust -- Assignment of Receivables"; "Description of the Receivables Purchase Agreement -- Sale of Receivables" herein. The Seller entered into a receivables purchase agreement dated as of September 1, 1995 (the "Initial Cut-Off Date"), with each Subservicer (the "Receivables Purchase Agreement"), and may enter into a similar agreement with other affiliates of HFC. On September 28, 1995 (the "Initial Issuance Date"), pursuant to the Receivables Purchase Agreement, each of the Subservicers sold to the Seller all of their respective rights, title and interest in the Receivables existing under the Credit Lines designated to the Deposit Trust as of the Initial Cut-Off Date (the "Initial Credit Lines", and such Receivables outstanding under the Initial Credit Lines as of the Initial Cut-Off Date, the "Initial Receivables"). Each Subservicer has sold and will continue to sell to the Seller all of its right, title and interest in new Principal Receivables and Finance Charge and Administrative Receivables arising under the Initial Credit Lines from time to time. Pursuant to the Pooling and Servicing Agreement, all Receivables purchased by the Seller from the Subservicers will be sold to the Deposit Trust. Pursuant to the Pooling and Servicing Agreement, the Seller expects (subject to certain limitations and conditions), to continue to add Receivables to the Deposit Trust. To do so, the Seller may designate additional Credit Lines, the Receivables of which will be purchased and assigned by the Seller to the Deposit Trust. Such additional Credit Lines may include New Credit Lines (as defined herein) and Additional Credit Lines (as defined herein). Since the Initial Cut-Off Date, the Seller has conveyed to the Deposit Trust the Receivables arising in certain Additional Credit Lines in accordance with the provisions of the Pooling and Servicing Agreement. All Receivables arising under Credit Lines designated to the Deposit Trust, whether existing at the time such Credit Lines are designated, or subsequently generated, will be conveyed to the Deposit Trust. The Seller will also have the right, in certain circumstances, to remove certain Credit Lines, in which case, no further interest in Receivables arising under such Credit Lines will be transferred to the Deposit Trust (the "Removed Credit Lines"). See "Description of the Deposit Trust -- Additions of Credit Lines" and "-- Removal of Deposit Trust Assets". THE RECEIVABLES.................. The Receivables include (a) all periodic finance charges, and other amounts as described in the Series 1996-2 Supplement (as defined herein) (as increased by any Principal Discount, the "Finance Charge Receivables") (b) all administrative fees and late charges and all other fees or charges billed to obligors on the Credit Lines (the "Administrative Receivables" and together with the Finance Charge Receivables, the "Finance Charge and Administrative Receivables") and (c) all amounts owed by obligors under the Credit Line Agreements (as defined herein) and other amounts in respect of principal as described in the Series 1996-2 Supplement (as decreased by any Principal Discount) (the "Principal Receivables"). Recoveries (as defined below) attributed to Defaulted Credit Lines (as defined below) will be treated as collections of Finance Charge Receivables. Finance Charge and Administrative Receivables and Principal Receivables will be allocated to the Series 1996-2 Participation in accordance with the applicable Allocation Percentage (as defined herein) for the related Collection Period. Finance charges are assessed on principal receivables and certain of the finance charge receivables at rates determined by the Subservicers with respect to the respective Credit Lines generated by each such party. As of the close of business on July 31, 1996 (the "Series 1996-2 Cut-Off Date"), the interest rates on the Receivables ranged from 0.00% to 36.00% with a weighted average interest rate (by principal balance) of 19.64%. As of the Series 1996-2 Cut-Off Date, the average principal balance of the Credit Lines designated to the Deposit Trust was $5,087.18. Pursuant to the option to discount receivables contained in the Pooling and Servicing Agreement (see "Description of the Deposit Trust -- Discount Option"), the Seller has the option to designate or redesignate a fixed percentage of each Principal Receivable assigned to the Deposit Trust as a finance charge receivable (the "Principal Discount"). As of the date of this Prospectus, the Seller has not elected to exercise such option with respect to the Receivables; however, it may do so at any time in the future. In the event of such election, such percentage designated by the Seller is the "Discount Percentage." The Discount Percentage may be designated by the Seller at any time, and once designated, may be increased, decreased or withdrawn by the Seller. The Principal Discount may apply to Principal Receivables assigned to the Deposit Trust prior to, on or after the date the Seller makes such designation or redesignation. When the Discount Option has been elected, the Discount Percentage of Principal Receivables will instead be treated as Finance Charge and Administrative Receivables, and the Discount Percentage of all collections of Receivables that would otherwise be Principal Receivables will be applied as collections of Finance Charge and Administrative Receivables. The applicable Allocation Percentage of such discounted amount treated as Finance Charge and Administrative receivables will be available to make distributions of the Participation Pass-Through Rate and Defaulted Amounts allocated to the Series 1996-2 Participation. See "Risk Factors -- Discounted Principal Receivables" herein. If such election is made, as described in this Prospectus, all references herein to Principal Receivables or Finance Charge Receivables, or collections with respect thereto, are deemed in the case of Receivables assigned to the Deposit Trust to refer to such Receivables, or collections with respect thereto, as defined above, after application of the Principal Discount. In such event, references in this Prospectus to Principal Receivables or Finance Charge Receivables, or collections with respect thereto, are deemed in the case of Receivables assigned to the Deposit Trust prior to such election to refer to such Receivables, or collections with respect thereto, without application of a Discount Percentage. All historical and current data herein regarding credit lines and receivables is presented without adjustment for a Principal Discount. The amount of Receivables will fluctuate from day to day as new Receivables are generated and sold by the Subservicers to the Seller and then by the Seller to the Deposit Trust, and as existing Receivables are collected, charged-off as uncollectible or otherwise adjusted. The amount represented by the Series 1996-2 Participation will not increase as a result of additional Principal Receivables being generated under any designated Credit Line ("Additional Balances"). Additional Balances and Receivables attributable to Aggregate Additional Credit Lines exceeding the amount of reinvested collections for the Series 1996-2 Participation and all other Series Participation Interests will be reflected in the principal balance of the Seller's Interest. However, the principal balance of the Series 1996-2 Participation will be adjusted to reflect payments made on the Series 1996-2 Participation. The aggregate amount of Receivables in the Deposit Trust on the Series 1996-2 Cut-Off Date was $2,989,342,714.28 of which $2,911,818,229.60 were Principal Receivables and $77,524,484.68 were Finance Charge and Administrative Receivables. With respect to any date, the "Pool Balance" will be equal to the aggregate of the Principal Balances of all Credit Lines as of such date. The "Principal Balance" of a Credit Line on any day is equal to its principal balance on the date the Credit Line is designated to the Deposit Trust (each such date, a "Cut-Off Date"), plus (i) any Additional Balance in respect of such Credit Line, minus (ii) all Principal Collections credited against the Principal Balance prior to such day, minus (iii) all related Defaulted Amounts, and plus or minus (iv) any correcting adjustments. Notwithstanding the above, the Principal Balance of Receivables for a Defaulted Credit Line shall be zero. With respect to any Distribution Date, a "Defaulted Credit Line" is a defaulted Credit Line as to which the Servicer has charged off all of the related Principal Balance during the related Collection Period. A "Defaulted Amount" is the amount equal to the Principal Balance of a Defaulted Credit Line that the Servicer has charged off on its servicing records in such Collection Period. SERIES 1996-2 PARTICIPATION...... Pursuant to the Series 1996-2 Supplement, the Seller will convey the Series 1996-2 Participation to the Issuer. The Series 1996-2 Participation shall initially be $1,044,800,000 (the "Initial Series 1996-2 Participation Invested Amount"). Thereafter, the "Series 1996-2 Participation Invested Amount" with respect to any date will be an amount equal to the Initial Series 1996-2 Participation Invested Amount minus the sum of the Series 1996-2 Participation Principal Distribution Amount (as defined herein) paid for all Distribution Dates and the Defaulted Amounts allocated to the Series 1996-2 Participation during the related and all prior Collection Periods that have not been included in the Series 1996-2 Participation Principal Distribution Amount on the current or any prior Distribution Date. The Series 1996-2 Participation will be entitled to receive a percentage of the Interest Collections (which shall include Recoveries), Principal Collections or Net Principal Collections (as defined below) and Defaulted Amounts received or incurred during each Collection Period. With respect to any Collection Period prior to the occurrence of an Amortization Event, Interest Collections and Defaulted Amounts allocated to the Series 1996-2 Participation will be based upon the Floating Allocation Percentage. With respect to any Collection Period during an Early Amortization Period, Interest Collections will be allocated to the Series 1996-2 Participation based upon the Fixed Allocation Percentage. However, Defaulted Amounts allocated to the Series 1996-2 Participation with respect to any Collection Period after an Amortization Event shall continue to be made based upon the Floating Allocation Percentage. Interest Collections with respect to any Collection Period will be distributable to the Issuer as holder of the Series 1996-2 Participation as described under "Remittance on the Series 1996-2 Participation." Allocated Interest Collections not so distributed will be distributable to the Seller. With respect to any Collection Period prior to the Accelerated Amortization Date or the commencement of an Early Amortization Period, Principal Collections will be allocated to the Series 1996-2 Participation based upon the greater of: (i) the Floating Allocation Percentage of Net Principal Collections (as defined below) or (ii) the Minimum Principal Amount. With respect to any Collection Period after the Accelerated Amortization Date or during the Early Amortization Period, the Series 1996-2 Participation will be entitled to Principal Collections based upon the Fixed Allocation Percentage. For any Distribution Date, the Fixed Allocation Percentage applicable to Principal Collections may be different than the Fixed Allocation Percentage applicable to Interest Collections if an Amortization Event occurs after the Accelerated Amortization Date. "Net Principal Collections" will equal the excess, if any, of Principal Collections for the related Collection Period, minus Additional Balances sold to the Deposit Trust during any Collection Period. If there is no excess, Net Principal Collections will equal zero. The Floating Allocation Percentage and the Fixed Allocation Percentage are defined herein under "Description of the Deposit Trust -- Allocations and Collections". The Minimum Principal Amount is defined herein under "Description of the Deposit Trust -- Distributions on the Series 1996-2 Participation". COLLECTIONS...................... All collections on the Receivables will be allocated by the Servicer as payments on Credit Lines in accordance with the terms of the Credit Line Agreements. See "Description of the Deposit Trust -- Allocations and Collections" herein. As to any Payment Date, "Interest Collections" will be equal to the sum of (i) the amounts collected during the related Collection Period in respect of Finance Charge and Administrative Receivables, including Recoveries and (ii) the interest portion of the Transfer Price received (as defined herein) in the event the Series 1996-2 Participation is reassigned to the Seller, reduced, if HFC is no longer the Servicer, by the Servicing Fee for such Collection Period. As to any Payment Date, "Principal Collections" will be equal to the sum of (i) the amounts collected during the related Collection Period in respect of Principal Receivables (other than the principal portion of any Recoveries), and (ii) the principal portion of the price received for any repurchased Receivable and the Transfer Price. As to any Payment Date, the "Collection Period" is the calendar month preceding the month of such Payment Date. On the Business Day prior to each Payment Date, the Servicer will deposit the remittances on the Series 1996-2 Participation for such Payment Date into an account (the "Collection Account") established and maintained by the Deposit Trustee under the Pooling and Servicing Agreement. A "Defective Receivable" is any Receivable which is required to be repurchased or substituted for as a result of a defect in the related Credit Line Agreement or another breach of a representation and warranty. ACCELERATED AMORTIZATION DATE.... The "Accelerated Amortization Date" is July 31, 2001. EARLY AMORTIZATION PERIOD........ An Early Amortization Period will begin with the first day of the Collection Period in which an Amortization Event has occurred and will continue until the unpaid principal balance of the Series 1996-2 Participation is zero. "Amortization Events" will include, but are not limited to: (a) failure of the Seller to observe certain covenants; (b) certain breaches of representations and warranties; (c) the occurrence of certain events of bankruptcy, insolvency or receivership related to the Seller or the Servicer; (d) the Deposit Trust or the Issuer become an investment company under the Investment Company Act of 1940; (e) a Servicer Default occurs under the Pooling and Servicing Agreement; (f) the percentage (averaged over any three consecutive months) obtained by dividing i) the Overcollateralization Amount by ii) the outstanding unpaid principal balance of the Series 1996-2 Participation, is reduced below 4.25%; and (g) the portion of the Seller's Trust Amount owned by Household Consumer Loan Corporation is reduced below 1.01% of the aggregate invested amounts of all outstanding Series Participation Interests. See "Description of the Securities -- Early Amortization Period." REMITTANCE ON THE SERIES 1996-2 PARTICIPATION.................. On each Distribution Date the Deposit Trust will make the following remittances to the Indenture Trustee in respect of collections during the preceding Collection Period: INTEREST.................... An amount will be remitted to the Indenture Trustee on behalf of the Issuer from the applicable Allocation Percentage of Interest Collections for the preceding Collection Period equal to the amount accrued at the Participation Pass-Through Rate on the unpaid principal balance of the Series 1996-2 Participation. The "Participation Pass-Through Rate" for each Distribution Date is a per annum rate equal to Prime Rate (as defined herein), less 1.50%, subject to a minimum rate equal to a per annum rate which will result in an amount which will be sufficient to pay the full amount of interest due on the Notes and to make a full distribution on the Certificates at the Certificate Rate, plus 0.25% of the Series 1996-2 Participation Invested Amount in respect of the Accelerated Principal Payment Amount (the "Series 1996-2 Participation Interest Distribution Amount"). PRINCIPAL................... An amount will be remitted to the Indenture Trustee on behalf of the Issuer equal to the sum of the applicable Allocation Percentage of Principal Collections, or during any Collection Period prior to the Accelerated Amortization Date or commencement of an Early Amortization Period, equal to the sum of (a) the greater of: (i) the Floating Allocation Percentage of Net Principal Collections or (ii) the Minimum Principal Amount, as defined herein, and (b) to the extent of the applicable Allocation Percentage of Interest Collections remaining after providing for the distribution of the Participation Pass-Through Rate on the Series 1996-2 Participation, Defaulted Amounts and the amount of any Defaulted Amounts previously allocated to the Series 1996-2 Participation that have not been included in the Series 1996-2 Principal Distribution Amount on any prior Distribution Date (the "Series 1996-2 Participation Principal Distribution Amount"). SECURITIES INTEREST.............. Interest on each Class of Notes will be payable monthly on the fifteenth day of each month or, if such day is not a Business Day (as defined herein), on the next succeeding Business Day (each, a "Payment Date"), commencing in September, 1996, in an amount equal to interest accrued during the related Interest Period (as defined below) at the applicable Note Rate on the Security Balance for the related class of Notes. The applicable Note Rate for an Interest Period will be the per annum rate equal to the sum of (a) the London interbank offered rate for one-month United States dollar deposits ("LIBOR"), determined as specified herein, as of the second LIBOR Business Day (as defined herein) prior to the first day of such Interest Period (or as of two LIBOR Business Days prior to the Closing Date, in the case of the first Interest Period) and (b) %, %, % and % per annum in the case of the Class A-1 Notes, Class A-2 Notes, Class A-3 Notes and Class B Notes, respectively, in each case, subject to a maximum rate for each class as described under "Description of the Securities -- Distributions on the Securities" herein. Interest on the Notes in respect of any Payment Date will accrue from (and including) the preceding Payment Date (or in the case of the first Payment Date, from the date of the initial issuance of the Notes (the "Closing Date")) through (and including) the day preceding such Payment Date (each such period, an "Interest Period") on the basis of a 360-day year and the actual number of days in such interest period. See "Description of the Securities -- Distributions on the Securities". Interest for any Payment Date due but not paid on such Payment Date shall bear interest, to the extent permitted by applicable law, at the related Note Rate until paid. Failure to pay interest in full on any Payment Date after expiration of the applicable grace period is an Event of Default under the Indenture. Distributions on Certificates will be payable monthly on each Payment Date, commencing in September, 1996, at the Certificate Rate on the Security Balance of the Certificates for the related Interest Period. The "Certificate Rate" will generally equal the sum of (a) LIBOR (calculated in the manner described above for the Class A and Class B Notes for such Interest Period) and (b) the percentage specified in the Trust Agreement, subject to certain limitations as described herein under "Description of the Securities -- Distributions on the Securities." The Certificate Rate will accrue on any amounts distributable in payment of the Certificate Rate, but not paid on any monthly Payment Date. SECURITIES PRINCIPAL............. On each Payment Date, to the extent funds are available therefore, other than the Payment Date in August 2006 (the "Final Payment Date"), principal payments will be due and payable on the Notes and distributions will be due on the Certificates in respective amounts described below under "Allocation of Remittances on the Series 1996-2 Participation". On the Final Payment Date, principal will be due and payable on the Notes in an amount equal to the Security Balance thereof on such Payment Date. In addition, on any Payment Date, to the extent of funds available therefor, Noteholders will also be entitled to receive principal payments in respect of the Accelerated Principal Payment Amount as described in this Prospectus Summary under "Allocation of Remittances on the Series 1996-2 Participation". In no event will principal payments on the Notes on any Payment Date exceed the Security Balance thereof on such date. ALLOCATION OF REMITTANCES ON THE SERIES 1996-2 PARTICIPATION...... The majority of the defined terms used in this Allocation of Remittances on the Series 1996-2 Participation are defined beginning on page 62 under "Description of the Securities -- Distributions on the Securities -- Allocations of Remittances on the Series 1996-2 Participation". Except as provided below, on each Payment Date other than a Payment Date occurring after an Event of Default, remittances on the Series 1996-2 Participation will be allocated in the following order of priority: (i) sequentially, as payment for the amount of interest due on the Class A-1 Notes, Class A-2 Notes, Class A-3 Notes and Class B Notes; (ii) except as otherwise specified below, to the Certificates on behalf of the Issuer, as payment of the amount distributable in respect of the Certificate Rate on the Security Balance of the Certificates and previously unpaid; (iii) sequentially, up to the Optimum Monthly Principal, (a) to the Class A-1 Notes until the Security Balance of the Class A-1 Notes would equal the Class A-1 Targeted Principal Balance, (b) to the Class A-2 Notes until the Security Balance of the Class A-2 Notes would equal the Class A-2 Targeted Principal Balance, to the extent the Adjusted Security Balance of the Class A-2 Notes would not be reduced below the Minimum Security Balance for the Class A-2 Notes, (c) to the Class A-3 Notes until the Security Balance of the Class A-3 Notes would equal the Class A-3 Targeted Principal Balance, to the extent the Adjusted Security Balance of the Class A-3 Notes would not be reduced below the Minimum Security Balance for the Class A-3 Notes, and (d) to the Class B Notes until the Security Balance of the Class B Notes would equal the Class B Targeted Principal Balance, to the extent the Adjusted Security Balance of the Class B Notes would not be reduced below the Minimum Security Balance for the Class B Notes; (iv) to the Certificates, up to the remaining Optimum Monthly Principal until the Security Balance of the Certificates would equal the Certificate Targeted Balance, to the extent the Adjusted Security Balance of the Certificates would not be reduced below $7,900,000; (v) to the Seller, up to the remaining Optimum Monthly Principal provided the Overcollateralization Amount is not less than $14,800,000; (vi) as principal on the Notes, sequentially, up to the Accelerated Principal Payment Amount for such Payment Date: (a) to the Class A-1 Notes until the Security Balance of the Class A-1 Notes would equal the Class A-1 Targeted Principal Balance, (b) to the Class A-2 Notes until the Security Balance of the Class A-2 Notes would equal the Class A-2 Targeted Principal Balance, to the extent the Adjusted Security Balance of the Class A-2 Notes would not be reduced below the Minimum Security Balance for the Class A-2 Notes, (c) to the Class A-3 Notes until the Security Balance of the Class A-3 Notes would equal the Class A-3 Targeted Principal Balance, to the extent the Adjusted Security Balance of the Class A-3 Notes would not be reduced below the Minimum Security Balance for the Class A-3 Notes, (d) to the Class B Notes until the Security Balance of the Class B Notes would equal the Class B Targeted Principal Balance, to the extent the Adjusted Security Balance of the Class B Notes would not be reduced below the Minimum Security Balance for the Class B Notes, (e) to the Class A-1 Notes until the Security Balance of the Class A-1 Notes would equal zero, (f) to the Class A-2 Notes until the Security Balance of the Class A-2 Notes would equal zero, (g) to the Class A-3 Notes until the Security Balance of the Class A-3 Notes would equal zero, and (h) to the Class B Notes until the Security Balance of the Class B Notes would equal zero; (vii) as principal on the Notes, sequentially, up to the remaining Optimum Monthly Principal for such Payment Date: (a) to the Class A-1 Notes until the Security Balance of the Class A-1 Notes would equal zero, (b) to the Class A-2 Notes until the Security Balance of the Class A-2 Notes would equal zero, (c) to the Class A-3 Notes until the Security Balance of the Class A-3 Notes would equal zero, and (d) to the Class B Notes until the Security Balance of the Class B Notes would equal zero; (viii) to the Certificates, up to the remaining Optimum Monthly Principal until the Security Balance of the Certificates would equal the Certificate Minimum Balance, or if the Series 1996-2 Participation Invested Amount is zero, then to the Certificates until the Security Balance of the Certificates would equal zero; (ix) to the Seller provided the Overcollateralization Amount is greater than zero, the remaining Optimum Monthly Principal; and (x) any remaining amounts to the Issuer or its designee. In the event (a) immediately prior to a Distribution Date the Series 1996-2 Participation Invested Amount is less than the aggregate Security Balance of the Class A and Class B Notes immediately prior to the related Payment Date, or (b) the remittances on the Series 1996-2 Participation for a Payment Date is less than the aggregate amount to be paid pursuant to clauses (i) and (ii) above, the amount to be paid pursuant to clause (ii) above will be paid only after payments are made on the Notes pursuant to clause (iii). OVERCOLLATERALIZATION AMOUNT..... As of the Closing Date, the Overcollateralization Amount is equal to $44,404,000 (the "Initial Overcollateralization Amount") or 4.25% (the "Initial Overcollateralization Percentage") of the Initial Series 1996-2 Participation Invested Amount. For each Payment Date the "Overcollateralization Amount" equals the amount by which the Series 1996-2 Participation Invested Amount exceeds the aggregate Security Balance of the Series 1996-2 Securities, in each case after giving effect to distributions on such Payment Date. For each Payment Date, the "Accelerated Principal Payment Amount" is equal to the lesser of (i) the amount by which the remittance on the Series 1996-2 Participation exceeds the sum of (a) the amount to be distributed on the Notes with respect to interest and the Certificates with respect to the Certificate Rate on such Payment Date and (b) the Optimum Monthly Principal for such Payment Date and (ii) one-twelfth of the Series 1996-2 Participation Invested Amount, multiplied by 0.25%. The distribution of Accelerated Principal Payment Amounts, if any, to Noteholders will increase the Overcollateralization Amount. The Overcollateralization Amount will be available to absorb any Defaulted Amounts that are allocated to Noteholders and not covered by remittances on the Series 1996-2 Securities. See "Description of the Securities -- Distributions on the Securities -- Overcollateralization Amount" herein. ISSUANCE OF ADDITIONAL SERIES.... Two Series were previously issued through the sale of Series Participation Interests in the Receivables of the Deposit Trust. See "Annex II: Prior Issuance of Series Participation Interests" for a summary of the Series Participation Interests previously issued by the Deposit Trust. Additional Series are expected to be issued from time to time through the sale of additional Series Participation Interests to new issuers. It is anticipated that the securities of other Series will have expected final payment dates, rapid amortization dates, amortization periods, non-amortization periods, accelerated amortization periods and periods during which the principal amount of such securities is accumulated in a principal funding account or paid to holders of such securities which differ from those for the Series 1996-2 Securities. Accordingly, each Series may have entirely different methods for calculating the amount and timing of principal and interest distributions to securityholders and Series Enhancements (as defined below) for such series and may utilize other methods for determining the portion of collections of Receivables allocable to such securityholders and Series Enhancement. See "Deposit Trust Risk Factors." "Series Enhancement" means any letter of credit, surety bond, subordinated interest in the trust assets, collateral invested amount, collateral account, spread account, guaranteed rate agreement, maturity liquidity facility, tax protection agreement, interest rate swap agreement, interest rate cap agreement or other similar arrangement for the benefit of holders of interests in a Series. DENOMINATIONS.................... The Class A and Class B Notes will be issued in the aggregate principal amounts set forth on the cover page hereof, in fully registered denominations of $100,000 and integral multiples of $1,000 in excess thereof. REGISTRATION OF NOTES............ The Notes will initially be issued in book-entry form. Persons acquiring beneficial ownership interests in the Notes ("Note Owners") may elect to hold their Notes through DTC, in the United States, or Cedel Bank, societe anonyme ("Cedel") or the Euroclear System ("Euroclear"), in Europe. Transfers within DTC, Cedel or Euroclear, as the case may be, will be in accordance with the usual rules and operating procedures of the relevant system. Cross-market transfers between persons holding directly or indirectly through DTC, on the one hand, and counterparties holding directly or indirectly through Cedel or Euroclear, on the other, will be effected in DTC through Citibank, N.A. or Chemical Bank, the relevant depositaries (collectively, the "Depositaries") of Cedel or Euroclear, respectively, and each a participating member of DTC. So long as the Notes are in book-entry form, such Notes will be evidenced by one or more Notes registered in the name of CEDE & Co., the nominee of DTC. The interests of the Note Owners will be represented by book-entries on the records of DTC and participating members thereof. Notes will be available in definitive form only under the limited circumstances described herein. All references in this Prospectus to "Holders" or "Noteholders" shall be deemed, unless the context clearly requires otherwise, to refer to CEDE & Co., as nominee of DTC. See "Risk Factors" and "Description of the Securities -- Registration of Notes" herein. RECORD DATE...................... The last day preceding a Payment Date, or if the Notes are no longer book-entry securities, the last day of a month preceding a Payment Date. SERVICING........................ The Servicer will be responsible for servicing and managing the Credit Lines and making collections on the Receivables. Each Credit Line will be subserviced by the appropriate Subservicer on behalf of HFC, as Servicer. The Servicer will cause Interest Collections and Principal Collections to be deposited into the Collection Account, except as described herein. On the fifth Business Day prior to any Payment Date (the "Determination Date"), the Servicer will calculate, and instruct the Deposit Trust, the Issuer and the Indenture Trustee regarding the amounts to be paid, as described herein, with respect to the related Collection Period to the Noteholders. See "Description of the Securities -- Distributions on the Securities." As long as HFC is the Servicer it will receive, or be entitled to retain on behalf of itself and the Subservicers, a portion of the Interest Collections remaining after distribution of the Series 1996-2 Participation Interest Distribution Amount and the Series 1996-2 Participation Principal Distribution Amount a monthly servicing fee (the "Servicing Fee") attributable to the Series 1996-2 Participation in the amount of 2.00% per annum of the Series 1996-2 Participation Invested Amount as of the end of the related Collection Period. See "Description of the Deposit Trust -- Servicing Compensation and Payment of Expenses." In certain limited circumstances, the Servicer may resign or be removed under the Pooling and Servicing Agreement, in which event either the Deposit Trustee or, so long as it meets certain eligibility standards as set forth in the Pooling and Servicing Agreement, a third-party servicer will be appointed as a successor Servicer. In such event, the Servicing Fee will be paid to the successor Servicer from Interest Collections prior to any distributions on the Series 1996-2 Participation. See "Description of the Deposit Trust -- Certain Matters Regarding the Servicer and the Seller." If the Servicer fails to comply in all material respects with certain representations, warranties or covenants with respect to any Credit Line and such noncompliance is not cured within a specified period after the Servicer becomes aware or receives notice thereof and such noncompliance has a material adverse effect on the Noteholders, or certain events of insolvency occur with respect to the Servicer, the Deposit Trustee may appoint a successor Servicer. See "Description of the Deposit Trust -- Assignment of Receivables." FINAL PAYMENT OF PRINCIPAL; TERMINATION...................... The Notes will mature on the earlier of the date the Notes are paid in full or on the Payment Date occurring in August 2006. In addition, the Issuer of the Notes will pay the Notes in full upon the exercise by the Seller of its option to purchase the Series 1996-2 Participation after the aggregate Security Balance of the Series 1996-2 Securities is reduced to an amount less than or equal to $100,039,600 (10% of the initial aggregate Security Balance of the Series 1996-2 Securities). See "Description of the Securities" -- Maturity." MANDATORY RETRANSFER OF CERTAIN RECEIVABLES.................... The Seller will make certain representations and warranties with respect to the Trust Assets, the Credit Lines and the Receivables. If the Seller breaches certain of its representations and warranties with respect to any Receivable, then depending upon the representation or warranty breached, if such breach has a material adverse effect on the interest of the Noteholders and the persons holding the Certificates ("Certificateholders") and is not cured within the specified period, such Receivable will be removed from the Deposit Trust and assigned to the Seller for reassignment to the related Subservicer. In the event of a breach of certain representations and warranties in the Trust Agreement with respect to the Series 1996-2 Participation and such breach has a material adverse effect on the Noteholder's and Certificateholder's interests, the Series 1996-2 Participation will be assigned to the Deposit Trust. TAX STATUS....................... Special tax counsel to the Seller is of the opinion that under existing law, the Notes will be characterized as indebtedness, and neither the Deposit Trust nor the Issuer will be characterized as an association (or publicly traded partnership) taxable as a corporation. The Seller, the Indenture Trustee, the Owner Trustee and the Noteholders will agree to treat the Notes as indebtedness for all federal, state and local income and franchise tax purposes. See "Certain Federal and State Income Tax Consequences" for additional information concerning the application of federal income tax laws. ERISA CONSIDERATIONS............. Generally a pension or an employee benefit plan (a "Plan") subject to the requirements of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") and the Internal Revenue Code of 1986, as amended (the "Code") is permitted to purchase instruments like the Notes that are debt under applicable state law and have no "substantial equity features" without reference to the prohibited transaction requirements of ERISA and the Code, absent certain circumstances described in "ERISA Considerations" herein. In the opinion of ERISA Counsel (as defined herein), the Notes will be classified as indebtedness without substantial equity features for ERISA purposes. However, if the Notes are deemed to be equity interests and no statutory, regulatory or administrative exemption applies, the Issuer will hold plan assets by reason of a Plan's investment in the Notes. Any Plan fiduciary considering whether to purchase any Notes on behalf of a Plan should consult with its counsel regarding the applicability of the provisions of ERISA and the Code. See "ERISA Considerations"
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. As used in this Prospectus, unless the context otherwise requires, the term "Holdings" refers to Sprint Spectrum Holding Company, L.P., and the term "Company" refers to Sprint Spectrum L.P. ("Sprint Spectrum") and its direct and indirect subsidiaries, including Sprint Spectrum Finance Corporation ("FinCo"), WirelessCo, L.P. ("WirelessCo"), Sprint Spectrum Realty Company, L.P. ("RealtyCo") and Sprint Spectrum Equipment Company, L.P. ("EquipmentCo"). Sprint Spectrum and FinCo are collectively referred to as the "Issuers." See "The Company" and "Business--General." Prior to July 1, 1996, substantially all wireless operations of the Company and Holdings have been conducted at Holdings and all assets, with the exception of the interest in American PCS, L.P. ("APC") and the PCS (as defined under "--The Company") licenses which are held by WirelessCo, have been held at Holdings. Holdings and the Company are reorganizing (the "Reorganization") operations so that the assets used in the Company's PCS business are owned by subsidiaries of Sprint Spectrum and the investment in APC will be transferred to Holdings. Effective July 1, 1996, Holdings' assets used in the Company's PCS business were transferred to subsidiaries of Sprint Spectrum; the transfer of the interest in APC is expected to occur after the Offering. Unless otherwise indicated, all information in this Prospectus assumes that all elements of the Reorganization have occurred; however, references to "Reorganized Sprint Spectrum" assume only that the July 1, 1996 transactions have occurred. Certain of the statements contained in this summary and elsewhere in this Prospectus, including information with respect to the Company's expected PCS operations and buildout, its strategy for its PCS business and related financings are forward-looking statements. See "Risk Factors" for a discussion of important factors that could affect such matters. The term population equivalents ("Pops") means the Donnelley Marketing Service estimate of the December 31, 1995 population of a geographic area. A glossary of additional terms appearing herein has been included in this Prospectus. See "Glossary of Selected Terms." THE COMPANY Sprint Spectrum intends to become a leading provider of wireless communications products and services in the United States. The Company is the largest broadband wireless personal communications services ("PCS") company in the United States in terms of total licensed Pops, with licenses (including those to be contributed to the Company and those owned by licensees that have affiliated or have agreed to affiliate with the Company) to provide service in 33 major trading areas ("MTAs") covering 190.9 million Pops (73% of the total United States population), including eight of the nation's ten largest MTAs. The Company intends to initiate the commercial launch of its service in the fourth quarter of 1996 with service in all MTAs by the end of the first quarter of 1997. Pop coverage at the end of the first quarter of 1997 is expected to reach approximately 60% in the aggregate across all of the Company's markets. The timing of launch in individual markets will be determined by various factors, principally zoning and microwave relocation factors, equipment delivery schedules and local market and competitive considerations. The Company intends to continue to expand its coverage in its PCS markets to reach approximately 70% of the Pops in its existing license areas in the aggregate by the end of 1997. Thereafter, the Company will evaluate further coverage expansion on a market-by-market basis, eventually targeting coverage of 80% of the Pops in its existing license areas in the aggregate, thereby substantially completing its planned network buildout of its existing license areas. The general partner of Sprint Spectrum is Holdings, a limited partnership formed by Sprint Enterprises, L.P., which has a 40% partnership interest in Holdings, TCI Telephony Services, Inc. (as successor in interest to TCI Network Services), which has a 30% partnership interest in Holdings, and Comcast Telephony Services and Cox Telephony Partnership, each of which has a 15% partnership interest in Holdings (collectively, the "Partners"). Each Partner is both a general partner holding 99% of its interest as a general partner and a limited partner holding 1% of its interest as a limited partner. Holdings has a greater than 99% general partnership interest in the Company. The Partners are subsidiaries of, respectively, Sprint Corporation ("Sprint"), Tele- Communications, Inc. ("TCI"), Comcast Corporation ("Comcast") and Cox Communications, Inc. ("Cox" and, together with Sprint, TCI and Comcast, the "Parents"). The Company is at an early stage of development, has not commenced commercial PCS operations and has no revenues from operations. The Company will require significant funds for development, construction, testing and deployment of its PCS network before commencement of commercial operations. The Partners have agreed to contribute up to an aggregate of $4.2 billion of equity to Holdings to the extent required by the annual budgets of Holdings through fiscal 1999 as approved by the Partners. As of March 31, 1996, approximately $2.4 billion had been contributed to Holdings, of which $2.2 billion had been contributed to the Company and the remaining $0.2 billion had been contributed or advanced to APC. The Company currently intends to obtain up to $1.4 billion of additional equity following March 31, 1996 (of which up to $1.0 billion as of March 31, 1996 is committed to be provided to the Company by the Parents to the extent required by the Company to fund any projected cash shortfall), resulting in $3.6 billion in aggregate invested equity capital in the Company. See "Description of Vendor Contracts and Financing--Capital Contribution Agreement." There can be no assurance that any additional capital will be obtained in the form of equity from the Partners or otherwise. See "--Network Buildout and Financing Plan." The Company was the successful bidder for 29 PCS licenses in the Federal Communications Commission's ("FCC") A Block and B Block PCS auction which concluded in March 1995. The Company's 29 wholly-owned markets cover 150.3 million Pops and include, among others, the New York, San Francisco, Detroit, Dallas/Fort Worth and Boston/Providence MTAs. Additionally, Cox has agreed to contribute to the Company, upon FCC approval which is pending, a PCS license for the Omaha MTA that it purchased in the broadband PCS auction in March 1995. In order to increase its Pop coverage, the Company has affiliated and expects to continue to affiliate with other PCS providers, including those in which Holdings or affiliates of its Partners have an interest. Pursuant to affiliation agreements, each affiliated PCS service provider will be included in the Company's national network and will use the Sprint(R) (a registered trademark of Sprint Communications Company, L.P.) brand name. Each affiliated PCS provider will sell and market Sprint wireless products and services in its respective territory (and earn the revenues from such sales) and is expected to pay to the Company an affiliation fee (which may take the form of up-front and/or ongoing fees), agree to adhere to certain network technical standards and agree to provide certain wireless communication products offered by the Company. The Company may perform various services for the benefit of the affiliates, including, but not limited to, advertising, inventory management, sales and market support and customer service. Holdings owns a 49% limited partnership interest in APC, which owns a PCS license for, and operates a broadband PCS system in, the Washington D.C./Baltimore MTA. APC has affiliated with Sprint Spectrum and is marketing its products and services under the Sprint brand name. APC launched its PCS service in November 1995 and is the nation's first commercially operational PCS system. As of May 15, 1996, APC had approximately 80,000 subscribers. See "Business--General" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Holdings also expects to acquire a 49% limited partnership interest in Cox California PCS, L.P. ("Cox-California"), a partnership that will be formed to hold a PCS license for the Los Angeles-San Diego MTA covering 21.5 million Pops. Cox, which currently owns this license, has agreed to contribute the license to Cox-California and will manage and control Cox-California. The Company expects to sign an affiliation agreement with Cox-California by the end of the third quarter of 1996. At the same time, the Company also expects to affiliate with, and provide various services to, PhillieCo, L.P. ("PhillieCo"), a limited partnership organized by and among subsidiaries of Sprint, TCI and Cox, that owns a PCS license for the Philadelphia MTA. In addition, as part of an overall strategy to increase the Company's Pop coverage, either or both of Holdings and the Company may elect to bid on, or affiliate with or invest in other entities who are bidding on, PCS licenses to be awarded in the FCC auction of PCS licenses for the D, E and F Blocks. The table below presents the owned and affiliated Pops after giving effect to such affiliation arrangements: <TABLE> <CAPTION> 1995 AVERAGE LICENSE POPULATION PURCHASE PRICE OWNED/AFFILIATED # OF MTAS IN MTA(S) PER 1990 POP(1) ---------------- --------- ------------- --------------- (MILLIONS) <S> <C> <C> <C> Owned.................................... 29 150.3 $14.54 Omaha (to be contributed by Cox)(2)...... 1 1.7 $ 3.06 Affiliated: APC (Baltimore/Washington)(3).......... 1 8.3 $13.16 Cox-California (Los Angeles/San Die- go)(4)................................ 1 21.5 $13.16 PhillieCo (Philadelphia)(5)............ 1 9.1 $ 9.52 --- ----- Total................................ 33 190.9 === ===== </TABLE> - - -------- (1) Cost to winning bidder in FCC auction(s) or in connection with the award of Pioneer's Preference license (as defined under "Business--Regulation"). (2) Contribution will be credited towards capital contributions required of Cox under the Holdings Partnership Agreement (as defined under "The Partnership Agreements") to the same extent as if Cox had made a cash contribution in an amount equal to the sum of (i) $995,564, together with interest at the annual rate of 13.4% computed from November 17, 1994 through the date the Omaha license is contributed, plus (ii) $4,062,400, together with interest at the annual rate of 13.4% computed from June 30, 1995 through the date the Omaha license is contributed. (3) Holdings owns a 49% limited partnership interest in APC, which has signed an affiliation agreement with the Company. (4) Holdings intends to acquire a 49% limited partnership interest in, and the Company expects to sign an affiliation agreement with, Cox-California. (5) Owned by subsidiaries of Sprint, TCI and Cox. The Company expects to sign a services and affiliation agreement with PhillieCo. STRATEGY The Company intends to achieve its objective of becoming a leading provider of wireless communications products and services in the United States by employing strategies for network construction, service offering, branding and marketing which utilize the Company's competitive advantages. These competitive advantages are expected to include: . State-of-the-art technology. The Company is implementing a state-of-the- art PCS network using Code Division Multiple Access ("CDMA") digital technology which, the Company believes, provides benefits relative to current analog systems. The Company believes that its digital technology will increase system capacity by approximately 7 to 10 times, offer better call quality and clarity and provide a wider variety of advanced features and applications. . National network. Sprint Spectrum intends to offer wireless service on a national basis with a single technology (CDMA) operating on a uniform spectrum (1.9 GHz), thereby providing consistent functionality and high quality service. The Company currently owns (including the Omaha license to be contributed to the Company), or expects to have affiliate relationships with PCS providers who own, PCS licenses covering 190.9 million Pops and intends to pursue additional coverage on a market-by- market basis through license acquisitions and affiliation or resale agreements with other CDMA-based PCS providers. Together the Company and other PCS licensees that have announced their intentions to implement CDMA technology, have licenses covering territories representing approximately 89% of the United States population. The Company expects to gain cost advantages in purchasing power, operations and marketing because of the national scope and operating scale of its network. The Company believes it will have the flexibility to utilize pricing and promotional programs on a national basis to provide incentives for customer subscription and increased usage. . National brand. The Company will market and promote its wireless products and services under the Sprint brand which is one of the most widely recognized and respected brands in the telecommunications market. The Company expects that the use of the Sprint brand will build consumer confidence and accelerate consumer acceptance of the Company's products and services. . Strong Parent sponsorship. The Company intends to capitalize on the communications expertise of the Parents, including local exchange carrier services, cable television services and long distance telephone services. In addition, the size and breadth of the customer base of each Parent provides a key advantage for the Company's distribution and marketing efforts. Subject to certain exceptions, the Parents and the Company intend to cross-market the Company's wireless services with the long distance, local telephone and cable-based entertainment services of the Parents in order to accelerate subscriber growth and increase retention rates while improving overall customer satisfaction. Sprint has a combined customer base of 14 million long distance and local telephone subscribers and TCI, Comcast and Cox (collectively, the "Cable Parents") have 20 million cable television customers. See "Business--Relationship with Partners and Parents." NETWORK BUILDOUT AND FINANCING PLAN The Company intends to initiate the commercial launch of its service in the fourth quarter of 1996 with service in all MTAs by the end of the first quarter of 1997. Pop coverage at the end of the first quarter of 1997 is expected to reach approximately 60% in the aggregate across all of the Company's markets. The timing of launch in individual markets will be determined by various factors, principally zoning and microwave relocation factors, equipment delivery schedules and local market and competitive considerations. The Company intends to continue to expand its coverage in its PCS markets to reach approximately 70% of the Pops in its existing license areas in the aggregate by the end of 1997. Thereafter, the Company will evaluate further coverage expansion on a market-by-market basis, eventually targeting coverage of 80% of the Pops in its existing license areas in the aggregate, thereby substantially completing its planned network buildout of its existing license areas. The Company is developing a network infrastructure, including network management systems, to support a range of wireless services, including voice, data, messaging, paging and facsimile. A planning and engineering team, comprised of approximately 1,500 engineering and operations employees and thousands of independent contractors, consultants, agents and other third parties, is designing and constructing the Company's network based on national and regional marketing product requirements to meet the Company's targets for consistency, uniformity and reliability. The Company has selected Lucent Technologies Inc. ("Lucent") and Northern Telecom Inc. ("Nortel" and, together with Lucent, the "Vendors"), two of the leading telecommunications equipment manufacturers, to construct the Company's wireless network. The Vendors were selected because of their extensive experience in wireless technology and their willingness to deliver against specifications developed by the Company. The Company has entered into procurement and services contracts (the "Procurement Contracts") with each of Lucent and Nortel pursuant to which the Vendors will bear a significant portion of the responsibility for the construction of the Company's network. To mitigate against a substantial portion of the risks of completion delay and performance of the network and to ensure the Company has received competitive terms and conditions, the Procurement Contracts include, among other things, deferred payment schedules, liquidated damages provisions, extended warranty periods and "most favored customer" status. The buildout of the Company's PCS network and the marketing and distribution of the Company's PCS products and services will require substantial capital. The Company currently estimates that its capital requirements (capital expenditures, the cost of its existing licenses, working capital, debt service requirements and anticipated operating losses) for the period from inception through the end of 1998 (assuming substantial completion of the Company's network buildout to cover 80% of the Pops in its current license areas in the aggregate by the end of 1998), will total approximately $7.9 billion (of which approximately $2.2 billion had been expended as of March 31, 1996). The Company will also require substantial additional capital for new license acquisitions or investments in entities making license acquisitions (if any) and, after 1998, for coverage expansion, volume-driven network capacity and other capital expenditures for existing and new license areas (if any), working capital, debt service requirements and anticipated further operating losses. The Company will have certain commitments that must be funded in any event, including lease obligations for cell and switch sites, minimum purchase obligations under the Procurement Contracts and amortization under the Secured Financing (as defined in the second succeeding paragraph). Actual amounts of the funds required may vary materially from these estimates and additional funds would be required in the event of significant departures from the current business plan, new license acquisitions, unforeseen delays, cost overruns, unanticipated expenses, regulatory changes, engineering design changes and other technological risks. The Company currently has no sources of revenue to meet its capital requirements. The Partners have agreed to contribute up to an aggregate of $4.2 billion of equity to Holdings, to the extent required by the annual budgets of Holdings through fiscal 1999 as approved by the Partners. As of March 31, 1996, approximately $2.4 billion had been contributed to Holdings, of which $2.2 billion had been contributed to the Company and the remaining $0.2 billion had been contributed or advanced to APC. The Company currently intends to obtain up to $1.4 billion of additional equity following March 31, 1996, resulting in $3.6 billion in aggregate invested equity capital in the Company, although there can be no assurance that any additional capital will be obtained in the form of equity from the Parents or otherwise. The Parents have committed to make available to the Company or cause Holdings to make available to the Company up to $1.0 billion of such additional equity, to the extent required by the Company to fund any projected cash shortfall, under a Capital Contribution Agreement among Sprint Spectrum and the Parents that provides for $1.0 billion in aggregate equity commitments (less, subject to certain exceptions, amounts of cash equity contributed to Sprint Spectrum after December 31, 1995). At March 31, 1996, approximately $1.0 billion was available under the Capital Contribution Agreement. The Company's business plan and the financial covenants and other terms of the Secured Financing will require such additional equity financing prior to the end of 1998, absent a new financing source. The $1.0 billion portion of the $4.2 billion not invested in the Company that may be available to Holdings from the Partners may be used by Holdings to fund Holdings' other affiliate commitments, to make other wireless investments and/or to make new license acquisitions. The Partners are not obligated to make capital contributions to Holdings in excess of amounts contributed through December 31, 1995 and amounts covered under the Capital Contribution Agreement for the benefit of the Company, except to the extent required by the annual budgets of Holdings. There can be no assurance that these funds will be made available by the Parents. See "Risk Factors-- Substantial Capital Requirements and Liquidity; Highly Leveraged Capital Structure." See also "Description of Vendor Contracts and Financing--Capital Contribution Agreement" and "The Partnership Agreements--Holdings Partnership Agreement--Capital Contributions" for a discussion of the equity capital commitments to Holdings and Sprint Spectrum. Sprint Spectrum has obtained commitment letters for up to an aggregate of $5.1 billion of senior secured loans from certain third-parties. Sprint Spectrum has obtained a commitment letter from Nortel in which Nortel has committed to provide up to $1.3 billion in senior secured loans (the "Nortel Financing") to finance purchases of Nortel's PCS equipment and related services. Sprint Spectrum has also obtained a commitment letter from Lucent to provide up to $1.8 billion in senior secured loans (the "Lucent Financing" and, together with the Nortel Financing, the "Vendor Financing") to finance purchases of Lucent's PCS equipment and related services. Under the Procurement Contracts, the Company is required to purchase minimum amounts of equipment and services from each Vendor. Sprint Spectrum has also obtained a commitment letter from Chase Securities Inc. and The Chase Manhattan Bank ("Chase") in which Chase has committed to provide a $2.0 billion fully underwritten senior secured credit facility (the "Bank Credit Facility" and, together with the Vendor Financing, the "Secured Financing") to finance working capital, capital expenditures, operating losses and other partnership purposes. There can be no assurance that the conditions to the commitments under the Vendor Financing or the Bank Credit Facility will be met. See "Description of Vendor Contracts and Financing." The following table describes the estimated sources and uses of capital by the Company since inception and through 1998, assuming the Company covers approximately 80% of the Pops in its current license areas in the aggregate, thereby substantially completing the planned buildout of its PCS network. See "Business--Network Buildout." This table is based on certain assumptions as to the terms and covenant requirements of the Secured Financing and as to how the Company will elect to use available amounts under those facilities. See "Use of Proceeds" and "Description of Vendor Contracts and Financing." <TABLE> <CAPTION> SOURCES: -------- (IN BILLIONS) <S> <C> Equity Contributions Received(1)............................... $2.2 Vendor Financing(2)............................................ 2.6 Bank Credit Facility(3)........................................ 1.1 Net Proceeds to the Company from the Offering.................. 0.6 Unfunded Equity and Future Capital Required(4)................. 1.4 ---- Total Sources................................................ $7.9 ==== USES: Existing PCS Licenses.......................................... $2.1 PCS Network Buildout........................................... 3.8 Cash Debt Service Requirements(5).............................. 0.2 Operating Losses and Working Capital........................... 1.8 ---- Total Uses................................................... $7.9 ==== </TABLE> - - -------- (1) As of March 31, 1996. (2) Sprint Spectrum has obtained commitments from Nortel for an aggregate $1.3 billion secured credit facility and from Lucent for an aggregate $1.8 billion secured credit facility. Of this aggregate amount of $3.1 billion of Vendor Financing, the Company expects to have borrowed approximately $2.6 billion prior to December 31, 1998, based upon availability thereunder. (3) Sprint Spectrum has obtained a commitment from Chase to provide a $2.0 billion fully underwritten secured credit facility, of which $1.1 billion is expected to have been drawn prior to December 31, 1998, based upon availability thereunder. (4) Of such amount, approximately $1.0 billion of additional financing is expected to be obtained in the form of equity from Holdings. The Parents have committed to provide, or cause Holdings to provide, $1.0 billion of financing subsequent to December 31, 1995, of which approximately $1.0 billion was available at March 31, 1996. See "Description of Vendor Contracts--Capital Contribution Agreement." The Partners are not obligated to fund to Sprint Spectrum amounts in excess of those contemplated by the Capital Contribution Agreement. The Company's business plan assumes that additional required capital will be obtained in the form of equity (from the Partners or other sources), but a portion of it may be obtained through other means including the following: debt offerings, bank financing and vendor financing. There can be no assurance that these sources will be available when needed or on terms acceptable to the Company. (5) Includes interest expense and assumes certain interest rates. THE OFFERING Securities Offered.......... $150,000,000 aggregate principal amount of % Senior Notes due 2006 (the "Senior Notes"). $ aggregate principal amount at maturity of % Senior Discount Notes due 2006 (the "Senior Discount Notes" and, together with Senior Notes, the "Notes"). The Senior Discount Notes will be issued at a discount to their aggregate principal amount at maturity and will generate gross pro- ceeds to the Issuers of approximately $500,000,000. The yield to maturity of the Senior Discount Notes will be % (computed on a semi- annual bond equivalent basis), calculated from , 1996. See "Certain Federal Income Tax Consequences." Issuers..................... The Notes will be joint and several obligations of the Issuers. Sprint Spectrum will receive all of the net proceeds from the Offering. Non-Recourse to Holdings, the Partners and the Parents.................... The Senior Notes and the Senior Discount Notes are non-recourse to Holdings, the Partners and the Parents. Based on the advice of Simpson Thacher & Bartlett, management believes that pur- suant to New York law, which will be the gov- erning law provided for in each of the indentures under which the Notes will be issued (the "Inden- tures"), creditors may contractually agree to waive any rights granted to them pursuant to state law. Section 11.9 of each of the Indentures expressly provides that no Partner will have any liability for any obligations under the Notes and that a holder of Notes waives such liability by purchasing the Notes. Maturity Date............... , 2006. Ranking..................... The Notes will rank pari passu in right of payment and priority with all other existing and future indebtedness of the Issuers that is not by its terms subordinated in right of payment and priority to the Notes and will rank senior in right of payment to all indebtedness of the Issuers that is expressly subordinated to the Notes. A substantial portion of the assets of Sprint Spectrum on a consolidated basis will be owned by Sprint Spectrum's subsidiaries, and accordingly, claims of holders of the Notes will be effectively subordinated to claims of creditors (including trade creditors) of such subsidiaries, the amount of which are expected to be substantial. The obligations under the Vendor Financing and the Bank Credit Facility will rank pari passu in right of payment and priority with the Notes. Borrowings of up to $5.1 billion in the aggregate under the Secured Financing will be unconditionally guaranteed by subsidiaries of Sprint Spectrum. Accordingly, the claims of holders of the Notes will be structurally subordinated to the claims of creditors under the Secured Financing. See "Risk Factors--Structural Subordination of the Notes to Subsidiary Indebtedness; Asset Encumbrances." Interest Rate and Payment Dates: The Senior Notes................. Cash interest on the Senior Notes will accrue at a rate of % per annum and will be payable semi-annually in arrears on each and , commencing , 1997. The Senior Discount Notes.. Cash interest will not accrue or be payable on the Senior Discount Notes prior to , 2001. Thereafter, cash interest on the Senior Discount Notes will accrue at a rate of % per annum and will be payable semi-annually in arrears on each and , commencing , 2002. Original Issue Discount..... For federal income tax purposes, the Senior Dis- count Notes will be treated as having been issued with "original issue discount" equal to the dif- ference between the issue price of the Senior Discount Notes and the sum of all cash payments (whether denominated as principal or interest) to be made thereon. Each holder of a Senior Discount Note must include as gross income for federal in- come tax purposes a portion of such original is- sue discount for each day during each taxable year in which a Senior Discount Note is held even though no cash interest payments will be received prior to , 2002. See "Certain Federal Income Tax Consequences." Optional Redemption......... The Notes will be redeemable at the option of the Issuers, in whole or in part, at any time on or after , 2001 at the redemption prices set forth under "Description of the Notes--Optional Redemption," plus accrued and unpaid interest, if any, thereon to the date of redemption. In addi- tion, prior to , 1999, the Issuers may redeem up to 35% of the originally issued principal amount of Senior Notes and up to 35% of the orig- inally issued principal amount at maturity of the Senior Discount Notes at a redemption price equal to % of the Senior Notes so redeemed, plus ac- crued and unpaid interest, if any, thereon to the redemption date and % of the Accreted Value at the redemption date of the Senior Discount Notes so redeemed, in each case with the net proceeds of one or more Public Equity Offerings (as de- fined under "Description of the Notes--Certain Definitions") of Common Equity Interests (as de- fined under "Description of the Notes--Certain Definitions") of Sprint Spectrum, Holdings or a Special Purpose Corporation (as defined under "Description of the Notes--Optional Redemption"), in either case, resulting in gross proceeds of at least $100 million; provided that at least 65% of the originally issued principal amount of Senior Notes and 65% of the originally issued principal amount at maturity of Senior Discount Notes would remain outstanding immediately after giving ef- fect to such redemption. Change of Control........... In the event of a Change of Control (as defined under "Description of the Notes--Certain Defini- tions"), the Issuers will be obligated to make an offer to purchase all outstanding Notes at a pur- chase price equal to (i) 101% of the principal amount thereof, in the case of the Senior Notes, plus accrued and unpaid interest, if any, thereon to the purchase date and (ii)(a) 101% of the Ac- creted Value thereof on the Change of Control Payment Date, in the case of the Senior Discount Notes, if the Change of Control Payment Date is on or before , 2001, and (b) 101% of the principal amount at maturity of the Senior Dis- count Notes, plus accrued and unpaid interest, if any, thereon to the purchase date, if the Change of Control Payment Date is after , 2001. See "Descrip- tion of the Notes--Certain Covenants--Change of Control" for a discussion of such covenant and potential consequences attendant to the existence of such covenant. Asset Sale Offer............ The Issuers will, under certain circumstances, be obligated to make an offer to purchase Notes with the proceeds of certain asset sales at a purchase price equal to (i) 100% of the principal amount of the Senior Notes, plus accrued and unpaid in- terest, if any, thereon to the purchase date and (ii)(a) 100% of the Accreted Value of the Senior Discount Notes on the purchase date, if such date is on or before , 2001, and (b) 100% of the principal amount of the Senior Discount Notes, plus accrued and unpaid interest, if any, thereon to the purchase date, if such date is after , 2001. See "Description of the Notes--Cer- tain Covenants--Disposition of Proceeds of Asset Sales." Certain Covenants........... The Indentures will contain certain restrictive covenants, including (i) limitations on addi- tional indebtedness, (ii) limitations on re- stricted payments, (iii) limitations on liens, (iv) limitations on dividends and other payment restrictions affecting Restricted Subsidiaries (as defined under "Description of the Notes--Cer- tain Definitions"), (v) limitations on equity in- terests of Restricted Subsidiaries, (vi) limita- tions on transactions with equity holders and af- filiates, (vii) limitations on issuances of cer- tain guarantees by Restricted Subsidiaries, (viii) limitations on activities of the Issuers and the Restricted Subsidiaries, (ix) limitations on the disposition of proceeds of asset sales and (x) limitations on designations of Unrestricted Subsidiaries (as defined under "Description of the Notes--Certain Definitions"). In addition, the Indentures will limit the ability of the Is- suers to consolidate, merge or sell all or sub- stantially all of their assets. These covenants are subject to important exceptions and qualifi- cations. See "Description of the Notes--Certain Covenants." Use of Proceeds............. The net proceeds to Sprint Spectrum from the sale of the Notes offered hereby will be approximately $631 million, after deducting estimated dis- counts, commissions and offering expenses. The Company intends to use the net proceeds from the Offering to fund capital expenditures, including the buildout of a nationwide PCS network, to fund working capital as required, to fund operating losses and for other partnership purposes. In ad- dition, a portion of the net proceeds may be used for new PCS license acquisitions or investments in entities owning PCS licenses. See "Use of Pro- ceeds."
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+PROSPECTUS SUMMARY The following information is qualified in its entirety by the detailed information and financial statements found elsewhere in this Prospectus. See "Glossary of Selected Insurance Terms" for definitions of certain insurance terms used herein. Unless otherwise indicated, all financial data have been prepared using generally accepted accounting principles ("GAAP"). References to "Talegen" in this Prospectus include Talegen Holdings, its insurance subsidiaries (the "Insurance Companies") and its non-insurance subsidiaries. Unless otherwise indicated, references to "Coregis," "Crum & Forster," "Industrial Indemnity" and "Westchester Specialty" are references to Operating Groups, which include, respectively, Coregis Group, Inc., Crum & Forster Holdings, Inc., Industrial Indemnity Holdings, Inc., and Westchester Specialty Group, Inc. (individually, an "Intermediate Holding Company"; collectively, the "Intermediate Holding Companies") and each such Intermediate Holding Company's respective subsidiaries. The Company was organized at the direction of KKR and certain members of management of Talegen Holdings and the Insurance Companies to acquire Talegen Holdings from XFSI, a subsidiary of Xerox. The narrative and tabular presentations included in this Prospectus relating to sources and uses of funds to finance the Acquisition assume the Acquisition had closed on March 31, 1996. Upon completion of the Acquisition, Talegen Holdings will be a wholly owned subsidiary of the Company. GENERAL Talegen, with net premiums written of $1.7 billion in 1995, is a leading writer of commercial property and casualty insurance that operates through four dedicated business units (the "Operating Groups"), each of which is focused on a different, well-defined segment of the commercial property and casualty insurance market. This operating structure allows each Operating Group to focus on a specific operating strategy and to respond rapidly to changing market conditions, and provides Talegen with diversified sources of cash flow and opportunities for premium growth. As of March 31, 1996, Talegen's combined statutory surplus was $1.7 billion and total assets were $11.0 billion, including $6.3 billion of investment assets comprised principally of cash and short-term investments. Talegen is the seventeenth largest writer of commercial property and casualty insurance in the United States based on 1994 net premiums written, according to A.M. Best Company, Inc. ("A.M. Best"). The Operating Groups are: Coregis. Coregis, with net premiums written of $355 million in 1995, is a leading writer throughout the United States of commercial property and casualty insurance programs for public entities, lawyers, nonprofit organizations, and other selected market niches in which insureds' needs are generally underserved by most major insurers. Coregis distinguishes itself by developing in-depth knowledge of well-defined customer groups, by designing customized products for such groups, and by distributing such products through specialized distribution channels on a program-by-program basis. Crum & Forster. Crum & Forster, with net premiums written of $960 million in 1995, is a national writer of a broad array of property and casualty products for mid-sized commercial accounts distributed through a select network of independent agents and brokers. Crum & Forster has differentiated itself by developing long-term relationships with a select group of 589 agents and brokers ("custom agents") that accounted for 81% of Crum & Forster's gross premiums written in 1995. In order to maintain its responsive service and thorough knowledge of the local insurance market, Crum & Forster operates on a highly decentralized and regionalized basis through 20 regional offices. Industrial Indemnity. Industrial Indemnity, with net premiums written of $227 million in 1995, specializes in providing workers' compensation insurance and risk management services on a nationwide basis with an emphasis on the western United States. Industrial Indemnity has differentiated itself by its recent implementation of a new comprehensive claims management process that integrates all facets of a workers' compensation claim, including prevention, medical management, legal and financial. This innovative claims process allows Industrial Indemnity to manage more effectively the medical care and disability components of its business and to reduce overall workers' compensation costs for its customers. Westchester Specialty. Westchester Specialty, with net premiums written of $152 million in 1995, specializes in umbrella, excess casualty and specialty property coverages. Westchester Specialty principally focuses on excess and surplus lines of business which are difficult to place and/or complex, and which require a greater underwriting and claims expertise than that typically found in the standard commercial property and casualty insurance market. CORE STRENGTHS In 1992, a new management team began to implement a series of initiatives designed to strengthen Talegen's competitive position in the property and casualty insurance industry. The most significant of these initiatives was a comprehensive legal and capital restructuring (the "Talegen Restructuring") that terminated Talegen's intercompany pooling arrangement and realigned 18 of Talegen's insurance companies into the four highly focused Operating Groups. A fifth group, composed of The Resolution Group, Inc. and its subsidiaries ("TRG"), which is being sold by XFSI in a separate transaction to an entity organized at the direction of KKR and certain management members of TRG, was established at the same time to manage claims run-off obligations and reinsurance collections associated with its own and several Talegen discontinued books of business. In addition to the Talegen Restructuring, which required the approval of 15 state insurance departments, management's initiatives also included: (i) the strengthening of the balance sheet through capital infusions, significant additions to reserves and a repositioning of the investment portfolio primarily to cash and short-term investments, (ii) the implementation of more disciplined planning, reserving, reinsurance and catastrophe management practices, and (iii) various initiatives to improve productivity, including the more effective use of technology and other process enhancements. Talegen believes that these initiatives, as well as additional management actions, have resulted in the following core strengths: Focused Operating Groups. Although Talegen is a leading writer of commercial property and casualty insurance, each of the Operating Groups is a dedicated business unit with a specific market focus, operating strategy, and business and financial objectives. This structure permits each Operating Group to (i) identify customer needs, (ii) develop tailored products for its targeted customer groups, (iii) respond rapidly to new opportunities and changing market conditions, and (iv) maintain its own balance sheet to improve internal financial accountability. Although the Operating Groups are managed as separate businesses, Talegen Holdings establishes corporate strategies and objectives and implements disciplined planning and audit review processes for each of the Operating Groups. Well Capitalized Balance Sheet. Talegen believes that the Insurance Companies are well capitalized with $1.7 billion of combined statutory surplus to support $1.7 billion of net premiums written in 1995. This conservative premium-to-surplus ratio of 1.0 to 1.0 provides the opportunity for profitable business expansion consistent with Talegen's philosophy of disciplined underwriting and managed premium growth. In addition, Talegen's $6.3 billion investment portfolio is currently invested principally in cash and short-term investments. As part of the Acquisition and prior to the Closing, XFSI will replace certain promissory notes and certain real estate assets of the Insurance Companies with $468 million of cash that Talegen will use to increase the investment portfolio of the Insurance Companies. Conservative Reserving and Reinsurance Practices. Since 1992, Talegen has developed a comprehensive loss reserving process that will continue to be enhanced after the Acquisition. This process includes in-depth analyses of reserves at least semi-annually by each Operating Group and a review of such analyses by Talegen Holdings's actuaries and senior management. In addition, Talegen periodically retains independent actuaries to review and confirm its reserve levels. Talegen has developed comprehensive methodologies to evaluate its environmental and asbestos exposures, which Talegen believes are among the most sophisticated in the property and casualty insurance industry. Since 1992, Talegen has strengthened its gross loss and loss expense and uncollectible reinsurance reserves, including reserves relating to environmental, asbestos and other latent exposures, by $1.3 billion. Furthermore, as of March 31, 1996, gross reinsurance coverage remains available from a subsidiary of Xerox for accident years 1992 and prior of $140 million and $100 million for Coregis and Industrial Indemnity, respectively, exclusive of 15% coinsurance. Talegen has also significantly improved the quality of its reinsurance program by reducing the number of its reinsurers from approximately 175 in 1992 to approximately 35 high quality reinsurers in 1995 with whom Talegen placed over 80% of its 1995 ceded premiums. Talegen's management believes that its actions to strengthen reserves coupled with its focus on claims and reinsurance management will mitigate future adverse reserve development and believes its current reserves are adequate. See "Reserves and Risk Management." Disciplined Pricing and Underwriting. The Operating Groups underwrite insurance products for well-defined, and often underserved, customer groups through a profit-oriented rather than a premium volume strategy. This profit-oriented strategy has led to a strict focus on pricing adequacy within Talegen. For example, Westchester Specialty has decreased its book of umbrella and excess casualty business due to significant price competition and has simultaneously increased its book of specialty property business where conditions have been favorable due to capacity shortages. By operating in well- defined market segments, the Operating Groups obtain significant data and experience within each customer group, enabling them to identify acceptable risks and appropriately price coverages. Claims Management Expertise. Talegen believes that the Operating Groups' claims management practices provide a significant competitive advantage in the marketplace. Each of the Operating Groups strongly emphasizes the timeliness and quality of its claims handling practices, resulting in high quality service to customers. In addition, appropriate disbursement of claim payments and claim expenses is critical to Talegen's financial success. To differentiate its claim management practices and to enhance the effectiveness of its knowledgeable claims staff, Talegen has invested significantly in technology over the last three years. Talegen's management has devoted the past four years to developing its core strengths, completing the Talegen Restructuring, and resolving Talegen's ownership situation following Xerox's January 1993 announcement of its intention to divest itself of its financial services operations, including Talegen. With the Talegen Restructuring and the other management actions now complete and the ownership question resolved by the Acquisition, management can direct its full attention to profitably growing the Operating Groups by building on these core strengths. STRATEGY Talegen believes that the most effective strategy for competing in the commercial property and casualty insurance industry is to operate as dedicated, flexible business units that are focused on well-defined markets. While continuing to focus on its core strengths, Talegen plans to implement the following strategies: Disciplined Premium Growth. Talegen believes premium growth opportunities that offer adequate returns exist in each of its markets through geographic expansion, development of new products and increased penetration of its existing customer groups and distribution channels. For example, Coregis is developing new products for its existing customer groups, identifying new customer groups, and expanding each of its divisions geographically. Through its differentiated distribution strategy, Crum & Forster believes that it can continue to grow the volume of business obtained from its custom agents. Industrial Indemnity is focused on increasing its penetration of its existing markets as well as extending its workers' compensation expertise beyond the western states. In the absence of profitable opportunities to expand its casualty coverages, Westchester Specialty has been increasing its book of specialty property business. Low-Cost Provider. Talegen's objective is to become a low-cost provider in each of its markets. The Operating Groups have been increasing their efficiency by implementing technological improvements to increase productivity, reducing staff, and enhancing management controls and financial oversight. As a result of these efforts, gross premiums written per employee have increased from approximately $426,000 in 1993 to $533,000 in 1995, or 25%. In addition, Talegen's internal operating expenses (see "Glossary of Selected Insurance Terms") have decreased from $463 million in 1992 to $391 million in 1995. Talegen believes that additional opportunities exist for expense and productivity improvements by optimizing its significant investments in technology to date and by continuing management's focus on internal expense improvements. Reposition Investment Portfolio. The Operating Groups liquidated their investment portfolios in 1992 to assist in obtaining regulatory approval for the Talegen Restructuring. After the Talegen Restructuring, Talegen engaged in limited reinvestment activities and, to assist in the sale of Talegen, again liquidated its investment portfolio in 1995. As of March 31, 1996, Talegen had total investment assets of $6.3 billion, which were comprised principally of cash and short-term investments. With its ownership situation resolved, Talegen will implement an investment strategy consistent with the duration of its liabilities and designed to maximize after-tax investment income within acceptable risk and volatility criteria. Talegen's strategy will be to invest principally in a portfolio of high-quality marketable fixed income securities with an average rating for the portfolio of "A" or better, while maintaining sufficient investments in highly liquid, short-term securities to provide for immediate cash requirements. THE ACQUISITION Pursuant to the Stock Purchase Agreement dated as of January 17, 1996 among XFSI, Xerox, Holdings, and the Company (the "Purchase Agreement"), the Company will acquire all of the issued and outstanding capital stock of Talegen Holdings in consideration of $1.75 billion, including the sale by a trust formed by Holdings (the "Trust") of $450 million of preferred securities (the "Preferred Securities") to XFSI (subject to certain adjustments). See "Description of Preferred Securities." In addition, in conjunction with the Acquisition, Talegen Holdings will (i) repay existing indebtedness of its Intermediate Holding Companies, which amounted to $351 million at March 31, 1996, and (ii) apply an estimated $100 million to a combination of the payment of transaction fees and expenses and balances for working capital. To finance the Acquisition, in addition to the Offering and the utilization of $72 million of cash and investment balances of Talegen Holdings, the Company will enter into a $775 million term loan facility (the "Term Loan Facility") and a $200 million revolving credit facility (the "Revolving Credit Facility"; collectively, the "Credit Facilities"). Of the $200 million commitment under the Revolving Credit Facility, $21 million will be used to finance the Acquisition with the remainder available to fund future liquidity needs of the Company, if any. Entities organized at the direction of KKR and approximately 85 members of Talegen's management (the "Management Investors") will fund a portion of the Acquisition cash purchase price through a $513 million common equity investment (approximately $53 million from the Management Investors) in Holdings, which will be contributed by Holdings, along with $450 million in proceeds from the sale of the Preferred Securities, to the Company as common equity (the "Equity Investment"). The Offering, the Credit Facilities, and the Equity Investment (including the contribution to the Company of the proceeds of the Preferred Securities) are collectively referred to in this Prospectus as the "Financings." The sources and uses of the funds for the Acquisition and the related transactions are as follows (dollars in millions): <TABLE> <CAPTION> SOURCES OF FUNDS <S> <C> Cash and investment balances of Talegen Holdings......................... $ 72.0(1) Cash contribution by XFSI................................................ 20.0(2) Term Loan Facility....................................................... 775.0 Revolving Credit Facility................................................ 21.0(3) Debentures offered hereby................................................ 350.0 Equity Investment........................................................ 963.0(4) -------- Total sources of funds................................................. $2,201.0 -------- -------- USES OF FUNDS Purchase of Talegen Holdings equity...................................... $1,750.0(5) Refinancing of existing debt............................................. 351.0 Estimated transaction fees and expenses and balances for working capital................................................................ 100.0 -------- Total uses of funds.................................................... $2,201.0 -------- -------- </TABLE> - ------------ (1) As of March 31, 1996, on a pro forma basis to give effect to certain dividends from the Intermediate Holding Companies and the Insurance Companies and the release of funds from a security arrangement upon the repayment of debt of the Intermediate Holding Companies, Talegen Holdings would have had cash and investment balances of $195 million. From its pro forma cash balances, Talegen Holdings intends to: (i) contribute a total of $85 million to Crum & Forster and Westchester Specialty, (ii) apply $72 million to fund the Acquisition and the related transactions, and (iii) retain $38 million as excess cash and investment balances. Pursuant to the Purchase Agreement, substantially all cash dividends of the Insurance Companies from and after July 1, 1995, with the exception of the proceeds of certain sales of assets, will be retained by Talegen Holdings and not paid to XFSI. (2) Primarily represents a contribution by XFSI of dividends to be paid by TRG subsequent to March 31, 1996 and prior to Closing. (3) $179 million of commitments under the Revolving Credit Facility will be available to the Company after the Closing to fund future liquidity needs, if any. (4) The Equity Investment is comprised of capital contributions from the following sources: Preferred Securities of Holdings.................................. $450.0 KKR-organized entities............................................ 460.0 Management Investors.............................................. 53.0 ------ Total Equity Investment....................................... $963.0 ------ ------ The Trust will sell $450 million of Preferred Securities to XFSI and then loan the proceeds to Holdings. Holdings will contribute the proceeds of the Preferred Securities as common equity to the Company. One of Industrial Indemnity's Insurance Company subsidiaries has applied to California regulators for permission to pay an extraordinary dividend of $50 million in connection with the Acquisition. In the event that such approval is not obtained or is obtained for only a portion of the requested $50 million, the total purchase price of the Acquisition will remain the same, but an additional amount of Preferred Securities equal to the difference between $50 million and the permitted dividend, if any, will be issued to XFSI in lieu of a like amount of cash. See "Description of Preferred Securities." Included in the $53 million investment by the Management Investors is a $13 million restricted investment in Holdings stock, the proceeds of which will be invested as common equity by Holdings in the Company. (5) If the Closing has not occurred prior to July 1, 1996, the purchase price will be increased by $10 million each month (or the pro rata portion of each month), payable in additional Preferred Securities. THE OFFERING <TABLE> <S> <C> Debentures Offered........... $350,000,000 principal amount of % Senior Subordinated Debentures due 2008. Maturity Date................ , 2008. Interest Payment Dates....... and of each year, commencing , 1996. Optional Redemption.......... The Debentures will be redeemable at the option of the Company, in whole or in part, at any time or from time to time, on or after , 2001, at the redemption prices set forth herein, together with accrued and unpaid interest, if any, to the date of redemption. In addition, at any time on or prior to , 1999, the Company may redeem up to 40% of the aggregate principal amount of the Debentures originally issued with the net proceeds of (i) one or more Equity Offerings (as defined) by the Company or (ii) one or more capital contributions to the Company by Holdings with the net proceeds of one or more Equity Offerings by Holdings, at a redemption price equal to % of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of redemption; provided that at least $210 million aggregate principal amount of the Debentures remains outstanding after such redemption. See "Description of the Debentures--Optional Redemption." Change of Control............ Upon the occurrence of a Change of Control of the Company or Holdings, each holder of the Debentures may require the Company to purchase all or any portion of such holder's Debentures at a purchase price equal to 101% of the principal amount thereof, together with accrued and unpaid interest, if any, to the date of purchase. See "Description of the Debentures--Repurchase at the Option of Holders--Change of Control." Ranking...................... The Debentures will be unsecured senior subordinated obligations of the Company and, as such, will be subordinated to all existing and future Senior Indebtedness (as defined) of the Company, including indebtedness under the Credit Facilities, with respect to principal, premium, if any, and interest. By reason of such subordination, holders of Senior Indebtedness must be paid in full before holders of the Debentures may be paid in the event of a liquidation, dissolution or other winding up of the Company, whether voluntary or involuntary and whether or not involving insolvency or bankruptcy. At March 31, 1996, on a pro forma basis after giving effect to the Acquisition and the Financings and the application of the net proceeds therefrom, the Company would have had approximately $796 million of Senior Indebtedness outstanding and the Company would have had additional availability of $179 million for borrowings under the Credit Facilities, all of which would be Senior Indebtedness, if borrowed. The Company will be a holding company and, accordingly, the Debentures also will be effectively subordinated to all existing and future liabilities of the Company's subsidiaries. At March 31, 1996, </TABLE> <TABLE> <S> <C> on a pro forma basis after giving effect to the Acquisition and the Financings and the application of the net proceeds therefrom, the Company's subsidiaries would have had total liabilities (including loss reserves and unearned premium reserves) of $8,667 million. Additional Senior Indebtedness may be incurred by the Company from time to time, subject to certain restrictions. See "Description of the Debentures--Subordination." Certain Covenants............ The indenture under which the Debentures will be offered (the "Indenture") will contain covenants, including, but not limited to, covenants with respect to the following matters: (i) restricted payments; (ii) limitation on incurrence of indebtedness and issuance of disqualified stock; (iii) liens; (iv) merger, consolidation, or sale of all or substantially all assets; (v) limitation on transactions with affiliates; (vi) dividends and other payment restrictions affecting subsidiaries; (vii) limitations on other senior subordinated indebtedness and (viii) asset sales. See "Description of the Debentures." Use of Proceeds.............. The gross proceeds from the Debentures offered hereby will be used to provide a portion of the Financings that will be used to acquire Talegen Holdings, repay indebtedness of the Intermediate Holdings Companies, pay certain related fees and expenses and fund balances for working capital. See "Use of Proceeds." Absence of Public Market for the Debentures.............. There is no public market for the Debentures and the Company does not intend to apply for listing of the Debentures on any securities exchange or for quotation on any inter-dealer quotation system. The Company has been advised by the Underwriters that, following completion of the initial offering of the Debentures, the Underwriters presently intend to make a market in the Debentures; however, they are not obligated to do so and any such market making may be discontinued at any time without notice. Accordingly, there can be no assurance as to whether an active public market for the Debentures will develop or, if a public market does develop, as to the liquidity of the trading market for the Debentures. If an active public market does not develop, the market price and liquidity of the Debentures may be adversely affected. See "Underwriting."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001015604_healthcor_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001015604_healthcor_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. THE COMPANY HealthCor is a leading provider of comprehensive home health care services in the southwestern and central United States. The Company provides fully-integrated home health care services, including nursing, respiratory therapy/medical equipment and infusion therapy. Since incorporation in 1989, the Company has expanded from 12 offices in three states to 75 offices in eight states at May 31, 1996. The Company has successfully diversified its business mix from approximately 98% nursing in 1989 to 58% nursing on a pro forma basis as of March 31, 1996, reflecting the Company's evolution to a fully-integrated home health care provider. Home health care is among the fastest growing segments of the health care industry with estimated annual expenditures of $36.1 billion in 1995, up from $12.9 billion in 1990, representing a compounded annual growth rate of approximately 23%. The underlying growth factors in the home health care industry include: (i) the cost-effective nature of home care; (ii) an increasing number of patients due to growth in the aging population; (iii) technological advances that expand the range of home care procedures; and (iv) patient preference for treatment in the home. In addition, the home health care industry is highly fragmented with over 17,000 providers delivering home care services in the United States. Managed care organizations and cost containment initiatives by payors have driven the growth of home health care by emphasizing lower cost alternatives to hospitals and skilled nursing facilities. These organizations and payors seek coordinated, consistent quality home health care across broad geographic areas in order to serve their patients more effectively. The Company believes its ability to offer comprehensive home health care services is a significant differentiating factor in its markets and affords it the ability to attract contracts with payors. In addition, the Company seeks to enhance its market position by making strategic acquisitions of high-quality companies that complement and expand its operations. The Company's business objective is to enhance its position as one of the leading providers of comprehensive home health care services in the southwestern and central United States. The Company's strategy is to: (i) provide one-stop shop home health care to enhance its appeal to referral sources and payors; (ii) acquire companies to enter new markets and further penetrate existing markets; (iii) accelerate internal growth by expanding its scope of services; and (iv) enhance its competitive position through the use of clinically-based management information technology. In December 1994, the Company, with the assistance of Rockwell International Corporation ("Rockwell") and others, began developing a custom-designed, clinically-based management information system to reduce costs, improve productivity, produce and analyze clinical outcomes data and manage growth more effectively. To date, the Company has implemented several phases of this system, including the nursing component. Productivity analyses conducted in various offices of the Company have demonstrated increased individual nurse productivity in certain instances ranging up to 40%. The Company believes that this system will enable it to compete more effectively in an increasingly competitive managed care environment and under new government reimbursement models, such as prospective pay. See "Business -- Information System."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001015611_united_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001015611_united_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements appearing elsewhere in this Prospectus. Unless the context otherwise requires, the "Issuer" refers to UIH Australia/Pacific, Inc., a wholly owned subsidiary of UIH Asia/Pacific Communications, Inc. ("UAP"), an indirect majority-owned subsidiary of United International Holdings, Inc. ("UIH"), and the "Company" refers collectively to the Issuer, its subsidiaries and non-majority owned affiliates and their respective predecessors. The Issuer owns, through directly and indirectly held interests, a combined 100% economic interest in two Australian companies, CTV Pty Ltd. ("CTV") and STV Pty Ltd. ("STV"), which are together operating, and are referred to herein, as "Austar." See "Corporate Organizational Structure-- Austar." Unless the context requires otherwise, "UIH" includes UIH and all of its subsidiaries other than the Issuer and its subsidiaries. All references to "$" or "dollars" are to U.S. dollars, unless otherwise indicated. For information regarding foreign currency amounts translated to U.S. dollars, see "Exchange Rate Data." THE COMPANY OVERVIEW The Company is a leading provider of multi-channel television services in Australasia. Through its Australian operating company Austar, the Company is the largest provider of multi-channel television services in regional Australia, where it operates wireless cable ("MMDS") systems and is marketing a direct-to-home ("DTH") service in franchise areas encompassing approximately 1.5 million television homes, or 25% of the total Australian market. In addition, the Company, through its New Zealand operating company, Saturn Communications Limited ("Saturn"), is constructing a wireline cable and telephony system in Wellington, New Zealand, a market representing approximately 135,000 television homes. The Company's other assets include a 25% interest in XYZ Entertainment Pty Ltd. ("XYZ"), a programming company that provides four channels to the Australian multi-channel television market as part of the "Galaxy" package, the most widely distributed programming package in Australia and the core component of Austar's programming offering, and a 90% economic interest in Telefenua S.A. ("Telefenua"), the only provider of multi- channel television services in Tahiti, with an MMDS system in a market with 31,000 television homes. The Company believes that it is well-positioned to capitalize on the rapidly increasing demand for multi-channel television and telephony services in Australasia. As of October 31, 1996, the Company had invested approximately $200 million in its networks and operating infrastructure and had launched service in each of its markets. The Company has experienced rapid growth in its network coverage and subscriber base during 1996. As of October 31, 1996 the Company's multi-channel television operating systems had an aggregate of approximately 1.5 million television homes serviceable and approximately 81,500 subscribers, as compared with approximately 233,000 television homes serviceable and approximately 10,200 subscribers as of December 31, 1995 (with a substantial majority of such growth resulting from Austar's expansion). During this same ten-month period, programming subscribers of XYZ increased from approximately 65,000 to approximately 269,000. While the Company expects that a substantial portion of its growth will come from the continued development of Austar, the Company is also anticipating significant growth by its other operating companies. OPERATIONS AUSTAR (AUSTRALIA) Austar is the largest provider of multi-channel television services in regional Australia (areas outside Australia's six largest cities). Austar initiated widespread deployment of its services in early 1996 and as of October 31, 1996, had launched MMDS service in 27 metropolitan markets containing approximately 700,000 homes and had initiated the marketing of DTH services in non-metropolitan markets containing approximately 740,000 homes. These markets represent over 93% of Austar's 1.5 million franchise television homes, the remaining 100,000 of which will be serviceable by early 1997. Austar's marketing efforts have kept pace with the rapid roll-out of its network services during 1996. As of October 31, 1996, Austar had 75,300 subscribers with a backlog of 13,900 customers scheduled for installation. In addition, subscriber growth has accelerated in recent periods, as demonstrated by October's results in which Austar generated 23,800 subscription sales orders and had a net gain of over 15,000 subscribers, with the difference primarily attributable to installation backlog. Austar is continuing to market its services aggressively and expects to continue rapidly building its subscriber base. Austar is benefitting from several characteristics which are supporting its marketing success and which management believes give it a competitive advantage in its markets: . OPERATIONAL INFRASTRUCTURE IN PLACE. In addition to having launched service to over 93% of its franchise areas, Austar has also developed the operational infrastructure necessary to continue its rapid growth. Austar's early investment of approximately $149 million in operating and capital expenditures from inception through October 31, 1996 has established it currently as the only multi-channel television provider in substantially all of its franchise areas. Austar has developed a comprehensive marketing organization consisting of a 200 person direct salesforce and over 200 national customer service and telemarketing personnel. The direct salesforce, which operates out of local offices in the majority of Austar's metropolitan markets, is currently generating sales of approximately 2,250 subscriptions per week. The salesforce at Austar's state-of-the-art national customer operations center ("NCOC") is currently generating sales of approximately 3,000 additional subscriptions per week from inbound and outbound calls. This salesforce is supported by an integrated marketing program of television, radio and print advertising. The NCOC is also the center of Austar's customer service organization, processing all incoming information, installation and service requests. The NCOC has sufficient capacity to service Austar's customer service needs for the foreseeable future. Austar has a total of approximately 600 employees, most of whom are located in local offices and regional operating centers, and has contracted with a number of local service companies which employ an aggregate of approximately 400 technicians to install and maintain subscriber equipment in each of its markets. Management believes that this infrastructure positions Austar to service its markets efficiently and provides it with significant competitive advantages. . REGIONAL FOCUS; CLASSIC MARKETS. Austar has strategically focused on the currently less competitive regional markets that are located outside of Australia's largest cities and encompass approximately 25% of the total Australian television market. These areas are "classic" multi-channel television markets with attractive demographics and limited television and alternative entertainment options. Approximately one-half of its service area (approximately 800,000 television homes) are in metropolitan markets with sufficient housing densities to support the construction of MMDS systems. Austar owns virtually all of the available MMDS licenses in each of these markets. The Company believes these markets generally do not have the size and/or densities to support the construction of a competitive wireline cable system. In Austar's non-metropolitan markets (approximately 740,000 serviceable television homes), where management believes household densities do not support the deployment of MMDS networks, Austar is marketing a DTH service on an exclusive basis. Austar is currently the only provider of multi-channel television services in substantially all of its service area. See "Risk Factors--Competitive Industries." . APPROPRIATE TECHNOLOGY. Austar believes that its utilization of wireless technologies in the build-out of its franchise area has afforded it with several economic and strategic advantages. The rapid deployment of MMDS networks in its metropolitan markets and a DTH service in its non- metropolitan markets has allowed Austar to reach the vast majority of the homes in these markets in just over one year. Austar's status as the initial operator in all of its markets has allowed it to establish a significant subscriber base and strong brand awareness, factors that management believes will give it a competitive advantage. Management believes the combination of MMDS and DTH has allowed Austar to reach virtually all of the 1.5 million serviceable television homes in its service areas on the most cost effective basis. Austar estimates its total fixed capital cost to build out initially its entire franchise area will be approximately $43 million, or $29 per serviceable home, over 75% of which had been expended as of October 31, 1996. Accordingly, Austar has been able to devote a significant amount of its financial resources to completing its operational infrastructure and installing its "in-home" subscriber equipment, over which Austar retains ownership. Austar has spent in excess of $80 million as of October 31, 1996 on these items and expects that the substantial majority of its future incremental capital expenditures will be incurred only as additional subscribers are installed (currently approximately $460 and $945 per MMDS and DTH subscriber, respectively, which amounts are partially offset by installation charges). While Austar is currently employing analog technology in its MMDS systems, it is testing digital technology (which would increase its existing 19 channel capacity) in one market and intends to offer digital service in its metropolitan markets if and when competitive factors dictate. Austar's DTH service uses state-of- the-art MPEG II digital technology. . ATTRACTIVE PROGRAMMING AGREEMENTS. Austar has entered into franchise agreements with Australis Media Limited ("Australis") that grant it the right to provide the Galaxy programming package within its franchise areas through 2009 (extendible at Austar's option through 2019). The Galaxy programming package, the most widely distributed programming package in Australia, was created by many of the world's leading programming suppliers and features brand name channels including Showtime, Encore, Fox Sports, The Discovery Channel, Nickelodeon/Nick at Nite and Red (a 24-hour music video channel) as well as two general entertainment channels. Management believes that Austar's franchise agreements have favorable pricing for such programs. Austar's programming costs are based on a percentage of its service revenue and provide for an offset of those costs with the depreciation of its subscriber equipment. Austar's franchise agreements provide exclusivity over wireless technologies (MMDS and DTH). While Austar's franchise agreements were formerly exclusive for cable television, the Company recently agreed to allow Foxtel Management Pty Limited ("Foxtel") to carry the Galaxy package on Foxtel's wireline cable systems throughout Australia (the "Australis Arrangement"). The Australis Arrangement provides that Austar will be compensated for any Foxtel subscriber in its franchise areas in an amount approximately equal to the profit margin that Austar would have received had it sublicensed such programming to Foxtel (which currently would be approximately $8 per Foxtel subscriber per month). Foxtel is currently operating in only one of Austar's markets and the Company believes that the small size of and/or low household densities in the majority of its markets do not justify the construction of competitive wireline cable systems. Austar does not currently have any subscription television competitors in the remainder of its franchise areas. Austar's franchise agreements continue to provide exclusivity over all wireline cable operators other than Foxtel. In addition, as part of the Australis Arrangement, Austar was granted the right to acquire any additional channels distributed by Galaxy on no less favorable terms than offered to any other person and in any event at no more than Australis' cost, plus 10%. See "Business--Austar (Australia)-- Franchise Agreements." Austar has also secured several additional satellite-delivered programming services to supplement the Galaxy channels. . ATTRACTIVE DEMOGRAPHICS. Australia has demographic and other characteristics that management believes are favorable to multi-channel television operators, including high per capita income and high television and VCR penetration rates. Television viewers in Australia have limited over-the-air television options with a maximum of five free- to-air channels, which number is generally lower in regional Australia. The Australian subscription television industry has grown rapidly since its inception in early 1995, reaching a combined 6% penetration rate. In addition, management believes Australian consumers are generally receptive to new technologies, as demonstrated by their high cellular telephone penetration rates. The following table summarizes selected demographic characteristics of Australia compared to comparable statistics for the more mature multi-channel television markets of the United States and the United Kingdom: <TABLE> <CAPTION> GDP PER HOMES YEARS OF SUBSCRIPTION TELEVISION CELLULAR CAPITA IN WITH SUBSCRIPTION TELEVISION HOMES WITH TELEPHONE 1995 TELEVISION TELEVISION PENETRATION VCR PENETRATION --------- ---------- ------------ ------------ ---------- ----------- <S> <C> <C> <C> <C> <C> <C> Australia............... $19,271 99% 2 6% 81% 19% United States........... 27,581 99 40+ 66 80 15 United Kingdom.......... 18,881 97 12 23 81 10 </TABLE> SATURN (NEW ZEALAND) The Company owns 100% of Saturn, which recently launched service on the initial portions of its hybrid fiber coaxial ("HFC") cable network that enables it to provide multi-channel television services as well as business and residential telecommunications services in the Wellington area, encompassing 135,000 homes. Wellington is New Zealand's capital and second largest city. The Company launched service in portions of this system in September 1996 and expects construction to be completed by mid-1998. Saturn also operates an existing cable system, which passes approximately 6,000 homes, on the Kapiti Coast north of Wellington. As of October 31, 1996, Saturn's activated networks passed approximately 12,600 homes, and serviced approximately 1,300 subscribers. The Company expects to use a portion of the UAP Contribution (as defined below) to accelerate Saturn's build-out and marketing programs during 1997. Saturn has secured additional infrastructure rights in markets representing 200,000 homes and is exploring the possibility of expanding its networks and services to these markets. The Company believes that New Zealand is an attractive market for multi-channel television providers. New Zealand has a demographic profile similar to Australia, including high per capita income and strong television, VCR and cellular telephone penetration rates. In addition, New Zealand permits operators to offer combined multi-channel television and telephony services over one network and Saturn expects to launch telephone, pay-per-view and data services over the next six to 18 months. There is currently one significant multi-channel television provider in New Zealand, which provider offers a five-channel UHF-delivered subscription service. XYZ (AUSTRALIAN PROGRAMMING) Through its 25% interest in XYZ, the Company provides four of the eight channels offered in the Galaxy package, Australia's most widely distributed programming package. XYZ's channels consist of high quality, brand named programming services, including Nickelodeon/Nick at Nite, The Discovery Channel, Arena (quality general entertainment channel) and Red. XYZ has entered into an agreement that provides for carriage of its four channels by virtually all existing Australian MMDS and DTH providers, including Austar, Australis and East Coast Television Pty Limited ("ECT"), as well as by the largest cable television operator in Australia, Foxtel. The Company believes that this agreement, which extends through 2010 for MMDS and DTH subscribers and 2020 for Foxtel subscribers and provides for fixed per subscriber prices (and in the case of Foxtel, substantial minimum subscriber guarantees), will result in XYZ's programming package being available to virtually all of Australia's 6.0 million television households. XYZ launched its channels in April 1995 and as of October 31, 1996, XYZ provided its channels to approximately 269,000 subscribers in Australia. Foxtel, which owns 50% of XYZ, is a joint venture between The News Corporation Limited ("News Corp.") and Telstra Corporation Limited ("Telstra"), the Australian government-owned telephone company. The Company's other partner in XYZ is Century Communications Corp. ("Century"), a large U.S. multiple system cable operator and the parent of ECT. OTHER BUSINESSES The Company's other businesses include a 90% economic interest in Telefenua, the only multi-channel television operator in Tahiti, and a 100% interest in United Wireless Pty Limited ("United Wireless"), a provider of two-way wireless mobile data services in Australia. As of October 31, 1996, Telefenua was marketing its 15-channel MMDS service to 18,700 of 31,000 homes in its franchise area and had approximately 4,900 subscribers paying an average monthly rate of $65. The Company is in the early stages of negotiating the sale of all or a portion of Telefenua to a local strategic investor, although there can be no assurance that the Company will conclude such a transaction. RELATIONSHIP WITH UIH The Issuer, through UAP, is an indirect majority owned subsidiary of UIH, a leading provider of multi-channel television services outside the United States. UIH, together with its strategic and financial partners, have ownership interests in multi-channel television systems in operation or under construction in 25 countries in Europe, Latin America and, through the Company, Asia/Pacific. As of September 30, 1996, UIH's multi-channel television systems had approximately 10.4 million television homes in their respective service areas, passed approximately 7.2 million homes and had approximately 3.1 million subscribers. In addition to the Company, UIH's operations include its 50% interest in United and Philips Communications B.V., a joint venture with Philips Electronics N.V. that is the largest privately owned multi-channel television operator in Europe. UAP and each of Austar, Saturn and Telefenua are parties to Technical Assistance Agreements, pursuant to which UAP provides its expertise in system design and engineering, construction, marketing, programming acquisition, subscriber management and other areas critical for the success of each operating company for a fee based, in part, upon the revenues of such operating companies. In addition, UAP and the Issuer are parties to a management agreement (the "UAP Management Agreement"), pursuant to which UAP performs certain management, technical, administrative, accounting, financial reporting, tax, legal and other services for the Issuer for a fee. See "Certain Relationships." OTHER The Issuer, a Colorado corporation, was incorporated in 1994. The principal executive office of the Company is located at 4643 South Ulster Street, Suite 1300, Denver, Colorado 80237, and its telephone number is (303) 770-4001. CONCURRENT UAP CLASS A COMMON STOCK OFFERING Concurrently with the Offering, UAP is offering pursuant to a separate prospectus shares of its Class A Common Stock which is expected to generate gross proceeds of approximately $100.0 million and UIH has agreed to contribute $25.0 million cash to UAP (the "UIH Investment") for additional shares of Class B Common Stock of UAP at the initial public offering price. Pro forma for the initial public offering and the UIH Investment (assuming the midpoint of the filing range), UAP would have an equity market capitalization of approximately $ million. The Offering is contingent upon the consummation of the UAP Stock Offering, but the UAP Stock Offering and the UIH Investment are not contingent upon the consummation of the Offering. UAP intends to use $70.0 million of the net proceeds of the UAP Stock Offering and the UIH Investment to purchase shares of capital stock of the Issuer (the "UAP Contribution"). Upon completion of the Offering and the UAP Contribution, the Company believes that it will have sufficient capital to complete construction of all of its existing systems and fund anticipated start-up losses. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." THE OFFERING Securities Offered.......... $ million principal amount at maturity of Senior Discount Notes due 2007. Maturity.................... , 2007. Issue Price................. $ per $1,000 principal amount at maturity. Interest.................... Cash interest on the Notes will not accrue prior to , 2002. Thereafter, cash interest on the Notes will accrue at a rate of % per annum, and will be payable semi-annually on each and , commencing , 2002. Optional Redemption......... The Notes may be redeemed, in whole or in part, at the option of the Issuer, at any time on or after , 2002, at the redemption prices set forth herein, plus accrued and unpaid interest to the date of redemption. In addition, at any time prior to , the Issuer may redeem up to 33% of the originally issued aggregate principal amount at maturity of the Notes with the net proceeds of certain public or private sales of equity interests of the Issuer at a redemption price equal to % of the Accreted Value thereof on the redemption date; provided that not less than 67% of the aggregate principal amount at maturity of the Notes originally issued are outstanding immediately after giving effect to such redemption. See "Description of the Notes-- Redemption." Ranking..................... The Notes will be senior, unsecured obligations of the Issuer and will rank pari passu in right and priority of payment with all existing and future senior indebtedness of the Issuer, other than indebtedness that by its terms is expressly subordinated in right and priority of payment to the Notes. The Issuer conducts substantially all of its business through its subsidiaries and the Notes will be effectively subordinated to the claims of creditors of such subsidiaries. As of September 30, 1996, after giving effect to the sale of the Notes and the use of proceeds therefrom, the Issuer and its subsidiaries would have had an aggregate of approximately $427.2 million of consolidated liabilities outstanding (including $ million of trade payables of subsidiaries and the Notes and Existing Notes) substantially all of which, except for the Notes and the Issuer's 14% Senior Discount Notes due 2006 (the "Existing Notes") (of which there was outstanding as of September 30, 1996, $237.0 million aggregate accreted value thereof), would have been obligations of the Issuer's subsidiaries and effectively rank prior in right of payment to the Notes. See "Capitalization." Change of Control........... Upon a Change of Control, each holder of the Notes will have the right to require the Issuer to purchase such holder's Notes at 101% of the Accreted Value thereof, in the case of any such purchase prior to , or 101% of the principal amount at maturity thereof, plus accrued and unpaid interest, if any, in the case of any such purchase on or after . See "Description of the Notes--Certain Covenants--Change of Control." Certain Covenants........... The indenture pursuant to which the Notes will be issued (the "Indenture") will contain certain covenants which, among other things, will restrict the ability of the Issuer and/or its Restricted Subsidiaries (as defined herein) to (i) incur additional indebtedness or issue certain preferred stock, (ii) pay dividends or make distributions in respect of the capital stock of the Issuer or make certain other Restricted Payments, (iii) conduct a business other than a Related Business (as defined herein) or transfer certain assets to certain subsidiaries, (iv) create certain liens, (v) enter into certain transactions with affiliates or other interested persons and (vi) consummate certain asset sales. In addition, the Indenture will limit the ability of the Issuer to consolidate, merge or sell all or substantially all of its assets. These covenants are subject to important exceptions and qualifications. See "Description of the Notes." Original Issue Discount..... The Notes are being offered at an original issue discount for United States Federal income tax purposes. Thus, although cash interest will not be payable on the Notes prior to , 2002, original issue discount (i.e., the difference between the principal and interest payable on the Notes and their issue price) will accrue from the issue date of the Notes and will generally be included as interest income periodically in a Noteholder's gross income for United States Federal income tax purposes in advance of receipt of the cash payments to which the income is attributable. See "Certain U.S. Income Tax Considerations--Taxation of Original Issue Discount." Use of Proceeds............. The net proceeds from the Offering are estimated to be approximately $144.1 million. The Company plans to use such proceeds together with the $70.0 million of the UAP Contribution and the $70.1 million of the cash and short-term investments on hand at October 31, 1996 to fund the system construction and initial marketing costs and working capital requirements of its operating companies and fund general corporate purposes. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001015665_leapnet_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001015665_leapnet_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information, including "Risk Factors," and consolidated financial statements (including the notes thereto) appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus assumes that the Underwriters' over-allotment option described in "Underwriting" is not exercised. Financial data pertaining to periods prior to March 11, 1996 reflect the consolidated financial data of The Leap Partnership, Inc. ("Leap Partnership"), Lilypad Services, Inc. ("Lilypad") and Tadpole Productions, Inc. ("Tadpole"), which became wholly-owned subsidiaries of The Leap Group, Inc. on such date. Unless the context otherwise requires, "Company" or "Leap" shall mean The Leap Group, Inc. and its subsidiaries. References herein to "fiscal 1996," "fiscal 1995" and "fiscal 1994" refer, respectively, to the twelve months ended January 31, 1996, the twelve months ended January 31, 1995 and the period from inception (September 20, 1993) to January 31, 1994. THE COMPANY Leap is a strategic and creative communications company that develops and implements integrated brand marketing campaigns using traditional and new media primarily for market leading clients. Traditional marketing services provided by Leap include television, print, radio and outdoor advertising, promotions, direct mail and package and logo design; and its new media services include digital interactive applications such as World Wide Web sites, CD-ROMs and interactive presentations. The Company's marketing and communications services combine comprehensive strategic brand marketing skills, award-winning creative talent, and the production capabilities of world class full service advertising agencies with the technological expertise to exploit new interactive and other digital media. Leap's mission is to build brand equity for its clients. Leap focuses on establishing long-term marketing partnerships with marquee clients of national and international scope that position the Company as the steward for major brands with correspondingly significant advertising budgets. The Company believes that certain core strengths have been, and will continue to be, integral to Leap's strategy. These strengths include superior creative talent, a focus on and an expertise in strategic brand positioning, a "flat" organizational structure built around cross-functional work teams that maximize accessibility and responsiveness to clients, and expertise in the application of new marketing communications technology integrated with a wide range of traditional services. Leap believes that these strengths enable the Company to create integrated marketing communications campaigns that fulfill its clients' marketing goals on a timely and cost-effective basis. The Company targets Fortune 500 clients who are national and global industry leaders. Since its founding in late 1993, Leap has successfully competed for and managed large national accounts for prestigious clients such as Nike, Inc. ("Nike") and Miller Brewing Company ("Miller"). The Company's past and current projects include (i) serving as agency of record for Niketown and Nike Factory Stores, Tommy Armour Golf Company ("Tommy Armour"), U.S. Robotics, Inc., ("U.S. Robotics"), and Ameritech Corporation, (ii) World Wide Web site development for Nike, Tommy Armour and the Chicago Tribune Company, (iii) strategic brand positioning for Niketown, R.J. Reynolds Tobacco Co. ("R.J. Reynolds"), Pizza Hut, Inc., and YES! Entertainment and (iv) the January 1995 Super Bowl campaign for Miller. In December 1995, Leap voluntarily resigned the Miller account in order to pursue other assignments. See "--Summary Consolidated Financial and Other Data." Leap's present and prospective clients currently advertise primarily on national mass circulation media such as network television, network radio and nationally circulating newspapers and magazines. According to McCann-Erickson Worldwide, a leading advertising agency that regularly publishes such information, total U.S. spending on such media amounted to approximately $40 billion in 1995. Leap believes that large advertisers increasingly are looking for ways to improve the effectiveness of their advertising without increasing advertising expenditures, and to better measure results from advertising. As a result, advertisers are beginning to shift away from relying primarily on traditional one-way "broad cast" media, such as broadcast television, to media that enable advertisers to "narrow cast" or customize marketing messages to a well-defined audience. Recent developments in digital technology have led to the emergence of new media communications vehicles such as the World Wide Web, the Internet, CD-ROMs and interactive presentations. Now, such new media not only permit real time one-to-one communications links with consumers, but allow consumers, as a consequence of the interactive process, to shape the advertising messages that they receive and become more engaged by the messages. A Forrester Research report dated May 1996 estimated that the market for online advertising spending will reach $80 million in 1996 and $4.8 billion by the year 2000. The Company was incorporated in Delaware in March 1996 as a holding company for Leap Partnership, Lilypad and Tadpole. Leap Partnership was incorporated in Illinois in September 1993. Lilypad and Tadpole were incorporated in Illinois in September 1995. The Company's principal executive offices are located at 22 West Hubbard Street, Chicago, Illinois 60610, and its telephone number is (312) 494-0300. The Company's World Wide Web site address is: http://www.leapnet.com. Information contained in the Company's Web site shall not be deemed to be a part of this Prospectus. THE OFFERING Common Stock Offered by the Company..... 4,000,000 shares Common Stock to be Outstanding after the Offering............................ 13,600,000 shares(1) Use of Proceeds......................... For working capital and other general corporate purposes and for repayment of indebtedness. See "Use of Proceeds." Proposed Nasdaq National Market symbol.................................. LEAP - -------- (1) Excludes (i) 2,364,000 shares of Common Stock issuable upon exercise of options outstanding as of September 24, 1996 (options to purchase 1,602,333 of such shares are currently exercisable), (ii) 60,000 shares of Common Stock issuable upon exercise of options to be granted on the effective date of the Registration Statement of which this Prospectus is a part, all of which will become exercisable on the date of grant, and (iii) 2,580,000 shares of Common Stock reserved for issuance upon exercise of options that may be granted in the future under the Company's stock option and stock purchase plans. See "Capitalization," "Management--Stock Option Plans" and Notes 5 and 9 of Notes to the Company's Consolidated Financial Statements. SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA The summary consolidated financial and other data should be read in conjunction with the audited financial statements, including the notes thereto, appearing elsewhere in this Prospectus and with "Management's Discussion and Analysis of Financial Condition and Results of Operations." Results for interim periods are not necessarily indicative of results to be expected during the remainder of the fiscal year or for any future period. The following data are presented in thousands, except per share amounts and the number of Creative Partners. <TABLE> <CAPTION> SIX MONTHS FISCAL YEAR ENDED ENDED JULY JANUARY 31, 31, ----------------------- ------------- 1994(1) 1995 1996 1995 1996 ------- ------ ------ ------ ------ (UNAUDITED) <S> <C> <C> <C> <C> <C> INCOME STATEMENT DATA: Revenues.................................. $ 373 $4,679 $8,210 $5,577 $7,290 Operating income/(loss)................... (123) (1,390) 1,356 1,240 355 Net income/(loss)......................... (76) (1,065) 700 675 257 Net income/(loss) per share(2)............ $(0.01) $(0.11) $ 0.07 $ 0.07 $ 0.03 Shares used in per share computation(2)... 10,109 10,109 10,109 10,109 10,109 </TABLE> <TABLE> <CAPTION> AS OF JULY 31, 1996 ----------------------- ACTUAL AS ADJUSTED(3) ------- -------------- (UNAUDITED) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents.............................. $ 82 $33,643 Working capital........................................ (1,425) 34,426 Total assets........................................... 6,101 39,662 Long-term debt......................................... 648 99 Total stockholders' equity/(deficit)................... (182) 36,218 </TABLE> <TABLE> <CAPTION> SIX MONTHS FISCAL YEAR ENDED ENDED JULY JANUARY 31, 31, ------------------------- ------------- 1994(1) 1995 1996 1995 1996 ------- ------- ------- ---- ------- (UNAUDITED) <S> <C> <C> <C> <C> <C> OTHER DATA (UNAUDITED): Revenues, excluding Miller(4)....... $ 373 $ 1,700 $ 2,758 $813 $ 7,290 Retainer and fee revenues(5)........ $ 0 $ 560 $ 1,642 $163 $ 1,946 Retainer and fee revenues as a percentage of total revenues(5).... 0.0% 12.0% 20.0% 2.9% 26.7% Number of Creative Partners at end of period(6)....................... 15 27 38 30 65 </TABLE> - -------- (1) The Company's initial operating business, Leap Partnership, was formed September 20, 1993, and had no operations prior to November 1993. (2) Calculated on the basis described in Note 2 of Notes to the Company's Consolidated Financial Statements. (3) As adjusted to give effect to the offering (at an assumed initial public offering price of $10.00 per share, after deduction of underwriting discounts, commissions and estimated offering expenses payable by the Company) and the application by the Company of the net proceeds therefrom. See "Use of Proceeds" and "Capitalization." (4) In December 1995, the Company voluntarily resigned the Miller account in order to pursue other assignments. The information provided presents revenues as if Miller had been excluded throughout each of the periods presented. See "Business--Leap's Clients." (5) Retainer and fee revenues represent revenues derived from fixed fee arrangements with clients, not specific to particular projects, which typically contemplate monthly payments over specified service periods. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview." (6) All of Leap's employees share the same title--"Creative Partner." See "Business--Leap's Core Strengths--Talent and Creative Distinction."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001015728_chase_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001015728_chase_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION, INCLUDING THE FINANCIAL STATEMENTS, INCLUDED ELSEWHERE IN THIS PROSPECTUS. AS USED HEREIN, UNLESS THE CONTEXT OTHERWISE INDICATES, THE TERMS "COMPANY" AND "CHASETEL" REFER TO CHASE TELECOMMUNICATIONS, INC. AND ITS PREDECESSOR, CHASE TELECOMMUNICATIONS, L.P., AND, UNLESS OTHERWISE SPECIFIED, THE TERM POPULATION EQUIVALENTS ("POPS") REFERS TO THE ESTIMATE OF THE 1995 POPULATION OF A GEOGRAPHIC AREA CONTAINED IN THE 1995 PCS ATLAS AND DATA BOOK (PUBLISHED BY PAUL KAGAN ASSOCIATES, INC. ("KAGAN ASSOCIATES")). SEE "GLOSSARY OF TERMS" FOR DEFINITIONS OF CERTAIN ADDITIONAL TERMS USED IN THIS PROSPECTUS. UNLESS OTHERWISE EXPRESSLY INDICATED, ALL INFORMATION CONTAINED IN THIS PROSPECTUS (I) GIVES EFFECT TO THE RECAPITALIZATION OF THE COMPANY'S CAPITAL STOCK (THE "IPO RECAPITALIZATION") TO EFFECT, AMONG OTHER THINGS, (A) A -FOR-1 STOCK SPLIT OF THE COMPANY'S CLASS A COMMON STOCK, (B) A -FOR-1 STOCK SPLIT OF THE COMPANY'S CLASS B COMMON STOCK AND (C) A -FOR-1 STOCK SPLIT OF THE COMPANY'S CLASS C COMMON STOCK, WHICH RECAPITALIZATION WILL BE CONSUMMATED PRIOR TO THE CLOSING OF THE STOCK OFFERING, AND (II) ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. SEE "CAPITALIZATION" AND "UNDERWRITING." THE COMPANY OVERVIEW ChaseTel intends to become a leading provider of broadband personal communications services ("PCS") in the State of Tennessee and surrounding areas. The Company bid for and has been granted FCC licenses to provide PCS service to the approximately 6.3 million POPs in its service area, including the Nashville, Memphis, Knoxville and Chattanooga metropolitan areas. The Company's service area covers approximately 98% of the population of the State of Tennessee, and contiguous portions of six adjacent states. The Company's PCS licenses cover contiguous markets in an area that the Company believes has attractive demographic characteristics, including strong population and household growth, high population density, favorable commuting patterns and a favorable business environment. The Company is a party to a series of agreements (collectively, the "PrimeCo Agreements") with PrimeCo Personal Communications, L.P. ("PrimeCo"), a partnership indirectly owned by AirTouch Communications, Inc. ("AirTouch"), U S WEST, Inc. ("U S WEST"), Bell Atlantic Corporation ("Bell Atlantic") and NYNEX Corporation ("NYNEX"), which establish certain branding, purchasing, roaming and service relationships between the Company and PrimeCo. PrimeCo owns PCS licenses in markets covering approximately 57 million POPs (including Chicago, Dallas and Tampa). PrimeCo has announced that it is in the final stages of testing its CDMA-technology based PCS network and expects to launch service in certain of its markets by the end of 1996. The Company, with assistance from PrimeCo, is currently completing the design of its PCS network. The Company anticipates launching service in its largest major metropolitan areas, Nashville and Memphis, and the greater part of western Tennessee by the end of 1997. The Company plans to construct networks for its licensed areas using the same CDMA digital technology selected by PrimeCo for its network. In May 1996, the Company acquired the rights to its licenses through the FCC's C Block Auction, and on September 17, 1996 (the "License Grant Date"), the Company was granted its licenses. The C Block Auction was reserved exclusively for qualified entrepreneurs and provided additional benefits to entrepreneurial small businesses such as ChaseTel. The Company's successful bids, which totaled $175.1 million, represent an average price per 1990 POP of $29.49 (net of bidding credits), which is 26% below the average net price per 1990 POP paid by successful bidders in the C Block Auction. Under the C Block Auction rules, the Company is entitled to government financing (the "Government Financing") of 90% of the net purchase price for its licenses over a ten-year term at an annual interest rate of % (representing the annual interest rate for ten-year U.S. Treasury obligations on the License Grant Date). The favorable terms of the Government Financing significantly reduce the effective cost of the licenses to the Company on a net present value basis. PRIMECO RELATIONSHIP The Company believes that the PrimeCo Agreements will allow it to derive the following strategic benefits from the brand names, potential national account and distribution programs, purchasing relationships, operating experience and economies of scale of PrimeCo: BRAND NAMES. Under the PrimeCo Agreements, PrimeCo will make available to ChaseTel the brand name or names that PrimeCo uses to market its own PCS services, which the Company expects will include the PrimeCo brand name and may also include the PowerBand-SM- and/or TalkAlong-SM- brand names owned by AirTouch and Bell Atlantic, respectively (both of which are affiliates of PrimeCo). Through the use of these brand names, the Company expects to participate in and benefit from PrimeCo's promotional and marketing efforts. NETWORK BUILD-OUT. The Company has engaged PrimeCo during the initial planning and construction of its network to perform certain limited services in connection with network planning, radio frequency ("RF") design engineering, network design, site acquisition and preparation, microwave relocation and human resources. ChaseTel thereby expects to benefit from the experience that PrimeCo gains in building its own network. NATIONAL ACCOUNTS AND NATIONAL DISTRIBUTION. The Company will be a participant (as a wholesaler of services) in national account programs that may be established by PrimeCo. The Company expects that its relationship with PrimeCo will increase traffic on its network from accounts that purchase telecommunications services on a centralized basis, such as large corporations and government entities. Similarly, the Company may be included in any program that PrimeCo establishes to pursue distribution agreements with national distribution outlets, such as mass merchandising retail distribution channels for handsets and PCS services. EQUIPMENT PURCHASING. Under the PrimeCo Agreements, the Company may have access, to the extent it satisfies criteria specified by individual vendors, to certain network and switching equipment on the same pricing terms as PrimeCo has negotiated with its vendors. ROAMING AGREEMENTS. Consistent with the FCC's roaming requirements, the PrimeCo Agreements contemplate the Company entering into mutual roaming arrangements with PrimeCo and with other PCS licensees who enter into affiliation agreements with PrimeCo. The Company also expects to be entitled to the benefits of any other roaming arrangements made by PrimeCo with operators of other cellular or PCS networks, which may include the cellular and PCS networks of AirTouch, U S WEST, Bell Atlantic and NYNEX. ADDITIONAL SERVICES. The Company has the right to purchase a number of additional business services from PrimeCo during the initial planning and construction of its network, including network operations and maintenance and the performance of billing and customer service functions. In addition, under the PrimeCo Management Agreement (as defined), the Company has the right to request PrimeCo to perform any number of additional services for the Company. See "Risk Factors--Limited PrimeCo Commitment; Limitations on Scope of Relationship." In November 1995, PrimeCo loaned the Company $2.0 million (the "PrimeCo Loan") to enable the Company to make certain downpayments to the FCC in connection with the C Block Auction. Pursuant to the PrimeCo Agreements, PrimeCo has agreed to convert approximately $1.9 million of the PrimeCo Loan, immediately following the Offerings, into shares of Series B Convertible Preferred Stock, representing a 4.99% equity interest (on a fully-diluted basis) in the Company. In addition, at such time, PrimeCo will purchase shares of Series B Convertible Preferred Stock for $50,000, representing an additional 5.01% equity interest (on a fully-diluted basis) in the Company, thereby increasing its total equity interest to 10% on a fully-diluted basis. STRATEGY The Company was formed in 1995 to capitalize upon the opportunity provided by the C Block Auction to enter the rapidly-growing market for wireless telecommunications services. Since the introduction of cellular telecommunications services in 1983, the number of domestic cellular telephone subscribers, both analog and digital, has grown to an estimated 33.8 million as of December 31, 1995, which represents U.S. penetration of approximately 13%. Industry analysts forecast that U.S. penetration rates for mobile wireless telephony services will reach approximately 48% by 2006. The Company's strategy is to become a leading provider of high-quality digital wireless services in its markets. This strategy includes the following elements: LEVERAGE RELATIONSHIP WITH PRIMECO. The Company will utilize the relationships established under the PrimeCo Agreements to obtain the benefits of PrimeCo's network build-out experience and marketing efforts, while retaining its local perspective and the ability to respond rapidly to changing customer needs. The Company has engaged PrimeCo to assist in the initial design and construction of the Company's PCS network. In addition, the Company believes that its contractual relationship with PrimeCo will enable it to benefit from PrimeCo's brand names and marketing and distribution efforts, reduce the time, cost and risk of its system build-out, enhance market penetration and compete more effectively with both existing cellular carriers and future PCS service providers in its service area. LEVERAGE EXTENSIVE TENNESSEE REACH. The Company's wireless footprint covers approximately 98% of the population of the State of Tennessee. The Company believes that it will have an advantage over its competitors with less extensive and/or non-contiguous coverage by maximizing local appeal through the implementation of a uniform, "homegrown" marketing strategy across the entire state and offering Tennessee-wide PCS services using 100% of its own network facilities. Therefore, the Company will be able to complete almost any call within the state as a local call, without using a third-party long distance carrier. LEVERAGE ECONOMIC BENEFITS OF CONTIGUOUS MARKETS. ChaseTel holds licenses in 11 contiguous BTAs covering approximately 6.3 million POPs. The Company expects that its infrastructure costs will be lower as a result of the economic benefits of operating in a contiguous cluster of markets. OFFER CUSTOMERS A HIGHER QUALITY, LOWER COST ALTERNATIVE TO CELLULAR TELECOMMUNICATIONS; EXPAND SERVICE OFFERINGS. The Company believes that the distinctive quality advantages of its CDMA system, combined with attractive pricing plans, will enable it not only to expand the total market for wireless telephony services, but also to capture significant market share from the existing analog cellular carriers in its markets. Industry sources indicate that the high cost and poor quality of analog cellular are principal factors responsible for the 25% to 30% of cellular customers who each year cancel their cellular service or change their cellular carriers. The Company also intends to build upon traditional wireless voice telephony by taking advantage of the increasing demand to access data from any location, including e-mail and internet services. The Company expects to eventually provide other advanced data services such as wireless telemetry, short messaging capability, voice messaging and two-way data applications. TARGET MASS MARKET CUSTOMERS CURRENTLY NOT USING CELLULAR. The Company plans to focus its marketing efforts on the estimated 85% of the population that has chosen not to subscribe to cellular services because of the high cost, low quality service and confusing pricing plans. ChaseTel expects to make the purchasing decision less of a risk for new buyers by providing simple, easy-to-understand products, with predictable bills and no long-term customer contracts. ChaseTel believes that this factor, combined with providing a greater variety of services at lower prices than existing cellular companies offer, will create significant new demand for wireless services. NETWORK BUILD-OUT The Company intends to build a high quality digital wireless telecommunications network to serve its licensed areas and, with the assistance of PrimeCo, is currently completing the design of its network. The Company has begun the site selection process for its base stations and will commence base station site acquisition shortly. The Company's current schedule contemplates completion of build-out activities in time to launch digital services in its largest major metropolitan areas, Nashville and Memphis, and the greater part of western Tennessee by the end of 1997. Within nine months following its initial service launch, the Company expects to be in a position to provide service to its remaining major metropolitan areas, Knoxville and Chattanooga, as well as Bristol, Virginia and Kingsport and Johnson City, Tennessee (collectively, the "Tri-Cities area") and the rest of eastern Tennessee targeted for coverage. Additional build-out activities will expand coverage throughout and beyond these areas, introducing coverage into more rural areas and linking the Company's major markets together. ChaseTel expects to supply service to 80% of its licensed POPs by the middle of 1999, which will give it an active footprint comparable to the current coverage of its cellular competitors. The Company has enlisted PrimeCo's services in connection with network planning, RF design engineering, network design, site acquisition and preparation, microwave relocation and human resources. ChaseTel expects to benefit from the experience that PrimeCo gains in building its own network (which is expected to commence service in certain markets by the end of 1996). The Company has selected CDMA technology for its PCS network, which the Company expects, based on announcements of other PCS licensees, will be the most widely used technology platform in the U.S. PCS industry. CDMA is also the technology that PrimeCo has selected for its network. The Company expects that CDMA technology will enable it to have approximately six times the effective call capacity in its allotted spectrum as the analog technologies currently in general use in the cellular industry. Other advantages of CDMA include: (i) higher quality transmission capabilities, with far fewer dropped calls and virtually none of the static characteristic of current analog cellular technology; (ii) lower power requirements, resulting in increased handset battery life; (iii) superior security inherent in the digital coding system, which will make calls much more secure and eliminate the need for personal identification numbers (PIN); and (iv) the ability to seamlessly support enhanced features, such as simultaneous voice and data transmission and, ultimately, high-speed wireless applications such as video, multimedia and ISDN-rate data services. FINANCING PLAN The Company's successful bids on its PCS licenses totaled $175.1 million (net of bidding credits). The Company fulfilled its obligation to the FCC to pay five percent ($8.8 million) of the purchase price as a down payment on the licenses through payments of $5.4 million on November 30, 1995 and $3.4 million on May 15, 1996. On September 23, 1996, an additional payment of five percent of the purchase price was made as required following the formal grant of the licenses to the Company. See "--Financing History." Under the C Block Auction rules, the Company is entitled to the Government Financing for the remaining portion of the purchase price ($157.6 million) for the licenses. Under the terms of the Government Financing, the Company is required to make installment payments of interest only (approximately $ million per year, payable quarterly) for the first six years after the License Grant Date, and installment payments of interest and principal (approximately $ million per year, payable quarterly) over the remaining four years of the license term. The Company estimates that it will require $ million to fund its business plan during the period from consummation of the Offerings through the end of . This amount includes funding for capital expenditures, interest payments, operating losses, working capital and other general corporate purposes. To the extent unexpected expenditures arise or the Company's estimates prove to be inaccurate, the Company may require additional financing before the end of . See "Risk Factors--Significant Capital Requirements; Status as a Going Concern." The Company expects to have available $ million to fund the Company's business plan after giving effect to the Offerings and an additional $ million of financing that the Company expects to obtain from its principal equipment vendors (the "Vendor Financing"). The Company is currently negotiating with manufacturers of infrastructure equipment for such Vendor Financing, which is intended to fund a significant portion of the Company's required capital expenditures, including network design, site selection, equipment purchases, network construction and microwave relocation. See "Risk Factors--Construction and Operational Risks" and "--Dependence on Third Parties." The following table sets forth the Company's estimated sources and uses of funds on an aggregate basis for the period from consummation of the Offerings through the end of : <TABLE> <CAPTION> AMOUNT ------------- <S> <C> (IN THOUSANDS) SOURCES OF FUNDS: Stock Offering(a)............................................................ $ % Senior Discount Notes Due 2006(a)........................................ Vendor Financing............................................................. ------------- Total.................................................................. $ ------------- ------------- USES OF FUNDS: Repayment of PrimeCo Loan.................................................... $ Interest payments on Government Financing.................................... Interest payments on Vendor Financing........................................ Capital expenditures (including equipment)................................... Working capital and other general corporate purposes......................... Fees and expenses(b)......................................................... ------------- Total.................................................................. $ ------------- ------------- </TABLE> - ------------------ (a) Represents the proceeds of the Offerings before the deduction of underwriting discounts and commissions. (b) Represents fees and expenses, including (i) the underwriting discounts and commissions payable by the Company in connection with the Offerings, (ii) legal, accounting and other professional fees payable in connection with the Offerings, (iii) the financing fee of $448,500 incurred in connection with the placement of the 12% Senior Subordinated Notes (as defined), (iv) fees payable in connection with the Vendor Financing and (v) certain miscellaneous expenses. FINANCING HISTORY The Company was incorporated in Delaware on April 25, 1996. On May 10, 1996, the predecessors of the Company, Chase Telecommunications, L.P. ("Chase LP"), Chase Wireless, L.P. ("Chase Wireless") and Chase GP Inc. (collectively, the "Predecessors"), were merged with and into the Company (the "May Recapitalization"), with the Company being the sole surviving entity. Chase LP was formed on June 12, 1995. Prior to the May Recapitalization, Chase Wireless and Chase GP Inc. had no operations. Through September 30, 1996, the Company raised approximately $20.9 million through private sales of debt and equity securities in a series of transactions with various institutional and other accredited investors, as described below. FOUNDERS INVESTMENT. In connection with the formation of the Predecessors, in November 1995, the Company sold to various institutional and other accredited investors, including Mr. Anthony R. Chase, President and Chairman of the Board of the Company, approximately $2.0 million of equity securities (the "Founders Equity"). The Founders Equity consists of shares of Class A Common Stock and shares of Class B Common Stock. At such time, certain of these investors also loaned approximately $2.0 million to the Company (the "Founders Loan" and, together with the Founders Equity, the "Founders Investment"). In addition, in connection with the Founders Investment, the Company issued a warrant exercisable for shares of Class B Common Stock at an exercise price of $ per share and made a cash payment of $85,056 to a placement agent in consideration for arranging the Founders Investment. The Company used the proceeds of the Founders Investment to make certain down payments to the FCC in connection with the C Block Auction. Upon consummation of the Offerings, the holders of Class A Common Stock will assume the Founders Loan and contribute such loan to the equity of the Company (the "Founders Contribution"). See "Related Party Transactions." PRIMECO INVESTMENT. In November 1995, PrimeCo loaned the Company $2.0 million to enable the Company to make certain downpayments to the FCC in connection with the C Block Auction. Pursuant to the PrimeCo Agreements, PrimeCo has agreed to convert (the "PrimeCo Loan Conversion") approximately $1.9 million of the PrimeCo Loan, immediately following the Offerings, into shares of Series B Convertible Preferred Stock, representing a 4.99% equity interest (on a fully-diluted basis) in the Company. The unconverted portion of the PrimeCo Loan (approximately $0.1 million) will be repaid in full out of the net proceeds of the Offerings. Concurrent with the PrimeCo Loan Conversion, PrimeCo will purchase (the "PrimeCo Share Purchase") shares of Series B Convertible Preferred Stock for $50,000, representing an additional 5.01% equity interest (on a fully-diluted basis) in the Company, thereby increasing its total equity interest to 10% on a fully-diluted basis. The shares of Series B Convertible Preferred Stock will be convertible, at PrimeCo's election, on a share-for-share basis into shares of Class B Common Stock, and, prior to such conversion, will vote as a single class with the Class B Common Stock and Class C Common Stock on all matters on which all holders of the Common Stock have the right to vote. Pursuant to the PrimeCo Agreements, subject to certain conditions, PrimeCo will be entitled to receive additional shares of Series B Convertible Preferred Stock (the "PrimeCo Contingent Share Issuance") representing up to a 3% equity interest (on a fully-diluted basis) in the Company. See "Use of Proceeds," "Business--PrimeCo Relationship" and "Related Party Transactions." The PrimeCo Loan Conversion, the PrimeCo Share Purchase and the PrimeCo Contingent Share Issuance are collectively referred to as the "PrimeCo Transactions." 1996 INVESTORS INVESTMENT. In May 1996, pursuant to the terms of a Securities Purchase Agreement (as amended, the "1996 Purchase Agreement"), the Company sold to various institutional and other accredited investors (the "1996 Investors") shares of Class B Common Stock, shares of Class C Common Stock and approximately $5.0 million principal amount of its 12% Senior Subordinated Notes Due 2003 (the "12% Senior Subordinated Notes") for an aggregate purchase price of approximately $5.0 million. In addition, on September 23, 1996, the Company sold to the 1996 Investors shares of Class B Common Stock, shares of Class C Common Stock and approximately $10.0 million aggregate principal amount of 12% Senior Subordinated Notes (collectively, the "September 1996 Investment") for an aggregate purchase price of approximately $10.0 million, thereby increasing the outstanding principal amount of 12% Senior Subordinated Notes to approximately $15.0 million. In connection with the placement of the 12% Senior Subordinated Notes, a note in the amount of $448,500 was issued as payment of a placement fee, which will be repaid in full out of the net proceeds of the Offerings. See "Use of Proceeds" and "Related Party Transactions." Upon consummation of the Offerings, the 1996 Investors have agreed to exchange (the "1996 Debt Exchange") the approximately $15.0 million principal amount of 12% Senior Subordinated Notes for Senior Notes having an initial accreted value of approximately $10.0 million (the "1996 Investors Exchange Notes") and shares of the Company's 5% Cumulative Convertible Preferred Stock (the "5% Cumulative Convertible Preferred Stock") having an aggregate liquidation preference of approximately $6.5 million. The Founders Contribution, the PrimeCo Transactions, the September 1996 Investment and the 1996 Debt Exchange, together with the Government Financing and the Offerings and the application of the net proceeds therefrom, are collectively referred to as the "Transactions." ------------------------ The Company's principal executive offices are located at 222 Second Avenue North, Nashville, Tennessee 37201, and its telephone number is (615) 251-4800. THE OFFERINGS <TABLE> <S> <C> Class B Common Stock offered by the Company.......... shares Common Stock to be outstanding after the Offerings: Class A Common Stock............ shares Class B Common Stock............ shares(a) Class C Common Stock............ shares Voting Rights..................... Under the Company's Amended and Restated Certificate of Incorporation, with respect to matters on which all holders of the Company's Common Stock have the right to vote, the Class B Common Stock, Class C Common Stock and Series B Convertible Preferred Stock, voting together as a single class, will constitute 49.9% of the total voting power of the Company, and the Company's Class A Common Stock will constitute 50.1% of the total voting power of the Company. With respect to certain specified matters other than the election of the Company's Board of Directors, shareholder approval will require the affirmative vote of 75% of the total voting power of the Company, with all classes of the Common Stock and the Series B Convertible Preferred Stock voting together as a single class. In addition, certain specified actions will require the approval of a majority of the Series B Convertible Preferred Stock outstanding. See "Description of Capital Stock." The holders of the Class A Common Stock will have the right to elect a majority of the Company's Board of Directors. The holders of each of the Class C Common Stock and the Series B Convertible Preferred Stock will have the right to elect one director. The holders of Class B Common Stock will have the right to elect the remaining members of the Company's Board of Directors. See "Description of Capital Stock." Concurrent Senior Notes Concurrently with the Stock Offering, the Company is Offering........................ offering Senior Notes having an initial accreted value of $ million. Under the terms of the indenture governing the Senior Notes (the "Indenture"), subject to certain exceptions, the Company will not be able to pay any dividends or make any distributions on its Common Stock unless and until the Company satisfies </TABLE> - -------------- (a) Includes shares issuable upon conversion of the Series B Convertible Preferred Stock to be issued to PrimeCo upon consummation of the Offerings. Excludes (i) warrants to purchase shares at an exercise price of $ per share, and (ii) shares reserved for issuance pursuant to the Company's 1996 Long-Term Incentive Plan (the "1996 Plan"). In the event the over-allotment option is exercised in full, the total number of shares to be outstanding after the Offerings would be . <TABLE> <S> <C> certain requirements, which the Company does not expect to satisfy for the foreseeable future. See "Dividend Policy." The Indenture will also include certain restrictive covenants, including covenants relating to preservation of the Company's assets, limitations on the scope of the Company's business, limitations on debt incurrence, limitations on mergers, consolidations and sales of assets of the Company and restrictions on transactions with affiliates. Use of Proceeds................... The net proceeds from the Stock Offering and the Senior Notes Offering are estimated to be $ million and $ million, respectively, of which approximately $0.6 million will be applied to the repayment of a commitment fee and other miscellaneous indebtedness and the remainder of which (approximately $ million) will be used to fund capital expenditures, to make interest payments on the Government Financing and Vendor Financing, to fund working capital requirements and for other general corporate purposes. See "Use of Proceeds." Proposed NNM Symbol............... CTEL Risk Factors...................... Prospective investors should carefully consider all the information set forth in this Prospectus and, in particular, should evaluate the specific factors set forth under "Risk Factors" before purchasing shares of Class B Common Stock. </TABLE> SUMMARY FINANCIAL DATA The following summary financial data should be read in conjunction with "Pro Forma Financial Data," "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements included elsewhere in this Prospectus. <TABLE> <CAPTION> PERIOD FROM SIX-MONTH PERIOD INCEPTION ENDED JUNE 30, 1996 (JUNE 12, 1995) (UNAUDITED) THROUGH DECEMBER ------------------------ 31, 1995 HISTORICAL PRO FORMA ------------------- ----------- ----------- <S> <C> <C> <C> (IN THOUSANDS, EXCEPT SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues....................................................... $ -- $ -- $ -- Operating expenses............................................. 172 675 (1,059) ----- ----- ----------- Operating loss................................................. (172) (675) (1,059) Interest expense............................................... 34 283 7,029 ----- ----- ----------- Net loss....................................................... $ (206) $ (958) $ (8,088) ----- ----- ----------- ----- ----- ----------- Pro forma net loss per share of Common Stock (unaudited)(a).... $ $ $ Pro forma number of shares used in computing pro forma net loss per share of Common Stock (unaudited)(a)..................... OTHER DATA: Deficiency of earnings to fixed charges(b)..................... $ (206) $ (958) $ (8,088) </TABLE> <TABLE> <CAPTION> AS OF JUNE 30, 1996 (UNAUDITED) ------------------------------- PRO FORMA FOR THE HISTORICAL TRANSACTIONS(C) ----------- ------------------ <S> <C> <C> (IN THOUSANDS) BALANCE SHEET DATA: Working capital..................................................................... $ 14 $166,251 Investment in PCS licenses.......................................................... 8,755 125,728 Total assets........................................................................ 10,992 303,213 % Senior Discount Notes Due 2006................................................. -- 115,017 Government Financing(d)............................................................. -- 108,218 Other debt.......................................................................... 8,340 -- 5% Cumulative Convertible Preferred Stock........................................... -- 6,508 Series B Convertible Preferred Stock................................................ -- 15,249 Class B Common Stock (with put feature)............................................. 668 4,211 Class C Common Stock................................................................ 835 15,249 Total stockholders' equity (deficit)................................................ (96) 38,169 </TABLE> - ------------------ (a) See Note 2 to the Financial Statements included elsewhere in this Prospectus for an explanation of the unaudited pro forma net loss per share of Common Stock and the unaudited pro forma number of shares used in computing pro forma net loss per share of Common Stock. (b) For the purpose of calculating the ratio of earnings to fixed charges as prescribed by the rules and regulations of the SEC, earnings represent pre-tax earnings from continuing operations plus fixed charges, less interest capitalized. Fixed charges represent interest (including amounts capitalized), the portion of rent expense deemed to be interest, and amortization of deferred financing costs and debt discounts. (c) Adjusted to give effect to the Transactions as if they had occurred on June 30, 1996. (d) The Government Financing has been recorded at its estimated fair market value of approximately $108.2 million based on an estimated fair market borrowing rate of %, as estimated by management. The actual obligation under the Government Financing is $157.6 million. See "Risk Factors--Substantial Debt Obligations to the U.S. Government; Implications of Accounting Treatment."
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. As used in this Prospectus, the term "Continuing Stockholders" collectively refers to Brian, Dean, Neil, Ross and Steve Blechman and Stephen Welling, and the term "Stockholders" collectively refers to the Continuing Stockholders together with David and Jean Blechman. Unless the context otherwise requires, the term "Company" refers to (a) TLC and, as applicable, its direct and indirect subsidiaries, Twin Laboratories Inc. and Advanced Research Press, Inc. ("ARP"), when used with respect to information about events occurring upon completion of or after the Acquisition (as defined herein) or when giving pro forma effect thereto and (b) collectively Natur-Pharma Inc., Twin Laboratories Inc., Alvita Products, Inc., Twinlab Export Corp., Twinlab Specialty Corporation, B. Bros. Realty Corporation and Advanced Research Press, Inc., all of which were affiliated entities, as such entities existed prior to the consummation of the Acquisition, when used with respect to historical information contained herein. On June 7, 1996, the name of the Company was changed from TLG Laboratories Holding Corp. to Twinlab Corporation. Except where otherwise indicated, the information in this Prospectus (i) assumes that the over-allotment option granted to the Underwriters will not be exercised and (ii) gives effect to an 18.5 for 1 stock split effected as a stock dividend with respect to the Common Stock which was effected prior to the consummation of the Offerings. THE COMPANY The Company believes based upon its knowledge of the nutritional supplement industry that it is one of the leading manufacturers and marketers of brand name nutritional supplements sold through domestic health food stores. Since the Company's founding in 1968 by David and Jean Blechman, the Company has emphasized the development and introduction of high-quality, unique products in response to emerging trends in the nutritional supplement industry. The Company produces a full line of nutritional supplements and offers the broadest product line in the industry with more than 800 products and 1,500 stockkeeping units (SKU's). The Company's product line includes vitamins, minerals, amino acids, fish and marine oils, sports nutrition products and special formulas marketed under the TWINLAB (R) trademark and a full line of herbal supplements and phytonutrients and herb teas marketed under the Nature's Herbs (R) and Alvita (R) trademarks, respectively. None of the Company's products individually accounted for more than 7% of total net sales in 1995. The Company's broad product line, strong history of new product introductions and innovations, superior marketing and advertising programs and premium product quality have established TWINLAB, Nature's Herbs and Alvita as leading brands in the nutritional supplement industry. Under the management of Mr. and Mrs. Blechman's five sons, the Company has diversified its product line through internal growth, product development and selected acquisitions, including the acquisition in 1989 of Natur-Pharma Inc., a leading manufacturer and marketer of herbal supplements and phytonutrients under the Nature's Herbs brand name, and the acquisition in 1991 of Alvita Products, Inc., a leading marketer of herb teas. The Company has achieved increased net sales and income from operations every year since 1990. In particular, during the three-year period from 1993 through 1995, the Company achieved a compound annual growth rate in net sales and income from operations of 22.0% and 37.8%, respectively. For the fiscal year ended December 31, 1995, the Company achieved net sales growth of 26.8% to $148.7 million and growth in income from operations of 31.3% to $31.6 million, as compared to fiscal year 1994. For the nine months ended September 30, 1996, the Company achieved net sales of $121.2 million and income from operations of $26.9 million, representing an increase of 15.7% and 32.2%, respectively, as compared to the nine months ended September 30, 1995. The Company's products target consumers who utilize nutritional supplements in their daily diet and who demand premium quality ingredients in a broad variety of dosages and delivery methods. The Company's products compete primarily in the health food store market, where the dominant competitive factors include product attributes such as quality, potency and the uniqueness of the product formulation. The Company sells its products domestically through a network of approximately 60 distributors, who service approximately 11,000 health food stores and other selected retail outlets. The Company believes that its products are available in over 90% of the health food stores in the United States. The health food store channel of distribution has expanded significantly in recent years and is expected to grow further as national chains, including those which sell the Company's products such as General Nutrition Companies, Inc. ("GNC"), Whole Foods Market ("WFM"), Wild Oats Markets, Fresh Fields, and other industry participants continue to add stores in new and existing markets. Certain of these chains, such as GNC and WFM, manufacture and market their own private label products in addition to selling brand name products manufactured by third parties such as the Company. The health food store market differs significantly from the mass market for vitamin and other nutritional supplements where price and convenience constitute the primary bases of competition. The nutritional supplement products sold in grocery stores, drug stores and mass merchandisers are typically manufactured by large pharmaceutical companies and private label manufacturers. The Company's products are also offered in Europe, Asia, South America and other international markets through arrangements with overseas distributors. The Company believes it is well positioned to capitalize on the growth of the nutritional supplement market. Based on estimates in a 1994 market report conducted by Packaged Facts (the "Packaged Facts Report"), an independent research firm, the retail market for vitamins, minerals and other nutritional supplements has grown at a compound annual rate of greater than 12% from $3.3 billion in 1991 to over $4.6 billion in 1994. Furthermore, the Company's rate of sales growth has exceeded the industry's growth rate for each year during this period. Packaged Facts forecasts approximately 7% annual industry growth through the end of the decade in vitamins, minerals and other supplements, which management believes will be fueled by (i) favorable demographic trends towards older Americans, who are more likely to consume nutritional supplements; (ii) product introductions in response to new scientific research findings; (iii) the nationwide trend toward preventive medicine in response to rising health care costs; and (iv) the heightened understanding and awareness of the connection between diet and health. Moreover, although the industry has grown dramatically in recent years, there is still a large untapped domestic market as only an estimated 50% of Americans currently consume vitamins, minerals and herbal supplements on a regular basis. BUSINESS STRATEGY The Company's strategy is to continue to enhance its leadership position in the domestic sale of vitamins, minerals and other nutritional supplements in health food stores and to increase its market share and sales while continuing to improve its overall operating efficiency and financial performance. The Company intends to capitalize on the TWINLAB brand name by growing market share domestically, increasing penetration of the Company's other brands, continuing to introduce new products and product extensions, and expanding internationally. Specifically, the Company seeks to: Capitalize on Powerful Brand Name Recognition. The Company's recognized product quality, broad product line, strong history of new product introductions and innovations, and superior marketing and advertising programs have established TWINLAB, Nature's Herbs and Alvita as leading brands in the nutritional supplement industry. Each of the Company's product categories, including vitamins, minerals and amino acids; sports nutrition; special formulas; herbal supplements and phytonutrients; and herb teas, have posted double digit sales growth in each of the last three years. The Company's extensive marketing and advertising programs have been critical components of its products' strong brand name recognition, and management believes that the Company offers its customers the strongest marketing and advertising support programs in the industry. In fiscal 1995, the Company invested $11.1 million, an increase of 27% over fiscal 1994, in marketing and advertising to promote its products. Furthermore, since quality is a critical factor in consumer purchase decisions, the Company believes that its premium quality ingredients, modern manufacturing facilities and comprehensive quality control procedures have enabled the Company to establish a competitive advantage based on the quality of its products. Increase Penetration in the Growing Health Food Market. Management believes that the expansion of retail distribution channels and the strong growth characteristics of the nutritional supplement industry provide the Company with significant opportunities to increase sales. Management further believes that the established brand name recognition of the Company's products positions it to increase its penetration of shelf space as health food retailers seek to align themselves with companies who possess strong brand names, offer a wide range of products, demonstrate continued marketing and advertising support and provide consistently high levels of customer service. Since Nature's Herbs and Alvita products currently are available in only an estimated 60% and 50%, respectively, of domestic health food stores, compared to an estimated 90% for TWINLAB products, the Company believes that it will be able to capitalize on health food retailers' success with the TWINLAB product line in order to significantly increase shelf space for the Company's herbal supplements, phytonutrients and herb teas. Continue to Introduce New Products and Product Innovations. A cornerstone of the Company's success has been its ability to rapidly utilize recent scientific and medical findings in its new product development efforts. The Company has consistently been among the first in its industry to introduce new products and product innovations which anticipate and meet customer demands for newly identified nutritional supplement benefits. Furthermore, the Company's geographically diverse network of more than 60 distributors allows the Company to achieve immediate and broad distribution for new product launches. As part of its ongoing research and development effort, the Company maintains an extensive database and actively researches and monitors a wide variety of publications containing scientific and medical research. From 1991 through 1995, the Company introduced over 350 products, with over 90 new products introduced in 1995 alone. Gross sales during 1995 from new products introduced in 1995 were $18.4 million, or approximately 11% of gross sales. During the first nine months of 1996, the Company introduced over 82 new products, from which the Company realized gross sales of $9.6 million, or approximately 7.3% of gross sales. The Company intends to build upon its historical success by continuing to introduce new and innovative products not previously available in health food stores. Build Upon Established Customer Relationships. The Company's established relationships with distributors and health food store retailers are based upon the Company's long-standing commitment to a high level of customer service. In order to ensure that its customers receive prompt and reliable service, the Company has designed a flexible and responsive manufacturing process and has achieved a fill rate of approximately 98% for customer orders. In addition, the Company's sales force consists of 30 dedicated sales professionals who operate in sales territories which cover the entire continental United States and Alaska. The primary functions of the Company's sales force are to gain better placement and additional shelf space for the Company's products and to stay abreast of customer needs. The sales force personnel work with direct accounts, distributors and individual retailers to enhance knowledge of TWINLAB, Nature's Herbs and Alvita products and to achieve maximum exposure for these products. Increase Penetration of Foreign Markets. Management believes that there are substantial opportunities for the Company to expand its presence in foreign markets. The Company has a department, headed by a senior sales professional, dedicated to increasing sales in such markets. The Company's foreign marketing effort is primarily focused on establishing additional relationships with leading overseas distributor organizations as a cost-effective method of increasing international sales. The Company presently has distribution agreements covering over 44 foreign countries and has agreements for another seven countries currently in negotiation. In 1995, the Company had net sales of $8.3 million to foreign markets. Supplement Internal Growth Through Strategic Acquisitions. As the nutritional supplement industry is highly fragmented with many companies producing only a single product line or single product, the Company believes that it is strategically positioned to participate in the consolidation of the industry due to its established brand name, broad distribution capabilities and proven ability to generate sales of its products through successful marketing programs. Since 1989 the Company has acquired two businesses, Natur-Pharma Inc. (Nature's Herbs) and Alvita Products, Inc. (Alvita), and in each case has embarked on successful expansion programs which resulted in substantially higher sales and income from operations for the acquired companies. Net sales for Natur-Pharma Inc. increased from $5.2 million in 1990 (the first full year after its acquisition) to $17.9 million in 1995, and net sales for Alvita Products, Inc. increased from $1.7 million in 1992 (the first full year after its acquisition) to $5.6 million in 1995. The Company intends to actively pursue acquisition opportunities, including product line acquisitions, that complement its existing products, expand its distribution channels or are compatible with its business philosophy and strategic goals. Some of such acquisition opportunities may be material and some are currently under investigation, discussion or negotiation. There can be no assurance that any such opportunities will result in a completed acquisition. Future acquisitions could be financed by internally generated funds, bank borrowings, public offerings or private placements of equity or debt securities, or a combination of the foregoing. In connection with the Offerings, the Company entered into an amendment and restatement of its existing credit facility (as amended and restated, the "Amended and Restated Revolving Credit Facility"), which provides for a revolving credit facility of $50.0 million, up to $35.0 million of which will be available to fund acquisitions, subject to certain conditions and reductions (including a reduction for the approximately $20.0 million of borrowings to be used as described under "Use of Proceeds" until such time as such borrowings are repaid). See "Risk Factors--Risks of Future Acquisitions" and "Description of Certain Indebtedness--The Amended and Restated Revolving Credit Facility." THE ACQUISITION The Stockholders, TLC, Natur-Pharma Inc. and Green Equity Investors II, L.P. ("GEI") entered into a Stock Purchase and Sale Agreement, dated as of March 5, 1996, as amended (the "Acquisition Agreement"), pursuant to which, among other things, on May 7, 1996 (i) GEI acquired 48% of the Common Stock of TLC for aggregate consideration of $4.8 million and shares of non-voting junior redeemable preferred stock of TLC (the "Junior Preferred Stock") for aggregate consideration of $37.0 million, (ii) certain other investors acquired 7% of the Common Stock of TLC for aggregate consideration of $0.7 million and shares of non-voting senior redeemable preferred stock of TLC (the "Senior Preferred Stock," and, together with the Junior Preferred Stock, the "Preferred Stock") for aggregate consideration of $30.0 million, (iii) the Continuing Stockholders exchanged certain of their shares of common stock of Natur-Pharma Inc. for 45% of the outstanding shares of Common Stock of TLC, valued at $4.5 million, (iv) TLC purchased all of the remaining shares of common stock of Natur-Pharma Inc. from the Stockholders for cash, resulting in Natur-Pharma Inc. becoming a wholly owned subsidiary of TLC, (v) Twin Laboratories Inc., Alvita Products, Inc., Twinlab Export Corp., Twinlab Specialty Corporation and B. Bros. Realty Corporation merged into Natur-Pharma Inc. (the "Natur-Pharma Merger"); and Advanced Research Press, Inc. merged with Natur-Pharma II Inc., a wholly owned subsidiary of Natur-Pharma Inc. (the surviving entity in such merger is referred to herein as "ARP"), and (vi) in connection with such mergers the Stockholders received cash in consideration for all of their shares of capital stock of Twin Laboratories Inc., Alvita Products, Inc., Twinlab Export Corp., Twinlab Specialty Corporation, B. Bros. Realty Corporation and Advanced Research Press, Inc. The total cash consideration that the Stockholders received was approximately $212.5 million, the majority of which was paid to David and Jean Blechman. Of the total cash consideration to the Stockholders, approximately $15.3 million represented consideration for the Non-Competition Agreements (as defined herein). See "Management--Employment Agreements." The transactions described above are hereinafter referred to as the "Acquisition." Concurrently with the consummation of the Acquisition, the Company entered into its existing credit facility (which provided for a term loan facility in the amount of $53.0 million and a revolving credit facility in the amount of $15.0 million) (the "Existing Credit Facility") and issued $100.0 million principal amount of 10 1/4% Senior Subordinated Notes due 2006 (the "Note Offering"; and collectively with the Acquisition and the Existing Credit Facility, the "Transactions"). The net cash proceeds of the Note Offering were used, together with borrowings under the Existing Credit Facility, the proceeds from the issuance of the Common Stock and Preferred Stock of TLC and available cash of the Company, to finance the Acquisition, to refinance approximately $7.0 million aggregate principal amount of debt of the Company and to pay related fees and expenses. See "Description of Certain Indebtedness" and "Description of Capital Stock." In connection with the Acquisition, Natur-Pharma Inc.'s name was changed to Twin Laboratories Inc. Subsequent to the Transactions, the Company repaid $6.0 million of outstanding indebtedness under the term loan facility contained in the Existing Credit Facility. THE OFFERINGS Common Stock offered by the Company: U.S. Offering......... 6,800,000 shares International 1,700,000 shares Offering............... Total............... 8,500,000 shares Common Stock to be outstanding after the Offerings.............. 27,000,000 shares Use of proceeds ........ The net proceeds of the Offerings together with available cash resources of the Company and approximately $20.0 million of borrowings under the Amended and Restated Revolving Credit Facility will be used to prepay all of the $47.0 million of outstanding indebtedness under the term loan facility contained in the Existing Credit Facility (plus accrued and unpaid interest thereon; the "Prepayment") and to redeem all of the outstanding shares of Senior Preferred Stock and Junior Preferred Stock, which together have an aggregate liquidation preference of $67.0 million (plus accrued and unpaid dividends thereon; together with the Prepayment, the "Repayments"). See "Use of Proceeds." Nasdaq National Market TWLB symbol................. SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA The summary information below presents historical consolidated financial data and unaudited pro forma condensed consolidated financial data for the periods indicated which have been derived from audited and unaudited financial statements of the Company. The results for the interim periods are not necessarily indicative of the results for the full fiscal year. The summary unaudited pro forma condensed consolidated operating data for the year ended December 31, 1995, and the nine months ended September 30, 1995 and 1996 give effect to (i) the Note Offering and the Existing Credit Facility and the application of the net proceeds therefrom, (ii) the Acquisition (including the Company's conversion of tax status from an "S" corporation to a "C" corporation and other tax consequences related to the Acquisition) and related transactions, and (iii) the Offerings and the Repayments, as if each of the Transactions, the Offerings and the Repayments had been consummated as of January 1, 1995. The pro forma balance sheet data give effect to the Offerings and the Repayments as if the Offerings and the Repayments had been consummated on September 30, 1996. See "Unaudited Pro Forma Condensed Consolidated Financial Data" and the notes thereto. The pro forma financial data set forth below may not necessarily be indicative of the results that would have been achieved had the Transactions, the Offerings and the Repayments been consummated as of the dates indicated or that may be achieved in the future. The summary historical and pro forma financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Selected Historical Financial Data" and the Consolidated Financial Statements of the Company and the notes thereto included elsewhere in this Prospectus. <TABLE> <CAPTION> NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, --------------------------------------------- ------------------ 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> OPERATING DATA: Net sales.............. $70,165 $83,014 $99,897 $117,342 $148,735 $104,822 $121,230 Gross profit........... 25,501 31,800 37,766 47,095 58,803 40,877 49,548 Operating expenses..... 14,570 17,463 21,125 23,022 27,191 20,521 22,644 Income from operations. 10,931 14,337 16,641 24,073 31,612 20,356 26,904 Nonrecurring and trans- action expenses....... -- -- -- -- 656 -- 15,700 (a) Net income............. 10,162 13,435 16,676 21,693 30,224 19,613 1,502 (a) Pro forma relating to change in tax status:(b) Historical income be- fore provision for in- come taxes............ $10,331 $14,010 $16,906 $ 21,938 $ 30,464 $ 19,752 $ 4,768 Pro forma provision for income taxes.......... 4,017 5,436 6,644 9,087 12,060 7,818 8,027 ------- ------- ------- -------- -------- -------- -------- Pro forma net income (loss)................ $ 6,314 $ 8,574 $10,262 $ 12,851 $ 18,404 $ 11,934 $ (3,259)(a) ======= ======= ======= ======== ======== ======== ======== Pro forma net income (loss) per share...... $ 0.68 $ (0.25)(c) ======== ======== Weighted average shares outstanding(d)........ 27,000 27,000 ======== ======== OTHER DATA: Capital expenditures... $ 1,472 $ 1,304 $ 4,904 $ 1,786 $ 2,641 $ 2,465 $ 1,253 Net sales growth....... 17.4% 18.3% 20.3% 17.5% 26.8% -- % 15.7% Income from operations growth................ 37.7 31.2 16.1 44.7 31.3 -- 32.2 Pro forma net income growth................ -- 35.8 19.7 25.2 43.2 -- -- Income from operations margin(e)............. 15.6 17.3 16.7 20.5 21.3 19.4 22.2 </TABLE> <TABLE> <CAPTION> NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED ------------------- DECEMBER 31, 1995 1995 1996 ----------------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> PRO FORMA DATA: Net sales........................... $148,735 $ 104,822 $ 121,230 Income from operations.............. 31,212 20,056 26,763 Net income.......................... 11,429 6,393 10,480 Net income per share................ 0.42 -- 0.39 Weighted average shares outstanding(d)..................... 27,000 -- 27,000 </TABLE> <TABLE> <CAPTION> AS OF SEPTEMBER 30, 1996 -------------------------- HISTORICAL PRO FORMA ------------ ------------ (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents..................... $ 8,367 $ -- Net working capital (excluding cash and cash equivalents and current debt) ............... 33,903 38,069 Total assets.................................. 143,408 132,230 Total debt (including current debt)........... 147,697 117,296 Senior and junior redeemable preferred stock.. 67,000 -- Shareholders' deficit......................... (94,695) (4,306) </TABLE> - ------- (a) Reflects $15.3 million of nonrecurring non-competition agreement expense and $0.4 million of transaction expenses. (b) The Company consisted of S corporations and, accordingly, federal and state taxes were generally paid at the shareholder level only. Upon consummation of the Transactions, the Company eliminated its S corporation status and, accordingly, became subject to federal and state income taxes. (c) Pro forma net loss per share for the nine months ended September 30, 1996 has been computed by dividing pro forma net loss, after reduction for Preferred Stock dividends of $3.4 million, by the weighted average shares outstanding. (d) Weighted average shares outstanding represents the number of equivalent shares outstanding after giving retroactive effect to TLC's 18.5 for 1 stock split (effected in the form of a stock dividend) and assumes that the 10,175,000 shares issued in connection with the Acquisition and the 8,500,000 shares of Common Stock offered hereby are outstanding during each of the periods indicated. See Notes to the Consolidated Financial Statements of the Company included elsewhere in this Prospectus. (e) Income from operations margin equals income from operations as a percentage of net sales.
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Prospective investors should consider carefully the information discussed under "Risk Factors." This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors." THE COMPANY CEMAX-ICON designs, manufactures and markets medical image information systems which electronically acquire, archive, distribute and display medical images throughout hospitals, outpatient facilities and integrated delivery networks ("IDNs"). The Company's systems interface with virtually all commercially available imaging modalities, including x-ray, computed tomography ("CT"), magnetic resonance imaging ("MRI"), computed radiography, ultrasound and nuclear medicine. By automating and increasing the availability of medical images within a healthcare facility or throughout an IDN, the Company's systems reduce the cost and improve the management of medical care. CEMAX-ICON's systems and modules are based on an open architecture and utilize standard hardware and standard network protocols in order to facilitate integration with existing image acquisition devices and healthcare information systems. CEMAX-ICON provides complete turn-key systems as well as scalable software modules that integrate with commercially available third party hardware. Medical images, traditionally stored on film, are a critical component of the patient's medical record as they are used in all stages of patient care, including screening, diagnosis, treatment and post-treatment assessment. Currently, film retrieval and distribution are primarily manual processes which are inherently slow and labor-intensive. Furthermore, film is bulky, expensive to store, frequently lost or misplaced and requires expensive chemical handling and processing which produce environmentally hazardous by-products. Trends toward lower cost and higher quality care in the healthcare industry are causing changes in the management of medical images, including an emphasis on reducing the operational costs of film management as well as the requirement that images be accessible throughout the healthcare organization or IDN. Traditional healthcare information systems are limited in their ability to provide cost-effective, institution-wide access to medical images because many existing image acquisition devices use a variety of proprietary platforms. Moreover, digitized medical images contain enormous quantities of data which can exceed the ability of current information systems to effectively store and transmit such images. Recent computing advances have made possible the creation of large-scale networks, known as Picture Archiving and Communications Systems ("PACS"), that digitize, transmit, store and retrieve medical images. The Company's systems, designed in consultation with clinicians, enable healthcare providers to reengineer the management of medical images to cost-effectively implement PACS in order to increase the productivity of radiologists, other clinicians and support staff, and to reduce film use and film-related expenses. In addition, the Company's systems increase the accessibility of medical images to clinical staff, both within an institution and at remote sites, and enable healthcare providers to broaden their geographic service areas. The Company has developed a large library of interfaces to provide connectivity with standard interfaces as well as the large installed base of proprietary image acquisition devices. The Company's systems utilize a distributed server and database architecture and advanced image compression technology to cost-effectively store and transmit large image data sets at clinically acceptable speeds. CEMAX-ICON intends to maintain and enhance its position as a market leader by leveraging its technology and its knowledge of radiology practice, increasing its penetration of the PACS and teleradiology markets, maintaining and expanding OEM relationships, and cross-selling its systems and services. The Company sells its products directly to end-users as well as through OEMs, including several leading suppliers of imaging and information systems to the healthcare industry, including Minnesota Mining and Manufacturing Co. ("3M"), Toshiba Corporation ("Toshiba"), Lucent Technologies, Inc. (formerly a division of AT&T) ("Lucent"), Hewlett-Packard Co.("Hewlett-Packard"), Sterling Diagnostics, Inc. (formerly a division of DuPont) ("Sterling"), General Electric Co. ("General Electric") and Eastman Kodak Co. ("Kodak"), as well as distributors. CEMAX-ICON's systems are installed at over 1,500 sites worldwide. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company.................................... 2,800,000 Shares Common Stock to be outstanding after the offering...................... 8,986,934 Shares(1) Working capital and general corporate Use of proceeds........................................................ purposes Nasdaq National Market symbol.......................................... ICON </TABLE> SUMMARY OF FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, -------------------------------------------------- ------------------ 1991 1992 1993 1994 1995 1995 1996 ------- ------ ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Total revenues................................... $ 4,637 $8,314 $12,114 $16,457 $17,030 $ 8,600 $11,232 Loss from operations............................. (1,141) (809) (1,141) (2,490) (6,842) (3,186) (1,300) Net loss......................................... (1,271) (843) (1,198) (2,578) (6,815) (3,233) (1,299) Pro forma net loss per share(2).................. $ (1.17) $ (0.59) $ (0.21) Shares used to compute pro forma net loss per share(2)....................................... 5,820 5,455 6,283 </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 -------------------------- ACTUAL AS ADJUSTED(3) -------- -------------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents.......................................................... $ 3,796 $ 26,432 Working capital (deficit).......................................................... (1,846) 20,790 Total assets....................................................................... 11,304 33,940 Long-term obligations, less current portion........................................ 499 499 Accumulated deficit................................................................ (32,880) (32,880) Total stockholders' equity (deficit)............................................... (807) 21,829 </TABLE> - --------------- (1) Excludes as of June 30, 1996: (i) 632,481 shares of Common Stock issuable upon exercise of outstanding stock options at a weighted average price of $1.76 per share; (ii) warrants to purchase 202,383 shares of Common Stock at a weighted average exercise price of $11.37 per share; and (iii) 950,000 shares reserved for future grants under the Company's 1996 Stock Plan, 1996 Employee Stock Purchase Plan, and 1996 Director Option Plan. See "Management -- Director Compensation," "-- Stock Plans" and Notes 7 and 8 of Notes to Financial Statements. (2) See Note 1 of Notes to Financial Statements describing the shares used in calculating pro forma net loss per share. (3) Adjusted to give effect to the receipt of the estimated net proceeds from the sale of 2,800,000 shares of Common Stock offered by the Company hereby (at an assumed initial public offering price of $9.00 per share) and the conversion of convertible preferred stock. See "Use of Proceeds" and "Capitalization." ------------------------ Except as otherwise noted, all information contained in this Prospectus: (i) gives effect to the conversion of all outstanding shares of convertible preferred stock into 845,054 shares of Common Stock upon the closing of this offering; and (ii) reflects a 1-for-2.35 reverse stock split of the Company's Common Stock effected in July 1996. See "Capitalization" and "Description of Capital Stock."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001016169_antares_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001016169_antares_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..039ca2c37e99b6e523ecf18f129ae1082fd2a710
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the more detailed information and financial statements and notes appearing elsewhere in this Prospectus. Unless otherwise indicated, all financial and share information set forth in this Prospectus (i) has been adjusted to reflect the conversion of all outstanding Convertible Preferred Stock into Common Stock upon the effectiveness or the closing of this offering, (ii) reflects a 1-for- 1.313 reverse stock split of the Common Stock effected on August 6, 1996, (iii) assumes an initial public offering price of $5.75 per share, the midpoint of the range set forth on the cover page of this Prospectus and (iv) assumes no exercise of the Underwriters' over-allotment option. Unless the context requires otherwise, all references in this Prospectus to "Medi-Ject" or the "Company" refer to Medi-Ject Corporation. This Prospectus contains forward- looking statements that involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward- looking statements. Factors that might cause such differences include, but are not limited to, those discussed under the heading "Risk Factors," which investors should consider carefully. THE COMPANY Medi-Ject Corporation is a drug delivery company focused on developing, manufacturing and marketing needle-free injection systems for the self- administration of a wide range of parenteral (injectable) drugs. The Company's product, the Medi-Jector system, is a hand-held, spring-powered device that injects drugs from a front-end chamber through the skin without a needle as a narrow, high pressure stream of liquid approximately 7/1000ths of an inch in diameter. The Medi-Jector system eliminates the need to pierce the skin with a sharp needle and manipulate a plunger with the needle inserted through the skin. Therefore, many people perceive injections with the Medi-Jector system to be less threatening than injections with a needle. Today's Medi-Jector systems are smaller, easier to use, less expensive and more comfortable than previous needle-free injection systems. The Company believes that the key to widespread market acceptance of its needle-free injection systems depends upon continued improvements in these areas. The Company believes that individuals who require self-injection will benefit from the Medi-Jector system because it (i) eliminates the need to pierce themselves with needles for each injection, which should lead to increased compliance with a prescribed injection regimen and consequently reduce health complications, (ii) provides the ability to inject themselves discreetly and (iii) eliminates the need for sharps disposal of used needles. In addition, healthcare industry providers and payors may benefit from the decrease in long- term costs of patient care which may result from improved patient compliance. Furthermore, based upon discussions with pharmaceutical companies, the Company believes that those companies are motivated to provide improved drug delivery methods in an attempt to differentiate their products in the marketplace and improve patient compliance, which may result in increased sales and larger market share. The Company has entered into licensing and development agreements with multi- national pharmaceutical and medical device companies covering the design and manufacture of customized injection systems for specific drug therapies. In addition to agreements with pharmaceutical companies, including those with Ferring NV, JCR Pharmaceuticals Co., Ltd., Schwarz Pharma AG, Teva Pharmaceuticals Co., Ltd. and GeneMedicine, Inc., the Company has entered into a strategic alliance with Becton Dickinson and Company ("Becton Dickinson"). The goal of this alliance is the joint development and commercialization of new, less expensive and more user friendly injectors which embody proprietary, advanced technology. The Company will design and manufacture the injectors, and Becton Dickinson will design and manufacture the consumable components for the systems. Becton Dickinson has the right to market the injectors and the consumable components worldwide for use initially with insulin and potentially with other drugs. Medi-Ject and Becton Dickinson will collaborate on the development and manufacture of customized versions of the system and share revenues from sales of injectors and consumables to pharmaceutical companies and any revenue generated from licensing milestone payments, development fees and royalties. See "Business--Collaborative Agreements." The Company's focus is on the market for the delivery of self-administered parenteral drugs, the largest, most developed portion of which consists of the delivery of insulin. In the United States, over 3.2 million people inject insulin for the treatment of diabetes, resulting in an estimated 2.3 billion injections annually, and the Company believes that the number of insulin injections will increase with time as the result of new diabetes management approaches which recommend more frequent use. Other parenteral drugs that presently are self-administered and are or may be suitable for injection with the Medi-Jector system include therapies for the treatment of multiple sclerosis, migraine headaches, growth retardation, impotence, female infertility, AIDS and hepatitis. The Company also believes that other existing parenteral drugs will be self-administered in the future and that additional parenteral drugs that are under development will be deemed appropriate for self-administration. In 1993, the Company hired a new management team with the goal of revitalizing and redefining the Company's strategic direction. Since that time, the Company has focused on entering into collaborative arrangements with pharmaceutical and medical device companies, and has increased its product development efforts to emphasize ease of use and to reduce the cost of its products to make them more competitive in the marketplace. The Company's goal is to establish its needle-free injectors as the drug delivery method of choice for the self-administration of a wide range of parenteral drugs. The Company's strategic plan for accomplishing this goal consists of (i) developing improved proprietary injection systems, (ii) generating an income stream from consumable components, (iii) collaborating with pharmaceutical and medical device manufacturers to leverage off of their marketing capabilities and (iv) focusing on delivery systems for high-priced pharmaceuticals. The Company's offices are located at 1840 Berkshire Lane, Minneapolis, Minnesota 55441, and its telephone number is (612) 553-1102. The Company was incorporated in Minnesota in 1979. THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Company......... 2,200,000 shares Common Stock to be Outstanding After the Offering.................................... 6,925,633 shares (1) Use of Proceeds............................. For capital expenditures, primarily the improvement of the Company's manufacturing and assembly capability; market development activities; research and development; and working capital and other general corporate purposes. Proposed Nasdaq National Market Symbol...... "MEDJ" </TABLE> - -------- (1) Excludes 2,966,810 shares consisting of (i) 481,690 shares issuable upon exercise of outstanding options granted under the Company's 1993 Stock Option Plan and (ii) 2,485,120 shares issuable upon exercise of outstanding options and warrants granted to third parties. See "Description of Capital Stock." SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, --------------------------- --------------- 1993 1994 1995 1995 1996 ------- -------- -------- ------ ------- <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Sales........................... $ 1,058 $ 1,518 $ 1,654 $ 831 $ 814 Licensing and product develop- ment........................... 125 470 921 410 686 ------- -------- -------- ------ ------- Revenues....................... 1,183 1,988 2,575 1,241 1,500 ------- -------- -------- ------ ------- Cost of sales................... 409 631 1,049 465 502 Research and development........ 146 401 1,195 607 1,093 General and administrative...... 615 868 978 628 672 Sales and marketing............. 485 1,128 1,146 450 467 ------- -------- -------- ------ ------- Operating expenses............. 1,655 3,028 4,368 2,150 2,734 ------- -------- -------- ------ ------- Net operating loss.............. (472) (1,040) (1,793) (909) (1,233) Net other income (expense)...... (28) (26) (89) (21) 49 ------- -------- -------- ------ ------- Net loss........................ $ (500) $ (1,066) $ (1,882) $ (930) $(1,184) ======= ======== ======== ====== ======= Pro forma net loss per common $ (0.46) $ (0.22) share (1)...................... ======== ======= Pro forma weighted average com- mon shares outstanding (1)..... 4,136 5,310 </TABLE> <TABLE> <CAPTION> AT JUNE 30, 1996 ------------------------- ACTUAL AS ADJUSTED (2) -------- --------------- <S> <C> <C> SELECTED BALANCE SHEET DATA: Cash and cash equivalents............................ $ 2,233 $ 13,534 Working capital...................................... 1,699 13,000 Total assets......................................... 3,705 15,006 Long-term liabilities, less current maturities....... 54 54 Accumulated deficit.................................. (10,486) (10,486) Total shareholders' equity (3)....................... 2,544 13,845 </TABLE> - -------- (1) Computed on the basis described in Note 1 of Notes to Financial Statements. (2) Adjusted to reflect receipt by the Company of estimated net proceeds from the issuance of 2,200,000 shares at an assumed public offering price of $5.75 per share and the application of such proceeds. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001016173_sleepys_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001016173_sleepys_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..362f05bdb99b63c7aa3d95ab96266dfe3802ee76
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements (including the notes thereto) appearing elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus assumes no exercise of the Underwriter's over-allotment option and reflects (i) the 29,000-to-one stock split of the Common Stock effected in June 1996, and (ii) the Reorganization of the Company, as described below, which will be effected immediately prior to the consummation of this offering. Prospective investors should carefully consider the information set forth under the caption 'Risk Factors.' Unless the context otherwise requires, the 'Company' or 'Sleepy's' refers to Sleepy's, Inc. and its subsidiaries as reorganized prior to the consummation of this offering. See 'Reorganization of the Company and Change in Tax Status.' References in this Prospectus to a fiscal year of the Company refer to the fiscal year of the Company ended or ending on the Saturday closest to December 31 of that fiscal year. THE COMPANY The Company is one of the leading specialty retailers of bedding in the New York, New Jersey and Connecticut tri-state metropolitan area (the 'Tri-state area'), where it currently operates 88 stores. Based on the number of its stores, the Company believes that it also is one of the largest specialty retailers of bedding in the United States. The Company's sales operations are conducted through three formats: (i) 68 Sleepy's'tm' stores, which address a broad customer base and offer an extensive selection of bedding merchandise in a wide range of prices; (ii) 20 Kleinsleep'tm' stores, which generally are located in more affluent areas and offer a greater mix of higher-priced bedding merchandise; and (iii) the Company's 1-800-SLEEPY'S'tm' telemarketing operations, which commenced in 1995 and offer only products of the nation's three largest bedding manufacturers to the most convenience-oriented and cost-conscious consumers. The Company has experienced significant growth in revenues and earnings over the past two years. Net sales increased from $49,644,000 in fiscal 1994 to $59,763,000 in fiscal 1995 and from $13,115,000 in the first quarter of fiscal 1995 to $16,045,000 in the first quarter of fiscal 1996. Net income also increased, from $676,000 in fiscal 1994 to $3,569,000 in fiscal 1995 and from $(46,000) in the first quarter of fiscal 1995 to $419,000 in the first quarter of fiscal 1996. The Company attributes these increases primarily to the growth during fiscal 1995 in the number of its stores, from 75 to 87, the leveraging of fixed expenses over the additional stores and the commencement of telemarketing operations. The Company's stores offer a wide variety of bedding merchandise. Sales of mattresses and box springs ('bed sets') currently account for approximately 84% of the Company's revenues, although the Company's stores offer a variety of other bedding products, including brass beds, iron beds, headboards, footboards, high risers, day beds, bunk beds, futons, motorized beds, bed frames and related items. The Company offers only brand name products from all of the major mattress manufacturers in the United States, including Simmons, Sealy, Serta, Spring Air, Stearns & Foster, Kingsdown, Aireloom, Eclipse and Eastern. Each store displays approximately 50 varieties of bed sets. In addition to its broad selection of merchandise, the Company offers a wide choice of bed sets and other bedding products through manufacturers' catalogs. OPERATING STRATEGY The Company believes that its current operating strategy offers competitive advantages, including the following (for more information concerning the Company's operating strategy, see 'Business -- Operating Strategy'): Broad Market Coverage. By marketing and selling its products through its three different formats, the Company covers virtually all consumers throughout the Tri-state area. Competitive Pricing. In order to achieve competitive pricing, the Company maintains relatively low costs of occupancy, labor, distribution of merchandise and other aspects of its operations. Aggressive Marketing. The Company effectively uses print, radio, television and other advertising to promote each of its three sales formats and has achieved broad name recognition in the Tri-state area. Centralized Distribution Facility. The Company realizes economies of scale by servicing stores from its leased centralized distribution facility/headquarters. The Company expects that its proposed expansion strategy will permit further leveraging of the centralized facility's costs over the anticipated increase in sales volume from the addition of new stores and the expansion of its telemarketing operations. Ongoing Review of Store Performance and Location. The Company continually reviews the profitability trends and prospects of its stores and evaluates whether underperforming stores should be closed, relocated to more desirable locations or converted to the Company's other store format. GROWTH STRATEGY The Company's goal is to become the dominant retailer of bedding in the Tri-state area. The Company intends to increase its market penetration in this area and to expand its operations into contiguous geographic areas. The Company intends to open or acquire more than 15 stores during the 12 months following the date of this Prospectus. The Company believes that by opening these new stores it will realize greater economies of scale in distribution, advertising and management. The principal elements of the Company's growth strategy include the following (for more information concerning the Company's growth strategy, see 'Business -- Growth Strategy'): Store Expansion. The Company intends to pursue an aggressive expansion strategy, primarily through new store openings and acquisitions in the Tri-state area, as well as in markets contiguous to that area. Expanded Telemarketing. The Company intends to expand its telemarketing operations. The expansion of these operations, which are conducted from the Company's main facility, primarily involves the addition of personnel and generally does not require significant capital expenditures. Increased Advertising. The Company intends to significantly increase its advertising efforts. As a result of the extensive penetration in the Tri-state area of the advertising media used by the Company, the Company believes that its advertising efforts will be effective in reaching virtually all consumers throughout its market. Warehouse Expansion. Currently, the Company's centralized distribution facility/headquarters is being expanded by the landlord/owner in accordance with the Company's requirements and specifications. The Company believes that these improvements will enable the Company to maintain a larger inventory of products and continue to fulfill its customers' needs as the Company increases its market share. THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Company................ 1,375,000 shares Common Stock Outstanding after the Offering........ 4,275,000 shares(1) Use of Proceeds.................................... The net proceeds of this offering will be used to finance the Company's planned expansion, through the opening and acquisition of new stores and increased warehouse inventory relating thereto; to make a distribution to the principal shareholder of the Company in connection with the change in the Company's tax status; to repay outstanding indebtedness to a corporation controlled by the principal shareholder of the Company and to a bank, in each case incurred in order to provide working capital to the Company; to repay outstanding indebtedness assumed by the Company in the Reorganization; and for general working capital purposes and potential acquisitions. See 'Reorganization of the Company and Change in Tax Status' and 'Use of Proceeds.' Risk Factors....................................... The purchase of the Common Stock offered hereby involves risks, including risks relating to the Company's expansion plans, dependence on certain suppliers, competition and proposed warehouse expansion project. See 'Risk Factors.' Nasdaq National Market Symbol...................... SLPY </TABLE> -------------- (1)Does not include up to 400,000 shares of Common Stock reserved for issuance pursuant to the Company's 1996 Stock Option Plan. On or prior to the date of this Prospectus, the Company will have granted options to purchase 232,000 shares of Common Stock under the 1996 Stock Option Plan at the initial public offering price, none of which options has been exercised. See 'Risk Factors -- Shares Eligible for Future Sale.' SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT OPERATING AND PER SHARE DATA) <TABLE> <CAPTION> FISCAL YEAR ENDED(1) THREE MONTHS ENDED ------------------------------------------------------------------------ ------------------------- DECEMBER 28, JANUARY 2, JANUARY 1, DECEMBER 31, DECEMBER 30, APRIL 1, MARCH 30, 1991 1993 1994 1994 1995 1995 1996 ------------ ------------ ------------ ------------ ------------ ----------- ----------- <S> <C> <C> <C> <C> <C> <C> <C> INCOME STATEMENT DATA: Net sales......... $29,620 $35,305 $41,402 $49,644 $59,763 $13,115 $16,045 Gross profit...... 15,290 17,271 20,374 23,226 29,069 6,269 7,920 Income from operations...... 1,229 882 1,217 1,131 3,804 25 713 Pro forma provision for income taxes(3)........ 1,328 143 Pro forma net income(2)(3).... 1,991 214 Pro forma net income per share(3)(4)..... $ 0.69 $ 0.07 Weighted average common shares outstanding(3)(4).. 2,900 2,900 Supplemental pro forma net income per share(4).... $ 0.61 $ 0.07 OPERATING DATA (UNAUDITED): Stores open at end of period....... 56 63 66 75 87 78 88 Inventory turnover(5)..... 11.5x 8.3x 10.4x 10.7x 10.9x 9.3x 13.5x </TABLE> <TABLE> <CAPTION> AS OF MARCH 30, 1996 ----------------------------------------- PRO PRO FORMA ACTUAL FORMA(6) AS ADJUSTED(6)(7) ------- --------- ----------------- <S> <C> <C> <C> BALANCE SHEET DATA: Working capital...................................................... $(1,980) $(5,273) $11,486 Total assets......................................................... 17,278 19,261 26,591 Long-term debt and obligations under capital lease................... 2,686 5,747 5,747 Shareholder's equity................................................. 4,493 122 13,588 </TABLE> - ------------ (1)The Company's fiscal year-end is the Saturday closest to December 31 in each year. References to 'fiscal 1991,' 'fiscal 1992,' 'fiscal 1993,' 'fiscal 1994' and 'fiscal 1995' are to the fiscal years ended December 28, 1991, January 2, 1993, January 1, 1994, December 31, 1994 and December 30, 1995, respectively. (2)For fiscal 1995 and the three months ended March 30, 1996, pro forma net income reflects a pro forma adjustment in accordance with the increase in the annual salary of the Company's Chairman of the Board and Chief Executive Officer to $400,000 from an imputed $150,000. In addition, commencing May 1, 1996, the Company entered into an employment agreement with the new President of the Company providing for a salary of $200,000 during the first year thereof, which amount is not reflected in pro forma net income. See Notes to Consolidated Financial Statements and 'Management.' (3)Prior to the date of this Prospectus, the Company reported as an S corporation for federal and certain state income tax purposes. Accordingly, the Company was not subject to federal and certain state income taxes during that period. The pro forma income taxes reflect the taxes which would have been accrued if the Company had elected to report as a C corporation. See 'Reorganization of the Company and Change in Tax Status.' (4)Supplemental pro forma net income per share is based on the weighted average number of shares of Common Stock used in the calculation of pro forma net income per share plus the estimated (footnotes continued on next page) (footnotes continued from previous page) number of shares that would need to be sold by the Company in order to fund the cash distribution to the Company's principal shareholder of approximately $1,900,000 (representing approximately $3,600,000 of undistributed S corporation taxable income less advances of approximately $1,700,000 at March 30, 1996), the repayment of a $1,000,000 loan payable to an affiliate, $750,000 of bank debt and $540,000 of vendor loans to be assumed in the Reorganization, all of which are to be paid out of the net proceeds of this offering. See 'Use of Proceeds' and 'Reorganization of the Company and Change in Tax Status.' (5)Inventory turnover is determined by dividing cost of sales, which is included in the cost of sales, buying and occupancy, by the annual average inventory, which represents the average inventory at the beginning and end of each fiscal period. (6)Includes pro forma adjustments to reflect (i) the Reorganization of the Company, including the cash distribution to the Company's principal shareholder of approximately $1,900,000 (representing approximately $3,600,000 of undistributed S corporation taxable income less advances of approximately $1,700,000 at March 30, 1996), the Company's assumption of loans payable to vendors of $540,000, and the recording of a $428,000 deferred tax asset and (ii) $5,077,000 and $5,786,000, respectively, of property and obligations under a capital lease and $613,000 of capital distributions resulting from the recording of the new lease agreement for the Company's centralized distribution facility/headquarters as a capital lease. See 'Reorganization of the Company and Change in Tax Status' and 'Use of Proceeds.' (7)Adjusted to reflect the sale of shares of Common Stock offered hereby and the application of net proceeds therefrom. See 'Use of Proceeds.'
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001016181_xomed_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001016181_xomed_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..dcf259541282d033725752c02d2f0e434847d416
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in "Risk Factors." THE COMPANY Xomed is a leading developer, manufacturer and marketer of a broad line of surgical products for use by ear, nose and throat ("ENT") specialists. The Company's broad line of products includes, in its core ENT market, powered tissue-removal systems and other microendoscopy instruments, implantable devices, nerve monitoring systems and disposable fluid-control products. The Company also offers a line of ophthalmic and other products that includes hand instruments and disposable products developed and manufactured by the Company for use in various ophthalmic procedures and marketed under the Solan trademark. For the first half of 1996, approximately 86% of Xomed's revenues were derived from disposable or implantable products. The Company distributes its products worldwide through a 62-person direct sales force in the U.S. and selected other countries and through a network of 121 independent distributors. Xomed is the only major manufacturer and marketer of ENT surgical products with a direct U.S. sales force exclusively serving ENT specialists. Approximately 34% of the Company's net sales was derived from international markets during the first half of 1996, as compared to 23% of the total 1993 net sales of the Company and of Xomed-Treace, Inc., which the Company acquired in 1994. With over 25 years of industry experience, Xomed believes that it has established a long-standing reputation for innovative, high-quality products and is uniquely positioned as the only major surgical products company focused on the ENT market. More than an estimated 20,000 ENT specialists practice worldwide, of which approximately 9,000 practice in the United States. Diseases and conditions addressed by ENT specialists affect sizable patient populations and include chronic sinusitis, chronic infection of the middle ear, tonsils and adenoids, nasal and laryngeal polyps and facial tumors. Increasingly, ENT surgeons are expanding their practice to include facial plastic and reconstructive surgery. The Company estimates that more than three million ENT procedures were performed in the U.S. in 1995 and that the U.S. market for surgical instruments, devices and supplies used by ENT specialists was approximately $200 million in 1995. Xomed believes that the ENT market is beginning a conversion from conventional surgical approaches to less-traumatic approaches that involves the use of advanced surgical tools, such as powered tissue-removal systems and small-diameter surgical endoscopes, thereby minimizing patient trauma and reducing procedure times. Xomed believes that the adoption of these less- traumatic techniques may be driven by several factors, including economic pressures and patient demand. Minimally invasive techniques have the potential to expand the number of ENT procedures that can be performed in lower-cost outpatient or day surgery settings. Patient demand is likely to increase due to the reduced morbidity and improved outcomes. Xomed believes that the conversion in the ENT market to less-traumatic approaches will be similar to recent conversions in the general surgery market to less invasive techniques and the orthopaedic surgery market to powered instrumentation systems. Xomed's objective is to enhance its position in the ENT market. The principal elements of its strategy to meet this objective include: (i) continued focus on the ENT market; (ii) facilitation of the ENT market's conversion to less- traumatic approaches; (iii) emphasis on product innovation through internal research and development; (iv) maintenance of a broad product line, with particular emphasis on disposable and implantable products; and (v) expansion of the Company's global distribution network. In April 1996, Xomed acquired TreBay Medical Corporation, a microendoscopy company ("TreBay"). The senior management of TreBay, including James T. Treace, F. Barry Bays and Thomas E. Timbie, assumed senior management positions at Xomed at the time of the acquisition. These executives were formerly associated with Concept, Inc., a minimally invasive surgical products company that was acquired by Bristol-Myers Squibb Company in 1990. Up to $25.0 million of the net proceeds of this offering will be used to redeem shares of the Company's outstanding Series C Redeemable Preferred Stock, all of which are owned by existing stockholders of the Company. Approximately 78% of the outstanding Series C Redeemable Preferred Stock is held by Warburg, Pincus Investors, L.P. ("WP Investors"). The holders of the Series C Redeemable Preferred Stock have agreed that the shares of Series C Redeemable Preferred Stock not redeemed will be exchanged following the closing of this offering for shares of Common Stock at the initial public offering price. Upon completion of this offering and the subsequent exchange of shares of Series C Redeemable Preferred Stock for shares of Common Stock, WP Investors will beneficially own approximately 48.1% of the outstanding shares of Common Stock. See "Use of Proceeds" and "Principal Stockholders."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001016202_integrated_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001016202_integrated_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Prospective investors should carefully consider the information set forth under "Risk Factors." THE COMPANY The Company provides assisted living and related services to the private pay elderly market. Assisted living facilities combine housing, personalized support and healthcare services in a cost-effective, non-institutional setting designed to address the individual needs of the elderly who need regular assistance with activities of daily living, such as eating, bathing, dressing and personal hygiene, but who do not require the level of healthcare provided in a skilled nursing facility. The Company currently operates 19 assisted living and other senior housing facilities containing 1,812 units in seven states. The 1,812 units operated by the Company consist of 1,187 assisted living units (including 172 units devoted to Alzheimer's and dementia care), 544 independent living units for persons who require occasional assistance with the activities of daily living, and 81 skilled nursing units. The Company is pursuing a strategy of rapid growth through development and acquisition and intends to acquire, develop or obtain agreements to manage approximately 60 to 75 assisted living facilities per year in each of the next three years. As part of this strategy, ILC is currently developing 33 new assisted living facilities, of which 24 are scheduled to open during 1997, has entered into an agreement to acquire one facility containing 258 units simultaneous with the closing of this offering and is evaluating numerous additional acquisition opportunities. All of ILC's revenues from its owned and leased facilities for 1995 and the first six months of 1996 were derived from private-pay sources. The Company's objective is to expand its operations to become a leading provider of high-quality, affordable assisted living services. Key elements of the Company's strategy to achieve this goal are to: (i) provide high-quality healthcare-oriented services; (ii) grow rapidly through development and acquisition of assisted living facilities; (iii) utilize a flexible, cost-effective approach for the development of new assisted living facilities; and (iv) target a broad segment of the private-pay population. The assisted living industry is highly fragmented and characterized by numerous small operators whose scope of services vary widely. Annual expenditures for assisted living services were estimated to be $10 to 12 billion in 1995. The Company believes that factors contributing to the growth of the assisted living industry include: (i) the aging of the U.S. population; (ii) the increasing affluence of the elderly and their families; (iii) the decreasing availability of family care in the home; (iv) consumer preference for greater independence and a less institutional setting; (v) the increasing emphasis by both federal and state governments and private insurers on containing long-term care costs; and (vi) the reduced availability of skilled nursing beds for less medically intensive residents. The Company believes that the foregoing factors, combined with the fragmented nature of the industry and the inexperience and lack of resources of many operators, have created a significant opportunity for ILC to become a leading provider of high-quality, affordable assisted living services. The Company believes that its approach to the development of new assisted living facilities differs from that of many other operators. Unlike many assisted living operators, the Company intends to rely primarily on a limited number of third-party developers, rather than maintain a large internal development staff. ILC currently has relationships with three developers, which developers are responsible for 29 of the 33 facilities currently under development by the Company. The Company has, together with these developers, developed three flexible and expandable prototype building designs. The flexibility feature is expected to allow the facility's assisted living and Alzheimer's bed allotment to be quickly and cost-effectively reconfigured based on changing market demand. The expandability feature is expected to allow the prototype buildings to be easily and cost-effectively expanded with little or no disruption to current operations. The Company believes its development approach will offer many advantages, including better construction quality control, lower architectural and engineering fees, bulk purchasing of materials and fixtures, and faster development and construction schedules. THE OFFERING Common Stock being offered by: The Company 2,800,000 shares IHS 1,400,000 shares Common Stock to be outstanding after the offering 6,697,900 shares(1) Use of proceeds For acquisition and development of assisted living facilities, for repayment of certain indebtedness due to IHS and for general corporate purposes Proposed Nasdaq National Market symbol ILCC - ---------- (1) Excludes (i) 855,500 shares of Common Stock issuable upon exercise of outstanding options and (ii) 94,540 additional shares of Common Stock reserved for issuance pursuant to the Company's stock option plans. See "Management -- Stock Options." SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ------------------------ -------------------------------- 1995 1996 ----------------------- ----------------------- PRO 1993 1994 ACTUAL FORMA(1) 1995 ACTUAL PRO FORMA(1) -------- --------- ---------- ------------ -------- --------- ------------- <S> <C> <C> <C> <C> <C> <C> <C> Statement of Operations Data(2): Net revenues .......................... $5,240 $11,645 $16,269 $27,452 $8,018 $11,295 $14,241 Facility operations.................... 3,455 8,254 11,243 18,522 5,576 7,138 9,379 Facility rents......................... 856 1,466 2,430 1,770 1,215 1,309 1,005 Corporate administrative and general .. 315 726 1,005 3,895 499 678 1,948 Depreciation and amortization ......... 24 369 415 1,672 206 480 912 Loss on impairment of long-lived assets(3).............................. -- -- 5,126 5,126 -- -- -- -------- --------- ---------- ------------ -------- --------- ------------- Earnings (loss) before income taxes and minority interest................. 590 830 (3,950) (3,533) 522 1,690 997 Minority interest...................... 10 (29) 37 -- 23 -- -- -------- --------- ---------- ------------ -------- --------- ------------- Earnings (loss) before income taxes ... 580 859 (3,987) (3,533) 499 1,690 997 Federal and state income taxes ....... 226 322 (643) (468) 192 651 384 -------- --------- ---------- ------------ -------- --------- ------------- Net earnings (loss) ................... $ 354 $ 537 $(3,344) $(3,065) $ 307 $ 1,039 $ 613 ======== ========= ========== ============ ======== ========= ============= Earnings (loss) per common share ...... $ 0.09 $ 0.14 $ (0.86) $ (0.57) $ 0.08 $ 0.27 $ 0.11 ======== ========= ========== ============ ======== ========= ============= Weighted average shares outstanding(4)........................ 3,898 3,898 3,898 5,355 3,898 3,898 5,355 ======== ========= ========== ============ ======== ========= ============= </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 --------------------------------------- PRO FORMA ACTUAL PRO FORMA(5) AS ADJUSTED(6) ------ ------------ -------------- <S> <C> <C> <C> Balance Sheet Data: Cash and cash equivalents .... $ 120 $ 120 $ 6,643 Total assets................... 55,465 67,745 74,268 Note payable to parent company 3,363 3,363 -- Stockholder's equity........... 40,331 52,531 62,417 </TABLE> - ---------- (1) The pro forma statement of operations data for the year ended December 31, 1995 and the six months ended June 30, 1996 were prepared as if the Company's interest in the following facilities had been acquired on January 1, 1995: Vintage Healthcare Center ("Vintage"), which was leased by the Company commencing January 29, 1996; Terrace Gardens Healthcare and Retirement Center ("Terrace Gardens"), which the Company has agreed to acquire simultaneous with the closing of this offering; Homestead of Garden City ("Garden City"), which the Company leased effective July 1, 1996; and Carrington Pointe, which the Company acquired effective December 31, 1995. Effective October 31, 1995, a subsidiary of IHS (which subsidiary is now a subsidiary of the Company) exchanged its 60.5% partnership interest in a retirement community for the 39.5% minority partnership interest in the Waterside Retirement Estates ("Waterside") facility. The pro forma statement of operations data for the year ended December 31, 1995 is adjusted to reflect the acquisition of the minority interest in the Waterside facility as if such acquisition had occurred on January 1, 1995. Effective June 1, 1996, the Company received as a capital contribution condominium interests in the assisted living and related portions of the Vintage, Treemont Retirement Community ("Treemont") and West Palm Beach Retirement ("West Palm Beach") facilities which the Company had previously leased from IHS. Accordingly, the pro forma statement of operations data is adjusted to decrease rent expense associated with these facilities and to increase depreciation resulting from the receipt of a condominium interest in these facilities. The pro forma statement of operations data is also adjusted to (i) increase facility rents to reflect an increase in rent for the Company's Shores and Cheyenne Place Retirement ("Cheyenne Place") facilities effective June 1, 1996 and (ii) increase corporate administrative and general expenses to reflect management's estimate of the additional corporate administrative and general expense that would have been incurred during the period if the Company had operated on a stand-alone basis. No pro forma adjustments have been made to reflect the operations of the Homestead of Wichita facility ("Homestead Wichita"), which the Company leased commencing July 17, 1996, or the Cabot Pointe facility, which the Company acquired in August 1996 and intends to sell and lease back pursuant to a sale/leaseback transaction which the Company anticipates will close in October 1996, because such facilities were not in operation at June 30, 1996. See "Company History," "Use of Proceeds," "Pro Forma Financial Information," "Business -- Properties" and Notes 2 and 12 of Notes to Consolidated Financial Statements. (2) The Company has grown substantially through acquisitions, which materially affects the comparability of the financial data reflected herein. See "Company History" and "Certain Transactions." (3) In 1995, the Company implemented Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 121 in connection with IHS' implementation thereof. Through evaluation of the recent financial performance and a recent appraisal of one of its facilities, the Company estimated the fair value of this facility and determined that the carrying value of certain long-lived assets, including goodwill and buildings and improvements, exceeded their fair value. The excess carrying value was written off and is included in the statement of operations for 1995 as a loss on impairment of long-lived assets. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (4) The pro forma weighted average shares outstanding is presented as if the Company sold 1,457,587 shares of Common Stock, representing the number of shares which would be required to be sold by the Company at the assumed initial public offering price of $9.00 per share (net of estimated underwriting discounts) in order for the Company to pay the purchase price for the Terrace Gardens facility. See "Use of Proceeds." (5) The pro forma balance sheet data as of June 30, 1996 was prepared as if the acquisition of the Terrace Gardens facility, which is expected to close simultaneous with the closing of this offering, had been consummated as of June 30, 1996. No pro forma adjustments have been made to reflect the acquisition of leasehold interests in the Garden City and Homestead Wichita facilities because such acquisitions will have no effect on the Company's balance sheet. No pro forma adjustments have been made to reflect the acquisition of Cabot Pointe because the Company intends to sell and lease back that facility in a sale/leaseback transaction which the Company anticipates will close in October 1996 and, as a result, such transaction will have no effect on the Company's balance sheet. See "Company History,"
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001016243_industri_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001016243_industri_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c49e1763787f5f365840d73e0547424d823b423a
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0001016243_industri_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including information under "Risk Factors," and Consolidated Financial Statements and notes thereto, appearing elsewhere in this Prospectus. IMI develops, markets, and supports client/server application software that enables manufacturers, distributors and wholesalers to more effectively manage the "demand chain." Demand chain management encompasses the execution of multiple customer-centric order fulfillment processes, including order management, distribution logistics, inventory replenishment and demand planning. The Company's principal product, System ESS, has been designed specifically to meet the complex or high-volume demand chain management requirements of manufacturers, distributors and wholesalers. System ESS allows customers to leverage the value of their existing systems by integrating with legacy and new client/server manufacturing, planning and financial information systems. The Company's target customers are multinational manufacturers, distributors and wholesalers in the consumer packaged goods, health care, electronics, automotive parts, and industrial products sectors, as well as other high-volume wholesalers. The Company sells and supports its products through direct sales and support organizations in the United States, Sweden and the United Kingdom, as well as through third party systems integrators. Current customers of IMI include large manufacturers such as Bristol-Myers Squibb Company, Campbell Soup Company, Canon U.S.A., Inc., Dannon Company, Inc., Eastman Kodak Company, Kellogg Company, Matsushita Electrical Corporation of America and Unisys Corporation, as well as several retail and wholesale distributors. In recent years, there has been a fundamental shift in market power from manufacturers and distributors to retailers and consumers. Historically, manufacturers dictated the terms of trade with retailers and consumers and, consequently, organized their businesses and utilized their information systems primarily to increase manufacturing efficiency and output. Today, customers increasingly are choosing suppliers based on their ability to match product flow to actual customer demand. As a result, manufacturers and distributors are reengineering their businesses and redirecting their information systems to focus on satisfying customer demand through effective order fulfillment. System ESS has been designed specifically for the sophisticated order fulfillment requirements of manufacturers, distributors and wholesalers, enabling them to better match product flow to actual customer demand, thereby enhancing revenue opportunities and reducing administrative and logistics/distribution costs. System ESS serves as an infrastructure to enable companies to implement the "virtual enterprise" by synchronizing internal systems with external participants in the demand chain. System ESS is an open systems, client/server demand chain management solution that provides full capabilities for managing and executing the entire order fulfillment process. In addition, it provides interfaces to other complementary applications to provide customers with an integrated solution. The Company supports System ESS with a range of software tools developed by the Company or by third parties and provides its customers with a full range of software maintenance and support, training, and consulting services. The Company's objective is to be the leading global supplier of demand chain management software solutions to manufacturers, distributors and wholesalers. The key elements of the Company's strategy to achieve this leading position are: (i) to target specific vertical markets for System ESS; (ii) to expand its worldwide sales, support, service and marketing organizations; (iii) to expand usage of System ESS within its existing customer base; (iv) to enhance the core functionality of System ESS; (v) to continue to integrate System ESS with complementary products; and (vi) to establish partnerships to assist in developing customer relationships and implementing System ESS. THE OFFERING <TABLE> <C> <S> Common Stock offered by the Company............. 3,200,000 shares Common Stock offered by the Selling Stockholder. 1,200,000 shares Common Stock to be outstanding after the offer- ing............................................ 27,694,253 shares(1) Use of proceeds................................. For general corporate purposes and working capital, including the expansion of the Company's sales, support, service and marketing organizations, and reduction of certain indebtedness. See "Use of Proceeds." Nasdaq National Market symbol................... IMIC </TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED APRIL 30, JULY 31, ------------------------- ---------------- 1994 1995 1996 1995 1996 ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERA- TIONS DATA: Total revenues................... $18,780 $27,744 $40,009 $ 4,725 $ 9,217 Gross profit..................... 7,198 10,896 19,532 939 3,943 Income (loss) from operations.... (5,063) (6,025) 1,385 (2,642) (1,592) Net income (loss)................ (5,670) (6,388) 1,750 (2,357) (1,062) Pro forma net income (loss) per share(2)........................ $ 0.07 $ (0.04) Pro forma shares used in per share calculation(2)............ 25,223 24,502 </TABLE> <TABLE> <CAPTION> JULY 31, 1996 ----------------------- ACTUAL AS ADJUSTED(3) ------- -------------- <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents............................. $ 282 $24,783 Working capital(4).................................... (3,412) 27,724 Total assets.......................................... 19,806 44,308 Capital lease obligations, less current portion....... 778 778 Total stockholders' equity............................ (887) 30,249 </TABLE> - -------- (1) Based on the number of shares outstanding as of July 31, 1996. Excludes options outstanding as of July 31, 1996 to purchase 1,024,975 shares of Common Stock at a weighted average exercise price per share of $2.66. (2) See Note 2 of Notes to Consolidated Financial Statements and Note 2 of Notes to Condensed Consolidated Financial Statements for an explanation of the determination of shares used in calculating pro forma net income per share. (3) Adjusted to reflect the sale of 3,200,000 shares of Common Stock offered by the Company hereby (assuming an estimated initial public offering price of $11.00 per share and after deducting estimated underwriting discounts and commissions and offering expenses payable by the Company) and the expected application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization." (4) The Company's working capital position is due, in part, to the classification of the Company's credit facilities as short-term borrowings. See Note 7 of Notes to Consolidated Financial Statements. ---------------- Except as otherwise indicated, all information in this Prospectus (i) reflects the conversion of all of the Company's currently outstanding shares of Preferred Stock into Common Stock and Class B Common Stock upon the closing of this offering, (ii) reflects a three-for-one stock split effected in July 1996, (iii) reflects the filing of an Amended and Restated Certificate of Incorporation upon the closing of this offering, (iv) assumes that the Underwriters' over-allotment option is not exercised, and (v) includes as Common Stock 12,088,200 shares of non-voting Class B Common Stock. See "Description of Capital Stock" and "Underwriting."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001016277_national_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001016277_national_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8661d9d6c5627f291b47b9619e526c9f5d142b85
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+++ b/parsed_sections/prospectus_summary/1996/CIK0001016277_national_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the consolidated financial statements and notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. Investors should carefully consider the information set forth under the caption "Risk Factors." National Processing, Inc. is an Ohio corporation organized to hold all of the capital stock of National Processing Company ("NPC"). Unless the context otherwise requires, references herein to the Company mean National Processing, Inc., NPC and the subsidiaries of NPC. THE COMPANY The Company is a leading provider of low-cost, high-volume transaction processing services and customized processing solutions. Deploying technology and applications software, the Company currently provides products and services which include (i) processing of card and check transactions for merchants and other commercial businesses ("Merchant Services"), (ii) outsourcing of administrative and financial functions for corporations seeking to reduce overhead costs ("Corporate Services"), and (iii) ticket processing and settlement for providers of travel-related services ("Travel Services"). The Company focuses in particular on the high-growth markets for Merchant Services and Corporate Services by sustaining and enhancing its long-term customer relationships, expanding its offerings of products and services, and aggressively pursuing acquisitions. In the Merchant Services market, the Company is the second largest processor of merchant credit and debit card transactions and the third largest provider of check acceptance services in the United States, according to published industry sources. Merchant Services represented approximately 60.8% of the Company's revenues in 1995 and were provided to over 125,000 merchant locations. In the Corporate Services market, the Company believes that it is one of the largest providers of outsourcing services in the United States, processing more than 434 million transactions annually. The Company's Corporate Services include accounts payable processing, remittance processing, audit and funds settlement for freight-related charges and electronic imaging solutions. Corporate Services represented approximately 23.8% of the Company's revenues in 1995. In its Travel Services market, the Company is the exclusive processor and clearinghouse for all airline tickets issued by travel agents in the United States and by travel agents for the U.S. government. Travel Services, which accounted for approximately 15.4% of the Company's revenues in 1995, also includes processing services for air cargo sales, direct airline ticket sales and passenger flight data. As a leading provider of Merchant Services, Corporate Services and Travel Services, the Company's current customer base includes seven of the top ten and 22 overall of the Fortune 100 companies. The Company has experienced steady growth in both revenue and net income in recent years, with revenue increasing from $272.5 million in 1993 to $339.3 million in 1995, representing a compounded annual growth rate of 11.6%. Over the same period, net income has grown from $17.4 million to $25.8 million, representing a compounded annual growth rate of 21.8%. A significant portion of the Company's revenue results from long-term customer relationships. The Company estimates that the average tenure of its relationships with its 50 largest customers is approximately ten years. The Company's net income has grown faster than revenues through improvement in its margins as a result of continuous cost reduction efforts and a greater mix of higher margin products. An important contributor to the Company's cost reductions has been the use of low-cost international labor markets. The Company established its initial presence internationally with the opening of a processing facility in Juarez, Mexico in 1988. Over time, the Company's Juarez operations have become increasingly significant, representing approximately 43.8% of the Company's employees as of March 31, 1996. The transaction processing industry has experienced strong growth in recent years, as acceptance and use of credit and debit cards have grown. According to industry publications, consumer usage of VISA(R) and MasterCard(R) credit and debit cards for purchases and cash advances in the United States was $574.5 billion in 1995 compared to $463.1 billion in 1994, representing an increase of 24.1%. Transaction volume increased 23.2% during this same period, from 5.6 billion transactions processed in 1994 to 6.9 billion transactions processed in 1995. The market for corporate outsourcing has also grown as corporations have increasingly outsourced non-core functions to reduce costs, capitalize upon advances in technology, and enhance the quality and availability of management information. This growth is creating additional market opportunities for transaction processing providers like the Company, who possess the scale of operations, breadth of products and services, and expertise to provide low-cost processing and full-featured information services. The rapid growth of the transaction processing industry has also resulted in considerable competition in the marketplace, while the costs of advancing technology, the efficiencies derived from economies of scale and customer demands for a broad product line have caused consolidation among industry participants. The Company believes that its Merchant Services and Corporate Services markets will continue to grow and consolidate. The Company's objective is to continue its growth and enhance its position as a market leader in the transaction processing industry by (i) penetrating new markets which offer higher margin growth opportunities by broadening the range of products and services it offers, such as Virtual PAY (TM) (which allows the payment of bills over the Internet), expanding its sales team and entering into relationships with independent sales organizations; (ii) expanding the customer base for its existing products and services by offering such products and services to middle-market companies that it has not historically targeted and through aggressive cross-selling to its large and diverse base of long-term customers; (iii) leveraging its status as a low-cost transaction processor by continuously investing in systems, operations and new technology and by opening additional international facilities; and (iv) actively pursuing acquisitions that enhance its technology base, expand its products and services or offer increased efficiencies or economies of scale. The Company is an Ohio corporation organized to hold all of the capital stock of NPC. NPC began its business in 1979 and maintains its corporate headquarters at 1231 Durrett Lane, Louisville, Kentucky 40285-0001, telephone (502) 364-2000. THE OFFERING <TABLE> <S> <C> Common Stock Offered........................ 6,500,000 shares(1) Common Stock Outstanding after the Offering.............................. 49,600,000 shares(1)(2) Use of Proceeds............................. To fund future acquisitions and strategic technology investments and for general corporate purposes, including research and product development and expansion of international processing facilities. See "Use of Proceeds." Proposed NYSE Symbol........................ NAP </TABLE> - --------------- (1) Does not include 975,000 shares of Common Stock that may be sold by the Company pursuant to the Underwriters' over-allotment option. (2) Excludes 2,245,000 shares of Common Stock issuable upon the exercise of outstanding options granted by the Company in connection with the Offering. See "Executive Compensation -- Compensation Pursuant to Employee Benefit Plans." RELATIONSHIP WITH NATIONAL CITY CORPORATION The Company is a wholly owned subsidiary of National City Corporation ("National City"), a multi-bank holding company headquartered in Cleveland, Ohio and registered under the Bank Holding Company Act of 1956, as amended. See "Business -- Regulation." Following completion of the Offering and assuming no exercise of the Underwriters' over-allotment option, National City will continue to own approximately 86.9% of the outstanding shares of Common Stock and will have the ability to elect all of the members of the Board of Directors of the Company. See "Risk Factors -- Control by National City and Potential Conflicts of Interest." The Company maintains operations, employees and contracts substantially independent of National City's other operating subsidiaries. In connection with the Offering, the Company and National City have entered into certain agreements pursuant to which National City and its subsidiaries will provide the Company, and the Company will provide National City and its subsidiaries, certain administrative support, operational, and processing services. The Company is also a party to a tax sharing agreement and a registration rights agreement with National City. See "Certain Transactions." SUMMARY CONSOLIDATED FINANCIAL DATA The following summary consolidated income statement data for each of the three years in the period ended December 31, 1995 are derived from the consolidated financial statements of the Company, which have been audited by Ernst & Young LLP, independent auditors. The following summary consolidated income statement data for the years ended December 31, 1991 and 1992 and for the three months ended March 31, 1995 and 1996 and balance sheet data as of March 31, 1996 are derived from the unaudited consolidated financial statements of the Company. The data should be read in conjunction with the consolidated financial statements and notes thereto and other financial information, as well as the Management's Discussion and Analysis of Financial Condition and Results of Operations, included elsewhere herein. The results of operations for the three month period ended March 31, 1996 are not necessarily indicative of results to be expected for the full year. <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, --------------------------------------------------- ------------------ 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- ------- ------- (IN MILLIONS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> INCOME STATEMENT DATA:(1) Revenues.................................. $ 173.2 $ 199.3 $ 272.5 $ 319.5 $ 339.3 $ 78.4 $ 83.9 Operating Expenses........................ 83.0 100.0 148.9 178.6 189.5 43.1 46.4 Wages and Benefits........................ 38.6 44.1 49.6 56.9 53.8 13.6 14.2 General and Administrative Expenses....... 18.9 22.5 36.0 40.2 41.8 10.4 10.6 Depreciation and Amortization(2).......... 4.1 4.7 7.4 9.6 10.4 2.5 2.8 ------- ------- ------- ------- ------- ------- ------- Income from Operations.................... 28.6 28.0 30.6 34.2 43.8 8.8 9.9 Net Interest Income (Expense)............. (.7) (.5) (.4) (.6) .6 .1 .3 ------- ------- ------- ------- ------- ------- ------- Income Before Taxes....................... 27.9 27.5 30.2 33.6 44.4 8.9 10.2 Provision for Income Taxes................ 11.2 10.4 12.8 14.3 18.6 3.7 4.3 ------- ------- ------- ------- ------- ------- ------- Net Income................................ $ 16.7 $ 17.1 $ 17.4 $ 19.3 $ 25.8 $ 5.2 $ 5.9 ====== ====== ====== ====== ====== ====== ====== Net Income per Share(3)................... $ 0.39 $ 0.40 $ 0.40 $ 0.45 $ 0.60 $ 0.12 $ 0.14 ====== ====== ====== ====== ====== ====== ====== </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 ------------------------- ACTUAL AS ADJUSTED(4) ------ -------------- <S> <C> <C> <C> <C> <C> <C> BALANCE SHEET DATA:(1) Working Capital........................... $ 69.6 $158.9 Goodwill(2)............................... 72.1 72.1 Total Assets.............................. 273.0 362.4 Total Liabilities......................... 93.2 93.2 Shareholder's Equity...................... 179.8 269.2 OTHER DATA:(1) Merchant Services Number of merchant transactions processed............................. 717.7 892.4 1,128.0 1,266.6 1,467.8 311.3 337.6 Corporate Services Number of transactions processed........ 326.4 270.1 266.7 389.1 434.5 104.6 136.9 Travel Services Number of transactions processed........ 242.6 285.1 296.3 364.4 374.1 94.1 96.9 </TABLE> - --------------- (1) The Company made the following acquisitions during the periods presented: on July 1, 1991, the Company acquired Consolidated Data-Tech, Inc., an accounts payable processor; on February 20, 1992, the Company acquired B&L Consultants, Inc., a freight payable processor; on July 6, 1992, the Company acquired Check Security Services of America, Inc., a check acceptance and collection company; on February 1, 1993, the Company acquired JBS Associates, Inc., a check acceptance and collection company; and on January 3, 1994, the Company acquired CTI Logistics, Inc., a freight payable processor. These transactions were accounted for as purchases; accordingly, the results of operations are included in the statements of income from the respective acquisition dates. (2) Goodwill related to acquisitions is amortized over 40 years. (3) Net income per share for all periods has been calculated based on 43,100,000 shares outstanding, which reflect the retroactive effect of the 57,465 2/3-to-one stock split effective June 6, 1996. (4) As adjusted to give effect to the sale of 6,500,000 shares of Common Stock pursuant to the Offering and the application of the estimated net proceeds therefrom. See "Use of Proceeds."
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+SUMMARY This summary is qualified in its entirety by the more detailed information and Financial Statements of the Association and Notes thereto included elsewhere in this Prospectus. HOME BANCORP OF ELGIN, INC. Home Bancorp of Elgin, Inc. (the "Company") is a Delaware corporation recently organized by the Association for the purpose of acquiring all of the capital stock of the Association to be issued in the Conversion. Immediately following the Conversion, the only significant assets of the Company will be the capital stock of the Association, the loan that the Company intends to make to the ESOP and the net conversion proceeds retained by the Company. The Company will purchase all of the capital stock of the Association to be issued upon the Conversion in exchange for 50% of the net proceeds from the Offerings with the remaining net proceeds to be retained by the Company. Funds retained by the Company will be used for general business activities, including for the loan that the Company intends to make to the ESOP. On an interim basis, the net proceeds from the Offerings are expected to be invested in federal funds, short- term, investment grade marketable securities and mortgage-backed securities. See "Use of Proceeds." The business of the Company will initially consist of the business of the Association. See "Business of the Association" and "Regulation -- Regulation of Savings Association Holding Companies." HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF ELGIN GENERAL Home Federal Savings and Loan Association of Elgin (the "Association") was originally founded in 1883 as an Illinois state-chartered mutual savings and loan association. On October 7, 1969, the Association converted to a federally chartered mutual savings and loan association. The Association has been, and intends to continue to be, a community-oriented financial institution providing a variety of financial services to meet the needs of the communities which it serves. The Association maintains its headquarters in Elgin, Illinois, and operates four other branch offices in Crystal Lake, Roselle, Bartlett and South Elgin, Illinois. The Association gathers deposits in its market area primarily from the communities and neighborhoods in close proximity to its branch offices. The Association's delineated lending area is larger and includes portions of Cook, Kane, Lake, McHenry, DuPage and DeKalb counties in Illinois. Most of the Association's mortgage loans are secured by properties located in its delineated lending area. See "Business of the Association -- Market Area" and " -- Competition." At March 31, 1996, the Association had total assets of $306.7 million, total savings deposits of $264.5 million and equity of $37.2 million. The Association's deposits are insured up to the maximum allowable amount by the Savings Association Insurance Fund of the FDIC (the "SAIF"). BUSINESS STRATEGY Beginning in 1993, the Association began to implement a business strategy that was intended to improve the Association's profitability and capital position. The business strategy includes, among other things, an aggressive program to reduce general and administrative expenses, which resulted in the sale of three branch offices (one during 1993 and two during 1994). The branch sales also had the effect of increasing the Association's capital by a total of $1.5 million. The Association's business strategy also provides for an operating plan that, among other things: (i) emphasizes the origination of one-to-four-family residential mortgage loans (secured by properties located in the Association's delineated lending area), with a particular emphasis on the origination of adjustable-rate mortgage loans; (ii) provides for the origination of multifamily, commercial real estate, construction, land and other loans (consisting primarily of passbook 7 <PAGE> savings and consumer loans) in the Association's delineated lending area; (iii) requires the Association to maintain high asset quality by originating all loans in strict compliance with its underwriting standards; and (iv) focuses on attracting transactional deposit accounts (rather than certificates of deposit). The Association seeks to attract and retain customers by providing a high level of personal service, a variety of loan and deposit products and extended office hours, as well as 14 automated teller machines ("ATMs") at convenient locations throughout the Association's market area. The Association's business strategy has focused on improving the Association's profitability and capital position and increasing transactional deposit accounts and loans made at market rates. Certain steps taken by management to implement such strategy, including branch sales, have succeeded in increasing the Association's capital level and reducing its operating expenses, but have also had the effect of decreasing total assets and total savings deposits. Such reductions in assets and savings deposits, when combined with the Association's sensitivity to interest rates, also resulted in a reduction in net income. See "-- Financial Highlights." In addition, management has determined that paying a rate higher than market rates to attract deposits and originating loans at rates below market rates would not be prudent strategies as they would not improve profitability and the associated asset growth would have a much greater negative effect by diluting the Association's capital level. In particular, the effects of management's business strategy as noted above include the following. Total assets decreased from $347.2 million at December 31, 1992 to $306.7 million at March 31, 1996. This reduction was primarily the result of branch sales of $17.1 million and $19.4 million in 1993 and 1994, respectively, which branch sales also resulted in increasing the Association's capital by $1.5 million and reducing general and administrative expenses. Gross loans declined from $305.6 million at December 31, 1993 to $274.2 at December 31, 1994. The funds generated from the repayments of loans were primarily used to fund branch sales. The Association's gross loans declined from $274.2 million at December 31, 1994 to $267.1 million at March 31, 1996. This decline was due to competitive market conditions and the Association's decision not to offer loan products at rates below market rates. The Association's savings deposits declined from their five-year high of $319.0 million at December 31, 1992 to $267.9 million at December 31, 1994, primarily due to the sale of branches in 1993 and 1994 with savings deposits totaling $39.9 million. The remainder of the decline was due to competitive market conditions and the Association's decision not to offer above-market rates on its savings deposits. Competitive market conditions also account for the decrease in deposits from $267.9 million at December 31, 1994 to $264.5 million at March 31, 1996. See "Risk Factors -- Potential Impact of Changes in Interest Rates." The Company intends to utilize proceeds from the Conversion to implement its business strategy of increasing the origination of high quality mortgage loans, coupled with increasing transactional deposit accounts, which management believes could, although there can be no assurance that it would, reverse the recent trend of decreasing total asset size and reduced levels of net income. FINANCIAL HIGHLIGHTS Capital Position. At March 31, 1996, the Association had equity of $37.2 million. At that same date, the Association's tangible, core and total risk- based capital ratios were 12.04%, 12.04% and 23.65%, respectively, which exceeded all applicable regulatory capital requirements. See "Regulatory Capital Compliance," "Capitalization" and "Pro Forma Data." Residential Mortgage Lending. The Association's assets, which totaled $306.7 million at March 31, 1996, are primarily comprised of conventional first mortgage loans. The Association's gross loans amounted to $267.1 million, or 87.1% of total assets. At March 31, 1996, the Association's total one- to four- family residential mortgage loans amounted to $262.1 million (or 98.1% of gross loans), approximately $201.0 8 <PAGE> million (or 75.2% of gross loans) of which provided for fixed rates of interest. The remainder consisted of multifamily mortgage loans, commercial real estate mortgage loans, construction and land loans and other loans. See "Business of the Association -- Lending Activities." The Association's holdings of investment securities, representing 2.0% of total assets at March 31, 1996, were comprised of mortgage-backed securities totaling $173,000 and obligations of the U.S. Government and government agencies totaling $6.0 million. See "Business of the Association -- Investment Activities." Net Income. The Association's net income was $2.4 million, $4.4 million, $4.3 million, $3.8 million and $2.4 million for the years ended December 31, 1995, 1994, 1993, 1992 and 1991, respectively, and $512,000 and $695,000 for the three months ended March 31, 1996 and 1995, respectively. For the years ended December 31, 1994 and 1993, net income included a gain on sale of branches of $1.7 million and $822,000, respectively. The Association's return on average assets (net income expressed as a percentage of average assets) for the years ended December 31, 1995, 1994, 1993, 1992 and 1991 and the three months ended March 31, 1996 and 1995 was 0.78%, 1.33%, 1.22%, 1.13%, 0.73%, 0.68% (annualized) and 0.91% (annualized), respectively. Net income in 1994 and 1993 would have been $3.4 million and $3.8 million, respectively, had the gains on sale of branches not been recognized, and return on average assets would have been 1.03% and 1.08%, respectively. The gain on sale of branches in 1994 represented 22.5% of net income. The gain on sale of branches in 1993 and the impact of the change in accounting for income taxes represented 3.5% of net income. See "Selected Financial and Other Data of the Association." See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Comparison of Operating Results for the Three Months Ended March 31, 1996 and 1995," "-- Comparison of Operating Results for the Years Ended December 31, 1995 and 1994" and "-- Comparison of Operating Results for the Years Ended December 31, 1994 and 1993" for a discussion of the changes in net income and net interest income for these periods. Asset Quality. The Association has sought to maintain high asset quality by utilizing strict loan underwriting standards and collection efforts and by generally limiting its origination of mortgage loans to its delineated lending area. The Association's ratio of non-performing loans to total loans at year end ranged from 0.34% to 0.81% during the five-year period ended December 31, 1995 and was 0.41% at March 31, 1996. Non-performing assets to total assets ranged from 0.46% to 0.86% during the five-year period ended December 31, 1995, and was at 0.47% at March 31, 1996. The Association's allowance for loan losses to non-performing loans ranged from 18.49% to 90.17% over the five years ended December 31, 1995 and was 79.48% at March 31, 1996. See "Business of the Association -- Delinquencies and Non-Performing Assets." Net Interest Margin. The Association's net interest margin (net interest income divided by average interest-earning assets) ranged from 3.82% to 4.77% for the five fiscal years ended December 31, 1995. The Association's net interest margin for the year ended December 31, 1995 decreased to 4.19% from 4.53% for the year ended December 31, 1994, primarily because the yield on interest-earning assets increased at a slower rate than the cost of interest- bearing liabilities. For the three months ended March 31, 1996, the Association's net interest margin on an annualized basis was 3.98%. See "Risk Factors -- Potential Impact of Changes in Interest Rates" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Management Strategy" and "--Analysis of Net Interest Income." Savings Deposits. The Association's total savings deposits at March 31, 1996 were $264.5 million, of which $135.2 million, or 51.1%, were in transactional accounts. Management of the Association considers its transactional accounts to consist of noninterest bearing NOW accounts, NOW/Super NOW interest-bearing accounts, passbook and money market accounts, which accounts management believes are more resistant to interest rate changes than certificates of deposit. At March 31, 1996, the Association's total cost of deposits 9 <PAGE> was 4.14%. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Business of the Association-- Sources of Funds." MARKET AREA AND DEMOGRAPHICS Elgin is located in the Fox River Valley approximately 38 miles northwest of downtown Chicago and 25 miles west of O'Hare International Airport. Neighboring communities include Sleepy Hollow, West Dundee and East Dundee to the north, Hoffman Estates and Streamwood to the east, Bartlett to the southeast and South Elgin to the south. Elgin and its surrounding communities are in one of the fastest growing areas in northeastern Illinois. Elgin's population based upon the 1990 census was 77,010, an increase of approximately 21% from the community's population recorded in the 1980 census. The Northeastern Illinois Planning Commission estimates that Elgin's population will grow by approximately 30% to 100,000 by the year 2010. One of the major contributors to this population growth has been the expansion of the boundaries of metropolitan Chicago. Elgin is located on U.S. Interstate 90 (the Northwest Tollway), which provides easy access to the city of Chicago and is a major corridor of suburban growth for Chicago. As the Chicago suburbs have extended to the northwest, Elgin has experienced a considerable influx of people and a number of new employers. As a result, a new service-oriented business sector has developed to supplement Elgin's historical manufacturing base. See "Business of the Association -- Market Area" and " -- Competition." RECENT DEVELOPMENTS For the three months ended June 30, 1996, the Association recorded a net loss of $11,000 compared to net income of $618,000 for the three months ended June 30, 1995. For the six months ended June 30, 1996, net income was $501,000, as compared to $1.3 million for the six months ended June 30, 1995. The reduced net income for the three and six month periods ended June 30, 1996 resulted primarily from the recognition during the three months ended June 30, 1996 of an $837,000 expense related to the curtailment of pension benefits as a result of the Association's termination of its Pension Plan. see "--Benefits to Management and Directors--Termination of Pension Plan." Total assets decreased from $304.5 million at December 31, 1995 to $300.4 million at June 30, 1996, which resulted primarily from a decrease in borrowed funds of $4.0 million and a decrease in savings deposits of $1.3 million. See "Recent Developments." On July 19, 1996, RP Financial updated its appraisal of the aggregate estimated pro forma market value of the Common Stock and reduced the Valuation Range by approximately 7.8% from the appraisal dated June 7, 1996, after a review of, among other factors, the Association's financial condition and results of operations at and for the three and six month periods ended June 30, 1996, an updated comparison of the Association's financial condition and operating results versus its peer group and a review of stock market conditions since the date of the original appraisal. the reduction in value was primarily attributable to less favorable market conditions for thrift stocks, including the new issue market. See "The Conversion--Stock Pricing." THE CONVERSION AND THE SUBSCRIPTION AND COMMUNITY OFFERINGS On April 18, 1996, the Board of Directors of the Association adopted the Plan of Conversion (which was amended on June 6, 1996) pursuant to which the Association is converting from a federally chartered mutual savings and loan association to a federally chartered stock savings and loan association, and all of the outstanding capital stock of the Association will be acquired by the Company in exchange for 50% of the net proceeds from the Offerings. The Conversion and the Offerings are subject to OTS approval, which was received on ______ __, 1996, and approval of the Association's members at a special meeting to be held on ______ __, 1996. See "The Conversion -- General." The Association is converting to increase its capital and to structure itself in a form used by commercial banks and many other business entities and a growing number of savings institutions. The Conversion will enhance the Association's ability to access capital markets, expand its current operations, acquire other financial institutions or branch offices, provide affordable home financing opportunities to the communities it serves and diversify into other financial services to the extent allowable by applicable law and regulation. The holding company form of organization would provide additional flexibility to diversify the Association's business activities through existing or newly-formed subsidiaries or through acquisitions of or mergers with both mutual and stock institutions, as well as other companies. Although there are no current arrangements, understandings or agreements, written or oral, regarding any such opportunities, the Company will be in a position after the Conversion, subject to regulatory limitations and the Company's financial position, to take advantage of any such opportunities that may arise. See "The Conversion -- Purposes of Conversion." The holding company form of organization also provides certain anti-takeover protections. See "Risk Factors -- Certain Anti-Takeover Provisions." Common Stock will be offered in the Subscription Offering and, to the extent shares are available, in the Community Offering. To the extent that shares are available after the expiration of the Community Offering, such shares may be offered in the Syndicated Community Offering. See "The Conversion -- Syndicated Community Offering." Common Stock offered in the Subscription Offering will be offered in the following order of priority: (1) depositors whose deposits in qualifying accounts in the Association totaled $50 or more on March 31, 1995 ("Eligible Account Holders"); (2) the ESOP; (3) depositors whose deposits in 10 <PAGE> qualifying accounts in the Association totaled $50 or more on June 30, 1996, other than (i) those depositors who would otherwise qualify as Eligible Account Holders or (ii) directors or officers of the Association or their Associates (as defined herein under "The Conversion -- Limitations on Common Stock Purchases") ("Supplemental Eligible Account Holders"); and (4) members of the Association, consisting of depositors and borrowers of the Association as of July 31, 1996, the voting record date (the "Voting Record Date") for the special meeting of members to vote on the Conversion, other than those members who otherwise qualify as Eligible Account Holders or Supplemental Eligible Account Holders ("Other Members"). Subscription rights will expire if not exercised by, and the Subscription Offering will terminate at, 12:00 Noon, Central Time, on the Expiration Date, unless extended by the Association and the Company, with approval of the OTS, if necessary. Subject to the prior rights of holders of subscription rights, Common Stock not subscribed for in the Subscription Offering will be subsequently offered in the Community Offering to certain members of the general public, with preference given to natural persons residing in Kane, DuPage and McHenry counties, the counties in which the Association's offices are located. The Company and the Association have the option to reserve up to 25% of the Common Stock offered in the Community Offering for purchase by certain institutional investors, although no such institutional investors have been selected. The Company and the Association reserve the absolute right to reject or accept any orders in the Community Offering, in whole or in part, either at the time of receipt of an order or as soon as practicable following the expiration of the Community Offering. The Community Offering will terminate not later than 45 days after the Expiration Date. The Association and the Company have retained Hovde as consultant and advisor in connection with the Offerings and to assist in soliciting subscriptions and purchase orders in the Offerings. The Association and the Company will pay a fee to Hovde which will be based on the aggregate Purchase Price of the Common Stock sold in the Offerings. See "The Conversion -- Marketing and Underwriting Arrangements." The Board of Directors of the Association received information about various types of benefit plans typically utilized by public companies in general and implemented by converting thrift institutions in particular. Management reviewed the anticipated costs of establishing a customary program of benefits and the anticipated positive effects of such programs on the Company. Management determined that such benefit plans significantly enhance the ability of a public company to retain and attract executives of the caliber needed to run a successful public company, to maintain their dedication and loyalty in change in control situations and to align their interests with those of the Company's stockholders. Ultimately, the Board of Directors concluded that the cost of establishing and maintaining these benefit plans, coupled with the savings to be recognized in future periods as a result of the termination of the Association's pension plan (see "Management of the Association -- Benefits -- Pension Plan"), would be justified by the foregoing positive effects on the Company. In connection with the Conversion, the Company has established, and the Association has adopted, the ESOP for eligible employees of the Association and the Company. The ESOP intends to subscribe for 8% of the shares of Common Stock issued in the Conversion. At a meeting of stockholders to be held no earlier than six months following the completion of the Conversion (which meeting is anticipated to be held during March 1997), the Company may seek stockholder approval of the Stock Option Plans and the Stock Programs for implementation prior to the first anniversary of the Conversion, which the Company intends to establish as a method of providing officers, employees and non-employee directors of the Association and the Company with a proprietary interest in the Company in a manner designed to encourage such persons to remain with the Association and the Company. For a more detailed discussion of the Stock Option Plans and Stock Programs and the benefits expected to be received by officers, employees and directors, see " -- Benefits to Management and Directors," "Risk Factors -- Certain Anti-Takeover Provisions -- Voting Control of Officers and Directors" and "Management of the Association -- Benefits." 11 <PAGE> PROSPECTUS DELIVERY AND PROCEDURE FOR PURCHASING SHARES OF COMMON STOCK To ensure that each purchaser receives a prospectus at least 48 hours prior to the respective expiration dates for the Offerings in accordance with Rule 15c2-8 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), no prospectus will be mailed any later than five days prior to any such date or hand delivered any later than two days prior to any such date. Execution of the stock order form will confirm receipt of delivery in accordance with Rule 15c2- 8. Each stock order form distributed will be accompanied by a prospectus and certification form. The Company and the Association are not obligated to accept or process orders which are submitted on facsimiled or copied stock order forms. Stock order forms unaccompanied by an executed original certification form will not be accepted. Payment by check, money order, bank draft, cash or debit authorization to an existing account at the Association must accompany the stock order form and certification form. No wire transfers will be accepted. The Association is prohibited from lending funds to any person or entity for the purpose of purchasing shares of Common Stock in the Conversion. See "The Conversion -- Procedure for Purchasing Shares in Subscription and Community Offerings." In order to ensure that Eligible Account Holders, Supplemental Eligible Account Holders and Other Members are properly identified as to their stock purchase priorities, depositors as of the Eligibility Record Date (March 31, 1995), Supplemental Eligibility Record Date (June 30, 1996) and/or the Voting Record Date (July 31, 1996) must list all accounts on the stock order form, giving all names on each account and the account numbers. Failure to list all such account numbers may result in the inability of the Company or the Association to fill all or part of a subscription order. See "The Conversion -- Procedure for Purchasing Shares in Subscription and Community Offerings." RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES OF COMMON STOCK Prior to the completion of the Conversion, no person may transfer or enter into any agreement or understanding to transfer the legal or beneficial ownership of the subscription rights issued under the Plan or the shares of Common Stock to be issued upon their exercise. Each person exercising subscription rights will be required to certify that any purchase of Common Stock will be solely for the purchaser's own account and that there is no agreement or understanding regarding the sale or transfer of any shares purchased as a result of the exercise. The Company and the Association will pursue any and all legal and equitable remedies in the event they become aware of the transfer of subscription rights and will not honor orders known by them to involve the transfer of such rights. See "The Conversion -- Restrictions on Transfer of Subscription Rights and Shares of Common Stock." PURCHASE LIMITATIONS The minimum purchase in the Offerings is 25 shares. The ESOP intends to subscribe for 8% of the shares of Common Stock issued in the Conversion pursuant to the subscription rights granted under the Plan. The subscription of the ESOP will be afforded a second priority behind the subscription rights of Eligible Account Holders, except that, in the event of an increase in the amount of Common Stock to be issued as a result of an increase of up to 15% in the maximum of the Estimated Price Range, the subscription of the ESOP will be afforded a first priority with respect to such increase in shares. No Eligible Account Holder, Supplemental Eligible Account Holder or Other Member, in their capacity as such, may subscribe in the Subscription Offering for more than $200,000 of the Common Stock offered; no person, together with associates of or persons acting in concert with such person, may purchase in the Community Offering and the Syndicated Community Offering in the aggregate more than $200,000 of the Common Stock offered; and, except for the ESOP, no person, together with associates of or persons acting in concert with such person, 12 <PAGE> may purchase more than the overall maximum purchase limitation of 1.0% of the total number of shares of Common Stock offered in the Offerings. At any time during the Conversion and without further approval by the Association's members, the Company and the Association may in their sole discretion increase the overall maximum purchase limitation, and increase the amount that may be subscribed for in the Offerings, to up to 5% of the shares offered or, if orders for Common Stock that exceed 5% of the total offering of shares do not, in the aggregate, exceed 10% of the total shares offered, to up to 9.99% of the total offering of shares. It is currently anticipated that the overall maximum purchase limitation may be increased if, after a Community Offering, the Company has not received subscriptions for a minimum of 4,505,000 shares of Common Stock. Prior to consummation of the Conversion, if such amount is increased, subscribers for the maximum amount will be, and certain other large subscribers in the sole discretion of the Association may be, given the opportunity to increase their subscriptions up to the then applicable limit. See "The Conversion --Limitations on Common Stock Purchases" and "The Conversion -- Community Offering." In the event of an increase in the total number of shares up to 15%, the additional shares will be distributed and allocated to fill unfilled orders in the Subscription and Community Offerings, with priority given to the subscription of the ESOP, without any resolicitation of subscribers, as described in "The Conversion -- Subscription Offering and Subscription Rights" and "-- Limitations on Common Stock Purchases." STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED IN THE CONVERSION Federal regulations require that the aggregate purchase price of the Common Stock to be issued in the Conversion be consistent with an independent appraisal of the estimated pro forma market value of the Common Stock following the Conversion. RP Financial, an independent appraiser, has advised the Association that in its opinion, dated June 7, 1996 and updated July 19, 1996, the aggregate estimated pro forma market value of the Common Stock ranged from $45,050,000 to $60,950,000, with a midpoint of $53,000,000. See "--Home Federal Savings and Loan Association of Elgin--Recent Developments." RP Financial's appraisal is included as an exhibit to the Company's Registration Statement, of which this Prospectus is a part. See "Additional Information." The Board of Directors of the Association has established the Estimated Price Range of $45.1 million to $61.0 million, assuming the issuance of between 4,505,000 and 6,095,000 shares of Common Stock at the Purchase Price of $10.00 per share. THE APPRAISAL OF THE COMMON STOCK IS NOT INTENDED AND SHOULD NOT BE CONSTRUED AS A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING SUCH STOCK NOR CAN ANY ASSURANCE BE GIVEN THAT PURCHASERS OF THE COMMON STOCK IN THE CONVERSION WILL BE ABLE TO SELL SUCH SHARES AFTER THE COMPLETION OF THE CONVERSION AT OR ABOVE THE PURCHASE PRICE. All shares of Common Stock issued in the Conversion will be sold at the Purchase Price, as determined by the Association and approved by the Company. The actual number of shares to be issued in the Conversion will be determined by the Company and the Association based upon the final updated valuation of the estimated pro forma market value of the Common Stock, giving effect to the Conversion, at the completion of the Offerings. The number of shares to be issued is expected to range from a minimum of 4,505,000 shares to a maximum of 6,095,000 shares. Subject to approval of the OTS, the Estimated Price Range may be increased or decreased to reflect market and economic conditions prior to the completion of the Conversion, and under such circumstances the Company may increase or decrease the number of shares of Common Stock to be issued in the Conversion. The maximum of the Estimated Price Range may be increased by up to 15% and the number of shares of Common Stock to be issued in the Conversion may be increased to 7,009,250 shares due to regulatory considerations, changes in the market and general financial and economic conditions. No resolicitation of subscribers will be made and 13 <PAGE> subscribers will not be permitted to modify or cancel their subscriptions unless the gross proceeds from the sale of the Common Stock are less than the minimum or more than 15% above the maximum of the current Estimated Price Range. See "Pro Forma Data," "Risk Factors -- Possible Increase in Estimated Price Range and Number of Shares Issued" and "The Conversion -- Stock Pricing" and "-- Number of Shares to be Issued." USE OF PROCEEDS Net proceeds from the sale of the Common Stock are estimated to be between $43.5 million and $59.2 million (or $68.2 million if the Estimated Price Range is increased by 15%) depending on the number of shares sold and the expenses of the Conversion. See "Pro Forma Data." The Company will use the net proceeds from the sale of the Common Stock as follows: 1. The Company will purchase all of the capital stock of the Association to be issued upon Conversion in exchange for 50% of the net proceeds. 2. The remaining net proceeds will be retained by the Company. Net proceeds to be retained by the Company after the purchase of the capital stock of the Association are estimated to be between $21.8 million and $29.6 million (or $34.1 million if the Estimated Price Range is increased by 15%). The net proceeds retained by the Company will initially be invested primarily in federal funds, short-term investment grade marketable securities and mortgage-backed securities. 3. The Company intends to use a portion of the retained net proceeds to make a loan directly to the ESOP to enable the ESOP to purchase 8% of the shares to be issued in the Conversion. The amount of the loan to the ESOP is estimated to be between $3.6 million and $4.9 million (or $5.6 million if the Estimated Price Range is increased by 15%) to be repaid over a period of up to 10 years at an interest rate of 8%. See "Management of the Association -- Benefits -- Employee Stock Ownership Plan and Trust." The Company is subject to the terms of a certification made to the OTS in connection with the application to the OTS for approval of the Conversion, which certification prohibits the Company from taking any actions to further any payments to its stockholders through a return of excess capital for a period of one year following the Conversion without the prior written consent of the OTS. The certification expressly does not apply to taxable dividend payments made by the Company or to dividend payments made by the Association to the Company. See "Dividend Policy." The portion of the net proceeds not retained by the Company, estimated to be between $21.8 million at the minimum of the Estimated Price Range and $29.6 million at the maximum of the Estimated Price Range, will be added to the Association's general funds to be used for general corporate purposes, including investment in one- to four-family residential mortgage loans and other loans which will provide affordable home financing opportunities to the community; investment in federal funds, short-term, investment grade marketable securities and mortgage-backed securities; and to fund the Stock Programs. See "Use of Proceeds." DIVIDENDS Upon completion of the Conversion, the Board of Directors of the Company will have the authority to declare dividends on the Common Stock. The Board of Directors does not presently intend to declare dividends on the Common Stock. In the future, declarations of dividends, if any, by the Board of Directors will depend upon a number of factors, including the amount of the net proceeds from the Offerings retained by the Company, investment opportunities available to the Company or the Association, capital requirements, regulatory limitations, the Company's and the Association's financial condition and results of operations, tax considerations, general economic conditions, industry standards and other factors. As the principal asset of the Company, the Association will provide the principal source of funds for payment of dividends by the 14 <PAGE> Company. Assuming the shares of Common Stock are sold at the maximum of the Estimated Price Range, at March 31, 1996, after giving pro forma effect to (i) the Conversion, (ii) the deduction from capital of the amount expected to be borrowed by the ESOP and the cost of shares of Common Stock to be acquired by the Stock Programs and (iii) the retention by the Association of 50% of the net proceeds of the Conversion, the Association would be permitted to make capital distributions of up to approximately $8.8 million to the Company without prior OTS approval. See "Dividend Policy." BENEFITS TO MANAGEMENT AND DIRECTORS Stock Option Plans. Following the Conversion, the Company intends to adopt the Stock Option Plans. If implemented within one year following the Conversion, the adoption of the Stock Option Plans will be subject to stockholder approval obtained at a meeting of stockholders to be held no earlier than six months after the completion of the Conversion. Assuming implementation, an amount of shares of Common Stock equal to 10% of the Common Stock issued in the Conversion (450,500 shares and 609,500 shares at the minimum and maximum of the Estimated Price Range, having an aggregate fair market value of $4.5 million and $6.1 million, respectively, based on a Purchase Price of $10.00 per share) is expected to be reserved for issuance under the Stock Option Plans. No determinations have been made by the Company as to the specific terms of the Stock Option Plans or the amount of awards to be made thereunder. Current OTS regulations provide that no individual employee may receive more than 25% of the options granted, and non-employee directors may not receive more than 5% individually or 30% in the aggregate of the options granted, under option plans implemented within one year following the Conversion. See "Management of the Association -- Benefits --Stock Option Plans." Stock Programs. Following the Conversion, the Company also intends to adopt certain Stock Programs for the benefit of officers, employees and non-employee directors of the Company and the Association. If implemented within one year following the Conversion, the adoption of the Stock Programs will be subject to stockholder approval obtained at a meeting of stockholders to be held no earlier than six months after the completion of the Conversion. Assuming implementation, the Association expects to contribute funds to the Stock Programs to enable their related trusts to acquire, in the aggregate, up to 4% (3% unless OTS approval is obtained) of the shares of Common Stock issued in the Conversion, or 180,200 shares and 243,800 shares at the minimum and maximum of the Estimated Price Range, respectively, having an aggregate fair market value of $1.8 million and $2.4 million, respectively, based on a Purchase Price of $10.00 per share. These shares will be acquired either through open market purchases, subject to OTS approval, if necessary, or from authorized but unissued Common Stock. See "Risk Factors -- Possible Dilutive Effect of Stock Options and Stock Programs." No determinations have been made by the Company as to the specific terms of the Stock Programs or the amount of awards to be made thereunder. Current OTS regulations provide that no individual employee may receive more than 25% of the shares of any plan, and that non-employee directors may not receive more than 5% of the shares individually or 30% in the aggregate, in the case of plans implemented within one year following the Conversion. Under the anticipated terms of the Stock Programs, recipients would vote any shares allocated to them and an independent trustee would vote unallocated shares in the same proportion as it receives instructions from recipients with respect to allocated shares which have not been vested and distributed. See "Management of the Association-- Benefits -- Stock Programs." ESOP. The Association and the Company have established the ESOP for the benefit of eligible employees, including officers. The ESOP intends to subscribe for up to 8% of the Common Stock issued in the Conversion (7% unless OTS approval is obtained) and to finance its subscription with funds anticipated to be borrowed from the Company for a period of up to 10 years at an interest rate of 8% per annum. The Association and the Company intend to make cash contributions to the ESOP as required for debt service. 15 <PAGE> The Common Stock acquired by the ESOP will initially be held in a suspense account and will be allocated to eligible employees as the loan is repaid. See "Management of the Association -- Benefits -- Employee Stock Ownership Plan and Trust." Termination of Pension Plan. In connection with the Conversion and the implementation of the ESOP, the Association intends to terminate its tax- qualified defined benefit pension plan on August 31, 1996. Plan benefits will cease to accrue on June 30, 1996. Such termination will result in the vesting of all benefits and will afford each participant the option of receiving an immediate lump sum payment in settlement of all benefit entitlements. The estimated cost of terminating the pension plan is $1.0 million. Termination of the pension plan is expected to be completed by March 31, 1997. See "Recent Developments" and "Management of the Association -- Benefits." Employment Arrangements With Senior Management and Key Personnel. The Association and the Company intend to enter into employment arrangements with certain senior management and key employees that will provide for benefit and cash payments to be made in the event of their termination of employment following a change of control of the Association or the Company. The provisions of these arrangements, described below, may have the effect of increasing the cost of acquiring the Company, thereby discouraging future attempts to take over the Company or the Association. Based on current compensation and benefit costs, cash payments to be made in the event of a change of control of the Association or the Company pursuant to the terms of the Employment Agreements would be approximately $1,940,000 of which approximately $955,000 would be payable to Mr. Perucco, $555,000 would be payable to Mr. Dolan and $430,000 would be payable to Mr. Moran. However, the actual amount to be paid under the Employment Agreements in the event of a change of control of the Association or the Company cannot be estimated at this time because the actual amount is based on the compensation and benefit costs applicable to these individuals and other factors existing at the time of the change of control which cannot be determined at this time. See "Management of the Association -- Employment Agreements." The Association and the Company also intend to enter into employee retention agreements ("Retention Agreements"), effective on the Conversion, with certain other officers ("Contract Employee(s)"). Based on current compensation and benefit costs applicable to the Contract Employees expected to be covered by the Retention Agreements, cash payments to be made in the event of a change of control of the Association or the Company would be approximately $530,000. However, the actual amount to be paid under the Retention Agreements in the event of a change of control of the Association or the Company cannot be estimated at this time because it will be based on the compensation and benefit costs applicable to the Contract Employees and other factors existing at the time of the change of control which cannot be determined at this time. See "Management of the Association -- Employee Retention Agreements." Other Change in Control Provisions. The Association's Employee Severance Pay Plan provides for benefits and/or cash payments in the event of a change of control of the Company or the Association. Certain anticipated provisions of the Stock Option Plans and Stock Programs (which the Company intends to adopt and which will only become effective prior to the first anniversary of the Conversion upon stockholder approval obtained at a meeting of stockholders to be held no earlier than six months after completion of the Conversion) provide for cash payments and/or accelerated vesting in the event of a change of control of the Company or the Association. The ESOP provides for accelerated vesting in the event of a change of control. These provisions may have the effect of increasing the cost of acquiring the Company, which could result in stockholders receiving less for their shares of Common Stock than might otherwise be available in the event of an acquisition of the Company. Based on current salaries, cash payments to be paid in the event of a change of control pursuant to the terms of the Employee Severance Pay Plan would be approximately $570,000. However, the actual 16 <PAGE> amount to be paid in the event of a change of control of the Association or the Company cannot be estimated at this time, because it will be based on the compensation and benefits, as applicable, for each covered individual and other factors existing at the time of the change of control which cannot be determined at this time. See "Restrictions on Acquisition of the Company and the Association -- Restrictions in the Company's Certificate of Incorporation and Bylaws," "Management of the Association -- Employee Severance Compensation Plan," "-- Benefits -- Employee Stock Ownership Plan and Trust," "-- Benefits -- Stock Option Plans," and "--Benefits -- Stock Programs." Subscriptions by Executive Officers and Directors. The Association's executive officers and directors propose to purchase in the Offerings an aggregate of 136,500 (or 3.03%, based on the minimum of the Estimated Price Range, or 2.24%, based on the maximum of the Estimated Price Range) of the shares to be issued in the Offerings. See "Management of the Association -- Subscriptions by Executive Officers and Directors." RISK FACTORS See "Risk Factors" for a discussion of certain factors that should be considered by prospective investors, including: Potential Impact of Changes in Interest Rates; Impact of the Economy on Operations; Competition; Recapitalization of the SAIF; SAIF Premiums and Possible Special Assessment; Pending Tax Legislation Regarding Tax Bad Debt Reserves; Impact of Technological Advances; Residential and Non-Residential Lending Risks; Certain Anti-Takeover Provisions; Absence of Market for Common Stock and Recent Performance of Conversion Offerings; Possible Increase in Estimated Price Range and Number of Shares Issued; Possible Dilutive Effect of Stock Options and Stock Programs; Possible Adverse Income Tax Consequences of the Distribution of Subscription Rights; Financial Institution Regulation and Possible Legislation; and Risk of Delayed Offering. 17 <PAGE>
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001016370_golden_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001016370_golden_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, (I) ALL INFORMATION IN THIS PROSPECTUS GIVES RETROACTIVE EFFECT TO A 3,000-FOR-1 STOCK SPLIT AND ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED AND (II) ALL REFERENCES IN THIS PROSPECTUS TO THE "COMPANY" OR "GOLDEN BEAR" REFER TO GOLDEN BEAR GOLF, INC., A FLORIDA CORPORATION AND ITS SUBSIDIARIES, AFTER GIVING EFFECT TO THE REORGANIZATION, AS MORE FULLY DESCRIBED UNDER "THE COMPANY--THE REORGANIZATION," AND TO THE TRANSFER OF THE ASSETS AND STOCK TO AND THE ASSUMPTION OF THE RELATED LIABILITIES BY THE COMPANY IN THE REORGANIZATION, AS IF SUCH ASSETS AND STOCK HAD BEEN TRANSFERRED TO AND OPERATED BY, AND RELATED LIABILITIES HAD BEEN OBLIGATIONS OF, THE COMPANY FOR THE PERIODS PRESENTED HEREIN. THE COMPANY Golden Bear Golf, Inc. ("Golden Bear" or the "Company") is a diversified, international brand name golf products and services company engaged in the development, marketing and management of golf-related businesses, including the licensing, ownership and operation of golf practice and instruction facilities, the construction and renovation of golf courses, the marketing of golf course design services and the licensing, distribution and sale of golf-related consumer products. Through its three divisions, the Golf Division, the Construction Division and the Marketing Division, the Company provides high quality products and services in over 40 countries primarily under the NICKLAUS, JACK NICKLAUS and GOLDEN BEAR brand names. From 1993 to 1995, the Company realized an increase in revenues and operating income from $11.8 million to $31.5 million and from $0.1 million to $3.3 million, respectively. The Company's Golf Division is involved in the licensing, ownership and operation of golf practice and instruction facilities under the JACK NICKLAUS GOLF CENTER, JACK NICKLAUS ACADEMY OF GOLF and GOLDEN BEAR GOLF CENTER brand names. The Company's golf centers are designed to provide affordable golf practice and instruction facilities to a large golfer population, to attract new participants to the game and to create an environment for family entertainment. The Company believes the highly fragmented golf practice and instruction facility industry presents advantageous opportunities to acquire, upgrade and renovate golf centers over the next five years. The Company believes that its golf facilities are differentiated from its competitors on the basis of the consumer's recognition of the high quality of the products and services associated with the NICKLAUS, JACK NICKLAUS and GOLDEN BEAR brand names, the quality of its facilities and the availability at its facilities of the unique and individualized golf instruction programs designed by Jack Nicklaus and Jim Flick, a world renowned instructor. The Company currently operates three golf practice and instruction facilities and recently entered into letter agreements or letters of intent regarding the proposed acquisition or lease of four additional existing facilities and two facilities currently under development. See "The Company--Recent Acquisitions." As part of its growth strategy to focus its efforts on the ownership and operation of facilities, the Company has identified approximately 60 to 70 markets within the United States which it believes can support one or more golf practice and instruction facilities of the type operated by the Company. Although there is no assurance that additional facilities will be acquired, the Company's plan is to acquire or develop a total of ten facilities during 1996 and an additional twelve facilities by the end of 1997. In addition to the three golf practice and instruction facilities it currently operates, the Company currently licenses for operation by third parties 17 golf practice and instruction facilities under the JACK NICKLAUS GOLF CENTER, JACK NICKLAUS ACADEMY OF GOLF and GOLDEN BEAR GOLF CENTER brand names. The Company intends to continue to support its existing licensee base. The Company's Golf Division also is involved in the marketing of golf course designs on behalf of designers, primarily for the golf course design division of Golden Bear International, Inc. ("GBI"), Nicklaus Design. In addition, the Company provides club management and consulting services to golf course owners, with five Nicklaus designed courses currently under management in the United States and one under management in Asia. Through its Construction Division, the Company provides technical construction services in connection with the construction and renovation of golf courses. Since 1983, such construction services have been provided throughout the world in the development of approximately 39 golf courses, most of which were designed by Mr. Nicklaus through Nicklaus Design. Through its Marketing Division, the Company licenses NICKLAUS, JACK NICKLAUS and GOLDEN BEAR branded consumer products and operates its Nicklaus/Flick Golf Schools. The Company believes, based upon estimated mark-ups of wholesale prices or factory costs, that retail sales of the Company's licensed products, including apparel and accessories, were approximately $306 million worldwide in 1995, which generated approximately $5.1 million of licensing revenue for the Company in 1995. The Company also operates in its Marketing Division high-end golf schools under the NICKLAUS/FLICK GOLF SCHOOL brand name. The Company has developed innovative teaching methods which are offered at the Nicklaus/Flick Golf Schools throughout the United States and serve as the basis for instruction at the Company's golf practice and instruction facilities worldwide. The Company has invested approximately $1.3 million in a proprietary teaching method including instruction books and a computer assisted video swing analysis device. This teaching methodology is the basis for the JACK NICKLAUS COACHING STUDIOS included within the Company's golf practice and instruction facilities worldwide as well as teaching at the Nicklaus/Flick Golf Schools. The Company's strategy is to increase its worldwide revenue and operating income by capitalizing on the growth and popularity of golf and Mr. Nicklaus' reputation, image and accomplishments as one of the greatest golfers ever to play the game. Specific components of the Company's growth strategy include (i) acquiring, leasing or entering into joint ventures for well-located golf practice and instruction facilities that have the potential for improvement under the Company's management and with improved or expanded facilities; (ii) developing new golf practice and instruction facilities in locations where suitable acquisition opportunities are not available; (iii) capitalizing on the demand for the construction of new golf courses and the renovation of existing courses; and (iv) broadening the Company's base of branded consumer product offerings under the NICKLAUS, JACK NICKLAUS and GOLDEN BEAR brand names. The Company also believes that cross-marketing of its products and services will provide it with opportunities to maximize its operating performance. To this end, it is anticipated that the acquisition and development of new golf practice and instruction facilities will provide the Company with additional opportunities to market its Nicklaus/Flick Golf School programs and to sell its licensed products at retail pro shops established at such facilities. Similarly, the Company believes that the Company's arrangement as exclusive marketer of Nicklaus Design's services will increase the exposure of the Company's products and provide it with a competitive advantage in obtaining golf course construction and renovation business. The Company and its predecessors have been controlled by Mr. Nicklaus since their founding. Immediately after the Offering, Mr. Nicklaus will be the Chairman of the Board of the Company and Nicklaus Family Members (as defined) will beneficially own shares representing approximately 93.9% of the voting power of the Company's Common Stock and 62.5% of the Company's aggregate outstanding Common Stock. RECENT ACQUISITIONS Consistent with its business strategy of increasing its ownership and operation of golf practice and instruction facilities, the Company has entered into purchase, lease and management agreements relating to three existing facilities. On April 15, 1996, the Company assumed operation of a golf practice and instruction facility located in Pittsburgh, Pennsylvania pursuant to a long-term lease agreement with an option to purchase; on May 1, 1996, the Company assumed operation of a New Jersey facility pursuant to a management agreement with the intent to execute a long-term lease agreement for the property and a purchase agreement for the assets within 90 days; and on June 17, 1996 the Company acquired and assumed operation of a second Pittsburgh golf practice and instruction facility pursuant to a purchase and sale agreement. Additionally, on June 11, 1996, the Company entered into letters of intent with one of its licensees with respect to the proposed acquisition of an existing GOLDEN BEAR GOLF CENTER located in Columbus, Ohio and two GOLDEN BEAR GOLF CENTERS currently under development in Fort Lauderdale, Florida and Charlotte, North Carolina; on July 16, 1996, the Company entered into a letter of intent with another of its licensees with respect to the proposed acquisition of two other GOLDEN BEAR GOLF CENTERS located in Moreno Valley, California and Carrollton, Texas; and on July 16, 1996, the Company entered into a letter agreement with respect to the proposed lease of an existing facility in the Dayton, Ohio area. Consummation of any of the above-described pending transactions are subject to the satisfaction of various conditions, including, the execution of definitive agreements and the satisfactory completion of due diligence by the Company. There is no assurance that any of the above-described pending transactions will be consummated. While there can be no assurance that any additional facilities will be acquired, the Company's strategy is to acquire or develop a total of ten golf practice instruction facilities during 1996 and an additional twelve facilities by the end of 1997. See "The Company--Recent Acquisitions." Assuming the above-described existing facilties had been acquired on January 1, 1995, the Company's 1995 pro forma revenues and operating income would have been $36.6 million and $2.1 million, respectively. The closing of the above-described transactions is not a condition to the consummation of this Offering. The Company is actively pursuing acquisitions and is currently having preliminary discussions regarding acquisitions of additional facilities on terms not yet determined. Any such acquisitions may be significant and may have a material impact on the Company's financial condition and operating results. See "The Company--Recent Acquisitions--Other Potential Acquisitions." RECENT DEVELOPMENTS For the six months ended June 30, 1996, the Company had total revenues of $14.0 million as compared to $12.7 million for the comparable period in 1995, an increase of 10%, and operating income of $1.3 million as compared with $1.8 million for the six months ended June 30, 1995, a decrease of approximately 30%. Results for the six months ended June 30, 1996 are before a one-time expense of approximately $3.0 million associated with compensation deemed received by executives of the Company in connection with shares purchased by them in Golden Bear Golf Centers, Inc. prior to the Reorganization. Pro forma income as adjusted to reflect C-Corp status, before the above described compensation expense, was $0.4 million for the six months ended June 30, 1996 as compared to $0.8 million for the comparable period in 1995. While revenues in 1996 as compared to 1995 are expected to increase as a consequence of the acquisition of golf practice and instruction facilities, the costs associated with the acquisitions and the integration of the operations of the acquired facilities into the Company, investment in additional management information systems and personnel and the costs associated with this Offering and being a public company are expected to result in decreased earnings from operations for 1996 as compared to 1995. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." THE OFFERING <TABLE> <CAPTION> <S> <C> CLASS A COMMON STOCK OFFERED ...........1,800,000 SHARES Common Stock to be outstanding after the Offering: Class A Common Stock .................. 2,040,000 shares(1) Class B Common Stock .................. 2,760,000 shares(2) --------- Total ................................ 4,800,000 shares ========= Voting Rights .......................... The Class A Common Stock and Class B Common Stock vote as a single class on all matters, except as otherwise required by law, with each share of Class A Common Stock entitling its holder to one vote and each share of Class B Common Stock entitling its holder to ten votes. Use of Proceeds ........................ The net proceeds from the Offering will be used for working capital and general corporate purposes, including the acquisition and development of golf practice and instruction facilities and to repay approximately $1.65 million of indebtedness to Mr. Nicklaus incurred by the Company in connection with the Acquisitions (as defined). See "The Company--The Reorganization" and "Use of Proceeds." Nasdaq National Market Symbol .......... JACK <FN> - --------------------- (1) Does not include an aggregate of up to 384,000 shares of Class A Common stock reserved for issuance upon exercise of stock options which will be outstanding upon consummation of the Offering under the Company's 1996 Stock Option Plan. see "Management--Executive Compensation." (2) Each share of Class B Common Stock is convertible at any time into one share of Class A Common Stock and will convert automatically into Class A Common Stock upon a transfer to anyone other than a Nicklaus Family Member or on the record date of any meeting of shareholders if the total number of shares of Class B Common Stock outstanding is less than 20% of the aggregate number of shares of Common Stock outstanding. In addition, shares of Class B Common Stock owned by Nicklaus Family Members are subject to certain transfer restrictions. See "Certain Relationships and Related Transactions" and "Description of Capital Stock."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001016558_kapson_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001016558_kapson_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER "RISK FACTORS." UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES IN THIS PROSPECTUS TO THE "COMPANY" REFER TO KAPSON SENIOR QUARTERS CORP., ITS CONSOLIDATED SUBSIDIARIES AND ITS PREDECESSOR. EXCEPT AS OTHERWISE NOTED, THE INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. THE INFORMATION CONTAINED IN THIS PROSPECTUS GIVES EFFECT TO CERTAIN TRANSACTIONS TO BE CONSUMMATED PRIOR TO OR SIMULTANEOUSLY WITH THE CLOSING OF THE OFFERING. THE COMPANY Kapson Senior Quarters Corp. (the "Company") is a leading provider of assisted living services in the northeastern region of the United States, and has owned, managed and/or operated assisted living facilities since 1972. Assisted living facilities provide a residential alternative for elderly senior citizens who need or desire assistance with their activities of daily living and certain home health care services, in a non-institutional environment. A majority of the Company's assisted living facilities are operated under the "Senior Quarters" trademark. The Company owns, manages and/or operates 15 assisted living facilities with an aggregate of 1,623 units and a capacity for 2,392 residents, located in New York, New Jersey, Connecticut and Pennsylvania. Of these facilities, the Company owns all or a portion of eleven facilities (six facilities are wholly owned and five partially owned, with partial ownership interests ranging from 10.0% to 50.1%) with an aggregate of 1,145 units and a capacity for 1,749 residents. Revenues from these eleven facilities constituted 96.7% of total revenues in 1995, with the balance provided by management fees from the four facilities owned by unaffiliated third parties. In addition, the Company currently has under pre-construction development seven assisted living facilities in these states with an expected aggregate of 948 units and a capacity for 1,146 residents. At June 30, 1996, the Company's facilities that were stabilized (i.e., in operation for at least twelve months) had a weighted average occupancy rate of 99.0%, with many of them maintaining waiting lists. Furthermore, such facilities have operated at a 98.0% occupancy rate for the past five calendar years. The Company believes that it is characterized by the following: - A pioneer in assisted living in the northeastern United States since 1972, and a preeminent provider of assisted living services in the State of New York, the state with the second highest elderly population in the United States - Well-positioned to capitalize on the considerable growth opportunities in the assisted living industry presented by strong demographic trends, cost-containment initiatives, long-term care facility supply and demand imbalances and quality of life advantages - Assisted living facilities that are designed to provide premium accommodations and a comprehensive, bundled package of standard services for a single monthly fee - Focused on "private-pay" residents who pay through private insurance or funds - Large facilities, with a prototype facility consisting of 125 units and a capacity for 200 residents, that produce cost-efficiencies and enhance operating margins - Three senior executives with combined experience of over 50 years in the assisted living industry and a management team (the members of which have on average been with the Company for approximately 10 years) with the demonstrated ability necessary to (i) implement the Company's growth strategy, (ii) operate assisted living facilities in the State of New York (traditionally one of the states in which assisted living is most heavily regulated), and (iii) operate licensed home health care services agencies so as to enable the Company to provide home health care services at many of its facilities The Company's operating philosophy is to provide services and care which meet the individual needs of its residents, and to enhance their physical and mental well-being, thereby allowing them to live longer and to "age in place." The Company's facilities are designed to provide premium accommodations and a comprehensive, bundled package of standard services for a single monthly fee. These facilities offer, on a 24-hour basis, personal, supportive and home health care services appropriate for their residents in a home-like setting, which allow residents to maintain their independence and quality of life. Furthermore, many of the Company's facilities, through its Extended Care Program, also offer additional specialized care and services to residents in the beginning stages of Alzheimer's disease, dementia and other cognitive impairments. At June 30, 1996, the average monthly fee for standard services at the Company's facilities was approximately $2,980 per unit. The Company's growth strategy focuses on the expansion of its existing portfolio through the development, acquisition and conversion of additional assisted living facilities, the expansion of its ancillary services (which have not yet produced significant revenues), including home health care, in-house pharmacy services and its Extended Care Program, as well as cost-efficient facilities management. The Company's primary focus is the northeastern United States, where it intends to maintain its position as a leading assisted living provider. In the future, the Company will also selectively seek additional opportunities in other regions of the United States. Since 1985, the Company has developed ten assisted living facilities and acquired all, or an interest in, three others. The Company anticipates that, by utilizing its infrastructure and assisted living experience, it will develop or acquire an additional 30 facilities with 3,500 units and a capacity for 4,100 residents by the end of 1999. The Company believes its assisted living business benefits from the following significant demographic trends, cost-containment initiatives, and long-term care facility supply and demand imbalances: (i) the continued aging of the United States population, resulting in increasing demand for care of the elderly; (ii) changing family dynamics, which increase the likelihood of families utilizing the assisted living alternative; (iii) the increased net worth of the elderly and their increased ability to pay for such care, and (iv) a general effort to contain health care costs by governmental authorities, private insurers and managed care organizations by limiting lengths of stay, services and reimbursement amounts. The Company incurred net losses for the six months ended June 30, 1996 and for fiscal 1995 primarily as a result of the Company's development and construction of two facilities that opened on September 1, 1995 and March 15, 1996, as well as the Company's strategic decision to invest in management and facility development capabilities to support future growth. The Company intends to pursue a rapid growth strategy, the success of which will depend upon a large number of factors, including the availability of financing and general real estate and construction risks. Other risks include the fact that the Company and its facilities are subject to governmental regulation; competition in the assisted living market; the Company's dependence on senior management; and other business risks common to assisted living operations. See "Risk Factors." The Company was formed in order to consolidate and expand the assisted living business of The Kapson Group, a New York general partnership of which the sole equal partners are Glenn Kaplan, Wayne Kaplan and Evan Kaplan, who are brothers (collectively, the "Kaplans"). The Kaplans are the three senior executive officers of the Company and, after giving effect to the Offering, will own approximately 53.9% of the outstanding shares of the Company's Common Stock (48.8% if the Underwriters' over-allotment option is exercised in full). While the Company has an ownership interest in substantially all of its facilities, in order to comply with applicable New York law and regulations prohibiting the operation of certain types of adult care facilities by a publicly-traded for-profit corporation, substantially all of the Company's New York facilities are operated by the Kaplans individually. As licensed operators, the Kaplans have site control over substantially all of the Company's New York facilities, and have personal liability for operating these facilities. With respect to such facilities, the Kaplans have engaged a wholly owned subsidiary of the Company to perform the day-to-day operations of the facilities in a manner that the Company believes is consistent with New York law and regulations. THE OFFERING <TABLE> <S> <C> Common Stock Offered.............. 3,550,000 shares (1) Common Stock outstanding after the Offering......................... 7,700,000 shares (1)(2)(3) Use of Proceeds................... The Company will use the net proceeds of the Offering for the development and acquisition of assisted living facilities (including seven facilities currently in various stages of pre-construction development), to pay to the Kaplans $6.0 million (the approximate tax liability expected to be incurred by them from transactions pertaining to the transfer of certain facilities to the Company), to pay all real estate transfer taxes arising from these transactions (estimated to be approximately $250,000), to acquire the remaining interest in one of its partially owned facilities, and for working capital and general corporate purposes. Proposed Nasdaq National Market Symbol........................... "KPSQ" </TABLE> - ------------------------ (1) Excludes 532,500 shares of Common Stock subject to the Underwriters' over-allotment option granted by the Company and the Selling Stockholders. The Company will not receive any proceeds from the sale of any shares by the Selling Stockholders, which will occur only if the over-allotment option is exercised. See "Principal and Selling Stockholders." (2) Excludes 600,000 shares of Common Stock reserved for issuance and available for grant under the Kapson Senior Quarters Corp. 1996 Stock Incentive Plan, under which options to purchase 117,500 shares of Common Stock have already been issued. See "Management -- 1996 Stock Incentive Plan." (3) Excludes approximately 50,000 shares that the Company expects to issue in connection with the purchase of the 50% interest it does not already own in one of its facilities. SUMMARY FINANCIAL, OPERATING AND PRO FORMA DATA The following table sets forth certain historical financial and operating data as of and for each of the three years ended December 31, 1995 and the six months ended June 30, 1995 and 1996 for The Kapson Group (the "Predecessor"), and certain pro forma financial data and operating data as of and for the six months ended June 30, 1996 and for the year ended December 31, 1995 for the Company as described in footnote (1) below. The Predecessor represents a combination of the businesses of partnerships, Subchapter S corporations and limited liability companies which, as of June 30, 1996, consisted of six wholly owned, two majority-owned and three minority-owned assisted living facilities, and two entities that provided managerial services to five related and four unrelated entities. The businesses of the Predecessor are being acquired by the Company in connection with the Offering. The financial data below should be read in conjunction with, and is qualified in its entirety by reference to, the combined financial statements of the Predecessor, including the notes thereto, and the information in "Unaudited Pro Forma Financial Information" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, -------------------------------------------- --------------------------------- PREDECESSOR PRO FORMA PREDECESSOR PRO FORMA ------------------------------- ----------- -------------------- ----------- 1993 1994 1995 1995 (1) 1995 1996 1996 (1) --------- --------- --------- ----------- --------- --------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA Revenues: Assisted living revenues.............. $ 12,628 $ 13,349 $ 14,275 $ 17,828 $ 7,024 $ 9,529 $ 10,440 Management fees....................... 248 348 443 443 209 432 432 Other -- affiliates................... 112 57 45 -- 23 23 -- --------- --------- --------- ----------- --------- --------- ----------- Total revenues.......................... 12,988 13,754 14,763 18,271 7,256 9,984 10,872 --------- --------- --------- ----------- --------- --------- ----------- Operating Expenses: Assisted living operating expenses.... 7,591 7,837 8,314 10,913 3,931 6,252 7,070 General and administrative............ 727 1,142 1,658 3,096 730 1,275 1,832 Depreciation.......................... 1,188 1,180 1,234 1,440 576 912 964 --------- --------- --------- ----------- --------- --------- ----------- Total operating expenses................ 9,506 10,159 11,206 15,449 5,237 8,439 9,866 --------- --------- --------- ----------- --------- --------- ----------- Operating income........................ 3,482 3,595 3,557 2,822 2,019 1,545 1,006 Interest expense, net................. (3,541) (3,487) (3,892) (4,780) (1,739) (2,861) (3,013) Other income (expense), net........... (10) (1) (34) (30) 1 20 20 --------- --------- --------- ----------- --------- --------- ----------- Income (loss) before minority interest and extraordinary item................. (69) 107 (369) (1,988) 281 (1,296) (1,987) Minority interest in net loss of combined partnerships.................. -- -- 16 360 -- 371 271 --------- --------- --------- ----------- --------- --------- ----------- Income (loss) before extraordinary item................................... (69) 107 (353) (1,628) 281 (925) (1,716) Extraordinary Item...................... -- 4,399 -- -- -- -- -- --------- --------- --------- ----------- --------- --------- ----------- Net Income (loss)....................... (69) 4,506 (353) (1,628) 281 (925) (1,716) Unaudited pro forma data: Pro forma benefit (provision) for income taxes (2).............................. 28 (1,803) 141 651 (112) 370 686 --------- --------- --------- ----------- --------- --------- ----------- Pro forma net income (loss)............. $ (41) $ 2,703 $ (212) $ (977) $ 169 $ (555) $ (1,030) --------- --------- --------- ----------- --------- --------- ----------- --------- --------- --------- ----------- --------- --------- ----------- Pro forma net loss per share (3)........ $ (.20) $ (.21) ----------- ----------- ----------- ----------- Pro forma weighted average number of common shares outstanding (3).......... 4,831 4,831 ----------- ----------- ----------- ----------- Pro forma, as adjusted, net loss per share (3)(4)........................... $ (.13) $ (.13) ----------- ----------- ----------- ----------- Pro forma, as adjusted, weighted average number of common shares outstanding (3)(4)..................... 7,750 7,750 ----------- ----------- ----------- ----------- </TABLE> <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------- -------------------- PREDECESSOR PREDECESSOR ------------------------------- -------------------- 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> SELECTED OPERATING DATA: Assisted living units owned, managed and/or operated (end of period)... 661 661 862 661 1,623 Assisted living resident capacity (end of period)...................... 1,143 1,143 1,403 1,143 2,392 Weighted average occupancy of fully-stabilized assisted living facilities............................................................ 98% 98% 98% 99% 99% </TABLE> <TABLE> <CAPTION> JUNE 30, ---------------------------- PRO FORMA AS PREDECESSOR ADJUSTED 1996 1996(1)(3)(4) ------------- ------------- (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Working capital (deficit)......................................................... $ (4,344) $ 31,177 Total assets...................................................................... 67,853 101,540 Long-term debt, excluding current portion......................................... 67,816 67,816 Partners'and shareholders' equity (deficit)....................................... (11,107) 27,014 </TABLE> - ------------------------ (1) The pro forma statements of operations data for the year ended December 31, 1995 and the six months ended June 30, 1996 gives effect to (a) the acquisition on April 1, 1996 by the Predecessor of the operations of Town Gate Manor (Rochester, New York) and Town Gate East (Penfield, New York); (b) the April 1996 acquisition of the 49.9% interest in Senior Quarters at Chestnut Ridge by an unrelated third party; (c) the pending acquisition of the 50% interest it does not already own in the entity which owns Senior Quarters at East Northport from an unrelated party for $2,600. The purchase price is payable from Offering proceeds ($1,950) and the issuance of 50 shares of common stock at an assumed initial public offering price of $13.00 per share ($650); (d) operating fees payable to the Kaplans as operators for various New York facilities, net of management fees payable to a subsidiary of the Company; (e) compensation of the Kaplans and additional general and administrative costs of operating as a public company; (f) the initial capitalization of the Company; (g) the issuance of 4,150 shares of the Company's common stock as consideration for the conveyance of all of the Predecessor's assets relating to its assisted living business; and (h) the elimination of net indebtedness and interest payable to an uncombined affiliate of the Predecessor all as if the transactions had occurred as of January 1, 1995. The pro forma balance sheet as of June 30, 1996 gives effect to these transactions as if they occurred on that date, except for the transactions in (a) and (b) which are included in the historical combined balance sheet at June 30, 1996. See "Unaudited Pro Forma Financial Information."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001016694_new-york_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001016694_new-york_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY INFORMATION IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND COMBINED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION CONTAINED IN THIS PROSPECTUS (I) REFLECTS A 1.4-FOR-1 STOCK SPLIT EFFECTED ON JUNE 4, 1996, (II) REFLECTS THE REORGANIZATION AND ACQUISITIONS AS DESCRIBED HEREIN, (III) REFLECTS THE CONVERSION ON A ONE-FOR-ONE BASIS OF THE CLASS B COMMON STOCK INTO CLASS A COMMON STOCK AND THE RECLASSIFICATION OF THE CLASS A COMMON STOCK INTO COMMON STOCK, AND (IV) ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS." THE COMPANY The Company owns and franchises 50 quick-service New York Bagel restaurants in 16 states that serve generous portions of fresh, high quality food with fast, friendly service at an attractive price-value relationship. New York Bagel restaurants provide a selection of up to 20 varieties of bagels that are made from scratch, boiled and baked throughout the day in the traditional "New York style." Breakfast menu items include a variety of bagels and custom-blended cream cheeses, breakfast bagel sandwiches, gourmet coffees, muffins and croissants. Lunch and dinner items include an assortment of bagel delicatessen sandwiches, prepared salads, cookies and soft drinks. The restaurants are generally open Monday through Saturday from 6:30 a.m. to 8:00 p.m. and on Sunday from 8:00 a.m. to 5:00 p.m. Management believes that Company-owned restaurants typically generate approximately 40% of their sales before 11:00 a.m., with an average ticket of approximately $3.00 during such period and $4.00 thereafter. Time studies performed on a periodic basis by the Company show that, on average, breakfast customers are served within three minutes of placing their order and lunch and dinner customers are served within five minutes. The Company opened its first restaurant in 1986 and has grown by expanding its base of Company-owned restaurants and selectively adding franchisees. The Company has developed 18 of its 20 Company-owned restaurants in Oklahoma, Kansas, Tennessee and Texas. In addition to developing new restaurants, the Company acquired two bagel restaurants in December 1995, one of which was a franchised New York Bagel restaurant. The Company commenced franchising the New York Bagel concept in 1993 and currently has 20 franchisees operating 30 restaurants in 15 states. The Company intends to continue expanding its concept and contemplates having 28 to 30 Company-owned and 45 to 50 franchised restaurants in operation by the end of 1996 and 45 to 50 Company-owned and 70 to 80 franchised restaurants by the end of 1997. The Company believes that consumption of bagels has increased in recent years as consumers have discovered that bagels are a healthier, lower fat alternative to other quick-service foods and are a suitable substitute for sandwich breads. Management believes that the market for retail bagel restaurants is fragmented and underserved, and that the Company can capitalize on the demand for fresh bagels by expanding the New York Bagel concept in targeted markets. The Company presently targets mid-sized and smaller metropolitan markets, as management believes these markets typically contain fewer competing bagel restaurants and more favorable lease and labor environments than larger metropolitan markets. In each of its targeted markets, the Company seeks to establish a strong market presence by employing a multiple store strategy involving a bakery restaurant which produces bagels for itself and for one or more nearby satellite restaurants. In addition to opening new restaurants, the Company intends to pursue selective acquisitions of local and regional bagel operations with an established market presence. By entering underserved markets and opening multiple restaurants, the Company hopes to maximize market share and establish brand awareness. The Company and its franchisees have implemented this bakery/satellite restaurant combination 15 times. By employing a multiple store strategy, the Company focuses not only on generating attractive unit level economics, but also on the economic returns of each target market. The Company's approach to opening new restaurants has been to minimize its required investment by leasing substantially all of its locations. The Company believes that bakery restaurants can be opened for an initial investment, including leasehold improvements, furniture, fixtures, equipment, initial working capital and pre-opening expenses, of approximately $250,000, with satellite restaurants requiring approximately $150,000. By averaging these initial investment amounts within markets, the Company believes it achieves attractive returns on investment. During 1995 and the period ended June 30, 1996, average sales per Company-owned restaurant opened throughout each period were $559,000 and $293,000, respectively. During 1995 and the period ended June 30, 1996, the Company's restaurant level margin (defined as sales from Company-owned restaurants less cost of sales and restaurant operating expenses as a percentage of sales from Company-owned restaurants) was 17.1% and 18.9%, respectively. The Company believes that the location, layout and design of its restaurants contribute to the success of its operations. The Company's restaurants are typically located in strip shopping centers, free-standing buildings and downtown business districts that provide visibility, curb appeal and accessibility. A variety of factors are considered in selecting sites for the Company's restaurants, including population density, traffic patterns, area demographics and competition. The Company's restaurants are configured to facilitate a smooth flow of dine-in and carry-out traffic while retaining a casual cafe atmosphere. The Company's prototypical unit is decorated in rich colors and dark woods and contains a mixture of booth, table and barstool seating and, where available, outdoor seating. Exposed ceilings with drop lighting and a combination of tile and carpeted flooring are used to enhance its comfortable ambiance. Walls are covered with black and white photographs depicting classic New York scenes. The flexibility of its restaurant design and layout allow its restaurants to be configured to fit a wide variety of locations, thereby increasing the number of suitable sites. Management believes that comprehensive training is essential to the efficiency and consistency of its operations. Accordingly, the Company conducts an extensive 90-day training program for its restaurant managers and franchisees that is comprised of approximately ten days of classroom instruction on administration, record keeping and inventory control and approximately 80 days of on-site instruction on baking and food preparation at the Company's training facility in Oklahoma City, Oklahoma. In addition, the Company provides a team for on-site assistance during the initial ten days of operation at each Company-owned restaurant and at a franchisee's initial franchised restaurant. The Company's executive offices are located at 300 I.M.A. Plaza, 250 North Water Street, Wichita, Kansas 67202-1213, and its telephone number is (316) 267-7373. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company.............. 1,800,000 shares Common Stock offered by the Selling Stockholders.................................... 200,000 shares Common Stock to be outstanding after this offering (1).................................... 4,600,000 shares Use of Proceeds.................................. To repay bank indebtedness, finance the development of Company-owned restaurants, for possible acquisitions of bagel restaurants, and for working capital and general corporate purposes. Nasdaq National Market Symbol.................... NYBE </TABLE> - ------------------------ (1) Excludes (i) 400,000 shares of Common Stock reserved for issuance under the Company's 1996 Incentive Plan, of which options to acquire 271,000 shares are outstanding as of the date of this Prospectus and (ii) 19,320 shares of Common Stock issuable upon conversion of the Convertible Debenture, as defined herein. See "Management -- 1996 Incentive Plan" and "Description of Capital Stock -- Convertible Debenture." SUMMARY FINANCIAL AND RESTAURANT DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> TWENTY-SIX YEAR ENDED DECEMBER 31, SIX MONTHS WEEKS ENDED ------------------------------- ENDED JUNE JUNE 30, 1993 1994 1995 (1) 30, 1995 1996 (2) --------- --------- --------- ----------- ----------- (UNAUDITED) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenues.......................................... $ 3,561 $ 5,822 $ 7,359 $ 3,539 $ 5,190 Operating income........................................ 99 647 666 394 676 Earnings before income taxes............................ 85 594 626 374 512 Net earnings............................................ 76 597 619 374 512 Pro forma to reflect income taxes (3): Net earnings.......................................... $ 380 $ 311 Net earnings per share................................ $ 0.13 $ 0.10 Pro forma weighted average shares outstanding (in thousands) (4)......................................... 2,996 2,996 RESTAURANT DATA: System-wide sales (5)................................... $ 3,581 $ 7,260 $ 13,232 $ 5,623 $ 10,544 Company-owned restaurants (6): Average period sales per restaurant................... 470 524 559 279 293 Average period sales per restaurant (excluding limited hour restaurants) (7)................................ 513 604 635 316 322 Same restaurant sales increase........................ 21.0% 19.0% 9.8% 13.9% 5.1% Number of restaurants open at end of period: Company-owned......................................... 9 12 15 12 20 Franchised............................................ 2 9 25 16 30 --------- --------- --------- ----------- ----------- Total............................................... 11 21 40 28 50 --------- --------- --------- ----------- ----------- --------- --------- --------- ----------- ----------- <CAPTION> JUNE 30, 1996 ------------------------------- AS PRO FORMA ADJUSTED ACTUAL (8) (9) --------- --------- --------- (UNAUDITED) <S> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Working capital (deficit).............................................. $ (872) $ (1,124) $ 12,085 Total assets........................................................... 4,002 4,002 16,043 Total debt............................................................. 3,930 3,930 115 Stockholders' equity (deficit)......................................... (1,066) (1,341) 14,699 </TABLE> - ------------------------ (1) The Company acquired two restaurants in December 1995. If such transactions had occurred on January 1, 1995, "Total revenues," "Net earnings" and "Net earnings per share" would have been approximately $8,761,000, $224,000 and $0.07, respectively, for the year ended December 31, 1995, on a pro forma basis. The pro forma results do not necessarily reflect what would have occurred if the acquisitions had been made at the beginning of the respective periods or the results that may occur in the future. See "Pro Forma Condensed Combined Statement of Operations" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview." (2) Effective January 1, 1996, the Company elected to change its fiscal year end from a calendar year end to a 52/53 week fiscal year, ending on the last Sunday of the year, which consists of four 13-week periods. (3) Reflects a pro forma adjustment assuming the Company had been treated as a C corporation rather than as an S corporation for income tax purposes for the periods presented. See "S Corporation Distributions" and Note 2(i) of Notes to Combined Financial Statements. (4) See Note 2(i) of Notes to Combined Financial Statements. (5) Reflects total sales of Company-owned restaurants and sales of franchised restaurants as reported by franchisees or derived by the Company from other data reported by franchisees. (6) Reflects restaurants open throughout the entire period indicated. Same restaurant sales reflects restaurants that were open during the entire period indicated and the entire corresponding prior period. (7) Limited hour restaurants are typically open Monday through Friday during business hours. As of June 30, 1996, there were five Company-owned limited hour restaurants and three franchised limited hour restaurants. (8) Gives effect to (i) an accrual for the distribution of $184,000 to stockholders as if the Company had terminated its S corporation status at June 30, 1996 and made a distribution to the stockholders in connection with their estimated federal and state income tax obligations, and (ii) the establishment of a deferred tax liability in the estimated amount of $91,000 arising from the termination of the Company's S corporation status. (9) As adjusted to reflect the sale of 1,800,000 shares of Common Stock offered by the Company hereby and the application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001016718_metro_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001016718_metro_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND COMBINED FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE OVER-ALLOTMENT OPTIONS GRANTED TO THE UNDERWRITERS ARE NOT EXERCISED. IN ADDITION, UNLESS THE CONTEXT REQUIRES OTHERWISE, REFERENCES TO THE COMPANY REFER TO METRO NETWORKS, INC., A DELAWARE CORPORATION, AND ITS SUBSIDIARY AFTER THE REORGANIZATION (AS DEFINED HEREIN). A GLOSSARY OF CERTAIN TERMS APPEARING HEREIN HAS BEEN INCLUDED IN THIS PROSPECTUS. SEE "GLOSSARY." THE COMPANY OVERVIEW The Company is the largest provider of traffic reporting services, according to a March, 1994 market analysis prepared by the United States Department of Transportation, and believes that it is a leading supplier of local news, sports, weather and other information reporting services to the television and radio broadcast industries. The Company's information reports, which are customized to meet the specific needs of each of the Company's individual radio and television station affiliates, are presently being broadcast by approximately 1,275 radio station affiliates and 110 television station affiliates. The Company provides local broadcast information reports in 47 of the 50 largest MSA markets in the United States. In exchange for the Company's information reports, radio and television station affiliates provide commercial airtime inventory to the Company. The packaging and sale of this commercial airtime inventory accounts for substantially all of the Company's revenues. See "-- Advertising Sales and Marketing," "Business" and "Glossary." Because the Company has numerous radio station affiliates in each of its markets (averaging 21 affiliates per market), the Company believes that its broadcasts of local traffic information enable advertisers to reach more people, more often, in a higher impact manner than can be achieved using other advertising media. The Company's information reports are broadcast daily in 60 MSA markets and are heard by more than 100 million people (age 12 and over). Such reports and the Company's commercial messages are listened to by an average of 88% of the population (age 12 and over) in its markets. The Company's large network of affiliates offers advertisers the opportunity to reach a broad-based local, regional or national audience, through a single purchase of commercial airtime inventory. See "Business." The Company offers advertisers three different networks on which to broadcast their advertisements: the network of radio stations (the "Radio Traffic Services Network") which broadcasts the Company's traffic information reports (the "Radio Traffic Services"); the network of radio stations (the "Expanded Radio Services Network") which broadcasts an array of customized local news, sports, weather and other programming services (the "Expanded Radio Services"); and the network of television stations (the "MetroTV Network") which broadcasts the Company's television traffic services and video news services (the "Television Traffic Services" and "Video News Services" and collectively, the "MetroTV Services"). The Company believes that the Expanded Radio Services Network and the MetroTV Network, both of which are currently being developed, will become separate broad-based networks through which the Company will be able to acquire, package and sell additional commercial airtime inventory. See "Business -- Operating Strategy" and " -- Advertising Sales and Marketing." Since its founding in 1978, the Company has demonstrated growth in revenues and EBITDA (I.E., earnings before other expense (income), interest expense, taxes, depreciation and amortization). For the six months ended June 30, 1996, the Company had revenues of $50.1 million, EBITDA of $11.5 million and adjusted EBITDA (I.E., EBITDA plus predecessor shareholder costs) of $12.2 million. For the year ended December 31, 1995, the Company had pro forma revenues of $78.1 million, pro forma EBITDA of $10.0 million and pro forma adjusted EBITDA of $12.1 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Selected Financial and Operating Data." OPERATING STRATEGY The Company's strategy is to realize operating efficiencies by (i) expanding geographically; (ii) increasing the number of affiliates using the Radio Traffic Services within existing markets; (iii) developing the Expanded Radio Services; (iv) developing the MetroTV Services; and (v) continuing to strengthen marketing, sales and inventory management operations. -EXPAND GEOGRAPHICALLY. The Company, which currently operates in 60 MSA markets in the United States, including 54 of the largest 75 MSA markets, believes that the economic model for its local information services business is viable in each of the largest 75 MSA markets. Since July 1994, the Company has entered 16 new markets and the Company intends to expand into the remaining 21 of the largest 75 MSA markets over the next three years through strategic acquisitions and start-ups. The Company has recently entered into a purchase agreement to acquire all of the assets of Airborne Traffic Network, Inc. ("ATN") and a letter of intent to acquire the assets of Wisconsin Information Systems, Inc. ("WIS") (collectively, the "Pending Acquisitions"). The Company is always examining acquisition and expansion opportunities. See "-- Recent Developments." -INCREASE THE NUMBER OF AFFILIATES USING THE RADIO TRAFFIC SERVICES WITHIN EXISTING MARKETS. The Company believes there are substantial opportunities for continued growth in the Radio Traffic Services Network. As of June 30, 1996, the Company provided its Radio Traffic Services to approximately 1,230 radio station affiliates, an increase from approximately 900 radio station affiliates as of December 31, 1994. The Company believes that opportunities are available to increase its market penetration by establishing affiliate relationships with additional radio stations nationwide. Its current Radio Traffic Services Network represents 48.7% of the approximately 2,524 radio stations in the 60 MSA markets in which the Company operates. -DEVELOP THE EXPANDED RADIO SERVICES. Having established a substantial market presence in the Radio Traffic Services, the Company began during 1994 to leverage this business by offering the Expanded Radio Services to its network of radio station affiliates. As of June 30, 1996, the Company provided the Expanded Radio Services to more than 200 radio station affiliates in 28 MSA markets, an increase from 92 radio station affiliates in 17 MSA markets as of December 31, 1994. The Company intends to expand these services to all of its markets by the end of 1997. -DEVELOP THE METROTV SERVICES. The Company has provided Television Traffic Services to the MetroTV Network for over ten years. As of June 30, 1996, this network consisted of 110 television stations in 47 DMA markets, an increase from 71 television stations in 33 DMA markets as of December 31, 1994. In connection with its core Radio Traffic Services business, the Company developed an extensive array of video surveillance and broadcast equipment, including jet helicopters, broadcast quality remote and omni-directional aircraft-mounted camera systems, mobile units, computer-generated graphic displays and broadcasting technology. In 1995, the Company began to use this infrastructure to offer the Video News Services to its network of television station affiliates, and is currently providing these services to 16 of its television station affiliates in 12 of its 47 DMA markets. The MetroTV Services include full service, 24 hours per day/7 days per week video coverage from camera crews in the Company's aircraft and mobile ground units covering breaking news stories. The Company intends to expand the Video News Services into the 25 largest DMA markets in the United States over the next three years. -CONTINUE TO STRENGTHEN MARKETING, SALES AND INVENTORY MANAGEMENT OPERATIONS. Over the past year, the Company has invested in, and continues to initiate and implement, new operating strategies and systems to increase revenues and EBITDA. In order to increase the percentage of the Company's commercial airtime inventory sold, the Company has (i) increased its sales force from approximately 70 sales representatives as of December 31, 1994 to approximately 136 sales representatives as of June 30, 1996; (ii) developed a corporate marketing department to support the efforts of its sales representatives by providing extensive training, research, sales/marketing materials and analysis; (iii) hired additional general managers and sales managers to better manage the activities of its sales representatives and enhance its affiliate relations; (iv) fully automated its commercial airtime inventory management system to improve inventory control and pricing; and (v) reduced the level of reciprocal arrangements (the exchange of commercial airtime for goods and services) to focus sales representatives on cash revenue business. PROGRAMMING Every aspect of the Company's information reports (including the length of report, content of report, specific geographic coverage area, time of broadcast, number of reports aired per day, broadcaster's style, etc.) is customized to meet each individual affiliate's requirements. The Company typically works closely with the program directors, news directors, and general managers of its affiliates to ensure that the Company's services meet its affiliates' quality standards. The Company and its affiliates jointly select the on-air broadcasters to ensure that each broadcaster's style is appropriate for the station's format. The Company's broadcasters often become integral "personalities" on such affiliates' stations as a result of their significant on-air presence and interaction with the stations' on-air personnel. In order to realize operating efficiencies, the Company endeavors to utilize its professional broadcasters on multiple affiliate stations within a particular market. Generally, each of the Company's broadcasters delivers reports to between two and four of the Company's affiliates. The Company does not require its affiliates to identify the Company as the supplier of its information reports. This provides the Company's affiliates with a high degree of customization and flexibility, as each affiliate has the right to present the information reports provided by the Company as if the affiliate had generated such reports with its own resources. For example, multiple affiliates in a single market may suggest that the Company's infrastructure, including its airplanes, helicopters and broadcasters, are those of the affiliate. See "Business -- Programming". INFRASTRUCTURE The Company believes that its extensive fleet of aircraft and other information-gathering technology and broadcast equipment have allowed the Company to provide high quality programming, enabling it to retain and expand its affiliate base. In the aggregate, the Company utilizes approximately 69 fixed-wing aircraft, 17 helicopters, 30 mobile units, 7 airborne camera systems, 16 fixed-position camera systems, 50 broadcast studios and 1,177 broadcasters and producers. The Company also maintains a staff of computer programmers and graphics experts to supply customized graphics and other visual programming elements to television stations. In addition, the Company's operating centers and broadcast studios have sophisticated computer technology, video and broadcast equipment and cellular and wireless technology which enable the Company's broadcasters to deliver accurate and timely reports to its affiliates. The infrastructure and resources dedicated to a specific market by the Company are determined by the size of the market, the number of affiliates the Company serves in the market and the type of services being provided. See "Business -- Infrastructure." ADVERTISING SALES AND MARKETING The Company's primary source of revenue is the packaging and sale to advertisers of commercial airtime inventory provided to the Company by its affiliates in exchange for its information reports. The Company's standard radio affiliate contract, which is generally for a term of one year or longer, typically requires that for each report provided by the Company, the radio station provide the Company with an opening announcement and a ten second commercial message (or "sponsorship") to be broadcast as part of the report. The Company packages its radio commercial airtime inventory for sale to advertisers on a market-wide, regional or national basis and then broadcasts these sponsorship advertisements among its entire network of affiliates within a particular market on a fair and equal rotation (i.e., each advertiser receives its pro rata share of advertisements on each of the Company's affiliates in the relevant market). The Company believes that its radio sponsorships, which are typically sold in multiple "sponsorship" packages (generally 125, 250 or 500 sponsorships broadcast over four week periods in each market), provide advertisers with an effective and efficient medium to reach a high percentage of the population in its markets. The Company's 500 sponsorship package (which the Company believes is the most frequently purchased package) reaches an average of approximately 70% of the population (age 12 and over) in the Company's MSA markets. The Company's advertisers have the ability to target individual markets and customize their commercial messages by station format. Because most of the sponsorships are read live, advertisers can change their messages on short notice. The Company believes that its radio advertising networks have a high degree of impact because the commercial messages are imbedded in the affiliates' programming and are generally delivered live by the Company's broadcasters during peak drive periods. The Company provides its MetroTV Services to television stations in exchange for thirty second commercial airtime inventory. The amount and day-part placement of the commercial airtime inventory that the Company receives from television stations varies by market and by the type of service provided by the Company. In each of the markets in which it conducts operations, the Company maintains an advertising sales office as part of its operations center. The Company's advertising sales force is able to sell available commercial airtime inventory in any and all of the Company's markets in addition to selling such inventory in each local market. The Company believes this affords its sales representatives an advantage over certain of their competitors. The Company's advertising sales force is comprised of approximately 136 sales representatives. Although the Company typically has two or three sales representatives in an individual market, the number of sales representatives ranges from one to eight depending on the size of the market and the number of potential regional and national advertising clients headquartered in the market. Specialized programs and marketing campaigns, which support nationwide sales and other special forms of advertising, are managed from the Company's headquarters in Houston, Texas. As the Company's business has developed, the Company has sold increasing amounts of its commercial airtime inventory to regional/national advertisers. For the year ended December 31, 1994, approximately 25% of the Company's advertising revenue was attributable to regional/national advertisers, with the balance attributable to local advertisers. For the six months ended June 30, 1996, sales to regional/national advertisers accounted for approximately 50% of total advertising revenues. See "Business -- Advertising and Sales". RECENT DEVELOPMENTS Since July 1994, through strategic acquisitions and new start-ups, the Company has expanded into 16 new markets, comprised of 14 new markets as a result of strategic acquisitions and two new markets as a result of new start-ups. In this period, the Company has made six strategic acquisitions (which accounted for new markets including Salt Lake City, Utah; Phoenix and Tucson, Arizona; Las Vegas, Nevada; St. Louis, Missouri; Milwaukee, Wisconsin; Nashville and Memphis, Tennessee; Louisville, Kentucky; Charlotte, North Carolina; Providence, Rhode Island; Hartford, Danbury and New Haven, Connecticut) and made an additional strategic acquisition to expand its operations in Atlanta, Georgia. The aggregate purchase price for these acquisitions was approximately $20 million. On a pro forma basis, the operations acquired by the Company in this period generated revenues of approximately $15 million and EBITDA of approximately $3 million for the year ended December 31, 1995. See "Business -- Acquisitions". -SALT LAKE CITY ACQUISITION. On January 3, 1996, the Company acquired Aeromedia, Inc. ("Aeromedia"). As of June 30, 1996, the Company (through Aeromedia) provided traffic services to 22 radio station and two television station affiliates in Salt Lake City, Utah, the thirty-fifth largest MSA market. -NEW ENGLAND ACQUISITION. On January 4, 1996, the Company acquired a group of companies (the "Traffic Net Group"). As of June 30, 1996, the Company (through the Traffic Net Group) provided local traffic information services to approximately 70 radio station and three television station affiliates in and around the Hartford, Connecticut area (the forty-first largest MSA market), and Providence, Rhode Island (the thirty-first largest MSA market). In addition, one of the companies in the Traffic Net Group provides weather reporting services to approximately 46 radio station affiliates in Boston, Massachusetts (the tenth largest MSA market), and throughout New England. See "Business -- Acquisitions." -KANSAS CITY AND OMAHA LETTER OF INTENT. In September 1996, the Company signed an agreement to acquire all the assets of ATN for approximately $1.5 million. As of June 30, 1996 ATN provided traffic services to 16 radio station affiliates in Kansas City, Missouri and Omaha, Nebraska. Such acquisition is expected to close in January 1997. -OKLAHOMA CITY, ALBUQUERQUE, OMAHA AND MILWAUKEE LETTER OF INTENT. On July 24, 1996, the Company entered into a letter of intent to acquire all the assets of WIS for approximately $650,000. As of June 30, 1996 WIS provided traffic services to eight radio station affiliates and one television station affiliate in Oklahoma City, 12 radio station affiliates and one television affiliate in Albuquerque, eight radio station affiliates in Omaha and one television station affiliate in Milwaukee. REORGANIZATION From 1978 until the closing of the offering, the business of the Company will have been operated through Metro Traffic Control, Inc., a Maryland corporation; Metro Networks, Ltd., a Texas limited partnership, Metro Video News, Inc., a Texas corporation; Metro Reciprocal, Inc., a Texas corporation and their subsidiaries (collectively, the "Predecessor Companies"). Until the closing of this offering, all of the equity interests in the Predecessor Companies will be owned by David I. Saperstein, the Chairman and Chief Executive Officer of the Company, and certain trusts (the "Trusts") created for the benefit of Mr. Saperstein's children (collectively, the "Saperstein Family"). In May 1996, Metro Networks, Inc. was incorporated in Delaware. Immediately prior to the closing of this offering, the Saperstein Family will establish Metro Networks, Inc. as a holding company and consolidate the issued and outstanding equity interests in the Predecessor Companies, by exchanging such interests for 9,350,607 shares of Metro Networks, Inc.'s Common Stock and 2,549,750 shares of Metro Networks, Inc.'s Series A Convertible Preferred Stock (the "Reorganization"). Metro Networks, Inc. expects to conduct substantially all of its operations through Metro Traffic Control, Inc. See "Business -- Reorganization." The principal executive offices of Metro Networks, Inc. are located at 2800 Post Oak Boulevard, Suite 4000, Houston, Texas 77056. The telephone number at that location is (713) 407-6000. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company.......... 3,600,000 shares Common Stock offered by the Selling Stockholder................................. 3,600,000 shares Common Stock outstanding after the offering.................................... 15,500,357 shares(1) Proposed Nasdaq National Market Symbol....... MTNT Use of Proceeds.............................. To reduce bank indebtedness, to fund growth through pending and potential acquisitions and entry into new markets and for working capital purposes. See "Use of Proceeds." Risk Factors................................. See "Risk Factors" for a discussion of certain considerations relevant to an investment in the Common Stock. </TABLE> - ------------------------ (1) Does not include 1,000,000 shares of Common Stock reserved for issuance upon the exercise of stock options to be granted to employees under the Company's 1996 Incentive Stock Option Plan (the "1996 Plan"). See "Management -- Executive Compensation." Does not include 2,549,750 shares of Series A Convertible Preferred Stock. See "Business -- Reorganization", "Description of Capital Stock" and "Certain Transactions." SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OTHER OPERATING DATA <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, SIX MONTHS ENDED --------------------------------------------- JUNE 30, PRO FORMA ---------------------------- 1993 1994 1995 1995(1) 1995 1996 --------- --------- ---------- ----------- ----------- --------------- (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) <S> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Advertising revenues................. $ 47,905 $ 60,048 $ 72,433 $ 78,102 $ 30,623 $ 50,077 Broadcasting costs................... 27,384 32,239 41,286 43,243 19,816 24,173 Marketing expense.................... 8,848 11,355 14,504 15,980 6,821 10,101 General and administrative expense... 6,994 5,939 7,193 8,869 4,055 4,350 Depreciation and amortization expense............................. 1,814 1,302 3,981 5,920 1,694 2,936 --------- --------- ---------- ----------- ----------- --------------- Total operating costs................ 45,040 50,835 66,964 74,012 32,386 41,560 Income (loss) from operations........ 2,865 9,213 5,469 4,090 (1,763) 8,517 Other expense (income)............. 238 (164) (137) (123) (93) (66) Interest expense................... 145 293 1,260 1,838 421 934 --------- --------- ---------- ----------- ----------- --------------- Income (loss) before tax provision... 2,482 9,084 4,346 2,375 (2,091) 7,649 Income tax provision............... 1,066 2,179 1,036 808 229 573 Income (loss) from continuing operations.......................... 1,416 6,905 3,310 1,567 (2,320) 7,076 --------- --------- ---------- ----------- ----------- --------------- Discontinued operations............ (561) -- -- -- -- -- --------- --------- ---------- ----------- ----------- --------------- Net income (loss).................... $ 855 $ 6,905 $ 3,310 $ 1,567 $ (2,320) $ 7,076 --------- --------- ---------- ----------- ----------- --------------- --------- --------- ---------- ----------- ----------- --------------- Pro forma net income................. $ 2,803 $ 4,933 ---------- --------------- ---------- --------------- Pro forma net income per share(2).... $ .23 $ .41 ---------- --------------- ---------- --------------- Pro forma weighted average shares outstanding(2)...................... 12,251,997 11,962,153 ---------- --------------- ---------- --------------- CASH FLOWS DATA: Net cash provided by (used in) operating activities.............. $ (912) $ 1,253 $ 2,106 $ 3,392 $ 3,298 $ 3,771 Net cash used in investing activities........................ (1,218) (2,387) (11,908) (12,102) (10,442) (6,353) Net cash provided by financing activities........................ $ 1,963 $ 3,625 $ 9,175 $ 9,352 $ 5,824 $ 2,999 <CAPTION> AT DECEMBER 31, AT JUNE 30, 1996 -------------------------------- ---------------------------- 1993 1994 1995 AS ADJUSTED(3) --------- --------- ---------- --------------- ACTUAL ----------- (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Working capital...................... $ 1,862 $ 7,414 $ 7,900 $ 6,843 $ 29,049 Total assets......................... 16,492 27,502 42,437 56,750 73,621 Total debt........................... 2,183 6,650 22,624 31,147 1,847 Common stockholder's equity/partners' capital............................. $ 4,153 $ 9,401 $ 4,478 $ 5,343 $ 51,515 <CAPTION> YEAR ENDED DECEMBER 31, SIX MONTHS ENDED --------------------------------------------- JUNE 30, PRO FORMA ---------------------------- 1993 1994 1995 1995(1) 1995 1996 --------- --------- ---------- ----------- ----------- --------------- (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) <S> <C> <C> <C> <C> <C> <C> OTHER DATA: EBITDA (4)........................... $ 4,679 $ 10,515 $ 9,450 $ 10,010 $ (69) $ 11,453 Predecessor shareholder costs (5).... 2,022 1,734 1,392 2,138 625 726 --------- --------- ---------- ----------- ----------- --------------- Adjusted EBITDA (6).................. 6,701 12,249 10,842 12,148 556 12,179 Capital expenditures................. $ 891 $ 2,712 $ 2,746 $ 2,746 $ 1,236 $ 2,134 Affiliates: Radio............................ 754 914 1,152 1,244 1,125 1,284 Television....................... 59 71 91 96 82 110 Markets: Radio............................ 38 46 54 59 52 60 Television....................... 29 33 38 41 38 47 </TABLE> - ------------------------------ (1) The unaudited pro forma financial data for the year ended December 31, 1995 were prepared assuming that the 1995 Acquisitions (as defined herein), 1996 Acquisitions (as defined herein) and Pending Acquisitions were consummated as of January 1, 1995. In addition, such data give effect to the anticipated Reorganization. The unaudited pro forma financial data give effect to the 1995 Acquisitions, 1996 Acquisitions and Pending Acquisitions under the purchase method of accounting and certain estimated operational and financial effects that are direct results of the acquisitions. See "Business -- Acquisitions, and -- Reorganization" and "Pro Forma Financial Data." (2) Pro forma weighted average shares outstanding and pro forma net income per common share are calculated assuming the shares issued in conjunction with the Reorganization were outstanding for all periods presented, adjusted for excess distributions and assuming the Predecessor Companies were taxed at rates expected to apply subsequent to the Reorganization. Metro Networks, Inc. has not declared or paid any dividends on its Common Stock. However, the Predeccesor Companies have made cash distributions to their shareholders from time to time. See "Business -- Reorganization." (3) Assumes an initial public offering price of $14.00 per share (the midpoint of the range of the initial public offering prices set forth on the cover page of this Prospectus) and estimated net proceeds to the Company from the offering of $46.2 million. See "Use of Proceeds." (4) EBITDA is earnings before other expense (income), interest expense, taxes, depreciation and amortization. EBITDA does not represent cash flows as defined by generally accepted accounting principles and does not necessarily indicate that cash flows are sufficient to fund all of the Company's cash needs. EBITDA should not be considered in isolation or as a substitute for net income, cash from operating activities or other measures of liquidity determined in accordance with generally accepted accounting principles. (5) Predecessor shareholder costs consist of the expenses incurred by the Predecessor Companies on behalf of their shareholders, which expenses will not be incurred by the Company after the closing of this offering. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Certain Transactions."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001016831_document_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001016831_document_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and consolidated financial statements and notes thereto appearing elsewhere in this Prospectus. The Common Stock offered hereby involves a high degree of risk. See "Risk Factors."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001016919_cross_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001016919_cross_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FACTORS SET FORTH HEREIN UNDER THE CAPTION "RISK FACTORS" AND ARE URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY. REFERENCES TO "CROSS-CONTINENT" OR THE "COMPANY" ARE TO CROSS-CONTINENT AUTO RETAILERS, INC. AND, UNLESS THE CONTEXT INDICATES OTHERWISE, ITS CONSOLIDATED SUBSIDIARIES AND THEIR RESPECTIVE PREDECESSORS. REFERENCES IN THIS PROSPECTUS TO THE "COMMON STOCK" MEAN THE COMMON STOCK, PAR VALUE $.01 PER SHARE, OF THE COMPANY; REFERENCES TO THE "OFFERING" MEAN THE OFFERING OF COMMON STOCK MADE HEREBY; AND REFERENCES TO "SHARES" MEAN THE SHARES OF COMMON STOCK OFFERED HEREBY. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED. THE COMPANY The Company owns and operates six franchised automobile dealerships in the Amarillo, Texas and Oklahoma City, Oklahoma markets. Through these dealerships, the Company sells new and used cars and light trucks, arranges related financing and insurance, sells replacement parts and provides vehicle maintenance and repair services. The Company's founder and Chief Executive Officer, Bill A. Gilliland, has managed automobile dealerships since 1966 and acquired the Company's first dealership, Quality Nissan, Inc. in Amarillo, in 1982. The Company continued its growth in the Amarillo area by acquiring three Chevrolet dealerships, two of which have been in continuous operation (under various owners) since the 1920s. The Company is the exclusive Chevrolet and Nissan dealer in Amarillo. The Company led the Amarillo market in vehicle unit sales in 1995, accounting for approximately 36% of new vehicle unit sales and 25% of used vehicle unit sales. In 1995, the Company entered the Oklahoma City market through the acquisition of a Nissan dealership in February and a Dodge dealership in December. In June 1996, the Company entered into an agreement to purchase Lynn Hickey Dodge, Inc. ("Hickey Dodge"), which is located in the Oklahoma City market and is one of the largest Dodge dealerships in the United States. With this acquisition, the Company believes that, based on pro forma revenue, it would have been one of the 50 largest dealer groups out of more than 15,000 dealer groups nationwide in 1995. The Company has demonstrated historical success in acquiring and integrating dealerships, and acquisitions remain an important element of the Company's growth strategy. According to AUTOMOTIVE NEWS the number of franchised dealerships has declined from 36,336 in 1960 to 22,288 in 1996. Further consolidation of automobile dealers is anticipated due to a number of factors, including increased capital requirements for dealerships, the fact that many dealerships are owned by individuals nearing retirement age and the desire of certain automakers to strengthen their brand identity by consolidating their franchised dealerships. The Company believes that an opportunity exists for dealership groups with significant equity capital to purchase additional franchises and that being able to offer prospective sellers tax-advantaged transactions through the use of publicly traded stock will, in certain instances, make the Company a more attractive acquiror. As a result of the Company's business strategy and growth through acquisitions, including the full year effect of the dealership acquired in December 1995, the Company's sales increased from $74.9 million in 1991 to $294.7 million in 1995. Giving effect to the pending acquisition of Hickey Dodge and including the full year effect of the dealership acquired in December 1995, the Company's pro forma 1995 sales would have been $416.9 million. The Company believes that its business strategy and operations have also enabled it to achieve a level of profitability superior to the industry average. In 1995, the Company's actual gross profit margin was 15.9%, compared to the industry average of 12.9%. OPERATING STRATEGY The Company's strategy includes: EFFECTIVELY SERVING ITS TARGET CUSTOMERS. The Company's existing dealerships, which together offer the complete lines of Chevrolet, Nissan and Dodge vehicles, focus primarily on middle-income buyers seeking moderately priced vehicles that can be financed with relatively affordable monthly payments. The Company believes that working closely with its customers to identify appropriate vehicles and offering suitable financing and credit insurance products enhances the Company's overall profitability by increasing the percentage of vehicle purchases financed through its dealerships and by reducing the subsequent default rate on such financing contracts. In 1995, the Company arranged financing for approximately 76% of its new vehicle sales and 83% of its used vehicle sales, as compared to 42% and 51%, respectively, for the average automobile dealership in the United States. OPERATING MULTIPLE DEALERSHIPS IN SELECTED MARKETS. By operating multiple dealerships within individual markets, the Company seeks to become a leading automotive dealer in each market that it serves. This strategy enables the Company to achieve economies of scale in advertising, inventory management, management information systems and corporate overhead. In 1995, the Company was the market share leader in the Amarillo vicinity, accounting for approximately 28% of the new car market and 46% of the new truck market. In Oklahoma City, the combined market shares in 1995 for the Company's two existing Oklahoma City dealerships were approximately 2% and 7% of new car and truck sales, respectively. The Company estimates that, including Hickey Dodge, the Company's combined market shares in Oklahoma City would have been 4% of the new car market and 15% of the new truck market in 1995. MAINTAINING DISCIPLINED INVENTORY MANAGEMENT. The Company believes that maintaining a vehicle mix that matches market demand is critical to dealership profitability. The Company's policy is to maintain a 60-day supply of new vehicles and a 39-day supply of used vehicles. If a new vehicle remains in inventory for 120 days, or a used vehicle for 60 days, the Company typically disposes of the vehicle by selling it to another dealer or wholesaler. The Company believes that this policy enhances profitability by increasing inventory turnover and reducing carrying costs. If the Company cannot obtain a sufficient supply of popular models from the manufacturers, it purchases the needed vehicles from other franchised dealers throughout the United States. For example, because Chevrolet trucks are popular in Amarillo, the Company purchases trucks from Chevrolet dealers in other cities to supplement its allocation of trucks from Chevrolet. In managing its used vehicle inventory, the Company attempts to "mirror the market" by tracking new and used vehicle sales within its region and maintaining an inventory mix that matches consumer demand. EMPLOYING PROFIT-BASED MANAGEMENT COMPENSATION. The Company uses a management compensation system that differentiates it from most other automobile dealerships. The Company believes that at many other auto dealerships the heads of each sales department (new vehicles, used vehicles and finance and insurance ("F&I")) are compensated based on the profitability or sales volumes of their own departments. This method of compensation does not encourage cooperation among departments and can affect overall profitability of the dealership. At Cross-Continent, each dealership's general manager and sales managers are trained in F&I analysis and receive bonuses based on the profitability of overall vehicle sales and related F&I income. The Company believes that this compensation system promotes teamwork and encourages each management team to maximize overall profitability. UTILIZING TECHNOLOGY THROUGHOUT OPERATIONS. The Company believes that it has achieved a competitive advantage in its markets by integrating computer-based systems into all aspects of its operations. The Company uses computer-based technology to monitor each dealership's gross profit, permitting senior management to gauge each dealership's daily and monthly gross margin "pace" and to quickly identify areas requiring additional focus. Sales managers also utilize a computer system to design for each customer an affordable financing and insurance package that maximizes the Company's total profit on each transaction. Computer technology is also an integral part of the inventory management system for new and used vehicles and vehicle parts. ACHIEVING HIGH LEVELS OF CUSTOMER SATISFACTION. Customer satisfaction and a dealer's reputation for fairness are key competitive factors and are crucial for establishing long-term customer loyalty. The Company's sales process is intended to satisfy customers by providing high-quality vehicles that customers can afford. A customer's experience with the parts and service departments at the Company's dealerships can also positively influence overall satisfaction. The Company strives to train its service managers as professionals, employs state-of-the-art service equipment, maintains a computer-managed inventory of replacement parts, and provides clean service and waiting areas to enhance customers' post-sale experience. GROWTH STRATEGY The Company intends to expand its business by acquiring additional dealerships and seeks to improve their profitability through implementation of the Company's business strategies. The Company believes that its management team has considerable experience in evaluating potential acquisition candidates and determining whether a particular dealership can be successfully integrated into the Company's existing operations. Based on trends affecting automobile dealerships, the Company also believes that an increasing number of acquisition opportunities will become available to the Company. Although it plans to evaluate acquisition candidates on a case-by-case basis, the Company intends to make acquisitions primarily in selected cities in the Western and Southern regions of the United States where there are fewer dealerships relative to the size of the population than the national average. Although it may pursue other acquisition opportunities, as part of its strategy to acquire a leading market share in a given area, the Company intends to focus its efforts on dealer groups that own multiple franchises in a single city, as well as on large, single-dealer franchises possessing significant market share. Other criteria for evaluating potential acquisitions will include a dealership or dealer group's current profitability, the quality of its management team, its local reputation with customers and its location along an interstate highway or principal thoroughfare. Upon completion of each acquisition, the Company plans to implement its sales methods and philosophy, computer-supported management system and profit-based compensation plan in an effort to enhance the acquired dealership's overall profitability. Cross-Continent intends to focus initially on any underperforming departments within the acquired entity that the Company believes may yield the most rapid marginal improvements in operating results. The Company anticipates that it will take two to three years to integrate an acquired dealership into the Company's operations and realize the full benefit of the Company's strategies and systems. There can be no assurance, however, that the profitability of any acquired dealership will equal that achieved to date by the Company's existing dealerships. See "Risk Factors -- Risks Associated with Expansion." THE OFFERING <TABLE> <S> <C> Common Stock offered.............. 3,675,000 shares (1) Common Stock to be outstanding after the Offering.............. 13,800,000 shares (2) Use of proceeds................... The net proceeds of the Offering will be used to finance the pending acquisition of Hickey Dodge and future acquisitions, repay debt and provide cash for working capital and general corporate purposes. New York Stock Exchange symbol.... XC </TABLE> - --------- (1) Does not include up to an aggregate of 551,250 Shares that may be sold by the Selling Stockholders pursuant to the Underwriters' over-allotment option. See "Principal Stockholders" and "Underwriters." (2) Excludes (i) 1,380,000 shares of Common Stock reserved for future issuance under the Company's stock option plan, including an option to purchase 7,692 shares of Common Stock that will be granted immediately before the completion of the Offering with an exercise price equal to the initial public offering price, and (ii) 130,308 shares of Common Stock issuable upon the exercise of other options that will have an exercise price equal to the initial public offering price. See "Management -- Stock Option Plan" and "Certain Transactions." SUMMARY COMBINED FINANCIAL DATA The following summary historical and pro forma combined financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Combined Financial Statements of the Company and the related notes and "Pro Forma Combined Financial Data" included elsewhere in this Prospectus. <TABLE> <CAPTION> SIX MONTHS ENDED FISCAL YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------------------------------------------ -------------------- PRO ACTUAL FORMA (1) ACTUAL ----------------------------------------------------- ----------- -------------------- 1991 1992 1993 1994 1995 1995 1995 1996 --------- --------- --------- --------- --------- ----------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenues.................. $74,925 $ 125,183 $ 165,364 $ 181,768 $ 236,194 $416,943 $112,344 $141,241 Gross profit.................... 10,839 18,502 25,738 28,322 37,492 60,758 17,874 21,320 Operating income (2)(3)......... 2,355 3,369 5,016 5,683 6,593 12,634 3,290 3,977(4) Net income (3).................. 849 956 1,995 2,382 2,195 5,871 1,105 1,029 Net income per share (5)........ $0.43 Weighted average shares outstanding (5)................ 13,800 <CAPTION> PRO FORMA (1) ----------- 1996 ----------- <S> <C> STATEMENT OF OPERATIONS DATA: Total revenues.................. $211,919 Gross profit.................... 32,160 Operating income (2)(3)......... 6,989 (4) Net income (3).................. 3,193 Net income per share (5)........ $0.23 Weighted average shares outstanding (5)................ 13,800 </TABLE> <TABLE> <CAPTION> AS OF JUNE 30, 1996 AS OF ---------------------- DECEMBER 31, PRO 1995 ACTUAL FORMA(1) ------------- --------- ----------- (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Working capital................................................................ $ 536 $ 2,044 $ 31,557 Total assets................................................................... 83,407 80,888 109,993 Long-term debt................................................................. 11,859 11,131 11,131 Stockholders' equity........................................................... 7,101 9,479 52,260 </TABLE> - ------------ (1) For information regarding the pro forma adjustments made to the Company's historical financial data, see "Pro Forma Combined Financial Data." (2) Operating income is defined as income before income taxes, interest income and interest expense. (3) During the six months ended June 30, 1996, the Company recognized a non-cash expense of approximately $1.1 million relating to employee stock compensation in connection with the issuance of 303,750 shares of Common Stock issued for $250,000 to Ezra P. Mager, the Company's Vice Chairman, pursuant to an agreement dated April 1, 1996 (the "Executive Purchase"). During the six months ended June 30, 1996, the Company also recognized a compensation expense of $600,000 relating to a bonus paid to Emmett M. Rice, Jr., the Company's Senior Vice President and Chief Operating Officer (the "Executive Bonus") in connection with the Reorganization (as defined below). Excluding the non-cash expense and compensation expense, actual operating income and net income for the six months ended June 30, 1996 would have approximated $5.7 million and $2.5 million, respectively. (4) Prior to 1996 the Company paid the Gilliland Group Family Partnership ("GGFP") an annual management fee for executive management services. This fee was generally based upon profits earned by the Company and the level of management services rendered by GGFP. As of January 1, 1996 the Company no longer pays management fees to GGFP. Management fees for the year ended December 31, 1995, and for the six months ended June 30, 1995 approximated $4.3 million and $2.2 million, respectively. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Certain Transactions" and Note 17 to the Notes to the Combined Financial Statements. (5) Historical earnings per share are not presented, as the historical capital structure of the Company prior to the Reorganization (as defined below) and the Offering is not comparable with the capital structure that will exist subsequent to these events. Pro forma earnings per share are based upon the assumption that 13,800,000 shares of Common Stock are outstanding for each period. This amount represents the total number of Shares to be issued in the Offering (3,675,000), the number of shares of Common Stock owned by the Company's stockholders immediately following the Reorganization (9,821,250) and the number of shares of Common Stock (303,750) issued in connection with the Executive Purchase. See "Certain Transactions," "Principal Stockholders" and Note 15 to the Notes to Combined Financial Statements. THE COMPANY WAS FORMED IN MAY 1996 AND IN JUNE 1996 ACQUIRED (THE "REORGANIZATION") ALL OF THE CAPITAL STOCK OF MIDWAY CHEVROLET, INC., PLAINS CHEVROLET, INC., WESTGATE CHEVROLET, INC., QUALITY NISSAN, INC., PERFORMANCE NISSAN, INC., PERFORMANCE DODGE, INC., WORKING MAN'S CREDIT PLAN, INC. AND ALLIED 2000 COLLISION CENTER, INC. ALL OF THESE SUBSIDIARIES WERE CONTROLLED BY MR. GILLILAND PRIOR TO THE REORGANIZATION. MR. GILLILAND WILL REMAIN THE PRINCIPAL STOCKHOLDER OF THE COMPANY IMMEDIATELY FOLLOWING THE OFFERING. SEE "CERTAIN TRANSACTIONS" AND "PRINCIPAL STOCKHOLDERS."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001016931_afsala_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001016931_afsala_prospectus_summary.txt
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+SUMMARY The following summary does not purport to be complete, and is qualified in its entirety by more detailed information and the Financial Statements of the Bank and the Notes thereto appearing elsewhere in this prospectus. AFSALA Bancorp, Inc.: The Company was organized under Delaware law in June 1996 at the direction of the Board of Directors of the Bank to acquire all of the capital stock that the Bank will issue upon its conversion from the mutual to stock form of ownership. The Company has not engaged in any significant business to date. Management believes that the holding company structure will provide flexibility for possible diversification or expansion of business activities, although there are no current arrangements, understandings, or agreements regarding any such opportunities. Subject to limitations on repurchases, the holding company structure will also enable the Company to repurchase its own stock without adverse tax consequences. See "AFSALA Bancorp, Inc." and "Business of the Company." Amsterdam Federal Bank: The Bank, a federally chartered mutual savings and loan association, operates a traditional savings and loan association business, attracting deposit accounts from the general public and using those deposits, together with other funds, primarily to originate and invest in loans secured by single-family residential real estate. At March 31, 1996, the Bank had total assets of $133.0 million, total deposits of $121.4 million, and equity of $8.2 million. See "Amsterdam Federal Savings and Loan Association" and "Business of the Bank." The Plan and Approval by Members: The Board of Directors of the Bank unanimously adopted the Plan on April 26, 1996. Pursuant to the Plan, the Bank will convert from a federal mutual savings and loan association into a federal stock savings bank and will become a wholly owned subsidiary of the Company which will issue Common Stock in the Offerings. The Plan must be approved by the affirmative vote of the majority of total votes eligible to be cast by the Bank's members. See "The Conversion." The Offerings and the Purchase: Between 935,000 and 1,265,000 shares of Common Stock Price: are being offered at $10.00 per share in the Offerings. The maximum number of shares sold in the Offerings may be increased to up to 1,454,750 shares without a resolicitation of subscribers in the event of an increase in the pro forma market value of the Bank to an amount not more than 15% above the maximum of the EVR. See "The Conversion - Stock Pricing" and "- Number of Shares to be Issued in the Conversion." Distribution of Common Stock The shares of Common Stock will first be and Purchase Priorities: offered in the Subscription Offering according to the following priorities: (i) Eligible Account Holders; (ii) the ESOP; (iii) Supplemental Eligible RISK FACTORS Before investing in shares of the Common Stock offered hereby, prospective investors should carefully consider the matters presented below in addition to those discussed elsewhere in this prospectus. Potential Impact of Changes in Interest Rates The Bank's profitability, like that of most financial institutions, is dependent to a large extent upon its net interest income, which is the difference between its interest income on interest earning assets, such as loans and securities, and its interest expense on interest bearing liabilities, such as deposits and other borrowings. Generally, during periods of increasing interest rates, the Bank's interest rate sensitive liabilities would reprice faster than its interest rate sensitive assets, causing a decline in the Bank's interest rate spread and margin. This would result in an increase in the Bank's cost of funds that would not be immediately offset by an increase in its yield on earning assets. An increase in the cost of funds without an equivalent increase in the yield on interest earning assets would tend to reduce net interest income. As a result of the increase in interest rates during these periods, the Bank's net interest rate spread decreased between the fiscal years ended September 30, 1994 and September 30, 1995 from 2.89% to 2.78% and between the six months ended March 31, 1995 and March 31, 1996 from 2.97% to 2.55%. For additional discussion of this interest rate risk, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Net Portfolio Value." For additional information on the Bank's management of its interest bearing liabilities and interest earning assets, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Asset/Liability Management." Disparity in Insurance Premiums and Special Assessment Deposits of the Bank are currently insured by the SAIF of the FDIC. As a member of the SAIF, the Bank pays an insurance premium to the FDIC equal to 0.23% of its total deposits. The FDIC also maintains another insurance fund, the Bank Insurance Fund ("BIF"), which primarily insures commercial bank deposits. Effective September 30, 1995, the FDIC lowered the insurance premium for members of the BIF to a range of between 0.04% and 0.31% of deposits, with the result that most commercial banks would pay the lowest rate of 0.04%. However, effective January 1, 1996, the annual insurance premium for most BIF members was lowered to $2,000. These reductions in insurance premiums for BIF members have placed SAIF members at a competitive disadvantage to BIF members and, for the reasons set forth below, have had an adverse effect on the results of operations and financial condition of the Bank. The disparity in insurance premiums between those required for the Bank and BIF members could allow BIF members to attract and retain deposits at higher interest rates and at a lower effective cost than the Bank. This could put competitive pressure on the Bank to raise its interest rates paid on deposits, thus increasing its cost of funds and possibly reducing net interest income. Although the Bank has other sources of funds, these other sources may have higher costs than those of deposits. See "Regulation Insurance of Deposit Accounts."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001016933_r-g_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001016933_r-g_prospectus_summary.txt
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+PROSPECTUS SUMMARY THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE ACCOMPANYING NOTES, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITER'S OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS." UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES HEREIN TO THE COMPANY INCLUDE THE BANK AND R&G MORTGAGE, EACH AS DEFINED BELOW. THE COMPANY R&G FINANCIAL. R&G Financial, which had $868.3 million in assets at March 31, 1996, is the newly established holding company for R&G Mortgage Corporation, a Puerto Rico mortgage banking company ("R&G Mortgage"), and R-G Premier Bank of Puerto Rico, a Puerto Rico commercial bank (the "Bank"). The Company competes for business in Puerto Rico by providing a wide range of financial services to residents of all of Puerto Rico's major cities through branch offices and mortgage banking facilities at 17 locations. Puerto Rico, the fourth largest of the Caribbean Islands, is a commonwealth of the United States and is approximately 100 miles long and 35 miles wide. The population of Puerto Rico as of June 30, 1995 was estimated at approximately 3.7 million. The operations of both R&G Mortgage and the Bank have expanded substantially during the 1990's, due in large part to R&G Mortgage's emergence as the second largest originator of loans secured by single-family residential properties in Puerto Rico. During the two year period ended March 31, 1996, R&G Mortgage originated 20% of all single-family residential loans originated in Puerto Rico, which has resulted in significant growth in its servicing portfolio as well as facilitated rapid expansion of the Bank's franchise and operations. R&G Mortgage's servicing portfolio has increased by 50.3% since December 31, 1991 and, at March 31, 1996, R&G Mortgage serviced approximately 49,000 accounts with an aggregate loan balance of $2.4 billion. The Bank's asset size, which amounted to $653.9 million at March 31, 1996, has increased 12 fold since R&G Mortgage became affiliated with the Bank in February 1990, while the branch office network has increased from two to 14 offices. Management estimates that at March 31, 1996, 23.3% of R&G Mortgage's customers have established a banking relationship with the Bank. R&G Financial on a consolidated basis had net income of $2.9 million and $10.4 million for the three months ended March 31, 1996 and the year ended December 31, 1995, respectively. Mr. Victor J. Galan, the Chairman of the Board, Chief Executive Officer and controlling shareholder of the Company, originally organized R&G Mortgage in 1972. In February 1990, R&G Mortgage acquired a 74.7% interest in a two branch federal savings and loan association with total assets of $52.9 million, which was re-named R&G Federal Savings Bank. Recognizing the complementary operational aspects and cross selling opportunities that are inherent in operating both a mortgage bank and banking institution, during 1990 Mr. Galan successfully integrated both the Bank's and R&G Mortgage's operations, which structure has since been emulated in Puerto Rico. Embarking on a retail branch expansion strategy, the Bank in 1993 acquired a two branch savings and loan association with total assets of $78.6 million and, in June 1995, acquired from a commercial bank $77.2 million in deposits and, after consolidation, six branch offices. In November 1994, the Bank converted to a Puerto Rico-chartered commercial bank and took its present name. In connection with the reorganization of R&G Mortgage and the Bank into the bank holding company form of organization, the Company in July 1996 acquired the approximately 88.1% ownership interest of the Bank held by Mr. Galan. During the quarter following completion of the Offering, the Company anticipates that it will acquire the approximately 11.9% ownership interest in the Bank which, as of March 31, 1996, was held by 205 other stockholders (the "Minority Bank Stockholders") in an exchange transaction in which, in consideration of the acquisition of such interests, the Company will provide such stockholders with additional Class B Shares. See "Capitalization." BUSINESS STRATEGY. The Company has generally sought to achieve long-term financial strength and profitability by increasing the amount and stability of its net interest income and non-interest income. The Company has sought to implement this strategy by (i) establishing and emphasizing the growth of its mortgage banking activities, including growing its loan servicing operation; (ii) expanding its retail banking franchise in order to achieve increased market presence and to increase core deposits; (iii) enhancing the Company's net interest income by increasing the Company's loans held for investment, particularly single-family residential loans; (iv) developing new business relationships through an increased emphasis on commercial real estate and commercial business lending; (v) diversifying the Company's retail products and services, including an increase in consumer loan originations (such as credit cards); (vi) meeting the banking needs of its customers through, among other things, the offering of trust and investment services; and (vii) controlled growth and the pursuit of a variety of acquisition opportunities when appropriate. The Company attempts to control its overall operating expenses notwithstanding the Company's recent growth and expansion activities. R&G MORTGAGE. R&G Mortgage is engaged primarily in the business of originating first mortgage loans secured by single-family residential properties which are either insured by the Federal Housing Administration ("FHA") or guaranteed by the Veterans' Administration ("VA") and originating second mortgage loans which are neither secured nor guaranteed. R&G Mortgage also originates conforming conventional single-family residential loans which are neither insured by the FHA nor guaranteed by the VA. Pursuant to agreements entered into between R&G Mortgage and the Bank, R&G Mortgage also originates for the Bank for portfolio retention non-conforming single-family residential conventional loans and consumer loans, most of which are secured by real estate. The Bank retains the non-conforming conventional single-family residential loans because these loans generally do not satisfy resale guidelines of purchasers in the secondary mortgage market, primarily because of size or other underwriting technicalities at the time of origination. Jumbo loans may be packaged into collateralized mortgage obligations ("CMOs") and sold while loans with underwriting technicalities may be cured through payment experience and subsequently sold. During the three months ended March 31, 1996 and the years ended December 31, 1995, 1994 and 1993, R&G Mortgage originated a total of $100.2 million, $322.7 million, $488.1 million and $834.7 million of loans, respectively. These aggregate originations include loans originated by R&G Mortgage directly for the Bank of $56.9 million, $156.3 million, $142.6 million and $180.8 million during such respective periods, or 56.8%, 48.4%, 29.2% and 21.7%, respectively, of total originations. R&G Mortgage pools FHA/VA loans into mortgage-backed securities which are guaranteed by the Government National Mortgage Association ("GNMA"), which securities are sold to securities broker dealers and other investors. Conventional loans may either be sold directly to agencies such as the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC") or to private investors, or may be pooled into FNMA- or FHLMC-backed mortgage-backed securities which are generally sold to investors. During the three months ended March 31, 1996 and the years ended December 31, 1995, 1994 and 1993, R&G Mortgage sold $37.6 million, $232.4 million, $368.1 million and $604.1 million of loans, respectively, which includes loans securitized and sold but does not include loans originated for the Bank. R&G Mortgage generally retains the servicing function with respect to the loans which have been securitized and sold. R&G Mortgage is subject to regulation and examination by the FHA, FNMA, FHLMC, GNMA, VA, Department of Housing and Urban Development ("HUD") and the Puerto Rico Office of the Commissioner of Financial Institutions ("OCFI"). For the three months ended March 31, 1996 and the year ended December 31, 1995, R&G Mortgage on an unconsolidated basis (which does not reflect certain items of revenue and expense which are eliminated upon consolidation) had net income of $1.4 million and $6.7 million, respectively. THE BANK. The Bank's principal business consists of attracting deposits from the general public and tax-advantaged funds from eligible Puerto Rico corporations and using such deposits, together with funds obtained from other sources, to originate (through R&G Mortgage) and purchase loans secured primarily by residential real estate in Puerto Rico, and to purchase mortgage-backed and other securities. To a lesser extent but with increasing emphasis over the past few years, the Bank also originates a variety of consumer loans, commercial business loans and loans secured by commercial real estate. The Bank offers trust services through its trust department ("Trust Department"). Total loan originations by the Bank during the three months ended March 31, 1996 and the years ended December 31, 1995, 1994 and 1993 amounted to $30.2 million, $121.7 million, $57.6 million and $40.7 million, respectively. The Bank's deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") and it is regulated and examined by the FDIC as well as by the OCFI. At March 31, 1996, there were a total of 20 financial institutions (commercial banks and savings institutions) headquartered in Puerto Rico and the Bank had a total of $541.1 million or 2.35% of the total $23 billion of deposits in Puerto Rico. For the three months ended March 31, 1996 and the year ended December 31, 1995, the Bank on an unconsolidated basis (which does not reflect certain items of revenue and expense which are eliminated upon consolidation) had net income of $1.5 million and $6.2 million, respectively. THE OFFERING <TABLE> <S> <C> SHARES OFFERED BY THE COMPANY IN THE OFFERING: 1,933,333 Class B Shares (2,233,333 Class B Shares, assuming full exercise of the over-allotment option.) See "Underwriting." SHARES OFFERED BY THE SELLING STOCKHOLDER IN THE OFFERING: The Company's Chairman of the Board and Chief Executive Officer, who is the Selling Stockholder, in connection with the Offering will convert 66,667 of his Class A Shares into an equal number of Class B Shares, all of which Class B Shares will be sold in the Offering. See "Underwriting." COMMON STOCK TO BE OUTSTANDING AFTER THE OFFERING: 5,122,377 Class A Shares and 2,000,000 Class B Shares (2,300,000 Class B Shares, assuming full exercise of the over-allotment option). USE OF PROCEEDS: Based upon the sale of the Class B Shares by the Company at an assumed Price to Public of $15.00, approximately $ of the net proceeds will be used to enhance the capital base of the Bank. The additional capital will support further expansion of the Bank, including the acquisition of branch offices or financial institutions in Puerto Rico, when or if such opportunities arise in the future. There can be no assurance that the Bank will be successful in making any acquisitions in the future on terms favorable to the Bank. The Company will use $10.0 million of net proceeds to acquire from R&G Mortgage the $10.0 million Series A Preferred Stock of the Bank presently held by R&G Mortgage. The Company proposes to retain the remaining $ of net proceeds for general corporate purposes. The Company will not receive any of the proceeds from the sale of the Class B Shares offered by the Selling Stockholder. See "Use of Proceeds." DIVIDENDS: The Company expects to initiate a cash dividend policy and to pay a dividend on the Common Stock beginning with the first full quarter following the Offering. However, no decision has been made as to the amount or timing of such dividends, if any. Declarations of dividends by the Board of Directors will depend upon a number of factors including the ability to </TABLE> <TABLE> <S> <C> receive dividends from the Bank and/or R&G Mortgage. See "Use of Proceeds" and "Dividends and Market for Class B Shares." NASDAQ SYMBOL: The Class B Shares have been conditionally approved for quotation on the Nasdaq Stock Market under the symbol "RGFC." See "Dividends and Market for Class B Shares."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001016942_uih-asia_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001016942_uih-asia_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements appearing elsewhere in this Prospectus. Unless the context otherwise requires, "UAP" refers to UIH Asia/Pacific Communications, Inc., an indirect majority-owned subsidiary of United International Holdings, Inc. ("UIH"), and the "Company" refers collectively to UAP, its subsidiaries and non-majority owned affiliates and their respective predecessors. UAP owns, through directly and indirectly held interests, a combined 100% economic interest in two Australian companies, CTV Pty Ltd. ("CTV") and STV Pty Ltd. ("STV"), which are together operating, and are referred to herein, as "Austar." See "Corporate Organizational Structure-- Austar." Unless the context requires otherwise, "UIH" includes UIH and all of its subsidiaries other than UAP and its subsidiaries. All references to "$" or "dollars" are to U.S. dollars, unless otherwise indicated. For information regarding foreign currency amounts translated to U.S. dollars, see "Exchange Rate Data." THE COMPANY OVERVIEW The Company is a leading provider of multi-channel television services in Australasia and the Asia/Pacific region. Through its Australian operating company Austar, the Company is the largest provider of multi-channel television services in regional Australia, where it operates wireless cable ("MMDS") systems and is marketing a direct-to-home ("DTH") service in franchise areas encompassing approximately 1.5 million television homes, or 25% of the total Australian market. In addition, the Company, through its New Zealand operating company, Saturn Communications Limited ("Saturn"), is constructing a wireline cable and telephony system in Wellington, New Zealand, a market representing approximately 135,000 television homes. The Company's Philippine joint venture, Telemondial Holdings, Inc. (d.b.a. "Sun Cable"), is the third largest cable television operator in the Philippines with wireline cable television systems in 15 markets that have approximately 575,000 television homes. The Company's other assets include a 25% interest in XYZ Entertainment Pty Ltd. ("XYZ"), a programming company that provides four channels to the Australian multi-channel television market as part of the "Galaxy" package, the most widely distributed programming package in Australia and the core component of Austar's programming offering, and a 90% economic interest in Telefenua S.A. ("Telefenua"), the only provider of multi-channel television services in Tahiti, with an MMDS system in a market with 31,000 television homes. The Company believes that it is well-positioned to capitalize on the rapidly increasing demand for multi-channel television and telephony services in Australasia and the Asia/Pacific region. As of October 31, 1996, the Company had invested over $215 million in its networks and operating infrastructure and had launched service in each of its markets. The Company has experienced rapid growth in its network coverage and subscriber base during 1996. As of October 31, 1996 the Company's multi-channel television operating systems had an aggregate of approximately 1.6 million television homes serviceable and approximately 115,300 subscribers, as compared with approximately 296,200 television homes serviceable and approximately 29,300 subscribers as of December 31, 1995 (with a substantial majority of such growth resulting from Austar's expansion). During this same ten-month period, programming subscribers of XYZ increased from approximately 65,000 to approximately 269,000. While the Company expects that a substantial portion of its growth will come from the continued development of Austar, the Company is also anticipating significant growth by its other operating companies. OPERATIONS AUSTAR (AUSTRALIA) Austar is the largest provider of multi-channel television services in regional Australia (areas outside Australia's six largest cities). Austar initiated widespread deployment of its services in early 1996 and as of October 31, 1996, had launched MMDS service in 27 metropolitan markets containing approximately 700,000 homes and had initiated the marketing of DTH services in non-metropolitan markets containing approximately 740,000 homes. These markets represent over 93% of Austar's 1.5 million franchise television homes, the remaining 100,000 of which will be serviceable by early 1997. Austar's marketing efforts have kept pace with the rapid roll-out of its network services during 1996. As of October 31, 1996, Austar had 75,300 subscribers with a backlog of 13,900 customers scheduled for installation. In addition, subscriber growth has accelerated in recent periods, as demonstrated by October's results in which Austar generated 23,800 subscription sales orders and had a net gain of over 15,000 subscribers, with the difference primarily attributable to installation backlog. Austar is continuing to market its services aggressively and expects to continue rapidly building its subscriber base. Austar is benefitting from several characteristics which are supporting its marketing success and which management believes give it a competitive advantage in its markets: . OPERATIONAL INFRASTRUCTURE IN PLACE. In addition to having launched service to over 93% of its franchise areas, Austar has also developed the operational infrastructure necessary to continue its rapid growth. Austar's early investment of approximately $149 million in operating and capital expenditures from inception through October 31, 1996 has established it currently as the only multi-channel television provider in substantially all of its franchise areas. Austar has developed a comprehensive marketing organization consisting of a 200 person direct salesforce and over 200 national customer service and telemarketing personnel. The direct salesforce, which operates out of local offices in the majority of Austar's metropolitan markets, is currently generating sales of approximately 2,250 subscriptions per week. The salesforce at Austar's state-of-the-art national customer operations center ("NCOC") is currently generating sales of approximately 3,000 additional subscriptions per week from inbound and outbound calls. This salesforce is supported by an integrated marketing program of television, radio and print advertising. The NCOC is also the center of Austar's customer service organization, processing all incoming information, installation and service requests. The NCOC has sufficient capacity to service Austar's customer service needs for the forseeable future. Austar has a total of approximately 600 employees, most of whom are located in local offices and regional operating centers, and has contracted with a number of local service companies which employ an aggregate of approximately 400 technicians to install and maintain subscriber equipment in each of its markets. Management believes that this infrastructure positions Austar to service its markets efficiently and provides it with significant competitive advantages. . REGIONAL FOCUS; CLASSIC MARKETS. Austar has strategically focused on the currently less competitive regional markets that are located outside of Australia's largest cities and encompass approximately 25% of the total Australian television market. These areas are "classic" multi-channel television markets with attractive demographics and limited television and alternative entertainment options. Approximately one-half of its service area (approximately 800,000 television homes) are in metropolitan markets with sufficient housing densities to support the construction of MMDS systems. Austar owns virtually all of the available MMDS licenses in each of these markets. The Company believes these markets generally do not have the size and/or densities to support the construction of a competitive wireline cable system. In Austar's non-metropolitan markets (approximately 740,000 serviceable television homes), where management believes household densities do not support the deployment of MMDS networks, Austar is marketing a DTH service on an exclusive basis. Austar is currently the only provider of multi-channel television services in substantially all of its service area. See "Risk Factors--Competitive Industry." . APPROPRIATE TECHNOLOGY. Austar believes that its utilization of wireless technologies in the build-out of its franchise area has afforded it with several economic and strategic advantages. The rapid deployment of MMDS networks in its metropolitan markets and a DTH service in its non- metropolitan markets has allowed Austar to reach the vast majority of the homes in these markets in just over one year. Austar's status as the initial operator in all of its markets has allowed it to establish a significant subscriber base and strong brand awareness, factors that management believes will give it a competitive advantage. Management believes the combination of MMDS and DTH has allowed Austar to reach virtually all of the 1.5 million serviceable television homes in its service areas on the most cost effective basis. Austar estimates its total fixed capital cost to build out initially its entire franchise area will be approximately $43 million, or $29 per serviceable home, over 75% of which had been expended as of October 31, 1996. Accordingly, Austar has been able to devote a significant amount of its financial resources to completing its operational infrastructure and installing its "in-home" subscriber equipment, over which Austar retains ownership. Austar has spent in excess of $80 million as of October 31, 1996 on these items and expects that the substantial majority of its future incremental capital expenditures will be incurred only as additional subscribers are installed (currently approximately $460 and $945 per MMDS and DTH subscriber, respectively, which amounts are partially offset by installation charges). While Austar is currently employing analog technology in its MMDS systems, it is testing digital technology (which would increase its existing 19 channel capacity) in one market and intends to offer digital service in its metropolitan markets if and when competitive factors dictate. The DTH service marketed by Austar uses state-of-the-art MPEG II digital technology. . ATTRACTIVE PROGRAMMING AGREEMENTS. Austar has entered into franchise agreements with Australis Media Limited ("Australis") that grant it the right to provide the Galaxy programming package within its franchise areas through 2009 (extendible at Austar's option through 2019). The Galaxy programming package, the most widely distributed programming package in Australia, was created by many of the world's leading programming suppliers and features brand name channels including Showtime, Encore, Fox Sports, The Discovery Channel, Nickelodeon/Nick at Nite and Red (a 24-hour music video channel) as well as two general entertainment channels. Management believes that Austar's franchise agreements have favorable pricing for such programs. Austar's programming costs are based on a percentage of its service revenue and provide for an offset of those costs with the depreciation of its subscriber equipment. Austar's franchise agreements provide exclusivity over wireless technologies (MMDS and DTH). While Austar's franchise agreements were formerly exclusive for cable television, the Company recently agreed to allow Foxtel Management Pty Limited ("Foxtel") to carry the Galaxy package on Foxtel's wireline cable systems throughout Australia (the "Australis Arrangement"). The Australis Arrangement provides that Austar will be compensated for any Foxtel subscriber in its franchise areas in an amount approximately equal to the profit margin that Austar would have received had it sublicensed such programming to Foxtel (which currently would be approximately $8 per Foxtel subscriber per month). Foxtel is currently operating in only one of Austar's markets and the Company believes that the small size of and/or low household densities in the majority of its markets do not justify the construction of competitive wireline cable systems. Austar does not currently have any subscription television competitors in the remainder of its franchise areas. Austar's franchise agreements continue to provide exclusivity over all wireline cable operators other than Foxtel. In addition, as part of the Australis Arrangement, Austar was granted the right to acquire any additional channels distributed by Galaxy on no less favorable terms than offered to any other person and in any event at no more than Australis' cost, plus 10%. See "Business--Austar (Australia)-- Franchise Agreements." Austar has also secured several additional satellite-delivered programming services to supplement the Galaxy channels. . ATTRACTIVE DEMOGRAPHICS. Australia has demographic and other characteristics that management believes are favorable to multi-channel television operators, including high per capita income and high television and VCR penetration rates. Television viewers in Australia have limited over-the-air television options with a maximum of five free- to-air channels, which number is generally lower in regional Australia. The Australian subscription television industry has grown rapidly since its inception in early 1995, reaching a combined 6% penetration rate. In addition, management believes Australian consumers are generally receptive to new technologies, as demonstrated by their high cellular telephone penetration rates. The following table summarizes selected demographic characteristics of Australia compared to comparable statistics for the more mature multi-channel television markets of the United States and the United Kingdom: <TABLE> <CAPTION> GDP PER HOMES YEARS OF SUBSCRIPTION TELEVISION CELLULAR CAPITA IN WITH SUBSCRIPTION TELEVISION HOMES WITH TELEPHONE 1995 TELEVISION TELEVISION PENETRATION VCR PENETRATION --------- ---------- ------------ ------------ ---------- ----------- <S> <C> <C> <C> <C> <C> <C> Australia............... $19,271 99% 2 6% 81% 19% United States........... 27,581 99 40+ 66 80 15 United Kingdom.......... 18,881 97 12 23 81 10 </TABLE> SATURN (NEW ZEALAND) The Company owns 100% of Saturn, which recently launched service on the initial portions of its hybrid fiber coaxial ("HFC") cable network that enables it to provide multi-channel television services as well as business and residential telecommunications services in the Wellington area, encompassing 135,000 homes. Wellington is New Zealand's capital and second largest city. The Company launched service in portions of this system in September 1996 and expects construction to be completed by mid-1998. Saturn also operates an existing cable system, which passes approximately 6,000 homes, on the Kapiti Coast north of Wellington. As of October 31, 1996, Saturn's activated networks passed approximately 12,600 homes, and serviced approximately 1,300 subscribers. The Company expects to use a portion of the proceeds of the Offering to accelerate Saturn's build-out and marketing programs during 1997. Saturn has secured additional infrastructure rights in markets representing 240,000 homes and is exploring the possibility of expanding its networks and services to these markets. The Company believes that New Zealand is an attractive market for multi-channel television providers. New Zealand has a demographic profile similar to Australia, including high per capita income and strong television, VCR and cellular telephone penetration rates. In addition, New Zealand permits operators to offer combined multi-channel television and telephony services over one network and Saturn expects to launch telephone, pay-per-view and data services over the next six to 18 months. There is currently only one significant multi-channel television provider in New Zealand, which provider offers only a five-channel UHF-delivered subscription service. SUN CABLE (PHILIPPINES) The Company holds a 40% economic interest in Sun Cable, the third largest cable television operator in the Philippines with wireline cable television systems in 15 markets that have a total of approximately 575,000 television homes. Sun Cable has selected markets where management believes it can be a major cable television provider. These markets are generally among the country's top 50 population centers or, if not, are strategic to Sun Cable's existing operating areas. Sun Cable is dedicating significant resources to the construction and build-out of these franchise areas. Multi-channel television in the Philippines is experiencing rapid growth due in part to the country's economic growth, widespread proficiency of English and the high demand for television and alternative entertainment services. Sun Cable is also exploring the provision of telephony services over its networks, many of which are HFC, due to the Philippines' current telephone penetration rate of three lines per 100 persons, which is one of the lowest in the world. As of October 31, 1996, Sun Cable's systems passed approximately 94,364 homes and had 33,837 subscribers, representing a penetration rate of 36%. Due to limitations on foreign ownership, the Company's interest in Sun Cable is held as a loan, which is convertible into a 40% equity interest in Sun Cable upon certain events (the "Sun Cable Loan"). See "Regulation--Philippines." The Company's partner in Sun Cable is the Lorenzo Group, a conglomerate controlled by the Lorenzo family, with significant holdings in Philippine agribusiness, real estate and consumer products. XYZ (AUSTRALIAN PROGRAMMING) Through its 25% interest in XYZ, the Company provides four of the eight channels offered in the Galaxy package, Australia's most widely distributed programming offering. XYZ's channels consist of high quality, brand named programming services, including Nickelodeon/Nick at Nite, The Discovery Channel, Arena (quality general entertainment channel) and Red. XYZ has entered into an agreement that provides for carriage of its four channels by virtually all existing Australian MMDS and DTH providers, including Austar, Australis and East Coast Television Pty Limited ("ECT"), as well as by the largest cable television operator in Australia, Foxtel. The Company believes that this agreement, which extends through 2010 for MMDS and DTH subscribers and 2020 for Foxtel subscribers and provides for fixed per subscriber prices (and in the case of Foxtel, substantial minimum subscriber guarantees), will result in XYZ's programming package being available to virtually all of Australia's 6.0 million television households. XYZ launched its channels in April 1995 and as of October 31, 1996, XYZ provided its channels to approximately 269,000 subscribers in Australia. Foxtel, which owns 50% of XYZ, is a joint venture between The News Corporation Limited ("News Corp.") and Telstra Corporation Limited ("Telstra"), the Australian government-owned telephone company. The Company's other partner in XYZ is Century Communications Corp. ("Century"), a large U.S. multiple system cable operator and the parent of ECT. OTHER BUSINESSES The Company's other businesses include: (i) a 90% economic interest in Telefenua, the only multi-channel television operator in Tahiti, (ii) a 100% interest in United Wireless Pty Limited ("United Wireless"), a provider of two- way wireless mobile data services in Australia, and (iii) a 49% interest in Hunan International TV Communications Company Ltd. ("HITV"), a joint venture with a Chinese government agency that owns, operates and is currently rebuilding a digital microwave relay network that delivers video services to the 14 largest cities in the Hunan Province. As of October 31, 1996, Telefenua was marketing its 15-channel MMDS service to approximately 18,700 of the approximately 31,000 homes in its franchise area and had approximately 4,900 subscribers paying an average monthly rate of $65. The Company is in the early stages of negotiating the sale of all or a portion of Telefenua to a local strategic investor, although there can be no assurance that the Company will conclude such a transaction. In addition, the Company is pursuing other multi-channel television system and related business opportunities in other areas throughout the region including India, China, Japan, Taiwan, Indonesia and Malaysia. See "Business-- Development Projects." The Company's strategy with respect to its investment in new businesses is to focus on opportunities that, whenever possible, (i) will be controlled by the Company, (ii) allow for the Company to pursue significant market share in the targeted country and (iii) are capable of securing debt and/or equity financing at the local level. RELATIONSHIP WITH UIH The Company is an indirect majority owned subsidiary of UIH, a leading provider of multi-channel television services outside the United States. UIH, together with its strategic and financial partners, have ownership interests in multi-channel television systems in operation or under construction in 25 countries in Europe, Latin America and, through the Company, the Asia/Pacific region. As of September 30, 1996, UIH's multi-channel television systems had approximately 10.4 million television homes in their respective service areas, passed approximately 7.2 million homes and had approximately 3.1 million subscribers. In addition to the Company, UIH's operations include its 50% interest in United and Philips Communications B.V., a joint venture with Philips Electronics N.V. that is the largest privately owned multi-channel television operator in Europe. Prior to the closing of the Offering, certain personnel currently employed by UIH will be transferred to UAP. UIH and UAP are parties to a management agreement (the "UIH Management Agreement"), pursuant to which UIH will continue to perform and be compensated for certain management, technical, administrative, accounting, tax, legal, financial reporting and other services for UAP. See "Relationship with UIH and Related Transactions." UIH INVESTMENT Upon the closing of the Offering, UIH has agreed to contribute $25.0 million cash to the Company for additional Class B Common Stock at a purchase price per share equal to the initial public offering price per share of the Class A Common Stock offered hereby (the "UIH Investment"), increasing the Company's total gross proceeds from the sale of its equity securities to approximately $125.0 million. CONCURRENT SENIOR DISCOUNT NOTE OFFERING Concurrent with the Offering, UIH A/P, which holds the Company's interests in Austar, Saturn, XYZ, Telefenua and United Wireless, is offering the New UIH A/P Notes in such principal amount as will generate gross proceeds of approximately $150.0 million. The Senior Discount Note Offering is contingent upon the consummation of the Offering, but the Offering and the UIH Investment are not contingent upon the consummation of the Senior Discount Note Offering. Upon completion of the Offerings and the UIH Investment, the Company believes that it will have sufficient capital to complete construction of all of its existing systems and fund anticipated start-up losses, as well as a limited amount of capital to fund new opportunities which the Company is pursuing or which may arise in the future. See "Risk Factors--Need for Additional Capital for New Businesses," "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." OTHER UAP, a Delaware corporation, was incorporated in April 1996. The principal executive office of the Company is located at 4643 South Ulster Street, Suite 1300, Denver, Colorado 80237, and its telephone number is (303) 770-4001. THE OFFERING <TABLE> <CAPTION> <S> <C> Class A Common Stock offered by the Company............................ shares Common Stock to be outstanding after the Offering and the UIH Investment: Class A Common Stock.............. shares(1) Class B Common Stock.............. shares Total........................... shares Voting Rights....................... Holders of Class A Common Stock are entitled to one vote per share on all matters submitted to a vote of stockholders, and holders of Class B Common Stock are entitled to ten votes per share. Both classes vote together as a single class on all matters, except where class voting is required by the Delaware General Corporation Law. Immediately following the Offering, the Class A Common Stock offered will account for approximately % of the combined voting power of the Company's outstanding common stock. Use of Proceeds..................... The Company intends to use the net proceeds of the Offering, combined with the proceeds of the Senior Discount Note Offering and the UIH Investment, primarily to fund the build-out and marketing of its existing systems. The Company may also use a portion of the proceeds to pursue new opportunities in the Australasia and Asia/Pacific regions. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001017008_univision_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001017008_univision_prospectus_summary.txt
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--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary information is qualified in its entirety by the more detailed information, including "Risk Factors" and Consolidated Financial Statements and notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus (i) assumes an initial public offering price of $20.00 per share of Class A Common Stock, (ii) does not give effect to the exercise of the over-allotment option granted to the Underwriters as described in "Underwriting," and (iii) is presented on a pro forma basis giving effect to the Reorganization. Unless otherwise indicated, all references to the "Company" and "Univision" refer to Univision Communications Inc. and its consolidated subsidiaries, including its owned and operated television stations, the Network and Galavision. Unless otherwise indicated, capitalized terms used herein are defined in the Glossary on page G-1, all ratings and audience share data are derived from reports produced by Nielsen Media Research and demographic data are derived from the DRI Study. THE COMPANY Univision is the leading Spanish-language television broadcaster in the U.S., reaching more than 92% of all Hispanic Households and having an approximate 77% share of the U.S. Spanish-language network television audience. The Company's Network, which is the most watched television network (English- or Spanish-language) among Hispanic Households, provides the Univision Affiliates with 24 hours per day of Spanish-language programming with a prime time schedule of substantially all first run programming (i.e., no reruns) throughout the year. As a leading, vertically-integrated television broadcaster, Univision owns and operates 11 full-power and seven low-power UHF stations (the "O&Os"), representing approximately 78% of its Network broadcast distribution. The full-power O&Os are located in 11 of the top 14 designated market areas in terms of numbers of Hispanic Households -- Los Angeles, New York, Chicago, Miami, Houston, San Francisco, San Antonio, Dallas, Fresno, Albuquerque and Phoenix. The Company has Affiliation Agreements with an additional nine full-power and 14 low-power Affiliated Stations and approximately 740 Cable Affiliates. Each of the Company's full-power O&Os and Affiliated Stations ranks first in Spanish- language television viewership in its DMA. The Company also owns Galavision, a Spanish-language cable network that has approximately 1.8 million Hispanic subscribers, representing approximately 47% of all Hispanic Households that subscribe to cable television. The Company believes that the breadth and diversity of its programming provides it with a competitive advantage over both Spanish-language broadcasters and English-language broadcasters in appealing to Hispanic viewers. The Company's programming is similar in format to that of major English-language networks and includes novelas (long-term mini-series), national and local newscasts, variety shows, children's programming, mini-series, musical specials, movies, sporting events and public affairs programs. The Program License Agreements provide the Company with unparalleled long-term access to first rate programming produced by Televisa and Venevision. Televisa-produced novelas are popular throughout the world and are among the Company's highest rated programs. Univision also produces a variety of programs specifically tailored to meet the tastes, preferences and information needs of the Hispanic audience, including national and local news and the highly successful programs Sabado Gigante, Cristina and Primer Impacto. The Company has also televised World Cup Soccer since 1978, including the widely watched 1994 World Cup, and recently began televising the Sunday "Game of the Week" for Major League Soccer. In 1992, A. Jerrold Perenchio, Televisa and Venevision formed the Company and UNHP, which acquired UTG and the Network, respectively, in December 1992, bringing extensive broadcasting, programming and production experience to Univision. Mr. Perenchio has over 25 years of experience in the U.S. media and communications industry and has been the chief executive officer or owner of a number of successful entities, including Chartwell Artists, Tandem Productions, Inc., Embassy Communications and Loews Theaters. Mr. Perenchio also owned and operated Spanish-language television stations in Los Angeles and New York from 1975 to 1986. Televisa, which is the world's largest producer of Spanish-language television programs, is the leading media and entertainment company in Mexico with an approximate 80% share of Mexico's viewing audience. Venevision is Venezuela's leading television network with an approximate 59% share of its viewing audience. Since the Acquisition, the Company's operating performance has improved significantly with combined net revenues and pro forma EBITDA increasing to $321 million and $112 million, representing compound annual growth rates of 16% and 36%, respectively, from the 1992 operating results of the Company and its predecessor. In addition, from November 1992 to May 1996 the Company increased its audience share of Spanish-language network television viewing from 57% to 77% and increased its share of the 20 most widely watched programs among Hispanic Households from 30% to 90%. BUSINESS STRATEGY Univision attributes its recent success to several factors, including increased emphasis on popular, high quality programming produced by Televisa, Univision and Venevision, contracting with Nielsen to develop more accurate, credible rating systems to measure Hispanic audience viewership, increasing acceptance by advertisers of Spanish-language television, continued growth of the Hispanic audience and the strengthening of its management team with executives and sales managers with extensive English-language television and advertising experience. The Company expects to continue to realize strong revenue and EBITDA growth by capitalizing on the expected continued growth in advertising expenditures targeted at the rapidly expanding Hispanic population. Specifically, the Company's business strategy seeks to capitalize on the following factors and competitive advantages: Leading Audience Share Among Hispanics. The Company's emphasis on popular, high quality programming has enabled it to achieve the highest ratings versus all other broadcasters (English- or Spanish-language) among Hispanic television viewers. For instance, for the first five months of 1996, the Company had a 77% audience share of Spanish-language television viewers and in May 1996 had 18 out of the top 20 most highly rated television programs (in Spanish or English) viewed by Hispanic Households. Each of the Company's 20 full-power Broadcast Affiliates ranks first in Spanish-language television viewership in its DMA. Investment in Research and Sales Management. Prior to November 1992, there were no Hispanic audience television rating services comparable to those measuring television viewership in the general U.S. population. Beginning in 1992, the Company contracted with Nielsen to develop Nielsen ratings measuring Hispanic viewership both at the Network and local DMA levels. Because these Nielsen ratings provide advertisers with a more accurate and reliable measure of Hispanic audience television viewership, they have been important in allowing the Company to demonstrate to advertisers its ability to reach the Hispanic audience. The Company believes that continued use of reliable ratings will allow it to further increase its advertising rates and narrow the gap which has historically existed between its audience share and its share of advertising revenues. In addition, the Company has made significant investments in experienced sales managers and account executives and has provided its sales professionals with state-of-the-art research tools to continue to attract major advertisers. Highly Favorable Demographic Trends. The Hispanic population is currently one of the fastest growing segments of the U.S. population, growing at approximately five times the rate of the non-Hispanic population. The Hispanic population, which consisted of 23.7 million people (9.5% of the U.S. population) in 1990, is estimated to be 28.4 million people (10.7% of the U.S. population) in 1996, and is expected to grow to 32.0 million people (11.6% of the U.S. population) by 2000 and 41.5 million people (13.9% of the U.S. population) by 2010. Hispanic Households on average are larger and younger and spend a greater percentage of their total household income on consumer products than non-Hispanic households. Furthermore, approximately 68% of all Hispanics, regardless of income or educational level, speak Spanish at home. This percentage is expected to remain relatively constant through 2010. Consequently, the number of Hispanics speaking Spanish in the home is expected to increase significantly in the foreseeable future. Increasing Advertiser Expenditures on Spanish-language Television. Total advertising expenditures targeting Hispanics grew from $166 million in 1982 to approximately $1.1 billion in 1995, representing a compound annual growth rate of 15.6%. Approximately one-half of the $1.1 billion in advertising expenditures in 1995 targeting Hispanics was directed towards Spanish-language television. The Company believes that major advertisers have found that Spanish-language television advertising is a more cost-effective means to target the growing Hispanic audience than English-language broadcast media. Since the Acquisition, the Company has added or substantially increased commitments from many national advertisers, including AT&T, Sears, McDonald's, Ford, Colgate-Palmolive and Coca-Cola. The Company believes that advertiser interest in the Hispanic population will continue to grow primarily because Hispanic consumer expenditures, which are expected to total approximately $325 billion in 1996, are expected to grow at an annual rate of 8.9% over the next four years to $458 billion in 2000, far outpacing the expected growth in total U.S. consumer expenditures. Strategic Acquisition Opportunities. The Company believes that its knowledge of, and experience with, Hispanic audiences will enable it to identify strategic acquisitions and successfully integrate them into the Company's operations. Since the Acquisition, the Company has acquired full-power stations in two important markets, Chicago and Houston, and used its management expertise, programming and brand identity to substantially improve the Company's performance in those DMAs. In addition, the Company has signed a letter of intent with Entravision to make a $10 million investment in the form of a note and an option to acquire a 25% equity interest in Entravision. Entravision owns seven and has agreements to acquire two of the Affiliated Stations, representing approximately 12% of the Network's distribution. The Company is also negotiating for the acquisition of its Sacramento Affiliated Station for a purchase price expected to be approximately $40 million payable in cash and preferred stock. To complement and capitalize on the Company's existing business and management strengths, the Company expects to explore both Spanish-language television and other media acquisition opportunities. The Company was incorporated in Delaware in April 1992 as Perenchio Communications, Inc. and its name was changed to Univision Communications Inc. in June 1996. The Company's principal executive offices are located at 1999 Avenue of the Stars, Suite 3050, Los Angeles, California 90067, and its telephone number is (310) 556-7600.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001017047_rockshox_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001017047_rockshox_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..3a407074601ddf6c1809be9d7ca94150744b1c73
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0001017047_rockshox_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT INDICATES OTHERWISE, THE "COMPANY" OR "ROCKSHOX," AS USED IN THIS PROSPECTUS, MEANS ROCKSHOX, INC., ITS PREDECESSORS AND THEIR RESPECTIVE PARENTS AND SUBSIDIARIES ON A CONSOLIDATED BASIS. UNLESS THE CONTEXT INDICATES OTHERWISE, ALL REFERENCES TO A FISCAL YEAR ARE TO THE COMPANY'S FISCAL YEAR. IN 1995, THE COMPANY CHANGED ITS FISCAL YEAR END FROM DECEMBER 31 TO MARCH 31. THE COMPANY RockShox is the worldwide leader in the design, manufacture and marketing of high performance bicycle suspension products. The Company developed the first widely accepted front suspension fork for the mountain bike industry, and, through a series of new product introductions, has continued to be at the forefront of the design and development of bicycle suspension. ROCKSHOX suspension products enhance riding performance and comfort by mitigating the impact of rough terrain and providing better wheel contact with the riding surface. The Company, which currently manufactures both front suspension forks and rear shocks for mountain bikes, has combined technical innovation with high quality products and creative marketing to establish one of the most widely recognized brand names in the bicycle industry. In a 1995 BICYCLING MAGAZINE readers' survey, 45% of the respondents who owned a suspension fork owned a RockShox manufactured product--more than twice the share of the next leading manufacturer--and more than 65% of the respondents who planned to purchase a suspension fork within the next two years planned to purchase a ROCKSHOX suspension fork. The Company's sales have grown rapidly, from approximately $6 million in fiscal 1991 to approximately $83.5 million in fiscal 1996, a compound annual growth rate of approximately 85.5%. The Company believes that its growth has been the result of increasing market acceptance of bicycle suspension worldwide and, more specifically, growing demand for ROCKSHOX suspension products. From 1992 to 1996, the number of mountain bike models available in the U.S. with suspension has increased from approximately 80 to over 660. The Company has been a key contributor to this growth, with ROCKSHOX components now specified on over 460, or more than 60%, of these 1996 suspension-equipped mountain bike models. The Company believes that significant opportunities for growth continue to exist worldwide. Although the number of mountain bikes sold with suspension has been rapidly increasing, suspension was included on only 17% of all mountain bike units sold domestically by independent bicycle dealers ("IBDs") in 1995. The Company believes that the market penetration of suspension-equipped mountain bikes is even lower internationally. RockShox currently markets ten front suspension forks and three rear shocks under its JUDY, INDY, QUADRA, MAG and DELUXE product lines. The Company's products have been repeatedly recognized for their innovative design and superior performance. For example, the Company's first product, the RS1, won a "Best of 1989" award from BICYCLE GUIDE MAGAZINE, and, in 1993, its first QUADRA front suspension fork was voted "Best Product Tried This Year" by readers of MOUNTAIN BIKE MAGAZINE. The Company's JUDY suspension fork received the 1994 award for "Best Technical Development of the Year" in the bicycle industry from VELO NEWS, and, in 1995, the Company's QUADRA suspension fork was designated as the "Best Value" among suspension forks by BICYCLING MAGAZINE'S BUYERS GUIDE. As further evidence of the advanced design and technical benefits of its products, ROCKSHOX suspension was used by more than half of the mountain bike racers competing in the 1996 Olympic Games in Atlanta. Approximately two-thirds of the Company's sales are to bicycle manufacturers ("OEMs"), including Trek, GT and Specialized, who incorporate ROCKSHOX branded components as part of new, fully-assembled mountain bikes sold worldwide. The Company is the primary supplier of front suspension forks to eight out of the ten leading OEMs selling through domestic IBDs. Management believes that OEM customers IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ STOCK MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. recognize the strength of the Company's brand name as a deciding factor in the consumer's choice of mountain bikes. In addition, the Company believes that OEMs choose RockShox for product innovation and quality as well as reliable worldwide distribution and service. The Company's products are also sold as an accessory component to consumers through a network of over 10,000 IBDs worldwide. According to a Company-sponsored survey, 85% of responding domestic IBDs identified ROCKSHOX as the most important brand of suspension product sold in their stores and management believes that the Company enjoys a similar retail presence internationally. The Company's front suspension forks and rear shocks are generally priced to consumers from $199 to $649 and from $199 to $289, respectively. Management believes that the Company can continue to take advantage of significant growth opportunities by (i) maintaining its leadership in providing front suspension forks to the high-end of the mountain bike market, a segment that grew at a compound annual rate of approximately 40% from 1992 to 1995, (ii) expanding its product offerings with recently-introduced rear shocks that allow the Company to more aggressively pursue the fast growing market for full suspension mountain bikes (i.e., bikes that include both front suspension and rear shocks), (iii) developing more moderately priced suspension forks, such as the QUADRA 5, which meet the needs of the emerging high-volume, mid-priced mountain bike suspension market, and (iv) leveraging the ROCKSHOX brand name into new product categories, including suspension products for road and trekking bikes. The Company's principal executive office is located at 401 Charcot Avenue, San Jose, California 95131; its telephone number is (408) 435-7469. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company.......... 4,800,000 shares Common Stock to be outstanding after the Offering.................................... 13,620,000 shares (1) Use of proceeds.............................. The net proceeds to the Company will be used to repay indebtedness, to redeem all of the outstanding shares of Holdings Preferred Stock (as defined below), to make a payment to terminate the Bonus Plan (as defined below) and for working capital purposes. See "Use of Proceeds." Listing...................................... The Common Stock has been approved for quotation on The Nasdaq Stock Market under the symbol "RSHX," subject to commencement of the Offering. </TABLE> - ------------------------ (1) Excludes approximately 821,320 shares of Common Stock issuable upon exercise of stock options outstanding under the Amended and Restated RSx Holdings, Inc. 1996 Stock Plan (the "Stock Plan"). See "Management -- 1996 Stock Plan." ------------------------ Unless otherwise noted, all Common Stock share amounts, per share data and other information set forth in this Prospectus (i) have been adjusted to reflect the consummation of the Merger (as defined below) and (ii) assume that the Underwriters' over-allotment option granted by certain stockholders of the Company (the "Selling Stockholders") has not been exercised. See "The Recapitalization and the Merger." This Prospectus includes references to registered trademarks and brand names of the Company and of manufacturers who purchase the Company's products, including Trek Bicycle Corp. ("Trek"), GT Bicycles, Inc. ("GT") and Specialized Bicycle Components, Inc. ("Specialized"). The Company's trademarks and brand names include: ROCKSHOX, ROCKSHOX, JUDY, INDY, DELUXE, QUADRA, MAG and ROCKSHOX GARB. Market data and industry information referred to in this Prospectus are derived from various trade publications and industry sources (including the results of a suspension study conducted by the Bicycle Market Research Institute ("BMRI"), BMRI's U.S. 1995 Annual Market Assessment Report for Bicycles (20" and over), MOUNTAIN BIKE MAGAZINE'S 1996 Industry Survey and BICYCLING MAGAZINE'S September 1995 Subscriber Study) as well as the Company's own research and estimates. Unless otherwise noted, all references to "IBDs" include bike shops, other sports specialty stores, mail order and television shopping. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> YEAR ENDED MARCH THREE MONTHS 31, 1996 (1) YEAR ENDED DECEMBER 31, ENDED ------------------ --------------------------------- MARCH 31, PRO 1991 1992 1993 1994 1995 (1) ACTUAL FORMA (2) ------ ------- ------- ------- --------- ------- --------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales.................... $6,050 $16,442 $30,941 $37,900 $14,279 $83,509 $83,509 Cost of sales............... 4,017 10,565 20,113 24,477 9,590 54,110 54,110 ------ ------- ------- ------- --------- ------- --------- Gross profit.............. 2,033 5,877 10,828 13,423 4,689 29,399 29,399 Operating expenses.......... 1,923 5,541 6,634 6,283 7,627 14,621 12,871 ------ ------- ------- ------- --------- ------- --------- Income (loss) from opera- tions...................... 110 336 4,194 7,140 (2,938) 14,778 16,528 Interest and other (income) expense, net............... 21 67 16 6 51 5,650 (136) ------ ------- ------- ------- --------- ------- --------- Income (loss) before income taxes...................... 89 269 4,178 7,134 (2,989) 9,128 16,664 Provision for (benefit from) income taxes............... 9 104 1,521 2,420 (653) 3,464 6,478 ------ ------- ------- ------- --------- ------- --------- Net income (loss)........... $ 80 $ 165 $ 2,657 $ 4,714 $(2,336) $ 5,664 $10,186 ------ ------- ------- ------- --------- ------- --------- ------ ------- ------- ------- --------- ------- --------- Net income (loss) per share (3)........................ $ 0.01 $ 0.02 $ 0.29 $ 0.51 $ (0.25) $ 0.57 $ 0.73 ------ ------- ------- ------- --------- ------- --------- ------ ------- ------- ------- --------- ------- --------- Shares used in per share calculations (3)........................ 9,240 9,240 9,240 9,240 9,240 9,240 13,899(4) <CAPTION> THREE MONTHS ENDED JUNE 30, ------------------------------- 1996 1996 1995 ACTUAL PRO FORMA (2) ------- ------- ------------- <S> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales.................... $18,784 $21,378 $21,378 Cost of sales............... 12,285 13,733 13,733 ------- ------- ------------- Gross profit.............. 6,499 7,645 7,645 Operating expenses.......... 3,411 4,159 3,503 ------- ------- ------------- Income (loss) from opera- tions...................... 3,088 3,486 4,142 Interest and other (income) expense, net............... 1,484 1,292 (49) ------- ------- ------------- Income (loss) before income taxes...................... 1,604 2,194 4,191 Provision for (benefit from) income taxes............... 610 845 1,644 ------- ------- ------------- Net income (loss)........... $ 994 1,349 $ 2,547 ------- ------- ------------- ------- ------- ------------- Net income (loss) per share (3)........................ $ 0.10 $ 0.14 $ 0.18 ------- ------- ------------- ------- ------- ------------- Shares used in per share calculations (3)........................ 9,240 9,240 13,899(4) </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 ------------------------------ PRO FORMA ACTUAL AS ADJUSTED (5) ------------ --------------- <S> <C> <C> BALANCE SHEET DATA: Working capital............................................................... $ 1,797 $ 11,414 Total assets.................................................................. 28,665 31,898 Total debt.................................................................... 43,750 -- Mandatorily redeemable preferred stock........................................ 7,449 -- Stockholders' equity (deficit)................................................ (38,358) 16,730 </TABLE> - ------------------------ (1) In 1995, the Company changed its fiscal year end from December 31 to March 31. (2) The pro forma statement of operations data for the fiscal year ended March 31, 1996 and the quarter ended June 30, 1996 give effect to the Offering and the application of the net proceeds therefrom as if the Offering had occurred at the beginning of the respective periods, and reflect the reduction of operating expenses of $1.8 million and $0.7 million, respectively, related to the termination of the Bonus Plan, the reduction of interest expense of $5.8 million and $1.3 million, respectively, and the tax effect of the foregoing (but exclude the effect of write-offs of approximately $2.4 million relating to unamortized debt issuance costs, expenses of approximately $6.7 million relating to the termination of the Bonus Plan and the tax effect of the foregoing). See "Selected Financial Data," "Use of Proceeds" and Note 2 of Notes to Pro Forma Condensed Consolidated Balance Sheet and Statements of Operations. (CONTINUED ON THE FOLLOWING PAGE) (CONTINUED FROM PRIOR PAGE) (3) For an explanation of the determination of the number of shares used in per share calculations and net income (loss) per share, see Note 2 of Notes to Consolidated Financial Statements. For the fiscal year ended March 31, 1996 and the quarters ended June 30, 1995 and 1996, net income has been reduced by accretion for dividends on the Holdings Preferred Stock of $357,000, $94,000 and $92,000, respectively. (4) Pro forma computation of net income per share includes 4,658,571 shares of Common Stock to be issued pursuant to the Offering, net of expenses, the proceeds from the sale of which the Company intends to use as follows: (a) $26.75 million to repay borrowings outstanding under the Existing Credit Facilities (as defined below), (b) $17.0 million to repay the Senior Notes (as defined below) and the Junior Notes (as defined below), (c) $7.4 million to redeem all of the outstanding shares of Holdings Preferred Stock and (d) $7.3 million to make payments to terminate the Bonus Plan. Shares to be issued for working capital purposes have been excluded from the pro forma computation of net income per share. See "Use of Proceeds" and Note 2 to Pro Forma Condensed Consolidated Balance Sheet and Statements of Operations. (5) Pro forma as adjusted to give effect to the Offering and the application of the net proceeds therefrom as if the Offering had occurred on June 30, 1996, including write-offs of approximately $2.4 million relating to unamortized debt issuance costs, expenses of approximately $6.7 million relating to the termination of the Bonus Plan, payments of approximately $7.4 million to redeem all of the outstanding shares of Holdings Preferred Stock and $26.75 million, $11.0 million and $6.0 million to repay the Existing Credit Facilities, the Senior Notes and the Junior Notes, respectively, and the tax effect of the foregoing. See "Use of Proceeds," "Capitalization" and Note 1 of Notes to Pro Forma Condensed Consolidated Balance Sheet and Statements of Operations.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0001017102_poppe_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001017102_poppe_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..60baa8e64343aaafc8afa427a17bb62b21f7baa1
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+++ b/parsed_sections/prospectus_summary/1996/CIK0001017102_poppe_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information, including the financial statements (including the notes thereto) appearing elsewhere in this Prospectus. All references in this Prospectus to Common Stock data reflect a stock split, as adjusted, of approximately 8,450-to-1 which the Company completed prior to the date of this Prospectus. Unless otherwise indicated, all information in this Prospectus assumes that the Underwriters' over-allotment option described in "Underwriting" is not exercised. This Prospectus contains certain statements of a forward-looking nature relating to future events or the future financial performance of the Company. Prospective investors are cautioned that such statements are only predictions and that actual events or results may differ materially. In evaluating such statements, prospective investors should specifically consider the various factors identified in this Prospectus, including the matters set forth under the caption "Risk Factors" which could cause actual results to differ materially from those indicated by such forward-looking statements. THE COMPANY Poppe is a full-service marketing communications company that develops and implements marketing programs utilizing traditional media and interactive applications of digital media such as the Internet, the World Wide Web (the "Web"), CD-ROMs and digital diskettes. The Company specializes in providing marketing communications services for "considered purchase" products and services. Considered purchase products and services, such as automobiles, computers and financial services, typically involve lengthy, non-impulse sales processes during which customers generally seek substantial detailed product information before making their purchase decisions. The Company is also a leader among major marketing communications companies in the creation of marketing programs using the Web. Since commencing its Web environment services in fiscal 1994, Poppe has provided design and development services for The White House Web site and approximately 60 other Web sites for such clients as General Motors Corporation's Cadillac Motor Car Division ("Cadillac"), LensCrafters Inc. ("LensCrafters"), Merrill Lynch & Co. ("Merrill Lynch") and Netscape Communications Corp. ("Netscape"). Poppe's approximately 395 full-time employees operate from offices in New York City; Morris Plains, New Jersey; Pittsburgh, Pennsylvania; and Mountain View, Palo Alto and Los Angeles, California. Poppe and its predecessor have been providing traditional marketing communications services for over 70 years. The Company's objective is to be a leading provider of interactive marketing communications products and services utilizing digital based media such as the Web and CD-ROMs, while continuing to develop and expand its traditional marketing business. The Company provides a range of integrated marketing services such as the creation of core themes for marketing campaigns, market analysis, creation of marketing materials, media planning and placement, product positioning, corporate and product branding, public relations, data base driven sales support and Web site design, development, launch and maintenance services. See "Business--Poppe's Products and Services." The Company delivers its clients' marketing messages through traditional media such as broadcast, print and direct mail, as well as digital media. The Company believes that there are significant factors and trends driving change and creating opportunities in the marketing communications industry for the use of digital media. These factors include the ability of marketers to use digital media to strengthen corporate and product brands, to reach targeted demographic groups, to quantify specific information regarding their customers and to provide in-depth information on their products and services in a timely manner. Industry observers generally believe that the number of Internet and Web users has increased substantially over the last several years. According to Netcraft, Ltd., the number of corporate Internet sites increased from approximately 4,900 in August 1995 to approximately 171,000 in June 1996 and to approximately 287,000 in October 1996. Furthermore, The Forrester Report for December 1995 estimated that typical budgets to launch and maintain Web sites for one year ranged, depending on the type of site, from approximately $300,000 for a site with static content, to over $3.0 million for a site providing for consumer transactions. This report estimated that these expenditures will rise between approximately 50% and approximately 230% through 1997. The Company's interactive marketing communications products and services include Web environment services such as Web site design, development and launch services, digital marketing, sales and training products delivered primarily through CD-ROMs and digital diskettes, and data base marketing services such as processing, grading and tracking customer e-mail, Web data collection systems, 1-800 telephone responses and business reply card processing (collectively, "Interactive Products and Services"). The Company's revenues from its Interactive Products and Services were approximately $813,000 and $4.8 million (approximately 7% and 28% of the Company's total revenues) for the fiscal years ended March 31, 1995 and 1996, respectively, and approximately $1.5 million and $5.8 million (approximately 23% and 38% of the Company's total revenues) for the six months ended September 30, 1995 and 1996, respectively. On June 27, 1996, Poppe acquired Animated Systems & Design, Inc. ("Animated Systems"), which creates and develops marketing and sales presentations, sales information systems and computer-based training materials delivered primarily through CD-ROMs and digital diskettes. On a pro forma basis giving effect to the acquisitions of Animated Systems and another marketing communications company in fiscal 1996 as if they had occurred on April 1, 1995, the Company's revenues from Interactive Products and Services were approximately $7.4 million (approximately 34% of the Company's total revenues) for fiscal 1996 and giving effect to the acquisition of Animated Systems as if it had occurred on April 1, 1995, the Company's revenues from Interactive Products and Services were approximately $6.7 million (approximately 41% of the Company's total revenues) for the six months ended September 30, 1996. The balance of the Company's revenues were derived from marketing communications services utilizing traditional media such as broadcast and print advertising and public relations. Poppe's digital media products and services allow its clients to provide interactive delivery of information and services to their customers. For example, Poppe performed Web site design and development services for E*Trade Securities, Inc. ("E*Trade"), a discount brokerage firm accepting customer orders over the Internet, which allows customers to buy or sell stocks directly through the Web site and updates the customer's trading records. Also, in conjunction with BJK&E's "milk moustache" campaign for the National Fluid Milk Processor Promotion Board (the "Milk Board"), Poppe performed Web site design, development and launch services. Additionally, Animated Systems designed and created a CD-ROM based data library for International Business Machines Corporation ("IBM") containing product information and training materials. This software allows IBM's sales people and customers access to detailed product information, demonstrations and trial versions of software products, and electronic brochures. The Company was a wholly-owned subsidiary of BJK&E from February 1988 until June 1996 and as of October 31, 1996, BJK&E owned approximately 88% of the outstanding Common Stock, on a fully diluted basis. Immediately after the completion of this offering, BJK&E will own approximately 63%, on a fully diluted basis, of the outstanding Common Stock (61% if the Underwriters' over- allotment option is exercised in full). BJK&E (including Poppe) is among the 15 largest marketing communications holding companies in the world and one of the five largest privately held marketing communications holding companies in the world, based on worldwide gross income for 1995 of $404.5 million as published in the April 15, 1996 issue of Advertising Age. BJK&E has worked closely with Poppe to develop new business opportunities for Poppe and to deliver marketing communication services to their clients. Poppe has developed Web sites for BJK&E clients such as Chrysler Corporation ("Chrysler"), Merrill Lynch, Taylor- Made Golf Company, Inc. ("Taylor-Made"), The Valvoline Company, a division of Ashland Oil, Inc., ("Valvoline") and Weber-Stephen Products Co. ("Weber") (the maker of Weber grills). Poppe expects this relationship with BJK&E to continue after this offering. BJK&E has historically provided certain administrative and support services to the Company. Pursuant to an operating services agreement (the "Operating Services Agreement"), BJK&E is obligated to continue providing these services for at least one year following the consummation of this offering. For further information regarding the terms of the Operating Services Agreement and additional support provided by BJK&E to the Company, see "Business--Poppe's Strategy" and "Certain Transactions--Relationship with BJK&E." Poppe anticipates that its continued association with BJK&E will provide the Company with client introductions and marketplace visibility not generally available to other new media communications companies. Poppe is a Delaware company incorporated on December 10, 1985 under the name "USAdvertising, Inc." Its name was changed to Poppe Tyson, Inc. on April 8, 1987 in conjunction with its acquisition at that time of an advertising agency of the same name. The principal executive offices of the Company are located at 40 West 23rd Street, New York, New York 10010-5201, its telephone number is (212) 727-5600, its e-mail address is @ny.poppe.com, and its World Wide Web site is located at http://www.poppe.com. Information contained in the Company's Web site shall not be deemed to be a part of this Prospectus. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company........................... 3,000,000 shares Common Stock to be outstanding after this offering............... 10,288,700 shares(1) Use of proceeds.................... Repayment of all of the intercorporate borrowings to BJK&E, general corporate purposes, including working capital, fund- ing for the continued development of the Company's interactive marketing communica- tions business, for acquisition of prod- ucts, technologies or businesses that of- fer marketing communications products or services and to expand operations and es- tablish new domestic and international of- fices Nasdaq National Market symbol...... POPT </TABLE> - -------- (1) Does not include (i) 2,210,746 shares of Common Stock reserved for issuance upon exercise of stock options pursuant to the Company's stock option plan on October 31, 1996, of which on October 31, 1996 outstanding options to purchase 750,295 shares have been granted to certain executive officers and other employees of, and an advisor to, the Company and the former optionholders of Animated Systems, and of which options to purchase an additional 43,749 shares have been granted to nominees to the Company's Board of Directors at an exercise price equal to the initial public offering price effective at the closing of this offering, at a weighted average exercise price of $6.16 per share (for purposes of options with an exercise price equal to the initial public offering price, assuming an initial offering price of $10.00 per share, the midpoint of the price range set forth on the cover page of this Prospectus) or (ii) 174,165 shares of Common Stock reserved for issuance pursuant to the Company's stock purchase plan, none of which have been issued at October 31, 1996. See "Management-- Directors' Compensation," "--Stock Option Plan" and "--Stock Purchase Plan." SUMMARY HISTORICAL AND PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> SIX MONTHS YEARS ENDED MARCH 31, ENDED SEPTEMBER 30, ---------------------------------------------------- ----------------------------- 1996 1996 1992 1993 1994 1995 1996 PRO FORMA(1) 1995 1996 PRO FORMA(1) ------ ------ ------- ------- ------- ------------ ------ ------- ------------ (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Commissions and fees.... $7,332 $7,371 $10,585 $11,036 $17,077 $21,517 $6,371 $15,303 $16,203 Operating income (loss)................. (503) (397) 560 163 847 927 (394) (944) (1,103) Net earnings (loss)..... (236) (166) 313 36 496 309 (247) (676) (925) Net earnings (loss) per share....... $ (.03) $ (.02) $ .04 $ -- $ .06 $ .04 $ (.03) $ (.10) $ (.13) Weighted average number of shares outstanding(2)......... 8,451 8,451 8,451 8,451 8,335 8,786 8,451 7,048 7,274 </TABLE> <TABLE> <CAPTION> AT SEPTEMBER 30, 1996 ------------------- AS ACTUAL ADJUSTED(3) ------ ----------- (UNAUDITED) <S> <C> <C> BALANCE SHEET DATA: Cash........................................................ $ 48 $18,820 Working capital (deficit)................................... (3,108) 23,292 Total assets................................................ 32,301 49,873 Long-term liabilities....................................... 834 834 Total liabilities........................................... 29,571 20,743 Total stockholders' equity.................................. 2,730 29,130 </TABLE> - -------- Notes on following page (1) The pro forma condensed consolidated financial data give effect to the acquisition by Poppe of certain assets and the assumption of certain liabilities of Werner Chepelsky & Partners, Inc., a Pennsylvania corporation ("WCP") in January 1996 (the "WCP Acquisition"), as well as the merger of Animated Systems into a wholly-owned subsidiary of the Company in June 1996 (the "Animated Acquisition" and, together with the WCP Acquisition, the "Acquisitions" and financial information presented on a pro forma basis to reflect such Acquisitions as described below being hereinafter referred to as on a "Pro Forma Basis"). Each of the Acquisitions was accounted for under purchase accounting. The pro forma condensed consolidated statement of operations data for the year ended March 31, 1996 combine the results of operations of the Company for the year ended March 31, 1996 and the results of operations for that period as if each such Acquisition had been consummated at April 1, 1995. The pro forma condensed consolidated statement of operations data for the six months ended September 30, 1996 combine the results of operations of the Company for the six months ended September 30, 1996 and the results of operations for that period as if the Animated Acquisition had been consummated at April 1, 1995. Additionally, the pro forma condensed consolidated financial data reflect adjustments for, among other things, amortization of intangible assets arising from the Acquisitions, a special bonus paid to management of WCP and interest on intercompany borrowings in connection with the Animated Acquisition. The pro forma data are not necessarily indicative of the results of operations which would actually have been reported had the Acquisitions been consummated at April 1, 1995 or which may be reported in the future. The data should be read in conjunction with the Pro Forma Condensed Consolidated Financial Statements (including the notes thereto) of the Company and the respective historical financial statements (including the notes thereto) of the Company, WCP and Animated Systems appearing elsewhere in this Prospectus. (2) The weighted average number of shares outstanding included in the pro forma columns includes the weighted average of common shares and common equivalent shares adjusted for the 451,596 common shares and common share equivalents issued in connection with the Animated Acquisition. (3) As adjusted to give effect to the sale of the 3,000,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $10.00 per share (the midpoint of the price range set forth on the cover page of this Prospectus).
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001017143_nexus_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001017143_nexus_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the consolidated financial statements and notes thereto included elsewhere in this Prospectus. Unless the context otherwise requires, references to "NexUS" or the "Company" are to NexUS Healthcare Information Corporation, its predecessors and its wholly-owned subsidiaries, which include St. Anthony Outsourcing, Inc., St. Anthony Healthcare Resource Group, Inc. ("SAHR") and St. Anthony Publishing, Inc. ("St. Anthony Publishing"), which incorporates as a division The Center for Healthcare Industry Performance Studies, Inc. ("CHIPS"). St. Anthony Publishing and SAHR are collectively referred to as the "Operating Subsidiaries." Unless indicated otherwise, the information contained in this Prospectus (i) gives effect to the Recapitalization (as defined herein) and (ii) assumes no exercise of the Underwriters' over-allotment option. References to fiscal years are to the Company's fiscal year, which ends on April 30. See "The Company." THE COMPANY NexUS is a leading provider of information management products and services to the healthcare industry. The Company's products and services include a broad range of surveys, compilations, analyses, manuals and reports and decision support systems that assist providers and payors in determining reimbursement for clinical services and in developing a variety of database initiatives. These products facilitate the customer's ability to evaluate resource utilization, analyze practice patterns, develop clinical pathways, measure outcomes, benchmark peer groups and negotiate managed care contracts under capitation and various risk-sharing payment agreements. The Company's customers include substantially all U.S. hospitals, as well as physician groups and healthcare payors, including federal and state agencies, health maintenance organizations ("HMOs"), insurance companies and employers. The Company believes its St. Anthony Publishing brand name is acknowledged as a market leader in medical coding, the basis on which healthcare financial and clinical information is recorded. Healthcare providers and payors in the United States use a uniform set of basic data elements to identify and code diagnoses and the number and type of patient procedures. In inpatient settings, these basic elements are expressed in ICD-9-CM codes, and in outpatient settings, procedures are coded using a classification system called CPT. Typically government agencies and private payors require the use of these uniform coding systems on claims forms submitted to them for reimbursement to ensure uniform claims data. In addition to being used as the basis for reimbursement, coded claims data are used for a variety of other purposes such as accreditation, rate setting, trend monitoring, and increasingly for utilization and quality assessment reviews for profiling provider practice patterns and clinical outcomes measurements. Despite the importance and multiple uses of such data, claims processing is widely acknowledged to generate substantial inaccuracies. Inaccuracies result from (i) the broad discretion of medical coders in the coding process, (ii) frequent omission of pertinent diagnoses and hospital discharge summaries, (iii) clinical codes which are often not distinct and (iv) ambiguities in classifying chronic and acute conditions. The Company was founded in 1986 to provide value-added information and reference manuals designed to assist providers and payors in coding medical records under the evolving uniform coding system. In response to the increased demand for healthcare information in the 1990's, the Company has expanded its healthcare payment expertise and now provides a range of information products, including products for managed care, decision support systems and benchmarking. The Company believes these products enable providers to determine reimbursement for clinical services, assess and manage financial risk, and enhance their understanding of treatment costs, variability of costs and cost control measures. The Company believes these products enable payors to assess more accurately resource utilization, profile provider practice patterns, measure clinical outcomes, and establish and implement peer group benchmarks. The Company's products include: (i) healthcare and medical information relating to coding and payment processing, (ii) managed care and related information, and (iii) decision support systems and benchmarking products utilizing the Company's proprietary software and public and proprietary databases. These products are generally sold on a subscription basis and are available in a variety of print and electronic formats. From April 30, 1994 to April 30, 1996, the Company's subscriptions increased from 198,000 to 280,000 and units sold during fiscal 1994 and 1996 increased from 304,000 to 475,000. In fiscal 1996, the Company experienced estimated renewal rates of 70% for its coding and payment-related and managed care products and 94% for its decision support systems and benchmarking products. In addition, the Company provides consulting services which include the review and audit of the coding practices and procedures of healthcare providers. THE OFFERING <TABLE> <S> <C> Common Stock offered hereby..... 2,000,000 shares Common Stock to be outstanding 9,682,080 shares(1) after the offering............. Use of proceeds................. To repay approximately $11.0 million of revolving bank debt, to fund approximately $1.2 million of capital expenditures and to provide funds for general corporate purposes, including possible acquisitions of products and companies in healthcare information- related fields. See "Use of Proceeds." Proposed Nasdaq National Market NHIC symbol......................... </TABLE> - -------- (1) Does not include (i) 317,500 shares of Common Stock issuable at $11.00 per share upon the exercise of options currently outstanding or (ii) 1,000,000 shares of Common Stock reserved for issuance under the Company's 1996 Stock Option Plan, of which options covering 430,104 shares of Common Stock have been granted and will be exercisable at the initial offering price. See "Management--Stock Options" and Note M to the Consolidated Financial Statements. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> YEAR ENDED FISCAL YEAR ENDED APRIL 30, DECEMBER 31, ------------------------------- 1992(1) 1993 1994 1995 1996 ------------ ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF INCOME DATA: Revenue.......................... $29,383 $28,664 $30,555 $35,799 $40,730 Operating income................. 2,549 1,056 2,011 3,111 3,674 Net income....................... 2,430 926 1,716 2,116 2,683 Pro forma net income(2).......... 2,352 Pro forma net income per share... $ 0.31 Weighted average number of common shares outstanding.............. 7,682 </TABLE> <TABLE> <CAPTION> APRIL 30, 1996 ----------------------- ACTUAL AS ADJUSTED(3) ------- -------------- <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash.................................................... $ 164 $9,850 Working capital (deficit)............................... (949) 9,237 Total assets............................................ 18,685 28,371 Notes payable, noncurrent............................... 9,989 250 Stockholders' equity (deficit).......................... (4,480) 15,445 </TABLE> - -------- (1) The Company changed its fiscal year end to April 30 subsequent to calendar year 1992. Consolidated statement of income data for all years presented are for full twelve month periods. (2) Prior to the date of the Recapitalization (as defined herein), the Company elected to be treated as a Subchapter S corporation, and accordingly was not subject to federal or state income taxes. During the period the Company was treated as a Subchapter S corporation, it made distributions to its stockholders to pay these taxes at the individual level, as they relate to the Company's operations. A substantial portion of these distributions was recorded as compensation expense in the historical financial statements. Pro forma net income reflects an adjustment to reduce compensation expense relating to these distributions and a provision for income taxes as if the Company had been subject to federal and state income taxes. See "S Corporation Distributions and Termination of Subchapter S Corporation Status," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes A and L to the Consolidated Financial Statements. (3) Adjusted to reflect the sale by the Company of 2,000,000 shares of Common Stock offered hereby and the application of the net proceeds therefrom as described under "Use of Proceeds." Does not give effect to a one-time, non- cash charge against earnings of approximately $475,000 in the first quarter of fiscal 1997 to reflect additional deferred income tax liability resulting from the termination of Subchapter S corporation status on May 15, 1996. See Note L to the Consolidated Financial Statements.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001017147_intensiva_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001017147_intensiva_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including notes thereto, appearing elsewhere in this Prospectus. Investors should carefully consider the information set forth under the heading "Risk Factors." THE COMPANY Intensiva HealthCare Corporation ("Intensiva" or the "Company") provides highly specialized, acute long-term care for critically ill or injured patients who require intensive medical monitoring and treatment, and who often have multiple medical conditions and are medically unstable. The Company provides high quality, cost effective, specialized care for its patients, who typically require an average length of stay of greater than 25 days in an intensive inpatient setting. Intensiva's medical staffs provide specialized medical services, as well as nursing and respiratory care, and the Company is developing disease-specific pathways to treat patients with pulmonary, cancer, renal and cardiac conditions, among others. The Company's clinical programs utilize specialized staff, equipment and protocols for the treatment of its patients. Extended stay critically ill or injured patients are difficult and expensive to treat and, as a result, are in danger of becoming disenfranchised by the current health care system. These patients generally require an interdisciplinary team of specialists due to their multiple system deficits and the critical nature of their illnesses or injuries. Traditional acute care hospitals serve a general population which consists primarily of short-stay patients. These hospitals are not well positioned to provide the most cost effective services to critically ill and injured extended stay patients because of their focus and lack of critical mass with respect to these patients. Traditional hospitals have an incentive to discharge these patients to other specialty care providers as soon as practicable. In addition, payors are seeking specialized clinical programs that provide high quality, predictable outcomes that demonstrate reduced cost for this disenfranchised, expensive patient population. The Company estimates that the cost of treatment for this discrete patient population exceeds $2 billion annually. Intensiva leases underutilized space from general acute care hospitals ("Host Hospitals") in underserved secondary markets, creating a separate "hospital within a hospital." By leasing space from the Host Hospital, Intensiva is able to minimize capital and overhead costs, including owning and operating the physical plant and expensive medical and diagnostic equipment. The Company is able to purchase certain services from its Host Hospitals, such as laboratory and radiology (MRI, CAT Scan, X-Ray), as well as hotel services such as laundry, housekeeping, dietary and property management. The Company's business model provides for each of its specialized hospitals to become certified by Medicare as a "long-term care hospital" and exempt from Medicare's Prospective Payment System ("PPS") after a minimum of six months of operations, and receive cost-based reimbursement, which the Company believes is more appropriate given the medical condition of its patients. The Company's objective is to be a leading provider of high quality, clinically appropriate, cost effective care for critically ill or injured patients requiring extended lengths of stay. To achieve this goal the Company intends to: (i) penetrate underserved secondary markets, defined as service area populations of one million or less; (ii) maintain and develop key referral sources, including managed care organizations and insurance companies; (iii) explore the development of management services organizations; (iv) maintain a highly focused admissions process; (v) expand its clinical protocols to address the needs of patients with similar diagnoses; and (vi) leverage its existing infrastructure. As of October 1, 1996, the Company operated seven clinical programs in four states (254 beds), had an additional three clinical programs under development in three states (98 beds), and had entered into a letter of intent to open an additional clinical program (30 beds). THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company................... 2,500,000 shares Common Stock to be outstanding after the Offering..... 9,530,067 shares(1) Use of proceeds....................................... For development of additional facilities, working capital and general corporate purposes, including possible acquisitions. See "Use of Proceeds." Nasdaq National Market symbol......................... IHCC </TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AND SELECTED STATISTICAL DATA) <TABLE> <CAPTION> SIX MONTHS PERIOD FROM ENDED JULY 18, 1994 YEAR JUNE 30, THROUGH ENDED -------------------------- DEC. 31, 1994 DEC. 31, 1995 1995 1996 -------------- ------------- ----------- ----------- <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net revenues............................ $ -- $ 1,488 $ 165 $ 6,076 Operating expenses...................... -- 2,521 714 6,305 General and administrative.............. 214 1,884 736 1,324 Provision for doubtful accounts......... -- 139 30 150 Depreciation and amortization........... -- 29 14 249 Operating income (loss)................. (214) (3,085) (1,329) (1,952) Interest (expense) income, net.......... (1) 238 128 202 Net income (loss)....................... $ (215) $(2,847) $ (1,201) $(1,750) Pro forma:(2) Net income (loss) per share.......... $(0.39) $(0.24) Weighted average shares outstanding........................ 7,268 7,268 SELECTED STATISTICAL DATA: Long-term exempt hospitals: Open at end of period................ -- 1 -- 1 Average daily census(3).............. -- 6 -- 17 Medicare revenue(4).................. -- 44.4% -- 45.5% All other facilities: Open at end of period................ -- 1 1 5 Average daily census(3).............. -- 1 4 18 Medicare revenue(4).................. -- 100.0% 92.3% 90.9% </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 ----------------------------------------- PRO FORMA ACTUAL PRO FORMA(2) AS ADJUSTED(5) ------- ------------ -------------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents.............................. $ 5,217 $ 5,217 $ 22,055 Working capital........................................ 8,564 8,564 25,402 Total assets........................................... 13,431 13,431 30,269 Long-term obligations.................................. 710 710 710 Stockholders' equity................................... 10,040 10,040 26,878 </TABLE> See notes on following page. (1) Does not include 15,950 shares issuable upon the exercise of warrants at a weighted average exercise price of $3.76 and 575,850 shares issuable upon the exercise of options at a weighted average exercise price of approximately $0.74, in each case outstanding as of August 31, 1996. See "Capitalization," "Management" and Notes 4 and 9 of Notes to Consolidated Financial Statements. (2) See Note 1 of Notes to Consolidated Financial Statements for information concerning the calculation of net loss per share, weighted average shares outstanding and pro forma balance sheet information. (3) Average daily census for all applicable facilities. Computed by dividing total patient days by the number of days in the applicable period that each facility was open. (4) As a percentage of net revenues. Excludes net revenues from managed care organizations including Medicare managed care, traditional indemnity insurers, third-party administrators and other non-governmental payors. (5) Adjusted to give effect to the sale of Common Stock offered hereby at an assumed initial public offering price of $7.50, and application of the net proceeds therefrom and conversion of the Convertible Preferred Stock into Common Stock. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001017172_authorize_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001017172_authorize_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus (i) gives effect to a 2-for-1 stock split effected on July 15, 1996, (ii) except in the Financial Statements and Notes thereto, reflects the conversion of all outstanding shares of the Company's Redeemable Convertible Preferred Stock (collectively, the "Convertible Preferred Stock") into 5,247,324 shares of Common Stock and the issuance of 405,065 shares of Common Stock upon exercise of certain warrants, all upon the closing of this offering, (iii) gives effect to the repurchase by the Company of 200,000 shares of Common Stock from an existing stockholder on or before September 3, 1996 and the purchase by certain stockholders of the Company of an aggregate of 200,000 shares of Common Stock from an existing stockholder on or before September 3, 1996, (iv) gives effect to the filing of an Amended and Restated Certificate of Incorporation immediately after the closing of this offering to, among other things, create a new class of undesignated preferred stock and (v) assumes no exercise of the Underwriters' over-allotment option. See "Description of Capital Stock" and "Underwriting." THE COMPANY Lightbridge, Inc. ("Lightbridge" or the "Company") develops, markets and supports a suite of integrated products and services that enable wireless telecommunications carriers to improve their customer acquisition and retention processes. The Company's software-based services are delivered primarily on an outsourcing and service bureau basis, which allows wireless carriers to focus internal resources on their core business activities. The Company offers on- line, real-time transaction processing and call center support solutions to aid carriers in qualifying and activating applicants for wireless service, as well as software-based sales support services for traditional distribution channels, such as dealers, agents and direct mobile sales forces, and emerging distribution channels, such as mass market retail stores, home shopping and stand-alone kiosks. The Company develops and implements interfaces that fully integrate its acquisition system with carrier and third-party systems, such as those for billing, point-of-sale, activation and order fulfillment. The Company recently introduced software-based decision support tools and services that enable carriers to reduce subscriber churn and to make more informed business decisions about their customers, markets and distribution channels. Over the past 10 years, the number of U.S. cellular subscribers has increased 58% on a compounded annual basis, as the market for cellular phones has evolved from serving early adopters to serving mass market consumers. While cellular service historically has represented the largest sector of the U.S. wireless telecommunications industry, other wireless services, such as personal communication services ("PCS") and enhanced specialized mobile radio ("ESMR"), are emerging as competitive alternatives to cellular services. In the midst of strong subscriber growth and increasing competition, wireless carriers are encountering high costs of acquisition, declining revenues per subscriber, escalating losses from subscription fraud and lost revenues from churn in subscriber bases. Lightbridge's objective is to be the leading provider of innovative, software-based solutions for cost-effective customer acquisition and retention for the wireless telecommunications industry. By focusing on the wireless telecommunications industry, the Company has developed significant expertise and experience that it intends to employ to address the changing needs of wireless carriers in both existing and emerging markets. The Company's strategy is to provide a suite of complementary software-based products and services that permit a wireless carrier to select applications and functions to create an integrated, customized solution addressing its particular needs. The open architecture underlying the Company's software applications supports the development of flexible, integrated solutions, regardless of the type of wireless service provided by a client and independent of the client's computing environment. The Company develops long-term consultative relationships with leading wireless carriers that assist it in identifying evolving industry needs and marketing additional products and services to its existing client base. Lightbridge also establishes relationships with strategic partners in order to increase the functionality of its products, reduce the time to market for its new products and services, and access its partners' marketing and development resources. The Company intends to leverage these consultative and partnering relationships to expand the Company's presence in the United States, including in the emerging PCS market, and to facilitate and expedite the Company's entry into the rapidly expanding international wireless market. The Company sells its products and services through a direct sales force. The Company's current client base consists of 39 wireless telecommunication clients, including 8 of the 12 largest domestic cellular carriers (based on total population coverage) and the only 3 domestic carriers currently delivering PCS service. In the year ended September 30, 1995, approximately 94% of the Company's revenues was attributable to carriers that were also clients in the preceding fiscal year. Lightbridge was incorporated in Delaware in June 1989 under the name Credit Technologies, Inc. and changed its name to Lightbridge, Inc. in November 1994. The Company's principal executive offices are located at 281 Winter Street, Waltham, Massachusetts 02154, and its telephone number is (617) 890-2000. THE OFFERING <TABLE> <S> <C> Common Stock offered: By the Company................. 3,021,868 shares By the Selling Stockholders.... 778,132 shares Common Stock to be outstanding after the offering.............. 14,530,377 shares(1) Use of Proceeds.................. For repayment of indebtedness, for payment of the exercise price of repurchase options to acquire 400,000 shares of Common Stock, and for working capital and other general corporate purposes, including potential acquisitions Proposed Nasdaq National Market symbol.......................... LTBG </TABLE> - -------- (1) Excludes, as of August 26, 1996, (i) 1,615,800 shares of Common Stock issuable upon the exercise of outstanding options at a weighted average exercise price of $1.80 per share, (ii) 1,000,000 shares of Common Stock reserved for future option grants under the Company's 1996 Incentive and Nonqualified Stock Option Plan, (iii) 100,000 shares of Common Stock reserved for issuance under the Company's 1996 Employee Stock Purchase Plan and (iv) 750,250 shares of Common Stock issuable upon the exercise of warrants at an exercise price of $2.00 per share and 100,000 shares of Common Stock issuable upon the exercise of a warrant at an exercise price equal to the initial public offering price set forth on the front cover page hereof. See "Management--Benefit Plans" and Notes 7 and 12 to Notes to Financial Statements. Assumes the surrender of 52,223 shares of Common Stock in payment of the exercise price of certain warrants that will expire upon the closing of the offering, based on an assumed initial public offering price of $9.00 per share. To the extent the initial public offering price differs, the number of shares will vary. See "Description of Capital Stock--Warrants." Also gives effect to the repurchase of an additional 200,000 shares of Common Stock by the Company upon the closing of this offering using a portion of the net proceeds. See "Use of Proceeds" and "Certain Transactions--Settlement Agreement and Related Matters." SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> TWELVE THREE MONTHS SIX MONTHS MONTHS ENDED ENDED YEARS ENDED SEPTEMBER 30, ENDED DECEMBER 31, JUNE 30, ---------------------------------------- DEC. 31, ------------- --------------- 1991 1992 1993 1994 1995 1995(1) 1994 1995 1995 1996 ------- ------ ------ ------- ------- -------- ------ ------ ------ ------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues............... $ 1,174 $2,988 $6,986 $13,398 $19,350 $20,347 $5,515 $6,512 $9,003 $13,263 Income (loss) from operations............ (1,125) (623) 130 1,207 (1,607) (1,806) 586 387 (1,331) 692 Net income (loss)...... (1,202) (753) (125) 950 (2,433) (2,773) 412 72 (1,736) 303 Pro forma net income (loss) per common share(2).............. $ (0.19) $ 0.01 $ 0.02 Pro forma weighted average number of common and common equivalent shares outstanding(2)........ 12,614 13,115 13,747 </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 --------------------------- AS ACTUAL ADJUSTED(2)(3) ------- -------------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents.......................... $ 3,532 $25,344 Working capital.................................... 2,420 25,845 Total assets....................................... 14,555 36,367 Long-term obligations, less current portion........ 2,694 2,581 Redeemable preferred stock......................... 9,226 -- Stockholders' equity (deficiency).................. (4,153) 28,611 </TABLE> - -------- (1) The Company changed its fiscal year from September 30 to December 31, effective with the fiscal year ending December 31, 1996. All references to fiscal years are to years ended September 30. (2) Adjusted to give effect to the conversion of all outstanding shares of Convertible Preferred Stock into 5,247,324 shares of Common Stock. The Company has never declared or paid any cash dividends on its Common Stock. (3) Adjusted to reflect the sale of 3,021,868 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $9.00 per share, after deducting estimated underwriting discounts and commissions and offering expenses, the application of the net proceeds thereof and the payment by the Company of cash to purchase Common Stock from and settle certain obligations with an existing stockholder subsequent to June 30, 1996. See "Use of Proceeds" and "Capitalization."
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+SUMMARY The following summary does not purport to be complete and is qualified in its entirety by the more detailed information and financial statements appearing elsewhere herein. Certain terms used in this summary are defined elsewhere herein. CAROLINA FINCORP, INC. The Holding Company is a North Carolina corporation recently organized by the Board of Directors of Richmond Savings to acquire all of the capital stock that Richmond Savings will issue upon its conversion from the mutual to stock form of ownership. The conversion of Richmond Savings to stock form, the issuance of Richmond Savings' capital stock to the Holding Company, and the offer and sale of the Common Stock of the Holding Company are referred to in this Prospectus as the "Conversion." The Holding Company has not as yet engaged in any business. Upon completion of the Conversion, its business will initially consist solely of owning Richmond Savings, investing the proceeds of the Conversion that are retained by the Holding Company and holding the indebtedness to be outstanding from the ESOP. The Holding Company has received the approval of the Administrator and the Board of Governors of the Federal Reserve System (the "Federal Reserve") to acquire Richmond Savings. The executive office of the Holding Company is located at 115 South Lawrence Street, Rockingham, North Carolina, and its telephone number is (910) 997-6245. RICHMOND SAVINGS BANK, SSB Richmond Savings is a North Carolina-chartered mutual savings bank headquartered in Rockingham, North Carolina and has been in operation since 1906. Since 1957, Richmond Savings has been a member of the Federal Home Loan Bank ("FHLB") system and its deposits have been federally insured. Richmond Savings' deposits are now insured by the Savings Association Insurance Fund (the "SAIF") of the FDIC to the maximum amount permitted by law. Richmond Savings conducts business through two full service offices in Rockingham and full service offices in Southern Pines and Ellerbe, North Carolina. Richmond Savings also operates a loan origination office in Laurinburg, North Carolina. Richmond Savings' primary market area consists of Richmond, Moore and Scotland counties in North Carolina. At June 30, 1996, Richmond Savings had total assets of $94.1 million, net loans of $68.4 million, deposits of $83.7 million and retained earnings of $8.6 million. Richmond Savings is primarily engaged in the business of attracting deposits from the general public and using such deposits to make mortgage loans secured by one-to-four family residential real estate located in Richmond Savings' primary market area of Richmond, Moore and Scotland counties in North Carolina. Richmond Savings also makes home equity line of credit loans, multi- family residential loans, commercial loans, construction loans, home improvement loans, loans secured by deposit accounts, and various types of consumer loans. See "BUSINESS OF RICHMOND SAVINGS." Richmond Savings has been and intends to continue to be a community-oriented financial institution offering a variety of financial services to meet the needs of the communities it serves. THE CONVERSION Richmond Savings was organized and has operated for most of its existence as a traditional savings and loan association. The Board of Directors believes that the banking and financial services industries are in the process of fundamental changes, reflecting changes in the local, national and international economies, technological changes and changes in state and federal laws. As a result, for several years Richmond Savings has been studying the environment in which it operates and its strategic options. As a result of its study of its strategic options, Richmond Savings adopted the Plan of Conversion, which provides for conversion of Richmond Savings from a North Carolina-chartered mutual savings bank to a North Carolina-chartered stock savings bank. Richmond Savings believes that converting the bank from the mutual to stock form and organizing the Holding Company will provide increased flexibility for Richmond Savings and the Holding Company to react to changes in their operating environment, regardless of any strategies ultimately chosen. Richmond Savings also believes that the additional capital will enhance its ability to provide additional customer services and that stockholders of the Holding Company will be encouraged to do more business with, and refer more customers to, Richmond Savings. The Plan of Conversion must be approved by a majority of the votes which could be cast by members of Richmond Savings at a Special Meeting to be held on ______________, 1996 (the "Special Meeting"). Consummation of the Conversion is also contingent upon receipt of the approvals of the Administrator and the Federal Reserve which are necessary for the Holding Company to acquire Richmond Savings and the approvals of the FDIC and the Administrator which are necessary for Richmond Savings to convert from mutual to stock form. The Administrator has conditionally approved the Conversion and the Holding Company's acquisition application, subject to approval by Richmond Savings' members and satisfaction of certain other conditions. The Federal Reserve has conditionally approved the Holding Company's acquisition application, subject to the satisfaction of certain conditions. The FDIC has issued a notice of non-objection with respect to the Conversion, subject to certain conditions. See "THE CONVERSION -- General." If the Conversion is not approved by the members at the Special Meeting or an adjournment thereof, no Common Stock will be issued, Richmond Savings will remain a North Carolina-chartered mutual savings bank, all subscription funds will be returned promptly plus interest at Richmond Savings' passbook rate, and all deposit withdrawal authorizations will be cancelled without any action on the part of subscribers or purchasers. THE OFFERINGS Pursuant to the Plan of Conversion, between 1,190,000 shares and 1,851,500 shares of Common Stock are being offered by the Holding Company at the price of $10.00 per share in the Subscription Offering to the following persons in the following order of priority: (i) Richmond Savings' depositors as of March 31, 1995 who had aggregate deposits at the close of business on such date of at least $50 ("Eligible Account Holders"); (ii) Richmond Savings' Employee Stock Ownership Plan (the "ESOP"); (iii) Richmond Savings' depositors as of _______________, 1996 (the "Supplemental Eligibility Record Date"), who had aggregate deposits at the close of business on such date of at least $50 ("Supplemental Eligible Account Holders"); (iv) Richmond Savings' depositor and borrower members as of _________________, 1996, who are not Eligible Account Holders or Supplemental Eligible Account Holders ("Other Members"); and (v) directors, officers and employees of Richmond Savings who are not Eligible Account Holders, Supplemental Eligible Account Holders or Other Members. Beneficial owners of individual retirement accounts ("IRAs"), Keogh savings accounts and other similar retirement accounts have been deemed to be holders of such accounts for purposes of the exercise of Subscription Rights. See "THE CONVERSION -- Subscription Offering." Shares of Common Stock not subscribed for in the Subscription Offering will be offered in a Community Offering to members of the general public, with priority given to natural persons or trusts of natural persons who are residents of the Local Community, including IRAs, Keogh accounts and similar retirement accounts established for the benefit of natural persons who are residents of the Local Community. The Holding Company and Richmond Savings have the absolute right to reject orders in the Community Offering in whole or in part. See "THE CONVERSION --Community Offering." If there is a Community Offering, it is anticipated that all shares of Common Stock not purchased in the Community Offering will be offered for sale by the Holding Company to the general public in the Syndicated Community Offering. See "THE CONVERSION -- Syndicated Community Offering." THE SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS IN THE SUBSCRIPTION OFFERING EXPIRE AT THE EXPIRATION TIME, WHICH IS 12:00 NOON., EASTERN TIME, ON _______________, 1996, UNLESS EXTENDED. THE COMMUNITY OFFERING, IF ANY, MAY COMMENCE AT ANY TIME AFTER THE COMMENCEMENT OF THE SUBSCRIPTION OFFERING AND MAY TERMINATE AT THE EXPIRATION TIME OR AT ANY TIME THEREAFTER, BUT NOT LATER THAN _________________, 1996, UNLESS EXTENDED WITH THE APPROVAL OF THE ADMINISTRATOR. STOCK PURCHASE LIMITATIONS The maximum aggregate number of shares of Common Stock for which any person or entity (other than the ESOP), together with associates, and persons acting in concert, may subscribe in the Offerings is 25,000 shares. However, Richmond Savings' Board of Directors has the right, at any time prior to completion of the Conversion, to decrease the 25,000 maximum purchase limitation to an amount not less than 1% of the shares issued in the Conversion or increase such 25,000 share limitation to an amount up to 5% of the shares issued in the Conversion. Any decrease or increase in the maximum purchase limitation will be without notice to, or resolicitation of, subscribers and without a resolicitation of proxies in connection with the Special Meeting. The ESOP may purchase up to 8% of the shares of Common Stock issued in the Conversion (between 95,200 and 128,800 shares assuming the issuance of between 1,190,000 and 1,610,000 shares). If, because there is an oversubscription for shares or for any other reason, the ESOP is nevertheless unable to purchase in the aggregate up to 8% of the shares of Common Stock issued in the Conversion, it is expected that the ESOP will purchase shares of Common Stock in the open market so that after such purchases a number of shares of Common Stock up to 8% of the number of shares issued in the Conversion will have been acquired by the ESOP. See "RISK FACTORS -- Cost of ESOP." No person or entity may subscribe for less than 50 shares of Common Stock, or an aggregate dollar amount of less than $500. The term "acting in concert" is defined in the Plan to mean: (i) knowing participation in a joint activity or interdependent conscious parallel action towards a common goal, whether or not pursuant to an express agreement, with respect to the purchase, ownership, voting or sale of Common Stock; or (ii) a combination or pooling of voting or other interests in the securities of the Holding Company for a common purpose pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise. The Holding Company and Richmond Savings may presume that certain persons are acting in concert based upon, among other things, joint account relationships and the fact that such persons have filed joint Schedules 13D with the SEC with respect to other companies. The term "associate" of a person is defined in the Plan to mean: (i) any corporation or organization (other than Richmond Savings, the Holding Company or any of their majority-owned subsidiaries) of which such person is an officer or partner or is, directly or indirectly, the beneficial owner of 10% or more of any class of equity securities; (ii) any trust or other estate in which such person has a substantial beneficial interest or as to which such person serves as trustee or in a similar fiduciary capacity (excluding tax- qualified employee plans and charitable trusts which are exempt from federal taxation pursuant to Section 501(c)(3) of the Internal Revenue Code, as amended); and (iii) any relative or spouse of such person, or any relative of such spouse, who either has the same home as such person or who is a director or officer of Richmond Savings, the Holding Company or any of their parents or subsidiaries. See "THE CONVERSION -- Minimum and Maximum Purchase Limitations." SUBSCRIPTION RIGHTS; PURCHASE OF SHARES Subscription Rights are non-transferable and may be exercised only by the person to whom they are issued and only for his or her own account. Subscription Rights are exercisable and purchases may be made in the Offerings only by returning the stock order form accompanying this Prospectus (the "Stock Order Form") properly completed with full payment for the aggregate dollar amount of Common Stock desired. Stock Order Forms and required payments for purchases in the Subscription Offering must be received prior to the Expiration Time. Stock Order Forms and required payments for purchases in the Community Offering must be delivered prior to the time the Community Offering terminates, which may be at the Expiration Time or at any time thereafter (but not later than ______________, 1996). Payment may be made in cash (if delivered in person to any office of Richmond Savings), by check, bank draft, negotiable order of withdrawal or money order, or by authorization of withdrawal from deposit accounts maintained with Richmond Savings, other than negotiable order of withdrawal or other demand deposit accounts. Subscription payments made in cash, by check, bank draft, negotiable order of withdrawal or money order will earn interest at Richmond Savings' passbook savings rate from the date payment in good funds is received by Richmond Savings until the completion or termination of the Conversion or, in the case of an order submitted in the Community Offering, until it is determined that such order cannot or will not be filled. Subscription payments made by authorization of withdrawal from a deposit account at Richmond Savings will continue to earn interest at the applicable contractual rate until the Conversion is completed or terminated; such funds will be otherwise unavailable to the depositor. Payment for Common Stock may be made from funds in an IRA, Keogh or similar account at Richmond Savings only if the beneficial owner of such account directs Richmond Savings to transfer that account to a self-directed account in the name of an independent trustee. No early withdrawal penalties will be incurred in connection with payments made through authorization of withdrawals from certificate accounts, including IRA, Keogh and similar retirement accounts. However, if after such withdrawal the applicable minimum balance requirement ceases to be satisfied, such certificate account will be cancelled and the remaining balance thereof will earn interest at Richmond Savings' passbook savings rate. See "THE CONVERSION -- Exercise of Subscription Rights and Purchases in the Community Offering." APPRAISAL The Plan of Conversion requires that the aggregate purchase price of the Common Stock be based upon an independent valuation of the estimated aggregate pro forma market value of the Holding Company and Richmond Savings. Baxter Fentriss and Company ("Baxter Fentriss"), an independent financial consulting firm, has advised Richmond Savings and the Holding Company that in its opinion, at August 8, 1996, the Valuation Range of the aggregate estimated pro forma market value of the Holding Company and Richmond Savings was from $11,900,000 to $16,100,000. The appraisal will be reviewed and, if appropriate, revised by Baxter Fentriss upon conclusion of the Offerings. The appraisal by Baxter Fentriss is not intended and should not be construed as a recommendation of any kind as to the advisability of purchasing the Common Stock. See "MARKET FOR COMMON STOCK," "PRO FORMA DATA" and "THE CONVERSION -- Purchase Price of Common Stock and Number of Shares Offered." STOCK PRICING AND NUMBER OF SHARES TO BE OFFERED The purchase price of the Common Stock offered in the Subscription Offering and the price at which the Common Stock is sold in the Community and Syndicated Community Offerings, if any, will be $10.00 per share. The aggregate dollar amount of Common Stock that may be sold in the Conversion has been determined by the Board of Directors of Richmond Savings and the Holding Company based upon the independent appraisal of the pro forma market value of the Holding Company and Richmond Savings prepared by Baxter Fentriss. Depending on market and financial conditions following commencement of the Subscription Offering, the number of shares offered and sold in the Conversion may be increased or decreased. With the consent of the Administrator and the FDIC and in order to reflect changes in market and financial conditions following commencement of the Subscription Offering, the aggregate purchase price of the shares of Common Stock issued in the Conversion may be increased, without any solicitation of subscriptions or right to cancel, rescind or change subscription orders, to up to 15% above the maximum of the Valuation Range. However, the aggregate dollar amount of Common Stock that may be sold in the Conversion will not be more than $18,515,000 or less than $11,900,000 without a resolicitation of subscribers. Any change in the total dollar amount of the Offerings outside of the current Valuation Range will be subject to the receipt of an updated appraisal confirming such valuation and regulatory approvals. See "THE CONVERSION -- Purchase Price of Common Stock and Number of Shares Offered." USE OF PROCEEDS The net proceeds from the sale of the Common Stock in the Conversion, including shares purchased by the ESOP with funds loaned by the Holding Company, are estimated to be between $11,205,000 and $17,633,000 depending upon the actual expenses of the Conversion and other factors. See "PRO FORMA DATA." The Holding Company intends to use a portion of the net proceeds of the Offerings (estimated between $952,000 and $1,288,000 assuming the ESOP's purchase of between 95,200 and 128,800 shares at $10 per share) to fund the loan made to the ESOP to purchase shares of Common Stock in the Conversion. After deducting the amount of such loan from the proceeds, the Holding Company is expected to retain approximately 50% of the remaining net proceeds from the issuance of the Common Stock. The Holding Company will initially invest these proceeds primarily in interest-earning deposits, U.S. government, federal agency and other marketable securities and mortgage-backed securities. See "USE OF PROCEEDS." The remainder of the net proceeds from the sale of the Common Stock will be paid by the Holding Company to Richmond Savings in exchange for all of the capital stock of Richmond Savings. The net proceeds paid to Richmond Savings will become part of Richmond Savings' general funds, and will initially be invested in mortgage and other loans, mortgage- backed securities and investments consisting primarily of U.S. government and federal agency obligations, interest-earning deposits and other marketable securities in accordance with Richmond Savings' lending and investment policies. Net proceeds will also be used for other general corporate purposes. Richmond Savings is in the process of relocating its Ellerbe, North Carolina branch office into a new Ellerbe office which is expected to be opened in late 1996. The completion of this relocation is not contingent upon consummation of the Conversion. The estimated cost of such new office, less the expected proceeds from the sale of the existing Ellerbe office, is expected to be approximately $255,000. In addition, regardless of whether the Conversion is consummated, Richmond Savings anticipates relocating its Richmond Plaza branch office in Rockingham, North Carolina (which is now leased) to another nearby location in Rockingham to be owned by Richmond Savings. Although the new facility is expected to cost approximately $495,000, the effect on the Holding Company's financial condition and results of operations is not expected to be material because lease payments at the existing Richmond Plaza location would terminate. Proceeds of the Conversion are not needed to complete the relocation of the Ellerbe and Richmond Plaza offices but could be used for such purposes. In addition, prior to adopting the Plan of Conversion, Richmond Savings had begun considering the possibility of opening other branch offices in its primary market area and other nearby communities. Whether such offices will be opened is not contingent upon consummation of the Conversion; however, if any such offices are opened, proceeds of the Conversion could be used in acquiring, constructing or equipping them. In addition, the Holding Company and Richmond Savings may consider acquiring other financial institutions in Richmond Savings' primary market area and other nearby communities in transactions in which such institutions would be merged into Richmond Savings or held as separate subsidiaries of the Holding Company. Except for the Ellerbe and Richmond Plaza branch relocations described above, the Holding Company and Richmond Savings have no current plans to open any additional office or to acquire any other financial institution. If Richmond Savings' proposed Management Recognition Plan and Trust (the "MRP") is approved by the stockholders of the Holding Company, the MRP will acquire a number of shares of Common Stock equal to 4% of the number of shares issued in the Conversion. See "MANAGEMENT OF RICHMOND SAVINGS --Proposed Management Recognition Plan." Such shares may either be acquired in the open market or acquired through the Holding Company's issuance of authorized but unissued shares. In either event, it is expected that the MRP will acquire such shares reasonably promptly after the MRP is approved by the stockholders. In the event shares are acquired in the open market, the funds for such purchase may be provided by Richmond Savings from the proceeds of the Conversion. It is estimated that between 47,600 and 64,400 shares will be acquired by the MRP, assuming the issuance of between 1,190,000 and 1,610,000 shares in the Conversion. If all such shares were acquired by the MRP in the open market, and if such shares were acquired at a price of $10.00 per share, Richmond Savings would contribute between $476,000 and $644,000, respectively, to the MRP for this purpose. Additional shares would be acquired if the number of shares issued in the Conversion exceeds 1,610,000 and the price per share paid by the MRP could be more or less than $10.00 per share, which would change the total contribution to the MRP accordingly. See "RISK FACTORS -- Cost and Possible Dilutive Effect of the MRP and Stock Option Plan" and "MANAGEMENT OF RICHMOND SAVINGS -- Proposed Management Recognition Plan." If the Holding Company's Stock Option Plan and Trust (the "Stock Option Plan") is approved by the stockholders of the Holding Company, the Stock Option Plan could acquire in the open market a number of shares equal to 10% of the number of shares issued in the Conversion, which shares would be held to satisfy options granted under such plan. Such shares could be acquired after options are granted and prior to the time options vest under the Stock Option Plan. To the extent that sufficient shares are not acquired in the open market to satisfy options granted under the Stock Option Plan, the Holding Company will reserve authorized but unissued shares for this purpose. See "MANAGEMENT OF RICHMOND SAVINGS -- Proposed Stock Option Plan." The funds for any purchases in the open market may be provided by the Holding Company or Richmond Savings from the proceeds of the Conversion. It is estimated that between 119,000 and 161,000 shares will be acquired by the Stock Option Plan in the open market and/or reserved for issuance by the Holding Company, assuming the issuance of between 1,190,000 and 1,610,000 shares in the Conversion. If shares are acquired in the open market, the Holding Company or Richmond Savings would contribute between $1,190,000 and $1,610,000 respectively, to the Stock Option Plan for this purpose, assuming such shares are acquired at a price of $10.00 per share. Additional shares could be acquired if the number of shares issued in the Conversion exceeds 1,610,000 and the price could be more or less than $10.00 per share, which would change the contribution to the Stock Option Plan accordingly. See "RISK FACTORS -- Cost and Possible Dilutive Effect on the MRP and Stock Option Plan" and "MANAGEMENT OF RICHMOND SAVINGS -- Proposed Stock Option Plan." DIVIDENDS Following the Conversion, the Holding Company currently expects to pay quarterly cash dividends on the Common Stock at a rate to be determined. In addition, the Holding Company may determine from time to time that it is prudent to pay special nonrecurring cash dividends. Payment of dividends will be subject to determination and declaration by the Holding Company's Board of Directors. The Board of Directors will periodically review its dividend policy in view of the operating results and financial condition of the Holding Company and Richmond Savings, net worth and capital requirements, regulatory restrictions, tax consequences, industry standards, and general economic conditions, and it will authorize cash dividends to be paid if it deems such payment appropriate and in compliance with applicable law. There can be no assurance that dividends will in fact be paid on the Common Stock or that, if paid, such dividends will not be reduced or eliminated in future periods. See "DIVIDEND POLICY." In connection with the Conversion, the Holding Company and Richmond Savings have agreed with the FDIC that, within the first year after completion of the Conversion, neither the Holding Company nor Richmond Savings will pay any dividend or make any distribution that represents, or is characterized as, or is treated for income tax purposes as, a return of capital. The ability of the Holding Company to pay dividends may be dependent upon the Holding Company's receipt of dividends from Richmond Savings. Richmond Savings' ability to pay dividends is restricted. See "SUPERVISION AND REGULATION -- Regulation of Richmond Savings -- Restrictions on Dividends and Other Capital Distributions." In addition, see "TAXATION" for a discussion of federal income tax provisions that may limit the ability of Richmond Savings to pay dividends to the Holding Company without incurring a recapture tax. MARKET FOR COMMON STOCK The Holding Company, as a newly organized company, has never issued capital stock, and consequently, there is no market for the Common Stock at this time. The Holding Company has received conditional approval to have the Common Stock listed on the Nasdaq National Market ("Nasdaq") under the symbol "CFNC." There can be no assurance that the Common Stock will in fact be listed for quotation on Nasdaq. A public market having the desirable characteristics of depth, liquidity and orderliness will depend upon the presence in the market place of both willing buyers and willing sellers at any given time. No assurance can be given that an active trading market will develop and be maintained. See "MARKET FOR COMMON STOCK." STOCK OWNERSHIP BY MANAGEMENT The directors and executive officers of the Holding Company and of Richmond Savings and their associates currently anticipate subscribing for Common Stock in the aggregate amount of $1,299,000, or 129,900 shares. As a result, such persons anticipate subscribing for 8.07% to 10.92% of the shares of Common Stock issued in the Conversion based upon the maximum and minimum of the Valuation Range, respectively. See "ANTICIPATED STOCK PURCHASES BY MANAGEMENT." In addition, it is expected that the ESOP will subscribe for 8% of the shares of Common Stock issued in the Conversion (between 95,200 and 128,800 shares, assuming the issuance of between 1,190,000 and 1,610,000 shares). See "MANAGEMENT OF RICHMOND SAVINGS -- Employee Stock Ownership Plan." It is expected that directors, officers and employees of the Holding Company and Richmond Savings will also receive restricted stock grants under the MRP for a number of shares of Common Stock equal to 4% of the number of shares issued in the Conversion and will receive options under the Stock Option Plan to purchase a number of shares of Common Stock equal to 10% of the number of shares issued in the Conversion, if such plans are approved at a meeting of stockholders of the Holding Company following the Conversion. See "-- Benefits to Directors and Officers" and "MANAGEMENT OF RICHMOND SAVINGS --Proposed Management Recognition Plan" and "-- Proposed Stock Option Plan." If (i) the Stock Option Plan is approved by the stockholders of the Holding Company within one year after the Conversion and all of the stock options which could be granted to directors and executive officers under the Stock Option Plan are granted and exercised or the shares for such options are acquired by the Stock Option Plan and all option shares are acquired in the open market, (ii) the MRP is approved by the stockholders of the Holding Company within one year after the Conversion, all of the MRP shares which could be granted to directors and executive officers are granted and issued and all such shares are acquired in the open market, (iii) the ESOP acquires 8% of the shares issued in the Conversion and none of such shares are allocated, and (iv) the Holding Company did not issue any additional shares of its Common Stock, the shares held by directors and executive officers and their associates as a group, including (a) shares purchased outright in the Conversion, (b) shares purchased by the ESOP, (c) shares purchased pursuant to the Stock Option Plan and (d) shares granted under the MRP, would give such persons effective control over as much as 28.02% or 25.17%, at the minimum and maximum of the Valuation Range, respectively, of the Common Stock issued and outstanding. BENEFITS TO DIRECTORS AND EXECUTIVE OFFICERS In connection with the Conversion, certain benefits will be provided to directors, officers and employees of Richmond Savings. Employment Agreements. In connection with the Conversion, Richmond Savings will enter into employment agreements with R. Larry Campbell, President, and John W. Bullard, Executive Vice President. The employment agreements provide for initial annual salaries of $95,400 and $63,600, respectively. See "MANAGEMENT OF RICHMOND SAVINGS --Employment Agreements." Restricted Stock Grants. Pursuant to the MRP, which is expected to be adopted by the Boards of Directors of the Holding Company and Richmond Savings, directors, officers and employees of Richmond Savings could receive restricted stock grants of a number of shares of Common Stock equal to 4% of the shares issued in the Conversion (between 47,600 and 64,400 shares, assuming the issuance of between 1,190,000 and 1,610,000 shares). Assuming that the shares issued pursuant to the MRP had a value of $10.00 per share, such shares would have a value of between $476,000 and $644,000. Under the MRP, it is expected that Richmond Savings' two executive officers, R. Larry Campbell and John W. Bullard, would receive restricted stock grants for shares of Common Stock equal to approximately 25% and 10%, respectively, of the number of shares issued under the MRP. If 1,610,000 shares were issued in the Conversion and if such shares had a value of $10.00 per share, Messrs. Campbell and Bullard would receive restricted stock grants of 16,100 shares and 6,440 shares, respectively, having a value of $161,000 and $64,400, respectively. Under applicable regulations, if the proposed MRP is submitted to and approved by the stockholders of the Holding Company within one year after consummation of the Conversion, the seven non- employee directors of Richmond Savings would receive restricted stock grants for an aggregate of not more than 30% of the shares issued under the MRP, or 19,320 shares, assuming the issuance of 1,610,000 shares in the Conversion. Assuming the MRP shares had a value of $10.00 per share, such shares would have an aggregate value of $193,200. After such grants, and after the above- described grants to Messrs. Campbell and Bullard, 35% of the shares which could be issued under the MRP would be available for grants to other employees or could be held under the MRP for later grants pursuant to the plan. Shares granted under the MRP will be forfeited unless recipients of grants satisfy certain vesting requirements, and the MRP will only be effective if approved by the stockholders of the Holding Company at a meeting of stockholders which may be held no sooner than six months following the Conversion. Grants of restricted stock under the MRP will be made at no cost to recipients. See "MANAGEMENT OF RICHMOND SAVINGS -- Proposed Management Recognition Plan." Stock Options. Pursuant to the Stock Option Plan which is expected to be adopted by the Boards of Directors of the Holding Company and Richmond Savings, directors and employees of Richmond Savings could receive options to purchase a number of shares of Common Stock equal to 10% of the shares issued in the Conversion (between 119,000 and 161,000 shares, assuming the issuance of between 1,190,000 and 1,610,000 shares). Under the proposed Stock Option Plan, it is expected that Richmond Savings' two executive officers, R. Larry Campbell and John W. Bullard, would receive 25% and 10%, respectively, of the options to be issued under the Stock Option Plan. If 1,610,000 shares were issued in the Conversion, Messrs. Campbell and Bullard would receive options to purchase 40,250 and 16,100 shares, respectively. Under applicable regulations, if the proposed Stock Option Plan is submitted to and approved by the stockholders of the Holding Company within one year after consummation of the Conversion, the seven non-employee directors of Richmond Savings would receive, in the aggregate, 30% of the options to be issued under the Stock Option Plan, or options to purchase 48,300 shares, assuming the issuance of 1,610,000 shares in the Conversion. After such option grants, and after the above-described grants of options to Messrs. Campbell and Bullard, 35% of the options which could be issued under the Stock Option Plan would be available for grants to other employees or could be held under the Stock Option Plan for later grants pursuant to the plan. Options granted under the Stock Option Plan will be forfeited unless recipients satisfy certain vesting requirements. The Stock Option Plan will only be effective if approved by the stockholders of the Holding Company at a meeting of stockholders which may be held no sooner than six months following the Conversion. The exercise price of the options will be the fair market value of the Common Stock at the time the options are granted (which will be after the Stock Option Plan is approved by the Holding Company's stockholders), and the options will have terms of 10 years or less. Options would be issued at no cost to recipients. See "MANAGEMENT OF RICHMOND SAVINGS -- Proposed Stock Option Plan." ESOP. In connection with the Conversion, Richmond Savings has established the ESOP. As part of the Conversion, the ESOP intends to borrow funds from the Holding Company and to use such funds to purchase 8% of the shares of Common Stock to be issued in the Conversion, estimated to be between 95,200 and 128,800 shares, assuming the issuance of between 1,190,000 and 1,610,000 shares. See "MANAGEMENT OF RICHMOND SAVINGS -- Employee Stock Ownership Plan." ANTI-TAKEOVER PROVISIONS The Articles of Incorporation and Bylaws of the Holding Company and Richmond Savings contain certain restrictions that are intended to discourage non-negotiated attempts to acquire control of the Holding Company or Richmond Savings. The Board of Directors of the Holding Company believes that these provisions encourage potential acquirors to negotiate directly with the Board of Directors. However, these provisions may discourage an attempt to acquire control of the Holding Company which a majority of the stockholders might deem to be in their best interests or in which they might receive a premium over the then market price of their shares. These provisions may also render the removal of a director or the entire Board of Directors of the Holding Company more difficult and may deter or delay changes in control which have not received the requisite approval of the Holding Company's Board of Directors. Other factors, such as voting control of directors and officers and agreements with employees, may also have an anti-takeover effect. See "RISK FACTORS -- Anti-Takeover Considerations Which Could Impede Changes in Control" and "ANTI-TAKEOVER PROVISIONS AFFECTING THE HOLDING COMPANY AND RICHMOND SAVINGS." RISK FACTORS Special attention should be given to the "RISK FACTORS" section of this Prospectus, which discusses the possible effects of increases in interest rates on Richmond Savings, the disparity between SAIF and Bank Insurance Fund ("BIF") insurance premiums, a possible special SAIF insurance premium assessment, strong competition and slow growth in Richmond Savings' market area, possible expansion of Richmond Savings, anticipated low return on equity following the Conversion, the cost of the ESOP, the cost and possible dilutive effect of the MRP and Stock Option Plan, increased tax liability related to recapture of bad debt reserves, potential financial institution regulation and legislation, absence of a prior market for the Common Stock, income tax consequences of Subscription Rights, anti-takeover considerations, and certain other matters that potential purchasers should consider before deciding whether to subscribe for the Common Stock offered hereby.
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS." THE COMPANY Hambrecht & Quist is a major bracket investment bank focused on emerging growth companies and growth-oriented investors. The Company's core strength has been the early identification of trends, industries and entrepreneurial companies that have the potential to become broad-based drivers of economic growth and change. The Company believes that its industry-oriented research specialization is crucial to meeting the demands of its investor and issuer clients for sophisticated and informed investment and strategic advice, and to building long-term relationships with these clients. Since its inception in 1968, Hambrecht & Quist has broadened its industry focus from technology and healthcare to encompass the branded consumer industry and companies providing business information, outsourcing and healthcare services. Hambrecht & Quist is generally considered by the securities industry to be one of the approximately 15 major bracket investment banks based on H&Q's significant level of participation in equity underwritings as manager or a co-manager and in syndicates for public equity offerings managed by other investment banks. "Major bracket" firms are smaller than the five "bulge bracket" investment banks. The Company is one of the smallest major bracket firms based on measures such as revenues, assets, dollar amounts of underwritten debt and equity, number of employees and trading volume. However, the Company believes that based on the number of managed or co-managed public equity offerings, H&Q is a leading underwriter of equity securities for emerging growth companies in its industry areas of focus. As a result of the high proportion of venture capital invested in emerging growth companies located in California and Massachusetts, the Company's underwriting clients have been concentrated in these states. Approximately 47% of the companies for which H&Q served as manager or co-manager of a securities offering between January 1995 and June 1996 were based in California, and approximately 11% of these companies were based in Massachusetts. H&Q organizes its research and investment banking professionals into industry teams. Each team, together with H&Q's venture capital professionals, endeavors to develop and maintain an in-depth understanding of the secular and cyclical trends driving that particular industry sector. In addition, each team of professionals maintains close relationships not only with private and public growth companies, but also with venture capital and institutional investors, technical experts, professional service providers and other key industry participants. Through these relationships, H&Q gains the opportunity to participate actively in the growth of promising entrepreneurial companies. H&Q has leveraged its industry expertise by providing an increasing range of investment banking and brokerage services and by investing its own capital in emerging growth companies. It has grown its business by expanding the range of services it provides to growth companies and investors, by addressing the needs of larger companies and by developing expertise in new industries and markets. The Company has expanded its underwriting capability by increasing its corporate finance and syndicate personnel and increased its advisory services in mergers, acquisitions, strategic partnerships, private placements and asset-based and mezzanine financing. At June 30, 1996, H&Q made a market in over 300 Nasdaq stocks and was one of the top three market makers in approximately 74% of the Nasdaq equity securities issued by companies for which H&Q served as manager or co-manager in an initial public offering completed between 1991 and 1996. H&Q also has recently increased its number of retail brokers from 41 to 62 and increased its trading of NYSE-listed securities. The Company brings together growth companies and growth investors through the sponsorship of eight regular conferences, each focusing on a different industry or geographic region. In addition, to facilitate the analysis of long- term trends, the Company has developed 11 industry indices, starting with the H&Q Technology Index. The Company believes that these efforts, together with the Company's investment banking and brokerage activities, have closely associated the name Hambrecht & Quist with entrepreneurial, high growth companies in its chosen areas of focus. H&Q is a leading underwriter of public offerings of equity securities for emerging growth companies in its industry areas of focus, based on the number of transactions completed since January 1991 in which H&Q served as a managing or co-managing underwriter. The number of public equity offerings managed or co-managed by the Company has increased from 42 in 1991 to 90 in 1995 and 69 in the first six months of calendar 1996, with H&Q serving as lead manager in 43%, 57% and 42% of these transactions, respectively. While the distribution of offerings among industries has varied over time, during 1995 and the first six months of calendar 1996, the Company managed or co-managed 96 public equity offerings in the technology industry, 35 in the healthcare industry, 21 in the services industry and 7 in the branded consumer industry, with H&Q serving as lead manager in 50% of these transactions. Since 1968, Hambrecht & Quist has managed or co-managed over 650 public offerings for over 440 growth companies in the technology, healthcare, business information and outsourcing services, healthcare services, branded consumer and related industries, serving as lead manager in more than 260 of these offerings. The Company's underwriting clients have included pioneers in emerging industries, such as Adobe, Apple, Genentech and Netscape. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company............ 3,500,000 shares Common Stock to be outstanding after the 22,169,064 shares(1) offering..................................... Use of proceeds................................ General corporate purposes Proposed New York Stock Exchange symbol........ HMQ </TABLE> - ------------------------------ (1) Based on shares outstanding at June 30, 1996. Excludes 5,697,520 shares of Common Stock issuable upon exercise of stock options outstanding at June 30, 1996 at a weighted average exercise price of $7.15 per share and 3,000,000 shares of Common Stock reserved at June 30, 1996 for future issuance under the Company's 1996 Equity Plan. See "Management -- Compensation Plans" and Note 8 of Condensed Notes to Combined Financial Statements -- June 30, 1996. SUMMARY COMBINED FINANCIAL INFORMATION(1) (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) <TABLE> <CAPTION> NINE MONTHS ENDED JUNE FISCAL YEAR ENDED SEPTEMBER 30, 30, ----------------------------------------------------- ------------------------ <S> <C> <C> <C> <C> <C> <C> <C> 1991 1992 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- ----------- ----------- COMBINED STATEMENT OF OPERATIONS DATA: Revenues: Principal transactions........... $ 23,480 $ 33,438 $ 30,045 $ 36,411 $ 53,425 $ 36,316 $ 75,354 Agency commissions............... 11,135 12,557 14,221 14,242 24,603 15,911 29,094 Investment banking............... 23,176 51,517 42,960 29,234 70,360 39,400 130,522 Corporate finance fees........... 7,409 8,371 9,993 18,561 20,709 14,530 31,947 Net investment gains............. 7,026 8,193 3,524 10,270 33,852 18,542 19,087 Other............................ 9,620 11,418 9,804 10,612 17,074 11,988 26,358 --------- --------- --------- --------- --------- ----------- ----------- Total revenues................... 81,846 125,494 110,547 119,330 220,023 136,687 312,362 --------- --------- --------- --------- --------- ----------- ----------- Expenses: Compensation and benefits........ 37,424 58,044 54,917 60,175 105,370 68,750 159,738 Brokerage and clearance.......... 5,611 6,184 6,892 7,367 10,441 6,678 10,017 Occupancy and equipment.......... 6,003 6,040 6,045 6,679 7,803 5,511 7,146 Communications................... 3,461 4,135 4,377 6,244 7,394 5,533 7,310 Interest......................... 303 1,141 1,464 987 1,266 727 1,041 Other(3)......................... 44,382 32,226 10,256 11,315 15,131 10,790 19,717 --------- --------- --------- --------- --------- ----------- ----------- Total expenses................... 97,184 107,770 83,951 92,767 147,405 97,989 204,969 --------- --------- --------- --------- --------- ----------- ----------- Minority interest(4)............... 453 794 352 526 719 454 874 --------- --------- --------- --------- --------- ----------- ----------- Income (loss) before income tax provision......................... (15,791) 16,930 26,244 26,037 71,899 38,244 106,519 Income tax provision (credit)...... (5,878) 7,200 10,940 10,119 22,461 11,810 36,493 --------- --------- --------- --------- --------- ----------- ----------- Net income (loss).................. $ (9,913) $ 9,730 $ 15,304 $ 15,918 $ 49,438 $ 26,434 $ 70,026 --------- --------- --------- --------- --------- ----------- ----------- --------- --------- --------- --------- --------- ----------- ----------- Pro forma net income per share(5).......................... Pro forma weighted average shares outstanding(5).................... <CAPTION> JUNE 30, 1996 ------------------------------- AS PRO ADJUSTED ACTUAL FORMA(2) (2)(6) --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> <C> COMBINED BALANCE SHEET DATA: Total assets....................... $ 486,736 $ 463,708 $ 514,988 Debt obligations................... 11,252 11,252 11,252 Stockholders' equity............... 170,394 155,725 207,005 Book value per common share outstanding....................... $ 8.34 $ 9.34 <CAPTION> FISCAL YEAR NINE MONTHS ENDED SEPTEMBER ENDED 30, JUNE 30, --------------- ------------- <S> <C> <C> 1995 1996 --------------- ------------- PRO FORMA(2) COMBINED STATEMENT OF OPERATIONS DATA: Revenues: Principal transactions........... $ 53,425 $ 75,354 Agency commissions............... 24,603 29,094 Investment banking............... 70,360 130,522 Corporate finance fees........... 20,709 31,947 Net investment gains............. 26,439 15,383 Other............................ 16,809 26,159 ------- ------------- Total revenues................... 212,345 308,459 ------- ------------- Expenses: Compensation and benefits........ 105,370 159,738 Brokerage and clearance.......... 10,441 10,017 Occupancy and equipment.......... 7,803 7,146 Communications................... 7,394 7,310 Interest......................... 1,266 1,041 Other(3)......................... 15,131 19,717 ------- ------------- Total expenses................... 147,405 204,969 ------- ------------- Minority interest(4)............... 300 364 ------- ------------- Income (loss) before income tax provision......................... 64,640 103,126 Income tax provision (credit)...... 28,442 45,374 ------- ------------- Net income (loss).................. $ 36,198 $ 57,752 ------- ------------- ------- ------------- Pro forma net income per share(5).......................... $ 1.83 $ 2.78 ------- ------------- ------- ------------- Pro forma weighted average shares outstanding(5).................... 19,827 20,769 ------- ------------- ------- ------------- <S> <C> <C> COMBINED BALANCE SHEET DATA: Total assets....................... Debt obligations................... Stockholders' equity............... Book value per common share outstanding....................... </TABLE> <TABLE> <CAPTION> NINE MONTHS ENDED FISCAL YEAR ENDED SEPTEMBER 30, JUNE 30, ----------------------------------------------------- ------------ 1991 1992 1993 1994 1995 1996 --------- --------- --------- --------- --------- ------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> OPERATING DATA: Total employees(7)............... 291 327 350 426 498 617 Return on average equity......... -- 34% 37% 28% 58% 62%(8) Compensation and benefits expense as a percentage of total revenues........................ 46% 46% 50% 50% 48% 51% Non-compensation and benefits expense as a percentage of total revenues........................ 73% 40% 26% 27% 19% 14% <CAPTION> <S> <C> OPERATING DATA: Total employees(7)............... Return on average equity......... Compensation and benefits expense as a percentage of total revenues........................ Non-compensation and benefits expense as a percentage of total revenues........................ </TABLE> - ------------------------------ (1) See Note 1 of Notes to Combined Financial Statements--September 30, 1995 for an explanation of the basis of presentation. (2) Gives effect to the transactions described under "Restructuring" and to the Tax Distribution. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview." (3) Includes $36.9 million in fiscal 1991 and $22.9 million in fiscal 1992 for settlement of certain litigation relating to MiniScribe Corporation. See "Business--Legal Proceedings." (4) Represents the pro rata interest of owners other than the Company in the earnings of Hambrecht & Quist Guaranty Finance. (5) See Note 8 of Notes to Pro Forma Combined Financial Statements for a discussion of the number of shares used in calculating pro forma net income per share. (6) As adjusted to reflect the sale of the shares of Common Stock offered hereby at an assumed initial public offering price of $16.00 per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001017292_biosense_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001017292_biosense_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial data, including the Consolidated Financial Statements and notes thereto, included elsewhere in this Prospectus. References herein to Biosense or the Company, unless the context requires otherwise, refer to Biosense, Inc. and its subsidiaries. THE COMPANY Biosense has developed proprietary technology which enables physicians to accurately and safely navigate medical instruments within patients' bodies during the performance of a wide variety of minimally invasive medical procedures. Biosense's technology consists of miniature, disposable location sensors incorporated into catheters and other medical instruments, a reusable "location pad" which emits non-hazardous, low-level electromagnetic energy and a proprietary computer system that converts the raw data gathered into a user- friendly map and location guide. The Company's products permit physicians to continuously acquire, display, compare, store and retrieve three dimensional ("3-D") spatially correct anatomical data and corresponding physiological data, which will provide physicians with important navigational and functional information not currently available during the performance of many medical procedures. The Company's products do not require fluoroscopic x-rays for navigating, thereby significantly reducing physician and patient exposure to dangerous ionizing radiation during the medical procedure. The Company believes that its proprietary technology will improve the accuracy and minimize the invasiveness of many diagnostic and therapeutic procedures, producing better clinical results. In addition, the Company believes that its technology will increase safety, reduce patient recovery times and lower the overall costs associated with a wide variety of invasive medical procedures. The initial applications of the Company's technology include the CARTO system, used for the diagnosis and treatment of cardiac arrhythmias, the NOGA system, used for the diagnosis of coronary artery disease and its related effects, and the MAGELLAN system, used for the performance of minimally invasive image-guided surgery and image-guided biopsy procedures. CARTO. The CARTO system is designed to allow physicians to diagnose and treat cardiac tachyarrhythmias (abnormally rapid heart beat) more quickly, accurately and safely than currently available procedures. The CARTO system incorporates the Company's miniature, disposable location sensors into the tip of electrophysiological ("EP") catheters which are designed to measure the electrical activity of the heart. By placing the catheter tip at various points along the inside wall of the heart, the CARTO system constructs an accurate 3-D map of the anatomy of the heart, and simultaneously records the patterns of electrical activity in the heart ("EP mapping"). The CARTO system permits the physician to pinpoint on this electro-anatomical map the exact location of the abnormal heart tissue ("arrhythmogenic tissue") responsible for inducing the dangerous heart rhythm. The CARTO system also shows, on a real time basis, the exact 3-D location of the tip of the catheter in relation to the arrhythmogenic tissue. This allows the physician to accurately navigate the catheter to the site of the arrhythmogenic tissue and perform ablation therapy, which involves the creation of scar tissue at the site of the arrhythmia in order to block the conduction of aberrant electrical signals. The Company knows of no other technology capable of providing physicians with real time, 3-D location information for the performance of non-fluoroscopic EP mapping and ablation therapy. Current mapping and ablation techniques can take many hours to complete, involve exposure of the patient and the physician to high levels of fluoroscopic x-rays, and do not provide the physician with the precise 3-D location information available with the CARTO system. In December 1995, the Company received FDA 510(k) clearance to market the CARTO system for mapping of cardiac arrhythmias, including atrial fibrillation, ventricular tachycardia and supraventricular tachycardia. NOGA. The NOGA system is designed to provide an accurate, comprehensive diagnosis of the effects of coronary artery disease in a single procedure. Diagnosis of the effects of coronary artery disease currently requires a variety of tests, typically conducted in separate facilities, to determine the location, extent and functional significance of damage to the heart muscle. Current functional diagnostic tests, including electrocardiography (which tests electrical activity), echocardiography (which tests the movement of the heart muscle) and nuclear perfusion studies (which measure blood flow to heart tissue) provide information in separate components that cannot easily be evaluated in combination. Moreover, these tests are not performed in the catheterization laboratory, where treatment typically is performed. The NOGA system provides a new method of testing the effects of coronary artery disease by simultaneously testing both cardiac mechanics (the movement of the heart muscle) and electrical activity at specific locations within the heart, a capability known as "electro-mechanical coupling." The Company believes that this capability will enable the NOGA system to provide the physician with all necessary diagnostic information in a single procedure in the catheterization laboratory. With this information, the physician can determine the precise location of damaged tissue and evaluate whether such tissue is dead, in which case treatment will not be effective, or hibernating, in which case the patient is likely to benefit from reperfusion treatment. This cardiac viability testing will permit physicians to make better informed decisions as to whether the patient will benefit from therapy. In April 1996, the Company received FDA 510(k) clearance to market the NOGA system for testing of cardiac mechanics and hemodynamics. The Company expects to commence clinical studies of cardiac viability testing using the NOGA system in the first quarter of 1997 and to submit a 510(k) pre-market notification to the FDA in the second quarter of 1997 to permit marketing of the NOGA system for testing of cardiac viability. MAGELLAN. Minimally invasive surgical techniques typically involve the use of imaging technology in order to guide the physician during the performance of the procedure so that it can be performed using smaller incisions than would otherwise be required using normal "open" surgical procedures. The effectiveness of many minimally invasive procedures has been limited, however, by the imaging modalities available and a physician's ability to utilize these images while performing the procedure. As a result, healthy tissue can be damaged during the navigation of medical instruments within the patient's anatomy or during the actual procedure of removing diseased tissue because physicians can only estimate the location of the target from a static image. The Company's MAGELLAN system is designed to enable physicians to determine in real time the precise location of medical instruments relative to the patient's internal anatomy, permitting the physician to maneuver around critical anatomical structures and to guide the medical instrument to the exact location for diagnosis and treatment. As a result, the Company believes that its MAGELLAN technology will make many procedures involving the insertion of medical instruments into a body cavity or incision safer, more accurate, less invasive and less expensive. The Company's initial applications for the MAGELLAN system include (i) image-guided neurosurgery and sinus surgery and (ii) image-guided biopsy. - MAGELLAN Image-Guided Surgery. The Company believes that the MAGELLAN system will permit physicians to safely and accurately perform a wide variety of image-guided medical procedures, including neuro, sinus, orthopedic, urological, gastrointestinal and pulmonary surgery. Moreover, unlike other image-guided technologies, the Company believes that the MAGELLAN system is the only navigation technology that will permit the determination of the location of flexible, steerable tip medical instruments. The Company believes that the ability to use the MAGELLAN system to manipulate flexible medical instruments around critical anatomical structures will permit physicians to further minimize the invasiveness of many medical procedures. The Company submitted a 510(k) pre-market notification to the FDA to permit marketing of the MAGELLAN system for image-guided neurosurgery during the second quarter of 1996. - MAGELLAN Image-Guided Biopsy Procedures. The Company believes that its technology can be combined with ultrasound imaging technology to dramatically improve the accuracy of biopsy procedures (the removal of a small quantity of tissue for microscopic examination to determine an exact diagnosis). By providing physicians with a 3-D guidance system, the MAGELLAN system will enable the accurate free-hand positioning of the biopsy needle in order to sample the desired tissue. The Company expects to file a 510(k) pre-market notification with the FDA to permit marketing of the MAGELLAN system for image-guided biopsy procedures during the first quarter of 1997. The Company's goal is to become the leader in minimally invasive navigation technology allowing medical procedures to be performed in a safer, less intrusive manner than can be achieved using alternative methods and technologies. The Company intends to achieve its goal by: (i) establishing strategic relationships with leading developers and manufacturers of medical instruments, (ii) developing or acquiring medical instrument development and manufacturing capability, (iii) sponsoring clinical trials to demonstrate the efficacy of the Company's products, (iv) developing a direct marketing and sales force and (v) increasing the Company's research and development activities. In July 1995, the Company entered into a Product Development and Supply Agreement (the "Cordis Agreement") with Cordis Corporation ("Cordis"), a leading developer, manufacturer and distributor of catheters and other medical devices which recently was acquired by Johnson & Johnson. The agreement grants to Cordis an exclusive license to distribute the Company's CARTO system and the MAGELLAN system for certain neurological applications which terminates, with respect to each product, two years from the date on which Cordis consummates its first commercial sale of such product to an end user. Thereafter, Cordis will maintain a non-exclusive license to distribute these products. THE OFFERING <TABLE> <S> <C> Common Stock Offered......................... shares Common Stock Outstanding after this Offering................................... shares(1) Use of Proceeds.............................. The Company intends to use the net proceeds of this Offering to fund research and development, clinical studies, sales and marketing efforts, acquisitions of capital equipment and for working capital and other general corporate purposes. The Company may also use a portion of the net proceeds to acquire complementary businesses, products or technologies. See "Use of Proceeds." Proposed Nasdaq National Market Symbol....... BSEN </TABLE> - --------------- (1) Gives effect to the conversion of the Company's Series A Preferred Stock, which will be converted into Common Stock upon consummation of this Offering. See "Principal Stockholders" and "Description of Capital Stock." Excludes shares reserved for future issuance pursuant to stock options outstanding as of June 30, 1996 and shares reserved for future issuance under the Company's stock option plans. See "Management -- Stock Option Plans" and Note 9 of Notes to Consolidated Financial Statements. ------------------------ Unless otherwise indicated, all information in this Prospectus assumes the Underwriters' over-allotment option is not exercised. Biosense(TM), CARTO(TM), NOGA(TM), MAGELLAN(TM) and the Company's logo are trademarks of the Company. SUMMARY CONSOLIDATED FINANCIAL DATA <TABLE> <CAPTION> PERIOD FROM INCEPTION (MARCH 23, 1994) YEAR ENDED SIX MONTHS ENDED JUNE 30, TO DECEMBER 31, DECEMBER 31, ------------------------- 1994(1) 1995 1995 1996 ---------------- ------------ ----------- ----------- <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue............................... $ -- $ 204,000 $ -- $ 2,850,150 Expenses Cost of sales...................... -- 49,457 -- 1,817,524 Sales and marketing................ 67,000 245,250 45,000 732,022 Research and development........... 31,395,126(2) 6,708,464 1,473,655 2,351,116 General and administrative......... 422,129 1,216,700 261,864 1,461,400 ------------ ----------- ----------- ----------- Operating loss........................ (31,884,255) (8,015,871 ) (1,780,519) (3,511,912) Other income.......................... 78,148 408,093 56,139 415,582 ------------ ----------- ----------- ----------- Loss before provision for income taxes.............................. (31,806,107) (7,607,778 ) (1,724,380) (3,096,330) Provision for income taxes............ 24,918 153,681 41,900 48,601 ------------ ----------- ----------- ----------- Net loss.............................. $(31,831,025) $(7,761,459 ) $(1,766,280) $(3,144,931) ============ =========== =========== =========== Pro forma net loss per share(3)....... $ $ =========== =========== Shares used in computing pro forma net loss per share(3).................. =========== =========== </TABLE> <TABLE> <CAPTION> AT JUNE 30, 1996 ------------------------------- ACTUAL AS ADJUSTED(4) ------------ -------------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents...................................... $ 12,115,863 $ Working capital................................................ 9,606,292 Total assets................................................... 15,412,711 Accumulated deficit............................................ (42,737,415) Total stockholders' equity..................................... 11,433,198 </TABLE> - --------------- (1) Although the founders and certain other employees of the Company were engaged in research and development activities prior thereto, March 23, 1994 represents the date of inception of the Company for financial reporting purposes. See Note 1 of Notes to Consolidated Financial Statements. (2) In accordance with generally accepted accounting principles, the Company wrote off $28.9 million of research and development costs related to all in-process technologies acquired from the founders of the Company in return for the issuance of 3,225,000 shares of Series A Preferred Stock of the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 1 of Notes to Consolidated Financial Statements. (3) See Note 2 of Notes to Consolidated Financial Statements for information concerning calculation of pro forma net loss per share. (4) Adjusted to give effect to the receipt of the net proceeds of the sale of shares of Common Stock offered hereby, assuming an initial public offering price of $ per share (the midpoint of the range shown on the front cover of this Prospectus), after deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001017295_millennium_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001017295_millennium_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and is subject to, the more detailed information and financial statements and notes thereto contained elsewhere in this Prospectus. In this Prospectus, (i) unless otherwise indicated, the terms 'Millennium' or 'the Company' refer collectively to Millennium Chemicals Inc. and its consolidated subsidiaries and the terms 'Millennium America' or 'the Issuer' refer collectively to Millennium America Inc. and its consolidated subsidiaries; (ii) references to the activities of, and financial information with respect to, the Company prior to October 1, 1996 are to the historical activities and combined historical financial information of the chemicals business (the 'Chemicals Business') and certain building materials and materials handling businesses (the 'Discontinued Businesses') of Hanson PLC ('Hanson') that were transferred to the Company by Hanson in connection with the demerger (i.e., spin-off) of the Chemicals Business by Hanson on that date (the 'Demerger'); (iii) the term 'Non-Chemical Businesses' refers to businesses and assets of Hanson that were intended to remain with Hanson (including, but not limited to, the Discontinued Operations), but which, prior to commencement of the Demerger Transactions (as defined), were owned by Hanson subsidiaries that were to become subsidiaries of the Company upon the Demerger; (iv) the term 'Demerger Transactions' refers to the series of transactions undertaken to effect the Demerger, including the sale of the Non-Chemical Businesses (other than the Discontinued Operations) to Hanson on September 30, 1996 and the sale of the Discontinued Businesses to Hanson on October 6, 1996; (v) the term 'Suburban Propane' refers to the propane operations of the Chemicals Business, which were transferred to Suburban Propane Partners, L.P. ('Suburban Propane Partners') in contemplation of its initial public offering of a 73.6% equity interest therein in March 1996; (vi) pro forma information gives effect to the Demerger Transactions, this Offering and the Tender Offer referred to below; (vii) references to '1995' and subsequent years are to the applicable calendar year ended December 31, reflecting the fact that the Company adopted a December 31 fiscal year-end effective as of January 1, 1995, and references to 'fiscal' 1994 and earlier years are to the applicable fiscal year ended September 30; and (viii) references to 'tonnes' are to metric tons, equal to 1,000 kilograms or 2,204.6 pounds. MILLENNIUM CHEMICALS INC. The Company is a major international chemicals company, with leading market positions in a broad range of commodity, industrial, performance and specialty chemicals. In 1995, the Company had pro forma net sales of approximately $3.2 billion and pro forma operating income of $776 million; for the nine months ended September 30, 1996, the Company had pro forma net sales of approximately $2.3 billion and pro forma operating income of $197 million (including $75 million of non-recurring charges relating to the Company's sulfate-process titanium dioxide operations). At September 30, 1996, the Company had pro forma total assets of approximately $5.5 billion. Through its operating subsidiaries, Quantum Chemical Corporation ('Quantum Chemical'), SCM Chemicals Inc. and its non-U.S. affiliates (collectively, 'SCM Chemicals') and Glidco Inc. ('Glidco'), the Company is: The largest producer of polyethylene products in the United States; The second largest producer of titanium dioxide ('TiO2') in the United States and the third largest producer of TiO2 in the world; The second largest producer of acetic acid and vinyl acetate monomer in the United States; A leading producer of high value-added specialty polymers, color concentrates and polymeric powders, and of titanium tetrachloride, cadmium/selenium pigments and silica gel; and A leading producer of fragrance and flavor chemicals derived from crude sulfate turpentine. In addition, a wholly-owned subsidiary of Quantum Chemical serves as the general partner of Suburban Propane Partners, a publicly traded limited partnership which, through an operating partnership, is the third largest retail marketer of propane in the United States. Quantum Chemical owns a 2% general partnership interest and an approximate 24% subordinated limited partnership interest, each on a combined basis, in these partnerships. The Company accounts for its interest in Suburban Propane Partners as a 26.4% equity investment. The Company has been an independent, publicly owned company since October 1, 1996, when, in consideration for Hanson's transfer to it of the Chemicals Business, the Company issued to Hanson's shareholders all of its then outstanding Common Stock. On October 6, 1996, the Company sold the Discontinued Businesses to Hanson and subsequently repaid all outstanding indebtedness to Hanson. At September 30, 1996, after giving pro forma effect to the Demerger Transactions, the Company had consolidated indebtedness of approximately $2.5 billion, including approximately $1.0 billion accreted value of the Issuer's 2.39% Senior Exchangeable Discount Notes Due 2001 (the 'Pre-Demerger Notes'). The Demerger resulted in a change-in-control of the Issuer within the meaning of the indenture governing the Pre-Demerger Notes. Accordingly, on October 18, 1996, the Issuer commenced an offer to purchase any and all of the outstanding Pre-Demerger Notes (the 'Tender Offer') for cash equal to 101% of the accreted value of the Pre-Demerger Notes plus accrued interest (the 'Repurchase Price'). The Tender Offer will expire on December 17, 1996 unless required by applicable law to be extended. If all outstanding Pre-Demerger Notes are tendered and repurchased pursuant to the Tender Offer on that date, the Repurchase Price will be approximately $1.1 billion. The Issuer will use the net proceeds of the Offering, to the extent necessary, to pay the Repurchase Price. Additional funds will be borrowed under the Issuer's credit facility with a syndicate of banks (the 'Credit Facility'), if the net proceeds from the Offering are not sufficient to repurchase all Pre-Demerger Notes tendered pursuant to the Tender Offer. See 'Use of Proceeds.' The Company's strategy is to maximize long-term cash flow and thereby create value through improved efficiency at existing operations, disciplined capital expenditures, selective dispositions, selective acquisitions of other chemical businesses and reduction of leverage. In addition to building upon its leading market positions in existing lines of business, the Company will seek to expand its operations worldwide, focus its production on more profitable value-added products and increase the proportion of its businesses that are less cyclical in nature. The Company emphasizes stock ownership by management and links a significant portion of management's compensation to the achievement of performance targets, including targets based on 'economic value added' concepts and the Company's performance relative to its industry peers. See 'Business -- Strategy.' The Company's principal executive offices are located at 99 Wood Avenue South, Iselin, New Jersey 08830, and its United States telephone number is (908) 603-6600. The Company also has executive offices located at Laporte Road, Stallingborough, Grimsby, North East Lincolnshire, DN40 2PR, England, and its United Kingdom telephone number is 01469-57-1000. MILLENNIUM AMERICA INC. The Issuer, an indirect wholly-owned subsidiary of the Company, is a Delaware corporation organized in November 1980. It is a holding company for all of the Company's operating subsidiaries other than the non-U.S. affiliates of SCM Chemicals. In addition, it is the issuer of the Pre-Demerger Notes and a borrower under the Credit Facility. For the nine months ended September 30, 1996, the Issuer had net sales of approximately $2.0 billion and operating income of $156 million (including $57 million of the non-recurring charges relating to the Company's sulfate-process TiO2 operations). At September 30, 1996, the Issuer had pro forma total assets of approximately $5.1 billion. For the nine months ended September 30, 1996, the non-U.S. affiliates of SCM Chemicals, which are the only operating subsidiaries of the Company that are not subsidiaries of the Issuer, had net sales of approximately $291 million and operating income of $49 million (including the remaining $18 million of the non-recurring charges). At September 30, 1996, the non-U.S. affiliates of SCM Chemicals had pro forma total assets of approximately $377 million. The Issuer's principal executive offices are located at 99 Wood Avenue South, Iselin, New Jersey 08830, and its telephone number at that address is (908) 603-6600. THE OFFERING <TABLE> <S> <C> Securities Offered........................... $ aggregate principal amount of % Senior Notes due November , 2006. $ aggregate principal amount of % Senior Debentures due November , 2026. Issuer....................................... Millennium America Inc. Guarantor.................................... Millennium Chemicals Inc. Interest Payment Dates....................... Semi-annually on and , commencing , 1997. Optional Redemption.......................... The Securities will not be redeemable prior to maturity (except for redemption at the option of the Issuer in the event of certain changes involving taxation). </TABLE> <TABLE> <S> <C> Mandatory Sinking Fund....................... None Ranking and Holding Company Structure........ The Securities and the Guarantees will be unsecured senior obligations of the Issuer and the Company, respectively, and will rank pari passu with all other existing and future unsecured and unsubordinated indebtedness of, and will be senior in right of payment to all subordinated indebtedness of, the Issuer and the Company, respectively. The Securities and the Guarantees will be effectively subordinated to (i) all existing and future secured indebtedness of the Issuer and the Company, to the extent of the value of the assets securing such indebtedness, (ii) all existing and future indebtedness (including guarantees) of any subsidiaries of the Issuer and of the Company (other than the Issuer) and (iii) all existing and future guarantees by subsidiaries of the Issuer and of the Company (other than the Issuer) of the Issuer's and the Company's indebtedness. At September 30, 1996, on a pro forma basis after giving effect to the Demerger Transactions, the Tender Offer and the Offering, the Issuer (on a consolidated basis) had indebtedness of approximately $2.5 billion, of which $51 million represented indebtedness of its subsidiaries. The Company (on a consolidated basis) had additional indebtedness of $40 million, all of which represented indebtedness of subsidiaries other than the Issuer and its subsidiaries. See 'Risk Factors -- Limited Operating History as an Independent Company; Significant Leverage,' 'Unaudited Pro Forma Combined Financial Data,' 'Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources' and 'Description of the Securities -- Ranking.' Certain Covenants............................ The Indenture under which the Securities will be issued (the 'Indenture') will contain certain covenants that limit, among other things, (i) the ability of the Issuer and the Restricted Subsidiaries (as defined) to grant liens or enter into sale and lease-back transactions, (ii) the ability of the Restricted Subsidiaries to incur additional indebtedness, and (iii) the ability of the Issuer and the Company to merge, consolidate or transfer substantially all of their respective assets. See 'Description of the Securities -- Restrictive Covenants' and ' -- Consolidation, Merger and Certain Sales of Assets.' Use of Proceeds.............................. The net proceeds from the Offering, after deducting the estimated underwriting discounts and expenses, are estimated to be approximately $ million. The Issuer intends to use such net proceeds, to the extent necessary, to pay the Repurchase Price for Pre-Demerger Notes tendered pursuant to the Tender Offer. Additional funds will be borrowed under the Credit Facility if the net proceeds from the Offering are not sufficient to repurchase all Pre-Demerger Notes tendered pursuant to the Tender Offer. See 'Use of Proceeds.'
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001017358_sprint_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001017358_sprint_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. As used in this Prospectus, unless the context otherwise requires, the term "Holdings" refers to Sprint Spectrum Holding Company, L.P., and the term "Company" refers to Sprint Spectrum L.P. ("Sprint Spectrum") and its direct and indirect subsidiaries, including Sprint Spectrum Finance Corporation ("FinCo"), WirelessCo, L.P. ("WirelessCo"), Sprint Spectrum Realty Company, L.P. ("RealtyCo") and Sprint Spectrum Equipment Company, L.P. ("EquipmentCo"). Sprint Spectrum and FinCo are collectively referred to as the "Issuers." See "The Company" and "Business--General." Prior to July 1, 1996, substantially all wireless operations of the Company and Holdings have been conducted at Holdings and all assets, with the exception of the interest in American PCS, L.P. ("APC") and the PCS (as defined under "--The Company") licenses which are held by WirelessCo, have been held at Holdings. Holdings and the Company are reorganizing (the "Reorganization") operations so that the assets used in the Company's PCS business are owned by subsidiaries of Sprint Spectrum and the investment in APC will be transferred to Holdings. Effective July 1, 1996, Holdings' assets used in the Company's PCS business were transferred to subsidiaries of Sprint Spectrum; the transfer of the interest in APC is expected to occur after the Offering. Unless otherwise indicated, all information in this Prospectus assumes that all elements of the Reorganization have occurred; however, references to "Reorganized Sprint Spectrum" assume only that the July 1, 1996 transactions have occurred. Certain of the statements contained in this summary and elsewhere in this Prospectus, including information with respect to the Company's expected PCS operations and buildout, its strategy for its PCS business and related financings are forward-looking statements. See "Risk Factors" for a discussion of important factors that could affect such matters. The term population equivalents ("Pops") means the Donnelley Marketing Service estimate of the December 31, 1995 population of a geographic area. A glossary of additional terms appearing herein has been included in this Prospectus. See "Glossary of Selected Terms." THE COMPANY Sprint Spectrum intends to become a leading provider of wireless communications products and services in the United States. The Company is the largest broadband wireless personal communications services ("PCS") company in the United States in terms of total licensed Pops, with licenses (including those to be contributed to the Company and those owned by licensees that have affiliated or have agreed to affiliate with the Company) to provide service in 33 major trading areas ("MTAs") covering 190.9 million Pops (73% of the total United States population), including eight of the nation's ten largest MTAs. The Company intends to initiate the commercial launch of its service in the fourth quarter of 1996 with service in all MTAs by the end of the first quarter of 1997. Pop coverage at the end of the first quarter of 1997 is expected to reach approximately 60% in the aggregate across all of the Company's markets. The timing of launch in individual markets will be determined by various factors, principally zoning and microwave relocation factors, equipment delivery schedules and local market and competitive considerations. The Company intends to continue to expand its coverage in its PCS markets to reach approximately 70% of the Pops in its existing license areas in the aggregate by the end of 1997. Thereafter, the Company will evaluate further coverage expansion on a market-by-market basis, eventually targeting coverage of 80% of the Pops in its existing license areas in the aggregate, thereby substantially completing its planned network buildout of its existing license areas. The general partner of Sprint Spectrum is Holdings, a limited partnership formed by Sprint Enterprises, L.P., which has a 40% partnership interest in Holdings, TCI Telephony Services, Inc. (as successor in interest to TCI Network Services), which has a 30% partnership interest in Holdings, and Comcast Telephony Services and Cox Telephony Partnership, each of which has a 15% partnership interest in Holdings (collectively, the "Partners"). Each Partner is both a general partner holding 99% of its interest as a general partner and a limited partner holding 1% of its interest as a limited partner. Holdings has a greater than 99% general partnership interest in the Company. The Partners are subsidiaries of, respectively, Sprint Corporation ("Sprint"), Tele- Communications, Inc. ("TCI"), Comcast Corporation ("Comcast") and Cox Communications, Inc. ("Cox" and, together with Sprint, TCI and Comcast, the "Parents"). The Company is at an early stage of development, has not commenced commercial PCS operations and has no revenues from operations. The Company will require significant funds for development, construction, testing and deployment of its PCS network before commencement of commercial operations. The Partners have agreed to contribute up to an aggregate of $4.2 billion of equity to Holdings to the extent required by the annual budgets of Holdings through fiscal 1999 as approved by the Partners. As of March 31, 1996, approximately $2.4 billion had been contributed to Holdings, of which $2.2 billion had been contributed to the Company and the remaining $0.2 billion had been contributed or advanced to APC. The Company currently intends to obtain up to $1.4 billion of additional equity following March 31, 1996 (of which up to $1.0 billion as of March 31, 1996 is committed to be provided to the Company by the Parents to the extent required by the Company to fund any projected cash shortfall), resulting in $3.6 billion in aggregate invested equity capital in the Company. See "Description of Vendor Contracts and Financing--Capital Contribution Agreement." There can be no assurance that any additional capital will be obtained in the form of equity from the Partners or otherwise. See "--Network Buildout and Financing Plan." The Company was the successful bidder for 29 PCS licenses in the Federal Communications Commission's ("FCC") A Block and B Block PCS auction which concluded in March 1995. The Company's 29 wholly-owned markets cover 150.3 million Pops and include, among others, the New York, San Francisco, Detroit, Dallas/Fort Worth and Boston/Providence MTAs. Additionally, Cox has agreed to contribute to the Company, upon FCC approval which is pending, a PCS license for the Omaha MTA that it purchased in the broadband PCS auction in March 1995. In order to increase its Pop coverage, the Company has affiliated and expects to continue to affiliate with other PCS providers, including those in which Holdings or affiliates of its Partners have an interest. Pursuant to affiliation agreements, each affiliated PCS service provider will be included in the Company's national network and will use the Sprint(R) (a registered trademark of Sprint Communications Company, L.P.) brand name. Each affiliated PCS provider will sell and market Sprint wireless products and services in its respective territory (and earn the revenues from such sales) and is expected to pay to the Company an affiliation fee (which may take the form of up-front and/or ongoing fees), agree to adhere to certain network technical standards and agree to provide certain wireless communication products offered by the Company. The Company may perform various services for the benefit of the affiliates, including, but not limited to, advertising, inventory management, sales and market support and customer service. Holdings owns a 49% limited partnership interest in APC, which owns a PCS license for, and operates a broadband PCS system in, the Washington D.C./Baltimore MTA. APC has affiliated with Sprint Spectrum and is marketing its products and services under the Sprint brand name. APC launched its PCS service in November 1995 and is the nation's first commercially operational PCS system. As of May 15, 1996, APC had approximately 80,000 subscribers. See "Business--General" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Holdings also expects to acquire a 49% limited partnership interest in Cox California PCS, L.P. ("Cox-California"), a partnership that will be formed to hold a PCS license for the Los Angeles-San Diego MTA covering 21.5 million Pops. Cox, which currently owns this license, has agreed to contribute the license to Cox-California and will manage and control Cox-California. The Company expects to sign an affiliation agreement with Cox-California by the end of the third quarter of 1996. At the same time, the Company also expects to affiliate with, and provide various services to, PhillieCo, L.P. ("PhillieCo"), a limited partnership organized by and among subsidiaries of Sprint, TCI and Cox, that owns a PCS license for the Philadelphia MTA. In addition, as part of an overall strategy to increase the Company's Pop coverage, either or both of Holdings and the Company may elect to bid on, or affiliate with or invest in other entities who are bidding on, PCS licenses to be awarded in the FCC auction of PCS licenses for the D, E and F Blocks. The table below presents the owned and affiliated Pops after giving effect to such affiliation arrangements: <TABLE> <CAPTION> 1995 AVERAGE LICENSE POPULATION PURCHASE PRICE OWNED/AFFILIATED # OF MTAS IN MTA(S) PER 1990 POP(1) ---------------- --------- ------------- --------------- (MILLIONS) <S> <C> <C> <C> Owned.................................... 29 150.3 $14.54 Omaha (to be contributed by Cox)(2)...... 1 1.7 $ 3.06 Affiliated: APC (Baltimore/Washington)(3).......... 1 8.3 $13.16 Cox-California (Los Angeles/San Die- go)(4)................................ 1 21.5 $13.16 PhillieCo (Philadelphia)(5)............ 1 9.1 $ 9.52 --- ----- Total................................ 33 190.9 === ===== </TABLE> - - -------- (1) Cost to winning bidder in FCC auction(s) or in connection with the award of Pioneer's Preference license (as defined under "Business--Regulation"). (2) Contribution will be credited towards capital contributions required of Cox under the Holdings Partnership Agreement (as defined under "The Partnership Agreements") to the same extent as if Cox had made a cash contribution in an amount equal to the sum of (i) $995,564, together with interest at the annual rate of 13.4% computed from November 17, 1994 through the date the Omaha license is contributed, plus (ii) $4,062,400, together with interest at the annual rate of 13.4% computed from June 30, 1995 through the date the Omaha license is contributed. (3) Holdings owns a 49% limited partnership interest in APC, which has signed an affiliation agreement with the Company. (4) Holdings intends to acquire a 49% limited partnership interest in, and the Company expects to sign an affiliation agreement with, Cox-California. (5) Owned by subsidiaries of Sprint, TCI and Cox. The Company expects to sign a services and affiliation agreement with PhillieCo. STRATEGY The Company intends to achieve its objective of becoming a leading provider of wireless communications products and services in the United States by employing strategies for network construction, service offering, branding and marketing which utilize the Company's competitive advantages. These competitive advantages are expected to include: . State-of-the-art technology. The Company is implementing a state-of-the- art PCS network using Code Division Multiple Access ("CDMA") digital technology which, the Company believes, provides benefits relative to current analog systems. The Company believes that its digital technology will increase system capacity by approximately 7 to 10 times, offer better call quality and clarity and provide a wider variety of advanced features and applications. . National network. Sprint Spectrum intends to offer wireless service on a national basis with a single technology (CDMA) operating on a uniform spectrum (1.9 GHz), thereby providing consistent functionality and high quality service. The Company currently owns (including the Omaha license to be contributed to the Company), or expects to have affiliate relationships with PCS providers who own, PCS licenses covering 190.9 million Pops and intends to pursue additional coverage on a market-by- market basis through license acquisitions and affiliation or resale agreements with other CDMA-based PCS providers. Together the Company and other PCS licensees that have announced their intentions to implement CDMA technology, have licenses covering territories representing approximately 89% of the United States population. The Company expects to gain cost advantages in purchasing power, operations and marketing because of the national scope and operating scale of its network. The Company believes it will have the flexibility to utilize pricing and promotional programs on a national basis to provide incentives for customer subscription and increased usage. . National brand. The Company will market and promote its wireless products and services under the Sprint brand which is one of the most widely recognized and respected brands in the telecommunications market. The Company expects that the use of the Sprint brand will build consumer confidence and accelerate consumer acceptance of the Company's products and services. . Strong Parent sponsorship. The Company intends to capitalize on the communications expertise of the Parents, including local exchange carrier services, cable television services and long distance telephone services. In addition, the size and breadth of the customer base of each Parent provides a key advantage for the Company's distribution and marketing efforts. Subject to certain exceptions, the Parents and the Company intend to cross-market the Company's wireless services with the long distance, local telephone and cable-based entertainment services of the Parents in order to accelerate subscriber growth and increase retention rates while improving overall customer satisfaction. Sprint has a combined customer base of 14 million long distance and local telephone subscribers and TCI, Comcast and Cox (collectively, the "Cable Parents") have 20 million cable television customers. See "Business--Relationship with Partners and Parents." NETWORK BUILDOUT AND FINANCING PLAN The Company intends to initiate the commercial launch of its service in the fourth quarter of 1996 with service in all MTAs by the end of the first quarter of 1997. Pop coverage at the end of the first quarter of 1997 is expected to reach approximately 60% in the aggregate across all of the Company's markets. The timing of launch in individual markets will be determined by various factors, principally zoning and microwave relocation factors, equipment delivery schedules and local market and competitive considerations. The Company intends to continue to expand its coverage in its PCS markets to reach approximately 70% of the Pops in its existing license areas in the aggregate by the end of 1997. Thereafter, the Company will evaluate further coverage expansion on a market-by-market basis, eventually targeting coverage of 80% of the Pops in its existing license areas in the aggregate, thereby substantially completing its planned network buildout of its existing license areas. The Company is developing a network infrastructure, including network management systems, to support a range of wireless services, including voice, data, messaging, paging and facsimile. A planning and engineering team, comprised of approximately 1,500 engineering and operations employees and thousands of independent contractors, consultants, agents and other third parties, is designing and constructing the Company's network based on national and regional marketing product requirements to meet the Company's targets for consistency, uniformity and reliability. The Company has selected Lucent Technologies Inc. ("Lucent") and Northern Telecom Inc. ("Nortel" and, together with Lucent, the "Vendors"), two of the leading telecommunications equipment manufacturers, to construct the Company's wireless network. The Vendors were selected because of their extensive experience in wireless technology and their willingness to deliver against specifications developed by the Company. The Company has entered into procurement and services contracts (the "Procurement Contracts") with each of Lucent and Nortel pursuant to which the Vendors will bear a significant portion of the responsibility for the construction of the Company's network. To mitigate against a substantial portion of the risks of completion delay and performance of the network and to ensure the Company has received competitive terms and conditions, the Procurement Contracts include, among other things, deferred payment schedules, liquidated damages provisions, extended warranty periods and "most favored customer" status. The buildout of the Company's PCS network and the marketing and distribution of the Company's PCS products and services will require substantial capital. The Company currently estimates that its capital requirements (capital expenditures, the cost of its existing licenses, working capital, debt service requirements and anticipated operating losses) for the period from inception through the end of 1998 (assuming substantial completion of the Company's network buildout to cover 80% of the Pops in its current license areas in the aggregate by the end of 1998), will total approximately $7.9 billion (of which approximately $2.2 billion had been expended as of March 31, 1996). The Company will also require substantial additional capital for new license acquisitions or investments in entities making license acquisitions (if any) and, after 1998, for coverage expansion, volume-driven network capacity and other capital expenditures for existing and new license areas (if any), working capital, debt service requirements and anticipated further operating losses. The Company will have certain commitments that must be funded in any event, including lease obligations for cell and switch sites, minimum purchase obligations under the Procurement Contracts and amortization under the Secured Financing (as defined in the second succeeding paragraph). Actual amounts of the funds required may vary materially from these estimates and additional funds would be required in the event of significant departures from the current business plan, new license acquisitions, unforeseen delays, cost overruns, unanticipated expenses, regulatory changes, engineering design changes and other technological risks. The Company currently has no sources of revenue to meet its capital requirements. The Partners have agreed to contribute up to an aggregate of $4.2 billion of equity to Holdings, to the extent required by the annual budgets of Holdings through fiscal 1999 as approved by the Partners. As of March 31, 1996, approximately $2.4 billion had been contributed to Holdings, of which $2.2 billion had been contributed to the Company and the remaining $0.2 billion had been contributed or advanced to APC. The Company currently intends to obtain up to $1.4 billion of additional equity following March 31, 1996, resulting in $3.6 billion in aggregate invested equity capital in the Company, although there can be no assurance that any additional capital will be obtained in the form of equity from the Parents or otherwise. The Parents have committed to make available to the Company or cause Holdings to make available to the Company up to $1.0 billion of such additional equity, to the extent required by the Company to fund any projected cash shortfall, under a Capital Contribution Agreement among Sprint Spectrum and the Parents that provides for $1.0 billion in aggregate equity commitments (less, subject to certain exceptions, amounts of cash equity contributed to Sprint Spectrum after December 31, 1995). At March 31, 1996, approximately $1.0 billion was available under the Capital Contribution Agreement. The Company's business plan and the financial covenants and other terms of the Secured Financing will require such additional equity financing prior to the end of 1998, absent a new financing source. The $1.0 billion portion of the $4.2 billion not invested in the Company that may be available to Holdings from the Partners may be used by Holdings to fund Holdings' other affiliate commitments, to make other wireless investments and/or to make new license acquisitions. The Partners are not obligated to make capital contributions to Holdings in excess of amounts contributed through December 31, 1995 and amounts covered under the Capital Contribution Agreement for the benefit of the Company, except to the extent required by the annual budgets of Holdings. There can be no assurance that these funds will be made available by the Parents. See "Risk Factors-- Substantial Capital Requirements and Liquidity; Highly Leveraged Capital Structure." See also "Description of Vendor Contracts and Financing--Capital Contribution Agreement" and "The Partnership Agreements--Holdings Partnership Agreement--Capital Contributions" for a discussion of the equity capital commitments to Holdings and Sprint Spectrum. Sprint Spectrum has obtained commitment letters for up to an aggregate of $5.1 billion of senior secured loans from certain third-parties. Sprint Spectrum has obtained a commitment letter from Nortel in which Nortel has committed to provide up to $1.3 billion in senior secured loans (the "Nortel Financing") to finance purchases of Nortel's PCS equipment and related services. Sprint Spectrum has also obtained a commitment letter from Lucent to provide up to $1.8 billion in senior secured loans (the "Lucent Financing" and, together with the Nortel Financing, the "Vendor Financing") to finance purchases of Lucent's PCS equipment and related services. Under the Procurement Contracts, the Company is required to purchase minimum amounts of equipment and services from each Vendor. Sprint Spectrum has also obtained a commitment letter from Chase Securities Inc. and The Chase Manhattan Bank ("Chase") in which Chase has committed to provide a $2.0 billion fully underwritten senior secured credit facility (the "Bank Credit Facility" and, together with the Vendor Financing, the "Secured Financing") to finance working capital, capital expenditures, operating losses and other partnership purposes. There can be no assurance that the conditions to the commitments under the Vendor Financing or the Bank Credit Facility will be met. See "Description of Vendor Contracts and Financing." The following table describes the estimated sources and uses of capital by the Company since inception and through 1998, assuming the Company covers approximately 80% of the Pops in its current license areas in the aggregate, thereby substantially completing the planned buildout of its PCS network. See "Business--Network Buildout." This table is based on certain assumptions as to the terms and covenant requirements of the Secured Financing and as to how the Company will elect to use available amounts under those facilities. See "Use of Proceeds" and "Description of Vendor Contracts and Financing." <TABLE> <CAPTION> SOURCES: -------- (IN BILLIONS) <S> <C> Equity Contributions Received(1)............................... $2.2 Vendor Financing(2)............................................ 2.6 Bank Credit Facility(3)........................................ 1.1 Net Proceeds to the Company from the Offering.................. 0.6 Unfunded Equity and Future Capital Required(4)................. 1.4 ---- Total Sources................................................ $7.9 ==== USES: Existing PCS Licenses.......................................... $2.1 PCS Network Buildout........................................... 3.8 Cash Debt Service Requirements(5).............................. 0.2 Operating Losses and Working Capital........................... 1.8 ---- Total Uses................................................... $7.9 ==== </TABLE> - - -------- (1) As of March 31, 1996. (2) Sprint Spectrum has obtained commitments from Nortel for an aggregate $1.3 billion secured credit facility and from Lucent for an aggregate $1.8 billion secured credit facility. Of this aggregate amount of $3.1 billion of Vendor Financing, the Company expects to have borrowed approximately $2.6 billion prior to December 31, 1998, based upon availability thereunder. (3) Sprint Spectrum has obtained a commitment from Chase to provide a $2.0 billion fully underwritten secured credit facility, of which $1.1 billion is expected to have been drawn prior to December 31, 1998, based upon availability thereunder. (4) Of such amount, approximately $1.0 billion of additional financing is expected to be obtained in the form of equity from Holdings. The Parents have committed to provide, or cause Holdings to provide, $1.0 billion of financing subsequent to December 31, 1995, of which approximately $1.0 billion was available at March 31, 1996. See "Description of Vendor Contracts--Capital Contribution Agreement." The Partners are not obligated to fund to Sprint Spectrum amounts in excess of those contemplated by the Capital Contribution Agreement. The Company's business plan assumes that additional required capital will be obtained in the form of equity (from the Partners or other sources), but a portion of it may be obtained through other means including the following: debt offerings, bank financing and vendor financing. There can be no assurance that these sources will be available when needed or on terms acceptable to the Company. (5) Includes interest expense and assumes certain interest rates. THE OFFERING Securities Offered.......... $150,000,000 aggregate principal amount of % Senior Notes due 2006 (the "Senior Notes"). $ aggregate principal amount at maturity of % Senior Discount Notes due 2006 (the "Senior Discount Notes" and, together with Senior Notes, the "Notes"). The Senior Discount Notes will be issued at a discount to their aggregate principal amount at maturity and will generate gross pro- ceeds to the Issuers of approximately $500,000,000. The yield to maturity of the Senior Discount Notes will be % (computed on a semi- annual bond equivalent basis), calculated from , 1996. See "Certain Federal Income Tax Consequences." Issuers..................... The Notes will be joint and several obligations of the Issuers. Sprint Spectrum will receive all of the net proceeds from the Offering. Non-Recourse to Holdings, the Partners and the Parents.................... The Senior Notes and the Senior Discount Notes are non-recourse to Holdings, the Partners and the Parents. Based on the advice of Simpson Thacher & Bartlett, management believes that pur- suant to New York law, which will be the gov- erning law provided for in each of the indentures under which the Notes will be issued (the "Inden- tures"), creditors may contractually agree to waive any rights granted to them pursuant to state law. Section 11.9 of each of the Indentures expressly provides that no Partner will have any liability for any obligations under the Notes and that a holder of Notes waives such liability by purchasing the Notes. Maturity Date............... , 2006. Ranking..................... The Notes will rank pari passu in right of payment and priority with all other existing and future indebtedness of the Issuers that is not by its terms subordinated in right of payment and priority to the Notes and will rank senior in right of payment to all indebtedness of the Issuers that is expressly subordinated to the Notes. A substantial portion of the assets of Sprint Spectrum on a consolidated basis will be owned by Sprint Spectrum's subsidiaries, and accordingly, claims of holders of the Notes will be effectively subordinated to claims of creditors (including trade creditors) of such subsidiaries, the amount of which are expected to be substantial. The obligations under the Vendor Financing and the Bank Credit Facility will rank pari passu in right of payment and priority with the Notes. Borrowings of up to $5.1 billion in the aggregate under the Secured Financing will be unconditionally guaranteed by subsidiaries of Sprint Spectrum. Accordingly, the claims of holders of the Notes will be structurally subordinated to the claims of creditors under the Secured Financing. See "Risk Factors--Structural Subordination of the Notes to Subsidiary Indebtedness; Asset Encumbrances." Interest Rate and Payment Dates: The Senior Notes................. Cash interest on the Senior Notes will accrue at a rate of % per annum and will be payable semi-annually in arrears on each and , commencing , 1997. The Senior Discount Notes.. Cash interest will not accrue or be payable on the Senior Discount Notes prior to , 2001. Thereafter, cash interest on the Senior Discount Notes will accrue at a rate of % per annum and will be payable semi-annually in arrears on each and , commencing , 2002. Original Issue Discount..... For federal income tax purposes, the Senior Dis- count Notes will be treated as having been issued with "original issue discount" equal to the dif- ference between the issue price of the Senior Discount Notes and the sum of all cash payments (whether denominated as principal or interest) to be made thereon. Each holder of a Senior Discount Note must include as gross income for federal in- come tax purposes a portion of such original is- sue discount for each day during each taxable year in which a Senior Discount Note is held even though no cash interest payments will be received prior to , 2002. See "Certain Federal Income Tax Consequences." Optional Redemption......... The Notes will be redeemable at the option of the Issuers, in whole or in part, at any time on or after , 2001 at the redemption prices set forth under "Description of the Notes--Optional Redemption," plus accrued and unpaid interest, if any, thereon to the date of redemption. In addi- tion, prior to , 1999, the Issuers may redeem up to 35% of the originally issued principal amount of Senior Notes and up to 35% of the orig- inally issued principal amount at maturity of the Senior Discount Notes at a redemption price equal to % of the Senior Notes so redeemed, plus ac- crued and unpaid interest, if any, thereon to the redemption date and % of the Accreted Value at the redemption date of the Senior Discount Notes so redeemed, in each case with the net proceeds of one or more Public Equity Offerings (as de- fined under "Description of the Notes--Certain Definitions") of Common Equity Interests (as de- fined under "Description of the Notes--Certain Definitions") of Sprint Spectrum, Holdings or a Special Purpose Corporation (as defined under "Description of the Notes--Optional Redemption"), in either case, resulting in gross proceeds of at least $100 million; provided that at least 65% of the originally issued principal amount of Senior Notes and 65% of the originally issued principal amount at maturity of Senior Discount Notes would remain outstanding immediately after giving ef- fect to such redemption. Change of Control........... In the event of a Change of Control (as defined under "Description of the Notes--Certain Defini- tions"), the Issuers will be obligated to make an offer to purchase all outstanding Notes at a pur- chase price equal to (i) 101% of the principal amount thereof, in the case of the Senior Notes, plus accrued and unpaid interest, if any, thereon to the purchase date and (ii)(a) 101% of the Ac- creted Value thereof on the Change of Control Payment Date, in the case of the Senior Discount Notes, if the Change of Control Payment Date is on or before , 2001, and (b) 101% of the principal amount at maturity of the Senior Dis- count Notes, plus accrued and unpaid interest, if any, thereon to the purchase date, if the Change of Control Payment Date is after , 2001. See "Descrip- tion of the Notes--Certain Covenants--Change of Control" for a discussion of such covenant and potential consequences attendant to the existence of such covenant. Asset Sale Offer............ The Issuers will, under certain circumstances, be obligated to make an offer to purchase Notes with the proceeds of certain asset sales at a purchase price equal to (i) 100% of the principal amount of the Senior Notes, plus accrued and unpaid in- terest, if any, thereon to the purchase date and (ii)(a) 100% of the Accreted Value of the Senior Discount Notes on the purchase date, if such date is on or before , 2001, and (b) 100% of the principal amount of the Senior Discount Notes, plus accrued and unpaid interest, if any, thereon to the purchase date, if such date is after , 2001. See "Description of the Notes--Cer- tain Covenants--Disposition of Proceeds of Asset Sales." Certain Covenants........... The Indentures will contain certain restrictive covenants, including (i) limitations on addi- tional indebtedness, (ii) limitations on re- stricted payments, (iii) limitations on liens, (iv) limitations on dividends and other payment restrictions affecting Restricted Subsidiaries (as defined under "Description of the Notes--Cer- tain Definitions"), (v) limitations on equity in- terests of Restricted Subsidiaries, (vi) limita- tions on transactions with equity holders and af- filiates, (vii) limitations on issuances of cer- tain guarantees by Restricted Subsidiaries, (viii) limitations on activities of the Issuers and the Restricted Subsidiaries, (ix) limitations on the disposition of proceeds of asset sales and (x) limitations on designations of Unrestricted Subsidiaries (as defined under "Description of the Notes--Certain Definitions"). In addition, the Indentures will limit the ability of the Is- suers to consolidate, merge or sell all or sub- stantially all of their assets. These covenants are subject to important exceptions and qualifi- cations. See "Description of the Notes--Certain Covenants." Use of Proceeds............. The net proceeds to Sprint Spectrum from the sale of the Notes offered hereby will be approximately $631 million, after deducting estimated dis- counts, commissions and offering expenses. The Company intends to use the net proceeds from the Offering to fund capital expenditures, including the buildout of a nationwide PCS network, to fund working capital as required, to fund operating losses and for other partnership purposes. In ad- dition, a portion of the net proceeds may be used for new PCS license acquisitions or investments in entities owning PCS licenses. See "Use of Pro- ceeds."
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. As used in this Prospectus, unless the context otherwise requires, the term "Holdings" refers to Sprint Spectrum Holding Company, L.P., and the term "Company" refers to Sprint Spectrum L.P. ("Sprint Spectrum") and its direct and indirect subsidiaries, including Sprint Spectrum Finance Corporation ("FinCo"), WirelessCo, L.P. ("WirelessCo"), Sprint Spectrum Realty Company, L.P. ("RealtyCo") and Sprint Spectrum Equipment Company, L.P. ("EquipmentCo"). Sprint Spectrum and FinCo are collectively referred to as the "Issuers." See "The Company" and "Business--General." To date, substantially all wireless operations of the Company and Holdings have been conducted at Holdings and all assets, with the exception of the interest in American PCS, L.P. ("APC") and the PCS (as defined) licenses which are held by WirelessCo, are held at Holdings. Holdings and the Company will reorganize (the "Reorganization") operations so that the assets used in the Company's PCS business will be owned by subsidiaries of Sprint Spectrum and the investment in APC will be transferred to Holdings. Unless otherwise indicated, all information in this Prospectus assumes that the Reorganization has occurred. Certain of the statements contained in this summary and elsewhere in this Prospectus, including information with respect to the Company's expected PCS operations and buildout, its strategy for its PCS business and related financings are forward-looking statements. See "Risk Factors" for a discussion of important factors that could affect such matters. The term population equivalents ("Pops") means the Donnelley Marketing Service estimate of the December 31, 1995 population of a geographic area. A glossary of additional terms appearing herein has been included in this Prospectus. See "Glossary of Selected Terms." THE COMPANY Sprint Spectrum intends to become a leading provider of wireless communications products and services in the United States. The Company is the largest broadband wireless personal communications services ("PCS") company in the United States in terms of total licensed Pops, with licenses (including those to be contributed to the Company and those owned by licensees that have affiliated or have agreed to affiliate with the Company) to provide service in 33 major trading areas ("MTAs") covering 190.9 million Pops (73% of the total United States population), including eight of the nation's ten largest MTAs. The Company intends to commence marketing efforts and launch commercial service in certain MTAs in the fourth quarter of 1996 and to continue to expand its coverage in its PCS markets to reach approximately 70% of the Pops in its license areas in the aggregate by the end of 1997. Thereafter, the Company will evaluate further coverage expansion on a market-by-market basis, eventually targeting coverage of 80% of the Pops in its license areas in the aggregate, thereby substantially completing its planned network buildout. The general partner of Sprint Spectrum is Holdings, a limited partnership formed by Sprint Enterprises, L.P., which has a 40% partnership interest in Holdings, TCI Network Services, which has a 30% partnership interest in Holdings, and Comcast Telephony Services and Cox Telephony Partnership, each of which has a 15% partnership interest in Holdings (collectively, the "Partners"). Holdings has a greater than 99% general partnership interest in the Company. The Partners are subsidiaries of, respectively, Sprint Corporation ("Sprint"), Tele-Communications, Inc. ("TCI"), Comcast Corporation ("Comcast") and Cox Communications, Inc. ("Cox" and, together with Sprint, TCI and Comcast, the "Parents"). The Partners have agreed to contribute up to an aggregate of $4.2 billion of equity to Holdings, to the extent required by the annual budgets of Holdings through fiscal 1999 as approved by the Partners. As of March 31, 1996, approximately $2.4 billion had been contributed to Holdings, of which $2.2 billion had been contributed to the Company and the remaining $0.2 billion had been contributed or advanced to APC. The Company currently intends to obtain up to $1.4 billion of additional equity following March 31, 1996 (of which up to $1.0 billion is expected to be, but is not presently committed to be, provided by the Parents), resulting in $3.6 billion in aggregate invested equity capital in the Company. There can be no assurance that any additional capital will be obtained in the form of equity from the Partners or otherwise. See "--Network Buildout and Financing Plan." The Company was the successful bidder for 29 PCS licenses in the Federal Communications Commission's ("FCC") A Block and B Block PCS auction which concluded in March 1995. The Company's 29 wholly-owned markets cover 150.3 million Pops and include, among others, the New York, San Francisco, Detroit, Dallas/Fort Worth and Boston/Providence MTAs. Additionally, Cox has agreed to contribute to the Company, upon FCC approval which is pending, a PCS license for the Omaha MTA that it purchased in the broadband PCS auction in March 1995. In order to increase its Pop coverage, the Company has affiliated and expects to continue to affiliate with other PCS providers, including those in which Holdings or affiliates of its Partners have an interest. Pursuant to affiliation agreements, each affiliated PCS service provider will be included in the Company's national network and will use the Sprint(R) (a registered trademark of Sprint Communications Company, L.P.) brand name. Holdings owns a 49% limited partnership interest in APC, which owns a PCS license for, and operates a broadband PCS system in, the Washington D.C./Baltimore MTA. APC has affiliated with Sprint Spectrum and is marketing its products and services under the Sprint brand name. APC launched its PCS service in November 1995 and is the nation's first commercially operational PCS system. As of May 15, 1996, APC had approximately 80,000 subscribers. Subject to certain conditions, Holdings is entitled to increase its percentage ownership in APC, and consequently may assume the management of APC. See "Business--General" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Holdings also expects to acquire a 49% limited partnership interest in Cox California PCS, L.P. ("Cox-California"), a partnership that will be formed to hold a PCS license for the Los Angeles-San Diego MTA covering 21.5 million Pops. Cox, which currently owns this license, has agreed to contribute the license to Cox-California and will manage and control Cox- California. The Company also expects to affiliate with, and provide various services to, PhillieCo, L.P. ("PhillieCo"), a limited partnership organized by and among subsidiaries of Sprint, TCI and Cox, that owns a PCS license for the Philadelphia MTA. The table below presents the owned and affiliated Pops: <TABLE> <CAPTION> 1995 AVERAGE LICENSE POPULATION PURCHASE PRICE OWNED/AFFILIATED # OF MTAS IN MTA(S) PER 1990 POP(1) ---------------- --------- ------------- --------------- (MILLIONS) <S> <C> <C> <C> Owned.................................... 29 150.3 $14.54 Omaha (to be contributed)................ 1 1.7 $ 3.06 Affiliated: APC (Baltimore/Washington)(2).......... 1 8.3 $13.16 Cox-California (Los Angeles/San Die- go)(3)................................ 1 21.5 $13.16 PhillieCo (Philadelphia)(4)............ 1 9.1 $ 9.52 --- ----- Total................................ 33 190.9 === ===== </TABLE> - - -------- (1) Cost to winning bidder in FCC auction(s) or in connection with the award of Pioneer's Preference license (as defined). (2) Holdings owns a 49% limited partnership interest in APC, which has signed an affiliation agreement with the Company. (3) Holdings intends to acquire a 49% limited partnership interest in, and the Company expects to sign an affiliation agreement with, Cox-California. (4) Owned by subsidiaries of Sprint, TCI and Cox. The Company expects to sign a services and affiliation agreement with PhillieCo. STRATEGY The Company intends to achieve its objective of becoming a leading provider of wireless communications products and services in the United States by employing strategies for network construction, service offering, branding and marketing which utilize the Company's competitive advantages. These competitive advantages are expected to include: . State-of-the-art technology. The Company is implementing a state-of-the- art PCS network using Code Division Multiple Access ("CDMA") digital technology which, the Company believes, provides benefits relative to current analog systems. The Company believes that its digital technology will increase system capacity by approximately 7 to 10 times, offer better call quality and clarity and provide a wider variety of advanced features and applications. . National network. Sprint Spectrum intends to offer wireless service on a national basis with a single technology (CDMA) operating on a uniform spectrum (1.9 GHz), thereby providing consistent functionality and high quality service. The Company currently owns (including the Omaha license to be contributed to the Company), or expects to have affiliate relationships with PCS providers who own, PCS licenses covering 190.9 million Pops and intends to pursue additional coverage on a market-by- market basis through license acquisitions and affiliation or resale agreements with other CDMA-based PCS providers. Together the Company and other PCS licensees that have announced their intentions to implement CDMA technology, have licenses covering territories representing approximately 89% of the United States population. The Company expects to gain cost advantages in purchasing power, operations and marketing because of the national scope and operating scale of its network. The Company believes it will have the flexibility to utilize pricing and promotional programs on a national basis to provide incentives for customer subscription and increased usage. . National brand. The Company will market and promote its wireless products and services under the Sprint brand which is one of the most widely recognized and respected brands in the telecommunications market. The Company expects that the use of the Sprint brand will build consumer confidence and accelerate consumer acceptance of the Company's products and services. . Strong Parent sponsorship. The Company intends to capitalize on the communications expertise of the Parents, including local exchange carrier services, cable-based telephony services, cable television services and long distance telephone services. In addition, the size and breadth of the customer base of each Parent provides a key advantage for the Company's distribution and marketing efforts. Subject to certain exceptions, the Parents and the Company intend to cross-market the Company's wireless services with the long distance, local telephone and cable-based entertainment services of the Parents in order to accelerate subscriber growth and increase retention rates while improving overall customer satisfaction. Sprint has a combined customer base of 14 million long distance and local telephone subscribers and TCI, Comcast and Cox (collectively, the "Cable Parents") have 20 million cable television customers. See "Business--Relationship with Partners and Parents." NETWORK BUILDOUT AND FINANCING PLAN The Company intends to commence marketing efforts and launch commercial service in the fourth quarter of 1996 and to continue to expand its coverage in its PCS markets to reach approximately 70% of the Pops in its license areas in the aggregate by the end of 1997. Thereafter, the Company will evaluate further coverage expansion on a market-by-market basis, eventually targeting coverage of 80% of the Pops in its license areas in the aggregate, thereby substantially completing its planned network buildout. The Company is developing a network infrastructure, including network management systems, to support a range of wireless services, including voice, data, messaging, paging and facsimile. A planning and engineering team, comprised of approximately 1,350 engineering and operations employees and thousands of independent contractors, consultants, agents and other third parties, is designing and constructing the Company's network based on national and regional marketing product requirements to meet the Company's targets for consistency, uniformity and reliability. The Company has selected Lucent Technologies Inc. ("Lucent") and Northern Telecom Inc. ("Nortel" and, together with Lucent, the "Vendors"), two of the leading telecommunications equipment manufacturers, to construct the Company's wireless network. The Vendors were selected because of their extensive experience in wireless technology and their willingness to deliver against specifications developed by the Company. The Company has entered into procurement and services contracts (the "Procurement Contracts") with each of Lucent and Nortel pursuant to which the Vendors will bear a significant portion of the responsibility for the construction of the Company's network. To mitigate against a substantial portion of the risks of completion delay and performance of the network and to ensure the Company has received competitive terms and conditions, the Procurement Contracts include, among other things, deferred payment schedules, liquidated damages provisions, extended warranty periods and "most favored customer" status. The buildout of the Company's PCS network and the marketing and distribution of the Company's PCS products and services will require substantial capital. The Company currently estimates that its capital requirements (capital expenditures, license acquisitions, working capital, debt service requirements and anticipated operating losses) for the period from inception through the end of 1998 (assuming substantial completion of the Company's network buildout to cover 80% of the Pops in its current license areas in the aggregate by the end of 1998), will total approximately $7.9 billion (of which approximately $2.2 billion had been expended as of March 31, 1996). The Company will also require substantial additional capital after 1998 for coverage expansion, volume-driven network capacity and other capital expenditures for existing and new license areas (if any), new license acquisitions or affiliation arrangements (if any), working capital, debt service requirements and anticipated further operating losses. The Company will have certain commitments that must be funded in any event, including lease obligations for cell and switch sites, minimum purchase obligations under the Procurement Contracts and amortization under the External Financing (as defined). Actual amounts of the funds required may vary materially from these estimates and additional funds would be required in the event of significant departures from the current business plan, unforeseen delays, cost overruns, unanticipated expenses, regulatory changes, engineering design changes and other technological risks. The Company currently has no sources of revenue to meet its capital requirements. The Partners have agreed to contribute up to an aggregate of $4.2 billion of equity to Holdings to the extent required by the annual budgets of Holdings through fiscal 1999 as approved by the Partners. As of March 31, 1996, approximately $2.4 billion had been contributed to Holdings, of which $2.2 billion had been contributed to the Company and the remaining $0.2 billion had been contributed or advanced to APC. The Company currently intends to obtain up to $1.4 billion of additional equity following March 31, 1996, resulting in $3.6 billion in aggregate invested equity capital in the Company, although there can be no assurance that any additional capital will be obtained in the form of equity from the Parents or otherwise. The Parents presently expect to make available or cause Holdings to make available to the Company up to $1.0 billion of such additional equity, to the extent required by the Company. The Company's business plan and the financial covenants and other terms of the External Financing will require such additional equity financing prior to the end of 1998, absent a new financing source. The $0.8 billion balance (of the $4.2 billion) that may be available to Holdings from its Partners may be used by Holdings to fund the Company's capital needs, Holdings' other affiliate commitments and/or to make other wireless investments. See "Risk Factors--Substantial Capital Requirements and Liquidity" and "The Partnership Agreements--Holdings Partnership Agreement--Capital Contributions" for a discussion of the equity capital commitments to Holdings. The Company has entered into agreements with certain third-parties that have committed to provide up to $5.1 billion of senior secured loans. The Company has entered into an agreement with Nortel in which Nortel has committed to provide up to $1.3 billion in senior secured loans (the "Nortel Financing") to finance purchases of Nortel's PCS equipment and related services. The Company has also entered into an agreement with Lucent to provide up to $1.8 billion in senior secured loans (the "Lucent Financing" and, together with the Nortel Financing, the "Vendor Financing") to finance purchases of Lucent's PCS equipment and related services. Under the Procurement Contracts, the Company is required to purchase minimum amounts of equipment and services from each Vendor. The Company has also entered into an agreement with Chase Securities Inc. and Chemical Bank (together, "Chase") in which Chase has committed to provide a $2.0 billion fully underwritten senior secured credit facility (the "Bank Credit Facility" and, together with the Vendor Financing, the "External Financing") to finance working capital, capital expenditures, operating losses and other partnership purposes. There can be no assurance that the conditions for borrowing under the Vendor Financing or the Bank Credit Facility will be met. See "Description of Vendor Contracts and Financing." The following table describes the estimated sources and uses of capital by the Company since inception and through 1998, assuming the Company covers approximately 80% of the Pops in its current license areas in the aggregate, thereby substantially completing the planned buildout of its PCS network. See "Business--Network Buildout." This table is based on certain assumptions as to the terms and covenant requirements of the External Financing and as to how the Company will elect to use available amounts under those facilities. See "Description of Vendor Contracts and Financing." <TABLE> <CAPTION> SOURCES: -------- (IN BILLIONS) <S> <C> Equity Contributions Received(1)............................... $2.2 Unfunded Equity(2)............................................. 1.0 Vendor Financing(3)............................................ 2.6 Bank Credit Facility(4)........................................ 1.1 Net Proceeds to the Company from the Offering.................. 0.6 Future Capital Required(5)..................................... 0.4 ---- Total Sources................................................ $7.9 ==== USES: PCS Licenses................................................... $2.1 PCS Network Buildout........................................... 3.8 Cash Debt Service Requirements(6).............................. 0.2 Operating Losses and Working Capital........................... 1.8 ---- Total Uses................................................... $7.9 ==== </TABLE> - - -------- (1) As of March 31, 1996. (2) While the Partners' capital contribution commitments are to Holdings and are subject to the conditions described above and under "The Partnership Agreements--Holdings Partnership Agreement--Capital Contributions," it is expected that approximately $1.0 billion of additional funding will be obtained in the form of equity from Holdings through the capital contribution provisions of the Holdings Partnership Agreement. The Company's business plan and the financial covenants and other terms of the External Financing will require such additional equity financing prior to the end of 1998, absent a new financing source. (3) The Company has commitments from Nortel for an aggregate $1.3 billion secured credit facility and from Lucent for an aggregate $1.8 billion secured credit facility. Of this aggregate amount of $3.1 billion of Vendor Financing, the Company expects to have borrowed approximately $2.6 billion prior to December 31, 1998, based upon availability thereunder. (4) The Company has obtained a commitment from Chase to provide a $2.0 billion fully underwritten secured credit facility, of which $1.1 billion is expected to have been drawn prior to December 31, 1998, based upon availability thereunder. (5) The Company's business plan assumes that such additional capital will be obtained in the form of equity (from the Partners or other sources), but it may be obtained through other means including the following: debt offerings, bank financing and vendor financing. There can be no assurance that these sources will be available when needed or on terms acceptable to the Company. (6) Includes interest expense and assumes certain interest rates. THE OFFERING Securities Offered.......... $150,000,000 aggregate principal amount of % Senior Notes due 2006 (the "Senior Notes"). $ aggregate principal amount at maturity of % Senior Discount Notes due 2006 (the "Senior Discount Notes" and, together with Senior Notes, the "Notes"). The Senior Discount Notes will be issued at a discount to their aggregate principal amount at maturity and will generate gross pro- ceeds to the Issuers of approximately $500,000,000. The yield to maturity of the Senior Discount Notes will be % (computed on a semi- annual bond equivalent basis), calculated from , 1996. See "Certain Federal Income Tax Consequences." Issuers..................... The Notes will be joint and several obligations of the Issuers. Sprint Spectrum will receive all of the net proceeds from the Offering. Guarantee................... The Notes will be guaranteed on a senior unsecured basis by the Guarantor (the "Guaran- tee"). See "Description of the Notes-- Guarantees." None of the Issuers' subsidiaries will initially guarantee the Notes. The Senior Notes and the Senior Discount Notes are non-re- course to the Partners and the Parents. Maturity Date............... , 2006. Ranking..................... The Notes will rank pari passu in right of pay- ment and priority with all other existing and fu- ture indebtedness of the Issuers that is not by its terms subordinated in right of payment and priority to the Notes and will rank senior in right of payment to all indebtedness of the Is- suers that is expressly subordinated to the Notes. A substantial portion of the assets of Sprint Spectrum on a consolidated basis will be owned by Sprint Spectrum's subsidiaries, and ac- cordingly, claims of holders of the Notes will be effectively subordinated to claims of creditors (including trade creditors) of such subsidiaries. Interest Rate and Payment Dates: The Senior Notes................. Cash interest on the Senior Notes will accrue at a rate of % per annum and will be payable semi-annually in arrears on each and , commencing , 1997. The Senior Discount Cash interest will not accrue or be payable on Notes... the Senior Discount Notes prior to , 2001. Thereafter, cash interest on the Senior Discount Notes will accrue at a rate of % per annum and will be payable semi-annually in arrears on each and , commencing , 2002. Original Issue Discount..... For federal income tax purposes, the Senior Dis- count Notes will be treated as having been issued with "original issue discount" equal to the difference between the issue price of the Senior Discount Notes and the sum of all cash payments (whether denominated as principal or in- terest) to be made thereon. Each holder of a Se- nior Discount Note must include as gross income for federal income tax purposes a portion of such original issue discount for each day during each taxable year in which a Senior Discount Note is held even though no cash interest payments will be received prior to , 2002. See "Certain Federal Income Tax Consequences." Optional Redemption......... The Notes will be redeemable at the option of the Issuers, in whole or in part, at any time on or after , 2001 at the redemption prices set forth under "Description of the Notes--Optional Redemption," plus accrued and unpaid interest, if any, thereon to the date of redemption. In addi- tion, prior to , 1999, the Issuers may redeem up to 35% of the originally issued principal amount of Senior Notes and up to 35% of the orig- inally issued principal amount at maturity of the Senior Discount Notes at a redemption price equal to % of the Senior Notes so redeemed, plus ac- crued and unpaid interest, if any, thereon to the redemption date and % of the Accreted Value at the redemption date of the Senior Discount Notes so redeemed, in each case with the net proceeds of one or more Public Equity Offerings (as de- fined) of Common Equity Interests (as defined) of Sprint Spectrum, the Guarantor or a Special Pur- pose Corporation (as defined), in either case, resulting in gross proceeds of at least $100 mil- lion; provided that at least 65% of the origi- nally issued principal amount of Senior Notes and 65% of the originally issued principal amount at maturity of Senior Discount Notes would remain outstanding immediately after giving effect to such redemption. Change of Control........... In the event of a Change of Control (as defined), the Issuers will be obligated to make an offer to purchase all outstanding Notes at a purchase price equal to (i) 101% of the principal amount thereof, in the case of the Senior Notes, plus accrued and unpaid interest, if any, thereon to the Change of Control Payment Date (as defined) and (ii)(a) 101% of the Accreted Value thereof on the Change of Control Payment Date, in the case of the Senior Discount Notes, if the Change of Control Payment Date is on or before , 2001, and (b) 101% of the principal amount at ma- turity of the Senior Discount Notes, plus accrued and unpaid interest, if any, thereon to the Change of Control Payment Date, if the Change of Control Payment Date is after , 2001. Asset Sale Offer............ The Issuers will, under certain circumstances, be obligated to make an offer to purchase Notes with the proceeds of certain asset sales at a purchase price equal to (i) 100% of the principal amount of the Senior Notes, plus accrued and unpaid in- terest, if any, thereon to the purchase date and (ii)(a) 100% of the Accreted Value of the Senior Discount Notes on the purchase date, if such date is on or before , 2001, and (b) 100% of the principal amount of the Senior Discount Notes, plus accrued and unpaid interest, if any, thereon to the purchase date, if such date is after , 2001. See "Description of the Notes--Certain Covenants-- Disposition of Proceeds of Asset Sales." Certain Covenants........... The indentures under which the Notes will be is- sued (the "Indentures") will contain certain re- strictive covenants, including (i) limitations on additional indebtedness, (ii) limitations on re- stricted payments, (iii) limitations on liens, (iv) limitations on dividends and other payment restrictions affecting Restricted Subsidiaries (as defined), (v) limitations on equity interests of Restricted Subsidiaries, (vi) limitations on transactions with equity holders and affiliates, (vii) limitations on issuances of certain guaran- tees by Restricted Subsidiaries, (viii) limita- tions on activities of the Issuers and the Re- stricted Subsidiaries, (ix) limitations on the disposition of proceeds of asset sales and (x) limitations on designations of Unrestricted Sub- sidiaries (as defined). In addition, the Inden- tures will limit the ability of the Issuers to consolidate, merge or sell all or substantially all of their assets. These covenants are subject to important exceptions and qualifications. See "Description of the Notes--Certain Covenants."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001017450_o-reilly_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001017450_o-reilly_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary should be read in conjunction with and is qualified in its entirety by the more detailed information and Consolidated Financial Statements, including the Notes thereto, appearing elsewhere in this Prospectus. As used in this Prospectus unless otherwise indicated, the "Company" refers to CSK Auto, Inc. and its subsidiaries (after giving effect to the merger referred to below), and references to the Company's fiscal year mean the fiscal year ended on the Sunday nearest January 31 of the following calendar year (e.g., fiscal 1995 means the fiscal year ended January 28, 1996). Except as otherwise noted, as used in this Prospectus all share and per share data and information relating to the number of shares of common stock, par value $.001 per share, of the Company (the "Common Stock") outstanding (i) have been adjusted to give effect to the merger to be consummated prior to the completion of the Offering whereby Northern Automotive Corporation ("NAC"), which currently operates the Company's automotive parts retailing business, will merge with and into the Company (the "Merger") and (ii) assume no exercise of the Underwriters' over-allotment option. See "Capitalization," "The Merger" and "Underwriting." Investors should carefully consider the information set forth under "Risk Factors" prior to making a decision to purchase any shares of Common Stock offered hereby. THE COMPANY CSK Auto, Inc. (the "Company") is the largest retailer of automotive parts and accessories in the Western United States and one of the largest such retailers in the United States. As of April 28, 1996, the Company operated 569 stores as a fully integrated chain under three tradenames, each of which at one time represented a separate retail chain: Checker Auto Parts, founded in 1968 and operating in the Southwestern and Rocky Mountain states; Schuck's Auto Supply, founded in 1917 and operating in the Pacific Northwest; and Kragen Auto Parts, founded in 1947 and operating primarily in California. As such, each has a long operating history, established name recognition and customer loyalty in its respective markets. Based on store count, the Company believes it is the largest retailer of automotive parts and accessories in 18 of its 24 markets. The Company is a consumer-oriented, specialty retailer primarily servicing the do-it-yourself ("DIY") customer, with an increasing emphasis on the commercial customer. The Company offers a broad selection of national brand name and private label automotive products for domestic and imported cars, vans and light trucks, including new and remanufactured automotive hard parts, maintenance items and accessories. The Company's operating strategy is to offer these products at generally the lowest prices in each of its markets and at conveniently located and attractively designed stores, supported by knowledgeable and courteous customer service personnel. As a specialty retailer, the Company has chosen not to sell tires or perform automotive repairs. In order to improve the efficiency of its operations, enhance customer service and position the Company for future growth, the Company began in fiscal 1994 to implement a sophisticated, centralized infrastructure and to install various store-based information systems. At the same time, the Company initiated its Commercial Sales Program. Implementation of these strategies involved capital expenditures (including capital leases) of approximately $30.1 million during fiscal 1994 and 1995 and operating costs of approximately $15.5 million during fiscal 1995, which contributed to a net loss for that fiscal year. In addition, during this period, the Company accelerated its store expansion and repositioning program to increase penetration of its existing markets (see "Business--Store Development and Expansion Strategy"). These initiatives provided significant momentum to the Company's operations as reflected in the first quarter of fiscal 1996, with operating profit increasing to $6.0 million from $0.4 million during the first quarter of fiscal 1995. See "Summary Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Several of the Company's key initiatives that have been implemented beginning in fiscal 1994 are summarized below. . Commercial Sales Program--The Company formalized and expanded its marketing efforts to the commercial segment of the automotive aftermarket, which the Company believes constitutes in excess of 50% of the approximately $75 billion of annual sales for this market. The Company increased the number of stores with Commercial Sales Centers from five at September 30, 1994 to 189 at April 28, 1996. Principally as a result of this expansion, the Company's sales to commercial accounts (including sales by stores without Commercial Sales Centers) grew to $60.8 million in fiscal 1995 from $32.6 million in fiscal 1994 and to $20.3 million in the first quarter of fiscal 1996 from $12.4 million in the first quarter of fiscal 1995. The Company's Commercial Sales Program became profitable in the first quarter of fiscal 1996. Based on the success of this program, the Company expects to continue to assess opportunities to add Commercial Sales Centers to its existing and new stores. . Customer Service Culture--The Company increased its focus on formal classroom training and on-the-job training, customer service measurement systems and incentive programs for its district managers, store managers, sales associates and other employees in order to encourage development of technical expertise and customer service skills. To further encourage superior performance by its employees, the Company has recently adopted a variety of stock based plans, pursuant to which more than 1,000 employees have been granted stock options. The Company believes these programs have resulted in an increased level of customer service and store-level efficiency. . Warehouse and Distribution--The Company completed the conversion of its warehouse and distribution facilities from a manual, labor intensive, paper-based system to a technologically advanced, fully integrated system, which has reduced warehouse and distribution costs while providing the Company with sufficient capacity to meet the requirements of its growth plans for the foreseeable future. This new system became fully operational during the fourth quarter of fiscal 1995. . Store-Based Information Systems--The Company installed a new Point-of- Sale system ("POS"), integrated the POS with the Company's Electronics Parts Catalog, implemented its Retail Paperless Management System and installed a store-wide satellite communications network. Each of these systems developments has improved store labor productivity and enhanced customer service. . Priority Parts--The Company expanded its Priority Parts operation by improving its delivery system and adding seven strategically located parts depots to its two existing locations. This expansion has enabled the Company to better serve its customers by making available to more than 400 of its stores, on a same day delivery basis, an additional 200,000 stock keeping units not regularly stocked in its stores and has also enabled it to increase sales to commercial accounts due to the broader availability of automotive hard parts. Prior to this expansion, this same day delivery service was available to only 80 of the Company's stores. The Company believes that its Priority Parts operation provides it with an important competitive advantage. . Call Center--The Company completed the installation of a centralized Call Center that handles the overflow of customer calls during the stores' busiest hours of operation. Use of the Call Center allows sales associates to give undivided attention to customers at the store, while customers who call the store are serviced directly by Call Center operators who are dedicated to such callers. As a result, the Call Center has enhanced customer service while improving store labor productivity. At April 28, 1996, over 200 of the Company's stores had access to the Call Center and additional stores will continue to be added. . Store Expansion and Repositioning--The Company has accelerated the relocation of smaller stores to larger stores at better locations, the expansion of certain other stores and the opening of new stores primarily in existing markets. During fiscal 1995, the Company opened a total of 54 new stores (of which 30 resulted from relocations of existing stores) and expanded 9 stores. The focus of the Company's expansion strategy is to open, relocate or expand stores primarily in existing markets in order to further increase its name recognition and market penetration while benefiting from economies of scale in advertising, management and distribution costs. The Company plans to open, relocate or expand approximately 75 stores in fiscal 1996 (compared to 63 stores in fiscal 1995) and approximately 100 to 125 stores in fiscal 1997. The Company opened, relocated or expanded 11 stores during the first quarter of fiscal 1996, currently has executed purchase contracts or leases for 64 additional stores and is in various stages of negotiation for 60 more sites. The Company has also identified numerous potential additional sites for future expansion. The Company believes that its recent financial performance demonstrates the effectiveness of the Company's investments in its corporate infrastructure and store-based information systems, its focus on commercial customers and its store repositioning program. The Company believes these initiatives have positioned it for future growth in sales and profitability. During the first quarter of fiscal 1996, the Company's total sales and comparable store sales increased 10% and 7%, respectively, over the comparable period in fiscal 1995, while its operating profit improved to $6.0 million from $0.4 million and net income increased to $1.5 million from a net loss of $1.8 million. The Company's executive offices are located at 645 E. Missouri Avenue, Phoenix, Arizona 85012 and its telephone number is (602) 265-9200. THE OFFERING Common Stock offered................ 6,700,000 shares of Common Stock Common Stock to be outstanding after the Offering................. 37,021,700 shares of Common Stock(1) Use of proceeds..................... The net proceeds from the Offering (approximately $92.5 million) will be used to repay indebtedness incurred under the Company's existing credit agreement. See "Use of Proceeds." Proposed NYSE symbol........... - -------- (1) Excludes options to purchase 3,584,052 shares of Common Stock granted to certain officers, a former officer, directors and certain employees of the Company at an exercise price of $12.75 per share, of which options to purchase 2,118,000 shares of Common Stock are currently exercisable. Also excludes an additional 1,265,948 shares of Common Stock reserved for issuance pursuant to employee benefit plans, which, if issued, will be subject to certain restrictions included in such plans. See "Management-- Stock Based Plans." SUMMARY CONSOLIDATED FINANCIAL DATA The following table sets forth summary consolidated statement of operations, balance sheet and operating data of the Company. The summary financial data for each of the three fiscal years during the period ended January 28, 1996 are derived from the Consolidated Financial Statements of the Company, which have been audited by Price Waterhouse LLP, independent accountants, and appear elsewhere herein. The summary financial data for the thirteen weeks ended April 30, 1995 and April 28, 1996 have been derived from the Company's unaudited consolidated financial statements and include, in the opinion of the Company's management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the data for such periods. The results for the thirteen weeks ended April 28, 1996 are not necessarily indicative of the results to be expected for the fiscal year ending February 2, 1997 or for any future period. The data presented below should be read in conjunction with the Consolidated Financial Statements, including the related Notes thereto, the other financial information included herein, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "The Merger." <TABLE> <CAPTION> PRO FORMA(2) -------------------------------- THIRTEEN WEEKS FISCAL YEAR THIRTEEN WEEKS FISCAL YEAR ENDED(1) ENDED ENDED ENDED ---------------------------- -------------------- ----------- -------------------- JAN. 30, JAN. 29, JAN. 28, APRIL 30, APRIL 28, JAN. 28, APRIL 30, APRIL 28, 1994 1995(3) 1996(4) 1995 1996 1996 1995 1996 -------- -------- -------- --------- --------- ----------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE AND PER SQUARE FOOT DATA) <S> <C> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales.............. $645,426 $688,135 $718,352 $172,301 $189,185 $718,352 $172,301 $189,185 Cost of sales.......... 397,565 410,358 433,817 103,712 113,709 433,817 103,712 113,709 Operating and administrative expenses.............. 237,311 258,600 284,697 68,199 69,450 284,697 68,199 69,450 -------- -------- -------- -------- -------- -------- -------- -------- Operating profit (loss)................ 10,550 19,177 (162) 390 6,026 (162) 390 6,026 Interest expense....... 11,731 10,343 14,379 3,270 3,595 4,997 1,287 1,220 -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) before taxes and extraordinary gain.... (1,181) 8,834 (14,541) (2,880) 2,431 (5,159) (897) 4,806 Income (loss) before extraordinary gain.... (650) 8,038 (9,094) (1,798) 1,499 (3,173) (547) 2,947 Extraordinary gain..... -- 97,186 -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss)...... $ (650) $105,224 $ (9,094) $ (1,798) $ 1,499 $ (3,173) $ (547) $ 2,947 ======== ======== ======== ======== ======== ======== ======== ======== Per share amounts: Net income (loss) per common share before extraordinary gain.... $ (0.02) $ 0.26 $ (0.29) $ (0.06) $ 0.05 -- -- -- Extraordinary gain..... -- 3.15 -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) per share................. $ (0.02) $ 3.41 $ (0.29) $ (0.06) $ 0.05 -- -- -- ======== ======== ======== ======== ======== ======== ======== ======== Pro forma net income (loss) per share...... -- -- -- -- -- $ (0.08) $ (0.01) $ 0.08 ======== ======== ======== Weighted-average common and common equivalent shares outstanding (in thousands)............ 30,860 30,860 30,860 30,860 30,860 37,457 37,299 37,580 ======== ======== ======== ======== ======== ======== ======== ======== SELECTED ADDITIONAL OPERATING DATA: Warehouse and distribution expense(5)............ $ 25,599 $ 29,827 $ 34,860 $ 7,676 $ 7,424 -- -- -- Occupancy expense(6)... 29,286 32,232 35,357 8,406 9,405 -- -- -- Depreciation and amortization expense.. 12,176 13,105 16,261 3,412 4,885 -- -- -- Average net sales per store(7).............. 1,215 1,272 1,294 314 333 -- -- -- Average net sales per store square foot(7).. 223 226 224 55 56 -- -- -- Percentage increase in comparable store net sales(8).............. 9.9% 5.2% 2.1% 2.9% 7.3% -- -- -- </TABLE> <TABLE> <CAPTION> THIRTEEN WEEKS FISCAL YEAR ENDED(1) ENDED ------------------------- ------------------- JAN. 30, JAN. 29 JAN. 28, APRIL 30, APRIL 28, 1994 1995(3) 1996 1995 1996 -------- ------- -------- --------- --------- <S> <C> <C> <C> <C> <C> SELECTED STORE DATA: Beginning Stores................ 524 538 544 544 566 New Stores...................... 15 10 24 10 3 Relocated Stores................ 25 12 30 5 6 Closed Stores (including relocated stores).............. (26) (16) (32) (5) (6) ----- ----- ----- ----- ----- Ending Stores................... 538 544 566 554 569 ===== ===== ===== ===== ===== Expanded Stores................. 13 5 9 2 2 Stores with Commercial Sales Centers........................ 5 59 176 183 189 Total store square footage (at period end)(000s)(7)........... 2,992 3,097 3,329 3,161 3,377 </TABLE> <TABLE> <CAPTION> AT APRIL 28, 1996 ----------------------------- ACTUAL AS ADJUSTED(9) ------------ ---------------- (IN THOUSANDS OF DOLLARS) <S> <C> <C> BALANCE SHEET DATA: Working capital.................................. $ 82,052 $ 82,158 Total assets..................................... 398,949 395,506 Long-term debt: Credit Agreement................................. 92,671 -- Capital leases................................... 18,941 18,941 Stockholder's equity(10)......................... 61,496 153,740 </TABLE> - -------- (1) The Company's fiscal year consists of 52 or 53 weeks ending on the Sunday nearest to January 31. All fiscal years presented are 52 weeks. (2) The Pro Forma statement of operations and net income per common share data give effect to the completion of the Offering and the application of the estimated net proceeds therefrom as if the same had occurred at the beginning of the periods indicated. (3) The extraordinary gain represents a gain resulting from cancellation of a portion of the Company's long-term debt. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 4 and 9 to Consolidated Financial Statements. (4) Includes in cost of sales pre-opening expenses of $1.6 million associated with the opening of the new distribution center in Phoenix, Arizona. Includes in operating and administrative expenses $5.3 million of non- recurring software development costs and $1.8 million of depreciation and amortization expense relating to equipment associated with the new store- based information systems. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (5) Warehouse and distribution expense is included in cost of sales. (6) Occupancy expense is included in operating and administrative expenses. (7) Total store square footage is based on the Company's actual store formats and includes normal selling, office, stockroom and receiving space. Average net sales per store and average net sales per store square foot are based on the average of beginning and ending number of stores and store square footage and are not weighted to take into consideration the actual dates of store openings, closings or expansions. (8) Comparable store net sales data is calculated based on the change in net sales commencing after the time a new store has been opened twelve months. The first twelve months during which a new store is open are not included in the comparable store calculation. Relocations are included in comparable store net sales from the date of opening. (9) Gives effect to the sale of 6,700,000 shares of Common Stock offered hereby at an assumed initial public offering price of $15.00 per share and the application of the estimated net proceeds therefrom and includes an aggregate of 21,700 shares of Common Stock issued to certain executive officers of the Company at a price of $12.75 per share. See "Use of Proceeds," and "Capitalization" and "The Merger." (10) Excludes the effect of equity participation agreements under which certain current officers and a former officer of the Company have been granted participation interests equal in the aggregate to 6.4% of the Common Stock held by CSK Holdings, Ltd. immediately prior to the Offering. Pursuant to these agreements, these individuals are entitled to a cash payment by the Company equal to the product of their vested participation interest and the consideration received (up to a maximum of $12.75 per equity participation share equivalent) in respect of one or more of the following: (i) a sale of substantially all of the assets of the Company; (ii) the merger of the Company; and (iii) the sale of Common Stock by CSK Holdings, Ltd. (in which case the payment will be adjusted based upon the percentage of such stockholder's holdings being sold). See "Management-- Equity Participation Agreements."
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the more detailed information and the financial data appearing elsewhere in this Prospectus. Unless otherwise noted, all references to "Digital Courier" or the "Company" refer to the business, assets and technology acquired by the Company on November 15, 1995, and, for all periods thereafter, both Digital Courier International Corporation and its subsidiary, Digital Courier International Inc. ("DCI"). Unless otherwise noted, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option and reflects the 1-for-3 reverse stock split which occurred in May 1996. Unless otherwise noted, financial data in this Prospectus are expressed in Canadian dollars and are presented in accordance with generally accepted accounting principles in Canada ("Canadian GAAP"). See Note 11 of Company's Consolidated Financial Statements for a description of the principal differences between Canadian GAAP and generally accepted accounting principles in the United States ("U.S. GAAP"). THE COMPANY Digital Courier International Corporation ("Digital Courier" or the "Company") is a leading supplier of electronic distribution and communication services for the radio broadcast industry in Canada and the United States. Digital Courier's two-way network enables fast and reliable electronic distribution of CD quality audio, text and data to organizations that traditionally have relied upon tape and courier distribution services. Since its Canadian roll-out in April 1995, the Digital Courier network has succeeded in becoming the standard system for the electronic distribution of advertising and short-form programming throughout Canada, with over 260 radio stations connected to its network. In the United States, Digital Courier has gained rapid industry acceptance since the introduction of its network in August 1995, with more than 2,220 radio stations currently under contract and approximately 250 additional stations joining each month. The Digital Courier network is a two-way network in which digital or analog audio may be compressed and stored on customer computers and then sent to multiple end-user locations. The Company designed its network with an open, scalable architecture to facilitate the addition of new services. The Company's principal technology was initially developed by BC TELECOM Inc. ("BC TELECOM"), Canada's second largest telecommunications group. A number of the Company's management team were involved with the development of the technology prior to its acquisition by the Company in November 1995. Current radio industry business processes are inefficient and prone to error: distribution of spot advertising to individual radio stations is accomplished predominately through physical delivery, which is time consuming and labor intensive; and the current market for the buying and selling of radio advertising time is supported by a paper based, inefficient and time consuming method of transacting business. A majority of the work flow created by the various participants in the radio industry is conducted by phone, mail, fax and physical courier. The Company believes that its network is well positioned to (i) streamline the flow of information in the radio broadcast industry by exploiting recent technological developments that have made digital communications, audio compression technologies and computing technology practical and affordable for the industry and (ii) take advantage of the recent enactment of the Telecommunications Act of 1996 (the "Telecommunications Act") in the United States which has led to consolidation of the radio broadcast groups into new larger organizations that are now faced with the challenge of reducing costs and improving the efficiencies of their operations. According to industry sources, there are approximately 10,000 radio stations in the United States and 500 radio stations in Canada. Digital Courier has targeted the top- rated 5,000 of these stations, as well as the largest suppliers of advertising and services to such stations, for the installation of its network. Digital Courier recognized the opportunities created by the convergence of compression technology, increased computing power and the emergence of nation- wide digital telephone services (ISDN), and as a result began deployment of the Company's two-way network. Distributors and programmers utilize the Digital Courier network to send radio advertisements, traffic instructions and short- form programming to radio stations participating in the network and thereby eliminate the necessity of using a physical courier as well as take advantage of the integrated confirmation, billing and other services afforded by the network. The Company's network can be configured to provide virtual private networks ("SubNets") for major distributors and content providers which eliminates their need to invest capital in a proprietary network or use networks owned by competing organizations. The Company intends to expand the value-added services available through its existing network by developing services for advertising agencies and rep companies (companies that represent individual radio stations to national advertisers) that streamline the process of buying/selling radio time and by facilitating the collection and distribution of ratings information. The Company and The Arbitron Company ("Arbitron") are currently evaluating opportunities to jointly develop and market such products. In addition, the Company believes its network will provide expanding radio station groups with a low-cost solution for centralizing management and operational functions. The Company's objective is to become the leading supplier of integrated communication services to the radio broadcast and advertising industries by complementing its existing distribution services with a comprehensive communications solution for distributors, radio station groups, advertising agencies, rep companies, program syndicators, media companies and media buyers. To achieve this objective, the Company has adopted the following strategies: (i) continue the rapid expansion of its network to radio stations and other industry participants; (ii) maintain a scaleable/open architecture for its network to facilitate the addition of new services as they become available and to provide the maximum benefit to its customers; (iii) leverage its installed network through the development and provision of new value-added services; (iv) position its network as an out-sourcer of services that enhance the competitiveness of, rather than compete against, existing industry participants; and (v) develop strategic alliances/relationships which increase its ability to offer value-added services in a cost-effective manner. THE OFFERING <TABLE> <S> <C> Common Shares offered by the Company... 4,500,000 shares Common Shares offered by the Selling 2,000,000 shares(1) Shareholders.......................... Total Common Shares offered............ 6,500,000 shares Common Shares to be outstanding after 16,990,115 shares(2) this offering......................... Estimated net proceeds to the Company.. US$21.7 million(3) Use of proceeds by the Company......... To repurchase outstanding Preferred Shares, repay existing equipment lease obligations, purchase additional computer and communication equipment, acquire software licenses, develop new products and services and provide for working capital and general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market DCICF symbol................................ Alberta Stock Exchange symbol.......... DIC </TABLE> - -------- (1) Excludes an additional 975,000 shares which will be sold by the Selling Shareholders in the event the Underwriters exercise their over-allotment option in full. See "Underwriting." (2) Excludes 1,250,000 Common Shares issuable upon exercise of options outstanding at June 30, 1996. See "Stock Options." (3) Assuming an offering price of $US5.33 per Common Share and after deducting the underwriting discount and estimated expenses of the offering payable by the Company. SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA The consolidated statement of operations and deficit data set forth below for the six-month period ended March 31, 1996 and the balance sheet data at March 31, 1996, have been derived from the Company's audited Consolidated Financial Statements included elsewhere in this Prospectus. <TABLE> <CAPTION> US$ EQUIVALENT SIX MONTH SIX MONTH PERIOD ENDED PERIOD ENDED MARCH 31, MARCH 31, 1996(1) 1996(2) ------------ -------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS AND DEFICIT DATA: CANADIAN GAAP(3) Revenue........................................... $ 508 US$ 373 Cost of sales..................................... 648 476 Other expenses.................................... 1,945 1,427 Other income...................................... 124 91 ------ -------- Net loss.......................................... 1,962 1,439 ====== ======== Net loss per share................................ $ 0.16 US$ 0.12 ====== ======== Weighted average number of shares outstanding(4).. 12,317 12,317 U.S. GAAP(3) Net loss(5)....................................... $4,022 US$2,952 ====== ======== Net loss per share................................ $ 0.30 US$ 0.22 ====== ======== Weighted average number of shares outstanding(4).. 13,302 13,302 OTHER DATA: Total stations under contract at end of period (US)............................................. 1,529 Total stations under contract at end of period (Canada)......................................... 257 Total deliveries (US)(6).......................... 950 Total deliveries (Canada)(6)...................... 10,442 </TABLE> <TABLE> <CAPTION> US$ EQUIVALENT MARCH 31, 1996(1) MARCH 31, 1996(2) --------------------- ----------------------- ACTUAL AS ADJUSTED(7) ACTUAL AS ADJUSTED(7) ------ -------------- -------- -------------- (IN THOUSANDS) <S> <C> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: CANADIAN GAAP(3) Cash and cash equivalents........ $3,209 $30,416 US$2,353 US$22,363 Working capital.................. 596 27,803 437 20,440 Total assets..................... 10,596 37,803 7,771 27,798 Shareholders' equity............. 5,303 32,260 3,889 23,717 U.S. GAAP(3) Cash and cash equivalents........ $3,209 $30,416 US$2,353 US$ 22,363 Working capital.................. 596 27,803 437 20,440 Total assets..................... 8,846 36,053 6,488 26,510 Shareholders' equity............. 3,553 32,760 2,605 24,071 </TABLE> - -------- (1) Gives effect, as of November 15, 1995, to (i) the purchase by the Company of certain assets and the assumption of certain liabilities of MPR Teltech Ltd., which constituted substantially all of the assets of the Company as of such date, and (ii) the acquisition of the Company by Kwikstar Communications Ltd., which was accounted for as a reverse takeover and a purchase. The Company had no material assets, liabilities or operating results prior to such date. See "The Company" and Notes 2 and 3 to the Company's Consolidated Financial Statements. (2) Canadian dollar statement of operations and deficit amounts have been translated into U.S. dollars using the average exchange rate for the relevant period, and Canadian dollar balance sheet amounts have been translated using the relevant period-end rate, as set forth in "Exchange Rate Information." These translations are not necessarily representative of the amounts that would have been reported if the Company historically reported its financial statements in U.S. dollars. In addition, the exchange rates utilized are not necessarily indicative of the rates in effect at any other time. (3) For a description of the principal differences between Canadian GAAP and U.S. GAAP, see Note 11 of the Company's Consolidated Financial Statements. (4) See Notes 8 and 11(c) to the Company's Consolidated Financial Statements. (5) Includes the loss determined under Canadian GAAP of $1,962, plus expenses relating to stock-based compensation of $2,409, less a reduction of amortization of intellectual property of $250. See Note 11 of the Company's Consolidated Financial Statements. (6) See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations."
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+PROSPECTUS SUMMARY The following summary information is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless the context indicates otherwise, all references in this Prospectus to "VentureTech" or the "Company" include its predecessors and subsidiaries. The Company VentureTech, Inc. ("VentureTech" or the "Company") is engaged in the development, acquisition and licensing of certain computer based technology designed to ultimately offer a full range of casino style gaming, entertainment, information and financial transaction services over the worldwide Internet. Through its technology agreements and licenses, the Company intends to establish a series of multi-cultural / multi-ethnic virtual casinos over the Internet from various locations around the world. A casino is deemed to be "virtual" when it emulates actual casino style games offered in existing land-based casinos, but provides such gaming services via computer software and hardware as opposed to actual gaming equipment such as slot machines and blackjack tables. The Internet is generally defined as a hierarchical collection of interconnected computer networks throughout the world. Individual websites, a collection of files and applications on a specific computer system, are established by individuals or organizations that seek to provide information and/or services to the general public. Interested parties access a particular website at a unique Internet address, typically by way of an off-site computer and modem, and through the services of a local Internet service provider. The Company intends to establish unique Internet addresses for its virtual casinos to clearly distinguish them from others that may be established by competitors. The Company has created two wholly owned subsidiaries, EuroAsian E-Casinos, Inc. (hereinafter "E-Casinos"), and Cybernet Currency Clearing, Inc. (hereinafter "CCCI") to facilitate the distinct operations of its business. E-Casinos was established as a foreign corporation in the Marshall Islands to own, either solely or in partnership with joint venturers, and operate multiple full service virtual gambling casinos over the Internet. CCCI was established as a Nevada corporation to function as an international currency converter of world currency in various international business transactions. In developing its Internet gaming and financial transaction services, the Company intends to acquire or otherwise obtain, by license or other agreement, access to newly emerging Internet security and gaming technologies. The Company has entered into separate agreements with CasinoWorld Holdings, Ltd ("CWH"), a Delaware corporation, and Alphacom Data Security Services, Inc. ("Alphacom"), a Nevada corporation, to supply the necessary technology and related services to conduct the Company's business operations. Operating through its newly created subsidiaries and in reliance upon its agreements with CWH and Alphacom, the Company is preparing to commence substantive operations of its gaming services over the Internet during the second half of 1996 or first quarter of 1997. The Company plans to establish its virtual casinos by creating partnerships and join ventures whereby the venture partners will share revenues with the Company pursuant to revenue sharing agreements to be negotiated and executed. The Company's primary strategy is to fully use the CWH technology to establish its virtual casinos. Management believes, however, that it may improve its percentages of revenue sharing in the virtual casinos by establishing various gaming technology license agreements with multiple third parties, although there can be no assurance that such agreements can be finalized. The Company intends to establish a series of virtual casinos over the Internet from "authorized locations" around the world. The Company's licensing and operating agreements with CWH require that a valid gaming license be obtained from international jurisdictions acceptable to CWH for each individual virtual casino to be licensed from CWH, provided that such jurisdiction requires a gaming license. Once the Company obtains approval from CWH regarding the submitted foreign gaming license, the Company may offer its Internet gaming services to any jurisdiction in the world where such Internet gaming is lawful. These areas where Inernet gaming is considered lawful constitute "authorized locations." The Company is currently seeking valid gaming licenses from the jurisdictions of Turkey and the Marshall Islands. As of the date hereof, no formal agreements have been reached with any recognized authorized location. See "Business - Government Regulations." In anticipation of entering into the Internet gaming services business, the Company on March 14, 1996 effected the sale of its wholly owned subsidiary, Tessier Resources, Ltd. ("Tessier"), to Kaniksu Ventures, Inc. ("Kaniksu") in exchange for a $3,000,000 debenture convertible into 2,000,000 shares of Kaniksu common stock. The $3,000,000 debenture matures in four (4) years from the date of issuance, carries no interest, and may be converted at the conversion price of $1.50 per share into an aggregate of 2,000,000 shares of authorized but previously unissued shares of Kaniksu common stock at any time prior to repayment of the debenture. Presently, VentureTech does not have an ownership interest in Kaniksu. However, if the debenture was totally converted into 2,000,000 shares of Kaniksu common stock as of the date hereof, and assuming no additional Kaniksu shares have been issued, VentureTech would own approximately 40% of Kaniksu's issued and outstanding common stock. As additional consideration for the acquisition of Tessier, Kaniksu has agreed to issue to eligible stockholders of the Company shares of Kaniksu common stock and rights to purchase additional shares. Under the terms of the agreement, each individual VentureTech stockholder as of the date of record, April 5, 1996, is entitled to five (5) shares of authorized but previously unissued Kaniksu common stock for each 100 shares of VentureTech common Stock owned. Further, each five shares of Kaniksu common stock issued to VentureTech stockholders shall include ten (10) rights, each right entitling the holder thereof to purchase one additional share of Kaniksu common stock for $2.25 per share for a period of sixty (60) days following receipt of the Kaniksu shares and rights. Kaniksu intends to provide these shares and rights pursuant to a registration statement to be filed as soon as practical. See "Business Background." Tessier is in the business of developing and supplying snow and ice removal technology to the commercial market. Management believes that the attention required by this subsidiary would detract from the potentially more lucrative business of Internet gaming and it is in the best interest of the Company to divest itself of this subsidiary. In April 1996, the Company incorporated E-Casinos in the Republic of the Marshall Islands primarily to take advantage of favorable tax laws and to avoid possible conflicts with United States ("US") laws in regard to Internet gaming. Although the Company does not believe that its intended business actions violate the letter of the law in regards to any existing regulations of the US, management intends to focus primarily on the market outside of the US until such time as US laws, specifically in regard to Internet gaming, are clarified. A bill to create a national commission to study gambling in the US (including interactive virtual wagering) was tentatively approved by a Senate committee in May of 1996. On July 22, 1996, the House gave final congressional approval to a measure that would create a federal commission to examine the rapid growth of the US gambling industry. On a voice vote, the House sent the legislation to President Clinton, who has said he supported the bill. The bill's sponsor is Rep. Frank R. Wolf (R-Va.). The measure would create a nine member National Gambling Impact and Policy Commission to study economic and social impact of gambling and report its findings to Congress and the president in two years. The commission could recommend changes in state or federal gambling policies. Among the issues the panel would examine is gambling on the Internet. As of the date hereof, there is no indication as to any potential legislation or new laws that may result from this commission . See "Business - Government Regulations." Through E-Casinos, the Company intends to establish its first virtual casino in affiliation with CWH. On March 4, 1996, the Company entered into a definitive non-exclusive license agreement (the "License Agreement") with CWH for CWH's proprietary technology and a non-exclusive sublicense to use Durand Communications Network's ("Durand") MindWireTM software technology. Durand is a privately held corporation founded in 1993 in Santa Barbara, California and is a software developer of client-server technologies for real time electronic commerce and other applications. In consideration of a $2,000,000 license fee, the Company was granted a non-exclusive license to CWH's revolutionary new Virtual CasinoWorldTM software application, an interactive service bureau , gaming service and multimedia virtual casino on the Internet. With a non-exclusive sublicense to the MindWireTM proprietary technology, the Company will be able to provide its customers with realistic casino wagering games with high-level 3-D graphics, player interactivity in real-time scenarios and with automatic updating of applications and graphics during online sessions. E-Casinos also intends to ultimately offer a "Sportsbook," capable of providing wagering opportunities on sporting events, as well as access to various international lottery purchases. It is expected that these supplemental services will be provided in association with third parties already engaged and knowledgeable in these business areas. On April 19, 1996 the Company also entered into an Operating, Revenue Sharing and Management Services Agreement (the "Operating Agreement") with CWH. This Operating Agreement provides the Company with a new interactive platform that will combine Monacall s.a.m. L'Univers Telematique's ("Monacall") Interactive Voice Response software with CWH's Virtual CasinoWorldTM application. The integrated technologies will provide secured transaction processing, gaming, international bank account management and technical administration, via Monte Carlo, Monaco, of the Virtual CasinoWorldTM application. E-Casinos has contracted with CWH whereby CWH will provide, pursuant to a joint venture between CWH and Monacall, facilities in Monaco, telecom bandwith, Tandem banking services, business licenses, Monaco operating approvals, banking relationships and expertise. Monacall, a Monegasque corporation with headquarters in Monte Carlo, has been authorized by the Principality of Monaco by way of an approval letter executed by the Department of Finances and Economy, to provide a platform for interactive wagering and gaming for telecom and Internet activities. This will allow transaction processing for Internet gaming that is legally initiated outside of Monaco and provide a safe and plausible operation of its online interactive gaming activities. Under its revenue sharing agreement with CWH, the Company shall receive 33.333% of the gross win/loss disbursed from operations of the virtual casino. CWH and its affiliated telephony and transaction facility (Monacall) shall share the balance of win/loss distributions. The Company will market and focus its casino operations primarily in Europe, Asia, and the Middle East offering a full range of gambling, information and other entertainment services over the Internet. E-Casinos will operate under strict guidelines and laws to assure fair opportunities for its Internet clients. The Company is currently engaged in discussions and negotiations with interested parties and potential partners and joint venturers in various parts of the world. Based on the success of these discussions, of which there can be no assurance, the Company intends to establish multi cultural/multi-ethnic casinos around the world over the next several years as satisfactory agreements can be entered into. Presently, US laws are vague on the matter of Internet wagering within the US. Management believes that until such time as new legislation is passed or current statutes are adequately defined, it is in the Company's best interest to delay marketing its Internet gaming services within the US. Thus, all of the Company's initial marketing will be directed outside the US. In March 1996, the Company entered into an agreement with Alphacom Data Security Services, Inc., a Nevada corporation ("Alphacom"), for a license to use and to further sublicense Alphacom's Internet gaming software integrated with the Alpha Guard computer security application. The Company has paid an aggregate of $250,000 toward an exclusive license for the software technology as it relates to the Internet gaming industry. In further consideration for the license, E-Casinos will pay to Alphacom an additional license fee (royalty) of up to ten percent (10%) of the net win/loss earned by the Company, after payouts and certain license fees (as applicable), generated from casino operations using the Alphacom software. In September 1995, the Company entered into a letter of understanding with CD MAX, Inc. ("CD-MAX"), a Delaware corporation, to license CD-MAX's propriety software encoding, encryption and billing system for exclusive use within the Internet gaming industry. Management anticipates using CD-MAX's encryption expertise with both of its subsidiaries, E-Casinos and CCCI, as a supplement or an alternative to other security measures. The CD-MAX technology will likely be integrated with the Company's other licensed technology to offer maximum security and provide users anonymity and financial protection in banking, currency exchanges and playing the full range of casino games, although there can be no assurance the level of security represented. The CD-MAX system is not expected to require any additional hardware devices and can be automatically installed at the initial service log on. In August 1995, the Company created Cybernet Currency Clearing, Inc. ("CCCI") to become engaged in the business of providing international business services, primarily the conversion of international currency into "e-cash" or "e-dollars" on a fee basis. Once operational, CCCI is expected to perform conversions of world currencies into "e-cash" and then back to hard currency for individual clients, for associated Internet casinos. Further, management intends to align CCCI with major banks to provide a secure conversion service for exchanging their client's money to and from "e-cash". The Company intends to use a portion of the proceeds from the sale of Common Stock to the Selling Stockholders to commence CCCI's operations. Through its subsidiary, E-Casinos, the Company intends to offer a full range of Internet gaming, information and entertainment services in the form of virtual casinos on the Internet, open to all individuals interested in playing casino style games for real money on a worldwide basis, subject to local laws and regulations. E-Casinos must adhere to the legal requirements of each jurisdiction in which it operates from or offers it services. The virtual casinos will initially offer a cross-section of casino style games including, but not limited to, blackjack, craps, roulette, poker, keno and slots. Other casino games, such as baccarat, will be added over time consistent with the cultural and regional demands of the clientele. In addition, E-Casinos, most likely through a partnership and/or joint venture, intends to ultimately offer a "Sportsbook" for wagering on international sporting events and access to international lottery ticket purchases. CCCI, when fully operational, intends to secure the currency transactions for E-Casinos by using the security technologies licensed with its affiliates. The primary focus of CCCI is to convert the electronic money, known as "e-cash", into real dollars (or other appropriate currency). CCCI will perform the conversion of currencies, for transaction fees, into "e-cash" and then back to dollars for its associated virtual casinos. The actual financial transactions will be handled by a major bank(s) affiliated with the Company that will provide the administrative expertise and credibility required by customers when dealing in personal financial transactions. Neither the Company nor CCCI has entered into any definitive agreements with prospective affiliated banks due to the current stage of early development. The Company expects to materially depend on its pending license and technology agreements with CD-MAX, Inc. to implement its proposed currency services and strategy. The operation of CCCI is separate and apart from the Company's agreement with CWH. CWH has no current obligation to incorporate or integrate these proposed operations or technology into its virtual casino operations. The Company intends to use a portion of the proceeds from the sale of Common Stock to the Selling Shareholders to commence CCCI's operations. See "Business - Business of Issuer." The Offering Securities Offered 6,000,000 shares of Common Stock sold by Selling Stockholders. Shares of Common Stock Outstanding: Before Offering (1) 16,850,186 shares After Offering (1) 16,850,186 shares Proposed Nasdaq Symbol(2) "VTEH" Use of Proceeds Although the Company will not receive any proceeds from the sale of shares of Common Stock by the Selling Stockholders pursuant to this Prospectus, the Company will receive $60,000,000 ($10.00 per share) from the private sale of 6,000,000 shares to the Selling Stockholders. Net proceeds after deducting all costs associated with the sale and placement of the Shares and preparation of the registration statement to which this Prospectus relates, is estimated to be $47,850,000 and will be used for research and development, marketing and advertising, licensing and acquisition of related technology, licensing fees to various government agencies, and working capital and other general corporate purposes. See "Use of Proceeds." Risk Factors The Offering involves a high degree of risk as well as immediate and substantial dilution. See "Risk Factors" and "Dilution." (1) The Common Stock being offered hereby has been issued to the Selling Stockholders and is being held in escrow pending completion of the registration statement to which this Prospectus relates and receipt of payment for the Shares. Purchasers pursuant to this Offering will purchase from the Selling Stockholders and not from the Company. Amounts shown do not include (a) 2,341,968 shares of Common Stock issuable upon exercise of certain warrants and stock options held by certain individuals at present exercise prices per share of $1.70 to $6.00 per share, (b) 15,200,000 shares of Common Stock issuable upon conversion of certain convertible debentures at the present exercise price of $.03 per share, and (c) additional shares of Common Stock that may be issued upon conversion of certain other convertible securities that are either presently outstanding or may be issued in the future. See ""Description of Securities", and "Risk Factors - Additional Dilution." (2) Concurrent with the filing of the registration statement to which this Prospectus relates, the Company has applied to have its Common Stock approved for quotation through the Nasdaq Stock Market System. Currently, the Common Stock is traded in the over-the-counter market. See "Risk Factors - Limited Public Market for Shares; Possible Volatility of Price of Shares" and "Market Information." Summary Financial Information Statement of Operations Data: <TABLE> <CAPTION> From Inception on Six Months January 1, Ended Years Ended 1986 Through June 30, December 31, June 30, ------------- -------------------------------------------- ------------- 1996 1995 1994 1993 1996 --------------- ------------ ------------ --------- --------- <S> <C> <C> <C> <C> <C> Revenue.......................... $ - $ - $ - $ - $ 5,645 ------------- -------------- -------------- ----------- ---------- Expenses Research and development - - - - 50,215 General and administrative 896,792 906,518 29,190 15,200 2,130,854 Depreciation................ 11,568 - - - 11,568 ------------ ------------- ------------- ------------- -------------- Total Expenses................... 908,360 906,518 29,190 15,200 2,192,637 ----------- ---------- ---------- ---------- ---------- Net income (loss) from operations.......... (908,360) (906,518) (29,190) (15,200) (2,186,992) ---------- ----------- ---------- ---------- ---------- Other income / expense Interest expense............ (8,750) (27,709) - - (36,459) ------------ ----------- ------------- ------------- ----------- Total other income / expense (8,750) (27,709) - - (36,459) ------------ ----------- ------------- ------------- ----------- Income (loss) before loss from discontinued operations and provisions for income tax..... (917,110) (934,227) (29,190) (15,200) (2,223,451) Loss from discontinued operations.................... (34,206) (103,008) - - (137,215) Income taxes (benefit)........... - - - - - -------------------------------- ------------- ------------- ------------ Net income (loss)................ $ (951,316) $(1,037,235) $ (29,190) $ (15,200) $ (2,360,666) =========== =========== =========== =========== ============ Income (loss) per share.......... $ (0.08) $ (0.25) $ (0.01) $ (0.01) Weighted average number of shares outstanding.... 11,650,880 4,177,136 3,695,920 1,960,154 </TABLE> Balance Sheet Data: June 30, 1996 Actual Pro Forma(1) Working capital........................... $ (1,772,168) $46,077,832 Total assets.............................. 2,579,213 50,429,213 Total stockholders' equity................ 692,913 48,542,913 (1) Adjusted to give effect to the private sale of the 6,000,000 shares of Common Stock to the Selling Stockholders and hereby offered for resale by the Selling Stockholders to the public, and the initial application of the estimated net proceeds from the sale to the Selling Stockholders. See "Use of Proceeds."
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+PROSPECTUS SUMMARY The following summary should be read in conjunction with, and is qualified in its entirety by, the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. As used in this Prospectus, the "Company" refers to Kabelmedia Holding GmbH ("Kabelmedia"), a limited liability company formed under the laws of Germany, and Kabelvision Beteiligungs GmbH, which will be merged into Kabelmedia in June, 1996 (the "Merger"), together with their respective subsidiaries and, where appropriate, their respective predecessors. The Offering is conditioned upon the completion of the Merger. Certain terms used in this Prospectus are defined in the Glossary included herein as Appendix A. THE COMPANY The Company acquires, owns and operates cable television systems that serve primarily medium- and small-sized communities in Germany. Principally as a result of completing 14 acquisitions since its inception in 1992, the Company owned and operated cable systems passing approximately 492,000 homes and serving approximately 359,000 customers as of March 31, 1996. In addition, the Company has entered into non-binding letters of intent and commenced negotiations of definitive purchase agreements to acquire two cable companies serving an aggregate of approximately 46,000 customers (the "Pending Acquisitions"). See "Business -- Acquisitions and Pending Acquisitions." The Company has followed a systematic approach in acquiring, consolidating and operating cable television systems, based on the goal of increasing operating cash flow while maintaining or improving service standards. A key element of the Company's strategy is to expand its existing regional clusters of cable television systems and to establish new regional clusters of systems large enough to serve as cores for new operating regions. In addition, the Company aggressively consolidates cable systems following their acquisition to improve operating performance by eliminating duplicative personnel and office locations, creating regional customer service centers and signal distribution facilities and centralizing corporate support functions, including accounting, billing, marketing and technical and administration services. Between January 1, 1994 and March 31, 1996, the Company completed 12 acquisitions, thereby adding cable systems serving approximately 317,500 customers (measured at the date of the respective acquisitions), while reducing the number of office locations serving customers of such acquired systems and the Company's other systems from 25 to seven and the number of employees serving such acquired systems and the Company's other systems from 211 to 125. The following tables provide certain data for the Company's cable television systems (i) on an actual basis as at and for the years ended December 31, 1993, 1994 and 1995 and the three months ended March 31, 1996; (ii) on a pro forma basis as at and for the year ended December 31, 1995 giving effect to the Recent Acquisitions (as defined in "-- Recent and Pending Acquisitions"), the Shareholder Debt Conversion (as defined in "-- Shareholder Debt Conversion") and the Offering and the application of the proceeds therefrom as if such transactions had occurred on January 1, 1995; (iii) on a pro forma basis as at and for the year ended December 31, 1995 giving effect to the Recent Acquisitions, Shareholder Debt Conversion, the Offering and the application of the proceeds therefrom and the Pending Acquisitions as if such transactions had occurred on January 1, 1995; and (iv) on a pro forma basis as at and for the three-month period ended March 31, 1996 giving effect to the InfoSat Acquisition (as defined in "-- Recent and Pending Acquisitions"), the Shareholder Debt Conversion, the Offering and the application of the proceeds therefrom and the Pending Acquisitions as if such transactions had occurred on January 1, 1996. See "Business -- Acquisitions and Pending Acquisitions." <TABLE> <CAPTION> HISTORICAL(1) ------------------------------------------------------------------- DECEMBER 31, MARCH 31, ------------------------------------------- ------------------- 1993 1994 1995 1995(2) 1996 1996(2) ------- ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> <C> Homes passed(3)................................. 23,890 71,032 452,948 -- 491,863 -- Customers(3).................................... 22,655 58,613 342,752 -- 358,784 -- Penetration(3)(4)............................... 94.8% 82.5% 75.7% -- 72.9% -- Average monthly revenue per customer(5)......... DM9.24 DM9.37 DM12.44 $8.42 DM14.30 $9.68 Average monthly EBITDA per customer(5).......... DM4.22 DM1.59 DM 4.60 $3.11 DM 7.50 $5.08 EBITDA margin(6)................................ 45.7% 17.0% 37.0% -- 52.4% -- </TABLE> <TABLE> <CAPTION> PRO FORMA ------------------------------------------------------------- MARCH 31, 1996 DECEMBER 31, 1995 ----------------- --------------------------------------- FOR THE RECENT FOR THE INFOSAT FOR THE RECENT ACQUISITIONS, ACQUISITION, ACQUISITIONS, THE SHAREHOLDER THE SHAREHOLDER THE SHAREHOLDER DEBT CONVERSION, DEBT CONVERSION, DEBT CONVERSION THE OFFERING THE OFFERING AND THE AND THE PENDING AND THE PENDING OFFERING(2) ACQUISITIONS(2)(7) ACQUISITIONS(2)(7) ----------------- ----------------- ----------------- <S> <C> <C> <C> <C> <C> <C> Homes passed(3)........................................ 467,184 -- 517,394 -- 542,073 -- Customers(3)........................................... 356,251 -- 402,251 -- 404,784 -- Penetration(3)(4)...................................... 76.3% -- 77.7% -- 74.7% -- Average monthly revenue per customer(5)................ DM13.98 $9.47 DM13.43 $9.10 DM13.71 $9.28 Average monthly EBITDA per customer(5)................. DM 6.98 $4.73 DM 6.88 $4.66 DM 7.35 $4.98 EBITDA margin(6)....................................... 49.9% -- 51.2% -- 53.6% -- </TABLE> - --------------- (1) Reflects acquisitions completed by the Company from inception through March 31, 1996 as of their acquisition dates. See "Business -- Systems." (2) For convenience, the financial data have been translated at the rate of DM1.4766 = $1.00, the Noon Buying Rate on March 29, 1996. (3) At end of period. Homes passed and penetration at March 31, 1996 reflect results reported to the Company during 1996 of a survey commissioned by the Company of the number of homes in certain of its concession areas and, to a lesser extent, the build-out of existing systems. (4) Customers as a percentage of homes passed. (5) "EBITDA" consists of earnings (loss) before extraordinary items, minority interests, net interest expense, income taxes and depreciation and amortization. The Company believes that EBITDA and related measures of cash flow from operating activities serve as important financial indicators in measuring and comparing cable television companies in several areas, including liquidity, operating performance and leverage. EBITDA is not a U.S. GAAP measure of income (loss) or cash flow from operations and should not be considered as an alternative to net income as an indication of the Company's financial performance or as an alternative to cash flow from operating activities as a measure of liquidity. Historical average monthly revenue and EBITDA per customer equals (a)(i) historical revenues and EBITDA for the period divided by (ii) twelve for the annual periods and three for the quarterly periods divided by (b) the average monthly number of customers for such period. Pro forma average monthly revenue and EBITDA per customer equals (a)(i) pro forma revenue and EBITDA for the period divided by (ii) twelve for the annual periods and three for the quarterly periods divided by (b) the pro forma number of customers at December 31, 1995 or March 31, 1996, as appropriate. (6) Represents EBITDA as a percentage of revenues. (7) Computations of pro forma number of homes passed, number of customers and average monthly revenue per customer reflect information with respect to the Pending Acquisitions supplied by the respective sellers as of certain dates during the fourth quarter of 1995. Such information has been subject to only limited verification by the Company and, in some cases, has been calculated on a different basis than that used by the Company. The Company has experienced rapid growth since its inception in 1992 and, as is common for cable television companies in comparable stages of development, has incurred significant net losses in each of its first three years of operations (DM1,501,000 in 1993, DM6,116,000 in 1994 and DM38,282,000 in 1995). The Company had accumulated deficits amounting to DM1,501,000, DM7,617,000 and DM45,899,000 as at December 31, 1993, 1994 and 1995, respectively. THE GERMAN CABLE TELEVISION MARKET Germany is the largest cable television market in Europe and provides a highly favorable environment for cable television system acquisitions and operations: - - Large, Fragmented Cable Television Market -- Germany has a population of over 81 million people and over 36 million homes. Deutsche Telekom AG ("Deutsche Telekom") is the dominant cable television supplier; its cable television distribution systems, either directly or indirectly through private cable system operators, passed approximately 24 million homes and served over 15 million cable subscribers as of September 30, 1995. Deutsche Telekom provides cable television signals to over 5,000 private cable system operators with over 100 subscribers each and to over 475 private cable system operators with over 1,000 subscribers each. A large number of German cable system operators also obtain their programming directly through their own head-ends and provide that programming to a significant number of additional homes in Germany. This large number of cable system operators provides the Company with significant consolidation opportunities. - - Built-out Infrastructure -- The German cable television infrastructure is substantially built-out. As of September 30, 1995, Deutsche Telekom cable television distribution systems, either directly or through cable transmission lines of private system operators, passed approximately 64% of the homes in Germany. In addition, systems in which the head-end is owned by a private cable system operator pass or provide signal to a significant number of other homes in Germany. The Company estimates that as of March 31, 1996, principal transmission lines passed 84% of the approximately 585,000 homes in its concession areas. - - High Density -- Germany has an average population density of 562 persons per square mile, compared to 70 persons per square mile in the United States and 616 persons per square mile in the United Kingdom. Approximately 86% of Germany's population resides in urban areas, compared to 75% in the United States and 89% in the United Kingdom. In addition to generating cost savings from lower investment in cable plant per home passed, such density contributes to lower operating costs because fewer technicians are required to service a given number of customers. - - Low Churn Rate -- The Company estimates that its churn rate has historically been less than 5%, which is a significantly lower churn rate than those which generally prevail in the U.S. and U.K. cable television industries. The Company believes such lower churn rate to be due primarily to the greater use of preauthorized payment procedures, fewer alternative tiers of programming and, when compared with the United States, a less transient population. See "Business -- Programming." - - Wide Use of Preauthorized Payment Procedures -- Approximately 70% of the Company's customers pay their subscription fees through preauthorized payment procedures, whereby an automatic draw is made on such customer's bank account. The Company believes that preauthorized payment procedures result in lower billing costs, less bad debt expense and lower churn rates. - - Low Programming Costs -- Historically, the Company's cost of programming as a percentage of revenue has been nominal. Although such costs are expected to increase due to several factors, including the possible imposition of copyright royalty fees in respect of programming received on Company-owned head-ends and pursuant to Deutsche Telekom signal delivery contracts (see "Risk Factors -- Copyright Royalty Fees") and the increasing market strength of certain program providers relative to that of Deutsche Telekom and private cable system operators (see "Risk Factors -- Access to and Cost of Programming"), the Company believes that for the foreseeable future, the uncertain state of German copyright law and market conditions in the German cable television industry will enable the Company and other German cable system operators to maintain a level of programming cost as a percentage of revenue which is relatively low as compared to cable television operators in the United States and the United Kingdom. See "Business -- Programming." For further information on the German cable television market, see "Industry," "Business" and "Certain Regulatory Matters." BUSINESS STRATEGY The Company's objective is to enhance the value of its business by capitalizing on opportunities presented by the large and fragmented German cable television market. The Company's business strategy to achieve this objective focuses on the following general principles: - - Emphasis on Regional Clusters and Growth Through Acquisitions -- A key element of the Company's strategy is to develop regional clusters of cable television systems by acquiring cable systems that are either in close proximity to its existing systems or large enough to serve as cores for new operating regions. The Company has established significant regional clusters of cable systems in the regions surrounding Plauen, Leipzig, Berlin, Dresden, Stuttgart and Osnabruck. The Company is not aware of any reliable or consistent published industry data on the relative size of private cable system operators in Germany. However, on the basis of discussions with competitors, the Company believes that with over 359,000 existing customers it is the fifth largest private cable system operator in Germany in terms of customers (not including Deutsche Telekom, which is not considered a private cable system operator). Approximately 46,000 additional customers are served by the systems expected to be acquired upon consummation of the Pending Acquisitions, although no assurances can be given as to when or if any of the Pending Acquisitions will be consummated. The Company believes that its clustering strategy and the scope of its operations have enabled it to reduce operating costs. See "Business." - - Enhancing Efficiency and Margins by Streamlining Operations -- Upon completion of an acquisition, the Company generally implements extensive management, operational and organizational changes designed to enhance operating cash flow and operating margins. The Company's customer account processing and administrative services for acquired cable systems are transferred to one centralized location, thereby reducing redundant overhead costs. - - Promoting Internal Growth -- The Company seeks to increase revenues in acquired systems in a number of ways, including selective increases in rates for cable services that are timed to coincide with published increases in various cost of living indices or the introduction of new or improved programming, the continued build-out of existing cable systems and marketing efforts designed to increase penetration. - - Technological Enhancement -- The Company strives to maintain high technological standards in its cable television systems on a cost-effective basis and continuously upgrades its cable systems to achieve this goal. The Company monitors and evaluates new technological developments on the basis of its ability to make optimal use of its existing assets and to anticipate the introduction of new services and program delivery capabilities. The Company believes that it is well-positioned in terms of technological capabilities to take advantage of the introduction of new cable television and ancillary services in the German market. - - Customer Service Orientation -- Each of the Company's operating regions is managed by a regional manager who is responsible for both customer and technical service within his region and who reports directly to Ernst Uhlig, the Company's Chief Operating Officer. The Company believes that this flat operating structure enables it to be more responsive to customer needs. - - Ownership and Control of Systems -- The Company owns approximately 98% of its cable television systems on an equity subscriber basis. The Company owns 100% of each of its cable systems, with the exception of systems serving three communities with an aggregate of approximately 33,000 customers, in which it owns 91%, 50% and 80%, respectively. RECENT AND PENDING ACQUISITIONS During the year ended December 31, 1995, the Company completed the acquisition of six cable television companies and the assets of one additional cable television company serving an aggregate of approximately 270,000 customers (measured at the dates of the respective acquisitions) in the regions of Leipzig, Berlin, Stuttgart and Osnabruck (collectively, the "1995 Acquisitions"), and during the first quarter of 1996 the Company completed the acquisition of InfoSat GmbH (as defined in "Business -- Systems"), a cable television company serving approximately 13,500 customers in and around the towns of Aschersleben and Luckenwalde (the "InfoSat Acquisition" and, together with the 1995 Acquisitions, the "Recent Acquisitions"). In addition, the Company has entered into non-binding letters of intent with respect to the Pending Acquisitions. The Company expects to enter into definitive agreements with respect to the Pending Acquisitions in the foreseeable future. The Company estimates that the aggregate consideration, including acquired indebtedness, brokerage fees and closing costs, payable in respect of the Pending Acquisitions will be between DM50,000,000 and DM57,000,000, which the Company would borrow under the Bank Facility (as defined in "Description of Certain Indebtedness"). There can be no assurance, however, that the Company will consummate either of such acquisitions. See "Business -- Acquisitions and Pending Acquisitions."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001017526_ace-comm_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001017526_ace-comm_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND RELATED NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES (I) NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION, (II) THE EFFECT OF A 4.5-FOR-ONE STOCK SPLIT OF THE COMPANY'S COMMON STOCK EFFECTED IN THE FORM OF A STOCK DIVIDEND PRIOR TO THE DATE OF THIS PROSPECTUS, (III) THE REDEMPTION OF ALL OUTSTANDING SHARES OF THE COMPANY'S CLASS B PREFERRED STOCK AND (IV) THE CONVERSION OF ALL OUTSTANDING SHARES OF THE COMPANY'S CLASS C CONVERTIBLE PREFERRED STOCK (THE "CLASS C PREFERRED STOCK") INTO 1,530,950 SHARES OF COMMON STOCK, WHICH WILL OCCUR AUTOMATICALLY UPON THE COMPLETION OF THIS OFFERING. CERTAIN TECHNICAL TERMS AND ACRONYMS USED IN THIS PROSPECTUS ARE DEFINED IN THE "GLOSSARY OF TERMS" BEGINNING ON PAGE 57. THE COMPANY CONSIDERS TELECOMMUNICATIONS SERVICE PROVIDERS TO CONSIST GENERALLY OF BOTH CARRIERS OPERATING VOICE AND DATA NETWORKS FOR THEIR CUSTOMERS AND ENTERPRISES WHICH OPERATE VOICE AND DATA NETWORKS FOR THEIR OWN USE. THE COMPANY ACE*COMM Corporation ("ACE*COMM" or the "Company") develops, markets and services operations support systems ("OSS") products for networks deployed by telecommunications service providers, such as telephone companies, other public carriers and large enterprises operating data and voice networks using intranets and the Internet. The Company's products perform such functions as billing data collection, network surveillance, alarm processing and network management for some of the largest carriers and enterprises in the world. Increasing worldwide demand for data, voice and video services has created a need for increased network capacity and new network services. In addition, telecommunications service providers face an increasingly competitive environment due to continued deregulation and privatization of the global telecommunications industry. In response to these developments, interexchange and local exchange carriers and providers of Internet, personal communications and cellular services are offering a wide range of network features and options. As a result of the growth in network usage and new services, large enterprises require timely, accurate information regarding network performance and system usage to support the increasing volumes of data and voice communications to and from employees, customers and suppliers. ACE*COMM's products are designed to enable carriers and large enterprises to optimize the use of new and existing communications networks. The Company's carrier network products connect to existing network infrastructures and enable carriers to rapidly and accurately collect call records and performance data which are used for billing, fraud detection, customer care, marketing research and forecasting, and other operations support functions. These products are designed to enhance the carriers' competitive position by allowing them to offer new features and services, minimize network down-time, increase revenue through more accurate and timely billing and improve network productivity. The Company believes that it is well positioned to continue to offer its carrier network products for use by end users located throughout the world, for example, in Europe, Asia and the Pacific Rim, which typically operate a wide variety of switches from different manufacturers and require a data collection system capable of adapting to and integrating with the billing system and other OSSs. Leveraging its experience in developing carrier network products, the Company has also produced network management products that meet the growing needs of large enterprises in the United States and abroad, including government agencies, military organizations, educational institutions and "Fortune 1000" size organizations. As these enterprises have become increasingly dependent on the Internet and intranets for voice and data communications, their demand for reliable and flexible network management tools has increased. The Company's network management products consist of standardized software-based systems that enable network managers to manage voice and data communications by automating service administration, tracking network connections, detecting system errors and malfunctions, controlling network inventory assignments and configuration, monitoring traffic and performing billing functions. The Company's network management products are designed to increase the efficiency of communication operations and incorporate recent developments in object-oriented development, real-time response, client server architecture and graphical user interfaces. The Company is well positioned to develop products to support the convergence and growth of telephony and data networks within the enterprise, as a result of its knowledge and experience in data control and network switching technology, data capture and warehousing, and client server systems. The Company presently is partnering with Newbridge Networks Corporation ("Newbridge") to develop software designed to provide billing data collection capabilities for asynchronous transfer mode ("ATM"), Frame Relay and X.25 switch users. See "Business -- Strategic Alliances and Other Customers." The Company anticipates similar opportunities to develop other network edge technologies for equipment and service providers in the growing market for data services. The Company has strategic alliances with several significant customers or potential customers in order to distribute its products effectively and develop products that can be responsive to the needs of end users. The Company's strategic alliance partners include AT&T Corporation ("AT&T"), Cincinnati Bell Information Systems, Inc. ("CBIS"), Teleglobe Canada, Inc. ("Teleglobe"), International Computers Limited ("ICL"), Lucent Technologies, Inc., GTE Government Systems Corporation ("GTE Government Systems") and BellSouth Communication Services, Inc. ("BellSouth"). The Company develops products which are purchased by these partners for their own use or for resale to their own customers directly or as part of a larger system. The Company has sold products to its strategic alliance partners for installation in domestic and overseas carriers, the U.S. Armed Forces, the U.S. Department of State and major airports, among others. The alliances have been especially helpful in enabling the Company to further penetrate, on a cost-effective basis, the international telecommunications carrier markets, where the Company's alliance partners are well recognized and have well-developed business relationships. The Company also sells directly to large customers such as Telefonos de Mexico S.A. de C.V. ("TELMEX"), NYNEX and the University of Iowa. See "Business -- Strategic Alliances and Other Customers." The Company's carrier network products have been installed in over 500 end user sites in 32 countries and its network management products have been installed in over 100 end user sites in 10 countries. The Company's carrier network products can be tailored to the needs of operating companies in both the wireline and wireless sectors, as well as end users, regardless of the geographical location of the network equipment. The Company's network management products are compatible with virtually all standard network management platforms. The Company was incorporated in the State of Maryland in 1983. Its principal executive offices are located at 209 Perry Parkway, Gaithersburg, Maryland 20877, and its telephone number is (301) 258-9850. The Company's site on the World Wide Web is located at http://www.acec.com. THE OFFERING <TABLE> <S> <C> Common Stock offered by: The Company................................ 2,270,000 shares The Selling Stockholder.................... 230,000 shares Total.................................... 2,500,000 shares Common Stock to be outstanding after the offering.................................... 7,391,401 shares(1) Use of Proceeds to the Company............... For general corporate purposes, including working capital, the employment of additional personnel, the repayment of bank indebtedness, the redemption of Class B Preferred Stock and the repayment of certain indebtedness held by the holder of such stock and by a related party. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001017546_storm_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001017546_storm_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..889ded0559de25b9b52a6d98e5e001a99715a61a
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Consolidated Financial Statements and notes thereto appearing elsewhere in this Prospectus. Except as otherwise noted, all information in this Prospectus, including share and per share data, (i) assumes an initial public offering price of $10 per share, (ii) gives effect to the reincorporation of the Company in Delaware prior to the effectiveness of the offering, the associated exchange of four shares of the California predecessor corporation for every one share of the Delaware successor corporation, and a change in the Company's name from Storm Primax, Inc. to Storm Technology, Inc., (iii) reflects the automatic conversion of all outstanding shares of Preferred Stock into shares of Common Stock effective upon the closing of the offering, (iv) assumes the exercise, prior to the effectiveness of the offering, of warrants to purchase 3,413 shares of Common Stock, which warrants will terminate upon the effectiveness of the offering, and (v) assumes no exercise of the Underwriters' over-allotment option. See "Description of Capital Stock" and "Underwriting." THE COMPANY Storm Technology, Inc. ("Storm" or the "Company") is a leading provider of digital photo solutions that enable consumers and small businesses to input, store, organize, enhance and use photos easily on their personal computers ("PCs"). The Company's vision is to empower consumers to use digital photos to create more personal, memorable and effective communications. The Company believes that the $16 billion worldwide chemical photography market is evolving to a market that will increasingly include digital photos due in part to the increasing availability of photo input devices and software that enable people to use digital photos with their computers. This transition, coupled with the recent proliferation of powerful multimedia home PCs, is leading to the emergence of digital photos as a new and rapidly growing product category for consumers. To capitalize on this emerging market opportunity, Storm develops and markets software-differentiated, consumer-branded products that are easy to use, result in high image quality and provide consumers and small businesses with a comprehensive digital photo solution. The Company's current photo scanner products, the EasyPhoto Reader, EasyPhoto SmartPage and PhotoDrive, sell at affordable consumer-oriented price points and are designed to function with typical home PC configurations (such as 486-based computers with 8 MB of RAM). These photo scanners are tightly integrated with the Company's EasyPhoto software environment, which combines an intuitive user interface with advanced image compression technology, a photo-oriented virtual memory system, powerful database functionality and a unique library of image enhancement tools based on sophisticated imaging algorithms. In addition, the EasyPhoto software environment is designed to capitalize fully on Microsoft's Object Linking and Embedding (OLE) standard, enabling consumers to use their photos in other applications directly through "drag and drop" of photographs from their EasyPhoto database into virtually any document. The Company's objective is to become the leading provider of digital photo input and software solutions for consumers and small businesses. The Company's strategy is focused on (i) making its EasyPhoto software environment the de facto standard for organizing and storing digital photos on PCs, (ii) developing and marketing high quality, easy to use, affordable photo input solutions that are tightly integrated with its EasyPhoto software environment, and (iii) distributing photo-centric applications that further enhance the value of its photo input products. The Company plans to extend its competitive advantage in these product categories through technology leadership, strategic partnerships, brand marketing and worldwide retail and OEM distribution. The Company's distribution efforts focus on aftermarket sales to existing PC users through leading computer retail channels and on establishing OEM relationships with a variety of key companies within the computer industry to broaden the distribution channel for its products. The Company's products are presently sold by most of the leading retailers of computer products in the United States, including Best Buy, Circuit City, CompUSA, Computer City, Egghead Software, Fry's Electronics, The Good Guys, OfficeMax, Staples and others. Sales are promoted through proactive consumer marketing designed to increase end user awareness and demand for EasyPhoto products. Key OEM relationships include Hewlett-Packard, which incorporates the Company's PhotoDrive in certain models of its Pavilion product line, Acer, Polaroid and Epson. In addition, the Company recently entered into a technology and distribution agreement with Intel Corporation, which also made an equity investment in the Company. RECENT ACQUISITION In March 1996, the Company acquired from Primax Electronics, Ltd. ("Primax"), a Republic of China corporation, all photo scanner technology, including certain in-process technology, associated with the Company's EasyPhoto Reader, PhotoDrive and certain other scanner products, as well as Primax's U.S. subsidiary ("Primax USA"), which was primarily a sales distribution company for Primax products in North America. The Company and Primax also entered into a strategic manufacturing agreement, pursuant to which Primax has agreed to manufacture a minimum of 85% of certain of the Company's photo scanners. As part of this transaction, Primax was issued 4,214,329 shares of Storm Preferred Stock. As a result of this transaction, a small prior investment in the Company and the sale of certain shares to third parties in June 1996, Primax owned approximately 48% of the Company's outstanding voting securities as of June 30, 1996. After completion of this offering, Primax will own approximately 31% of the Company's outstanding voting securities.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0001017643_pocket_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001017643_pocket_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..11ffc704b79c5904b31a8f3c7271892127f1b0b1
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information, including the Consolidated Financial Statements and the notes thereto, set forth elsewhere in this Prospectus. As used herein, the terms "Company" and "Pocket," unless otherwise indicated, refer to Pocket Communications, Inc., a Maryland corporation, and its subsidiaries. The term population equivalents ("POPs") means the Paul Kagan Associates 1995 PCS Atlas & Databook estimate of the 1995 population of a particular Major Trading Area ("MTA") or Basic Trading Area ("BTA") of the U.S. In addition, certain terms used in this Prospectus are defined in the Glossary of Terms. Unless otherwise indicated, all information in this Prospectus reflects (a) the reclassification prior to the Offering of the outstanding securities of the Company into shares of the Company's Class A Common Stock, par value $0.01 per share (the "Class A Common Stock"), and Class B Common Stock, par value $0.01 per share (the "Class B Common Stock" and together with the Class A Common Stock, the "Common Stock") and (b) the simultaneous reverse stock split (collectively, the "Recapitalization"), to become effective upon consummation of the Offering and subject to any necessary FCC approvals. See "Description of Capital Stock." Except as otherwise specified, the information in this Prospectus assumes no exercise of the Underwriters' option to purchase up to additional shares of Class B Common Stock from the Company to cover over-allotments, if any. THE COMPANY Pocket intends to be a leading provider of full-service wireless telecommunications services in its markets, which cover approximately 35.5 million POPs. The Company currently is the sixth largest Personal Communications Services ("PCS") licensee in the United States in terms of POPs, having acquired 43 BTA licenses, each consisting of 30 MHz of spectrum, in the FCC C Block auction, which ended on May 6, 1996. Major markets covered by the Company's PCS licenses include Chicago, Dallas-Ft. Worth, Detroit, St. Louis, New Orleans, Las Vegas, and Honolulu. More than 85% of the Company's POPs are in substantially contiguous markets located in the central region of the U.S. The Company intends to build out its PCS networks (each a "network" and collectively the "Network") rapidly using commercially established Global System for Mobile Communications ("GSM") technology, and anticipates commencing service in Las Vegas and Honolulu in the third quarter of 1997. The Company successfully bid $1.43 billion, net of a 25% bidding credit, for 43 BTA licenses in the FCC C Block auction. To date, the Company has paid $143 million, representing 10% of this total net bid, as a down payment (the "Downpayment"). The government financing terms for the balance of $1.28 billion include a below-market interest rate of 6.5% fixed for the 10-year term of the financing (the "Government Financing"). This Government Financing allows the Company to pay interest only on the principal balance for the first six years of the license term with payments of interest and principal amortized over the remaining four years of the license term. This favorable Government Financing significantly reduces the effective cost of these licenses to the Company on a net present value basis. The Company intends to position its PCS service as a "new category" of wireless telephone service aimed primarily at that segment of the mass consumer market that has not previously purchased cellular service. The Company has developed an initial marketing and advertising plan that is designed to create a new identity for the service. The Company plans to offer the mobility features of cellular, the calling features of landline and a pricing plan more similar to current local telephone service than to existing cellular. The Company will be using GSM, which is an advanced digital technology that is superior to traditional analog cellular systems in terms of voice quality, reliability, functionality and privacy while providing substantially greater capacity. The Company's marketing and distribution strategy will be based on the use of custom-designed user-friendly handsets, brand name development and unique packaging. With the increased number of wireless telecommunications services and the anticipated decrease in service rates, the Company believes that there will be a growing demand for wireless services. The Company will focus its marketing efforts to target the estimated more than 80% of the POPs in its markets who currently are not using cellular services and to attract cellular users who may be dissatisfied with the quality or cost of their existing service. <PAGE> 5 The Company has selected GSM technology, with established commercial performance and multiple equipment suppliers, to position it to rapidly build out its PCS networks at competitive costs. Based on the announced intentions of other PCS licensees to date, the Company will be the second largest PCS licensee in the U.S. (in terms of POPs) using GSM technology. GSM permits enhanced features such as secure calling, text messaging and data and fax services. In addition, GSM permits the networking of equipment from a number of different manufacturers. The Company believes that, given the global predominance of GSM usage, the cost of GSM equipment will decrease as economies of scale in production of network equipment are realized and competition among equipment suppliers intensifies. Although GSM technology has only been commercially available in the United States on a limited basis, GSM is the predominant digital wireless technology in the world, serving over 26 million customers in 100 countries as of November 1996. GSM technology has been chosen by a number of other companies in the United States, which, together with Pocket's markets, are licensed to cover over 200 million POPs, or over 76% of the United States population, based on currently announced intentions. Pocket is negotiating or intends to negotiate roaming agreements with all North American GSM carriers including Pacific Bell Mobile Services Inc. ("Pacific Bell"), BellSouth Mobility DCS ("BellSouth"), Omnipoint Corporation ("Omnipoint"), InterCel, Inc. ("InterCel"), Aerial Communications, Inc. ("Aerial"), Western Wireless Corporation ("Western Wireless"), American PCS, L.P. ("APC") and Microcell Telecommunications, Inc. ("Microcell") of Canada. As of November 1996, APC, BellSouth, InterCel, Omnipoint, Pacific Bell and Western Wireless have commenced offering services utilizing GSM technology in 26 markets across the U.S. The ongoing FCC D, E and F Block PCS auctions may result in GSM technology being chosen by licensees in areas currently not having a declared GSM operator. See "Risk Factors -- GSM Technical Standard and Implications for Roaming Services." The Company has strategic relationships with Ericsson, Inc. ("Ericsson"), Siemens Stromberg-Carlson ("Siemens"), Northern Telecom Inc. ("Nortel"), Mitsubishi Corporation (together with certain of its affiliates, "Mitsubishi"), LCC, L.L.C. ("LCC"), Booz - Allen & Hamilton, Inc. ("Booz - Allen") and Brightpoint, Inc. ("Brightpoint"). The Company has arranged vendor financing with Ericsson and Nortel totaling $481 million for the supply of equipment and services in connection with the buildout of several of the Company's networks. In addition, the Company has reached an agreement with Siemens on the terms of additional vendor financing totaling $165 million. Under the terms of these vendor financing arrangements, Ericsson, Siemens or Nortel will be the primary network equipment supplier in their respective markets. The Company and Mitsubishi are developing a custom-designed handset and are negotiating a handset supply agreement. LCC is providing radio network design, program management (including site acquisition and construction management) and network optimization services. Booz - Allen is providing product design, information system deployment, systems integration services and management consulting. Brightpoint will provide a variety of services to the Company, including wholesale inventory management, warehousing and fulfillment. In addition, Dominion Fund IV ("Dominion Fund") will provide the Company financing for the purchase of telephone switch equipment and services in certain markets. See "Business -- Strategic Relationships." The key elements of the Company's business strategy are to target its products and services primarily to the mass consumer market, offer wireless products and services with superior voice quality, reliability, functionality and privacy, implement proven GSM technology, operate its business in clusters to provide a regional market focus and achieve economies of scale, and expand its market coverage through the establishment of strategic alliances with other GSM licensees and the possible acquisition of additional PCS licenses. - Target Mass Consumer Market. The Company's marketing strategy is to focus on the mass consumer market, targeting the estimated more than 80% of the POPs in its markets who currently are not using cellular services as well as cellular service users who may be dissatisfied with the quality or cost of their existing service. In order to attract subscribers from this potential market, the Company plans to offer service packages priced significantly below current cellular rates on a per minute basis. The Company also plans to simplify the products and services it will offer by not requiring service contracts, providing immediate service activation, offering 24-hour customer service, streamlining the customer's bill and 2 <PAGE> 6 providing user-friendly handsets. The Company plans to distribute its products and services through a variety of distribution channels, including Company-owned stores, direct marketing and retail electronics stores as well as through non-traditional channels such as supermarkets, kiosks and vending machines. Prior to launching its services, the Company plans to begin aggressively developing and marketing its brand in order to establish it in the consumer marketplace. - Provide Superior Products and Services. The Company plans to offer wireless products and services with superior voice quality, reliability, functionality and privacy. The Company plans to offer PCS service that will include one-way paging, voice mail, call waiting, call forwarding, conference calling and caller ID, with two-way text messaging as an option. Existing GSM technology will also enable the Company to offer personalized services such as call screening, rejection, routing and forwarding, enhanced voice mail and data transmission services such as electronic mail, facsimile and Internet access. In addition, the Company and Mitsubishi are developing a custom-designed handset that incorporates an ergonomic design with easy-to-use menus and large screens to manage handset functions and significantly longer battery life than is currently available for cellular handsets. The existing and planned GSM systems worldwide will enable the Company to offer national and international roaming in conjunction with other GSM operators. - Implement Proven GSM Technology. The Company believes that by building its PCS Network using commercially established GSM technology, it will minimize many risks associated with using new technology. The Company has made significant progress towards the completion of the detailed engineering and site acquisition work to build out its Las Vegas and Honolulu networks and has begun the preliminary network design and site acquisition processes in certain other service areas, including Chicago. The Company plans to begin offering services in Las Vegas and Honolulu in the third quarter of 1997, and its remaining markets in 1998, with Chicago and Detroit as the first of such markets to begin offering services. The Company plans to build out PCS networks that will be able to offer service to at least 80% of the POPs within its service areas by the end of 1998. - Operate in Market Clusters. The Company has organized its 43 BTAs into nine clusters to provide a regional market focus while allowing it to achieve operational efficiencies and lower infrastructure costs. The Company plans to establish management and operational teams in each of its clusters to support all of the BTAs in such clusters. Emphasis on operations at the regional market level will allow the Company to serve its customers more effectively and to build a loyal customer base. The Company also believes that this approach will allow it to customize its marketing efforts and maintain high levels of customer satisfaction. This clustering strategy is designed to facilitate network switch-sharing, allow the Company to benefit from shared resources and coordinated management and provide efficiencies in advertising, marketing and distribution within a region. - Expand Market Coverage. The Company currently is negotiating strategic alliances with other PCS licensees to broaden its markets. The Company also may seek to expand its markets by entering into additional strategic alliances or acquiring other PCS licenses. FINANCING PLAN The Company estimates that the aggregate funds required for the development, construction and deployment of PCS networks in its markets through December 31, 1997 will total approximately $805 million. This figure consists of (i) approximately $520 million for capital expenditures, (ii) approximately $165 million in debt service requirements and (iii) approximately $120 million for operating losses and working capital needs. In addition, in conjunction with the award of its licenses, the Company has incurred the Government Financing for the balance due for its licenses. See "Description of Certain Indebtedness." The Company is offering shares of Class B Common Stock in the Offering and $ million in gross proceeds of the Notes in the concurrent Debt Offering for estimated aggregate net proceeds to the Company of $ million ($ million if the Underwriters' over-allotment option is exercised in full). The Company believes that the net proceeds of the Offerings in combination with available borrowings under the 3 <PAGE> 7 vendor financing, will be sufficient (i) to fund operating losses and working capital requirements, (ii) to complete the initial buildout of PCS networks and commence service in the Chicago, Las Vegas and Honolulu BTAs, (iii) to complete a significant portion of the detailed engineering and site acquisition work in Detroit, Dallas, and St. Louis, and (iv) to repay certain of the Company's debt and satisfy the Company's debt service requirements, including interest payments on the Government Financing, through 1997. To complete the buildout of its PCS Network and implement the Company's business strategy, the Company will require substantial additional capital, both during and after 1997, beyond amounts raised in the Offerings. The exact amount of the Company's future requirements will depend upon many factors, including the cost of development of PCS networks in each of its clusters, the extent of completion and pricing of wireless services in these clusters, the acceptance of the Company's services and the development of new consumer products. See "Risk Factors -- Significant Capital Requirements and Uncertainty of Additional Financing." The Company was incorporated in Maryland in 1994. The Company's principal executive offices are located at 2550 M Street NW, Suite 200, Washington, DC 20037, and its telephone number is (202) 496-4300. 4 <PAGE> 8 THE OFFERINGS Class B Common Stock Offered by the Company................ shares Class B Common Stock to be Outstanding after the Offering..................... shares (1) Class A Common Stock to be Outstanding after the Offering..................... shares Total Common Stock to be Outstanding after the Offering..................... shares (1) Concurrent Debt Offering...... Concurrently with the Offering, the Company is offering $ million gross proceeds of % Senior Discount Notes due 2007. Under the terms of the indenture relating to the Notes (the "Indenture"), the Company generally may not pay any dividend or make any distribution on its Common Stock unless and until the Company meets certain requirements that the Company does not expect to meet for the foreseeable future. See "Dividend Policy." The Indenture also contains covenants relating to preservation of the Company's assets, limitation on the scope of the Company's business, limitations on debt incurrence, limitations on mergers, consolidations and sales of assets of the Company, and restrictions on transactions with affiliates. The Offering is not conditioned on the consummation of the Debt Offering, but the Debt Offering is conditioned on the consummation of the Offering. Use of Proceeds............... The net proceeds to the Company from the Offering are estimated to be approximately $ million after deducting estimated underwriting discounts and commissions and offering expenses. This figure assumes an initial public offering price of $ per share, the midpoint of the range set forth on the cover page hereof. The Company expects to use the net proceeds of the Offering, together with the net proceeds from the Debt Offering, (i) for principal and interest payments on indebtedness (approximately $130 million), and (ii) for capital contributions to its operating subsidiaries for the buildout and operation of the PCS networks in several of its license areas, and for general corporate purposes (approximately $155 million). Nasdaq National Market Symbol........................ "PCKT" - --------------- (1) Includes 9,937,500 shares of Class B Common Stock assumed to be issued to holders of $72.3 million of convertible debt and term loans convertible into convertible debt, of which $7.3 million is expected to convert immediately following the consummation of the Offering and $65.0 million of which is expected to convert into convertible debt and subsequently into Class B Common Stock within 15 days following the consummation of the Offering, subject, in each case, to compliance with FCC requirements. Excludes shares reserved for issuance under the Company's stock option plans and grants for employees and directors, including shares issuable upon exercise of outstanding options (the "Reserved Option Shares") shares reserved for issuance under certain circumstances to members of the Control Group to comply with certain FCC requirements (the "Control Group Option Shares") and shares issuable upon the exercise of warrants. See "Management -- Stock Option Plans" and "-- Compensation of Directors," "Regulation of the Wireless Telecommunications Industry," "Description of Certain Indebtedness," and "Description of Capital Stock."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001017646_halter_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001017646_halter_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and related notes appearing elsewhere in this Prospectus. Unless otherwise indicated, all information contained in this Prospectus (i) gives effect to the consolidation of the assets and liabilities of the Company Businesses (as defined herein) described under "Separation From Trinity -- Consolidation Transactions" and (ii) assumes that the Underwriters will not exercise their over-allotment option (the "Over-Allotment Option"). THE COMPANY The Company is the seventh largest shipbuilder, and the largest builder of small to medium sized ocean-going ships and barges and inland tow boats, in the United States. The Company, which has built more than 2,000 vessels in the past 40 years, specializes in the construction, repair and conversion of a wide variety of vessels for the commercial and governmental markets. The Company's principal products include offshore support vessels, offshore double hull tank barges, offshore tug boats and oil spill recovery vessels for commercial use and oceanographic survey and research ships, high speed patrol boats and ferries for government use. The Company has ten shipyards (including one that currently is idle) which are strategically located along the Gulf Coast from Louisiana to Florida. The Company's multiple shipyards employ advanced manufacturing techniques, including modular construction and zone outfitting methods, and provide the Company significant flexibility and efficiency in manufacturing a wide variety of vessels. The Company believes that these factors, together with its large and experienced engineering team and work force, make the Company one of the most versatile and cost-efficient shipbuilders in the United States. The United States, the European Union, Finland, Japan, Korea, Norway and Sweden collectively control over 75% of the market share for worldwide vessel construction. As of July 31, 1996, the Company had firm shipbuilding contracts with an aggregate remaining value of approximately $417 million (excluding unexercised options held by customers), covering a total of 115 vessels (including 50 inland hopper barges). Of this contract value, approximately $181 million was attributable to contracts to build ships for the U.S. Navy. The Company's strategy is to enhance its position as a leading manufacturer of small to medium sized vessels, to respond to anticipated new shipbuilding construction opportunities and to increase its revenues and profitability. The following are the key elements of the Company's strategy: - Wide Variety of Products for Diversified Markets. The Company's shipbuilding versatility is one of its principal competitive strengths, not only reducing its dependence on particular types of products, but also providing engineering and manufacturing benefits across product lines. The Company intends to continue to serve diversified markets, including a balance of commercial and governmental shipbuilding projects. In fiscal 1996, the Company delivered 59 vessels, with commercial and governmental projects accounting for 46.3% and 53.7% of revenues, respectively. - New Construction Opportunities. The Company believes that it is well positioned to take advantage of the expected upturn in the market for offshore support vessels to service oil and gas drilling rigs and production platforms and the expected increase in offshore tank barge construction and conversion resulting from the requirements of the Oil Pollution Act of 1990 ("OPA '90"). - Offshore Support Vessels. The Company has built more offshore support vessels (including supply boats, anchor handling tug supply boats and anchor handling tugs) than any shipbuilder in the United States. As a result of the severe downturn in the oil and gas industry in the mid-1980's, there has been very limited construction of offshore support vessels in the United States since 1985. During the period from 1985 through 1995, the Company built eight new 200-foot or longer offshore support vessels, more than any other U.S. shipbuilder. The Company's offshore support vessel manufacturing activities during this period have enabled it to gain a competitive advantage through experience with recent advances in vessel engineering and construction techniques. The Company expects that substantial orders for new offshore support vessels may be made in the next several years due to the demand for larger vessels to support deep water oil and gas exploration and production activities, as well as the substantial worldwide fleet attrition over the past ten years and the aging of the remaining fleet. The Company currently has eight offshore support vessels under contract, of which six contracts have been entered into since July 1, 1996. The Company also has outstanding options for eight additional vessels, including seven from one customer, and is bidding on a number of substantial potential orders for such vessels. - Offshore Double Hull Tank Barges. OPA '90 generally requires certain U.S. and foreign vessels carrying fuel or other hazardous cargos and entering U.S. ports to have double hulls by 2015. OPA '90 establishes a phase-out schedule that began January 1, 1995 for all existing single hull vessels based on the vessel's age and gross tonnage. The Company estimates that OPA '90 will require approximately 66 barges engaged in domestic trade to be retrofitted or replaced by 2005 and another approximately 22 such barges to be retrofitted or replaced by 2010. During the past three years, the Company has built eight large offshore double hull tank barges, more than any other U.S. shipbuilder. The Company currently has three such barges under construction and has an outstanding option from a customer for one additional barge. In addition, the Company is bidding on a number of other substantial barge construction projects. - Multiple, Strategically Located Shipyards. The Company's multiple shipyards, which are strategically located along the Gulf Coast, provide it with significant flexibility and efficiency in manufacturing a wide variety of vessels. The Company utilizes certain shipyards with specialized machinery to centrally manufacture various components for its other shipyards, helping to reduce costs and equipment redundancy. The Company has spent approximately $46.5 million in the past five years to acquire, expand and improve its shipyard facilities, which are well maintained. - Low Cost Structure. The Company believes it is one of the most cost-efficient shipbuilders in the United States. The Company's shipyards employ many advanced manufacturing techniques including modular construction methods, which the Company was among the first U.S. shipbuilders to use, zone outfitting methods, advanced welding techniques, panel line fabrication, computerized plasma arc metal cutting and automatic sandblasting and painting. - Additional Capacity at Existing Facilities. The Company has the ability to significantly increase production at its existing shipyards. As of June 30, 1996, the Company employed 2,597 shipyard workers and estimates that it could employ a maximum of approximately 3,670 workers without significant expansion of its plant facilities. While some of its principal competitors are experiencing a severe shortage of skilled shipyard workers in southern Louisiana (which has also affected one of the Company's shipyards), the Company's other shipyards currently have access to additional shipyard labor in their respective markets along the Gulf Coast. Significant excess capacity is available at the Company's Pascagoula, Mississippi yard, which was acquired in late 1995 and at which production has recently commenced, and its Panama City, Florida yard, which currently is idle. - Increased Repair and Conversion Capacity. The Company recently has significantly increased its capacity for repair and conversion work through three acquisitions beginning in late 1994. Depending on demand for such services, the Company may, at some time in the future, relocate a 115 foot wide dry dock from its Gulf Repair shipyard in New Orleans to its Pascagoula yard in order to undertake large repair and conversion projects, such as those for large barges, cargo ships and drilling rigs. - Strategic Acquisitions. The Company has grown substantially through nine acquisitions since 1972. Although the Company currently has additional capacity at its existing facilities, the Company expects to consider strategic acquisitions of additional shipyards in the future depending on a variety of factors, including demand for new construction, conversion and repair, the advantages offered by the facilities and the acquisition terms. OFFERING RELATED TRANSACTIONS Prior to the Offering, the Company will enter into a new bank credit facility (the "Credit Facility"). It is anticipated that the Credit Facility will provide for borrowings of $105.0 million to $125.0 million. Immediately prior to the consummation of the Offering, the Company will borrow under the Credit Facility to repay (i) a $25.0 million intercompany note to Trinity and (ii) $25.0 million of certain indebtedness of Trinity associated with the Company Businesses and assumed by the Company in connection with the Consolidation Transactions (as defined herein). See "Separation From Trinity -- Consolidation Transactions" and "Separation From Trinity -- Offering Related Transactions." THE OFFERING <TABLE> <S> <C> Common Stock offered.................................... 3,000,000 shares Common Stock to be outstanding after the Offering....... 18,000,000 shares(1) Use of proceeds......................................... To repay income taxes payable to Trinity and a portion of the indebtedness incurred under the Credit Facility immediately prior to the Offering. See "Use of Proceeds" and "Separation From Trinity -- Offering Related Transactions." Proposed NYSE symbol.................................... "HLX" </TABLE> - --------------- (1) Does not include 1,400,000 shares of Common Stock reserved for issuance pursuant to the Company's 1996 Stock Option and Incentive Plan (the "1996 Stock Option and Incentive Plan"). It is expected that options for an aggregate of 250,000 shares of Common Stock will be granted under the 1996 Stock Option and Incentive Plan on the date of the Offering. In addition, at the time of the proposed Separation (as defined herein), the Company expects to assume certain outstanding stock options exercisable for shares of Trinity Common Stock (as defined herein) granted to Company employees under certain Trinity stock compensation plans and such options will become exercisable for shares of Common Stock. See "Management -- Incentive and Other Employee Benefit Plans" and Note 7 of Notes to Consolidated Financial Statements. PROPOSED SEPARATION FROM TRINITY Prior to the Offering, the Company has been a wholly owned subsidiary of Trinity. Upon the consummation of the Offering, Trinity will continue to own approximately 83.3% of the outstanding Common Stock (81.3% if the Underwriters exercise the Over-Allotment Option in full). Trinity has announced its intention to divest itself of its remaining ownership interest in the Company (the "Separation"). The timing, form and other terms of the proposed Separation are subject to the approval of the Board of Directors of Trinity (the "Trinity Board"). The proposed Separation could be accomplished by means of either a non-taxable or taxable transaction. The proposed Separation would be subject to various conditions, including the absence of any events or developments that cause the Trinity Board to determine, in its sole discretion, that the Separation is not in the best interests of Trinity or its stockholders. If the proposed Separation is to be accomplished by means of a non-taxable transaction (which could take the form of either an exchange offer or a distribution to Trinity's stockholders), such transaction also will be subject to the receipt of a private letter ruling from the Internal Revenue Service (the "IRS") to the effect that the Separation will qualify as a tax-free transaction for federal income tax purposes under Section 355 of the Internal Revenue Code of 1986, as amended (the "Code"). There can be no assurance that the proposed Separation will occur or, if it occurs, as to its form or other terms. See "Risk Factors -- Risk of Noncompletion of the Separation." Prior to the consummation of the Offering, the Company and Trinity will enter into various agreements with respect to ongoing arrangements and relationships between the two companies. See "Separation From Trinity" and "Certain Transactions and Related Arrangements -- Arrangements Between the Company and Trinity." SUMMARY CONSOLIDATED FINANCIAL DATA The following table sets forth summary consolidated financial data for the Company for the five fiscal years ended March 31, 1996 and for the three months ended June 30, 1995 and 1996 and as of June 30, 1996. See "Capitalization," "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and related notes included elsewhere in this Prospectus. <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED MARCH 31, JUNE 30, ---------------------------------------------------- ------------------- 1992 1993 1994 1995 1996 1995 1996 -------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> INCOME STATEMENT DATA: Contract revenue earned............. $219,228 $304,385 $275,310 $250,586 $254,294 $ 72,008 $ 85,981 Cost of revenue earned.............. 206,959 259,819 228,833 207,398 214,559 60,876 74,695 Gross profit........................ 12,269 44,566 46,477 43,188 39,735 11,132 11,286 Selling, general and administrative expenses.......................... 8,242 12,363 12,874 13,471 15,911 4,077 4,832 Operating income.................... 4,027 32,203 33,603 29,717 23,824 7,055 6,454 Interest expense, net............... 5,766 1,937 1,902 3,844 3,268 1,003 896 Income (loss) before income taxes... (1,734) 30,290 31,734 25,878 20,567 6,054 5,561 Provision (benefit) for income taxes............................. (100) 10,704 12,227 10,170 8,102 2,385 2,219 Net income (loss)(1)................ (1,634) 19,586 19,507 15,708 12,465 3,669 3,342 Pro forma net income per share(2)... $ 0.70 $ 0.19 NET CASH PROVIDED (REQUIRED) BY: Operating activities................ $ 33,593 $ 51,841 $(28,175) $ 14,803 $ 23,742 $ 22,010 $(10,381) Investing activities................ (8,250) (8,546) (3,440) (10,443) (15,687) (404) (2,042) Financing activities................ (25,192) (43,292) 31,300 (4,057) (7,907) (21,581) 12,408 OTHER DATA: EBITDA(3)........................... $ 7,635 $ 36,762 $ 38,266 $ 35,136 $ 30,579 $ 8,430 $ 8,303 Depreciation and amortization....... 3,603 4,535 4,630 5,414 6,744 1,373 1,846 Capital expenditures(4)............. 2,100 5,064 3,529 6,405 5,568 404 2,623 </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 --------------------------- ACTUAL AS ADJUSTED(5) -------- -------------- (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Working capital.......................................................... $ 39,615 $ 56,053 Total assets............................................................. 157,783 157,783 Long-term debt(6)........................................................ 25,000 31,141 Stockholder's net investment............................................. 70,085 -- Stockholders' equity..................................................... -- 80,382 </TABLE> - --------------- (1) Because the Company was a wholly owned subsidiary of Trinity prior to the Offering, historical earnings per share have been omitted. (2) Adjusted to give effect to the Consolidation Transactions, the Offering Related Transactions and the Offering. Pro forma net income per share is based on the 18,000,000 shares that will be outstanding immediately after the Offering. Pro forma net income for the year ended March 31, 1996 and the three months ended June 30, 1996 is $12.6 million and $3.4 million, respectively, and reflects a reduction in interest expense, net of tax, resulting from the use of the net proceeds of the Offering to retire outstanding debt at the beginning of the period. (3) EBITDA (earnings before interest, taxes, depreciation and amortization expense) is presented here not as a measure of operating results, but rather as a measure of the Company's operating performance and ability to service debt since the Credit Facility contains restrictive covenants which are based upon EBITDA. EBITDA should not be construed as an alternative to operating income (determined in accordance with generally accepted accounting principles ("GAAP")) as an indicator of the Company's operating performance or as an alternative to cash flows from operating activities (determined in accordance with GAAP) as a measure of liquidity. EBITDA measures presented herein may not be comparable to similarly titled measures of other companies. (4) Excludes payments for business acquisitions. (5) Adjusted to give effect to the Consolidation Transactions, the Offering Related Transactions and the Offering. If the Over-Allotment Option is exercised in full, pro forma long-term debt and stockholders' equity would be $25.7 million and $85.8 million, respectively. See "Separation From Trinity -- Consolidation Transactions", "Separation From Trinity -- Offering Related Transactions" and "Use of Proceeds." (6) Long-term debt represents an intercompany note due to Trinity on an actual basis and borrowings under the Credit Facility on an as adjusted basis. See "Separation From Trinity -- Offering Related Transactions."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001017657_infinity_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001017657_infinity_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..744a7aaf87e540dbd4e672e71e3c72cde7c34ff0
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and Consolidated Financial Statements and the Notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus (i) gives effect to the reincorporation of the Company in Delaware to be effected prior to the closing of the Offerings, (ii) reflects the conversion of all outstanding shares of Preferred Stock into shares of Common Stock effective automatically upon the closing of the Offerings, (iii) assumes no exercise of the U.S. Underwriters' or International Underwriters' over-allotment options and (iv) has been adjusted to reflect a 2-for-1 stock split to be effected prior to the closing of the Offerings. THE COMPANY Infinity Financial Technology, Inc. ("Infinity" or the "Company") develops, markets and supports object-oriented, client/server platform and solutions software for financial trading and risk management. Founded in 1989, Infinity currently has more than 35 customers around the world, consisting primarily of large banks and other financial institutions with sophisticated trading operations and risk management needs. Infinity's primary product is the Infinity Platform, which provides customers with a foundation to rapidly develop, deploy and modify trading and risk management systems in response to the changing requirements of the marketplace. The Infinity Platform allows financial institutions and corporations to build applications to process, store, integrate and analyze their traded instrument portfolios. Infinity also offers Infinity Derivatives, solutions software for derivatives trading, which enables the customer to integrate "front-office" trading activities such as pricing, deal capture and position-keeping with "back-office" operations such as trade confirmations, payments processing and general ledger accounting. Infinity has introduced and plans to release in the second half of 1996 Infinity RiskView, which is designed to facilitate customers' development of risk management systems. These solutions are built with the Infinity Platform and are designed to work together with the Infinity Platform to automate a range of transaction processing and decision support activities. The Infinity Platform is characterized by an open systems, client/server architecture running on the UNIX and Windows NT operating systems and on leading relational database management systems from Oracle Corporation ("Oracle") and Sybase, Inc. ("Sybase"). The demand for trading and risk management systems has grown significantly over the past several years. Increases in trading volumes and the complexity of financial instruments have led to a fundamental shift in how financial assets are managed: a shift to value management, in which mark-to-market accounting and value at risk methodologies are used to value traded instrument portfolios and quantify their associated risks. At the same time, various regulators worldwide are adopting more stringent reporting requirements. Often, within a single institution, several different computer systems capture and process trading portfolios. These systems frequently are located in multiple trading centers, use different data sets and database technologies and run on a variety of hardware platforms and operating systems. Integrating these data is a difficult technological and operational undertaking. A number of high profile financial crises -- Orange County, California, Baring Brothers and Sumitomo Corporation -- have highlighted the importance of effective risk management systems, as well as rigorous management and oversight of trading operations. These factors, among others, are presenting significant challenges that need to be met in order to process high volumes of complex financial instruments in a secure environment and to achieve comprehensive, firmwide risk management. In response to these challenges, financial institutions worldwide are investing financial and other resources in the development and acquisition of trading and risk management technology. The Tower Group, a market research and consulting firm, estimates that worldwide internal and external expenditures on hardware, software and services for risk management systems totaled more than $3.0 billion in 1994 and are expected to grow to $4.3 billion by 2000. Traditionally, financial [ALTERNATE PAGE] SUBJECT TO COMPLETION, DATED OCTOBER 22, 1996 LOGO 2,500,000 SHARES INFINITY FINANCIAL TECHNOLOGY, INC. COMMON STOCK (PAR VALUE $.001 PER SHARE) ---------------------- Of the 2,500,000 shares of Common Stock offered, 500,000 shares are being offered hereby in an international offering outside the United States and 2,000,000 shares are being offered in a concurrent United States offering. The initial public offering price and the aggregate underwriting discount per share will be identical for both offerings. See "Underwriting." Of the 2,500,000 shares of Common Stock offered, 2,000,000 shares are being sold by the Company and 500,000 shares are being sold by the Selling Stockholders. The Company will not receive any of the proceeds from the sale of shares being sold by the Selling Stockholders. See "Principal and Selling Stockholders." Prior to the offerings, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price per share will be between $13.00 and $15.00. For factors to be considered in determining the initial public offering price, see "Underwriting." SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR CERTAIN CONSIDERATIONS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK. Application has been made for quotation of the Common Stock on the Nasdaq National Market under the symbol "INFN." ---------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ---------------------- <TABLE> <CAPTION> PROCEEDS TO INITIAL PUBLIC UNDERWRITING PROCEEDS TO SELLING OFFERING PRICE DISCOUNT(1) COMPANY(2) STOCKHOLDERS ---------------- ------------------ ---------------- ------------------ <S> <C> <C> <C> <C> Per Share................. $ $ $ $ Total(3).................. $ $ $ $ </TABLE> - --------------- (1) The Company and the Selling Stockholders have agreed to indemnify the Several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. (2) Before deducting estimated expenses of $900,000 payable by the Company. (3) Certain Selling Stockholders have granted the International Underwriters an option for 30 days to purchase up to an additional 75,000 shares at the initial public offering price per share, less the underwriting discount, solely to cover over-allotments. Additionally, certain Selling Stockholders have granted the U.S. Underwriters a similar option with respect to an additional 300,000 shares as part of the concurrent United States offering. If such options are exercised in full, the total initial public offering price, underwriting discount and proceeds to Selling Stockholders will be $ , $ and $ , respectively. See "Underwriting." ---------------------- The shares offered hereby are offered severally by the International Underwriters, as specified herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that certificates for the shares will be ready for delivery in New York, New York, on or about October , 1996, against payment therefor in immediately available funds. GOLDMAN SACHS INTERNATIONAL DEUTSCHE MORGAN GRENFELL ROBERTSON, STEPHENS & COMPANY ---------------------- The date of this Prospectus is October , 1996. THE INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. institutions have licensed off-the-shelf solutions where they exist and have internally developed those systems that are not readily available or that require a unique understanding of the institution's needs. The Company believes that its strategy and products uniquely position it to take advantage of these trends. The Company's objective is to establish itself worldwide as the leading provider of trading and risk management platform and solutions software. In order to meet this goal, Infinity's strategy is to establish the Infinity Platform as an industry standard, expand the Company's product offerings, target initial sales of new products to sophisticated customers, broaden its customer base geographically and beyond the banking industry, develop and leverage strategic business partners and integrate sophisticated financial engineering with advanced information technology. The Company sells its products through a direct sales force located in offices in New York, London, Paris and Tokyo as well as its headquarters in Mountain View, California. The Company also has full-time support personnel in Frankfurt, Sydney and Toronto. Infinity has focused on developing strategic third-party relationships with companies that provide consulting, software development and implementation services. These relationships enable the Company to leverage the technical expertise of its strategic partners, access an additional sales and marketing channel and further enhance its efforts to establish the Infinity Platform as an industry standard. The Company was incorporated in California in 1989 and was reincorporated in Delaware in 1996. The Company's headquarters are located at 640 Clyde Court, Mountain View, California 94043, and its telephone number is (415) 940-6100.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001017673_dover_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001017673_dover_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..77f8ef561fbf4e4be89efba9468342255e245220
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the Consolidated Financial Statements (including the notes thereto), Glossary of Certain Terms and more detailed information appearing elsewhere in this Prospectus. Unless otherwise indicated, all information contained herein assumes no exercise of the Underwriters' over-allotment option or of options granted pursuant to the Company's 1991 and 1996 Stock Option Plans. See 'Underwriting' and 'Management -- Stock Option Plans.' THE COMPANY Dover Downs owns and operates the Dover Downs International Speedway, the Dover Downs Raceway and a video lottery casino at a multi-purpose gaming and entertainment complex. The facility is located in close proximity to the major metropolitan areas of Philadelphia, Baltimore and Washington, D.C. on approximately 775 acres of land owned by the Company in Dover, Delaware. Dover Downs International Speedway offers a modern, state-of-the-art, concrete superspeedway for top-rated NASCAR-sanctioned auto racing events with one of the largest and most comfortable seating capacities in its market. Dover Downs Raceway offers traditional harness horse racing and year-round satellite-linked pari-mutuel wagering on simulcast harness and thoroughbred horse races from regional and national tracks. The Company has recently expanded into video lottery (slot) machine gaming. The video lottery operations are managed by Caesars World Gaming Development Corporation, a wholly owned subsidiary of Caesars World, Inc., the casino gaming arm of ITT Corporation. Using Caesars' expertise and marketing skills in the gaming industry, the Company has created a stylish gaming facility with attractive decor, dining and nightly entertainment. Dover Downs offers a unique gaming and entertainment experience. Management believes it to be the only facility in the country that combines in one location NASCAR-sanctioned Winston Cup/Busch Series stock car racing, harness horse racing, pari-mutuel wagering on both live and simulcast horse races, and video lottery (slot) machine gaming. MOTORSPORTS Dover Downs has presented NASCAR-sanctioned racing events for 28 consecutive years. The Company currently conducts four major NASCAR-sanctioned events per year. Two races are associated with the Winston Cup professional stock car racing circuit and two races are associated with the Busch Series, Grand National Division racing circuit. For the past 11 years, NASCAR-sanctioned Winston Cup events at Dover Downs have sold out well in advance of the race. Current seating capacity consists of 88,977 grandstand seats and 1,000 skybox seats. The Company has increased seating capacity for the last 11 consecutive years, adding 64,000 seats (53,000 permanent and 11,000 temporary seats) during that period. An additional 7,500 permanent grandstand seats, 960 skybox seats, new food concessions and restroom facilities are expected to be completed in time for the 1997 race season. All races are conducted on a recently resurfaced, high-banked, one mile long, concrete superspeedway known by NASCAR race fans as the 'Monster Mile.' The Dover Downs track is currently the only superspeedway made of concrete that conducts NASCAR-sanctioned events. The concrete surface provides several advantages over the traditional asphalt paving employed by other tracks. It offers a fast racing surface yet remains cooler than asphalt. It has a longer useful life and is considered by management to be safer for the drivers. Unlike some speedways, substantially all grandstand seats at Dover Downs, including indoor, air-conditioned grandstand and skybox seats, offer an unobstructed view of the entire track. In recent years, attendance, television coverage and corporate sponsorship have significantly increased for NASCAR-sanctioned events. According to statistics made available by The Goodyear Tire & Rubber Co., spectator attendance at Winston Cup events and Busch Series events has shown strong growth. For the 1993, 1994 and 1995 racing seasons, attendance at Winston Cup events nationwide increased over the prior year by 9%, 18% and 9%, respectively. For Busch Series events, the corresponding increases were 10%, 12% and 23%. In 1995, total attendance at Winston Cup events exceeded 5.3 million. The Company's NASCAR-sanctioned events are currently televised live by TNN to a nationwide audience and broadcast nationally to a network of radio stations affiliated with the Motor Racing Network. The increasing corporate presence in autosports has resulted in significant demand for premier seating in skyboxes and for corporate hospitality services. Dover Downs has one of the largest corporate hospitality programs associated with NASCAR-sanctioned events. Over 6 acres of its facility are dedicated to corporate hospitality villages consisting of temporary pavilions erected for entertaining at race events. All pavilions are presently filled to capacity at Winston Cup events. GAMING Dover Downs has presented harness horse racing events for 28 consecutive years. On December 29, 1995, the Company introduced video lottery (slot) machines to its entertainment mix. Under an agreement with the Company, Caesars, a leader in the gaming industry, supervises, manages, markets and operates the Company's video lottery operations. The newly constructed, air-conditioned 'video lottery casino' was designed and built using expertise from Caesars. The 24,000 square foot facility features a stylish video lottery casino area with a hand-painted mural of the sky on its dome ceiling and murals of floral design which adorn the surrounding walls. A total of 572 lottery machines are currently in operation. The casino is open every day of the year, except Christmas and Easter. By October 1996, management expects to complete the expansion of the video lottery casino to approximately 41,000 square feet, almost double the size of the existing gaming floor, add a gourmet coffee shop, and improve parking and access to the casino. With the completion of this expansion, an additional 428 machines will be added, bringing the facility up to 1,000 machines, which is the maximum permitted by law. For the harness horse racing season expected to begin November 1996 and end April 1997, the Company anticipates that it will schedule a minimum of 70 live racing dates. Live harness horse races are held on Thursday, Friday and Saturday evenings, and on Sunday afternoons. The five-eighths mile harness racing track is located inside the one mile auto racing superspeedway and is lighted for nighttime racing. The Company has facilities for pari-mutuel wagering on both live harness horse races and on simulcast thoroughbred and harness horse races received from numerous tracks across North America. With the recent expansion of its simulcasting operations, pari-mutuel wagering is now conducted on a year-round basis. Beginning with the race season commencing November 1996, for the first time, the Company will simulcast live races held at Dover Downs to tracks and other off-track betting locations across the country. In June 1994, the Delaware General Assembly passed the Horse Racing Redevelopment Act in order to legalize the use of video lottery (slot) machines in Delaware. The Act limits video lottery operations to the three locations in Delaware where thoroughbred horse racing or harness horse racing was held in 1993. A portion of the proceeds from the wagering on the machines at Dover Downs is allocated by law to increase the purse for live harness horse races held at Dover Downs and is intended to provide increased vitality for Delaware's horse racing industry. A portion of the Company's simulcast revenues is also allocated to the purses. With a percentage of video lottery (slot) machine revenues and simulcast revenues supplementing the purses, the Company has experienced a dramatic increase in the size of its purses and expects to attract higher quality horses. Bettors are attracted to races with larger purses and typically wager more on the higher quality and more predictable horses. Management believes that larger purses and better horses should increase attendance and wagering and also have a positive impact on the number of markets that may wish to receive the Company's racing signal for simulcasting. Dover Downs expects to begin its live race season commencing November 1996 with a daily purse distribution of over $100,000, more than a ten-fold increase over the daily purse distribution prior to the introduction of video lottery (slot) machines. GROWTH STRATEGY The Company's mission is to provide all of its customers a premier gaming and entertainment experience. The Company's growth strategy is to continue to increase revenue and profitability by focusing on the following: o Increase the seating capacity and corporate hospitality facilities for NASCAR-sanctioned events o Complete the expansion of the video lottery (slot) machine facilities, increasing the number of machines to 1,000 o Increase the attendance and wagering on live harness horse racing through increased purse levels and facility upgrades o Expand the existing simulcasting operations and begin transmitting to tracks and other locations throughout North America o Pursue innovative marketing programs o Seek additional gaming and entertainment opportunities ------------------------------ The Company's principal executive office is located at 1131 North DuPont Highway, Route 13, in Dover, Delaware, 19901. Its mailing address is Post Office Box 843, Dover, Delaware 19903, and its telephone number is (302) 674-4600. THE OFFERING The Company has two classes of authorized and issued common stock. Holders of the Common Stock, par value $.10 per share, which is offered hereby, are entitled to one vote per share. Holders of the Class A Common Stock, par value $.10 per share (the 'Class A Common Stock'), are entitled to ten votes per share on all matters submitted to a vote of stockholders of the Company. Class A Common Stock is convertible at any time into Common Stock on a share for share basis at the option of the holders thereof. See 'Description of Capital Stock.' <TABLE> <S> <C> Common Stock offered by: The Company....................................... 1,000,000 shares (1) The Selling Stockholders.......................... 1,500,000 shares (1) Capital Stock to be outstanding after the Offering: Common Stock...................................... 2,500,000 shares (1)(2) Class A Common Stock.............................. 12,515,830 shares (3) Common Stock and Class A Common Stock............. 15,015,830 shares (1)(2)(3) Use of Proceeds........................................ To improve and further expand the Company's facilities, to repay all borrowings under the Company's credit facility, and for general corporate purposes. See 'Use of Proceeds.' NYSE symbol............................................ DVD </TABLE> - ------------------ (1) Excludes up to 375,000 shares of Common Stock that may be sold by the Company or certain Selling Stockholders upon exercise of the over-allotment option granted to the Underwriters. See 'Underwriting.' (2) Excludes 98,500 shares of Common Stock reserved for issuance upon the exercise of options granted pursuant to the Company's 1996 Stock Option Plan. See 'Management -- Stock Option Plans.' (3) Excludes 495,000 shares of Class A Common Stock reserved for issuance upon the exercise of options granted pursuant to the Company's 1991 Stock Option Plan. See 'Management -- Stock Option Plans.' SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) <TABLE> <CAPTION> YEAR ENDED JULY 31, ----------------------------------------------------- 1992 1993 1994 1995 1996 --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> EARNINGS DATA: Revenues: Motorsports................................................. $ 10,182 $ 11,941 $ 13,524 $ 16,099 $ 18,115 Gaming (including win)(1)................................... 2,476 1,936 1,024 1,309 38,278 --------- --------- --------- --------- --------- 12,658 13,877 14,548 17,408 56,393 Expenses: Operating................................................... 6,238 6,706 6,107 7,445 35,245 Depreciation................................................ 678 721 775 1,088 1,495 General and administrative.................................. 1,338 1,603 1,468 1,643 2,285 --------- --------- --------- --------- --------- 8,254 9,030 8,350 10,176 39,025 --------- --------- --------- --------- --------- Operating earnings............................................ 4,404 4,847 6,198 7,232 17,368 Interest expense.............................................. 328 175 185 142 272 --------- --------- --------- --------- --------- Earnings before income taxes.................................. 4,076 4,672 6,013 7,090 17,096 Income taxes.................................................. 1,543 1,834 2,314 2,847 7,104 --------- --------- --------- --------- --------- Net earnings.................................................. $ 2,533 $ 2,838 $ 3,699 $ 4,243 $ 9,992 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Earnings per common share..................................... $ .18 $ .20 $ .27 $ .29 $ .69 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Weighted average common shares and common share equivalents outstanding................................................. 14,207 13,935 13,935 14,511 14,511 SUPPLEMENTAL PRO FORMA EARNINGS DATA:(2) Net earnings.............................................. $ 10,151 Earnings per common share................................. $ .70 Weighted average common shares and common share equivalents outstanding(3).............................. 14,588 SELECTED COMPANY OPERATING DATA: Motorsports Winston Cup admissions (4)................................ 113,000 129,000 143,000 161,000 173,000 Seating capacity.......................................... 60,000 65,000 75,000 82,000 89,000 Gaming Number of live horse race dates........................... 47 44 36 39 67 Number of simulcast dates................................. 173 137 72 127 239 Number of slot machines................................... -- -- -- -- 572 </TABLE> <TABLE> <CAPTION> JULY 31, 1996 -------------------------- ACTUAL AS ADJUSTED(5) --------- --------------- <S> <C> <C> BALANCE SHEET DATA: Working capital (deficit)....................................................... $ (10,758) $ (7,258)(6) Total assets.................................................................... $ 43,609 $ 54,501 Long-term debt, less current portion............................................ $ 774 $ 774 Shareholders' equity............................................................ $ 24,447 $ 38,839 </TABLE> - ------------------ (1) Gaming revenues from the Company's video lottery (slot) machine gaming operations include the total win from such operations. The Delaware State Lottery Office collects the win and remits a portion thereof to the Company as its commission for acting as a Licensed Agent. The difference between total win and the amount remitted to the Company is reflected in Operating Expenses. See Note 2 to the Consolidated Financial Statements. (2) Amounts reflect the elimination of $272 ($159 net of tax) of interest expense on Company debt which will be repaid with proceeds of the Offering. See 'Use of Proceeds'.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001017741_interact_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001017741_interact_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..7f8298abac3bb8e3e630984c1dad93e1e2dc6317
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Financial Statements and Notes thereto appearing elsewhere in this Prospectus. The Company was formed in April 1996, and in May 1996, it acquired its assets and technologies in connection with a business combination. All references herein to Interact Medical Technologies Corporation ("Interact" or the "Company") also shall be deemed to be references to the Company and its predecessors, Ixion, Inc. ("Ixion") and Medical Media Systems ("MMS"). See "The Company."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001017799_allegiance_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001017799_allegiance_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..339337d24be2cbcc1699d0b76218fbf9084875ec
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+PROSPECTUS SUMMARY REFERENCE IS MADE TO, AND THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT REQUIRES OTHERWISE, (I) "ALLEGIANCE" OR THE "COMPANY" REFERS TO THE ALLEGIANCE BUSINESS (AS DEFINED BELOW) OF BAXTER INTERNATIONAL INC. ("BAXTER") FOR PERIODS PRIOR TO SEPTEMBER 30, 1996 (THE "DISTRIBUTION DATE") AND ALLEGIANCE CORPORATION AND ITS CONSOLIDATED SUBSIDIARIES FOR THE PERIODS ON AND AFTER THE DISTRIBUTION DATE, (II) ALL REFERENCES TO "BAXTER" INCLUDE BAXTER INTERNATIONAL INC. AND ITS CONSOLIDATED SUBSIDIARIES AS OF THE RELEVANT DATE, AND (III) "OFFERING" REFERS TO THE OFFERING OF $200,000,000 MILLION AGGREGATE PRINCIPAL AMOUNT OF THE COMPANY'S % NOTES DUE , 2006 (THE "NOTES"), $150,000,000 MILLION AGGREGATE PRINCIPAL AMOUNT OF THE COMPANY'S % DEBENTURES DUE , 2016 (THE "2016 DEBENTURES") AND $150,000,000 MILLION AGGREGATE PRINCIPAL AMOUNT OF THE COMPANY'S % DEBENTURES DUE , 2026 (THE "2026 DEBENTURES" AND TOGETHER WITH THE NOTES AND THE 2016 DEBENTURES, THE "SECURITIES"). SEE "COMPANY BACKGROUND." THE COMPANY Allegiance Corporation is America's largest provider of health-care products and cost-management services for hospitals and other health-care providers, with recorded total sales of approximately $4.5 billion in 1995. Allegiance offers more than 200,000 products -- the broadest range of medical and laboratory products in the industry. Allegiance's offering includes its own products as well as products manufactured by more than 2,000 independent suppliers. Allegiance operates more than 60 distribution centers across the country, delivering products often on a just-in-time basis. The economics of health care are undergoing rapid and fundamental change, particularly in the United States, which is Allegiance's largest current market. In the past, doctors and nurses were paid for their services with few cost constraints. Today, large employers, insurance companies and HMOs are negotiating set fees for the care of patients. For U.S. hospitals and health systems, Allegiance's main customers, the pressure to reduce costs has never been greater. At the same time, demand for health services is continuing to climb with the dramatic growth of elderly populations in the United States and abroad. This environment offers opportunities for Allegiance, which has invested in integrated product and service programs that help medical professionals cope with health care's new economics and demographic trends. Management believes Allegiance, with its size, breadth of product line, customer relationships, growing array of cost-management services and financial strength, is well-positioned competitively for the increasingly cost-conscious health-care marketplace. The health-care distribution market in the United States has experienced intense competition and a resultant erosion in its margins in recent years in response to the growth of managed care and increased consolidation among health-care providers. Allegiance has responded by integrating its market-leading distribution capabilities with a broad product offering, high levels of customer service and innovative cost-management services. Within a larger Baxter organization, Allegiance's cost structure was higher than industry standards. As an independent public company, Allegiance intends to realign its cost structure, and improve returns from its distribution operations. Allegiance's mission is to align its objectives with those of its customers - -- to help hospitals and others throughout the health-care field fulfill their mission of serving patients. Allegiance intends to achieve this goal by providing high-quality products, excellent service and new ways of managing costs. Allegiance's leading competitive position within the health-care marketplace is a function of several key advantages, including its size and breadth of products; an intense customer-service orientation; a growing portfolio of cost-management services and financial strength. Allegiance is the only health-care company that fully integrates distribution, products and services to bring greater efficiency to health care. Management believes its key competitive advantages and integrated product and service offerings provide a solid platform for growth. Allegiance's strategy is designed to continue to improve efficiency and returns in its distribution operations, to increase market penetration for its self-manufactured and "best value" preferred distributed products, and to expand its ability to help health-care professionals manage costs. Allegiance was formed in June 1996 as a wholly owned subsidiary of Baxter consisting of Baxter's U.S. distribution, surgical and respiratory-therapy products, and health-care cost-management services operations (the "Allegiance Business"). These integrated businesses recorded total sales of approximately $4.5 billion in 1995. On September 30, 1996 (the "Distribution Date"), Baxter effected a spin-off of Allegiance through a distribution of all of the outstanding shares of common stock of Allegiance ("Allegiance Stock") to Baxter stockholders. Prior to the Distribution Date, Allegiance became the owner of all of the assets, liabilities and operations of the Allegiance Business.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001017813_careguide_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001017813_careguide_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..8efc9832e1462169ab52ac1ccf45fee8c6ef5a7d
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS." THE COMPANY Patient Infosystems, Inc. designs and develops health care information systems and services to manage, collect and analyze patient-related information to improve patient compliance with prescribed treatment protocols. The Company's technology platform integrates treatment algorithms, live telephone operators, an advanced voice recognition telephone system, high speed data processing and analysis capability and demand publishing and information distribution capabilities. The system permits the Company to communicate via telephone directly with the patient at home in order to gather relevant data about a patient and his condition. This data is subsequently evaluated and computer generated reports which are tailored to the specific needs of each recipient are automatically transmitted to health care payors, providers and patients. The Company markets its services to pharmaceutical manufacturers, pharmacy benefit managers ("PBMs") and health care payors and providers to collect data outside of the physician office and institutional setting. The information can be used to enhance compliance by patients with prescribed treatment protocols. The Company's disease state management programs are designed to provide the following benefits: (i) for patients, improved communication with health care providers, enhanced self-care skills, increased treatment compliance, resulting in improved quality of care and reduced expense associated with unscheduled visits to the doctor; (ii) for health care providers, more information on patient progress, quicker identification of hard-to-manage patients, enhanced ability to make timely treatment modifications, triage capability and expanded information for development of improved treatment protocols; and (iii) for payors and program sponsors, cost-effective management of diseases, improved outcomes and enhanced patient and provider satisfaction. According to the Federal government, national health expenditures have increased from $540 billion in 1988 (11.1% of gross national product ("GNP")) to a projected $1 trillion in 1995 (15.7% of projected GNP). One way to achieve significant savings in health care costs is to change the way that health care is delivered to patients by focusing on quality and cost efficient clinical outcomes. Since a substantial portion of most treatment regimens is self-administered, patient compliance is critical to achieving quality outcomes. Estimates vary from disease to disease, but generally indicate that between 30% and 60% of all patients fail to take medications as prescribed. The consequences of patient non-compliance with prescribed treatment plans represent a significant portion of health care expenditures. One third-party study indicated that patient non-compliance results in $100 billion in health care and lost productivity costs annually. Costs associated with treating patients with chronic diseases who fail to adhere to prescribed regimens have been particularly difficult to control. When long-term treatments for chronic disease have been prescribed, as many as 80% of all patients fail to carry out correctly at least one element of the disease treatment regimen. Most health care information systems in use today gather information in the hospital or at the clinician's office and do not monitor adequately patient condition away from the point of care. The Company believes that by coupling effective treatment protocols with the ability to monitor patient condition and treatment regimen compliance between physician interventions, health care providers and payors can significantly enhance clinical outcomes while reducing costs. The Company's strategy is to capitalize on its information technology platform to become the leading provider of patient-centered health care information programs. The key elements of this strategy are to: (i) introduce information system programs for specific diseases on a customized basis for client-specified disease targets and on a standardized basis for diseases selected by the Company and marketed to multiple clients; (ii) implement marketing and awareness programs to establish and demonstrate the expected clinical benefits and cost-effectiveness of the Company's systems through clinical studies, protocol development and research publications; (iii) analyze collected outcomes data with advanced computational intelligence, including neural networks, fuzzy logic and genetic algorithms, to develop improved clinical protocols; (iv) develop or acquire additional technologies that enhance its ability to gather information and interact with patients while the patient is away from the health care provider; and (v) leverage the Company's technology platform to develop additional applications, such as clinical trial data compilation and analysis, patient surveys, clinical outcomes evaluation, demand management and case management. The Company was founded in February 1995, signed its first customer contract in September 1995 and enrolled its first patients in a disease state management program in October 1996. Bristol-Myers Squibb Company, U.S. Pharmaceuticals Division and Oncology/Immunology Division (collectively, "Bristol-Myers") has retained the Company to provide customized disease state management systems for congestive heart failure, cardiovascular disease, chronic pain and weight management. The Bristol-Myers agreements call for development fees and per patient operational fees. The Company has also entered into services agreements for standardized programs with American HomePatient, Inc. ("American HomePatient"), Harris Methodist Health Plan ("Harris Methodist"), Equifax Healthcare Administrative Services, a division of Equifax, Inc. ("Equifax"), and Health Resources, Inc. ("Health Resources") for patients suffering from asthma and with Equifax and Health Resources for patients suffering from diabetes. Each of the Company's agreements for its standardized programs provides for the Company to receive a per patient fee for services provided to enrolled patients over the duration of the program. THE OFFERING <TABLE> <S> <C> Common Stock offered........................................... 2,000,000 shares (1) Common Stock outstanding after this offering................... 7,503,202 shares (1)(2) Use of proceeds................................................ For expansion of systems capabilities, for sales and marketing activities and for working capital and other general corporate purposes Proposed Nasdaq National Market symbol......................... PATI </TABLE> SUMMARY FINANCIAL DATA <TABLE> <CAPTION> FROM FROM FROM FEBRUARY 22, FEBRUARY 22, 1995 FEBRUARY 22, 1995 NINE MONTH PERIOD 1995 (INCEPTION) TO (INCEPTION) TO ENDED (INCEPTION) TO DECEMBER 31, 1995 SEPTEMBER 30, 1995 SEPTEMBER 30, 1996 SEPTEMBER 30, 1996 ----------------- ------------------ ------------------ ------------------ <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues............................................. $ 113,000 7,500 $ 644,146 $ 757,146 Total operating expenses............................. 1,255,661 614,995 2,677,089 3,932,750 ----------------- ------------------ ------------------ ------------------ Operating loss....................................... (1,142,661) (607,495) (2,032,943) (3,175,604) Interest income...................................... 26,009 483 53,333 79,342 ----------------- ------------------ ------------------ ------------------ Net loss............................................. $ (1,116,652) $ (607,012) $ (1,979,610) $ (3,096,262) ----------------- ------------------ ------------------ ------------------ ----------------- ------------------ ------------------ ------------------ Net loss per common and common share equivalents(3)......................... $ (.18) $ (.10) $ (.32) $ (.50) ----------------- ------------------ ------------------ ------------------ ----------------- ------------------ ------------------ ------------------ Weighted average common and common share equivalents(3)...................................... 5,963,306 5,956,248 6,160,715 6,160,715 ----------------- ------------------ ------------------ ------------------ ----------------- ------------------ ------------------ ------------------ </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1996 ----------------------------- ACTUAL AS ADJUSTED(4) ------------- -------------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents............................................................................ $ 2,022,628 $ 20,022,628 Working capital...................................................................................... 1,470,088 19,470,088 Total assets......................................................................................... 2,986,652 20,986,652 Total liabilities.................................................................................... 788,137 788,137 Deficit accumulated during the development stage..................................................... (3,096,262) (3,096,262) Total stockholders' equity........................................................................... 2,198,515 20,198,515 </TABLE> - --------------- (1) Does not include 300,000 shares of Common Stock that may be sold by the Company pursuant to the Underwriters' over-allotment option. See "Underwriting."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001017815_qep-co-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001017815_qep-co-inc_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..72047437c27d21d3e6c21fbaf2b145951fe5e1ab
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0001017815_qep-co-inc_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and consolidated financial statements and notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, the information contained in this Prospectus (i) assumes no exercise of the Underwriters' over-allotment option or options granted or reserved under the Company's stock option plan, and (ii) gives effect to a recapitalization effective September 16, 1996 in connection with the Company's reincorporation in Delaware. Industry data used in this Prospectus was obtained from industry publications that the Company believes to be reliable, but has not independently verified. Unless the context indicates otherwise, references in this Prospectus to the "Company" are to Q.E.P. Co., Inc. and its subsidiaries. THE COMPANY The Company is a leading manufacturer, marketer and distributor of a broad line of specialty tools and related products for the home improvement market. Under brand names including "QEP," "O'Tool," "Marion Tool" and "Andrews Tools," the Company markets over 4,000 specialty tools and related products used primarily for surface preparation and installation of ceramic tile, carpet, marble, masonry, drywall and paint. The Company's products include, among other items, trowels, floats, tile cutters, wet saws, spacers, nippers, pliers, carpet trimmers and cutters, knives and abrasives. The Company's products are sold through home improvement retailers including national and regional chains such as Home Depot, Lowe's and Hechinger/Home Quarters, specialty distributors to the hardware, construction and home improvement trades, retailers such as Ace Hardware and New York Carpet World, and OEMs such as Stanley and Red Devil. The Company's full line of specialty tools and related products are marketed for use by do-it-yourself consumers as well as construction and remodeling professionals. Since fiscal 1992, the Company's net sales have increased at a compound annual rate of 38.0% to $25,272,000 in fiscal 1996. In the three months ended May 31, 1996, the Company's net sales increased 35.6% over the prior comparable period to $7,702,000. The growth in net sales over the last four fiscal years reflects (i) the introduction of new products and the Company's success in cross-marketing new and existing products among its channels of distribution, (ii) the Company's expansion of its market share through sales to additional home improvement retailers, distributors, OEMs and specialty retail customers, (iii) growth experienced by the Company's customers within the home improvement market, particularly among national and regional home improvement retailers, and (iv) growth of the home improvement market as a whole. Although consolidation of the home improvement retail market could adversely affect gross profit margins, the Company believes that national and regional home improvement retailers will increasingly rely upon their larger suppliers to provide a broad array of products accompanied by a high level of customer service. The Company believes that its relationships with several large home improvement retailers, coupled with its high level of customer service, have positioned the Company to become one of the principal suppliers of specialty tools and related products to national and regional home improvement retailers. The Company intends to pursue additional growth in sales as it expands its product lines, continues marketing to new customers and seeks to capitalize on the ongoing consolidation of the home improvement retail market by national and regional home improvement retailers. According to industry information published by the National Home Center News, the U.S. home improvement market generated retail sales of approximately $116 billion and $132 billion in 1993 and 1995, respectively. Growth in the home improvement market is expected to continue due to a variety of factors including the aging of U.S. homes, increased housing turnover, favorable demographic trends and increased consumer preference for larger, personalized homes. Within the home improvement market, national and large regional home improvement retailers have increased their market shares by offering broad product lines, project advice and orientation, competitive pricing and aggressive promotions. The Company's two largest customers, Home Depot and Lowe's, are the two largest home improvement retailers in the country. The Company's five largest customers in fiscal 1996 were among the ten largest home improvement retailers in the United States. The Company anticipates that its largest customers will maintain significant positions within the home improvement retail market by establishing additional home centers, as evidenced by Home Depot's and Lowe's recent reports of their intention to open 477 and 335 additional stores, respectively, by the turn of the century. The Company's strategy is to enhance its position as a leading manufacturer and marketer of specialty tools and related products for the home improvement market in order to capitalize on the continued expansion of its core markets and growth experienced by its customer base. The Company intends to implement this strategy by (i) increasing sales by broadening existing product lines and securing new customers in its primary channels of distribution, (ii) continuing its practice of cross-selling existing and new products among its channels of distribution, (iii) addressing the requirements of its key customers by maintaining its focus on customer service, quality control and enhancement of information systems, (iv) acquiring additional manufacturers, distributors and other companies which will complement the Company's operations, and (v) expanding its foreign market presence through a recently introduced foreign sales program. The Company was incorporated in the State of New York in March 1979 and was reincorporated in the State of Delaware in September 1996. Its principal executive offices are located at 990 South Rogers Circle, Boca Raton, Florida 33487, and its telephone number is (561) 994-5550. *************************************************************************** * * * INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A * * REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED * * WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT * * BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE * * REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT * * CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY * * NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH * * SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO * * REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH * * STATE. * * * *************************************************************************** PROSPECTUS SUBJECT TO COMPLETION, DATED SEPTEMBER 16, 1996 1,200,000 SHARES [QEP LOGO] COMMON STOCK --------------------- Of the shares of Common Stock offered hereby, 1,000,000 shares are being sold by Q.E.P. Co., Inc. ("QEP" or the "Company") and 200,000 shares are being sold by certain shareholders of the Company (the "Selling Shareholders"). See "Principal and Selling Shareholders." The Company will not receive any proceeds from the sale of shares by the Selling Shareholders. It is currently anticipated that the initial public offering price will be $8.50 per share. See "Underwriting" for a discussion of the factors considered in determining the initial public offering price. Application has been made to have the Common Stock approved for quotation on the Nasdaq National Market under the symbol "QEPC." --------------------- SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR INFORMATION PROSPECTIVE INVESTORS SHOULD CONSIDER. --------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. <TABLE> <CAPTION> ================================================================================================= UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS(2) - ------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Per Share......................... $ $ $ $ Total(3).......................... $ $ $ $ ================================================================================================= </TABLE> (1) The Company and the Selling Shareholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Act"). The Company has also agreed to issue, for nominal consideration, registered Representative's Warrants to purchase 120,000 shares of Common Stock. The shares of Common Stock underlying the Representative's Warrants have been registered for resale only. See "Underwriting." (2) Before deducting expenses payable by the Company estimated at $548,000 and $20,000 payable by the Selling Shareholders, including the Representative's nonaccountable expense allowance. (3) The Company has granted to the Underwriters a 45-day option to purchase an aggregate of up to 150,000 additional shares of Common Stock solely to cover over-allotments, if any. If this option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions, Proceeds to Company and Proceeds to Selling Shareholders will be $ , $ , $ and $ , respectively. See "Underwriting." --------------------- The shares of Common Stock are offered by the Underwriters subject to prior sale when, as and if delivered to and accepted by them, and subject to the right of the Underwriters to withdraw, cancel or modify such offer and reject orders in whole or in part. It is expected that delivery of the certificates for the Common Stock will be made at the offices of Cruttenden Roth Incorporated, Irvine, California, on or about , 1996. --------------------- CRUTTENDEN ROTH INCORPORATED THE DATE OF THIS PROSPECTUS IS , 1996 THE OFFERING <TABLE> <S> <C> Common Stock offered: By the Company................................. 1,000,000 shares By the Selling Shareholders.................... 200,000 shares Common Stock to be outstanding after this offering....................................... 2,504,894 shares(1) Use of proceeds.................................. To repay a bank credit facility, finance growth in inventories and accounts receivable, acquire complementary businesses or product lines, make capital improvements and for general corporate purposes. See "Use of Proceeds." Nasdaq National Market symbol.................... QEPC </TABLE> - --------------- (1) Includes 4,894 shares of Common Stock to be issued in exchange for 166,385 shares of Preferred Stock as of the date of this Prospectus. Excludes 156,150 shares of Common Stock issuable upon the exercise of currently outstanding options. See "Management -- Stock Option Plan" and "Description of Securities." SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> FISCAL YEAR ENDED THREE MONTHS ---------------------------------- ENDED MAY 31, FEB. 28, FEB. 28, FEB. 29, ------------------ 1994 1995 1996 1995 1996 -------- -------- -------- ------ ------- <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF INCOME DATA: Net sales............................... $13,407 $19,247 $25,272 $5,681 $7,702 Gross profit............................ 4,991 7,142 9,295 2,008 2,901 Operating income........................ 1,015 1,303 1,931 481 751 Income before income taxes.............. 880 1,154 1,736 432 707 Net income.............................. 539 725 1,068 258 439 Net income per common share(1).......... $ .36 $ .47 $ .70 $ .17 $ .29 Weighted average shares outstanding..... 1,515 1,515 1,506 1,515 1,500 PRO FORMA DATA(2): Operating income............................................... $ 1,931 $ 751 Net income..................................................... 1,144 459 Net income per share(1)........................................ $ .65 $ .27 </TABLE> <TABLE> <CAPTION> MAY 31, 1996 --------------------------- FEBRUARY 29, 1996 ACTUAL AS ADJUSTED(3) ------------------ ------ ---------------- <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Working capital.......................... $2,931 $3,401 $10,737 Total assets............................. 7,880 7,818 13,466 Total liabilities........................ 4,455 3,961 2,273 Shareholders' equity..................... 3,425 3,857 11,193 </TABLE> - --------------- (1) Cash dividends on Preferred Stock are deducted from net income before calculating net income per common share. (2) Pro forma information gives effect to the sale of 198,587 shares of Common Stock offered by the Company at an assumed offering price of $8.50 per share and the application of the proceeds therefrom to repay an outstanding bank credit facility as of May 31, 1996. (3) Adjusted to reflect the sale of 1,000,000 shares of Common Stock by the Company at an assumed offering price of $8.50 per share, and the application of the estimated net proceeds therefrom. Gives effect to repayment of $2,600,000 under the Company's credit facility, of which $2,628,000 was outstanding as of August 31, 1996. See "Use of Proceeds." *************************************************************************** * * * INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A * * REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED * * WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT * * BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE * * REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT * * CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY * * NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH * * SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO * * REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH * * STATE. * * * *************************************************************************** PROSPECTUS SUBJECT TO COMPLETION, DATED SEPTEMBER 16, 1996 4,894 SHARES [QEP LOGO] COMMON STOCK --------------------- This Prospectus relates to 4,894 shares of Common Stock being sold by certain Selling Shareholders. The 4,894 shares of Common Stock of Q.E.P. Co., Inc. (the "Company") were issued to the Selling Shareholders in exchange for a total of 166,385 shares of the Company's Preferred Stock. The Selling Shareholders may offer the shares of Common Stock owned by them for sale as principals for their own accounts at any time, and from time to time, in the over-the-counter market at prices prevailing at the time of sale, commencing from the date of this Prospectus. This Prospectus, which forms a part of the registration statement filed by the Company, must be current at any time during which a Selling Shareholder sells shares of Common Stock. See "Selling Shareholders" and "Description of Securities." This Prospectus (without certain information concerning the Selling Shareholders) was also used in connection with an underwritten public offering by the Company and certain other selling shareholders of 1,200,000 shares of Common Stock which became effective on , 1996. In connection with the underwritten offering, the Company issued to the managing underwriter (the "Representative") warrants to purchase up to 120,000 shares of Common Stock (the "Representative's Warrants") for $ per share, and granted to the Representative an option, exercisable at any time prior to , 1996, to purchase up to 150,000 shares of Common Stock solely to cover over-allotments (the "over-allotment option"). See "Prospectus Summary" and "Capitalization."
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+PROSPECTUS SUMMARY The following summary should be read in conjunction with, and is qualified in its entirety by, the more detailed information and the Financial Statements and notes thereto appearing elsewhere in this Prospectus. The purchase of Common Stock involves a high degree of risk. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors including those set forth under "Risk Factors" and elsewhere in this Prospectus. Except as otherwise noted, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option and reflects, prior to the completion of this offering, (i) the conversion of all outstanding shares of the Company's Preferred Stock into shares of Common Stock and (ii) the conversion of all outstanding options and warrants to purchase shares of Preferred Stock into options and warrants to purchase shares of Common Stock. First Virtual Holdings Incorporated ("First Virtual" or the "Company") has developed and implemented the VirtualPIN architecture which facilitates Internet commerce and is designed to facilitate other forms of interactive Internet communications. The VirtualPIN architecture uses E-mail which has the widest reach and broadest use of any Internet application. The First Virtual Internet Payment System ("FVIPS"), a secure and easy-to-use payment system introduced in October 1994, is the Company's first application of the VirtualPIN architecture. As of September 30, 1996, the Company has processed over 260,000 FVIPS transactions and has registered more than 2,650 merchants ("Sellers") and 180,000 consumers ("Buyers") in 166 countries. The Company believes that the VirtualPIN architecture can also serve as the basis for additional Internet applications including direct marketing, interactive advertising, merchandising, subscriptions and renewals, bill payments, client response surveys and Internet communications. The Internet and the World Wide Web have become well-established and are generally expected to support a growing number of applications including commerce. International Data Corporation ("IDC") estimates that there were 56 million Internet users worldwide at the end of 1995, with approximately 200 million users forecasted by the end of 1999. First Virtual's objective is to become a leading facilitator of Internet commerce and other forms of interactive Internet communications. The Company intends to pursue this objective by rapidly deploying VirtualPINs through multiple channels, including credit card companies and other financial institutions, on-line and Internet service providers, value added integrators, businesses with large direct response customer bases and a variety of direct marketing programs. To promote the deployment of the VirtualPIN, the Company has entered into strategic relationships with several major financial institutions including First USA Paymentech, General Electric Capital Corporation and First Data Corporation. These relationships include equity investments in the Company, representation on the Company's Board of Directors, and, in certain instances, distribution and marketing arrangements. To date, the Company has not derived any significant revenues as a result of such relationships. The VirtualPIN, an alphanumeric sequence unique to each user, allows the user to establish and maintain identity on the Internet in a controlled and confidential manner. To initiate a transaction using FVIPS, the Buyer transmits a VirtualPIN to the Seller, who accepts it as a form of payment for the Buyer's order and relays it to First Virtual for verification. After the Buyer responds to the Company's automated request for E-mail confirmation of the transaction, First Virtual initiates financial settlement through the established and secure credit card transaction processing networks. The Company's VirtualPIN architecture also enables merchandisers to target specific registered users with the users' consent and without revealing the users' sensitive personal data. The VirtualPIN is designed for integration with a broad set of Internet applications and for use on a wide variety of platforms. In contrast to certain other Internet payment systems which require complex computer architectures capable of deciphering intricate encrypted messages and the installation of hardware or software on the Buyer's computer, FVIPS, through the VirtualPIN, can be used on virtually any standard personal computer or Internet access appliance. In an effort to further promote the retail environment on the Web, the Company has prototyped the VirtualTAG, the second application of the VirtualPIN architecture. The VirtualTAG uses cross-platform multimedia environments such as Java or Shockwave to create stimulating, interactive advertisements within banners or "store fronts" which are designed to allow Buyers to initiate the purchase and payment and arrange for the delivery of a product being advertised without leaving the Web page on which the advertisement appears. Upon its introduction, the Company believes VirtualTAG may become one of the first solutions that takes full advantage of the Internet's unique attributes by combining advertising, selling and paying in one application. The Company believes the VirtualTAG represents an attractive opportunity to work with merchandisers and advertising agencies to market products on the Web and to establish First Virtual's own direct merchandising channel. The Company was incorporated in Wyoming in March 1994 and was reincorporated into Delaware in July 1996. The Company's executive offices are located at 11975 El Camino Real, Suite 300, San Diego, California 92130-2543, and its telephone number is (619) 793-2700. Information regarding the Company can be obtained from its site on the Web located at "http://www.fv.com." Information contained in the Company's Web site shall not be deemed to be a part of this Prospectus. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company................. 3,000,000 shares Common Stock to be outstanding after the offering... 11,072,733 shares(1) Use of proceeds..................................... For working capital and other general corporate purposes including capital expenditures and the repayment of approximately $1.4 million of indebtedness to certain stockholders. See "Use of Proceeds." Proposed Nasdaq National Market symbol.............. FVHI </TABLE> SUMMARY FINANCIAL DATA <TABLE> <CAPTION> PERIOD FROM MARCH 11, 1994 (DATE OF INCEPTION) NINE MONTHS ENDED THROUGH YEAR ENDED SEPTEMBER 30, DECEMBER 31, DECEMBER 31, --------------------------- 1994 1995 1995 1996 ------------ ------------ ----------- ----------- <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: (UNAUDITED) Revenues................................ $ 3,580 $ 197,902 $ 87,230 $ 498,262 Total operating expenses................ 826,110 2,399,993 1,692,721 6,550,673 Net loss................................ (835,679) (2,269,981) (1,657,548) (5,980,314) Pro forma net loss per share(2)......... $(0.28) $(0.68) Shares used in computing pro forma net loss per share(2)..................... 8,141,959 8,774,157 </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1996 ---------------------------------------------- <S> <C> <C> <C> BALANCE SHEET DATA: ACTUAL PRO FORMA(3) AS ADJUSTED(4) ---------- ---------- ---------- Cash, cash equivalents, and a short-term investment, available-for-sale.................. $ 6,081,945 $6,095,225 $ 36,802,885 Working capital................................... 4,135,162 4,148,442 35,028,442 Total assets...................................... 8,278,472 8,291,752 38,999,412 Notes payable to stockholders..................... 1,200,000 1,200,000 -- Total stockholders' equity........................ 4,657,202 4,670,482 36,750,482 </TABLE> - --------------- (1) Based on number of shares outstanding as of November 26, 1996 and includes 1,328,006 shares of Common Stock issuable upon exercise of warrants outstanding as of November 26, 1996 at an exercise price of $0.01 per share held by First USA Merchant Services Inc. ("First USA Merchant Services"), a wholly-owned subsidiary of First USA Paymentech, Inc. ("First USA Paymentech"). Excludes (i) an aggregate of 3,460,750 shares of Common Stock reserved for issuance under the Company's stock option plans, of which 1,748,145 shares were subject to outstanding options at November 26, 1996 at a weighted average exercise price of $4.79 per share, (ii) an aggregate of 1,000,000 shares of Common Stock subject (GATEFOLD) to additional outstanding options at November 26, 1996 at an exercise price of $6.30 per share, (iii) an aggregate of 100,000 shares of Common Stock reserved for issuance under the Company's Employee Stock Purchase Plan, none of which were outstanding as of the date of this Prospectus, (iv) shares of Common Stock equivalent to up to four percent of the Company's outstanding capital stock issuable upon the exercise of a warrant held by First USA Merchant Services at an exercise price of $0.01 per share subject to the satisfaction of certain marketing-related performance milestones and which terminates immediately prior to the closing date of this offering, (v) up to 47,619 shares of Common Stock reserved for issuance upon the exercise of an outstanding warrant at an exercise price of $10.50 per share held by General Electric Capital Corporation ("GE Capital"), subject to adjustment and (vi) 1,500,000 shares of Common Stock reserved for issuance upon the exercise of an outstanding warrant at exercise prices between $2.23 and $5.00 per share held by First Data Corporation ("First Data"), subject to the satisfaction of certain marketing-related performance milestones. See "Capitalization," "Dilution," "Management -- Stock Plans," "Certain Transactions" and Notes 6 and 8 of Notes to Financial Statements. (2) See Note 1 of Notes to Financial Statements for an explanation of the number of shares used in computing pro forma net loss per share. (3) Gives effect to (i) the assumed exercise of warrants outstanding as of September 30, 1996 to purchase 1,328,006 shares of Common Stock at an exercise price of $0.01 per share held by First USA Merchant Services, and (ii) the conversion of the 2,273,441 outstanding shares of Preferred Stock into 2,295,207 shares of Common Stock. (4) Adjusted to reflect the sale of the 3,000,000 shares of Common Stock offered hereby at an assumed offering price of $12.00 per share (after deduction of the underwriting discounts and commissions and estimated offering expenses) and the application of the net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001017916_frd_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001017916_frd_prospectus_summary.txt
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+SUMMARY The following summary is qualified in its entirety by the detailed information and financial statements, including notes thereto, located elsewhere in this Prospectus. For purposes hereof and unless the context requires otherwise, the "Company" refers to FRD, a newly-formed unrestricted subsidiary of Flagstar Corporation ("Flagstar"), and the newly-acquired operations of the Family Restaurant Division formerly owned by Family Restaurants, Inc. ("FRI"), which include FRI-M and certain subsidiaries of FRI- M, including those restaurants that make up the Family Restaurant Division and including the FRD Commissary. Concurrently with the issuance of the Notes, FRD acquired the operations of the Family Restaurant Division by acquiring the outstanding stock of FRI-M (the "Acquisition"). Upon completion of the Acquisition, FRI-M became a wholly-owned subsidiary of FRD. THE COMPANY The Company is one of the nation's leading operators of family restaurants. As of March 31, 1996 the Company operated 348 restaurants principally under the Coco's and Carrows names. As of March 31, 1996, the Company operated 168 Coco's, 160 Carrows, 17 jojos, 1 Jeremiah's and 2 Bob's restaurants. Approximately 74% of the Company's restaurants are located in California, making the Company the second largest family restaurant operator in California, both in terms of sales volume and number of restaurants. Coco's and Carrows restaurants were founded more than 25 years ago and have developed excellent name recognition and a loyal customer base, with customers on average making return visits to the restaurants seven and six times per month, respectively. In addition to its domestic operations, as of March 31, 1996 the Company is the licensor of 251 Coco's restaurants in Japan and South Korea, representing the most substantial penetration of any United States, non-fast food restaurant chain overseas. The Company's restaurants offer an extensive menu of moderately priced breakfast, lunch and dinner items and are typically open either 18 or 24 hours a day. Both Coco's and Carrows restaurants emphasize consistently high quality food with an excellent price/value relationship and friendly, efficient service. During the twelve months ended December 31, 1995, the average check per person was approximately $6.73 for Coco's and $6.09 for Carrows, representing increases of 3.2% and 5.0%, respectively, over the previous year. The Company generates approximately 23%, 32%, 40% and 5% of its revenue from breakfast, lunch, dinner and late night meals, respectively, which the Company believes represents a higher dinner proportion than its major competitors. The Company's average weekly restaurant customer count in 1995 was 4,244 for Coco's and 4,443 for Carrows. The Company's restaurants are generally located in densely populated suburban areas with high commercial traffic and a strong residential base. The commercial traffic typically provides a large portion of the Company's weekday breakfast and lunch customers, while the residential traffic accounts for a majority of the Company's dinner and weekend business. The Company's restaurants average between 5,000 and 6,000 square feet of floor space, allowing them to accommodate approximately 120 to 180 guests. The Company believes that the location and concentration of its restaurants allows it to realize economies of scale in advertising, distribution and field supervision. In 1992, the Company significantly increased its revenue base and California market share with the acquisition of 109 Bob's Big Boy and Allie's Restaurants (collectively, "Bob's") from Marriott Corporation. The Company believes that the acquisition of Bob's enabled the Company to establish attractive locations in developed areas at a substantially lower cost than had the Company built the locations itself. The Company completed its conversion of the Bob's restaurants to the Company's Coco's and Carrows concepts in 1994 at an average cost of approximately $230,000 per restaurant. In addition, the Company implemented a remodeling program in 1994 to remodel its 208 Coco's and Carrows restaurants that were not part of the Bob's conversion. From January 1, 1994 through March 31, 1996, the Company remodeled 64 Coco's and 50 Carrows restaurants, at an average cost of approximately $150,000 per restaurant, with the majority of such remodels occurring in 1994 and early 1995. Since such time, remodeling activities have been curtailed due to the limited availability of capital. The Company's headquarters are located at 18831 Von Karman Avenue, Irvine, California, 92715. The Company's telephone number is (714) 757-7900. THE ACQUISITION Flagstar, through the newly-formed FRD, acquired 100% of the capital stock of FRI-M and its Family Restaurant Division operating subsidiaries on May 23, 1996 for a purchase price of approximately $306 million. FRD financed the acquisition with $125 million in cash, $150 million in Notes and the assumption of approximately $31 million in lease and other debt obligations of FRI-M. The $125 million in cash paid to the seller was funded by a $75 million equity investment from Flagstar and a $51.5 million intercompany loan from FRI-M ($1.5 million of which was used to fund transaction costs). In order to fund an intercompany loan to FRD and provide a source of working capital, FRI-M obtained at the May 23, 1996 closing of the Acquisition a new credit facility consisting of a $56 million, 39-month term loan and a $35 million working capital facility to support letters of credit and for general working capital purposes (together, the "Credit Facility"). See "Description of Credit Agreement." Hereinafter, these transactions are collectively referred to as the "Acquisition." Flagstar is a wholly-owned subsidiary of Flagstar Companies, Inc. ("FCI"). THE NOTES Securities.................. $150,000,000 aggregate principal amount of 12 1/2% Senior Notes due 2004 Issuer...................... FRD Acquisition Co., a Delaware corporation Maturity Date............... July 15, 2004 Interest Payments........... Interest on the Notes accrues at the rate of 12 1/2% per annum and is paid semi-annually on each January 15 and July 15, commencing July 15, 1996. The Company has the option, in its sole discretion, upon the failure to achieve certain financial performance levels and subject to certain conditions and restrictions, to issue Secondary Securities at a rate of 14% per annum in lieu of a cash payment of any or all of the interest due on the Notes on up to four interest payment dates within the first 39-months following issuance of the Notes. See "Description of Notes--Principal, Maturity and Interest." Ranking..................... The Notes are unsecured obligations of the Company and rank senior in right of payment to all future subordinated indebtedness of the Company and pari passu in right of payment to all future senior indebtedness of the Company. The Notes are structurally subordinated to all existing and future liabilities and obligations (whether or not for borrowed money) of FRI-M and the Company's other subsidiaries. The Company on a stand alone basis does not currently have any outstanding senior indebtedness other than the Notes and its guarantee of FRI-M's borrowings under the Credit Agreement. As of March 31, 1996, on a pro forma basis, FRI-M and the Company's other subsidiaries had approximately $157.4 million of indebtedness and other liabilities (including trade payables and capitalized lease obligations). Optional Redemption......... The Notes are redeemable at the option of the Company, in whole or in part, at any time on or after May 23, 2001 at the redemption prices set forth herein, together with accrued and unpaid interest, if any, to the date of redemption. In addition, prior to May 23, 1999, the Company may, subject to certain conditions described herein, use the proceeds from an Initial Public Equity Offering to redeem up to $50 million aggregate principal amount of the Notes at the redemption price set forth herein. See "Description of Notes--Optional Redemption." Change of Control........... Upon a Change of Control, each holder of Notes will have the right to require the Company to repurchase such holder's Notes at a purchase price equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest, if any, to the date of repurchase, subject to certain conditions described herein. See "Description of Notes--Repurchase at the Option of Holders--Change of Control." Certain Covenants........... The Indenture limits, among other things, (i) the issuance of additional debt or disqualified stock by the Company or any of its subsidiaries, (ii) the payment of dividends on, and redemption of, stock of the Company and certain other restricted payments, (iii) creation of liens, (iv) asset sales, (v) transactions with affiliates, (vi) licensing of trade names or other intangible assets, (vii) engaging in a business other than the Company's current lines of business, (viii) consolidations, mergers, or transfers of all or substantially all of the Company's assets and (ix) the payment of management fees, franchise fees and tax payments by the Company to Flagstar or its other subsidiaries. Original Issue Discount..... The Notes were issued with original issue discount for federal income tax purposes. Original issue discount (that is, the difference between the face amount and the issue price of the Notes) will accrue from the date of issuance of a Note to its maturity date and will be includible as interest income for each day during each taxable year in which the Note is held by a holder in such holder's gross income for federal income tax purposes possibly in advance of receipt of the cash payments to which the income is attributable. See "Certain Federal Income Tax Considerations." Risk Factors................ An investment in the Notes involves a high degree of risk. For a discussion of certain considerations relevant to an investment in the Notes, see "Risk Factors." For a detailed discussion of the terms of the Notes, see "Description of Notes." SUMMARY COMBINED HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL INFORMATION The summary combined historical and unaudited combined pro forma financial information presented below have been derived from the audited combined financial statements, the Selected Combined Historical Financial Information and the Unaudited Pro Forma Combined Financial Information included elsewhere herein. For additional financial information about the Company, see "Capitalization," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited combined financial statements included elsewhere herein. <TABLE> <CAPTION> PREDECESSOR PRO FORMA(e) ---------------------------------------------------------------------------- ------------------------- FISCAL YEAR ENDED THREE-MONTHS THREE-MONTHS DECEMBER(a), ENDED MARCH(d), YEAR ENDED ENDED ---------------------------------------------------- -------------------- DECEMBER 31, MARCH 31, 1991 1992 1993 1994(b) 1995(c) 1995 1996 1995 1996 (UNAUDITED) (UNAUDITED) (UNAUDITED) (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> OPERATING STATEMENT DATA: Operating revenues..... $339,894 $438,582 $487,433 $504,174 $501,248 $117,596 $118,996 $501,248 $118,996 Operating income....... 22,484 23,486 30,522 27,073 27,909 4,332 4,725 33,108 6,679 Interest and debt expenses.............. 4,601 4,852 4,594 6,934(f) 16,515(f) 2,750 3,931 29,333 7,249 Net income (loss)...... 10,619 10,899 15,236 10,111 4,724 421 (52) 142 (873) Ratio of earnings to fixed charges (g)..... 4.9x 4.8x 6.6x 3.9x 1.7x 1.6x 1.2x 1.1x (h) SELECTED OPERATING DATA: Depreciation and amortization of property.............. $ 11,280 $ 8,416 $ 9,241 $ 19,006(i) $ 23,167 $ 5,151 $ 5,606 $ 23,167 $ 5,606(k) Amortization of goodwill and other intangibles........... 276 703 801 4,993(i) 5,280 1,320 1,320 5,307 1,327 Capital expenditures... 6,394 85,231(j) 14,720 24,154 22,890 8,825 1,335 22,890 1,335 </TABLE> <TABLE> <CAPTION> AS OF AS OF MARCH 31, 1996 DECEMBER 31, -------------------- 1995 ACTUAL AS ADJUSTED (UNAUDITED) <S> <C> <C> <C> BALANCE SHEET DATA: Net property............................... $146,042 $141,671 $141,671(k) Total assets............................... 332,847 317,184 382,373 Long-term debt, excluding current portion and loans payable to bank................. 27,502 25,780 232,780 Stockholder's equity (l)................... 152,601 132,199 75,000 </TABLE> - ------------------- (a) The Company's five most recently completed fiscal years ended on December 30, 1991, December 28, 1992, December 26, 1993, December 25, 1994 and December 31, 1995. (b) Data presented for 1994 includes one month of financial information for the Company prior to FRI's reorganization under Chapter 11 of the Bankruptcy Code and eleven months of financial information for the Company following such reorganization. In January 1994, FRI's predecessor corporation, The Restaurant Enterprises Group, Inc. ("REG"), completed a reorganization under Chapter 11 of the Bankruptcy Code (the "Reorganization") and applied the provisions of the American Institute of Certified Public Accountants Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code," ("SOP 90-7"). Pursuant to SOP 90-7, REG qualified for fresh start reporting as of January 27, 1994. Under this concept, all assets and liabilities of FRI are restated to current value at the date of reorganization. FRI obtained an appraisal of the assets and liabilities of FRI and the Company which determined the reorganization value (i.e., fair value) of the assets and liabilities. FRI utilized the results of this appraisal to implement fresh start reporting, which resulted in reorganization value in excess of amounts allocable to identifiable assets of $155,540,000 to the Company at January 27, 1994. For the one month ended January 26, 1994, the Company's selected operating statement data consisted of operating revenues of $43,538,000, operating income of $1,707,000, interest and debt expenses of $458,000, net income of $717,000, ratio of earnings to fixed charges of 3.7 times, depreciation and amortization of property of $697,000, amortization of goodwill and other intangibles of $81,000 and capital expenditures of $412,000. For the eleven months ended December 25, 1994, the Company's selected operating statement data consisted of operating revenues of $460,636,000, operating income of $25,366,000, interest and debt expenses of $6,476,000, net income of $9,394,000, ratio of earnings to fixed charges of 3.9 times, depreciation and amortization of property of $18,309,000, amortization of intangibles of $4,912,000 and capital expenditures of $23,742,000. (c) Fiscal 1995 represents a 53 week period. (d) The Company's two most recently completed fiscal first quarters ended on March 26, 1995 and March 31, 1996. (e) Pro forma information gives effect to the Acquisition as if it had occurred on December 26, 1994. (f) Includes $3,033,000 in 1994 and $13,117,000 in 1995 for interest related to the Company's outstanding balance under the working capital portion of FRI's credit agreement used to fund operating cash flow needs for all of FRI's subsidiaries. (g) For purposes of computing the ratio of earnings to fixed charges, "fixed charges" consist of interest on debt, amortization of deferred financing expense and the interest element in rental payments under operating and capital leases. "Earnings" consist of income (loss) before income taxes, plus fixed charges. (h) On a pro forma basis for the three months ended March 31, 1996, earnings were insufficient to cover fixed charges by $570,000. (i) In connection with the Reorganization in January 1994, the Company restated all assets and liabilities, which resulted in reorganization value in excess of amounts allocable to identifiable assets of $155,540,000 to the Company at January 27, 1994. (j) Includes $67,904,000 related to the acquisition of 109 Bob's restaurants in February 1992. (k) Certain assets and liabilities are subject to appraisals which have not yet been completed. (l) The predecessor financial information presented represents a combination of certain subsidiaries and divisions of FRI and does not represent a legal entity. Therefore, stockholder's equity represents the net activity with FRI.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001017917_ccc_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001017917_ccc_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. AS USED HEREIN, THE "COMPANY" MEANS CCC INFORMATION SERVICES GROUP INC., TOGETHER WITH ITS CONSOLIDATED SUBSIDIARIES, UNLESS THE CONTEXT OTHERWISE REQUIRES. "CCC" REFERS TO CCC INFORMATION SERVICES INC. AND ITS CONSOLIDATED SUBSIDIARIES, WHICH CONSTITUTE THE OPERATING SUBSIDIARIES OF THE COMPANY. "CCCDC" OR THE "JOINT VENTURE" REFERS TO CCC DEVELOPMENT COMPANY. UNLESS OTHERWISE SPECIFIED, THE PROSPECTUS ASSUMES (I) THE COMPLETION OF A 40 FOR 1 SPLIT OF COMMON STOCK OF THE COMPANY IMMEDIATELY PRIOR TO THE TIME THE REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS IS A PART BECOMES EFFECTIVE, (II) THE REDEMPTION OF 3,350 SHARES OF THE OUTSTANDING SERIES C CUMULATIVE REDEEMABLE PREFERRED STOCK (THE "SERIES C PREFERRED STOCK") AND 22,780 SHARES OF THE OUTSTANDING SERIES D CUMULATIVE REDEEMABLE PREFERRED STOCK (THE "SERIES D PREFERRED STOCK") OF THE COMPANY (COLLECTIVELY, THE "REDEEMABLE PREFERRED STOCK") WHICH WILL OCCUR SIMULTANEOUSLY WITH THE CONSUMMATION OF THE OFFERING, AND (III) NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. A GLOSSARY OF TECHNICAL TERMS BEGINS ON PAGE 41 OF THIS PROSPECTUS. THE COMPANY The Company is a leading supplier of automobile claims information and processing, claims management software and value-added communication services. The Company's customers include each of the 50 largest U.S. automobile insurance companies, over 250 other automobile insurance companies and more than 8,500 collision repair facilities. The Company's technology-based services and products improve efficiency, manage costs and increase consumer satisfaction in the management of automobile claims and restoration. The Company believes that its core competencies include the efficient collection and processing of claims and automobile valuation and repair data, development of advanced client-server, object-oriented claims software products, management of a value-added communications network, understanding the workflow processes of automobile claims and marketing through a customer-oriented field sales and service organization. The Company's services and products automate the process of evaluating and settling both total loss and repairable automobile claims. The Company's TOTAL LOSS services and products provide insurance companies the ability to effect total loss settlements on the basis of market-specific vehicle values. The Company's collision estimating services and products provide insurance appraisers and collision repair facilities with up-to-date pricing, interactive decision support and computer-assisted logic to produce accurate collision repair estimates. Communication services offered by the Company connect insurers, appraisers and collision repair facilities, providing the information required to make appropriate and timely decisions. The Company also provides a wide variety of related services and products intended to facilitate the overall management of the automobile claims process. The Company's PATHWAYS workflow management software is designed to integrate each of the Company's product offerings on a common platform with a common graphical user interface, facilitating the learning of new applications while providing the Company's customers with a broader tool set for claims completion. The Company's services and products are an integrated solution that combines reliable information, advanced claims management software and value-added, secure communication systems to improve the efficiency of the automobile claims process. The Company markets its services and products to the key participants in the automobile claims industry, including over 400 insurance companies and approximately 20,000 to 25,000 collision repair facilities. The Company sells its services and products to insurance companies through a 125 person direct sales force. The Company contracts with 85 independent sales representatives to sell its products to collision repair facilities. Over half of the Company's revenue for 1995 was for services and products sold pursuant to contracts, which generally have a two to three year term. A substantial portion of the Company's remaining revenue represented sales to customers that have been doing business with the Company for at least ten years. The Company's services and products are sold either on a monthly subscription or a per transaction basis. Insurance companies paid approximately $35 billion for automobile damage and loss claims in 1994, of which the Company believes $19 billion was paid to collision repair facilities and $13 billion was paid for total loss claims. Competitive pressures and resistance by policy holders and regulators to premium increases are causing insurance companies to focus on both customer satisfaction and cost control. At the same time, the costs to operate a collision repair facility have risen substantially over the past decade. Modern automobile designs coupled with extensive environmental regulations are forcing collision repair facilities to make significant capital investments in increasingly sophisticated equipment and better training. Automobile insurance companies are seeking to reduce the costs of adjusting claims through better and more timely flows of information and to increase consumer satisfaction through faster, more efficient claims handling procedures. Collision repair facilities are seeking to obtain a steady supply of customers through greater connectivity with insurance companies and through improved operating efficiency, business management and repair processing. The Company's objective is to enhance its position as a leading provider of business solutions to the automobile claims industry. The Company intends to grow its installed user base and to offer new and enhanced services and products. The Company focuses resources on leading insurance companies because these customers drive new product innovation and influence the systems decisions of other participants in the claims process. The Company has also committed substantial resources to develop and program class libraries and claims workflow objects and intends to leverage this technology asset to develop new services and enhancements rapidly. The Company plans to expand its appraisal and restoration outsourcing solution as an alternative to high cost independent adjusters. The Company also plans to expand the scope of its service and product offerings beyond automobile physical damage solutions to include claims involving bodily injury and to offer selected insurance company customers a total claims outsourcing solution. Underlying each of the Company's principal services and products are value-added databases which the Company's customers access using workflow-oriented software and the Company's communications network. The Company's proprietary database of valuation data used in connection with its total loss services and products is built through the Company's own data collection network. The Company offers its collision estimating services and products through a personal computer-based, open systems approach utilizing an object-oriented design which is readily integrated with customer legacy systems and which enables rapid introduction of additional application modules. The Company's product engineering activities focus on improving speed to market of new products, services and enhancements, and reducing development costs. CCC entered the vehicle total loss valuation market in 1980 when it introduced the first computerized vehicle valuation system based on market-specific conditions and physically inspected dealer inventories. The Company was incorporated in Delaware in 1983. Its principal executive office is located at 444 Merchandise Mart, Chicago, Illinois 60654. Its telephone number is (312) 222-4636. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company............... 5,500,000 Shares Common Stock to be outstanding after the Offering.......................................... 22,026,800 Shares(1) Use of Proceeds................................... To repay certain bank debt of CCC that has been guaranteed by the Company and to redeem a portion of the Redeemable Preferred Stock. See "Use of Proceeds." Nasdaq National Market Symbol..................... CCCG </TABLE> - ------------------------------ (1) Excludes 2,579,760 shares of Common Stock issuable upon the exercise of stock options outstanding at June 30, 1996 at a weighted average exercise price of $2.64 per share. CCC-TM-, Pathways-TM-, EZEst-TM-, EZNet-TM-, ACCESS-TM-, ACCLAIM-TM-, GuidePost-TM-, EZFocus-TM-, EZWorks-TM-, VINguard-TM- and AutoSearch-TM- are trademarks of the Company. All other trademarks, service marks, or trade names referred to in this Prospectus are the property of the respective owners. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following summary consolidated statement of operations data, per share data, pro forma data and balance sheet data should be read in connection with the consolidated financial statements, the notes related thereto and the unaudited pro forma consolidated financial data included elsewhere in this Prospectus. The information as of and for the three years ended December 31, 1995 is derived from the audited consolidated financial statements of the Company. The information presented as of and for the two years ended December 31, 1992 and the six months ended June 30, 1995 and 1996 and all pro forma data is derived from the unaudited consolidated financial information of the Company. With respect to the unaudited financial information, the Company is of the opinion that all material adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of the Company's interim and pro forma results of operations and financial condition, have been included. The results of operations presented below should not be regarded as necessarily indicative of results that may be expected in any future period. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ---------------------------------------------------------------- ------------------------------- PRO PRO FORMA FORMA 1991 1992 1993 1994(1) 1995 1995(2) 1995 1995(2) 1996 --------- --------- --------- --------- --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues...................... $ 38,859 $ 45,805 $ 51,264 $ 91,917 $ 115,519 $ 115,519 $ 56,624 $ 56,624 $ 63,325 Expenses: Operating expenses.......... 35,938 41,429 44,233 84,094 104,697 104,697 51,507 51,507 53,272 Purchased research and development................ -- -- -- 13,791 -- -- -- -- -- Loss on lease termination... -- -- 3,802 -- -- -- -- -- -- Litigation settlements...... -- -- -- 1,750 4,500 4,500 4,500 4,500 -- --------- --------- --------- --------- --------- --------- --------- --------- --------- Operating income (loss)....... $ 2,921 $ 4,376 $ 3,229 $ (7,718) $ 6,322 $ 6,322 $ 617 $ 617 $ 10,053 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Income (loss) from continuing operations................... $ (5,946) $ (7,260) $ (5,774) $ (13,159) $ 1,286 $ 3,538 $ (1,107) $ (97) $ 6,691 Income (loss) from discontinued operations, net of income taxes.............. (194) 409 (4,357) 1,006 -- -- -- -- -- --------- --------- --------- --------- --------- --------- --------- --------- --------- Net income (loss)............. (6,140) (6,851) (10,131) (12,153) 1,286 3,538 (1,107) (97) 6,691 Dividends and accretion on mandatorily redeemable preferred stock.............. -- -- -- (1,518) (3,003) (991) (1,455) (480) (1,604) --------- --------- --------- --------- --------- --------- --------- --------- --------- Net income (loss) applicable to common stock.............. $ (6,140) $ (6,851) $ (10,131) $ (13,671) $ (1,717) $ 2,547 $ (2,562) $ (577) $ 5,087 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- PER SHARE DATA: Income (loss) from: Continuing operations....... $ (0.67) $ (0.78) $ (0.61) $ (0.99) $ 0.08 $ 0.16 $ (0.06) $ (0.01) $ 0.38 Discontinued operations..... (0.02) 0.04 (0.47) 0.07 -- -- -- -- -- Dividends and accretion on mandatorily redeemable preferred stock............ -- -- -- (0.11) (0.18) (0.05) (0.09) (0.02) (0.09) --------- --------- --------- --------- --------- --------- --------- --------- --------- Net income (loss) applicable to common stock.............. $ (0.69) $ (0.74) $ (1.08) $ (1.03) $ (0.10) $ 0.11 $ (0.15) $ (0.03) $ 0.29 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Weighted average common and common equivalent shares outstanding.................. 8,819 9,228 9,392 13,237 17,025 22,525 16,617 22,117 17,593 <CAPTION> PRO FORMA 1996(2) --------- <S> <C> STATEMENT OF OPERATIONS DATA: Revenues...................... $ 63,325 Expenses: Operating expenses.......... 53,272 Purchased research and development................ -- Loss on lease termination... -- Litigation settlements...... -- --------- Operating income (loss)....... $ 10,053 --------- --------- Income (loss) from continuing operations................... $ 7,520 Income (loss) from discontinued operations, net of income taxes.............. -- --------- Net income (loss)............. 7,520 Dividends and accretion on mandatorily redeemable preferred stock.............. (529) --------- Net income (loss) applicable to common stock.............. $ 6,991 --------- --------- PER SHARE DATA: Income (loss) from: Continuing operations....... $ 0.32 Discontinued operations..... -- Dividends and accretion on mandatorily redeemable preferred stock............ (0.02) --------- Net income (loss) applicable to common stock.............. $ 0.30 --------- --------- Weighted average common and common equivalent shares outstanding.................. 23,093 </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 -------------------------- ACTUAL AS ADJUSTED (3) --------- --------------- <S> <C> <C> BALANCE SHEET DATA: Cash.................................................................................. $ 4,690 $ 4,774 Working capital....................................................................... (14,483) (6,631) Total assets.......................................................................... 44,609 43,374 Current portion of long-term debt..................................................... 8,151 1,151 Long-term debt, excluding current maturities.......................................... 21,386 1,208 Mandatorily redeemable preferred stock................................................ 35,729 11,791 Stockholders' deficit................................................................. (51,125) (116) </TABLE> - ------------------------------ (1) The Company accounted for its interest in the Joint Venture under the equity method of accounting prior to acquiring the remaining interest in the Joint Venture, effective March 30, 1994. (2) Pro forma data gives effect to the Offering (at an assumed initial offering price of $11.00) as of January 1, 1995, including: (i) redemption of a portion of the Redeemable Preferred Stock, (ii) elimination of interest expense associated with repayment of a portion of the Company's existing indebtedness under the 1994 bank credit facility, elimination of amortization associated with the write-off of deferred debt issue costs as a result of the early retirement of debt and (iii) the tax effects of the interest-related adjustments described above. See "Unaudited Pro Forma Consolidated Financial Data" presented elsewhere in this Prospectus. (3) Adjusted to reflect (i) receipt by the Company of the net proceeds to be received from the sale of Common Stock offered hereby at an assumed initial public offering price of $11.00 per share and (ii) the application of the net proceeds of the Offering to repay existing indebtedness under the Company's 1994 bank credit facility in the principal amount of approximately $27.2 million (or approximately 98% of the principal amount outstanding), plus accrued interest of approximately $0.4 million and to redeem Redeemable Preferred Stock with a stated value of approximately $26.1 million (or approximately 67% of the stated value outstanding), plus accrued dividends of approximately $1.5 million. With regard to redemption of the Redeemable Preferred Stock, the adjustments reflect acceleration of the unaccreted portion of the original preferred stock discount as a charge to stockholders' equity (deficit). There is no income tax benefit associated with the accelerated accretion. With regard to repayment of a portion of the 1994 bank credit facility, the adjustments reflect deferred debt issue costs, net of related income tax benefits, as a charge to stockholders' equity (deficit). The deferred debt issue cost write-off will be charged against earnings, as an extraordinary item, net of tax, in the period in which a portion of the 1994 bank credit facility is repaid. Based on an assumed public offering price of $11.00 per share, this charge is estimated to be $0.9 million before income taxes.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001017919_immusol_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001017919_immusol_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the financial statements (including the notes thereto) appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus has been adjusted to reflect the conversion into one share of Common Stock of each share of the Company's outstanding preferred stock (the "Preferred Stock") and assumes no exercise of the Underwriters' over-allotment option and no purchase of shares by Pfizer Inc. in connection with the Offering. The shares of Common Stock offered hereby involve a high degree of risk. See "Risk Factors" and "Business -- Strategic Alliances and Licenses -- Pfizer Inc." THE COMPANY Immusol, Inc. ("Immusol" or the "Company") is a biopharmaceutical company dedicated to the discovery, development and commercialization of products based on proprietary technologies in the areas of ribozyme gene therapy and ribozyme-mediated gene functional analysis. Ribozymes are naturally occurring ribonucleic acid ("RNA") molecules that can be engineered to cleave and inactivate other RNA molecules in a specific, sequence-dependent fashion. Thus, ribozymes can be designed to selectively inactivate RNA molecules and their corresponding proteins that play a role in human disease. The Company intends to initiate a Phase I clinical trial with its lead compound, HIVase I(TM), in 1996. HIVase I is being developed through a collaboration with Pfizer Inc. ("Pfizer") for the treatment of HIV-infected individuals. In addition, the Company has three other ribozyme gene therapy programs in various stages of research and preclinical development for the prevention of coronary restenosis and the treatment of hepatitis C and hepatitis B viral infections. Ribozyme therapies can be based on (i) ribozyme gene therapy which involves inserting specific sequences that lead to the production of ribozymes within the patient's cells or (ii) synthetic, chemically-modified ribozymes administered as drugs. The gene therapy approach to ribozyme therapy utilizes the patient's own cellular machinery to produce a constant and continuous supply of ribozymes inside the cell where the disease-causing gene is produced. The Company has utilized a number of different viral vectors (gene delivery vehicles), including retroviral, adeno-associated viral ("AAV") and adenoviral vectors, to provide optimal periods of in vivo production of ribozymes. The Company believes that ribozyme gene therapy is a new, versatile modality which will be applicable in the treatment of a wide range of viral diseases, coronary disease, genetic diseases, cancers and other medical conditions. The Company believes its ribozyme gene therapy technology will have certain advantages over conventional drug development, including: (i) the high specificity of ribozymes can be used to inactivate certain undesirable target genes whose sequences are known; (ii) ribozymes can have application to a broad spectrum of human diseases; (iii) ribozymes can be highly potent due to their natural catalytic activity by which one ribozyme can inactivate many target molecules; and (iv) ribozymes can result in fewer side effects due to their high degree of target specificity. The Company believes its ribozyme gene therapy technology has several advantages over synthetic ribozymes, including: (i) efficient intracellular delivery and potential lack of immune response; (ii) providing a constant and continuous supply of ribozymes inside the cell; and (iii) the ability to deliver multiple ribozymes on one vector. In May 1995, the Company and Pfizer entered into a research collaboration for the discovery and development of products for ribozyme-based gene therapy useful in treating or preventing HIV infection. In preclinical studies to date, the Company has demonstrated potent activity of its multi-ribozyme gene therapy against all strains of HIV known to the Company isolated from HIV-infected individuals. In addition, the Company has found no evidence of ribozyme-resistant mutants of HIV to date. The Company intends to initiate a Phase I clinical trial with its first generation compound, HIVase I, in 1996 in HIV-infected individuals. Immusol believes that its ribozyme technology can be useful in drug discovery in conjunction with gene sequence knowledge to characterize the function of recently discovered genes that may be suitable therapeutic targets. Since ribozymes can be designed to act on specific target genetic sequences, ribozymes may be useful to identify the function of these sequences. As a result, the Company believes its ribozyme technology can provide an important link between gene dysfunction and disease. The Company was incorporated in the State of California in March 1992. The Company's principal executive offices are located at 3050 Science Park Road, San Diego, California 92121, and its telephone number is (619) 677-0182. [DRAWING DESCRIBING IMMUSOL'S APPROACH TO USE VIRAL VECTORS (IN A VIAL) TO DELIVER THERAPEUTIC RIBOZYME GENES BY INJECTION INTO THE PATIENT.] Immusol HIVase has been tested only in preclinical studies for the treatment of HIV-infected individuals. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. The Company intends to furnish to its shareholders annual reports containing audited financial statements certified by an independent public accounting firm and quarterly reports containing unaudited interim financial information for the first three quarters of each year. HIVase I(TM) is a trademark of the Company. This Prospectus also includes names and trademarks of companies other than the Company. THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Company................... 3,000,000 shares Common Stock to be Outstanding after this Offering(1)......................................... 13,024,477 shares Use of Proceeds....................................... To fund research and development and for working capital and general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market Symbol................ IMSL </TABLE> - --------------- (1) Does not include (i) 2,002,500 shares of Common Stock issuable upon exercise of options outstanding at a weighted average exercise price of $0.10 per share pursuant to the Company's stock option plans at June 30, 1996 and (ii) 1,354 shares of Common Stock issued upon exercise of options subsequent to June 30, 1996 and 11,500 shares of Common Stock issuable upon exercise of options granted subsequent to June 30, 1996. See "Capitalization," "Management -- Benefit Plans," "Certain Transactions" and "Shares Eligible for Future Sale." SUMMARY FINANCIAL INFORMATION <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, -------------------------------------- ------------------------ 1993 1994 1995 1995 1996 --------- --------- ---------- --------- ---------- <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenue................. $ -- $ 204,475 $3,174,515 $ 621,937 $2,941,489 Costs and expenses: Research and development.... 157,101 492,513 2,831,860 1,246,189 1,982,939 General and administrative........... 47,948 127,360 487,234 238,491 396,571 --------- --------- ---------- --------- ---------- Total costs and expenses............... 205,049 619,873 3,319,094 1,484,680 2,379,510 Income (loss) from operations.................. (205,049) (415,398) (144,579) (862,743) 561,979 Interest income............... 50,743 57,798 275,564 99,230 200,795 Interest expense.............. -- -- (5,343) (2,326) (3,386) --------- --------- ---------- --------- ---------- Net income (loss)............. $(154,306) $(357,600) $ 125,642 $(765,839) 759,388 ========= ========= ========== ========= ========== Pro forma net income (loss) per share(1)................ $ (0.02) $ (0.05) $ 0.01 $ (0.10) $ 0.06 ========= ========= ========== ========= ========== Shares used in computing pro forma net income (loss) per share(1).................... 7,342,653 7,471,420 11,830,427 7,479,860 12,404,535 </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 ----------------------------- ACTUAL AS ADJUSTED(2) ---------- -------------- <S> <C> <C> BALANCE SHEET DATA: Cash, cash equivalents and short-term investments................. $7,684,784 $ 34,984,784 Working capital................................................... 6,724,715 34,024,715 Total assets...................................................... 8,439,891 35,739,891 Long-term liabilities, less current portion....................... 185,047 185,047 Accumulated deficit............................................... (12,105) (12,105) Total shareholders' equity........................................ 7,154,642 34,454,642 </TABLE> - --------------- (1) See Note 1 of Notes to Financial Statements for information concerning the computation of pro forma net income (loss) per share and shares used in computing pro forma net income (loss) per share. (2) As adjusted to reflect the sale of the Common Stock offered hereby and the application of the net proceeds of this Offering, based on an assumed public offering price of $10.00 per share (the midpoint of the range set forth on the cover page of this Prospectus). See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001017921_thermo_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001017921_thermo_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the financial statements and notes thereto appearing elsewhere in this Prospectus. Except as otherwise indicated, all information in this Prospectus assumes that the Underwriters' over-allotment option will not be exercised. Investors should carefully consider the information set forth under the heading "Risk Factors." THE COMPANY Thermo Fibergen Inc. (the "Company") was established as a subsidiary of Thermo Fibertek Inc. ("Thermo Fibertek") to develop and commercialize equipment and systems to recover valuable materials from increasing volumes of pulp residue generated by plants that produce recycled pulp and paper. The Company intends to finance, build and operate recovery plants on sites at, or immediately adjacent to, recycled pulp mills, employing a proprietary process to treat pulp residue. The Company's plants will recover and clean long cellulose fibers for resale to pulp mills, and will process the remaining recoverable components of pulp residue, such as fines (very short fibers not usable for papermaking) and minerals, into saleable products. On July 3, 1996, the Company's wholly owned GranTek Inc. subsidiary ("GranTek") acquired substantially all of the assets, subject to certain liabilities, of Granulation Technology, Inc. ("GT") and Biodac, a division of Edward Lowe Industries, Inc. (collectively, "GT/ELI"), for approximately $12,000,000 in cash, subject to a post-closing adjustment. GranTek employs patented technology to produce absorbent granules from pulp residue. These granules, marketed under the trade name BIODAC, are currently used as a carrier to deliver chemicals for agricultural, lawn and garden, and other needs. GranTek's Green Bay, Wisconsin, plant currently produces more than 30,000 tons of BIODAC per year. Environmental concerns and other factors have led to an increase in the use and production of recycled paper in recent years. However, paper companies that increase the use of recycled paper as a source of their papermaking fiber experience substantial increases in their pulp residue. These increases result from the pulp de-inking, filtering and cleaning process, in which approximately 25% of the recycled fiber entering a pulp mill is lost to the waste stream, and must be disposed of at a substantial cost. The Company believes the North American pulp and paper industry spent an estimated $900 million to treat and dispose of approximately 9 million tons of pulp residue in 1993. The Company believes that worldwide expenditures to treat and dispose of pulp residue in 1993 were approximately $2.5 billion. The Company's strategy is to generate revenues from several sources. First, the Company will seek to enter into long-term contracts with pulp and paper mills under which the Company will charge the customer a tipping fee to accept the customer's pulp residue. Second, the Company intends to sell much of the clean long fibers it recovers directly back to the customer for use in the papermaking process. The Company has not yet begun to recover long fibers; as described below, the Company expects to begin construction of its first commercial recovery plant employing its long fiber-recovery technology in 1997. Third, the Company will apply existing technologies, such as its granulation technologies, and expects to develop new technologies, to maximize the value of the other recoverable components of the pulp residue, such as fines and minerals, for sale into other markets. For example, the Company intends to further develop GranTek's technology to produce granules for oil and grease absorbents as well as for specialty absorbents, such as for the cat box filler market. The Company anticipates that the tipping fees it receives will generally be competitive with the pulp mills' current disposal costs. The Company believes that pulp mills will prefer to dispose of their residue streams by paying the Company a tipping fee for a number of reasons. Disposal of residue with the Company will provide pulp mills with a long-term disposal solution and will eliminate concerns over long-term capacity constraints at their landfills; will relieve the pulp mills of the responsibility for complying with changing treatment and disposal regulations; and will allow pulp mills to reduce their capital investments in dewatering and treatment equipment, and to focus their resources on the manufacture of paper. The Company is actively developing a process to recover long fibers from pulp residue, and has completed the construction of a mobile pilot recovery system which the Company is using for initial mill demonstrations of its fiber-recovery process. The Company expects that its first commercial plants will feature only GranTek's technology to process pulp residue into absorbent granules. The Company's strategy is to introduce this technology to pulp mill customers, to enter into long-term contracts with such customers and to construct its plants, and then, upon the completion of development, to retrofit existing GranTek plants with the Company's long fiber-recovery technology. The Company will also explore the construction of plants in certain niche markets that may feature only the Company's long fiber-recovery technology. The Company expects to begin construction of its first commercial recovery plant employing its long fiber-recovery technology before the end of 1997. - -------------------------------------------------------------------------------- <TABLE> THE OFFERING <S> <C> Units Offered(1)..................... 4,100,000 Common Stock to be Outstanding after the Offering(1)(2)................. 14,100,000 Proposed AMEX Symbol for the Units... TFGU Proposed AMEX Symbol for the Common Stock.............................. TFG Proposed AMEX Symbol for the Redemption Rights.................. TFGR Scheduled Optional Redemptions....... The holder of a Redemption Right may require the Company to redeem one share of Common Stock for an amount of cash equal to the initial public offering price during the month of September 2000 (the "First Redemption Period") and the month of September 2001 (the "Second Redemption Period"). The Redemption Rights will expire if at any time after the 90th day after the date of this Prospectus and (i) prior to the beginning of the First Redemption Period or (ii) after the end of the First Redemption Period and prior to the beginning of the Second Redemption Period, the closing price of the Common Stock has been at least 150% of the Redemption Price, as adjusted, for 20 of any 30 consecutive trading days. Thermo Electron Guarantees........... Redemption payments have been guaranteed by Thermo Electron. The obligations represented by Thermo Electron's guarantees (the "Guarantees") will be subordinated in right of payment to the prior payment in full of all Senior Indebtedness (as defined herein) of Thermo Electron, including Senior Indebtedness which may be incurred by Thermo Electron after the issuance of the Guarantees. Use of Proceeds...................... Funding the development and commercialization of the Company's fiber-recovery system, and general corporate purposes, including acquisitions. Federal Tax Consequences............. Special tax considerations may apply to an investment in the Units. Investors should read carefully "Certain Federal Income Tax Consequences" and are advised to consult with their own tax advisors regarding the consequences of an investment in the Units. </TABLE> THERMO ELECTRON Thermo Electron develops, manufactures and markets environmental monitoring and analysis instruments, biomedical products including heart-assist systems, mammography systems and respiratory care products, paper-recycling and papermaking equipment, alternative-energy systems, industrial process equipment, and other specialized products. Thermo Electron also provides environmental and metallurgical services and conducts advanced technology research and development. Thermo Electron performs its business through its divisions and wholly owned subsidiaries, as well as majority-owned subsidiaries that are partially owned by the public or by private investors. - --------------- (1) Each Unit consists of one share of Common Stock and one Redemption Right. The Common Stock and the Redemption Rights will trade together as Units until the 90th day after the date of this Prospectus, after which date the Common Stock and the Redemption Rights will trade separately. (2) Does not include 825,000 shares of Common Stock reserved for issuance under the Company's stock-based compensation plans. As of August 31, 1996, options to purchase 338,000 shares of Common Stock had been granted and were outstanding under these plans. See "Capitalization," "Management -- Compensation of Directors" and "-- Compensation of Executive Officers" and Note 5 of Notes to Financial Statements of the Company. - -------------------------------------------------------------------------------- <TABLE> SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <CAPTION> PRO FORMA COMBINED(1)(2) ----------------------- SIX MONTHS TWELVE SIX ENDED(1) MONTHS MONTHS FISCAL YEAR ------------------ ENDED ENDED ------------------------------------- JULY 1, JUNE 29, DECEMBER 30, JUNE 29, 1992(1) 1993 1994 1995 1995 1996 1995 1996 ------- ------- ------- ------- ------- -------- ------------ -------- <S> <C> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues..................... $ -- $ -- $ -- $ -- $ -- $ -- $ 4,233 $ 3,154 Gross Profit................. -- -- -- -- -- -- 992 1,071 Research and Development Expenses................... 147 106 128 601 276 548 904 637 Patent Litigation Expenses... -- -- -- -- -- -- 1,654 290 Operating Loss............... (147) (106) (128) (601) (276) (548) (2,648) (842) Interest and Other Income (Expense).................. -- -- -- -- -- 267 (1,469) 704 Net Loss..................... (147) (106) (128) (601) (276) (281) (4,117) (138) Loss per Share(3)............ (.01) (.01) (.01) (.06) (.03) (.03) (.41) (.01) Weighted Average Shares(3)... 10,073 10,073 10,073 10,073 10,073 10,073 10,073 10,073 </TABLE> <TABLE> <CAPTION> JUNE 29, 1996 ------------------------ PRO FORMA AS COMBINED(4) ADJUSTED(5) ------------ --------- <S> <C> <C> BALANCE SHEET DATA: Working Capital........................................................................ $ 359 $48,861 Total Assets........................................................................... 13,659 62,161 Common Stock Subject to Redemption..................................................... -- 48,502 Shareholder's Investment............................................................... 12,313 12,313 <FN> - --------------- (1) Derived from unaudited financial statements. (2) The pro forma combined statement of operations data was derived from the pro forma combined condensed statements of operations included elsewhere in this Prospectus. The pro forma combined statement of operations data sets forth the results of operations for the twelve months ended December 30, 1995 and the six months ended June 29, 1996, as if the acquisition of substantially all of the assets, subject to certain liabilities, of GT/ELI had occurred on January 1, 1995. (3) Pursuant to Securities and Exchange Commission requirements, loss per share has been presented for all periods. Weighted average shares for all periods include 10,000,000 shares issued to Thermo Fibertek in connection with the initial capitalization of the Company and the effect of the assumed exercise of stock options issued within one year prior to the Company's proposed initial public offering. (4) The pro forma combined balance sheet data as of June 29, 1996 is derived from the pro forma combined condensed balance sheet included elsewhere in this Prospectus, which was prepared as if the acquisition of substantially all of the assets, subject to certain liabilities, of GT/ELI had occurred on June 29, 1996. (5) Adjusted to reflect the sale by the Company of 4,100,000 Units offered hereby at an assumed initial public offering price of $12.75 per Unit, after deducting estimated underwriting discounts and commissions and offering expenses payable by the Company. </TABLE>
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001017952_fulton_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001017952_fulton_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..670462e3392ec9c7a5da14ccf800091461f04372
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+PROSPECTUS SUMMARY The information set forth below should be read in conjunction with and is qualified in its entirety by the more detailed information and Consolidated Financial Statements (including the Notes thereto) presented elsewhere in this Prospectus. The purchase of Common Stock is subject to certain risks. See "RISK FACTORS." Fulton Bancorp, Inc. The Holding Company is a Delaware corporation organized in May 1996 at the direction of the Savings Bank to acquire all of the capital stock that the Savings Bank will issue upon its conversion from the mutual to stock form of ownership. The Holding Company has not engaged in any significant business to date. The Holding Company has received the approval of the OTS to become a savings and loan holding company and to acquire 100% of the capital stock of the Savings Bank. Immediately following the Conversion, the only significant assets of the Holding Company will be the capital stock of the Savings Bank, that portion of the net proceeds of the Offerings permitted by the OTS to be retained by the Holding Company and a note receivable from the ESOP evidencing a loan from the Holding Company to fund the Savings Bank's ESOP. The Holding Company has received approval from the OTS to retain 50% of the net proceeds of the Offerings. Funds retained by the Holding Company will be used for general business activities, including a loan by the Holding Company directly to the ESOP to enable the ESOP to purchase 8% of the Common Stock issued in the Conversion. See "USE OF PROCEEDS." Upon Conversion, the Holding Company will be classified as a unitary savings and loan holding company subject to regulation by the OTS. See "REGULATION -- Savings and Loan Holding Company Regulations." Management believes that the holding company structure and retention of proceeds may facilitate the expansion and diversification of its operations, should it decide to do so. The holding company structure will also enable the Holding Company to repurchase its stock without adverse tax consequences, subject to applicable regulatory restrictions and waiting periods. There are no present plans, arrangements, agreements, or understandings, written or oral, regarding any such activities or repurchases. The main office of the Holding Company is located at 410 Market Street, Fulton, Missouri 65251, and its telephone number is (573) 642-6618. Fulton Savings Bank, FSB The Savings Bank, founded in 1912, is a federally chartered mutual savings bank located in Fulton, Missouri. The Savings Bank amended its charter from that of a state-chartered mutual savings bank to become a federal mutual savings bank in April 1995. In connection with the Conversion, the Savings Bank will convert to a federally chartered capital stock savings bank and will become a subsidiary of the Holding Company. The Savings Bank is regulated by the OTS, its primary federal regulator, and the FDIC, the insurer of its deposits. The Savings Bank's deposits are insured by the FDIC's Savings Association Insurance Fund ("SAIF") and have been federally insured since 1965. The Savings Bank has been a member of the Federal Home Loan Bank ("FHLB") System since 1942. At April 30, 1996, the Savings Bank had total assets of $85.5 million, total deposits of $70.3 million and retained earnings of $9.1 million on a consolidated basis. The Savings Bank is a community oriented financial institution that engages primarily in the business of attracting deposits from the general public and using those funds to originate residential and commercial mortgage loans within the Savings Bank's market area. The Savings Bank generally sells all of the fixed-rate and some of the adjustable-rate residential mortgage loans that it originates while retaining the servicing rights on such loans. At April 30, 1996, one- to four-family residential mortgage loans totalled $46.7 million, or 59.6% of the Savings
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001017958_rmh_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001017958_rmh_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b5bbbbc4c727651c8df335d655248dd4ba1d37c2
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements appearing elsewhere in this Prospectus. As used in this Prospectus, references to a fiscal year are to the Company's fiscal year ended September 30 of such year. THE COMPANY RMH Teleservices, Inc. (the "Company") is a leading provider of outbound teleservices to major corporations in the insurance and financial services industries. The Company distinguishes itself through its high quality service and disciplined management approach which has led to long-term client relationships and sustained profitable growth. The Company originated relationships with Mass Marketing Insurance Group ("MMIG"), J.C. Penney Life Insurance Company ("J.C. Penney"), AT&T/Universal Card Services ("AT&T") and Advanta Corp. ("Advanta") over five years ago. The Company's revenue and operating income, all of which has been generated internally, have increased 148% and 252%, respectively, over the last two years. The Company's revenue and operating income in fiscal 1995 were $25.5 million and $2.0 million, respectively, reflecting increases of 49% and 149% when compared to fiscal 1994. The Company's revenue and operating income in fiscal 1994 increased 66% and 41%, respectively, when compared to fiscal 1993. As a result of the payment of special bonuses, interest expense on the Founders' Note (as defined in "Certain Transactions -- Recapitalization") and an extraordinary charge, a net loss is expected for fiscal 1996. The Company, which has established inbound as well as outbound call center capabilities, recently began to capitalize on the increased demand for call center services by the telecommunications industry. The Company opened its eighth call center in April 1996 and currently operates 744 workstations. The Company intends to add a total of 48 additional workstations in three existing call centers and open a new call center with 80 workstations by the end of calendar 1996, for a total of 872 workstations. As of June 30, 1996, the Company employed 1,484 people, 184 of whom are licensed to sell insurance in a total of 41 states. According to Direct Marketing Magazine, the teleservices industry has grown from $34 billion in 1984 to approximately $77 billion in 1994, of which only a small percentage is currently being outsourced to independent providers. The rapid growth of the industry is primarily due to the increased cost-effectiveness of personalized teleservices programs over traditional marketing channels. Growth in the market for outsourced call center services is accelerating as large corporations focus on their core competencies and turn to independent providers with the industry expertise, sophisticated technology and resources to service their long-term needs efficiently. The Company believes that the demand for call center services will continue to increase in its core markets and will expand to include new industries and broader applications. The Company's objective is to become the leading national provider of outsourced teleservices. The Company intends to pursue this objective through the following operating and growth strategies. OPERATING STRATEGY. The Company selectively develops client relationships and concentrates on improving productivity through the following operating strategies: - Proactive Account Management. The Company focuses on developing long-term relationships with its clients and strengthening those relationships through its account management. As a result of taking this partnering approach, the Company believes that it is better able to improve service quality, predict revenues and maximize utilization of its facilities, equipment and personnel. - Innovative Human Resource Management. By hiring qualified applicants, training them effectively and providing an innovative compensation package that includes health insurance to qualifying full-time employees, the Company believes that it is able to increase employee retention, reduce recruiting and training expenditures and improve productivity. - Strategic Investments in Technology. The Company invests in proven state-of-the-art technologies and develops proprietary software to enhance efficiency and provide high quality services. - Systematic Call Center Site Selection. The Company takes a systematic approach to selecting call center locations to minimize operating costs and provide access to a quality labor force. To facilitate the management of each call center and to generate operational efficiencies, the Company's strategy is to locate its call centers in geographic clusters. GROWTH STRATEGY. The Company seeks to capitalize on its operational strengths to participate in the growth of the teleservices industry and the accelerating trend towards outsourcing among large corporations. The Company's growth strategy includes the following key elements: - Deploy a National Account Sales Team. In fiscal 1996, the Company initiated a national account sales program to focus its direct sales efforts on developing long-term relationships with the leading users of teleservices in targeted industries. - Expand Client Relationships in Core Industries. As a recognized provider of high quality services to the insurance and financial services industries, the Company seeks to expand its business with existing clients and to establish new relationships in these industries. - Increase Penetration of the Telecommunications Industry. The Company is targeting its sales efforts on the telecommunications industry to capitalize on that industry's rapid increase in demand for teleservices. The Company recently completed several programs for a major telecommunications client. - Expand Inbound Teleservices. In response to the increased demand for inbound teleservices and requests from existing clients, the Company intends to increase its inbound service offerings. The Company has developed an inbound customer service program for Blue Cross/Blue Shield of Florida for which it won the Gold Cup Award from Telemarketing Magazine in October 1995. - Expand Business-to-Business Teleservices. The Company is pursuing the growing opportunities for the development of long-term relationships and large-scale campaigns in the business-to-business segment. - Selectively Pursue Strategic Acquisitions. The Company intends to explore possible acquisitions of companies with demonstrated competencies and existing client relationships in areas of strategic interest to the Company. The Company was founded in 1983 by Raymond J. Hansell, Vice Chairman and Chief Executive Officer, and MarySue Lucci, Director, President and Chief Operating Officer (the "Founders"). In May 1996, the Company completed a leveraged recapitalization (the "Recapitalization") pursuant to which Advanta Partners LP ("Advanta Partners"), a venture capital affiliate of Advanta, became the largest equity holder of the Company. The Company completed the Recapitalization to permit Advanta Partners to invest substantial financial and other resources in the Company and to permit the Founders to realize a portion of the economic value of their initial investment in the Company. In connection with the Recapitalization (i) the Company redeemed 8,500,000 shares of Common Stock held by the Founders, (ii) Advanta Partners purchased 1,594,112 shares of Class A Common Stock, 1,279,573 shares of Class B Common Stock and 6,226,316 shares of the Company's Series B Preferred Stock (the "Series B Preferred Stock"), (iii) Glengar International Investments Limited ("Glengar") purchased 126,315 shares of Class A Common Stock and 273,684 shares of Series B Preferred Stock and (iv) the Company borrowed $11.2 million under a credit facility entered into with a bank. See "Certain Transactions -- Recapitalization." The Company is a Pennsylvania corporation and its principal business office is located at 40 Morris Avenue, Bryn Mawr, Pennsylvania 19010. Its telephone number is (610) 520-5300. THE OFFERING Common Stock offered by the Company.......................... 2,800,000 shares Common Stock to be outstanding after this offering.............. 7,700,000 shares(1) Use of Proceeds.................. To repay indebtedness incurred in connection with the Recapitalization; to redeem the Company's Series B Preferred Stock; to pay bonuses to the Founders pursuant to their employment agreements; and for working capital and other general corporate purposes, including possible future acquisitions. Proposed Nasdaq National Market symbol........................... RMHT - --------------- (1) Does not include 325,000 shares issuable upon exercise of stock options to be granted prior to the completion of this offering at the initial public offering price or 142,105 shares issuable upon exercise of an outstanding warrant at $.01 per share. SUMMARY FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30, JUNE 30, --------------------------------------------- ----------------- 1991 1992 1993 1994 1995 1995 1996 ------ ------ ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues.................................. $6,217 $6,988 $10,292 $17,105 $25,545 $18,447 $23,562 Operating income(1)....................... 426 371 574 812 2,023 1,726 2,430 Income before income taxes................ 297 246 437 642 1,762 1,544 2,055 Net income................................ 297 246 437 602 1,741 1,525 1,664 Pro forma net income(2)................... 1,048 1,136 Pro forma net income per share(2)......... $ 0.23 $ 0.24 Shares used in computing pro forma net income per share(2)..................... 4,642 4,642 Supplemental pro forma net income per share(2)................................ $ 0.18 $ 0.22 Shares used in computing supplemental pro forma net income per share(2)........... 6,682 6,682 OPERATING DATA (AT END OF PERIOD): Number of call centers.................... 2 2 4 5 6 6 8 Number of workstations.................... 184 200 328 392 472 456 744 </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 ------------------------- ACTUAL AS ADJUSTED(3) -------- -------------- <S> <C> <C> BALANCE SHEET DATA: Working capital............................................................. $ 820 $ 7,070 Total assets................................................................ 10,907 17,982 Long-term debt and capitalized lease obligations, less current maturities........................................................ 12,470 8 Founders' note.............................................................. 2,036 -- Redeemable Preferred and Common Stock and warrant........................... 7,654 -- Shareholders' equity (deficit).............................................. (16,640) 14,550 </TABLE> - --------------- (1) Operating income reflects Founders' compensation of $370,000, $308,000, $386,000, $660,000, and $766,000 for fiscal 1991, fiscal 1992, fiscal 1993, fiscal 1994 and fiscal 1995, respectively, and $554,000 and $512,000 for the nine months ended June 30, 1995 and 1996, respectively. Pursuant to employment contracts entered into in May 1996 in connection with the Recapitalization, Founders' compensation is fixed at a combined base amount of $400,000 per year for three years (subject to annual adjustment based on the inflation rate), plus a discretionary bonus which is not expected to exceed 20% of base compensation. (2) The Company operated as an S Corporation for income tax purposes since April 1, 1990 and terminated such status in connection with the Recapitalization. See "Certain Transactions -- Recapitalization" and Note 2 of Notes to Financial Statements for information concerning the computation of pro forma net income and pro forma and supplemental pro forma net income per share. (3) Adjusted to give effect to the exchange of Common Stock for the Founders' Note (as defined under "Certain Transactions -- Recapitalization") and the Company's Series A Preferred Stock, the elimination of the mandatory redemption provision of the Redeemable Common Stock and warrant and the sale by the Company of the 2,800,000 shares of Common Stock offered hereby (at an assumed initial public offering price of $12.50 per share) and the application of the estimated net proceeds therefrom as set forth in "Use of Proceeds." Except as otherwise indicated, all information in this Prospectus reflects the following transactions which will occur on or before the completion of this offering: (i) the issuance of 80,000 shares of Common Stock in exchange for all outstanding shares of the Company's Series A Preferred Stock (the "Series A Preferred Stock"); (ii) the issuance of 320,000 shares of Common Stock in exchange for the Founders' Note; and (iii) the issuance of 1,279,573 shares of Common Stock upon conversion of all outstanding shares of Class B Common Stock. See "Certain Transactions" and "Description of Capital Stock." The information in this Prospectus assumes that this offering is consummated at an initial public offering price of $12.50 per share. In addition, except as otherwise noted, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option, an outstanding warrant to purchase 142,105 shares of Common Stock or stock options to be granted prior to the completion of this offering to purchase 325,000 shares of Common Stock. See "Management -- 1996 Stock Incentive Plan," "Description of Capital Stock" and "Underwriting."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001018084_gray_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001018084_gray_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..234efb1522b03b62881985b1b1a5693f2c1937cb
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING INFORMATION IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. AS USED HEREIN, UNLESS THE CONTEXT OTHERWISE REQUIRES, THE "COMPANY" MEANS GRAY COMMUNICATIONS SYSTEMS, INC. AND ITS SUBSIDIARIES. THE COMPANY HAS NOT YET CONSUMMATED THE PHIPPS ACQUISITION (AS DEFINED) AND THERE CAN BE NO ASSURANCE THAT THE PHIPPS ACQUISITION WILL BE CONSUMMATED. HOWEVER, EXCEPT WITH RESPECT TO HISTORICAL FINANCIAL STATEMENTS AND UNLESS THE CONTEXT INDICATES OTHERWISE, THE PHIPPS BUSINESS (AS DEFINED) IS INCLUDED IN THE DESCRIPTION OF THE COMPANY. SEE "THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING." UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION GRANTED BY THE COMPANY TO THE UNDERWRITERS IN THE CONCURRENT OFFERING IS NOT EXERCISED. ALL INFORMATION IN THIS PROSPECTUS HAS BEEN ADJUSTED TO GIVE EFFECT TO A 3-FOR-2 SPLIT OF THE CLASS A COMMON STOCK, EFFECTED IN THE FORM OF A STOCK DIVIDEND DECLARED ON OCTOBER 2, 1995. UNLESS OTHERWISE INDICATED, ALL STATION RANK, IN-MARKET SHARE AND TELEVISION HOUSEHOLD DATA IN THIS PROSPECTUS ARE DERIVED FROM THE NIELSEN STATION INDEX, VIEWERS IN PROFILE, DATED NOVEMBER 1995, AS PREPARED BY A.C. NIELSEN COMPANY ("NIELSEN"). THE COMPANY The Company owns and operates seven network-affiliated television stations in medium-size markets in the southeastern United States, six of which are ranked number one in their respective markets (which includes two television stations that are part of the Phipps Business). Five of the stations are affiliated with the CBS Television Network, a division of CBS, Inc. ("CBS") and two are affiliated with the NBC Television Network, a division of the National Broadcasting Company, Incorporated ("NBC"). In connection with the Phipps Acquisition (described below), the Company will be required under current regulations of the Federal Communications Commission (the "FCC") to divest its NBC affiliates in Albany, Georgia and Panama City, Florida. For a discussion of the Company's plans regarding such divestiture, see "Risk Factors -- FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." The Company also owns and operates three daily newspapers, two weekly, advertising only publications ("shoppers"), and a paging business (which is part of the Phipps Business), all located in the Southeast. The Company derives significant operating advantages and cost saving synergies through the size of its television station group and the regional focus of its television and publishing operations. These advantages and synergies include (i) sharing television production facilities, equipment and regionally oriented programming, (ii) the ability to purchase television programming for the group as a whole, (iii) negotiating network affiliation agreements on a group basis and (iv) purchasing newsprint and other supplies in bulk. In addition, the Company believes that its regional focus can provide advertisers with an efficient network through which to advertise in the fast-growing Southeast. In 1993, after the acquisition of a large block of Class A Common Stock by a new investor, the Company implemented a strategy to foster growth through strategic acquisitions. Since 1994, the Company's significant acquisitions have included three television stations and two newspapers, all located in the Southeast. As a result of the Company's acquisitions and in support of its growth strategy, the Company has added certain key members of management and has greatly expanded its operations in the television broadcasting and newspaper publishing businesses. On September 10, 1996, J. Mack Robinson, a director of the Company, was appointed President and Chief Executive Officer of the Company on an interim basis, to succeed Ralph W. Gabbard, who had died suddenly. The Company expects to commence a search to locate a new President as soon as practicable following this Offering. On September 11, 1996, Robert S. Prather, Jr., a director of the Company, was appointed Executive Vice President-Acquisitions on an interim basis. In January 1996, the Company acquired (the "Augusta Acquisition") WRDW-TV ("WRDW"), a CBS affiliate serving Augusta, Georgia (the "Augusta Business"). In December 1995, the Company entered into an asset purchase agreement to acquire (the "Phipps Acquisition") two CBS-affiliated stations, WCTV-TV ("WCTV") serving Tallahassee, Florida/Thomasville, Georgia and WKXT-TV ("WKXT") in Knoxville, Tennessee, a satellite broadcasting business and a paging business (collectively, the "Phipps Business"). The Company believes that the Phipps Acquisition will further enhance the Company's position as a major regional television broadcaster and is highly attractive for a number of reasons, including (i) the stations' strategic fit in the Southeast, (ii) WCTV's leading station market position and WKXT's significant growth potential, (iii) strong station broadcast cash flows, (iv) opportunities for revenue growth utilizing the Company's extensive management expertise with medium-size stations and (v) opportunities for synergies between WCTV and WKXT and the Company's existing stations with regard to revenue enhancement and cost controls. The consummation of the Phipps Acquisition is currently expected to occur by September 30, 1996, although there can be no assurance with respect thereto. In August 1996, the Company sold the assets (the "KTVE Sale") of KTVE Inc. ("KTVE"), a television station serving Monroe, Louisiana/El Dorado, Arkansas for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing. For the year ended December 31, 1995, on a pro forma basis, the Company had net revenues, Media Cash Flow (the sum of broadcast cash flow, publishing cash flow and paging cash flow), operating cash flow and net (loss) of $90.6 million, $30.3 million, $28.1 million and $(3.6) million, respectively. For the six months ended June 30, 1996, on a pro forma basis, the Company had net revenues, Media Cash Flow, operating cash flow and net income of $47.3 million, $17.9 million, $16.3 million and $251,000, respectively. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the year ended December 31, 1995 increased 148.2%, 188.4% and 227.9%, respectively, while net income decreased 230.3% from the historical amounts for the year ended December 31, 1994. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the six months ended June 30, 1996 increased 67.1%, 114.7% and 122.8%, respectively, while net income decreased 78.7% from the historical amounts for the six months ended June 30, 1995. The Company's pro forma net income for its television stations for the year ended December 31, 1995 and for the six months ended June 30, 1996 was $1.6 million and $1.4 million, respectively. The following table sets forth certain information for each of the Company's television stations. <TABLE> <CAPTION> ------------------------------------------------------------------------------------------------------------------ PRO FORMA --------------------------------------- IN-MARKET YEAR ENDED DECEMBER SIX MONTHS ENDED STATION SHARE OF 31, 1995 JUNE 30, 1996 RANK HOUSEHOLDS ------------------- ------------------ NETWORK YEAR DMA CHANNEL/ IN VIEWING NET OPERATING NET OPERATING STATION AFFILIATION MARKET ACQUIRED RANK(1) FREQUENCY DMA(2) TV REVENUES INCOME(6) REVENUES INCOME(6) - -------- ------- ------------- ------- -------- --------- -------- --------- --------- -------- -------- -------- (IN THOUSANDS) (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> WKYT CBS Lexington, KY 1994 68 27/UHF(3) 1 33% $15,553 $5,247 $7,845 $2,701 WYMT CBS Hazard, KY 1994 68 57/UHF(3) 1(4) 24 3,721 831 2,107 530 WRDW CBS Augusta, GA 1996 111 12/VHF 1 36 8,888 1,853 4,489 1,149 WALB (5) NBC Albany, GA 1954 152 10/VHF 1 80 9,445 4,795 5,099 2,658 Panama City, WJHG (5) NBC FL 1960 159 7/VHF 1 53 3,843 270 2,409 476 PHIPPS ACQUISITION WKXT CBS Knoxville, TN 62 8/VHF 3 22 9,269 2,204 4,387 903 Tallahassee, WCTV CBS FL/ 116 6/VHF 1 60 11,862 4,229 6,212 2,254 Thomasville, GA </TABLE> - ------------------------------ (1) Ranking of designated market area as defined by Nielsen ("DMA") served by a station among all DMAs is measured by the number of television households within the DMA based on the November 1995 Nielsen estimates. (2) Represents station rank in DMA as determined by November 1995 Nielsen estimates of the number of television sets tuned to the Company's station as a percentage of the number of television sets in use in the market for the Sunday through Saturday 6 a.m. to 2 a.m. time period. (3) All stations in the market are UHF stations. (4) The market area served by WYMT is an 18-county trading area, as defined by Nielsen, and is included in the Lexington, Kentucky DMA. WYMT's station rank is based upon its position in the 18-county trading area. (5) The Company will be required under current FCC regulations to divest WALB and WJHG in connection with the Phipps Acquisition. For a discussion of the Company's plans, see "Risk Factors-FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." (6) Represents pro forma income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes. The Company's three newspapers, THE ALBANY HERALD, THE ROCKDALE CITIZEN and the GWINNETT DAILY POST and two shoppers had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $21.9 million and $660,000, respectively, for the year ended December 31, 1995, and $11.3 million and $1.3 million for the six months ended June 30, 1996, respectively. The satellite broadcasting business and paging business, which are a part of the Phipps Business, had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $6.2 million and $542,000 for the year ended December 31, 1995 and $3.5 million and $467,000 for the six months ended June 30, 1996, respectively. BUSINESS STRATEGY The Company's business strategy includes the following key elements: - STRONG LOCAL PRESENCE. Each of the Company's television stations seeks to achieve a distinct identity through its emphasis on local programming. A key objective is to build audience loyalty through the development of a strong local news franchise. Strong local news generates high viewership and results in higher ratings for programs both preceding and following the news, which increases revenues and Media Cash Flow. - REGIONAL FOCUS. The Company believes its regional focus has competitive advantages, including the ability to purchase and produce programming that can be used by multiple Company-owned stations as well as the opportunity to sell advertising on multiple stations as a single buy. In addition, the proximity of the Company's operations allows the sharing of equipment, management and marketing expertise. - TARGETED MARKETING. The Company seeks to increase its advertising revenues and Media Cash Flow by expanding existing relationships with local and national advertisers and by attracting new advertisers through targeted marketing techniques and carefully tailored programming. The Company works closely with advertisers to develop advertising campaigns that match specifically targeted audience segments including sponsoring and staging various special events such as fishing tournaments, boat shows and bridal expositions. - COST CONTROLS. Through its strategic planning and annual budgeting processes, the Company continually seeks to identify and implement cost savings opportunities at each of its stations and publications in order to increase Media Cash Flow. The Company's ownership of multiple stations and publications also benefits each operation in negotiating favorable terms with programming syndicators, newsprint suppliers, national sales representatives and other vendors. - SELECTIVE ACQUISITIONS. The Company has focused on acquiring television stations where the Company believes there is the potential for improvements in revenue share, audience share and cost control. The Company focuses on southeastern markets of medium size because the Company believes these markets offer superior opportunities in terms of projected population and economic growth, leading to higher advertising and circulation revenues. In assessing acquisitions, the Company targets stations and publications where it sees specific opportunities for revenue enhancement while controlling expenditures, utilizing management's significant experience with local and national advertising sales and in operating similar businesses. In appropriate circumstances, the Company will dispose of assets that it deems non-essential to its operating or growth strategy. THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING The Company has entered into an agreement to acquire WCTV and WKXT, a satellite broadcasting business and a paging business in the Southeast. The purchase price for the Phipps Acquisition is approximately $185 million, including fees, expenses and working capital and other adjustments. The consummation of the Phipps Acquisition is expected to occur by September 30, 1996, although there can be no assurance with respect thereto. See "Risk Factors -- Possible Non-Consummation of the Phipps Acquisition." Pursuant to an agreement, dated as of May 15, 1996 (the "KTVE Agreement"), with GOCOM Television of Ouachita, L.P., in August 1996, the Company sold the assets of KTVE for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing (approximately $870,000), to the extent collected by the buyer, to be paid to the Company 150 days following the date of closing. For the year ended December 31, 1995, KTVE had net revenues, Media Cash Flow and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) of $4.2 million, $916,000 and $437,000, respectively, and $2.3 million, $598,000 and $360,000, respectively, for the six months ended June 30, 1996. The Company estimates that the gain, net of estimated taxes, on the KTVE Sale was approximately $2.8 million. In addition to the KTVE Sale and the consummation of this Offering, the Concurrent Offering and the Phipps Acquisition, the Company intends to implement a financing plan (the "Financing") to increase liquidity and improve operating and financial flexibility. Pursuant to the Financing, the Company will (i) retire approximately $49.5 million aggregate principal amount of outstanding indebtedness under its senior secured bank credit facility (the "Old Credit Facility"), together with accrued interest thereon, (ii) retire approximately $25.0 million aggregate principal amount of outstanding indebtedness under its senior note due 2003 (the "Senior Note"), together with accrued interest thereon and a prepayment fee, (iii) issue $10.0 million liquidation preference of its Series A preferred stock (the "Series A Preferred Stock") in exchange for its outstanding $10.0 million aggregate principal amount 8% subordinated note (the "8% Note") issued to Bull Run Corporation ("Bull Run"), a principal shareholder of the Company, (iv) issue to Bull Run, J. Mack Robinson, the President, Chief Executive Officer and a director of the Company, and certain of his affiliates $10.0 million liquidation preference of its Series B preferred stock (the "Series B Preferred Stock" and together with the Series A Preferred Stock, the "Preferred Stock") with warrants to purchase up to 500,000 shares of Class A Common Stock (representing 10.1% of the currently issued and outstanding Class A Common Stock after giving effect to the exercise of such warrants) for cash proceeds of $10.0 million and (v) enter into a new senior secured bank credit facility (the "Senior Credit Facility") to provide for a term loan and revolving credit facility aggregating $125.0 million. The cash required for the consummation of the Phipps Acquisition, the repayment of indebtedness and related transaction costs will be provided by the net proceeds of this Offering, the Concurrent Offering and the sale of the Series B Preferred Stock and the warrants, borrowings under the Senior Credit Facility and the Company's working capital. For a description of the Senior Credit Facility and the Preferred Stock, see "Description of Certain Indebtedness" and "Management--Compensation Committee Interlocks and Insider Participation-Issuances of Preferred Stock." The consummation of this Offering and the placement of funds into escrow are conditioned upon the issuance of the Series A Preferred Stock in exchange for the 8% Note, the issuance of the Series B Preferred Stock and the entering into of the Senior Credit Facility. The consummation of this Offering and the placement of the net proceeds thereof into escrow are not conditioned upon the consummation of the Concurrent Offering or the Phipps Acquisition or the other elements of the Financing. However the release of the net proceeds hereof from escrow is conditioned, among other things, upon the satisfaction of the Minimum Equity Condition, the retirement of the Senior Note and the Old Credit Facility and the consummation of the Phipps Acquisition. The Notes are subject to a mandatory redemption on the Special Redemption Date at the Special Redemption Price if either the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996. See "Description of the Notes-Redemption-Special Redemption." The Senior Credit Facility will provide that no borrowings may be made thereunder until the closing of the Phipps Acquisition. Accordingly, if the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied, the Notes will be redeemed by the Company, the Old Credit Facility will remain in place and the Company will not borrow under the Senior Credit Facility. The following table sets forth the estimated sources and uses of funds relating to this Offering, the Concurrent Offering, the Phipps Acquisition and the Financing: <TABLE> <CAPTION> ---------- (IN MILLIONS) AMOUNT ---------- <S> <C> SOURCES OF FUNDS: The Notes offered hereby $160.0 The Concurrent Offering (1) 73.5 Sale of Series B Preferred Stock and Warrants 10.0 Borrowings under the Senior Credit Facility 22.9 Working capital (2) 9.5 ---------- TOTAL $275.9 ---------- ---------- USES OF FUNDS: Consummation of Phipps Acquisition $185.0 Retire indebtedness under the Old Credit Facility (3) 49.5 Retire indebtedness under the Senior Note (4) 25.0 Fees and expenses (5) 16.4 ---------- TOTAL $275.9 ---------- ---------- </TABLE> - ------------------------------ (1) Assumes estimated gross proceeds from the Concurrent Offering of $73.5 million and estimated net proceeds therefrom of $67.6 million. It is a condition of the release from escrow of the net proceeds of this Offering that the Company shall have consummated one or more equity offerings having gross proceeds of not less than $65.0 million. To the extent that the gross proceeds of any such equity offerings are less than $73.5 million, the Company intends to borrow such difference under its Senior Credit Facility. It is anticipated that there will not be a significant interval between the closing of this Offering and the closing of the Concurrent Offering. (2) The source of these funds was the KTVE Sale. (3) Borrowings under the Old Credit Facility bear interest at formula rates based upon the applicable London inter-bank offered rate ("LIBOR") or prime rate at the time of borrowing plus a fixed spread and have a final maturity of 2003. As of June 30, 1996, the weighted average interest rate was 8.94%. (4) The indebtedness under the Senior Note bears interest at 10.7%. (5) Fees and expenses include underwriting costs for the Notes and the Concurrent Offering, fees payable in connection with the negotiation and execution of the Senior Credit Facility, fees payable in connection with the retirement of the Senior Note and legal, accounting and other transaction fees. Prior to the consummation of the Phipps Acquisition and the satisfaction of the Minimum Equity Condition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes. The Trust Funds will be invested in cash equivalents. The proceeds of the Concurrent Offering will be used to repay indebtedness under the Old Credit Facility, to retire the Senior Note and to provide funds for the Phipps Acquisition. THE OFFERING <TABLE> <S> <C> SECURITIES OFFERED.......................... $160,000,000 aggregate principal amount of % Senior Subordinated Notes due 2006. MATURITY DATE............................... , 2006. INTEREST PAYMENT DATES...................... and , commencing , 1997. SPECIAL REDEMPTION BY THE COMPANY........... If the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996, the Company will be required to redeem (the "Special Redemption") the Notes on or prior to December 31, 1996 (the "Special Redemption Date") at a redemption price (the "Special Redemption Price") equal to 101% of the principal amount of the Notes plus accrued and unpaid interest to the Special Redemption Date. At any time prior to December 23, 1996, if the Phipps Acquisition has not been consummated or the Minimum Equity Condition is not satisfied, the Company may, at its option, redeem the Notes, in whole but not in part, at a redemption price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date fixed for redemption. Prior to the consummation of the Phipps Acquisition and the satisfaction of the Minimum Equity Condition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes and the obligation of the Company to consummate the Special Redemption will be secured by such funds (the "Trust Funds"). </TABLE> <TABLE> <S> <C> OPTIONAL REDEMPTION BY THE COMPANY.......... The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after , 2001, at the redemption prices set forth herein, plus accrued and unpaid interest to the date fixed for redemption. In addition, at any time prior to , 1999, the Company, at its option, may redeem up to 35% of the aggregate principal amount of the Notes originally issued with the cash proceeds received by the Company from one or more Public Equity Offerings, other than the Concurrent Offering, at any time or from time to time, at a redemption price equal to % of the principal amount thereof, plus accrued and unpaid interest to the date fixed for redemption; PROVIDED, HOWEVER, that at least $104.0 million in aggregate principal amount of the Notes remain outstanding immediately after any such redemption. CHANGE OF CONTROL OFFER..................... Upon a Change of Control, the Company has the obligation to offer to purchase all the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. See "Description of the Notes -- Change of Control" for a discussion of the circumstances in which the Company may not be required to make a Change of Control Offer (as defined). OFFERS TO PURCHASE.......................... In the event of certain asset sales, the Company will be required to offer to repurchase the Notes at 100% of their principal amount plus accrued and unpaid interest, if any, to the date of repurchase with the net proceeds of such asset sales. SUBORDINATION............................... The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company, including all indebtedness of the Company under the Senior Credit Facility. As of June 30, 1996, on a pro forma basis after giving effect to this Offering, the Concurrent Offering, the KTVE Sale, the Financing and the application of the net proceeds therefrom, and to the Phipps Acquisition, the Company would have had approximately $183.6 million of indebtedness outstanding, of which $23.6 million would be Senior Debt. SUBSIDIARY GUARANTEES....................... The Notes will be guaranteed, jointly and severally, fully and unconditionally, on a senior subordinated basis by the Subsidiary Guarantors (the "Subsidiary Guarantees"). The obligations of any Subsidiary Guarantor with respect to its Subsidiary Guarantee will be subordinated in right of payment, to the same extent as the obligations of the Company in respect of the Notes, to all existing and future Guarantor Senior Debt of such Subsidiary Guarantor, which will include any guarantee by such Subsidiary Guarantor of the Company's indebtedness under the Senior Credit Facility. </TABLE> <TABLE> <S> <C> PRINCIPAL COVENANTS......................... The Indenture for the Notes (the "Indenture") will impose certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt or Guarantor Senior Debt and senior in right of payment to the Notes or any Subsidiary Guarantee, incur liens, impose restrictions on the ability of a subsidiary to pay dividends or make certain payments to the Company, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. USE OF PROCEEDS............................. The Company intends to use the proceeds from the sale of the Notes, together with the proceeds of the Concurrent Offering, the other proceeds of the Financing and the Company's working capital, to (i) consummate the Phipps Acquisition, (ii) retire indebtedness under the Old Credit Facility and the Senior Note and (iii) pay related fees and expenses. However, in the event the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996, the Company will be obligated to redeem the Notes. See "The Phipps Acquisition, the KTVE Sale and the Financing" and "Description of the Notes-Redemption-Special Redemption."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001018090_cii_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001018090_cii_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the detailed information and financial statements, including the notes thereto, contained elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus (i) gives effect to a 2.5-for-1 stock split of each share of the Company's Common Stock to be effected prior to consummation of the Offering; (ii) assumes the Kilovac Share Exchange and the Preferred Exchange (as described under "Certain Relationships and Related Transactions-- Kilovac Acquisition" and "--Preferred Exchange") have been completed; and (iii) assumes the Underwriters' over-allotment option is not exercised. See "Underwriting." Unless otherwise indicated, all amounts and statistical information presented herein for fiscal 1995, other than financial statement information and information contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations," is presented on a pro forma basis after giving effect to the acquisitions of Kilovac Corporation ("Kilovac") and the Hartman Electrical Manufacturing Division (the "Hartman Division" or "Hartman") of Figgie International, Inc. ("Figgie"). Unless the context otherwise specifically requires, references to the "Company" include CII Technologies Inc. and its consolidated operating subsidiaries, together with the historical business and operations undertaken by Communications Instruments, Inc. (the "Predecessor"). THE COMPANY The Company is a leading designer, manufacturer and marketer of a broad line of high performance electromechanical and electronic products and solenoids for customers in the commercial/industrial equipment, commercial airframe, defense/aerospace, communications, automatic test equipment and automotive industries. The Company's relays are used to control current or signals in electrical and electronic circuits and are technological building blocks for a wide range of products. While the Company is a broad-based supplier of general and special purpose relays and solenoids, it has focused on manufacturing high performance relay products and targeting customized applications of these products to meet the needs of the markets it serves. The Company's high performance relays are sophisticated, complex devices that have been engineered for highly reliable performance over substantial periods of time, often in adverse operating environments. The Company sells its products to more than 2,100 customers, including Boeing, AT&T, Rockwell, Hewlett Packard, McDonnell Douglas and General Motors. To further penetrate and expand the size and number of markets that it serves, the Company seeks to leverage its broad product offering, its reputation for quality, innovation and technological leadership, its diverse and efficient manufacturing capabilities and its wide and diversified customer base. In addition, the Company's successful implementation of its acquisition strategy and integration of acquired companies and product lines into its operations have produced significant growth in the Company's revenues. Since its inception in 1980, the Company has completed 13 acquisitions for an aggregate consideration of approximately $36.0 million. In October 1995 the Company acquired Kilovac (the "Kilovac Acquisition") and in July 1996 the Company completed the acquisition of the Hartman Division (the "Hartman Acquisition"). Net sales of Kilovac and Hartman for 1995 represented 21.5% and 25.5%, respectively, of the Company's pro forma net sales for 1995. The Company believes that these acquisitions have enabled it to become one of the five largest relay manufacturers in North America. The Company plans to enhance its growth by strategically acquiring product lines and manufacturing operations to obtain new product capabilities and technologies, to further increase market penetration with both existing and new customers, and to expand manufacturing and assembly capabilities. Electromechanical and electronic products (which are used to direct and control electrical currents and signal transmissions) and solenoids (which are used to convert electrical energy into mechanical motion) have a myriad of commercial and industrial applications. The Company currently manufactures and assembles more than 750 types of relays and solenoids and believes that it has one of the largest and most diverse product portfolios of any manufacturer in its industry. The Company believes that its sales as a sole source supplier of high performance relays and solenoids represented approximately 53% of its net sales for 1995. The Company currently manufactures high performance relays at its four facilities in the United States and general purpose relays at its facility in Mexico. The Company also maintains several subcontracting relationships with manufacturers in the People's Republic of China, and the Company has entered into a joint venture in India which has recently commenced construction of a manufacturing facility. The Company believes that its domestic and international manufacturing capabilities allow it to provide to its customers high quality products at globally competitive prices. THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Company............ 3,500,000 shares Common Stock to be Outstanding After the Offering............... 6,862,500 shares (1) Use of Proceeds......... Repayment of indebtedness and redemption of preferred stock. See "Use of Proceeds." Nasdaq National Market Symbol................. CIIT </TABLE> - -------- (1) Includes (i) 250,000 shares to be issued upon the completion of this Offering to CII Associates, L.P., (the "Partnership") (assuming an initial public offering price of $8.00 per share) in exchange for the surrender by the Partnership of shares of the Company's Preferred Stock having an aggregate liquidation preference at the date of exchange of $2.0 million (the "Preferred Exchange") and (ii) 562,500 shares anticipated to be issued upon the completion of this Offering as part of the Kilovac Share Exchange, assuming an initial public offering price of $8.00 per share. The actual number of shares issuable in the Preferred Exchange and the Kilovac Share Exchange will be calculated by dividing $2.0 million and $4.5 million, respectively, by the initial public offering price per share in the Offering. See "Certain Relationships and Related Transactions--Kilovac Acquisition and "--Preferred Exchange". Excludes 100,000 shares reserved for issuance upon the exercise of options to be granted under the Company's 1996 Management Stock Plan at or about the time of the Offering.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001018099_millennium_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001018099_millennium_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and is subject to, the more detailed information and financial statements and notes thereto contained elsewhere in this Prospectus. In this Prospectus, (i) unless otherwise indicated, the terms 'Millennium' or 'the Company' refer collectively to Millennium Chemicals Inc. and its consolidated subsidiaries and the terms 'Millennium America' or 'the Issuer' refer collectively to Millennium America Inc. and its consolidated subsidiaries; (ii) references to the activities of, and financial information with respect to, the Company prior to October 1, 1996 are to the historical activities and combined historical financial information of the chemicals business (the 'Chemicals Business') and certain building materials and materials handling businesses (the 'Discontinued Businesses') of Hanson PLC ('Hanson') that were transferred to the Company by Hanson in connection with the demerger (i.e., spin-off) of the Chemicals Business by Hanson on that date (the 'Demerger'); (iii) the term 'Non-Chemical Businesses' refers to businesses and assets of Hanson that were intended to remain with Hanson (including, but not limited to, the Discontinued Operations), but which, prior to commencement of the Demerger Transactions (as defined), were owned by Hanson subsidiaries that were to become subsidiaries of the Company upon the Demerger; (iv) the term 'Demerger Transactions' refers to the series of transactions undertaken to effect the Demerger, including the sale of the Non-Chemical Businesses (other than the Discontinued Operations) to Hanson on September 30, 1996 and the sale of the Discontinued Businesses to Hanson on October 6, 1996; (v) the term 'Suburban Propane' refers to the propane operations of the Chemicals Business, which were transferred to Suburban Propane Partners, L.P. ('Suburban Propane Partners') in contemplation of its initial public offering of a 73.6% equity interest therein in March 1996; (vi) pro forma information gives effect to the Demerger Transactions, this Offering and the Tender Offer referred to below; (vii) references to '1995' and subsequent years are to the applicable calendar year ended December 31, reflecting the fact that the Company adopted a December 31 fiscal year-end effective as of January 1, 1995, and references to 'fiscal' 1994 and earlier years are to the applicable fiscal year ended September 30; and (viii) references to 'tonnes' are to metric tons, equal to 1,000 kilograms or 2,204.6 pounds. MILLENNIUM CHEMICALS INC. The Company is a major international chemicals company, with leading market positions in a broad range of commodity, industrial, performance and specialty chemicals. In 1995, the Company had pro forma net sales of approximately $3.2 billion and pro forma operating income of $776 million; for the nine months ended September 30, 1996, the Company had pro forma net sales of approximately $2.3 billion and pro forma operating income of $197 million (including $75 million of non-recurring charges relating to the Company's sulfate-process titanium dioxide operations). At September 30, 1996, the Company had pro forma total assets of approximately $5.5 billion. Through its operating subsidiaries, Quantum Chemical Corporation ('Quantum Chemical'), SCM Chemicals Inc. and its non-U.S. affiliates (collectively, 'SCM Chemicals') and Glidco Inc. ('Glidco'), the Company is: The largest producer of polyethylene products in the United States; The second largest producer of titanium dioxide ('TiO2') in the United States and the third largest producer of TiO2 in the world; The second largest producer of acetic acid and vinyl acetate monomer in the United States; A leading producer of high value-added specialty polymers, color concentrates and polymeric powders, and of titanium tetrachloride, cadmium/selenium pigments and silica gel; and A leading producer of fragrance and flavor chemicals derived from crude sulfate turpentine. In addition, a wholly-owned subsidiary of Quantum Chemical serves as the general partner of Suburban Propane Partners, a publicly traded limited partnership which, through an operating partnership, is the third largest retail marketer of propane in the United States. Quantum Chemical owns a 2% general partnership interest and an approximate 24% subordinated limited partnership interest, each on a combined basis, in these partnerships. The Company accounts for its interest in Suburban Propane Partners as a 26.4% equity investment. The Company has been an independent, publicly owned company since October 1, 1996, when, in consideration for Hanson's transfer to it of the Chemicals Business, the Company issued to Hanson's shareholders all of its then outstanding Common Stock. On October 6, 1996, the Company sold the Discontinued Businesses to Hanson and subsequently repaid all outstanding indebtedness to Hanson. At September 30, 1996, after giving pro forma effect to the Demerger Transactions, the Company had consolidated indebtedness of approximately $2.5 billion, including approximately $1.0 billion accreted value of the Issuer's 2.39% Senior Exchangeable Discount Notes Due 2001 (the 'Pre-Demerger Notes'). The Demerger resulted in a change-in-control of the Issuer within the meaning of the indenture governing the Pre-Demerger Notes. Accordingly, on October 18, 1996, the Issuer commenced an offer to purchase any and all of the outstanding Pre-Demerger Notes (the 'Tender Offer') for cash equal to 101% of the accreted value of the Pre-Demerger Notes plus accrued interest (the 'Repurchase Price'). The Tender Offer will expire on December 17, 1996 unless required by applicable law to be extended. If all outstanding Pre-Demerger Notes are tendered and repurchased pursuant to the Tender Offer on that date, the Repurchase Price will be approximately $1.1 billion. The Issuer will use the net proceeds of the Offering, to the extent necessary, to pay the Repurchase Price. Additional funds will be borrowed under the Issuer's credit facility with a syndicate of banks (the 'Credit Facility'), if the net proceeds from the Offering are not sufficient to repurchase all Pre-Demerger Notes tendered pursuant to the Tender Offer. See 'Use of Proceeds.' The Company's strategy is to maximize long-term cash flow and thereby create value through improved efficiency at existing operations, disciplined capital expenditures, selective dispositions, selective acquisitions of other chemical businesses and reduction of leverage. In addition to building upon its leading market positions in existing lines of business, the Company will seek to expand its operations worldwide, focus its production on more profitable value-added products and increase the proportion of its businesses that are less cyclical in nature. The Company emphasizes stock ownership by management and links a significant portion of management's compensation to the achievement of performance targets, including targets based on 'economic value added' concepts and the Company's performance relative to its industry peers. See 'Business -- Strategy.' The Company's principal executive offices are located at 99 Wood Avenue South, Iselin, New Jersey 08830, and its United States telephone number is (908) 603-6600. The Company also has executive offices located at Laporte Road, Stallingborough, Grimsby, North East Lincolnshire, DN40 2PR, England, and its United Kingdom telephone number is 01469-57-1000. MILLENNIUM AMERICA INC. The Issuer, an indirect wholly-owned subsidiary of the Company, is a Delaware corporation organized in November 1980. It is a holding company for all of the Company's operating subsidiaries other than the non-U.S. affiliates of SCM Chemicals. In addition, it is the issuer of the Pre-Demerger Notes and a borrower under the Credit Facility. For the nine months ended September 30, 1996, the Issuer had net sales of approximately $2.0 billion and operating income of $156 million (including $57 million of the non-recurring charges relating to the Company's sulfate-process TiO2 operations). At September 30, 1996, the Issuer had pro forma total assets of approximately $5.1 billion. For the nine months ended September 30, 1996, the non-U.S. affiliates of SCM Chemicals, which are the only operating subsidiaries of the Company that are not subsidiaries of the Issuer, had net sales of approximately $291 million and operating income of $49 million (including the remaining $18 million of the non-recurring charges). At September 30, 1996, the non-U.S. affiliates of SCM Chemicals had pro forma total assets of approximately $377 million. The Issuer's principal executive offices are located at 99 Wood Avenue South, Iselin, New Jersey 08830, and its telephone number at that address is (908) 603-6600. THE OFFERING <TABLE> <S> <C> Securities Offered........................... $ aggregate principal amount of % Senior Notes due November , 2006. $ aggregate principal amount of % Senior Debentures due November , 2026. Issuer....................................... Millennium America Inc. Guarantor.................................... Millennium Chemicals Inc. Interest Payment Dates....................... Semi-annually on and , commencing , 1997. Optional Redemption.......................... The Securities will not be redeemable prior to maturity (except for redemption at the option of the Issuer in the event of certain changes involving taxation). </TABLE> <TABLE> <S> <C> Mandatory Sinking Fund....................... None Ranking and Holding Company Structure........ The Securities and the Guarantees will be unsecured senior obligations of the Issuer and the Company, respectively, and will rank pari passu with all other existing and future unsecured and unsubordinated indebtedness of, and will be senior in right of payment to all subordinated indebtedness of, the Issuer and the Company, respectively. The Securities and the Guarantees will be effectively subordinated to (i) all existing and future secured indebtedness of the Issuer and the Company, to the extent of the value of the assets securing such indebtedness, (ii) all existing and future indebtedness (including guarantees) of any subsidiaries of the Issuer and of the Company (other than the Issuer) and (iii) all existing and future guarantees by subsidiaries of the Issuer and of the Company (other than the Issuer) of the Issuer's and the Company's indebtedness. At September 30, 1996, on a pro forma basis after giving effect to the Demerger Transactions, the Tender Offer and the Offering, the Issuer (on a consolidated basis) had indebtedness of approximately $2.5 billion, of which $51 million represented indebtedness of its subsidiaries. The Company (on a consolidated basis) had additional indebtedness of $40 million, all of which represented indebtedness of subsidiaries other than the Issuer and its subsidiaries. See 'Risk Factors -- Limited Operating History as an Independent Company; Significant Leverage,' 'Unaudited Pro Forma Combined Financial Data,' 'Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources' and 'Description of the Securities -- Ranking.' Certain Covenants............................ The Indenture under which the Securities will be issued (the 'Indenture') will contain certain covenants that limit, among other things, (i) the ability of the Issuer and the Restricted Subsidiaries (as defined) to grant liens or enter into sale and lease-back transactions, (ii) the ability of the Restricted Subsidiaries to incur additional indebtedness, and (iii) the ability of the Issuer and the Company to merge, consolidate or transfer substantially all of their respective assets. See 'Description of the Securities -- Restrictive Covenants' and ' -- Consolidation, Merger and Certain Sales of Assets.' Use of Proceeds.............................. The net proceeds from the Offering, after deducting the estimated underwriting discounts and expenses, are estimated to be approximately $ million. The Issuer intends to use such net proceeds, to the extent necessary, to pay the Repurchase Price for Pre-Demerger Notes tendered pursuant to the Tender Offer. Additional funds will be borrowed under the Credit Facility if the net proceeds from the Offering are not sufficient to repurchase all Pre-Demerger Notes tendered pursuant to the Tender Offer. See 'Use of Proceeds.'
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001018149_koll-real_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001018149_koll-real_prospectus_summary.txt
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+SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements (including the notes thereto) appearing elsewhere in this Prospectus. Unless otherwise indicated, as used in this Prospectus (i) the term "KRES" refers to Koll Real Estate Services, a Delaware corporation, the terms "KMS" and "Predecessor Company" refer to Koll Management Services, Inc., a Delaware corporation and wholly-owned subsidiary of KRES, and its subsidiaries, and the term "Company" refers to KRES and KMS and its subsidiaries, and, with respect to periods prior to its acquisition by KRES, to KMS and its subsidiaries, (ii) all information assumes that the over-allotment option granted to the Underwriters has not been exercised and is not adjusted to reflect a -for- stock split to be effected prior to the consummation of the Offering and (iii) all references to a fiscal year shall mean the fiscal year of the Company in which such year concludes (for example, the fiscal year commencing April 1, 1995 and ending March 31, 1996 is referred to herein as fiscal 1996). This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors." THE COMPANY The Company is a fully-integrated real estate services company that provides property, facility and investment management services to institutional and corporate owners of and investors in commercial real estate in the United States and Asia. The Company's services include (i) property and facilities management and leasing services for approximately 1,740 commercial properties containing approximately 149 million square feet and over 19,000 tenants, (ii) investment management for asset portfolios consisting primarily of commercial real estate investments, which had an aggregate cost basis of approximately $2.0 billion as of June 30, 1996 and (iii) a variety of related services which provide the Company's clients with "one-stop shopping" throughout the ownership of their real estate investments. The Company's approximately 2,600 employees provide these services through a network of 279 offices located in 22 out of the 25 largest Metropolitan Statistical Areas ("MSAs") in the United States and in five major cities in Asia. According to Commercial Property News' 1996 Annual Survey of Property Managers, the Company is one of the ten largest commercial property management companies in the United States. Since fiscal 1992, the Company has implemented an aggressive growth strategy through acquisitions, capitalizing upon its extensive real estate capabilities, property and facilities management experience and reputation as a quality service provider. From fiscal 1992 through fiscal 1996, the Company (i) increased the total square footage it manages or leases from approximately 38 million square feet to approximately 149 million square feet, (ii) established the Investment Management Division, which raised and invested approximately $585 million in fiscal 1996, and (iii) developed numerous related services which have been cross-marketed to the Company's existing and new clients. The Company's revenue increased at a compound annual rate of approximately 42% from $29.1 million for fiscal 1992 to $119.7 million for fiscal 1996 and the Company's EBITDA (as defined herein) increased at a compound annual rate of approximately 39% from $4.8 million to $17.7 million for the same periods. The Company believes that its primary competitive advantages for continued growth in the consolidating real estate services industry include its (i) ability to offer customers comprehensive, high-quality services at competitive prices in multiple geographic markets, (ii) large-scale operations, with the appropriate corporate infrastructure to assimilate additional acquisitions, (iii) ability to capitalize on the "Koll" name, which the Company believes is widely recognized and respected in the real estate services industry, (iv) innovative approach to developing new services in response to perceived market demands, (v) experienced management team, the executive officers and key employees of which have an average tenure of over 20 years in the real estate services industry and who, after the Offering, will collectively own % of the Company's Common Stock (assuming exercise of outstanding performance stock options) and (vi) access to capital to fund continued internal growth and acquisitions. The Company's growth strategy has focused on the acquisition of regional property management companies in strategically-targeted markets, investment management companies and other complementary service providers. Since fiscal 1992, the Company has completed 21 acquisitions for an aggregate purchase price of approximately $43 million, and currently has five acquisitions pending, all of which are listed below: PROPERTY AND CORPORATE SERVICES DIVISION (1) <TABLE> <CAPTION> SQUARE FEET MANAGED AT DATED DATE OF GEOGRAPHIC ACQUIRED ACQUISITION ACQUISITION MARKET SERVED -------- ----------- ------------- -------------- (IN MILLIONS) <C> <C> <C> <S> Pending Property Management and Brokerage Company.................................. 5.5 California, Oregon and Washington Pending Leasing and Brokerage Company (2)......... -- Southern California Pending Relocations, Inc. (3)..................... -- China Pending PT IPAC Propertindo (4)................... 1.7 Indonesia Pending The Landmark Property Corporation (5)..... 3.0 Hawaii 7/96 Total Employee Relations, Inc. (6)........ -- United States 10/95 Bridgewood Properties..................... 1.8 New Jersey 7/95 The Shelard Group, Inc. .................. 7.9 Minnesota 4/95 Jones & Company........................... 1.0 Kansas and Missouri 3/95 Ross-Dove Company, Inc. (7)............... -- International 1/95 CBS Investment Realty, Inc. .............. 19.2 Southwestern and Western U.S. 10/94 Midstates Management Company, Inc. ....... 3.6 Illinois 2/94 Karsten Realty Advisors (8)............... 2.0 Southwestern, Western and Eastern U.S. 2/94 The Peregrine White Company, Inc. (9)..... -- Eastern U.S. 2/94 Bonutto-Hofer Investments (8)............. 0.6 Western U.S. 7/93 Rubloff Inc. ............................. 32.0 Midwestern, Southern, Central and Southeastern U.S. 1/93 Tishman Midwest Management Corp. ......... 2.2 New York 9/92 The Swearingen Management Company, Inc. .. 4.1 Texas 2/92 Sunwest Asset Management.................. 4.8 California 1/92 CC&F Asset Management Co., Inc. (10). .... 13.9 New England, Illinois 7/91 Tipton Associates, Inc ................... 1.3 Ohio 4/91 Linclay................................... 1.3 Ohio 4/91 Shannon Management Services, Inc. ........ 1.8 Texas </TABLE> (footnotes on following page) INVESTMENT MANAGEMENT DIVISION <TABLE> <CAPTION> ASSETS UNDER MANAGEMENT AT DATED DATE OF ACQUIRED ACQUISITION ACQUISITION SERVICES ACQUIRED - -------- ----------- ------------- ----------------- (IN MILLIONS) <S> <C> <C> <C> 4/95 National Real Estate Index.......... $ 5 Real estate research & publishing, investment management 5/94 Dover Retail Properties, Inc. (11).. -- Investment and property management 2/94 Karsten Realty Advisors (8)......... $637 Investment and property management 2/94 Bonutto-Hofer Investments (8)....... $351 General partner services 4/93 D.A. Management, Inc. .............. $ 59 Investment management </TABLE> - -------- (1) Unless otherwise noted, the entities listed below provide property and/or facilities management or related services. (2) Provides leasing and sales brokerage and consulting services for retail real estate. (3) Provides relocation services to employees of multinational corporations relocating to Hong Kong and China. (4) Pending acquisition of a 50% interest. (5) Pending acquisition of a 99.8% interest. (6) Provides employee relations consulting. (7) Acquisition of a 50.1% interest. Provides capital asset disposition services. (8) Both property management and investment management contracts were included as part of this acquisition. (9) Provides leasing and tenant representation services. (10) Acquisition of a 50% interest. (11) Represents acquisition of remaining general partnership interests of assets under management acquired with Bonutto-Hofer Investments. After completing 20 acquisitions during the previous five years, in October 1995 the Company focused its resources on (i) assimilating these acquisitions, (ii) enhancing its existing corporate infrastructure in order to accommodate continued growth and (iii) improving its financial flexibility to fund future acquisitions. The Company recently completed one smaller acquisition, currently has five acquisitions pending and continually assesses acquisition opportunities as part of its growth strategy. Management believes there are significant opportunities in the fragmented and consolidating real estate services industry to acquire additional companies that will complement and expand the Company's existing operations. Following completion of the Offering, the Company expects to have approximately $ million of net proceeds from the Offering to fund future acquisitions. The real estate services industry continues to experience consolidation. Since the late 1980's, competition among real estate service providers has increased dramatically, institutional ownership of real estate in the United States has become more concentrated and corporate owners of real estate have increasingly outsourced their real estate service needs to third-party providers in order to refocus their resources on core businesses. The desire of institutions and corporations to receive comprehensive real estate services from a reduced number of providers capable of broad geographic coverage and the downward pressure on fees paid to real estate service providers due to increased competition, have driven, and should continue to drive, the consolidation taking place in the industry today. The Company believes that this consolidation will motivate the large number of local and regional real estate service providers to sell to, or form alliances with, major national and international companies. Despite this consolidation, the real estate services industry still remains highly fragmented. As the chart below depicts, the top ten property managers (based on square footage) manage less than 3% and the top 50 property managers manage less than 5% of the approximately 60 billion total square feet of commercial property (industrial, office and retail) located in the United States. [PIE CHART] The Company provides a broad spectrum of real estate and real estate-related services through two principal operating divisions: Property and Corporate Services and Investment Management. The Property and Corporate Services Division provides (i) property management services, which include maintenance, marketing and leasing services for investor-owned, but not typically investor- occupied, property and (ii) corporate and facilities management services, which include the administration, management and maintenance of corporate-owned and occupied property, as well as tenant representation, capital asset disposition, strategic real estate consulting and other ancillary services for corporate clients. The Investment Management Division provides a variety of services to the pension fund and institutional real estate investment community including (i) real estate investment fund and portfolio management, (ii) acquisition, disposition, financing and valuation services related to commercial properties and (iii) real estate market and securities research. In order to support its broad geographic operations and diverse services, the Company has developed a centralized corporate support structure that provides a variety of uniform, high-quality technical and personnel support services to the entire organization, including management information systems, risk management, employee training and human resources administration. The Company believes these centralized support services provide it with a distinct competitive advantage and have been instrumental in the Company's ability to assimilate acquisitions effectively. In addition, since a portion of the Company's administrative costs are fixed, the Company believes it will be able to add revenue associated with additional square footage and assets under management without significantly increasing those costs. The Company's primary business and operating strategy is to pursue increased revenue, market share and profitability through growth in square footage under management, assets under management and related new services combined with proactive cost control. Key elements of the Company's strategy involve (i) continuing to grow through acquisitions, (ii) continuing to provide and develop new services for existing and prospective institutional and corporate clients, (iii) capitalizing on the trend by large corporations to outsource their real estate service needs to major national and international third-party providers, (iv) positioning the Company to take advantage of currently recovering real estate markets in the U.S. and emerging markets in Asia and (v) developing and offering new services to property tenants and their employees. THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Compa- ny................................ shares (1) Common Stock Offered by the Selling Stockholders...................... shares (2) Common Stock to be outstanding af- ter the Offering.................. shares (1)(3) Use of Proceeds.................... The net proceeds of the Offering will be used to repay indebtedness outstanding under the Bank Credit Facility (as defined herein), to fund acquisitions and internal growth and for general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market Symbol............................ "KOLL" </TABLE> - -------- (1) Does not include up to shares of Common Stock subject to an over- allotment option granted by the Company to the Underwriters. See "Underwriting." (2) The Company will not receive any proceeds from the sale of Common Stock by the Selling Stockholders. (3) Does not include 548,500 shares of Common Stock issuable upon the exercise of performance stock options outstanding as of June 30, 1996. SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT PER SHARE DATA AND ASSETS UNDER MANAGEMENT) The following tables set forth summary financial and other data for the Company on a consolidated historical basis and on a consolidated pro forma basis for the periods and dates indicated. The summary historical financial data as of March 31, 1996 and 1995 and for the years ended March 31, 1996 and 1994 and the four month and eight month periods ended March 31, 1995 and November 30, 1994, respectively, are derived from, and are qualified by reference to, the audited consolidated financial statements of the Company and the Predecessor Company included elsewhere in this Prospectus. The summary financial data as of March 31, 1994, 1993 and 1992 and for the years ended March 31, 1993 and 1992 are derived from the audited consolidated financial statements of the Predecessor Company not included herein. The summary historical consolidated financial data as of and for the three month periods ended June 30, 1996 and 1995 are derived from unaudited financial statements. The unaudited financial statements include all adjustments, consisting of normal recurring accruals, which the Company considers necessary for a fair presentation of the financial position and the results of operations for these periods. Due to seasonality of the Company's business, operating results for the three month period ended June 30, 1996 are not necessarily indicative of the results that may be expected for the entire year ending March 31, 1997. Pro forma amounts include completed and pending acquisitions as if such acquisitions had occurred as of the beginning of the period for income statement and other data and as of the end of the period for balance sheet data. The pro forma amounts also reflect the application of a portion of the net proceeds from the Offering in an amount sufficient to repay the pro forma amount outstanding under the Company's Bank Credit Facility as of June 30, 1996. The pro forma financial data is not necessarily indicative of what the Company's actual financial position and results of operations would have been as of and for the periods indicated if those acquisitions had been consummated on such dates, nor does it purport to represent the Company's financial position and results of operations for future periods. The financial and other data presented below are qualified by reference to and should be read in conjunction with the Company's pro forma and audited consolidated historical financial statements and notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other information included elsewhere in this Prospectus. <TABLE> <CAPTION> KOLL MANAGEMENT KOLL REAL ESTATE SERVICES (1) SERVICES, INC. (PREDECESSOR) (1) --------------------------------------------------------- ------------------------------------ PRO FORMA PRO FORMA -------- --------- THREE FOUR EIGHT MONTHS THREE MONTHS YEAR YEAR MONTHS MONTHS YEAR ENDED ENDED ENDED JUNE 30, ENDED ENDED ENDED ENDED MARCH 31, JUNE 30, ------------------ MARCH 31, MARCH 31, MARCH 31, NOVEMBER 30, ----------------------- 1996 (2) 1996 (2) 1995 (2) 1996 1996 1995 1994 1994 1993 1992 -------- -------- -------- --------- --------- --------- ------------ ------- ------- ------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Revenue................. $ 31,570 $ 29,630 $ 27,566 $129,620 $119,700 $ 32,490 $ 51,566 $59,671 $38,924 $29,096 Costs and expenses, excluding depreciation, amortization and interest............... 28,515 26,711 24,578 112,161 102,899 28,939 47,472 53,152 33,742 24,322 Depreciation............ 563 535 420 2,012 1,883 486 682 736 184 98 Amortization............ 2,090 1,927 1,357 7,742 6,937 1,389 1,545 980 455 154 Operating income........ 887 942 1,118 8,617 8,893 1,565 1,822 5,143 4,543 4,522 Income (loss) before provision for income taxes and extraordinary item................... 756 (55) 261 8,092 5,002 973 1,470 5,017 4,506 4,522 Net income (loss)....... 380 (26) 104 3,566 2,047 388 250 2,987 2,701 2,713 Earnings (loss) per share.................. Average number of common shares and common share equivalents (3)........ OTHER DATA: EBITDA (4).............. $ 3,540 $ 3,404 $ 2,895 $ 18,371 $ 17,713 $ 3,440 $ 5,257 $ 6,859 $ 5,182 $ 4,774 Square feet under management (5)......... 159,388 149,188 136,287 155,405 145,205 129,976 106,555 91,425 65,275 58,699 Assets under management (in millions)(5)....... 1,985 1,985 1,643 1,643 1,436 1,127 780 BALANCE SHEET DATA (AT END OF PERIOD): Working capital......... $ 15,701 $ 4,948 $ 3,738 -- $ 12,796 $ (2,298) -- $ 3,304 $ 9,832 $ 8,404 Total assets............ 126,896 122,379 106,923 -- 126,207 96,696 -- 32,858 17,357 14,500 Long-term liabilities... 8,404 40,363 33,482 -- 45,297 27,597 -- 2,832 250 -- Minority interest....... 12,076 11,542 8,907 -- 13,631 8,552 -- 2,383 552 244 Stockholders' equity.... 80,758 35,219 33,384 -- 35,245 32,985 -- 14,159 12,616 9,915 </TABLE> (footnotes on following page) - -------- (1) The financial data for Koll Real Estate Services reflect the effects of the Merger (as defined herein) and as a result are not comparable to the financial data for Koll Management Services, Inc. (the Predecessor Company) prior to the Merger. (2) A significant component of the Company's revenue is transactional in nature which is subject to certain seasonality. Historically, the Company's revenue, operating income and net income in the first and fourth quarters of its fiscal years are generally lower than in the second and third quarters due to these fluctuations, which is consistent with industry trends. Therefore, quarterly results are not necessarily representative of results for the entire year. (3) See Note 1 of Notes to Consolidated Financial Statements and the Pro Forma Financial Statements for a description of the shares used in calculating earnings (loss) per share. (4) EBITDA represents net income before interest, income taxes, depreciation and amortization, non-cash compensation under stock award plans and certain other non-recurring items including compensation expense related to the Merger of $1,208,000 for the eight months ended November 30, 1994. Management believes that it is industry practice to evaluate real estate services companies based on operating income before interest, taxes, depreciation and amortization, which is generally equivalent to EBITDA. EBITDA removes the effect of certain non-cash charges on operating performance, such as the amortization of acquired management contracts and merger costs, which management believes results in an effective measure of operating performance. EBITDA does not represent cash flow from operations as defined by generally accepted accounting principles ("GAAP"), is not necessarily indicative of cash available to fund cash flow needs and should not be considered as an alternative to net income for purposes of evaluating the Company's operating performance. (5) Square feet under management represents the properties for which the Company provided management or leasing services through its Property and Corporate Services Division as of the end of the period presented. Assets under management represents the cost basis of assets the Company managed through its Investment Management Division as of the end of the period presented.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001018156_milestone_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001018156_milestone_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following information is qualified in its entirety by the more detailed information and the Financial Statements and Notes thereto appearing elsewhere in this Prospectus. See "Risk Factors" for information that should be carefully considered by prospective investors. THE COMPANY MileStone Healthcare, Inc. ("MileStone" or the "Company") is a leading provider of program management services for specialty care units in hospitals. The Company's services are designed to enable hospitals to broaden the care continuum provided to patients. MileStone manages a broad range of clinical programs that includes inpatient acute physical rehabilitation, comprehensive outpatient rehabilitation, skilled nursing and subacute care, geropsychiatric services, cardiac outpatient services, and sports and industrial medicine. The Company also provides contract therapy services to hospitals, outpatient facilities, subacute facilities, schools and other locations and owns and operates nine outpatient therapy clinics. As of May 31, 1996, the Company provided services in 14 states under 121 contracts. Eighty-three of these were program management or consulting contracts for hospitals, accounting for 82% of MileStone's revenues for the fiscal year ended May 31, 1996. The hospital market is characterized by increasing competition and widespread consolidation, as well as pressures to reduce costs and improve the quality of patient care. General acute care hospitals are taking steps to change their operations in order to remain competitive, including treating a growing percentage of their patients on an outpatient basis and through on-site specialty care units which, collectively, can provide the full continuum of health care services. The development and use of specialty care units allows hospitals to generate incremental revenue that would otherwise be captured by nursing homes, free-standing clinics and other alternate-site health care providers. Specialty care units also help hospitals to enhance their profitability by improving capacity utilization and better matching costs and services to the required level of patient care. Hospitals are increasingly relying on third parties to provide a wide range of services, including post-acute care, emergency room staffing, pharmacy management, and pediatric care. A hospital typically contracts with a third party when it lacks the resident expertise necessary for developing, managing and operating such programs on its own. A hospital often has insufficient expertise in the marketing and development activities required to support such programs and the expertise necessary to design and operate programs that satisfy regulatory, licensing and accreditation requirements. While outsourcing has increased significantly in the last few years, it still accounts for a relatively small percentage of hospital budgets. The Company believes outsourcing by hospitals will continue to increase in the coming years. Hospitals can derive significant benefits by contracting with MileStone for the design and management of their specialty care or therapy programs. MileStone believes that its knowledge and experience in the areas of licensing, certification, staffing and reimbursement allow it to establish programs and achieve profitability more quickly than hospitals which choose to rely on their own internal resources, greatly enhancing the likelihood of the program's operational and financial success. In addition, MileStone assists hospitals in more effectively integrating their specialty care units with existing services in order to maximize the potential of the hospital's overall care continuum. MileStone's objective is to ensure that treatments provided under its programs are outcome-oriented and delivered on a cost-effective basis. The Company's growth strategy is focused on enhancing the Company's position as a leading provider of quality program management services to hospitals in the United States. The key elements of the Company's strategy are to: (i) expand MileStone's customer base by providing outcomes driven, cost-effective services that help differentiate hospital clients in their respective markets; (ii) increase penetration of existing hospital clients by expanding the range of services provided; (iii) emphasize clinical outcomes and cost-effectiveness by utilizing treatment protocols and treatment outcomes management systems which measure and track the efficacy and productivity of treatments of the specialty care units; and (iv) pursue acquisitions of companies that are within the Company's scope of services or that perform services which are complementary to those of the Company. [MAP] The Company intends to furnish its stockholders annual reports containing audited financial statements and an opinion thereon expressed by independent certified public accountants and quarterly reports for the first three quarters of each fiscal year containing unaudited summary financial information. --------------------- IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMPANY'S COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. THE OFFERING <TABLE> <S> <C> Common Stock offered by: The Company........................................... 2,100,000 shares(1) The Selling Stockholders.............................. 400,000 shares Common Stock outstanding after the offering............. 6,361,510 shares(1)(2) Use of proceeds......................................... To repay indebtedness and for general corporate purposes, including possible acquisitions Proposed Nasdaq National Market Symbol.................. MILE </TABLE> - --------------- (1) Does not include up to 375,000 shares of Common Stock that may be sold by the Company pursuant to the Underwriters' over-allotment option. See "Underwriting."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001018214_goss_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001018214_goss_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information set forth elsewhere in this Prospectus. Unless the context requires otherwise, (i) references in this Prospectus to "Goss" mean, at all times prior to the date of consummation of the Offering (the "Closing Date"), the Graphic Systems business unit of Rockwell International Corporation, a Delaware corporation ("Rockwell") and, at all times on or after the Closing Date, Goss Graphic Systems, Inc. and its subsidiaries, and (ii) references in this Prospectus to the "Company" mean Goss Graphic Systems, Inc. and its subsidiaries. In addition, unless the context requires otherwise, references in this Prospectus to "Management" mean the management of Goss Graphic Systems, Inc. after the Closing Date. Consummation of the Offering is conditioned upon consummation of the Transactions (as defined herein). GOSS GENERAL Goss is the leading manufacturer of web offset newspaper press systems worldwide and of insert web offset press systems in North America. Goss also manufactures commercial web offset printing presses in North America and provides aftermarket parts and service to its newspaper and commercial printing customers. A web offset press utilizes lithography processes to print on long ribbons of paper (the "web") which are fed through a series of press cylinders. Photographically or laser produced printing plates mounted on plate cylinders are coated with ink and water based solutions and the print images are then transferred (or "offset") to a blanket cylinder which comes into contact with the paper web to print the image. See "Business--Products and Services--Web Offset Technology." Founded in 1885, Goss is the only U.S.-based manufacturer of large-scale web offset printing presses and has pioneered many major industry innovations, including the conversion from letter press printing to web offset lithography, the development of computerized electronic control systems and the introduction of back-to-back color printing. The Company is the only global producer of newspaper printing presses with manufacturing and sales capabilities in North America, Europe and Asia. Goss generated approximately 51% of its fiscal 1995 net revenue of $709 million outside the U.S. (including exports from the U.S.). The Company operates through three business categories: . Newspaper. Goss is a widely recognized trade name in the newspaper printing press industry. Management estimates that approximately 57% of daily newspapers worldwide (excluding the People's Republic of China ("PRC")) print on Goss presses (approximately 70% in the U.S. and Canada). Goss provides sophisticated, computer-controlled press systems for a wide variety of newspaper publications which vary significantly in circulation, page count and color content and operate in markets around the world. Goss presses print such publications as The Wall Street Journal, USA Today, The New York Times and The Los Angeles Times in the U.S., The Financial Times in the United Kingdom, Zero Hora in Brazil, The Asahi Shimbun in Japan, The Straits Times in Singapore and The People's Daily in China. Goss's newspaper press business generated approximately $512 million in net revenues in fiscal year 1995, or approximately 72% of Goss's net revenues. . Insert. Goss pioneered the development of specialized web offset presses for printing advertising inserts and continues to be the leader in the insert press business with an estimated market share of approximately 70% in the U.S. and Canada, the principal markets for such equipment. Goss's insert presses combine newspaper press designs for high speed with selected commercial press features for enhanced print quality, low maintenance and high productivity. The Company's customers include leading insert printers such as Big Flower Press Holdings, Inc. and Sullivan Graphics, Inc. Goss's insert press business generated approximately $94 million in net revenues in fiscal year 1995, or approximately 13% of Goss's net revenues. . Commercial. Goss also manufactures commercial web offset printing presses in North America used to print a broad variety of commercial products, including brochures and promotional materials, catalogs, magazines, books, financial publications and directories. Goss sells its commercial presses principally in North America, and its customers include large multinational, regional and local printers, including R.R. Donnelley & Sons Company, Quebecor, Inc. and Banta Corporation. The commercial press business generated approximately $103 million in net revenues in fiscal year 1995, or approximately 15% of Goss's net revenues. ----------------- The principal executive offices of Goss are located at 700 Oakmont Lane, Westmont, Illinois 60559 and its telephone number is (630) 850-5600. BUSINESS STRATEGY The Company's business strategy is to (i) capitalize on its substantial installed base of newspaper presses and market share in its traditional markets, (ii) continue to lead in the development of innovative products that respond to customers' needs while increasing their productivity and efficiency, (iii) expand its strong presence in developing regions such as Asia, (iv) draw on the manufacturing and marketing strengths of its newspaper and insert businesses to improve the performance of its commercial business, and (v) pursue business process improvements and cost-saving opportunities. Key elements underlying this strategy include: . Leading Installed Base of Newspaper Presses. Goss is the market leader in newspaper presses with approximately 57% of daily newspapers worldwide (excluding PRC) utilizing Goss presses. The Company believes that this installed base and the Company's established customer relationships provide it with a competitive advantage in obtaining repeat business, including color capability upgrades, press line extensions and new press purchases. In addition, the Company's significant installed base provides a relatively stable source of aftermarket parts and service business. . Established Global Newspaper Presence. Goss is one of only seven major global suppliers of newspaper press systems and is the only supplier with manufacturing, engineering and sales operations in North America, Europe and Asia. The Company believes this global presence provides it with a competitive advantage in light of the significant cost of transporting newspaper press systems and the degree to which such presses require custom engineering and manufacturing to address each customer's particular production requirements and press configurations. . Technology Leader. Management believes that it enjoys a reputation in the newspaper industry as a leader in technological innovation, having engineered several major technological advancements, including the conversion from letterpress to web offset lithography, the development of computerized electronic control systems and the introduction of back-to-back process color printing, each of which has improved its customers' print quality and productivity. Letterpress printing involves mechanically complex systems that create each line of type out of metal slugs that are made into plates mounted on a press. The conversion to web offset presses improved print quality and productivity. Computerized electronic controls reduced the need for precise adjustments and fine tuning by technicians, thereby decreasing waste and enhancing reliability and quality. Back-to-back process color printing utilizes four vertically-stacked presses (each printing one color) that allow multiple colors to be printed on both sides of the paper in the same print run. With the Company's recent introduction of an advanced inking system, and its ongoing development of an optical color quality adjustment mechanism and of an automatic image make-ready ("AIM") press system, Management believes the Company is well-positioned to maintain its technology leadership. See "Business -- Research and Development." . Growth in Developing Markets. The Company believes that increasing incomes and literacy rates are driving the establishment and growth of newspapers in developing countries, particularly in South America and Asia (excluding the more mature Japanese market). The Company believes it is well-positioned to benefit from such growth since approximately 52% and 61%, respectively, of daily newspapers in South America and Asia/Pacific (excluding Japan and PRC) print on Goss presses. In addition, Goss is the only foreign-owned manufacturer of printing presses in PRC through the Company's joint venture. . Business Process Improvements. A key element of the Company's business strategy is to further improve its operating performance. Management has identified certain specific cost saving opportunities that are reflected in the pro forma financial statements included herein. See "--Identified Cost Savings" and "Unaudited Pro Forma Combined Financial Statements." Management believes that efficiencies not reflected in the pro forma financial statements included herein can be realized through improvement of business processes, including enhanced material procurement practices, more efficient flow of work-in-process through both machining and assembly operations, increased outsourcing, and restructuring of factory support functions. In addition, the Company will seek to generate cost savings by improving efficiency in the process of configuring presses for specific customer requirements. The Company also has in place integrated product development teams which include design and manufacturing engineers and other disciplines which work to identify and implement product cost reduction initiatives such as component redesign, lower cost component suppliers, and design modifications to improve manufacturability. However, there can be no assurance that such efficiencies or cost savings can be realized. IDENTIFIED COST SAVINGS Although no assurance can be given either that any specific level of cost savings will be achieved or as to the timing thereof, Management currently plans to achieve substantial savings in the base of operating costs which are reflected in the pro forma combined financial statements (the "Identified Cost Savings"). Once these plans are completed, annual savings are expected to amount to approximately $19 million per year associated with the closing of redundant facilities and reduction in staffing, revision of employee benefit plans, and the elimination of certain corporate services previously provided by Rockwell. It is expected that, upon consummation of the acquisition by the Company of the Graphic Systems business unit from Rockwell (the "Acquisition"), a reserve of $16.3 million, net of a $3.9 million provision reflected in the first nine months of 1996, will be established associated primarily with severance, outplacement and relocation payments to be incurred in connection with headcount reductions and costs in connection with planned facility closings. See "Unaudited Pro Forma Combined Financial Statements." GGS HOLDINGS, INC. AND GOSS GRAPHIC SYSTEMS, INC. GGS Holdings, Inc. ("Holdings") and the Company are newly formed Delaware corporations organized by Stonington Partners, Inc. ("Stonington") on behalf of Stonington Capital Appreciation 1994 Fund, L.P. (the "Fund") to effect the acquisition of Goss from Rockwell. The Acquisition will be effected through the purchase by the Company and certain foreign subsidiaries to be formed by it of the outstanding capital stock of certain entities which constitute a part of Goss and certain of the assets and liabilities of other entities that constitute the remainder of Goss. Neither Holdings nor the Company is expected to have any assets or liabilities other than those arising in connection with the Acquisition, or to engage in any business activities other than those incident to its formation, the Acquisition and the financing of the Acquisition, until the Acquisition becomes effective. Holdings will, directly or indirectly, own all of the capital stock of, and assets of, and will assume all of the liabilities of, Goss. Pursuant to the terms of the Stockholders Agreement (as defined herein), the Fund will have the right to nominate and to remove all directors of Holdings, and each of the Stockholders (as defined herein) will agree to vote in favor of such nomination or removal. STONINGTON AND THE FUND Stonington was formed in 1993 and, through the Fund, has raised $1 billion in funds available for investments of this nature. The senior principals of Stonington have been organizing investments of this nature since 1981, having closed an aggregate of 44 transactions with total consideration of approximately $21 billion. The Fund is a Delaware limited partnership which was organized by Stonington to finance investments in industrial and other companies. Its principal investors include major pension funds, U.S. and foreign banks, insurance companies and corporations. THE ACQUISITION The Company has entered into a Stock and Asset Purchase Agreement dated as of April 26, 1996, as amended on July 18, 1996 (the "Purchase Agreement") with Rockwell to effect the acquisition of Goss from Rockwell. The Acquisition will be effected through the purchase by the Company of all the outstanding stock of Rockwell Graphic Systems, Inc., a Delaware corporation ("Goss Delaware") and Rockwell Systemes Graphiques Nantes, a societe anonyme organized under the laws of the Republic of France ("Goss France"), and through the purchase by the Company and certain wholly owned foreign subsidiaries of the assets and the assumption of liabilities which constitute the remainder of Goss. Immediately after the Acquisition, the Company will merge with Goss Delaware. The purchase price for the Acquisition will consist of $552.5 million in cash, subject to certain adjustments (the "Cash Consideration"), and 47,500 shares of Preferred Stock (as defined herein), $1,000 liquidation preference per share, issued by Holdings to Rockwell. Simultaneously with the closing of the Acquisition (the "Acquisition Closing"), Holdings will raise $116.5 million of equity financing, comprised of $111.5 million in cash from the sale of common stock, par value $.01 per share, of Holdings (the "Common Stock") to the Fund (the "Stonington Investment"), $1.0 million in cash from the sale of Common Stock (the "Equity Private Placement") to an affiliate of a limited partner of the Fund (the "Institutional Investor"), and $4.0 million in cash from the sale (the "Management Placement") of the Management Shares (as defined herein) to certain members of the Company's Management (the "Management Investors"). Holdings will finance $2.0 million of the Management Placement. Holdings will simultaneously therewith contribute all such amounts to the Company in exchange for all of the capital stock of the Company. Upon consummation of the Transactions, the Fund will own approximately 95.7% of the outstanding Common Stock of Holdings, the Institutional Investor will own approximately 0.8% of the outstanding Common Stock of Holdings and the Management Investors will own the remaining approximately 3.5% (the "Management Shares"). In addition, upon consummation of the Transactions, Holdings will also grant to certain members of the Board of Directors of Holdings who are not Management Investors 7,500 shares of nonvoting common stock, par value $.01 per share, of Holdings (the "Nonvoting Common Stock"), representing 100% of the Nonvoting Common Stock that will be outstanding after the Acquisition, pursuant to restricted stock granted under the Plan (as defined herein). Rockwell will own all of the outstanding Preferred Stock of Holdings. The balance of the funds needed to consummate the Acquisition will come from borrowings under a credit agreement, dated , 1996, among the Company, Bankers Trust Company as agent, the co-agents named therein and the lenders named therein (the "New Bank Credit Agreement"), the proceeds of the Offering and the proceeds from the sale of a portfolio of notes receivable issued in connection with customer financing provided by Goss to purchasers of Goss's products (collectively, the "Customer Notes"). The foregoing equity and debt financings, together with the Acquisition, are collectively referred to as the "Transactions." The Offering is conditioned upon, among other things, consummation of the Transactions. See "The Acquisition," "Description of New Bank Credit Agreement," "Description of Sale of Customer Notes" and "Description of Preferred Stock." The following table sets forth the sources and uses of funds related to the Acquisition: (IN MILLIONS) ------------- SOURCES OF FUNDS New Bank Credit Agreement(a).................................... $ 75.3 Senior Subordinated Notes....................................... 225.0 ------------- Total Debt.................................................. 300.3 Sale of Customer Notes.......................................... 163.7 Issuance of Equity(b)........................................... 164.0 ------------- Total..................................................... $ 628.0 ------------- ------------- USES OF FUNDS Cash Consideration.............................................. $ 552.5 Issuance of Preferred Stock of Holdings......................... 47.5 Transaction Costs............................................... 26.0 Loans to Management Investors................................... 2.0 ------------- Total..................................................... $ 628.0 ------------- ------------- - ------------ <TABLE> <C> <S> (a) The Bank Facilities (as defined herein) provide for a Term Loan Facility (as defined herein) aggregating $75 million and a Revolving Credit Facility (as defined herein) of $150 million (approximately $0.3 million of which will be drawn down on the Closing Date in cash in connection with the Acquisition and approximately $31.4 million of which will be drawn down on the Closing Date in connection with the issuance, assumption or replacement of letters of credit, comprised of approximately $6.9 million relating to the sale of Customer Notes and approximately $24.5 million relating to the assumption or replacement of certain outstanding letters of credit). See "Description of New Bank Credit Agreement" and "Description of Sale of Customer Notes." The Purchase Agreement provides for a post-closing purchase price adjustment, pursuant to which the Company may receive from Rockwell or be required to make to Rockwell additional payments. The Company intends to pay down the Revolving Credit Facility or draw down additional amounts under the Revolving Credit Facility, as the case may be, as a result of such purchase price adjustments. See "The Acquisition--Purchase Price; Adjustments."
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+PROSPECTUS SUMMARY THE FOLLOWING INFORMATION IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. AS USED HEREIN, UNLESS THE CONTEXT OTHERWISE REQUIRES, THE "COMPANY" MEANS GRAY COMMUNICATIONS SYSTEMS, INC. AND ITS SUBSIDIARIES. THE COMPANY HAS NOT YET CONSUMMATED THE PHIPPS ACQUISITION (AS DEFINED) AND THERE CAN BE NO ASSURANCE THAT THE PHIPPS ACQUISITION WILL BE CONSUMMATED. HOWEVER, EXCEPT WITH RESPECT TO HISTORICAL FINANCIAL STATEMENTS AND UNLESS THE CONTEXT INDICATES OTHERWISE, THE PHIPPS BUSINESS (AS DEFINED) IS INCLUDED IN THE DESCRIPTION OF THE COMPANY. SEE "THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING." UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION GRANTED BY THE COMPANY TO THE UNDERWRITERS IN THE CONCURRENT OFFERING IS NOT EXERCISED. ALL INFORMATION IN THIS PROSPECTUS HAS BEEN ADJUSTED TO GIVE EFFECT TO A 3-FOR-2 SPLIT OF THE CLASS A COMMON STOCK, EFFECTED IN THE FORM OF A STOCK DIVIDEND DECLARED ON OCTOBER 2, 1995. UNLESS OTHERWISE INDICATED, ALL STATION RANK, IN-MARKET SHARE AND TELEVISION HOUSEHOLD DATA IN THIS PROSPECTUS ARE DERIVED FROM THE NIELSEN STATION INDEX, VIEWERS IN PROFILE, DATED NOVEMBER 1995, AS PREPARED BY A.C. NIELSEN COMPANY ("NIELSEN"). THE COMPANY The Company owns and operates seven network-affiliated television stations in medium-size markets in the southeastern United States, six of which are ranked number one in their respective markets (which includes two television stations that are part of the Phipps Business). Five of the stations are affiliated with the CBS Television Network, a division of CBS, Inc. ("CBS") and two are affiliated with the NBC Television Network, a division of the National Broadcasting Company, Incorporated ("NBC"). In connection with the Phipps Acquisition (described below), the Company will be required under current regulations of the Federal Communications Commission (the "FCC") to divest its NBC affiliates in Albany, Georgia and Panama City, Florida. For a discussion of the Company's plans regarding such divestiture, see "Risk Factors -- FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." The Company also owns and operates three daily newspapers, two weekly, advertising only publications ("shoppers"), and a paging business (which is part of the Phipps Business), all located in the Southeast. The Company derives significant operating advantages and cost saving synergies through the size of its television station group and the regional focus of its television and publishing operations. These advantages and synergies include (i) sharing television production facilities, equipment and regionally oriented programming, (ii) the ability to purchase television programming for the group as a whole, (iii) negotiating network affiliation agreements on a group basis and (iv) purchasing newsprint and other supplies in bulk. In addition, the Company believes that its regional focus can provide advertisers with an efficient network through which to advertise in the fast-growing Southeast. In 1993, after the acquisition of a large block of Class A Common Stock by a new investor, the Company implemented a strategy to foster growth through strategic acquisitions. Since 1994, the Company's significant acquisitions have included three television stations and two newspapers, all located in the Southeast. As a result of the Company's acquisitions and in support of its growth strategy, the Company has added certain key members of management and has greatly expanded its operations in the television broadcasting and newspaper publishing businesses. On September 10, 1996, J. Mack Robinson, a director of the Company, was appointed President and Chief Executive Officer of the Company on an interim basis, to succeed Ralph W. Gabbard, who had died suddenly. The Company expects to commence a search to locate a new President as soon as practicable following this Offering. On September 11, 1996, Robert S. Prather, Jr., a director of the Company, was appointed Executive Vice President-Acquisitions on an interim basis. In January 1996, the Company acquired (the "Augusta Acquisition") WRDW-TV ("WRDW"), a CBS affiliate serving Augusta, Georgia (the "Augusta Business"). In December 1995, the Company entered into an asset purchase agreement to acquire (the "Phipps Acquisition") two CBS-affiliated stations, WCTV-TV ("WCTV") serving Tallahassee, Florida/Thomasville, Georgia and WKXT-TV ("WKXT") in Knoxville, Tennessee, a satellite broadcasting business and a paging business (collectively, the "Phipps Business"). The Company believes that the Phipps Acquisition will further enhance the Company's position as a major regional television broadcaster and is highly attractive for a number of reasons, including (i) the stations' strategic fit in the Southeast, (ii) WCTV's leading station market position and WKXT's significant growth potential, (iii) strong station broadcast cash flows, (iv) opportunities for revenue growth utilizing the Company's extensive management expertise with medium-size stations and (v) opportunities for synergies between WCTV and WKXT and the Company's existing stations with regard to revenue enhancement and cost controls. The consummation of the Phipps Acquisition is currently expected to occur by September 30, 1996, although there can be no assurance with respect thereto. In August 1996, the Company sold the assets (the "KTVE Sale") of KTVE Inc. ("KTVE"), a television station serving Monroe, Louisiana/El Dorado, Arkansas for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing. For the year ended December 31, 1995, on a pro forma basis, the Company had net revenues, Media Cash Flow (the sum of broadcast cash flow, publishing cash flow and paging cash flow), operating cash flow and net (loss) of $90.6 million, $30.3 million, $28.1 million and $(3.6) million, respectively. For the six months ended June 30, 1996, on a pro forma basis, the Company had net revenues, Media Cash Flow, operating cash flow and net income of $47.3 million, $17.9 million, $16.3 million and $251,000, respectively. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the year ended December 31, 1995 increased 148.2%, 188.4% and 227.9%, respectively, while net income decreased 230.3% from the historical amounts for the year ended December 31, 1994. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the six months ended June 30, 1996 increased 67.1%, 114.7% and 122.8%, respectively, while net income decreased 78.7% from the historical amounts for the six months ended June 30, 1995. The Company's pro forma net income for its television stations for the year ended December 31, 1995 and for the six months ended June 30, 1996 was $1.6 million and $1.4 million, respectively. The following table sets forth certain information for each of the Company's television stations. <TABLE> <CAPTION> ------------------------------------------------------------------------------------------------------------------ PRO FORMA --------------------------------------- IN-MARKET YEAR ENDED DECEMBER SIX MONTHS ENDED STATION SHARE OF 31, 1995 JUNE 30, 1996 RANK HOUSEHOLDS ------------------- ------------------ NETWORK YEAR DMA CHANNEL/ IN VIEWING NET OPERATING NET OPERATING STATION AFFILIATION MARKET ACQUIRED RANK(1) FREQUENCY DMA(2) TV REVENUES INCOME(6) REVENUES INCOME(6) - -------- ------- ------------- ------- -------- --------- -------- --------- --------- -------- -------- -------- (IN THOUSANDS) (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> WKYT CBS Lexington, KY 1994 68 27/UHF(3) 1 33% $15,553 $5,247 $7,845 $2,701 WYMT CBS Hazard, KY 1994 68 57/UHF(3) 1(4) 24 3,721 831 2,107 530 WRDW CBS Augusta, GA 1996 111 12/VHF 1 36 8,888 1,853 4,489 1,149 WALB (5) NBC Albany, GA 1954 152 10/VHF 1 80 9,445 4,795 5,099 2,658 Panama City, WJHG (5) NBC FL 1960 159 7/VHF 1 53 3,843 270 2,409 476 PHIPPS ACQUISITION WKXT CBS Knoxville, TN 62 8/VHF 3 22 9,269 2,204 4,387 903 Tallahassee, WCTV CBS FL/ 116 6/VHF 1 60 11,862 4,229 6,212 2,254 Thomasville, GA </TABLE> - ------------------------------ (1) Ranking of designated market area as defined by Nielsen ("DMA") served by a station among all DMAs is measured by the number of television households within the DMA based on the November 1995 Nielsen estimates. (2) Represents station rank in DMA as determined by November 1995 Nielsen estimates of the number of television sets tuned to the Company's station as a percentage of the number of television sets in use in the market for the Sunday through Saturday 6 a.m. to 2 a.m. time period. (3) All stations in the market are UHF stations. (4) The market area served by WYMT is an 18-county trading area, as defined by Nielsen, and is included in the Lexington, Kentucky DMA. WYMT's station rank is based upon its position in the 18-county trading area. (5) The Company will be required under current FCC regulations to divest WALB and WJHG in connection with the Phipps Acquisition. For a discussion of the Company's plans, see "Risk Factors-FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." (6) Represents pro forma income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes. The Company's three newspapers, THE ALBANY HERALD, THE ROCKDALE CITIZEN and the GWINNETT DAILY POST and two shoppers had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $21.9 million and $660,000, respectively, for the year ended December 31, 1995, and $11.3 million and $1.3 million for the six months ended June 30, 1996, respectively. The satellite broadcasting business and paging business, which are a part of the Phipps Business, had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $6.2 million and $542,000 for the year ended December 31, 1995 and $3.5 million and $467,000 for the six months ended June 30, 1996, respectively. BUSINESS STRATEGY The Company's business strategy includes the following key elements: - STRONG LOCAL PRESENCE. Each of the Company's television stations seeks to achieve a distinct identity through its emphasis on local programming. A key objective is to build audience loyalty through the development of a strong local news franchise. Strong local news generates high viewership and results in higher ratings for programs both preceding and following the news, which increases revenues and Media Cash Flow. - REGIONAL FOCUS. The Company believes its regional focus has competitive advantages, including the ability to purchase and produce programming that can be used by multiple Company-owned stations as well as the opportunity to sell advertising on multiple stations as a single buy. In addition, the proximity of the Company's operations allows the sharing of equipment, management and marketing expertise. - TARGETED MARKETING. The Company seeks to increase its advertising revenues and Media Cash Flow by expanding existing relationships with local and national advertisers and by attracting new advertisers through targeted marketing techniques and carefully tailored programming. The Company works closely with advertisers to develop advertising campaigns that match specifically targeted audience segments including sponsoring and staging various special events such as fishing tournaments, boat shows and bridal expositions. - COST CONTROLS. Through its strategic planning and annual budgeting processes, the Company continually seeks to identify and implement cost savings opportunities at each of its stations and publications in order to increase Media Cash Flow. The Company's ownership of multiple stations and publications also benefits each operation in negotiating favorable terms with programming syndicators, newsprint suppliers, national sales representatives and other vendors. - SELECTIVE ACQUISITIONS. The Company has focused on acquiring television stations where the Company believes there is the potential for improvements in revenue share, audience share and cost control. The Company focuses on southeastern markets of medium size because the Company believes these markets offer superior opportunities in terms of projected population and economic growth, leading to higher advertising and circulation revenues. In assessing acquisitions, the Company targets stations and publications where it sees specific opportunities for revenue enhancement while controlling expenditures, utilizing management's significant experience with local and national advertising sales and in operating similar businesses. In appropriate circumstances, the Company will dispose of assets that it deems non-essential to its operating or growth strategy. THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING The Company has entered into an agreement to acquire WCTV and WKXT, a satellite broadcasting business and a paging business in the Southeast. The purchase price for the Phipps Acquisition is approximately $185 million, including fees, expenses and working capital and other adjustments. The consummation of the Phipps Acquisition is expected to occur by September 30, 1996, although there can be no assurance with respect thereto. See "Risk Factors -- Possible Non-Consummation of the Phipps Acquisition." Pursuant to an agreement, dated as of May 15, 1996 (the "KTVE Agreement"), with GOCOM Television of Ouachita, L.P., in August 1996, the Company sold the assets of KTVE for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing (approximately $870,000), to the extent collected by the buyer, to be paid to the Company 150 days following the date of closing. For the year ended December 31, 1995, KTVE had net revenues, Media Cash Flow and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) of $4.2 million, $916,000 and $437,000, respectively, and $2.3 million, $598,000 and $360,000, respectively, for the six months ended June 30, 1996. The Company estimates that the gain, net of estimated taxes, on the KTVE Sale was approximately $2.8 million. In addition to the KTVE Sale and the consummation of this Offering, the Concurrent Offering and the Phipps Acquisition, the Company intends to implement a financing plan (the "Financing") to increase liquidity and improve operating and financial flexibility. Pursuant to the Financing, the Company will (i) retire approximately $49.5 million aggregate principal amount of outstanding indebtedness under its senior secured bank credit facility (the "Old Credit Facility"), together with accrued interest thereon, (ii) retire approximately $25.0 million aggregate principal amount of outstanding indebtedness under its senior note due 2003 (the "Senior Note"), together with accrued interest thereon and a prepayment fee, (iii) issue $10.0 million liquidation preference of its Series A preferred stock (the "Series A Preferred Stock") in exchange for its outstanding $10.0 million aggregate principal amount 8% subordinated note (the "8% Note") issued to Bull Run Corporation ("Bull Run"), a principal shareholder of the Company, (iv) issue to Bull Run, J. Mack Robinson, the President, Chief Executive Officer and a director of the Company, and certain of his affiliates $10.0 million liquidation preference of its Series B preferred stock (the "Series B Preferred Stock" and together with the Series A Preferred Stock, the "Preferred Stock") with warrants to purchase up to 500,000 shares of Class A Common Stock (representing 10.1% of the currently issued and outstanding Class A Common Stock after giving effect to the exercise of such warrants) for cash proceeds of $10.0 million and (v) enter into a new senior secured bank credit facility (the "Senior Credit Facility") to provide for a term loan and revolving credit facility aggregating $125.0 million. The cash required for the consummation of the Phipps Acquisition, the repayment of indebtedness and related transaction costs will be provided by the net proceeds of this Offering, the Concurrent Offering and the sale of the Series B Preferred Stock and the warrants, borrowings under the Senior Credit Facility and the Company's working capital. For a description of the Senior Credit Facility and the Preferred Stock, see "Description of Certain Indebtedness" and "Management--Compensation Committee Interlocks and Insider Participation-Issuances of Preferred Stock." The consummation of this Offering and the placement of funds into escrow are conditioned upon the issuance of the Series A Preferred Stock in exchange for the 8% Note, the issuance of the Series B Preferred Stock and the entering into of the Senior Credit Facility. The consummation of this Offering and the placement of the net proceeds thereof into escrow are not conditioned upon the consummation of the Concurrent Offering or the Phipps Acquisition or the other elements of the Financing. However the release of the net proceeds hereof from escrow is conditioned, among other things, upon the satisfaction of the Minimum Equity Condition, the retirement of the Senior Note and the Old Credit Facility and the consummation of the Phipps Acquisition. The Notes are subject to a mandatory redemption on the Special Redemption Date at the Special Redemption Price if either the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996. See "Description of the Notes-Redemption-Special Redemption." The Senior Credit Facility will provide that no borrowings may be made thereunder until the closing of the Phipps Acquisition. Accordingly, if the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied, the Notes will be redeemed by the Company, the Old Credit Facility will remain in place and the Company will not borrow under the Senior Credit Facility. The following table sets forth the estimated sources and uses of funds relating to this Offering, the Concurrent Offering, the Phipps Acquisition and the Financing: <TABLE> <CAPTION> ---------- (IN MILLIONS) AMOUNT ---------- <S> <C> SOURCES OF FUNDS: The Notes offered hereby $160.0 The Concurrent Offering (1) 73.5 Sale of Series B Preferred Stock and Warrants 10.0 Borrowings under the Senior Credit Facility 22.9 Working capital (2) 9.5 ---------- TOTAL $275.9 ---------- ---------- USES OF FUNDS: Consummation of Phipps Acquisition $185.0 Retire indebtedness under the Old Credit Facility (3) 49.5 Retire indebtedness under the Senior Note (4) 25.0 Fees and expenses (5) 16.4 ---------- TOTAL $275.9 ---------- ---------- </TABLE> - ------------------------------ (1) Assumes estimated gross proceeds from the Concurrent Offering of $73.5 million and estimated net proceeds therefrom of $67.6 million. It is a condition of the release from escrow of the net proceeds of this Offering that the Company shall have consummated one or more equity offerings having gross proceeds of not less than $65.0 million. To the extent that the gross proceeds of any such equity offerings are less than $73.5 million, the Company intends to borrow such difference under its Senior Credit Facility. It is anticipated that there will not be a significant interval between the closing of this Offering and the closing of the Concurrent Offering. (2) The source of these funds was the KTVE Sale. (3) Borrowings under the Old Credit Facility bear interest at formula rates based upon the applicable London inter-bank offered rate ("LIBOR") or prime rate at the time of borrowing plus a fixed spread and have a final maturity of 2003. As of June 30, 1996, the weighted average interest rate was 8.94%. (4) The indebtedness under the Senior Note bears interest at 10.7%. (5) Fees and expenses include underwriting costs for the Notes and the Concurrent Offering, fees payable in connection with the negotiation and execution of the Senior Credit Facility, fees payable in connection with the retirement of the Senior Note and legal, accounting and other transaction fees. Prior to the consummation of the Phipps Acquisition and the satisfaction of the Minimum Equity Condition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes. The Trust Funds will be invested in cash equivalents. The proceeds of the Concurrent Offering will be used to repay indebtedness under the Old Credit Facility, to retire the Senior Note and to provide funds for the Phipps Acquisition. THE OFFERING <TABLE> <S> <C> SECURITIES OFFERED.......................... $160,000,000 aggregate principal amount of % Senior Subordinated Notes due 2006. MATURITY DATE............................... , 2006. INTEREST PAYMENT DATES...................... and , commencing , 1997. SPECIAL REDEMPTION BY THE COMPANY........... If the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996, the Company will be required to redeem (the "Special Redemption") the Notes on or prior to December 31, 1996 (the "Special Redemption Date") at a redemption price (the "Special Redemption Price") equal to 101% of the principal amount of the Notes plus accrued and unpaid interest to the Special Redemption Date. At any time prior to December 23, 1996, if the Phipps Acquisition has not been consummated or the Minimum Equity Condition is not satisfied, the Company may, at its option, redeem the Notes, in whole but not in part, at a redemption price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date fixed for redemption. Prior to the consummation of the Phipps Acquisition and the satisfaction of the Minimum Equity Condition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes and the obligation of the Company to consummate the Special Redemption will be secured by such funds (the "Trust Funds"). </TABLE> <TABLE> <S> <C> OPTIONAL REDEMPTION BY THE COMPANY.......... The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after , 2001, at the redemption prices set forth herein, plus accrued and unpaid interest to the date fixed for redemption. In addition, at any time prior to , 1999, the Company, at its option, may redeem up to 35% of the aggregate principal amount of the Notes originally issued with the cash proceeds received by the Company from one or more Public Equity Offerings, other than the Concurrent Offering, at any time or from time to time, at a redemption price equal to % of the principal amount thereof, plus accrued and unpaid interest to the date fixed for redemption; PROVIDED, HOWEVER, that at least $104.0 million in aggregate principal amount of the Notes remain outstanding immediately after any such redemption. CHANGE OF CONTROL OFFER..................... Upon a Change of Control, the Company has the obligation to offer to purchase all the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. See "Description of the Notes -- Change of Control" for a discussion of the circumstances in which the Company may not be required to make a Change of Control Offer (as defined). OFFERS TO PURCHASE.......................... In the event of certain asset sales, the Company will be required to offer to repurchase the Notes at 100% of their principal amount plus accrued and unpaid interest, if any, to the date of repurchase with the net proceeds of such asset sales. SUBORDINATION............................... The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company, including all indebtedness of the Company under the Senior Credit Facility. As of June 30, 1996, on a pro forma basis after giving effect to this Offering, the Concurrent Offering, the KTVE Sale, the Financing and the application of the net proceeds therefrom, and to the Phipps Acquisition, the Company would have had approximately $183.6 million of indebtedness outstanding, of which $23.6 million would be Senior Debt. SUBSIDIARY GUARANTEES....................... The Notes will be guaranteed, jointly and severally, fully and unconditionally, on a senior subordinated basis by the Subsidiary Guarantors (the "Subsidiary Guarantees"). The obligations of any Subsidiary Guarantor with respect to its Subsidiary Guarantee will be subordinated in right of payment, to the same extent as the obligations of the Company in respect of the Notes, to all existing and future Guarantor Senior Debt of such Subsidiary Guarantor, which will include any guarantee by such Subsidiary Guarantor of the Company's indebtedness under the Senior Credit Facility. </TABLE> <TABLE> <S> <C> PRINCIPAL COVENANTS......................... The Indenture for the Notes (the "Indenture") will impose certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt or Guarantor Senior Debt and senior in right of payment to the Notes or any Subsidiary Guarantee, incur liens, impose restrictions on the ability of a subsidiary to pay dividends or make certain payments to the Company, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. USE OF PROCEEDS............................. The Company intends to use the proceeds from the sale of the Notes, together with the proceeds of the Concurrent Offering, the other proceeds of the Financing and the Company's working capital, to (i) consummate the Phipps Acquisition, (ii) retire indebtedness under the Old Credit Facility and the Senior Note and (iii) pay related fees and expenses. However, in the event the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996, the Company will be obligated to redeem the Notes. See "The Phipps Acquisition, the KTVE Sale and the Financing" and "Description of the Notes-Redemption-Special Redemption."
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+PROSPECTUS SUMMARY THE FOLLOWING INFORMATION IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. AS USED HEREIN, UNLESS THE CONTEXT OTHERWISE REQUIRES, THE "COMPANY" MEANS GRAY COMMUNICATIONS SYSTEMS, INC. AND ITS SUBSIDIARIES. THE COMPANY HAS NOT YET CONSUMMATED THE PHIPPS ACQUISITION (AS DEFINED) AND THERE CAN BE NO ASSURANCE THAT THE PHIPPS ACQUISITION WILL BE CONSUMMATED. HOWEVER, EXCEPT WITH RESPECT TO HISTORICAL FINANCIAL STATEMENTS AND UNLESS THE CONTEXT INDICATES OTHERWISE, THE PHIPPS BUSINESS (AS DEFINED) IS INCLUDED IN THE DESCRIPTION OF THE COMPANY. SEE "THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING." UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION GRANTED BY THE COMPANY TO THE UNDERWRITERS IN THE CONCURRENT OFFERING IS NOT EXERCISED. ALL INFORMATION IN THIS PROSPECTUS HAS BEEN ADJUSTED TO GIVE EFFECT TO A 3-FOR-2 SPLIT OF THE CLASS A COMMON STOCK, EFFECTED IN THE FORM OF A STOCK DIVIDEND DECLARED ON OCTOBER 2, 1995. UNLESS OTHERWISE INDICATED, ALL STATION RANK, IN-MARKET SHARE AND TELEVISION HOUSEHOLD DATA IN THIS PROSPECTUS ARE DERIVED FROM THE NIELSEN STATION INDEX, VIEWERS IN PROFILE, DATED NOVEMBER 1995, AS PREPARED BY A.C. NIELSEN COMPANY ("NIELSEN"). THE COMPANY The Company owns and operates seven network-affiliated television stations in medium-size markets in the southeastern United States, six of which are ranked number one in their respective markets (which includes two television stations that are part of the Phipps Business). Five of the stations are affiliated with the CBS Television Network, a division of CBS, Inc. ("CBS") and two are affiliated with the NBC Television Network, a division of the National Broadcasting Company, Incorporated ("NBC"). In connection with the Phipps Acquisition (described below), the Company will be required under current regulations of the Federal Communications Commission (the "FCC") to divest its NBC affiliates in Albany, Georgia and Panama City, Florida. For a discussion of the Company's plans regarding such divestiture, see "Risk Factors -- FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." The Company also owns and operates three daily newspapers, two weekly, advertising only publications ("shoppers"), and a paging business (which is part of the Phipps Business), all located in the Southeast. The Company derives significant operating advantages and cost saving synergies through the size of its television station group and the regional focus of its television and publishing operations. These advantages and synergies include (i) sharing television production facilities, equipment and regionally oriented programming, (ii) the ability to purchase television programming for the group as a whole, (iii) negotiating network affiliation agreements on a group basis and (iv) purchasing newsprint and other supplies in bulk. In addition, the Company believes that its regional focus can provide advertisers with an efficient network through which to advertise in the fast-growing Southeast. In 1993, after the acquisition of a large block of Class A Common Stock by a new investor, the Company implemented a strategy to foster growth through strategic acquisitions. Since 1994, the Company's significant acquisitions have included three television stations and two newspapers, all located in the Southeast. As a result of the Company's acquisitions and in support of its growth strategy, the Company has added certain key members of management and has greatly expanded its operations in the television broadcasting and newspaper publishing businesses. On September 10, 1996, J. Mack Robinson, a director of the Company, was appointed President and Chief Executive Officer of the Company on an interim basis, to succeed Ralph W. Gabbard, who had died suddenly. The Company expects to commence a search to locate a new President as soon as practicable following this Offering. On September 11, 1996, Robert S. Prather, Jr., a director of the Company, was appointed Executive Vice President-Acquisitions on an interim basis. In January 1996, the Company acquired (the "Augusta Acquisition") WRDW-TV ("WRDW"), a CBS affiliate serving Augusta, Georgia (the "Augusta Business"). In December 1995, the Company entered into an asset purchase agreement to acquire (the "Phipps Acquisition") two CBS-affiliated stations, WCTV-TV ("WCTV") serving Tallahassee, Florida/Thomasville, Georgia and WKXT-TV ("WKXT") in Knoxville, Tennessee, a satellite broadcasting business and a paging business (collectively, the "Phipps Business"). The Company believes that the Phipps Acquisition will further enhance the Company's position as a major regional television broadcaster and is highly attractive for a number of reasons, including (i) the stations' strategic fit in the Southeast, (ii) WCTV's leading station market position and WKXT's significant growth potential, (iii) strong station broadcast cash flows, (iv) opportunities for revenue growth utilizing the Company's extensive management expertise with medium-size stations and (v) opportunities for synergies between WCTV and WKXT and the Company's existing stations with regard to revenue enhancement and cost controls. The consummation of the Phipps Acquisition is currently expected to occur by September 30, 1996, although there can be no assurance with respect thereto. In August 1996, the Company sold the assets (the "KTVE Sale") of KTVE Inc. ("KTVE"), a television station serving Monroe, Louisiana/El Dorado, Arkansas for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing. For the year ended December 31, 1995, on a pro forma basis, the Company had net revenues, Media Cash Flow (the sum of broadcast cash flow, publishing cash flow and paging cash flow), operating cash flow and net (loss) of $90.6 million, $30.3 million, $28.1 million and $(3.6) million, respectively. For the six months ended June 30, 1996, on a pro forma basis, the Company had net revenues, Media Cash Flow, operating cash flow and net income of $47.3 million, $17.9 million, $16.3 million and $251,000, respectively. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the year ended December 31, 1995 increased 148.2%, 188.4% and 227.9%, respectively, while net income decreased 230.3% from the historical amounts for the year ended December 31, 1994. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the six months ended June 30, 1996 increased 67.1%, 114.7% and 122.8%, respectively, while net income decreased 78.7% from the historical amounts for the six months ended June 30, 1995. The Company's pro forma net income for its television stations for the year ended December 31, 1995 and for the six months ended June 30, 1996 was $1.6 million and $1.4 million, respectively. The following table sets forth certain information for each of the Company's television stations. <TABLE> <CAPTION> ------------------------------------------------------------------------------------------------------------------ PRO FORMA --------------------------------------- IN-MARKET YEAR ENDED DECEMBER SIX MONTHS ENDED STATION SHARE OF 31, 1995 JUNE 30, 1996 RANK HOUSEHOLDS ------------------- ------------------ NETWORK YEAR DMA CHANNEL/ IN VIEWING NET OPERATING NET OPERATING STATION AFFILIATION MARKET ACQUIRED RANK(1) FREQUENCY DMA(2) TV REVENUES INCOME(6) REVENUES INCOME(6) - -------- ------- ------------- ------- -------- --------- -------- --------- --------- -------- -------- -------- (IN THOUSANDS) (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> WKYT CBS Lexington, KY 1994 68 27/UHF(3) 1 33% $15,553 $5,247 $7,845 $2,701 WYMT CBS Hazard, KY 1994 68 57/UHF(3) 1(4) 24 3,721 831 2,107 530 WRDW CBS Augusta, GA 1996 111 12/VHF 1 36 8,888 1,853 4,489 1,149 WALB (5) NBC Albany, GA 1954 152 10/VHF 1 80 9,445 4,795 5,099 2,658 Panama City, WJHG (5) NBC FL 1960 159 7/VHF 1 53 3,843 270 2,409 476 PHIPPS ACQUISITION WKXT CBS Knoxville, TN 62 8/VHF 3 22 9,269 2,204 4,387 903 Tallahassee, WCTV CBS FL/ 116 6/VHF 1 60 11,862 4,229 6,212 2,254 Thomasville, GA </TABLE> - ------------------------------ (1) Ranking of designated market area as defined by Nielsen ("DMA") served by a station among all DMAs is measured by the number of television households within the DMA based on the November 1995 Nielsen estimates. (2) Represents station rank in DMA as determined by November 1995 Nielsen estimates of the number of television sets tuned to the Company's station as a percentage of the number of television sets in use in the market for the Sunday through Saturday 6 a.m. to 2 a.m. time period. (3) All stations in the market are UHF stations. (4) The market area served by WYMT is an 18-county trading area, as defined by Nielsen, and is included in the Lexington, Kentucky DMA. WYMT's station rank is based upon its position in the 18-county trading area. (5) The Company will be required under current FCC regulations to divest WALB and WJHG in connection with the Phipps Acquisition. For a discussion of the Company's plans, see "Risk Factors-FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." (6) Represents pro forma income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes. The Company's three newspapers, THE ALBANY HERALD, THE ROCKDALE CITIZEN and the GWINNETT DAILY POST and two shoppers had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $21.9 million and $660,000, respectively, for the year ended December 31, 1995, and $11.3 million and $1.3 million for the six months ended June 30, 1996, respectively. The satellite broadcasting business and paging business, which are a part of the Phipps Business, had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $6.2 million and $542,000 for the year ended December 31, 1995 and $3.5 million and $467,000 for the six months ended June 30, 1996, respectively. BUSINESS STRATEGY The Company's business strategy includes the following key elements: - STRONG LOCAL PRESENCE. Each of the Company's television stations seeks to achieve a distinct identity through its emphasis on local programming. A key objective is to build audience loyalty through the development of a strong local news franchise. Strong local news generates high viewership and results in higher ratings for programs both preceding and following the news, which increases revenues and Media Cash Flow. - REGIONAL FOCUS. The Company believes its regional focus has competitive advantages, including the ability to purchase and produce programming that can be used by multiple Company-owned stations as well as the opportunity to sell advertising on multiple stations as a single buy. In addition, the proximity of the Company's operations allows the sharing of equipment, management and marketing expertise. - TARGETED MARKETING. The Company seeks to increase its advertising revenues and Media Cash Flow by expanding existing relationships with local and national advertisers and by attracting new advertisers through targeted marketing techniques and carefully tailored programming. The Company works closely with advertisers to develop advertising campaigns that match specifically targeted audience segments including sponsoring and staging various special events such as fishing tournaments, boat shows and bridal expositions. - COST CONTROLS. Through its strategic planning and annual budgeting processes, the Company continually seeks to identify and implement cost savings opportunities at each of its stations and publications in order to increase Media Cash Flow. The Company's ownership of multiple stations and publications also benefits each operation in negotiating favorable terms with programming syndicators, newsprint suppliers, national sales representatives and other vendors. - SELECTIVE ACQUISITIONS. The Company has focused on acquiring television stations where the Company believes there is the potential for improvements in revenue share, audience share and cost control. The Company focuses on southeastern markets of medium size because the Company believes these markets offer superior opportunities in terms of projected population and economic growth, leading to higher advertising and circulation revenues. In assessing acquisitions, the Company targets stations and publications where it sees specific opportunities for revenue enhancement while controlling expenditures, utilizing management's significant experience with local and national advertising sales and in operating similar businesses. In appropriate circumstances, the Company will dispose of assets that it deems non-essential to its operating or growth strategy. THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING The Company has entered into an agreement to acquire WCTV and WKXT, a satellite broadcasting business and a paging business in the Southeast. The purchase price for the Phipps Acquisition is approximately $185 million, including fees, expenses and working capital and other adjustments. The consummation of the Phipps Acquisition is expected to occur by September 30, 1996, although there can be no assurance with respect thereto. See "Risk Factors -- Possible Non-Consummation of the Phipps Acquisition." Pursuant to an agreement, dated as of May 15, 1996 (the "KTVE Agreement"), with GOCOM Television of Ouachita, L.P., in August 1996, the Company sold the assets of KTVE for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing (approximately $870,000), to the extent collected by the buyer, to be paid to the Company 150 days following the date of closing. For the year ended December 31, 1995, KTVE had net revenues, Media Cash Flow and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) of $4.2 million, $916,000 and $437,000, respectively, and $2.3 million, $598,000 and $360,000, respectively, for the six months ended June 30, 1996. The Company estimates that the gain, net of estimated taxes, on the KTVE Sale was approximately $2.8 million. In addition to the KTVE Sale and the consummation of this Offering, the Concurrent Offering and the Phipps Acquisition, the Company intends to implement a financing plan (the "Financing") to increase liquidity and improve operating and financial flexibility. Pursuant to the Financing, the Company will (i) retire approximately $49.5 million aggregate principal amount of outstanding indebtedness under its senior secured bank credit facility (the "Old Credit Facility"), together with accrued interest thereon, (ii) retire approximately $25.0 million aggregate principal amount of outstanding indebtedness under its senior note due 2003 (the "Senior Note"), together with accrued interest thereon and a prepayment fee, (iii) issue $10.0 million liquidation preference of its Series A preferred stock (the "Series A Preferred Stock") in exchange for its outstanding $10.0 million aggregate principal amount 8% subordinated note (the "8% Note") issued to Bull Run Corporation ("Bull Run"), a principal shareholder of the Company, (iv) issue to Bull Run, J. Mack Robinson, the President, Chief Executive Officer and a director of the Company, and certain of his affiliates $10.0 million liquidation preference of its Series B preferred stock (the "Series B Preferred Stock" and together with the Series A Preferred Stock, the "Preferred Stock") with warrants to purchase up to 500,000 shares of Class A Common Stock (representing 10.1% of the currently issued and outstanding Class A Common Stock after giving effect to the exercise of such warrants) for cash proceeds of $10.0 million and (v) enter into a new senior secured bank credit facility (the "Senior Credit Facility") to provide for a term loan and revolving credit facility aggregating $125.0 million. The cash required for the consummation of the Phipps Acquisition, the repayment of indebtedness and related transaction costs will be provided by the net proceeds of this Offering, the Concurrent Offering and the sale of the Series B Preferred Stock and the warrants, borrowings under the Senior Credit Facility and the Company's working capital. For a description of the Senior Credit Facility and the Preferred Stock, see "Description of Certain Indebtedness" and "Management--Compensation Committee Interlocks and Insider Participation-Issuances of Preferred Stock." The consummation of this Offering and the placement of funds into escrow are conditioned upon the issuance of the Series A Preferred Stock in exchange for the 8% Note, the issuance of the Series B Preferred Stock and the entering into of the Senior Credit Facility. The consummation of this Offering and the placement of the net proceeds thereof into escrow are not conditioned upon the consummation of the Concurrent Offering or the Phipps Acquisition or the other elements of the Financing. However the release of the net proceeds hereof from escrow is conditioned, among other things, upon the satisfaction of the Minimum Equity Condition, the retirement of the Senior Note and the Old Credit Facility and the consummation of the Phipps Acquisition. The Notes are subject to a mandatory redemption on the Special Redemption Date at the Special Redemption Price if either the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996. See "Description of the Notes-Redemption-Special Redemption." The Senior Credit Facility will provide that no borrowings may be made thereunder until the closing of the Phipps Acquisition. Accordingly, if the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied, the Notes will be redeemed by the Company, the Old Credit Facility will remain in place and the Company will not borrow under the Senior Credit Facility. The following table sets forth the estimated sources and uses of funds relating to this Offering, the Concurrent Offering, the Phipps Acquisition and the Financing: <TABLE> <CAPTION> ---------- (IN MILLIONS) AMOUNT ---------- <S> <C> SOURCES OF FUNDS: The Notes offered hereby $160.0 The Concurrent Offering (1) 73.5 Sale of Series B Preferred Stock and Warrants 10.0 Borrowings under the Senior Credit Facility 22.9 Working capital (2) 9.5 ---------- TOTAL $275.9 ---------- ---------- USES OF FUNDS: Consummation of Phipps Acquisition $185.0 Retire indebtedness under the Old Credit Facility (3) 49.5 Retire indebtedness under the Senior Note (4) 25.0 Fees and expenses (5) 16.4 ---------- TOTAL $275.9 ---------- ---------- </TABLE> - ------------------------------ (1) Assumes estimated gross proceeds from the Concurrent Offering of $73.5 million and estimated net proceeds therefrom of $67.6 million. It is a condition of the release from escrow of the net proceeds of this Offering that the Company shall have consummated one or more equity offerings having gross proceeds of not less than $65.0 million. To the extent that the gross proceeds of any such equity offerings are less than $73.5 million, the Company intends to borrow such difference under its Senior Credit Facility. It is anticipated that there will not be a significant interval between the closing of this Offering and the closing of the Concurrent Offering. (2) The source of these funds was the KTVE Sale. (3) Borrowings under the Old Credit Facility bear interest at formula rates based upon the applicable London inter-bank offered rate ("LIBOR") or prime rate at the time of borrowing plus a fixed spread and have a final maturity of 2003. As of June 30, 1996, the weighted average interest rate was 8.94%. (4) The indebtedness under the Senior Note bears interest at 10.7%. (5) Fees and expenses include underwriting costs for the Notes and the Concurrent Offering, fees payable in connection with the negotiation and execution of the Senior Credit Facility, fees payable in connection with the retirement of the Senior Note and legal, accounting and other transaction fees. Prior to the consummation of the Phipps Acquisition and the satisfaction of the Minimum Equity Condition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes. The Trust Funds will be invested in cash equivalents. The proceeds of the Concurrent Offering will be used to repay indebtedness under the Old Credit Facility, to retire the Senior Note and to provide funds for the Phipps Acquisition. THE OFFERING <TABLE> <S> <C> SECURITIES OFFERED.......................... $160,000,000 aggregate principal amount of % Senior Subordinated Notes due 2006. MATURITY DATE............................... , 2006. INTEREST PAYMENT DATES...................... and , commencing , 1997. SPECIAL REDEMPTION BY THE COMPANY........... If the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996, the Company will be required to redeem (the "Special Redemption") the Notes on or prior to December 31, 1996 (the "Special Redemption Date") at a redemption price (the "Special Redemption Price") equal to 101% of the principal amount of the Notes plus accrued and unpaid interest to the Special Redemption Date. At any time prior to December 23, 1996, if the Phipps Acquisition has not been consummated or the Minimum Equity Condition is not satisfied, the Company may, at its option, redeem the Notes, in whole but not in part, at a redemption price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date fixed for redemption. Prior to the consummation of the Phipps Acquisition and the satisfaction of the Minimum Equity Condition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes and the obligation of the Company to consummate the Special Redemption will be secured by such funds (the "Trust Funds"). </TABLE> <TABLE> <S> <C> OPTIONAL REDEMPTION BY THE COMPANY.......... The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after , 2001, at the redemption prices set forth herein, plus accrued and unpaid interest to the date fixed for redemption. In addition, at any time prior to , 1999, the Company, at its option, may redeem up to 35% of the aggregate principal amount of the Notes originally issued with the cash proceeds received by the Company from one or more Public Equity Offerings, other than the Concurrent Offering, at any time or from time to time, at a redemption price equal to % of the principal amount thereof, plus accrued and unpaid interest to the date fixed for redemption; PROVIDED, HOWEVER, that at least $104.0 million in aggregate principal amount of the Notes remain outstanding immediately after any such redemption. CHANGE OF CONTROL OFFER..................... Upon a Change of Control, the Company has the obligation to offer to purchase all the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. See "Description of the Notes -- Change of Control" for a discussion of the circumstances in which the Company may not be required to make a Change of Control Offer (as defined). OFFERS TO PURCHASE.......................... In the event of certain asset sales, the Company will be required to offer to repurchase the Notes at 100% of their principal amount plus accrued and unpaid interest, if any, to the date of repurchase with the net proceeds of such asset sales. SUBORDINATION............................... The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company, including all indebtedness of the Company under the Senior Credit Facility. As of June 30, 1996, on a pro forma basis after giving effect to this Offering, the Concurrent Offering, the KTVE Sale, the Financing and the application of the net proceeds therefrom, and to the Phipps Acquisition, the Company would have had approximately $183.6 million of indebtedness outstanding, of which $23.6 million would be Senior Debt. SUBSIDIARY GUARANTEES....................... The Notes will be guaranteed, jointly and severally, fully and unconditionally, on a senior subordinated basis by the Subsidiary Guarantors (the "Subsidiary Guarantees"). The obligations of any Subsidiary Guarantor with respect to its Subsidiary Guarantee will be subordinated in right of payment, to the same extent as the obligations of the Company in respect of the Notes, to all existing and future Guarantor Senior Debt of such Subsidiary Guarantor, which will include any guarantee by such Subsidiary Guarantor of the Company's indebtedness under the Senior Credit Facility. </TABLE> <TABLE> <S> <C> PRINCIPAL COVENANTS......................... The Indenture for the Notes (the "Indenture") will impose certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt or Guarantor Senior Debt and senior in right of payment to the Notes or any Subsidiary Guarantee, incur liens, impose restrictions on the ability of a subsidiary to pay dividends or make certain payments to the Company, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. USE OF PROCEEDS............................. The Company intends to use the proceeds from the sale of the Notes, together with the proceeds of the Concurrent Offering, the other proceeds of the Financing and the Company's working capital, to (i) consummate the Phipps Acquisition, (ii) retire indebtedness under the Old Credit Facility and the Senior Note and (iii) pay related fees and expenses. However, in the event the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996, the Company will be obligated to redeem the Notes. See "The Phipps Acquisition, the KTVE Sale and the Financing" and "Description of the Notes-Redemption-Special Redemption."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0001018360_wkxt_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001018360_wkxt_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING INFORMATION IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. AS USED HEREIN, UNLESS THE CONTEXT OTHERWISE REQUIRES, THE "COMPANY" MEANS GRAY COMMUNICATIONS SYSTEMS, INC. AND ITS SUBSIDIARIES. THE COMPANY HAS NOT YET CONSUMMATED THE PHIPPS ACQUISITION (AS DEFINED) AND THERE CAN BE NO ASSURANCE THAT THE PHIPPS ACQUISITION WILL BE CONSUMMATED. HOWEVER, EXCEPT WITH RESPECT TO HISTORICAL FINANCIAL STATEMENTS AND UNLESS THE CONTEXT INDICATES OTHERWISE, THE PHIPPS BUSINESS (AS DEFINED) IS INCLUDED IN THE DESCRIPTION OF THE COMPANY. SEE "THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING." UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION GRANTED BY THE COMPANY TO THE UNDERWRITERS IN THE CONCURRENT OFFERING IS NOT EXERCISED. ALL INFORMATION IN THIS PROSPECTUS HAS BEEN ADJUSTED TO GIVE EFFECT TO A 3-FOR-2 SPLIT OF THE CLASS A COMMON STOCK, EFFECTED IN THE FORM OF A STOCK DIVIDEND DECLARED ON OCTOBER 2, 1995. UNLESS OTHERWISE INDICATED, ALL STATION RANK, IN-MARKET SHARE AND TELEVISION HOUSEHOLD DATA IN THIS PROSPECTUS ARE DERIVED FROM THE NIELSEN STATION INDEX, VIEWERS IN PROFILE, DATED NOVEMBER 1995, AS PREPARED BY A.C. NIELSEN COMPANY ("NIELSEN"). THE COMPANY The Company owns and operates seven network-affiliated television stations in medium-size markets in the southeastern United States, six of which are ranked number one in their respective markets (which includes two television stations that are part of the Phipps Business). Five of the stations are affiliated with the CBS Television Network, a division of CBS, Inc. ("CBS") and two are affiliated with the NBC Television Network, a division of the National Broadcasting Company, Incorporated ("NBC"). In connection with the Phipps Acquisition (described below), the Company will be required under current regulations of the Federal Communications Commission (the "FCC") to divest its NBC affiliates in Albany, Georgia and Panama City, Florida. For a discussion of the Company's plans regarding such divestiture, see "Risk Factors -- FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." The Company also owns and operates three daily newspapers, two weekly, advertising only publications ("shoppers"), and a paging business (which is part of the Phipps Business), all located in the Southeast. The Company derives significant operating advantages and cost saving synergies through the size of its television station group and the regional focus of its television and publishing operations. These advantages and synergies include (i) sharing television production facilities, equipment and regionally oriented programming, (ii) the ability to purchase television programming for the group as a whole, (iii) negotiating network affiliation agreements on a group basis and (iv) purchasing newsprint and other supplies in bulk. In addition, the Company believes that its regional focus can provide advertisers with an efficient network through which to advertise in the fast-growing Southeast. In 1993, after the acquisition of a large block of Class A Common Stock by a new investor, the Company implemented a strategy to foster growth through strategic acquisitions. Since 1994, the Company's significant acquisitions have included three television stations and two newspapers, all located in the Southeast. As a result of the Company's acquisitions and in support of its growth strategy, the Company has added certain key members of management and has greatly expanded its operations in the television broadcasting and newspaper publishing businesses. On September 10, 1996, J. Mack Robinson, a director of the Company, was appointed President and Chief Executive Officer of the Company on an interim basis, to succeed Ralph W. Gabbard, who had died suddenly. The Company expects to commence a search to locate a new President as soon as practicable following this Offering. On September 11, 1996, Robert S. Prather, Jr., a director of the Company, was appointed Executive Vice President-Acquisitions on an interim basis. In January 1996, the Company acquired (the "Augusta Acquisition") WRDW-TV ("WRDW"), a CBS affiliate serving Augusta, Georgia (the "Augusta Business"). In December 1995, the Company entered into an asset purchase agreement to acquire (the "Phipps Acquisition") two CBS-affiliated stations, WCTV-TV ("WCTV") serving Tallahassee, Florida/Thomasville, Georgia and WKXT-TV ("WKXT") in Knoxville, Tennessee, a satellite broadcasting business and a paging business (collectively, the "Phipps Business"). The Company believes that the Phipps Acquisition will further enhance the Company's position as a major regional television broadcaster and is highly attractive for a number of reasons, including (i) the stations' strategic fit in the Southeast, (ii) WCTV's leading station market position and WKXT's significant growth potential, (iii) strong station broadcast cash flows, (iv) opportunities for revenue growth utilizing the Company's extensive management expertise with medium-size stations and (v) opportunities for synergies between WCTV and WKXT and the Company's existing stations with regard to revenue enhancement and cost controls. The consummation of the Phipps Acquisition is currently expected to occur by September 30, 1996, although there can be no assurance with respect thereto. In August 1996, the Company sold the assets (the "KTVE Sale") of KTVE Inc. ("KTVE"), a television station serving Monroe, Louisiana/El Dorado, Arkansas for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing. For the year ended December 31, 1995, on a pro forma basis, the Company had net revenues, Media Cash Flow (the sum of broadcast cash flow, publishing cash flow and paging cash flow), operating cash flow and net (loss) of $90.6 million, $30.3 million, $28.1 million and $(3.6) million, respectively. For the six months ended June 30, 1996, on a pro forma basis, the Company had net revenues, Media Cash Flow, operating cash flow and net income of $47.3 million, $17.9 million, $16.3 million and $251,000, respectively. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the year ended December 31, 1995 increased 148.2%, 188.4% and 227.9%, respectively, while net income decreased 230.3% from the historical amounts for the year ended December 31, 1994. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the six months ended June 30, 1996 increased 67.1%, 114.7% and 122.8%, respectively, while net income decreased 78.7% from the historical amounts for the six months ended June 30, 1995. The Company's pro forma net income for its television stations for the year ended December 31, 1995 and for the six months ended June 30, 1996 was $1.6 million and $1.4 million, respectively. The following table sets forth certain information for each of the Company's television stations. <TABLE> <CAPTION> ------------------------------------------------------------------------------------------------------------------ PRO FORMA --------------------------------------- IN-MARKET YEAR ENDED DECEMBER SIX MONTHS ENDED STATION SHARE OF 31, 1995 JUNE 30, 1996 RANK HOUSEHOLDS ------------------- ------------------ NETWORK YEAR DMA CHANNEL/ IN VIEWING NET OPERATING NET OPERATING STATION AFFILIATION MARKET ACQUIRED RANK(1) FREQUENCY DMA(2) TV REVENUES INCOME(6) REVENUES INCOME(6) - -------- ------- ------------- ------- -------- --------- -------- --------- --------- -------- -------- -------- (IN THOUSANDS) (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> WKYT CBS Lexington, KY 1994 68 27/UHF(3) 1 33% $15,553 $5,247 $7,845 $2,701 WYMT CBS Hazard, KY 1994 68 57/UHF(3) 1(4) 24 3,721 831 2,107 530 WRDW CBS Augusta, GA 1996 111 12/VHF 1 36 8,888 1,853 4,489 1,149 WALB (5) NBC Albany, GA 1954 152 10/VHF 1 80 9,445 4,795 5,099 2,658 Panama City, WJHG (5) NBC FL 1960 159 7/VHF 1 53 3,843 270 2,409 476 PHIPPS ACQUISITION WKXT CBS Knoxville, TN 62 8/VHF 3 22 9,269 2,204 4,387 903 Tallahassee, WCTV CBS FL/ 116 6/VHF 1 60 11,862 4,229 6,212 2,254 Thomasville, GA </TABLE> - ------------------------------ (1) Ranking of designated market area as defined by Nielsen ("DMA") served by a station among all DMAs is measured by the number of television households within the DMA based on the November 1995 Nielsen estimates. (2) Represents station rank in DMA as determined by November 1995 Nielsen estimates of the number of television sets tuned to the Company's station as a percentage of the number of television sets in use in the market for the Sunday through Saturday 6 a.m. to 2 a.m. time period. (3) All stations in the market are UHF stations. (4) The market area served by WYMT is an 18-county trading area, as defined by Nielsen, and is included in the Lexington, Kentucky DMA. WYMT's station rank is based upon its position in the 18-county trading area. (5) The Company will be required under current FCC regulations to divest WALB and WJHG in connection with the Phipps Acquisition. For a discussion of the Company's plans, see "Risk Factors-FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." (6) Represents pro forma income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes. The Company's three newspapers, THE ALBANY HERALD, THE ROCKDALE CITIZEN and the GWINNETT DAILY POST and two shoppers had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $21.9 million and $660,000, respectively, for the year ended December 31, 1995, and $11.3 million and $1.3 million for the six months ended June 30, 1996, respectively. The satellite broadcasting business and paging business, which are a part of the Phipps Business, had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $6.2 million and $542,000 for the year ended December 31, 1995 and $3.5 million and $467,000 for the six months ended June 30, 1996, respectively. BUSINESS STRATEGY The Company's business strategy includes the following key elements: - STRONG LOCAL PRESENCE. Each of the Company's television stations seeks to achieve a distinct identity through its emphasis on local programming. A key objective is to build audience loyalty through the development of a strong local news franchise. Strong local news generates high viewership and results in higher ratings for programs both preceding and following the news, which increases revenues and Media Cash Flow. - REGIONAL FOCUS. The Company believes its regional focus has competitive advantages, including the ability to purchase and produce programming that can be used by multiple Company-owned stations as well as the opportunity to sell advertising on multiple stations as a single buy. In addition, the proximity of the Company's operations allows the sharing of equipment, management and marketing expertise. - TARGETED MARKETING. The Company seeks to increase its advertising revenues and Media Cash Flow by expanding existing relationships with local and national advertisers and by attracting new advertisers through targeted marketing techniques and carefully tailored programming. The Company works closely with advertisers to develop advertising campaigns that match specifically targeted audience segments including sponsoring and staging various special events such as fishing tournaments, boat shows and bridal expositions. - COST CONTROLS. Through its strategic planning and annual budgeting processes, the Company continually seeks to identify and implement cost savings opportunities at each of its stations and publications in order to increase Media Cash Flow. The Company's ownership of multiple stations and publications also benefits each operation in negotiating favorable terms with programming syndicators, newsprint suppliers, national sales representatives and other vendors. - SELECTIVE ACQUISITIONS. The Company has focused on acquiring television stations where the Company believes there is the potential for improvements in revenue share, audience share and cost control. The Company focuses on southeastern markets of medium size because the Company believes these markets offer superior opportunities in terms of projected population and economic growth, leading to higher advertising and circulation revenues. In assessing acquisitions, the Company targets stations and publications where it sees specific opportunities for revenue enhancement while controlling expenditures, utilizing management's significant experience with local and national advertising sales and in operating similar businesses. In appropriate circumstances, the Company will dispose of assets that it deems non-essential to its operating or growth strategy. THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING The Company has entered into an agreement to acquire WCTV and WKXT, a satellite broadcasting business and a paging business in the Southeast. The purchase price for the Phipps Acquisition is approximately $185 million, including fees, expenses and working capital and other adjustments. The consummation of the Phipps Acquisition is expected to occur by September 30, 1996, although there can be no assurance with respect thereto. See "Risk Factors -- Possible Non-Consummation of the Phipps Acquisition." Pursuant to an agreement, dated as of May 15, 1996 (the "KTVE Agreement"), with GOCOM Television of Ouachita, L.P., in August 1996, the Company sold the assets of KTVE for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing (approximately $870,000), to the extent collected by the buyer, to be paid to the Company 150 days following the date of closing. For the year ended December 31, 1995, KTVE had net revenues, Media Cash Flow and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) of $4.2 million, $916,000 and $437,000, respectively, and $2.3 million, $598,000 and $360,000, respectively, for the six months ended June 30, 1996. The Company estimates that the gain, net of estimated taxes, on the KTVE Sale was approximately $2.8 million. In addition to the KTVE Sale and the consummation of this Offering, the Concurrent Offering and the Phipps Acquisition, the Company intends to implement a financing plan (the "Financing") to increase liquidity and improve operating and financial flexibility. Pursuant to the Financing, the Company will (i) retire approximately $49.5 million aggregate principal amount of outstanding indebtedness under its senior secured bank credit facility (the "Old Credit Facility"), together with accrued interest thereon, (ii) retire approximately $25.0 million aggregate principal amount of outstanding indebtedness under its senior note due 2003 (the "Senior Note"), together with accrued interest thereon and a prepayment fee, (iii) issue $10.0 million liquidation preference of its Series A preferred stock (the "Series A Preferred Stock") in exchange for its outstanding $10.0 million aggregate principal amount 8% subordinated note (the "8% Note") issued to Bull Run Corporation ("Bull Run"), a principal shareholder of the Company, (iv) issue to Bull Run, J. Mack Robinson, the President, Chief Executive Officer and a director of the Company, and certain of his affiliates $10.0 million liquidation preference of its Series B preferred stock (the "Series B Preferred Stock" and together with the Series A Preferred Stock, the "Preferred Stock") with warrants to purchase up to 500,000 shares of Class A Common Stock (representing 10.1% of the currently issued and outstanding Class A Common Stock after giving effect to the exercise of such warrants) for cash proceeds of $10.0 million and (v) enter into a new senior secured bank credit facility (the "Senior Credit Facility") to provide for a term loan and revolving credit facility aggregating $125.0 million. The cash required for the consummation of the Phipps Acquisition, the repayment of indebtedness and related transaction costs will be provided by the net proceeds of this Offering, the Concurrent Offering and the sale of the Series B Preferred Stock and the warrants, borrowings under the Senior Credit Facility and the Company's working capital. For a description of the Senior Credit Facility and the Preferred Stock, see "Description of Certain Indebtedness" and "Management--Compensation Committee Interlocks and Insider Participation-Issuances of Preferred Stock." The consummation of this Offering and the placement of funds into escrow are conditioned upon the issuance of the Series A Preferred Stock in exchange for the 8% Note, the issuance of the Series B Preferred Stock and the entering into of the Senior Credit Facility. The consummation of this Offering and the placement of the net proceeds thereof into escrow are not conditioned upon the consummation of the Concurrent Offering or the Phipps Acquisition or the other elements of the Financing. However the release of the net proceeds hereof from escrow is conditioned, among other things, upon the satisfaction of the Minimum Equity Condition, the retirement of the Senior Note and the Old Credit Facility and the consummation of the Phipps Acquisition. The Notes are subject to a mandatory redemption on the Special Redemption Date at the Special Redemption Price if either the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996. See "Description of the Notes-Redemption-Special Redemption." The Senior Credit Facility will provide that no borrowings may be made thereunder until the closing of the Phipps Acquisition. Accordingly, if the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied, the Notes will be redeemed by the Company, the Old Credit Facility will remain in place and the Company will not borrow under the Senior Credit Facility. The following table sets forth the estimated sources and uses of funds relating to this Offering, the Concurrent Offering, the Phipps Acquisition and the Financing: <TABLE> <CAPTION> ---------- (IN MILLIONS) AMOUNT ---------- <S> <C> SOURCES OF FUNDS: The Notes offered hereby $160.0 The Concurrent Offering (1) 73.5 Sale of Series B Preferred Stock and Warrants 10.0 Borrowings under the Senior Credit Facility 22.9 Working capital (2) 9.5 ---------- TOTAL $275.9 ---------- ---------- USES OF FUNDS: Consummation of Phipps Acquisition $185.0 Retire indebtedness under the Old Credit Facility (3) 49.5 Retire indebtedness under the Senior Note (4) 25.0 Fees and expenses (5) 16.4 ---------- TOTAL $275.9 ---------- ---------- </TABLE> - ------------------------------ (1) Assumes estimated gross proceeds from the Concurrent Offering of $73.5 million and estimated net proceeds therefrom of $67.6 million. It is a condition of the release from escrow of the net proceeds of this Offering that the Company shall have consummated one or more equity offerings having gross proceeds of not less than $65.0 million. To the extent that the gross proceeds of any such equity offerings are less than $73.5 million, the Company intends to borrow such difference under its Senior Credit Facility. It is anticipated that there will not be a significant interval between the closing of this Offering and the closing of the Concurrent Offering. (2) The source of these funds was the KTVE Sale. (3) Borrowings under the Old Credit Facility bear interest at formula rates based upon the applicable London inter-bank offered rate ("LIBOR") or prime rate at the time of borrowing plus a fixed spread and have a final maturity of 2003. As of June 30, 1996, the weighted average interest rate was 8.94%. (4) The indebtedness under the Senior Note bears interest at 10.7%. (5) Fees and expenses include underwriting costs for the Notes and the Concurrent Offering, fees payable in connection with the negotiation and execution of the Senior Credit Facility, fees payable in connection with the retirement of the Senior Note and legal, accounting and other transaction fees. Prior to the consummation of the Phipps Acquisition and the satisfaction of the Minimum Equity Condition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes. The Trust Funds will be invested in cash equivalents. The proceeds of the Concurrent Offering will be used to repay indebtedness under the Old Credit Facility, to retire the Senior Note and to provide funds for the Phipps Acquisition. THE OFFERING <TABLE> <S> <C> SECURITIES OFFERED.......................... $160,000,000 aggregate principal amount of % Senior Subordinated Notes due 2006. MATURITY DATE............................... , 2006. INTEREST PAYMENT DATES...................... and , commencing , 1997. SPECIAL REDEMPTION BY THE COMPANY........... If the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996, the Company will be required to redeem (the "Special Redemption") the Notes on or prior to December 31, 1996 (the "Special Redemption Date") at a redemption price (the "Special Redemption Price") equal to 101% of the principal amount of the Notes plus accrued and unpaid interest to the Special Redemption Date. At any time prior to December 23, 1996, if the Phipps Acquisition has not been consummated or the Minimum Equity Condition is not satisfied, the Company may, at its option, redeem the Notes, in whole but not in part, at a redemption price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date fixed for redemption. Prior to the consummation of the Phipps Acquisition and the satisfaction of the Minimum Equity Condition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes and the obligation of the Company to consummate the Special Redemption will be secured by such funds (the "Trust Funds"). </TABLE> <TABLE> <S> <C> OPTIONAL REDEMPTION BY THE COMPANY.......... The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after , 2001, at the redemption prices set forth herein, plus accrued and unpaid interest to the date fixed for redemption. In addition, at any time prior to , 1999, the Company, at its option, may redeem up to 35% of the aggregate principal amount of the Notes originally issued with the cash proceeds received by the Company from one or more Public Equity Offerings, other than the Concurrent Offering, at any time or from time to time, at a redemption price equal to % of the principal amount thereof, plus accrued and unpaid interest to the date fixed for redemption; PROVIDED, HOWEVER, that at least $104.0 million in aggregate principal amount of the Notes remain outstanding immediately after any such redemption. CHANGE OF CONTROL OFFER..................... Upon a Change of Control, the Company has the obligation to offer to purchase all the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. See "Description of the Notes -- Change of Control" for a discussion of the circumstances in which the Company may not be required to make a Change of Control Offer (as defined). OFFERS TO PURCHASE.......................... In the event of certain asset sales, the Company will be required to offer to repurchase the Notes at 100% of their principal amount plus accrued and unpaid interest, if any, to the date of repurchase with the net proceeds of such asset sales. SUBORDINATION............................... The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company, including all indebtedness of the Company under the Senior Credit Facility. As of June 30, 1996, on a pro forma basis after giving effect to this Offering, the Concurrent Offering, the KTVE Sale, the Financing and the application of the net proceeds therefrom, and to the Phipps Acquisition, the Company would have had approximately $183.6 million of indebtedness outstanding, of which $23.6 million would be Senior Debt. SUBSIDIARY GUARANTEES....................... The Notes will be guaranteed, jointly and severally, fully and unconditionally, on a senior subordinated basis by the Subsidiary Guarantors (the "Subsidiary Guarantees"). The obligations of any Subsidiary Guarantor with respect to its Subsidiary Guarantee will be subordinated in right of payment, to the same extent as the obligations of the Company in respect of the Notes, to all existing and future Guarantor Senior Debt of such Subsidiary Guarantor, which will include any guarantee by such Subsidiary Guarantor of the Company's indebtedness under the Senior Credit Facility. </TABLE> <TABLE> <S> <C> PRINCIPAL COVENANTS......................... The Indenture for the Notes (the "Indenture") will impose certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt or Guarantor Senior Debt and senior in right of payment to the Notes or any Subsidiary Guarantee, incur liens, impose restrictions on the ability of a subsidiary to pay dividends or make certain payments to the Company, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. USE OF PROCEEDS............................. The Company intends to use the proceeds from the sale of the Notes, together with the proceeds of the Concurrent Offering, the other proceeds of the Financing and the Company's working capital, to (i) consummate the Phipps Acquisition, (ii) retire indebtedness under the Old Credit Facility and the Senior Note and (iii) pay related fees and expenses. However, in the event the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996, the Company will be obligated to redeem the Notes. See "The Phipps Acquisition, the KTVE Sale and the Financing" and "Description of the Notes-Redemption-Special Redemption."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0001018361_wrdw_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001018361_wrdw_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..234efb1522b03b62881985b1b1a5693f2c1937cb
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING INFORMATION IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. AS USED HEREIN, UNLESS THE CONTEXT OTHERWISE REQUIRES, THE "COMPANY" MEANS GRAY COMMUNICATIONS SYSTEMS, INC. AND ITS SUBSIDIARIES. THE COMPANY HAS NOT YET CONSUMMATED THE PHIPPS ACQUISITION (AS DEFINED) AND THERE CAN BE NO ASSURANCE THAT THE PHIPPS ACQUISITION WILL BE CONSUMMATED. HOWEVER, EXCEPT WITH RESPECT TO HISTORICAL FINANCIAL STATEMENTS AND UNLESS THE CONTEXT INDICATES OTHERWISE, THE PHIPPS BUSINESS (AS DEFINED) IS INCLUDED IN THE DESCRIPTION OF THE COMPANY. SEE "THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING." UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION GRANTED BY THE COMPANY TO THE UNDERWRITERS IN THE CONCURRENT OFFERING IS NOT EXERCISED. ALL INFORMATION IN THIS PROSPECTUS HAS BEEN ADJUSTED TO GIVE EFFECT TO A 3-FOR-2 SPLIT OF THE CLASS A COMMON STOCK, EFFECTED IN THE FORM OF A STOCK DIVIDEND DECLARED ON OCTOBER 2, 1995. UNLESS OTHERWISE INDICATED, ALL STATION RANK, IN-MARKET SHARE AND TELEVISION HOUSEHOLD DATA IN THIS PROSPECTUS ARE DERIVED FROM THE NIELSEN STATION INDEX, VIEWERS IN PROFILE, DATED NOVEMBER 1995, AS PREPARED BY A.C. NIELSEN COMPANY ("NIELSEN"). THE COMPANY The Company owns and operates seven network-affiliated television stations in medium-size markets in the southeastern United States, six of which are ranked number one in their respective markets (which includes two television stations that are part of the Phipps Business). Five of the stations are affiliated with the CBS Television Network, a division of CBS, Inc. ("CBS") and two are affiliated with the NBC Television Network, a division of the National Broadcasting Company, Incorporated ("NBC"). In connection with the Phipps Acquisition (described below), the Company will be required under current regulations of the Federal Communications Commission (the "FCC") to divest its NBC affiliates in Albany, Georgia and Panama City, Florida. For a discussion of the Company's plans regarding such divestiture, see "Risk Factors -- FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." The Company also owns and operates three daily newspapers, two weekly, advertising only publications ("shoppers"), and a paging business (which is part of the Phipps Business), all located in the Southeast. The Company derives significant operating advantages and cost saving synergies through the size of its television station group and the regional focus of its television and publishing operations. These advantages and synergies include (i) sharing television production facilities, equipment and regionally oriented programming, (ii) the ability to purchase television programming for the group as a whole, (iii) negotiating network affiliation agreements on a group basis and (iv) purchasing newsprint and other supplies in bulk. In addition, the Company believes that its regional focus can provide advertisers with an efficient network through which to advertise in the fast-growing Southeast. In 1993, after the acquisition of a large block of Class A Common Stock by a new investor, the Company implemented a strategy to foster growth through strategic acquisitions. Since 1994, the Company's significant acquisitions have included three television stations and two newspapers, all located in the Southeast. As a result of the Company's acquisitions and in support of its growth strategy, the Company has added certain key members of management and has greatly expanded its operations in the television broadcasting and newspaper publishing businesses. On September 10, 1996, J. Mack Robinson, a director of the Company, was appointed President and Chief Executive Officer of the Company on an interim basis, to succeed Ralph W. Gabbard, who had died suddenly. The Company expects to commence a search to locate a new President as soon as practicable following this Offering. On September 11, 1996, Robert S. Prather, Jr., a director of the Company, was appointed Executive Vice President-Acquisitions on an interim basis. In January 1996, the Company acquired (the "Augusta Acquisition") WRDW-TV ("WRDW"), a CBS affiliate serving Augusta, Georgia (the "Augusta Business"). In December 1995, the Company entered into an asset purchase agreement to acquire (the "Phipps Acquisition") two CBS-affiliated stations, WCTV-TV ("WCTV") serving Tallahassee, Florida/Thomasville, Georgia and WKXT-TV ("WKXT") in Knoxville, Tennessee, a satellite broadcasting business and a paging business (collectively, the "Phipps Business"). The Company believes that the Phipps Acquisition will further enhance the Company's position as a major regional television broadcaster and is highly attractive for a number of reasons, including (i) the stations' strategic fit in the Southeast, (ii) WCTV's leading station market position and WKXT's significant growth potential, (iii) strong station broadcast cash flows, (iv) opportunities for revenue growth utilizing the Company's extensive management expertise with medium-size stations and (v) opportunities for synergies between WCTV and WKXT and the Company's existing stations with regard to revenue enhancement and cost controls. The consummation of the Phipps Acquisition is currently expected to occur by September 30, 1996, although there can be no assurance with respect thereto. In August 1996, the Company sold the assets (the "KTVE Sale") of KTVE Inc. ("KTVE"), a television station serving Monroe, Louisiana/El Dorado, Arkansas for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing. For the year ended December 31, 1995, on a pro forma basis, the Company had net revenues, Media Cash Flow (the sum of broadcast cash flow, publishing cash flow and paging cash flow), operating cash flow and net (loss) of $90.6 million, $30.3 million, $28.1 million and $(3.6) million, respectively. For the six months ended June 30, 1996, on a pro forma basis, the Company had net revenues, Media Cash Flow, operating cash flow and net income of $47.3 million, $17.9 million, $16.3 million and $251,000, respectively. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the year ended December 31, 1995 increased 148.2%, 188.4% and 227.9%, respectively, while net income decreased 230.3% from the historical amounts for the year ended December 31, 1994. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the six months ended June 30, 1996 increased 67.1%, 114.7% and 122.8%, respectively, while net income decreased 78.7% from the historical amounts for the six months ended June 30, 1995. The Company's pro forma net income for its television stations for the year ended December 31, 1995 and for the six months ended June 30, 1996 was $1.6 million and $1.4 million, respectively. The following table sets forth certain information for each of the Company's television stations. <TABLE> <CAPTION> ------------------------------------------------------------------------------------------------------------------ PRO FORMA --------------------------------------- IN-MARKET YEAR ENDED DECEMBER SIX MONTHS ENDED STATION SHARE OF 31, 1995 JUNE 30, 1996 RANK HOUSEHOLDS ------------------- ------------------ NETWORK YEAR DMA CHANNEL/ IN VIEWING NET OPERATING NET OPERATING STATION AFFILIATION MARKET ACQUIRED RANK(1) FREQUENCY DMA(2) TV REVENUES INCOME(6) REVENUES INCOME(6) - -------- ------- ------------- ------- -------- --------- -------- --------- --------- -------- -------- -------- (IN THOUSANDS) (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> WKYT CBS Lexington, KY 1994 68 27/UHF(3) 1 33% $15,553 $5,247 $7,845 $2,701 WYMT CBS Hazard, KY 1994 68 57/UHF(3) 1(4) 24 3,721 831 2,107 530 WRDW CBS Augusta, GA 1996 111 12/VHF 1 36 8,888 1,853 4,489 1,149 WALB (5) NBC Albany, GA 1954 152 10/VHF 1 80 9,445 4,795 5,099 2,658 Panama City, WJHG (5) NBC FL 1960 159 7/VHF 1 53 3,843 270 2,409 476 PHIPPS ACQUISITION WKXT CBS Knoxville, TN 62 8/VHF 3 22 9,269 2,204 4,387 903 Tallahassee, WCTV CBS FL/ 116 6/VHF 1 60 11,862 4,229 6,212 2,254 Thomasville, GA </TABLE> - ------------------------------ (1) Ranking of designated market area as defined by Nielsen ("DMA") served by a station among all DMAs is measured by the number of television households within the DMA based on the November 1995 Nielsen estimates. (2) Represents station rank in DMA as determined by November 1995 Nielsen estimates of the number of television sets tuned to the Company's station as a percentage of the number of television sets in use in the market for the Sunday through Saturday 6 a.m. to 2 a.m. time period. (3) All stations in the market are UHF stations. (4) The market area served by WYMT is an 18-county trading area, as defined by Nielsen, and is included in the Lexington, Kentucky DMA. WYMT's station rank is based upon its position in the 18-county trading area. (5) The Company will be required under current FCC regulations to divest WALB and WJHG in connection with the Phipps Acquisition. For a discussion of the Company's plans, see "Risk Factors-FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." (6) Represents pro forma income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes. The Company's three newspapers, THE ALBANY HERALD, THE ROCKDALE CITIZEN and the GWINNETT DAILY POST and two shoppers had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $21.9 million and $660,000, respectively, for the year ended December 31, 1995, and $11.3 million and $1.3 million for the six months ended June 30, 1996, respectively. The satellite broadcasting business and paging business, which are a part of the Phipps Business, had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $6.2 million and $542,000 for the year ended December 31, 1995 and $3.5 million and $467,000 for the six months ended June 30, 1996, respectively. BUSINESS STRATEGY The Company's business strategy includes the following key elements: - STRONG LOCAL PRESENCE. Each of the Company's television stations seeks to achieve a distinct identity through its emphasis on local programming. A key objective is to build audience loyalty through the development of a strong local news franchise. Strong local news generates high viewership and results in higher ratings for programs both preceding and following the news, which increases revenues and Media Cash Flow. - REGIONAL FOCUS. The Company believes its regional focus has competitive advantages, including the ability to purchase and produce programming that can be used by multiple Company-owned stations as well as the opportunity to sell advertising on multiple stations as a single buy. In addition, the proximity of the Company's operations allows the sharing of equipment, management and marketing expertise. - TARGETED MARKETING. The Company seeks to increase its advertising revenues and Media Cash Flow by expanding existing relationships with local and national advertisers and by attracting new advertisers through targeted marketing techniques and carefully tailored programming. The Company works closely with advertisers to develop advertising campaigns that match specifically targeted audience segments including sponsoring and staging various special events such as fishing tournaments, boat shows and bridal expositions. - COST CONTROLS. Through its strategic planning and annual budgeting processes, the Company continually seeks to identify and implement cost savings opportunities at each of its stations and publications in order to increase Media Cash Flow. The Company's ownership of multiple stations and publications also benefits each operation in negotiating favorable terms with programming syndicators, newsprint suppliers, national sales representatives and other vendors. - SELECTIVE ACQUISITIONS. The Company has focused on acquiring television stations where the Company believes there is the potential for improvements in revenue share, audience share and cost control. The Company focuses on southeastern markets of medium size because the Company believes these markets offer superior opportunities in terms of projected population and economic growth, leading to higher advertising and circulation revenues. In assessing acquisitions, the Company targets stations and publications where it sees specific opportunities for revenue enhancement while controlling expenditures, utilizing management's significant experience with local and national advertising sales and in operating similar businesses. In appropriate circumstances, the Company will dispose of assets that it deems non-essential to its operating or growth strategy. THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING The Company has entered into an agreement to acquire WCTV and WKXT, a satellite broadcasting business and a paging business in the Southeast. The purchase price for the Phipps Acquisition is approximately $185 million, including fees, expenses and working capital and other adjustments. The consummation of the Phipps Acquisition is expected to occur by September 30, 1996, although there can be no assurance with respect thereto. See "Risk Factors -- Possible Non-Consummation of the Phipps Acquisition." Pursuant to an agreement, dated as of May 15, 1996 (the "KTVE Agreement"), with GOCOM Television of Ouachita, L.P., in August 1996, the Company sold the assets of KTVE for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing (approximately $870,000), to the extent collected by the buyer, to be paid to the Company 150 days following the date of closing. For the year ended December 31, 1995, KTVE had net revenues, Media Cash Flow and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) of $4.2 million, $916,000 and $437,000, respectively, and $2.3 million, $598,000 and $360,000, respectively, for the six months ended June 30, 1996. The Company estimates that the gain, net of estimated taxes, on the KTVE Sale was approximately $2.8 million. In addition to the KTVE Sale and the consummation of this Offering, the Concurrent Offering and the Phipps Acquisition, the Company intends to implement a financing plan (the "Financing") to increase liquidity and improve operating and financial flexibility. Pursuant to the Financing, the Company will (i) retire approximately $49.5 million aggregate principal amount of outstanding indebtedness under its senior secured bank credit facility (the "Old Credit Facility"), together with accrued interest thereon, (ii) retire approximately $25.0 million aggregate principal amount of outstanding indebtedness under its senior note due 2003 (the "Senior Note"), together with accrued interest thereon and a prepayment fee, (iii) issue $10.0 million liquidation preference of its Series A preferred stock (the "Series A Preferred Stock") in exchange for its outstanding $10.0 million aggregate principal amount 8% subordinated note (the "8% Note") issued to Bull Run Corporation ("Bull Run"), a principal shareholder of the Company, (iv) issue to Bull Run, J. Mack Robinson, the President, Chief Executive Officer and a director of the Company, and certain of his affiliates $10.0 million liquidation preference of its Series B preferred stock (the "Series B Preferred Stock" and together with the Series A Preferred Stock, the "Preferred Stock") with warrants to purchase up to 500,000 shares of Class A Common Stock (representing 10.1% of the currently issued and outstanding Class A Common Stock after giving effect to the exercise of such warrants) for cash proceeds of $10.0 million and (v) enter into a new senior secured bank credit facility (the "Senior Credit Facility") to provide for a term loan and revolving credit facility aggregating $125.0 million. The cash required for the consummation of the Phipps Acquisition, the repayment of indebtedness and related transaction costs will be provided by the net proceeds of this Offering, the Concurrent Offering and the sale of the Series B Preferred Stock and the warrants, borrowings under the Senior Credit Facility and the Company's working capital. For a description of the Senior Credit Facility and the Preferred Stock, see "Description of Certain Indebtedness" and "Management--Compensation Committee Interlocks and Insider Participation-Issuances of Preferred Stock." The consummation of this Offering and the placement of funds into escrow are conditioned upon the issuance of the Series A Preferred Stock in exchange for the 8% Note, the issuance of the Series B Preferred Stock and the entering into of the Senior Credit Facility. The consummation of this Offering and the placement of the net proceeds thereof into escrow are not conditioned upon the consummation of the Concurrent Offering or the Phipps Acquisition or the other elements of the Financing. However the release of the net proceeds hereof from escrow is conditioned, among other things, upon the satisfaction of the Minimum Equity Condition, the retirement of the Senior Note and the Old Credit Facility and the consummation of the Phipps Acquisition. The Notes are subject to a mandatory redemption on the Special Redemption Date at the Special Redemption Price if either the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996. See "Description of the Notes-Redemption-Special Redemption." The Senior Credit Facility will provide that no borrowings may be made thereunder until the closing of the Phipps Acquisition. Accordingly, if the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied, the Notes will be redeemed by the Company, the Old Credit Facility will remain in place and the Company will not borrow under the Senior Credit Facility. The following table sets forth the estimated sources and uses of funds relating to this Offering, the Concurrent Offering, the Phipps Acquisition and the Financing: <TABLE> <CAPTION> ---------- (IN MILLIONS) AMOUNT ---------- <S> <C> SOURCES OF FUNDS: The Notes offered hereby $160.0 The Concurrent Offering (1) 73.5 Sale of Series B Preferred Stock and Warrants 10.0 Borrowings under the Senior Credit Facility 22.9 Working capital (2) 9.5 ---------- TOTAL $275.9 ---------- ---------- USES OF FUNDS: Consummation of Phipps Acquisition $185.0 Retire indebtedness under the Old Credit Facility (3) 49.5 Retire indebtedness under the Senior Note (4) 25.0 Fees and expenses (5) 16.4 ---------- TOTAL $275.9 ---------- ---------- </TABLE> - ------------------------------ (1) Assumes estimated gross proceeds from the Concurrent Offering of $73.5 million and estimated net proceeds therefrom of $67.6 million. It is a condition of the release from escrow of the net proceeds of this Offering that the Company shall have consummated one or more equity offerings having gross proceeds of not less than $65.0 million. To the extent that the gross proceeds of any such equity offerings are less than $73.5 million, the Company intends to borrow such difference under its Senior Credit Facility. It is anticipated that there will not be a significant interval between the closing of this Offering and the closing of the Concurrent Offering. (2) The source of these funds was the KTVE Sale. (3) Borrowings under the Old Credit Facility bear interest at formula rates based upon the applicable London inter-bank offered rate ("LIBOR") or prime rate at the time of borrowing plus a fixed spread and have a final maturity of 2003. As of June 30, 1996, the weighted average interest rate was 8.94%. (4) The indebtedness under the Senior Note bears interest at 10.7%. (5) Fees and expenses include underwriting costs for the Notes and the Concurrent Offering, fees payable in connection with the negotiation and execution of the Senior Credit Facility, fees payable in connection with the retirement of the Senior Note and legal, accounting and other transaction fees. Prior to the consummation of the Phipps Acquisition and the satisfaction of the Minimum Equity Condition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes. The Trust Funds will be invested in cash equivalents. The proceeds of the Concurrent Offering will be used to repay indebtedness under the Old Credit Facility, to retire the Senior Note and to provide funds for the Phipps Acquisition. THE OFFERING <TABLE> <S> <C> SECURITIES OFFERED.......................... $160,000,000 aggregate principal amount of % Senior Subordinated Notes due 2006. MATURITY DATE............................... , 2006. INTEREST PAYMENT DATES...................... and , commencing , 1997. SPECIAL REDEMPTION BY THE COMPANY........... If the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996, the Company will be required to redeem (the "Special Redemption") the Notes on or prior to December 31, 1996 (the "Special Redemption Date") at a redemption price (the "Special Redemption Price") equal to 101% of the principal amount of the Notes plus accrued and unpaid interest to the Special Redemption Date. At any time prior to December 23, 1996, if the Phipps Acquisition has not been consummated or the Minimum Equity Condition is not satisfied, the Company may, at its option, redeem the Notes, in whole but not in part, at a redemption price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date fixed for redemption. Prior to the consummation of the Phipps Acquisition and the satisfaction of the Minimum Equity Condition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes and the obligation of the Company to consummate the Special Redemption will be secured by such funds (the "Trust Funds"). </TABLE> <TABLE> <S> <C> OPTIONAL REDEMPTION BY THE COMPANY.......... The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after , 2001, at the redemption prices set forth herein, plus accrued and unpaid interest to the date fixed for redemption. In addition, at any time prior to , 1999, the Company, at its option, may redeem up to 35% of the aggregate principal amount of the Notes originally issued with the cash proceeds received by the Company from one or more Public Equity Offerings, other than the Concurrent Offering, at any time or from time to time, at a redemption price equal to % of the principal amount thereof, plus accrued and unpaid interest to the date fixed for redemption; PROVIDED, HOWEVER, that at least $104.0 million in aggregate principal amount of the Notes remain outstanding immediately after any such redemption. CHANGE OF CONTROL OFFER..................... Upon a Change of Control, the Company has the obligation to offer to purchase all the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. See "Description of the Notes -- Change of Control" for a discussion of the circumstances in which the Company may not be required to make a Change of Control Offer (as defined). OFFERS TO PURCHASE.......................... In the event of certain asset sales, the Company will be required to offer to repurchase the Notes at 100% of their principal amount plus accrued and unpaid interest, if any, to the date of repurchase with the net proceeds of such asset sales. SUBORDINATION............................... The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company, including all indebtedness of the Company under the Senior Credit Facility. As of June 30, 1996, on a pro forma basis after giving effect to this Offering, the Concurrent Offering, the KTVE Sale, the Financing and the application of the net proceeds therefrom, and to the Phipps Acquisition, the Company would have had approximately $183.6 million of indebtedness outstanding, of which $23.6 million would be Senior Debt. SUBSIDIARY GUARANTEES....................... The Notes will be guaranteed, jointly and severally, fully and unconditionally, on a senior subordinated basis by the Subsidiary Guarantors (the "Subsidiary Guarantees"). The obligations of any Subsidiary Guarantor with respect to its Subsidiary Guarantee will be subordinated in right of payment, to the same extent as the obligations of the Company in respect of the Notes, to all existing and future Guarantor Senior Debt of such Subsidiary Guarantor, which will include any guarantee by such Subsidiary Guarantor of the Company's indebtedness under the Senior Credit Facility. </TABLE> <TABLE> <S> <C> PRINCIPAL COVENANTS......................... The Indenture for the Notes (the "Indenture") will impose certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt or Guarantor Senior Debt and senior in right of payment to the Notes or any Subsidiary Guarantee, incur liens, impose restrictions on the ability of a subsidiary to pay dividends or make certain payments to the Company, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. USE OF PROCEEDS............................. The Company intends to use the proceeds from the sale of the Notes, together with the proceeds of the Concurrent Offering, the other proceeds of the Financing and the Company's working capital, to (i) consummate the Phipps Acquisition, (ii) retire indebtedness under the Old Credit Facility and the Senior Note and (iii) pay related fees and expenses. However, in the event the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996, the Company will be obligated to redeem the Notes. See "The Phipps Acquisition, the KTVE Sale and the Financing" and "Description of the Notes-Redemption-Special Redemption."
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+PROSPECTUS SUMMARY THE FOLLOWING INFORMATION IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. AS USED HEREIN, UNLESS THE CONTEXT OTHERWISE REQUIRES, THE "COMPANY" MEANS GRAY COMMUNICATIONS SYSTEMS, INC. AND ITS SUBSIDIARIES. THE COMPANY HAS NOT YET CONSUMMATED THE PHIPPS ACQUISITION (AS DEFINED) AND THERE CAN BE NO ASSURANCE THAT THE PHIPPS ACQUISITION WILL BE CONSUMMATED. HOWEVER, EXCEPT WITH RESPECT TO HISTORICAL FINANCIAL STATEMENTS AND UNLESS THE CONTEXT INDICATES OTHERWISE, THE PHIPPS BUSINESS (AS DEFINED) IS INCLUDED IN THE DESCRIPTION OF THE COMPANY. SEE "THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING." UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION GRANTED BY THE COMPANY TO THE UNDERWRITERS IN THE CONCURRENT OFFERING IS NOT EXERCISED. ALL INFORMATION IN THIS PROSPECTUS HAS BEEN ADJUSTED TO GIVE EFFECT TO A 3-FOR-2 SPLIT OF THE CLASS A COMMON STOCK, EFFECTED IN THE FORM OF A STOCK DIVIDEND DECLARED ON OCTOBER 2, 1995. UNLESS OTHERWISE INDICATED, ALL STATION RANK, IN-MARKET SHARE AND TELEVISION HOUSEHOLD DATA IN THIS PROSPECTUS ARE DERIVED FROM THE NIELSEN STATION INDEX, VIEWERS IN PROFILE, DATED NOVEMBER 1995, AS PREPARED BY A.C. NIELSEN COMPANY ("NIELSEN"). THE COMPANY The Company owns and operates seven network-affiliated television stations in medium-size markets in the southeastern United States, six of which are ranked number one in their respective markets (which includes two television stations that are part of the Phipps Business). Five of the stations are affiliated with the CBS Television Network, a division of CBS, Inc. ("CBS") and two are affiliated with the NBC Television Network, a division of the National Broadcasting Company, Incorporated ("NBC"). In connection with the Phipps Acquisition (described below), the Company will be required under current regulations of the Federal Communications Commission (the "FCC") to divest its NBC affiliates in Albany, Georgia and Panama City, Florida. For a discussion of the Company's plans regarding such divestiture, see "Risk Factors -- FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." The Company also owns and operates three daily newspapers, two weekly, advertising only publications ("shoppers"), and a paging business (which is part of the Phipps Business), all located in the Southeast. The Company derives significant operating advantages and cost saving synergies through the size of its television station group and the regional focus of its television and publishing operations. These advantages and synergies include (i) sharing television production facilities, equipment and regionally oriented programming, (ii) the ability to purchase television programming for the group as a whole, (iii) negotiating network affiliation agreements on a group basis and (iv) purchasing newsprint and other supplies in bulk. In addition, the Company believes that its regional focus can provide advertisers with an efficient network through which to advertise in the fast-growing Southeast. In 1993, after the acquisition of a large block of Class A Common Stock by a new investor, the Company implemented a strategy to foster growth through strategic acquisitions. Since 1994, the Company's significant acquisitions have included three television stations and two newspapers, all located in the Southeast. As a result of the Company's acquisitions and in support of its growth strategy, the Company has added certain key members of management and has greatly expanded its operations in the television broadcasting and newspaper publishing businesses. On September 10, 1996, J. Mack Robinson, a director of the Company, was appointed President and Chief Executive Officer of the Company on an interim basis, to succeed Ralph W. Gabbard, who had died suddenly. The Company expects to commence a search to locate a new President as soon as practicable following this Offering. On September 11, 1996, Robert S. Prather, Jr., a director of the Company, was appointed Executive Vice President-Acquisitions on an interim basis. In January 1996, the Company acquired (the "Augusta Acquisition") WRDW-TV ("WRDW"), a CBS affiliate serving Augusta, Georgia (the "Augusta Business"). In December 1995, the Company entered into an asset purchase agreement to acquire (the "Phipps Acquisition") two CBS-affiliated stations, WCTV-TV ("WCTV") serving Tallahassee, Florida/Thomasville, Georgia and WKXT-TV ("WKXT") in Knoxville, Tennessee, a satellite broadcasting business and a paging business (collectively, the "Phipps Business"). The Company believes that the Phipps Acquisition will further enhance the Company's position as a major regional television broadcaster and is highly attractive for a number of reasons, including (i) the stations' strategic fit in the Southeast, (ii) WCTV's leading station market position and WKXT's significant growth potential, (iii) strong station broadcast cash flows, (iv) opportunities for revenue growth utilizing the Company's extensive management expertise with medium-size stations and (v) opportunities for synergies between WCTV and WKXT and the Company's existing stations with regard to revenue enhancement and cost controls. The consummation of the Phipps Acquisition is currently expected to occur by September 30, 1996, although there can be no assurance with respect thereto. In August 1996, the Company sold the assets (the "KTVE Sale") of KTVE Inc. ("KTVE"), a television station serving Monroe, Louisiana/El Dorado, Arkansas for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing. For the year ended December 31, 1995, on a pro forma basis, the Company had net revenues, Media Cash Flow (the sum of broadcast cash flow, publishing cash flow and paging cash flow), operating cash flow and net (loss) of $90.6 million, $30.3 million, $28.1 million and $(3.6) million, respectively. For the six months ended June 30, 1996, on a pro forma basis, the Company had net revenues, Media Cash Flow, operating cash flow and net income of $47.3 million, $17.9 million, $16.3 million and $251,000, respectively. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the year ended December 31, 1995 increased 148.2%, 188.4% and 227.9%, respectively, while net income decreased 230.3% from the historical amounts for the year ended December 31, 1994. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the six months ended June 30, 1996 increased 67.1%, 114.7% and 122.8%, respectively, while net income decreased 78.7% from the historical amounts for the six months ended June 30, 1995. The Company's pro forma net income for its television stations for the year ended December 31, 1995 and for the six months ended June 30, 1996 was $1.6 million and $1.4 million, respectively. The following table sets forth certain information for each of the Company's television stations. <TABLE> <CAPTION> ------------------------------------------------------------------------------------------------------------------ PRO FORMA --------------------------------------- IN-MARKET YEAR ENDED DECEMBER SIX MONTHS ENDED STATION SHARE OF 31, 1995 JUNE 30, 1996 RANK HOUSEHOLDS ------------------- ------------------ NETWORK YEAR DMA CHANNEL/ IN VIEWING NET OPERATING NET OPERATING STATION AFFILIATION MARKET ACQUIRED RANK(1) FREQUENCY DMA(2) TV REVENUES INCOME(6) REVENUES INCOME(6) - -------- ------- ------------- ------- -------- --------- -------- --------- --------- -------- -------- -------- (IN THOUSANDS) (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> WKYT CBS Lexington, KY 1994 68 27/UHF(3) 1 33% $15,553 $5,247 $7,845 $2,701 WYMT CBS Hazard, KY 1994 68 57/UHF(3) 1(4) 24 3,721 831 2,107 530 WRDW CBS Augusta, GA 1996 111 12/VHF 1 36 8,888 1,853 4,489 1,149 WALB (5) NBC Albany, GA 1954 152 10/VHF 1 80 9,445 4,795 5,099 2,658 Panama City, WJHG (5) NBC FL 1960 159 7/VHF 1 53 3,843 270 2,409 476 PHIPPS ACQUISITION WKXT CBS Knoxville, TN 62 8/VHF 3 22 9,269 2,204 4,387 903 Tallahassee, WCTV CBS FL/ 116 6/VHF 1 60 11,862 4,229 6,212 2,254 Thomasville, GA </TABLE> - ------------------------------ (1) Ranking of designated market area as defined by Nielsen ("DMA") served by a station among all DMAs is measured by the number of television households within the DMA based on the November 1995 Nielsen estimates. (2) Represents station rank in DMA as determined by November 1995 Nielsen estimates of the number of television sets tuned to the Company's station as a percentage of the number of television sets in use in the market for the Sunday through Saturday 6 a.m. to 2 a.m. time period. (3) All stations in the market are UHF stations. (4) The market area served by WYMT is an 18-county trading area, as defined by Nielsen, and is included in the Lexington, Kentucky DMA. WYMT's station rank is based upon its position in the 18-county trading area. (5) The Company will be required under current FCC regulations to divest WALB and WJHG in connection with the Phipps Acquisition. For a discussion of the Company's plans, see "Risk Factors-FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." (6) Represents pro forma income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes. The Company's three newspapers, THE ALBANY HERALD, THE ROCKDALE CITIZEN and the GWINNETT DAILY POST and two shoppers had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $21.9 million and $660,000, respectively, for the year ended December 31, 1995, and $11.3 million and $1.3 million for the six months ended June 30, 1996, respectively. The satellite broadcasting business and paging business, which are a part of the Phipps Business, had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $6.2 million and $542,000 for the year ended December 31, 1995 and $3.5 million and $467,000 for the six months ended June 30, 1996, respectively. BUSINESS STRATEGY The Company's business strategy includes the following key elements: - STRONG LOCAL PRESENCE. Each of the Company's television stations seeks to achieve a distinct identity through its emphasis on local programming. A key objective is to build audience loyalty through the development of a strong local news franchise. Strong local news generates high viewership and results in higher ratings for programs both preceding and following the news, which increases revenues and Media Cash Flow. - REGIONAL FOCUS. The Company believes its regional focus has competitive advantages, including the ability to purchase and produce programming that can be used by multiple Company-owned stations as well as the opportunity to sell advertising on multiple stations as a single buy. In addition, the proximity of the Company's operations allows the sharing of equipment, management and marketing expertise. - TARGETED MARKETING. The Company seeks to increase its advertising revenues and Media Cash Flow by expanding existing relationships with local and national advertisers and by attracting new advertisers through targeted marketing techniques and carefully tailored programming. The Company works closely with advertisers to develop advertising campaigns that match specifically targeted audience segments including sponsoring and staging various special events such as fishing tournaments, boat shows and bridal expositions. - COST CONTROLS. Through its strategic planning and annual budgeting processes, the Company continually seeks to identify and implement cost savings opportunities at each of its stations and publications in order to increase Media Cash Flow. The Company's ownership of multiple stations and publications also benefits each operation in negotiating favorable terms with programming syndicators, newsprint suppliers, national sales representatives and other vendors. - SELECTIVE ACQUISITIONS. The Company has focused on acquiring television stations where the Company believes there is the potential for improvements in revenue share, audience share and cost control. The Company focuses on southeastern markets of medium size because the Company believes these markets offer superior opportunities in terms of projected population and economic growth, leading to higher advertising and circulation revenues. In assessing acquisitions, the Company targets stations and publications where it sees specific opportunities for revenue enhancement while controlling expenditures, utilizing management's significant experience with local and national advertising sales and in operating similar businesses. In appropriate circumstances, the Company will dispose of assets that it deems non-essential to its operating or growth strategy. THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING The Company has entered into an agreement to acquire WCTV and WKXT, a satellite broadcasting business and a paging business in the Southeast. The purchase price for the Phipps Acquisition is approximately $185 million, including fees, expenses and working capital and other adjustments. The consummation of the Phipps Acquisition is expected to occur by September 30, 1996, although there can be no assurance with respect thereto. See "Risk Factors -- Possible Non-Consummation of the Phipps Acquisition." Pursuant to an agreement, dated as of May 15, 1996 (the "KTVE Agreement"), with GOCOM Television of Ouachita, L.P., in August 1996, the Company sold the assets of KTVE for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing (approximately $870,000), to the extent collected by the buyer, to be paid to the Company 150 days following the date of closing. For the year ended December 31, 1995, KTVE had net revenues, Media Cash Flow and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) of $4.2 million, $916,000 and $437,000, respectively, and $2.3 million, $598,000 and $360,000, respectively, for the six months ended June 30, 1996. The Company estimates that the gain, net of estimated taxes, on the KTVE Sale was approximately $2.8 million. In addition to the KTVE Sale and the consummation of this Offering, the Concurrent Offering and the Phipps Acquisition, the Company intends to implement a financing plan (the "Financing") to increase liquidity and improve operating and financial flexibility. Pursuant to the Financing, the Company will (i) retire approximately $49.5 million aggregate principal amount of outstanding indebtedness under its senior secured bank credit facility (the "Old Credit Facility"), together with accrued interest thereon, (ii) retire approximately $25.0 million aggregate principal amount of outstanding indebtedness under its senior note due 2003 (the "Senior Note"), together with accrued interest thereon and a prepayment fee, (iii) issue $10.0 million liquidation preference of its Series A preferred stock (the "Series A Preferred Stock") in exchange for its outstanding $10.0 million aggregate principal amount 8% subordinated note (the "8% Note") issued to Bull Run Corporation ("Bull Run"), a principal shareholder of the Company, (iv) issue to Bull Run, J. Mack Robinson, the President, Chief Executive Officer and a director of the Company, and certain of his affiliates $10.0 million liquidation preference of its Series B preferred stock (the "Series B Preferred Stock" and together with the Series A Preferred Stock, the "Preferred Stock") with warrants to purchase up to 500,000 shares of Class A Common Stock (representing 10.1% of the currently issued and outstanding Class A Common Stock after giving effect to the exercise of such warrants) for cash proceeds of $10.0 million and (v) enter into a new senior secured bank credit facility (the "Senior Credit Facility") to provide for a term loan and revolving credit facility aggregating $125.0 million. The cash required for the consummation of the Phipps Acquisition, the repayment of indebtedness and related transaction costs will be provided by the net proceeds of this Offering, the Concurrent Offering and the sale of the Series B Preferred Stock and the warrants, borrowings under the Senior Credit Facility and the Company's working capital. For a description of the Senior Credit Facility and the Preferred Stock, see "Description of Certain Indebtedness" and "Management--Compensation Committee Interlocks and Insider Participation-Issuances of Preferred Stock." The consummation of this Offering and the placement of funds into escrow are conditioned upon the issuance of the Series A Preferred Stock in exchange for the 8% Note, the issuance of the Series B Preferred Stock and the entering into of the Senior Credit Facility. The consummation of this Offering and the placement of the net proceeds thereof into escrow are not conditioned upon the consummation of the Concurrent Offering or the Phipps Acquisition or the other elements of the Financing. However the release of the net proceeds hereof from escrow is conditioned, among other things, upon the satisfaction of the Minimum Equity Condition, the retirement of the Senior Note and the Old Credit Facility and the consummation of the Phipps Acquisition. The Notes are subject to a mandatory redemption on the Special Redemption Date at the Special Redemption Price if either the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996. See "Description of the Notes-Redemption-Special Redemption." The Senior Credit Facility will provide that no borrowings may be made thereunder until the closing of the Phipps Acquisition. Accordingly, if the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied, the Notes will be redeemed by the Company, the Old Credit Facility will remain in place and the Company will not borrow under the Senior Credit Facility. The following table sets forth the estimated sources and uses of funds relating to this Offering, the Concurrent Offering, the Phipps Acquisition and the Financing: <TABLE> <CAPTION> ---------- (IN MILLIONS) AMOUNT ---------- <S> <C> SOURCES OF FUNDS: The Notes offered hereby $160.0 The Concurrent Offering (1) 73.5 Sale of Series B Preferred Stock and Warrants 10.0 Borrowings under the Senior Credit Facility 22.9 Working capital (2) 9.5 ---------- TOTAL $275.9 ---------- ---------- USES OF FUNDS: Consummation of Phipps Acquisition $185.0 Retire indebtedness under the Old Credit Facility (3) 49.5 Retire indebtedness under the Senior Note (4) 25.0 Fees and expenses (5) 16.4 ---------- TOTAL $275.9 ---------- ---------- </TABLE> - ------------------------------ (1) Assumes estimated gross proceeds from the Concurrent Offering of $73.5 million and estimated net proceeds therefrom of $67.6 million. It is a condition of the release from escrow of the net proceeds of this Offering that the Company shall have consummated one or more equity offerings having gross proceeds of not less than $65.0 million. To the extent that the gross proceeds of any such equity offerings are less than $73.5 million, the Company intends to borrow such difference under its Senior Credit Facility. It is anticipated that there will not be a significant interval between the closing of this Offering and the closing of the Concurrent Offering. (2) The source of these funds was the KTVE Sale. (3) Borrowings under the Old Credit Facility bear interest at formula rates based upon the applicable London inter-bank offered rate ("LIBOR") or prime rate at the time of borrowing plus a fixed spread and have a final maturity of 2003. As of June 30, 1996, the weighted average interest rate was 8.94%. (4) The indebtedness under the Senior Note bears interest at 10.7%. (5) Fees and expenses include underwriting costs for the Notes and the Concurrent Offering, fees payable in connection with the negotiation and execution of the Senior Credit Facility, fees payable in connection with the retirement of the Senior Note and legal, accounting and other transaction fees. Prior to the consummation of the Phipps Acquisition and the satisfaction of the Minimum Equity Condition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes. The Trust Funds will be invested in cash equivalents. The proceeds of the Concurrent Offering will be used to repay indebtedness under the Old Credit Facility, to retire the Senior Note and to provide funds for the Phipps Acquisition. THE OFFERING <TABLE> <S> <C> SECURITIES OFFERED.......................... $160,000,000 aggregate principal amount of % Senior Subordinated Notes due 2006. MATURITY DATE............................... , 2006. INTEREST PAYMENT DATES...................... and , commencing , 1997. SPECIAL REDEMPTION BY THE COMPANY........... If the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996, the Company will be required to redeem (the "Special Redemption") the Notes on or prior to December 31, 1996 (the "Special Redemption Date") at a redemption price (the "Special Redemption Price") equal to 101% of the principal amount of the Notes plus accrued and unpaid interest to the Special Redemption Date. At any time prior to December 23, 1996, if the Phipps Acquisition has not been consummated or the Minimum Equity Condition is not satisfied, the Company may, at its option, redeem the Notes, in whole but not in part, at a redemption price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date fixed for redemption. Prior to the consummation of the Phipps Acquisition and the satisfaction of the Minimum Equity Condition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes and the obligation of the Company to consummate the Special Redemption will be secured by such funds (the "Trust Funds"). </TABLE> <TABLE> <S> <C> OPTIONAL REDEMPTION BY THE COMPANY.......... The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after , 2001, at the redemption prices set forth herein, plus accrued and unpaid interest to the date fixed for redemption. In addition, at any time prior to , 1999, the Company, at its option, may redeem up to 35% of the aggregate principal amount of the Notes originally issued with the cash proceeds received by the Company from one or more Public Equity Offerings, other than the Concurrent Offering, at any time or from time to time, at a redemption price equal to % of the principal amount thereof, plus accrued and unpaid interest to the date fixed for redemption; PROVIDED, HOWEVER, that at least $104.0 million in aggregate principal amount of the Notes remain outstanding immediately after any such redemption. CHANGE OF CONTROL OFFER..................... Upon a Change of Control, the Company has the obligation to offer to purchase all the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. See "Description of the Notes -- Change of Control" for a discussion of the circumstances in which the Company may not be required to make a Change of Control Offer (as defined). OFFERS TO PURCHASE.......................... In the event of certain asset sales, the Company will be required to offer to repurchase the Notes at 100% of their principal amount plus accrued and unpaid interest, if any, to the date of repurchase with the net proceeds of such asset sales. SUBORDINATION............................... The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company, including all indebtedness of the Company under the Senior Credit Facility. As of June 30, 1996, on a pro forma basis after giving effect to this Offering, the Concurrent Offering, the KTVE Sale, the Financing and the application of the net proceeds therefrom, and to the Phipps Acquisition, the Company would have had approximately $183.6 million of indebtedness outstanding, of which $23.6 million would be Senior Debt. SUBSIDIARY GUARANTEES....................... The Notes will be guaranteed, jointly and severally, fully and unconditionally, on a senior subordinated basis by the Subsidiary Guarantors (the "Subsidiary Guarantees"). The obligations of any Subsidiary Guarantor with respect to its Subsidiary Guarantee will be subordinated in right of payment, to the same extent as the obligations of the Company in respect of the Notes, to all existing and future Guarantor Senior Debt of such Subsidiary Guarantor, which will include any guarantee by such Subsidiary Guarantor of the Company's indebtedness under the Senior Credit Facility. </TABLE> <TABLE> <S> <C> PRINCIPAL COVENANTS......................... The Indenture for the Notes (the "Indenture") will impose certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt or Guarantor Senior Debt and senior in right of payment to the Notes or any Subsidiary Guarantee, incur liens, impose restrictions on the ability of a subsidiary to pay dividends or make certain payments to the Company, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. USE OF PROCEEDS............................. The Company intends to use the proceeds from the sale of the Notes, together with the proceeds of the Concurrent Offering, the other proceeds of the Financing and the Company's working capital, to (i) consummate the Phipps Acquisition, (ii) retire indebtedness under the Old Credit Facility and the Senior Note and (iii) pay related fees and expenses. However, in the event the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996, the Company will be obligated to redeem the Notes. See "The Phipps Acquisition, the KTVE Sale and the Financing" and "Description of the Notes-Redemption-Special Redemption."
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+PROSPECTUS SUMMARY THE FOLLOWING INFORMATION IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. AS USED HEREIN, UNLESS THE CONTEXT OTHERWISE REQUIRES, THE "COMPANY" MEANS GRAY COMMUNICATIONS SYSTEMS, INC. AND ITS SUBSIDIARIES. THE COMPANY HAS NOT YET CONSUMMATED THE PHIPPS ACQUISITION (AS DEFINED) AND THERE CAN BE NO ASSURANCE THAT THE PHIPPS ACQUISITION WILL BE CONSUMMATED. HOWEVER, EXCEPT WITH RESPECT TO HISTORICAL FINANCIAL STATEMENTS AND UNLESS THE CONTEXT INDICATES OTHERWISE, THE PHIPPS BUSINESS (AS DEFINED) IS INCLUDED IN THE DESCRIPTION OF THE COMPANY. SEE "THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING." UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION GRANTED BY THE COMPANY TO THE UNDERWRITERS IN THE CONCURRENT OFFERING IS NOT EXERCISED. ALL INFORMATION IN THIS PROSPECTUS HAS BEEN ADJUSTED TO GIVE EFFECT TO A 3-FOR-2 SPLIT OF THE CLASS A COMMON STOCK, EFFECTED IN THE FORM OF A STOCK DIVIDEND DECLARED ON OCTOBER 2, 1995. UNLESS OTHERWISE INDICATED, ALL STATION RANK, IN-MARKET SHARE AND TELEVISION HOUSEHOLD DATA IN THIS PROSPECTUS ARE DERIVED FROM THE NIELSEN STATION INDEX, VIEWERS IN PROFILE, DATED NOVEMBER 1995, AS PREPARED BY A.C. NIELSEN COMPANY ("NIELSEN"). THE COMPANY The Company owns and operates seven network-affiliated television stations in medium-size markets in the southeastern United States, six of which are ranked number one in their respective markets (which includes two television stations that are part of the Phipps Business). Five of the stations are affiliated with the CBS Television Network, a division of CBS, Inc. ("CBS") and two are affiliated with the NBC Television Network, a division of the National Broadcasting Company, Incorporated ("NBC"). In connection with the Phipps Acquisition (described below), the Company will be required under current regulations of the Federal Communications Commission (the "FCC") to divest its NBC affiliates in Albany, Georgia and Panama City, Florida. For a discussion of the Company's plans regarding such divestiture, see "Risk Factors -- FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." The Company also owns and operates three daily newspapers, two weekly, advertising only publications ("shoppers"), and a paging business (which is part of the Phipps Business), all located in the Southeast. The Company derives significant operating advantages and cost saving synergies through the size of its television station group and the regional focus of its television and publishing operations. These advantages and synergies include (i) sharing television production facilities, equipment and regionally oriented programming, (ii) the ability to purchase television programming for the group as a whole, (iii) negotiating network affiliation agreements on a group basis and (iv) purchasing newsprint and other supplies in bulk. In addition, the Company believes that its regional focus can provide advertisers with an efficient network through which to advertise in the fast-growing Southeast. In 1993, after the acquisition of a large block of Class A Common Stock by a new investor, the Company implemented a strategy to foster growth through strategic acquisitions. Since 1994, the Company's significant acquisitions have included three television stations and two newspapers, all located in the Southeast. As a result of the Company's acquisitions and in support of its growth strategy, the Company has added certain key members of management and has greatly expanded its operations in the television broadcasting and newspaper publishing businesses. On September 10, 1996, J. Mack Robinson, a director of the Company, was appointed President and Chief Executive Officer of the Company on an interim basis, to succeed Ralph W. Gabbard, who had died suddenly. The Company expects to commence a search to locate a new President as soon as practicable following this Offering. On September 11, 1996, Robert S. Prather, Jr., a director of the Company, was appointed Executive Vice President-Acquisitions on an interim basis. In January 1996, the Company acquired (the "Augusta Acquisition") WRDW-TV ("WRDW"), a CBS affiliate serving Augusta, Georgia (the "Augusta Business"). In December 1995, the Company entered into an asset purchase agreement to acquire (the "Phipps Acquisition") two CBS-affiliated stations, WCTV-TV ("WCTV") serving Tallahassee, Florida/Thomasville, Georgia and WKXT-TV ("WKXT") in Knoxville, Tennessee, a satellite broadcasting business and a paging business (collectively, the "Phipps Business"). The Company believes that the Phipps Acquisition will further enhance the Company's position as a major regional television broadcaster and is highly attractive for a number of reasons, including (i) the stations' strategic fit in the Southeast, (ii) WCTV's leading station market position and WKXT's significant growth potential, (iii) strong station broadcast cash flows, (iv) opportunities for revenue growth utilizing the Company's extensive management expertise with medium-size stations and (v) opportunities for synergies between WCTV and WKXT and the Company's existing stations with regard to revenue enhancement and cost controls. The consummation of the Phipps Acquisition is currently expected to occur by September 30, 1996, although there can be no assurance with respect thereto. In August 1996, the Company sold the assets (the "KTVE Sale") of KTVE Inc. ("KTVE"), a television station serving Monroe, Louisiana/El Dorado, Arkansas for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing. For the year ended December 31, 1995, on a pro forma basis, the Company had net revenues, Media Cash Flow (the sum of broadcast cash flow, publishing cash flow and paging cash flow), operating cash flow and net (loss) of $90.6 million, $30.3 million, $28.1 million and $(3.6) million, respectively. For the six months ended June 30, 1996, on a pro forma basis, the Company had net revenues, Media Cash Flow, operating cash flow and net income of $47.3 million, $17.9 million, $16.3 million and $251,000, respectively. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the year ended December 31, 1995 increased 148.2%, 188.4% and 227.9%, respectively, while net income decreased 230.3% from the historical amounts for the year ended December 31, 1994. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the six months ended June 30, 1996 increased 67.1%, 114.7% and 122.8%, respectively, while net income decreased 78.7% from the historical amounts for the six months ended June 30, 1995. The Company's pro forma net income for its television stations for the year ended December 31, 1995 and for the six months ended June 30, 1996 was $1.6 million and $1.4 million, respectively. The following table sets forth certain information for each of the Company's television stations. <TABLE> <CAPTION> ------------------------------------------------------------------------------------------------------------------ PRO FORMA --------------------------------------- IN-MARKET YEAR ENDED DECEMBER SIX MONTHS ENDED STATION SHARE OF 31, 1995 JUNE 30, 1996 RANK HOUSEHOLDS ------------------- ------------------ NETWORK YEAR DMA CHANNEL/ IN VIEWING NET OPERATING NET OPERATING STATION AFFILIATION MARKET ACQUIRED RANK(1) FREQUENCY DMA(2) TV REVENUES INCOME(6) REVENUES INCOME(6) - -------- ------- ------------- ------- -------- --------- -------- --------- --------- -------- -------- -------- (IN THOUSANDS) (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> WKYT CBS Lexington, KY 1994 68 27/UHF(3) 1 33% $15,553 $5,247 $7,845 $2,701 WYMT CBS Hazard, KY 1994 68 57/UHF(3) 1(4) 24 3,721 831 2,107 530 WRDW CBS Augusta, GA 1996 111 12/VHF 1 36 8,888 1,853 4,489 1,149 WALB (5) NBC Albany, GA 1954 152 10/VHF 1 80 9,445 4,795 5,099 2,658 Panama City, WJHG (5) NBC FL 1960 159 7/VHF 1 53 3,843 270 2,409 476 PHIPPS ACQUISITION WKXT CBS Knoxville, TN 62 8/VHF 3 22 9,269 2,204 4,387 903 Tallahassee, WCTV CBS FL/ 116 6/VHF 1 60 11,862 4,229 6,212 2,254 Thomasville, GA </TABLE> - ------------------------------ (1) Ranking of designated market area as defined by Nielsen ("DMA") served by a station among all DMAs is measured by the number of television households within the DMA based on the November 1995 Nielsen estimates. (2) Represents station rank in DMA as determined by November 1995 Nielsen estimates of the number of television sets tuned to the Company's station as a percentage of the number of television sets in use in the market for the Sunday through Saturday 6 a.m. to 2 a.m. time period. (3) All stations in the market are UHF stations. (4) The market area served by WYMT is an 18-county trading area, as defined by Nielsen, and is included in the Lexington, Kentucky DMA. WYMT's station rank is based upon its position in the 18-county trading area. (5) The Company will be required under current FCC regulations to divest WALB and WJHG in connection with the Phipps Acquisition. For a discussion of the Company's plans, see "Risk Factors-FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." (6) Represents pro forma income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes. The Company's three newspapers, THE ALBANY HERALD, THE ROCKDALE CITIZEN and the GWINNETT DAILY POST and two shoppers had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $21.9 million and $660,000, respectively, for the year ended December 31, 1995, and $11.3 million and $1.3 million for the six months ended June 30, 1996, respectively. The satellite broadcasting business and paging business, which are a part of the Phipps Business, had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $6.2 million and $542,000 for the year ended December 31, 1995 and $3.5 million and $467,000 for the six months ended June 30, 1996, respectively. BUSINESS STRATEGY The Company's business strategy includes the following key elements: - STRONG LOCAL PRESENCE. Each of the Company's television stations seeks to achieve a distinct identity through its emphasis on local programming. A key objective is to build audience loyalty through the development of a strong local news franchise. Strong local news generates high viewership and results in higher ratings for programs both preceding and following the news, which increases revenues and Media Cash Flow. - REGIONAL FOCUS. The Company believes its regional focus has competitive advantages, including the ability to purchase and produce programming that can be used by multiple Company-owned stations as well as the opportunity to sell advertising on multiple stations as a single buy. In addition, the proximity of the Company's operations allows the sharing of equipment, management and marketing expertise. - TARGETED MARKETING. The Company seeks to increase its advertising revenues and Media Cash Flow by expanding existing relationships with local and national advertisers and by attracting new advertisers through targeted marketing techniques and carefully tailored programming. The Company works closely with advertisers to develop advertising campaigns that match specifically targeted audience segments including sponsoring and staging various special events such as fishing tournaments, boat shows and bridal expositions. - COST CONTROLS. Through its strategic planning and annual budgeting processes, the Company continually seeks to identify and implement cost savings opportunities at each of its stations and publications in order to increase Media Cash Flow. The Company's ownership of multiple stations and publications also benefits each operation in negotiating favorable terms with programming syndicators, newsprint suppliers, national sales representatives and other vendors. - SELECTIVE ACQUISITIONS. The Company has focused on acquiring television stations where the Company believes there is the potential for improvements in revenue share, audience share and cost control. The Company focuses on southeastern markets of medium size because the Company believes these markets offer superior opportunities in terms of projected population and economic growth, leading to higher advertising and circulation revenues. In assessing acquisitions, the Company targets stations and publications where it sees specific opportunities for revenue enhancement while controlling expenditures, utilizing management's significant experience with local and national advertising sales and in operating similar businesses. In appropriate circumstances, the Company will dispose of assets that it deems non-essential to its operating or growth strategy. THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING The Company has entered into an agreement to acquire WCTV and WKXT, a satellite broadcasting business and a paging business in the Southeast. The purchase price for the Phipps Acquisition is approximately $185 million, including fees, expenses and working capital and other adjustments. The consummation of the Phipps Acquisition is expected to occur by September 30, 1996, although there can be no assurance with respect thereto. See "Risk Factors -- Possible Non-Consummation of the Phipps Acquisition." Pursuant to an agreement, dated as of May 15, 1996 (the "KTVE Agreement"), with GOCOM Television of Ouachita, L.P., in August 1996, the Company sold the assets of KTVE for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing (approximately $870,000), to the extent collected by the buyer, to be paid to the Company 150 days following the date of closing. For the year ended December 31, 1995, KTVE had net revenues, Media Cash Flow and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) of $4.2 million, $916,000 and $437,000, respectively, and $2.3 million, $598,000 and $360,000, respectively, for the six months ended June 30, 1996. The Company estimates that the gain, net of estimated taxes, on the KTVE Sale was approximately $2.8 million. In addition to the KTVE Sale and the consummation of this Offering, the Concurrent Offering and the Phipps Acquisition, the Company intends to implement a financing plan (the "Financing") to increase liquidity and improve operating and financial flexibility. Pursuant to the Financing, the Company will (i) retire approximately $49.5 million aggregate principal amount of outstanding indebtedness under its senior secured bank credit facility (the "Old Credit Facility"), together with accrued interest thereon, (ii) retire approximately $25.0 million aggregate principal amount of outstanding indebtedness under its senior note due 2003 (the "Senior Note"), together with accrued interest thereon and a prepayment fee, (iii) issue $10.0 million liquidation preference of its Series A preferred stock (the "Series A Preferred Stock") in exchange for its outstanding $10.0 million aggregate principal amount 8% subordinated note (the "8% Note") issued to Bull Run Corporation ("Bull Run"), a principal shareholder of the Company, (iv) issue to Bull Run, J. Mack Robinson, the President, Chief Executive Officer and a director of the Company, and certain of his affiliates $10.0 million liquidation preference of its Series B preferred stock (the "Series B Preferred Stock" and together with the Series A Preferred Stock, the "Preferred Stock") with warrants to purchase up to 500,000 shares of Class A Common Stock (representing 10.1% of the currently issued and outstanding Class A Common Stock after giving effect to the exercise of such warrants) for cash proceeds of $10.0 million and (v) enter into a new senior secured bank credit facility (the "Senior Credit Facility") to provide for a term loan and revolving credit facility aggregating $125.0 million. The cash required for the consummation of the Phipps Acquisition, the repayment of indebtedness and related transaction costs will be provided by the net proceeds of this Offering, the Concurrent Offering and the sale of the Series B Preferred Stock and the warrants, borrowings under the Senior Credit Facility and the Company's working capital. For a description of the Senior Credit Facility and the Preferred Stock, see "Description of Certain Indebtedness" and "Management--Compensation Committee Interlocks and Insider Participation-Issuances of Preferred Stock." The consummation of this Offering and the placement of funds into escrow are conditioned upon the issuance of the Series A Preferred Stock in exchange for the 8% Note, the issuance of the Series B Preferred Stock and the entering into of the Senior Credit Facility. The consummation of this Offering and the placement of the net proceeds thereof into escrow are not conditioned upon the consummation of the Concurrent Offering or the Phipps Acquisition or the other elements of the Financing. However the release of the net proceeds hereof from escrow is conditioned, among other things, upon the satisfaction of the Minimum Equity Condition, the retirement of the Senior Note and the Old Credit Facility and the consummation of the Phipps Acquisition. The Notes are subject to a mandatory redemption on the Special Redemption Date at the Special Redemption Price if either the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996. See "Description of the Notes-Redemption-Special Redemption." The Senior Credit Facility will provide that no borrowings may be made thereunder until the closing of the Phipps Acquisition. Accordingly, if the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied, the Notes will be redeemed by the Company, the Old Credit Facility will remain in place and the Company will not borrow under the Senior Credit Facility. The following table sets forth the estimated sources and uses of funds relating to this Offering, the Concurrent Offering, the Phipps Acquisition and the Financing: <TABLE> <CAPTION> ---------- (IN MILLIONS) AMOUNT ---------- <S> <C> SOURCES OF FUNDS: The Notes offered hereby $160.0 The Concurrent Offering (1) 73.5 Sale of Series B Preferred Stock and Warrants 10.0 Borrowings under the Senior Credit Facility 22.9 Working capital (2) 9.5 ---------- TOTAL $275.9 ---------- ---------- USES OF FUNDS: Consummation of Phipps Acquisition $185.0 Retire indebtedness under the Old Credit Facility (3) 49.5 Retire indebtedness under the Senior Note (4) 25.0 Fees and expenses (5) 16.4 ---------- TOTAL $275.9 ---------- ---------- </TABLE> - ------------------------------ (1) Assumes estimated gross proceeds from the Concurrent Offering of $73.5 million and estimated net proceeds therefrom of $67.6 million. It is a condition of the release from escrow of the net proceeds of this Offering that the Company shall have consummated one or more equity offerings having gross proceeds of not less than $65.0 million. To the extent that the gross proceeds of any such equity offerings are less than $73.5 million, the Company intends to borrow such difference under its Senior Credit Facility. It is anticipated that there will not be a significant interval between the closing of this Offering and the closing of the Concurrent Offering. (2) The source of these funds was the KTVE Sale. (3) Borrowings under the Old Credit Facility bear interest at formula rates based upon the applicable London inter-bank offered rate ("LIBOR") or prime rate at the time of borrowing plus a fixed spread and have a final maturity of 2003. As of June 30, 1996, the weighted average interest rate was 8.94%. (4) The indebtedness under the Senior Note bears interest at 10.7%. (5) Fees and expenses include underwriting costs for the Notes and the Concurrent Offering, fees payable in connection with the negotiation and execution of the Senior Credit Facility, fees payable in connection with the retirement of the Senior Note and legal, accounting and other transaction fees. Prior to the consummation of the Phipps Acquisition and the satisfaction of the Minimum Equity Condition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes. The Trust Funds will be invested in cash equivalents. The proceeds of the Concurrent Offering will be used to repay indebtedness under the Old Credit Facility, to retire the Senior Note and to provide funds for the Phipps Acquisition. THE OFFERING <TABLE> <S> <C> SECURITIES OFFERED.......................... $160,000,000 aggregate principal amount of % Senior Subordinated Notes due 2006. MATURITY DATE............................... , 2006. INTEREST PAYMENT DATES...................... and , commencing , 1997. SPECIAL REDEMPTION BY THE COMPANY........... If the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996, the Company will be required to redeem (the "Special Redemption") the Notes on or prior to December 31, 1996 (the "Special Redemption Date") at a redemption price (the "Special Redemption Price") equal to 101% of the principal amount of the Notes plus accrued and unpaid interest to the Special Redemption Date. At any time prior to December 23, 1996, if the Phipps Acquisition has not been consummated or the Minimum Equity Condition is not satisfied, the Company may, at its option, redeem the Notes, in whole but not in part, at a redemption price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date fixed for redemption. Prior to the consummation of the Phipps Acquisition and the satisfaction of the Minimum Equity Condition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes and the obligation of the Company to consummate the Special Redemption will be secured by such funds (the "Trust Funds"). </TABLE> <TABLE> <S> <C> OPTIONAL REDEMPTION BY THE COMPANY.......... The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after , 2001, at the redemption prices set forth herein, plus accrued and unpaid interest to the date fixed for redemption. In addition, at any time prior to , 1999, the Company, at its option, may redeem up to 35% of the aggregate principal amount of the Notes originally issued with the cash proceeds received by the Company from one or more Public Equity Offerings, other than the Concurrent Offering, at any time or from time to time, at a redemption price equal to % of the principal amount thereof, plus accrued and unpaid interest to the date fixed for redemption; PROVIDED, HOWEVER, that at least $104.0 million in aggregate principal amount of the Notes remain outstanding immediately after any such redemption. CHANGE OF CONTROL OFFER..................... Upon a Change of Control, the Company has the obligation to offer to purchase all the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. See "Description of the Notes -- Change of Control" for a discussion of the circumstances in which the Company may not be required to make a Change of Control Offer (as defined). OFFERS TO PURCHASE.......................... In the event of certain asset sales, the Company will be required to offer to repurchase the Notes at 100% of their principal amount plus accrued and unpaid interest, if any, to the date of repurchase with the net proceeds of such asset sales. SUBORDINATION............................... The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company, including all indebtedness of the Company under the Senior Credit Facility. As of June 30, 1996, on a pro forma basis after giving effect to this Offering, the Concurrent Offering, the KTVE Sale, the Financing and the application of the net proceeds therefrom, and to the Phipps Acquisition, the Company would have had approximately $183.6 million of indebtedness outstanding, of which $23.6 million would be Senior Debt. SUBSIDIARY GUARANTEES....................... The Notes will be guaranteed, jointly and severally, fully and unconditionally, on a senior subordinated basis by the Subsidiary Guarantors (the "Subsidiary Guarantees"). The obligations of any Subsidiary Guarantor with respect to its Subsidiary Guarantee will be subordinated in right of payment, to the same extent as the obligations of the Company in respect of the Notes, to all existing and future Guarantor Senior Debt of such Subsidiary Guarantor, which will include any guarantee by such Subsidiary Guarantor of the Company's indebtedness under the Senior Credit Facility. </TABLE> <TABLE> <S> <C> PRINCIPAL COVENANTS......................... The Indenture for the Notes (the "Indenture") will impose certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt or Guarantor Senior Debt and senior in right of payment to the Notes or any Subsidiary Guarantee, incur liens, impose restrictions on the ability of a subsidiary to pay dividends or make certain payments to the Company, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. USE OF PROCEEDS............................. The Company intends to use the proceeds from the sale of the Notes, together with the proceeds of the Concurrent Offering, the other proceeds of the Financing and the Company's working capital, to (i) consummate the Phipps Acquisition, (ii) retire indebtedness under the Old Credit Facility and the Senior Note and (iii) pay related fees and expenses. However, in the event the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996, the Company will be obligated to redeem the Notes. See "The Phipps Acquisition, the KTVE Sale and the Financing" and "Description of the Notes-Redemption-Special Redemption."
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+PROSPECTUS SUMMARY THE FOLLOWING INFORMATION IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. AS USED HEREIN, UNLESS THE CONTEXT OTHERWISE REQUIRES, THE "COMPANY" MEANS GRAY COMMUNICATIONS SYSTEMS, INC. AND ITS SUBSIDIARIES. THE COMPANY HAS NOT YET CONSUMMATED THE PHIPPS ACQUISITION (AS DEFINED) AND THERE CAN BE NO ASSURANCE THAT THE PHIPPS ACQUISITION WILL BE CONSUMMATED. HOWEVER, EXCEPT WITH RESPECT TO HISTORICAL FINANCIAL STATEMENTS AND UNLESS THE CONTEXT INDICATES OTHERWISE, THE PHIPPS BUSINESS (AS DEFINED) IS INCLUDED IN THE DESCRIPTION OF THE COMPANY. SEE "THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING." UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION GRANTED BY THE COMPANY TO THE UNDERWRITERS IN THE CONCURRENT OFFERING IS NOT EXERCISED. ALL INFORMATION IN THIS PROSPECTUS HAS BEEN ADJUSTED TO GIVE EFFECT TO A 3-FOR-2 SPLIT OF THE CLASS A COMMON STOCK, EFFECTED IN THE FORM OF A STOCK DIVIDEND DECLARED ON OCTOBER 2, 1995. UNLESS OTHERWISE INDICATED, ALL STATION RANK, IN-MARKET SHARE AND TELEVISION HOUSEHOLD DATA IN THIS PROSPECTUS ARE DERIVED FROM THE NIELSEN STATION INDEX, VIEWERS IN PROFILE, DATED NOVEMBER 1995, AS PREPARED BY A.C. NIELSEN COMPANY ("NIELSEN"). THE COMPANY The Company owns and operates seven network-affiliated television stations in medium-size markets in the southeastern United States, six of which are ranked number one in their respective markets (which includes two television stations that are part of the Phipps Business). Five of the stations are affiliated with the CBS Television Network, a division of CBS, Inc. ("CBS") and two are affiliated with the NBC Television Network, a division of the National Broadcasting Company, Incorporated ("NBC"). In connection with the Phipps Acquisition (described below), the Company will be required under current regulations of the Federal Communications Commission (the "FCC") to divest its NBC affiliates in Albany, Georgia and Panama City, Florida. For a discussion of the Company's plans regarding such divestiture, see "Risk Factors -- FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." The Company also owns and operates three daily newspapers, two weekly, advertising only publications ("shoppers"), and a paging business (which is part of the Phipps Business), all located in the Southeast. The Company derives significant operating advantages and cost saving synergies through the size of its television station group and the regional focus of its television and publishing operations. These advantages and synergies include (i) sharing television production facilities, equipment and regionally oriented programming, (ii) the ability to purchase television programming for the group as a whole, (iii) negotiating network affiliation agreements on a group basis and (iv) purchasing newsprint and other supplies in bulk. In addition, the Company believes that its regional focus can provide advertisers with an efficient network through which to advertise in the fast-growing Southeast. In 1993, after the acquisition of a large block of Class A Common Stock by a new investor, the Company implemented a strategy to foster growth through strategic acquisitions. Since 1994, the Company's significant acquisitions have included three television stations and two newspapers, all located in the Southeast. As a result of the Company's acquisitions and in support of its growth strategy, the Company has added certain key members of management and has greatly expanded its operations in the television broadcasting and newspaper publishing businesses. On September 10, 1996, J. Mack Robinson, a director of the Company, was appointed President and Chief Executive Officer of the Company on an interim basis, to succeed Ralph W. Gabbard, who had died suddenly. The Company expects to commence a search to locate a new President as soon as practicable following this Offering. On September 11, 1996, Robert S. Prather, Jr., a director of the Company, was appointed Executive Vice President-Acquisitions on an interim basis. In January 1996, the Company acquired (the "Augusta Acquisition") WRDW-TV ("WRDW"), a CBS affiliate serving Augusta, Georgia (the "Augusta Business"). In December 1995, the Company entered into an asset purchase agreement to acquire (the "Phipps Acquisition") two CBS-affiliated stations, WCTV-TV ("WCTV") serving Tallahassee, Florida/Thomasville, Georgia and WKXT-TV ("WKXT") in Knoxville, Tennessee, a satellite broadcasting business and a paging business (collectively, the "Phipps Business"). The Company believes that the Phipps Acquisition will further enhance the Company's position as a major regional television broadcaster and is highly attractive for a number of reasons, including (i) the stations' strategic fit in the Southeast, (ii) WCTV's leading station market position and WKXT's significant growth potential, (iii) strong station broadcast cash flows, (iv) opportunities for revenue growth utilizing the Company's extensive management expertise with medium-size stations and (v) opportunities for synergies between WCTV and WKXT and the Company's existing stations with regard to revenue enhancement and cost controls. The consummation of the Phipps Acquisition is currently expected to occur by September 30, 1996, although there can be no assurance with respect thereto. In August 1996, the Company sold the assets (the "KTVE Sale") of KTVE Inc. ("KTVE"), a television station serving Monroe, Louisiana/El Dorado, Arkansas for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing. For the year ended December 31, 1995, on a pro forma basis, the Company had net revenues, Media Cash Flow (the sum of broadcast cash flow, publishing cash flow and paging cash flow), operating cash flow and net (loss) of $90.6 million, $30.3 million, $28.1 million and $(3.6) million, respectively. For the six months ended June 30, 1996, on a pro forma basis, the Company had net revenues, Media Cash Flow, operating cash flow and net income of $47.3 million, $17.9 million, $16.3 million and $251,000, respectively. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the year ended December 31, 1995 increased 148.2%, 188.4% and 227.9%, respectively, while net income decreased 230.3% from the historical amounts for the year ended December 31, 1994. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the six months ended June 30, 1996 increased 67.1%, 114.7% and 122.8%, respectively, while net income decreased 78.7% from the historical amounts for the six months ended June 30, 1995. The Company's pro forma net income for its television stations for the year ended December 31, 1995 and for the six months ended June 30, 1996 was $1.6 million and $1.4 million, respectively. The following table sets forth certain information for each of the Company's television stations. <TABLE> <CAPTION> ------------------------------------------------------------------------------------------------------------------ PRO FORMA --------------------------------------- IN-MARKET YEAR ENDED DECEMBER SIX MONTHS ENDED STATION SHARE OF 31, 1995 JUNE 30, 1996 RANK HOUSEHOLDS ------------------- ------------------ NETWORK YEAR DMA CHANNEL/ IN VIEWING NET OPERATING NET OPERATING STATION AFFILIATION MARKET ACQUIRED RANK(1) FREQUENCY DMA(2) TV REVENUES INCOME(6) REVENUES INCOME(6) - -------- ------- ------------- ------- -------- --------- -------- --------- --------- -------- -------- -------- (IN THOUSANDS) (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> WKYT CBS Lexington, KY 1994 68 27/UHF(3) 1 33% $15,553 $5,247 $7,845 $2,701 WYMT CBS Hazard, KY 1994 68 57/UHF(3) 1(4) 24 3,721 831 2,107 530 WRDW CBS Augusta, GA 1996 111 12/VHF 1 36 8,888 1,853 4,489 1,149 WALB (5) NBC Albany, GA 1954 152 10/VHF 1 80 9,445 4,795 5,099 2,658 Panama City, WJHG (5) NBC FL 1960 159 7/VHF 1 53 3,843 270 2,409 476 PHIPPS ACQUISITION WKXT CBS Knoxville, TN 62 8/VHF 3 22 9,269 2,204 4,387 903 Tallahassee, WCTV CBS FL/ 116 6/VHF 1 60 11,862 4,229 6,212 2,254 Thomasville, GA </TABLE> - ------------------------------ (1) Ranking of designated market area as defined by Nielsen ("DMA") served by a station among all DMAs is measured by the number of television households within the DMA based on the November 1995 Nielsen estimates. (2) Represents station rank in DMA as determined by November 1995 Nielsen estimates of the number of television sets tuned to the Company's station as a percentage of the number of television sets in use in the market for the Sunday through Saturday 6 a.m. to 2 a.m. time period. (3) All stations in the market are UHF stations. (4) The market area served by WYMT is an 18-county trading area, as defined by Nielsen, and is included in the Lexington, Kentucky DMA. WYMT's station rank is based upon its position in the 18-county trading area. (5) The Company will be required under current FCC regulations to divest WALB and WJHG in connection with the Phipps Acquisition. For a discussion of the Company's plans, see "Risk Factors-FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." (6) Represents pro forma income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes. The Company's three newspapers, THE ALBANY HERALD, THE ROCKDALE CITIZEN and the GWINNETT DAILY POST and two shoppers had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $21.9 million and $660,000, respectively, for the year ended December 31, 1995, and $11.3 million and $1.3 million for the six months ended June 30, 1996, respectively. The satellite broadcasting business and paging business, which are a part of the Phipps Business, had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $6.2 million and $542,000 for the year ended December 31, 1995 and $3.5 million and $467,000 for the six months ended June 30, 1996, respectively. BUSINESS STRATEGY The Company's business strategy includes the following key elements: - STRONG LOCAL PRESENCE. Each of the Company's television stations seeks to achieve a distinct identity through its emphasis on local programming. A key objective is to build audience loyalty through the development of a strong local news franchise. Strong local news generates high viewership and results in higher ratings for programs both preceding and following the news, which increases revenues and Media Cash Flow. - REGIONAL FOCUS. The Company believes its regional focus has competitive advantages, including the ability to purchase and produce programming that can be used by multiple Company-owned stations as well as the opportunity to sell advertising on multiple stations as a single buy. In addition, the proximity of the Company's operations allows the sharing of equipment, management and marketing expertise. - TARGETED MARKETING. The Company seeks to increase its advertising revenues and Media Cash Flow by expanding existing relationships with local and national advertisers and by attracting new advertisers through targeted marketing techniques and carefully tailored programming. The Company works closely with advertisers to develop advertising campaigns that match specifically targeted audience segments including sponsoring and staging various special events such as fishing tournaments, boat shows and bridal expositions. - COST CONTROLS. Through its strategic planning and annual budgeting processes, the Company continually seeks to identify and implement cost savings opportunities at each of its stations and publications in order to increase Media Cash Flow. The Company's ownership of multiple stations and publications also benefits each operation in negotiating favorable terms with programming syndicators, newsprint suppliers, national sales representatives and other vendors. - SELECTIVE ACQUISITIONS. The Company has focused on acquiring television stations where the Company believes there is the potential for improvements in revenue share, audience share and cost control. The Company focuses on southeastern markets of medium size because the Company believes these markets offer superior opportunities in terms of projected population and economic growth, leading to higher advertising and circulation revenues. In assessing acquisitions, the Company targets stations and publications where it sees specific opportunities for revenue enhancement while controlling expenditures, utilizing management's significant experience with local and national advertising sales and in operating similar businesses. In appropriate circumstances, the Company will dispose of assets that it deems non-essential to its operating or growth strategy. THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING The Company has entered into an agreement to acquire WCTV and WKXT, a satellite broadcasting business and a paging business in the Southeast. The purchase price for the Phipps Acquisition is approximately $185 million, including fees, expenses and working capital and other adjustments. The consummation of the Phipps Acquisition is expected to occur by September 30, 1996, although there can be no assurance with respect thereto. See "Risk Factors -- Possible Non-Consummation of the Phipps Acquisition." Pursuant to an agreement, dated as of May 15, 1996 (the "KTVE Agreement"), with GOCOM Television of Ouachita, L.P., in August 1996, the Company sold the assets of KTVE for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing (approximately $870,000), to the extent collected by the buyer, to be paid to the Company 150 days following the date of closing. For the year ended December 31, 1995, KTVE had net revenues, Media Cash Flow and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) of $4.2 million, $916,000 and $437,000, respectively, and $2.3 million, $598,000 and $360,000, respectively, for the six months ended June 30, 1996. The Company estimates that the gain, net of estimated taxes, on the KTVE Sale was approximately $2.8 million. In addition to the KTVE Sale and the consummation of this Offering, the Concurrent Offering and the Phipps Acquisition, the Company intends to implement a financing plan (the "Financing") to increase liquidity and improve operating and financial flexibility. Pursuant to the Financing, the Company will (i) retire approximately $49.5 million aggregate principal amount of outstanding indebtedness under its senior secured bank credit facility (the "Old Credit Facility"), together with accrued interest thereon, (ii) retire approximately $25.0 million aggregate principal amount of outstanding indebtedness under its senior note due 2003 (the "Senior Note"), together with accrued interest thereon and a prepayment fee, (iii) issue $10.0 million liquidation preference of its Series A preferred stock (the "Series A Preferred Stock") in exchange for its outstanding $10.0 million aggregate principal amount 8% subordinated note (the "8% Note") issued to Bull Run Corporation ("Bull Run"), a principal shareholder of the Company, (iv) issue to Bull Run, J. Mack Robinson, the President, Chief Executive Officer and a director of the Company, and certain of his affiliates $10.0 million liquidation preference of its Series B preferred stock (the "Series B Preferred Stock" and together with the Series A Preferred Stock, the "Preferred Stock") with warrants to purchase up to 500,000 shares of Class A Common Stock (representing 10.1% of the currently issued and outstanding Class A Common Stock after giving effect to the exercise of such warrants) for cash proceeds of $10.0 million and (v) enter into a new senior secured bank credit facility (the "Senior Credit Facility") to provide for a term loan and revolving credit facility aggregating $125.0 million. The cash required for the consummation of the Phipps Acquisition, the repayment of indebtedness and related transaction costs will be provided by the net proceeds of this Offering, the Concurrent Offering and the sale of the Series B Preferred Stock and the warrants, borrowings under the Senior Credit Facility and the Company's working capital. For a description of the Senior Credit Facility and the Preferred Stock, see "Description of Certain Indebtedness" and "Management--Compensation Committee Interlocks and Insider Participation-Issuances of Preferred Stock." The consummation of this Offering and the placement of funds into escrow are conditioned upon the issuance of the Series A Preferred Stock in exchange for the 8% Note, the issuance of the Series B Preferred Stock and the entering into of the Senior Credit Facility. The consummation of this Offering and the placement of the net proceeds thereof into escrow are not conditioned upon the consummation of the Concurrent Offering or the Phipps Acquisition or the other elements of the Financing. However the release of the net proceeds hereof from escrow is conditioned, among other things, upon the satisfaction of the Minimum Equity Condition, the retirement of the Senior Note and the Old Credit Facility and the consummation of the Phipps Acquisition. The Notes are subject to a mandatory redemption on the Special Redemption Date at the Special Redemption Price if either the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996. See "Description of the Notes-Redemption-Special Redemption." The Senior Credit Facility will provide that no borrowings may be made thereunder until the closing of the Phipps Acquisition. Accordingly, if the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied, the Notes will be redeemed by the Company, the Old Credit Facility will remain in place and the Company will not borrow under the Senior Credit Facility. The following table sets forth the estimated sources and uses of funds relating to this Offering, the Concurrent Offering, the Phipps Acquisition and the Financing: <TABLE> <CAPTION> ---------- (IN MILLIONS) AMOUNT ---------- <S> <C> SOURCES OF FUNDS: The Notes offered hereby $160.0 The Concurrent Offering (1) 73.5 Sale of Series B Preferred Stock and Warrants 10.0 Borrowings under the Senior Credit Facility 22.9 Working capital (2) 9.5 ---------- TOTAL $275.9 ---------- ---------- USES OF FUNDS: Consummation of Phipps Acquisition $185.0 Retire indebtedness under the Old Credit Facility (3) 49.5 Retire indebtedness under the Senior Note (4) 25.0 Fees and expenses (5) 16.4 ---------- TOTAL $275.9 ---------- ---------- </TABLE> - ------------------------------ (1) Assumes estimated gross proceeds from the Concurrent Offering of $73.5 million and estimated net proceeds therefrom of $67.6 million. It is a condition of the release from escrow of the net proceeds of this Offering that the Company shall have consummated one or more equity offerings having gross proceeds of not less than $65.0 million. To the extent that the gross proceeds of any such equity offerings are less than $73.5 million, the Company intends to borrow such difference under its Senior Credit Facility. It is anticipated that there will not be a significant interval between the closing of this Offering and the closing of the Concurrent Offering. (2) The source of these funds was the KTVE Sale. (3) Borrowings under the Old Credit Facility bear interest at formula rates based upon the applicable London inter-bank offered rate ("LIBOR") or prime rate at the time of borrowing plus a fixed spread and have a final maturity of 2003. As of June 30, 1996, the weighted average interest rate was 8.94%. (4) The indebtedness under the Senior Note bears interest at 10.7%. (5) Fees and expenses include underwriting costs for the Notes and the Concurrent Offering, fees payable in connection with the negotiation and execution of the Senior Credit Facility, fees payable in connection with the retirement of the Senior Note and legal, accounting and other transaction fees. Prior to the consummation of the Phipps Acquisition and the satisfaction of the Minimum Equity Condition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes. The Trust Funds will be invested in cash equivalents. The proceeds of the Concurrent Offering will be used to repay indebtedness under the Old Credit Facility, to retire the Senior Note and to provide funds for the Phipps Acquisition. THE OFFERING <TABLE> <S> <C> SECURITIES OFFERED.......................... $160,000,000 aggregate principal amount of % Senior Subordinated Notes due 2006. MATURITY DATE............................... , 2006. INTEREST PAYMENT DATES...................... and , commencing , 1997. SPECIAL REDEMPTION BY THE COMPANY........... If the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996, the Company will be required to redeem (the "Special Redemption") the Notes on or prior to December 31, 1996 (the "Special Redemption Date") at a redemption price (the "Special Redemption Price") equal to 101% of the principal amount of the Notes plus accrued and unpaid interest to the Special Redemption Date. At any time prior to December 23, 1996, if the Phipps Acquisition has not been consummated or the Minimum Equity Condition is not satisfied, the Company may, at its option, redeem the Notes, in whole but not in part, at a redemption price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date fixed for redemption. Prior to the consummation of the Phipps Acquisition and the satisfaction of the Minimum Equity Condition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes and the obligation of the Company to consummate the Special Redemption will be secured by such funds (the "Trust Funds"). </TABLE> <TABLE> <S> <C> OPTIONAL REDEMPTION BY THE COMPANY.......... The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after , 2001, at the redemption prices set forth herein, plus accrued and unpaid interest to the date fixed for redemption. In addition, at any time prior to , 1999, the Company, at its option, may redeem up to 35% of the aggregate principal amount of the Notes originally issued with the cash proceeds received by the Company from one or more Public Equity Offerings, other than the Concurrent Offering, at any time or from time to time, at a redemption price equal to % of the principal amount thereof, plus accrued and unpaid interest to the date fixed for redemption; PROVIDED, HOWEVER, that at least $104.0 million in aggregate principal amount of the Notes remain outstanding immediately after any such redemption. CHANGE OF CONTROL OFFER..................... Upon a Change of Control, the Company has the obligation to offer to purchase all the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. See "Description of the Notes -- Change of Control" for a discussion of the circumstances in which the Company may not be required to make a Change of Control Offer (as defined). OFFERS TO PURCHASE.......................... In the event of certain asset sales, the Company will be required to offer to repurchase the Notes at 100% of their principal amount plus accrued and unpaid interest, if any, to the date of repurchase with the net proceeds of such asset sales. SUBORDINATION............................... The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company, including all indebtedness of the Company under the Senior Credit Facility. As of June 30, 1996, on a pro forma basis after giving effect to this Offering, the Concurrent Offering, the KTVE Sale, the Financing and the application of the net proceeds therefrom, and to the Phipps Acquisition, the Company would have had approximately $183.6 million of indebtedness outstanding, of which $23.6 million would be Senior Debt. SUBSIDIARY GUARANTEES....................... The Notes will be guaranteed, jointly and severally, fully and unconditionally, on a senior subordinated basis by the Subsidiary Guarantors (the "Subsidiary Guarantees"). The obligations of any Subsidiary Guarantor with respect to its Subsidiary Guarantee will be subordinated in right of payment, to the same extent as the obligations of the Company in respect of the Notes, to all existing and future Guarantor Senior Debt of such Subsidiary Guarantor, which will include any guarantee by such Subsidiary Guarantor of the Company's indebtedness under the Senior Credit Facility. </TABLE> <TABLE> <S> <C> PRINCIPAL COVENANTS......................... The Indenture for the Notes (the "Indenture") will impose certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt or Guarantor Senior Debt and senior in right of payment to the Notes or any Subsidiary Guarantee, incur liens, impose restrictions on the ability of a subsidiary to pay dividends or make certain payments to the Company, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. USE OF PROCEEDS............................. The Company intends to use the proceeds from the sale of the Notes, together with the proceeds of the Concurrent Offering, the other proceeds of the Financing and the Company's working capital, to (i) consummate the Phipps Acquisition, (ii) retire indebtedness under the Old Credit Facility and the Senior Note and (iii) pay related fees and expenses. However, in the event the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996, the Company will be obligated to redeem the Notes. See "The Phipps Acquisition, the KTVE Sale and the Financing" and "Description of the Notes-Redemption-Special Redemption."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0001018365_wjhg_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001018365_wjhg_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING INFORMATION IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. AS USED HEREIN, UNLESS THE CONTEXT OTHERWISE REQUIRES, THE "COMPANY" MEANS GRAY COMMUNICATIONS SYSTEMS, INC. AND ITS SUBSIDIARIES. THE COMPANY HAS NOT YET CONSUMMATED THE PHIPPS ACQUISITION (AS DEFINED) AND THERE CAN BE NO ASSURANCE THAT THE PHIPPS ACQUISITION WILL BE CONSUMMATED. HOWEVER, EXCEPT WITH RESPECT TO HISTORICAL FINANCIAL STATEMENTS AND UNLESS THE CONTEXT INDICATES OTHERWISE, THE PHIPPS BUSINESS (AS DEFINED) IS INCLUDED IN THE DESCRIPTION OF THE COMPANY. SEE "THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING." UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION GRANTED BY THE COMPANY TO THE UNDERWRITERS IN THE CONCURRENT OFFERING IS NOT EXERCISED. ALL INFORMATION IN THIS PROSPECTUS HAS BEEN ADJUSTED TO GIVE EFFECT TO A 3-FOR-2 SPLIT OF THE CLASS A COMMON STOCK, EFFECTED IN THE FORM OF A STOCK DIVIDEND DECLARED ON OCTOBER 2, 1995. UNLESS OTHERWISE INDICATED, ALL STATION RANK, IN-MARKET SHARE AND TELEVISION HOUSEHOLD DATA IN THIS PROSPECTUS ARE DERIVED FROM THE NIELSEN STATION INDEX, VIEWERS IN PROFILE, DATED NOVEMBER 1995, AS PREPARED BY A.C. NIELSEN COMPANY ("NIELSEN"). THE COMPANY The Company owns and operates seven network-affiliated television stations in medium-size markets in the southeastern United States, six of which are ranked number one in their respective markets (which includes two television stations that are part of the Phipps Business). Five of the stations are affiliated with the CBS Television Network, a division of CBS, Inc. ("CBS") and two are affiliated with the NBC Television Network, a division of the National Broadcasting Company, Incorporated ("NBC"). In connection with the Phipps Acquisition (described below), the Company will be required under current regulations of the Federal Communications Commission (the "FCC") to divest its NBC affiliates in Albany, Georgia and Panama City, Florida. For a discussion of the Company's plans regarding such divestiture, see "Risk Factors -- FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." The Company also owns and operates three daily newspapers, two weekly, advertising only publications ("shoppers"), and a paging business (which is part of the Phipps Business), all located in the Southeast. The Company derives significant operating advantages and cost saving synergies through the size of its television station group and the regional focus of its television and publishing operations. These advantages and synergies include (i) sharing television production facilities, equipment and regionally oriented programming, (ii) the ability to purchase television programming for the group as a whole, (iii) negotiating network affiliation agreements on a group basis and (iv) purchasing newsprint and other supplies in bulk. In addition, the Company believes that its regional focus can provide advertisers with an efficient network through which to advertise in the fast-growing Southeast. In 1993, after the acquisition of a large block of Class A Common Stock by a new investor, the Company implemented a strategy to foster growth through strategic acquisitions. Since 1994, the Company's significant acquisitions have included three television stations and two newspapers, all located in the Southeast. As a result of the Company's acquisitions and in support of its growth strategy, the Company has added certain key members of management and has greatly expanded its operations in the television broadcasting and newspaper publishing businesses. On September 10, 1996, J. Mack Robinson, a director of the Company, was appointed President and Chief Executive Officer of the Company on an interim basis, to succeed Ralph W. Gabbard, who had died suddenly. The Company expects to commence a search to locate a new President as soon as practicable following this Offering. On September 11, 1996, Robert S. Prather, Jr., a director of the Company, was appointed Executive Vice President-Acquisitions on an interim basis. In January 1996, the Company acquired (the "Augusta Acquisition") WRDW-TV ("WRDW"), a CBS affiliate serving Augusta, Georgia (the "Augusta Business"). In December 1995, the Company entered into an asset purchase agreement to acquire (the "Phipps Acquisition") two CBS-affiliated stations, WCTV-TV ("WCTV") serving Tallahassee, Florida/Thomasville, Georgia and WKXT-TV ("WKXT") in Knoxville, Tennessee, a satellite broadcasting business and a paging business (collectively, the "Phipps Business"). The Company believes that the Phipps Acquisition will further enhance the Company's position as a major regional television broadcaster and is highly attractive for a number of reasons, including (i) the stations' strategic fit in the Southeast, (ii) WCTV's leading station market position and WKXT's significant growth potential, (iii) strong station broadcast cash flows, (iv) opportunities for revenue growth utilizing the Company's extensive management expertise with medium-size stations and (v) opportunities for synergies between WCTV and WKXT and the Company's existing stations with regard to revenue enhancement and cost controls. The consummation of the Phipps Acquisition is currently expected to occur by September 30, 1996, although there can be no assurance with respect thereto. In August 1996, the Company sold the assets (the "KTVE Sale") of KTVE Inc. ("KTVE"), a television station serving Monroe, Louisiana/El Dorado, Arkansas for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing. For the year ended December 31, 1995, on a pro forma basis, the Company had net revenues, Media Cash Flow (the sum of broadcast cash flow, publishing cash flow and paging cash flow), operating cash flow and net (loss) of $90.6 million, $30.3 million, $28.1 million and $(3.6) million, respectively. For the six months ended June 30, 1996, on a pro forma basis, the Company had net revenues, Media Cash Flow, operating cash flow and net income of $47.3 million, $17.9 million, $16.3 million and $251,000, respectively. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the year ended December 31, 1995 increased 148.2%, 188.4% and 227.9%, respectively, while net income decreased 230.3% from the historical amounts for the year ended December 31, 1994. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the six months ended June 30, 1996 increased 67.1%, 114.7% and 122.8%, respectively, while net income decreased 78.7% from the historical amounts for the six months ended June 30, 1995. The Company's pro forma net income for its television stations for the year ended December 31, 1995 and for the six months ended June 30, 1996 was $1.6 million and $1.4 million, respectively. The following table sets forth certain information for each of the Company's television stations. <TABLE> <CAPTION> ------------------------------------------------------------------------------------------------------------------ PRO FORMA --------------------------------------- IN-MARKET YEAR ENDED DECEMBER SIX MONTHS ENDED STATION SHARE OF 31, 1995 JUNE 30, 1996 RANK HOUSEHOLDS ------------------- ------------------ NETWORK YEAR DMA CHANNEL/ IN VIEWING NET OPERATING NET OPERATING STATION AFFILIATION MARKET ACQUIRED RANK(1) FREQUENCY DMA(2) TV REVENUES INCOME(6) REVENUES INCOME(6) - -------- ------- ------------- ------- -------- --------- -------- --------- --------- -------- -------- -------- (IN THOUSANDS) (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> WKYT CBS Lexington, KY 1994 68 27/UHF(3) 1 33% $15,553 $5,247 $7,845 $2,701 WYMT CBS Hazard, KY 1994 68 57/UHF(3) 1(4) 24 3,721 831 2,107 530 WRDW CBS Augusta, GA 1996 111 12/VHF 1 36 8,888 1,853 4,489 1,149 WALB (5) NBC Albany, GA 1954 152 10/VHF 1 80 9,445 4,795 5,099 2,658 Panama City, WJHG (5) NBC FL 1960 159 7/VHF 1 53 3,843 270 2,409 476 PHIPPS ACQUISITION WKXT CBS Knoxville, TN 62 8/VHF 3 22 9,269 2,204 4,387 903 Tallahassee, WCTV CBS FL/ 116 6/VHF 1 60 11,862 4,229 6,212 2,254 Thomasville, GA </TABLE> - ------------------------------ (1) Ranking of designated market area as defined by Nielsen ("DMA") served by a station among all DMAs is measured by the number of television households within the DMA based on the November 1995 Nielsen estimates. (2) Represents station rank in DMA as determined by November 1995 Nielsen estimates of the number of television sets tuned to the Company's station as a percentage of the number of television sets in use in the market for the Sunday through Saturday 6 a.m. to 2 a.m. time period. (3) All stations in the market are UHF stations. (4) The market area served by WYMT is an 18-county trading area, as defined by Nielsen, and is included in the Lexington, Kentucky DMA. WYMT's station rank is based upon its position in the 18-county trading area. (5) The Company will be required under current FCC regulations to divest WALB and WJHG in connection with the Phipps Acquisition. For a discussion of the Company's plans, see "Risk Factors-FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." (6) Represents pro forma income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes. The Company's three newspapers, THE ALBANY HERALD, THE ROCKDALE CITIZEN and the GWINNETT DAILY POST and two shoppers had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $21.9 million and $660,000, respectively, for the year ended December 31, 1995, and $11.3 million and $1.3 million for the six months ended June 30, 1996, respectively. The satellite broadcasting business and paging business, which are a part of the Phipps Business, had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $6.2 million and $542,000 for the year ended December 31, 1995 and $3.5 million and $467,000 for the six months ended June 30, 1996, respectively. BUSINESS STRATEGY The Company's business strategy includes the following key elements: - STRONG LOCAL PRESENCE. Each of the Company's television stations seeks to achieve a distinct identity through its emphasis on local programming. A key objective is to build audience loyalty through the development of a strong local news franchise. Strong local news generates high viewership and results in higher ratings for programs both preceding and following the news, which increases revenues and Media Cash Flow. - REGIONAL FOCUS. The Company believes its regional focus has competitive advantages, including the ability to purchase and produce programming that can be used by multiple Company-owned stations as well as the opportunity to sell advertising on multiple stations as a single buy. In addition, the proximity of the Company's operations allows the sharing of equipment, management and marketing expertise. - TARGETED MARKETING. The Company seeks to increase its advertising revenues and Media Cash Flow by expanding existing relationships with local and national advertisers and by attracting new advertisers through targeted marketing techniques and carefully tailored programming. The Company works closely with advertisers to develop advertising campaigns that match specifically targeted audience segments including sponsoring and staging various special events such as fishing tournaments, boat shows and bridal expositions. - COST CONTROLS. Through its strategic planning and annual budgeting processes, the Company continually seeks to identify and implement cost savings opportunities at each of its stations and publications in order to increase Media Cash Flow. The Company's ownership of multiple stations and publications also benefits each operation in negotiating favorable terms with programming syndicators, newsprint suppliers, national sales representatives and other vendors. - SELECTIVE ACQUISITIONS. The Company has focused on acquiring television stations where the Company believes there is the potential for improvements in revenue share, audience share and cost control. The Company focuses on southeastern markets of medium size because the Company believes these markets offer superior opportunities in terms of projected population and economic growth, leading to higher advertising and circulation revenues. In assessing acquisitions, the Company targets stations and publications where it sees specific opportunities for revenue enhancement while controlling expenditures, utilizing management's significant experience with local and national advertising sales and in operating similar businesses. In appropriate circumstances, the Company will dispose of assets that it deems non-essential to its operating or growth strategy. THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING The Company has entered into an agreement to acquire WCTV and WKXT, a satellite broadcasting business and a paging business in the Southeast. The purchase price for the Phipps Acquisition is approximately $185 million, including fees, expenses and working capital and other adjustments. The consummation of the Phipps Acquisition is expected to occur by September 30, 1996, although there can be no assurance with respect thereto. See "Risk Factors -- Possible Non-Consummation of the Phipps Acquisition." Pursuant to an agreement, dated as of May 15, 1996 (the "KTVE Agreement"), with GOCOM Television of Ouachita, L.P., in August 1996, the Company sold the assets of KTVE for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing (approximately $870,000), to the extent collected by the buyer, to be paid to the Company 150 days following the date of closing. For the year ended December 31, 1995, KTVE had net revenues, Media Cash Flow and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) of $4.2 million, $916,000 and $437,000, respectively, and $2.3 million, $598,000 and $360,000, respectively, for the six months ended June 30, 1996. The Company estimates that the gain, net of estimated taxes, on the KTVE Sale was approximately $2.8 million. In addition to the KTVE Sale and the consummation of this Offering, the Concurrent Offering and the Phipps Acquisition, the Company intends to implement a financing plan (the "Financing") to increase liquidity and improve operating and financial flexibility. Pursuant to the Financing, the Company will (i) retire approximately $49.5 million aggregate principal amount of outstanding indebtedness under its senior secured bank credit facility (the "Old Credit Facility"), together with accrued interest thereon, (ii) retire approximately $25.0 million aggregate principal amount of outstanding indebtedness under its senior note due 2003 (the "Senior Note"), together with accrued interest thereon and a prepayment fee, (iii) issue $10.0 million liquidation preference of its Series A preferred stock (the "Series A Preferred Stock") in exchange for its outstanding $10.0 million aggregate principal amount 8% subordinated note (the "8% Note") issued to Bull Run Corporation ("Bull Run"), a principal shareholder of the Company, (iv) issue to Bull Run, J. Mack Robinson, the President, Chief Executive Officer and a director of the Company, and certain of his affiliates $10.0 million liquidation preference of its Series B preferred stock (the "Series B Preferred Stock" and together with the Series A Preferred Stock, the "Preferred Stock") with warrants to purchase up to 500,000 shares of Class A Common Stock (representing 10.1% of the currently issued and outstanding Class A Common Stock after giving effect to the exercise of such warrants) for cash proceeds of $10.0 million and (v) enter into a new senior secured bank credit facility (the "Senior Credit Facility") to provide for a term loan and revolving credit facility aggregating $125.0 million. The cash required for the consummation of the Phipps Acquisition, the repayment of indebtedness and related transaction costs will be provided by the net proceeds of this Offering, the Concurrent Offering and the sale of the Series B Preferred Stock and the warrants, borrowings under the Senior Credit Facility and the Company's working capital. For a description of the Senior Credit Facility and the Preferred Stock, see "Description of Certain Indebtedness" and "Management--Compensation Committee Interlocks and Insider Participation-Issuances of Preferred Stock." The consummation of this Offering and the placement of funds into escrow are conditioned upon the issuance of the Series A Preferred Stock in exchange for the 8% Note, the issuance of the Series B Preferred Stock and the entering into of the Senior Credit Facility. The consummation of this Offering and the placement of the net proceeds thereof into escrow are not conditioned upon the consummation of the Concurrent Offering or the Phipps Acquisition or the other elements of the Financing. However the release of the net proceeds hereof from escrow is conditioned, among other things, upon the satisfaction of the Minimum Equity Condition, the retirement of the Senior Note and the Old Credit Facility and the consummation of the Phipps Acquisition. The Notes are subject to a mandatory redemption on the Special Redemption Date at the Special Redemption Price if either the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996. See "Description of the Notes-Redemption-Special Redemption." The Senior Credit Facility will provide that no borrowings may be made thereunder until the closing of the Phipps Acquisition. Accordingly, if the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied, the Notes will be redeemed by the Company, the Old Credit Facility will remain in place and the Company will not borrow under the Senior Credit Facility. The following table sets forth the estimated sources and uses of funds relating to this Offering, the Concurrent Offering, the Phipps Acquisition and the Financing: <TABLE> <CAPTION> ---------- (IN MILLIONS) AMOUNT ---------- <S> <C> SOURCES OF FUNDS: The Notes offered hereby $160.0 The Concurrent Offering (1) 73.5 Sale of Series B Preferred Stock and Warrants 10.0 Borrowings under the Senior Credit Facility 22.9 Working capital (2) 9.5 ---------- TOTAL $275.9 ---------- ---------- USES OF FUNDS: Consummation of Phipps Acquisition $185.0 Retire indebtedness under the Old Credit Facility (3) 49.5 Retire indebtedness under the Senior Note (4) 25.0 Fees and expenses (5) 16.4 ---------- TOTAL $275.9 ---------- ---------- </TABLE> - ------------------------------ (1) Assumes estimated gross proceeds from the Concurrent Offering of $73.5 million and estimated net proceeds therefrom of $67.6 million. It is a condition of the release from escrow of the net proceeds of this Offering that the Company shall have consummated one or more equity offerings having gross proceeds of not less than $65.0 million. To the extent that the gross proceeds of any such equity offerings are less than $73.5 million, the Company intends to borrow such difference under its Senior Credit Facility. It is anticipated that there will not be a significant interval between the closing of this Offering and the closing of the Concurrent Offering. (2) The source of these funds was the KTVE Sale. (3) Borrowings under the Old Credit Facility bear interest at formula rates based upon the applicable London inter-bank offered rate ("LIBOR") or prime rate at the time of borrowing plus a fixed spread and have a final maturity of 2003. As of June 30, 1996, the weighted average interest rate was 8.94%. (4) The indebtedness under the Senior Note bears interest at 10.7%. (5) Fees and expenses include underwriting costs for the Notes and the Concurrent Offering, fees payable in connection with the negotiation and execution of the Senior Credit Facility, fees payable in connection with the retirement of the Senior Note and legal, accounting and other transaction fees. Prior to the consummation of the Phipps Acquisition and the satisfaction of the Minimum Equity Condition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes. The Trust Funds will be invested in cash equivalents. The proceeds of the Concurrent Offering will be used to repay indebtedness under the Old Credit Facility, to retire the Senior Note and to provide funds for the Phipps Acquisition. THE OFFERING <TABLE> <S> <C> SECURITIES OFFERED.......................... $160,000,000 aggregate principal amount of % Senior Subordinated Notes due 2006. MATURITY DATE............................... , 2006. INTEREST PAYMENT DATES...................... and , commencing , 1997. SPECIAL REDEMPTION BY THE COMPANY........... If the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996, the Company will be required to redeem (the "Special Redemption") the Notes on or prior to December 31, 1996 (the "Special Redemption Date") at a redemption price (the "Special Redemption Price") equal to 101% of the principal amount of the Notes plus accrued and unpaid interest to the Special Redemption Date. At any time prior to December 23, 1996, if the Phipps Acquisition has not been consummated or the Minimum Equity Condition is not satisfied, the Company may, at its option, redeem the Notes, in whole but not in part, at a redemption price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date fixed for redemption. Prior to the consummation of the Phipps Acquisition and the satisfaction of the Minimum Equity Condition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes and the obligation of the Company to consummate the Special Redemption will be secured by such funds (the "Trust Funds"). </TABLE> <TABLE> <S> <C> OPTIONAL REDEMPTION BY THE COMPANY.......... The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after , 2001, at the redemption prices set forth herein, plus accrued and unpaid interest to the date fixed for redemption. In addition, at any time prior to , 1999, the Company, at its option, may redeem up to 35% of the aggregate principal amount of the Notes originally issued with the cash proceeds received by the Company from one or more Public Equity Offerings, other than the Concurrent Offering, at any time or from time to time, at a redemption price equal to % of the principal amount thereof, plus accrued and unpaid interest to the date fixed for redemption; PROVIDED, HOWEVER, that at least $104.0 million in aggregate principal amount of the Notes remain outstanding immediately after any such redemption. CHANGE OF CONTROL OFFER..................... Upon a Change of Control, the Company has the obligation to offer to purchase all the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. See "Description of the Notes -- Change of Control" for a discussion of the circumstances in which the Company may not be required to make a Change of Control Offer (as defined). OFFERS TO PURCHASE.......................... In the event of certain asset sales, the Company will be required to offer to repurchase the Notes at 100% of their principal amount plus accrued and unpaid interest, if any, to the date of repurchase with the net proceeds of such asset sales. SUBORDINATION............................... The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company, including all indebtedness of the Company under the Senior Credit Facility. As of June 30, 1996, on a pro forma basis after giving effect to this Offering, the Concurrent Offering, the KTVE Sale, the Financing and the application of the net proceeds therefrom, and to the Phipps Acquisition, the Company would have had approximately $183.6 million of indebtedness outstanding, of which $23.6 million would be Senior Debt. SUBSIDIARY GUARANTEES....................... The Notes will be guaranteed, jointly and severally, fully and unconditionally, on a senior subordinated basis by the Subsidiary Guarantors (the "Subsidiary Guarantees"). The obligations of any Subsidiary Guarantor with respect to its Subsidiary Guarantee will be subordinated in right of payment, to the same extent as the obligations of the Company in respect of the Notes, to all existing and future Guarantor Senior Debt of such Subsidiary Guarantor, which will include any guarantee by such Subsidiary Guarantor of the Company's indebtedness under the Senior Credit Facility. </TABLE> <TABLE> <S> <C> PRINCIPAL COVENANTS......................... The Indenture for the Notes (the "Indenture") will impose certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt or Guarantor Senior Debt and senior in right of payment to the Notes or any Subsidiary Guarantee, incur liens, impose restrictions on the ability of a subsidiary to pay dividends or make certain payments to the Company, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. USE OF PROCEEDS............................. The Company intends to use the proceeds from the sale of the Notes, together with the proceeds of the Concurrent Offering, the other proceeds of the Financing and the Company's working capital, to (i) consummate the Phipps Acquisition, (ii) retire indebtedness under the Old Credit Facility and the Senior Note and (iii) pay related fees and expenses. However, in the event the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996, the Company will be obligated to redeem the Notes. See "The Phipps Acquisition, the KTVE Sale and the Financing" and "Description of the Notes-Redemption-Special Redemption."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001018366_wkxt-tv_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001018366_wkxt-tv_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING INFORMATION IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. AS USED HEREIN, UNLESS THE CONTEXT OTHERWISE REQUIRES, THE "COMPANY" MEANS GRAY COMMUNICATIONS SYSTEMS, INC. AND ITS SUBSIDIARIES. THE COMPANY HAS NOT YET CONSUMMATED THE PHIPPS ACQUISITION (AS DEFINED) AND THERE CAN BE NO ASSURANCE THAT THE PHIPPS ACQUISITION WILL BE CONSUMMATED. HOWEVER, EXCEPT WITH RESPECT TO HISTORICAL FINANCIAL STATEMENTS AND UNLESS THE CONTEXT INDICATES OTHERWISE, THE PHIPPS BUSINESS (AS DEFINED) IS INCLUDED IN THE DESCRIPTION OF THE COMPANY. SEE "THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING." UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION GRANTED BY THE COMPANY TO THE UNDERWRITERS IN THE CONCURRENT OFFERING IS NOT EXERCISED. ALL INFORMATION IN THIS PROSPECTUS HAS BEEN ADJUSTED TO GIVE EFFECT TO A 3-FOR-2 SPLIT OF THE CLASS A COMMON STOCK, EFFECTED IN THE FORM OF A STOCK DIVIDEND DECLARED ON OCTOBER 2, 1995. UNLESS OTHERWISE INDICATED, ALL STATION RANK, IN-MARKET SHARE AND TELEVISION HOUSEHOLD DATA IN THIS PROSPECTUS ARE DERIVED FROM THE NIELSEN STATION INDEX, VIEWERS IN PROFILE, DATED NOVEMBER 1995, AS PREPARED BY A.C. NIELSEN COMPANY ("NIELSEN"). THE COMPANY The Company owns and operates seven network-affiliated television stations in medium-size markets in the southeastern United States, six of which are ranked number one in their respective markets (which includes two television stations that are part of the Phipps Business). Five of the stations are affiliated with the CBS Television Network, a division of CBS, Inc. ("CBS") and two are affiliated with the NBC Television Network, a division of the National Broadcasting Company, Incorporated ("NBC"). In connection with the Phipps Acquisition (described below), the Company will be required under current regulations of the Federal Communications Commission (the "FCC") to divest its NBC affiliates in Albany, Georgia and Panama City, Florida. For a discussion of the Company's plans regarding such divestiture, see "Risk Factors -- FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." The Company also owns and operates three daily newspapers, two weekly, advertising only publications ("shoppers"), and a paging business (which is part of the Phipps Business), all located in the Southeast. The Company derives significant operating advantages and cost saving synergies through the size of its television station group and the regional focus of its television and publishing operations. These advantages and synergies include (i) sharing television production facilities, equipment and regionally oriented programming, (ii) the ability to purchase television programming for the group as a whole, (iii) negotiating network affiliation agreements on a group basis and (iv) purchasing newsprint and other supplies in bulk. In addition, the Company believes that its regional focus can provide advertisers with an efficient network through which to advertise in the fast-growing Southeast. In 1993, after the acquisition of a large block of Class A Common Stock by a new investor, the Company implemented a strategy to foster growth through strategic acquisitions. Since 1994, the Company's significant acquisitions have included three television stations and two newspapers, all located in the Southeast. As a result of the Company's acquisitions and in support of its growth strategy, the Company has added certain key members of management and has greatly expanded its operations in the television broadcasting and newspaper publishing businesses. On September 10, 1996, J. Mack Robinson, a director of the Company, was appointed President and Chief Executive Officer of the Company on an interim basis, to succeed Ralph W. Gabbard, who had died suddenly. The Company expects to commence a search to locate a new President as soon as practicable following this Offering. On September 11, 1996, Robert S. Prather, Jr., a director of the Company, was appointed Executive Vice President-Acquisitions on an interim basis. In January 1996, the Company acquired (the "Augusta Acquisition") WRDW-TV ("WRDW"), a CBS affiliate serving Augusta, Georgia (the "Augusta Business"). In December 1995, the Company entered into an asset purchase agreement to acquire (the "Phipps Acquisition") two CBS-affiliated stations, WCTV-TV ("WCTV") serving Tallahassee, Florida/Thomasville, Georgia and WKXT-TV ("WKXT") in Knoxville, Tennessee, a satellite broadcasting business and a paging business (collectively, the "Phipps Business"). The Company believes that the Phipps Acquisition will further enhance the Company's position as a major regional television broadcaster and is highly attractive for a number of reasons, including (i) the stations' strategic fit in the Southeast, (ii) WCTV's leading station market position and WKXT's significant growth potential, (iii) strong station broadcast cash flows, (iv) opportunities for revenue growth utilizing the Company's extensive management expertise with medium-size stations and (v) opportunities for synergies between WCTV and WKXT and the Company's existing stations with regard to revenue enhancement and cost controls. The consummation of the Phipps Acquisition is currently expected to occur by September 30, 1996, although there can be no assurance with respect thereto. In August 1996, the Company sold the assets (the "KTVE Sale") of KTVE Inc. ("KTVE"), a television station serving Monroe, Louisiana/El Dorado, Arkansas for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing. For the year ended December 31, 1995, on a pro forma basis, the Company had net revenues, Media Cash Flow (the sum of broadcast cash flow, publishing cash flow and paging cash flow), operating cash flow and net (loss) of $90.6 million, $30.3 million, $28.1 million and $(3.6) million, respectively. For the six months ended June 30, 1996, on a pro forma basis, the Company had net revenues, Media Cash Flow, operating cash flow and net income of $47.3 million, $17.9 million, $16.3 million and $251,000, respectively. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the year ended December 31, 1995 increased 148.2%, 188.4% and 227.9%, respectively, while net income decreased 230.3% from the historical amounts for the year ended December 31, 1994. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the six months ended June 30, 1996 increased 67.1%, 114.7% and 122.8%, respectively, while net income decreased 78.7% from the historical amounts for the six months ended June 30, 1995. The Company's pro forma net income for its television stations for the year ended December 31, 1995 and for the six months ended June 30, 1996 was $1.6 million and $1.4 million, respectively. The following table sets forth certain information for each of the Company's television stations. <TABLE> <CAPTION> ------------------------------------------------------------------------------------------------------------------ PRO FORMA --------------------------------------- IN-MARKET YEAR ENDED DECEMBER SIX MONTHS ENDED STATION SHARE OF 31, 1995 JUNE 30, 1996 RANK HOUSEHOLDS ------------------- ------------------ NETWORK YEAR DMA CHANNEL/ IN VIEWING NET OPERATING NET OPERATING STATION AFFILIATION MARKET ACQUIRED RANK(1) FREQUENCY DMA(2) TV REVENUES INCOME(6) REVENUES INCOME(6) - -------- ------- ------------- ------- -------- --------- -------- --------- --------- -------- -------- -------- (IN THOUSANDS) (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> WKYT CBS Lexington, KY 1994 68 27/UHF(3) 1 33% $15,553 $5,247 $7,845 $2,701 WYMT CBS Hazard, KY 1994 68 57/UHF(3) 1(4) 24 3,721 831 2,107 530 WRDW CBS Augusta, GA 1996 111 12/VHF 1 36 8,888 1,853 4,489 1,149 WALB (5) NBC Albany, GA 1954 152 10/VHF 1 80 9,445 4,795 5,099 2,658 Panama City, WJHG (5) NBC FL 1960 159 7/VHF 1 53 3,843 270 2,409 476 PHIPPS ACQUISITION WKXT CBS Knoxville, TN 62 8/VHF 3 22 9,269 2,204 4,387 903 Tallahassee, WCTV CBS FL/ 116 6/VHF 1 60 11,862 4,229 6,212 2,254 Thomasville, GA </TABLE> - ------------------------------ (1) Ranking of designated market area as defined by Nielsen ("DMA") served by a station among all DMAs is measured by the number of television households within the DMA based on the November 1995 Nielsen estimates. (2) Represents station rank in DMA as determined by November 1995 Nielsen estimates of the number of television sets tuned to the Company's station as a percentage of the number of television sets in use in the market for the Sunday through Saturday 6 a.m. to 2 a.m. time period. (3) All stations in the market are UHF stations. (4) The market area served by WYMT is an 18-county trading area, as defined by Nielsen, and is included in the Lexington, Kentucky DMA. WYMT's station rank is based upon its position in the 18-county trading area. (5) The Company will be required under current FCC regulations to divest WALB and WJHG in connection with the Phipps Acquisition. For a discussion of the Company's plans, see "Risk Factors-FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." (6) Represents pro forma income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes. The Company's three newspapers, THE ALBANY HERALD, THE ROCKDALE CITIZEN and the GWINNETT DAILY POST and two shoppers had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $21.9 million and $660,000, respectively, for the year ended December 31, 1995, and $11.3 million and $1.3 million for the six months ended June 30, 1996, respectively. The satellite broadcasting business and paging business, which are a part of the Phipps Business, had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $6.2 million and $542,000 for the year ended December 31, 1995 and $3.5 million and $467,000 for the six months ended June 30, 1996, respectively. BUSINESS STRATEGY The Company's business strategy includes the following key elements: - STRONG LOCAL PRESENCE. Each of the Company's television stations seeks to achieve a distinct identity through its emphasis on local programming. A key objective is to build audience loyalty through the development of a strong local news franchise. Strong local news generates high viewership and results in higher ratings for programs both preceding and following the news, which increases revenues and Media Cash Flow. - REGIONAL FOCUS. The Company believes its regional focus has competitive advantages, including the ability to purchase and produce programming that can be used by multiple Company-owned stations as well as the opportunity to sell advertising on multiple stations as a single buy. In addition, the proximity of the Company's operations allows the sharing of equipment, management and marketing expertise. - TARGETED MARKETING. The Company seeks to increase its advertising revenues and Media Cash Flow by expanding existing relationships with local and national advertisers and by attracting new advertisers through targeted marketing techniques and carefully tailored programming. The Company works closely with advertisers to develop advertising campaigns that match specifically targeted audience segments including sponsoring and staging various special events such as fishing tournaments, boat shows and bridal expositions. - COST CONTROLS. Through its strategic planning and annual budgeting processes, the Company continually seeks to identify and implement cost savings opportunities at each of its stations and publications in order to increase Media Cash Flow. The Company's ownership of multiple stations and publications also benefits each operation in negotiating favorable terms with programming syndicators, newsprint suppliers, national sales representatives and other vendors. - SELECTIVE ACQUISITIONS. The Company has focused on acquiring television stations where the Company believes there is the potential for improvements in revenue share, audience share and cost control. The Company focuses on southeastern markets of medium size because the Company believes these markets offer superior opportunities in terms of projected population and economic growth, leading to higher advertising and circulation revenues. In assessing acquisitions, the Company targets stations and publications where it sees specific opportunities for revenue enhancement while controlling expenditures, utilizing management's significant experience with local and national advertising sales and in operating similar businesses. In appropriate circumstances, the Company will dispose of assets that it deems non-essential to its operating or growth strategy. THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING The Company has entered into an agreement to acquire WCTV and WKXT, a satellite broadcasting business and a paging business in the Southeast. The purchase price for the Phipps Acquisition is approximately $185 million, including fees, expenses and working capital and other adjustments. The consummation of the Phipps Acquisition is expected to occur by September 30, 1996, although there can be no assurance with respect thereto. See "Risk Factors -- Possible Non-Consummation of the Phipps Acquisition." Pursuant to an agreement, dated as of May 15, 1996 (the "KTVE Agreement"), with GOCOM Television of Ouachita, L.P., in August 1996, the Company sold the assets of KTVE for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing (approximately $870,000), to the extent collected by the buyer, to be paid to the Company 150 days following the date of closing. For the year ended December 31, 1995, KTVE had net revenues, Media Cash Flow and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) of $4.2 million, $916,000 and $437,000, respectively, and $2.3 million, $598,000 and $360,000, respectively, for the six months ended June 30, 1996. The Company estimates that the gain, net of estimated taxes, on the KTVE Sale was approximately $2.8 million. In addition to the KTVE Sale and the consummation of this Offering, the Concurrent Offering and the Phipps Acquisition, the Company intends to implement a financing plan (the "Financing") to increase liquidity and improve operating and financial flexibility. Pursuant to the Financing, the Company will (i) retire approximately $49.5 million aggregate principal amount of outstanding indebtedness under its senior secured bank credit facility (the "Old Credit Facility"), together with accrued interest thereon, (ii) retire approximately $25.0 million aggregate principal amount of outstanding indebtedness under its senior note due 2003 (the "Senior Note"), together with accrued interest thereon and a prepayment fee, (iii) issue $10.0 million liquidation preference of its Series A preferred stock (the "Series A Preferred Stock") in exchange for its outstanding $10.0 million aggregate principal amount 8% subordinated note (the "8% Note") issued to Bull Run Corporation ("Bull Run"), a principal shareholder of the Company, (iv) issue to Bull Run, J. Mack Robinson, the President, Chief Executive Officer and a director of the Company, and certain of his affiliates $10.0 million liquidation preference of its Series B preferred stock (the "Series B Preferred Stock" and together with the Series A Preferred Stock, the "Preferred Stock") with warrants to purchase up to 500,000 shares of Class A Common Stock (representing 10.1% of the currently issued and outstanding Class A Common Stock after giving effect to the exercise of such warrants) for cash proceeds of $10.0 million and (v) enter into a new senior secured bank credit facility (the "Senior Credit Facility") to provide for a term loan and revolving credit facility aggregating $125.0 million. The cash required for the consummation of the Phipps Acquisition, the repayment of indebtedness and related transaction costs will be provided by the net proceeds of this Offering, the Concurrent Offering and the sale of the Series B Preferred Stock and the warrants, borrowings under the Senior Credit Facility and the Company's working capital. For a description of the Senior Credit Facility and the Preferred Stock, see "Description of Certain Indebtedness" and "Management--Compensation Committee Interlocks and Insider Participation-Issuances of Preferred Stock." The consummation of this Offering and the placement of funds into escrow are conditioned upon the issuance of the Series A Preferred Stock in exchange for the 8% Note, the issuance of the Series B Preferred Stock and the entering into of the Senior Credit Facility. The consummation of this Offering and the placement of the net proceeds thereof into escrow are not conditioned upon the consummation of the Concurrent Offering or the Phipps Acquisition or the other elements of the Financing. However the release of the net proceeds hereof from escrow is conditioned, among other things, upon the satisfaction of the Minimum Equity Condition, the retirement of the Senior Note and the Old Credit Facility and the consummation of the Phipps Acquisition. The Notes are subject to a mandatory redemption on the Special Redemption Date at the Special Redemption Price if either the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996. See "Description of the Notes-Redemption-Special Redemption." The Senior Credit Facility will provide that no borrowings may be made thereunder until the closing of the Phipps Acquisition. Accordingly, if the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied, the Notes will be redeemed by the Company, the Old Credit Facility will remain in place and the Company will not borrow under the Senior Credit Facility. The following table sets forth the estimated sources and uses of funds relating to this Offering, the Concurrent Offering, the Phipps Acquisition and the Financing: <TABLE> <CAPTION> ---------- (IN MILLIONS) AMOUNT ---------- <S> <C> SOURCES OF FUNDS: The Notes offered hereby $160.0 The Concurrent Offering (1) 73.5 Sale of Series B Preferred Stock and Warrants 10.0 Borrowings under the Senior Credit Facility 22.9 Working capital (2) 9.5 ---------- TOTAL $275.9 ---------- ---------- USES OF FUNDS: Consummation of Phipps Acquisition $185.0 Retire indebtedness under the Old Credit Facility (3) 49.5 Retire indebtedness under the Senior Note (4) 25.0 Fees and expenses (5) 16.4 ---------- TOTAL $275.9 ---------- ---------- </TABLE> - ------------------------------ (1) Assumes estimated gross proceeds from the Concurrent Offering of $73.5 million and estimated net proceeds therefrom of $67.6 million. It is a condition of the release from escrow of the net proceeds of this Offering that the Company shall have consummated one or more equity offerings having gross proceeds of not less than $65.0 million. To the extent that the gross proceeds of any such equity offerings are less than $73.5 million, the Company intends to borrow such difference under its Senior Credit Facility. It is anticipated that there will not be a significant interval between the closing of this Offering and the closing of the Concurrent Offering. (2) The source of these funds was the KTVE Sale. (3) Borrowings under the Old Credit Facility bear interest at formula rates based upon the applicable London inter-bank offered rate ("LIBOR") or prime rate at the time of borrowing plus a fixed spread and have a final maturity of 2003. As of June 30, 1996, the weighted average interest rate was 8.94%. (4) The indebtedness under the Senior Note bears interest at 10.7%. (5) Fees and expenses include underwriting costs for the Notes and the Concurrent Offering, fees payable in connection with the negotiation and execution of the Senior Credit Facility, fees payable in connection with the retirement of the Senior Note and legal, accounting and other transaction fees. Prior to the consummation of the Phipps Acquisition and the satisfaction of the Minimum Equity Condition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes. The Trust Funds will be invested in cash equivalents. The proceeds of the Concurrent Offering will be used to repay indebtedness under the Old Credit Facility, to retire the Senior Note and to provide funds for the Phipps Acquisition. THE OFFERING <TABLE> <S> <C> SECURITIES OFFERED.......................... $160,000,000 aggregate principal amount of % Senior Subordinated Notes due 2006. MATURITY DATE............................... , 2006. INTEREST PAYMENT DATES...................... and , commencing , 1997. SPECIAL REDEMPTION BY THE COMPANY........... If the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996, the Company will be required to redeem (the "Special Redemption") the Notes on or prior to December 31, 1996 (the "Special Redemption Date") at a redemption price (the "Special Redemption Price") equal to 101% of the principal amount of the Notes plus accrued and unpaid interest to the Special Redemption Date. At any time prior to December 23, 1996, if the Phipps Acquisition has not been consummated or the Minimum Equity Condition is not satisfied, the Company may, at its option, redeem the Notes, in whole but not in part, at a redemption price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date fixed for redemption. Prior to the consummation of the Phipps Acquisition and the satisfaction of the Minimum Equity Condition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes and the obligation of the Company to consummate the Special Redemption will be secured by such funds (the "Trust Funds"). </TABLE> <TABLE> <S> <C> OPTIONAL REDEMPTION BY THE COMPANY.......... The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after , 2001, at the redemption prices set forth herein, plus accrued and unpaid interest to the date fixed for redemption. In addition, at any time prior to , 1999, the Company, at its option, may redeem up to 35% of the aggregate principal amount of the Notes originally issued with the cash proceeds received by the Company from one or more Public Equity Offerings, other than the Concurrent Offering, at any time or from time to time, at a redemption price equal to % of the principal amount thereof, plus accrued and unpaid interest to the date fixed for redemption; PROVIDED, HOWEVER, that at least $104.0 million in aggregate principal amount of the Notes remain outstanding immediately after any such redemption. CHANGE OF CONTROL OFFER..................... Upon a Change of Control, the Company has the obligation to offer to purchase all the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. See "Description of the Notes -- Change of Control" for a discussion of the circumstances in which the Company may not be required to make a Change of Control Offer (as defined). OFFERS TO PURCHASE.......................... In the event of certain asset sales, the Company will be required to offer to repurchase the Notes at 100% of their principal amount plus accrued and unpaid interest, if any, to the date of repurchase with the net proceeds of such asset sales. SUBORDINATION............................... The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company, including all indebtedness of the Company under the Senior Credit Facility. As of June 30, 1996, on a pro forma basis after giving effect to this Offering, the Concurrent Offering, the KTVE Sale, the Financing and the application of the net proceeds therefrom, and to the Phipps Acquisition, the Company would have had approximately $183.6 million of indebtedness outstanding, of which $23.6 million would be Senior Debt. SUBSIDIARY GUARANTEES....................... The Notes will be guaranteed, jointly and severally, fully and unconditionally, on a senior subordinated basis by the Subsidiary Guarantors (the "Subsidiary Guarantees"). The obligations of any Subsidiary Guarantor with respect to its Subsidiary Guarantee will be subordinated in right of payment, to the same extent as the obligations of the Company in respect of the Notes, to all existing and future Guarantor Senior Debt of such Subsidiary Guarantor, which will include any guarantee by such Subsidiary Guarantor of the Company's indebtedness under the Senior Credit Facility. </TABLE> <TABLE> <S> <C> PRINCIPAL COVENANTS......................... The Indenture for the Notes (the "Indenture") will impose certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt or Guarantor Senior Debt and senior in right of payment to the Notes or any Subsidiary Guarantee, incur liens, impose restrictions on the ability of a subsidiary to pay dividends or make certain payments to the Company, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. USE OF PROCEEDS............................. The Company intends to use the proceeds from the sale of the Notes, together with the proceeds of the Concurrent Offering, the other proceeds of the Financing and the Company's working capital, to (i) consummate the Phipps Acquisition, (ii) retire indebtedness under the Old Credit Facility and the Senior Note and (iii) pay related fees and expenses. However, in the event the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996, the Company will be obligated to redeem the Notes. See "The Phipps Acquisition, the KTVE Sale and the Financing" and "Description of the Notes-Redemption-Special Redemption."
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (I) HAS BEEN ADJUSTED TO GIVE EFFECT TO THE MINORITY INTEREST CONVERSIONS AND THE GOOD SAMARITAN CONSOLIDATION (EACH AS DEFINED HEREIN), (II) ASSUMES ISSUANCE OF 174,554 SHARES OF COMMON STOCK UPON CONVERSION OF THE ROYAL CARE NOTE, (III) ASSUMES THE EFFECTIVENESS OF THE COMPANY'S AMENDED AND RESTATED CERTIFICATE OF INCORPORATION WHICH WILL, AMONG OTHER THINGS, EFFECT A RECLASSIFICATION OF EACH SHARE OF THE COMPANY'S CLASS A COMMON STOCK AND CLASS B COMMON STOCK INTO 69.65 SHARES OF COMMON STOCK, (IV) ASSUMES ISSUANCE OF 565,625 SHARES OF COMMON STOCK TO THE COMPANY'S PRINCIPAL STOCKHOLDER IN SATISFACTION OF AN UNPAID PREFERENCE WITH RESPECT TO THE COMPANY'S CLASS A COMMON STOCK AND (V) ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. THE COMPANY American Medserve Corporation (the "Company" or "AMC") is a leading independent provider of pharmacy services to long-term care institutions, including skilled nursing facilities, assisted living facilities and other long-term health care settings. The Company purchases, repackages and dispenses pharmaceuticals to patients or residents in its client facilities and provides such facilities with related consultant pharmacist and information services, including formulary management (I.E., management of pharmaceuticals dispensed to minimize cost and maximize therapeutic benefit), automated medical record-keeping, drug therapy evaluation and assistance with regulatory compliance. The Company also provides infusion therapy (I.E., intravenous introduction of fluids containing medications and/or nutrients), parenteral and enteral nutrition therapy (I.E., introduction, either intravenously or directly into a patient's digestive system, of nutrient fluids or other fluids), inhalation and respiratory therapy and wound care management services, as well as medical supplies and devices. As of October 23, 1996, AMC provided pharmacy services to approximately 41,800 residents at over 540 facilities located in Colorado, Illinois, Louisiana, Minnesota, Nebraska, New York, Pennsylvania, South Dakota and Virginia. The Company was formed by Timothy L. Burfield (the Company's President and Chief Executive Officer) and an investment fund affiliated with Golder, Thoma, Cressey, Rauner, Inc. to participate in the consolidation of the long-term care pharmacy industry. To meet this objective, the Company has pursued an acquisition program designed to expand its presence in selected geographic markets. Since commencing operations in August 1994, the Company has completed 18 acquisitions, including ten acquisitions in 1996. In April 1996, the Company acquired a 40% equity interest in Good Samaritan Supply Services, Inc. ("Good Samaritan Supply"). The Company's co-investor in Good Samaritan Supply is The Evangelical Lutheran Good Samaritan Foundation (the "Foundation"), an affiliate of The Evangelical Lutheran Good Samaritan Society (the "Society"). A 1995 industry survey ranked (by total licensed beds) the Society as the fifth largest, and largest non-profit, owner-operator of nursing homes in the United States. As of October 23, 1996, the Society operated 236 long-term care facilities in 26 states, of which 20 facilities were served by the Company's long-term care pharmacy operations. The Company believes that the Society's facilities that are not currently served by the Company's long-term care pharmacy operations represent a significant potential market for such operations. The Company believes that several factors support growth in the U.S. market for pharmacy services in long-term care facilities, including the aging of the U.S. population; the increasing acuity level of patients receiving care in lower-cost non-hospital facilities; the emergence of alternative long-term care settings, such as assisted living; and the continuing advances in drug research and development. In addition, the long-term care pharmacy market is fragmented and is in the process of consolidating. Prior to the 1970's, retail pharmacies generally fulfilled the pharmacy needs of most long-term care facilities. Today, long-term care institutions are more typically served by pharmacies that specialize in serving the needs of the elderly, including "captive" pharmacy companies owned by, or affiliated with, long-term care providers and independent long-term care pharmacy companies such as the Company. The Company believes that larger providers possess the advantages associated with size, such as enhanced purchasing power and the ability to spread fixed costs over a larger revenue base, as well as the breadth of services and capital necessary to compete in this increasingly competitive and regulated business environment. The Company seeks to benefit from these favorable industry trends and to continue to expand its position as a leading independent provider of pharmacy services to long-term care facilities through the implementation of its business strategy, which emphasizes (i) continuing the acquisition of long-term care pharmacy companies to serve as platforms for the Company's entry into new markets as well as "add-on" pharmacies in AMC's existing markets; (ii) promoting internal growth by expanding the breadth of the Company's services and by increasing its marketing emphasis on newly-introduced products and services; (iii) achieving greater efficiency through the consolidation and coordination of purchasing, administrative and financial reporting functions; and (iv) forming strategic alliances (such as the Company's alliance with the Foundation) with long-term care facility operators and other health care providers to enable the Company to expand its product and service offerings and to lower the cost of care, thereby increasing the Company's appeal to managed care organizations and other payors. THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Company.......... 5,357,000 shares Common Stock to be Outstanding After the Offering..................................... 11,656,804 shares(1) Use of Proceeds.............................. To reduce indebtedness; to fund a one-time mandatory preferential distribution to the Company's principal stockholder; to fund a payment to an affiliate of the Company's principal stockholder; to make an additional investment in Good Samaritan Supply; and for other general corporate purposes, including possible future acquisitions. See "Use of Proceeds," "Company Background," "Management -- Compensation Committee Interlocks and Insider Participation" and "Certain Transactions." Proposed Nasdaq National Market Symbol....... AMCI </TABLE> - ------------------------ (1) Includes 565,625 Additional GTCR Shares and 174,554 shares issuable upon conversion of the Royal Care Note. See "Company Background." Excludes 1,150,000 shares of Common Stock reserved for issuance under the Company's 1996 Stock Incentive Plan (including 160,000 shares subject to options to be granted under the 1996 Stock Incentive Plan upon consummation of the Offering) and 160,790 shares reserved for issuance under stock option plans of the Company's subsidiaries (including 146,635 shares subject to options granted under such stock option plans of the Company's subsidiaries, of which options to purchase 48,186 shares of Common Stock were exercisable at October 15, 1996). See "Management -- Employee Benefit Plans -- 1996 Stock Incentive Plan" and "-- Subsidiary Option Plans." Also excludes shares of Common Stock issuable pursuant to the Good Samaritan Shareholders Agreement. See "Risk Factors -- Possible Dilution Resulting from Good Samaritan Option and Put," "Company Background" and "Certain Transactions -- Good Samaritan Relationship." SUMMARY CONSOLIDATED FINANCIAL INFORMATION AND OPERATING DATA (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) <TABLE> <CAPTION> PREDECESSOR (1) THE COMPANY (2) -------------------------- ---------------------------------------------------------------------- YEAR ENDED DECEMBER 31, PERIOD FROM PERIOD FROM ---------------------- SIX MONTHS ENDED JUNE 30, JANUARY 1, AUGUST 3, PRO --------------------------------- YEAR ENDED 1994 TO 1994 TO FORMA AS PRO FORMA DECEMBER 31, AUGUST 2, DECEMBER ADJUSTED AS ADJUSTED 1993 1994 31, 1994 1995 1995 (3) 1995 1996 1996 (4) ------------- ----------- ----------- --------- ----------- --------- --------- ----------- <S> <C> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues................. $ 9,099 $ 6,917 $ 8,091 $ 44,049 $ 109,867 $ 16,702 $ 32,357 $ 59,754 Gross profit............. 2,275 1,954 2,100 12,585 30,044 4,797 9,098 15,514 Operating income......... 515 639 191 2,556 2,269 1,043 1,808 2,457 Interest expense......... 162 78 292 1,762 430 709 1,213 214 Income (loss) before income taxes and extraordinary item...... 349 561 (38) 1,074 2,413 399 674 2,404 Income (loss) before extraordinary item...... 206 537 (17) 405 1,232 109 350 1,364 Pro forma income per share before extraordinary item (5)................ $ 0.06 $ 0.11 $ 0.02 $ 0.05 $ 0.12 Pro forma weighted average shares outstanding (5)......... 6,578 11,696 6,578 6,578 11,696 SELECTED OPERATING DATA (AT PERIOD END): Number of beds served.... 4,800 7,200 9,600 23,400 17,600 32,200 </TABLE> <TABLE> <CAPTION> AT JUNE 30, ----------------------------------- <S> <C> <C> <C> PRO FORMA ACTUAL PRO FORMA AS ADJUSTED 1996 1996 (6) 1996 (7) --------- ----------- ----------- BALANCE SHEET DATA: Working capital (deficiency)................................................ $ 9,818 $ (9,869) $ 28,516 Total assets................................................................ 61,830 94,361 99,885 Long-term debt, excluding current portion................................... 28,167 41,042 4,111 Stockholders' equity........................................................ 22,836 8,110 83,426 </TABLE> - ------------------------------ (1) Represents the combined results of operations of G.S.H.C., Inc. and the Contract Services Division of Louis F. Gatti, Inc. (hereinafter referred to as "Gatti LTC Services, Inc."), which were acquired by the Company on August 2, 1994. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview." (2) The Company was formed in November 1993 by management and an investment fund affiliated with Golder, Thoma, Cressey, Rauner, Inc. and commenced operations with the acquisition of Gatti LTC Services, Inc., on August 2, 1994. (3) Pro forma to give effect to the Completed Acquisitions, the Minority Interest Conversions, the Good Samaritan Consolidation, the conversion of the Royal Care Note (each as defined in "Company Background"), and the elimination of an annual $50,000 management fee payable to an affiliate of the Company's principal stockholder, and as further adjusted to give effect to the issuance of the Additional GTCR Shares and the offering of 5,357,000 shares of Common Stock made hereby and the use of a portion of the estimated net proceeds therefrom to repay interest-bearing indebtedness in the amount of $44.8 million, in each case as if such events had occurred on January 1, 1995. See "Company Background" and "Unaudited Pro Forma Consolidated Financial Statements." (4) Pro forma to give effect to the Completed Acquisitions that occurred after December 31, 1995, the Minority Interest Conversions, the Good Samaritan Consolidation, the conversion of the Royal Care Note and the elimination of an annual $50,000 management fee to an affiliate of the Company's principal stockholder, and as further adjusted to give effect to the issuance of the Additional GTCR Shares and the offering of 5,357,000 shares of Common Stock made hereby and the use of a portion of the estimated net proceeds therefrom to repay interest-bearing indebtedness in the amount of $44.8 million, in each case as if such events had occurred on January 1, 1996. See "Company Background" and "Unaudited Pro Forma Consolidated Financial Statements." (5) With respect to historical periods, pro forma weighted average shares outstanding used in the calculation of pro forma income per share before extraordinary item give effect to (a) the issuance of the Additional GTCR Shares, (b) an additional 1,208,036 shares of Common Stock assumed to have been issued at an assumed initial public offering price of $14.00 per share, the proceeds of which will fund a one-time mandatory preferential distribution (estimated to be approximately $16.9 million) to the Company's principal stockholder with respect to the Company's Class A Common Stock (which stock will be converted into Common Stock contemporaneously with the Offering), (c) the issuance of 33,620 shares of Common Stock in connection with a Completed Acquisition and (d) the dilutive effect (349,036 shares) of Common Stock and options therefor issued to management and directors within the twelve-month period preceding the Company's initial public offering. See Note 3 of Notes to the Consolidated Financial Statements of the Company. With respect to pro forma as adjusted periods, pro forma weighted average shares outstanding used in the calculation of pro forma income per share before extraordinary item also give effect to (a) the issuance of 174,554 shares of Common Stock in connection with the conversion of the Royal Care Note, (b) the issuance of 794,581 shares of Common Stock in connection with the Minority Interest Conversions and (c) the issuance of 5,357,000 shares of Common Stock (including the 1,208,036 shares assumed to have been issued to fund the preferential distribution) offered hereby. (6) Pro forma to give effect to the Completed Acquisitions that occurred after June 30, 1996, the Minority Interest Conversions, the Good Samaritan Consolidation, the issuance of shares to management in September 1996 and the recognition of the corresponding special compensation charges (the "Special Compensation Charges") in the amount of $1.3 million and $1.1 million to be recognized in the quarter ended September 30, 1996 and the quarter ending December 31, 1996, respectively, the conversion of the Royal Care Note and the recording of a liability in connection with the one-time mandatory preferential distribution to the Company's principal stockholder with respect to the Company's Class A Common Stock (which stock will be converted into Common Stock contemporaneously with the Offering), payable in cash of $16.9 million and by issuance of the Additional GTCR Shares with an assumed value of $7.9 million, in each case as if such events had occurred on June 30, 1996. See "Company Background" and "Unaudited Pro Forma Consolidated Financial Statements."
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+PROSPECTUS SUMMARY The following information is qualified in its entirety by the more detailed information and financial statements appearing elsewhere in this Prospectus. As indicated, the information with respect to Cox Radio contained in this Prospectus, other than the historical financial data, gives effect to the pending acquisition (the "NewCity Acquisition") by Cox Radio of NewCity Communications, Inc. ("NewCity"), as well as certain other planned acquisitions and dispositions (together with the NewCity Acquisition, the "Pending Transactions"). See "Pending Transactions." Consummation of each of the Pending Transactions is subject to certain conditions, including the approval of the Federal Communications Commission ("FCC"). Two of the Pending Transactions are also being reviewed by the Department of Justice ("DOJ") pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended ("HSR"). There can be no assurance that such FCC approval will be obtained, that, in connection with such HSR review, the DOJ will not require restructuring of such transactions or that such other required conditions will be satisfied or waived. See "Risk Factors." Unless otherwise indicated, the information in this Prospectus does not give effect to the exercise of the Underwriters' over-allotment option described herein under "Underwriting." THE COMPANY Cox Radio, upon completion of the Pending Transactions, will be one of the ten largest radio broadcasting companies in the United States, based on both net revenues and number of stations. Cox Radio will own or operate, or provide sales and marketing services for, 42 radio stations (27 FM and 15 AM) clustered in 12 markets, including 18 stations to be acquired from NewCity. On a pro forma basis for 1995, Cox Radio will be the number one radio station group ranked by revenue share and audience share in five of its 12 markets. On a pro forma basis, Cox Radio would have generated net revenues of $178.6 million and broadcast cash flow of $51.8 million during the twelve month period ending June 30, 1996. Cox Radio, as part of CEI, was a pioneer in radio broadcasting, building its first station in 1934, acquiring its flagship station, WSB-AM (Atlanta), in 1939 and launching its first FM station, WSB-FM (Atlanta), in 1948. Cox Radio seeks to maximize the revenues and broadcast cash flow of its radio stations by operating and developing clusters of stations in demographically attractive and rapidly growing markets, including major markets such as Los Angeles and Sunbelt markets such as Atlanta, Miami, Tampa, Orlando, San Antonio and Birmingham. During the past five years, the 12 markets in which the Company's stations will operate have demonstrated, on an aggregate basis, greater radio advertising revenue growth than the U.S. radio industry as a whole. The Pending Transactions will enhance the clustering of the Company's radio stations; Cox Radio will operate three or more stations in nine of its 12 markets, and a total of 25 of the Company's 42 stations will be clustered in five markets. In addition, the NewCity Acquisition will create a platform for future strategic acquisitions to further cluster radio stations in the Company's markets. As a result of the Company's management, programming and sales efforts, the Company's radio stations are characterized by strong ratings and above average power ratios. In addition, Cox Radio has a track record of acquiring, repositioning and improving the operating performance of previously underperforming stations. Cox Radio's senior operating management, together with the NewCity senior operating management which will join Cox Radio as part of the NewCity Acquisition, will be comprised of six individuals with an average of over 23 years of experience in the radio broadcasting industry, including an average of over 14 years with their respective organizations. The Company believes that this experienced senior management team will be well positioned to manage larger radio station clusters and take advantage of new opportunities arising in the U.S. radio broadcasting industry. The following table sets forth certain information with respect to Cox Radio and its markets: <TABLE> <CAPTION> PRO FORMA COMPANY DATA MARKET DATA ---------------------------------------------------------- ------------------------------ 1990 - NUMBER 1995 COMBINED STATION GROUP 1995 1995 OF ------------------------------------------ RADIO 1995 RADIO STATIONS REVENUE REVENUE AUDIENCE MARKET ARBITRON MARKET ------------ MARKET MARKET MARKET POWER REVENUE MARKET REVENUE MARKET FM AM RANK SHARE SHARE(1) RATIO RANK RANK CAGR - ---------------------------------- --- --- -------- -------- -------- ------ ------- -------- ------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Los Angeles....................... 2 1 4 10.9% 8.8 1.24 1 2 2.7% Atlanta........................... 2 2 1 21.3% 15.9 1.34 10 12 8.3% Miami............................. 2 -- 3 11.3% 8.5 1.33 12 11 5.9% Tampa............................. 2 2 4 11.9% 13.0 0.92 21 21 6.1% Orlando........................... 4 3 1 30.7% 28.5 1.08 26 39 6.3% San Antonio....................... 2 1 4 14.3% 12.8 1.12 29 34 7.6% Louisville........................ 3 -- 5 8.0% 7.0 1.14 45 49 5.8% Birmingham........................ 2 1 1 32.5% 19.1 1.70 51 55 4.9% Dayton............................ 1 1 2 25.5% 19.0 1.34 55 52 4.7% Tulsa............................. 3 2 1 41.8% 33.0 1.27 56 60 7.4% Bridgeport........................ 1 -- 3 21.6% 12.3 1.76 58 111 5.1% Syracuse.......................... 3 2 1 55.3% 34.9 1.58 71 68 0.4% </TABLE> - --------------- (1) Audience share data based upon all Persons 12+. COX RADIO, INC. CROSS REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K <TABLE> <CAPTION> ITEM NUMBER CAPTION LOCATION IN PROSPECTUS - ----------- ---------------------------------------- -------------------------------------------- <C> <S> <C> 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus.............................. Outside Front Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus..................... Inside Front and Outside Back Cover Pages 3. Summary Information, Risk Factors....... Prospectus Summary; Risk Factors; Selected Historical Consolidated Financial Data; Management's Discussion and Analysis of the Pro Forma Combined Results of Operations; Management's Discussion and Analysis of Financial Condition and Results of Operations of Cox Radio; Management's Discussion and Analysis of Financial Condition and Results of Operations of NewCity 4. Use of Proceeds......................... Prospectus Summary; Use of Proceeds 5. Determination of Offering Price......... Outside Front Cover Page; Underwriting 6. Dilution................................ Dilution 7. Selling Security Holders................ * 8. Plan of Distribution.................... Outside Front Cover Page; Underwriting 9. Description of Securities to be Registered.............................. Outside Front Cover Page; Prospectus Summary; Capitalization; Dividend Policy; Description of Capital Stock; Underwriting 10. Interests of Named Experts and Counsel................................. * </TABLE> [LEFT FLAP OF FOLDOUT CONTAINS STATION LOGOS] The Company's stations are diversified in terms of format, target audience, geographic location and stage of development. Management believes that a number of the Company's stations have significant growth opportunities or turnaround potential and can therefore be characterized as developing stations. Cox Radio believes these stations can achieve significant broadcast cash flow growth by employing the Company's operating strategy. Management believes that its portfolio of stations in different stages of development enables it to maximize the Company's growth potential. OPERATING STRATEGY Cox Radio operates its stations in clusters to (i) enhance net revenue growth by increasing the appeal of the Company's radio stations to advertisers and enabling such stations to compete more effectively with other forms of advertising and (ii) achieve operating efficiencies by consolidating broadcast facilities, eliminating duplicative positions in management and production and reducing overhead expenses. In addition, Cox Radio has demonstrated an ability to acquire underperforming stations and develop them into ratings and revenue leaders. This is achieved through the Company's management philosophy which emphasizes (i) market research and targeted programming; (ii) a customer-focused selling strategy; and (iii) marketing and promotional activities. This management philosophy is designed and coordinated by Cox Radio's experienced senior operating management and implemented on a local level by the Company's station managers. Cox Radio invests significant resources to identify and train local managers who are given the responsibility for day-to-day operations of the stations and the flexibility to develop policies that will improve station performance and establish long-term relationships with advertisers. ACQUISITION STRATEGY During the last several years, the Company has implemented its clustering strategy through the acquisition of radio stations in several of its existing markets, and it intends to continue to make acquisitions in the 12 markets in which it will operate following the completion of the Pending Transactions. In the past, the Company has primarily acquired underperforming stations. Cox Radio may also make opportunistic acquisitions in additional markets in which the Company believes that it can cost-effectively achieve a leading position in terms of audience and revenue share. In evaluating acquisition opportunities in additional markets, Cox Radio intends to focus primarily on demographically attractive markets, such as those in the Sunbelt, and markets ranked between ten and 60 in terms of radio advertising revenues. The Company believes that such markets offer the greatest potential for growth relative to the cost of entry. Management also believes that Cox Radio will have the financial resources and management expertise to continue to pursue its acquisition strategy. PENDING TRANSACTIONS Within the last six months, Cox Radio has entered into the following transactions: NEWCITY ACQUISITION In July 1996, Cox Radio agreed to acquire NewCity for an aggregate consideration of approximately $253 million, consisting of approximately $166 million in cash and approximately $87 million in assumption of NewCity debt. The NewCity Acquisition will provide Cox Radio with an additional 18 stations (12 FM and 6 AM): 14 stations in five new markets (Birmingham, Bridgeport, Orlando, San Antonio and Tulsa) and four stations in two existing markets (Atlanta and Syracuse). Three of the five new markets are in the Sunbelt, a region which the Company believes will, over the next several years, demonstrate greater radio advertising revenue growth than the U.S. radio industry as a whole. The acquisition of three radio stations in Syracuse will provide Cox Radio with five stations (three FM and two AM) and a 55% radio revenue share in that market, and the acquisition of four radio stations in Orlando, together with the three stations acquired in the Orlando Acquisition (see below), will provide Cox Radio with seven stations (four FM and three AM) and a 31% radio revenue share in that market. The Company expects NewCity's management group to join Cox Radio, <TABLE> <CAPTION> ITEM NUMBER CAPTION LOCATION IN PROSPECTUS - ----------- ---------------------------------------- -------------------------------------------- <C> <S> <C> 11. Information with Respect to the Registrant.............................. Outside Front Cover Page; Certain Definitions and Market and Industry Data; Prospectus Summary; Risk Factors; Use of Proceeds; Dividend Policy; Dilution; Capitalization; Unaudited Pro Forma Combined Financial Data; Unaudited Pro Forma Combined Balance Sheet; Unaudited Pro Forma Combined Statements of Operations; Selected Historical Consolidated Financial Data; Management's Discussion and Analysis of the Pro Forma Combined Results of Operations; Management's Discussion and Analysis of Financial Condition and Results of Operations of Cox Radio; Management's Discussion and Analysis of Financial Condition and Results of Operations of NewCity; Business; The NewCity Acquisition; Management; Security Ownership of Certain Beneficial Owners; Certain Relationships and Related Transactions; Description of Capital Stock; Description of Indebtedness; Shares Eligible for Future Sale; Underwriting 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities............................. * </TABLE> - --------------- * Omitted from Prospectus because item is inapplicable. [RIGHT FLAP OF FOLDOUT CONTAINS MAP OF UNITED STATES SHOWING STATION LOCATIONS] providing continuity and management depth to the combined organization. Cox Radio expects to consummate the NewCity Acquisition in the first half of 1997. ORLANDO ACQUISITION In June 1996, in order to expand its cluster of Orlando stations, Cox Radio agreed to exchange its two Chicago radio stations for three Orlando stations (the "Orlando Acquisition") and approximately $20 million in cash. Cox Radio expects to consummate the Orlando Acquisition in the first half of 1997. LOUISVILLE ACQUISITION In June 1996, Cox Radio agreed to acquire a Louisville FM station for $2.5 million in cash (the "Louisville Acquisition"), which will provide Cox Radio with its third FM station and an 8% revenue share in that market. Cox Radio expects to consummate the Louisville Acquisition in the third quarter of 1996. MIAMI DISPOSITION In April 1996, Cox Radio agreed to sell its AM station in Miami for $13 million in cash (the "Miami Disposition"). Cox Radio expects to consummate the Miami Disposition in the fourth quarter of 1996. TAMPA ACQUISITION In July 1996, Cox Radio exercised its option to purchase an AM station in Tampa for $1.5 million comprised of $0.8 million in cash and the forgiveness of $0.7 million in amounts due to Cox Radio (the "Tampa Acquisition"). Cox Radio expects to consummate the Tampa Acquisition in the fourth quarter of 1996. TULSA ACQUISITION In August 1996, Cox Radio entered into negotiations to acquire an AM and an FM station in Tulsa for $5.5 million in cash. Cox Radio expects to consummate the Tulsa Acquisition in the first quarter of 1997. RELATIONSHIP WITH COX ENTERPRISES, INC. Cox Radio is currently an indirect, wholly-owned subsidiary of CEI. CEI, a privately-held corporation headquartered in Atlanta, Georgia, is one of the largest media companies in the United States, with consolidated 1995 revenues of approximately $4 billion. CEI, which has a 98-year history in the media and communications industry and a 62-year history in the radio broadcasting business, publishes 18 daily newspapers, owns and operates seven television stations and owns approximately 75% of Cox Communications, Inc. ("CCI"), a publicly-traded broadband communications company (NYSE: COX) with approximately 3.3 million cable television customers. CEI is also the world's largest operator of auto auctions through Manheim Auctions. Immediately prior to the closing of the Offerings, all of CEI's U.S. radio operations will be transferred to Cox Radio (the "Cox Radio Consolidation"). Following the Cox Radio Consolidation, Cox Radio and its subsidiaries will be indebted to CEI in the amount of approximately $107.1 million (the "CEI Notes"). Cox Radio will apply $107.1 million of the net proceeds of the Offerings to discharge completely all amounts owed under the CEI Notes. See "Use of Proceeds" and "Certain Relationships and Related Transactions." Upon completion of the Offerings and the issuance of 129,469 shares of restricted Class A Common Stock to management, CEI will own approximately 72.0% of the outstanding Common Stock of Cox Radio and have 96.2% of the voting power of Cox Radio. The principal executive offices of Cox Radio are located at 1400 Lake Hearn Drive, N.E., Atlanta, Georgia 30319 and the Company's telephone number is (404) 843-5000. EXPLANATORY NOTE This Registration Statement contains a preliminary prospectus relating to the offering of Class A Common Stock of Cox Radio, Inc. in the United States and Canada (the "U.S. Offering"), together with separate preliminary prospectus pages relating to a concurrent public offering of Class A Common Stock outside the United States and Canada (the "International Offering"). The complete preliminary prospectus for the U.S. Offering follows immediately after this Explanatory Note. After such preliminary prospectus are the following alternate pages for the preliminary prospectus for the International Offering: a front cover page and a back cover page. Each such page has been labeled "Alternate Page for International Prospectus." All other pages of the preliminary prospectus for the U.S. Offering are to be used for both the U.S. Offering and the International Offering. THE OFFERINGS <TABLE> <S> <C> Class A Common Stock offered: U.S. Offering............................... 6,000,000 shares International Offering...................... 1,500,000 shares Total............................... 7,500,000 shares Common Stock to be outstanding after the Offerings: Class A Common Stock(1)..................... 7,629,469 shares Class B Common Stock........................ 19,577,672 shares Total............................... 27,207,141 shares Voting Rights................................. There will be two classes of Common Stock outstanding after the Offerings: Class A Common Stock and Class B Common Stock. Except with respect to voting and conversion, the rights of holders of Class A Common Stock and Class B Common Stock are identical. Each share of Class A Common Stock is entitled to one vote and each share of Class B Common Stock is entitled to ten votes. Class A Common Stock and Class B Common Stock generally vote as a single class with respect to all matters submitted to a vote of stockholders. Each share of Class B Common Stock is convertible into one share of Class A Common Stock at the option of the holder. See "Description of Capital Stock." Use of Proceeds............................... Cox Radio expects to use the net proceeds from the Offerings to repay the CEI Notes, to partially fund the NewCity Acquisition and for general corporate purposes. In order to consummate the NewCity Acquisition, Cox Radio will be required to incur indebtedness. See "Use of Proceeds." Proposed NYSE Symbol.......................... "CXR" </TABLE> - --------------- (1) If the Underwriters' over-allotment option were exercised in full, 8,754,469 shares of Class A Common Stock would be outstanding after the Offerings. See "Underwriting" and "Description of Capital Stock." Includes 129,469 shares of restricted stock to be issued to management at the closing of the Offerings pursuant to Cox Radio's Long-Term Incentive Plan. Does not include 2,645,531 shares of Class A Common Stock reserved for issuance under Cox Radio's Long-Term Incentive Plan, Stock Purchase Plan and Directors Restricted Stock Plan (as defined herein), of which 610,339 shares will be issuable upon exercise of options granted at the closing of the Offerings at an exercise price per share equal to the initial public offering price. See "Management -- Long-Term Incentive Plan." INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. Subject to Completion, dated September 4, 1996 PROSPECTUS <TABLE> <S> <C> <C> 7,500,000 SHARES COX RADIO, INC. COX RADIO, INC. CLASS A COMMON STOCK </TABLE> --------------------------- All of the shares of Class A Common Stock, par value $1.00 per share (the "Class A Common Stock"), offered hereby are being sold by Cox Radio, Inc. ("Cox Radio" or the "Company"). Of the 7,500,000 shares of Class A Common Stock being offered, 6,000,000 shares are being offered initially in the United States and Canada (the "U.S. Offering") by the U.S. Underwriters and 1,500,000 shares are being concurrently offered outside the United States and Canada (the "International Offering") by the International Managers (together with the U.S. Underwriters, the "Underwriters"). The U.S. Offering and the International Offering are collectively referred to as the "Offerings." Cox Radio's authorized capital stock includes Class A Common Stock and Class B Common Stock, par value $1.00 per share (the "Class B Common Stock" and, together with the Class A Common Stock, the "Common Stock"). Except with respect to voting and conversion, the rights of holders of Class A Common Stock and Class B Common Stock are identical. Each share of Class B Common Stock generally entitles its holder to ten votes, whereas each share of Class A Common Stock entitles its holder to one vote. Shares of Class B Common Stock are convertible into shares of Class A Common Stock on a one-for-one basis at the option of the holder. After giving effect to the sale of Class A Common Stock offered hereby and the issuance of 129,469 shares of restricted Class A Common Stock to management at the closing of the Offerings (assuming that the Underwriters' over-allotment option is not exercised), Cox Enterprises, Inc. ("CEI") will own approximately 72.0% of the outstanding Common Stock and have 96.2% of the voting power of the Company. See "Description of Capital Stock." Prior to the Offerings, there has been no public market for the Class A Common Stock. The initial public offering price is expected to be between $15.00 and $17.00 per share. See "Underwriting" for information relating to the factors to be considered in determining the initial public offering price. The initial public offering price and the underwriting discounts and commissions per share are identical for each of the Offerings. At the request of Cox Radio, up to 500,000 shares of Class A Common Stock will be reserved for sale at the initial public offering price to directors, officers and employees of Cox Radio and certain other persons. If such shares are not purchased by such persons, they will be offered by the Underwriters to the public upon the terms and conditions set forth in this Prospectus. See "Underwriting." Application has been made for listing of the Class A Common Stock on the New York Stock Exchange ("NYSE") under the symbol "CXR." --------------------------- SEE "RISK FACTORS" COMMENCING ON PAGE 9 HEREIN FOR CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. --------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. <TABLE> <CAPTION> - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO PUBLIC AND COMMISSIONS(1) COMPANY(2) - ---------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Per Share......................................... $ $ $ - ---------------------------------------------------------------------------------------------------------- Total(3).......................................... $ $ $ - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- </TABLE> (1) Cox Radio has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933 (the "Securities Act"). See "Underwriting." (2) Before deducting expenses payable by Cox Radio estimated to be $1,850,000. (3) Cox Radio has granted the Underwriters a 30-day option to purchase up to an aggregate of 1,125,000 additional shares of Class A Common Stock on the same terms and conditions as set forth herein, solely to cover over-allotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." --------------------------- The shares of Class A Common Stock offered by this Prospectus are offered by the U.S. Underwriters subject to prior sale, to withdrawal, cancellation, or modification of the offer without notice, to delivery to and acceptance by the U.S. Underwriters and to certain further conditions. It is expected that delivery of the shares will be made at the offices of Lehman Brothers Inc., New York, New York, on or about , 1996. --------------------------- LEHMAN BROTHERS ALLEN & COMPANY INCORPORATED CS FIRST BOSTON MORGAN STANLEY & CO. INCORPORATED , 1996 SUMMARY UNAUDITED PRO FORMA FINANCIAL INFORMATION The following pro forma financial data are derived from the Unaudited Pro Forma Combined Statements of Operations and Balance Sheet (the "Pro Forma Financial Data") included elsewhere in this Prospectus. The pro forma combined statements of operations data give effect to the Transactions (as defined herein) as if they had occurred as of January 1, 1995 and the pro forma combined balance sheet data give effect to the Transactions (other than the Prior Acquisitions (as defined herein)) as if they had occurred as of June 30, 1996. The Transactions include (i) the acquisition of WRKA-FM and WRVI-FM in Louisville, which was completed by Cox Radio in January 1996 (the "Prior Louisville Acquisition"); (ii) the acquisition of WHEN-AM and WWHT-FM in Syracuse, which was completed by Cox Radio in June 1996 (the "Prior Syracuse Acquisition" and, together with the Prior Louisville Acquisition, the "Prior Acquisitions"); (iii) the Orlando Acquisition, the Louisville Acquisition, the Tulsa Acquisition and the Miami Disposition (collectively, the "Other Pending Transactions"); (iv) the Offerings; and (v) the NewCity Acquisition. The Pro Forma Financial Data do not purport to represent what Cox Radio's results of operations or financial condition would actually have been had the Transactions in fact occurred on such dates or to project Cox Radio's results of operations or financial condition for any future period or at any future date. The Summary Unaudited Pro Forma Financial Information is based on certain assumptions and adjustments described in the Notes to the Unaudited Pro Forma Combined Statements of Operations and Balance Sheet and should be read in conjunction therewith. See also "Management's Discussion and Analysis of the Pro Forma Combined Results of Operations," "Management's Discussion and Analysis of Financial Condition and Results of Operations of Cox Radio," "Management's Discussion and Analysis of Financial Condition and Results of Operations of NewCity," and the Consolidated Financial Statements for each of Cox Radio and NewCity included elsewhere in this Prospectus. Consummation of each of the Pending Transactions is subject to certain conditions, including the approval of the FCC. Two of the Pending Transactions are also being reviewed by the DOJ pursuant to HSR. There can be no assurance that such FCC approval will be obtained, that, in connection with such HSR review, the DOJ will not require restructuring of such transactions or that such other required conditions will be satisfied or waived. <TABLE> <CAPTION> PRO FORMA --------------------------------- YEAR ENDED SIX MONTHS DECEMBER 31, ENDED JUNE 30, ------------ ---------------- 1995 1995 1996 ------------ ----- ------ (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Net revenues(1)............................................. $168.4 $80.5 $ 90.7 Station operating expenses.................................. 121.6 59.4 64.6 Corporate general and administrative expenses............... 4.4 2.3 2.7 Depreciation and amortization............................... 15.4 7.5 7.9 ------------ ----- ------ Operating income............................................ 27.0 11.3 15.5 Interest expense............................................ 20.6 10.1 10.5 Net income (loss)........................................... 1.2 (.9) 1.5 Net income (loss) per share................................. .04 (.03) .06 Number of shares outstanding................................ 27.2 27.2 27.2 OTHER OPERATING AND FINANCIAL DATA: Broadcast cash flow(2)...................................... $ 46.8 $21.1 $ 26.1 Broadcast cash flow margin(2)............................... 27.8% 26.2% 28.8% EBITDA(2)................................................... $ 42.4 $18.8 $ 23.4 After-tax cash flow(2)...................................... 16.6 6.6 9.4 Net debt to EBITDA(3)....................................... -- -- 4.9x BALANCE SHEET DATA (end of period): Cash and cash equivalents................................... $ -- $ -- $ 29.0(4) Intangible assets, net...................................... -- -- 379.8 Total assets................................................ -- -- 498.3 Total debt.................................................. -- -- 258.6 Shareholders' equity........................................ -- -- 207.5 </TABLE> - --------------- (1) Total revenues less advertising agency commissions. (2) "Broadcast cash flow" consists of operating income plus depreciation and amortization and corporate general and administrative expenses. "Broadcast cash flow margin" is broadcast cash flow as a percentage of net revenues. "EBITDA" is operating income plus depreciation and amortization. "After-tax cash flow" is income (loss) before extraordinary items, plus depreciation and amortization. Although broadcast cash flow, broadcast cash flow margin, EBITDA and after-tax cash flow are not recognized under GAAP, they are accepted by the broadcasting industry as generally recognized measures of performance and are used by analysts who report publicly on the condition and performance of broadcast companies. For the foregoing reasons, the Company believes that these measures are useful to investors. However, investors should not consider these measures to be an alternative to operating income as determined in accordance with GAAP, an alternative to cash flows from operating activities (as a measure of liquidity) or an indicator of the Company's performance under GAAP. (3) For purposes of this calculation, EBITDA is based on pro forma results for the twelve month period ending June 30, 1996. In addition, for purposes of this calculation, net debt includes $26.7 million of restricted cash, representing the net proceeds from the Miami Disposition and the Orlando Acquisition, net of the cash to be used for the Tulsa Acquisition. The Company intends to use such cash for the acquisition of additional radio properties in transactions which qualify as deferred like-kind exchanges. To qualify, such acquisitions must be consummated within 180 days of receipt of the proceeds from the Miami Disposition and the Orlando Acquisition, respectively. If qualifying acquisitions are not consummated within the required time, the $26.7 million in restricted cash will be subject to tax liability. In such event, assuming a tax rate of 38%, the net debt to EBITDA ratio would be 5.1x. (4) Includes cash of $26.7 million, representing the net proceeds from the Miami Disposition and the Orlando Acquisition, net of the cash to be used for the Tulsa Acquisition. The Company intends to use the proceeds from the Miami Disposition and the Orlando Acquisition for the acquisition of additional radio properties in transactions which will qualify as deferred like-kind exchanges. See "Unaudited Pro Forma Combined Financial Data." SUMMARY HISTORICAL FINANCIAL DATA The following sets forth summary historical financial data for Cox Radio and NewCity for the three years ended December 31, 1993, 1994 and 1995 and the six months ended June 30, 1995 and 1996. The comparability of the historical consolidated financial data reflected herein has been significantly impacted by acquisitions and dispositions. The information presented below is qualified in its entirety by, and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations of Cox Radio," "Management's Discussion and Analysis of Financial Condition and Results of Operations of NewCity," and the Consolidated Financial Statements for each of Cox Radio and NewCity included elsewhere in this Prospectus. <TABLE> <CAPTION> COX RADIO ------------------------------------------------- SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ----------------------------- --------------- 1993 1994 1995 1995 1996 ----- ------- ------- ----- ----- (DOLLARS IN MILLIONS) <S> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Net revenues(1)................................ $95.0 $111.5 $123.6 $58.6 $66.3 Station operating expenses..................... 67.9 76.3 90.0 43.0 47.3 Corporate general and administrative expenses(2)................................. 2.5 2.7 5.9 1.9 2.3 Depreciation and amortization.................. 7.3 6.9 7.2 3.7 4.0 ----- ------ ------ ----- ----- Operating income............................... 17.3 25.6 20.5 10.0 12.7 Net income (loss)(3)........................... (1.1)(4) 11.2 8.2 3.8 5.2 OTHER OPERATING DATA: Broadcast cash flow(5)......................... $27.1 $ 35.2 $ 33.6 (6) $15.6 $19.0 Broadcast cash flow margin(5).................. 28.5% 31.6 % 27.2 % 26.6% 28.7% EBITDA(5)...................................... $24.6 $ 32.5 $ 27.7 (6) $13.7 $16.7 After-tax cash flow(5)......................... 13.8 18.1 15.4 7.5 9.2 Net cash provided by operating activities...... 11.4 14.1 14.0 6.3 9.1 Net cash used in investing activities.......... 6.1 12.3 17.3 2.1 15.2 Net cash provided by (used in) financing activities.................................. (4.8) (1.6 ) 3.1 (4.3) 6.1 Number of stations owned or operated or for which services are provided(7).............. 14 16 18 18 20 </TABLE> <TABLE> <CAPTION> NEWCITY --------------------------------------------- SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ------------------------- --------------- 1993 1994 1995 1995 1996 ----- ----- ----- ----- ----- (DOLLARS IN MILLIONS) <S> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Net revenues(1).................................. $53.3 $52.7(8) $55.6 $27.4 $28.9 Station operating expenses....................... 36.8 36.9 40.7 20.3 20.3 Corporate general and administrative expenses.... 1.9 1.8 1.7 1.0 0.9 Depreciation and amortization.................... 3.8 3.1 3.5 1.5 1.6 ----- ----- ----- ----- ----- Operating income................................. 10.8 10.9 9.7 4.6 6.1 Net income (loss)(3)............................. 11.0(9) 2.1 (0.4) (0.3) 0.7 OTHER OPERATING DATA: Broadcast cash flow(5)........................... $16.5 $15.8(8) $14.9(10) $ 7.1 $ 8.6 Broadcast cash flow margin(5).................... 31.0% 30.0% 26.8% 25.9% 29.8% EBITDA(5)........................................ $14.6 $14.0(8) $13.2(10) $ 6.1 $ 7.7 After-tax cash flow(5)........................... 16.9 5.3 3.1 1.2 2.3 Net cash provided by operating activities........ 6.9 4.2 2.4 -- 1.4 Net cash provided by (used in) investing activities.................................... 12.9 7.1 (13.3) (12.7) (1.2) Net cash provided by (used in) financing activities.................................... (20.1) (13.6) 11.0 12.6 0.3 Number of stations owned or operated or for which services were provided(7)..................... 14 17 17 17 19 </TABLE> - --------------- (1) Total revenues less advertising agency commissions. (2) As described in Note 9 to the Consolidated Financial Statements of Cox Radio, certain of Cox Radio's executives participate in CEI's stock-based compensation plan (the "Unit Appreciation Plan" or "UAP"). Because CEI and Cox Radio are private companies, the benefits under the UAP are generally payable in cash. This cash payment option has resulted in charges to compensation expense of $0.9 million, $0.8 million and $1.6 million for the years ended December 31, 1993, 1994 and 1995, respectively, and $0.8 million and $1.2 million for the six months ended June 30, 1995 and 1996, respectively. This compensation expense is included in historical corporate general and administrative expenses. Public companies traditionally implement stock award plans that provide for the issuance of stock to participants and do not result in compensation expense under applicable accounting standards. The Company intends to implement such a plan in 1996 and, therefore, Cox Radio does not expect to incur this expense in future periods. See "Management -- Cox Enterprises, Inc. Unit Appreciation Plan"
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001018525_xlconnect_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001018525_xlconnect_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial data appearing elsewhere in this Prospectus. This Prospectus contains certain statements of a forward-looking nature relating to future events or the future financial performance of the Company. Prospective investors are cautioned that such statements are only predictions and that actual events or results may differ materially. In evaluating such statements, prospective investors should specifically consider the various factors identified in this Prospectus, including the matters set forth under the caption 'Risk Factors,' which could cause actual results to differ materially from those indicated by such forward-looking statements. THE COMPANY XLConnect is a professional services organization providing enterprise-wide total connectivity solutions to clients with complex computing and communications requirements. As a single source provider, the Company offers comprehensive internetworking services, applications development services, managed services and telecommunications services. The Company's solutions are custom designed to integrate computing and communications devices and equipment with software applications and systems to develop local area networks ('LANs') and to link LANs through public and private communications networks and the Internet to form wide area networks ('WANs'). The Company describes the provision of these services on an integrated basis as total connectivity solutions. Internetworking services include consulting, design and implementation of LANs and WANs. Applications development services include customization and adaptation of proven software as well as training to support the Company's applications and internetworking solutions. Managed services enable clients to outsource multiple aspects of their information technology functions, including technology selection, deployment and support, network management and help desk support. Telecommunications services include data, video and voice transmission. XLConnect believes that its total connectivity solutions enable its clients to increase productivity and enhance competitiveness by improving the flow of information among clients' employees, customers and suppliers. Demand for internetworking, applications development and outsourcing services is expected to increase as organizations continue to: (i) migrate from legacy mainframe environments to distributed, client/server environments characterized by LANs relying on multi-vendor, multi-protocol technologies; (ii) share information among diverse client, employee and supplier locations across telecommunications networks, creating WANs; and (iii) experience difficulty in maintaining in-house technical expertise sufficient to support these complex LAN and WAN environments. The Company believes that as a single source provider of total connectivity solutions with broad geographic reach and expertise in multi-vendor technologies, it is capable of addressing organizations' demands for total connectivity solutions. The Company's strategy focuses on maintaining and enhancing its technical expertise, expanding its national presence, emphasizing high quality service and customer support, further penetrating its existing client base, leveraging alliances with industry leaders and maintaining and enhancing its multiple sales channels. The Company focuses its sales, services and support efforts on a variety of enterprises participating in a wide range of industries throughout the United States. XLConnect delivers total connectivity solutions through its engineering and technical staff of approximately 1,000 professionals located in 24 offices nationwide, which include the Network Management Center and two Help Desk Centers. The Company utilizes a direct sales force currently comprised of approximately 60 persons, including certain managerial personnel with sales responsibilities, in addition to indirect sales channels, including IE's approximately 210 person sales staff. The Company's approximately 500 authorized agents, principally value added resellers ('VARs'), sell data and voice transmission services on behalf of the Company. The Company has alliances and relationships with many industry-leading vendors of information technology and telecommunications products and services, including Ameritech, Inc. ('Ameritech'), Bay Networks, Inc. ('Bay Networks'), 3Com Corporation ('3Com'), Hewlett-Packard Company ('HP'), International Business Machines Corporation, including its Lotus Division ('IBM/Lotus'), MCI Telecommunications Corporation ('MCI'), Microsoft Corporation ('Microsoft') and Novell, Inc. ('Novell'). The executive offices of the Company are located at 411 Eagleview Boulevard, Exton, Pennsylvania 19341, and its telephone number is (610) 458-5500. XLConnect, XLConnect Solutions, XLConnect Systems, XLConnect Services and the Company's logo are trademarks of the Company. This Prospectus also includes trademarks of companies other than the Company.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001018647_pinnacle_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001018647_pinnacle_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements (including the notes thereto) included elsewhere in this Prospectus. Unless the context otherwise requires, as used in this Prospectus, the term "Pinnacle" means Pinnacle Brands, Inc., and the term "Company" means Pinnacle and its direct and indirect wholly-owned subsidiaries. "SCMA" means the Sports Card Manufacturers Association, Inc., which is a trade organization comprising the Company and its three principal competitors: Fleer/Skybox, Topps and Upper Deck. As used in this Prospectus, references to SCMA data or net sales mean net sales, defined as the aggregate wholesale gross sales of the four SCMA members less the dollar value of product returns the four members actually received during the reporting period. SCMA net sales are reported for baseball, football, hockey and basketball trading cards. The Company believes that SCMA data represent approximately 90% of wholesale net sales of the sports trading card industry. THE COMPANY The Company is one of the nation's leading designers, producers and distributors of sports trading cards. The Company offers premium value products under numerous brands and sub-brands--differentiated by product feature, price point, sport and distribution channel--including such well-established brands as Score, Select, Pinnacle, Donruss, Leaf, Action Packed, Racer's Choice and Sportflix. Based on SCMA data, for 1995 the Company had an aggregate 37% market share in the three major team sports categories in which it competes (consisting of a 26% market share for the Company and an 11% market share related to products sold under licenses acquired by the Company in May 1996). The Company believes that it has the leading market share in each of those three team sports--baseball, football and hockey. The Company is also a NASCAR licensee and a leading producer of auto racing cards. In addition to its sports trading card business, the Company sells collectible and similar picture products to consumer and food product companies for their promotional purposes. According to SCMA data, the 1995 sports trading card market was approximately $560 million, which equates to approximately $900 million in retail sales. Sales of sports trading cards are significantly influenced by the popularity of the related sport. The Company and other producers of sports trading cards operate pursuant to licenses with the owners' and players' association in each relevant team sport or, in the case of auto racing, with National Association for Stock Car Auto Racing, Inc. DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR THE ACCOUNTS OF OTHERS IN COMMON STOCK PURSUANT TO EXEMPTIONS FROM RULES 10b-6, 10b-7, AND 10b-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934. ("NASCAR") and the relevant drivers, team owners and sponsors. The major sports organizations have generally limited the number of licensed sports trading card competitors. Sports trading cards are sold to consumers through a variety of distribution channels, including approximately 5,000 specialty hobby stores and over 80,000 retail outlets such as mass merchandisers, convenience stores, grocery and drug stores and toy stores. Sport trading cards are a highly attractive category for retailers because of their relatively high profit margins per square foot of shelf space. The Company has positioned itself as a leader in the industry through an emphasis on collectibility and continual product innovation, with a reputation for high quality products and service. Each of the Company's sports trading card brands has its own positioning in the marketplace and is designed to appeal to a targeted group of consumers. Marketing studies commissioned by the Company indicate that the Company's average collector is approximately 31 years old and owns a collection valued at over $4,000. The Company produces different products utilizing a variety of production technologies and distinctive features and sells these products through multiple distribution channels at a wide range of price points. The Company believes that it is an industry leader in innovative card design and production technologies. The Company's sports trading card products consistently have among the industry's highest aftermarket trading values, based on aftermarket prices published in Beckett Monthly (the most widely circulated sports trading card publication). As a result of the business strategy implemented by the Company beginning in 1993, the Company's net sales more than doubled from $62.5 million in 1993 to $130.2 million in 1995, despite a decline in overall sports trading card industry sales during that period. The Company's net sales have increased 19% from $41.9 million for the first six months of 1995 to $49.9 million for the comparable 1996 period. The Company's historical losses were $56.1 million, $44.0 million and $2.5 million in 1993, 1994 and 1995, respectively. For the first six months of 1995 and 1996, respectively, the Company had net losses of $7.2 million and $9.6 million. The Company's historical losses include unusual charges that the Company does not expect to be recurring, including charges related to the write-off of amounts due from an acquired company in connection with the acquisition thereof in 1993 and the write-off of goodwill in 1994. Historical losses also include non-cash interest expense on indebtedness that is being repaid or converted into Common Stock concurrently with the Offering. Pro forma as adjusted for the Offering, net income (loss) for the year ended December 31, 1995 and for the six month periods ended June 30, 1995 and June 30, 1996 was $8.2 million, $0 and ($1.5) million, respectively. See "-- Summary Consolidated Financial Data" and the notes thereto and "Business--Seasonality." Historically, the Company relied on multiple-product brokers to sell its products. In 1996, however, the Company established an in-house, field sales force to market its trading card products more effectively by providing a higher level of customer service to retail and hobby dealers. The field sales force educates the customer about the Company's products, helps to tailor the customer's product selection, and shares product placement and merchandising techniques with the customer, all with the goal of enhancing the customer's sell-through of the Company's products. The Company utilizes what it believes to be an aggressive, cost-effective marketing strategy concentrating on public relations events and targeted advertising to maximize brand awareness. To increase its visibility in the sports market, the Company has entered into multi-year commitments to be the exclusive title sponsor of the premiere fan events for hockey and baseball, which include the Pinnacle NHL FANtasy held in conjunction with the National Hockey League All-Star game and the Pinnacle All-Star FanFest held in conjunction with the Major League Baseball All-Star game. The Company is also the exclusive sports trading card sponsor of the NFL Quarterback Club's Quarterback Challenge. These events serve both to increase fan interest in the relevant sport and to provide an opportunity to introduce the Company's sports trading cards to a large number of fans who may not be familiar with the Company's products. In addition, these events provide significant brand exposure, including national television and print media coverage, to a sports-conscious target audience at a substantially lower cost than conventional media advertising. The Company continually seeks to improve its profitability and the quality and predictability of its earnings and cash flows by managing the return of unsold product and controlling costs. The Company believes that it has been an industry leader in the effort to minimize returns, which has historically been a concern for the industry. The Company has increased the percentage of its sales to the hobby distribution channel, which traditionally does not have return privileges, and has also negotiated with some major mass market retailers to eliminate return privileges. As a result, since 1992 the Company has tripled the percentage of its sales made on a non-returnable basis, to more than 50%. In addition, the Company continually evaluates cost control opportunities. The Company has successfully identified and reduced certain significant costs through investments in design technology and identification of more cost-efficient vendors and sources of raw materials. In addition, since 1993 the Company has shifted its focus from being a manufacturer of sports trading cards to being a flexible designer, marketer and distributor of collectible products. The Company now outsources substantially all of its production processes other than design and artwork. STRATEGY The Company's strategy is to position its sports trading card products principally as collectibles which are likely to have superior value in the secondary market. This strategy has led the Company to increase its sales to specialty retail outlets, consisting mainly of trading card hobby stores, the retailer of choice for the serious collector/consumer. The Company believes that success within this hobby channel, in turn, drives demand within the broader, general retail channel. Since 1993, by consistently executing this strategy, the Company has experienced a significant increase in net sales, as well as in the proportion of its sales attributable to the key hobby channel. The Company's strategy encompasses the following elements: . Continual product innovation, both technological and artistic, to stimulate collector interest; . Managed production quantity and quality, making less than the market demands, to promote collectibility; and . Tailored product distribution, packaging and sales support, customized to each individual channel of distribution to maximize sell-through. In order to implement its strategy, the Company intends to: (i) continue to enhance highly recognizable brands; (ii) further enhance hobby channel distribution; (iii) selectively expand general retail distribution; (iv) continually evaluate and reposition products to meet both customers' and consumers' demands and preferences; (v) maximize profitability of recent acquisitions; (vi) pursue opportunities in promotional and related markets; and (vii) position the Company as a strong contender for additional licensing opportunities. In addition, the Company will continue to seek strategic acquisitions which would complement its existing business and/or take maximum advantage of the Company's core competencies. These competencies include, among other things, retail and specialty distribution, product development, licensing and knowledge of collectibles markets. The Company believes that the continued implementation of its strategy will enable it to maintain its leadership position in the sports trading card market and achieve future growth. RECENT ACQUISITION In May 1996, the Company acquired from Donruss Trading Cards, Inc. ("Donruss/Leaf"), a subsidiary of Leaf, Inc., its baseball and hockey trading card licenses, as well as certain inventory and intangibles, for an aggregate purchase price of approximately $41.0 million (the "Donruss License Acquisition"), which comprised a $32.5 million cash payment to Donruss/Leaf plus the assumption of certain liabilities. In 1995, based on data reported to its licensors, Donruss' gross shipments of products sold pursuant to the purchased licenses (without deduction for returns) exceeded $50 million. The Company believes that the Donruss License Acquisition significantly enhances the Company's strategic position in the sports trading card industry. Management believes that the Donruss products have distinctive features and brand recognition that appeal to certain collectors/consumers and therefore intends to maintain the distinctiveness of these products. The Company's strategy to maximize net sales and profitability of the Donruss licensed products includes: (i) leveraging the Company's existing infrastructure to maximize the contribution of the Donruss products; (ii) repositioning Donruss products for targeted market segments; (iii) marketing Donruss products using the Company's more effective field sales force and aggressive marketing techniques; (iv) extending Donruss brands into football trading cards; and (v) applying the Company's return policies to sales of Donruss products. Except as otherwise indicated, all information in this Prospectus (i) has been adjusted to reflect a 103.96-for-1 stock split of the outstanding Common Stock to be effected immediately prior to the consummation of this Offering, (ii) gives effect to the conversion of certain subordinated indebtedness and all outstanding shares of Redeemable Preferred Stock, par value $.01 per share ("Redeemable Preferred Stock"), into shares of Common Stock and (iii) assumes no exercise of the Underwriters' over-allotment option. Score, Select, Pinnacle, Donruss, Action Packed, Racer's Choice, Sportflix and Optigraphics are among the Company's trademarks. Leaf is a trademark of Leaf, Inc. THE OFFERING <TABLE> <CAPTION> <S> <C> Common Stock offered by the Company(a)....... 4,000,000 shares Common Stock to be outstanding after the Offering(b).................................. 11,689,726 shares Use of Proceeds.............................. Of the estimated net proceeds to the Company of $55.0 million, approximately $22.0 million will be used to reduce indebtedness under the Credit Agreement (as defined herein) and $33.0 million will be used to retire a portion of the Subordinated Notes (as defined herein). The Company will not receive any of the proceeds from the sale of shares subject to the over-allotment option. Proposed New York Stock Exchange Symbol...... PNE </TABLE> - ------------ (a) Excludes shares subject to the over-allotment option which are being offered by the Selling Stockholder. (b) Excludes 1,386,652 shares of Common Stock subject to options granted under the Company's 1992 Option Plan and 123,621 shares of Common Stock subject to other options. Excludes 1,168,973 shares reserved for issuance under the 1996 Incentive Stock Option Plan and 33,837 shares reserved for issuance under the 1996 Restricted Stock Plan. ------------------- SUMMARY CONSOLIDATED FINANCIAL DATA STATEMENT OF OPERATIONS DATA: <TABLE> <CAPTION> FOR THE SIX FOR THE THREE MONTHS MONTHS ENDED FOR THE YEAR ENDED DECEMBER 31, ENDED JUNE 30, DECEMBER 31, ----------------------------------------- ----------------- 1991(A) 1992 1993 1994 1995 1995 1996 ------------- -------- -------- -------- -------- ------- ------- <S> <C> <C> <C> <C> <C> <C> <C> (IN THOUSANDS) Net sales(b).................... $35,511 $108,881 $ 62,501 $117,965 $130,183 $41,879 $49,905 Cost of sales................... 25,810 73,264 41,000 78,013 90,388 29,548 34,503 ------------- -------- -------- -------- -------- ------- ------- Gross profit.................... 9,701 35,617 21,501 39,952 39,795 12,331 15,402 Selling, general and administrative expenses........ 5,119 20,222 20,972 23,506 26,310 11,480 15,659 Unusual charges(c)(d)........... -- -- 41,435 47,366 -- -- -- ------------- -------- -------- -------- -------- ------- ------- Operating income (loss)......... 4,582 15,395 (40,906) (30,920) 13,485 851 (257) Interest expense--subordinated notes payable.................. (777) (4,298) (7,198) (9,307) (11,526) (5,524) (6,034) Interest expense--other......... (839) (5,792) (4,180) (4,509) (5,068) (2,581) (3,521) Other income (expense), net..... (795) 252 72 730 657 42 195 ------------- -------- -------- -------- -------- ------- ------- Income (loss) before income taxes........................... 2,171 5,557 (52,212) (44,006) (2,452) (7,212) (9,617) Income tax provision............ 1,074 2,431 -- -- -- -- -- ------------- -------- -------- -------- -------- ------- ------- Net income (loss)(e)............ $ 1,097 $ 3,126 $(52,212) $(44,006) $ (2,452) $(7,212) $(9,617) ------------- -------- -------- -------- -------- ------- ------- ------------- -------- -------- -------- -------- ------- ------- </TABLE> PRO FORMA, AS ADJUSTED, STATEMENT OF OPERATIONS DATA(F): <TABLE> <CAPTION> FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED JUNE 30, DECEMBER 31, ----------------- 1995(G) 1995(H) 1996(I) ------------ ------- ------- <S> <C> <C> <C> <C> <C> <C> <C> (IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales...................................................................... $130,183 $41,879 $49,905 Cost of sales.................................................................. 90,388 29,548 34,503 ------------ ------- ------- Gross profit................................................................... 39,795 12,331 15,402 Selling, general and administrative expenses................................... 24,325 10,930 15,509 ------------ ------- ------- Operating income (loss)........................................................ 15,470 1,401 (107) Interest expense............................................................... (2,888) (1,490) (2,431) Other income (expense), net.................................................... 657 42 195 ------------ ------- ------- Income (loss) before income taxes.............................................. 13,239 (47) (2,343) Income tax provision (benefit)................................................. 5,031 (18) (890) ------------ ------- ------- Net income (loss).............................................................. $ 8,208 $ (29) $(1,453) ------------ ------- ------- ------------ ------- ------- Net income (loss) per share(j)................................................. $ 0.63 $ -- $ (0.11) Weighted average number of shares of common stock and equivalents(j)........... 13,091 13,091 13,091 </TABLE> BALANCE SHEET DATA: <TABLE> <CAPTION> AS OF JUNE 30, 1996 ------------------------- PRO FORMA, AS ACTUAL ADJUSTED(F)(K) --------- ------------- <S> <C> <C> (IN THOUSANDS) Net working capital...................................................... $ 11,471 $ 11,471 Total assets............................................................. 129,296 147,396 Long-term debt, including current maturities............................. 197,666 74,318 Stockholders' equity (deficit)........................................... (102,492) 38,956 </TABLE> (Notes on following page) NOTES TO SUMMARY CONSOLIDATED FINANCIAL DATA <TABLE> <C> <S> (a) The Company was formed by a group of investors to effect the September 28, 1991 acquisition of Optigraphics, Inc. Therefore, the 1991 period includes results of operations for the three months ended December 31, 1991. (b) Net sales for 1992 includes sales related to "collector's sets" that were discontinued after 1992. The Company's reported SCMA net sales for these "collector's sets" for 1992 were $17.0 million. Unlike the data contained in the table above, which reports sales of products shipped less a provision for estimated returns of such products, reported SCMA net sales are based on sales of products shipped less the dollar value of returns actually received during the period. (c) Included in operating loss for 1993 is an unusual charge of $41.4 million resulting from events that led to the MLM Acquisition related to (i) the write-off of a $30.2 million pre-acquisition receivable from MLM and (ii) incremental sales returns, write-offs of unsalable inventory and other operating expenses aggregating $11.2 million. (d) Included in operating loss for 1994 are unusual charges of $47.4 million related to (i) a $40.0 million writedown of goodwill and (ii) incremental sales returns and write-offs of unsalable inventory related to the Major League Baseball and National Hockey League work stoppages. (e) For the year ended December 31, 1993, net income (loss) as reported herein is prior to the effect of the adoption of a new accounting principle. (f) Presented on a pro forma basis (as if the following transactions had occurred on the first day of the period presented, and in the case of the Balance Sheet Data, as if such transactions had occurred on June 30, 1996) to give effect to the conversion of a portion of the Acadia subordinated notes and all of the Redeemable Preferred Stock; plus options granted prior to the Offering to purchase Common Stock at $2.49 per share and shares of Common Stock to be awarded under the Restricted Stock Plan (assuming all such Common Stock was outstanding for all periods presented); and as adjusted for the Offering assuming the issuance and sale of 4,000,000 shares of Common Stock and application of the assumed net proceeds. Of the net proceeds from the sale of shares of Common Stock offered by the Company in the Offering, approximately $22.0 million will be used to repay senior bank indebtedness and $33.0 million will be used to repay Acadia subordinated notes. (g) Pro forma, as adjusted, results for the year ended December 31, 1995 give effect to (i) decreased interest expense of $13.7 million (which consists of $2.0 million related to senior bank borrowings, $11.5 million related to subordinated notes to Acadia, and $0.2 million related to amortization of deferred loan costs with respect to senior bank borrowings), (ii) decreased selling, general and administrative expenses of $2.0 million (which consists of $2.3 million of management and consulting fees that will no longer be incurred offset by an increase of $0.3 million in compensation expense for new employment agreements with members of senior management), and (iii) a tax provision of $5.0 million. (h) Pro forma, as adjusted, results for the six months ended June 30, 1995 give effect to (i) decreased interest expense of $6.6 million (which consists of $1.0 million related to senior bank borrowings, $5.5 million related to subordinated notes to Acadia, and $0.1 million related to amortization of deferred loan costs with respect to senior bank borrowings), (ii) decreased selling, general and administrative expenses of $0.6 million (which consists of $0.8 million of management and consulting fees that will no longer be incurred offset by an increase of $0.2 million in compensation expense for new employment agreements with members of senior management), and (iii) a tax benefit of $18,000. (i) Pro forma, as adjusted, results for the six months ended June 30, 1996 give effect to (i) decreased interest expense of $7.1 million (which consists of $1.0 million related to senior bank borrowings, $6.0 million related to subordinated notes to Acadia, and $0.1 million related to amortization of deferred loan costs with respect to senior bank borrowings), (ii) decreased selling, general and administrative expenses of $0.2 million (which consists of $0.3 million of management and consulting fees that will no longer be incurred offset by an increase of $0.1 million in compensation expense for new employment agreements with members of senior management), and (iii) a tax benefit of $0.9 million. (j) For purposes of pro forma, as adjusted, net income (loss) per share, weighted average shares outstanding is 13,090,714, which is comprised of 2,156,026 shares currently outstanding, 5,499,863 shares to be issued to give effect to the conversion of a portion of the Acadia subordinated notes and all of the Redeemable Preferred Stock, 1,400,988 options (net of 122,237 options granted by Acadia from its existing holdings) granted prior to the Offering to purchase Common Stock at $2.49 per share and 33,837 shares to be awarded under the Restricted Stock Plan, and 4,000,000 million shares to be issued in the Offering. (k) Gives effect to the Offering and includes (i) a charge of $0.4 million (net of taxes of $0.2 million) related to a write-off of a portion of deferred financing costs with respect to the early payment of a portion of senior bank indebtedness, (ii) a non-cash operating expense of $10.6 million (net of taxes of $6.5 million) in connection with the grant of options to purchase Common Stock prior to the Offering at $2.49 per share and shares of Common Stock to be awarded under the Restricted Stock Plan, and (iii) a credit of $12.0 million related to the reversal of a portion of the deferred tax asset valuation allowance. See "Management's Discussion and Analysis of Results of Operation and Financial Condition--General." These nonrecurring charges are not considered in the pro forma, as adjusted, statement of operations data. </TABLE>
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001018730_smartalk_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001018730_smartalk_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and Financial Statements, including the Notes thereto, appearing elsewhere in this Prospectus. Investors should also carefully consider the information set forth under the heading "Risk Factors" and are urged to read this Prospectus in its entirety. Unless otherwise indicated, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. THE COMPANY SmarTalk provides convenient, easy to use, cost-effective telecommunications products and services to individuals and businesses primarily through its SmarTalk TeleServices Card (the "SmarTalk Card"). The SmarTalk Card provides customers with a single point of access to prepaid telecommunications services at a fixed rate charge per minute regardless of the time of day or, in the case of domestic calls, the distance of the call. The Company's services currently include domestic calling and outbound international long distance calling to more than 150 countries, as well as enhanced features such as sequential calling, speed dial and message delivery. The SmarTalk Card may also be recharged on-line with a major credit card, allowing the user to add minutes as needed. The Company expects to offer other enhanced services, including conference calling, voice mail, fax mail, content delivery and selected international calling services. The Company's long distance calls are carried primarily through MCI and AT&T. For the six months ended December 31, 1995 and June 30, 1996, the number of minutes decremented from SmarTalk cards or otherwise used by SmarTalk customers were approximately 2,576,000 and 15,901,000, respectively. The domestic prepaid phone card industry has grown significantly in recent years. Prepaid phone card revenues in the U.S. have grown from an estimated $20 million in 1990 to an estimated $1 billion in 1996, making prepaid phone services one of the fastest growing segments of the telecommunications industry. Industry sources project the total U.S. prepaid phone card market to reach $2.5 billion in 2000. SmarTalk's primary marketing and distribution focus is to target individuals and small businesses through major national and regional retailers. Currently, the SmarTalk Card is sold at selected retail locations throughout the U.S., including locations operated by the following leading retailers: American Drug Stores (which includes Jewel/Osco Combo Stores, Osco Drug Stores and Sav-On Drug Stores), Office Depot, Thrifty Oil, Builders Square, Hills Department Stores, Bradlees, Bergen Brunswig Drug Company (Good Neighbor Pharmacy), Venture Stores, Foley's Department Stores, Marshall Field's, Fred W. Albrecht Grocery Company, Office 1 Superstores, Price/Costco, Acme, Best Buy, Dayton's, Fedco, The Good Guys, Hudson's, Penn Daniels, Pamida and Robinsons-May. The Company believes its success to date in rapidly expanding its retail network is attributable to management's ability to increase retailers' awareness of the profit potential of offering telecommunications services at retail, the minimal space involved in offering the SmarTalk Card at retail and the ability of the SmarTalk Card to generate ongoing residuals for retailers through participation in recharge revenues. SmarTalk also is exploring the opportunity of offering retailers a co-branded, pre-subscribed "1+" long distance service. This new product, if successfully introduced, would afford retailers the ability to offer residential and small business customers long distance services that are designed to generate ongoing revenue streams while requiring virtually no shelf space or inventory cost. SmarTalk also markets its services directly to customers through direct response sales which include recharge sales, and sales generated through print, direct mail, and, in the future, Internet and television advertising. The Company has developed additional marketing and distribution avenues, including the Company's Corporate Advantage Program and corporate promotional programs. Under the Corporate Advantage Program, employees who are away from their offices can utilize SmarTalk services, thereby enabling businesses to lower telecommunications costs and monitor call activity to better allocate long distance costs. Corporate promotional programs allow the Company's corporate customers to provide co-branded prepaid phone cards for use in corporate or product promotions. SmarTalk services are delivered through proprietary switching, application and database access software which run on two interactive call processing platforms (the "SmarTalk Platforms"), one of which was recently acquired from Pacific Bell Information Services (the "VoiceChoice Platform"). The acquisition of the VoiceChoice Platform provides the Company with the opportunity to reduce its costs while providing the Company with the flexibility to customize and add features. The Company has also developed a proprietary in-house data reporting and tracking system (the "SmarTrac System"), which tracks inventory, controls fraud, monitors usage by card and retailer and allows the Company to provide certain customer and usage information to its retailers and business customers. The Company believes that its principal competitive advantages are its (i) well-established presence among major retailers, (ii) advanced telecommunications infrastructure, and (iii) management team, which has extensive marketing and merchandising expertise. The Company believes its competitive advantages will assist it in achieving its growth objective through implementation of the following strategies: Increase Penetration of Retailers. SmarTalk plans to increase penetration of retailers by expanding the number of stores in which the SmarTalk Card is sold and the points of sale at which a customer can purchase the SmarTalk Card within each store. The Company also intends to leverage its relationships with retailers to market additional telecommunications services such as "1+" long distance. Further Develop Direct Response Channels. SmarTalk plans to stimulate the growth of its existing direct response sales through, for example, volume discounts and on-line advertising. The Company plans to continue to develop new and innovative means of marketing its telecommunications products and services directly to customers to complement its retail distribution network, including television advertising, catalogue and other direct marketing methods. Broaden Corporate Advantage and Promotional Programs. SmarTalk intends to expand the Corporate Advantage Program and corporate promotional programs by (i) expanding its sales force to include representatives that focus on business customers, (ii) capitalizing on the Company's strategic relationships, and (iii) leveraging its existing relationships with retailers by promoting its corporate programs to retailers already familiar with SmarTalk services. Target the Business Customer. SmarTalk plans to introduce additional enhanced features in an effort to attract both small businesses at retail and corporations as subscribers to its Corporate Advantage Program. Such planned enhanced features include voice mail, fax mail, conference calling and selected international calling services. Leverage Existing Strategic Relationships. SmarTalk plans to leverage its existing network of strategic relationships to gain access to new business opportunities and a wider customer base. The Company has recently entered into strategic alliances, including those with MCI, West Interactive, and Douglas Stewart, which the Company believes will expand its distribution channels. The Company also plans to develop additional strategic relationships with partners whose customers are prospective users of SmarTalk services. Expand International Services. SmarTalk plans to expand its business to international markets in order to market prepaid phone cards to U.S. travelers and foreign customers who frequently call the U.S. SmarTalk believes that it can market to foreign customers who frequently call the U.S. by establishing a sales force abroad and by providing turnkey merchandising materials to retailers abroad which are customized for foreign markets. SmarTalk TeleServices, Inc. was incorporated in California in October 1994. As used in this Prospectus, the term "SmarTalk" or the "Company" refers to SmarTalk TeleServices, Inc. and its subsidiary, unless the context otherwise requires. All information in this Prospectus gives effect for all periods to a 3,500 for 1 stock split effected on February 13, 1996, a 2.51 for 1 stock split effected on May 23, 1996, and a 0.5625 for 1 reverse stock split effected on August 15, 1996. The Company's principal executive offices are located at 1640 South Sepulveda Boulevard, Suite 500, Los Angeles, California 90025, and its telephone number is (310) 444-8800. THE OFFERING Common Stock Offered By: <TABLE> <S> <C> The Company ............ 4,000,000 shares The Selling Shareholders........... 200,000 shares(1) Total................. 4,200,000 shares(1) =================== Common Stock Outstanding after the Offering....... 12,824,834 shares(2) Use of Proceeds........... To repay indebtedness, to fund capital expenditures, marketing, new business development opportunities and the expansion of the Company's business internationally, and for additional working capital and general corporate purposes including possible acquisitions. Proposed Nasdaq National Market Symbol............ SMTK </TABLE> - -------- (1) Excludes 630,000 shares of Common Stock that may be sold by the Selling Shareholders pursuant to the Underwriters' over-allotment option. (2) Excludes 510,514 shares of Common Stock reserved for issuance upon exercise of outstanding options granted by the Company. See "Dilution" and "Management -- Stock Option Plans." SUMMARY FINANCIAL DATA <TABLE> <CAPTION> PERIOD FROM INCEPTION (OCTOBER 28, SIX MONTHS ENDED 1994) TO YEAR ENDED JUNE 30, DECEMBER 31, DECEMBER 31, ---------------------- 1994 1995 1995 1996 ------------ ------------ --------- ----------- <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA(1): Revenue.................... $ 444 $ 453,916 $ 41,738 $ 3,678,020 Gross profit (loss)........ (272) 135,230 11,828 935,905 Operating expenses......... 65,200 1,466,544 297,265 3,102,719 --------- ----------- --------- ----------- Loss from operations....... (65,472) (1,331,314) (285,437) (2,166,814) Net loss................... $ (65,472) $(1,329,302) $(285,437) $(2,271,186) ========= =========== ========= =========== Net loss per share(2)...... $ (.01) $ (.14) $ (.03) $ (.24) ========= =========== ========= =========== Weighted average number of common shares and common equivalent shares(2)...... 9,333,348 9,333,348 9,333,348 9,333,348 </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 --------------------------- ACTUAL AS ADJUSTED(3) ----------- -------------- <S> <C> <C> BALANCE SHEET DATA(1): Working capital................................... $(3,256,069) $44,313,929 Total assets...................................... 4,782,822 52,322,822 Deferred revenue(4)............................... 4,127,919 4,127,919 Total debt........................................ 3,825,000 510,000 Total shareholders' equity (deficit).............. (5,814,988) 45,040,012 </TABLE> <TABLE> <CAPTION> FOR THE THREE MONTHS ENDED ----------------------------------------------- SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, 1995 1995 1996 1996 ------------- ------------ --------- ---------- <S> <C> <C> <C> <C> SELECTED QUARTERLY OPERATING DATA: Number of PINs activated(5).. 15,811 52,800 117,212 196,259 Number of minutes decremented(6).............. 640,320 1,935,247 5,152,179 10,748,914 Number of recharge minutes purchased................... 154,974 312,390 666,030 1,112,130 </TABLE> - -------- (1) This data should be read in connection with the Financial Statements and Notes thereto included elsewhere in this Prospectus. (2) See Note 2 of Notes to Financial Statements for a discussion of net loss per share and shares used in computing net loss per share. (3) Adjusted to reflect $510,000 borrowed under a $1,000,000 line of credit established in September 1996 and to give effect to the application of the estimated net proceeds of the Offering based upon as assumed initial public offering price of $14 per share. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001018866_trylon_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001018866_trylon_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..cca9952e63aaade9ffc102470dd004c8f29cca21
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0001018866_trylon_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus assumes an initial public offering price of $ per share and that the Underwriters' over-allotment option to acquire shares is not exercised. In addition, all of the information in this Prospectus has been adjusted to give effect to an aggregate Common Stock split to be completed prior to the consummation of the Offering. Unless the context requires otherwise, all references herein to the Company include the Company's wholly-owned subsidiary, Perisphere Industries, Inc. THE COMPANY The Trylon Corporation ("Trylon" or the "Company") is an innovative medical products company that has pioneered the use of chemical light technology in diagnostic and other medical applications. The Company's first product, PAP PLUS SPECULOSCOPY(R) ("PPS"), combines the Company's patented visual examination, SPECULOSCOPY(TM), with the standard Pap smear, into a simple primary cervical screening test for women. Speculoscopy, which can be performed by a wide range of health care practitioners at low cost, visually illuminates cervical abnormalities, which may include cancer and precancer, during a routine pelvic examination. Trylon received clearance from the FDA in December 1995 to market PPS for primary cervical screening. Clinical data reviewed by the FDA indicated that PPS was more accurate in detecting cervical abnormalities than the traditional screening test for detecting cervical cancer, the Pap smear. As a result, the Company believes that PPS will allow health care practitioners to identify women with cervical abnormalities earlier than if they used the Pap smear alone. Earlier diagnosis allows for more cost-effective treatment. At a precancerous state of disease, costs of treatment typically do not exceed $500, while costs of treating invasive cervical cancer often exceed $60,000. The Company's objective is to have PPS become a standard of care generally accepted for primary cervical screening worldwide. The Company has scheduled major United States and international product launches of PPS during 1996. In the United States, the Company has a long-term marketing and distribution agreement with Pharmacia & Upjohn, Inc. ("P&U"), one of the largest pharmaceutical distribution companies in the world. In addition, PPS is being marketed through leading pharmaceutical and medical supply companies in certain European, Asian and North American markets. P&U has a strong commitment to the areas of women's health care and cancer treatment and plans to utilize its entire national sales force for the distribution of PPS. In addition, P&U has committed to a national advertising campaign for PPS and has selected PPS for special sales incentives. P&U will be the primary sponsor of the national advertising campaign, although the Company intends to supplement P&U's efforts by contributing approximately $10 million to the cost of such campaign. The PPS launch, scheduled to commence in the fourth quarter of 1996, will target: (i) over 60,000 health care practitioners through P&U's direct selling efforts and educational programs, (ii) women and women's advocacy groups, primarily through a direct-to-consumer television and print advertising program and other public relations efforts and (iii) third- party payors, including managed-care organizations. The initial promotional campaign will use P&U's established sales force to target office-based physicians in 20 major domestic markets. During 1997, P&U plans to expand these marketing efforts nationwide, supported by the consumer advertising and advocacy campaigns to be undertaken jointly by the Company and P&U. Cervical cancer is the second most common cancer in women worldwide, with approximately 450,000 new cases diagnosed annually. In the United States, over 50 million women are screened for cervical cancer annually using a standard Pap smear. Nevertheless, the incidence of cervical cancer has increased in the United States over the last ten years, and the rate of death within the first five years of diagnosis of cervical cancer remains above 30%. The American Cancer Society reported that in 1995 approximately 15,800 new cases of cervical cancer were diagnosed in the United States. Worldwide, more than 150 million Pap smears are performed annually, leaving acute, unfulfilled needs for screening in large portions of the world, particularly in developing countries. In addition to PPS, the Company has developed and initiated clinical studies of a number of products that apply its proprietary technologies to other medical, surgical and dental uses. These products include ORAL SPECULOSCOPY(TM) for the screening of oral cancer and SPIRABRUSH Cx(R) as a cervical sampling device. The Company's goal is to introduce at least one new product each year. The Company is actively developing and seeking to acquire other innovative technologies with medical applications. See "Business." The Company was incorporated in the State of Delaware on June 30, 1987. The Company's executive offices are located at 970 West 190th Street, Torrance, California 90502 and its telephone number is (310) 327-8820. THE OFFERING <TABLE> <C> <S> Common Stock offered by the Company(1)....... Common Stock to be outstanding immediately after the Offering(2)....................... Use of Proceeds to the Company............... To fund domestic and international marketing campaigns for PPS, research and development activities, capital expenditures and general corporate purposes. Proposed Nasdaq National Market Symbol....... TRLN </TABLE> - -------------------- (1) Does not include up to shares of Common Stock that may be sold by the Company and the Selling Stockholders pursuant to the Underwriters' over- allotment option. See "Underwriting." (2) Includes (i) 3,399.6 shares of Common Stock which will be issued upon the automatic conversion of outstanding shares of Series A Convertible Preferred Stock at the effective date of the Offering and (ii) up to 149.9 additional shares of Common Stock issuable to an existing stockholder of the Company pursuant to anti-dilution rights that are held by such stockholder and that will be triggered by the preferred stock conversion, but excludes up to 2,143 shares of Common Stock issuable upon the exercise of outstanding options held by an officer, a director and a former director. See "Description of Capital Stock." SUMMARY CONSOLIDATED FINANCIAL INFORMATION The summary consolidated financial information set forth below for the Company's fiscal years ended December 31, 1993, 1994 and 1995 is derived from the Company's consolidated financial statements audited by Arthur Andersen LLP, independent public accountants, included elsewhere in this Prospectus. The summary consolidated financial information set forth below for the Company's fiscal years ended December 31, 1991 and 1992 and the six months ended June 30, 1995 and 1996, and as of June 30, 1996, is derived from the Company's unaudited consolidated financial statements. The unaudited consolidated financial statements from which such financial information is derived include all adjustments, consisting of normal recurring adjustments, which management considers necessary for a fair presentation of the Company's financial position and results of operations as of such date and for such periods. Operating results for the six months ended June 30, 1996 are not necessarily indicative of the results that may be expected for future periods, including the entire year ending December 31, 1996. The summary financial information presented below is qualified in its entirety by, and should be read in conjunction with, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's consolidated financial statements, including the notes thereto, appearing elsewhere in this Prospectus. <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, -------------------------------------------------------- -------------------- 1991 1992 1993 1994 1995 1995 1996 <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues, net........... $ 88,417 $ 593,757 $1,305,014 $2,544,983 $ 628,748 $ 214,162 $ 608,196 Gross profit............ 49,605 241,122 979,312 1,847,720 333,116 75,134 257,919 Income (loss) before income taxes........... (910,275) (646,968) (251,386) 432,259 (1,007,968) (724,375) (738,148) Net income (loss)....... (912,792) (647,768) (252,186) 431,459 (1,008,768) (724,375) (738,948) Net income (loss) per common share: Historical ............ $ (15.89) $ (10.84) $ (3.65) $ 4.64 $ (12.94) $ (8.94) $ (9.27) ========= ========= ========== ========== =========== ========= ========= Pro forma(2)........... $ (11.54) $ (8.45) =========== ========= Weighted average number of common shares outstanding: Historical............. 57,459.2 59,766.7 69,159.1 76,741.7 83,868.4 83,868.4 83,868.4 ========= ========= ========== ========== =========== ========= ========= Pro forma(2)........... 87,417.9 87,417.9 =========== ========= </TABLE> <TABLE> <CAPTION> AS OF JUNE 30, 1996 ------------------------- ACTUAL AS ADJUSTED(1) <S> <C> <C> BALANCE SHEET DATA: Working capital..................................... $ 878,175 $37,278,175 Total assets........................................ 1,670,302 38,070,302 Total liabilities................................... 720,205 720,205 Long term debt, net of current portion.............. -- -- Stockholders' equity................................ 950,097 37,350,097 </TABLE> - -------------------- (1) Adjusted to reflect the sale by the Company of shares of Common Stock in the Offering at an assumed initial public offering price of $ per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001018891_ridgeview_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001018891_ridgeview_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..ce175563a978e5e94ebe29e17ec55f9674b8788a
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the financial statements and notes thereto appearing elsewhere in this Prospectus. Prospective investors should carefully consider the information discussed under "Risk Factors." Except as set forth in the financial statements and unless otherwise indicated, all information in this Prospectus (i) gives effect to an approximate 129 for 1 split of the Company's outstanding Common Stock effected October 8, 1996 in the form of a stock dividend, (ii) reflects the issuance of 240,000 shares of Common Stock pursuant to a share exchange agreement by and among the Company and the shareholders of an affiliated corporation, which will occur immediately prior to the completion of this Offering, and (iii) assumes no exercise of the Underwriters' over-allotment option. Unless otherwise indicated, references to years in this Prospectus refer to the Company's fiscal year ending December 31 in such year. This Prospectus contains forward-looking statements and information which involve risks and uncertainties. The Company's actual results could differ materially from the results anticipated in these forward-looking statements as a result of certain risks and uncertainties described under the heading "Risk Factors" and elsewhere in this Prospectus. THE COMPANY Founded in 1912, the Company designs, manufactures and markets a complete range of sports, rugged outdoor and heavyweight casual socks as well as a wide variety of women's hosiery products, including tights, trouser socks, pantyhose and knee-highs. The Company believes it is one of the leading vendors of sports socks to sporting goods and active apparel stores. The Company also sells its products to department stores, discount stores and a variety of other retailers. In addition, the Company produces sports socks for sale by others under such brand names as adidas, ASICS, Bass, Brooks, Fila, Head Sportswear, IZOD, New Balance and Reebok and women's hosiery products for sale under the Liz Claiborne and Elisabeth brand names. Under license agreements, the Company produces and sells socks and women's hosiery directly to retailers under the brand names Converse, Ellen Tracy, Evan-Picone, Jacques Moret and Woolrich. See "Business -- Women's Hosiery Products." The Company is currently negotiating licensing terms to produce and sell socks under the Coleman and Rockport brand names. The Company expects that approximately two-thirds of its net sales in the current year will be derived from sales of socks with the balance derived from sales of women's hosiery products. As of September 30, 1996, the Company had more than 3,500 customers in the United States, Europe and other parts of the world. Only one of such customers, Target, accounted for more than 10% of the Company's 1995 net sales and is expected to account for more than 10% of the Company's 1996 net sales. In recent years the Company has diversified geographically and modernized its production capacity, increased its domestic customer base, expanded its contract manufacturing business, negotiated the rights to manufacture and sell socks and women's hosiery under widely-recognized brand names and increased its marketing activities and sales in Europe and other foreign markets. These steps included in 1994 and 1995 establishing a manufacturing facility with high speed electronic knitting equipment in Ft. Payne, Alabama to produce promotionally-priced, multi-pair pack sports socks and replacing all of the mechanical sock knitting equipment in the Company's facilities in Newton, North Carolina with similar electronic equipment. In 1994, the Company entered the designer segment of the women's hosiery market through a licensing agreement to manufacture and sell women's hosiery under the Ellen Tracy brand name in the United States. Ellen Tracy hosiery products manufactured by the Company are available in tights, trouser socks and pantyhose in department stores, including Neiman Marcus, Nordstrom, Saks Fifth Avenue, Macy's, Dillard's and Bloomingdale's. The Company recently negotiated a license to manufacture and sell women's hosiery under the Evan-Picone trademark, an established brand of women's hosiery. See "Business -- Women's Hosiery Products." IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. <PAGE> 5 In June 1995, the Company expanded its manufacturing capacity and customer base by acquiring Seneca Knitting Mills Corporation ("Seneca") located in Seneca Falls, New York (the "Seneca Acquisition"). See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations -- The Seneca Acquisition." Seneca has been engaged since 1954 exclusively in producing rugged outdoor and heavyweight casual socks under various private labels for customers such as Kmart, J.C. Penney and Structure (a division of The Limited, Inc.), and under Seneca's own brand, Oyster Bay. In 1995, the Company obtained through a strategic alliance with another domestic manufacturer, Chipman-Union Co., a new sports sock manufacturing program for adidas. To accommodate growth from the adidas program, the Company has doubled the capacity of its manufacturing facility in the Republic of Ireland, which was established in 1986 to serve European customers. See "Business -- Sales and Marketing -- Sports, Rugged Outdoor and Heavyweight Casual Socks." During the last three years, the Company has experienced substantial growth. Net sales increased 52.8% from $35.6 million in 1993 to $54.4 million in 1995, a compound annual growth rate of 23.6%. On a pro forma basis (giving effect to certain acquisitions -- see "Summary Consolidated Financial Data"), for the six months ended June 30, 1996, net sales increased 25.7% compared to net sales in the same period in the prior year. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- General." The Company's future growth strategy includes the following elements: INCREASING SALES TO EXISTING CUSTOMERS. Many of the Company's existing customers in the sporting goods industry, such as Just for Feet, The Sports Authority, Sports & Recreation and Oshman's Sporting Goods, are rapidly expanding the number of stores they operate, and the Company expects its sales to these customers will increase as a result of their unit growth. The Company also expects to be able to increase its sales to other existing customers such as Target, the Company's largest customer, as well as J.C. Penney and Nordstrom. EXPANDING SALES RELATIONSHIPS THROUGH CROSS-SELLING. The Company is seeking to establish relationships with certain major retailers with which the Company has not historically done business. Management believes that the Company's expanded customer base of major retailers resulting from the Seneca Acquisition and the Evan-Picone hosiery program creates opportunities for cross-selling the Company's other products. OBTAINING ADDITIONAL LICENSING ARRANGEMENTS. The Company is seeking to license additional nationally and internationally recognized consumer brand names to complement the Converse, Ellen Tracy, Evan-Picone, Jacques Moret and Woolrich licensed brand names. Management is currently negotiating licensing terms to produce and sell socks under the Coleman and Rockport brand names. ADDING COMPLEMENTARY PRODUCT CATEGORIES THROUGH SELECTIVE ACQUISITIONS. Women's casual socks and men's dress socks are complementary product categories that could be added to the Company's existing product lines through selective acquisitions of other manufacturers of socks or women's hosiery or through internal product diversification. Although the Company has no proposal, agreement, understanding or arrangement relating to the acquisition of any other company at this time, future acquisitions could also be expected to expand production capacity and add to the Company's customer base. INCREASING INTERNATIONAL SALES. The Company plans to build on the existing customer base served by its manufacturing facility in the Republic of Ireland and on the Company's base of export sales of domestically manufactured products. See "Business -- Sales and Marketing -- International Sales and Marketing of Socks." In recent years, manufacturers of socks and women's hosiery have experienced a period of rapid technological change and encountered a demanding retail environment characterized by customers' expectations of immediate order fulfillment and depth in all product categories. See "Business -- Industry Overview." The Company is investing in new technology and strengthening its ability to provide a significant share of major retailers' total socks and women's hosiery requirements. The Company's core operating strategy includes the following elements: - Manufacturing a broad range of products, including sports socks, rugged outdoor and heavyweight casual socks, tights, trouser socks, pantyhose and knee-highs, for sale under widely-recognized brand names as well as for large retailers' private label programs and under the Company's own brands. 2 <PAGE> 6 - Replacing most of its mechanical sock knitting machines with more flexible electronic machines capable of operating at significantly higher production levels with lower per unit costs. - Making additional capital investments required to make the Company a lower-cost, higher volume producer of a wide variety of products with the capability of responding to tighter shipment schedules and increased production capabilities demanded by large retailers. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations -- Industry and Business Trends." - Outsourcing the manufacturing of a variety of styles of socks and women's hosiery products to meet peak demand and accommodate major new women's hosiery programs such as Evan-Picone, allowing the Company to operate its own manufacturing facilities at more efficient production levels. - Focusing on consistent product quality and providing rapid order fulfillment to a large and diverse customer base. The Company believes the sock and women's hosiery manufacturing industry is entering a period of consolidation. Management believes the pace of consolidation will increase in future years in part as a result of a trend among large retailers to do business with a smaller group of vendors that are capable not only of providing a significant share of a large retailer's total sock and women's hosiery requirements but also of satisfying large retailers' increasing inventory management demands. Although the Company does not currently have any proposal, agreement, understanding or arrangement regarding any particular acquisition, management believes manufacturers such as the Company that have the commitment and resources to remain independent will be presented with attractive acquisition opportunities in future years. The Company's executive offices are located at 2101 North Main Avenue, Newton, North Carolina 28658, and its telephone number is (704) 464-2972. ACQUISITION OF AFFILIATE Immediately prior to the completion of this Offering, the Company will acquire all of the 500 issued and outstanding shares of Interknit, Inc. ("Interknit"), a corporation affiliated with the Company through common ownership of its shares by eight persons who are also shareholders of the Company, including the Company's five executive officers (four of whom are members of the Company's Board of Directors), one director who is not an executive officer and one greater than 5% shareholder of the Company who was formerly a director and executive officer of the Company (the "Interknit Acquisition"). Interknit was established by these persons and five other employees of the Company in January 1994 for the purpose of providing a consistent, reliable supply of high quality "greige goods" (unfinished socks and women's hosiery) for the Company's sock finishing and shipping facility in Ft. Payne, Alabama. During 1995, approximately 82% of Interknit's output of greige goods was sold to the Company, and Interknit purchased approximately 11% of its raw materials requirements from the Company. Pursuant to a share exchange agreement entered into on August 27, 1996 by and among the Company and the shareholders of Interknit (the "Share Exchange Agreement"), the shareholders of Interknit will, immediately prior to the completion of this Offering, transfer all of the 500 shares of outstanding capital stock of Interknit to the Company in exchange for an aggregate of 240,000 shares of Common Stock. Assuming the market price of the Common Stock on the date this Offering is completed is equal to the initial public offering price (and assuming an initial public offering price of $10.00 per share), the 240,000 shares when issued will have an aggregate fair market value of $2.4 million. The Interknit Acquisition will be accounted for as a "pooling of interests." The obligations of the shareholders of Interknit under the Share Exchange Agreement are conditioned upon all of the conditions to the issuance and sale of the shares of Common Stock offered hereby to the Underwriters, other than the condition that the proposed share exchange be consummated, having been met or waived. See "Certain Transactions -- Transactions with and Acquisition of Affiliate" for a more complete description of the terms and conditions of the Interknit Acquisition. 3 <PAGE> 7 Unless the context otherwise requires, all references to the "Company" in this Prospectus are to the Company, including its subsidiaries, and Interknit, collectively, and all references to the Company's outstanding Common Stock include the 240,000 shares of Common Stock to be issued to the shareholders of Interknit. THE OFFERING Common Stock offered by the Company............................ 1,520,000 shares Common Stock offered by the Selling Shareholders..................... 80,000 shares Common Stock to be outstanding after this Offering................ 3,120,000 shares(1) Use of proceeds by the Company..... To reduce outstanding debt and fund capital expenditures, including construction of a new distribution facility and purchase of additional electronic knitting equipment. See "Use of Proceeds." Risk factors....................... Investors should carefully consider the risks and uncertainties that may adversely affect the Company's future results of operations or financial condition, which are described under the heading "Risk Factors" on page 6 of this Prospectus. Nasdaq National Market symbol...... RIDG - --------------- (1) Excludes (i) 245,000 shares of Common Stock available for future grants of stock options, restricted stock and other stock-based awards under the Company's stock incentive plans and (ii) 75,000 shares of Common Stock that may be issued in connection with future purchases by employees under the Company's employee stock purchase plan. See "Management -- Employee Benefit Plans." 4 <PAGE> 8 SUMMARY CONSOLIDATED FINANCIAL DATA(1) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, --------------------------------------------------------- ------------------------------------- PRO PRO PRO FORMA FORMA FORMA 1991 1992 1993 1994 1995 1995(2) 1995 1996 1995(2) 1996(3) ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales..................... $32,283 $32,438 $35,605 $40,093 $54,408 $59,602 $21,474 $31,799 $26,026 $32,712 Gross profit.................. 7,232 6,259 7,792 9,130 10,685 11,658 4,552 6,143 5,422 6,474 Operating income.............. 1,760 944 1,760 2,362 2,016 2,210 838 1,242 986 1,522 Interest expense.............. (721) (630) (661) (829) (1,584) (2,014) (520) (1,064) (906) (1,130) Income before income taxes....................... 1,159 610 1,433 1,587 535 314 335 207 104 420 Net income.................... $ 912 $ 533 $ 1,084 $ 1,014 $ 296 $ 105 $ 238 $ 129 $ 37 $ 271 Net income per share.......... $ 0.67 $ 0.40 $ 0.80 $ 0.75 $ 0.22 $ 0.07 $ 0.18 $ 0.10 $ 0.02 $ 0.17 Weighted average shares outstanding................. 1,362 1,359 1,353 1,350 1,350 1,590 1,353 1,355 1,593 1,595 OTHER DATA: Operating income before depreciation and amortization(4)............. $ 2,447 $ 1,768 $ 2,661 $ 3,279 $ 3,216 $ 3,736 $ 1,342 $ 1,988 $ 1,725 $ 2,391 Depreciation and amortization................ 687 824 901 917 1,200 1,526 504 746 739 869 Capital expenditures.......... 2,066 1,512 840 1,881 3,619 4,383 1,794 606 1,834 624 As adjusted for certain charges(5): Gross profit................ 11,306 12,279 4,862 5,732 Operating income............ 3,137 3,331 1,148 1,296 Operating income before depreciation and amortization(4)........... 4,337 4,857 1,652 2,035 Net income.................. $ 969 $ 778 $ 424 $ 223 Net income per share........ $ 0.72 $ 0.49 $ 0.31 $ 0.14 </TABLE> <TABLE> <CAPTION> AT JUNE 30, 1996 AT DECEMBER 31, --------------------------------- ----------------------------------------------- PRO PRO FORMA AS 1991 1992 1993 1994 1995 ACTUAL FORMA(6) ADJUSTED(7) ------- ------- ------- ------- ------- ------- -------- ------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Working capital........................ $ 7,205 $ 6,885 $ 7,616 $11,696 $11,911 $15,112 $15,090 $ 15,158 Total assets........................... 18,094 19,145 21,614 24,487 38,534 44,445 46,401 46,119 Long-term debt (less current portion)............................. 5,693 5,859 5,771 9,492 14,624 17,516 18,771 5,585 Total debt............................. 7,964 9,651 10,918 11,292 21,511 25,423 27,052 13,516 Shareholders' equity................... 5,924 6,119 6,690 7,776 7,986 8,106 8,243 21,779 </TABLE> - --------------- (1) The summary historical consolidated financial data have been derived from the Company's annual consolidated financial statements and unaudited interim financial statements appearing elsewhere in this Prospectus. The summary consolidated pro forma financial data have been derived from the Company's unaudited pro forma financial statements also appearing elsewhere in this Prospectus. (2) Gives effect to the Seneca and Interknit Acquisitions as if each of such events had occurred on January 1, 1995. See the unaudited pro forma condensed consolidated financial statements and notes thereto. (3) Gives effect to the Interknit Acquisition as if such event had occurred on January 1, 1996. (4) Operating income before depreciation and amortization is net sales minus cost of goods sold, selling, general and administrative expenses and supplemental retirement benefit expense plus depreciation and amortization expense. The measure does not represent cash generated from operating activities determined in accordance with generally accepted accounting principles, is not necessarily indicative of cash available to fund cash needs and should not be considered an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flow as a measure of liquidity. (5) Gross profit for the year ended December 31, 1995 and the six months ended June 30, 1995 reflects charges for the write-off of obsolete, unfinished women's hosiery products in excess of normal reserves in the amounts of $621,000 and $310,000, respectively. Operating income for the year ended December 31, 1995 reflects the recognition of a supplemental retirement obligation in the amount of $500,000 to the Company's former chairman. See "Certain Transactions -- Supplemental Retirement Benefit." The data presented have been adjusted to eliminate the effect of these one-time charges. (6) Gives effect to the Interknit Acquisition as if such event had occurred on June 30, 1996. (7) Adjusted to give effect to this Offering and the use of the net proceeds thereof as described in "Use of Proceeds." 5 <PAGE> 9
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed financial data, including the Consolidated Financial Statements and the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, all information contained in this Prospectus: (i) assumes that the Underwriters' over-allotment option is not exercised, (ii) has been adjusted to give effect to a 1.561-for-1 stock split, effected through a stock dividend, prior to the consummation of the Offering, and (iii) has been adjusted to give effect to the conversion of the outstanding shares of Convertible Preferred Stock into Common Stock upon consummation of the Offering. "Medical Alliance" or the "Company" refers to Medical Alliance, Inc. and its subsidiaries. THE COMPANY Medical Alliance provides a complete range of services used to create temporary surgical sites in physician offices in 40 states and Canada and believes it is a leading national provider of such services. The Company's services facilitate the migration of established surgical procedures and advanced medical technologies from hospitals and outpatient surgery centers to a lower-cost setting, the physician's office. Payors, physicians and patients benefit from the Company's services through reduced costs for surgical procedures, increased physician productivity, greater access to advanced medical technologies and improved patient satisfaction. The Company has over 100 managed care contracts that in aggregate cover approximately 16 million lives. Managed care contracts are made directly between the Company and managed care organizations, and typically have automatically renewable one-year terms. The Company has served approximately 2,500 physicians during the six months ended June 30, 1996, and currently, physicians perform approximately 6,000 procedures monthly using the Company's services. The Company's services include: - Providing on-site technical personnel and medical equipment on a scheduled basis; - Monitoring and documenting preoperative, intraoperative and postoperative procedures; - Returning the physician's office to its pre-procedure condition; - Establishing procedural safety and quality assurance protocols for office-based procedures; - Facilitating physician training and qualification; and - Physician credentialing pursuant to contracts with managed care organizations. The Company provides its services along two primary business lines: medical surgical and aesthetic elective services. The Company's medical surgical services allow physicians to perform approximately 25 different office-based surgical procedures across numerous specialties, including gynecology, podiatry, urology and otolaryngology. The Company's aesthetic elective services are utilized primarily by plastic surgeons and dermatologists for cosmetic procedures such as skin resurfacing, vascular and pigmented lesion treatment, and tattoo removal. The Company is generally reimbursed for providing its medical surgical services by third-party payors, including through its contracts with managed care organizations, and is paid directly by patients for any required copayments and deductibles. For providing its aesthetic elective services, the Company is paid directly by patients, generally at the time of service. The Company derived approximately 64% and 33% of its net revenues in 1995 from the provision of medical surgical and aesthetic elective services, respectively. None of the Company's net revenues is derived from Medicare or Medicaid reimbursement. The Company markets its services directly to physicians and managed care organizations. If a managed care organization decides to enter into a contract with the Company, a formal agreement is negotiated stipulating each party's responsibilities and a structure for financial reimbursement. If a physician decides to utilize the Company's services, the physician will enter into a contract with the Company certifying as to the physician's credentials and training in the use of the technology. The contract will also define the relative responsibilities of the Company and the physician. Generally, the Company does not require the physician to exclusively utilize the Company's services. In utilizing the Company's services, a physician will schedule an office-based procedure for a specified date and time. If appropriate, the Company will verify a patient's insurance coverage and obtain any necessary - -------------------------------------------------------------------------------- MEDICAL ALLIANCE, INC. [LOGO] A LEADING NATIONAL PROVIDER OF SERVICES TO CREATE TEMPORARY SURGICAL SITES IN THE PHYSICIAN OFFICE SERVING APPROXIMATELY 2,500 PHYSICIANS ACROSS THE U.S. MEDICAL SURGICAL SERVICES AESTHETIC ELECTIVE SERVICES DISTRICT OFFICES FACILITATING PROCEDURES IN GYNECOLOGY, UROLOGY, PODIATRY, DERMATOLOGY, OTOLARYNGOLOGY AND PLASTIC SURGERY. - -------------------------------------------------------------------------------- IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. The Company intends to furnish to its shareholders annual reports containing audited consolidated financial statements certified by independent public accountants for each year and quarterly reports containing unaudited consolidated financial statements for the first three quarters of each fiscal year. precertification from the third-party payor. Prior to arrival of the patient, the Company's field technician will create a temporary surgical setting in the physician's office that meets the Company's preoperative protocol and will configure the transportable medical equipment in accordance with the Company's procedure guidelines. Prior to performing the procedure, the physician and/or his or her staff is required to inspect the temporary surgical setting, test and accept all medical equipment, and record such acceptance in the field technician's delivery log. After the physician has finished using the Company's services, the field technician returns the physician's office to its pre-procedure condition. An invoice for the Company's services is then either presented to the patient or sent to the third-party payor. According to Medical Data International, Inc. ("MDI"), total surgical procedures in the United States have increased by 12.4% from 25.8 million procedures in 1990 to 29.0 million procedures in 1994. Over this period, the number of surgeries performed in an outpatient setting as a percentage of total surgeries performed annually in the United States has increased. The volume of outpatient surgical procedures has grown by 71.8% over this period, from 11.0 million procedures, or approximately 43% of total surgeries in 1990, to 18.9 million procedures, or approximately 65% of total surgeries in 1994. Furthermore, the prevalence of surgical procedures occurring in a physician's office has increased, representing approximately 12% of total outpatient procedures performed in 1994 as compared to approximately 6% in 1990. The Company believes that a broader array of procedures, including more complex surgeries, is currently being performed in an outpatient setting than was performed in a similar setting in 1990 and believes that the migration of outpatient procedures to a physician's office will continue. The Company also believes that the number of aesthetic elective procedures performed annually in the United States will continue to grow, primarily due to the development of new technologies for cosmetic procedures, increased public awareness, shorter recovery times and the aging of the "baby boom" generation. According to an American Academy of Cosmetic Surgery survey (the "AACS Survey"), approximately 2.7 million cosmetic procedures were performed in the United States in 1994. The Company believes that a majority of such procedures are or can be performed in a physician's office. According to a survey by the American Society of Plastic and Reconstructive Surgeons (the "ASPRS Survey"), patients between the ages of 35 and 50 represented 41% of the cosmetic procedures performed in the United States in 1994, and the number of people who say they approve of cosmetic surgery, either for themselves or others, has increased 50% in the last decade. According to the ASPRS Survey, approximately 36% of the cosmetic procedures performed in 1994 were performed in a physician's office. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company.............. 2,000,000 shares Common Stock to be outstanding after the Offering(1).................................... 5,623,596 shares Use of proceeds.................................. To repay indebtedness, make capital expenditures, including the acquisition of medical equipment, and hire additional personnel, and for working capital and general corporate purposes, including possible acquisitions. See "Use of Proceeds." Reserved Nasdaq National Market symbol........... MAII </TABLE> - --------------- (1) Excludes 902,315 shares of Common Stock issuable upon the exercise of outstanding stock options granted under the Company's Amended and Restated 1994 Long-Term Incentive Plan (the "Incentive Plan") (60,106 of which are exercisable at the initial offering price, assumed to be $12.00) at a weighted average exercise price of $2.68 per share, 294,436 shares of Common Stock reserved for future option grants or awards under the Incentive Plan and 49,328 shares of Common Stock issuable upon the exercise of outstanding warrants at a weighted average exercise price of $1.69 per share. See "Management -- Incentive Plan" and "Description of Capital Stock -- Warrants." [LOGO] CREATING TEMPORARY SURGICAL SITES IN THE PHYSICIAN'S OFFICE TO BENEFIT PAYORS, PHYSICIANS AND PATIENTS* <TABLE> <S> <C> ENHANCED PATIENT SATISFACTION INCREASED PHYSICIAN PRODUCTIVITY - Shorter recovery times - Ability to perform a broad array - Reduced anesthesia requirements of procedures - Increased scheduling flexibility - On-site technical assistance - Optimizes procedure scheduling [Photograph of technician demonstrating equipment to physician] BENEFICIARIES - PAYORS - PHYSICIANS - PATIENTS HIGH QUALITY MEDICAL SERVICES - Physician training and credentialing - Protocols and standards for office-based procedures - Procedure documentation [Photograph of Company representative conducting training session] GREATER ACCESS TO ADVANCED MEDICAL IMPROVED PROCEDURAL COST-EFFECTIVENESS TECHNOLOGIES - Lower facility cost - State-of-the-art laser technologies - Lower personnel cost - Devices for minimally invasive surgery - Lower out-of-pocket expenditures for - Integrated medical systems delivered in patients office [Photograph of technician unloading medical equipment from van] </TABLE> * Photographs depict medical equipment leased to the Company. SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ----------------------------------------------- ---------------- 1991 1992 1993 1994 1995 1995 1996 ------ ------ ------ ------ ------- ------ ------ <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net revenues.................... $1,827 $3,148 $3,720 $5,262 $11,177 $4,854 $8,395 Operating expenses(1)........... 1,981 3,051 3,408 4,603 9,226 3,969 6,972 Depreciation and amortization... 193 283 333 293 719 265 653 Operating income (loss)......... (347) (186) (21) 365 1,232 621 770 Interest and other expense, net........................... 125 141 156 173 259 140 139 Net income (loss)............... (472) (353) (150) 192 578 285 369 Net income (loss) applicable to common stock.................. (472) (353) (225) 117 311 18 282 Pro forma net income applicable to common stock(2)............ -- -- -- -- 519 157 449 Pro forma earnings per share(2)...................... -- -- -- -- .09 .03 .07 Shares used in computing pro forma earnings per share(2)... -- -- -- -- 5,690 5,407 6,232 OPERATING DATA: Procedures serviced: Medical surgical.............. 5,036 8,242 8,494 9,656 19,509 8,736 12,690 Aesthetic elective............ 0 0 660 5,497 20,131 7,935 20,219 Physicians served in-office(3).................. 450 674 760 1,161 2,046 1,538 2,503 Mobile field units in service(4).................... 23 42 44 55 79 61 126 </TABLE> <TABLE> <CAPTION> AS OF JUNE 30, 1996 ------------------------ ACTUAL AS ADJUSTED(5) ------ -------------- <S> <C> <C> BALANCE SHEET DATA: Cash.................................................................. $1,432 $ 23,252 Working capital....................................................... 2,345 24,165 Total assets.......................................................... 8,931 30,751 Total debt and capital lease obligations.............................. 3,813 457 Convertible preferred stock........................................... 2 -- Total shareholders' equity............................................ 2,758 24,578 </TABLE> - --------------- (1) Operating expenses include salaries and benefits expense, selling, general and administrative expense and provision for uncollectible accounts. (2) Adjusted to give effect to the sale of the 2,000,000 shares of Common Stock offered hereby at an assumed offering price of $12.00 per share, the application of a portion of the estimated net proceeds therefrom to repay indebtedness and the conversion of the outstanding Convertible Preferred Stock into shares of Common Stock as if each had occurred on January 1, 1995. See "Use of Proceeds." (3) Number of physicians who have used the Company's services to perform an office-based procedure during the last six months of the period. (4) Number of mobile field units in service is as of end of period. (5) "As Adjusted" amounts reflect the sale of 2,000,000 shares of Common Stock offered hereby at an assumed offering price of $12.00 per share and the application of a portion of the estimated net proceeds therefrom to repay indebtedness. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001018980_costilla_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001018980_costilla_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION, FINANCIAL STATEMENTS AND OTHER DATA APPEARING ELSEWHERE IN THIS PROSPECTUS. THE PRO FORMA INFORMATION GIVES EFFECT TO THE CONVERSION OF COSTILLA FROM A LIMITED LIABILITY COMPANY TO A CORPORATION, CERTAIN MATERIAL ACQUISITIONS AND THE OFFERINGS AND THE APPLICATION OF THE ESTIMATED NET PROCEEDS THEREFROM. SEE "-- SIGNIFICANT ACQUISITIONS," "THE COMPANY -- CORPORATE REORGANIZATION," AND "USE OF PROCEEDS." AS USED HEREIN, REFERENCES TO THE COMPANY OR TO COSTILLA ARE TO COSTILLA ENERGY, INC. AND ITS SUBSIDIARIES. UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THE UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED. CERTAIN OIL AND GAS TERMS USED IN THIS PROSPECTUS ARE DEFINED IN THE "GLOSSARY" INCLUDED HEREIN. "ADJUSTED EBITDA," AS USED HEREIN, MEANS NET INCOME (LOSS), PLUS INTEREST, INCOME TAXES, DEPRECIATION, DEPLETION AND AMORTIZATION, EXPLORATION AND ABANDONMENT COSTS AND EXTRAORDINARY LOSS RESULTING FROM EXTINGUISHMENT OF DEBT. THE COMPANY Costilla is an independent energy company engaged in the exploration, acquisition and development of oil and gas properties. The Company's primary operations are in the Permian Basin area of Texas and New Mexico, the Gulf Coast and the Rocky Mountain regions. The Company's strategy focuses on increasing reserves through a targeted exploration program, the exploitation of its existing properties and selective property acquisitions. In addition, the Company recently acquired an interest in an entity which has a concession for the development of mineral interests in the Republic of Moldova, in Eastern Europe. The Company also has minor interests in the domestic gas gathering and transmission business. The Company's predecessor began operating in 1988 with the strategy of acquiring and exploiting undervalued oil and gas properties, and at December 31, 1992 had net proved reserves of 4.7 MMBOE. Since January 1, 1993, the Company has successfully closed seven transactions for an aggregate purchase price of approximately $101 million. As of April 1, 1996, the Company had total estimated net proved reserves of 16.5 Mmbbls of oil and 112.9 Bcf of gas, aggregating 35.3 MMBOE, with a PV-10 Value of approximately $179.5 million, assuming the 1996 Acquisition (as defined below) had occurred at April 1, 1996. The Company also has a substantial undeveloped acreage position consisting of 180,704 gross (165,166 net) acres at June 30, 1996. The Company has identified in excess of 185 drilling locations of which 64 are included in its proved reserves. Costilla has in-house exploration expertise which uses 3-D seismic technology as a primary tool to identify drilling opportunities and has experienced high rates of success in each of its first two major 3-D seismic drilling programs. Since 1994, the Company has drilled 37 wells based on these 3-D surveys, 31 of which have been productive. The Company has recently completed two additional 3-D surveys and intends to commence drilling on one of these acreage blocks in the second half of 1996. The Company currently plans to drill 63 wells through 1997 based on its 3-D surveys. Since 1993, Costilla has generated significant growth in reserves and production. The Company increased its estimated proved reserves from 6.0 MMBOE at December 31, 1993 to 35.3 MMBOE at April 1, 1996 (pro forma for the 1996 Acquisition), representing a compound annual growth rate of 114%. This reserve growth has been achieved at an average all-in finding cost of $3.60 per BOE over such period, a level which the Company believes is lower than industry averages. Concurrently, the Company increased its average net daily production from 827 BOE for the year ended December 31, 1993 to 10,231 BOE for the three months ended March 31, 1996 (pro forma for the 1996 Acquisition), representing a compound annual growth rate of 190%. BUSINESS STRATEGY The Company's strategy is to increase its oil and gas reserves, production and cash flow from operations through a two-pronged approach which combines an active exploration program using 3-D seismic and other technological advances with the acquisition and exploitation of producing properties. The Company seeks to reduce its operating and commodity risks by holding a geographically diverse portfolio of properties, the reserves attributable to which are approximately balanced between oil and gas. The Company also seeks to manage the elements of its business strategy through the operation of a significant portion of its properties, the use of a rate of return analysis and the direct marketing and hedging of its oil and gas production. The elements of the Company's strategy may be further described as follows: - EXPLORATION EFFORTS. The Company uses extensive geological and geophysical analysis to carefully focus its 3-D seismic surveys. This focus allows the Company to successfully direct the size and scope of its exploration program in order to improve the likelihood of success while managing overall exploration costs. The Company's exploration efforts are concentrated currently on known producing regions. The Company plans to drill 24 exploratory wells during the last half of 1996 and 36 exploratory wells in 1997. Capital budgeted for exploration activities is $8.1 million for the last six months of 1996 and $10.8 million for 1997. - EXPLOITATION ACTIVITIES. The Company is actively pursuing numerous exploitation opportunities within its existing properties, including areas where no proved reserves are currently assigned. Exploitation activities currently in progress include a carbon dioxide flood, recompletions, workovers, infill and horizontal drilling and a secondary recovery project. The Company's capital budget for such activities is $8.4 million for the last six months of 1996 and $9.2 million for 1997, which includes the drilling of 12 development wells in 1996 and 13 development wells in 1997. - PROPERTY ACQUISITIONS. The Company seeks to acquire producing properties where it has identified opportunities to increase production and reserves through both exploitation and exploration activities. The Company has increased the value of its acquisitions by aggressively managing the operations of existing proved properties and by successfully identifying and developing previously unproved reserves on acquired acreage. The Company seeks to acquire reserves which will fit its existing portfolio, are generally not being actively marketed and where a negotiated sale would be the method of purchase. The Company does not rely on major oil company divestitures or property auctions. - PROPERTY DIVERSIFICATION. The Company holds a portfolio of oil and gas properties located in the Permian Basin, the Gulf Coast and the Rocky Mountain regions. The Company believes that by conducting its activities in distinct regions it is able to reduce commodity price and other operational risks. The Company's Moldovan interest is an extension of this strategy and can be characterized by low initial costs, significant reserve potential and the availability of technical data that may be further developed by the Company. - CONTROL OF OPERATIONS. The Company prefers to operate and own the majority working interest in its properties. This allows the Company greater control over future development, drilling, completing and lifting costs and marketing of production. At April 1, 1996, the Company operated wells constituting approximately 72% of its total PV-10 Value (pro forma for the 1996 Acquisition). SIGNIFICANT ACQUISITIONS 1995 ACQUISITION. In a $46.6 million acquisition completed in June 1995, the Company acquired a group of oil and gas properties located in the Permian Basin, Gulf Coast and Rocky Mountain regions. At the date of acquisition, the net proved reserves included 7.1 Mmbbls of oil and 44.1 Bcf of gas, aggregating 14.4 MMBOE. From the date of acquisition until March 31, 1996, the Company produced 1.5 MMBOE from the acquired properties and sold a portion of the acquired properties for approximately $3.6 million. At April 1, 1996, the net proved reserves of the remaining properties were 13.4 MMBOE. The acquired properties also included 103,010 gross (93,787 net) undeveloped acres. 1996 ACQUISITION. In June 1996, the Company acquired a group of oil and gas properties located primarily in the Permian Basin and Gulf Coast regions for approximately $42.5 million. This acquisition included properties with net proved reserves at April 1, 1996 of 5.0 Mmbbls of oil and 33.5 Bcf of gas, aggregating 10.6 MMBOE. The acquired properties also included 42,855 gross (16,646 net) undeveloped acres and a pipeline located in Pennsylvania which had an allocated purchase price of $3.5 million. DRILLING ACTIVITIES Exploration efforts since January 1, 1996 include the drilling of eight wells located on the Company's Edwards/McElroy Ranch Prospect in the Permian Basin. While one of such wells is being drilled, the remaining seven wells have been completed as producers. Three of the productive wells have resulted in separate field discoveries which have confirmed the Company's seismic interpretation of a significant trend. Since beginning operations on this prospect, the Company has drilled 11 producing wells and one dry hole. As a result, the Company has identified up to 68 additional drilling locations, none of which are included in the Company's proved reserves. The Company has also continued drilling in the McGyver-Green Acres 3-D Prospect. Since commencing activity in this prospect in July 1994, the Company has drilled 17 wells, of which 14 have been successful. During June 1996, the average daily capacity from the producing wells in this prospect was approximately 83 BOE per well. The Company has identified 34 additional drilling locations in the McGyver-Green Acres Prospect, nine of which are included in the Company's proved reserves. The Company has also drilled and completed seven development wells in the Permian Basin and Gulf Coast regions since the beginning of 1996. Currently, the Company's principal exploitation activities include a carbon dioxide flood in the East Goldsmith Unit, infill drilling primarily in the Permian Basin and horizontal drilling in the Susan Peak Field. THE COMMON STOCK OFFERING <TABLE> <S> <C> Common Stock Offered by the Company............ 4,800,000 Shares(1) Common Stock to be Outstanding after the Offering...................................... 10,000,000 Shares(1) Concurrent Notes Offering...................... Concurrent with the Common Stock Offering, the Company is offering $100,000,000 of 10 1/4% Senior Notes due 2006. See "Notes Offering." The Notes Offering and the Common Stock Offering are each conditioned upon the consummation of the other. Use of Proceeds................................ To repay existing indebtedness, to pay certain costs incurred in connection with the Corporate Reorganization, and for general corporate purposes. See "Use of Proceeds." Nasdaq National Market Symbol.................. COSE </TABLE> - ------------------------ (1) Excludes 1,000,000 shares of Common Stock reserved for issuance under the Company's employee benefit plans. See "Executive Compensation and Other Information."
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+SUMMARY The following summary does not purport to be complete and is qualified in its entirety by the more detailed information and financial statements appearing elsewhere herein. Certain terms used in this summary are defined elsewhere herein. Century Bancorp, Inc. The Holding Company is a North Carolina corporation recently organized by the Board of Directors of Home Savings to acquire all of the capital stock that Home Savings will issue upon its conversion from the mutual to stock form of ownership. The conversion of Home Savings to stock form, the issuance of Home Savings' capital stock to the Holding Company, and the offer and sale of the Common Stock of the Holding Company are referred to in this Prospectus as the "Conversion." The Holding Company has not as yet engaged in any business. Upon completion of the Conversion, its business will initially consist solely of owning Home Savings, investing the proceeds of the Conversion that are retained by the Holding Company and holding the indebtedness to be outstanding from the ESOP. The Holding Company has received the approval of the Administrator and the Board of Governors of the Federal Reserve System (the "Federal Reserve") to acquire Home Savings. The executive office of the Holding Company is located at 22 Winston Street, Thomasville, North Carolina, and its telephone number is (910) 475-4663. Home Savings, SSB Home Savings is a North Carolina-chartered mutual savings bank headquartered in Thomasville, North Carolina and has been in operation since 1915. Home Savings has been a member of the Federal Home Loan Bank ("FHLB") system, and its deposits have been federally insured since the late 1950's. Home Savings' deposits are now insured by the Savings Association Insurance Fund (the "SAIF") of the FDIC to the maximum amount permitted by law. Home Savings conducts business through one full service office in Thomasville, North Carolina. Home Savings' primary market area consists of the communities within a 10-mile radius of its office, which includes portions of Davidson, Randolph and Guilford counties in North Carolina. At June 30, 1996, Home Savings had total assets of $81.3 million, net loans of $55.2 million, deposits of $69.7 million and retained earnings of $11.2 million. Home Savings is primarily engaged in the business of attracting deposits from the general public and using such deposits to make mortgage loans secured by one-to-four family residential real estate located in Home Savings' primary market area. Home Savings also makes home equity line of credit loans, multi-family residential loans, commercial loans, construction loans, loans secured by deposit accounts, and various types of consumer loans. Home Savings is a portfolio lender in that it does not originate its fixed or adjustable rate loans for sale in the secondary market. See "BUSINESS OF HOME SAVINGS." Home Savings has been and intends to continue to be a community-oriented financial institution offering a variety of financial services to meet the needs of the communities it serves. Highlights of Home Savings' operations include: . Profitability. For the fiscal years ended June 30, 1996, 1995 and 1994, Home Savings had net income of $677,000, $921,000, and $1.2 million, respectively, and a return on average assets of 0.86%, 1.25%, and 1.59%, respectively. Future profitability of Home Savings will be affected by changes in market interest rates and other factors. See "RISK FACTORS." . Capital Position. As of June 30, 1996, Home Savings' ratios of Tier I capital to total assets and total capital to risk-weighted assets were 13.79% and 27.73%, respectively, which substantially exceeded the FDIC's requirements. On such date, Home Savings' ratio of net worth to total assets, calculated under the Administrator's regulations, was 14.44%, which substantially exceeded the North Carolina requirement. See "SUPERVISION AND REGULATION-- Regulation of Home Savings--Capital Requirements Applicable to Home Savings." . Emphasis on One- to Four-Family Residential Lending. Historically, Home Savings has been predominantly a one-to-four family residential lender. As of June 30, 1996, 75.4% of Home Savings' loan portfolio, before net items, was composed of permanent one-to-four family residential loans and 8.0% of its loan portfolio, before net items, was composed of construction and home equity loans. . Asset Quality. On June 30, 1996 and June 30, 1995, Home Savings' ratio of nonperforming assets to total assets was 0.76% and 1.21%, respectively. See "BUSINESS OF HOME SAVINGS -- Lending Activities-- Nonperforming Assets and Asset Classification." . Control of General and Administrative Expenses. Home Savings strives to control its non- interest expenses. For the years ended June 30, 1996 and June 30, 1995, Home Savings' ratio of non- interest expense to average total assets was 1.49% and 1.33%, respectively. . Interest Rate Risk. Home Savings has a significant amount of interest rate risk; however, management believes its interest rate risk is at an acceptable level given Home Savings' capital position and historical results of operations. As of June 30, 1996, Home Savings' one- year interest sensitivity gap was a negative 48.86% of total interest- earning assets, and its three year cumulative interest sensitivity gap was a negative 49.45%. Other modeling used by Home Savings indicates that, as of June 30, 1996, its net portfolio value (present values of cash flows from assets, liabilities and off-balance sheet items) would decrease by 27% in the event of an instantaneous and permanent 200 basis point increase in market interest rates and would increase by 25% in the event of a 200 basis point decrease in market interest rates. Such modeling also indicates that, as of June 30, 1996, such a 200 basis point increase in market interest rates would result in a 17% decrease in net interest income and that a 200 basis point decrease in such rates would result in a 17% increase in net interest income. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Asset/Liability Management." . Low Loan Growth. At June 30, 1996, 1995 and 1994, Home Savings' net loans receivable were $55.2 million, $54.0 million and $53.8 million. During recent periods, Home Savings loan growth has been lower than the average for comparable thrift institutions and has not matched its growth in deposits. . Unpredictability of Earnings. The earnings of financial institutions are significantly impacted by changes in noninterest income and by the interest sensitivity of its assets and liabilities. As is described above, Home Savings' asset/liability structure presents a significant amount of interest rate risk, and Home Savings' earnings have been reduced during periods of increasing interest rates and are likely to continue to be significantly and negatively impacted if interest rates increase. Home Savings has not established a consistent source of noninterest income to stabilize its net income. As a result, Home Savings earnings are significantly tied to market interest rates and are, therefore, not highly predictable. . Effect of Recent SAIF Assessment. As part of a comprehensive continuing appropriations bill passed by the United States Congress and signed by the President on September 30, 1996, SAIF-insured financial institutions such as Home Savings will be required to pay a special one-time assessment to recapitalize the SAIF. The assessment, estimated to equal 65.7 cents per each $100 of insured deposits, is payable prior to December 1996. The assessment to be paid by Home Savings, estimated at $409,000, was accrued as an expense during the quarter ended September 30, 1996. As a result of this expense, Home Savings experienced a net loss during that quarter. See "RECENT DEVELOPMENTS," MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT DEVELOPMENTS" and "RISK FACTORS -- Recapitalization of SAIF, its Impact on SAIF Premiums and One-Time Recapitalization Fee." The Conversion Home Savings was organized and has operated as a traditional savings institution. It recognizes that the banking and financial services industries are in the process of fundamental changes, reflecting changes in the local, national and international economies, technological changes and changes in state and federal laws. As a result, for several years Home Savings has been studying the environment in which it operates and its strategic options. As a result of its study of its strategic options, Home Savings adopted the Plan of Conversion, which provides for conversion of the bank from a North Carolina-chartered mutual savings bank to a North Carolina- chartered stock savings bank. Home Savings believes that converting the bank from the mutual to stock form and organizing the Holding Company will provide increased flexibility for Home Savings and the Holding Company to react to changes in their operating environment. Consummation of the Conversion is contingent upon receipt of the approvals of the Administrator and the Federal Reserve which are necessary for the Holding Company to acquire Home Savings and the approvals of the FDIC and the Administrator which are necessary for Home Savings to convert from mutual to stock form. The Administrator has conditionally approved the Conversion and the Holding Company's acquisition application, subject to approval by Home Savings' members and satisfaction of certain other conditions. The Federal Reserve has conditionally approved the Holding Company's acquisition application, subject to the satisfaction of certain conditions. The FDIC has issued a notice of non- objection with respect to the Conversion, subject to certain conditions. See "THE CONVERSION -- General." If the Conversion is not approved by the members at the Special Meeting or an adjournment thereof, no Common Stock will be issued, Home Savings will remain a North Carolina-chartered mutual savings bank, all subscription funds will be returned promptly plus interest at Home Savings' passbook rate, and all deposit withdrawal authorizations will be cancelled without any action on the part of subscribers or purchasers. The existing management of Home Savings and the Holding Company believes that it will be in the best interests of Home Savings, the Holding Company and the stockholders of the Holding Company for the Holding Company to remain an independent financial institution. Assuming the consummation of the Conversion, the Holding Company and Home Savings intend to pursue the business strategy described in this Prospectus with the goal of enhancing shareholder value over the long term. Neither the Holding Company nor Home Savings has any existing plan to consider any business combination, and neither company has any agreement or understanding with respect to any possible business combination. The Offerings Pursuant to the Plan of Conversion, between 261,800 shares and 407,330 shares of Common Stock are being offered by the Holding Company at the price of $50.00 per share in the Subscription Offering to the following persons in the following order of priority: (i) Home Savings' depositors as of March 31, 1995 who had aggregate deposits at the close of business on such date of at least $50 ("Eligible Account Holders"); (ii) Home Savings' Employee Stock Ownership Plan (the "ESOP"); (iii) Home Savings' depositors as of September 30, 1996 (the "Supplemental Eligibility Record Date"), who had aggregate deposits at the close of business on such date of at least $50 ("Supplemental Eligible Account Holders"); (iv) Home Savings' depositor and borrower members as of October 25, 1996, who are not Eligible Account Holders or Supplemental Eligible Account Holders ("Other Members"); and (v) directors, officers and employees of Home Savings who are not Eligible Account Holders, Supplemental Eligible Account Holders or Other Members. Beneficial owners of individual retirement accounts ("IRAs"), Keogh savings accounts and other similar retirement accounts have been deemed to be holders of such accounts for purposes of the exercise of Subscription Rights. Subscription Rights received in any of the foregoing categories will be subordinate to the Subscription Rights received by those in a prior category. See "THE CONVERSION -- Subscription Offering." Shares of Common Stock not subscribed for in the Subscription Offering will be offered in a Community Offering to members of the general public, with priority given to natural persons or trusts of natural persons who are residents of the Local Community, including IRAs, Keogh accounts and similar retirement accounts established for the benefit of natural persons who are residents of the Local Community. The Holding Company and Home Savings have the absolute right to reject orders in the Community Offering in whole or in part. See "THE CONVERSION -- Community Offering." If there is a Community Offering, it is anticipated that all shares of Common Stock not purchased in the Community Offering will be offered for sale by the Holding Company to the general public in the Syndicated Community Offering. See "THE CONVERSION -- Syndicated Community Offering." The Subscription Offering and Subscription Rights in the Subscription Offering expire at the Expiration Time, which is 12:00 Noon., Eastern Time, on _______________, 1996, unless extended. The Community Offering, if any, may commence at any time after the commencement of the Subscription Offering and may terminate at the Expiration Time or at any time thereafter, but not later than _________________, 1996, unless extended with the approval of the Administrator. Stock Purchase Limitations The maximum aggregate number of shares of Common Stock for which any (i) person or entity (other than the ESOP), (ii) persons or entities exercising Subscription Rights through a single account or (iii) persons acting in concert, may subscribe in the Offerings is 5,000 shares. In addition, no person or entity, or group of persons or entities acting in concert, together with any associates (as defined in the Plan of Conversion), may subscribe for more than 7,000 shares of Common Stock sold in the Conversion. However, Home Savings' Board of Directors has the right, at any time prior to completion of the Conversion, to decrease the 5,000 and 7,000 share maximum purchase limitations to an amount not less than 1% of the shares issued in the Conversion or increase such 5,000 and 7,000 share limitations to an amount up to 5% of the shares issued in the Conversion. Any decrease or increase in the maximum purchase limitation will be without notice to, or resolicitation of, subscribers and without a resolicitation of proxies in connection with the Special Meeting. The ESOP may purchase up to 8% of the shares of Common Stock issued in the Conversion (between 20,944 and 28,336 shares assuming the issuance of between 261,800 and 354,200 shares). If because there is an oversubscription or for any other reason the ESOP is unable to purchase in the aggregate up to 8% of the shares of Common Stock issued in the Conversion, it is expected that the ESOP will purchase shares of Common Stock in the open market so that after such purchases a number of shares of Common Stock up to 8% of the number of shares issued in the Conversion will have been acquired by the ESOP. See "RISK FACTORS -- Cost of ESOP." No person or entity may subscribe for less than 10 shares of Common Stock, or an aggregate dollar amount of less than $500. The term "acting in concert" is defined in the Plan to mean: (i) knowing participation in a joint activity or interdependent conscious parallel action towards a common goal, whether or not pursuant to an express agreement, with respect to the purchase, ownership, voting or sale of Common Stock; or (ii) a combination or pooling of voting or other interests in the securities of the Holding Company for a common purpose pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise. The Holding Company and Home Savings may presume that certain persons are acting in concert based upon, among other things, joint account relationships and the fact that such persons have filed joint Schedules 13D with the SEC with respect to other companies. The term "associate" of a person is defined in the Plan to mean: (i) any corporation or organization (other than Home Savings, the Holding Company or any of their majority-owned subsidiaries of which such person is an officer or partner or is, directly or indirectly, the beneficial owner of 10% or more of any class of equity securities; (ii) any trust or other estate in which such person has a substantial beneficial interest or as to which such person serves as trustee or in a similar fiduciary capacity (excluding tax-qualified employee plans and charitable trusts which are exempt from federal taxation pursuant to Section 501(c)(3) of the Internal Revenue Code, as amended); and (iii) any relative or spouse of such person, or any relative of such spouse, who either has the same home as such person or who is a director or officer of Home Savings, the Holding Company or any of their parents or subsidiaries. See "THE CONVERSION -- Minimum and Maximum Purchase Limitations." Subscription Rights; Purchase of Shares Subscription Rights are exercisable and purchases may be made in the Offerings only by returning the original of the stock order form accompanying this Prospectus (the "Stock Order Form") properly completed with full payment for the aggregate dollar amount of Common Stock desired. Stock Order Forms and required payments for purchases in the Subscription Offering must be received prior to the Expiration Time. Copies of the Stock Order Form, including facsimile copies, will not be accepted. Stock Order Forms and required payments for purchases in the Community Offering must be delivered prior to the time the Community Offering terminates, which may be at the Expiration Time or at any time thereafter (but not later than ______________, 1996). Payment may be made in cash (if delivered in person to any office of Home Savings), by check, bank draft, negotiable order of withdrawal or money order, or by authorization of withdrawal from deposit accounts maintained with Home Savings, other than negotiable order of withdrawal or other demand deposit accounts. Stock Order Forms directing that payment for shares be made by authorization of withdrawal will be accepted only if, at the time the Stock Order Form is received, there exists sufficient funds in the account from which withdrawal is authorized to pay the full purchase price for the number of shares ordered. Payment may not be made by wire transfer. Subscription payments made in cash, by check, bank draft, negotiable order of withdrawal or money order will earn interest at Home Savings' passbook savings rate from the date payment in good funds is received by Home Savings until the completion or termination of the Conversion or, in the case of an order submitted in the Community Offering, until it is determined that such order cannot or will not be accepted. Subscription payments made by authorization of withdrawal from a deposit account at Home Savings will continue to earn interest at the applicable contractual rate until the Conversion is completed or terminated; such funds will be otherwise unavailable to the depositor. Payment for Common Stock may be made from funds in an IRA, Keogh or similar account at Home Savings only if the beneficial owner of such account directs Home Savings to transfer that account to a self-directed account in the name of an independent trustee. Persons wishing to use their Home Savings IRA's to purchase shares of Common Stock must visit the Stock Information Center on or before _____________, 1996 in order for the necessary paperwork for such purchases to be completed and executed prior to the Expiration Time. No early withdrawal penalties will be incurred in connection with payments made through authorization of withdrawals from certificate accounts, including IRA, Keogh and similar retirement accounts. However, if after such withdrawal the applicable minimum balance requirement ceases to be satisfied, such certificate account will be cancelled and the remaining balance thereof will earn interest at Home Savings' passbook savings rate. After amounts submitted for payment are applied to the purchase price for shares sold, they will no longer earn interest, and they will not be insured by the FDIC or any other government agency or other entity. THE CONVERSION -- Exercise of Subscription Rights and Purchases in the Community Offering." Non-transferability of Subscription Rights The Subscription Rights granted under the Plan of Conversion are non-transferable. Subscription Rights may be exercised only by the person to whom they are issued and only for his or her own account. Persons exercising Subscription Rights are required to certify that they are purchasing shares for their own accounts within the purchase limitations set forth in the Plan of Conversion and that they have no agreement or understanding for the sale or transfer of such shares. See "THE CONVERSION -- Certain Restrictions on Transfer of Subscription Rights; False or Misleading Order Forms." Appraisal The Plan of Conversion requires that the aggregate purchase price of the Common Stock be based upon an independent valuation of the estimated aggregate pro forma market value of the Holding Company and Home Savings. JMP Financial, Inc., of Grosse Pointe Park, Michigan ("JMP Financial"), an independent financial consulting firm, has advised Home Savings and the Holding Company that in its opinion, at October 22, 1996, the Valuation Range of the aggregate estimated pro forma market value of the Holding Company and Home Savings was from $13,090,000 to $17,710,000. The appraisal will be reviewed and, if appropriate, revised by JMP Financial upon conclusion of the Offerings. The appraisal by JMP Financial is not intended and should not be construed as a recommendation of any kind as to the advisability of purchasing the Common Stock. See "MARKET FOR COMMON STOCK," "PRO FORMA DATA" and "THE CONVERSION --Purchase Price of Common Stock and Number of Shares Offered." Stock Pricing and Number of Shares to be Offered The purchase price of the Common Stock offered in the Subscription Offering and the price at which the Common Stock is sold in the Community and Syndicated Community Offerings, if any, will be $50.00 per share. The aggregate dollar amount of Common Stock that may be sold in the Conversion will be determined by the Board of Directors of Home Savings and the Holding Company based upon the independent appraisal of the pro forma market value of the Holding Company and Home Savings prepared by JMP Financial. Depending on market and financial conditions following commencement of the Subscription Offering, the number of shares offered and sold in the Conversion may be increased or decreased. With the consent of the Administrator and the FDIC and in order to reflect changes in market and financial conditions following commencement of the Subscription Offering, the aggregate purchase price of the shares of Common Stock issued in the Conversion may be increased, without any solicitation of subscriptions or right to cancel, rescind or change subscription orders, to up to 15% above the maximum of the Valuation Range. However, the aggregate dollar amount of Common Stock that may be sold in the Conversion will not be more than $20,366,500 or less than $13,090,000 without a resolicitation of subscribers. Any change in the total dollar amount of the Offerings outside of the current Valuation Range will be subject to the receipt of an updated appraisal confirming such valuation and regulatory approvals. See "THE CONVERSION -- Purchase Price of Common Stock and Number of Shares Offered." Use of Proceeds The net proceeds from the sale of the Common Stock in the Conversion, including shares purchased by the ESOP with funds loaned by the Holding Company, are estimated to be between $12,375,000 and $16,863,000, depending upon the actual expenses of the Conversion and other factors. See "PRO FORMA DATA." The Holding Company intends to use a portion of the net proceeds of the Offerings (estimated between $1,047,200 and $1,416,800 assuming the ESOP's purchase of between 20,944 and 28,336 shares at $50.00 per share) to fund the loan made to the ESOP to purchase shares of Common Stock in the Conversion. After deducting the amount of such loan from the proceeds, the Holding Company is expected to retain approximately 50% of the remaining net proceeds from the issuance of the Common Stock. The Holding Company will initially invest these proceeds primarily in interest-earning deposits, U.S. government, federal agency and other marketable securities and mortgage-backed securities. See "USE OF PROCEEDS." The remainder of the net proceeds from the sale of the Common Stock will be paid by the Holding Company to Home Savings in exchange for all of the capital stock of Home Savings. The net proceeds paid to Home Savings will become part of Home Savings' general funds, and will initially be invested in mortgage and other loans, mortgage-backed securities and investments consisting primarily of U.S. government and federal agency obligations, interest-earning deposits and other marketable securities in accordance with Home Savings' lending and investment policies. Net proceeds will also be used for other general corporate purposes. Home Savings and the Holding Company may consider opening one or more branch offices or acquiring other financial institutions in its primary market area and other nearby communities, and such proceeds could be used for such purposes. However, the Holding Company and Home Savings have no current plans to open any additional office or to acquire any other financial institution. If Home Savings' proposed Management Recognition Plan (the "MRP") is approved by the stockholders of the Holding Company, the MRP will acquire a number of shares of Common Stock equal to 4% of the number of shares issued in the Conversion. See "MANAGEMENT OF HOME SAVINGS -- Proposed Management Recognition Plan." Such shares may either be acquired in the open market or acquired through the Holding Company's issuance of authorized but unissued shares. In either event, it is expected that the MRP will acquire such shares reasonably promptly after the MRP is approved by the stockholders. In the event shares are acquired in the open market, the funds for such purchase may be provided by Home Savings from the proceeds of the Conversion. It is estimated that between 10,472 and 14,168 shares will be acquired by the MRP, assuming the issuance of between 261,800 and 354,200 shares in the Conversion. If all such shares were acquired by the MRP in the open market, and if such shares were acquired at a price of $50.00 per share, Home Savings would contribute between $523,600 and $708,400, respectively, to the MRP for this purpose. Additional shares would be acquired if the number of shares issued in the Conversion exceeds 354,200, and the price per share paid by the MRP could be more or less than $50.00 per share, which would change the total contribution to the MRP accordingly. See "RISK FACTORS -- Cost and Possible Dilutive Effect of the MRP and Stock Option Plan" and "MANAGEMENT OF HOME SAVINGS -- Proposed Management Recognition Plan." If the Holding Company's Stock Option Plan and Trust (the "Stock Option Plan") is approved by the stockholders of the Holding Company, the Stock Option Plan could acquire in the open market a number of shares equal to 10% of the number of shares issued in the Conversion, which shares will be held to satisfy options granted under such plan. Such shares could be acquired after options are granted and prior to the time options vest under the Stock Option Plan. To the extent the Stock Option Plan does not acquire sufficient shares in the open market to satisfy options granted under the Stock Option Plan, the Holding Company will reserve authorized but unissued shares for this purpose. See "MANAGEMENT OF HOME SAVINGS -- Proposed Stock Option Plan." The funds for any purchases in the open market may be provided by the Holding Company or Home Savings from the proceeds of the Conversion. It is estimated that between 26,180 and 35,420 shares will be acquired by the Stock Option Plan in the open market and/or reserved for issuance by the Holding Company, assuming the issuance of between 261,800 and 354,200 shares in the Conversion. If shares are acquired in the open market, the Holding Company or Home Savings would contribute between $1,309,000 and $1,771,000, respectively, to the Stock Option Plan for this purpose, assuming such shares are acquired at a price of $50.00 per share. Additional shares would be acquired if the number of shares issued in the Conversion exceeds 354,200, and the price could be more or less than $50.00 per share, which would change the contribution to the Stock Option Plan accordingly. See "RISK FACTORS -- Cost and Possible Dilutive Effect of the MRP and Stock Option Plan" and "MANAGEMENT OF HOME SAVINGS -- Proposed Stock Option Plan." Dividends Following the Conversion, the Holding Company currently expects to pay quarterly cash dividends on the Common Stock at a rate to be determined. In addition, the Holding Company may determine from time to time that it is prudent to pay special nonrecurring cash dividends. Payment of dividends will be subject to determination and declaration by the Holding Company's Board of Directors. The Board of Directors will periodically review its dividend policy in view of the operating results and financial condition of the Holding Company and Home Savings, net worth and capital requirements, regulatory restrictions, tax consequences, industry standards, and general economic conditions, and it will authorize cash dividends to be paid if it deems such payment appropriate and in compliance with applicable law. There can be no assurance that dividends will in fact be paid on the Common Stock or that, if paid, such dividends will not be reduced or eliminated in future periods. See "DIVIDEND POLICY." In connection with the Conversion, Home Savings has agreed with the FDIC that, within the first year after completion of the Conversion, neither the Holding Company nor Home Savings will pay any dividend or make any distribution that represents, or is characterized as, or is treated for income tax purposes as a return of capital. The ability of the Holding Company to pay dividends may be dependent upon the Holding Company's receipt of dividends from Home Savings. Home Savings' ability to pay dividends is restricted. See "SUPERVISION AND REGULATION -- Regulation of Home Savings -- Restrictions on Dividends and Other Capital Distributions." In addition, see "TAXATION" for a discussion of federal income tax provisions that may limit the ability of Home Savings to pay dividends to the Holding Company without incurring a recapture tax. Market for Common Stock Neither the Holding Company nor Home Savings has ever issued stock before and, due to the relatively small size of the Offerings, it is unlikely that an active and liquid trading market will develop. Upon the consummation of the Conversion, the Holding Company will review the eligibility of the Common Stock for quotation on the Nasdaq SmallCap Market. In the event that the Common Stock is eligible for quotation on the Nasdaq SmallCap Market, the Holding Company will apply to have the Common Stock quoted on the Nasdaq SmallCap Market. There can be no assurance, however, that any such application will be approved or that the Common Stock will be quoted on the Nasdaq SmallCap Market. If the Common Stock is quoted on the Nasdaq SmallCap Market, Trident Securities intends to act as a market maker and to encourage at least one other market maker to make a market in the Common Stock. In the event the Common Stock does not qualify for quotation on the Nasdaq SmallCap Market, the Holding Company intends to list the Common Stock over-the-counter through the National Daily Quotation System "Pink Sheets" published by the National Quotation Bureau, Inc., and the Holding Company intends to request that Trident Securities undertake to match offers to buy and offers to sell the Common Stock. There can be no assurance that timely or accurate quotations will be available in the "Pink Sheets." In addition, the existence of a public trading market will depend upon the presence in the market of both willing buyers and willing sellers at any given time. Due to the small number of shares of Common Stock being offered in the Conversion and the concentration of ownership, it is unlikely that an active or liquid trading market for the Common Stock will develop and be maintained. Further, the absence of an active and liquid trading market may make it difficult to sell the Common Stock and may have an adverse effect on the price of the Common Stock. Purchasers should consider the potentially illiquid and long-term nature of their investment in the shares offered hereby. See "MARKET FOR COMMON STOCK." Stock Ownership by Management The directors and executive officers of the Holding Company and of Home Savings and their associates currently anticipate subscribing for Common Stock in the aggregate amount of $1,215,000, or 24,300 shares. As a result, such persons anticipate subscribing for 9.28% to 6.86% of the shares of Common Stock issued in the Conversion based upon the minimum and maximum of the Valuation Range, respectively. See "ANTICIPATED STOCK PURCHASES BY MANAGEMENT." In addition, it is expected that the ESOP will subscribe for 8% of the shares of Common Stock issued in the Conversion (between 20,944 and 28,336 shares, assuming the issuance of between 261,800 and 354,200 shares). See "MANAGEMENT OF HOME SAVINGS -- Employee Stock Ownership Plan." It is expected that directors and certain employees of the Holding Company and Home Savings will also receive restricted stock grants under the MRP for a number of shares of Common Stock equal to 4% of the number of shares issued in the Conversion and will receive options under the Stock Option Plan to purchase a number of shares of Common Stock equal to 10% of the number of shares issued in the Conversion, if such plans are approved by the stockholders of the Holding Company at a meeting of stockholders following the Conversion. See "-- Benefits to Directors and Officers" and "MANAGEMENT OF HOME SAVINGS --Proposed Management Recognition Plan" and "-- Proposed Stock Option Plan." If (i) the Stock Option Plan is approved by the stockholders of the Holding Company within one year after the Conversion and all of the stock options which could be granted to directors and executive officers under the Stock Option Plan are granted and exercised or the shares for such options are acquired by the Stock Option Plan and all option shares are acquired in the open market, (ii) the MRP is approved by the stockholders of the Holding Company within one year after the Conversion, all of the MRP shares which could be granted to directors and executive officers are granted and issued and all such shares are acquired in the open market, (iii) the ESOP acquires 8% of the shares issued in the Conversion and none of such shares are allocated, and (iv) the Holding Company did not issue any additional shares of its Common Stock, the shares held by directors and executive officers and their associates as a group, including (a) shares purchased outright in the Conversion, (b) shares purchased by the ESOP, (c) shares purchased pursuant to the Stock Option Plan and (d) shares granted under the MRP, would give such persons effective control over as much as 30.58% or 28.16%, at the minimum and maximum of the Valuation Range, respectively, of the Common Stock issued and outstanding. Benefits to Directors and Executive Officers In connection with the Conversion, certain benefits will be provided to directors, officers and employees of Home Savings. Employment Agreement. In connection with the Conversion, Home Savings expects to enter into an employment agreement with James G. Hudson, Jr., President, Chief Executive Officer and Treasurer. The employment agreement with Mr. Hudson provides for an initial annual salary of $93,600. See "MANAGEMENT OF HOME SAVINGS -- Employment Agreement." In addition, Mr. Hudson participates in a bonus compensation plan pursuant to which he received $10,283, $15,861 and $18,909 in bonus compensation for fiscal years 1996, 1995 and 1994, respectively. Mr. Hudson, along with all other employees, is also eligible to receive holiday bonuses as declared by Home Savings' Board of Directors. During the fiscal years ended June 30, 1996, 1995 and 1994, Home Savings' employees have received holiday bonuses equal to two weeks salary. See "MANAGEMENT OF HOME SAVINGS -- Bonus Compensation." Special Termination Agreements. In connection with the Conversion, the Holding Company expects to enter into Special Termination Agreements with John E. Todd, Vice President, and Drema A. Michael, Secretary and Assistant Treasurer. The Special Termination Agreements provide for the payment to such officers of an amount equal to two times their salary and bonuses for the most recently completed calendar year if, within two years after a change in control, the officer is terminated without cause or if the officer terminates their employment after certain changes in their employment circumstances. If a change in control and such a termination occurred during calendar year 1996, Mr. Todd and Ms. Michael would be entitled to receive $121,654 and $114,394, respectively, under such agreements. See "MANAGEMENT OF HOME SAVINGS -- Special Termination Agreements." Restricted Stock Grants. Pursuant to the MRP, which is expected to be adopted by the Boards of Directors of the Holding Company and Home Savings, directors and certain employees of Home Savings could receive restricted stock grants of a number of shares of Common Stock equal to 4% of the shares issued in the Conversion (between 10,472 and 14,168 shares, assuming the issuance of between 261,800 and 354,200 shares). Assuming that the shares issued pursuant to the MRP had a value of $50.00 per share, such shares would have a value of between $523,600 and $708,400. Under applicable regulations, if the proposed MRP is submitted to and approved by the stockholders of the Holding Company within one year after consummation of the Conversion, (i) no employee of Home Savings (including Mr. Hudson, Mr. Todd and Ms. Michael) could receive more than 25% of the shares issued under the MRP, or 3,542 shares, assuming the issuance of 354,200 shares in the Conversion, (ii) the four non- employee directors of Home Savings could receive restricted stock grants for an aggregate of not more than 20% of the shares issued under the MRP, or 2,833 shares, assuming the issuance of 354,200 shares in the Conversion and (iii) none of the four non-employee directors of Home Savings could receive individually more than 5% of the shares issued under the MRP, or 708 shares, assuming the issuance of 354,200 shares in the Conversion. Assuming the MRP shares had a value of $50.00 per share, 3,542 shares would have a value of $177,100, and 2,833 shares would have a value of $141,650 and 708 shares would have a value of $35,400. If the MRP is submitted to and approved by the Holding Company's stockholders more than one year after consummation of the Conversion, the regulatory percentage limitations set forth above would not apply. Shares granted under the MRP will be forfeited unless recipients of grants satisfy certain vesting requirements, and the MRP will only be effective if approved by the stockholders of the Holding Company at a meeting of stockholders to be held no sooner than six months following the Conversion. Recipients of restricted stock under the MRP will not have to pay for their restricted shares. See "MANAGEMENT OF HOME SAVINGS -- Proposed Management Recognition Plan." Stock Options. Pursuant to the Stock Option Plan which is expected to be adopted by the Boards of Directors of the Holding Company and Home Savings, directors and certain employees of Home Savings could receive options to purchase a number of shares of Common Stock equal to 10% of the shares issued in the Conversion (between 26,180 and 35,420 shares, assuming the issuance of between 261,800 and 354,200 shares). Under applicable regulations, if the proposed Stock Option Plan is submitted to and approved by the stockholders of the Holding Company within one year after consummation of the Conversion, (i) no employee of Home Savings (including Mr. Hudson, Mr. Todd and Ms. Michael) could receive more than 25% of the options issued under the Stock Option Plan, or options to purchase 8,855 shares, assuming the issuance of 354,200 shares in the Conversion, (ii) the four non-employee directors of Home Savings could receive not more than 20% of the options issued under the Stock Option Plan, or options to purchase 7,084 shares, assuming the issuance of 354,200 shares in the Conversion, and (iii) none of the four non-employee directors of Home Savings could receive individually more than 5% of the options issued under the Stock Option Plan, or options to purchase 1,771 shares, assuming the issuance of 354,200 shares in the Conversion. If the Stock Option Plan is submitted to and approved by the Holding Company's stockholders more than one year after consummation of the Conversion, the regulatory percentage limitations set forth above would not apply. Options granted under the Stock Option Plan will be forfeited unless recipients satisfy certain vesting requirements. The Stock Option Plan will only be effective if approved by the stockholders of the Holding Company at a meeting of stockholders to be held no sooner than six months following the Conversion. The exercise price of the options will be the fair market value of the Common Stock at the time the options are granted (which will be after the Stock Option Plan is approved by the Holding Company's stockholders), and the options will have terms of 10 years or less. Recipients of options under the Stock Option Plan will not have to pay for the options issued to them. See "MANAGEMENT OF HOME SAVINGS -- Proposed Stock Option Plan." ESOP. In connection with the Conversion, Home Savings has established the ESOP. As part of the Conversion, the ESOP intends to borrow funds from the Holding Company and to use such funds to purchase 8% of the shares of Common Stock to be issued in the Conversion, estimated to be between 20,944 and 28,336 shares, assuming the issuance of between 261,800 and 354,200 shares. See "MANAGEMENT OF HOME SAVINGS -- Employee Stock Ownership Plan." Income Tax Consequences of Subscription Rights If the Subscription Rights granted in connection with the Conversion are deemed to have an ascertainable value, receipt of such rights will be taxable to recipients who exercise such Subscription Rights, either as ordinary income or capital gain, in an amount not in excess of such value. Whether such Subscription Rights are considered to have any ascertainable value is an inherently factual determination. Home Savings has received an opinion from JMP Financial stating that the Subscription Rights do not have any ascertainable value. The opinion of JMP Financial is not binding on the Internal Revenue Service ("IRS"). See "THE CONVERSION -- Income Tax Consequences." Anti-Takeover Provisions The Articles of Incorporation and Bylaws of the Holding Company and Home Savings contain certain restrictions that are intended to discourage non-negotiated attempts to acquire control of the Holding Company or Home Savings. The Board of Directors of the Holding Company believes that these provisions encourage potential acquirors to negotiate directly with the Board of Directors. However, these provisions may discourage an attempt to acquire control of the Holding Company which a majority of the stockholders might deem to be in their best interests or in which they might receive a premium over the then market price of their shares. These provisions may also render the removal of a director or the entire Board of Directors of the Holding Company more difficult and may deter or delay changes in control which have not received the requisite approval of the Holding Company's Board of Directors. Other factors, such as voting control of directors and officers and agreements with employees, may also have an anti-takeover effect. See "RISK FACTORS -- Anti-Takeover Considerations" and "ANTI- TAKEOVER PROVISIONS AFFECTING THE HOLDING COMPANY AND HOME SAVINGS."
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Financial Statements and Notes thereto appearing elsewhere in this Prospectus. The shares of Common Stock offered hereby include a high degree of risk. Investors should carefully consider the information set forth under the heading "Risk Factors." THE COMPANY CyberMedia is a leading provider of automatic service and support software products for Windows-based personal computer ("PC") users. The Company's First Aid products enable PC users to diagnose and resolve problems automatically without relying on costly and increasingly scarce technical support resources. To date, the Company has sold over one million units of its First Aid family of products. The Company's latest product, Oil Change(released in a preproduction version ("beta") in June 1996), is designed to offer PC users a one-stop solution for automatically updating their software applications and device drivers over the Internet. In today's typical Windows-based PC configuration, the integration of a wide range of hardware and software components from different vendors has resulted in an increase in both the number and types of system errors and technical difficulties. PC users and software and hardware vendors share a common need for the timely resolution of technical support problems. These technical support problems are compounded by the complexity of today's PC environment and a decline in the average technical sophistication of PC users. Dataquest estimates that approximately 200 million calls are expected to be received at technical support centers nationwide in 1996, resulting in expenditures of nearly $4 billion. In response to cost pressures and an often unmanageable level of technical support calls, many software and hardware vendors are scaling back or completely eliminating the technical support that they once provided free of charge. The Company has developed an innovative, vendor-neutral, automated approach to technical support that enables the Company to deliver among the most comprehensive and easy to use software support solutions available today for Windows-based PC users. The Company's products are based on its scalable ActiveHelp architecture that allows for the support of a broad range of PC products and related problems and enables the Company's products to be regularly and automatically updated through the Internet. The Company's objective is to capitalize on the growing need for technical support by being first to market with innovative products and product upgrades that leverage the Company's proprietary technology and incorporate feedback from its extensive user base. The Company's First Aid products utilize a knowledge base of general and system-specific information supporting a wide range of software applications, multimedia cards, modems, video cards and networks that, in the aggregate, resolve over 10,000 potential combinations of problems. The Company has introduced several versions of First Aid, including First Aid 95 and First Aid 95 Deluxe in September 1995 and March 1996, respectively, for the retail distribution channels and First Aid 95 Deluxe, Network Version in June 1996 for the corporate market. The First Aid title ranked in the top ten of all Windows 95 business software applications sold in the United States (by number of units) in each month from November 1995 to July 1996 (PC Data). The Company believes that the Internet is emerging as a medium for vendors to quickly and cost-effectively disseminate software updates and patches to correct problems or resolve compatibility issues associated with their products. Despite the potential benefits of the Internet, few PC users have the time or technical knowledge required to identify, locate, download and install the updates and patches that apply to their PCs. CyberMedia's Oil Change is designed to enable PC users to keep their systems up-to-date, thereby enhancing overall system performance and avoiding problems frequently encountered as a result of outdated software and device drivers. The Company seeks to establish Oil Change as the de facto standard for PC users to obtain updates and patches to third-party software applications and device drivers over the Internet. The Company intends to launch the commercial version of Oil Change during the fourth quarter of 1996 through both the retail distribution channels and the Internet. The Company sells its products to individual and corporate users primarily through retail distribution channels and direct mail. The Company is expanding the marketing and sale of its products through the Internet, internationally and through strategic relationships. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company..................... 2,500,000 shares Common Stock to be outstanding after the offering....... 11,482,449 shares (1)(3) Use of proceeds......................................... For working capital, repayment of debt and other general corporate purposes. Proposed Nasdaq National Market symbol.................. CYBR </TABLE> SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31, ----------------- ----------------------------------------------- 1995 1996 1991 1992 1993 1994 1995 (5) (5) ------- ------- ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net revenues.................. $ -- $ 20 $ 55 $ 241 $ 4,797 $ 1,724 $13,949 Gross profit.................. -- 20 41 135 2,694 1,306 9,061 Total operating expenses...... 19 352 772 1,230 5,987 1,336 11,265 Loss from operations.......... (19) (332) (731) (1,095) (3,293) (30) (2,204) Net loss...................... $ (19) $ (333) $ (732) $(1,115) $(3,352) $ (57) $(2,229) Net loss per share (2)........ $ -- $ (0.04) $ (0.09) $ (0.14) $ (0.43) $ (0.01) $ (0.28) Shares used in per share calculation (2)............ 7,753 7,753 7,785 7,798 7,814 7,798 7,848 </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 ----------------------------------------- ACTUAL PRO FORMA (5) PRO FORMA (3) AS ADJUSTED (4) ------- ------------- --------------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents.............................. $ 569 $ 7,176 $37,381 Working capital (deficit).............................. (2,339) 4,268 35,318 Total assets........................................... 7,088 13,695 43,900 Note payable, long-term................................ 400 400 -- Total stockholders' equity (deficiency)................ (2,095) 4,512 35,962 </TABLE> - --------------- (1) Based on shares outstanding at June 30, 1996. Excludes (i) 1,513,016 shares of Common Stock subject to options outstanding as of June 30, 1996 at a weighted average exercise price of $1.51 per share and (ii) an aggregate of 277,459 shares of Common Stock reserved for issuance and available for grant under the Company's Amended 1993 Stock Plan, 1996 Director Option Plan and 1996 Employee Stock Purchase Plan. In August 1996, an additional 1,000,000 shares of Common Stock were authorized and reserved for issuance under the Amended 1993 Stock Plan. See "Management -- Director Compensation," "-- Employee Benefit Plans," "Description of Capital Stock" and Notes 8, 9, 11 and 15 of Notes to Financial Statements. (2) See Note 1 of Notes to Financial Statements for an explanation regarding per share calculations. (3) Reflects (i) the sale in July 1996 of 1,666,667 shares of Series C Preferred Stock, convertible into approximately 833,334 shares of Common Stock, for $5.0 million, (ii) the exercise of all outstanding warrants and (iii) the conversion of each share of Preferred Stock into one-half share of Common Stock upon the closing of this offering. (4) As adjusted to reflect the sale of 2,500,000 shares of Common Stock offered by the Company at an assumed initial public offering price of $14.00 per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001019266_porta_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001019266_porta_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING INFORMATION IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. AS USED HEREIN, UNLESS THE CONTEXT OTHERWISE REQUIRES, THE "COMPANY" MEANS GRAY COMMUNICATIONS SYSTEMS, INC. AND ITS SUBSIDIARIES. THE COMPANY HAS NOT YET CONSUMMATED THE PHIPPS ACQUISITION (AS DEFINED) AND THERE CAN BE NO ASSURANCE THAT THE PHIPPS ACQUISITION WILL BE CONSUMMATED. HOWEVER, EXCEPT WITH RESPECT TO HISTORICAL FINANCIAL STATEMENTS AND UNLESS THE CONTEXT INDICATES OTHERWISE, THE PHIPPS BUSINESS (AS DEFINED) IS INCLUDED IN THE DESCRIPTION OF THE COMPANY. SEE "THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING." UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION GRANTED BY THE COMPANY TO THE UNDERWRITERS IN THE CONCURRENT OFFERING IS NOT EXERCISED. ALL INFORMATION IN THIS PROSPECTUS HAS BEEN ADJUSTED TO GIVE EFFECT TO A 3-FOR-2 SPLIT OF THE CLASS A COMMON STOCK, EFFECTED IN THE FORM OF A STOCK DIVIDEND DECLARED ON OCTOBER 2, 1995. UNLESS OTHERWISE INDICATED, ALL STATION RANK, IN-MARKET SHARE AND TELEVISION HOUSEHOLD DATA IN THIS PROSPECTUS ARE DERIVED FROM THE NIELSEN STATION INDEX, VIEWERS IN PROFILE, DATED NOVEMBER 1995, AS PREPARED BY A.C. NIELSEN COMPANY ("NIELSEN"). THE COMPANY The Company owns and operates seven network-affiliated television stations in medium-size markets in the southeastern United States, six of which are ranked number one in their respective markets (which includes two television stations that are part of the Phipps Business). Five of the stations are affiliated with the CBS Television Network, a division of CBS, Inc. ("CBS") and two are affiliated with the NBC Television Network, a division of the National Broadcasting Company, Incorporated ("NBC"). In connection with the Phipps Acquisition (described below), the Company will be required under current regulations of the Federal Communications Commission (the "FCC") to divest its NBC affiliates in Albany, Georgia and Panama City, Florida. For a discussion of the Company's plans regarding such divestiture, see "Risk Factors -- FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." The Company also owns and operates three daily newspapers, two weekly, advertising only publications ("shoppers"), and a paging business (which is part of the Phipps Business), all located in the Southeast. The Company derives significant operating advantages and cost saving synergies through the size of its television station group and the regional focus of its television and publishing operations. These advantages and synergies include (i) sharing television production facilities, equipment and regionally oriented programming, (ii) the ability to purchase television programming for the group as a whole, (iii) negotiating network affiliation agreements on a group basis and (iv) purchasing newsprint and other supplies in bulk. In addition, the Company believes that its regional focus can provide advertisers with an efficient network through which to advertise in the fast-growing Southeast. In 1993, after the acquisition of a large block of Class A Common Stock by a new investor, the Company implemented a strategy to foster growth through strategic acquisitions. Since 1994, the Company's significant acquisitions have included three television stations and two newspapers, all located in the Southeast. As a result of the Company's acquisitions and in support of its growth strategy, the Company has added certain key members of management and has greatly expanded its operations in the television broadcasting and newspaper publishing businesses. On September 10, 1996, J. Mack Robinson, a director of the Company, was appointed President and Chief Executive Officer of the Company on an interim basis, to succeed Ralph W. Gabbard, who had died suddenly. The Company expects to commence a search to locate a new President as soon as practicable following this Offering. On September 11, 1996, Robert S. Prather, Jr., a director of the Company, was appointed Executive Vice President-Acquisitions on an interim basis. In January 1996, the Company acquired (the "Augusta Acquisition") WRDW-TV ("WRDW"), a CBS affiliate serving Augusta, Georgia (the "Augusta Business"). In December 1995, the Company entered into an asset purchase agreement to acquire (the "Phipps Acquisition") two CBS-affiliated stations, WCTV-TV ("WCTV") serving Tallahassee, Florida/Thomasville, Georgia and WKXT-TV ("WKXT") in Knoxville, Tennessee, a satellite broadcasting business and a paging business (collectively, the "Phipps Business"). The Company believes that the Phipps Acquisition will further enhance the Company's position as a major regional television broadcaster and is highly attractive for a number of reasons, including (i) the stations' strategic fit in the Southeast, (ii) WCTV's leading station market position and WKXT's significant growth potential, (iii) strong station broadcast cash flows, (iv) opportunities for revenue growth utilizing the Company's extensive management expertise with medium-size stations and (v) opportunities for synergies between WCTV and WKXT and the Company's existing stations with regard to revenue enhancement and cost controls. The consummation of the Phipps Acquisition is currently expected to occur by September 30, 1996, although there can be no assurance with respect thereto. In August 1996, the Company sold the assets (the "KTVE Sale") of KTVE Inc. ("KTVE"), a television station serving Monroe, Louisiana/El Dorado, Arkansas for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing. For the year ended December 31, 1995, on a pro forma basis, the Company had net revenues, Media Cash Flow (the sum of broadcast cash flow, publishing cash flow and paging cash flow), operating cash flow and net (loss) of $90.6 million, $30.3 million, $28.1 million and $(3.6) million, respectively. For the six months ended June 30, 1996, on a pro forma basis, the Company had net revenues, Media Cash Flow, operating cash flow and net income of $47.3 million, $17.9 million, $16.3 million and $251,000, respectively. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the year ended December 31, 1995 increased 148.2%, 188.4% and 227.9%, respectively, while net income decreased 230.3% from the historical amounts for the year ended December 31, 1994. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the six months ended June 30, 1996 increased 67.1%, 114.7% and 122.8%, respectively, while net income decreased 78.7% from the historical amounts for the six months ended June 30, 1995. The Company's pro forma net income for its television stations for the year ended December 31, 1995 and for the six months ended June 30, 1996 was $1.6 million and $1.4 million, respectively. The following table sets forth certain information for each of the Company's television stations. <TABLE> <CAPTION> ------------------------------------------------------------------------------------------------------------------ PRO FORMA --------------------------------------- IN-MARKET YEAR ENDED DECEMBER SIX MONTHS ENDED STATION SHARE OF 31, 1995 JUNE 30, 1996 RANK HOUSEHOLDS ------------------- ------------------ NETWORK YEAR DMA CHANNEL/ IN VIEWING NET OPERATING NET OPERATING STATION AFFILIATION MARKET ACQUIRED RANK(1) FREQUENCY DMA(2) TV REVENUES INCOME(6) REVENUES INCOME(6) - -------- ------- ------------- ------- -------- --------- -------- --------- --------- -------- -------- -------- (IN THOUSANDS) (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> WKYT CBS Lexington, KY 1994 68 27/UHF(3) 1 33% $15,553 $5,247 $7,845 $2,701 WYMT CBS Hazard, KY 1994 68 57/UHF(3) 1(4) 24 3,721 831 2,107 530 WRDW CBS Augusta, GA 1996 111 12/VHF 1 36 8,888 1,853 4,489 1,149 WALB (5) NBC Albany, GA 1954 152 10/VHF 1 80 9,445 4,795 5,099 2,658 Panama City, WJHG (5) NBC FL 1960 159 7/VHF 1 53 3,843 270 2,409 476 PHIPPS ACQUISITION WKXT CBS Knoxville, TN 62 8/VHF 3 22 9,269 2,204 4,387 903 Tallahassee, WCTV CBS FL/ 116 6/VHF 1 60 11,862 4,229 6,212 2,254 Thomasville, GA </TABLE> - ------------------------------ (1) Ranking of designated market area as defined by Nielsen ("DMA") served by a station among all DMAs is measured by the number of television households within the DMA based on the November 1995 Nielsen estimates. (2) Represents station rank in DMA as determined by November 1995 Nielsen estimates of the number of television sets tuned to the Company's station as a percentage of the number of television sets in use in the market for the Sunday through Saturday 6 a.m. to 2 a.m. time period. (3) All stations in the market are UHF stations. (4) The market area served by WYMT is an 18-county trading area, as defined by Nielsen, and is included in the Lexington, Kentucky DMA. WYMT's station rank is based upon its position in the 18-county trading area. (5) The Company will be required under current FCC regulations to divest WALB and WJHG in connection with the Phipps Acquisition. For a discussion of the Company's plans, see "Risk Factors-FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." (6) Represents pro forma income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes. The Company's three newspapers, THE ALBANY HERALD, THE ROCKDALE CITIZEN and the GWINNETT DAILY POST and two shoppers had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $21.9 million and $660,000, respectively, for the year ended December 31, 1995, and $11.3 million and $1.3 million for the six months ended June 30, 1996, respectively. The satellite broadcasting business and paging business, which are a part of the Phipps Business, had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $6.2 million and $542,000 for the year ended December 31, 1995 and $3.5 million and $467,000 for the six months ended June 30, 1996, respectively. BUSINESS STRATEGY The Company's business strategy includes the following key elements: - STRONG LOCAL PRESENCE. Each of the Company's television stations seeks to achieve a distinct identity through its emphasis on local programming. A key objective is to build audience loyalty through the development of a strong local news franchise. Strong local news generates high viewership and results in higher ratings for programs both preceding and following the news, which increases revenues and Media Cash Flow. - REGIONAL FOCUS. The Company believes its regional focus has competitive advantages, including the ability to purchase and produce programming that can be used by multiple Company-owned stations as well as the opportunity to sell advertising on multiple stations as a single buy. In addition, the proximity of the Company's operations allows the sharing of equipment, management and marketing expertise. - TARGETED MARKETING. The Company seeks to increase its advertising revenues and Media Cash Flow by expanding existing relationships with local and national advertisers and by attracting new advertisers through targeted marketing techniques and carefully tailored programming. The Company works closely with advertisers to develop advertising campaigns that match specifically targeted audience segments including sponsoring and staging various special events such as fishing tournaments, boat shows and bridal expositions. - COST CONTROLS. Through its strategic planning and annual budgeting processes, the Company continually seeks to identify and implement cost savings opportunities at each of its stations and publications in order to increase Media Cash Flow. The Company's ownership of multiple stations and publications also benefits each operation in negotiating favorable terms with programming syndicators, newsprint suppliers, national sales representatives and other vendors. - SELECTIVE ACQUISITIONS. The Company has focused on acquiring television stations where the Company believes there is the potential for improvements in revenue share, audience share and cost control. The Company focuses on southeastern markets of medium size because the Company believes these markets offer superior opportunities in terms of projected population and economic growth, leading to higher advertising and circulation revenues. In assessing acquisitions, the Company targets stations and publications where it sees specific opportunities for revenue enhancement while controlling expenditures, utilizing management's significant experience with local and national advertising sales and in operating similar businesses. In appropriate circumstances, the Company will dispose of assets that it deems non-essential to its operating or growth strategy. THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING The Company has entered into an agreement to acquire WCTV and WKXT, a satellite broadcasting business and a paging business in the Southeast. The purchase price for the Phipps Acquisition is approximately $185 million, including fees, expenses and working capital and other adjustments. The consummation of the Phipps Acquisition is expected to occur by September 30, 1996, although there can be no assurance with respect thereto. See "Risk Factors -- Possible Non-Consummation of the Phipps Acquisition." Pursuant to an agreement, dated as of May 15, 1996 (the "KTVE Agreement"), with GOCOM Television of Ouachita, L.P., in August 1996, the Company sold the assets of KTVE for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing (approximately $870,000), to the extent collected by the buyer, to be paid to the Company 150 days following the date of closing. For the year ended December 31, 1995, KTVE had net revenues, Media Cash Flow and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) of $4.2 million, $916,000 and $437,000, respectively, and $2.3 million, $598,000 and $360,000, respectively, for the six months ended June 30, 1996. The Company estimates that the gain, net of estimated taxes, on the KTVE Sale was approximately $2.8 million. In addition to the KTVE Sale and the consummation of this Offering, the Concurrent Offering and the Phipps Acquisition, the Company intends to implement a financing plan (the "Financing") to increase liquidity and improve operating and financial flexibility. Pursuant to the Financing, the Company will (i) retire approximately $49.5 million aggregate principal amount of outstanding indebtedness under its senior secured bank credit facility (the "Old Credit Facility"), together with accrued interest thereon, (ii) retire approximately $25.0 million aggregate principal amount of outstanding indebtedness under its senior note due 2003 (the "Senior Note"), together with accrued interest thereon and a prepayment fee, (iii) issue $10.0 million liquidation preference of its Series A preferred stock (the "Series A Preferred Stock") in exchange for its outstanding $10.0 million aggregate principal amount 8% subordinated note (the "8% Note") issued to Bull Run Corporation ("Bull Run"), a principal shareholder of the Company, (iv) issue to Bull Run, J. Mack Robinson, the President, Chief Executive Officer and a director of the Company, and certain of his affiliates $10.0 million liquidation preference of its Series B preferred stock (the "Series B Preferred Stock" and together with the Series A Preferred Stock, the "Preferred Stock") with warrants to purchase up to 500,000 shares of Class A Common Stock (representing 10.1% of the currently issued and outstanding Class A Common Stock after giving effect to the exercise of such warrants) for cash proceeds of $10.0 million and (v) enter into a new senior secured bank credit facility (the "Senior Credit Facility") to provide for a term loan and revolving credit facility aggregating $125.0 million. The cash required for the consummation of the Phipps Acquisition, the repayment of indebtedness and related transaction costs will be provided by the net proceeds of this Offering, the Concurrent Offering and the sale of the Series B Preferred Stock and the warrants, borrowings under the Senior Credit Facility and the Company's working capital. For a description of the Senior Credit Facility and the Preferred Stock, see "Description of Certain Indebtedness" and "Management--Compensation Committee Interlocks and Insider Participation-Issuances of Preferred Stock." The consummation of this Offering and the placement of funds into escrow are conditioned upon the issuance of the Series A Preferred Stock in exchange for the 8% Note, the issuance of the Series B Preferred Stock and the entering into of the Senior Credit Facility. The consummation of this Offering and the placement of the net proceeds thereof into escrow are not conditioned upon the consummation of the Concurrent Offering or the Phipps Acquisition or the other elements of the Financing. However the release of the net proceeds hereof from escrow is conditioned, among other things, upon the satisfaction of the Minimum Equity Condition, the retirement of the Senior Note and the Old Credit Facility and the consummation of the Phipps Acquisition. The Notes are subject to a mandatory redemption on the Special Redemption Date at the Special Redemption Price if either the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996. See "Description of the Notes-Redemption-Special Redemption." The Senior Credit Facility will provide that no borrowings may be made thereunder until the closing of the Phipps Acquisition. Accordingly, if the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied, the Notes will be redeemed by the Company, the Old Credit Facility will remain in place and the Company will not borrow under the Senior Credit Facility. The following table sets forth the estimated sources and uses of funds relating to this Offering, the Concurrent Offering, the Phipps Acquisition and the Financing: <TABLE> <CAPTION> ---------- (IN MILLIONS) AMOUNT ---------- <S> <C> SOURCES OF FUNDS: The Notes offered hereby $160.0 The Concurrent Offering (1) 73.5 Sale of Series B Preferred Stock and Warrants 10.0 Borrowings under the Senior Credit Facility 22.9 Working capital (2) 9.5 ---------- TOTAL $275.9 ---------- ---------- USES OF FUNDS: Consummation of Phipps Acquisition $185.0 Retire indebtedness under the Old Credit Facility (3) 49.5 Retire indebtedness under the Senior Note (4) 25.0 Fees and expenses (5) 16.4 ---------- TOTAL $275.9 ---------- ---------- </TABLE> - ------------------------------ (1) Assumes estimated gross proceeds from the Concurrent Offering of $73.5 million and estimated net proceeds therefrom of $67.6 million. It is a condition of the release from escrow of the net proceeds of this Offering that the Company shall have consummated one or more equity offerings having gross proceeds of not less than $65.0 million. To the extent that the gross proceeds of any such equity offerings are less than $73.5 million, the Company intends to borrow such difference under its Senior Credit Facility. It is anticipated that there will not be a significant interval between the closing of this Offering and the closing of the Concurrent Offering. (2) The source of these funds was the KTVE Sale. (3) Borrowings under the Old Credit Facility bear interest at formula rates based upon the applicable London inter-bank offered rate ("LIBOR") or prime rate at the time of borrowing plus a fixed spread and have a final maturity of 2003. As of June 30, 1996, the weighted average interest rate was 8.94%. (4) The indebtedness under the Senior Note bears interest at 10.7%. (5) Fees and expenses include underwriting costs for the Notes and the Concurrent Offering, fees payable in connection with the negotiation and execution of the Senior Credit Facility, fees payable in connection with the retirement of the Senior Note and legal, accounting and other transaction fees. Prior to the consummation of the Phipps Acquisition and the satisfaction of the Minimum Equity Condition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes. The Trust Funds will be invested in cash equivalents. The proceeds of the Concurrent Offering will be used to repay indebtedness under the Old Credit Facility, to retire the Senior Note and to provide funds for the Phipps Acquisition. THE OFFERING <TABLE> <S> <C> SECURITIES OFFERED.......................... $160,000,000 aggregate principal amount of % Senior Subordinated Notes due 2006. MATURITY DATE............................... , 2006. INTEREST PAYMENT DATES...................... and , commencing , 1997. SPECIAL REDEMPTION BY THE COMPANY........... If the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996, the Company will be required to redeem (the "Special Redemption") the Notes on or prior to December 31, 1996 (the "Special Redemption Date") at a redemption price (the "Special Redemption Price") equal to 101% of the principal amount of the Notes plus accrued and unpaid interest to the Special Redemption Date. At any time prior to December 23, 1996, if the Phipps Acquisition has not been consummated or the Minimum Equity Condition is not satisfied, the Company may, at its option, redeem the Notes, in whole but not in part, at a redemption price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date fixed for redemption. Prior to the consummation of the Phipps Acquisition and the satisfaction of the Minimum Equity Condition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes and the obligation of the Company to consummate the Special Redemption will be secured by such funds (the "Trust Funds"). </TABLE> <TABLE> <S> <C> OPTIONAL REDEMPTION BY THE COMPANY.......... The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after , 2001, at the redemption prices set forth herein, plus accrued and unpaid interest to the date fixed for redemption. In addition, at any time prior to , 1999, the Company, at its option, may redeem up to 35% of the aggregate principal amount of the Notes originally issued with the cash proceeds received by the Company from one or more Public Equity Offerings, other than the Concurrent Offering, at any time or from time to time, at a redemption price equal to % of the principal amount thereof, plus accrued and unpaid interest to the date fixed for redemption; PROVIDED, HOWEVER, that at least $104.0 million in aggregate principal amount of the Notes remain outstanding immediately after any such redemption. CHANGE OF CONTROL OFFER..................... Upon a Change of Control, the Company has the obligation to offer to purchase all the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. See "Description of the Notes -- Change of Control" for a discussion of the circumstances in which the Company may not be required to make a Change of Control Offer (as defined). OFFERS TO PURCHASE.......................... In the event of certain asset sales, the Company will be required to offer to repurchase the Notes at 100% of their principal amount plus accrued and unpaid interest, if any, to the date of repurchase with the net proceeds of such asset sales. SUBORDINATION............................... The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company, including all indebtedness of the Company under the Senior Credit Facility. As of June 30, 1996, on a pro forma basis after giving effect to this Offering, the Concurrent Offering, the KTVE Sale, the Financing and the application of the net proceeds therefrom, and to the Phipps Acquisition, the Company would have had approximately $183.6 million of indebtedness outstanding, of which $23.6 million would be Senior Debt. SUBSIDIARY GUARANTEES....................... The Notes will be guaranteed, jointly and severally, fully and unconditionally, on a senior subordinated basis by the Subsidiary Guarantors (the "Subsidiary Guarantees"). The obligations of any Subsidiary Guarantor with respect to its Subsidiary Guarantee will be subordinated in right of payment, to the same extent as the obligations of the Company in respect of the Notes, to all existing and future Guarantor Senior Debt of such Subsidiary Guarantor, which will include any guarantee by such Subsidiary Guarantor of the Company's indebtedness under the Senior Credit Facility. </TABLE> <TABLE> <S> <C> PRINCIPAL COVENANTS......................... The Indenture for the Notes (the "Indenture") will impose certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt or Guarantor Senior Debt and senior in right of payment to the Notes or any Subsidiary Guarantee, incur liens, impose restrictions on the ability of a subsidiary to pay dividends or make certain payments to the Company, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. USE OF PROCEEDS............................. The Company intends to use the proceeds from the sale of the Notes, together with the proceeds of the Concurrent Offering, the other proceeds of the Financing and the Company's working capital, to (i) consummate the Phipps Acquisition, (ii) retire indebtedness under the Old Credit Facility and the Senior Note and (iii) pay related fees and expenses. However, in the event the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996, the Company will be obligated to redeem the Notes. See "The Phipps Acquisition, the KTVE Sale and the Financing" and "Description of the Notes-Redemption-Special Redemption."
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS (AND RELATED NOTES THERETO) INCLUDED ELSEWHERE IN THIS PROSPECTUS. THE COMPANY MEANS SUPERIOR TELECOM INC. AND THE SUBSIDIARIES THAT IT WILL OWN AS A RESULT OF THE REORGANIZATION (AS DEFINED BELOW) AND, UNLESS THE CONTEXT OTHERWISE REQUIRES, SUCH SUBSIDIARIES ARE INCLUDED IN THE DESCRIPTION OF THE COMPANY. SEE "THE COMPANY -- THE REORGANIZATION AND RELATED TRANSACTIONS." UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THE COMPLETION OF THE REORGANIZATION AND RELATED TRANSACTIONS AND THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED. ALL REFERENCES HEREIN TO FISCAL 1994, FISCAL 1995 AND FISCAL 1996 MEAN THE YEARS ENDED MAY 1, APRIL 30 AND APRIL 28 OF SUCH YEARS, RESPECTIVELY. THE COMPANY The Company is a leading manufacturer of copper wire and cable products for the local loop segment of the telecommunications network in the United States (based on 1995 data). The local loop is the segment of the telecommunications network that connects the customer's premises to the nearest telephone company switch or central office. Copper wire and cable is the most widely used medium for transmission in the local loop, which comprises approximately 160 million residential and business access lines in the United States. The Company also develops and manufactures data communications and other electronic equipment, including multiplexers, for defense, government and commercial applications. As a result of acquisitions, as well as internal growth through expansion of its customer relationships and introductions of new products, the Company's net sales increased from $164.5 million in fiscal 1995 to $410.4 million in fiscal 1996, and operating income increased from $9.6 million to $31.8 million over the same period. The Company believes it is well-positioned to take advantage of the rapid changes in the telecommunications industry as the demand for voice, data and video services over the local loop increases dramatically and new technologies and products are developed to enable the local loop to satisfy that demand. TELECOMMUNICATIONS WIRE AND CABLE. The Company conducts its copper telecommunications wire and cable products business through its subsidiary, Superior Telecommunications Inc. ("Superior"). Superior manufactures a wide variety of copper telecommunications wire and cable products, ranging in size from a single twisted pair wire to a 4,200 pair cable, including hybrid cable products such as coaxial/copper wire and fiber optic/copper wire combinations. These products, referred to as distribution wire and cable, are variously configured for aerial and underground use in the local loop. The Company also has developed high speed data communication copper wire products, including unshielded twisted pair ("UTP") wire for on-premise applications, such as in computer networks. The Company's products are sold primarily to the regional Bell operating companies ("RBOCs") and the two major independent telephone companies under multi-year supply arrangements. Superior's net sales for the twelve months ended July 28, 1996 constituted 93.8% of the Company 's net sales for such period. The Company has led a recent consolidation in the copper telecommunications wire and cable industry by acquiring the U.S. and Canadian copper telecommunications wire and cable business of Alcatel NA in May 1995 and substantially all of the machinery, equipment and inventory of the Vancouver, B.C. copper telecommunications wire and cable business of BICC Phillips, Inc. in November 1995. Through these acquisitions, the Company increased its annual production capacity from 28 billion conductor feet ("bcf") in one plant to an aggregate of 92 bcf in four geographically diverse plants. The Company believes that it has successfully integrated its acquired businesses, particularly by implementing improved production techniques at each of its plants and reducing the cost structure of its operations. Due to further industry-wide consolidation, total industry capacity has been reduced, the number of manufacturers has declined and the size of those remaining has increased. As a result, the Company has become a key supplier of copper wire and cable to six of the seven RBOCs and the two major independent telephone companies and believes that it will continue to be able to compete effectively as its major customers consolidate their vendor base in order to stabilize their sources of supply and ensure timely delivery of quality products on a consistent basis. In addition, the industry consolidation, increased demand for copper telecommunications wire and cable and the resulting changes in the nature of customer relationships have led to a recent improvement in the pricing environment for the Company's products. The Company believes that copper will continue to be the transmission medium of choice in the local loop and that demand for access to the local loop will continue to increase for the following reasons: -INSTALLED BASE. The installed base of copper wire and cable in the local loop represents an investment of over $150 billion that must be maintained by the RBOCs and other local telephone companies. Although other media, such as fiber optic cable, are used for trunk lines between central offices, substantially all local loop lines continue to be copper-based. Local loop lines are continually maintained and replaced, providing a steady demand for copper wire and cable. -LOWER INSTALLATION COSTS AND EASE OF REPAIR. The Company believes that in the local loop, copper has significantly lower installation costs and is easier to repair than other media primarily because it does not require an additional power source and other electronics. Installation of fiber optic cable is both capital and labor intensive and deployment of fiber optic cable generally has been limited to trunk and feeder lines and wide area loop configurations. Therefore, the Company believes that new installations in the local loop will continue to be copper-based. -TECHNOLOGICAL ADVANCES. Copper dominance in the local loop continues to be supported by technological advances that expand the use and bandwidth of the installed local loop copper network. These advances include integrated services digital networks ("ISDN"), and digital subscriber line ("DSL") technologies, including high-bit-rate digital subscriber line ("HDSL") and asymmetric digital subscriber line ("ADSL"). These technologies permit telecommunication carriers, private network owners and end-user consumers to employ the copper wire and cable infrastructure for high speed and bandwidth-intensive applications. -DEMAND FOR NEW SERVICES. Technological advances, regulatory developments and increased competition have accelerated the demand for and introduction of new bandwidth-intensive telecommunications services. These services include integrated voice and data, broadcast and conference quality video, Internet and on-line data services access, high speed LAN to LAN connectivity, collaborative network processing and other specialized, bandwidth-intensive applications. -DEMAND FOR MULTIPLE RESIDENTIAL ACCESS LINES. An increasing number of U.S. households are installing additional access lines for multiple telephone lines, facsimile machines, access to the Internet, home offices and other purposes. Additional access lines increase the demand for copper telecommunications wire and cable in the local loop. DATA COMMUNICATIONS AND ELECTRONICS. The Company, through its subsidiary DNE Systems, Inc. ("DNE"), designs and fabricates data communications equipment, integrated access devices and other electronic products. DNE is a supplier to the U.S. defense industry of data and voice multiplexers used in tactical secure military applications. Multiplexers are integrated access devices that combine several information carrying channels into one line, thereby permitting simultaneous multiple voice and data communications over a single line. DNE also produces military avionic products, including switches, dimmers, relays and other electrical controllers, various sensors and refueling amplifiers. DNE has reduced its dependence on the defense market in recent years, primarily through the development of contract subsystem manufacturing services for commercial and (non-defense) governmental customers. DNE's net sales for the twelve months ended July 28, 1996 constituted 6.2% of the Company's net sales for such period. BUSINESS STRATEGY. The Company's strategy is to (i) respond to the current and changing requirements of its customers' communications networks and expand its business in the local loop by continuing to develop, manufacture and sell a full line of copper telecommunications wire and cable products; (ii) expand its product lines to include transmission media such as data communications cable, including UTP products, and hybrid wire products, including coaxial/copper wire and fiber optic/copper wire combinations; (iii) take advantage of strategic acquisition opportunities in data communications cable, the local loop and its other markets; and (iv) expand its international business through increased export sales and the establishment of joint ventures or similar arrangements. THE REORGANIZATION. On October 2, 1996, The Alpine Group, Inc. ("Alpine"), which then owned all of the outstanding capital stock of the Company, Superior and DNE, caused Superior and DNE to declare dividends on their common stock in an aggregate amount of $117.1 million. Superior also issued to Alpine 20,000 shares of its 6% Cumulative Preferred Stock ("Superior Preferred Stock"). Alpine then contributed to the Company all of the issued and outstanding common stock of Superior and DNE (together with the foregoing transactions, the "Reorganization"). See "The Company -- The Reorganization and Related Transactions." In connection with the Reorganization, the Company entered into a five-year revolving credit facility (the "Bank Credit Facility") under which it borrowed $154.7 million to repay the net amount of the intercompany debt owed to Alpine and to pay to Alpine a portion of the dividends declared as part of the Reorganization. The net proceeds of this Offering will be used to pay the remainder of the declared dividends and to reduce the amount outstanding under the Bank Credit Facility. See "The Company -- The Reorganization and Related Transactions -- Bank Credit Facility" and "Use of Proceeds." Upon completion of this Offering, Alpine will own 50.1% of the outstanding capital stock of the Company (approximately 46.6% if the Underwriters' over-allotment option is exercised in full). If the over-allotment option granted to the Underwriters by the Company is exercised, Alpine intends to restore its ownership of the outstanding Common Stock to 50.1% by contributing to the capital of the Company a portion of Superior Preferred Stock in exchange for shares of Common Stock. The amount of Superior Preferred Stock to be contributed by Alpine will be that number of shares having an aggregate liquidation value equal to the aggregate price paid by the Company (including brokers' commissions) for shares of Common Stock to be transferred by the Company to Alpine. The Company intends to acquire such shares of Common Stock through open market purchases or otherwise using only net proceeds of the exercise of the over-allotment option. The Company will use any balance of those net proceeds to reduce outstanding debt under the Bank Credit Facility. See "Use of Proceeds," "Principal Stockholders" and "Certain Transactions and Relationships." See "Principal Stockholders" and "Certain Transactions and Relationships." THE OFFERING <TABLE> <S> <C> Common Stock offered hereby (1)............. 6,000,000 (1) Common Stock to be outstanding after this Offering................................... 12,024,048 (1)(2) Use of proceeds............................. The net proceeds of this Offering will be used to pay the unpaid portion of the dividends declared in connection with the Reorganization and to reduce the amount outstanding under the Bank Credit Facility. See "Use of Proceeds." New York Stock Exchange Symbol.............. SUT </TABLE> - ------------------------ (1) Excludes up to 900,000 shares that may be sold pursuant to the Underwriters' over-allotment option. (2) Excludes 1,250,000 shares of Common Stock issuable pursuant to options that may be granted pursuant to the Company's 1996 Stock Option Plan and 250,000 shares issuable pursuant to the Company's Employee Stock Purchase Plan. See "Management -- Executive Compensation -- Compensation Under Plans." SUMMARY FINANCIAL DATA The financial data of the Company set forth below have been derived from the combined financial statements of Superior and DNE (which have been reorganized as the Company). The combined financial data for the fiscal years ended 1994, 1995 and 1996, are derived from the combined financial statements of the Company that have been audited by Arthur Andersen LLP, as indicated in their report included elsewhere in this Prospectus. The unaudited combined financial data for the three months ended July 29, 1995 and July 28, 1996 are derived from unaudited combined financial statements included elsewhere in this Prospectus. The financial data are provided on (i) an historical basis for fiscal 1994, 1995 and 1996 and for the three months ended July 29, 1995 and July 28, 1996; and (ii) a pro forma basis for the fiscal year ended April 28, 1996 and for the three months ended July 28, 1996 after giving effect to the following transactions as if they had occurred as of May 1, 1995: (1) the Alcatel acquisition, (2) the Reorganization and related transactions and (3) this Offering. The unaudited pro forma financial information is provided for comparative purposes only and does not purport to be indicative of the results that actually would have been obtained if the events set forth had been effected on the dates indicated or of those results that may be obtained in the future. The historical results presented below reflect the operations of Superior since its acquisition by Alpine in November 1993 and the operations of the Alcatel Business (as defined below in "The Company -- Background") since its acquisition by Alpine in May 1995. <TABLE> <CAPTION> FISCAL YEAR ENDED THREE MONTHS ENDED -------------------------------------------------- ----------------------------------- HISTORICAL PRO FORMA HISTORICAL PRO FORMA ------------------------------------- ----------- ---------------------- ----------- APRIL 30, APRIL 28, APRIL 28, JULY 29, JULY 28, JULY 28, MAY 1, 1994 1995 1996 1996 1995 1996 1996 ----------- ----------- ----------- ----------- ----------- --------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Net sales............................. $ 68,510 $ 164,485 $ 410,413 $ 417,934 $ 99,324 $ 123,824 $ 123,824 Cost of goods sold.................... 56,250 142,114 362,854 369,780 89,821 105,447 105,447 ----------- ----------- ----------- ----------- ----------- --------- ----------- Gross profit........................ 12,260 22,371 47,559 48,154 9,503 18,377 18,377 Selling, general and administrative expense.............................. 8,884 11,632 14,223 16,256 3,299 3,888 4,388 Amortization of goodwill.............. 2,186 1,124 1,556 1,570 374 432 432 ----------- ----------- ----------- ----------- ----------- --------- ----------- Operating income.................... 1,190 9,615 31,780 30,328 5,830 14,057 13,557 Interest expense, net................. (1,742) (3,700) (17,006) (10,931) (3,733) (4,258) (2,728) Preferred stock dividends of subsidiary (1)....................... -- -- -- (1,200) -- -- (300) Other income (expense), net........... (61) 231 55 55 28 (53) (53) ----------- ----------- ----------- ----------- ----------- --------- ----------- Income (loss) from continuing operations before income taxes..... (613) 6,146 14,829 18,252 2,125 9,746 10,476 Provision for income taxes............ (521) (2,240) (6,722) (7,781) (451) (3,778) (4,310) ----------- ----------- ----------- ----------- ----------- --------- ----------- Income (loss) from continuing operations......................... (1,134) 3,906 8,107 10,471 1,674 5,968 6,166 (Loss) from discontinued operations... (287) (176) -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- --------- ----------- Income (loss) before extraordinary item............................... (1,421) 3,730 8,107 10,471 1,674 5,968 6,166 Extraordinary (loss) on early extinguishment of debt (2)........... -- -- (2,645) -- (2,811) -- -- ----------- ----------- ----------- ----------- ----------- --------- ----------- Net income (loss)................... $ (1,421) $ 3,730 $ 5,462 $ 10,471 (1,137) $ 5,968 $ 6,166 ----------- ----------- ----------- ----------- ----------- --------- ----------- ----------- ----------- ----------- ----------- ----------- --------- ----------- Per share of common stock (3): Income from continuing operations............................... $ 0.67 $ 0.87 $ 0.14 $ 0.50 $ 0.51 Extraordinary (loss) on early extinguishment of debt (2)........ (0.22 ) -- (0.23 ) -- -- ----------- ----------- ----------- --------- ----------- Net income (loss)............................................. $ 0.45 $ 0.87 $ (0.09 ) $ 0.50 $ 0.51 ----------- ----------- ----------- --------- ----------- ----------- ----------- ----------- --------- ----------- </TABLE> <TABLE> <CAPTION> FISCAL YEAR ENDED THREE MONTHS ENDED -------------------------------------------------- ----------------------------------- HISTORICAL PRO FORMA HISTORICAL PRO FORMA ------------------------------------- ----------- ---------------------- ----------- APRIL 30, APRIL 28, APRIL 28, JULY 29, JULY 28, JULY 28, MAY 1, 1994 1995 1996 1996 1995 1996 1996 ----------- ----------- ----------- ----------- ----------- --------- ----------- (IN THOUSANDS) OTHER DATA: <S> <C> <C> <C> <C> <C> <C> <C> EBITDA (4)............................ $ 5,525 $ 14,201 $ 40,231 $ 38,869 $ 7,793 $ 16,308 $ 15,808 Depreciation and amortization (5)..... 4,335 4,586 8,451 8,541 1,963 2,251 2,251 Capital expenditures.................. 1,560 1,782 4,339 4,339 1,204 1,511 1,511 Cash flows from operating activities........................... 1,999 7,444 27,238 29,602 22,930 12,292 12,490 Cash flows from investing activities........................... (5,243) (1,739) (111,776) (111,776) (93,178) (1,595) (1,595) Cash flows from financing activities........................... 2,367 (6,109) 84,616 85,096 70,500 (11,146) (10,606) </TABLE> <TABLE> <CAPTION> AT JULY 28, 1996 ---------------------- ACTUAL PRO FORMA --------- ----------- <S> <C> <C> BALANCE SHEET DATA: Working capital....................................................................... $ 54,609 $ 55,149 Total assets.......................................................................... 232,360 236,000 Total debt (6)........................................................................ 114,753 131,839 Total stockholders' equity............................................................ 57,432 23,986 </TABLE> - ------------------------ (1) Represents dividends on Superior Preferred Stock issued to Alpine as part of the Reorganization and related transactions. (2) Relates to the early extinguishment of $140.0 million principal amount of debt incurred by Superior in connection with the Alcatel acquisition, during the first quarter of fiscal 1996 and to the early extinguishment of a $2.5 million subordinated note issued to DNE's former parent during the second quarter of fiscal 1996. The debt was substantially replaced by promissory notes payable to Alpine. (3) Based upon 12,024,048 shares outstanding subsequent to this Offering. (4) EBITDA represents operating income plus depreciation and amortization, and provision for non-cash compensation expense (primarily stock options and restricted stock grants). EBITDA is presented because the Company believes such information is a widely accepted finanical indicator of the Company's ability to generate cash and to service debt. However, although the Company has measured EBITDA consistently between periods presented, EBITDA as a measure of liquidity is not governed by generally accepted accounting principles ("GAAP"), and, as such, may not be comparable to other similarly titled measures of other companies. The Company believes that EBITDA, while providing useful information, should not be considered in isolation or as an alternative to either (i) operating income determined in accordance with GAAP as an indicator of operating performance or (ii) cash flows from operating activities determined in accordance with GAAP as a measure of liquidity. (5) Includes $76,000 in fiscal 1994 for a non-cash compensation expense. (6) Actual amount includes $102.9 million of intercompany debt owed to Alpine at July 28, 1996.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001019336_donnelley_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001019336_donnelley_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the financial statements and pro forma information (and the notes related thereto) included elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. See "Underwriting." THE COMPANY Donnelley Enterprise Solutions Incorporated is a single-source provider of integrated information management services to professional service organizations, primarily large law firms, investment banks and accounting firms. DESI offers its clients the opportunity to focus on their core businesses by outsourcing a variety of functions, including business services and information technology services. The Company has experienced substantial growth by expanding its service offerings, adding new clients, increasing business with existing clients and capitalizing on the growing trend toward outsourcing. In 1995, the Company had revenues of $45.7 million from business services outsourcing and $20.2 million from information technology services, representing six months of operations following the June 1995 acquisition of LAN Systems, Inc. ("LANSystems"). In the first six months of 1996, the Company's revenues from business services outsourcing and information technology services were $26.6 million and $18.6 million, respectively. The Company has well-established client relationships with a significant number of leaders in its target markets, including the law firms of Shearman & Sterling and Sidley & Austin, the investment banks of Lehman Brothers Inc. and Morgan Stanley & Co. Incorporated and the accounting firm of Ernst & Young LLP. Revenues from these five clients accounted for approximately 28.9% of the Company's 1995 revenues and approximately 25.4% of the Company's revenues for the first six months of 1996. In 1995, the Company provided services to 30 of the 100 largest law firms as ranked by the American Lawyer for 1995 and six of the 10 largest investment banks ranked by dollar volume of public debt and equity issuances for 1995 as reported by Securities Data Corporation. The Company typically enters into contracts with business services clients that have terms ranging from three to five years and which typically provide for monthly minimum payments. The Company's record in retaining outsourcing clients has been excellent. The Company's information technology services are contracted for primarily on a project basis and generally result in follow-on projects and on-going support. DESI commenced outsourcing operations in 1988 as a provider of reprographic services and expanded its service offerings to include networked and color printing, mailroom and facsimile services, word processing, desktop publishing and imaging. In June 1995, the Company broadened its capabilities from managing paper-based information to include the management of electronic information through the acquisition of LANSystems, which has provided information technology services since 1983, including systems integration, consulting and software development. Beginning in February 1996, the Company began providing systems management outsourcing services, which include on-site management and administration of servers and desktops and operation of the help-desk function. The demand for business services outsourcing and information technology services is accelerating as more businesses seek outside expertise in the management of increasingly complex and crucial business and technology requirements. DESI focuses on its target markets because the success of leading professional service organizations greatly depends on their ability to manage and process information, integrate information into document form and generate and deliver high-quality documents, all under significant time pressures. Tolerance for system downtime or disruption to normal business services is very limited. As a result, the Company's clients demand premium service levels with stringent controls to ensure quality, reliability and accuracy. The Company believes its competitive strengths are as follows: . Established Premier Client Base in Target Markets--DESI has well- established relationships with a significant number of industry leaders in its target markets. These relationships with high-quality professional service organizations have been an important factor in enabling the Company to add new clients. . Comprehensive Array of Service Offerings--The Company is capable of satisfying a client's needs for information management services for both paper-based and electronic information by providing staff trained to perform multiple functions, integrating technical and business processes and providing consistency across the enterprise. . Accumulated Knowledge and Expertise in Target Markets--DESI has accumulated knowledge of the best practices to address the unique needs of the professional service organizations in its target markets. . Proven Quality Driven Processes--DESI has developed proven, cost- effective processes for the delivery of business and information technology services, including a copyrighted production management system which permits the Company to monitor the client's needs and the quality of services provided by tracking use, service levels, turnaround and efficiency. . Depth, Experience and Expertise of Service Delivery Personnel--The Company has been successful in attracting and retaining talented, motivated employees in critical positions which involve extensive client interaction, including the client managers who oversee the performance of the Company's business services and the technical employees who design, implement and support computer networks and provide other information technology services. DESI's principal growth strategy is to become the single-source provider of integrated information management services to the leading firms in its target markets. Key elements of the Company's strategy include (i) increasing penetration in its target markets; (ii) cross-selling its services to existing clients; (iii) attracting and retaining outstanding employees; (iv) enhancing its expertise in information management technology; and (v) selectively acquiring businesses that strengthen service offerings or expand geographic presence. R. R. Donnelley & Sons Company is currently the sole stockholder of the Company and upon completion of the Offering will own 48.0% of the outstanding Common Stock (40.2% if the over-allotment option granted to the Underwriters is exercised in full). While R.R. Donnelley in the future may reduce its ownership interest in the Company, R.R. Donnelley has advised the Company that it has no plans to do so. In July 1996, the Company declared a dividend of $8.0 million paid in the form of a promissory note to R.R. Donnelley (the "Dividend Note"). A significant portion of the net proceeds of the Offering received by the Company will be used to repay the Dividend Note and the advances owed to R.R. Donnelley and in final payment of certain contingent obligations arising from the acquisition of LANSystems. See "Use of Proceeds" and "Relationship with R.R. Donnelley." The business services currently offered by the Company were operated by R.R. Donnelley prior to 1996 as a division known as Donnelley Business Services ("DBS"). As of January 1, 1996, R.R. Donnelley contributed the assets and liabilities of the DBS division to LANSystems and changed its corporate name to Donnelley Enterprise Solutions Incorporated. See "The Company." THE OFFERING <TABLE> <S> <C> Common Stock offered by: The Company...................... 1,855,000 shares R.R. Donnelley................... 745,000 shares ---------------------- Total.......................... 2,600,000 shares Common Stock to be outstanding after the Offering................ 5,000,000 shares(1) Use of net proceeds to the Company. Final payment of approximately $8.7 million for certain contingent obligations arising from the acquisition of LANSystems; repay- ment of the $8.0 million aggregate princi- pal amount of, and interest on, the Divi- dend Note and the advances owed to R.R. Donnelley, which advances as of June 30, 1996 totaled approximately $17.6 million, and for general corporate purposes. The Company estimates that the advances owed to R.R. Donnelley will total approximately $20.7 million as of the completion of the Offering. See "Use of Proceeds" and "Rela- tionship with R.R. Donnelley." Nasdaq National Market Symbol...... DEZI </TABLE> - -------- (1) Excludes 400,000 shares of Common Stock reserved for issuance under the Company's 1996 Stock Incentive Plan and 1996 Broad-Based Employee Stock Plan, including 5,000 shares of restricted Common Stock and options to purchase approximately 308,000 shares of Common Stock (at the initial public offering price set forth on the cover page of this Prospectus) that the Company expects to grant to employees in connection with the Offering. See "Management-- Stock Plans" and "Management--Employment Agreements." SUMMARY CONSOLIDATED FINANCIAL DATA The following table summarizes selected historical consolidated financial data of DESI. Income statement data for each of the three years in the period ended December 31, 1995 have been derived from the audited consolidated financial statements of DESI contained herein. Income statement data for the six month periods ended June 30, 1995 and 1996, respectively, and balance sheet data as of June 30, 1996 have been derived from the unaudited consolidated financial statements of DESI contained herein. Income statement data for each of the two years in the period ended December 31, 1992 have been derived from unaudited information of DESI. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Unaudited Pro Forma Consolidated Financial Information" and Consolidated Financial Statements of DESI and notes thereto included elsewhere in this Prospectus. <TABLE> <CAPTION> SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ---------------------------------------- --------------- 1991 1992 1993 1994 1995(1) 1995(1) 1996(1) ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> INCOME STATEMENT DATA: Revenues............... $13,652 $17,985 $23,527 $34,745 $65,944 $21,108 $45,243 Cost of revenues....... 11,193 14,075 18,800 27,800 53,900 18,077 35,309 ------- ------- ------- ------- ------- ------- ------- Gross profit......... 2,459 3,910 4,727 6,945 12,044 3,031 9,934 Selling expenses....... 1,120 1,657 1,665 2,110 5,563 1,249 4,633 General and administrative expenses.............. 1,312 1,648 1,333 1,540 4,866 1,082 3,536 Amortization of goodwill.............. -- -- -- -- 295 -- 306 ------- ------- ------- ------- ------- ------- ------- Earnings from operations.......... 27 605 1,729 3,295 1,320 700 1,459 Interest expense....... 31 87 184 283 522 230 126 ------- ------- ------- ------- ------- ------- ------- Earnings (loss) before income taxes. (4) 518 1,545 3,012 798 470 1,333 Income taxes........... 4 248 684 1,277 495 208 712 ------- ------- ------- ------- ------- ------- ------- Net income (loss).... $ (8) $ 270 $ 861 $ 1,735 $ 303 $ 262 $ 621 ======= ======= ======= ======= ======= ======= ======= </TABLE> <TABLE> <CAPTION> AS OF JUNE 30, 1996 ---------------------------- PRO FORMA PRO AS ACTUAL FORMA(2) ADJUSTED(3) ------- -------- ----------- (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Total assets..................................... $46,339 $55,039 $63,163 Amounts due to LANSystems earnout participants... -- 8,700 -- Debt and advances due to R.R. Donnelley.......... 17,637 25,637 -- Capital lease obligations........................ 2,483 2,483 2,483 Total shareholders' equity....................... 15,757 7,757 50,218 </TABLE> - -------- (1) Income statement data for the year ended December 31, 1995 and the six months ended June 30, 1996 include the results of operations of LANSystems, which the Company acquired in June 1995, beginning July 1, 1995. (2) Represents the issuance of the Dividend Note in the principal amount of $8.0 million and additional goodwill in the approximate amount of $8.7 million and the related amounts due to LANSystems earnout participants resulting from the agreement to modify certain contractual obligations under the LANSystems acquisition agreement that provided for additional contingent payments to former LANSystems shareholders and certain management participants based on specified financial targets for the years ended December 31, 1995 through 1998. (3) Adjusts the pro forma balance sheet data to give effect to the Offering being completed and a significant portion of the assumed net proceeds of the Offering received by the Company being applied to repay the Dividend Note and the advances owed to R.R. Donnelley and in final payment of certain contingent obligations arising from the acquisition of LANSystems, as described under "Use of Proceeds." SUMMARY UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME The unaudited pro forma consolidated statements of income for the year ended December 31, 1995 and the six months ended June 30, 1996 set forth below illustrate: (i) the effects of the historical results of operations (under the Company's accounting policies) of LANSystems for the period from January 1, 1995 to June 21, 1995, the date on which LANSystems was acquired by the Company; (ii) the increase in the amortization of goodwill related to the acquisition of LANSystems; and (iii) the Offering being completed and a significant portion of the assumed net proceeds received by the Company therefrom being applied as described under "Use of Proceeds." In addition, the pro forma statements of income illustrate the estimated net operating effects resulting from the Company being a public entity, which include pricing of certain services the Company will receive from R.R. Donnelley after the Offering under certain intercompany agreements, as well as other incremental public company expenses. The pro forma adjustments are based on available information and upon certain assumptions the Company believes are reasonable. The pro forma consolidated statements of income do not purport to represent what the Company's results of operations would actually have been or to project the Company's results of operations for any future period. <TABLE> <CAPTION> YEAR ENDED SIX MONTHS ENDED DECEMBER 31, 1995 JUNE 30, 1996 ------------------- ------------------- AS AS ACTUAL ADJUSTED(1) ACTUAL ADJUSTED(1) ------- ----------- ------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> Revenues............................... $65,944 $79,545 $45,243 $45,243 Cost of revenues....................... 53,900 64,333 35,309 34,986 ------- ------- ------- ------- Gross profit....................... 12,044 15,212 9,934 10,257 Selling expenses....................... 5,563 7,918 4,633 4,633 General and administrative expenses.... 4,866 8,138 3,536 3,906 Amortization of goodwill............... 295 1,065 306 533 ------- ------- ------- ------- Earnings (loss) from operations.... 1,320 (1,909) 1,459 1,185 Interest expense....................... 522 543 126 126 ------- ------- ------- ------- Earnings (loss) before income taxes............................. 798 (2,452) 1,333 1,059 Income taxes........................... 495 (470) 712 692 ------- ------- ------- ------- Net income (loss).................. $ 303 $(1,982) $ 621 $ 367 ======= ======= ======= ======= Pro forma net income (loss) per share (2)......................... $ (.43) $ .08 ======= ======= </TABLE> - -------- (1) For a detailed description of the adjustments to these unaudited pro forma consolidated statements of income, see "Unaudited Pro Forma Consolidated Financial Information." (2) Pro forma net income (loss) per share is computed by dividing pro forma net income (loss) for the year ended December 31, 1995 and the six months ended June 30, 1996 by the pro forma weighted average shares outstanding during such periods of 4,645,000. RECENT UNAUDITED FINANCIAL DATA The following table sets forth a summary of certain unaudited financial data for the Company for the three and nine-month periods ended September 30, 1995 and 1996, respectively. The summary unaudited financial operating results set forth below are not necessarily indicative of the Company's results for any future interim period or the year ended December 31, 1996. <TABLE> <CAPTION> THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------- --------------- 1995 1996 1995 1996 ------- ------- ------- ------- (IN THOUSANDS) <S> <C> <C> <C> <C> Revenues................................ $21,080 $25,780 $42,188 $71,023 Earnings (loss) before interest and taxes.................................. (74) 1,136 625 2,596 Net income (loss)....................... (162) 474 100 1,096 </TABLE> For the quarter ended September 30, 1996, the Company's revenues from business services outsourcing and information technology services were $15.0 million and $10.8 million, respectively, and for the nine months then ended were $41.6 million and $29.4 million, respectively. The unaudited financial data for the nine-month period ended September 30, 1995 includes the results of operations of LANSystems from July 1, 1995. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Quarterly operating results." The three and the nine months ended September 30, 1996 include (1) a special charge of $300,000 related to the departure of Thomas P. Bradbury, former President, LANSystems division, and (2) $128,000 of interest expense associated with the Dividend Note. See "Management--Agreement with Former Executive Officer."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001019346_wireless_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001019346_wireless_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Consolidated Financial Statements and Notes thereto contained elsewhere in this Prospectus, including information contained in "Risk Factors." Unless otherwise indicated herein, this Prospectus (i) gives effect to: (a) the creation of Class A Common Stock and Class B Common Stock; (b) the conversion of existing common stock into Class B Common Stock; (c) the conversion of all outstanding shares of Class A Cumulative Convertible Preferred Stock into Class B Common Stock and the accrued dividend thereon into Class A Common Stock (estimated as of October 31, 1996); and (d) a 5.753:1 reverse stock split of its common stock; and (ii) assumes that the Underwriters' over- allotment option will not be exercised. As used in this Prospectus, except as the context otherwise requires, the term "Company" or "WBSA" means Wireless Broadcasting Systems of America, Inc., a Delaware corporation, its subsidiaries, and WJB-TV Limited Partnership (the "Predecessor Partnership"). The "Glossary," which begins on page 63 of this Prospectus, contains definitions for certain technical and industry as well as other defined terms used in this Prospectus. THE COMPANY Wireless Broadcasting Systems of America, Inc. acquires, owns, develops and operates wireless cable systems in two regions of the United States. The Company currently provides subscription television services in its Florida region through wireless cable systems located in Fort Pierce and Melbourne and in its Northwest region through wireless cable systems located in Boise, Idaho; Sacramento, California; and Yakima, Washington (collectively, the "Operating Systems"). In the 12 month period ended June 30, 1996, the Operating Systems experienced substantial subscriber growth from approximately 52,700 to 63,100, an increase of approximately 19.7%, which represents a penetration rate (see "Glossary") of 4.8%. As of August 31, 1996, the Company's subscriber base had grown to 65,400. In addition to the Operating Systems, the Company plans to launch new systems in West Palm Beach, Florida; Coos Bay, Oregon; Eureka, California; Helena, Montana; Kennewick, Washington; Klamath Falls, Oregon; and Roseburg, Oregon (collectively, the "Planned Systems"). The Company's markets encompass over 2.5 million line-of-sight ("LOS") households. The Company strives to develop its markets in a manner that produces sustainable subscriber growth and positive System EBITDA (see "Glossary") at relatively low subscriber penetration levels. The Company's benchmarks in each of its markets for the necessary subscriber penetration to achieve positive System EBITDA vary on the basis of market-specific factors. By maintaining control over operating expenses and targeting its marketing efforts, the Company has been able to achieve positive System EBITDA in its Melbourne System, the Company's most recently launched system, at a subscription level of approximately 6,000 subscribers within 12 months of launch. In the 12 month period ended June 30, 1996, the Company generated $19.6 million of revenues and $3.7 million of EBITDA. See "Glossary." The Company has assembled a management team that has one of the most extensive subscription television operating backgrounds in the wireless cable industry. Leading the management team is William W. Kingery, Jr., President and Chief Executive Officer, who has over two decades of management, financial and operating experience in the subscription television industry. Mr. Kingery served as chief financial officer of United Cable Television Corporation, president of Daniels & Associates, Inc., and most recently as executive vice president of United Artists Cable Systems Corporation, where he had responsibility for 90 cable systems serving 1.3 million subscribers. See "Management." The Company employs the following strategies to achieve its business objectives: Focus on Regional Clusters with Strong Growth Potential. The Company focuses on markets which it believes exhibit demographic and topographic characteristics conducive to the transmission of wireless cable services. The Company operates in and targets markets which it expects to achieve household growth rates in excess of the national average. The Company also strives to cluster its systems to achieve economies of scale in management, marketing, training, customer service and billing and enhance opportunities for additional revenues. Differentiate Service Offering. The Company believes that it offers greater value to its customers than that afforded by its hard-wire cable and direct broadcast satellite subscription television competitors. The Company seeks to differentiate its service offering from other subscription television providers by: (i) offering attractive channel line-ups; (ii) pricing its service competitively; and (iii) providing superior customer satisfaction. Maximize Profitable Subscriber Growth. The Company seeks efficiencies in all aspects of its operations. In an effort to achieve continued, consistent subscriber growth, the Company targets persons that the Company's marketing research indicates could be long-term subscribers likely to increase their services over time. To minimize turnover of subscribers, the Company charges installation fees, conducts credit checks and actively manages its billing. The Company's incentive compensation program promotes efficient subscriber service and system operation by rewarding employees for achieving targeted subscriber service goals, minimizing subscriber turnover and attaining budgeted System EBITDA. Own Wireless Cable Channel Licenses. The Company seeks to own, rather than lease, the majority of available wireless cable channel licenses in its markets. Benefits of ownership include: (i) increased EBITDA by eliminating variable channel leasing costs; (ii) enhanced flexibility in deploying digital compression and other technological innovations; and (iii) reduced dependence on third party channel lessors. Maintain Disciplined Approach to New Technologies. The Company evaluates the implementation of new technologies on a market-by-market basis as dictated by subscriber demands and competitive conditions. Specifically, installation of whole-house decoders, which are fully addressable, is targeted for the Company's smaller markets where digital technology is not expected to be cost-effective in the near term. Digital technology, which the Company expects to be commercially viable in 1997, will be incorporated into the Company's larger, more competitive markets. The Company intends to complement its Operating and Planned Systems by acquiring additional wireless cable systems in markets that meet its selection criteria, including: (i) demographic profile of the market, including size of potential subscriber base and projected household growth rates; (ii) proximity to existing markets; (iii) topography of the transmission area; (iv) availability of wireless cable channel rights and licenses; and (v) the competitive environment. The Company seeks to take advantage of economies of scale and operating efficiencies, particularly where it can add to existing regional clusters or develop new regional clusters of operating systems and intends to utilize the experience of its management in evaluating, acquiring and operating such potential systems. HISTORY In April 1992, the Company acquired its initial wireless cable assets in Fort Pierce, Florida and subsequently launched the Fort Pierce System in May 1992. The Company expanded its presence in Florida with the launch of the Melbourne System in November 1993. In March 1994, the Company entered the Northwest region of the United States with the acquisition of the Sacramento System. In March and April 1995, Boston Ventures, a private investment firm, invested $35.0 million in the Company through the purchase of shares of Class A Cumulative Convertible Preferred Stock (the "Convertible Preferred Stock") in connection with which the Company acquired the Boise and Yakima Systems. Immediately prior to closing of the Offering, Boston Ventures will convert its Convertible Preferred Stock into Class B Common Stock and the accrued dividend thereon into shares of Class A Common Stock. In March 1996, the Company acquired the exclusive right to apply for currently and subsequently available commercial channels for five new markets. The Company's executive offices are located at 9250 East Costilla Avenue, Suite 325, Englewood, Colorado 80112, and the Company's telephone number is (303) 649-1195. THE COMPANY'S MARKETS The following table outlines the characteristics of the markets in which the Company operates or where it anticipates launching systems. <TABLE> <CAPTION> ESTIMATED PROJECTED LOS NUMBER OF LOS PERCENTAGE HOUSEHOLDS SUBSCRIBERS HOUSEHOLD OF AS OF AS OF GROWTH NUMBER OF AMOUNT OF COMMERCIAL DECEMBER 31, JUNE 30, MARKET 1995 TO CHANNELS SPECTRUM LICENSES 1995(1) 1996(2) PENETRATION(3) 2000(4) CONTROLLED(5) CONTROLLED(5) OWNED(6) ------------ ----------- -------------- --------- ------------- ------------- ---------- <S> <C> <C> <C> <C> <C> <C> <C> FLORIDA MARKETS: Ft. Pierce, FL.......... 244,000 12,800 5.2% 10.0% 34 202MHz 100.0 % Melbourne, FL........... 219,000 14,600 6.7 11.2 36 214 100.0 West Palm Beach, FL(7)................. 1,010,000 -- -- 10.8 31 186 84.6 NORTHWEST MARKETS: Boise, ID............... 130,000 12,300 9.5 15.4 33 196 85.7 Sacramento, CA.......... 654,000 16,000 2.4 7.0 29 174 15.4 Yakima, WA.............. 64,000 7,400 11.6 10.5 33 196 66.7 Coos Bay, OR............ 26,000 -- -- 5.4 20 118 95.2 Eureka, CA.............. 42,000 -- -- 4.1 10 58 76.9 Helena, MT.............. 22,000 -- -- 9.7 21 118 100.0 Kennewick, WA(8)........ 72,000 -- -- 14.4 33 196 69.2 Klamath Falls, OR....... 23,000 -- -- 4.4 21 100 100.0 Roseburg, OR............ 32,000 -- -- 4.3 21 124 100.0 --------- ------ ---- ---- ---------- TOTALS................ 2,538,000 63,100 4.8%(3) 9.8%(4) Avg. 82.8 % ========= ====== ==== ==== ========== </TABLE> - ------------------------- (1) LOS is defined as the number of households in the market that can receive an unobstructed signal through a receiving antenna that is elevated 30 feet above ground level. Estimated LOS Households are based upon engineering studies performed for the Company. (2) Number of Subscribers includes single family homes, the number of units in each multiple dwelling unit ("MDU") and commercial subscribers. (3) Market Penetration was derived by dividing the Number of Subscribers in each market as of June 30, 1996 by the number of Estimated LOS Households as of December 31, 1995 in that market. Total Market Penetration was derived by dividing the Total Number of Subscribers as of June 30, 1996 for all Operating Systems by the total Estimated LOS Households as of December 31, 1995 for all Operating Systems. (4) Based upon estimates of household growth by CACI Marketing Systems ("CACI") and the Company's LOS household engineering studies, the Company estimates the LOS households in its markets will increase by 9.8% from 1995 to 2000. CACI projects a U.S. mean household growth rate of 5.3% for the same period. (5) Spectrum is measured in megahertz ("MHz"), with each wireless cable channel containing 6 MHz of bandwidth except for channel 2A which contains 4 MHz. The Sacramento System includes channel 2, which is a full 6 MHz of bandwidth, but all of the remaining systems include channel 2A. The Number of Channels Controlled and Amount of Spectrum Controlled figures include one 6 MHz Low Power Television ("LPTV") channel in Fort Pierce and three 6MHz LPTV channels in Melbourne. (6) Percentage of Commercial Licenses Owned is calculated by dividing the number of commercial channels for which licenses are owned by the Company by the total number of commercial channels for which licenses are available in each market, in each case exclusive of LPTV channels. The Company owns the licenses for the following number of commercial channels in each market: Fort Pierce, 13; Melbourne, 13; West Palm Beach, 11; Boise, 18; Sacramento, 2; Yakima, 14; Coos Bay, 20; Eureka, 10; Helena, 21; Kennewick, 9; Klamath Falls, 21; and Roseburg, 21. The total number of commercial channels available for license ownership in Fort Pierce, Melbourne, West Palm Beach, Sacramento, Eureka and Kennewick is 13 and the total number of commercial channels available for license ownership in Boise, Yakima, Coos Bay, Helena, Klamath Falls and Roseburg is 21, of which 8 are commercially available ITFS channel licenses. See "Business -- Licenses and Channel Leases." In the markets where ITFS channel licenses are commercially available, the Company, as the holder of the exclusive right to apply for currently and subsequently available commercial channels (the "BTA Authorization"), has the exclusive right to file license applications under FCC rules and regulations, subject only to applications of educational and non-profit institutions and restrictions resulting therefrom. See "Risk Factors -- Uncertainty of Ability to Obtain FCC Authorizations." (7) The Number of Channels Controlled, Amount of Spectrum Controlled and the Percentage of Commercial Licenses Owned data for West Palm Beach are subject to the receipt of certain approvals from the FCC and/or third party interference agreements. Any delays or failures in obtaining governmental approvals or interference agreements may delay the Company from launching the West Palm Beach System, transmitting the maximum number of channels it controls, or may cause the Estimated LOS Households in West Palm Beach to be decreased. See "Risk Factors -- Interference Issues." (8) The Number of Channels Controlled, Amount of Spectrum Controlled and Percentage of Commercial Licenses Owned data contained in the table for the Kennewick System are subject to the consummation of the Kennewick acquisition. See "Business -- History." THE OFFERING <TABLE> <S> <C> Class A Common Stock Offered Hereby................ 2,350,000 shares Common Stock to be Outstanding after the Offering: Class A Common Stock.......................... 3,062,621 shares(1) Class B Common Stock.......................... 8,366,515 shares(2)(3) ---------------------------------------- Total.................................... 11,429,136 shares(3) ======================================= Voting Rights...................................... Each share of Class A Common Stock is entitled to one vote and each share of Class B Common Stock is entitled to ten votes on all matters requiring a shareholder vote. Each class of Common Stock has identical economic rights. See "Description of Capital Stock -- Common Stock." Use of Proceeds.................................... To repay in full its outstanding indebtedness under the Revolving Credit Facility and to finance further expansion and development of the Operating Systems, capital expenditures and operating expenses in connection with the launch and development of the Planned Systems and possible acquisitions of additional wireless cable systems, assets or channel rights. Proposed Nasdaq National Market Symbol............. WBSA </TABLE> - ------------------------- (1) Reflects the 2,350,000 shares of Class A Common Stock offered hereby and an additional 712,621 shares of Class A Common Stock issuable in payment of the accrued dividend on the Convertible Preferred Stock through October 31, 1996 (the estimated closing date of the Offering). The actual number of shares of Class A Common Stock issued in the conversion of the accrued dividend will be dependent on the actual closing date of the Offering. (2) Class B Common Stock is convertible into Class A Common Stock on a one-for-one basis at the option of the holder and in certain other circumstances. See "Description of Capital Stock -- Common Stock." (3) Does not include 407,475 shares of Class B Common Stock issuable upon exercise of stock options anticipated to be outstanding as of October 31, 1996, of which options to purchase 355,328 shares have an exercise price of $8.37, and options to purchase 52,147 shares have an exercise price at the initial public offering price per share. As of October 31, 1996 options to purchase 123,275 shares are currently exercisable. See "Description of Capital Stock." SUMMARY CONSOLIDATED FINANCIAL DATA The summary consolidated financial data as of and for each period in the three year period ended December 31, 1995 have been derived from audited financial statements of the Company and its subsidiaries. The following summary consolidated financial data for the six month periods ended June 30, 1995 and June 30, 1996 have been derived from unaudited consolidated financial statements that in the opinion of the Company reflect all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial data for such periods. The summary pro forma consolidated statement of operations and other data give effect to: (a) the acquisition of the Boise and Yakima Systems (the "Acquisitions"); (b) the application of the proceeds from the issuance of the Convertible Preferred Stock to effect the Acquisitions; and (c) the conversion of all outstanding shares of Convertible Preferred Stock into Class B Common Stock and the accrued dividend into Class A Common Stock (the "Conversion"), as if all such events had occurred on January 1, 1995. The Acquisitions, the issuance of Convertible Preferred Stock and the Conversion are referred to collectively herein as the "Transactions." The pro forma data should not be considered indicative of actual results that would have been achieved had the events described above been consummated on the date or for the periods indicated and do not purport to indicate results of operations for any future period. These data should be read in conjunction with the Consolidated Financial Statements of the Company and Notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Pro Forma Consolidated Financial Data," each of which is included elsewhere in this Prospectus. The Consolidated Financial Statements include operations of the Predecessor Partnership to March 1994, and the operations of the Company thereafter. The Company's acquisition and development of its systems during the periods reflected in the Summary Consolidated Financial Data materially affect the comparability of that data from one period to another. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, -------------------------------------------------- ----------------------------------------- PRO FORMA PRO FORMA PRO FORMA 1992 1993 1994 1995 1995(B) 1995 1996 1995(B) 1996(B) ------- ------- ------- -------- --------- ------- ------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA:(A) Revenues....................... $ 361 $ 2,669 $ 9,591 $ 16,874 $18,431 $ 7,480 $10,190 $ 9,037 $10,190 Expenses....................... 1,804 6,758 13,998 24,054 25,801 10,559 13,604 13,604 13,604 Loss from operations........... (1,443) (4,089) (4,407) (7,180) (7,370) (3,079) (3,414) (3,269) (3,414) Interest income (expense), net.......................... 94 39 (539) (447) (169) (274) (493) 4 (493) Net loss....................... (1,337) (4,015) (4,938) (7,627) (7,539) (3,353) (3,907) (3,265) (3,907) Preferred stock dividend requirement.................. -- -- -- (2,414) -- (611) (1,894) -- -- Net loss applicable to common stock................. (1,337) (4,015) (4,938) (10,041) (7,539) (3,964) (5,801) (3,265) (3,907) Net loss per common share(c)... $ (1.17) $ (2.10) $ (1.31) $ (2.40) $ (0.83) $ (0.95) $ (1.39) $ (0.36) $ (0.43) Weighted average common and common equivalent shares outstanding(c)............... 1,144 1,913 3,762 4,181 9,074 4,181 4,181 9,074 9,074 </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 ------------------------ AS ACTUAL ADJUSTED(D) ------- ----------- (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................................................. $ 217 $19,655 Investment in wireless cable systems, net................................................. 54,755 54,755 Total assets.............................................................................. 58,271 77,709 Long-term debt, including current portion................................................. 12,545 -- Convertible preferred stock............................................................... 39,308 -- Total stockholders' equity................................................................ 1,080 72,370 </TABLE> <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ------------------------------------------------- ----------------------------------------- PRO FORMA PRO FORMA PRO FORMA 1992 1993 1994 1995 1995(B) 1995 1996 1995(B) 1996(B) ------- ------- ------- ------- --------- ------- ------- --------- --------- (IN THOUSANDS, EXCEPT SYSTEM AND SUBSCRIBER DATA) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> OPERATING AND OTHER DATA: EBITDA(e)....................... $(1,069) $(2,489) $ 242 $ 3,169 $ 3,778 $ 1,477 $ 1,971 $ 2,086 $ 1,971 Systems in operation at end of period................. 1 2 3 5 5 5 5 5 5 Total subscribers at end of period........................ 3,500 11,500 34,600 57,000 57,000 52,700 63,100 52,700 63,100 </TABLE> - ------------------------- (footnotes on next page) (a) During the period from inception (October 1991) through March 15, 1994, the Company operated as a Delaware limited partnership. Subsequent to March 15, 1994, the Company has operated as a Delaware corporation. (b) The summary pro forma consolidated statement of operations and other data give effect to the Transactions as if such events had occurred on January 1, 1995. See "Pro Forma Consolidated Financial Data." (c) Excludes the common stock equivalents of employee stock options, as the effect on all periods presented is anti-dilutive. The computation of weighted average common and common equivalent shares outstanding and net loss per common share for years prior to 1995 assumes a pro forma issuance of common shares to the partners in exchange for their partnership interests at the time of, and in proportion to, partner capital contributions to the Predecessor Partnership. (d) As adjusted (i) to reflect sale of 2,350,000 shares of Class A Common Stock offered hereby at an offering price of $15.00 per share (the mid-point of the range of the anticipated initial public offering price) after deducting underwriting discounts and commissions and estimated offering expenses, and the application of the estimated net proceeds therefrom; and (ii) the Transactions. (e) "EBITDA" means net income (loss) before interest income, interest expense, income taxes, depreciation and amortization expenses. EBITDA is commonly used as a measure of performance in the subscription television industry; however, EBITDA does not purport to represent cash provided by or used in operating activities and should not be considered in isolation or as a substitute for measures of performance in accordance with generally accepted accounting principles. EBITDA is also a primary factor in determining the effective interest rate and maximum borrowings under the Revolving Credit Facility. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001019361_rofin_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001019361_rofin_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this Prospectus. Unless the context otherwise requires, the terms "Company" or "Rofin-Sinar" mean Rofin-Sinar Technologies Inc. and its combined subsidiaries after giving effect to the restructuring described below under "Background of the Offerings" and "Certain Transactions -- Transfer Agreements." Unless otherwise indicated, the information in this Prospectus assumes that there will be no exercise of the Underwriters' over-allotment option. All references to "$" or "dollars" are to United States dollars. All financial information presented in this Prospectus has been prepared in accordance with U.S. generally accepted accounting principles. THE COMPANY Rofin-Sinar is a leader in the design, development, engineering, manufacture and marketing of laser products for cutting, welding and marking a wide range of industrial materials (collectively, "material processing applications"). Lasers are a non-contact technology for material processing which have several advantages that are desirable in industrial applications. The Company's lasers all deliver a high-quality beam at guaranteed power outputs and feature compact design, high processing speed, flexibility, low operating and maintenance costs and easy integration into the customer's production process. As a technological leader in both CO/2/ and Nd:YAG lasers, the Company is able to meet a broad range of its customers' material processing requirements. The Company believes it has a worldwide market share (based on sales volume) of approximately 20% for laser products used for cutting and welding applications and that it is among the largest suppliers of laser products used for marking applications in Europe and the Asia/Pacific region (other than Japan). Over 80% of the Company's sales in fiscal 1995 were made to existing customers. The Company has sold more than 4,000 laser sources since 1975 and currently has over 1,500 active customers (including multinational companies with multiple facilities purchasing from the Company). During the 1995 fiscal year and the first nine months of fiscal 1996, respectively, approximately 75% and 69% of the Company's revenues were from sales and servicing of laser products for cutting and welding applications and approximately 25% and 31% were from sales and servicing of laser products for marking applications. Through its global manufacturing, distribution and service network, the Company provides a comprehensive range of laser solutions to three principal target markets for material processing lasers: the Machine Tool, Automotive and Semiconductor & Electronics industries. The Company sells directly to industrial end-users, to original equipment manufacturers ("OEMs"), principally in the Machine Tool industry, who integrate Rofin-Sinar's laser sources with other system components and to distributors. Many of Rofin-Sinar's customers are among the largest global participants in their respective industries, and include Aerospatiale, ASM, BMW, Boeing, Bosch, Chrysler, Ford, General Motors, Mercedes-Benz, Philips, SGS Thomson, Siemens, Thyssen, TRW, Volkswagen and Volvo. During fiscal 1995 and the first nine months of fiscal 1996, 37% and 33% of the Company's sales were in North America, 50% and 46% were in Europe and 13% and 21% were in the Asia/Pacific region, respectively. In developing its laser solutions, the Company offers customers its expertise in: (i) product development and manufacturing (i.e., state-of-the-art product development and manufacturing services based on over 20 years of laser technology experience and applications know-how); (ii) application and process development (i.e., developing new laser-based applications for manufacturing customers and assisting them in successfully integrating lasers into their production processes); (iii) system engineering (i.e., advising customers on machine design, including tooling, automation and controls, for customers in need of "turn-key" solutions); and (iv) extensive after-sales support for its laser products (including technical support, field service, maintenance and training programs and rapid spare parts delivery). COMPETITIVE ADVANTAGES The Company attributes its strong market position and its long-standing customer relationships to several competitive advantages: (i) its technological leadership and product innovation; (ii) its sophisticated application development; (iii) its broad product range; (iv) its product quality; (v) its comprehensive customer service; (vi) and its global presence. BUSINESS STRATEGY The Company's business strategy is to maximize shareholder value by (i) strengthening its position as a leading supplier to the global market for cutting and welding applications and (ii) capitalizing on its leadership position in cutting and welding, its strength in the European and Asian marking markets and its other significant competitive advantages to build its share of the U.S. market for marking applications. The Company believes that the major sources of its growth over the next three years will be the following: . Developing new laser products through technological innovation in response to evolving customer needs for increased output power, greater penetration and higher processing speeds. . Focusing on cross-selling to existing customers in target markets, in particular to the Machine Tool, Automotive and Semiconductor & Electronics industries. . Capitalizing on its global presence to attract new customers in the three principal geographic markets in which its customers operate (North America, Europe and the Asia/Pacific region). . Offering customized solutions based on standard laser sources. BACKGROUND OF THE OFFERINGS Prior to the Offerings, the business of the Company was conducted by subsidiaries of Siemens, a company organized under the laws of the Federal Republic of Germany whose principal business is the design, development, manufacture and marketing of a wide range of electrical and electronics products and systems. Siemens originally acquired the laser businesses of Rofin-Sinar in 1987 to obtain access to laser technologies for application in a number of industrial areas. Since being acquired, however, the Company has pursued and developed broader goals and capabilities independent of Siemens. Siemens and the Company have concluded that Rofin-Sinar will have a better opportunity to achieve its full potential as an independent entity rather than as part of Siemens. Siemens has conducted the laser business through its directly and indirectly wholly owned subsidiaries Rofin-Sinar Inc. ("RSI") and Rofin-Sinar Laser GmbH ("RSL"), which in turn owns Rofin-Sinar France S.A., Rofin-Sinar Italiana S.r.l. (90.65% owned) and 51% of Rofin-Marubeni Laser Corporation (collectively, the "Rofin-Sinar Subsidiaries"). On July 19, 1996, Rofin-Sinar Technologies Inc. was incorporated under the laws of Delaware to be a holding company for RSI and RSL upon completion of the Offerings as described below. The Company will use approximately $70.3 million of the net proceeds of the Offerings (excluding any proceeds received from the exercise by the Underwriters of their over-allotment option) to purchase the stock of RSL from Siemens and the stock of RSI from SPC, a wholly owned subsidiary of SC. Because the purchase price for RSL and RSI is derived from the offering price of the shares of Common Stock of the Company being sold in the Offerings, it reflects the factors considered in determining such offering price. Such offering price was determined through discussions and negotiations among the Company, Siemens, SPC and the Underwriters. See "Risk Factors -- Proceeds of Offerings Payable to Siemens; Purchase Price and Terms of Transfer of RSL and RSI Stock," "Certain Transactions -- Transfer Agreements" and "Underwriting." The Company maintains executive offices and manufacturing facilities at 45701 Mast Street, Plymouth, Michigan 48170, where its telephone number is (313) 455-5400. The principal executive offices of RSL and its manufacturing facilities for lasers for cutting and welding applications are located at Berzeliusstrasse 83, D-22113 Hamburg in the Federal Republic of Germany, where its telephone number is 49-40-733-630. RSL's manufacturing facilities for lasers for marking applications are located at Neufeldstrasse 16/ Gunding, D- 85232 Bergkirchen in the Federal Republic of Germany, where its telephone number is 49-8131-7040. THE OFFERINGS <TABLE> <C> <S> Common Stock Offered(1): U.S. Offering.................................... 8,000,000 shares International Offering........................... 2,000,000 shares Total Offerings(1).................................. 10,000,000 shares Common Stock Outstanding after the Offerings(1)(2).. 10,000,000 shares Use of Proceeds..................................... Assuming the Underwriters do not exercise their over-allotment option, approximately $70.3 million of the net proceeds of the Offerings will be paid by the Company to Siemens and SPC as consideration for the Company's acquisition of RSL and RSI. The Company will retain $19.0 million of the net proceeds, together with any net proceeds received by the Company from the exercise of the Underwriters' over- allotment option, to use for general corporate purposes, including repayment of $7.0 million of indebtedness owed to Siemens and SC and future acquisitions, if any. See "Use of Proceeds." Proposed Nasdaq National Market Symbol.............. "RSTI" Dividend Policy..................................... The Company intends to retain its earnings to fund development of its business and does not anticipate paying cash dividends in the foreseeable future. See "Dividend Policy." </TABLE> - -------- (1) Assumes the Underwriters' over-allotment option for up to 1,500,000 shares of Common Stock is not exercised. See "Underwriting." (2) Excludes 400,000 shares issuable at the initial public offering price upon exercise of options to be granted to certain officers and key employees of the Company and 10,500 shares of stock (including 7,500 shares of restricted stock) to be issued to non-employee directors of the Company pursuant to employee benefit plans at the time of the Offerings. Such options are exercisable, subject to vesting requirements, commencing on the first anniversary of the closing of the Offerings and such 7,500 shares of restricted stock are transferable, subject to vesting and forfeiture requirements, commencing on the first anniversary of the closing of the Offerings. See "Management--Equity Incentive Plan" and "--Director Compensation." SUMMARY COMBINED FINANCIAL INFORMATION The Statement of Operations Data for each of the years in the three-year period ended September 30, 1995 and the nine-month period ended June 30, 1996 and the Balance Sheet Data as of September 30, 1994 and 1995 and June 30, 1996 set forth below have been derived from the Company's combined financial statements included elsewhere in this Prospectus, which have been audited by KPMG Peat Marwick LLP, the Company's independent auditors. Net sales for the fiscal years ended September 30, 1991 and 1992 and Balance Sheet Data as of September 30, 1993 are unaudited and have been derived from the Company's historical financial records. The Statement of Operations Data for the nine- month period ended June 30, 1995 and the Balance Sheet Data as of September 30, 1993 are unaudited but, in the opinion of management, such information reflects all adjustments consisting of only normal recurring adjustments necessary for a fair presentation of the financial data for the interim periods. The results for the interim periods presented are not necessarily indicative of the results for a full year. These data should be read in conjunction with "Management's Discussion and Analysis of Financial Conditions and Results of Operations," the Company's Combined Financial Statements and other financial information appearing elsewhere in this Prospectus. <TABLE> <CAPTION> NINE MONTHS YEARS ENDED SEPTEMBER 30, ENDED JUNE 30, --------------------------- ------------------ 1993 1994 1995 1995 1996 ------- ------- --------- ------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales(1)................ $60,034 $69,217 $ 92,466 $65,460 $ 83,372 Cost of goods sold.......... 47,745 46,993 57,162 40,475 51,466 Gross profit................ 12,289 22,224 35,304 24,985 31,906 Selling, general, and admin- istrative expenses......... 21,951 17,059 20,673 14,534 15,221 Research and development ex- penses..................... 10,276 6,834 6,719 5,903 5,850 Income (loss) from opera- tions...................... (19,938) (1,669) 7,912 4,548 10,835 Net interest expense........ 1,654 1,308 1,272 947 790 Income (loss) before income taxes...................... (21,386) (3,116) 6,265 3,489 10,092 Income tax expense (bene- fit)....................... (1,565) (1,422) 3,052 1,725 4,354 Net income (loss)........... (19,821) (1,694) 3,213 1,764 5,738 Pro forma net income per common share............... .37 .66 Shares used in computing pro forma net income per common share(2)................... 8,631,578 8,631,578 OPERATING DATA: As percentage of sales: Gross profit................ 20.5% 32.1% 38.2% 38.2% 38.3% Selling, general and admin- istrative expenses......... 36.6 24.6 22.4 22.2 18.3 Research and development ex- penses..................... 17.1 9.9 7.3 9.0 7.0 Income (loss) from opera- tions...................... (33.2) (2.4) 8.6 6.9 13.0 Income (loss) before income taxes...................... (35.6) (4.5) 6.8 5.3 12.1 </TABLE> <TABLE> <CAPTION> AT SEPTEMBER 30, ----------------------- AT JUNE 30, 1993 1994 1995 1996 ------- ------- ------- ----------- (IN THOUSANDS) <S> <C> <C> <C> <C> BALANCE SHEET DATA: Working capital(3).................... $ 7,672 $ 4,927 $14,530 $ 18,981 Total assets.......................... 84,580 76,667 90,995 104,509 Line of credit and loans.............. 22,196 22,380 21,805 25,587 Stockholders' equity.................. 35,837 30,583 39,673 41,798 </TABLE> <TABLE> <CAPTION> NINE MONTHS YEARS ENDED SEPTEMBER 30, ENDED JUNE 30, -------------------------- --------------- 1993 1994 1995 1995 1996 -------- -------- -------- ------- ------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> OTHER DATA: Depreciation and amortization...... 2,803 2,527 2,364 1,773 1,830 Backlog............................ 12,500 17,000 26,500 26,900 35,900 Sales per employee................. 135 184 227 166 188 </TABLE> - ------- (1) Net sales for the years ended September 30, 1991 and 1992 were $72,900 and $73,300, respectively. Other financial data for fiscal years 1991 and 1992 have not been provided as comparable information during these periods is not available due to changes in accounting software, overhead and expense allocation policies of the Company's parent and lack of historical US GAAP financial information for certain foreign locations. (2) Pro forma net income per share has been calculated for the year ended September 30, 1995 and the nine months ended June 30, 1996 assuming that 8,631,578 shares have been outstanding for such periods. Such shares represent a portion of the number of shares to be issued pursuant to the Offerings, the proceeds from which will be used to purchase the shares of RSL and RSI and to repay $7 million of indebtedness owed to Siemens and SC. (3) Working capital is defined as total current assets less total current liabilities.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001019376_roadhouse_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001019376_roadhouse_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f4e3eb459f2bc59b0dff803494ba3318a4f327e4
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+++ b/parsed_sections/prospectus_summary/1996/CIK0001019376_roadhouse_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (I) REFLECTS A ONE-FOR-THREE REVERSE SPLIT OF THE COMPANY'S COMMON STOCK WHICH WILL OCCUR PRIOR TO THE OFFERING, (II) ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION AND (III) GIVES EFFECT TO THE CONVERSION OF ALL OUTSTANDING SHARES OF THE COMPANY'S SERIES A PREFERRED STOCK AND SERIES B PREFERRED STOCK (TOGETHER, THE "ISSUED PREFERRED STOCK") INTO SHARES OF COMMON STOCK, WHICH CONVERSION WILL OCCUR CONCURRENTLY WITH THE CLOSING OF THE OFFERING. THE TERMS "COMPANY" AND "ROADHOUSE GRILL" REFER TO ROADHOUSE GRILL, INC. THE COMPANY The Company currently owns and operates 30 and franchises or licenses six full-service, casual dining restaurants under the name "Roadhouse Grill." The Roadhouse Grill concept offers a fun, value-oriented dining experience that features premium quality grilled entrees and friendly service consistent with the Company's motto: "Good Food and a Smile . . . That's Roadhouse Style."/registered trademark/ The comfortable, entertaining roadhouse setting is designed to appeal to a broad range of customers, including business people, couples, singles and particularly families. Roadhouse Grill restaurants have an energetic and casual atmosphere. The interior of each restaurant is large, open and visually appealing, featuring exposed ceilings and brick and lapboard cedar walls decorated with colorful, hand-painted murals and neon signs. Multi-level seating provides guests with a full view of the restaurant, including the exhibition grill and display kitchen, allowing everyone to enjoy the Roadhouse Grill experience. The exhibition cooking area features a mesquite-fired grill, a kitchen where homemade yeast rolls are made throughout the day and a display case filled with fresh cuts of meat, seafood and salads. To help create Roadhouse Grill's casual ambience, metal pails of roasted peanuts top each table, guests are encouraged to toss peanut shells on the floor, drinks are served in mason jars, long neck beers are delivered in metal buckets filled with ice, and a classic jukebox entertains guests with popular rock and country and western music. The exterior of each restaurant features rough-sawed siding, a wrap-around wood plank porch, a tin roof trimmed in neon and an oversized "Roadhouse Grill" sign. The Roadhouse Grill menu features aged USDA Choice steaks hand cut at each restaurant, ribs, chicken and seafood, all of which are grilled to order. In addition to grilled selections, the menu offers a variety of appetizers, sandwiches, salads and desserts, including signature items such as Roadhouse cheese wraps, hot-out-of-the-oven yeast rolls made from scratch each day and a daily selection of homemade ice cream. Prices range from $2.99 to $6.29 for lunch entrees and from $4.99 to $15.99 for dinner entrees. For the nine months ended September 29, 1996, the average guest check, including beverage, was approximately $8.75 for lunch and $13.25 for dinner. Since opening its first Roadhouse Grill in March 1993, the Company has grown rapidly, adding two additional restaurants in 1993, three restaurants in 1994, 13 restaurants in 1995 and, to date, 11 restaurants in 1996. Although the Company has recently opened restaurants in Georgia, South Carolina and upstate New York, the Company-owned Roadhouse Grill restaurants are located primarily in Florida. The Company's growth strategy is to continue opening Company-owned restaurants primarily in the Southeastern and Gulf Coast regions of the United States. The Company currently plans to open two more restaurants in 1996 and approximately 15 restaurants in 1997, subject to the Company's ability to obtain financing for such expansion following completion of the Offering. See "Future Capital Needs". The Company currently has six franchised or licensed restaurants. Of these, three are located in Malaysia and three are located in the United States. The Company expects that its international franchisees will open at least two additional Roadhouse Grill restaurants in Asia and the Pacific Rim by the end of 1997. Although the Company has granted certain domestic franchise/development rights, it intends to focus on expansion of Company-owned restaurants in the United States. The Company believes that Company-owned Roadhouse Grill restaurants have achieved attractive unit level economics. The 15 Company-owned restaurants that were open for the entire twelve-month period ended September 29, 1996 generated average restaurant revenues of approximately $2.8 million for such period. The average cash investment, excluding real estate costs and pre-opening expenses, required to open each of the 27 Roadhouse Grill restaurants opened by the Company prior to September 29, 1996 was approximately $1.3 million. The Company's current prototype restaurant is approximately 6,800 square feet with seating for approximately 210 guests. The Company expects that the average cash investment required to open such a prototype restaurant, including pre-opening expenses but excluding real estate costs, will be approximately $1.1 million or $1.4 million, depending upon whether the Company converts an existing building or constructs a new restaurant. Real estate costs will vary depending upon whether the Company purchases or leases restaurant properties and depending upon market conditions and location of the properties. The average real estate acquisition cost for the 11 restaurant sites owned by the Company was approximately $898,000. The average monthly occupancy cost in Fiscal 1996 (through September 29, 1996) for the 18 restaurant sites leased by the Company was approximately $11,000 per site. Roadhouse Grill restaurants are based upon a roadhouse-style concept developed in 1991 by the Company's founder and Chief Executive Officer, John David Toole III. During the last two years, the Company has assembled a corporate management team averaging more than 11 years of experience in the restaurant industry. The Company believes that personable, well-trained employees are essential to the overall success of Roadhouse Grill restaurants and, accordingly, selects employees based upon personality and initiative, devotes significant resources to employee development and emphasizes training and internal promotion. The Company was incorporated in Florida in October 1992, and its principal executive offices are located at 6600 N. Andrews Avenue, Suite 160, Fort Lauderdale, Florida 33309. Its telephone number at that address is (954) 489-9699. THE OFFERING Common Stock offered by the Company ......2,000,000 shares Common Stock to be outstanding after the Offering .....................8,665,996 shares(1) Use of proceeds .......................... Approximately 33% of the net proceeds of the Offering will be used to repay indebtedness owed to a former Chairman of the Board of the Company. The remainder of the net proceeds will be used to finance the opening of additional restaurants, repay other indebtedness and for other general corporate purposes. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001019504_frontiervi_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001019504_frontiervi_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..8950a74d7b173eacf63334de136b80264a58b292
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. The information set forth in this Prospectus gives effect to the organization of Capital, a newly created corporation, as a wholly owned subsidiary of FVOP. As used in this Prospectus, the term "Acquisition Systems" includes the cable television systems acquired from Phoenix Grassroots Cable Systems, L.L.C. on August 30, 1996 and the term "Acquisition Transactions" includes the purchase of such systems. See "Risk Factors" for a discussion of certain risks associated with an investment in the Notes. See "Glossary" for the definitions of certain terms used herein. THE COMPANY The Company owns, operates and develops cable television systems in small and medium-sized suburban and exurban communities, primarily concentrated in two operating regions -- New England and Ohio/Kentucky -- with a third, smaller group of cable television systems in the Southeast. To date, the Company has acquired strategically located cable television systems at historically attractive values, thus establishing its core geographic base and building subscriber mass. Since closing its initial acquisition in November 1995, the Company has become one of the 35 largest multiple system cable operators ("MSOs") in the United States. The cable television systems owned by the Company on June 30, 1996 (the "Existing Systems") passed approximately 304,700 homes in six states and served approximately 217,900 basic subscribers as of such date. The Company has recently acquired or entered into agreements to acquire, for an aggregate purchase price of approximately $244.4 million (subject to adjustment), additional systems (the "Acquisition Systems") which passed approximately 202,800 homes and served approximately 146,700 basic subscribers as of June 30, 1996. The Acquisition Systems primarily consist of certain significant cable television systems to be acquired from American Cable Entertainment of Kentucky-Indiana, Inc. ("ACE") and from an affiliate of Triax Communications Corp. ("Triax"). The ACE systems, serving approximately 82,400 subscribers in Kentucky and Indiana, and the Triax systems, serving approximately 53,200 subscribers in Ohio/Kentucky and the Southeast, are contiguous or in close proximity to the Existing Systems, consistent with the Company's strategy of clustering its cable television systems to achieve economies of scale and operating efficiencies. The Company intends to continue to pursue, on an opportunistic basis, additional strategic acquisitions and smaller "fill-in" acquisitions within its existing operating regions to further enhance their operational and financial performance. In addition, the Company has sold or entered into agreements to sell three systems in the Southeast (the "Disposition Systems") for an aggregate sales price of approximately $17.0 million, representing a per subscriber sales price that is over 30% more than the average per subscriber acquisition cost of the Existing Systems in the Southeast. As of June 30, 1996, after giving pro forma effect to the purchase of the Acquisition Systems and the sale of the Disposition Systems, the Company's cable television systems passed approximately 494,300 homes and served approximately 353,800 basic subscribers, representing a basic penetration level of 71.6%. On such a pro forma basis, as of June 30, 1996, the Company would be one of the 25 largest MSOs in the United States and a dominant cable operator in its two primary operating regions. On the same pro forma basis, for the six months ended June 30, 1996 and for the year ended December 31, 1995, the Company had revenues of approximately $60.6 million and $117.0 million, respectively, and EBITDA (as defined) of approximately $29.3 million and $53.3 million, respectively. In order to execute the Company's business strategy, James C. Vaughn and John S. Koo, the Company's co-founders, have assembled a senior management group of six individuals with over 85 years of collective experience in the cable industry. The equity investors in the Company include affiliates of J.P. Morgan & Co. Incorporated, Brown Brothers Harriman & Co., Olympus Partners and First Union Capital Partners, Inc. After giving pro forma effect to a $76.0 million rights offering (the "Rights Offering"), which is expected to be consummated concurrently with or prior to the Offering, the Company will have obtained aggregate equity capital commitments of approximately $195.7 million, of which $115.6 million has been invested in the Company. The Existing Systems and the Acquisition Systems represent the substantial completion of the first phase of the Company's business plan. Through its core acquisitions in New England and Ohio/Kentucky, the Company has established significant subscriber mass and positioned itself as a dominant cable operator in each of its primary operating regions. The Company is currently the second largest MSO in Maine, and, after giving pro forma effect to the purchase of the Acquisition Systems, as of June 30, 1996, the Company would be the second largest MSO in Kentucky and one of the largest operators of cable systems in small and medium-sized markets in southern Ohio. In the Southeast, the Company has accumulated attractive systems which it expects either to consolidate with subsequent system acquisitions, trade for systems within the Company's primary operating regions or divest at favorable prices. The next phase of the Company's business plan will focus on increasing subscriber density within its primary operating regions through selective acquisitions, integrating and streamlining business operations, making significant investment and improvements in technical plant and developing existing and new cable and broadband telecommunications services. BUSINESS STRATEGY The Company's objective is to increase its operating cash flow and the value of its systems by utilizing its expertise in acquiring and managing cable systems. Through strategic acquisitions and internal growth, the Company seeks to own and operate cable television systems serving at least 500,000 subscribers in geographically concentrated clusters serving 100,000 or more subscribers. To achieve its objective, the Company pursues the following business strategies: TARGET CLUSTERS IN SMALL AND MEDIUM-SIZED MARKETS. The Company has acquired clusters of cable television systems serving small and medium-sized suburban and exurban markets which are generally within 50 to 100 miles of larger urban and suburban communities. The Company believes that such markets have many of the beneficial attributes of larger urban and suburban markets -- moderate to high household growth, economic stability, attractive subscriber demographics and favorable potential for additional clustering. Moreover, in such markets, the Company believes that (i) it will face less direct competition given the lower population densities and higher costs per subscriber of installing cable plant, (ii) it will maintain higher subscriber penetration levels and lower customer turnover based on fewer competing entertainment alternatives, and (iii) its overhead and certain operating costs will generally be lower than those in larger markets. GROW THROUGH STRATEGIC AND OPPORTUNISTIC ACQUISITIONS. Beginning with its initial acquisition in November 1995 of systems in Maine and Ohio, the Company has systematically implemented a focused acquisition and consolidation strategy within its two primary operating regions of New England and Ohio/Kentucky and its systems group in the Southeast. Going forward, the Company will seek to acquire systems that can be readily integrated into its primary operating regions in order to maximize operating efficiencies. As a consolidator of systems within its primary operating regions, the Company will pursue both "fill-in" acquisitions of smaller systems as well as strategic acquisitions. The Company believes that such acquisition targets will have diminished strategic value to other prospective buyers given its geographic prominence in these regions. Consequently, the Company believes these systems can be purchased at favorable prices. The Company also opportunistically pursues acquisitions outside of its primary operating regions that can either be resold at higher prices or exchanged for systems that are contiguous to its primary operating regions. The Company has begun to execute this strategy with its Southeast systems. IMPLEMENT OPERATING EFFICIENCIES. Upon acquiring a system, the Company implements extensive management, operational and technical changes designed to improve operating efficiencies, enhance operating cash flow and operating margins and reduce overhead through economies of scale. Within each of its operating regions, the Company has begun to streamline field operations by establishing centralized customer service facilities, installing state-of-the-art telephone systems, management information systems ("MIS") and billing systems and eliminating duplicative functions. These changes have resulted in lower administrative costs, better trained employees and a higher level of customer service. Lastly, the Company seeks to reduce technical operating costs and capital expenditures associated with the implementation of new channels and services by consolidating headends. By serving more subscribers from a single distribution point, the Company has begun to decrease ongoing technical maintenance expenses, improve system reliability and enhance cost efficiencies in adding new channels and services. PROMOTE AND EXPAND SERVICE OFFERINGS. The Company aggressively promotes and expands services to add and retain customers and increase revenue per customer. The Company employs a coordinated array of marketing techniques, including door-to-door sales, telemarketing, direct mail, print and broadcast advertising, flyers and billing inserts and cross-channel promotion. Many of the Company's customers received limited service offerings prior to acquisition and, accordingly, the Company has begun to expand and repackage the basic and premium services it offers. The Company believes that significant opportunity exists to increase service revenue by expanding the programming and pricing options available to its customers. For example, the Company introduced between three and seven new tiered and premium channels to 89% of the New England subscribers in May and June of 1996, including lower priced premium services such as The Disney Channel, Starz! and Encore. The new service launch was accompanied by an aggressive direct mail and telemarketing campaign and an average basic service rate increase. By July 1996, monthly basic subscribers and pay units in the New England operating region increased by 1.6% and 9.7%, respectively. The Company is in the process of implementing similar new programming launches and marketing campaigns in its other primary service areas. As systems are consolidated and technically enhanced, the Company will also expand addressability, currently accessed by only 27.6% of the subscribers in the Existing Systems and the Acquisition Systems. Addressability will enable the Company to increase revenues derived from pay-per-view movies and events and new pay services such as interactive video games, including The Sega Channel. In addition, with the expanded advertising market delivery afforded by larger, contiguous system clusters, the Company plans to intensify local spot advertising sales efforts. STRATEGICALLY UPGRADE SYSTEMS. The Company will selectively upgrade its cable systems to increase channel capacity, enhance signal quality and improve technical reliability. The Company believes such technical upgrades will not only enhance the potential for increasing revenues, but also will improve customer and community relations and further solidify the Company's position as the preeminent local provider of video services in its operating regions. In addition, by implementing a hybrid fiber optic-backbone/coaxial cable design across the portions of its cable plant that serve its highest subscriber densities, the Company will effectively position itself for the introduction of new broadband and interactive services. In its primary operating regions of New England and Ohio/Kentucky, the Company intends to invest up to $49 million over the next five years to establish a technical platform of at least 400 MHz to 450 MHz (54 to 62 channels) in a majority of its systems and 550 MHz to 750 MHz (78 to 100 channels) in certain of its larger markets. Over the same period, the Company plans to invest up to an additional $11 million for addressable converters in its two primary operating regions. FOCUS ON THE CUSTOMER. The Company continually seeks to provide superior customer service and improve programming and service choices for its subscribers. By centralizing customer service at the regional level, all functions that directly impact subscribers -- sales and marketing, customer service and administration and technical support -- are implemented more quickly and effectively. In addition, as a result of its consolidation efforts, the Company has been able to enhance its customer service by increasing hours of operations for its customer service functions, better coordinating service calls, increasing responsiveness to customer inquiries and standardizing maintenance procedures. While centralizing and improving customer service, the Company has retained local payment and technical offices to maintain its presence and visibility within its communities. THE EXISTING SYSTEMS AND THE ACQUISITION SYSTEMS The following table illustrates certain subscriber and operating statistics for the Company as of June 30, 1996 on a pro forma basis giving effect to the purchase of the Acquisition Systems and the sale of the Disposition Systems (see "--Summary Financial and Operating Data of the Company" for a description of certain terms used in the following table): <TABLE> <CAPTION> --------------------------------------------------------------------- AVG. MONTHLY REVENUE PER HOMES BASIC BASIC PREMIUM BASIC CABLE SYSTEMS PASSED SUBSCRIBERS PENETRATION PENETRATION SUBSCRIBER(1) -------- ----------- ----------- ----------- ------------- <S> <C> <C> <C> <C> <C> Existing Systems(2): New England.............................. 82,985 60,747 73.2% 35.3% $28.01 Ohio/Kentucky............................ 159,662 116,261 72.8% 45.0% 29.73 Southeast................................ 62,082 40,898 65.9% 42.9% 24.23 -------- ----------- ----------- ----------- ------------- Total Existing Systems................. 304,729 217,906 71.5% 41.9% 28.22 Acquisition Systems(3): ACE...................................... 107,073 82,415 77.0% 34.2% 30.37 Triax.................................... 79,237 53,159 67.1% 56.5% 30.28 Other.................................... 16,512 11,115 67.3% 43.5% 28.74 -------- ----------- ----------- ----------- ------------- Total Acquisition Systems.............. 202,822 146,689 72.3% 43.0% 30.21 Disposition Systems(4):.................... (13,233) (10,784) 81.5% 43.1% 25.20 -------- ----------- ----------- ----------- ------------- Total Systems.......................... 494,318 353,811 71.6% 42.3% $29.02 ======== =========== =========== =========== ============ </TABLE> - --------------- (1) Average monthly revenue per basic subscriber equals revenue for the month ended June 30, 1996 divided by the number of basic subscribers as of the end of such period. (2) The Existing Systems include cable television systems acquired from (i) United Video Cablevision, Inc. ("UVC"), (ii) Longfellow Cable Company, Inc. and two of its affiliates ("Longfellow"), (iii) C4 Media Cable Southeast, Limited Partnership and County Cable Company, L.P. ("C4"), (iv) Americable International Maine, Inc. ("Americable") and (v) affiliates of Cox Communications, Inc. ("Cox"). (3) The Acquisition Systems include the ACE Systems, Triax Systems, Grassroots Systems and Penn/Ohio Systems. See "--The Acquisition Systems." (4) The Disposition Systems include certain systems acquired from C4 in the Southeast region. See "--The Disposition Systems." THE ACQUISITION SYSTEMS ACE Systems. The Company has entered into an agreement with ACE to acquire systems (the "ACE Systems") serving approximately 82,400 subscribers as of June 30, 1996 in Kentucky and Indiana for $146.0 million. The Company intends to operate all of the ACE Systems as part of its Ohio/Kentucky cluster. It is anticipated that this acquisition will be completed concurrently with or promptly following the consummation of the Offering, although there can be no assurances that this transaction will be consummated. On September 11, 1996, the bankruptcy court administering ACE's voluntary bankruptcy proceedings entered an order confirming ACE's plan of reorganization and approving the sale of the ACE Systems to the Company. The ACE transaction is subject to such order becoming a final order, which, in the absence of an unanticipated appeal or rehearing, will occur on September 23, 1996. Triax Systems. The Company has also entered into an agreement with Triax to acquire systems (the "Triax Systems") serving approximately 53,200 subscribers as of June 30, 1996 in Ohio, Kentucky, Virginia, West Virginia, Pennsylvania, Maryland and North Carolina for $85.0 million. The Company intends to operate the systems in Kentucky, Ohio and West Virginia, serving approximately 28,700 basic subscribers, as part of its Ohio/Kentucky cluster. The Company intends to operate the systems in North Carolina, Virginia, Pennsylvania and Maryland, serving approximately 24,500 basic subscribers, as part of its Southeast region. It is anticipated that this acquisition will be completed in the third or fourth quarter of 1996, although there can be no assurances that this transaction will be consummated. Upon acquisition and the subsequent integration of the ACE Systems and the Triax Systems with the Existing Systems, the Company will serve over 200,000 subscribers in communities south of Columbus, Ohio to the southern perimeter of Lexington, Kentucky. Within this region are ten county service areas along the Interstate 75 "growth corridor," which is among the fastest growing areas in the region. By 1997, it is anticipated that 30% of the Company's subscribers within this region will be served by fiber-to-the-feeder 550 MHz or 750 MHz technical plant. Other Acquisitions. In addition to the acquisition of the ACE Systems and the Triax Systems, the Company has recently acquired or entered into agreements to acquire systems serving an aggregate of approximately 11,100 basic subscribers as of June 30, 1996 for approximately $13.4 million. On August 30, 1996, the Company purchased from Phoenix Grassroots Cable Systems, L.L.C. ("Grassroots") systems (the "Grassroots Systems") serving approximately 7,800 basic subscribers as of June 30, 1996 in Maine and New Hampshire for approximately $9.3 million (as adjusted). In August 1996, the Company entered into an agreement with SRW, Inc.'s Penn/Ohio Cablevision, L.P. ("Penn/Ohio") to acquire systems (the "Penn/Ohio Systems") serving approximately 3,300 subscribers as of June 30, 1996 in Ohio and Pennsylvania for $3.8 million. It is anticipated that this acquisition will be completed in the third or fourth quarter of 1996, although there can be no assurances that this transaction will be consummated. The Company's purchase of the Acquisition Systems (other than the purchase of the Grassroots Systems, which occurred on August 30, 1996) is subject to, among other things, the satisfaction of customary closing conditions and the receipt of certain third-party or governmental approvals, including the consent of franchising authorities. Although there can be no assurances that such closing conditions will be satisfied or that any of these transactions will be consummated, it is anticipated that these acquisitions will be completed in the third or fourth quarter of 1996. See "Risk Factors--Risks Relating to Acquisition Strategy." The Company believes that other acquisition opportunities exist, and the Company is continuously engaged in discussions with other cable television system owners and operators to explore such potential opportunities. Some of these potential opportunities may involve systems serving substantial numbers of subscribers. Although the Company does not currently have definitive agreements to acquire systems other than those described herein, the Company intends to continue to pursue, on an opportunistic basis, additional strategic acquisitions and smaller "fill-in" acquisitions within its existing operating regions to enhance further their operational and financial performance. THE DISPOSITION SYSTEMS On July 24, 1996, the Company sold its Chatsworth, Georgia system, representing approximately 5,600 basic subscribers as of June 30, 1996, to an affiliate of Helicon Partners for approximately $8.7 million. The Company also has entered into an agreement to sell its Woodstock and New Market, Virginia systems, representing approximately 5,100 subscribers, to Shenandoah Cable Television Company, an affiliate of Shenandoah Telephone Company, for approximately $8.3 million. It is anticipated that this sale will be completed in the third or fourth quarter of 1996, although there can be no assurances that this transaction will be consummated. The aggregate sales price of approximately $17.0 million for the Disposition Systems represents a per subscriber sales price that is over 30% more than the average per subscriber acquisition cost of the Existing Systems in the Southeast. THE TRANSACTIONS Concurrently with or prior to the completion of the Offering, it is anticipated that FrontierVision Partners, L.P. ("FVP"), the sole general partner and the owner, directly and indirectly, of substantially all of the partnership interests of the Company, will consummate a $76.0 million Rights Offering, the net proceeds of which will be contributed as equity to the Company over time to fund future acquisitions. The Company will use (i) $34.4 million of the proceeds from the Rights Offering, (ii) $193.0 million of net proceeds from the Offering, (iii) $16.9 million of proceeds (net of transaction costs) from the sale of the Disposition Systems and (iv) $5.3 million of net working capital adjustment related to the Acquisition Systems to (i) pay the purchase prices for the Acquisition Systems, (ii) pay estimated transaction costs associated with the purchase of the Acquisition Systems and (iii) repay existing indebtedness of $4.9 million outstanding under the Senior Credit Facility. The Rights Offering, the Offering, the sale of the Disposition Systems, the purchase of the Acquisition Systems and such repayment of indebtedness under the Senior Credit Facility are collectively referred to as the "Acquisition Transactions." To the extent that there is any delay in consummating the purchase of any of the Acquisition Systems, a portion of the net proceeds of the Offering corresponding to the purchase price of such system may be applied to reduce indebtedness for borrowings under the Senior Credit Facility or may be held in a special account pending reinvestment in a subsequent acquisition of cable systems approved by the Senior Credit Facility lenders within 180 days of the closing of the Offering. To the extent the purchase of any of the Acquisition Systems is consummated prior to the consummation of the Offering (as has already occurred in the case of the Grassroots Systems), additional borrowings under the Senior Credit Facility may be used to pay a portion of the purchase price therefor, in which event a portion of the net proceeds of the Offering will be used to repay such borrowings. See "Use of Proceeds," "The Partnership Agreements" and "Credit Arrangements of the Company." The following table sets forth the sources and uses of the proceeds to be received by the Company in connection with the Acquisition Transactions (determined as of June 30, 1996): <TABLE> <CAPTION> -------- In thousands AMOUNT -------- <S> <C> SOURCES OF FUNDS: Rights Offering(1).......................................................................... $ 34,400 % Senior Subordinated Notes due 2006(2)................................................... 193,000 Sale of Disposition Systems(3).............................................................. 16,860 Net working capital adjustment.............................................................. 5,312 -------- Total sources of funds.................................................................. $249,572 ========= USES OF FUNDS: Purchase Acquisition Systems: ACE....................................................................................... $146,000 Triax..................................................................................... 85,000 Grassroots and Penn/Ohio(4)............................................................... 13,400 -------- Total................................................................................... 244,400 Estimated purchase price adjustments(5)..................................................... (900) Estimated transaction costs for Acquisition Systems......................................... 1,200 Repayment of Senior Credit Facility indebtedness............................................ 4,872 -------- Total uses of funds..................................................................... $249,572 ========= </TABLE> - --------------- (1) The approximately $41.4 million of net proceeds remaining from the Rights Offering will be used to fund additional acquisitions. The size of the equity commitments to be made available to FVOP through the Rights Offering may be reduced if no later than six months after the closing of the Rights Offering, the General Partner and the Advisory Committee of FVP determine that the remaining equity commitments exceed the Company's projected requirements. Such remaining equity commitments will expire on June 30, 1997, subject to the election by the General Partner and approval by the Advisory Committee to extend the commitment period to June 30, 1998. See "Management" and "The Partnership Agreements." (2) Aggregate proceeds of $200.0 million reduced by underwriting discounts of $6.0 million and estimated Offering expenses of $1.0 million. (3) Aggregate proceeds of $17.0 million reduced by approximately $0.1 million of transaction costs. (4) On August 30, 1996, the Company acquired the Grassroots Systems for approximately $9.3 million (as adjusted), approximately $8.6 million of which was funded with additional borrowings under the Senior Credit Facility, approximately $0.5 million of which was funded with proceeds from equity contributions and approximately $0.2 million of which is represented by a net working capital adjustment. (5) Represents estimated contractual purchase price reductions that would be effective if the purchase of the Acquisition Systems were consummated at June 30, 1996. Effective as of April 9, 1996, and in conjunction with the acquisition of systems from Cox, the Company amended and restated its credit facility to effect an increase in the amount available to be borrowed thereunder from $130.0 million to $265.0 million (the "Credit Agreement Restatement"). The Company received an additional $10.6 million from a draw down during August 1996 by FVP (the "Equity Call") of equity commitments in place prior to the Rights Offering. Concurrently with or prior to the consummation of the Offering, it is anticipated that a subordinated note (the "UVC Note") in the aggregate principal amount of $7.2 million issued by the Company in connection with the acquisition of the systems from UVC, which UVC Note has accreted to $7.7 million as of June 30, 1996, will be converted into $5.0 million of Class A limited partnership interests in the Company (the "Class A Partnership Interests"), with the balance of the aggregate accreted principal amount of the UVC Note to be repaid in cash (the "UVC Note Conversion"). See "Business--Development of the Systems--The Existing Systems--UVC Systems" and "The Partnership Agreements--The Company Partnership Agreement--Class A Partnership Interests." It is also anticipated that the outstanding indebtedness under the Senior Credit Facility will be reduced by $16.7 million (including the $4.9 million repayment listed in the table above) from the aggregate of approximately $210.0 million outstanding at June 30, 1996 (the "Credit Agreement Repayment"). The Credit Agreement Restatement, the Equity Call, the UVC Note Conversion and the Credit Agreement Repayment are collectively referred to herein as the "Other Transactions," and the Acquisition Transactions and the Other Transactions are collectively referred to herein as the "Transactions." THE OFFERING SECURITIES OFFERED.................. $200.0 million aggregate principal amount of % Senior Subordinated Notes due 2006. MATURITY DATE....................... , 2006. INTEREST PAYMENT DATES.............. and , commencing , 1997. ISSUERS............................. The Notes are the joint and several obligations of FVOP and Capital. OPTIONAL REDEMPTION BY THE ISSUERS............................. The Notes are not redeemable prior to , 2001, except as set forth below. The Notes will be redeemable at the option of the Issuers, in whole or in part, at any time on or after , 2001, at the redemption prices set forth herein, together with accrued and unpaid interest to the redemption date. In addition, prior to , 1999, the Issuers may redeem up to 35% of the principal amount of the Notes with the net cash proceeds from one or more Public Equity Offerings or Strategic Equity Investments (as defined in the Indenture governing the Notes (the "Indenture")) at a redemption price of % of the principal amount thereof, together with accrued and unpaid interest to the redemption date; provided, however, that at least 65% in aggregate principal amount of the Notes originally issued remains outstanding immediately after any such redemption. MANDATORY REDEMPTION BY THE ISSUERS............................. None. CHANGE OF CONTROL OFFER............. Upon a Change of Control, the Issuers will be required to make an offer to purchase all outstanding Notes at 101% of the principal amount thereof, together with accrued and unpaid interest to the purchase date. RANKING............................. The Notes are general unsecured obligations of the Issuers and will rank subordinate in right of payment to all existing and future Senior Indebtedness (as defined in the Indenture) of the Issuers, including indebtedness under the Senior Credit Facility. The Notes will rank pari passu in right of payment with any other senior subordinated indebtedness of the Issuers. CERTAIN COVENANTS................... The Indenture will contain certain covenants that, among other things, limit the ability of each Issuer and certain of its Subsidiaries to incur additional Indebtedness, create certain Liens, make certain Restricted Payments, enter into certain transactions with Affiliates, permit dividend or other payment restrictions to apply to certain Subsidiaries or consummate certain merger, consolidation or similar transactions. In addition, in certain circumstances, the Issuers will be required to offer to purchase Notes at 100% of the principal amount thereof with the net proceeds of certain asset sales. These covenants are subject to a number of significant exceptions and qualifications. See "Description of the Notes."
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+SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements and the notes thereto appearing elsewhere in this Prospectus. As used herein, unless the context otherwise requires, "Grupo Dina" means Consorcio G Grupo Dina, S.A. de C.V. and its consolidated subsidiaries, "MCII Holdings" means MCII Holdings (USA), Inc., a wholly-owned subsidiary of Grupo Dina, and "MCII" means Motor Coach Industries International, Inc. and its consolidated subsidiaries. Unless otherwise defined herein, capitalized terms used in this summary have the respective meanings ascribed to them elsewhere in this Prospectus. See "Risk Factors" for a discussion of certain factors that should be considered in connection with the Exchange Offer. CONSORCIO G GRUPO DINA, S.A. DE C.V. Grupo Dina is one of the leading suppliers of medium-duty and heavy-duty trucks in Mexico in the combined Class 5, 6, 7 and 8 truck market. Classifications in the truck market are made on the basis of gross vehicle weight ("GVW"). Class 5, 6 and 7 trucks are considered to be medium-duty trucks while Class 8 trucks, which are characterized primarily by "cabs" consisting of a separate engine and drive compartment section to which trailers are attached, are considered heavy-duty trucks. Grupo Dina is a domestic manufacturer of European-style intercity coaches in Mexico and a major supplier of intercity coaches used primarily in the executive and first-class service segments of the Mexican intercity transportation market. Grupo Dina also manufactures and distributes replacement parts for trucks and coaches and plastic components for truck, coach, bus and other industries. See "Business of Grupo Dina." The principal executive offices of Grupo Dina are located at Tlacoquemecatl 41 Colonia Del Valle, 03100, Mexico D.F., Mexico, (525) 420-3900. MCII HOLDINGS (USA), INC. MCII Holdings is a Delaware corporation and a wholly-owned subsidiary of Grupo Dina. MCII Holdings is a limited purpose corporation and will conduct virtually no operations for so long as the Notes are outstanding. Until such time as the MCII Shares are sold in accordance with the terms set forth herein, MCII Holdings' wholly owned subsidiary will be MCII. MCII Holdings, through its wholly owned subsidiary, MCII, designs, manufactures, assembles and markets intercity coaches and replacement parts for coaches and transit buses, principally in the United States and Canada. See "Business of MCII Holdings." The principal executive offices of MCII Holdings are located at Dial Tower, 1850 North Central Avenue, Phoenix, Arizona 85004, (602) 207-5000. THE EXCHANGE OFFER Securities Offered...... Up to US$206,499,680 aggregate principal amount of Senior Secured Discount Exchange Notes due 2002, which have been registered under the Securities Act. The terms of the New Notes and the Old Notes are identical in all material respects, except for certain transfer restrictions and registration rights relating to the Old Notes and except that, if the Exchange Offer is not consummated by December 30, 1996, the Old Notes will bear additional interest as described herein. See "Description of the Notes -- Registration Rights." The Exchange Offer...... The New Notes are being offered in exchange for a like principal amount of Old Notes. The issuance of the New Notes is intended to satisfy obligations of the Issuers contained in the Registration Agreement. For procedures for tendering, see "The Exchange Offer." Tenders, Expiration Date; Withdrawal...... The Exchange Offer will expire at 5:00 p.m., New York City time, on December 2, 1996, or such later date and time to which it is extended. The tender of Old Notes pursuant to the Exchange Offer may be withdrawn at any time prior to the Expiration Date. Any Old Note not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Exchange Offer. Certain Tax Consequences.......... The exchange of Old Notes for New Notes pursuant to the Exchange Offer will not be subject to Mexican or U.S. income tax. See "Tax Considerations." Use of Proceeds......... There will be no proceeds to the Issuers from the exchange pursuant to the Exchange Offer. Exchange Agent.......... IBJ Schroder Bank & Trust Company is serving as exchange agent (the "Exchange Agent") in connection with the Exchange Offer. CONSEQUENCES OF EXCHANGING OLD NOTES Holders of Old Notes who do not exchange their Old Notes for New Notes pursuant to the Exchange Offer will continue to be subject to the provisions in the Indenture regarding transfer and exchange of the Old Notes and the restrictions on transfer of such Old Notes as set forth in the legend thereon as a consequence of the issuance of the Old Notes pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws. In general, the Old Notes may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. The Issuers do not currently anticipate that they will register Old Notes under the Securities Act. See "Description of the Notes--Registration Rights." Based on interpretations by the staff of the SEC as set forth in no-action letters issued to third parties, the Issuers believe that New Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be offered for resale, resold or otherwise transferred by holders thereof (other than any holder which is an "affiliate" of the Issuers within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such New Notes are acquired in the ordinary course of such holders' business and such holders have no arrangement with any person to participate in the distribution of such New Notes. However, the Issuers do not intend to request the SEC to consider, and the SEC has not considered, the Exchange Offer in the context of a no-action letter and there can be no assurance that the staff of the SEC would make a similar determination with respect to the Exchange Offer as in such other circumstances. Each holder, other than a broker-dealer, must acknowledge that it is not engaged in, and does not intend to engage in, a distribution of New Notes and has no arrangement or understanding to participate in a distribution of New Notes. Each broker-dealer that receives New Notes for its own account in exchange for Old Notes must acknowledge that such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities and that it will deliver a prospectus in connection with any resale of such New Notes. See "Plan of Distribution." In addition, to comply with the state securities laws, the New Notes may not be offered or sold in any state unless they have been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied with. The offer and sale of the New Notes to "qualified institutional buyers" (as such term is defined under Rule 144A of the Securities Act) is generally exempt from registration or qualification under the state securities laws. The Issuers currently do not intend to register or qualify the sale of the New Notes in any state where an exemption from registration or qualification is required and not available. See "The Exchange Offer--Consequences of Exchanging Old Notes" and "Description of the Notes--Registration Rights." SUMMARY DESCRIPTION OF THE NEW NOTES The terms of the New Notes and the Old Notes are identical in all material respects, except for certain transfer restrictions and registration rights relating to the Old Notes and except that, if the Exchange Offer is not consummated by December 30, 1996, the Old Notes will bear additional interest as described under "Description of the Notes -- Registration Rights." Old Notes accepted for exchange will cease to accrue interest from and after the date of consummation of the Exchange Offer. Holders of Old Notes whose Old Notes are accepted for exchange will not receive any payment in respect of interest on such Old Notes otherwise payable on any interest payment date the record date for which occurs on or after consummation of the Exchange Offer. Securities Offered........ Up to US$206,499,680 aggregate principal amount of Senior Secured Discount Exchange Notes due 2002, which have been registered under the Securities Act, each with an initial accreted value as of November 18, 1995 of US$705.65 for each US$1,000 in principal amount. Payment of Interest....... The Old Notes are, and the New Notes will be, dated as of, and accrue interest from, November 18, 1995 and will bear interest at the rate of 12% per annum through maturity; provided, that, if the Notes are not rated either BB-or better by S&P or Ba3 or better by Moody's at November 15, 1999 the per annum interest rate shall be increased on such date to 15% until maturity. Prior to and including the interest payment due on November 15, 1998, the Notes will accrue interest on a zero coupon basis and, accordingly, the accreted value of the Notes will accrete from US$705.65 as of November 18 1995 for each US$1,000 in principal amount to US$1,000 at November 15, 1998. Thereafter, all interest will be payable in cash semiannually on May 15 and November 15 of each year, commencing May 15, 1999. Original Issue Discount... The New Notes, like the Old Notes, will be issued with original issue discount ("OID"). Each U.S. holder of the New Notes will be required to include OID in income as it accrues under a constant yield method in advance of cash payments attributable to such income. See "Tax Considerations." Repayment of Principal.... Principal of the Notes will be payable in full on November 15, 2002. Optional Redemption....... The Notes will be redeemable at the option of Grupo Dina, in whole or in part, at any time on or after November 15, 1998 at 100% of the principal amount thereof plus accrued and unpaid interest. Security.................. MCII Holdings' obligation under the Old Notes is, and under the New Notes will be, secured by (i) a pledge of MCII Shares held by MCII Holdings and (ii) a perfected first priority security interest in any cash or Cash Equivalents deposited with the Trustee under the Indenture governing the New Notes. Under certain circumstances, collateral in the form of MCII Shares may be released by the Trustee and sold by MCII Holdings. See "Description of the Notes." Change of Control......... Upon a Change of Control, each holder of New Notes shall have the right to require Grupo Dina and MCII Holdings to repurchase all or any part of the outstanding New Notes at a purchase price equal to the Accreted Value thereof, if on or prior to November 15, 1998, and equal to the aggregate principal amount thereof, plus accrued and unpaid interest, if any, thereafter. See "Description of the Notes--Change of Control." Ranking................... The obligation of Grupo Dina in respect of the New Notes will rank pari passu with the Old Notes and with all other outstanding unsecured and unsubordinated obligations of Grupo Dina, present or future, other than obligations which are mandatorily preferred by statute or by operation of law. The obligation of MCII Holdings in respect of the New Notes will rank pari passu with the Old Notes and, by reason of its being secured by collateral, effectively senior to any outstanding unsecured obligations of MCII Holdings. At June 30, 1996, Grupo Dina had outstanding Ps 2,442.2 million in aggregate principal amount of indebtedness that, by reason of its being secured by collateral, ranks effectively senior to the Old Notes and the New Notes. At such date, MCII Holdings had no outstanding indebtedness ranking senior to the Old Notes or the New Notes. At such date, MCII and its subsidiaries had outstanding indebtedness in an aggregate principal amount of US$195.6 million that is structurally senior to the Old Notes and the New Notes. Form and Denominations.... New Notes will generally be issued in denominations of US$1,000 and integral multiples of US$1,000. Covenants................. The indenture governing the Notes provides for certain affirmative and negative covenants by MCII Holdings and to a lesser extent by Grupo Dina for the benefit of the holders of Notes. Use of Proceeds........... The Issuers will not receive any proceeds from the Exchange Offer. Exchange Offer; Registra- tion Rights............. Holders of New Notes are not entitled to any registration rights with respect to the New Notes. Pursuant to the Registration Agreement, the Issuers agreed to file, at their cost, a registration statement with respect to the Exchange Offer. The Registration Statement of which this Prospectus is a part constitutes the registration statement for the Exchange Offer. See "Description of the Notes--Registration Rights." Governing Law............. The Notes and any controversy arising thereunder will be governed by the laws of the State of New York.
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+SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed financial and other information contained elsewhere in this Prospectus. References herein to the "Predecessor Company" mean SWEB prior to its acquisition by the Company. All references to a "fiscal" year mean a year ended March 31 and all references to a "calendar" year mean a year ended December 31. References to Pro Forma Fiscal Year 1996 mean the unaudited pro forma financial information of the Company presented for fiscal year 1996 as if the acquisition of SWEB by the Company had occurred as of April 1, 1995. THE COMPANY The Company is a wholly-owned subsidiary of Southern Investments UK Holdings Limited ("Holdings"), of which 75% is owned indirectly by Southern Company ("Southern", together with its subsidiaries, the "Southern Company system") and 25% is owned indirectly by PP&L Resources, Inc. ("PP&L Resources"). The Company was incorporated as a public limited company under the laws of England and Wales on June 23, 1995, as a vehicle for the acquisition of South Western Electricity plc ("SWEB"), one of the 12 regional electricity companies ("RECs") in England and Wales licensed to distribute, supply and, to a limited extent, generate electricity. In September 1995, the Company gained effective control of SWEB, having acquired approximately 84% of its shares. The Company subsequently replaced SWEB's board of directors and certain senior managers with officers and employees of companies from within the Southern Company system. In November 1995, the Company acquired the remaining shares of SWEB. The Company's sole investment and only significant asset is the entire share capital of SWEB, which is headquartered in Bristol, England. At September 30, 1996, the Company had consolidated assets of (Pounds)1.663 billion ($2.603 billion). See "The Company." SWEB's two main business lines are the distribution of electricity and the supply of electricity to approximately 1.3 million customers primarily in its franchise area in southwest England (the "Franchise Area"). This area covers approximately 5,560 square miles and has a resident population of approximately 2.8 million. The distribution business and the supply business are distinct business segments and produced operating income of (Pounds)112 million ($175 million) and (Pounds)15 million ($23 million), respectively, in Pro Forma Fiscal Year 1996, representing substantially all of the Company's consolidated operating income in that pro forma fiscal year. See "Business--SWEB's Main Businesses." SWEB is the only distributor of electricity in its Franchise Area, and management believes that economic, environmental and regulatory factors are likely to prevent competitors from entering this business in SWEB's Franchise Area. SWEB has an exclusive right to supply electricity to customers in its Franchise Area with demand of not more than 100kW, which is scheduled to continue until at least March 31, 1998. The supply business to consumers with demand above 100kW, both inside and outside SWEB's Franchise Area, is open to competition, and SWEB is able to competitively bid or negotiate to supply electricity to such customers. See "The Electric Utility Industry in Great Britain." The operations of SWEB are regulated under its Public Electricity Supply license ("PES license") pursuant to which the distribution business, and the supply business to consumers with demand of not more than 100kW, are subject to a price cap regulatory framework that provides economic incentives to SWEB to increase the number of units of electricity distributed and supplied and to operate in a more cost-efficient manner. SWEB also has ancillary business activities that support the main businesses, including power generation and gas supply. See "Business--SWEB's Other Business Activities." THE OFFERING Issuer........................ Southern Investments UK plc. Securities Offered............ $160,000,000 aggregate principal amount of % Notes due 2001 and $320,000,000 aggregate principal amount of % Notes due 2006. Maturity Date................. , 2001 in the case of the % Notes and , 2006 in the case of the % Notes. Interest...................... The % Notes and the % Notes will bear interest from the date of original issuance at the rate of % per annum and % per annum, respectively, payable semiannually in arrears. Interest Payment Dates........ and , commencing , 1997 with respect to the % Notes, and and , commencing , 1997 with respect to the % Notes. Ranking....................... The Senior Notes are direct, unsecured and unsubordinated obligations of the Company ranking pari passu with all other unsecured and unsubordinated obligations of the Company (other than those obligations preferred by operation of law). The Senior Notes will effectively rank junior to any secured indebtedness of the Company to the extent of the assets securing such indebtedness and to any indebtedness of the Company's subsidiaries to the extent of the assets of such subsidiaries. Substantially all of the Company's consolidated assets other than the stock of SWEB, the Company's only Significant Subsidiary (as defined herein), are currently held by the Company's subsidiaries. At September 30, 1996, the Company had unsecured and unsubordinated debt obligations in the amount of (Pounds)41.5 million ($65.0 million) which will rank pari passu with the Senior Notes. This amount does not include approximately (Pounds)302 million ($473 million) of debt of the Company which will be refinanced with the proceeds of this Offering. See "Use of Proceeds." At September 30, 1996, the Company had no secured debt. Also at September 30, 1996, SWEB had indebtedness of approximately (Pounds)266 million ($416 million) outstanding to parties other than the Company. The Indenture for the Senior Notes contains no restrictions on the amount of additional indebtedness which may be incurred by the Company or its subsidiaries; however, the Indenture contains certain restrictions on the ability of the Company and its Significant Subsidiaries to incur secured indebtedness. See "Description of the Senior Notes-- Covenants." Ratings....................... The Senior Notes have been assigned ratings of by Standard & Poor's Ratings Services ("S&P"), by Duff & Phelps Credit Rating Company ("DCR") and by Moody's Investors Service, Inc. ("Moody's"). These ratings have been obtained with the understanding that S&P, DCR and Moody's will continue to monitor the credit rating of the Company and will make future adjustments to the extent warranted. A rating reflects only the views of S&P, DCR or Moody's, as the case may be, and is not a recommendation to buy, sell or hold the Senior Notes. There is no assurance that any such rating will be retained for any given period of time or that it will not be revised downward or withdrawn entirely by S&P, DCR or Moody's, as the case may be, if, in their respective judgments, circumstances so warrant. Optional Redemption........... The Senior Notes of each series will be redeemable in whole or in part at the option of the Company at any time, at a redemption price equal to the greater of (i) 100% of the principal amount of the series of the Senior Notes being redeemed or (ii) the sum of the present values of the remaining scheduled payments of the principal of and interest on the series of the Senior Notes being redeemed discounted to the date of redemption on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Yield (as defined herein) plus basis points in the case of the % Notes and basis points in the case of the % Notes; plus, for (i) or (ii) above, whichever is applicable, accrued interest on the Senior Notes being redeemed to the date of redemption. See "Description of the Senior Notes--Optional Redemption." Optional Tax Redemption....... In the event of changes in the tax laws of the UK after the date hereof and certain other events that would obligate the Company to pay Additional Amounts, the Senior Notes of each series may be redeemed at the option of the Company, in whole but not in part, at the principal amount thereof, plus accrued and unpaid interest. See "Description of the Senior Notes-- Optional Tax Redemption." Principal Covenants........... The Indenture under which the Senior Notes are to be issued will not contain any limitation on the Company's or its subsidiaries' right to incur indebtedness. The Indenture will, however, contain certain covenants, including covenants applicable to the Company and its Significant Subsidiaries with respect to (i) limitations on liens, (ii) limitations on sale and lease-back transactions and (iii) limitations regarding consolidation, merger, conveyance, sale or lease transactions. See "Description of the Senior Notes--Covenants--Limitation on Liens," "--Limitation on Sale and Lease- Back Transactions" and "--Consolidation, Merger, Conveyance, Sale or Lease." Events of Default............. For a discussion of certain events that will permit acceleration of the principal of the Senior Notes (together with all interest accrued and unpaid thereon), see "Description of the Senior Notes--Events of Default." Withholding Tax............... Payments in respect of the Global Notes will be made free and clear of any present or future UK withholding and other deductions existing in the UK, except as set forth under "Description of the Senior Notes--Additional Amounts." Subject to certain exceptions, the Company will pay such additional amounts (the "Additional Amounts") as will result in receipt by the holder of the Global Notes of such amounts as would have been received by it had no such withholding or deduction been required. See "Description of the Senior Notes-- Additional Amounts." Use of Proceeds............... The Company intends to use the net proceeds of the Offering principally to refinance a portion of its existing debt. See "Use of Proceeds" and "Capitalization." Form and Denomination......... The % Notes and the % Notes will each be issued only in the form of one global bearer note and deposited with the Book- Entry Depositary which will hold the Senior Notes for the benefit of DTC and its participants. The Book-Entry Depositary will issue the Book-Entry Interests to DTC which will operate a system of dealing in the Book-Entry Interests. Ownership of interests in the Book-Entry Interests will be limited to persons who have accounts with DTC ("Participants") or persons who may hold interests through such participants ("Indirect Participants"). Interests in the Book-Entry Interests will be shown on, and transfers thereof will be effected only through, records maintained by DTC and its Participants, including Morgan Guaranty Trust Company of New York, Brussels office, as operator of the Euroclear System ("Euroclear"), and Cedel Bank, societe anonyme ("Cedel Bank"). Except as set forth under "Description of the Senior Notes," Participants and Indirect Participants will not be entitled to receive physical delivery of definitive Senior Notes in registered form ("Definitive Registered Notes") or to have Senior Notes issued and registered in their names and will not be considered the owners or holders of the Senior Notes under the Indenture pursuant to which the Senior Notes are issued. See "Risk Factors-- Considerations Related to Book-Entry Interests." Interests in the Book-Entry Interests and the Definitive Registered Notes, if any, will be issued in minimum denominations of US$1,000 and integral multiples of US$1,000 in excess thereof. Governing Law................. The Indenture and the Senior Notes will be governed by, and construed in accordance with, the laws of the State of New York. Trustee, Registrar and Book- Entry Depositary............. Bankers Trust Company. Paying Agents................. Bankers Trust Company and Bankers Trust Luxembourg S.A. SUMMARY FINANCIAL INFORMATION The following table sets forth summary consolidated financial data for the Company (the "Successor Company" or the "Company") and the Predecessor Company. For a description of the financial statements and records from which the following financial data have been derived, see "Selected Financial Data." This information should be read in conjunction with "Capitalization," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes thereto of the Successor Company and the Predecessor Company included elsewhere in this Prospectus. The unaudited pro forma condensed consolidated income statement and other data presented below for fiscal year 1996 reflect the acquisition by the Company of SWEB as if it had occurred as of April 1, 1995. Such unaudited pro forma condensed consolidated income statement and other data have been prepared by the Successor Company based upon assumptions deemed proper by it and reflect a preliminary allocation of the purchase price paid for the Predecessor Company. The unaudited pro forma condensed consolidated income statement and other data presented herein are shown for illustrative purposes only and are not necessarily indicative of the future results of operations of the Successor Company or of the results of operations of the Successor Company that would have actually occurred had the transaction been in effect for the period presented. PREDECESSOR COMPANY UK GAAP(1) <TABLE> <CAPTION> YEAR ENDED MARCH 31, ------------------------------------------------------ 1992 1993 1994 1995 ------------ ------------ ------------ ------------ (AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> CONSOLIDATED INCOME STATEMENT DATA: Turnover............... (Pounds) 847 (Pounds) 892 (Pounds) 900 (Pounds) 875 Operating costs........ (759) (790) (791) (755) ------------ ------------ ------------ ------------ Operating profit....... 88 102 109 120 Exceptional item(2).... -- -- -- (20) Other income........... 10 11 15 17 Interest, net.......... (15) (12) (7) (5) Tax on profit.......... (21) (23) (24) (26) ------------ ------------ ------------ ------------ Profit for financial period(3)............. (Pounds) 62 (Pounds) 78 (Pounds) 93 (Pounds) 86 ============ ============ ============ ============ Dividends declared per share................. (Pounds)0.17 (Pounds)0.20 (Pounds)0.24 (Pounds)0.27 ============ ============ ============ ============ <CAPTION> MARCH 31, ------------------------------------------------------ 1992 1993 1994 1995 ------------ ------------ ------------ ------------ (AMOUNTS IN MILLIONS) <S> <C> <C> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Fixed assets........... (Pounds) 490 (Pounds) 544 (Pounds) 579 (Pounds) 615 Current assets......... 212 213 301 254 Creditors: Amounts falling due within one year.................. (179) (176) (205) (243) ------------ ------------ ------------ ------------ Total assets less cur- rent liabilities...... 523 581 675 626 Creditors: Amounts falling due in more than one year (85) (87) (92) (95) Total shareholders' funds................. 425 479 543 494 <CAPTION> YEAR ENDED MARCH 31, ------------------------------------------------------ 1992 1993 1994 1995 ------------ ------------ ------------ ------------ (AMOUNTS IN MILLIONS, EXCEPT RATIO) <S> <C> <C> <C> <C> <C> OTHER CONSOLIDATED DATA: EBIT(4)................ (Pounds) 99 (Pounds) 115 (Pounds) 126 (Pounds) 142 EBITDA(5).............. 123 141 154 173 Cash flow from opera- tions(6).............. 128 140 245 124 Ratio of earnings to fixed charges(7)...... 6 8 12 13 </TABLE> PREDECESSOR COMPANY US GAAP(1) <TABLE> <CAPTION> PERIOD FROM PRO FORMA YEAR ENDED MARCH 31, APRIL 1, 1995 SIX MONTHS ENDED -------------------------- TO SEPTEMBER 17, SEPTEMBER 30, 1995 1994 1995 1995(8) (UNAUDITED)(9) ------------ ------------ ---------------- ------------------- (AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> CONSOLIDATED INCOME STATEMENT DATA: Operating revenues..... (Pounds) 808 (Pounds) 776 (Pounds) 299 (Pounds) 322 Operating income....... 122 139 40 43 Interest, net.......... (7) (4) (3) (37) Other, net............. 16 16 1 2 Provision for income taxes................. (43) (50) (13) (3) ------------ ------------ ------------ ------------- Income from continuing operations............ 88 101 25 5 Discontinued opera- tions................. -- (7) (1) -- ------------ ------------ ------------ ------------- Net income............. (Pounds) 88 (Pounds) 94 (Pounds) 24 (Pounds) 5 ============ ============ ============ ============= Dividends declared per share ................ (Pounds)0.21 (Pounds)0.25 (Pounds)0.85 (Pounds) 0.85 ============ ============ ============ ============= <CAPTION> MARCH 31, 1995 ------------ (AMOUNTS IN MILLIONS) <S> <C> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Property, plant and equipment, net........ (Pounds) 541 Total assets........... 869 Total stockholder's eq- uity.................. 374 Long-term debt......... 95 Short-term debt........ 24 <CAPTION> PERIOD FROM PRO FORMA YEAR ENDED MARCH 31, APRIL 1, 1995 SIX MONTHS ENDED -------------------------- TO SEPTEMBER 17, SEPTEMBER 30, 1995 1994 1995 1995(8) (UNAUDITED)(9) ------------ ------------ ---------------- ------------------- (AMOUNTS IN MILLIONS, EXCEPT RATIO) <S> <C> <C> <C> <C> OTHER CONSOLIDATED DATA: EBIT(4)................ (Pounds) 142 (Pounds) 162 (Pounds) 43 (Pounds) 47 EBITDA(5).............. 170 193 58 67 Cash flow from opera- tions(6).............. 236 100 69 79 Ratio of earnings to fixed charges(7)...... 13 15 9 1 </TABLE> SUCCESSOR COMPANY US GAAP <TABLE> <CAPTION> PERIOD FROM PRO FORMA SIX MONTHS INCEPTION FISCAL YEAR ENDED ENDED (JUNE 23, 1995) MARCH 31, 1996 SEPTEMBER 30, 1996 TO MARCH 31, 1996(8) (UNAUDITED)(9) (UNAUDITED) ---------------------------------------------- ------------------------- (Pounds) $(10) (Pounds) $(10) (Pounds) $(10) -------------- ---------------------- ------ -------------- --------- (AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> CONSOLIDATED INCOME STATEMENT DATA: Operating revenues..... (Pounds) 481 $ 753 (Pounds) 780 $1,221 (Pounds) 360 $ 563 Operating income....... 86 135 129 202 51 80 Interest, net.......... (21) (33) (57) (89) (25) (39) Gain on sale of invest- ments................. 14 22 -- -- -- -- Other, net............. 2 3 3 5 4 6 Provision for income taxes................. (28) (44) (26) (41) (11) (17) -------------- ------- ------------- ------ -------------- ------- Income from continuing operations............ 53 83 (Pounds) 49 $ 77 19 30 ============= ====== Extraordinary gain on early extinguishment of debt.................. 6 9 -- -- -------------- ------- -------------- ------- Net income............. (Pounds) 59 $ 92 (Pounds) 19 $ 30 ============== ======= ============== ======= Dividends declared per share................. (Pounds) 3.82 $ 5.98 (Pounds) 4.67 $ 7.31 (Pounds) 0.02 $ 0.03 ============== ======= ============= ====== ============== ======= <CAPTION> SEPTEMBER 30, 1996 MARCH 31, 1996 (UNAUDITED) ------------------------- ------------------------- (Pounds) $(10) (Pounds) $(10) -------------- --------- -------------- --------- (AMOUNTS IN MILLIONS) (AMOUNTS IN MILLIONS) <S> <C> <C> <C> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Property, plant and equipment, net........ (Pounds) 1,207 $ 1,889 (Pounds) 1,235 $ 1,933 Total assets........... 1,686 2,639 1,663 2,603 Total stockholder's eq- uity.................. 368 576 376 589 Short-term debt........ 650 1,018 609 953 <CAPTION> PERIOD FROM PRO FORMA SIX MONTHS INCEPTION FISCAL YEAR ENDED ENDED (JUNE 23, 1995) MARCH 31, 1996 SEPTEMBER 30, 1996 TO MARCH 31, 1996(8) (UNAUDITED)(9) (UNAUDITED) ---------------------------------------------- ------------------------- (Pounds) $(10) (Pounds) $(10) (Pounds) $(10) -------------- ---------------------- ------ -------------- --------- (AMOUNTS IN MILLIONS, EXCEPT RATIO) <S> <C> <C> <C> <C> <C> <C> OTHER CONSOLIDATED DATA: EBIT(4)................ (Pounds) 95 $ 149 (Pounds) 141 $ 221 (Pounds) 56 $ 88 EBITDA(5).............. 117 183 183 286 78 122 Cash flow from opera- tions(13)............. 25 39 94 147 63 99 Ratio of earnings to fixed charges(7)...... 4 2 2 </TABLE> BUSINESS SEGMENTS PREDECESSOR COMPANY UK GAAP(1) <TABLE> <CAPTION> YEAR ENDED MARCH 31, -------------------------------------------------- 1992 1993 1994 1995 ----------- ----------- ----------- ----------- (AMOUNTS IN MILLIONS) <S> <C> <C> <C> <C> <C> TURNOVER: Electricity distribu- tion.................. (Pounds)230 (Pounds)235 (Pounds)250 (Pounds)274 Electricity supply..... 763 787 772 725 Retailing(2)........... 53 72 79 82 Other.................. 21 59 78 84 Less: Intra-busi- ness(11).............. (220) (261) (279) (290) ----------- ----------- ----------- ----------- Total............... (Pounds)847 (Pounds)892 (Pounds)900 (Pounds)875 OPERATING PROFIT (LOSS): Electricity distribu- tion.................. (Pounds) 90 (Pounds) 85 (Pounds) 77 (Pounds) 96 Electricity supply..... 4 16 25 15 Retailing(2)........... (1) (2) 1 1 Other.................. (5) 4 6 9 Less: Intra-busi- ness(11).............. -- -- -- (1) ----------- ----------- ----------- ----------- Total............... (Pounds) 88 (Pounds)103 (Pounds)109 (Pounds)120 <CAPTION> MARCH 31, -------------------------------------------------- 1992 1993 1994 1995 ----------- ----------- ----------- ----------- (AMOUNTS IN MILLIONS) <S> <C> <C> <C> <C> <C> ASSETS: Electricity distribu- tion.................. (Pounds)449 (Pounds)454 (Pounds)472 (Pounds)504 Electricity supply..... 139 134 91 89 Retailing(2)........... 32 38 56 64 Other.................. 82 131 261 212 ----------- ----------- ----------- ----------- Total............... (Pounds)702 (Pounds)757 (Pounds)880 (Pounds)869 </TABLE> BUSINESS SEGMENTS PREDECESSOR COMPANY US GAAP(1) <TABLE> <CAPTION> YEAR ENDED MARCH 31, PERIOD FROM ------------------------- APRIL 1, 1995 TO 1994 1995 SEPTEMBER 17, 1995 ----------- ------------ ------------------ (AMOUNTS IN MILLIONS) <S> <C> <C> <C> OPERATING REVENUE: Electricity distribution.......... (Pounds)250 (Pounds)274 (Pounds) 105 Electricity supply................ 772 725 276 Other............................. 54 57 23 Less: Intra-business(11).......... (268) (280) (105) ----------- ----------- ------------ Total.......................... (Pounds)808 (Pounds)776 (Pounds) 299 OPERATING INCOME (LOSS): Electricity distribution.......... (Pounds) 84 (Pounds)112 (Pounds) 42 Electricity supply................ 27 18 2 Other............................. 11 10 (4) Less: Intra-business(11).......... -- (1) -- ----------- ----------- ------------ Total.......................... (Pounds)122 (Pounds)139 (Pounds) 40 <CAPTION> MARCH 31, 1995 ------------ (AMOUNTS IN MILLIONS) <S> <C> <C> <C> ASSETS: Electricity distribution.......... (Pounds)531 Electricity supply................ 93 Other............................. 245 ----------- Total.......................... (Pounds)869 </TABLE> BUSINESS SEGMENTS SUCCESSOR COMPANY US GAAP <TABLE> <CAPTION> PRO FORMA PERIOD FROM FISCAL YEAR ENDED SIX MONTHS ENDED INCEPTION (JUNE 23, 1995) MARCH 31, 1996 SEPTEMBER 30, 1996 TO MARCH 31, 1996(8) (UNAUDITED)(9) (UNAUDITED) ------------------------------------------------ ------------------------- (Pounds) $(10) (Pounds) $(10) (Pounds) $(10) ---------------- ---------------------- ------ -------------- --------- (AMOUNTS IN MILLIONS) <S> <C> <C> <C> <C> <C> <C> OPERATING REVENUE: Electricity distribu- tion.................. (Pounds) 147 $ 230 (Pounds)252 $ 394 (Pounds) 104 $ 163 Electricity supply..... 450 704 726 1,136 338 529 Other.................. 33 52 54 85 24 37 Less: Intra-busi- ness(11).............. (149) (233) (252) (394) (106) (166) ---------------- --------- ----------- ------ -------------- ------- Total............... (Pounds) 481 $ 753 (Pounds)780 $1,221 (Pounds) 360 $ 563 OPERATING INCOME (LOSS): Electricity distribu- tion.................. (Pounds) 72 $ 113 (Pounds)112 $ 175 (Pounds) 42 $ 66 Electricity supply..... 13 20 15 24 10 16 Other.................. 1 2 2 3 -- -- Less: Intra-busi- ness(11).............. -- -- -- -- (1) (2) ---------------- --------- ----------- ------ -------------- ------- Total............... (Pounds) 86 $ 135 (Pounds)129 $ 202 (Pounds) 51 $ 80 <CAPTION> SEPTEMBER 30, 1996 MARCH 31, 1996 (UNAUDITED) ----------------------------- ------------------------- (Pounds) $(10) (Pounds) $(10) ---------------- ----------- -------------- --------- (AMOUNTS IN MILLIONS) (AMOUNTS IN MILLIONS) <S> <C> <C> <C> <C> <C> <C> ASSETS(12): Electricity distribu- tion.................. (Pounds) 1,422 $ 2,226 (Pounds) 1,449 $ 2,268 Electricity supply..... 102 160 88 138 Other.................. 162 253 126 197 ---------------- --------- -------------- ------- Total............... (Pounds) 1,686 $ 2,639 (Pounds) 1,663 $ 2,603 </TABLE> - -------- (1) The financial data for the Predecessor Company shown on pages (i) 8 and 11 and (ii) 9 and 12 were derived from financial statements for the Predecessor Company prepared, respectively, in accordance with UK GAAP and US GAAP. The principal differences between US GAAP and UK GAAP as applied to the Predecessor Company relate to the treatment of discontinued operations, pension costs and deferred taxes. (2) A provision for the disposition of the electrical appliance retailing business resulted in an exceptional item for the fiscal year ended March 31, 1995. The actual disposition of this business segment occurred in June 1995. (3) Excluding the exceptional item, profit for fiscal year 1995 would have been (Pounds)98 million. (4) EBIT equals income from continuing operations before the sum of interest expense and income taxes. EBIT for the period from inception (June 23, 1995) to March 31, 1996 and for Pro Forma Fiscal Year 1996 excludes a nonrecurring gain on sale of investment of (Pounds)14 million ($22 million). This information is provided for informational purposes only and such measure should not be construed as an alternative to operating income (as determined in accordance with US GAAP) as an indicator of operating performance, or as an alternative to cash flows from operating activities (as determined in accordance with US GAAP) as a measure of liquidity. (5) EBITDA equals income from continuing operations before the sum of interest expense, income taxes, depreciation and amortization. EBITDA for the period from inception (June 23, 1995) to March 31, 1996 and for Pro Forma Fiscal Year 1996 excludes a nonrecurring gain on sale of investment of (Pounds)14 million ($22 million). This information is provided for informational purposes only and such measure should not be construed as an alternative to operating income (as determined in accordance with US GAAP) as an indicator of operating performance, or as an alternative to cash flows from operating activities (as determined in accordance with US GAAP) as a measure of liquidity. (6) Cash flow from operations increased in fiscal year 1994 as a result of customers who paid bills in advance in order to avoid paying value added taxes which were introduced by the British government. (7) The ratio of earnings to fixed charges is computed as the sum of pretax income from continuing operations and fixed charges divided by fixed charges. Fixed charges consist of interest expensed. (8) On September 18, 1995, the Successor Company obtained effective control of the Predecessor Company pursuant to the Successor Company's offer to acquire the Predecessor Company. (9) Pro Forma Six Months Ended September 30, 1995 and Pro Forma Fiscal Year 1996 financial information gives effect to the acquisition of the Predecessor Company by the Successor Company as if it had occurred on April 1, 1995. See pages F-42, F-43 and F-44 included in this Prospectus. (10) Solely for the convenience of the reader, pounds sterling amounts have been translated into US dollars at the Noon Buying Rate on September 30, 1996 of $1.5653 = (Pounds)1.00. (11) Intra-business eliminations consist primarily of intercompany transactions between the distribution business and the supply business and intra- business transactions between ancillary support businesses. Pursuant to the UK regulatory framework, SWEB's distribution of electricity to its supply customers within its own Franchise Area is billed to SWEB's supply business, which in turn incorporates the distribution charge into the bill sent to the final end user. (12) Includes goodwill, net of amortization, and prepaid pension costs of (Pounds)173 million ($271 million) and (Pounds)95 million ($149 million), respectively at March 31, 1996. (13) Cash flow from operations for the period from inception (June 23, 1995) to March 31, 1996 includes the settlement of accounts payable balances of (Pounds)39 million ($61 million).
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001019737_navigant_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001019737_navigant_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to, and should be read in conjunction with, the more detailed information and the Financial Statements and related Notes thereto appearing elsewhere in this Prospectus. Unless indicated otherwise, the information contained in this Prospectus: (i) assumes that the Underwriters' over-allotment option is not exercised; (ii) gives retroactive effect to the Company's reorganization as a Delaware holding company immediately prior to the consummation of this offering; and (iii) gives retroactive effect to the 9,714.285 for 1 split of the shares of common stock, $.001 par value per share (the "Common Stock") in September 1996. Unless otherwise indicated, all references to "Metzler" or the "Company" include the Company and its subsidiaries. THE COMPANY The Metzler Group, Inc. is a leading nationwide provider of consulting services to electric utilities and other energy-related businesses. The Company offers a wide range of consulting services related to information technology, process/operations management, strategy, and marketing and sales designed to assist its clients in succeeding in a business environment of changing regulation, increasing competition and evolving technology. The Company has competed successfully in this environment, having achieved revenue growth of 29% from 1994 to 1995 and 93% from the six months ended June 30, 1995 to the corresponding period in 1996. The changing competitive environment in the electric utility industry has forced utility companies to confront an evolving range of strategic options and challenges. In order to deal with these challenges and address these opportunities, electric utilities are formulating and implementing new strategies and tactics, including redesigning business processes, re- engineering work forces, acquiring more effective information technology and adopting or restructuring customer service and marketing programs. Utilities are increasingly turning to experienced outside consulting firms to assist in or lead this process because: (i) the pace of change is eclipsing utilities' internal resources; (ii) many utilities lack the depth and breadth of experience to identify, evaluate and implement the full range of possible options and solutions; (iii) outside specialists often enable electric utilities to develop better solutions in shorter time frames; (iv) purchasing consulting expertise converts fixed labor costs to variable costs and can be more cost-effective; and (v) consultants can often formulate more objective advice, free of internal cultural or political forces. Alpha Publications Ltd. estimates that in 1994 the market for consulting services to the utility industry represented approximately 8% of the $20.5 billion total market for consulting services, and projects a 9% annual growth rate through 2000. Based upon these data, the Company estimates that the market for consulting services to the utility industry was approximately $1.8 billion in 1995. Metzler believes that several competitive factors distinguish it from other participants in the consulting market including: (i) established electric utility expertise developed over more than thirteen years of providing consulting services to the electric utility industry; (ii) deep-rooted client relationships supporting multiple engagements; (iii) proprietary knowledge base that the Company has developed internally and continuously refines for incorporation into analysis for new engagements; (iv) wide range of industry- specific services that enables the Company to be a single-source provider of consulting services to utilities while maintaining advanced skill sets in each area; and (v) strategic planning methodology using a high-level modeling tool developed by Metzler to support the comprehensive strategic planning process of utilities. Metzler's growth strategy includes the following elements: (i) further penetrating its existing client base; (ii) seeking new clients and expanding its geographic presence; (iii) continuing to recruit highly skilled professionals with skill sets and client relationships complementary to the Company's existing professional base; (iv) pursuing strategic acquisitions that provide the Company with an expeditious and cost-effective method of increasing its number of consultants, broadening its client base, expanding its skill sets or expanding its presence in a geographic region; and (v) expanding its service offerings to include other service areas that the Company believes will be in demand as the industry continues its move toward a more competitive environment. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company. 2,000,000 shares Common Stock offered by the Selling Stockholders....................... 1,200,000 shares Common Stock to be outstanding after the offering....................... 10,000,000 shares(1) Use of proceeds..................... Repayment of indebtedness to the Company's founder incurred in connection with a redemption of Common Stock and general corporate purposes, including working capital and possible acquisitions of related businesses Proposed Nasdaq National Market symbol............................. METZ </TABLE> - ------- (1) Excludes: (i) options outstanding on the date hereof to purchase 355,666 shares at an exercise price of $12.00; and (ii) 944,334 shares reserved for issuance upon exercise of options that may be granted in the future under the Company's Long-Term Incentive Plan. See "Management--Long-Term Incentive Plan," "Description of Capital Stock" and Note 8 of Notes to Financial Statements. SUMMARY FINANCIAL DATA <TABLE> <CAPTION> SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, ---------------------------------------------------- ------------------------- PRO FORMA PRO FORMA 1991 1992 1993 1994 1995 1995(1) 1995 1996 1996(2) (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues............... $12,786 $9,216 $10,380 $10,420 $13,460 $13,460 $5,626 $10,857 $10,857 Cost of services....... 6,615 5,644 5,797 5,263 6,422 6,422 2,841 5,215 5,215 ------- ------ ------- ------- ------- ------- ------ ------- ------- Gross profit........... 6,171 3,572 4,583 5,157 7,038 7,038 2,785 5,642 5,642 Selling, general and administrative expenses(3)........... 5,387 4,006 4,267 5,327 7,650 4,875 4,023 1,404 2,423 ------- ------ ------- ------- ------- ------- ------ ------- ------- Operating income (loss)................ 784 (434) 316 (170) (612) 2,163 (1,238) 4,238 3,219 Other expense (income), net................... (69) (24) 15 72 127 127 98 12 12 ------- ------ ------- ------- ------- ------- ------ ------- ------- Income (loss) before income tax expense (benefit)............. 853 (410) 301 (242) (739) 2,036 (1,336) 4,226 3,207 Income tax expense (benefit)............. 343 (145) 147 (58) (266) 844 (478) 86 1,283 ------- ------ ------- ------- ------- ------- ------ ------- ------- Net income (loss)...... $ 510 $ (265) $ 154 $ (184) $ (473) $ 1,192 $ (858) $ 4,140 $ 1,924 ======= ====== ======= ======= ======= ======= ====== ======= ======= Pro forma net income per share............. $ 0.12 $ 0.20 ======= ======= Shares used in computing pro forma net income per share(4).............. 9,763 9,785 </TABLE> <TABLE> <CAPTION> AS OF JUNE 30, 1996 ---------------------------------- ACTUAL PRO FORMA(5) AS ADJUSTED(6) (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Cash....................................... $ 226 $ 226 $19,401 Working capital (deficit).................. 2,261 (332) 18,843 Total assets............................... 5,653 5,653 24,828 Obligations under capital lease, less current portion........................... 22 22 22 Total stockholders' equity................. 2,783 143 19,318 </TABLE> - ------- (1) The pro forma statement of operations data for the year ended December 31, 1995 have been computed by eliminating from selling, general and administrative expenses that portion of officer compensation that exceeded the compensation that would have been paid had the compensation plan adopted on July 1, 1996 been in effect for all of 1995. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Management--Executive Compensation." (2) Effective January 1, 1996, the Company elected to be treated as an S- corporation. As an S-corporation, the Company was not subject to federal (and some state) income taxes. The pro forma statement of operations information for the six months ended June 30, 1996 has been computed by adjusting the Company's net income, as reported, to (a) increase selling, general and administrative expenses to reflect the amount by which the officer compensation that would have been paid under the compensation plan adopted July 1, 1996 exceeded officer compensation actually paid during the six months ended June 30, 1996, and (b) record income tax expense assuming an effective tax rate of 40% that would have been recorded had the Company been a C-corporation. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Management--Executive Compensation" and Note 2 of Notes to Financial Statements. (3) Selling, general and administrative expenses include salary and bonuses for the executive officers of the Company. Beginning July 1, 1996, these eight persons will be compensated pursuant to a compensation plan that provides for annual base and bonus compensation in the aggregate amount of $3,193,750, assuming the Company meets the mid-point of the compensation plan's financial performance criteria. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Management--Executive Compensation." (4) Pro forma net income per share is based on the weighted average of 9,763,267 shares of common and common stock equivalent shares outstanding which includes 9,692,134 actual shares outstanding and 71,133 common stock equivalent shares outstanding during the year ended December 31, 1995. Pro forma net income per share is based on the weighted average of 9,785,418 shares of common and common stock equivalent shares outstanding which includes 9,714,285 actual shares outstanding and 71,133 common stock equivalent shares outstanding during the six months ended June 30, 1996. See Note 2 of Notes to Financial Statements. (5) As adjusted to reflect the declaration of the S Corporation Dividend (as defined in "S Corporation Dividend"), which is estimated to be approximately $2,540,000 as of June 30, 1996, and a $100,000 charge to earnings to reinstate deferred income taxes upon termination of the Company's S-corporation status. See "S Corporation Dividend."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001019764_jones_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001019764_jones_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1537f4cd7d09e0cea68fbaa47d9c701f7b7db3f7
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by and should be read in conjunction with the more detailed information and Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Unless the context requires otherwise, references to the Company herein include Jones Education Company and its subsidiaries and references to Common Stock herein refer collectively to the Class A Common Stock and Class B Common Stock. Unless otherwise indicated, all information in this Prospectus assumes that the Underwriters' overallotment option has not been exercised and reflects a 285-for-one stock split of the Class A Common Stock and Class B Common Stock to be effected immediately prior to the consummation of the Offering. Investors should consider carefully the information set forth under the heading "Risk Factors." The Company The Company offers a variety of integrated educational programming, products and services through multiple distribution channels designed to serve a continuum of adult learning needs. Targeting adults who want everything from practical information to formal education, the Company offers a myriad of products and services. For adults who seek information that is of practical use in their day-to-day lives, the Company licenses, develops and produces knowledge-enhancing programs and distributes these programs primarily on its television networks, JEC Knowledge TV and Jones Computer Network. For those who desire more in-depth information or formal education, i.e., certification or post-secondary degrees, the Company works in conjunction with select universities and colleges to offer degree and certificate courses through multiple media including videotapes, television and print, in addition to the Internet and other interactive media. As a complement to the programs and degrees offered, the Company also offers a broad selection of educational video and software products. The Company's programming, products and services concentrate primarily on four high-demand subject areas: (i) computers and technology, (ii) business, careers and finance, (iii) health and wellness and (iv) global culture and languages. By integrating and cross-promoting its networks, degree and certificate programs and educational products, the Company encourages its customers to experience a continuum of learning and, while so doing, utilize any combination of the Company's products and services. The Company's television networks generate revenue through license fees paid by program distributors and through the sale of advertising time. The networks' programming is intended to reach an audience that has demographics attractive to advertisers and that is receptive to the Company's education products and services. The Company's distance learning operations generate revenue from tuition fees, student fees and the sale of education-oriented products, particularly training videos and programs. In 1995 and the first nine months of 1996, network revenue and education products and services revenue accounted for 77% and 79%, and 23% and 21%, respectively, of the Company's total revenue. Historically, advertising revenue has accounted for a significant portion of the Company's network revenue. For the first nine months of 1996, advertising revenue accounted for approximately 54% of the Company's network revenue, or 43% of its total revenue. The Company believes that its distance education business is differentiated from others because it is highly integrated and it derives revenue from multiple sources. The Company's network programs are designed to provide adults with practical information that can be applied immediately in their personal and professional lives and are distributed on the Company's two 24- hours a day, satellite-delivered networks, JEC Knowledge TV and Jones Computer Network. JEC Knowledge TV, launched in 1987, features programs in each of the Company's four high-demand subject areas and is currently available to approximately 24.5 million households in the United States. Jones Computer Network, launched in 1994, offers programming focused primarily on computers and technology and is currently available to approximately 1.2 million households in the United States. The Company's degree and certificate courses target adults who desire in-depth, post-secondary education, but who are constrained by the time and location inconveniences associated with enrollment in programs using the traditional educational model. Working in conjunction with universities and colleges, the Company offers distance education degree and certificate courses that are delivered directly to adults through multiple forms of media, including videotape, television, print materials, the Internet and other interactive multimedia. The Company currently offers 170 course selections and 17 degree and certificate programs through 11 accredited universities and colleges, including The George Washington University, Regis University, California State University at Dominguez Hills and the University of Colorado-Colorado Springs, as well as through International University, an affiliate of the Company currently in the accreditation process. The Company seeks to distinguish its distance education programs from those of others by offering students: (i) a variety of accredited universities and colleges from which they can choose to earn a degree or certificate, (ii) a greater selection of degree and certificate programs, (iii) greater flexibility in the scheduling and delivery methods for its courses and (iv) increased frequency in the delivery of its courses. The Company also provides a range of support services for its distance education degree and certificate courses through its education services center, JEC College Connection, and offers a broad selection of educational videotapes, audiotapes, books, compact disks and other learning tools through its JEC Knowledge Store. The Company believes that rapidly evolving changes in society, the workplace and technology may lead adults to seek new educational opportunities offered in a more convenient fashion than traditional site- based education programs. The Company believes that the market for educational and informational programming, of which the Company's programming comprises a segment, is growing. The Company further believes that advertisers and programming distributors have responded positively to the popularity of such programming. Based on recent industry data, advertisers spent approximately $780 million, net of agency commissions, in 1995 on 10 networks airing information-based programming, representing an increase of approximately 144% from such advertising expenditures in 1990. In addition, industry data indicates that license fees paid by cable operators to these networks were approximately $600 million in 1995. The Company believes that its programming is more education-oriented than these information-based networks and therefore appeals to a smaller audience than, and may not be as attractive to advertisers and programming distributors as, information-based networks. See "Business - The Market for Adult Education Programming and Credit Courses." In addition, the Company believes a substantial number of adults are seeking more in-depth education through formal credit and degree courses. In 1993, the most recent year for which information is available, the U.S Department of Education estimated that adults over 24 years of age comprised approximately 6.3 million, or 44%, of the 14.3 million students enrolled in higher education programs. The Company believes that it is positioned to compete effectively in these markets due to its unique combination of experience, resources, depth of course offerings, breadth of delivery modes and integrated sales and marketing capabilities. There can be no assurance, however, that the Company's advertising or license fee revenue or educational products and services revenue will grow in the future. The Company seeks to strengthen and expand its position as a provider of knowledge-enhancing programming and distance education products and services to adults. The Company's strategy is: (i) to expand the distribution of its networks, (ii) to license, develop and produce high quality programming for both its networks and degree and certificate courses, (iii) to increase its marketing and promotion activities, (iv) to increase its student enrollments, (v) to develop corporate relationships (vi) to expand further into international markets and (vii) to pursue strategic investments, acquisitions and joint ventures. By pursuing these strategies, the Company hopes to expand its subscriber base, make its networks more attractive to both viewers and advertisers, increase the brand awareness and usage of both its networks and its distance education programs and expand further into international markets. The Company was incorporated as a Colorado corporation in 1990 and is the successor to certain affiliated entities that previously conducted certain of its businesses. The Company's corporate offices are located at 9697 East Mineral Avenue, Englewood, Colorado 80112, and its telephone number is (303) 792-3111. <TABLE> <CAPTION> The Offering <S> <C> Class A Common Stock offered by: The Company........................................... 5,800,000 shares The Selling Shareholders.............................. 1,100,000 shares Total......................................... 6,900,000 shares ========= Common Stock to be outstanding after the Offering: Class A Common Stock.................................. 9,492,175 shares Class B Common Stock.................................. 2,089,620 shares --------- Total............................................. 11,581,795 shares(1) ========== Use of proceeds........................................... The Company currently intends to use the net proceeds from the Offering as follows: (i) approximately $32.0 million to increase marketing activities relating to the Company's networks and its education products and services through 1998; (ii) approximately $41.0 million to license, develop and produce additional programming for its networks and its degree and certificate course offerings through 1998; and (iii) approximately $1.4 million to repay a long- term advance from Jones International, Ltd. ("Jones International"). The Company intends to use the remaining $3.9 million for working capital and general corporate purposes, including potential strategic investments, acquisitions or joint ventures. The Company believes that the proceeds of this Offering, together with its revenues from operations, will be sufficient to pursue these plans. The Company may reallocate the amount of proceeds used for marketing, programming and strategic investments, acquisitions or joint ventures in response to changes within the markets in which it competes. The Company will not receive any of the proceeds from the sale of shares by the Selling Shareholders. See "Use of Proceeds." Voting rights............................................. Holders of Class A Common Stock are entitled to 1/10th of a vote per share and holders of Class B Common Stock are entitled to one vote per share on all matters submitted to a vote of shareholders. Both classes vote together as a single class on all matters not requiring a class vote. As long as the Class A Common Stock constitutes more than 10% of the outstanding shares of Common Stock, the holders of Class A Common Stock, voting separately as a </TABLE> <TABLE> <S> <C> class, are entitled to elect approximately 25% of the Company's directors, with the remainder of the directors being elected by the holders of Class B Common Stock, voting separately as a class. The shares of Class B Common Stock are not convertible into shares of Class A Common Stock. See "Description of Capital Stock." Immediately following the Offering and on a fully-diluted basis, Glenn R. Jones, the beneficial owner of all of the outstanding shares of the Class B Common Stock, will have approximately 69% of the combined voting power of the Company's outstanding Common Stock. See "Principal and Selling Shareholders" and "Risk Factors - Voting Rights; Control by Principal Shareholder." Nasdaq National Market symbol............................. JECO </TABLE> - -------------------------- (1) Excludes: (i) 1,100,000 shares of Class A Common Stock reserved for issuance pursuant to the Company's Stock Option Plan, 381,500 of which were subject to outstanding options as of December 19, 1996, and (ii) 28,750 shares (33,063 shares if the Underwriters' over-allotment option is exercised in full) of Class A Common Stock issuable under a warrant the Company has agreed to grant to M. Kane & Company, Inc. with an exercise price equal to 120% of the initial public offering price. See "Management - Stock Option Plan" and "Underwriting." Summary Consolidated Financial Data (In thousands, except per share and student and enrollment data) <TABLE> <CAPTION> Nine Months Ended Year Ended December 31, September 30, -------------------------------------- ------------------- 1993 1994 1995 1995 1996 -------- -------- -------- -------- ------ <S> <C> <C> <C> <C> <C> Statement of Operations Data: Revenues...................................... $ 6,073 $ 9,973 $ 15,911 $ 11,311 $ 15,594 Operating loss................................ (10,060) (10,232) (12,308) (10,501) (4,150) Loss before income tax benefit and minority interests................................... (10,136) (12,830) (13,365) (11,378) (4,315) Net loss...................................... (9,728) (11,029) (13,365) (11,378) (3,889) Net loss per common share .................... (2.50) (2.82) (2.55) (2.09) (0.68) Weighted average number of common shares outstanding................................. 3,891 3,909 5,239 5,443 5,702 Other Data: Number of network households(1)............... 25,552 25,558 25,720 25,800 25,607 Number of paying network households(2)........ 6,800 8,200 11,500 11,400 11,900 Number of enrollments(3)...................... 1,974 2,544 4,662 4,456 4,918 Number of students(4)......................... 1,131 1,654 1,901 1,635 1,838 </TABLE> <TABLE> <CAPTION> September 30, 1996 ----------------------------------- Actual As Adjusted(5) ------------- ----------------- <S> <C> <C> Balance Sheet Data: Working capital.......................................................... $ 3,631 $80,550 Total assets............................................................. 11,010 87,929 Long term debt........................................................... 1,400 - Total shareholders' equity .............................................. 4,422 82,741 </TABLE> - ----------------------- (1) Represents the number of television households that receive the Company's networks via cable or through C-band satellite receivers. (2) Represents the number of television households that receive the Company's networks for which a monthly subscriber fee is paid to the Company by cable television system operators or other video distributors. (3) Represents the cumulative number of students in all credit bearing courses offered through the Company during the period (for example, a single student enrolled in three courses during the period would be counted as three enrollments). (4) Represents the number of individual students enrolled in one or more credit bearing courses offered through the Company during the period. (5) Adjusted to give effect to the sale of 5,800,000 shares of Class A Common Stock offered by the Company hereby, at an assumed offering price of $15.00 per share and after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company, and the application of the net proceeds therefrom. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001019808_carson-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001019808_carson-inc_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..196e1aed9369c64b3437bb6623232992d9f17aa0
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the more detailed information and financial statements, including the related notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated or where the context otherwise requires, (i) all information in this Prospectus gives effect to the Recapitalization (as defined herein) and assumes no exercise of the Underwriters' over-allotment options, and (ii) all references herein to the "Company" refer to Carson, Inc., Aminco, Inc. (the "Predecessor") and their direct and indirect subsidiaries. Unless otherwise indicated, certain industry data and data regarding the Company's products in this Prospectus are based on (i) the December 1995 Combined Food and Drug Store Report (the "Towne- Oller Report") published by Towne-Oller & Associates, Inc., a market research organization and a subsidiary of Information Resources Inc., and (ii) a July 1995 report published by Packaged Facts, an independent market research company that provides market data to consumer products companies and relies on a variety of information sources including the Towne-Oller Report (the "Packaged Facts Report"). Towne-Oller's data is based on market samples from food and drug chain stores, which constitute approximately 20% of the total ethnic health and beauty aids product distribution channels, and is therefore limited in scope. While the Company believes these reports to be reliable, the Company has not independently verified the data contained therein. References herein to fiscal years refer to the Company's fiscal year ending March 31 in the year referenced. THE COMPANY GENERAL The Company is a leading manufacturer and marketer in the U.S. retail ethnic hair care market for African-Americans. The Company believes that it is one of the leading global manufacturers and marketers of ethnic hair care products for persons of African descent. The Company's flagship brand, Dark & Lovely, is the most widely recognized ethnic brand name in the U.S. retail ethnic hair care market. The Company currently sells over 60 different products under five principal brand names, including Dark & Lovely, Excelle, Beautiful Beginnings, Dark & Natural and Magic. The majority of the Company's sales are derived from four categories of the ethnic health and beauty aids market: hair relaxers and texturizers, which are used to chemically treat and straighten hair (constituting approximately 50% of the Company's net sales in fiscal 1996), hair color, shaving products and hair care maintenance products. The Company's products are specifically formulated to address the unique physiological characteristics of hair of persons of African descent, which typically include curliness and dryness. The Company markets its products in the United States with its own experienced direct sales force. The Company also currently markets its products in 60 countries outside of the United States, primarily through local distributors. In fiscal 1996, approximately 23.8% of the Company's net sales were derived from sales within these countries. On August 23, 1995, the Predecessor was acquired (the "Acquisition") by an investor group for a purchase price of approximately $95 million (inclusive of transaction costs), funded primarily with Company debt. This investor group assembled a new management team to focus on enhancing the Company's position in the ethnic hair care market. Several important initiatives have been undertaken by the new management, including establishing a manufacturing facility in South Africa, expanding the in-house direct sales force, selecting a new ethnic- oriented advertising agency, reinvigorating the product line with new packaging and accelerating the introduction of new products. The Company experienced a 17.5% increase in net sales from $58.1 million in fiscal 1995 to $68.3 million in fiscal 1996 and a 45.6% increase in operating income from $8.2 million in fiscal 1995 to $12.0 million in fiscal 1996. ETHNIC MARKET LEADERSHIP The Company's resources are focused primarily on satisfying the unique hair care needs of individuals of African descent worldwide. The Company believes that it has the number one U.S. retail market position in three of the four ethnic hair care categories in which it competes (hair relaxers and texturizers, hair color and shaving products). The Company attributes its leading market position to its strong brand names, combined with its direct sales force, broad distribution, research and development capabilities and experienced management team. Because of these strengths, the Company believes that it has a competitive advantage over both the companies specializing in products for the ethnic hair care market and the few general market companies that compete in the ethnic hair care market, but whose principal resources are targeted to the general health and beauty aids market. . Strong brands. The Company currently sells its products under five principal brand names including Dark & Lovely, Excelle, Beautiful Beginnings, Dark & Natural and Magic. The Company's flagship brand, Dark & Lovely, is the most widely recognized ethnic brand name in the U.S. retail ethnic hair care market for African-Americans. The Company believes that its brand strength is based upon product quality, properly targeted advertising, package design, reputation for innovation and focused commitment to the unique needs of ethnic consumers. . Experienced Sales Force and Broad Distribution. In April 1995, the Company established a direct sales force to enhance its ability to further penetrate existing markets with both current and new products. The sales force has significant sales experience both with major consumer product companies and ethnic hair care competitors. The Company believes that it now has the largest direct sales force serving the U.S. retail ethnic hair care market. Historically, the Company used commissioned sales brokers, as is the industry norm, who tended to have conflicting brand loyalties and provided minimal marketing and sell- through support. In the United States, the Company benefits from having its extensive product line distributed broadly through three principal channels: (i) multi-warehouse chains, including mass merchandisers (e.g., Wal-Mart, K-Mart), major drug chains (e.g., Walgreens, Revco), food chains (e.g., Winn Dixie, Kroger) and discount chains (e.g., Family Dollar, Dollar General), (ii) beauty and barber supply stores ("B&Bs") such as Alberto-Culver Company's Sally's Beauty Supply stores and members of the National Beauty Supply Dealers Association, and (iii) ethnic product distributors. . Research and Development. The Company believes that its heritage of technological innovation and its focused research and development ("R&D") effort are important to maintaining its market leadership position. Three of the ethnic hair care industry's most significant innovations were introduced by the Company: the first hair color developed exclusively for hair of persons of African descent (1972), the first no-lye relaxer, which provided a safe relaxer product for home use (1978), and the Fail Safe technology for no-lye relaxers (1993), which eliminates problems associated with imprecise mixing which can make no- lye products too weak, thereby impacting straightening, or too strong, leading to hair damage. One of the most significant sources of consumer complaints in the industry is inconsistent results caused by mixing errors. The Company believes that its R&D department, led by two industry experienced chemists with Ph.D.s and including nine other researchers and technicians, represents the largest R&D effort focused on the ethnic hair care market. . Experienced Management Team. In connection with the Acquisition, the senior management of the Predecessor was replaced. A team of seasoned senior executives with extensive experience in the ethnic market and consumer products industry was recruited to build on the Company's strong position in the global ethnic hair care market. As Chairman and Chief Executive Officer, Dr. Leroy Keith, former President of Morehouse College and Director of the Predecessor, entrepreneur and prominent member of the African-American community, provides the Company with leadership and vision. Joyce M. Roche, President and Chief Operating Officer, has over 20 years of experience in the health and beauty aids industry, including positions as Senior Vice President of Marketing and Vice President of Global Marketing at Avon Products, Inc. ("Avon") and Director of Marketing at Revlon, Inc. ("Revlon"). Dennis Smith, Executive Vice President of Sales, has over 20 years of experience in the ethnic hair care industry, including senior management positions with a competitor and 14 years with the Company. Miriam Muley, Executive Vice President of Marketing, has over 17 years of consumer products industry experience, having held marketing positions at Avon, Bristol-Myers Squibb Company's Clairol division and Johnson & Johnson. This management team has focused the Company's strategy to further develop the ethnic hair care market both in the United States and internationally. GROWTH STRATEGY The Company believes that it is well positioned to grow both internally and through acquisitions, in order to enhance its market position in the ethnic hair care market. The Company intends to achieve its goals by (i) increasing its share of existing markets, (ii) increasing international expansion, (iii) leveraging brands into new categories, (iv) targeting the U.S. professional salon market and (v) capitalizing on selective acquisition opportunities. . Increase Share of Existing Markets. Product innovation and ongoing upgrading of existing products are the cornerstone of the Company's efforts to increase its market share in existing markets. The Company recently incorporated into all of its relaxer products its latest innovation in relaxer technology, called Fail Safe, which eliminates the problem of mixing errors which occur with the in-home use of no-lye relaxers. The Company's Fail Safe technology assures that the consumer will not make a mixing error and thereby vary the relaxer strength. The Company has been on an aggressive schedule of new product introductions or existing product upgrades during the last several years with over 10 products that have been recently introduced or that will be introduced during the next six months, including improved Dark & Lovely and Excelle products, a new shampoo and conditioner to complement the Company's hair color products and a new Magic mild cream formula shaving product. . Increase International Expansion. The Company believes it is poised for growth in markets such as Africa, Brazil and the Caribbean, each of which has a significant concentration of consumers of African descent. The Company currently markets its entire product line in over 60 countries worldwide under the same brand names as it uses in the United States. International sales in fiscal 1996 of $16.3 million represented 23.8% of the Company's fiscal 1996 net sales and increased 48.0% compared to fiscal 1995. -- Africa: In fiscal 1996, the Company had sales of approximately $7.7 million to 17 of the 55 African countries. The Company commenced its own manufacturing operations in South Africa in March 1996 to support its African strategic initiatives. The Company's key strategic initiatives to achieve growth throughout the African continent are to: (i) continue market penetration and expansion of the core Southern African business; (ii) establish and develop distribution and/or manufacturing facilities in East Africa and West Africa; (iii) extend existing product lines to include related product categories such as cosmetics; and (iv) identify selected strategic acquisitions. -- Brazil: Brazil has a population of approximately 100 million people of African descent, almost three times the number of people of African descent as the United States. Moreover, the Company believes that the ethnic hair care industry in Brazil is underdeveloped and that the country's improving economy and demographic trends make this market attractive for the introduction of the Company's products. The Company began establishing a distribution network and training stylists in Brazil in October 1995, through a strategic alliance with Servico Nacional de Aprendizagem (SENAC), a national professional services training organization. The Company intends to use Brazil as a base for expanding its products and facilities to other Central and South American countries. -- Caribbean: In order to increase sales penetration in the Caribbean region, the Company recently appointed a Caribbean Sales Manager and is investigating whether to establish a factory in Jamaica which would enable the Company to produce in a Caribbean Community and Common Market (CARICOM) nation, thereby substantially reducing taxes and tariffs. The Company has sold products into the Caribbean on an export basis through brokers since before 1975, but expects to benefit from a more focused local marketing and manufacturing presence. . Leverage Brands into New Product Categories. The Company believes that its flagship Dark & Lovely brand name is transferable to other ethnic health and beauty aids categories, including cosmetics. According to the Packaged Facts Report, the cosmetics segment of the U.S. retail ethnic health and beauty aids market was projected to be approximately $251 million in retail sales in 1995, and is forecasted to grow at 15% per year until 1999. The Company intends to enter the ethnic cosmetics market with a product line that is consistent with the positioning of its ethnic hair care brands. The Company intends to take advantage of (i) its ability to introduce its consumers to the Dark & Lovely cosmetic line through inserts in Dark & Lovely relaxer and hair color kits (which total 11 million units annually), (ii) its strong relationships with its current customers which will enable it to distribute new cosmetics products efficiently through the same channels, and (iii) its exclusive contract manufacturing arrangement with AM Cosmetics, Inc. ("AM Cosmetics"), a leading low-cost manufacturer of cosmetics. The Company is engaged in market research and product development and, although no specific product launch date has been set, expects to enter the ethnic cosmetics market by the end of 1997. . Target the U.S. Professional Salon Market. The Company believes that its R&D expertise and heritage as the technological innovator in the ethnic hair care market will facilitate its entry into the United States professional salon market. The Company is developing a new professional product line under a distinct brand name that will offer certain technological advantages versus products currently offered in salons, as well as a complementary line of hair care maintenance products for exclusive purchase in salons. The Company estimates that there are in excess of 28,000 African-American hair care salons in the United States and Company market research indicates that African-American women are twice as likely as their Caucasian counterparts to patronize salons. The Company believes that it is well positioned to deliver products to the salon market, in significant part because many ethnic stylists purchase their supplies at B&Bs, a distribution channel in which the Company is well established. Additionally, the Company has successfully entered the professional salon market internationally through its South African subsidiary and is implementing a professional salon strategy in other parts of Africa as well as in Brazil. The Company will use the expertise gained from its international efforts to create teams of technical experts to educate salon owners and stylists about the new brand and provide ongoing training and education on the latest techniques in ethnic hair care through trade shows, clinics and newsletters. The Company is engaged in market research and product development and although no specific launch date has been set, expects to be able to enter the salon market by the end of 1997. . Capitalize on Selective Acquisition Opportunities. In addition to internally generated growth, the Company will consider the selective acquisition of related brands and businesses which would increase the Company's market share or expand and complement its product lines. The Company does not currently have any outstanding agreements, commitments or understandings to make any acquisitions or enter into any joint ventures. There can be no assurance that suitable acquisition or joint venture candidates can be identified, or if an acquisition is completed, that the operations will be successfully integrated or otherwise not have an adverse effect on the Company. BACKGROUND On August 23, 1995, DNL Savannah Acquisition Corp. ("Acquisition Corp."), a wholly-owned subsidiary of the Company, acquired all of the stock of the Predecessor in the Acquisition. Acquisition Corp. was formed by Morningside Capital Group, L.L.C. ("Morningside"), as financial sponsor, on behalf of an investor group consisting of DNL Partners, Limited Partnership ("DNL Partners"), a partnership formed by the principals of Morningside, the lenders providing the acquisition financing, and certain members of management, specifically, Dr. Leroy Keith and Mr. Bradford N. Creswell. The Predecessor was acquired for a purchase price of approximately $95 million (inclusive of transaction costs), funded primarily with Company debt. See "Use of Proceeds." The principal shareholder of the Predecessor, Mr. A. Minis, Jr., owned and controlled the Predecessor since 1951 when he purchased it from its original founders and owners who had started the business in 1901 with a single product--Magic shaving powder. The Minis family and certain related trusts and entities (the "Selling Stockholders") will sell all of their shares of Common Stock in the Offerings. Concurrent with the Acquisition, Acquisition Corp. merged into Carson Products Company ("Carson Products"). The Company's equity structure has been altered by the filing of its Amended and Restated Certificate of Incorporation (the "Recapitalization"). The Company has effected the conversion of each outstanding share of the Company's former Class A common stock into 11,370 shares of its newly created Class C Common Stock and the conversion of each outstanding share of the Company's former Class B common stock into 11,370 shares of its newly created Class B Common Stock. After the Recapitalization, holders of Class A Common Stock, Class B Common Stock and Class C Common Stock have 4.8%, 0% and 95.2% of the combined voting power of the outstanding shares of Common Stock of the Company. See "Description of Capital Stock." Upon the consummation of the Offerings, senior management will own approximately 6.2% of the total number (including shares held in a voting trust), and 4.4% of the combined voting power, of the outstanding shares of Common Stock of the Company. DNL Partners will own approximately 46.1% of the total number and 75.8% of the combined voting power of the outstanding shares of Common Stock of the Company. THE OFFERINGS The offering of 3,352,000 shares of Class A Common Stock in the United States and Canada (the "U.S. Offering") and the offering of 838,000 shares of Class A Common Stock outside the United States and Canada (the "International Offering") are collectively referred to herein as the "Offerings." <TABLE> <S> <C> Class A Common Stock offered(a): By the Company........ 2,484,500 shares By the Selling Stock- holders.............. 1,705,500 shares Total............... 4,190,000 shares Common Stock to be Out- standing After the Of- ferings................ 4,190,000 shares of Class A Common Stock(b) 1,859,677 shares of Class B Common Stock(c) 8,306,014 shares of Class C Common Stock(c) Total............... 14,355,691 shares of Common Stock(b) ===== Voting Rights........... The Class A Common Stock and Class C Common Stock vote as a single class on all matters, except as otherwise required by law, with each share of Class A Common Stock entitling its holder to one vote and each share of Class C Common Stock entitling its holder to ten votes. The Class B Common Stock generally is not entitled to vote on any matter submitted for the vote of stockholders. See "Description of Capital Stock." </TABLE> <TABLE> <S> <C> Use of Proceeds......... The net proceeds to be received by the Company from the Offerings (estimated to be $33.7 million based on an assumed initial public offering price of $15.00 per share, the midpoint of the estimated range of the initial public offering price) will be used to repay certain outstanding indebtedness. The Company will not receive any proceeds from the sale of shares by the Selling Stockholders. See "Use of Proceeds." New York Stock Exchange Symbol................. "CIC" </TABLE> - -------- (a) Of the shares being offered hereby, 400,000 shares of Class A Common Stock will be reserved for sale to certain directors, officers, employees, business associates and related persons of the Company. See "Underwriting." (b) Excludes 400,000 shares of Class A Common Stock reserved for issuance pursuant to the Company's 1996 Non-Employee Directors Equity Incentive Program (including 10,500 shares issuable upon the exercise of options to be granted to the Company's non-employee directors immediately prior to the consummation of the Offerings). Also excludes 600,000 shares of Class A Common Stock reserved for issuance pursuant to the Company's 1996 Long-Term Incentive Plan (including 59,500 shares issuable upon the exercise of options to be granted to the Company's management immediately prior to the consummation of the Offerings). The exercise price for the options to be granted under each of these programs will be the initial public offering price of the Class A Common Stock. (c) Each share of Class B Common Stock and Class C Common Stock is convertible at any time at the option of the holder thereof into one share of Class A Common Stock and converts automatically into one share of Class A Common Stock upon transfer to any person other than specified permitted transferees. The Class C Common Stock will automatically convert to Class A Common Stock if, at any time, the then outstanding Class C Common Stock represents less than 9% of the outstanding shares of Common Stock. See "Description of Capital Stock."
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+PROSPECTUS SUMMARY THE FOLLOWING INFORMATION IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. AS USED HEREIN, UNLESS THE CONTEXT OTHERWISE REQUIRES, THE "COMPANY" MEANS GRAY COMMUNICATIONS SYSTEMS, INC. AND ITS SUBSIDIARIES. THE COMPANY HAS NOT YET CONSUMMATED THE PHIPPS ACQUISITION (AS DEFINED) AND THERE CAN BE NO ASSURANCE THAT THE PHIPPS ACQUISITION WILL BE CONSUMMATED. HOWEVER, EXCEPT WITH RESPECT TO HISTORICAL FINANCIAL STATEMENTS AND UNLESS THE CONTEXT INDICATES OTHERWISE, THE PHIPPS BUSINESS (AS DEFINED) IS INCLUDED IN THE DESCRIPTION OF THE COMPANY. SEE "THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING." UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION GRANTED BY THE COMPANY TO THE UNDERWRITERS IN THE CONCURRENT OFFERING IS NOT EXERCISED. ALL INFORMATION IN THIS PROSPECTUS HAS BEEN ADJUSTED TO GIVE EFFECT TO A 3-FOR-2 SPLIT OF THE CLASS A COMMON STOCK, EFFECTED IN THE FORM OF A STOCK DIVIDEND DECLARED ON OCTOBER 2, 1995. UNLESS OTHERWISE INDICATED, ALL STATION RANK, IN-MARKET SHARE AND TELEVISION HOUSEHOLD DATA IN THIS PROSPECTUS ARE DERIVED FROM THE NIELSEN STATION INDEX, VIEWERS IN PROFILE, DATED NOVEMBER 1995, AS PREPARED BY A.C. NIELSEN COMPANY ("NIELSEN"). THE COMPANY The Company owns and operates seven network-affiliated television stations in medium-size markets in the southeastern United States, six of which are ranked number one in their respective markets (which includes two television stations that are part of the Phipps Business). Five of the stations are affiliated with the CBS Television Network, a division of CBS, Inc. ("CBS") and two are affiliated with the NBC Television Network, a division of the National Broadcasting Company, Incorporated ("NBC"). In connection with the Phipps Acquisition (described below), the Company will be required under current regulations of the Federal Communications Commission (the "FCC") to divest its NBC affiliates in Albany, Georgia and Panama City, Florida. For a discussion of the Company's plans regarding such divestiture, see "Risk Factors -- FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." The Company also owns and operates three daily newspapers, two weekly, advertising only publications ("shoppers"), and a paging business (which is part of the Phipps Business), all located in the Southeast. The Company derives significant operating advantages and cost saving synergies through the size of its television station group and the regional focus of its television and publishing operations. These advantages and synergies include (i) sharing television production facilities, equipment and regionally oriented programming, (ii) the ability to purchase television programming for the group as a whole, (iii) negotiating network affiliation agreements on a group basis and (iv) purchasing newsprint and other supplies in bulk. In addition, the Company believes that its regional focus can provide advertisers with an efficient network through which to advertise in the fast-growing Southeast. In 1993, after the acquisition of a large block of Class A Common Stock by a new investor, the Company implemented a strategy to foster growth through strategic acquisitions. Since 1994, the Company's significant acquisitions have included three television stations and two newspapers, all located in the Southeast. As a result of the Company's acquisitions and in support of its growth strategy, the Company has added certain key members of management and has greatly expanded its operations in the television broadcasting and newspaper publishing businesses. On September 10, 1996, J. Mack Robinson, a director of the Company, was appointed President and Chief Executive Officer of the Company on an interim basis, to succeed Ralph W. Gabbard, who had died suddenly. The Company expects to commence a search to locate a new President as soon as practicable following this Offering. On September 11, 1996, Robert S. Prather, Jr., a director of the Company, was appointed Executive Vice President-Acquisitions on an interim basis. In January 1996, the Company acquired (the "Augusta Acquisition") WRDW-TV ("WRDW"), a CBS affiliate serving Augusta, Georgia (the "Augusta Business"). In December 1995, the Company entered into an asset purchase agreement to acquire (the "Phipps Acquisition") two CBS-affiliated stations, WCTV-TV ("WCTV") serving Tallahassee, Florida/Thomasville, Georgia and WKXT-TV ("WKXT") in Knoxville, Tennessee, a satellite broadcasting business and a paging business (collectively, the "Phipps Business"). The Company believes that the Phipps Acquisition will further enhance the Company's position as a major regional television broadcaster and is highly attractive for a number of reasons, including (i) the stations' strategic fit in the Southeast, (ii) WCTV's leading station market position and WKXT's significant growth potential, (iii) strong station broadcast cash flows, (iv) opportunities for revenue growth utilizing the Company's extensive management expertise with medium-size stations and (v) opportunities for synergies between WCTV and WKXT and the Company's existing stations with regard to revenue enhancement and cost controls. The consummation of the Phipps Acquisition is currently expected to occur by September 30, 1996, although there can be no assurance with respect thereto. In August 1996, the Company sold the assets (the "KTVE Sale") of KTVE Inc. ("KTVE"), a television station serving Monroe, Louisiana/El Dorado, Arkansas for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing. For the year ended December 31, 1995, on a pro forma basis, the Company had net revenues, Media Cash Flow (the sum of broadcast cash flow, publishing cash flow and paging cash flow), operating cash flow and net (loss) of $90.6 million, $30.3 million, $28.1 million and $(3.6) million, respectively. For the six months ended June 30, 1996, on a pro forma basis, the Company had net revenues, Media Cash Flow, operating cash flow and net income of $47.3 million, $17.9 million, $16.3 million and $251,000, respectively. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the year ended December 31, 1995 increased 148.2%, 188.4% and 227.9%, respectively, while net income decreased 230.3% from the historical amounts for the year ended December 31, 1994. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the six months ended June 30, 1996 increased 67.1%, 114.7% and 122.8%, respectively, while net income decreased 78.7% from the historical amounts for the six months ended June 30, 1995. The Company's pro forma net income for its television stations for the year ended December 31, 1995 and for the six months ended June 30, 1996 was $1.6 million and $1.4 million, respectively. The following table sets forth certain information for each of the Company's television stations. <TABLE> <CAPTION> ------------------------------------------------------------------------------------------------------------------ PRO FORMA --------------------------------------- IN-MARKET YEAR ENDED DECEMBER SIX MONTHS ENDED STATION SHARE OF 31, 1995 JUNE 30, 1996 RANK HOUSEHOLDS ------------------- ------------------ NETWORK YEAR DMA CHANNEL/ IN VIEWING NET OPERATING NET OPERATING STATION AFFILIATION MARKET ACQUIRED RANK(1) FREQUENCY DMA(2) TV REVENUES INCOME(6) REVENUES INCOME(6) - -------- ------- ------------- ------- -------- --------- -------- --------- --------- -------- -------- -------- (IN THOUSANDS) (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> WKYT CBS Lexington, KY 1994 68 27/UHF(3) 1 33% $15,553 $5,247 $7,845 $2,701 WYMT CBS Hazard, KY 1994 68 57/UHF(3) 1(4) 24 3,721 831 2,107 530 WRDW CBS Augusta, GA 1996 111 12/VHF 1 36 8,888 1,853 4,489 1,149 WALB (5) NBC Albany, GA 1954 152 10/VHF 1 80 9,445 4,795 5,099 2,658 Panama City, WJHG (5) NBC FL 1960 159 7/VHF 1 53 3,843 270 2,409 476 PHIPPS ACQUISITION WKXT CBS Knoxville, TN 62 8/VHF 3 22 9,269 2,204 4,387 903 Tallahassee, WCTV CBS FL/ 116 6/VHF 1 60 11,862 4,229 6,212 2,254 Thomasville, GA </TABLE> - ------------------------------ (1) Ranking of designated market area as defined by Nielsen ("DMA") served by a station among all DMAs is measured by the number of television households within the DMA based on the November 1995 Nielsen estimates. (2) Represents station rank in DMA as determined by November 1995 Nielsen estimates of the number of television sets tuned to the Company's station as a percentage of the number of television sets in use in the market for the Sunday through Saturday 6 a.m. to 2 a.m. time period. (3) All stations in the market are UHF stations. (4) The market area served by WYMT is an 18-county trading area, as defined by Nielsen, and is included in the Lexington, Kentucky DMA. WYMT's station rank is based upon its position in the 18-county trading area. (5) The Company will be required under current FCC regulations to divest WALB and WJHG in connection with the Phipps Acquisition. For a discussion of the Company's plans, see "Risk Factors-FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." (6) Represents pro forma income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes. The Company's three newspapers, THE ALBANY HERALD, THE ROCKDALE CITIZEN and the GWINNETT DAILY POST and two shoppers had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $21.9 million and $660,000, respectively, for the year ended December 31, 1995, and $11.3 million and $1.3 million for the six months ended June 30, 1996, respectively. The satellite broadcasting business and paging business, which are a part of the Phipps Business, had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $6.2 million and $542,000 for the year ended December 31, 1995 and $3.5 million and $467,000 for the six months ended June 30, 1996, respectively. BUSINESS STRATEGY The Company's business strategy includes the following key elements: - STRONG LOCAL PRESENCE. Each of the Company's television stations seeks to achieve a distinct identity through its emphasis on local programming. A key objective is to build audience loyalty through the development of a strong local news franchise. Strong local news generates high viewership and results in higher ratings for programs both preceding and following the news, which increases revenues and Media Cash Flow. - REGIONAL FOCUS. The Company believes its regional focus has competitive advantages, including the ability to purchase and produce programming that can be used by multiple Company-owned stations as well as the opportunity to sell advertising on multiple stations as a single buy. In addition, the proximity of the Company's operations allows the sharing of equipment, management and marketing expertise. - TARGETED MARKETING. The Company seeks to increase its advertising revenues and Media Cash Flow by expanding existing relationships with local and national advertisers and by attracting new advertisers through targeted marketing techniques and carefully tailored programming. The Company works closely with advertisers to develop advertising campaigns that match specifically targeted audience segments including sponsoring and staging various special events such as fishing tournaments, boat shows and bridal expositions. - COST CONTROLS. Through its strategic planning and annual budgeting processes, the Company continually seeks to identify and implement cost savings opportunities at each of its stations and publications in order to increase Media Cash Flow. The Company's ownership of multiple stations and publications also benefits each operation in negotiating favorable terms with programming syndicators, newsprint suppliers, national sales representatives and other vendors. - SELECTIVE ACQUISITIONS. The Company has focused on acquiring television stations where the Company believes there is the potential for improvements in revenue share, audience share and cost control. The Company focuses on southeastern markets of medium size because the Company believes these markets offer superior opportunities in terms of projected population and economic growth, leading to higher advertising and circulation revenues. In assessing acquisitions, the Company targets stations and publications where it sees specific opportunities for revenue enhancement while controlling expenditures, utilizing management's significant experience with local and national advertising sales and in operating similar businesses. In appropriate circumstances, the Company will dispose of assets that it deems non-essential to its operating or growth strategy. THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING The Company has entered into an agreement to acquire WCTV and WKXT, a satellite broadcasting business and a paging business in the Southeast. The purchase price for the Phipps Acquisition is approximately $185 million, including fees, expenses and working capital and other adjustments. The consummation of the Phipps Acquisition is expected to occur by September 30, 1996, although there can be no assurance with respect thereto. See "Risk Factors -- Possible Non-Consummation of the Phipps Acquisition." Pursuant to an agreement, dated as of May 15, 1996 (the "KTVE Agreement"), with GOCOM Television of Ouachita, L.P., in August 1996, the Company sold the assets of KTVE for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing (approximately $870,000), to the extent collected by the buyer, to be paid to the Company 150 days following the date of closing. For the year ended December 31, 1995, KTVE had net revenues, Media Cash Flow and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) of $4.2 million, $916,000 and $437,000, respectively, and $2.3 million, $598,000 and $360,000, respectively, for the six months ended June 30, 1996. The Company estimates that the gain, net of estimated taxes, on the KTVE Sale was approximately $2.8 million. In addition to the KTVE Sale and the consummation of this Offering, the Concurrent Offering and the Phipps Acquisition, the Company intends to implement a financing plan (the "Financing") to increase liquidity and improve operating and financial flexibility. Pursuant to the Financing, the Company will (i) retire approximately $49.5 million aggregate principal amount of outstanding indebtedness under its senior secured bank credit facility (the "Old Credit Facility"), together with accrued interest thereon, (ii) retire approximately $25.0 million aggregate principal amount of outstanding indebtedness under its senior note due 2003 (the "Senior Note"), together with accrued interest thereon and a prepayment fee, (iii) issue $10.0 million liquidation preference of its Series A preferred stock (the "Series A Preferred Stock") in exchange for its outstanding $10.0 million aggregate principal amount 8% subordinated note (the "8% Note") issued to Bull Run Corporation ("Bull Run"), a principal shareholder of the Company, (iv) issue to Bull Run, J. Mack Robinson, the President, Chief Executive Officer and a director of the Company, and certain of his affiliates $10.0 million liquidation preference of its Series B preferred stock (the "Series B Preferred Stock" and together with the Series A Preferred Stock, the "Preferred Stock") with warrants to purchase up to 500,000 shares of Class A Common Stock (representing 10.1% of the currently issued and outstanding Class A Common Stock after giving effect to the exercise of such warrants) for cash proceeds of $10.0 million and (v) enter into a new senior secured bank credit facility (the "Senior Credit Facility") to provide for a term loan and revolving credit facility aggregating $125.0 million. The cash required for the consummation of the Phipps Acquisition, the repayment of indebtedness and related transaction costs will be provided by the net proceeds of this Offering, the Concurrent Offering and the sale of the Series B Preferred Stock and the warrants, borrowings under the Senior Credit Facility and the Company's working capital. For a description of the Senior Credit Facility and the Preferred Stock, see "Description of Certain Indebtedness" and "Management--Compensation Committee Interlocks and Insider Participation-Issuances of Preferred Stock." The consummation of this Offering and the placement of funds into escrow are conditioned upon the issuance of the Series A Preferred Stock in exchange for the 8% Note, the issuance of the Series B Preferred Stock and the entering into of the Senior Credit Facility. The consummation of this Offering and the placement of the net proceeds thereof into escrow are not conditioned upon the consummation of the Concurrent Offering or the Phipps Acquisition or the other elements of the Financing. However the release of the net proceeds hereof from escrow is conditioned, among other things, upon the satisfaction of the Minimum Equity Condition, the retirement of the Senior Note and the Old Credit Facility and the consummation of the Phipps Acquisition. The Notes are subject to a mandatory redemption on the Special Redemption Date at the Special Redemption Price if either the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996. See "Description of the Notes-Redemption-Special Redemption." The Senior Credit Facility will provide that no borrowings may be made thereunder until the closing of the Phipps Acquisition. Accordingly, if the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied, the Notes will be redeemed by the Company, the Old Credit Facility will remain in place and the Company will not borrow under the Senior Credit Facility. The following table sets forth the estimated sources and uses of funds relating to this Offering, the Concurrent Offering, the Phipps Acquisition and the Financing: <TABLE> <CAPTION> ---------- (IN MILLIONS) AMOUNT ---------- <S> <C> SOURCES OF FUNDS: The Notes offered hereby $160.0 The Concurrent Offering (1) 73.5 Sale of Series B Preferred Stock and Warrants 10.0 Borrowings under the Senior Credit Facility 22.9 Working capital (2) 9.5 ---------- TOTAL $275.9 ---------- ---------- USES OF FUNDS: Consummation of Phipps Acquisition $185.0 Retire indebtedness under the Old Credit Facility (3) 49.5 Retire indebtedness under the Senior Note (4) 25.0 Fees and expenses (5) 16.4 ---------- TOTAL $275.9 ---------- ---------- </TABLE> - ------------------------------ (1) Assumes estimated gross proceeds from the Concurrent Offering of $73.5 million and estimated net proceeds therefrom of $67.6 million. It is a condition of the release from escrow of the net proceeds of this Offering that the Company shall have consummated one or more equity offerings having gross proceeds of not less than $65.0 million. To the extent that the gross proceeds of any such equity offerings are less than $73.5 million, the Company intends to borrow such difference under its Senior Credit Facility. It is anticipated that there will not be a significant interval between the closing of this Offering and the closing of the Concurrent Offering. (2) The source of these funds was the KTVE Sale. (3) Borrowings under the Old Credit Facility bear interest at formula rates based upon the applicable London inter-bank offered rate ("LIBOR") or prime rate at the time of borrowing plus a fixed spread and have a final maturity of 2003. As of June 30, 1996, the weighted average interest rate was 8.94%. (4) The indebtedness under the Senior Note bears interest at 10.7%. (5) Fees and expenses include underwriting costs for the Notes and the Concurrent Offering, fees payable in connection with the negotiation and execution of the Senior Credit Facility, fees payable in connection with the retirement of the Senior Note and legal, accounting and other transaction fees. Prior to the consummation of the Phipps Acquisition and the satisfaction of the Minimum Equity Condition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes. The Trust Funds will be invested in cash equivalents. The proceeds of the Concurrent Offering will be used to repay indebtedness under the Old Credit Facility, to retire the Senior Note and to provide funds for the Phipps Acquisition. THE OFFERING <TABLE> <S> <C> SECURITIES OFFERED.......................... $160,000,000 aggregate principal amount of % Senior Subordinated Notes due 2006. MATURITY DATE............................... , 2006. INTEREST PAYMENT DATES...................... and , commencing , 1997. SPECIAL REDEMPTION BY THE COMPANY........... If the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996, the Company will be required to redeem (the "Special Redemption") the Notes on or prior to December 31, 1996 (the "Special Redemption Date") at a redemption price (the "Special Redemption Price") equal to 101% of the principal amount of the Notes plus accrued and unpaid interest to the Special Redemption Date. At any time prior to December 23, 1996, if the Phipps Acquisition has not been consummated or the Minimum Equity Condition is not satisfied, the Company may, at its option, redeem the Notes, in whole but not in part, at a redemption price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date fixed for redemption. Prior to the consummation of the Phipps Acquisition and the satisfaction of the Minimum Equity Condition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes and the obligation of the Company to consummate the Special Redemption will be secured by such funds (the "Trust Funds"). </TABLE> <TABLE> <S> <C> OPTIONAL REDEMPTION BY THE COMPANY.......... The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after , 2001, at the redemption prices set forth herein, plus accrued and unpaid interest to the date fixed for redemption. In addition, at any time prior to , 1999, the Company, at its option, may redeem up to 35% of the aggregate principal amount of the Notes originally issued with the cash proceeds received by the Company from one or more Public Equity Offerings, other than the Concurrent Offering, at any time or from time to time, at a redemption price equal to % of the principal amount thereof, plus accrued and unpaid interest to the date fixed for redemption; PROVIDED, HOWEVER, that at least $104.0 million in aggregate principal amount of the Notes remain outstanding immediately after any such redemption. CHANGE OF CONTROL OFFER..................... Upon a Change of Control, the Company has the obligation to offer to purchase all the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. See "Description of the Notes -- Change of Control" for a discussion of the circumstances in which the Company may not be required to make a Change of Control Offer (as defined). OFFERS TO PURCHASE.......................... In the event of certain asset sales, the Company will be required to offer to repurchase the Notes at 100% of their principal amount plus accrued and unpaid interest, if any, to the date of repurchase with the net proceeds of such asset sales. SUBORDINATION............................... The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company, including all indebtedness of the Company under the Senior Credit Facility. As of June 30, 1996, on a pro forma basis after giving effect to this Offering, the Concurrent Offering, the KTVE Sale, the Financing and the application of the net proceeds therefrom, and to the Phipps Acquisition, the Company would have had approximately $183.6 million of indebtedness outstanding, of which $23.6 million would be Senior Debt. SUBSIDIARY GUARANTEES....................... The Notes will be guaranteed, jointly and severally, fully and unconditionally, on a senior subordinated basis by the Subsidiary Guarantors (the "Subsidiary Guarantees"). The obligations of any Subsidiary Guarantor with respect to its Subsidiary Guarantee will be subordinated in right of payment, to the same extent as the obligations of the Company in respect of the Notes, to all existing and future Guarantor Senior Debt of such Subsidiary Guarantor, which will include any guarantee by such Subsidiary Guarantor of the Company's indebtedness under the Senior Credit Facility. </TABLE> <TABLE> <S> <C> PRINCIPAL COVENANTS......................... The Indenture for the Notes (the "Indenture") will impose certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt or Guarantor Senior Debt and senior in right of payment to the Notes or any Subsidiary Guarantee, incur liens, impose restrictions on the ability of a subsidiary to pay dividends or make certain payments to the Company, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. USE OF PROCEEDS............................. The Company intends to use the proceeds from the sale of the Notes, together with the proceeds of the Concurrent Offering, the other proceeds of the Financing and the Company's working capital, to (i) consummate the Phipps Acquisition, (ii) retire indebtedness under the Old Credit Facility and the Senior Note and (iii) pay related fees and expenses. However, in the event the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996, the Company will be obligated to redeem the Notes. See "The Phipps Acquisition, the KTVE Sale and the Financing" and "Description of the Notes-Redemption-Special Redemption."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001019982_mettler_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001019982_mettler_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements, including the related notes, appearing elsewhere in this Prospectus. Unless the context otherwise requires, the 'Issuer' means MT Acquisition Corp. and, after giving effect to the transactions described in 'The Acquisition' (which are referred to herein collectively as the 'Acquisition'), Mettler-Toledo, Inc. The 'Company' or 'Mettler-Toledo' as used in this Prospectus means the Issuer and its subsidiaries, after giving effect on a pro forma basis to the transactions described in 'The Acquisition'. The 'Mettler-Toledo Group' refers to the group of companies being acquired pursuant to the Acquisition. Unless otherwise indicated, industry data contained herein is derived from publicly available industry trade journals, government reports and other publicly available sources, which the Company has not independently verified but which the Company believes to be reliable, and where such sources were not available, from Company estimates, which the Company believes to be reasonable, but which cannot be independently verified. As used in this Prospectus, '$' refers to U.S. dollars and 'SFr' refers to Swiss francs. THE COMPANY GENERAL Mettler-Toledo is the world's largest manufacturer and marketer of weighing instruments for use in laboratory, industrial and food retailing applications. The Company focuses on the high value-added segments of the weighing instruments market by providing solutions for specific applications. The Company also manufactures and sells certain related laboratory measurement instruments, with one of the top three market positions worldwide in titrators, thermal analysis systems, pH meters and lab reactors. Mettler-Toledo services a worldwide customer base, with 1995 net sales of $850 million, which were derived 52% in Europe, 37% in North and South America and 11% in Asia and other markets. The Company has a global manufacturing presence, with manufacturing facilities in Europe, the United States and Asia. Weighing is one of the most broadly used measuring techniques, and its results are often used as the basis of commercial transactions. The Company's products are used in the laboratory as an integral part of the research process; in industry for materials preparation, filling, counting and dimensioning; and in food retailing for preparation, portioning and inventory control. Customers include pharmaceutical, biotechnology, chemical, cosmetics, food and beverage, postal, jewelry, metals, logistics, shipping and food retailing businesses, as well as schools, universities and government and private standards labs. MARKET LEADERSHIP Mettler-Toledo is the only company to offer weighing products for laboratory, industrial and food retailing applications throughout the world. The Company believes that in 1995, the global market for weighing instruments for laboratory, industrial and food retailing applications was approximately $4.5 billion and that the Company held a market share more than two times greater than its nearest competitor. The Company believes that, in 1995, it had an approximate 40% market share of the global market for laboratory balances, including the largest market share in each of Europe, the United States and Asia (excluding Japan), and one of the three leading positions in Japan. In the industrial and food retailing market, the Company believes it has the largest market share in Europe and in the United States. In Asia, the Company has a substantial, rapidly growing industrial and food retailing business supported by its established manufacturing presence in China. The Company attributes its worldwide market leadership position to the following competitive strengths: Brand Recognition. The Mettler-Toledo brand name is identified worldwide with accuracy, reliability and innovation. The Company's brand name is so well recognized that laboratory balances are often referred to as 'Mettlers.' Brand recognition is important because weighing applications significantly impact customers' product quality, productivity, cost and regulatory compliance. As a result, customers tend to emphasize accuracy, product reliability, technical innovation, reputation and past experience with a manufacturer's products when making their purchasing decisions for weighing instruments. Technological Innovation. Mettler-Toledo has a long and successful track record of innovation, as demonstrated by the invention of the single-pan analytical balance in 1945 and the introduction of the first fully electronic precision balance in 1973. The Company has continued to be at the forefront of weighing technology with several recent innovations, including its ID 20 terminal and 'Brickstone' weighing sensor technology. The Company has particular expertise in sensor technology, electronics and software, and in the industrial design of measurement instruments. The Company believes it is the global leader in providing sophisticated features, such as data-handling and storage capabilities, integration into management information systems and improved productivity through automation, all of which are increasingly important to users of weighing instruments. The Company devotes substantial resources to research and product development in order to maintain its competitive advantage in technological innovation. Comprehensive Product Range. Mettler-Toledo manufactures a more comprehensive range of weighing instruments than any of its competitors. The Company's broad product line addresses a wide range of weighing applications across many industries and regions. Within an industry, the Company offers multiple products to meet customers' requirements. Its broad range of products allows the Company to leverage its manufacturing and distribution capabilities, sales and service organization and product development activities. Global Sales and Service. The Company has the only global sales and service organization among weighing instruments manufacturers. At June 30, 1996, this organization consisted of 2,700 employees organized into locally based, customer-focused groups that provide prompt service and support to the Company's customers and distributors in virtually all major markets across the globe. The local focus of the Company's sales and service organization enables the Company to adapt marketing and service efforts to different cultural and economic conditions, and provides feedback for manufacturing and product development. Largest Installed Base. The Company believes that it has the largest installed base of weighing instruments in the world. Service revenues from this installed base provide a strong, stable source of recurring revenue, representing approximately 17% of net sales in 1995. The Company believes that its installed base represents a competitive advantage with respect to repeat purchases. Customers tend to remain with an existing supplier who can provide accurate and reliable products and related services. In addition, switching to a new instrument supplier entails additional costs to the customer for training, spare parts, service and system integration requirements. Close relationships and frequent contact with its broad customer base provide the Company with sales leads and new product and application ideas. Diversity of Revenue Base. The Company's revenue base is widely diversified by geographic region, by type of customer and by individual customer. The Company's broad range of product offerings is utilized in many different industries, from chemicals and pharmaceuticals to food processing to food retailing to transportation. The Company supplies customers in over 100 countries, and no one customer accounted for more than 2% of 1995 net sales. The Company's diverse revenue base reduces its exposure to regional or industry- specific economic conditions. INDUSTRY TRENDS The Company believes that the weighing instruments market is being influenced by several industry trends. First, customers are demanding products for industry-specific applications, with significant data management capabilities designed to be integrated into business processes and to improve productivity. Second, quality manufacturing and laboratory requirements are becoming more standardized. For example, ISO 9001 standards require manufacturers to utilize certified measurement instruments, and good laboratory practices require each step in the research process to be recorded with certified instruments so that results can be accurately traced and reproduced. Third, increased harmonization of national weighing standards, particularly in the European Union, has facilitated multinational manufacturers' ability to meet local regulatory requirements and provides broader-based markets for their product lines. Most importantly, there has been significant growth in demand in emerging markets as these economies develop and global manufacturing customers shift production operations to these markets. As a result, customers in these emerging markets require additional and more sophisticated weighing instruments. Global manufacturers operating in emerging markets often utilize the same suppliers that service their needs in other markets. The Company believes that its global operations position it to take advantage of these industry trends. BUSINESS STRATEGY The Company's strategy is to enhance its position as global market leader by providing the most comprehensive, innovative and reliable weighing solutions. The Company plans to actively pursue the following initiatives to increase revenues and profitability: Product Innovation. The Company intends to continue to invest in product innovation in order to provide technologically advanced products to its customers for existing and new applications. Over the last three calendar years, the Company invested $149 million in research and development, which has resulted in a pipeline of new and updated products. A recent example of the Company's extensive product development efforts is the innovative ID 20 terminal for use in the Company's range of industrial scales. ID 20 includes the first personal computer interface to be certified by weights and measures regulators, combined with an ergonomically designed personal computer terminal for industrial applications. Other recent examples include a new moisture analyzer, a dimensioning system for logistics applications that combines volume and weight measurements, a new generation of postal meters and a mid-range food retailing scale. The Company is also focused on innovations that can reduce its production costs. For example, the Company's new 'Brickstone' weighing sensor technology, in addition to providing greater accuracy, reduces from approximately 100 to approximately 50 the number of parts in the sensor, and thus significantly reduces manufacturing costs and the time and expense of design changes. Increased Penetration of Developed Markets. The Company intends to leverage its brand name and existing infrastructure to further penetrate selected geographic regions and product lines in Europe, the United States and Japan. For example, in European food retailing products, the Company plans to further expand from its strong base in German-speaking countries into other countries. In addition, the Company plans to increase penetration with shipping and logistics businesses by introducing a new weighing and dimensioning product. The Company also continues to take advantage of the standardization of weights and measures, both in the European Union and worldwide, which favors a manufacturer with a global presence, such as the Company. Further Expansion in Emerging Markets. The Company believes that global recognition of the Mettler-Toledo brand name and the Company's global sales and service organization position the Company to take advantage of continued growth opportunities in emerging markets. In 1995, the Company had net sales of $69 million in Asia (excluding Japan) and Latin America, representing 8% of net sales. In Asia (excluding Japan), it is the market leader in laboratory weighing instruments and has a substantial and rapidly growing industrial and food retailing business. The Company has been operating in China since 1987 through a 60%-owned joint venture, which owns one manufacturing facility, and the Company plans to complete construction of a new wholly owned manufacturing facility in Shanghai by the end of 1996. The Company believes that this manufacturing infrastructure, as well as its sales and service organization in Asia and its already substantial sales in Asia and Latin America, position it to take advantage of further growth opportunities in emerging markets. Reengineering and Cost Reductions. Over the last three years, the Company has been successful at increasing its margins, despite negative currency effects. These increases have been achieved through, among other things, increased workforce flexibility, a reduction in its overall workforce, a shift in the mix of its workforce toward higher growth, lower cost regions and the introduction of new products with lower manufacturing costs. The Company is currently implementing two projects which are aimed at reducing warehouse capacity, improving inventory turnover and reducing materials handling costs. The Company is restructuring the order and product delivery process in Europe to enable the Company to deliver many of its products to its customers directly from the manufacturing facility within several days. The Company is also streamlining its European spare parts inventory management system. In addition to continuing these cost-cutting efforts, the Company is also evaluating its business strategy as an independent company after the Acquisition and believes that it can support continued sales growth while further reducing its overall cost base. In July 1996, in anticipation of the consummation of the Acquisition, the Company announced the closure of its Westerville, Ohio facility. In addition, the Company will implement a targeted workforce reduction by the end of 1996. The Company expects that these two additional projects will result in annual cost reductions of $8.3 million. Pursue Selected Acquisition Opportunities. The Company has a proven record of acquiring and integrating businesses into existing operations. As an independent company, Mettler-Toledo plans to more actively pursue additional product lines and distribution channels through acquisitions, strategic alliances and joint ventures. The Company believes that by taking advantage of its brand name and global sales and service organization it can expand distribution of acquired product lines and operate acquired businesses more efficiently. The mailing address of the Company's and Holding's principal executive offices is Im Langacher, P.O. Box MT-100, CH-8606, Greifensee, Switzerland. Its telephone number is 41-1-944-22-11.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001020086_porta_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001020086_porta_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING INFORMATION IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. AS USED HEREIN, UNLESS THE CONTEXT OTHERWISE REQUIRES, THE "COMPANY" MEANS GRAY COMMUNICATIONS SYSTEMS, INC. AND ITS SUBSIDIARIES. THE COMPANY HAS NOT YET CONSUMMATED THE PHIPPS ACQUISITION (AS DEFINED) AND THERE CAN BE NO ASSURANCE THAT THE PHIPPS ACQUISITION WILL BE CONSUMMATED. HOWEVER, EXCEPT WITH RESPECT TO HISTORICAL FINANCIAL STATEMENTS AND UNLESS THE CONTEXT INDICATES OTHERWISE, THE PHIPPS BUSINESS (AS DEFINED) IS INCLUDED IN THE DESCRIPTION OF THE COMPANY. SEE "THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING." UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION GRANTED BY THE COMPANY TO THE UNDERWRITERS IN THE CONCURRENT OFFERING IS NOT EXERCISED. ALL INFORMATION IN THIS PROSPECTUS HAS BEEN ADJUSTED TO GIVE EFFECT TO A 3-FOR-2 SPLIT OF THE CLASS A COMMON STOCK, EFFECTED IN THE FORM OF A STOCK DIVIDEND DECLARED ON OCTOBER 2, 1995. UNLESS OTHERWISE INDICATED, ALL STATION RANK, IN-MARKET SHARE AND TELEVISION HOUSEHOLD DATA IN THIS PROSPECTUS ARE DERIVED FROM THE NIELSEN STATION INDEX, VIEWERS IN PROFILE, DATED NOVEMBER 1995, AS PREPARED BY A.C. NIELSEN COMPANY ("NIELSEN"). THE COMPANY The Company owns and operates seven network-affiliated television stations in medium-size markets in the southeastern United States, six of which are ranked number one in their respective markets (which includes two television stations that are part of the Phipps Business). Five of the stations are affiliated with the CBS Television Network, a division of CBS, Inc. ("CBS") and two are affiliated with the NBC Television Network, a division of the National Broadcasting Company, Incorporated ("NBC"). In connection with the Phipps Acquisition (described below), the Company will be required under current regulations of the Federal Communications Commission (the "FCC") to divest its NBC affiliates in Albany, Georgia and Panama City, Florida. For a discussion of the Company's plans regarding such divestiture, see "Risk Factors -- FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." The Company also owns and operates three daily newspapers, two weekly, advertising only publications ("shoppers"), and a paging business (which is part of the Phipps Business), all located in the Southeast. The Company derives significant operating advantages and cost saving synergies through the size of its television station group and the regional focus of its television and publishing operations. These advantages and synergies include (i) sharing television production facilities, equipment and regionally oriented programming, (ii) the ability to purchase television programming for the group as a whole, (iii) negotiating network affiliation agreements on a group basis and (iv) purchasing newsprint and other supplies in bulk. In addition, the Company believes that its regional focus can provide advertisers with an efficient network through which to advertise in the fast-growing Southeast. In 1993, after the acquisition of a large block of Class A Common Stock by a new investor, the Company implemented a strategy to foster growth through strategic acquisitions. Since 1994, the Company's significant acquisitions have included three television stations and two newspapers, all located in the Southeast. As a result of the Company's acquisitions and in support of its growth strategy, the Company has added certain key members of management and has greatly expanded its operations in the television broadcasting and newspaper publishing businesses. On September 10, 1996, J. Mack Robinson, a director of the Company, was appointed President and Chief Executive Officer of the Company on an interim basis, to succeed Ralph W. Gabbard, who had died suddenly. The Company expects to commence a search to locate a new President as soon as practicable following this Offering. On September 11, 1996, Robert S. Prather, Jr., a director of the Company, was appointed Executive Vice President-Acquisitions on an interim basis. In January 1996, the Company acquired (the "Augusta Acquisition") WRDW-TV ("WRDW"), a CBS affiliate serving Augusta, Georgia (the "Augusta Business"). In December 1995, the Company entered into an asset purchase agreement to acquire (the "Phipps Acquisition") two CBS-affiliated stations, WCTV-TV ("WCTV") serving Tallahassee, Florida/Thomasville, Georgia and WKXT-TV ("WKXT") in Knoxville, Tennessee, a satellite broadcasting business and a paging business (collectively, the "Phipps Business"). The Company believes that the Phipps Acquisition will further enhance the Company's position as a major regional television broadcaster and is highly attractive for a number of reasons, including (i) the stations' strategic fit in the Southeast, (ii) WCTV's leading station market position and WKXT's significant growth potential, (iii) strong station broadcast cash flows, (iv) opportunities for revenue growth utilizing the Company's extensive management expertise with medium-size stations and (v) opportunities for synergies between WCTV and WKXT and the Company's existing stations with regard to revenue enhancement and cost controls. The consummation of the Phipps Acquisition is currently expected to occur by September 30, 1996, although there can be no assurance with respect thereto. In August 1996, the Company sold the assets (the "KTVE Sale") of KTVE Inc. ("KTVE"), a television station serving Monroe, Louisiana/El Dorado, Arkansas for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing. For the year ended December 31, 1995, on a pro forma basis, the Company had net revenues, Media Cash Flow (the sum of broadcast cash flow, publishing cash flow and paging cash flow), operating cash flow and net (loss) of $90.6 million, $30.3 million, $28.1 million and $(3.6) million, respectively. For the six months ended June 30, 1996, on a pro forma basis, the Company had net revenues, Media Cash Flow, operating cash flow and net income of $47.3 million, $17.9 million, $16.3 million and $251,000, respectively. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the year ended December 31, 1995 increased 148.2%, 188.4% and 227.9%, respectively, while net income decreased 230.3% from the historical amounts for the year ended December 31, 1994. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the six months ended June 30, 1996 increased 67.1%, 114.7% and 122.8%, respectively, while net income decreased 78.7% from the historical amounts for the six months ended June 30, 1995. The Company's pro forma net income for its television stations for the year ended December 31, 1995 and for the six months ended June 30, 1996 was $1.6 million and $1.4 million, respectively. The following table sets forth certain information for each of the Company's television stations. <TABLE> <CAPTION> ------------------------------------------------------------------------------------------------------------------ PRO FORMA --------------------------------------- IN-MARKET YEAR ENDED DECEMBER SIX MONTHS ENDED STATION SHARE OF 31, 1995 JUNE 30, 1996 RANK HOUSEHOLDS ------------------- ------------------ NETWORK YEAR DMA CHANNEL/ IN VIEWING NET OPERATING NET OPERATING STATION AFFILIATION MARKET ACQUIRED RANK(1) FREQUENCY DMA(2) TV REVENUES INCOME(6) REVENUES INCOME(6) - -------- ------- ------------- ------- -------- --------- -------- --------- --------- -------- -------- -------- (IN THOUSANDS) (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> WKYT CBS Lexington, KY 1994 68 27/UHF(3) 1 33% $15,553 $5,247 $7,845 $2,701 WYMT CBS Hazard, KY 1994 68 57/UHF(3) 1(4) 24 3,721 831 2,107 530 WRDW CBS Augusta, GA 1996 111 12/VHF 1 36 8,888 1,853 4,489 1,149 WALB (5) NBC Albany, GA 1954 152 10/VHF 1 80 9,445 4,795 5,099 2,658 Panama City, WJHG (5) NBC FL 1960 159 7/VHF 1 53 3,843 270 2,409 476 PHIPPS ACQUISITION WKXT CBS Knoxville, TN 62 8/VHF 3 22 9,269 2,204 4,387 903 Tallahassee, WCTV CBS FL/ 116 6/VHF 1 60 11,862 4,229 6,212 2,254 Thomasville, GA </TABLE> - ------------------------------ (1) Ranking of designated market area as defined by Nielsen ("DMA") served by a station among all DMAs is measured by the number of television households within the DMA based on the November 1995 Nielsen estimates. (2) Represents station rank in DMA as determined by November 1995 Nielsen estimates of the number of television sets tuned to the Company's station as a percentage of the number of television sets in use in the market for the Sunday through Saturday 6 a.m. to 2 a.m. time period. (3) All stations in the market are UHF stations. (4) The market area served by WYMT is an 18-county trading area, as defined by Nielsen, and is included in the Lexington, Kentucky DMA. WYMT's station rank is based upon its position in the 18-county trading area. (5) The Company will be required under current FCC regulations to divest WALB and WJHG in connection with the Phipps Acquisition. For a discussion of the Company's plans, see "Risk Factors-FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." (6) Represents pro forma income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes. The Company's three newspapers, THE ALBANY HERALD, THE ROCKDALE CITIZEN and the GWINNETT DAILY POST and two shoppers had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $21.9 million and $660,000, respectively, for the year ended December 31, 1995, and $11.3 million and $1.3 million for the six months ended June 30, 1996, respectively. The satellite broadcasting business and paging business, which are a part of the Phipps Business, had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $6.2 million and $542,000 for the year ended December 31, 1995 and $3.5 million and $467,000 for the six months ended June 30, 1996, respectively. BUSINESS STRATEGY The Company's business strategy includes the following key elements: - STRONG LOCAL PRESENCE. Each of the Company's television stations seeks to achieve a distinct identity through its emphasis on local programming. A key objective is to build audience loyalty through the development of a strong local news franchise. Strong local news generates high viewership and results in higher ratings for programs both preceding and following the news, which increases revenues and Media Cash Flow. - REGIONAL FOCUS. The Company believes its regional focus has competitive advantages, including the ability to purchase and produce programming that can be used by multiple Company-owned stations as well as the opportunity to sell advertising on multiple stations as a single buy. In addition, the proximity of the Company's operations allows the sharing of equipment, management and marketing expertise. - TARGETED MARKETING. The Company seeks to increase its advertising revenues and Media Cash Flow by expanding existing relationships with local and national advertisers and by attracting new advertisers through targeted marketing techniques and carefully tailored programming. The Company works closely with advertisers to develop advertising campaigns that match specifically targeted audience segments including sponsoring and staging various special events such as fishing tournaments, boat shows and bridal expositions. - COST CONTROLS. Through its strategic planning and annual budgeting processes, the Company continually seeks to identify and implement cost savings opportunities at each of its stations and publications in order to increase Media Cash Flow. The Company's ownership of multiple stations and publications also benefits each operation in negotiating favorable terms with programming syndicators, newsprint suppliers, national sales representatives and other vendors. - SELECTIVE ACQUISITIONS. The Company has focused on acquiring television stations where the Company believes there is the potential for improvements in revenue share, audience share and cost control. The Company focuses on southeastern markets of medium size because the Company believes these markets offer superior opportunities in terms of projected population and economic growth, leading to higher advertising and circulation revenues. In assessing acquisitions, the Company targets stations and publications where it sees specific opportunities for revenue enhancement while controlling expenditures, utilizing management's significant experience with local and national advertising sales and in operating similar businesses. In appropriate circumstances, the Company will dispose of assets that it deems non-essential to its operating or growth strategy. THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING The Company has entered into an agreement to acquire WCTV and WKXT, a satellite broadcasting business and a paging business in the Southeast. The purchase price for the Phipps Acquisition is approximately $185 million, including fees, expenses and working capital and other adjustments. The consummation of the Phipps Acquisition is expected to occur by September 30, 1996, although there can be no assurance with respect thereto. See "Risk Factors -- Possible Non-Consummation of the Phipps Acquisition." Pursuant to an agreement, dated as of May 15, 1996 (the "KTVE Agreement"), with GOCOM Television of Ouachita, L.P., in August 1996, the Company sold the assets of KTVE for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing (approximately $870,000), to the extent collected by the buyer, to be paid to the Company 150 days following the date of closing. For the year ended December 31, 1995, KTVE had net revenues, Media Cash Flow and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) of $4.2 million, $916,000 and $437,000, respectively, and $2.3 million, $598,000 and $360,000, respectively, for the six months ended June 30, 1996. The Company estimates that the gain, net of estimated taxes, on the KTVE Sale was approximately $2.8 million. In addition to the KTVE Sale and the consummation of this Offering, the Concurrent Offering and the Phipps Acquisition, the Company intends to implement a financing plan (the "Financing") to increase liquidity and improve operating and financial flexibility. Pursuant to the Financing, the Company will (i) retire approximately $49.5 million aggregate principal amount of outstanding indebtedness under its senior secured bank credit facility (the "Old Credit Facility"), together with accrued interest thereon, (ii) retire approximately $25.0 million aggregate principal amount of outstanding indebtedness under its senior note due 2003 (the "Senior Note"), together with accrued interest thereon and a prepayment fee, (iii) issue $10.0 million liquidation preference of its Series A preferred stock (the "Series A Preferred Stock") in exchange for its outstanding $10.0 million aggregate principal amount 8% subordinated note (the "8% Note") issued to Bull Run Corporation ("Bull Run"), a principal shareholder of the Company, (iv) issue to Bull Run, J. Mack Robinson, the President, Chief Executive Officer and a director of the Company, and certain of his affiliates $10.0 million liquidation preference of its Series B preferred stock (the "Series B Preferred Stock" and together with the Series A Preferred Stock, the "Preferred Stock") with warrants to purchase up to 500,000 shares of Class A Common Stock (representing 10.1% of the currently issued and outstanding Class A Common Stock after giving effect to the exercise of such warrants) for cash proceeds of $10.0 million and (v) enter into a new senior secured bank credit facility (the "Senior Credit Facility") to provide for a term loan and revolving credit facility aggregating $125.0 million. The cash required for the consummation of the Phipps Acquisition, the repayment of indebtedness and related transaction costs will be provided by the net proceeds of this Offering, the Concurrent Offering and the sale of the Series B Preferred Stock and the warrants, borrowings under the Senior Credit Facility and the Company's working capital. For a description of the Senior Credit Facility and the Preferred Stock, see "Description of Certain Indebtedness" and "Management--Compensation Committee Interlocks and Insider Participation-Issuances of Preferred Stock." The consummation of this Offering and the placement of funds into escrow are conditioned upon the issuance of the Series A Preferred Stock in exchange for the 8% Note, the issuance of the Series B Preferred Stock and the entering into of the Senior Credit Facility. The consummation of this Offering and the placement of the net proceeds thereof into escrow are not conditioned upon the consummation of the Concurrent Offering or the Phipps Acquisition or the other elements of the Financing. However the release of the net proceeds hereof from escrow is conditioned, among other things, upon the satisfaction of the Minimum Equity Condition, the retirement of the Senior Note and the Old Credit Facility and the consummation of the Phipps Acquisition. The Notes are subject to a mandatory redemption on the Special Redemption Date at the Special Redemption Price if either the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996. See "Description of the Notes-Redemption-Special Redemption." The Senior Credit Facility will provide that no borrowings may be made thereunder until the closing of the Phipps Acquisition. Accordingly, if the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied, the Notes will be redeemed by the Company, the Old Credit Facility will remain in place and the Company will not borrow under the Senior Credit Facility. The following table sets forth the estimated sources and uses of funds relating to this Offering, the Concurrent Offering, the Phipps Acquisition and the Financing: <TABLE> <CAPTION> ---------- (IN MILLIONS) AMOUNT ---------- <S> <C> SOURCES OF FUNDS: The Notes offered hereby $160.0 The Concurrent Offering (1) 73.5 Sale of Series B Preferred Stock and Warrants 10.0 Borrowings under the Senior Credit Facility 22.9 Working capital (2) 9.5 ---------- TOTAL $275.9 ---------- ---------- USES OF FUNDS: Consummation of Phipps Acquisition $185.0 Retire indebtedness under the Old Credit Facility (3) 49.5 Retire indebtedness under the Senior Note (4) 25.0 Fees and expenses (5) 16.4 ---------- TOTAL $275.9 ---------- ---------- </TABLE> - ------------------------------ (1) Assumes estimated gross proceeds from the Concurrent Offering of $73.5 million and estimated net proceeds therefrom of $67.6 million. It is a condition of the release from escrow of the net proceeds of this Offering that the Company shall have consummated one or more equity offerings having gross proceeds of not less than $65.0 million. To the extent that the gross proceeds of any such equity offerings are less than $73.5 million, the Company intends to borrow such difference under its Senior Credit Facility. It is anticipated that there will not be a significant interval between the closing of this Offering and the closing of the Concurrent Offering. (2) The source of these funds was the KTVE Sale. (3) Borrowings under the Old Credit Facility bear interest at formula rates based upon the applicable London inter-bank offered rate ("LIBOR") or prime rate at the time of borrowing plus a fixed spread and have a final maturity of 2003. As of June 30, 1996, the weighted average interest rate was 8.94%. (4) The indebtedness under the Senior Note bears interest at 10.7%. (5) Fees and expenses include underwriting costs for the Notes and the Concurrent Offering, fees payable in connection with the negotiation and execution of the Senior Credit Facility, fees payable in connection with the retirement of the Senior Note and legal, accounting and other transaction fees. Prior to the consummation of the Phipps Acquisition and the satisfaction of the Minimum Equity Condition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes. The Trust Funds will be invested in cash equivalents. The proceeds of the Concurrent Offering will be used to repay indebtedness under the Old Credit Facility, to retire the Senior Note and to provide funds for the Phipps Acquisition. THE OFFERING <TABLE> <S> <C> SECURITIES OFFERED.......................... $160,000,000 aggregate principal amount of % Senior Subordinated Notes due 2006. MATURITY DATE............................... , 2006. INTEREST PAYMENT DATES...................... and , commencing , 1997. SPECIAL REDEMPTION BY THE COMPANY........... If the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996, the Company will be required to redeem (the "Special Redemption") the Notes on or prior to December 31, 1996 (the "Special Redemption Date") at a redemption price (the "Special Redemption Price") equal to 101% of the principal amount of the Notes plus accrued and unpaid interest to the Special Redemption Date. At any time prior to December 23, 1996, if the Phipps Acquisition has not been consummated or the Minimum Equity Condition is not satisfied, the Company may, at its option, redeem the Notes, in whole but not in part, at a redemption price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date fixed for redemption. Prior to the consummation of the Phipps Acquisition and the satisfaction of the Minimum Equity Condition, the net proceeds of this Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee for the benefit of the holders of the Notes and the obligation of the Company to consummate the Special Redemption will be secured by such funds (the "Trust Funds"). </TABLE> <TABLE> <S> <C> OPTIONAL REDEMPTION BY THE COMPANY.......... The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after , 2001, at the redemption prices set forth herein, plus accrued and unpaid interest to the date fixed for redemption. In addition, at any time prior to , 1999, the Company, at its option, may redeem up to 35% of the aggregate principal amount of the Notes originally issued with the cash proceeds received by the Company from one or more Public Equity Offerings, other than the Concurrent Offering, at any time or from time to time, at a redemption price equal to % of the principal amount thereof, plus accrued and unpaid interest to the date fixed for redemption; PROVIDED, HOWEVER, that at least $104.0 million in aggregate principal amount of the Notes remain outstanding immediately after any such redemption. CHANGE OF CONTROL OFFER..................... Upon a Change of Control, the Company has the obligation to offer to purchase all the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. See "Description of the Notes -- Change of Control" for a discussion of the circumstances in which the Company may not be required to make a Change of Control Offer (as defined). OFFERS TO PURCHASE.......................... In the event of certain asset sales, the Company will be required to offer to repurchase the Notes at 100% of their principal amount plus accrued and unpaid interest, if any, to the date of repurchase with the net proceeds of such asset sales. SUBORDINATION............................... The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company, including all indebtedness of the Company under the Senior Credit Facility. As of June 30, 1996, on a pro forma basis after giving effect to this Offering, the Concurrent Offering, the KTVE Sale, the Financing and the application of the net proceeds therefrom, and to the Phipps Acquisition, the Company would have had approximately $183.6 million of indebtedness outstanding, of which $23.6 million would be Senior Debt. SUBSIDIARY GUARANTEES....................... The Notes will be guaranteed, jointly and severally, fully and unconditionally, on a senior subordinated basis by the Subsidiary Guarantors (the "Subsidiary Guarantees"). The obligations of any Subsidiary Guarantor with respect to its Subsidiary Guarantee will be subordinated in right of payment, to the same extent as the obligations of the Company in respect of the Notes, to all existing and future Guarantor Senior Debt of such Subsidiary Guarantor, which will include any guarantee by such Subsidiary Guarantor of the Company's indebtedness under the Senior Credit Facility. </TABLE> <TABLE> <S> <C> PRINCIPAL COVENANTS......................... The Indenture for the Notes (the "Indenture") will impose certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt or Guarantor Senior Debt and senior in right of payment to the Notes or any Subsidiary Guarantee, incur liens, impose restrictions on the ability of a subsidiary to pay dividends or make certain payments to the Company, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. USE OF PROCEEDS............................. The Company intends to use the proceeds from the sale of the Notes, together with the proceeds of the Concurrent Offering, the other proceeds of the Financing and the Company's working capital, to (i) consummate the Phipps Acquisition, (ii) retire indebtedness under the Old Credit Facility and the Senior Note and (iii) pay related fees and expenses. However, in the event the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996, the Company will be obligated to redeem the Notes. See "The Phipps Acquisition, the KTVE Sale and the Financing" and "Description of the Notes-Redemption-Special Redemption."
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and consolidated financial statements and notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated or the context otherwise requires, references to "Masada" or the "Company" are to Masada Security Holdings, Inc. and its subsidiaries. This Prospectus contains forward-looking statements which involve risk and uncertainties. The Company's actual results may differ materially from the results discussed in forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors" and elsewhere in this Prospectus. THE COMPANY The Company provides security alarm monitoring services and installs and services security alarm systems for residential and small business subscribers, principally in the southern United States. At September 30, 1996, the Company had over 81,000 subscriber accounts for its alarm monitoring services, a majority of which were residential subscribers. As a result of the Company's internally generated "Safe Choice" subscriber accounts and acquisitions of subscriber account portfolios, the Company has increased its monthly recurring revenue ("MRR") (1) from approximately $0.6 million at February 1, 1993 to approximately $2.1 million at September 30, 1996, which represents an increase in annualized MRR from $7.3 million to $25.6 million. Based upon a ranking of security alarm monitoring companies by annual revenues included in the May 1996 issue of SDM magazine (formerly Security Distributing and Marketing) ("SDM"), the Company believes that it is one of the largest residential security alarm monitoring companies in the southern United States. According to a May 1996 survey by SDM, the Company is the second fastest growing security alarm monitoring company in the United States based upon the Company's historical three year growth rate in revenues. The Company's objective is to provide residential security alarm services to a greater number of Americans by making such services affordable and by focusing on markets with attractive demographics. The Company's growth strategy is based upon both internal generation of subscriber accounts marketed under the tradename "Safe Choice" by the Company's sales consultants, and acquisitions of subscriber accounts from independent alarm monitoring companies. The Company believes that it can achieve economies of scale and improve results of operations by increasing the number and density of subscribers for whom it provides services, thereby increasing utilization of the Company's central monitoring station and improving efficiency of its service operations. From February 1, 1993 through September 30, 1996, Masada has generated approximately 42,100 subscriber accounts internally through the Safe Choice marketing program, including over 7,700 new Safe Choice subscriber accounts during the third quarter of 1996. The Company seeks to create additional subscriber accounts through the Safe Choice marketing program principally by subsidizing the initial installation of a residential security alarm monitoring system in order to capture the MRR generated by the monitoring contract. By offering the Safe Choice alarm system at a base installation price of $99, the Company believes it can access a broader demographic market than is presently being accessed by other existing companies who, according to the January 1996 issue of SDM, sold and installed alarm systems during 1995 for an average price of $1,200. In addition, the Safe Choice program allows Masada to create subscriber accounts for an investment which, expressed as a multiple of MRR generated, is substantially lower than that for which the Company can acquire subscriber accounts and, in management's belief based upon its knowledge of the industry, is among the lowest in the industry. - --------------- (1) MRR is monthly recurring revenue which the Company is entitled to receive from contracts in effect at the end of the period. MRR is a term commonly used in the industry as a measure of the size of a company but not as a measure of profitability or performance, and does not include any allowance for future attrition of subscriber accounts or allowance for doubtful accounts. The Company does not have sufficient information as to the attrition of acquired subscriber accounts to predict the amount of acquired MRR that will be realized in future periods or the impact of the attrition of acquired subscriber accounts on the Company's overall rate of attrition. See "Risk Factors -- Attrition of Subscriber Accounts." From September 1994 through September 1996, the Company has acquired approximately 39,000 subscriber accounts in 18 separate transactions. The Company intends to make acquisitions and open branches in new geographic markets where the Company does not presently have subscribers, and then to increase the number of subscriber accounts in such markets through the Safe Choice marketing program and subsequent acquisitions, both of which have the effect of increasing subscriber account density in the area, and thereby improving operating efficiency. Approximately 90% of the Company's subscribers are located in Florida, Texas and the Richmond/Washington, D.C./Baltimore metropolitan areas. The Company's remaining subscribers are located in Georgia, Louisiana, Oklahoma and Tennessee. According to the Bureau of the Census and the Federal Bureau of Investigation, the states which the Company serves collectively have higher projected population growth rates from 1990 through 2010 and had higher crime rates during 1994 than the nation as a whole. The Company also owns a 12.3% ownership interest in Centennial Security, Inc., an alarm security company based in New Jersey ("Centennial Security"), which holds an exclusive license from the Company to use the Masada Security trademark and tradename, the Safe Choice tradename, and certain other intellectual property in the northern half of the United States and in Canada. The Company may operate as an alarm security company in the territory licensed to Centennial Security, however the Company cannot, without the consent of Centennial Security, operate under the name "Masada Security" or use the "Safe Choice" tradename within the licensed territory until the license terminates, which is not scheduled to occur until 2004. The Company monitors digital signals arising from burglaries, fires and other monitored events which occur at the subscribers' premises from the Company's state-of-the-art central monitoring station located in Birmingham, Alabama, which has the capacity to serve approximately 250,000 subscriber accounts. The security alarm industry is highly fragmented and growing. According to research conducted by J.P. Freeman & Co., a security industry consulting firm (the "Freeman Research"), there currently are approximately 11,500 security alarm companies in the United States. A May 1996 survey by SDM reported that in 1995 the 100 largest companies in the industry accounted for only 23% of alarm industry revenues and the top 10 security alarm monitoring companies served less than 3% of all United States households. Freeman Research indicates that residential security alarm monitoring revenues grew in the United States at a compounded annual rate of 12% between 1988 and 1995. The Company believes that several factors, including increased concern about crime and favorable demographic trends, have contributed to the increased demand for residential security alarm services. Market penetration, however, remains low, with monitored security alarm systems installed in only 11% of all U.S. households according to Freeman Research. THE OFFERING <TABLE> <S> <C> Common Stock Offered......................... 2,400,000 shares Common Stock Outstanding after the Offering................................... 7,826,826 shares(1) Use of Proceeds.............................. Redemption of Class A preferred stock and partial repayment of indebtedness outstanding under the Company's credit facility. The Company intends to borrow in the future under the credit facility to fund the Safe Choice marketing program, to fund acquisitions of subscriber accounts, and for general corporate purposes, including capital expenditures and working capital. See "Use of Proceeds." Proposed Nasdaq National Market Symbol....... MSDA </TABLE> - --------------- (1) Excludes, as of December 3, 1996, shares reserved for issuance upon exercise of outstanding options to purchase 385,500 shares of Common Stock and excludes shares covered by the Underwriters' over-allotment option. SUMMARY FINANCIAL AND OPERATING DATA (In thousands, except number of subscribers) <TABLE> <CAPTION> YEARS ENDED DEC. 31, NINE MONTHS ENDED SEPT. 30, ELEVEN ----------------------------- SIX ------------------------------ MONTHS MONTHS ENDED HISTORICAL ENDED HISTORICAL DEC. 31, ----------------- PRO FORMA JUNE 30, ------------------ PRO FORMA 1993(1) 1994 1995 1995(2) 1996 1995 1996 1996(2) -------- ------- ------- --------- -------- ------- -------- --------- <S> <C> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues: Monitoring..................... $ 6,958 $ 8,756 $12,472 $ 22,326 $ 9,367 $ 8,748 $ 15,374 $ 17,424 Installation................... 2,477 3,083 3,429 5,806 2,493 2,583 3,936 3,936 Service........................ 520 678 911 1,083 677 695 1,153 1,153 Other.......................... -- -- -- 484 -- -- -- -- ------- ------- ------- ------- ------- ------- -------- -------- Total revenues............. 9,955 12,517 16,812 29,699 12,537 12,026 20,463 22,513 Cost of revenues: Monitoring..................... 1,137 1,374 1,945 3,544 1,421 1,378 2,297 2,575 Installation................... 1,220 1,268 1,339 3,210 1,151 979 1,754 1,754 Service........................ 1,429 1,734 2,235 2,235 1,628 1,574 2,735 2,735 ------- ------- ------- ------- ------- ------- -------- -------- Total cost of revenues..... 3,786 4,376 5,519 8,989 4,200 3,931 6,786 7,064 ------- ------- ------- ------- ------- ------- -------- -------- Gross profit............... 6,169 8,141 11,293 20,710 8,337 8,095 13,677 15,449 General and administrative expenses....................... 3,091 5,071 7,550 14,874 4,563 5,470 7,271 8,665 Noncash compensation expense..... -- 92 56 56 99 -- 121 121 Selling and marketing costs...... 1,879 2,923 5,411 5,411 3,780 3,960 6,271 6,271 Depreciation and amortization.... 2,406 3,451 5,258 8,764 4,774 3,573 7,761 8,454 ------- ------- ------- ------- ------- ------- -------- -------- Operating loss............. (1,207 ) (3,396) (6,982) (8,395 ) (4,879 ) (4,908) (7,747) (8,062 ) Interest expense, net............ 754 593 844 3,622 1,140 632 2,226 2,757 Other nonoperating expense....... -- -- -- (277 ) -- -- -- (70 ) Gain on disposal of assets....... -- -- -- 2 160 -- 225 225 Extraordinary loss from early retirement of debt............. -- -- -- -- (567 ) -- (567) (567 ) Income tax expense............... -- -- -- (10 ) -- -- -- -- ------- ------- ------- ------- ------- ------- -------- -------- Net loss................... $(1,961 ) $(3,989) $(7,826) $(12,302 ) $(6,426 ) $(5,540) $(10,315) $(11,231 ) ======= ======= ======= ======= ======= ======= ======== ======== </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1996 --------------------------------------- ACTUAL PRO FORMA(2) AS ADJUSTED(3) ------- ------------ -------------- <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Working capital (deficit).................................... $ (434) $ (434) $ (434) Total assets................................................. 57,239 57,239 57,239 Long-term debt less current portion.......................... 44,359 44,359 27,750 Total stockholders' equity................................... 1,706 1,706 26,960 </TABLE> - --------------- (1) The Company commenced operations on February 1, 1993. (2) With respect to Statement of Operations Data and Other Data, gives effect to acquisitions occurring during 1995 and the first nine months of 1996 as if each had occurred on January 1, 1995, and with respect to Consolidated Balance Sheet Data, reflects the conversion of all outstanding shares of Class B convertible preferred stock and Class C convertible preferred stock into shares of Class B common stock and Class C common stock, respectively, and the exchange of each outstanding share of Class A common stock, Class B common stock, and Class C common stock into three shares of a new, single class of Common Stock, as provided for in the Company's Plan of Recapitalization, concurrently with the consummation of this offering. See "Pro Forma Financial Information." (3) As adjusted to reflect the sale by the Company of 2,400,000 shares of Common Stock offered hereby and the anticipated application of the estimated net proceeds therefrom at an assumed offering price of $12.00 per share (less underwriting discounts and commissions and estimated offering expenses). See "Use of Proceeds." <TABLE> <CAPTION> YEARS ENDED DEC. 31, NINE MONTHS ENDED SEPT. 30, ELEVEN ------------------------------ SIX ------------------------------- MONTHS MONTHS ENDED HISTORICAL ENDED HISTORICAL DEC. 31, ------------------ PRO FORMA JUNE 30, ------------------- PRO FORMA 1993(1) 1994 1995 1995(2) 1996 1995 1996 1996(2) -------- ------- -------- --------- -------- -------- -------- --------- <S> <C> <C> <C> <C> <C> <C> <C> <C> OTHER DATA: MRR at end of period(4)........ $ 660 $ 903 $ 1,298 $ 1,298 $ 2,045 $ 1,108 $ 2,129 $ 2,129 Number of subscribers at end of period....................... 21,051 30,053 47,060 47,060 77,927 38,699 81,607 81,607 EBITDA(5)...................... $ 1,199 $ 147 $ (1,668) $ 425 $ (6) $ (1,335) $ 135 $ 513 Less Safe Choice revenues.... (1,346 ) (1,937) (2,076) (2,076 ) (1,352) (1,541) (2,122) (2,122 ) Plus Safe Choice selling and marketing expenses......... 1,879 2,923 5,411 5,411 3,780 3,960 6,271 6,271 ------- ------- ------- ------- ------- ------- -------- -------- Adjusted EBITDA(6)......... $ 1,732 $ 1,133 $ 1,667 $ 3,760 $ 2,422 $ 1,084 $ 4,284 $ 4,662 ======= ======= ======= ======= ======= ======= ======== ======== Net cash provided by (used in) operating activities......... $ (329 ) $ 172 $ (3,595) $ 23 $ (3,207) $ (1,159) Net cash (used in) investing activities................... $(1,842 ) $(8,663) $(12,729) $(29,348) $ (9,255) $(32,495) Net cash provided by financing activities................... $ 1,212 $ 8,610 $ 16,189 $ 29,637 $ 13,807 $ 33,959 </TABLE> - --------------- (4) MRR is monthly recurring revenue that the Company is entitled to receive under contracts in effect at the end of the period. MRR is a term commonly used in the security alarm industry as a measure of the size of a company, but not as a measure of profitability or performance, and does not include any allowance for future attrition or allowance for doubtful accounts. The Company does not have sufficient information as to the attrition of acquired subscriber accounts to predict the amount of acquired MRR that will be realized in future periods or the impact of the attrition of acquired accounts on the Company's overall rate of attrition. (5) EBITDA is derived by adding to net loss the sum of (i) interest expense, (ii) depreciation and amortization expense, (iii) noncash compensation expense related to the Company's stock option grants, and (iv) extraordinary loss from early retirement of debt less (v) gain on disposal of assets. EBITDA does not represent cash flow from operations as defined by generally accepted accounting principles, should not be construed as an alternative to net income, and is indicative neither of the Company's operating performance nor of cash flows available to fund the Company's cash needs. Items excluded from EBITDA are significant components in understanding and assessing the Company's financial performance. The Company believes that EBITDA is used by senior lenders and the investment community to determine the current borrowing capacity and to estimate the long-term value of companies with recurring cash flows from operations and net losses. Accordingly, EBITDA is presented to meet the investment community's expectations for comparative data. There can be no assurance that EBITDA, as presented by the Company, is comparable to other similarly titled measures of other security alarm companies. (6) Adjusted EBITDA ("Adjusted EBITDA") is derived by adding to EBITDA the Safe Choice selling and marketing expenses, net of Safe Choice installation revenues, during the period. Adjusted EBITDA does not represent cash flow from operations as defined by generally accepted accounting principles, should not be construed as an alternative to net income, and is indicative neither of the Company's operating performance nor of cash flows available to fund the Company's cash needs. As a result of the accounting treatment applicable to the Company's Safe Choice marketing program, as compared to the accounting treatment applicable to the acquisition of subscriber accounts, the Company believes that EBITDA does not fairly reflect that a significant component of the Company's current period expenses are being voluntarily "invested" in the internal creation of long-term recurring revenue Safe Choice subscriber accounts, as though the accounts were being acquired. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- General -- Accounting Policies for Safe Choice Installations and Subscriber Account Purchases." Accordingly, the Company presents Adjusted EBITDA as a measure which the Company believes provides a more appropriate comparison to EBITDA as presented by companies growing principally through acquisitions. The Company's existing credit facility contains a financial covenant based upon Adjusted EBITDA. There can be no assurance that Adjusted EBITDA, as presented by the Company, is comparable to other similarly titled measures of other security alarm companies. ---------------------- Unless otherwise indicated or the context otherwise requires, all information contained in this Prospectus assumes (i) the implementation of the Company's Plan of Recapitalization (the "Recapitalization") concurrently with the consummation of this offering, which Recapitalization provides for (a) the automatic redemption of all outstanding shares of Class A preferred stock, (b) the automatic conversion of all outstanding shares of Class B convertible preferred stock and Class C convertible preferred stock into shares of Class B common stock and Class C common stock, respectively, and (c) the automatic exchange of each outstanding share of Class A common stock, Class B common stock and Class C common stock into three shares of a new, single class of Common Stock, and (ii) that the Underwriters' over-allotment option is not exercised. The closing of this offering will not occur without implementation of the Recapitalization.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001020233_world_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001020233_world_prospectus_summary.txt
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+SUMMARY The following summary is qualified in its entirety by reference to the detailed information appearing elsewhere in this Prospectus. See the Index of Capitalized Terms for the location herein of certain capitalized terms. Overview................... Certain motor vehicle dealers ("Dealers") in the World Omni Financial Corp. ("World Omni") network of dealers have assigned, and will assign, closed-end retail automobile and light duty truck leases to World Omni LT, an Alabama trust (the "Origination Trust"). The Origination Trust was created in 1993 to avoid the administrative difficulty and expense associated with retitling leased vehicles in the securitization of automobile and light duty truck leases. The Origination Trust has issued to Auto Lease Finance L.P. ("ALFI L.P.") an Undivided Trust Interest (the "UTI") representing the entire beneficial interest in the unallocated assets of the Origination Trust. ALFI L.P. will instruct the trustee of the Origination Trust to allocate a separate portfolio of leases and leased vehicles within the Origination Trust and create a special unit of beneficial interest (the "SUBI") which will represent the entire beneficial interest in such portfolio. Upon its creation, such portfolio will no longer be a part of the Origination Trust Assets represented by the UTI. ALFI L.P. will sell its interest in the SUBI to World Omni Lease Securitization L.P. (the "Seller") and the Seller will in turn contribute a 99.8% interest in the SUBI to the World Omni 1996-B Automobile Lease Securitization Trust (the "Trust"). In return, the Trust will issue four classes of Certificates, including the Class A-1 Certificates, Class A-2 Certificates and Class A-3 Certificates being offered hereby. The undivided interest in the Trust not evidenced by the Certificates will be permanently retained by the Seller. ALFI L.P. has caused and from time to time in the future may cause additional special units of beneficial interest similar to the SUBI ("Other SUBIs") to be created out of the UTI and sold to the Seller or one or more other entities. The Trust and the Certificateholders will have no interest in the UTI, any Other SUBI or any assets of the Origination Trust evidenced by the UTI or any Other SUBI. The Trust.................. The Trust will be formed pursuant to a securitization trust agreement to be dated as of October 1, 1996 (the "Agreement"), between the Seller and First Bank National Association ("First Bank"), as trustee (in such capacity, the "Trustee"). The property of the Trust will consist primarily of an undivided 99.8% interest (the "SUBI Interest") in the SUBI, which will evidence a beneficial interest in certain specified assets of the Origination Trust, and monies on deposit in the Reserve Fund, the Residual Value Surplus Account and in certain other accounts established as described herein. The Origination Trust was formed by ALFI L.P., as grantor and initial beneficiary, and VT Inc., as trustee (the "Origination Trustee"). The sole general partner of ALFI L.P. is Auto Lease Finance, Inc., a Delaware corporation which is a wholly owned, special purpose subsidiary of World Omni ("ALFI"). ALFI may not transfer its general partnership interest in ALFI L.P. so long as any financings involving interests in the Origination Trust (including the transaction described herein) are outstanding. The sole limited partner of ALFI L.P. is World Omni. VT Inc. is an Alabama corporation and a wholly owned, special purpose subsidiary of First Bank that was organized solely for the purpose of acting as Origination Trustee. VT Inc. is not affiliated with World Omni or any affiliate thereof. For further information regarding the Origination Trustee, see "The Origination Trust -- The Origination Trustee". The Origination Trust Assets consist of retail closed-end lease contracts assigned to the Origination Trust by Dealers, the automobiles and light duty trucks relating thereto and all proceeds thereof and payments made under certain insurance policies relating to such contracts, the related lessees or such leased vehicles. The SUBI initially will evidence a beneficial interest in a specified portion of the Origination Trust Assets, including certain lease contracts (the "Initial Contracts") originated by Dealers located throughout the United States, the automobiles and light duty trucks relating thereto (the "Initial Leased Vehicles"), certain monies due under or payable in respect of the Initial Contracts and the Initial Leased Vehicles on or after September 1, 1996 (the "Initial Cutoff Date"), payments made under certain insurance policies relating to the Initial Contracts, the related lessees and the Initial Leased Vehicles and certain related assets and rights (collectively, the "SUBI Assets"). For further information regarding the SUBI Assets, see "The Trust and the SUBI -- The SUBI". Prior to the time when principal is first distributed to Certificateholders as described herein, payments made on or in respect of the SUBI Assets allocable to principal will be reinvested in additional retail closed-end lease contracts (the "Subsequent Contracts" and, together with the Initial Contracts, the "Contracts") originated and assigned to the Origination Trust by Dealers located throughout the United States and the automobiles and light duty trucks relating thereto (the "Subsequent Leased Vehicles" and, together with the Initial Leased Vehicles, the "Leased Vehicles"). At the time of such reinvestment, the related Subsequent Contracts and Subsequent Leased Vehicles will become SUBI Assets. For further information regarding the Subsequent Contracts and Subsequent Leased Vehicles, see "Summary -- The Revolving Period; Subsequent Contracts and Subsequent Leased Vehicles" and "The Trust and the SUBI -- The SUBI". The Dealers comprising the sources for Contracts and Leased Vehicles are members of World Omni's network of dealers. Predominantly Toyota dealerships, these Dealers offer automobiles and light duty trucks for lease pursuant to World Omni-approved terms and documentation. For further information regarding World Omni's lease business, see "World Omni". The SUBI will not evidence a direct interest in the SUBI Assets, nor will it represent a beneficial interest in any Origination Trust Assets other than the SUBI Assets. Payments made on or in respect of the Origination Trust Assets other than the SUBI Assets will not be available to make payments on the Certificates. The 0.2% interest in the SUBI not transferred to the Trustee will be permanently retained by the Seller (the "Retained SUBI Interest"). Accordingly, the Seller will be entitled to receive 0.2% of all payments made on or in respect of the SUBI Assets and will share in 0.2% of all losses and liabilities incurred by the SUBI Assets. Any payments made in respect of the Retained SUBI Interest will not be available to make payments on the Certificates. For further information regarding the SUBI, see "Summary -- Security for the Certificates -- The SUBI", "The Trust and the SUBI -- The SUBI" and "The Origination Trust". The Seller................. The Seller is a Delaware limited partnership, the sole general partner of which is World Omni Lease Securitization, Inc., a Delaware corporation ("WOLSI"), which is a wholly owned, special purpose subsidiary of World Omni. WOLSI may not transfer its general partnership interest in the Seller so long as any financings involving interests formerly or partially held by it in the Origination Trust (including the transaction described herein) are outstanding. The sole limited partner of the Seller is World Omni. World Omni................. World Omni is a Florida corporation that is a wholly owned subsidiary of JM Family Enterprises, Inc., a Delaware corporation ("JMFE"). JMFE also wholly owns Southeast Toyota Distributors, Inc. ("SET"), which is the exclusive distributor of Toyota automobiles and light duty trucks in Florida, Alabama, Georgia, North Carolina and South Carolina (the "Five State Area"). As more fully described under "World Omni", World Omni provides consumer lease and installment contract financing to retail customers of, and floorplan and other dealer financing to, Dealers that are located throughout the United States. World Omni wholly owns both ALFI and WOLSI. Pursuant to an amended and restated servicing agreement dated as of July 1, 1994, as amended, to be supplemented by a servicing supplement dated as of October 1, 1996 (collectively, the "Servicing Agreement"), each between World Omni and the Origination Trustee, World Omni will act as the initial servicer of the Origination Trust Assets, including the SUBI Assets (in such capacity, the "Servicer"). The Trustee will be a third party beneficiary of the Servicing Agreement. Securities Offered......... The Automobile Lease Asset Backed Certificates (the "Certificates") will represent fractional undivided interests in the Trust. The Certificates will consist of three classes of senior certificates (the "Class A-1 Certificates", the "Class A-2 Certificates" and the "Class A-3 Certificates", respectively, and collectively, the "Class A Certificates") and one class of subordinated certificates (the "Class B Certificates"). Principal payments generally will not be made in respect of the Class A-2 Certificates until the Class A-1 Certificates have been paid in full and no principal payments will be made on the Class A-3 Certificates until the Class A-1 Certificates and the Class A-2 Certificates have been paid in full, in each case as more fully described under "Description of the Certificates -- Distributions on the Certificates -- Application and Distributions of Principal -- Amortization Period". The Class B Certificates will be subordinated to the Class A Certificates so that (i) interest payments generally will not be made in respect of the Class B Certificates until interest in respect of the Class A Certificates has been paid, (ii) principal payments generally will not be made in respect of the Class B Certificates until the Class A-1 and Class A-2 Certificates have been paid in full and (iii) if other sources available to make payments of principal and interest on the Class A-3 Certificates are insufficient, amounts that otherwise would be paid in respect of the Class B Certificates generally will be available for that purpose, as more fully described under "Description of the Certificates -- Distributions on the Certificates". The undivided interest in the Trust not represented by the Certificates will be permanently retained by the Seller (the "Seller Interest"). The Seller Interest will be subordinated to the Certificates as described under "Summary -- Security for the Certificates -- Subordination of the Seller Interest". Only the Class A Certificates are being offered hereby. The Class A Certificates will be issued in book-entry form in minimum denominations of $1,000 and integral multiples thereof. The Class B Certificates will be sold in one or more private placements. Additional information regarding the Class A Certificates is set forth under "Description of the Certificates -- Book-Entry Registration" and "-- Definitive Certificates". Each Certificate will represent the right to receive monthly payments of interest at the related Certificate Rate and, to the extent described herein, monthly payments of principal during the Amortization Period. These payments will be funded from a portion of the payments received by the Trust on or in respect of the SUBI Interest (i.e., from a portion of 99.8% of the payments received on or in respect of the Contracts and the Leased Vehicles) and, in certain circumstances, from Excess Collections, monies on deposit in the Reserve Fund, monies on deposit in the Residual Value Surplus Account, the Servicing Fee (so long as World Omni is the Servicer) and monies that otherwise would be distributable in respect of the Seller Interest. Interests in the assets of the Trust will be allocated among the Class A-1 Certificateholders (the "Class A-1 Interest"), the Class A-2 Certificateholders (the "Class A-2 Interest"), the Class A-3 Certificateholders (the "Class A-3 Interest" and, together with the Class A-1 Interest and the Class A-2 Interest, the "Class A Interest"), the Class B Certificateholders (the "Class B Interest" and, together with the Class A Interest, the "Investor Interest") and the Seller Interest. On the date of initial issuance of the Certificates (the "Closing Date"), the Trust will issue $260,000,000 aggregate principal amount of Class A-1 Certificates (the "Initial Class A-1 Certificate Balance"), $280,000,000 aggregate principal amount of Class A-2 Certificates (the "Initial Class A-2 Certificate Balance"), $210,057,988 aggregate principal amount of Class A-3 Certificates (the "Initial Class A-3 Certificate Balance" and, together with the Initial Class A-1 Certificate Balance and the Initial Class A-2 Certificate Balance, the "Initial Class A Certificate Balance") and $44,598,043 aggregate principal amount of Class B Certificates (the "Initial Class B Certificate Balance" and, together with the Initial Class A Certificate Balance, the "Initial Certificate Balance"). The aggregate principal amount of the Class A-1, Class A-2 and Class A-3 Certificates and the Class B Certificates will, except in certain circumstances described under "Summary -- The Revolving Period; Subsequent Contracts and Subsequent Leased Vehicles", remain fixed at their respective Initial Certificate Balances during the Revolving Period and, to the extent described herein, will decline thereafter during the Amortization Period as principal is paid on the Certificates. The "Class Certificate Balance" of any Class of Certificates on any day will equal the Initial Class Certificate Balance, reduced by the sum of all distributions made in respect of principal (including any reimbursements of Loss Amounts allocable to such Class and Certificate Principal Loss Amounts in respect of such Class) on or prior to such day on the related Class of Certificates and those Certificate Principal Loss Amounts in respect of such Class, if any, which have not been reimbursed as described herein. The "Class A Certificate Balance" will mean the sum of the Class A-1, Class A-2 and Class A-3 Certificate Balances. The "Certificate Balance" with respect to the Certificates will mean the sum of the Class A Certificate Balance and the Class B Certificate Balance. The amount of the Seller Interest will initially equal $16,217,470 (which amount will equal 2% of 99.8% of the Aggregate Net Investment Value as of the Initial Cutoff Date) and on any day will equal the difference between 99.8% of the Aggregate Net Investment Value, calculated as described under "Summary -- Security for the Certificates -- The SUBI -- The Contracts", and the Certificate Balance. As more fully described under "Description of the Certificates -- General", the Aggregate Net Investment Value can change daily. Because the Seller Interest will represent the interest in the Trust not represented by the Certificates, the amount of the Seller Interest can decrease daily as the Aggregate Net Investment Value decreases and can increase on a Distribution Date to reflect reductions in the Certificate Balance, but will never exceed the initial amount of the Seller Interest. Registration of the Certificates............... Each Class of Class A Certificates initially will be represented by one or more certificates registered in the name of Cede & Co. ("Cede"), as the nominee of The Depository Trust Company ("DTC"). A person acquiring an interest in the Class A Certificates (each, a "Certificate Owner") may elect to hold his or her interest through DTC, in the United States of America, or Cedel Bank, societe anonyme ("Cedel") or the Euroclear System ("Euroclear"), in Europe. Transfers within DTC, Cedel or Euroclear, as the case may be, will be in accordance with the usual rules and operating procedures of the relevant system. Cross-market transfers between persons holding directly or indirectly through DTC, on the one hand, and counterparties holding directly or indirectly through Cedel or Euroclear, on the other, will be effected in DTC through Citibank, N.A. or Morgan Guaranty Trust Company of New York, the relevant depositaries (collectively, the "Depositaries") of Cedel or Euroclear, respectively, and each a participating member of DTC. No Certificate Owner will be able to receive a definitive certificate representing such person's interest, except in the limited circumstances described under "Description of the Certificates -- Definitive Certificates". Unless and until definitive certificates are issued, Certificate Owners will not be recognized as holders of record of Class A Certificates and will be permitted to exercise the rights of such holders only indirectly through DTC. For further information regarding book-entry registration of the Class A Certificates, see "Description of the Certificates -- General" and "-- Book-Entry Registration". Interest................... On the fifteenth day of each month or, if such day is not a Business Day, on the next succeeding Business Day, beginning November 15, 1996 (each, a "Distribution Date"), distributions in respect of the Class A Certificates will be made to the holders of record of the Class A-1, Class A-2 and Class A-3 Certificates (respectively, the "Class A-1 Certificateholders", the "Class A-2 Certificateholders" and the "Class A-3 Certificateholders", and collectively, the "Class A Certificateholders") as of the day immediately preceding such Distribution Date or, if Definitive Certificates are issued, the last day of the immediately preceding calendar month (each such date, a "Record Date"). On each Distribution Date, the Trustee will distribute interest for the related Interest Period to the Class A Certificateholders, based on the related Class Certificate Balance as of the immediately preceding Distribution Date (after giving effect to reductions in such Class Certificate Balance as of such immediately preceding Distribution Date) or, in the case of the first Distribution Date, on the Initial Class Certificate Balance, in the case of (i) the Class A-1 Certificates, at an annual percentage rate equal to 5.95% (the "Class A-1 Certificate Rate"), (ii) the Class A-2 Certificates, at an annual percentage rate equal to 6.20% (the "Class A-2 Certificate Rate") and (iii) the Class A-3 Certificates, at an annual percentage rate equal to 6.25% (the "Class A-3 Certificate Rate"). Interest in respect of the Class A Certificates will accrue for the period from and including the Distribution Date in each month to but excluding the Distribution Date in the immediately succeeding month (or, in the case of the first Distribution Date, from and including October 24, 1996) (each, an "Interest Period"). All such payments will be calculated on the basis of a 360-day year consisting of twelve 30-day months. The final scheduled Distribution Date for the Certificates (the "Final Scheduled Distribution Date") will be the November 2002 Distribution Date. A "Business Day" will be a day other than a Saturday or Sunday or a day on which banking institutions in the States of Alabama, Florida, Illinois or New York are authorized or obligated by law, or executive order or government decree to be closed. As described under "Description of the Certificates -- Distributions on the Certificates -- Distributions of Interest", distributions in respect of interest on the Class B Certificates will be subordinated to distributions in respect of interest on the Class A Certificates under certain circumstances. The Revolving Period; Subsequent Contracts and Subsequent Leased Vehicles................. No principal will be payable on the Certificates until the November 1997 Distribution Date or, upon the occurrence of an Early Amortization Event, until the Distribution Date in the month immediately succeeding the month in which such Early Amortization Event occurs. From the Closing Date and ending on the day immediately preceding the commencement of the Amortization Period (the "Revolving Period"), all Principal Collections and reimbursements of Loss Amounts will be reinvested in Subsequent Contracts and Subsequent Leased Vehicles so as to maintain the Class A-1, Class A-2, Class A-3 and Class B Certificate Balances at constant levels during the Revolving Period, except to the extent there are unreimbursed Certificate Principal Loss Amounts in respect of any such Class, in which case the Certificate Balance of the related Class of Certificates will decrease until such time, if any, as such Certificate Principal Loss Amounts are reimbursed as described under "Description of the Certificates -- Distributions on the Certificates -- Distributions of Interest". The events that might lead to the termination of the Revolving Period prior to its scheduled termina- tion date are described under "Description of the Certificates -- Early Amortization Events". Prior to the twenty-fifth calendar day (i) in each month (beginning November 1996) during the Revolving Period and (ii) if no Early Amortization Event has occurred, in the month in which the Amortization Date occurs, on one or more days selected by the Servicer (each, a "Transfer Date"), the Servicer will direct the Origination Trustee to reinvest Principal Collections in certain lease contracts and the related leased vehicles of the Origination Trust that are not evidenced by the SUBI or any Other SUBI. Upon such reinvestment, the related Subsequent Contracts and Subsequent Leased Vehicles will become SUBI Assets. If on the twenty-fifth calendar day of any month (beginning November 1996) during the Revolving Period the amount of Principal Collections as of the last day of the immediately preceding month that have not been reinvested in Subsequent Contracts and Subsequent Leased Vehicles exceeds $1,000,000, an Early Amortization Event will occur, the Revolving Period will terminate as of such day and all unreinvested Principal Collections will be distributed as principal to the Trust and then to Certificateholders on the immediately succeeding Distribution Date. For further details concerning the application of Principal Collections, see "Summary -- Amortization Period; Principal Payments", "The Trust and the SUBI -- The SUBI" and "Description of the Certificates -- Distributions on the Certificates -- Application and Distributions of Principal -- Revolving Period". The Subsequent Contracts and Subsequent Leased Vehicles will be selected from the Origination Trust's portfolio of lease contracts and related vehicles that are not allocated to (or reserved for allocation to) any Other SUBI, based on the same criteria as are applicable to the Initial Contracts and the other criteria described under the "The Contracts -- Representations, Warranties and Covenants". The reinvestment of Principal Collections (and reimbursement of Loss Amounts) will be made in the available lease contracts with the earliest origination dates, except that lease contracts booked from September 1, 1996 through September 27, 1996 shall be reserved for allocation to the SUBI and will be used first, and if allocations are being made in respect of any one or more previous Other SUBIs at the same time out of the Origination Trust's general pool of unreserved lease contracts, reinvestment will be made first in respect of such previous Other SUBI(s). For further information regarding the Subsequent Contracts and Subsequent Leased Vehicles, see "The Contracts". "Principal Collections" will mean, with respect to any Collection Period, all Collections allocable to the principal component of any Contract (including any payment in respect of the related Leased Vehicle, but other than any payment as to which a Loss Amount has been realized and allocated during any prior Collection Period), discounted to the extent required below. A "Collection Period" will be each calendar month (or, with respect to the first Collection Period, the months of September and October 1996). For purposes of determining Principal Collections, the principal component of all payments made on or in respect of a Contract (or the related Leased Vehicle) with a Lease Rate less than 8.7% (each, a "Discounted Contract") will be discounted at a rate of 8.7%, thereby effectively reallocating a portion of the payments received in respect of the principal component of the Contracts to Interest Collections and providing additional credit enhancement for the benefit of the Certificateholders. "Collections" with respect to any Collection Period will include all net collections collected or received in respect of the Contracts and Leased Vehicles during such Collection Period, such as Monthly Payments (including amounts in the SUBI Collection Account that previously constituted Payments Ahead but which represent Monthly Payments due during such Collection Period), Prepayments, Advances, Net Matured Leased Vehicle Proceeds (including amounts withdrawn from the Residual Value Surplus Account to offset certain Residual Value Losses in respect of Leased Vehicles relating to Matured Contracts and certain Matured Leased Vehicle Expenses, but not including any Residual Value Surplus deposited into the Residual Value Surplus Account in respect of such Collection Period), Net Repossessed Vehicle Proceeds and other Net Liquidation Proceeds, less an amount equal to the sum of (i) Payments Ahead with respect to one or more future Collection Periods, (ii) amounts paid to the Servicer in respect of outstanding Advances and (iii) Additional Loss Amounts in respect of such Collection Period. In addition, if such Collection Period occurs during the Revolving Period, amounts otherwise payable to the Certificateholders on the related Distribution Date as reimbursement of Loss Amounts allocable to the Investor Interest (as described under "Description of the Certificates -- Distributions on the Certificates -- Distributions of Interest") will be treated as Principal Collections and reinvested in Subsequent Contracts and Subsequent Leased Vehicles as described above. "Interest Collections" with respect to any Collection Period generally will equal the amount by which Collections exceed Principal Collections. "Net Repossessed Vehicle Proceeds" will equal Repossessed Vehicle Proceeds net of Repossessed Vehicle Expenses, and "Net Liquidation Proceeds" will equal Liquidation Proceeds net of Liquidation Expenses. Amortization Period; Principal Payments................. The "Amortization Period" shall commence on the earlier of October 1, 1997 (the "Amortization Date") or the day on which an Early Amortization Event occurs, and will end when each Class of Certificates has been paid in full and all Certificate Principal Loss Amounts and Class B Certificate Principal Carryover Shortfalls, if any, have been repaid in full, together with accrued interest thereon, or when the Trust otherwise terminates. During the Amortization Period, Principal Collections will no longer be reinvested in Subsequent Contracts and Subsequent Leased Vehicles as described above. Instead, on each Distribution Date beginning with the Distribution Date in the month following the month in which the Amortization Period commences and ending on the Distribution Date on which the Class A-2 Certificates have been paid in full, all Principal Collections for the related Collection Period that are allocable to the Investor Interest will be distributed as principal payments first to the Class A-1 Certificateholders until the Class A-1 Certificates have been paid in full, second, to the Class A-2 Certificateholders until the Class A-2 Certificates have been paid in full and thereafter the Class A Percentage and the Class B Percentage of any remaining such Principal Collections will be distributed as principal payments to the Class A-3 Certificateholders and to the holders of record of the Class B Certificates (the "Class B Certificateholders"), respectively. On each Distribution Date after the Class A-2 Certificates have been paid in full, the Class A Percentage and the Class B Percentage of Principal Collections for the related Collection Period allocable to the Investor Interest will be distributed to the Class A-3 Certificateholders and the Class B Certificateholders, respectively, until the related Class of Certificates has been paid in full. The "Class A Percentage" will mean the Class A Certificate Balance immediately after the Class A-2 Certificates have been paid in full, as a percentage of the Certificate Balance at such time, and the "Class B Percentage" will mean the Class B Certificate Balance immediately after the Class A-2 Certificates have been paid in full, as a percentage of the Certificate Balance at such time. The Class A Percentage and the Class B Percentage will not change after they are set. In no event will the principal distributed in respect of any Class of Certificates exceed its Certificate Balance. In addition, under certain circumstances, (i) Class A Certificateholders will be entitled to receive reimbursement of an allocable percentage of Loss Amounts as a distribution of principal from sources other than Principal Collections and (ii) principal allocable to the Class B Certificates may instead be distributed in respect of Loss Amounts allocable to the Class A-3 Certificates, Class A-3 Certificate Principal Loss Amounts and accrued and unpaid interest thereon, as described under "Description of the Certificates -- Distributions on the Certificates -- Distributions of Interest", "-- Application and Distributions of Principal" and "Risk Factors -- Maturity and Prepayment Considerations -- Reimbursement of Certain Losses". See "Description of the Certificates -- Early Amortization Events" for a description of the events that might lead to the commencement of the Amortization Period prior to the Amortization Date. During the Amortization Period, the amount of Principal Collections allocable to the Investor Interest in respect of a Collection Period (the "Principal Allocation") generally will mean the Principal Collections in respect of such Collection Period allocable to the SUBI Interest multiplied by the Investor Percentage for such Principal Collections. The "Investor Percentage" for purposes of the Principal Allocation will equal the percentage equivalent of a fraction (not to exceed 100%), the numerator of which is the Certificate Balance and the denominator of which is 99.8% of the Aggregate Net Investment Value, calculated as described under "Summary -- Security for the Certificates -- The SUBI -- The Contracts", as of the last day of the last Collection Period (i) preceding the Amortization Date or (ii) preceding the month, if any, during which an Early Amortization Event occurs. See "Description of the Certificates -- Calculation of Investor Percentage and Seller Percentage" for a description of calculation of the Investor Percentage relating to Interest Collections and Loss Amounts. Allocations based upon the Principal Allocation for Principal Collections during the Amortization Period may result in distributions of principal with respect to a Collection Period during the Amortization Period to Certificateholders in amounts that are greater relative to the declining balance of the Certificate Balance than would be the case if no fixed Investor Percentage were used to determine the percentage of Principal Collections distributed in respect of the Certificates. Additionally, to the extent that on any Distribution Date during the Amortization Period any portion of the Investor Percentage of Interest Collections in respect of the related Collection Period allocable to the SUBI Interest remains after required distributions have been made, such excess interest will be deposited into the Reserve Fund until the amount on deposit therein equals the Reserve Fund Cash Requirement. Any remaining excess interest, up to but not exceeding the product of (i) one-twelfth of 0.25%, (ii) 99.8% and (iii) the Aggregate Net Investment Value as of the last day of such Collection Period (the "Accelerated Principal Distribution Amount"), will be distributed as an additional payment of principal to the Certificateholders in the same manner and priority as principal is distributed in respect of the Certificates as described in the preceding paragraphs. See "Description of the Certificates -- Distributions on the Certificates -- Distributions of Interest" and "Security for the Certificates -- The Accounts -- The SUBI Collection Account -- Withdrawals from the SUBI Collection Account" for further information regarding the foregoing matters. Optional Purchase.......... The Certificates will be subject to purchase at the option of the Seller on any Distribution Date if, either before or after giving effect to any payment of principal required to be made on such Distribution Date, the Certificate Balance has been reduced to an amount less than or equal to 10% of the Initial Certificate Balance at a purchase price determined as described under "Description of the Certificates -- Termination of the Trust; Retirement of the Certificates". Security for the Certificates............... The security for the Certificates will consist primarily of the following: A. The SUBI.............. The SUBI will evidence a beneficial interest in the SUBI Assets. The Origination Trust was created pursuant to a trust agreement (the "Origination Trust Agreement"), among ALFI L.P., as grantor and initial beneficiary, the Origination Trustee and First Bank, as trust agent (in such capacity, the "Trust Agent"). The SUBI Interest will be evidenced by a certificate (the "SUBI Certificate") evidencing a 99.8% beneficial interest in the SUBI Assets that will be issued by the Origination Trust pursuant to a supplement to the Origination Trust Agreement to be dated as of October 1, 1996 (the "SUBI Supplement" and, together with the Origination Trust Agreement, the "SUBI Trust Agreement"). The Trustee will be a third party beneficiary of the SUBI Trust Agreement. The Seller will permanently hold the Retained SUBI Interest, representing the 0.2% beneficial interest in the SUBI Assets not evidenced by the SUBI Certificate. The Origination Trust Assets evidenced by the SUBI will primarily include the Contracts and the Leased Vehicles. The SUBI will not evidence an interest in any Origination Trust Assets other than the SUBI Assets, and payments made on or in respect of all other Origination Trust Assets will not be available to make payments on the Certificates. For more information regarding the SUBI, see "The Trust and the SUBI" and "The Origination Trust". 1. The Contracts......... The Contracts will consist of a pool of retail closed-end lease contracts originated by Dealers located throughout the United States, each of which will have an original term of not more than 60 months. Each Contract will be a finance lease for accounting purposes and will have been written for a "capitalized cost" (which may exceed the manufacturer's suggested retail price), plus an implicit rate in each Lease calculated as an annual percentage rate (the "Lease Rate") on a constant yield basis. The Contracts will provide for equal monthly payments (the "Monthly Payments") such that at the end of the related Contract term such capitalized cost will have been amortized to an amount equal to the residual value of the related Leased Vehicle established at the time of origination of such Contract (the "Residual Value"). The amount to which the capitalized cost of a Contract has been amortized at any point in time is referred to herein as its "Outstanding Principal Balance". The Initial Contracts consist of 35,016 lease contracts. As of the Initial Cutoff Date, the Lease Rate of the Initial Contracts ranged from 2.01% to 12.87%, with a weighted average Lease Rate of 7.74%. The aggregate of the original principal balances of the Initial Contracts as of their respective dates of origination was $858,054,687. As of the Initial Cutoff Date, the aggregate Outstanding Principal Balance of the Initial Contracts was $831,416,020, the aggregate Residual Value of the Initial Leased Vehicles was $523,477,146 and the Initial Contracts had a weighted average original term of 40.38 months and a weighted average remaining term to scheduled maturity of 36.79 months. See "The Contracts" for further information regarding the Initial Contracts. The Initial Contracts were, and the Subsequent Contracts will be, identified by the Servicer from the Origination Trust's portfolio of lease contracts originated by Dealers located throughout the United States that are not evidenced by (or reserved for allocation to) any Other SUBI, based upon the criteria specified in the SUBI Trust Agreement and described under "The Contracts -- Characteristics of the Contracts" and "-- Representations, Warranties and Covenants". The "Aggregate Net Investment Value" as of any day will equal the sum of (i) the Discounted Principal Balance of all Contracts other than Charged-off, Liquidated, Matured and Additional Loss Contracts, (ii) the aggregate Residual Value of all Leased Vehicles to the extent that the related Contracts have reached their scheduled maturities (each, a "Matured Contract") within the three immediately preceding Collection Periods but which Leased Vehicles as of the last day of the most recent Collection Period have remained unsold and not otherwise disposed of by the Servicer for no more than two full Collection Periods (the "Matured Leased Vehicle Inventory") and (iii) during the Revolving Period, the amount of Principal Collections, if any, that have not been reinvested in Subsequent Contracts and Subsequent Leased Vehicles. The "Discounted Principal Balance" of (i) a Discounted Contract will equal its Outstanding Principal Balance, discounted by 8.70%, and (ii) all Contracts other than Discounted Contracts will equal their Outstanding Principal Balance. As of the Initial Cutoff Date, the aggregate Discounted Principal Balance of the Initial Contracts and the Aggregate Net Investment Value was $812,498,498. 2. The Leased Vehicles... The Leased Vehicles will be comprised of automobiles and light duty trucks. As of the times of origination of the Contracts, the related Leased Vehicles will be either new vehicles, dealer demonstrator vehicles or manufacturers' program vehicles, as described under "The Contracts -- General". The certificates of title to the Initial Leased Vehicles have been, and the certificates of title to the Subsequent Leased Vehicles will be, registered at all times in the name of the Origination Trustee (in its capacity as trustee of the Origination Trust). Such certificates of title will not reflect the indirect interest of the Trustee in the Leased Vehicles by virtue of its beneficial interest in the SUBI. Therefore, if the Class A Certificates were recharacterized as secured loans, the Trustee would not have a perfected lien in the Leased Vehicles, although it would be deemed to have a perfected security interest in the SUBI Certificate and the Contracts and Contract Rights. For further information regarding the titling of the Leased Vehicles and the interest of the Trustee therein, see "Risk Factors -- Structural Considerations" and "Certain Legal Aspects of the Contracts and the Leased Vehicles -- Back-up Security Interests". B. The Accounts.......... The Origination Trustee will maintain the SUBI Collection Account and the Residual Value Surplus Account for the benefit of the holders of interests in the SUBI. Within two Business Days of receipt, payments made on or in respect of the Contracts or the Leased Vehicles generally will be deposited by the Servicer into the SUBI Collection Account. Such payments will include, but will not be limited to, Monthly Payments made by lessees, Monthly Payments determined by the Servicer to be due in one or more future Collection Periods (each, a "Payment Ahead"), Prepayments, proceeds from the sale or other disposition of Leased Vehicles relating to Matured Contracts, including payments for excess mileage and excess wear and use ("Matured Leased Vehicle Proceeds"), proceeds received in connection with the sale or other disposition of Leased Vehicles that have been repossessed ("Repossessed Vehicle Proceeds") and other amounts received in connection with the realization of the amounts due under any Contract (together with Matured Leased Vehicle Proceeds and Repossessed Vehicle Proceeds, "Liquidation Proceeds"). The Servicer will be entitled to reimbursement for expenses incurred in connection with the realization of Matured Leased Vehicle Proceeds ("Matured Leased Vehicle Expenses"), Repossessed Vehicle Proceeds ("Repossessed Vehicle Expenses") and other Liquidation Proceeds (such expenses, together with Matured Leased Vehicle Expenses and Repossessed Vehicle Expenses, "Liquidation Expenses"), either from amounts on deposit in the SUBI Collection Account or, to the extent described herein, the Residual Value Surplus Account, or as a deduction from Matured Leased Vehicle Proceeds, Repossessed Vehicle Proceeds or other Liquidation Proceeds, as appropriate, deposited into the SUBI Collection Account. For further details regarding these deposits and reimbursements, see "Security for the Certificates -- The Accounts -- The SUBI Collection Account" and "-- The Residual Value Surplus Account". On the Business Day immediately preceding each Distribution Date (each, a "Deposit Date"), the following amounts will be deposited into the SUBI Collection Account: (i) Advances by the Servicer, (ii) Reallocation Payments by World Omni (together with, under certain circumstances during the Amortization Period, Reallocation Deposit Amounts) in respect of certain Contracts as to which an uncured breach of certain representations and warranties or certain servicing covenants has occurred and (iii) certain amounts in respect of the Residual Value of Leased Vehicles relating to Matured Contracts withdrawn from the Residual Value Surplus Account. Thereafter, 99.8% of Interest Collections (and, with respect to the Deposit Date in any month following the month during which the Amortization Period commences, 99.8% of Principal Collections) on deposit in the SUBI Collection Account in respect of the related Collection Period will be allocable to the SUBI Interest and deposited into the Distribution Account maintained with the Trustee for the benefit of the Certificateholders and the Seller. The Required Amount will be withdrawn from the Reserve Fund and deposited into the Distribution Account on each Deposit Date. All payments to Certificateholders will be made from the Distribution Account. The remaining 0.2% of Collections will be distributed on such Distribution Date to the Seller in respect of the Retained SUBI Interest, which amounts in no event will be available to make payments on the Certificates. Any funds remaining in the Distribution Account on a Distribution Date in respect of the related Collection Period following the payment of amounts required to be paid therefrom will be deposited into the Reserve Fund until the amount on deposit therein equals the Reserve Fund Cash Requirement, and thereafter generally will be paid to the Seller. For further information regarding these deposits and payments, see "Security for the Certificates -- The Accounts -- The Distribution Account" and "-- The SUBI Collection Account". On each Deposit Date, if Matured Leased Vehicle Proceeds received during the related Collection Period with respect to Leased Vehicles relating to Matured Contracts that were sold or otherwise disposed of during such Collection Period, net of related Matured Leased Vehicle Expenses incurred during such Collection Period ("Net Matured Leased Vehicle Proceeds"), exceed the aggregate Residual Value of the related Leased Vehicles (the "Residual Value Surplus"), then such excess will be deposited into the Residual Value Surplus Account maintained with the Origination Trustee for the benefit of holders of interests in the SUBI. On each Deposit Date, funds on deposit in the Residual Value Surplus Account, if any, will be withdrawn and deposited into the SUBI Collection Account up to an amount equal to the sum of (a) the aggregate of the Residual Values of those Leased Vehicles that were a part of Matured Leased Vehicle Inventory but that had remained unsold and not otherwise disposed of for at least two full Collection Periods as of the last day of the most recent Collection Period and (b) the amount by which Net Matured Leased Vehicle Proceeds (after application of amounts withdrawn pursuant to the next sentence) for the related Collection Period are less than the aggregate of the Residual Values of all Leased Vehicles included in Matured Leased Vehicle Inventory that were sold or otherwise disposed of during such Collection Period. Also on each Deposit Date, funds will be withdrawn and paid to the Servicer in reimbursement for any Matured Leased Vehicle Expenses incurred during such Collection Period, but only to the extent that, after such reimbursement (but exclusive of any other reimbursement from any other source), Net Matured Leased Vehicle Proceeds would be no more than the aggregate of the Residual Values of Leased Vehicles sold or otherwise disposed of during such Collection Period. For further information regarding the Residual Value Surplus Account, see "Security for the Certificates -- The Accounts -- The Residual Value Surplus Account". C. The Reserve Fund...... The Trust will have the benefit of the Reserve Fund maintained with the Trustee for the benefit of the Certificateholders and the Seller. The Reserve Fund is designed to provide additional funds for the benefit of the Certificateholders in the event that on any Distribution Date Interest Collections allocable to the Investor Interest for the related Collection Period are insufficient to pay, among other things, the sum of (i) accrued interest and any overdue interest (with interest thereon) at the applicable Certificate Rate on the Certificates on such Distribution Date, (ii) any Loss Amount for such Collection Period allocable to the Investor Interest, calculated as described under "Description of the Certificates -- Calculation of Investor Percentage and Seller Percentage", and (iii) any unreimbursed Certificate Principal Loss Amounts, together with interest thereon at the applicable Certificate Rate (any such deficiency, the "Required Amount"). Monies on deposit in the Reserve Fund also will be available to Certificateholders should Collections ultimately be insufficient to pay in full any Class of Certificates. For further information regarding the Reserve Fund, see "Security for the Certificates -- The Accounts -- The Reserve Fund". The Reserve Fund will be created with an initial deposit by the Seller of $28,380,573 (the "Initial Deposit") (which amount will equal 3.5% of 99.8% of the Aggregate Net Investment Value as of the Initial Cutoff Date). On each Distribution Date, the funds in the Reserve Fund will be supplemented by (i) certain excess Interest Collections, as more fully described under "Description of the Certificates -- Distributions on the Certificates -- Distributions of Interest", (ii) income realized on the investment of amounts on deposit in the Reserve Fund and (iii) the deposit of monies in respect of the related Collection Period remaining in the Distribution Account after making all payments required to be made therefrom on such Distribution Date prior to such deposit, including monies that would otherwise be distributed or applied in respect of the Seller Interest, until the amount on deposit in the Reserve Fund equals the Reserve Fund Cash Requirement then in effect, calculated as described under "Security for the Certificates -- The Accounts -- The Reserve Fund -- The Reserve Fund Cash Requirement". On each Deposit Date relating to a Distribution Date on which withdrawals must be made from the Reserve Fund, the Seller may be required under certain circumstances to deposit funds into the Reserve Fund in an amount equal to the Reserve Fund Supplemental Requirement to the extent of any Reserve Fund Deficiency. For a description of the circumstances under which the Seller will be required to make such deposits, see "Security for the Certificates -- The Accounts -- The Reserve Fund". For further information regarding deposits into the Reserve Fund, see "Description of the Certificates -- Distributions on the Certificates -- Distributions of Interest". After giving effect to all payments from the Reserve Fund on a Distribution Date, monies on deposit therein that are in excess of the Reserve Fund Cash Requirement will be paid to the Seller, free and clear of any lien of the Trust. However, the Seller will remain responsible to fund the Reserve Fund under certain circumstances described under "Security for the Certificates -- The Accounts -- The Reserve Fund -- Reserve Fund Supplemental Requirement". D. Subordination of the Seller Interest....... The Seller Interest will initially equal $16,217,470, and will represent the interest in the Trust not represented by the Investor Interest. However, to provide additional credit enhancement for the Certificates, on each Distribution Date, no payments will be made to the Seller in respect of the Seller Interest until all payments required to be made on such Distribution Date that are described under "Description of the Certificates -- Distributions on the Certificates -- Distributions of Interest" have been made and the amount on deposit in the Reserve Fund equals the Reserve Fund Cash Requirement. For a description of certain payments made to the Seller, see "Description of the Certificates -- Certain Payments to the Seller". Advances................... On each Deposit Date the Servicer will be obligated to make, by deposit into the SUBI Collection Account, an advance equal to the aggregate Monthly Payments due but not received during the related Collection Period with respect to Contracts that are 31 days or more past due as of the end of such Collection Period, and the Servicer may (but shall not be required to) make such an advance with respect to Contracts that are one or more days, but less than 31 days, past due as of the end of such Collection Period (each, an "Advance"). The Servicer will not be required to make an Advance to the extent that it determines that such Advance may not be ultimately recoverable by the Servicer from Net Liquidation Proceeds or otherwise. For further information regarding Advances, see "Additional Document Provisions -- The Servicing Agreement -- Advances". Servicing Compensation..... The Servicer will be entitled to receive a monthly fee with respect to the SUBI Assets allocable to the SUBI Interest (the "Servicing Fee"), payable on each Distribution Date, equal to one-twelfth of 1% of 99.8% of the Aggregate Net Investment Value as of the first day of the related Collection Period (or, in the case of the first Distribution Date, one-twelfth of 1% of 99.8% of the Aggregate Net Investment Value as of the Initial Cutoff Date). The Servicer also will be entitled to additional servicing compensation in the form of, among other things, late fees and other administrative fees or similar charges under the Contracts. For further information regarding Servicer compensation, see "Additional Document Provisions -- The Servicing Agreement -- Servicing Compensation". Tax Status................. Brown & Wood LLP, special federal income tax counsel to the Seller and counsel for the Underwriters, will deliver an opinion to the effect that the Class A Certificates will be characterized as indebtedness for federal income tax purposes. Each Class A Certificateholder, by its acceptance of a Class A Certificate, and each Certificate Owner by its acquisition of an interest in the Class A Certificates, will agree to treat the Class A Certificates as indebtedness for federal, state and local income tax purposes. Prospective investors are advised to consult their own tax advisors regarding the federal income tax consequences of the purchase, ownership and disposition of Class A Certificates, and the tax consequences arising under the laws of any state or other taxing jurisdiction. For further information regarding material federal income tax considerations with respect to the Class A Certificates, see "Certain Income Tax Considerations -- Federal Taxation". ERISA Considerations....... As more fully described under "ERISA Considerations", an employee benefit plan subject to the requirements of the fiduciary responsibility provisions of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or the provisions of Section 4975 of the Internal Revenue Code of 1986, as amended, contemplating the purchase of Class A Certificates should consult its counsel before making a purchase and the fiduciary, and such legal advisors should consider the application of the ERISA prohibited transaction exemption described herein. Ratings.................... It is a condition of issuance that each of Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Ratings Services ("Standard & Poor's" and, together with Moody's, the "Rating Agencies") rates each Class of Class A Certificates in its highest rating category. The ratings of the Class A Certificates address the likelihood of the payment of principal of and interest on the Class A Certificates pursuant to their terms. For further information concerning the ratings assigned to the Class A Certificates, see "Ratings of the Class A Certificates".
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+SUMMARY Simultaneously with the consummation of this offering (the "Offering"), GSR Industries, Inc. will (i) acquire in exchange for shares of Common Stock, par value $.20 per share, of the Company ("Common Stock"), an existing roofing products manufacturing business ("the Founding Company"); (ii) acquire in exchange for cash and shares of Common Stock of the Company two additional roofing products manufacturing businesses (the "Predecessor Companies"); (iii) complete a financing consisting of a $60 million senior secured revolving credit facility and a $40 million senior secured term loan (the "Senior Debt Financing"); and (iv) complete a financing consisting of $15 million of subordinated debt, along with warrants to purchase 430,000 shares of Common Stock (the "Mezzanine Financing"). The Senior Debt Financing and the Mezzanine Financing are collectively referred to herein as the "Debt Financing". The completion of the acquisitions of the Founding Company and the Predecessor Companies (collectively, the "Acquisitions") and the Debt Financing is a condition to consummation of the Offering. Unless the context indicates otherwise, all references herein to the Company mean GSR Industries, Inc. together with the Founding Company and the Predecessor Companies after giving effect to the Acquisitions, and references herein to GSR mean GSR Industries, Inc. before the consummation of the Acquisitions. The following Summary is qualified in its entirety by the more detailed information and Financial Statements, including the Notes thereto, appearing elsewhere in this Prospectus. Prospective investors are urged to read this Prospectus in its entirety, including the information under "Risk Factors." Unless otherwise indicated, the information contained in this Prospectus gives effect to the Acquisitions and is presented as if the over-allotment option granted to the Underwriters has not been exercised. THE COMPANY GENERAL The Company designs, manufactures and markets a full line of asphalt-based roofing products, including premium laminated shingles, strip shingles and roll roofing products for use in residential roofing applications, and roll roofing products, including built-up roofing and premium modified bitumen products, for use in commercial roofing applications. The Company believes it is the nation's third largest producer of asphalt-based residential roofing products. In 1995, the Company had combined gross sales of $323.0 million, approximately 72% of which were sales of residential roofing products, approximately 22% of which were sales of commercial roofing products and approximately 6% of which involved other roofing related materials. The Company employs a vertically integrated manufacturing process in which approximately 46% of the granules, 99% of the fiberglass mat and 100% of the dry felt it uses to manufacture its products are produced by the Company. Management believes the Company is among the most vertically integrated residential roofing products manufacturers in the United States. The Company operates 14 manufacturing plants located in the western, southeastern and northeastern United States and one plant in Ontario, Canada. During the six years ended December 31, 1996, the Company has invested, on a combined basis, approximately $40.0 million to upgrade, automate and streamline its manufacturing facilities. These capital expenditures have provided the Company with several facilities that are among the most automated and efficient in the roofing products industry. The Company believes its automation has enabled it to become one of the lowest cost, highest quality producers of asphalt-based roofing products in the United States. BUSINESS STRATEGY The Company plans to become a nationwide manufacturer and marketer of asphalt-based roofing products. Over the last ten years, consolidation in the wholesale building supply industry has resulted in the development of strong, national wholesale distributors. These large wholesale distributors increasingly are demanding that their suppliers provide a full line of nationally branded products supported by superior service. While a few large nationwide manufacturers exist, most of the manufacturers in the roofing products industry operate regionally and do not offer a full line of products nationally. Since a substantial number of roofing products manufacturers do not provide products or services nationally, the Company believes that the opportunity exists for a vertically integrated roofing products manufacturer to supply a full line of roofing products nationwide and thereby achieve a strong competitive advantage within the industry. The Company intends to be in a position to take advantage of this opportunity through business initiatives that include: - Growth Through Acquisitions. The Company's primary strategy is to grow through acquisitions. The Company believes it can increase manufacturing and distribution efficiencies, lower its raw materials costs and broaden its customer base through the acquisition of companies that are not vertically integrated, do not have fully automated facilities or do not have a nationwide distribution network or full product line. By applying the Company's automation practices, manufacturing procedures and management discipline to acquired facilities, management believes it will achieve significant margin improvement in these facilities. The Company's plans include acquiring facilities in the regions of the United States that it does not currently serve. These acquisitions are expected to enable the Company to expand its manufacturing base, offer its products over a wider geographic area and diversify its product lines. Moreover, these acquisitions are expected to give the Company an increased national presence that will be attractive to the large national wholesalers of commercial and residential roofing products. - Vertical Integration. Unlike many roofing products manufacturers, the Company manufactures many of its product components and controls a substantial portion of its raw materials. By controlling the source of many of its raw materials, the Company is able to realize higher margins on the sale of its products. The Company intends to expand its vertical integration by acquiring new sources of raw materials and by purchasing manufacturing facilities that will enable the Company to produce more of the components necessary to produce its products. This expansion is expected to enable the Company to continue to produce high quality products and reduce raw materials and manufacturing costs. - Two-Tier Marketing Program. The Company employs approximately 70 sales professionals to sell its products directly to national, regional and local distributors of asphalt-based roofing products. The Company also focuses its sales efforts on contractors, architects and engineers who can create indirect or "pull through" sales. Since homeowners often do not have sufficient experience with roofing products to identify and request a particular brand, they generally will follow the advice of contractors in selecting roofing products. In commercial roofing, the architects or engineers who design a roofing system often will specify the particular types or brands of roofing products that are required to be used in the system. - Expanded Automation Program. The Company has implemented an automation program designed to increase the efficiency of its manufacturing facilities and reduce production costs. In addition, the Company believes that as a result of such automation program it is an industry leader in employing statistical process control to monitor and improve color consistency, dimensional stability, product weight and other production parameters on a real-time basis. During 1997 the Company expects to spend approximately $19.0 million for capital improvements, of which approximately $10.0 million will be used to automate certain of its existing facilities. Additional expenditures will be necessary in future years for automation as additional facilities are acquired. - Development of Premium Products and Proprietary Products. The Company is committed to the development of premium products and proprietary products. The Company believes that premium products and proprietary products can be sold at higher margins and that proprietary products can enable the Company to expand its customer base by offering products not offered by its competitors. Recently developed premium products include a modified hip and ridge shingle that enhances the appearance of rooflines and a modified asphalt shingle that withstands harsh weather conditions. In addition, the Company is implementing improvements to the existing saturated paper product lines at certain of its plants to facilitate the production of a proprietary value-added product called Fast Felt(R), a patented tar paper product for which the Company is the exclusive licensee. Management believes Fast Felt(R) is more easily installed and is better able to withstand severe weather conditions than conventional tar paper. The Company anticipates that it will begin marketing Fast Felt(R) in the first half of 1997. INDUSTRY OVERVIEW Market Size. In 1995, the U.S. and Canadian market for sales of asphalt-based roofing products was approximately $10.5 billion, which comprised approximately 82% of the total U.S. and Canadian roofing products market. Reroofing accounts for approximately 80% of the total U.S. and Canadian roofing products market, with the balance being in new construction. Residential Roofing Products. Asphalt-based products used in residential roofing include strip shingles, premium laminated shingles and tar paper. Strip and laminated shingles are the most commonly used shingles in residential roofing applications. Strip shingles are lightweight shingles made from fiberglass mat or from an organic paper called dry felt. Laminated shingles are a premium product made with two layers of asphalt-coated fiberglass mat. Both strip and laminated shingles are embedded with mineral granules that add protection from sunlight degradation and serve decorative purposes. Fiberglass mat shingles currently represent approximately 90% of the U.S. and Canadian asphalt shingle market with dry felt (organic) shingles representing the remaining 10%. Tar paper is used as an underlayment for shingles in substantially all residential roofing applications. Commercial Roofing Products. The primary products used in commercial roofing are built-up roofing, premium asphalt-based modified bitumen rolls and single-ply roofing (which is not asphalt based). A typical built-up roof consists of multiple layers of roll roofing products. Modified bitumen is a separate family of premium roll roofing products that can be used in lieu of built-up roofing. Single-ply roofing consists of a single layer of a non-asphalt-based rubberized compound that is attached to the roof by fasteners or other means thereby providing a seal. The Company does not produce single-ply roofing. Commercial roofing products are significantly different from the products used in residential roofing. The differences primarily are caused by the physical specifications of commercial buildings' roofs, which tend to be large and flat, as opposed to the smaller sloped roofs of residential buildings. Commercial roofs also are significantly more expensive to install and usually have a shorter life span than typical residential roofs. Distribution. Roofing products are distributed primarily through national, regional and local wholesalers and retailers. Sales to wholesalers are important because building and roofing contractors purchase most of their supplies from wholesalers. National retailers currently account for a relatively small, but growing, segment of roofing product sales. Because of transportation costs, distribution from any particular manufacturing facility generally is limited to a 350-mile radius. THE ACQUISITIONS, THE DEBT FINANCING AND THE FOUNDING AND THE PREDECESSOR COMPANIES The Acquisitions. Effective upon consummation of the Offering and completion of the Debt Financing, GSR will acquire (i) all of the capital stock of Striker Industries, Inc. ("Striker") in exchange for 3,260,000 shares of Common Stock (plus an additional 634,214 shares of Common Stock to be issued from time to time pursuant to certain outstanding options, warrants and convertible securities) (ii) all of the capital stock of Newgen Holding, Inc. ("GS Roofing") in exchange for 1,750,000 shares of Common Stock (See "Certain Transactions") and $55.5 million in cash and (iii) certain of the assets and liabilities of Woodland Industries, Inc. ("Woodland") in exchange for an 8.5% subordinated note in the original principal amount of $3.0 million and $7.5 million in cash. Following completion of the Acquisitions and after giving effect to the Offering, former GS Roofing and Striker shareholders will own, respectively, approximately 21.1% and 39.2% of the then issued and outstanding Common Stock. See "Security Ownership of Management and Principal Stockholders." The Acquisitions are accounted for as purchase transactions by Striker, the Founding Company, since for accounting purposes, Striker is the acquiror of each of GS Roofing and Woodland (collectively, the "Predecessor Companies"). The Debt Financing. The Debt Financing consists of (i) a $60 million senior secured revolving credit facility due 2001; (ii) a $40 million senior secured term loan due 2001, which will rank pari passu in right of payment with the revolving credit facility from a collateral pool of all of the current and fixed assets of the Company and its subsidiaries; and (iii) $15 million of senior subordinated notes due 2004, which will be unsecured obligations of the Company and subordinated in terms of interest, principal and premium payments to all senior debt obligations of the Company and its subsidiaries. Purchasers of the senior subordinated notes will receive detachable warrants to purchase 430,000 shares of the Company's Common Stock at an exercise price equal to the initial public offering price of the Common Stock offered hereby. The Company has engaged SPP Hambro Capital Markets Group ("Hambro") to complete the Debt Financing. Hambro has issued a letter to the Company stating that it is highly confident that it will be able to complete the Debt Financing. The Founding Company. Set forth below is a brief description of the Founding Company. Striker manufactures and sells dry felt and is capable of manufacturing asphalt-saturated felt for use in residential roofing applications. Striker operates facilities in Stephens, Arkansas and Ontario, Canada. Striker has developed and licensed the technology used to manufacture Fast Felt(R), the Company's proprietary tar paper product, and improvements to Striker's existing saturated paper lines have been implemented for its production. The Predecessor Companies. Set forth below are brief descriptions of the Predecessor Companies. GS Roofing designs, manufactures and sells a full line of asphalt-based roofing products. Its products include strip shingles, premium fiberglass laminated shingles, dry felt, saturated felt and fiberglass mat based roll roofing for use in residential roofing applications, and built-up roofing and premium modified bitumen roll roofing for use in commercial roofing applications. GS Roofing's manufacturing facilities include nine roofing manufacturing plants, two of which are either wholly or primarily devoted to commercial roofing products; two stand-alone granule processing facilities and one granule processing facility in the planning phase of construction; one manufacturing facility includes a fiberglass mat manufacturing sub-plant, a limestone rock processing sub-plant and a granule processing sub-plant. Another manufacturing facility includes a dry felt manufacturing sub-plant. Woodland manufactures and sells asphalt-saturated felt for use in residential roofing applications. Woodland operates a facility in Griffin, Georgia that contains two saturated felt lines. The Company's principal executive offices are located at One Riverway, Houston, Texas 77056 and its telephone number at such address is (713) 622-4092. The Company also has executive offices at 5525 MacArthur Boulevard, Suite 900, Irving, Texas 75038. THE OFFERING Common Stock Offered by the Company.................. 3,300,000 shares Common Stock to be Outstanding after the Offering................. 8,310,000 shares(1) Use of Proceeds............ Of the net proceeds from this Offering and from the Debt Financing, the Company intends to use approximately $63.0 million to pay the cash portion of the purchase price for the Predecessor Companies; approximately $46.9 million to repay indebtedness of the Founding Company and Predecessor Companies; with the balance to be used for working capital and general corporate purposes or used for expansion and upgrading of existing facilities. See "Use of Proceeds." Proposed Nasdaq National Market symbol............ GSRI - --------------- (1) Does not include (i) 1,147,214 shares of Common Stock issuable upon conversion or exercise of certain options, warrants and other convertible securities and (ii) 330,000 shares of Common Stock issuable upon exercise of warrants issued to the Representative of the Underwriters in connection with this Offering ("Representative's Warrants"). See "Business -- Stock Option Plans," "Use of Proceeds," "Dilution" and "Underwriting." SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA Simultaneously with the consummation of the Offering, GSR will acquire all of the capital stock of Striker and GS Roofing and certain of the assets and liabilities of Woodland. The acquisition of Striker will be accounted for as a recapitalization of Striker while the acquisition of GS Roofing and Woodland will be accounted for using the purchase method of accounting. Accordingly, the assets and liabilities of Striker will be accounted for at their historical values and the assets and liabilities of GS Roofing and Woodland will be valued at their respective fair values as of the acquisition date. The historical financial information for the year ended December 31, 1995, and for the nine months ended September 30, 1996 was derived from financial information appearing elsewhere in this Prospectus. The pro forma combined financial information for the year ended December 31, 1995 and the nine months ended September 30, 1996 give effect to the Acquisitions and other transactions contemplated in connection with this Prospectus as if they had occurred on January 1, 1995. The pro forma combined financial data may not be indicative of actual results that would have been achieved if the transactions had occurred on the dates indicated or the results that may be realized in the future. <TABLE> <CAPTION> COMPANY YEAR ENDED COMPANY NINE MONTHS ENDED PRO FORMA DECEMBER 31, 1995 PRO FORMA SEPTEMBER 30, 1996 NINE MONTHS ---------------------------- YEAR ENDED ----------------------------- ENDED GS DECEMBER 31, GS SEPTEMBER 30, STRIKER ROOFING WOODLAND 1995 STRIKER ROOFING WOODLAND 1996 ------- -------- -------- ------------ ------- -------- -------- ------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <S> <C> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net Sales.................... $ 7,983 $275,983 $11,251 $295,217 $ 5,105 $201,654 $8,585 $ 215,344 Cost of Sales................ 7,023 223,694 8,422 239,889 4,971 163,985 6,965 176,484 Gross Profit................. 960 52,289 2,829 55,328 134 37,669 1,620 38,860 Operating Expenses: Selling.................... -- 11,676 -- 13,669 -- 9,521 -- 11,143 Freight.................... -- 22,199 -- 22,199 -- 15,271 -- 15,271 General and administrative........... 1,993 8,011 758 8,895 1,622 5,614 564 6,345 Operating income (loss)...... (1,033) 10,403 2,071 10,565 (1,488) 7,263 1,056 6,101 Interest Expense (income).... 311 3,226 (108) 9,745 481 2,245 (104) 7,309 Other income................. 34 -- 16 55 -- -- 22 25 Income (loss) before income taxes...................... (1,310) 7,177 2,195 875 (1,969) 5,018 1,182 (1,183) Income tax expense (benefit).................. -- 2,397 -- 820 -- 2,113 -- (29) Net income (loss)(1)......... (1,310) 4,780 2,195 55 (1,969) 2,905 1,182 (1,154) Pro forma income (loss) per share...................... N/A N/A N/A .01 N/A N/A N/A (.14) CASH FLOW DATA: Depreciation and Amortization............... 749 4,305 82 -- 609 3,523 55 -- Capital Expenditures......... (3,982) (5,722) (16) -- (968) (9,385) -- -- BALANCE SHEET DATA: Working Capital (deficit).... (2,179) 38,586 3,585 -- (1,087) 47,427 3,559 40,935 Total Assets................. 18,322 101,257 4,983 -- 21,900 119,502 5,447 206,829 Long-term debt, less current portion.................... 2,388 27,073 -- -- 6,668 37,627 -- 79,059 Total Stockholders' equity... 11,946 28,581 4,459 -- 10,502 31,498 4,273 58,403 </TABLE> - --------------- (1) Woodland was a flow-through entity for federal income taxes for the above periods. SUPPLEMENTAL FINANCIAL DATA -- FOUNDING, PREDECESSOR AND COMBINED COMPANIES (IN THOUSANDS) The following summary supplemental financial data of each of the Founding Company and the Predecessor Companies for each of the periods indicated has been derived from: (i) the audited historical financial statements of Striker, GS Roofing and Woodland as of and for the three years ended December 31, 1995; and (ii) the unaudited interim financial statements of Striker, GS Roofing and Woodland for the nine months ended September 30, 1995 and September 30, 1996 appearing elsewhere in this Prospectus. The supplemental financial data shown below is not necessarily indicative of the results of operations for the Founding Company and the Predecessor Companies had they been combined during the periods indicated below. The information for the nine months ended September 30, 1995 and September 30, 1996 is not necessarily indicative of the results for the entirety of years 1995 and 1996, respectively. This information should be read in conjunction with "Summary Historical and Pro Forma Financial and Operating Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements, including the Notes thereto, appearing elsewhere in this Prospectus. <TABLE> <CAPTION> NINE MONTHS YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30, ---------------------------------- --------------------- 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> FOUNDING COMPANY: STRIKER Net sales......................... $ 5,933 $ 7,978 $ 7,983 $ 6,506 $ 5,105 Operating income (loss)........... (2,425) (1,631) (1,033) (86) (1,488) Net income (loss)................. (2,515) 359 (1,310) (203) (1,969) Total assets(1)................... 5,862 6,838 18,322 19,821 21,900 Total liabilities(1).............. 5,174 2,673 6,377 6,493 11,398 PREDECESSOR COMPANIES: GS ROOFING Net sales......................... 286,922 266,892 275,983 210,799 201,654 Operating income.................. 14,408 8,694 10,403 9,348 7,263 Net income........................ 6,915 2,890 4,780 3,950 2,905 Total assets(1)................... 94,794 95,552 101,257 106,513 119,502 Total liabilities(1).............. 73,128 71,685 72,676 78,871 88,004 WOODLAND Net sales......................... 8,934 10,509 11,251 8,617 8,585 Operating income (loss)........... (218) 451 2,071 1,826 1,056 Net income (loss)(3).............. (180) 500 2,195 1,904 1,182 Total assets(1)................... 2,751 3,226 4,983 4,612 5,447 Total liabilities(1).............. 527 512 524 359 1,174 COMBINED COMPANIES(2): Net sales......................... 301,789 285,379 295,217 225,922 215,344 Operating income.................. 11,765 7,514 11,441 11,088 6,831 Net income........................ 4,220 3,749 5,665 5,651 2,118 Total assets(1)................... 103,407 105,616 124,562 130,946 146,849 Total liabilities(1).............. 78,829 74,870 79,577 85,723 100,576 </TABLE> - --------------- (1) Balance sheet data are presented as of the last day of the period. (2) Combined amounts represent the summation of the respective category for all of the entities listed above. The combined amounts do not include the effect of pro forma adjustments, and may not be indicative of (i) the results that actually would have occurred if the Acquisitions had been consummated as of the pro forma dates indicated elsewhere in this Prospectus or (ii) future results of operations of the combined companies and are not intended to be a presentation in accordance with generally accepted accounting principles. (3) Woodland was a flow-through entity for federal income tax purposes for the periods above.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001020265_sabre_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001020265_sabre_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and consolidated financial statements, including notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, references herein to the "Company" include The SABRE Group Holdings, Inc. and its consolidated subsidiaries and, for any period prior to the July 2, 1996 reorganization (the "Reorganization") of the businesses of AMR Corporation ("AMR"), the businesses of AMR constituting The SABRE Group, an operating unit of AMR. THE COMPANY OVERVIEW The Company is a world leader in the electronic distribution of travel through its proprietary travel reservation and information system, SABRE(R), and is the largest electronic distributor of travel in the United States. In addition, the Company is a leading provider of solutions to the airline industry and fulfills substantially all of the data processing, network and distributed systems needs of American Airlines, Inc. ("American") and AMR's other subsidiaries. The Company believes that its competitive strengths give it a leadership position in its markets and a foundation from which to pursue further growth. During the last 20 years, the Company has developed core competencies that include a comprehensive knowledge of the travel industry, the capability to perform high-volume, high-reliability, real-time transactions processing and expertise in the application of operations research, information technology and industrial engineering skills to solve complex operations problems. These core competencies enable the Company to create an efficient electronic marketplace for the sale and purchase of travel and to offer a broad and deep array of technological solutions to the airline industry. In providing its products and services, the Company operates one of the largest, privately-owned, real-time transactions processing systems in the world in its underground central computer facility (the "Data Center"), which is connected to over 120,000 computer access terminals and operates 24 hours a day, seven days a week. The SABRE system maintains over 50 million air fares (updated five times per business day), processes an average of 93 million requests for information per day and has processed up to 4,969 requests for information per second (in July 1996). The Company has generated consistent annual revenue growth, from $1,097 million in 1991 to $1,530 million in 1995, and operating earnings growth, from $220 million in 1991 to $380 million in 1995. A majority of the Company's revenues, 59.1%, is attributable to bookings made by travel agents using SABRE. The Company has had long-standing relationships with most of its travel agency subscribers. For example, approximately 97% of the travel agency locations that were SABRE subscribers at the beginning of 1995 were SABRE subscribers at the end of 1995. In addition, a significant portion of the Company's revenues, 24.2% in 1995, is derived from information technology solutions provided to American and its affiliates. Such services are currently provided to American and its affiliates pursuant to an Information Technology Services Agreement, dated as of July 1, 1996 (the "Technology Services Agreement"), which has a term of 10 years for most services (three and five years for other services). See "Relationship with AMR and Certain Transactions -- Contractual Arrangements." The Company's non-affiliated customer revenues have grown at a 13.5% compound annual rate during the last five years, to $982 million in 1995, and have grown from 53.9% of total revenues in 1991 to 64.2% in 1995. The Company expects that the proportion of its revenues represented by non-affiliated customer revenues will continue to increase. The Company has identified several opportunities for future revenue growth, including increasing the use of SABRE outside of the United States, offering new products in emerging distribution channels, such as corporate direct distribution and the Internet, expanding participation of travel providers in SABRE and providing technology solutions products and services more broadly. ELECTRONIC TRAVEL DISTRIBUTION SABRE and other global distribution systems are the principal means of air travel distribution in the United States and a growing means of air travel distribution internationally. Through SABRE, travel agencies, corporate travel departments and individual consumers ("subscribers") can access information on and book reservations with airlines and other providers of travel and travel- related products and services ("associates"). As of June 30, 1996, travel agencies with more than 29,000 locations in over 70 countries on six continents subscribed to SABRE, and more than 2.5 million individuals subscribed to Travelocity(sm) and easySABRE(sm), the Company's consumer-direct products. SABRE subscribers are able to book reservations with more than 350 airlines and to make reservations with more than 55 car rental companies and more than 190 hotel companies covering approximately 30,000 hotel properties worldwide. During 1995, more airline bookings in the United States were made through SABRE than through any other global distribution system. The Company estimates that in 1995 over 40% of all airline bookings made through travel agencies in the United States were made through SABRE. In 1995, 65.8% of the Company's revenues was generated by the electronic distribution of travel, primarily through booking fees paid by associates. INFORMATION TECHNOLOGY SOLUTIONS The Company is a leading provider of solutions to the airline industry. The Company also employs its airline expertise to offer solutions to other industries that face similar complex operations issues, including the airport, railroad, logistics, hospitality and financial services industries. The solutions offered by the Company include software development and product sales, transactions processing and consulting. The Company believes that its suite of airline-related software solutions is the most comprehensive in the world. In addition, pursuant to the Technology Services Agreement, the Company provides data processing, network and distributed systems services to American and AMR's other subsidiaries, fulfilling substantially all of their information technology requirements. In 1995, 34.2% of the Company's revenues was generated by the provision of information technology solutions. MARKET POSITION AND STRATEGY The Company intends to maintain its leadership positions and to expand its product offerings in electronic travel distribution and information technology solutions. The Company believes that it has many competitive strengths, including (i) a strong market position as a world leader in, and the largest provider in the United States of, the electronic distribution of travel, (ii) established relationships with travel agencies and providers of travel products and services, (iii) comprehensive product and service offerings in electronic travel distribution and information technology solutions, (iv) a comprehensive knowledge of the travel industry and (v) economies of scale and sizable investments in its technological infrastructure and network. The Company intends to use these strengths to achieve continued revenue and earnings growth. Key components of this strategy include: o INCREASING PENETRATION IN INTERNATIONAL TRAVEL DISTRIBUTION MARKETS. The Company believes that the international market for travel and travel-related products and services presents opportunities for the Company to expand by building on its existing base in Europe and Latin America and by pursuing additional opportunities in Asia. The Company will pursue international opportunities directly and through the formation of international alliances. The Company's revenues from its travel distribution products outside the United States have grown at a compound annual rate of 29.8% during the last five years, to $250 million in 1995. o EXPANDING AND CUSTOMIZING ASSOCIATE PARTICIPATION. The Company plans to continue to expand participation in SABRE by associates, such as air charters, car rental companies, hotels, railroads and tour operators, and has initiated an effort to increase the value provided to associates by tailoring available participation options to the needs of different travel providers. o ENHANCING THE VALUE OF THE TRAVEL DISTRIBUTION PRODUCT TO TRAVEL AGENTS. The Company plans to maximize the value of its products to travel agents by increasing the depth and breadth of information available through SABRE and the ease of use and reliability of its products. The Company will also continue to develop products to enhance the competitiveness of its travel agent subscribers. For example, the Company has developed two user interface products, Turbo SABRE(sm) and Planet SABRE(sm), that provide travel agencies with greater productivity through data integration and increased ease of use, respectively. o PARTICIPATING IN EMERGING DISTRIBUTION CHANNELS. With products such as Business Travel Solutions(sm) ("BTS"), which is scheduled for release in the fourth quarter of 1996, and Travelocity, the Company intends to continue to compete in emerging distribution channels, such as corporate direct distribution, the Internet and computer on-line services. o ENHANCING TECHNOLOGY AND OPERATING CAPABILITIES. The Company has budgeted capital expenditures of over $210 million for 1996, which the Company anticipates funding with operating cash flow. In addition, the Company has begun a multi-year development effort, for which the Company has budgeted over $100 million during the next five years, to improve SABRE's core operating capabilities. The goals of this development effort are to accelerate new product development, increase flexibility, power and functionality for subscribers and associates, improve data management capabilities, raise capacity levels and lower operating costs. o ENHANCING THE COMPANY'S POSITION IN INFORMATION TECHNOLOGY SOLUTIONS. The Company intends to expand its information technology solutions in the airline industry and to employ its airline industry expertise to continue to expand into other industries with similar complex operations issues. o PURSUING STRATEGIC ACQUISITIONS AND ALLIANCES. The Company expects to enhance its competitive position through strategic acquisitions of and alliances with businesses that augment the Company's product offerings or provide entry into new markets or access to new technologies. The Company believes that it will generate sufficient cash flow beyond internal capital requirements to fund significant acquisitions and alliances in the future. During 1995, the Company generated approximately $217 million of net cash flow from operating activities, after its internal capital requirements were met. RELATIONSHIP WITH AMR The Company is a newly-formed Delaware corporation and, prior to the Offerings, a direct wholly-owned subsidiary of AMR. AMR is also the parent corporation of American and other subsidiaries. Upon completion of the Offerings, AMR will own 100% of the outstanding Class B common stock, par value $.01 per share, of the Company (the "Class B Common Stock"), representing approximately 98.2% of the combined voting power of all classes of voting stock of the Company (approximately 97.9% if the Underwriters' over-allotment options are exercised in full). As long as AMR beneficially owns a majority of the combined voting power, it will have the ability to elect all of the members of the Board of Directors of the Company (the "Board of Directors") and thereby ultimately to control the management and affairs of the Company. Pursuant to the Reorganization consummated on July 2, 1996, the Company became the successor to the businesses of The SABRE Group which were formerly operated as divisions or subsidiaries of American or AMR. In connection with the Reorganization, the Company issued an $850 million subordinated debenture (the "Debenture") payable to American, which was transferred to AMR and the amount of which exceeds the historical book value of the assets contributed by American and AMR to the Company by $120.9 million. The Company will have $405 million of long-term indebtedness outstanding after approximately $445 million of the net proceeds of the Offerings is used to repay a portion of such indebtedness. See "Use of Proceeds" and Pro Forma Condensed Consolidated Financial Information. The Company in the past has been and will continue to be dependent upon American and its affiliates for a substantial portion of the Company's business. In connection with the Reorganization, the Company has entered into certain agreements with AMR and its affiliates (the "Affiliate Agreements"), the financial terms of which were generally effective as of January 1, 1996. Those agreements include the Technology Services Agreement pursuant to which the Company will provide information technology services to American for a term of 10 years for most services (three and five years for others). On a pro forma basis, giving effect to the Reorganization and the Affiliate Agreements as though effective as of January 1, 1995, the Company's revenues for 1995 were $1,463 million, representing a decrease of $66 million from historical 1995 revenues, and net income was $133 million, representing a decrease of $92 million from historical 1995 net income. See "Risk Factors -- Dependence on American Airlines," "Risk Factors -- Relationship with AMR," "Relationship with AMR and Certain Transactions -- Contractual Arrangements" and Pro Forma Condensed Consolidated Financial Information. THE OFFERINGS The offering hereby of 16,160,000 shares of Class A common stock, par value $.01 per share, of the Company (the "Class A Common Stock" and, collectively with the Class B Common Stock, the "Common Stock") initially being offered in the United States (the "U.S. Offering") and the offering of 4,040,000 shares of Class A Common Stock initially being offered in a concurrent international offering outside of the United States (the "International Offering") are collectively referred to as the "Offerings." The closing of each Offering is conditioned upon the closing of the other Offering. <TABLE> <S> <C> Class A Common Stock offered by the Company(1) U.S. Offering......................... 16,160,000 shares International Offering................ 4,040,000 shares Total......................... 20,200,000 shares Common Stock to be outstanding after the Offerings(1) Class A Common Stock.................. 20,200,000 shares Class B Common Stock.................. 107,374,000 shares Total......................... 127,574,000 shares Use of proceeds(2)...................... Approximately $445 million will be used to repay a portion of the Debenture to AMR. The remaining net proceeds will be used for general corporate purposes. Proposed NYSE symbol.................... TSG Voting rights........................... The holders of Class A Common Stock generally have rights identical to holders of Class B Common Stock, except that holders of Class A Common Stock are entitled to one vote per share and holders of Class B Common Stock are entitled to 10 votes per share. The Class A Common Stock and Class B Common Stock generally will vote together as a single class on all matters except as otherwise required by Delaware law. See "Description of Capital Stock -- Common Stock -- Voting Rights." Under certain circumstances, Class B Common Stock will automatically convert to Class A Common Stock. See "Relationship with AMR and Certain Transactions" and "Description of Capital Stock -- Common Stock -- Con- version." </TABLE> - --------------- (1) Exclusive of up to 3,030,000 shares of Class A Common Stock subject to over-allotment options granted by the Company to the Underwriters. See "Underwriting." (2) After deducting the underwriting discount and estimated expenses of the Offerings, and assuming no exercise of the Underwriters' over-allotment options. SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION Set forth below are the summary historical consolidated financial and other data of the Company for the periods and dates indicated. This information should be read in conjunction with the Consolidated Financial Statements, and the related notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus. <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ---------------------------------------------------------- -------------------- 1991 1992 1993 1994 1995 1995 1996(4) -------- -------- --------- -------- --------- --------- ------- (IN MILLIONS, EXCEPT OTHER DATA WHERE INDICATED) <S> <C> <C> <C> <C> <C> <C> <C> INCOME STATEMENT DATA(1): Revenues........................... $1,097.1 $1,173.8 $ 1,258.2 $1,406.7 $ 1,529.6 $ 767.5 $838.3 Operating Expenses................. 876.9 929.5 1,004.5 1,056.5 1,149.2 548.0 640.7 -------- -------- --------- -------- --------- --------- ------- Operating Income................... $ 220.2 $ 244.3 $ 253.7 $ 350.2 $ 380.4 $ 219.5 $197.6 Other Income (Expense), net(2)..... (7.6) (173.2) (84.7) (26.1) (10.3) (10.4) (2.4 ) -------- -------- --------- -------- --------- --------- ------- Income Before Income Taxes......... $ 212.6 $ 71.1 $ 169.0 $ 324.1 $ 370.1 $ 209.1 $195.2 Income Taxes....................... 77.6 38.8 69.0 126.9 144.2 82.0 76.1 -------- -------- --------- -------- --------- --------- ------- Income Before Cumulative Effect of Accounting Change................ $ 135.0 $ 32.3 $ 100.0 $ 197.2 $ 225.9 $ 127.1 $119.1 Cumulative Effect of Accounting Change(3)........................ -- 19.0 -- -- -- -- -- -------- -------- --------- -------- --------- --------- ------- Net Earnings....................... $ 135.0 $ 13.3 $ 100.0 $ 197.2 $ 225.9 $ 127.1 $119.1 ======== ======== ========= ======== ========= ========= ======= BALANCE SHEET DATA (AT END OF PERIOD)(1): Current Assets..................... $ 55.1 $ 91.1 $ 107.1 $ 404.3 $ 271.2 $ 259.2 $449.6 Total Assets....................... 558.8 550.1 584.3 873.5 729.4 737.8 855.8 Current Liabilities(2)............. 108.5 154.2 346.4 503.2 218.6 176.5 225.8 Stockholders' Equity............... 411.0 244.7 158.0 289.5 432.1 477.8 551.2 OTHER DATA(1): Operating Income as a Percentage of Revenue.......................... 20.1% 20.8% 20.2% 24.9% 24.9% 28.6% 23.6% Percentage of Revenue from Non-affiliated Customers......... 53.9% 55.0% 56.6% 58.1% 64.2% 64.4% 68.8% Reservations Booked Using SABRE............................ 220.2 255.3 275.2 311.1 325.5 170.6 181.2 Net Cash Provided by Operating Activities............. $ 315.3 $ 328.1 $ 332.4 $ 224.9 $ 391.8 $ 168.3 $143.2 Net Cash Used for Investing Activities....................... $ (183.0) $ (122.4) $ (171.7) $ (177.3) $ (174.7) $ (105.4) $(41.5 ) Net Cash Provided by (Used for) Financing Activities(5).......... $ (130.9) $ (204.7) $ (160.7) $ 215.3 $ (385.2) $ (246.4) $ (9.4 ) Capital Expenditures............... $ 171.0 $ 128.8 $ 176.6 $ 168.9 $ 164.6 $ 104.4 $ 82.0 </TABLE> - --------------- (1) The Company has significant transactions with AMR and American. See Notes 3 and 11 to the Consolidated Financial Statements. (2) The operating results for the years ended December 31, 1992 and 1993 include a provision for losses of $165 million and $71 million, respectively, associated with a reservations system project and resolution of related litigation. The balance sheets as of December 31, 1992 and 1993 include current liabilities for the losses of $28 million and $133 million, respectively. See Note 5 to the Consolidated Financial Statements. (3) Effective January 1, 1992, the Company adopted FAS 106, "Accounting for Postretirement Benefits Other Than Pensions," changing the method of accounting for these benefits. The cumulative effect of adopting FAS 106 as of January 1, 1992 was a charge of $19 million, net of income taxes of $10 million. (4) The operating results for the six months ended June 30, 1996 reflect the impact of the Affiliate Agreements, the financial terms of which were effective as of January 1, 1996. See Note 11 to the Consolidated Financial Statements. (5) Consists of advances to or from affiliates and contributions from or distributions to affiliates. SUMMARY PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION Set forth below are the summary pro forma consolidated financial and other data of the Company for the periods indicated. This information should be read in conjunction with the Consolidated Financial Statements, and the related notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Pro Forma Condensed Consolidated Financial Information, and the related notes thereto, included elsewhere in this Prospectus. The pro forma financial information below assumes the Reorganization and Offerings were consummated, and the Affiliate Agreements were effective, on January 1, 1995 with respect to the income statement data and at June 30, 1996 with respect to the balance sheet data. The pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have occurred if the transactions had been consummated at the assumed dates, nor is it necessarily indicative of future results of operations. <TABLE> <CAPTION> PRO FORMA AS ADJUSTED FOR THE REORGANIZATION, THE AFFILIATE AGREEMENTS AND THE OFFERINGS ---------------------------------- SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, ----------------- 1995 1995 1996 ------------ ------ ------ (IN MILLIONS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> INCOME STATEMENT DATA(1): Revenues.................................................... $1,463.3 $736.7 $832.2 Operating Expenses.......................................... 1,178.7 561.2 635.1 -------- ------ ------ Operating Income............................................ $ 284.6 $175.5 $197.1 Other Income (Expense), net................................. (34.2) (22.3) (14.5) -------- ------ ------ Income Before Income Taxes.................................. $ 250.4 $153.2 $182.6 Income Taxes................................................ 97.5 60.2 71.2 -------- ------ ------ Net Earnings................................................ $ 152.9 $ 93.0 $111.4 ======== ====== ====== Pro Forma Earnings Per Share(2)............................. $ 1.20 $ .73 $ .87 ======== ====== ====== </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 ----------------------------- AS ADJUSTED FOR THE REORGANIZATION AS FURTHER AND THE ADJUSTED AFFILIATE FOR THE AGREEMENTS OFFERINGS -------------- ---------- (IN MILLIONS) <S> <C> <C> BALANCE SHEET DATA(1): Current Assets.................................................... $ 449.6 $ 499.1 Total Assets...................................................... 1,049.0 1,098.5 Current Liabilities............................................... 171.7 171.7 Debenture Payable to AMR.......................................... 850.0 404.5 Stockholders' Equity (Deficit).................................... (120.9) 374.1 </TABLE> <TABLE> <CAPTION> PRO FORMA AS ADJUSTED FOR THE REORGANIZATION, THE AFFILIATE AGREEMENTS AND THE OFFERINGS ------------------------------- SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, --------------- 1995 1995 1996 ------------ ----- ----- <S> <C> <C> <C> OTHER DATA(1): Operating Income as a Percentage of Revenue.................... 19.4% 23.8% 23.7% Percentage of Revenue from Non-affiliated Customers............ 67.1% 67.1% 69.3% </TABLE> - --------------- (1) The Company has significant transactions with AMR and American. See Notes 3 and 11 to the Consolidated Financial Statements. (2) The Company was formed on June 25, 1996 and became a wholly-owned subsidiary of AMR on July 2, 1996 in connection with the Reorganization. As part of the Reorganization, AMR caused to be transferred to the Company the subsidiaries and divisions through which AMR has historically conducted its electronic travel distribution and information technology solutions operations. The pro forma earnings per common share calculation is based upon weighted average common shares outstanding after the Reorganization and the Offerings. See Notes 10 and 11 to the Consolidated Financial Statements.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001020291_frontiervi_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001020291_frontiervi_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. The information set forth in this Prospectus gives effect to the organization of Capital, a newly created corporation, as a wholly owned subsidiary of FVOP. As used in this Prospectus, the term "Acquisition Systems" includes the cable television systems acquired from Phoenix Grassroots Cable Systems, L.L.C. on August 30, 1996 and the term "Acquisition Transactions" includes the purchase of such systems. See "Risk Factors" for a discussion of certain risks associated with an investment in the Notes. See "Glossary" for the definitions of certain terms used herein. THE COMPANY The Company owns, operates and develops cable television systems in small and medium-sized suburban and exurban communities, primarily concentrated in two operating regions -- New England and Ohio/Kentucky -- with a third, smaller group of cable television systems in the Southeast. To date, the Company has acquired strategically located cable television systems at historically attractive values, thus establishing its core geographic base and building subscriber mass. Since closing its initial acquisition in November 1995, the Company has become one of the 35 largest multiple system cable operators ("MSOs") in the United States. The cable television systems owned by the Company on June 30, 1996 (the "Existing Systems") passed approximately 304,700 homes in six states and served approximately 217,900 basic subscribers as of such date. The Company has recently acquired or entered into agreements to acquire, for an aggregate purchase price of approximately $244.4 million (subject to adjustment), additional systems (the "Acquisition Systems") which passed approximately 202,800 homes and served approximately 146,700 basic subscribers as of June 30, 1996. The Acquisition Systems primarily consist of certain significant cable television systems to be acquired from American Cable Entertainment of Kentucky-Indiana, Inc. ("ACE") and from an affiliate of Triax Communications Corp. ("Triax"). The ACE systems, serving approximately 82,400 subscribers in Kentucky and Indiana, and the Triax systems, serving approximately 53,200 subscribers in Ohio/Kentucky and the Southeast, are contiguous or in close proximity to the Existing Systems, consistent with the Company's strategy of clustering its cable television systems to achieve economies of scale and operating efficiencies. The Company intends to continue to pursue, on an opportunistic basis, additional strategic acquisitions and smaller "fill-in" acquisitions within its existing operating regions to further enhance their operational and financial performance. In addition, the Company has sold or entered into agreements to sell three systems in the Southeast (the "Disposition Systems") for an aggregate sales price of approximately $17.0 million, representing a per subscriber sales price that is over 30% more than the average per subscriber acquisition cost of the Existing Systems in the Southeast. As of June 30, 1996, after giving pro forma effect to the purchase of the Acquisition Systems and the sale of the Disposition Systems, the Company's cable television systems passed approximately 494,300 homes and served approximately 353,800 basic subscribers, representing a basic penetration level of 71.6%. On such a pro forma basis, as of June 30, 1996, the Company would be one of the 25 largest MSOs in the United States and a dominant cable operator in its two primary operating regions. On the same pro forma basis, for the six months ended June 30, 1996 and for the year ended December 31, 1995, the Company had revenues of approximately $60.6 million and $117.0 million, respectively, and EBITDA (as defined) of approximately $29.3 million and $53.3 million, respectively. In order to execute the Company's business strategy, James C. Vaughn and John S. Koo, the Company's co-founders, have assembled a senior management group of six individuals with over 85 years of collective experience in the cable industry. The equity investors in the Company include affiliates of J.P. Morgan & Co. Incorporated, Brown Brothers Harriman & Co., Olympus Partners and First Union Capital Partners, Inc. After giving pro forma effect to a $76.0 million rights offering (the "Rights Offering"), which is expected to be consummated concurrently with or prior to the Offering, the Company will have obtained aggregate equity capital commitments of approximately $195.7 million, of which $115.6 million has been invested in the Company. The Existing Systems and the Acquisition Systems represent the substantial completion of the first phase of the Company's business plan. Through its core acquisitions in New England and Ohio/Kentucky, the Company has established significant subscriber mass and positioned itself as a dominant cable operator in each of its primary operating regions. The Company is currently the second largest MSO in Maine, and, after giving pro forma effect to the purchase of the Acquisition Systems, as of June 30, 1996, the Company would be the second largest MSO in Kentucky and one of the largest operators of cable systems in small and medium-sized markets in southern Ohio. In the Southeast, the Company has accumulated attractive systems which it expects either to consolidate with subsequent system acquisitions, trade for systems within the Company's primary operating regions or divest at favorable prices. The next phase of the Company's business plan will focus on increasing subscriber density within its primary operating regions through selective acquisitions, integrating and streamlining business operations, making significant investment and improvements in technical plant and developing existing and new cable and broadband telecommunications services. BUSINESS STRATEGY The Company's objective is to increase its operating cash flow and the value of its systems by utilizing its expertise in acquiring and managing cable systems. Through strategic acquisitions and internal growth, the Company seeks to own and operate cable television systems serving at least 500,000 subscribers in geographically concentrated clusters serving 100,000 or more subscribers. To achieve its objective, the Company pursues the following business strategies: TARGET CLUSTERS IN SMALL AND MEDIUM-SIZED MARKETS. The Company has acquired clusters of cable television systems serving small and medium-sized suburban and exurban markets which are generally within 50 to 100 miles of larger urban and suburban communities. The Company believes that such markets have many of the beneficial attributes of larger urban and suburban markets -- moderate to high household growth, economic stability, attractive subscriber demographics and favorable potential for additional clustering. Moreover, in such markets, the Company believes that (i) it will face less direct competition given the lower population densities and higher costs per subscriber of installing cable plant, (ii) it will maintain higher subscriber penetration levels and lower customer turnover based on fewer competing entertainment alternatives, and (iii) its overhead and certain operating costs will generally be lower than those in larger markets. GROW THROUGH STRATEGIC AND OPPORTUNISTIC ACQUISITIONS. Beginning with its initial acquisition in November 1995 of systems in Maine and Ohio, the Company has systematically implemented a focused acquisition and consolidation strategy within its two primary operating regions of New England and Ohio/Kentucky and its systems group in the Southeast. Going forward, the Company will seek to acquire systems that can be readily integrated into its primary operating regions in order to maximize operating efficiencies. As a consolidator of systems within its primary operating regions, the Company will pursue both "fill-in" acquisitions of smaller systems as well as strategic acquisitions. The Company believes that such acquisition targets will have diminished strategic value to other prospective buyers given its geographic prominence in these regions. Consequently, the Company believes these systems can be purchased at favorable prices. The Company also opportunistically pursues acquisitions outside of its primary operating regions that can either be resold at higher prices or exchanged for systems that are contiguous to its primary operating regions. The Company has begun to execute this strategy with its Southeast systems. IMPLEMENT OPERATING EFFICIENCIES. Upon acquiring a system, the Company implements extensive management, operational and technical changes designed to improve operating efficiencies, enhance operating cash flow and operating margins and reduce overhead through economies of scale. Within each of its operating regions, the Company has begun to streamline field operations by establishing centralized customer service facilities, installing state-of-the-art telephone systems, management information systems ("MIS") and billing systems and eliminating duplicative functions. These changes have resulted in lower administrative costs, better trained employees and a higher level of customer service. Lastly, the Company seeks to reduce technical operating costs and capital expenditures associated with the implementation of new channels and services by consolidating headends. By serving more subscribers from a single distribution point, the Company has begun to decrease ongoing technical maintenance expenses, improve system reliability and enhance cost efficiencies in adding new channels and services. PROMOTE AND EXPAND SERVICE OFFERINGS. The Company aggressively promotes and expands services to add and retain customers and increase revenue per customer. The Company employs a coordinated array of marketing techniques, including door-to-door sales, telemarketing, direct mail, print and broadcast advertising, flyers and billing inserts and cross-channel promotion. Many of the Company's customers received limited service offerings prior to acquisition and, accordingly, the Company has begun to expand and repackage the basic and premium services it offers. The Company believes that significant opportunity exists to increase service revenue by expanding the programming and pricing options available to its customers. For example, the Company introduced between three and seven new tiered and premium channels to 89% of the New England subscribers in May and June of 1996, including lower priced premium services such as The Disney Channel, Starz! and Encore. The new service launch was accompanied by an aggressive direct mail and telemarketing campaign and an average basic service rate increase. By July 1996, monthly basic subscribers and pay units in the New England operating region increased by 1.6% and 9.7%, respectively. The Company is in the process of implementing similar new programming launches and marketing campaigns in its other primary service areas. As systems are consolidated and technically enhanced, the Company will also expand addressability, currently accessed by only 27.6% of the subscribers in the Existing Systems and the Acquisition Systems. Addressability will enable the Company to increase revenues derived from pay-per-view movies and events and new pay services such as interactive video games, including The Sega Channel. In addition, with the expanded advertising market delivery afforded by larger, contiguous system clusters, the Company plans to intensify local spot advertising sales efforts. STRATEGICALLY UPGRADE SYSTEMS. The Company will selectively upgrade its cable systems to increase channel capacity, enhance signal quality and improve technical reliability. The Company believes such technical upgrades will not only enhance the potential for increasing revenues, but also will improve customer and community relations and further solidify the Company's position as the preeminent local provider of video services in its operating regions. In addition, by implementing a hybrid fiber optic-backbone/coaxial cable design across the portions of its cable plant that serve its highest subscriber densities, the Company will effectively position itself for the introduction of new broadband and interactive services. In its primary operating regions of New England and Ohio/Kentucky, the Company intends to invest up to $49 million over the next five years to establish a technical platform of at least 400 MHz to 450 MHz (54 to 62 channels) in a majority of its systems and 550 MHz to 750 MHz (78 to 100 channels) in certain of its larger markets. Over the same period, the Company plans to invest up to an additional $11 million for addressable converters in its two primary operating regions. FOCUS ON THE CUSTOMER. The Company continually seeks to provide superior customer service and improve programming and service choices for its subscribers. By centralizing customer service at the regional level, all functions that directly impact subscribers -- sales and marketing, customer service and administration and technical support -- are implemented more quickly and effectively. In addition, as a result of its consolidation efforts, the Company has been able to enhance its customer service by increasing hours of operations for its customer service functions, better coordinating service calls, increasing responsiveness to customer inquiries and standardizing maintenance procedures. While centralizing and improving customer service, the Company has retained local payment and technical offices to maintain its presence and visibility within its communities. THE EXISTING SYSTEMS AND THE ACQUISITION SYSTEMS The following table illustrates certain subscriber and operating statistics for the Company as of June 30, 1996 on a pro forma basis giving effect to the purchase of the Acquisition Systems and the sale of the Disposition Systems (see "--Summary Financial and Operating Data of the Company" for a description of certain terms used in the following table): <TABLE> <CAPTION> --------------------------------------------------------------------- AVG. MONTHLY REVENUE PER HOMES BASIC BASIC PREMIUM BASIC CABLE SYSTEMS PASSED SUBSCRIBERS PENETRATION PENETRATION SUBSCRIBER(1) -------- ----------- ----------- ----------- ------------- <S> <C> <C> <C> <C> <C> Existing Systems(2): New England.............................. 82,985 60,747 73.2% 35.3% $28.01 Ohio/Kentucky............................ 159,662 116,261 72.8% 45.0% 29.73 Southeast................................ 62,082 40,898 65.9% 42.9% 24.23 -------- ----------- ----------- ----------- ------------- Total Existing Systems................. 304,729 217,906 71.5% 41.9% 28.22 Acquisition Systems(3): ACE...................................... 107,073 82,415 77.0% 34.2% 30.37 Triax.................................... 79,237 53,159 67.1% 56.5% 30.28 Other.................................... 16,512 11,115 67.3% 43.5% 28.74 -------- ----------- ----------- ----------- ------------- Total Acquisition Systems.............. 202,822 146,689 72.3% 43.0% 30.21 Disposition Systems(4):.................... (13,233) (10,784) 81.5% 43.1% 25.20 -------- ----------- ----------- ----------- ------------- Total Systems.......................... 494,318 353,811 71.6% 42.3% $29.02 ======== =========== =========== =========== ============ </TABLE> - --------------- (1) Average monthly revenue per basic subscriber equals revenue for the month ended June 30, 1996 divided by the number of basic subscribers as of the end of such period. (2) The Existing Systems include cable television systems acquired from (i) United Video Cablevision, Inc. ("UVC"), (ii) Longfellow Cable Company, Inc. and two of its affiliates ("Longfellow"), (iii) C4 Media Cable Southeast, Limited Partnership and County Cable Company, L.P. ("C4"), (iv) Americable International Maine, Inc. ("Americable") and (v) affiliates of Cox Communications, Inc. ("Cox"). (3) The Acquisition Systems include the ACE Systems, Triax Systems, Grassroots Systems and Penn/Ohio Systems. See "--The Acquisition Systems." (4) The Disposition Systems include certain systems acquired from C4 in the Southeast region. See "--The Disposition Systems." THE ACQUISITION SYSTEMS ACE Systems. The Company has entered into an agreement with ACE to acquire systems (the "ACE Systems") serving approximately 82,400 subscribers as of June 30, 1996 in Kentucky and Indiana for $146.0 million. The Company intends to operate all of the ACE Systems as part of its Ohio/Kentucky cluster. It is anticipated that this acquisition will be completed concurrently with or promptly following the consummation of the Offering, although there can be no assurances that this transaction will be consummated. On September 11, 1996, the bankruptcy court administering ACE's voluntary bankruptcy proceedings entered an order confirming ACE's plan of reorganization and approving the sale of the ACE Systems to the Company. The ACE transaction is subject to such order becoming a final order, which, in the absence of an unanticipated appeal or rehearing, will occur on September 23, 1996. Triax Systems. The Company has also entered into an agreement with Triax to acquire systems (the "Triax Systems") serving approximately 53,200 subscribers as of June 30, 1996 in Ohio, Kentucky, Virginia, West Virginia, Pennsylvania, Maryland and North Carolina for $85.0 million. The Company intends to operate the systems in Kentucky, Ohio and West Virginia, serving approximately 28,700 basic subscribers, as part of its Ohio/Kentucky cluster. The Company intends to operate the systems in North Carolina, Virginia, Pennsylvania and Maryland, serving approximately 24,500 basic subscribers, as part of its Southeast region. It is anticipated that this acquisition will be completed in the third or fourth quarter of 1996, although there can be no assurances that this transaction will be consummated. Upon acquisition and the subsequent integration of the ACE Systems and the Triax Systems with the Existing Systems, the Company will serve over 200,000 subscribers in communities south of Columbus, Ohio to the southern perimeter of Lexington, Kentucky. Within this region are ten county service areas along the Interstate 75 "growth corridor," which is among the fastest growing areas in the region. By 1997, it is anticipated that 30% of the Company's subscribers within this region will be served by fiber-to-the-feeder 550 MHz or 750 MHz technical plant. Other Acquisitions. In addition to the acquisition of the ACE Systems and the Triax Systems, the Company has recently acquired or entered into agreements to acquire systems serving an aggregate of approximately 11,100 basic subscribers as of June 30, 1996 for approximately $13.4 million. On August 30, 1996, the Company purchased from Phoenix Grassroots Cable Systems, L.L.C. ("Grassroots") systems (the "Grassroots Systems") serving approximately 7,800 basic subscribers as of June 30, 1996 in Maine and New Hampshire for approximately $9.3 million (as adjusted). In August 1996, the Company entered into an agreement with SRW, Inc.'s Penn/Ohio Cablevision, L.P. ("Penn/Ohio") to acquire systems (the "Penn/Ohio Systems") serving approximately 3,300 subscribers as of June 30, 1996 in Ohio and Pennsylvania for $3.8 million. It is anticipated that this acquisition will be completed in the third or fourth quarter of 1996, although there can be no assurances that this transaction will be consummated. The Company's purchase of the Acquisition Systems (other than the purchase of the Grassroots Systems, which occurred on August 30, 1996) is subject to, among other things, the satisfaction of customary closing conditions and the receipt of certain third-party or governmental approvals, including the consent of franchising authorities. Although there can be no assurances that such closing conditions will be satisfied or that any of these transactions will be consummated, it is anticipated that these acquisitions will be completed in the third or fourth quarter of 1996. See "Risk Factors--Risks Relating to Acquisition Strategy." The Company believes that other acquisition opportunities exist, and the Company is continuously engaged in discussions with other cable television system owners and operators to explore such potential opportunities. Some of these potential opportunities may involve systems serving substantial numbers of subscribers. Although the Company does not currently have definitive agreements to acquire systems other than those described herein, the Company intends to continue to pursue, on an opportunistic basis, additional strategic acquisitions and smaller "fill-in" acquisitions within its existing operating regions to enhance further their operational and financial performance. THE DISPOSITION SYSTEMS On July 24, 1996, the Company sold its Chatsworth, Georgia system, representing approximately 5,600 basic subscribers as of June 30, 1996, to an affiliate of Helicon Partners for approximately $8.7 million. The Company also has entered into an agreement to sell its Woodstock and New Market, Virginia systems, representing approximately 5,100 subscribers, to Shenandoah Cable Television Company, an affiliate of Shenandoah Telephone Company, for approximately $8.3 million. It is anticipated that this sale will be completed in the third or fourth quarter of 1996, although there can be no assurances that this transaction will be consummated. The aggregate sales price of approximately $17.0 million for the Disposition Systems represents a per subscriber sales price that is over 30% more than the average per subscriber acquisition cost of the Existing Systems in the Southeast. THE TRANSACTIONS Concurrently with or prior to the completion of the Offering, it is anticipated that FrontierVision Partners, L.P. ("FVP"), the sole general partner and the owner, directly and indirectly, of substantially all of the partnership interests of the Company, will consummate a $76.0 million Rights Offering, the net proceeds of which will be contributed as equity to the Company over time to fund future acquisitions. The Company will use (i) $34.4 million of the proceeds from the Rights Offering, (ii) $193.0 million of net proceeds from the Offering, (iii) $16.9 million of proceeds (net of transaction costs) from the sale of the Disposition Systems and (iv) $5.3 million of net working capital adjustment related to the Acquisition Systems to (i) pay the purchase prices for the Acquisition Systems, (ii) pay estimated transaction costs associated with the purchase of the Acquisition Systems and (iii) repay existing indebtedness of $4.9 million outstanding under the Senior Credit Facility. The Rights Offering, the Offering, the sale of the Disposition Systems, the purchase of the Acquisition Systems and such repayment of indebtedness under the Senior Credit Facility are collectively referred to as the "Acquisition Transactions." To the extent that there is any delay in consummating the purchase of any of the Acquisition Systems, a portion of the net proceeds of the Offering corresponding to the purchase price of such system may be applied to reduce indebtedness for borrowings under the Senior Credit Facility or may be held in a special account pending reinvestment in a subsequent acquisition of cable systems approved by the Senior Credit Facility lenders within 180 days of the closing of the Offering. To the extent the purchase of any of the Acquisition Systems is consummated prior to the consummation of the Offering (as has already occurred in the case of the Grassroots Systems), additional borrowings under the Senior Credit Facility may be used to pay a portion of the purchase price therefor, in which event a portion of the net proceeds of the Offering will be used to repay such borrowings. See "Use of Proceeds," "The Partnership Agreements" and "Credit Arrangements of the Company." The following table sets forth the sources and uses of the proceeds to be received by the Company in connection with the Acquisition Transactions (determined as of June 30, 1996): <TABLE> <CAPTION> -------- In thousands AMOUNT -------- <S> <C> SOURCES OF FUNDS: Rights Offering(1).......................................................................... $ 34,400 % Senior Subordinated Notes due 2006(2)................................................... 193,000 Sale of Disposition Systems(3).............................................................. 16,860 Net working capital adjustment.............................................................. 5,312 -------- Total sources of funds.................................................................. $249,572 ========= USES OF FUNDS: Purchase Acquisition Systems: ACE....................................................................................... $146,000 Triax..................................................................................... 85,000 Grassroots and Penn/Ohio(4)............................................................... 13,400 -------- Total................................................................................... 244,400 Estimated purchase price adjustments(5)..................................................... (900) Estimated transaction costs for Acquisition Systems......................................... 1,200 Repayment of Senior Credit Facility indebtedness............................................ 4,872 -------- Total uses of funds..................................................................... $249,572 ========= </TABLE> - --------------- (1) The approximately $41.4 million of net proceeds remaining from the Rights Offering will be used to fund additional acquisitions. The size of the equity commitments to be made available to FVOP through the Rights Offering may be reduced if no later than six months after the closing of the Rights Offering, the General Partner and the Advisory Committee of FVP determine that the remaining equity commitments exceed the Company's projected requirements. Such remaining equity commitments will expire on June 30, 1997, subject to the election by the General Partner and approval by the Advisory Committee to extend the commitment period to June 30, 1998. See "Management" and "The Partnership Agreements." (2) Aggregate proceeds of $200.0 million reduced by underwriting discounts of $6.0 million and estimated Offering expenses of $1.0 million. (3) Aggregate proceeds of $17.0 million reduced by approximately $0.1 million of transaction costs. (4) On August 30, 1996, the Company acquired the Grassroots Systems for approximately $9.3 million (as adjusted), approximately $8.6 million of which was funded with additional borrowings under the Senior Credit Facility, approximately $0.5 million of which was funded with proceeds from equity contributions and approximately $0.2 million of which is represented by a net working capital adjustment. (5) Represents estimated contractual purchase price reductions that would be effective if the purchase of the Acquisition Systems were consummated at June 30, 1996. Effective as of April 9, 1996, and in conjunction with the acquisition of systems from Cox, the Company amended and restated its credit facility to effect an increase in the amount available to be borrowed thereunder from $130.0 million to $265.0 million (the "Credit Agreement Restatement"). The Company received an additional $10.6 million from a draw down during August 1996 by FVP (the "Equity Call") of equity commitments in place prior to the Rights Offering. Concurrently with or prior to the consummation of the Offering, it is anticipated that a subordinated note (the "UVC Note") in the aggregate principal amount of $7.2 million issued by the Company in connection with the acquisition of the systems from UVC, which UVC Note has accreted to $7.7 million as of June 30, 1996, will be converted into $5.0 million of Class A limited partnership interests in the Company (the "Class A Partnership Interests"), with the balance of the aggregate accreted principal amount of the UVC Note to be repaid in cash (the "UVC Note Conversion"). See "Business--Development of the Systems--The Existing Systems--UVC Systems" and "The Partnership Agreements--The Company Partnership Agreement--Class A Partnership Interests." It is also anticipated that the outstanding indebtedness under the Senior Credit Facility will be reduced by $16.7 million (including the $4.9 million repayment listed in the table above) from the aggregate of approximately $210.0 million outstanding at June 30, 1996 (the "Credit Agreement Repayment"). The Credit Agreement Restatement, the Equity Call, the UVC Note Conversion and the Credit Agreement Repayment are collectively referred to herein as the "Other Transactions," and the Acquisition Transactions and the Other Transactions are collectively referred to herein as the "Transactions." THE OFFERING SECURITIES OFFERED.................. $200.0 million aggregate principal amount of % Senior Subordinated Notes due 2006. MATURITY DATE....................... , 2006. INTEREST PAYMENT DATES.............. and , commencing , 1997. ISSUERS............................. The Notes are the joint and several obligations of FVOP and Capital. OPTIONAL REDEMPTION BY THE ISSUERS............................. The Notes are not redeemable prior to , 2001, except as set forth below. The Notes will be redeemable at the option of the Issuers, in whole or in part, at any time on or after , 2001, at the redemption prices set forth herein, together with accrued and unpaid interest to the redemption date. In addition, prior to , 1999, the Issuers may redeem up to 35% of the principal amount of the Notes with the net cash proceeds from one or more Public Equity Offerings or Strategic Equity Investments (as defined in the Indenture governing the Notes (the "Indenture")) at a redemption price of % of the principal amount thereof, together with accrued and unpaid interest to the redemption date; provided, however, that at least 65% in aggregate principal amount of the Notes originally issued remains outstanding immediately after any such redemption. MANDATORY REDEMPTION BY THE ISSUERS............................. None. CHANGE OF CONTROL OFFER............. Upon a Change of Control, the Issuers will be required to make an offer to purchase all outstanding Notes at 101% of the principal amount thereof, together with accrued and unpaid interest to the purchase date. RANKING............................. The Notes are general unsecured obligations of the Issuers and will rank subordinate in right of payment to all existing and future Senior Indebtedness (as defined in the Indenture) of the Issuers, including indebtedness under the Senior Credit Facility. The Notes will rank pari passu in right of payment with any other senior subordinated indebtedness of the Issuers. CERTAIN COVENANTS................... The Indenture will contain certain covenants that, among other things, limit the ability of each Issuer and certain of its Subsidiaries to incur additional Indebtedness, create certain Liens, make certain Restricted Payments, enter into certain transactions with Affiliates, permit dividend or other payment restrictions to apply to certain Subsidiaries or consummate certain merger, consolidation or similar transactions. In addition, in certain circumstances, the Issuers will be required to offer to purchase Notes at 100% of the principal amount thereof with the net proceeds of certain asset sales. These covenants are subject to a number of significant exceptions and qualifications. See "Description of the Notes."
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements (including the notes thereto) appearing elsewhere in this Prospectus. As used in this Prospectus, unless the context otherwise requires, the terms "USFS" and "Company" include U.S. Franchise Systems, Inc. and its subsidiaries and their operations. The offering of shares of the Class A Common Stock, par value $0.01 per share (the "Class A Common Stock"), of U.S. Franchise Systems, Inc. is referred to herein as the "Offering". Unless otherwise indicated, all information included in this Prospectus (i) assumes that the Underwriters' over-allotment option will not be exercised and (ii) has been adjusted to give effect to the reclassification of the Company's Common Stock, par value $.10 per share (the "Old Common Stock"), pursuant to which each share of Old Common Stock will become 9.67 shares of Class A Common Stock, and to the exchange of 2,707,919 shares of such Class A Common Stock held by certain members of management for the same number of shares of a newly created class of common stock to be designated Class B Common Stock, par value $0.01 per share (the "Class B Common Stock" and together with the Class A Common Stock, the "Common Stock", and the foregoing reclassification and exchange, the "Reclassification"). THE COMPANY General U.S. Franchise Systems, Inc. was formed in August 1995 to acquire, market and expand high-quality, well- positioned brands with potential for rapid unit growth through the sale of franchises to third-party operators. The Company's initial brands, both of which are in the lodging industry, are the Microtel budget brand ("Microtel") and the Hawthorn Suites upscale, extended-stay brand ("Hawthorn Suites"). The Company acquired the rights to these brands because of their potential for significant growth, which reflects, among other things, their profitability for franchisees at the property level and their positions in attractive segments of the lodging industry. The Company has assembled an experienced management team and sales force led by its Chairman, President and Chief Executive Officer, Michael A. Leven, who has 35 years of experience in the lodging industry, and its Executive Vice President and Chief Financial Officer, Neal K. Aronson, a former principal of the New York investment firm Odyssey Partners, L.P. Mr. Leven most recently served as President and Chief Operating Officer of Holiday Inn Worldwide (1990-95) and President and Chief Operating Officer of Days Inn of America, Inc. (1985- 90), franchisors of the two largest lodging brands in the world. The Company has hired and trained a staff of 73 employees, including a 28-person sales force, which management believes is the third largest franchise sales organization in the lodging industry. Mr. Leven and the Company's sales force have collectively sold over 2,200 hotel franchises on behalf of other hotel chains. Since acquiring the Microtel brand in October 1995 and establishing a sales force by January 1996, the Company has executed 145 franchise agreements and accepted applications for an additional 74 hotels as of September 30, 1996, expanding the number of states in which Microtels are or may be located from 10 to 44. Since acquiring the exclusive rights to franchise hotels under the Hawthorn Suites brand in March 1996 and establishing a sales force by July 1996, the Company has executed five franchise agreements and accepted applications for 16 additional hotel sites as of September 30, 1996. As a franchisor, USFS licenses the use of its brand names to independent hotel owners and operators (i.e., franchisees). The Company provides its franchisees with a variety of benefits and services designed to (i) decrease development costs, (ii) shorten the time frame and reduce the complexity of the construction process and (iii) increase occupancy rates, revenues and profitability of the franchised properties. The Company offers prospective franchisees access to financing, a business format, design and construction assistance (including architectural plans), uniform quality standards, training programs, national reservations systems, national and local advertising and promotional campaigns and volume purchasing discounts. The Company does not currently build, own or manage properties. The Company expects that its future revenues will consist primarily of (i) franchise royalty fees, (ii) franchise application fees, (iii) reservation and marketing fees, (iv) various fees and other revenues from third-party financing arranged by the Company for its franchisees and (v) payments made by vendors who supply the Company's franchisees with various products and services. Currently, the Company derives substantially all of its revenues from reservation and marketing fees collected from its franchisees. The Company also receives cash from its franchisees in the form of application fees, which are recognized as revenue only upon the opening of the underlying hotels. See the Consolidated Financial Statements and the related Notes included elsewhere in this Prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations". Microtel The Microtel system currently includes 27 hotels operating under the Microtel Inn and Microtel Inn & Suites brand names. In addition, the Company has executed one franchise agreement for a hotel to be operated under the Microtel Suites brand name. Microtel properties operate in the budget segment of the lodging industry, which is the lowest priced segment in the industry (with an average daily room rate in 1995 of approximately $36) and which has experienced favorable growth in room demand relative to growth in room supply. For the six months ended June 1996, the rate of growth in room demand exceeded the rate of growth in room supply in the budget segment by 3.4 times, significantly higher than comparable ratios for any other segment in the lodging industry during this period. According to an industry study, the rate of growth in room demand relative to the rate of growth in room supply was 2.0x in the luxury segment, 1.1x in the upscale segment, 1.3x in the mid-price segment and 1.5x in the economy segment over the same period. Microtels are distinctively styled hotels with a residential look that offer travelers an attractive and consistent appearance, clean, comfortable rooms and the safety of interior corridor access, all for a competitive room rate. Management believes that Microtel is one of the only brands in the budget segment that franchises only newly constructed, interior corridor properties. In contrast, many other budget hotels are older properties with rooms that are accessible only through outside entrances and that may have been converted from independent hotels or other brands. Management believes that Microtels' strict new construction and interior corridor requirements provide travelers with a brand that is among the safest, most consistent and highest quality in the budget segment. Evidence of the appeal of Microtels to hotel guests is found in its "intent-to-return" rating, which measures guests' overall satisfaction and willingness to return to a Microtel in the future. In surveys of approximately 5,000 Microtel guests conducted by franchisees from 1989 to 1994, more than 95% of Microtel guests expressed an intent to return to a Microtel in the future. The Company believes that Microtels offer franchisees significant financial advantages. Microtels are designed to minimize construction costs and maintenance expenses by incorporating smaller room sizes, limited common areas, relatively smaller land requirements and built-in standardized furniture, all of which enable franchisees to build and operate a Microtel at a lower cost. These lower costs may reduce a franchisee's equity investment and may broaden its debt financing alternatives, thereby expanding the appeal of the Microtel brand to prospective franchisees. See "Business--Microtel". Hawthorn Suites The Hawthorn Suites system, which currently includes 18 open Hawthorn Suites hotels, targets the upscale segment of the rapidly growing extended-stay lodging market, which is defined as guests that stay five or more consecutive nights. Hotels in this segment offer guests the amenities of an apartment with the convenience and flexibility of a hotel. According to an industry study, extended-stay rooms accounted for over 30% of all hotel room nights sold in the United States in 1995. Another industry study indicates that the supply of dedicated extended- stay rooms accounted for only 1.3% of the total number of hotel rooms. Extended-stay properties offer attractive economics to franchisees because of the relatively high occupancy rates in this segment and the lower operating costs relative to similarly priced, full-service hotel properties. Extended-stay hotels experienced occupancy rates of approximately 80% in 1995 compared to approximately 65% for the lodging industry as a whole during the same period. Hawthorn Suites hotels offer large suites equipped with full kitchens and work spaces, laundry facilities and exercise rooms, daily housekeeping, 24-hour front-desk service, complimentary hot breakfast and hospitality hours. Hawthorn Suites hotels include both newly constructed properties and conversions of pre-existing hotels and apartment buildings. The Company has also recently developed prototypes for a mid-price, all-suite hotel brand, called Hawthorn Suites LTD, which is designed to meet the needs of both extended-stay and short-term guests. See "Business--Hawthorn Suites". The agreement pursuant to which the Company acquired the exclusive worldwide rights to franchise the Hawthorn Suites brand of hotels (the "Hawthorn Acquisition Agreement") limits the Company's ability to franchise certain types of all-suite and full-service lodging brands prior to June 26, 1998 and any non-lodging brands prior to June 26, 1997. For a more complete discussion of the terms and conditions of the Hawthorn Acquisition Agreement, see "Risk Factors--Risks Relating to Hawthorn Acquisition Agreement", "--Limitations on New Brands" and "Business--Acquisition of the Microtel and Hawthorn Suites Systems". Business Strategy The Company's business strategy is to (i) rapidly increase the number of open Microtels and Hawthorn Suites, (ii) operate its administrative and franchisee support departments in order to maximize the operating leverage inherent in the franchising business and (iii) acquire additional lodging or other service-oriented brands that provide attractive unit economics to franchisees and significant growth opportunities for the Company (to the extent permitted under the Hawthorn Acquisition Agreement). See "Business--Acquisition of the Microtel and Hawthorn Suites Systems". While the Company currently has no agreements, commitments or formal understandings with respect to any acquisitions, the Company may in the future acquire and franchise brands both in and out of the lodging industry. The Company has developed several programs designed to accelerate the opening of new properties and expand its brands' attractiveness to franchisees. First, in May 1996, the Company reached an agreement in principle with Nomura Asset Capital Corporation ("NACC"), a subsidiary of The Nomura Securities Co., Ltd., one of the world's largest investment banks ("Nomura Securities"), pursuant to which NACC would make available to prospective Microtel and Hawthorn Suites franchisees up to $200 million in construction and long-term mortgage financing, subject to certain terms and conditions. This program is intended to add speed and certainty to the hotel development process, enabling the Company's franchisees to devote more time to identifying acceptable hotel sites and developing properties and less time obtaining financing. There can be no assurance, however, that any loans will be made under this program. See "Business--Special Programs--Franchisee Financing Facility." Second, the Company has reached an understanding in principle with a hotel developer to construct Microtels for lease to prospective franchisees. This program, "American Dream|PS by Microtel" (the "American Dream Program"), is designed to enable hotel operators with limited capital resources and/or little or no building experience to operate, and possibly to own, a Microtel and thereby increase the number of potential Microtel franchisees. See "Business--Special Programs--American Dream Program." Third, the Company has extended the Microtel and Hawthorn Suites brands from two to five distinct products, which the Company believes increases the appeal and viability of the brands to franchisees by offering multiple formats that can be tailored to specific markets, development requirements and guest preferences. To date, more than 50% of the Microtel franchises sold by the Company relate to Microtel Inn & Suites or Microtel Suites, two formats designed by the Company after its acquisition of the Microtel brand. The Company was formed in August 1995 as a Delaware corporation. Its executive offices are located at 13 Corporate Square, Suite 250, Atlanta, Georgia 30329. Its telephone number is (404) 321-4045. THE OFFERING <TABLE> <CAPTION> <S> <C> Common Stock offered by: The Company 1,825,000 shares of Class A Common Stock The Selling Stockholders 500,000 shares of Class A Common Stock Common Stock to be outstanding after 9,872,490 shares of Class A Common Stock the Offering 2,707,919 shares of Class B Common Stock --------- 12,580,409 total shares of Common Stock ========== Use of Proceeds The proceeds of the Offering will be used for working capital and general corporate purposes, which may include (i) funding the Company's remaining obligations (approximately $2 million) under the agreement pursuant to which it acquired the Microtel brand (the "Microtel Acquisition Agreement"), (ii) acquiring additional lodging or other service-oriented brands or exclusive franchise rights (to the extent permitted under the Hawthorn Acquisition Agreement), (iii) making initial deposits in connection with the American Dream Program until qualified lessees can be identified, (iv) investing in financing programs developed by its wholly owned subsidiary, US Funding Corp., and (v) investing in entities that make equity investments in hotel properties built and managed by certain franchisees with the potential for multi-unit development. See "Use of Proceeds", "Business-- Acquisition of the Microtel and Hawthorn Suites Systems" and "--Special Programs". Voting Rights Shares of Class A Common Stock have one vote per share, while shares of Class B Common Stock have ten votes per share. The Class B Common Stock, the holders of which have effective control of the Company, is voted only by Messrs. Leven and Aronson. Class B Common Stock is convertible into Class A Common Stock on a share-for-share basis and, with limited exceptions, will automatically convert into Class A Common Stock upon transfer. The Class B Common Stock is not being offered by this Prospectus. See "Risk Factors--Control by Management and Anti-Takeover Effect of Dual Classes of Stock", "Description of Capital Stock--Common Stock" and "Principal Stockholders--Management's Shares of Common Stock". Nasdaq National Market symbol USFS </TABLE> SUMMARY FINANCIAL AND OTHER DATA The following table sets forth consolidated financial information for the Company and its subsidiaries as of December 31, 1995 and June 30, 1996, for the period from August 28, 1995, the date of the Company's inception, to December 31, 1995 and for the six months ended June 30, 1996. The table includes operating data for the Company since its inception and should be read in conjunction with the Consolidated Financial Statements and related Notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations", which are contained elsewhere in this Prospectus. <TABLE> <CAPTION> Period from August 28, 1995 to Six Months Ended December 31, 1995 June 30, 1996 ------------------ ---------------- (In thousands of dollars, except share and per share data) <S> <C> <C> Statement of Operations Data: Revenues $ -- $ 395 Operating expenses 1,327 3,849 Operating loss 1,327 3,454 Interest income 195 331 Interest expense 36 72 Net loss 1,168 3,195 Loss applicable to common stockholders 1,645 4,033 Net loss applicable to common stockholders per share (1) 0.15 0.38 Weighted average number of common shares outstanding (2) 10,755,409 10,755,409 Balance Sheet Data (at period end): Working capital $ 13,265 $ 8,029 Total assets 18,072 19,027 Total liabilities 1,845 5,992 Redeemable Preferred Stock 16,759 17,597 Redeemable Common Stock 330 330 Stockholders' deficit 862 4,892 </TABLE> - ------------- (1) Based upon 8,047,490 shares of Class A Common Stock and 2,707,919 shares of Class B Common Stock outstanding after the Reclassification but before the Offering. (2) Includes 3,186,294 shares of Class A Common Stock that are redeemable under certain circumstances by the Company for reasons not under the Company's control. See "Principal Stockholders--Management's Shares of Common Stock". Franchised Hotels <TABLE> <CAPTION> Microtel(1) Hawthorn Suites (2) -------------------------------------- ------------------------------------- As of As of As of As of December 31, 1995 September 30, 1996 December 31, 1995 September 30, 1996 ------------------ ------------------ ----------------- ------------------ <S> <C> <C> <C> <C> Properties Open 23 27 17 18 Properties Under Construction 0 7 0 2 Executed Franchise Agreements 3 145 0 5 Franchise Applications Accepted (3) 10 74 0 16 </TABLE> - ------------- (1) The Company will not receive royalties from the 23 Microtels open as of December 31, 1995 and from 26 of the 27 Microtels open as of September 30, 1996, but does receive marketing fees from the franchisees of these properties. See "Business--Microtel" and "Business--Acquisition of the Microtel and Hawthorn Suites Systems". (2) The Company will not receive royalties from the 17 Hawthorn Suites hotels open as of December 31, 1995 and the 18 Hawthorn Suites hotels open as of September 30, 1996, but does receive reservation and marketing fees from the franchisees of these properties. See "Business--Hawthorn Suites" and "Business-- Acquisition of the Microtel and Hawthorn Suites Systems."
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+PROSPECTUS SUMMARY The following summary information is qualified in its entirety by reference to, and should be read in conjunction with, the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. Prospective investors should carefully consider all of the information in this Prospectus. The Company was formed to act as a holding company for four operating subsidiaries: SeaVision, Inc., PhotoWave, Inc., SportsWave, Inc. and Kent Consulting Group, Inc. See "Background." Simultaneously with the closing of the Offering, the Company will acquire the sports marketing business of International Sports Marketing, Inc., a Pennsylvania corporation ("ISM"), in exchange for cash and certain future contingent payments (the "ISM Acquisition"), and will change the name of ISM to SportsWave, Inc. Simultaneously with the closing of the Offering, the Company will also acquire the software design and network solutions business of Kent Consulting Group, Inc., a California corporation ("KCG"), in exchange for cash, shares of Common Stock and certain future contingent payments (the "KCG Acquisition"). See "Background--The Acquisitions." Unless the context otherwise requires, all references herein to the "Company" mean Allin Communications Corporation, a Delaware corporation, and its subsidiaries. Unless otherwise indicated, all information in this Prospectus assumes that the over-allotment option granted to the Underwriters will not be exercised. THE COMPANY Allin Communications Corporation (the "Company") provides customized interactive television ("ITV"), digital imaging and other communications and media services to users in the travel and leisure, sports marketing and promotion and other industries. These services are provided principally through the use of the Company's proprietary interactive communications platform which was created to run on the Microsoft Windows NT operating system. The platform includes a multimedia digital file server and Windows-based software applications, and features high resolution and animated graphics, compressed full motion video, superior quality audio and flexible input capacity. Unlike many other ITV platforms, the Company's platform features rapid response and real time interfacing with a variety of third party systems permitting the immediate execution and confirmation of transactions. The platform, which received an applications development award from Microsoft in 1995, can provide its media and imaging services over a variety of network architectures, including the Internet, telephone and cable television systems, and other public and private communications networks. The Company maintains a constant focus on creating ITV design features that emphasize ease of use and eye- catching graphics. THE INTERACTIVE TELEVISION SYSTEM The Company's ITV system offers customers a variety of interactive services through 18 separate system modules. Among the pay services that can be offered are video-on-demand, music-on-demand, shopping, games of chance, event ticketing and customized photographs using digital imaging technology. Free-to- user services include informational messages, account review and room service. While free services do not currently provide revenue, they enhance the usefulness of the system, afford the Company a competitive advantage in marketing its system, attract users to other services offered on the Company's system and provide potential sources of additional revenue from sponsorship of various services by advertisers and from transaction fees. The ITV system can also serve as a response-based marketing vehicle that can target specific audiences for potential advertisers and can make available to service providers a variety of other services, including activity reports and market research. The Company's ITV system permits a user to access the transactional and other services offered on the system by using a handheld television remote control to make selections from easy-to-use menus on a television screen that may be located in a user's cruise ship cabin, hotel room or other individual station, or in a centrally located kiosk. Users can limit access to various pay services by utilizing lock out codes and password procedures. The system currently operates in six languages: English, Spanish, French, Italian, German and Portuguese. MARKETS AND APPLICATIONS Revenue from the domestic ITV service and advertising market increased from approximately $252 million in 1992 to $866 million in 1995. This revenue resulted primarily from the delivery of a limited number of interactive services, predominantly on-demand movies. The Company believes that it is one of the first to market a fully operational ITV system which is capable of providing multiple interactive services. While the Company's ITV service and advertising market share is currently insubstantial (less than one percent), the Company believes that the capabilities of its ITV system, the existing contracts for the installation and operation of its ITV system and the proceeds to be realized from the Offering position the Company to increase its share of the market for ITV services and advertising. The Company initially marketed its ITV system to the travel and leisure industry, principally the international cruise ship industry, which the Company believes provides a substantial market opportunity for its ITV system and related services. Through its wholly owned subsidiary, SeaVision, Inc. ("SeaVision"), the Company has installed and operates its ITV system on three cruise ships operated by Celebrity Cruises Inc. ("Celebrity"), Carnival Cruise Lines ("Carnival") and Norwegian Cruise Lines ("NCL"), respectively. As of September 30, 1996, SeaVision had entered into contracts to install and operate its system on five additional Celebrity cruise ships, one additional NCL ship and two ships operated by Royal Caribbean Cruise Line ("RCCL"), and Carnival had exercised an option to have the Company's system installed on one additional ship. Based on its historical and projected installation schedules, the Company anticipates completion of six of these installations by December 31, 1996, which will result in the ITV system being operational on nine ships with approximately 8,200 cabins. The Company's contracts with Carnival, NCL and RCCL provide Carnival, NCL and RCCL with the option of having SeaVision install and operate its ITV system on up to eleven, four and two additional cruise ships, respectively, and the Company is currently pursuing negotiations with various other cruise lines to install its system on up to 26 additional vessels. Based on its historical and projected installation schedules, the Company believes that if it obtains firm contracts for 13 additional installations, either through the exercise of cruise line options or through the acquisition of additional contracts, the Company would have its systems installed and operational on 25 ships by December 31, 1997. There can be no assurance, however, that any option will be exercised or that any additional contracts will be acquired or, if additional firm contracts are secured, that unforeseen delays in installation will not occur. SeaVision's in-cabin ITV system provides cruise passengers with a variety of services, including casino video gaming, on-demand pay-per-view movies, shopping, shore excursion ticket purchasing and room service ordering. The system also can be used by passengers to preview and purchase photographs taken by the ship's photographers during their voyage, and to customize photos with special graphic overlays, borders and backgrounds. SeaVision and Eastman Kodak Company ("Kodak") have entered into a market trial agreement for the operation of this service on three ships fitted with SeaVision's ITV system. As of August 1, 1996, SeaVision's ITV system had been utilized on over 366,000 occasions, or an average of 5,000 sessions per week per ship, by passengers on board the three ships currently equipped with the system, resulting in what the Company believes represents a multiple service application of interactive television larger than any in the United States. SeaVision's system can also be utilized for advertising on behalf of retailers, corporate sponsors and other third parties and for gathering data and disseminating information by cruise operators. The Company is actively seeking to market its services in other industries and niche markets in which its technology may afford a competitive advantage. Through SeaVision, the Company has begun to offer additional services to the cruise industry and is currently providing shipboard systems integration services aboard the Queen Elizabeth 2 ("QE2") operated by Cunard Line Limited ("Cunard") and is also pursuing other shipboard systems integration contracts. SeaVision is also marketing to the hotel and resort industry an ITV system offering guest services that include not only on-demand pay-per-view movies but also other services not typically provided, including high-speed Internet access through the hotel's television system. Through its wholly owned subsidiary, PhotoWave, Inc. ("PhotoWave"), the Company intends to market a turnkey package of digital imaging services to industries dependent on conventional "wet" photography, including the real estate, insurance and commercial photography industries. The Company and District Photo, Inc. ("District Photo"), a major mail order photo finisher, have agreed in principle to certain cooperative arrangements with respect to the Company's digital imaging technology. The Company's wholly owned subsidiary, SportsWave, Inc. ("SportsWave"), intends to use the platform to expand the existing sports marketing capabilities of ISM, which has exclusive worldwide marketing rights with the Major League Baseball Players Alumni Association ("MLBPAA") and significant relationships with former athletes in other professional sports. The Company also intends to continue to operate KCG's software design and network solutions business. STRATEGY To achieve its goal of becoming a leader in the processing and distribution of ITV and digital imaging services, the Company's strategy is (i) to expand its presence in the travel and leisure industry by (a) completing the installation of ITV systems on ships for which the Company has firm contracts, (b) seeking additional commitments from cruise line operators for the installation and operation of ITV systems, (c) adding new applications to its platform to maintain its competitive position within the cruise industry, (d) expanding its shipboard systems integration business and (e) extending the use of its platform to other segments of the travel and leisure industry, including hotels and resorts; (ii) to develop its digital imaging business by marketing, through PhotoWave, digital imaging services to niche markets currently dependent on conventional photography; (iii) to expand the sports marketing business of ISM by marketing, through SportsWave, new applications for the Company's platform directed at promoters of sporting events and corporate sponsors and spectators at such events; (iv) to utilize KCG's technical and creative expertise to further develop the Company's digital platform and to provide third party software design and network solutions; (v) to engage from time to time in acquisitions of businesses and the development of joint venture relationships that offer opportunities to complement or expand the Company's ITV and other capabilities and the marketing of such capabilities; and (vi) to supply specialized software and creative program enhancements to mass market providers of interactive communications and digital imaging services, such as cable television and telephone companies. BACKGROUND The Company was formed in July 1996 to act as a holding company for four operating subsidiaries: SeaVision, PhotoWave, SportsWave and KCG. The Company's principal offices are located at 300 Greentree Commons, 381 Mansfield Avenue, Pittsburgh, Pennsylvania 15220, and its telephone number is (412) 928-8800. SEAVISION SeaVision was formed in June 1994 to focus on the development of an interactive digital platform and the installation and operation of interactive television systems in the travel and leisure industry. Henry Posner, Jr. and Thomas D. Wright, who currently own more than ten percent of the outstanding Common Stock, Richard W. Talarico, a director and executive officer of the Company, and James C. Roddey, a director of the Company, were among the founding stockholders of SeaVision and are stockholders of the Company. They are affiliated with The Hawthorne Group, a private investment and management company whose principals have had investments in diversified media and communications businesses, including television and radio broadcasting, cable, outdoor advertising, paging and video production. Certain stockholders of SeaVision and an entity affiliated with such stockholders contributed to SeaVision certain intellectual property rights relating to the technology utilized by SeaVision. In addition, the founders of SeaVision were reimbursed for expenses incurred by them in forming and organizing SeaVision. See "Certain Transactions--Transactions Relating to the Formation and Organization of SeaVision." In August 1996, SeaVision became a subsidiary of the Company by merging into SeaVision Acquisition Corporation, a newly formed subsidiary of the Company which changed its name to SeaVision, Inc. See "Certain Transactions--Transactions Relating to the Formation and Organization of the Company." PHOTOWAVE In August 1996, PhotoWave was formed as a subsidiary of the Company to continue the development and marketing of the Company's digital imaging business. THE ACQUISITIONS Simultaneously with, and conditioned upon, the closing of the Offering, the Company will acquire the sports marketing business of ISM, which has been in operation since 1989 and which will change its name to SportsWave, Inc. following the acquisition, and the software design and network solutions business of KCG, which, including a predecessor business, has been in operation since 1983. ISM and SeaVision have been exploring and continue to explore applications of SeaVision's ITV system and interactive platform for the sports marketing and promotions industry and have cooperated in various sports marketing ventures. Since 1994, KCG has assisted SeaVision with many aspects of the development of its ITV system. The acquisitions of ISM and KCG by the Company present opportunities for these companies to combine their resources, talents and capabilities. ISM Acquisition The ISM Acquisition is being made pursuant to a stock purchase agreement (the "ISM Stock Purchase Agreement") providing for the acquisition by the Company of all of the issued and outstanding shares of capital stock of ISM. The ISM Stock Purchase Agreement provides for the payment of up to $4.8 million by the Company to the ISM stockholders, consisting of $2.4 million in cash at the time of closing of the ISM Acquisition and up to $2.4 million in contingent payments based on the operating income of ISM for the years 1997, 1998 and 1999, calculated as set forth in the ISM Stock Purchase Agreement, and paid pursuant to a formula more fully described under "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." At the closing of the ISM Acquisition, Henry Posner, Jr., Thomas D. Wright, Richard W. Talarico and James C. Roddey, each a stockholder of ISM as well as a stockholder, officer and/or director of the Company, will receive cash payments in amounts of approximately $1,273,000, $791,000, $48,000 and $120,000, respectively, and will be entitled to receive contingent payments up to the same approximate amounts (not including interest payable on any promissory note delivered in respect of the contingent payments). See "Certain Transactions," "Management" and "Principal Stockholders." KCG Acquisition The KCG Acquisition is being made pursuant to an agreement and plan of merger (the "KCG Merger Agreement") providing for the merger of KCG with and into a wholly owned subsidiary of the Company. The KCG Merger Agreement provides for consideration to Les Kent, the sole stockholder of KCG, of up to $8.0 million, consisting of $2.0 million in cash at the time of closing of the KCG Acquisition, $3.2 million in Common Stock valued at the initial public offering price in the Offering and up to $2.8 million in contingent payments, the amount of which would be based on the operating income of KCG for the years 1997, 1998 and 1999, calculated as set forth in the KCG Merger Agreement, and paid in the manner more fully described under "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources." Additionally, certain restricted stock grants totaling $400,000, which will not vest until the third anniversary of the KCG Acquisition, will be made to various employees of KCG. The sole stockholder will have certain registration rights with respect to the shares of Common Stock issued in the merger. See "Certain Transactions--Registration Rights." THE OFFERING <TABLE> <S> <C> Common Stock Offered Hereby(1)............. 2,000,000 shares. Common Stock Currently Outstanding......... 2,400,000 shares. Common Stock to be Outstanding After this Offering(1)(2)....................... 4,884,065 shares. Use of Net Proceeds........................ To repay accrued interest on indebtedness, to acquire ISM and KCG and for capital expenditures. See "Use of Proceeds." NASDAQ Stock Market National Market symbol. "ALLN." </TABLE> - -------- (1) Excludes 300,000 shares of Common Stock that may be issued pursuant to the Underwriters' over-allotment option. See "Underwriting."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001020503_offshore_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001020503_offshore_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED HEREIN, THE INFORMATION CONTAINED IN THIS PROSPECTUS (I) GIVES EFFECT TO THE COMBINATION (THE "COMBINATION") OF CERTAIN OPERATIONS DESCRIBED UNDER "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- OVERVIEW" AND (II) ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED. UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES HEREIN TO THE "COMPANY" OR "OEDC" SHALL MEAN OFFSHORE ENERGY DEVELOPMENT CORPORATION AND THE CORPORATIONS AND PARTNERSHIPS CONSOLIDATED THEREIN, AND THEIR RESPECTIVE PREDECESSORS, ON A CONSOLIDATED BASIS. CERTAIN TERMS USED HEREIN RELATING TO THE OIL AND GAS INDUSTRY ARE DEFINED IN THE "GLOSSARY OF CERTAIN OIL AND GAS TERMS" INCLUDED ELSEWHERE IN THIS PROSPECTUS. THE COMPANY Offshore Energy Development Corporation is an independent energy company that focuses on the acquisition, exploration, development and production of natural gas and on natural gas gathering and marketing activities. The Company's integrated operations are conducted in the Gulf of Mexico, primarily offshore Alabama and Louisiana. The Company has established strategic alliances with several major energy companies to conduct exploration and development activities and to construct and operate a natural gas gathering system and a natural gas processing plant. Management believes these relationships and its experience in its core area of operations provide the Company with unique growth opportunities. EXPLORATION AND DEVELOPMENT The Company has interests in 21 lease blocks, all of which are operated by the Company. On 14 of these blocks, the Company plans to connect eight existing wells to production platforms and to drill five exploratory prospects and three proved undeveloped locations by the end of 1997. The Company's estimated capital expenditure budget for these activities from November 1, 1996 through December 31, 1997 is $34 million. The Company plans to finance a majority of these expenditures from the proceeds of this Offering, with the balance to be financed from cash flow from operations and, to the extent necessary, borrowings under the Company's existing line of credit. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Capital Expenditures and Future Outlook." From January 1 through October 7, 1996, the Company drilled and completed four exploratory wells offshore Alabama and offshore Louisiana. The Company has drilled a fifth exploratory well offshore Alabama that was logged in October. The one well drilled offshore Louisiana is currently producing and the Company anticipates that construction of necessary production facilities offshore Alabama and connection of the Alabama wells to such facilities will be completed by the end of the first quarter of 1997. In October 1996, the Company acquired a majority interest in North Padre Island Block A-59 in federal waters offshore Texas. As part of the acquisition, the Company acquired a platform with two wells, a satellite well and a flowline to an interstate pipeline. Prior to the end of 1996, the Company intends to drill two new platform wells with dual completions in shallow Miocene sands under this property. See "Business and Properties -- Exploration and Development." As of January 1, 1996, the Company had net proved natural gas reserves, as estimated by Ryder Scott Company ("Ryder Scott"), of 20.3 Bcfe attributable to 11 gross (7.30 net) wells offshore Alabama and Louisiana. From January 1 through October 7, 1996, the Company drilled and completed four exploratory wells, completed the purchase of an interest in North Padre Island Block A-59 and shot a proprietary seismic survey over its one block offshore Mississippi. Based on a reserve report prepared by Ryder Scott dated October 7, 1996, these activities have added 14.87 Bcf of estimated net proved reserves attributable to the Company's interests after giving effect to the increase in the Company's interest in the four wells that will occur through the application of the net proceeds of this Offering. See "Use of Proceeds." Although no assurance may be given, the Company's experience under similar circumstances has been that additional reserves will be attributed to its interests in all such properties once production history has been established. In October 1996, the Company entered into a joint venture agreement with a subsidiary of Amoco Corporation ("Amoco") pursuant to which the Company will evaluate proprietary 3-D seismic data to identify prospects for joint exploration and development by the parties on approximately 59,000 contiguous acres covering portions of 23 lease blocks in the Gulf of Mexico. Of this total, approximately 14,000 acres are currently leased by the Company or Amoco. Costs of drilling and development on existing leases would be shared 75% by the owner of the lease being drilled and 25% by the other party; such costs will be shared equally on newly acquired leases. The Company will be the operator of any prospects drilled under this agreement. Unless renewed by mutual consent, the agreement terminates on October 1, 1997. See "Business and Properties -- Exploration and Development." NATURAL GAS GATHERING The Company operates the Dauphin Island Gathering System ("DIGS") as a 95-mile non-jurisdictional pipeline system offshore Alabama with a current capacity of 400 MMcf/d. The DIGS, which the Company began developing in 1990, is the primary open-access gas gathering system in federal waters serving the Mobile, Viosca Knoll and Destin Dome areas of the Gulf of Mexico. In early 1996, the Company sold its 24% limited partnership interest in Dauphin Island Gathering Partners ("DIGP"), the partnership that owns the DIGS, for $19.1 million, and retained a one percent general partnership interest. The Company realized a pre-tax profit of $10.8 million on the sale. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The current partners in DIGP are the Company and subsidiaries of MCN Corporation ("MCN") and PanEnergy Corp ("PanEnergy"). The Company's one percent interest in DIGP will increase to 15% (subject to reduction in certain circumstances) when each of MCN and PanEnergy receives the return of its investment plus a 10% rate of return, subject to certain other conditions (collectively, "DIGP Payout"). See "Business and Properties -- Natural Gas Gathering -- Current Operations." The Company and its DIGS partners recently announced a planned 65-mile extension of the DIGS to gather new production that currently lacks adequate transportation outlets. An additional planned 1997 expansion of the DIGS would create separate dry gas and wet gas gathering systems with a combined capacity of approximately 900 MMcf/d. In September 1996, DIGP signed a nonbinding letter of intent with Main Pass Gathering Company ("MPGC") to combine MPGC's Main Pass Gathering System ("MPGS") with the DIGS. See "Business and Properties -- Natural Gas Gathering," "Business and Properties -- Natural Gas Processing" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Capital Expenditures and Future Outlook." NATURAL GAS PROCESSING In August 1996, the Company entered into an agreement to form a partnership with MCN and PanEnergy for the construction and development of a natural gas liquids ("NGL") plant onshore Alabama. This plant will be constructed in stages and when completed is expected to have a capacity of 900 MMcf/d. The plant would be the first NGL plant in Alabama available for processing existing Mobile area production and would be available to process additional volumes from the Main Pass and Viosca Knoll areas of the Gulf of Mexico. The total cost of this plant is estimated by the Company to be $90 million. The Company will initially have a one percent cost and revenue interest in the partnership. In addition, the Company will acquire from MCN and PanEnergy for $200,000 an option to purchase up to an additional 32 1/3% interest in the partnership during the first three years of plant operations for 32 1/3% of the depreciated book value of the plant, increased by 12% each year. See "Business and Properties -- Natural Gas Processing." BUSINESS STRATEGY The Company's objective is to enhance stockholder value through sustained growth in revenue, earnings and operating cash flow from increases in natural gas and oil reserves and production and development of related downstream projects. The Company intends to achieve its objective by pursuing the following key strategies: o CAPITALIZE ON INTEGRATED NATURAL GAS OPERATIONS. OEDC has operations in all phases of the production, gathering, and marketing of natural gas. OEDC believes this integrated approach has provided the Company access to information not otherwise widely available regarding regional reserve development; flexibility in achieving favorable volumes and prices on gas sales; the opportunity to initiate downstream projects on terms attractive to the Company; and diversification of revenue streams. o DEVELOP AND EXPAND PROSPECT INVENTORY. The Company believes that its reserve growth will come primarily from drilling activity rather than through acquisitions of producing reserves. The Company has accumulated approximately 21,000 gross (19,000 net) producing acres with additional exploitation potential. Additionally, the Company has approximately 92,000 gross undeveloped acres which, after giving effect to the increase in the Company's interest in four wells that will occur through the application of the net proceeds of this Offering, will represent approximately 66,000 net undeveloped acres. See "Use of Proceeds." Joint ventures, other strategic alliances and acquisitions of acreage with development potential are being pursued in order to generate additional post-1997 drilling inventory. o DEVELOP STRATEGIC ALLIANCES. The Company intends to continue to form strategic alliances with substantial energy companies, which have historically given the Company access to the financial strength, property inventories, marketing presence and other resources of such companies. The Company has traditionally managed projects with strategic partners from conceptualization through planning, implementation and operation. The Company has successfully managed joint developments with affiliates of major energy companies, such as Amoco, British Petroleum, Enron Corp., Tenneco, Inc., MCN, Mobil Corporation and PanEnergy. o ACTIVELY MANAGE DRILLING RISK. The Company primarily targets geophysically defined natural gas prospects with associated hydrocarbon indicators. The Company uses computer aided exploration analysis and proprietary 3-D and high resolution 2-D seismic data to better determine the likelihood of encountering hydrocarbons and more closely estimate the extent of reservoirs. During the drilling of wells, the Company interactively correlates geophysical data on seismic workstations with real-time well-logging techniques, such as measurement-while-drilling and magnetic resonance imaging, to improve its accuracy in defining and evaluating oil and gas reservoirs. As a result of this approach, the Company has completed 24 of the 25 wells it has drilled since 1988. o PURSUE OPERATING EFFICIENCIES. The Company generally initiates and manages projects and prefers to maintain majority ownership in order to improve project returns. The Company has reduced the time between capital expenditure and revenue generation by the use of refurbished platforms and equipment, and off-the-shelf designs and components and by simultaneously conducting exploration and construction. The Company has also reduced development costs by the cluster development of neighboring properties and the use of slim hole and splitter technology. The Company is committed to maintaining low operating overhead by outsourcing many technical and field functions, rather than developing in-house capabilities. o MAINTAIN GEOGRAPHIC FOCUS. The Company has focused its exploration and development efforts in relatively concentrated areas of the Gulf of Mexico. This geographic focus has enabled the Company to build and utilize a base of geological, geophysical, engineering and production experience in its focus areas. The Company believes this discipline enhances its ability to identify, evaluate and prioritize drilling prospects and other ancillary business opportunities in its areas of operation.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001020716_intellisyn_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001020716_intellisyn_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..918dbef4b23795d377d86fc4c7eb8a08cefcbd33
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001020729_alanex_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001020729_alanex_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b69158f00a294ed15caad5c290733fe66ca015be
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus assumes (i) the Underwriters' over-allotment option will not be exercised and (ii) the reincorporation of the Company in the State of Delaware. Investors should carefully consider the information set forth under the heading "Risk Factors." This Prospectus contains forward-looking statements that involve certain risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors" and elsewhere in this Prospectus. THE COMPANY Alanex Corporation ("Alanex" or the "Company") is a drug discovery company that is applying its highly integrated and comprehensive approach to rapidly and cost-effectively discover and optimize novel, small molecule drug candidates. The Company's proprietary core drug discovery technology, Pharmacophore Directed Parallel Synthesis ("PDPS"), accelerates the steps necessary to discover small molecule drug candidates, from the initial identification of compounds that exhibit activity against selected biological targets to the progression of these compounds to drug candidates for human clinical trials. PDPS combines combinatorial chemistry with computational and medicinal chemistries which, when used in conjunction with high throughput screening and pharmacology, form an integrated drug discovery platform that can be broadly applied to a wide array of biological targets. An important element of the Company's strategy is to enter into collaborations with pharmaceutical companies. Alanex has collaboration agreements with Astra Pharma, Inc. ("Astra Pharma"), Novo Nordisk A/S ("Novo Nordisk") and Roche Bioscience, a division of Syntex (U.S.A.) Inc., a wholly owned subsidiary of Roche Holding Ltd. ("Roche Bioscience"). To date, Alanex has used PDPS to identify one preclinical drug development candidate for the treatment of pain and a number of lead compounds in four other programs that address diseases or conditions for which existing therapies are inadequate or unavailable, including diabetes, obesity, depression and anxiety. A major challenge for the pharmaceutical industry is the rapid and cost-effective identification of lead compounds and their subsequent development into drugs. Combinatorial chemistry -- which creates large libraries of molecules by generating combinations of chemical building blocks -- represents a significant advance in drug discovery technology, permitting the identification of lead compounds on a more rapid and cost-effective basis. The Company believes that a key factor in the successful application of combinatorial chemistry, however, is the diversity, not simply the number, of compounds comprising a combinatorial library. Alanex uses its proprietary library design software, LiBrain, to maximize the diversity of its exploratory library by selecting for synthesis compounds from Alanex's virtual library of over 140 million chemical structures. The Company's exploratory library is increasing at an average rate of 10,000 individual compounds per month and currently consists of over 150,000 synthesized compounds. Alanex believes that its ability to create a highly diverse library of individual molecules increases the likelihood of discovering lead compounds. The Company's drug discovery approach broadens the scope of combinatorial chemistry to include the transition from lead compound to drug candidate by making medicinal chemistry an integral part of the PDPS technology and by focusing on the synthesis of compounds with drug-like structures. Optimization of lead compounds into drug candidates can be accelerated by Alanex's ability to quickly design and synthesize thousands of derivatives of a lead compound and purify them using the Company's proprietary parallel chromatography technology. The Company's opiate agonist program, its most advanced drug discovery program, has produced compounds that, in preclinical models, act as potent, orally active analgesics with a novel mechanism of action for the treatment of pain. This program is being conducted on behalf of Astra Pharma and is in preclinical development. From initiation of this program to production of preclinical compounds required only 14 months. Alanex's diabetes programs, which are being pursued in conjunction with Novo Nordisk, focus on two distinct molecular targets and have produced active lead compounds for each target. Alanex's neuropeptide Y (NPY) antagonist program has produced active lead compounds for the potential treatment of obesity and cardiovascular disease. In addition, the Company's corticotrophin releasing factor (CRF) antagonist program has produced active lead compounds that are being evaluated for the treatment of depression and anxiety. Alanex recently initiated a project to discover drugs that inhibit the action of gonadotropin releasing hormone (GnRH) for the treatment of endometriosis and sex hormone-dependent tumors. Most recently, in collaboration with Roche Bioscience, Alanex initiated a project to discover an antagonist for an undisclosed target for the treatment for pain. Alanex intends to continue to develop in-house programs for the discovery of new drugs. The Company will also continue to seek corporate collaborations with major pharmaceutical companies in order to capitalize on the emerging trend in the pharmaceutical industry to outsource those components of drug discovery that can be more efficiently provided by firms with unique or focused technologies. The Company commenced operations as Alanex, L.P., a California limited partnership (the "Partnership"), in May 1991. In November 1993, the Partnership was converted into a California corporation. The Company intends to reincorporate in Delaware prior to the completion of this offering. The Company's principal executive offices are located at 3550 General Atomics Court, San Diego, California 92121, and its telephone number is (619) 455-3200. THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Company................... 2,500,000 shares of Common Stock, $.00l par value ("Common Stock") Common Stock to be Outstanding after the Offering..... 6,247,635(1) shares Use of Proceeds....................................... Research and development, facilities expansion and working capital and general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market Symbol................ ALNX </TABLE> - --------------- (1) Excludes 954,724 shares of Common Stock issuable upon exercise of options outstanding as of September 1, 1996 with a weighted average exercise price of $0.21 per share and 450,000 shares of Common Stock issuable upon exercise of an outstanding warrant at an exercise price of $1.51 per share. Also excludes up to 125,000 shares of Common Stock subject to an offering under the Company's Employee Stock Purchase Plan that will commence upon the date hereof. See Note 7 and Note 12 of Notes to Consolidated Financial Statements, "Management--Stock Option and Equity Incentive Plans," "Management--Stock Options Granted Outside of the 1993 Plan and the 1996 Plan," "Management -- Employee Stock Purchase Plan," "Description of Capital Stock--Warrants" and "Certain Transactions." SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ------------------------ --------------- 1993(1) 1994 1995 1995 1996 ------ ------ ------ ------ ------ <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Contract research revenue........................... $ 23 $ 50 $ 944 $ 382 $ 946 Contract research revenue from related party........ -- 1,440 2,565 1,215 1,275 Project initiation fees............................. -- 250 250 -- 2,000 Other revenue....................................... 6 16 7 -- 3 ------ ------ ------ ------ ------ Total revenue............................. 29 1,756 3,766 1,597 4,224 ------ ------ ------ ------ ------ Operating expenses: Research and development.......................... 816 2,181 3,685 1,522 2,274 General and administrative........................ 162 585 804 387 562 ------ ------ ------ ------ ------ Total operating expenses.................. 978 2,766 4,489 1,909 2,836 ------ ------ ------ ------ ------ Income (loss) from operations....................... (949) (1,010) (723) (312) 1,388 Interest income..................................... -- 97 180 84 79 Interest expense.................................... (31) (25) (168) (37) (105) Loss on sale of property and equipment.............. -- -- (49) -- -- ------ ------ ------ ------ ------ Income (loss) before income taxes................... (980) (938) (760) (265) 1,362 Income taxes........................................ (1) (1) (2) (2) (2) ------ ------ ------ ------ ------ Net income (loss)................................... $ (981) $ (939) $ (762) $ (267) $1,360 ====== ====== ====== ====== ====== Net income (loss) per share(2)...................... $(0.24) $(0.22) $(0.17) $(0.06) $ 0.30 ====== ====== ====== ====== ====== Number of shares used in computing net income (loss) per share(2)...................................... 4,012 4,364 4,504 4,464 4,545 </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 ------------------------- ACTUAL AS ADJUSTED(3) ------ -------------- <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and debt securities available for sale.......................... $4,343 $ 29,343 Total assets......................................................... 7,745 32,745 Long-term debt, less current maturities.............................. 3,716 3,716 Accumulated deficit.................................................. (444) (444) Total stockholders' equity........................................... 1,312 26,312 </TABLE> - --------------- (1) Includes operations of the Partnership. See "Certain Transactions." (2) For an explanation of the determination of the number of shares used in computing net loss per share, see Note 1 of Notes to Consolidated Financial Statements. (3) As adjusted to give effect to the sale of 2,500,000 shares of Common Stock in this offering assuming an initial public offering price of $11.00 per share (the midpoint of the range set forth on the cover page of this Prospectus) and receipt of the net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0001020786_cooper_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001020786_cooper_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8188c180c601bb22b1276a8e9826e69c2c9e24d2
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0001020786_cooper_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to, and should be read in conjunction with, the more detailed information and financial statements (including the notes thereto) appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus does not give effect to the exercise of (i) the Over-Allotment Option, (ii) the Warrants, (iii) the Bridge Warrants, (iv) the Representative's Unit Purchase Option, (v) options reserved for issuance under the Company's 1996 Stock Option Plan, (vi) 250,000 shares of Common Stock issuable upon exercise of certain warrants issued in connection with the Private Placement (the "Private Warrants") and (vii) the Acquisition Warrant (as defined below). THE COMPANY Cooper International Group, Inc. (the "Company") was recently organized to acquire, integrate and operate seasoned companies operating in the floorcoverings industry. Simultaneously with the closing of this offering, the Company will acquire (the "Acquisition") from TDA Industries, Inc. ("TDA") all of the issued and outstanding capital stock of Cooper Flooring International, Inc., a Florida corporation ("Cooper Florida"), for consideration consisting of 1,149,900 shares of Common Stock and a warrant (the "Acquisition Warrant") exercisable to purchase 250,000 (subject to adjustment) shares of Common Stock. Cooper Florida, founded in 1948, is engaged in the wholesale distribution of carpet, wood, laminate, ceramic tile and vinyl floorcoverings and padding and accessories throughout Florida, portions of Georgia and Alabama and, to a lesser extent, the Caribbean. Upon the consummation of the Acquisition, Cooper Florida will become a wholly-owned subsidiary of the Company and will constitute the sole operating business of the Company until such time, if any, as the Company consummates additional acquisitions. See "Business" and "Certain Transactions." The Company's strategy is to acquire, integrate and operate seasoned companies operating in the floorcoverings industry and to build an integrated company with the ability to source products domestically and internationally and to distribute products throughout North America and the Caribbean on a wholesale basis and as agent for various foreign manufacturers. The Company intends to provide expansion capital, if necessary, and administrative and management services to acquired companies, including Cooper Florida, in order to exploit the growth potential which management of the Company perceives in the floorcoverings industry and to assist such acquired companies to penetrate new markets. Although the Company does not currently have any agreements, arrangements or commitments in place with respect to any proposed acquisitions, other than the Acquisition, it believes that there are a number of potential acquisition candidates that may meet its criteria. While the Company intends to seek out prospective acquisition candidates in businesses that complement or are otherwise related to the business of Cooper Florida, the Company does not intend to restrict itself to any one particular industry segment and may attempt to acquire companies in industries unrelated to the core business of Cooper Florida. There can be no assurance that the Company will successfully identify and complete any acquisitions or that any acquisitions, if completed successfully, will be integrated successfully with the other operations of the Company, will perform as expected, will not result in significant unexpected liabilities or will ever contribute significant revenues or profits to the Company. The Company anticipates that it will finance future acquisitions, if any, through a combination of cash (including a substantial portion of the net proceeds of this offering), issuances of shares of capital stock of the Company, and additional equity or debt financings. There can be no assurance that the Company will be able to obtain additional equity or debt financing on terms acceptable to the Company or at all. The Company has and will continue to identify potential acquisition candidates through the industry contacts of the management of the Company and Cooper Florida, as well as through TDA and general business sources. See "Business-Strategy" and "Certain Transactions." The Company was incorporated in Delaware on April 4, 1996. The Company's executive office is located at 122 East 42nd Street, Suite 1116, New York, New York 10168 and its telephone number is (212) 986-6190. The Offering Securities offered by the Company ...... 1,000,000 Units, each Unit consisting of one share of Common Stock and one Warrant. See "Description of Capital Stock." Terms of Warrants....................... Each Warrant entitles the registered holder thereof to purchase one share of Common Stock at an initial exercise price of $6.00, subject to adjustment, for a period of three years commencing on the second anniversary of the date of this Prospectus. See "Description of Capital Stock - Warrants." Common Stock outstanding prior to this offering.......... 100 shares (1) after this offering ............ 2,150,000 shares (2)(3) Warrants outstanding prior to this offering.......... 2,000,000 Bridge Warrants after this offering............. 3,000,000 Warrants (4) Proposed Nasdaq symbols: Common Stock.................... Warrants........................ Use of proceeds......................... To finance acquisitions of privately- held companies operating in the floorcoverings industry and for working capital purposes, including general corporate purposes of the Company and for the working capital purposes of Cooper Florida. See "Use of Proceeds," "Capitalization" and "Certain Transactions." Risk Factors............................ An investment in the securities offered hereby involves a high degree of risk and immediate substantial dilution to the public investors. See "Risk Factors" and "Dilution." - ------------------------------- (1) Does not include (i) 2,000,000 shares of Common Stock issuable upon exercise of the Bridge Warrants at an exercise price of $6.00 per share, (ii) 250,000 shares of Common Stock issuable upon exercise of the Private Warrants at an exercise price of $1.00 per share, and (iii) 1,000,000 shares of Common Stock reserved for issuance upon the exercise of options available for grant under the Company's 1996 Stock Option Plan of which options to purchase 450,000 shares of Common Stock will be issued upon the closing of this offering but will not be exercisable until at least one year from the date of the closing of this offering. See "Management - Stock Option Plan," "Description of Capital Stock," "Underwriting" and "Shares Eligible for Future Sale." (2) Does not include (i) 1,000,000 shares of Common Stock issuable upon exercise of the Warrants, (ii) 2,000,000 shares of Common Stock issuable upon exercise of the Bridge Warrants, (iii) 250,000 shares of Common Stock issuable upon exercise of the Private Warrants, (iv) 250,000 shares of Common Stock issuable upon exercise of the Acquisition Warrant, (v) 100,000 shares of Common Stock and 100,000 shares of Common Stock underlying Warrants contained in the Unit Purchase Option, (vi) up to 150,000 shares of Common Stock reserved for issuance pursuant to the Over-Allotment Option and (vii) 1,000,000 shares of Common Stock reserved for issuance upon the exercise of options available for grant under the Company's 1996 Stock Option Plan of which options to purchase 450,000 shares of Common Stock will be issued upon the closing of this offering but will not be exercisable until at least one year from the date of the closing of this offering. See "Management - Stock Option Plan," "Description of Capital Stock," "Underwriting" and "Shares Eligible for Future Sale." (3) Includes 1,149,900 shares of Common Stock to be issued to TDA simultaneously with the closing of this offering in connection with the Acquisition. See "Certain Transactions." (4) Includes 2,000,000 Bridge Warrants. Upon the consummation of this offering, the terms and conditions of the Bridge Warrants will automatically convert to the terms and conditions of the Warrants offered hereby. Does not include Warrants comprising a part of the Over-Allotment Option, the Private Warrants, the Acquisition Warrant, or the Representative's Unit Purchase Option. Summary Financial Data (in thousands, except share and per share data) <TABLE> <CAPTION> Nine Months Ended Year Ended June 30, March 31, ------------------- ------------------ 1995 1994 1993 1992 1991 1996 1995 ---- ---- ---- ---- ---- ---- ---- STATEMENT OF OPERATIONS DATA (1): <S> <C> <C> <C> <C> <C> <C> <C> Revenues ........................... $ 29,547 $ 28,020 $ 30,900 $ 25,391 $ 24,329 $ 22,910 $ 22,140 Gross Profit ....................... 6,207 5,582 6,271 5,105 4,830 5,070 4,645 Operating Income (Loss) ............ 55 141 495 (263) (856) 176 58 Net Income (Loss) .................. 31 316 484 (203) (632) 109 38 Pro Forma Net Income Per Share ..... $ .02 $ .07 $ .02 ========== ========== ========== Pro Forma Weighted Average Number of Shares Outstanding(2) .............. 1,559,090 1,559,090 1,559,090 ========== ========== ========== </TABLE> <TABLE> <CAPTION> June 30, 1995 March 31, 1996 --------------- ------------------------------------- Actual As Adjusted(3) Pro Forma(4) ------ -------------- ------------ <S> <C> <C> <C> <C> Balance Sheet Data (1): Working Capital ............................... $4,668 $4,607 $4,562 $ 9,169 Total Assets .................................. 7,195 7,739 4,562 12,301 Long-term Debt ................................ 152 374 -- 374 Stockholders' Equity .......................... 4,755 4,500 4,562 9,062 </TABLE> - -------------------------- (1) Actual operating and balance sheet data was derived from the financial statements of Cooper Florida, because the Company was organized in April 1996 and has conducted no business activities to date. (2) The pro forma weighted average number of shares outstanding includes the 100 shares of Common Stock issued in connection with the Company's initial capitalization, 1,149,900 shares to be issued to TDA in connection with the Acquisition and the dilutive effect of the Acquisition Warrant and the Private Warrants. See "Certain Transactions"
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001020882_iron_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001020882_iron_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..79cfffa03d24a8713cd8f692794507f22b44abb7
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this Prospectus. References to "Iron Mountain" and the "Company" include Iron Mountain Incorporated (including predecessor entities) and its consolidated subsidiaries, unless the context otherwise requires. THE COMPANY Iron Mountain is the largest records management company in the United States, as measured by revenues. The Company is a full-service provider of records management and related services, enabling customers to outsource records management functions. Pro forma for the Acquisitions (as defined herein), as of June 30, 1996, the Company managed approximately 29.6 million Cartons* in 103 records centers in 33 markets nationwide. The Company has a diversified base of over 19,000 customer accounts, which includes more than half of the Fortune 500 and numerous legal, banking, healthcare, accounting, insurance, entertainment and government organizations. The Company provides storage and related services for all major media, including paper (which is the dominant form of records retention and which has accounted for approximately 85% of the Company's revenues since 1992), computer disks and tapes, microfilm and microfiche, master audio and video tapes, film and optical disks, X-rays and blueprints. The Company's principal services include filing, retrieval and destruction of records, courier pick-up and delivery, database management and customized reporting. The Company also sells storage materials and provides consulting and other records-related services. The Company continues to capitalize on its leading position in the records management industry and the industry trends of increased records retention, outsourcing of records management and vendor consolidation. As a result, the Company has achieved significant increases in revenues and EBITDA (as defined herein). From 1991 to 1995, Iron Mountain's total revenues increased from $62.8 million to $104.4 million primarily from internal growth, representing a compound annual growth rate ("CAGR") of 13.5%. During the same period, storage revenues grew at a 12.9% CAGR while service and storage material sales revenues grew at a 14.6% CAGR. From 1991 to 1995, the Company's EBITDA grew from $15.0 million to $26.1 million, representing a 14.9% CAGR. Revenues and EBITDA for the six months ended June 30, 1996 increased 27.3% (10.2% from internal growth and 17.1% from acquisitions) and 24.8%, respectively, over the same period in 1995. For a discussion of the significance of EBITDA and other measures of the Company's performance determined in accordance with generally accepted accounting principles ("GAAP") and the Company's sources and applications of cash flow, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview" and "--Liquidity and Capital Resources." Industry Overview According to industry sources, organizations in the United States generate an estimated four trillion documents each year, many of which must be retained and remain available for reference for many years. These records may be generally divided into two categories: active and inactive. Inactive records, which are the principal focus of the records management industry, consist of records that are not needed for immediate access but which must be retained for legal or regulatory reasons or for occasional reference to support ongoing business operations. Based on industry studies, the Company believes that inactive records make up approximately 80% of all records. The Company believes that the volume of inactive records is increasing for a number of reasons, including: (i) the rapid growth of inexpensive document producing technologies such as facsimile, desktop printing and computer networking; (ii) increased regulatory requirements; (iii) concerns over possible future litigation and the resulting increases in volume and holding periods of documentation; (iv) the high cost of reviewing records and deciding whether to retain or destroy them; and (v) the failure of many entities to adopt or follow policies on records destruction. Despite the growth of new "paperless" technologies, such as the Internet and e-mail, management believes that stored information remains predominantly paper-based and that such technologies have promoted the creation of hard copies of such electronic information. - ------------- * The term "Carton" is defined as a measurement of volume equal to a single standard storage carton, approximately 1.2 cubic feet. The number of Cartons stored does not include storage volumes in the Company's vital records services and data protection services, which are described under "Business." The Company believes that it benefits from several industry fundamentals, including: (i) the historically non- cyclical nature of the records management industry; (ii) the continued trend towards corporate outsourcing of records management functions; (iii) the ability of larger records management companies to achieve economies of scale with respect to labor, real estate costs and the utilization of management information systems; and (iv) the ongoing consolidation of the records management industry. The Company believes that it is one of only four records management providers with a national operating presence, the balance being regional or, in most instances, single-city operators. According to the Association of Commercial Records Centers (the "ACRC"), a trade group of approximately 500 members, as of January 1994 (the latest date for which such information is available), approximately 2,600 firms offered records storage and management services in the United States. The Company believes that there is a trend toward consolidation in the records management industry and that such trend will continue to accelerate primarily because of: (i) the opportunities to achieve economies of scale; (ii) the industry's capital requirements for growth; (iii) customer demands for more sophisticated technology-based solutions; and (iv) the preference of certain large, national customers to outsource a significant portion of their records management functions to one vendor with a national presence, such as Iron Mountain. Financial Characteristics of Iron Mountain's Business Iron Mountain's records management business has the following financial characteristics: (bullet)Recurring Revenues. Iron Mountain derives a majority of its revenues from fixed periodic (usually monthly) fees charged to customers for storage of records. Storage revenues have grown for 30 consecutive quarters and have represented approximately 60% of the Company's total revenues in each of the last five years. Once a customer places a record in storage with the Company and until that record is destroyed or permanently removed (for which the Company typically receives a service fee), the Company receives recurring payments of fixed periodic fees without incurring additional labor or marketing expenses or significant capital costs. The stable and growing storage base also provides the foundation for increases in revenues and EBITDA from service activities and sales of storage materials. (bullet)Historically Non-Cyclical Business. Iron Mountain has not experienced a reduction of its business as a result of past general economic downturns, although there can be no assurance that this would be the case in the future. Management believes that the outsourcing of records management may accelerate during economic downturns as companies focus on reducing costs through outsourcing non-core operating functions. In addition, management believes that companies that have outsourced records management are less likely during economic downturns to incur the move-out costs and other expenses associated with switching vendors or moving records management in-house. (bullet)Inherent Growth from Existing Customers. The Company's customers have on average generated additional Cartons at a faster rate than stored Cartons have been destroyed or permanently removed. From 1992 to 1995, net Cartons from existing customers grew at an average annual rate of 6.7%. The Company believes the consistent growth of its storage revenues is the result of a number of additional factors, including: (i) the trend toward increased records retention; (ii) customer satisfaction with the Company's services; and (iii) the costs and inconvenience of moving storage operations in-house or to another provider of records management services. (bullet)Diversified and Stable Customer Base. The Company has over 19,000 customer accounts in a variety of industries. The Company currently provides services to more than half of the Fortune 500 and numerous legal, banking, healthcare, accounting, insurance, entertainment and government organizations. Only one of the Company's customers accounted for more than 3% of revenues in 1993, 1994 or 1995. From 1992 to 1995, average annual permanent removals of Cartons represented only approximately 4% of total Cartons stored. (bullet)Capital Expenditures Related Primarily to Growth. The Company's business requires limited annual maintenance capital expenditures. Maintenance capital expenditures were $1.8 million, $1.2 million and $0.9 million in 1993, 1994 and 1995, respectively. From 1992 to 1995, over 90% of the Company's aggregate capital expenditures were growth-related investments, primarily in racking systems, new buildings and leasehold improvements, equipment for new facilities, management information systems and facilities restructuring. These growth-related capital expenditures are primarily discretionary and create additional capacity for increases in revenues and EBITDA. Business Strategy Iron Mountain's business strategy is to increase revenues and EBITDA while maintaining a low-cost operating structure and providing premium service. The Company intends to generate growth by increasing its storage and service revenues from existing customers, adding new customers and making acquisitions. The Company's strategy is based on the following elements: (bullet)Provide Superior Customer Service. The Company believes it has a reputation for providing reliable, quality service based on its more than 45 years of operations, its commitment to providing premium customer service and the continuity and depth of its management team. The Company has successfully implemented a decentralized management structure that enables the Company to respond quickly and flexibly to local customer needs. Iron Mountain's proprietary Safekeeper(R) system enables it to quickly provide customized records management solutions to its customers, enhancing the quality of its services. In addition, Iron Mountain's national operating presence allows it to better service large organizations that require records management functions at multiple, geographically diverse facilities. (bullet)Capitalize on Operating Efficiencies. Iron Mountain pursues a low-cost operating strategy based primarily on achieving economies of scale in the areas of storage, labor and transportation, general and administrative functions and management information systems. Because occupancy costs are a major component of the Company's cost of sales, its real estate management staff aggressively seeks to minimize per Carton storage costs by designing racking systems and operating space to maximize facility storage efficiency, negotiating favorable facility leases, contracting for facilities to be built to its custom specifications, and leasing larger facilities in order to reduce operating costs per Carton. The Company seeks to increase labor efficiency by offering incentive compensation to all full-time employees based upon achieving specific operating targets. Certain operating costs, such as the maintenance of local delivery fleets, general and administrative costs and management information systems, offer economies of scale, providing the Company with operating leverage and the ability to increase its efficiency through further growth. (bullet)Pursue Acquisition Opportunities. The Company believes that it is well positioned to participate in the further consolidation of the records management industry. Iron Mountain's management team has successfully completed 18 acquisitions since the Company embarked on a proactive acquisition strategy in mid-1994, and one additional acquisition is currently pending. The Company intends to continue to make fold-in acquisitions to augment its operations in existing markets and to make strategic acquisitions in new geographic markets, with an emphasis on the 50 largest markets in the United States and potentially in certain markets outside the United States. Following an acquisition in a new market, the Company seeks to increase its business with the acquired customer base and to supplement that growth both with new customers and through appropriate fold-in acquisitions. In addition, the Company has successfully reduced the cost structure of its acquired operations by implementing its efficient operating strategies and leveraging its centralized administrative resources and management information systems. (bullet)Leverage Proprietary Safekeeper System. The Company pioneered the application of advanced information technology to the records management industry. Iron Mountain's proprietary Safekeeper system provides advanced inventory control and information access, enabling the Company to provide faster, higher quality and more flexible solutions to its customers and to lower the costs of its operations. Safekeeper has been designed to easily and effectively integrate newly acquired records management companies and offer improved levels of customer service and records management capabilities to customers acquired through acquisitions. Iron Mountain's Safekeeper system exploits bar-code technology to provide a comprehensive, standardized approach to tracking, accessing and retrieving records. Safekeeper offers state-of-the-art records management capabilities and ease of access to customers while featuring security functions to protect customer information from unauthorized access. Since 1992, the Company has invested $12.5 million to develop and refine its management information systems, including Safekeeper. THE OFFERING <TABLE> <CAPTION> <S> <C> Securities Offered $150,000,000 principal amount of % Senior Subordinated Notes due 2006 (the "Notes"). Maturity Date , 2006 Interest Payment Dates and of each year, commencing , 1997. Guarantees The Notes will be fully and unconditionally guaranteed on an unsecured senior subordinated and joint and several basis (the "Subsidiary Guarantees") by substantially all of the Company's present and future Restricted Subsidiaries (collectively, the "Guarantors"). Each of the Guarantors has also guaranteed unconditionally the indebtedness outstanding under the Company's existing bank credit facility (the "Credit Agreement") and will guarantee unconditionally the indebtedness outstanding under the new bank credit facility the Company intends to enter into with its lenders (the "New Credit Facility"). See "Description of the Notes--Subsidiary Guarantees." Subordination The Notes will be general unsecured senior subordinated obligations of the Company ranking junior to all existing and future Senior Debt of the Company, including any indebtedness that may be incurred under the Credit Agreement or the New Credit Facility. The Subsidiary Guarantees will rank junior to all existing and future Senior Debt of the Guarantors. As of June 30, 1996, on a pro forma basis after giving effect to the Transactions, the aggregate outstanding principal amount of Senior Debt of the Company and the Guarantors would have been $24.5 million. See "Description of the Notes--Subordination." Optional Redemption Except as described below, the Notes are not redeemable by the Company prior to , 2001. Thereafter, the Notes are redeemable at the option of the Company, in whole or in part, at any time and from time to time, at the redemption prices set forth herein plus accrued and unpaid interest to, but excluding, the date of redemption. In addition, during the first 36 months after the date of issuance of the Notes, the Company, at its option, may redeem up to 35% of the initial principal amount of the Notes with the net proceeds of one or more Qualified Equity Offerings at a redemption price equal to %, plus accrued and unpaid interest to, but excluding, the date of redemption; provided that at least 65% of the initial principal amount of the Notes remains outstanding after each such redemption. See "Description of the Notes--Optional Redemption." Mandatory Redemption Except with respect to required repurchases upon the occurrence of a Change of Control or in the event of certain Asset Sales, the Company is not required to make sinking fund or redemption payments with respect to the Notes at any time prior to maturity. See "Description of the Notes-- Mandatory Redemption." Change of Control Upon the occurrence of a Change of Control, each Holder of Notes may require the Company to repurchase such Notes at 101% of the principal amount thereof, plus accrued and unpaid interest to, but excluding, the date of repurchase. See "Description of the Notes--Repurchase at the Option of Holders--Change of Control." Certain Covenants The Indenture governing the Notes (the "Indenture") will contain covenants restricting or limiting the ability of the Company and its Restricted Subsidiaries to, among other things: (i) incur additional indebtedness, including indebtedness ranking senior to the Notes and junior to any Senior Debt; (ii) pay dividends or make other restricted payments; (iii) make asset dispositions; (iv) permit liens; (v) enter into sale and leaseback transactions; (vi) enter into certain mergers; (vii) make certain investments; and (viii) enter into transactions with related persons. See "Description of the Notes--Certain Covenants." Use of Proceeds The net proceeds of the Offering will be used to repay outstanding bank debt and certain other indebtedness and to fund a portion of the purchase price of the Pending Acquisition. </TABLE> RISK FACTORS For a discussion of certain material factors that should be considered in connection with an investment in the Notes offered hereby, see "Risk Factors" on pages 10 to 14.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001020883_metro_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001020883_metro_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this Prospectus. References to "Iron Mountain" and the "Company" include Iron Mountain Incorporated (including predecessor entities) and its consolidated subsidiaries, unless the context otherwise requires. THE COMPANY Iron Mountain is the largest records management company in the United States, as measured by revenues. The Company is a full-service provider of records management and related services, enabling customers to outsource records management functions. Pro forma for the Acquisitions (as defined herein), as of June 30, 1996, the Company managed approximately 29.6 million Cartons* in 103 records centers in 33 markets nationwide. The Company has a diversified base of over 19,000 customer accounts, which includes more than half of the Fortune 500 and numerous legal, banking, healthcare, accounting, insurance, entertainment and government organizations. The Company provides storage and related services for all major media, including paper (which is the dominant form of records retention and which has accounted for approximately 85% of the Company's revenues since 1992), computer disks and tapes, microfilm and microfiche, master audio and video tapes, film and optical disks, X-rays and blueprints. The Company's principal services include filing, retrieval and destruction of records, courier pick-up and delivery, database management and customized reporting. The Company also sells storage materials and provides consulting and other records-related services. The Company continues to capitalize on its leading position in the records management industry and the industry trends of increased records retention, outsourcing of records management and vendor consolidation. As a result, the Company has achieved significant increases in revenues and EBITDA (as defined herein). From 1991 to 1995, Iron Mountain's total revenues increased from $62.8 million to $104.4 million primarily from internal growth, representing a compound annual growth rate ("CAGR") of 13.5%. During the same period, storage revenues grew at a 12.9% CAGR while service and storage material sales revenues grew at a 14.6% CAGR. From 1991 to 1995, the Company's EBITDA grew from $15.0 million to $26.1 million, representing a 14.9% CAGR. Revenues and EBITDA for the six months ended June 30, 1996 increased 27.3% (10.2% from internal growth and 17.1% from acquisitions) and 24.8%, respectively, over the same period in 1995. For a discussion of the significance of EBITDA and other measures of the Company's performance determined in accordance with generally accepted accounting principles ("GAAP") and the Company's sources and applications of cash flow, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview" and "--Liquidity and Capital Resources." Industry Overview According to industry sources, organizations in the United States generate an estimated four trillion documents each year, many of which must be retained and remain available for reference for many years. These records may be generally divided into two categories: active and inactive. Inactive records, which are the principal focus of the records management industry, consist of records that are not needed for immediate access but which must be retained for legal or regulatory reasons or for occasional reference to support ongoing business operations. Based on industry studies, the Company believes that inactive records make up approximately 80% of all records. The Company believes that the volume of inactive records is increasing for a number of reasons, including: (i) the rapid growth of inexpensive document producing technologies such as facsimile, desktop printing and computer networking; (ii) increased regulatory requirements; (iii) concerns over possible future litigation and the resulting increases in volume and holding periods of documentation; (iv) the high cost of reviewing records and deciding whether to retain or destroy them; and (v) the failure of many entities to adopt or follow policies on records destruction. Despite the growth of new "paperless" technologies, such as the Internet and e-mail, management believes that stored information remains predominantly paper-based and that such technologies have promoted the creation of hard copies of such electronic information. - ------------- * The term "Carton" is defined as a measurement of volume equal to a single standard storage carton, approximately 1.2 cubic feet. The number of Cartons stored does not include storage volumes in the Company's vital records services and data protection services, which are described under "Business." The Company believes that it benefits from several industry fundamentals, including: (i) the historically non- cyclical nature of the records management industry; (ii) the continued trend towards corporate outsourcing of records management functions; (iii) the ability of larger records management companies to achieve economies of scale with respect to labor, real estate costs and the utilization of management information systems; and (iv) the ongoing consolidation of the records management industry. The Company believes that it is one of only four records management providers with a national operating presence, the balance being regional or, in most instances, single-city operators. According to the Association of Commercial Records Centers (the "ACRC"), a trade group of approximately 500 members, as of January 1994 (the latest date for which such information is available), approximately 2,600 firms offered records storage and management services in the United States. The Company believes that there is a trend toward consolidation in the records management industry and that such trend will continue to accelerate primarily because of: (i) the opportunities to achieve economies of scale; (ii) the industry's capital requirements for growth; (iii) customer demands for more sophisticated technology-based solutions; and (iv) the preference of certain large, national customers to outsource a significant portion of their records management functions to one vendor with a national presence, such as Iron Mountain. Financial Characteristics of Iron Mountain's Business Iron Mountain's records management business has the following financial characteristics: (bullet)Recurring Revenues. Iron Mountain derives a majority of its revenues from fixed periodic (usually monthly) fees charged to customers for storage of records. Storage revenues have grown for 30 consecutive quarters and have represented approximately 60% of the Company's total revenues in each of the last five years. Once a customer places a record in storage with the Company and until that record is destroyed or permanently removed (for which the Company typically receives a service fee), the Company receives recurring payments of fixed periodic fees without incurring additional labor or marketing expenses or significant capital costs. The stable and growing storage base also provides the foundation for increases in revenues and EBITDA from service activities and sales of storage materials. (bullet)Historically Non-Cyclical Business. Iron Mountain has not experienced a reduction of its business as a result of past general economic downturns, although there can be no assurance that this would be the case in the future. Management believes that the outsourcing of records management may accelerate during economic downturns as companies focus on reducing costs through outsourcing non-core operating functions. In addition, management believes that companies that have outsourced records management are less likely during economic downturns to incur the move-out costs and other expenses associated with switching vendors or moving records management in-house. (bullet)Inherent Growth from Existing Customers. The Company's customers have on average generated additional Cartons at a faster rate than stored Cartons have been destroyed or permanently removed. From 1992 to 1995, net Cartons from existing customers grew at an average annual rate of 6.7%. The Company believes the consistent growth of its storage revenues is the result of a number of additional factors, including: (i) the trend toward increased records retention; (ii) customer satisfaction with the Company's services; and (iii) the costs and inconvenience of moving storage operations in-house or to another provider of records management services. (bullet)Diversified and Stable Customer Base. The Company has over 19,000 customer accounts in a variety of industries. The Company currently provides services to more than half of the Fortune 500 and numerous legal, banking, healthcare, accounting, insurance, entertainment and government organizations. Only one of the Company's customers accounted for more than 3% of revenues in 1993, 1994 or 1995. From 1992 to 1995, average annual permanent removals of Cartons represented only approximately 4% of total Cartons stored. (bullet)Capital Expenditures Related Primarily to Growth. The Company's business requires limited annual maintenance capital expenditures. Maintenance capital expenditures were $1.8 million, $1.2 million and $0.9 million in 1993, 1994 and 1995, respectively. From 1992 to 1995, over 90% of the Company's aggregate capital expenditures were growth-related investments, primarily in racking systems, new buildings and leasehold improvements, equipment for new facilities, management information systems and facilities restructuring. These growth-related capital expenditures are primarily discretionary and create additional capacity for increases in revenues and EBITDA. Business Strategy Iron Mountain's business strategy is to increase revenues and EBITDA while maintaining a low-cost operating structure and providing premium service. The Company intends to generate growth by increasing its storage and service revenues from existing customers, adding new customers and making acquisitions. The Company's strategy is based on the following elements: (bullet)Provide Superior Customer Service. The Company believes it has a reputation for providing reliable, quality service based on its more than 45 years of operations, its commitment to providing premium customer service and the continuity and depth of its management team. The Company has successfully implemented a decentralized management structure that enables the Company to respond quickly and flexibly to local customer needs. Iron Mountain's proprietary Safekeeper(R) system enables it to quickly provide customized records management solutions to its customers, enhancing the quality of its services. In addition, Iron Mountain's national operating presence allows it to better service large organizations that require records management functions at multiple, geographically diverse facilities. (bullet)Capitalize on Operating Efficiencies. Iron Mountain pursues a low-cost operating strategy based primarily on achieving economies of scale in the areas of storage, labor and transportation, general and administrative functions and management information systems. Because occupancy costs are a major component of the Company's cost of sales, its real estate management staff aggressively seeks to minimize per Carton storage costs by designing racking systems and operating space to maximize facility storage efficiency, negotiating favorable facility leases, contracting for facilities to be built to its custom specifications, and leasing larger facilities in order to reduce operating costs per Carton. The Company seeks to increase labor efficiency by offering incentive compensation to all full-time employees based upon achieving specific operating targets. Certain operating costs, such as the maintenance of local delivery fleets, general and administrative costs and management information systems, offer economies of scale, providing the Company with operating leverage and the ability to increase its efficiency through further growth. (bullet)Pursue Acquisition Opportunities. The Company believes that it is well positioned to participate in the further consolidation of the records management industry. Iron Mountain's management team has successfully completed 18 acquisitions since the Company embarked on a proactive acquisition strategy in mid-1994, and one additional acquisition is currently pending. The Company intends to continue to make fold-in acquisitions to augment its operations in existing markets and to make strategic acquisitions in new geographic markets, with an emphasis on the 50 largest markets in the United States and potentially in certain markets outside the United States. Following an acquisition in a new market, the Company seeks to increase its business with the acquired customer base and to supplement that growth both with new customers and through appropriate fold-in acquisitions. In addition, the Company has successfully reduced the cost structure of its acquired operations by implementing its efficient operating strategies and leveraging its centralized administrative resources and management information systems. (bullet)Leverage Proprietary Safekeeper System. The Company pioneered the application of advanced information technology to the records management industry. Iron Mountain's proprietary Safekeeper system provides advanced inventory control and information access, enabling the Company to provide faster, higher quality and more flexible solutions to its customers and to lower the costs of its operations. Safekeeper has been designed to easily and effectively integrate newly acquired records management companies and offer improved levels of customer service and records management capabilities to customers acquired through acquisitions. Iron Mountain's Safekeeper system exploits bar-code technology to provide a comprehensive, standardized approach to tracking, accessing and retrieving records. Safekeeper offers state-of-the-art records management capabilities and ease of access to customers while featuring security functions to protect customer information from unauthorized access. Since 1992, the Company has invested $12.5 million to develop and refine its management information systems, including Safekeeper. THE OFFERING <TABLE> <CAPTION> <S> <C> Securities Offered $150,000,000 principal amount of % Senior Subordinated Notes due 2006 (the "Notes"). Maturity Date , 2006 Interest Payment Dates and of each year, commencing , 1997. Guarantees The Notes will be fully and unconditionally guaranteed on an unsecured senior subordinated and joint and several basis (the "Subsidiary Guarantees") by substantially all of the Company's present and future Restricted Subsidiaries (collectively, the "Guarantors"). Each of the Guarantors has also guaranteed unconditionally the indebtedness outstanding under the Company's existing bank credit facility (the "Credit Agreement") and will guarantee unconditionally the indebtedness outstanding under the new bank credit facility the Company intends to enter into with its lenders (the "New Credit Facility"). See "Description of the Notes--Subsidiary Guarantees." Subordination The Notes will be general unsecured senior subordinated obligations of the Company ranking junior to all existing and future Senior Debt of the Company, including any indebtedness that may be incurred under the Credit Agreement or the New Credit Facility. The Subsidiary Guarantees will rank junior to all existing and future Senior Debt of the Guarantors. As of June 30, 1996, on a pro forma basis after giving effect to the Transactions, the aggregate outstanding principal amount of Senior Debt of the Company and the Guarantors would have been $24.5 million. See "Description of the Notes--Subordination." Optional Redemption Except as described below, the Notes are not redeemable by the Company prior to , 2001. Thereafter, the Notes are redeemable at the option of the Company, in whole or in part, at any time and from time to time, at the redemption prices set forth herein plus accrued and unpaid interest to, but excluding, the date of redemption. In addition, during the first 36 months after the date of issuance of the Notes, the Company, at its option, may redeem up to 35% of the initial principal amount of the Notes with the net proceeds of one or more Qualified Equity Offerings at a redemption price equal to %, plus accrued and unpaid interest to, but excluding, the date of redemption; provided that at least 65% of the initial principal amount of the Notes remains outstanding after each such redemption. See "Description of the Notes--Optional Redemption." Mandatory Redemption Except with respect to required repurchases upon the occurrence of a Change of Control or in the event of certain Asset Sales, the Company is not required to make sinking fund or redemption payments with respect to the Notes at any time prior to maturity. See "Description of the Notes-- Mandatory Redemption." Change of Control Upon the occurrence of a Change of Control, each Holder of Notes may require the Company to repurchase such Notes at 101% of the principal amount thereof, plus accrued and unpaid interest to, but excluding, the date of repurchase. See "Description of the Notes--Repurchase at the Option of Holders--Change of Control." Certain Covenants The Indenture governing the Notes (the "Indenture") will contain covenants restricting or limiting the ability of the Company and its Restricted Subsidiaries to, among other things: (i) incur additional indebtedness, including indebtedness ranking senior to the Notes and junior to any Senior Debt; (ii) pay dividends or make other restricted payments; (iii) make asset dispositions; (iv) permit liens; (v) enter into sale and leaseback transactions; (vi) enter into certain mergers; (vii) make certain investments; and (viii) enter into transactions with related persons. See "Description of the Notes--Certain Covenants." Use of Proceeds The net proceeds of the Offering will be used to repay outstanding bank debt and certain other indebtedness and to fund a portion of the purchase price of the Pending Acquisition. </TABLE> RISK FACTORS For a discussion of certain material factors that should be considered in connection with an investment in the Notes offered hereby, see "Risk Factors" on pages 10 to 14.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0001020884_criterion_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001020884_criterion_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..79cfffa03d24a8713cd8f692794507f22b44abb7
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this Prospectus. References to "Iron Mountain" and the "Company" include Iron Mountain Incorporated (including predecessor entities) and its consolidated subsidiaries, unless the context otherwise requires. THE COMPANY Iron Mountain is the largest records management company in the United States, as measured by revenues. The Company is a full-service provider of records management and related services, enabling customers to outsource records management functions. Pro forma for the Acquisitions (as defined herein), as of June 30, 1996, the Company managed approximately 29.6 million Cartons* in 103 records centers in 33 markets nationwide. The Company has a diversified base of over 19,000 customer accounts, which includes more than half of the Fortune 500 and numerous legal, banking, healthcare, accounting, insurance, entertainment and government organizations. The Company provides storage and related services for all major media, including paper (which is the dominant form of records retention and which has accounted for approximately 85% of the Company's revenues since 1992), computer disks and tapes, microfilm and microfiche, master audio and video tapes, film and optical disks, X-rays and blueprints. The Company's principal services include filing, retrieval and destruction of records, courier pick-up and delivery, database management and customized reporting. The Company also sells storage materials and provides consulting and other records-related services. The Company continues to capitalize on its leading position in the records management industry and the industry trends of increased records retention, outsourcing of records management and vendor consolidation. As a result, the Company has achieved significant increases in revenues and EBITDA (as defined herein). From 1991 to 1995, Iron Mountain's total revenues increased from $62.8 million to $104.4 million primarily from internal growth, representing a compound annual growth rate ("CAGR") of 13.5%. During the same period, storage revenues grew at a 12.9% CAGR while service and storage material sales revenues grew at a 14.6% CAGR. From 1991 to 1995, the Company's EBITDA grew from $15.0 million to $26.1 million, representing a 14.9% CAGR. Revenues and EBITDA for the six months ended June 30, 1996 increased 27.3% (10.2% from internal growth and 17.1% from acquisitions) and 24.8%, respectively, over the same period in 1995. For a discussion of the significance of EBITDA and other measures of the Company's performance determined in accordance with generally accepted accounting principles ("GAAP") and the Company's sources and applications of cash flow, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview" and "--Liquidity and Capital Resources." Industry Overview According to industry sources, organizations in the United States generate an estimated four trillion documents each year, many of which must be retained and remain available for reference for many years. These records may be generally divided into two categories: active and inactive. Inactive records, which are the principal focus of the records management industry, consist of records that are not needed for immediate access but which must be retained for legal or regulatory reasons or for occasional reference to support ongoing business operations. Based on industry studies, the Company believes that inactive records make up approximately 80% of all records. The Company believes that the volume of inactive records is increasing for a number of reasons, including: (i) the rapid growth of inexpensive document producing technologies such as facsimile, desktop printing and computer networking; (ii) increased regulatory requirements; (iii) concerns over possible future litigation and the resulting increases in volume and holding periods of documentation; (iv) the high cost of reviewing records and deciding whether to retain or destroy them; and (v) the failure of many entities to adopt or follow policies on records destruction. Despite the growth of new "paperless" technologies, such as the Internet and e-mail, management believes that stored information remains predominantly paper-based and that such technologies have promoted the creation of hard copies of such electronic information. - ------------- * The term "Carton" is defined as a measurement of volume equal to a single standard storage carton, approximately 1.2 cubic feet. The number of Cartons stored does not include storage volumes in the Company's vital records services and data protection services, which are described under "Business." The Company believes that it benefits from several industry fundamentals, including: (i) the historically non- cyclical nature of the records management industry; (ii) the continued trend towards corporate outsourcing of records management functions; (iii) the ability of larger records management companies to achieve economies of scale with respect to labor, real estate costs and the utilization of management information systems; and (iv) the ongoing consolidation of the records management industry. The Company believes that it is one of only four records management providers with a national operating presence, the balance being regional or, in most instances, single-city operators. According to the Association of Commercial Records Centers (the "ACRC"), a trade group of approximately 500 members, as of January 1994 (the latest date for which such information is available), approximately 2,600 firms offered records storage and management services in the United States. The Company believes that there is a trend toward consolidation in the records management industry and that such trend will continue to accelerate primarily because of: (i) the opportunities to achieve economies of scale; (ii) the industry's capital requirements for growth; (iii) customer demands for more sophisticated technology-based solutions; and (iv) the preference of certain large, national customers to outsource a significant portion of their records management functions to one vendor with a national presence, such as Iron Mountain. Financial Characteristics of Iron Mountain's Business Iron Mountain's records management business has the following financial characteristics: (bullet)Recurring Revenues. Iron Mountain derives a majority of its revenues from fixed periodic (usually monthly) fees charged to customers for storage of records. Storage revenues have grown for 30 consecutive quarters and have represented approximately 60% of the Company's total revenues in each of the last five years. Once a customer places a record in storage with the Company and until that record is destroyed or permanently removed (for which the Company typically receives a service fee), the Company receives recurring payments of fixed periodic fees without incurring additional labor or marketing expenses or significant capital costs. The stable and growing storage base also provides the foundation for increases in revenues and EBITDA from service activities and sales of storage materials. (bullet)Historically Non-Cyclical Business. Iron Mountain has not experienced a reduction of its business as a result of past general economic downturns, although there can be no assurance that this would be the case in the future. Management believes that the outsourcing of records management may accelerate during economic downturns as companies focus on reducing costs through outsourcing non-core operating functions. In addition, management believes that companies that have outsourced records management are less likely during economic downturns to incur the move-out costs and other expenses associated with switching vendors or moving records management in-house. (bullet)Inherent Growth from Existing Customers. The Company's customers have on average generated additional Cartons at a faster rate than stored Cartons have been destroyed or permanently removed. From 1992 to 1995, net Cartons from existing customers grew at an average annual rate of 6.7%. The Company believes the consistent growth of its storage revenues is the result of a number of additional factors, including: (i) the trend toward increased records retention; (ii) customer satisfaction with the Company's services; and (iii) the costs and inconvenience of moving storage operations in-house or to another provider of records management services. (bullet)Diversified and Stable Customer Base. The Company has over 19,000 customer accounts in a variety of industries. The Company currently provides services to more than half of the Fortune 500 and numerous legal, banking, healthcare, accounting, insurance, entertainment and government organizations. Only one of the Company's customers accounted for more than 3% of revenues in 1993, 1994 or 1995. From 1992 to 1995, average annual permanent removals of Cartons represented only approximately 4% of total Cartons stored. (bullet)Capital Expenditures Related Primarily to Growth. The Company's business requires limited annual maintenance capital expenditures. Maintenance capital expenditures were $1.8 million, $1.2 million and $0.9 million in 1993, 1994 and 1995, respectively. From 1992 to 1995, over 90% of the Company's aggregate capital expenditures were growth-related investments, primarily in racking systems, new buildings and leasehold improvements, equipment for new facilities, management information systems and facilities restructuring. These growth-related capital expenditures are primarily discretionary and create additional capacity for increases in revenues and EBITDA. Business Strategy Iron Mountain's business strategy is to increase revenues and EBITDA while maintaining a low-cost operating structure and providing premium service. The Company intends to generate growth by increasing its storage and service revenues from existing customers, adding new customers and making acquisitions. The Company's strategy is based on the following elements: (bullet)Provide Superior Customer Service. The Company believes it has a reputation for providing reliable, quality service based on its more than 45 years of operations, its commitment to providing premium customer service and the continuity and depth of its management team. The Company has successfully implemented a decentralized management structure that enables the Company to respond quickly and flexibly to local customer needs. Iron Mountain's proprietary Safekeeper(R) system enables it to quickly provide customized records management solutions to its customers, enhancing the quality of its services. In addition, Iron Mountain's national operating presence allows it to better service large organizations that require records management functions at multiple, geographically diverse facilities. (bullet)Capitalize on Operating Efficiencies. Iron Mountain pursues a low-cost operating strategy based primarily on achieving economies of scale in the areas of storage, labor and transportation, general and administrative functions and management information systems. Because occupancy costs are a major component of the Company's cost of sales, its real estate management staff aggressively seeks to minimize per Carton storage costs by designing racking systems and operating space to maximize facility storage efficiency, negotiating favorable facility leases, contracting for facilities to be built to its custom specifications, and leasing larger facilities in order to reduce operating costs per Carton. The Company seeks to increase labor efficiency by offering incentive compensation to all full-time employees based upon achieving specific operating targets. Certain operating costs, such as the maintenance of local delivery fleets, general and administrative costs and management information systems, offer economies of scale, providing the Company with operating leverage and the ability to increase its efficiency through further growth. (bullet)Pursue Acquisition Opportunities. The Company believes that it is well positioned to participate in the further consolidation of the records management industry. Iron Mountain's management team has successfully completed 18 acquisitions since the Company embarked on a proactive acquisition strategy in mid-1994, and one additional acquisition is currently pending. The Company intends to continue to make fold-in acquisitions to augment its operations in existing markets and to make strategic acquisitions in new geographic markets, with an emphasis on the 50 largest markets in the United States and potentially in certain markets outside the United States. Following an acquisition in a new market, the Company seeks to increase its business with the acquired customer base and to supplement that growth both with new customers and through appropriate fold-in acquisitions. In addition, the Company has successfully reduced the cost structure of its acquired operations by implementing its efficient operating strategies and leveraging its centralized administrative resources and management information systems. (bullet)Leverage Proprietary Safekeeper System. The Company pioneered the application of advanced information technology to the records management industry. Iron Mountain's proprietary Safekeeper system provides advanced inventory control and information access, enabling the Company to provide faster, higher quality and more flexible solutions to its customers and to lower the costs of its operations. Safekeeper has been designed to easily and effectively integrate newly acquired records management companies and offer improved levels of customer service and records management capabilities to customers acquired through acquisitions. Iron Mountain's Safekeeper system exploits bar-code technology to provide a comprehensive, standardized approach to tracking, accessing and retrieving records. Safekeeper offers state-of-the-art records management capabilities and ease of access to customers while featuring security functions to protect customer information from unauthorized access. Since 1992, the Company has invested $12.5 million to develop and refine its management information systems, including Safekeeper. THE OFFERING <TABLE> <CAPTION> <S> <C> Securities Offered $150,000,000 principal amount of % Senior Subordinated Notes due 2006 (the "Notes"). Maturity Date , 2006 Interest Payment Dates and of each year, commencing , 1997. Guarantees The Notes will be fully and unconditionally guaranteed on an unsecured senior subordinated and joint and several basis (the "Subsidiary Guarantees") by substantially all of the Company's present and future Restricted Subsidiaries (collectively, the "Guarantors"). Each of the Guarantors has also guaranteed unconditionally the indebtedness outstanding under the Company's existing bank credit facility (the "Credit Agreement") and will guarantee unconditionally the indebtedness outstanding under the new bank credit facility the Company intends to enter into with its lenders (the "New Credit Facility"). See "Description of the Notes--Subsidiary Guarantees." Subordination The Notes will be general unsecured senior subordinated obligations of the Company ranking junior to all existing and future Senior Debt of the Company, including any indebtedness that may be incurred under the Credit Agreement or the New Credit Facility. The Subsidiary Guarantees will rank junior to all existing and future Senior Debt of the Guarantors. As of June 30, 1996, on a pro forma basis after giving effect to the Transactions, the aggregate outstanding principal amount of Senior Debt of the Company and the Guarantors would have been $24.5 million. See "Description of the Notes--Subordination." Optional Redemption Except as described below, the Notes are not redeemable by the Company prior to , 2001. Thereafter, the Notes are redeemable at the option of the Company, in whole or in part, at any time and from time to time, at the redemption prices set forth herein plus accrued and unpaid interest to, but excluding, the date of redemption. In addition, during the first 36 months after the date of issuance of the Notes, the Company, at its option, may redeem up to 35% of the initial principal amount of the Notes with the net proceeds of one or more Qualified Equity Offerings at a redemption price equal to %, plus accrued and unpaid interest to, but excluding, the date of redemption; provided that at least 65% of the initial principal amount of the Notes remains outstanding after each such redemption. See "Description of the Notes--Optional Redemption." Mandatory Redemption Except with respect to required repurchases upon the occurrence of a Change of Control or in the event of certain Asset Sales, the Company is not required to make sinking fund or redemption payments with respect to the Notes at any time prior to maturity. See "Description of the Notes-- Mandatory Redemption." Change of Control Upon the occurrence of a Change of Control, each Holder of Notes may require the Company to repurchase such Notes at 101% of the principal amount thereof, plus accrued and unpaid interest to, but excluding, the date of repurchase. See "Description of the Notes--Repurchase at the Option of Holders--Change of Control." Certain Covenants The Indenture governing the Notes (the "Indenture") will contain covenants restricting or limiting the ability of the Company and its Restricted Subsidiaries to, among other things: (i) incur additional indebtedness, including indebtedness ranking senior to the Notes and junior to any Senior Debt; (ii) pay dividends or make other restricted payments; (iii) make asset dispositions; (iv) permit liens; (v) enter into sale and leaseback transactions; (vi) enter into certain mergers; (vii) make certain investments; and (viii) enter into transactions with related persons. See "Description of the Notes--Certain Covenants." Use of Proceeds The net proceeds of the Offering will be used to repay outstanding bank debt and certain other indebtedness and to fund a portion of the purchase price of the Pending Acquisition. </TABLE> RISK FACTORS For a discussion of certain material factors that should be considered in connection with an investment in the Notes offered hereby, see "Risk Factors" on pages 10 to 14.
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this Prospectus. References to "Iron Mountain" and the "Company" include Iron Mountain Incorporated (including predecessor entities) and its consolidated subsidiaries, unless the context otherwise requires. THE COMPANY Iron Mountain is the largest records management company in the United States, as measured by revenues. The Company is a full-service provider of records management and related services, enabling customers to outsource records management functions. Pro forma for the Acquisitions (as defined herein), as of June 30, 1996, the Company managed approximately 29.6 million Cartons* in 103 records centers in 33 markets nationwide. The Company has a diversified base of over 19,000 customer accounts, which includes more than half of the Fortune 500 and numerous legal, banking, healthcare, accounting, insurance, entertainment and government organizations. The Company provides storage and related services for all major media, including paper (which is the dominant form of records retention and which has accounted for approximately 85% of the Company's revenues since 1992), computer disks and tapes, microfilm and microfiche, master audio and video tapes, film and optical disks, X-rays and blueprints. The Company's principal services include filing, retrieval and destruction of records, courier pick-up and delivery, database management and customized reporting. The Company also sells storage materials and provides consulting and other records-related services. The Company continues to capitalize on its leading position in the records management industry and the industry trends of increased records retention, outsourcing of records management and vendor consolidation. As a result, the Company has achieved significant increases in revenues and EBITDA (as defined herein). From 1991 to 1995, Iron Mountain's total revenues increased from $62.8 million to $104.4 million primarily from internal growth, representing a compound annual growth rate ("CAGR") of 13.5%. During the same period, storage revenues grew at a 12.9% CAGR while service and storage material sales revenues grew at a 14.6% CAGR. From 1991 to 1995, the Company's EBITDA grew from $15.0 million to $26.1 million, representing a 14.9% CAGR. Revenues and EBITDA for the six months ended June 30, 1996 increased 27.3% (10.2% from internal growth and 17.1% from acquisitions) and 24.8%, respectively, over the same period in 1995. For a discussion of the significance of EBITDA and other measures of the Company's performance determined in accordance with generally accepted accounting principles ("GAAP") and the Company's sources and applications of cash flow, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview" and "--Liquidity and Capital Resources." Industry Overview According to industry sources, organizations in the United States generate an estimated four trillion documents each year, many of which must be retained and remain available for reference for many years. These records may be generally divided into two categories: active and inactive. Inactive records, which are the principal focus of the records management industry, consist of records that are not needed for immediate access but which must be retained for legal or regulatory reasons or for occasional reference to support ongoing business operations. Based on industry studies, the Company believes that inactive records make up approximately 80% of all records. The Company believes that the volume of inactive records is increasing for a number of reasons, including: (i) the rapid growth of inexpensive document producing technologies such as facsimile, desktop printing and computer networking; (ii) increased regulatory requirements; (iii) concerns over possible future litigation and the resulting increases in volume and holding periods of documentation; (iv) the high cost of reviewing records and deciding whether to retain or destroy them; and (v) the failure of many entities to adopt or follow policies on records destruction. Despite the growth of new "paperless" technologies, such as the Internet and e-mail, management believes that stored information remains predominantly paper-based and that such technologies have promoted the creation of hard copies of such electronic information. - ------------- * The term "Carton" is defined as a measurement of volume equal to a single standard storage carton, approximately 1.2 cubic feet. The number of Cartons stored does not include storage volumes in the Company's vital records services and data protection services, which are described under "Business." The Company believes that it benefits from several industry fundamentals, including: (i) the historically non- cyclical nature of the records management industry; (ii) the continued trend towards corporate outsourcing of records management functions; (iii) the ability of larger records management companies to achieve economies of scale with respect to labor, real estate costs and the utilization of management information systems; and (iv) the ongoing consolidation of the records management industry. The Company believes that it is one of only four records management providers with a national operating presence, the balance being regional or, in most instances, single-city operators. According to the Association of Commercial Records Centers (the "ACRC"), a trade group of approximately 500 members, as of January 1994 (the latest date for which such information is available), approximately 2,600 firms offered records storage and management services in the United States. The Company believes that there is a trend toward consolidation in the records management industry and that such trend will continue to accelerate primarily because of: (i) the opportunities to achieve economies of scale; (ii) the industry's capital requirements for growth; (iii) customer demands for more sophisticated technology-based solutions; and (iv) the preference of certain large, national customers to outsource a significant portion of their records management functions to one vendor with a national presence, such as Iron Mountain. Financial Characteristics of Iron Mountain's Business Iron Mountain's records management business has the following financial characteristics: (bullet)Recurring Revenues. Iron Mountain derives a majority of its revenues from fixed periodic (usually monthly) fees charged to customers for storage of records. Storage revenues have grown for 30 consecutive quarters and have represented approximately 60% of the Company's total revenues in each of the last five years. Once a customer places a record in storage with the Company and until that record is destroyed or permanently removed (for which the Company typically receives a service fee), the Company receives recurring payments of fixed periodic fees without incurring additional labor or marketing expenses or significant capital costs. The stable and growing storage base also provides the foundation for increases in revenues and EBITDA from service activities and sales of storage materials. (bullet)Historically Non-Cyclical Business. Iron Mountain has not experienced a reduction of its business as a result of past general economic downturns, although there can be no assurance that this would be the case in the future. Management believes that the outsourcing of records management may accelerate during economic downturns as companies focus on reducing costs through outsourcing non-core operating functions. In addition, management believes that companies that have outsourced records management are less likely during economic downturns to incur the move-out costs and other expenses associated with switching vendors or moving records management in-house. (bullet)Inherent Growth from Existing Customers. The Company's customers have on average generated additional Cartons at a faster rate than stored Cartons have been destroyed or permanently removed. From 1992 to 1995, net Cartons from existing customers grew at an average annual rate of 6.7%. The Company believes the consistent growth of its storage revenues is the result of a number of additional factors, including: (i) the trend toward increased records retention; (ii) customer satisfaction with the Company's services; and (iii) the costs and inconvenience of moving storage operations in-house or to another provider of records management services. (bullet)Diversified and Stable Customer Base. The Company has over 19,000 customer accounts in a variety of industries. The Company currently provides services to more than half of the Fortune 500 and numerous legal, banking, healthcare, accounting, insurance, entertainment and government organizations. Only one of the Company's customers accounted for more than 3% of revenues in 1993, 1994 or 1995. From 1992 to 1995, average annual permanent removals of Cartons represented only approximately 4% of total Cartons stored. (bullet)Capital Expenditures Related Primarily to Growth. The Company's business requires limited annual maintenance capital expenditures. Maintenance capital expenditures were $1.8 million, $1.2 million and $0.9 million in 1993, 1994 and 1995, respectively. From 1992 to 1995, over 90% of the Company's aggregate capital expenditures were growth-related investments, primarily in racking systems, new buildings and leasehold improvements, equipment for new facilities, management information systems and facilities restructuring. These growth-related capital expenditures are primarily discretionary and create additional capacity for increases in revenues and EBITDA. Business Strategy Iron Mountain's business strategy is to increase revenues and EBITDA while maintaining a low-cost operating structure and providing premium service. The Company intends to generate growth by increasing its storage and service revenues from existing customers, adding new customers and making acquisitions. The Company's strategy is based on the following elements: (bullet)Provide Superior Customer Service. The Company believes it has a reputation for providing reliable, quality service based on its more than 45 years of operations, its commitment to providing premium customer service and the continuity and depth of its management team. The Company has successfully implemented a decentralized management structure that enables the Company to respond quickly and flexibly to local customer needs. Iron Mountain's proprietary Safekeeper(R) system enables it to quickly provide customized records management solutions to its customers, enhancing the quality of its services. In addition, Iron Mountain's national operating presence allows it to better service large organizations that require records management functions at multiple, geographically diverse facilities. (bullet)Capitalize on Operating Efficiencies. Iron Mountain pursues a low-cost operating strategy based primarily on achieving economies of scale in the areas of storage, labor and transportation, general and administrative functions and management information systems. Because occupancy costs are a major component of the Company's cost of sales, its real estate management staff aggressively seeks to minimize per Carton storage costs by designing racking systems and operating space to maximize facility storage efficiency, negotiating favorable facility leases, contracting for facilities to be built to its custom specifications, and leasing larger facilities in order to reduce operating costs per Carton. The Company seeks to increase labor efficiency by offering incentive compensation to all full-time employees based upon achieving specific operating targets. Certain operating costs, such as the maintenance of local delivery fleets, general and administrative costs and management information systems, offer economies of scale, providing the Company with operating leverage and the ability to increase its efficiency through further growth. (bullet)Pursue Acquisition Opportunities. The Company believes that it is well positioned to participate in the further consolidation of the records management industry. Iron Mountain's management team has successfully completed 18 acquisitions since the Company embarked on a proactive acquisition strategy in mid-1994, and one additional acquisition is currently pending. The Company intends to continue to make fold-in acquisitions to augment its operations in existing markets and to make strategic acquisitions in new geographic markets, with an emphasis on the 50 largest markets in the United States and potentially in certain markets outside the United States. Following an acquisition in a new market, the Company seeks to increase its business with the acquired customer base and to supplement that growth both with new customers and through appropriate fold-in acquisitions. In addition, the Company has successfully reduced the cost structure of its acquired operations by implementing its efficient operating strategies and leveraging its centralized administrative resources and management information systems. (bullet)Leverage Proprietary Safekeeper System. The Company pioneered the application of advanced information technology to the records management industry. Iron Mountain's proprietary Safekeeper system provides advanced inventory control and information access, enabling the Company to provide faster, higher quality and more flexible solutions to its customers and to lower the costs of its operations. Safekeeper has been designed to easily and effectively integrate newly acquired records management companies and offer improved levels of customer service and records management capabilities to customers acquired through acquisitions. Iron Mountain's Safekeeper system exploits bar-code technology to provide a comprehensive, standardized approach to tracking, accessing and retrieving records. Safekeeper offers state-of-the-art records management capabilities and ease of access to customers while featuring security functions to protect customer information from unauthorized access. Since 1992, the Company has invested $12.5 million to develop and refine its management information systems, including Safekeeper. THE OFFERING <TABLE> <CAPTION> <S> <C> Securities Offered $150,000,000 principal amount of % Senior Subordinated Notes due 2006 (the "Notes"). Maturity Date , 2006 Interest Payment Dates and of each year, commencing , 1997. Guarantees The Notes will be fully and unconditionally guaranteed on an unsecured senior subordinated and joint and several basis (the "Subsidiary Guarantees") by substantially all of the Company's present and future Restricted Subsidiaries (collectively, the "Guarantors"). Each of the Guarantors has also guaranteed unconditionally the indebtedness outstanding under the Company's existing bank credit facility (the "Credit Agreement") and will guarantee unconditionally the indebtedness outstanding under the new bank credit facility the Company intends to enter into with its lenders (the "New Credit Facility"). See "Description of the Notes--Subsidiary Guarantees." Subordination The Notes will be general unsecured senior subordinated obligations of the Company ranking junior to all existing and future Senior Debt of the Company, including any indebtedness that may be incurred under the Credit Agreement or the New Credit Facility. The Subsidiary Guarantees will rank junior to all existing and future Senior Debt of the Guarantors. As of June 30, 1996, on a pro forma basis after giving effect to the Transactions, the aggregate outstanding principal amount of Senior Debt of the Company and the Guarantors would have been $24.5 million. See "Description of the Notes--Subordination." Optional Redemption Except as described below, the Notes are not redeemable by the Company prior to , 2001. Thereafter, the Notes are redeemable at the option of the Company, in whole or in part, at any time and from time to time, at the redemption prices set forth herein plus accrued and unpaid interest to, but excluding, the date of redemption. In addition, during the first 36 months after the date of issuance of the Notes, the Company, at its option, may redeem up to 35% of the initial principal amount of the Notes with the net proceeds of one or more Qualified Equity Offerings at a redemption price equal to %, plus accrued and unpaid interest to, but excluding, the date of redemption; provided that at least 65% of the initial principal amount of the Notes remains outstanding after each such redemption. See "Description of the Notes--Optional Redemption." Mandatory Redemption Except with respect to required repurchases upon the occurrence of a Change of Control or in the event of certain Asset Sales, the Company is not required to make sinking fund or redemption payments with respect to the Notes at any time prior to maturity. See "Description of the Notes-- Mandatory Redemption." Change of Control Upon the occurrence of a Change of Control, each Holder of Notes may require the Company to repurchase such Notes at 101% of the principal amount thereof, plus accrued and unpaid interest to, but excluding, the date of repurchase. See "Description of the Notes--Repurchase at the Option of Holders--Change of Control." Certain Covenants The Indenture governing the Notes (the "Indenture") will contain covenants restricting or limiting the ability of the Company and its Restricted Subsidiaries to, among other things: (i) incur additional indebtedness, including indebtedness ranking senior to the Notes and junior to any Senior Debt; (ii) pay dividends or make other restricted payments; (iii) make asset dispositions; (iv) permit liens; (v) enter into sale and leaseback transactions; (vi) enter into certain mergers; (vii) make certain investments; and (viii) enter into transactions with related persons. See "Description of the Notes--Certain Covenants." Use of Proceeds The net proceeds of the Offering will be used to repay outstanding bank debt and certain other indebtedness and to fund a portion of the purchase price of the Pending Acquisition. </TABLE> RISK FACTORS For a discussion of certain material factors that should be considered in connection with an investment in the Notes offered hereby, see "Risk Factors" on pages 10 to 14.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0001020886_hollywood_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001020886_hollywood_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..79cfffa03d24a8713cd8f692794507f22b44abb7
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this Prospectus. References to "Iron Mountain" and the "Company" include Iron Mountain Incorporated (including predecessor entities) and its consolidated subsidiaries, unless the context otherwise requires. THE COMPANY Iron Mountain is the largest records management company in the United States, as measured by revenues. The Company is a full-service provider of records management and related services, enabling customers to outsource records management functions. Pro forma for the Acquisitions (as defined herein), as of June 30, 1996, the Company managed approximately 29.6 million Cartons* in 103 records centers in 33 markets nationwide. The Company has a diversified base of over 19,000 customer accounts, which includes more than half of the Fortune 500 and numerous legal, banking, healthcare, accounting, insurance, entertainment and government organizations. The Company provides storage and related services for all major media, including paper (which is the dominant form of records retention and which has accounted for approximately 85% of the Company's revenues since 1992), computer disks and tapes, microfilm and microfiche, master audio and video tapes, film and optical disks, X-rays and blueprints. The Company's principal services include filing, retrieval and destruction of records, courier pick-up and delivery, database management and customized reporting. The Company also sells storage materials and provides consulting and other records-related services. The Company continues to capitalize on its leading position in the records management industry and the industry trends of increased records retention, outsourcing of records management and vendor consolidation. As a result, the Company has achieved significant increases in revenues and EBITDA (as defined herein). From 1991 to 1995, Iron Mountain's total revenues increased from $62.8 million to $104.4 million primarily from internal growth, representing a compound annual growth rate ("CAGR") of 13.5%. During the same period, storage revenues grew at a 12.9% CAGR while service and storage material sales revenues grew at a 14.6% CAGR. From 1991 to 1995, the Company's EBITDA grew from $15.0 million to $26.1 million, representing a 14.9% CAGR. Revenues and EBITDA for the six months ended June 30, 1996 increased 27.3% (10.2% from internal growth and 17.1% from acquisitions) and 24.8%, respectively, over the same period in 1995. For a discussion of the significance of EBITDA and other measures of the Company's performance determined in accordance with generally accepted accounting principles ("GAAP") and the Company's sources and applications of cash flow, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview" and "--Liquidity and Capital Resources." Industry Overview According to industry sources, organizations in the United States generate an estimated four trillion documents each year, many of which must be retained and remain available for reference for many years. These records may be generally divided into two categories: active and inactive. Inactive records, which are the principal focus of the records management industry, consist of records that are not needed for immediate access but which must be retained for legal or regulatory reasons or for occasional reference to support ongoing business operations. Based on industry studies, the Company believes that inactive records make up approximately 80% of all records. The Company believes that the volume of inactive records is increasing for a number of reasons, including: (i) the rapid growth of inexpensive document producing technologies such as facsimile, desktop printing and computer networking; (ii) increased regulatory requirements; (iii) concerns over possible future litigation and the resulting increases in volume and holding periods of documentation; (iv) the high cost of reviewing records and deciding whether to retain or destroy them; and (v) the failure of many entities to adopt or follow policies on records destruction. Despite the growth of new "paperless" technologies, such as the Internet and e-mail, management believes that stored information remains predominantly paper-based and that such technologies have promoted the creation of hard copies of such electronic information. - ------------- * The term "Carton" is defined as a measurement of volume equal to a single standard storage carton, approximately 1.2 cubic feet. The number of Cartons stored does not include storage volumes in the Company's vital records services and data protection services, which are described under "Business." The Company believes that it benefits from several industry fundamentals, including: (i) the historically non- cyclical nature of the records management industry; (ii) the continued trend towards corporate outsourcing of records management functions; (iii) the ability of larger records management companies to achieve economies of scale with respect to labor, real estate costs and the utilization of management information systems; and (iv) the ongoing consolidation of the records management industry. The Company believes that it is one of only four records management providers with a national operating presence, the balance being regional or, in most instances, single-city operators. According to the Association of Commercial Records Centers (the "ACRC"), a trade group of approximately 500 members, as of January 1994 (the latest date for which such information is available), approximately 2,600 firms offered records storage and management services in the United States. The Company believes that there is a trend toward consolidation in the records management industry and that such trend will continue to accelerate primarily because of: (i) the opportunities to achieve economies of scale; (ii) the industry's capital requirements for growth; (iii) customer demands for more sophisticated technology-based solutions; and (iv) the preference of certain large, national customers to outsource a significant portion of their records management functions to one vendor with a national presence, such as Iron Mountain. Financial Characteristics of Iron Mountain's Business Iron Mountain's records management business has the following financial characteristics: (bullet)Recurring Revenues. Iron Mountain derives a majority of its revenues from fixed periodic (usually monthly) fees charged to customers for storage of records. Storage revenues have grown for 30 consecutive quarters and have represented approximately 60% of the Company's total revenues in each of the last five years. Once a customer places a record in storage with the Company and until that record is destroyed or permanently removed (for which the Company typically receives a service fee), the Company receives recurring payments of fixed periodic fees without incurring additional labor or marketing expenses or significant capital costs. The stable and growing storage base also provides the foundation for increases in revenues and EBITDA from service activities and sales of storage materials. (bullet)Historically Non-Cyclical Business. Iron Mountain has not experienced a reduction of its business as a result of past general economic downturns, although there can be no assurance that this would be the case in the future. Management believes that the outsourcing of records management may accelerate during economic downturns as companies focus on reducing costs through outsourcing non-core operating functions. In addition, management believes that companies that have outsourced records management are less likely during economic downturns to incur the move-out costs and other expenses associated with switching vendors or moving records management in-house. (bullet)Inherent Growth from Existing Customers. The Company's customers have on average generated additional Cartons at a faster rate than stored Cartons have been destroyed or permanently removed. From 1992 to 1995, net Cartons from existing customers grew at an average annual rate of 6.7%. The Company believes the consistent growth of its storage revenues is the result of a number of additional factors, including: (i) the trend toward increased records retention; (ii) customer satisfaction with the Company's services; and (iii) the costs and inconvenience of moving storage operations in-house or to another provider of records management services. (bullet)Diversified and Stable Customer Base. The Company has over 19,000 customer accounts in a variety of industries. The Company currently provides services to more than half of the Fortune 500 and numerous legal, banking, healthcare, accounting, insurance, entertainment and government organizations. Only one of the Company's customers accounted for more than 3% of revenues in 1993, 1994 or 1995. From 1992 to 1995, average annual permanent removals of Cartons represented only approximately 4% of total Cartons stored. (bullet)Capital Expenditures Related Primarily to Growth. The Company's business requires limited annual maintenance capital expenditures. Maintenance capital expenditures were $1.8 million, $1.2 million and $0.9 million in 1993, 1994 and 1995, respectively. From 1992 to 1995, over 90% of the Company's aggregate capital expenditures were growth-related investments, primarily in racking systems, new buildings and leasehold improvements, equipment for new facilities, management information systems and facilities restructuring. These growth-related capital expenditures are primarily discretionary and create additional capacity for increases in revenues and EBITDA. Business Strategy Iron Mountain's business strategy is to increase revenues and EBITDA while maintaining a low-cost operating structure and providing premium service. The Company intends to generate growth by increasing its storage and service revenues from existing customers, adding new customers and making acquisitions. The Company's strategy is based on the following elements: (bullet)Provide Superior Customer Service. The Company believes it has a reputation for providing reliable, quality service based on its more than 45 years of operations, its commitment to providing premium customer service and the continuity and depth of its management team. The Company has successfully implemented a decentralized management structure that enables the Company to respond quickly and flexibly to local customer needs. Iron Mountain's proprietary Safekeeper(R) system enables it to quickly provide customized records management solutions to its customers, enhancing the quality of its services. In addition, Iron Mountain's national operating presence allows it to better service large organizations that require records management functions at multiple, geographically diverse facilities. (bullet)Capitalize on Operating Efficiencies. Iron Mountain pursues a low-cost operating strategy based primarily on achieving economies of scale in the areas of storage, labor and transportation, general and administrative functions and management information systems. Because occupancy costs are a major component of the Company's cost of sales, its real estate management staff aggressively seeks to minimize per Carton storage costs by designing racking systems and operating space to maximize facility storage efficiency, negotiating favorable facility leases, contracting for facilities to be built to its custom specifications, and leasing larger facilities in order to reduce operating costs per Carton. The Company seeks to increase labor efficiency by offering incentive compensation to all full-time employees based upon achieving specific operating targets. Certain operating costs, such as the maintenance of local delivery fleets, general and administrative costs and management information systems, offer economies of scale, providing the Company with operating leverage and the ability to increase its efficiency through further growth. (bullet)Pursue Acquisition Opportunities. The Company believes that it is well positioned to participate in the further consolidation of the records management industry. Iron Mountain's management team has successfully completed 18 acquisitions since the Company embarked on a proactive acquisition strategy in mid-1994, and one additional acquisition is currently pending. The Company intends to continue to make fold-in acquisitions to augment its operations in existing markets and to make strategic acquisitions in new geographic markets, with an emphasis on the 50 largest markets in the United States and potentially in certain markets outside the United States. Following an acquisition in a new market, the Company seeks to increase its business with the acquired customer base and to supplement that growth both with new customers and through appropriate fold-in acquisitions. In addition, the Company has successfully reduced the cost structure of its acquired operations by implementing its efficient operating strategies and leveraging its centralized administrative resources and management information systems. (bullet)Leverage Proprietary Safekeeper System. The Company pioneered the application of advanced information technology to the records management industry. Iron Mountain's proprietary Safekeeper system provides advanced inventory control and information access, enabling the Company to provide faster, higher quality and more flexible solutions to its customers and to lower the costs of its operations. Safekeeper has been designed to easily and effectively integrate newly acquired records management companies and offer improved levels of customer service and records management capabilities to customers acquired through acquisitions. Iron Mountain's Safekeeper system exploits bar-code technology to provide a comprehensive, standardized approach to tracking, accessing and retrieving records. Safekeeper offers state-of-the-art records management capabilities and ease of access to customers while featuring security functions to protect customer information from unauthorized access. Since 1992, the Company has invested $12.5 million to develop and refine its management information systems, including Safekeeper. THE OFFERING <TABLE> <CAPTION> <S> <C> Securities Offered $150,000,000 principal amount of % Senior Subordinated Notes due 2006 (the "Notes"). Maturity Date , 2006 Interest Payment Dates and of each year, commencing , 1997. Guarantees The Notes will be fully and unconditionally guaranteed on an unsecured senior subordinated and joint and several basis (the "Subsidiary Guarantees") by substantially all of the Company's present and future Restricted Subsidiaries (collectively, the "Guarantors"). Each of the Guarantors has also guaranteed unconditionally the indebtedness outstanding under the Company's existing bank credit facility (the "Credit Agreement") and will guarantee unconditionally the indebtedness outstanding under the new bank credit facility the Company intends to enter into with its lenders (the "New Credit Facility"). See "Description of the Notes--Subsidiary Guarantees." Subordination The Notes will be general unsecured senior subordinated obligations of the Company ranking junior to all existing and future Senior Debt of the Company, including any indebtedness that may be incurred under the Credit Agreement or the New Credit Facility. The Subsidiary Guarantees will rank junior to all existing and future Senior Debt of the Guarantors. As of June 30, 1996, on a pro forma basis after giving effect to the Transactions, the aggregate outstanding principal amount of Senior Debt of the Company and the Guarantors would have been $24.5 million. See "Description of the Notes--Subordination." Optional Redemption Except as described below, the Notes are not redeemable by the Company prior to , 2001. Thereafter, the Notes are redeemable at the option of the Company, in whole or in part, at any time and from time to time, at the redemption prices set forth herein plus accrued and unpaid interest to, but excluding, the date of redemption. In addition, during the first 36 months after the date of issuance of the Notes, the Company, at its option, may redeem up to 35% of the initial principal amount of the Notes with the net proceeds of one or more Qualified Equity Offerings at a redemption price equal to %, plus accrued and unpaid interest to, but excluding, the date of redemption; provided that at least 65% of the initial principal amount of the Notes remains outstanding after each such redemption. See "Description of the Notes--Optional Redemption." Mandatory Redemption Except with respect to required repurchases upon the occurrence of a Change of Control or in the event of certain Asset Sales, the Company is not required to make sinking fund or redemption payments with respect to the Notes at any time prior to maturity. See "Description of the Notes-- Mandatory Redemption." Change of Control Upon the occurrence of a Change of Control, each Holder of Notes may require the Company to repurchase such Notes at 101% of the principal amount thereof, plus accrued and unpaid interest to, but excluding, the date of repurchase. See "Description of the Notes--Repurchase at the Option of Holders--Change of Control." Certain Covenants The Indenture governing the Notes (the "Indenture") will contain covenants restricting or limiting the ability of the Company and its Restricted Subsidiaries to, among other things: (i) incur additional indebtedness, including indebtedness ranking senior to the Notes and junior to any Senior Debt; (ii) pay dividends or make other restricted payments; (iii) make asset dispositions; (iv) permit liens; (v) enter into sale and leaseback transactions; (vi) enter into certain mergers; (vii) make certain investments; and (viii) enter into transactions with related persons. See "Description of the Notes--Certain Covenants." Use of Proceeds The net proceeds of the Offering will be used to repay outstanding bank debt and certain other indebtedness and to fund a portion of the purchase price of the Pending Acquisition. </TABLE> RISK FACTORS For a discussion of certain material factors that should be considered in connection with an investment in the Notes offered hereby, see "Risk Factors" on pages 10 to 14.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0001020887_im-san_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001020887_im-san_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this Prospectus. References to "Iron Mountain" and the "Company" include Iron Mountain Incorporated (including predecessor entities) and its consolidated subsidiaries, unless the context otherwise requires. THE COMPANY Iron Mountain is the largest records management company in the United States, as measured by revenues. The Company is a full-service provider of records management and related services, enabling customers to outsource records management functions. Pro forma for the Acquisitions (as defined herein), as of June 30, 1996, the Company managed approximately 29.6 million Cartons* in 103 records centers in 33 markets nationwide. The Company has a diversified base of over 19,000 customer accounts, which includes more than half of the Fortune 500 and numerous legal, banking, healthcare, accounting, insurance, entertainment and government organizations. The Company provides storage and related services for all major media, including paper (which is the dominant form of records retention and which has accounted for approximately 85% of the Company's revenues since 1992), computer disks and tapes, microfilm and microfiche, master audio and video tapes, film and optical disks, X-rays and blueprints. The Company's principal services include filing, retrieval and destruction of records, courier pick-up and delivery, database management and customized reporting. The Company also sells storage materials and provides consulting and other records-related services. The Company continues to capitalize on its leading position in the records management industry and the industry trends of increased records retention, outsourcing of records management and vendor consolidation. As a result, the Company has achieved significant increases in revenues and EBITDA (as defined herein). From 1991 to 1995, Iron Mountain's total revenues increased from $62.8 million to $104.4 million primarily from internal growth, representing a compound annual growth rate ("CAGR") of 13.5%. During the same period, storage revenues grew at a 12.9% CAGR while service and storage material sales revenues grew at a 14.6% CAGR. From 1991 to 1995, the Company's EBITDA grew from $15.0 million to $26.1 million, representing a 14.9% CAGR. Revenues and EBITDA for the six months ended June 30, 1996 increased 27.3% (10.2% from internal growth and 17.1% from acquisitions) and 24.8%, respectively, over the same period in 1995. For a discussion of the significance of EBITDA and other measures of the Company's performance determined in accordance with generally accepted accounting principles ("GAAP") and the Company's sources and applications of cash flow, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview" and "--Liquidity and Capital Resources." Industry Overview According to industry sources, organizations in the United States generate an estimated four trillion documents each year, many of which must be retained and remain available for reference for many years. These records may be generally divided into two categories: active and inactive. Inactive records, which are the principal focus of the records management industry, consist of records that are not needed for immediate access but which must be retained for legal or regulatory reasons or for occasional reference to support ongoing business operations. Based on industry studies, the Company believes that inactive records make up approximately 80% of all records. The Company believes that the volume of inactive records is increasing for a number of reasons, including: (i) the rapid growth of inexpensive document producing technologies such as facsimile, desktop printing and computer networking; (ii) increased regulatory requirements; (iii) concerns over possible future litigation and the resulting increases in volume and holding periods of documentation; (iv) the high cost of reviewing records and deciding whether to retain or destroy them; and (v) the failure of many entities to adopt or follow policies on records destruction. Despite the growth of new "paperless" technologies, such as the Internet and e-mail, management believes that stored information remains predominantly paper-based and that such technologies have promoted the creation of hard copies of such electronic information. - ------------- * The term "Carton" is defined as a measurement of volume equal to a single standard storage carton, approximately 1.2 cubic feet. The number of Cartons stored does not include storage volumes in the Company's vital records services and data protection services, which are described under "Business." The Company believes that it benefits from several industry fundamentals, including: (i) the historically non- cyclical nature of the records management industry; (ii) the continued trend towards corporate outsourcing of records management functions; (iii) the ability of larger records management companies to achieve economies of scale with respect to labor, real estate costs and the utilization of management information systems; and (iv) the ongoing consolidation of the records management industry. The Company believes that it is one of only four records management providers with a national operating presence, the balance being regional or, in most instances, single-city operators. According to the Association of Commercial Records Centers (the "ACRC"), a trade group of approximately 500 members, as of January 1994 (the latest date for which such information is available), approximately 2,600 firms offered records storage and management services in the United States. The Company believes that there is a trend toward consolidation in the records management industry and that such trend will continue to accelerate primarily because of: (i) the opportunities to achieve economies of scale; (ii) the industry's capital requirements for growth; (iii) customer demands for more sophisticated technology-based solutions; and (iv) the preference of certain large, national customers to outsource a significant portion of their records management functions to one vendor with a national presence, such as Iron Mountain. Financial Characteristics of Iron Mountain's Business Iron Mountain's records management business has the following financial characteristics: (bullet)Recurring Revenues. Iron Mountain derives a majority of its revenues from fixed periodic (usually monthly) fees charged to customers for storage of records. Storage revenues have grown for 30 consecutive quarters and have represented approximately 60% of the Company's total revenues in each of the last five years. Once a customer places a record in storage with the Company and until that record is destroyed or permanently removed (for which the Company typically receives a service fee), the Company receives recurring payments of fixed periodic fees without incurring additional labor or marketing expenses or significant capital costs. The stable and growing storage base also provides the foundation for increases in revenues and EBITDA from service activities and sales of storage materials. (bullet)Historically Non-Cyclical Business. Iron Mountain has not experienced a reduction of its business as a result of past general economic downturns, although there can be no assurance that this would be the case in the future. Management believes that the outsourcing of records management may accelerate during economic downturns as companies focus on reducing costs through outsourcing non-core operating functions. In addition, management believes that companies that have outsourced records management are less likely during economic downturns to incur the move-out costs and other expenses associated with switching vendors or moving records management in-house. (bullet)Inherent Growth from Existing Customers. The Company's customers have on average generated additional Cartons at a faster rate than stored Cartons have been destroyed or permanently removed. From 1992 to 1995, net Cartons from existing customers grew at an average annual rate of 6.7%. The Company believes the consistent growth of its storage revenues is the result of a number of additional factors, including: (i) the trend toward increased records retention; (ii) customer satisfaction with the Company's services; and (iii) the costs and inconvenience of moving storage operations in-house or to another provider of records management services. (bullet)Diversified and Stable Customer Base. The Company has over 19,000 customer accounts in a variety of industries. The Company currently provides services to more than half of the Fortune 500 and numerous legal, banking, healthcare, accounting, insurance, entertainment and government organizations. Only one of the Company's customers accounted for more than 3% of revenues in 1993, 1994 or 1995. From 1992 to 1995, average annual permanent removals of Cartons represented only approximately 4% of total Cartons stored. (bullet)Capital Expenditures Related Primarily to Growth. The Company's business requires limited annual maintenance capital expenditures. Maintenance capital expenditures were $1.8 million, $1.2 million and $0.9 million in 1993, 1994 and 1995, respectively. From 1992 to 1995, over 90% of the Company's aggregate capital expenditures were growth-related investments, primarily in racking systems, new buildings and leasehold improvements, equipment for new facilities, management information systems and facilities restructuring. These growth-related capital expenditures are primarily discretionary and create additional capacity for increases in revenues and EBITDA. Business Strategy Iron Mountain's business strategy is to increase revenues and EBITDA while maintaining a low-cost operating structure and providing premium service. The Company intends to generate growth by increasing its storage and service revenues from existing customers, adding new customers and making acquisitions. The Company's strategy is based on the following elements: (bullet)Provide Superior Customer Service. The Company believes it has a reputation for providing reliable, quality service based on its more than 45 years of operations, its commitment to providing premium customer service and the continuity and depth of its management team. The Company has successfully implemented a decentralized management structure that enables the Company to respond quickly and flexibly to local customer needs. Iron Mountain's proprietary Safekeeper(R) system enables it to quickly provide customized records management solutions to its customers, enhancing the quality of its services. In addition, Iron Mountain's national operating presence allows it to better service large organizations that require records management functions at multiple, geographically diverse facilities. (bullet)Capitalize on Operating Efficiencies. Iron Mountain pursues a low-cost operating strategy based primarily on achieving economies of scale in the areas of storage, labor and transportation, general and administrative functions and management information systems. Because occupancy costs are a major component of the Company's cost of sales, its real estate management staff aggressively seeks to minimize per Carton storage costs by designing racking systems and operating space to maximize facility storage efficiency, negotiating favorable facility leases, contracting for facilities to be built to its custom specifications, and leasing larger facilities in order to reduce operating costs per Carton. The Company seeks to increase labor efficiency by offering incentive compensation to all full-time employees based upon achieving specific operating targets. Certain operating costs, such as the maintenance of local delivery fleets, general and administrative costs and management information systems, offer economies of scale, providing the Company with operating leverage and the ability to increase its efficiency through further growth. (bullet)Pursue Acquisition Opportunities. The Company believes that it is well positioned to participate in the further consolidation of the records management industry. Iron Mountain's management team has successfully completed 18 acquisitions since the Company embarked on a proactive acquisition strategy in mid-1994, and one additional acquisition is currently pending. The Company intends to continue to make fold-in acquisitions to augment its operations in existing markets and to make strategic acquisitions in new geographic markets, with an emphasis on the 50 largest markets in the United States and potentially in certain markets outside the United States. Following an acquisition in a new market, the Company seeks to increase its business with the acquired customer base and to supplement that growth both with new customers and through appropriate fold-in acquisitions. In addition, the Company has successfully reduced the cost structure of its acquired operations by implementing its efficient operating strategies and leveraging its centralized administrative resources and management information systems. (bullet)Leverage Proprietary Safekeeper System. The Company pioneered the application of advanced information technology to the records management industry. Iron Mountain's proprietary Safekeeper system provides advanced inventory control and information access, enabling the Company to provide faster, higher quality and more flexible solutions to its customers and to lower the costs of its operations. Safekeeper has been designed to easily and effectively integrate newly acquired records management companies and offer improved levels of customer service and records management capabilities to customers acquired through acquisitions. Iron Mountain's Safekeeper system exploits bar-code technology to provide a comprehensive, standardized approach to tracking, accessing and retrieving records. Safekeeper offers state-of-the-art records management capabilities and ease of access to customers while featuring security functions to protect customer information from unauthorized access. Since 1992, the Company has invested $12.5 million to develop and refine its management information systems, including Safekeeper. THE OFFERING <TABLE> <CAPTION> <S> <C> Securities Offered $150,000,000 principal amount of % Senior Subordinated Notes due 2006 (the "Notes"). Maturity Date , 2006 Interest Payment Dates and of each year, commencing , 1997. Guarantees The Notes will be fully and unconditionally guaranteed on an unsecured senior subordinated and joint and several basis (the "Subsidiary Guarantees") by substantially all of the Company's present and future Restricted Subsidiaries (collectively, the "Guarantors"). Each of the Guarantors has also guaranteed unconditionally the indebtedness outstanding under the Company's existing bank credit facility (the "Credit Agreement") and will guarantee unconditionally the indebtedness outstanding under the new bank credit facility the Company intends to enter into with its lenders (the "New Credit Facility"). See "Description of the Notes--Subsidiary Guarantees." Subordination The Notes will be general unsecured senior subordinated obligations of the Company ranking junior to all existing and future Senior Debt of the Company, including any indebtedness that may be incurred under the Credit Agreement or the New Credit Facility. The Subsidiary Guarantees will rank junior to all existing and future Senior Debt of the Guarantors. As of June 30, 1996, on a pro forma basis after giving effect to the Transactions, the aggregate outstanding principal amount of Senior Debt of the Company and the Guarantors would have been $24.5 million. See "Description of the Notes--Subordination." Optional Redemption Except as described below, the Notes are not redeemable by the Company prior to , 2001. Thereafter, the Notes are redeemable at the option of the Company, in whole or in part, at any time and from time to time, at the redemption prices set forth herein plus accrued and unpaid interest to, but excluding, the date of redemption. In addition, during the first 36 months after the date of issuance of the Notes, the Company, at its option, may redeem up to 35% of the initial principal amount of the Notes with the net proceeds of one or more Qualified Equity Offerings at a redemption price equal to %, plus accrued and unpaid interest to, but excluding, the date of redemption; provided that at least 65% of the initial principal amount of the Notes remains outstanding after each such redemption. See "Description of the Notes--Optional Redemption." Mandatory Redemption Except with respect to required repurchases upon the occurrence of a Change of Control or in the event of certain Asset Sales, the Company is not required to make sinking fund or redemption payments with respect to the Notes at any time prior to maturity. See "Description of the Notes-- Mandatory Redemption." Change of Control Upon the occurrence of a Change of Control, each Holder of Notes may require the Company to repurchase such Notes at 101% of the principal amount thereof, plus accrued and unpaid interest to, but excluding, the date of repurchase. See "Description of the Notes--Repurchase at the Option of Holders--Change of Control." Certain Covenants The Indenture governing the Notes (the "Indenture") will contain covenants restricting or limiting the ability of the Company and its Restricted Subsidiaries to, among other things: (i) incur additional indebtedness, including indebtedness ranking senior to the Notes and junior to any Senior Debt; (ii) pay dividends or make other restricted payments; (iii) make asset dispositions; (iv) permit liens; (v) enter into sale and leaseback transactions; (vi) enter into certain mergers; (vii) make certain investments; and (viii) enter into transactions with related persons. See "Description of the Notes--Certain Covenants." Use of Proceeds The net proceeds of the Offering will be used to repay outstanding bank debt and certain other indebtedness and to fund a portion of the purchase price of the Pending Acquisition. </TABLE> RISK FACTORS For a discussion of certain material factors that should be considered in connection with an investment in the Notes offered hereby, see "Risk Factors" on pages 10 to 14.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0001020888_iron_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001020888_iron_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..79cfffa03d24a8713cd8f692794507f22b44abb7
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0001020888_iron_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this Prospectus. References to "Iron Mountain" and the "Company" include Iron Mountain Incorporated (including predecessor entities) and its consolidated subsidiaries, unless the context otherwise requires. THE COMPANY Iron Mountain is the largest records management company in the United States, as measured by revenues. The Company is a full-service provider of records management and related services, enabling customers to outsource records management functions. Pro forma for the Acquisitions (as defined herein), as of June 30, 1996, the Company managed approximately 29.6 million Cartons* in 103 records centers in 33 markets nationwide. The Company has a diversified base of over 19,000 customer accounts, which includes more than half of the Fortune 500 and numerous legal, banking, healthcare, accounting, insurance, entertainment and government organizations. The Company provides storage and related services for all major media, including paper (which is the dominant form of records retention and which has accounted for approximately 85% of the Company's revenues since 1992), computer disks and tapes, microfilm and microfiche, master audio and video tapes, film and optical disks, X-rays and blueprints. The Company's principal services include filing, retrieval and destruction of records, courier pick-up and delivery, database management and customized reporting. The Company also sells storage materials and provides consulting and other records-related services. The Company continues to capitalize on its leading position in the records management industry and the industry trends of increased records retention, outsourcing of records management and vendor consolidation. As a result, the Company has achieved significant increases in revenues and EBITDA (as defined herein). From 1991 to 1995, Iron Mountain's total revenues increased from $62.8 million to $104.4 million primarily from internal growth, representing a compound annual growth rate ("CAGR") of 13.5%. During the same period, storage revenues grew at a 12.9% CAGR while service and storage material sales revenues grew at a 14.6% CAGR. From 1991 to 1995, the Company's EBITDA grew from $15.0 million to $26.1 million, representing a 14.9% CAGR. Revenues and EBITDA for the six months ended June 30, 1996 increased 27.3% (10.2% from internal growth and 17.1% from acquisitions) and 24.8%, respectively, over the same period in 1995. For a discussion of the significance of EBITDA and other measures of the Company's performance determined in accordance with generally accepted accounting principles ("GAAP") and the Company's sources and applications of cash flow, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview" and "--Liquidity and Capital Resources." Industry Overview According to industry sources, organizations in the United States generate an estimated four trillion documents each year, many of which must be retained and remain available for reference for many years. These records may be generally divided into two categories: active and inactive. Inactive records, which are the principal focus of the records management industry, consist of records that are not needed for immediate access but which must be retained for legal or regulatory reasons or for occasional reference to support ongoing business operations. Based on industry studies, the Company believes that inactive records make up approximately 80% of all records. The Company believes that the volume of inactive records is increasing for a number of reasons, including: (i) the rapid growth of inexpensive document producing technologies such as facsimile, desktop printing and computer networking; (ii) increased regulatory requirements; (iii) concerns over possible future litigation and the resulting increases in volume and holding periods of documentation; (iv) the high cost of reviewing records and deciding whether to retain or destroy them; and (v) the failure of many entities to adopt or follow policies on records destruction. Despite the growth of new "paperless" technologies, such as the Internet and e-mail, management believes that stored information remains predominantly paper-based and that such technologies have promoted the creation of hard copies of such electronic information. - ------------- * The term "Carton" is defined as a measurement of volume equal to a single standard storage carton, approximately 1.2 cubic feet. The number of Cartons stored does not include storage volumes in the Company's vital records services and data protection services, which are described under "Business." The Company believes that it benefits from several industry fundamentals, including: (i) the historically non- cyclical nature of the records management industry; (ii) the continued trend towards corporate outsourcing of records management functions; (iii) the ability of larger records management companies to achieve economies of scale with respect to labor, real estate costs and the utilization of management information systems; and (iv) the ongoing consolidation of the records management industry. The Company believes that it is one of only four records management providers with a national operating presence, the balance being regional or, in most instances, single-city operators. According to the Association of Commercial Records Centers (the "ACRC"), a trade group of approximately 500 members, as of January 1994 (the latest date for which such information is available), approximately 2,600 firms offered records storage and management services in the United States. The Company believes that there is a trend toward consolidation in the records management industry and that such trend will continue to accelerate primarily because of: (i) the opportunities to achieve economies of scale; (ii) the industry's capital requirements for growth; (iii) customer demands for more sophisticated technology-based solutions; and (iv) the preference of certain large, national customers to outsource a significant portion of their records management functions to one vendor with a national presence, such as Iron Mountain. Financial Characteristics of Iron Mountain's Business Iron Mountain's records management business has the following financial characteristics: (bullet)Recurring Revenues. Iron Mountain derives a majority of its revenues from fixed periodic (usually monthly) fees charged to customers for storage of records. Storage revenues have grown for 30 consecutive quarters and have represented approximately 60% of the Company's total revenues in each of the last five years. Once a customer places a record in storage with the Company and until that record is destroyed or permanently removed (for which the Company typically receives a service fee), the Company receives recurring payments of fixed periodic fees without incurring additional labor or marketing expenses or significant capital costs. The stable and growing storage base also provides the foundation for increases in revenues and EBITDA from service activities and sales of storage materials. (bullet)Historically Non-Cyclical Business. Iron Mountain has not experienced a reduction of its business as a result of past general economic downturns, although there can be no assurance that this would be the case in the future. Management believes that the outsourcing of records management may accelerate during economic downturns as companies focus on reducing costs through outsourcing non-core operating functions. In addition, management believes that companies that have outsourced records management are less likely during economic downturns to incur the move-out costs and other expenses associated with switching vendors or moving records management in-house. (bullet)Inherent Growth from Existing Customers. The Company's customers have on average generated additional Cartons at a faster rate than stored Cartons have been destroyed or permanently removed. From 1992 to 1995, net Cartons from existing customers grew at an average annual rate of 6.7%. The Company believes the consistent growth of its storage revenues is the result of a number of additional factors, including: (i) the trend toward increased records retention; (ii) customer satisfaction with the Company's services; and (iii) the costs and inconvenience of moving storage operations in-house or to another provider of records management services. (bullet)Diversified and Stable Customer Base. The Company has over 19,000 customer accounts in a variety of industries. The Company currently provides services to more than half of the Fortune 500 and numerous legal, banking, healthcare, accounting, insurance, entertainment and government organizations. Only one of the Company's customers accounted for more than 3% of revenues in 1993, 1994 or 1995. From 1992 to 1995, average annual permanent removals of Cartons represented only approximately 4% of total Cartons stored. (bullet)Capital Expenditures Related Primarily to Growth. The Company's business requires limited annual maintenance capital expenditures. Maintenance capital expenditures were $1.8 million, $1.2 million and $0.9 million in 1993, 1994 and 1995, respectively. From 1992 to 1995, over 90% of the Company's aggregate capital expenditures were growth-related investments, primarily in racking systems, new buildings and leasehold improvements, equipment for new facilities, management information systems and facilities restructuring. These growth-related capital expenditures are primarily discretionary and create additional capacity for increases in revenues and EBITDA. Business Strategy Iron Mountain's business strategy is to increase revenues and EBITDA while maintaining a low-cost operating structure and providing premium service. The Company intends to generate growth by increasing its storage and service revenues from existing customers, adding new customers and making acquisitions. The Company's strategy is based on the following elements: (bullet)Provide Superior Customer Service. The Company believes it has a reputation for providing reliable, quality service based on its more than 45 years of operations, its commitment to providing premium customer service and the continuity and depth of its management team. The Company has successfully implemented a decentralized management structure that enables the Company to respond quickly and flexibly to local customer needs. Iron Mountain's proprietary Safekeeper(R) system enables it to quickly provide customized records management solutions to its customers, enhancing the quality of its services. In addition, Iron Mountain's national operating presence allows it to better service large organizations that require records management functions at multiple, geographically diverse facilities. (bullet)Capitalize on Operating Efficiencies. Iron Mountain pursues a low-cost operating strategy based primarily on achieving economies of scale in the areas of storage, labor and transportation, general and administrative functions and management information systems. Because occupancy costs are a major component of the Company's cost of sales, its real estate management staff aggressively seeks to minimize per Carton storage costs by designing racking systems and operating space to maximize facility storage efficiency, negotiating favorable facility leases, contracting for facilities to be built to its custom specifications, and leasing larger facilities in order to reduce operating costs per Carton. The Company seeks to increase labor efficiency by offering incentive compensation to all full-time employees based upon achieving specific operating targets. Certain operating costs, such as the maintenance of local delivery fleets, general and administrative costs and management information systems, offer economies of scale, providing the Company with operating leverage and the ability to increase its efficiency through further growth. (bullet)Pursue Acquisition Opportunities. The Company believes that it is well positioned to participate in the further consolidation of the records management industry. Iron Mountain's management team has successfully completed 18 acquisitions since the Company embarked on a proactive acquisition strategy in mid-1994, and one additional acquisition is currently pending. The Company intends to continue to make fold-in acquisitions to augment its operations in existing markets and to make strategic acquisitions in new geographic markets, with an emphasis on the 50 largest markets in the United States and potentially in certain markets outside the United States. Following an acquisition in a new market, the Company seeks to increase its business with the acquired customer base and to supplement that growth both with new customers and through appropriate fold-in acquisitions. In addition, the Company has successfully reduced the cost structure of its acquired operations by implementing its efficient operating strategies and leveraging its centralized administrative resources and management information systems. (bullet)Leverage Proprietary Safekeeper System. The Company pioneered the application of advanced information technology to the records management industry. Iron Mountain's proprietary Safekeeper system provides advanced inventory control and information access, enabling the Company to provide faster, higher quality and more flexible solutions to its customers and to lower the costs of its operations. Safekeeper has been designed to easily and effectively integrate newly acquired records management companies and offer improved levels of customer service and records management capabilities to customers acquired through acquisitions. Iron Mountain's Safekeeper system exploits bar-code technology to provide a comprehensive, standardized approach to tracking, accessing and retrieving records. Safekeeper offers state-of-the-art records management capabilities and ease of access to customers while featuring security functions to protect customer information from unauthorized access. Since 1992, the Company has invested $12.5 million to develop and refine its management information systems, including Safekeeper. THE OFFERING <TABLE> <CAPTION> <S> <C> Securities Offered $150,000,000 principal amount of % Senior Subordinated Notes due 2006 (the "Notes"). Maturity Date , 2006 Interest Payment Dates and of each year, commencing , 1997. Guarantees The Notes will be fully and unconditionally guaranteed on an unsecured senior subordinated and joint and several basis (the "Subsidiary Guarantees") by substantially all of the Company's present and future Restricted Subsidiaries (collectively, the "Guarantors"). Each of the Guarantors has also guaranteed unconditionally the indebtedness outstanding under the Company's existing bank credit facility (the "Credit Agreement") and will guarantee unconditionally the indebtedness outstanding under the new bank credit facility the Company intends to enter into with its lenders (the "New Credit Facility"). See "Description of the Notes--Subsidiary Guarantees." Subordination The Notes will be general unsecured senior subordinated obligations of the Company ranking junior to all existing and future Senior Debt of the Company, including any indebtedness that may be incurred under the Credit Agreement or the New Credit Facility. The Subsidiary Guarantees will rank junior to all existing and future Senior Debt of the Guarantors. As of June 30, 1996, on a pro forma basis after giving effect to the Transactions, the aggregate outstanding principal amount of Senior Debt of the Company and the Guarantors would have been $24.5 million. See "Description of the Notes--Subordination." Optional Redemption Except as described below, the Notes are not redeemable by the Company prior to , 2001. Thereafter, the Notes are redeemable at the option of the Company, in whole or in part, at any time and from time to time, at the redemption prices set forth herein plus accrued and unpaid interest to, but excluding, the date of redemption. In addition, during the first 36 months after the date of issuance of the Notes, the Company, at its option, may redeem up to 35% of the initial principal amount of the Notes with the net proceeds of one or more Qualified Equity Offerings at a redemption price equal to %, plus accrued and unpaid interest to, but excluding, the date of redemption; provided that at least 65% of the initial principal amount of the Notes remains outstanding after each such redemption. See "Description of the Notes--Optional Redemption." Mandatory Redemption Except with respect to required repurchases upon the occurrence of a Change of Control or in the event of certain Asset Sales, the Company is not required to make sinking fund or redemption payments with respect to the Notes at any time prior to maturity. See "Description of the Notes-- Mandatory Redemption." Change of Control Upon the occurrence of a Change of Control, each Holder of Notes may require the Company to repurchase such Notes at 101% of the principal amount thereof, plus accrued and unpaid interest to, but excluding, the date of repurchase. See "Description of the Notes--Repurchase at the Option of Holders--Change of Control." Certain Covenants The Indenture governing the Notes (the "Indenture") will contain covenants restricting or limiting the ability of the Company and its Restricted Subsidiaries to, among other things: (i) incur additional indebtedness, including indebtedness ranking senior to the Notes and junior to any Senior Debt; (ii) pay dividends or make other restricted payments; (iii) make asset dispositions; (iv) permit liens; (v) enter into sale and leaseback transactions; (vi) enter into certain mergers; (vii) make certain investments; and (viii) enter into transactions with related persons. See "Description of the Notes--Certain Covenants." Use of Proceeds The net proceeds of the Offering will be used to repay outstanding bank debt and certain other indebtedness and to fund a portion of the purchase price of the Pending Acquisition. </TABLE> RISK FACTORS For a discussion of certain material factors that should be considered in connection with an investment in the Notes offered hereby, see "Risk Factors" on pages 10 to 14.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0001020889_iron_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001020889_iron_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..79cfffa03d24a8713cd8f692794507f22b44abb7
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0001020889_iron_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this Prospectus. References to "Iron Mountain" and the "Company" include Iron Mountain Incorporated (including predecessor entities) and its consolidated subsidiaries, unless the context otherwise requires. THE COMPANY Iron Mountain is the largest records management company in the United States, as measured by revenues. The Company is a full-service provider of records management and related services, enabling customers to outsource records management functions. Pro forma for the Acquisitions (as defined herein), as of June 30, 1996, the Company managed approximately 29.6 million Cartons* in 103 records centers in 33 markets nationwide. The Company has a diversified base of over 19,000 customer accounts, which includes more than half of the Fortune 500 and numerous legal, banking, healthcare, accounting, insurance, entertainment and government organizations. The Company provides storage and related services for all major media, including paper (which is the dominant form of records retention and which has accounted for approximately 85% of the Company's revenues since 1992), computer disks and tapes, microfilm and microfiche, master audio and video tapes, film and optical disks, X-rays and blueprints. The Company's principal services include filing, retrieval and destruction of records, courier pick-up and delivery, database management and customized reporting. The Company also sells storage materials and provides consulting and other records-related services. The Company continues to capitalize on its leading position in the records management industry and the industry trends of increased records retention, outsourcing of records management and vendor consolidation. As a result, the Company has achieved significant increases in revenues and EBITDA (as defined herein). From 1991 to 1995, Iron Mountain's total revenues increased from $62.8 million to $104.4 million primarily from internal growth, representing a compound annual growth rate ("CAGR") of 13.5%. During the same period, storage revenues grew at a 12.9% CAGR while service and storage material sales revenues grew at a 14.6% CAGR. From 1991 to 1995, the Company's EBITDA grew from $15.0 million to $26.1 million, representing a 14.9% CAGR. Revenues and EBITDA for the six months ended June 30, 1996 increased 27.3% (10.2% from internal growth and 17.1% from acquisitions) and 24.8%, respectively, over the same period in 1995. For a discussion of the significance of EBITDA and other measures of the Company's performance determined in accordance with generally accepted accounting principles ("GAAP") and the Company's sources and applications of cash flow, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview" and "--Liquidity and Capital Resources." Industry Overview According to industry sources, organizations in the United States generate an estimated four trillion documents each year, many of which must be retained and remain available for reference for many years. These records may be generally divided into two categories: active and inactive. Inactive records, which are the principal focus of the records management industry, consist of records that are not needed for immediate access but which must be retained for legal or regulatory reasons or for occasional reference to support ongoing business operations. Based on industry studies, the Company believes that inactive records make up approximately 80% of all records. The Company believes that the volume of inactive records is increasing for a number of reasons, including: (i) the rapid growth of inexpensive document producing technologies such as facsimile, desktop printing and computer networking; (ii) increased regulatory requirements; (iii) concerns over possible future litigation and the resulting increases in volume and holding periods of documentation; (iv) the high cost of reviewing records and deciding whether to retain or destroy them; and (v) the failure of many entities to adopt or follow policies on records destruction. Despite the growth of new "paperless" technologies, such as the Internet and e-mail, management believes that stored information remains predominantly paper-based and that such technologies have promoted the creation of hard copies of such electronic information. - ------------- * The term "Carton" is defined as a measurement of volume equal to a single standard storage carton, approximately 1.2 cubic feet. The number of Cartons stored does not include storage volumes in the Company's vital records services and data protection services, which are described under "Business." The Company believes that it benefits from several industry fundamentals, including: (i) the historically non- cyclical nature of the records management industry; (ii) the continued trend towards corporate outsourcing of records management functions; (iii) the ability of larger records management companies to achieve economies of scale with respect to labor, real estate costs and the utilization of management information systems; and (iv) the ongoing consolidation of the records management industry. The Company believes that it is one of only four records management providers with a national operating presence, the balance being regional or, in most instances, single-city operators. According to the Association of Commercial Records Centers (the "ACRC"), a trade group of approximately 500 members, as of January 1994 (the latest date for which such information is available), approximately 2,600 firms offered records storage and management services in the United States. The Company believes that there is a trend toward consolidation in the records management industry and that such trend will continue to accelerate primarily because of: (i) the opportunities to achieve economies of scale; (ii) the industry's capital requirements for growth; (iii) customer demands for more sophisticated technology-based solutions; and (iv) the preference of certain large, national customers to outsource a significant portion of their records management functions to one vendor with a national presence, such as Iron Mountain. Financial Characteristics of Iron Mountain's Business Iron Mountain's records management business has the following financial characteristics: (bullet)Recurring Revenues. Iron Mountain derives a majority of its revenues from fixed periodic (usually monthly) fees charged to customers for storage of records. Storage revenues have grown for 30 consecutive quarters and have represented approximately 60% of the Company's total revenues in each of the last five years. Once a customer places a record in storage with the Company and until that record is destroyed or permanently removed (for which the Company typically receives a service fee), the Company receives recurring payments of fixed periodic fees without incurring additional labor or marketing expenses or significant capital costs. The stable and growing storage base also provides the foundation for increases in revenues and EBITDA from service activities and sales of storage materials. (bullet)Historically Non-Cyclical Business. Iron Mountain has not experienced a reduction of its business as a result of past general economic downturns, although there can be no assurance that this would be the case in the future. Management believes that the outsourcing of records management may accelerate during economic downturns as companies focus on reducing costs through outsourcing non-core operating functions. In addition, management believes that companies that have outsourced records management are less likely during economic downturns to incur the move-out costs and other expenses associated with switching vendors or moving records management in-house. (bullet)Inherent Growth from Existing Customers. The Company's customers have on average generated additional Cartons at a faster rate than stored Cartons have been destroyed or permanently removed. From 1992 to 1995, net Cartons from existing customers grew at an average annual rate of 6.7%. The Company believes the consistent growth of its storage revenues is the result of a number of additional factors, including: (i) the trend toward increased records retention; (ii) customer satisfaction with the Company's services; and (iii) the costs and inconvenience of moving storage operations in-house or to another provider of records management services. (bullet)Diversified and Stable Customer Base. The Company has over 19,000 customer accounts in a variety of industries. The Company currently provides services to more than half of the Fortune 500 and numerous legal, banking, healthcare, accounting, insurance, entertainment and government organizations. Only one of the Company's customers accounted for more than 3% of revenues in 1993, 1994 or 1995. From 1992 to 1995, average annual permanent removals of Cartons represented only approximately 4% of total Cartons stored. (bullet)Capital Expenditures Related Primarily to Growth. The Company's business requires limited annual maintenance capital expenditures. Maintenance capital expenditures were $1.8 million, $1.2 million and $0.9 million in 1993, 1994 and 1995, respectively. From 1992 to 1995, over 90% of the Company's aggregate capital expenditures were growth-related investments, primarily in racking systems, new buildings and leasehold improvements, equipment for new facilities, management information systems and facilities restructuring. These growth-related capital expenditures are primarily discretionary and create additional capacity for increases in revenues and EBITDA. Business Strategy Iron Mountain's business strategy is to increase revenues and EBITDA while maintaining a low-cost operating structure and providing premium service. The Company intends to generate growth by increasing its storage and service revenues from existing customers, adding new customers and making acquisitions. The Company's strategy is based on the following elements: (bullet)Provide Superior Customer Service. The Company believes it has a reputation for providing reliable, quality service based on its more than 45 years of operations, its commitment to providing premium customer service and the continuity and depth of its management team. The Company has successfully implemented a decentralized management structure that enables the Company to respond quickly and flexibly to local customer needs. Iron Mountain's proprietary Safekeeper(R) system enables it to quickly provide customized records management solutions to its customers, enhancing the quality of its services. In addition, Iron Mountain's national operating presence allows it to better service large organizations that require records management functions at multiple, geographically diverse facilities. (bullet)Capitalize on Operating Efficiencies. Iron Mountain pursues a low-cost operating strategy based primarily on achieving economies of scale in the areas of storage, labor and transportation, general and administrative functions and management information systems. Because occupancy costs are a major component of the Company's cost of sales, its real estate management staff aggressively seeks to minimize per Carton storage costs by designing racking systems and operating space to maximize facility storage efficiency, negotiating favorable facility leases, contracting for facilities to be built to its custom specifications, and leasing larger facilities in order to reduce operating costs per Carton. The Company seeks to increase labor efficiency by offering incentive compensation to all full-time employees based upon achieving specific operating targets. Certain operating costs, such as the maintenance of local delivery fleets, general and administrative costs and management information systems, offer economies of scale, providing the Company with operating leverage and the ability to increase its efficiency through further growth. (bullet)Pursue Acquisition Opportunities. The Company believes that it is well positioned to participate in the further consolidation of the records management industry. Iron Mountain's management team has successfully completed 18 acquisitions since the Company embarked on a proactive acquisition strategy in mid-1994, and one additional acquisition is currently pending. The Company intends to continue to make fold-in acquisitions to augment its operations in existing markets and to make strategic acquisitions in new geographic markets, with an emphasis on the 50 largest markets in the United States and potentially in certain markets outside the United States. Following an acquisition in a new market, the Company seeks to increase its business with the acquired customer base and to supplement that growth both with new customers and through appropriate fold-in acquisitions. In addition, the Company has successfully reduced the cost structure of its acquired operations by implementing its efficient operating strategies and leveraging its centralized administrative resources and management information systems. (bullet)Leverage Proprietary Safekeeper System. The Company pioneered the application of advanced information technology to the records management industry. Iron Mountain's proprietary Safekeeper system provides advanced inventory control and information access, enabling the Company to provide faster, higher quality and more flexible solutions to its customers and to lower the costs of its operations. Safekeeper has been designed to easily and effectively integrate newly acquired records management companies and offer improved levels of customer service and records management capabilities to customers acquired through acquisitions. Iron Mountain's Safekeeper system exploits bar-code technology to provide a comprehensive, standardized approach to tracking, accessing and retrieving records. Safekeeper offers state-of-the-art records management capabilities and ease of access to customers while featuring security functions to protect customer information from unauthorized access. Since 1992, the Company has invested $12.5 million to develop and refine its management information systems, including Safekeeper. THE OFFERING <TABLE> <CAPTION> <S> <C> Securities Offered $150,000,000 principal amount of % Senior Subordinated Notes due 2006 (the "Notes"). Maturity Date , 2006 Interest Payment Dates and of each year, commencing , 1997. Guarantees The Notes will be fully and unconditionally guaranteed on an unsecured senior subordinated and joint and several basis (the "Subsidiary Guarantees") by substantially all of the Company's present and future Restricted Subsidiaries (collectively, the "Guarantors"). Each of the Guarantors has also guaranteed unconditionally the indebtedness outstanding under the Company's existing bank credit facility (the "Credit Agreement") and will guarantee unconditionally the indebtedness outstanding under the new bank credit facility the Company intends to enter into with its lenders (the "New Credit Facility"). See "Description of the Notes--Subsidiary Guarantees." Subordination The Notes will be general unsecured senior subordinated obligations of the Company ranking junior to all existing and future Senior Debt of the Company, including any indebtedness that may be incurred under the Credit Agreement or the New Credit Facility. The Subsidiary Guarantees will rank junior to all existing and future Senior Debt of the Guarantors. As of June 30, 1996, on a pro forma basis after giving effect to the Transactions, the aggregate outstanding principal amount of Senior Debt of the Company and the Guarantors would have been $24.5 million. See "Description of the Notes--Subordination." Optional Redemption Except as described below, the Notes are not redeemable by the Company prior to , 2001. Thereafter, the Notes are redeemable at the option of the Company, in whole or in part, at any time and from time to time, at the redemption prices set forth herein plus accrued and unpaid interest to, but excluding, the date of redemption. In addition, during the first 36 months after the date of issuance of the Notes, the Company, at its option, may redeem up to 35% of the initial principal amount of the Notes with the net proceeds of one or more Qualified Equity Offerings at a redemption price equal to %, plus accrued and unpaid interest to, but excluding, the date of redemption; provided that at least 65% of the initial principal amount of the Notes remains outstanding after each such redemption. See "Description of the Notes--Optional Redemption." Mandatory Redemption Except with respect to required repurchases upon the occurrence of a Change of Control or in the event of certain Asset Sales, the Company is not required to make sinking fund or redemption payments with respect to the Notes at any time prior to maturity. See "Description of the Notes-- Mandatory Redemption." Change of Control Upon the occurrence of a Change of Control, each Holder of Notes may require the Company to repurchase such Notes at 101% of the principal amount thereof, plus accrued and unpaid interest to, but excluding, the date of repurchase. See "Description of the Notes--Repurchase at the Option of Holders--Change of Control." Certain Covenants The Indenture governing the Notes (the "Indenture") will contain covenants restricting or limiting the ability of the Company and its Restricted Subsidiaries to, among other things: (i) incur additional indebtedness, including indebtedness ranking senior to the Notes and junior to any Senior Debt; (ii) pay dividends or make other restricted payments; (iii) make asset dispositions; (iv) permit liens; (v) enter into sale and leaseback transactions; (vi) enter into certain mergers; (vii) make certain investments; and (viii) enter into transactions with related persons. See "Description of the Notes--Certain Covenants." Use of Proceeds The net proceeds of the Offering will be used to repay outstanding bank debt and certain other indebtedness and to fund a portion of the purchase price of the Pending Acquisition. </TABLE> RISK FACTORS For a discussion of certain material factors that should be considered in connection with an investment in the Notes offered hereby, see "Risk Factors" on pages 10 to 14.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001020890_iron_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001020890_iron_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..79cfffa03d24a8713cd8f692794507f22b44abb7
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this Prospectus. References to "Iron Mountain" and the "Company" include Iron Mountain Incorporated (including predecessor entities) and its consolidated subsidiaries, unless the context otherwise requires. THE COMPANY Iron Mountain is the largest records management company in the United States, as measured by revenues. The Company is a full-service provider of records management and related services, enabling customers to outsource records management functions. Pro forma for the Acquisitions (as defined herein), as of June 30, 1996, the Company managed approximately 29.6 million Cartons* in 103 records centers in 33 markets nationwide. The Company has a diversified base of over 19,000 customer accounts, which includes more than half of the Fortune 500 and numerous legal, banking, healthcare, accounting, insurance, entertainment and government organizations. The Company provides storage and related services for all major media, including paper (which is the dominant form of records retention and which has accounted for approximately 85% of the Company's revenues since 1992), computer disks and tapes, microfilm and microfiche, master audio and video tapes, film and optical disks, X-rays and blueprints. The Company's principal services include filing, retrieval and destruction of records, courier pick-up and delivery, database management and customized reporting. The Company also sells storage materials and provides consulting and other records-related services. The Company continues to capitalize on its leading position in the records management industry and the industry trends of increased records retention, outsourcing of records management and vendor consolidation. As a result, the Company has achieved significant increases in revenues and EBITDA (as defined herein). From 1991 to 1995, Iron Mountain's total revenues increased from $62.8 million to $104.4 million primarily from internal growth, representing a compound annual growth rate ("CAGR") of 13.5%. During the same period, storage revenues grew at a 12.9% CAGR while service and storage material sales revenues grew at a 14.6% CAGR. From 1991 to 1995, the Company's EBITDA grew from $15.0 million to $26.1 million, representing a 14.9% CAGR. Revenues and EBITDA for the six months ended June 30, 1996 increased 27.3% (10.2% from internal growth and 17.1% from acquisitions) and 24.8%, respectively, over the same period in 1995. For a discussion of the significance of EBITDA and other measures of the Company's performance determined in accordance with generally accepted accounting principles ("GAAP") and the Company's sources and applications of cash flow, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview" and "--Liquidity and Capital Resources." Industry Overview According to industry sources, organizations in the United States generate an estimated four trillion documents each year, many of which must be retained and remain available for reference for many years. These records may be generally divided into two categories: active and inactive. Inactive records, which are the principal focus of the records management industry, consist of records that are not needed for immediate access but which must be retained for legal or regulatory reasons or for occasional reference to support ongoing business operations. Based on industry studies, the Company believes that inactive records make up approximately 80% of all records. The Company believes that the volume of inactive records is increasing for a number of reasons, including: (i) the rapid growth of inexpensive document producing technologies such as facsimile, desktop printing and computer networking; (ii) increased regulatory requirements; (iii) concerns over possible future litigation and the resulting increases in volume and holding periods of documentation; (iv) the high cost of reviewing records and deciding whether to retain or destroy them; and (v) the failure of many entities to adopt or follow policies on records destruction. Despite the growth of new "paperless" technologies, such as the Internet and e-mail, management believes that stored information remains predominantly paper-based and that such technologies have promoted the creation of hard copies of such electronic information. - ------------- * The term "Carton" is defined as a measurement of volume equal to a single standard storage carton, approximately 1.2 cubic feet. The number of Cartons stored does not include storage volumes in the Company's vital records services and data protection services, which are described under "Business." The Company believes that it benefits from several industry fundamentals, including: (i) the historically non- cyclical nature of the records management industry; (ii) the continued trend towards corporate outsourcing of records management functions; (iii) the ability of larger records management companies to achieve economies of scale with respect to labor, real estate costs and the utilization of management information systems; and (iv) the ongoing consolidation of the records management industry. The Company believes that it is one of only four records management providers with a national operating presence, the balance being regional or, in most instances, single-city operators. According to the Association of Commercial Records Centers (the "ACRC"), a trade group of approximately 500 members, as of January 1994 (the latest date for which such information is available), approximately 2,600 firms offered records storage and management services in the United States. The Company believes that there is a trend toward consolidation in the records management industry and that such trend will continue to accelerate primarily because of: (i) the opportunities to achieve economies of scale; (ii) the industry's capital requirements for growth; (iii) customer demands for more sophisticated technology-based solutions; and (iv) the preference of certain large, national customers to outsource a significant portion of their records management functions to one vendor with a national presence, such as Iron Mountain. Financial Characteristics of Iron Mountain's Business Iron Mountain's records management business has the following financial characteristics: (bullet)Recurring Revenues. Iron Mountain derives a majority of its revenues from fixed periodic (usually monthly) fees charged to customers for storage of records. Storage revenues have grown for 30 consecutive quarters and have represented approximately 60% of the Company's total revenues in each of the last five years. Once a customer places a record in storage with the Company and until that record is destroyed or permanently removed (for which the Company typically receives a service fee), the Company receives recurring payments of fixed periodic fees without incurring additional labor or marketing expenses or significant capital costs. The stable and growing storage base also provides the foundation for increases in revenues and EBITDA from service activities and sales of storage materials. (bullet)Historically Non-Cyclical Business. Iron Mountain has not experienced a reduction of its business as a result of past general economic downturns, although there can be no assurance that this would be the case in the future. Management believes that the outsourcing of records management may accelerate during economic downturns as companies focus on reducing costs through outsourcing non-core operating functions. In addition, management believes that companies that have outsourced records management are less likely during economic downturns to incur the move-out costs and other expenses associated with switching vendors or moving records management in-house. (bullet)Inherent Growth from Existing Customers. The Company's customers have on average generated additional Cartons at a faster rate than stored Cartons have been destroyed or permanently removed. From 1992 to 1995, net Cartons from existing customers grew at an average annual rate of 6.7%. The Company believes the consistent growth of its storage revenues is the result of a number of additional factors, including: (i) the trend toward increased records retention; (ii) customer satisfaction with the Company's services; and (iii) the costs and inconvenience of moving storage operations in-house or to another provider of records management services. (bullet)Diversified and Stable Customer Base. The Company has over 19,000 customer accounts in a variety of industries. The Company currently provides services to more than half of the Fortune 500 and numerous legal, banking, healthcare, accounting, insurance, entertainment and government organizations. Only one of the Company's customers accounted for more than 3% of revenues in 1993, 1994 or 1995. From 1992 to 1995, average annual permanent removals of Cartons represented only approximately 4% of total Cartons stored. (bullet)Capital Expenditures Related Primarily to Growth. The Company's business requires limited annual maintenance capital expenditures. Maintenance capital expenditures were $1.8 million, $1.2 million and $0.9 million in 1993, 1994 and 1995, respectively. From 1992 to 1995, over 90% of the Company's aggregate capital expenditures were growth-related investments, primarily in racking systems, new buildings and leasehold improvements, equipment for new facilities, management information systems and facilities restructuring. These growth-related capital expenditures are primarily discretionary and create additional capacity for increases in revenues and EBITDA. Business Strategy Iron Mountain's business strategy is to increase revenues and EBITDA while maintaining a low-cost operating structure and providing premium service. The Company intends to generate growth by increasing its storage and service revenues from existing customers, adding new customers and making acquisitions. The Company's strategy is based on the following elements: (bullet)Provide Superior Customer Service. The Company believes it has a reputation for providing reliable, quality service based on its more than 45 years of operations, its commitment to providing premium customer service and the continuity and depth of its management team. The Company has successfully implemented a decentralized management structure that enables the Company to respond quickly and flexibly to local customer needs. Iron Mountain's proprietary Safekeeper(R) system enables it to quickly provide customized records management solutions to its customers, enhancing the quality of its services. In addition, Iron Mountain's national operating presence allows it to better service large organizations that require records management functions at multiple, geographically diverse facilities. (bullet)Capitalize on Operating Efficiencies. Iron Mountain pursues a low-cost operating strategy based primarily on achieving economies of scale in the areas of storage, labor and transportation, general and administrative functions and management information systems. Because occupancy costs are a major component of the Company's cost of sales, its real estate management staff aggressively seeks to minimize per Carton storage costs by designing racking systems and operating space to maximize facility storage efficiency, negotiating favorable facility leases, contracting for facilities to be built to its custom specifications, and leasing larger facilities in order to reduce operating costs per Carton. The Company seeks to increase labor efficiency by offering incentive compensation to all full-time employees based upon achieving specific operating targets. Certain operating costs, such as the maintenance of local delivery fleets, general and administrative costs and management information systems, offer economies of scale, providing the Company with operating leverage and the ability to increase its efficiency through further growth. (bullet)Pursue Acquisition Opportunities. The Company believes that it is well positioned to participate in the further consolidation of the records management industry. Iron Mountain's management team has successfully completed 18 acquisitions since the Company embarked on a proactive acquisition strategy in mid-1994, and one additional acquisition is currently pending. The Company intends to continue to make fold-in acquisitions to augment its operations in existing markets and to make strategic acquisitions in new geographic markets, with an emphasis on the 50 largest markets in the United States and potentially in certain markets outside the United States. Following an acquisition in a new market, the Company seeks to increase its business with the acquired customer base and to supplement that growth both with new customers and through appropriate fold-in acquisitions. In addition, the Company has successfully reduced the cost structure of its acquired operations by implementing its efficient operating strategies and leveraging its centralized administrative resources and management information systems. (bullet)Leverage Proprietary Safekeeper System. The Company pioneered the application of advanced information technology to the records management industry. Iron Mountain's proprietary Safekeeper system provides advanced inventory control and information access, enabling the Company to provide faster, higher quality and more flexible solutions to its customers and to lower the costs of its operations. Safekeeper has been designed to easily and effectively integrate newly acquired records management companies and offer improved levels of customer service and records management capabilities to customers acquired through acquisitions. Iron Mountain's Safekeeper system exploits bar-code technology to provide a comprehensive, standardized approach to tracking, accessing and retrieving records. Safekeeper offers state-of-the-art records management capabilities and ease of access to customers while featuring security functions to protect customer information from unauthorized access. Since 1992, the Company has invested $12.5 million to develop and refine its management information systems, including Safekeeper. THE OFFERING <TABLE> <CAPTION> <S> <C> Securities Offered $150,000,000 principal amount of % Senior Subordinated Notes due 2006 (the "Notes"). Maturity Date , 2006 Interest Payment Dates and of each year, commencing , 1997. Guarantees The Notes will be fully and unconditionally guaranteed on an unsecured senior subordinated and joint and several basis (the "Subsidiary Guarantees") by substantially all of the Company's present and future Restricted Subsidiaries (collectively, the "Guarantors"). Each of the Guarantors has also guaranteed unconditionally the indebtedness outstanding under the Company's existing bank credit facility (the "Credit Agreement") and will guarantee unconditionally the indebtedness outstanding under the new bank credit facility the Company intends to enter into with its lenders (the "New Credit Facility"). See "Description of the Notes--Subsidiary Guarantees." Subordination The Notes will be general unsecured senior subordinated obligations of the Company ranking junior to all existing and future Senior Debt of the Company, including any indebtedness that may be incurred under the Credit Agreement or the New Credit Facility. The Subsidiary Guarantees will rank junior to all existing and future Senior Debt of the Guarantors. As of June 30, 1996, on a pro forma basis after giving effect to the Transactions, the aggregate outstanding principal amount of Senior Debt of the Company and the Guarantors would have been $24.5 million. See "Description of the Notes--Subordination." Optional Redemption Except as described below, the Notes are not redeemable by the Company prior to , 2001. Thereafter, the Notes are redeemable at the option of the Company, in whole or in part, at any time and from time to time, at the redemption prices set forth herein plus accrued and unpaid interest to, but excluding, the date of redemption. In addition, during the first 36 months after the date of issuance of the Notes, the Company, at its option, may redeem up to 35% of the initial principal amount of the Notes with the net proceeds of one or more Qualified Equity Offerings at a redemption price equal to %, plus accrued and unpaid interest to, but excluding, the date of redemption; provided that at least 65% of the initial principal amount of the Notes remains outstanding after each such redemption. See "Description of the Notes--Optional Redemption." Mandatory Redemption Except with respect to required repurchases upon the occurrence of a Change of Control or in the event of certain Asset Sales, the Company is not required to make sinking fund or redemption payments with respect to the Notes at any time prior to maturity. See "Description of the Notes-- Mandatory Redemption." Change of Control Upon the occurrence of a Change of Control, each Holder of Notes may require the Company to repurchase such Notes at 101% of the principal amount thereof, plus accrued and unpaid interest to, but excluding, the date of repurchase. See "Description of the Notes--Repurchase at the Option of Holders--Change of Control." Certain Covenants The Indenture governing the Notes (the "Indenture") will contain covenants restricting or limiting the ability of the Company and its Restricted Subsidiaries to, among other things: (i) incur additional indebtedness, including indebtedness ranking senior to the Notes and junior to any Senior Debt; (ii) pay dividends or make other restricted payments; (iii) make asset dispositions; (iv) permit liens; (v) enter into sale and leaseback transactions; (vi) enter into certain mergers; (vii) make certain investments; and (viii) enter into transactions with related persons. See "Description of the Notes--Certain Covenants." Use of Proceeds The net proceeds of the Offering will be used to repay outstanding bank debt and certain other indebtedness and to fund a portion of the purchase price of the Pending Acquisition. </TABLE> RISK FACTORS For a discussion of certain material factors that should be considered in connection with an investment in the Notes offered hereby, see "Risk Factors" on pages 10 to 14.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0001020891_iron_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001020891_iron_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..79cfffa03d24a8713cd8f692794507f22b44abb7
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0001020891_iron_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this Prospectus. References to "Iron Mountain" and the "Company" include Iron Mountain Incorporated (including predecessor entities) and its consolidated subsidiaries, unless the context otherwise requires. THE COMPANY Iron Mountain is the largest records management company in the United States, as measured by revenues. The Company is a full-service provider of records management and related services, enabling customers to outsource records management functions. Pro forma for the Acquisitions (as defined herein), as of June 30, 1996, the Company managed approximately 29.6 million Cartons* in 103 records centers in 33 markets nationwide. The Company has a diversified base of over 19,000 customer accounts, which includes more than half of the Fortune 500 and numerous legal, banking, healthcare, accounting, insurance, entertainment and government organizations. The Company provides storage and related services for all major media, including paper (which is the dominant form of records retention and which has accounted for approximately 85% of the Company's revenues since 1992), computer disks and tapes, microfilm and microfiche, master audio and video tapes, film and optical disks, X-rays and blueprints. The Company's principal services include filing, retrieval and destruction of records, courier pick-up and delivery, database management and customized reporting. The Company also sells storage materials and provides consulting and other records-related services. The Company continues to capitalize on its leading position in the records management industry and the industry trends of increased records retention, outsourcing of records management and vendor consolidation. As a result, the Company has achieved significant increases in revenues and EBITDA (as defined herein). From 1991 to 1995, Iron Mountain's total revenues increased from $62.8 million to $104.4 million primarily from internal growth, representing a compound annual growth rate ("CAGR") of 13.5%. During the same period, storage revenues grew at a 12.9% CAGR while service and storage material sales revenues grew at a 14.6% CAGR. From 1991 to 1995, the Company's EBITDA grew from $15.0 million to $26.1 million, representing a 14.9% CAGR. Revenues and EBITDA for the six months ended June 30, 1996 increased 27.3% (10.2% from internal growth and 17.1% from acquisitions) and 24.8%, respectively, over the same period in 1995. For a discussion of the significance of EBITDA and other measures of the Company's performance determined in accordance with generally accepted accounting principles ("GAAP") and the Company's sources and applications of cash flow, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview" and "--Liquidity and Capital Resources." Industry Overview According to industry sources, organizations in the United States generate an estimated four trillion documents each year, many of which must be retained and remain available for reference for many years. These records may be generally divided into two categories: active and inactive. Inactive records, which are the principal focus of the records management industry, consist of records that are not needed for immediate access but which must be retained for legal or regulatory reasons or for occasional reference to support ongoing business operations. Based on industry studies, the Company believes that inactive records make up approximately 80% of all records. The Company believes that the volume of inactive records is increasing for a number of reasons, including: (i) the rapid growth of inexpensive document producing technologies such as facsimile, desktop printing and computer networking; (ii) increased regulatory requirements; (iii) concerns over possible future litigation and the resulting increases in volume and holding periods of documentation; (iv) the high cost of reviewing records and deciding whether to retain or destroy them; and (v) the failure of many entities to adopt or follow policies on records destruction. Despite the growth of new "paperless" technologies, such as the Internet and e-mail, management believes that stored information remains predominantly paper-based and that such technologies have promoted the creation of hard copies of such electronic information. - ------------- * The term "Carton" is defined as a measurement of volume equal to a single standard storage carton, approximately 1.2 cubic feet. The number of Cartons stored does not include storage volumes in the Company's vital records services and data protection services, which are described under "Business." The Company believes that it benefits from several industry fundamentals, including: (i) the historically non- cyclical nature of the records management industry; (ii) the continued trend towards corporate outsourcing of records management functions; (iii) the ability of larger records management companies to achieve economies of scale with respect to labor, real estate costs and the utilization of management information systems; and (iv) the ongoing consolidation of the records management industry. The Company believes that it is one of only four records management providers with a national operating presence, the balance being regional or, in most instances, single-city operators. According to the Association of Commercial Records Centers (the "ACRC"), a trade group of approximately 500 members, as of January 1994 (the latest date for which such information is available), approximately 2,600 firms offered records storage and management services in the United States. The Company believes that there is a trend toward consolidation in the records management industry and that such trend will continue to accelerate primarily because of: (i) the opportunities to achieve economies of scale; (ii) the industry's capital requirements for growth; (iii) customer demands for more sophisticated technology-based solutions; and (iv) the preference of certain large, national customers to outsource a significant portion of their records management functions to one vendor with a national presence, such as Iron Mountain. Financial Characteristics of Iron Mountain's Business Iron Mountain's records management business has the following financial characteristics: (bullet)Recurring Revenues. Iron Mountain derives a majority of its revenues from fixed periodic (usually monthly) fees charged to customers for storage of records. Storage revenues have grown for 30 consecutive quarters and have represented approximately 60% of the Company's total revenues in each of the last five years. Once a customer places a record in storage with the Company and until that record is destroyed or permanently removed (for which the Company typically receives a service fee), the Company receives recurring payments of fixed periodic fees without incurring additional labor or marketing expenses or significant capital costs. The stable and growing storage base also provides the foundation for increases in revenues and EBITDA from service activities and sales of storage materials. (bullet)Historically Non-Cyclical Business. Iron Mountain has not experienced a reduction of its business as a result of past general economic downturns, although there can be no assurance that this would be the case in the future. Management believes that the outsourcing of records management may accelerate during economic downturns as companies focus on reducing costs through outsourcing non-core operating functions. In addition, management believes that companies that have outsourced records management are less likely during economic downturns to incur the move-out costs and other expenses associated with switching vendors or moving records management in-house. (bullet)Inherent Growth from Existing Customers. The Company's customers have on average generated additional Cartons at a faster rate than stored Cartons have been destroyed or permanently removed. From 1992 to 1995, net Cartons from existing customers grew at an average annual rate of 6.7%. The Company believes the consistent growth of its storage revenues is the result of a number of additional factors, including: (i) the trend toward increased records retention; (ii) customer satisfaction with the Company's services; and (iii) the costs and inconvenience of moving storage operations in-house or to another provider of records management services. (bullet)Diversified and Stable Customer Base. The Company has over 19,000 customer accounts in a variety of industries. The Company currently provides services to more than half of the Fortune 500 and numerous legal, banking, healthcare, accounting, insurance, entertainment and government organizations. Only one of the Company's customers accounted for more than 3% of revenues in 1993, 1994 or 1995. From 1992 to 1995, average annual permanent removals of Cartons represented only approximately 4% of total Cartons stored. (bullet)Capital Expenditures Related Primarily to Growth. The Company's business requires limited annual maintenance capital expenditures. Maintenance capital expenditures were $1.8 million, $1.2 million and $0.9 million in 1993, 1994 and 1995, respectively. From 1992 to 1995, over 90% of the Company's aggregate capital expenditures were growth-related investments, primarily in racking systems, new buildings and leasehold improvements, equipment for new facilities, management information systems and facilities restructuring. These growth-related capital expenditures are primarily discretionary and create additional capacity for increases in revenues and EBITDA. Business Strategy Iron Mountain's business strategy is to increase revenues and EBITDA while maintaining a low-cost operating structure and providing premium service. The Company intends to generate growth by increasing its storage and service revenues from existing customers, adding new customers and making acquisitions. The Company's strategy is based on the following elements: (bullet)Provide Superior Customer Service. The Company believes it has a reputation for providing reliable, quality service based on its more than 45 years of operations, its commitment to providing premium customer service and the continuity and depth of its management team. The Company has successfully implemented a decentralized management structure that enables the Company to respond quickly and flexibly to local customer needs. Iron Mountain's proprietary Safekeeper(R) system enables it to quickly provide customized records management solutions to its customers, enhancing the quality of its services. In addition, Iron Mountain's national operating presence allows it to better service large organizations that require records management functions at multiple, geographically diverse facilities. (bullet)Capitalize on Operating Efficiencies. Iron Mountain pursues a low-cost operating strategy based primarily on achieving economies of scale in the areas of storage, labor and transportation, general and administrative functions and management information systems. Because occupancy costs are a major component of the Company's cost of sales, its real estate management staff aggressively seeks to minimize per Carton storage costs by designing racking systems and operating space to maximize facility storage efficiency, negotiating favorable facility leases, contracting for facilities to be built to its custom specifications, and leasing larger facilities in order to reduce operating costs per Carton. The Company seeks to increase labor efficiency by offering incentive compensation to all full-time employees based upon achieving specific operating targets. Certain operating costs, such as the maintenance of local delivery fleets, general and administrative costs and management information systems, offer economies of scale, providing the Company with operating leverage and the ability to increase its efficiency through further growth. (bullet)Pursue Acquisition Opportunities. The Company believes that it is well positioned to participate in the further consolidation of the records management industry. Iron Mountain's management team has successfully completed 18 acquisitions since the Company embarked on a proactive acquisition strategy in mid-1994, and one additional acquisition is currently pending. The Company intends to continue to make fold-in acquisitions to augment its operations in existing markets and to make strategic acquisitions in new geographic markets, with an emphasis on the 50 largest markets in the United States and potentially in certain markets outside the United States. Following an acquisition in a new market, the Company seeks to increase its business with the acquired customer base and to supplement that growth both with new customers and through appropriate fold-in acquisitions. In addition, the Company has successfully reduced the cost structure of its acquired operations by implementing its efficient operating strategies and leveraging its centralized administrative resources and management information systems. (bullet)Leverage Proprietary Safekeeper System. The Company pioneered the application of advanced information technology to the records management industry. Iron Mountain's proprietary Safekeeper system provides advanced inventory control and information access, enabling the Company to provide faster, higher quality and more flexible solutions to its customers and to lower the costs of its operations. Safekeeper has been designed to easily and effectively integrate newly acquired records management companies and offer improved levels of customer service and records management capabilities to customers acquired through acquisitions. Iron Mountain's Safekeeper system exploits bar-code technology to provide a comprehensive, standardized approach to tracking, accessing and retrieving records. Safekeeper offers state-of-the-art records management capabilities and ease of access to customers while featuring security functions to protect customer information from unauthorized access. Since 1992, the Company has invested $12.5 million to develop and refine its management information systems, including Safekeeper. THE OFFERING <TABLE> <CAPTION> <S> <C> Securities Offered $150,000,000 principal amount of % Senior Subordinated Notes due 2006 (the "Notes"). Maturity Date , 2006 Interest Payment Dates and of each year, commencing , 1997. Guarantees The Notes will be fully and unconditionally guaranteed on an unsecured senior subordinated and joint and several basis (the "Subsidiary Guarantees") by substantially all of the Company's present and future Restricted Subsidiaries (collectively, the "Guarantors"). Each of the Guarantors has also guaranteed unconditionally the indebtedness outstanding under the Company's existing bank credit facility (the "Credit Agreement") and will guarantee unconditionally the indebtedness outstanding under the new bank credit facility the Company intends to enter into with its lenders (the "New Credit Facility"). See "Description of the Notes--Subsidiary Guarantees." Subordination The Notes will be general unsecured senior subordinated obligations of the Company ranking junior to all existing and future Senior Debt of the Company, including any indebtedness that may be incurred under the Credit Agreement or the New Credit Facility. The Subsidiary Guarantees will rank junior to all existing and future Senior Debt of the Guarantors. As of June 30, 1996, on a pro forma basis after giving effect to the Transactions, the aggregate outstanding principal amount of Senior Debt of the Company and the Guarantors would have been $24.5 million. See "Description of the Notes--Subordination." Optional Redemption Except as described below, the Notes are not redeemable by the Company prior to , 2001. Thereafter, the Notes are redeemable at the option of the Company, in whole or in part, at any time and from time to time, at the redemption prices set forth herein plus accrued and unpaid interest to, but excluding, the date of redemption. In addition, during the first 36 months after the date of issuance of the Notes, the Company, at its option, may redeem up to 35% of the initial principal amount of the Notes with the net proceeds of one or more Qualified Equity Offerings at a redemption price equal to %, plus accrued and unpaid interest to, but excluding, the date of redemption; provided that at least 65% of the initial principal amount of the Notes remains outstanding after each such redemption. See "Description of the Notes--Optional Redemption." Mandatory Redemption Except with respect to required repurchases upon the occurrence of a Change of Control or in the event of certain Asset Sales, the Company is not required to make sinking fund or redemption payments with respect to the Notes at any time prior to maturity. See "Description of the Notes-- Mandatory Redemption." Change of Control Upon the occurrence of a Change of Control, each Holder of Notes may require the Company to repurchase such Notes at 101% of the principal amount thereof, plus accrued and unpaid interest to, but excluding, the date of repurchase. See "Description of the Notes--Repurchase at the Option of Holders--Change of Control." Certain Covenants The Indenture governing the Notes (the "Indenture") will contain covenants restricting or limiting the ability of the Company and its Restricted Subsidiaries to, among other things: (i) incur additional indebtedness, including indebtedness ranking senior to the Notes and junior to any Senior Debt; (ii) pay dividends or make other restricted payments; (iii) make asset dispositions; (iv) permit liens; (v) enter into sale and leaseback transactions; (vi) enter into certain mergers; (vii) make certain investments; and (viii) enter into transactions with related persons. See "Description of the Notes--Certain Covenants." Use of Proceeds The net proceeds of the Offering will be used to repay outstanding bank debt and certain other indebtedness and to fund a portion of the purchase price of the Pending Acquisition. </TABLE> RISK FACTORS For a discussion of certain material factors that should be considered in connection with an investment in the Notes offered hereby, see "Risk Factors" on pages 10 to 14.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0001020892_iron_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001020892_iron_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..79cfffa03d24a8713cd8f692794507f22b44abb7
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this Prospectus. References to "Iron Mountain" and the "Company" include Iron Mountain Incorporated (including predecessor entities) and its consolidated subsidiaries, unless the context otherwise requires. THE COMPANY Iron Mountain is the largest records management company in the United States, as measured by revenues. The Company is a full-service provider of records management and related services, enabling customers to outsource records management functions. Pro forma for the Acquisitions (as defined herein), as of June 30, 1996, the Company managed approximately 29.6 million Cartons* in 103 records centers in 33 markets nationwide. The Company has a diversified base of over 19,000 customer accounts, which includes more than half of the Fortune 500 and numerous legal, banking, healthcare, accounting, insurance, entertainment and government organizations. The Company provides storage and related services for all major media, including paper (which is the dominant form of records retention and which has accounted for approximately 85% of the Company's revenues since 1992), computer disks and tapes, microfilm and microfiche, master audio and video tapes, film and optical disks, X-rays and blueprints. The Company's principal services include filing, retrieval and destruction of records, courier pick-up and delivery, database management and customized reporting. The Company also sells storage materials and provides consulting and other records-related services. The Company continues to capitalize on its leading position in the records management industry and the industry trends of increased records retention, outsourcing of records management and vendor consolidation. As a result, the Company has achieved significant increases in revenues and EBITDA (as defined herein). From 1991 to 1995, Iron Mountain's total revenues increased from $62.8 million to $104.4 million primarily from internal growth, representing a compound annual growth rate ("CAGR") of 13.5%. During the same period, storage revenues grew at a 12.9% CAGR while service and storage material sales revenues grew at a 14.6% CAGR. From 1991 to 1995, the Company's EBITDA grew from $15.0 million to $26.1 million, representing a 14.9% CAGR. Revenues and EBITDA for the six months ended June 30, 1996 increased 27.3% (10.2% from internal growth and 17.1% from acquisitions) and 24.8%, respectively, over the same period in 1995. For a discussion of the significance of EBITDA and other measures of the Company's performance determined in accordance with generally accepted accounting principles ("GAAP") and the Company's sources and applications of cash flow, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview" and "--Liquidity and Capital Resources." Industry Overview According to industry sources, organizations in the United States generate an estimated four trillion documents each year, many of which must be retained and remain available for reference for many years. These records may be generally divided into two categories: active and inactive. Inactive records, which are the principal focus of the records management industry, consist of records that are not needed for immediate access but which must be retained for legal or regulatory reasons or for occasional reference to support ongoing business operations. Based on industry studies, the Company believes that inactive records make up approximately 80% of all records. The Company believes that the volume of inactive records is increasing for a number of reasons, including: (i) the rapid growth of inexpensive document producing technologies such as facsimile, desktop printing and computer networking; (ii) increased regulatory requirements; (iii) concerns over possible future litigation and the resulting increases in volume and holding periods of documentation; (iv) the high cost of reviewing records and deciding whether to retain or destroy them; and (v) the failure of many entities to adopt or follow policies on records destruction. Despite the growth of new "paperless" technologies, such as the Internet and e-mail, management believes that stored information remains predominantly paper-based and that such technologies have promoted the creation of hard copies of such electronic information. - ------------- * The term "Carton" is defined as a measurement of volume equal to a single standard storage carton, approximately 1.2 cubic feet. The number of Cartons stored does not include storage volumes in the Company's vital records services and data protection services, which are described under "Business." The Company believes that it benefits from several industry fundamentals, including: (i) the historically non- cyclical nature of the records management industry; (ii) the continued trend towards corporate outsourcing of records management functions; (iii) the ability of larger records management companies to achieve economies of scale with respect to labor, real estate costs and the utilization of management information systems; and (iv) the ongoing consolidation of the records management industry. The Company believes that it is one of only four records management providers with a national operating presence, the balance being regional or, in most instances, single-city operators. According to the Association of Commercial Records Centers (the "ACRC"), a trade group of approximately 500 members, as of January 1994 (the latest date for which such information is available), approximately 2,600 firms offered records storage and management services in the United States. The Company believes that there is a trend toward consolidation in the records management industry and that such trend will continue to accelerate primarily because of: (i) the opportunities to achieve economies of scale; (ii) the industry's capital requirements for growth; (iii) customer demands for more sophisticated technology-based solutions; and (iv) the preference of certain large, national customers to outsource a significant portion of their records management functions to one vendor with a national presence, such as Iron Mountain. Financial Characteristics of Iron Mountain's Business Iron Mountain's records management business has the following financial characteristics: (bullet)Recurring Revenues. Iron Mountain derives a majority of its revenues from fixed periodic (usually monthly) fees charged to customers for storage of records. Storage revenues have grown for 30 consecutive quarters and have represented approximately 60% of the Company's total revenues in each of the last five years. Once a customer places a record in storage with the Company and until that record is destroyed or permanently removed (for which the Company typically receives a service fee), the Company receives recurring payments of fixed periodic fees without incurring additional labor or marketing expenses or significant capital costs. The stable and growing storage base also provides the foundation for increases in revenues and EBITDA from service activities and sales of storage materials. (bullet)Historically Non-Cyclical Business. Iron Mountain has not experienced a reduction of its business as a result of past general economic downturns, although there can be no assurance that this would be the case in the future. Management believes that the outsourcing of records management may accelerate during economic downturns as companies focus on reducing costs through outsourcing non-core operating functions. In addition, management believes that companies that have outsourced records management are less likely during economic downturns to incur the move-out costs and other expenses associated with switching vendors or moving records management in-house. (bullet)Inherent Growth from Existing Customers. The Company's customers have on average generated additional Cartons at a faster rate than stored Cartons have been destroyed or permanently removed. From 1992 to 1995, net Cartons from existing customers grew at an average annual rate of 6.7%. The Company believes the consistent growth of its storage revenues is the result of a number of additional factors, including: (i) the trend toward increased records retention; (ii) customer satisfaction with the Company's services; and (iii) the costs and inconvenience of moving storage operations in-house or to another provider of records management services. (bullet)Diversified and Stable Customer Base. The Company has over 19,000 customer accounts in a variety of industries. The Company currently provides services to more than half of the Fortune 500 and numerous legal, banking, healthcare, accounting, insurance, entertainment and government organizations. Only one of the Company's customers accounted for more than 3% of revenues in 1993, 1994 or 1995. From 1992 to 1995, average annual permanent removals of Cartons represented only approximately 4% of total Cartons stored. (bullet)Capital Expenditures Related Primarily to Growth. The Company's business requires limited annual maintenance capital expenditures. Maintenance capital expenditures were $1.8 million, $1.2 million and $0.9 million in 1993, 1994 and 1995, respectively. From 1992 to 1995, over 90% of the Company's aggregate capital expenditures were growth-related investments, primarily in racking systems, new buildings and leasehold improvements, equipment for new facilities, management information systems and facilities restructuring. These growth-related capital expenditures are primarily discretionary and create additional capacity for increases in revenues and EBITDA. Business Strategy Iron Mountain's business strategy is to increase revenues and EBITDA while maintaining a low-cost operating structure and providing premium service. The Company intends to generate growth by increasing its storage and service revenues from existing customers, adding new customers and making acquisitions. The Company's strategy is based on the following elements: (bullet)Provide Superior Customer Service. The Company believes it has a reputation for providing reliable, quality service based on its more than 45 years of operations, its commitment to providing premium customer service and the continuity and depth of its management team. The Company has successfully implemented a decentralized management structure that enables the Company to respond quickly and flexibly to local customer needs. Iron Mountain's proprietary Safekeeper(R) system enables it to quickly provide customized records management solutions to its customers, enhancing the quality of its services. In addition, Iron Mountain's national operating presence allows it to better service large organizations that require records management functions at multiple, geographically diverse facilities. (bullet)Capitalize on Operating Efficiencies. Iron Mountain pursues a low-cost operating strategy based primarily on achieving economies of scale in the areas of storage, labor and transportation, general and administrative functions and management information systems. Because occupancy costs are a major component of the Company's cost of sales, its real estate management staff aggressively seeks to minimize per Carton storage costs by designing racking systems and operating space to maximize facility storage efficiency, negotiating favorable facility leases, contracting for facilities to be built to its custom specifications, and leasing larger facilities in order to reduce operating costs per Carton. The Company seeks to increase labor efficiency by offering incentive compensation to all full-time employees based upon achieving specific operating targets. Certain operating costs, such as the maintenance of local delivery fleets, general and administrative costs and management information systems, offer economies of scale, providing the Company with operating leverage and the ability to increase its efficiency through further growth. (bullet)Pursue Acquisition Opportunities. The Company believes that it is well positioned to participate in the further consolidation of the records management industry. Iron Mountain's management team has successfully completed 18 acquisitions since the Company embarked on a proactive acquisition strategy in mid-1994, and one additional acquisition is currently pending. The Company intends to continue to make fold-in acquisitions to augment its operations in existing markets and to make strategic acquisitions in new geographic markets, with an emphasis on the 50 largest markets in the United States and potentially in certain markets outside the United States. Following an acquisition in a new market, the Company seeks to increase its business with the acquired customer base and to supplement that growth both with new customers and through appropriate fold-in acquisitions. In addition, the Company has successfully reduced the cost structure of its acquired operations by implementing its efficient operating strategies and leveraging its centralized administrative resources and management information systems. (bullet)Leverage Proprietary Safekeeper System. The Company pioneered the application of advanced information technology to the records management industry. Iron Mountain's proprietary Safekeeper system provides advanced inventory control and information access, enabling the Company to provide faster, higher quality and more flexible solutions to its customers and to lower the costs of its operations. Safekeeper has been designed to easily and effectively integrate newly acquired records management companies and offer improved levels of customer service and records management capabilities to customers acquired through acquisitions. Iron Mountain's Safekeeper system exploits bar-code technology to provide a comprehensive, standardized approach to tracking, accessing and retrieving records. Safekeeper offers state-of-the-art records management capabilities and ease of access to customers while featuring security functions to protect customer information from unauthorized access. Since 1992, the Company has invested $12.5 million to develop and refine its management information systems, including Safekeeper. THE OFFERING <TABLE> <CAPTION> <S> <C> Securities Offered $150,000,000 principal amount of % Senior Subordinated Notes due 2006 (the "Notes"). Maturity Date , 2006 Interest Payment Dates and of each year, commencing , 1997. Guarantees The Notes will be fully and unconditionally guaranteed on an unsecured senior subordinated and joint and several basis (the "Subsidiary Guarantees") by substantially all of the Company's present and future Restricted Subsidiaries (collectively, the "Guarantors"). Each of the Guarantors has also guaranteed unconditionally the indebtedness outstanding under the Company's existing bank credit facility (the "Credit Agreement") and will guarantee unconditionally the indebtedness outstanding under the new bank credit facility the Company intends to enter into with its lenders (the "New Credit Facility"). See "Description of the Notes--Subsidiary Guarantees." Subordination The Notes will be general unsecured senior subordinated obligations of the Company ranking junior to all existing and future Senior Debt of the Company, including any indebtedness that may be incurred under the Credit Agreement or the New Credit Facility. The Subsidiary Guarantees will rank junior to all existing and future Senior Debt of the Guarantors. As of June 30, 1996, on a pro forma basis after giving effect to the Transactions, the aggregate outstanding principal amount of Senior Debt of the Company and the Guarantors would have been $24.5 million. See "Description of the Notes--Subordination." Optional Redemption Except as described below, the Notes are not redeemable by the Company prior to , 2001. Thereafter, the Notes are redeemable at the option of the Company, in whole or in part, at any time and from time to time, at the redemption prices set forth herein plus accrued and unpaid interest to, but excluding, the date of redemption. In addition, during the first 36 months after the date of issuance of the Notes, the Company, at its option, may redeem up to 35% of the initial principal amount of the Notes with the net proceeds of one or more Qualified Equity Offerings at a redemption price equal to %, plus accrued and unpaid interest to, but excluding, the date of redemption; provided that at least 65% of the initial principal amount of the Notes remains outstanding after each such redemption. See "Description of the Notes--Optional Redemption." Mandatory Redemption Except with respect to required repurchases upon the occurrence of a Change of Control or in the event of certain Asset Sales, the Company is not required to make sinking fund or redemption payments with respect to the Notes at any time prior to maturity. See "Description of the Notes-- Mandatory Redemption." Change of Control Upon the occurrence of a Change of Control, each Holder of Notes may require the Company to repurchase such Notes at 101% of the principal amount thereof, plus accrued and unpaid interest to, but excluding, the date of repurchase. See "Description of the Notes--Repurchase at the Option of Holders--Change of Control." Certain Covenants The Indenture governing the Notes (the "Indenture") will contain covenants restricting or limiting the ability of the Company and its Restricted Subsidiaries to, among other things: (i) incur additional indebtedness, including indebtedness ranking senior to the Notes and junior to any Senior Debt; (ii) pay dividends or make other restricted payments; (iii) make asset dispositions; (iv) permit liens; (v) enter into sale and leaseback transactions; (vi) enter into certain mergers; (vii) make certain investments; and (viii) enter into transactions with related persons. See "Description of the Notes--Certain Covenants." Use of Proceeds The net proceeds of the Offering will be used to repay outstanding bank debt and certain other indebtedness and to fund a portion of the purchase price of the Pending Acquisition. </TABLE> RISK FACTORS For a discussion of certain material factors that should be considered in connection with an investment in the Notes offered hereby, see "Risk Factors" on pages 10 to 14.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0001020893_iron_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001020893_iron_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..79cfffa03d24a8713cd8f692794507f22b44abb7
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0001020893_iron_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this Prospectus. References to "Iron Mountain" and the "Company" include Iron Mountain Incorporated (including predecessor entities) and its consolidated subsidiaries, unless the context otherwise requires. THE COMPANY Iron Mountain is the largest records management company in the United States, as measured by revenues. The Company is a full-service provider of records management and related services, enabling customers to outsource records management functions. Pro forma for the Acquisitions (as defined herein), as of June 30, 1996, the Company managed approximately 29.6 million Cartons* in 103 records centers in 33 markets nationwide. The Company has a diversified base of over 19,000 customer accounts, which includes more than half of the Fortune 500 and numerous legal, banking, healthcare, accounting, insurance, entertainment and government organizations. The Company provides storage and related services for all major media, including paper (which is the dominant form of records retention and which has accounted for approximately 85% of the Company's revenues since 1992), computer disks and tapes, microfilm and microfiche, master audio and video tapes, film and optical disks, X-rays and blueprints. The Company's principal services include filing, retrieval and destruction of records, courier pick-up and delivery, database management and customized reporting. The Company also sells storage materials and provides consulting and other records-related services. The Company continues to capitalize on its leading position in the records management industry and the industry trends of increased records retention, outsourcing of records management and vendor consolidation. As a result, the Company has achieved significant increases in revenues and EBITDA (as defined herein). From 1991 to 1995, Iron Mountain's total revenues increased from $62.8 million to $104.4 million primarily from internal growth, representing a compound annual growth rate ("CAGR") of 13.5%. During the same period, storage revenues grew at a 12.9% CAGR while service and storage material sales revenues grew at a 14.6% CAGR. From 1991 to 1995, the Company's EBITDA grew from $15.0 million to $26.1 million, representing a 14.9% CAGR. Revenues and EBITDA for the six months ended June 30, 1996 increased 27.3% (10.2% from internal growth and 17.1% from acquisitions) and 24.8%, respectively, over the same period in 1995. For a discussion of the significance of EBITDA and other measures of the Company's performance determined in accordance with generally accepted accounting principles ("GAAP") and the Company's sources and applications of cash flow, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview" and "--Liquidity and Capital Resources." Industry Overview According to industry sources, organizations in the United States generate an estimated four trillion documents each year, many of which must be retained and remain available for reference for many years. These records may be generally divided into two categories: active and inactive. Inactive records, which are the principal focus of the records management industry, consist of records that are not needed for immediate access but which must be retained for legal or regulatory reasons or for occasional reference to support ongoing business operations. Based on industry studies, the Company believes that inactive records make up approximately 80% of all records. The Company believes that the volume of inactive records is increasing for a number of reasons, including: (i) the rapid growth of inexpensive document producing technologies such as facsimile, desktop printing and computer networking; (ii) increased regulatory requirements; (iii) concerns over possible future litigation and the resulting increases in volume and holding periods of documentation; (iv) the high cost of reviewing records and deciding whether to retain or destroy them; and (v) the failure of many entities to adopt or follow policies on records destruction. Despite the growth of new "paperless" technologies, such as the Internet and e-mail, management believes that stored information remains predominantly paper-based and that such technologies have promoted the creation of hard copies of such electronic information. - ------------- * The term "Carton" is defined as a measurement of volume equal to a single standard storage carton, approximately 1.2 cubic feet. The number of Cartons stored does not include storage volumes in the Company's vital records services and data protection services, which are described under "Business." The Company believes that it benefits from several industry fundamentals, including: (i) the historically non- cyclical nature of the records management industry; (ii) the continued trend towards corporate outsourcing of records management functions; (iii) the ability of larger records management companies to achieve economies of scale with respect to labor, real estate costs and the utilization of management information systems; and (iv) the ongoing consolidation of the records management industry. The Company believes that it is one of only four records management providers with a national operating presence, the balance being regional or, in most instances, single-city operators. According to the Association of Commercial Records Centers (the "ACRC"), a trade group of approximately 500 members, as of January 1994 (the latest date for which such information is available), approximately 2,600 firms offered records storage and management services in the United States. The Company believes that there is a trend toward consolidation in the records management industry and that such trend will continue to accelerate primarily because of: (i) the opportunities to achieve economies of scale; (ii) the industry's capital requirements for growth; (iii) customer demands for more sophisticated technology-based solutions; and (iv) the preference of certain large, national customers to outsource a significant portion of their records management functions to one vendor with a national presence, such as Iron Mountain. Financial Characteristics of Iron Mountain's Business Iron Mountain's records management business has the following financial characteristics: (bullet)Recurring Revenues. Iron Mountain derives a majority of its revenues from fixed periodic (usually monthly) fees charged to customers for storage of records. Storage revenues have grown for 30 consecutive quarters and have represented approximately 60% of the Company's total revenues in each of the last five years. Once a customer places a record in storage with the Company and until that record is destroyed or permanently removed (for which the Company typically receives a service fee), the Company receives recurring payments of fixed periodic fees without incurring additional labor or marketing expenses or significant capital costs. The stable and growing storage base also provides the foundation for increases in revenues and EBITDA from service activities and sales of storage materials. (bullet)Historically Non-Cyclical Business. Iron Mountain has not experienced a reduction of its business as a result of past general economic downturns, although there can be no assurance that this would be the case in the future. Management believes that the outsourcing of records management may accelerate during economic downturns as companies focus on reducing costs through outsourcing non-core operating functions. In addition, management believes that companies that have outsourced records management are less likely during economic downturns to incur the move-out costs and other expenses associated with switching vendors or moving records management in-house. (bullet)Inherent Growth from Existing Customers. The Company's customers have on average generated additional Cartons at a faster rate than stored Cartons have been destroyed or permanently removed. From 1992 to 1995, net Cartons from existing customers grew at an average annual rate of 6.7%. The Company believes the consistent growth of its storage revenues is the result of a number of additional factors, including: (i) the trend toward increased records retention; (ii) customer satisfaction with the Company's services; and (iii) the costs and inconvenience of moving storage operations in-house or to another provider of records management services. (bullet)Diversified and Stable Customer Base. The Company has over 19,000 customer accounts in a variety of industries. The Company currently provides services to more than half of the Fortune 500 and numerous legal, banking, healthcare, accounting, insurance, entertainment and government organizations. Only one of the Company's customers accounted for more than 3% of revenues in 1993, 1994 or 1995. From 1992 to 1995, average annual permanent removals of Cartons represented only approximately 4% of total Cartons stored. (bullet)Capital Expenditures Related Primarily to Growth. The Company's business requires limited annual maintenance capital expenditures. Maintenance capital expenditures were $1.8 million, $1.2 million and $0.9 million in 1993, 1994 and 1995, respectively. From 1992 to 1995, over 90% of the Company's aggregate capital expenditures were growth-related investments, primarily in racking systems, new buildings and leasehold improvements, equipment for new facilities, management information systems and facilities restructuring. These growth-related capital expenditures are primarily discretionary and create additional capacity for increases in revenues and EBITDA. Business Strategy Iron Mountain's business strategy is to increase revenues and EBITDA while maintaining a low-cost operating structure and providing premium service. The Company intends to generate growth by increasing its storage and service revenues from existing customers, adding new customers and making acquisitions. The Company's strategy is based on the following elements: (bullet)Provide Superior Customer Service. The Company believes it has a reputation for providing reliable, quality service based on its more than 45 years of operations, its commitment to providing premium customer service and the continuity and depth of its management team. The Company has successfully implemented a decentralized management structure that enables the Company to respond quickly and flexibly to local customer needs. Iron Mountain's proprietary Safekeeper(R) system enables it to quickly provide customized records management solutions to its customers, enhancing the quality of its services. In addition, Iron Mountain's national operating presence allows it to better service large organizations that require records management functions at multiple, geographically diverse facilities. (bullet)Capitalize on Operating Efficiencies. Iron Mountain pursues a low-cost operating strategy based primarily on achieving economies of scale in the areas of storage, labor and transportation, general and administrative functions and management information systems. Because occupancy costs are a major component of the Company's cost of sales, its real estate management staff aggressively seeks to minimize per Carton storage costs by designing racking systems and operating space to maximize facility storage efficiency, negotiating favorable facility leases, contracting for facilities to be built to its custom specifications, and leasing larger facilities in order to reduce operating costs per Carton. The Company seeks to increase labor efficiency by offering incentive compensation to all full-time employees based upon achieving specific operating targets. Certain operating costs, such as the maintenance of local delivery fleets, general and administrative costs and management information systems, offer economies of scale, providing the Company with operating leverage and the ability to increase its efficiency through further growth. (bullet)Pursue Acquisition Opportunities. The Company believes that it is well positioned to participate in the further consolidation of the records management industry. Iron Mountain's management team has successfully completed 18 acquisitions since the Company embarked on a proactive acquisition strategy in mid-1994, and one additional acquisition is currently pending. The Company intends to continue to make fold-in acquisitions to augment its operations in existing markets and to make strategic acquisitions in new geographic markets, with an emphasis on the 50 largest markets in the United States and potentially in certain markets outside the United States. Following an acquisition in a new market, the Company seeks to increase its business with the acquired customer base and to supplement that growth both with new customers and through appropriate fold-in acquisitions. In addition, the Company has successfully reduced the cost structure of its acquired operations by implementing its efficient operating strategies and leveraging its centralized administrative resources and management information systems. (bullet)Leverage Proprietary Safekeeper System. The Company pioneered the application of advanced information technology to the records management industry. Iron Mountain's proprietary Safekeeper system provides advanced inventory control and information access, enabling the Company to provide faster, higher quality and more flexible solutions to its customers and to lower the costs of its operations. Safekeeper has been designed to easily and effectively integrate newly acquired records management companies and offer improved levels of customer service and records management capabilities to customers acquired through acquisitions. Iron Mountain's Safekeeper system exploits bar-code technology to provide a comprehensive, standardized approach to tracking, accessing and retrieving records. Safekeeper offers state-of-the-art records management capabilities and ease of access to customers while featuring security functions to protect customer information from unauthorized access. Since 1992, the Company has invested $12.5 million to develop and refine its management information systems, including Safekeeper. THE OFFERING <TABLE> <CAPTION> <S> <C> Securities Offered $150,000,000 principal amount of % Senior Subordinated Notes due 2006 (the "Notes"). Maturity Date , 2006 Interest Payment Dates and of each year, commencing , 1997. Guarantees The Notes will be fully and unconditionally guaranteed on an unsecured senior subordinated and joint and several basis (the "Subsidiary Guarantees") by substantially all of the Company's present and future Restricted Subsidiaries (collectively, the "Guarantors"). Each of the Guarantors has also guaranteed unconditionally the indebtedness outstanding under the Company's existing bank credit facility (the "Credit Agreement") and will guarantee unconditionally the indebtedness outstanding under the new bank credit facility the Company intends to enter into with its lenders (the "New Credit Facility"). See "Description of the Notes--Subsidiary Guarantees." Subordination The Notes will be general unsecured senior subordinated obligations of the Company ranking junior to all existing and future Senior Debt of the Company, including any indebtedness that may be incurred under the Credit Agreement or the New Credit Facility. The Subsidiary Guarantees will rank junior to all existing and future Senior Debt of the Guarantors. As of June 30, 1996, on a pro forma basis after giving effect to the Transactions, the aggregate outstanding principal amount of Senior Debt of the Company and the Guarantors would have been $24.5 million. See "Description of the Notes--Subordination." Optional Redemption Except as described below, the Notes are not redeemable by the Company prior to , 2001. Thereafter, the Notes are redeemable at the option of the Company, in whole or in part, at any time and from time to time, at the redemption prices set forth herein plus accrued and unpaid interest to, but excluding, the date of redemption. In addition, during the first 36 months after the date of issuance of the Notes, the Company, at its option, may redeem up to 35% of the initial principal amount of the Notes with the net proceeds of one or more Qualified Equity Offerings at a redemption price equal to %, plus accrued and unpaid interest to, but excluding, the date of redemption; provided that at least 65% of the initial principal amount of the Notes remains outstanding after each such redemption. See "Description of the Notes--Optional Redemption." Mandatory Redemption Except with respect to required repurchases upon the occurrence of a Change of Control or in the event of certain Asset Sales, the Company is not required to make sinking fund or redemption payments with respect to the Notes at any time prior to maturity. See "Description of the Notes-- Mandatory Redemption." Change of Control Upon the occurrence of a Change of Control, each Holder of Notes may require the Company to repurchase such Notes at 101% of the principal amount thereof, plus accrued and unpaid interest to, but excluding, the date of repurchase. See "Description of the Notes--Repurchase at the Option of Holders--Change of Control." Certain Covenants The Indenture governing the Notes (the "Indenture") will contain covenants restricting or limiting the ability of the Company and its Restricted Subsidiaries to, among other things: (i) incur additional indebtedness, including indebtedness ranking senior to the Notes and junior to any Senior Debt; (ii) pay dividends or make other restricted payments; (iii) make asset dispositions; (iv) permit liens; (v) enter into sale and leaseback transactions; (vi) enter into certain mergers; (vii) make certain investments; and (viii) enter into transactions with related persons. See "Description of the Notes--Certain Covenants." Use of Proceeds The net proceeds of the Offering will be used to repay outstanding bank debt and certain other indebtedness and to fund a portion of the purchase price of the Pending Acquisition. </TABLE> RISK FACTORS For a discussion of certain material factors that should be considered in connection with an investment in the Notes offered hereby, see "Risk Factors" on pages 10 to 14.
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this Prospectus. References to "Iron Mountain" and the "Company" include Iron Mountain Incorporated (including predecessor entities) and its consolidated subsidiaries, unless the context otherwise requires. THE COMPANY Iron Mountain is the largest records management company in the United States, as measured by revenues. The Company is a full-service provider of records management and related services, enabling customers to outsource records management functions. Pro forma for the Acquisitions (as defined herein), as of June 30, 1996, the Company managed approximately 29.6 million Cartons* in 103 records centers in 33 markets nationwide. The Company has a diversified base of over 19,000 customer accounts, which includes more than half of the Fortune 500 and numerous legal, banking, healthcare, accounting, insurance, entertainment and government organizations. The Company provides storage and related services for all major media, including paper (which is the dominant form of records retention and which has accounted for approximately 85% of the Company's revenues since 1992), computer disks and tapes, microfilm and microfiche, master audio and video tapes, film and optical disks, X-rays and blueprints. The Company's principal services include filing, retrieval and destruction of records, courier pick-up and delivery, database management and customized reporting. The Company also sells storage materials and provides consulting and other records-related services. The Company continues to capitalize on its leading position in the records management industry and the industry trends of increased records retention, outsourcing of records management and vendor consolidation. As a result, the Company has achieved significant increases in revenues and EBITDA (as defined herein). From 1991 to 1995, Iron Mountain's total revenues increased from $62.8 million to $104.4 million primarily from internal growth, representing a compound annual growth rate ("CAGR") of 13.5%. During the same period, storage revenues grew at a 12.9% CAGR while service and storage material sales revenues grew at a 14.6% CAGR. From 1991 to 1995, the Company's EBITDA grew from $15.0 million to $26.1 million, representing a 14.9% CAGR. Revenues and EBITDA for the six months ended June 30, 1996 increased 27.3% (10.2% from internal growth and 17.1% from acquisitions) and 24.8%, respectively, over the same period in 1995. For a discussion of the significance of EBITDA and other measures of the Company's performance determined in accordance with generally accepted accounting principles ("GAAP") and the Company's sources and applications of cash flow, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview" and "--Liquidity and Capital Resources." Industry Overview According to industry sources, organizations in the United States generate an estimated four trillion documents each year, many of which must be retained and remain available for reference for many years. These records may be generally divided into two categories: active and inactive. Inactive records, which are the principal focus of the records management industry, consist of records that are not needed for immediate access but which must be retained for legal or regulatory reasons or for occasional reference to support ongoing business operations. Based on industry studies, the Company believes that inactive records make up approximately 80% of all records. The Company believes that the volume of inactive records is increasing for a number of reasons, including: (i) the rapid growth of inexpensive document producing technologies such as facsimile, desktop printing and computer networking; (ii) increased regulatory requirements; (iii) concerns over possible future litigation and the resulting increases in volume and holding periods of documentation; (iv) the high cost of reviewing records and deciding whether to retain or destroy them; and (v) the failure of many entities to adopt or follow policies on records destruction. Despite the growth of new "paperless" technologies, such as the Internet and e-mail, management believes that stored information remains predominantly paper-based and that such technologies have promoted the creation of hard copies of such electronic information. - ------------- * The term "Carton" is defined as a measurement of volume equal to a single standard storage carton, approximately 1.2 cubic feet. The number of Cartons stored does not include storage volumes in the Company's vital records services and data protection services, which are described under "Business." The Company believes that it benefits from several industry fundamentals, including: (i) the historically non- cyclical nature of the records management industry; (ii) the continued trend towards corporate outsourcing of records management functions; (iii) the ability of larger records management companies to achieve economies of scale with respect to labor, real estate costs and the utilization of management information systems; and (iv) the ongoing consolidation of the records management industry. The Company believes that it is one of only four records management providers with a national operating presence, the balance being regional or, in most instances, single-city operators. According to the Association of Commercial Records Centers (the "ACRC"), a trade group of approximately 500 members, as of January 1994 (the latest date for which such information is available), approximately 2,600 firms offered records storage and management services in the United States. The Company believes that there is a trend toward consolidation in the records management industry and that such trend will continue to accelerate primarily because of: (i) the opportunities to achieve economies of scale; (ii) the industry's capital requirements for growth; (iii) customer demands for more sophisticated technology-based solutions; and (iv) the preference of certain large, national customers to outsource a significant portion of their records management functions to one vendor with a national presence, such as Iron Mountain. Financial Characteristics of Iron Mountain's Business Iron Mountain's records management business has the following financial characteristics: (bullet)Recurring Revenues. Iron Mountain derives a majority of its revenues from fixed periodic (usually monthly) fees charged to customers for storage of records. Storage revenues have grown for 30 consecutive quarters and have represented approximately 60% of the Company's total revenues in each of the last five years. Once a customer places a record in storage with the Company and until that record is destroyed or permanently removed (for which the Company typically receives a service fee), the Company receives recurring payments of fixed periodic fees without incurring additional labor or marketing expenses or significant capital costs. The stable and growing storage base also provides the foundation for increases in revenues and EBITDA from service activities and sales of storage materials. (bullet)Historically Non-Cyclical Business. Iron Mountain has not experienced a reduction of its business as a result of past general economic downturns, although there can be no assurance that this would be the case in the future. Management believes that the outsourcing of records management may accelerate during economic downturns as companies focus on reducing costs through outsourcing non-core operating functions. In addition, management believes that companies that have outsourced records management are less likely during economic downturns to incur the move-out costs and other expenses associated with switching vendors or moving records management in-house. (bullet)Inherent Growth from Existing Customers. The Company's customers have on average generated additional Cartons at a faster rate than stored Cartons have been destroyed or permanently removed. From 1992 to 1995, net Cartons from existing customers grew at an average annual rate of 6.7%. The Company believes the consistent growth of its storage revenues is the result of a number of additional factors, including: (i) the trend toward increased records retention; (ii) customer satisfaction with the Company's services; and (iii) the costs and inconvenience of moving storage operations in-house or to another provider of records management services. (bullet)Diversified and Stable Customer Base. The Company has over 19,000 customer accounts in a variety of industries. The Company currently provides services to more than half of the Fortune 500 and numerous legal, banking, healthcare, accounting, insurance, entertainment and government organizations. Only one of the Company's customers accounted for more than 3% of revenues in 1993, 1994 or 1995. From 1992 to 1995, average annual permanent removals of Cartons represented only approximately 4% of total Cartons stored. (bullet)Capital Expenditures Related Primarily to Growth. The Company's business requires limited annual maintenance capital expenditures. Maintenance capital expenditures were $1.8 million, $1.2 million and $0.9 million in 1993, 1994 and 1995, respectively. From 1992 to 1995, over 90% of the Company's aggregate capital expenditures were growth-related investments, primarily in racking systems, new buildings and leasehold improvements, equipment for new facilities, management information systems and facilities restructuring. These growth-related capital expenditures are primarily discretionary and create additional capacity for increases in revenues and EBITDA. Business Strategy Iron Mountain's business strategy is to increase revenues and EBITDA while maintaining a low-cost operating structure and providing premium service. The Company intends to generate growth by increasing its storage and service revenues from existing customers, adding new customers and making acquisitions. The Company's strategy is based on the following elements: (bullet)Provide Superior Customer Service. The Company believes it has a reputation for providing reliable, quality service based on its more than 45 years of operations, its commitment to providing premium customer service and the continuity and depth of its management team. The Company has successfully implemented a decentralized management structure that enables the Company to respond quickly and flexibly to local customer needs. Iron Mountain's proprietary Safekeeper(R) system enables it to quickly provide customized records management solutions to its customers, enhancing the quality of its services. In addition, Iron Mountain's national operating presence allows it to better service large organizations that require records management functions at multiple, geographically diverse facilities. (bullet)Capitalize on Operating Efficiencies. Iron Mountain pursues a low-cost operating strategy based primarily on achieving economies of scale in the areas of storage, labor and transportation, general and administrative functions and management information systems. Because occupancy costs are a major component of the Company's cost of sales, its real estate management staff aggressively seeks to minimize per Carton storage costs by designing racking systems and operating space to maximize facility storage efficiency, negotiating favorable facility leases, contracting for facilities to be built to its custom specifications, and leasing larger facilities in order to reduce operating costs per Carton. The Company seeks to increase labor efficiency by offering incentive compensation to all full-time employees based upon achieving specific operating targets. Certain operating costs, such as the maintenance of local delivery fleets, general and administrative costs and management information systems, offer economies of scale, providing the Company with operating leverage and the ability to increase its efficiency through further growth. (bullet)Pursue Acquisition Opportunities. The Company believes that it is well positioned to participate in the further consolidation of the records management industry. Iron Mountain's management team has successfully completed 18 acquisitions since the Company embarked on a proactive acquisition strategy in mid-1994, and one additional acquisition is currently pending. The Company intends to continue to make fold-in acquisitions to augment its operations in existing markets and to make strategic acquisitions in new geographic markets, with an emphasis on the 50 largest markets in the United States and potentially in certain markets outside the United States. Following an acquisition in a new market, the Company seeks to increase its business with the acquired customer base and to supplement that growth both with new customers and through appropriate fold-in acquisitions. In addition, the Company has successfully reduced the cost structure of its acquired operations by implementing its efficient operating strategies and leveraging its centralized administrative resources and management information systems. (bullet)Leverage Proprietary Safekeeper System. The Company pioneered the application of advanced information technology to the records management industry. Iron Mountain's proprietary Safekeeper system provides advanced inventory control and information access, enabling the Company to provide faster, higher quality and more flexible solutions to its customers and to lower the costs of its operations. Safekeeper has been designed to easily and effectively integrate newly acquired records management companies and offer improved levels of customer service and records management capabilities to customers acquired through acquisitions. Iron Mountain's Safekeeper system exploits bar-code technology to provide a comprehensive, standardized approach to tracking, accessing and retrieving records. Safekeeper offers state-of-the-art records management capabilities and ease of access to customers while featuring security functions to protect customer information from unauthorized access. Since 1992, the Company has invested $12.5 million to develop and refine its management information systems, including Safekeeper. THE OFFERING <TABLE> <CAPTION> <S> <C> Securities Offered $150,000,000 principal amount of % Senior Subordinated Notes due 2006 (the "Notes"). Maturity Date , 2006 Interest Payment Dates and of each year, commencing , 1997. Guarantees The Notes will be fully and unconditionally guaranteed on an unsecured senior subordinated and joint and several basis (the "Subsidiary Guarantees") by substantially all of the Company's present and future Restricted Subsidiaries (collectively, the "Guarantors"). Each of the Guarantors has also guaranteed unconditionally the indebtedness outstanding under the Company's existing bank credit facility (the "Credit Agreement") and will guarantee unconditionally the indebtedness outstanding under the new bank credit facility the Company intends to enter into with its lenders (the "New Credit Facility"). See "Description of the Notes--Subsidiary Guarantees." Subordination The Notes will be general unsecured senior subordinated obligations of the Company ranking junior to all existing and future Senior Debt of the Company, including any indebtedness that may be incurred under the Credit Agreement or the New Credit Facility. The Subsidiary Guarantees will rank junior to all existing and future Senior Debt of the Guarantors. As of June 30, 1996, on a pro forma basis after giving effect to the Transactions, the aggregate outstanding principal amount of Senior Debt of the Company and the Guarantors would have been $24.5 million. See "Description of the Notes--Subordination." Optional Redemption Except as described below, the Notes are not redeemable by the Company prior to , 2001. Thereafter, the Notes are redeemable at the option of the Company, in whole or in part, at any time and from time to time, at the redemption prices set forth herein plus accrued and unpaid interest to, but excluding, the date of redemption. In addition, during the first 36 months after the date of issuance of the Notes, the Company, at its option, may redeem up to 35% of the initial principal amount of the Notes with the net proceeds of one or more Qualified Equity Offerings at a redemption price equal to %, plus accrued and unpaid interest to, but excluding, the date of redemption; provided that at least 65% of the initial principal amount of the Notes remains outstanding after each such redemption. See "Description of the Notes--Optional Redemption." Mandatory Redemption Except with respect to required repurchases upon the occurrence of a Change of Control or in the event of certain Asset Sales, the Company is not required to make sinking fund or redemption payments with respect to the Notes at any time prior to maturity. See "Description of the Notes-- Mandatory Redemption." Change of Control Upon the occurrence of a Change of Control, each Holder of Notes may require the Company to repurchase such Notes at 101% of the principal amount thereof, plus accrued and unpaid interest to, but excluding, the date of repurchase. See "Description of the Notes--Repurchase at the Option of Holders--Change of Control." Certain Covenants The Indenture governing the Notes (the "Indenture") will contain covenants restricting or limiting the ability of the Company and its Restricted Subsidiaries to, among other things: (i) incur additional indebtedness, including indebtedness ranking senior to the Notes and junior to any Senior Debt; (ii) pay dividends or make other restricted payments; (iii) make asset dispositions; (iv) permit liens; (v) enter into sale and leaseback transactions; (vi) enter into certain mergers; (vii) make certain investments; and (viii) enter into transactions with related persons. See "Description of the Notes--Certain Covenants." Use of Proceeds The net proceeds of the Offering will be used to repay outstanding bank debt and certain other indebtedness and to fund a portion of the purchase price of the Pending Acquisition. </TABLE> RISK FACTORS For a discussion of certain material factors that should be considered in connection with an investment in the Notes offered hereby, see "Risk Factors" on pages 10 to 14.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001020897_specialty_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001020897_specialty_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to, and should be read in conjunction with, the more detailed information and financial statements (including the notes thereto) appearing elsewhere in this Prospectus. Unless otherwise indicated, "Company" shall include the two operating subsidiaries of the Company, SC Corporation, doing business under the name SC Direct ("SC Direct"), and SC Publishing, Inc. ("SC Publishing"), a wholly-owned subsidiary of SC Direct. Each prospective investor is urged to read this Prospectus in its entirety. THE COMPANY The Company is a direct marketer targeting niche consumer product categories. SC Direct, its principal operating subsidiary, is the leading U.S. retailer of women's wigs and hairpieces. SC Publishing, a subsidiary of SC Direct, sells continuing education courses to nurses, real estate professionals and Certified Public Accountants ("CPAs"). SC Direct sells wigs and hairpieces primarily to women over the age of 50, using three distinct catalogs: Paula Young (R), Christine Jordan (TM) and Especially Yours (TM). In 1995, SC Direct mailed 20.9 million catalogs, generating net sales of $37.3 million. SC Direct has developed a proprietary data base consisting of approximately 5.6 million persons, including more than 875,000 active customers and more than one million persons who have requested catalogs in the past year but who have not made a purchase. Due to the fact that wig wearers are difficult to identify, the Company believes that its wig database is unique and would be very expensive to replicate. The Company believes that this poses a substantial barrier to entry for any potential competitor. SC Direct's target market, women over age 50, is projected by the U.S. Census Bureau to grow from 38.7 million women, or 38% of the total female population in 1995, to 51.5 million women, or 45% of the total female population in 2010. This growth is driven primarily by aging "baby-boomers." The Company believes that only approximately five million, or 25%, of the 20 million American women with thinning hair currently wear wigs, and that, accordingly, there is substantial opportunity for future growth of SC Direct's business. SC Direct's strategy for its core business is to exploit new distribution opportunities for wigs and hairpieces and to sell additional products to its customers. For example, in the last three years, SC Direct has introduced its upscale Christine Jordan catalog and its Especially Yours catalog for African- American customers, expanded into international markets and begun a test program selling to hair salons. In 1995, SC Direct launched its Paula's Hatbox (TM) catalog through which it sells a variety of fashion hats to women. The Company believes that the market for fashion hats has niche characteristics similar to those of the wig market. In addition, SC Direct intends to enter another new market by testing men's wigs in the Paula Young catalog in early 1997. The Company utilizes primarily a two-step marketing program. Step one involves obtaining prospective customers through a targeted advertising program. Step two, which commences when a prospective customer responds favorably to an advertisement placed by the Company, involves sending such prospective customer a series of catalogs designed to elicit an initial sale. Through this program, the Company has been able to convert into customers 15% to 20% of those persons who request catalogs. Because this program involves targeted mailings only to persons who have shown an interest in its products, the Company also has been able to reduce its exposure to increases in paper, postage and other catalog production costs. SC Publishing offers nurses, real estate agents and CPAs home study continuing education through its Western Schools(R) catalogs. SC Publishing's strategy is to build its business by offering additional products and programs to its core customers and by expanding into new and related professional fields. In 1995, SC Publishing mailed 8.3 million catalogs generating net sales of $5.3 million. The Company intends to build its existing niche markets and enter new niche markets both by internal expansion and through acquisitions. Niche markets are characterized by smaller market size, unique or hard to find products, or hard to locate customers. The Company plans to implement its two-step marketing program in new and acquired businesses where appropriate. The catalog industry is very fragmented, with more than 8,000 catalogs currently being circulated. Many catalog retailers, especially the smaller ones, are finding it difficult to grow due to a combination of capital constraints, higher costs and an inability to achieve sufficient operating economies of scale. This situation was exacerbated by substantial increases in paper and postage costs in 1995. The Company believes that this environment will create many acquisition opportunities, allowing it to select acquisition candidates that provide either strategic growth to its existing businesses or an opportunity to enter additional niche markets. As of the date of this Prospectus, the Company has no agreement or understanding, nor is it engaged in any negotiations, with respect to any acquisition. The Company was incorporated in Delaware on November 30, 1994, as a holding company for SC Direct and SC Publishing, which emerged from bankruptcy on November 23, 1994. See "Reorganization." The principal executive offices of the Company are located at 21 Bristol Drive, South Easton, Massachusetts 02375 and its telephone number is (508) 238-0199. THE OFFERING <TABLE> <S> <C> Common Stock Offered........................................ 1,500,000 shares Common Stock Outstanding Prior to this Offering............. 3,201,666 shares(1) Common Stock to be Outstanding After this Offering.......... 4,701,666 shares Proposed Nasdaq National Market Symbol...................... CTLG </TABLE> - -------- (1) Gives effect to a 325.51 for 1 stock split which will be effected prior to the date hereof. USE OF PROCEEDS The Company intends to apply the net proceeds of this Offering to repay $5.9 million of the Company's Senior Indebtedness (as hereinafter defined), including: (i) $1.5 million to pay down the outstanding amount under the revolving credit portion of the Senior Indebtedness; (ii) $1.8 million of the Senior Indebtedness which is due within one year of the date hereof; and (iii) $2.6 million of the Senior Indebtedness which is due more than one year following the date hereof. The remaining $3.0 million will be used for working capital and general corporate purposes. See "Use of Proceeds." RISK FACTORS The securities offered hereby involve a high degree of risk, including, without limitation: substantial indebtedness; pledge of assets; substantial portion of proceeds used to pay debt; broad discretion in application of remaining proceeds; possible inability to refinance senior indebtedness; working capital deficit; negative net worth; recent decrease in net sales and net income; possible need for additional capital; effectiveness of catalogs and advertising; postal rates, paper prices and media costs; limited sources of fiber and limited number of wig manufacturers. See "Risk Factors." SUMMARY FINANCIAL AND OPERATING DATA The summary financial data presented below, except for the summary operating data, as of and for the fiscal years ended January 1, 1994, December 31, 1994 and December 30, 1995 is derived from the audited financial statements of the Company included herein. The summary financial data for fiscal years ended December 28, 1991 and January 2, 1993 and the summary financial data for the six months ended July 1, 1995 and June 29, 1996, except for the summary operating data, are derived from the unaudited financial statements of the Company. In the opinion of management, the summary financial data presented below as of and for the six months ended July 1, 1995 and June 29, 1996 include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations for these periods. The six month results are not necessarily indicative of the results to be expected for the full year. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements of the Company, including the notes thereto, appearing elsewhere herein. <TABLE> <CAPTION> PRO FORMA HISTORICAL AS ADJUSTED(1) ------------------------------------------------------------------- ------------------------- FISCAL YEAR ENDED SIX MONTHS ENDED FISCAL YEAR SIX MONTHS ------------------------------------------------ ----------------- ENDED ENDED DEC. 28, JAN. 2, JAN. 1, DEC. 31, DEC. 30, JULY 1, JUNE 29, DEC. 30, JUNE 29, 1991 1993 1994 1994 1995 1995 1996 1995 1996 -------- -------- -------- -------- -------- ------- -------- -------------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND AVERAGE ORDER SIZE) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales(2)............ $ 46,552 $ 47,120 $ 33,801 $38,179 $42,568 $22,419 $18,754 $42,568 $18,754 Interest expense, net... 3,242 3,080 431 661 1,918 958 909 1,343 623 Income (loss) before cumulative effect of change in accounting principle and extraordinary item..... (5,897) (2,136) 992 710 522 554 149 872 322 Net income (loss)(3).... $ (5,897) $ (2,136) $ 9,977 $12,789 $ 522 $ 554 $ 149 $ 872 $ 322 EARNINGS (LOSS) PER COMMON SHARE(4): Income (loss) before cumulative effect of change in accounting principle and extraordinary item..... $ (1.95) $ (0.71) $ 0.33 $ 0.22 $ 0.08 $ 0.14 $ 0.00 $ 0.17 $ 0.06 Net income (loss)....... $ (1.95) $ (0.71) $ 3.30 $ 4.22 $ 0.08 $ 0.14 $ 0.00 $ 0.17 $ 0.06 SUMMARY OPERATING DATA: Total catalog circulation(5)......... 17,122 17,562 18,807 22,623 29,245 15,245 12,891 Active customer file.... 762 890 941 1,094 1,096 1,254 1,222 Average order size...... $ 56.17 $ 57.98 $ 60.82 $ 60.27 $ 61.05 $ 60.05 $ 62.85 <CAPTION> PRO FORMA HISTORICAL AS ADJUSTED(6) ------------------------------------------------------------------- -------------- FISCAL YEAR ENDED SIX MONTHS ENDED SIX MONTHS ------------------------------------------------ ----------------- ENDED DEC. 28, JAN. 2, JAN. 1, DEC. 31, DEC. 30, JULY 1, JUNE 29, JUNE 29, 1991 1993 1994 1994 1995 1995 1996 1996 -------- -------- -------- -------- -------- ------- -------- -------------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Working capital......... $ (3,480) $ (30) $ 124 $ 2,114 $ 649 $ 2,253 $ (185) $ 6,373 Total assets............ 10,756 6,150 19,142 17,364 18,170 18,755 17,777 21,287 Long-term debt(7)....... 28,461 31,621 30,125 15,180 12,876 14,792 11,813 9,343 Preferred stock......... -- -- -- 2,249 2,249 2,249 2,249 -- Stockholders' equity (deficit).............. $(28,222) $(30,358) $(20,381) $(4,654) $(4,416) $(4,246) $(4,413) $ 5,128 </TABLE> - -------- (1) Pro forma as adjusted operations data and earnings per share information gives effect to: (i) the sale of 1,019,553 shares by the Company in this Offering at an estimated initial offering price of $7.00 per share less the Underwriter's discount and other offering expenses; (ii) the application of the estimated net proceeds therefrom to repay $5.9 million of Senior Indebtedness; and (iii) the Preferred Conversion (as hereinafter defined) (375,000 shares). These transactions, along with the incremental effect of issuing an additional 75,000 options (17,893 shares) to Steven L. Bock, the Company's Chairman and Chief Executive Officer, in connection with this Offering and the weighted average shares outstanding as of June 29, 1996 of 3,577,986, which includes the dilutive effect of the issuance of the Warrants (as hereinafter defined) (265,335 shares) and 582,999 options to Mr. Bock and Stephen M. O'Hara, the Company's President, calculated under the treasury stock method described in Accounting Principles Board Opinion No. 15, support the share figure of 4,990,432 used to calculate pro forma as adjusted operations data and earnings per share information. (2) Net sales include for fiscal 1991 and 1992 the sales of certain subsidiaries that were sold as of the end of 1992. For comparative purposes, excluding the sold subsidiaries, the Company's net sales would be $30,817,000 in fiscal 1991 and $32,430,000 in fiscal 1992. (3) Net income reflects, for the fiscal year ended January 1, 1994, a gain of $8,985,122 from the cumulative effect of change in accounting for income taxes and for the fiscal year ended December 31, 1994, a gain from extraordinary item of $12,078,489, net of income taxes resulting from the forgiveness of debt upon the Company's emergence from bankruptcy. See the financial statements and the notes thereto. (4) Earnings per share for each fiscal year of the Company is computed by dividing net income after preferred dividends for such fiscal year by the weighted average number of shares of common stock and common stock equivalents outstanding during such fiscal year. See the financial statements and the notes thereto. (5) Reflects number of customers who are being mailed catalogs at the end of each period. (6) The pro forma as adjusted balance sheet information gives effect to the issuance of the Junior Subordinated Indebtedness (as hereinafter defined), the issuance of the Warrants, the irrevocable waiver of accrued dividends on the 13% Preferred Stock, the Preferred Conversion, the grant of options to purchase 75,000 shares of Common Stock at an exercise price of $5.33 per share to Steven L. Bock, the Company's Chairman and Chief Executive Officer, and the sale by the Company of 1,500,000 shares of Common Stock offered hereby at an estimated initial public offering price of $7.00 per share and the application of the estimated net proceeds therefrom as described in "Use of Proceeds." See the financial statements and the notes thereto. (7) Long term debt reflects, for fiscal years ended January 2, 1993 and January 1, 1994, amounts subject to settlement under reorganization proceedings. See "Reorganization."
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+SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Prospectus. This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. THE COMPANY MemberWorks Incorporated ("MemberWorks" or the "Company") believes, based on its senior management's extensive knowledge of the industry and its relationships with major credit card issuers in banking, oil and retail, that it is a leading designer and provider of innovative membership service programs. The Company addresses the needs of organizations seeking to leverage the expertise of an outside provider in offering these programs. MemberWorks offers its programs to increasingly sophisticated consumers seeking economy, efficiency and convenience in their purchase of products and services. For participating vendors, the programs provide the opportunity to reach a large number of demographically attractive members at minimal incremental marketing cost. As of June 30, 1996, the Company had approximately 40 client organizations and approximately 1.5 million members. The Company currently offers eight membership programs in broad lifestyle areas such as health, dental, travel, entertainment, sports, financial, and computers and software. The Company offers memberships primarily on an individual basis. Individual memberships are marketed by the Company to consumers listed in databases provided to it by clients. The Company analyzes these client lists to identify likely members utilizing a sophisticated, proprietary membership database system. Individual members pay fees directly to the Company, while the Company incurs the marketing costs to solicit these members and pays royalties to the clients on membership fees. The Company solicits members for its programs primarily through third-party telemarketers and to a lesser extent direct mail campaigns. Some of the Company's individual memberships are available at retail stores and on-line through the World Wide Web. Recently, the Company also began to offer memberships on a wholesale basis. Wholesale memberships incorporate elements from the Company's eight membership programs and are sold to client organizations who then market them to their consumers. The Company arranges with client financial institutions, retailers, oil companies, and other credit card issuers to market membership programs to such clients' individual account holders and customers. Currently, the Company has 38 credit card issuer clients to whom it is obligated to pay royalties, including 12 of the top 20 issuers of bank credit cards, such as Household Credit Services, Inc. and Capital One Financial Corp., four of the top five issuers of oil company credit cards, such as Shell Oil Company and Texaco Credit Card Services, and Sears, Roebuck and Co., the leading issuer of retail company credit cards. The Company has developed a consultative product development process which it believes has allowed it to respond quickly and effectively to market demand for new products. The Company believes it was the first membership services company to introduce aggregated discount services in health, sports, financial and, most recently, through Home PC Link, personal computers and software. The Company also believes that its programs are innovative with respect to the variety and quality of particular services, discounts and other features which those programs offer. To achieve its objective of becoming the leading provider of innovative membership programs, the Company intends to continue to develop innovative service programs for broad markets, expand existing and develop new distribution channels, maintain and build its renewal membership base, offer premium quality services, develop and use innovative technical solutions, leverage and develop multiple vendor partners, and pursue international opportunities. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company........................ 2,400,000 shares Common Stock offered by the Selling Stockholders........... 300,000 shares Common Stock outstanding after the offering................ 14,550,177 shares(1) Use of Proceeds............................................ Redemption of redeemable preferred stock and general corporate purposes, including the acquisition of new members, program development, capital expenditures and working capital. Proposed Nasdaq National Market symbol..................... MBRS </TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA (In thousands, except per share data) <TABLE> <CAPTION> YEAR ENDED JUNE 30, ------------------------------- 1994 1995 1996 ------- ------- ------- <S> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues................................................................ $25,830 $41,547 $57,012 Total expenses.......................................................... 31,846 52,279 62,259 Net loss................................................................ (6,016) (10,732) (5,247) Pro forma net loss per share(2)......................................... $ (0.42) Pro forma weighted average common and common equivalent shares outstanding(2)........................................................ 12,735 </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 ----------------------------------------------- PRO PRO FORMA ACTUAL FORMA(3) AS ADJUSTED(3)(4) -------- ------------ ----------------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents............................... $ 4,312 $ 4,312 $36,645 Working capital (deficit)............................... (18,977) (18,977) 13,356 Total assets............................................ 41,927 41,927 74,260 Long-term obligations................................... 1,089 1,089 1,089 Redeemable preferred stock.............................. 20,487 1,949 -- Total stockholders' equity (deficit).................... (36,332) (17,794) 16,488 </TABLE> - --------------- (1) Based on the number of shares of Common Stock outstanding as of June 30, 1996, exclusive of 173,830 treasury shares. Excludes 1,277,762 shares of Common Stock issuable pursuant to stock options outstanding at June 30, 1996 (of which options to purchase 378,180 shares were exercisable) at a weighted average exercise price of $2.62 per share, and 384,287 shares of Common Stock issuable upon the exercise of warrants outstanding at June 30, 1996 (all of which warrants were exercisable) at a weighted average exercise price of $1.24 per share. Also excludes 310,140 shares of Common Stock issuable pursuant to stock options granted on July 1, 1996 (none of which were exercisable) at an exercise price of $8.00 per share. See "Capitalization," "Management -- Stock Plans," "Certain Transactions" and "Principal and Selling Stockholders." Also excludes 129,600 shares of Common Stock issuable upon exercise of options that may be granted to an executive officer of the Company upon achievement of certain performance goals prior to December 31, 1996. All such options will be exercisable at an exercise price of $2.78 per share and will vest ratably over a four-year period. See "Management -- Executive Compensation." (2) See Note 2 of Notes to Consolidated Financial Statements for an explanation of the computation of pro forma net loss per share and the shares used in computing pro forma net loss per share. (3) Gives effect to the conversion of all outstanding shares of the Company's Class A Common Stock and Series A, Series B, Series C, Series D and Series H Preferred Stock into an aggregate of 12,062,239 shares of Common Stock. (4) As adjusted to give effect to the sale of 2,400,000 shares of Common Stock offered by the Company hereby, at an assumed initial public offering price of $16.00 per share, the issuance of 3,533 shares of Common Stock pursuant to the exercise of a warrant by a Selling Stockholder and the application of the estimated net proceeds therefrom, including the redemption of all outstanding shares of the Company's Series E and Series F Preferred Stock upon the closing of this offering. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001021061_metris_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001021061_metris_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto (the "Financial Statements"), appearing elsewhere in this Prospectus. Metris Companies Inc., a recently formed indirect wholly owned subsidiary of Fingerhut Companies, Inc. ("FCI"), operates certain businesses previously operated as a division of FCI (collectively, the "Financial Services Business"). Except as otherwise noted herein, the information in this Prospectus gives effect to the contribution of such division to the Company, and, as used in this Prospectus, unless the context otherwise requires, (i) "Metris" and "Company" refer, with respect to any date prior to the effective date of such contribution, to the Financial Services Business of FCI, and, with respect to any date on or subsequent to the effective date of such contribution, to Metris Companies Inc. and its subsidiaries and (ii) "FCI" refers to Fingerhut Companies, Inc., and its subsidiaries other than the Company, including its principal operating subsidiary, Fingerhut Corporation ("Fingerhut"). Unless the context otherwise requires, all information contained in this Prospectus assumes that the Underwriters' over-allotment option will not be exercised. THE COMPANY Metris Companies Inc. is an information-based direct marketer of consumer credit products, extended service plans, and fee-based products and services to moderate income consumers. Management believes the moderate income market (i.e., households with annual incomes of $15,000 to $35,000), which currently represents 31% of all U.S. households, is underserved by the traditional providers of many of the Company's products and services. The Company's strategy is to first establish a profitable customer relationship through the issuance of a general purpose credit card, and then to expand this customer relationship by cross-selling additional fee-based products and services. The Company provides credit to this market by utilizing a risk-based pricing strategy based on proprietary databases and credit scoring systems. The Company's agreements with FCI provide for the exclusive use of Fingerhut's proprietary database (the "Fingerhut Database") to market the Company's products and services, including general purpose credit cards (although Fingerhut will continue to use such information in providing credit, through a private label credit card or otherwise, in connection with the sale of Fingerhut products and services). The Fingerhut Database contains demographic, behavioral and credit history information on more than 30 million individuals, the majority of whom are moderate income consumers. Fingerhut does not report its credit information to the credit bureaus, which means this information is not publicly available. The Company's management believes this access to the Fingerhut Database and the ability to utilize Fingerhut's proprietary credit scoring models give it a competitive advantage in targeting and lending to moderate income consumers. The Company's consumer credit products currently are unsecured and secured credit cards, including the Fingerhut co-branded MasterCard(R) and the Direct Merchants Bank MasterCard. The Company's customers and prospects include both Fingerhut's existing customers ("Fingerhut Customers") and individuals who are not Fingerhut Customers but for whom credit bureau information is available ("External Prospects"). Once a prospective customer is targeted, the Company utilizes its proprietary credit scoring models and a risk-based pricing strategy to assign the annual percentage rate, annual fee and credit line based upon the expected risk of the individual prospect. As a result of the risk profile that is typical of the Company's customers, approximately 82% of the existing credit card accounts carry an annual fee, annual percentage rates range from prime plus 6.45% to prime plus 14.20%, and the average initial credit line is approximately $1,700. Management believes this average initial credit line is below the industry average. The Company also provides extended service plans on certain categories of products sold by Fingerhut that extend service coverage beyond the manufacturer's warranty. Although these plans historically have been available only on consumer electronics, the Company has recently begun to offer these plans for jewelry and furniture, and may offer plans on additional types of products in the future. Through focused marketing, the Company increased the percentage of Warrantable Products (as defined herein) sold that are covered by its plans from 15% in 1994 to 24% in the first six months of 1996. Management believes that opportunities for growth in extended service plans exist through further increasing the percentage of Fingerhut Warrantable Products sold with an extended service plan, identifying new Warrantable Product categories for Fingerhut products, and marketing extended service plans in conjunction with retailers other than Fingerhut. Metris markets its fee-based products and services, including third party insurance, membership clubs, card registration and debt waiver programs, to its credit card customers and to Fingerhut's customers. As a result of the Company's direct marketing and cross-selling efforts, approximately 53% of the Company's credit card customers have purchased one or more fee-based products. As an additional service, the Company develops highly tailored marketing lists, derived from its proprietary database, for third parties. At year-end 1995, the Company was the 23rd largest MasterCard issuer in the United States based on number of cards issued, with over 700,000 total credit card accounts and $543.6 million total managed loans outstanding. At March 31, 1996, the Company was the 52nd largest credit card issuer in the United States, based on managed credit card loan balances. As of June 30, 1996, the Company had approximately 1.1 million total credit card accounts and $1.1 billion in total managed loans outstanding. For the first six months of 1996, the Company had total revenues of approximately $65.9 million and net income of approximately $8.9 million. HISTORY Fingerhut, one of the largest catalog marketers in the United States, made the strategic decision in 1993 to directly market general purpose credit cards to its customers. The decision was based on Fingerhut's expertise in extending closed end credit to its customers, the large amount of proprietary information in the Fingerhut Database, and the high responsiveness of Fingerhut's customers to direct marketing efforts. After successfully test marketing credit cards to Fingerhut's customers, Fingerhut began to aggressively expand its credit card business. As part of this strategy, Fingerhut hired a management team led by Ronald Zebeck, whose more than 20 years of experience in the credit card industry includes responsibility for the launch and management of the highly successful GM MasterCard. This management team has since been implementing its strategy to expand its credit card customer base of both Fingerhut Customers and External Prospects and to grow its extended service plan and fee-based products and services businesses. Based upon a series of targeted credit card marketing campaigns launched over the past 18 months, the Company's management believes that (i) the Company's target market has been highly responsive to direct marketing, allowing the Company to acquire new customers at lower costs than traditional credit card issuers and to pursue marketing strategies that improve the penetration rates of additional products and services, (ii) while the Company's target market includes individuals with relatively high risk profiles, the Company has been able to effectively target and evaluate the creditworthiness of moderate income consumers using proprietary scoring models, traditional credit information and Fingerhut Database information and (iii) the Company's risk-based pricing strategy has allowed it to manage customer relationships based on individual risk profiles. See "Risk Factors -- Risks Related to Target Market". The significant growth to date of the Company's credit card accounts and managed loan balances has been supported by funds from FCI and from the Company's retained earnings. The Offering will provide Metris with additional equity capital to continue to fund its growth. BUSINESS STRATEGY The Company's business strategy is to continue its growth by targeting new customers through the issuance of credit cards and expanding its customer relationships through the sale of additional products and services. The principal components of the Company's strategy are the following: - Increase the number of Fingerhut Customers utilizing the Company's consumer credit products, extended service plans and fee-based products and services. - Identify and solicit additional External Prospects for credit cards using the Company's proprietary risk, response and profitability models. - Maximize the profitability of each customer relationship by cross-selling multiple products and services and using individualized risk-based pricing. - Expand the range of products and services offered. Management believes the Company will make an attractive marketing partner to providers of other financial services such as home equity loans, auto loans, student loans, and supplemental insurance. - Access additional customers for the Company's products and services by establishing relationships with third parties whose customers fit the Company's target market profile. - Pursue acquisitions of credit card portfolios and/or other businesses whose customers fit the Company's product and target market profile. RELATIONSHIP WITH FCI Metris Companies Inc. is currently an indirect wholly owned subsidiary of FCI, the business of which historically has been operated as a division of FCI. After completion of the Offering, FCI will beneficially own 84.9% of the outstanding shares of Common Stock (83.0% if the Underwriters' over-allotment option is exercised in full). Accordingly, FCI will have significant influence over the policies and affairs of the Company and will be in a position to determine the outcome of corporate actions requiring stockholder approval, including the election of directors, the adoption of amendments to the Company's Certificate of Incorporation and the approval of mergers and sales of the Company's assets. See "Risk Factors -- Control by FCI" and "-- Potential Conflicts of Interest; Relationship with FCI". FCI is a direct-to-the-consumer marketing company that sells a broad range of products and services via catalogs, telemarketing, television and other media. FCI had net revenues of $2.1 billion and $1.9 billion, and had net earnings of $50.9 million and $45.9 million, in 1995 and 1994, respectively. For the nine-month period ended September 27, 1996, FCI had net revenues of $1.3 billion and had net earnings of $8.7 million. Metris had net earnings of $4.6 million and $2.2 million, in 1995 and 1994, respectively. For the nine-month period ended September 30, 1996, Metris had net earnings of $14.7 million. FCI had total assets of $1.3 billion and $1.1 billion at December 29, 1995, and December 30, 1994, respectively. Its principal subsidiaries are the Company, Fingerhut, Figi's Inc. and Infochoice USA, Inc. Fingerhut has been in the direct mail marketing business for over 45 years and sells general merchandise using catalogs and other direct marketing solicitations. Fingerhut's merchandise includes a broad mix of brand name and private label products. Metris is significantly dependent on FCI and has entered into a number of intercompany agreements with FCI, including the Co-brand Credit Card Agreement, the Data Sharing Agreement, the Extended Service Plan Agreement, the Database Access Agreement and the Administrative Services Agreement. In addition to providing the Company exclusive use of the Fingerhut Database for the marketing of financial service products, the agreements provide for continued access to information about Fingerhut Customers, for marketing of extended service plans and for a variety of administrative and other services during the term (generally seven years) of these agreements. Additionally, FCI has guaranteed the Company's revolving bank credit facility. Breaches of covenants contained in the guaranty, including various financial covenants of FCI, would be events of default under the facility. Upon the occurrence of any such event the facility would be terminable at the option of the lenders. Such events could have a material adverse impact on the Company's financial condition and results of operations. To the extent that the FCI guarantee contains certain financial covenants and the cost of maintaining availability and borrowing under the revolving credit facility is based on FCI's credit rating, the Company is dependent on the financial strength and performance of FCI. FCI has been impacted by the industry-wide increase in paper and postage rates which began in early 1995 and continued into 1996. The impact of rate-based increases in paper and postage expenses was approximately $44 million in 1995. Primarily as a result of such increased expenses, FCI's debt rating was recently downgraded by Standard & Poor's. FCI is currently rated BBB/Baa2 by Standard & Poor's and Moody's Investors Service, respectively. See "Transactions Between FCI and the Company". THE OFFERING <TABLE> <S> <C> Common Stock offered(1)................... 2,833,333 Shares Common Stock to be outstanding after the Offering(1)(2).......................... 18,800,000 Shares Use of Proceeds........................... The net proceeds of the Offering will be used to repay short-term indebtedness of the Company, and the remainder, if any, will be used for general corporate purposes. See "Use of Proceeds". Proposed Nasdaq National Market Symbol.... "MTRS". Risk Factors.............................. See "Risk Factors" for a discussion of certain factors that should be considered in evaluating an investment in the Common Stock. </TABLE> - ------------------------- (1) Assumes the Underwriters do not exercise their option to purchase up to an additional 425,000 shares of Common Stock to cover over-allotments, if any. (2) Excludes 1,362,072 shares of Common Stock issuable upon exercise of outstanding stock options granted or expected to be granted by the Company. The Company has reserved a total of 1,976,125 shares of Common Stock for issuance in connection with options issuable under the Company's stock option plans. See "Management -- Compensation Programs". ------------------------ Metris Companies Inc. is a Delaware corporation incorporated on August 20, 1996, and is a wholly owned subsidiary of FFS Holdings, Inc., which is itself an indirect wholly owned subsidiary of FCI. The Company's subsidiaries are Direct Merchants Credit Card Bank, National Association ("Direct Merchants Bank"), Metris Receivables, Inc. ("MRI"), DMCCB, Inc., and Metris Direct, Inc. In anticipation of the Offering, FCI contributed the assets, liabilities and equity of the extended service plan business and all of the outstanding stock of these subsidiaries to the Company (the "Contribution"). The Company's principal executive offices are located at 600 South Highway 169, Suite 1800, St. Louis Park, Minnesota 55426, and its telephone number is (612) 525-5020. FORWARD-LOOKING STATEMENTS This Prospectus includes "forward-looking statements". The Company's actual results may differ significantly from the results discussed in such forward-looking statements, including, among others, those under "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Asset Quality". Certain factors that might cause such differences include, but are not limited to, the "Risk Factors" described herein. SUMMARY FINANCIAL AND OPERATING DATA The following summary historical financial and operating data reflects the assets, liabilities, equity, and revenues and expenses of FCI's businesses engaged in offering certain consumer credit products, extended service plans, and other fee-based products and services to moderate income consumers. The Income Statement Data, Balance Sheet Data, Net Extended Service Plan Revenues and Fee-Based Product Revenues presented below as of December 31, 1995 and 1994, and for each of the years in the three-year period ended December 31, 1995, have been derived from the audited financial statements and the notes thereto appearing elsewhere in this Prospectus. All other summary financial and operating data are unaudited, but reflect, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of such data. The results for the six months ended June 30, 1996, are also not necessarily indicative of the results to be expected for the entire year. As discussed under "Risk Factors -- Lack of Prior Operating History as a Stand-Alone Entity" and "-- Recently Commenced Credit Card Operations", the historical financial information presented below may not be indicative of the Company's future performance nor does it necessarily reflect what the financial position and results of operations of the Company would have been had the Company operated as a separate, stand-alone entity during the periods covered. Additionally, the Company's consumer credit products business and a substantial portion of its fee-based products and services business began operations in February 1995 with the opening of Direct Merchants Bank. Therefore, the financial statements and financial and operating data derived therefrom prior to 1995 are not comparable to the periods ending in 1995 and thereafter. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations", and the historical financial statements and notes thereto, included elsewhere in this Prospectus. In order to provide funds for operations and to improve liquidity, the Company securitizes and sells substantially all of its credit card loans to investors through a master trust. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity, Funding and Capital Resources", and "Business -- Securitization". The effect of these transactions is to remove credit card loans sold with limited recourse from the Company's balance sheet and record a gain on sale for the difference between the carrying value of the loans and the adjusted sales proceeds. The adjusted sales proceeds are based on a present value estimate of future cash flows to be received over the life of the loans, net of certain funding and servicing costs. The resulting gain is further reduced for estimated loan losses over the life of the related loans under the limited recourse provisions. Because these estimates are influenced by factors outside of the Company's control, the uncertainty inherent in these estimates makes it reasonably possible that these estimates could change in the near term. The securitization and sale of credit card loans changes the Company's interest in such loans from that of a lender to that of a servicer. Accordingly there is a change in how revenue is reported in the income statement. For securitized and sold credit card loans, amounts that otherwise would have been recorded as interest income, interest expense, fee income and provision for loan losses are instead recorded as net securitization and credit card servicing income, and the Company's allowance for loan losses also does not include amounts for securitized loans. However, the information on the following table under "Credit Card Data" includes both securitized loans and the Company's on-balance sheet loans. SUMMARY FINANCIAL AND OPERATING DATA <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, ---------------------- ------------------------------ 1996 1995 1995 1994 1993 ---------- -------- -------- ------- ------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> INCOME STATEMENT DATA: Interest income................................... $ 12,619 $ 1,460 $ 7,616 $ 487 $ 279 Interest expense.................................. 1,858 280 1,217 -- -- ---------- -------- -------- ------- ------- Net interest income............................... 10,761 1,180 6,399 487 279 Provision for loan losses......................... 5,173 534 4,393 -- -- Other operating income............................ 53,296 16,094 51,083 14,238 10,053 Other operating expense........................... 44,422 16,602 45,640 11,222 8,333 ---------- -------- -------- ------- ------- Income before income taxes........................ $ 14,462 $ 138 $ 7,449 $ 3,503 $ 1,999 Income taxes...................................... 5,568 53 2,868 1,305 737 ---------- -------- -------- ------- ------- Net income........................................ $ 8,894 $ 85 $ 4,581 $ 2,198 $ 1,262 ========== ======== ======== ======= ======= ADJUSTED PRO-FORMA INCOME STATEMENT DATA:(1) Adjusted pro-forma net income per share........... $ 0.51 $ 0.33 ========== ======== BALANCE SHEET DATA: Credit card/other loans(2)........................ $ 131,963 $ 44,514 $ 95,064 $ 9,375 $ 6,160 Allowance for loan losses......................... 5,303 534 3,679 -- -- Total assets...................................... 185,784 78,036 174,428 9,856 6,615 Short-term borrowings............................. 54,318 28,205 63,482 -- -- Division equity................................... 80,212 26,822 71,318 6,737 4,539 CREDIT CARD DATA: Average managed loans............................. $ 741,177 $ 42,576 $183,274 $ -- $ -- Period-end managed loans.......................... 1,068,018 190,069 543,619 -- -- Period-end total accounts......................... 1,122,673 319,511 702,891 -- -- Managed net interest margin(3).................... 13.85% 13.35% 13.65% 7.36% 6.16% Managed net charge-off ratio(4)................... 5.53% -- 2.19% -- -- Managed delinquency ratio(5)...................... 3.37% 0.17% 3.95% -- -- Period-end managed allowance for loan losses...... 4.15% 1.49% 4.09% -- -- EXTENDED SERVICE PLAN DATA: Net extended service plan revenues................ $ 8,615 $ 6,687 $ 17,779 $12,244 $ 7,935 Warrantable product sales penetration rates(6).... 23.8% 21.0% 20.4% 15.3% 12.9% FEE-BASED PRODUCTS AND SERVICES DATA: Fee-based product revenues........................ $ 12,067 $ 1,549 $ 6,662 $ 1,994 $ 2,118 </TABLE> - ------------------------- (1) Pro-forma per share information is based on 18,800,000 shares assumed to be outstanding upon consummation of the Offering. Amounts also give effect to the adjustment to net income of $721 and $1,663 from the application of the estimated net proceeds from the Offering to repay a portion of outstanding short-term borrowings from FCI as if the Offering had occurred at the beginning of the respective periods shown using average interest rates of 6.06% and 6.99% for the six months ended June 30, 1996, and the year ended December 31, 1995, respectively, and an effective tax rate of 38.5% for both periods. See "Use of Proceeds".
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this Prospectus. References to "Iron Mountain" and the "Company" include Iron Mountain Incorporated (including predecessor entities) and its consolidated subsidiaries, unless the context otherwise requires. THE COMPANY Iron Mountain is the largest records management company in the United States, as measured by revenues. The Company is a full-service provider of records management and related services, enabling customers to outsource records management functions. Pro forma for the Acquisitions (as defined herein), as of June 30, 1996, the Company managed approximately 29.6 million Cartons* in 103 records centers in 33 markets nationwide. The Company has a diversified base of over 19,000 customer accounts, which includes more than half of the Fortune 500 and numerous legal, banking, healthcare, accounting, insurance, entertainment and government organizations. The Company provides storage and related services for all major media, including paper (which is the dominant form of records retention and which has accounted for approximately 85% of the Company's revenues since 1992), computer disks and tapes, microfilm and microfiche, master audio and video tapes, film and optical disks, X-rays and blueprints. The Company's principal services include filing, retrieval and destruction of records, courier pick-up and delivery, database management and customized reporting. The Company also sells storage materials and provides consulting and other records-related services. The Company continues to capitalize on its leading position in the records management industry and the industry trends of increased records retention, outsourcing of records management and vendor consolidation. As a result, the Company has achieved significant increases in revenues and EBITDA (as defined herein). From 1991 to 1995, Iron Mountain's total revenues increased from $62.8 million to $104.4 million primarily from internal growth, representing a compound annual growth rate ("CAGR") of 13.5%. During the same period, storage revenues grew at a 12.9% CAGR while service and storage material sales revenues grew at a 14.6% CAGR. From 1991 to 1995, the Company's EBITDA grew from $15.0 million to $26.1 million, representing a 14.9% CAGR. Revenues and EBITDA for the six months ended June 30, 1996 increased 27.3% (10.2% from internal growth and 17.1% from acquisitions) and 24.8%, respectively, over the same period in 1995. For a discussion of the significance of EBITDA and other measures of the Company's performance determined in accordance with generally accepted accounting principles ("GAAP") and the Company's sources and applications of cash flow, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview" and "--Liquidity and Capital Resources." Industry Overview According to industry sources, organizations in the United States generate an estimated four trillion documents each year, many of which must be retained and remain available for reference for many years. These records may be generally divided into two categories: active and inactive. Inactive records, which are the principal focus of the records management industry, consist of records that are not needed for immediate access but which must be retained for legal or regulatory reasons or for occasional reference to support ongoing business operations. Based on industry studies, the Company believes that inactive records make up approximately 80% of all records. The Company believes that the volume of inactive records is increasing for a number of reasons, including: (i) the rapid growth of inexpensive document producing technologies such as facsimile, desktop printing and computer networking; (ii) increased regulatory requirements; (iii) concerns over possible future litigation and the resulting increases in volume and holding periods of documentation; (iv) the high cost of reviewing records and deciding whether to retain or destroy them; and (v) the failure of many entities to adopt or follow policies on records destruction. Despite the growth of new "paperless" technologies, such as the Internet and e-mail, management believes that stored information remains predominantly paper-based and that such technologies have promoted the creation of hard copies of such electronic information. - ------------- * The term "Carton" is defined as a measurement of volume equal to a single standard storage carton, approximately 1.2 cubic feet. The number of Cartons stored does not include storage volumes in the Company's vital records services and data protection services, which are described under "Business." The Company believes that it benefits from several industry fundamentals, including: (i) the historically non- cyclical nature of the records management industry; (ii) the continued trend towards corporate outsourcing of records management functions; (iii) the ability of larger records management companies to achieve economies of scale with respect to labor, real estate costs and the utilization of management information systems; and (iv) the ongoing consolidation of the records management industry. The Company believes that it is one of only four records management providers with a national operating presence, the balance being regional or, in most instances, single-city operators. According to the Association of Commercial Records Centers (the "ACRC"), a trade group of approximately 500 members, as of January 1994 (the latest date for which such information is available), approximately 2,600 firms offered records storage and management services in the United States. The Company believes that there is a trend toward consolidation in the records management industry and that such trend will continue to accelerate primarily because of: (i) the opportunities to achieve economies of scale; (ii) the industry's capital requirements for growth; (iii) customer demands for more sophisticated technology-based solutions; and (iv) the preference of certain large, national customers to outsource a significant portion of their records management functions to one vendor with a national presence, such as Iron Mountain. Financial Characteristics of Iron Mountain's Business Iron Mountain's records management business has the following financial characteristics: (bullet)Recurring Revenues. Iron Mountain derives a majority of its revenues from fixed periodic (usually monthly) fees charged to customers for storage of records. Storage revenues have grown for 30 consecutive quarters and have represented approximately 60% of the Company's total revenues in each of the last five years. Once a customer places a record in storage with the Company and until that record is destroyed or permanently removed (for which the Company typically receives a service fee), the Company receives recurring payments of fixed periodic fees without incurring additional labor or marketing expenses or significant capital costs. The stable and growing storage base also provides the foundation for increases in revenues and EBITDA from service activities and sales of storage materials. (bullet)Historically Non-Cyclical Business. Iron Mountain has not experienced a reduction of its business as a result of past general economic downturns, although there can be no assurance that this would be the case in the future. Management believes that the outsourcing of records management may accelerate during economic downturns as companies focus on reducing costs through outsourcing non-core operating functions. In addition, management believes that companies that have outsourced records management are less likely during economic downturns to incur the move-out costs and other expenses associated with switching vendors or moving records management in-house. (bullet)Inherent Growth from Existing Customers. The Company's customers have on average generated additional Cartons at a faster rate than stored Cartons have been destroyed or permanently removed. From 1992 to 1995, net Cartons from existing customers grew at an average annual rate of 6.7%. The Company believes the consistent growth of its storage revenues is the result of a number of additional factors, including: (i) the trend toward increased records retention; (ii) customer satisfaction with the Company's services; and (iii) the costs and inconvenience of moving storage operations in-house or to another provider of records management services. (bullet)Diversified and Stable Customer Base. The Company has over 19,000 customer accounts in a variety of industries. The Company currently provides services to more than half of the Fortune 500 and numerous legal, banking, healthcare, accounting, insurance, entertainment and government organizations. Only one of the Company's customers accounted for more than 3% of revenues in 1993, 1994 or 1995. From 1992 to 1995, average annual permanent removals of Cartons represented only approximately 4% of total Cartons stored. (bullet)Capital Expenditures Related Primarily to Growth. The Company's business requires limited annual maintenance capital expenditures. Maintenance capital expenditures were $1.8 million, $1.2 million and $0.9 million in 1993, 1994 and 1995, respectively. From 1992 to 1995, over 90% of the Company's aggregate capital expenditures were growth-related investments, primarily in racking systems, new buildings and leasehold improvements, equipment for new facilities, management information systems and facilities restructuring. These growth-related capital expenditures are primarily discretionary and create additional capacity for increases in revenues and EBITDA. Business Strategy Iron Mountain's business strategy is to increase revenues and EBITDA while maintaining a low-cost operating structure and providing premium service. The Company intends to generate growth by increasing its storage and service revenues from existing customers, adding new customers and making acquisitions. The Company's strategy is based on the following elements: (bullet)Provide Superior Customer Service. The Company believes it has a reputation for providing reliable, quality service based on its more than 45 years of operations, its commitment to providing premium customer service and the continuity and depth of its management team. The Company has successfully implemented a decentralized management structure that enables the Company to respond quickly and flexibly to local customer needs. Iron Mountain's proprietary Safekeeper(R) system enables it to quickly provide customized records management solutions to its customers, enhancing the quality of its services. In addition, Iron Mountain's national operating presence allows it to better service large organizations that require records management functions at multiple, geographically diverse facilities. (bullet)Capitalize on Operating Efficiencies. Iron Mountain pursues a low-cost operating strategy based primarily on achieving economies of scale in the areas of storage, labor and transportation, general and administrative functions and management information systems. Because occupancy costs are a major component of the Company's cost of sales, its real estate management staff aggressively seeks to minimize per Carton storage costs by designing racking systems and operating space to maximize facility storage efficiency, negotiating favorable facility leases, contracting for facilities to be built to its custom specifications, and leasing larger facilities in order to reduce operating costs per Carton. The Company seeks to increase labor efficiency by offering incentive compensation to all full-time employees based upon achieving specific operating targets. Certain operating costs, such as the maintenance of local delivery fleets, general and administrative costs and management information systems, offer economies of scale, providing the Company with operating leverage and the ability to increase its efficiency through further growth. (bullet)Pursue Acquisition Opportunities. The Company believes that it is well positioned to participate in the further consolidation of the records management industry. Iron Mountain's management team has successfully completed 18 acquisitions since the Company embarked on a proactive acquisition strategy in mid-1994, and one additional acquisition is currently pending. The Company intends to continue to make fold-in acquisitions to augment its operations in existing markets and to make strategic acquisitions in new geographic markets, with an emphasis on the 50 largest markets in the United States and potentially in certain markets outside the United States. Following an acquisition in a new market, the Company seeks to increase its business with the acquired customer base and to supplement that growth both with new customers and through appropriate fold-in acquisitions. In addition, the Company has successfully reduced the cost structure of its acquired operations by implementing its efficient operating strategies and leveraging its centralized administrative resources and management information systems. (bullet)Leverage Proprietary Safekeeper System. The Company pioneered the application of advanced information technology to the records management industry. Iron Mountain's proprietary Safekeeper system provides advanced inventory control and information access, enabling the Company to provide faster, higher quality and more flexible solutions to its customers and to lower the costs of its operations. Safekeeper has been designed to easily and effectively integrate newly acquired records management companies and offer improved levels of customer service and records management capabilities to customers acquired through acquisitions. Iron Mountain's Safekeeper system exploits bar-code technology to provide a comprehensive, standardized approach to tracking, accessing and retrieving records. Safekeeper offers state-of-the-art records management capabilities and ease of access to customers while featuring security functions to protect customer information from unauthorized access. Since 1992, the Company has invested $12.5 million to develop and refine its management information systems, including Safekeeper. THE OFFERING <TABLE> <CAPTION> <S> <C> Securities Offered $150,000,000 principal amount of % Senior Subordinated Notes due 2006 (the "Notes"). Maturity Date , 2006 Interest Payment Dates and of each year, commencing , 1997. Guarantees The Notes will be fully and unconditionally guaranteed on an unsecured senior subordinated and joint and several basis (the "Subsidiary Guarantees") by substantially all of the Company's present and future Restricted Subsidiaries (collectively, the "Guarantors"). Each of the Guarantors has also guaranteed unconditionally the indebtedness outstanding under the Company's existing bank credit facility (the "Credit Agreement") and will guarantee unconditionally the indebtedness outstanding under the new bank credit facility the Company intends to enter into with its lenders (the "New Credit Facility"). See "Description of the Notes--Subsidiary Guarantees." Subordination The Notes will be general unsecured senior subordinated obligations of the Company ranking junior to all existing and future Senior Debt of the Company, including any indebtedness that may be incurred under the Credit Agreement or the New Credit Facility. The Subsidiary Guarantees will rank junior to all existing and future Senior Debt of the Guarantors. As of June 30, 1996, on a pro forma basis after giving effect to the Transactions, the aggregate outstanding principal amount of Senior Debt of the Company and the Guarantors would have been $24.5 million. See "Description of the Notes--Subordination." Optional Redemption Except as described below, the Notes are not redeemable by the Company prior to , 2001. Thereafter, the Notes are redeemable at the option of the Company, in whole or in part, at any time and from time to time, at the redemption prices set forth herein plus accrued and unpaid interest to, but excluding, the date of redemption. In addition, during the first 36 months after the date of issuance of the Notes, the Company, at its option, may redeem up to 35% of the initial principal amount of the Notes with the net proceeds of one or more Qualified Equity Offerings at a redemption price equal to %, plus accrued and unpaid interest to, but excluding, the date of redemption; provided that at least 65% of the initial principal amount of the Notes remains outstanding after each such redemption. See "Description of the Notes--Optional Redemption." Mandatory Redemption Except with respect to required repurchases upon the occurrence of a Change of Control or in the event of certain Asset Sales, the Company is not required to make sinking fund or redemption payments with respect to the Notes at any time prior to maturity. See "Description of the Notes-- Mandatory Redemption." Change of Control Upon the occurrence of a Change of Control, each Holder of Notes may require the Company to repurchase such Notes at 101% of the principal amount thereof, plus accrued and unpaid interest to, but excluding, the date of repurchase. See "Description of the Notes--Repurchase at the Option of Holders--Change of Control." Certain Covenants The Indenture governing the Notes (the "Indenture") will contain covenants restricting or limiting the ability of the Company and its Restricted Subsidiaries to, among other things: (i) incur additional indebtedness, including indebtedness ranking senior to the Notes and junior to any Senior Debt; (ii) pay dividends or make other restricted payments; (iii) make asset dispositions; (iv) permit liens; (v) enter into sale and leaseback transactions; (vi) enter into certain mergers; (vii) make certain investments; and (viii) enter into transactions with related persons. See "Description of the Notes--Certain Covenants." Use of Proceeds The net proceeds of the Offering will be used to repay outstanding bank debt and certain other indebtedness and to fund a portion of the purchase price of the Pending Acquisition. </TABLE> RISK FACTORS For a discussion of certain material factors that should be considered in connection with an investment in the Notes offered hereby, see "Risk Factors" on pages 10 to 14.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001021094_data_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001021094_data_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..6dd8fa4deac4f52438272652b8df540eb3b69072
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this Prospectus. References to "Iron Mountain" and the "Company" include Iron Mountain Incorporated (including predecessor entities) and its consolidated subsidiaries, unless the context otherwise requires. The Company Iron Mountain is the largest records management company in the United States, as measured by revenues. The Company is a full-service provider of records management and related services, enabling customers to outsource records management functions. Pro forma for the Acquisitions (as defined herein), as of June 30, 1996, the Company managed approximately 29.6 million Cartons* in 103 records centers in 33 markets nationwide. The Company has a diversified base of over 19,000 customer accounts, which includes more than half of the Fortune 500 and numerous legal, banking, healthcare, accounting, insurance, entertainment and government organizations. The Company provides storage and related services for all major media, including paper (which is the dominant form of records retention and which has accounted for approximately 85% of the Company's revenues since 1992), computer disks and tapes, microfilm and microfiche, master audio and video tapes, film and optical disks, X-rays and blueprints. The Company's principal services include filing, retrieval and destruction of records, courier pick-up and delivery, database management and customized reporting. The Company also sells storage materials and provides consulting and other records-related services. The Company continues to capitalize on its leading position in the records management industry and the industry trends of increased records retention, outsourcing of records management and vendor consolidation. As a result, the Company has achieved significant increases in revenues and EBITDA (as defined herein). From 1991 to 1995, Iron Mountain's total revenues increased from $62.8 million to $104.4 million primarily from internal growth, representing a compound annual growth rate ("CAGR") of 13.5%. During the same period, storage revenues grew at a 12.9% CAGR while service and storage material sales revenues grew at a 14.6% CAGR. From 1991 to 1995, the Company's EBITDA grew from $15.0 million to $26.1 million, representing a 14.9% CAGR. Revenues and EBITDA for the six months ended June 30, 1996 increased 27.3% (10.2% from internal growth and 17.1% from acquisitions) and 24.8%, respectively, over the same period in 1995. For a discussion of the significance of EBITDA and other measures of the Company's performance determined in accordance with generally accepted accounting principles ("GAAP") and the Company's sources and applications of cash flow, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview" and "--Liquidity and Capital Resources." Industry Overview According to industry sources, organizations in the United States generate an estimated four trillion documents each year, many of which must be retained and remain available for reference for many years. These records may be generally divided into two categories: active and inactive. Inactive records, which are the principal focus of the records management industry, consist of records that are not needed for immediate access but which must be retained for legal or regulatory reasons or for occasional reference to support ongoing business operations. Based on industry studies, the Company believes that inactive records make up approximately 80% of all records. The Company believes that the volume of inactive records is increasing for a number of reasons, including: (i) the rapid growth of inexpensive document producing technologies such as facsimile, desktop printing and computer networking; (ii) increased regulatory requirements; (iii) concerns over possible future litigation and the resulting increases in volume and holding periods of documentation; (iv) the high cost of reviewing records and deciding whether to retain or destroy them; and (v) the failure of many entities to adopt or follow policies on records destruction. Despite the growth of new "paperless" technologies, such as the Internet and e-mail, management believes that stored information remains predominantly paper-based and that such technologies have promoted the creation of hard copies of such electronic information. - ------------- * The term "Carton" is defined as a measurement of volume equal to a single standard storage carton, approximately 1.2 cubic feet. The number of Cartons stored does not include storage volumes in the Company's vital records services and data protection services, which are described under "Business." The Company believes that it benefits from several industry fundamentals, including: (i) the historically non- cyclical nature of the records management industry; (ii) the continued trend towards corporate outsourcing of records management functions; (iii) the ability of larger records management companies to achieve economies of scale with respect to labor, real estate costs and the utilization of management information systems; and (iv) the ongoing consolidation of the records management industry. The Company believes that it is one of only four records management providers with a national operating presence, the balance being regional or, in most instances, single-city operators. According to the Association of Commercial Records Centers (the "ACRC"), a trade group of approximately 500 members, as of January 1994 (the latest date for which such information is available), approximately 2,600 firms offered records storage and management services in the United States. The Company believes that there is a trend toward consolidation in the records management industry and that such trend will continue to accelerate primarily because of: (i) the opportunities to achieve economies of scale; (ii) the industry's capital requirements for growth; (iii) customer demands for more sophisticated technology-based solutions; and (iv) the preference of certain large, national customers to outsource a significant portion of their records management functions to one vendor with a national presence, such as Iron Mountain. Financial Characteristics of Iron Mountain's Business Iron Mountain's records management business has the following financial characteristics: (bullet)Recurring Revenues. Iron Mountain derives a majority of its revenues from fixed periodic (usually monthly) fees charged to customers for storage of records. Storage revenues have grown for 30 consecutive quarters and have represented approximately 60% of the Company's total revenues in each of the last five years. Once a customer places a record in storage with the Company and until that record is destroyed or permanently removed (for which the Company typically receives a service fee), the Company receives recurring payments of fixed periodic fees without incurring additional labor or marketing expenses or significant capital costs. The stable and growing storage base also provides the foundation for increases in revenues and EBITDA from service activities and sales of storage materials. (bullet)Historically Non-Cyclical Business. Iron Mountain has not experienced a reduction of its business as a result of past general economic downturns, although there can be no assurance that this would be the case in the future. Management believes that the outsourcing of records management may accelerate during economic downturns as companies focus on reducing costs through outsourcing non-core operating functions. In addition, management believes that companies that have outsourced records management are less likely during economic downturns to incur the move-out costs and other expenses associated with switching vendors or moving records management in-house. (bullet)Inherent Growth from Existing Customers. The Company's customers have on average generated additional Cartons at a faster rate than stored Cartons have been destroyed or permanently removed. From 1992 to 1995, net Cartons from existing customers grew at an average annual rate of 6.7%. The Company believes the consistent growth of its storage revenues is the result of a number of additional factors, including: (i) the trend toward increased records retention; (ii) customer satisfaction with the Company's services; and (iii) the costs and inconvenience of moving storage operations in-house or to another provider of records management services. (bullet)Diversified and Stable Customer Base. The Company has over 19,000 customer accounts in a variety of industries. The Company currently provides services to more than half of the Fortune 500 and numerous legal, banking, healthcare, accounting, insurance, entertainment and government organizations. Only one of the Company's customers accounted for more than 3% of revenues in 1993, 1994 or 1995. From 1992 to 1995, average annual permanent removals of Cartons represented only approximately 4% of total Cartons stored. (bullet)Capital Expenditures Related Primarily to Growth. The Company's business requires limited annual maintenance capital expenditures. Maintenance capital expenditures were $1.8 million, $1.2 million and $0.9 million in 1993, 1994 and 1995, respectively. From 1992 to 1995, over 90% of the Company's aggregate capital expenditures were growth-related investments, primarily in racking systems, new buildings and leasehold improvements, equipment for new facilities, management information systems and facilities restructuring. These growth-related capital expenditures are primarily discretionary and create additional capacity for increases in revenues and EBITDA. Business Strategy Iron Mountain's business strategy is to increase revenues and EBITDA while maintaining a low-cost operating structure and providing premium service. The Company intends to generate growth by increasing its storage and service revenues from existing customers, adding new customers and making acquisitions. The Company's strategy is based on the following elements: (bullet)Provide Superior Customer Service. The Company believes it has a reputation for providing reliable, quality service based on its more than 45 years of operations, its commitment to providing premium customer service and the continuity and depth of its management team. The Company has successfully implemented a decentralized management structure that enables the Company to respond quickly and flexibly to local customer needs. Iron Mountain's proprietary Safekeeper(R) system enables it to quickly provide customized records management solutions to its customers, enhancing the quality of its services. In addition, Iron Mountain's national operating presence allows it to better service large organizations that require records management functions at multiple, geographically diverse facilities. (bullet)Capitalize on Operating Efficiencies. Iron Mountain pursues a low-cost operating strategy based primarily on achieving economies of scale in the areas of storage, labor and transportation, general and administrative functions and management information systems. Because occupancy costs are a major component of the Company's cost of sales, its real estate management staff aggressively seeks to minimize per Carton storage costs by designing racking systems and operating space to maximize facility storage efficiency, negotiating favorable facility leases, contracting for facilities to be built to its custom specifications, and leasing larger facilities in order to reduce operating costs per Carton. The Company seeks to increase labor efficiency by offering incentive compensation to all full-time employees based upon achieving specific operating targets. Certain operating costs, such as the maintenance of local delivery fleets, general and administrative costs and management information systems, offer economies of scale, providing the Company with operating leverage and the ability to increase its efficiency through further growth. (bullet)Pursue Acquisition Opportunities. The Company believes that it is well positioned to participate in the further consolidation of the records management industry. Iron Mountain's management team has successfully completed 17 acquisitions since the Company embarked on a proactive acquisition strategy in mid-1994, and two additional acquisitions are currently pending. The Company intends to continue to make fold-in acquisitions to augment its operations in existing markets and to make strategic acquisitions in new geographic markets, with an emphasis on the 50 largest markets in the United States and potentially in certain markets outside the United States. Following an acquisition in a new market, the Company seeks to increase its business with the acquired customer base and to supplement that growth both with new customers and through appropriate fold-in acquisitions. In addition, the Company has successfully reduced the cost structure of its acquired operations by implementing its efficient operating strategies and leveraging its centralized administrative resources and management information systems. (bullet)Leverage Proprietary Safekeeper System. The Company pioneered the application of advanced information technology to the records management industry. Iron Mountain's proprietary Safekeeper system provides advanced inventory control and information access, enabling the Company to provide faster, higher quality and more flexible solutions to its customers and to lower the costs of its operations. Safekeeper has been designed to easily and effectively integrate newly acquired records management companies and offer improved levels of customer service and records management capabilities to customers acquired through acquisitions. Iron Mountain's Safekeeper system exploits bar-code technology to provide a comprehensive, standardized approach to tracking, accessing and retrieving records. Safekeeper offers state-of-the-art records management capabilities and ease of access to customers while featuring security functions to protect customer information from unauthorized access. Since 1992, the Company has invested $12.5 million to develop and refine its management information systems, including Safekeeper. The Offering <TABLE> <S> <C> Securities Offered $150,000,000 principal amount of % Senior Subordinated Notes due 2006 (the "Notes"). Maturity Date , 2006 Interest Payment Dates and of each year, commencing , 1997. Guarantees The Notes will be fully and unconditionally guaranteed on an unsecured senior subordinated and joint and several basis (the "Subsidiary Guarantees") by substantially all of the Company's present and future Restricted Subsidiaries (collectively, the "Guarantors"). Each of the Guarantors has also guaranteed unconditionally the indebtedness outstanding under the Company's existing bank credit facility (the "Credit Agreement") and will be required to guarantee unconditionally the indebtedness outstanding under the new bank credit facility the Company intends to enter into with its lenders (the "New Credit Facility"). See "Description of the Notes--Subsidiary Guarantees." Subordination The Notes will be general unsecured senior subordinated obligations of the Company ranking junior to all existing and future Senior Debt of the Company, including any indebtedness that may be incurred under the Credit Agreement or the New Credit Facility. The Subsidiary Guarantees will rank junior to all existing and future Senior Debt of the Guarantors. As of June 30, 1996, on a pro forma basis after giving effect to the Transactions, the aggregate outstanding principal amount of Senior Debt of the Company and the Guarantors would have been $24.5 million. See "Description of the Notes--Subordination." Optional Redemption Except as described below, the Notes are not redeemable by the Company prior to , 2001. Thereafter, the Notes are redeemable at the option of the Company, in whole or in part, at any time and from time to time, at the redemption prices set forth herein plus accrued and unpaid interest to, but excluding, the date of redemption. In addition, during the first 36 months after the date of issuance of the Notes, the Company, at its option, may redeem up to 35% of the initial principal amount of the Notes with the net proceeds of one or more Qualified Equity Offerings at a redemption price equal to %, plus accrued and unpaid interest to, but excluding, the date of redemption; provided that at least 65% of the initial principal amount of the Notes remains outstanding after each such redemption. See "Description of the Notes--Optional Redemption." Mandatory Redemption Except with respect to required repurchases upon the occurrence of a Change of Control or in the event of certain Asset Sales, the Company is not required to make sinking fund or redemption payments with respect to the Notes at any time prior to maturity. See "Description of the Notes-- Mandatory Redemption." Change of Control Upon the occurrence of a Change of Control, each Holder of Notes may require the Company to repurchase such Notes at 101% of the principal amount thereof, plus accrued and unpaid interest to, but excluding, the date of repurchase. See "Description of the Notes--Repurchase at the Option of Holders--Change of Control." Certain Covenants The Indenture governing the Notes (the "Indenture") will contain covenants restricting or limiting the ability of the Company and its Restricted Subsidiaries to, among other things: (i) incur additional indebtedness, including indebtedness ranking senior to the Notes and junior to any Senior Debt; (ii) pay dividends or make other restricted payments; (iii) make asset dispositions; (iv) permit liens; (v) enter into sale and leaseback transactions; (vi) enter into certain mergers; (vii) make certain investments; and (viii) enter into transactions with related persons. See "Description of the Notes--Certain Covenants." Use of Proceeds The net proceeds of the Offering will be used to repay outstanding bank debt and certain other indebtedness and to fund a portion of the purchase price of the Pending Acquisitions. </TABLE> Risk Factors For a discussion of certain material factors that should be considered in connection with an investment in the Notes offered hereby, see "Risk Factors" on pages 10 to 14.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001021121_transeaste_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001021121_transeaste_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..318aee643483f9f14754291f58f0739d0b285190
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (I) ASSUMES THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED, (II) ASSUMES AN INITIAL PUBLIC OFFERING PRICE OF $7.00 PER SHARE, (III) REFLECTS AN 8.2-FOR-1 STOCK SPLIT OF THE COMMON STOCK EFFECTED ON AUGUST 15, 1996, (IV) ASSUMES THE REDEMPTION OF ALL 1,819 SHARES OF THE COMPANY'S ISSUED AND OUTSTANDING SERIES A PREFERRED STOCK, PAR VALUE $.01 PER SHARE (THE "SERIES A PREFERRED STOCK") AND ALL 33,202 SHARES OF THE COMPANY'S ISSUED AND OUTSTANDING SERIES B PREFERRED STOCK, PAR VALUE $.01 PER SHARE (THE "SERIES B PREFERRED STOCK") UPON CONSUMMATION OF THE OFFERING, (V) ASSUMES THE CASHLESS EXERCISE AND CONVERSION OF ALL OF THE 1,258,774 WARRANTS TO PURCHASE COMMON STOCK OF THE COMPANY OUTSTANDING AT NOVEMBER 15, 1996 ("WARRANTS"), (VI) ASSUMES NO EXERCISE OF ANY OF THE REPRESENTATIVES' WARRANTS ISSUED IN CONNECTION WITH THE OFFERING, (VII) ASSUMES NO EXERCISE OF ANY OPTIONS GRANTED UNDER THE COMPANY'S 1996 STOCK OPTION AND SHAREHOLDER VALUE PLAN (THE "1996 STOCK PLAN") AND (VIII) DOES NOT INCLUDE WARRANTS (THE "CONTINGENT WARRANTS") TO PURCHASE SHARES OF COMMON STOCK, WHICH CONTINGENT WARRANTS ARE ISSUABLE IN THE EVENT CERTAIN TARGETED COMMON STOCK SHARE PRICES ARE NOT ACHIEVED IN THE OFFERING (SEE "CAPITALIZATION"). See "Underwriting," "Management--Stock Option and Shareholder Value Plan," and "Description of Capital Stock--Contingent Warrants." Investors should carefully consider the information set forth under the heading "Risk Factors." THE COMPANY Transeastern has experienced rapid growth and is engaged primarily in the acquisition of land and the construction and sale of quality, single-family and multi-family homes for the move-up and senior home-buying markets in the State of Florida. Transeastern uses a systematic and disciplined approach to the acquisition of parcels of land through a rigorous evaluation of each parcel to determine whether it satisfies the Company's quantitative and qualitative acquisition criteria. The Company constructs homes with a variety of designs with standardized option packages in order to cost-effectively build homes of superior value. Transeastern's approach utilizes innovative marketing and sales programs and procedures. Transeastern believes that its disciplined approach coupled with its emphasis on customer satisfaction, quality, value and pride in workmanship are largely responsible for its growth. The Company experienced a ten-fold increase in revenues over the past four years. The Company's objective is to become a more broadly-diversified real estate company achieving long-term, stable growth with measured risk. The Company employs the following strategies in furtherance of its objective: (i) to aggressively target the move-up and senior home-buying markets, by constructing and selling quality homes of superior value on distinctive niche properties in growth markets, primarily featuring waterfront and golf course living and other upscale recreational amenities; (ii) to strategically acquire land which is well-suited for the construction and sale of the Company's homes, and which may also include parcels considered favorable for short-term, profitable resale to other builders; (iii) to develop multi-family housing, primarily for sale to institutional investors; (iv) to develop strategic alliances with leading real estate and institutional investors to further the Company's ability to opportunistically acquire and finance distinctive niche properties in growth markets, primarily for single-family home development by the Company; and (v) to develop ancillary business activities, typical of other home builders, which traditionally complement single-family home development businesses. The Company has experienced significant growth in revenues during the past four consecutive years. Revenues increased by 1,788% during the fiscal year ended June 30, 1996 to $105.7 million as compared to $5.6 million in fiscal year 1992. The Company's pre-tax income increased from $146,000 in 1992 to $8.1 million in 1996. The Company's net income before income taxes and extraordinary gain in 1996 of $8.1 million increased by 741% from $963,000 in 1995. The number of home sales closed increased from 25 in 1992 to 375 in 1996.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001021162_triumph_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001021162_triumph_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT (I) THE UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED, AND (II) THE TRANSACTIONS DESCRIBED UNDER "RECAPITALIZATION" HAVE OCCURRED. THE COMPANY The Company designs, engineers, manufactures, repairs and/or overhauls aircraft components such as mechanical and electromechanical control systems, aircraft and engine accessories, auxiliary power units ("APUs"), avionics and aircraft instruments. The Company serves a broad spectrum of the aviation industry, including commercial airlines and air cargo carriers, as well as original equipment manufacturers of aircraft and aircraft components ("OEMs"), on a worldwide basis. According to current U.S. Department of Commerce statistics, the annual worldwide market for aircraft, including components, is approximately $56.7 billion. A recent issue of AVIATION WEEK AND SPACE TECHNOLOGY states that the global airline industry spends at least $20 billion annually to maintain its aircraft. The aircraft component production and repair industry is highly fragmented, consisting of both a limited number of well-capitalized companies, which offer a broad range of products and services, and a large number of smaller, specialized companies. The Company believes that this market structure and industry trends will result in continued industry consolidation. The Company believes that there are a number of significant trends affecting the demand for its products and services. Boeing's 1996 Market Outlook projects that global air travel will increase by 70% and that the number of passenger and cargo delivery aircraft in service will increase by 47% through the year 2005. This continued growth in air transit and aircraft production will increase the demand for aircraft component purchases and repairs. In addition to increased air transit and aircraft in service, these trends include increased outsourcing of the manufacture and maintenance of aircraft components, assemblies and subassemblies by aircraft operators and OEMs, reductions by customers in the number of approved suppliers and vendors of aviation products and services, aging aircraft that require increased repair and maintenance, reduced supply of surplus aircraft, increased emphasis on component traceability and more stringent maintenance and safety requirements. COMPETITIVE ADVANTAGES The Company believes that it is well positioned to take advantage of these trends due to: BROAD ARRAY OF PRODUCT AND SERVICES. The Company offers the aviation industry a consolidated point of purchase for a broad array of aviation products and services. The Company designs, engineers and manufactures aircraft components to fulfill the particular needs and requirements of its customers. In certain cases, the Company retains the proprietary right to these designs and, accordingly, the customer will rely on the Company to provide service on such aircraft components at every stage of their useful lives, including the repair and overhaul or replacement of such components. The Company also manufactures aircraft components according to customer specifications. In addition, the Company performs repair and overhaul services for customers on various aircraft components manufactured by third parties. GOVERNMENT CERTIFICATIONS. The Company operates nine repair stations certified by the United States Federal Aviation Administration (the "FAA") and has been granted licenses from the FAA and foreign regulatory counterparts to perform repair and overhaul services on broad classifications of aircraft instruments and accessories. Without such broad certifications and licenses, other companies may not offer these products and services, thereby constituting a significant barrier to entry. In addition, the Company holds two exclusive licenses issued by the FAA that permit the Company to design, engineer and repair products to its own specifications for certain aircraft components and therefore to compete directly with OEMs with respect to such components. These exclusive licenses enable the Company to offer, on a proprietary basis, certain repaired parts to its customers at a lower cost than other companies that must purchase replacement parts from third parties. EMPHASIS ON QUALITY CONTROL. The Company incurs significant expenses to maintain stringent quality control of its products and services. In addition to domestic and foreign governmental regulations, OEMs and other customers require that the Company satisfy certain requirements relating to the quality of its products and services. The Company performs testing and certification procedures on all of the products that it designs, engineers, manufactures, repairs and overhauls, and maintains detailed records to ensure traceability of the production of and service on each aircraft component. The expense required to institute and maintain comparable quality control procedures represents a barrier to entry. BROAD CUSTOMER BASE. Due to the Company's broad array of products and services and its emphasis on quality control and timely delivery, the Company's customers include virtually all of the world's major commercial airlines and an increasing number of the most widely recognized air cargo carriers and OEMs. The Company expects that its customer base will continue to strengthen and broaden with increased cross-selling efforts by the Company of its various products and services. ESTABLISHED INDUSTRY PRESENCE. The operating divisions and subsidiaries in the Company's aviation group have been involved in the aviation industry for an average of over 30 years. These entities are characterized by experienced management and highly-skilled employees. Due in large part to its established industry presence, the Company enjoys strong customer relations, name recognition and repeat business. COMPANY STRATEGY The Company intends to grow its aviation business through: EXPANSION OF PRODUCTS AND SERVICES. The Company will continue to introduce new aviation products and services to take advantage of the growing aviation industry and the increasing demand for aviation products and services. In an effort to expand its existing array of products and services and to capture additional repair and overhaul business, the Company plans to expand, as appropriate, its program for the distribution and inventory management of third party aircraft components. The Company will also expand its assembly and subassembly capabilities on certain aircraft components. By broadening its products and services, the Company intends to further augment its position as a consolidated point of purchase to the aviation industry, capitalizing on the trend toward outsourcing and the reduction by aircraft operators and OEMs of the number of approved suppliers and vendors. INCREASED INTERNATIONAL MARKETING. The Company will continue to take advantage of the expanding international market for aviation products and services, as worldwide air travel escalates and foreign nations, particularly China and other countries in Asia, purchase used aircraft that require more frequent repair and maintenance. The Company currently supplies products and services to virtually every major commercial airline in the world and retains independent sales representatives in a number of foreign countries. The Company intends to build on its existing international presence through foreign acquisitions and continued market penetration. CAPITALIZING ON AVIATION GROUP AFFILIATION. Utilizing the group affiliation of the Company's operating divisions and subsidiaries, the Company plans to increase cross-selling of its various capabilities to its customers. The Company's operating divisions and subsidiaries will continue to share independent sales representatives and jointly bid on projects where appropriate, while still maintaining their individual identities. EXPANDED OPERATING CAPACITY. The Company plans to increase its operating capacity to meet the expected increased growth and demand in the aviation industry. The Company will increase its capital expenditures, including expenditures for additional equipment and skilled labor, to support this increased capacity. The Company intends to continue to invest in state of the art machinery to increase its operating efficiencies and improve operating margins. GROWTH THROUGH ACQUISITIONS. The Company expects to continue its growth through acquisitions of other companies, assets or product lines that add to or complement the Company's existing aviation products and services. The Company has successfully completed three acquisitions in the last 12 months. Because of the fragmented nature of much of the market for aircraft products and services, the Company believes that many additional acquisition opportunities exist in the aviation industry. The Company does not currently have any pending or probable acquisitions. ADDITIONAL BUSINESSES In addition to the aviation group, the Company also operates a metals group that, through its operating divisions and subsidiaries, processes, fabricates and distributes metal products to manufacturers and other customers in the computer, construction, container, farm equipment and office furniture industries, primarily within North America. The metals group processes and distributes carbon flat-rolled steel products and performs a variety of processes on these products, including electrogalvanizing, slitting and blanking. The Company also manufactures fuel tanks and hydraulic reservoirs and erects structural steel frameworks. The metals group is a significant contributor to the Company's financial strength and has consistently generated profits and positive cash flows for the Company. The Company believes that it competes successfully in the metals markets on the basis of price, quality and reliability of service. COMPANY ORGANIZATION The Company was incorporated in 1993 to purchase the aviation and metals businesses of Alco Standard Corporation ("Alco") in a management buyout (the "Acquisition") organized by 19 members of management and CVC. See "Historical Background." The Company's executive offices are located at Four Glenhardie Corporate Center, 1255 Drummers Lane, Suite 200, Wayne, Pennsylvania 19087-1565, and its telephone number is (610) 975-0420. RECAPITALIZATION Immediately prior to the closing of this offering, the Company will consummate a series of transactions to recapitalize. The purpose of these transactions is to simplify the Company's capital structure in anticipation of this offering and the Company's continued operation as a publicly traded company. All of the outstanding shares of Class A Common Stock, Class B Common Stock and Class C Common Stock, each having par value $.001 per share, of the Company will be split 65-for-one (the "Stock Split"). In addition, (i) all outstanding shares of Class A Common Stock and Class C Common Stock of the Company and shares of Class B Common Stock held by persons other than CVC and certain investors currently or previously affiliated with CVC ("CVC Investors") will be exchanged (the "Common Stock Conversion") for shares of the Company's Common Stock, par value $.001 per share (the "Common Stock"), (ii) the outstanding shares of Common Stock, par value $.001 per share of Triumph Controls, Inc. ("TCI"), a subsidiary of the Company, which are owned by management of TCI, will be converted into shares of Common Stock (the "TCI Conversion"), (iii) all outstanding shares of the Company's preferred stock, par value $.01 per share (the "Preferred Stock"), held by persons other than CVC Investors, with an aggregate liquidation value plus accumulated dividends to the date of this Prospectus will be exchanged (the "Preferred Stock Conversion") at an estimated exchange ratio of one share of Common Stock for 10.85 shares of Preferred Stock (the "Preferred Stock Exchange Ratio") and (iv) all outstanding 14% junior subordinated promissory notes (the "14% JSDs"), held by persons other than CVC Investors, and all outstanding 10.5% junior subordinated promissory notes (the "10.5% JSDs") held by management of TCI (the 14% JSDs and the 10.5% JSDs are collectively referred to hereafter as the "JSDs"), will be exchanged (referred to hereafter individually as the "14% JSD Conversion" and the "10.5% JSD Conversion" and collectively as the "JSD Conversion") at an estimated exchange ratio of one share of Common Stock for every $14.48 of principal and accrued interest on the JSDs to the date of this Prospectus (the "JSD Exchange Ratio"). All shares of Class B Common Stock, Preferred Stock (at the Preferred Stock Exchange Ratio) and JSDs (at the JSD Exchange Ratio) held by CVC Investors will be exchanged for 1,023,570 shares of Common Stock and 4,273,519 shares of Class D Common Stock, par value $.001 per share ("Class D Common Stock"), of the Company (the "CVC Exchange"). The CVC Investors will receive the shares of Class D Common Stock pursuant to the CVC Exchange in order to remain in compliance with certain regulatory requirements relating to investments in small businesses. See "Description of Capital Stock -- Class D Common Stock." The Common Stock of TCI owned by TFX Equities, Inc., an affiliate of Teleflex Incorporated ("Teleflex"), will remain outstanding as a 4.3% minority interest in TCI. The exchange ratios for the Preferred Stock and the JSDs will be adjusted to give effect to the accumulation of dividends on the Preferred Stock and the accrual of interest on the JSDs, respectively, to the date of the exchange and to give effect to the actual initial public offering price of the Common Stock. The outstanding shares of Common Stock and Class D Common Stock are collectively referred to herein as the "Shares." The Common Stock Conversion, the Preferred Stock Conversion, the JSD Conversion and the TCI Conversion are collectively referred to herein as the "Conversions." Except as otherwise indicated, all share numbers in this Prospectus assume that the Conversions have occurred on September 25, 1996. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company..................... 2,500,000 shares Shares to be outstanding after this offering............ 9,526,873 shares(1)(2)(3) Use of Proceeds......................................... To repay certain indebtedness of the Company and for working capital and general corporate purposes. See "Use of Proceeds." Proposed New York Stock Exchange ("NYSE") symbol........ TGI </TABLE> - -------------- (1) Excludes 650,000 shares of Common Stock issuable upon exercise of an outstanding warrant held by an affiliate of CVC (the "Warrant"). See "Historical Background" and "Certain Transactions." (2) Includes 125,000 shares to be sold pursuant to the Direct Sale and 4,273,519 shares of Class D Common Stock held by CVC Investors and convertible at their option into an equal number of shares of Common Stock. (3) Shares outstanding after this offering will be subject to adjustment to the actual date of consummation of the Preferred Stock Conversion, the JSD Conversion and the CVC Exchange to give effect to changes to the exchange ratio of the Preferred Stock for accumulation of dividends on the Preferred Stock and the exchange ratio of the JSDs for accrual of interest to the date of the exchanges and the actual initial public offering price. See "Principal Stockholders." SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> FISCAL YEARS ENDED MARCH 31, THREE MONTHS ENDED JUNE 30, TEN MONTHS ------------------------------------- ------------------------------------- ENDED MARCH 31, PRO FORMA PRO FORMA 1994 1995 1996(1) 1996(2) 1995 1996(1) 1996(2) --------------- ----------- ----------- ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> <C> OPERATING DATA: AVIATION GROUP Net sales.................... $ 57,257 $ 70,714 $ 100,166 $ 143,560 $ 21,301 $ 35,535 $ 41,750 Group operating income, before corporate expense(3).................. 9,138 8,778 14,095 23,312 2,765 5,948 7,384 METALS GROUP Net sales.................... 72,738 93,451 86,608 86,608 21,073 19,649 19,649 Group operating income, before corporate expense(3).................. 5,376 6,379 4,638 4,638 1,140 516 516 Combined operating income, before corporate expense...... 14,514 15,157 18,733 27,950 3,905 6,464 7,900 Corporate expense(4)........... 1,573 1,606 2,522 2,522 604 1,117 1,117 --------------- ----------- ----------- ----------- ----------- ----------- ----------- Operating income............... 12,941 13,551 16,211 25,428 3,301 5,347 6,783 Interest expense............... 4,908 6,589 7,318 8,082 1,600 2,286 1,797 --------------- ----------- ----------- ----------- ----------- ----------- ----------- Income from continuing operations, before income taxes......................... 8,033 6,962 8,893 17,346 1,701 3,061 4,986 --------------- ----------- ----------- ----------- ----------- ----------- ----------- --------------- ----------- ----------- ----------- ----------- ----------- ----------- Income from continuing operations.................... 4,908 4,364 5,194 10,279 1,014 1,809 2,970 Income (loss) from discontinued operations(5)................. (462) (2,852) 4,496 4,496 109 -- -- --------------- ----------- ----------- ----------- ----------- ----------- ----------- Net income..................... $ 4,446 $ 1,512 $ 9,690 $ 14,775 $ 1,123 $ 1,809 $ 2,970 --------------- ----------- ----------- ----------- ----------- ----------- ----------- --------------- ----------- ----------- ----------- ----------- ----------- ----------- Earnings per share: Income from continuing operations.................. $ 0.73(6) $ 0.67(6) $ 0.78(6) $ 1.37(7) $ 0.16(6) $ 0.27(6) $ 0.40(7) --------------- ----------- ----------- ----------- ----------- ----------- ----------- --------------- ----------- ----------- ----------- ----------- ----------- ----------- Shares used in computing income from continuing operations.................. 7,219(6) 7,360(6) 7,518(6) 7,518(7) 7,397(6) 7,505(6) 7,505(7) --------------- ----------- ----------- ----------- ----------- ----------- ----------- --------------- ----------- ----------- ----------- ----------- ----------- ----------- Pro forma income from continuing operations, as adjusted(8)................. $ 1.18 $ 0.33 ----------- ----------- ----------- ----------- Pro forma shares used in computing income from continuing operations, as adjusted(8)................. 10,143 10,130 ----------- ----------- ----------- ----------- </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 -------------------------------------------- PRO FORMA ACTUAL PRO FORMA(9) AS ADJUSTED(9)(10) --------- ------------- ------------------ <S> <C> <C> <C> BALANCE SHEET DATA: Working capital....................................................... $ 49,608 $ 54,662 $ 55,881 Total assets.......................................................... 142,297 162,812 164,031 Long-term debt, including current portion............................. 81,467 87,738 50,947 Redeemable preferred stock............................................ 2,854 -- -- Total common stockholders' equity..................................... 16,667 28,451 66,461 </TABLE> - ------------------ (1) The fiscal year ended March 31, 1996 includes the operating results of TCI and Air Lab, Inc. ("Air Lab") since the dates of acquisition, January 1, 1996 and October 2, 1995, respectively. Additionally, these entities are included in the results of operations for the three months ended June 30, 1996. The combined operations of TCI and Air Lab contributed $11.0 million and $12.2 million, respectively, to the aviation group's net sales and $2.3 million and $2.8 million, respectively, to the aviation group's operating income, before corporate expense, for the fiscal year ended March 31, 1996 and the three months ended June 30, 1996, respectively. (2) Represents historical data adjusted to reflect (i) the acquisitions of TCI (acquired on January 1, 1996), Advanced Materials Technologies, Inc. ("AMTI") (acquired on July 31, 1996) and Air Lab (acquired on October 2, 1995) (the "Acquisitions"), (ii) the refinancing of a portion of the Company's long-term debt (consummated on July 19, 1996), (iii) the Conversions, and (iv) the CVC Exchange as if they occurred on April 1, 1995. See Notes to the Unaudited Condensed Consolidated Pro Forma Financial Statements for information concerning the adjustments to arrive at the pro forma amounts presented herein. (3) Operating income, before corporate expense, is presented by group to assist the investor in evaluating each of the group's results of operations before financing and corporate expenses. (4) Corporate expenses primarily consist of compensation, rent and general costs related to the operation of the Company's corporate office and other general expenses of the Company including professional fees. (5) Represents the results of operations of Quality Park Products, Inc. which was sold by the Company on March 31, 1996. See Note 4 of the Company's Consolidated Financial Statements. (6) Earnings per share information represents the Company's per share data and weighted average shares of Common Stock outstanding restated to give effect to the 65-for-one stock split to be effected immediately prior to this offering, the dilutive effects of the Warrant and stock issued during the period commencing 12 months prior to the initial filing of the proposed initial public offering at prices below the anticipated public offering price, the Conversions, the CVC Exchange and an adjustment for the interest on the JSDs net of tax expense. Income from continuing operations represents the amounts reflected in the Company's Consolidated Financial Statements. Primary and fully diluted earnings per share are the same. See Note 2 to the Company's Consolidated Financial Statements. (7) Pro forma earnings per share represents the Company's pro forma income from continuing operations and historical weighted average shares outstanding restated to give effect to the 65-for-one stock split to be effected immediately prior to this offering, the dilutive effects of the Warrant and stock issued during the period commencing 12 months prior to the initial filing of the proposed initial public offering at prices below the anticipated public offering price, the Conversions and the CVC Exchange. See Notes to the Unaudited Condensed Consolidated Pro Forma Financial Statements. (8) Pro forma earnings per share, as adjusted, represents the Company's pro forma earnings per share adjusted to give effect to the sale of shares of Common Stock offered by the Company pursuant to this offering and the application of the net proceeds therefrom (at an assumed initial public offering price of $16.00 per share, less underwriting discounts and commissions and estimated offering expenses payable by the Company) and pursuant to the Direct Sale and the application of the proceeds therefrom to reduce the Company's long-term borrowings. See Note 12 to the Unaudited Condensed Consolidated Pro Forma Financial Statements for information concerning the computation of pro forma as adjusted earnings per share. See also "Use of Proceeds," "Capitalization" and "Dividend Policy." (9) Adjusted to give effect to the acquisition of AMTI, the refinancing of a portion of the Company's long-term debt, the Conversions and the CVC Exchange as if they occurred on June 30, 1996. See Notes to the Unaudited Condensed Consolidated Pro Forma Financial Statements for information concerning the adjustments to arrive at the pro forma amounts presented herein. (10) Adjusted to give effect to the sale of shares of Common Stock offered by the Company pursuant to this offering and the application of the net proceeds thereof (at an assumed initial public offering price of $16.00 per share, less underwriting discounts and commissions and estimated offering expenses payable by the Company) and pursuant to the Direct Sale and the application of the proceeds therefrom as set forth in "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001021187_netsource_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001021187_netsource_prospectus_summary.txt
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+PROSPECTUS SUMMARY This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section entitled "Risk Factors" and elsewhere in this Prospectus. The following summary is qualified in its entirety by the more detailed information and Consolidated Financial Statements, including notes thereto, appearing elsewhere in this Prospectus. Except as otherwise specified, all information in this Prospectus (i) assumes no exercise of the Underwriters' over-allotment option, (ii) reflects the consummation of the Reorganization (as defined and described in "Business-- Reorganization") in June 1996, (iii) excludes the shares issued in connection with the acquisitions of scruz-net, inc. and DNA New Media Group, Inc. in November 1996 (as described in "Business--Recent Developments"), (iv) excludes options, warrants and convertible notes exercisable for or convertible into an aggregate of 5,889,598 shares of Common Stock outstanding as of September 30, 1996 (assuming an initial public offering price of $14 per share) and (v) reflects a three-for-four reverse split of the Company's Common Stock as of November 20, 1996. For the definition of certain terms used in this Prospectus, see "Glossary." THE COMPANY NetSource Communications, Inc. ("NetSource" or the "Company") develops, implements and manages a wide range of communications solutions for business and end-user customers worldwide. The Company's products and services include international and domestic long distance telecommunications, value-added telecommunications and related telemanagement services, Internet access and hosting, Internet and interactive electronic commerce products and services, such as Web-based architecture development and maintenance, Web-based content development and management, and marketing communications services. The Company's strategy consists of integrating communications solutions, expanding its telecommunications and Internet-related networks, broadening its distribution channels, developing innovative technology and acquiring complementary technologies and businesses. The Company believes that the telecommunications, applications software development and marketing communications services industries are becoming increasingly complementary as a result of telecommunications deregulation, the proliferation of personal computers, connectivity advances and rapidly converging technologies. Traditional voice and data services, multimedia applications and emerging Internet-based products are being delivered to customers using the medium of telecommunications. At the same time, businesses worldwide are being confronted with increasingly complex communications requirements as interaction increases with customers, remote offices, affiliates and computer networks in global markets. To manage increased traffic from fax, voice, data and electronic/Internet related media, businesses must currently utilize multiple vendors for a number of communications services including long distance telecommunications, network design and engineering, Internet access, design and implementation of Web architectures, and corporate marketing communications. NetSource offers its customers a single source solution for such services on both a bundled and discrete basis. The Company currently offers telecommunications services in the U.S. and in over 130 countries worldwide. NetSource offers international and domestic long distance telephony services through its dedicated facilities and international network of five digital switches that use advanced technologies such as packet and SS7 signaling protocols and centralized computer control. The Company believes that its proprietary Computer Controlled Switching Arrangement provides it with a competitive advantage by enabling it to optimize the routing of calls over the NetSource network or other carriers' networks, depending upon the lowest cost route available at any given time. During the next 24 months, the Company expects to expand its telecommunications network by deploying up to 14 additional switches in Europe, Asia and the Americas. In addition to long distance services, NetSource offers value-added telephony services including travel card, cellular reorigination, data transmission, inbound toll free 800 and dedicated private line services. The Company markets its telephony services via independent sales affiliates, strategic partners, joint ventures, a direct sales force and M-net, the Company's network marketing system. In the year ended December 31, 1995 and the nine months ended September 30, 1996, the Company's revenues from its telecommunications business were approximately $86.9 million and $67.9 million, respectively. NetSource also provides an array of Internet-based Web architecture development and maintenance and content products and services for Internet and Intranet-based electronic commerce solutions. The Company defines electronic commerce as the delivery of information (both voice and data), products, services, marketing, systems and support both within an organization or to the external marketplace over any interactive, electronic or on-line medium. Many of the Company's service and product offerings involve the implementation of WebSense, the Company's Web architecture methodology, and Content Management Services, the Company's software-based system that allows for the efficient updating and management of content. The Company believes that its Internet and Intranet solutions provide its customers with a cost-effective means of storing, managing and transferring information via an interactive medium more readily accessed by employees, clients, suppliers and other parties connected to the customer. Since the inception of its Internet oriented business in mid- 1995, NetSource has created and deployed 20 electronic commerce Web sites for its customers, including the American College of Cardiology, the American College of Surgeons, Cadence Design Systems, Inc., Conner Peripherals, Inc. (now a subsidiary of Seagate Technologies, Inc.), CyberCash, Inc., Fujitsu Microelectronics, Inc. and The Yankee Group, and is in the process of creating Web architectures for additional customers, including Boehringer Mannheim Corporation, Boston Scientific Corporation, the California Society of Certified Public Accountants and Union Camp Corporation. In the year ended December 31, 1995 and the nine months ended September 30, 1996, the Company's revenues from its electronic commerce products and services business were approximately $654,000 and $1.1 million, respectively. Among its electronic commerce products and services, the Company offers a variety of convergent product offerings that leverage the Company's relationships and expertise in the telecommunications industry, including Internet access and Web hosting services. The Company plans to use a portion of the proceeds of this offering to deploy an Internet backbone. The Company also has acquired scruz-net, inc., an Internet service provider located in Santa Cruz, California with approximately 2,000 customers as of November 15, 1996. The Company's business also includes a full-service advertising and marketing communications component that specializes in leveraging both traditional and electronic media into business solutions for a range of companies and other organizations via today's range of print, broadcast and Internet communications. The Company believes that its experience in and application of more traditional content-related marketing communications services enhance the Company's capabilities in delivering a comprehensive electronic commerce solution to its customers. In the year ended December 31, 1995 and the nine months ended September 30, 1996, the Company's revenues from its marketing communications business were approximately $3.8 million and $1.9 million, respectively. REORGANIZATION NetSource, which was incorporated in Delaware on November 20, 1995, succeeded to the businesses of MTC Telemanagement Corporation, a California corporation ("MTC Telemanagement"), MTC International, Inc., a Nevada corporation ("MTC International"), and Transphere Interactive, Inc. ("Transphere Interactive") and Transphere International, Inc. ("Transphere International"), each California corporations (collectively the "Transphere Entities") pursuant to a series of reorganization transactions consummated on June 28, 1996 (collectively, the "Reorganization"). See "Business--Reorganization." MTC Telemanagement commenced operations in October 1988 as a provider of long distance services in the U.S. MTC International was formed in March 1993 as a provider of international telecommunications services to countries outside the U.S. Pursuant to a series of stock exchanges, MTC Telemanagement and MTC International became wholly- owned subsidiaries of the Company. Transphere International, an advertising and marketing communications company, was formed in 1985, while Transphere Interactive, a provider of services related to the Internet, with a focus on Web-site design and enabling Web-based electronic commerce on the Internet, was formed in August 1995. The Transphere Entities merged to form NetSource Interactive Services, Inc. ("NetSource Interactive") in June 1996. NetSource Interactive thereafter merged into the Company in connection with the Reorganization. Unless the context otherwise requires, references to NetSource or the Company include NetSource Communications, Inc. and its subsidiaries, including MTC Telemanagement and MTC International. RECENT DEVELOPMENTS In November 1996, the Company acquired scruz-net, inc., an Internet service provider, for an aggregate of 230,190 shares of Common Stock. The business competencies of scruz-net include Internet network design, implementation and administration, and technology management for data networking and Intranet applications. In November 1996, the Company also acquired DNA New Media Group, Inc., an interactive development firm, for an aggregate of 230,190 shares of Common Stock. The Company believes that DNA has substantial skill and experience in the areas of multimedia, interactive and graphic design and content creation for Web sites for a diverse group of clients. The shares issued in both the acquisitions are restricted under federal securities laws but have registration rights which permit, under certain circumstances, such shares to be included in future public offerings of the Company. In September 1996, the Company entered into a memorandum of understanding with British Telecommunications plc ("BT") to provide electronic commerce solutions to BT's finance sector customers. The memorandum contemplates the training of BT sales personnel and includes revenue goals as well as specific customers of BT that the parties hope to supply with the Company's electronic commerce solutions. The Company expects to obtain additional customers referred by BT. See "Business--Recent Developments." The address of the Company's corporate headquarters is 444 Spear Street, Suite 200, San Francisco, CA 94105. The Company's telephone number is (415) 243-8080, and its facsimile number is (415) 546-5252. The Company's Web site is located at http://www.netsourcecom.com. Neither the information contained in the Company's Web site nor those of its customers shall be deemed to be part of this Prospectus. THE OFFERING <TABLE> <C> <S> Common Stock offered hereby: U.S. offering............................. 2,800,000 shares International offering.................... 700,000 shares Total offering............................ 3,500,000 shares Common Stock to be outstanding after the offering.................................. 19,478,074 shares Use of Proceeds............................ For capital expenditures, including telecommunications network upgrade and expansion and establishment of Internet backbone, working capital and other general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol..... NSCE </TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OTHER OPERATING DATA) <TABLE> <CAPTION> NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------- ------------------ 1993 1994 1995 1995 1996 ------- ------- ------- -------- -------- <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPER- ATIONS DATA Revenues(1): Telecommunications........... $23,510 $48,937 $86,871 $64,985 $67,907 Marketing communications..... 4,792 4,915 3,774 3,022 1,943 Electronic commerce products and services................ -- -- 654 408 1,106 ------- ------- ------- -------- -------- Total revenues............. 28,302 53,852 91,299 68,415 70,956 ------- ------- ------- -------- -------- Cost of revenues: Telecommunications........... 16,676 34,565 58,467 43,634 44,802 Marketing communications..... 2,164 1,497 1,194 986 544 Electronic commerce products and services................ -- -- 281 154 402 ------- ------- ------- -------- -------- Total cost of revenues..... 18,840 36,062 59,942 44,774 45,748 ------- ------- ------- -------- -------- Gross profit................... 9,462 17,790 31,357 23,641 25,208 Sales and marketing expenses... 2,289 6,713 13,191 9,810 9,558 General and administrative ex- penses........................ 7,708 12,837 18,495 13,131 17,825 ------- ------- ------- -------- -------- Operating income (loss)........ $ (535) $(1,760) $ (329) $ 700 $ (2,175) ======= ======= ======= ======== ======== Net loss....................... $ (438) $(1,998) $(1,834) $ (124) $ (3,450) ======= ======= ======= ======== ======== Pro forma net loss per share... $ (0.10) $ (0.17) Weighted average common shares and common share equivalents outstanding................... 16,952 17,507 OTHER FINANCIAL DATA EBITDA(2)...................... $ (341) $(1,300) $ 711 $ 1,469 $ (1,044) Net cash provided by operating activities.................... 1,478 3,603 1,456 1,235 85 Net cash used in investing ac- tivities...................... (1,659) (1,779) (3,276) (2,828) (6,802) Net cash provided by (used in) financing activities.......... (17) (832) 1,043 775 11,120 Capital expenditures........... 982 2,331 3,231 2,783 3,198 OTHER OPERATING DATA(3) Number of switches(4).......... 4 4 5 5 5 Telecommunications customers... 7,000 36,400 60,000 56,300 75,300 Cumulative Web architectures created and deployed.......... -- -- 8 2 16 </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1996 -------------------- ACTUAL AS ADJUSTED ------- ----------- <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA Cash, cash equivalents and short-term investments.......... $ 8,396 $52,816 Total working capital...................................... (2,282) 42,138 Total assets............................................... 37,042 81,462 Long-term debt and capital lease obligations............... 21,411 21,411 Total debt and capital lease obligations................... 22,689 22,689 Stockholders' equity (deficit)............................. (7,869) 36,551 </TABLE> - -------- (1) Telecommunications revenues represent revenues derived from sales of telecommunications products and services; marketing communications revenues represent revenues derived from sales of traditional advertising services; and electronic commerce products and services revenues represent revenues derived from sales of Internet and interactive products and services, including Internet access and hosting. (2) EBITDA consists of earnings before other income (expenses) net, income taxes, depreciation, amortization and share of losses of joint ventures. EBITDA is not a measure of financial performance under generally accepted accounting principles and therefore should not be considered as an alternative to net income as a measure of performance nor as an alternative to cash flow as a measure of liquidity. EBITDA is a term commonly used in the telecommunications industry. EBITDA differs from cash flow from operating activities because changes in operating assets and liabilities, provision for doubtful accounts, other income (expense) and current tax expense are treated differently. (3) Information derived from operating records of the Company. (4) Total deployed switches at end of period indicated.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001021285_unifrax_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001021285_unifrax_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary information is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements included elsewhere in this Prospectus. Prior to February 29, 1996, Unifrax Corporation ("Unifrax") was known as The Carborundum Company ("Carborundum") and included a number of divisions and subsidiaries engaged in various manufacturing businesses. On February 29, 1996, all of the Carborundum businesses except for the North American ceramic fibers division (the "Division") were sold in the Saint-Gobain Sale (as defined). Concurrent with the Saint-Gobain Sale, Carborundum was re-named Unifrax, and subsequent to the Saint-Gobain Sale, Unifrax has consisted solely of the Division. As used herein, unless the context otherwise requires, the "Company," prior to February 29, 1996, refers to the Division and, subsequently, refers to Unifrax and the related sales corporations in Europe (XPE Vertriebs GmbH) and South America (NAF Brasil Ltda.). THE COMPANY The Company is the leading North American manufacturer of ceramic fiber with a market share in excess of 40% of the ceramic fiber sold in the North American market, as measured by volume. Developed by the Company in 1942, ceramic fiber is a white, glassy material belonging to a class of materials known as man-made vitreous fibers (a class which also includes fiberglass and mineral wool). Ceramic fiber possesses several commercially attractive performance properties including stability at very high temperatures, extremely low heat transmission and retention, light weight compared to other heat-resistant materials, chemical stability and corrosion resistance. These properties make ceramic fiber a superior insulating material in high temperature applications. Ceramic fiber's most common application has been to line industrial furnaces, where high temperatures demand its heat-resistant characteristics. Historically, the industrial furnace-related market has represented the largest percentage of the Company's sales. While maintaining its strong position in this traditional market, the Company's strategy has been to apply its expertise to rapidly-growing, high value-added niche markets. These niche markets, which include automotive (products such as airbag inflation filters and catalytic converter gaskets), power generation (products such as steam boiler insulation, duct wrap and stack linings), and fire protection (products such as commercial kitchen exhaust duct wrap and cable trays), now account for the majority of the Company's net sales. For the year ended December 31, 1995, approximately 44% of the Company's net sales were derived from furnace-related markets, 31% from automotive-related markets, and 25% from other markets. During each of the four years ended December 31, 1995, sales of new products and applications (those commercialized within the previous five years) represented over 20% of the Company's net sales. During the four-year period ended December 31, 1995, the Company's net sales and EBITDA increased at compound annual growth rates of 12% and 28%, respectively. During this period, the growth in EBITDA exceeded the growth in sales due to a shift in the sales mix to higher margin products, improvements in manufacturing efficiency, increased capacity utilization rates, and continued control of marketing and administrative costs. COMPETITIVE STRENGTHS The Company has the following strengths which provide competitive advantages in the North American ceramic fiber market. Broad Product Line. The Company manufactures one of the broadest lines of ceramic fiber products sold in the North American market. The Company's ceramic fiber is produced in numerous forms, including bulk fiber, blankets and modules, boards, papers and felts, textiles and a variety of other high value-added products. These products are used in thermal management applications where heat resistance, light weight and low heat transmission and retention are required. Product Innovation. The Company has demonstrated the ability to introduce successful, high value-added products and applications for both traditional and niche markets. The Company's product leadership can be attributed to its close relationship with its customers and its extensive research and development efforts. These new products have been sold in the furnace-related markets as well as in high-growth niche markets for both existing and new applications. Examples of successful new product introductions include porosity-controlled paper used as a filter in automotive airbag inflators, expandable paper (known as XPE(TM)) used as a gasket in catalytic converters, easy-to-install Anchor-Loc 2(R) furnace modules and Insulfrax(R) furnace blanket which uses a new fiber chemistry. Strong Customer Relationships. Long-term customer relationships with distributors as well as end-use customers have been an important factor in the Company's success. Of the Company's top 10 distributors in 1995, the majority have represented the Company for over 10 years and a substantial number have been distributors for the Company for more than 20 years. A significant number of end-use customers have also been purchasing products from the Company for extended periods of time. For example, in the furnace-related market, most of the Company's current customers have been purchasing products for at least 5 years, many for over 10 years and several for over 20 years. In many situations, especially in the case of the automotive market, customers recognize that they must depend on a particular supplier for an extended period and consequently exercise considerable care in the supplier selection process. The Company's products are currently specified in numerous automotive applications, such as airbag inflators, which require "zero defect" components. By successfully meeting such stringent requirements, the Company is recognized as a reliable supplier, and has developed solid relationships with its customers. Recognized Quality. The Company's products have received repeated recognition for high quality and excellent capability, including eight consecutive Chrysler Pentastars, an award which Chrysler bestows on only the top 2% of its suppliers. The Company also expects its Tonawanda facility to receive certification under QS-9000, the quality standard for GM, Ford and Chrysler suppliers, early in 1997, although there can be no assurance that it will do so. Low Cost Manufacturing. The Company's manufacturing strategy has consistently emphasized investment in capital equipment and process engineering improvements designed to increase efficiency and lower manufacturing costs. The Company believes it has the industry's most advanced fiber manufacturing technology and has obtained the scale of operations necessary to protect its position as a low cost manufacturer in the North American market. BUSINESS STRATEGY The Company's business objective is to increase earnings by expanding its leadership position in niche markets while maintaining its market position in furnace-related markets. To meet this objective, the Company will continue to focus research and development efforts on the creation of new niche products and applications, and will add needed capacity at its New Carlisle, Indiana facility to maintain its position as a low cost producer of bulk fiber and blanket. In addition, the Company has developed the industry model for product stewardship, and will continue to lead the industry's effort on such programs. New Products and Markets. By combining its market knowledge and strong customer relationships with its technical expertise, the Company has successfully introduced a wide variety of new products. During each of the past four years, new products and applications (those commercialized within the previous five years) have accounted for over 20% of the Company's net sales. These new products have been sold for use in existing and new applications to both the furnace-related and high-growth niche markets, and many are designed and qualified to meet specialized customer requirements. The Company's cumulative research and development expenses were $9.4 million for the four fiscal years ended December 31, 1995 and the Company expects such expenses to be $2.5 million in 1996. The Company plans to continue to dedicate substantial resources to its new product development programs and expects new products to continue to drive the Company's long-term growth. Continued Cost Reduction and Productivity Enhancements. The Company's current management team has a successful track record of achieving cost reductions and will continue these efforts. By concentrating its furnacing operations primarily at one location, the Company believes that it has developed the industry's most advanced fiber manufacturing technology and has obtained the scale of operations necessary to protect its position as a low cost manufacturer in the North American market. The Company spent $12.8 million in total capital expenditures for the four fiscal years ended December 31, 1995. The Company anticipates spending $9.7 million in 1996, including construction in progress under a $13.7 million furnace expansion program to be completed in 1997. This furnace expansion is designed to provide needed capacity and flexibility and to further reduce manufacturing costs. Leadership in Product Health and Safety. Man-made fibers such as ceramic fiber, fiberglass and mineral wool have been categorized as "possibly carcinogenic in humans" and "probably carcinogenic in humans" by various government agencies and health organizations. The Company has been the industry's leader with respect to management of potential health and product safety issues associated with ceramic fiber. Specifically, the Company has established systems to identify and reduce potential adverse health effects, if any, associated with its products. The Company works actively with its employees and customers to reduce workplace exposure through improved product handling procedures. In addition, the Company has been active in developing new types of industrial fibers with physical and chemical properties that may help to reduce the potential risks associated with ceramic fiber. See "Business -- Product and Health Safety Issues."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001021305_altavista_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001021305_altavista_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following is a summary of certain information contained elsewhere in this Prospectus. Reference is made to, and this summary is qualified in its entirety by, the more detailed information contained in this Prospectus. Unless otherwise indicated, the information contained in this Prospectus assumes no exercise of the over-allotment options granted to the Underwriters and reflects the filing of an Amended and Restated Certificate of Incorporation of the Company increasing the number of authorized shares of capital stock and effecting a recapitalization of the outstanding shares of common stock. THE COMPANY The Company develops and markets software products for use in the emerging integrated Internet/intranet business environment. The Company's portfolio of innovative software products enables users of the Internet and intranets to (i) find useful information, (ii) control access to information and transmit it securely and (iii) collaborate and communicate from multiple locations. The Company's products and services are designed to integrate all levels of the work environment -- Internet, enterprise, workgroup and individual user -- and to allow location- and platform-independent computing. To increase global awareness of the AltaVista brand and showcase AltaVista software technologies and products, the Company provides the popular AltaVista Internet Search Service and other Internet services free on the World Wide Web. The Company also licenses its Internet services to major telecommunications and media companies outside the United States and to major Internet content providers. The Internet and the Web have grown dramatically primarily due to the platform-independence of Internet technologies and the ease of use of standard Web browsers. Recognizing these benefits, many organizations have begun to create "intranets" by adopting Internet technologies on their private networks. Intranets provide users substantially increased access to information and other users both inside an organization and, via the Internet, throughout the world. To take advantage of these expanded capabilities and resources and allow the Internet/intranet environment to become the work environment of choice, users need products and services that integrate all levels of their work environment. The Company has developed the following portfolio of products to address these needs: - SEARCH/DIRECTORY PRODUCTS. AltaVista Search assists users in finding relevant information in all levels of their work environment. AltaVista Directory provides a single, integrated on-line directory of employees, customers or other affiliated individuals. - SECURITY PRODUCTS. AltaVista Firewall provides an easy-to-manage, secure gateway between an organization's private intranet and the Internet, or between sub-networks of an intranet. AltaVista Tunnel employs advanced authentication and encryption technologies to create a secure Internet pathway over which external users can connect inexpensively and securely to an organization's intranet, thereby allowing external users to work as if directly connected to the organization's private network. - COLLABORATION AND COMMUNICATION PRODUCTS. AltaVista Forum provides an environment for members of workgroups to share documents, conduct asynchronous discussions or real-time conferences from multiple locations and search the entire text of a Forum, all using a standard Web browser. AltaVista Mail is Internet/intranet email server software that provides email services and supports a wide range of email clients and attachments. The Company's target customers are business users. To date, customers for one or more of the Company's products include AT&T, Inc., British Columbia Hydro and Power Authority, Computer Sciences Corporation, Woods Hole Research Center and Xerox Corporation. As an integral part of its marketing strategy, the Company provides free of charge its AltaVista Internet Search Service, which assists Web users in finding information anywhere on the Web. The AltaVista Internet Search Service uses advanced search engine and indexing technology developed in Digital's Palo Alto research laboratories in response to the industry-wide challenge of indexing the entire Web. This service recorded over 300,000 requests for information or "hits" on its December 15, 1995 Web-wide launch date, and recorded over 17.5 million hits per day during the week of August 5, 1996. The Company's goal is to establish the AltaVista Internet Search Service as the global standard for Internet search results by licensing it to major telecommunications and media companies outside the United States to provide "mirror sites" for local markets and by licensing major Internet content providers to deliver branded AltaVista Internet Search Service results to their users through "value added links" on their Web sites. The Company has entered into letters of intent for mirror sites to be established by Telia TeleCom AB (Sweden) and Telstra Corporation Ltd. (Australia) and into value added link agreements with Yahoo! Inc. and CNET, Inc., thereby generating a revenue stream from the AltaVista Internet Search Service. Because the Company does not accept advertising on its own Web sites and, therefore, does not compete for Internet advertising revenue, the Company is able to partner with Internet companies that derive revenue from advertising. The Company's goal is to be the leading supplier of software products and services for use in the emerging integrated Internet/intranet business environment. The Company's strategy includes the following elements: - INCREASE ALTAVISTA BRAND RECOGNITION WORLDWIDE. The Company provides free Internet services from its Web sites and licenses AltaVista branded services to leading Internet partners to showcase AltaVista technologies and increase global awareness of the AltaVista brand. - DELIVER INNOVATIVE SOFTWARE PRODUCTS FOR INTERNET/INTRANET USERS. In addition to its current portfolio of software products, the Company intends to build upon its technical expertise and that of its partners and Digital to develop additional innovative products, product suites and services for general and specific industry and business application needs in the emerging Internet/intranet environment. - CONDUCT BUSINESS ON THE WEB. The Company conducts a significant portion of its business over the Web, including marketing, communications, partner registration, sales, software distribution and partner and customer support. The Company believes that this "Web-centric" strategy will establish it as a highly visible Internet/intranet software leader, as well as facilitate responsive, low-cost, global business operations. The Company intends to achieve broad market penetration with its products by employing multiple Internet-focused distribution channels. - LEVERAGE RELATIONSHIP WITH DIGITAL. The Company intends to leverage its relationship with Digital, one of the world's leading suppliers of computer hardware, software and services. The Company's products are sold by Digital's worldwide direct and channel sales organizations, which also provide the Company access to Digital's major customers, channel partners and strategic alliance partners. In addition, the Company has a preferred relationship with Digital's research laboratories. The Company is currently wholly owned by Digital. As used herein, unless the context requires otherwise, the "Company" means AltaVista Internet Software, Inc. and its subsidiaries, and "Digital" means Digital Equipment Corporation and its subsidiaries (other than the Company and its subsidiaries). References herein to the Company also include, as required by the context, the business of the Company as conducted by Digital prior to the transfer of that business to the Company, which transfer will occur prior to the consummation of the Offering; this Prospectus assumes that such transfer has occurred. The Company was incorporated in Delaware on June 28, 1996. Its principal executive offices are located at 30 Porter Road, Littleton, Massachusetts 01460, and its telephone number is (508) 486-2700. The Company's primary Web site is located at http://www.altavista.software.digital.com. Information contained in such Web site or any other Web site referred to in this Prospectus shall not be deemed a part of this Prospectus. THE OFFERING(1) <TABLE> <S> <C> <C> Class A Common Stock offered hereby: U.S. Offering................................ shares International Offering....................... shares --------- Total................................ shares Common Stock to be outstanding after the Offering(2): Class A Common Stock......................... shares Class B Common Stock......................... shares --------- Total................................ shares Working capital and other general corporate purposes, including product development, expansion of sales and marketing efforts and capital expenditures. In addition, the Company may make one or more acquisitions of complementary technologies, products or Use of proceeds................................ businesses. See "Use of Proceeds." Proposed Nasdaq National Market symbol......... ALTV The holders of Class A Common Stock generally have rights identical to, and generally vote together as a single class with, the holders of the Class B Common Stock, except that the holders of Class A Common Stock are entitled to one vote per share and the holders of the Class B Common Stock, are entitled, with certain exceptions, to three votes per share. See "Relationship with Digital" and "Description of Capital Stock -- Common Voting rights.................................. Stock -- Voting Rights." </TABLE> - --------------- (1) Does not include up to shares of Class A Common Stock that are subject to the over-allotment options granted to the Underwriters by the Company. See "Underwriting." (2) Does not include an aggregate of shares of Class A Common Stock reserved for issuance in respect of employee stock options granted as of the date of this Prospectus with an exercise price equal to the initial public offering price set forth on the cover page of this Prospectus. See "Capitalization" and "Management -- Compensation of Executive Officers." SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> FISCAL YEAR ENDED -------------------------------- JULY 2, JULY 1, JUNE 29, 1994 1995 1996 ------- ------- -------- <S> <C> <C> <C> STATEMENT OF OPERATIONS DATA(1): Total operating revenues..................................... $ 298 $ 964 $ 3,632 ------- ------- -------- Costs and expenses: Cost of operating revenues.............................. 47 374 1,110 Research and engineering expenses....................... 2,235 4,516 15,352 Selling and marketing expenses.......................... 50 248 10,522 General and administrative expenses..................... 684 1,062 6,516 ------- ------- -------- Total costs and expenses........................... 3,016 6,200 33,500 ------- ------- -------- Operating loss............................................. (2,718) (5,236) (29,868) ------- ------- -------- Net loss................................................... $(2,718) $(5,236) $(29,868) ======= ======= ======== Unaudited pro forma net loss per common share(2)........... $ ======== </TABLE> <TABLE> <CAPTION> AS OF JUNE 29, 1996 --------------------------------- PRO FORMA, HISTORICAL(1) AS ADJUSTED(3) ------------- --------------- <S> <C> <C> BALANCE SHEET DATA: Working capital.................................................. $ (925) $ Total assets..................................................... 7,508 Net parent's investment.......................................... 5,528 -- Total stockholders' equity....................................... -- </TABLE> - --------------- (1) Historical amounts are included in or derived from the AltaVista Internet Software Products Financial Statements included elsewhere in this Prospectus. (2) Historical earnings per share data is omitted from the statement of operations data because it is not meaningful. Unaudited pro forma net loss per common share is calculated based on the net loss divided by the number of shares of Class B Common Stock to be issued to Digital prior to the consummation of the Offering. (3) Balance sheet data for the Company on a pro forma, as adjusted basis gives effect to the contribution, as of June 29, 1996, of assets from Digital to the Company and the Company's assumption of certain liabilities from Digital, includes the assets and stockholder's equity of AltaVista Internet Software, Inc. and gives effect to the net proceeds from the sale of shares of Class A Common Stock offered by the Company hereby at an assumed initial public offering price of $ per share. Net parent's investment has been restated as total stockholders' equity as if Digital's investment was in the Class B Common Stock of the Company to be issued to Digital prior to the consummation of the Offering. See "Use of Proceeds" and "Capitalization." RELATIONSHIP WITH DIGITAL The Company is currently wholly owned by Digital. Upon consummation of the Offering, Digital will beneficially own all of the Class B Common Stock, which will represent approximately % of the combined voting power of all classes of voting stock ( % if the Underwriters' over-allotment options are exercised in full) and thus will continue to have the ability to direct the election of all of the directors of the Company and otherwise exercise a controlling influence over the business and affairs of the Company. Digital has advised the Company that its current intent is to continue to hold all of the Class B Common Stock. However, Digital has no agreement with the Company not to sell or distribute such shares, and there can be no assurance concerning the period of time during which Digital will maintain its beneficial ownership of Common Stock after the expiration of the 180-day lock-up agreement contained in the Underwriting Agreements. See "Relationship with Digital -- Corporate Agreement" and "Underwriting." Each share of Class B Common Stock is convertible while held by Digital or any of its subsidiaries at such holder's option into one share of Class A Common Stock. Any shares of Class B Common Stock transferred to a person other than Digital or any of its subsidiaries shall automatically convert to shares of Class A Common Stock upon such disposition, except for a disposition effected in connection with a transfer of Class B Common Stock to stockholders of Digital as a dividend intended to be on a tax-free basis (a "Tax-Free Spin-Off") under the Internal Revenue Code of 1986, as amended (the "Code"). See "Description of Capital Stock -- Common Stock -- Conversion." Upon consummation of the Offering, Digital will continue to provide certain services to the Company and make available certain employee benefit plans to the Company's employees in a manner generally consistent with past practices. The Company and Digital will enter into a number of intercompany agreements with respect to such services and other matters. See "Relationship with Digital."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001021354_ticketmast_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001021354_ticketmast_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c186287f201e4ad806dc56af5a25a0381d51c751
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and consolidated financial statements (the "Consolidated Financial Statements") included elsewhere in this Prospectus. As used in this Prospectus, references to a "fiscal" year refer to the 12-month period ending on January 31 of each year (e.g., "fiscal 1996" shall mean the Company's fiscal year ended January 31, 1996). Unless otherwise indicated, all information contained in this Prospectus assumes that (i) the Underwriters' over-allotment option has not been exercised, (ii) any outstanding options to purchase shares of Common Stock have not been exercised, (iii) any outstanding shares of Preferred Stock convertible into shares of Common Stock have not been converted and (iv) any outstanding notes exchangeable for shares of Common Stock have not been exchanged. In addition, all share amounts and per share data in this Prospectus reflect a recently effected 1-for-3 reverse stock split. Unless the context otherwise requires, references to "Ticketmaster" or the "Company" include Ticketmaster Group, Inc., its predecessors and its subsidiaries. References to the "Managed Businesses" include the Company's wholly and majority owned subsidiaries (the "Consolidated Businesses") together with the Company's interest in those unconsolidated joint ventures in which it acts as managing partner (the "Unconsolidated Joint Ventures"). THE COMPANY Ticketmaster, through the Managed Businesses (the Consolidated Businesses together with the Unconsolidated Joint Ventures), is the leading provider of automated ticketing services in the U.S. with over 3,500 clients, including many of the country's foremost entertainment facilities and promoters and 73 professional sports franchises. The Company has established its market position by providing these clients with comprehensive ticket inventory control and management, a broad distribution network and dedicated marketing and support services. Ticket orders are received and fulfilled through operator-staffed call centers and independent sales outlets remote to the facility box office. Revenue is generated principally from convenience charges received by the Company for tickets sold on its clients' behalf. The Company generally serves as an exclusive agent for its clients and typically has no financial risk for unsold tickets. The Company, through the Managed Businesses, sold 53.1 million tickets in fiscal 1996 and 30.4 million tickets during the first six months of fiscal 1997, while generating revenues of $241.3 million and $146.2 million, respectively, for those periods. Based upon recent trends in the entertainment, sporting and leisure industries, the Company believes that its principal business, live entertainment ticketing, will experience increased revenues under existing venue contracts. The Company believes that significant opportunities exist through continued penetration of this principal market. Additionally, the Company believes that further ticketing opportunities will arise from the construction of new and larger facilities, the increase in the number of professional sports teams and the development of new sports leagues. Furthermore, the Company plans to continue to broaden its client base to include such venues as museums, zoos, amusement parks, state and county fairs and other locations such as golf courses, ski resorts and trade shows. The Company also believes that significant opportunities exist internationally to attract additional venues in a historically under-penetrated market for ticketing services. In addition, the continued enthusiasm for soccer and growing popularity of major American sports such as football, baseball and basketball should lead to increased utilization of these international venues and provide additional revenue opportunities. In order to be in a position to capitalize on these trends, the Company expects to expand its existing operations in the U.K., Australia and, through a new joint venture, in Mexico, and is exploring further opportunities in Europe, the Pacific Rim and Central and South America. The Company is continuing to leverage its widely recognized brand name and extensive distribution capabilities by developing new opportunities in related areas, such as entertainment information and publishing, merchandising, advertising, promotional services and direct marketing. Specific examples of its efforts include offering integrated brand management and marketing services to strategic partners, such as MasterCard International and Sprint Communications, through sponsorship advertising opportunities during live events, during telephone ticketing services, on its ticket stock and envelopes, on event promotional material and in additional media outlets which the Company is developing. In addition, in February 1996, the Company launched Live!, a monthly entertainment magazine and event guide which the Company believes is a natural extension of its existing distribution channels. The Company has also recently launched Ticketmaster Online (http://www.ticketmaster.com), its site on the World Wide Web, designed to promote ticket sales for live events, disseminate event information and offer transactional and merchandising services. These efforts to create new promotional, marketing and distribution opportunities by utilizing and integrating the Company's traditional principal ticketing services and brand name have formed the basis for new growth opportunities in the future. The Company believes that its proprietary inventory control management and ticketing system (the "Ticketmaster System") and its extensive distribution capabilities provide a competitive advantage that enhances the Company's ability to attract new clients and maintain its existing client base. The Ticketmaster System, which includes both hardware and software, is typically installed in a client's facility box office and provides a single centralized inventory control management system capable of tracking total ticket inventory for all events, whether sales are made on a season, subscription, group or individual ticket basis. The Ticketmaster System is capable of processing over 100,000 tickets per hour in certain markets. Through its Managed Businesses, Ticketmaster has a comprehensive domestic distribution system that includes approximately 2,800 remote sales outlets in 44 states covering many of the major metropolitan areas in the U.S. and 17 call centers with approximately 1,750 operator positions. The Company provides the public with convenient access to tickets and information regarding entertainment events. Ticket purchasers are assessed a convenience charge for each ticket sold by the Company on behalf of its clients. These charges are negotiated and included in the Company's contracts with its clients. The versatility of the Ticketmaster System allows it to be customized to satisfy a full range of client requirements. From fiscal 1991 through fiscal 1996, the number of tickets sold and revenues for the Managed Businesses have grown from 29.1 million tickets and $96.1 million of revenues to 53.1 million tickets and $241.3 million of revenues, a compounded annual growth rate of 13% and 20%, respectively. BUSINESS STRATEGY Ticketmaster believes that future growth will be derived principally from the following: - Continued penetration of its principal ticketing market in the U.S. and expansion of both its live entertainment ticketing services and sales of its automated general admission ticketing and concession sales/control systems by broadening its client base to include such venues as museums, zoos, amusement parks, state and county fairs, golf courses, ski resorts and trade shows. - International expansion of its live entertainment ticketing services and sales of its automated general admission ticketing and concession sales/control systems in Europe (including the U.K.), Australia, Canada, Mexico, Central America and South America. - Leveraging of its existing assets, including its brand name, fulfillment capabilities, distribution network and user base, by offering integrated brand management and expanded marketing services through both traditional and new media for the benefit of its strategic partners and clients by: - actively pursuing marketing and joint promotion agreements with third parties, similar to its recent agreements with MasterCard International and Sprint Communications; - expanding the offerings on the Company's Web site, Ticketmaster Online, and continuing to explore opportunities on the Internet; - increasing subscription levels, advertising pages and related revenues of Live! magazine; - creating promotional and merchandising business opportunities through membership programs, including the development of a co-branded Ticketmaster credit card; and - accessing its customer database to create direct marketing programs. RECENT TRANSACTIONS In furtherance of its growth strategy, the Company has recently begun to acquire, by purchase, redemption or otherwise, certain of the rights to use the Company's name and the Ticketmaster System that had been previously granted to licensees and the remaining interests in certain joint ventures. Completed Transactions. Acquisitions completed by the Company since January 31, 1996, in furtherance of its growth strategy (all of such completed acquisitions being collectively referred to herein as the "Completed Transactions") include the following: (i) on June 7, 1996, the Company acquired the 50% equity interest of its joint venture partner in the European Joint Venture (as defined herein) for $6.0 million in cash and an Exchangeable Promissory Note in the principal amount of $5.0 million; (ii) on October 3, 1996, the Company acquired the license rights and related assets of its Delaware Valley (Philadelphia) licensee for $19.0 million in cash; (iii) on February 12, 1996 and August 31, 1996, respectively, the Company acquired the license rights and related assets of its Nashville, Tennessee and Albuquerque, New Mexico licensees for an aggregate of $1.8 million in cash; (iv) on October 10, 1996, the Company acquired a 27% equity interest in the Company's Mexico licensee for $1.8 million in cash and 5% of net distributions received with respect to such equity interest by the Company through December 31, 1998; (v) as of November 15, 1996, the Company acquired its joint venture partner's 50% equity interest in Ticketmaster-Indiana for Preferred Stock automatically convertible into shares of Common Stock having a value of $27.0 million based on the initial public offering price of the Common Stock in the Offering; and (vi) on July 29, 1996, the Company acquired the remaining 50% equity interest not already owned of its Pacer/CATS/CCS operations; together with its initial 50% interest, aggregate consideration paid by the Company for the Pacer/CATS/CCS operations totaled $16.0 million in cash and the assumption of $7.5 million in debt. Pending Transactions. Acquisitions in furtherance of the Company's growth strategy that are pending but not yet completed (all of such proposed acquisitions being subject to signed letters of intent or definitive agreements and collectively referred to herein as the "Pending Transactions") include the following: (i) on October 16, 1996, the Company entered into an agreement to acquire the 20% equity interest of its partner in the Company's operating subsidiary in Texas for $6.0 million in cash; (ii) on October 25, 1996, the Company entered into an agreement to purchase the 20% equity interest of its partner in the Company's operating subsidiary in Florida for shares of Common Stock having a value of $4.6 million based on the initial public offering price of the Common Stock in the Offering; and (iii) on June 20, 1996, the Company entered into a letter of intent with the owner of a 73% equity interest in the Company's Mexico licensee to form a Latin American Joint Venture (as defined herein) for the purpose of marketing and operating the Ticketmaster System throughout Central and South America and, in connection therewith, acquire an additional 23% equity interest in the Company's Mexico licensee. See "Risk Factors -- Failure to Close Pending Transactions" and "Business -- Joint Ventures and Licensees." Consummation of the Pending Transactions (or any one of the Pending Transactions) is not a condition to the closing of the Offering. THE OFFERING <TABLE> <S> <C> Common Stock offered(1).............. 7,250,000 shares(1) Common Stock to be outstanding after the Offering....................... 22,560,405 shares(1)(2) Use of proceeds...................... The Company intends to use the net proceeds of the Offering (i) to repay outstanding indebtedness ($19.0 million) incurred to acquire the license rights and related assets of its Delaware Valley (Philadelphia) licensee; (ii) to repay a portion of the outstanding indebtedness (estimated to be $56.1 million) under the Company's credit agreement (the "Credit Agreement"); (iii) to repay outstanding indebtedness under the Exchangeable Promissory Note ($5.0 million) incurred to acquire the Company's joint venture partner's 50% equity interest in the European Joint Venture; (iv) to purchase an interest not previously owned by the Company in its operating subsidiary in Texas ($6.0 million); and (v) for general corporate purposes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Description of Certain Indebtedness." Nasdaq Market System symbol.......... TKTM </TABLE> - --------------- (1) Does not include up to 1,087,500 shares of Common Stock subject to the over-allotment option granted to the Underwriters. See "Underwriting." (2) Does not include 1,331,340 shares of Common Stock reserved for future issuance pursuant to an option granted to Fredric D. Rosen, the Company's President and Chief Executive Officer (the "Rosen Option"), and 3,250,000 shares of Common Stock reserved for future issuance under the Ticketmaster Stock Plan (the "Stock Plan") of which options covering 3,066,811 shares have been granted. See "Management -- Employment Agreements" and "Management -- Stock Plan." Also, does not include shares of Common Stock (i) issuable in lieu of cash repayment at the election of the Company's joint venture partner, in connection with the Company's acquisition of that partner's 50% equity interest in the European Joint Venture, in June 1996, (ii) issuable upon conversion of convertible Preferred Stock issued in connection with the acquisition of the Company's joint venture partner's 50% equity interest in Ticketmaster-Indiana, and (iii) issuable in connection with the Company's acquisition of the 20% equity interest of its partner in the Company's operating subsidiary in Florida, expected to close shortly after the consummation of the Offering, all of which, at the initial public offering price of $14.50 per share, will total 2,524,138 shares of Common Stock. See "Business -- Joint Ventures and Licensees." ------------------------ The Company was organized in 1988 as a corporation under the laws of the State of Illinois. The principal executive office of the Company is currently located at 3701 Wilshire Boulevard, 7th Floor, Los Angeles, California 90010, and the telephone number at that address is (213) 381-2000. See "Business -- Properties." RISK FACTORS INVESTORS SHOULD CAREFULLY CONSIDER THE FACTORS DESCRIBED UNDER "RISK FACTORS" COMMENCING ON PAGE 10 BEFORE PURCHASING SHARES OF COMMON STOCK.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001021421_homegate_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001021421_homegate_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to, and should be read in conjunction with, the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this prospectus (this "Prospectus"). Unless otherwise indicated, the information in this Prospectus assumes (i) the completion of the formation of the Company and related transactions (the "Formation," as more specifically defined under "The Formation Transaction") to occur immediately prior to, or simultaneously with, the completion of the Offering, (ii) no exercise of the Over-Allotment Option, and (iii) an initial public offering price of $12.00 per share (which represents the midpoint of the range on the cover page of this Prospectus and which affects the number of shares to be received by the parties in the Formation and the calculation of the proceeds from the Offering). See "The Formation Transaction," "Underwriting" and "Principal Stockholders." Unless the context suggests otherwise, references in this Prospectus to (i) the "Company" mean Homegate Hospitality, Inc. and its predecessors, (ii) the "Crow Family" include various descendants of Mr. and Mrs. Trammell Crow and various corporations, partnerships, trusts and other entities beneficially owned or controlled by such persons, (iii) "TCR" mean Trammell Crow Residential Company and its affiliates, (iv) "Greystar" mean Greystar Capital Partners, L.P. and its affiliates, (v) "Crow" mean Crow Realty Investors, L.P. d/b/a Crow Investment Trust and its affiliates, and (vi) "Wyndham" mean Wyndham Hotel Corporation and its predecessors and affiliates. "Homegate Studios & Suites" and "Homegate Studios" are service marks of the Company. THE COMPANY Homegate Hospitality, Inc.'s goal is to become a national provider of high quality extended-stay hotels in strategically selected markets located throughout the United States. The Company plans to rapidly develop a chain of midprice extended-stay hotels under the Homegate Studios & Suites brand name to capitalize on what management believes is a large and underserved market of guests who desire extended-stay accommodations. This market includes business travelers, professionals on temporary work assignments, persons between domestic situations, and persons relocating or purchasing a home, who often desire accommodations for an extended duration. As of the completion of the Offering, the Company will own six hotels and have five hotels under development, and expects to have agreements, letters of intent, contracts or other arrangements to purchase 14 additional development sites (each a "Planned Hotel Site"). Of the five hotels under development, three are currently under construction and two more are expected to be under construction by December 31, 1996. The Company's objective is to have approximately 65 extended-stay hotels open or under construction by December 31, 1998 (the "Initial Hotel Program"). The Company was recently founded by management and by affiliates of the following three entities: Trammell Crow Residential Company, one of the nation's leading developers of multi-family housing units with 22 regional offices; Greystar Capital Partners, L.P., a private investment company with substantial multi-family housing development and construction expertise; and Crow Investment Trust, the real estate investment arm of the Crow Family. In TCR, Greystar and Crow, the Company brings together extensive experience in developing, constructing and managing properties on a national scale and in structuring, financing and executing national real estate investment programs. The Company has entered into a master development agreement with a partnership (the "Developer Partnership"), comprised of TCR and Greystar (the "Developer Affiliates"), to provide site selection, construction and development services for the Company's Initial Hotel Program. Management believes the Developer Affiliates' expertise and local market presence will significantly enhance the Company's ability to execute its Initial Hotel Program. The Company has also entered into a master management assistance agreement (the "Management Agreement") with a subsidiary of Wyndham Hotel Corporation, which owns, operates or franchises over 70 hotels in North America, to manage the Company's hotels pursuant to 10-year management contracts. Management believes that Wyndham's experience in managing and operating one of the nation's leading hotel chains will facilitate the Company's ability to provide consistently high quality accommodations and services to its guests, and that access to Wyndham's resources will minimize the Company's overhead expenses during its initial phase of operations. Although Wyndham owns no Common Stock in the Company, over 48% of Wyndham's stock is owned by the Crow Family. See "Certain Transactions" and "Risk Factors--Reliance upon Affiliated Companies." Upon completion of the Offering, TCR, Greystar, Crow and their affiliates will own 59.7% of the outstanding Common Stock. See "Risk Factors--Control of the Company by Management and Principal Stockholders" and "Principal Stockholders." The Company's product strategy is to develop a well-recognized national brand under the Homegate Studios & Suites name by offering high quality accommodations in a standard format, providing much of the value offered by limited service hotels with many of the added features and comforts of apartment living. Homegate Studios & Suites hotels will feature three functional room configurations, each with a fully equipped kitchen, upscale residential-quality finishes and accessories, and separation between the cooking, living, and sleeping areas, and other amenities, including weekly maid service, twice-weekly linen service, resident laundry facilities, direct dial telephone service with voice mail messaging and dataport capabilities, cable TV, a business center and an exercise facility. See "Business--Product Concept." The extended-stay category (defined as hotel suites with full kitchens) is one of the most rapidly growing sectors of the U.S. lodging industry. From 1990 through 1995, the compounded annual growth rate in occupied rooms in dedicated extended-stay hotels was 7.2% compared to 2.1% for the overall U.S. lodging industry, while the compounded annual growth rate in room supply was 5.3% compared to 1.0% for the overall U.S. lodging industry. However, the vast majority of dedicated extended-stay rooms developed during this time period were in the upscale segment of the extended-stay category. Average occupancy rates for extended-stay hotel chains have exceeded such rates in the overall U.S. lodging industry for each of the previous six years, and extended-stay hotel chains have achieved an 80% or greater occupancy level during each of the past three years. The Company believes that the size of the demand for extended-stay lodging compares favorably to the limited supply of dedicated extended-stay rooms, and that this is especially true in the midprice segment of the extended-stay category. In 1995, extended-stay guests (defined as those guests staying five or more nights) who were accommodated at hotels accounted for a total of 137.8 million room nights, or 15.9%, of the approximately 867.7 million room nights occupied in hotel accommodations in the United States. Of these 137.8 million room nights, only six to nine percent (8.3 million to 12.4 million) were accommodated by extended-stay hotel chains, which management believes was due in part to the limited number of dedicated extended-stay facilities in operation in 1995. Of the approximately 3.3 million total available rooms in the U.S. lodging industry at the end of 1995, approximately 51,100, or only 1.5%, were extended-stay rooms at approximately 445 dedicated extended-stay facilities. Of these 445 facilities, approximately 25, or 5.6%, operated in the midprice segment of the extended-stay category. As a result, management believes that there exist favorable growth opportunities in the extended-stay category in the near term. The sources of the industry information set forth above were Smith Travel Research and D. K. Shifflet, neither of which provided any form of consultation, advice or counsel regarding any aspect of the Offering, or are in any way associated with the Offering. Smith Travel Research and D.K. Shifflet have not consented to the use of the data presented in this Prospectus. Management believes that the Company's affiliations with TCR, Greystar and Wyndham will provide significant competitive advantages in achieving its growth and operating objectives and distinguish the Company from many of its competitors in the extended-stay market. DEVELOPMENT, CONSTRUCTION AND LOCAL SITE SELECTION EXPERTISE. TCR and Greystar have constructed an aggregate of approximately 115,000 multi- family housing units over the last 14 years, and have extensive experience in the development of standardized properties nationwide. Management believes that the construction of multi-family housing units is similar to construction of the Company's hotels. TCR and Greystar's combined regional office network will provide the Company with local market knowledge and site selection, development and construction expertise. As the partners of the Developer Partnership, TCR and Greystar will identify and evaluate potential development sites in the markets targeted by the Company. Once sites are approved by Company management, either TCR or Greystar will manage site acquisition, development and construction of the property. The Company believes its relationships with TCR and Greystar will produce significant competitive advantages and cost efficiencies, and will minimize the Company's development and administrative overhead costs during the Initial Hotel Program. The Developer Partnership has entered into a master development agreement to develop and construct up to 60 extended-stay facilities for the Company by December 31, 1998. Unless extended, the master development agreement will terminate upon the earlier of the commencement of the 60th project or December 31, 1998. The Developer Partnership will own 1,073,103 shares of Common Stock, constituting 10.0% of the Common Stock outstanding after the Offering, and will distribute a portion of these shares as each project is completed to the Developer Affiliate that is responsible for the completed project. The Developer Affiliates have agreed to accept below-market development fees in exchange for these equity interests in the Company. Management believes this distribution mechanism will provide the Developer Affiliates the necessary incentives to assist the Company in achieving its Initial Hotel Program. See "Certain Transactions," "Risk Factors--Reliance upon Affiliated Companies" and "Business--Growth Strategy." HOTEL MANAGEMENT CAPABILITIES. Pursuant to the Management Agreement, Wyndham has agreed to manage up to 60 Company hotels, each under a 10-year management contract, and to provide the Company market research, assistance with interior and exterior design, a preferred vendor program, a proprietary property management software package and national and local marketing services. See "Certain Transactions" and "Risk Factors--Reliance upon Affiliated Companies." Management believes that being able to utilize Wyndham's expertise will be a competitive advantage and will produce cost efficiencies in the Company's buying, marketing and development programs. Unless extended, the Management Agreement will terminate upon the earlier of the signing of a management contract for the 60th hotel or December 31, 1998. Wyndham has agreed, subject to certain exceptions, not to compete with Company hotels that it manages. See "Certain Transactions." SUPERIOR PRICE/VALUE RELATIONSHIP. Based on its expected average weekly rates of $280 to $350, the quality of its interior design elements and finishes, the separation between cooking, living and sleeping areas and the available amenities, management believes that its hotels will offer a superior price/value relationship and appeal to extended-stay guests of both upscale and economy extended-stay facilities. The Company has carefully designed its product and marketing programs to (i) attract guests who ordinarily patronize higher priced/comparable quality or comparably priced/lower quality extended-stay or traditional hotel chains in markets in which the Company competes, and (ii) educate extended-stay guests who have typically stayed in traditional hotels of the value offered by the Company's extended-stay facilities. The Company's first property, which it acquired while under construction, is located in Grand Prairie, Texas near the Dallas/Fort Worth International Airport. This 139-unit facility opened on June 17, 1996, under the name "Studio Suites," and will be renamed "Homegate Studios." The Company has also acquired beneficial ownership of five extended-stay hotels currently operated under the name "Westar Suites" (the "Westar Transaction"). See "The Formation Transaction." The Westar hotels are located in Texas in the cities of San Antonio (2), El Paso, Amarillo and Irving. Collectively, the Westar hotels contain an aggregate of 622 units, all of which are similar to the prototype developed by the Company for its guest rooms. The Westar facilities will be renovated at an anticipated cost of approximately $4 million in order to conform to the quality standards of the Homegate Studios & Suites prototype, and will be operated under the Homegate Studios & Suites brand name. As of the completion of the Offering, the Company will have begun construction of three extended-stay hotels--a 139-unit facility in Phoenix, Arizona, a 143-unit facility in Denver, Colorado and a 117-unit facility in Lenexa, Kansas, and expects each of these hotels to be operational in the second or third quarter of 1997. The Company also owns development sites in Overland Park, Kansas and Dallas, Texas, and expects to begin construction of hotels on each of these sites during the fourth quarter of 1996. THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Company........ 4,325,000 shares Common Stock to be outstanding after the Offering(1)............................... 10,725,000 shares Use of Proceeds............................ To finance the development or acquisition of additional extended- stay hotels and other general corporate purposes. See "Use of Proceeds." Nasdaq National Market symbol.............. HMGT </TABLE> - -------- (1) Excludes 518,750 shares issuable upon exercise of options to be granted as of the completion of the Offering under the Company's 1996 Plan (as defined below), with an exercise price equal to the initial public offering price shown on the cover page of this Prospectus. See "Management--The 1996 Plan--Initial Awards." SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE DATA) <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, 1996 -------------------------- EXTENDED STAY LIMITED PARTNERSHIP COMPANY HISTORICAL(1) PRO FORMA(2) ------------- ------------ <S> <C> <C> OPERATING DATA: Revenue............................................. $ 26 $ 3,970 Property operating expenses......................... 30 2,504 Corporate operating expenses........................ 204 541 Depreciation and amortization....................... 10 454 Interest expense.................................... 21 934 ------- --------- Net loss............................................ $ (239) $ (463) ======= ========= Net loss per share.................................. $ (0.07) Weighted average number of shares of common stock outstanding........................................ 6,400,000 OTHER DATA: EBITDA(3)........................................... $ (208) $ 925 ======= ========= Cash flows provided by (used in): Operating activities.............................. $ 313 $ 1,110 Investing activities.............................. (8,264) (8,290) Financing activities.............................. 9,225 9,167 </TABLE> <TABLE> <CAPTION> EXTENDED STAY LIMITED COMPANY PARTNERSHIP COMPANY PRO FORMA, AS HISTORICAL PRO FORMA(2) ADJUSTED(4) ------------- ------------ ------------- <S> <C> <C> <C> BALANCE SHEET DATA (AT END OF PERIOD): Cash and cash equivalents............. $1,274 $ 4,857 $52,624 Property and equipment, net........... 8,201 36,189 36,189 Total assets.......................... 9,725 41,457 89,224 Total debt............................ 2,869 20,896 20,896 Total partners' capital (stockholders' equity pro forma and as adjusted).... 6,156 19,761 67,528 </TABLE> - -------- (1) From inception (February 9, 1996) through June 30, 1996. Extended Stay Limited Partnership ("ESLP") is the predecessor to the Company. The Company was incorporated on August 16, 1996, to succeed to the business of ESLP, and prior to the Offering, has minimal assets and no operations of its own. Immediately prior to or simultaneously with the completion of the Offering, ESLP will merge into the Company. See "The Formation Transaction."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001021479_forsyth_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001021479_forsyth_prospectus_summary.txt
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+SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, contained elsewhere in this Prospectus. THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT DEPOSITS OR SAVINGS ACCOUNTS OR SAVINGS DEPOSITS AND ARE NOT INSURED OR GUARANTEED BY THE FDIC OR ANY OTHER GOVERNMENTAL AGENCY. THE COMPANY Forsyth Bancshares, Inc., a Georgia corporation (the "Company"), was incorporated primarily to hold all of the capital stock of a state-chartered nonmember bank organized under the laws of the State of Georgia, The Citizens Bank of Forsyth County (the "Bank"). The Company may not acquire the capital stock of the Bank without the prior approval of the Federal Reserve, as delegate of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), and the DBF. The Company filed applications for this approval with the Federal Reserve on September 11, 1996 and with the DBF on September 12, 1996. The Company initially will engage in no business other than owning and managing the Bank. THE BANK The Organizers (as defined below) filed an application with the DBF on November 8, 1995, subsequently amended on February 19, 1996, to charter the Bank as a state nonmember bank. The Organizers obtained preliminary approval of the Bank's application for charter from the DBF on June 5, 1996. On November 8, 1995, the Organizers also filed an application with the FDIC for insurance by the FDIC of the deposits of the Bank (such application was forwarded to the FDIC by the DBF once the DBF accepted the application). The Organizers obtained preliminary approval of the Bank's application for insurance from the FDIC on July 3, 1996. The Bank may not conduct any banking business until the DBF grants final approval of the Bank's application and issues the Bank a charter and the FDIC grants deposit insurance to the Bank. The issuance of a charter will depend, among other things, upon compliance with certain legal requirements that may be imposed by the DBF or the FDIC, including capitalization of the Bank at not less than $6,500,000. In order to receive deposit insurance, the Bank must also comply with certain legal requirements that may be imposed by the FDIC. See "The Offering" and "Use of Proceeds." Additionally, the Company must obtain the approval of the Federal Reserve and the DBF to become a bank holding company before acquiring the capital stock of the Bank. The Bank will engage in a general commercial and retail banking business, emphasizing the needs of small- to medium-sized businesses, professional concerns and individuals, primarily in Cumming, Georgia and the surrounding area (the "Forsyth County Area"). The Bank will initially consist of a principal facility located in Cumming, Georgia in Forsyth County. The facility will primarily serve the central area of Forsyth County. The Bank initially will not have trust powers. The Bank may in the future offer a full-service trust department, but it cannot do so without the prior approval of the DBF. See "Proposed Business." David H. Denton, the President and Chief Executive Officer of the Company and the Bank, has over 30 years of banking experience, including former lending responsibilities with three community banks located in Georgia, two of which were located in the city of Cumming. See "Management." The Organizers believe that the combined banking experience of the Bank's President and Chief Executive Office and the extensive business experience and contacts of the Organizers in the Forsyth County Area should create immediate business opportunities for the Bank. The Organizers presently are engaged in completing the tasks necessary to open the Bank by December 1, 1996, although no assurances can be given that the Bank will open for business or that the projected opening date can be achieved. The Bank currently has no plans to establish any branch offices. The principal executive offices of both the Company and the Bank will be located at 501 Tri-County Plaza, Highways 9 and 20, Cumming, Georgia 30130. Pending commencement of operations, the Company's interim address and telephone number are 425 Tribble Gap Road, Cumming, Georgia 30130, (770) 886-9500. THE ORGANIZERS The Organizers of the Company and the Bank are Catherine M. Amos, Jeffrey S. Bagley, Bill H. Barnett, Danny M. Bennett, Michael P. Bennett, Bryan L. Bettis, Talmadge W. Bolton, Thomas L. Bower III, Charles R. Castleberry, David H. Denton, Charles D. Ingram, Herbert A. Lang, Jr., John P. McGruder, James J. Myers, Danny L. Reid, Charles R. Smith, Wyatt L. Willingham and Jerry M. Wood. Additional individuals may be added as Organizers, subject to regulatory approval. All of the Organizers will serve as directors of the Company, and Ms. Amos and Messrs. Bagley, D. Bennett, M. Bennett, Bolton, Denton, Ingram, Lang, McGruder, Myers, Reid, Smith and Willingham will serve as directors of the Bank. See "Management." The Organizers (together with members of their immediate families) intend to purchase an aggregate of at least 140,500 shares of the Common Stock to be sold in this offering at a purchase price of $10.00 per share. Subject to prior regulatory approval, the Organizers may subscribe for up to 100% of the shares in the offering if necessary to help the Company achieve the minimum subscription level necessary to release subscription proceeds from escrow, and some Organizers may decide to purchase additional shares even if the minimum subscription amount has been achieved. All shares purchased by the Organizers will be purchased for investment and not with a view to the resale of such shares. Because purchases by the Organizers may be substantial, investors should not place any reliance on the sale of a specified minimum offering amount as an indication of the merits of this offering or that an Organizer's investment decision is shared by unaffiliated investors. See "The Offering" and "Management." THE OFFERING Securities Offered ......... Common Stock of the Company, no par value Offering Price ............. $10.00 per share Number of Shares Offered ... Minimum 665,000 Maximum 800,000 Use of Proceeds ............ The Company will use the net proceeds of the offering to capitalize the Bank at a minimum of $6,500,000 and a maximum of $7,850,000 through the purchase of all of the capital stock of the Bank, subject to regulatory approval; to pay organizational expenses of the Company and the expenses of this offering, estimated to be approximately $100,000; and to provide working capital. If sufficient proceeds are available, the Company may choose to capitalize the Bank at a level in excess of $6,500,000. The Company plans to retain sums in excess of the minimum necessary to capitalize the Bank at the Company and initially invest such monies in United States government securities or as a deposit at the Bank. IF THE CONDITIONS FOR RELEASING SUBSCRIPTION FUNDS FROM ESCROW ARE MET AND SUCH FUNDS ARE RELEASED BUT FINAL REGULATORY APPROVAL TO COMMENCE BANKING OPERATIONS IS NOT OBTAINED FROM THE DBF, OR THE BANK DOES NOT OPEN FOR ANY OTHER REASON, IT IS POSSIBLE THAT UPON LIQUIDATION SUBSCRIBERS COULD BE RETURNED AN AMOUNT LESS THAN THEIR ORIGINAL INVESTMENT. See "Risk Factors--Return of Less Than Subscription Amount." The Bank will use the proceeds received from the sale of its stock to the Company to pay organizational and pre-opening expenses of the Bank; to renovate and furnish a building for the Company and the Bank's main office; and to provide working capital to be used for business purposes, including paying officers' and employees' salaries and making loans and investments. See "Use of Proceeds." Conditions to Offering ..... This offering will be terminated and all subscription funds (without interest) will be returned promptly to subscribers unless on or before December 31, 1996 (or such later date if the offering is extended by the Company for additional periods not to extend beyond August 31, 1997): (i) the Company has accepted subscriptions and payment in full for a minimum of 665,000 shares; and (ii) the Company has obtained approval of the Federal Reserve and the DBF to acquire the capital stock of the Bank and thereafter to become a bank holding company. It is the DBF's policy to encourage community support and make distribution of stock ownership of de novo banks such as the Bank. In furtherance of that policy, the DBF will require as a condition to granting the Bank's charter that the Company has at least 100 shareholders with 75% of both the number of shareholders and the total number of shares to be owned by subscribers residing or working in the proposed Bank's market area. The Company anticipates that it will meet these conditions. If these conditions are not met, the Company will seek regulatory approval from the DBF for a waiver of these requirements. Subscription proceeds for shares subscribed for will be deposited promptly in an escrow account with The Bankers Bank, Atlanta, Georgia, as escrow agent (the "Escrow Agent"), under the terms of an escrow agreement (the "Escrow Agreement"), pending the satisfaction of the conditions set forth above or the termination of the offering. Upon satisfaction of the conditions set forth above, all subscription funds held in escrow, including any interest actually earned thereon, shall be released to the Company for its immediate use. Any subscription proceeds accepted after satisfaction of the conditions set forth above but before termination of this offering will not be deposited in escrow but will be available for immediate use by the Company to fund offering and organizational expenses and for working capital. See "The Offering."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001021549_leading_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001021549_leading_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY SHOULD BE READ IN CONJUNCTION WITH, AND IS QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION AND THE COMPANY'S FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL FINANCIAL INFORMATION AND SHARE AND PER-SHARE DATA IN THIS PROSPECTUS ASSUME NO EXERCISE OF THE OVER-ALLOTMENT OPTION OR THE REPRESENTATIVE'S WARRANTS. THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "UNDERWRITING," "RISK FACTORS" AND "DILUTION." THE COMPANY The Company sells and distributes, in North America, packaging products used primarily in the sale of luxury consumer goods. Its packaging products include metal and plastic cases, optical cases, pouches and bags, and paper gift boxes. The Company also sells display units for retail merchandising of jewelry, watches, eyeglasses, pens, cosmetics and gold coins (the packaging products and display units are collectively referred to herein as "Packaging Products"). The Company's customers are mainly wholesalers and distributors of Packaging Products and consumer product manufacturers. The Company anticipates that it will purchase all of its inventory from Rich City International Packaging Limited ("Rich City"), a Hong Kong company and the Company's parent. The Company has entered into an Assignment and Distribution Agreement (the "Distribution Agreement") with Rich City which, effective April 1, 1996, appoints the Company as the exclusive distributor in North America of Packaging Products supplied by Rich City. Since 1990, Rich City had supplied its Packaging Products to North America. Although no market data exists for the packaging products industry, based on the number of units of luxury consumer goods sold in each category as extracted from estimates published by the American Watch Association, MJ JEWELRY SALES and U.S. OPTICAL INDUSTRY HANDBOOK '96 and on Rich City's average pricing data, the Company estimates that the U.S. wholesale market in 1994 was approximately $130,000,000 for jewelry packages of all types and approximately $140,000,000 for watch boxes, and in 1995 was approximately $54,000,000 for prescription optical cases. As successor to Rich City's North American business operations, the Company plans to implement a market consolidation strategy. The Company believes that the market for Packaging Products in North America is fragmented and lacks a centralized, efficient mechanism for bringing such products from areas of low-cost production to wholesalers, distributors and consumer product manufacturers. The Company plans to consolidate this process through its own system of purchasing and customizing high quality Packaging Products from the Company's low-cost Asian producer and distributing the products in North America. To effect this strategy, the Company has leased a 2,000 square-foot office and showroom in the Empire State Building in New York City, and a 33,000 square-foot facility in Raritan Center, Edison, New Jersey, for the Company's warehousing, customization and distribution operations. The Company believes that its warehousing and customizing capabilities located in the United States, coupled with its Asian low-cost source of supply, give it an advantage over its competitors in the North American market by enabling the Company to fill orders and customize products on a "just in time" basis. The Company believes that its source of supply will allow it to capitalize on lower production costs obtainable overseas, while maintaining the high quality of its products. THE OFFERING <TABLE> <S> <C> Common Stock offered hereby.................. 1,250,000 shares Common Stock outstanding after the 3,125,000 shares offering(1)................................ Use of proceeds.............................. Inventory, warehouse, light assembly equipment, office and showroom, furniture, computers, fixtures and equipment, sales and marketing, and working capital. See "Use of Proceeds." Risk factors................................. Investment in the Common Stock offered hereby involves a high degree of risk and immediate substantial dilution. See "Risk Factors" and "Dilution." Nasdaq National Market Symbol................ LEPI </TABLE> - ------------------------ (1) Does not include 312,500 shares of Common Stock which have been reserved for issuance upon exercise of options, which may be granted under the Company's 1996 Incentive Stock Option Plan for employees. To date, no options to purchase shares of Common Stock have been granted under the Plan. See "Management." SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION The selected financial data set forth below has been derived from the financial statements of Rich City's North American Distribution Business (the "N.A. Distribution Business") for the years ended March 31, 1994, 1995 and 1996 and the financial statements of the Company for the six months ended September 30, 1996. The financial statements of the N.A. Distribution Business for each of the years ended March 31, 1994, 1995 and 1996 and for the six months ended September 30, 1995, have been prepared on a "carved-out" basis as if the N.A. Distribution Business had been operating independently. Assets and liabilities of the N.A. Distribution Business as at March 31, 1996 were not transferred to the Company. The financial statements of the Company for the six months ended September 30, 1996 were prepared on an actual basis as the Company was operating under the terms of the Distribution Agreement between the Company and Rich City, which became effective on April 1, 1996. The unaudited pro forma statements of income of the N.A. Distribution Business for the six months ended September 30, 1995 and for the year ended March 31, 1996 have been presented on the basis that the Distribution Agreement had been in place since April 1, 1995. The unaudited pro forma statement of income of the Company for the six months ended September 30, 1996 has been presented to reflect the Company's operating lease rentals as if the operating lease were in effect on April 1, 1996. The selected financial data should be read in conjunction with, and are qualified in their entirety by reference to, the financial statements, the unaudited interim financial information and the unaudited pro forma statements of income, including the respective notes thereto, included elsewhere in this Prospectus. The historical financial data may not be indicative of the Company's future performance as an independent company. Results of any interim period may not be indicative of results for the full fiscal year. SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION (CONT'D) The interim financial information of both the N.A. Distribution Business and the Company for the six months ended September 30, 1995 and 1996, respectively, and the pro forma statements of income of the N.A. Distribution Business and the Company, have not been audited but, in the opinion of management, contain all adjustments which are of a normal recurring nature, including those to conform with generally accepted accounting principles, necessary for the fair presentation of the results of operations and cash flows, for the periods then ended. <TABLE> <CAPTION> (ALL AMOUNTS IN THOUSANDS OTHER THAN SHARE AND PER SHARE INFORMATION)(1) <S> <C> <C> <C> <C> <C> <C> <C> <C> RICH CITY'S N.A. DISTRIBUTION RICH CITY'S N.A. DISTRIBUTION BUSINESS BUSINESS LEADING EDGE ---------------------------------------------- ------------------------ ---------------------------- <CAPTION> YEAR ENDED MARCH 31, SIX MONTHS ENDED SEPTEMBER 30, ---------------------------------------------- ------------------------------------------------------ (CARVED-OUT) (CARVED-OUT) (ACTUAL) ---------------------------------------------- ------------------------ ---------------------------- (PRO (PRO FORMA)(2) FORMA)(2) (PRO FORMA)(2) 1994 1995 1996 1996 1995 1995 1996 1996 --------- --------- --------- ------------- --------- ------------- ------------ -------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> INCOME STATEMENT DATA: Net sales.............. $ 13,725 $ 6,311 $ 10,987 $10,987 $ 5,210 $5,210 $5,552 $5,552 Gross profit........... 4,296 2,289 4,352 3,921 2,079 1,876 1,815 1,815 Operating income....... 3,073 1,482 3,247 2,816 1,538 1,334 1,540 1,519 Income before income taxes................ 3,052 1,473 3,201 2,769 1,516 1,313 1,540 1,519 Income taxes........... 33 -- -- 1,052 -- 499 585 577 Net income(3).......... 3,019 1,473 3,201 1,717 1,516 814 955 942 Earnings per share..... -- -- -- 0.92 -- 0.43 0.51 0.50 Weighted average number of shares outstanding.......... -- -- -- 1,875,000 -- 1,875,000 1,875,000 1,875,000 </TABLE> <TABLE> <CAPTION> RICH CITY'S N.A. LEADING EDGE DISTRIBUTION BUSINESS -------------------------------- (CARVED-OUT) --------------------------------- SEPTEMBER 30, -------------------------------- MARCH 31, 1996 --------------------------------- 1996 (AS 1994 1995 1996(4) (ACTUAL) ADJUSTED)(5) --------- --------- ----------- --------------- --------------- <S> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Working capital........... $ (116) $ (220) $ (194) $ 1,426 $ 7,271 Total assets.............. 4,559 1,044 1,797 3,944 9,789 Total liabilities......... 4,549 1,044 1,797 2,489 2,489 Division/company equity... 10 -- -- 1,455 7,300 </TABLE> - ------------------------------ (1) The functional currency of the N.A. Distribution Business is Hong Kong dollars. Transactions, assets and liabilities denominated in Hong Kong dollars have been translated to the U.S. dollar at HK$7.80 to $1.00 which approximates the market rate at all periods presented. References in this Prospectus to "dollars" or "$" are to United States dollars and reference to "HK$" are to Hong Kong dollars. (2) The pro forma income statement data for the N.A. Distribution Business is presented to reflect the pro forma effect of the Distribution Agreement as if the Distribution Agreement had been in place since April 1, 1995. See "Unaudited Pro Forma Statements of Income" elsewhere in this Prospectus. The pro forma income statement data for the Company is presented to reflect the pro forma effect of the rental expenses in the United States. (3) Effective April 1, 1996, the Company is subject to United States income taxes. Net income for the periods prior to that date after providing for U.S. federal and state income taxes, calculated at a rate of 38%, would have been $1,859,000 for year ended March 31, 1994, $913,000 for the year ended March 31, 1995, $1,984,000 for the year ended March 31, 1996 and $940,000 for the six months ended September 30, 1995. (4) Assets and liabilities of the N.A. Distribution Business as at March 31, 1996 were not transferred to the Company. (5) As adjusted to reflect the receipt and initial application of the estimated net proceeds from the sale of 1,250,000 shares of Common Stock offered hereby at an assumed initial public offering price of $6.00 per share.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001021575_ps_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001021575_ps_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..072db7b41c6a1e75a352beb6c705725dfb741bca
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+PROSPECTUS SUMMARY The following summary does not purport to be complete and is qualified in its entirety by the de tailed information and Consolidated Financial Statements appearing elsewhere herein. PS Financial, Inc. The Holding Company, PS Financial, Inc. was recently formed by Preferred Savings under the laws of Delaware for the purpose of becoming a savings and loan holding company which will own all of the outstanding capital stock that Preferred Savings will issue in connection with the Conversion. Immediately following the Conversion, the only significant assets of the Holding Company will be the capital stock of Preferred Savings, a note evidencing the Holding Company's loan to the ESOP and up to approximately 50% of the net proceeds from the Conversion. See "Use of Proceeds." Upon completion of the Conversion, the Holding Company's business initially will consist only of the business of Preferred Savings. See "PS Financial, Inc." Preferred Savings General. Preferred Savings is a federally chartered mutual savings bank headquartered in Chicago, Illinois. Preferred Savings was originally chartered in 1891 as New City Savings and Loan Association. In 1969, the Bank changed its name to Preferred Savings and Loan Association. In 1993 the Bank converted to a state savings bank and changed its name to Preferred Savings Bank. And in August 1996, Preferred Savings converted to a federal charter. Preferred Savings currently serves the financial needs of communities in its market area through its office located at 4800 South Pulaski Road, Chicago, Illinois 60632-4195. Its deposits are insured up to applicable limits by the Federal Deposit Insurance Corporation ("FDIC"). At May 31, 1996, Preferred Savings had total assets of $54.9 million, deposits of $41.9 million and total retained earnings of $12.0 million (or 21.9% of total assets). Preferred Savings' business involves attracting deposits from the general public and using such deposits, together with other funds, to originate primarily one- to four-family residential mortgage and, to a much lesser extent, multi-family, commercial real estate and consumer loans primarily in its market area. At May 31, 1996, $26.2 million, or 71.8%, of the Bank's total loan portfolio consisted of one-to four-family residential mortgage loans. The Bank also invests in mortgage-backed and other securities and other permissible investments. See "Business - Investment Activities - Securities" and "- Mortgage-Backed and Related Securities." Financial and operational highlights of the Bank include the following: o Capital Strength. At May 31, 1996, the Bank had total equity of $12.0 million (21.9% of total assets) and substantially exceeded all of the applicable regulatory capital requirements with tangible, core and risk-based capital ratios of 22.1%, 22.1% and 57.1%, respectively. Assuming on a pro forma basis that $16.5 million, the midpoint of the Estimated Valuation Range, of shares were sold in the Conversion and approximately 50% of the net proceeds were retained by the Holding Company, as of May 31, 1996, the Bank's capital would have been $18.1 million (29.8% of assets). See "Pro Forma Regulatory Capital Analysis." o Profitability. Preferred Savings recorded net income of $883,000 and $1.0 million, respectively, and a return on assets of 1.74% and 1.96%, respectively, for the years ended February 29, 1992 and February 28, 1993. The Bank recorded net income of $942,000 and a return on assets of 1.83% for the ten months ended December 31, 1993, and net income of $758,000 and $1.1 million, respectively, and a return on assets of 1.46% and 1.99%, respectively, for the years ended December 31, 1994 and 1995. For the five months ended May 31, 1996, the Bank had a net income of $440,000 which represents a return on assets (annualized) of 1.94%. The Bank's net interest margin has consistently exceeded its ratio of operating expense to average total assets. During the five months ended May 31, 1996, the Bank's net interest margin was 5.09% while its ratio of operating expense to average total assets (annualized) was 1.56%, respectively. In view of the Holding Company's very high post conversion capital levels as well as its modest historical growth, the Holding Company's ability to quickly leverage the conversion proceeds is likely to be quite limited. Accordingly, for the near term, return on equity is likely to decline from current levels. Since return on equity is generally an important factor in determining an institution's stock price, an unfavorable return on equity could adversely affect the Holding Company's stock price and liquidity in the stock. o Interest Rate Sensitivity. The Bank's profitability, like that of most financial institutions, is dependent to a large extent upon its net interest income, which is the difference between its interest income and interest expense. In managing its asset/liability mix, Preferred Savings often, depending on the relationship between long and short-term interest rates, market conditions and consumer preference, places greater emphasis on maximizing its net interest margin than on matching the interest rate sensitivity of its assets and liabilities. At May 31, 1996, the Bank's liabilities anticipated to reprice within one year exceeded its assets anticipated to similarly reprice by $25.8 million or 47.1% of assets. At May 31, 1996, the net value of the Bank's portfolio equity was projected to decline by 14% and 32% if there were instantaneous increases in interest rates of 200 and 400 basis points, respectively. See "Risk Factors - Interest Rate Risk Exposure" and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Asset/Liability Management." o Core Deposits. Management believes that the "core" portions of the Bank's regular savings and money market accounts can have a lower cost and be more resistant to interest rate changes than certificate accounts. Accordingly, the Bank uses customer service initiatives in an attempt to maintain and expand these accounts. However, the Bank's regular savings and money market accounts decreased $1.7 million from fiscal 1994 to fiscal 1995. Management believes that most of this outflow represents the most interest rate sensitive portion of such accounts (indeed, a substantial portion of the outflow is believed to have been reinvested into certificates of deposit at the Bank) and that a majority of the remaining balance represents the less interest rate sensitive portion thereof. At May 31, 1996, $21.6 million, or 51.6%, of the Bank's total deposits^ consisted of regular savings and money market accounts. o Limited Recent Growth. The Bank's net loans have grown from $31.7 million at February 29, 1992 to $35.7 million at May 31, 1996. Over the same period, the Bank's deposit growth has been limited. While the Bank intends to increase its marketing efforts somewhat in order to stimulate loan and deposit growth, in view of the high level of competition in the Bank's market area and the absence of a branch office network as well as an adjustable rate residential mortgage loan product and secondary market activities, the Board believes that future internal growth can be effectively sustained only at modest levels. See "Pro Forma Income and Equity Data" and "Use of Proceeds." o Effect of the SAIF recapture on earnings. On September 30, 1996, Federal legislation was enacted that requires the Savings Association Insurance Fund (the "SAIF") to be recapitalized by a one-time assessment equal to 65.7 basis points on all SAIF deposits as of March 31, 1995. As a result of the legislation, the Bank will incur a one-time charge against earnings equal to approximately $162,000 after taxes. This will result in a dramatic decline in the Bank's net income for the quarter ended September 30, 1996. However, following the special assessment, the Bank's deposit insurance premium will decrease significantly for future periods. See "Risk Factors - Competitive Disadvantage caused by the Disparity Between BIF and SAIF Insurance Premiums." The Conversion The Offering is being made in connection with the conversion of Preferred Savings from a federally chartered mutual savings bank to a federally chartered stock savings bank and the formation of PS Financial, Inc. as the holding company of Preferred Savings. The Conversion is subject to certain conditions, including the prior approval of the Plan by the Bank's members at a Special Meeting to be held on ____________, 1996. After the Conversion, the Bank's current voting members (who include certain deposit account holders and borrowers) will have no voting rights in Preferred Savings and will have no voting rights in the Holding Company unless they become Holding Company stockholders. Eligible Account Holders and Supplemental Eligible Account Holders, however, will have certain liquidation rights in the Bank. See "The Conversion - Effects of Conversion to Stock Form on Depositors and Borrowers of the Bank - Liquidation Rights." The Offering. The shares of Common Stock to be issued in the Conversion are being offered at a Purchase Price of $10.00 per share in the Subscription Offering pursuant to nontransferable Subscription Rights in the following order of priority: (i) Eligible Account Holders (i.e., depositors whose accounts in the Bank totaled $50.00 or more on March 31, 1995); (ii) Tax-Qualified Employee Plans; provided, however, that the Tax Qualified Employee Plans shall have first priority Subscription Rights to the extent that the total number of shares of Common Stock sold in the Conversion exceeds the maximum of the Estimated Valuation Range; (iii) Supplemental Eligible Account Holders (i.e., depositors whose accounts in the Bank totaled $50.00 or more on September 30, 1996); (iv) Other Members (i.e., depositors of the Bank as of ___________, 1996); and (v) employees, officers and directors of the Bank. Subscription Rights received in any of the foregoing categories will be subordinated to the Subscription Rights received by those in a prior category. Subscription Rights will expire if not exercised by noon, Chicago, Illinois time, on _______________, 1996, unless extended (the "Expiration Date"). Subject to the prior rights of holders of Subscription Rights and market conditions at or near the completion of the Subscription Offering, any shares of Common Stock not subscribed for in the Subscription Offering may be offered at the same price in the Public Offering through Webb to selected persons to whom this prospectus is delivered. To order Common Stock in connection with the Public Offering, if any, an executed stock order and account withdrawal authorization and certification must be received by Webb prior to the termination of the Public Offering. The date by which orders must be received in the Public Offering, if any, will be set by the Holding Company at the time of such offering provided that if the Offering is extended beyond _______________, 1996, each subscriber will have the right to modify or rescind his or her subscription. The Holding Company and the Bank reserve the absolute right to accept or reject any orders in the Public Offering, in whole or in part. If necessary, shares of Common Stock may also be offered in connection with the Public Offering for sale on a best-efforts basis by selected dealers managed by Webb. See "The Conversion - Public Offering." The Bank and the Holding Company have engaged Webb to consult with and advise the Holding Company and the Bank with respect to the Offering, and Webb has agreed to solicit subscriptions and purchase orders for shares of Common Stock in the Offering. Neither Webb nor any selected broker-dealers will have any obligation to purchase shares of Common Stock in the Offering. Webb will receive for its services a marketing fee of 1.5% of the total dollar amount of Common Stock sold in the Conversion (excluding purchases by directors, officers, employees and members of their immediate families and the employee benefit plans of the Holding Company and for the Bank, and shares sold by selected broker-dealers). To the extent selected broker-dealers are utilized in connection with the sale of shares in the Public Offering, the selected dealers will receive a fee of up to 4.5% and Webb will receive a fee of 1.0% of the aggregate Purchase Price for all shares of Common Stock sold through such broker-dealers. Webb will also receive certain expense reimbursements in connection with the Offering. The Holding Company has agreed to indemnify Webb against certain liabilities, including certain liabilities under the Securities Act of 1933, as amended ("Securities Act"). See "The Conversion Marketing Arrangements." The Bank has established a Stock Information Center, which will be managed by Webb, to coordinate the Offering, including tabulating orders and answering questions about the Offering received by telephone. All subscribers will be instructed to mail payment to the Stock Information Center or deliver payment directly to the Bank's office. Payment for shares of Common Stock may be made by cash (if delivered in person), check or money order or by authorization of withdrawal from deposit accounts maintained with the Bank. Such funds will not be available for withdrawal and will not be released until the Conversion is completed or terminated. See "The Conversion - Method of Payment for Subscriptions." Purchase Limitations. The Plan of Conversion places limitations on the number of shares which may be purchased in the Conversion by various categories of persons. With the exception of the Tax-Qualified Employee Plans, no Eligible Account Holder, Supplemental Eligible Account Holder, Other Member or director, officer or employee may purchase in their capacity as such in the Subscription Offering more than $150,000 of Common Stock; no person, together with associates of and persons acting in concert with such person, may purchase more than $150,000 of Common Stock in the Public Offering; and no person or group of persons acting in concert (other than the Tax-Qualified Employee Plans) may purchase more than $900,000 of Common Stock in the Conversion. The minimum purchase limitation is 25 shares of Common Stock. These purchase limits may be increased or decreased consistent with the Office of Thrift Supervision ("OTS") regulations at the sole discretion of the Holding Company and the Bank. See "The Conversion - Offering of Holding Company Common Stock." Restrictions on Transfer of Subscription Rights. Prior to the completion of the Conversion, no person may transfer or enter into any agreement or understanding to transfer the legal or beneficial ownership of the subscription rights issued under the Plan or the shares of Common Stock to be issued upon their exercise. Persons found to be selling or otherwise transferring their right to purchase stock in the Subscription Offering or purchasing Common Stock on behalf of another person will be subject to forfeiture of such rights and possible federal penalties and sanctions. See "The Conversion - Restrictions on Transfer of Subscription Rights and Shares." Stock Pricing and Number of Shares of Common Stock to be Issued in the Conversion. The Purchase Price of the Common Stock is $10.00 per share and is the same for all purchasers. The aggregate pro forma market value of the Holding Company and Preferred Savings, as converted, was estimated by Keller, which is experienced in appraising converting thrift institutions, to be the Estimated Valuation Range. The Board of Directors has reviewed the Estimated Valuation Range as stated in the appraisal and compared it with recent stock trading prices as well as other recent pro forma market value estimates. The Board of Directors has also reviewed the appraisal report, including the assumptions and methodology utilized therein, and determined that it was not unreasonable. Depending on market and financial conditions at the time of the completion of the Offering, the total number of shares of Common Stock to be issued in the Conversion may be increased or decreased significantly from the 1,897,500 shares offered hereby and the Purchase Price may be decreased. However, subscribers will be permitted to modify or rescind their subscriptions if the product of the total number of shares to be issued multiplied by the price per share is less than $14,025,000 or more than $21,821,250. The appraisal is not intended to be, and must not be interpreted as, a recommendation of any kind as to the advisability of voting to approve the Conversion or of purchasing shares of Common Stock. The appraisal considers Preferred Savings and the Holding Company only as going concerns and should not be considered as any indication of the liquidation value of Preferred Savings or the Holding Company. Moreover, the appraisal is necessarily based on many factors which change from time to time. There can be no assurance that persons who purchase shares in the Conversion will be able to sell such shares at prices at or above the Purchase Price. See "Pro Forma Data" and "The Conversion - Stock Pricing and Number of Shares to be Issued" for a description of the manner in which such valuation was made and the limitations on its use. Purchases by Directors and Executive Officers The directors and executive officers of Preferred Savings intend to purchase, for investment purposes and at the same price as the shares are sold to other investors in the Conversion, approximately $950,000 of Common Stock, or 6.8%, 5.8% or 5.0% of the shares to be sold in the Conversion at the minimum, midpoint and maximum of the Estimated Valuation Range, respectively. In addition, an amount of shares equal to an aggregate of 8% of the shares to be issued in the Conversion is anticipated to be purchased by the ESOP. See "The Conversion - Participation by the Board and Executive Officers." Potential Benefits of Conversion to Directors and Executive Officers Employee Stock Ownership Plan. The Board of Directors of the Bank has adopted an ESOP, a tax-qualified employee benefit plan for officers and employees of the Holding Company and the Bank. The ESOP intends to buy up to 8% of the Common Stock issued in the Conversion (approximately $1.1 million to $1.5 million of the Common Stock based on the issuance of the minimum and the maximum of the Estimated Valuation Range and the $10.00 per share Purchase Price). The ESOP will purchase the shares with funds borrowed from the Holding Company, and it is anticipated that the ESOP will repay the loans through periodic tax-deductible contributions from the Bank over a twelve-year period. These contributions will increase the compensation expense of the Bank. See "Management - Benefit Plans Employee Stock Ownership Plan" for a description of this plan. Stock Option and Incentive Plan and Recognition and Retention Plan. The Board of Directors of the Holding Company intends to adopt a Stock Option and Incentive Plan (the "Stock Option Plan") and a Recognition and Retention Plan ("RRP") to become effective upon ratification by stockholders following the Conversion. Certain of the directors and executive officers of the Holding Company and the Bank will receive awards under these plans. It is currently anticipated that an amount of shares equal to 10% and 4% of the shares sold in the Conversion will be reserved for issuance under the Stock Option Plan and RRP, respectively. Depending upon market conditions in the future, the Holding Company may purchase shares in the open market to fund these plans. See "Management - Benefit Plans" for a description of these plans. Under the proposed Stock Option Plan, it is presently intended that the directors and executive officers be granted options to purchase, in addition to the shares to be issued in the Conversion, an amount of shares equal to 8.3% of the shares sold in the Conversion (or 116,407 and 157,492 shares, respectively, of Common Stock based on the minimum and maximum of the Estimated Valuation Range) at an exercise price equal to the market value per share of the Common Stock on the date of grant. Such options will be awarded at no expense to the recipients and pose no financial risk to the recipients until exercised. It is presently anticipated that Kimberly P. Rooney, President and Chief Executive Officer, will each receive an option to purchase an amount of shares equal to 2.5% of the shares sold in the Conversion (or 35,063 and 47,438 shares, assuming the minimum and maximum of the Estimated Valuation Range). See "Management - Benefit Plans - Stock Option and Incentive Plan." The award and exercise of options pursuant to the Stock Option Plan will not result in any expense to the Holding Company; however, when the options are exercised, the per share earnings and book value of existing stockholders will likely be diluted. It is also intended that directors and executive officers be granted (without any requirement of payment by the grantee) an amount of shares of restricted stock awards equal to 3.35% of the shares sold in the Conversion (or 46,984 and 63,566 shares, respectively, based on the minimum and maximum of the Estimated Valuation Range) which will vest over five years commencing one year from stockholder ratification and which will have a total value of $518,930 and $702,080 based on the Purchase Price of $10.00 per share at the minimum and maximum of the Estimated Valuation Range, respectively. It is presently anticipated that President Rooney and Chairman Ptak each will receive a restricted stock award equal to 1.0% of the shares sold in the Conversion (or 14,025 and 18,975 shares, assuming the minimum and maximum of the Estimated Valuation Range). The restricted stock award to President Rooney and Chairman Ptak each would have an aggregate value ranging from $140,250 to $189,750 (at the minimum and maximum of the Estimated Valuation Range) based upon the original Purchase Price of $10.00 per share. See "Risk Factors - Takeover Defensive Provisions" and "Management - Benefit Plans Recognition and Retention Plan." Following stockholder ratification of the RRP, the RRP will be funded either with shares purchased in the open market or with authorized but unissued shares. Based upon the Purchase Price of $10.00 per share, the amount required to fund the RRP through open-market purchases would range from approximately $561,000 (based upon the sale of shares at the minimum of the Estimated Valuation Range) to approximately $759,000 (based upon the sale of shares at the maximum of the Estimated Valuation Range). In the event that the per share price of the Common Stock increases above the $10.00 per share Purchase Price following completion of the Offering, the amount necessary to fund the RRP would also increase. The expense related to the cost of the RRP will be recognized over the five-year vesting period of the awards made pursuant to such plan. The use of authorized but unissued shares to fund the RRP would dilute the holdings of stockholders who purchase Common Stock in the Conversion. See "Management - Benefit Plans - Recognition and Retention Plan." The Holding Company intends to submit the RRP and the Stock Option Plan to stockholders for ratification following completion of the Offering, but in no event prior to six months following the completion of the Conversion. These plans will only be effective if ratified by the stockholders. In the event the Stock Option Plan and the RRP are not ratified by stockholders, management may consider the adoption of alternate incentive plans, although no such plans are currently contemplated. While the Bank believes that the RRP and the Stock Option Plan will provide important incentives for the performance and retention of management, the Bank has no reason to believe that the failure to obtain shareholder ratification of such plans would result in the departure of any members of senior management. Employment and Severance Agreements. The Bank intends to enter into employment agreements with Chairman Ptak and President Rooney. It is anticipated that the agreements will provide for a salary equal to the employee's current salary, will have an initial term of three years, subject to annual extension for an additional year following the Bank's annual performance review and will become effective upon the completion of the Conversion. Under certain circumstances including a change in control, as defined in the employment agreements, the employee will be entitled to a severance payment in lieu of salary equal to a percentage of his base amount of compensation, as defined. See "Management - Executive Compensation." The Bank also intends to enter into change in control severance agreements with three other executive officers. Such agreements have initial terms of 18 months and become effective upon completion of the Conversion. In the event the officer is terminated following a "change in control" (as defined in the agreements) such officer will be entitled to a severance payment equal to $40,000. See "Management - Executive Compensation - Employment Agreements and Severance Agreements" for the definition of "change in control" and a more detailed description of these agreements. Use of Proceeds The net proceeds from the sale of Common Stock in the Conversion (estimated at $13.5 million, $16.0 million, $18.4 million and $21.2 million based on sales at the minimum, midpoint, maximum and 15% above the maximum of the Estimated Valuation Range, respectively) will substantially increase the capital of Preferred Savings. See "Pro Forma Data." The Holding Company will utilize approximately 50% of the net proceeds from the issuance of the Common Stock to purchase all of the common stock of Preferred Savings to be issued upon Conversion and will retain approximately 50% of the net proceeds. The proceeds retained by the Holding Company will be invested initially in short-term investments similar to those currently in the Bank's portfolio. Such proceeds will subsequently be invested in mortgage-backed securities and investment securities and will be available for general corporate purposes, including the possible repurchase of shares of the Common Stock, as permitted by the OTS. The Holding Company currently has no specific plan to make any such repurchases of any of its Common Stock. In addition, the Holding Company intends to provide the funding for the ESOP loan. Based upon the initial Purchase Price of $10.00 per share, the dollar amount of the ESOP loan would range from $1.1 million (based upon the sale of shares at the minimum of the Estimated Valuation Range) to $1.5 million (based upon the sale of shares at the maximum of the Estimated Valuation Range). The interest rate to be charged by the Holding Company on the ESOP loan will be based upon the Internal Revenue Service ("IRS") prescribed applicable federal rate at the time of origination. Finally, the Holding Company currently intends to use a portion of the proceeds to fund a Recognition and Retention Plan ("RRP"), subject to stockholder ratification although the ultimate payment for the RRP will be made by the Bank through compensation expense. Following stockholder ratification of the RRP, the RRP will be funded either with shares purchased in the open market or with authorized but unissued shares. Based upon the Purchase Price of $10.00 per share, the amount required to fund the RRP through open-market purchases would range from approximately $561,000 (based upon the sale of shares at the minimum of the Estimated Valuation Range) to approximately $759,000 (based upon the sale of shares at the maximum of the Estimated Valuation Range). In the event that the per share price of the Common Stock increases above the $10.00 per share Purchase Price following completion of the Offering, the amount necessary to fund the RRP would also increase. The use of authorized but unissued shares to fund the RRP could dilute the holdings of stockholders who purchase Common Stock in the Conversion. See "Management - Benefit Plans - Recognition and Retention Plan." The net proceeds received by Preferred Savings will become part of Preferred Savings' general funds for use in its business and will be used to support the Bank's existing operations, subject to applicable regulatory restrictions. Immediately upon the completion of the Conversion, it is anticipated that the Bank will invest such proceeds into short-term assets. Subsequently, the Bank intends to redirect the net proceeds to the origination of residential loans and, to a lesser extent, commercial real estate and consumer loans, subject to market conditions. In addition, such proceeds will be available for the acquisition of deposits or assets or both from other institutions, although no such acquisitions are contemplated at this time. See "Use of Proceeds" for additional information on the utilization of the offering proceeds as well as OTS restrictions on repurchases of the Holding Company's stock. Dividends After completion of the Conversion, the Board may consider a policy of paying quarterly cash dividends on the Common Stock, although there can be no assurance as to whether or when the Holding Company will pay a dividend. The declaration and payment of dividends are subject to, among other things, the Holding Company's financial condition and results of operations, Preferred Savings' compliance with its regulatory capital requirements, including the fully phased-in capital requirements, tax considerations, industry standards, economic conditions, regulatory restrictions, general business practices and other factors. See "Dividends." Market for Common Stock The Holding Company has received preliminary approval to have the Common Stock traded on the Nasdaq National Market System under the symbol "____." In order to be traded on the Nasdaq National Market System, there must be at least two market makers for the Common Stock. Keefe, Bruyette & Woods has indicated its intention to make a market in the Holding Company's Common Stock following completion of the Conversion, depending upon the volume of trading activity in the Common Stock and subject to compliance with applicable laws and other regulatory requirements. A second market marker has not yet been secured by the Holding Company. The Holding Company anticipates that it will be able to secure the two market makers necessary to enable the Common Stock to be traded on the Nasdaq National Market System. A public market having the desirable characteristics of depth, liquidity and orderliness, however, depends upon the presence in the marketplace of both willing buyers and sellers of the Common Stock at any given time, which is not within the control of the Holding Company, Preferred Savings or any market maker. Further, no assurance can be given that an investor will be able to resell the Common Stock at or above the Purchase Price after the Conversion. See "Market for Common Stock" and "The Conversion - Stock Pricing and Number of Shares to be Issued."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001021706_kevco-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001021706_kevco-inc_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by and should be read in conjunction with the more detailed information and financial statements, including notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus assumes no exercise of the Underwriters' over-allotment option and reflects a 0.47-for-1 reverse stock split effected on August 29, 1996. Unless the context otherwise requires, "Kevco" and the "Company" refer to Kevco, Inc. and its subsidiaries. THE COMPANY Kevco is a leading wholesale distributor of building products to the manufactured housing and recreational vehicle (RV) industries. Through its 17 distribution centers, the Company distributes more than 10,000 different inventory items to approximately 278 manufactured home and 148 RV manufacturing facilities throughout the United States. Kevco is one of only a few companies capable of providing national distribution of building products to the manufactured housing and RV industries. In addition, the Company also manufactures wood products for the manufactured housing industry in the southeastern and southwestern United States. From 1991 to 1995, the Company's net sales increased from $47.8 million to $182.5 million, a compound annual growth rate of approximately 40%. Since its founding in 1964, the Company's growth has been fueled by internal growth and acquisitions. The Company believes that it provides a cost-effective form of distribution that offers value to both the Company's suppliers and producers of manufactured homes and RVs. Kevco believes that it provides significant benefits to its suppliers by placing large orders at regular intervals, thereby enabling its suppliers to achieve efficient and cost-effective production planning and economies of scale. In addition, Kevco markets and sells its suppliers' products directly to the manufactured housing and RV industries. As a result, the Company believes it reduces its suppliers' inventory carrying, marketing and distribution costs. The Company also provides significant benefits to its customers as a result of its ability to respond on a same day shipment basis to a majority of its customers' orders, thus reducing the amount of inventory they must maintain. Furthermore, Kevco assists its customers in inventory management, product support, training and implementing cost saving measures, all of which are services that the Company believes most building products manufacturers cannot provide in a cost-effective manner. The Company believes that the specialized product knowledge and high level of service provided by Kevco personnel result in strong relationships between Kevco and its suppliers and customers. The Company primarily distributes a full line of plumbing fixtures and supplies as well as a variety of other building products, including insulation, roof shingles, patio doors, aluminum and wood windows, vinyl siding, fireplaces and electrical products. The Company distributes products of several nationally recognized manufacturers, including Eljer, Crane Plumbing, Coastal(R) and Nibco(R) plumbing products, State Industries water heaters, Owens-Corning Fiberglas(R) insulation and shingles, Delta(R), Moen(R) and Phoenix(R) faucets, CertainTeed(R) vinyl siding and Capri bath products. The Company's wood products subsidiary manufactures roof trusses and lumber cut to customer specifications. For the six months ended June 30, 1996, approximately 54% of the Company's net sales were derived from plumbing products, 20% from wood products and 26% from other building products. BUSINESS STRATEGY Kevco's primary objective is to become the leading national distributor of building products to the manufactured housing and RV industries. The Company intends to continue to pursue this objective through a combination of internal growth and selective acquisitions. To achieve its objective, the Company has adopted a strategy based on the following key elements: Provide Superior Customer Service. The Company believes its success is primarily attributable to its emphasis on customer service and that providing a high level of customer service leads to long-term relationships with customers. The Company's operating philosophy is based on a commitment to Total Quality Management, which emphasizes at every level an awareness of, and accountability for, customer needs and effective communication both internally and externally. Consistent with this commitment, the Company strives to achieve maximum responsiveness to customer orders and to assist its customers in controlling costs, improving their materials resource planning and facilitating their just-in-time inventory procurement needs. The Company's sales representatives, who have an average of approximately nine years of experience with the Company, play an important role in training customers in the proper installation of products and assisting in their inventory management. Leverage National Distribution Network. Kevco will continue to use its national distribution network as a platform for growth and profitability. The Company believes that its national distribution network has allowed it to develop close relationships with leading product manufacturers and to become the exclusive supplier of certain product lines to the manufactured housing and RV industries. In addition, the Company believes that its national presence provides it with a significant competitive advantage due to its ability to service effectively the building products needs of its customers' manufacturing facilities, several of which are located in remote, rural areas. This capability has led to several national customer accounts. As one of the leading national distributors of building products in the United States to the manufactured housing and RV industries, the Company has substantial purchasing power and is able to realize economies of scale. Increase Customer Penetration and Product Offerings. Kevco currently supplies approximately 92% of all manufactured housing plants in the United States with one or more product lines. This established customer base provides the Company with a significant opportunity to supply a greater portion of its customers' building products needs as the customers seek to reduce the number of their suppliers. The Company also intends to add new product lines through internal growth and acquisitions. With its existing national distribution infrastructure, the Company believes that additional product lines can be offered to customers without significant additional cost. Geographically Expand Wood Products Business. The Company intends to expand its wood products business primarily by increasing the number of its wood products manufacturing facilities. The Company currently manufactures wood products, primarily roof trusses, in three locations in the southeastern and southwestern United States. This segment of the wood products industry is highly fragmented, and the Company believes there are significant opportunities to grow this business internally and through acquisitions. Pursue Vertical Integration Opportunities. The Company intends to selectively explore the acquisition of manufacturers of building products. By manufacturing its own products, the Company will seek to achieve greater profitability from its sales, while obtaining direct control over product availability and quality. MANUFACTURED HOUSING AND RECREATIONAL VEHICLE INDUSTRIES For the six months ended June 30, 1996, approximately 88% of the Company's net sales were to producers of manufactured homes and 10% were to producers of RVs. In 1995, reported sales of new manufactured homes totaled approximately $12.3 billion (at retail). Approximately 340,000 manufactured homes were reported as shipped in 1995 (which would represent approximately 33.7% of all new single family homes sold in 1995). Reported shipments of new manufactured homes experienced compound annual growth of approximately 18.8% for the four years ended December 31, 1995. The Company believes that recent industry growth primarily reflects greater consumer acceptance of manufactured housing, greater availability of financing for manufactured housing consumers and steady employment growth. RV shipments to retailers reportedly totaled approximately $12.1 billion (at retail) in 1995. Although reported RV shipments declined approximately 8.4% in 1995, the RV industry has experienced compound annual growth in reported shipments of approximately 12.8% since 1991. The Company distributes products to each of the ten highest volume producers of manufactured homes in the United States. The ten highest volume producers of manufactured homes in 1995 reportedly accounted for approximately 66.4% of total manufactured home shipments in that year. Management believes that only a few distributors are capable of distributing a broad line of building products to meet the needs of these producers on a national basis. ACQUISITION OF SERVICE SUPPLY In June 1995, the Company acquired Service Supply Systems, Inc. ("Service Supply"), a leading wholesale distributor of building products to the manufactured housing industry in the southeastern United States, the only region of the country not then served by the Company. The acquisition of Service Supply enabled Kevco to become a national distributor of building products to the manufactured housing and RV industries and significantly enhanced the Company's competitive position. The Company benefits from Service Supply's product mix, which, like Kevco's, is weighted toward plumbing products, but also includes a variety of other building products. In particular, through its acquisition of Service Supply's former subsidiary, Sunbelt Wood Components, Inc., the Company has become a wood products manufacturer for the manufactured housing industry in the southeastern and southwestern United States. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Acquisition of Service Supply." THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company...... 2,100,000 shares Common Stock to be outstanding after the offering................................ 6,494,500 shares (1) Use of proceeds.......................... To reduce indebtedness, including the Prior S Corporation Earnings Note to be issued in connection with the S Corporation Distribution. See "Prior S Corporation Status" and "Use of Proceeds." Proposed Nasdaq National Market symbol... KVCO </TABLE> - -------- (1) Excludes an aggregate of 418,426 shares of Common Stock issuable upon exercise of stock options outstanding at August 1, 1996 at a weighted average exercise price of $10.58 per share under the Company's stock option plans and 214,194 shares reserved at that date for future issuance under the Company's 1995 Stock Option Plan. See "Management--Stock Option Plans." FORWARD-LOOKING STATEMENTS AND RISK FACTORS This Prospectus includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company's actual results may differ significantly from the results discussed in such forward-looking statements. Certain factors that might cause such differences include, but are not limited to, the "Risk Factors" described herein. The safe harbors contained in Section 27A of the Securities Act and Section 21E of the Exchange Act, which apply to certain forward-looking statements, are not applicable to this offering. ---------------- The Company's principal executive offices are located at University Centre I, 1300 S. University Drive, Suite 200, Fort Worth, Texas 76107. The Company's telephone number is (817) 332-2758. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, -------------------------------------------------- ------------------- PRO FORMA 1991 1992 1993 1994 1995(1) 1995(2) 1995 1996(1) ------- ------- ------- ------- -------- --------- ------- ----------- <S> <C> <C> <C> <C> <C> <C> <C> <C> INCOME STATEMENT DATA: Net sales............... $47,782 $61,169 $80,257 $99,279 $182,519 $241,846 $56,301 $135,598 Gross profit............ 8,350 10,550 13,170 15,654 26,642 33,997 8,652 20,351 Operating income........ 636 2,293 3,894 4,779 8,363 10,989 2,256 8,083 Income before income taxes.................. 98 1,959 3,552 5,298 7,026 8,888 2,096 7,025 Net income.............. 98 1,959 3,552 5,247 6,981 8,843 2,076 7,000 SUPPLEMENTAL INCOME STATEMENT DATA(3): Net income ............. $ 4,286 $ 5,422 $ 4,285 Earnings per share (4).. $ 0.87 $ 1.10 $ 0.90 Weighted average shares outstanding (4)........ 4,946 4,946 4,778 As adjusted earnings per share (5).............. $ 0.96 $ 0.72 <CAPTION> JUNE 30, 1996 ------------------- AS FURTHER ACTUAL ADJUSTED(6) ------- ----------- <S> <C> <C> <C> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Working capital......... $16,048 $16,048 Total assets............ 60,902 60,902 Total debt.............. 27,827 8,645 Stockholders' equity.... 10,443 29,625 </TABLE> - -------- (1) The Company acquired Service Supply on June 30, 1995. The acquisition was accounted for as a purchase and, accordingly, the operating results of Service Supply have been included in the operating results of the Company since June 30, 1995. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Acquisition of Service Supply." (2) Pro forma as if the acquisition of Service Supply had occurred on January 1, 1995. (3) Prior to this offering, the Company had elected to be treated as an S corporation under the provisions of Subchapter S of the Internal Revenue Code. As an S corporation, the Company was not subject to federal and certain state income taxes. The supplemental data give effect to the income taxes that would have been recorded had the Company been taxed as a C corporation. (4) Reflects the assumed issuance of 502,379 and 334,488 shares of Common Stock at the assumed initial public offering price of $12.00 per share, less underwriting discount, to generate sufficient funds to pay an S corporation distribution in an amount equal to undistributed earnings previously taxed at the shareholder level existing at December 31, 1995 and June 30, 1996, respectively. See "Prior S Corporation Status." (5) As adjusted to give effect to the sale of the Common Stock offered hereby and the application of the estimated net proceeds therefrom at the beginning of the periods shown, including the elimination of interest expense as if debt of $17.3 million and $19.2 million had been repaid on January 1, 1995 and January 1, 1996, respectively. These amounts reflect the portion of such net proceeds that would have been available to repay debt after making an S corporation distribution in an amount equal to undistributed earnings previously taxed at the shareholder level existing at December 31, 1995 and June 30, 1996, respectively. See "Prior S Corporation Status." (6) As adjusted to give effect to (i) an S corporation distribution in an amount equal to undistributed earnings previously taxed at the shareholder level existing at June 30, 1996 and (ii) the sale of the Common Stock offered hereby and the application of the estimated net proceeds therefrom. No adjustment has been made to give effect to the distribution to the Company's shareholders of an amount equal to any S corporation earnings for the period from July 1, 1996 through the date immediately preceding the date of the consummation of this offering, which will be taxed at the shareholder level. Such amount, net of cash distributions declared and made during such period, will be distributed as part of the S Corporation Distribution in the form of the Future S Corporation Earnings Note. See "Prior S Corporation Status."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001021770_firearms_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001021770_firearms_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial data, including the financial statements and notes thereto, included elsewhere in this Prospectus. Except as otherwise noted, all information in this Prospectus: (i) assumes that the initial public offering price will be $15.00 per share and no exercise of the Underwriters' over-allotment option; (ii) gives effect to the Recapitalization and the Drop Down Transaction described herein; and (iii) gives effect for all periods to the 100,000-for-one stock split effected in July 1996 and the 1.66-for-one stock split effected November 1, 1996 with respect to all the outstanding shares of Common Stock. THE COMPANY Firearms Training Systems, Inc., a Delaware corporation ("FATS" or the "Company"), is the leading worldwide producer of interactive simulation systems designed to provide training in the handling and use of small and supporting arms. The Company offers a broad array of cost-effective training systems ranging from individual marksmanship trainers to instructional systems for multiple users. Unlike traditional live firing ranges, the Company's simulation systems enable users to train in highly realistic situations through the integration of video and digitized projected imagery and modified, laser- emitting firearms that retain the fit, function and feel of the original weapon. Utilizing internally developed proprietary software and sensors incorporated into the simulated weapons, the Company's systems offer real-time feedback and evaluation with respect to a number of performance measures such as accuracy, reaction time, situational judgment and important elements of weapons handling. Over its 12-year history, the Company's team of experts has developed over 180 types of simulated weapons and approximately 100 laser discs containing more than 1,000 training scenarios. The Company's customers are primarily U.S. and international military and law enforcement agencies including the U.S. Marine Corps, the U.S. Army, the U.S. Air Force, the Los Angeles Police Department, the Internal Revenue Service, the Singapore Army and Police Coast Guard, the British Ministry of Defense and the Royal Netherlands Army. More recently, the Company also has begun to sell simulation training systems for hunter and sports training. The Company has helped to revolutionize small and supporting arms training through the introduction of cost-effective and realistic interactive simulation. For decades, military and law enforcement organizations have trained personnel on firing ranges with targets that are static or have limited motion capabilities. This approach neither accurately replicates the hostile situations armed personnel are likely to face nor helps to develop tactical skills and individual judgment. Simulation systems not only provide solutions to these issues but also offer significant improvements in safety and many other benefits that cannot be attained in live weapons practice, including reductions in ammunition consumption, weaponry wear, trainee transport, range maintenance costs and environmental remediation expenses. Furthermore, many law enforcement agencies have begun to adopt simulation systems based in part on their concern over the increasing number of liability lawsuits relating to alleged uses of excessive force. Of the approximately $260 billion U.S. military budget for fiscal 1997, approximately $3 billion to $5 billion is allocated to overall training and training-related expenditures. Management estimates that the market for small and supporting arms simulation systems like the Company's product line in the U.S. military market segment alone is approximately $800 million, based on near-term stated acquisition objectives set by various branches of the U.S. armed services. Moreover, management believes that the trends favoring increased adoption of simulation in the U.S. can also be identified abroad as military and law enforcement agencies in other countries, generally more centralized than those in the U.S. and facing increasingly restrictive budgets, are allocating greater portions of their training budgets to small and supporting arms simulation training. To date the Company has sold more than 2,000 FATS(TM) systems in the U.S. and over 30 other countries. Although the Company is unaware of any independent third party industry statistics, the Company believes, based on its monitoring of the market, that its systems sold to date represent a substantial majority of the worldwide installed base of interactive small and supporting arms simulation systems purchased by military and law enforcement agencies. The Company's revenues and operating income have grown at compound annual growth rates of 51.8% and 80.6%, respectively, over the last five fiscal years to $65.4 million and $19.3 million, respectively, in fiscal 1996. As of September 30, 1996, the Company had a backlog of approximately $56.2 million from all customers and approximately an additional $46 million in unexercised options to purchase the Company's products through September 30, 1999 under an existing contract with the U.S. Marine Corps. COMPETITIVE ADVANTAGES Management believes that the Company's success is primarily attributable to the following key competitive advantages: . High Quality and Cost-Effective Products. The Company has participated in studies of its products conducted by the U.S. Marine Corps, the U.S. Army and the U.S. Air Force. The Company has been informed that such studies have validated the cost-effectiveness and training benefits of FATS(TM) systems for such entities and that trainees using the FATS(TM) systems generally improve their marksmanship and judgment skills faster than those using only live fire training. FATS(TM) systems have been used for training U.S. and British forces in Bosnia and for pre-deployment training of U.S. forces for Operation Desert Storm and operations in Somalia. . Premier FATS(TM) Brand Name. The Company believes that the FATS(TM) brand name has become associated with high quality, technically superior interactive small and supporting arms simulation systems. Management believes that its reputation has been enhanced by the acceptance of the Company's products by certain military and law enforcement agencies that employ exacting standards in making purchasing decisions. . Strong Long-Term Relationships with Customers. The Company works closely with its customers often for a substantial period of time to help define their training needs and develop customized training solutions. Management believes that this approach is particularly important given the relative infancy of the interactive simulation-based small and supporting arms training market and the education required to convert into customers those agencies and personnel accustomed to traditional live fire training. . Innovative Customized Training Solutions. The Company works closely with many of its customers to develop training programs, simulated weapons and training scenarios tailored to their specific needs. This ability to adapt products to particular training needs is critical because the needs of the Company's customers vary substantially. . Extensive Inventory of Proven Weapons and Scenarios. The Company draws on its extensive catalog of already fielded simulated weapons and scenarios to address customers' requirements in an innovative manner and on a timely basis. . Integration of Advanced Technologies. The Company's strong technical application capability enables it to integrate effectively: (i) advanced laser, computer and video technology from third parties; (ii) proprietary ballistics modeling, training and diagnostic software; and (iii) specially machined, realistic, sensor-embedded weapons. . Team of Recognized Subject Matter Experts. The Company maintains a team of technical, training and other experts from a wide variety of military, law enforcement and technology backgrounds to ensure an understanding of each customer's particular training needs as well as the appropriation and procurement process. GROWTH STRATEGY The Company intends to seek further growth by implementing a strategy that includes the following key elements: . Increase Market Penetration. The interactive small and supporting arms simulation industry is relatively new. As a result, the Company is seeking to broaden acceptance of its products and increase sales to military and law enforcement agencies in the U.S. and internationally. . Continue New Product Development. The Company intends to continue to develop new products based on the Company's research and development ("R&D") capabilities and its understanding of the needs of its customers. For example, the Company's newest simulator, the Vessel Weapons Engagement Training System ("VWETS"), is being developed at the request of and in close collaboration with an international customer. . Expand into New Markets. Management believes that significant opportunities exist for sales beyond the Company's traditional military and law enforcement customers. The Company has already begun to focus on the hunter and sports training component of the market, which management believes is a natural extension of its business to date. In addition, although the Company has not yet taken steps to develop a product line or otherwise enter the market for arcades, amusement parks and other entertainment venues, the Company believes that this market may represent significant opportunities for the Company in the future. The Company was incorporated in Delaware in 1984. Its principal executive offices are located at 7340 McGinnis Ferry Road, Suwanee, Georgia 30174. The Company's telephone number is (770) 813-0180. RECAPITALIZATION Prior to July 31, 1996, the Company was wholly-owned by THIN International N.V., a Netherlands Antilles corporation ("THIN International" or the "Selling Shareholder") formerly known as Firearms Training Systems International N.V. On July 31, 1996, the Company consummated a set of transactions (the "Recapitalization"), pursuant to a Recapitalization and Stock Purchase Agreement dated as of June 5, 1996 (the "Recapitalization Agreement") among the Company, THIN International, Centre Partners Management LLC ("Centre Management") and a group of entities (including Centre Capital Investors II, L.P., Centre Partners Coinvestment, L.P., Centre Capital Offshore Investors II, L.P. and Centre Capital Tax-exempt Investors II, L.P.) managed by Centre Management and referred to herein (together with their controlling entity, Centre Partners II LLC) as the "Centre Entities." As part of the Recapitalization, the Company: (i) effected a 100,000-for-one stock split with respect to its common stock and issued to the Centre Entities certain shares of the Company's capital stock now consisting of Class A Common Stock, $0.000006 par value ("Common Stock"), for $36.0 million in cash; (ii) issued to NationsBridge, L.L.C. ("NationsBridge") certain senior subordinated bridge notes (the "Bridge Notes") for $40.0 million in cash and entered into escrow arrangements providing for the delivery to NationsBridge in certain circumstances of certain warrants currently held in escrow (the "NationsBridge Warrants") to purchase shares of Common Stock, which NationsBridge Warrants are being reacquired by the Company in connection with this offering (the "Offering") as described below; (iii) entered into a new credit agreement (the "NationsBank Credit Agreement") with NationsBank, N.A. (South) ("NationsBank") and certain other lenders providing for certain credit facilities aggregating $85.0 million (the "Senior Bank Debt"), borrowed $76.0 million under such credit facilities and terminated its then existing credit facility with NationsBank; and (iv) repurchased certain shares of Common Stock owned by THIN International for approximately $151.9 million in cash ($15.0 million of which was deposited in escrow) and agreed to make an additional contingent payment (the "Contingent Payment") in cash or shares of Common Stock to THIN International in certain circumstances, such as upon the consummation of the Offering. The obligation to make the Contingent Payment will be satisfied in full by payment of $19.3 million in cash from the proceeds of the Offering. Also in connection with the Recapitalization, the Company sold certain shares of Common Stock and granted certain options to members of the Company's management on September 18, 1996. The Company and NationsBridge have agreed that the obligation to deliver from escrow the NationsBridge Warrants if the Offering is completed as contemplated, which would otherwise have required the delivery to NationsBridge of warrants to purchase 288,434 shares of Common Stock at a nominal price upon consummation of the Offering, is to be satisfied by the payment by the Company to NationsBridge (the "Warrant Payment") of approximately $4.0 million (which amount represents the aggregate value of the 288,434 shares at an assumed initial offering price of $15.00 per share less the assumed underwriting discount) from the proceeds of the shares of Common Stock being offered by the Company hereby, and have agreed that the NationsBridge Warrants will be redelivered to the Company for cancellation. See "Management," "Certain Transactions," "Recapitalization" and Note 5 of Notes to Consolidated Financial Statements. Effective upon consummation of the Recapitalization and the related sales of shares of Common Stock to management and prior to the Offering, the Centre Entities owned or had voting control over and THIN International owned approximately 77.5% and 20.6% of the outstanding shares of Common Stock, respectively. At the consummation of the Offering, the Centre Entities will own or have voting control over approximately 54.7%, and THIN International will own approximately 14.5%, of the outstanding shares of Common Stock. See "Principal Shareholders." The Company, currently an operating company, is in the process of reorganizing into a holding company (the "Drop Down Transaction"), with the Company owning 100% of the outstanding capital stock of a newly-formed subsidiary, FATS, Inc., a Delaware corporation (the "Drop Down Subsidiary"), which subsidiary will hold the operating assets of the Company. See "Recapitalization." THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company................... 6,000,000 shares Common Stock to be outstanding after the Offering..... 20,402,404 shares (1) Use of proceeds....................................... To repay outstanding indebtedness and to fund the Contingent Payment and the Warrant Payment. See "Use of Proceeds." Proposed Nasdaq National Market symbol................ FATS </TABLE> - -------- (1) Excludes 2,490,000 shares of Common Stock reserved for issuance pursuant to the Company's Stock Option Plan, of which options to purchase 1,742,834 shares of Common Stock at an exercise price of approximately $3.25 have been granted as of the date hereof. See "Management--Stock Option Plan" and Note 5 of Notes to Consolidated Financial Statements. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> SIX MONTHS ENDED FISCAL YEAR ENDED MARCH 31, SEPTEMBER 30, --------------------------------------- ----------------- 1992 1993 1994 1995 1996 1995 1996 ------- ------- ------- ------- ------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues................ $12,324 $14,049 $20,534 $29,164 $65,439 $ 27,089 $ 39,138 Gross profit............ 7,285 8,276 10,883 14,934 34,537 12,885 21,158 Operating income........ 1,813 1,131 2,472 4,139 19,283 6,080 11,611 Income before income taxes.................. 1,827 1,081 2,248 4,217 19,355 6,088 8,619 Net income.............. $ 1,274 $ 811 $ 1,518 $ 2,830 $12,790 $ 3,962 $ 5,338 ======= ======= ======= ======= ======= ======== ======== Net income per share (1).................... $0.08 $0.05 $0.09 $0.18 $0.80 $0.25 $0.33 ======= ======= ======= ======= ======= ======== ======== Weighted average common shares (1)............. 16,055 16,055 16,055 16,055 16,055 16,055 16,055 PRO FORMA STATEMENT OF OPERATIONS DATA (2): Operating income........................................ $19,283 $ 11,611 Income before income taxes.............................. 13,745 9,082 Net income.............................................. $ 9,082 $ 5,767 ======= ======== Net income per share.................................... $0.42 $0.26 ======= ======== Shares used in computation (3).......................... 21,767 21,767 </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1996 ----------------------- ACTUAL PRO FORMA (4) -------- ------------- <S> <C> <C> BALANCE SHEET DATA: Working capital......................................... $ 10,859 $ 16,386 Total assets............................................ 34,628 33,289 Total debt, including current maturities................ 108,870 52,724 Stockholders' equity (deficit).......................... (87,444) (32,237) </TABLE> - -------- (1) Pursuant to the Securities and Exchange Commission Staff Accounting Bulletin No. 83, common stock and common stock equivalents issued at prices below the expected public offering price during the 12-month period prior to the Company's expected initial public offering have been included in the calculation of weighted average common shares as if they were outstanding for all periods prior to the Offering, regardless of whether they are dilutive. Accordingly, the weighted average common shares for all periods presented reflects: (i) the issuance of shares to the Centre Entities and the repurchase of shares from THIN International pursuant to the Recapitalization; (ii) all shares issuable upon exercise of stock options granted (using the treasury stock method); (iii) 288,434 shares issuable upon exercise of the NationsBridge Warrants; (iv) all shares granted to management within 12 months of the Offering; and (v) all shares purchased by management within 12 months of the Offering. (2) Pro forma statement of operations data give effect to the Recapitalization, the consummation of the Offering and the application of the net proceeds from the Offering after deducting the assumed underwriting discount and estimated offering expenses as if they occurred at the beginning of the respective period. Adjustments to the historical statement of operations data represent the net effect of: (i) interest on borrowings under the Senior Bank Debt at effective interest rates of 8.4% to 9.1% representing interest rates in effect at the time of the Recapitalization and the Bridge Notes at an average effective interest rate of 13.3% and amortization of related deferred financing costs; (ii) elimination of interest and amortization of deferred financing costs due to repayment of the Bridge Notes and repayment of a portion of the Senior Bank Debt; and (iii) the effect of the pro forma adjustments on the provision for income taxes. The effect of the nonrecurring recapitalization expenses and the extraordinary loss on the early extinguishment of debt as a result of the repayment of the Bridge Notes and repayment of a portion of the Senior Bank Debt have not been included in the pro forma statement of operations data as the nonrecurring recapitalization expenses and the extraordinary loss are assumed to occur immediately prior to the period presented. See "Use of Proceeds," "Management's Discussion and Analysis of Financial Conditions and Results of Operations--Overview--Extraordinary Loss," "Recapitalization" and Notes 4 and 10 of Notes to Consolidated Financial Statements. (3) Shares used in computation include the effect of 6,000,000 shares of Common Stock issued and sold by the Company as part of the Offering and 1,365,220 shares of Common Stock issuable upon the exercise of outstanding options (net of 377,614 shares assumed to be repurchased by the Company using the treasury stock method). See "Use of Proceeds," "Management," "Certain Transactions," "Recapitalization" and Note 5 of Notes to Consolidated Financial Statements. (4) Pro forma balance sheet data give effect to the consummation of the Offering and the application of the proceeds from the Offering after deducting the assumed underwriting discount and estimated offering expenses as if they had occurred on the balance sheet date. See "Use of Proceeds,"
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+SUMMARY The following summary is qualified in its entirety by reference to the detailed information appearing elsewhere in this Prospectus. Certain capitalized terms used herein are defined in the "Glossary of Terms" or elsewhere in this Prospectus. OVERVIEW...................... As more fully described herein, Dealers in fifteen states have originated certain retail lease contracts for automobiles and light trucks and have assigned and will assign such lease contracts and the related vehicles to the Ford Credit Titling Trust ("FCTT"), a trust established by Ford Credit and Ford Credit Leasing, a special purpose wholly-owned subsidiary of Ford Credit. Ford Credit and Ford Credit Leasing are the beneficiaries of the interests in FCTT which have not previously been securitized and have instructed the Administrative Agent to select, in accordance with certain eligibility criteria, Leases and Leased Vehicles held by FCTT to be designated as Series 1996-1 Assets. On the Closing Date, the Series 1996-1 Certificates representing the beneficial interest in the Series 1996-1 Assets will be issued to Ford Credit and Ford Credit Leasing. Immediately thereafter, Ford Credit and Ford Credit Leasing will contribute their Series 1996-1 Certificates to the Transferor which in turn will transfer the Series 1996-1 Certificates to the Issuer. The Issuer will issue the Senior Notes pursuant to the Indenture and will pledge the Series 1996-1 Certificates to the Indenture Trustee as security for such Senior Notes. The Issuer also will issue the Subordinated Notes and the Lease Trust Certificates, which are not offered hereby. Pursuant to the Program Operating Lease the Issuer will lease the Series 1996-1 Certificates, subject to the lien securing the Senior Notes, back to the Transferor in exchange for the obligation of the Transferor to make certain payments during the period that each underlying Series 1996-1 Leased Vehicle is subject to the Program Operating Lease. Such payments (the "Program Operating Lease Payments") will consist of a Required Interest Payment portion and an Additional Payment portion. The "Required Interest Payment" generally will be equal to the sum for the related three months of the Administrative Agent Fee and three months of interest accrued on the Senior Notes, the Subordinated Notes and the Lease Trust Certificates. The "Additional Payment" generally will be equal to the amount, if any, by which the amount on deposit in the Cash Collateral Account on any Payment Date (after giving effect to any withdrawals therefrom to pay the Required Interest Payment and any deposits therein with respect to such Payment Date) exceeds the Required Cash Collateral Amount for such Payment Date. The Issuer will apply such Program Operating Lease Payments, together with certain proceeds (as described in "-- Transferor Leased Vehicle Purchase Option") from Series 1996-1 Leased Vehicles which are sold on or after their Scheduled Lease End Dates, to pay interest on and principal of the Senior Notes, the Subordinated Notes and the Lease Trust Certificates in accordance with their respective terms. On the Closing Date, the Transferor will make an initial deposit to the Cash Collateral Account of $30,821,533.09. The Cash Collateral Account will secure the Transferor's obligation to make Program Operating Lease Payments on a quarterly basis. The Transferor initially will retain the Subordinated Notes and will be required to deposit payments of interest on and principal of the Subordinated Notes into the Cash Collateral Account. The Transferor will pledge the Subordinated Notes to the Issuer to secure the Transferor's obligation to make Program Operating Lease Payments on a quarterly basis. Amounts payable to the Issuer with respect to the Series 1996-1 Certificates and the Program Operating Lease (including amounts withdrawn from the Cash Collateral Account) will be applied to pay interest on and principal of the Senior Notes, the Subordinated Notes and the Lease Trust Certificates and certain other amounts as more fully described herein. The Issuer has pledged amounts payable to it to the Indenture Trustee to secure payment of the Senior Notes. Ford Credit and Ford Credit Leasing intend that the securitization described in this Prospectus will result in a sale of the Series 1996-1 Assets for accounting purposes and a financing of the Series 1996-1 Leases and Series 1996-1 Leased Vehicles for tax purposes. THE ISSUER.................... Ford Credit Auto Lease Trust 1996-1, established pursuant to the Lease Trust Agreement. THE LEASE TRUSTEE............. PNC Bank, Delaware, as Lease Trustee under the Lease Trust Agreement. THE INDENTURE TRUSTEE......... The Chase Manhattan Bank, as Indenture Trustee under the Indenture. THE ADMINISTRATIVE AGENT...... Ford Credit, a wholly owned indirect subsidiary of Ford Motor Company, is the Administrative Agent. See "Description of the Administrative Agency Agreement." FORD CREDIT LEASING........... Ford Credit Leasing Company, Inc., a wholly owned special purpose subsidiary of Ford Credit. THE TRANSFEROR................ The Transferor will be formed by Ford Credit and Ford Credit Leasing as a Delaware business trust pursuant to the RCL Trust Agreement. The RCL Trustee is First Union Bank of Delaware, a Delaware banking corporation. See "The Transferor." THE SENIOR NOTES.............. On the Closing Date the Issuer will issue, pursuant to the Indenture, Class A-1 Senior Notes in an initial principal balance of $150,000,000 and Class A-2 Senior Notes in an initial principal balance of $660,843,000. Concurrently with the issuance of the Senior Notes, the Issuer will issue Subordinated Notes in an initial principal balance of $106,690,331.13 and Lease Trust Certificates in an initial principal balance of $30,821,533.09. The Subordinated Notes and the Lease Trust Certificates are not being offered hereby. INTEREST...................... The Class A-1 Senior Notes will bear interest at the rate of % per annum and the Class A-2 Senior Notes will bear interest at the rate of % per annum. Interest on the principal balance of the Senior Notes will accrue at the applicable interest rate (i) with respect to the Class A-1 Senior Notes, either from and including the Closing Date (in the case of the first Payment Date) or from and including the most recent Payment Date on which interest has been paid to but excluding the following Payment Date and (ii) with respect to the Class A-2 Senior Notes, either from and including the Closing Date (in the case of the first Payment Date) or from and including the fifteenth day of the third calendar month preceding the calendar month in which each Payment Date occurs, to but excluding the fifteenth day of the calendar month in which such Payment Date occurs. Interest will be payable on each Payment Date to Senior Noteholders of record on the related Record Date. Interest accrued but not paid as of any Payment Date will be due on the next Payment Date together with interest on such amount (to the extent lawful) at a rate per annum equal to the interest rate for the applicable Class. Interest on the Class A-1 Senior Notes will be calculated on the basis of actual days elapsed and a 360-day year. Interest on the Class A-2 Senior Notes will be calculated on the basis of a 360-day year of twelve 30-day months. See "Description of the Senior Notes -- Interest." PRINCIPAL..................... The aggregate amount of principal of the Senior Notes payable on each Payment Date will equal the sum of the Available Funds and the Cash Collateral Additional Draw Amount, if any, remaining after giving effect on such Payment Date to (i) the payment of the Administrative Agent Fee and (ii) the payment of interest accrued on the Senior Notes, the Subordinated Notes and the Lease Trust Certificates. See "Description of the Senior Notes -- The Indenture Cash Flows." Principal of the Senior Notes will be paid to holders of each Class of Senior Notes sequentially. No principal payments will be made on the Class A-2 Senior Notes until the principal balance of the Class A-1 Senior Notes has been reduced to zero, and no principal payments will be made on the Subordinated Notes and the Lease Trust Certificates until the principal balance of the Class A-2 Senior Notes has been reduced to zero; provided that if an Event of Default under the Indenture has occurred and the maturity of the Senior Notes has been accelerated, principal payments will be made on a pro rata basis to holders of the Class A-1 Senior Notes and the Class A-2 Senior Notes based on their respective principal balances without any distinction between Classes. See "Description of the Senior Notes -- Indenture" for a discussion of the Events of Default under the Indenture and the remedies available to the Indenture Trustee and the Senior Noteholders. As described in "-- Priority of Payments" and "Description of the Senior Notes -- The Indenture Cash Flows," amounts payable on any Payment Date generally will be paid first from Available Funds and second from the Cash Collateral Additional Draw Amount, if any. The "Available Funds" on any Payment Date will be equal to the sum of the Available Sale Proceeds and the Cash Collateral Required Draw Amount. The "Available Sale Proceeds" with respect to any Payment Date will be equal to the Monthly Scheduled Termination Sale Proceeds deposited in the Collection Account on each of the two preceding Distribution Dates and Monthly Scheduled Termination Sale Proceeds deposited in the Collection Account on the business day preceding the Distribution Date occurring on such Payment Date (or on each business day during the related Accrual Period if any Monthly Remittance Condition has not been satisfied) plus the Aggregate Net Sale Proceeds Advances deposited in the Collection Account on the business day preceding such Payment Date. The "Cash Collateral Required Draw Amount" with respect to any Payment Date is the lesser of (i) the Required Interest Payment for such Payment Date and (ii) the Cash Collateral Amount on the business day preceding such Payment Date (after giving effect to all deposits to the Cash Collateral Account on such business day). See "Description of the Senior Notes -- Cash Collateral Account Withdrawals and Deposits." The "Cash Collateral Additional Draw Amount" on any Payment Date will be equal to the Additional Payment for such Payment Date less the portion thereof to be applied to make payments on the Subordinated Notes. See "Description of the Senior Notes -- Cash Collateral Account Withdrawals and Deposits." The rate of payment and the yield to maturity on each Class of Senior Notes generally will be directly related to the rate at which payments are made on the Series 1996-1 Leases and in respect of the Series 1996-1 Leased Vehicles. The rate of prepayments on the Series 1996-1 Leases may be influenced by a variety of economic, social and other factors including competing consumer finance products and the conditions in the used vehicle market. If there are prepayments in full of the Series 1996-1 Leases, Senior Noteholders will bear the risk of being able to reinvest principal payments of the Senior Notes at yields at least equal to the yield on their respective Class of Senior Notes. For further discussion of the factors which may affect the amount and timing of payments of principal of the Senior Notes, see "Maturity, Prepayment and Yield Considerations." See also "Description of the Senior Notes -- Principal" and "-- The Indenture Cash Flows." PRIORITY OF PAYMENTS.......... On each Payment Date, the Indenture Trustee will apply first the Available Funds and second the Cash Collateral Additional Draw Amount, if any, to the following (in the priority indicated): (i) the Administrative Agent Fee to the Administrative Agent; (ii) interest due on the outstanding Senior Notes (and, to the extent permitted under applicable law, interest on any overdue interest at the interest rate for the applicable Class) to the Senior Noteholders; (iii) interest due on the outstanding Subordinated Notes (and, to the extent permitted under applicable law, interest on any overdue interest at the interest rate for the Subordinated Notes) to the Lease Trust Paying Agent for deposit to the Cash Collateral Account; (iv) interest accrued (including any interest accrued but not deposited to the Certificate Distribution Account on the previous Payment Date) on the Lease Trust Certificates (and, to the extent permitted under applicable law, interest on any overdue interest at the interest rate for the Lease Trust Certificates) plus the Certificate Distribution Draw Amount, if any, to the Certificate Distribution Account; and (v) principal with respect to each Class of Senior Notes outstanding, sequentially, to the Senior Noteholders until the Senior Notes have been paid in full; provided that if an Event of Default has occurred under the Indenture and the maturity of the Senior Notes has been accelerated, principal payments will be made on a pro rata basis to holders of the Class A-1 Senior Notes and the Class A-2 Senior Notes based on their respective principal balances, without any distinction between Classes. Following payment in full of the Class A-2 Senior Notes, the portion, if any, of the Available Funds plus the Cash Collateral Additional Draw Amount, if any, remaining will be applied to pay the Subordinated Notes and the Lease Trust Certificates in accordance with the terms thereof. See "Description of the Senior Notes -- The Indenture Cash Flows." OPTIONAL REDEMPTION OF THE SENIOR NOTES................. The Administrative Agent may, at its option, purchase the Series 1996-1 Certificates on any Payment Date on which the Pool Balance has declined to less than 10% of the Initial Pool Balance. Because the principal balance of the Subordinated Notes and the Lease Trust Certificates exceeds 10% of the Initial Pool Balance, the Issuer does not anticipate, although no assurances can be given, that the Pool Balance will decline to a level permitting the Administrative Agent to purchase the Series 1996-1 Certificates while the Senior Notes are outstanding. If, however, such a decline occurs and the Administrative Agent exercises such option, the Senior Notes will be redeemed in whole, but not in part, on the Payment Date of such exercise. See "Description of the Senior Notes -- Optional Redemption." FCTT.......................... FCTT is a trust formed pursuant to the FCTT Agreement. The FCTT Trustee is Comerica Bank, a Michigan banking corporation, which may appoint one or more co-trustees or separate trustees for the purpose of meeting applicable state requirements. FCTT was formed for the purpose of holding title to vehicles subject to leases in order to enable Ford Credit to obtain the benefits of financing such vehicles and leases without retitling. Vehicles subject to retail leases which would otherwise be sold by Dealers to Ford Credit are instead sold to FCTT. The FCTT Trustee will hold the assets of FCTT in trust for the benefit of the beneficiaries of FCTT. As of the date of this Prospectus, the primary assets of FCTT are Leases and Leased Vehicles assigned to it by Dealers located in fifteen states and all amounts payable in connection therewith. See "FCTT -- Creation of FCTT by Ford Credit and Ford Credit Leasing." Ford Credit and Ford Credit Leasing were the initial beneficiaries of FCTT. Ford Credit initially held an Exchangeable Beneficial Certificate (an "EBC") representing a 98% beneficial interest in FCTT and the FCTT Assets and Ford Credit Leasing initially held an EBC representing a 2% beneficial interest in FCTT and the FCTT Assets. Ford Credit and Ford Credit Leasing have previously exchanged a portion of their EBCs for a Series of Specified Beneficial Certificates, the Series 1995-1 Certificates, and contributed such Series 1995-1 Certificates to an affiliate which deposited them to a securitization trust in connection with the issuance of a previous series of asset backed securities. Similarly, Ford Credit and Ford Credit Leasing will exchange a portion of their EBCs for the Series 1996-1 Certificates and contribute them to the Transferor which will deposit them with the Issuer. After the issuance of the Series 1996-1 Certificates on the Closing Date, the EBCs will represent the beneficial interest in the FCTT Assets other than the Series 1995-1 Assets, the Series 1996-1 Assets and any other Series Specified Assets which may be designated from time to time. See "FCTT -- Exchangeable Beneficial Certificates and Specified Beneficial Certificates." Payments by or on behalf of Obligors made on or in respect of FCTT Assets other than the Series 1996-1 Assets will not be available to make payments on the Senior Notes, the Subordinated Notes or the Lease Trust Certificates. Neither Ford Credit nor Ford Credit Leasing, as holders of the EBCs, nor holders of any Series of Specified Beneficial Certificates other than Series 1996-1 (whether issued in connection with a future securitization or for any other purpose) will have any interest in the Series 1996-1 Assets. THE SERIES 1996-1 ASSETS...... The Series 1996-1 Leases will consist of a pool of retail closed-end lease contracts originated by Dealers and assigned to FCTT. Each Series 1996-1 Lease is an operating lease for accounting purposes and a "true lease" for tax purposes and will be purchased by FCTT, together with the related Series 1996-1 Leased Vehicle, from the Dealer for an amount equal to the Balance Subject to Lease Charges. The Obligor under each Series 1996-1 Lease is obligated to make a fixed total monthly payment (a "Total Monthly Payment") to the Administrative Agent, acting on behalf of FCTT and the holders of the Series 1996-1 Certificates, equal to the sum of (i) the Monthly Payment, (ii) the Use and Lease Tax Amount (payable to tax authorities), and (iii) the Vehicle Insurance and Maintenance Amount (payable to Dealers). Only the Monthly Payment portion of each Total Monthly Payment is available to holders of the Series 1996-1 Certificates. See "Description of the Administrative Agency Agreement -- Remittance of Payments; Allocation of Funds." The Monthly Payments remitted by Obligors will be deposited into the Cash Collateral Account to secure the Transferor's obligation to make Program Operating Lease Payments to the Issuer. See "Description of the Senior Notes -- Cash Collateral Account Withdrawals and Deposits." The Series 1996-1 Leases consist of 48,284 individual Leases. The aggregate Balance Subject to Lease Charges of the Series 1996-1 Leases as of their respective dates of origination was $989,830,208.28. As of the Series 1996-1 Cut-Off Date, the Pool Balance was $948,354,864.22 (the "Initial Pool Balance") and the aggregate Residual Values of the Series 1996-1 Leased Vehicles were $748,058,759.90. The Series 1996-1 Leases and Series 1996-1 Leased Vehicles were selected by the Administrative Agent at the direction of Ford Credit and Ford Credit Leasing as holders of the EBCs from FCTT's portfolio of Leases and Leased Vehicles represented by the EBCs, based upon the General Eligibility Criteria and the Specific Eligibility Criteria described herein. See "The Leases and Leased Vehicles," "FCTT -- Exchangeable Beneficial Certificates and Specified Beneficial Certificates" and "Additional Document Provisions -- Representations, Warranties and Covenants." THE SERIES 1996-1 CERTIFICATES.................. The Series 1996-1 Certificates will represent in the aggregate a 100% beneficial interest in the Series 1996-1 Assets and will entitle the holders thereof to all proceeds of and payments in connection with the Series 1996-1 Assets. The Series 1996-1 Certificates will not evidence legal title to or direct ownership of the Series 1996-1 Assets nor will they represent a beneficial interest in any FCTT Assets other than the Series 1996-1 Assets. See "FCTT -- Exchangeable Beneficial Certificates and Specified Beneficial Certificates." The Indenture Trustee as assignee of the Issuer will have a perfected security interest in the underlying Series 1996-1 Leases but will not have a security interest in the underlying Series 1996-1 Leased Vehicles. For a discussion of the security interests in the Series 1996-1 Certificates, the Series 1996-1 Leases and the Series 1996-1 Leased Vehicles, see "Certain Legal Aspects of the Leases and Leased Vehicles." CONTRIBUTION, TRANSFER, AND LEASE OF SERIES 1996-1 CERTIFICATES................ On the Closing Date, Ford Credit and Ford Credit Leasing each will contribute their respective Series 1996-1 Certificates to the Transferor pursuant to the Asset Contribution Agreement. The Transferor will transfer the Series 1996-1 Certificates to the Issuer pursuant to the Transfer Agreement. Subject to the pledge by the Issuer of its interest in such Series 1996-1 Certificates to the Indenture Trustee to secure payment of the Senior Notes, the Issuer will lease the Series 1996-1 Certificates back to the Transferor pursuant to the Program Operating Lease. The Transferor will assign 1% of all of its assets and obligations, including its rights and obligations under the Program Operating Lease, to Ford Credit Leasing. For convenience, these rights and obligations of the Transferor and its assignee, Ford Credit Leasing, generally are referred to herein as rights and obligations of the Transferor. In connection with such assignment, Ford Credit Leasing will hold $1,066,903.31 in initial principal balance of Subordinated Notes and $3,115.33 in initial principal balance of Lease Trust Certificates representing 1% of the initial principal balance of the Subordinated Notes and Lease Trust Certificates, respectively, initially acquired by the Transferor. See "The Transferor -- Creation by Ford Credit and Ford Credit Leasing; Assignment to Ford Credit Leasing." Under the Program Operating Lease, the Transferor will be entitled to receive all payments and proceeds with respect to the Series 1996-1 Certificates during the term of the Program Operating Lease and will be required to deposit such payments and proceeds into the Cash Collateral Account to secure its obligation to make Program Operating Lease Payments to the Issuer. Because the Program Operating Lease expires with respect to the portion of the Series 1996-1 Certificates representing the beneficial interest in a Series 1996-1 Leased Vehicle at the end of the related Series 1996-1 Lease (and before such Series 1996-1 Leased Vehicle is sold or a Sale Proceeds Advance is made in respect thereof), the Issuer will receive directly the proceeds from the sale of Series 1996-1 Leased Vehicles following scheduled termination of the related Series 1996-1 Leases. See "Series 1996-1 Certificates." PROPERTY OF THE ISSUER; PLEDGE TO THE INDENTURE TRUSTEE..... Pursuant to the Indenture and prior to entering into the Program Operating Lease, the Issuer will pledge its interest in the Lease Trust Estate to secure its obligation to pay interest on and principal of the Senior Notes. The "Lease Trust Estate" consists of (i) the rights of the Issuer under the Series 1996-1 Certificates, (ii) the rights under the Program Operating Lease, (iii) the rights of the Issuer to funds on deposit from time to time in the Collection Account, the Payahead Account, the Payment Account, the Certificate Distribution Account and any other account or accounts established pursuant to the Indenture (including investment earnings (net of losses and investment expenses) on amounts on deposit in the Collection Account and the Certificate Distribution Account) and proceeds thereof, (iv) the rights of the Transferor under the Asset Contribution Agreement, (v) the rights as holder of the Series 1996-1 Certificates under the Administrative Agency Agreement and the Series 1996-1 Supplement, (vi) the security interest of the Issuer in the Subordinated Notes and the Cash Collateral Account and the right to make withdrawals from the Cash Collateral Account and (vii) all proceeds of the foregoing. See "Property of the Issuer" and "Series 1996-1 Certificates -- Pledge of the Series 1996-1 Certificates to the Indenture Trustee." TRANSFEROR LEASED VEHICLE PURCHASE OPTION.............. Under the Program Operating Lease, the Transferor may, at its option, purchase the Issuer's beneficial interest in any Series 1996-1 Leased Vehicle which is sold at auction following the Scheduled Lease End Date of the related Series 1996-1 Lease. The Transferor may exercise such option (the "Transferor Leased Vehicle Purchase Option") by paying to the Issuer an amount equal to the Residual Value of such Series 1996-1 Leased Vehicle minus any amounts due from the related Obligor for Uncollected Excess Wear and Tear and Excess Mileage (such amount, the "Transferor Purchase Option Price"). The Transferor will exercise such option only if neither the Obligor nor the Dealer exercises its option to purchase the Series 1996-1 Leased Vehicle, and the Sale Proceeds of such Series 1996-1 Leased Vehicle exceed the Transferor Purchase Option Price. Because the Transferor intends to exercise this option when available, Sale Proceeds received by the Issuer with respect to any Series 1996-1 Leased Vehicle the related Series 1996-1 Lease of which terminated on or after its Scheduled Lease End Date will not exceed the Transferor Purchase Option Price. With respect to each Series 1996-1 Leased Vehicle for which the Transferor exercises its purchase option, the Transferor will deposit the excess of the Sale Proceeds of such Series 1996-1 Leased Vehicle over the related Transferor Purchase Option Price (the "Transferor Purchase Option Net Proceeds") into the Cash Collateral Account until the aggregate cumulative amount deposited in respect of such Transferor Purchase Option Net Proceeds for all such Series 1996-1 Leased Vehicles equals $94,835,486.42, which is equal to 10% of the Initial Pool Balance. Thereafter, the Transferor will retain any Transferor Purchase Option Net Proceeds and such amounts, if any, will not be available to pay interest on or principal of the Senior Notes, the Subordinated Notes or the Lease Trust Certificates. To the extent that Transferor Purchase Option Net Proceeds are deposited into the Cash Collateral Account, such amounts will secure the Transferor's obligation to make Program Operating Lease Payments to the Issuer. See "Series 1996-1 Certificates -- Lease of the Series 1996-1 Certificates to the Transferor" for further discussion of the purchase option of the Transferor and "Description of the Administrative Agency Agreement -- Sale of Leased Vehicles" for a discussion of the process by which the Administrative Agent sells Series 1996-1 Leased Vehicles after their respective Scheduled Lease End Dates. Senior Noteholders will not be subject to delay in receipt of principal resulting from a delay in the sale of Series 1996-1 Leased Vehicles after their respective Scheduled Lease End Dates to the extent that the Administrative Agent makes Sale Proceeds Advances of the Residual Values of Series 1996-1 Leased Vehicles as described in "-- Sale Proceeds Advances" and "Description of the Administrative Agency Agreement -- Advances of Sale Proceeds." CASH COLLATERAL ACCOUNT....... Amounts on deposit in the Cash Collateral Account from time to time (the "Cash Collateral Amount") secure the Transferor's obligations under the Program Operating Lease and on each Payment Date will be applied to pay Program Operating Lease Payments. On the Closing Date the Transferor will deposit $30,821,533.09 (the "Initial Cash Collateral Deposit") in the Cash Collateral Account. Amounts on deposit in the Cash Collateral Account will be augmented during each Accrual Period by the deposit therein of the following amounts with respect to such Accrual Period: (i) all Collections other than Monthly Scheduled Termination Sale Proceeds with respect to Series 1996-1 Assets; (ii) the Aggregate Net Monthly Payment Advances; (iii) any Transferor Purchase Option Net Proceeds until the aggregate cumulative amount deposited in respect of such proceeds equals $94,835,486.42; (iv) payments of interest on and principal of the Subordinated Notes; and (v) any investment earnings (net of losses and investment expenses) on funds on deposit in the Collection Account, the Cash Collateral Account and the Certificate Distribution Account. On the business day preceding each Payment Date, the Indenture Trustee will withdraw the Cash Collateral Required Draw Amount from the Cash Collateral Account and use such amount to pay the Required Interest Payment portion of the Program Operating Lease Payments. On each Payment Date, the Indenture Trustee will withdraw the Cash Collateral Additional Draw Amount from the Cash Collateral Account and use such amount to pay the Additional Payment portion, if any, of the Program Operating Lease Payments. See "Description of the Senior Notes -- Cash Collateral Account Withdrawals and Deposits" and "-- The Indenture Cash Flows." The "Required Cash Collateral Amount" as of any Payment Date will be 3.25% of the Initial Pool Balance, provided that the Required Cash Collateral Amount will equal zero as of any Payment Date occurring on or after the earlier of the date on which the last remaining Series 1996-1 Lease terminated or the date on which the Program Operating Lease is terminated following an event of default thereunder. THE ADMINISTRATIVE AGENT...... The Administrative Agent will act as servicer with respect to all Leases and Leased Vehicles owned by FCTT (including the Series 1996-1 Leases and Series 1996-1 Leased Vehicles) and will be the custodian of the related Lease Files. The Administrative Agent will receive the Administrative Agent Fee and the Supplemental Administrative Agent Fee as compensation for servicing the Series 1996-1 Assets (including disposing of Series 1996-1 Leased Vehicles) and administering the distribution of funds in respect thereof. The Administrative Agent Fee as of any Payment Date will equal the sum, for each of the three Collection Periods preceding such Payment Date, of the product of 1/12 of 1.00% and the Pool Balance as of the beginning of each such Collection Period. See "Description of the Administrative Agency Agreement." ADMINISTRATIVE PURCHASES...... Ford Credit and Ford Credit Leasing, as holders of the EBCs, will be required to purchase the beneficial interest in any Series 1996-1 Lease and Series 1996-1 Leased Vehicle as to which (i) all of the Specific Eligibility Criteria and General Eligibility Criteria were not satisfied on the Series 1996-1 Cut-Off Date, (ii) a breach of certain covenants has occurred and has not been cured, (iii) the Administrative Agent has granted a Term Extension or any Payment Extension over three months (in the aggregate) or (iv) the Series 1996-1 Leased Vehicle is relocated to a jurisdiction in which FCTT is not authorized to hold the related certificate of title. Any such purchase shall be effected by the deposit of the Administrative Purchase Amount in the Collection Account on the business day preceding the Payment Date relating to the Accrual Period in which any of the events specified above occurred or were discovered, as applicable. See "Description of the Administrative Agency Agreement -- Administrative Purchases." MONTHLY PAYMENT ADVANCES...... The Administrative Agent will be obligated to make a Monthly Payment Advance in an amount equal to any unpaid portion of the Monthly Payments due under a Series 1996-1 Lease during an Accrual Period, but only if the Administrative Agent determines, in its sole discretion, that such Monthly Payment Advance will be recoverable from subsequent Collections on such Series 1996-1 Lease (excluding Sale Proceeds). See "Description of the Senior Notes -- Advances" and "Description of the Administrative Agency Agreement -- Monthly Payment Advances." SALE PROCEEDS ADVANCES........ The Administrative Agent will be obligated to make a Sale Proceeds Advance in an amount equal to the Residual Value of any Series 1996-1 Leased Vehicle which has not been sold by the last business day of the Accrual Period in which the Scheduled Lease End Date of the related Series 1996-1 Lease occurred, but only if the Administrative Agent determines, in its sole discretion, that such Sale Proceeds Advance will be recoverable from the Sale Proceeds of such Series 1996-1 Leased Vehicle. See "Description of the Senior Notes -- Advances" and "Description of the Administrative Agency Agreement -- Advances of Sale Proceeds." TAX STATUS.................... In the opinion of Special Tax Counsel, subject to the matters discussed under "Federal Income Tax Consequences," for federal income tax purposes (i) the Senior Notes will be treated as debt, (ii) the Lease Trust Certificates (other than the Lease Trust Certificates initially acquired by the Transferor) should be treated as debt and (iii) none of FCTT, the Transferor or the Issuer will be classified as an association (or publicly traded partnership) taxable as a corporation. The Class A-1 Senior Notes will be treated as "short-term obligations" issued with acquisition discount. The Class A-2 Senior Notes will be issued with a de minimis amount of original issue discount ("OID"). See "Federal Income Tax Consequences" for additional information concerning acquisition discount, OID and the application of federal income tax laws. In the opinion of Michigan Tax Counsel, assuming that the Senior Notes will be treated as debt for federal income tax purposes, (i) the Senior Notes will be treated as debt for Michigan income and single business tax purposes and (ii) Senior Note Owners not otherwise subject to taxation in Michigan would not become subject to taxation in Michigan solely because of a Senior Note Owner's ownership of a Senior Note. Assuming further that the Lease Trust Certificates (other than the Lease Trust Certificates initially acquired by the Transferor) will be treated as debt for federal income tax purposes and that none of FCTT, the Transferor or the Issuer will be classified as an association (or publicly traded partnership) taxable as a corporation for federal income tax purposes, none of FCTT, the Transferor or the Issuer should be subject to Michigan income and single business tax at the entity level. See "Certain State Tax Consequences" for additional information concerning the application of state tax laws. ERISA CONSIDERATIONS.......... Subject to the considerations discussed under "ERISA Considerations," the Senior Notes are eligible for purchase by employee benefit plans. LEGAL INVESTMENT.............. The Class A-1 Senior Notes will be eligible securities for purchase by money market funds under Rule 2a-7 under the Investment Company Act of 1940, as amended. RATINGS OF THE SENIOR NOTES... It is a condition of the issuance of the Senior Notes that they be rated in the highest investment rating category by at least one Rating Agency. There can be no assurance that such ratings will not be lowered or withdrawn by a Rating Agency if in its judgment circumstances so warrant. See "Ratings of the Senior Notes" and "Risk Factors -- ERISA Liabilities; Effect on Ratings."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001021923_futronix_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001021923_futronix_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the related unaudited pro forma combined financial statements of the Company, and the notes thereto, and the audited financial statements of each of Futronix Corporation ("Futronix") and Wire & Cable Specialties Corporation ("Wire & Cable"), and the notes thereto, appearing elsewhere in this Prospectus. References in this Prospectus to the Company include, unless the context requires otherwise, the Company's wholly-owned subsidiary formed in contemplation of the merger (the "Merger") of Futronix and Wire & Cable. The Merger will become effective simultaneously with the closing of the sale of the Common Stock (the "Common Stock") in this offering (this "Offering"). Unless otherwise indicated, all information presented in this Prospectus assumes (i) the businesses of Futronix and Wire & Cable have been combined and (ii) the Underwriters have not exercised their over-allotment option. THE COMPANY GENERAL The Company is a leading national master distributor of specialty wire and cable, serving more than 1,000 electrical distributors throughout the United States. The Company seeks to serve as an efficient single source of supply and as the distributor of choice for electrical distributors by maintaining for immediate delivery large quantities of over 10,000 specialty wire and cable products purchased from more than 50 manufacturers worldwide, as well as limited quantities of complementary products. The Company's products typically are used in specific, often highly-sophisticated applications such as telecommunications systems, factory automation, "intelligent" buildings and computer systems. The Company believes that the products it sells are used primarily within the telecommunications, electronics, process and manufacturing industries and that a substantial portion of those products are used for maintenance, retrofit and operations ("MRO") applications. The Company generally does not sell commodity wire and cable, such as that used in commercial and residential construction. In recent years, the Company has experienced rapid growth which it attributes to the growth of the estimated $2.4 billion specialty wire and cable market, as well as several internal factors, including: (i) the opening of seven distribution centers since January 1, 1995 (for a current total of 12), creating a national distribution system; (ii) a significant increase in the breadth and depth of the Company's inventory, providing greater opportunity to secure a customer's order; (iii) the Company's ability to service consistently the demands of its customers on a just-in-time basis; and (iv) an increase in the number of sales personnel employed by the Company, many of whom have substantial experience in the specialty wire and cable industry. In addition, the Company believes that it has benefitted from its operating philosophy of selling exclusively to electrical distributors and not directly to end-users, such as construction contractors and installers. The Company has assembled a knowledgeable team of industry executives and sales managers, each of whom has many years of experience in the sale and distribution of specialty wire and cable and firmly established customer and supplier relationships. Terrence M. Hunt, the Company's President, founded Futronix and co-founded in 1975 HWC Distribution Corp., a master distributor of specialty wire and cable that completed its initial public offering in 1987 and was sold to ALLTEL Corporation for $143 million in 1989. Mr. Hunt and many of the Company's current employees were instrumental in HWC Distribution Corp.'s growth from its inception to its sale. Theodore J. Bruno, who will be the Vice Chairman of the Company, founded Wire & Cable and has over 25 years of experience in the specialty wire and cable industry. Paul R. Monahan, who will be the Company's Chief Financial Officer, served as Wire & Cable's chief operating officer and, together with Mr. Bruno, developed Wire & Cable into a national master distributor of specialty wire and cable. In addition, the branch sales managers of the Company's distribution centers have an average of over 15 years of experience in the specialty wire and cable industry. The senior executives and branch sales managers of the Company will own approximately 39% of the outstanding shares of Common Stock (on a fully diluted basis) upon consummation of this Offering. Historically, wire and cable manufacturers have sold their products through several methods of distribution, such as direct sales and through independent, non-exclusive manufacturers' representatives. An alternative channel of distribution for specialty wire and cable has developed whereby master distributors serve as a replacement for manufacturers' representatives and other less efficient distribution methods. The principal activities undertaken by master distributors are to purchase and inventory large quantities of specialty wire and cable on a regular basis from many different manufacturers, and market and sell such products to electrical distributors on an as-needed, just-in-time basis. The Company believes that master distributors provide a cost-effective alternative method of distribution which provides value to distributors (the Company's customers) as well as to manufacturers (the Company's primary suppliers). . Value to Customers. The Company believes that it significantly reduces the transaction and other costs of its customers, while improving their overall level of service to end-users, by permitting them to: (i) eliminate lead times typically required by manufacturers and thereby respond on a same-day shipment basis to the majority of their customers' orders; (ii) fill relatively small orders without being subject to purchase order minimums typically required by manufacturers; and (iii) reduce the amount of inventory that they must maintain. . Value to Suppliers. The Company believes that it offers cost savings to manufacturers of specialty wire and cable by typically placing large orders at regular intervals, thereby meeting the lead time and purchase order minimums required by manufacturers to achieve efficient and cost- effective production planning and economies of scale. In addition, as a master distributor, the Company reduces the marketing and sales effort required by manufacturers to sell their products. BUSINESS STRATEGY The Company's objective is to become the leading national master distributor of specialty wire and cable through strategic expansion and a focus on high quality, value-added customer service. Specifically, the Company seeks to: (i) penetrate additional markets through the expansion of its network of distribution centers; (ii) market its national distribution capabilities to electrical distributors which have national operations; (iii) expand product offerings and increase the levels of inventory at its existing distribution centers; (iv) utilize profitability-based incentive compensation for its sales force; and (v) integrate and exploit its information technology to provide its customers with immediate access to product and other key information. THE MERGER On August 7, 1996, Futronix, Wire & Cable and the Company entered into a definitive agreement (the "Merger Agreement") with respect to the Merger, which will be accounted for as a "pooling of interests" for financial reporting purposes. The Merger will become effective simultaneously with the closing of the sale of the Common Stock offered hereby (the "Closing"). As a result of the Merger, the Company will become one of the largest national master distributors of specialty wire and cable in the United States. The distribution centers of Futronix and Wire & Cable serve geographically and economically distinct markets, resulting in minimal customer overlap. The Company anticipates several benefits from the Merger, including: (i) increased market share as a result of its national distribution capabilities and expanded inventory; (ii) greater customer penetration, as each sales person in the combined sales force will be able to focus on smaller, defined territories; (iii) cost savings as a result of the consolidation of certain functions; (iv) increased purchasing power and other economies of scale; and (v) increased diversification of its customer base and markets. The Company's executive offices are located at 12614 Hempstead Highway, Houston, Texas 77092 and 5060 Avalon Ridge Parkway, Norcross, Georgia 30071, and its telephone numbers are (713) 329-1100 and (770) 441-8900, respectively. THE OFFERING <TABLE> <S> <C> Common Stock offered................. 1,950,000 shares Common Stock to be outstanding after this Offering....................... 4,659,944 shares(1) Use of Proceeds...................... To reduce indebtedness and for working capital and general corporate purposes, including the purchase of inventory. See "Use of Proceeds." Nasdaq National Market Symbol........ FXSC </TABLE> - ---------- (1) Includes: (i) the 1,950,000 shares of Common Stock offered hereby; (ii) 1,823,937 shares of Common Stock to be issued in the Merger simultaneously with the Closing of this Offering; and (iii) 60,813 shares of Common Stock to be issued in connection with the Value Appreciation Bonus. Also includes Common Stock equivalents representented by (i) an aggregate of 334,204 shares of Common Stock reserved for issuance upon the exercise of Warrants of the Company to be issued pursuant to the Merger Agreement (the "Warrants") and (ii) an aggregate of 490,990 shares of Common Stock reserved for issuance upon the conversion of the Convertible Preferred Stock of the Company to be issued pursuant to the Merger Agreement (the "Convertible Preferred Stock"). Does not include an aggregate of 54,254 shares of Common Stock reserved for issuance upon the exercise of options to be issued following the Closing of this Offering pursuant to the Company's Equity Compensation Plan (the "Equity Compensation Plan"), at an exercise price equivalent to the initial public offering price per share. See "The Merger" and "Management--Value Appreciation Bonus for Officer." SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA The summary unaudited pro forma combined financial data of the Company presented below were prepared using the "pooling of interests" method of accounting as if Futronix and Wire & Cable have always operated as one company. The unaudited pro forma combined financial data do not give effect to any cost savings that may result from the Merger, costs incurred to operate as a public company or transaction costs (estimated to be approximately $150,000) relating to the Merger. The following data should be read in conjunction with "Selected Unaudited Pro Forma Combined Financial Data," "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the related unaudited pro forma combined financial statements of the Company, and the notes thereto, and the audited financial statements of each of Futronix and Wire & Cable, and the notes thereto, appearing elsewhere in this Prospectus. <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ----------------------- ----------------- 1993 1994 1995 1995 1996 ------- ------- ------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> STATEMENT OF INCOME DATA: Sales............................... $13,897 $26,193 $53,791 $ 22,256 $ 35,159 Gross profit........................ 4,502 7,863 13,439 6,043 7,732 Income from operations(1)........... 647 1,780 3,088 1,284 1,420 Income before income taxes(2)....... 524 1,282 2,056 856 746 Pro forma net income(3)............. 325 806 1,264 524 456 As adjusted(4): Pro forma net income............... $ 1,904 $ 855 Pro forma net income per common share............................. $ .41 $ .19 Weighted average common shares outstanding(5).................... 4,598 4,598 </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 --------------------------- PRO FORMA AS ADJUSTED (4) --------- --------------- (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Inventory........................................... $23,226 $23,226 Working capital..................................... 7,133(6) 28,965 Total assets........................................ 36,403(6) 43,270 Total debt.......................................... 18,427(7) 2,218 Stockholders' equity................................ 5,913(6) 28,988 </TABLE> - ---------- (1) No adjustment has been made to reflect the non-recurring compensation expense of $1,438,836, or $892,078 after tax, (assuming an initial public offering price of $13.00 per share) to be incurred by the Company, seven days after the Closing of this Offering, in connection with the Value Appreciation Bonus. See "Management--Value Appreciation Bonus for Officer." (2) Adjusted to reflect the interest that would have been incurred on the $2.2 million principal amount of the 7% subordinated notes to be issued by the Company, pursuant to the Merger Agreement, in exchange for 2.2 million shares of nonconvertible preferred stock of Futronix. (3) Prior to this Offering, Wire & Cable was an S corporation for federal and state income tax purposes. Prior to 1994, Futronix also was an S corporation for federal and state income tax purposes. Net income and net income per common share reflect a provision for income taxes at an assumed effective combined federal and state income tax rate of 38% for all periods in which Futronix or Wire & Cable were S corporations. (4) Adjusted to reflect the sale of 1,950,000 shares of Common Stock in this Offering and the application of the net proceeds therefrom to repay $16.2 million of indebtedness. Such amounts have not been adjusted to reflect application of $4.0 million of the net proceeds of this Offering intended to be used over the next six months to expand the Company's inventory. See "Use of Proceeds." (5) Includes: (i) the 1,950,000 shares of Common Stock offered hereby; (ii) 1,823,937 shares of Common Stock to be issued in the Merger simultaneously with the sale of the Common Stock offered hereby; (iii) an aggregate of 334,204 shares of Common Stock reserved for issuance upon the exercise of Warrants; and (iv) an aggregate of 490,990 shares of Common Stock reserved for issuance upon the conversion of the Convertible Preferred Stock. Does not include (i) an aggregate of 54,254 shares of Common Stock reserved for issuance upon the exercise of options to be issued following the Closing of this Offering pursuant to the Equity Compensation Plan and (ii) 60,813 shares of Common Stock to be issued in connection with the Value Appreciation Bonus. See "The Merger" and "Management--Value Appreciation Bonus for Officer." (6) Adjusted to reflect the non-recurring compensation expense of $1,438,836, or $892,078 after tax (assuming an initial public offering price of $13.00 per share) to be incurred by the Company, seven days after the Closing of this Offering, in connection with the Value Appreciation Bonus. See "Management--Value Appreciation Bonus for Officer."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001022103_home-city_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001022103_home-city_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following information is not complete and is qualified in its entirety by the detailed information and the financial statements and accompanying notes appearing elsewhere in this Prospectus: HOME CITY FINANCIAL CORPORATION HCFC was incorporated under Ohio law in August 1996 at the direction of Home City for the purpose of purchasing all of the capital stock of Home City to be issued in connection with the Conversion. HCFC has not conducted and will not conduct any business before the completion of the Conversion other than business related to the Conversion. Upon the consummation of the Conversion, HCFC will be a unitary savings and loan holding company, the principal assets of which initially will be the capital stock of Home City, a loan made to the ESOP for the purchase of Common Shares and the investments made with 50% of the net proceeds retained from the sale of HCFC shares in connection with the Conversion. See "USE OF PROCEEDS." The main office of HCFC is located at 63 West Main Street, Springfield, Ohio 45502-1309, and its telephone number is (513) 324-5736. HOME CITY FEDERAL SAVINGS BANK OF SPRINGFIELD Home City is a federal mutual savings bank which has served the Springfield, Ohio, area since 1925. Originally formed under the name "Home City Savings and Loan Association," Home City changed its name on May 1, 1996, to "Home City Savings Bank." As a federal savings bank, Home City is subject to supervision and regulation by the OTS and the FDIC and is a member of the Federal Home Loan Bank (the "FHLB") of Cincinnati. The deposits of Home City are insured up to applicable limits by the FDIC in the Savings Association Insurance Fund (the "SAIF"). See "REGULATION." At June 30, 1996, $31.9 million, or approximately 66% of Home City's loan portfolio, consisted of loans secured by first mortgages on one- to four-family homes, virtually all of which were located within Clark County, Ohio, and adjacent counties. See "THE BUSINESS OF HOME CITY - Lending Activities -- One- to Four-Family Real Estate Loans." Home City's capital exceeds by a substantial margin all regulatory requirements. At June 30, 1996, Home City's tangible and core capital both equaled $5.4 million, or 9.8% of assets, an amount which exceeded the minimum tangible and core capital requirements by approximately $4.4 million and $3.6 million, respectively. On a pro forma basis, assuming the sale of 720,000 Common Shares (the mid-point of the Valuation Range) and the retention by HCFC of 50% of the net proceeds from such sale, Home City's tangible and core capital ratios will both equal 13.45%. See "REGULATORY CAPITAL COMPLIANCE," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF HOME CITY Liquidity and Capital Resources," and "REGULATION - OTS Regulations -- Regulatory Capital Requirements." Home City conducts business from its office in Springfield, Ohio. Home City's primary market area consists of Clark County, Ohio, and adjacent counties. The office of Home City is located at 63 West Main Street, Springfield, Ohio, and its telephone number is (513) 324-5736. THE CONVERSION On September 3, 1996, the Board of Directors of Home City unanimously approved the Plan of Conversion. The OTS approved the Plan, subject to the approval of the Plan by Home City's voting members at the Special Meeting, to be held at ____ p.m., Eastern Time, on ___________, 1996, at the offices of Home City at 63 West Main Street, Springfield, Ohio. THE SUBSCRIPTION AND COMMUNITY OFFERINGS The Plan provides for the formation of HCFC for the purpose of acquiring all of the capital stock to be issued by Home City in the Conversion. Pursuant to the Plan, subscription rights to purchase Common Shares are hereby offered at a price of $10 per share to (a) depositors of Home City with Qualifying Deposits as of June 30, 1995 ("Eligible Account Holders"), (b) the ESOP, (c) depositors of Home City with Qualifying Deposits as of September 30, 1996 ("Supplemental Eligible Account Holders"), and (d) account holders of Home City having savings deposits of record on October 31, 1996 (the "Voting Record Date"), and borrowers of record on the Voting Record Date whose loans were outstanding on May 1, 1996 (such depositors and <PAGE> 8 borrowers as of October 31, 1996, collectively, the "Voting Members"). See "THE CONVERSION Subscription Offering." Common Shares not subscribed for in the Subscription Offering are hereby being concurrently offered to those members of the general public receiving this Prospectus in the Community Offering, in which preference will be given to natural persons residing in Clark County, Ohio. See "THE CONVERSION - Community Offering." The Plan authorizes the Boards of Directors of HCFC and Home City to establish limits on the number of Common Shares that may be purchased by various categories of persons. The Plan also permits the Board of Directors of HCFC and Home City, subject to any required regulatory approval and the requirements of applicable laws and regulations, to increase or decrease such purchase limitations in their sole discretion. Pursuant to such authority, the Boards of Directors have established the limitation that, generally, an Eligible Account Holder or a Supplemental Eligible Account Holder may purchase in the Subscription Offering a number of Common Shares equal to the greater of (i) 1% of the Common Shares sold in connection with the Conversion (9,522 Common Shares at the maximum of the Valuation Range, as adjusted) or (ii) 15 times the product (rounded down to the next whole number) obtained by multiplying the total number of Common Shares to be sold in connection with the Conversion by a fraction, the numerator of which is the amount of such Eligible Account Holder's or Supplemental Eligible Account Holder's Qualifying Deposit and the denominator of which is the total amount of Qualifying Deposits of all Eligible Account Holders or Supplemental Eligible Account Holders, as the case may be. A Voting Member may purchase in the Subscription Offering 1% of the Common Shares sold in connection with the Conversion (9,522 Common Shares at the maximum of the Valuation Range, as adjusted). The Board of Directors has also established the limitation that any person may purchase in the Community Offering a number of Common Shares equal to 1% of the total number of Common Shares sold in connection with the Conversion (9,522 Common Shares at the maximum of the Valuation Range, as adjusted). Subscriptions and orders for Common Shares in the Conversion are also subject to the limitation that no person, together with any Associates or persons Acting in Concert, may purchase more than 2% of the Common Shares sold in connection with the Conversion (19,044 Common Shares at the maximum of the Valuation Range, as adjusted). Such limitation does not apply to the ESOP, which intends to purchase 8% of the Common Shares sold in connection with the Conversion. The ESOP may purchase Common Shares if shares remain available after satisfying the subscriptions of Eligible Account Holders up to $8,280,000, the maximum of the Valuation Range. If Common Shares in excess of the maximum of the Valuation Range are sold, the ESOP will have the first right to purchase such excess Common Shares. If the ESOP is unable to purchase all or part of the Common Shares for which it subscribes, the ESOP may purchase Common Shares in the open market or may purchase authorized but unissued Common Shares from HCFC. If the ESOP purchases authorized but unissued Common Shares from HCFC, such purchases could have a dilutive effect on the interest of HCFC's shareholders. Subject to applicable regulations, the purchase limitations may be increased or decreased after the commencement of the Offering in the sole discretion of the Boards of Directors. See "THE CONVERSION - Limitations on Purchases of Common Shares" and "RESTRICTIONS ON ACQUISITION OF HCFC AND HOME CITY." The sale of Common Shares pursuant to subscriptions or orders received in the Offering will be subject to the approval of the Plan by the voting members of Home City at the Special Meeting, to the sale of the requisite number of Common Shares and to certain other conditions. See "THE CONVERSION - Subscription Offering; - Community Offering; and - Pricing and Number of Common Shares to be Sold." Home City has retained Webb to consult, advise and assist in the sale of the Common Shares in the Subscription Offering and in the Community Offering. Webb has been paid a management fee of $25,000 and will receive a commission equal to 1.5% of the aggregate amount received by HCFC in the Offering, excluding any amounts paid for Common Shares by Home City's directors, executive officers and employees (and members of their immediate families) and by the ESOP. Home City will reimburse Webb for legal and out-of-pocket expenses. See "THE CONVERSION - Plan of Distribution." The Subscription Offering will terminate at 4:00 p.m., Eastern Time, on _________, 1996. The Community Offering may be terminated at any time after orders for at least 952,200 shares have been received, but in no event later than __________, 1996, unless extended. If the Community Offering extends beyond 45 days after the Subscription Expiration Date, persons who have subscribed for Common Shares in the Subscription Offering or in the Community Offering will receive a notice that, until a date specified in the notice, they have the right to affirm, increase, decrease or rescind their subscriptions or orders for Common Shares. Any person who does not affirmatively elect to continue his subscription or order or elects to rescind his subscription or order during such time will have all of his funds promptly refunded with interest. Any person who elects to decrease his subscription or order will have the appropriate portion of his funds promptly refunded with interest. The sale of Common Shares pursuant to subscriptions or orders received in the Offering will be subject to the approval of the Plan by the voting members of Home City at the Special Meeting, to the determination by the Board of Directors of HCFC of the total number of Common -2- <PAGE> 9 Shares to be sold and to the satisfaction or waiver of certain other conditions. See "THE CONVERSION - Subscription Offering; - Community Offering; and - Pricing and Number of Common Shares to be Sold." Assuming 720,000 Common Shares are sold in connection with the Conversion, all directors and executive officers of HCFC and Home City and their Associates intend to purchase an aggregate amount of 75,000 Common Shares in connection with the Conversion, which would constitute 10.4% of the Common Shares sold. The aggregate number of Common Shares proposed to be purchased by the directors, the executive officers and the ESOP is 132,600, which would constitute 18.4% of the Common Shares sold. Such percentages may increase or decrease if more or less than 720,000 Common Shares are sold in the Conversion. See "THE CONVERSION -- Shares to be Purchased by Management Pursuant to Subscription Rights." NON-TRANSFERABILITY OF SUBSCRIPTION RIGHTS Federal regulations prohibit any person from transferring or entering into any agreement or understanding before the completion of the Conversion to transfer the ownership of the subscription rights issued in the Conversion or the shares to be issued upon the exercise of such subscription rights. Persons attempting to violate such provision may lose their rights to purchase Common Shares in the Conversion and may be subject to penalties imposed by the OTS. Each person exercising subscription rights will be required to certify that a purchase of Common Shares is solely for the subscriber's own account and that there is no agreement or understanding regarding the sale or transfer of such Common Shares. PRICING OF THE COMMON SHARES Keller, an independent firm experienced in valuing thrift institutions, has prepared a valuation of the estimated pro forma market value of Home City, as converted. Keller's valuation of the estimated pro forma market value of Home City, as converted, is $7,200,000 as of September 6, 1996 (the "Pro Forma Value"). The Board of Directors reviewed the valuation, including the methodology and the appropriateness of the assumptions used by Keller, and determined that the valuation was not unreasonable. HCFC will issue the Common Shares at a fixed price of $10 per share and, by dividing the price per share into the Pro Forma Value, will determine the number of shares to be issued. Applicable regulations require, however, that Home City establish a range of 15% above and below the Pro Forma Value to allow for fluctuations in the aggregate value of the Common Shares due to changes in the market for thrift shares and other factors from the time of the commencement of the Subscription Offering until the completion of the offering of the Common Shares. Based on the Pro Forma Value of Home City as of September 6, 1996, the Valuation Range is $6,120,000 to $8,280,000, resulting in the offer of between 612,000 and 828,000 Common Shares at a purchase price of $10 per share. The valuation should not be considered a recommendation as to the advisability of purchasing the Common Shares. Keller has assumed and relied upon the accuracy and completeness of the financial information provided by Home City and did not independently value Home City's assets and liabilities. The actual number of Common Shares sold in connection with the Conversion will be determined in the discretion of HCFC's Board of Directors upon the completion of the Subscription Offering and the Community Offering, if any, and will be based upon the final valuation of Home City, as converted. The final valuation will be determined by Keller at the time of the closing of the Offering. If the final valuation is within the Valuation Range, or does not exceed the maximum of the Valuation Range by more than 15%, the number of Common Shares to be issued in connection with the Conversion will not be less than 612,000 or more than 952,200. If, due to changing market conditions, the final valuation is not between the minimum of the Valuation Range and 15% above the maximum of the Valuation Range, subscribers will be given the opportunity to affirm, increase, decrease or rescind their subscriptions. See "THE CONVERSION - Pricing and Number of Common Shares to be Sold." If the final valuation is between the minimum and 15% above the maximum of the Valuation Range, subscribers will not be permitted to increase, decrease or rescind their subscriptions. USE OF PROCEEDS HCFC will retain 50% of the net proceeds from the sale of the Common Shares, or approximately $3,414,000 at the mid-point of the Valuation Range, including the value of a promissory note from the ESOP, which HCFC intends to accept in exchange for the issuance of Common Shares to the ESOP. Such proceeds will be used to fund the Home City Financial Corporation Recognition and Retention Plan (the "RRP") and will be invested in short-term and intermediate-term government securities. The remainder of the net proceeds received from the sale of the Common Shares, $3,414,000 at the mid-point of the Valuation Range, will be invested by HCFC in the capital stock to be issued by Home City to HCFC as a result of the Conversion. Such investment will increase the regulatory capital of Home City and will permit Home City to expand its lending -3- <PAGE> 10 and investment activities. Home City anticipates that such net proceeds initially will be invested in short-term interest-bearing deposits. Eventually, however, Home City will attempt to use such net proceeds to originate mortgage, consumer and other loans in Home City's market area. Home City may also use the proceeds from the Conversion to expand operations through the establishment of a branch office, which would include space for administrative operations. Home City estimates that the cost of establishing a new branch will be approximately $1.25 million, including land acquisition and construction costs. Neither HCFC nor Home City has, however, entered into any agreements concerning the establishment of a branch office. Although HCFC and Home City could use the proceeds from the Conversion to acquire other financial institutions or for HCFC to purchase its own outstanding shares, HCFC and Home City have no current intentions to do so. See "USE OF PROCEEDS." OFFICER AND DIRECTOR BENEFITS In connection with the Conversion, HCFC will establish the ESOP. Common Shares will be purchased by the ESOP in the Conversion with a loan from HCFC. The ESOP intends to repay the loan with discretionary contributions made by Home City to the ESOP. As the loan is repaid, the Common Shares held by the ESOP will be allocated to the accounts of employees of Home City and HCFC, including executive officers. See "MANAGEMENT OF HOME CITY - Employee Stock Ownership Plan." At a meeting of the shareholders of HCFC to be held at least six months after the consummation of the Conversion, the Boards of Directors of HCFC and Home City intend to present to the shareholders for approval both the RRP and the Home City Financial Corporation 1997 Stock Option and Incentive Plan (the "Stock Option Plan"). If the RRP is approved at such meeting, HCFC will form a trust (the "RRP Trust") to which HCFC will contribute sufficient amounts for the purchase by the RRP Trust of an unspecified number of HCFC common shares equal to up to 4% of the number of Common Shares sold in the Conversion. Such HCFC common shares may be purchased after shareholder approval of the RRP in the open market or from the authorized, but unissued, common shares of HCFC, and will be awarded by a committee of the HCFC Board of Directors to the officers and directors of HCFC and Home City for services rendered to Home City. See "MANAGEMENT OF HOME CITY - Stock Option Plan; and - Recognition and Retention Plan and Trust." If the Stock Option Plan is approved at a meeting of shareholders following the Conversion, directors, officers and employees of HCFC and Home City will be granted options to purchase, in the aggregate, a number of Common Shares equal to up to 10% of the Common Shares sold in the Conversion. The exercise price for options granted will equal the HCFC market price on the date of grant. The grant of such options, in combination with purchases of Common Shares by such officers and directors and certain anti-takeover provisions in the Articles of Incorporation and Code of Regulations of HCFC and the Amended Charter of Home City, may facilitate the perpetuation of current management and discourage proxy contests and takeover attempts. See "RESTRICTIONS ON ACQUISITIONS OF HOME CITY AND HCFC AND RELATED ANTI-TAKEOVER PROVISIONS." Assuming the purchase by directors and executive officers of 10.4% of the Common Shares sold at the mid-point of the Valuation Range, the purchase by the RRP of a number of Common Shares equal to 4% of the Common Shares sold in the Conversion, the exercise by directors and executive officers of all options authorized pursuant to the Stock Option Plan and the control by directors and executive officers of the 8% of the Common Shares purchased by the ESOP in the Conversion, directors and executive officers could own or control up to 29.5% of the outstanding common shares of HCFC. See "RISK FACTORS-Controlling Influence of Management and Anti-Takeover Provisions Which May Discourage Sales of Common Shares for Premium Prices." MARKET FOR THE COMMON SHARES There is presently no market for the Common Shares. The aggregate offering price for the Common Shares is based upon an independent appraisal of Home City. The appraisal is not a recommendation as to the advisability of purchasing Common Shares. See "THE CONVERSION - Pricing and Number of Common Shares to be Sold." No assurance can be given that persons purchasing Common Shares will thereafter be able to sell such shares at a price at or above the $10 offering price. HCFC has received approval to have the Common Shares quoted on The Nasdaq Small Cap Market under the symbol "__________" upon the closing of the Conversion, subject to certain conditions which HCFC and Home City believe will be satisfied, although no assurance can be provided that the conditions will be met. In connection with such approval, Webb has informed Home City that Keefe, Bruyette & Woods, Inc., intends to make a market in the Common Shares. No assurance can be given, however, that an active or liquid market for the Common Shares will develop after the completion of the Conversion or, if such a market does develop, that such market will continue. Investors should consider, therefore, the potentially illiquid and long-term nature of an investment in the Common Shares. See "RISK FACTORS - Market for the Common Shares." -4- <PAGE> 11 DIVIDEND POLICY The declaration and payment of dividends by HCFC will be subject to the discretion of the Board of Directors of HCFC and will be based on the earnings and financial condition of HCFC and general economic conditions. Other than the earnings on the investment of proceeds retained by HCFC, the only source of income of HCFC will be dividends periodically declared and paid by the Board of Directors of Home City on the common shares of Home City owned by HCFC. The payment of dividends by Home City to HCFC will be subject to various regulatory restrictions. On a pro forma basis, as of June 30, 1996, assuming (i) receipt by Home City of $3.4 million of net conversion proceeds, (ii) the investment of such net proceeds in assets having a risk weighting of 20% and (iii) the establishment of a Liquidation Account (hereinafter defined) in the amount of $5.4 million (the regulatory capital of Home City at June 30, 1996), Home City would have $4.19 million available for the payment of dividends to HCFC. In an effort to manage the capital of HCFC, the Board of Directors of HCFC may determine that the payment of a regular or a special cash dividend or both may be prudent. No assurance can be given, however, that any dividend will be declared, what the amount will be or whether such dividends, if declared, will continue in the future. See "DIVIDEND POLICY." INVESTMENT RISKS Special attention should be given to the matters discussed under "RISK FACTORS," beginning on page 9, prior to investing in the Common Shares. -5- <PAGE> 12 SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA The following tables set forth certain information concerning the consolidated financial condition, earnings and other data regarding Home City at the dates and for the periods indicated. The financial information should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere herein. In addition, the financial information should be read in conjunction with the "Recent Developments" section, beginning on page 31, for the impact of the special SAIF assessment on Home City's capital and earnings for the three months ended September 30, 1996. However, in the opinion of management of Home City, all adjustments necessary for a fair presentation of such financial data have been included. All such adjustments are of a normal recurring nature. SELECTED FINANCIAL CONDITION AND OTHER DATA: <TABLE> <CAPTION> At June 30, ------------------------------------------------------------------- 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- (Dollars in thousands) <S> <C> <C> <C> <C> <C> Total amount of: Assets $55,728 $48,578 $39,680 $40,769 $42,325 Cash and cash equivalents (1) 1,843 2,377 987 3,358 5,889 Investment securities available for sale 2,188 259 314 1,398 20 Investment securities held to maturity -- 1,901 2,098 2,473 4,484 Mortgage-backed securities available for sale 2,975 -- -- -- -- Mortgage-backed securities held to maturity -- 3,667 4,257 5,314 2,064 Loans receivable - net 45,225 38,960 31,103 28,648 28,875 FHLB stock - at cost 394 288 248 216 205 Deposits 47,174 40,936 34,816 36,688 39,398 FHLB advances 2,903 2,618 424 460 -- Retained earnings, substantially restricted-net (2) 5,271 4,757 4,202 3,497 2,832 Number of offices, all full service 1 1 1 1 1 </TABLE> <TABLE> <CAPTION> At June 30, --------------------------------------------------------------- SUMMARY OF EARNINGS: 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- (In thousands) <S> <C> <C> <C> <C> <C> Interest income $4,507 $3,835 $3,542 $3,565 $3,439 Interest expense 2,542 1,942 1,446 1,710 2,370 ------ ------ ------ ------ ------ Net interest income 1,965 1,893 2,096 1,855 1,069 Provision for loan losses 50 109 113 83 52 ------ ------ ------ ------ ------ Net interest income after provision for loan losses 1,915 1,784 1,983 1,772 1,017 Noninterest income 58 9 12 44 1 Noninterest expense 1,216 998 923 727 845 ------ ------ ------ ------ ------ Income before income tax 757 795 1,072 1,089 173 Income tax expense (2) 243 240 367 424 73 ------ ------ ------ ------ ------ Net income (2) $ 514 $ 555 $ 705 $ 665 $ 100 ====== ====== ====== ====== ====== </TABLE> - --------------------------- (Footnotes on next page) -6- <PAGE> 13 <TABLE> <CAPTION> At or for the year ended June 30, ----------------------------------------------------------- SELECTED FINANCIAL RATIOS: 1996 1995 1994 1993 1992 ------ ------ ------ ----- ------ <S> <C> <C> <C> <C> <C> Return on assets (3) 0.98% 1.24% 1.69% 1.66% 0.26% Return on equity (4) 10.46 12.20 17.23 21.08 3.52 Interest rate spread (5) 3.42 3.95 4.88 4.58 3.12 Net interest margin (6) 3.86 4.36 5.28 4.81 2.92 Noninterest expense to average assets (7) 2.31 2.22 2.28 1.82 2.21 Average equity to average assets 9.55 10.21 10.09 7.88 7.42 Equity to assets at period end 9.69 10.06 10.87 8.58 6.69 Nonperforming loans to total loans 0.54 0.53 0.11 1.35 0.17 Nonperforming assets to total assets (8) 0.44 0.43 0.09 0.96 0.12 Allowance for loan losses to total loans 0.80 0.82 0.74 0.69 0.38 Allowance for loan losses to nonperforming loans 146.56 154.11 673.53 50.77 222.00 Net charge-offs to average loans 0.02 0.05 0.27 (0.01) - </TABLE> - ---------------------------- (1) Includes cash and amounts due from depository institutions and interest-bearing deposits in other financial institutions. (2) Effective January 1, 1993, Home City adopted Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". The effect of adopting SFAS No. 109 on income tax expense in 1994 and 1993 was not material. (3) Net income divided by average total assets. (4) Net income divided by average total equity. (5) Average yield on interest-earning assets less average cost of interest-bearing liabilities. (6) Net interest income as a percentage of average interest-earning assets. (7) Noninterest expense divided by average total assets. (8) Nonperforming assets consist of nonaccruing loans, accruing loans 90 days or more past due and real estate acquired (or deemed acquired) in foreclosure proceedings or in lieu thereof. See "THE BUSINESS OF HOME CITY - Delinquent Loans, Nonperforming Assets and Classified Assets." -7- <PAGE> 14 REGULATORY CAPITAL COMPLIANCE The following table sets forth the historical and pro forma regulatory capital of Home City at June 30, 1996, based on the receipt of proceeds for the number of Common Shares indicated, less estimated expenses of $357,000, $372,000, $387,000 and $404,000 at the minimum, mid-point, maximum and maximum, as adjusted, of the Valuation Range, respectively, assuming all of such shares are sold in the Subscription Offering. <TABLE> <CAPTION> Pro forma capital at June 30, 1996, assuming the sale of ----------------------------------------------------------------------------- 612,000 720,000 828,000 952,200 Common Shares Common Shares Common Shares Common Shares Historical at (offering price (offering price (offering price (offering price June 30, 1996 of $10 per of $10 per of $10 per of $10 per (1) share) share) share) share) ---------------- ---------------- ---------------- ---------------- ----------------- Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- (Dollars in thousands) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Capital under generally accepted accounting principles, before $5,398 9.68% $7,545 13.07% $7,545 13.67% $8,351 14.27% $8,847 14.99% adjustments (2)(3) Current tangible capital (2)(3): Capital level $5,271 9.48% $7,418 12.85% $7,821 13.45% $8,224 14.05% $8,720 14.77% Requirement 834 1.50 866 1.50 872 1.50 878 1.50 886 1.50 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Excess $4,437 7. 98% $6,552 11.35% $6,949 11.95% $7,346 12.55% $7,834 13.27% ====== ===== ====== ===== ====== ===== ====== ===== ====== ===== Current core capital (2)(3): Capital level $5,271 9.48% $7,418 12.85% $7,821 13.45% $8,224 14.88% $8,720 15.83% Requirement 1,668 3.00 1,732 3.00 1,744 3.00 1,756 3.00 1,771 3.00 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Excess $3,603 6.48% $5,686 9.85% $6,077 10.45% $6,468 11.88% $6,949 11.77% ====== ===== ====== ===== ====== ===== ====== ===== ====== ===== Current risk-based capital (4): Capital level $5,633 18.77% $7,780 25.57% $8,183 26.82% $8,586 28.07% $9,082 29.59% Requirement 2,400 8.00 2,434 8.00 2,441 8.00 2,447 8.00 2,455 8.00 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Excess $3,233 10.77% $5,346 17.57% $5,742 18.82% $6,139 20.07% $6,627 21.59% ====== ===== ====== ===== ====== ===== ====== ===== ====== ===== </TABLE> - ----------------------------------- (1) See Note N of the Notes to Financial Statements. (2) Pro forma amounts assume Home City will receive 50% of the conversion proceeds before reduction for the ESOP loan. Also reflects a deduction from capital for unearned ESOP shares equal to 8% of the shares offered and unearned RRP shares equal to 4% of the shares offered. (3) Historical tangible and core capital percentages are based on adjusted total assets of $56.0 million. Pro forma tangible and core capital percentages are based on adjusted total assets of $52.7 million, $58.1 million, $58.5 million, and $59.0 million, which assumes the receipt by Home City of net proceeds from the sale of Common Shares of $2.9 million, $3.4 million, $3.9 million and $4.6 million, at the minimum, mid-point, maximum and maximum, as adjusted, of the Valuation Range, respectively. The OTS has proposed a new regulation which would increase the core capital requirement to between 4% and 5% of adjusted total assets, with the specific requirement to be determined on a case-by-case basis. See "REGULATION - OTS Regulations -- Regulatory Capital Requirements." (4) Historical risk-based capital percentages are based on risk-weighted assets of $30.0 million. Pro forma risk-based capital percentages are based on the receipt by Home City of net proceeds of $2.9 million, $3.4 million, $3.9 million and $4.6 million, and assumes the net proceeds will be invested in short-term interest-bearing deposits having a risk weighting of 20%. -8- <PAGE> 15
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES TO THE "COMPANY" OR "PRIME" INCLUDE PRIMECO INC., A TEXAS CORPORATION AND A WHOLLY OWNED SUBSIDIARY OF THE COMPANY ("PRIMECO"). UNLESS THE CONTEXT OTHERWISE REQUIRES, THE INFORMATION CONTAINED HEREIN (I) GIVES EFFECT TO A 18.15 FOR ONE SPLIT OF THE COMMON STOCK EFFECTIVE ON OCTOBER 9, 1996, AND THE CONVERSION OF ALL OUTSTANDING CLASS A COMMON STOCK, CLASS C COMMON STOCK AND CLASS D COMMON STOCK OF THE COMPANY INTO AN EQUIVALENT NUMBER OF SHARES OF COMMON STOCK EFFECTIVE AS OF THE CLOSING OF THE OFFERING, AND (II) ASSUMES THAT THE OVER-ALLOTMENT OPTION IS NOT EXERCISED. SEE "UNDERWRITING." THE COMPANY GENERAL Prime is the second largest rental equipment company in the United States, based upon 1995 rental equipment revenues, and currently operates 101 rental equipment yards in 13 states. The Company rents over 100 different types of equipment, such as aerial manlifts, portable air compressors, forklifts and light earth moving equipment and small equipment such as lawnmowers, plumbing equipment and hand tools, to commercial construction, industrial and residential users. The Company also sells complementary parts and merchandise and used equipment, and acts as a distributor of new equipment on behalf of nationally known equipment manufacturers. At September 30, 1996, the Company had an equipment rental fleet with a book value of $255.8 million ($360.7 million at original price) comprised of over 40,000 pieces of equipment. Over the period from 1991 to 1995, Prime's total revenues increased from $146.2 million to $242.8 million, a compound annual growth rate of 13.5%. Total 1995 revenues on a pro forma basis for two acquisitions completed in 1996 would have been $307.2 million, an increase of 45% over the 1994 historical result. Prime reported a net loss of $8.7 million in 1995 compared to net income of $12.1 million in the year ended December 31, 1994. See "Management's Discussion and Analysis of Financial Condition and Operations." Prime seeks to be the market leader in the regions it services while maximizing its profitability and cash flow. The Company attributes its success to its operating strategy which includes, among other things, a focus on customer service, a modern and diverse rental fleet, and a proprietary point-of-sale ("POS") system. Management believes that the consistent delivery of high quality service, including 24 hour on-call maintenance, repair and support services, differentiates Prime from its competitors. Prime believes it also offers one of the most comprehensive and well maintained fleets of equipment in the rental equipment industry. The Company employs an extensive preventive maintenance program for its rental fleet, increasing the dependability, useful life and resale value of the equipment. In addition, the Company's proprietary POS system enables each rental equipment yard manager on a real-time basis to search the Company's entire rental fleet for needed equipment, determine its location and arrange for delivery to customers using the Company's radio-dispatched fleet of trucks and trailers and independent carriers. The Company believes that its extensive, well maintained rental fleet, coupled with its ability to redeploy equipment rapidly and efficiently among its yards, allows it to optimize fleet utilization and return on fleet investment. Prime has a diverse base of over 40,000 active customers, ranging from "Fortune 500" companies to small contractors and homeowners. Commercial construction and industrial customers accounted for approximately 50% and 40%, respectively, of the Company's total revenues in 1995, with subcontractors, homeowners and other customers generating the remaining 10%. Primeco was purchased from W.R. Grace & Co. in 1989 by Compagnie Francaise de l'Afrique Occidentale, a French company which, in turn, was acquired by an affiliate of Artemis S.A. ("Artemis") in 1993. In December 1994, affiliates of Investcorp S.A. ("Investcorp") and a group of international investors formed Prime Service, Inc. to acquire Primeco from Artemis (the "1994 Acquisition"). PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES TO THE "COMPANY" OR "PRIME" INCLUDE PRIMECO INC., A TEXAS CORPORATION AND A WHOLLY OWNED SUBSIDIARY OF THE COMPANY ("PRIMECO"). UNLESS THE CONTEXT OTHERWISE REQUIRES, THE INFORMATION CONTAINED HEREIN (I) GIVES EFFECT TO A 18.15 FOR ONE SPLIT OF THE COMMON STOCK EFFECTIVE ON OCTOBER 9, 1996, AND THE CONVERSION OF ALL OUTSTANDING CLASS A COMMON STOCK, CLASS C COMMON STOCK AND CLASS D COMMON STOCK OF THE COMPANY INTO AN EQUIVALENT NUMBER OF SHARES OF COMMON STOCK EFFECTIVE AS OF THE CLOSING OF THE OFFERING, AND (II) ASSUMES THAT THE OVER-ALLOTMENT OPTION IS NOT EXERCISED. SEE "SUBSCRIPTION AND SALE." THE COMPANY GENERAL Prime is the second largest rental equipment company in the United States, based upon 1995 rental equipment revenues, and currently operates 101 rental equipment yards in 13 states. The Company rents over 100 different types of equipment, such as aerial manlifts, portable air compressors, forklifts and light earth moving equipment and small equipment such as lawnmowers, plumbing equipment and hand tools, to commercial construction, industrial and residential users. The Company also sells complementary parts and merchandise and used equipment, and acts as a distributor of new equipment on behalf of nationally known equipment manufacturers. At September 30, 1996, the Company had an equipment rental fleet with a book value of $257.1 million ($360.7 million at original price) comprised of over 40,000 pieces of equipment. Over the period from 1991 to 1995, Prime's total revenues increased from $146.2 million to $242.8 million, a compound annual growth rate of 13.5%. Total 1995 revenues on a pro forma basis for two acquisitions completed in 1996 would have been $307.2 million, an increase of 45% over the 1994 historical result. Due to the Company's substantial financial leverage and special charges, Prime reported a net loss of $8.7 million in 1995 compared to net income of $13.9 million in the year ended December 31, 1994. Prime seeks to be the market leader in the regions it services while maximizing its profitability and cash flow. The Company attributes its success to its operating strategy which includes, among other things, a focus on customer service, a modern and diverse rental fleet, and a proprietary point-of-sale ("POS") system. Management believes that the consistent delivery of high quality service, including 24 hour on-call maintenance, repair and support services, differentiates Prime from its competitors. Prime believes it also offers one of the most comprehensive and well maintained fleets of equipment in the rental equipment industry. The Company employs an extensive preventive maintenance program for its rental fleet, increasing the dependability, useful life and resale value of the equipment. In addition, the Company's proprietary POS system enables each rental equipment yard manager on a real-time basis to search the Company's entire rental fleet for needed equipment, determine its location and arrange for delivery to customers using the Company's radio-dispatched fleet of trucks and trailers and independent carriers. The Company believes that its extensive, well maintained rental fleet, coupled with its ability to redeploy equipment rapidly and efficiently among its yards, allows it to optimize fleet utilization and return on fleet investment. Prime has a diverse base of over 40,000 active customers, ranging from "Fortune 500" companies to small contractors and homeowners. Commercial construction and industrial customers accounted for approximately 50% and 40%, respectively, of the Company's total revenues in 1995, with subcontractors, homeowners and other customers generating the remaining 10%. Primeco was purchased from W.R. Grace & Co. in 1989 by Compagnie Francaise de l'Afrique Occidentale, a French company which, in turn, was acquired by an affiliate of Artemis S.A. ("Artemis") in 1993. In December 1994, affiliates of Investcorp S.A. ("Investcorp") and a group of international investors formed Prime Service, Inc. to acquire Primeco from Artemis (the "1994 Acquisition"). INDUSTRY According to a survey conducted for the Associated Equipment Distributors, an industry trade association ("AED"), the equipment rental industry grew from approximately $600 million in 1982 to approximately $13 billion in 1993, the last period for which such data are available. This increase represents a compound annual growth rate of 32%. In addition, according to the Rental Equipment Register, an industry trade publication ("RER"), rental revenues for the top 100 equipment rental companies increased approximately 25% to $2.5 billion in 1995 from approximately $2.0 billion in 1994. Management believes that this growth reflects, in part, increased outsourcing trends by industrial corporations related to an increased emphasis on minimizing capital invested to purchase low usage equipment as well as reducing the labor costs associated with maintaining and servicing such equipment. While equipment users traditionally have rented equipment for specific purposes, such as supplementing capacity during peak periods in connection with special projects, the convenience and cost-saving factors of utilizing rental equipment have encouraged customers to look to suppliers such as the Company as ongoing comprehensive sources of equipment. Management believes that demand for rental equipment by the industrial segment will continue to increase as these industrial companies continue to outsource many non-core operations. According to recent surveys conducted by the CIT Group, commercial construction contractors intend to increase the percentage of equipment they rent without a purchase option to an estimated 8% of their total equipment requirements in 1996 from less than 5% in 1994. The rental equipment industry is highly fragmented and primarily consists of a large number of relatively small, independent businesses serving discrete local markets and a small number of multi-yard regional and multi-regional operators. Management believes that the rental equipment industry offers substantial consolidation opportunities for large, well-capitalized rental businesses such as the Company. Relative to smaller competitors, multi-regional operators such as the Company benefit from several competitive advantages, including purchasing power, the ability to service national accounts, the ability to transfer equipment among rental equipment yards in response to changing patterns of customer demand and sophisticated management information systems. In addition, multi-regional operators such as the Company are less sensitive to localized cyclical downturns. STRATEGY Prime's strategy is to become the largest and most profitable rental equipment company in the United States. Since the 1994 Acquisition, the Company has pursued an aggressive growth strategy primarily by: (i) increasing the rental fleet at its existing rental equipment yards to satisfy current and anticipated demands; (ii) expanding its rental equipment yard network both in existing and new geographic markets by either acquiring existing yards or, to a lesser extent, opening new yards; (iii) increasing revenues from industrial customers; and (iv) maximizing the utilization and profitability of its rental fleet. The Company plans to continue implementing these strategies, with increased emphasis on expanding its rental equipment yard network and increasing its revenues from industrial customers. INCREASE RENTAL FLEET AT EXISTING RENTAL EQUIPMENT YARDS. From 1991 to 1995, Prime experienced a significant increase in the demand for its rental equipment, as evidenced by a decline in Prime's percentage of equipment not rented within the last 90 days (non-rental rate) from an average monthly rate of 7.0% in 1991 to an average monthly rate of 3.4% in 1994, 3.6% in 1995 and 3.5% for the first nine months of 1996, despite increasing the rental fleet (based on average original price) from $172.9 million in 1991 to $335.4 million for the nine month period ended September 30, 1996. The Company targets a non-rental rate of 5%, which it believes minimizes lost revenue opportunities resulting from having insufficient equipment to meet demand, while maximizing the Company's return on equity. Prior to the 1994 Acquisition, the Company's capital expenditure program was limited by the Company's prior owners. From 1991 to 1994, the Company did not make any material acquisitions and purchased an aggregate of $33.7 million of equipment (exclusive of amounts required to replace used equipment sold in the ordinary course of business and inclusive of rental equipment purchases for new yards). Despite revenues increasing during INDUSTRY According to a survey conducted for the Associated Equipment Distributors, an industry trade association ("AED"), the equipment rental industry grew from approximately $600 million in 1982 to approximately $13 billion in 1993, the last period for which such data are available. This increase represents a compound annual growth rate of 32%. In addition, according to the Rental Equipment Register, an industry trade publication ("RER"), rental revenues for the top 100 equipment rental companies increased approximately 25% to $2.5 billion in 1995 from approximately $2.0 billion in 1994. Management believes that this growth reflects, in part, increased outsourcing trends by industrial corporations related to an increased emphasis on minimizing capital invested to purchase low usage equipment as well as reducing the labor costs associated with maintaining and servicing such equipment. While equipment users traditionally have rented equipment for specific purposes, such as supplementing capacity during peak periods in connection with special projects, the convenience and cost-saving factors of utilizing rental equipment have encouraged customers to look to suppliers such as the Company as ongoing comprehensive sources of equipment. Management believes that demand for rental equipment by the industrial segment will continue to increase as these industrial companies continue to outsource many non-core operations. According to recent surveys conducted by the CIT Group, commercial construction contractors intend to increase the percentage of equipment they rent without a purchase option to an estimated 8% of their total equipment requirements in 1996 from less than 5% in 1994. The rental equipment industry is highly fragmented and primarily consists of a large number of relatively small, independent businesses serving discrete local markets and a small number of multi-yard regional and multi-regional operators. Management believes that the rental equipment industry offers substantial consolidation opportunities for large, well-capitalized rental businesses such as the Company. Relative to smaller competitors, multi-regional operators such as the Company benefit from several competitive advantages, including purchasing power, the ability to service national accounts, the ability to transfer equipment among rental equipment yards in response to changing patterns of customer demand and sophisticated management information systems. In addition, multi-regional operators such as the Company are less sensitive to localized cyclical downturns. STRATEGY Prime's strategy is to become the largest and most profitable rental equipment company in the United States. Since the 1994 Acquisition, the Company has pursued an aggressive growth strategy primarily by: (i) increasing the rental fleet at its existing rental equipment yards to satisfy current and anticipated demands; (ii) expanding its rental equipment yard network both in existing and new geographic markets by either acquiring existing yards or, to a lesser extent, opening new yards; (iii) increasing revenues from industrial customers; and (iv) maximizing the utilization and profitability of its rental fleet. The Company plans to continue implementing these strategies, with increased emphasis on expanding its rental equipment yard network and increasing its revenues from industrial customers. INCREASE RENTAL FLEET AT EXISTING RENTAL EQUIPMENT YARDS. From 1991 to 1995, Prime experienced a significant increase in the demand for its rental equipment, as evidenced by a decline in Prime's percentage of equipment not rented within the last 90 days (non-rental rate) from an average monthly rate of 7.0% in 1991 to an average monthly rate of 3.4% in 1994, 3.6% in 1995 and 3.5% for the first nine months of 1996, despite increasing the rental fleet (based on average original price) from $172.9 million in 1991 to $335.4 million for the nine month period ended September 30, 1996. The Company targets a non-rental rate of 5%, which it believes minimizes lost revenue opportunities resulting from having insufficient equipment to meet demand, while maximizing the Company's return on equity. Prior to the 1994 Acquisition, the Company's capital expenditure program was limited by the Company's prior owners. From 1991 to 1994, the Company did not make any material acquisitions and purchased an aggregate of $33.7 million of equipment (exclusive of amounts required to replace used equipment sold in the ordinary course of business and inclusive of rental equipment purchases for new yards). Despite revenues increasing during this period from $146.2 million in 1991 to $211.9 million in 1994, management believes that its capital expenditures program and resulting rental equipment fleet were not adequate to meet the market demand. Since the 1994 Acquisition, the Company has significantly increased its rental fleet by purchasing approximately $56.3 million of equipment through December 31, 1995, and $31.0 million during the nine months ended September 30, 1996 (in each case exclusive of amounts required to replace used equipment sold in the ordinary course of business and recent acquisitions, but inclusive of rental equipment purchases for new yards). Management expects its total 1996 rental equipment purchases to be $42.9 million (exclusive of amounts required to replace used equipment sold in the ordinary course of business and recent acquisitions, but inclusive of rental equipment purchases for new yards). EXPAND RENTAL EQUIPMENT YARD NETWORK. Prime intends to selectively expand its network of rental equipment yards through a combination of acquisitions of suitable existing rental equipment yards and to a lesser extent by opening new rental equipment yards. Management believes that its management information systems, size and operating expertise provide a competitive advantage in making acquisitions as these strengths allow Prime to (i) integrate targets quickly into its information and operating structure, (ii) realize significant synergies in the form of reduced overhead and lower cost of goods through greater purchasing power, (iii) enhance revenue by supplying acquired yards with additional equipment to optimize the rental fleet mix and add new business lines at those yards and (iv) enhance revenue by expanding coverage of national accounts. The Company primarily targets acquisitions of stable equipment businesses in new or existing markets where an existing owner has limited resources to expand the rental equipment fleet. Pursuant to this strategy, in February 1996 Prime acquired Vibroplant U.S., Inc. (which operated as American Hi-Lift Corporation, "American Hi-Lift"), adding a net of 12 yards in seven states, and in July 1996 Prime acquired the assets of Alpine Equipment Rentals & Supply Company, Inc. ("Alpine"), adding a net six yards in the state of Washington and expanding Prime's presence in the Northwest (collectively, the "1996 Acquisitions"). In the case of the 1996 Acquisitions, Prime completed the integration of the acquired equipment yards and the acquired fleet into the Company's management information systems on the closing date of each acquisition. In connection with the integration of the business of American Hi-Lift, Prime's management reduced, on an annualized basis, the selling, general, administrative and other expenses associated with American Hi-Lift by approximately $5.0 million, from $15.2 million incurred by American Hi-Lift for the year ended March 31, 1995. Prime is currently considering several potential acquisitions of equipment rental companies, although Prime does not currently have any understandings or agreements with respect to potential acquisitions. INCREASE REVENUES FROM INDUSTRIAL CUSTOMERS. Prime believes that it is one of the largest suppliers of rental equipment to industrial companies in the southern United States, based upon revenues from equipment rentals to such customers. The demand for rental equipment from Prime's industrial customers generally has been less sensitive to economic cycles than that of its commercial and residential customers and is, therefore, more stable. Management attributes this relative stability to the fact that a major part of rental equipment use by industrial customers is related to ongoing and periodic maintenance work on existing facilities. Since many of the facilities operate 24 hours a day, such maintenance is essential to industrial customers in order to avoid costly shutdowns that result from equipment failures. Prime has taken a number of steps to increase revenues from industrial customers, including focusing its national marketing program on the industrial market segment and offering services that meet the specific needs of industrial customers such as its Integrated Rental Management-TM- program. Under its Integrated Rental Management-TM- program, Prime typically enters into exclusive contracts with large industrial customers, generally "Fortune 500" companies, to supply rental equipment, to provide 24 hours a day maintenance and repair services, and to provide sophisticated equipment management services required for a particular facility or facilities. Prime believes that it is well-positioned to take advantage of the trend of companies outsourcing their rental equipment needs due to its formalized Integrated Rental Management-TM- program, customized POS system and strong national account relationships. this period from $146.2 million in 1991 to $211.9 million in 1994, management believes that its capital expenditures program and resulting rental equipment fleet were not adequate to meet the market demand. Since the 1994 Acquisition, the Company has significantly increased its rental fleet by purchasing approximately $56.3 million of equipment through December 31, 1995, and $31.0 million during the nine months ended September 30, 1996 (in each case exclusive of amounts required to replace used equipment sold in the ordinary course of business and recent acquisitions, but inclusive of rental equipment purchases for new yards). Management expects its total 1996 rental equipment purchases to be $42.9 million (exclusive of amounts required to replace used equipment sold in the ordinary course of business and recent acquisitions, but inclusive of rental equipment purchases for new yards). EXPAND RENTAL EQUIPMENT YARD NETWORK. Prime intends to selectively expand its network of rental equipment yards through a combination of acquisitions of suitable existing rental equipment yards and to a lesser extent by opening new rental equipment yards. Management believes that its management information systems, size and operating expertise provide a competitive advantage in making acquisitions as these strengths allow Prime to (i) integrate targets quickly into its information and operating structure, (ii) realize significant synergies in the form of reduced overhead and lower cost of goods through greater purchasing power, (iii) enhance revenue by supplying acquired yards with additional equipment to optimize the rental fleet mix and add new business lines at those yards and (iv) enhance revenue by expanding coverage of national accounts. The Company primarily targets acquisitions of stable equipment businesses in new or existing markets where an existing owner has limited resources to expand the rental equipment fleet. Pursuant to this strategy, in February 1996 Prime acquired Vibroplant U.S., Inc. (operating as American Hi-Lift Corporation, "American Hi-Lift"), adding a net of 12 yards in seven states, and in July 1996 Prime acquired the assets of Alpine Equipment Rentals & Supply Company, Inc. ("Alpine"), adding a net six yards in the state of Washington and expanding Prime's presence in the Northwest (collectively, the "1996 Acquisitions"). In the case of the 1996 Acquisitions, Prime completed the integration of the acquired equipment yards and the acquired fleet into the Company's management information systems on the closing date of each acquisition. In connection with the integration of the business of American Hi-Lift, Prime's management reduced, on an annualized basis, the selling, general, administrative and other expenses associated with American Hi-Lift by approximately $5 million, from $15.2 million incurred by American Hi-Lift for the year ended March 31, 1995. Prime is currently considering several potential acquisitions of equipment rental companies, although Prime does not currently have any understandings or agreements with respect to potential acquisitions. INCREASE REVENUES FROM INDUSTRIAL CUSTOMERS. Prime believes that it is one of the largest suppliers of rental equipment to industrial companies in the southern United States, based upon revenues from equipment rentals to such customers. The demand for rental equipment from Prime's industrial customers generally has been less sensitive to economic cycles than that of its commercial and residential customers and is, therefore, more stable. Management attributes this relative stability to the fact that a major part of rental equipment use by industrial customers is related to ongoing and periodic maintenance work on existing facilities. Since many of the facilities operate 24 hours a day, such maintenance is essential to industrial customers in order to avoid costly shutdowns that result from equipment failures. Prime has taken a number of steps to increase revenues from industrial customers, including focusing its national marketing program on the industrial market segment and offering services that meet the specific needs of industrial customers such as its Integrated Rental Management-TM- program. Under its Integrated Rental Management-TM- program, Prime typically enters into exclusive contracts with large industrial customers, generally "Fortune 500" companies, to supply rental equipment, to provide 24 hours a day maintenance and repair services, and to provide sophisticated equipment management services required for a particular facility or facilities. Prime believes that it is well-positioned to take advantage of the trend of companies outsourcing their rental equipment needs due to its formalized Integrated Rental Management-TM- program, customized POS system and strong national account relationships. MAXIMIZE UTILIZATION AND PROFITABILITY OF RENTAL FLEET. Prime believes that it maintains customer loyalty by maintaining a diverse modern fleet. As of September 30, 1996, the average age of Prime's rental fleet was 36 months. Prime's proprietary POS system allows it to monitor the demand for and actual usage of its equipment on a real-time basis. The Company, taking advantage of the POS system and its presence in numerous markets, can allocate new equipment and transfer current equipment to yards with high rental activity. In addition, if utilization of equipment declines, management is able to quickly react by decreasing purchases of new equipment or replacement of used rental equipment sold. The Company believes its comprehensive preventative maintenance program allows it to increase the useful life of its equipment and obtain premium values when it is sold. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company.......... 7,250,000 Common Stock outstanding immediately after the Offering............................... 27,991,544(1) Use of proceeds to the Company............... The net proceeds to the Company from the Offering will be used to reduce outstanding indebtedness of the Company. Prime will not receive any proceeds from the sale by the Selling Stockholders. Dividend policy.............................. The Company does not anticipate paying any dividends. Proposed NYSE Symbol......................... "PRS" </TABLE> - ------------------------ (1) Excludes (i) 606,392 shares subject to options to be outstanding upon the consummation of the Offering and (ii) 1,153,335 additional shares reserved for issuance pursuant to options available for grant under the Company's Management Stock Incentive Plan (the "Old Stock Plan") and the 1996 Management Stock Incentive Plan (the "New Stock Plan," together with the Old Stock Plan, the "Stock Plans"). See "Management--Management Stock Incentive Plans."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001022454_rtc_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001022454_rtc_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b709f57dfbdfec68529ce148710ef99989e0a125
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. EACH PROSPECTIVE INVESTOR IS URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY. UNLESS OTHERWISE INDICATED HEREIN, ALL DOLLAR AMOUNTS ARE IN UNITES STATES DOLLARS. THE COMPANY RTC Cruises, Ltd. (the "Company") is a development stage enterprise that has been formed to operate and market a premium class cruise ship and land tours in French Polynesia, popularly known as Tahiti, on a year round basis. The Company, which will operate under the name Royal Tahitian Cruises, plans to offer seven day cruises between the islands of Tahiti, Raiatea, Tahaa, Bora, Huahine, Rangiaroa, and Moorea. The Company will also offer three, four and seven day land vacation packages in conjunction with its cruises. The Company's business strategy is to emphasize its French Polynesian destination as well as the luxury and convenience of travelling by cruise ship. The Company believes that French Polynesia is an ideal location to establish a cruise line. Tahiti has a strong name recognition with the public and possesses a sub-tropical climate with exotic islands relatively untouched by modern development. Distances between island destinations are short, which will be traveled at night to afford passengers the opportunity to experience the various islands and to partake in onshore activities during the day. Although the Company is aware of at least two companies that presently offer cruise services in Tahiti and one ship presently under construction by another company, the Company believes that the Tahitian market is underdeveloped and that, in any event, the Company will be able to compete effectively against these better capitalized and established competitors. The Company, however, will periodically review its cruise itinerary and may deploy its vessel in other areas if financially attractive opportunities develop. Passenger fares for a seven day cruise are expected to range from $1,600 to $2,400 (not including airfare), although the Company may in the future be required to adjust these fares due to competitive pressures. The Company will perform all marketing services for the cruise line. The Company believes that by operating year round in a single geographical area it will develop a strong market awareness of its product and will avoid the expenses associated with multiple destination programs that require the repositioning of the vessel from one geographic region to another. The Company intends to charter a cruise ship from Concorde Shipping, Ltd., a Cayman Islands, British West Indies corporation in which Douglas H. MacGarvey and Thomas G. Rader, directors and the principal stockholders of the Company, own 50% of the outstanding stock, and commence operations upon the completion of this Offering. The remaining 50% of the stock of Concorde is owned by Herbert Peintner, who was granted options by Messrs. MacGarvey and Rader to purchase an aggregate of 1,065,333 shares of Common Stock from them. The Company may also attempt to charter or acquire additional cruise ships and to engage in other cruise line related activities if the Company is successful in completing this Offering and thereafter obtains the necessary funds either from operations or from additional financing of which there can be no assurance. See "Proposed Business-Possible Additional Activities." The Company has not yet received a license from the Government of French Polynesia to operate a passenger cruise vessel in French Polynesia, although the Company has received a commitment from such Government to issue such a license for a period of five years from the commencement of the Company's passenger cruise operations if the Company complies with certain conditions. See "Proposed Business-License and Description of Tahiti." The Company intends to charter its passenger cruise vessel from a Company in which the principal stockholders of the Company own 50% of the Stock. Such affiliated Company does not presently own or charter a vessel which is available for use by the Company. The estimated net proceeds of this Offering are expected to be sufficient to finance the Company's currently contemplated operations for a period of approximately six months from the date that the Company obtains a passenger cruise vessel from its affiliated company and is required to commence charter payments. Further, the Company requires a passenger load factor of 65% of capacity in order to generate sufficient revenues from operations to cover operating expenses. See Risk Factor Nos. 2, 3, 6, and 9, "Use of Proceeds" and Management's Discussion and Analysis of Financial Condition-Liquidity." The Company was originally incorporated in July 1994 as a Florida corporation with the name of Royal Tahitian Cruises, Inc. and was continued in the Cayman Islands, British West Indies on August 23, 1996. Its principal executive offices are presently located at 1390 South Dixie Highway, Suite 2114, Coral Gables, Florida 33146, and its telephone number is (305) 663-9072.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001022536_odd-job_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001022536_odd-job_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c72628a674f12746f48f84e72aeb9cd8fbd41b43
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. Unless indicated otherwise, the information contained in this Prospectus: (i) assumes that the Underwriters' over-allotment option is not exercised; and (ii) has been adjusted to reflect the 1996 Restructuring described in "Significant Corporate Transactions -- 1996 Restructuring." The Company's fiscal year ended December 31 in 1991 and 1992 and January 31 in 1994, 1995 and 1996. References to fiscal years by date refer to the fiscal year beginning in January or February of that calendar year: for example, "fiscal year 1995" began on February 1, 1995 and ended on January 31, 1996. Commencing with fiscal 1996, the Company converted to a 52- or 53-week fiscal year and the Company's fiscal year ends on the Saturday closest to January 31 in the following calendar year.
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001022568_super_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001022568_super_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d712cfa0aff7bf286cf94622e812e1a1fa3dea54
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS HAS BEEN ADJUSTED TO GIVE EFFECT TO AN AMENDMENT AND RESTATEMENT OF THE COMPANY'S ARTICLES OF INCORPORATION TO (I) CREATE TWO CLASSES OF STOCK, (II) EFFECT A 55,500-FOR-1 STOCK SPLIT AND (III) INCREASE THE AUTHORIZED COMMON STOCK, ALL TO BE EFFECTIVE IMMEDIATELY PRIOR TO THE CONSUMMATION OF THE OFFERING. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS" AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." THE COMPANY The Company is engaged in the sale and licensing of "turn key" Super Wash reg-trade-mark facilities and provides ongoing support to its licensees through its parts, service, research and advertising departments. The Company is also available to its licensees for consultation regarding various business aspects of operating their Super Washreg-trade-mark facility. In addition, the Company owns and operates Super Washreg-trade-mark facilities and provides management services for licensees who choose not to manage their facilities on a day-to-day basis. Under its "turn-key" package, the Company acquires the site, handles all zoning and permitting issues, performs as the general contractor during construction of the Super Washreg-trade-mark facility, sells and installs its Super Washreg-trade-mark equipment which is designed by the Company and manufactured to its specifications, trains the licensees and their employees, conducts the grand opening, and provides consultation and management services thereafter. As of June 30, 1996, the Company had constructed and sold over 436 Super Washreg-trade-mark facilities and had 17 facilities under construction. Starting in 1996, the business plan of the Company is to retain, own and operate a number of the facilities constructed by it each year with the goal of owning and operating in excess of 100 Super Washreg-trade-mark facilities by the end of the year 2001. During the last 7 fiscal periods (including the 10-month period ended December 31, 1995), the number of Super Washreg-trade-mark facilities constructed each period has ranged between 27 and 69. Additionally, during the last 5 fiscal periods the Company expanded existing Super Washreg-trade-mark facilities and added in total 6 self-service bays and 17 Supermaticreg-trade-mark bays. As of June 30, 1996, there were 380 Super Washreg-trade-mark> facilities operating in 19 states. The Company plans to add approximately 50 Super Washreg-trade-mark facilities during each of the years 1996 and 1997 and continue at or above that level in future years. As of June 30, 1996, 19 of the 380 facilities are owned and operated by the Company, 4 of which are for long-term ownership, and 15 of which are held in inventory for sale to approved licensees. A total of 55 Super Washreg-trade-mark facilities are managed by the Company for its licensees, including 26 which are owned by officers of the Company or entities owned by such persons. As of June 30, 1996, 56 facilities constructed by the Company were delicensed and not operating as Super Washreg-trade-mark facilities. See "Business -- Licensing Program." The Company believes Super Washreg-trade-mark facilities are state of the art and the highest quality. The Company's service department can access each licensed Super Washreg-trade-mark facility via computer and modem located at each facility and by using its proprietary computer diagnostic software to pinpoint mechanical problems in order to keep each facility operational and downtime to a minimum. The Company's software also possesses auditing capabilities which allows an absentee owner/manager to monitor cash receipts off-site. Each Super Washreg-trade-mark facility is constructed in accordance with a standard set of proprietary plans which have been developed by the Company. This approach provides a nationally consistent image, savings in cost of construction and also allows the Company's service technicians to solve over 99% of all mechanical problems via telephone contact with the on- site attendant. A federally registered trademark has been granted to the Company for its automatic bay car washing process ("Supermaticreg-trade-mark") which the Company displays above the automatic bay(s) at each Super Washreg-trade-mark facility. Each Super Washreg-trade-mark facility includes at least one Supermaticreg-trade-mark bay and several self-serve bays. A substantial number of facilities have two Supermaticreg-trade-mark bays and three to four self-serve bays. The Company has constructed individual facilities consisting of as many as three Supermaticreg-trade-mark bays and six self-serve bays. The Company believes that it has developed expertise in site selection and layout of the facility. The Company also believes it is widely recognized for its commitment to its customers. The Company has developed a detailed system of operating a Super Washreg-trade-mark facility. The training provided by the Company to its licensees and their employees includes instruction on the implementation and maintenance of the Super Washreg-trade-mark operating system, including audit procedures, banking, personnel, promotion, equipment operation and maintenance and creating positive customer relationships. Robert D. Black and his wife, Mary K. Black (collectively, the "Blacks"), are the founders of the Company. The Blacks built their first car wash in 1976. They have recently been honored with the 1995 SBA Illinois and Region V (Midwest) Entrepreneurial Success Awards. In 1992, the Company received the U.S. Chamber of Commerce Blue Chip Enterprise Award, and was listed in "INC. Magazine" in each of the years 1989, 1990, and 1991 as one of the fastest growing private companies in the country based on that year's sales growth over an average of the prior five years. The Blacks also received Ernst & Young's Entrepreneur of the Year Award in the service category for Illinois and Missouri in 1989. The Company believes that its success is the direct result of the work of the Blacks, its licensees, and the many individuals associated with the Company. The Company was incorporated in Illinois in 1982 as an outgrowth of a business started in 1976 by the Blacks. The Company's executive offices are located at 707 West Lincolnway, P.O. Box 188, Morrison, Illinois 61270, and its telephone number is (815) 772-2111. <PAGE> THE OFFERING Class A Common Stock offered by the Company up to 450,000 shares, subject to a minimum of 250,000(1) Common Stock to be outstanding after the Offering: Class A Common Stock a minimum of 250,000 and a maximum of 450,000 shares(1) Class B Common Stock 5,550,000 shares(2) Estimated proceeds(1) The Company estimates the net proceeds from the Offering prior to deducting any commissions paid to Agents, to be a minimum of $2.4 million and up to a maximum of $4.4 million. There can be no assurance that the Company will receive net proceeds in excess of the minimum less any Agents' commissions. Use of proceeds(1) The Company intends to use the estimated net proceeds to fund a portion of the S Corporation Distribution (as defined in "S Corporation Distribution") to stockholders of record immediately prior to the consummation of the Offering. See "Use of Proceeds." (1) Unless the Company is able to sell at least 250,000 shares of the Class A Common Stock offered hereby, the Company will cancel the Offering, promptly return all monies collected from subscribers, and pay to each subscriber the interest earned by the Company, if any, on such subscriber's escrowed subscription payment. See "Risk Factors and "Plan of Distribution." (2) Each share of Class B Common Stock is convertible into one share of Class A Common Stock and will convert automatically into Class A Common Stock upon a transfer to anyone other than a Black Family Member or on the record date of any meeting of stockholders if the total number of shares of Class B Common Stock outstanding is less than 20% of the aggregate number of shares of Common Stock outstanding. See "Certain Relationships and Related Transactions" and "Description of Capital Stock." SUBSCRIPTION PROCEDURES A Subscription Agreement accompanies this Prospectus. Subject to the Purchase Minimum, availability and the Company's right to reject subscriptions, in whole or in part, for any reason, shares of Class A Common Stock may be subscribed for by completing, executing and returning the Subscription Agreement, together with payment for all shares subscribed for, to the Company. All checks should be made payable to the Super Wash Offering Escrow. The Company's acceptance of a subscription shall be evidenced solely by the delivery to the subscriber of a written confirmation of sale. Receipt by the Company of a Subscription Agreement and/or deposit by the Company of payment for the subscribed shares as described below shall not constitute acceptance of a subscription. The subscription payments will be deposited into an escrow account by the Company subject to the Closing on such escrowed funds if the Company has accepted subscriptions for at least 250,000 shares. Unless the Company is able to sell at least 250,000 shares of the Class A Common Stock offered hereby, the Company will cancel the Offering, promptly return all monies collected from subscribers, and pay to each subscriber the interest earned by the Company, if any, on such subscriber's escrowed subscription payment. Likewise, the Company will promptly refund any monies collected and attributed to a subscription, or portion thereof, rejected by the Company and pay to each rejected subscriber all interest earned by the Company, if any, on such subscriber's rejected escrowed subscription payment, or portion thereof. However, if the Company accepts a subscription, in whole or in part, subscribers will have no right to a return of their accepted subscription payment held in the escrow account and all interest earned on the accepted escrowed proceeds will belong to the Company. The Company reserves the right to withdraw, cancel or modify the Offering hereby and to reject subscriptions, in whole or in part, for any reason. <PAGE> SUMMARY FINANCIAL AND OPERATING DATA TEN MONTHS ENDED SIX MONTHS DECEM- ENDED <TABLE> <CAPTION> YEARS ENDED FEBRUARY 28, BER 31, JUNE 30, 1992 1993 1994 1995 1995 1995 1996 (In thousands, except per share data) <S> <C> <C> <C> <C> <C> <C> Statement of Operations Data: Net sales $13,148 $13,865 $17,846 $23,071 $23,586 $ 8,456 $13,509 Cost of sales 10,817 11,338 14,578 18,734 18,392 6,858 11,062 Gross profit 2,331 2,527 3,268 4,337 5,194 1,598 2,447 Selling, general, and administrative expenses 1,107 1,337 1,750 1,893 1,483 794 813 Income from operations 1,224 1,190 1,518 2,444 3,711 804 1,634 Other income (expense), net 147 224 228 192 98 143 (20) Income before income taxes 1,371 1,414 1,746 2,636 3,809 947 1,614 Pro forma provision for income taxes (1) 515 532 683 1,037 1,485 370 629 Pro forma net income (1) $856 $882 $ 1,063 $ 1,599 $ 2,324 $577 $985 Pro forma net income per share (1)(2) $ .40 $ .10 $ .17 Weighted average shares outstanding (2) 5,820,000 SELECTED OPERATING DATA: Super Washreg-trade-mark facilities constructed 27 27 31 46 48 14 23 Self-serve bays 78 81 93 151 151 43 80 Supermaticreg-trade-mark bays 32 38 43 70 76 21 27 Super Washreg-trade-mark facilities sold 27 25 32 38 41 15 20 Self-serve bays 78 73 95 127 132 39 56 Supermaticreg-trade-mark bays 32 37 44 59 67 21 20 Ratios: Current ratio 8.79 8.50 10.64 5.90 4.38 3.45 2.05 Debt to equity .40 .31 .13 .22 .26 .40 .79 </TABLE> ______________________ (1) The Company elected S Corporation (as defined in "S Corporation Distribution") status for federal and state income tax purposes effective March 1, 1995. The Company's election to be taxed as an S Corporation will terminate upon consummation of the Offering, and the Company will be subject to federal and state income taxes from that date forward. The pro forma provision for income taxes, pro forma net income, and pro forma net income per share reflect the pro forma effect of income taxes as if the Company had been taxed as a C corporation for all periods presented. (2) Pro forma net income per share information assumes that 270,000 of the shares of Class A Common Stock being offered by the Company hereby were outstanding during the periods indicated. The 270,000 shares represent the approximate number of shares (of the maximum of 450,000 shares being offered) which are being sold by the Company (at the initial public Offering price set forth on the cover page of this Prospectus) to fund the payment of a dividend equal to the amount of the Company's taxable earnings and profits from March 1, 1995 through June 30, 1996, not yet distributed to existing stockholders of approximately $2.7 million ("June 30 E&P Dividend"). <PAGE> <TABLE> <CAPTION> FEBRUARY 28, DECEMBER 31, JUNE 30, 1996 As Ad- 1992 1993 1994 1995 1995 ACTUAL JUSTED(3) (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Working capital $ 3,542 $ 4,244 $ 5,734 $ 7,375 $ 9,754 $ 8,682 $ 10,225 Total assets 6,308 7,030 7,274 9,805 14,866 19,214 19,214 Long term debt 1,357 1,086 238 206 176 157 0 Stockholders' equity 4,497 5,379 6,441 8,069 11,791 10,742 12,307 </TABLE> ______________________ (3) Adjusted to give effect to the conversion of the Company to a C corporation, the sale of the maximum number of shares of Class A Common Stock offered by the Company hereby (at the initial public Offering price set forth on the cover page of this Prospectus net of estimated Offering expenses) and the application of such proceeds therefrom as of June 30, 1996. See "Use of Proceeds" and Note 13 to the Company's financial statements. Gives effect to the payment of the June 30 E&P Dividend, but does not give effect to the anticipated distribution of an additional $4.0 million in estimated S Corporation earnings for the period from July 1, 1996 to the consummation of the Offering. <PAGE> RISK FACTORS IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE CLASS A COMMON STOCK OFFERED HEREBY. CAR WASH BUSINESS RISKS GENERALLY. The Company is subject to all of the risks generally associated with the car wash business, including, without limitation, adverse developments in the national and local economies, changes in consumer preferences, fluctuations in the availability and cost of supplies and materials, and the ability to obtain and retain qualified employees at affordable wages. COMPETITION. The Company may be in competition with other persons and entities having similar or greater experience and financial resources. Although the Company believes in the economic viability of the business of the Company, there can be no assurance that its operations will continue to be profitable. In addition, the Super Washreg-trade-mark facilities owned by the Company may face competition from existing and future car washes, including self-service and full service washes, some of which may have similar equipment. Customers may also elect to wash their cars at home without going to a car wash. CONSTRUCTION BUSINESS. The construction business is inherently risky and subject to, among other risks, the risk of cost overruns, labor strikes, adverse weather conditions, material delays and quality problems. AVAILABILITY OF SITES AND FINANCING. The goal of the Company to retain, own and operate in excess of 100 Super Washreg-trade-mark facilities by the end of the year 2001 may be affected by the ability of the Company to locate suitable sites for the Super Washreg-trade-mark facilities. Additionally, the Company will be required to raise additional capital in the future to meet its current expansion plan through 2001. Such capital may be raised by the issuance of additional equity or the incurrence of indebtedness. In addition, in appropriate situations, the Company may seek financing from other sources. There can be no assurance that any required financing will be available or that the Company can accomplish its goal in a timely or profitable manner. DEPENDENCE OF A LIMITED NUMBER OF SUPPLIERS. The Company currently relies on approximately twelve major suppliers for its supply of products and equipment required to construct and operate Super Washreg-trade-mark facilities. In turn, many of such suppliers also rely on a limited number of suppliers. The products and equipment of such suppliers are essential to the Company's business and any disruption in the supply of such products or equipment could adversely affect the Company's Super Washreg-trade-mark facility construction and its operating results. There can be no assurance that all of the Company's suppliers will continue to meet its current product and equipment requirements or meet these requirements at current prices. SALE OF SUPER WASHreg-trade-mark FACILITIES. Approximately 79% of the Company's revenues for the six months ended June 30, 1996, are attributable to the construction and sale of Super Washreg-trade-mark facilities. To the extent a Super Washreg-trade-mark facility has not been presold or designated as a Company-owned facility, after the completion of a Super Washreg-trade-mark facility the Company will hold and operate such facility until it is sold. There is no assurance that in the future the Company can sell all of the Super Washreg-trade-mark facilities it constructs or that such facilities will be sold or operated at a profit. FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company experiences quarterly variation in net revenues and operating income as a result of many factors. The primary factor is the effect of weather and the seasons on construction in certain areas of the country and the resulting effect on sales of Super Washreg-trade-mark facilities. See "Management's Discussion and Analysis of Financial Condition and Results of Operation - Seasonality and Quarterly Financial Information." The quarterly variations in net revenues and operating incomes could continue as a result of these many factors. NEW BUSINESS PLAN. The Company has modified its business plan and presently intends to retain, own and operate a number of the Super Washreg-trade-mark facilities constructed by it in each year with the goal of owning and operating in excess of 100 Super Washreg-trade-mark facilities by the end of the year 2001. The Company currently operates 4 facilities for long-term ownership. Consequently, if the new plan is implemented as proposed in the future a greater proportion of the Company's revenues will be attributable to the operation of Super Washreg-trade-mark facilities. There is no assurance that the Company will be able to build for its own account the desired number of facilities or operate such facilities in a profitable manner. WEATHER. The operation of the Company's Super Washreg-trade-mark facilities may be affected by adverse weather conditions (the weather that differs significantly from the norm in a particular season in a particular region of the country). In addition, the operations of car washes may be limited in areas experiencing severe drought conditions. To minimize the effect on the Company's overall profitability from operating facilities due to adverse weather conditions in any one region of the United States, the Company intends to build Super Washreg-trade-mark facilities in geographical regions offering a variety of weather patterns. POTENTIAL CHANGE IN LICENSE AGREEMENT. Current licensees have entered into an operations agreement (the "Operations Agreement") with the Company. Under the Operations Agreement which grants licensees the right to use the Company's trademarks, Company licensees do not pay a license fee but are required to meet certain quality standards. The Company is considering whether to strengthen its Operations Agreement to have more substantial control over certain aspects of its licensees' operations or to convert the relationship between future licensees and the Company from a license without fees or substantial control to a franchise relationship with fees and more comprehensive controls. The Company's existing license agreements do not contain a specific term. If the Company desires to cause its current licensees to enter into a new license agreement or become franchisees, there is no assurance the Company will be able to accomplish such result. If the Company decides to become a franchisor, it will be required to register as a franchisor in those states that require registration and in which the Company intends to offer Super Washreg-trade-mark franchises. There is no assurance that the Company can meet all such states' requirements. Furthermore, certain state regulatory agencies may raise the issue of why the Company was not previously registered as a franchisor. The Company believes that its current license arrangement does not constitute a franchise, although there is no assurance that the resolution of such issue, if raised, will be favorable to the Company. All of the foregoing may have a material adverse effect on the Company. TERMINATION OF LICENSES. Each Super Washreg-trade-mark licensee has a right to terminate his relationship as a licensee at will and the Company has the right to terminate each license in the event of the breach of its terms. Through June 30, 1996, 56 Super Washreg-trade-mark facilities have been delicensed. The delicensing of a substantial number of Super Washreg-trade-mark facilities may have a material adverse effect on the Company. BEST EFFORTS OFFERING; MINIMUM NUMBER OF SHARES TO BE SOLD. The Company is offering the Class A Common Stock on a "best efforts" basis. There is therefore no assurance that all of the 450,000 shares of Class A Common Stock offered hereby will be sold and if all of the shares offered hereby are not sold the estimated net proceeds will be reduced to reflect the number of shares actually sold. If the Company is unable to sell at least 250,000 shares of the Class A Common Stock offered hereby, the Company will cancel the Offering and promptly return all monies collected from subscribers held in escrow. See "Management's Discussion and Analysis of Results of Operations and Financial Condition - Liquidity and Capital Resources" and "Plan of Distribution." S CORPORATION DISTRIBUTION. The net proceeds of the Offering will not be sufficient to fund the entire S Corporation Distribution. To fund the portion of the S Corporation Distribution not covered by the proceeds of the Offering the Company will be required to obtain funds from alternate sources, including borrowing under the Company's lines of credit. To the extent less than the maximum number of shares offered hereby are sold, the Company will be required to increase the amount of funds acquired from alternative sources to fund the S Corporation Distribution. The use of funds other than the proceeds of this Offering may adversely affect the Company's ability to execute its business plan and its liquidity and capital resources. See "Management's Discussion and Analysis of Results of Operations and Financial Condition - Liquidity and Capital Resources." NO DIVIDENDS ON COMMON STOCK. Upon consummation of the Offering the Company does not anticipate declaring any cash dividends in the foreseeable future and intends to retain any future earnings for the further development and growth of its business. See "Dividend Policy." NO PRIOR MARKET; ABSENCE OF PUBLIC MARKET; OFFERING PRICE DETERMINED ARBITRARILY BY THE COMPANY. There has been no public market for the Class A Common Stock prior to the Offering. The price to the public has been arbitrarily determined by the Company and may not be indicative of the market price for the Common Stock after this Offering. The Company makes no representations as to any objectively determinable value of the Common Stock. There can be no assurance that any market will develop for the Class A Common Stock or that holders of Class A Common Stock will be able to sell their securities at any price. Additionally, the Company has not applied to list its Common Stock on a national securities exchange, quotations system or over- the-counter market and does not presently intend to do so. The Company is not seeking securities brokers/dealers to be market makers for the Class A Common Stock offered hereby. Consequently, the liquidity of the Common Stock will be impaired, not only in the number of shares of Class A Common Stock which can be bought and sold, but also through delays in the timing of transactions, reductions in security analysts' and news media coverage, if any, of the Class A Common Stock, and lower prices for the Class A Common Stock than might otherwise prevail. Furthermore, the lack of a market maker could result in persons being unable to buy or sell shares of the Class A Common Stock offered hereby on any secondary market. DILUTION. Investors in the Offering will experience immediate and substantial dilution of $7.95 per share (assuming the sale of all 450,000 shares) or $8.22 per share (assuming the sale of 250,000 shares) in the net tangible book value of their shares of Class A Common Stock, and current stockholders will receive an increase in the book value of their shares of Class B Common Stock. See "Dilution." DEPENDENCE UPON OTHER SUPER WASHreg-trade-mark FACILITIES. Although the Company will have no ownership interest in any Super Washreg-trade-mark facilities that are sold, the success of the Company's Super Washreg-trade-mark facilities may depend in part upon the good will associated with Super Washreg-trade-mark facilities owned and operated by licensees. DEPENDENCE ON KEY EMPLOYEES. The Company's success is dependent on the active participation of Mary K. Black, Chairman of the Board, and Robert D. Black, a Director, President and Chief Executive Officer. The Company is dependent for its future success on the continued services of its executive officers, including the Blacks, and other key employees. The Company believes that the unexpected loss of the services of a key employee could have a material adverse effect on the Company. The Company does not maintain key person life insurance on the life of either Mary K. or Robert D. Black. The Company has not entered into employment Agreements with any of its executive officers. GOVERNMENTAL REGULATION. The Company's business will be subject to the jurisdiction of a variety of regulatory authorities, including, without limitation, federal, state, county and city agencies administering laws and regulations relating to zoning, environmental, health, labor and taxation. Although it is the policy of the Company to obtain a Phase I Environmental Study on sites it acquires which it believes have a potential environmental risk, there is no assurance that such studies will identify all environmental risks, including any underground storage tanks. CONTROL BY CURRENT STOCKHOLDERS AND ANTI-TAKEOVER EFFECT OF DUAL CLASSES OF STOCK. Holders of the Company's Class A Common Stock are entitled to one vote per share and holders of the Company's Class B Common Stock are entitled to ten votes per share. Each share of Class B Common Stock is convertible at any time into one share of Class A Common Stock. Following the completion of the Offering, and assuming the maximum number of shares are sold, Black Family Members will beneficially own or control, directly or indirectly, all of the outstanding shares of the Company's Class B Common Stock which in the aggregate will represent approximately 92.5% of the outstanding shares of Common Stock and 99.2% of the combined voting power of such stock. The Black Family Members will, therefore, initially have the ability to elect all of the directors of the Company and to control the outcome of all issues submitted to a vote of the stockholders of the Company. See "Principal Stockholders." Voting control by Black Family Members may discourage certain types of transactions involving an actual or potential change of control of the Company, including transactions in which the holders of Class A Common Stock might receive a premium for their shares over prevailing market prices. RELATED PARTY TRANSACTIONS. As described herein, the Company has entered into a number of transactions with its directors, executive officers and principal stockholders (collectively, the "Related Party Transactions"). See "Certain Relationships and Related Party Transactions." The terms of the Related Party Transactions were established by the Blacks and management and are not the result of arm's-length negotiations. Certain Related Party Transactions between the Black Family Members and the Company are on terms more favorable to the Black Family Members than those which could have been obtained in arm's-length transactions. Following the Closing of the Offering, the Company intends to submit any proposed transactions not described herein between the Company and its directors, executive officers and their affiliates or the Black Family Members to a committee of disinterested directors for review. Transactions not described herein between the Company and Black Family Members will require approval by a majority of the disinterested directors. See "Certain Relationships and Related Party Transactions." POTENTIAL CONFLICTS OF INTEREST. Mrs. Black, the Chairman of the Board of the Company, Mr. Black, the President and Chief Executive Officer of the Company and certain other executive officers of the Company are engaged in, and after the Offering will continue to be engaged in, activities other than those related to the Company. Such persons own and operate Super Washreg-trade-mark facilities. Accordingly, such facilities may compete with the Company for the management time of the Blacks and the other executive officers. PREFERRED STOCK. The Company's Articles authorize the issuance of 2.5 million shares of "blank check" preferred stock with such designation, rights and preferences as may be determined from time to time by the Board of Directors. Accordingly, the Board of Directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights that could materially adversely affect the voting power or other rights of the holders of the Company's Common Stock. In the event of issuance, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. Although the Company has no present intention to issue any shares of its preferred stock, there can be no assurance that the Company will not do so in the future. The application of any such provisions or the issuance of preferred stock could prevent stockholders from realizing a premium upon the sale of their shares of Class A Common Stock. See "Description of Capital Stock." EFFECT OF CERTAIN STATUTORY PROVISIONS. The Company is subject to provisions of the Illinois Business Corporation Act that prohibit a publicly- held Illinois corporation from engaging in a broad range of business combinations with a person who, together with affiliates and associates, owns 15% or more of the corporation's common stock (an "interested stockholder") for three years after the person became an interested stockholder, unless the business combination is approved in a prescribed manner. Those provisions could discourage or make more difficult a merger, tender offer or similar transaction, even if favorable to the Company's stockholders. See "Description of Capital Stock -- Certain Provisions of the Illinois Business Corporation Act." <PAGE> THE COMPANY The Company is engaged in the sale and licensing of "turn key" Super Washreg-trade-mark facilities and provides ongoing support to its licensees through its parts, service, research and advertising departments. The Company is also available to its licensees for consultation regarding various business aspects of operating their Super Washreg-trade-mark facilities. In addition, the Company owns and operates Super Washreg-trade-mark facilities and provides management services for licensees who choose not to manage their facilities on a day-to-day basis. Under its "turn key" package, the Company acquires the Super Washreg-trade-mark facility site, handles all zoning and permitting issues, performs as the general contractor during construction of the Super Washreg-trade-mark facility, installs its Super Washreg-trade-mark equipment which is designed by the Company and manufactured to its specifications, trains the licensees and their employees, conducts the grand opening and provides consultation and management services thereafter. As of June 30, 1996, the Company had constructed and sold over 436 Super Washreg-trade-mark facilities and had 17 facilities under construction. The vision of the Company as embodied in its goals and philosophy is: . To obtain and maintain a position of unquestionable respectability and credibility in the business world. . To create an investment opportunity which will leave a positive lifelong effect on the many right-hearted quality people we serve. . To construct facilities which are profitable and successful for everyone involved. . To provide our customers with the best car wash service available at a reasonable price. . To create a position of employment for as many needful, right-hearted people as possible. . To have the Company become "all it is suppose to be" while at the same time never taking advantage of anyone along the way. . To create a business environment which will allow all staff members and affiliates to be true to their own highest conviction while daily utilizing all of their God-given talents. The Blacks consider the goals and philosophies to be the driving force behind the continued success of the Company. The Company's vision is fostered by Mr. Black, the Company's primary "vision keeper." The Company is an Illinois corporation incorporated in 1982 as an outgrowth of a business begun in 1976 by Robert D. Black and his wife, Mary K. Black. The Company's principal executive office and operation headquarters are located at 707 West Lincolnway, P.O. Box 188, Morrison, Illinois 61270 and its phone number is (815) 772-2111. <PAGE> USE OF PROCEEDS The net proceeds to the Company from the Offering are estimated to be $2.4 million if the minimum of 250,000 shares of Class A Common Stock offered hereby are sold, and are estimated to be $4.4 million if the maximum of 450,000 shares of Class A Common Stock offered hereby are sold, at an initial public offering price of $10.00 per share, after deducting estimated offering expenses payable by the Company, and prior to deducting any commissions paid to Agents. The Company intends to use these proceeds to fund a portion of the S Corporation Distribution to stockholders of record immediately prior to consummation of the Offering. See "S Corporation Distribution" and "Risk Factors." S CORPORATION DISTRIBUTION Since March 1, 1995, the Company has been an S corporation (an "S Corporation") under the Internal Revenue Code of 1986, as amended (the "Code"). As a result, the income of the Company subsequent to March 1, 1995, has been taxed, for federal and certain state and local income tax purposes, directly to the Company's stockholders, rather than to the Company. The Company's status as an S Corporation will terminate upon consummation of the Offering (the "Termination Date") and, as a result, the Company will be subject to federal and state corporate income taxation for that portion of the year ended December 31, 1997 after the Termination Date. Upon termination of the Company's status as an S Corporation, the Company will recognize a deferred tax liability of approximately $135,000. The Company's existing stockholders have included or will include in their taxable incomes a total of approximately $9.3 million, the estimated amount of the Company's taxable earnings and profits from March 1, 1995 through the Termination Date. The Company has or intends to distribute all of the estimated $9.3 million of such earnings and profits to the persons who are stockholders of record prior to the consummation of the Offering ("S Corporation Distribution."). Approximately $4.0 million of the estimated $9.3 million of earnings are for the period from July 1, 1996 through the Termination Date and have not yet been recognized by the Company for financial reporting purposes. Of the total $9.3 million estimated S Corporation Distribution, the Company has distributed approximately $2.7 million as of June 30, 1996, and expects to distribute approximately an additional $1.2 million between July 1, 1996, and the consummation of the Offering. The estimated balance of approximately $5.4 million will be distributed to the persons who are stockholders of record immediately prior to the consummation of the Offering. To the extent the Offering proceeds are not sufficient to pay the portion of the S Corporation Distribution which has not been paid as of the consummation of the Offering, the Company intends to pay the remaining portion of the S Corporation Distribution within one year of the Termination Date with cash flow, borrowings or any other funds available for that purpose. Purchasers of Class A Common Stock in this Offering are not entitled to and will not receive any portion of the S Corporation Distribution. See "Capitalization" and Notes to Financial Statements. Prior to the closing of the Offering, the Company will enter into a tax indemnification agreement with the Company's existing stockholders, pursuant to which the existing stockholders will agree to indemnify the Company and the Company will agree to indemnify the existing stockholders against certain possible income tax consequences. See "Certain Relationships and Related Party Transactions." DIVIDEND POLICY Since its inception and prior to March 1, 1995, the Company did not pay any cash dividends. Since March 1, 1995, the Company's dividend policy has been based primarily on considerations relating to its S Corporation status, including the desirability of paying dividends to stockholders in amounts at least sufficient to fund their individual income tax liability resulting from the taxation of corporate income at the stockholder level. As of June 30, 1996, the Company had paid total cash dividends of approximately $2.7 million. The Company expects to pay cash dividends of approximately $1.2 million between July 1, 1996 and the consummation of the Offering. The Company intends to pay the remainder of the S Corporation Distribution as a cash dividend to its stockholders of record immediately prior to the consummation of the Offering. Purchasers of Class A Common Stock in this Offering are not entitled to and will not receive any portion of the S Corporation Distribution. See "Capitalization" and Notes to Financial Statements. See "S Corporation Distribution." Upon consummation of the Offering, the Company's status as an S Corporation will be terminated and the Company intends to retain its earnings to support operations and finance its growth. Consequently, after making the S Corporation Distribution, the Company does not anticipate declaring or paying cash dividends in the foreseeable future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and Notes to Financial Statements. <PAGE> DILUTION The net tangible book value of the Company as of June 30, 1996 was approximately $10.7 million, or $1.94 per share of Common Stock. Net tangible book value per share represents the amount of the Company's stockholders' equity, less intangible assets, divided by the number of shares of Common Stock outstanding. Dilution per share to new investors represents the difference between the amount per share paid by purchasers of shares of Class A Common Stock in the Offering made hereby and the pro forma net tangible book value per share of Class A Common Stock immediately after completion of the Offering. Assuming the sale by the Company of the minimum of 250,000 shares of the 450,000 shares of Class A Common Stock offered hereby at an initial public offering price per share of $10.00, and after (i) deducting estimated Offering expenses payable by the Company, (ii) giving effect to the June 30 E&P Dividend of approximately $2.7 million, and (iii) recording the deferred taxes of approximately $135,000, the pro forma net tangible book value of the Company as of June 30, 1996, would have been approximately $10.3 million, or $1.78 per share. This represents an immediate increase in net tangible book value to existing stockholders attributable to new investors of $0.35 per share and an immediate dilution in net tangible book value of $8.22 per share to new investors purchasing Class A Common Stock in the Offering, as illustrated in the following table: IF MINIMUM OF 250,000 SHARES SOLD: <TABLE> <CAPTION> Initial public Offering price per share of Class A Common $10.00 Stock <S> <C> <C> Net tangible book value per share of Common Stock at June $1.94 30, 1996(1) Decrease per share attributable to June 30 E&P Dividend (0.49) Decrease per share attributable to conversion to C (0.02) corporation and resulting deferred tax liability Increase per share of Common Stock attributable to new 0.35 stockholders Net tangible book value per share of Common Stock after the 1.78 Offering Net tangible book value per share dilution to new $8.22 stockholders </TABLE> (1) There are no outstanding options to consider in calculating the shares outstanding. <PAGE> Assuming the sale by the Company of all of the 450,000 shares of Class A Common Stock offered hereby at an initial public offering price per share of $10.00, and after (i) deducting estimated Offering expenses payable the Company, (ii) giving effect to the June 30 E&P Dividend of approximately $2.7 million, and (iii) recording deferred taxes of approximately $135,000, the pro forma net tangible book value of the Company as of June 30, 1996, would have been approximately $12.3 million, or $2.05 per share. This represents an immediate increase in net tangible book value to existing stockholders attributable to new investors of $0.62 per share and an immediate dilution in net tangible book value of $7.95 per share to new investors purchasing Class A Common Stock in the Offering, as illustrated in the following table: IF MAXIMUM OF 450,000 SHARES SOLD: <TABLE> <CAPTION> Initial public Offering price per share of Class A Common $10.00 Stock <S> <C> <C> Net tangible book value per share of Common Stock at June $1.94 30, 1996(1) Decrease per share attributable to June 30 E&P Dividend (0.49) Decrease per share attributable to conversion to C (0.02) corporation and resulting deferred tax liability Increase per share of Common Stock attributable to new 0.62 stockholders Net tangible book value per share of Common Stock after the 2.05 Offering Net tangible book value per share dilution to new $7.95 stockholders </TABLE> (1) There are no outstanding options to consider in calculating the shares outstanding. <PAGE> The following tables summarize on a pro forma basis as of June 30, 1996 the differences between the existing stockholders and the investors purchasing shares of Class A Common Stock in the Offering (at an initial public Offering price of $10.00 per share) with respect to the number of shares purchased from the Company, the total consideration paid and the average price paid per share. The first table below reflects the sale by the Company of the minimum of 250,000 shares of the 450,000 shares of Class A Common Stock offered hereby and the second table reflects the sale by the Company of all of the 450,000 shares of Class A Common Stock offered hereby: IF MINIMUM OF 250,000 SHARES SOLD: <TABLE> <CAPTION> SHARES PURCHASED TOTAL CONSIDERATION AVERAGE NUMBER PERCENT AMOUNT PERCENT PRICE PER SHARE <S> <C> <C> <C> <C> <C> Existing stockholders(1) 5,550,000 95.7% $1,000 -% - New investors 250,000 4.3 2,500,000 100.0 $10.00 Total 5,800,000 100.0% $2,501,000 100.0% </TABLE> IF MAXIMUM OF 450,000 SHARES SOLD: <TABLE> <CAPTION> SHARES PURCHASED TOTAL CONSIDERATION AVERAGE NUMBER PERCENT AMOUNT PERCENT PRICE PER SHARE <S> <C> <C> <C> <C> <C> Existing stockholders(1) 5,550,000 92.5% $1,000 -% - New investors 450,000 7.5 4,500,000 100.0 $10.00 Total 6,000,000 100.0% $4,501,000 100.0% </TABLE> (1) As of the date of this Prospectus, there are no shares of Class A Common Stock outstanding and 5,550,000 shares of Class B Common Stock outstanding. All of the outstanding Class B Common Stock is held of record by Black Family Members. Shares of Class B Common Stock are convertible at any time into Class A Common Stock and convert automatically into Class A Common Stock upon a transfer to anyone other than a Black Family Member. All of the shares of Class B Common Stock will automatically convert into Class A Common Stock if the total number of shares of Class B Common Stock outstanding falls below 20% of the aggregate number of shares of Common Stock outstanding. <PAGE> CAPITALIZATION The following table sets forth the short-term debt and the total capitalization of the Company at June 30, 1996, (i) on a historical basis and (ii) on an adjusted basis to reflect the issuance and sale by the Company of the minimum of 250,000 shares of the 450,000 shares of Class A Common Stock offered hereby at an initial public Offering price of $10.00 per share, net of estimated Offering expenses, the recognition of a deferred tax liability of $135,000 resulting from termination of S Corporation status, the application of the estimated net proceeds of the Offering to pay the June 30 E&P Dividend of approximately $2.7 million, and the additional borrowing required to fund the June 30 E&P Dividend. This table should be read in conjunction with "Management Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Financial Statements and Notes thereto included elsewhere in this Prospectus. <TABLE> <CAPTION> JUNE 30, 1996 ACTUAL AS ADJUSTED <S> <C> <C> (IN THOUSANDS) SHORT-TERM DEBT: Borrowings under revolving credit facility $5,450 $5,450 Long-term debt, current portion 37 37 Total short-term debt $5,487 $5,487 LONG-TERM DEBT NET OF CURRENT PORTION: $ 157 $ 457 STOCKHOLDERS' EQUITY: Preferred Stock, no par value per share; 2,500,000 shares authorized; no shares issued and outstanding; no shares issued and outstanding as adjusted 0 0 Class A Common Stock, $0.01 par value per share; 25,000,000 shares authorized; no shares issued and outstanding; 250,000 shares issued and outstanding as adjusted _ 3 Class B Common Stock, $0.01 par value per share, 25,000,000 shares authorized; 5,550,000 shares issued and outstanding; 5,550,000 shares issued and outstanding as adjusted 1 1 Additional paid-in capital _ 2,397 Unrealized gain on equity securities 89 89 Retained earnings 10,652 7,817 Total stockholders' equity 10,742 10,307 Total $ 10,899$ 10,764 Capitalization </TABLE> <PAGE> The following table sets forth the short-term debt and the total capitalization of the Company at June 30, 1996, (i) on a historical basis and (ii) on an adjusted basis to reflect the issuance and sale by the Company of all of the 450,000 shares of Class A Common Stock offered hereby at an initial public Offering price of $10.00 per share, net of estimated Offering expenses, and the recognition of a deferred tax liability of $135,000 resulting from termination of S Corporation status, the application of a portion of the estimated net proceeds of the Offering to the payment of the June 30 E&P Dividend of approximately $2.7 million, the repayment of long-term debt, and a reduction in borrowings under the revolving credit facility. This table should be read in conjunction with "Management Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Financial Statements and Notes thereto included elsewhere in this Prospectus. <TABLE> <CAPTION> JUNE 30, 1996 ACTUAL AS ADJUSTED <S> <C> <C> (IN THOUSANDS) SHORT-TERM DEBT: Borrowings under revolving credit facility $5,450 $3,944 Long-term debt, current portion 37 0 Total short-term debt $5,487 $3,944 LONG-TERM DEBT NET OF CURRENT PORTION: $ 157 $ 0 STOCKHOLDERS' EQUITY: Preferred Stock, no par value per share; 2,500,000 shares authorized; no shares issued and outstanding; no shares issued and outstanding as adjusted 0 0 Class A Common Stock, $0.01 par value per share; 25,000,000 shares authorized; no shares issued and outstanding; 450,000 shares issued and outstanding as adjusted 0 5 Class B Common Stock, $0.01 par value per share, 25,000,000 shares authorized; 5,550,000 shares issued and outstanding; 5,550,000 shares issued and outstanding as adjusted 1 1 Additional paid-in capital _ 4,395 Unrealized gain on equity securities 89 89 Retained earnings 10,652 7,817 Total stockholders' equity 10,742 12,307 Total $ 10,899$ 12,307 Capitalization </TABLE> <PAGE> SELECTED FINANCIAL AND OPERATING DATA The following consolidated statements of operations and balance sheet data as of and for the years ended February 28, 1992, through February 28, 1995, and as of and for the ten months ended December 31, 1995, has been derived from the Company's audited consolidated financial statements. The statement of operations data for the years ended February 28, 1994 and 1995, and the ten months ended December 31, 1995, and the balance sheet data at February 28, 1994 and at December 31, 1995, are derived from the consolidated financial statements audited by Arthur Andersen LLP, independent auditors and which are contained elsewhere in this Prospectus. Selected consolidated financial data as of June 30, 1996, and for the six months ended June 30, 1995 and 1996, has been derived from the unaudited consolidated financial statements of the Company and, in the opinion of the Company's management, includes all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company's results of operations for the periods then ended and the financial position of the Company as of such dates. The results for the six months ended June 30, 1996, may not be indicative of the results to be achieved for the entire fiscal year. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements and related notes incorporated by reference or included elsewhere in this Prospectus. <PAGE> TEN MONTHS ENDED SIX MONTHS DECEM- ENDED <TABLE> <CAPTION> YEARS ENDED FEBRUARY 28, BER 31, JUNE 30, 1992 1993 1994 1995 1995 1995 1996 (In thousands, except per share data) <S> <C> <C> <C> <C> <C. <C. Statement of Operations Data: Net sales $13,148 $13,865 $17,846 $23,071 $23,586 $ 8,456 $13,509 Cost of sales 10,817 11,338 14,578 18,734 18,392 6,858 11,062 Gross profit 2,331 2,527 3,268 4,337 5,194 1,598 2,447 Selling, general, and administrative expenses 1,107 1,337 1,750 1,893 1,483 794 813 Income from operations 1,224 1,190 1,518 2,444 3,711 804 1,634 Other income (expense), net 147 224 228 192 98 143 (20) Income before income taxes 1,371 1,414 1,746 2,636 3,809 947 1,614 Pro forma provision for income taxes (1) 515 532 683 1,037 1,485 370 629 Pro forma net income (1) $ 856 $ 882 $1,063 $1,599 $2,324 $577 $985 Pro forma net income per share (1)(2) $ .40 $ .10 $ .17 Weighted average shares outstanding (2) 5,820,000 SELECTED OPERATING DATA: Super Washreg-trade-mark facilities constructed 27 27 31 46 48 14 23 Self-serve bays 78 81 93 151 151 43 80 Supermaticreg-trade-mark bays 32 38 43 70 76 21 27 Super Washreg-trade-mark facilities sold 27 25 32 38 41 15 20 Self-serve bays 78 73 95 127 132 39 56 Supermaticreg-trade-mark bays 32 37 44 59 67 21 20 Ratios: Current ratio 8.79 8.50 10.64 5.90 4.38 3.45 2.05 Debt to equity .40 .31 .13 .22 .26 .40 .79 </TABLE> ______________________ (1) The Company elected S Corporation (as defined in "S Corporation Distribution") status for federal and state income tax purposes effective March 1, 1995. The Company's election to be taxed as an S Corporation will terminate upon consummation of the Offering, and the Company will be subject to federal and state income taxes from that date forward. The pro forma provision for income taxes, pro forma net income, and pro forma net income per share reflect the pro forma effect of income taxes as if the Company had been taxed as a C corporation for all periods presented. (2) Pro forma net income per share information assumes that 270,000 of the shares of Class A Common Stock being offered by the Company hereby were outstanding during the periods indicated. The 270,000 shares represent the approximate number of shares (of the maximum of 450,000 shares being offered), which are being sold by the Company (at the initial public Offering price set forth on the cover page of this Prospectus) to fund the payment of a dividend equal to the amount of the Company's taxable earnings and profits from March 1, 1995 through June 30, 1996, not yet distributed to existing stockholders of approximately $2.7 million ("June 30 E&P Dividend"). <PAGE> <TABLE> <CAPTION> FEBRUARY 28, DECEMBER 31, JUNE 30, 1996 As Ad- 1992 1993 1994 1995 1995 ACTUAL JUSTED(3) (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Working capital $ 3,542 $ 4,244 $ 5,734 $ 7,375 $ 9,754 $ 8,682 $ 10,225 Total assets 6,308 7,030 7,274 9,805 14,866 19,214 19,214 Long term debt 1,357 1,086 238 206 176 157 0 Stockholders' equity 4,497 5,379 6,441 8,069 11,791 10,742 12,307 </TABLE> ______________________ (3) Adjusted to give effect to the conversion of the Company to a C corporation, the sale of the maximum number of shares of Class A Common Stock offered by the Company hereby (at the initial public Offering price set forth on the cover page of this Prospectus net of estimated Offering expenses) and the application of such proceeds therefrom as of June 30, 1996. See "Use of Proceeds" and Note 13 to the Company's financial statements. Gives effect to the payment of the June 30 E&P Dividend, but does not give effect to the anticipated distribution of an additional $4.0 million in estimated S Corporation earnings for the period from July 1, 1996 to the consummation of the Offering. <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Selected Financial Data and the Financial Statements and Notes thereto included in this Prospectus. OVERVIEW The Company is engaged in the sale and licensing of "turn key" Super Washreg-trade-mark facilities and provides ongoing support to its licensees through its parts, service, research and advertising departments. The Company is also available to its licensees for consultation regarding various business aspects of operating their Super Washreg-trade-mark facilities. This includes licensee questions regarding recordkeeping, financial and statistical analysis, personnel issues, promotion ideas, property tax assessments, financing, insurance claims, etc. The Company also owns and operates Super Washreg-trade-mark facilities and provides management services for licensees who choose not to manage their facilities on a day-to-day basis. The Company believes it is the only Company in the car wash industry that provides licensees a "turn-key" package whereby the Company acquires the site, handles all zoning and permitting issues, performs as the general contractor, sells and installs the equipment, trains the licensees and their employees, conducts the grand opening, and provides consultation and management services thereafter. At June 30, 1996, there were 380 Super Washreg-trade-mark facilities operating in 19 states. These facilities are primarily located in the Midwest, with 78% located in Illinois, Wisconsin, Iowa, South Dakota, Nebraska, Indiana and Ohio. As of June 30, 1996, 56 facilities constructed by the Company were delicensed and not operating as Super Washreg-trade-mark facilities. The Company's sales and profits are derived from the construction and sale of "turn key" Super Washreg-trade-mark facilities, the sale of parts and supplies to operating Super Washreg-trade-mark facilities, the sales results during the period the Company operates a Super Washreg-trade-mark facility until the facility is sold, if applicable, and management fees from managing certain Super Washreg-trade-mark facilities. The majority of sales and profits have been from the construction and sale of "turn key" Super Washreg-trade-mark facilities. The Company is beginning to generate sales from retaining Super Washreg-trade-mark facilities and operating them long- term. As the Company retains and operates more Super Washreg-trade-mark facilities, its sales and profits will primarily be derived from both operating Super Washreg-trade-mark facilities (to the extent operated profitably) and the construction and sale of "turn key" Super Washreg-trade-mark facilities to licensees. <PAGE> RESULTS OF OPERATION The following table sets forth, for the periods indicated, certain information derived from the Company's Statement of Operations expressed as a percentage of net sales. Fiscal Year Ten Months Six Months <TABLE> <CAPTION> ENDED ENDED ENDED February 28, February 28,December 31, June 30,June 30, 1994 1995 1995 1995 1996 <S> <C> <C> <C> <C> <C> Sales Super Washreg-trade-mark facilities 81.3% 83.8% 84.1% 74.9% 79.2% Parts, supplies & service 15.2 14.0 12.0 19.7 14.8 Operations & fees 3.5 2.2 3.9 5.4 6.0 Total sales 100.0 100.0 100.0 100.0 100.0 Cost of sales Super Washreg-trade-mark facilities 65.8 66.6 64.9 59.9 63.8 Parts, supplies & service 12.4 12.0 9.4 16.2 12.9 Operations & fees 3.5 2.6 3.7 5.0 5.2 Total cost of sales 81.7 81.2 78.0 81.1 81.9 Gross profit 18.3 18.8 22.0 18.9 18.1 Selling, general & </TABLE> <TABLE> <CAPTION> <S> <C> <C> <C> <C> <C> administrative expenses 9.8 8.2 6.3 9.4 6.0 Operating income 8.5 10.6 15.7 9.5 12.1 Other income (expense) net 1.3 .8 .4 1.7 (.1) Income before pro forma income taxes 9.8 11.4 16.1 11.2 12.0 Pro forma income taxes (1) 3.8 4.5 6.3 4.4 4.7 Pro forma net income 6.0% 6.9% 9.8% 6.8% 7.3% </TABLE> ________________________ (1) For the fiscal years ended February 28, 1995 and 1994, the Company operated as a C corporation. The income taxes above reflect the income tax provision for those years. Beginning March 1, 1995, the Company operated as an S Corporation and was not subject to federal income taxes and most state and local income taxes. For the ten months ended December 31, 1995, and the six-month periods shown, pro forma income taxes are based upon estimated income tax rates that would have applied if the Company had been operating as a C-corporation. SIX MONTHS ENDED JUNE 30, 1996 AND 1995 NET SALES for the six-month period ended June 30, 1996, increased 59.8% to $13,509,000 from $8,456,000 for the comparable period ended June 30, 1995. This net sales increase was primarily due to increased sale of Super Washreg-trade-mark facilities. This increase was the direct result of the company's strategy of constructing washes in southern climates during winter months. Sales of Super Washreg-trade-mark facilities increased 68.8% to $10,695,000; while sales of parts, and supplies and service increased 20.0% to $2,004,000. Other sales including management fees and gross revenues from Company-owned Super Washreg-trade-mark facilities increased 79.9% to $810,000 as a result of an increase in the number of Super Washreg-trade-mark facilities operating while held in inventory for sale to approved licensees. GROSS PROFIT for the six-month period ended June 30, 1996, increased 53.2% to $2,447,000 from $1,597,000 for the comparable period ended June 30, 1995. As a percentage of net sales, gross profit margin for the six-month period ended June 30, 1996, was 18.1% compared to 18.9% for the comparable period ended June 30, 1995. The decrease is the result of additional construction overhead during the first quarter of 1996 to initiate the construction of Super Washreg-trade-mark facilities in southern climates. SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES for the six-month period ended June 30, 1996, increased 2.5% to $813,000 from $794,000 for the comparable period ended June 30, 1995. As a percentage of net sales, these expenses were 6.0% and 9.4% for the six-month periods ended June 30, 1996 and 1995, respectively. This percentage reduction is primarily the result of the increase in net sales and the Company's ability to control such expenses while net sales are increasing. OTHER INCOME (EXPENSE) NET for the six-month period ended June 30, 1996, was a net expense of $20,000, while for the comparable period ended June 30, 1995, was a net income of $143,000. The difference of $163,000 is primarily the result of increased borrowing and interest expense to initiate construction of Super Washreg-trade-mark facilities in southern climates as discussed earlier, the distribution of approximately $2.7 million of cash dividends to stockholders, which was borrowed under the credit facility, and increased borrowing under the credit facility to finance the Super Washreg-trade-mark facilities held for sale. PRO FORMA INCOME TAXES for the six-month periods ended June 30, 1996 and 1995, were calculated at a rate of 39%. The Company was taxed as a C corporation through February 28, 1995, and as an S Corporation thereafter. Upon consummation of the Offering, the Company will again be taxed as a C corporation. TEN MONTHS ENDED DECEMBER 31, 1995, AND FISCAL YEARS ENDED FEBRUARY 28, 1995 AND 1994 NET SALES were $23,586,000 in the ten months ended December 31, 1995, compared to $23,071,000 and $17,846,000 in the fiscal years ended February 28, 1995 and 1994, respectively. Net sales increases during these periods were primarily attributed to increased sales of Super Washreg-trade-mark facilities. A comparison of sales of "turn key" Super Washreg-trade-mark facilities self-serve bays and Supermaticreg-trade-mark bays, for the periods presented is as follows: Fiscal Year Fiscal Year Ten Months Ended Ended Ended February 28, February 28, December 31, SALES 1994 1995 1995 "Turn key" Super Washreg-trade-mark facilities 32 38 41 Self-serve bays 95 127 132 Supermaticreg-trade-mark bays 44 59 67 GROSS PROFIT was $5,194,000 for the ten months ended December 31, 1995, compared to $4,337,000 and $3,268,000 for the fiscal years ended February 28, 1995 and 1994 respectively. As a percentage of net sales, gross profit was 22% for the ten months ended December 31, 1995; 18.8% for the year ended February 28, 1995; and 18.3% for the year ended February 28, 1994. The increase in gross profit margin from the fiscal years ended February 28, 1995 and 1994 to the ten months ended December 31, 1995, is largely explained by the increased number of Super Washreg-trade-mark facilities constructed on private sites. For the ten months ended December 31, 1995, 19 of the 41 "turn key" Super Washreg-trade-mark facilities sold were on sites owned prior to construction by the licensee. For the fiscal years ended February 28, 1995 and 1994, sales of "turn key" Super Washreg-trade-mark facilities on sites owned by the licensee were 11 of 38, and 14 of 32, respectively. As real estate prices have increased, the gross profit recognized by the Company on the site portion of a "turn key" Super Washreg-trade-mark facility has decreased. With a private site, "turn key" sales are only recognized for construction and equipment and the resulting gross profit as a percentage of net sales is higher. SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES were $1,483,000 in the ten months ended December 31, 1995, compared to $1,893,000 and $1,750,000 in the fiscal years ended February 28, 1995 and 1994, respectively. As a percentage of net sales, selling, general, and administrative expenses decreased from 9.8% to 8.2% in comparing the fiscal year ended February 28, 1994, to the fiscal year ended February 28, 1995, and finally to 6.3% for the ten months ended December 31, 1995. For the fiscal years ended February 28, 1995 and 1994, the compensation to the two officer-stockholders as a percentage of sales was 4.6% and 4.8% respectively. For the ten months ended December 31, 1995, it was 2.0%, which is the principal reason for the decrease. OTHER INCOME (EXPENSE) NET was $98,000 for the ten months ended December 31, 1995, compared to $192,000 and $228,000 for the fiscal years ended February 28, 1995 and 1994, respectively. The decrease during these periods is the result of increased borrowing and interest expense as the Company increased Super Washreg-trade-mark facilities under construction and its inventory of Super Washreg-trade-mark facilities operating and held for sale. PRO FORMA INCOME TAXES as indicated in the footnote are the actual income tax provisions for the fiscal years ended February 28, 1995 and 1994. For the ten months ended December 31, 1995, the income taxes are based upon estimated income tax rates that would have applied if the Company had been operating as a C corporation. LIQUIDITY AND CAPITAL RESOURCES The Company has funded its operations to date primarily from operating cash flow, although such funds have also been supplemented by borrowings under lines of credit and term notes as needed. As of June 30, 1996, the Company had working capital of $8,682,000 including cash and cash equivalents of $915,000 and marketable securities of $1,898,000. Working capital was $9,754,000 at December 31, 1995; $7,375,000 at February 28, 1995; and $5,734,000 at February 28, 1994. The Company's principal uses of cash historically have been to pay operating expenses and make capital expenditures. For the periods after March 1, 1995, when the Company elected to be taxed as an S Corporation, cash has been used for distributions to its S Corporation stockholders as well. As of June 30, 1996, the Company has available lines of credit of approximately $6,500,000 for working capital and $12,000,000 for the financing of Super Washreg-trade-mark facility construction. As of June 30, 1996, the Company had borrowings of $5,450,000 outstanding on the working capital lines of credit. These lines of credit had expiration dates ranging from September 1, 1996 through February 28, 1998. Interest rates on borrowings outstanding as of June 30, 1996 ranged from 8.25% to 9.25%. Borrowings are secured by substantially all of the Company's assets. The agreements require the Company to meet certain restrictive covenants including, among other things, certain financial statement ratios. As of June 30, 1996, the Company was in compliance with all applicable covenants. Beginning with the year ended February 28, 1995, the Company decided to increase the number of Super Washreg-trade-mark facilities held for sale. The increase in the cost of Super Washreg-trade-mark facilities operating pending sale for the fiscal year ended February 28, 1995, was $1,784,000. For the ten months ended December 31, 1995, the increase was $2,205,000. At December 31, 1995, the cost of Super Washreg-trade-mark facilities operating pending sale was $4,014,000, while at June 30, 1996, it was $4,253,000. The Company expects that Super Washreg-trade-mark facilities operating pending sale will be maintained at the June 30, 1996 level. The Company's capital expenditures for property and equipment were $1,344,000 for the ten months ended December 31, 1995, including $912,000 for the long-term ownership and operation of Super Washreg-trade-mark facilities. The capital expenditures for property and equipment for the fiscal years ended February 28, 1995 and 1994, were $401,000 and $96,000, respectively. The Company intends to pay within one year from the Termination Date the portion of the S Corporation Distribution not funded by the proceeds of the Offering from alternative sources, including borrowings under the Company's lines of credit. The Company believes that its internally generated funds from operations and existing working capital lines of credit will together be sufficient to meet the Company's working capital and normal capital expenditure requirements for the foreseeable future. Expected significant expenditures for the long- term ownership and operation of Super Washreg-trade-mark facilities will be funded by the lines of credit available for the financing of Super Washreg-trade-mark facilities. EFFECTS OF INFLATION Although increases in costs for sites, building materials, sub- contractors, and labor could adversely affect the Company's operations, the Company generally has been able to maintain cost increases at or below the level of inflation. Selling price increases have kept pace with cost increases and gross profit percentages have remained relatively stable. SEASONALITY AND QUARTERLY FINANCIAL INFORMATION Historically, the Company had its highest net sales and profits in the third calendar quarter and the fourth calendar quarter. This fluctuation has been due to the Company constructing its Super Washreg-trade-mark facilities predominantly in the climate of the Midwest. Normally the construction season began by the end of the first calendar quarter with facilities available for sale in the second calendar quarter. The construction season ended by the end of the fourth calendar quarter. As the Company constructs a greater percentage of Super Washreg-trade-mark facilities in Southern climates, in addition to the Midwest (six facilities were completed during the first six months in 1996 in Texas and Arizona), the Company believes net sales and profits from the sale of Super Washreg-trade-mark facilities should be less seasonal. Starting in 1996, the business plan of the Company is to retain, own and operate a number of the Super Washreg-trade-mark facilities constructed by it each year with the goal of owning and operating in excess of 100 Super Washreg-trade-mark facilities by the end of the year 2001. The Company currently operates 4 facilities for long-term ownership. To minimize the effect on the Company's overall profitability from operating facilities due to adverse weather conditions in any one region of the United States, the Company intends to build Super Washreg-trade-mark facilities in geographical regions offering a variety of weather patterns. The following is an unaudited summary of the Company's quarterly results of operations for the calendar years 1994 and 1995, and the first six months of 1996. QUARTERLY DATA (CALENDAR YEAR IN THOUSANDS) FIRST SECOND THIRD FOURTH CALENDAR QUARTER QUARTER QUARTER QUARTER YEAR Net Sales 94 $ 2,033 100.0% $ 5,546 100.0% $ 7,361 100.0% $ 7,666 100.0% $22,606 100.0% 95 4,573 100.0 3,883 100.0 11,465 100.0 5,851 100.0 25,772 100.0 96 4,644 100.0 8,865 100.0 Gross Profit 94 $ 219 10.8% $ 1,079 19.5% $ 1,725 23.4% $ 1,375 17.9% $ 4,398 19.4% 95 780 17.1 818 21.1 2,755 24.0 1,048 17.9 5,401 21.0 96 539 11.6 1,909 21.5 Pro-Forma Net Income (Loss) 94 $ (27 ) (1.3)% $ 407 7.3% $ 717 9.7% $ 426 5.6% $ 1,523 6.7% 95 295 6.4 283 7.3 1,443 12.6 336 5.7 2,357 9.1 96 115 2.5 869 9.8 ENVIRONMENTAL REGULATION The Company is subject to various federal, state, and local environmental laws and regulations. The Company believes that its operations currently comply in all material respects with applicable environmental laws and regulations. The Company believes that the trend in environmental regulation is toward stricter standards, and that these stricter standards may result in higher costs for the Company and its competitors. Those costs and required capital expenditures are not expected to be material to the Company. <PAGE> BUSINESS GENERAL The Company is engaged in the sale and licensing of "turn key" Super Washreg-trade-mark facilities and provides ongoing support to its licensees through its parts, service, research and advertising departments. The Company is also available to its licensees for consultation regarding various business aspects of operating their Super Washreg-trade-mark facilities. This includes licensee questions regarding recordkeeping, financial and statistical analysis, personnel issues, promotion ideas, property tax assessments, financing, insurance claims, etc. The Company also owns and operates Super Washreg-trade-mark facilities and provides management services for licensees who choose not to manage their facilities on a day-to-day basis. The Company believes it is the only Company in the car wash industry that provides licensees a "turn-key" package whereby the Company acquires the site, handles all zoning and permitting issues, performs as the general contractor, sells and installs the equipment, trains the licensees and their employees, conducts the grand opening, and provides consultation and management services thereafter. As of June 30, 1996, there were 380 Super Washreg-trade-mark facilities operating in 19 states. These facilities are primarily located in the Midwest, with 78% located in Illinois, Wisconsin, Iowa, South Dakota, Nebraska, Indiana and Ohio. Of the 380 Super Washreg-trade-mark facilities operating as of June 30, 1996, employees of the Company owned or had an interest in 68 facilities, including 28 facilities in which non-officer employees had an interest, 31 facilities in which executive officers had an interest and 9 facilities in which non-officer employees and executive officers had an interest. Historically, the Company strategy has been to sell all of the Super Washreg-trade-mark facilities it constructs to approved licensees. For the last five reporting periods, fiscal years ending February 28, 1992 through February 28, 1995, and the ten months ended December 31, 1995, gross sales from the sale of Super Washreg-trade-mark facilities ranged from 81% to 84% of total gross sales. The percentage of new Super Washreg-trade-mark facilities sold during these reporting periods to licensees who already owned one or more Super Washreg-trade-mark facilities ranged from 33% to 48% of the total facilities sold. The remainder of the Super Washreg-trade-mark facilities sold during these periods were sold to new Super Washreg-trade-mark licensees. During the last five reporting periods, the number of Super Washreg-trade-mark facilities developed by the Company on sites owned by Super Washreg-trade-mark licensees ranged from 25% to 43% of the total Super Washreg-trade-mark facilities developed by the Company during those periods. As the Company implements its business plan of retaining, owning, and operating a number of the Super Washreg-trade-mark facilities it constructs each year, the majority of the real estate the Company acquires for facilities will be for this purpose. In general the construction and sale of Super Washreg-trade-mark facilities for licensees will be on real estate owned or leased by the licensee. The Company has purchased a number of existing Super Washreg-trade-mark facilities as well as other existing car wash facilities which it retrofitted into Super Washreg-trade-mark facilities which it sold or is operating pending sale. During the last five reporting periods, 6 such facilities were acquired. In addition, the Company has expanded a number of Super Washreg-trade-mark facilities to add additional bays. During the last five reporting periods, the Company added in total 6 self-service bays and 17 Supermaticreg-trade-mark bays to these facilities. INDUSTRY There are numerous companies in the United States that assemble and distribute car wash equipment and supplies. According to the International Car Wash Association ("ICA"), there are approximately 22,000 car washes in the United States. Car washes are generally classified as either automatic car washes or self-service car washes. Automatic car washes include full service conveyor washes (in which the vehicle is moved by a conveyor or other means through various wash processes and may include extensive hand work to wipe down the vehicle's exterior and clean the vehicle's interior), exterior only conveyor washes and exterior only non-conveyor washes (in which the vehicle remains stationary in the washing area, or bay, while the various wash processes are applied). Generally, only full service conveyor car washes include interior cleaning. Most automatic car washes utilize a combination of a friction cleaning process (in which brushes, pads or other abrasive processes touch the vehicle) and a high-pressure spray cleaning process. Self-service car washes use a foaming brush and/or a high-pressure spray cleaning process which is applied by the customer by means of a hand-held spray wand. In addition to the basic wash, most car washes offer customers optional car care products and services. SUPER WASHreg-trade-mark FACILITIES A Super Washreg-trade-mark facility generally contains several self- service car wash bays and one or two Supermaticreg-trade-mark friction-free, non-conveyor bays. The "typical" Super Washreg-trade-mark facility has three self-service bays, one Supermaticreg-trade-mark bay and an equipment room. A Super Washreg-trade-mark facility is generally located on a site containing approximately 10,000 square feet of hard surface that will accommodate four or more waiting vehicles per bay. Located in front of each of the self-service bays is a coin-operated vacuum cleaner. The average price paid by a self-service wash customer at a Super Washreg-trade-mark facility is approximately $1.25 for four minutes. The average self-service wash customer utilizes two four minute cycles to complete the washing process. The average price paid by a Supermaticreg-trade-mark wash customer, including polish, is approximately $4.00. Self-service bays may also be used to clean motorcycles, boats, trailers, lawn tractors, off-road recreational vehicles and various types of yard and garden equipment. Super Washreg-trade-mark facilities utilize a high-pressure, friction- free cleaning process. This process minimizes the possibility of damaging the car's surface because it does not involve brushes, pads or other abrasive devices. The self-service washing process is activated in-bay by the customer depositing quarters into a coin receptacle mechanism. Customers are offered a five step process that includes a presoak step, a high-pressure soap step, a high-pressure rinse step, a high-pressure polish step and a final spot free rinse step. If selected, the polish step is available for use after the high- pressure rinse step and before the spot free rinse step. Super Washreg-trade-mark facilities use a water-based polish instead of an oil- based product which typically leaves a film build-up upon the car's surface and smears its windows. The Company believes its polish is the only water- based polish used in the car wash industry. The presoak cycle utilizes "SW 3000 Super Soap," a product blended exclusively for the Company. It is applied under low pressure and is formulated to emulsify common dirt, bugs, road film and pollutants. The high- pressure soap step removes the dirt and grime loosened by the SW 3000 Super Soap and is followed by the high-pressure rinse step which rinses away dirt and soap residue. The final step is the spot free rinse step in which the vehicle is rinsed with water purified by a reverse osmosis system. This system substantially removes all of the minerals, particles and chemicals that cause spotting and streaking on glass, chrome and paint. After the spot free rinse is applied, the customer drives away and lets the air dry the vehicle, thereby avoiding the need for blower-dryers or drying curtains, towels or chamois which may damage the vehicle's finish. The Supermaticreg-trade-mark bay offers a friction-free washing process which takes place while the customer remains in the vehicle. Outside the Supermaticreg-trade-mark bay is an automatic car wash actuator ("ACW"). To activate the Supermaticreg-trade-mark bay, the customer, prior to driving into the bay, chooses one of four options offered at the ACW and pays for the wash with either cash or pre-purchased specially encoded coupons ("token notes") which are inserted into the ACW. All options include (i) an undercarriage flush which is particularly beneficial during the winter months when salt, snow and other harmful residue can build up underneath the vehicle, (ii) a pre-soak step in which "SW 3000 Super Soap" is applied to the vehicle's surface under low pressure, (iii) an initial high-pressure rinse step which is followed by, (iv) a second high-pressure rinse step and (v) a final spot-free rinse step. If the customer chooses option two, polish is applied with the second high-pressure rinse step. If option three is selected, a third high- pressure rinse step is added, but polish is not included. Option four includes two SW 3000 Super Soap steps, three high-pressure steps and a spot- free rinse step and polish is added to the second high-pressure rinse step. After inserting either cash, token notes or a combination of cash and token notes into the ACW, a lighted signal, which is located at the front of the bay in view of the customer, flashes green and the customer drives forward and automatically trips a switch at the entrance of the bay which activates the undercarriage flush. As the customer continues to drive forward, the undercarriage of the vehicle is washed by a high-pressure flush. When the vehicle drives over a stop plate, the red light of the signal is activated and stays on until the washing process is completed. The signal also has a light to indicate when the polish (if selected) and spot-free rinse steps are being applied. Each car wash step is automatically applied by means of a spray arch which travels around the vehicle on a fixed overhead track. Following the spot-free rinse step, the exit door automatically opens and the lighted signal flashes green to inform the driver to drive forward and exit the bay. A Supermaticreg-trade-mark wash takes from two minutes and fifty-three seconds to three minutes and forty-five seconds to complete, depending on the option selected. Typically, the cash price charged for a Supermaticreg-trade-mark wash ranges from $3.50 to $6.00, depending on the option selected. Token notes are generally sold at a discount which the Company believes encourages customers to wash more frequently. Most Super Washreg-trade-mark facilities are open twenty-four hours a day and are lighted for safety, security and night use. Each facility generally employs 1.5 full-time equivalent employees for the day-time shift (compared with exterior only and full-service conveyor car washes which, according to a 1995 survey published in Professional Car Washing & Detailing Magazine, employ an average of 8.5 and 19.5 full-time equivalent employees, respectively). The attendant at a Super Washreg-trade-mark facility meets and greets customers, sells discount Supermaticreg-trade-mark car wash tokens and maintains the equipment and the Super Washreg-trade-mark facility premises. The Company has a mission statement for attendants "to meet and greet the customer with a glad heart and make a positive difference in their day." The Company believes the execution of this mission statement has a positive effect on Super Washreg-trade-mark customers and a positive influence on repeat business. The following table sets forth the location by state of licensed and Company-owned operating Super Washreg-trade-mark facilities as of June 30, 1996. STATE NUMBER OF CAR WASHES Arizona 1 Colorado 2 Idaho 10 Illinois 144 Indiana 21 Iowa 38 Missouri 8 Minnesota 4 Montana 2 Nebraska 13 Ohio 24 Oregon 1 Pennsylvania 2 South Dakota 12 Tennessee 2 Texas 5 Utah 42 Washington 4 Wisconsin 45 Total 380 LICENSING PROGRAM Typically, prospective licensees have a strong desire to own their own business and have discovered the Company either as a customer of an existing Super Washreg-trade-mark facility or through discussions with another Super Washreg-trade-mark licensee. The Company has never advertised for new licensees or for the sale of its Super Washreg-trade-mark facilities. Each prospective licensee is required to visit the Company headquarters in Morrison, Illinois. A significant portion of that visit involves a meeting with senior management personnel. The purpose of the meeting is to (i) discuss the prospective licensee's future goals and determine where ownership of a Super Washreg-trade-mark facility fits, (ii) gain insight into the Company's philosophy of doing business, and (iii) gain a deeper understanding of the relationship between the Company and its licensees. If, after this initial meeting, the prospective licensee decides to continue to pursue the ownership of a Super Washreg-trade-mark facility, the Company evaluates the information it has been furnished by the prospective licensee and what it learned from the meeting with the prospective licensee and either approves or disapproves the prospective licensee as a potential Super Washreg-trade-mark facility owner. If approved, the prospective licensee is then required to demonstrate to the Company that he or she has the financial ability to acquire a Super Washreg-trade-mark facility. Once the Company is satisfied that the prospective licensee has the financial ability to acquire a Super Washreg-trade-mark facility, his or her name is added to the list of individuals / ownership groups who want to acquire a Super Washreg-trade-mark facility. Each prospective licensee that is added to the list must provide the Company with the geographic location and the size of the Super Washreg-trade-mark facility (number of bays: self-serve and Supermaticreg-trade-mark bays) he or she is willing to consider acquiring. As the Company develops Super Washreg-trade-mark facilities which meet their criteria, prospective licensees are provided information about their locations and given an opportunity to purchase the facility. Currently, licensees who purchase Super Washreg-trade-mark facilities from the Company enter into an Operations Agreement with the Company pursuant to which the Company grants the licensee the right to use the Super Washreg-trade-mark name, symbol, logo and colors and the licensee agrees (i) to use only supplies and products which are sold by or have been approved by the Company, (ii) to operate and maintain his or her facility in conformity with the Super Washreg-trade-mark standards, (iii) not to add to or delete from the original Super Washreg-trade-mark equipment installed in the Super Washreg-trade-mark facility without the approval of the Company and (iv) not to compete with the Company. Pursuant to the Operations Agreement the Company has the right to inspect any Super Washreg-trade-mark facility without notice and cause the licensee to refrain from using the Super Washreg-trade-mark name, symbol, logo or colors if the licensee has not operated or maintained his or her facility in conformity with the Super Washreg-trade-mark standards, a process that the Company refers to as "delicensing" a licensee. As of June 30, 1996, 56 facilities constructed by the Company were delicensed and not operating as Super Washreg-trade-mark facilities for failure to comply with the Operations Agreement. Licensees who purchase Super Washreg-trade-mark facilities are also eligible to participate in the Super Washreg-trade-mark Insurance Package. The Company initiated this package in September 1990 to provide licensees, from state to state, with quality coverage at an affordable price. The package, which includes property, liability, workmen compensation, and extended coverage, is designed, and only available for Super Washreg-trade-mark licensees. The package is provided and administered through an independent insurance agency and underwritten by a national insurance company. The Company receives no remuneration for licensee participation. The Company is considering whether to strengthen its Operations Agreement to have more substantial control over certain aspects of its licensees' operations or to convert the relationship between future licensees and the Company from a license without fees or substantial control to a franchise relationship with fees and more comprehensive controls. The Company's existing license agreements do not contain a specific term. If the Company decides to cause its current licensees to enter into a new license agreement or become franchisees, there is no assurance the Company will be able to accomplish such result. If the Company decides to enter into a new license agreement or become a franchisor, it will be required to register as a franchisor in those states that require registration and in which the Company intends to offer Super Washreg-trade-mark franchises. There is no assurance that the Company can meet all such states' requirements. Furthermore, certain state regulatory agencies may raise the issue of why the Company was not previously registered as a franchisor. The Company believes that its current license arrangement does not constitute a franchise, although there is no assurance that the resolution of such issue, if raised, will be favorable to the Company. REAL ESTATE ACQUISITION AND DEVELOPMENT The Company has a real estate acquisition and development department comprised of two site selectors, a zoning and permits supervisor and assistant, a department head and an assistant to the department head. Robert D. Black also participates in the approval process for every site. Mr. Black, over his twenty year career in the car wash industry, has reviewed and been instrumental in submitting real estate purchase offers on over 3000 potential car wash sites. Mr. Black has ultimate approval authority with respect to each site together with the orientation of the Super Washreg-trade-mark facility on such site. In order for a site to be considered for a Super Washreg-trade-mark facility, the site must meet the requirements of the Company, including those relating to location, lot size, traffic count, traffic speed, population, available utilities, competition, the local economic climate, zoning and other pertinent demographic data. The Company also works to obtain appropriate permits required by the various state and municipal authorities who have jurisdiction over the site. In addition to locating and acquiring sites for development as a Super Washreg-trade-mark facility, the Company's real estate acquisition and development department also provides extensive assistance to prospective licensees and existing licensees who wish to acquire their own site to develop a Super Washreg-trade-mark facility. All such sites must meet the Company's site criteria and standards and must be approved by the Company's real estate department's acquisition committee. The Company often purchases sites before it has a licensee to whom to sell the site. A number of Super Washreg-trade-mark facilities have been built on real estate owned by licensees. A limited number of Super Washreg-trade-mark facilities have been built on real estate leased by either the Company or the licensee. CONSTRUCTION The Company construction personnel supervise and perform certain phases of the construction of each Super Washreg-trade-mark facility. The Company has 34 full time employees in its construction department, including 13 construction supervisors. This department is responsible for building each Super Washreg-trade-mark facility to the standards and specifications of the Company. The Super Washreg-trade-mark facility, except for plumbing and electrical work, is constructed by the Company personnel and by certain subcontractors. Many of these subcontractors work for the Company in different geographic areas. The Super Washreg-trade-mark equipment is installed and tested by Company equipment technicians. Generally, excavation, plumbing, electrical and paving work is performed by subcontractors whose business is located in the community where the Super Washreg-trade-mark site is located. The Company believes a standard set of proprietary plans enables the Company to realize savings in the cost of construction of each Super Washreg-trade-mark facility. PARTS AND SERVICE The Company furnishes support to each Super Washreg-trade-mark licensee after the Super Washreg-trade-mark facility opens. Licensees can call the Company parts and service department about any maintenance or repair problem and receive free consultation no matter how long it takes to work through the problem; a charge is only made in the event an on-site service call is required. The Company staffs its service phones Monday through Friday from 8:00 AM to 5:00 PM and on Saturday from 9:00 AM to 2:00 PM. Service technicians then monitor the Company's telephone answering service at specified times for the remainder of Saturday afternoon, on Sundays, and on holidays, and respond to any licensee service requests received during these time periods. The Company generally maintains a complete inventory of parts and supplies required to keep a Super Washreg-trade-mark facility operational. ADVERTISING The Company employs a full time advertising coordinator to supervise the advertising program at Super Washreg-trade-mark facilities managed by the Company, to administer Company advertising campaigns where all licensees are eligible to participate, and to consult with licensees regarding advertising plans at their Super Washesreg-trade-mark. The Company maintains an extensive library of Super Washreg-trade-mark advertising materials for various media. Sample advertising materials and advertising assistance is provided at no cost to licensees. MANAGEMENT The Company's Super Washreg-trade-mark facility management department was established in 1986 to manage Super Washreg-trade-mark facilities for licensees who do not want to be operators. The Company generally charges licensees a percentage of gross revenue (ranging from 8 to 9%) for this service (See "Certain Relationships and Related Party Transactions.") As of June 30, 1996, the Company managed 55 Super Washreg-trade-mark facilities pursuant to management agreements with licensees and 19 Super Washreg-trade-mark facilities owned by the Company, 4 of which are held for long-term ownership, and 15 of which are held in inventory for sale to approved licensees. The Company is responsible for the day-to-day operation of the Super Washreg-trade-mark facility, including but not limited to the handling of all personnel matters, overseeing all ordering of parts and service, implementing all advertising and promotions, accounting for all receipts, performing all bill paying and bookkeeping functions, preparing all payroll and sales tax returns, and preparing periodic financial statements. The Company management department has nine field staff personnel whose primary duty is to insure that the managers and attendants at each Super Washreg-trade-mark facility managed by the Company conform to Company standards and procedures and that the building and equipment are being maintained according to Company standards. This is accomplished through frequent telephone contact, written communication and monthly or more frequent visits to the facility. Throughout the month, field personnel also work closely with the attendants at each facility handling any special situations which may arise as well as assisting them in the implementation of new programs and the evaluation of the performance of such programs. In addition, for a fee Company personnel are available to staff a licensee's facility for a limited period of time to provide temporary management assistance. The Company is also available, for a fee, to hire personnel at a licensee's facility, to provide additional training to attendants and to inspect the facility for whatever repairs and improvements need to be made. RESEARCH AND DEVELOPMENT The Company employs one employee to investigate and test new car wash equipment and supplies. The Company has introduced many innovations in the car wash industry, including the first self-service car wash to use low pressure "SW 3000 Super Soap" presoak and one of the first self-service car washes to use the reverse osmosis "spot free" rinse. The Company has also developed a system whereby it can, through the use of a modem and a computer located at its Morrison, Illinois Service Center, dial into the computer controlling the operations of the Supermaticreg-trade-mark bay at any Super Washreg-trade-mark facility and determine the reason for operating problems and then implement or suggest corrective action. In the event that a computer program operating the computer at a Super Washreg-trade-mark facility fails for any reason, the parts and service department is able to download a new program via the modem and thereby limit the down time of the Supermaticreg-trade-mark bay to approximately ten minutes. As part of the same computer system and through the use of proprietary software it developed and owns, the Company is able to independently access the volume and cash receipts information at any Super Washreg-trade-mark facility it owns and/or manages. The Company believes this system provides internal control with respect to car wash volume and cash receipts. The Company makes this system available to its licensees. QUALITY ASSURANCE PROGRAM The Company's Quality Assurance Program provides its licensees with feedback regarding the general conditions and operations of a licensee's Super Washreg-trade-mark facility. Generally, each licensee's Super Washreg-trade-mark facility is inspected by a Company Quality Assurance Inspector once a year. The Company uses these inspections to monitor licensees compliance with the operating terms and conditions of the Operations Agreement. Facilities which are in violation of the Operations Agreement will receive a letter from the Company that describes the violations. The licensee then has 60 days to correct the violations. If any violations remain uncorrected at the termination of the 60 day period, the Company will commence actions to delicense the facility. As of June 30, 1996, the Company had delicensed approximately 56 facilities for failure to comply with the Operations Agreement. COMPETITION Super Washreg-trade-mark facilities are in competition with other self- service exterior and automatic car washes as well as automatic full service washes which, unlike Super Washreg-trade-mark facilities also clean the interior of the car, although usually at a higher price per wash. Although the Company believes that its network of licensed Super Washreg-trade-mark facilities is the largest car wash network in the United States, there may be other larger networks, or persons and entities having similar or greater experience and financial resources than the Super Washreg-trade-mark network. In addition, the car washes owned by the Company may face competition from existing and future car washes, including self-service and full service washes, some of which may have similar equipment. Customers also may elect to wash their cars without using a car wash facility. EMPLOYEES As of June 30, 1996, the Company employed 184 persons, none of whom is covered by a collective bargaining agreement. The Company provides medical insurance and other benefits for eligible employees. The Company generally considers its relationships with its employees to be good. INTELLECTUAL PROPERTY RIGHTS The Company has obtained the registration of the trademarks Super Washreg-trade-mark and Supermaticreg-trade-mark. Such trademarks are registered on the Principal Register of the U.S. and Trademark Office. Such trademarks are believed by the Company to be well-recognized by consumers and therefore important in the business of the Company. The Company grants to each licensee the right to use such trademarks in connection with such licensee's facility. PROPERTIES The Company leases its executive offices and operating headquarters from Robert D. and Mary K. Black. The executive offices and headquarters are located in Morrison, Illinois and consist of a parts and service building, an administrative office building, a warehouse building, a secured open storage area and vacant ground for expansion of the Company's facilities. The parts and service building was constructed in 1988 and both the administrative office and the warehouse buildings were constructed in 1995 and occupied in early January, 1996. The Company has entered into an agreement with the Blacks to lease a training facility to be constructed by them on the vacant ground to be used for expansion of the Company's facilities. This facility is expected to be completed in early 1997. The parts and service building contains approximately 8,430 square feet and the administrative office and warehouse buildings contain approximately 8,320 square feet and 1,800 square feet, respectively. Each property is leased by the Company under the terms of a triple net lease agreement. Beginning in 1996, annual lease payments to be paid to Robert D. and Mary K. Black will amount to approximately $156,600. See "Certain Relationships and Related Party Transactions." ENVIRONMENTAL PROCEEDINGS The Company is subject to various federal, state and local environmental laws and regulations. The Company believes that its operations currently comply in all material respects with applicable environmental laws and regulations. The Company obtains a Phase I environmental study on sites it acquires which it believes have a potential environmental risk. LEGAL PROCEEDINGS In the opinion of the Company's management, there are no legal proceedings pending to which the Company is a party or to which any of its properties is subject, other than ordinary routine litigation incidental to the business, which is not expected to have a material adverse effect on the results of operations, financial condition or cash flows of the Company. <PAGE> MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS As of June 30, 1996, the directors and executive officers of the Company, their ages and their present positions with the Company are as follows: <TABLE> <CAPTION> NAME AGE POSITION AND OFFICES HELD <S> <C> <C> Mary K. Black 45 Chairman of the Board of Directors and Secretary Robert D. Black 47 Director, President, Treasurer and Chief Executive Officer Joseph B. Hermes 55 Senior Vice President Donald B. Vogel 42 Vice President and Chief Financial Officer Michael C. Fliss 39 Vice President and Chief Operating Officer Barry J. Black 45 Vice President </TABLE> All directors hold office until the next annual meeting of stockholders of the Company, and until their successors have been elected and qualified. The Company's officers are elected annually by and serve at the discretion of the Board of Directors. Robert Black and Mary Black are husband and wife. Barry Black is Robert Black's brother. Within 90 days of the consummation of the Offering, the Company anticipates naming Mr. Hermes, Mr. Vogel, Mr. Fliss, Mr. Barry Black and the following three additional persons, who are not affiliated with the Company, as directors: ________. MARY K. BLACK. Mary K. Black has served as Chairman of the Board of Directors since September 10, 1996, and an executive officer and Director of the Company since its inception in March 1982. Mrs. Black has been responsible for the development of many departments at the Company, including the accounting, advertising and customer relations departments. Additionally, Mrs. Black has been directly responsible for developing the Parts and Service Department, which has grown from $1,519,000 in gross sales in 1989 to $3,241,000 in 1995. Mrs. Black is a co-founder of the Company, along with her husband, Robert. ROBERT D. BLACK. Robert D. Black has served as the Chief Executive Officer, President, Treasurer and a Director of the Company since its inception in March 1982. His primary responsibility is acting as the Company's primary "vision keeper," whereby he cultivates the Company's growth while upholding and monitoring its goals and philosophy. Mr. Black has been and remains the Company's only sales representative and is a member of the real estate site selection committee. Mr. Black is a co-founder of the Company, along with his wife, Mary. JOSEPH B. HERMES. Joseph B. Hermes has served as Senior Vice President of the Company since December 1995 and will direct the new Company strategy. Mr. Hermes joined the Company in February 1989 as a Vice President and Chief Financial and Operating Officer. Prior to joining the Company, Mr. Hermes served as President and Chief Executive Officer of Whiteside County Bank, Morrison, Illinois. Mr. Hermes became associated with Bob and Mary Black, the co-founders of the Company, in 1976, when they obtained their first car wash loan from the bank. As the bank officer in charge of the Super Wash relationship, Mr. Hermes was a close advisor to the Company during its development. Prior to joining the bank in September 1974, Mr. Hermes was a partner in the accounting firm of Clifton, Gunderson & Co. Mr. Hermes graduated from Loras College, Dubuque, Iowa in June 1962. Following graduation, he was employed by Arthur Andersen LLP. Mr. Hermes received his Certified Public Accountant Certificate in September 1971. DONALD B. VOGEL. Donald B. Vogel has served as a Vice President and Chief Financial Officer of the Company since July 1994. From 1987 to June 1994, Mr. Vogel was a partner with Clifton, Gunderson & Co., a certified public accounting firm, in the Sterling, Illinois office. Clifton, Gunderson & Co. provided audit, tax and management advisory services to the Company from 1982 to June 1994. Mr. Vogel served as the partner-in-charge of these engagements until he joined the Company in July 1994. Mr. Vogel is a Certified Public Accountant and has a Bachelor in Business Administration from Western Illinois University. MICHAEL C. FLISS. Michael C. Fliss has served as a Vice President and Chief Operating Officer of the Company since December 1995. Prior to joining the Company, Mr. Fliss served as a Director and the President/Chief Operating Officer of AMCORE Bank N.A., Rock River Valley ("Amcore") from January 1993. Amcore is one of the Company's primary lenders and, as President, Mr. Fliss supervised the Bank's relationship with the Company. From April 1990 to January 1993, Mr. Fliss served as the Executive Vice President/Chief Lending Officer of Amcore-Sterling. From June 1982 to March, 1989, he was employed by MBank Dallas, N.A. ("MBank"), Dallas, Texas, as a commercial lending officer in the National and Middle Market sectors. MBank was acquired by Banc One Corporation in 1989, and Mr. Fliss served as a First Vice President-Bank Acquisitions of Banc One N.A., Dallas and served on the Executive Loan Committee and Credit Committee. Mr. Fliss has a Bachelor of Business Administration degree in finance and financial economics from the University of Iowa. BARRY J. BLACK. Barry J. Black has served as a Vice President since June 1996. In 1985, Mr. Black became the Construction and Installation Department Head. In his role as department head, Mr. Black has been instrumental in the development of the department and in the development of the building design and equipment layout. From 1981 to 1985, Mr. Black worked as an independent contractor exclusively for Super Wash, Inc. Mr. Black has a Bachelor of Arts degree from Upper Iowa University. [INSERT BIOGRAPHIES OF OUTSIDE DIRECTORS TO BE ELECTED.] COMMITTEES OF THE BOARD OF DIRECTORS After the consummation of the Offering and the election of _____________________, the Company intends to form an Audit Committee comprised of a minimum of two of the outside directors. DIRECTOR COMPENSATION Non-employee directors will receive $1,000 per meeting attended, in person, or by telephone and the Company will reimburse their out-of-pocket expenses related to attending meetings of the Board of Directors or the committees thereof. EXECUTIVE COMPENSATION Robert D. Black, Chief Executive Officer, and Mary K. Black are the only executive officers of the Company whose 1995 calendar year salary and bonus exceeded $100,000. Mr. Black's 1995 annual compensation was a salary of $348,637 and a bonus of $3,363. Mrs. Black's 1995 annual compensation was a salary of $148,637 and a bonus of $3,363. There were no other forms of compensation besides salary and bonus. STOCK OPTION PLAN The Company intends to adopt a stock option plan for key employees. Upon consummation of the Offering the Company intends to grant stock options to certain executive officers and other key employees, none of which are Named Executive Officers, relating to 360,000 shares of Class A Common Stock at $10 per share. Under the Company's stock option plan for key employees (the "Stock Option Plan"), as proposed, key employees of the Company will be granted options to purchase shares of Class A Common Stock. The Stock Option Plan will allow for the sale of up to 600,000 shares of Class A Common Stock. The exercise price of options granted under the Stock Option Plan will be determined by the Board of Directors of the Company and will be required to be not less than 100% of the fair market value of the shares on the date of grant. The options granted under the Stock Option Plan may be "incentive stock options" under Section 422 of the Code or non-statutory options. The aggregate fair market value of shares with respect to which incentive options become exercisable for the first time by any optionee during any calendar year cannot exceed $100,000. The Board of Directors of the Company will have the authority in its discretion to prescribe in any option agreement the terms under which options are exercised, provided that such options must be exercised within ten years of the date of grant. Upon the termination of employment of an optionee, the optionee will be able to, within three months after such termination, exercise options to the extent the options were exercisable on the date of such termination. Upon the retirement of an optionee, the optionee will be able to, within three months after such retirement, exercise options whether or not such options were exercisable upon the date of the retirement. Upon the permanent disability or death of an optionee while employed by the Company, the optionee or the executor or administrator of his or her estate will be able to, within 12 months after such event, exercise options whether or not such options were exercisable at the time of permanent disability or death. Upon the death of an optionee within three months following termination of such optionee's employment, the executor or administrator of the optionee's estate will be able to, within 12 months of such optionee's death, exercise options to the extent the options were exercisable on the date of such optionee's termination of employment. Provided, however, in no event may an option be exercised after its expiration date. In the event of a merger, consolidation, reorganization or dissolution of the Company, or the sale or exchange of substantially all of the Company's assets, the rights under outstanding options will terminate, except to the extent and subject to such adjustments as may be provided by the Board of Directors of the Company or by the terms of the plan or agreement of merger, consolidation, reorganization, dissolution or sale or exchange or such assets. Options granted pursuant to the Stock Option Plan will not be transferable other than by will and by the laws of descent and distribution and will be exercisable during the optionee's lifetime only by the optionee. The Stock Option Plan will not, without the approval of the stockholders, be amended in any manner that would (i) materially increase the benefits accruing to participants thereunder, (ii) materially increase the number of shares which may be issued thereunder or (iii) materially modify the requirements as to eligibility for participation thereunder. <PAGE> CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS FAMILY RELATIONSHIPS As used in this Prospectus, the term "Black Family Member" includes the following persons: (i) Mary K. Black, Robert D. Black and their estates, guardians, conservators, committees or attorneys-in-fact; (ii) each lineal descendant of Mary K. Black and Robert D. Black (a "Black Descendant") and their respective guardians, conservators, committees or attorneys-in-fact; (iii) each "Family Controlled Entity" (as defined below); and (iv) the trustee, in their respective capacities, as such, of each "Family Controlled Trust" (as defined below). The term "Family Controlled Entity" means (i) any partnership if at least 80% of the value of its partnership interests are owned by Black Family Members; and (ii) any limited liability or similar company if at least 80% of the value of the company is owned by Black Family Members. The term "Family Controlled Trust" includes certain trusts existing on the date hereof and trusts, the primary beneficiaries of which are Mr. Black, Mrs. Black and Black Descendants. RELATED PARTY TRANSACTIONS The terms of the Related Party Transactions were established by the Blacks and management and are not the result of arm's-length negotiations. Certain Related Party transactions between the Black Family Members and the Company are on terms more favorable to the Black Family Members than those which could have been obtained in arm's-length transactions. Following the Closing of the Offering, the Company intends to submit any proposed transactions not described herein between the Company and its directors, executive officers and their affiliates or the Black Family Members to a committee of disinterested directors for review. Transactions not described herein between the Company and Black Family Members will require approval by a majority of the disinterested directors. Transactions between the Company and other officer and directors or entities owned by such persons will continue to be at prices available to an unaffiliated licensee. PAYMENTS FOR PARTS AND SUPPLIES The following table sets forth certain payments made to the Company by officers, directors and entities owned by officers and directors. <TABLE> <CAPTION> TEN MONTHS ENDED Six Months Ended DECEMBER 31, 1995 JUNE 30, 1996 <S> <C> <C> Town's Edge Car Wash, Inc.(1) $162,579 $46,581 Edge Town Car Wash, Inc.(1) 9,165 6,150 Super Wash Limited Partnership(2) 79,545 41,000 Joseph B. Hermes (Senior Vice President) 31,533 16,984 Donald B. Vogel (Vice President) 8,805 6,243 Harmik Wash, Inc.(3) - 63 LDB, Inc.(4) 9,811 4,632 </TABLE> (1) The sole stockholders of such entity are Robert and Mary Black. Such entities purchase, and will continue to purchase after the Offering, all parts and supplies from the Company at cost plus 10%. (2) Robert and Mary Black and Joseph B. Hermes are limited partners holding an aggregate of 33.18% of the limited partnership interest in such partnership. The general partner of such partnership is Lincolnway, Inc., which is owned 75% by the Company and 25% by the Blacks. Under the terms of the limited partnership agreement of the Super Wash Limited Partnership, the general partner is obligated to attempt to sell the Super Washreg-trade-mark facilities owned by the partnership after each facility has been owned and operated by the partnership for a period of five years and before the facility is seven years old. Four of the eight facilities owned by the partnership were acquired in 1991, two were acquired in 1992 and one facility was acquired in each of 1994 and 1995. The Company has considered the possibility of acquiring the facilities owned by the Super Wash Limited Partnership but no final decision has been made as of the date of this Prospectus. If the facilities are acquired by the Company, the acquisition price will be the fair market value of such facilities. (3) Michael C. Fliss, a Vice President of the Company, is the beneficial owner of all of the capital stock of such entity. (4) Barry Black, a Vice President of the Company, is a 50% stockholder in such entity. PAYMENTS FOR MANAGEMENT FEES <TABLE> <CAPTION> TEN MONTHS Six Months ENDED Ended DECEMBER 31, 1995 JUNE 30, 1996 <S> <C> <C> Super Wash Limited Partnership $70,554 $42,503 Joseph B. Hermes, Senior Vice President 13,342 8,856 </TABLE> As of June 30, 1996, the Company managed an aggregate of 25 Super Washreg-trade-mark facilities owned by Town's Edge Car Wash, Inc. ("Town's Edge") and Edge Town Car Wash, Inc. ("Edge Town") without charging such entities a management fee. After the consummation of the Offering the Company will continue to manage such Super Washreg-trade-mark facilities owned by Town's Edge and Edge Town for a management fee per facility of (i) 5% of the gross revenue of such facility per year for facilities which are less than two years old, and (ii) $3,000 per year for facilities which are two years or older. SALES OF SUPER WASHreg-trade-mark FACILITIES <TABLE> <CAPTION> TEN MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, 1995 JUNE 30, 1996 <S> <C> <C> TOWN'S EDGE CAR WASH, INC. Berne, IN $325,000* Rocks Falls, IL - Dixon Ave. 267,000* EDGE TOWN CAR WASH, INC. Urbana, OH - Main St. $370,000* MICHAEL C. FLISS Hebron, IN 474,586** SUPER WASH LIMITED PARTNERSHIP Olney, IL 244,956** </TABLE> * Cost plus $10,000. ** Standard price. An Entity owned by certain employees of the Company owns one Super Washreg-trade-mark facility. Management of the Company has considered the possibility of exchanging shares of its Class A Common Stock for such facility. As of the date of this Prospectus, no final decision has been made regarding any proposed exchange. If the facility is acquired by the Company, the acquisition price will be the fair market value of such facility. Joseph B. Hermes, a Senior Vice President of the Company, is in the process of acquiring real estate on which to build a Super Washreg-trade-mark facility. If the property passes through the approval process, it is anticipated that construction will begin on this facility during 1996. The price for such facility will be the price available to an unaffiliated licensee. On July 8, 1996, a company owned by the daughters of Robert and Mary Black purchased from the Company a Super Washreg-trade-mark facility previously owned by a licensee and repurchased by the Company at the cost to the Company of the repurchase and renovations, plus $10,000. Following consummation of the Offering, entities owned by Robert (a Director, the President and Chief Executive Officer of the Company) and Mary (the Chairman of the Board of the Company) Black anticipate purchasing between three and five Super Washreg-trade-mark facilities each year. LEASE PAYMENTS The Company made lease payments to Robert and Mary Black in the amount of $50,000 for the ten month period ending December 31, 1995 and $60,000 for the year ending February 28, 1995 to lease the parts and service building. 1996 lease payments will total approximately $156,600 for the parts and service building, the administrative office building and the warehouse building, which the Company believes is the fair market value of such buildings. The Company is planning to lease a building being constructed by the Blacks for a training facility. The facility is expected to be completed in early 1997. No rent has been established; however, the rent is expected to be at fair market value. During 1995 the administrative office building and warehouse building, which are owned by, and leased by the Company from, Robert and Mary Black, were constructed. Throughout the construction period, the Company paid the bills on behalf of the Blacks. Total construction costs amounted to $554,877. As of March 31, 1996, Robert and Mary had reimbursed the Company $464,562 and owed a balance of $90,315, which has been repaid as of July 31, 1996, without interest. TAX INDEMNIFICATION AGREEMENTS. Prior to the closing of this Offering, the Company and its existing stockholders will enter into an indemnification agreement relating to certain federal, state and local income tax liabilities of the Company and the existing stockholders, for the tax years during which the Company had elected to be treated as an S Corporation. This agreement will generally provide that the Company will indemnify the existing stockholders, and the existing stockholders will indemnify the Company, against any increase in the indemnified party's income tax benefits or liabilities (including interest and penalties and all expenses, attorneys' fees and accountants' fees incurred in connection therewith) as a result of any adjustment associated with a return filed with respect to a period during which the Company was an S Corporation. Payments under the agreement in favor of its stockholders of record immediately prior to the consummation of the Offering must be approved by a majority of the directors who are not affiliated with the Company as being consistent with the terms of the agreement. PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of June 30, 1996, and as adjusted to reflect the sale of the shares of the Common Stock offered hereby by the Company, by (i) all stockholders known by the Company to be beneficial owners of more than 5% of its outstanding Common Stock immediately prior to the Offering, (ii) each director of the Company, (iii) each of the Named Executive Officers and (iv) all executive officers and directors of the Company as a group. <TABLE> <CAPTION> STOCKHOLDER(1) Number of Number of TOTAL COMMON STOCK Shares of Class A Shares of Class Common Stock B Common Stock Percent of Percent of Beneficially Beneficially Total Owned Prior to Owned Prior to Total VotingVoting THE OFFERING(2) THE OFFERING(2)(3)(4) Power Prior to After the THE OFFERING <S> <C> <C> <C> <C> Mary K. Black - 2,553,000 46% 45.6% Robert D. Black - 2,553,000 46% 45.6% All directors and officers - 5,106,000 92% 91.2% as a group (5 persons) </TABLE> ___________ (1) The address of all stockholders who are executive officers is 707 West Lincolnway, P.O. Box 188, Morrison, Illinois 61270. (2) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission (the "Commission") and generally includes voting or investment power with respect to securities. Shares of Common Stock subject to options or warrants exercisable or convertible within 60 days are deemed outstanding for computing the percentage of the person or group holding such options or warrants, but are not outstanding for computing the percentage of any other person. Except as indicated in the footnotes to this table and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all share of Common Stock beneficially owned. (3) Each share of Class B Common Stock is convertible at the option of the holder into one share of Class A Common Stock and is automatically converted into a share of Class A Common Stock upon transfer to a person who is not a Black Family Member or if the total number of shares of Class B Common Stock is less than 20% of the aggregate number of shares of Common Stock outstanding on the record date of any stockholders meeting. See "Description of Capital Stock." (4) Excluding 222,000 shares of Class B Common Stock owned by a child of the Blacks, for which the Blacks disclaim beneficial ownership. DESCRIPTION OF CAPITAL STOCK The Company's authorized capital consists of 2,500,000 shares of Preferred Stock, no par value per share, 25,000,000 shares of Class A Common Stock, par value $.01 per share, and 25,000,000 shares of Class B Common Stock, par value $.01 per share. As of the date of this Prospectus there are 5,550,000 shares of Class B Common Stock outstanding (which may be converted into Class A Common Stock at any time), all of which are owned by Black Family Members and no shares of Class A Common Stock outstanding. See "Principal Stockholders." COMMON STOCK The shares of Class A Common Stock and Class B Common Stock are identical in all respects, except for voting rights and certain conversion rights and transfer restrictions in respect of the shares of the Class B Common Stock, as described below. VOTING RIGHTS. Each share of Class A Common Stock entitles the holder to one vote on each matter submitted to a vote of the Company's stockholders and each share of Class B Common Stock entitles the holder to ten votes on each such matter, including the election of directors. Except as required by applicable law, holders of the Class A Common Stock and Class B Common Stock will vote together on all matters submitted to a vote of the stockholders. See "Risk Factors - Control By Current Stockholders and Anti-Takeover Effect of Dual Classes of Stock." Neither the Class A Common Stock nor the Class B Common Stock have cumulative voting rights. Any action that can be taken at a meeting of the stockholders may be taken by written consent in lieu of the meeting if the Company receives consents signed by stockholders having the minimum number of votes that would be necessary to approve the action at a meeting at which all shares entitled to vote on the matter were present. This could permit the holders of Class B Common Stock to take all actions required to be taken by the stockholders without providing the other stockholders the opportunity to make nominations or raise other matters at a meeting. DIVIDENDS. Holders of Class A Common Stock and Class B Common Stock are entitled to receive dividends at the same rate if and when declared by the Board of Directors out of funds legally available therefrom, subject to the dividend and liquidation rights of any Preferred Stock that may be issued and outstanding. No dividend or other distribution (including redemptions or repurchases of shares of capital stock) may be made if after giving effect to such distribution, the Company would not be able to pay its debts as they become due in the usual course of business, or if the Company's total assets would be less than the sum of its total liabilities plus the amount that would be needed at the time of a liquidation to satisfy the preferential rights of any holders of Preferred Stock. See "Dividend Policy." If a dividend or distribution payable in Class A Common Stock is made on the Class A Common Stock, the Company must also make a pro rata and simultaneous dividend or distribution on the Class B Common Stock payable in shares of Class B Common Stock. Conversely, if a dividend or distribution payable in Class B Common Stock is made on the Class B Common Stock, the Company must also make a pro rata and simultaneous dividend or distribution on the Class A Common Stock payable in shares of Class A Common Stock. RESTRICTIONS ON TRANSFER. If a holder of Class B Common Stock transfers such shares, whether by sale, assignment, gift, bequest, appointment or otherwise, to a person other than a Black Family Member, such shares will be converted automatically into shares of Class A Common Stock. In the case of a pledge of shares of Class B Common Stock to a financial institution, such shares will not be deemed to be transferred unless and until a foreclosure or similar event occurs. CONVERSION. Class A Common Stock has no conversion rights. Class B Common Stock is convertible into Class A Common Stock, in whole or in part, at any time and from time to time at the option of the holder, on the basis of one share of Class A Common Stock for each share of Class B Common Stock converted. In the event of a transfer of shares of Class B Common Stock to any person other than a Black Family Member, each share of Class B Common Stock so transferred will be converted automatically into one share of Class A Common Stock. Each share of Class B Common Stock will also automatically convert into one share of Class A Common Stock if, on the record date for any meeting of the stockholders, the number of shares of Class B Common Stock then outstanding is less than 20% of the aggregate number of shares of Class A Common Stock and Class B Common Stock then outstanding. LIQUIDATION. In the event of liquidation, after payment of the debts and other liabilities of the Company, the remaining assets of the Company will be distributable ratably among the holders of the Class A Common Stock and Class B Common Stock treated as a single class. MERGERS AND OTHER BUSINESS COMBINATIONS. Upon the merger or consolidation of the Company, holders of each class of Common Stock are entitled to receive equal per share payments or distributions, except that in any transaction in which shares of capital stock are distributed, such shares may differ as to voting rights to the extent and only to the extent that the voting rights of the Class A Common Stock and Class B Common Stock differ at that time. OTHER PROVISIONS. The holders of the Class A Common Stock and Class B Common Stock are not entitled to preemptive rights. Neither the Class A Common Stock nor the Class B Common Stock may be subdivided or combined in any manner unless the other class is subdivided or combined in the same proportion. TRANSFER AGENT AND REGISTRAR. The Company is the Transfer Agent and Registrar for the Common Stock. PREFERRED STOCK. The Board of Directors of the Company is authorized, without further stockholder action, to divide any or all shares of the authorized Preferred Stock into series and fix and determine the designations, preferences and relative rights and qualifications, limitations, or restrictions thereon of any series so established, including voting powers, dividend rights, liquidation preferences, redemption rights and conversion privileges. As of the date of this Prospectus, the Board of Directors has not authorized any series of Preferred Stock, and there are no plans, agreements or understandings for the authorization or issuance of shares of Preferred Stock. The issuance of Preferred Stock with voting rights or conversion rights may adversely affect the voting power of the Common Stock, including the loss of voting control to others. The issuance of Preferred Stock may have the effect of delaying, deferring or preventing a change of control of the Company without stockholder approval. See "Risk Factors-Preferred Stock." CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION AND BYLAWS AND ILLINOIS BUSINESS CORPORATION ACT DIRECTORS The Bylaws provide that the number of directors is two, subject to change from time to time as determined by the Board of Directors or the stockholders, and that vacancies on the Board of Directors (including vacancies created by an increase in the number of directors) may be filled by the Board of Directors, acting by a majority of the remaining directors then in office. Officers are elected annually by and serve at the pleasure of the Board of Directors. Upon consummation of the Offering, the number of directors will be increased to eight. LIMITATION OF LIABILITY AND INDEMNIFICATION As permitted by the Illinois Business Corporation Act, the Articles provide that directors of the Company shall not be personally liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 8.65 of the Illinois Business Corporation Act or (iv) for any transaction from which the director derives an improper personal benefit. In addition, the Bylaws provide that the Company shall, to the fullest extent authorized by the Illinois Business Corporation Act, as amended from time to time, indemnify all directors and officers and may, at the election of the Company as determined by the Board of Directors, indemnify all other persons serving at the request of the Company as a director, officers, employee or agent of another corporation or of a partnership, trust or other enterprise. The Company will also enter into indemnification agreements in the form described below with each person who is currently a member of its board of directors and with persons who in the future become directors of the Company. Such indemnification agreements provide for indemnification against any and all expenses incurred in connection with, as well as any and all judgments, fines and amounts paid in settlement resulting from, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (collectively an "Action"), by reason of the fact that such director is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. The indemnification agreements provide that if any payment, advance or indemnification of the director requires that he or she acted in good faith, in a manner he or she reasonably believed to be for or not opposed to the best interest of the Company or without reasonable cause to believe his or her conduct was unlawful, then it shall be presumed that he or she so acted unless proven otherwise by clear and convincing evidence. The indemnification agreements also provide for the advancement of all expenses, including reasonable attorneys' fees, arising from the investigation of any claim, preparation for the defense or defense of settlement of an Action. The indemnification agreements authorize the Company to participate in the defense of any Action and to assume the defense thereof, with counsel who shall be reasonably satisfactory to the director, provided that the director shall be entitled to separate counsel of his or her choosing if he or she reasonably believes that (i) there exists conflicting interests between himself or herself and the Company or other party (the defense of whom the Company shall have assumed) or (ii) there is any substantial likelihood that the Company will be financially or legally unable to satisfy its obligations under the indemnification agreements. The indemnification agreements provide that a director's rights under such contract are not exclusive of any other indemnification rights he or she may have under any provision of law, the Articles or Bylaws of the Company, the vote of the Company's stockholders or disinterested directors, other agreements or otherwise. (Insofar as indemnification by the Company for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, the Company has been advised that such indemnification is considered by the Commission to be against public policy and, therefore, unenforceable.) CERTAIN STATUTORY PROVISIONS Following the Offering, the Company will be subject to Section 7.85 of the Business Corporation Act of Illinois ("Section 7.85"), Section 7.85 prohibits a publicly held Illinois corporation from engaging in a "business combination" with an "interested stockholder," unless the proposed "business combination" receives (i) the affirmative vote of the holders of at least 80% of the combined voting power of the then outstanding shares of all classes and series of the corporation entitled to vote generally in the election of directors (the "Voting Shares"), voting together as a single class and (ii) the affirmative vote of a majority of the combined voting power of the then outstanding Voting Shares held by disinterested stockholders voting together as a single class. For purposes of Section 7.85 and Section 11.75 described below, a "business combination" includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder and, for purposes of Section 7.85, an "interested stockholder" is a person who, together with affiliates and associates, owns (or, within the prior two years, did own) 10% or more of the combined voting power of the outstanding Voting Shares. Further, the Company is also subject to Section 11.75 of the Business Corporation Act of Illinois ("Section 11.75") which prohibits "business combinations" with "interested stockholders" for a period of three years following the date that such stockholder became an "interested stockholder," unless (i) prior to such date, the Board of Directors approved the transaction which resulted in the stockholder becoming an "interested stockholder," or (ii) upon consummation of such transaction, the "interested stockholder" owned at least 85% of the Voting Shares outstanding at the time such transaction commenced (excluding shares owned by directors who are also officers and shares reserved under an employee stock plan), or (iii) on or after such date, the "business combination" is approved by the Board of Directors and authorized at a meeting of the stockholders by 662/3% of the outstanding Voting Shares not owned by the "interested stockholder." For purposes of Section 11.75, an "interested stockholder" is a person who, together with affiliates and associates, owns (or, within the prior three years, did own) 15% of the Voting Shares. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this Offering, the Company will have outstanding 450,000 shares of Class A Common Stock and 5,550,000 shares of Class B Common Stock. Of such shares, the 450,000 shares of Class A Common Stock sold in this Offering will be freely tradeable without restrictions or further registration under the Securities Act, unless acquired by an affiliate of the Company, in which case those shares will be subject to the resale limitations of Rule 144. The remaining 5,550,000 shares of Class B Common Stock are "restricted securities" within the meaning of Rule 144 (the "Restricted Shares"). Except as provided below, the Restricted Shares will be eligible for sale in the public market, in accordance with Rule 144, 90 days following the date of this Prospectus, subject to certain volume and other limitations, except for shares acquired upon the exercise of employee stock options which will be registered under the Securities Act as soon as practicable after the consummation of the Offering and may be sold without limitation after the effective date of such registration. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned Restricted Shares for at least two years, including persons who may be deemed to be "affiliates" of the Company, as that term is defined under Rule 144, may sell within any three- month period a number of Restricted Shares that does not exceed the greater of one percent of the then outstanding shares of the Common Stock (estimated to be 60,000 shares after completion of this Offering) or the average weekly trading volume of the Common Stock on the open market during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to certain manner-of-sale limitations, notice requirements, and the availability of current public information about the Company. Pursuant to Rule 144(k), a person (or persons whose shares are aggregated) who is deemed not to have been an "affiliate" of the Company at any time during the three months preceding a sale, and who has beneficially owned Restricted Shares for at least three years, would be entitled to sell such shares under Rule 144 without regard to volume limitations, manner-of-sale provisions or notice requirements. The 5,550,000 Restricted Shares that have met such three-year holding period requirement, are all deemed beneficially owned by persons who will be deemed to be "affiliates" of the Company after the Offering.) Restricted Shares properly sold in reliance upon Rule 144 are thereafter freely tradeable without restrictions or registration under the Securities Act, unless thereafter held by an "affiliate" of the Company. Prior to this Offering there has been no market for the Class A Common Stock, and no prediction can be made as to the effect, if any, that sales of Restricted Shares, or availability of Restricted Shares for sale, by existing stockholders in reliance upon Rule 144 or otherwise will have on the market price of Class A Common Stock. The sale by the Company or the stockholders referred to above of a substantial number of shares of Class A Common Stock after this Offering could adversely affect the market price for the Class A Common Stock. The Company is not obligated to register any Restricted Shares for sale under the Securities Act or otherwise. Upon the consummation of the Offering, the Company intends to register, under the Securities Act, the sale of the shares of Class A Common Stock to be issued in connection with the employee and director stock option plans described under "Management." PLAN OF DISTRIBUTION GENERAL The Company is offering to sell up to 450,000 shares of its Class A Common Stock. The Class A Common Stock will be sold by the Company on a "best efforts" basis through one or more officers and directors of the Company who will not receive compensation in connection with any offers or sales of the Class A Common Stock. The Company may also retain licensed broker-dealers ("Agents") to sell the Class A Common Stock on a "best efforts" basis. There are no underwriters involved in this Offering. If the Company retains Agents to sell the Class A Common Stock offered hereby, the Company will pay such Agents a selling commission of up to 10% of the gross Offering proceeds attributable to Class A Common Stock sold by such Agents. The Company and the Agents, if any, will, in all likelihood, agree to indemnify each other against certain liabilities, including liabilities under the Securities Act of 1933. The Class A Common Stock will be sold at the price of $10.00 per share. A subscriber is required to purchase 100 shares of Class A Common Stock in order to subscribe to the Offering hereby. The Company reserves the right to withdraw, cancel or modify the Offering hereby and to reject subscriptions, in whole or in part, for any reason. DETERMINATION OF OFFERING PRICE Prior to the Offering hereby, there has been no public market for the Company's Class A Common Stock. The price to the public has been arbitrarily determined by the Company and may not be indicative of the market price for the Class A Common Stock after this Offering. The Company makes no representations as to any objectively determinable value of the Class A Common Stock. SUBSCRIPTION PROCEDURES An agreement to purchase shares of Class A Common Stock offered hereby (the "Subscription Agreement") accompanies this Prospectus. Subject to availability and the Company's right to reject subscriptions, in whole or in part, for any reason, shares of Class A Common Stock may be subscribed for by completing, executing and returning the Subscription Agreement, together with payment for all shares subscribed for, to the Company. All checks should be made payable to the Super Wash Offering Escrow. Company's acceptance of a subscription shall be evidenced solely by the delivery to the subscriber of a written confirmation of acceptance. Receipt by the Company of a Subscription Agreement and/or deposit by the Company of payment for the subscribed shares as described below shall not constitute acceptance of a subscription. The subscription payments will be deposited into an escrow account at First Bank/Sterling, 3014 East Lincolnway, Sterling, Illinois 61081, by the Company, subject to the Closing on such escrowed funds once the Company has accepted subscriptions for at least 250,000 shares of Class A Common Stock offered hereby. Unless the Company is able to sell at least 250,000 shares of Class A Common Stock, the Company will cancel this Offering, promptly return all monies collected from subscribers, and pay to each subscriber the interest earned by the Company, if any, on such subscriber's escrowed subscription payment. Likewise, the Company will promptly refund any monies collected and attributed to a subscription, or portion thereof, rejected by the Company and pay to each rejected subscriber all interest earned by the Company, if any, on such subscriber's rejected escrowed subscription payment, or portion thereof. However, unless the Company cancels this Offering or rejects a subscription, in whole or in part, subscribers will have no right to a return of their subscription payment held in the escrow account and all interest earned on the escrowed proceeds will belong to the Company. Stock certificates will not be issued to subscribers until such time as the funds related to the purchase of Class A Common Stock by such subscribers are released from the escrow account to the Company by the Escrow Agent. Until such time as stock certificates are issued to the subscribers, the subscribers will not be considered stockholders of the Company. WARRANTIES BY SUBSCRIBERS In the Subscription Agreement, each subscriber represents and warrants to the Company that the subscriber (i) has received this Prospectus and in making a subscription is only relying on the representations set forth in this Prospectus and (ii) has indicated his or her true state of legal residence. Each potential investor should carefully read this Prospectus in its entirety prior to purchasing shares of the Class A Common Stock offered hereby. The warranty given to the Company by each subscriber indicating that the subscriber has received this Prospectus and is only relying on the representations set forth herein provides the Company with some comfort that each subscriber has read this Prospectus. To the extent permitted by federal and state securities laws, the Company might assert its rights under this warranty to rebut a subscriber's claim that he or she relied on any oral representations or written representations other than those set forth in this Prospectus. In some states, for various reasons, the Company will not obtain permission to sell shares of the Class A Common Stock offered hereby. The Company will reject subscription agreements received, if any, from residents of such states. The warranty given by each subscriber indicating the subscriber's true state of legal residence will assist the Company in complying with state securities laws. The Company might assert its rights under this warranty if a misrepresentation by a subscriber resulted in the Company selling shares of Class A Common Stock in a state in which the Company was not permitted to sell such shares in violation of such state's securities laws. A subscriber does not waive any rights under the federal securities laws by executing the Subscription Agreement. TERMINATION OF OFFERING This Offering of the Class A Common Stock begins on the date hereof and terminates upon the earlier of (i) the date upon which the Company receives the proceeds for all 450,000 shares of Class A Common Stock offered hereby in the specified escrow account; (ii) February 14, 1997 (subject to the right of the Company to extend the Offering for an additional 30 days); or (iii) the date upon which the Company terminates this Offering prior to the sale of all the shares of Class A Common Stock offered hereby. The Company may terminate this offering at any time prior to the sale of all 450,000 shares of Class A Common Stock offered hereby. IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE ISSUER AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. FOR FLORIDA RESIDENTS ONLY: WHEN SALES ARE MADE TO FIVE OR MORE PERSONS IN THIS STATE, ANY SALE IN THIS STATE MADE PURSUANT TO SUBSECTION 517.061 OF THE FLORIDA INVESTOR PROTECTION ACT IS VOIDABLE BY THE PURCHASER IN SUCH SALE EITHER WITHIN 3 DAYS AFTER THE FIRST TENDER OF CONSIDERATION IS MADE BY SUCH PURCHASER TO THE ISSUER, AN AGENT OF THE ISSUER, OR AN ESCROW AGENT OR WITHIN 3 DAYS AFTER THE AVAILABILITY OF THAT PRIVILEGE IS COMMUNICATED TO SUCH PURCHASER, WHICHEVER OCCURS LATER. FOR NEW JERSEY RESIDENTS ONLY: THE ATTORNEY GENERAL OF THE STATE OF NEW JERSEY HAS NOT PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING. THE FILING OF THIS OFFERING WITH THE BUREAU OF SECURITIES DOES NOT CONSTITUTE APPROVAL OF THE ISSUE OR SALE THEREOF BY THE BUREAU OF SECURITIES OF THE DEPARTMENT OF LAW AND PUBLIC SAFETY OF THE STATE OF NEW JERSEY. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. FOR PENNSYLVANIA RESIDENTS ONLY: PURSUANT TO SECTION 207(M) OF THE PENNSYLVANIA SECURITIES ACT, EACH PERSON WHO ACCEPTS THIS OFFER TO PURCHASE UNITS EXEMPT FROM REGISTRATION UNDER SECTION 203(D) OF THE PENNSYLVANIA SECURITIES ACT DIRECTLY FROM THE PARTNERSHIP OR ITS AFFILIATES WILL HAVE THE RIGHT TO WITHDRAW HIS ACCEPTANCE WITHOUT INCURRING ANY LIABILITY TO THE SELLER, UNDERWRITER OR ANY OTHER PERSON WITHIN TWO BUSINESS DAYS FROM THE DATE OF RECEIPT BY THE ISSUER OF HIS WRITTEN BINDING CONTRACT OF PURCHASE OR, IN THE CASE OF A TRANSACTION IN WHICH THERE IS NO WRITTEN BINDING CONTRACT OF PURCHASE, WITHIN TWO BUSINESS DAYS AFTER HE MAKES THE INITIAL PAYMENT FOR THE SECURITIES BEING OFFERED. <PAGE> LEGAL MATTERS The validity of the Class A Common Stock offered hereby will be passed upon for the Company by Rudnick & Wolfe, Chicago, Illinois. EXPERTS The consolidated financial statements and schedule of Super Wash, Inc. and Subsidiary as of February 28, 1995 and December 31, 1995 and for each of the two years in the period ended February 28, 1995 and the ten month period ended December 31, 1995 included in this Prospectus and elsewhere in the registration statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in accounting and auditing in giving said reports. AVAILABLE INFORMATION The Company has filed with the Commission a registration statement on Form S-1 (the "Registration Statement") under the Securities Act with respect to the shares of Class A Common Stock offered hereby. This Prospectus, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement, certain items of which are contained in schedules and exhibits to the Registration Statement and have been omitted pursuant to rules and regulations of the Commission. For further information with respect to the Company and the shares of Class A Common Stock offered hereby, reference is made to such Registration Statement and the exhibits and schedules thereto. Statements contained in this Prospectus as to the contents of any contract or any other document referred to are complete in all material respects; with respect to each such contract or other document filed as an exhibit to the Registration Statement reference is made to the exhibit for a more complete description of the matters involved, and each such statement shall be deemed qualified in its entirety by such reference. Following the consummation of the Offering, the Company will be subject to the informational requirements of the Exchange Act and in accordance therewith will be required to file reports and other information with the Commission. The Company intends to furnish its stockholders with annual reports containing audited financial statements reported on by independent public accountants following the end of each fiscal year. A copy of the Registration Statement, including exhibits and schedules thereto, filed by the Company with the Commission may be inspected without charge at the public reference facility maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional Offices of the Commission: New York Regional Office, Seven World Trade Center, 13th Floor, New York, New York 10048; and Chicago Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material may be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 upon the payment of fees prescribed by the Commission. The Commission maintains a web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of the Commission's web site is: http://www.sec.gov. <PAGE> SUPER WASH, INC. AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS <PAGE> INDEX TO FINANCIAL STATEMENTS <TABLE> <CAPTION> PAGE <S> <C> Report of Independent Public Accountants F-3 Consolidated Balance Sheets as of February 28, 1995, and December 31, 1995, and as of June 30, 1996 (Unaudited) F-4 Consolidated Statements of Operations for the Years Ended February 28, 1994 and 1995, and for the Ten-Month Period Ended December 31, 1995, and for the Six Months Ended June 30, 1995 and 1996 (Unaudited) F-5 Consolidated Statements of Stockholders' Equity for the Years Ended February 28, 1994 and 1995, and for the Ten- Month Period Ended December 31, 1995, and for the Six Months F-6 Ended June 30, 1996 (Unaudited) Consolidated Statements of Cash Flows for the Years Ended February 28, 1994 and 1995, and for the Ten-Month Period Ended December 31, 1995, and for the Six Months Ended June 30, 1995 and 1996 (Unaudited) F-7 Notes to Consolidated Financial Statements F-8 </TABLE> <PAGE> (THIS PAGE INTENTIONALLY LEFT BLANK) <PAGE> REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS When the transaction referred to in Note 14 of Notes to Consolidated Financial Statements has been consummated, we will be in a position to render the following report. ARTHUR ANDERSEN LLP To the Board of Directors of Super Wash, Inc. and Subsidiary: We have audited the accompanying consolidated balance sheets of SUPER WASH, INC. (an Illinois corporation) AND SUBSIDIARY as of February 28, 1995, and December 31, 1995, and the related consolidated statements of income, stockholders' equity and cash flows for each of the two years in the period ended February 28, 1995, and for the ten-month period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Super Wash, Inc. and Subsidiary as of February 28, 1995, and December 31, 1995, and the results of their operations and their cash flows for each of the two years in the period ended February 28, 1995, and for the ten-month period ended December 31, 1995, in conformity with generally accepted accounting principles. Chicago, Illinois May 15, 1996 (except for Note 14, which is as of ________, 1997) SUPER WASH, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS <PAGE> <TABLE> <CAPTION> Pro Forma <S> <C> <C> <C> <C> A S S E T S FEB.28,1995 DEC.31,1995 JUNE 30,1996 JUNE 30,1996 (Unaudited) (Unaudited) CURRENT ASSETS: Cash $216,936 $523,324 $914,699 $914,699 Marketable securities 1,779,981 1,855,0851,898,004 1,898,004 Receivables, net of allowance for doubtful accounts of $75,000- Trade 1,393,693 2,427,590 2,813,494 2,813,494 Stockholders 218,260 29,806 130,536 130,536 Affiliates 482,227 86,362 302,042 302,042 Related party - 15,905 585 585 Other 111,646 181,517 193,154 193,154 Current portion of notes receivable- Related party - 14,522 14,522 14,522 Other 92,358 67,275 54,964 54,964 Costs and estimated earnings in excess of billings on uncompleted contracts - 5,416 1,551,282 1,551,282 Inventories- Car wash facility parts, supplies and equipment 996,176 1,005,283 1,058,013 1,058,013 Land, construction and equipment costs in car wash facilities under construction 1,617,354 2,328,460 3,690,241 3,690,241 Land purchase deposits 32,500 28,500 60,000 60,000 Car wash facilities held for sale 1,808,206 4,013,530 4,252,585 4,252,585 Prepaid expenses 45,735 55,137 47,648 47,648 Deferred income taxes 85,000 - - - ---------- ----------- ----------- ----------- Total current assets 8,880,072 12,637,712 16,981,769 16,981,769 ---------- ----------- ----------- ----------- PROPERTY AND EQUIPMENT: Car wash facilities 515,245 1,427,556 1,427,556 1,427,556 Vehicles 553,564 727,582 794,016 794,016 Office equipment 178,192 178,192 204,908 204,908 Construction equipment, tools and loaner parts 129,049 143,180 178,759 178,759 Computer hardware and software 166,996 387,630 446,143 446,143 ---------- ----------- ----------- ----------- 1,543,046 2,864,140 3,051,382 3,051,382 Less- Accumulated depreciation (776,009) (997,985) (1,110,175) (1,110,175) ---------- ----------- ----------- ----------- Property and equipment, net 767,037 1,866,155 1,941,207 1,941,207 ---------- ----------- ----------- ----------- OTHER ASSETS: Notes receivable, net of current portion- Related party 90,773 213,017 206,817 206,817 Other - 93,541 41,165 41,165 Investment in Super Wash Limited Partnership 66,922 55,922 42,609 42,609 ---------- ----------- ----------- ----------- Total other assets 157,695 362,480 290,591 290,591 ---------- ----------- ----------- ----------- $9,804,804 $14,866,347 $19,213,567 $19,213,567 ========== =========== =========== =========== </TABLE> <PAGE> <TABLE> <CAPTION> LIABILITIES AND Pro Forma <S> <C> <C> <C> <C> STOCKHOLDERS' EQUITY FEB.28,1995 DEC.31,1995 JUNE 30,1996 JUNE 30,1996 (Unaudited) (Unaudited) CURRENT LIABILITIES: Current portion of note payable $34,259 $35,552 $37,060 $37,060 Lines of credit - 1,000,000 5,450,000 5,450,000 Payables- Trade 423,046 452,016 1,286,937 1,286,937 Stockholders 34,500 55,620 82,477 82,477 Affiliates 19,109 - 9,828 9,828 Related parties 62,400 83,530 84,918 84,918 Employees 161,121 357,734 575,963 575,963 Other 53,000 97,624 97,624 97,624 Billings in excess of costs and estimated earnings on uncompleted contracts - - 100,339 100,339 Accrued expenses 558,025 693,772 556,327 556,327 Income taxes payable 159,370 108,278 18,000 18,000 Dividend payable - - - 2,700,000 ---------- -------- --------- --------- Total current liabilities 1,504,830 2,884,126 8,299,473 10,999,473 -------- -- ------- --------- ---------- NOTE PAYABLE, net of current portion 206,291 176,005 156,928 156,928 ---------- --------- --------- ---------- DEFERRED INCOME TAXES 10,000 - - 135,000 ---------- ----------- ------- ---------- MINORITY INTEREST 14,869 14,869 14,869 14,869 ---------- --------- -------- --------- STOCKHOLDERS' EQUITY: Class B common stock, $.01 par value; 25,000,000 shares authorized, 5,550,000 shares issued and outstanding 1,000 1,000 1,000 1,000 Unrealized gain on equity securities, net of tax 28,166 79,142 89,299 89,299 Retained earnings 8,039,648 11,711,205 10,651,998 7,816,998 ---------- --------- --------- ----------- Total stockholders' equity 8,068,814 11,791,347 10,742,297 7,907,297 ---------- --------- --------- ----------- $9,804,804 $14,866,347 $19,213,567 $19,213,567 ========== ========= =========== =========== </TABLE> <PAGE> The accompanying notes to consolidated financial statements are an integral part of these balance sheets. SUPER WASH, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS <TABLE> <CAPTION> Years Ended February 28 Ten Six Months Ended June 30 Months <S> <C> <C> <C> ------------------------- Ended ------------------------ </TABLE> <TABLE> <CAPTION> 1994 1995 DEC.31,1995 1995 1996 (Unaudited) <S> <C> <C> <C> <C> SALES: </TABLE> <TABLE> <CAPTION> Car wash facilities $12,488,337 $16,989,479 $18,913,000 $6,336,107 $ 9,379,049 <S> <C> <C> <C> <C> <C> Car wash facilities-- related parties 2,016,441 2,345,660 916,601 - 1,316,288 Parts, supplies and service 2,441,364 2,899,027 2,523,333 1,523,947 1,878,589 Parts, supplies and service-- related 279,623 341,595 304,429 145,806 125,633 parties Other 534,559 407,355 841,476 404,018 752,443 Other--related parties 85,693 88,162 86,756 45,946 56,888 ----------- ---------- --------- ---------- ---------- Total sales 17,846,017 23,071,278 23,585,595 8,455,824 13,508,890 ----------- ---------- -------- ---------- ----------- COST OF SALES: Car wash facilities 9,886,284 13,458,332 14,438,695 5,067,938 7,479,352 Car wash facilities - --related parties 1,859,951 1,912,615 869,913 - 1,136,232 Parts, supplies and service 2,041,511 2,563,838 2,045,053 1,340,400 1,672,101 Parts, supplies and service - --related 162,129 196,519 175,388 31,428 66,859 parties Other 457,944 307,417 633,734 307,602 558,269 Other--related parties 170,797 295,729 228,459 110,966 148,718 ----------- ----------- ---------- ---------- ---------- Total cost sales 14,578,616 18,734,450 18,391,242 6,858,334 11,061,531 ----------- ----------- ---------- --------- ---------- Gross profit 3,267,401 4,336,828 5,194,353 1,597,490 2,447,359 SELLING, GENERAL AND ADMINISTRATIVE 1,749,695 1,893,054 1,483,391 793,931 813,834 EXPENSES ----------- ----------- ---------- ---------- ----------- Income from operations 1,517,706 2,443,774 3,710,962 803,559 1,633,525 ----------- ---------- --------- ---------- ----------- OTHER INCOME (EXPENSE): Miscellaneous income 59,821 58,138 41,099 48,823 4,981 Dividend income 17,580 29,088 28,410 19,700 14,442 Interest income 215,408 232,739 214,393 102,433 115,580 Interest expense (64,740) (127,427) (185,419) (27,984) (154,299) ----------- --------- --------- ---------- ----------- Other income, net 228,069 192,538 98,483 142,972 (19,296) ----------- --------- --------- ---------- ----------- Income before income taxes 1,745,775 2,636,312 3,809,445 946,531 1,614,229 PROVISION FOR INCOME TAXES 683,220 1,036,983 137,888 (20,368) 17,436 ----------- ----------- --------- --------- ---------- NET INCOME $ 1,062,555 $ 1,599,329 $3,671,557 $ 966,899 $ 1,596,793 =========== =========== ========== ========= =========== PRO FORMA INCOME DATA (Unaudited): Net income as reported $1,062,555 $1,599,329 $3,671,557 $ 966,899 $ 1,596,793 Pro forma adjustment to recognize "C" Corporation provision for income taxes - - 1,347,112 390,368 611,564 ---------- ----------- ---------- ---------- ---------- Pro forma net income $1,062,555 $1,599,329 $2,324,445 $ 576,531 $ 985,229 =========== =========== ========== ========== =========== Pro forma net income per share $.40 $.10 $.17 =========== ========== =========== Pro forma weighted average number of shares outstanding 5,820,000 5,820,000 5,820,000 =========== ========= =========== </TABLE> The accompanying notes to consolidated financial statements are an integral part of these statements. <PAGE> SUPER WASH, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY <TABLE> <CAPTION> Class B <S> <C> <C> <C> <C> Common Shares Unrealized ------------------ Gain Total on </TABLE> <TABLE> <CAPTION> Shares Retained Equity Stockholders' <S> <C> <C> <C> <C> <C> ISSUED AMOUNT EARNINGS SECURITIES EQUITY BALANCE, February 28, 1993 100 $1,000 $ 5,377,764 $ - $ 5,378,764 Retroactive restatement for a 55,500-to-1 stock split 5,549,900 - - - - --------- ------ ----------- ------- ----------- As restated 5,550,000 1,000 5,377,764 - 5,378,764 Net income - - 1,062,555 - 1,062,555 --------- ------ ----------- ------- ----------- BALANCE, February 28 , 1994 5,550,00 1,000 6,440,319 - 6,441,319 Net income - - 1,599,329 - 1,599,329 Change in unrealized gains, net of tax - - - 28,166 28,166 --------- ------ ----------- ------- ----------- BALANCE, February 28, 1995 5,550,000 1,000 8,039,648 28,166 8,068,814 Net income - - 3,671,557 - 3,671,557 Change in unrealized gains, net of tax - - - 50,976 50,976 --------- ------ ---------- ------ ----------- BALANCE, December 31, 1995 5,550,000 1,000 11,711,205 79,142 11,791,347 Net income - - 1,596,793 - 1,596,793 Dividends paid - - (2,656,000) - (2,656,000) Change in unrealized gains, net of tax - - - 10,157 10,157 --------- ------ ---------- ------- ----------- BALANCE, June 30, 1996 (unaudited 5,550,000 $1,000 $10,651,998 $89,299 $10,742,297 ========= ====== =========== ======= =========== </TABLE> The accompanying notes to consolidated financial statements are an integral part of these statements. <PAGE> SUPER WASH, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> 10 Months Six Months Ended <S> <C> <C> <C> Years Ended February 28 Ended June 30 ----------------------- December 31 ----------------------- </TABLE> <TABLE> <CAPTION> 1994 1995 1995 1995 1996 (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: <S> <C> <C> <C> <C> <C> Net income$1,062,555 $1,599,329 $3,671,557 $ 966,899 $1,596,793 Adjustments to reconcile net income to net cash provided by (used in) operating activities- Depreciation221,308 162,013 250,971 76,229 167,906 Gain on sale of property and equipment(70,139) - (5,603) - - Provision for deferred income taxes - (75,000) 75,000 (45,000) - Changes in operating assets and liabilities- (Increase) decrease in receivables 1,089,877 (1,823,602) (535,354) 2,023,202 (686,320) (Increase) decrease in costs and estimated earnings in excess of billings on uncompleted (674,176) 704,466 (5,416) 237,216 (1,545,866) contracts Increase in inventories (764,773) (771,253) (716,213) (1,344,743) (1,446,011) (Increase) decrease in prepaid expenses 5,557 (24,974) (9,402) 5,207 7,489 (Increase) decrease in car wash facilities held 245,618 (1,783,589) (2,205,324) (1,928,315) (239,055) for sale Increase (decrease) in payables 256,379 430,304 293,348 (92,108) 1,091,223 Increase (decrease) in income taxes payable - 136,334 (51,092) (221,915) (90,278) Increase (decrease) in accrued expenses 49,555 341,747 135,747 (312,592) (137,445) Increase in billings in excess of costs and estimated earnings on uncompleted contracts - - - 158,679 100,339 ---------- ---------- ---------- ---------- ---------- Net cash provided by (used in) operating 1,421,761 (1,104,225) 898,219 (477,241) (1,181,225) activities ---------- ---------- ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of property and equipment 1,131,188 - - - - Purchase of property and equipment (95,660) (400,993) (1,344,486) (137,126) (242,958) Purchase of marketable securities (297,254) (143,981) (13,128) (6,626) (32,762) Sale of investment in Super Wash Limited Partnership - 46,000 - - - (Increase) decrease in notes and other receivables- 77,753 (1,052) (205,224) (14,248) 71,889 long term Proceeds from sale of marketable securities 341,965 - - - - ---------- ---------- ---------- ---------- ---------- Net cash provided by (used in) investing 1,157,992 (500,026) (1,562,838) (158,000) (203,831) activities ---------- ---------- ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (repayments) on long-term debt and line of credit (1,142,955) (29,819) 971,007 (515,398) 4,432,431 Dividends paid - - - - (2,656,000) ---------- ---------- ---------- ---------- ---------- Net cash provided by (used in) financin (1,142,955) (29,819) 971,007 (515,398) 1,776,431 activities ---------- ---------- ---------- ---------- ---------- NET INCREASE (DECREASE) IN CASH 1,436,798 (1,634,070) 306,388 (1,150,639) 391,375 CASH AT BEGINNING OF PERIOD 414,208 1,851,006 216,936 1,990,182 523,324 ---------- ---------- ---------- ---------- ---------- CASH AT END OF CURRENT PERIOD $1,851,006 $ 216,936 $ 523,324 $ 839,543 $ 914,699 ========== ========== ========== ========== ========== CASH PAID DURING THE PERIOD FOR: Interest$ 65,100 $ 109,238 $ 163,453 $ 17,927 $ 61,638 ========== ========== ========== ========== ========== Income taxes $ 660,439 $ 973,608 $ 113,980 $ 201,548 $ - ========== ========== ========== ========== ========== </TABLE> The accompanying notes to consolidated financial statements are an integral part of these statements. SUPER WASH, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--DESCRIPTION OF THE BUSINESS Super Wash, Inc. (the "Company") specializes in the design, construction, operation and licensing of coin-operated, self- service and brushless automatic Super Washreg-trade-mark car wash facilities. Licensees are provided a "turn-key" package whereby the Company acquires the car wash site, handles all zoning and permitting issues, performs as the general contractor, installs the equipment, trains the licensee and their employees and conducts the grand opening. The Company provides ongoing services through its parts, service and advertising and management departments. NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. INTERIM FINANCIAL INFORMATION The unaudited balance sheet as of June 30, 1996, the unaudited statement of stockholders' equity for the six months ended June 30, 1996, and the unaudited statements of income and cash flows for the six months ended June 30, 1995, and 1996, include, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary to present fairly the Company's financial position, results of operations and cash flows. Operating results for the six months ended June 30, 1996, are not necessarily indicative of the results that may be expected for the year ending December 31, 1996. The information included in these notes relating to June 30, 1995 and 1996, is unaudited. b. CHANGE IN YEAR-END The Company changed its year-end to December 31 on March 1, 1995, the date the Company elected to be treated as an S Corporation. c. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its 75%-owned subsidiary, Lincolnway, Inc. (also see Note 3). All intercompany accounts and transactions have been eliminated. d. MARKETABLE SECURITIES Marketable securities are carried at the fair value of the security in accordance with Statement of Financial Accounting Standard ("SFAS") No. 115. All securities held by the Company are equity securities that are classified as available for sale. e. INVENTORIES Inventories are carried at the lower of cost or market value, cost being determined on the first-in, first-out ("FIFO") basis. f. CAR WASH FACILITIES HELD FOR SALE Car wash facilities held for sale are completed car wash facilities which the Company plans to sell. Until the facilities are sold, the Company operates the car washes. Car wash facilities held for sale are carried at the lower of cost or fair value. g. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation of property and equipment is computed using straight-line and various accelerated methods at rates adequate to depreciate the cost of applicable assets over their expected useful lives. Maintenance and repairs are charged to operations as incurred and major improvements are capitalized. The cost of assets retired, or otherwise disposed of, and the accumulated depreciation thereon are removed from the accounts with any gain or loss realized upon sale or disposal charged or credited to operations. Estimated useful lives are as follows: <TABLE> <CAPTION> Building and equipment included in car wash facility 16-20 years <S> <C> Vehicles 5-6 years Office equipment 5-10 years Construction and service equipment 7-10 years Computer hardware and software 5 years =========== </TABLE> The car wash facilities are composed of: <TABLE> <CAPTION> FEB.28,1995 DEC.31,1995 JUNE 30,1996 <S> <C> <C> <C> (Unaudited) Land $105,000 $ 406,728 $ 406,728 Building 211,028 561,044 561,044 Equipment 199,217 459,784 459,784 -------- ---------- ---------- $515,245 $1,427,556 $1,427,556 ======== ========== ========== </TABLE> For the year ended February 28, 1995, the Company changed the depreciable lives for the building and equipment included in the car wash facility to more properly reflect the useful lives. This change resulted in an increase in income of approximately $26,000. h. REVENUE RECOGNITION Parts and supplies revenues are recognized when the parts and supplies are shipped. Service revenues are recorded when the services are rendered. i. CONSTRUCTION CONTRACTS Revenues from construction contracts are recognized on the percentage-of-completion method, measured by the percentage of costs incurred to date to the estimated total costs for each contract. Any losses expected to be incurred on contracts in progress are charged to operations in the period such losses are determined. The asset, costs and estimated earnings in excess of billings on uncompleted contracts represents revenues recognized in excess of amounts billed. Costs and estimated earnings in excess of billings on uncompleted contracts are comprised of the following: <TABLE> <CAPTION> DEC.31,1995 JUNE 30,1996 <S> <C> <C> Costs incurred on uncompleted contracts $25,754 $1,398,504 Estimated earnings 13,673 549,724 Less- billings to date (34,011) (396,946) ------- ---------- Costs and estimated earnings in excess of billings $ 5,416 $1,551,282 ======= ========== </TABLE> Billings in excess of costs and estimated earnings on uncompleted contracts are comprised of the following as of June 30, 1996: <TABLE> <CAPTION> Costs incurred on uncompleted contracts $ 708,855 <S> <C> Estimated earnings 289,532 Billings (1,098,726) ---------- Billings in excess of costs and estimated earnings on uncompleted contracts $ 100,339 ========== </TABLE> j. ACCRUED EXPENSES Accrued expenses are comprised of the following: <TABLE> <CAPTION> FEB.28,1995 DEC.31,1995 JUNE 30,1996 <S> <C> <C> <C> (Unaudited) Accrued payroll and payroll taxes $171,855 $241,530 $ 75,741 Other 386,170 452,242 480,586 -------- -------- -------- Total $558,025 $693,772 $556,327 ======== ======== ======== </TABLE> k. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. l. EARNINGS PER SHARE (UNAUDITED) Earnings per share are computed based upon the weighted average number of common shares and common share equivalents outstanding during each period presented after retroactive adjustment for the stock split that will occur immediately prior to the consummation of the proposed initial public offering of the Company's common A shares (the "Offering"). See Note 14. NOTE 3--INCOME TAXES Timing differences for financial reporting and income tax purposes include the allowances for doubtful accounts and certain inventory costs. Effective March 1, 1995, the Company elected to be treated as an S Corporation. By this election, income of the S Corporation is taxable to the stockholders rather than the Company itself. Income tax expense for the period ended December 31, 1995, includes the write-off of the deferred income taxes as the Company was previously a C Corporation, 1.5% state replacement taxes and a built-in gains tax for the sale of two car washes. The S Corporation will terminate upon consummation of the proposed Offering. Upon the successful completion of the Offering and effective termination of the S Corporation election, deferred income taxes will be recorded resulting in income tax expense in the Company's statements of income. If the effective date of the Offering had been June 30, 1996, deferred income taxes and income tax expenses of $135,000 would have been recorded. Deferred income taxes will be recorded under the asset and liability method of accounting for income taxes which requires the recognition of deferred income taxes based upon the tax consequences of "temporary differences" by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The Company intends to enter into a tax agreement with its shareholders which provides, among other things, that the Company will indemnify its current shareholders against additional income taxes resulting from adjustments made (as a result of a final determination made by a competent tax authority) to the taxable income reported by the Company as an S Corporation for periods prior to the Offering. NOTE 4--RELATED-PARTY TRANSACTIONS The Company leases office and warehouse facilities from its two stockholders. Rental expense relating to these agreements is $60,000 for the years ended February 28, 1994 and 1995, $50,000 for the ten-month period ended December 31, 1995, and $30,000 and $79,500 for the six months ended June 30, 1995 and 1996, respectively. Beginning in 1996, additional office space is being leased from the stockholders and new revised agreements replaced the existing leases. Annual rental expense relating to these agreements will be $157,800. The terms of the leases extend through 1998. During the year ended February 28, 1995, the Company had sold one Super Washreg-trade-mark car wash facility to the stockholders for approximately $442,000 or $11,000 over cost. On February 28, 1995, the Company sold a 25% interest in its subsidiary, Lincolnway, Inc., to the stockholders. Proceeds from this sale were approximately $46,000. The Company sells parts, supplies, equipment and Super Washreg-trade-mark car wash facilities at retail to Super Wash Limited Partnership. Lincolnway, Inc. holds the 10% general partnership interest in Super Wash Limited Partnership and accounts for its investment on the cost method. Super Wash Limited Partnership owns and operates Super Washreg-trade-mark car wash facilities in Utah and Illinois. These facilities are managed by the Company for a contracted fee. Management and administrative fees charged to this affiliate for the years ended February 28, 1994 and 1995, for the ten-month period ended December 31, 1995, and the six months ended June 30, 1995 and 1996, were approximately $79,000, $74,000, $70,000, $38,000 and $43,000, respectively. Total sales excluding management fees to this affiliate for the years ended February 28, 1994 and 1995, the ten-month period ended December 31, 1995, and the six months ended June 30, 1995 and 1996, were approximately $170,000, $1,065,000, $80,000, $37,000 and $286,000, respectively. The Company sells parts, supplies, equipment and Super Washreg-trade-mark car wash facilities to Town's Edge Car Wash, Inc. ("Town's Edge"), a company also owned by the stockholders of the Company. Sales to this affiliate were approximately $1,741,000, $657,000, $210,000, $80,000 and $639,000 for the years ended February 28, 1994 and 1995, the ten-month period ended December 31, 1995, and the six months ended June 30, 1995 and 1996, respectively. Sales discounts on parts, supplies and equipment amounted to approximately $44,000, $58,000, $51,000, $29,000 and $36,000 for the years ended February 28, 1994 and 1995, the ten-month period ended December 31, 1995, and the six months ended June 30, 1995 and 1996, respectively, while Super Washreg-trade-mark car wash facilities were sold at $117,063, $15,123, $5,523, $0 and $15,000 over cost. In addition, the Company manages the daily operation of the individual car wash facilities owned by Town's Edge. No fees are charged to Town's Edge for these services. The Company sells parts, supplies, equipment and Super Washreg-trade-mark car wash facilities to Edge Town Car Wash, Inc. ("Edge Town"), a company that was incorporated during 1995 and is owned by the stockholders of the Company. Sales to this affiliate were approximately $379,000, $1,400 and $6,150 for the ten-month period ended December 31, 1995, and for the six months ended June 30, 1995 and 1996, respectively. There are no sales discounts on parts, supplies and equipment, while Super Washreg-trade-mark car wash facilities were sold at $10,850 over cost during the ten-month period ended December 31, 1995. In addition, the Company manages the daily operation of the individual car wash facilities owned by Edge Town. Management fees charged to this affiliate were approximately $1,500, $375 and $750 for the ten-month period ended December 31, 1995, and the six months ended June 30, 1995 and 1996, respectively. The Company sells parts, supplies, equipment and Super Washreg-trade-mark car wash facilities to an employee-owned company that was incorporated during 1995 and is managed by the Company's executive committee. Sales to this affiliate were approximately $500,000 for the ten-month period ended December 31, 1995, and $3,980 for the six months ended June 30, 1996. There were no sales discounts on parts, supplies and equipment for the period ended December 31, 1995, while a Super Washreg-trade-mark car wash facility was sold to the employee- owned company at $30,315 over cost. Sales discounts on parts supplies and equipment for the six month period ended June 30, 1996, were approximately $200. There were no Super Washreg-trade-mark car wash facilities sold during the six- month period ended June 30, 1996. In addition, the Company manages the daily operation of the individual car wash facility owned by the employees. The management fee charged to them was $1,900 for the ten-month period ended December 31, 1995, and $4,800 for the six months ended June 30, 1996. During the year ended February 28, 1994, two car wash facilities were sold to an officer for approximately $352,000 or $113 over net book value. During the year ended February 28, 1995, one car wash facility was sold to an officer for approximately $470,000 or $121,000 over cost. During the six months ended June 30, 1996, one car wash facility was sold to an officer for $479,332 or $111,000 over cost. NOTE 5--CONCENTRATION OF CREDIT RISK The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash and trade accounts receivable. The Company places its cash with high credit quality financial institutions. At times, such cash may be in excess of the FDIC insurance limit. The Company's customers are concentrated in the Midwest, with approximately 78% of the Super Washreg-trade-mark car wash facilities located in Illinois, Wisconsin, Iowa, Indiana and Ohio. The Company reviews a customer's credit history before extending credit. In addition, the Company routinely assesses the financial strength of its customers and, as a consequence, believes that its trade accounts receivable credit risk is limited. The Company has no off-balance-sheet credit risk. NOTE 6--MARKETABLE SECURITIES The Company had approximately $680,000, $1,003,000 and $1,022,000 invested in repurchase agreements as of February 28, 1995, December 31, 1995, and June 30, 1996, respectively. The repurchase agreements have due dates between May, 1995, and May, 1997, and bear interest rates between 5.1% and 6.4%. NOTE 7--LINES OF CREDIT At December 31, 1995, the Company had available lines of credit of approximately $4,500,000 for working capital and $16,560,000 for the financing of car wash acquisitions. As of December 31, 1995, the Company had borrowings of $1,000,000 outstanding on the working capital line of credit. These lines of credit have expiration dates ranging from January 15, 1996, to February 28, 1998. Interest rates on borrowings outstanding as of December 31, 1995, ranged from 8.75% to 9.75%. The weighted average interest rates during the year ended February 28, 1995, and the ten-month period ended December 31, 1995, were 10% and 9.1%, respectively. Borrowings are secured by substantially all of the Company's assets. The agreements require the Company to meet certain restrictive covenants including, among other things, certain financial statement ratios. As of December 31, 1995, the Company obtained waivers or was in compliance with all applicable covenants. At June 30, 1996, the Company had available lines of credit of approximately $6,500,000 for working capital and $12,000,000 for the financing of car wash acquisitions. As of June 30, 1996, the Company had borrowings of $5,450,000 outstanding on the working capital lines of credit. These lines of credit have expiration dates ranging from September, 1996, to February 28, 1998. Interest rates on borrowings outstanding as of June 30, 1996, ranged from 8.25% to 9.25%. Borrowings are secured by substantially all of the Company's assets. The agreements require the Company to meet certain restrictive covenants including, among other things, certain financial statement ratios. As of June 30, 1996, the Company was in compliance with all covenants. Subsequent to June 30, 1996, the Company changed its line of credit facilities to approximately $8,500,000 for working capital and $10,000,000 for financing of car wash acquisitions. These facilities expire from September, 1996, to August, 1999. NOTE 8--LONG-TERM DEBT Long-term debt at February 28, 1995, and December 31, 1995, consisted of the following: <TABLE> <CAPTION> FEB.28,1995 DEC.31,199 JUNE 30,1996 <S> <C> <C> <C> (Unaudited) Mortgage payable to bank--variable at prime plus 1% (10% at February 28, 1995, 9.5% at December 31, 1995, and 9.25% at June 30, 1996), payable with interest in monthly installments of $4,511 through February, 1998, secured by certain equipment, real estate, repurchase agreements and fixtures $240,550 $211,557 $193,988 Less- Current maturities 34,259 35,552 37,060 -------- -------- -------- $206,291 $176,005 $156,928 ======== ======== ======== </TABLE> Long-term debt matures as follows: <TABLE> <CAPTION> Remainder of 1996 $ 37,060 <S> <C> 1997 39,080 1998 117,848 -------- $193,988 ======== </TABLE> NOTE 9--LEASE COMMITMENTS In addition to the facilities leased from the stockholders, the Company is obligated under two operating leases for office and warehouse rent. These leases require aggregate monthly payments of $1,898. One of the leases is month to month and the remaining lease is payable in monthly installments of $950 until a 90-day notification is provided. Total rent expense for the years ended February 28, 1994 and 1995, the ten-month period ended December 31, 1995, and the six months ended June 30, 1995 and 1996, was $95,192, $85,850, $69,175, $42,675 and $86,490, respectively, including related- party lease expense. NOTE 10--COMMITMENTS As of February 28, 1995, December 31, 1995, and June 30, 1996, the Company was contingently liable for letters of credit in the aggregate amount of $24,320, $10,510 and $173,278, respectively. The letters of credit cover bonding requirements of various municipalities where Super Washreg-trade-mark car wash facilities are being constructed. NOTE 11--RETIREMENT PLAN The Company sponsors a defined contribution retirement plan (the "plan") covering substantially all full-time employees. Eligible employees may contribute up to 15% of their eligible salary. In addition, the employer may make discretionary contributions to the plan. During 1994, 1995 and 1996, no discretionary employer contributions were made to the plan. NOTE 12--RECLASSIFICATIONS Certain prior-year balances have been reclassified to conform with the current-year presentation. NOTE 13--PRO FORMA DATA (UNAUDITED) The pro forma net income and net income per share includes a provision for federal and state income taxes as if the Company had been a C Corporation for all periods presented. The Company will convert to a C Corporation in connection with the completion of the Offering resulting in the recording of $135,000 in deferred income taxes as discussed in Note 3. Prior to consummation of the Offering, the Company intends to declare a dividend (the "Dividend") equal to the Company's taxable income while it has been an S Corporation prior to its conversion to a C Corporation, to the extent such taxable income has not been previously distributed. The Company currently estimates (based in part on the Company estimate of its earnings for the remainder of 1996 through the consummation date) that the dividend will equal approximately $5,400,000. As of June 30, 1996, the Company's taxable income while it has been an S Corporation that has not been distributed is approximately $2,700,000. The unaudited pro forma balance sheet gives effect to the deferred tax liability of $135,000 and the $2,700,000 dividend. No other contemplated transactions in connection with the Offering are included in the unaudited pro forma balance sheet information. NOTE 14--SUBSEQUENT EVENTS The Company's Board of Directors approved (i) the creation of two classes of stock--A and B, (ii) a 55,500-for-1 stock split of B shares and (iii) an increase in the authorized common stock to 25,000,000 Class A shares and 25,000,000 Class B shares, all to be effective immediately prior to the consummation of the Offering. All common share and per share amounts have been adjusted retroactively to give effect to the stock split. Additionally, the authorized number of shares have been adjusted to give effect to these increases. The shares of Class A common stock and Class B common stock are identical in all respects, except for voting rights and certain conversion rights and transfer restrictions in respect of the shares of Class B common shares. Each share of Class A common stock entitles the holder to one vote and each share of Class B common stock entitles the holder to ten votes. Class A common stock has no conversion rights. Class B common stock is convertible into Class A common stock, in whole or in part, at the option of the holder, on the basis of one share of Class A common stock for each share of Class B common stock converted. In the event of a transfer of shares of Class B common stock to any person other than a Black Family Member (as defined), each share will automatically convert into a Class A share of common stock. <PAGE> No dealer, salesperson or other individual has 450,000 Shares been authorized to give any information or to make any representations not contained in or incorporated by reference in this Prospectus and, if given or made, such information or representation must not be relied upon as having SUPER WASH, INC. been authorized by the Company. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any of the Common Stock in any jurisdiction to any person to whom it Class A is unlawful to make such offer or solicitation in Common Stock such jurisdiction. Neither the delivery of this ($0.01 par value) Prospectus nor any sale made hereunder shall, under any circumstances, create an implication that the information contained herein is correct as of any date subsequent to the date hereof or that there has been no change in the affairs of Prospectus the Company since such date. Until _________, 1996 (25 days from the date of this Prospectus), all agents and dealers effecting transactions in the Common Stock offered hereby, whether or not participating in this distribution, may be required to deliver a Prospectus. This is in addition to the obligation of dealers to deliver a Prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. TABLE OF CONTENTS Prospectus Summary .....................Risk Factors ......................The Company ..................Use of Proceeds .......S Corporation Distribution ..................Dividend Policy .........................Dilution ...................Capitalization Selected Financial and Operating Data Management's Discussion and Analysis of Financial Condition and Results of ...................Operations .........................Business .......................Management Certain Relationships and ...Related Party Transactions _____________, 1996 ...........Principal Stockholders .....Description of Capital Stock ..Shares Eligible for Future Sale .............Plan of Distribution ....................Legal Matters ..........................Experts ............Available Information ....Index to Financial Statements <PAGE> PART II - INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table itemizes the expenses incurred by the Company in connection with the registration, issuance and distribution of the securities being registered hereby, other than underwriting discounts and commissions. All the amounts shown are estimates except the Securities and Exchange Commission registration fee. ITEM AMOUNT Registration Fee - Securities and Exchange Commission $1,552.00 Printing and Engraving Fees and Expenses * Legal Fees and Expenses (other than Blue Sky) * Accounting Fees and Expenses * Blue Sky Fees and Expenses (including fees of counsel) * Miscellaneous Expenses * Total $ 100,000.00 * To be provided by amendment. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 8.75 of the Illinois Business Corporation Act authorizes indemnification of directors, officers, employees and agents of the Company; allows the advancement of costs of defending against litigation; and permits companies incorporated in Illinois to purchase insurance on behalf of directors, officers, employees and agents against liabilities whether or not in the circumstances such companies would have the power to indemnify against such liabilities under the provisions of the statute. The Company's Articles, incorporated by reference as Exhibit 3.1, and its Bylaws, incorporated by reference as Exhibit 3.2, provide for indemnification of its officers and directors to the full extent permitted by the Illinois Business Corporation Act. The Articles of the Company eliminate, to the fullest extent permitted by Illinois law, liability of a director to the Company or its stockholders for monetary damages for breach of such director's fiduciary duty of care except for liability where a director (a) breaches his or her duty of loyalty to the Company or its stockholders, (b) fails to act in good faith or engages in intentional misconduct or knowing violation of law, (c) authorizes payment of an illegal dividend or stock repurchase or (d) obtains an improper personal benefit. While liability for monetary damages has been eliminated, equitable remedies, such as injunctive relief or recision remain available. In addition, a director is not relieved of his responsibilities under any other law, including the federal securities laws. The Company will enter into indemnification agreements in the form described below with each person who is currently a member of its board of directors and with persons who in the future become directors of the Company. Such indemnification agreements provide for indemnification against any and all expenses incurred in connection with, as well as any and all judgments, fines and amounts paid in settlement resulting from, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (collectively an "Action"), by reason of the fact that such director is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. The indemnification agreements provide that if any payment, advance or indemnification of the director requires that he or she acted in good faith, in a manner he or she reasonably believed to be for or not opposed to the best interest of the Company or without reasonable cause to believe his or her conduct was unlawful, then it shall be presumed that he or she so acted unless proven otherwise by clear and convincing evidence. The indemnification agreements also provide for the advancement of all expenses, including reasonable attorneys' fees, arising from the investigation of any claim, preparation for the defense or settlement of an Action. The indemnification agreements authorize the Company to participate in the defense of any Action and to assume the defense thereof, with counsel who shall be reasonably satisfactory to the director, provided that the director shall be entitled to separate counsel of his or her choosing if he or she reasonably believes that (i) there exist conflicting interests between himself or herself and the Company or other party (the defense of whom the Company shall have assumed) or (ii) there is any substantial likelihood that the Company will be financially or legally unable to satisfy its obligations under the indemnification agreements. The indemnification agreements provide that a director's rights under such contract are not exclusive of any other indemnification rights he or she may have under any provision of law, the Articles or Bylaws of the Company, the vote of the Company's stockholders or disinterested directors, other agreements or otherwise. (Insofar as indemnification by the Company for liabilities arising under the Securities Act of 1933, as amended (the "Securities Act") may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, the Company has been advised that such indemnification is considered by the Commission to be against public policy and therefore unenforceable.) ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES There were no transactions by the Company during the last three years involving sales of the Company's securities. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits *1.1 Form of Subscription Agreement *1.2 Form of Escrow Agreement *3.1 Amended and Restated Articles of Incorporation of Super Wash, Inc. *3.2 Amended and Restated Bylaws of Super Wash, Inc. *4 Specimen Common Stock Certificate of Super Wash, Inc. *5.1 Opinion of Rudnick & Wolfe *10.1 Form of Director Indemnification Agreement *10.2 Form of Operations Agreement *10.3 Form of Tax Indemnification Agreement **23.1 Consent of Arthur Andersen LLP *23.3 Consent of Rudnick & Wolfe (included in Exhibit 5.1 hereof) **24 Power of Attorney **27 Financial Data Schedule *99.1 Consents of persons named to become directors * To be filed by amendment ** Filed with this document } Previously filed (b) Financial Statement Schedule ITEM 17. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Act, may be permitted to directors, officers, and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any election, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes: () To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: <PAGE> () To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; () To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post- effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. () To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the registration statement is on Form S-3, Form S-8 or Form F-3, and the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed with or furnished to the Commission by the registrant pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement. () That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial BONA BIDE Offering thereof. () To remove from registration by means of a post- effective amendment any of the securities being registered which remain unsold at the termination of the Offering. () If the registrant is a foreign private issuer, to file a post-effective amendment to the registration statement to include any financial statements required by Rule 3-19 of this chapter at the start of any delayed offering or throughout a continuous offering. Financial statements and information otherwise required by Section 10(a)(3) of the Act need not be furnished, provided, that the registrant includes in the prospectus, by means of a post-effective amendment, financial statements required pursuant to this paragraph (a)(4) and other information necessary to ensure that all other information in the prospectus is at least as current as the date of those financial statements. Notwithstanding the foregoing, with respect to registration statements on Form F-3, a post- effective amendment need not be filed to include financial statements and information required by Section 10(a)(3) of the Act. <PAGE> SIGNATURES Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Chicago, State of Illinois, on September 27, 1996. SUPER WASH, INC. By: /S/ MARY K. BLACK Mary K. Black Chairman of the Board Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated. NAME TITLE DATE Mary K. Black* Chairman of the Board September 27, 1996 and Secretary Robert D. Black* Director, President and Treasurer September 27, 1996 (principal executive officer) Donald B. Vogel* Vice President (principal financial September 27, 1996 and accounting officer) *By: /S/ MARY K. BLACK Individually and as Attorney-in-Fact September 27, 1996 Mary K. Black <PAGE> EXHIBIT INDEX EXHIBIT NUMBER DOCUMENT DESCRIPTION *1.1 Form of Subscription Agreement *1.2 Form of Escrow Agreement *3.1 Amended and Restated Articles of Incorporation of Super Wash, Inc. *3.2 Amended and Restated Bylaws of Super Wash, Inc. *4 Specimen Common Stock Certificate of Super Wash, Inc. *5.1 Opinion of Rudnick & Wolfe *10.1 Form of Director Indemnification Agreement *10.2 Form of Operations Agreement *10.3 Form of Tax Indemnification Agreement **23.1 Consent of Arthur Andersen LLP *23.3 Consent of Rudnick & Wolfe (included in Exhibit 5.1 hereof) **24 Power of Attorney **27 Financial Data Schedule *99.1 Consents of persons named to become directors </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-23.1 <SEQUENCE>2 <TEXT> EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the inclusion in this registration statement on Form S-1 of our reports, which contained a captioned opinion dated May 15, 1996, on our audits of the consolidated financial statements of Super Wash, Inc. and Subsidiary and to all references to our firm included in this registration statement. ARTHUR ANDERSON LLP Chicago, Illinois September 26, 1996 </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-24 <SEQUENCE>3 <TEXT> EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned, being a director or officer, or both, of SUPER WASH, INC., an Illinois corporation (the "Company"), does hereby constitute and appoint MARY K. BLACK, ROBERT D. BLACK and JOSEPH HERMES with full power to each of them to act alone, as the true and lawful attorneys and agents of the undersigned, with full power of substitution and resubstitution to each of said attorneys to execute, file or deliver any and all instruments and to do all acts and things which said attorneys and agents, or any of them, deem advisable to enable the Company to comply with the Securities Act of 1933, as amended, and any requirements or regulations of the Securities and Exchange Commission in respect thereof, in connection with the Company's filing with respect to the registration under said Securities Act of 4,500,000 shares of Class A Common Stock, par value $0.01 per shares, including specifically, but without limitation of the general authority hereby granted, the power and authority to sign his name as a director or officer or both, of the Company, as indicated below opposite his signature, to the registration statement, and any amendment, post-effective amendment, supplement or papers supplemental thereto, to be filed with respect to said shares of common stock; and each of the undersigned does hereby fully ratify and confirm all that said attorneys and agents, or any of them, or the substitute of any of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, each of the undersigned has subscribed these presents, as of this 10th day of September, 1996. /S/ MARY K. BLACK Mary K. Black Chairman of the Board of Directors /S/ ROBERT D. BLACK Robert D. Black Director and President (Principal Executive Officer) /S/ DONALD B. VOGEL Donald B. Vogel Vice President (Principal Financial and Accounting Officer) </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-27 <SEQUENCE>4 <DESCRIPTION>REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTAL SCHEDULE <FLAWED> <TEXT> WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. <TABLE> <S> <C> When the transaction referred to in Note 14 of Notes to Consolidated Financial Statements has been consummated we will be in a position to render the following report. ARTHUR ANDERSEN LLP To the Board of Directors of Super Wash, Inc. and Subsidiary: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of Super Wash, Inc. and Subsidiary included in this registration statement and have issued our report thereon dated May 15, 1996, except for Note 14 of Notes to Consolidated Financial Statements which is as of _________, 1997. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index in Item 16(b) is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Chicago, Illinois May 15, 1996 S-1 <PAGE> SCHEDULE II SUPER WASH, INC. AND SUBSIDIARY VALUATION AND QUALIFYING ACCOUNTS <CAPTION> Balance at Charged to Beginning Costs & Balance at OF YEAR EXPENSES DEDUCTION END OF YEAR Allowance for Doubtful Accounts: <S> <C> <C> <C> <C> Year Ended February 28, 1994 $ 63,000 $ 51,609 $49,609 $65,000 Year Ended February 28, 1995 $ 65,000 $ 10,000 $ $ -- 75,000 Ten Month Period Ended December $ 75,000 $ $ $ 31, 1995 -- -- 75,000 </TABLE> </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS SET FORTH IN THE FINANCIAL STATEMENTS AND NOTES THERETO AND AS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS (I) ASSUMES THAT THE U.S. UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED AND (II) REFLECTS THE CONVERSION OF ALL OF THE COMPANY'S OUTSTANDING SHARES OF SERIES A AND SERIES B PREFERRED STOCK, PAR VALUE $0.001 PER SHARE (COLLECTIVELY, THE "PREFERRED STOCK"), INTO SHARES OF COMMON STOCK, WHICH WILL OCCUR UPON THE CLOSING OF THE OFFERINGS. THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN OR PROJECTED BY THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED UNDER "RISK FACTORS" AND "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS. The Company Triangle is a pharmaceutical company engaged in the development of new drug candidates primarily in the antiviral area, with a particular focus on therapies for the human immunodeficiency virus ("HIV"), including the acquired immunodeficiency syndrome ("AIDS"), and the hepatitis B virus ("HBV"). Prior to their employment with the Company, members of the Company's management team played instrumental roles in the identification, clinical development and commercialization of several leading antiviral therapies. Triangle has an existing portfolio consisting of five licensed drug candidates and two drug candidates for which the Company has an option to acquire a license. In laboratory tests, four of the seven drug candidates inhibit the growth of HIV, and two of these four also inhibit the growth of HBV. The other three drug candidates have attractive preclinical profiles against certain cancers, herpes infections and psoriasis. All of the Company's drug candidates are in an early phase of development. The Company has completed a Phase Ia clinical trial and is currently conducting a Phase Ib/IIa clinical trial with one of its anti-HIV drug candidates. The Company expects to commence Phase I clinical trials for most of its other existing drug candidates by the end of 1997. The Company believes that some of its drug candidates may meet the criteria established by the United States Food and Drug Administration ("FDA") for accelerated approval. If so, the Company may be able to commercialize these drug candidates in a shorter time period than has historically been required for drugs that do not meet the criteria for accelerated approval. There can be no assurance, however, that the Company's drug candidates will qualify for accelerated approval or be approved in a time period that is shorter than would be historically expected. Treatment of HIV using combinations of drugs has recently shown significant clinical benefits including reducing virus levels and increasing patient longevity. Prior to joining the Company, the Company's management team was actively engaged for a number of years in the development of combination therapy for the treatment of HIV. The Company was founded based in part on the management team's belief that the prolonged use of combination therapy will generate demand for new anti-HIV drugs with favorable resistance and tolerance profiles. The Company believes the use of anti-HIV drugs will increase because it anticipates that (i) the use of multiple drugs in individual patients on combination therapy will increase, (ii) large numbers of previously untreated patients will begin to seek medical care as the benefits of combination therapy become more widely understood and (iii) patient longevity will increase and thus lengthen the duration of drug therapy. Triangle intends to maintain a limited corporate infrastructure that is focused on drug development. The Company does not intend to engage in drug discovery, but instead to focus on drug development, thereby avoiding much of the significant investment of time and capital that is generally required before a compound is identified and brought to clinical trials. The Company intends to use its expertise to perform internally what it believes are the most critical aspects of the development process, such as the design of clinical trials and the optimization of drug synthesis. The Company plans to out-source the conduct of clinical trials and many aspects of the manufacture of drug substance to carefully selected third parties. The Company believes that the high concentration of major prescribers of anti-HIV therapies in the United States will enable the Company to promote most drug candidates that are successfully developed to these prescribers through a small, direct sales force. The Company does not currently have a sales force. Triangle is a development stage company, has not received any revenues from the sale of products, and does not expect any of its drug candidates to be commercially available for at least the next several years. As of June 30, 1996, the Company's accumulated deficit was approximately $6.5 million. There can be no assurance that the Company will ever achieve profitable operations. The Company was incorporated in Delaware in July 1995. The Company's principal executive offices are located at 4 University Place, 4611 University Drive, Durham, North Carolina 27707, and its telephone number is (919) 493-5980. The Offerings <TABLE> <S> <C> Common Stock offered by the Company............ 4,000,000 shares Common Stock to be outstanding after the Offerings...................................... 17,035,238(1) Use of proceeds................................ For general corporate purposes, including drug development programs such as preclinical testing and clinical trials, the payment of license fees and other amounts to licensors and working capital. See "Use of Proceeds." Nasdaq National Market symbol.................. VIRS </TABLE> - ------------ (1) Excludes as of October 28, 1996 (i) 1,096,260 shares of Common Stock issuable upon exercise of outstanding options (at a weighted average exercise price of $2.13 per share) and (ii) 146,000 shares of Preferred Stock issuable upon exercise of outstanding warrants (at a weighted average exercise price of $1.22 per share). See "Management--Benefit Plans," "Description of Capital Stock--Preferred Stock, Warrants and Stock Options" and note 6 of notes to financial statements. Summary Financial Data <TABLE> <CAPTION> Period from inception Six Months (July 12, 1995) to Ended December 31, 1995 June 30, 1996 ------------------- -------------- <S> <C> <C> Statement of Operations Data: Costs and expenses: License fees............................................................. -- $ 2,751,829 Development.............................................................. -- 1,342,591 General and administrative............................................... $ 1,004,815 1,490,156 ------------------- -------------- Loss from operations......................................................... (1,004,815) (5,584,576) Interest income.............................................................. 37,232 85,158 ------------------- -------------- Net loss..................................................................... $ (967,583) $ (5,499,418) ------------------- -------------- ------------------- -------------- Pro forma net loss per share (1)............................................. $ (0.07) $ (0.39) ------------------- -------------- ------------------- -------------- Shares used in computing pro forma net loss per share (1).................... 14,277,498 14,277,498 <CAPTION> June 30, 1996 ----------------------------------- Actual As Adjusted(2) ------------------- -------------- <S> <C> <C> Balance Sheet Data: Cash and cash equivalents.................................................... $ 5,825,617 $ 36,745,617 Investments.................................................................. 11,305,549 11,305,549 Working capital.............................................................. 16,339,403 47,259,403 Total assets................................................................. 18,030,241 48,950,241 Accumulated deficit.......................................................... (6,467,001) (6,467,001) Total stockholders' equity................................................... 16,929,031 47,849,031 </TABLE> - ------------ (1) See note 1 of notes to financial statements for information concerning the computation of pro forma net loss per share and shares used in computing pro forma net loss per share. (2) As adjusted to reflect the sale of the Common Stock offered hereby at an assumed initial public offering price of $8.50 per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001022797_coleman_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001022797_coleman_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION, INCLUDING "RISK FACTORS" AND FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THE COMPANY Coleman Natural Products, Inc. ("Coleman" or the "Company") is the leading U.S. supplier and marketer of fresh, branded, natural beef products from cattle that have never received hormones and antibiotics ("Coleman Natural Meats"). Coleman believes that it is the only company with national distribution that has an approved U.S. Department of Agriculture ("USDA") label describing its hormone and antibiotic free cattle raising practices. In the United States, most commodity beef comes from cattle which have been given antibiotics and implanted with hormones to accelerate growth and weight gain. In 1979, Mel Coleman, Sr., a fourth-generation Colorado rancher and the Company's founder, pioneered the marketing of pure and natural beef, raised humanely and with respect for the environment. Coleman believes its products are not just a food, but a lifestyle. The Company believes that there are a growing number of consumers demanding high quality, safe and pure products, and that they are willing to pay a premium for them. Consumer attitudes about food and eating habits are undergoing fundamental changes relating to diet, health and food safety. Consumers are moving toward foods which are less processed and closer to their natural state. Coleman believes that these changes, which it considers long term in nature, are most dramatically portrayed by the growth in the natural food industry, as well as by the growth of many new premium products now offered in previously mature commodity categories, such as produce, coffee and juices. As a result, Coleman believes there is a significant growth opportunity for fresh, branded beef promoted as natural ("Natural Beef") as a distinct segment within the $18 billion retail category for fresh beef sold annually in supermarkets. Given Coleman's strong reputation, leadership position, unique product benefits and focus on the consumer, the Company believes that it is strategically positioned to capture an increasing share of the $18 billion fresh beef category. Coleman believes the Natural Beef segment is in its early stages of development. The fresh beef category is one of the few remaining areas in the supermarket without a preponderance of recognizable consumer brands. Coleman has capitalized on this opportunity by developing a premium branded natural product . . .Coleman Natural Meats-Registered Trademark-. Today, Coleman Natural Meats are the only beef carried in almost all of the largest natural food supermarket chains, including substantially all of the Whole Foods/Fresh Fields and Wild Oats/Alfalfa's stores. Coleman is also carried in conventional supermarket stores, including various A&P divisions, Dorothy Lane, Grand Union, King Kullen, Nob Hill and Wegmans. As of September 1996, Coleman Natural Meats were sold in over 600 supermarkets. Coleman believes there is a signficant opportunity to further expand into the approximately 27,000 chain and large supermarkets in the U.S. not now carrying Natural Beef, as well as to increase share and volume within existing and new accounts. The Company's objective is to significantly expand the Natural Beef segment, while profitably extending its leadership position within this segment. The Company feels that it can achieve this growth by further expanding its distribution in natural and conventional supermarket accounts; by building brand awareness and household penetration and purchase rates; by improving operational efficiencies; and by remaining true to its founding principles of producing food that is superior tasting, good for you, safe and raised right. The Company, originally incorporated in Colorado in 1982, was reincorporated in Delaware in 1993. Its executive offices are located at 5140 Race Court, Denver, Colorado 80216, and its telephone number at that location is (303) 297-9393. THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Company.......... 1,475,000 shares Common Stock Offered by the Selling Stockholders................................ 225,000 shares(1) Common Stock Outstanding after the Offering.................................... 3,363,181 shares(1)(2)(3) Use of Proceeds.............................. For capital expenditures for new facilities, redemption of Series A Preferred Stock, sales and marketing programs, and general corporate purposes. Proposed Nasdaq National Market Symbol....... NTRL </TABLE> - ------------------------ (1) Includes 170,865 shares to be issued in connection with the exercise of warrants to be purchased by the Underwriters from certain Selling Stockholders. The Underwriters intend to exercise the warrants in a cashless exercise transaction, pursuant to which a portion of the shares to be issued are redeemed as consideration for the warrant exercise price. The number of shares to be redeemed depends on the public offering price, which is assumed to be $10.25 per share. The Underwriters have agreed to purchase a portion of warrants held by certain Selling Stockholders sufficient for the Underwriters to receive 170,865 shares in the cashless exercise transaction. See "Principal and Selling Stockholders" and "Underwriting." (2) Includes an estimated 48,707 shares issuable upon exercise of the remaining warrants owned by certain Selling Stockholders. These warrants are to be purchased by the Underwriters, exercised for cash and the shares used to cover a portion of the over-allotment option, to the extent the option is exercised. To the extent the over-allotment option is not exercised, the Selling Stockholders will exercise such warrants for cash. The number of shares issuable upon exercise of the remaining warrants is affected by the actual public offering price used in the cashless exercise transaction described in footnote (1) above. See "Principal and Selling Stockholders" and "Underwriting." (3) Excludes (i) an aggregate of 304,514 shares of Common Stock reserved for issuance pursuant to the exercise of outstanding stock options under the Company's Amended and Restated Stock Option Plan at a weighted average price of $2.52 per share and (ii) an aggregate of 5,700 shares of Common Stock reserved for issuance pursuant to exercise of outstanding stock options at an exercise price of $9.50 per share, and 326,300 shares of Common Stock reserved for future issuance, pursuant to the Company's Omnibus Stock and Incentive Plan. UNLESS OTHERWISE INDICATED, ALL INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES (I) THE EFFECTS OF A 2.85:1 STOCK SPLIT OF THE COMPANY'S COMMON STOCK IN SEPTEMBER 1996 AND (II) NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. SEE "DESCRIPTION OF CAPITAL STOCK" AND "UNDERWRITING." THIS PROSPECTUS CONTAINS CERTAIN STATEMENTS OF A FORWARD-LOOKING NATURE RELATING TO FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY. PROSPECTIVE INVESTORS ARE CAUTIONED THAT SUCH STATEMENTS ARE ONLY PREDICTIONS AND THAT ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY. IN EVALUATING SUCH STATEMENTS, PROSPECTIVE INVESTORS SHOULD SPECIFICALLY CONSIDER THE VARIOUS FACTORS IDENTIFIED IN THIS PROSPECTUS, INCLUDING THE MATTERS SET FORTH UNDER THE CAPTION "RISK FACTORS," WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED IN SUCH FORWARD-LOOKING STATEMENTS. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AND OTHER OPERATING DATA) <TABLE> <CAPTION> 26 WEEK 52 WEEK FISCAL FISCAL 39/40 WEEK INTERIM PERIODS ENDED(1) PERIOD PERIODS ENDED(1) ------------------------------- ENDED ---------------------------- JUNE 26, JUNE 25, JUNE 24, DECEMBER 23, SEPTEMBER 23, SEPTEMBER 28, 1993 1994 1995 1995(1)(4) 1995 1996 --------- --------- --------- ------------ ------------- ------------- <S> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales............................ $ 30,410 $ 34,559 $ 43,002 $ 28,791 $ 37,755 $ 40,618 Gross profit......................... 3,304 2,829 4,635 2,696 4,211 5,428 Income (loss) from continuing operations.......................... 290 (370) 620 1,087 767 1,081 Net income (loss).................... 290 (1,025) 505 1,087 716 1,081 Net income (loss) attributable to common stock........................ $ 222 $ (1,077) $ 327 $ 921 $ 480 $ 772 --------- --------- --------- ------------ ------------- ------------- --------- --------- --------- ------------ ------------- ------------- Earnings (loss) per share: Continuing operations.............. $ .16 $ (.29) $ .26 $ .51 $ .31 $ .38 Discontinued operations............ $ -- $ (.44) $ (.07) $ -- $ (.03) $ -- --------- --------- --------- ------------ ------------- ------------- Net income (loss).................. $ .16 $ (.73) $ .19 $ .51 $ .28 $ .38 --------- --------- --------- ------------ ------------- ------------- --------- --------- --------- ------------ ------------- ------------- Weighted average common and common equivalent shares outstanding....... 1,414 1,478 1,685 1,811 1,697 2,021 --------- --------- --------- ------------ ------------- ------------- --------- --------- --------- ------------ ------------- ------------- Pro forma earnings (loss) per share (3) (Unaudited): Continuing operations.............. $ .31 $ .51 $ .46 Discontinued operations............ $ (.06) $ -- $ -- --------- ------------ ------------- Net income......................... $ .25 $ .51 $ .46 --------- ------------ ------------- --------- ------------ ------------- Pro forma weighted average common and common equivalent shares outstanding (Unaudited)......................... 2,008 2,137 2,348 --------- ------------ ------------- --------- ------------ ------------- OTHER OPERATING DATA: Approximate number of natural supermarket stores carrying Coleman's products.................. N/A N/A 74 84 76 90 Approximate number of conventional supermarket stores carrying Coleman's products.................. N/A N/A 284 396 348 526 </TABLE> <TABLE> <CAPTION> SEPTEMBER 28, 1996 ------------------------- DECEMBER 23, 1995 ACTUAL AS ADJUSTED(2) ----------------- --------- -------------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents............................................ $ 22 $ 63 $ 10,190 Working capital...................................................... 2,537 3,103 13,230 Total assets......................................................... 6,030 6,308 16,435 Notes payable........................................................ 1,161 791 791 Mandatorily redeemable preferred stock............................... 3,356 3,401 -- Total stockholders' equity (deficit)................................. (81) 855 14,383 </TABLE> - ------------------------ (1) Prior to December 23, 1995, the Company's fiscal year was the 52/53 week period ending on the last Saturday in June. Effective December 23, 1995, the Company's changed its fiscal year to the 52/53 week period ending on the last Saturday in December. Each fiscal quarter normally consists of one five-week period and two four-week periods. (2) Adjusted to give effect to (i) the sale of 1,475,000 shares of Common Stock by the Company at an assumed public offering price of $10.25 per share and the application of the net proceeds therefrom, (ii) the mandatory redemption of the Series A Preferred Stock (estimated to be $3.5 million as of the closing of the offering) and (iii) the issuance of an estimated 219,572 shares upon exercise of warrants and the receipt of the proceeds therefrom. See "Use of Proceeds" and "Underwriting."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001022807_big-foot_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001022807_big-foot_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..35e1f12914c1497842f332a04d2d40f511c63229
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0001022807_big-foot_prospectus_summary.txt
@@ -0,0 +1 @@
+SUMMARY THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS OF THE BANK AND NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. BIG FOOT FINANCIAL CORP. The Company is an Illinois corporation recently organized by the Bank for the purpose of acquiring all of the capital stock of the Bank to be issued in the Conversion. Immediately following the Conversion, the only significant assets of the Company will be the capital stock of the Bank, the loan that the Company intends to make to the ESOP and the net conversion proceeds retained by the Company. The Company will purchase all of the capital stock of the Bank to be issued upon the Conversion in exchange for 50% of the net proceeds from the Offerings with the remaining net proceeds to be retained by the Company. Funds retained by the Company will be used for general business activities, including the loan that the Company intends to make to the ESOP. The net proceeds from the Offerings are expected to be invested in federal funds, government and federal agency mortgage-backed securities, other debt securities, high-grade short-term marketable securities, deposits of or loans to the Bank or a combination thereof. See "Use of Proceeds." The business of the Company will initially consist of overseeing its investment in the Bank. See "Business of the Company," "Business of the Bank" and "Regulation -- Regulation of Savings Association Holding Companies." FAIRFIELD SAVINGS BANK, F.S.B. GENERAL The Bank was originally founded in 1901 as an Illinois state chartered mutual savings and loan association. On July 1, 1991, the Bank converted to a federally chartered savings bank. The Bank is subject to extensive regulation, supervision and examination by the OTS, its primary regulator, and the FDIC, which insures its deposits. The Bank is a community-oriented financial institution providing a variety of financial services to meet the needs of the communities which it serves. The Bank conducts business from its headquarters in Long Grove, Illinois and its two branches in Chicago and Norridge, Illinois. The Bank gathers savings deposits primarily from the communities and neighborhoods in close proximity to its offices. The Bank's lending area is larger and includes Cook, DuPage and Lake counties located in Illinois. The majority of the Bank's mortgage loans are secured by properties located in its lending area. See "Business of the Bank -- Market Area" and " -- Competition." The Bank's principal business consists of gathering savings deposits from the general public within its market area and investing those savings deposits primarily in one- to four-family residential mortgage loans, mortgage-backed securities and obligations of the U.S. Government. To a lesser extent, the Bank makes multifamily residential loans, commercial real estate loans, land, construction and development loans, consumer loans (including loans secured by savings deposits and home improvement loans) and commercial lines of credit. At July 31, 1996, the Bank had total assets of $194.6 million, of which $79.1 million was comprised of loans receivable and $102.4 million was comprised of mortgage-backed securities. At such date, total savings deposits were $137.2 million, borrowings were $39.9 million and retained earnings were $13.6 million. At that same date, the Bank's tangible, core and total risk-based capital ratios were 7.35%, 7.35% and 21.59%, respectively, which exceeded all applicable regulatory capital requirements. Additionally, the Bank's regulatory capital was in excess of the amount necessary to be "well-capitalized" under the Federal Deposit Insurance Corporation Improvement Act of 1991 (the "FDICIA"). See "Regulatory Capital Compliance," "Capitalization," "Pro Forma Data" and "Regulation -- Regulation of Federal Savings Associations." The Bank's savings deposits are insured up to the maximum allowable amount by the Savings Association Insurance Fund (the "SAIF") of the FDIC. 6 <PAGE> The Bank's net income was $226,000, $982,000 and $2.1 million for the fiscal years ended July 31, 1996, 1995 and 1994, respectively. Each of these years included certain non-recurring gains and settlements which are not expected to continue in the future. For the 1994 fiscal year, net income included an aggregate of $1.2 million ($775,000 net of tax) in gains on sale of investment securities available-for-sale and gains on sale of real estate held for sale and development; for the 1995 fiscal year, net income included a $557,000 gain ($385,000 net of tax) on real estate held for sale and development; and for the 1996 fiscal year, net income included $184,000 in income ($121,000 net of tax) related to settlements of litigation. Legal fees relating to these settlements also were incurred in 1996. See "Selected Financial and Other Data of the Bank," " Risk Factors -- Recent Declines in Net Income," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business of the Bank." The Bank is a member of the Federal Home Loan Bank of Chicago (the "FHLB of Chicago"), which is one of the 12 regional banks which comprise the Federal Home Loan Bank system. BUSINESS STRATEGY HOME LENDING AND ASSET QUALITY. The Bank's strategy has been to maintain its focus as a traditional consumer-oriented institution serving the markets in which its offices are located. Historically, the Bank's interest income has been derived primarily from one- to four-family residential mortgage loans and mortgage-backed securities. To a lesser extent, the Bank derives interest income from multifamily residential loans, commercial real estate loans, land, construction and development loans, consumer loans (including loans secured by savings deposits, and home improvement loans) and commercial lines of credit. The Bank has emphasized, and intends to continue to emphasize, the origination of one- to four-family residential mortgage loans in its lending area, which is defined generally as Cook, DuPage and Lake Counties. At July 31, 1996, one- to four-family residential mortgage loans totaled $76.3 million or 95.6% of gross loans, approximately $72.4 million (or 90.6% of gross loans) of which provided for fixed rates of interest. The remaining 4.4% of gross loans consisted of multifamily residential loans, land, construction and development loans, home equity loans and other loans. For the year ended July 31, 1996, the Bank originated $19.7 million of mortgage loans. See "Business of the Bank -- Lending Activities." The Bank also invests in mortgage-backed securities. The Bank's holdings of mortgage-backed securities totaled $102.4 million at July 31, 1996, representing 52.6% of total assets. See "Business of the Bank -- Investment Activities." The Bank pays particular attention to both the value estimates applied to the collateral securing loans as well as to the creditworthiness of its prospective borrowers and employs rigorous underwriting standards to minimize risk of loss. As a result of this strategy, historically the Bank has had only minimal loss experience in its lending operations. The Bank's ratio of non-performing loans to total loans at year end ranged from 0.15% to 5.58% during the five-year period ended July 31, 1996 and was 0.15% at July 31, 1996. Non-performing assets to total assets ranged from 0.06% to 2.92% during the five-year period ended July 31, 1996, and was at 0.06% at July 31, 1996. The Bank's ratio of allowance for loan losses to non-performing loans ranged from 11.08% to 254.24% over the five years ended July 31, 1996 and was 254.24% at July 31, 1996. In 1992, at the direction of the Bank's primary federal regulator, the Bank adversely classified a $4.2 million loan and placed reserves against it. Subsequently, the Bank reversed such reserves and classification when it became apparent that the loan would be repaid in full. For the past five fiscal years, the Bank's ratio of non-performing loans to total loans averaged 0.69% and the ratio of non-performing assets to total assets averaged 0.33%, without giving effect to the reserves that were initially placed against the $4.2 million loan but were subsequently reversed. See "Selected Financial and Other Data of the Bank" and "Business of the Bank -- Delinquencies and Non- Performing Assets." SAVINGS DEPOSITS AND BORROWED MONEY. The Bank's interest expense consists of the interest paid on savings deposits and borrowed money. The Bank's savings deposits are derived principally from its primary market area. The Bank's strategy has been to maintain a high level of stable savings deposits by providing quality service to its 7 <PAGE> customers without significantly increasing its cost of funds. The Bank's low- cost deposit base, consisting of passbook accounts, non-interest-bearing demand accounts, NOW accounts and money market demand accounts, totaled $65.8 million or 48% of total savings deposits and had a weighted average effective rate of 2.41% at July 31, 1996. For the past three years, these accounts have consistently accounted for more than 47% of total savings deposits and had a weighted average effective rate of not more than 2.45% throughout this period. At July 31, 1996, money market demand accounts totaled $13.0 million or 9.5% of total savings deposits and had a weighted average effective rate of 3.12%. The Bank has consistently maintained an overall cost of funds lower than the National Median Cost of Funds Rate as determined by the OTS. At July 31, 1996, the Bank's cost of deposits was 4.01% and its cost of funds (including FHLB borrowings) of 4.74% was 13 basis points below the National Median Cost of Funds Rate. The Bank has not and does not intend to use brokered deposits as a source of funds. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Business of the Bank -- Sources of Funds." MARKET AREA The Bank serves three distinct geographic markets: the Chicago branch at 1601 North Milwaukee Avenue serves the near northwest side of the City of Chicago, the Norridge branch at 8301 West Lawrence serves Chicago's near northwestern suburbs and the Long Grove branch at Old McHenry Road and Route 83 serves northern Cook and southern Lake counties. The Bank's customer base may be categorized by branch location. In the Chicago branch, the customer base is largely blue collar workers and young white collar technicians and professionals. The Chicago market is experiencing new construction and a refurbishing of its existing aged housing stock and is becoming an active mortgage as well as a savings market. The Norridge branch serves a customer base split between blue and white collar workers where the market is mature. The Norridge market has modest prospects for growth; however, it provides the Bank with a stable source of deposits. The Long Grove office is situated in an affluent, high-growth, white collar market. This is a dynamic market which provides the Bank with significant loan demand and potential for growth opportunities in savings and lending activities. See "Business of the Bank--Market Area." Substantially all loans originated by the Bank are secured by real estate located in Cook, DuPage and Lake counties in Illinois. RECENT LEGISLATION; SAIF ASSESSMENT On September 30, 1996, Congress enacted legislation to recapitalize the SAIF. Under this legislation, depository institutions such as the Bank were assessed a one-time charge at a rate of 65.7 basis points per $100 of SAIF- assessable deposits held at March 31, 1995. The assessment is payable on November 27, 1996. The impact on operations, net of related tax effects, will reduce reported earnings by $617,000 for the quarter ended October 31, 1996. Management, however, anticipates, although there can be no assurance, that the Bank will pay substantially lower regular deposit insurance assessments compared to those paid by the Bank in recent years. See "Risk Factors -- Recapitalization of the SAIF; SAIF Assessments; and Special Assessment," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Regulation -- Regulation of Federal Savings Associations -- Insurance of Deposit Accounts." THE CONVERSION AND THE SUBSCRIPTION AND COMMUNITY OFFERINGS On May 21, 1996, the Board of Directors of the Bank adopted the Plan of Conversion (which was amended as of September 17, 1996) pursuant to which the Bank is converting from a federally chartered mutual savings bank to a federally chartered stock savings bank, and all of the outstanding capital stock of the Bank will be acquired by the Company in exchange for 50% of the net proceeds from the Offerings. The Conversion and the Offerings are subject to OTS approval, which was received on October 24, 1996, and approval of the Bank's members at a special meeting to be held on December __, 1996. See "The Conversion -- General." The Bank is converting to increase its capital and to structure itself in a form used by commercial banks and many other business entities and a growing number of savings institutions. The Conversion will enhance the Bank's ability to access 8 <PAGE> capital markets, expand its current operations, acquire other financial institutions or branch offices, provide affordable home financing opportunities to the communities it serves and diversify into other financial services to the extent allowable by applicable law and regulation. The holding company form of organization would provide additional flexibility to diversify the Bank's business activities through newly-formed subsidiaries or through acquisitions of or mergers with both mutual and stock institutions, as well as other companies. Although there are no current arrangements, understandings or agreements, written or oral, regarding any such opportunities, the Company will be in a position after the Conversion, subject to regulatory limitations and the Company's financial position, to take advantage of any such opportunities that may arise. See "The Conversion -- Purposes of Conversion." The holding company form of organization also provides certain anti-takeover protections. See "Risk Factors -- Certain Anti-Takeover Provisions." Common Stock will be offered in the Subscription Offering and, to the extent shares are available, in the Community Offering. To the extent that shares are available after the expiration of the Community Offering, such shares may be offered in the Syndicated Community Offering. See "The Conversion -- Syndicated Community Offering." Common Stock offered in the Subscription Offering will be offered in the following order of priority: (1) depositors whose deposits in qualifying accounts in the Bank totaled $50 or more on December 31, 1994 ("Eligible Account Holders"); (2) the Employee Plans, including the ESOP; (3) depositors whose deposits in qualifying accounts in the Bank totaled $50 or more on September 30, 1996, other than (i) those depositors who would otherwise qualify as Eligible Account Holders or (ii) directors or officers of the Bank or their Associates (as defined herein under "The Conversion -- Limitations on Common Stock Purchases") ("Supplemental Eligible Account Holders"); (4) members of the Bank, consisting of depositors of the Bank as of October 31, 1996, the voting record date (the "Voting Record Date") for the special meeting of members to vote on the Conversion, and borrowers from the Bank as of July 1, 1991 whose loans continue to be outstanding as of the Voting Record Date, other than those members who otherwise qualify as Eligible Account Holders or Supplemental Eligible Account Holders ("Other Members"); and (5) employees and officers of the Bank, other than those employees and officers who otherwise qualify as Eligible Account Holders, Supplemental Eligible Account Holders or Other Members ("Bank Employees"). Subscription rights will expire if not exercised by, and the Subscription Offering will terminate at, 12:00 Noon, Central Time, on the Expiration Date, unless extended by the Bank and the Company, with approval of the OTS, if necessary. Subject to the prior rights of holders of subscription rights, Common Stock not subscribed for in the Subscription Offering will be subsequently offered in the Community Offering to certain members of the general public, with preference given to natural persons residing in Cook and Lake counties, the counties in which the Bank's offices are located. The Company and the Bank have the option to reserve up to 25% of the Common Stock offered in the Community Offering for purchase by certain institutional investors, although no such institutional investors have been selected. The Company and the Bank reserve the absolute right to reject or accept any orders in the Community Offering, in whole or in part, either at the time of receipt of an order or as soon as practicable following the expiration of the Community Offering. The Community Offering will terminate not later than 45 days after the Expiration Date. The Bank and the Company have retained Hovde as consultant and advisor in connection with the Offerings and to assist in soliciting subscriptions and purchase orders in the Offerings. The Bank and the Company will pay a fee to Hovde which will be based on the aggregate Purchase Price of the Common Stock sold in the Offerings. See "The Conversion -- Marketing and Underwriting Arrangements." In connection with the Conversion, the Company has established, and the Bank has adopted, the ESOP for eligible employees of the Bank and the Company. The ESOP intends to subscribe for 8% of the shares of Common Stock issued in the Conversion. At a meeting of shareholders to be held no earlier than six months following the completion of the Conversion (which meeting is anticipated to be held during July, 1997), the Company may seek shareholder approval of the Stock Option Plans and the Stock Programs for implementation prior to the first anniversary of the Conversion, which the Company intends to establish as a method of providing officers, employees and non-employee directors of the Bank and the Company with a proprietary interest in the Company in a manner designed to encourage such persons to remain with the Bank and the Company. For a more detailed 9 <PAGE> discussion of the Stock Option Plans and Stock Programs and the benefits expected to be received by officers, employees and directors, see " -- Benefits to Management and Directors," "Risk Factors -- Certain Anti-Takeover Provisions - -- Voting Control of Officers and Directors" and "Management of the Bank -- Benefits." PROSPECTUS DELIVERY AND PROCEDURE FOR PURCHASING SHARES OF COMMON STOCK To ensure that each purchaser receives a prospectus at least 48 hours prior to the respective expiration dates for the Offerings in accordance with Rule 15c2-8 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), no prospectus will be mailed any later than five days prior to any such date or hand delivered any later than two days prior to any such date. Execution of the stock order form will confirm receipt of delivery in accordance with Rule 15c2-8. Each stock order form distributed will be accompanied by a prospectus and certification form. The Company and the Bank are not obligated to accept or process orders which are submitted on facsimiled or copied stock order forms. Stock order forms unaccompanied by an executed original certification form will not be accepted. Payment by check, money order, bank draft, cash or debit authorization to an existing account at the Bank must accompany the stock order form and certification form. No wire transfers will be accepted. The Bank is prohibited from lending funds to any person or entity for the purpose of purchasing shares of Common Stock in the Conversion. See "The Conversion -- Procedure for Purchasing Shares in Subscription and Community Offerings." In order to ensure that Eligible Account Holders, Supplemental Eligible Account Holders and Other Members are properly identified as to their stock purchase priorities, depositors as of the Eligibility Record Date (December 31, 1994), Supplemental Eligibility Record Date (September 30, 1996) and/or the Voting Record Date (October 31, 1996) and borrowers as of the Voting Record Date (whose loans have been outstanding since July 1, 1991) must list all accounts on the stock order form, giving all names on each account and the account numbers. Failure to list all such account numbers may result in the inability of the Company or the Bank to fill all or part of a subscription order. See "The Conversion -- Procedure for Purchasing Shares in Subscription and Community Offerings." RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES OF COMMON STOCK Prior to the completion of the Conversion, no person may transfer or enter into any agreement or understanding to transfer the legal or beneficial ownership of the subscription rights issued under the Plan or the shares of Common Stock to be issued upon their exercise. Each person exercising subscription rights will be required to certify that any purchase of Common Stock will be solely for the purchaser's own account and that there is no agreement or understanding regarding the sale or transfer of any shares purchased as a result of the exercise. The Company and the Bank will pursue any and all legal and equitable remedies in the event they become aware of the transfer of subscription rights and will not honor orders known by them to involve the transfer of such rights. See "The Conversion -- Restrictions on Transfer of Subscription Rights and Shares of Common Stock." PURCHASE LIMITATIONS The minimum purchase in the Offerings is 25 shares. The ESOP intends to subscribe for 8% of the shares of Common Stock issued in the Conversion pursuant to the subscription rights granted under the Plan. The subscription of the ESOP will be afforded a second priority behind the subscription rights of Eligible Account Holders, except that, in the event of an increase in the amount of Common Stock to be issued as a result of an increase of up to 15% in the maximum of the Estimated Price Range, the subscriptions of the Employee Plans, including the ESOP, will be afforded a first priority with respect to such increase in shares to the extent necessary to fill the subscriptions of the Employee Plans. No Eligible Account Holder, Supplemental Eligible Account Holder, Other Member or Bank Employee, in their capacity as such, may subscribe in the Subscription Offering for more than $150,000 of the Common Stock offered; no person, together with associates of or persons acting in concert with such person, may purchase in the Community Offering and the Syndicated Community Offering in the aggregate more than $150,000 of the Common Stock offered; and, except for the Employee Plans, no person, together with associates of or persons acting in concert 10 <PAGE> with such person, may purchase more than the overall maximum purchase limitation of 1.0% of the total number of shares of Common Stock offered in the Offerings. At any time during the Conversion and without further approval by the Bank's members, the Company and the Bank may in their sole discretion increase the overall maximum purchase limitation, and increase the amount that may be subscribed for in the Offerings, to up to 5% of the shares offered or, if orders for Common Stock that exceed 5% of the total offering of shares do not, in the aggregate, exceed 10% of the total shares offered, to up to 9.99% of the total offering of shares. It is currently anticipated that the overall maximum purchase limitation may be increased if, after a Community Offering, the Company has not received subscriptions for an aggregate amount equal to at least the minimum of the Estimated Price Range. Prior to consummation of the Conversion, if such amount is increased, subscribers for the maximum amount will be, and certain other large subscribers in the sole discretion of the Bank may be, given the opportunity to increase their subscriptions up to the then applicable limit. See "The Conversion -- Limitations on Common Stock Purchases" and "The Conversion -- Community Offering." In the event of an increase in the total number of shares up to 15%, the additional shares will be distributed and allocated to fill unfilled orders in the Subscription and Community Offerings, with priority given to the subscription of the Employee Plans, including the ESOP, without any resolicitation of subscribers, as described in "The Conversion - -- Subscription Offering and Subscription Rights" and "-- Limitations on Common Stock Purchases." STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED IN THE CONVERSION Federal regulations require that the aggregate purchase price of the Common Stock to be issued in the Conversion be consistent with an independent appraisal of the estimated pro forma market value of the Common Stock following the Conversion. Capital Resources, an independent appraiser, has advised the Bank that in its opinion, dated September 6, 1996 and updated October 23, 1996, the aggregate estimated pro forma market value of the Common Stock ranged from $16,150,000 to $21,850,000, with a midpoint of $19,000,000. On October 23, 1996, Capital Resources updated its appraisal of the aggregate estimated pro forma market value of the Common Stock and increased the Valuation Range by approximately 8.57% from the appraisal dated September 6, 1996. The increase in value was primarily attributable to more favorable market conditions for thrift stocks, including the market performance of recently converted thrift institutions. See "The Conversion -- Stock Pricing." Capital Resources' appraisal reports are included as exhibits to the Company's Registration Statement, of which this Prospectus is a part. See "Additional Information." Based upon Capital Resources' appraisal, the Board of Directors of the Bank has established the Estimated Price Range of $16,150,000 to $21,850,000, assuming the issuance of between 1,615,000 and 2,185,000 shares of Common Stock at the Purchase Price of $10.00 per share. THE APPRAISAL OF THE COMMON STOCK IS NOT INTENDED AND SHOULD NOT BE CONSTRUED AS A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING SUCH STOCK NOR CAN ANY ASSURANCE BE GIVEN THAT PURCHASERS OF THE COMMON STOCK IN THE CONVERSION WILL BE ABLE TO SELL SUCH SHARES AFTER THE COMPLETION OF THE CONVERSION AT OR ABOVE THE PURCHASE PRICE. All shares of Common Stock issued in the Conversion will be sold at the Purchase Price, as determined by the Bank and approved by the Company. The actual number of shares to be issued in the Conversion will be determined by the Company and the Bank based upon the final updated valuation of the estimated pro forma market value of the Common Stock, giving effect to the Conversion, at the completion of the Offerings. The number of shares to be issued is expected to range from a minimum of 1,615,000 shares to a maximum of 2,185,000 shares. Subject to approval of the OTS, the Estimated Price Range may be increased or decreased to reflect market and economic conditions prior to the completion of the Conversion, and under such circumstances the Company may increase or decrease the number of shares of Common Stock to be issued in the Conversion. The maximum of the Estimated Price Range may be increased by up to 15% and the number of shares 11 <PAGE> of Common Stock to be issued in the Conversion may be increased to 2,512,750 shares due to regulatory considerations, changes in the market and general financial and economic conditions. No resolicitation of subscribers will be made and subscribers will not be permitted to modify or cancel their subscriptions unless the gross proceeds from the sale of the Common Stock are less than the minimum or more than 15% above the maximum of the current Estimated Price Range. See "Pro Forma Data," "Risk Factors -- Possible Increase in Estimated Price Range and Number of Shares Issued" and "The Conversion -- Stock Pricing" and "-- Number of Shares to be Issued." USE OF PROCEEDS Net proceeds from the sale of the Common Stock are estimated to be between $15.2 million and $20.8 million, with a midpoint of $18.0 million depending on the number of shares sold and the expenses of the Conversion. In the event that the Estimated Price Range is increased by 15%, the net proceeds from the sale of the Common Stock are estimated to be $24.0 million. See "Pro Forma Data." The Company will use the net proceeds from the sale of the Common Stock as follows: 1. The Company will purchase all of the capital stock of the Bank to be issued upon Conversion in exchange for 50% of the net proceeds. 2. The remaining net proceeds will be retained by the Company. Net proceeds to be retained by the Company after the purchase of the capital stock of the Bank are estimated to be between $7.6 million and $10.4 million, with a midpoint of $9.0 million. In the event that the Estimated Price Range is increased by 15%, the net proceeds retained by the Company are estimated to be $12.0 million. Such net proceeds will be used for general business activities. The net proceeds retained by the Company will be invested primarily in federal funds, government and federal agency mortgage-backed securities, other debt securities, high-grade short-term marketable securities, deposits of or loans to the Bank, or a combination thereof. In addition, the Company intends to purchase for approximately $262,000 a certain commercial parcel of land from the Bank. See "Business of the Bank -- Real Estate Investment." 3. The Company intends to use a portion of the retained net proceeds to make a loan directly to the ESOP to enable the ESOP to purchase 8% of the shares to be issued in the Conversion. The amount of the loan to the ESOP is estimated to be between $1.3 million and $1.7 million (or $2.0 million if the Estimated Price Range is increased by 15%) to be repaid over a period of up to 10 years at an interest rate of 8%. See "Management of the Bank -- Benefits -- Employee Stock Ownership Plan and Trust." Upon completion of the Conversion, the Board of Directors will have the authority to adopt stock repurchase plans, subject to statutory and regulatory requirements. The Company is subject to the terms of a certification made to and required by the OTS in connection with the application to the OTS for approval of the Conversion, which certification prohibits the Company from taking any actions to further any payments to its shareholders through a return of excess capital for a period of one year following the Conversion without the prior written consent of the OTS. The certification expressly does not apply to taxable dividend payments made by the Company or to dividend payments made by the Bank to the Company. The portion of the net proceeds received by the Bank from the Company's purchase of the Bank's capital stock, estimated to be between $7.6 million at the minimum of the Estimated Price Range and $10.4 million at the maximum of the Estimated Price Range, will be added to the Bank's general funds to be used for general corporate purposes, including investment in one- to four-family residential mortgage loans and other loans which will provide affordable home financing opportunities to the community; investment in federal funds, short- 12 <PAGE> term, investment grade marketable securities and mortgage-backed securities; and to fund the Stock Programs. See "Use of Proceeds." DIVIDENDS Upon completion of the Conversion, the Board of Directors of the Company will have the authority to declare dividends on the Common Stock. The Board of Directors does not presently intend to declare dividends on the Common Stock. In the future, declarations of dividends, if any, by the Board of Directors will depend upon a number of factors, including the amount of the net proceeds from the Offerings retained by the Company, investment opportunities available to the Company or the Bank, capital requirements, regulatory limitations, the Company's and the Bank's financial condition and results of operations, tax considerations, general economic conditions, industry standards and other factors. As the principal asset of the Company, the Bank will provide the principal source of funds for payment of dividends by the Company. Assuming the shares of Common Stock are sold at the maximum of the Estimated Price Range, at July 31, 1996, after giving pro forma effect to (i) the Conversion and related expenses, (ii) the deduction from capital of the amount expected to be borrowed by the ESOP and the cost of shares of Common Stock to be acquired by the Stock Programs and (iii) the retention by the Bank of 50% of the net proceeds of the Conversion, the Bank would be permitted to make capital distributions of up to approximately $8.4 million to the Company without prior OTS approval. See "Dividend Policy." BENEFITS TO MANAGEMENT AND DIRECTORS The Board of Directors of the Bank received information about various types of benefit plans typically utilized by public companies in general and converting thrift institutions in particular. Management reviewed the anticipated costs of establishing a customary program of benefits and the anticipated benefits to the Company. Management determined that the benefit plans helped significantly in providing the ability of a public company to retain and attract executives of the caliber needed to run a successful public company, to maintain their attention and loyalty in change of control situations and to align their interests with those of the Company's shareholders. Finally, the Board of Directors concluded that the cost of establishing and maintaining these benefit plans would be justified by these benefits to the Company. STOCK OPTION PLANS. Following the Conversion, the Company intends to adopt the Stock Option Plans. If implemented within one year following the Conversion, the adoption of the Stock Option Plans will be subject to shareholder approval obtained at a meeting of shareholders to be held no earlier than six months after the completion of the Conversion. Assuming such implementation, an amount of shares of Common Stock equal to 10% of the Common Stock issued in the Conversion (161,500 shares and 218,500 shares at the minimum and maximum of the Estimated Price Range, having an aggregate fair market value of $1.6 million and $2.2 million, respectively, based on a Purchase Price of $10.00 per share) is expected to be reserved for issuance under the Stock Option Plans. These shares will be acquired either through open market purchases, subject to OTS approval, if necessary, or from authorized but unissued Common Stock. See "Risk Factors -- Possible Dilutive Effect of Stock Options and Stock Programs." No conversion stock will be used to fund the Stock Option Plans. No determinations have been made by the Company as to the specific terms of the Stock Option Plans or the amount of awards to be made thereunder. Current OTS regulations provide that no individual employee may receive more than 25% of the options granted, and that non-employee directors may not receive more than 5% individually or 30% in the aggregate of the options granted, under option plans implemented within one year following the Conversion. See "Management of the Bank -- Benefits -- Stock Option Plans." STOCK PROGRAMS. Following the Conversion, the Company also intends to adopt certain Stock Programs for the benefit of officers, employees and non- employee directors of the Company and the Bank. If implemented within one year following the Conversion, the adoption of the Stock Programs will be subject to shareholder approval obtained at a meeting of shareholders to be held no earlier than six months after the completion of the 13 <PAGE> Conversion. Assuming such implementation, the Bank expects to contribute funds to the Stock Programs to enable their related trusts to acquire, in the aggregate, up to 4% (3% unless OTS approval is obtained) of the shares of Common Stock issued in the Conversion, or 64,600 shares and 87,400 shares at the minimum and maximum of the Estimated Price Range, respectively, having an aggregate fair market value of $646,000 and $874,000, respectively, based on a Purchase Price of $10.00 per share. These shares will be acquired either through open market purchases, subject to OTS approval, if necessary, or from authorized but unissued Common Stock. See "Risk Factors -- Possible Dilutive Effect of Stock Options and Stock Programs." No determinations have been made by the Company as to the specific terms of the Stock Programs or the amount of awards to be made thereunder. Current OTS regulations provide that no individual employee may receive more than 25% of the shares of any plan, and that non-employee directors may not receive more than 5% of the shares individually or 30% in the aggregate, in the case of plans implemented within one year following the Conversion. Under the anticipated terms of the Stock Programs, recipients would receive shares without any cost and would vote any shares allocated to them, and an independent trustee would vote unallocated shares in the same proportion as it receives instructions from recipients with respect to allocated shares which have not been vested and distributed. See "Management of the Bank -- Benefits -- Stock Programs." ESOP. The Bank and the Company have established the ESOP for the benefit of eligible employees, including officers. The ESOP intends to subscribe for up to 8% of the Common Stock issued in the Conversion (7% unless OTS approval is obtained) and to finance its subscription with funds anticipated to be borrowed from the Company for a period of up to 10 years at an interest rate of 8% per annum. The Bank and the Company intend to make cash contributions to the ESOP as required for debt service. The Common Stock acquired by the ESOP will initially be held in a suspense account and will be allocated to eligible employees as the loan is repaid. See "Management of the Bank -- Benefits -- Employee Stock Ownership Plan and Trust." PROFIT SHARING AND SAVINGS PLAN. The Bank has amended its existing Profit Sharing and Savings Plan to permit participating employees, including officers, to invest all or any portion of their account balances in Common Stock. Initially, such Common Stock may be purchased in the Conversion. Subsequent to the Conversion, purchases may be made in the open market or in private transactions, or from treasury stock or authorized but unissued shares in transactions with the Company. See "Management of the Bank -- Benefits -- Profit Sharing and Savings Plan." EMPLOYMENT ARRANGEMENTS WITH SENIOR MANAGEMENT AND KEY PERSONNEL. The Bank and the Company intend to enter into employment arrangements ("Employment Agreements") with certain senior management and key employees that will provide for, among other benefits, benefit and cash payments to be made in the event of their termination of employment following a change of control of the Bank or the Company. The provisions of these arrangements, described below, may have the effect of increasing the cost of acquiring the Company, thereby discouraging future attempts to take over the Company or the Bank. Based on current compensation and benefit costs, cash payments to be made in the event of a change of control of the Bank or the Company pursuant to the terms of the Employment Agreements would be approximately $3,980,000, of which approximately $1,245,000 would be payable to Mr. Briody, $1,180,000 would be payable to Mr. Opelka, $630,000 would be payable to Mr. McCue, $500,000 would be payable to Mr. Cahill and $425,000 would be payable to Mr. Jones. However, the actual amount to be paid under the Employment Agreements in the event of a change of control of the Bank or the Company cannot be estimated at this time, because the actual amount is based on the compensation and benefit costs applicable to these individuals and other factors existing at the time of the change of control which cannot be determined at this time. See "Management of the Bank -- Employment Agreements." The Bank and the Company also intend to enter into employee retention agreements ("Retention Agreements"), effective on the Conversion, with certain other employees ("Contract Employee(s)"). Based on current compensation and benefit costs applicable to the Contract Employees expected to be covered by the Retention 14 <PAGE> Agreements, cash payments to be made in the event of a change of control of the Bank or the Company would be approximately $530,000. However, the actual amount to be paid under the Retention Agreements in the event of a change of control of the Bank or the Company cannot be estimated at this time, because it will be based on the compensation and benefit costs applicable to the Contract Employees and other factors existing at the time of the change of control which cannot be determined at this time. See "Management of the Bank -- Employee Retention Agreements." OTHER CHANGE OF CONTROL PROVISIONS. The Bank's Employee Severance Pay Plan provides for benefits and/or cash payments in the event of a change of control of the Company or the Bank. Based on current salaries, cash payments to be paid in the event of a change of control (and assuming termination of all participating employees) pursuant to the terms of the Employee Severance Pay Plan would be approximately $396,500. However, the actual amount to be paid in the event of a change of control of the Bank or the Company cannot be estimated at this time, because it will be based on the compensation and benefits, as applicable, for each covered individual and other factors existing at the time of the change of control which cannot be determined at this time. Certain anticipated provisions of the Stock Option Plans and Stock Programs (which the Company intends to adopt and which will only become effective prior to the first anniversary of the Conversion upon shareholder approval obtained at a meeting of shareholders to be held no earlier than six months after completion of the Conversion) provide for cash payments and/or accelerated vesting in the event of a change of control of the Company or the Bank (in the case of plans established or implemented on or after the first anniversary of the Conversion). The ESOP provides for accelerated vesting in the event of a change of control. These provisions may also have the effect of increasing the cost of acquiring the Company. In addition, the existence of the provisions could result in shareholders receiving less for their shares of Common Stock than might otherwise be available in the event of an acquisition of the Company. See "Restrictions on Acquisition of the Company and the Bank -- Anti-Takeover Effects of the Company's Articles of Incorporation and Bylaws and Management Remuneration Plans Adopted in Conversion," "Management of the Bank -- Employee Severance Compensation Plan," "-- Benefits -- Employee Stock Ownership Plan and Trust," "-- Benefits -- Stock Option Plans," and "-- Benefits -- Stock Programs." SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS. The Bank's executive officers and directors propose to purchase Common Stock in the Offerings in an aggregate amount equal to $1,251,000 or 7.6% (based on the minimum of the Estimated Price Range) or $1,479,000 or 6.8% (based on the maximum of the Estimated Price Range) of the shares to be issued in the Offerings. See "Management of the Bank -- Subscriptions by Executive Officers and Directors." RISK FACTORS See "Risk Factors" for a discussion of certain factors that should be considered by prospective investors, including: Potential Impact of Changes in Interest Rates; Impact of the Economy on Operations; Competition; Recapitalization of the SAIF; SAIF Assessments; and Special Assessment; Recent Tax Legislation Regarding Tax Bad Debt Reserves; Concentration in Mortgage- backed Securities; Recent Declines in Net Income; Impact of Technological Advances; Residential and Non-Residential Lending Risks; Certain Anti-Takeover Provisions; Absence of Market for Common Stock and Performance of Conversion Offerings; Possible Increase in Estimated Price Range and Number of Shares Issued; Possible Dilutive Effect of Stock Options and Stock Programs; Possible Adverse Income Tax Consequences of the Distribution of Subscription Rights; Financial Institution Regulation and Possible Legislation; and Risk of Delayed Offering. 15 <PAGE>
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and the notes thereto appearing elsewhere in this Prospectus. Except as otherwise noted, all information in this Prospectus assumes (i) the consummation of the Reorganization (as defined herein), (ii) no exercise of the Underwriters' over-allotment option and (iii) an initial offering price of $13.00 per share (the midpoint of the range set forth on the cover of this Prospectus). Unless the context otherwise indicates, all references herein to the Company refer to Candlewood Hotel Company, Inc., together with its subsidiaries, after giving effect to the Reorganization. This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors." THE COMPANY Candlewood Hotel Company, Inc. is in the business of developing, owning, operating, franchising and managing Candlewood extended-stay hotels. Candlewood hotels and their amenities are designed to appeal particularly to business travelers seeking extended-stay accommodations by combining the convenience of a hotel with many of the comforts of an apartment and providing well appointed, high quality lodging at affordable prices. The Company's goal is to rapidly develop and franchise Candlewood hotels to capitalize on what the Company believes is an underserved demand for mid-priced extended-stay hotels and to develop a leading national brand within that segment of the extended-stay market, which the Company believes is characterized by average daily rates of approximately $40 to $60. As of October 15, 1996, the Company owned and operated one Candlewood hotel and was constructing four additional hotels, two of which are expected to open in the first quarter of 1997 and two of which are expected to open in the second quarter of 1997. In 1997, the Company's objective is to open approximately 14 additional Company-owned hotels and to begin construction of approximately 20 additional Company-owned hotels. In pursuing this objective, as of October 15, 1996 the Company had 18 potential sites under contract and had agreements in principle or letters of intent with respect to 17 potential sites. In addition, the Company is developing a nationwide franchising program, and as part of that program is a party to one multi-hotel development agreement which grants the developer options to obtain franchises to construct and operate up to 22 Candlewood hotels over the next three years. The Company believes that the experience of its senior management team will be instrumental in executing its growth strategy. Jack P. DeBoer, the Company's founder, Chairman and President, is credited by the lodging industry with creating the extended-stay concept. Mr. DeBoer, who founded the Residence Inn chain and co-founded Summerfield Hotel Corporation, developed and franchised a total of 116 extended-stay hotels under those two brands. This background has provided Mr. DeBoer with numerous contacts among potential franchisees, representatives from the construction industry and other leaders in the hospitality industry. The Company expects to derive substantial benefits from its strategic alliance with Doubletree Corporation (together with its subsidiaries, "Doubletree"), which will own 28.7% of the Company's Common Stock outstanding after the Offering. The Company believes it will benefit from Doubletree's central reservation system, in-room video and service arrangement and bulk purchasing discounts on phone rates and supplies. Candlewood also believes it will benefit from Doubletree's management resources, extensive knowledge of local markets, and established insurance and employee benefit programs. As additional Candlewood hotels commence operations, the Company anticipates that it will formalize the services to be provided by Doubletree and the cost of certain of those services. Doubletree is not expected to manage any Candlewood hotels. Doubletree has agreed to extend a five-year $15 million subordinated credit facility to the Company, a substantial portion of which will have been funded at the time of the Offering. Doubletree has also agreed to guarantee a portion of the construction loans and long-term financing that the Company has arranged for its qualified franchisees. Doubletree is a leading hotel management company that managed, leased or franchised 178 hotels in 31 states, the District of Columbia and Mexico as of June 30, 1996. The standard Candlewood hotel will contain approximately 75 - 135 rooms, comprised of studios and king suites, both of which contain business and other amenities consistent with amenities found in upscale, full-service hotels. The studios have been designed as spacious, well appointed rooms which the Company believes are larger than most full-service hotel rooms. Up to 25% of the rooms in a standard Candlewood hotel may be two-room king suites designed to accommodate guests who are willing to pay a premium rate for a bedroom separated from the kitchen and office area. The Company believes king suites will increase the average daily rate and the average length of stay. The majority of extended-stay hotels are either in the upscale sector of the market, such as Residence Inn, Homewood Suites, Hawthorn Suites and Summerfield Suites (most with average daily rates in excess of $80), or the economy sector, such as Suburban Lodge, Extended Stay America, Homestead Village and Villager Lodge (most with average daily rates less than $35). The Company believes that these brands do not meet the needs of a large number of travelers who desire well appointed, high quality, spacious accommodations with full kitchens, but with room rates in the mid-priced segment of the extended-stay market. Candlewood hotels are designed to accommodate what the Company believes to be an underserved segment of the extended-stay market. In addition, the Company believes that the high quality of Candlewood hotels relative to their moderate daily rate will attract certain guests who otherwise would stay at traditional hotels. The Company anticipates that the average daily rate at Candlewood hotels will be approximately $45 - $55 per studio, which is significantly lower than full-service hotels with comparable room features and amenities and generally competitive with traditional limited-service hotels that do not offer the high quality appointments and amenities of the Company's rooms. Accordingly, the Company believes that Candlewood hotels will be particularly attractive to business travelers, including professionals on temporary work assignment, consultants, travelers conducting or participating in training seminars and government employees. The Company has initiated a national franchising program which it believes will accelerate the establishment of its market presence and brand awareness on a national level, generate incremental revenues at an attractive margin, attract franchisees and create opportunities to obtain management contracts with respect to franchised properties. The Company intends to pursue its franchising program not only through the sale of individual or single-site franchises, but also through entering into development agreements. Under the development agreements, the Company will grant, in exchange for nominal consideration, options to obtain franchises to construct and operate Candlewood hotels in exclusive geographic territories, which exclusive rights may be terminated by the Company if the developer fails to submit franchise applications in accordance with a development schedule. As of October 15, 1996, the Company was a party to one development agreement, which grants the developer options to obtain franchises to construct and operate up to 22 Candlewood hotels, including five Candlewood hotels in 1996, seven Candlewood hotels in 1997, seven Candlewood hotels in 1998 and three Candlewood hotels in 1999. The Company believes that guests will find a combination of the following factors differentiate the Candlewood brand from other extended-stay hotels: - Upscale Accommodations at Moderate Prices. Candlewood hotels will offer upscale accommodations at competitive rates within the mid-priced extended-stay market which the Company believes will be attractive to guests staying six nights or longer. - Amenities for Business Travelers. Each Candlewood studio and king suite will offer amenities designed to accommodate the needs of the business traveler, such as two phones with two incoming direct dial phone lines and computer connections, an oversized wooden desk with a quad-outlet to accommodate office equipment needs, an executive chair, a bulletin board, a guest chair and personalized, remote accessible phone mail. - High Quality, Extended-Stay Features. Each Candlewood room will contain a 25-inch television, video cassette player, compact disc player, an iron and ironing board and a fully equipped kitchen, including a full-size refrigerator, full-size microwave oven, dishwasher, two burner stovetop, coffee maker, toaster, and a complete set of utensils and cookware. Also, each Candlewood hotel will be equipped with an exercise room, a guest laundry facility and a convenient dry cleaning drop with same-day service. - Value Priced Features. Candlewood hotels will offer complimentary use of laundry facilities, free local calls, $0.15-per-minute long distance calls and the self-service "Candlewood Cupboard," featuring value priced packaged foods and $0.25 beverages. Each Candlewood guest will receive a free "First-Night Kit" complete with items such as breakfast bars, coffee and popcorn. The Company believes that a combination of the following factors will make Candlewood an attractive brand choice for franchisees and investors compared to other extended-stay brands: - Operating Efficiencies. By employing only six to eight full-time employees and one part-time employee at each Candlewood hotel, the Company believes that it will minimize operating costs. Each hotel will be equipped with technology that will allow guests to check-in and check-out without the assistance of hotel employees. - Strength of Management and Staff. In addition to Mr. DeBoer's extensive experience in the extended-stay lodging industry, the Company is developing the management infrastructure necessary to pursue each of its strategies, including the formation of internal real estate, construction, marketing, operations and franchising divisions. - Strategic Alliance with Doubletree. The Company has a strategic alliance with Doubletree through which the Company and its franchisees are expected to be able to take advantage of Doubletree's purchasing power, central reservation system and financial support. - Sales Organization. The Company has established a sales and marketing division which, together with a dedicated on-site direct-sales employee at each hotel, will target institutions and employers in areas proximate to its hotels. - Standard Design and Low Construction Costs. The Company expects that all Candlewood hotels, including hotels owned by its franchisees, will be designed and built according to uniform plans and specifications and pursuant to standard construction contracts. The Company believes that standardization will lower construction costs and establish consistent quality, thereby enhancing its customers' loyalty and its ability to establish a national brand. The Company has identified and approved three major contractors in the United States, each of whom has agreed to cost-plus contracts with a ceiling on total expense. - Franchisee Financing. The Company has arranged with a third party lender to provide construction loans and long-term financing for up to 80% of the cost of franchised hotels, subject to approval by the Company and the lender on an individual property basis. The Company expects that the availability of this financing will expedite and provide added certainty to the development process. Doubletree has agreed to guarantee certain portions of the loans made to the Company's franchisees under this arrangement. THE REORGANIZATION The Company was incorporated in August 1996 to succeed to the business of Candlewood Hotel Company, L.L.C., a Delaware limited liability company ("Candlewood LLC"), in anticipation of the Offering. Candlewood LLC was formed in November 1995 to develop, own, operate and franchise Candlewood extended-stay hotels. The membership interests in Candlewood LLC are owned 50% by Doubletree, 42.5% by JPD Corporation, a Kansas corporation owned by Mr. DeBoer and certain trusts (the "DeBoer Trusts"), the beneficiaries of which are certain members of his family, and 7.5% by the Warren D. Fix Family Partnership, L.P. (the "Fix Partnership"), a Kansas limited partnership, the general partner and majority owner of which is Mr. Warren Fix, a director and the Executive Vice President and Chief Financial Officer of the Company (collectively, Doubletree, Mr. DeBoer, the DeBoer Trusts and the Fix Partnership are referred to herein as the "Initial Stockholders"). Doubletree and the Fix Partnership each acquired its membership interest in Candlewood LLC through a capital contribution and JPD Corporation acquired its membership interest through the contribution of certain intangibles, including the development of the Candlewood hotel concept and rights to the name of the Company, which were valued in the course of arms- length negotiations among the members of Candlewood LLC. Prior to the closing of the Offering, the Company's five properties will each be owned by a separate limited liability company (the "Subsidiary LLCs"), the membership interests of each of which will be owned 98% by Candlewood LLC, 1% by DT Real Estate, Inc., a subsidiary of Doubletree, 0.85% by JPD Corporation, and 0.15% by the Fix Partnership. Immediately prior to the Offering, Doubletree and the Fix Partnership will contribute to the Company all of their outstanding membership interests in Candlewood LLC and their minority interests in the Subsidiary LLCs. At the same time, Mr. DeBoer and the DeBoer Trusts will contribute to the Company 100% of the stock of JPD Corporation, the assets of which are substantially comprised of its membership interests in Candlewood LLC and the Subsidiary LLCs. In consideration of such transfer, each of Doubletree and the Fix Partnership will be issued shares of Common Stock of the Company in proportion to their ownership interests in Candlewood LLC immediately prior to such transfer and Mr. DeBoer and the DeBoer Trusts, collectively, will be issued shares of Common Stock of the Company in proportion to JPD Corporation's ownership interest in Candlewood LLC immediately prior to such transfer. As a result, the ownership of the Common Stock of the Company by Doubletree, the Fix Partnership and the shareholders of JPD Corporation immediately prior to the Offering will be in the same proportion as their ownership of membership interests in Candlewood LLC immediately prior to the reorganization of the Company. Upon consummation of such reorganization, Doubletree, the Fix Partnership and the shareholders of JPD Corporation, including Mr. DeBoer, will own 2,587,500, 388,125 and 2,199,375 shares of Common Stock of the Company, respectively. In addition, prior to the Offering, the amount of capital in excess of $200,100 previously contributed to Candlewood LLC by Doubletree, together with a preferred return on its capital contributions, will be distributed by Candlewood LLC to Doubletree. In connection with the reorganization of the Company, Doubletree has agreed to extend to the Company a $15 million subordinated credit facility. Prior to the Offering, Doubletree will loan to the Company an amount equal to the amount of the distributed capital and preferred return, which will be evidenced by a long-term note payable as part of the subordinated credit facility. As of October 15, 1996, Doubletree had made capital contributions to Candlewood LLC of approximately $12.3 million. The terms of the distribution to Doubletree, as well as the subsequent loan by Doubletree to the Company, were determined by the members of Candlewood LLC in the course of arms-length negotiations. The reorganization of Candlewood LLC, JPD Corporation and the Subsidiary LLCs into the Company and the related transactions described above are referred to herein as the "Reorganization." Following the Reorganization, each of the Company's five hotel properties will be owned by a separate limited liability company, the members of which will be the Company, Candlewood LLC and JPD Corporation. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "The Reorganization." THE OFFERING <TABLE> <S> <C> Common Stock offered........................ 3,850,000 shares(1) Common Stock outstanding after the 9,025,000 shares(1)(2) Offering.................................. Use of Proceeds............................. To fund the national expansion of Candlewood hotels and for working capital and other general corporate purposes. Nasdaq National Market Symbol............... The Company's Common Stock has been approved for listing on the Nasdaq National Market, subject to notice of issuance, under the symbol "CNDL." </TABLE> - --------------- (1) Excludes 577,500 shares of Common Stock subject to the Underwriters' over-allotment option. (2) Excludes 900,000 shares of Common Stock reserved for issuance pursuant to the Company's 1996 Equity Participation Plan (the "1996 Equity Plan"). See "Management -- Compensation Plans and Arrangements." The executive offices of the Company are located at Lakepoint Office Park, 9342 East Central, Wichita, Kansas 67206, and its telephone number is (316) 631-1300. SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL INFORMATION The Company was incorporated in August 1996 to succeed to the business of Candlewood LLC. See "The Reorganization." The following tables present summary historical consolidated financial information for Candlewood LLC. The following tables also present summary pro forma consolidated financial information for the Company, giving effect to the Reorganization. The historical results for the six months ended June 30, 1996 are not indicative of actual results of the year. The summary historical and pro forma consolidated financial information should be read in conjunction with "Selected Historical and Pro Forma Consolidated Financial Information," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical consolidated financial statements of Candlewood LLC, including notes thereto, included elsewhere in this Prospectus. <TABLE> <CAPTION> PERIOD FROM OCTOBER 1, 1995 SIX MONTHS (INCEPTION) TO ENDED DECEMBER 31, 1995(1) JUNE 30, 1996 -------------------- ---------------- <S> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues................................................. -- $ 120,038 Hotel operating expenses................................. -- 86,195 Corporate operating expenses............................. $ 204,361 748,348 Depreciation and amortization............................ 4,625 70,759 Operating loss........................................... (208,986) (785,264) Interest income.......................................... -- 11,496 Net loss................................................. (208,986) (773,768) Pro forma net loss per share(2).......................... (.04) (.15) Pro forma weighted average shares outstanding(2)......... 5,175,000 5,175,000 </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 ----------------------------------------- COMPANY -------------------------- CANDLEWOOD PRO FORMA LLC PRO AS HISTORICAL FORMA(3) ADJUSTED(4) ---------- ---------- ----------- (UNAUDITED) <S> <C> <C> <C> BALANCE SHEET DATA: Cash and equivalents.................................. $1,022,492 $1,022,492 $46,968,992 Total assets.......................................... 7,029,069 7,029,069 52,975,569 Accounts payable...................................... 329,828 329,828 329,828 Note payable.......................................... -- 7,334,614 7,334,614 Minority interest..................................... 47,460 -- -- Members' equity....................................... 6,569,318 -- -- Stockholders' equity (deficit)........................ -- (717,836) 45,228,664 </TABLE> - ------------------------ (1) Although Candlewood LLC was not formed until November 16, 1995, certain expenses applicable to its business were incurred during the period from October 1, 1995 to November 16, 1995 and were funded by capital contributions of members. Accordingly, the Company's statements of operations have been presented as if the Company's operations began on October 1, 1995. (2) Pro forma net loss per share is based on (i) the 5,175,000 shares of Common Stock of the Company issued in conjunction with the Reorganization as if such shares had been issued and outstanding for all periods presented and (ii) the amount of pro forma net loss as if the Company had operated as a C Corporation for all periods presented. See Notes 1g and 1j of Notes to Consolidated Financial Statements. (3) Gives effect to the Reorganization as if it had occurred on June 30, 1996, reflecting (i) the distribution of the amount of capital in excess of $200,100 previously contributed by Doubletree and related preferred return, (ii) the contribution of outstanding membership interests of Candlewood LLC and minority interests of the Subsidiary LLCs held by Doubletree and the Fix Partnership, and the contribution of the stock of JPD Corporation, to the Company and (iii) the issuance of a note payable to Doubletree pursuant to the subordinated credit facility. See Note 10 of Notes to Consolidated Financial Statements. (4) Adjusted to reflect the sale of 3,850,000 shares of Common Stock by the Company in the Offering at an assumed public offering price of $13.00 per share with assumed net proceeds of $45,946,500 and the application of such net proceeds as if the transactions contemplated hereby occurred on June 30, 1996. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001022844_brilliant_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001022844_brilliant_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information (including "Risk Factors" and the Consolidated Financial Statements and notes thereto) appearing elsewhere in this Prospectus. Unless the context otherwise requires, all references to Brilliant or the Company include its wholly owned Australian subsidiary, "BII Australia."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001022926_sanchez_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001022926_sanchez_prospectus_summary.txt
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+Prospectus Summary The following summary is qualified in its entirety by the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. Except as otherwise indicated, all information in this Prospectus (i) assumes no exercise of the Underwriters' over-allotment option; and (ii) gives effect to a 6-for-5 split of the Common Stock effected prior to the Offering. Unless the context otherwise indicates, Sanchez Computer Associates, Inc. and its subsidiaries are referred to collectively herein as "Sanchez" or the "Company." Technical terms related to the Company's business are defined in the Glossary beginning on page 63 herein. The Company Sanchez Computer Associates, Inc. ("Sanchez" or the "Company") designs, develops, markets, implements and supports comprehensive banking software, called PROFILE(R) ("PROFILE"), for financial services organizations worldwide. Sanchez's highly flexible PROFILE family of products is comprised of three integrated modules which operate on open, client-server platforms. The primary module, called PROFILE/Anyware, is a multi-currency bank production system which supports deposit, loan, customer, transaction processing and bank management requirements through multiple distribution channels, including the Internet. The other modules are PROFILE/FMS, a multi-company, multi-currency, financial management and accounting system, and PROFILE/ITS, a system that processes treasury transactions including foreign exchange, money market, securities trading (capital markets), futures, options and trade finance. The PROFILE system is currently licensed to 23 clients in nine countries serving more than 300 financial institutions. Historically, the Company has focused its marketing efforts in Central Europe and North America. Currently, the Company is targeting two market segments, the Emerging Banking Market in which the Company seeks to expand on its existing successes and increase its market share, and the Direct Banking Market in which the Company is seeking to establish itself as a significant participant. Financial services organizations in the Emerging Banking Market can generally be characterized as being located in areas with growing consumer banking bases, often with a large number of branches and little enterprise-wide automation. Sanchez, through the implementation of its PROFILE products, provides these organizations with a fully automated system which addresses all core areas of their data processing requirements, including head office operations, domestic and international payments, new product introduction, customer analysis, budgeting and forecasting, branch automation, treasury, trade finance and deposit and loan processing. The PROFILE products have the ability to adapt to diverse accounting, operational and regulatory environments and have the flexibility to support a broad spectrum of banking products and services. Because the PROFILE products are scalable, they can be implemented within an infrastructure that supports an organization's current operational requirements and thereafter be incrementally expanded as the client's operational requirements increase. Since 1991, the Company has principally targeted banks in Central Europe and Canada; and, in 1996, the Company expanded its marketing efforts to include financial services organizations located in the Asian-Pacific Rim. Since 1987, the Company has maintained a series of strategic alliance agreements with Digital Equipment Corporation ("Digital") and has marketed its products principally through leads generated by the Digital sales force. In 1995, the Company entered into an agreement with Hewlett-Packard Company ("Hewlett-Packard") and ported its software to Hewlett-Packard's HP-UX platform. Also in 1995, the Company entered into an agreement with Oracle Corporation ("Oracle") to port the PROFILE products to the Oracle database. These porting activities are currently under way. In mid-1996, the Company entered into an agreement with International Business Machines Corporation ("IBM") and ported its software to IBM's AIX platform. The Company markets PROFILE products through alliances with all four of these vendors as well as its own enhanced direct sales force. The Company intends to expand its business into the Direct Banking Market. The Company defines the Direct Banking Market as the on-line retail banking business conducted via alternate distribution channels by large financial services institutions located throughout the world. The Company believes that these organizations recognize that the emergence of electronic commerce, together with the availability and acceptance of computer technology, will ultimately cause a dramatic change in the consumer banking practices of many of their customers. The Company predicts that the growth of electronic commerce will result in a large increase in the volume of financial transactions which occur on-line as well as a greater demand for customized products and services. Because of these factors, in early 1996, the Company determined that a significant opportunity exists for it in the Direct Banking Market and it has subsequently committed substantial human and financial resources to position itself in that market. The Company believes that the capabilities already contained in the PROFILE product line, along with specific enhancements that it has identified, will provide financial services organizations with the technology to strategically respond to this consumer banking evolution. As of the date of this Prospectus, however, the Company has not recognized any revenues as a result of its activities in the Direct Banking Market. The Company has recently engaged the electronic banking division of Price Waterhouse LLP ("Price Waterhouse") to assist the Company in jointly defining future enhancements to PROFILE/Anyware for the Direct Banking Market. In connection with this engagement, Price Waterhouse and the Company are conducting joint marketing activities, including Price Waterhouse's introduction of the Company to prospective clients. In addition, the Company anticipates forming alliances with other complimentary service organizations in the areas of home banking interface, network security and other consumer-based financial applications. The Company anticipates that these alliances, along with the alliances mentioned in the previous paragraphs, will facilitate its entrance into the Direct Banking Market. The Sanchez Strategy The Company believes its most promising opportunities for growth lie in increasing market share in the Emerging Banking Market, broadening its scope of services in the Emerging Banking Market, and positioning itself as one of the first production system entries in the Direct Banking Market. The Company plans to pursue these objectives through the following strategic activities. Increase Market Share in the Emerging Banking Market The Company intends to expand its presence in the Emerging Banking Market, principally by increasing its marketing activities in Central Europe and the Asian-Pacific Rim. The Company expects to emphasize its strategic relationships with its hardware and software company partners. In addition, the Company plans to increase its own direct marketing efforts and has recently opened offices in Prague, Warsaw and Jakarta in furtherance of this objective. Broaden the Scope of Services Provided in the Emerging Banking Market The Company believes that the reception its products and services have received in the Emerging Banking Market, particularly in Central Europe, provides the opportunity to expand the scope of services which the Company offers to organizations in this market. Accordingly, the Company intends to market additional services and products to these organizations, including more expansive consulting services, credit bureau services, technology infrastructure planning, and systems integration. Become a Significant Participant in the Direct Banking Market The Company intends to become a significant participant in the Direct Banking Market by marketing its PROFILE family of products as a financial services organization's most appropriate response to the evolution in consumer banking spurred by the emergence of electronic commerce. The Company is positioning its PROFILE/Anyware product as part of a separate infrastructure focused specifically on the direct banking channels, as opposed to a replacement for the existing production systems. The Company is establishing strategic relationships with business partners in order to offer jointly with these partners a comprehensive direct banking solution. The Company was incorporated in Pennsylvania in 1981. The Company's principal executive offices are located at 40 Valley Stream Parkway, Malvern, Pennsylvania 19355, and its telephone number is (610) 296-8877. The Company maintains a site on the World Wide Web. Information contained in the Company's web site shall not be deemed to be part of this Prospectus. The Offering Terms of Rights Offering....... Holders of record at the close of business on November 13, 1996 of the outstanding Safeguard Common Shares will receive one Company Right for every ten Safeguard Common Shares. The Direct Purchasers will be granted the Direct Rights. Each Right will entitle the holder to purchase one share of Common Stock at a purchase price of $5.50 per share. Persons may not exercise Rights for fewer than 50 shares of Common Stock. Holders of Rights will have the opportunity to acquire an aggregate of approximately 3,226,500 shares of Common Stock upon exercise of the Rights. Exercise Price................. $5.50 per share of Common Stock. Expiration Date for Rights..... December 18, 1996 at 5:00 p.m., New York City time. Rights......................... Rights will be evidenced by transferable certificates that will be exercisable by the holder until the Expiration Date, at which time unexercised rights will be null and void. See "The Offering." Exercise by Safeguard CEO...... The Chairman and Chief Executive Officer of Safeguard and/or his assignees are expected to exercise all Company Rights distributed to them and acquire approximately 343,000 shares of Common Stock. Sales to Other Persons......... The first 300,000 Unsubscribed Shares will be sold by the Selling Stockholders to the Other Purchasers, the Direct Rights will be granted by the Company to the Direct Purchasers and the shares of Common Stock subject to the Undistributed Rights will be sold by the Company to the Other Purchasers. Standby Underwriting........... The number of Unsubscribed Shares exceeding the 300,000 shares of Common Stock to be sold by the Selling Stockholders to the Other Purchasers will be sold to the Underwriters and offered to the public by the Underwriters. See "The Offering--Sales of Unsubscribed Shares; Standby Commitment" and "Underwriting." Common Stock Offered: by the Company.............. 2,158,000 shares by the Selling Stockholders. 1,068,500 shares Common Stock to be Outstanding After the Rights Offering..................... 10,707,755 shares (1) Use of Proceeds................ For working capital, capital expenditures, and general corporate purposes. A portion of the net proceeds may be used for acquisitions, although the Company has no commitments or understan- dings with respect to future acquisitions. See "Use of Proceeds." Nasdaq National Market Symbols: Rights.................... SCAIR Common Stock.............. SCAIV (when-issued) SCAI (thereafter) - -------------------- (1) Excludes (i) 815,569 shares of Common Stock issuable upon the exercise of options outstanding as of October 31, 1996 (of which 436,142 were exercisable as of October 31, 1996) at a weighted average exercise price of $2.81 per share, and (ii) warrants to purchase an aggregate of 360,000 shares of Common Stock at an exercise price of $1.39 per share. See "Management--1995 Equity Compensation Plan." Summary Consolidated Financial Information <TABLE> <CAPTION> ------------------------------------------------------------- --------------------- Nine Months Year Ended December 31, Ended September 30, 1991 1992 1993 1994 1995 1995 1996 ---- ---- ---- ---- ---- ---- ---- In thousands, except per share (Unaudited) (Unaudited) data Statement of Operations Data: <S> <C> <C> <C> <C> <C> <C> <C> Revenues............................ $9,399 $11,881 $11,317 $15,516 $16,842 $11,602 $12,796 Income from operations.............. 680 359 546 2,074 2,616 755 854 Net income.......................... 542 332 463 3,038 1,587 479 684 Net income per common share......... $ .06 $ .04 $ .05 $ .33 $ .17 $ .05 $ .07 Weighted average number of shares outstanding............... 8,988 8,928 9,068 9,284 9,588 9,589 9,224 Other Operating Data: Backlog: License and services................ $ 8,510 $ 3,901 $ 1,576 $ 9,438 $ 5,816 $ 8,853 $ 8,196 Maintenance......................... 1,508 3,843 5,484 10,284 11,809 12,354 11,200 Total backlog....................... 10,018 7,744 7,060 19,722 17,625 21,207 19,396 Revenue per full time equivalent employee............................ 96 88 91 121 114 103 122 </TABLE> <TABLE> <CAPTION> ------------------------------- As of September 30, 1996 Actual As Adjusted(1) In thousands (Unaudited) Balance Sheet Data: <S> <C> <C> Cash and cash equivalents ............................................. $ 6,250 $16,597 Working capital........................................................ 5,385 15,732 Total assets........................................................... 13,531 23,878 Long-term debt, including current portion.............................. 407 407 Total stockholders' equity............................................. 6,631 16,978 </TABLE> (1) Adjusted to give effect to the sale by the Company of 2,158,000 shares of Common Stock and the receipt of approximately $10,346,500 in net proceeds from the Offering, after deducting the maximum Total Underwriting Discount with respect to such shares of approximately $797,500 and estimated offering expenses of $725,000 (including $125,000 representing the maximum applicable non- accountable expense allowance to the Underwriters).
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001023274_vision_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001023274_vision_prospectus_summary.txt
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+SUMMARY This summary is qualified in its entirety by the more detailed information regarding the Association and the Mutual Holding Company and the Financial Statements of the Association appearing elsewhere in this Prospectus. Vision Bancorp, Inc. Vision Bancorp, Inc. is an Indiana corporation organized in August 1996 by the Association for the purpose of holding all of the capital stock of the Association and in order to facilitate the Conversion and Reorganization. Upon completion of the Conversion and Reorganization, the only significant assets of the Company will be all of the outstanding Association Common Stock and the portion of the net proceeds from the Offerings retained by the Company. The business of the Company will initially consist of the business of the Association. See "Business" and "Regulation - The Company." Dearborn Savings Association, F.A. Dearborn Savings Association, F.A. is a federally chartered stock savings association that was organized on October 22, 1993 as a subsidiary of the Mutual Holding Company. Prior to that date, Dearborn Savings Association, F.A. in its mutual form (the "Mutual Association") had operated in the market area now served by the Association. In connection with the organization of the Mutual Holding Company (the "MHC Reorganization"), the Mutual Association transferred substantially all of its assets and liabilities to the Association in exchange for 250,000 shares of Association Common Stock and converted its charter to that of a federal mutual holding company known as Dearborn Mutual Holding Company. As part of the MHC Reorganization, the Association also sold an additional 200,000 shares of Association Common Stock to certain members of the general public. As of June 30, 1996, there was a total of 457,726 shares of Association Common Stock issued and outstanding, 207,726 shares of which consisted of Public Association Shares. Upon consummation of the Conversion and Reorganization, the Association intends to change its name to "Dearborn Bank." At June 30, 1996, the Association had $63.5 million of total assets, $56.7 million of total liabilities, including $41.4 million of deposits, and $6.8 million of stockholders' equity. The Association Common Stock is registered with the OTS under Section 12(g) of the Securities Exchange Act of 1934, as amended ("Exchange Act"). Dearborn Mutual Holding Company Dearborn Mutual Holding Company is a federally chartered mutual holding company chartered on October 22, 1993 in connection with the MHC Reorganization. The Mutual Holding Company's primary asset is 250,000 shares of Association Common Stock, which represents 54.6% of the shares of Association Common Stock outstanding as of the date of this Prospectus. The Mutual Holding Company's only other assets consist of deposit accounts in the amount of $80,000 as of June 30, 1996 (which will become assets of the Association upon consummation of the Conversion and Reorganization). As part of the Conversion and Reorganization, the Mutual Holding Company will convert from mutual form to a federal interim stock savings institution and simultaneously merge with and into the Association, with the Association being the surviving entity and operating under the name "Dearborn Bank." The Conversion and Reorganization Purposes of the Conversion and Reorganization. In their decision to pursue the Conversion and Reorganization, the Mutual Holding Company and the Association considered various regulatory uncertainties associated with the mutual holding company structure including the ability to waive dividends in the future as well as the general uncertainty regarding a possible elimination of the federal savings association charter. See "Risk Factors - Recapitalization of SAIF and Related Legislative Proposals." In addition, the Mutual Holding Company and the Association considered the various advantages of a stock holding company form of organization including: (1) a stock holding company's ability to diversify the Company's and the Association's business activities which will enhance the long-term value of the Company on a consolidated basis; (2) the larger capital base of a stock holding company; (3) the enhancement of the Company's future access to the capital markets; (4) the increase in the number of outstanding shares of publicly traded stock (which may increase the liquidity of the Common Stock); (5) a stock holding company's enhanced ability to repurchase shares of its common stock; and (6) the greater ability to acquire other financial institutions. For additional information see "The Conversion and Reorganization - Purposes of the Conversion and Reorganization." Description of the Conversion and Reorganization. On August 8, 1996, the Boards of Directors of the Association and the Mutual Holding Company adopted the Plan, which was amended on August 22, 1996, and in August 1996 the Association incorporated the Company under Indiana law as a first-tier wholly owned subsidiary of the Association. Pursuant to the Plan, (i) the Mutual Holding Company will convert to an interim federal stock savings institution and simultaneously merge with and into the Association, pursuant to which the Mutual Holding Company will cease to exist and the 250,000 shares or 54.6% of the outstanding Association Common Stock held by the Mutual Holding Company will be cancelled, and (ii) an interim savings association ("Interim") to be formed as a wholly owned subsidiary of the Company solely for such purpose will then merge with and into the Association. As a result of the merger of Interim with and into the Association, the Association will become a wholly owned subsidiary of the Company and the outstanding Public Association Shares, which amounted to 207,726 shares or 45.4% of the outstanding Association Common Stock at June 30, 1996, will be converted into the Exchange Shares pursuant to the Exchange Ratio, which will result in the holders of such shares owning in the aggregate approximately the same percentage of the Common Stock to be outstanding upon the completion of the Conversion and Reorganization (i.e., the Conversion Stock and the Exchange Shares) as the percentage of Association Common Stock owned by them in the aggregate immediately prior to consummation of the Conversion and Reorganization, adjusted downward pursuant to OTS policy in order to reflect the $403,000 of special dividends declared by the Association and waived by the Mutual Holding Company, before giving effect to (a) the payment of cash in lieu of issuing fractional Exchange Shares, (b) any shares of Conversion Stock purchased by the Association's stockholders in the Offerings, and (c) any exercise of dissenters' rights. For diagrams of the corporate structure of the Mutual Holding Company and the Association prior to consummation of the Conversion and Reorganization and the corporate structure of the Company and the Association thereafter, see "The Conversion and Reorganization - Description of the Conversion and Reorganization." In addition to shares of Common Stock to be issued pursuant to the Exchange, pursuant to the Plan, the Company is offering shares of Conversion Stock in the Offerings as part of the Conversion and Reorganization. See "- The Offerings" below and "The Conversion and Reorganization - The Offerings." Pursuant to OTS regulations, consummation of the Conversion and Reorganization is conditioned upon the approval of the Plan by the OTS, as well as (1) the approval of the holders of at least a majority of the total number of votes eligible to be cast by the members of the Mutual Holding Company (which consist of depositors of the Association) ("Members") as of the close of business on _______ __, 1996 (the "Voting Record Date") at a special meeting of Members called for the purpose of submitting the Plan for approval (the "Members' Meeting"), and (2) the approval of the holders of at least two-thirds of the shares of the outstanding Association Common Stock held by the Mutual Holding Company and the Public Stockholders (collectively, the "Stockholders"), as of the Voting Record Date at an annual meeting of Stockholders which will consider the Plan (the "Stockholders' Meeting"). In addition, the Primary Parties have conditioned the consummation of the Conversion and Reorganization on the approval of the Plan by at least a majority of the votes cast, in person or by proxy, by the Public Stockholders at the Stockholders' Meeting. The Mutual Holding Company intends to vote its shares of Association Common Stock, which amount to 54.6% of the outstanding shares, in favor of the Plan at the Stockholders' Meeting. In addition, as of ___________ __, 1996, directors and executive officers of the Association as a group (nine persons) beneficially owned 71,693 shares (not including stock options) or 15.7% of the outstanding Association Common Stock, which shares can also be expected to be voted in favor of the Plan at the Stockholders' Meeting. The Offerings Pursuant to the Plan and in connection with the Conversion and Reorganization, the Company is offering up to 504,735 shares of Conversion Stock in the Offerings. Conversion Stock is first being offered in the Subscription Offering with nontransferable subscription rights being granted, in the following order of priority, to (i) depositors of the Association with account balances of $50.00 or more as of the close of business on December 31, 1994 ("Eligible Account Holders"); (ii) depositors of the Association with account balances of $50.00 or more as of the close of business on September 30, 1996 ("Supplemental Eligible Account Holders"); (iii) depositors of the Association as of the Voting Record Date (other than Eligible Account Holders and Supplemental Eligible Account Holders) ("Other Members"); (iv) directors, officers and employees of the Mutual Holding Company and the Association; and (v) Public Stockholders. Although the Plan of Conversion permits the Association to provide priority subscription rights to the Association's Employee Stock Ownership Plan ("ESOP"), the Association has determined not to allow its ESOP to purchase additional shares of Common Stock in the Offerings. However, the ESOP may purchase additional shares of Common Stock not earlier than one year following completion of the Conversion and Reorganization. Subscription rights will expire if not exercised by 5:00 p.m., Eastern Time, on _________ __, 1996, unless extended. Subject to the prior rights of holders of subscription rights, Conversion Stock not subscribed for in the Subscription Offering is being offered in the Community Offering to certain members of the general public to whom a copy of this Prospectus is delivered, with preference given to natural persons residing in Dearborn County, Indiana. It is anticipated that shares not subscribed for in the Subscription and Community Offerings may be offered to certain members of the general public in a Syndicated Community Offering. The Primary Parties reserve the absolute right to reject or accept any orders in the Community Offering or the Syndicated Community Offering, in whole or in part, either at the time of receipt of an order or as soon as practicable following the Expiration Date. In the alternative, any shares not ordered in the Subscription and Community Offerings may be sold in an underwritten Public Offering in which Webb will serve as the underwriter. In the event of a Public Offering, the Company intends to grant Webb an option to purchase up to an additional 75,710 shares to cover any over-allotments in the Public Offering. In the event Webb exercises such over-allotment option, the total number of shares of Conversion Stock sold in the Offerings would amount to 580,445 shares. The closing of all shares sold in the Subscription and Community Offerings and any Public Offering will occur simultaneously, and all shares of Conversion Stock will be sold at a uniform price. The Primary Parties have also retained Webb as consultant and advisor in connection with the Offerings and to assist in soliciting subscriptions in the Subscription and Community Offerings. See "The Conversion and Reorganization - The Offerings - Subscription Offering," "- Community Offering," "- Syndicated Community Offering and Public Offering" and "- Marketing Arrangements." Purchase Limitations No Eligible Account Holder, Supplemental Eligible Account Holder, Other Member, director, officer or employee or Public Stockholder may purchase in their capacity as such in the Subscription Offering more than the number of shares of Conversion Stock that, when combined with Exchange Shares received, aggregate 2.5% of the Conversion Stock; no person may purchase in each of the Community Offering, any Syndicated Community Offering and any Public Offering more than the number of shares of Conversion Stock that when combined with Exchange Shares received aggregate 2.5% of the Conversion Stock; and no person, together with associates of or persons acting in concert with such person, may purchase in the Offerings more than the number of shares of Conversion Stock that when combined with Exchange Shares received by such person, together with associates of and persons acting in concert with such person, aggregate more than 5.0% of the Conversion Stock. For purposes of the purchase limitations set forth in the Plan of Conversion, Exchange Shares will be valued at the $10.00 per share price that shares of Conversion Stock are issued in the Offerings. At any time during the Offerings, and without further approval by the Members or the Stockholders, the Primary Parties may in their sole discretion decrease or increase any of the purchase limitations up to 5% of the Common Stock issued in the Conversion and Reorganization. Under certain circumstances, subscribers may be resolicited in the event of such an increase and given the opportunity to increase, decrease or rescind their orders. The minimum purchase is 25 shares. See "The Conversion and Reorganization - Limitations on Conversion Stock Purchases." In the event of an oversubscription, shares will be allocated in accordance with the Plan, as described under "The Conversion and Reorganization - The Offerings - Subscription Offering" and "Community Offering." Because the purchase limitations contained in the Plan of Conversion include Exchange Shares to be issued to Public Stockholders for their Public Association Shares, certain holders of Public Association Shares may be limited in their ability to purchase Conversion Stock in the Offerings. See "Risk Factors - Possible Dilution to Public Stockholders as a Result of Purchase Limitations." Stock Pricing, Exchange Ratio and Number of Shares to be Issued in the Conversion and Reorganization Federal regulations require the aggregate purchase price of the Conversion Stock to be consistent with RP Financial's pro forma appraisal of the Association and the Mutual Holding Company, which was $7.6 million as of September 6, 1996. Because the holders of the Public Association Shares will continue to hold the same aggregate percentage ownership interest in the Company as they held in the Association, adjusted downward pursuant to OTS policy in order to reflect the special dividends declared by the Association and waived by the Mutual Holding Company (before giving effect to any shares of Common Stock purchased by the Association's stockholders in the Offerings, the payment of cash in lieu of issuing fractional Exchange Shares and any exercise of dissenters' rights), the Appraisal was multiplied by 57.75% (which represents the Mutual Holding Company's percentage interest in the Association adjusted upward from 54.62% so as to reflect the $403,000 of special dividends declared by the Association and waived by the Mutual Holding Company) to determine the midpoint of the Offering Price Range, which is $4,389,000. In accordance with OTS regulations, the minimum and maximum of the Offering Price Range were set at 15% below and above the midpoint, respectively, resulting in an offering range of $3,730,650 to $5,047,350. The full text of the appraisal report of RP Financial describes the procedures followed, the assumptions made, limitations on the review undertaken and matters considered, which included the trading market for the Association Common Stock (see "Market for Common Stock") but was not dependent thereon. The appraisal report has been filed as an exhibit to the Registration Statement and Application for Conversion of which this Prospectus is a part, and is available in the manner set forth under "Additional Information." This appraisal of the Conversion Stock is not intended and should not be construed as a recommendation of any kind as to the advisability of purchasing such stock. All shares of Conversion Stock will be sold at the Purchase Price of $10.00 per share, which was established by the Boards of Directors of the Primary Parties. The actual number of shares to be issued in the Offerings will be determined by the Primary Parties based upon the final updated valuation of the estimated pro forma market value of the Conversion Stock at the completion of the Offerings. The number of shares of Conversion Stock to be issued is expected to range from a minimum of 373,065 shares to a maximum of 504,735 shares. As a result of the Company's engagement of Webb to act as the underwriter in a Public Offering with respect to any shares remaining unsold after completion of the Subscription and Community Offerings, the Company currently anticipates that the Conversion Stock will be sold in accordance with the upper end of the Offering Price Range. However, no assurance can be made that the Company will be able to sell all of such shares either in the Subscription and Community Offerings or in the Public Offering, if any. In addition, subject to approval of the OTS, the Offering Price Range may be increased or decreased to reflect market and economic conditions prior to the completion of the Offerings and may be increased to permit an increase in the number of shares of Conversion Stock sold in the Conversion and Reorganization pursuant to an over-allotment option which the Company intends to grant Webb in the Public Offering, and under such circumstances the Primary Parties may increase or decrease the number of shares of Conversion Stock. Subscribers will be resolicited and will be permitted to modify or cancel their subscriptions if (i) the gross proceeds from the sale of the Conversion Stock are less than the minimum or more than 15% above the maximum of the current Offering Price Range or (ii) the Offerings are extended beyond __________ __, 1996. Based on the 207,726 Public Association Shares outstanding at June 30, 1996, and assuming a minimum of 373,065 and a maximum of 504,735 shares of Conversion Stock are issued in the Offerings, the Exchange Ratio is expected to range from approximately 1.3139 Exchange Shares to 1.7777 Exchange Shares for each Public Association Share outstanding immediately prior to the consummation of the Conversion and Reorganization. The Exchange Ratio will be affected if any stock options to purchase shares of Association Common Stock are exercised after June 30, 1996 and prior to consummation of the Conversion and Reorganization. If any of such stock options are outstanding immediately prior to consummation of the Conversion and Reorganization, they will be converted into options to purchase shares of Common Stock, with the number of shares subject to the option and the exercise price per share to be adjusted based upon the Exchange Ratio so that the aggregate exercise price remains unchanged, and with the duration of the option remaining unchanged. At June 30, 1996, there were options to purchase 12,274 shares of Association Common Stock outstanding, all of which had an exercise price of $10.00 per share, and the Association has no plans to grant additional stock options prior to the consummation of the Conversion and Reorganization. Differences in Stockholder Rights The Company is an Indiana corporation subject to the provisions of the Indiana Business Corporation Law, and the Association is a federally chartered savings association subject to federal laws and regulations. Upon consummation of the Conversion and Reorganization, the Public Stockholders of the Association will become stockholders of the Company and their rights will be governed by the Company's Articles of Incorporation and Bylaws and Indiana law. The rights of stockholders of the Association are materially different in certain respects from the rights of stockholders of the Company. See "Comparison of Stockholders' Rights" and "Description of Capital Stock of the Company." Benefits of Conversion and Reorganization to Directors and Officers Following consummation of the Conversion and Reorganization, the Company may consider adopting certain stock benefit plans for the benefit of directors, officers and employees of the Company and the Association. The proposed benefit plans are as follows: (i) a 1997 Stock Option Plan, pursuant to which a number of authorized but unissued shares of Common Stock equal to 10% of the Conversion Stock to be sold in the Offerings (50,743 shares at the maximum of the Offering Price Range) may be reserved for issuance pursuant to stock options and stock appreciation rights to directors, officers and employees; and (ii) a 1997 Management Recognition Plan and Trust Agreement (the "1997 Recognition Plan"), which may, following the receipt of stockholder approval, purchase a number of shares of Common Stock, with funds contributed by the Company, either from the Company or in the open market equal to 4.0% of the Conversion Stock to be sold in the Offerings (20,189 shares at the maximum of the Offering Price Range) for distribution to directors, officers and employees. The Company currently anticipates that it would not implement the 1997 Stock Option Plan and the 1997 Recognition Plan until after one year following the consummation of the Conversion and Reorganization. See "Management of the Company - Benefits." In addition, the Association currently maintains an ESOP for the benefit of employees of the Association. Although the ESOP does not intend to purchase additional shares of Common Stock in the Offerings, the ESOP may purchase additional shares of Common Stock not earlier than one year following completion of the Conversion and Reorganization. See "Management of the Association - Stock Benefit Plans - Employee Stock Ownership Plan." The foregoing plans are in addition to a 1993 Stock Incentive Plan, a 1993 Directors' Stock Option Plan and a Management Recognition Plan which were adopted by the Association in connection with the MHC Reorganization and subsequently approved by the stockholders of the Association. These plans will continue in existence after the Conversion and Reorganization as plans of the Company. In addition, pursuant to the terms of the 1993 Stock Incentive Plan and 1993 Directors' Stock Option Plan, all outstanding stock options may be exercised in whole or in part immediately prior to consummation of the Conversion and Reorganization. See "Management of the Association - Stock Benefit Plans" and "The Conversion and Reorganization - Effects of the Conversion and Reorganization - Effect on Existing Compensation Plans." In addition to the foregoing plans, in connection with the Conversion and Reorganization, the Company and the Association may seek to enter into employment agreements with Donald C. Siemers, the current President and Chief Executive Officer of the Company and the Association, Jay Gary Fraley, the current Vice president of the Company and the Association, and Edward L. Fischer, the current Chief Financial Officer of the Company and the Association. If such employment agreements were in effect as of June 30, 1996 and Messrs. Siemers, Fraley and Fischer were terminated as of such date in connection with a "change in control" of the Company, as defined, Messrs. Siemers, Fraley and Fischer could be entitled to receive approximately $218,981, $89,871 and $91,875 in severance pay, respectively. See "Management of the Company - Employment Agreements." Use of Proceeds Net proceeds from the sale of the Conversion Stock are estimated to be between $3.4 million and $4.7 million, depending on the number of shares sold and the expenses of the Conversion and Reorganization. See "Pro Forma Data." The Company plans to contribute to the Association 50% of the net proceeds from the Offerings and retain the remainder of the net proceeds. The net proceeds will be initially used to invest primarily in short-term interest-bearing deposits and marketable securities. Funds retained by the Company may be used to support the future expansion of operations or diversification into other banking-related businesses and for other business or investment purposes, including the acquisition of other financial institutions and/or branch offices, although there are no current plans, arrangements, understandings or agreements regarding such expansion, diversification or acquisitions. A portion of the net proceeds retained by the Company also may be utilized in order to refinance the existing third party loan to the ESOP. In addition, subject to applicable limitations, such funds also may be used in the future to repurchase shares of Common Stock. Funds contributed to the Association from the Company will be used for general business purposes. The proceeds will be used to support the Association's lending and investment activities and thereby enhance the Association's capabilities to serve the borrowing and other financial needs of the communities it serves. The Association plans to initially use the proceeds to invest primarily in short-term interest-bearing deposits and marketable securities. See "Use of Proceeds." Dividend Policy Following consummation of the Conversion and Reorganization, the Board of Directors of the Company intends to declare cash dividends on the Common Stock at an initial quarterly rate equal to $.07 per share, commencing with the first full quarter following consummation of the Conversion and Reorganization. Declarations of dividends by the Company's Board of Directors will depend upon a number of factors, including the amount of the net proceeds from the Offerings retained by the Company, investment opportunities available to the Company or the Association, capital requirements, regulatory limitations, the Company's and the Association's financial condition and results of operations, tax considerations and general economic conditions. Consequently, there can be no assurance that dividends will in fact be paid on the Common Stock or that, if paid, such dividends will not be reduced or eliminated in future periods. The Association intends to continue to pay regular quarterly dividends through either the date of consummation of the Conversion and Reorganization (on a pro rata basis) or the end of the fiscal quarter during which the consummation of the Conversion and Reorganization occurs. See "Dividend Policy." Dissenters' Rights of Appraisal Holders of Association Common Stock are entitled to appraisal rights under Section 552.14 of the OTS' regulations as a result of the merger of the Mutual Holding Company (following its conversion to a federal interim stock savings institution) with and into the Association and the merger of the Association with and into Interim, with the Association to be the surviving entity in both mergers. Any such stockholder who wishes to exercise such appraisal rights should review carefully the discussion of such rights in the Association's proxy statement, including Appendix A thereto, because failure to timely and properly comply with the procedures specified will result in the loss of appraisal rights under Section 552.14. Pursuant to the Plan of Conversion, consummation of the Conversion and the Reorganization is conditioned upon holders of less than 10% of the outstanding Association Common Stock exercising appraisal rights, which condition may, in the sole discretion of the Primary Parties, be waived. See "The Conversion and Reorganization - Dissenters' Rights of Appraisal."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001023393_versatilit_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001023393_versatilit_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary should be read in conjunction with, and is qualified in its entirety by, the more detailed information, including "Risk Factors" and the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Prospectus. THE COMPANY Versatility is a leading provider of client/server customer interaction software that enables businesses to automate and enhance their telemarketing and teleselling capabilities. The Company's software products are designed to increase the productivity and revenue-generating capabilities of organizations operating call centers to interact with existing and potential customers. The Company's products include desktop software applications, development and customization tools and optional server-based software services, and support a wide variety of leading computing platforms, allowing users to implement a scaleable, flexible and interoperable software solution that can be used independently or as part of an integrated enterprise-wide customer interaction implementation. Versatility also offers fee-based professional, consulting and maintenance services to provide implementation, integration and ongoing support of the Company's software products. Companies in a variety of industries recognize the strategic importance of developing and maintaining long-term customer relationships. Companies are increasingly viewing every stage of customer interaction, from initial sales and marketing activities to post-sales service and support, as an opportunity to distinguish their products and services, "cross-sell" related products or "up-sell" higher margin products, and receive and process valuable customer feedback. In recent years, telephony-based customer interaction has become an increasingly significant channel as organizations have recognized that the telephone can help them more effectively leverage their sales and marketing investments, access a larger customer base, enhance customer satisfaction and increase revenue. The telephony-based customer interaction market is expected to grow significantly over the next few years. Industry sources estimate that the market for call center hardware and software is expected to exceed $10.0 billion by 2001. The customer interaction software market, which in addition to the principal markets addressed by the Company includes customer support, help desk, field sales force automation and quality assurance applications, is expected to grow from $1.1 billion in 1995 to over $2.7 billion in 1998. Versatility provides a suite of software applications that provide call center agents with the guidance and product and customer information they need to effectively sell increasingly complex products and services. The Company's software can enhance revenue-generating functions by supporting not only order taking but also cross-selling and up-selling other products and services. Versatility's products also permit the gathering of valuable information concerning customer needs, buying patterns and demographics, are fully integrated with the organization's information and telephone systems, enabling more effective exchange of gathered data and can readily be tailored to the needs of particular businesses, marketing campaigns or call center agents. The Company's software solutions are scaleable to support large volumes of calls and open to permit integration with a wide variety of telephony and computing systems. The Company's products are used by customers operating large and mid-sized call centers for activities including telebanking, claims servicing, customer service, consumer product telesales and other applications. Since introducing Versatility Series in May 1995, the Company has licensed Versatility Series applications for use on over 6,000 agent desktops. The Company's customers include Avantel, S.A., British Telecommunications Plc ("BT"), Chase Bank, Medco Containment Services and Mellon Bank. Versatility markets its products and services to customers in a number of targeted industries, including the financial services and communications industries. The Company sells its software and services in the United States through a direct sales organization that focuses primarily on enterprise-wide, large-scale solutions with complex requirements. In addition, Versatility markets and sells software through value-added resellers ("VARs"), distributors and third party systems integrators in the United States and internationally. ------------------------ The Company was incorporated as National Political Resources, Inc. in the District of Columbia in 1981 and merged into NPRI, Inc., a Virginia corporation, in July 1991. In January 1996, NPRI, Inc. reincorporated in Delaware. The Company changed its name to Versatility Inc. in June 1996. The Company's executive offices are located at 11781 Lee Jackson Memorial Highway, Seventh Floor, Fairfax, Virginia 22033, and its telephone number is (703) 591-2900. As used herein, the term "Company" refers to Versatility Inc., its subsidiaries and the predecessors of Versatility Inc. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company......................... 2,200,000 shares Common Stock to be outstanding after the offering(1)........ 7,201,883 shares Use of proceeds............................................. Working capital and other general corporate purposes, including expansion of the Company's sales and marketing and product development organizations. Proposed Nasdaq National Market symbol...................... VERS </TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED APRIL 30, OCTOBER 31, ---------------------------------------------------- ------------------ 1992 1993 1994 1995 1996 1995 1996 ------ ------ ------ ------- ------- ------ ------- <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenue: License revenue.............................. $4,226 $5,510 $5,393 $ 8,045 $10,345 $3,616 $ 7,548 Service and maintenance revenue.............. 2,271 2,411 2,987 3,440 6,190 3,035 3,923 Total revenue............................ 6,497 7,921 8,380 11,485 16,535 6,651 11,471 Write-off of capitalized software(2)........... -- -- -- -- 829 829 -- Income (loss) from operations(2)............... (171) (383) 161 1,981 861 (145) 612 Net income (loss).............................. (174) (372) 110 1,257 657 (92) 418 Pro forma net income (loss) per share(3)....... $ 0.12 $(0.02) $ 0.07 Pro forma weighted average number of shares outstanding(3)............................... 5,603 5,603 5,603 </TABLE> <TABLE> <CAPTION> OCTOBER 31, 1996 ----------------------------------- PRO PRO FORMA AS ACTUAL FORMA(4) ADJUSTED(4)(5) ------- -------- -------------- <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents....................................................... $ 1,983 $ 1,983 $ 29,847 Working capital................................................................. 5,311 5,311 33,175 Total assets.................................................................... 13,149 13,149 41,013 Long-term debt, less current portion............................................ 201 201 201 Redeemable convertible preferred stock.......................................... 3,737 -- -- Stockholders' equity............................................................ 2,080 5,817 33,681 </TABLE> - --------------- (1) Excludes (i) 740,505 shares of Common Stock issuable upon the exercise of outstanding options and (ii) 711,000 shares of Common Stock available for issuance pursuant to the Company's stock plans. See "Management -- Stock Plans."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001023398_advance_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001023398_advance_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..0c7459bfe64c68aaae1e8fb65fa58fa8b25d2847
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+SUMMARY The following summary does not purport to be complete, and is qualified in its entirety by more detailed information and the Consolidated Financial Statements of the Bank and the Notes thereto appearing elsewhere in this prospectus. Advance Financial Bancorp: The Company was organized under Delaware law in September 1996 at the direction of the Board of Directors of the Bank to acquire all of the capital stock that the Bank will issue upon its conversion from the mutual to stock form of ownership. The Company has not engaged in any significant business to date. Management believes that the holding company structure will provide flexibility for possible diversification or expansion of business activities, although there are no current arrangements, understandings, or agreements regarding any such opportunities. Subject to limitations on repurchases, the holding company structure will also enable the Company to repurchase its own stock without adverse tax consequences. See "Advance Financial Bancorp" and "Business of the Company." Advance Financial Savings Bank, f.s.b.: The Bank, a federally chartered mutual savings bank, operates a traditional savings association business, attracting deposit accounts from the general public and using those deposits, together with other funds, primarily to originate and invest in loans secured by single-family residential real estate. At June 30, 1996, the Bank had total assets of $91.9 million, total deposits of $80.8 million, and equity of $6.2 million. See "Advance Financial Savings Bank, f.s.b." and "Business of the Bank." The Plan and Approval by Members: The Board of Directors of the Bank unanimously adopted the Plan on September 3, 1996. Pursuant to the Plan, the Bank will convert from a federal mutual savings bank into a federal stock savings bank and will become a wholly owned subsidiary of the Company which will issue Common Stock in the Offerings. The Plan must be approved by the affirmative vote of the majority of total votes eligible to be cast by the Bank's members. See "The Conversion." The Offerings and the Purchase Price: Between 697,000 and 943,000 shares of Common Stock are being offered at $10.00 per share in the Offerings. The maximum number of shares sold in the Offerings may be increased to up to 1,084,450 shares without a resolicitation of subscribers in the event of an increase in the pro forma market value of the Bank to an amount not more than 15% above the maximum of the EVR. See "The Conversion - Stock Pricing" and "-Number of Shares to be Issued in the Conversion."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001023813_vivid_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001023813_vivid_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..5b876c8633e1f71023b8e572257869605543a103
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the more detailed information and the consolidated financial statements and notes thereto (the "Consolidated Financial Statements") appearing elsewhere in this Prospectus. All references in this Prospectus to the terms "Vivid" and the "Company" refer to Vivid Technologies, Inc., its Massachusetts predecessor and its wholly-owned subsidiaries unless otherwise required by the context. See "Risk Factors" for information that should be considered by prospective investors. THE COMPANY The Company is a leading developer, manufacturer and marketer of automated inspection systems which detect plastic and other explosives in airline baggage. The Company's family of advanced explosives detection systems identify targeted materials by analyzing the physical characteristics of each item in a bag, including the atomic number and mass, using patented composition analysis techniques and proprietary dual-energy X-ray technology. These systems automatically (without the use of an operator) isolate and identify targeted materials within a bag, thereby preventing a suspect bag from being loaded into an aircraft until cleared by operator inspection. The Company's systems can also be used to identify a wide variety of other substances, including drugs and currency. In 1993, the Company's automated systems were successfully deployed in airports as part of an integrated multi-level checked baggage screening approach that is being adopted in many countries throughout the world. As of September 30, 1996, the Company had sold more than 100 systems for installation in airports throughout Europe of which over 70 systems had been installed. The Company's systems are in use in 14 of the 17 airports that, to the knowledge of the Company, have deployed advanced integrated automated explosives detection systems. Airports at which the Company's systems are deployed include London Heathrow and London Gatwick, Paris Charles de Gaulle, Amsterdam, Zurich, Brussels and Glasgow. In response to the December 1988 bombing of Pan American Flight 103 over Lockerbie, Scotland, many countries began to require the installation of systems that could detect plastic and other explosives in airline baggage. Europe, led by the United Kingdom, has been at the forefront of deploying advanced automated explosives detection screening equipment. The United Kingdom Department of Transport (the "UK DOT") has required all of the United Kingdom's commercial airports to deploy systems for 100% screening of international checked baggage by the end of 1997. The European Civil Aviation Conference ("ECAC"), an organization of 33 member states, has agreed to implement 100% screening of international checked baggage by the year 2000. In the Asia/Pacific region, major new airports and terminals, including those in Hong Kong, Malaysia, Singapore and South Korea, are being designed to include 100% screening of international checked baggage. In the United States, the Federal Aviation Administration (the "FAA") has adopted more comprehensive standards for explosives detection systems than those adopted by the rest of the world. To date, no system has demonstrated that it meets these standards under realistic airport operating conditions. As a result, only a limited number of explosives detection systems have been deployed, primarily on a test basis, in the United States. In response to the recent crash of TWA Flight 800 off Long Island, New York in July 1996, the United States has enacted legislation which includes a $144.2 million allocation for the purchase of explosives detection systems and other advanced security equipment by air carriers and airport authorities. The Company believes that the success of its systems is attributable to their high performance, cost effectiveness, reliability, product breadth and system flexibility. These systems identify plastic and other high explosives, with relatively low false alarm rejections at throughputs of up to 1,500 bags per hour, which is comparable to the peak throughput of existing baggage handling equipment. The Company's installed base has had a reported average system availability of over 99% at airports of varying sizes, including London Heathrow, one of the world's largest international airports, serving more than 50 million passengers per year. The Company's objectives are to maintain its leadership in the airport automated explosives detection systems market and to apply its technology to address complementary applications. The key elements of the Company's strategy to achieve these objectives are to maintain its technological leadership, to continue its international expansion, to capitalize on the emerging United States market, to expand its product line and applications for those products, and to explore strategic alliances and acquisitions to complement its products and technology. The Company believes that installations of advanced automated explosives detection systems at airports will accelerate the adoption of this technology for other security applications, including the screening of airline carry-on baggage, the protection of government and private facilities, and the screening of mail. The Company is also exploring opportunities with various governmental agencies in the United States and internationally to use its equipment for the detection of drugs and currency. Further, the Company believes that its technology can expand the use of X-ray in food processing and other process control applications by providing enhanced or new value-added functions such as material analysis, segregation and sorting of materials, and quality control. The Company was incorporated as a Massachusetts corporation in May 1989 under the name of QDR Security, Inc. The Company changed its name to Vivitech, Inc. in June 1989 and was renamed Vivid Technologies, Inc. in September 1989. In October 1996, the Company changed its state of incorporation to Delaware. The Company's principal executive offices are located at 10E Commerce Way, Woburn, Massachusetts 01801, and its telephone number is (617) 938-7800. THE OFFERING <TABLE> <C> <S> Common Stock offered by the Company in the U.S. Offering........... 1,600,000 shares Common Stock offered by the Company in the International Offering.. 400,000 shares Common Stock to be outstanding after the Offering(1)............... 8,792,370 shares Use of proceeds.................................................... For working capital and general corporate purposes. In addition, approximately $5.8 million of the net proceeds will be used to redeem certain non- convertible redeemable Preferred Stock. See "Use of Proceeds." Nasdaq National Market symbol...................................... VVID </TABLE> - -------- (1) Based upon the number of shares of Common Stock outstanding as of October 15, 1996. Excludes 1,276,969 shares of Common Stock reserved for issuance as of October 15, 1996 upon exercise of outstanding stock options and warrants. See "Management--Stock Option Plans," "Description of Securities--Warrants" and Notes 6 and 7 to the Consolidated Financial Statements. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> YEAR ENDED SEPTEMBER 30, ----------------------------------------- 1992 1993 1994 1995 1996 ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues............................ $ 631 $ 2,854 $13,801 $14,437 $15,578 Income (loss) before income taxes(1)........................... (2,091) (859) 2,910 2,104 1,165 Net income (loss)................... $(2,091) $ (859) $ 2,810 $ 2,014 $ 1,165 ======= ======= ======= ======= ======= Net income (loss) per common and common equivalent share............ $ (0.38) $ (0.15) $ 0.39 $ 0.28 $ 0.15 ======= ======= ======= ======= ======= Weighted average number of common and common equivalent shares outstanding........................ 5,496 5,815 7,198 7,275 7,869 ======= ======= ======= ======= ======= </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1996 ----------------------- ACTUAL AS ADJUSTED(2) ------- -------------- <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Working capital ........................................ $(1,037) $22,620 Total assets............................................ 11,963 29,585 Currently redeemable preferred stock.................... 5,781 -- Stockholders' equity.................................... 177 23,707 </TABLE> - -------- (1) Fiscal 1994, 1995 and 1996 expenses include litigation expenses of $0.2 million, $0.3 million and $1.2 million, respectively, primarily relating to certain patent litigation which was settled by the Company on November 6, 1996. See "Risk Factors--Limited Protection of Intellectual Property Rights; Patent Litigation," "Business--Intellectual Property" and "--Legal Proceedings." (2) Adjusted to give effect to the sale of the 2,000,000 shares of Common Stock offered hereby at an assumed offering price of $13.00 per share, and the application of the proceeds therefrom, after deducting the estimated underwriting discounts and commissions and offering expenses payable by the Company. See "Use of Proceeds" and "Capitalization."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0001023876_manchester_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001023876_manchester_prospectus_summary.txt
new file mode 100644
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--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by and should be read in conjunction with the more detailed information and the Consolidated Financial Statements and the Notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, all references to the Company's authorized, issued and outstanding securities assume no exercise of the Underwriters' over-allotment option. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements as a result of the factors set forth under "Risk Factors" and elsewhere in this Prospectus. THE COMPANY Manchester Equipment Co., Inc. is a systems integrator and reseller of computer hardware, software and networking products, primarily for commercial customers. The Company offers its customers single-source solutions customized to their information systems needs by combining value-added services with hardware, software, networking products and peripherals from leading vendors. Over the past 20 years, the Company has forged long-standing relationships with both customers and suppliers and has capitalized on the rapid developments in the computer industry, including the shift toward client/server-based platforms. Manchester's marketing focus is on mid- to large-sized companies, which have become increasingly dependent upon complex information systems in an effort to gain competitive advantages. While many of these companies have the financial resources to make the required capital investments in information systems, often they do not have the necessary information technology personnel to design, install or maintain complex systems or to incorporate continuously evolving technologies. As a result, these companies are turning to independent third parties to procure, design, install, maintain and upgrade their information systems. The Company offers its customers a variety of value-added services, such as consulting, integration and support services, together with a broad range of computer and networking products from leading vendors. Consulting services include systems design, performance analysis, security analysis and migration planning. Integration services include product procurement, configuration, testing, systems installation and implementation. Support services include network management, "help-desk" support, and enhancement, maintenance and repair of computer systems. Significant customers of the Company currently include Barnes & Noble Inc., Cabletron Systems Inc., Conde Nast Publications Inc., J&R Music World, National Broadcasting Company Inc., Pfizer Inc., Reuters America Inc., Time Warner Inc., The Toronto Dominion Bank, United Parcel Service of America Inc. and the United States Merchant Marine Academy. The Company offers services and products from its headquarters in Long Island, New York, and its regional offices in New York City, Needham (Boston), Massachusetts and Boca Raton and Tampa, Florida. Most of the Company's revenues are derived from sales to customers located in the New York Metropolitan area, with approximately 90% of the Company's revenues being generated from its Long Island and New York City offices. The Company believes that a number of factors enable it to compete in its highly fragmented and rapidly changing market. Among other things, the Company benefits from long-standing relationships with many of its customers, providing opportunities for continued sales of products and services. The Company's long-standing relationships with suppliers and its large volume purchases contribute to the Company's ability to obtain significant purchase discounts and inventory as needed. Manchester further believes that its name is widely recognized for high quality, competitively priced products and value-added services. Manchester also has developed efficient inventory and credit extension controls which have historically resulted in rapid inventory turnover and minimal bad debt expense. The Company's expansion to regional offices in the Northeast and Florida has contributed to a continued increase in its revenues. Key elements of Manchester's strategy include (i) increasing its focus on providing value-added services, such as consulting, integration and support, (ii) expanding its marketing focus on companies outside the Fortune 500, (iii) introducing an electronic sales ordering system (linked to automated inventory and credit control systems) for its customers, (iv) increasing sales force productivity through enhanced electronic access to product information, increased training of sales representatives and use of telemarketing, (v) expanding its presence in the New York Metropolitan area by enlarging both its New York City and Long Island offices and (vi) expanding geographically into growing business centers in the eastern half of the United States. In support of its strategy, during the past fiscal year, the Company hired additional technical and administrative staff and increased its investment in its management information systems. The Company's executive offices are located at 160 Oser Avenue, Hauppauge, New York 11788; its telephone number is (516) 435-1199. THE OFFERING <TABLE> <S> <C> Common Stock offered by The Company...................................... 2,125,000 shares The Selling Shareholder.......................... 375,000 shares Common Stock to be outstanding after the offering(1)......................................... 8,325,000 shares Use of proceeds....................................... To repay short-term debt, to expand its New York Metropolitan area operations, to upgrade its telecommunications system and for working capital Proposed Nasdaq National Market symbol................ MANC </TABLE> - --------------- (1) Excluding 1,100,000 shares of Common Stock reserved for issuance under the Company's stock option plan and 250,000 shares of Common Stock reserved for issuance upon the exercise of warrants to be issued to the Representatives of the Underwriters and their designees exercisable at 120% of the public offering price (the "Representatives' Warrants"). See "Capitalization," "Management -- Stock Option Plan" and "Underwriting." SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) The following table sets forth summary financial data of the Company and should be read in conjunction with the Consolidated Financial Statements and the Notes thereto and other financial information included herein. <TABLE> <CAPTION> FISCAL YEAR ENDED JULY 31, ----------------------------------------------------------------- 1992 1993 1994 1995 1996 --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> INCOME STATEMENT DATA: Revenues................. $ 111,835 $ 118,898 $ 137,361 $ 170,818 $ 189,659 Gross profit............. 18,551 17,852 19,984 24,495 26,531 Income from operations... 1,285 1,787 2,604 3,215 3,933 Net income............... $ 628 $ 1,132 $ 1,776(1) $ 1,663 $ 2,138(2) ======== ======== ======== ======== ======== Net income per share..... $ .10 $ .18 $ .28 $ .27 $ .34(2) ======== ======== ======== ======== ======== Weighted average shares of Common Stock outstanding........... 6,262,626 6,262,626 6,262,626 6,262,626 6,246,970 ======== ======== ======== ======== ======== </TABLE> <TABLE> <CAPTION> JULY 31, 1996 -------------------------- ACTUAL AS ADJUSTED(3) ------- -------------- <S> <C> <C> BALANCE SHEET DATA: Working capital................................................. $ 9,841 $ 28,368 Total assets.................................................... 37,761 52,058 Short-term debt, including current maturities of capital lease obligation................................................... 6,952 452 Shareholders' equity............................................ 8,175 33,711 </TABLE> - --------------- (1) Includes a cumulative effect of a change in accounting for income taxes of $386. See Notes 1 and 8 of Notes to Consolidated Financial Statements. (2) Pro forma net income for the fiscal year ended July 31, 1996 would have been $4,246 or $.68 per share, after giving effect to the assumed reduction of (i) $3,209 in officers' compensation payable to the Company's Chief Executive Officer, Executive Vice President and Chief Financial Officer to an aggregate of $1,125, exclusive of fringe benefits, to reflect (A) the annual compensation that the Company's Chief Executive Officer and Executive Vice President have agreed to receive without any diminished duties or responsibilities, and (B) the reduction from the amount of annual compensation paid to the former Chief Financial Officer to the annual compensation currently payable to the present Chief Financial Officer, net of applicable income taxes, and (ii) $304 in rent paid to related parties to amounts stipulated in current leases, net of applicable income taxes. See "Management" and "Certain Transactions." Officers' compensation was $3,940, $1,897, $1,988, $4,990 and $4,334 for the fiscal years ended July 31, 1992, 1993, 1994, 1995 and 1996, respectively. (3) As adjusted to reflect the sale of 2,125,000 shares of Common Stock offered hereby at an assumed initial public offering price of $11.00 per share and the application of the estimated net proceeds therefrom and the termination of the put right and shareholders' agreements between the Company and certain shareholders. See "Use of Proceeds," "Capitalization" and Note 10 of Notes to the Consolidated Financial Statements.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0001023905_geotel_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001023905_geotel_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f518654fefd9761513ae2dc6920f79e1e0728465
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0001023905_geotel_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Financial Statements and Notes thereto appearing elsewhere in this Prospectus. THE COMPANY GeoTel Communications Corporation ("GeoTel" or the "Company") is a provider of telecommunications software solutions focused on enhanced call routing technology that enables customer-oriented companies to deliver responsive and cost-effective customer service. The Company's software solutions are aimed at decentralized or service-oriented corporations that use call centers, voice response units and other answering resources to interact with their customers. GeoTel's software solution, the Intelligent CallRouter, is designed for companies that utilize multiple call centers to handle high volumes of inbound customer calls and regard their effective handling of customer interaction through call center technology as a key competitive advantage. The Company is focused on open, standards-based software solutions for enterprise-wide call distribution in a multi-vendor, multi-carrier, fault-tolerant, distributed environment. GeoTel's call routing solutions have been deployed by a variety of companies, including America Online, American Express, Fidelity, MCI, Matrixx Marketing, Spiegel and USAir, representing approximately 6.5%, 2.6%, 23.3%, 7.0%, 4.9%, 3.8% and 6.7%, respectively, of the Company's total revenues to date. Companies are increasingly recognizing that excellent customer service can be used as a strategic weapon to differentiate their firms from competitors. In order to remain competitive, corporations must continually evaluate their product and service offerings to expand market share, lower costs and meet customer expectations. To improve service quality, companies have invested in technologies that enable them to concentrate customer service representatives, or agents, into groups known as call centers. Many large corporations utilize call centers as the primary method of interfacing with their customers. These call centers are typically deployed in multiple locations and can be utilized to provide a prioritized level of services for the most valued customers. Call centers allow businesses to reduce costs and deliver premium customer service. The technology utilized by call centers has evolved dramatically over the past three years. Historically, due to the closed nature of public networks, corporations installed premises-based switching systems at the end of long distance or local exchange telephone lines. Reliance on these switching systems requires corporations to use proprietary closed solutions offered by service providers where multi-vendor switching system interoperability was not possible. Consequently, the call center solutions employed by most corporations have been designed around the technological limits of premises-based switching systems and the limitations of carrier networks, which prevent corporations from realizing the potential benefits of virtual call centers. Virtual call centers draw upon all of the organization's call response resources and utilize open systems-based applications to enhance the capabilities of the existing call center infrastructure by integrating it with existing business applications and data. The Company's Intelligent CallRouter (the "ICR") enables enterprise-wide call routing and consolidated real-time management information at the network level. The ICR is an advanced call-by-call routing server that supports multiple routing clients independent of their location, toll-free carrier or switch provider. The multi-carrier, multi-vendor capabilities of the ICR allow the user to focus on delivering premium customer service without the limitations of proprietary or customer developed solutions. Its open architecture enables interoperability with other call processing and call volume management systems within an enterprise and provides a means for integrating these various stand-alone solutions. The ICR can be interfaced to agent scheduling, workflow management and other call center management tools. The distributed software fault tolerance implemented in the ICR provides the mission-critical reliability required for enterprise-wide call distribution. The Company also offers consulting and training, installation services and post-sale maintenance and support services. [GEOTEL LOGO] [Screen Shots Showing the Implementation of GEOTEL'S Intelligent CallRouter Software by Customer Service Representatives] Enterprise-Wide Call Distribution Creates a Virtual Call Center Network * Each call is matched with the best answering resource * Enterprise-wide call monitoring and reporting * Full integration with AT&T, MCI, Sprint networks, all major ACD/PBX/VRU equipment * Open/industry standards -- Microsoft Windows NT IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. The Company's objective is to become the leading supplier of enterprise-wide call distribution software solutions. To achieve this objective, the Company is pursuing a number of strategies, including extending its technology leadership in order to expand the value-added call processing features required by its customers; expanding its call distribution technology to include all of the answering resources available within a customer's business environment; leveraging its open architecture to develop interfaces to both existing and emerging call center technologies; utilizing a multiple-channel distribution system to cost-effectively address the market for its products; and providing superior customer service, support and training to ensure customer satisfaction and the effective deployment of the Company's products. GeoTel sells its software and services to large corporations with multiple call center locations that are major users of inbound, toll-free services. The Company sells primarily through a direct sales force in the United States and is also developing strategic relationships both domestically and internationally. The Company has signed agreements with MCI Telecommunications Corporation and Optus Systems PTY Ltd, representing 7.0% and 12.8%, respectively, of the Company's total revenues to date. To date, the Company has licensed its software to over 20 companies. The Company was incorporated in Delaware in June 1993. The Company's principal executive offices are located at 25 Porter Road, Littleton, Massachusetts 01460. The Company's telephone number is (508) 486-1100. ------------------------ Intelligent CallRouter, Pre-Routing and Post-Routing are registered trademarks of the Company and GeoTel is a trademark of the Company. All other trademarks and trade names referred to in this Prospectus are the property of their respective owners. GEOTEL INTELLIGENT CALLROUTER(R) Managing the interaction between customers and answering resources The system operates in a fault-tolerant, multi-vendor, multi-carrier, open telecommunications environment. Pre-Routing(R) allows intelligence to be applied at the network level before the call is sent to a destination. Post-Routing(R) controls the routing of calls among ACDs, PBXs or VRUs. [DIAGRAM ILLUSTRATING THE PRINCIPAL COMPONENTS OF THE INTELLIGENT CALLROUTER] EVENT AND THRESHOLD MONITORING The Intelligent CallRouter contains a comprehensive event monitoring system. It uses intuitive graphical display elements to immediately notify users of conditions requiring management intervention. [SCREEN SHOT OF EVENT MONITORING SYSTEM] - -------------------------------------------------------------------------------- THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company......................... 2,200,000 shares Common Stock to be outstanding after the offering........... 12,840,509 shares(1)(2) Use of proceeds............................................. For working capital and other general corporate purposes, including repayment of bank indebtedness Proposed Nasdaq National Market symbol...................... GEOC </TABLE> <TABLE> SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) <CAPTION> INCEPTION (JUNE 4, 1993) YEAR ENDED NINE MONTHS ENDED THROUGH DECEMBER 31, SEPTEMBER 30, DECEMBER 31, ------------------- ------------------- 1993 1994 1995 1995 1996 -------------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues......................... $ -- $ -- $ 1,534 $ -- $6,284 Income (loss) from operations.... (401) (3,090) (4,026) (3,591) 177 Net income (loss)................ (377) (2,966) (3,862) (3,479) 308 Pro forma net income (loss) per common and common equivalent share(2)....................... $ (0.37) $ 0.03 Pro forma weighted average number of common and common equivalent shares(2)...................... 10,365,465 11,514,315 <CAPTION> AS OF SEPTEMBER 30, 1996 --------------------------------------- PRO FORMA PRO AS ACTUAL FORMA(2) ADJUSTED(2)(3) ------- -------- -------------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents............................. $ 5,812 $5,812 $27,918 Working capital....................................... 4,699 4,699 27,178 Total assets.......................................... 9,176 9,176 31,282 Long-term debt, less current portion.................. 450 450 -- Convertible preferred stock........................... 12,229 -- -- Preferred stock....................................... -- -- Total stockholders' equity (deficit).................. (7,004) 5,225 28,154 <FN> - --------------- (1) Based upon the number of shares of Common Stock outstanding as of September 30, 1996. Excludes 860,396 shares of Common Stock issuable upon the exercise of options outstanding on that date, of which options to purchase 8,400 shares were then exercisable. See "Management -- Stock Plans." (2) Reflects the conversion of all issued and outstanding shares of Convertible Preferred Stock into 8,315,672 shares of Common Stock upon the closing of this offering. See Notes F and G to Financial Statements. (3) Adjusted to reflect the sale of 2,200,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $11.50 per share, after deducting estimated underwriting discounts and commissions and offering expenses. See "Use of Proceeds." </TABLE> Unless otherwise indicated, all information contained in this Prospectus reflects (i) the conversion of all outstanding shares of the Company's Series A Convertible Participating Preferred Stock, Series B Convertible Participating Preferred Stock and Series C Convertible Participating Preferred Stock (collectively, the "Convertible Preferred Stock") into an aggregate of 8,315,672 shares of Common Stock upon the closing of this offering, based upon an assumed initial public offering price of $11.50 per share; (ii) reflects the restatement of the Company's Certificate of Incorporation, to be filed upon the closing of this offering, to eliminate the Company's existing series of Convertible Preferred Stock and to create a class of authorized but undesignated preferred stock; and (iii) assumes no exercise of the Underwriters' over-allotment option. See "Description of Capital Stock" and "Underwriting."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001024047_larscom_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001024047_larscom_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..95dd6672fcd5c0ab55886926edb4918ce5e9263b
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY SHOULD BE READ IN CONJUNCTION WITH, AND IS QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. AS USED IN THIS PROSPECTUS, THE TERMS "LARSCOM" AND THE "COMPANY" INCLUDE LARSCOM INCORPORATED AND ITS SUBSIDIARY, UNLESS THE CONTEXT OTHERWISE INDICATES. THE DISCUSSION IN THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INCLUDE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THIS PROSPECTUS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED IN THE SECTIONS ENTITLED "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION PRESENTED IN THIS PROSPECTUS ASSUMES (I) NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION, (II) THE AMENDMENT AND RESTATEMENT OF THE COMPANY'S CERTIFICATE OF INCORPORATION PRIOR TO CONSUMMATION OF THIS OFFERING, PURSUANT TO WHICH EACH OUTSTANDING SHARE OF COMMON STOCK SHALL BE CONVERTED INTO 1,190 SHARES OF CLASS B COMMON STOCK AND AN AGGREGATE OF 100,000,000 SHARES OF CLASS A COMMON STOCK SHALL BE AUTHORIZED (THE "RECAPITALIZATION") AND (III) THE CONVERSION BY AXEL JOHNSON OF 1,200,000 SHARES OF CLASS B COMMON STOCK INTO 1,200,000 SHARES OF CLASS A COMMON STOCK TO BE SOLD HEREUNDER. CERTAIN TECHNICAL TERMS AND ACRONYMS USED IN THIS PROSPECTUS ARE DEFINED IN THE "GLOSSARY OF TERMS" BEGINNING ON PAGE 57. Larscom develops, manufactures and markets a broad range of high speed global internetworking solutions for network service providers ("NSPs") and corporate users. Larscom's products provide access to fractional T1, E1, T1/E1, frame relay, fractional T3/E3, channelized T3 services and Clear Channel ATM ("CCA") inverse multiplexing, with clear channel T3, ISDN, IMA and ATM under development. Larscom's newest families of products, the Orion 200 and Orion 4000, were designed with modular hardware and downloadable software to provide the Company's customers with the flexibility to increase network capacity and add services in a rapid and cost-effective manner. In the broadband market, for example, the Orion 4000 is unique in its ability to accommodate both the emerging cell-based ATM network connectivity and traditional circuit-based TDM connectivity within the same architecture and to accommodate bandwidth needs that range from a single T1 or E1 circuit to 155 Mbps. The proliferation of personal computers, the increased demand for local area networks ("LANs") that connect computing resources within an enterprise and the increased demand for wide area networks ("WANs") that permit interconnection of computing resources across wide geographic areas have created dramatic growth in the demand for capacity and high speed access. More recently, this demand has been further fueled by the growth in Internet usage among both individuals and businesses, as well as the emergence of more bandwidth-intensive applications such as video and imaging. As such, NSPs and corporate users require equipment that supports a broad range of services, operates reliably and consistently in all major markets across the globe and bridges the technology gap between current circuit-based TDM technology and the emerging cell-based ATM environment. Larscom addresses these needs with a broad range of products which provide affordable network access for multiple speeds and standards. The Company strives to be a global leader in providing flexible, dependable, high speed internetworking solutions that allow its customers to connect high speed applications economically across WANs and that enable NSPs to introduce new services rapidly and economically. In order to achieve this objective, the Company intends to expand relationships with major customers, to expand its customer base by broadening distribution channels and to capitalize on its innovative technology. The Company's expansion of its relationships with major customers provides it with advanced insight into the evolving needs of customers, which allows it to anticipate new technology requirements. The Company also seeks to extend its market presence domestically through the development of alternative distribution channels and to expand its international sales and support organization to complement existing and new distribution relationships. Furthermore, the Company seeks to build upon its strength in technology innovation to ensure that its products remain in the forefront of the broadband and digital access markets. The Company sells its products in the U.S. primarily through its direct sales organization and through OEMs, value added resellers ("VARs") and systems integrators. Internationally, the Company markets its products through distribution arrangements with VARs and systems integrators. The Company provides onsite services via arrangements with a number of service partners worldwide and provides technical applications assistance as well as customer and distributor product maintenance, installation and training. The Company's customers principally consist of NSPs, Fortune 500 corporations, systems integrators, VARs and federal, state and local government agencies. The Company's largest customers include MCI, IBM/Advantis, UUNET and AT&T. RELATIONSHIP WITH AXEL JOHNSON Axel Johnson currently owns 100% of the Company's outstanding Common Stock. Upon consummation of this Offering, assuming no exercise of the Underwriters' over-allotment option, Axel Johnson will own 100% of the Company's outstanding Class B Common Stock, representing 60.5% of the total outstanding Common Stock on a share-for-share basis and 85.9% of the total voting power of the outstanding Common Stock. Additionally, Axel Johnson will not own any shares of Class A Common Stock. See "Principal and Selling Stockholder." As a result of its ownership interest, Axel Johnson will be able to control the vote on most matters submitted to stockholders, including the election of directors and the approval of extraordinary corporate transactions. The Company and Axel Johnson have entered into a number of agreements for the purpose of defining their ongoing relationship. While these agreements will continue to provide the Company with certain services, the Company is only entitled to the ongoing assistance of Axel Johnson for a limited time and it may not receive such services beyond the terms of the agreements. See "Risk Factors--Control by and Relationship with Axel Johnson," "--No Recent Independent Operating History" and "Relationship Between the Company and Axel Johnson." In August 1996, the Company declared a dividend of $25.0 million to Axel Johnson, evidenced by a $25.0 million promissory note payable to Axel Johnson, bearing interest at a rate of 7.5% per annum, payable semi-annually. The principal amount of $25.0 million is repayable on August 22, 1999, or on the earliest occurrence of any of the following events: (i) the Company's total stockholders' equity equals or exceeds $40.0 million, (ii) the Company sells all or substantially all of its assets or (iii) Axel Johnson nominates less than a majority of the persons to be elected to the Company's Board of Directors. The sale of Class A Common Stock offered hereby will cause the Company's equity to exceed $40.0 million. As a result, it is anticipated that the Company will use $25.0 million of the net proceeds from the sale of the Class A Common Stock to repay the $25.0 million of indebtedness owed to Axel Johnson. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001024136_hops_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001024136_hops_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..aee69e9c1fae1dd9151e65d144f6639d4a65ac61
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+++ b/parsed_sections/prospectus_summary/1996/CIK0001024136_hops_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, INCLUDED ELSEWHERE IN THIS PROSPECTUS. ALL INFORMATION CONCERNING THE COMPANY HAS BEEN ADJUSTED TO REFLECT AND ASSUMES THE CONSUMMATION OF THE REORGANIZATION DESCRIBED UNDER "REORGANIZATION AND PRIOR S CORPORATION STATUS." AFTER GIVING EFFECT TO THE REORGANIZATION, THE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY WILL BE THE PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS PRESENTED HEREIN. THE PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS HAVE BEEN DERIVED FROM THE AUDITED HISTORICAL FINANCIAL STATEMENTS OF HOPS GRILL & BAR, INC. AND THE AUDITED HISTORICAL FINANCIAL STATEMENTS OF THE PREDECESSOR CORPORATIONS INCLUDED ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED (I) ALL FINANCIAL DATA IN THIS PROSPECTUS IS BASED UPON THE PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS AND (II) THE INFORMATION IN THIS PROSPECTUS GIVES NO EFFECT TO THE EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0001024339_credit_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001024339_credit_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..cbe64b6bbe6ac9e2b5e380563e590accbff2ce2a
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0001024339_credit_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS (I) ASSUMES THE FILING OF AN AMENDMENT TO THE ARTICLES OF INCORPORATION OF THE COMPANY PRIOR TO THE CONSUMMATION OF THE OFFERING WHICH, AMONG OTHER THINGS, WILL INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK, (II) ASSUMES THE REINCORPORATION OF THE COMPANY IN DELAWARE PRIOR TO THE CONSUMMATION OF THE OFFERING, AND (III) ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. ALL SHARE TOTALS STATED HEREIN REFLECT THE COMPANY'S 32,734-FOR-1 STOCK SPLIT EFFECTED IN OCTOBER 1996. THE COMPANY CMSI is a developer and provider of software solutions and services for automating the consumer and small business credit analysis, decisioning and funding process. Drawing upon over 10 years of experience in the credit processing industry, the Company has developed and provides open-architecture software products and services which manage volume-intensive credit operations over wide-area networks. The Company's products and services allow its customers to automate the entire credit application process by enabling the rapid transmission of credit applications to multiple funding sources, expediting credit application analysis and decisioning and facilitating compliance with federal and state regulatory requirements. These products and services are designed to enable credit originators, such as automobile dealerships and retailers, and lenders, such as banks and finance companies, to improve operating efficiencies by increasing productivity, enhance customer satisfaction by reducing turnaround time on credit decisions, and decrease portfolio risk by applying consistent underwriting standards. The Company's core product, CreditRevue, analyzes credit applications by automatically accessing third-party credit bureau reports, consulting the lending institution's internal loan guidelines and incorporating the loan "scorecards" used by lending institutions. Using CreditRevue, decision response time generally ranges from a matter of seconds for automated decisions to several minutes in cases where review by a credit analyst is required. The Company's CreditRevue customers include some of the largest financial institutions and finance companies in the United States, such as NationsBank Corp., Banc One Corp., Wells Fargo Bank and The Associates Bancorp, Inc. In addition, the Company has introduced CreditRevue to the telecommunications industry through a joint venture between AirTouch Cellular, Inc. and US West New Vector Group, Inc. To further support the needs of the lending industry, the Company developed Credit Connection, which became commercially available in July 1996. Credit Connection, a software-based service, links sources of credit origination through an online network that allows applications to be transmitted to multiple funding sources and credit decisions to be delivered back to the point of origin in a matter of minutes. The Company is introducing Credit Connection to the marketplace through the Company's sales force, the sales forces of lending institutions and various remarketers. To date, Credit Connection has generated approximately $27,000 in revenues. The Company recently entered into an agreement to form a strategic alliance with the Dealer Services Group of ADP, Inc. ("ADP") to remarket Credit Connection. This division of ADP is one of the largest providers of computing and consulting services for automobile and truck dealers worldwide. By facilitating the flow of applications to multiple funding sources through Credit Connection, and by automating the credit application analysis, decisioning and funding process through CreditRevue, the Company believes it is well positioned to capitalize on the growth in the consumer and small business credit markets. The Company's products have been designed to work together and complement each other to provide a seamless credit application process. The Company believes that its CreditRevue customer base and proposed strategic alliance with ADP will enhance its marketing efforts for the Credit Connection service. In addition, the Company believes that the implementation of Credit Connection will create new marketing opportunities for CreditRevue. The Company's objective is to be the leading provider of software solutions for automating the credit analysis, decisioning and funding process and for electronically transmitting credit related transactions between points of origination and multiple funding sources. The Company was incorporated in 1987 as a Maryland corporation and intends to reincorporate in Delaware prior to the consummation of the Offering. The Company's principal executive offices are located at 5950 Symphony Woods Road, Columbia, Maryland 21044 and its telephone number is (410) 740-1000.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0001024441_factory_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001024441_factory_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..ecb4bf60d7f394fff32d9ca5dbfcfb3fadb66c21
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0001024441_factory_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (I) ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION, (II) REFLECTS A 4.016-FOR-1 STOCK SPLIT EFFECTIVE IMMEDIATELY PRIOR TO THE CLOSING OF THIS OFFERING AND (III) REFLECTS THE CONVERSION OF ALL OUTSTANDING SHARES OF THE COMPANY'S SERIES A PREFERRED STOCK ("SERIES A PREFERRED"), SERIES B PREFERRED STOCK ("SERIES B PREFERRED"), AND SERIES C PREFERRED STOCK ("SERIES C PREFERRED"), EACH WITH A PAR VALUE OF $0.01 PER SHARE (COLLECTIVELY, THE "CONVERTIBLE PREFERRED STOCK"), INTO AN AGGREGATE OF 3,134,674 SHARES OF THE COMPANY'S COMMON STOCK, NO PAR VALUE (WHICH PAR VALUE WILL BE REDESIGNATED AS $0.01 PER SHARE IN CONNECTION WITH THIS OFFERING) (THE "COMMON STOCK"), WHICH WILL OCCUR UPON THE EFFECTIVENESS OF THE REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS IS A PART. IN THIS PROSPECTUS, WHERE A REFERENCE IS MADE TO A PARTICULAR FISCAL YEAR, IT IS A REFERENCE TO THE COMPANY'S 52-WEEK FISCAL YEAR, WHICH ENDS ON THE SATURDAY CLOSEST TO JUNE 30 OF THAT YEAR, EXCEPT FOR YEARS PRIOR TO FISCAL 1995, ALL OF WHICH ENDED ON JUNE 30. THE COMPANY Factory Card Outlet Corp. is a rapidly growing chain of company-owned superstores offering a vast assortment of party supplies, greeting cards, gift wrap and other special occasion merchandise at everyday value prices. As of November 15, 1996, the Company operated 122 stores in 14 states, primarily in the Midwest and mid-Atlantic regions of the United States. To maintain the quality and consistency of its retail presentation, the Company operates all of its stores, which comprise the largest chain of company-operated superstores within the party supply and special occasion merchandise category. The Company opened 15, 25 and 32 superstores in fiscal 1994, 1995 and 1996, respectively, and plans to open 30 to 35 superstores in fiscal 1997, including 15 opened through November 15, 1996, and at least 40 superstores in fiscal 1998. The Company's superstores provide customers with a value-oriented, "one-stop" shopping destination for party and special occasion merchandise for all major holidays and celebratory events, including birthdays, graduations, weddings, baby showers and other family, religious and special occasions. The Company's superstore prototype ranges in size from 10,000 to 12,000 square feet, with approximately 80% devoted to selling space, and is designed to provide ease of shopping within an attractive, spacious and festive environment. To enhance the look of its superstores and encourage multiple purchases, merchandise is displayed in assortments that emphasize themes and colors associated with holidays, special occasions and other seasonal events. To reinforce its emphasis on providing value, the Company since fiscal 1993 has offered multiple lines of high quality greeting cards, all at the everyday low price of 39 CENTS. According to the PARTY AND PAPER SOURCEBOOK, an industry trade publication, the United States market for party and special occasion merchandise, comprised of party supplies, greeting cards, gift wrap and related items, has estimated annual retail sales of approximately $8.8 billion. Historically, this market has been served by traditional retail channels such as card shops, mass merchandisers, discount retailers, drugstores and supermarkets, which generally offer a limited selection of party supply and special occasion products. Superstores have become the fastest growing retail format within this category. The Company believes that, through the expansion of its superstore base, it is well-positioned to capture an increasing share of this large and fragmented market and to capitalize on the increasing amount of products available within this industry. The key elements of the Company's business strategy are outlined below: EXTENSIVE MERCHANDISE OFFERING. The Company believes its everyday and seasonal merchandise offering, which includes approximately 23,000 stock keeping units ("SKUs") at its superstores, provides the solution, in a single destination, for a customer's complete product needs to create, enhance and celebrate special occasions. The Company offers a full line of party supplies in a wide variety of festive and distinctive patterns, colors and styles, including tableware, tablecovers, invitations, party favors, pinatas, banners and other decor items. The Company also offers a broad selection of high quality greeting cards for all occasions, consisting of approximately 4,000 everyday and seasonal titles. The Company carries an extensive selection of gift wrap, including a broad array of gift bags, gift boxes, ribbons, bows and related items in coordinated and complementary displays. In addition, the Company offers many other special occasion items such as balloons, stationery, gifts, novelty items and seasonal products. EVERYDAY VALUE PRICING. The Company's strategy of everyday value pricing is designed to provide customers with consistent value on all purchases. The Company typically sells its merchandise at discounts of 20% to 60% off manufacturers' suggested retail prices. In addition, the Company's superstores feature a "power aisle" offering a wide selection of opportunistic buys and manufacturers' seasonal over-runs, all priced at deep discounts and frequently changed to create continued customer interest. To build customer traffic and loyalty, the Company's high quality greeting cards are all sold for 39 CENTS each. ATTRACTIVE, SPACIOUS AND FESTIVE SUPERSTORE FORMAT. The Company creates an attractive and festive atmosphere within a spacious "easy to shop" superstore, encouraging browsing and repeat visits by customers. The Company's superstores are designed to provide a comfortable shopping experience, with bright lighting, wide carpeted aisles and fixtures that offer customers easy access to merchandise. The interiors of the Company's superstores are festively decorated with arrays of colorful merchandise to emphasize everyday and seasonal themes. The size of the Company's superstore prototype enables the Company to offer an extensive selection of merchandise and increase store-level efficiencies. TARGETED ADVERTISING. In the spring of 1996, the Company broadened its advertising program to include a Company-wide direct mail campaign designed to educate targeted consumers about the breadth and value of the Company's product offerings. The Company intends to support major holiday selling seasons with direct mail marketing and to continue radio advertising in order to complement its direct mail program and increase its name recognition within new and existing markets. DEVELOPMENT OF MANAGEMENT TEAM AND INFRASTRUCTURE. The Company has recruited a management team whose members have an average of 21 years of retail experience. The Company believes it benefits from operating its own distribution facilities, which enable it to make opportunistic purchases, import products directly and achieve operating efficiencies. In fiscal 1996, the Company completed installation of a fully integrated retail management software package that automated the areas of finance, merchandising and distribution and successfully tested a point of sale ("POS") system that is expected to be operational in all stores by the end of fiscal 1997. The Company has developed a rapid expansion plan designed to build on its position as the largest chain of company-owned superstores in the party supply and special occasion industry. The Company plans to open 30 to 35 superstores in fiscal 1997, including 15 opened through November 15, 1996, and at least 40 superstores in fiscal 1998. The Company plans to focus its expansion in existing and contiguous markets. The Company may also consider acquisitions of other retail chains in the industry. The Company's executive offices are located at 745 Birginal Drive, Bensenville, Illinois 60106-1212 and its telephone number is (630) 238-0010. The Company was incorporated in 1989 in Delaware. As used in this Prospectus, the "Company" and "Factory Card" refer to Factory Card Outlet Corp., a Delaware corporation, as well as Factory Card Outlet of America Ltd., an Illinois corporation, the Company's wholly-owned operating subsidiary. THE OFFERING <TABLE> <S> <C> <C> Common Stock offered by the Company..... 2,550,000 shares Common Stock offered by the Selling Stockholders.......................... 200,000 shares Common Stock to be outstanding after the offering.............................. 6,618,394 shares (1) Use of proceeds......................... Repayment of debt, opening new superstores and general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market Symbol................................ FCPY </TABLE> - ------------------------ (1) Excludes (i) 1,064,641 shares issuable upon the exercise of outstanding options under the Company's 1989 Stock Option Plan, with a weighted average exercise price of $2.36, (ii) 195,594 shares issuable upon exercise of outstanding warrants, with a nominal exercise price, and (iii) 191,601 shares reserved for future option grants under the Company's 1989 Stock Option Plan. The options under the Company's 1989 Stock Option Plan vest generally on an annual basis over three or four years and must be exercised within ten years from the date of grant. The warrants described above are immediately exercisable. See "Management--Incentive Stock Program--1989 Stock Option Plan." SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) <TABLE> <CAPTION> 13 WEEKS ENDED FISCAL YEAR -------------------------- ----------------------------------------------------- SEPT. 30, SEPT. 28, 1992 1993 1994 1995 1996 1995 1996 --------- --------- --------- --------- --------- ----------- ------------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales......................... $17,330 $24,333 $37,341 $63,174 $94,589 $16,817 $25,032 Gross profit...................... 6,215 9,174 14,114 23,417 35,450 5,792 8,036 Net store contribution(1)......... 1,965 3,165 4,609 7,922 11,772 995 1,345 Income (loss) from operations(2)................... 716 1,108 1,238 1,101 1,717 (1,808 ) (1,629 ) Interest expense.................. 340 311 497 411 1,529 190 597 Net income (loss)................. 368 865 449 368 70 (1,238 ) (1,291 ) Net income (loss) per common and common equivalent share......... $ 0.11 $ 0.25 $ 0.13 $ 0.08 $ 0.01 $ (0.24 ) $ (0.25 ) Weighted average common and common equivalent shares outstanding... 3,315 3,408 3,428 4,879 5,101 5,101 5,101 Supplementary net income (loss) per common and common equivalent share(3)........................ $ 0.14 $ (0.16 ) OPERATING DATA: Number of stores: Opened during period............ 5 11 15 25 32 10 5 Closed/relocated during period........................ 1 2 0 2 3 0 0 Open at end of period........... 31 40 55 78 107 88 112 Average sales per selling square foot(4)......................... $ 133 $ 130 $ 139 $ 146 $ 133 $ 28 $ 29 Comparable store sales increase(5)..................... 22.2% 9.6% 12.3% 22.2% 6.0% 7.4% 14.1% Average sales per store(4)........ $589,000 $645,000 $734,000 $941,000 $997,000 $204,000 $229,000 <CAPTION> SEPT. 28, 1996 -------------------------- ACTUAL PRO FORMA(6) ----------- ------------- <S> <C> <C> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Working capital.......................................................................... $ 30,019 $ 37,578 Total assets............................................................................. 70,570 77,591 Total debt(7)............................................................................ 18,164 300 Total stockholders' equity............................................................... 26,033 50,917 </TABLE> - ------------------------------ (1) Represents gross profit less store operating expenses, which include labor, advertising, depreciation and other store expenses. This computation excludes store preopening and general and administrative expenses. (2) Income (loss) from operations for the 13 weeks ended September 28, 1996 includes nonrecurring compensation expense of approximately $146,000 related to stock options granted to directors, one of whom is an employee. (3) Assumes the line of credit, term loan and subordinated debentures have been repaid in full as of the beginning of the period (if the balances of such debt were higher later in the period, then the higher balances were assumed to have been repaid) using proceeds from the sale of shares of Common Stock in this offering. (4) Includes only stores open during the entire period. (5) Includes stores open 13 or 14 months after their opening date. If the opening date of a store falls in the first 14 days of a period, it is included in the comparable store calculation in its 13th month of operation; otherwise, a store is included in the comparable store calculation in its 14th month of operation. (6) Adjusted to reflect the sale by the Company of the 2,550,000 shares of Common Stock offered hereby at an assumed initial public offering price of $11.00 per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds." (7) Total debt is defined as total current and long-term debt. See "Capitalization."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0001024638_kani-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001024638_kani-inc_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..130b7bf3a568ac466cf1c6ea70290451f0a9e198
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0001024638_kani-inc_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Each prospective investor is urged to read this Prospectus in its entirety. Unless otherwise indicated, all share and per share data and information contained in this Prospectus relating to the number of shares of Common Stock outstanding (i) assumes no exercise of the Underwriters' over-allotment option and (ii) does not include 140,000 shares of Common Stock reserved for issuance to the Representative upon exercise of the Representative's Warrants. THE COMPANY Kani, Inc. ("Kani" or the "Company") is a recently-formed company that has the exclusive right to market and sell products under the "Kani" brand name pursuant to a license from Carl Williams, a.k.a. Karl Kani (the "Master License"). The Company designs, develops, markets, and distributes footwear bearing the Kani brand name, and selectively sublicenses the Kani brand name to manufacturers of other products, principally apparel, which are designed by Carl Williams, a.k.a., Karl Kani ("Karl Kani"), a nationally recognized clothing designer. The Company receives income from the sale of its footwear products, and royalty income from the sale by sublicensees of apparel products bearing the Kani brand name. Prior to this offering, the Company operated as a division of Skechers U.S.A., Inc. ("Skechers"). The operations of Kani include certain ongoing operations contributed to the Company by Skechers. See "The Company." The Company's footwear lines consist of performance athletic footwear, street athletic footwear, utility/multi-purpose footwear, sandals and casual footwear and children's footwear. The Company recently refocused its footwear efforts on the athletic footwear market where the Company seeks to extend further the Kani brand name from the apparel industry into footwear. The Company's footwear is developed by its design team, manufactured by independent contract manufacturers outside the United States and marketed by the Company through salespersons and product promotions. From late 1993 to 1995 the Company built the Kani brand name by selectively sublicensing the Kani brand name for the manufacture of apparel products and focusing its efforts in the utility/multi-purpose and casual footwear market. Since July 1995, the Company has strategically refocused its footwear efforts towards the production of athletic footwear, primarily high performance basketball shoes aimed at a younger urban audience. This refocus is reflected in Kani's new performance athletic footwear line which was first marketed in early 1996 with results expected in the third quarter of 1996. In connection with its new athletic footwear products, the Company entered into a contract with John Wallace of the National Basketball Association's New York Knicks to promote the Kani brand name and it plans to introduce two signature footwear products that will be endorsed by Mr. Wallace. The Company intends to use a portion of the proceeds of this offering to secure additional athletic endorsement contracts. The Company sublicenses the Kani brand name to provide for the manufacture and distribution of various types of apparel and merchandise in the United States and foreign markets. The Company sublicenses its trademarks for the purpose of enhancing the Kani image by widening the range and distribution of Kani products without requiring the Company to make a significant capital investment or incur significant operating expenses. Generally, the Company receives an initial royalty payment when it grants a sublicense and receives monthly royalty payments based on the sublicensee's net sales of products covered by the sublicense, provided the sublicensee maintains certain minimum net sales. For the year ended December 31, 1995 and the six months ended June 30, 1996, net royalty income totaled approximately $1.3 million and $491,000, respectively. According to the United States Bureau of Economic Analysis, the 1995 domestic retail market for footwear was approximately $36 billion, which represents a 29% increase between 1985 and 1995, of which approximately $11.4 billion represented athletic footwear. Sportstyle, a sporting goods industry magazine, reported that Kani brand shoes ranked 22nd in domestic athletic footwear sales for 1995. In addition, the Company believes that the utility/multi-purpose footwear market, consisting primarily of boots, shoes and sandals for outdoor recreational activities such as hiking and casual wear, is driven by consumer demand for highly functional footwear that is rugged and durable as well as fashionable, and by consumer preferences and lifestyles that include more outdoor and recreational activities. In regards to apparel, according to the United States Bureau of Economic Analysis, from 1985 to 1995, domestic consumer spending on men's clothing increased approximately 47% with retail sales of approximately $76 billion domestically on men's clothing in 1995. The Company's management and design team consists of persons who are highly experienced in the footwear and apparel industry. The Company has successfully brought together Karl Kani with Robert Greenberg, the founder of L.A. Gear, Inc. ("L.A. Gear") and its past President and Chairman. The Company's apparel line is exclusively designed by Karl Kani and his design team, and he has approval rights of the Company's footwear design and promotion. Robert Greenberg, the Company's Chief Executive Officer, was largely responsible for L.A. Gear's growth in sales from $36 million in 1986, to over $900 million in 1990, and co-founded Skechers, together with Michael Greenberg, the Company's President. Since the inception of Skechers in 1992, the Company's management team has been responsible for Skechers' growth in sales from $10.9 million in 1993 to over $100 million in 1995. The Company believes this core group translates into an effective and efficient management and design team with proven abilities to recognize and respond to emerging consumer trends and demands. The Company's objective is to build brand name loyalty to the Kani brand name and become a leading footwear and apparel resource serving the contemporary urban market. The Company's overall strategy focuses on the enhancement of the Kani brand image and the maximization of the manufacture and sale of Kani products. To achieve its objective, the Company's strategies include (i) focusing on the athletic footwear market by developing and marketing its new line of performance athletic footwear, (ii) increasing brand name recognition and enhancing the Kani image, (iii) leveraging its management and design expertise, (iv) selectively sublicensing the Kani brand name, (v) continuously developing and introducing innovative footwear products, and (vi) expanding domestic and international distribution. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company.. 1,400,000 shares Common Stock to be Outstanding after the Offering*...................... 4,000,000 shares Use of Proceeds...................... The Company intends to use the net proceeds of this offering to advertise the Kani brand name, secure athletic endorsements of the Company's products and establish concept shops for the distribution of the Company's products, and for working capital and general corporate purposes. See "Use of Proceeds." Risk Factors......................... The shares offered hereby are speculative and involve a high degree of risk and immediate substantial dilution and should not be purchased by investors who cannot afford the loss of their entire investment. See "Risk Factors." Proposed Nasdaq National Market Symbol............................. "KANI" </TABLE> - --------------- * Does not include 400,000 shares of Common Stock reserved for issuance upon exercise of options available for grant under the Company's 1996 Stock Option, Deferred Stock and Restricted Stock Plan (the "Stock Option Plan"), none of which have been granted. SUMMARY FINANCIAL DATA (In thousands, except for per share data) The summary financial information set forth below is derived from and should be read in conjunction with the financial statements of the Company, including the notes thereto, and certain pro forma financial data of the Company, appearing elsewhere in this Prospectus. <TABLE> <CAPTION> SIX MONTHS YEAR ENDED ENDED DECEMBER 31, JUNE 30, ----------------------------- ---------------- 1993(1) 1994 1995 1995 1996 ------- ------- ------- ------ ------ <S> <C> <C> <C> <C> <C> STATEMENT OF EARNINGS: Net sales....................................... $3,356 $19,884 $18,063 $8,571 $6,774 Gross profit.................................... 1,296 7,989 4,690 2,115 1,999 Royalty income, net............................. -- 1,087 1,267 698 491 Earnings before income taxes.................... 522 3,374 762 367 180 Extraordinary item, net of taxes(2)............. -- -- 443 443 -- Net earnings.................................... 509 3,323 751 361 177 ====== ======= ======= ====== ====== SUPPLEMENTAL STATEMENT OF EARNINGS DATA: (3) Earnings before income taxes.................... $ 522 $ 3,374 $ 762 $ 367 $ 180 Income taxes.................................... 214 1,383 312 150 74 ------ ------- ------- ------ ------ Net earnings.................................... $ 308 $ 1,991 $ 450 $ 217 $ 106 ====== ======= ======= ====== ====== Net earnings per share before extraordinary item(2)....................................... $ .07 $ -- Net earnings per share.......................... 0.17 0.04 ======= ====== Weighted average number of shares outstanding(4)................................ 2,600 2,600 ======= ====== PRO FORMA STATEMENT OF EARNINGS DATA: (5) Earnings before income taxes.................... $ 237 $ 74 Income taxes.................................... 97 30 ------- ------ Net earnings.................................... $ 140 $ 44 ======= ====== Net earnings per share.......................... $ .05 $ .02 ======= ====== Weighted average number of shares outstanding(4)................................ 2,600 2,600 ======= ====== </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 -------------------------------------- PRO PRO FORMA ACTUAL FORMA(6) AS ADJUSTED(7) ------ -------- -------------- <S> <C> <C> <C> BALANCE SHEET DATA: Working capital............................................ $1,765 $1,765 $ 14,749 Total assets............................................... 5,665 5,665 18,649 Short-term borrowings...................................... 1,702 1,702 1,702 Long-term note to shareholder of Skechers.................. 2,263 -- -- Owners' equity............................................. 847 3,110 16,094 </TABLE> - --------------- (1) Reflects the period from November 1, 1993 (commencement of operations) to December 31, 1993. (2) Includes extraordinary gain of $443,000 net of income taxes of $7,000 for the year ended December 31, 1995 and the six months ended June 30, 1995, respectively, resulting from the acceleration of payment of a note. See Note 9 of Notes to Financial Statements. (3) Reflects adjustments for Federal and state income taxes as if the Company had been taxed as a "C" corporation rather than an "S" corporation. (4) For information pertaining to the weighted average number of shares outstanding, see Note 2 of Notes to Financial Statements. (5) Reflects pro forma adjustments to historical results for (i) the elimination of interest expense associated with the long term note payable to a shareholder of Skechers which note will be retained by Skechers, and (ii) the change in operating expenses associated with the allocation of certain expenses from Skechers, the costs of which will be determined under a management agreement between the Company and Skechers. See "Pro Forma Financial Data". (6) Gives effect to the Contribution Transaction as that term is defined herein. See "Risk Factors -- Recently Formed Enterprise; the Contribution Transaction" and "The Company." (7) As adjusted to give effect to the sale of the Common Stock offered by the Company hereby based upon an assumed initial public offering price of $11.00 per share. See "Use of Proceeds" and "Capitalization."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/CIK0001024645_titan_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001024645_titan_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..3d5ead32fd1a7447289c5730cc9900db228d648b
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/CIK0001024645_titan_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the detailed information and financial statements and the notes thereto appearing elsewhere in this Prospectus. The pro forma information gives effect to the reorganization of the Company, the 1995 Acquisition and the 1996 Acquisition. See "The Company." Unless otherwise indicated, the information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. Certain terms relating to the oil and gas industry are defined in "Glossary of Oil and Gas Terms." As noted in the glossary, PV-10 is calculated without giving effect to income taxes. THE COMPANY Titan is an independent energy company engaged in the exploration, development and acquisition of oil and gas properties. Since its inception in March 1995, the Company has experienced significant growth in reserves, production and cash flow by acquiring and exploiting producing properties primarily in the Permian Basin of west Texas and southeastern New Mexico. In December 1995, the Company acquired a concentrated group of Permian Basin producing oil and gas properties from a large independent company for approximately $40.6 million (the "1995 Acquisition"). On October 31, 1996, the Company acquired additional Permian Basin producing properties from a major integrated company for approximately $135.5 million (the "1996 Acquisition"). As of September 30, 1996, the Company had pro forma estimated net proved reserves of approximately 17.8 MMBbls of oil and 280.8 Bcf of natural gas, or an aggregate of 64.6 MMBOE with a PV-10 of $292.1 million. If, in calculating the PV-10, the Company's oil and gas prices at October 31, 1996 were substituted for the prices at September 30, 1996, the PV-10 would be $351.9 million. The prices of the Company's oil decreased 4% and gas increased 33% from September 30, 1996 to October 31, 1996. Approximately 62% of these reserves were classified as proved developed. The Company acquired, explored for and developed its reserves for an average reserve replacement cost of approximately $2.73 per BOE through September 30, 1996, assuming the 1996 Acquisition was consummated on September 30, 1996. Pro forma production for the nine months ended September 30, 1996 was 12,227 BOE per day, resulting in an annualized pro forma proved reserves to production ratio of 14.5 to one. The Company prefers to acquire properties over which it can exercise operating control. The Company operated 456 gross wells (389 net wells) on a pro forma basis at September 30, 1996, and these operated properties represented approximately 71% of its pro forma proved developed producing PV-10 and 83% of the Company's pro forma PV-10 attributable to proved reserves at September 30, 1996. The Company's emphasis on controlling the operation of its properties enables the Company to manage expenses, capital allocation and other aspects of development and exploration. The Company's oil and gas properties are located in 57 fields in the Permian Basin. Approximately 70% of the Company's PV-10 of total proved reserves is concentrated in 12 principal fields located in this region. The region is characterized by complex geology with numerous known producing horizons and provides significant opportunities to increase reserves, production and ultimate recoveries through development, exploratory and horizontal drilling, recompletions, secondary and tertiary recovery methods, and use of 3-D seismic and other advanced technologies. The Company believes that its personnel provide it with competitive advantages for exploiting these opportunities in the Permian Basin and other complex producing basins in North America. Members of the Company's management team have an average of 25 years experience in the oil and gas industry and have operating experience in all aspects of the industry, in particular deep well and horizontal drilling. They have formulated and supervised acquisitions, exploration projects, development drilling programs and production enhancement plans, including workovers and enhanced recovery projects. In addition, management has a significant equity investment in the Company. Giving effect to this offering and assuming the exercise by management of all of their options to acquire Common Stock, management will beneficially own an aggregate of 20% of the Company's outstanding Common Stock. BUSINESS STRATEGY The Company's strategy is to grow reserves, production and net income per share through (i) the acquisition of producing properties that provide significant development and exploratory drilling potential, (ii) the exploitation and development of its reserve base, (iii) the exploration for oil and gas reserves and (iv) the implementation of a low operating and overhead cost structure. - Acquisitions. The Company seeks to acquire oil and gas properties that provide opportunities for the addition of reserves, production and value through low risk exploitation and development, high-potential exploration and control of operations. The Company believes that these criteria can be met in the Permian Basin and in other North American basins that have had high historical cumulative production levels that represent a relatively small percentage of the recoverable in-place reserves. At September 30, 1996, the Company had acquired and developed 64.6 MMBOE of proved oil and gas reserves at an average reserve replacement cost of $2.73 per BOE, assuming the 1996 Acquisition was consummated on September 30, 1996, which compares to an average reserve replacement cost of $4.85 per BOE (for 1993 through 1995) for the 184 independent oil and gas companies included in the Arthur Andersen 1996 Oil and Gas Reserve Disclosures. - Exploitation of Reserve Base. The Company engages in horizontal and infill drilling activities, major workovers, recompletions, secondary and tertiary recovery operations, and other production enhancement techniques in order to increase reserves and production. Through 1998, subject to market conditions and drilling and operating results, the Company expects to spend approximately $22 million to drill 14 proved locations on Company-operated properties and $21 million to drill 129 unproven locations, 39 of which are on Company-operated properties and 90 of which are on Company-owned, but nonoperated, properties. - Exploration Activities. The Company seeks to apply management's extensive geological and drilling expertise and 3-D seismic technology to identify and develop exploration projects. As part of its exploration strategy, the Company attempts to reduce the costs and risks of its exploration activities by, in selected circumstances, applying 3-D seismic technology, drilling wells with multiple pay objectives in known producing areas and selling interests in its exploration prospects to industry partners. A large portion of the Company's efforts have focused on deep well opportunities in historically prolific fields. Through 1998, subject to market conditions and drilling and operating results, the Company expects to spend approximately $30 million to drill approximately 40 exploratory locations on Company-owned properties. - Low Cost Structure. The Company has implemented and plans to maintain a low overhead and operating cost structure to enhance the profitability and the exploitation potential of its properties. The Company provides incentive stock awards to its senior management team in lieu of comparatively higher salary levels in order to align management's interests with stockholders, maintain relatively low general and administrative expense and increase the amount of cash flow available for reinvestment by the Company. The Company also seeks to be an efficient operator and achieve reductions in labor and other field-level costs from those incurred by previous operators of its properties. By operating a significant portion of its daily production, the Company believes it is well positioned to control the expenses and timing of development and exploitation of such properties and to better manage such cost reduction efforts. THE OFFERING <TABLE> <S> <C> Common Stock Offered: By the Company......................................... 12,500,000 Shares By the Selling Stockholder............................. 110,000 Shares Common Stock to be outstanding after this offering....... 32,050,013 Shares(1) Use of Proceeds by the Company........................... For exploration, development and acquisition activities and other general corporate purposes. Pending use of the net proceeds in this manner, the Company intends to use the net proceeds for repayment of indebtedness incurred in connection with the 1996 Acquisition. See "Use of Proceeds." Nasdaq National Market Symbol............................ "TEXP" </TABLE> - --------------- (1) Does not include (i) 3,631,350 shares of Common Stock issuable upon exercise of outstanding employee stock options, with an exercise price of $2.08 per share, and (ii) 85,000 shares of Common Stock issuable upon exercise of outstanding employee stock options, with an exercise price equal to the Price to Public on the cover page of this Prospectus. See "Capitalization," "Management" and Note 9 of Notes to Consolidated Financial Statements. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> PERIOD ENDED NINE MONTHS ENDED DECEMBER 31, 1995 SEPTEMBER 30, 1996 -------------------------- -------------------------- PRO FORMA AS PRO FORMA AS HISTORICAL ADJUSTED(1) HISTORICAL ADJUSTED(1) ---------- ------------ ---------- ------------ <S> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues..................................... $ 985 $ 49,591 $ 10,377 $ 42,554 -------- ------- ------ ------- Expenses: Oil and gas production.................... 304 17,435 4,339 13,820 General and administrative................ 1,546 4,625 1,452 3,469 Amortization of stock option awards....... 576 576 576 576 Exploration and abandonment............... 490 490 110 110 Depletion, depreciation and amortization............................ 299 16,832 2,269 12,001 Interest.................................. 97 1,947 1,179 1,448 Other..................................... (796) (97) (336) -- -------- ------- ------ ------- Total expenses............................... 2,516 41,808 9,589 31,424 -------- ------- ------ ------- Net income (loss)............................ (1,531) 5,059 (2,210) 7,235 Net income (loss) per share.................. (.11) .17 (.12) .21 Weighted average shares outstanding.......... 14,066 29,585 18,835 34,412 CONSOLIDATED STATEMENT OF CASH FLOWS DATA: Net cash provided by (used in): Operating activities...................... $ (1,764) $ 5,653 Investing activities...................... (47,563) (12,763) Financing activities...................... 55,540 11,700 OTHER CONSOLIDATED FINANCIAL DATA: Capital expenditures......................... $ 43,811 $ 17,763 EBITDAX(2)................................... (69) $ 27,628 4,922 $ 25,265 </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1996 ------------------------- PRO FORMA AS HISTORICAL ADJUSTED(1) ---------- ------------ <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents............................................ $ 10,803 $ 2,000 Working capital...................................................... 8,760 (350) Oil and gas properties, net.......................................... 60,168 187,202 Total assets......................................................... 74,824 193,505 Total debt........................................................... 28,000 22,852 Total stockholders' equity........................................... 37,951 160,173 </TABLE> - --------------- (1) Assumes the 1995 Acquisition, the 1996 Acquisition, the Conversion (see "The Company"), this offering and the application of the proceeds therefrom had taken place on January 1, 1995 for purposes of the Consolidated Statement of Operations Data, Consolidated Statement of Cash Flows Data and Other Consolidated Financial Data and assumes the 1996 Acquisition, the Conversion, this offering and the application of the proceeds therefrom had taken place on September 30, 1996 for purposes of the Consolidated Balance Sheet Data. (2) EBITDAX is presented because of its wide acceptance as a financial indicator of a company's ability to service or incur debt. EBITDAX (as used herein) is calculated by adding interest, income taxes, depletion, depreciation and amortization, amortization of stock option awards, and exploration and abandonment costs to net income (loss). Interest includes interest expense accrued and amortization of deferred financing costs. EBITDAX should not be considered as an alternative to earnings (loss) or operating earnings (loss), as defined by generally accepted accounting principles, as an indicator of the Company's financial performance, as an alternative to cash flow, as a measure of liquidity or as being comparable to other similarly titled measures of other companies. SUMMARY RESERVE INFORMATION <TABLE> <CAPTION> DECEMBER 31, 1995 SEPTEMBER 30, 1996 -------------------------- -------------------------- HISTORICAL PRO FORMA(1) HISTORICAL PRO FORMA(1) ---------- ------------ ---------- ------------ (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> Estimated Proved Reserves(2): Oil (MBbls).................................. 6,146 16,460 6,563 17,843 Gas (MMcf)................................... 134,995 242,039 179,565 280,824 MBOE (6 Mcf per Bbl)......................... 28,645 56,800 36,491 64,647 Proved developed reserves as a percentage of proved reserves.............................. 47% 68% 42% 62% PV-10(3)....................................... $ 89,753 $198,341 $ 144,532 $292,080 Standardized Measure of Discounted Future Net Cash Flows(4)................................ $ 66,352 $176,421 $ 104,678 $229,199 </TABLE> - --------------- (1) Gives effect to the 1996 Acquisition as if it had occurred on the day indicated. (2) The reserve and present value data at December 31, 1995 have been prepared by the Company. The reserve and present value data at September 30, 1996 have been prepared by Williamson Petroleum Consultants, Inc. ("Williamson"), independent petroleum engineering consultants. For additional information relating to the Company's oil and gas reserves, see "Business and Properties -- Oil and Natural Gas Reserves" and Note 14 of the Notes to the Consolidated Financial Statements of the Company. Summaries of the October 1, 1996 reserve reports and the letter of Williamson with respect thereto are included as Appendix A to this Prospectus. (3) The present value of future net revenue attributable to the Company's reserves was prepared using prices in effect at the end of the respective periods presented, discounted at 10% per annum on a pre-tax basis. These amounts reflect the effects of the Company's hedging activities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Other Matters." (4) The Standardized Measure of Discounted Future Net Cash Flows prepared by the Company represents the present value of future net revenues after income taxes discounted at 10%. These amounts reflect the effects of the Company's hedging activities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Other Matters." SUMMARY OPERATING DATA <TABLE> <CAPTION> PERIOD ENDED NINE MONTHS DECEMBER 31, 1995 ENDED SEPTEMBER 30, 1996 --------------------------- --------------------------- HISTORICAL PRO FORMA(1) HISTORICAL PRO FORMA(1) ---------- ------------ ---------- ------------ <S> <C> <C> <C> <C> PRODUCTION: Oil (MBbls)............................... 30 2,004 388 1,311 Gas (MMcf)................................ 245 17,952 2,725 12,235 Total (MBOE).............................. 71 4,996 842 3,350 AVERAGE SALES PRICE PER UNIT(2): Oil (per Bbl)............................. $16.80 $14.23 $17.25 17.30 Gas (per Mcf)............................. .97 1.16 1.30 1.61 BOE....................................... 10.46 9.88 12.16 12.66 EXPENSES PER BOE: Production costs, including production taxes.................................. $ 4.28 $ 3.49 $ 5.15(3) $ 4.13(3) General and administrative................ 21.77 .93 1.72 1.04 Depletion, depreciation and amortization........................... 4.21 3.37 2.69 3.58 </TABLE> - --------------- (1) Gives effect to the 1995 Acquisition and the 1996 Acquisition as if those transactions had occurred on January 1, 1995. (2) Reflects results of hedging activities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Other Matters."
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the historical and pro forma combined financial statements and notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment options. Investors should carefully consider the factors set forth under the caption "Risk Factors." The Company was incorporated in October 1996. Prior to consummation of the Offerings, Bank of America National Trust and Savings Association (together with its subsidiaries, the "Bank") transferred to the Company its domestic merchant processing business and the Seafirst Bank Division of Bank of America NW, National Association ("Seafirst") transferred to the Company its merchant processing business. References in this Prospectus to operations of the Company prior to the date of transfer of such businesses to the Company are to such businesses conducted as divisions of the Bank and Seafirst. References in this Prospectus to "BankAmerica" shall be deemed to be references to BankAmerica Corporation, a bank holding company registered under the Bank Holding Company Act of 1956, as amended, and its subsidiaries and affiliates, including the Bank and Seafirst, unless the context requires otherwise. References in this Prospectus to the "Common Stock" shall be deemed to be references to both the Company's Class A Common Stock, par value $.01 per share, and the Company's Class B Common Stock, par value $.01 per share. THE COMPANY The Company provides an array of payment processing and related information products and services to merchants who accept credit, charge and debit cards as payment for goods and services throughout the United States. According to published industry sources, the Company is the fourth largest processor of merchant credit card transactions and the largest processor of debit card transactions in the United States. The Company's products and services include the processing of a wide variety of credit, charge and debit card transactions and the provision to merchants of other related information, services and product support. The Company provides its products and services to a merchant customer base in a wide variety of industries, including general retailers, restaurants and supermarkets. The Company's customers are large multi-regional chains, middle market merchants and small merchants that collectively operate from more than 135,000 locations. The Company's sales force of over 120 employees markets its products and services to merchants directly and through the BankAmerica branch network and product distribution system. In addition, the Company has grown its customer base and increased its transaction volume through the use of agent banks and independent sales organizations ("ISOs") that obtain customers on behalf of the Company. The Company continually invests in technology, research and product development and emphasizes excellent customer service in the delivery of its products and services in order to attract and retain merchant customers. The Company believes that its expense structure compares favorably to that of its competitors. The Company's annual customer retention rate has exceeded 95% in recent years. The Company has experienced substantial growth in its transaction volume, net revenue and net income during the three and three-quarter years ended September 30, 1996, principally through internally generated growth rather than through acquisitions. The number of card transactions processed by the Company increased from 201.8 million for the year ended December 31, 1993 to 319.0 million for the year ended December 31, 1995. During the same periods, the Company's net revenue and net income increased from $88.9 million and $11.5 million to $109.9 million and $20.7 million, respectively. During the nine months ended September 30, 1995 and the nine months ended September 30, 1996, the number of card transactions processed increased from 232.4 million to 270.5 million, the Company's net revenue increased from $80.6 million to $92.3 million and the Company's net income increased from $15.2 million to $18.6 million, respectively. The Company believes that its growth in recent years has been attributable in part to, and that it will continue to benefit from, its close affiliation with BankAmerica. As a result of its contractual arrangements with BankAmerica, the Company is able to utilize the Bank of America name and family of brands and directly access BankAmerica's product distribution channels and customer base in the conduct of its operations and the generation of new business. The Bank of America name and brands are widely recognized by consumers and businesses and provide the Company with substantial credibility in the merchant processing market. The Company's relationship with BankAmerica also affords it access to the marketing and sales capabilities of BankAmerica's approximately 1,997 retail banking branches in eleven states, the more than 850,000 small business and middle market customers of BankAmerica, the approximately 10.9 million BankAmerica debit card holders, the approximately 8.9 million BankAmerica credit card holders and the approximately 8.0 million consumers holding BankAmerica checking accounts at September 30, 1996. See "Risk Factors--Control by BankAmerica and Potential Conflicts of Interest" and "Relationship with BankAmerica." The Company's principal strategic objectives are: (i) to remain as one of the largest merchant processors through growth generated primarily through the Company's own sales channels (and, to the extent attractive opportunities arise, augmented through acquisitions); (ii) to continue increasing profitability through careful attention to pricing and cost controls; (iii) to provide a broad range of products that are both responsive to customer needs and supported by excellent customer service; and (iv) to maintain its high customer retention level. The central components of the Company's business strategy to achieve these objectives include: . expanding its sales resources in the markets served by the BankAmerica branch network, and in selected other markets in the United States and, to the extent possible, in Asia, while also increasing its emphasis on its agent bank and ISO relationships; . continuing to capitalize on the BankAmerica relationship by taking advantage of BankAmerica's prominent name and brand recognition, access to BankAmerica's distribution system and customer base, the competitive benefits from a higher volume of debit and credit card transactions which bypass commercial networks (and the attendant network charges) and are processed directly through BankAmerica (referred to herein as "On- Us" transactions), access to BankAmerica's research and development activities and the opportunities to bundle the Company's and BankAmerica's products; . managing its low cost structure through the introduction of new systems that will increase efficiency, the expansion of On-Us transactions and the integration of Seafirst's merchant processing business with the Bank's merchant processing business; . targeting new industries and customers, with a focus on larger "national accounts," specialty industries and government institutions; . expanding its product offerings, including product enhancements resulting from the introduction of the Company's Automated Chargeback System in 1996 and the planned introduction of its proprietary PayLink(TM) transaction processing system during the first quarter of 1997, and expansion into check authorization and recovery services; . increasing its emphasis on cross-selling other payment processing products to its existing merchant customer base (particularly including debit products and check authorization and recovery services); and . acquiring merchant portfolios and companies involved in the merchant processing industry to the extent that attractive opportunities exist. The Company was incorporated in October 1996 and combines into a single organization: (i) the Bank's primary merchant processing business, a multi- state operation based in California, and (ii) the merchant processing business of Seafirst, located principally in the state of Washington. During 1996, management of the Bank's primary merchant processing business assumed management responsibility for the Seafirst operations. During 1997, the Company expects to eliminate duplicative operations and combine these businesses where possible. Such duplicative operations consist of merchant processing systems and third party processing arrangements. The cost of eliminating such arrangements is not expected to be material. The Bank presently operates merchant processing businesses in five Asian countries: Taiwan, the Philippines, Thailand, South Korea and India. To the extent possible, the Company plans to build upon BankAmerica's initiatives in Asia. Accordingly, the Company has entered into a definitive agreement with BankAmerica to acquire the merchant processing businesses presently conducted by the Bank in the Philippines and Thailand (the "Asian Acquisitions") and to work cooperatively to allow the Company to acquire the Bank's merchant processing businesses in Taiwan and other countries in Asia. Such expansion, however, is dependent on approval in each such country of the local regulatory authorities. The Company expects to receive such decisions of the local regulatory authorities with respect to the Asian Acquisitions during the first half of 1997, although no assurance can be given that any of the regulatory approvals will be obtained or as to the timing thereof. Based on preliminary indications from the Ministry of Finance in Taiwan, approval of the transfer of the Bank's merchant processing business in Taiwan to the Company initially was regarded by the Company as being unlikely. More recent indications received on an informal basis from the Ministry of Finance are that such approval may be possible. However, a formal application has not yet been submitted and the matter remains at a preliminary stage at the date of this Prospectus. Although the Company and BankAmerica intend to pursue Taiwanese approval of such transfer, no assurances can be given that it will ever be obtained. In addition, the Company and BankAmerica have agreed to evaluate the possibility of entering into an outsourcing or other arrangement that would permit the Company to participate meaningfully in the Bank's merchant processing business in Taiwan in the event that such regulatory approval cannot be obtained. No assurances can be given, however, that any such arrangement will ultimately prove practicable. See "Risk Factors--Proposed Asian Acquisitions and Operations," "Business--Asia" and "--Regulation." Upon completion of the Offerings, BankAmerica will own 100% of the Company's outstanding Class B Common Stock, which will represent approximately 68.3% of the outstanding Common Stock of the Company (or 65.2% if the Underwriters exercise their over-allotment options in full). The Company's headquarters are located at One South Van Ness Avenue, San Francisco, California 94103, telephone (415) 241-3390. THE OFFERINGS <TABLE> <C> <S> Class A Common Stock Offered: United States Offering.......................... 11,200,000 shares International Offering.......................... 2,800,000 shares Total....................................... 14,000,000 shares(1) Common Stock to be Outstanding after the Offerings: Class A Common Stock............................ 14,000,000 shares(1)(2) Class B Common Stock............................ 30,200,000 shares(3) Total....................................... 44,200,000 shares(1)(2)(3) Voting Rights...................................... The holders of Class A Common Stock, par value $.01 per share (the "Class A Common Stock"), gener- ally have rights, includ- ing as to dividends, iden- tical to those of holders of Class B Common Stock, par value $.01 per share (the "Class B Common Stock"), except that hold- ers of Class A Common Stock are entitled to one vote per share and holders of Class B Common Stock are entitled to ten votes per share. Holders of Class A Common Stock and Class B Common Stock gen- erally vote together as a single class. See "De- scription of Capital Stock--Common Stock--Vot- ing Rights." Use of Proceeds.................................... To retire short-term debt to an affiliate and for general corporate purpos- es. See "Use of Proceeds." NYSE Symbol........................................ BPI </TABLE> - -------- (1) Does not include 2,100,000 shares of Class A Common Stock that may be sold by the Company pursuant to the Underwriters' over-allotment options. See "Underwriting." (2) Does not include options and restricted stock grants with respect to ap- proximately 321,000 shares of Class A Common Stock that have been awarded by the Company to its executive officers and nonemployee directors effec- tive upon completion of the Offerings. See "Executive Compensation." (3) Does not include an aggregate of up to 700,000 shares of Class B Common Stock issuable upon consummation of the Asian Acquisitions. The offering of 11,200,000 shares of Class A Common Stock initially being offered in the United States (the "United States Offering") and the offering of 2,800,000 shares of Class A Common Stock initially being offered outside the United States (the "International Offering") are collectively referred to herein as the "Offerings." RELATIONSHIP WITH BANKAMERICA The Company is wholly owned by the Bank and Seafirst, which are wholly owned subsidiaries of BankAmerica, a registered bank holding company. Upon completion of the Offerings, BankAmerica will own 100% of the outstanding Class B Common Stock of the Company, which will represent approximately 68.3% of the outstanding Common Stock of the Company (or 65.2% if the Underwriters' over- allotment options are exercised in full). Such economic ownership will represent approximately 95.6% of the combined voting power of the Company's outstanding Common Stock (or 94.9% if the Underwriters' over-allotment options are exercised in full). BankAmerica will also have the ability to elect all of the members of the Board of Directors of the Company and to exercise a controlling influence over the business and affairs of the Company. See "Risk Factors--Control by BankAmerica and Potential Conflicts of Interest." At September 30, 1996, BankAmerica operated 1,997 retail banking branches in the following states: California, Oregon, Nevada, Arizona, Washington, Alaska, Idaho, Texas, New Mexico, Hawaii and Illinois. In California, BankAmerica's most significant market, BankAmerica is the largest provider of retail banking services, maintaining at September 30, 1996, approximately 1,007 branches and at least one banking relationship with approximately one-half of the households. At December 31, 1995, BankAmerica was the eighth largest issuer of credit cards and the largest issuer of on-line debit cards in the United States with 8.9 million credit card holders and 10.9 million debit card holders at such date. BankAmerica is a leader in providing banking services to small business and middle market merchants (with approximately 850,000 such customers at September 30, 1996). BankAmerica conducts its wholesale commercial banking businesses throughout the United States and abroad. At September 30, 1996, BankAmerica had consolidated total assets of approximately $243.0 billion and total shareholders' equity of approximately $20.5 billion and was the third largest bank holding company in the United States, based on total assets. For the years ended December 31, 1994 and 1995 and for the nine months ended September 30, 1996, BankAmerica had consolidated total revenues of approximately $16.5 billion, $20.4 billion and $16.3 billion, respectively, and during such periods, BankAmerica had consolidated total net income of approximately $2.2 billion, $2.7 billion and $2.1 billion, respectively. The Company and BankAmerica engage in various intercompany transactions and arrangements, including the provision by BankAmerica of various services to the Company. Such services are provided pursuant to the Intercompany Agreements (as described in "Relationship with BankAmerica--Intercompany Agreements and Arrangements") which provide, among other things, for the grant to the Company of a license to use the Bank of America name and certain trademarks and servicemarks, including Bank of America(R), BankAmericard(R), VERSATEL(R) and VERSATELLER(R) (collectively, the "Marks") in connection with the Company's business. The Intercompany Agreements also provide for the provision to the Company by BankAmerica of certain product distribution services, direct access processing services, direct access marketing services, system support services, association and network sponsorship and representation in the Visa(R) and MasterCard(R) associations, telecommunications services, tax and treasury services, regulatory and compliance, legal, accounting and audit services and other miscellaneous support and administrative services. The Company and BankAmerica also have entered into agreements concerning registration rights and the allocation of tax liabilities and the leasing of certain facilities by the Company from BankAmerica. All of the Intercompany Agreements may be terminated by BankAmerica if it beneficially owns shares representing less than a majority of the voting power of the outstanding Common Stock of the Company. In connection with the Offerings, BankAmerica and the Company have also entered into a Non-Competition and Corporate Opportunities Allocation Agreement (the "Corporate Opportunities Agreement"), pursuant to which BankAmerica will not compete with the Company for a period of five years, subject to earlier termination in the event BankAmerica owns shares representing less than a majority of the voting power of the outstanding Common Stock of the Company, with respect to payment processing for merchants to the extent that such payments arise in the use of credit, charge or debit cards for the purchase of goods and services and are authorized through an electronic medium originating at the point of sale (the "Base Business") in the United States and, following an acquisition of the Bank's merchant processing business in an Asian country, the applicable foreign country, subject to certain exceptions. The Corporate Opportunities Agreement further provides that BankAmerica will have the right, as to any future business opportunities outside the scope of the Base Business, to determine the allocation thereof based solely upon BankAmerica's evaluation of what is in the best interests of the BankAmerica stockholders under the circumstances. The Company has entered into a definitive agreement with BankAmerica to acquire the merchant processing businesses presently conducted by the Bank in the Philippines and Thailand and to work cooperatively to allow the Company to acquire from the Bank in the future the Bank's merchant processing businesses in Taiwan and other countries in Asia. See "Risk Factors--Control by BankAmerica and Potential Conflicts of Interest," "--Proposed Asian Acquisitions and Operations," "Relationship with BankAmerica," "Business--Asia" and "Description of Capital Stock." SUMMARY COMBINED FINANCIAL AND OTHER DATA Set forth below are the summary combined financial and other data of the Company as of the dates and for the periods indicated. The data should be read in conjunction with the combined financial statements and notes thereto, as well as "Management's Discussion and Analysis of Financial Condition and Results of Operations," included elsewhere herein. The unaudited adjusted balance sheet information of the Company as of September 30, 1996 has been prepared to reflect the: (i) initial capitalization of the Company and its incurrence of short-term debt and (ii) completion of the Offerings. Data may not sum to the indicated totals due to rounding. <TABLE> <CAPTION> NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ----------------------------- ------------------------ 1993 1994 1995 1995 1996 --------- --------- --------- ----------- ------------ (UNAUDITED) (IN MILLIONS, EXCEPT PER SHARE AND COST PER TRANSACTION DATA) <S> <C> <C> <C> <C> <C> OPERATING DATA: Net Revenue............. $ 88.9 $ 98.1 $ 109.9 $ 80.6 $ 92.3 Operating Expense: Salaries and Employee Benefits.............. 19.0 20.5 22.3 16.4 18.6 Data Processing and Communications........ 28.0 24.6 27.8 19.6 20.5 Depreciation........... 3.7 4.4 6.3 4.6 6.2 Amortization of Intangibles........... 1.5 1.3 1.2 0.9 0.8 General and Administrative........ 9.8 10.6 12.3 10.1 11.1 Other.................. 7.6 5.2 4.7 3.2 3.5 --------- --------- --------- ---------- ---------- Total Operating Expense............... 69.5 66.6 74.7 54.7 60.6 --------- --------- --------- ---------- ---------- Income from Operations.. 19.4 31.5 35.2 26.0 31.6 Provision for Income Taxes.................. 8.0 13.0 14.6 10.7 13.1 --------- --------- --------- ---------- ---------- Net Income.............. $ 11.5 $ 18.5 $ 20.7 $ 15.2 $ 18.6 ========= ========= ========= ========== ========== Pro Forma Net Income per Share(1)............... $ 0.26 $ 0.42 $ 0.47 $ 0.34 $ 0.42 ========= ========= ========= ========== ========== OTHER DATA: Number of Credit Card Transactions Processed.............. 136.2 177.0 234.5 169.1 212.9 Number of Debit Card Transactions Processed.............. 65.6 74.6 84.5 63.3 57.6 Cost per Credit Card Transaction(2)......... $ 0.51 $ 0.38 $ 0.32 $ 0.32 $ 0.28 Credit Card Sales Volume Processed.............. $ 12,642 $ 14,903 $ 18,633 $ 13,554 $ 16,371 Debit Card Sales Volume Processed.............. 1,861 2,076 2,336 1,747 1,625 </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1996 ---------------------- ACTUAL PRO FORMA(3) ------ ------------ (UNAUDITED) <S> <C> <C> BALANCE SHEET DATA: Total Assets..................................... $135.8 $249.1 Total Liabilities................................ 32.8 32.8 Stockholders' Equity............................. 103.1(4) 216.3 </TABLE> - ------- (1) Pro forma net income per share for all historical periods has been calculated as if the Offerings had been completed on January 1, 1993, and 44,200,000 shares (30,200,000 shares of Class B Common Stock and 14,000,000 shares of Class A Common Stock) had been outstanding in all periods presented. (2) Calculated as the ratio of total operating expense to number of credit card transactions processed. (3) See "Capitalization" and "Pro Forma Combined Balance Sheet."
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+SUMMARY OF PROSPECTUS The following summary is qualified in its entirety by reference to the detailed information appearing elsewhere in this Prospectus. See the Index of Principal Definitions for the location herein of certain capitalized terms. Trust...................... WFS Financial 1996-D Owner Trust (the "Trust"). Seller..................... WFS Financial Auto Loans, Inc. (the "Seller"), a wholly owned, limited-purpose operating subsidiary of WFS Financial Inc. The principal executive offices of the Seller are located at 23 Pasteur Road, Irvine, California 92618 and its telephone number is (714) 753-3000. Prior to May 29, 1996, the Seller was known as Western Financial Auto Loans, Inc. See "The Seller." WFS........................ WFS Financial Inc ("WFS" or, in its capacity as Master Servicer, the "Master Servicer"), a majority owned, operating subsidiary of Western Financial Bank, F.S.B. (the "Bank"), a federally chartered savings association. The principal offices of WFS are located at 23 Pasteur Road, Irvine, California 92618 and its telephone number is (714) 753-3000. See "WFS." WII........................ WFS Investments, Inc. ("WII"), a California corporation and a wholly owned operating subsidiary of WFS. The principal office of WII is 23 Pasteur Road, Irvine, California 92618 and its telephone number is (714) 727-1000. See "WII." Securities Offered......... The securities offered are as follows: A. General................. The WFS Financial 1996-D Owner Trust Auto Receivable Backed Notes (the "Notes") will represent obligations of the Trust secured by the assets of the Trust (other than the Certificate Distribution Account and the Certificate Policy). The WFS Financial 1996-D Owner Trust Auto Receivable Backed Certificates (the "Certificates" and, together with the Notes, the "Securities") will represent fractional undivided interests in the Trust. The Trust will issue four Classes of Notes pursuant to an indenture to be dated as of December 1, 1996 (the "Indenture"), between the Trust and Bankers Trust Company, as trustee (the "Indenture Trustee"), as follows: (i) $115,000,000 aggregate principal amount of 5.50% Money Market Auto Receivable Backed Notes, Class A-1 (the "Class A-1 Notes" or the "Money Market Notes"), (ii) $110,000,000 aggregate principal amount of 5.80% Auto Receivable Backed Notes, Class A-2 (the "Class A-2 Notes"), (iii) $220,000,000 aggregate principal amount of 6.05% Auto Receivable Backed Notes, Class A-3 (the "Class A-3 Notes") and (iv) $50,950,000 aggregate principal amount of 6.30% Auto Receivable Backed Notes, Class A-4 (the "Class A-4 Notes"). Payments of principal and interest on the Notes will be made in accordance with the priorities set forth under "Certain Information Regarding the Securities -- Distributions on the Securities." The Trust will issue $49,050,000 aggregate principal amount of 6.40% Auto Receivable Backed Certificates (the "Certificates") pursuant to a trust agreement to be dated as of December 1, 1996 (the "Trust Agreement"), among the Seller, Financial Security Assurance Inc. ("Financial Security"), WII and Chase Manhattan Bank Delaware, as trustee (the "Owner Trustee" and, together with the Indenture Trustee, the "Trustees"). Payments in respect of the Certificates will be subordinated to payments on the Notes to the extent described herein. Each Class of Notes and the Certificates will be issued in minimum denominations of $1,000 and integral multiples of $1,000 in excess thereof. Definitive Securities will be issued only under the limited circumstances described herein. See "Certain Information Regarding the Securities -- Book-Entry Registration" and "-- Definitive Securities." B. Property of the Trust... Each Note will represent an obligation of, and each Certificate will represent a fractional undivided interest in, the Trust. The property of the Trust will primarily include (i) a pool of retail installment sales contracts and installment loans (the "Contracts") secured by the new and used automobiles and light-duty trucks financed thereby (the "Financed Vehicles"); (ii) certain monies due under the Contracts on and after December 1, 1996 (the "Cut-Off Date"); (iii) security interests in the Financed Vehicles; (iv) a financial guaranty insurance policy (the "Note Policy") to be issued by Financial Security for the exclusive benefit of Noteholders, which will unconditionally and irrevocably guarantee payment of the Scheduled Payments on each Distribution Date; (v) a financial guaranty insurance policy (the "Certificate Policy" and, together with the Note Policy, the "Policies") to be issued by Financial Security for the exclusive benefit of Certificateholders, which will unconditionally and irrevocably guarantee payment of the Guaranteed Distributions on each Distribution Date; (vi) amounts on deposit in the Collection Account, the Note Distribution Account, the Certificate Distribution Account, the Spread Account and the Holding Account, including all Eligible Investments therein and all income from the investment of funds therein and all proceeds therefrom; (vii) proceeds from claims under certain insurance policies in respect of individual Financed Vehicles or obligors under the Contracts (the "Obligors"); and (viii) certain rights under the sale and servicing agreement to be dated as of December 1, 1996 (the "Sale and Servicing Agreement"), among the Trust, the Seller and the Master Servicer. Pursuant to the Indenture, the property of the Trust (other than the Certificate Distribution Account and the Certificate Policy) will be held by the Master Servicer for the benefit of the Indenture Trustee and Financial Security on behalf of the holders of the Notes. C. Distribution Dates...... Distributions of interest and principal on the Securities will be made on January 20, April 20, July 20 and October 20 of each year (or, if any such day is not a Business Day, on the next succeeding Business Day) (each, a "Distribution Date"), commencing April 20, 1997. Payments on the Securities on each Distribution Date will be paid to the holders of record of the related Securities on the Business Day immediately preceding such Distribution Date or, in the event that Definitive Securities are issued, as of the 15th day of the month immediately preceding the month in which such Distribution Date occurs (each, a "Record Date"). A "Business Day" will be any day other than a Saturday, a Sunday or a day on which banking institutions in New York, New York, Wilmington, Delaware, or Los Angeles, California are authorized or obligated by law, executive order or government decree to be closed. To the extent not previously paid prior to such dates, the outstanding principal amount of (i) the Class A-1 Notes will be payable on January 16, 1998 (the "Class A-1 Final Distribution Date"), (ii) the Class A-2 Notes will be payable on July 20, 1999 (the "Class A-2 Final Distribution Date"), (iii) the Class A-3 Notes will be payable on July 20, 2001 (the "Class A-3 Final Distribution Date") and (iv) the Class A-4 Notes will be payable on April 20, 2003 (the "Class A-4 Final Distribution Date" and, together with the Class A-1 Final Distribution Date, the Class A-2 Final Distribution Date and the Class A-3 Final Distribution Date, the "Note Final Distribution Dates"). To the extent not previously paid in full prior to such date, the unpaid principal balance of the Certificates will be payable on April 20, 2003 (the "Certificate Final Distribution Date" and, together with the Note Final Distribution Dates, the "Final Distribution Dates"). Terms of the Notes......... The principal terms of the Notes will be as described below: A. Interest Rates.......... Interest will be borne on (i) the Class A-1 Notes at the rate of 5.50% per annum (the "Class A-1 Rate"), (ii) the Class A-2 Notes at the rate of 5.80 % per annum (the "Class A-2 Rate"), (iii) the Class A-3 Notes at the rate of 6.05% per annum (the "Class A-3 Rate") and (iv) the Class A-4 Notes at the rate of 6.30% per annum (the "Class A-4 Rate" and, together with the Class A-1 Rate, the Class A-2 Rate and the Class A-3 Rate, the "Interest Rates"). B. Interest................ Interest on the outstanding principal amount of each Class of Notes will accrue at the related Interest Rate from and including the most recent Distribution Date on which interest has been paid (or from and including the Cut-Off Date with respect to the first Distribution Date) to but excluding the current Distribution Date (each, an "Interest Period"). Interest on the Class A-1 Notes will be calculated on the basis of the actual number of days elapsed in an Interest Period and a 360 day year. Interest on the Class A-2, Class A-3 and Class A-4 Notes will be calculated on the basis of a 360-day year consisting of twelve 30-day months. Interest on the Notes for any Distribution Date due but not paid on such Distribution Date will be due on the next Distribution Date, together with, to the extent permitted by applicable law, interest on such shortfall at the related Interest Rate. See "The Notes -- Payments of Interest" and "Certain Information Regarding the Securities -- Distributions on the Securities." Notwithstanding anything to the contrary contained herein, on the Class A-1 Final Distribution Date holders of record as of the Record Date for such Distribution Date shall be entitled to receive interest on the outstanding principal amount of the Class A-1 Notes at the Class A-1 Rate for the period from and including the most recent Distribution Date on which interest has been paid to but excluding the Class A-1 Final Distribution Date (the "Final Class A-1 Interest Period") (together with interest due but not paid on prior Distribution Dates and, to the extent permitted by law, interest on such amount at the Class A-1 Rate) plus the unpaid principal amount of the Class A-1 Notes. Interest payable on the Class A-1 Notes on the Class A-1 Final Distribution Date will be calculated on the basis of a 360-day year and the actual number of days elapsed in the Final Class A-1 Interest Period. C. Principal............... Principal of the Notes will be payable on each Distribution Date in an amount generally equal to the Note Principal Distributable Amount for such Distribution Date, calculated as described under "Certain Information Regarding the Securities -- Distributions on the Securities -- Deposits to the Distribution Accounts; Priority of Payments." The Note Principal Distributable Amount will include an amount equal to the Accelerated Principal Distributable Amount for such Distribution Date. On each Distribution Date, the Note Principal Distributable Amount will be applied in the following priority: first to reduce the principal amount of the Money Market Notes; second, after the principal amount of the Money Market Notes has been reduced to zero, to reduce the principal amount of the Class A-2 Notes; third, after the principal amount of the Class A-2 Notes has been reduced to zero, to reduce the principal amount of the Class A-3 Notes; and fourth, after the principal amount of the Class A-3 Notes has been reduced to zero, to reduce the principal amount of the Class A-4 Notes. Notwithstanding the foregoing, if the principal amount of a Class of Notes has not been paid in full prior to its Note Final Distribution Date, the Note Principal Distributable Amount for such Note Final Distribution Date will include an amount sufficient to reduce the unpaid principal amount of such Class of Notes to zero on such Note Final Distribution Date. See "The Notes -- Payments of Principal" and "Certain Information Regarding the Securities -- Distributions on the Securities -- Deposits to the Distribution Accounts; Priority of Payments." D. Optional Redemption..... In the event of an Optional Purchase, each Class of outstanding Notes will be redeemed in whole, but not in part, at a redemption price equal to the unpaid principal amount of such Class of Notes plus accrued interest thereon at the related Interest Rate. See "The Notes -- Optional Redemption." E. Mandatory Redemption.... Under certain conditions, the Notes may be accelerated upon the occurrence of an Event of Default under the Indenture. So long as no Insurer Default shall have occurred and be continuing, under certain circumstances Financial Security will have the right (in addition to its obligation to make Scheduled Payments on the Notes in accordance with the terms of the Note Policy) but not the obligation, to elect to accelerate the principal of the Notes and to cause the Master Servicer or the Trustee to sell or otherwise liquidate the property of the Trust and to deliver the proceeds to the Indenture Trustee for distribution in accordance with the terms of the Indenture. See "The Notes -- Events of Default." Terms of the Certificates............... The principal terms of the Certificates will be as described below: A. Interest................ On each Distribution Date, the Owner Trustee or any paying agent as the Owner Trustee may designate from time to time (the "Paying Agent") will distribute pro rata to Certificateholders of record as of the related Record Date accrued interest at the rate of 6.40% per annum (the "Pass-Through Rate") on the Certificate Balance as of the immediately preceding Distribution Date (after giving effect to distributions of principal to be made on such immediately preceding Distribution Date) or, in the case of the first Distribution Date, the Original Certificate Balance. Interest in respect of a Distribution Date will accrue from and including the Cut-Off Date (in the case of the first Distribution Date), or from and including the most recent Distribution Date on which interest has been paid, to but excluding the current Distribution Date. Interest on the Certificates for any Distribution Date due but not paid on such Distribution Date will be due on the next Distribution Date, together with, to the extent permitted by applicable law, interest on such shortfall at the Pass-Through Rate. See "The Certificates -- Distributions of Interest" and "Certain Information Regarding the Securities -- Distributions on the Securities." The "Certificate Balance" will equal $49,050,000 (the "Original Certificate Balance") on the date of initial issuance of the Certificates (the "Closing Date") and on any date thereafter will equal the Original Certificate Balance reduced by all distributions of principal previously made in respect of the Certificates. Distributions on the Certificates will be subordinated to payments of interest and principal on the Notes as described under "The Certificates" and "Certain Information Regarding the Securities -- Distributions on the Securities." B. Principal............... No principal will be paid on the Certificates until the Distribution Date on which the principal amount of the Class A-1, Class A-2 and Class A-3 Notes has been reduced to zero. On such Distribution Date and each Distribution Date thereafter, principal of the Certificates will be payable in an amount equal to the Certificate Principal Distributable Amount for such Distribution Date, calculated as described under "Certain Information Regarding the Securities -- Distributions on the Securities -- Deposits to the Distribution Accounts; Priority of Payments." On each Distribution Date on or after the Distribution Date on which the Class A-4 Notes have been paid in full, any Accelerated Principal Distributable Amount will be included in the Certificate Principal Distributable Amount. If not paid in full prior to the Certificate Final Distribution Date, the remaining Certificate Balance, if any, will be payable on that date. See "The Certificates -- Distributions of Principal." C. Optional Prepayment..... In the event of an Optional Purchase, the Certificates will be repaid in whole, but not in part, at a repayment price equal to the Certificate Balance plus accrued interest thereon at the Pass-Through Rate. See "The Certificates -- Optional Prepayment." Security for the Securities................. The principal security for the Securities will be as described below: A. The Contracts........... The Contracts will consist of retail installment sales contracts and installment loans, secured by liens on the Financed Vehicles, purchased from WFS by the Seller and from the Seller by the Trust, including the right to receive the payments thereunder on and after the Cut-Off Date. The Seller will be required to repurchase Contracts under certain circumstances if certain representations and warranties made by the Seller are incorrect in a manner that materially and adversely affects the Securityholders, the Indenture Trustee, the Owner Trustee or Financial Security. The Contracts were purchased from new and used car dealers or originated directly from consumers by WFS. The Contracts were originated in California and 29 other states by new and used car dealers not affiliated with WFS, except for a limited number of Contracts originated directly from consumers by WFS. The Contracts will be selected by WFS from its portfolio of retail installment sales contracts and installment loans based upon the criteria to be specified in the Sale and Servicing Agreement. As of the Cut-Off Date, the Aggregate Scheduled Balance will be $545,000,000 (the "Cut-Off Date Aggregate Scheduled Balance") and the Contracts will have an expected weighted average annual percentage rate of approximately 15.83% and an expected weighted average remaining maturity of approximately 56 months. See "The Contracts Pool." Approximately 47.9% of the aggregate principal amount of the Contracts will be Rule of 78's Contracts and approximately 52.1% will be Simple Interest Contracts, based upon the anticipated Scheduled Balances of the Contracts as of the Cut-Off Date. All net collections received by the Master Servicer on or in respect of the Contracts, any Advances made by the Master Servicer and all amounts paid under the Policies will be deposited in or credited to the Collection Account or, in certain limited instances, the Holding Account. On each Distribution Date, the Indenture Trustee will distribute the amounts on deposit in the Collection Account with respect to such Distribution Date to the Note Distribution Account and, to the extent applicable, the Certificate Distribution Account. All payments to Noteholders will be made from the Note Distribution Account and to Certificateholders from the Certificate Distribution Account. See "Certain Information Regarding the Securities -- The Accounts and Eligible Investments" and "-- Distributions on the Securities." B. The Spread Account...... The Securityholders will be afforded certain limited protection, to the extent described herein, against losses in respect of the Contracts by the establishment of a segregated trust account in the name of the Indenture Trustee for the benefit of the Securityholders (the "Spread Account"). The Spread Account will be part of the Trust. The Spread Account will be created with an initial deposit by the Seller of $16,350,000 (the "Spread Account Initial Deposit"). The funds in the Spread Account will thereafter be supplemented on each Distribution Date by the deposit of any Excess Amounts (as defined below), until the cash on deposit in the Spread Account is at least equal to the Minimum Funded Amount and the sum of the Funded Amount and the Overcollateralization Amount is at least equal to the Specified Spread Account Balance. "Excess Amounts" in respect of a Distribution Date will be calculated as described under "Certain Information Regarding the Securities -- Distributions on the Securities -- Deposits to the Distribution Accounts; Priority of Payments" and will equal the funds on deposit in the Collection Account in respect of such Distribution Date, after giving effect to all distributions required to be made on such Distribution Date. The Specified Spread Account Balance, the Minimum Funded Amount and the Overcollateralization Amount will be calculated as described under "Certain Information Regarding the Securities -- Payment Priorities of the Notes and the Certificates; The Spread Account -- Calculation of Specified Spread Account Balance." On each Distribution Date, funds will be withdrawn from the Spread Account for distribution to Securityholders to cover any shortfalls in interest and principal required to be paid on the Securities (before giving effect to any claim under the Policies). If on the last day of any month (each, a "Calculation Day") or on any Distribution Date the Spread Account is fully funded, any excess cash on deposit therein will be released therefrom and upon such distribution Securityholders will have no further rights in, or claims to, such amounts. See "Certain Information Regarding the Securities -- Withdrawals from the Spread Account." C. The Policies............ On the Closing Date, Financial Security will issue the Note Policy to the Indenture Trustee and the Certificate Policy to the Owner Trustee pursuant to the insurance, indemnity and pledge agreement to be dated as of December 1, 1996 (the "Insurance Agreement"), among Financial Security, the Trust, the Seller, Bankers Trust Company as Collateral Agent for Financial Security, WII and WFS. Pursuant to the Note Policy, Financial Security will unconditionally and irrevocably guarantee to the Noteholders payment of the Scheduled Payments for each Distribution Date. Pursuant to the Certificate Policy, Financial Security will unconditionally and irrevocably guarantee to the Certificateholders payment of the Guaranteed Distributions for each Distribution Date. See "The Policies" and "Financial Security Assurance Inc." Optional Purchase.......... The Seller may, but will not be obligated to, purchase all of the Contracts in the Trust, and thereby cause early retirement of all outstanding Securities, on any Distribution Date as of which (i) the Aggregate Scheduled Balance is 10% or less of the Cut-Off Date Aggregate Scheduled Balance and (ii) the aggregate outstanding principal amount of the Securities is 5% or less of the initial aggregate amount of the Securities (an "Optional Purchase"). See "Certain Information Regarding the Securities -- Termination." The Master Servicer........ WFS, as Master Servicer, will be obligated pursuant to the Sale and Servicing Agreement, subject to the limitations set forth therein, to service the Contracts and to repurchase certain of the Contracts under certain circumstances if certain representations and warranties made by WFS are incorrect or if WFS, as Master Servicer, breaches certain of its servicing obligations under the Sale and Servicing Agreement, in either case in a manner that materially and adversely affects such Contracts. See "The Master Servicer." Ratings.................... It is a condition of issuance that the Class A-1 Notes be rated A-1+ by Standard & Poor's Ratings Services, a division of McGraw-Hill, Inc. ("S&P") and P-1 by Moody's Investors Service, Inc. ("Moody's" and, together with S&P, the "Rating Agencies"), and the Class A-2, Class A-3 and Class A-4 Notes and the Certificates each be rated AAA by S&P and Aaa by Moody's. See "Ratings of the Securities." Tax Status................. In the opinion of special tax counsel to the Seller, for both federal and California income tax purposes, the Notes will be characterized as debt, and the Trust will not be characterized as an association (or a publicly traded partnership) taxable as a corporation. Each Noteholder, by the acceptance of a Note, will agree to treat the Notes as indebtedness, and each Certificateholder, by the acceptance of a Certificate, will agree to treat the Trust as a partnership in which the Certificateholders are partners for federal income tax purposes. See "Certain Federal Income Tax Consequences" and "Certain California Income Tax Consequences." ERISA Considerations....... Subject to the considerations discussed under "ERISA Considerations," the Notes will be eligible for purchase by employee benefit plans that are subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Since the Certificates will be subordinated to the Notes to the extent described herein, employee benefit plans subject to ERISA will not be eligible to purchase the Certificates. Any benefit plan fiduciary considering purchase of the Securities should, among other things, consult with its counsel in determining whether all required conditions have been satisfied. See "ERISA Considerations." Legal Investment........... The Money Market Notes will be eligible securities for purchase by money market funds under Rule 2a-7 under the Investment Company Act of 1940, as amended.
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+PROSPECTUS SUMMARY Simultaneously with, and as a condition to the closing of the offering made by this Prospectus (the "Offering"), ExpressPoint Technology Services, Inc. will acquire two technology support service companies, Amcom Corporation ("Amcom") and Delta Parts, Inc. ("Delta Parts," together, the "Founding Companies") in exchange for shares of its Common Stock and cash (the "Acquisition"). Unless otherwise indicated, all references herein to ExpressPoint Technology Services, Inc. or ExpressPoint shall mean ExpressPoint Technology Services, Inc. prior to the effectiveness of the Acquisition, and references herein to the Company shall include the Founding Companies. See "Organization." The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, all share, per share and financial information set forth herein assumes (i) adjustment to give effect to the Acquisition, (ii) an initial public offering price of $9.00 and (iii) no exercise of the Underwriters' over-allotment option. This Prospectus includes forward-looking statements that involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Certain factors that might cause such differences include, but are not limited to, those discussed in the section entitled "Risk Factors." The Company ExpressPoint Technology Services, Inc. has agreed to acquire Amcom and Delta Parts, two established, independent technology support service companies, in order to create a platform from which to launch the development of an international company capable of providing comprehensive, cost-effective technology support services to keep computers, point of sale ("POS") systems, banking equipment and computer networks operational. The Company's services consist of depot repair and refurbishment (as opposed to on-site repair), spare parts sales, systems integration and sales and inventory and logistics management. The Company also markets primarily refurbished computer, banking and POS systems, as well as its proprietary ExpressPoint(R) POS software system. The Company primarily utilizes used parts for its sales, repair and systems integration businesses, which allows it to offer its customers a less costly solution to their maintenance requirements. Although ExpressPoint has conducted no operations to date, it has entered into agreements to acquire Amcom and Delta Parts simultaneously with the closing of this Offering. After the Acquisition, management believes the Company will be well-positioned to become one of the leading technology support service companies in the United States. Pro forma combined revenues and net income for the fiscal year ended December 31, 1995 were $27.0 million and $1.1 million, respectively. For the six months ended June 30, 1996, pro forma combined revenues and net income were $18.6 million and $1.1 million, respectively, as compared to $11.6 and $0.2 million, respectively, for the six months ended June 30, 1995. The Company believes that there is a strong trend in the technology support service industry towards outsourcing. Equipment manufacturers, third party maintenance organizations, resellers/dealers and self- maintainers, all of which traditionally performed their repair and maintenance work in-house, are increasingly outsourcing their repair needs, spare parts stocking and inventory management to what is referred to in the industry as "fourth party" service providers such as the Company. Management believes equipment manufacturers want to focus their resources on their primary business of selling new systems, responding to the accelerated pace of product lifecycles and reducing their costs and capital requirements. Management further believes that equipment manufacturers are finding it increasingly difficult to manage the repair and inventory needs of today's multivendor systems--systems which integrate components from several different manufacturers. Further, these organizations are looking to reduce the size of their vendor base and rely on a small number of vendors to concentrate their repair, logistic and other value-added services. These trends have created the opportunity for a fourth party service provider, such as the Company, to develop into a major company serving customers throughout the United States and internationally. According to Dataquest, the total size of the U.S. fourth party service market in 1994 was estimated to be $1.1 billion and is projected to be $1.9 billion in 1999, representing a compounded annual growth rate of 13.1%. The Company plans to grow through both internal growth and acquisitions. The Company believes that it has the financial strength and stability and the necessary infrastructure, personnel and systems to capitalize on current industry trends. To date, the Company has been successful in establishing strong relationships with many leading corporations, including equipment manufacturers such as NCR Corporation, formerly known as AT&T Global Information Solutions ("NCR"), Digital Equipment Corporation ("DEC"), and Hewlett-Packard Company ("Hewlett-Packard"); resellers/dealers such as MicroAge, Inc. ("MicroAge") and Intelligent Electronics, Inc. ("Intelligent Electronics"); third party maintenance organizations such as Electronic Data Systems Corp. ("EDS"), DecisionOne Corporation ("DecisionOne") and Siemens-Nixdorf Information Systems, Inc. ("Siemens-Nixdorf"); and self-maintainers such as The Von's Companies ("Von's"), Melville Corporation ("Melville"), Key Bank USA, NA ("Key Bank") and Federal Express Corporation ("FedEx"). The Company believes an acquisition strategy is timely because, according to an industry study commissioned on behalf of the Company, the technology support service industry is highly fragmented with over 2,000 companies in the United States, many of which have annual sales of less than $5.0 million. The Company plans to implement its acquisition program by focusing on companies with complementary services and market niches. It believes it will be an attractive acquisition partner to other companies due to its (i) strategy for creating a national company, (ii) increased financial strength and visibility as a public company and (iii) experience in developing and maintaining strong customer relationships. The Company believes its overall strengths include its (i) reputation as a reliable provider of technology support services, (ii) broad based technical knowledge and expertise, (iii) well-managed inventory systems and extensive database for sourcing parts, which allow for rapid turnaround on customer orders, (iv) ability to avoid the costly overhead involved with "feet on the street" service--repair work done at customer sites and (v) emphasis on developing a long-term relationship with customers, by working with them to determine, plan for and meet their needs. In the near term, the Company will maintain its two principal executive offices at 6205 Bury Drive, Eden Prairie, Minnesota 55346, telephone number (612) 949-9400 and 11401 Rupp Drive, Burnsville, Minnesota 55337, telephone number (612) 944-9448. The Offering <TABLE> <S> <C> Common Stock Offered by the Company 2,000,000 shares Common Stock to be Outstanding After the Offering 4,584,249 shares (1) Use of Proceeds For payment of the cash portion of the purchase price for the Acquisition, including expenses associated therewith, repayment of certain notes issued to Amcom employees in September 1996 and general corporate purposes, including potential future acquisitions. See "Use of Proceeds." Proposed Nasdaq National Market Symbol "EXPT" </TABLE> ________ (1) Includes (i) 2,584,149 shares of Common Stock to be issued to Amcom and Delta Parts shareholders in connection with the Acquisition, but excludes (ii) options to purchase 879,892 shares of Common Stock at an exercise price of $2.00 per share, (iii) options to purchase 25,000 shares of Common Stock at an exercise price of $6.75 per share, (iv) options to purchase 334,532 shares of Common Stock at exercise prices ranging from $0.01 to $6.75 per share, (v) warrants to purchase 222,926 shares of Common Stock at exercise prices ranging from $0.7092 to $5.00 per share and (vi) an aggregate of 925,000 shares of Common Stock reserved for issuance under the Company's 1996 Stock Option Plan, Non-Employee Director Stock Option Plan and Employee Stock Purchase Plan (collectively, the "Plans"). See "Management--Stock Option Plans." Summary Pro Forma Combined Financial Data ExpressPoint will acquire the Founding Companies simultaneously with and as a condition to the consummation of the Offering. The Acquisition will be recorded using the purchase method of accounting with Delta Parts treated as the acquirer in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 97. See "Organization," "Certain Transactions--Organization of the Company," Unaudited Pro Forma Combined Financial Statements and Notes to Pro Forma Combined Financial Statements. <TABLE> <CAPTION> Pro Forma ---------------------------------------------- Year Ended Six Months Ended June 30, December 31, ------------------------------ Statements of Operations Data: (1) 1995 1995 1996 --------------- -------------- --------------- <S> <C> <C> <C> Revenues $27,026,836 $11,631,484 $18,579,952 Cost of sales 15,537,678 6,803,157 11,072,758 --------------- -------------- --------------- Gross profit 11,489,158 4,828,327 7,507,194 Operating expenses: Selling, general and administrative (2)(3)(4) 9,118,749 4,307,986 5,405,975 Goodwill amortization (5) 368,941 184,470 184,470 --------------- -------------- --------------- Operating income 2,001,468 335,871 1,916,749 Nonoperating expenses: Interest expense, net (6) 179,497 67,430 102,426 Other expense 680 181 509 --------------- -------------- --------------- Pro forma income before income tax provision 1,821,291 268,260 1,813,814 Pro forma income tax provision (7) 692,091 101,939 689,249 --------------- -------------- --------------- Pro forma net income $ 1,129,200 $ 166,321 $ 1,124,565 =============== ============== =============== Pro forma net income per share $ .30 $ .04 $ .30 =============== ============== =============== Shares used in computing pro forma net income per share (8) 3,706,960 3,706,960 3,706,960 =============== ============== =============== </TABLE> <TABLE> <CAPTION> As of June 30, 1996 Pro Forma Selected Balance Sheet Data: (1) Actual Pro Forma As Adjusted (9) -------------- ------------- ---------------- <S> <C> <C> <C> Cash $ 100 $ 296,712 $ 9,156,712 Working capital 100 6,117,933 14,977,933 Total assets 100 22,102,957 30,962,957 Short-term debt -- 1,144,102 1,144,102 Long-term debt, net of current portion -- 435,852 435,852 Total stockholders' equity 100 17,603,163 26,463,163 </TABLE> _________ (1) Assumes that the closing of the Acquisition had occurred as of January 1, 1995, in the case of the pro forma statements of operations data, and as of June 30, 1996, in the case of the pro forma balance sheet data. The unaudited summary pro forma combined financial data are based upon preliminary estimates, available information and certain assumptions that management deems appropriate. The unaudited summary pro forma combined financial data presented herein are not necessarily indicative of the results the Company would have obtained had such events occurred at the beginning of the period or of the future results of the Company. The unaudited summary pro forma combined financial data should be read in conjunction with the other financial data and notes thereto included elsewhere in this Prospectus. The aggregate consideration for the Acquisition is $16.7 million, which consists of (i) $6.3 million of cash to be paid to the Amcom shareholders upon the consummation of the Offering, (ii) $10.0 million estimated fair value of 1,108,647 shares of Common Stock to be issued to the Amcom shareholders and (iii) $0.5 million of the Acquisition transaction costs. (2) Includes a pro forma adjustment to reflect adjustment to compensation expense of the officers of Amcom based upon employment agreements entered into in September 1996 in contemplation of the Acquisition pursuant to which the ExpressPoint Notes, as set forth and defined in footnote 9, were issued. Does not reflect costs (which will be significant) related to other employees of the Company or corporate expenses related to being a public company. See "Management's Discussion and Analysis of Pro Forma Financial Condition and Pro Forma Results of Operations," "Management -- Executive Compensation," "--Employment Agreements" and Notes to Pro Forma Combined Financial Statements. (3) Includes a pro forma adjustment to eliminate compensation expense associated with Amcom's contributions to an Employee Stock Ownership Plan (the "Amcom ESOP") which will be terminated in connection with the Acquisition. (4) Includes a pro forma adjustment to reflect an excise tax liability of Amcom resulting from the termination of the Amcom ESOP. (5) Includes a pro forma adjustment to reflect the amortization expense on the goodwill recorded in connection with the Acquisition. (6) Includes a pro forma adjustment to reflect the elimination of interest expense attributable to certain Delta Parts Convertible Notes which will be converted into Common Stock in connection with the Acquisition. (7) Includes a pro forma adjustment to reflect the provision for income taxes on the unaudited pro forma combined statements of operations at an effective tax rate of 38% for all periods presented. (8) Computed on a basis described in Note 5 of Notes to Pro Forma Combined Financial Statements. (9) Adjusted to give effect to the net proceeds of the Offering and the anticipated use of the net proceeds to pay $6.3 million of cash consideration to the Amcom shareholders and $350,000 of the Acquisition transaction costs. Does not give effect to $2,316,800 of demand notes issued to certain employees of Amcom in September 1996, which are anticipated to be paid upon completion of the Offering (the "ExpressPoint Notes").
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001025557_focus_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001025557_focus_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Each prospective investor is urged to read this Prospectus in its entirety. Unless otherwise indicated, all per share data and information in this Prospectus relating to the number of shares of Common Stock outstanding have been adjusted to give effect to (i) a 10,150-for-1 stock split in October 1996 and, upon consummation of this offering (ii) the issuance of 223,464 shares of Common Stock upon conversion of the Brightpoint Note and (iii) the repurchase by the Company of 36,000 shares of Common Stock from Ben Neman, Chairman, President and Chief Executive Officer of the Company, in consideration of the cancellation of $180,000 of indebtedness owed by Mr. Neman to the Company (the "Stock Repurchase"), and assumes no exercise of the Underwriters' over-allotment option to purchase an additional 300,000 shares of Common Stock from the Company. See "Underwriting." THE COMPANY Intellicell Corp. (the "Company") is engaged in the wholesale distribution of wireless communications products. The Company offers cellular telephones and accessories from leading manufacturers featuring brand names such as AT&T, Audiovox, Ericsson, Mitsubishi, Motorola, Nokia, NEC, OKI, Panasonic, Pioneer and Sony. The Company also offers a proprietary line of accessory products under the Intellicell(R) name. The Company has developed a customer base of more than 1,600 wholesalers, carriers, agents, dealers and retailers. During the past two years, the Company has grown rapidly, with revenues increasing from approximately $49,664,000 for the nine months ended September 30, 1995 to approximately $65,989,000 for the nine months ended September 30, 1996, and with pro forma net income increasing from approximately $99,000 to approximately $497,000 during the same period. The Company's objective is to capitalize on wireless communications opportunities in markets in which the Company believes it can achieve significant growth. The Company intends to implement its highly focused business strategy by (i) offering a broad product selection, (ii) emphasizing its accessory product line, (iii) targeting emerging foreign markets, (iv) establishing strategic relationships and (v) expanding through acquisitions. The Company believes that the diversity of its brand name product lines, its proprietary accessory products and its distribution capabilities position it to capitalize on the rapidly expanding markets for wireless communication products and services. The markets for wireless products and services have grown substantially in recent years as advances in system technology and wireless communications equipment, combined with lower retail prices, have resulted in increased demand for wireless products and services and increasing use of such products and services primarily for personal rather than business reasons. According to industry sources, the number of cellular subscribers in the United States has increased from approximately 3.5 million in 1990 to more than 37.6 million in 1996, growing by more than 3.8 million in the first six months of 1996 alone. The number of cellular and personal communication services ("PCS") subscribers in the United States is projected to reach approximately 89.3 million by the year 2000. The number of worldwide cellular subscribers has also increased and many countries with emerging economies, including countries in Latin America, represent fast-growing markets. These markets present attractive expansion opportunities, and management is focused on maximizing product penetration in new and existing geographic markets in the United States and abroad. Industry sources indicate that the emergence of new wireless communications technologies and services, such as digital cellular technology, PCS and satellite communications systems, will increase demand for wireless communications products and services upon widespread commercial introduction. Management believes that the emergence of new wireless technologies will result in the proliferation of new wireless voice and data products and a significant product replacement cycle. The Company currently distributes cellular products for several of the manufacturers expected to compete in new and emerging wireless communications markets, and believes that its relationships with equipment manufacturers, wholesalers and other potential providers of emerging wireless products will position it to capitalize on evolving industry standards and trends. The Intellicell line of accessory products consists principally of batteries, battery eliminators, conditioner and plug-in chargers, cases, antennas and "hands-free" kits. Management plans to focus the Company's marketing efforts on increasing sales and brand name recognition of higher-margin, proprietary accessory products. The Company is targeting emerging foreign markets in which low market penetration, economic growth, high population density and the limited availability and quality of land line service create the potential for significant growth opportunities. The Company also intends to pursue opportunities by seeking to enter into marketing and distribution alliances and by making acquisitions of businesses which the Company believes will enhance its prospects. In October 1996, the Company entered into a non-exclusive agreement with Brightpoint, a leading worldwide distributor of wireless communications products, pursuant to which the Company will market its proprietary line of accessory products through Brightpoint. Although the Company has identified potential areas for expansion, there can be no assurance that the Company will be able to successfully expand its operations. The Company was organized under the laws of the State of California in March 1994 under the name Cellular Telecom Corporation, as successor to the wholesale distribution business of Cellular Telecom Partnership (the "Partnership"), a general partnership organized in 1991. The Company intends to reincorporate under the laws of the State of Delaware and change its name to Intellicell Corp. on or prior to the date of this Prospectus. The Company's principal executive offices are located at 6929 Hayvenhurst Avenue, Van Nuys, California 91406, and its telephone number is (818) 906-7777. Unless otherwise indicated, all references in this Prospectus to the Company include the wholesale operations of the Partnership prior to March 1994. See "Certain Transactions." THE OFFERING Common Stock offered........... 2,000,000 shares Common Stock to be outstanding after the offering(1)........ 4,217,464 shares Use of Proceeds................ The Company intends to use the net proceeds of this offering in connection with its proposed expansion, including to finance increased levels of inventories and accounts receivable; repayment of indebtedness; and the balance for working capital and general corporate purposes. See "Use of Proceeds." Risk Factors................... The securities offered hereby involve a high degree of risk and immediate substantial dilution. See "Risk Factors" and "Dilution." Proposed Nasdaq symbol......... FONE - ------ (1) Includes 223,464 shares issuable upon the conversion of the Brightpoint Note upon consummation of this offering. Does not include (i) 200,000 shares of Common Stock reserved for issuance upon exercise of the Representative's Warrants; (ii) an aggregate of 245,250 shares of Common Stock reserved for issuance upon exercise of outstanding options under the Company's Stock Option Plan (the "Plan"); (iii) an aggregate of 139,750 shares of Common Stock reserved for issuance upon exercise of options available for future grant under the Plan; (iv) 65,000 shares issuable upon exercise of options granted outside of the Plan; (v) 36,000 shares of Common Stock to be repurchased by the Company pursuant to the Stock Repurchase upon consummation of this offering; and (vi) 15,000 shares of Common Stock reserved for issuance upon exercise of warrants (the "CIT Warrants") to be issued to The CIT Group/Credit Finance, Inc. ("CIT") upon consummation of this offering. See "Management-- Stock Option Plan," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Certain Transactions" and "Underwriting." SUMMARY FINANCIAL INFORMATION (in thousands, except share and per share data) The summary financial information set forth below is derived from the financial statements appearing elsewhere in this Prospectus. Such information should be read in conjunction with such financial statements, including the notes thereto. STATEMENT OF INCOME DATA: <TABLE> <CAPTION> Nine Months Year Ended December 31, Ended September 30, ---------------------------------------- -------------------------- 1993 1994 1995 1995 1996 ----------- ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> <C> Net sales .............................. $ 20,496 $ 56,447 $ 69,850 $ 49,664 $ 65,989 Net income (loss) ...................... (22) 437 402 171 833 Pro forma net income(loss)(1) .......... (19) 257 236 99 497 Pro forma net income (loss) per share(1) (.01) .13 .12 .05 .24 Weighted average number of common shares outstanding ........................... 2,030,000 2,030,000 2,030,000 2,030,000 2,030,000 </TABLE> BALANCE SHEET DATA: <TABLE> <CAPTION> September 30, 1996 -------------------------------------------- Actual Pro Forma(2) As Adjusted(3) -------- ------------ -------------- <S> <C> <C> <C> Working capital (deficiency) $ (150) $ 307 $ 8,953 Total assets ............... 15,610 15,067 19,635 Short-term debt ............ 4,771 3,771 -- Total liabilities .......... 14,863 13,863 10,281 Stockholders' equity ....... 747 1,204 9,354 </TABLE> - ------ (1) The Company has elected to be treated as an S corporation and, accordingly, is not subject to federal or state income taxes. Pro forma net income amounts assume that the Company was subject to federal and state income taxes and taxed at the rates in effect for the periods presented. The Company's election to be treated as an S corporation will terminate upon the consummation of this offering. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note J to Notes to Financial Statements. (2) Gives pro forma effect to (i) aggregate S corporation distributions estimated to be $747,000, which the Company intends to make to its current stockholder prior to the consummation of this offering, (ii) the reclassification of undistributed S corporation earnings (estimated to be $80,000) to additional paid-in capital upon the termination of the Company's status as an S corporation, (iii) the recognition of a deferred tax asset in the amount of $204,000 resulting from the termination of the Company's S corporation status, (iv) the conversion of $1,000,000 principal amount of the Brightpoint Note into 223,464 shares of Common Stock and (v) the Stock Repurchase, all of which will be effected upon the consummation of this offering. The foregoing adjustments are collectively referred to as the "Pro Forma Adjustments." See Note M to Notes to Financial Statements. (3) As adjusted to give effect to the sale of the Common Stock offered hereby and the application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001025711_procom_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001025711_procom_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary information is qualified in its entirety by the more detailed information, including "Risk Factors" and Consolidated Financial Statements and notes thereto, appearing elsewhere in this Prospectus. THE COMPANY Procom Technology, Inc. ("Procom" or the "Company") designs, manufactures and markets enterprise-wide data storage and information access solutions that are compatible with all major hardware platforms, operating systems and network protocols. The Company has become a leading provider of CD-ROM servers and arrays as a result of its extensive distribution channels as well as the scalability, performance, ease of use and multi-protocol support of its products. The Company provides end users with disk drive upgrades for servers, desktop and notebook computers and also provides high performance, fault tolerant RAID solutions (Redundant Array of Independent Disks) and tape backup subsystems. The Company utilizes computer resellers, value-added resellers ("VARs") and distributors to sell its products to a wide variety of end users, including Fortune 500 corporations, governmental agencies and financial and educational institutions. Recognizing the growing demand for fast and reliable access to large volumes of information increasingly stored on CD-ROM media across enterprise-wide networks, the Company introduced the first of its CD server and array products in early 1994. These products enable a large number of network users to simultaneously access computer data stored on multiple CD-ROMs. The Company has recently introduced its CD FORCE server, which provides plug and play compatibility with most popular operating systems and network topologies and improves functionality by relieving the network operating system from the burden of managing requests for access to information stored on CD-ROMs. The CD FORCE server incorporates Procom's CD FORCE software, which manages network connectivity and access to information contained on CD-ROMs. The Company has continued to improve the capacity and performance of its product offerings, which include the Company's recently introduced Hyper CD-30x server, which is capable of providing access to up to 40 gigabytes of information (63 CDs) with 30x data transfer rates. The Company has experienced rapid growth in sales of its CD servers and arrays to end users such as law and accounting firms, educational and governmental entities and other companies and organizations that require frequent access to large amounts of information stored on CD-ROMs. The Company first developed its expertise in computer data storage products by providing upgrade storage solutions for desktop computers. Since that time, the Company has expanded its product offerings to provide upgrade and replacement disk drive products for notebook computers and servers, which have become more popular in recent years as client/server computing has proliferated. The Company's disk drive upgrades allow users to utilize their existing hardware for longer periods of time, thereby extending the life of their initial investment. The Company's RAID products provide high performance, fault tolerant storage of over one terabyte of data for large network information databases. The key elements of the Company's strategy include the following: (i) developing additional network storage products incorporating the Company's proprietary storage management software; (ii) accessing end users in key vertical markets by leveraging relationships with computer resellers, VARs and distributors; (iii) expanding relationships with key component suppliers in order to enable the Company to anticipate and respond to technological developments; and (iv) delivering timely storage solutions compatible with all major operating systems and network topologies. The Company's CD servers and arrays can be configured for Unix, Novell NetWare, IBM OS/2 Warp, Windows NT, Windows 95, Windows 3.1 and Macintosh OS, while supporting different topologies such as Ethernet, FDDI, Fast Ethernet and Token Ring. The Company's high-capacity storage subsystems will support varying RAID levels to meet virtually any network or operating system storage requirements. The Company's major customers include Vanstar Corporation, Entex Information Services Inc., Inacom and Intelligent Electronics, and end users include Microsoft, Ernst & Young, Federal Express, Prudential Insurance and Bank One. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company............. 2,000,000 shares Common Stock offered by the Selling Shareholders.................................. 1,025,000 shares Common Stock to be outstanding after the offering...................................... 11,000,000 shares(1) Use of proceeds................................. Repayment of outstanding debt (approximately $3.7 million at October 25, 1996), approximately $300,000 to acquire capital equipment to increase production capacity and the remainder for general corporate purposes, including working capital. Proposed Nasdaq National Market symbol.......... PRCM </TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> YEARS ENDED QUARTERS ENDED ---------------------------------------------------- ------------------------- JULY 31, JULY 30, JULY 29, JULY 28, JULY 26, OCTOBER 27, OCTOBER 25, 1992 1993 1994 1995 1996 1995 1996 -------- -------- -------- -------- -------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales.................................... $42,898 $41,726 $34,502 $44,660 $73,456 $15,275 $24,915 Gross profit................................. 8,869 9,453 7,315 11,802 21,967 4,142 8,425 Income (loss) before income taxes............ 861 906 (1,130) 1,137 4,649 915 3,310 Net income (loss)............................ 576 609 (773) 723 2,849 559 2,015 Net income (loss) per share(2)............... $ 0.06 $ 0.07 $ (0.08) $ 0.08 $ 0.31 $ 0.06 $ 0.22 Weighted average number of shares(2)......... 9,172 9,172 9,172 9,172 9,172 9,172 9,172 </TABLE> <TABLE> <CAPTION> OCTOBER 25, 1996 -------------------------- ACTUAL AS ADJUSTED(3) ------- -------------- <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash....................................................................... $ 58 $ 13,918 Working capital............................................................ 6,569 24,089 Total assets............................................................... 25,325 39,485 Line of credit............................................................. 3,660 -- Long-term obligations...................................................... -- -- Total shareholders' equity................................................. 7,151 24,971 </TABLE> - --------------- (1) Based on shares outstanding as of October 25, 1996. Excludes an aggregate of 271,800 shares of Common Stock issuable upon the exercise of stock options outstanding as of October 25, 1996 at a weighted average exercise price of $3.67 per share and an aggregate of 268,200 additional shares of Common Stock reserved for future issuance under the Company's 1995 Stock Option Plan. (2) See Note 1 of Notes to Consolidated Financial Statements for a description of the computation of net income (loss) per share. (3) Adjusted to give effect to the sale of shares offered by the Company hereby at an assumed initial public offering price of $10.00 per share, after deducting the estimated underwriting discount and offering expenses, and the application of the net proceeds therefrom. See "Use of Proceeds" and "Underwriting."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001025865_experian_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001025865_experian_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements, and the related notes thereto, included elsewhere in this Prospectus. As used in this Prospectus, unless the context otherwise requires, the "Company," for periods prior to the Recapitalization (as described herein) refers to the combined operations of TRW Information Services, IS&S International, Inc., TRW REDI Property Data ("TRW REDI"), IS&S Staff, TRW Business Credit Services, TRW Hotel Company Inc. and Information Systems and Services, Inc. (collectively, "TRW IS&S"), which were business groups, divisions, majority-owned general partnerships, or wholly owned subsidiaries of TRW Inc. ("TRW"), and for periods after the Recapitalization refers to the combined operations of Experian Corporation and its subsidiaries. See "The Recapitalization." Unless otherwise indicated, all financial information and share and per share data contained in this Prospectus (i) give effect to the conversion ("Conversion") that will occur concurrently with the closing of the sale of the common stock, $ par value (the "Common Stock"), offered hereby, whereby all shares of the existing Class A Common Stock, par value $.001, Class B Common Stock, par value $.001, Class L-1 Common Stock, par value $.001, and Class L-2 Common Stock, par value $.001, of the Company will be exchanged on the basis of a formula that will be derived from the actual initial public offering price for the Common Stock at a ratio estimated (based on an assumed offering price of $ per share and a valuation date of , 1996) to be , , and shares of Common Stock per share of Class A Common Stock, Class B Common Stock, Class L-1 Common Stock and Class L-2 Common Stock, respectively; and (ii) assume no exercise of the Underwriters' over-allotment option. See "The Recapitalization," "Description of Capital Stock," "Underwriting" and the Notes to Consolidated Financial Statements. Certain of the information contained in this summary and elsewhere in this Prospectus, including under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and information with respect to the Company's plans and strategy for its business are forward-looking statements. For a discussion of important factors that could cause actual results to differ materially from the forward-looking statements, see "Risk Factors." THE COMPANY OVERVIEW The Company is a leading provider of credit, marketing and real estate information on individuals, businesses and properties in the United States, servicing over 40,000 corporate and financial institutions in the United States. The Company's products and services play a key role in financial risk management as well as customer identification, acquisition and retention for businesses in a wide range of industries including financial services, retail, real estate, telecommunications and utilities. For the twelve-month period ended June 30, 1996, the Company generated pro forma sales of $554.8 million and pro forma net income of $23.9 million. Increased demand for the Company's core products and expanded applications for reliable credit and marketing information as well as positive market dynamics have contributed to the Company's growth and profitability. Over the last 25 years, the Company has developed expertise in collecting, screening and organizing volumes of data into its five proprietary databases (the "Databases"). The Databases--consumer credit, business credit, consumer demographic, business marketing and real estate--contain information on over 190 million people, 93% of households and 12 million businesses in the United States. The Company updates the Databases with an average of over 40 million pieces of information daily from credit grantors, public records and proprietary sources. Management believes that the Databases represent the broadest and most current collection of such information in the United States. The Company utilizes the Databases to create a variety of products and services designed to address the information needs of its customers and continually seeks to improve the quality and breadth of its product offerings. To address the changing requirement of its customers, the Company recently implemented File One, a $100 million investment in, and upgrade of, the Company's consumer credit database from a traditional flat-file structure to a state-of-the-art relational database. Management believes File One is on of the largest relational databases used commercially in the United States and that neither of the Company's major competitors currently has a similar database. File One offers a competitive advantage by enabling faster new product development cycles which improve time-to-market capabilities, providing information to customers in an open and more usable form, and reducing development costs for new and enhanced versions of existing products. Furthermore, File One utilizes a unique data identification system which results in more accurate cataloging of individual pieces of data and reduces the risk of incorrect data or duplicate files. Credit Information Credit products and services are critical to issuers of credit because they identify credit extension risks and provide a cost-effective method of monitoring outstanding credit portfolios. Customers use the Company's credit products and services in a variety of applications including the issuance and monitoring of credit cards, mortgages, small business loans and trade credit. These products and services include credit profile reports, credit scoring services, customized account management, on-line support for instant credit decisions, accounts receivable evaluations and fraud detection. The Company believes that it is one of the two largest providers of consumer credit information and the second largest provider of business credit information in the United States. Marketdata Enterprises estimates that the consumer credit reporting industry generated approximately $1.63 billion of revenues in 1995. Management believes that the portion of the market in which the Company competes was approximately $875 million of revenues in 1995. Furthermore, Marketdata Enterprises estimates the business credit reporting industry generated approximately $1 billion of revenues in 1995. Management believes that the portion of the market in which the Company competes was approximately $600 million of revenues in 1995. Marketing Information Marketing products and services enable businesses to identify, retain and cross-sell both new and existing customers in a targeted, cost-effective manner. The Company uses selected credit, demographic, lifestyle and behavioral data to develop and sell prescreened lists of individuals and businesses to whom financial institutions and retailers extend pre-approved offers of credit. Additionally, the Company uses its demographic and real estate data, enhanced by the non-restricted information (primarily name, address, telephone number and social security number) in its credit databases, to develop and sell targeted marketing products and services to financial institutions, consumer products companies, retailers, telecommunications companies and other consumer and business-to-business marketers. Targeted marketing products and services include the development of lists of potential customers, value-added enhancements to customer lists, the creation of marketing databases and other analytical tools. These micro-marketing techniques enable marketers to refine programs based on measurable results. The Company believes it is the largest provider of prescreen services in North America, an industry which the Company believes had revenues of approximately $200 million in 1995, and which has grown at a compound annual growth rate of 39% since 1992. Real Estate Information Real estate products and services provide appraisers, realtors, lenders, government agencies and title companies with property, title and tax information necessary for the property transfer and financing process. The Company has detailed property data for 349 counties nationwide, and property title and tax data for 80 counties in eight western states, representing approximately 55% and 17%, respectively, of the U.S. population. The Company is the national leader in both property data and title information services. Management believes that the Company's 1995 sales of real estate products and services were twice as large as the sales of its nearest competitors. The following table summarizes key characteristics of the Company's three categories of products and services: <TABLE> <CAPTION> CREDIT INFORMATION MARKETING INFORMATION REAL ESTATE INFORMATION ------------------ --------------------- ----------------------- <S> <C> <C> <C> 1995 COMPANY SALES...... $315 million $134 million $92 million REPRESENTATIVE Credit Profile Reports Prescreen Services Property Characteristics PRODUCTS............... Credit Scoring Services Targeted Lists Tax/Title Data Customized Account List Enhancement Sales Activity Reports Management Marketing Databases Appraisal Models On-Line Instant Credit Support Analytical Tools Accounts Receivable Evaluations Fraud Detection PRIMARY USERS........... Commercial Banks Credit Card Issuers Mortgage Lenders Retailers Financial Service Title Companies Consumer Finance Companies Companies Appraisers Business Credit Issuers List Brokers Realtors Telecom Providers Direct Marketers Government Agencies Utilities Retailers GROWTH FACTORS.......... New Credit Issuance Credit Solicitations Property Sales Activity Portfolio Monitoring Target Marketing Trends Lending Process New Products/Applications New Products/Applications Automation </TABLE> OPERATING STRENGTHS The Company believes its operating strengths include its (i) unique collection of proprietary Databases; (ii) extensive database expertise; (iii) leading market positions; (iv) large base of established customers and comprehensive network of sales channels; (v) reputation for integrity, quality and reliability; and (vi) experienced management team and employees. The Company believes that it can leverage its strengths to capitalize on continuing growth in fundamental demand for credit and marketing information. GROWTH STRATEGY The Company seeks to leverage its expertise in data management, mining and analysis to develop increasingly customized products and services. The Company's customer focused operating strategy seeks to capitalize on its strengths, the growing demand and expanding applications for its information and the economies of scale in the information services industry. Maintain, Expand and Enhance the Databases The unique and comprehensive nature of the Databases have been key elements in the Company's success to date. The Company plans to continue strengthening and investing in its core business by acquiring and developing new data and ways to screen information to enhance the breadth and quality of its data content. The Company believes that the breadth of information in its Databases, together with the flexibility afforded by File One, uniquely positions the Company to independently develop product offerings utilizing data from various databases. The Company does not believe any of its competitors have a similar capability to link together such a wide range of information. Develop New Products and Enter Growing End Use Markets The Company intends to continue utilizing the Databases to develop value- added products and services for its customers. The Company intends to generate additional growth through the introduction of products and services that address a broader range of its customers credit decisions, leverage the relational structure of File One and utilize new information sources. Furthermore, the demand for credit and marketing information continues to expand rapidly as an increasingly broad group of industries utilize the Company's information. For example, as growth in the cellular phone industry has yielded significant credit exposure for telecommunications companies, the Company's sales to telecommunications providers have doubled. Exploit New Delivery Systems for its Products As a provider of information content and analytical tools, the Company continually seeks new ways to package and deliver its products and services to its customers. Different delivery systems can stimulate usage by existing customers and make the Company's products and services accessible to new customers. Currently, the Company delivers a substantial portion of its products through on-line links between mainframe computers and, to a lesser extent, on paper and microfiche. Recently, the Company has begun to enhance its delivery alternatives through the addition of CD ROM and the ability to download to customer client server networks. In addition, the Company is developing ways to enhance the accessability of its content through the Internet and other data networks. The Company plans to expand its distribution methods as new technologies emerge. Pursue Strategic Acquisitions and Alliances The Company intends to pursue strategic acquisitions of or alliances with companies that have products and services, technologies or industry specializations that enhance or complement those of the Company. In particular, the Company believes that the domestic marketing information industry is consolidating and that this trend will continue as the need for higher quality information, privacy protection and information technology infrastructure become more significant. The Company will also pursue opportunities to enter the credit reporting and marketing information industries in foreign markets through acquisitions of, or partnerships with, established businesses. The Company intends to pursue alliances and joint ventures as a cost-effective method of offering its products and services in selected markets. Improve Operating Efficiencies As a result of the Recapitalization, the Company operates as a stand-alone entity for the first time. Management has identified numerous reductions, primarily resulting from operating as an independent corporate entity. Furthermore, the Company believes a significant portion of the expenses associated with the development and implementation of File One will be eliminated upon the completion of the integration period by the end of 1996. Management continues to implement programs to increase margins and profitability. -------------------------------------------------------- The Company's principal executive offices are located at 505 City Parkway West, Orange, California 92668, telephone number: (714) 385-7000. THE RECAPITALIZATION On September 19, 1996 (the "Recapitalization Closing") the Company effected a recapitalization (the "Recapitalization") in which Bain Capital, Inc. and its affiliates (collectively "Bain"), Thomas H. Lee Company and its affiliates (collectively, "THL") and certain other investors (Bain, THL and such other investors are collectively referred to as the "Investors") invested $248.7 million (the "'Equity Investment") in, and became the largest shareholders of, the Company. At the same time, Experian Information Solutions, Inc., a subsidiary of the Company ("Experian"), entered into a loan agreement with The Chase Manhattan Bank ("Chase") and Bankers Trust Company ("Bankers Trust") providing for up to $625 million of Senior Indebtedness (the "Credit Facilities"), $575 million of which was borrowed at the Recapitalization Closing, and a bridge loan agreement with Chase, Bankers Trust and The Bear Stearns Companies Inc., for $250 million of senior subordinated indebtedness (the "Bridge Loan"). Proceeds from the Credit Facilities and Bridge Loan, along with the Equity Investment, were used to pay all amounts owed to TRW by Experian under a $761.3 million note (the "TRW Note"), to pay TRW $248.7 million in connection with the redemption of certain stock of TRW in the Company and to pay fees and expenses relating to the Recapitalization Closing. See "Description of Credit Facilities," "Capitalization" and "Unaudited Pro Forma Financial Data." The Bridge Loan will be repaid with the net proceeds of the Offering. See "Use of Proceeds." The Company owns all of the outstanding capital stock of Experian. Bain owns approximately 34.2% of the voting power of the Company, THL owns approximately 34.4% of the voting power of the Company, TRW owns securities entitled to approximately 19.2% of the voting power of the Company and certain other investors own approximately 12.2% of the voting power of the Company. See "Risk Factors--Controlling Stockholders," "Principal Stockholders" and "Certain Relationships and Related Transactions." THE OFFERING The Offering together with the transactions described above under "The Recapitalization" are referred to herein collectively as the "Transactions." <TABLE> <S> <C> Common Stock offered(a): U.S. Offering........................... shares International Offering.................. shares Total................................... shares Common Stock to be outstanding after this Offering(a)(b).................... shares Uses of proceeds........................ To repay the Bridge Loan. [NYSE/NASDAQ] symbol ................... </TABLE> - -------- (a)Assumes that the Underwriters' over-allotment option is not exercised. See "Underwriting."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001026020_eller_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001026020_eller_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. As used herein, "EMC" or the "Company" means Eller Media Corporation, together with its consolidated subsidiaries, unless the context otherwise requires. The Company is a holding company and conducts all of its operations through its subsidiaries, including Eller Media Company ("Eller"), Patrick Media Group, Inc. ("PMG") and the subsidiaries of Eller Investment Company, Inc. ("EIC"), which collectively operate under the name "Eller Media Company." PMG and EIC are collectively referred to herein as the "Predecessors." Unless otherwise specified, the Prospectus assumes, (i) a for split and reclassification of the Common Stock of the Company which will be effective immediately prior to the Offering of Common Stock contemplated hereby and (ii) no exercise of the Underwriters' over-allotment option. "Operating Cash Flow" has the meaning set forth in footnote 5 on page 7 hereof and "Operating Cash Flow Margin" has the meaning set forth in footnote 6 on page 7 hereof. The term "market" refers to the geographic area constituting a Designated Market Area as defined by the A.C. Nielsen Company. THE COMPANY Eller Media Corporation is the largest outdoor advertising company in the United States based on its total U.S. advertising display inventory of approximately 50,000 display faces. The Company provides outdoor advertising services in 15 major metropolitan markets located in six operating regions: Southern California, Texas, the Midwest, Northern California, the Southeast and the Southwest. The Company believes it is the largest provider of outdoor advertising services in 12 of its 15 markets based on total display faces. The markets in which the Company operates represent approximately 22% of the total U.S. population and approximately 50% of the rapidly growing U.S. Hispanic population. For the nine month period ended September 30, 1996, the Company had net revenues, Operating Cash Flow and an Operating Cash Flow Margin of $178.7 million, $70.8 million and 39.6%, respectively. For the fiscal year ended December 31, 1995, on a pro forma basis as if the acquisition of the Predecessors had occurred on January 1, 1995, the Company had net revenues, Operating Cash Flow and an Operating Cash Flow Margin of $218.0 million, $76.2 million and 35.0%, respectively. According to estimates by the Outdoor Advertising Association of America (the "OAAA"), the trade association for the outdoor advertising industry, outdoor advertising generated total revenues of approximately $1.8 billion in 1995, or approximately 1.1% of the total advertising expenditures in the United States, and the out-of-home advertising industry generated revenues in excess of $3.0 billion in 1995. Outdoor advertising's 1995 revenues represent growth of approximately 8.2% over estimated total 1994 revenues, which compares favorably to the growth of total U.S. advertising expenditures of approximately 7.7% during the same period. In addition, for the first half of 1996, outdoor advertising generated total revenues of approximately $915 million, up 7.0% from the same 1995 period, according to recent estimates by the OAAA. Outdoor advertising offers repetitive impact and a lower cost-per-thousand impressions, a commonly used media measurement, as compared to competitive media, including television, radio, newspapers, magazines and direct mail marketing. As a result, outdoor advertising is attractive to both national and local advertisers either seeking mass market exposure or targeting specific geographic areas or sets of specific demographic characteristics. The following table sets forth for the nine month period ended September 30, 1996 certain information with respect to each of the Company's 15 major metropolitan markets (dollars in thousands): <TABLE> <CAPTION> PREMIER PANELS(TM) AND PERCENTAGE PREMIER TOTAL MARKET NET OF NET PLUS(TM) 30-SHEET 8-SHEET TRANSIT DISPLAY MARKET RANK(1) REVENUES REVENUES BULLETINS PANELS POSTERS POSTERS DISPLAYS FACES - ----------------------------------- ------- -------- ---------- --------- -------- -------- ------- -------- ------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> SOUTHERN CALIFORNIA: Los Angeles(2)................... 2 $ 39,696 22.5% 722 116 4,875 -- 1,168 6,881 San Diego........................ 15 5,019 2.8 112 125 575 -- -- 812 TEXAS: Dallas/Ft. Worth................. 7 13,329 7.6 679 84 2,073 135 -- 2,971 Houston.......................... 9 17,091 9.7 557 647 2,215 1,860 -- 5,279 San Antonio...................... 34 8,484 4.8 754 -- 1,374 1,332 -- 3,460 MIDWEST: Chicago.......................... 3 17,891 10.1 417 17 2,858 -- 3,078 6,370 Cleveland(3)..................... 22 9,821 5.6 261 6 2,007 -- -- 2,274 Milwaukee........................ 28 4,949 2.8 137 30 821 -- -- 988 NORTHERN CALIFORNIA: San Francisco/Oakland(4)......... 4 23,832 13.5 386 320 1,554 432 6,812 9,504 Sacramento....................... 29 4,101 2.3 91 44 426 -- 142 703 SOUTHEAST: Miami............................ 11 3,759 2.2 -- -- -- -- 2,088 2,088 Atlanta.......................... 12 8,433 4.8 365 26 1,132 -- -- 1,523 Tampa(5)......................... 21 10,267 5.8 522 45 1,471 -- -- 2,038 SOUTHWEST: Phoenix.......................... 20 5,683 3.2 365 -- -- -- -- 365 El Paso.......................... 70 4,091 2.3 284 11 545 544 -- 1,384 -------- ----- ----- ----- ------ ----- ------ ------ Total.......................... $176,446(6) 100.0% 5,652(7) 1,471 21,926 4,303 13,288 46,640(8) ======== ===== ===== ===== ====== ===== ====== ====== </TABLE> - --------------- (1) Market rank of the largest city in each market. (2) Includes Los Angeles, Orange, Riverside, San Bernardino and Ventura counties. (3) Includes Akron and Canton. (4) Includes San Francisco, Oakland, San Jose, Santa Cruz and Solano counties. (5) Includes Sarasota and Bradenton. (6) Excludes convenience store and other miscellaneous net revenues. (7) Includes 21 wallscapes. (8) Excludes 4,086 convenience store displays. OPERATING STRATEGY The Company's strategy is to expand its market presence and improve its operating results by (i) managing the advertising rates and occupancy levels of its displays to maximize market revenues; (ii) attracting new categories of advertisers to the outdoor medium through significant investments in sales and marketing resources; (iii) constructing new displays and upgrading its existing displays; (iv) taking advantage of technological advances which increase both sales force productivity and production department efficiency; and (v) acquiring additional displays in its existing markets and expanding into additional markets within the country's 35 largest media markets and their surrounding regional areas. The Company believes this operating strategy enhances its ability to effectively respond to advertisers' needs. - Maximizing market revenues. The Company believes that the size, diversity, and premium location of its display inventory provides it with substantial pricing flexibility. The Company seeks to maximize revenues through the optimization of advertising rates and occupancy levels. - Attracting new categories of advertisers. The Company dedicates substantial resources to target large companies whose advertising expenditures do not typically include outdoor advertising and introduce them to the benefits of the outdoor medium. The Company offers comprehensive sales, marketing, creative and research services to new and existing customers. - Constructing new displays and upgrading existing display faces. Since January 1, 1996, the Company has invested approximately $10.2 million for new display construction and for ongoing enhancement of its existing display inventory. Where opportunities are available, the Company intends to build new displays, continue to convert existing 30-sheet posters into Premier Panels(TM) and Premier Plus(TM) panels and continue to upgrade its existing display inventory. - Capitalizing on technological improvements. The Company intends to take advantage of advances in production (including the increased use of vinyl and pre-printed advertising copy) and market research (including the increased use of mapping and demographic software) in order to achieve greater efficiencies and to increase the Company's net revenues and Operating Cash Flow. - Acquiring additional displays. In addition to internal growth, the Company seeks to grow by continuing to acquire additional displays in its existing markets and through the acquisition of other outdoor companies whose assets have strategic appeal. The Company is focused on expanding its operations in existing markets and expanding into additional markets within the country's 35 largest media markets and their surrounding regional areas. The Company believes that larger markets provide greater revenue potential per display, improved access to national advertisers, greater regional advertising benefits and the opportunity to gain a larger market share from competitive and higher cost (per thousand) media. The Company is also considering expansion into international markets. To support this operating strategy, the Company has decentralized its operating structure in order to place authority, autonomy and accountability at the market level and provide local management with the tools necessary to oversee sales, display development, administration and production and to identify suitable acquisition candidates. The Company is implementing centralized accounting and financial controls designed to allow it to closely monitor the operating and financial performance of its markets. The Company also maintains a fully-staffed sales and marketing office in New York which services national accounts and supports the Company's local sales force in each market. The Company believes that one of its strongest competitive advantages is its unique blend of highly experienced corporate and local market management. BACKGROUND AND RECENT DEVELOPMENTS The Company was formed in August 1995 to acquire PMG and EIC. EIC was formed in August 1992 for the purpose of acquiring certain outdoor advertising operations in Phoenix, Arizona. In September 1993, EIC purchased certain outdoor advertising operations in El Paso, Texas, and in December 1994, EIC purchased certain outdoor advertising operations in Atlanta, Georgia. In August 1995, the Company acquired EIC and purchased from General Electric Capital Corporation ("GECC") the outdoor advertising operations of PMG. PMG was the successor to Foster and Kleiser, the first significant national outdoor advertising company in the United States, founded at the turn of the century. Since January 1, 1996, the Company has purchased an aggregate of approximately 1,550 display faces in 26 in-market purchases for an aggregate purchase price of approximately $38.0 million. The Company believes that these purchases strengthen its market position and allow it to capitalize on operating efficiencies associated with the addition of display faces to its existing markets. These purchases have included 167 bulletins in the Dallas/Ft. Worth market and 227 bulletins and 735 30-sheet posters in the San Antonio market. In addition, in December 1996, the Company entered into an agreement to acquire 45 bulletins in the San Francisco/Oakland market. In addition to these acquisitions, the Company has initiated several operational restructuring activities since August 1995, including the (i) relocation of PMG's Chicago headquarters to Phoenix and (ii) relocation of PMG's financial operations from Scranton, Pennsylvania to Phoenix. Collectively, these measures have reduced operating and administrative costs and have helped the Company to operate more efficiently and respond more quickly to its customers' needs. The Company was incorporated in Delaware in 1995 and its principal executive office is located at 2850 E. Camelback Road, Suite 300, Phoenix, Arizona 85016, and its telephone number is (602) 957-8116. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company..................... shares Common Stock offered by the Selling Stockholders........ shares Common Stock to be outstanding after the Offering....... shares(1) Use of Proceeds to the Company.......................... To repay existing bank indebtedness and for general corporate purposes. See "Use of Proceeds." The Company will not receive any proceeds from the sale of shares by the Selling Stockholders. See "Principal and Selling Stockholders." Nasdaq National Market Symbol........................... ELLR </TABLE> - --------------- (1) Excludes (i) shares of Common Stock issuable upon exercise of options outstanding on the date hereof, of which will be immediately exercisable upon consummation of the Offering, (ii) shares reserved for issuance pursuant to the Company's Equity Plan (as defined herein), (iii) shares issuable pursuant to the Company's Phantom Equity Plan (as defined herein) and (iv) shares issuable pursuant to the terms of a convertible promissory note. See "Management -- Executive Officers' Stock Options," "Management -- Equity Plan," "Management -- Phantom Equity Plan" and "Description of Indebtedness and Other Commitments -- Convertible Promissory Note." SUMMARY FINANCIAL AND OTHER DATA The following table is derived from the Company's and the Predecessors' respective financial statements and should be read in conjunction with such financial statements, "Selected Consolidated Financial and Other Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus. <TABLE> <CAPTION> PREDECESSORS(1) EMC --------------------- | ----------------------------------------- | NINE YEAR ENDED | MONTHS ENDED DECEMBER 31, | YEAR ENDED SEPTEMBER 30, --------------------- | DECEMBER 31, --------------------- 1993 1994 | 1995 1995 1996 --------- --------- | ----------------- --------- --------- | PRO | PRO FORMA(2) FORMA(2) (DOLLARS IN | ----------------- --------- THOUSANDS | EXCEPT PER SHARE | AMOUNTS) | <S> <C> <C> | <C> <C> <C> STATEMENT OF OPERATIONS DATA: | Gross revenues.................... $ 193,184 $ 216,008 | $ 249,400 $ 185,056 $ 203,995 Net revenues(3)................... 166,210 188,867 | 218,012 161,664 178,728 Cost of sales..................... 76,029 80,683 | 89,006 65,780 68,135 Selling, general and | administrative expense.......... 43,919 47,226 | 52,760 39,686 39,830 Depreciation and amortization..... 43,630 43,446 | 33,259 22,807 29,372 -------- -------- | -------- -------- -------- Operating income.................. 2,632 17,512 | 42,987 33,391 41,391 Interest expense.................. 47,597 52,962 | 36,542 27,546 26,877 Other (expense) income, net....... (75) 6,859 | (8,354) (6,373) (5,323) Provision for (benefit from) | income taxes.................... (27,015) (9,870) | -- -- 2,400 -------- -------- | -------- -------- -------- Income (loss) before extraordinary | item(4)......................... (18,025) (18,721) | (1,909) (528) 6,791 Net income (loss)................. (18,025) (20,894) | (1,909) (528) 6,791 Net income (loss) per share....... | Weighted average common and | equivalent shares outstanding... | OTHER DATA: | Operating Cash Flow(5)............ $ 46,262 $ 60,958 | $ 76,246 $ 56,198 $ 70,763 Operating Cash Flow Margin(6)..... 27.8% 32.3% | 35.0% 34.8% 39.6% Capital expenditures(7)........... 21,319 44,185 | 14,289 9,876 48,151 </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1996 --------------------------- ACTUAL AS ADJUSTED(8) -------- -------------- (DOLLARS IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Working capital(9)............................................... $ 11,164 Total assets..................................................... 668,034 Total debt and capital lease obligations......................... 419,403 Stockholders' equity............................................. 196,016 </TABLE> - --------------- (1) See footnote 1 to "Selected Consolidated Financial and Other Data." (2) See the Unaudited Pro Forma Consolidated Statements of Operations of the Company included elsewhere in this Prospectus. (3) Net revenues are gross revenues less agency commissions. (4) Extraordinary item in 1994 represents loss on early extinguishment of debt. (5) "Operating Cash Flow" is operating income before depreciation, amortization and non-cash compensation expense. Operating Cash Flow is not intended to represent net cash provided by operating activities as defined by generally accepted accounting principles and should not be considered as an alternative to net income (loss) as an indicator of the Company's operating performance or to net cash provided by operating activities as a measure of liquidity. The Company believes Operating Cash Flow is a measure commonly reported and widely used by analysts, investors and other interested parties in the media industry. Accordingly, this information has been disclosed herein to permit a more complete comparative analysis of the Company's operating performance relative to other companies in the media industry. (6) "Operating Cash Flow Margin" is Operating Cash Flow stated as a percentage of net revenues. (7) Amount includes purchases and construction of display faces. (8) Adjusted to reflect the sale of shares of Common Stock by the Company in the Offering at an assumed initial public offering price of $ per share and the application of the net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1996/CIK0001026601_chemfirst_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/CIK0001026601_chemfirst_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8e4ce83f6eb59d588f4712061e542584b034cc00
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@@ -0,0 +1 @@
+SUMMARY The following is a summary of the information contained elsewhere in this Prospectus. This summary does not purport to be complete and is qualified in its entirety by, and is subject to, the more detailed information and financial statements, including the notes thereto, set forth in this Prospectus. This Prospectus is Appendix E to the Joint Proxy Statement/Prospectus. Unless otherwise defined herein, capitalized terms used in this summary shall have the respective meanings ascribed to them elsewhere in this Prospectus. SHAREHOLDERS ARE URGED TO READ CAREFULLY THIS PROSPECTUS IN ITS ENTIRETY. CHEMFIRST ChemFirst is currently a wholly owned subsidiary of First Mississippi. It was incorporated in 1983 but has had no activities during the last five years. Prior to the Distribution, First Mississippi will transfer or cause to be transferred to ChemFirst all of its assets other than those which are part of the Fertilizer Business and ChemFirst will assume all of First Mississippi's liabilities except to the extent that they relate to the Fertilizer Business and except for certain indebtedness. The information in this Prospectus assumes that these transfer of assets and assumption of liabilities have been completed. At the time of the Distribution, ChemFirst's principal businesses will involve continuous production of aniline, nitrobenzene, nitrotoluene and toluidines; custom production of fine chemicals for chemical, agricultural and pharmaceutical companies and production of electronic performance chemicals for the semiconductor and related industries. Other significant businesses will include the design and production of low-emission burners, flares and incinerators and thermal plasma equipment for steel production, waste treatment and research. ChemFirst will also produce steel ingots and billets from melted scrap. The mailing address of ChemFirst's principal executive offices is 700 North Street, P.O. Box 1249, Jackson, MS 39215-1249, and the telephone number at such address is (601) 948-7550. OVERVIEW OF THE DISTRIBUTION AND THE MERGER First Mississippi has entered into the Merger Agreement whereby, upon the terms and subject to the conditions set forth therein, first, First Mississippi will spin-off its chemicals and other non-fertilizer businesses to shareholders in the Distribution and second, First Mississippi will be merged with Miss Sub, with First Mississippi surviving the Merger and becoming a wholly-owned subsidiary of Mississippi Chemical. As a condition to and in order to facilitate the Merger, First Mississippi has agreed to effect the Distribution prior to consummation of the Merger. In the Distribution all of the outstanding shares of ChemFirst Common Stock will be distributed pro rata to First Mississippi's shareholders on the Distribution Record Date. The Distribution will, by means of a spin-off of First Mississippi's chemicals and other non- fertilizer businesses, separate the Fertilizer Business from First Mississippi's other businesses and enable Mississippi Chemical to acquire only the Fertilizer Business in the Merger. Pursuant to the Merger Agreement, at the effective time of the Merger (the "Effective Time"), each issued and outstanding share of First Mississippi Common Stock will be converted into the right to receive a fraction of a share of common stock, par value $.01 per share, of Mississippi Chemical (the "Mississippi Chemical Common Stock") as described under "The Merger--Terms of the Merger--Conversion of First Mississippi Common Stock in the Merger" in the Joint Proxy Statement/Prospectus. As a result of the Distribution and the Merger, First Mississippi shareholders as of the Distribution Record Date will receive ChemFirst Common Stock in the Distribution and, upon surrendering their First Mississippi Common Stock share certificates in accordance with the Merger Agreement, will receive Mississippi Chemical Common Stock in the Merger. Pursuant to the Distribution Agreement, prior to the Distribution, First Mississippi will transfer or cause to be transferred to ChemFirst all of its assets other than those which are part of the Fertilizer Business and ChemFirst will assume all of First Mississippi's liabilities except to the extent that they relate to the Fertilizer Business and except for certain indebtedness (collectively, the "Transfers"). Prior to the Distribution, First Mississippi will consummate the Financing described in the Joint Proxy Statement/Prospectus. A portion of the proceeds of the Financing will be used to refinance First Mississippi's existing indebtedness and pay certain costs related to the Merger, with the remaining proceeds, estimated to be approximately $50.0 million, to be contributed to ChemFirst prior to the Distribution. As a result of the Financing, which will remain the obligation of the Fertilizer Business to be acquired by Mississippi Chemical in the Merger, and the application of its proceeds, at the time of the Distribution ChemFirst will have no significant long-term indebtedness and available cash reserves currently estimated to be approximately $50.0 million. See "Pro Forma Financial Information." In accordance with the terms of the Distribution Agreement, each of First Mississippi and ChemFirst have agreed to indemnify the other after the Distribution with respect to certain losses, damages, claims and liabilities assumed or retained by that party. See "The Transfers and the Distribution-- Terms of the Distribution Agreement." The foregoing is a brief summary of certain terms of the Distribution, the Merger and related transactions affecting ChemFirst. A more complete description of the Merger and the Merger Agreement may be found in the Joint Proxy Statement/Prospectus. The Distribution and the Distribution Agreement between ChemFirst and First Mississippi are more fully described herein under "The Transfers and the Distribution--Terms of the Distribution Agreement" and a copy of the Distribution Agreement is attached as Appendix B to the Joint Proxy Statement/Prospectus. THE DISTRIBUTION Distributing Corporation........ First Mississippi. References to First Mis- sissippi include its subsidiaries, except where the context otherwise requires. Distributed Corporation......... ChemFirst, which, by the Distribution Record Date, will hold the assets and be responsible for the liabilities of First Mississippi other than those of the Fertilizer Business and certain indebtedness. Shares to be Distributed........ Assumed to be 20,621,736 shares of ChemFirst Common Stock. However, after giving effect to the conversion of all outstanding convertible debentures of First Mississippi (the "Con- vertible Debentures") and the subsequent con- version of the First Mississippi convertible preferred stock into which such Debentures are convertible (the "Convertible Preferred Stock"), the exercise of outstanding and ex- ercisable options to acquire Convertible De- bentures (the "Debenture Options") and the conversion of the Convertible Debentures ex- ercisable therefor and subsequent conversion of the Convertible Preferred Stock issuable upon such conversion, and the exercise of outstanding and exercisable options to pur- chase First Mississippi Common Stock ("Stock Options"), up to 21,331,850 shares of ChemFirst Common Stock will be issued in the Distribution. Distribution Ratio.............. One share of ChemFirst Common Stock for every share of First Mississippi Common Stock owned as of the close of business on the Distribu- tion Record Date. See "The Transfers and the Distribution--Terms of the Distribution Agreement--The Distribution." Federal Income Tax Consequences................... It is a condition to the Distribution and the Merger that Skadden, Arps, Slate, Meagher & Flom (Illinois), special counsel to First Mississippi, issue an opinion to the effect that the Distribution qualifies as a tax-free distribution under Sec tion 355 of the Internal Revenue Code of 1986, as amended (the "Code"), the Merger qualifies as a tax-free transaction under Section 368(a) of the Code, and the Transfers qualify as one or more tax-free transactions under one or more of Sections 332, 351 and 368(a)(1)(D) of the Code. See "Certain Fed- eral Income Tax Consequences." In addition, it is a condition to the Merger that Hughes & Luce, LLP, counsel to Mississippi Chemical, issue an opinion to Mississippi Chemical to the effect that the Merger qualifies as a tax-free transaction under Section 368(a) of the Code. Trading Market.................. There is currently no public market for ChemFirst Common Stock. ChemFirst has applied for the listing of ChemFirst Common Stock on the NYSE. See "Listing and Trading of ChemFirst Common Stock." Effect of the Distribution...... In connection with the Distribution, First Mississippi will transfer to ChemFirst all of First Mississippi's assets and liabilities other than those of the Fertilizer Business and certain indebtedness. First Mississippi will deliver to the Distribution Agent shares of ChemFirst Common Stock representing 100% of the outstanding shares of ChemFirst Common Stock for distribution to the holders of First Mississippi Common Stock as of the close of business on the Distribution Record Date. Upon consummation of the Distribution, the holders of First Mississippi Common Stock on the Distribution Record Date will be the shareholders of ChemFirst. Relationship with First Mississippi after the Distribution................... First Mississippi and ChemFirst have agreed to indemnify each other after the Distribu- tion with respect to certain losses, damages, claims and liabilities assumed or retained by that party, including certain tax liabili- ties. See "Risk Factors--Relationship with First Mississippi; Reorganization to Effect Distribution," and "The Transfers and the Distribution--Terms of the Distribution Agreement--Mutual Indemnities," "The Trans- fers and the Distribution--Terms of the Tax Disaffiliation Agreement" and "The Transfers and the Distribution--Terms of the Employee Benefits Agreement." Distribution Record Date........ It is expected that the Distribution Record Date will be established as the close of business on the business day immediately prior to the day on which the Effective Time occurs. Date of Distribution............ The Distribution will be effective the close of business on the Distribution Record Date. The distribution of certificates of shares of ChemFirst Common Stock will occur as promptly as practicable thereafter. Distribution Agent, Transfer Agent and Registrar............ KeyCorp Shareholder Services, Inc. Risk Factors.................... First Mississippi shareholders should care- fully consider the matters discussed under the section entitled "Risk Factors" in this Prospectus. SUMMARY HISTORICAL FINANCIAL INFORMATION As a result of the proposed Distribution, the historical consolidated financial statements of ChemFirst will reflect the historical results of operations and financial position of First Mississippi, reflecting the classification of the Fertilizer Business as a discontinued operation. The summary historical consolidated financial information set forth below has been derived from the audited financial statements of ChemFirst Inc. for the periods ended June 30, 1996, 1995 and 1994, except for income statement data for the three months ended September 30, 1996 and 1995, balance sheet data at September 30, 1996 and balance sheet data at June 30, 1994. ChemFirst Inc.'s Consolidated Balance Sheets at June 30, 1996 and 1995 and the related Statements of Operations, Stockholders' Equity and Cash Flows for the three years ended June 30, 1996 and notes thereto appear elsewhere herein. The financial information for the three-month interim periods ended September 30, 1996 and 1995 has been derived from ChemFirst Inc.'s unaudited interim financial statements, presented elsewhere herein, that reflect all adjustments that, in the opinion of management, are necessary for a fair presentation of the results of the interim periods presented; all such adjustments are of a normal recurring nature. The balance sheet data at June 30, 1994 has been derived from ChemFirst Inc.'s unaudited consolidated financial statements. The summary historical financial information set forth below should be read in conjunction with and is qualified in its entirety by reference to ChemFirst Inc.'s historical consolidated financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus. <TABLE> <CAPTION> CHEMFIRST INC. THREE MONTHS ENDED FISCAL YEAR ENDED JUNE SEPTEMBER 30, 30, --------------------- ------------------------ 1996 1995 1996 1995 1994 ------- ------------- ------- ------- ------- (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) <S> <C> <C> <C> <C> <C> INCOME STATEMENT DATA: Sales......................... $95,432 88,746 370,547 331,721 249,091 Earnings (loss) from continuing operations before income taxes (benefit), investee earnings (loss) and cumulative effect of change in accounting principle...... 6,718 3,387 (4,929) 18,484 1,226 Earnings (loss) from continuing operations before cumulative effect of change in accounting principle...... 4,090 1,886 (3,458) 10,638 (1,271) Net earnings.................. 12,789 12,480 35,220 57,794 21,863 Earnings (loss) per share from continuing operations before cumulative effect of change in accounting principle...... 0.20 0.09 (0.16) 0.52 (0.06) Net earnings per share........ 0.61 0.59 1.68 2.80 1.09 Weighted average common shares outstanding.................. 20,894 21,048 20,980 20,632 20,126 <CAPTION> AT AT JUNE 30, SEPTEMBER 30, ------------------------ 1996 1996 1995 1994 ------------- ------- ------- ------- <S> <C> <C> <C> <C> BALANCE SHEET DATA: Working Capital....................... $ 86,442 86,918 110,107 78,874 Total assets.......................... 432,483 413,635 433,327 357,845 Long-term debt, excluding long-term debt due within one year............. 76,732 79,909 84,394 104,275 Shareholders' equity.................. 242,208 230,267 232,996 177,687 Cash dividend declared per common share................................ 0.10 0.40 0.35 0.30 </TABLE>
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+SUMMARY The following summary is qualified in its entirety by reference to the detailed information appearing elsewhere in this Prospectus. See the Index of Capitalized Terms for the location herein of capitalized terms. Overview Certain motor vehicle dealers ("Dealers") in the World Omni Financial Corp. ("World Omni") network of dealers have assigned, and will assign, closed-end retail automobile and light duty truck leases to World Omni LT, an Alabama trust (the "Origination Trust"). The Origination Trust was created in 1993 to avoid the administrative difficulty and expense associated with retitling leased vehicles in connection with the financing or transfer of beneficial ownership of automobile and light duty truck leases. The Origination Trust has issued to Auto Lease Finance L.P. ("ALFI L.P.") an Undivided Trust Interest (the "UTI") representing the entire beneficial interest in the unallocated assets of the Origination Trust. ALFI L.P. will instruct the trustee of the Origination Trust to allocate a separate portfolio of leases and leased vehicles within the Origination Trust and create a special unit of beneficial interest (the "1996-1 SUBI") which will represent the entire beneficial interest in such portfolio. Upon its creation, such portfolio will no longer be a part of the Origination Trust Assets represented by the UTI. ALFI L.P. will sell its interest in the 1996-1 SUBI to World Omni Auto Leasing, Inc., a Delaware corporation and a wholly-owned, special purpose subsidiary of World Omni (the "Seller"), and the Seller will in turn sell the 1996-1 SUBI to the World Omni Vehicle Lease 1996-1 Owner Trust (the "Issuer"). ALFI L.P. has caused and from time to time in the future may cause additional special units of beneficial interest similar to the 1996-1 SUBI (each, an "Other SUBI") to be created out of the UTI and sold to the Seller or one or more other entities. Neither the Issuer nor the Noteholders will have any interest in the UTI, any Other SUBI or any assets of the Origination Trust evidenced by the UTI or any Other SUBI. The Seller intends that the transactions described in this prospectus will result in a sale of the 1996-1 SUBI Assets for accounting, tax and other purposes. The Origination Trust The Origination Trust was formed by ALFI L.P., as grantor and initial beneficiary, and VT Inc., as trustee (the "Origination Trustee"). The sole general partner of ALFI L.P. is Auto Lease Finance, Inc., a Delaware corporation which is a wholly owned, special purpose subsidiary of World Omni ("ALFI"). ALFI may not transfer its general partnership interest in ALFI L.P. so long as any financings involving interests in the Origination Trust (including the transaction described herein) are outstanding. The sole limited partner of ALFI L.P. is World Omni. VT Inc. is an Alabama corporation and a wholly owned, special purpose subsidiary of First Bank National Association that was organized solely for the purpose of acting as Origination Trustee. VT Inc. is not affiliated with World Omni or any affiliate thereof. For further information regarding the Origination Trustee, see "The Origination Trust--The Origination Trustee". The Origination Trust Assets consist of retail closed-end lease contracts assigned to the Origination Trust by Dealers, the automobiles and light duty trucks relating thereto and all proceeds thereof and payments made under certain insurance policies relating to such lease contracts, the related lessees or such leased vehicles. The 1996-1 SUBI initially will evidence a beneficial interest in a specified portion of the Origination Trust Assets, including certain lease contracts (the "Series 1996-1 Contracts") originated by Dealers located throughout the United States, the automobiles and light duty trucks relating thereto (the "Series 1996-1 Leased Vehicles"), certain monies due under or payable in respect of the Series 1996-1 Contracts and the Series 1996-1 Leased Vehicles on or after November 1, 1996 (the "Cutoff Date"), payments made under certain insurance policies relating to the Series 1996-1 Contracts, the related lessees (each, a "Consumer Lessee") and the Series 1996-1 Leased Vehicles and certain related assets and rights (collectively, the "1996-1 SUBI Assets"). For further information regarding the 1996-1 SUBI Assets, see "The Issuer--The 1996-1 SUBI". The Dealers comprising the sources for Series 1996-1 Contracts and Series 1996-1 Leased Vehicles are members of World Omni's network of dealers. Predominantly Toyota dealerships, these Dealers offer automobiles and light duty trucks for lease pursuant to World Omni-approved terms and documentation. For further information regarding World Omni's lease business, see "World Omni". The 1996-1 SUBI will not evidence a direct interest in the 1996-1 SUBI Assets, nor will it represent a beneficial interest in any Origination Trust Assets other than the 1996-1 SUBI Assets. Payments made on or in respect of the Origination Trust Assets other than the 1996-1 SUBI Assets will not be available to make payments on the Notes. For further information regarding the 1996-1 SUBI, see "Summary - Security for the Notes - The 1996-1 SUBI", "The Issuer - The 1996-1 SUBI" and "The Origination Trust". The Issuer The Issuer will be formed pursuant to a Trust Agreement to be dated as of December 1, 1996 (the "Owner Trust Agreement"), between the Seller and PNC Bank Delaware, as Owner Trustee (the "Owner Trustee"). Pursuant to an Indenture to be dated as of December __, 1996, between the Issuer and First Bank National Association, as Indenture Trustee (the "Indenture Trustee"), the Issuer will issue the Notes. It is anticipated that the Certificates will be sold by the Issuer in a private transaction to one or more unaffiliated third parties. The property of the Trust (the "Trust Estate") will consist pri- marily of (i) the rights of the Issuer under the 1996-1 SUBI (subject to the rights of the Lessee under the Master Lease), (ii) the rights of the Issuer under the Master Lease, (iii) the rights of the Issuer to funds on deposit from time to time in the Issuer Collection Account, the Payment Account and any other account or accounts established pursuant to the Indenture (including investment income on amounts on deposit in the Issuer Collection Account and the Payment Account) and proceeds thereof, (iv) the rights of the Issuer (and a pledge of the rights of the Lessee) as holder of the 1996-1 SUBI under the Servicing Agreement and the Series 1996-1 Supplement and (v) certain other rights as described herein and (vi) the interest of the Issuer in the Master Lease Reserve Account. See "Property of the Issuer." Master Lease Pursuant to the Master Lease, the Issuer will lease to the Lessee the rights represented by the 1996-1 SUBI in exchange for the obligation of the Seller, as Lessee, to make certain payments (collectively, the "Master Lease Payments") during the period that each underlying Series 1996-1 Leased Vehicle is subject to the Master Lease. See "Security for the Notes - The Master Lease." The Issuer will apply such Master Lease Payments, together with certain proceeds from the disposition of Series 1996-1 Leased Vehicles upon termination of the related Series 1996-1 Contracts, to pay interest on and principal of the Notes in accordance with their terms, and to make required deposits in the Residual Value Support Account and Reserve Fund. Any remaining amounts generally will be distributed to the holders of Certificates during the period that the Notes are outstanding. The Master Lease will terminate with respect to each Series 1996-1 Leased Vehicle upon termination of the related Series 1996-1 Contract and disposition of the Series 1996-1 Leased Vehicles. See "Security for the Notes -- The Master Lease." Optional Purchase Upon termination of the Master Lease on _______, of 1996-1 SUBI provided that no Event of Default on the Master Lease has occurred and is continuing, the Lessee will have the option to purchase rights of the Issuer evidenced by the 1996-1 SUBI from the Issuer (the "Purchase Option") at a price equal to (i) $________ or (ii) the fair market value of the 1996-1 SUBI at such time. In the event that the Lessee elects to exercise its purchase option, the purchase price of the SUBI Interest will be applied on the next Payment Date to pay the outstanding principal amount of the Notes together with the accrued unpaid interest thereon. In the event that the purchase price of the SUBI is not sufficient to pay accrued interest on, and the outstanding Principal Amount of the Notes, a draw will be made on the Residual Value Support Account and then, the Reserve Fund in the amount of the shortfall. In the event that the amounts on deposit in the Residual Value Support Account and the Reserve Fund are insufficient to redeem the Notes in full, the Noteholders will suffer a loss. The Owner Trustee PNC Bank, Delaware, as Owner Trustee under the Owner Trust Agreement. The Indenture Trustee First Bank, National Association, as Indenture Trustee under the Indenture. The Seller and Lessee The Seller/Lessee is a Delaware corporation which is a wholly owned, special purpose subsidiary of World Omni. World Omni World Omni is a Florida corporation that is a wholly owned subsidiary of JM Family Enterprises, Inc., a Delaware corporation ("JMFE"). JMFE also wholly owns Southeast Toyota Distributors, Inc. ("SET"), which is the exclusive distributor of Toyota automobiles and light duty trucks in Florida, Ala- bama, Georgia, North Carolina and South Carolina (the "Five State Area"). As more fully described under "World Omni", World Omni provides consumer lease and installment contract financing to retail customers of, and floorplan and other dealer financing to, Dealers that are located throughout the United States. World Omni wholly owns both ALFI and the Seller. Pursuant to an Amended and Restated Servicing Agreement dated as of July 1, 1994, as amended between World Omni and the Origination Trustee, to be supplemented by the Series 1996-1 SUBI Servicing Supplement dated as of December 1, 1996 among World Omni, the Owner Trustee and the Origination Trustee (collectively, the "Servicing Agreement"), World Omni will act as the initial servicer of the Origination Trust Assets, including the 1996-1 SUBI Assets (in such capacity, the "Servicer"). The Indenture Trustee will be third party beneficiary of the Servicing Agreement. The Notes On the date of initial issuance of the Notes and the Certificates (the "Closing Date") the Issuer will issue, pursuant to the Indenture, Notes in an initial principal amount of $_____ (the "Initial Principal Balance"). A. Payment Dates On the fifteenth day of each month or, if such day is not a Business Day, on the next succeeding Business Day, beginning January 15, 1997 (each, a "Payment Date"), payments of interest and principal on the Notes will be made to the holders of record as of the day immediately preceding such Payment Date or, if Definitive Notes are issued, the last day of the immediately preceding calendar month (each such date, a "Record Date"). For each Payment Date, payments will be made from amounts on deposit in the Payment Account, which include (i) Available Funds with respect to any Payment Date and (ii) amounts, if any, withdrawn from Residual Value Support Account and the Required Amount withdrawn from the Reserve Fund for such Payment Date pursuant to the Indenture after payment of certain expenses of the Issuer such as periodic fees payable to the Servicer, the Indenture Trustee and the Owner Trustee, and reimbursement of Servicer Advances and other reimbursable servicing expenses. See "Description of the Notes". "Available Funds" will consist of payments made by or on behalf of the Lessee on the Master Lease with respect to the immediately preceding calendar month (or, in the case of the first Payment Date, the month of December) and all other payments made to the Lessor as owner of the 1996-1 SUBI, including the proceeds of the disposition to the extent collected during such Collection Period of all Series 1996-1 Leased Vehicles with respect to which the related Series 1996-1 Leases have terminated. See "Security for the Notes." B. Interest On each Payment Date, the Indenture Trustee will make payments of interest for the related Interest Period to the Noteholders, based on the Principal Balance as of the immediately preceding Payment Date (after giving effect to reductions in such Principal Balance as of such immediately preceding Payment Date) or, in the case of the first Payment Date, on the Initial Principal Balance, at an annual percentage rate equal to ___% (the "Note Rate"). Interest on the Notes will accrue for the period from and including the Payment Date in each month to but excluding the Payment Date in the immediately succeeding month (or, in the case of the first Payment Date, from and including December __, 1996) (each, an "Interest Period"). All such payments will be calculated on the basis of a 360-day year consisting of twelve 30-day months. C. Principal Payments On each Payment Date, unless an Event of Default shall have occurred on the Notes, principal will be paid on the Notes, to the extent of amounts remaining in the Payment Account after payment of interest on the Notes, in an amount equal to the Principal Payment Amount. The "Principal Payment Amount" for any Payment Date prior to an Event of Default will equal the sum of (i) a Scheduled Payment (as further described under "__________") and (ii) an Accelerated Principal Payment. The "Accelerated Principal Payment" will consist of the sum of (x) the Outstanding Principal Balance of each Series 1996-1 Contract with respect to which the Master Lease terminated, as a result of a Prepayment of the related Series 1996-1 Contract, during the related Collection Period, (y) the Discounted Principal Balance, as defined herein of any Series 1996-1 Contract as to which the Master Lease terminated during the related Collection Period as a result of any other early termination, and (z) the Outstanding Principal Balance of each Series 1996-1 Contract as to which the Master Lease terminated during the related Collection Period following the Maturity of the Series 1996-1 Contract. The Principal Payment Amount on any Payment Date will not be less than the amount that would cause the Principal Balance of the Notes, after taking into account such payment, to be no greater than [__%] of the Aggregate Net Investment Value of the Issuer's interest in the 1996-1 SUBI as of the close of the related Collection Period. See ______________. The rate of payment of principal on the Notes will depend, in part, upon the rate of Prepayments and other terminations of the Series 1996-1 Contracts. See ___________. In the event that the portion of Available Funds remaining after payment of certain expenses and interest on the Notes, is insufficient to pay the Principal Payment Amount, a draw will be made first, on the Residual Value Support Account, to the extent of amounts available therein, and, if amounts therein are insufficient, on the Reserve Fund. On each Payment Date following the occurrence and continuance of an Event of Default under the Indenture, all amounts received with respect to the 1996-1 SUBI during the related Collection Period would thereafter be applied to repayment of the Notes. In addition, the Indenture Trustee would have the right to exercise other remedies provided for under the Indenture, including, under certain conditions, the right to accelerate the maturity date of the Notes and the right to cause the Series 1996-1 Leased Vehicles to be retitled. In the event that the Seller elects to purchase the 1996-1 SUBI from the Issuer, such purchase will cause the Notes to be redeemed in full. See "Summary -- Optional Purchase of 1996-1 SUBI." The final scheduled Payment Date for the Notes (the "Stated Maturity") will be the _________ Payment Date. A "Business Day" means a day other than a Saturday or Sunday or a day on which banking institutions in the States of Alabama, Delaware, Florida, Illinois or New York are authorized or obligated by law, or executive order or government decree to be closed. D. Registration of The Notes initially will be represented by one or the Notes more notes registered in the name of Cede & Co. ("Cede"), as the nominee of the Depository Trust Company ("DTC"). A person acquiring an interest in the Notes (each, a "Note Owner") may elect to hold his or her interest through DTC, in the United States of America, or Cedel Bank, societe anonyme ("Cedel") or the Euroclear system ("Euroclear") in Europe. Transfer within DTC, Cedel or Euroclear, as the case may be, will be in accordance with the usual rules and operating procedures of the relevant system. Cross-market transfers between persons holding directly or indirectly through DTC, on the one hand, and counterparties holding directly or indirectly through Cedel or Euroclear, on the other, will be effected in DTC through Citibank, N.A. or Morgan Guaranty Trust Company of New York, the relevant depositaries (collectively, the "Depositaries") of Cedel or Euroclear, respectively, and each a partici- pating member of DTC. No Note Owner will be able to receive a definitive note representing such person's interest, except in the limited circumstances described under "Description of the Notes--Definitive Notes". Unless and until de- finitive notes are issued, Noteholders will not be recognized as holders of record of Notes and will be permitted to exercise the rights of such holders only indirectly through DTC. For further information regarding book-entry registration of the Notes, see "Description of the Notes--General" and "--Book Entry Registration". Security for the Notes The security for the Notes will consist primarily of (i) the obligation of the Lessee to make payments pursuant to the Master Lease (and a security interest in the Master Lease Reserve Account pledged to secure such obligation); (ii) subject to the rights of the Lessee under the Master Lease, the Issuer's interest in the 1996-1 SUBI, including (x) the rights to all payments or proceeds of Series 1996-1 Contracts due or received on such Series 1996-1 Contracts or following the termination of the Master Lease, and (y) all proceeds of the sale or other disposition of Series 1996-1 Leased Vehicles; and (iii) the Reserve Fund and the Residual Value Support Account. The Lessee's obligations to make payments under the Master Lease will be secured by the Master Lease Reserve Account. Amounts payable to the Issuer as owner of the 1996-1 SUBI and pursuant to the Master Lease (including amounts withdrawn from the Master Lease Reserve Account to make Master Lease Payments as defined below) will be applied to pay interest on and principal of the Notes, to pay interest on the WOALI Loan, and to make distributions to Certificateholders. See "__________." The Issuer has pledged its right to receive payments as owner and lessor of the 1996-1 SUBI to the Indenture Trustee to secure payment of the Notes. A. The 1996-1 SUBI The 1996-1 SUBI will evidence a beneficial interest in the 1996-1 SUBI Assets. The Origination Trust was created pursuant to a Trust Agreement (the "Origination Trust Agreement"), among ALFI L.P., as grantor and initial beneficiary, the Origination Trustee and First Bank National Association, as successor trust agent (in such capacity, the "Trust Agent"). The 1996-1 SUBI will be evidenced by a certificate (the "1996-1 SUBI Certificate") evidencing a 100% beneficial interest in the 1996-1 SUBI Assets that will be issued by the Origination Trust pursuant to a supplement to the Origination Trust Agreement to be dated as of December 1, 1996 (the "SUBI Supplement" and, together with the Origination Trust Agreement, the "SUBI Trust Agreement") to be entered into among the Origination Trustee, ALFI L.P., First Bank National Association and the Owner Trustee. The Owner Trustee and the Indenture Trustee will each be a third party beneficiary of the SUBI Trust Agreement. The Origination Trust Assets evidenced by the 1996-1 SUBI will primarily include the Series 1996-1 Contracts and the Series 1996-1 Leased Vehicles. The 1996-1 SUBI will not evidence an interest in any Origination Trust Assets other than the 1996-1 SUBI Assets, and payments made on or in respect of all other Origination Trust Assets will not be available to make payments on the Notes. For more information regarding the 1996-1 SUBI, see "The Trust and the SUBI" and "The Origination Trust". 1. The Series 1996-1 Contracts The Series 1996-1 Contracts will consist of a pool of retail closed-end lease contracts originated by Dealers located throughout the United States, each of which will have an original term of not more than 60 months. Each Series 1996-1 Contract will be a finance lease for accounting purposes and will have been written for a "capitalized cost" (which may exceed the manufacturer's suggested retail price), plus an implicit rate in each Lease calculated as an annual percentage rate (the "Lease Rate") on a constant yield basis. The Series 1996-1 Contracts will provide for equal monthly payments (the "Monthly Payments") such that at the end of the related Contract term such capitalized cost will have been amortized to an amount equal to the residual value of the related Leased Vehicle established at the time of origination of such Series 1996-1 Contract (the "Residual Value"). The amount to which the capitalized cost of a Series 1996-1 Contract has been amortized at any point in time is referred to herein as its "Outstanding Principal Balance". The Series 1996-1 Contracts consist of 22,399 lease contracts. As of the Cutoff Date, the Lease Rate of the Series 1996-1 Contracts ranged from 2.14% to 12.65%, with a weighted average Lease Rate of 8.07%. The aggregate of the original principal balances of the Series 1996-1 Contracts as of their respective dates of origination was $563,356,075. As of the Cutoff Date, the aggregate Outstanding Principal Balance of the Series 1996-1 Contracts was $550,184,929 the aggregate Residual Value of the Series 1996-1 Leased Vehicles was $352,975,282 and the Series 1996-1 Contracts had a weighted average original term of 40.67 months and a weighted average remaining term to scheduled maturity of 37.88 months. See "The Series 1996-1 Contracts" for further information regarding the Series 1996-1 Contracts. The Series 1996-1 Contracts were identified by the Servicer from the Origination Trust's portfolio of lease contracts originated by Dealers located throughout the United States that are not evidenced by (or reserved for allocation to) any other SUBI, based upon the criteria specified in the SUBI Trust Agreement and described under "The Series 1996-1 Contracts--Characteristics of the Contracts" and "--Representations, Warranties and Covenants". The "Aggregate Net Investment Value" as of any day will equal the sum of (i) the Discounted Principal Balance of all Series 1996-1 Contracts other than Charged-off, Liquidated, Matured and Additional Loss Contracts and (ii) the aggregate Residual Value of all Series 1996-1 Leased Vehicles to the extent that the related Series 1996-1 Contracts have reached their scheduled maturities (each, a "Matured Contract") within the three immediately preceding Collection Periods but which Series 1996-1 Leased Vehicles as of the last day of the most recent Collection Period have remained unsold and not otherwise disposed of by the Servicer for no more than two full Collection Periods (the "Matured Leased Vehicle Inventory"). For purposes of determining Aggregate Net Investment Value, all payments made on or in respect of a Series 1996-1 Contract (or the related Series 1996-1 Leased Vehicle) with a Lease Rate less than ___% (each, a "Discounted Contract") will be discounted at a rate of ___%, thereby effectively treating a portion of the payments received in respect of the implicit principal component of the related Series 1996-1 Contracts as if it were interest, and providing additional credit enhancement for the benefit of the Noteholders. The "Discounted Principal Balance" of (i) a Discounted Series 1996-1 Contract will equal its Outstanding Principal Balance, discounted by %, and (ii) all Series 1996-1 Contracts other than Discounted Series 1996-1 Contracts will equal their respective Outstanding Principal Balances. As of the Cutoff Date, the aggregate Discounted Principal Balance of the Series 1996-1 Contracts and the Aggregate Net Investment Value was $______________. 2. The Leased Vehicles The Series 1996-1 Leased Vehicles will be comprised of automobiles and light duty trucks. As of the times of origination of the Series 1996-1 Contracts, the related Series 1996-1 Leased Vehicles will be either new vehicles, dealer demonstrator vehicles or manufacturers' program vehicles, as described under "The Series 1996-1 Contracts--General". The certificates of title to the Series 1996-1 Leased Vehicles have been registered at all times in the name of the Origination Trustee (in its capacity as trustee of the Origination Trust). Such certificates of title will not reflect the indirect interest of the Issuer or of the Indenture Trustee in the Series 1996-1 Leased Vehicles by virtue of the Issuer's ownership of the 1996-1 SUBI. Therefore, the Issuer (and accordingly, the Indenture Trustee) does not have perfected title to or a lien on the Leased Vehicles; however, certain steps have been taken to cause the Issuer to have a perfected security interest in the 1996-1 SUBI Certificate and in the Series 1996-1 Contracts and Contract Rights. For further information regarding the titling of the Series 1996-1 Leased Vehicles and the interest of the Issuer and the Indenture Trustee therein, see "Risk Factors--Structural Considerations" and "Certain Legal Aspects of the Series 1996-1 Contracts and the Leased Vehicles--Back-up Security Interests". B. The Master Lease Pursuant to the Master Lease, the Issuer will lease the rights represented by the 1996-1 SUBI Interest to the Lessee for a period of [__] months beginning on December __ (but which will end earlier with respect to particular Series 1996-1 Leased Vehicles upon the termination of the related Series 1996-1 Contract). During the term of the Master Lease, the Lessee will be entitled to receive all payments made on or in respect of the Series 1996-1 Leases, and will be obligated to make Master Lease Payments as described herein. Payments under the Master Lease ("Master Lease Payments") will be payable by the Lessee monthly in arrears in an aggregate amount equal to the sum of (i) the Scheduled Lease Payment and (ii) any Termination Payments (as defined below) then or previously due. The "Scheduled Lease Payment" will equal the sum of (a) the amount that would be the reduction in the Aggregate Net Investment Value of the Series 1996-1 Contracts from the close of the second preceding Collection Period to the close of the related Collection Period assuming no early terminations of Series 1996-1 Contracts and (b) the Aggregate Net Investment Value as of __________ multiplied by the decimal equal to one-twelfth of (x) for months _____ through _____ of the Master Lease term, ___%; (y) for months _____ through _____ of the Master Lease term, ___% and (z) for months _____ through _____ of the Master Lease term, ___%. In the event of a termination of a Series 1996-1 Contract prior to its scheduled termination date, the Lessee will be required to make a payment to the Lessor (a "Termination Payment") in an amount equal to the excess, if any, of (i) the Outstanding Principal Balance (in the case of a Prepayment, or the Discounted Principal Balance in the case of any other early termination) of the related Series 1996-1 Lease over (ii) the amount realized by the Issuer upon disposition of the Series 1996-1 Leased Vehicle with respect to which such termination occurred. On each Deposit Date, all amounts on deposit in the Lessee Collection Account in excess of the Master Lease Payment made on such date will be withdrawn and deposited in the Master Lease Reserve Account. The Master Lease Reserve Account will secure the obligation of the Lessee to make payments under the Master Lease and will be drawn upon on any Deposit Date to the extent necessary to make Master Lease Payments. The Master Lease will provide that upon the occurrence of an event of default on the Master Lease (a "Lease Event of Default") the Issuer or will be entitled, at its option, to terminate the Master Lease, and upon such termination would be entitled to receive directly all payments made thereafter on the Series 1996-1 Leased Vehicles. See "________________" herein. In connection with the execution of the Indenture, however, the Issuer will pledge its rights under the Master Lease to the Indenture Trustee. Pursuant to the pledge, the Indenture Trustee will generally have the right to control the Issuer's exercise of its rights against the Lessee while the Notes are outstanding. In the case of certain payment defaults on the Master Lease for a limited period, the Indenture Trustee will agree that, so long as an Event of Default on the Notes has not occurred, it will not terminate the Master Lease without the concurrence of the Issuer. C.The Collection Accounts "Collections" with respect to any Collection Period will include all net collections collected or received in respect of the Series 1996-1 Contracts and Series 1996-1 Leased Vehicles, including Monthly Payments, Prepayments, Matured Vehicle Proceeds, Repossessed Vehicle Proceeds and other Liquidation Proceeds. Within two Business Days of receipt, Collections (other than Collections received in November 1996), net of certain related expenses, will be deposited into one of two Collection Accounts maintained by the Indenture Trustee for the benefit of the Noteholders and the Issuer. Within two Business Days of receipt, payments made on or in respect of the Series 1996-1 Contracts during the related Collection Period will be deposited by the Servicer, (i) during the term of the Master Lease, into an account (the "Lessee Collection Account") beneficially owned by the Lessee and pledged to the Issuer by the Lessee to secure its obligation to make Master Lease Payments and (ii) following the termination of the Master Lease into an account (the "Issuer Collection Account") beneficially owned by the Issuer and pledged to the Indenture Trustee to secure payment of the Notes. Payments deposited into the Lessee Collection Account during the term of the Master Lease will include, but will not be limited to, Collections constituting Monthly Payments made by the Consumer Lessees and Monthly Payments determined by the Servicer to be due in one or more future Collection Periods (each, a "Payment Ahead") and Advances made by the Servicer. Amounts deposited in the Issuer Collection Account will include Collections constituting Prepayments, proceeds from the disposition of Leased Vehicles relating to Matured Contracts, including payments for excess mileage and excess wear and use ("Matured Leased Vehicle Proceeds"), and proceeds received in connection with the sale or other disposition of Leased Vehicles that have been repossessed ("Repossessed Vehicle Proceeds" and together with Matured Leased Vehicle Proceeds, "Liquidation Proceeds"). The Servicer will be entitled to reimbursement for expenses incurred in connection with the realization of Matured Leased Vehicle Proceeds ("Matured Leased Vehicle Expenses"), Repossessed Vehicle Proceeds ("Repossessed Vehicle Expenses"), and other Liquidation Proceeds (such expenses, together with Matured Leased Vehicle Expenses and Repossessed Vehicle Expenses, "Liquidation Expenses"), either from amounts on deposit in the Lessee Collection Account or the Issuer Collection Account, as applicable, or as a deduction from Matured Leased Vehicle Proceeds, Repossessed Vehicle Proceeds or other Liquidation Proceeds, as appropriate, available for deposit into the Issuer Collection Account. For further details regarding these deposits and reimbursements, see "Security for the Notes--The Accounts--The SUBI Collection Accounts" and "--The Residual Value Support Account". On the Business Day immediately preceding each Payment Date (each, a "Deposit Date") the Servicer will deposit Advances in the Lessee Collection Account and will deposit in the Issuer Collection Account Reallocation Payments by World Omni in respect of Series 1996-1 Contracts as to which an uncured breach of certain representations and warranties or certain servicing covenants has occurred. On the Deposit Date, collections on deposit in the Lessee Collection Account and, if necessary, amounts on deposit in the Master Lease Reserve Account, in respect of the related Collection Period (including amounts in the Lessee Collection Account that previously constituted Payments Ahead but which represent Monthly Payments due during such Collection Period), less an amount equal to the sum of (i) Payments Ahead with respect to one or more future Collection Periods, and (ii) amounts paid to the Servicer in reimbursement of outstanding Advances will be used by the Servicer on behalf of the Lessee (i) to pay certain expenses of the Lessee, including the Servicing Fee, and then (ii) to make Master Lease Payments and (iii) finally, to make required deposits in the Master Lease Reserve Account. Pursuant to the Indenture, Master Lease Payments will be deposited directly in the Payment Account maintained with the Indenture Trustee for the benefit of the Noteholders. On each Deposit Date, all amounts on deposit in the Issuer Collection Account will be withdrawn and deposited pursuant to certain calculations performed by the Servicer, in the Payment Account, the Residual Value Support Account or the Reserve Fund. On each Deposit Date, any amount to be drawn from the Residual Value Support Account (the "Draw Amount") will be withdrawn therefrom and the Required Amount will be withdrawn from the Reserve Fund and such amounts will be deposited into the Payment Account. All payments to Noteholders will be made from the Payment Account. Any funds remaining in the Payment Account on a Payment Date in respect of the related Collection Period following the payment of amounts required to be paid therefrom will be deposited into the Reserve Fund until the amount on deposit therein equals the Reserve Fund Cash Requirement, then into the Residual Value Support Account until the amount deposited therein equals the Support Account Deposit Amount for such Payment Date (plus any such amounts not previously deposited), and thereafter generally will be used to pay accrued unpaid interest on the WOALI Loan and then be released to the Certificateholders. For further information regarding these deposits and payments, see "Security for the Notes--The Accounts--The Payment Account" and "--The SUBI Collection Account". D. Residual Value Support Account On each Deposit Date, if Matured Leased Vehicle Proceeds received during the related Collection Period with respect to Series 1996-1 Leased Vehicles relating to Matured Contracts that were sold or otherwise disposed of during such Collection Period, net of related Matured Leased Vehicle Expenses in- curred during such Collection Period ("Net Matured Leased Vehicle Proceeds"), exceed the aggregate Residual Value of the related Series 1996-1 Leased Vehicles (the "Residual Value Surplus"), then such excess will be deposited into the Residual Value Support Account. In addition deposits will be made into Residual Value Support Account on each Deposit Date in an amount equal to a fixed percentage of the Aggregate Net Investment Value of the Series 1996-1 Contracts as of the beginning of the related Collection Period. Such percentage will equal ____% for months one through twelve and ____% thereafter until the termination of the Master Lease (such amount, the "Support Account Deposit Amount"). If draws on the Residual Value Support Account occur, the Issuer will not be required to deposit additional funds therein to reinstate such draw. Investment earnings on amounts on deposit in the Reserve Account will be retained therein. The Residual Value Support Account will be owned by the Issuer and will be pledged to the Indenture Trustee to secure the Notes. On each Deposit Date, funds on deposit in the Residual Value Support Account, if any, will be withdrawn and deposited into the Payment Account to the extent that Available Funds for such Payment Date are less than the principal and interest payable to Noteholders for such Payment Date. Such a shortfall could occur, for example, as a result of (i) the failure of the Lessee to make required payments under the Master Lease or (ii) the disposition of a Series 1996-1 Leased Vehicle following the scheduled termination of a Contract, for an amount less than the Residual Value thereof. For further information regarding the Reserve Fund, see "Security for the Notes--The Accounts--The Reserve Fund and "--The Residual Value Support Account". E. The Reserve Fund The Issuer will establish a Reserve Fund maintained with the Indenture Trustee for the benefit of the Noteholders. The Reserve Fund is designed to provide additional funds for the benefit of the Noteholders in the event that on any Payment Date, Available Funds, plus the amount drawn on the Residual Value Support Account for such Payment Date, are less than the amount of principal and interest required to be paid to the Noteholders on such Payment Date. The Reserve Fund will be the property of the Issuer and will be pledged to the Indenture Trustee to secure the Notes. The Reserve Fund will be funded by the Issuer with the proceeds of a loan by the Seller made to the Issuer (the "WOALI Loan") of $___________ (the "Reserve Fund Cash Requirement") (which amount will equal % the Aggregate Net Investment Value as of the Cutoff Date). On each Payment Date, the funds in the Reserve Fund will be supplemented by (i) income realized on the investment of amounts on deposit in the Reserve Fund and (ii) the deposit of monies in respect of the related Collection Period remaining in the Payment Account after making all payments required to be made therefrom on such Payment Date prior to such deposit, until the amount on deposit in the Reserve Fund equals the Reserve Fund Cash Requirement then in effect, calculated as described under "Security for the Notes--The Accounts--The Reserve Fund--The Reserve Fund Cash Requirement". On any Payment Date, amounts on deposit in the Reserve Fund will be included in Available Funds and applied as described in "Description of the Notes--Payments on the Notes--"Payment to Noteholders." Interest will be paid on the WOALI Loan on each Payment Date to the extent of funds available therefor after making required payments on the Notes and deposits in the Residual Value Support Account and the Reserve Fund. However, no principal payments will be made on the WOALI Loan until the Notes have been retired. F. Advances On each Deposit Date the Servicer will be obligated to make, by deposit into the Lessee Collection Account, an advance equal to the aggregate Monthly Payments due but not received during the related Collection Period with respect to Series 1996-1 Contracts that are 31 days or more past due as of the end of such Collection Period, and the Servicer may (but shall not be required to) make such an advance with respect to Series 1996-1 Contracts that are one or more days, but less than 31 days, past due as of the end of such Collection Period (each, an "Advance"). The Servicer will not be required to make an Advance to the extent that it determines that such Advance may not be ultimately recoverable by the Servicer from Net Liquidation Proceeds or otherwise. For further information regarding Advances, see "Additional Document Provisions--The Servicing Agreement--Advances". All Advances made with respect to a Series 1996-1 Contract will be reimbursed to the Servicer out of payments on the related Series 1996-1 Contract or out of proceeds of the disposition of the vehicle, and the Servicer's right to reimbursement will have priority over the rights of the Noteholders and the Owner Trustee to such amounts. Servicing Compensation The Servicer will be entitled to receive a monthly fee with respect to the 1996-1 SUBI Assets allocable to the SUBI Interest (the "Servicing Fee"), payable on each Payment Date, equal to one-twelfth of 1% of the Aggregate Net Investment Value as of the first day of the related Collection Period (or, in the case of the first Payment Date, one-twelfth of 1% of the Aggregate Net Investment Value as of the Cutoff Date). The Servicer also will be entitled to additional servicing compensation in the form of, among other things, late fees and other administrative fees or similar charges under the Series 1996-1 Contracts. The Servicer will also be entitled to reimbursement for certain expenses of insuring the Series 1996-1 Leased Vehicles (which amount will be for the paid out of the Lessee Collection Account during the term of the Master Lease), and certain administrative expenses, including the certain costs associated with the sale of Series 1996-1 Vehicles as to which the related Series 1996-1 Contract has terminated. See ____________. For further information regarding Servicer compensation, see "Additional Document Provisions--The Servicing Agreement--Servicing Compensation". Tax Status Skadden, Arps, Slate, Meagher & Flom LLP will deliver an opinion to the effect that the Notes will be characterized as indebtedness for federal income tax purposes. Each Noteholder, by its acceptance of a Note, and each Noteholder by its acquisition of an interest in the Notes, will agree to treat the Notes as indebtedness for federal, state and local income tax purposes. Prospective investors are advised to consult their own tax advisors regarding the federal income tax consequences of the purchase, ownership and disposition of Notes, and the tax consequences arising under the laws of any state or other taxing jurisdiction. For further information regarding material federal income tax considerations with respect to the Notes, see "Certain Income Tax Considerations--Federal Taxation". ERISA Considerations Subject to the considerations discussed in "ERISA Considerations",the notes are eligible for purchase by employee benefit plans. Ratings It is a condition of issuance that two Rating Agencies rate the Notes in its highest rating category. The ratings of the Notes address the likelihood of the payment of principal of and interest on the Notes pursuant to their terms. For further information concerning the ratings assigned to the Notes, see "Ratings of the Notes".
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+Prospectus Summary This Summary is qualified by the more detailed information (including the financial statements and related notes) set forth elsewhere in this Prospectus which should be read in its entirety. Unless the context indicates, or it is specifically indicated otherwise, all references to (i) "Corning" include Corning Incorporated, a New York corporation, and its consolidated subsidiaries, (ii) "Quest Diagnostics" or the "Company" include Corning Clinical Laboratories Inc. (to be renamed Quest Diagnostics Incorporated prior to the Distributions), a Delaware corporation, and its direct and indirect subsidiaries (other than Covance) and assume that the Distributions have occurred, and (iii) "Covance" include Covance Inc. (formerly Corning Pharmaceutical Services Inc.), a Delaware corporation, and its direct and indirect subsidiaries and assume that the Distributions have occurred. Capitalized terms used but not defined in this Summary are defined elsewhere in this Prospectus. The Company Quest Diagnostics is one of the largest independent clinical laboratory testing companies in the United States. Quest Diagnostics offers a broad range of routine and specialty ("esoteric") testing services used by the medical profession in the diagnosis, monitoring and treatment of disease and other medical conditions. Quest Diagnostics' network, which processes approximately 60 million requisitions for diagnostic tests annually, consists of 17 regional laboratories across the United States and the Corning Nichols Institute ("Nichols") esoteric testing laboratory in San Juan Capistrano, California. In addition, Quest Diagnostics has 14 branch laboratories in the United States as well as one branch laboratory in Mexico City (branch laboratories are smaller than regional laboratories), approximately 200 "STAT" laboratories and approximately 850 patient service centers located throughout the United States. For the year ended December 31, 1995 and the nine months ended September 30, 1996, Quest Diagnostics had net revenues of $1,629 million and $1,231 million, respectively, and Adjusted EBITDA (income (loss) before income taxes plus net interest expense, depreciation and amortization and restructuring and other special charges) of $177 million and $135 million, respectively. Quest Diagnostics operates 24 hours a day, 365 days a year, utilizing a fully integrated collection and processing system. Quest Diagnostics generally performs and reports most routine procedures within 24 hours, employing a variety of sophisticated and computerized laboratory testing instruments. Quest Diagnostics provides daily pickup of specimens from most customers principally through an in-house courier system. The specimens are sent to one of the Company's laboratories where one or more tests are performed. Each patient specimen is accompanied by a test requisition form, which is completed by the customer, that indicates the tests to be performed and provides the necessary billing information. Each specimen and related requisition form is checked for completeness and then given a unique bar-coded identification number. Once the appropriate information is entered into the computer system, the tests are performed and the results are delivered to the doctor, primarily through computer interface or manually. Corning entered the clinical laboratory business in 1982 with the acquisition of MetPath Inc. ("MetPath"), which was founded in 1967 and was one of the first laboratories to expand beyond a regional market. Since January 1993, Quest Diagnostics has acquired over thirty laboratories, including Damon Corporation ("Damon"), Bioran Medical Laboratory ("Bioran") and Maryland Medical Laboratory, Inc. ("MML"). In 1994, Quest Diagnostics enhanced its presence in the esoteric testing market through the acquisition of Nichols, a preeminent clinical laboratory with a leading reputation for esoteric testing and test innovations. While Corning's ownership provided the Company with the capital to grow through acquisitions and to become one of the nation's largest independent clinical laboratory testing companies, the management of both Corning and Quest Diagnostics believe that Quest Diagnostics will be more competitive and operate more successfully in the future as an independent company, with a strong, focused and experienced management team to concentrate on customer needs. Independence will also enable Quest Diagnostics to motivate its employees by offering equity-based incentives tied directly to the performance of the Company and individual performance. Quest Diagnostics' management team has implemented a new business strategy, which focuses the business around three key strategic areas: clinical operations, customer focus and technological leadership and excellence. The Clinical Laboratory Testing Industry Clinical testing is a critical component in the delivery of quality health care service to patients. Currently, clinical laboratory testing is the first step in determining how a significant amount of all health care dollars are spent. Quest Diagnostics believes that in 1995 the entire United States clinical laboratory industry had revenues exceeding $30 billion. The clinical laboratory industry consists primarily of three types of providers: hospital-affiliated laboratories, independent clinical laboratories, such as Quest Diagnostics, and physician-office laboratories. The Company believes that in 1995 approximately 56% of the clinical testing revenues in the United States were attributable to hospital-affiliated laboratories, approximately 36% were attributable to independent clinical laboratories and approximately 8% were attributable to physicians in their offices and laboratories. Quest Diagnostics believes that consolidation will continue in the clinical laboratory testing business. In addition, Quest Diagnostics believes that it and the other large independent clinical laboratory testing companies may have the opportunity to increase their share of the overall clinical laboratories testing market due to a number of external factors, including cost efficiencies afforded by large-scale automated testing, Medicare reimbursement reductions and the growth of managed health care entities which require low-cost testing services and large service networks. In addition, legal restrictions on physician referrals and the ownership of laboratories as well as increased regulation of laboratories are expected to contribute to the continuing consolidation of the industry. Quest Diagnostics believes that a number of factors are likely to positively influence the volume of clinical laboratory testing performed in the United States in the future, including (1) the general aging of the population in the United States; (2) an expanded base of scientific knowledge which has led to the development of more sophisticated specialized tests and an increase in the awareness of physicians of the value of clinical laboratory testing as a cost-effective means of early detection of disease and monitoring of treatment; (3) an increase in the number and types of tests which are, due to advances in technology and increased cost efficiencies, readily available on a more affordable basis to physicians; (4) expanded substance-abuse testing by corporations and governmental agencies; and (5) increased testing for sexually transmitted diseases such as AIDS. The impact of these factors is expected to be offset in part by increased controls over the utilization of clinical laboratory tests by both Medicare and the private sector, particularly managed care organizations. Business Strategy Quest Diagnostics' overall goal is to be recognized by its customers, employees and competitors as the best provider of comprehensive and innovative clinical testing, information and services. To achieve this, Quest Diagnostics' management team has focused the business around three key strategic areas: clinical operations, customer focus and technological leadership and excellence. (bullet) Best Supplier. Quest Diagnostics seeks to be the best supplier of the highest quality and the lowest-cost testing services. Health care providers and patients expect accurate, timely and consistent laboratory test results at a fair price. (bullet) Lowest-cost provider. Quest Diagnostics' average cost per requisition varies significantly among its regional laboratories; there is an approximately $7.00 difference in cost per requisition between the most efficient regional laboratory and the average, and an approximately $13.00 difference in cost per requisition between the most and the least efficient regional laboratories. In many cases, these variations do not relate to testing volumes or mixes, space costs, service requirements or regional labor cost differences. To reduce costs, Quest Diagnostics has begun to replicate the best practices from each region throughout its national network. Management expects to achieve significant cost savings within the next three years as these programs are fully implemented. * (bullet) Highest Quality Provider. Quest Diagnostics is dedicated to providing accurate and timely test results and to being viewed by its customers as the highest quality provider of clinical testing services. Quest Diagnostics believes that implementation of best practices already developed in certain regions will permit the Company to be viewed by its customers as the highest quality provider of clinical testing services. (bullet) Preferred Provider. Quest Diagnostics seeks to be the preferred provider of laboratory testing services to existing and new health care networks on a selective basis determined by profitability of accounts. Quest Diagnostics believes that it will become the preferred provider to these networks as (1) large networks typically prefer to utilize large independent clinical laboratories that can service them on a national or regional basis and (2) the Company continues to pursue its primary strategy of becoming the highest quality, lowest-cost provider. To achieve this, Quest Diagnostics will employ a rigorous national and regional process to both select and pursue customers and allocate resources to support these efforts. *This is a forward looking statement and is based on current expectations. Actual results may vary materially from those projected. See "Business- Important Factors Regarding Forward Looking Statements." In particular, see factors (a), (d) and (j). (bullet) Account Profitability. Quest Diagnostics intends to refocus its sales efforts on pursuing and keeping profitable accounts. Quest Diagnostics is actively reviewing the profitability of its current accounts, including those with managed care organizations, and will either increase pricing or eliminate accounts that cannot be serviced profitably. (bullet) Regional Profitability. Quest Diagnostics presently believes that it has the leading market share among independent clinical laboratories in most routine testing markets of the northeast, mid-Atlantic and midwest regions. Approximately 65% of Quest Diagnostics' revenues and almost all of its EBITDA is generated from markets in which the Company believes that it has the leading market share. In most of these markets, Quest Diagnostics believes that it also is the lowest cost provider. Quest Diagnostics is evaluating its strategic alternatives relative to units whose profitability does not meet its internal goals. These alternatives may include joint ventures, alliances, or dispositions. Quest Diagnostics believes that, while the clinical laboratory industry is becoming national in scope, the Company can subcontract with other clinical laboratories to perform testing for national accounts in any markets in which the Company chooses not to compete. (bullet) Leading Innovator. Quest Diagnostics intends to remain a leading innovator in the clinical laboratory industry by continuing to introduce new tests, technology and services. Through its relationship with the academic community and pharmaceutical and biotechnology firms and a research and development budget exceeding $15 million per year, Quest Diagnostics believes it is one of the leaders in transferring innovation from academic biotechnology laboratories to the market. Recent Developments By a plea agreement and civil agreement and release dated October 9, 1996, between the Department of Justice ("DOJ") and Damon, all federal criminal matters within the scope of the various federal investigations against Damon, and all claims including the civil qui tam cases underlying the civil investigations were settled for an aggregate of $119 million, which sum was reimbursed to Quest Diagnostics by Corning. The Damon settlement does not exclude Quest Diagnostics from future participation in any federal health care programs on account of Damon's practices. Quest Diagnostics' aggregate reserve with respect to all governmental and private claims was $215 million at September 30, 1996 and is estimated to be reduced to $85 million as of the Distribution Date as a result of the payment of settled claims, primarily the Damon settlement of $119 million. Based on information available to management and Quest Diagnostics' experience with past settlements (including the fact that the aggregate amount of the Damon settlement was significantly in excess of established reserves) management has reassessed its reserve levels and believes that its current level of reserves is adequate. However, it is possible that additional information may become available which may cause the final resolution of these matters to be in excess of established reserves by an amount which could be material to Quest Diagnostics' results of operations and, for non-indemnified claims, Quest Diagnostics' cash flows in the period in which such claims are settled. While none of the governmental or nongovernmental investigations or claims is covered by insurance, Quest Diagnostics does not believe that these matters will have a material adverse effect on Quest Diagnostics' overall financial condition. Corning Indemnity In connection with the Distributions, Corning has agreed to indemnify Quest Diagnostics against all monetary penalties, fines or settlements arising out of any governmental claims arising out of alleged violations of applicable federal fraud and health care statutes and relating to billing practices of Quest Diagnostics and its predecessors that have been settled or are pending on the Distribution Date. Corning has also agreed to indemnify Quest Diagnostics for 50% of the aggregate of all judgment or settlement payments made by Quest Diagnostics that are in excess of $42.0 million in respect of claims by private parties (i.e., nongovernmental parties such as private insurers) that relate to indemnified or previously settled governmental claims and that allege overbillings by Quest Diagnostics or any existing subsidiaries of Quest Diagnostics, for services provided prior to the Distribution Date; provided, however, such indemnification for nongovernmental claims will not exceed $25.0 million in the aggregate and all amounts indemnified against by Corning for the benefit of Quest Diagnostics will be calculated on a net after-tax basis. Such indemnification will not cover (i) any governmental claims that arise after the Distribution Date pursuant to service of subpoena or other notice of such investigation after the Distribution Date, (ii) any nongovernmental claims unrelated to the indemnified governmental claims or investigations, (iii) any nongovernmental claims not settled prior to five years after the Distribution Date, (iv) any consequential or incidental damages relating to the billing claims, including losses of revenues and profits as a consequence of exclusion for participation in federal or state health care programs or (v) the fees and expenses of litigation. The Distributions On May 13, 1996, the board of directors of Corning approved a plan to distribute to Corning shareholders the clinical laboratory testing business being conducted by Quest Diagnostics and the contract research business being conducted by Quest Diagnostics' wholly owned subsidiary, Covance (together, the "Distributions"). The Distributions will be effected by distributing all of the outstanding shares of Quest Diagnostics common stock (the "Quest Diagnostics Common Stock") to holders of Corning common stock (the "Corning Common Stock"), followed immediately by the distribution of all of the common stock of Covance (the "Covance Common Stock") to those same holders, as holders of Quest Diagnostics Common Stock. It is expected that the Distributions will be made on December 31, 1996 (the date on which the Distributions are to be made, the "Distribution Date"). Prior to the consummation of the offering of the Notes contemplated hereby (the "Offering"), the Company entered into a $450 million senior, secured credit facility (the "Credit Facility"), among the Company, the lenders listed therein, NationsBank, N.A., as Issuing Bank, Wachovia Bank of Georgia, N.A., as Swingline Bank, and Morgan Guaranty Trust Company of New York, as Administrative Agent. The Credit Facility is comprised of a $300 million six-year amortizing term loan ("Tranche A Loan"), a $50 million seven-year term loan ("Tranche B Loan" and together with the Tranche A Loan, the "Term Loans") and a $100 million six-year revolving working capital facility (the "Working Capital Facility"). Corning currently has approximately $1.2 billion of Quest Diagnostics intercompany debt. Approximately $145 million of net proceeds from the Offering, together with the $350 million of borrowings under the Term Loans, will be paid to Corning in satisfaction of a portion of the outstanding intercompany debt. Corning will contribute the remaining intercompany debt to Quest Diagnostics' capital. Borrowings under the Working Capital Facility, substantially all of which is expected to be available as of the Distribution Date, will provide for future working capital needs and other general corporate purposes. The Offering <TABLE> <CAPTION> <S> <C> Securities Offered $150,000,000 aggregate principal amount of % Senior Subordinated Notes due December 15, 2006 (the "Notes"). Maturity Date December 15, 2006. Interest Payment Date June 15 and December 15, commencing June 15, 1997. Optional Redemption by the Company The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after December 15, 2001, at the redemption prices set forth herein, plus accrued and unpaid interest, if any, to but excluding the date fixed for redemption. In addition, if as a result of an event outside the control of Corning, Quest Diagnostics and Covance, the Distributions do not occur prior to March 31, 1997, the Notes will be subject to redemption, as a whole and not in part, at the option of Quest Diagnostics, prior to June 30, 1997, at a redemption price equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to but excluding the date fixed for redemption. See "Description of the Notes--Optional Redemption." Change of Control Offer Upon a Change of Control, the Company has the obligation to offer to purchase all the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to but excluding the date of purchase. See "Description of the Notes-- Repurchase at the Option of Holders--Change of Control" for a discussion of the circumstances in which the Company may not be required to make an offer to purchase upon a Change of Control. Offers to Purchase In the event of certain asset sales, the Company will be required to offer to repurchase the Notes at 100% of their principal amount, plus accrued and unpaid interest, if any, to but excluding the date of purchase with the net proceeds of such asset sales. Subordination The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company, including all indebtedness of the Company under the Credit Facility. The Notes will rank Pari Passu in right of payment with any other senior subordinated indebtedness of the Company. Subsidiary Guarantees The Notes will be guaranteed, jointly and severally, and fully and unconditionally, on a senior subordinated basis by the Guarantors (the "Senior Subordinated Guarantees"). The obligations of any Guarantor with respect to its Senior Subordinated Guarantee will be subordinated in right of payment, to the same extent as the obligations of the Company in respect of the Notes, to all existing and future Senior Guarantees, which will include the guarantees of the Credit Facility. The Senior Subordinated Guarantees would also be subordinated to all existing and future indebtedness of the Guarantors if the Senior Subordinated Guarantees were avoided or subordinated in favor of the Guarantors' other creditors. See "Risk Factors--Fraudulent Conveyance." The obligations of a Guarantor under its Senior Subordinated Guarantee will be released in certain circumstances, including if the Guarantor ceases to guarantee the Credit Facility. See "Description of the Notes--Senior Subordinated Guarantees." Principal Covenants The indenture under which the Notes are issued (the "Indenture") will impose certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt and senior in right of payment to the Notes, enter into leases, incur liens, merge or consolidate with any other person, or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. Use of Proceeds The Company intends to use the proceeds from the sale of the Notes, together with the proceeds of borrowings under the Credit Facility, to repay certain intercompany indebtedness owed to Corning. See "Use of Proceeds." The Distributions The Notes are being offered in connection with the Distributions of the Quest Diagnostics Common Stock and the Covance Common Stock to holders of Corning Common Stock. The closing of the offering of the Notes is anticipated to occur prior to the Distributions. Listing The Notes have been approved for listing on the New York Stock Exchange, subject to official notice of issuance. Risk Factors See "Risk Factors" for a discussion of certain factors that should be considered in connection with an investment in the Notes. </TABLE> Summary Financial Data The following table summarizes certain historical and pro forma financial data of Quest Diagnostics at the dates and for each of the periods indicated. The selected financial data as of and for each of the years ended December 31, 1995, 1994 and 1993 have been derived from the audited combined financial statements of (the "Audited Financial Statements") and the notes thereto included elsewhere herein. The selected financial data as of and for the three and nine months ended September 30, 1996 and 1995 have been derived from the unaudited interim combined financial statements of Quest Diagnostics (the "Interim Financial Statements" and, together with the Audited Financial Statements, the "Financial Statements") and the notes thereto included elsewhere herein. In the opinion of Quest Diagnostics management, the unaudited interim combined financial statements include all adjustments, consisting of only normal recurring adjustments, that are necessary for a fair presentation of the financial position and results of operations for these periods. The unaudited interim results of operations for the three and nine months ended September 30, 1996 are not necessarily indicative of the results for the entire year ending December 31, 1996. The selected pro forma financial data have been derived from the unaudited pro forma combined financial information of Quest Diagnostics for the year ended December 31, 1995 and for the three and nine months ended September 30, 1996 (the "Pro Forma Financial Information") and the notes thereto included elsewhere herein. The pro forma statement of operations data gives effect to the Distributions and the Accounting Policy Change (as defined below) as if they had occurred on January 1, 1995 and the pro forma balance sheet data gives effect to the Distributions and the Accounting Policy Change as if they had occurred on September 30, 1996. The pro forma financial data does not purport to represent what Quest Diagnostics' results of operations would have been if the Distributions and the Accounting Policy Change had in fact occurred on such dates, nor does it purport to indicate the future financial position or results of future operations of Quest Diagnostics. The pro forma adjustments are based upon currently available information and certain assumptions that Quest Diagnostics management believes to be reasonable. The summary historical and pro forma financial data set forth below should be read in conjunction with "Selected Historical Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Financial Statements and the notes thereto and the Pro Forma Financial Information and the notes thereto. <TABLE> <CAPTION> Three Months Ended September 30, Nine Months Ended September 30, ------------------------------------------------------------------------------------------------ Pro Forma Historical Pro Forma Historical ------------------------------- ------------------------------- 1996(a) 1996 1995 1996(a) 1996 1995 --------------- --------------- --------------- ---------------- ---------------- -------------- (in thousands, except share, per share and percentage data) <S> <C> <C> <C> <C> <C> <C> Statement of Operations Data: Net revenues $ 405,352 $ 405,352 $ 399,959 $ 1,231,290 $1,231,290 $1,239,474 Costs and expenses: Cost of services 255,390 255,390 240,868 768,809 768,809 735,984 Selling, general and administrative 125,190 125,190 181,346(c) 371,439 371,439 399,635(c) Provision for restructuring and other special charges(d) 155,730 155,730 201,730 201,730 45,885 Interest expense, net 12,189 19,866 20,927 36,938 59,887 61,529 Amortization of intangible assets 7,672 10,328 11,293 23,803 31,772 33,678 Other, net 1,837 1,837 1,930 (198) (198) 4,429 --------------- --------------- --------------- ---------------- ---------------- -------------- Total 558,008 568,341 456,364 1,402,521 1,433,439 1,281,140 --------------- --------------- --------------- ---------------- ---------------- -------------- Income (loss) before taxes (152,656) (162,989) (56,405) (171,231) (202,149) (41,666) Income tax expense (benefit) (40,521) (43,553) (17,810) (34,215) (43,280) (3,642) --------------- --------------- --------------- ---------------- ---------------- -------------- Income (loss) before cumulative effect of change in accounting principle (112,135) (119,436) (38,595) (137,016) (158,869) (38,024) Cumulative effect of change in accounting principle --------------- --------------- --------------- ---------------- ---------------- -------------- Net income (loss) $ (112,135) $ (119,436) $ (38,595) $ (137,016) $ (158,869) $ (38,024) =============== =============== =============== ================ ================ ============== Pro forma shares outstanding(e) 28,901,735 28,901,735 Pro forma net loss per share $ (3.88) $ (4.74) Balance Sheet Data (at end of period): Cash $ 40,000 $ 48,319 $ 46,908 $ 40,000 $ 48,319 $ 46,908 Working capital 306,741 114,718 129,319 306,741 114,718 129,319 Total assets 1,612,459 1,886,378 1,896,058 1,612,459 1,886,378 1,896,058 Long-term debt 515,494 1,219,900 1,114,367 515,494 1,219,900 1,114,367 Total debt 517,379 1,231,785 1,226,211 517,379 1,231,785 1,226,211 Stockholder's equity 604,099 132,670 320,576 604,099 132,670 320,576 Ratio of earnings to fixed charges -- (f) -- (f) -- (f) -- (f) -- (f) -- (f) Supplemental Data: Net cash provided by operating activities $ 25,236 $ 25,236 $ 38,202 $ 41,937 $ 41,937 $ 53,789 Net cash used in investing activities (7,904) (7,904) (17,044) (53,097) (53,097) (77,911) Net cash provided by (used in) financing activities (6,618) (6,618) (18,006) 23,033 23,033 32,311 Bad debt expense $ 30,539 $ 30,539 $ 85,831(c) $ 81,891 $ 81,891 $ 127,297(c) Bad debt expense as a % of net revenues 7.5% 7.5% 21.5% 6.7% 6.7% 10.3% Rent expense $ 12,515 $ 12,515 $ 11,860 $ 37,315 $ 37,315 $ 35,060 Capital expenditures 11,912 11,912 16,441 58,802 58,802 56,062 Depreciation expense $ 14,672 $ 14,672 $ 14,275 $ 43,460 $ 43,460 $ 42,358 EBITDA(g) $ (118,123)(h) $ (118,123)(h) $ (9,910)(c) $ (67,030)(h) $ (67,030)(h) $ 95,899(c) EBITDA as a % of net revenues (29.1%) (29.1%) (2.5%) (5.4%) (5.4%) 7.7% Adjusted EBITDA(i) $ 37,607 $ 37,607 $ (9,910)(c) $ 134,700 $ 134,700 $ 141,784(c) Adjusted EBITDA as a % of net revenues 9.3% 9.3% (2.5%) 10.9% 10.9% 11.4% Supplemental Ratio Data: Adjusted EBITDA/interest expense, net 3.1x 3.6x (Adjusted EBITDA-capital expenditures)/interest expense, net 2.1x 2.1x (Total debt--cash)/annualized adjusted EBITDA 3.2x 2.7x </TABLE> (Footnotes on page 14) <TABLE> <CAPTION> Year Ended December 31, ----------------------------------------------------------- Pro Forma Historical ------------------------------------------- 1995(a) 1995 1994(b) 1993 --------------- --------------- ------------- ------------- (in thousands, except share, per share and percentage data) <S> <C> <C> <C> <C> Statement of Operations Data: Net revenues $ 1,629,388 $1,629,388 $1,633,699 $1,416,338 Costs and expenses: Cost of services 980,232 980,232 969,844 805,729 Selling, general and administrative 523,271(c) 523,271(c) 411,939 363,579 Provision for restructuring and other special charges(d) 50,560 50,560 79,814 99,600 Interest expense, net 50,748 82,016 63,295 41,898 Amortization of intangible assets 34,031 44,656 42,588 28,421 Other, net 6,221 6,221 3,464 6,423 --------------- --------------- ------------- ------------- Total 1,645,063 1,686,956 1,570,944 1,345,650 --------------- --------------- ------------- ------------- Income (loss) before taxes (15,675) (57,568) 62,755 70,688 Income tax expense (benefit) 6,835 (5,516) 34,410 25,929 --------------- --------------- ------------- ------------- Income (loss) before cumulative effect of change in accounting principle (22,510) (52,052) 28,345 44,759 Cumulative effect of change in accounting principle (10,562) --------------- --------------- ------------- ------------- Net income (loss) $ (22,510) $ (52,052) $ 28,345 $ 34,197 =============== =============== ============= ============= Pro forma shares outstanding(e) 28,901,735 Pro forma net loss per share $ (0.78) Balance Sheet Data (at end of period): Cash $ 36,446 $ 38,719 $ 39,410 Working capital 200,740 214,358 139,771 Total assets 1,853,385 1,882,663 1,861,162 Long-term debt 1,195,566 1,153,054 1,025,787 Total debt 1,207,714 1,165,626 1,123,307 Stockholder's equity 295,801 386,812 395,509 Ratio of earnings to fixed charges -- (f) -- (f) 1.77(f) 2.20(f) Supplemental Data: Net cash provided by operating activities $ 85,828 $ 85,828 $ 37,963 $ 99,614 Net cash used in investing activities (93,087) (93,087) (46,186) (473,687) Net cash provided by (used in) financing activities 4,986 4,986 7,532 392,956 Bad debt expense $ 152,590(c) $ 152,590(c) $ 59,480 $ 47,240 Bad debt expense as a % of net revenues 9.4% 9.4% 3.6% 3.3% Rent expense $ 46,900 $ 46,900 $ 49,400 $ 46,900 Capital expenditures 74,045 74,045 93,354 65,317 Depreciation expense $ 56,857 $ 56,857 $ 46,929 $ 38,058 EBITDA(g) $ 125,961(c) $ 125,961(c) $ 215,567 $ 179,065 EBITDA as a % of net revenues 7.7% 7.7% 13.2% 12.6% Adjusted EBITDA(i) $ 176,521(c) $ 176,521(c) $ 295,381 $ 278,665 Adjusted EBITDA as a % of net revenues 10.8% 10.8% 18.1% 19.7% Supplemental Ratio Data: Adjusted EBITDA/interest expense, net 3.5x (Adjusted EBITDA-capital expenditures)/ interest expense, net 2.0x </TABLE> (Footnotes on page 14) (Footnotes for preceding pages) (a) Adjusted to reflect the pro forma effects of the Distributions and the Accounting Policy Change. See "Selected Historical Financial Data" and "Pro Forma Financial Information."
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+Prospectus Summary This Summary is qualified by the more detailed information (including the financial statements and related notes) set forth elsewhere in this Prospectus which should be read in its entirety. Unless the context indicates, or it is specifically indicated otherwise, all references to (i) "Corning" include Corning Incorporated, a New York corporation, and its consolidated subsidiaries, (ii) "Quest Diagnostics" or the "Company" include Corning Clinical Laboratories Inc. (to be renamed Quest Diagnostics Incorporated prior to the Distributions), a Delaware corporation, and its direct and indirect subsidiaries (other than Covance) and assume that the Distributions have occurred, and (iii) "Covance" include Covance Inc. (formerly Corning Pharmaceutical Services Inc.), a Delaware corporation, and its direct and indirect subsidiaries and assume that the Distributions have occurred. Capitalized terms used but not defined in this Summary are defined elsewhere in this Prospectus. The Company Quest Diagnostics is one of the largest independent clinical laboratory testing companies in the United States. Quest Diagnostics offers a broad range of routine and specialty ("esoteric") testing services used by the medical profession in the diagnosis, monitoring and treatment of disease and other medical conditions. Quest Diagnostics' network, which processes approximately 60 million requisitions for diagnostic tests annually, consists of 17 regional laboratories across the United States and the Corning Nichols Institute ("Nichols") esoteric testing laboratory in San Juan Capistrano, California. In addition, Quest Diagnostics has 14 branch laboratories in the United States as well as one branch laboratory in Mexico City (branch laboratories are smaller than regional laboratories), approximately 200 "STAT" laboratories and approximately 850 patient service centers located throughout the United States. For the year ended December 31, 1995 and the nine months ended September 30, 1996, Quest Diagnostics had net revenues of $1,629 million and $1,231 million, respectively, and Adjusted EBITDA (income (loss) before income taxes plus net interest expense, depreciation and amortization and restructuring and other special charges) of $177 million and $135 million, respectively. Quest Diagnostics operates 24 hours a day, 365 days a year, utilizing a fully integrated collection and processing system. Quest Diagnostics generally performs and reports most routine procedures within 24 hours, employing a variety of sophisticated and computerized laboratory testing instruments. Quest Diagnostics provides daily pickup of specimens from most customers principally through an in-house courier system. The specimens are sent to one of the Company's laboratories where one or more tests are performed. Each patient specimen is accompanied by a test requisition form, which is completed by the customer, that indicates the tests to be performed and provides the necessary billing information. Each specimen and related requisition form is checked for completeness and then given a unique bar-coded identification number. Once the appropriate information is entered into the computer system, the tests are performed and the results are delivered to the doctor, primarily through computer interface or manually. Corning entered the clinical laboratory business in 1982 with the acquisition of MetPath Inc. ("MetPath"), which was founded in 1967 and was one of the first laboratories to expand beyond a regional market. Since January 1993, Quest Diagnostics has acquired over thirty laboratories, including Damon Corporation ("Damon"), Bioran Medical Laboratory ("Bioran") and Maryland Medical Laboratory, Inc. ("MML"). In 1994, Quest Diagnostics enhanced its presence in the esoteric testing market through the acquisition of Nichols, a preeminent clinical laboratory with a leading reputation for esoteric testing and test innovations. While Corning's ownership provided the Company with the capital to grow through acquisitions and to become one of the nation's largest independent clinical laboratory testing companies, the management of both Corning and Quest Diagnostics believe that Quest Diagnostics will be more competitive and operate more successfully in the future as an independent company, with a strong, focused and experienced management team to concentrate on customer needs. Independence will also enable Quest Diagnostics to motivate its employees by offering equity-based incentives tied directly to the performance of the Company and individual performance. Quest Diagnostics' management team has implemented a new business strategy, which focuses the business around three key strategic areas: clinical operations, customer focus and technological leadership and excellence. The Clinical Laboratory Testing Industry Clinical testing is a critical component in the delivery of quality health care service to patients. Currently, clinical laboratory testing is the first step in determining how a significant amount of all health care dollars are spent. Quest Diagnostics believes that in 1995 the entire United States clinical laboratory industry had revenues exceeding $30 billion. The clinical laboratory industry consists primarily of three types of providers: hospital-affiliated laboratories, independent clinical laboratories, such as Quest Diagnostics, and physician-office laboratories. The Company believes that in 1995 approximately 56% of the clinical testing revenues in the United States were attributable to hospital-affiliated laboratories, approximately 36% were attributable to independent clinical laboratories and approximately 8% were attributable to physicians in their offices and laboratories. Quest Diagnostics believes that consolidation will continue in the clinical laboratory testing business. In addition, Quest Diagnostics believes that it and the other large independent clinical laboratory testing companies may have the opportunity to increase their share of the overall clinical laboratories testing market due to a number of external factors, including cost efficiencies afforded by large-scale automated testing, Medicare reimbursement reductions and the growth of managed health care entities which require low-cost testing services and large service networks. In addition, legal restrictions on physician referrals and the ownership of laboratories as well as increased regulation of laboratories are expected to contribute to the continuing consolidation of the industry. Quest Diagnostics believes that a number of factors are likely to positively influence the volume of clinical laboratory testing performed in the United States in the future, including (1) the general aging of the population in the United States; (2) an expanded base of scientific knowledge which has led to the development of more sophisticated specialized tests and an increase in the awareness of physicians of the value of clinical laboratory testing as a cost-effective means of early detection of disease and monitoring of treatment; (3) an increase in the number and types of tests which are, due to advances in technology and increased cost efficiencies, readily available on a more affordable basis to physicians; (4) expanded substance-abuse testing by corporations and governmental agencies; and (5) increased testing for sexually transmitted diseases such as AIDS. The impact of these factors is expected to be offset in part by increased controls over the utilization of clinical laboratory tests by both Medicare and the private sector, particularly managed care organizations. Business Strategy Quest Diagnostics' overall goal is to be recognized by its customers, employees and competitors as the best provider of comprehensive and innovative clinical testing, information and services. To achieve this, Quest Diagnostics' management team has focused the business around three key strategic areas: clinical operations, customer focus and technological leadership and excellence. (bullet) Best Supplier. Quest Diagnostics seeks to be the best supplier of the highest quality and the lowest-cost testing services. Health care providers and patients expect accurate, timely and consistent laboratory test results at a fair price. (bullet) Lowest-cost provider. Quest Diagnostics' average cost per requisition varies significantly among its regional laboratories; there is an approximately $7.00 difference in cost per requisition between the most efficient regional laboratory and the average, and an approximately $13.00 difference in cost per requisition between the most and the least efficient regional laboratories. In many cases, these variations do not relate to testing volumes or mixes, space costs, service requirements or regional labor cost differences. To reduce costs, Quest Diagnostics has begun to replicate the best practices from each region throughout its national network. Management expects to achieve significant cost savings within the next three years as these programs are fully implemented. * (bullet) Highest Quality Provider. Quest Diagnostics is dedicated to providing accurate and timely test results and to being viewed by its customers as the highest quality provider of clinical testing services. Quest Diagnostics believes that implementation of best practices already developed in certain regions will permit the Company to be viewed by its customers as the highest quality provider of clinical testing services. (bullet) Preferred Provider. Quest Diagnostics seeks to be the preferred provider of laboratory testing services to existing and new health care networks on a selective basis determined by profitability of accounts. Quest Diagnostics believes that it will become the preferred provider to these networks as (1) large networks typically prefer to utilize large independent clinical laboratories that can service them on a national or regional basis and (2) the Company continues to pursue its primary strategy of becoming the highest quality, lowest-cost provider. To achieve this, Quest Diagnostics will employ a rigorous national and regional process to both select and pursue customers and allocate resources to support these efforts. *This is a forward looking statement and is based on current expectations. Actual results may vary materially from those projected. See "Business- Important Factors Regarding Forward Looking Statements." In particular, see factors (a), (d) and (j). (bullet) Account Profitability. Quest Diagnostics intends to refocus its sales efforts on pursuing and keeping profitable accounts. Quest Diagnostics is actively reviewing the profitability of its current accounts, including those with managed care organizations, and will either increase pricing or eliminate accounts that cannot be serviced profitably. (bullet) Regional Profitability. Quest Diagnostics presently believes that it has the leading market share among independent clinical laboratories in most routine testing markets of the northeast, mid-Atlantic and midwest regions. Approximately 65% of Quest Diagnostics' revenues and almost all of its EBITDA is generated from markets in which the Company believes that it has the leading market share. In most of these markets, Quest Diagnostics believes that it also is the lowest cost provider. Quest Diagnostics is evaluating its strategic alternatives relative to units whose profitability does not meet its internal goals. These alternatives may include joint ventures, alliances, or dispositions. Quest Diagnostics believes that, while the clinical laboratory industry is becoming national in scope, the Company can subcontract with other clinical laboratories to perform testing for national accounts in any markets in which the Company chooses not to compete. (bullet) Leading Innovator. Quest Diagnostics intends to remain a leading innovator in the clinical laboratory industry by continuing to introduce new tests, technology and services. Through its relationship with the academic community and pharmaceutical and biotechnology firms and a research and development budget exceeding $15 million per year, Quest Diagnostics believes it is one of the leaders in transferring innovation from academic biotechnology laboratories to the market. Recent Developments By a plea agreement and civil agreement and release dated October 9, 1996, between the Department of Justice ("DOJ") and Damon, all federal criminal matters within the scope of the various federal investigations against Damon, and all claims including the civil qui tam cases underlying the civil investigations were settled for an aggregate of $119 million, which sum was reimbursed to Quest Diagnostics by Corning. The Damon settlement does not exclude Quest Diagnostics from future participation in any federal health care programs on account of Damon's practices. Quest Diagnostics' aggregate reserve with respect to all governmental and private claims was $215 million at September 30, 1996 and is estimated to be reduced to $85 million as of the Distribution Date as a result of the payment of settled claims, primarily the Damon settlement of $119 million. Based on information available to management and Quest Diagnostics' experience with past settlements (including the fact that the aggregate amount of the Damon settlement was significantly in excess of established reserves) management has reassessed its reserve levels and believes that its current level of reserves is adequate. However, it is possible that additional information may become available which may cause the final resolution of these matters to be in excess of established reserves by an amount which could be material to Quest Diagnostics' results of operations and, for non-indemnified claims, Quest Diagnostics' cash flows in the period in which such claims are settled. While none of the governmental or nongovernmental investigations or claims is covered by insurance, Quest Diagnostics does not believe that these matters will have a material adverse effect on Quest Diagnostics' overall financial condition. Corning Indemnity In connection with the Distributions, Corning has agreed to indemnify Quest Diagnostics against all monetary penalties, fines or settlements arising out of any governmental claims arising out of alleged violations of applicable federal fraud and health care statutes and relating to billing practices of Quest Diagnostics and its predecessors that have been settled or are pending on the Distribution Date. Corning has also agreed to indemnify Quest Diagnostics for 50% of the aggregate of all judgment or settlement payments made by Quest Diagnostics that are in excess of $42.0 million in respect of claims by private parties (i.e., nongovernmental parties such as private insurers) that relate to indemnified or previously settled governmental claims and that allege overbillings by Quest Diagnostics or any existing subsidiaries of Quest Diagnostics, for services provided prior to the Distribution Date; provided, however, such indemnification for nongovernmental claims will not exceed $25.0 million in the aggregate and all amounts indemnified against by Corning for the benefit of Quest Diagnostics will be calculated on a net after-tax basis. Such indemnification will not cover (i) any governmental claims that arise after the Distribution Date pursuant to service of subpoena or other notice of such investigation after the Distribution Date, (ii) any nongovernmental claims unrelated to the indemnified governmental claims or investigations, (iii) any nongovernmental claims not settled prior to five years after the Distribution Date, (iv) any consequential or incidental damages relating to the billing claims, including losses of revenues and profits as a consequence of exclusion for participation in federal or state health care programs or (v) the fees and expenses of litigation. The Distributions On May 13, 1996, the board of directors of Corning approved a plan to distribute to Corning shareholders the clinical laboratory testing business being conducted by Quest Diagnostics and the contract research business being conducted by Quest Diagnostics' wholly owned subsidiary, Covance (together, the "Distributions"). The Distributions will be effected by distributing all of the outstanding shares of Quest Diagnostics common stock (the "Quest Diagnostics Common Stock") to holders of Corning common stock (the "Corning Common Stock"), followed immediately by the distribution of all of the common stock of Covance (the "Covance Common Stock") to those same holders, as holders of Quest Diagnostics Common Stock. It is expected that the Distributions will be made on December 31, 1996 (the date on which the Distributions are to be made, the "Distribution Date"). Prior to the consummation of the offering of the Notes contemplated hereby (the "Offering"), the Company entered into a $450 million senior, secured credit facility (the "Credit Facility"), among the Company, the lenders listed therein, NationsBank, N.A., as Issuing Bank, Wachovia Bank of Georgia, N.A., as Swingline Bank, and Morgan Guaranty Trust Company of New York, as Administrative Agent. The Credit Facility is comprised of a $300 million six-year amortizing term loan ("Tranche A Loan"), a $50 million seven-year term loan ("Tranche B Loan" and together with the Tranche A Loan, the "Term Loans") and a $100 million six-year revolving working capital facility (the "Working Capital Facility"). Corning currently has approximately $1.2 billion of Quest Diagnostics intercompany debt. Approximately $145 million of net proceeds from the Offering, together with the $350 million of borrowings under the Term Loans, will be paid to Corning in satisfaction of a portion of the outstanding intercompany debt. Corning will contribute the remaining intercompany debt to Quest Diagnostics' capital. Borrowings under the Working Capital Facility, substantially all of which is expected to be available as of the Distribution Date, will provide for future working capital needs and other general corporate purposes. The Offering <TABLE> <CAPTION> <S> <C> Securities Offered $150,000,000 aggregate principal amount of % Senior Subordinated Notes due December 15, 2006 (the "Notes"). Maturity Date December 15, 2006. Interest Payment Date June 15 and December 15, commencing June 15, 1997. Optional Redemption by the Company The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after December 15, 2001, at the redemption prices set forth herein, plus accrued and unpaid interest, if any, to but excluding the date fixed for redemption. In addition, if as a result of an event outside the control of Corning, Quest Diagnostics and Covance, the Distributions do not occur prior to March 31, 1997, the Notes will be subject to redemption, as a whole and not in part, at the option of Quest Diagnostics, prior to June 30, 1997, at a redemption price equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to but excluding the date fixed for redemption. See "Description of the Notes--Optional Redemption." Change of Control Offer Upon a Change of Control, the Company has the obligation to offer to purchase all the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to but excluding the date of purchase. See "Description of the Notes-- Repurchase at the Option of Holders--Change of Control" for a discussion of the circumstances in which the Company may not be required to make an offer to purchase upon a Change of Control. Offers to Purchase In the event of certain asset sales, the Company will be required to offer to repurchase the Notes at 100% of their principal amount, plus accrued and unpaid interest, if any, to but excluding the date of purchase with the net proceeds of such asset sales. Subordination The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company, including all indebtedness of the Company under the Credit Facility. The Notes will rank Pari Passu in right of payment with any other senior subordinated indebtedness of the Company. Subsidiary Guarantees The Notes will be guaranteed, jointly and severally, and fully and unconditionally, on a senior subordinated basis by the Guarantors (the "Senior Subordinated Guarantees"). The obligations of any Guarantor with respect to its Senior Subordinated Guarantee will be subordinated in right of payment, to the same extent as the obligations of the Company in respect of the Notes, to all existing and future Senior Guarantees, which will include the guarantees of the Credit Facility. The Senior Subordinated Guarantees would also be subordinated to all existing and future indebtedness of the Guarantors if the Senior Subordinated Guarantees were avoided or subordinated in favor of the Guarantors' other creditors. See "Risk Factors--Fraudulent Conveyance." The obligations of a Guarantor under its Senior Subordinated Guarantee will be released in certain circumstances, including if the Guarantor ceases to guarantee the Credit Facility. See "Description of the Notes--Senior Subordinated Guarantees." Principal Covenants The indenture under which the Notes are issued (the "Indenture") will impose certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt and senior in right of payment to the Notes, enter into leases, incur liens, merge or consolidate with any other person, or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. Use of Proceeds The Company intends to use the proceeds from the sale of the Notes, together with the proceeds of borrowings under the Credit Facility, to repay certain intercompany indebtedness owed to Corning. See "Use of Proceeds." The Distributions The Notes are being offered in connection with the Distributions of the Quest Diagnostics Common Stock and the Covance Common Stock to holders of Corning Common Stock. The closing of the offering of the Notes is anticipated to occur prior to the Distributions. Listing The Notes have been approved for listing on the New York Stock Exchange, subject to official notice of issuance. Risk Factors See "Risk Factors" for a discussion of certain factors that should be considered in connection with an investment in the Notes. </TABLE> Summary Financial Data The following table summarizes certain historical and pro forma financial data of Quest Diagnostics at the dates and for each of the periods indicated. The selected financial data as of and for each of the years ended December 31, 1995, 1994 and 1993 have been derived from the audited combined financial statements of (the "Audited Financial Statements") and the notes thereto included elsewhere herein. The selected financial data as of and for the three and nine months ended September 30, 1996 and 1995 have been derived from the unaudited interim combined financial statements of Quest Diagnostics (the "Interim Financial Statements" and, together with the Audited Financial Statements, the "Financial Statements") and the notes thereto included elsewhere herein. In the opinion of Quest Diagnostics management, the unaudited interim combined financial statements include all adjustments, consisting of only normal recurring adjustments, that are necessary for a fair presentation of the financial position and results of operations for these periods. The unaudited interim results of operations for the three and nine months ended September 30, 1996 are not necessarily indicative of the results for the entire year ending December 31, 1996. The selected pro forma financial data have been derived from the unaudited pro forma combined financial information of Quest Diagnostics for the year ended December 31, 1995 and for the three and nine months ended September 30, 1996 (the "Pro Forma Financial Information") and the notes thereto included elsewhere herein. The pro forma statement of operations data gives effect to the Distributions and the Accounting Policy Change (as defined below) as if they had occurred on January 1, 1995 and the pro forma balance sheet data gives effect to the Distributions and the Accounting Policy Change as if they had occurred on September 30, 1996. The pro forma financial data does not purport to represent what Quest Diagnostics' results of operations would have been if the Distributions and the Accounting Policy Change had in fact occurred on such dates, nor does it purport to indicate the future financial position or results of future operations of Quest Diagnostics. The pro forma adjustments are based upon currently available information and certain assumptions that Quest Diagnostics management believes to be reasonable. The summary historical and pro forma financial data set forth below should be read in conjunction with "Selected Historical Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Financial Statements and the notes thereto and the Pro Forma Financial Information and the notes thereto. <TABLE> <CAPTION> Three Months Ended September 30, Nine Months Ended September 30, ------------------------------------------------------------------------------------------------ Pro Forma Historical Pro Forma Historical ------------------------------- ------------------------------- 1996(a) 1996 1995 1996(a) 1996 1995 --------------- --------------- --------------- ---------------- ---------------- -------------- (in thousands, except share, per share and percentage data) <S> <C> <C> <C> <C> <C> <C> Statement of Operations Data: Net revenues $ 405,352 $ 405,352 $ 399,959 $ 1,231,290 $1,231,290 $1,239,474 Costs and expenses: Cost of services 255,390 255,390 240,868 768,809 768,809 735,984 Selling, general and administrative 125,190 125,190 181,346(c) 371,439 371,439 399,635(c) Provision for restructuring and other special charges(d) 155,730 155,730 201,730 201,730 45,885 Interest expense, net 12,189 19,866 20,927 36,938 59,887 61,529 Amortization of intangible assets 7,672 10,328 11,293 23,803 31,772 33,678 Other, net 1,837 1,837 1,930 (198) (198) 4,429 --------------- --------------- --------------- ---------------- ---------------- -------------- Total 558,008 568,341 456,364 1,402,521 1,433,439 1,281,140 --------------- --------------- --------------- ---------------- ---------------- -------------- Income (loss) before taxes (152,656) (162,989) (56,405) (171,231) (202,149) (41,666) Income tax expense (benefit) (40,521) (43,553) (17,810) (34,215) (43,280) (3,642) --------------- --------------- --------------- ---------------- ---------------- -------------- Income (loss) before cumulative effect of change in accounting principle (112,135) (119,436) (38,595) (137,016) (158,869) (38,024) Cumulative effect of change in accounting principle --------------- --------------- --------------- ---------------- ---------------- -------------- Net income (loss) $ (112,135) $ (119,436) $ (38,595) $ (137,016) $ (158,869) $ (38,024) =============== =============== =============== ================ ================ ============== Pro forma shares outstanding(e) 28,901,735 28,901,735 Pro forma net loss per share $ (3.88) $ (4.74) Balance Sheet Data (at end of period): Cash $ 40,000 $ 48,319 $ 46,908 $ 40,000 $ 48,319 $ 46,908 Working capital 306,741 114,718 129,319 306,741 114,718 129,319 Total assets 1,612,459 1,886,378 1,896,058 1,612,459 1,886,378 1,896,058 Long-term debt 515,494 1,219,900 1,114,367 515,494 1,219,900 1,114,367 Total debt 517,379 1,231,785 1,226,211 517,379 1,231,785 1,226,211 Stockholder's equity 604,099 132,670 320,576 604,099 132,670 320,576 Ratio of earnings to fixed charges -- (f) -- (f) -- (f) -- (f) -- (f) -- (f) Supplemental Data: Net cash provided by operating activities $ 25,236 $ 25,236 $ 38,202 $ 41,937 $ 41,937 $ 53,789 Net cash used in investing activities (7,904) (7,904) (17,044) (53,097) (53,097) (77,911) Net cash provided by (used in) financing activities (6,618) (6,618) (18,006) 23,033 23,033 32,311 Bad debt expense $ 30,539 $ 30,539 $ 85,831(c) $ 81,891 $ 81,891 $ 127,297(c) Bad debt expense as a % of net revenues 7.5% 7.5% 21.5% 6.7% 6.7% 10.3% Rent expense $ 12,515 $ 12,515 $ 11,860 $ 37,315 $ 37,315 $ 35,060 Capital expenditures 11,912 11,912 16,441 58,802 58,802 56,062 Depreciation expense $ 14,672 $ 14,672 $ 14,275 $ 43,460 $ 43,460 $ 42,358 EBITDA(g) $ (118,123)(h) $ (118,123)(h) $ (9,910)(c) $ (67,030)(h) $ (67,030)(h) $ 95,899(c) EBITDA as a % of net revenues (29.1%) (29.1%) (2.5%) (5.4%) (5.4%) 7.7% Adjusted EBITDA(i) $ 37,607 $ 37,607 $ (9,910)(c) $ 134,700 $ 134,700 $ 141,784(c) Adjusted EBITDA as a % of net revenues 9.3% 9.3% (2.5%) 10.9% 10.9% 11.4% Supplemental Ratio Data: Adjusted EBITDA/interest expense, net 3.1x 3.6x (Adjusted EBITDA-capital expenditures)/interest expense, net 2.1x 2.1x (Total debt--cash)/annualized adjusted EBITDA 3.2x 2.7x </TABLE> (Footnotes on page 14) <TABLE> <CAPTION> Year Ended December 31, ----------------------------------------------------------- Pro Forma Historical ------------------------------------------- 1995(a) 1995 1994(b) 1993 --------------- --------------- ------------- ------------- (in thousands, except share, per share and percentage data) <S> <C> <C> <C> <C> Statement of Operations Data: Net revenues $ 1,629,388 $1,629,388 $1,633,699 $1,416,338 Costs and expenses: Cost of services 980,232 980,232 969,844 805,729 Selling, general and administrative 523,271(c) 523,271(c) 411,939 363,579 Provision for restructuring and other special charges(d) 50,560 50,560 79,814 99,600 Interest expense, net 50,748 82,016 63,295 41,898 Amortization of intangible assets 34,031 44,656 42,588 28,421 Other, net 6,221 6,221 3,464 6,423 --------------- --------------- ------------- ------------- Total 1,645,063 1,686,956 1,570,944 1,345,650 --------------- --------------- ------------- ------------- Income (loss) before taxes (15,675) (57,568) 62,755 70,688 Income tax expense (benefit) 6,835 (5,516) 34,410 25,929 --------------- --------------- ------------- ------------- Income (loss) before cumulative effect of change in accounting principle (22,510) (52,052) 28,345 44,759 Cumulative effect of change in accounting principle (10,562) --------------- --------------- ------------- ------------- Net income (loss) $ (22,510) $ (52,052) $ 28,345 $ 34,197 =============== =============== ============= ============= Pro forma shares outstanding(e) 28,901,735 Pro forma net loss per share $ (0.78) Balance Sheet Data (at end of period): Cash $ 36,446 $ 38,719 $ 39,410 Working capital 200,740 214,358 139,771 Total assets 1,853,385 1,882,663 1,861,162 Long-term debt 1,195,566 1,153,054 1,025,787 Total debt 1,207,714 1,165,626 1,123,307 Stockholder's equity 295,801 386,812 395,509 Ratio of earnings to fixed charges -- (f) -- (f) 1.77(f) 2.20(f) Supplemental Data: Net cash provided by operating activities $ 85,828 $ 85,828 $ 37,963 $ 99,614 Net cash used in investing activities (93,087) (93,087) (46,186) (473,687) Net cash provided by (used in) financing activities 4,986 4,986 7,532 392,956 Bad debt expense $ 152,590(c) $ 152,590(c) $ 59,480 $ 47,240 Bad debt expense as a % of net revenues 9.4% 9.4% 3.6% 3.3% Rent expense $ 46,900 $ 46,900 $ 49,400 $ 46,900 Capital expenditures 74,045 74,045 93,354 65,317 Depreciation expense $ 56,857 $ 56,857 $ 46,929 $ 38,058 EBITDA(g) $ 125,961(c) $ 125,961(c) $ 215,567 $ 179,065 EBITDA as a % of net revenues 7.7% 7.7% 13.2% 12.6% Adjusted EBITDA(i) $ 176,521(c) $ 176,521(c) $ 295,381 $ 278,665 Adjusted EBITDA as a % of net revenues 10.8% 10.8% 18.1% 19.7% Supplemental Ratio Data: Adjusted EBITDA/interest expense, net 3.5x (Adjusted EBITDA-capital expenditures)/ interest expense, net 2.0x </TABLE> (Footnotes on page 14) (Footnotes for preceding pages) (a) Adjusted to reflect the pro forma effects of the Distributions and the Accounting Policy Change. See "Selected Historical Financial Data" and "Pro Forma Financial Information."
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+Prospectus Summary This Summary is qualified by the more detailed information (including the financial statements and related notes) set forth elsewhere in this Prospectus which should be read in its entirety. Unless the context indicates, or it is specifically indicated otherwise, all references to (i) "Corning" include Corning Incorporated, a New York corporation, and its consolidated subsidiaries, (ii) "Quest Diagnostics" or the "Company" include Corning Clinical Laboratories Inc. (to be renamed Quest Diagnostics Incorporated prior to the Distributions), a Delaware corporation, and its direct and indirect subsidiaries (other than Covance) and assume that the Distributions have occurred, and (iii) "Covance" include Covance Inc. (formerly Corning Pharmaceutical Services Inc.), a Delaware corporation, and its direct and indirect subsidiaries and assume that the Distributions have occurred. Capitalized terms used but not defined in this Summary are defined elsewhere in this Prospectus. The Company Quest Diagnostics is one of the largest independent clinical laboratory testing companies in the United States. Quest Diagnostics offers a broad range of routine and specialty ("esoteric") testing services used by the medical profession in the diagnosis, monitoring and treatment of disease and other medical conditions. Quest Diagnostics' network, which processes approximately 60 million requisitions for diagnostic tests annually, consists of 17 regional laboratories across the United States and the Corning Nichols Institute ("Nichols") esoteric testing laboratory in San Juan Capistrano, California. In addition, Quest Diagnostics has 14 branch laboratories in the United States as well as one branch laboratory in Mexico City (branch laboratories are smaller than regional laboratories), approximately 200 "STAT" laboratories and approximately 850 patient service centers located throughout the United States. For the year ended December 31, 1995 and the nine months ended September 30, 1996, Quest Diagnostics had net revenues of $1,629 million and $1,231 million, respectively, and Adjusted EBITDA (income (loss) before income taxes plus net interest expense, depreciation and amortization and restructuring and other special charges) of $177 million and $135 million, respectively. Quest Diagnostics operates 24 hours a day, 365 days a year, utilizing a fully integrated collection and processing system. Quest Diagnostics generally performs and reports most routine procedures within 24 hours, employing a variety of sophisticated and computerized laboratory testing instruments. Quest Diagnostics provides daily pickup of specimens from most customers principally through an in-house courier system. The specimens are sent to one of the Company's laboratories where one or more tests are performed. Each patient specimen is accompanied by a test requisition form, which is completed by the customer, that indicates the tests to be performed and provides the necessary billing information. Each specimen and related requisition form is checked for completeness and then given a unique bar-coded identification number. Once the appropriate information is entered into the computer system, the tests are performed and the results are delivered to the doctor, primarily through computer interface or manually. Corning entered the clinical laboratory business in 1982 with the acquisition of MetPath Inc. ("MetPath"), which was founded in 1967 and was one of the first laboratories to expand beyond a regional market. Since January 1993, Quest Diagnostics has acquired over thirty laboratories, including Damon Corporation ("Damon"), Bioran Medical Laboratory ("Bioran") and Maryland Medical Laboratory, Inc. ("MML"). In 1994, Quest Diagnostics enhanced its presence in the esoteric testing market through the acquisition of Nichols, a preeminent clinical laboratory with a leading reputation for esoteric testing and test innovations. While Corning's ownership provided the Company with the capital to grow through acquisitions and to become one of the nation's largest independent clinical laboratory testing companies, the management of both Corning and Quest Diagnostics believe that Quest Diagnostics will be more competitive and operate more successfully in the future as an independent company, with a strong, focused and experienced management team to concentrate on customer needs. Independence will also enable Quest Diagnostics to motivate its employees by offering equity-based incentives tied directly to the performance of the Company and individual performance. Quest Diagnostics' management team has implemented a new business strategy, which focuses the business around three key strategic areas: clinical operations, customer focus and technological leadership and excellence. The Clinical Laboratory Testing Industry Clinical testing is a critical component in the delivery of quality health care service to patients. Currently, clinical laboratory testing is the first step in determining how a significant amount of all health care dollars are spent. Quest Diagnostics believes that in 1995 the entire United States clinical laboratory industry had revenues exceeding $30 billion. The clinical laboratory industry consists primarily of three types of providers: hospital-affiliated laboratories, independent clinical laboratories, such as Quest Diagnostics, and physician-office laboratories. The Company believes that in 1995 approximately 56% of the clinical testing revenues in the United States were attributable to hospital-affiliated laboratories, approximately 36% were attributable to independent clinical laboratories and approximately 8% were attributable to physicians in their offices and laboratories. Quest Diagnostics believes that consolidation will continue in the clinical laboratory testing business. In addition, Quest Diagnostics believes that it and the other large independent clinical laboratory testing companies may have the opportunity to increase their share of the overall clinical laboratories testing market due to a number of external factors, including cost efficiencies afforded by large-scale automated testing, Medicare reimbursement reductions and the growth of managed health care entities which require low-cost testing services and large service networks. In addition, legal restrictions on physician referrals and the ownership of laboratories as well as increased regulation of laboratories are expected to contribute to the continuing consolidation of the industry. Quest Diagnostics believes that a number of factors are likely to positively influence the volume of clinical laboratory testing performed in the United States in the future, including (1) the general aging of the population in the United States; (2) an expanded base of scientific knowledge which has led to the development of more sophisticated specialized tests and an increase in the awareness of physicians of the value of clinical laboratory testing as a cost-effective means of early detection of disease and monitoring of treatment; (3) an increase in the number and types of tests which are, due to advances in technology and increased cost efficiencies, readily available on a more affordable basis to physicians; (4) expanded substance-abuse testing by corporations and governmental agencies; and (5) increased testing for sexually transmitted diseases such as AIDS. The impact of these factors is expected to be offset in part by increased controls over the utilization of clinical laboratory tests by both Medicare and the private sector, particularly managed care organizations. Business Strategy Quest Diagnostics' overall goal is to be recognized by its customers, employees and competitors as the best provider of comprehensive and innovative clinical testing, information and services. To achieve this, Quest Diagnostics' management team has focused the business around three key strategic areas: clinical operations, customer focus and technological leadership and excellence. (bullet) Best Supplier. Quest Diagnostics seeks to be the best supplier of the highest quality and the lowest-cost testing services. Health care providers and patients expect accurate, timely and consistent laboratory test results at a fair price. (bullet) Lowest-cost provider. Quest Diagnostics' average cost per requisition varies significantly among its regional laboratories; there is an approximately $7.00 difference in cost per requisition between the most efficient regional laboratory and the average, and an approximately $13.00 difference in cost per requisition between the most and the least efficient regional laboratories. In many cases, these variations do not relate to testing volumes or mixes, space costs, service requirements or regional labor cost differences. To reduce costs, Quest Diagnostics has begun to replicate the best practices from each region throughout its national network. Management expects to achieve significant cost savings within the next three years as these programs are fully implemented. * (bullet) Highest Quality Provider. Quest Diagnostics is dedicated to providing accurate and timely test results and to being viewed by its customers as the highest quality provider of clinical testing services. Quest Diagnostics believes that implementation of best practices already developed in certain regions will permit the Company to be viewed by its customers as the highest quality provider of clinical testing services. (bullet) Preferred Provider. Quest Diagnostics seeks to be the preferred provider of laboratory testing services to existing and new health care networks on a selective basis determined by profitability of accounts. Quest Diagnostics believes that it will become the preferred provider to these networks as (1) large networks typically prefer to utilize large independent clinical laboratories that can service them on a national or regional basis and (2) the Company continues to pursue its primary strategy of becoming the highest quality, lowest-cost provider. To achieve this, Quest Diagnostics will employ a rigorous national and regional process to both select and pursue customers and allocate resources to support these efforts. *This is a forward looking statement and is based on current expectations. Actual results may vary materially from those projected. See "Business- Important Factors Regarding Forward Looking Statements." In particular, see factors (a), (d) and (j). (bullet) Account Profitability. Quest Diagnostics intends to refocus its sales efforts on pursuing and keeping profitable accounts. Quest Diagnostics is actively reviewing the profitability of its current accounts, including those with managed care organizations, and will either increase pricing or eliminate accounts that cannot be serviced profitably. (bullet) Regional Profitability. Quest Diagnostics presently believes that it has the leading market share among independent clinical laboratories in most routine testing markets of the northeast, mid-Atlantic and midwest regions. Approximately 65% of Quest Diagnostics' revenues and almost all of its EBITDA is generated from markets in which the Company believes that it has the leading market share. In most of these markets, Quest Diagnostics believes that it also is the lowest cost provider. Quest Diagnostics is evaluating its strategic alternatives relative to units whose profitability does not meet its internal goals. These alternatives may include joint ventures, alliances, or dispositions. Quest Diagnostics believes that, while the clinical laboratory industry is becoming national in scope, the Company can subcontract with other clinical laboratories to perform testing for national accounts in any markets in which the Company chooses not to compete. (bullet) Leading Innovator. Quest Diagnostics intends to remain a leading innovator in the clinical laboratory industry by continuing to introduce new tests, technology and services. Through its relationship with the academic community and pharmaceutical and biotechnology firms and a research and development budget exceeding $15 million per year, Quest Diagnostics believes it is one of the leaders in transferring innovation from academic biotechnology laboratories to the market. Recent Developments By a plea agreement and civil agreement and release dated October 9, 1996, between the Department of Justice ("DOJ") and Damon, all federal criminal matters within the scope of the various federal investigations against Damon, and all claims including the civil qui tam cases underlying the civil investigations were settled for an aggregate of $119 million, which sum was reimbursed to Quest Diagnostics by Corning. The Damon settlement does not exclude Quest Diagnostics from future participation in any federal health care programs on account of Damon's practices. Quest Diagnostics' aggregate reserve with respect to all governmental and private claims was $215 million at September 30, 1996 and is estimated to be reduced to $85 million as of the Distribution Date as a result of the payment of settled claims, primarily the Damon settlement of $119 million. Based on information available to management and Quest Diagnostics' experience with past settlements (including the fact that the aggregate amount of the Damon settlement was significantly in excess of established reserves) management has reassessed its reserve levels and believes that its current level of reserves is adequate. However, it is possible that additional information may become available which may cause the final resolution of these matters to be in excess of established reserves by an amount which could be material to Quest Diagnostics' results of operations and, for non-indemnified claims, Quest Diagnostics' cash flows in the period in which such claims are settled. While none of the governmental or nongovernmental investigations or claims is covered by insurance, Quest Diagnostics does not believe that these matters will have a material adverse effect on Quest Diagnostics' overall financial condition. Corning Indemnity In connection with the Distributions, Corning has agreed to indemnify Quest Diagnostics against all monetary penalties, fines or settlements arising out of any governmental claims arising out of alleged violations of applicable federal fraud and health care statutes and relating to billing practices of Quest Diagnostics and its predecessors that have been settled or are pending on the Distribution Date. Corning has also agreed to indemnify Quest Diagnostics for 50% of the aggregate of all judgment or settlement payments made by Quest Diagnostics that are in excess of $42.0 million in respect of claims by private parties (i.e., nongovernmental parties such as private insurers) that relate to indemnified or previously settled governmental claims and that allege overbillings by Quest Diagnostics or any existing subsidiaries of Quest Diagnostics, for services provided prior to the Distribution Date; provided, however, such indemnification for nongovernmental claims will not exceed $25.0 million in the aggregate and all amounts indemnified against by Corning for the benefit of Quest Diagnostics will be calculated on a net after-tax basis. Such indemnification will not cover (i) any governmental claims that arise after the Distribution Date pursuant to service of subpoena or other notice of such investigation after the Distribution Date, (ii) any nongovernmental claims unrelated to the indemnified governmental claims or investigations, (iii) any nongovernmental claims not settled prior to five years after the Distribution Date, (iv) any consequential or incidental damages relating to the billing claims, including losses of revenues and profits as a consequence of exclusion for participation in federal or state health care programs or (v) the fees and expenses of litigation. The Distributions On May 13, 1996, the board of directors of Corning approved a plan to distribute to Corning shareholders the clinical laboratory testing business being conducted by Quest Diagnostics and the contract research business being conducted by Quest Diagnostics' wholly owned subsidiary, Covance (together, the "Distributions"). The Distributions will be effected by distributing all of the outstanding shares of Quest Diagnostics common stock (the "Quest Diagnostics Common Stock") to holders of Corning common stock (the "Corning Common Stock"), followed immediately by the distribution of all of the common stock of Covance (the "Covance Common Stock") to those same holders, as holders of Quest Diagnostics Common Stock. It is expected that the Distributions will be made on December 31, 1996 (the date on which the Distributions are to be made, the "Distribution Date"). Prior to the consummation of the offering of the Notes contemplated hereby (the "Offering"), the Company entered into a $450 million senior, secured credit facility (the "Credit Facility"), among the Company, the lenders listed therein, NationsBank, N.A., as Issuing Bank, Wachovia Bank of Georgia, N.A., as Swingline Bank, and Morgan Guaranty Trust Company of New York, as Administrative Agent. The Credit Facility is comprised of a $300 million six-year amortizing term loan ("Tranche A Loan"), a $50 million seven-year term loan ("Tranche B Loan" and together with the Tranche A Loan, the "Term Loans") and a $100 million six-year revolving working capital facility (the "Working Capital Facility"). Corning currently has approximately $1.2 billion of Quest Diagnostics intercompany debt. Approximately $145 million of net proceeds from the Offering, together with the $350 million of borrowings under the Term Loans, will be paid to Corning in satisfaction of a portion of the outstanding intercompany debt. Corning will contribute the remaining intercompany debt to Quest Diagnostics' capital. Borrowings under the Working Capital Facility, substantially all of which is expected to be available as of the Distribution Date, will provide for future working capital needs and other general corporate purposes. The Offering <TABLE> <CAPTION> <S> <C> Securities Offered $150,000,000 aggregate principal amount of % Senior Subordinated Notes due December 15, 2006 (the "Notes"). Maturity Date December 15, 2006. Interest Payment Date June 15 and December 15, commencing June 15, 1997. Optional Redemption by the Company The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after December 15, 2001, at the redemption prices set forth herein, plus accrued and unpaid interest, if any, to but excluding the date fixed for redemption. In addition, if as a result of an event outside the control of Corning, Quest Diagnostics and Covance, the Distributions do not occur prior to March 31, 1997, the Notes will be subject to redemption, as a whole and not in part, at the option of Quest Diagnostics, prior to June 30, 1997, at a redemption price equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to but excluding the date fixed for redemption. See "Description of the Notes--Optional Redemption." Change of Control Offer Upon a Change of Control, the Company has the obligation to offer to purchase all the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to but excluding the date of purchase. See "Description of the Notes-- Repurchase at the Option of Holders--Change of Control" for a discussion of the circumstances in which the Company may not be required to make an offer to purchase upon a Change of Control. Offers to Purchase In the event of certain asset sales, the Company will be required to offer to repurchase the Notes at 100% of their principal amount, plus accrued and unpaid interest, if any, to but excluding the date of purchase with the net proceeds of such asset sales. Subordination The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company, including all indebtedness of the Company under the Credit Facility. The Notes will rank Pari Passu in right of payment with any other senior subordinated indebtedness of the Company. Subsidiary Guarantees The Notes will be guaranteed, jointly and severally, and fully and unconditionally, on a senior subordinated basis by the Guarantors (the "Senior Subordinated Guarantees"). The obligations of any Guarantor with respect to its Senior Subordinated Guarantee will be subordinated in right of payment, to the same extent as the obligations of the Company in respect of the Notes, to all existing and future Senior Guarantees, which will include the guarantees of the Credit Facility. The Senior Subordinated Guarantees would also be subordinated to all existing and future indebtedness of the Guarantors if the Senior Subordinated Guarantees were avoided or subordinated in favor of the Guarantors' other creditors. See "Risk Factors--Fraudulent Conveyance." The obligations of a Guarantor under its Senior Subordinated Guarantee will be released in certain circumstances, including if the Guarantor ceases to guarantee the Credit Facility. See "Description of the Notes--Senior Subordinated Guarantees." Principal Covenants The indenture under which the Notes are issued (the "Indenture") will impose certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt and senior in right of payment to the Notes, enter into leases, incur liens, merge or consolidate with any other person, or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. Use of Proceeds The Company intends to use the proceeds from the sale of the Notes, together with the proceeds of borrowings under the Credit Facility, to repay certain intercompany indebtedness owed to Corning. See "Use of Proceeds." The Distributions The Notes are being offered in connection with the Distributions of the Quest Diagnostics Common Stock and the Covance Common Stock to holders of Corning Common Stock. The closing of the offering of the Notes is anticipated to occur prior to the Distributions. Listing The Notes have been approved for listing on the New York Stock Exchange, subject to official notice of issuance. Risk Factors See "Risk Factors" for a discussion of certain factors that should be considered in connection with an investment in the Notes. </TABLE> Summary Financial Data The following table summarizes certain historical and pro forma financial data of Quest Diagnostics at the dates and for each of the periods indicated. The selected financial data as of and for each of the years ended December 31, 1995, 1994 and 1993 have been derived from the audited combined financial statements of (the "Audited Financial Statements") and the notes thereto included elsewhere herein. The selected financial data as of and for the three and nine months ended September 30, 1996 and 1995 have been derived from the unaudited interim combined financial statements of Quest Diagnostics (the "Interim Financial Statements" and, together with the Audited Financial Statements, the "Financial Statements") and the notes thereto included elsewhere herein. In the opinion of Quest Diagnostics management, the unaudited interim combined financial statements include all adjustments, consisting of only normal recurring adjustments, that are necessary for a fair presentation of the financial position and results of operations for these periods. The unaudited interim results of operations for the three and nine months ended September 30, 1996 are not necessarily indicative of the results for the entire year ending December 31, 1996. The selected pro forma financial data have been derived from the unaudited pro forma combined financial information of Quest Diagnostics for the year ended December 31, 1995 and for the three and nine months ended September 30, 1996 (the "Pro Forma Financial Information") and the notes thereto included elsewhere herein. The pro forma statement of operations data gives effect to the Distributions and the Accounting Policy Change (as defined below) as if they had occurred on January 1, 1995 and the pro forma balance sheet data gives effect to the Distributions and the Accounting Policy Change as if they had occurred on September 30, 1996. The pro forma financial data does not purport to represent what Quest Diagnostics' results of operations would have been if the Distributions and the Accounting Policy Change had in fact occurred on such dates, nor does it purport to indicate the future financial position or results of future operations of Quest Diagnostics. The pro forma adjustments are based upon currently available information and certain assumptions that Quest Diagnostics management believes to be reasonable. The summary historical and pro forma financial data set forth below should be read in conjunction with "Selected Historical Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Financial Statements and the notes thereto and the Pro Forma Financial Information and the notes thereto. <TABLE> <CAPTION> Three Months Ended September 30, Nine Months Ended September 30, ------------------------------------------------------------------------------------------------ Pro Forma Historical Pro Forma Historical ------------------------------- ------------------------------- 1996(a) 1996 1995 1996(a) 1996 1995 --------------- --------------- --------------- ---------------- ---------------- -------------- (in thousands, except share, per share and percentage data) <S> <C> <C> <C> <C> <C> <C> Statement of Operations Data: Net revenues $ 405,352 $ 405,352 $ 399,959 $ 1,231,290 $1,231,290 $1,239,474 Costs and expenses: Cost of services 255,390 255,390 240,868 768,809 768,809 735,984 Selling, general and administrative 125,190 125,190 181,346(c) 371,439 371,439 399,635(c) Provision for restructuring and other special charges(d) 155,730 155,730 201,730 201,730 45,885 Interest expense, net 12,189 19,866 20,927 36,938 59,887 61,529 Amortization of intangible assets 7,672 10,328 11,293 23,803 31,772 33,678 Other, net 1,837 1,837 1,930 (198) (198) 4,429 --------------- --------------- --------------- ---------------- ---------------- -------------- Total 558,008 568,341 456,364 1,402,521 1,433,439 1,281,140 --------------- --------------- --------------- ---------------- ---------------- -------------- Income (loss) before taxes (152,656) (162,989) (56,405) (171,231) (202,149) (41,666) Income tax expense (benefit) (40,521) (43,553) (17,810) (34,215) (43,280) (3,642) --------------- --------------- --------------- ---------------- ---------------- -------------- Income (loss) before cumulative effect of change in accounting principle (112,135) (119,436) (38,595) (137,016) (158,869) (38,024) Cumulative effect of change in accounting principle --------------- --------------- --------------- ---------------- ---------------- -------------- Net income (loss) $ (112,135) $ (119,436) $ (38,595) $ (137,016) $ (158,869) $ (38,024) =============== =============== =============== ================ ================ ============== Pro forma shares outstanding(e) 28,901,735 28,901,735 Pro forma net loss per share $ (3.88) $ (4.74) Balance Sheet Data (at end of period): Cash $ 40,000 $ 48,319 $ 46,908 $ 40,000 $ 48,319 $ 46,908 Working capital 306,741 114,718 129,319 306,741 114,718 129,319 Total assets 1,612,459 1,886,378 1,896,058 1,612,459 1,886,378 1,896,058 Long-term debt 515,494 1,219,900 1,114,367 515,494 1,219,900 1,114,367 Total debt 517,379 1,231,785 1,226,211 517,379 1,231,785 1,226,211 Stockholder's equity 604,099 132,670 320,576 604,099 132,670 320,576 Ratio of earnings to fixed charges -- (f) -- (f) -- (f) -- (f) -- (f) -- (f) Supplemental Data: Net cash provided by operating activities $ 25,236 $ 25,236 $ 38,202 $ 41,937 $ 41,937 $ 53,789 Net cash used in investing activities (7,904) (7,904) (17,044) (53,097) (53,097) (77,911) Net cash provided by (used in) financing activities (6,618) (6,618) (18,006) 23,033 23,033 32,311 Bad debt expense $ 30,539 $ 30,539 $ 85,831(c) $ 81,891 $ 81,891 $ 127,297(c) Bad debt expense as a % of net revenues 7.5% 7.5% 21.5% 6.7% 6.7% 10.3% Rent expense $ 12,515 $ 12,515 $ 11,860 $ 37,315 $ 37,315 $ 35,060 Capital expenditures 11,912 11,912 16,441 58,802 58,802 56,062 Depreciation expense $ 14,672 $ 14,672 $ 14,275 $ 43,460 $ 43,460 $ 42,358 EBITDA(g) $ (118,123)(h) $ (118,123)(h) $ (9,910)(c) $ (67,030)(h) $ (67,030)(h) $ 95,899(c) EBITDA as a % of net revenues (29.1%) (29.1%) (2.5%) (5.4%) (5.4%) 7.7% Adjusted EBITDA(i) $ 37,607 $ 37,607 $ (9,910)(c) $ 134,700 $ 134,700 $ 141,784(c) Adjusted EBITDA as a % of net revenues 9.3% 9.3% (2.5%) 10.9% 10.9% 11.4% Supplemental Ratio Data: Adjusted EBITDA/interest expense, net 3.1x 3.6x (Adjusted EBITDA-capital expenditures)/interest expense, net 2.1x 2.1x (Total debt--cash)/annualized adjusted EBITDA 3.2x 2.7x </TABLE> (Footnotes on page 14) <TABLE> <CAPTION> Year Ended December 31, ----------------------------------------------------------- Pro Forma Historical ------------------------------------------- 1995(a) 1995 1994(b) 1993 --------------- --------------- ------------- ------------- (in thousands, except share, per share and percentage data) <S> <C> <C> <C> <C> Statement of Operations Data: Net revenues $ 1,629,388 $1,629,388 $1,633,699 $1,416,338 Costs and expenses: Cost of services 980,232 980,232 969,844 805,729 Selling, general and administrative 523,271(c) 523,271(c) 411,939 363,579 Provision for restructuring and other special charges(d) 50,560 50,560 79,814 99,600 Interest expense, net 50,748 82,016 63,295 41,898 Amortization of intangible assets 34,031 44,656 42,588 28,421 Other, net 6,221 6,221 3,464 6,423 --------------- --------------- ------------- ------------- Total 1,645,063 1,686,956 1,570,944 1,345,650 --------------- --------------- ------------- ------------- Income (loss) before taxes (15,675) (57,568) 62,755 70,688 Income tax expense (benefit) 6,835 (5,516) 34,410 25,929 --------------- --------------- ------------- ------------- Income (loss) before cumulative effect of change in accounting principle (22,510) (52,052) 28,345 44,759 Cumulative effect of change in accounting principle (10,562) --------------- --------------- ------------- ------------- Net income (loss) $ (22,510) $ (52,052) $ 28,345 $ 34,197 =============== =============== ============= ============= Pro forma shares outstanding(e) 28,901,735 Pro forma net loss per share $ (0.78) Balance Sheet Data (at end of period): Cash $ 36,446 $ 38,719 $ 39,410 Working capital 200,740 214,358 139,771 Total assets 1,853,385 1,882,663 1,861,162 Long-term debt 1,195,566 1,153,054 1,025,787 Total debt 1,207,714 1,165,626 1,123,307 Stockholder's equity 295,801 386,812 395,509 Ratio of earnings to fixed charges -- (f) -- (f) 1.77(f) 2.20(f) Supplemental Data: Net cash provided by operating activities $ 85,828 $ 85,828 $ 37,963 $ 99,614 Net cash used in investing activities (93,087) (93,087) (46,186) (473,687) Net cash provided by (used in) financing activities 4,986 4,986 7,532 392,956 Bad debt expense $ 152,590(c) $ 152,590(c) $ 59,480 $ 47,240 Bad debt expense as a % of net revenues 9.4% 9.4% 3.6% 3.3% Rent expense $ 46,900 $ 46,900 $ 49,400 $ 46,900 Capital expenditures 74,045 74,045 93,354 65,317 Depreciation expense $ 56,857 $ 56,857 $ 46,929 $ 38,058 EBITDA(g) $ 125,961(c) $ 125,961(c) $ 215,567 $ 179,065 EBITDA as a % of net revenues 7.7% 7.7% 13.2% 12.6% Adjusted EBITDA(i) $ 176,521(c) $ 176,521(c) $ 295,381 $ 278,665 Adjusted EBITDA as a % of net revenues 10.8% 10.8% 18.1% 19.7% Supplemental Ratio Data: Adjusted EBITDA/interest expense, net 3.5x (Adjusted EBITDA-capital expenditures)/ interest expense, net 2.0x </TABLE> (Footnotes on page 14) (Footnotes for preceding pages) (a) Adjusted to reflect the pro forma effects of the Distributions and the Accounting Policy Change. See "Selected Historical Financial Data" and "Pro Forma Financial Information."
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+Prospectus Summary This Summary is qualified by the more detailed information (including the financial statements and related notes) set forth elsewhere in this Prospectus which should be read in its entirety. Unless the context indicates, or it is specifically indicated otherwise, all references to (i) "Corning" include Corning Incorporated, a New York corporation, and its consolidated subsidiaries, (ii) "Quest Diagnostics" or the "Company" include Corning Clinical Laboratories Inc. (to be renamed Quest Diagnostics Incorporated prior to the Distributions), a Delaware corporation, and its direct and indirect subsidiaries (other than Covance) and assume that the Distributions have occurred, and (iii) "Covance" include Covance Inc. (formerly Corning Pharmaceutical Services Inc.), a Delaware corporation, and its direct and indirect subsidiaries and assume that the Distributions have occurred. Capitalized terms used but not defined in this Summary are defined elsewhere in this Prospectus. The Company Quest Diagnostics is one of the largest independent clinical laboratory testing companies in the United States. Quest Diagnostics offers a broad range of routine and specialty ("esoteric") testing services used by the medical profession in the diagnosis, monitoring and treatment of disease and other medical conditions. Quest Diagnostics' network, which processes approximately 60 million requisitions for diagnostic tests annually, consists of 17 regional laboratories across the United States and the Corning Nichols Institute ("Nichols") esoteric testing laboratory in San Juan Capistrano, California. In addition, Quest Diagnostics has 14 branch laboratories in the United States as well as one branch laboratory in Mexico City (branch laboratories are smaller than regional laboratories), approximately 200 "STAT" laboratories and approximately 850 patient service centers located throughout the United States. For the year ended December 31, 1995 and the nine months ended September 30, 1996, Quest Diagnostics had net revenues of $1,629 million and $1,231 million, respectively, and Adjusted EBITDA (income (loss) before income taxes plus net interest expense, depreciation and amortization and restructuring and other special charges) of $177 million and $135 million, respectively. Quest Diagnostics operates 24 hours a day, 365 days a year, utilizing a fully integrated collection and processing system. Quest Diagnostics generally performs and reports most routine procedures within 24 hours, employing a variety of sophisticated and computerized laboratory testing instruments. Quest Diagnostics provides daily pickup of specimens from most customers principally through an in-house courier system. The specimens are sent to one of the Company's laboratories where one or more tests are performed. Each patient specimen is accompanied by a test requisition form, which is completed by the customer, that indicates the tests to be performed and provides the necessary billing information. Each specimen and related requisition form is checked for completeness and then given a unique bar-coded identification number. Once the appropriate information is entered into the computer system, the tests are performed and the results are delivered to the doctor, primarily through computer interface or manually. Corning entered the clinical laboratory business in 1982 with the acquisition of MetPath Inc. ("MetPath"), which was founded in 1967 and was one of the first laboratories to expand beyond a regional market. Since January 1993, Quest Diagnostics has acquired over thirty laboratories, including Damon Corporation ("Damon"), Bioran Medical Laboratory ("Bioran") and Maryland Medical Laboratory, Inc. ("MML"). In 1994, Quest Diagnostics enhanced its presence in the esoteric testing market through the acquisition of Nichols, a preeminent clinical laboratory with a leading reputation for esoteric testing and test innovations. While Corning's ownership provided the Company with the capital to grow through acquisitions and to become one of the nation's largest independent clinical laboratory testing companies, the management of both Corning and Quest Diagnostics believe that Quest Diagnostics will be more competitive and operate more successfully in the future as an independent company, with a strong, focused and experienced management team to concentrate on customer needs. Independence will also enable Quest Diagnostics to motivate its employees by offering equity-based incentives tied directly to the performance of the Company and individual performance. Quest Diagnostics' management team has implemented a new business strategy, which focuses the business around three key strategic areas: clinical operations, customer focus and technological leadership and excellence. The Clinical Laboratory Testing Industry Clinical testing is a critical component in the delivery of quality health care service to patients. Currently, clinical laboratory testing is the first step in determining how a significant amount of all health care dollars are spent. Quest Diagnostics believes that in 1995 the entire United States clinical laboratory industry had revenues exceeding $30 billion. The clinical laboratory industry consists primarily of three types of providers: hospital-affiliated laboratories, independent clinical laboratories, such as Quest Diagnostics, and physician-office laboratories. The Company believes that in 1995 approximately 56% of the clinical testing revenues in the United States were attributable to hospital-affiliated laboratories, approximately 36% were attributable to independent clinical laboratories and approximately 8% were attributable to physicians in their offices and laboratories. Quest Diagnostics believes that consolidation will continue in the clinical laboratory testing business. In addition, Quest Diagnostics believes that it and the other large independent clinical laboratory testing companies may have the opportunity to increase their share of the overall clinical laboratories testing market due to a number of external factors, including cost efficiencies afforded by large-scale automated testing, Medicare reimbursement reductions and the growth of managed health care entities which require low-cost testing services and large service networks. In addition, legal restrictions on physician referrals and the ownership of laboratories as well as increased regulation of laboratories are expected to contribute to the continuing consolidation of the industry. Quest Diagnostics believes that a number of factors are likely to positively influence the volume of clinical laboratory testing performed in the United States in the future, including (1) the general aging of the population in the United States; (2) an expanded base of scientific knowledge which has led to the development of more sophisticated specialized tests and an increase in the awareness of physicians of the value of clinical laboratory testing as a cost-effective means of early detection of disease and monitoring of treatment; (3) an increase in the number and types of tests which are, due to advances in technology and increased cost efficiencies, readily available on a more affordable basis to physicians; (4) expanded substance-abuse testing by corporations and governmental agencies; and (5) increased testing for sexually transmitted diseases such as AIDS. The impact of these factors is expected to be offset in part by increased controls over the utilization of clinical laboratory tests by both Medicare and the private sector, particularly managed care organizations. Business Strategy Quest Diagnostics' overall goal is to be recognized by its customers, employees and competitors as the best provider of comprehensive and innovative clinical testing, information and services. To achieve this, Quest Diagnostics' management team has focused the business around three key strategic areas: clinical operations, customer focus and technological leadership and excellence. (bullet) Best Supplier. Quest Diagnostics seeks to be the best supplier of the highest quality and the lowest-cost testing services. Health care providers and patients expect accurate, timely and consistent laboratory test results at a fair price. (bullet) Lowest-cost provider. Quest Diagnostics' average cost per requisition varies significantly among its regional laboratories; there is an approximately $7.00 difference in cost per requisition between the most efficient regional laboratory and the average, and an approximately $13.00 difference in cost per requisition between the most and the least efficient regional laboratories. In many cases, these variations do not relate to testing volumes or mixes, space costs, service requirements or regional labor cost differences. To reduce costs, Quest Diagnostics has begun to replicate the best practices from each region throughout its national network. Management expects to achieve significant cost savings within the next three years as these programs are fully implemented. * (bullet) Highest Quality Provider. Quest Diagnostics is dedicated to providing accurate and timely test results and to being viewed by its customers as the highest quality provider of clinical testing services. Quest Diagnostics believes that implementation of best practices already developed in certain regions will permit the Company to be viewed by its customers as the highest quality provider of clinical testing services. (bullet) Preferred Provider. Quest Diagnostics seeks to be the preferred provider of laboratory testing services to existing and new health care networks on a selective basis determined by profitability of accounts. Quest Diagnostics believes that it will become the preferred provider to these networks as (1) large networks typically prefer to utilize large independent clinical laboratories that can service them on a national or regional basis and (2) the Company continues to pursue its primary strategy of becoming the highest quality, lowest-cost provider. To achieve this, Quest Diagnostics will employ a rigorous national and regional process to both select and pursue customers and allocate resources to support these efforts. *This is a forward looking statement and is based on current expectations. Actual results may vary materially from those projected. See "Business- Important Factors Regarding Forward Looking Statements." In particular, see factors (a), (d) and (j). (bullet) Account Profitability. Quest Diagnostics intends to refocus its sales efforts on pursuing and keeping profitable accounts. Quest Diagnostics is actively reviewing the profitability of its current accounts, including those with managed care organizations, and will either increase pricing or eliminate accounts that cannot be serviced profitably. (bullet) Regional Profitability. Quest Diagnostics presently believes that it has the leading market share among independent clinical laboratories in most routine testing markets of the northeast, mid-Atlantic and midwest regions. Approximately 65% of Quest Diagnostics' revenues and almost all of its EBITDA is generated from markets in which the Company believes that it has the leading market share. In most of these markets, Quest Diagnostics believes that it also is the lowest cost provider. Quest Diagnostics is evaluating its strategic alternatives relative to units whose profitability does not meet its internal goals. These alternatives may include joint ventures, alliances, or dispositions. Quest Diagnostics believes that, while the clinical laboratory industry is becoming national in scope, the Company can subcontract with other clinical laboratories to perform testing for national accounts in any markets in which the Company chooses not to compete. (bullet) Leading Innovator. Quest Diagnostics intends to remain a leading innovator in the clinical laboratory industry by continuing to introduce new tests, technology and services. Through its relationship with the academic community and pharmaceutical and biotechnology firms and a research and development budget exceeding $15 million per year, Quest Diagnostics believes it is one of the leaders in transferring innovation from academic biotechnology laboratories to the market. Recent Developments By a plea agreement and civil agreement and release dated October 9, 1996, between the Department of Justice ("DOJ") and Damon, all federal criminal matters within the scope of the various federal investigations against Damon, and all claims including the civil qui tam cases underlying the civil investigations were settled for an aggregate of $119 million, which sum was reimbursed to Quest Diagnostics by Corning. The Damon settlement does not exclude Quest Diagnostics from future participation in any federal health care programs on account of Damon's practices. Quest Diagnostics' aggregate reserve with respect to all governmental and private claims was $215 million at September 30, 1996 and is estimated to be reduced to $85 million as of the Distribution Date as a result of the payment of settled claims, primarily the Damon settlement of $119 million. Based on information available to management and Quest Diagnostics' experience with past settlements (including the fact that the aggregate amount of the Damon settlement was significantly in excess of established reserves) management has reassessed its reserve levels and believes that its current level of reserves is adequate. However, it is possible that additional information may become available which may cause the final resolution of these matters to be in excess of established reserves by an amount which could be material to Quest Diagnostics' results of operations and, for non-indemnified claims, Quest Diagnostics' cash flows in the period in which such claims are settled. While none of the governmental or nongovernmental investigations or claims is covered by insurance, Quest Diagnostics does not believe that these matters will have a material adverse effect on Quest Diagnostics' overall financial condition. Corning Indemnity In connection with the Distributions, Corning has agreed to indemnify Quest Diagnostics against all monetary penalties, fines or settlements arising out of any governmental claims arising out of alleged violations of applicable federal fraud and health care statutes and relating to billing practices of Quest Diagnostics and its predecessors that have been settled or are pending on the Distribution Date. Corning has also agreed to indemnify Quest Diagnostics for 50% of the aggregate of all judgment or settlement payments made by Quest Diagnostics that are in excess of $42.0 million in respect of claims by private parties (i.e., nongovernmental parties such as private insurers) that relate to indemnified or previously settled governmental claims and that allege overbillings by Quest Diagnostics or any existing subsidiaries of Quest Diagnostics, for services provided prior to the Distribution Date; provided, however, such indemnification for nongovernmental claims will not exceed $25.0 million in the aggregate and all amounts indemnified against by Corning for the benefit of Quest Diagnostics will be calculated on a net after-tax basis. Such indemnification will not cover (i) any governmental claims that arise after the Distribution Date pursuant to service of subpoena or other notice of such investigation after the Distribution Date, (ii) any nongovernmental claims unrelated to the indemnified governmental claims or investigations, (iii) any nongovernmental claims not settled prior to five years after the Distribution Date, (iv) any consequential or incidental damages relating to the billing claims, including losses of revenues and profits as a consequence of exclusion for participation in federal or state health care programs or (v) the fees and expenses of litigation. The Distributions On May 13, 1996, the board of directors of Corning approved a plan to distribute to Corning shareholders the clinical laboratory testing business being conducted by Quest Diagnostics and the contract research business being conducted by Quest Diagnostics' wholly owned subsidiary, Covance (together, the "Distributions"). The Distributions will be effected by distributing all of the outstanding shares of Quest Diagnostics common stock (the "Quest Diagnostics Common Stock") to holders of Corning common stock (the "Corning Common Stock"), followed immediately by the distribution of all of the common stock of Covance (the "Covance Common Stock") to those same holders, as holders of Quest Diagnostics Common Stock. It is expected that the Distributions will be made on December 31, 1996 (the date on which the Distributions are to be made, the "Distribution Date"). Prior to the consummation of the offering of the Notes contemplated hereby (the "Offering"), the Company entered into a $450 million senior, secured credit facility (the "Credit Facility"), among the Company, the lenders listed therein, NationsBank, N.A., as Issuing Bank, Wachovia Bank of Georgia, N.A., as Swingline Bank, and Morgan Guaranty Trust Company of New York, as Administrative Agent. The Credit Facility is comprised of a $300 million six-year amortizing term loan ("Tranche A Loan"), a $50 million seven-year term loan ("Tranche B Loan" and together with the Tranche A Loan, the "Term Loans") and a $100 million six-year revolving working capital facility (the "Working Capital Facility"). Corning currently has approximately $1.2 billion of Quest Diagnostics intercompany debt. Approximately $145 million of net proceeds from the Offering, together with the $350 million of borrowings under the Term Loans, will be paid to Corning in satisfaction of a portion of the outstanding intercompany debt. Corning will contribute the remaining intercompany debt to Quest Diagnostics' capital. Borrowings under the Working Capital Facility, substantially all of which is expected to be available as of the Distribution Date, will provide for future working capital needs and other general corporate purposes. The Offering <TABLE> <CAPTION> <S> <C> Securities Offered $150,000,000 aggregate principal amount of % Senior Subordinated Notes due December 15, 2006 (the "Notes"). Maturity Date December 15, 2006. Interest Payment Date June 15 and December 15, commencing June 15, 1997. Optional Redemption by the Company The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after December 15, 2001, at the redemption prices set forth herein, plus accrued and unpaid interest, if any, to but excluding the date fixed for redemption. In addition, if as a result of an event outside the control of Corning, Quest Diagnostics and Covance, the Distributions do not occur prior to March 31, 1997, the Notes will be subject to redemption, as a whole and not in part, at the option of Quest Diagnostics, prior to June 30, 1997, at a redemption price equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to but excluding the date fixed for redemption. See "Description of the Notes--Optional Redemption." Change of Control Offer Upon a Change of Control, the Company has the obligation to offer to purchase all the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to but excluding the date of purchase. See "Description of the Notes-- Repurchase at the Option of Holders--Change of Control" for a discussion of the circumstances in which the Company may not be required to make an offer to purchase upon a Change of Control. Offers to Purchase In the event of certain asset sales, the Company will be required to offer to repurchase the Notes at 100% of their principal amount, plus accrued and unpaid interest, if any, to but excluding the date of purchase with the net proceeds of such asset sales. Subordination The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company, including all indebtedness of the Company under the Credit Facility. The Notes will rank Pari Passu in right of payment with any other senior subordinated indebtedness of the Company. Subsidiary Guarantees The Notes will be guaranteed, jointly and severally, and fully and unconditionally, on a senior subordinated basis by the Guarantors (the "Senior Subordinated Guarantees"). The obligations of any Guarantor with respect to its Senior Subordinated Guarantee will be subordinated in right of payment, to the same extent as the obligations of the Company in respect of the Notes, to all existing and future Senior Guarantees, which will include the guarantees of the Credit Facility. The Senior Subordinated Guarantees would also be subordinated to all existing and future indebtedness of the Guarantors if the Senior Subordinated Guarantees were avoided or subordinated in favor of the Guarantors' other creditors. See "Risk Factors--Fraudulent Conveyance." The obligations of a Guarantor under its Senior Subordinated Guarantee will be released in certain circumstances, including if the Guarantor ceases to guarantee the Credit Facility. See "Description of the Notes--Senior Subordinated Guarantees." Principal Covenants The indenture under which the Notes are issued (the "Indenture") will impose certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt and senior in right of payment to the Notes, enter into leases, incur liens, merge or consolidate with any other person, or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. Use of Proceeds The Company intends to use the proceeds from the sale of the Notes, together with the proceeds of borrowings under the Credit Facility, to repay certain intercompany indebtedness owed to Corning. See "Use of Proceeds." The Distributions The Notes are being offered in connection with the Distributions of the Quest Diagnostics Common Stock and the Covance Common Stock to holders of Corning Common Stock. The closing of the offering of the Notes is anticipated to occur prior to the Distributions. Listing The Notes have been approved for listing on the New York Stock Exchange, subject to official notice of issuance. Risk Factors See "Risk Factors" for a discussion of certain factors that should be considered in connection with an investment in the Notes. </TABLE> Summary Financial Data The following table summarizes certain historical and pro forma financial data of Quest Diagnostics at the dates and for each of the periods indicated. The selected financial data as of and for each of the years ended December 31, 1995, 1994 and 1993 have been derived from the audited combined financial statements of (the "Audited Financial Statements") and the notes thereto included elsewhere herein. The selected financial data as of and for the three and nine months ended September 30, 1996 and 1995 have been derived from the unaudited interim combined financial statements of Quest Diagnostics (the "Interim Financial Statements" and, together with the Audited Financial Statements, the "Financial Statements") and the notes thereto included elsewhere herein. In the opinion of Quest Diagnostics management, the unaudited interim combined financial statements include all adjustments, consisting of only normal recurring adjustments, that are necessary for a fair presentation of the financial position and results of operations for these periods. The unaudited interim results of operations for the three and nine months ended September 30, 1996 are not necessarily indicative of the results for the entire year ending December 31, 1996. The selected pro forma financial data have been derived from the unaudited pro forma combined financial information of Quest Diagnostics for the year ended December 31, 1995 and for the three and nine months ended September 30, 1996 (the "Pro Forma Financial Information") and the notes thereto included elsewhere herein. The pro forma statement of operations data gives effect to the Distributions and the Accounting Policy Change (as defined below) as if they had occurred on January 1, 1995 and the pro forma balance sheet data gives effect to the Distributions and the Accounting Policy Change as if they had occurred on September 30, 1996. The pro forma financial data does not purport to represent what Quest Diagnostics' results of operations would have been if the Distributions and the Accounting Policy Change had in fact occurred on such dates, nor does it purport to indicate the future financial position or results of future operations of Quest Diagnostics. The pro forma adjustments are based upon currently available information and certain assumptions that Quest Diagnostics management believes to be reasonable. The summary historical and pro forma financial data set forth below should be read in conjunction with "Selected Historical Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Financial Statements and the notes thereto and the Pro Forma Financial Information and the notes thereto. <TABLE> <CAPTION> Three Months Ended September 30, Nine Months Ended September 30, ------------------------------------------------------------------------------------------------ Pro Forma Historical Pro Forma Historical ------------------------------- ------------------------------- 1996(a) 1996 1995 1996(a) 1996 1995 --------------- --------------- --------------- ---------------- ---------------- -------------- (in thousands, except share, per share and percentage data) <S> <C> <C> <C> <C> <C> <C> Statement of Operations Data: Net revenues $ 405,352 $ 405,352 $ 399,959 $ 1,231,290 $1,231,290 $1,239,474 Costs and expenses: Cost of services 255,390 255,390 240,868 768,809 768,809 735,984 Selling, general and administrative 125,190 125,190 181,346(c) 371,439 371,439 399,635(c) Provision for restructuring and other special charges(d) 155,730 155,730 201,730 201,730 45,885 Interest expense, net 12,189 19,866 20,927 36,938 59,887 61,529 Amortization of intangible assets 7,672 10,328 11,293 23,803 31,772 33,678 Other, net 1,837 1,837 1,930 (198) (198) 4,429 --------------- --------------- --------------- ---------------- ---------------- -------------- Total 558,008 568,341 456,364 1,402,521 1,433,439 1,281,140 --------------- --------------- --------------- ---------------- ---------------- -------------- Income (loss) before taxes (152,656) (162,989) (56,405) (171,231) (202,149) (41,666) Income tax expense (benefit) (40,521) (43,553) (17,810) (34,215) (43,280) (3,642) --------------- --------------- --------------- ---------------- ---------------- -------------- Income (loss) before cumulative effect of change in accounting principle (112,135) (119,436) (38,595) (137,016) (158,869) (38,024) Cumulative effect of change in accounting principle --------------- --------------- --------------- ---------------- ---------------- -------------- Net income (loss) $ (112,135) $ (119,436) $ (38,595) $ (137,016) $ (158,869) $ (38,024) =============== =============== =============== ================ ================ ============== Pro forma shares outstanding(e) 28,901,735 28,901,735 Pro forma net loss per share $ (3.88) $ (4.74) Balance Sheet Data (at end of period): Cash $ 40,000 $ 48,319 $ 46,908 $ 40,000 $ 48,319 $ 46,908 Working capital 306,741 114,718 129,319 306,741 114,718 129,319 Total assets 1,612,459 1,886,378 1,896,058 1,612,459 1,886,378 1,896,058 Long-term debt 515,494 1,219,900 1,114,367 515,494 1,219,900 1,114,367 Total debt 517,379 1,231,785 1,226,211 517,379 1,231,785 1,226,211 Stockholder's equity 604,099 132,670 320,576 604,099 132,670 320,576 Ratio of earnings to fixed charges -- (f) -- (f) -- (f) -- (f) -- (f) -- (f) Supplemental Data: Net cash provided by operating activities $ 25,236 $ 25,236 $ 38,202 $ 41,937 $ 41,937 $ 53,789 Net cash used in investing activities (7,904) (7,904) (17,044) (53,097) (53,097) (77,911) Net cash provided by (used in) financing activities (6,618) (6,618) (18,006) 23,033 23,033 32,311 Bad debt expense $ 30,539 $ 30,539 $ 85,831(c) $ 81,891 $ 81,891 $ 127,297(c) Bad debt expense as a % of net revenues 7.5% 7.5% 21.5% 6.7% 6.7% 10.3% Rent expense $ 12,515 $ 12,515 $ 11,860 $ 37,315 $ 37,315 $ 35,060 Capital expenditures 11,912 11,912 16,441 58,802 58,802 56,062 Depreciation expense $ 14,672 $ 14,672 $ 14,275 $ 43,460 $ 43,460 $ 42,358 EBITDA(g) $ (118,123)(h) $ (118,123)(h) $ (9,910)(c) $ (67,030)(h) $ (67,030)(h) $ 95,899(c) EBITDA as a % of net revenues (29.1%) (29.1%) (2.5%) (5.4%) (5.4%) 7.7% Adjusted EBITDA(i) $ 37,607 $ 37,607 $ (9,910)(c) $ 134,700 $ 134,700 $ 141,784(c) Adjusted EBITDA as a % of net revenues 9.3% 9.3% (2.5%) 10.9% 10.9% 11.4% Supplemental Ratio Data: Adjusted EBITDA/interest expense, net 3.1x 3.6x (Adjusted EBITDA-capital expenditures)/interest expense, net 2.1x 2.1x (Total debt--cash)/annualized adjusted EBITDA 3.2x 2.7x </TABLE> (Footnotes on page 14) <TABLE> <CAPTION> Year Ended December 31, ----------------------------------------------------------- Pro Forma Historical ------------------------------------------- 1995(a) 1995 1994(b) 1993 --------------- --------------- ------------- ------------- (in thousands, except share, per share and percentage data) <S> <C> <C> <C> <C> Statement of Operations Data: Net revenues $ 1,629,388 $1,629,388 $1,633,699 $1,416,338 Costs and expenses: Cost of services 980,232 980,232 969,844 805,729 Selling, general and administrative 523,271(c) 523,271(c) 411,939 363,579 Provision for restructuring and other special charges(d) 50,560 50,560 79,814 99,600 Interest expense, net 50,748 82,016 63,295 41,898 Amortization of intangible assets 34,031 44,656 42,588 28,421 Other, net 6,221 6,221 3,464 6,423 --------------- --------------- ------------- ------------- Total 1,645,063 1,686,956 1,570,944 1,345,650 --------------- --------------- ------------- ------------- Income (loss) before taxes (15,675) (57,568) 62,755 70,688 Income tax expense (benefit) 6,835 (5,516) 34,410 25,929 --------------- --------------- ------------- ------------- Income (loss) before cumulative effect of change in accounting principle (22,510) (52,052) 28,345 44,759 Cumulative effect of change in accounting principle (10,562) --------------- --------------- ------------- ------------- Net income (loss) $ (22,510) $ (52,052) $ 28,345 $ 34,197 =============== =============== ============= ============= Pro forma shares outstanding(e) 28,901,735 Pro forma net loss per share $ (0.78) Balance Sheet Data (at end of period): Cash $ 36,446 $ 38,719 $ 39,410 Working capital 200,740 214,358 139,771 Total assets 1,853,385 1,882,663 1,861,162 Long-term debt 1,195,566 1,153,054 1,025,787 Total debt 1,207,714 1,165,626 1,123,307 Stockholder's equity 295,801 386,812 395,509 Ratio of earnings to fixed charges -- (f) -- (f) 1.77(f) 2.20(f) Supplemental Data: Net cash provided by operating activities $ 85,828 $ 85,828 $ 37,963 $ 99,614 Net cash used in investing activities (93,087) (93,087) (46,186) (473,687) Net cash provided by (used in) financing activities 4,986 4,986 7,532 392,956 Bad debt expense $ 152,590(c) $ 152,590(c) $ 59,480 $ 47,240 Bad debt expense as a % of net revenues 9.4% 9.4% 3.6% 3.3% Rent expense $ 46,900 $ 46,900 $ 49,400 $ 46,900 Capital expenditures 74,045 74,045 93,354 65,317 Depreciation expense $ 56,857 $ 56,857 $ 46,929 $ 38,058 EBITDA(g) $ 125,961(c) $ 125,961(c) $ 215,567 $ 179,065 EBITDA as a % of net revenues 7.7% 7.7% 13.2% 12.6% Adjusted EBITDA(i) $ 176,521(c) $ 176,521(c) $ 295,381 $ 278,665 Adjusted EBITDA as a % of net revenues 10.8% 10.8% 18.1% 19.7% Supplemental Ratio Data: Adjusted EBITDA/interest expense, net 3.5x (Adjusted EBITDA-capital expenditures)/ interest expense, net 2.0x </TABLE> (Footnotes on page 14) (Footnotes for preceding pages) (a) Adjusted to reflect the pro forma effects of the Distributions and the Accounting Policy Change. See "Selected Historical Financial Data" and "Pro Forma Financial Information."
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+Prospectus Summary This Summary is qualified by the more detailed information (including the financial statements and related notes) set forth elsewhere in this Prospectus which should be read in its entirety. Unless the context indicates, or it is specifically indicated otherwise, all references to (i) "Corning" include Corning Incorporated, a New York corporation, and its consolidated subsidiaries, (ii) "Quest Diagnostics" or the "Company" include Corning Clinical Laboratories Inc. (to be renamed Quest Diagnostics Incorporated prior to the Distributions), a Delaware corporation, and its direct and indirect subsidiaries (other than Covance) and assume that the Distributions have occurred, and (iii) "Covance" include Covance Inc. (formerly Corning Pharmaceutical Services Inc.), a Delaware corporation, and its direct and indirect subsidiaries and assume that the Distributions have occurred. Capitalized terms used but not defined in this Summary are defined elsewhere in this Prospectus. The Company Quest Diagnostics is one of the largest independent clinical laboratory testing companies in the United States. Quest Diagnostics offers a broad range of routine and specialty ("esoteric") testing services used by the medical profession in the diagnosis, monitoring and treatment of disease and other medical conditions. Quest Diagnostics' network, which processes approximately 60 million requisitions for diagnostic tests annually, consists of 17 regional laboratories across the United States and the Corning Nichols Institute ("Nichols") esoteric testing laboratory in San Juan Capistrano, California. In addition, Quest Diagnostics has 14 branch laboratories in the United States as well as one branch laboratory in Mexico City (branch laboratories are smaller than regional laboratories), approximately 200 "STAT" laboratories and approximately 850 patient service centers located throughout the United States. For the year ended December 31, 1995 and the nine months ended September 30, 1996, Quest Diagnostics had net revenues of $1,629 million and $1,231 million, respectively, and Adjusted EBITDA (income (loss) before income taxes plus net interest expense, depreciation and amortization and restructuring and other special charges) of $177 million and $135 million, respectively. Quest Diagnostics operates 24 hours a day, 365 days a year, utilizing a fully integrated collection and processing system. Quest Diagnostics generally performs and reports most routine procedures within 24 hours, employing a variety of sophisticated and computerized laboratory testing instruments. Quest Diagnostics provides daily pickup of specimens from most customers principally through an in-house courier system. The specimens are sent to one of the Company's laboratories where one or more tests are performed. Each patient specimen is accompanied by a test requisition form, which is completed by the customer, that indicates the tests to be performed and provides the necessary billing information. Each specimen and related requisition form is checked for completeness and then given a unique bar-coded identification number. Once the appropriate information is entered into the computer system, the tests are performed and the results are delivered to the doctor, primarily through computer interface or manually. Corning entered the clinical laboratory business in 1982 with the acquisition of MetPath Inc. ("MetPath"), which was founded in 1967 and was one of the first laboratories to expand beyond a regional market. Since January 1993, Quest Diagnostics has acquired over thirty laboratories, including Damon Corporation ("Damon"), Bioran Medical Laboratory ("Bioran") and Maryland Medical Laboratory, Inc. ("MML"). In 1994, Quest Diagnostics enhanced its presence in the esoteric testing market through the acquisition of Nichols, a preeminent clinical laboratory with a leading reputation for esoteric testing and test innovations. While Corning's ownership provided the Company with the capital to grow through acquisitions and to become one of the nation's largest independent clinical laboratory testing companies, the management of both Corning and Quest Diagnostics believe that Quest Diagnostics will be more competitive and operate more successfully in the future as an independent company, with a strong, focused and experienced management team to concentrate on customer needs. Independence will also enable Quest Diagnostics to motivate its employees by offering equity-based incentives tied directly to the performance of the Company and individual performance. Quest Diagnostics' management team has implemented a new business strategy, which focuses the business around three key strategic areas: clinical operations, customer focus and technological leadership and excellence. The Clinical Laboratory Testing Industry Clinical testing is a critical component in the delivery of quality health care service to patients. Currently, clinical laboratory testing is the first step in determining how a significant amount of all health care dollars are spent. Quest Diagnostics believes that in 1995 the entire United States clinical laboratory industry had revenues exceeding $30 billion. The clinical laboratory industry consists primarily of three types of providers: hospital-affiliated laboratories, independent clinical laboratories, such as Quest Diagnostics, and physician-office laboratories. The Company believes that in 1995 approximately 56% of the clinical testing revenues in the United States were attributable to hospital-affiliated laboratories, approximately 36% were attributable to independent clinical laboratories and approximately 8% were attributable to physicians in their offices and laboratories. Quest Diagnostics believes that consolidation will continue in the clinical laboratory testing business. In addition, Quest Diagnostics believes that it and the other large independent clinical laboratory testing companies may have the opportunity to increase their share of the overall clinical laboratories testing market due to a number of external factors, including cost efficiencies afforded by large-scale automated testing, Medicare reimbursement reductions and the growth of managed health care entities which require low-cost testing services and large service networks. In addition, legal restrictions on physician referrals and the ownership of laboratories as well as increased regulation of laboratories are expected to contribute to the continuing consolidation of the industry. Quest Diagnostics believes that a number of factors are likely to positively influence the volume of clinical laboratory testing performed in the United States in the future, including (1) the general aging of the population in the United States; (2) an expanded base of scientific knowledge which has led to the development of more sophisticated specialized tests and an increase in the awareness of physicians of the value of clinical laboratory testing as a cost-effective means of early detection of disease and monitoring of treatment; (3) an increase in the number and types of tests which are, due to advances in technology and increased cost efficiencies, readily available on a more affordable basis to physicians; (4) expanded substance-abuse testing by corporations and governmental agencies; and (5) increased testing for sexually transmitted diseases such as AIDS. The impact of these factors is expected to be offset in part by increased controls over the utilization of clinical laboratory tests by both Medicare and the private sector, particularly managed care organizations. Business Strategy Quest Diagnostics' overall goal is to be recognized by its customers, employees and competitors as the best provider of comprehensive and innovative clinical testing, information and services. To achieve this, Quest Diagnostics' management team has focused the business around three key strategic areas: clinical operations, customer focus and technological leadership and excellence. (bullet) Best Supplier. Quest Diagnostics seeks to be the best supplier of the highest quality and the lowest-cost testing services. Health care providers and patients expect accurate, timely and consistent laboratory test results at a fair price. (bullet) Lowest-cost provider. Quest Diagnostics' average cost per requisition varies significantly among its regional laboratories; there is an approximately $7.00 difference in cost per requisition between the most efficient regional laboratory and the average, and an approximately $13.00 difference in cost per requisition between the most and the least efficient regional laboratories. In many cases, these variations do not relate to testing volumes or mixes, space costs, service requirements or regional labor cost differences. To reduce costs, Quest Diagnostics has begun to replicate the best practices from each region throughout its national network. Management expects to achieve significant cost savings within the next three years as these programs are fully implemented. * (bullet) Highest Quality Provider. Quest Diagnostics is dedicated to providing accurate and timely test results and to being viewed by its customers as the highest quality provider of clinical testing services. Quest Diagnostics believes that implementation of best practices already developed in certain regions will permit the Company to be viewed by its customers as the highest quality provider of clinical testing services. (bullet) Preferred Provider. Quest Diagnostics seeks to be the preferred provider of laboratory testing services to existing and new health care networks on a selective basis determined by profitability of accounts. Quest Diagnostics believes that it will become the preferred provider to these networks as (1) large networks typically prefer to utilize large independent clinical laboratories that can service them on a national or regional basis and (2) the Company continues to pursue its primary strategy of becoming the highest quality, lowest-cost provider. To achieve this, Quest Diagnostics will employ a rigorous national and regional process to both select and pursue customers and allocate resources to support these efforts. *This is a forward looking statement and is based on current expectations. Actual results may vary materially from those projected. See "Business- Important Factors Regarding Forward Looking Statements." In particular, see factors (a), (d) and (j). (bullet) Account Profitability. Quest Diagnostics intends to refocus its sales efforts on pursuing and keeping profitable accounts. Quest Diagnostics is actively reviewing the profitability of its current accounts, including those with managed care organizations, and will either increase pricing or eliminate accounts that cannot be serviced profitably. (bullet) Regional Profitability. Quest Diagnostics presently believes that it has the leading market share among independent clinical laboratories in most routine testing markets of the northeast, mid-Atlantic and midwest regions. Approximately 65% of Quest Diagnostics' revenues and almost all of its EBITDA is generated from markets in which the Company believes that it has the leading market share. In most of these markets, Quest Diagnostics believes that it also is the lowest cost provider. Quest Diagnostics is evaluating its strategic alternatives relative to units whose profitability does not meet its internal goals. These alternatives may include joint ventures, alliances, or dispositions. Quest Diagnostics believes that, while the clinical laboratory industry is becoming national in scope, the Company can subcontract with other clinical laboratories to perform testing for national accounts in any markets in which the Company chooses not to compete. (bullet) Leading Innovator. Quest Diagnostics intends to remain a leading innovator in the clinical laboratory industry by continuing to introduce new tests, technology and services. Through its relationship with the academic community and pharmaceutical and biotechnology firms and a research and development budget exceeding $15 million per year, Quest Diagnostics believes it is one of the leaders in transferring innovation from academic biotechnology laboratories to the market. Recent Developments By a plea agreement and civil agreement and release dated October 9, 1996, between the Department of Justice ("DOJ") and Damon, all federal criminal matters within the scope of the various federal investigations against Damon, and all claims including the civil qui tam cases underlying the civil investigations were settled for an aggregate of $119 million, which sum was reimbursed to Quest Diagnostics by Corning. The Damon settlement does not exclude Quest Diagnostics from future participation in any federal health care programs on account of Damon's practices. Quest Diagnostics' aggregate reserve with respect to all governmental and private claims was $215 million at September 30, 1996 and is estimated to be reduced to $85 million as of the Distribution Date as a result of the payment of settled claims, primarily the Damon settlement of $119 million. Based on information available to management and Quest Diagnostics' experience with past settlements (including the fact that the aggregate amount of the Damon settlement was significantly in excess of established reserves) management has reassessed its reserve levels and believes that its current level of reserves is adequate. However, it is possible that additional information may become available which may cause the final resolution of these matters to be in excess of established reserves by an amount which could be material to Quest Diagnostics' results of operations and, for non-indemnified claims, Quest Diagnostics' cash flows in the period in which such claims are settled. While none of the governmental or nongovernmental investigations or claims is covered by insurance, Quest Diagnostics does not believe that these matters will have a material adverse effect on Quest Diagnostics' overall financial condition. Corning Indemnity In connection with the Distributions, Corning has agreed to indemnify Quest Diagnostics against all monetary penalties, fines or settlements arising out of any governmental claims arising out of alleged violations of applicable federal fraud and health care statutes and relating to billing practices of Quest Diagnostics and its predecessors that have been settled or are pending on the Distribution Date. Corning has also agreed to indemnify Quest Diagnostics for 50% of the aggregate of all judgment or settlement payments made by Quest Diagnostics that are in excess of $42.0 million in respect of claims by private parties (i.e., nongovernmental parties such as private insurers) that relate to indemnified or previously settled governmental claims and that allege overbillings by Quest Diagnostics or any existing subsidiaries of Quest Diagnostics, for services provided prior to the Distribution Date; provided, however, such indemnification for nongovernmental claims will not exceed $25.0 million in the aggregate and all amounts indemnified against by Corning for the benefit of Quest Diagnostics will be calculated on a net after-tax basis. Such indemnification will not cover (i) any governmental claims that arise after the Distribution Date pursuant to service of subpoena or other notice of such investigation after the Distribution Date, (ii) any nongovernmental claims unrelated to the indemnified governmental claims or investigations, (iii) any nongovernmental claims not settled prior to five years after the Distribution Date, (iv) any consequential or incidental damages relating to the billing claims, including losses of revenues and profits as a consequence of exclusion for participation in federal or state health care programs or (v) the fees and expenses of litigation. The Distributions On May 13, 1996, the board of directors of Corning approved a plan to distribute to Corning shareholders the clinical laboratory testing business being conducted by Quest Diagnostics and the contract research business being conducted by Quest Diagnostics' wholly owned subsidiary, Covance (together, the "Distributions"). The Distributions will be effected by distributing all of the outstanding shares of Quest Diagnostics common stock (the "Quest Diagnostics Common Stock") to holders of Corning common stock (the "Corning Common Stock"), followed immediately by the distribution of all of the common stock of Covance (the "Covance Common Stock") to those same holders, as holders of Quest Diagnostics Common Stock. It is expected that the Distributions will be made on December 31, 1996 (the date on which the Distributions are to be made, the "Distribution Date"). Prior to the consummation of the offering of the Notes contemplated hereby (the "Offering"), the Company entered into a $450 million senior, secured credit facility (the "Credit Facility"), among the Company, the lenders listed therein, NationsBank, N.A., as Issuing Bank, Wachovia Bank of Georgia, N.A., as Swingline Bank, and Morgan Guaranty Trust Company of New York, as Administrative Agent. The Credit Facility is comprised of a $300 million six-year amortizing term loan ("Tranche A Loan"), a $50 million seven-year term loan ("Tranche B Loan" and together with the Tranche A Loan, the "Term Loans") and a $100 million six-year revolving working capital facility (the "Working Capital Facility"). Corning currently has approximately $1.2 billion of Quest Diagnostics intercompany debt. Approximately $145 million of net proceeds from the Offering, together with the $350 million of borrowings under the Term Loans, will be paid to Corning in satisfaction of a portion of the outstanding intercompany debt. Corning will contribute the remaining intercompany debt to Quest Diagnostics' capital. Borrowings under the Working Capital Facility, substantially all of which is expected to be available as of the Distribution Date, will provide for future working capital needs and other general corporate purposes. The Offering <TABLE> <CAPTION> <S> <C> Securities Offered $150,000,000 aggregate principal amount of % Senior Subordinated Notes due December 15, 2006 (the "Notes"). Maturity Date December 15, 2006. Interest Payment Date June 15 and December 15, commencing June 15, 1997. Optional Redemption by the Company The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after December 15, 2001, at the redemption prices set forth herein, plus accrued and unpaid interest, if any, to but excluding the date fixed for redemption. In addition, if as a result of an event outside the control of Corning, Quest Diagnostics and Covance, the Distributions do not occur prior to March 31, 1997, the Notes will be subject to redemption, as a whole and not in part, at the option of Quest Diagnostics, prior to June 30, 1997, at a redemption price equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to but excluding the date fixed for redemption. See "Description of the Notes--Optional Redemption." Change of Control Offer Upon a Change of Control, the Company has the obligation to offer to purchase all the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to but excluding the date of purchase. See "Description of the Notes-- Repurchase at the Option of Holders--Change of Control" for a discussion of the circumstances in which the Company may not be required to make an offer to purchase upon a Change of Control. Offers to Purchase In the event of certain asset sales, the Company will be required to offer to repurchase the Notes at 100% of their principal amount, plus accrued and unpaid interest, if any, to but excluding the date of purchase with the net proceeds of such asset sales. Subordination The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company, including all indebtedness of the Company under the Credit Facility. The Notes will rank Pari Passu in right of payment with any other senior subordinated indebtedness of the Company. Subsidiary Guarantees The Notes will be guaranteed, jointly and severally, and fully and unconditionally, on a senior subordinated basis by the Guarantors (the "Senior Subordinated Guarantees"). The obligations of any Guarantor with respect to its Senior Subordinated Guarantee will be subordinated in right of payment, to the same extent as the obligations of the Company in respect of the Notes, to all existing and future Senior Guarantees, which will include the guarantees of the Credit Facility. The Senior Subordinated Guarantees would also be subordinated to all existing and future indebtedness of the Guarantors if the Senior Subordinated Guarantees were avoided or subordinated in favor of the Guarantors' other creditors. See "Risk Factors--Fraudulent Conveyance." The obligations of a Guarantor under its Senior Subordinated Guarantee will be released in certain circumstances, including if the Guarantor ceases to guarantee the Credit Facility. See "Description of the Notes--Senior Subordinated Guarantees." Principal Covenants The indenture under which the Notes are issued (the "Indenture") will impose certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt and senior in right of payment to the Notes, enter into leases, incur liens, merge or consolidate with any other person, or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. Use of Proceeds The Company intends to use the proceeds from the sale of the Notes, together with the proceeds of borrowings under the Credit Facility, to repay certain intercompany indebtedness owed to Corning. See "Use of Proceeds." The Distributions The Notes are being offered in connection with the Distributions of the Quest Diagnostics Common Stock and the Covance Common Stock to holders of Corning Common Stock. The closing of the offering of the Notes is anticipated to occur prior to the Distributions. Listing The Notes have been approved for listing on the New York Stock Exchange, subject to official notice of issuance. Risk Factors See "Risk Factors" for a discussion of certain factors that should be considered in connection with an investment in the Notes. </TABLE> Summary Financial Data The following table summarizes certain historical and pro forma financial data of Quest Diagnostics at the dates and for each of the periods indicated. The selected financial data as of and for each of the years ended December 31, 1995, 1994 and 1993 have been derived from the audited combined financial statements of (the "Audited Financial Statements") and the notes thereto included elsewhere herein. The selected financial data as of and for the three and nine months ended September 30, 1996 and 1995 have been derived from the unaudited interim combined financial statements of Quest Diagnostics (the "Interim Financial Statements" and, together with the Audited Financial Statements, the "Financial Statements") and the notes thereto included elsewhere herein. In the opinion of Quest Diagnostics management, the unaudited interim combined financial statements include all adjustments, consisting of only normal recurring adjustments, that are necessary for a fair presentation of the financial position and results of operations for these periods. The unaudited interim results of operations for the three and nine months ended September 30, 1996 are not necessarily indicative of the results for the entire year ending December 31, 1996. The selected pro forma financial data have been derived from the unaudited pro forma combined financial information of Quest Diagnostics for the year ended December 31, 1995 and for the three and nine months ended September 30, 1996 (the "Pro Forma Financial Information") and the notes thereto included elsewhere herein. The pro forma statement of operations data gives effect to the Distributions and the Accounting Policy Change (as defined below) as if they had occurred on January 1, 1995 and the pro forma balance sheet data gives effect to the Distributions and the Accounting Policy Change as if they had occurred on September 30, 1996. The pro forma financial data does not purport to represent what Quest Diagnostics' results of operations would have been if the Distributions and the Accounting Policy Change had in fact occurred on such dates, nor does it purport to indicate the future financial position or results of future operations of Quest Diagnostics. The pro forma adjustments are based upon currently available information and certain assumptions that Quest Diagnostics management believes to be reasonable. The summary historical and pro forma financial data set forth below should be read in conjunction with "Selected Historical Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Financial Statements and the notes thereto and the Pro Forma Financial Information and the notes thereto. <TABLE> <CAPTION> Three Months Ended September 30, Nine Months Ended September 30, ------------------------------------------------------------------------------------------------ Pro Forma Historical Pro Forma Historical ------------------------------- ------------------------------- 1996(a) 1996 1995 1996(a) 1996 1995 --------------- --------------- --------------- ---------------- ---------------- -------------- (in thousands, except share, per share and percentage data) <S> <C> <C> <C> <C> <C> <C> Statement of Operations Data: Net revenues $ 405,352 $ 405,352 $ 399,959 $ 1,231,290 $1,231,290 $1,239,474 Costs and expenses: Cost of services 255,390 255,390 240,868 768,809 768,809 735,984 Selling, general and administrative 125,190 125,190 181,346(c) 371,439 371,439 399,635(c) Provision for restructuring and other special charges(d) 155,730 155,730 201,730 201,730 45,885 Interest expense, net 12,189 19,866 20,927 36,938 59,887 61,529 Amortization of intangible assets 7,672 10,328 11,293 23,803 31,772 33,678 Other, net 1,837 1,837 1,930 (198) (198) 4,429 --------------- --------------- --------------- ---------------- ---------------- -------------- Total 558,008 568,341 456,364 1,402,521 1,433,439 1,281,140 --------------- --------------- --------------- ---------------- ---------------- -------------- Income (loss) before taxes (152,656) (162,989) (56,405) (171,231) (202,149) (41,666) Income tax expense (benefit) (40,521) (43,553) (17,810) (34,215) (43,280) (3,642) --------------- --------------- --------------- ---------------- ---------------- -------------- Income (loss) before cumulative effect of change in accounting principle (112,135) (119,436) (38,595) (137,016) (158,869) (38,024) Cumulative effect of change in accounting principle --------------- --------------- --------------- ---------------- ---------------- -------------- Net income (loss) $ (112,135) $ (119,436) $ (38,595) $ (137,016) $ (158,869) $ (38,024) =============== =============== =============== ================ ================ ============== Pro forma shares outstanding(e) 28,901,735 28,901,735 Pro forma net loss per share $ (3.88) $ (4.74) Balance Sheet Data (at end of period): Cash $ 40,000 $ 48,319 $ 46,908 $ 40,000 $ 48,319 $ 46,908 Working capital 306,741 114,718 129,319 306,741 114,718 129,319 Total assets 1,612,459 1,886,378 1,896,058 1,612,459 1,886,378 1,896,058 Long-term debt 515,494 1,219,900 1,114,367 515,494 1,219,900 1,114,367 Total debt 517,379 1,231,785 1,226,211 517,379 1,231,785 1,226,211 Stockholder's equity 604,099 132,670 320,576 604,099 132,670 320,576 Ratio of earnings to fixed charges -- (f) -- (f) -- (f) -- (f) -- (f) -- (f) Supplemental Data: Net cash provided by operating activities $ 25,236 $ 25,236 $ 38,202 $ 41,937 $ 41,937 $ 53,789 Net cash used in investing activities (7,904) (7,904) (17,044) (53,097) (53,097) (77,911) Net cash provided by (used in) financing activities (6,618) (6,618) (18,006) 23,033 23,033 32,311 Bad debt expense $ 30,539 $ 30,539 $ 85,831(c) $ 81,891 $ 81,891 $ 127,297(c) Bad debt expense as a % of net revenues 7.5% 7.5% 21.5% 6.7% 6.7% 10.3% Rent expense $ 12,515 $ 12,515 $ 11,860 $ 37,315 $ 37,315 $ 35,060 Capital expenditures 11,912 11,912 16,441 58,802 58,802 56,062 Depreciation expense $ 14,672 $ 14,672 $ 14,275 $ 43,460 $ 43,460 $ 42,358 EBITDA(g) $ (118,123)(h) $ (118,123)(h) $ (9,910)(c) $ (67,030)(h) $ (67,030)(h) $ 95,899(c) EBITDA as a % of net revenues (29.1%) (29.1%) (2.5%) (5.4%) (5.4%) 7.7% Adjusted EBITDA(i) $ 37,607 $ 37,607 $ (9,910)(c) $ 134,700 $ 134,700 $ 141,784(c) Adjusted EBITDA as a % of net revenues 9.3% 9.3% (2.5%) 10.9% 10.9% 11.4% Supplemental Ratio Data: Adjusted EBITDA/interest expense, net 3.1x 3.6x (Adjusted EBITDA-capital expenditures)/interest expense, net 2.1x 2.1x (Total debt--cash)/annualized adjusted EBITDA 3.2x 2.7x </TABLE> (Footnotes on page 14) <TABLE> <CAPTION> Year Ended December 31, ----------------------------------------------------------- Pro Forma Historical ------------------------------------------- 1995(a) 1995 1994(b) 1993 --------------- --------------- ------------- ------------- (in thousands, except share, per share and percentage data) <S> <C> <C> <C> <C> Statement of Operations Data: Net revenues $ 1,629,388 $1,629,388 $1,633,699 $1,416,338 Costs and expenses: Cost of services 980,232 980,232 969,844 805,729 Selling, general and administrative 523,271(c) 523,271(c) 411,939 363,579 Provision for restructuring and other special charges(d) 50,560 50,560 79,814 99,600 Interest expense, net 50,748 82,016 63,295 41,898 Amortization of intangible assets 34,031 44,656 42,588 28,421 Other, net 6,221 6,221 3,464 6,423 --------------- --------------- ------------- ------------- Total 1,645,063 1,686,956 1,570,944 1,345,650 --------------- --------------- ------------- ------------- Income (loss) before taxes (15,675) (57,568) 62,755 70,688 Income tax expense (benefit) 6,835 (5,516) 34,410 25,929 --------------- --------------- ------------- ------------- Income (loss) before cumulative effect of change in accounting principle (22,510) (52,052) 28,345 44,759 Cumulative effect of change in accounting principle (10,562) --------------- --------------- ------------- ------------- Net income (loss) $ (22,510) $ (52,052) $ 28,345 $ 34,197 =============== =============== ============= ============= Pro forma shares outstanding(e) 28,901,735 Pro forma net loss per share $ (0.78) Balance Sheet Data (at end of period): Cash $ 36,446 $ 38,719 $ 39,410 Working capital 200,740 214,358 139,771 Total assets 1,853,385 1,882,663 1,861,162 Long-term debt 1,195,566 1,153,054 1,025,787 Total debt 1,207,714 1,165,626 1,123,307 Stockholder's equity 295,801 386,812 395,509 Ratio of earnings to fixed charges -- (f) -- (f) 1.77(f) 2.20(f) Supplemental Data: Net cash provided by operating activities $ 85,828 $ 85,828 $ 37,963 $ 99,614 Net cash used in investing activities (93,087) (93,087) (46,186) (473,687) Net cash provided by (used in) financing activities 4,986 4,986 7,532 392,956 Bad debt expense $ 152,590(c) $ 152,590(c) $ 59,480 $ 47,240 Bad debt expense as a % of net revenues 9.4% 9.4% 3.6% 3.3% Rent expense $ 46,900 $ 46,900 $ 49,400 $ 46,900 Capital expenditures 74,045 74,045 93,354 65,317 Depreciation expense $ 56,857 $ 56,857 $ 46,929 $ 38,058 EBITDA(g) $ 125,961(c) $ 125,961(c) $ 215,567 $ 179,065 EBITDA as a % of net revenues 7.7% 7.7% 13.2% 12.6% Adjusted EBITDA(i) $ 176,521(c) $ 176,521(c) $ 295,381 $ 278,665 Adjusted EBITDA as a % of net revenues 10.8% 10.8% 18.1% 19.7% Supplemental Ratio Data: Adjusted EBITDA/interest expense, net 3.5x (Adjusted EBITDA-capital expenditures)/ interest expense, net 2.0x </TABLE> (Footnotes on page 14) (Footnotes for preceding pages) (a) Adjusted to reflect the pro forma effects of the Distributions and the Accounting Policy Change. See "Selected Historical Financial Data" and "Pro Forma Financial Information."
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+Prospectus Summary This Summary is qualified by the more detailed information (including the financial statements and related notes) set forth elsewhere in this Prospectus which should be read in its entirety. Unless the context indicates, or it is specifically indicated otherwise, all references to (i) "Corning" include Corning Incorporated, a New York corporation, and its consolidated subsidiaries, (ii) "Quest Diagnostics" or the "Company" include Corning Clinical Laboratories Inc. (to be renamed Quest Diagnostics Incorporated prior to the Distributions), a Delaware corporation, and its direct and indirect subsidiaries (other than Covance) and assume that the Distributions have occurred, and (iii) "Covance" include Covance Inc. (formerly Corning Pharmaceutical Services Inc.), a Delaware corporation, and its direct and indirect subsidiaries and assume that the Distributions have occurred. Capitalized terms used but not defined in this Summary are defined elsewhere in this Prospectus. The Company Quest Diagnostics is one of the largest independent clinical laboratory testing companies in the United States. Quest Diagnostics offers a broad range of routine and specialty ("esoteric") testing services used by the medical profession in the diagnosis, monitoring and treatment of disease and other medical conditions. Quest Diagnostics' network, which processes approximately 60 million requisitions for diagnostic tests annually, consists of 17 regional laboratories across the United States and the Corning Nichols Institute ("Nichols") esoteric testing laboratory in San Juan Capistrano, California. In addition, Quest Diagnostics has 14 branch laboratories in the United States as well as one branch laboratory in Mexico City (branch laboratories are smaller than regional laboratories), approximately 200 "STAT" laboratories and approximately 850 patient service centers located throughout the United States. For the year ended December 31, 1995 and the nine months ended September 30, 1996, Quest Diagnostics had net revenues of $1,629 million and $1,231 million, respectively, and Adjusted EBITDA (income (loss) before income taxes plus net interest expense, depreciation and amortization and restructuring and other special charges) of $177 million and $135 million, respectively. Quest Diagnostics operates 24 hours a day, 365 days a year, utilizing a fully integrated collection and processing system. Quest Diagnostics generally performs and reports most routine procedures within 24 hours, employing a variety of sophisticated and computerized laboratory testing instruments. Quest Diagnostics provides daily pickup of specimens from most customers principally through an in-house courier system. The specimens are sent to one of the Company's laboratories where one or more tests are performed. Each patient specimen is accompanied by a test requisition form, which is completed by the customer, that indicates the tests to be performed and provides the necessary billing information. Each specimen and related requisition form is checked for completeness and then given a unique bar-coded identification number. Once the appropriate information is entered into the computer system, the tests are performed and the results are delivered to the doctor, primarily through computer interface or manually. Corning entered the clinical laboratory business in 1982 with the acquisition of MetPath Inc. ("MetPath"), which was founded in 1967 and was one of the first laboratories to expand beyond a regional market. Since January 1993, Quest Diagnostics has acquired over thirty laboratories, including Damon Corporation ("Damon"), Bioran Medical Laboratory ("Bioran") and Maryland Medical Laboratory, Inc. ("MML"). In 1994, Quest Diagnostics enhanced its presence in the esoteric testing market through the acquisition of Nichols, a preeminent clinical laboratory with a leading reputation for esoteric testing and test innovations. While Corning's ownership provided the Company with the capital to grow through acquisitions and to become one of the nation's largest independent clinical laboratory testing companies, the management of both Corning and Quest Diagnostics believe that Quest Diagnostics will be more competitive and operate more successfully in the future as an independent company, with a strong, focused and experienced management team to concentrate on customer needs. Independence will also enable Quest Diagnostics to motivate its employees by offering equity-based incentives tied directly to the performance of the Company and individual performance. Quest Diagnostics' management team has implemented a new business strategy, which focuses the business around three key strategic areas: clinical operations, customer focus and technological leadership and excellence. The Clinical Laboratory Testing Industry Clinical testing is a critical component in the delivery of quality health care service to patients. Currently, clinical laboratory testing is the first step in determining how a significant amount of all health care dollars are spent. Quest Diagnostics believes that in 1995 the entire United States clinical laboratory industry had revenues exceeding $30 billion. The clinical laboratory industry consists primarily of three types of providers: hospital-affiliated laboratories, independent clinical laboratories, such as Quest Diagnostics, and physician-office laboratories. The Company believes that in 1995 approximately 56% of the clinical testing revenues in the United States were attributable to hospital-affiliated laboratories, approximately 36% were attributable to independent clinical laboratories and approximately 8% were attributable to physicians in their offices and laboratories. Quest Diagnostics believes that consolidation will continue in the clinical laboratory testing business. In addition, Quest Diagnostics believes that it and the other large independent clinical laboratory testing companies may have the opportunity to increase their share of the overall clinical laboratories testing market due to a number of external factors, including cost efficiencies afforded by large-scale automated testing, Medicare reimbursement reductions and the growth of managed health care entities which require low-cost testing services and large service networks. In addition, legal restrictions on physician referrals and the ownership of laboratories as well as increased regulation of laboratories are expected to contribute to the continuing consolidation of the industry. Quest Diagnostics believes that a number of factors are likely to positively influence the volume of clinical laboratory testing performed in the United States in the future, including (1) the general aging of the population in the United States; (2) an expanded base of scientific knowledge which has led to the development of more sophisticated specialized tests and an increase in the awareness of physicians of the value of clinical laboratory testing as a cost-effective means of early detection of disease and monitoring of treatment; (3) an increase in the number and types of tests which are, due to advances in technology and increased cost efficiencies, readily available on a more affordable basis to physicians; (4) expanded substance-abuse testing by corporations and governmental agencies; and (5) increased testing for sexually transmitted diseases such as AIDS. The impact of these factors is expected to be offset in part by increased controls over the utilization of clinical laboratory tests by both Medicare and the private sector, particularly managed care organizations. Business Strategy Quest Diagnostics' overall goal is to be recognized by its customers, employees and competitors as the best provider of comprehensive and innovative clinical testing, information and services. To achieve this, Quest Diagnostics' management team has focused the business around three key strategic areas: clinical operations, customer focus and technological leadership and excellence. (bullet) Best Supplier. Quest Diagnostics seeks to be the best supplier of the highest quality and the lowest-cost testing services. Health care providers and patients expect accurate, timely and consistent laboratory test results at a fair price. (bullet) Lowest-cost provider. Quest Diagnostics' average cost per requisition varies significantly among its regional laboratories; there is an approximately $7.00 difference in cost per requisition between the most efficient regional laboratory and the average, and an approximately $13.00 difference in cost per requisition between the most and the least efficient regional laboratories. In many cases, these variations do not relate to testing volumes or mixes, space costs, service requirements or regional labor cost differences. To reduce costs, Quest Diagnostics has begun to replicate the best practices from each region throughout its national network. Management expects to achieve significant cost savings within the next three years as these programs are fully implemented. * (bullet) Highest Quality Provider. Quest Diagnostics is dedicated to providing accurate and timely test results and to being viewed by its customers as the highest quality provider of clinical testing services. Quest Diagnostics believes that implementation of best practices already developed in certain regions will permit the Company to be viewed by its customers as the highest quality provider of clinical testing services. (bullet) Preferred Provider. Quest Diagnostics seeks to be the preferred provider of laboratory testing services to existing and new health care networks on a selective basis determined by profitability of accounts. Quest Diagnostics believes that it will become the preferred provider to these networks as (1) large networks typically prefer to utilize large independent clinical laboratories that can service them on a national or regional basis and (2) the Company continues to pursue its primary strategy of becoming the highest quality, lowest-cost provider. To achieve this, Quest Diagnostics will employ a rigorous national and regional process to both select and pursue customers and allocate resources to support these efforts. *This is a forward looking statement and is based on current expectations. Actual results may vary materially from those projected. See "Business- Important Factors Regarding Forward Looking Statements." In particular, see factors (a), (d) and (j). (bullet) Account Profitability. Quest Diagnostics intends to refocus its sales efforts on pursuing and keeping profitable accounts. Quest Diagnostics is actively reviewing the profitability of its current accounts, including those with managed care organizations, and will either increase pricing or eliminate accounts that cannot be serviced profitably. (bullet) Regional Profitability. Quest Diagnostics presently believes that it has the leading market share among independent clinical laboratories in most routine testing markets of the northeast, mid-Atlantic and midwest regions. Approximately 65% of Quest Diagnostics' revenues and almost all of its EBITDA is generated from markets in which the Company believes that it has the leading market share. In most of these markets, Quest Diagnostics believes that it also is the lowest cost provider. Quest Diagnostics is evaluating its strategic alternatives relative to units whose profitability does not meet its internal goals. These alternatives may include joint ventures, alliances, or dispositions. Quest Diagnostics believes that, while the clinical laboratory industry is becoming national in scope, the Company can subcontract with other clinical laboratories to perform testing for national accounts in any markets in which the Company chooses not to compete. (bullet) Leading Innovator. Quest Diagnostics intends to remain a leading innovator in the clinical laboratory industry by continuing to introduce new tests, technology and services. Through its relationship with the academic community and pharmaceutical and biotechnology firms and a research and development budget exceeding $15 million per year, Quest Diagnostics believes it is one of the leaders in transferring innovation from academic biotechnology laboratories to the market. Recent Developments By a plea agreement and civil agreement and release dated October 9, 1996, between the Department of Justice ("DOJ") and Damon, all federal criminal matters within the scope of the various federal investigations against Damon, and all claims including the civil qui tam cases underlying the civil investigations were settled for an aggregate of $119 million, which sum was reimbursed to Quest Diagnostics by Corning. The Damon settlement does not exclude Quest Diagnostics from future participation in any federal health care programs on account of Damon's practices. Quest Diagnostics' aggregate reserve with respect to all governmental and private claims was $215 million at September 30, 1996 and is estimated to be reduced to $85 million as of the Distribution Date as a result of the payment of settled claims, primarily the Damon settlement of $119 million. Based on information available to management and Quest Diagnostics' experience with past settlements (including the fact that the aggregate amount of the Damon settlement was significantly in excess of established reserves) management has reassessed its reserve levels and believes that its current level of reserves is adequate. However, it is possible that additional information may become available which may cause the final resolution of these matters to be in excess of established reserves by an amount which could be material to Quest Diagnostics' results of operations and, for non-indemnified claims, Quest Diagnostics' cash flows in the period in which such claims are settled. While none of the governmental or nongovernmental investigations or claims is covered by insurance, Quest Diagnostics does not believe that these matters will have a material adverse effect on Quest Diagnostics' overall financial condition. Corning Indemnity In connection with the Distributions, Corning has agreed to indemnify Quest Diagnostics against all monetary penalties, fines or settlements arising out of any governmental claims arising out of alleged violations of applicable federal fraud and health care statutes and relating to billing practices of Quest Diagnostics and its predecessors that have been settled or are pending on the Distribution Date. Corning has also agreed to indemnify Quest Diagnostics for 50% of the aggregate of all judgment or settlement payments made by Quest Diagnostics that are in excess of $42.0 million in respect of claims by private parties (i.e., nongovernmental parties such as private insurers) that relate to indemnified or previously settled governmental claims and that allege overbillings by Quest Diagnostics or any existing subsidiaries of Quest Diagnostics, for services provided prior to the Distribution Date; provided, however, such indemnification for nongovernmental claims will not exceed $25.0 million in the aggregate and all amounts indemnified against by Corning for the benefit of Quest Diagnostics will be calculated on a net after-tax basis. Such indemnification will not cover (i) any governmental claims that arise after the Distribution Date pursuant to service of subpoena or other notice of such investigation after the Distribution Date, (ii) any nongovernmental claims unrelated to the indemnified governmental claims or investigations, (iii) any nongovernmental claims not settled prior to five years after the Distribution Date, (iv) any consequential or incidental damages relating to the billing claims, including losses of revenues and profits as a consequence of exclusion for participation in federal or state health care programs or (v) the fees and expenses of litigation. The Distributions On May 13, 1996, the board of directors of Corning approved a plan to distribute to Corning shareholders the clinical laboratory testing business being conducted by Quest Diagnostics and the contract research business being conducted by Quest Diagnostics' wholly owned subsidiary, Covance (together, the "Distributions"). The Distributions will be effected by distributing all of the outstanding shares of Quest Diagnostics common stock (the "Quest Diagnostics Common Stock") to holders of Corning common stock (the "Corning Common Stock"), followed immediately by the distribution of all of the common stock of Covance (the "Covance Common Stock") to those same holders, as holders of Quest Diagnostics Common Stock. It is expected that the Distributions will be made on December 31, 1996 (the date on which the Distributions are to be made, the "Distribution Date"). Prior to the consummation of the offering of the Notes contemplated hereby (the "Offering"), the Company entered into a $450 million senior, secured credit facility (the "Credit Facility"), among the Company, the lenders listed therein, NationsBank, N.A., as Issuing Bank, Wachovia Bank of Georgia, N.A., as Swingline Bank, and Morgan Guaranty Trust Company of New York, as Administrative Agent. The Credit Facility is comprised of a $300 million six-year amortizing term loan ("Tranche A Loan"), a $50 million seven-year term loan ("Tranche B Loan" and together with the Tranche A Loan, the "Term Loans") and a $100 million six-year revolving working capital facility (the "Working Capital Facility"). Corning currently has approximately $1.2 billion of Quest Diagnostics intercompany debt. Approximately $145 million of net proceeds from the Offering, together with the $350 million of borrowings under the Term Loans, will be paid to Corning in satisfaction of a portion of the outstanding intercompany debt. Corning will contribute the remaining intercompany debt to Quest Diagnostics' capital. Borrowings under the Working Capital Facility, substantially all of which is expected to be available as of the Distribution Date, will provide for future working capital needs and other general corporate purposes. The Offering <TABLE> <CAPTION> <S> <C> Securities Offered $150,000,000 aggregate principal amount of % Senior Subordinated Notes due December 15, 2006 (the "Notes"). Maturity Date December 15, 2006. Interest Payment Date June 15 and December 15, commencing June 15, 1997. Optional Redemption by the Company The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after December 15, 2001, at the redemption prices set forth herein, plus accrued and unpaid interest, if any, to but excluding the date fixed for redemption. In addition, if as a result of an event outside the control of Corning, Quest Diagnostics and Covance, the Distributions do not occur prior to March 31, 1997, the Notes will be subject to redemption, as a whole and not in part, at the option of Quest Diagnostics, prior to June 30, 1997, at a redemption price equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to but excluding the date fixed for redemption. See "Description of the Notes--Optional Redemption." Change of Control Offer Upon a Change of Control, the Company has the obligation to offer to purchase all the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to but excluding the date of purchase. See "Description of the Notes-- Repurchase at the Option of Holders--Change of Control" for a discussion of the circumstances in which the Company may not be required to make an offer to purchase upon a Change of Control. Offers to Purchase In the event of certain asset sales, the Company will be required to offer to repurchase the Notes at 100% of their principal amount, plus accrued and unpaid interest, if any, to but excluding the date of purchase with the net proceeds of such asset sales. Subordination The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company, including all indebtedness of the Company under the Credit Facility. The Notes will rank Pari Passu in right of payment with any other senior subordinated indebtedness of the Company. Subsidiary Guarantees The Notes will be guaranteed, jointly and severally, and fully and unconditionally, on a senior subordinated basis by the Guarantors (the "Senior Subordinated Guarantees"). The obligations of any Guarantor with respect to its Senior Subordinated Guarantee will be subordinated in right of payment, to the same extent as the obligations of the Company in respect of the Notes, to all existing and future Senior Guarantees, which will include the guarantees of the Credit Facility. The Senior Subordinated Guarantees would also be subordinated to all existing and future indebtedness of the Guarantors if the Senior Subordinated Guarantees were avoided or subordinated in favor of the Guarantors' other creditors. See "Risk Factors--Fraudulent Conveyance." The obligations of a Guarantor under its Senior Subordinated Guarantee will be released in certain circumstances, including if the Guarantor ceases to guarantee the Credit Facility. See "Description of the Notes--Senior Subordinated Guarantees." Principal Covenants The indenture under which the Notes are issued (the "Indenture") will impose certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt and senior in right of payment to the Notes, enter into leases, incur liens, merge or consolidate with any other person, or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. Use of Proceeds The Company intends to use the proceeds from the sale of the Notes, together with the proceeds of borrowings under the Credit Facility, to repay certain intercompany indebtedness owed to Corning. See "Use of Proceeds." The Distributions The Notes are being offered in connection with the Distributions of the Quest Diagnostics Common Stock and the Covance Common Stock to holders of Corning Common Stock. The closing of the offering of the Notes is anticipated to occur prior to the Distributions. Listing The Notes have been approved for listing on the New York Stock Exchange, subject to official notice of issuance. Risk Factors See "Risk Factors" for a discussion of certain factors that should be considered in connection with an investment in the Notes. </TABLE> Summary Financial Data The following table summarizes certain historical and pro forma financial data of Quest Diagnostics at the dates and for each of the periods indicated. The selected financial data as of and for each of the years ended December 31, 1995, 1994 and 1993 have been derived from the audited combined financial statements of (the "Audited Financial Statements") and the notes thereto included elsewhere herein. The selected financial data as of and for the three and nine months ended September 30, 1996 and 1995 have been derived from the unaudited interim combined financial statements of Quest Diagnostics (the "Interim Financial Statements" and, together with the Audited Financial Statements, the "Financial Statements") and the notes thereto included elsewhere herein. In the opinion of Quest Diagnostics management, the unaudited interim combined financial statements include all adjustments, consisting of only normal recurring adjustments, that are necessary for a fair presentation of the financial position and results of operations for these periods. The unaudited interim results of operations for the three and nine months ended September 30, 1996 are not necessarily indicative of the results for the entire year ending December 31, 1996. The selected pro forma financial data have been derived from the unaudited pro forma combined financial information of Quest Diagnostics for the year ended December 31, 1995 and for the three and nine months ended September 30, 1996 (the "Pro Forma Financial Information") and the notes thereto included elsewhere herein. The pro forma statement of operations data gives effect to the Distributions and the Accounting Policy Change (as defined below) as if they had occurred on January 1, 1995 and the pro forma balance sheet data gives effect to the Distributions and the Accounting Policy Change as if they had occurred on September 30, 1996. The pro forma financial data does not purport to represent what Quest Diagnostics' results of operations would have been if the Distributions and the Accounting Policy Change had in fact occurred on such dates, nor does it purport to indicate the future financial position or results of future operations of Quest Diagnostics. The pro forma adjustments are based upon currently available information and certain assumptions that Quest Diagnostics management believes to be reasonable. The summary historical and pro forma financial data set forth below should be read in conjunction with "Selected Historical Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Financial Statements and the notes thereto and the Pro Forma Financial Information and the notes thereto. <TABLE> <CAPTION> Three Months Ended September 30, Nine Months Ended September 30, ------------------------------------------------------------------------------------------------ Pro Forma Historical Pro Forma Historical ------------------------------- ------------------------------- 1996(a) 1996 1995 1996(a) 1996 1995 --------------- --------------- --------------- ---------------- ---------------- -------------- (in thousands, except share, per share and percentage data) <S> <C> <C> <C> <C> <C> <C> Statement of Operations Data: Net revenues $ 405,352 $ 405,352 $ 399,959 $ 1,231,290 $1,231,290 $1,239,474 Costs and expenses: Cost of services 255,390 255,390 240,868 768,809 768,809 735,984 Selling, general and administrative 125,190 125,190 181,346(c) 371,439 371,439 399,635(c) Provision for restructuring and other special charges(d) 155,730 155,730 201,730 201,730 45,885 Interest expense, net 12,189 19,866 20,927 36,938 59,887 61,529 Amortization of intangible assets 7,672 10,328 11,293 23,803 31,772 33,678 Other, net 1,837 1,837 1,930 (198) (198) 4,429 --------------- --------------- --------------- ---------------- ---------------- -------------- Total 558,008 568,341 456,364 1,402,521 1,433,439 1,281,140 --------------- --------------- --------------- ---------------- ---------------- -------------- Income (loss) before taxes (152,656) (162,989) (56,405) (171,231) (202,149) (41,666) Income tax expense (benefit) (40,521) (43,553) (17,810) (34,215) (43,280) (3,642) --------------- --------------- --------------- ---------------- ---------------- -------------- Income (loss) before cumulative effect of change in accounting principle (112,135) (119,436) (38,595) (137,016) (158,869) (38,024) Cumulative effect of change in accounting principle --------------- --------------- --------------- ---------------- ---------------- -------------- Net income (loss) $ (112,135) $ (119,436) $ (38,595) $ (137,016) $ (158,869) $ (38,024) =============== =============== =============== ================ ================ ============== Pro forma shares outstanding(e) 28,901,735 28,901,735 Pro forma net loss per share $ (3.88) $ (4.74) Balance Sheet Data (at end of period): Cash $ 40,000 $ 48,319 $ 46,908 $ 40,000 $ 48,319 $ 46,908 Working capital 306,741 114,718 129,319 306,741 114,718 129,319 Total assets 1,612,459 1,886,378 1,896,058 1,612,459 1,886,378 1,896,058 Long-term debt 515,494 1,219,900 1,114,367 515,494 1,219,900 1,114,367 Total debt 517,379 1,231,785 1,226,211 517,379 1,231,785 1,226,211 Stockholder's equity 604,099 132,670 320,576 604,099 132,670 320,576 Ratio of earnings to fixed charges -- (f) -- (f) -- (f) -- (f) -- (f) -- (f) Supplemental Data: Net cash provided by operating activities $ 25,236 $ 25,236 $ 38,202 $ 41,937 $ 41,937 $ 53,789 Net cash used in investing activities (7,904) (7,904) (17,044) (53,097) (53,097) (77,911) Net cash provided by (used in) financing activities (6,618) (6,618) (18,006) 23,033 23,033 32,311 Bad debt expense $ 30,539 $ 30,539 $ 85,831(c) $ 81,891 $ 81,891 $ 127,297(c) Bad debt expense as a % of net revenues 7.5% 7.5% 21.5% 6.7% 6.7% 10.3% Rent expense $ 12,515 $ 12,515 $ 11,860 $ 37,315 $ 37,315 $ 35,060 Capital expenditures 11,912 11,912 16,441 58,802 58,802 56,062 Depreciation expense $ 14,672 $ 14,672 $ 14,275 $ 43,460 $ 43,460 $ 42,358 EBITDA(g) $ (118,123)(h) $ (118,123)(h) $ (9,910)(c) $ (67,030)(h) $ (67,030)(h) $ 95,899(c) EBITDA as a % of net revenues (29.1%) (29.1%) (2.5%) (5.4%) (5.4%) 7.7% Adjusted EBITDA(i) $ 37,607 $ 37,607 $ (9,910)(c) $ 134,700 $ 134,700 $ 141,784(c) Adjusted EBITDA as a % of net revenues 9.3% 9.3% (2.5%) 10.9% 10.9% 11.4% Supplemental Ratio Data: Adjusted EBITDA/interest expense, net 3.1x 3.6x (Adjusted EBITDA-capital expenditures)/interest expense, net 2.1x 2.1x (Total debt--cash)/annualized adjusted EBITDA 3.2x 2.7x </TABLE> (Footnotes on page 14) <TABLE> <CAPTION> Year Ended December 31, ----------------------------------------------------------- Pro Forma Historical ------------------------------------------- 1995(a) 1995 1994(b) 1993 --------------- --------------- ------------- ------------- (in thousands, except share, per share and percentage data) <S> <C> <C> <C> <C> Statement of Operations Data: Net revenues $ 1,629,388 $1,629,388 $1,633,699 $1,416,338 Costs and expenses: Cost of services 980,232 980,232 969,844 805,729 Selling, general and administrative 523,271(c) 523,271(c) 411,939 363,579 Provision for restructuring and other special charges(d) 50,560 50,560 79,814 99,600 Interest expense, net 50,748 82,016 63,295 41,898 Amortization of intangible assets 34,031 44,656 42,588 28,421 Other, net 6,221 6,221 3,464 6,423 --------------- --------------- ------------- ------------- Total 1,645,063 1,686,956 1,570,944 1,345,650 --------------- --------------- ------------- ------------- Income (loss) before taxes (15,675) (57,568) 62,755 70,688 Income tax expense (benefit) 6,835 (5,516) 34,410 25,929 --------------- --------------- ------------- ------------- Income (loss) before cumulative effect of change in accounting principle (22,510) (52,052) 28,345 44,759 Cumulative effect of change in accounting principle (10,562) --------------- --------------- ------------- ------------- Net income (loss) $ (22,510) $ (52,052) $ 28,345 $ 34,197 =============== =============== ============= ============= Pro forma shares outstanding(e) 28,901,735 Pro forma net loss per share $ (0.78) Balance Sheet Data (at end of period): Cash $ 36,446 $ 38,719 $ 39,410 Working capital 200,740 214,358 139,771 Total assets 1,853,385 1,882,663 1,861,162 Long-term debt 1,195,566 1,153,054 1,025,787 Total debt 1,207,714 1,165,626 1,123,307 Stockholder's equity 295,801 386,812 395,509 Ratio of earnings to fixed charges -- (f) -- (f) 1.77(f) 2.20(f) Supplemental Data: Net cash provided by operating activities $ 85,828 $ 85,828 $ 37,963 $ 99,614 Net cash used in investing activities (93,087) (93,087) (46,186) (473,687) Net cash provided by (used in) financing activities 4,986 4,986 7,532 392,956 Bad debt expense $ 152,590(c) $ 152,590(c) $ 59,480 $ 47,240 Bad debt expense as a % of net revenues 9.4% 9.4% 3.6% 3.3% Rent expense $ 46,900 $ 46,900 $ 49,400 $ 46,900 Capital expenditures 74,045 74,045 93,354 65,317 Depreciation expense $ 56,857 $ 56,857 $ 46,929 $ 38,058 EBITDA(g) $ 125,961(c) $ 125,961(c) $ 215,567 $ 179,065 EBITDA as a % of net revenues 7.7% 7.7% 13.2% 12.6% Adjusted EBITDA(i) $ 176,521(c) $ 176,521(c) $ 295,381 $ 278,665 Adjusted EBITDA as a % of net revenues 10.8% 10.8% 18.1% 19.7% Supplemental Ratio Data: Adjusted EBITDA/interest expense, net 3.5x (Adjusted EBITDA-capital expenditures)/ interest expense, net 2.0x </TABLE> (Footnotes on page 14) (Footnotes for preceding pages) (a) Adjusted to reflect the pro forma effects of the Distributions and the Accounting Policy Change. See "Selected Historical Financial Data" and "Pro Forma Financial Information."
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+Prospectus Summary This Summary is qualified by the more detailed information (including the financial statements and related notes) set forth elsewhere in this Prospectus which should be read in its entirety. Unless the context indicates, or it is specifically indicated otherwise, all references to (i) "Corning" include Corning Incorporated, a New York corporation, and its consolidated subsidiaries, (ii) "Quest Diagnostics" or the "Company" include Corning Clinical Laboratories Inc. (to be renamed Quest Diagnostics Incorporated prior to the Distributions), a Delaware corporation, and its direct and indirect subsidiaries (other than Covance) and assume that the Distributions have occurred, and (iii) "Covance" include Covance Inc. (formerly Corning Pharmaceutical Services Inc.), a Delaware corporation, and its direct and indirect subsidiaries and assume that the Distributions have occurred. Capitalized terms used but not defined in this Summary are defined elsewhere in this Prospectus. The Company Quest Diagnostics is one of the largest independent clinical laboratory testing companies in the United States. Quest Diagnostics offers a broad range of routine and specialty ("esoteric") testing services used by the medical profession in the diagnosis, monitoring and treatment of disease and other medical conditions. Quest Diagnostics' network, which processes approximately 60 million requisitions for diagnostic tests annually, consists of 17 regional laboratories across the United States and the Corning Nichols Institute ("Nichols") esoteric testing laboratory in San Juan Capistrano, California. In addition, Quest Diagnostics has 14 branch laboratories in the United States as well as one branch laboratory in Mexico City (branch laboratories are smaller than regional laboratories), approximately 200 "STAT" laboratories and approximately 850 patient service centers located throughout the United States. For the year ended December 31, 1995 and the nine months ended September 30, 1996, Quest Diagnostics had net revenues of $1,629 million and $1,231 million, respectively, and Adjusted EBITDA (income (loss) before income taxes plus net interest expense, depreciation and amortization and restructuring and other special charges) of $177 million and $135 million, respectively. Quest Diagnostics operates 24 hours a day, 365 days a year, utilizing a fully integrated collection and processing system. Quest Diagnostics generally performs and reports most routine procedures within 24 hours, employing a variety of sophisticated and computerized laboratory testing instruments. Quest Diagnostics provides daily pickup of specimens from most customers principally through an in-house courier system. The specimens are sent to one of the Company's laboratories where one or more tests are performed. Each patient specimen is accompanied by a test requisition form, which is completed by the customer, that indicates the tests to be performed and provides the necessary billing information. Each specimen and related requisition form is checked for completeness and then given a unique bar-coded identification number. Once the appropriate information is entered into the computer system, the tests are performed and the results are delivered to the doctor, primarily through computer interface or manually. Corning entered the clinical laboratory business in 1982 with the acquisition of MetPath Inc. ("MetPath"), which was founded in 1967 and was one of the first laboratories to expand beyond a regional market. Since January 1993, Quest Diagnostics has acquired over thirty laboratories, including Damon Corporation ("Damon"), Bioran Medical Laboratory ("Bioran") and Maryland Medical Laboratory, Inc. ("MML"). In 1994, Quest Diagnostics enhanced its presence in the esoteric testing market through the acquisition of Nichols, a preeminent clinical laboratory with a leading reputation for esoteric testing and test innovations. While Corning's ownership provided the Company with the capital to grow through acquisitions and to become one of the nation's largest independent clinical laboratory testing companies, the management of both Corning and Quest Diagnostics believe that Quest Diagnostics will be more competitive and operate more successfully in the future as an independent company, with a strong, focused and experienced management team to concentrate on customer needs. Independence will also enable Quest Diagnostics to motivate its employees by offering equity-based incentives tied directly to the performance of the Company and individual performance. Quest Diagnostics' management team has implemented a new business strategy, which focuses the business around three key strategic areas: clinical operations, customer focus and technological leadership and excellence. The Clinical Laboratory Testing Industry Clinical testing is a critical component in the delivery of quality health care service to patients. Currently, clinical laboratory testing is the first step in determining how a significant amount of all health care dollars are spent. Quest Diagnostics believes that in 1995 the entire United States clinical laboratory industry had revenues exceeding $30 billion. The clinical laboratory industry consists primarily of three types of providers: hospital-affiliated laboratories, independent clinical laboratories, such as Quest Diagnostics, and physician-office laboratories. The Company believes that in 1995 approximately 56% of the clinical testing revenues in the United States were attributable to hospital-affiliated laboratories, approximately 36% were attributable to independent clinical laboratories and approximately 8% were attributable to physicians in their offices and laboratories. Quest Diagnostics believes that consolidation will continue in the clinical laboratory testing business. In addition, Quest Diagnostics believes that it and the other large independent clinical laboratory testing companies may have the opportunity to increase their share of the overall clinical laboratories testing market due to a number of external factors, including cost efficiencies afforded by large-scale automated testing, Medicare reimbursement reductions and the growth of managed health care entities which require low-cost testing services and large service networks. In addition, legal restrictions on physician referrals and the ownership of laboratories as well as increased regulation of laboratories are expected to contribute to the continuing consolidation of the industry. Quest Diagnostics believes that a number of factors are likely to positively influence the volume of clinical laboratory testing performed in the United States in the future, including (1) the general aging of the population in the United States; (2) an expanded base of scientific knowledge which has led to the development of more sophisticated specialized tests and an increase in the awareness of physicians of the value of clinical laboratory testing as a cost-effective means of early detection of disease and monitoring of treatment; (3) an increase in the number and types of tests which are, due to advances in technology and increased cost efficiencies, readily available on a more affordable basis to physicians; (4) expanded substance-abuse testing by corporations and governmental agencies; and (5) increased testing for sexually transmitted diseases such as AIDS. The impact of these factors is expected to be offset in part by increased controls over the utilization of clinical laboratory tests by both Medicare and the private sector, particularly managed care organizations. Business Strategy Quest Diagnostics' overall goal is to be recognized by its customers, employees and competitors as the best provider of comprehensive and innovative clinical testing, information and services. To achieve this, Quest Diagnostics' management team has focused the business around three key strategic areas: clinical operations, customer focus and technological leadership and excellence. (bullet) Best Supplier. Quest Diagnostics seeks to be the best supplier of the highest quality and the lowest-cost testing services. Health care providers and patients expect accurate, timely and consistent laboratory test results at a fair price. (bullet) Lowest-cost provider. Quest Diagnostics' average cost per requisition varies significantly among its regional laboratories; there is an approximately $7.00 difference in cost per requisition between the most efficient regional laboratory and the average, and an approximately $13.00 difference in cost per requisition between the most and the least efficient regional laboratories. In many cases, these variations do not relate to testing volumes or mixes, space costs, service requirements or regional labor cost differences. To reduce costs, Quest Diagnostics has begun to replicate the best practices from each region throughout its national network. Management expects to achieve significant cost savings within the next three years as these programs are fully implemented. * (bullet) Highest Quality Provider. Quest Diagnostics is dedicated to providing accurate and timely test results and to being viewed by its customers as the highest quality provider of clinical testing services. Quest Diagnostics believes that implementation of best practices already developed in certain regions will permit the Company to be viewed by its customers as the highest quality provider of clinical testing services. (bullet) Preferred Provider. Quest Diagnostics seeks to be the preferred provider of laboratory testing services to existing and new health care networks on a selective basis determined by profitability of accounts. Quest Diagnostics believes that it will become the preferred provider to these networks as (1) large networks typically prefer to utilize large independent clinical laboratories that can service them on a national or regional basis and (2) the Company continues to pursue its primary strategy of becoming the highest quality, lowest-cost provider. To achieve this, Quest Diagnostics will employ a rigorous national and regional process to both select and pursue customers and allocate resources to support these efforts. *This is a forward looking statement and is based on current expectations. Actual results may vary materially from those projected. See "Business- Important Factors Regarding Forward Looking Statements." In particular, see factors (a), (d) and (j). (bullet) Account Profitability. Quest Diagnostics intends to refocus its sales efforts on pursuing and keeping profitable accounts. Quest Diagnostics is actively reviewing the profitability of its current accounts, including those with managed care organizations, and will either increase pricing or eliminate accounts that cannot be serviced profitably. (bullet) Regional Profitability. Quest Diagnostics presently believes that it has the leading market share among independent clinical laboratories in most routine testing markets of the northeast, mid-Atlantic and midwest regions. Approximately 65% of Quest Diagnostics' revenues and almost all of its EBITDA is generated from markets in which the Company believes that it has the leading market share. In most of these markets, Quest Diagnostics believes that it also is the lowest cost provider. Quest Diagnostics is evaluating its strategic alternatives relative to units whose profitability does not meet its internal goals. These alternatives may include joint ventures, alliances, or dispositions. Quest Diagnostics believes that, while the clinical laboratory industry is becoming national in scope, the Company can subcontract with other clinical laboratories to perform testing for national accounts in any markets in which the Company chooses not to compete. (bullet) Leading Innovator. Quest Diagnostics intends to remain a leading innovator in the clinical laboratory industry by continuing to introduce new tests, technology and services. Through its relationship with the academic community and pharmaceutical and biotechnology firms and a research and development budget exceeding $15 million per year, Quest Diagnostics believes it is one of the leaders in transferring innovation from academic biotechnology laboratories to the market. Recent Developments By a plea agreement and civil agreement and release dated October 9, 1996, between the Department of Justice ("DOJ") and Damon, all federal criminal matters within the scope of the various federal investigations against Damon, and all claims including the civil qui tam cases underlying the civil investigations were settled for an aggregate of $119 million, which sum was reimbursed to Quest Diagnostics by Corning. The Damon settlement does not exclude Quest Diagnostics from future participation in any federal health care programs on account of Damon's practices. Quest Diagnostics' aggregate reserve with respect to all governmental and private claims was $215 million at September 30, 1996 and is estimated to be reduced to $85 million as of the Distribution Date as a result of the payment of settled claims, primarily the Damon settlement of $119 million. Based on information available to management and Quest Diagnostics' experience with past settlements (including the fact that the aggregate amount of the Damon settlement was significantly in excess of established reserves) management has reassessed its reserve levels and believes that its current level of reserves is adequate. However, it is possible that additional information may become available which may cause the final resolution of these matters to be in excess of established reserves by an amount which could be material to Quest Diagnostics' results of operations and, for non-indemnified claims, Quest Diagnostics' cash flows in the period in which such claims are settled. While none of the governmental or nongovernmental investigations or claims is covered by insurance, Quest Diagnostics does not believe that these matters will have a material adverse effect on Quest Diagnostics' overall financial condition. Corning Indemnity In connection with the Distributions, Corning has agreed to indemnify Quest Diagnostics against all monetary penalties, fines or settlements arising out of any governmental claims arising out of alleged violations of applicable federal fraud and health care statutes and relating to billing practices of Quest Diagnostics and its predecessors that have been settled or are pending on the Distribution Date. Corning has also agreed to indemnify Quest Diagnostics for 50% of the aggregate of all judgment or settlement payments made by Quest Diagnostics that are in excess of $42.0 million in respect of claims by private parties (i.e., nongovernmental parties such as private insurers) that relate to indemnified or previously settled governmental claims and that allege overbillings by Quest Diagnostics or any existing subsidiaries of Quest Diagnostics, for services provided prior to the Distribution Date; provided, however, such indemnification for nongovernmental claims will not exceed $25.0 million in the aggregate and all amounts indemnified against by Corning for the benefit of Quest Diagnostics will be calculated on a net after-tax basis. Such indemnification will not cover (i) any governmental claims that arise after the Distribution Date pursuant to service of subpoena or other notice of such investigation after the Distribution Date, (ii) any nongovernmental claims unrelated to the indemnified governmental claims or investigations, (iii) any nongovernmental claims not settled prior to five years after the Distribution Date, (iv) any consequential or incidental damages relating to the billing claims, including losses of revenues and profits as a consequence of exclusion for participation in federal or state health care programs or (v) the fees and expenses of litigation. The Distributions On May 13, 1996, the board of directors of Corning approved a plan to distribute to Corning shareholders the clinical laboratory testing business being conducted by Quest Diagnostics and the contract research business being conducted by Quest Diagnostics' wholly owned subsidiary, Covance (together, the "Distributions"). The Distributions will be effected by distributing all of the outstanding shares of Quest Diagnostics common stock (the "Quest Diagnostics Common Stock") to holders of Corning common stock (the "Corning Common Stock"), followed immediately by the distribution of all of the common stock of Covance (the "Covance Common Stock") to those same holders, as holders of Quest Diagnostics Common Stock. It is expected that the Distributions will be made on December 31, 1996 (the date on which the Distributions are to be made, the "Distribution Date"). Prior to the consummation of the offering of the Notes contemplated hereby (the "Offering"), the Company entered into a $450 million senior, secured credit facility (the "Credit Facility"), among the Company, the lenders listed therein, NationsBank, N.A., as Issuing Bank, Wachovia Bank of Georgia, N.A., as Swingline Bank, and Morgan Guaranty Trust Company of New York, as Administrative Agent. The Credit Facility is comprised of a $300 million six-year amortizing term loan ("Tranche A Loan"), a $50 million seven-year term loan ("Tranche B Loan" and together with the Tranche A Loan, the "Term Loans") and a $100 million six-year revolving working capital facility (the "Working Capital Facility"). Corning currently has approximately $1.2 billion of Quest Diagnostics intercompany debt. Approximately $145 million of net proceeds from the Offering, together with the $350 million of borrowings under the Term Loans, will be paid to Corning in satisfaction of a portion of the outstanding intercompany debt. Corning will contribute the remaining intercompany debt to Quest Diagnostics' capital. Borrowings under the Working Capital Facility, substantially all of which is expected to be available as of the Distribution Date, will provide for future working capital needs and other general corporate purposes. The Offering <TABLE> <CAPTION> <S> <C> Securities Offered $150,000,000 aggregate principal amount of % Senior Subordinated Notes due December 15, 2006 (the "Notes"). Maturity Date December 15, 2006. Interest Payment Date June 15 and December 15, commencing June 15, 1997. Optional Redemption by the Company The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after December 15, 2001, at the redemption prices set forth herein, plus accrued and unpaid interest, if any, to but excluding the date fixed for redemption. In addition, if as a result of an event outside the control of Corning, Quest Diagnostics and Covance, the Distributions do not occur prior to March 31, 1997, the Notes will be subject to redemption, as a whole and not in part, at the option of Quest Diagnostics, prior to June 30, 1997, at a redemption price equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to but excluding the date fixed for redemption. See "Description of the Notes--Optional Redemption." Change of Control Offer Upon a Change of Control, the Company has the obligation to offer to purchase all the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to but excluding the date of purchase. See "Description of the Notes-- Repurchase at the Option of Holders--Change of Control" for a discussion of the circumstances in which the Company may not be required to make an offer to purchase upon a Change of Control. Offers to Purchase In the event of certain asset sales, the Company will be required to offer to repurchase the Notes at 100% of their principal amount, plus accrued and unpaid interest, if any, to but excluding the date of purchase with the net proceeds of such asset sales. Subordination The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company, including all indebtedness of the Company under the Credit Facility. The Notes will rank Pari Passu in right of payment with any other senior subordinated indebtedness of the Company. Subsidiary Guarantees The Notes will be guaranteed, jointly and severally, and fully and unconditionally, on a senior subordinated basis by the Guarantors (the "Senior Subordinated Guarantees"). The obligations of any Guarantor with respect to its Senior Subordinated Guarantee will be subordinated in right of payment, to the same extent as the obligations of the Company in respect of the Notes, to all existing and future Senior Guarantees, which will include the guarantees of the Credit Facility. The Senior Subordinated Guarantees would also be subordinated to all existing and future indebtedness of the Guarantors if the Senior Subordinated Guarantees were avoided or subordinated in favor of the Guarantors' other creditors. See "Risk Factors--Fraudulent Conveyance." The obligations of a Guarantor under its Senior Subordinated Guarantee will be released in certain circumstances, including if the Guarantor ceases to guarantee the Credit Facility. See "Description of the Notes--Senior Subordinated Guarantees." Principal Covenants The indenture under which the Notes are issued (the "Indenture") will impose certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt and senior in right of payment to the Notes, enter into leases, incur liens, merge or consolidate with any other person, or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. Use of Proceeds The Company intends to use the proceeds from the sale of the Notes, together with the proceeds of borrowings under the Credit Facility, to repay certain intercompany indebtedness owed to Corning. See "Use of Proceeds." The Distributions The Notes are being offered in connection with the Distributions of the Quest Diagnostics Common Stock and the Covance Common Stock to holders of Corning Common Stock. The closing of the offering of the Notes is anticipated to occur prior to the Distributions. Listing The Notes have been approved for listing on the New York Stock Exchange, subject to official notice of issuance. Risk Factors See "Risk Factors" for a discussion of certain factors that should be considered in connection with an investment in the Notes. </TABLE> Summary Financial Data The following table summarizes certain historical and pro forma financial data of Quest Diagnostics at the dates and for each of the periods indicated. The selected financial data as of and for each of the years ended December 31, 1995, 1994 and 1993 have been derived from the audited combined financial statements of (the "Audited Financial Statements") and the notes thereto included elsewhere herein. The selected financial data as of and for the three and nine months ended September 30, 1996 and 1995 have been derived from the unaudited interim combined financial statements of Quest Diagnostics (the "Interim Financial Statements" and, together with the Audited Financial Statements, the "Financial Statements") and the notes thereto included elsewhere herein. In the opinion of Quest Diagnostics management, the unaudited interim combined financial statements include all adjustments, consisting of only normal recurring adjustments, that are necessary for a fair presentation of the financial position and results of operations for these periods. The unaudited interim results of operations for the three and nine months ended September 30, 1996 are not necessarily indicative of the results for the entire year ending December 31, 1996. The selected pro forma financial data have been derived from the unaudited pro forma combined financial information of Quest Diagnostics for the year ended December 31, 1995 and for the three and nine months ended September 30, 1996 (the "Pro Forma Financial Information") and the notes thereto included elsewhere herein. The pro forma statement of operations data gives effect to the Distributions and the Accounting Policy Change (as defined below) as if they had occurred on January 1, 1995 and the pro forma balance sheet data gives effect to the Distributions and the Accounting Policy Change as if they had occurred on September 30, 1996. The pro forma financial data does not purport to represent what Quest Diagnostics' results of operations would have been if the Distributions and the Accounting Policy Change had in fact occurred on such dates, nor does it purport to indicate the future financial position or results of future operations of Quest Diagnostics. The pro forma adjustments are based upon currently available information and certain assumptions that Quest Diagnostics management believes to be reasonable. The summary historical and pro forma financial data set forth below should be read in conjunction with "Selected Historical Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Financial Statements and the notes thereto and the Pro Forma Financial Information and the notes thereto. <TABLE> <CAPTION> Three Months Ended September 30, Nine Months Ended September 30, ------------------------------------------------------------------------------------------------ Pro Forma Historical Pro Forma Historical ------------------------------- ------------------------------- 1996(a) 1996 1995 1996(a) 1996 1995 --------------- --------------- --------------- ---------------- ---------------- -------------- (in thousands, except share, per share and percentage data) <S> <C> <C> <C> <C> <C> <C> Statement of Operations Data: Net revenues $ 405,352 $ 405,352 $ 399,959 $ 1,231,290 $1,231,290 $1,239,474 Costs and expenses: Cost of services 255,390 255,390 240,868 768,809 768,809 735,984 Selling, general and administrative 125,190 125,190 181,346(c) 371,439 371,439 399,635(c) Provision for restructuring and other special charges(d) 155,730 155,730 201,730 201,730 45,885 Interest expense, net 12,189 19,866 20,927 36,938 59,887 61,529 Amortization of intangible assets 7,672 10,328 11,293 23,803 31,772 33,678 Other, net 1,837 1,837 1,930 (198) (198) 4,429 --------------- --------------- --------------- ---------------- ---------------- -------------- Total 558,008 568,341 456,364 1,402,521 1,433,439 1,281,140 --------------- --------------- --------------- ---------------- ---------------- -------------- Income (loss) before taxes (152,656) (162,989) (56,405) (171,231) (202,149) (41,666) Income tax expense (benefit) (40,521) (43,553) (17,810) (34,215) (43,280) (3,642) --------------- --------------- --------------- ---------------- ---------------- -------------- Income (loss) before cumulative effect of change in accounting principle (112,135) (119,436) (38,595) (137,016) (158,869) (38,024) Cumulative effect of change in accounting principle --------------- --------------- --------------- ---------------- ---------------- -------------- Net income (loss) $ (112,135) $ (119,436) $ (38,595) $ (137,016) $ (158,869) $ (38,024) =============== =============== =============== ================ ================ ============== Pro forma shares outstanding(e) 28,901,735 28,901,735 Pro forma net loss per share $ (3.88) $ (4.74) Balance Sheet Data (at end of period): Cash $ 40,000 $ 48,319 $ 46,908 $ 40,000 $ 48,319 $ 46,908 Working capital 306,741 114,718 129,319 306,741 114,718 129,319 Total assets 1,612,459 1,886,378 1,896,058 1,612,459 1,886,378 1,896,058 Long-term debt 515,494 1,219,900 1,114,367 515,494 1,219,900 1,114,367 Total debt 517,379 1,231,785 1,226,211 517,379 1,231,785 1,226,211 Stockholder's equity 604,099 132,670 320,576 604,099 132,670 320,576 Ratio of earnings to fixed charges -- (f) -- (f) -- (f) -- (f) -- (f) -- (f) Supplemental Data: Net cash provided by operating activities $ 25,236 $ 25,236 $ 38,202 $ 41,937 $ 41,937 $ 53,789 Net cash used in investing activities (7,904) (7,904) (17,044) (53,097) (53,097) (77,911) Net cash provided by (used in) financing activities (6,618) (6,618) (18,006) 23,033 23,033 32,311 Bad debt expense $ 30,539 $ 30,539 $ 85,831(c) $ 81,891 $ 81,891 $ 127,297(c) Bad debt expense as a % of net revenues 7.5% 7.5% 21.5% 6.7% 6.7% 10.3% Rent expense $ 12,515 $ 12,515 $ 11,860 $ 37,315 $ 37,315 $ 35,060 Capital expenditures 11,912 11,912 16,441 58,802 58,802 56,062 Depreciation expense $ 14,672 $ 14,672 $ 14,275 $ 43,460 $ 43,460 $ 42,358 EBITDA(g) $ (118,123)(h) $ (118,123)(h) $ (9,910)(c) $ (67,030)(h) $ (67,030)(h) $ 95,899(c) EBITDA as a % of net revenues (29.1%) (29.1%) (2.5%) (5.4%) (5.4%) 7.7% Adjusted EBITDA(i) $ 37,607 $ 37,607 $ (9,910)(c) $ 134,700 $ 134,700 $ 141,784(c) Adjusted EBITDA as a % of net revenues 9.3% 9.3% (2.5%) 10.9% 10.9% 11.4% Supplemental Ratio Data: Adjusted EBITDA/interest expense, net 3.1x 3.6x (Adjusted EBITDA-capital expenditures)/interest expense, net 2.1x 2.1x (Total debt--cash)/annualized adjusted EBITDA 3.2x 2.7x </TABLE> (Footnotes on page 14) <TABLE> <CAPTION> Year Ended December 31, ----------------------------------------------------------- Pro Forma Historical ------------------------------------------- 1995(a) 1995 1994(b) 1993 --------------- --------------- ------------- ------------- (in thousands, except share, per share and percentage data) <S> <C> <C> <C> <C> Statement of Operations Data: Net revenues $ 1,629,388 $1,629,388 $1,633,699 $1,416,338 Costs and expenses: Cost of services 980,232 980,232 969,844 805,729 Selling, general and administrative 523,271(c) 523,271(c) 411,939 363,579 Provision for restructuring and other special charges(d) 50,560 50,560 79,814 99,600 Interest expense, net 50,748 82,016 63,295 41,898 Amortization of intangible assets 34,031 44,656 42,588 28,421 Other, net 6,221 6,221 3,464 6,423 --------------- --------------- ------------- ------------- Total 1,645,063 1,686,956 1,570,944 1,345,650 --------------- --------------- ------------- ------------- Income (loss) before taxes (15,675) (57,568) 62,755 70,688 Income tax expense (benefit) 6,835 (5,516) 34,410 25,929 --------------- --------------- ------------- ------------- Income (loss) before cumulative effect of change in accounting principle (22,510) (52,052) 28,345 44,759 Cumulative effect of change in accounting principle (10,562) --------------- --------------- ------------- ------------- Net income (loss) $ (22,510) $ (52,052) $ 28,345 $ 34,197 =============== =============== ============= ============= Pro forma shares outstanding(e) 28,901,735 Pro forma net loss per share $ (0.78) Balance Sheet Data (at end of period): Cash $ 36,446 $ 38,719 $ 39,410 Working capital 200,740 214,358 139,771 Total assets 1,853,385 1,882,663 1,861,162 Long-term debt 1,195,566 1,153,054 1,025,787 Total debt 1,207,714 1,165,626 1,123,307 Stockholder's equity 295,801 386,812 395,509 Ratio of earnings to fixed charges -- (f) -- (f) 1.77(f) 2.20(f) Supplemental Data: Net cash provided by operating activities $ 85,828 $ 85,828 $ 37,963 $ 99,614 Net cash used in investing activities (93,087) (93,087) (46,186) (473,687) Net cash provided by (used in) financing activities 4,986 4,986 7,532 392,956 Bad debt expense $ 152,590(c) $ 152,590(c) $ 59,480 $ 47,240 Bad debt expense as a % of net revenues 9.4% 9.4% 3.6% 3.3% Rent expense $ 46,900 $ 46,900 $ 49,400 $ 46,900 Capital expenditures 74,045 74,045 93,354 65,317 Depreciation expense $ 56,857 $ 56,857 $ 46,929 $ 38,058 EBITDA(g) $ 125,961(c) $ 125,961(c) $ 215,567 $ 179,065 EBITDA as a % of net revenues 7.7% 7.7% 13.2% 12.6% Adjusted EBITDA(i) $ 176,521(c) $ 176,521(c) $ 295,381 $ 278,665 Adjusted EBITDA as a % of net revenues 10.8% 10.8% 18.1% 19.7% Supplemental Ratio Data: Adjusted EBITDA/interest expense, net 3.5x (Adjusted EBITDA-capital expenditures)/ interest expense, net 2.0x </TABLE> (Footnotes on page 14) (Footnotes for preceding pages) (a) Adjusted to reflect the pro forma effects of the Distributions and the Accounting Policy Change. See "Selected Historical Financial Data" and "Pro Forma Financial Information."
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+Prospectus Summary This Summary is qualified by the more detailed information (including the financial statements and related notes) set forth elsewhere in this Prospectus which should be read in its entirety. Unless the context indicates, or it is specifically indicated otherwise, all references to (i) "Corning" include Corning Incorporated, a New York corporation, and its consolidated subsidiaries, (ii) "Quest Diagnostics" or the "Company" include Corning Clinical Laboratories Inc. (to be renamed Quest Diagnostics Incorporated prior to the Distributions), a Delaware corporation, and its direct and indirect subsidiaries (other than Covance) and assume that the Distributions have occurred, and (iii) "Covance" include Covance Inc. (formerly Corning Pharmaceutical Services Inc.), a Delaware corporation, and its direct and indirect subsidiaries and assume that the Distributions have occurred. Capitalized terms used but not defined in this Summary are defined elsewhere in this Prospectus. The Company Quest Diagnostics is one of the largest independent clinical laboratory testing companies in the United States. Quest Diagnostics offers a broad range of routine and specialty ("esoteric") testing services used by the medical profession in the diagnosis, monitoring and treatment of disease and other medical conditions. Quest Diagnostics' network, which processes approximately 60 million requisitions for diagnostic tests annually, consists of 17 regional laboratories across the United States and the Corning Nichols Institute ("Nichols") esoteric testing laboratory in San Juan Capistrano, California. In addition, Quest Diagnostics has 14 branch laboratories in the United States as well as one branch laboratory in Mexico City (branch laboratories are smaller than regional laboratories), approximately 200 "STAT" laboratories and approximately 850 patient service centers located throughout the United States. For the year ended December 31, 1995 and the nine months ended September 30, 1996, Quest Diagnostics had net revenues of $1,629 million and $1,231 million, respectively, and Adjusted EBITDA (income (loss) before income taxes plus net interest expense, depreciation and amortization and restructuring and other special charges) of $177 million and $135 million, respectively. Quest Diagnostics operates 24 hours a day, 365 days a year, utilizing a fully integrated collection and processing system. Quest Diagnostics generally performs and reports most routine procedures within 24 hours, employing a variety of sophisticated and computerized laboratory testing instruments. Quest Diagnostics provides daily pickup of specimens from most customers principally through an in-house courier system. The specimens are sent to one of the Company's laboratories where one or more tests are performed. Each patient specimen is accompanied by a test requisition form, which is completed by the customer, that indicates the tests to be performed and provides the necessary billing information. Each specimen and related requisition form is checked for completeness and then given a unique bar-coded identification number. Once the appropriate information is entered into the computer system, the tests are performed and the results are delivered to the doctor, primarily through computer interface or manually. Corning entered the clinical laboratory business in 1982 with the acquisition of MetPath Inc. ("MetPath"), which was founded in 1967 and was one of the first laboratories to expand beyond a regional market. Since January 1993, Quest Diagnostics has acquired over thirty laboratories, including Damon Corporation ("Damon"), Bioran Medical Laboratory ("Bioran") and Maryland Medical Laboratory, Inc. ("MML"). In 1994, Quest Diagnostics enhanced its presence in the esoteric testing market through the acquisition of Nichols, a preeminent clinical laboratory with a leading reputation for esoteric testing and test innovations. While Corning's ownership provided the Company with the capital to grow through acquisitions and to become one of the nation's largest independent clinical laboratory testing companies, the management of both Corning and Quest Diagnostics believe that Quest Diagnostics will be more competitive and operate more successfully in the future as an independent company, with a strong, focused and experienced management team to concentrate on customer needs. Independence will also enable Quest Diagnostics to motivate its employees by offering equity-based incentives tied directly to the performance of the Company and individual performance. Quest Diagnostics' management team has implemented a new business strategy, which focuses the business around three key strategic areas: clinical operations, customer focus and technological leadership and excellence. The Clinical Laboratory Testing Industry Clinical testing is a critical component in the delivery of quality health care service to patients. Currently, clinical laboratory testing is the first step in determining how a significant amount of all health care dollars are spent. Quest Diagnostics believes that in 1995 the entire United States clinical laboratory industry had revenues exceeding $30 billion. The clinical laboratory industry consists primarily of three types of providers: hospital-affiliated laboratories, independent clinical laboratories, such as Quest Diagnostics, and physician-office laboratories. The Company believes that in 1995 approximately 56% of the clinical testing revenues in the United States were attributable to hospital-affiliated laboratories, approximately 36% were attributable to independent clinical laboratories and approximately 8% were attributable to physicians in their offices and laboratories. Quest Diagnostics believes that consolidation will continue in the clinical laboratory testing business. In addition, Quest Diagnostics believes that it and the other large independent clinical laboratory testing companies may have the opportunity to increase their share of the overall clinical laboratories testing market due to a number of external factors, including cost efficiencies afforded by large-scale automated testing, Medicare reimbursement reductions and the growth of managed health care entities which require low-cost testing services and large service networks. In addition, legal restrictions on physician referrals and the ownership of laboratories as well as increased regulation of laboratories are expected to contribute to the continuing consolidation of the industry. Quest Diagnostics believes that a number of factors are likely to positively influence the volume of clinical laboratory testing performed in the United States in the future, including (1) the general aging of the population in the United States; (2) an expanded base of scientific knowledge which has led to the development of more sophisticated specialized tests and an increase in the awareness of physicians of the value of clinical laboratory testing as a cost-effective means of early detection of disease and monitoring of treatment; (3) an increase in the number and types of tests which are, due to advances in technology and increased cost efficiencies, readily available on a more affordable basis to physicians; (4) expanded substance-abuse testing by corporations and governmental agencies; and (5) increased testing for sexually transmitted diseases such as AIDS. The impact of these factors is expected to be offset in part by increased controls over the utilization of clinical laboratory tests by both Medicare and the private sector, particularly managed care organizations. Business Strategy Quest Diagnostics' overall goal is to be recognized by its customers, employees and competitors as the best provider of comprehensive and innovative clinical testing, information and services. To achieve this, Quest Diagnostics' management team has focused the business around three key strategic areas: clinical operations, customer focus and technological leadership and excellence. (bullet) Best Supplier. Quest Diagnostics seeks to be the best supplier of the highest quality and the lowest-cost testing services. Health care providers and patients expect accurate, timely and consistent laboratory test results at a fair price. (bullet) Lowest-cost provider. Quest Diagnostics' average cost per requisition varies significantly among its regional laboratories; there is an approximately $7.00 difference in cost per requisition between the most efficient regional laboratory and the average, and an approximately $13.00 difference in cost per requisition between the most and the least efficient regional laboratories. In many cases, these variations do not relate to testing volumes or mixes, space costs, service requirements or regional labor cost differences. To reduce costs, Quest Diagnostics has begun to replicate the best practices from each region throughout its national network. Management expects to achieve significant cost savings within the next three years as these programs are fully implemented. * (bullet) Highest Quality Provider. Quest Diagnostics is dedicated to providing accurate and timely test results and to being viewed by its customers as the highest quality provider of clinical testing services. Quest Diagnostics believes that implementation of best practices already developed in certain regions will permit the Company to be viewed by its customers as the highest quality provider of clinical testing services. (bullet) Preferred Provider. Quest Diagnostics seeks to be the preferred provider of laboratory testing services to existing and new health care networks on a selective basis determined by profitability of accounts. Quest Diagnostics believes that it will become the preferred provider to these networks as (1) large networks typically prefer to utilize large independent clinical laboratories that can service them on a national or regional basis and (2) the Company continues to pursue its primary strategy of becoming the highest quality, lowest-cost provider. To achieve this, Quest Diagnostics will employ a rigorous national and regional process to both select and pursue customers and allocate resources to support these efforts. *This is a forward looking statement and is based on current expectations. Actual results may vary materially from those projected. See "Business- Important Factors Regarding Forward Looking Statements." In particular, see factors (a), (d) and (j). (bullet) Account Profitability. Quest Diagnostics intends to refocus its sales efforts on pursuing and keeping profitable accounts. Quest Diagnostics is actively reviewing the profitability of its current accounts, including those with managed care organizations, and will either increase pricing or eliminate accounts that cannot be serviced profitably. (bullet) Regional Profitability. Quest Diagnostics presently believes that it has the leading market share among independent clinical laboratories in most routine testing markets of the northeast, mid-Atlantic and midwest regions. Approximately 65% of Quest Diagnostics' revenues and almost all of its EBITDA is generated from markets in which the Company believes that it has the leading market share. In most of these markets, Quest Diagnostics believes that it also is the lowest cost provider. Quest Diagnostics is evaluating its strategic alternatives relative to units whose profitability does not meet its internal goals. These alternatives may include joint ventures, alliances, or dispositions. Quest Diagnostics believes that, while the clinical laboratory industry is becoming national in scope, the Company can subcontract with other clinical laboratories to perform testing for national accounts in any markets in which the Company chooses not to compete. (bullet) Leading Innovator. Quest Diagnostics intends to remain a leading innovator in the clinical laboratory industry by continuing to introduce new tests, technology and services. Through its relationship with the academic community and pharmaceutical and biotechnology firms and a research and development budget exceeding $15 million per year, Quest Diagnostics believes it is one of the leaders in transferring innovation from academic biotechnology laboratories to the market. Recent Developments By a plea agreement and civil agreement and release dated October 9, 1996, between the Department of Justice ("DOJ") and Damon, all federal criminal matters within the scope of the various federal investigations against Damon, and all claims including the civil qui tam cases underlying the civil investigations were settled for an aggregate of $119 million, which sum was reimbursed to Quest Diagnostics by Corning. The Damon settlement does not exclude Quest Diagnostics from future participation in any federal health care programs on account of Damon's practices. Quest Diagnostics' aggregate reserve with respect to all governmental and private claims was $215 million at September 30, 1996 and is estimated to be reduced to $85 million as of the Distribution Date as a result of the payment of settled claims, primarily the Damon settlement of $119 million. Based on information available to management and Quest Diagnostics' experience with past settlements (including the fact that the aggregate amount of the Damon settlement was significantly in excess of established reserves) management has reassessed its reserve levels and believes that its current level of reserves is adequate. However, it is possible that additional information may become available which may cause the final resolution of these matters to be in excess of established reserves by an amount which could be material to Quest Diagnostics' results of operations and, for non-indemnified claims, Quest Diagnostics' cash flows in the period in which such claims are settled. While none of the governmental or nongovernmental investigations or claims is covered by insurance, Quest Diagnostics does not believe that these matters will have a material adverse effect on Quest Diagnostics' overall financial condition. Corning Indemnity In connection with the Distributions, Corning has agreed to indemnify Quest Diagnostics against all monetary penalties, fines or settlements arising out of any governmental claims arising out of alleged violations of applicable federal fraud and health care statutes and relating to billing practices of Quest Diagnostics and its predecessors that have been settled or are pending on the Distribution Date. Corning has also agreed to indemnify Quest Diagnostics for 50% of the aggregate of all judgment or settlement payments made by Quest Diagnostics that are in excess of $42.0 million in respect of claims by private parties (i.e., nongovernmental parties such as private insurers) that relate to indemnified or previously settled governmental claims and that allege overbillings by Quest Diagnostics or any existing subsidiaries of Quest Diagnostics, for services provided prior to the Distribution Date; provided, however, such indemnification for nongovernmental claims will not exceed $25.0 million in the aggregate and all amounts indemnified against by Corning for the benefit of Quest Diagnostics will be calculated on a net after-tax basis. Such indemnification will not cover (i) any governmental claims that arise after the Distribution Date pursuant to service of subpoena or other notice of such investigation after the Distribution Date, (ii) any nongovernmental claims unrelated to the indemnified governmental claims or investigations, (iii) any nongovernmental claims not settled prior to five years after the Distribution Date, (iv) any consequential or incidental damages relating to the billing claims, including losses of revenues and profits as a consequence of exclusion for participation in federal or state health care programs or (v) the fees and expenses of litigation. The Distributions On May 13, 1996, the board of directors of Corning approved a plan to distribute to Corning shareholders the clinical laboratory testing business being conducted by Quest Diagnostics and the contract research business being conducted by Quest Diagnostics' wholly owned subsidiary, Covance (together, the "Distributions"). The Distributions will be effected by distributing all of the outstanding shares of Quest Diagnostics common stock (the "Quest Diagnostics Common Stock") to holders of Corning common stock (the "Corning Common Stock"), followed immediately by the distribution of all of the common stock of Covance (the "Covance Common Stock") to those same holders, as holders of Quest Diagnostics Common Stock. It is expected that the Distributions will be made on December 31, 1996 (the date on which the Distributions are to be made, the "Distribution Date"). Prior to the consummation of the offering of the Notes contemplated hereby (the "Offering"), the Company entered into a $450 million senior, secured credit facility (the "Credit Facility"), among the Company, the lenders listed therein, NationsBank, N.A., as Issuing Bank, Wachovia Bank of Georgia, N.A., as Swingline Bank, and Morgan Guaranty Trust Company of New York, as Administrative Agent. The Credit Facility is comprised of a $300 million six-year amortizing term loan ("Tranche A Loan"), a $50 million seven-year term loan ("Tranche B Loan" and together with the Tranche A Loan, the "Term Loans") and a $100 million six-year revolving working capital facility (the "Working Capital Facility"). Corning currently has approximately $1.2 billion of Quest Diagnostics intercompany debt. Approximately $145 million of net proceeds from the Offering, together with the $350 million of borrowings under the Term Loans, will be paid to Corning in satisfaction of a portion of the outstanding intercompany debt. Corning will contribute the remaining intercompany debt to Quest Diagnostics' capital. Borrowings under the Working Capital Facility, substantially all of which is expected to be available as of the Distribution Date, will provide for future working capital needs and other general corporate purposes. The Offering <TABLE> <CAPTION> <S> <C> Securities Offered $150,000,000 aggregate principal amount of % Senior Subordinated Notes due December 15, 2006 (the "Notes"). Maturity Date December 15, 2006. Interest Payment Date June 15 and December 15, commencing June 15, 1997. Optional Redemption by the Company The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after December 15, 2001, at the redemption prices set forth herein, plus accrued and unpaid interest, if any, to but excluding the date fixed for redemption. In addition, if as a result of an event outside the control of Corning, Quest Diagnostics and Covance, the Distributions do not occur prior to March 31, 1997, the Notes will be subject to redemption, as a whole and not in part, at the option of Quest Diagnostics, prior to June 30, 1997, at a redemption price equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to but excluding the date fixed for redemption. See "Description of the Notes--Optional Redemption." Change of Control Offer Upon a Change of Control, the Company has the obligation to offer to purchase all the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to but excluding the date of purchase. See "Description of the Notes-- Repurchase at the Option of Holders--Change of Control" for a discussion of the circumstances in which the Company may not be required to make an offer to purchase upon a Change of Control. Offers to Purchase In the event of certain asset sales, the Company will be required to offer to repurchase the Notes at 100% of their principal amount, plus accrued and unpaid interest, if any, to but excluding the date of purchase with the net proceeds of such asset sales. Subordination The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company, including all indebtedness of the Company under the Credit Facility. The Notes will rank Pari Passu in right of payment with any other senior subordinated indebtedness of the Company. Subsidiary Guarantees The Notes will be guaranteed, jointly and severally, and fully and unconditionally, on a senior subordinated basis by the Guarantors (the "Senior Subordinated Guarantees"). The obligations of any Guarantor with respect to its Senior Subordinated Guarantee will be subordinated in right of payment, to the same extent as the obligations of the Company in respect of the Notes, to all existing and future Senior Guarantees, which will include the guarantees of the Credit Facility. The Senior Subordinated Guarantees would also be subordinated to all existing and future indebtedness of the Guarantors if the Senior Subordinated Guarantees were avoided or subordinated in favor of the Guarantors' other creditors. See "Risk Factors--Fraudulent Conveyance." The obligations of a Guarantor under its Senior Subordinated Guarantee will be released in certain circumstances, including if the Guarantor ceases to guarantee the Credit Facility. See "Description of the Notes--Senior Subordinated Guarantees." Principal Covenants The indenture under which the Notes are issued (the "Indenture") will impose certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt and senior in right of payment to the Notes, enter into leases, incur liens, merge or consolidate with any other person, or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. Use of Proceeds The Company intends to use the proceeds from the sale of the Notes, together with the proceeds of borrowings under the Credit Facility, to repay certain intercompany indebtedness owed to Corning. See "Use of Proceeds." The Distributions The Notes are being offered in connection with the Distributions of the Quest Diagnostics Common Stock and the Covance Common Stock to holders of Corning Common Stock. The closing of the offering of the Notes is anticipated to occur prior to the Distributions. Listing The Notes have been approved for listing on the New York Stock Exchange, subject to official notice of issuance. Risk Factors See "Risk Factors" for a discussion of certain factors that should be considered in connection with an investment in the Notes. </TABLE> Summary Financial Data The following table summarizes certain historical and pro forma financial data of Quest Diagnostics at the dates and for each of the periods indicated. The selected financial data as of and for each of the years ended December 31, 1995, 1994 and 1993 have been derived from the audited combined financial statements of (the "Audited Financial Statements") and the notes thereto included elsewhere herein. The selected financial data as of and for the three and nine months ended September 30, 1996 and 1995 have been derived from the unaudited interim combined financial statements of Quest Diagnostics (the "Interim Financial Statements" and, together with the Audited Financial Statements, the "Financial Statements") and the notes thereto included elsewhere herein. In the opinion of Quest Diagnostics management, the unaudited interim combined financial statements include all adjustments, consisting of only normal recurring adjustments, that are necessary for a fair presentation of the financial position and results of operations for these periods. The unaudited interim results of operations for the three and nine months ended September 30, 1996 are not necessarily indicative of the results for the entire year ending December 31, 1996. The selected pro forma financial data have been derived from the unaudited pro forma combined financial information of Quest Diagnostics for the year ended December 31, 1995 and for the three and nine months ended September 30, 1996 (the "Pro Forma Financial Information") and the notes thereto included elsewhere herein. The pro forma statement of operations data gives effect to the Distributions and the Accounting Policy Change (as defined below) as if they had occurred on January 1, 1995 and the pro forma balance sheet data gives effect to the Distributions and the Accounting Policy Change as if they had occurred on September 30, 1996. The pro forma financial data does not purport to represent what Quest Diagnostics' results of operations would have been if the Distributions and the Accounting Policy Change had in fact occurred on such dates, nor does it purport to indicate the future financial position or results of future operations of Quest Diagnostics. The pro forma adjustments are based upon currently available information and certain assumptions that Quest Diagnostics management believes to be reasonable. The summary historical and pro forma financial data set forth below should be read in conjunction with "Selected Historical Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Financial Statements and the notes thereto and the Pro Forma Financial Information and the notes thereto. <TABLE> <CAPTION> Three Months Ended September 30, Nine Months Ended September 30, ------------------------------------------------------------------------------------------------ Pro Forma Historical Pro Forma Historical ------------------------------- ------------------------------- 1996(a) 1996 1995 1996(a) 1996 1995 --------------- --------------- --------------- ---------------- ---------------- -------------- (in thousands, except share, per share and percentage data) <S> <C> <C> <C> <C> <C> <C> Statement of Operations Data: Net revenues $ 405,352 $ 405,352 $ 399,959 $ 1,231,290 $1,231,290 $1,239,474 Costs and expenses: Cost of services 255,390 255,390 240,868 768,809 768,809 735,984 Selling, general and administrative 125,190 125,190 181,346(c) 371,439 371,439 399,635(c) Provision for restructuring and other special charges(d) 155,730 155,730 201,730 201,730 45,885 Interest expense, net 12,189 19,866 20,927 36,938 59,887 61,529 Amortization of intangible assets 7,672 10,328 11,293 23,803 31,772 33,678 Other, net 1,837 1,837 1,930 (198) (198) 4,429 --------------- --------------- --------------- ---------------- ---------------- -------------- Total 558,008 568,341 456,364 1,402,521 1,433,439 1,281,140 --------------- --------------- --------------- ---------------- ---------------- -------------- Income (loss) before taxes (152,656) (162,989) (56,405) (171,231) (202,149) (41,666) Income tax expense (benefit) (40,521) (43,553) (17,810) (34,215) (43,280) (3,642) --------------- --------------- --------------- ---------------- ---------------- -------------- Income (loss) before cumulative effect of change in accounting principle (112,135) (119,436) (38,595) (137,016) (158,869) (38,024) Cumulative effect of change in accounting principle --------------- --------------- --------------- ---------------- ---------------- -------------- Net income (loss) $ (112,135) $ (119,436) $ (38,595) $ (137,016) $ (158,869) $ (38,024) =============== =============== =============== ================ ================ ============== Pro forma shares outstanding(e) 28,901,735 28,901,735 Pro forma net loss per share $ (3.88) $ (4.74) Balance Sheet Data (at end of period): Cash $ 40,000 $ 48,319 $ 46,908 $ 40,000 $ 48,319 $ 46,908 Working capital 306,741 114,718 129,319 306,741 114,718 129,319 Total assets 1,612,459 1,886,378 1,896,058 1,612,459 1,886,378 1,896,058 Long-term debt 515,494 1,219,900 1,114,367 515,494 1,219,900 1,114,367 Total debt 517,379 1,231,785 1,226,211 517,379 1,231,785 1,226,211 Stockholder's equity 604,099 132,670 320,576 604,099 132,670 320,576 Ratio of earnings to fixed charges -- (f) -- (f) -- (f) -- (f) -- (f) -- (f) Supplemental Data: Net cash provided by operating activities $ 25,236 $ 25,236 $ 38,202 $ 41,937 $ 41,937 $ 53,789 Net cash used in investing activities (7,904) (7,904) (17,044) (53,097) (53,097) (77,911) Net cash provided by (used in) financing activities (6,618) (6,618) (18,006) 23,033 23,033 32,311 Bad debt expense $ 30,539 $ 30,539 $ 85,831(c) $ 81,891 $ 81,891 $ 127,297(c) Bad debt expense as a % of net revenues 7.5% 7.5% 21.5% 6.7% 6.7% 10.3% Rent expense $ 12,515 $ 12,515 $ 11,860 $ 37,315 $ 37,315 $ 35,060 Capital expenditures 11,912 11,912 16,441 58,802 58,802 56,062 Depreciation expense $ 14,672 $ 14,672 $ 14,275 $ 43,460 $ 43,460 $ 42,358 EBITDA(g) $ (118,123)(h) $ (118,123)(h) $ (9,910)(c) $ (67,030)(h) $ (67,030)(h) $ 95,899(c) EBITDA as a % of net revenues (29.1%) (29.1%) (2.5%) (5.4%) (5.4%) 7.7% Adjusted EBITDA(i) $ 37,607 $ 37,607 $ (9,910)(c) $ 134,700 $ 134,700 $ 141,784(c) Adjusted EBITDA as a % of net revenues 9.3% 9.3% (2.5%) 10.9% 10.9% 11.4% Supplemental Ratio Data: Adjusted EBITDA/interest expense, net 3.1x 3.6x (Adjusted EBITDA-capital expenditures)/interest expense, net 2.1x 2.1x (Total debt--cash)/annualized adjusted EBITDA 3.2x 2.7x </TABLE> (Footnotes on page 14) <TABLE> <CAPTION> Year Ended December 31, ----------------------------------------------------------- Pro Forma Historical ------------------------------------------- 1995(a) 1995 1994(b) 1993 --------------- --------------- ------------- ------------- (in thousands, except share, per share and percentage data) <S> <C> <C> <C> <C> Statement of Operations Data: Net revenues $ 1,629,388 $1,629,388 $1,633,699 $1,416,338 Costs and expenses: Cost of services 980,232 980,232 969,844 805,729 Selling, general and administrative 523,271(c) 523,271(c) 411,939 363,579 Provision for restructuring and other special charges(d) 50,560 50,560 79,814 99,600 Interest expense, net 50,748 82,016 63,295 41,898 Amortization of intangible assets 34,031 44,656 42,588 28,421 Other, net 6,221 6,221 3,464 6,423 --------------- --------------- ------------- ------------- Total 1,645,063 1,686,956 1,570,944 1,345,650 --------------- --------------- ------------- ------------- Income (loss) before taxes (15,675) (57,568) 62,755 70,688 Income tax expense (benefit) 6,835 (5,516) 34,410 25,929 --------------- --------------- ------------- ------------- Income (loss) before cumulative effect of change in accounting principle (22,510) (52,052) 28,345 44,759 Cumulative effect of change in accounting principle (10,562) --------------- --------------- ------------- ------------- Net income (loss) $ (22,510) $ (52,052) $ 28,345 $ 34,197 =============== =============== ============= ============= Pro forma shares outstanding(e) 28,901,735 Pro forma net loss per share $ (0.78) Balance Sheet Data (at end of period): Cash $ 36,446 $ 38,719 $ 39,410 Working capital 200,740 214,358 139,771 Total assets 1,853,385 1,882,663 1,861,162 Long-term debt 1,195,566 1,153,054 1,025,787 Total debt 1,207,714 1,165,626 1,123,307 Stockholder's equity 295,801 386,812 395,509 Ratio of earnings to fixed charges -- (f) -- (f) 1.77(f) 2.20(f) Supplemental Data: Net cash provided by operating activities $ 85,828 $ 85,828 $ 37,963 $ 99,614 Net cash used in investing activities (93,087) (93,087) (46,186) (473,687) Net cash provided by (used in) financing activities 4,986 4,986 7,532 392,956 Bad debt expense $ 152,590(c) $ 152,590(c) $ 59,480 $ 47,240 Bad debt expense as a % of net revenues 9.4% 9.4% 3.6% 3.3% Rent expense $ 46,900 $ 46,900 $ 49,400 $ 46,900 Capital expenditures 74,045 74,045 93,354 65,317 Depreciation expense $ 56,857 $ 56,857 $ 46,929 $ 38,058 EBITDA(g) $ 125,961(c) $ 125,961(c) $ 215,567 $ 179,065 EBITDA as a % of net revenues 7.7% 7.7% 13.2% 12.6% Adjusted EBITDA(i) $ 176,521(c) $ 176,521(c) $ 295,381 $ 278,665 Adjusted EBITDA as a % of net revenues 10.8% 10.8% 18.1% 19.7% Supplemental Ratio Data: Adjusted EBITDA/interest expense, net 3.5x (Adjusted EBITDA-capital expenditures)/ interest expense, net 2.0x </TABLE> (Footnotes on page 14) (Footnotes for preceding pages) (a) Adjusted to reflect the pro forma effects of the Distributions and the Accounting Policy Change. See "Selected Historical Financial Data" and "Pro Forma Financial Information."
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+Prospectus Summary This Summary is qualified by the more detailed information (including the financial statements and related notes) set forth elsewhere in this Prospectus which should be read in its entirety. Unless the context indicates, or it is specifically indicated otherwise, all references to (i) "Corning" include Corning Incorporated, a New York corporation, and its consolidated subsidiaries, (ii) "Quest Diagnostics" or the "Company" include Corning Clinical Laboratories Inc. (to be renamed Quest Diagnostics Incorporated prior to the Distributions), a Delaware corporation, and its direct and indirect subsidiaries (other than Covance) and assume that the Distributions have occurred, and (iii) "Covance" include Covance Inc. (formerly Corning Pharmaceutical Services Inc.), a Delaware corporation, and its direct and indirect subsidiaries and assume that the Distributions have occurred. Capitalized terms used but not defined in this Summary are defined elsewhere in this Prospectus. The Company Quest Diagnostics is one of the largest independent clinical laboratory testing companies in the United States. Quest Diagnostics offers a broad range of routine and specialty ("esoteric") testing services used by the medical profession in the diagnosis, monitoring and treatment of disease and other medical conditions. Quest Diagnostics' network, which processes approximately 60 million requisitions for diagnostic tests annually, consists of 17 regional laboratories across the United States and the Corning Nichols Institute ("Nichols") esoteric testing laboratory in San Juan Capistrano, California. In addition, Quest Diagnostics has 14 branch laboratories in the United States as well as one branch laboratory in Mexico City (branch laboratories are smaller than regional laboratories), approximately 200 "STAT" laboratories and approximately 850 patient service centers located throughout the United States. For the year ended December 31, 1995 and the nine months ended September 30, 1996, Quest Diagnostics had net revenues of $1,629 million and $1,231 million, respectively, and Adjusted EBITDA (income (loss) before income taxes plus net interest expense, depreciation and amortization and restructuring and other special charges) of $177 million and $135 million, respectively. Quest Diagnostics operates 24 hours a day, 365 days a year, utilizing a fully integrated collection and processing system. Quest Diagnostics generally performs and reports most routine procedures within 24 hours, employing a variety of sophisticated and computerized laboratory testing instruments. Quest Diagnostics provides daily pickup of specimens from most customers principally through an in-house courier system. The specimens are sent to one of the Company's laboratories where one or more tests are performed. Each patient specimen is accompanied by a test requisition form, which is completed by the customer, that indicates the tests to be performed and provides the necessary billing information. Each specimen and related requisition form is checked for completeness and then given a unique bar-coded identification number. Once the appropriate information is entered into the computer system, the tests are performed and the results are delivered to the doctor, primarily through computer interface or manually. Corning entered the clinical laboratory business in 1982 with the acquisition of MetPath Inc. ("MetPath"), which was founded in 1967 and was one of the first laboratories to expand beyond a regional market. Since January 1993, Quest Diagnostics has acquired over thirty laboratories, including Damon Corporation ("Damon"), Bioran Medical Laboratory ("Bioran") and Maryland Medical Laboratory, Inc. ("MML"). In 1994, Quest Diagnostics enhanced its presence in the esoteric testing market through the acquisition of Nichols, a preeminent clinical laboratory with a leading reputation for esoteric testing and test innovations. While Corning's ownership provided the Company with the capital to grow through acquisitions and to become one of the nation's largest independent clinical laboratory testing companies, the management of both Corning and Quest Diagnostics believe that Quest Diagnostics will be more competitive and operate more successfully in the future as an independent company, with a strong, focused and experienced management team to concentrate on customer needs. Independence will also enable Quest Diagnostics to motivate its employees by offering equity-based incentives tied directly to the performance of the Company and individual performance. Quest Diagnostics' management team has implemented a new business strategy, which focuses the business around three key strategic areas: clinical operations, customer focus and technological leadership and excellence. The Clinical Laboratory Testing Industry Clinical testing is a critical component in the delivery of quality health care service to patients. Currently, clinical laboratory testing is the first step in determining how a significant amount of all health care dollars are spent. Quest Diagnostics believes that in 1995 the entire United States clinical laboratory industry had revenues exceeding $30 billion. The clinical laboratory industry consists primarily of three types of providers: hospital-affiliated laboratories, independent clinical laboratories, such as Quest Diagnostics, and physician-office laboratories. The Company believes that in 1995 approximately 56% of the clinical testing revenues in the United States were attributable to hospital-affiliated laboratories, approximately 36% were attributable to independent clinical laboratories and approximately 8% were attributable to physicians in their offices and laboratories. Quest Diagnostics believes that consolidation will continue in the clinical laboratory testing business. In addition, Quest Diagnostics believes that it and the other large independent clinical laboratory testing companies may have the opportunity to increase their share of the overall clinical laboratories testing market due to a number of external factors, including cost efficiencies afforded by large-scale automated testing, Medicare reimbursement reductions and the growth of managed health care entities which require low-cost testing services and large service networks. In addition, legal restrictions on physician referrals and the ownership of laboratories as well as increased regulation of laboratories are expected to contribute to the continuing consolidation of the industry. Quest Diagnostics believes that a number of factors are likely to positively influence the volume of clinical laboratory testing performed in the United States in the future, including (1) the general aging of the population in the United States; (2) an expanded base of scientific knowledge which has led to the development of more sophisticated specialized tests and an increase in the awareness of physicians of the value of clinical laboratory testing as a cost-effective means of early detection of disease and monitoring of treatment; (3) an increase in the number and types of tests which are, due to advances in technology and increased cost efficiencies, readily available on a more affordable basis to physicians; (4) expanded substance-abuse testing by corporations and governmental agencies; and (5) increased testing for sexually transmitted diseases such as AIDS. The impact of these factors is expected to be offset in part by increased controls over the utilization of clinical laboratory tests by both Medicare and the private sector, particularly managed care organizations. Business Strategy Quest Diagnostics' overall goal is to be recognized by its customers, employees and competitors as the best provider of comprehensive and innovative clinical testing, information and services. To achieve this, Quest Diagnostics' management team has focused the business around three key strategic areas: clinical operations, customer focus and technological leadership and excellence. (bullet) Best Supplier. Quest Diagnostics seeks to be the best supplier of the highest quality and the lowest-cost testing services. Health care providers and patients expect accurate, timely and consistent laboratory test results at a fair price. (bullet) Lowest-cost provider. Quest Diagnostics' average cost per requisition varies significantly among its regional laboratories; there is an approximately $7.00 difference in cost per requisition between the most efficient regional laboratory and the average, and an approximately $13.00 difference in cost per requisition between the most and the least efficient regional laboratories. In many cases, these variations do not relate to testing volumes or mixes, space costs, service requirements or regional labor cost differences. To reduce costs, Quest Diagnostics has begun to replicate the best practices from each region throughout its national network. Management expects to achieve significant cost savings within the next three years as these programs are fully implemented. * (bullet) Highest Quality Provider. Quest Diagnostics is dedicated to providing accurate and timely test results and to being viewed by its customers as the highest quality provider of clinical testing services. Quest Diagnostics believes that implementation of best practices already developed in certain regions will permit the Company to be viewed by its customers as the highest quality provider of clinical testing services. (bullet) Preferred Provider. Quest Diagnostics seeks to be the preferred provider of laboratory testing services to existing and new health care networks on a selective basis determined by profitability of accounts. Quest Diagnostics believes that it will become the preferred provider to these networks as (1) large networks typically prefer to utilize large independent clinical laboratories that can service them on a national or regional basis and (2) the Company continues to pursue its primary strategy of becoming the highest quality, lowest-cost provider. To achieve this, Quest Diagnostics will employ a rigorous national and regional process to both select and pursue customers and allocate resources to support these efforts. *This is a forward looking statement and is based on current expectations. Actual results may vary materially from those projected. See "Business- Important Factors Regarding Forward Looking Statements." In particular, see factors (a), (d) and (j). (bullet) Account Profitability. Quest Diagnostics intends to refocus its sales efforts on pursuing and keeping profitable accounts. Quest Diagnostics is actively reviewing the profitability of its current accounts, including those with managed care organizations, and will either increase pricing or eliminate accounts that cannot be serviced profitably. (bullet) Regional Profitability. Quest Diagnostics presently believes that it has the leading market share among independent clinical laboratories in most routine testing markets of the northeast, mid-Atlantic and midwest regions. Approximately 65% of Quest Diagnostics' revenues and almost all of its EBITDA is generated from markets in which the Company believes that it has the leading market share. In most of these markets, Quest Diagnostics believes that it also is the lowest cost provider. Quest Diagnostics is evaluating its strategic alternatives relative to units whose profitability does not meet its internal goals. These alternatives may include joint ventures, alliances, or dispositions. Quest Diagnostics believes that, while the clinical laboratory industry is becoming national in scope, the Company can subcontract with other clinical laboratories to perform testing for national accounts in any markets in which the Company chooses not to compete. (bullet) Leading Innovator. Quest Diagnostics intends to remain a leading innovator in the clinical laboratory industry by continuing to introduce new tests, technology and services. Through its relationship with the academic community and pharmaceutical and biotechnology firms and a research and development budget exceeding $15 million per year, Quest Diagnostics believes it is one of the leaders in transferring innovation from academic biotechnology laboratories to the market. Recent Developments By a plea agreement and civil agreement and release dated October 9, 1996, between the Department of Justice ("DOJ") and Damon, all federal criminal matters within the scope of the various federal investigations against Damon, and all claims including the civil qui tam cases underlying the civil investigations were settled for an aggregate of $119 million, which sum was reimbursed to Quest Diagnostics by Corning. The Damon settlement does not exclude Quest Diagnostics from future participation in any federal health care programs on account of Damon's practices. Quest Diagnostics' aggregate reserve with respect to all governmental and private claims was $215 million at September 30, 1996 and is estimated to be reduced to $85 million as of the Distribution Date as a result of the payment of settled claims, primarily the Damon settlement of $119 million. Based on information available to management and Quest Diagnostics' experience with past settlements (including the fact that the aggregate amount of the Damon settlement was significantly in excess of established reserves) management has reassessed its reserve levels and believes that its current level of reserves is adequate. However, it is possible that additional information may become available which may cause the final resolution of these matters to be in excess of established reserves by an amount which could be material to Quest Diagnostics' results of operations and, for non-indemnified claims, Quest Diagnostics' cash flows in the period in which such claims are settled. While none of the governmental or nongovernmental investigations or claims is covered by insurance, Quest Diagnostics does not believe that these matters will have a material adverse effect on Quest Diagnostics' overall financial condition. Corning Indemnity In connection with the Distributions, Corning has agreed to indemnify Quest Diagnostics against all monetary penalties, fines or settlements arising out of any governmental claims arising out of alleged violations of applicable federal fraud and health care statutes and relating to billing practices of Quest Diagnostics and its predecessors that have been settled or are pending on the Distribution Date. Corning has also agreed to indemnify Quest Diagnostics for 50% of the aggregate of all judgment or settlement payments made by Quest Diagnostics that are in excess of $42.0 million in respect of claims by private parties (i.e., nongovernmental parties such as private insurers) that relate to indemnified or previously settled governmental claims and that allege overbillings by Quest Diagnostics or any existing subsidiaries of Quest Diagnostics, for services provided prior to the Distribution Date; provided, however, such indemnification for nongovernmental claims will not exceed $25.0 million in the aggregate and all amounts indemnified against by Corning for the benefit of Quest Diagnostics will be calculated on a net after-tax basis. Such indemnification will not cover (i) any governmental claims that arise after the Distribution Date pursuant to service of subpoena or other notice of such investigation after the Distribution Date, (ii) any nongovernmental claims unrelated to the indemnified governmental claims or investigations, (iii) any nongovernmental claims not settled prior to five years after the Distribution Date, (iv) any consequential or incidental damages relating to the billing claims, including losses of revenues and profits as a consequence of exclusion for participation in federal or state health care programs or (v) the fees and expenses of litigation. The Distributions On May 13, 1996, the board of directors of Corning approved a plan to distribute to Corning shareholders the clinical laboratory testing business being conducted by Quest Diagnostics and the contract research business being conducted by Quest Diagnostics' wholly owned subsidiary, Covance (together, the "Distributions"). The Distributions will be effected by distributing all of the outstanding shares of Quest Diagnostics common stock (the "Quest Diagnostics Common Stock") to holders of Corning common stock (the "Corning Common Stock"), followed immediately by the distribution of all of the common stock of Covance (the "Covance Common Stock") to those same holders, as holders of Quest Diagnostics Common Stock. It is expected that the Distributions will be made on December 31, 1996 (the date on which the Distributions are to be made, the "Distribution Date"). Prior to the consummation of the offering of the Notes contemplated hereby (the "Offering"), the Company entered into a $450 million senior, secured credit facility (the "Credit Facility"), among the Company, the lenders listed therein, NationsBank, N.A., as Issuing Bank, Wachovia Bank of Georgia, N.A., as Swingline Bank, and Morgan Guaranty Trust Company of New York, as Administrative Agent. The Credit Facility is comprised of a $300 million six-year amortizing term loan ("Tranche A Loan"), a $50 million seven-year term loan ("Tranche B Loan" and together with the Tranche A Loan, the "Term Loans") and a $100 million six-year revolving working capital facility (the "Working Capital Facility"). Corning currently has approximately $1.2 billion of Quest Diagnostics intercompany debt. Approximately $145 million of net proceeds from the Offering, together with the $350 million of borrowings under the Term Loans, will be paid to Corning in satisfaction of a portion of the outstanding intercompany debt. Corning will contribute the remaining intercompany debt to Quest Diagnostics' capital. Borrowings under the Working Capital Facility, substantially all of which is expected to be available as of the Distribution Date, will provide for future working capital needs and other general corporate purposes. The Offering <TABLE> <CAPTION> <S> <C> Securities Offered $150,000,000 aggregate principal amount of % Senior Subordinated Notes due December 15, 2006 (the "Notes"). Maturity Date December 15, 2006. Interest Payment Date June 15 and December 15, commencing June 15, 1997. Optional Redemption by the Company The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after December 15, 2001, at the redemption prices set forth herein, plus accrued and unpaid interest, if any, to but excluding the date fixed for redemption. In addition, if as a result of an event outside the control of Corning, Quest Diagnostics and Covance, the Distributions do not occur prior to March 31, 1997, the Notes will be subject to redemption, as a whole and not in part, at the option of Quest Diagnostics, prior to June 30, 1997, at a redemption price equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to but excluding the date fixed for redemption. See "Description of the Notes--Optional Redemption." Change of Control Offer Upon a Change of Control, the Company has the obligation to offer to purchase all the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to but excluding the date of purchase. See "Description of the Notes-- Repurchase at the Option of Holders--Change of Control" for a discussion of the circumstances in which the Company may not be required to make an offer to purchase upon a Change of Control. Offers to Purchase In the event of certain asset sales, the Company will be required to offer to repurchase the Notes at 100% of their principal amount, plus accrued and unpaid interest, if any, to but excluding the date of purchase with the net proceeds of such asset sales. Subordination The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company, including all indebtedness of the Company under the Credit Facility. The Notes will rank Pari Passu in right of payment with any other senior subordinated indebtedness of the Company. Subsidiary Guarantees The Notes will be guaranteed, jointly and severally, and fully and unconditionally, on a senior subordinated basis by the Guarantors (the "Senior Subordinated Guarantees"). The obligations of any Guarantor with respect to its Senior Subordinated Guarantee will be subordinated in right of payment, to the same extent as the obligations of the Company in respect of the Notes, to all existing and future Senior Guarantees, which will include the guarantees of the Credit Facility. The Senior Subordinated Guarantees would also be subordinated to all existing and future indebtedness of the Guarantors if the Senior Subordinated Guarantees were avoided or subordinated in favor of the Guarantors' other creditors. See "Risk Factors--Fraudulent Conveyance." The obligations of a Guarantor under its Senior Subordinated Guarantee will be released in certain circumstances, including if the Guarantor ceases to guarantee the Credit Facility. See "Description of the Notes--Senior Subordinated Guarantees." Principal Covenants The indenture under which the Notes are issued (the "Indenture") will impose certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt and senior in right of payment to the Notes, enter into leases, incur liens, merge or consolidate with any other person, or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. Use of Proceeds The Company intends to use the proceeds from the sale of the Notes, together with the proceeds of borrowings under the Credit Facility, to repay certain intercompany indebtedness owed to Corning. See "Use of Proceeds." The Distributions The Notes are being offered in connection with the Distributions of the Quest Diagnostics Common Stock and the Covance Common Stock to holders of Corning Common Stock. The closing of the offering of the Notes is anticipated to occur prior to the Distributions. Listing The Notes have been approved for listing on the New York Stock Exchange, subject to official notice of issuance. Risk Factors See "Risk Factors" for a discussion of certain factors that should be considered in connection with an investment in the Notes. </TABLE> Summary Financial Data The following table summarizes certain historical and pro forma financial data of Quest Diagnostics at the dates and for each of the periods indicated. The selected financial data as of and for each of the years ended December 31, 1995, 1994 and 1993 have been derived from the audited combined financial statements of (the "Audited Financial Statements") and the notes thereto included elsewhere herein. The selected financial data as of and for the three and nine months ended September 30, 1996 and 1995 have been derived from the unaudited interim combined financial statements of Quest Diagnostics (the "Interim Financial Statements" and, together with the Audited Financial Statements, the "Financial Statements") and the notes thereto included elsewhere herein. In the opinion of Quest Diagnostics management, the unaudited interim combined financial statements include all adjustments, consisting of only normal recurring adjustments, that are necessary for a fair presentation of the financial position and results of operations for these periods. The unaudited interim results of operations for the three and nine months ended September 30, 1996 are not necessarily indicative of the results for the entire year ending December 31, 1996. The selected pro forma financial data have been derived from the unaudited pro forma combined financial information of Quest Diagnostics for the year ended December 31, 1995 and for the three and nine months ended September 30, 1996 (the "Pro Forma Financial Information") and the notes thereto included elsewhere herein. The pro forma statement of operations data gives effect to the Distributions and the Accounting Policy Change (as defined below) as if they had occurred on January 1, 1995 and the pro forma balance sheet data gives effect to the Distributions and the Accounting Policy Change as if they had occurred on September 30, 1996. The pro forma financial data does not purport to represent what Quest Diagnostics' results of operations would have been if the Distributions and the Accounting Policy Change had in fact occurred on such dates, nor does it purport to indicate the future financial position or results of future operations of Quest Diagnostics. The pro forma adjustments are based upon currently available information and certain assumptions that Quest Diagnostics management believes to be reasonable. The summary historical and pro forma financial data set forth below should be read in conjunction with "Selected Historical Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Financial Statements and the notes thereto and the Pro Forma Financial Information and the notes thereto. <TABLE> <CAPTION> Three Months Ended September 30, Nine Months Ended September 30, ------------------------------------------------------------------------------------------------ Pro Forma Historical Pro Forma Historical ------------------------------- ------------------------------- 1996(a) 1996 1995 1996(a) 1996 1995 --------------- --------------- --------------- ---------------- ---------------- -------------- (in thousands, except share, per share and percentage data) <S> <C> <C> <C> <C> <C> <C> Statement of Operations Data: Net revenues $ 405,352 $ 405,352 $ 399,959 $ 1,231,290 $1,231,290 $1,239,474 Costs and expenses: Cost of services 255,390 255,390 240,868 768,809 768,809 735,984 Selling, general and administrative 125,190 125,190 181,346(c) 371,439 371,439 399,635(c) Provision for restructuring and other special charges(d) 155,730 155,730 201,730 201,730 45,885 Interest expense, net 12,189 19,866 20,927 36,938 59,887 61,529 Amortization of intangible assets 7,672 10,328 11,293 23,803 31,772 33,678 Other, net 1,837 1,837 1,930 (198) (198) 4,429 --------------- --------------- --------------- ---------------- ---------------- -------------- Total 558,008 568,341 456,364 1,402,521 1,433,439 1,281,140 --------------- --------------- --------------- ---------------- ---------------- -------------- Income (loss) before taxes (152,656) (162,989) (56,405) (171,231) (202,149) (41,666) Income tax expense (benefit) (40,521) (43,553) (17,810) (34,215) (43,280) (3,642) --------------- --------------- --------------- ---------------- ---------------- -------------- Income (loss) before cumulative effect of change in accounting principle (112,135) (119,436) (38,595) (137,016) (158,869) (38,024) Cumulative effect of change in accounting principle --------------- --------------- --------------- ---------------- ---------------- -------------- Net income (loss) $ (112,135) $ (119,436) $ (38,595) $ (137,016) $ (158,869) $ (38,024) =============== =============== =============== ================ ================ ============== Pro forma shares outstanding(e) 28,901,735 28,901,735 Pro forma net loss per share $ (3.88) $ (4.74) Balance Sheet Data (at end of period): Cash $ 40,000 $ 48,319 $ 46,908 $ 40,000 $ 48,319 $ 46,908 Working capital 306,741 114,718 129,319 306,741 114,718 129,319 Total assets 1,612,459 1,886,378 1,896,058 1,612,459 1,886,378 1,896,058 Long-term debt 515,494 1,219,900 1,114,367 515,494 1,219,900 1,114,367 Total debt 517,379 1,231,785 1,226,211 517,379 1,231,785 1,226,211 Stockholder's equity 604,099 132,670 320,576 604,099 132,670 320,576 Ratio of earnings to fixed charges -- (f) -- (f) -- (f) -- (f) -- (f) -- (f) Supplemental Data: Net cash provided by operating activities $ 25,236 $ 25,236 $ 38,202 $ 41,937 $ 41,937 $ 53,789 Net cash used in investing activities (7,904) (7,904) (17,044) (53,097) (53,097) (77,911) Net cash provided by (used in) financing activities (6,618) (6,618) (18,006) 23,033 23,033 32,311 Bad debt expense $ 30,539 $ 30,539 $ 85,831(c) $ 81,891 $ 81,891 $ 127,297(c) Bad debt expense as a % of net revenues 7.5% 7.5% 21.5% 6.7% 6.7% 10.3% Rent expense $ 12,515 $ 12,515 $ 11,860 $ 37,315 $ 37,315 $ 35,060 Capital expenditures 11,912 11,912 16,441 58,802 58,802 56,062 Depreciation expense $ 14,672 $ 14,672 $ 14,275 $ 43,460 $ 43,460 $ 42,358 EBITDA(g) $ (118,123)(h) $ (118,123)(h) $ (9,910)(c) $ (67,030)(h) $ (67,030)(h) $ 95,899(c) EBITDA as a % of net revenues (29.1%) (29.1%) (2.5%) (5.4%) (5.4%) 7.7% Adjusted EBITDA(i) $ 37,607 $ 37,607 $ (9,910)(c) $ 134,700 $ 134,700 $ 141,784(c) Adjusted EBITDA as a % of net revenues 9.3% 9.3% (2.5%) 10.9% 10.9% 11.4% Supplemental Ratio Data: Adjusted EBITDA/interest expense, net 3.1x 3.6x (Adjusted EBITDA-capital expenditures)/interest expense, net 2.1x 2.1x (Total debt--cash)/annualized adjusted EBITDA 3.2x 2.7x </TABLE> (Footnotes on page 14) <TABLE> <CAPTION> Year Ended December 31, ----------------------------------------------------------- Pro Forma Historical ------------------------------------------- 1995(a) 1995 1994(b) 1993 --------------- --------------- ------------- ------------- (in thousands, except share, per share and percentage data) <S> <C> <C> <C> <C> Statement of Operations Data: Net revenues $ 1,629,388 $1,629,388 $1,633,699 $1,416,338 Costs and expenses: Cost of services 980,232 980,232 969,844 805,729 Selling, general and administrative 523,271(c) 523,271(c) 411,939 363,579 Provision for restructuring and other special charges(d) 50,560 50,560 79,814 99,600 Interest expense, net 50,748 82,016 63,295 41,898 Amortization of intangible assets 34,031 44,656 42,588 28,421 Other, net 6,221 6,221 3,464 6,423 --------------- --------------- ------------- ------------- Total 1,645,063 1,686,956 1,570,944 1,345,650 --------------- --------------- ------------- ------------- Income (loss) before taxes (15,675) (57,568) 62,755 70,688 Income tax expense (benefit) 6,835 (5,516) 34,410 25,929 --------------- --------------- ------------- ------------- Income (loss) before cumulative effect of change in accounting principle (22,510) (52,052) 28,345 44,759 Cumulative effect of change in accounting principle (10,562) --------------- --------------- ------------- ------------- Net income (loss) $ (22,510) $ (52,052) $ 28,345 $ 34,197 =============== =============== ============= ============= Pro forma shares outstanding(e) 28,901,735 Pro forma net loss per share $ (0.78) Balance Sheet Data (at end of period): Cash $ 36,446 $ 38,719 $ 39,410 Working capital 200,740 214,358 139,771 Total assets 1,853,385 1,882,663 1,861,162 Long-term debt 1,195,566 1,153,054 1,025,787 Total debt 1,207,714 1,165,626 1,123,307 Stockholder's equity 295,801 386,812 395,509 Ratio of earnings to fixed charges -- (f) -- (f) 1.77(f) 2.20(f) Supplemental Data: Net cash provided by operating activities $ 85,828 $ 85,828 $ 37,963 $ 99,614 Net cash used in investing activities (93,087) (93,087) (46,186) (473,687) Net cash provided by (used in) financing activities 4,986 4,986 7,532 392,956 Bad debt expense $ 152,590(c) $ 152,590(c) $ 59,480 $ 47,240 Bad debt expense as a % of net revenues 9.4% 9.4% 3.6% 3.3% Rent expense $ 46,900 $ 46,900 $ 49,400 $ 46,900 Capital expenditures 74,045 74,045 93,354 65,317 Depreciation expense $ 56,857 $ 56,857 $ 46,929 $ 38,058 EBITDA(g) $ 125,961(c) $ 125,961(c) $ 215,567 $ 179,065 EBITDA as a % of net revenues 7.7% 7.7% 13.2% 12.6% Adjusted EBITDA(i) $ 176,521(c) $ 176,521(c) $ 295,381 $ 278,665 Adjusted EBITDA as a % of net revenues 10.8% 10.8% 18.1% 19.7% Supplemental Ratio Data: Adjusted EBITDA/interest expense, net 3.5x (Adjusted EBITDA-capital expenditures)/ interest expense, net 2.0x </TABLE> (Footnotes on page 14) (Footnotes for preceding pages) (a) Adjusted to reflect the pro forma effects of the Distributions and the Accounting Policy Change. See "Selected Historical Financial Data" and "Pro Forma Financial Information."
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+Prospectus Summary This Summary is qualified by the more detailed information (including the financial statements and related notes) set forth elsewhere in this Prospectus which should be read in its entirety. Unless the context indicates, or it is specifically indicated otherwise, all references to (i) "Corning" include Corning Incorporated, a New York corporation, and its consolidated subsidiaries, (ii) "Quest Diagnostics" or the "Company" include Corning Clinical Laboratories Inc. (to be renamed Quest Diagnostics Incorporated prior to the Distributions), a Delaware corporation, and its direct and indirect subsidiaries (other than Covance) and assume that the Distributions have occurred, and (iii) "Covance" include Covance Inc. (formerly Corning Pharmaceutical Services Inc.), a Delaware corporation, and its direct and indirect subsidiaries and assume that the Distributions have occurred. Capitalized terms used but not defined in this Summary are defined elsewhere in this Prospectus. The Company Quest Diagnostics is one of the largest independent clinical laboratory testing companies in the United States. Quest Diagnostics offers a broad range of routine and specialty ("esoteric") testing services used by the medical profession in the diagnosis, monitoring and treatment of disease and other medical conditions. Quest Diagnostics' network, which processes approximately 60 million requisitions for diagnostic tests annually, consists of 17 regional laboratories across the United States and the Corning Nichols Institute ("Nichols") esoteric testing laboratory in San Juan Capistrano, California. In addition, Quest Diagnostics has 14 branch laboratories in the United States as well as one branch laboratory in Mexico City (branch laboratories are smaller than regional laboratories), approximately 200 "STAT" laboratories and approximately 850 patient service centers located throughout the United States. For the year ended December 31, 1995 and the nine months ended September 30, 1996, Quest Diagnostics had net revenues of $1,629 million and $1,231 million, respectively, and Adjusted EBITDA (income (loss) before income taxes plus net interest expense, depreciation and amortization and restructuring and other special charges) of $177 million and $135 million, respectively. Quest Diagnostics operates 24 hours a day, 365 days a year, utilizing a fully integrated collection and processing system. Quest Diagnostics generally performs and reports most routine procedures within 24 hours, employing a variety of sophisticated and computerized laboratory testing instruments. Quest Diagnostics provides daily pickup of specimens from most customers principally through an in-house courier system. The specimens are sent to one of the Company's laboratories where one or more tests are performed. Each patient specimen is accompanied by a test requisition form, which is completed by the customer, that indicates the tests to be performed and provides the necessary billing information. Each specimen and related requisition form is checked for completeness and then given a unique bar-coded identification number. Once the appropriate information is entered into the computer system, the tests are performed and the results are delivered to the doctor, primarily through computer interface or manually. Corning entered the clinical laboratory business in 1982 with the acquisition of MetPath Inc. ("MetPath"), which was founded in 1967 and was one of the first laboratories to expand beyond a regional market. Since January 1993, Quest Diagnostics has acquired over thirty laboratories, including Damon Corporation ("Damon"), Bioran Medical Laboratory ("Bioran") and Maryland Medical Laboratory, Inc. ("MML"). In 1994, Quest Diagnostics enhanced its presence in the esoteric testing market through the acquisition of Nichols, a preeminent clinical laboratory with a leading reputation for esoteric testing and test innovations. While Corning's ownership provided the Company with the capital to grow through acquisitions and to become one of the nation's largest independent clinical laboratory testing companies, the management of both Corning and Quest Diagnostics believe that Quest Diagnostics will be more competitive and operate more successfully in the future as an independent company, with a strong, focused and experienced management team to concentrate on customer needs. Independence will also enable Quest Diagnostics to motivate its employees by offering equity-based incentives tied directly to the performance of the Company and individual performance. Quest Diagnostics' management team has implemented a new business strategy, which focuses the business around three key strategic areas: clinical operations, customer focus and technological leadership and excellence. The Clinical Laboratory Testing Industry Clinical testing is a critical component in the delivery of quality health care service to patients. Currently, clinical laboratory testing is the first step in determining how a significant amount of all health care dollars are spent. Quest Diagnostics believes that in 1995 the entire United States clinical laboratory industry had revenues exceeding $30 billion. The clinical laboratory industry consists primarily of three types of providers: hospital-affiliated laboratories, independent clinical laboratories, such as Quest Diagnostics, and physician-office laboratories. The Company believes that in 1995 approximately 56% of the clinical testing revenues in the United States were attributable to hospital-affiliated laboratories, approximately 36% were attributable to independent clinical laboratories and approximately 8% were attributable to physicians in their offices and laboratories. Quest Diagnostics believes that consolidation will continue in the clinical laboratory testing business. In addition, Quest Diagnostics believes that it and the other large independent clinical laboratory testing companies may have the opportunity to increase their share of the overall clinical laboratories testing market due to a number of external factors, including cost efficiencies afforded by large-scale automated testing, Medicare reimbursement reductions and the growth of managed health care entities which require low-cost testing services and large service networks. In addition, legal restrictions on physician referrals and the ownership of laboratories as well as increased regulation of laboratories are expected to contribute to the continuing consolidation of the industry. Quest Diagnostics believes that a number of factors are likely to positively influence the volume of clinical laboratory testing performed in the United States in the future, including (1) the general aging of the population in the United States; (2) an expanded base of scientific knowledge which has led to the development of more sophisticated specialized tests and an increase in the awareness of physicians of the value of clinical laboratory testing as a cost-effective means of early detection of disease and monitoring of treatment; (3) an increase in the number and types of tests which are, due to advances in technology and increased cost efficiencies, readily available on a more affordable basis to physicians; (4) expanded substance-abuse testing by corporations and governmental agencies; and (5) increased testing for sexually transmitted diseases such as AIDS. The impact of these factors is expected to be offset in part by increased controls over the utilization of clinical laboratory tests by both Medicare and the private sector, particularly managed care organizations. Business Strategy Quest Diagnostics' overall goal is to be recognized by its customers, employees and competitors as the best provider of comprehensive and innovative clinical testing, information and services. To achieve this, Quest Diagnostics' management team has focused the business around three key strategic areas: clinical operations, customer focus and technological leadership and excellence. (bullet) Best Supplier. Quest Diagnostics seeks to be the best supplier of the highest quality and the lowest-cost testing services. Health care providers and patients expect accurate, timely and consistent laboratory test results at a fair price. (bullet) Lowest-cost provider. Quest Diagnostics' average cost per requisition varies significantly among its regional laboratories; there is an approximately $7.00 difference in cost per requisition between the most efficient regional laboratory and the average, and an approximately $13.00 difference in cost per requisition between the most and the least efficient regional laboratories. In many cases, these variations do not relate to testing volumes or mixes, space costs, service requirements or regional labor cost differences. To reduce costs, Quest Diagnostics has begun to replicate the best practices from each region throughout its national network. Management expects to achieve significant cost savings within the next three years as these programs are fully implemented. * (bullet) Highest Quality Provider. Quest Diagnostics is dedicated to providing accurate and timely test results and to being viewed by its customers as the highest quality provider of clinical testing services. Quest Diagnostics believes that implementation of best practices already developed in certain regions will permit the Company to be viewed by its customers as the highest quality provider of clinical testing services. (bullet) Preferred Provider. Quest Diagnostics seeks to be the preferred provider of laboratory testing services to existing and new health care networks on a selective basis determined by profitability of accounts. Quest Diagnostics believes that it will become the preferred provider to these networks as (1) large networks typically prefer to utilize large independent clinical laboratories that can service them on a national or regional basis and (2) the Company continues to pursue its primary strategy of becoming the highest quality, lowest-cost provider. To achieve this, Quest Diagnostics will employ a rigorous national and regional process to both select and pursue customers and allocate resources to support these efforts. *This is a forward looking statement and is based on current expectations. Actual results may vary materially from those projected. See "Business- Important Factors Regarding Forward Looking Statements." In particular, see factors (a), (d) and (j). (bullet) Account Profitability. Quest Diagnostics intends to refocus its sales efforts on pursuing and keeping profitable accounts. Quest Diagnostics is actively reviewing the profitability of its current accounts, including those with managed care organizations, and will either increase pricing or eliminate accounts that cannot be serviced profitably. (bullet) Regional Profitability. Quest Diagnostics presently believes that it has the leading market share among independent clinical laboratories in most routine testing markets of the northeast, mid-Atlantic and midwest regions. Approximately 65% of Quest Diagnostics' revenues and almost all of its EBITDA is generated from markets in which the Company believes that it has the leading market share. In most of these markets, Quest Diagnostics believes that it also is the lowest cost provider. Quest Diagnostics is evaluating its strategic alternatives relative to units whose profitability does not meet its internal goals. These alternatives may include joint ventures, alliances, or dispositions. Quest Diagnostics believes that, while the clinical laboratory industry is becoming national in scope, the Company can subcontract with other clinical laboratories to perform testing for national accounts in any markets in which the Company chooses not to compete. (bullet) Leading Innovator. Quest Diagnostics intends to remain a leading innovator in the clinical laboratory industry by continuing to introduce new tests, technology and services. Through its relationship with the academic community and pharmaceutical and biotechnology firms and a research and development budget exceeding $15 million per year, Quest Diagnostics believes it is one of the leaders in transferring innovation from academic biotechnology laboratories to the market. Recent Developments By a plea agreement and civil agreement and release dated October 9, 1996, between the Department of Justice ("DOJ") and Damon, all federal criminal matters within the scope of the various federal investigations against Damon, and all claims including the civil qui tam cases underlying the civil investigations were settled for an aggregate of $119 million, which sum was reimbursed to Quest Diagnostics by Corning. The Damon settlement does not exclude Quest Diagnostics from future participation in any federal health care programs on account of Damon's practices. Quest Diagnostics' aggregate reserve with respect to all governmental and private claims was $215 million at September 30, 1996 and is estimated to be reduced to $85 million as of the Distribution Date as a result of the payment of settled claims, primarily the Damon settlement of $119 million. Based on information available to management and Quest Diagnostics' experience with past settlements (including the fact that the aggregate amount of the Damon settlement was significantly in excess of established reserves) management has reassessed its reserve levels and believes that its current level of reserves is adequate. However, it is possible that additional information may become available which may cause the final resolution of these matters to be in excess of established reserves by an amount which could be material to Quest Diagnostics' results of operations and, for non-indemnified claims, Quest Diagnostics' cash flows in the period in which such claims are settled. While none of the governmental or nongovernmental investigations or claims is covered by insurance, Quest Diagnostics does not believe that these matters will have a material adverse effect on Quest Diagnostics' overall financial condition. Corning Indemnity In connection with the Distributions, Corning has agreed to indemnify Quest Diagnostics against all monetary penalties, fines or settlements arising out of any governmental claims arising out of alleged violations of applicable federal fraud and health care statutes and relating to billing practices of Quest Diagnostics and its predecessors that have been settled or are pending on the Distribution Date. Corning has also agreed to indemnify Quest Diagnostics for 50% of the aggregate of all judgment or settlement payments made by Quest Diagnostics that are in excess of $42.0 million in respect of claims by private parties (i.e., nongovernmental parties such as private insurers) that relate to indemnified or previously settled governmental claims and that allege overbillings by Quest Diagnostics or any existing subsidiaries of Quest Diagnostics, for services provided prior to the Distribution Date; provided, however, such indemnification for nongovernmental claims will not exceed $25.0 million in the aggregate and all amounts indemnified against by Corning for the benefit of Quest Diagnostics will be calculated on a net after-tax basis. Such indemnification will not cover (i) any governmental claims that arise after the Distribution Date pursuant to service of subpoena or other notice of such investigation after the Distribution Date, (ii) any nongovernmental claims unrelated to the indemnified governmental claims or investigations, (iii) any nongovernmental claims not settled prior to five years after the Distribution Date, (iv) any consequential or incidental damages relating to the billing claims, including losses of revenues and profits as a consequence of exclusion for participation in federal or state health care programs or (v) the fees and expenses of litigation. The Distributions On May 13, 1996, the board of directors of Corning approved a plan to distribute to Corning shareholders the clinical laboratory testing business being conducted by Quest Diagnostics and the contract research business being conducted by Quest Diagnostics' wholly owned subsidiary, Covance (together, the "Distributions"). The Distributions will be effected by distributing all of the outstanding shares of Quest Diagnostics common stock (the "Quest Diagnostics Common Stock") to holders of Corning common stock (the "Corning Common Stock"), followed immediately by the distribution of all of the common stock of Covance (the "Covance Common Stock") to those same holders, as holders of Quest Diagnostics Common Stock. It is expected that the Distributions will be made on December 31, 1996 (the date on which the Distributions are to be made, the "Distribution Date"). Prior to the consummation of the offering of the Notes contemplated hereby (the "Offering"), the Company entered into a $450 million senior, secured credit facility (the "Credit Facility"), among the Company, the lenders listed therein, NationsBank, N.A., as Issuing Bank, Wachovia Bank of Georgia, N.A., as Swingline Bank, and Morgan Guaranty Trust Company of New York, as Administrative Agent. The Credit Facility is comprised of a $300 million six-year amortizing term loan ("Tranche A Loan"), a $50 million seven-year term loan ("Tranche B Loan" and together with the Tranche A Loan, the "Term Loans") and a $100 million six-year revolving working capital facility (the "Working Capital Facility"). Corning currently has approximately $1.2 billion of Quest Diagnostics intercompany debt. Approximately $145 million of net proceeds from the Offering, together with the $350 million of borrowings under the Term Loans, will be paid to Corning in satisfaction of a portion of the outstanding intercompany debt. Corning will contribute the remaining intercompany debt to Quest Diagnostics' capital. Borrowings under the Working Capital Facility, substantially all of which is expected to be available as of the Distribution Date, will provide for future working capital needs and other general corporate purposes. The Offering <TABLE> <CAPTION> <S> <C> Securities Offered $150,000,000 aggregate principal amount of % Senior Subordinated Notes due December 15, 2006 (the "Notes"). Maturity Date December 15, 2006. Interest Payment Date June 15 and December 15, commencing June 15, 1997. Optional Redemption by the Company The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after December 15, 2001, at the redemption prices set forth herein, plus accrued and unpaid interest, if any, to but excluding the date fixed for redemption. In addition, if as a result of an event outside the control of Corning, Quest Diagnostics and Covance, the Distributions do not occur prior to March 31, 1997, the Notes will be subject to redemption, as a whole and not in part, at the option of Quest Diagnostics, prior to June 30, 1997, at a redemption price equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to but excluding the date fixed for redemption. See "Description of the Notes--Optional Redemption." Change of Control Offer Upon a Change of Control, the Company has the obligation to offer to purchase all the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to but excluding the date of purchase. See "Description of the Notes-- Repurchase at the Option of Holders--Change of Control" for a discussion of the circumstances in which the Company may not be required to make an offer to purchase upon a Change of Control. Offers to Purchase In the event of certain asset sales, the Company will be required to offer to repurchase the Notes at 100% of their principal amount, plus accrued and unpaid interest, if any, to but excluding the date of purchase with the net proceeds of such asset sales. Subordination The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company, including all indebtedness of the Company under the Credit Facility. The Notes will rank Pari Passu in right of payment with any other senior subordinated indebtedness of the Company. Subsidiary Guarantees The Notes will be guaranteed, jointly and severally, and fully and unconditionally, on a senior subordinated basis by the Guarantors (the "Senior Subordinated Guarantees"). The obligations of any Guarantor with respect to its Senior Subordinated Guarantee will be subordinated in right of payment, to the same extent as the obligations of the Company in respect of the Notes, to all existing and future Senior Guarantees, which will include the guarantees of the Credit Facility. The Senior Subordinated Guarantees would also be subordinated to all existing and future indebtedness of the Guarantors if the Senior Subordinated Guarantees were avoided or subordinated in favor of the Guarantors' other creditors. See "Risk Factors--Fraudulent Conveyance." The obligations of a Guarantor under its Senior Subordinated Guarantee will be released in certain circumstances, including if the Guarantor ceases to guarantee the Credit Facility. See "Description of the Notes--Senior Subordinated Guarantees." Principal Covenants The indenture under which the Notes are issued (the "Indenture") will impose certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt and senior in right of payment to the Notes, enter into leases, incur liens, merge or consolidate with any other person, or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. Use of Proceeds The Company intends to use the proceeds from the sale of the Notes, together with the proceeds of borrowings under the Credit Facility, to repay certain intercompany indebtedness owed to Corning. See "Use of Proceeds." The Distributions The Notes are being offered in connection with the Distributions of the Quest Diagnostics Common Stock and the Covance Common Stock to holders of Corning Common Stock. The closing of the offering of the Notes is anticipated to occur prior to the Distributions. Listing The Notes have been approved for listing on the New York Stock Exchange, subject to official notice of issuance. Risk Factors See "Risk Factors" for a discussion of certain factors that should be considered in connection with an investment in the Notes. </TABLE> Summary Financial Data The following table summarizes certain historical and pro forma financial data of Quest Diagnostics at the dates and for each of the periods indicated. The selected financial data as of and for each of the years ended December 31, 1995, 1994 and 1993 have been derived from the audited combined financial statements of (the "Audited Financial Statements") and the notes thereto included elsewhere herein. The selected financial data as of and for the three and nine months ended September 30, 1996 and 1995 have been derived from the unaudited interim combined financial statements of Quest Diagnostics (the "Interim Financial Statements" and, together with the Audited Financial Statements, the "Financial Statements") and the notes thereto included elsewhere herein. In the opinion of Quest Diagnostics management, the unaudited interim combined financial statements include all adjustments, consisting of only normal recurring adjustments, that are necessary for a fair presentation of the financial position and results of operations for these periods. The unaudited interim results of operations for the three and nine months ended September 30, 1996 are not necessarily indicative of the results for the entire year ending December 31, 1996. The selected pro forma financial data have been derived from the unaudited pro forma combined financial information of Quest Diagnostics for the year ended December 31, 1995 and for the three and nine months ended September 30, 1996 (the "Pro Forma Financial Information") and the notes thereto included elsewhere herein. The pro forma statement of operations data gives effect to the Distributions and the Accounting Policy Change (as defined below) as if they had occurred on January 1, 1995 and the pro forma balance sheet data gives effect to the Distributions and the Accounting Policy Change as if they had occurred on September 30, 1996. The pro forma financial data does not purport to represent what Quest Diagnostics' results of operations would have been if the Distributions and the Accounting Policy Change had in fact occurred on such dates, nor does it purport to indicate the future financial position or results of future operations of Quest Diagnostics. The pro forma adjustments are based upon currently available information and certain assumptions that Quest Diagnostics management believes to be reasonable. The summary historical and pro forma financial data set forth below should be read in conjunction with "Selected Historical Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Financial Statements and the notes thereto and the Pro Forma Financial Information and the notes thereto. <TABLE> <CAPTION> Three Months Ended September 30, Nine Months Ended September 30, ------------------------------------------------------------------------------------------------ Pro Forma Historical Pro Forma Historical ------------------------------- ------------------------------- 1996(a) 1996 1995 1996(a) 1996 1995 --------------- --------------- --------------- ---------------- ---------------- -------------- (in thousands, except share, per share and percentage data) <S> <C> <C> <C> <C> <C> <C> Statement of Operations Data: Net revenues $ 405,352 $ 405,352 $ 399,959 $ 1,231,290 $1,231,290 $1,239,474 Costs and expenses: Cost of services 255,390 255,390 240,868 768,809 768,809 735,984 Selling, general and administrative 125,190 125,190 181,346(c) 371,439 371,439 399,635(c) Provision for restructuring and other special charges(d) 155,730 155,730 201,730 201,730 45,885 Interest expense, net 12,189 19,866 20,927 36,938 59,887 61,529 Amortization of intangible assets 7,672 10,328 11,293 23,803 31,772 33,678 Other, net 1,837 1,837 1,930 (198) (198) 4,429 --------------- --------------- --------------- ---------------- ---------------- -------------- Total 558,008 568,341 456,364 1,402,521 1,433,439 1,281,140 --------------- --------------- --------------- ---------------- ---------------- -------------- Income (loss) before taxes (152,656) (162,989) (56,405) (171,231) (202,149) (41,666) Income tax expense (benefit) (40,521) (43,553) (17,810) (34,215) (43,280) (3,642) --------------- --------------- --------------- ---------------- ---------------- -------------- Income (loss) before cumulative effect of change in accounting principle (112,135) (119,436) (38,595) (137,016) (158,869) (38,024) Cumulative effect of change in accounting principle --------------- --------------- --------------- ---------------- ---------------- -------------- Net income (loss) $ (112,135) $ (119,436) $ (38,595) $ (137,016) $ (158,869) $ (38,024) =============== =============== =============== ================ ================ ============== Pro forma shares outstanding(e) 28,901,735 28,901,735 Pro forma net loss per share $ (3.88) $ (4.74) Balance Sheet Data (at end of period): Cash $ 40,000 $ 48,319 $ 46,908 $ 40,000 $ 48,319 $ 46,908 Working capital 306,741 114,718 129,319 306,741 114,718 129,319 Total assets 1,612,459 1,886,378 1,896,058 1,612,459 1,886,378 1,896,058 Long-term debt 515,494 1,219,900 1,114,367 515,494 1,219,900 1,114,367 Total debt 517,379 1,231,785 1,226,211 517,379 1,231,785 1,226,211 Stockholder's equity 604,099 132,670 320,576 604,099 132,670 320,576 Ratio of earnings to fixed charges -- (f) -- (f) -- (f) -- (f) -- (f) -- (f) Supplemental Data: Net cash provided by operating activities $ 25,236 $ 25,236 $ 38,202 $ 41,937 $ 41,937 $ 53,789 Net cash used in investing activities (7,904) (7,904) (17,044) (53,097) (53,097) (77,911) Net cash provided by (used in) financing activities (6,618) (6,618) (18,006) 23,033 23,033 32,311 Bad debt expense $ 30,539 $ 30,539 $ 85,831(c) $ 81,891 $ 81,891 $ 127,297(c) Bad debt expense as a % of net revenues 7.5% 7.5% 21.5% 6.7% 6.7% 10.3% Rent expense $ 12,515 $ 12,515 $ 11,860 $ 37,315 $ 37,315 $ 35,060 Capital expenditures 11,912 11,912 16,441 58,802 58,802 56,062 Depreciation expense $ 14,672 $ 14,672 $ 14,275 $ 43,460 $ 43,460 $ 42,358 EBITDA(g) $ (118,123)(h) $ (118,123)(h) $ (9,910)(c) $ (67,030)(h) $ (67,030)(h) $ 95,899(c) EBITDA as a % of net revenues (29.1%) (29.1%) (2.5%) (5.4%) (5.4%) 7.7% Adjusted EBITDA(i) $ 37,607 $ 37,607 $ (9,910)(c) $ 134,700 $ 134,700 $ 141,784(c) Adjusted EBITDA as a % of net revenues 9.3% 9.3% (2.5%) 10.9% 10.9% 11.4% Supplemental Ratio Data: Adjusted EBITDA/interest expense, net 3.1x 3.6x (Adjusted EBITDA-capital expenditures)/interest expense, net 2.1x 2.1x (Total debt--cash)/annualized adjusted EBITDA 3.2x 2.7x </TABLE> (Footnotes on page 14) <TABLE> <CAPTION> Year Ended December 31, ----------------------------------------------------------- Pro Forma Historical ------------------------------------------- 1995(a) 1995 1994(b) 1993 --------------- --------------- ------------- ------------- (in thousands, except share, per share and percentage data) <S> <C> <C> <C> <C> Statement of Operations Data: Net revenues $ 1,629,388 $1,629,388 $1,633,699 $1,416,338 Costs and expenses: Cost of services 980,232 980,232 969,844 805,729 Selling, general and administrative 523,271(c) 523,271(c) 411,939 363,579 Provision for restructuring and other special charges(d) 50,560 50,560 79,814 99,600 Interest expense, net 50,748 82,016 63,295 41,898 Amortization of intangible assets 34,031 44,656 42,588 28,421 Other, net 6,221 6,221 3,464 6,423 --------------- --------------- ------------- ------------- Total 1,645,063 1,686,956 1,570,944 1,345,650 --------------- --------------- ------------- ------------- Income (loss) before taxes (15,675) (57,568) 62,755 70,688 Income tax expense (benefit) 6,835 (5,516) 34,410 25,929 --------------- --------------- ------------- ------------- Income (loss) before cumulative effect of change in accounting principle (22,510) (52,052) 28,345 44,759 Cumulative effect of change in accounting principle (10,562) --------------- --------------- ------------- ------------- Net income (loss) $ (22,510) $ (52,052) $ 28,345 $ 34,197 =============== =============== ============= ============= Pro forma shares outstanding(e) 28,901,735 Pro forma net loss per share $ (0.78) Balance Sheet Data (at end of period): Cash $ 36,446 $ 38,719 $ 39,410 Working capital 200,740 214,358 139,771 Total assets 1,853,385 1,882,663 1,861,162 Long-term debt 1,195,566 1,153,054 1,025,787 Total debt 1,207,714 1,165,626 1,123,307 Stockholder's equity 295,801 386,812 395,509 Ratio of earnings to fixed charges -- (f) -- (f) 1.77(f) 2.20(f) Supplemental Data: Net cash provided by operating activities $ 85,828 $ 85,828 $ 37,963 $ 99,614 Net cash used in investing activities (93,087) (93,087) (46,186) (473,687) Net cash provided by (used in) financing activities 4,986 4,986 7,532 392,956 Bad debt expense $ 152,590(c) $ 152,590(c) $ 59,480 $ 47,240 Bad debt expense as a % of net revenues 9.4% 9.4% 3.6% 3.3% Rent expense $ 46,900 $ 46,900 $ 49,400 $ 46,900 Capital expenditures 74,045 74,045 93,354 65,317 Depreciation expense $ 56,857 $ 56,857 $ 46,929 $ 38,058 EBITDA(g) $ 125,961(c) $ 125,961(c) $ 215,567 $ 179,065 EBITDA as a % of net revenues 7.7% 7.7% 13.2% 12.6% Adjusted EBITDA(i) $ 176,521(c) $ 176,521(c) $ 295,381 $ 278,665 Adjusted EBITDA as a % of net revenues 10.8% 10.8% 18.1% 19.7% Supplemental Ratio Data: Adjusted EBITDA/interest expense, net 3.5x (Adjusted EBITDA-capital expenditures)/ interest expense, net 2.0x </TABLE> (Footnotes on page 14) (Footnotes for preceding pages) (a) Adjusted to reflect the pro forma effects of the Distributions and the Accounting Policy Change. See "Selected Historical Financial Data" and "Pro Forma Financial Information."
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+Prospectus Summary This Summary is qualified by the more detailed information (including the financial statements and related notes) set forth elsewhere in this Prospectus which should be read in its entirety. Unless the context indicates, or it is specifically indicated otherwise, all references to (i) "Corning" include Corning Incorporated, a New York corporation, and its consolidated subsidiaries, (ii) "Quest Diagnostics" or the "Company" include Corning Clinical Laboratories Inc. (to be renamed Quest Diagnostics Incorporated prior to the Distributions), a Delaware corporation, and its direct and indirect subsidiaries (other than Covance) and assume that the Distributions have occurred, and (iii) "Covance" include Covance Inc. (formerly Corning Pharmaceutical Services Inc.), a Delaware corporation, and its direct and indirect subsidiaries and assume that the Distributions have occurred. Capitalized terms used but not defined in this Summary are defined elsewhere in this Prospectus. The Company Quest Diagnostics is one of the largest independent clinical laboratory testing companies in the United States. Quest Diagnostics offers a broad range of routine and specialty ("esoteric") testing services used by the medical profession in the diagnosis, monitoring and treatment of disease and other medical conditions. Quest Diagnostics' network, which processes approximately 60 million requisitions for diagnostic tests annually, consists of 17 regional laboratories across the United States and the Corning Nichols Institute ("Nichols") esoteric testing laboratory in San Juan Capistrano, California. In addition, Quest Diagnostics has 14 branch laboratories in the United States as well as one branch laboratory in Mexico City (branch laboratories are smaller than regional laboratories), approximately 200 "STAT" laboratories and approximately 850 patient service centers located throughout the United States. For the year ended December 31, 1995 and the nine months ended September 30, 1996, Quest Diagnostics had net revenues of $1,629 million and $1,231 million, respectively, and Adjusted EBITDA (income (loss) before income taxes plus net interest expense, depreciation and amortization and restructuring and other special charges) of $177 million and $135 million, respectively. Quest Diagnostics operates 24 hours a day, 365 days a year, utilizing a fully integrated collection and processing system. Quest Diagnostics generally performs and reports most routine procedures within 24 hours, employing a variety of sophisticated and computerized laboratory testing instruments. Quest Diagnostics provides daily pickup of specimens from most customers principally through an in-house courier system. The specimens are sent to one of the Company's laboratories where one or more tests are performed. Each patient specimen is accompanied by a test requisition form, which is completed by the customer, that indicates the tests to be performed and provides the necessary billing information. Each specimen and related requisition form is checked for completeness and then given a unique bar-coded identification number. Once the appropriate information is entered into the computer system, the tests are performed and the results are delivered to the doctor, primarily through computer interface or manually. Corning entered the clinical laboratory business in 1982 with the acquisition of MetPath Inc. ("MetPath"), which was founded in 1967 and was one of the first laboratories to expand beyond a regional market. Since January 1993, Quest Diagnostics has acquired over thirty laboratories, including Damon Corporation ("Damon"), Bioran Medical Laboratory ("Bioran") and Maryland Medical Laboratory, Inc. ("MML"). In 1994, Quest Diagnostics enhanced its presence in the esoteric testing market through the acquisition of Nichols, a preeminent clinical laboratory with a leading reputation for esoteric testing and test innovations. While Corning's ownership provided the Company with the capital to grow through acquisitions and to become one of the nation's largest independent clinical laboratory testing companies, the management of both Corning and Quest Diagnostics believe that Quest Diagnostics will be more competitive and operate more successfully in the future as an independent company, with a strong, focused and experienced management team to concentrate on customer needs. Independence will also enable Quest Diagnostics to motivate its employees by offering equity-based incentives tied directly to the performance of the Company and individual performance. Quest Diagnostics' management team has implemented a new business strategy, which focuses the business around three key strategic areas: clinical operations, customer focus and technological leadership and excellence. The Clinical Laboratory Testing Industry Clinical testing is a critical component in the delivery of quality health care service to patients. Currently, clinical laboratory testing is the first step in determining how a significant amount of all health care dollars are spent. Quest Diagnostics believes that in 1995 the entire United States clinical laboratory industry had revenues exceeding $30 billion. The clinical laboratory industry consists primarily of three types of providers: hospital-affiliated laboratories, independent clinical laboratories, such as Quest Diagnostics, and physician-office laboratories. The Company believes that in 1995 approximately 56% of the clinical testing revenues in the United States were attributable to hospital-affiliated laboratories, approximately 36% were attributable to independent clinical laboratories and approximately 8% were attributable to physicians in their offices and laboratories. Quest Diagnostics believes that consolidation will continue in the clinical laboratory testing business. In addition, Quest Diagnostics believes that it and the other large independent clinical laboratory testing companies may have the opportunity to increase their share of the overall clinical laboratories testing market due to a number of external factors, including cost efficiencies afforded by large-scale automated testing, Medicare reimbursement reductions and the growth of managed health care entities which require low-cost testing services and large service networks. In addition, legal restrictions on physician referrals and the ownership of laboratories as well as increased regulation of laboratories are expected to contribute to the continuing consolidation of the industry. Quest Diagnostics believes that a number of factors are likely to positively influence the volume of clinical laboratory testing performed in the United States in the future, including (1) the general aging of the population in the United States; (2) an expanded base of scientific knowledge which has led to the development of more sophisticated specialized tests and an increase in the awareness of physicians of the value of clinical laboratory testing as a cost-effective means of early detection of disease and monitoring of treatment; (3) an increase in the number and types of tests which are, due to advances in technology and increased cost efficiencies, readily available on a more affordable basis to physicians; (4) expanded substance-abuse testing by corporations and governmental agencies; and (5) increased testing for sexually transmitted diseases such as AIDS. The impact of these factors is expected to be offset in part by increased controls over the utilization of clinical laboratory tests by both Medicare and the private sector, particularly managed care organizations. Business Strategy Quest Diagnostics' overall goal is to be recognized by its customers, employees and competitors as the best provider of comprehensive and innovative clinical testing, information and services. To achieve this, Quest Diagnostics' management team has focused the business around three key strategic areas: clinical operations, customer focus and technological leadership and excellence. (bullet) Best Supplier. Quest Diagnostics seeks to be the best supplier of the highest quality and the lowest-cost testing services. Health care providers and patients expect accurate, timely and consistent laboratory test results at a fair price. (bullet) Lowest-cost provider. Quest Diagnostics' average cost per requisition varies significantly among its regional laboratories; there is an approximately $7.00 difference in cost per requisition between the most efficient regional laboratory and the average, and an approximately $13.00 difference in cost per requisition between the most and the least efficient regional laboratories. In many cases, these variations do not relate to testing volumes or mixes, space costs, service requirements or regional labor cost differences. To reduce costs, Quest Diagnostics has begun to replicate the best practices from each region throughout its national network. Management expects to achieve significant cost savings within the next three years as these programs are fully implemented. * (bullet) Highest Quality Provider. Quest Diagnostics is dedicated to providing accurate and timely test results and to being viewed by its customers as the highest quality provider of clinical testing services. Quest Diagnostics believes that implementation of best practices already developed in certain regions will permit the Company to be viewed by its customers as the highest quality provider of clinical testing services. (bullet) Preferred Provider. Quest Diagnostics seeks to be the preferred provider of laboratory testing services to existing and new health care networks on a selective basis determined by profitability of accounts. Quest Diagnostics believes that it will become the preferred provider to these networks as (1) large networks typically prefer to utilize large independent clinical laboratories that can service them on a national or regional basis and (2) the Company continues to pursue its primary strategy of becoming the highest quality, lowest-cost provider. To achieve this, Quest Diagnostics will employ a rigorous national and regional process to both select and pursue customers and allocate resources to support these efforts. *This is a forward looking statement and is based on current expectations. Actual results may vary materially from those projected. See "Business- Important Factors Regarding Forward Looking Statements." In particular, see factors (a), (d) and (j). (bullet) Account Profitability. Quest Diagnostics intends to refocus its sales efforts on pursuing and keeping profitable accounts. Quest Diagnostics is actively reviewing the profitability of its current accounts, including those with managed care organizations, and will either increase pricing or eliminate accounts that cannot be serviced profitably. (bullet) Regional Profitability. Quest Diagnostics presently believes that it has the leading market share among independent clinical laboratories in most routine testing markets of the northeast, mid-Atlantic and midwest regions. Approximately 65% of Quest Diagnostics' revenues and almost all of its EBITDA is generated from markets in which the Company believes that it has the leading market share. In most of these markets, Quest Diagnostics believes that it also is the lowest cost provider. Quest Diagnostics is evaluating its strategic alternatives relative to units whose profitability does not meet its internal goals. These alternatives may include joint ventures, alliances, or dispositions. Quest Diagnostics believes that, while the clinical laboratory industry is becoming national in scope, the Company can subcontract with other clinical laboratories to perform testing for national accounts in any markets in which the Company chooses not to compete. (bullet) Leading Innovator. Quest Diagnostics intends to remain a leading innovator in the clinical laboratory industry by continuing to introduce new tests, technology and services. Through its relationship with the academic community and pharmaceutical and biotechnology firms and a research and development budget exceeding $15 million per year, Quest Diagnostics believes it is one of the leaders in transferring innovation from academic biotechnology laboratories to the market. Recent Developments By a plea agreement and civil agreement and release dated October 9, 1996, between the Department of Justice ("DOJ") and Damon, all federal criminal matters within the scope of the various federal investigations against Damon, and all claims including the civil qui tam cases underlying the civil investigations were settled for an aggregate of $119 million, which sum was reimbursed to Quest Diagnostics by Corning. The Damon settlement does not exclude Quest Diagnostics from future participation in any federal health care programs on account of Damon's practices. Quest Diagnostics' aggregate reserve with respect to all governmental and private claims was $215 million at September 30, 1996 and is estimated to be reduced to $85 million as of the Distribution Date as a result of the payment of settled claims, primarily the Damon settlement of $119 million. Based on information available to management and Quest Diagnostics' experience with past settlements (including the fact that the aggregate amount of the Damon settlement was significantly in excess of established reserves) management has reassessed its reserve levels and believes that its current level of reserves is adequate. However, it is possible that additional information may become available which may cause the final resolution of these matters to be in excess of established reserves by an amount which could be material to Quest Diagnostics' results of operations and, for non-indemnified claims, Quest Diagnostics' cash flows in the period in which such claims are settled. While none of the governmental or nongovernmental investigations or claims is covered by insurance, Quest Diagnostics does not believe that these matters will have a material adverse effect on Quest Diagnostics' overall financial condition. Corning Indemnity In connection with the Distributions, Corning has agreed to indemnify Quest Diagnostics against all monetary penalties, fines or settlements arising out of any governmental claims arising out of alleged violations of applicable federal fraud and health care statutes and relating to billing practices of Quest Diagnostics and its predecessors that have been settled or are pending on the Distribution Date. Corning has also agreed to indemnify Quest Diagnostics for 50% of the aggregate of all judgment or settlement payments made by Quest Diagnostics that are in excess of $42.0 million in respect of claims by private parties (i.e., nongovernmental parties such as private insurers) that relate to indemnified or previously settled governmental claims and that allege overbillings by Quest Diagnostics or any existing subsidiaries of Quest Diagnostics, for services provided prior to the Distribution Date; provided, however, such indemnification for nongovernmental claims will not exceed $25.0 million in the aggregate and all amounts indemnified against by Corning for the benefit of Quest Diagnostics will be calculated on a net after-tax basis. Such indemnification will not cover (i) any governmental claims that arise after the Distribution Date pursuant to service of subpoena or other notice of such investigation after the Distribution Date, (ii) any nongovernmental claims unrelated to the indemnified governmental claims or investigations, (iii) any nongovernmental claims not settled prior to five years after the Distribution Date, (iv) any consequential or incidental damages relating to the billing claims, including losses of revenues and profits as a consequence of exclusion for participation in federal or state health care programs or (v) the fees and expenses of litigation. The Distributions On May 13, 1996, the board of directors of Corning approved a plan to distribute to Corning shareholders the clinical laboratory testing business being conducted by Quest Diagnostics and the contract research business being conducted by Quest Diagnostics' wholly owned subsidiary, Covance (together, the "Distributions"). The Distributions will be effected by distributing all of the outstanding shares of Quest Diagnostics common stock (the "Quest Diagnostics Common Stock") to holders of Corning common stock (the "Corning Common Stock"), followed immediately by the distribution of all of the common stock of Covance (the "Covance Common Stock") to those same holders, as holders of Quest Diagnostics Common Stock. It is expected that the Distributions will be made on December 31, 1996 (the date on which the Distributions are to be made, the "Distribution Date"). Prior to the consummation of the offering of the Notes contemplated hereby (the "Offering"), the Company entered into a $450 million senior, secured credit facility (the "Credit Facility"), among the Company, the lenders listed therein, NationsBank, N.A., as Issuing Bank, Wachovia Bank of Georgia, N.A., as Swingline Bank, and Morgan Guaranty Trust Company of New York, as Administrative Agent. The Credit Facility is comprised of a $300 million six-year amortizing term loan ("Tranche A Loan"), a $50 million seven-year term loan ("Tranche B Loan" and together with the Tranche A Loan, the "Term Loans") and a $100 million six-year revolving working capital facility (the "Working Capital Facility"). Corning currently has approximately $1.2 billion of Quest Diagnostics intercompany debt. Approximately $145 million of net proceeds from the Offering, together with the $350 million of borrowings under the Term Loans, will be paid to Corning in satisfaction of a portion of the outstanding intercompany debt. Corning will contribute the remaining intercompany debt to Quest Diagnostics' capital. Borrowings under the Working Capital Facility, substantially all of which is expected to be available as of the Distribution Date, will provide for future working capital needs and other general corporate purposes. The Offering <TABLE> <CAPTION> <S> <C> Securities Offered $150,000,000 aggregate principal amount of % Senior Subordinated Notes due December 15, 2006 (the "Notes"). Maturity Date December 15, 2006. Interest Payment Date June 15 and December 15, commencing June 15, 1997. Optional Redemption by the Company The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after December 15, 2001, at the redemption prices set forth herein, plus accrued and unpaid interest, if any, to but excluding the date fixed for redemption. In addition, if as a result of an event outside the control of Corning, Quest Diagnostics and Covance, the Distributions do not occur prior to March 31, 1997, the Notes will be subject to redemption, as a whole and not in part, at the option of Quest Diagnostics, prior to June 30, 1997, at a redemption price equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to but excluding the date fixed for redemption. See "Description of the Notes--Optional Redemption." Change of Control Offer Upon a Change of Control, the Company has the obligation to offer to purchase all the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to but excluding the date of purchase. See "Description of the Notes-- Repurchase at the Option of Holders--Change of Control" for a discussion of the circumstances in which the Company may not be required to make an offer to purchase upon a Change of Control. Offers to Purchase In the event of certain asset sales, the Company will be required to offer to repurchase the Notes at 100% of their principal amount, plus accrued and unpaid interest, if any, to but excluding the date of purchase with the net proceeds of such asset sales. Subordination The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company, including all indebtedness of the Company under the Credit Facility. The Notes will rank Pari Passu in right of payment with any other senior subordinated indebtedness of the Company. Subsidiary Guarantees The Notes will be guaranteed, jointly and severally, and fully and unconditionally, on a senior subordinated basis by the Guarantors (the "Senior Subordinated Guarantees"). The obligations of any Guarantor with respect to its Senior Subordinated Guarantee will be subordinated in right of payment, to the same extent as the obligations of the Company in respect of the Notes, to all existing and future Senior Guarantees, which will include the guarantees of the Credit Facility. The Senior Subordinated Guarantees would also be subordinated to all existing and future indebtedness of the Guarantors if the Senior Subordinated Guarantees were avoided or subordinated in favor of the Guarantors' other creditors. See "Risk Factors--Fraudulent Conveyance." The obligations of a Guarantor under its Senior Subordinated Guarantee will be released in certain circumstances, including if the Guarantor ceases to guarantee the Credit Facility. See "Description of the Notes--Senior Subordinated Guarantees." Principal Covenants The indenture under which the Notes are issued (the "Indenture") will impose certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt and senior in right of payment to the Notes, enter into leases, incur liens, merge or consolidate with any other person, or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. Use of Proceeds The Company intends to use the proceeds from the sale of the Notes, together with the proceeds of borrowings under the Credit Facility, to repay certain intercompany indebtedness owed to Corning. See "Use of Proceeds." The Distributions The Notes are being offered in connection with the Distributions of the Quest Diagnostics Common Stock and the Covance Common Stock to holders of Corning Common Stock. The closing of the offering of the Notes is anticipated to occur prior to the Distributions. Listing The Notes have been approved for listing on the New York Stock Exchange, subject to official notice of issuance. Risk Factors See "Risk Factors" for a discussion of certain factors that should be considered in connection with an investment in the Notes. </TABLE> Summary Financial Data The following table summarizes certain historical and pro forma financial data of Quest Diagnostics at the dates and for each of the periods indicated. The selected financial data as of and for each of the years ended December 31, 1995, 1994 and 1993 have been derived from the audited combined financial statements of (the "Audited Financial Statements") and the notes thereto included elsewhere herein. The selected financial data as of and for the three and nine months ended September 30, 1996 and 1995 have been derived from the unaudited interim combined financial statements of Quest Diagnostics (the "Interim Financial Statements" and, together with the Audited Financial Statements, the "Financial Statements") and the notes thereto included elsewhere herein. In the opinion of Quest Diagnostics management, the unaudited interim combined financial statements include all adjustments, consisting of only normal recurring adjustments, that are necessary for a fair presentation of the financial position and results of operations for these periods. The unaudited interim results of operations for the three and nine months ended September 30, 1996 are not necessarily indicative of the results for the entire year ending December 31, 1996. The selected pro forma financial data have been derived from the unaudited pro forma combined financial information of Quest Diagnostics for the year ended December 31, 1995 and for the three and nine months ended September 30, 1996 (the "Pro Forma Financial Information") and the notes thereto included elsewhere herein. The pro forma statement of operations data gives effect to the Distributions and the Accounting Policy Change (as defined below) as if they had occurred on January 1, 1995 and the pro forma balance sheet data gives effect to the Distributions and the Accounting Policy Change as if they had occurred on September 30, 1996. The pro forma financial data does not purport to represent what Quest Diagnostics' results of operations would have been if the Distributions and the Accounting Policy Change had in fact occurred on such dates, nor does it purport to indicate the future financial position or results of future operations of Quest Diagnostics. The pro forma adjustments are based upon currently available information and certain assumptions that Quest Diagnostics management believes to be reasonable. The summary historical and pro forma financial data set forth below should be read in conjunction with "Selected Historical Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Financial Statements and the notes thereto and the Pro Forma Financial Information and the notes thereto. <TABLE> <CAPTION> Three Months Ended September 30, Nine Months Ended September 30, ------------------------------------------------------------------------------------------------ Pro Forma Historical Pro Forma Historical ------------------------------- ------------------------------- 1996(a) 1996 1995 1996(a) 1996 1995 --------------- --------------- --------------- ---------------- ---------------- -------------- (in thousands, except share, per share and percentage data) <S> <C> <C> <C> <C> <C> <C> Statement of Operations Data: Net revenues $ 405,352 $ 405,352 $ 399,959 $ 1,231,290 $1,231,290 $1,239,474 Costs and expenses: Cost of services 255,390 255,390 240,868 768,809 768,809 735,984 Selling, general and administrative 125,190 125,190 181,346(c) 371,439 371,439 399,635(c) Provision for restructuring and other special charges(d) 155,730 155,730 201,730 201,730 45,885 Interest expense, net 12,189 19,866 20,927 36,938 59,887 61,529 Amortization of intangible assets 7,672 10,328 11,293 23,803 31,772 33,678 Other, net 1,837 1,837 1,930 (198) (198) 4,429 --------------- --------------- --------------- ---------------- ---------------- -------------- Total 558,008 568,341 456,364 1,402,521 1,433,439 1,281,140 --------------- --------------- --------------- ---------------- ---------------- -------------- Income (loss) before taxes (152,656) (162,989) (56,405) (171,231) (202,149) (41,666) Income tax expense (benefit) (40,521) (43,553) (17,810) (34,215) (43,280) (3,642) --------------- --------------- --------------- ---------------- ---------------- -------------- Income (loss) before cumulative effect of change in accounting principle (112,135) (119,436) (38,595) (137,016) (158,869) (38,024) Cumulative effect of change in accounting principle --------------- --------------- --------------- ---------------- ---------------- -------------- Net income (loss) $ (112,135) $ (119,436) $ (38,595) $ (137,016) $ (158,869) $ (38,024) =============== =============== =============== ================ ================ ============== Pro forma shares outstanding(e) 28,901,735 28,901,735 Pro forma net loss per share $ (3.88) $ (4.74) Balance Sheet Data (at end of period): Cash $ 40,000 $ 48,319 $ 46,908 $ 40,000 $ 48,319 $ 46,908 Working capital 306,741 114,718 129,319 306,741 114,718 129,319 Total assets 1,612,459 1,886,378 1,896,058 1,612,459 1,886,378 1,896,058 Long-term debt 515,494 1,219,900 1,114,367 515,494 1,219,900 1,114,367 Total debt 517,379 1,231,785 1,226,211 517,379 1,231,785 1,226,211 Stockholder's equity 604,099 132,670 320,576 604,099 132,670 320,576 Ratio of earnings to fixed charges -- (f) -- (f) -- (f) -- (f) -- (f) -- (f) Supplemental Data: Net cash provided by operating activities $ 25,236 $ 25,236 $ 38,202 $ 41,937 $ 41,937 $ 53,789 Net cash used in investing activities (7,904) (7,904) (17,044) (53,097) (53,097) (77,911) Net cash provided by (used in) financing activities (6,618) (6,618) (18,006) 23,033 23,033 32,311 Bad debt expense $ 30,539 $ 30,539 $ 85,831(c) $ 81,891 $ 81,891 $ 127,297(c) Bad debt expense as a % of net revenues 7.5% 7.5% 21.5% 6.7% 6.7% 10.3% Rent expense $ 12,515 $ 12,515 $ 11,860 $ 37,315 $ 37,315 $ 35,060 Capital expenditures 11,912 11,912 16,441 58,802 58,802 56,062 Depreciation expense $ 14,672 $ 14,672 $ 14,275 $ 43,460 $ 43,460 $ 42,358 EBITDA(g) $ (118,123)(h) $ (118,123)(h) $ (9,910)(c) $ (67,030)(h) $ (67,030)(h) $ 95,899(c) EBITDA as a % of net revenues (29.1%) (29.1%) (2.5%) (5.4%) (5.4%) 7.7% Adjusted EBITDA(i) $ 37,607 $ 37,607 $ (9,910)(c) $ 134,700 $ 134,700 $ 141,784(c) Adjusted EBITDA as a % of net revenues 9.3% 9.3% (2.5%) 10.9% 10.9% 11.4% Supplemental Ratio Data: Adjusted EBITDA/interest expense, net 3.1x 3.6x (Adjusted EBITDA-capital expenditures)/interest expense, net 2.1x 2.1x (Total debt--cash)/annualized adjusted EBITDA 3.2x 2.7x </TABLE> (Footnotes on page 14) <TABLE> <CAPTION> Year Ended December 31, ----------------------------------------------------------- Pro Forma Historical ------------------------------------------- 1995(a) 1995 1994(b) 1993 --------------- --------------- ------------- ------------- (in thousands, except share, per share and percentage data) <S> <C> <C> <C> <C> Statement of Operations Data: Net revenues $ 1,629,388 $1,629,388 $1,633,699 $1,416,338 Costs and expenses: Cost of services 980,232 980,232 969,844 805,729 Selling, general and administrative 523,271(c) 523,271(c) 411,939 363,579 Provision for restructuring and other special charges(d) 50,560 50,560 79,814 99,600 Interest expense, net 50,748 82,016 63,295 41,898 Amortization of intangible assets 34,031 44,656 42,588 28,421 Other, net 6,221 6,221 3,464 6,423 --------------- --------------- ------------- ------------- Total 1,645,063 1,686,956 1,570,944 1,345,650 --------------- --------------- ------------- ------------- Income (loss) before taxes (15,675) (57,568) 62,755 70,688 Income tax expense (benefit) 6,835 (5,516) 34,410 25,929 --------------- --------------- ------------- ------------- Income (loss) before cumulative effect of change in accounting principle (22,510) (52,052) 28,345 44,759 Cumulative effect of change in accounting principle (10,562) --------------- --------------- ------------- ------------- Net income (loss) $ (22,510) $ (52,052) $ 28,345 $ 34,197 =============== =============== ============= ============= Pro forma shares outstanding(e) 28,901,735 Pro forma net loss per share $ (0.78) Balance Sheet Data (at end of period): Cash $ 36,446 $ 38,719 $ 39,410 Working capital 200,740 214,358 139,771 Total assets 1,853,385 1,882,663 1,861,162 Long-term debt 1,195,566 1,153,054 1,025,787 Total debt 1,207,714 1,165,626 1,123,307 Stockholder's equity 295,801 386,812 395,509 Ratio of earnings to fixed charges -- (f) -- (f) 1.77(f) 2.20(f) Supplemental Data: Net cash provided by operating activities $ 85,828 $ 85,828 $ 37,963 $ 99,614 Net cash used in investing activities (93,087) (93,087) (46,186) (473,687) Net cash provided by (used in) financing activities 4,986 4,986 7,532 392,956 Bad debt expense $ 152,590(c) $ 152,590(c) $ 59,480 $ 47,240 Bad debt expense as a % of net revenues 9.4% 9.4% 3.6% 3.3% Rent expense $ 46,900 $ 46,900 $ 49,400 $ 46,900 Capital expenditures 74,045 74,045 93,354 65,317 Depreciation expense $ 56,857 $ 56,857 $ 46,929 $ 38,058 EBITDA(g) $ 125,961(c) $ 125,961(c) $ 215,567 $ 179,065 EBITDA as a % of net revenues 7.7% 7.7% 13.2% 12.6% Adjusted EBITDA(i) $ 176,521(c) $ 176,521(c) $ 295,381 $ 278,665 Adjusted EBITDA as a % of net revenues 10.8% 10.8% 18.1% 19.7% Supplemental Ratio Data: Adjusted EBITDA/interest expense, net 3.5x (Adjusted EBITDA-capital expenditures)/ interest expense, net 2.0x </TABLE> (Footnotes on page 14) (Footnotes for preceding pages) (a) Adjusted to reflect the pro forma effects of the Distributions and the Accounting Policy Change. See "Selected Historical Financial Data" and "Pro Forma Financial Information."
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+Prospectus Summary This Summary is qualified by the more detailed information (including the financial statements and related notes) set forth elsewhere in this Prospectus which should be read in its entirety. Unless the context indicates, or it is specifically indicated otherwise, all references to (i) "Corning" include Corning Incorporated, a New York corporation, and its consolidated subsidiaries, (ii) "Quest Diagnostics" or the "Company" include Corning Clinical Laboratories Inc. (to be renamed Quest Diagnostics Incorporated prior to the Distributions), a Delaware corporation, and its direct and indirect subsidiaries (other than Covance) and assume that the Distributions have occurred, and (iii) "Covance" include Covance Inc. (formerly Corning Pharmaceutical Services Inc.), a Delaware corporation, and its direct and indirect subsidiaries and assume that the Distributions have occurred. Capitalized terms used but not defined in this Summary are defined elsewhere in this Prospectus. The Company Quest Diagnostics is one of the largest independent clinical laboratory testing companies in the United States. Quest Diagnostics offers a broad range of routine and specialty ("esoteric") testing services used by the medical profession in the diagnosis, monitoring and treatment of disease and other medical conditions. Quest Diagnostics' network, which processes approximately 60 million requisitions for diagnostic tests annually, consists of 17 regional laboratories across the United States and the Corning Nichols Institute ("Nichols") esoteric testing laboratory in San Juan Capistrano, California. In addition, Quest Diagnostics has 14 branch laboratories in the United States as well as one branch laboratory in Mexico City (branch laboratories are smaller than regional laboratories), approximately 200 "STAT" laboratories and approximately 850 patient service centers located throughout the United States. For the year ended December 31, 1995 and the nine months ended September 30, 1996, Quest Diagnostics had net revenues of $1,629 million and $1,231 million, respectively, and Adjusted EBITDA (income (loss) before income taxes plus net interest expense, depreciation and amortization and restructuring and other special charges) of $177 million and $135 million, respectively. Quest Diagnostics operates 24 hours a day, 365 days a year, utilizing a fully integrated collection and processing system. Quest Diagnostics generally performs and reports most routine procedures within 24 hours, employing a variety of sophisticated and computerized laboratory testing instruments. Quest Diagnostics provides daily pickup of specimens from most customers principally through an in-house courier system. The specimens are sent to one of the Company's laboratories where one or more tests are performed. Each patient specimen is accompanied by a test requisition form, which is completed by the customer, that indicates the tests to be performed and provides the necessary billing information. Each specimen and related requisition form is checked for completeness and then given a unique bar-coded identification number. Once the appropriate information is entered into the computer system, the tests are performed and the results are delivered to the doctor, primarily through computer interface or manually. Corning entered the clinical laboratory business in 1982 with the acquisition of MetPath Inc. ("MetPath"), which was founded in 1967 and was one of the first laboratories to expand beyond a regional market. Since January 1993, Quest Diagnostics has acquired over thirty laboratories, including Damon Corporation ("Damon"), Bioran Medical Laboratory ("Bioran") and Maryland Medical Laboratory, Inc. ("MML"). In 1994, Quest Diagnostics enhanced its presence in the esoteric testing market through the acquisition of Nichols, a preeminent clinical laboratory with a leading reputation for esoteric testing and test innovations. While Corning's ownership provided the Company with the capital to grow through acquisitions and to become one of the nation's largest independent clinical laboratory testing companies, the management of both Corning and Quest Diagnostics believe that Quest Diagnostics will be more competitive and operate more successfully in the future as an independent company, with a strong, focused and experienced management team to concentrate on customer needs. Independence will also enable Quest Diagnostics to motivate its employees by offering equity-based incentives tied directly to the performance of the Company and individual performance. Quest Diagnostics' management team has implemented a new business strategy, which focuses the business around three key strategic areas: clinical operations, customer focus and technological leadership and excellence. The Clinical Laboratory Testing Industry Clinical testing is a critical component in the delivery of quality health care service to patients. Currently, clinical laboratory testing is the first step in determining how a significant amount of all health care dollars are spent. Quest Diagnostics believes that in 1995 the entire United States clinical laboratory industry had revenues exceeding $30 billion. The clinical laboratory industry consists primarily of three types of providers: hospital-affiliated laboratories, independent clinical laboratories, such as Quest Diagnostics, and physician-office laboratories. The Company believes that in 1995 approximately 56% of the clinical testing revenues in the United States were attributable to hospital-affiliated laboratories, approximately 36% were attributable to independent clinical laboratories and approximately 8% were attributable to physicians in their offices and laboratories. Quest Diagnostics believes that consolidation will continue in the clinical laboratory testing business. In addition, Quest Diagnostics believes that it and the other large independent clinical laboratory testing companies may have the opportunity to increase their share of the overall clinical laboratories testing market due to a number of external factors, including cost efficiencies afforded by large-scale automated testing, Medicare reimbursement reductions and the growth of managed health care entities which require low-cost testing services and large service networks. In addition, legal restrictions on physician referrals and the ownership of laboratories as well as increased regulation of laboratories are expected to contribute to the continuing consolidation of the industry. Quest Diagnostics believes that a number of factors are likely to positively influence the volume of clinical laboratory testing performed in the United States in the future, including (1) the general aging of the population in the United States; (2) an expanded base of scientific knowledge which has led to the development of more sophisticated specialized tests and an increase in the awareness of physicians of the value of clinical laboratory testing as a cost-effective means of early detection of disease and monitoring of treatment; (3) an increase in the number and types of tests which are, due to advances in technology and increased cost efficiencies, readily available on a more affordable basis to physicians; (4) expanded substance-abuse testing by corporations and governmental agencies; and (5) increased testing for sexually transmitted diseases such as AIDS. The impact of these factors is expected to be offset in part by increased controls over the utilization of clinical laboratory tests by both Medicare and the private sector, particularly managed care organizations. Business Strategy Quest Diagnostics' overall goal is to be recognized by its customers, employees and competitors as the best provider of comprehensive and innovative clinical testing, information and services. To achieve this, Quest Diagnostics' management team has focused the business around three key strategic areas: clinical operations, customer focus and technological leadership and excellence. (bullet) Best Supplier. Quest Diagnostics seeks to be the best supplier of the highest quality and the lowest-cost testing services. Health care providers and patients expect accurate, timely and consistent laboratory test results at a fair price. (bullet) Lowest-cost provider. Quest Diagnostics' average cost per requisition varies significantly among its regional laboratories; there is an approximately $7.00 difference in cost per requisition between the most efficient regional laboratory and the average, and an approximately $13.00 difference in cost per requisition between the most and the least efficient regional laboratories. In many cases, these variations do not relate to testing volumes or mixes, space costs, service requirements or regional labor cost differences. To reduce costs, Quest Diagnostics has begun to replicate the best practices from each region throughout its national network. Management expects to achieve significant cost savings within the next three years as these programs are fully implemented. * (bullet) Highest Quality Provider. Quest Diagnostics is dedicated to providing accurate and timely test results and to being viewed by its customers as the highest quality provider of clinical testing services. Quest Diagnostics believes that implementation of best practices already developed in certain regions will permit the Company to be viewed by its customers as the highest quality provider of clinical testing services. (bullet) Preferred Provider. Quest Diagnostics seeks to be the preferred provider of laboratory testing services to existing and new health care networks on a selective basis determined by profitability of accounts. Quest Diagnostics believes that it will become the preferred provider to these networks as (1) large networks typically prefer to utilize large independent clinical laboratories that can service them on a national or regional basis and (2) the Company continues to pursue its primary strategy of becoming the highest quality, lowest-cost provider. To achieve this, Quest Diagnostics will employ a rigorous national and regional process to both select and pursue customers and allocate resources to support these efforts. *This is a forward looking statement and is based on current expectations. Actual results may vary materially from those projected. See "Business- Important Factors Regarding Forward Looking Statements." In particular, see factors (a), (d) and (j). (bullet) Account Profitability. Quest Diagnostics intends to refocus its sales efforts on pursuing and keeping profitable accounts. Quest Diagnostics is actively reviewing the profitability of its current accounts, including those with managed care organizations, and will either increase pricing or eliminate accounts that cannot be serviced profitably. (bullet) Regional Profitability. Quest Diagnostics presently believes that it has the leading market share among independent clinical laboratories in most routine testing markets of the northeast, mid-Atlantic and midwest regions. Approximately 65% of Quest Diagnostics' revenues and almost all of its EBITDA is generated from markets in which the Company believes that it has the leading market share. In most of these markets, Quest Diagnostics believes that it also is the lowest cost provider. Quest Diagnostics is evaluating its strategic alternatives relative to units whose profitability does not meet its internal goals. These alternatives may include joint ventures, alliances, or dispositions. Quest Diagnostics believes that, while the clinical laboratory industry is becoming national in scope, the Company can subcontract with other clinical laboratories to perform testing for national accounts in any markets in which the Company chooses not to compete. (bullet) Leading Innovator. Quest Diagnostics intends to remain a leading innovator in the clinical laboratory industry by continuing to introduce new tests, technology and services. Through its relationship with the academic community and pharmaceutical and biotechnology firms and a research and development budget exceeding $15 million per year, Quest Diagnostics believes it is one of the leaders in transferring innovation from academic biotechnology laboratories to the market. Recent Developments By a plea agreement and civil agreement and release dated October 9, 1996, between the Department of Justice ("DOJ") and Damon, all federal criminal matters within the scope of the various federal investigations against Damon, and all claims including the civil qui tam cases underlying the civil investigations were settled for an aggregate of $119 million, which sum was reimbursed to Quest Diagnostics by Corning. The Damon settlement does not exclude Quest Diagnostics from future participation in any federal health care programs on account of Damon's practices. Quest Diagnostics' aggregate reserve with respect to all governmental and private claims was $215 million at September 30, 1996 and is estimated to be reduced to $85 million as of the Distribution Date as a result of the payment of settled claims, primarily the Damon settlement of $119 million. Based on information available to management and Quest Diagnostics' experience with past settlements (including the fact that the aggregate amount of the Damon settlement was significantly in excess of established reserves) management has reassessed its reserve levels and believes that its current level of reserves is adequate. However, it is possible that additional information may become available which may cause the final resolution of these matters to be in excess of established reserves by an amount which could be material to Quest Diagnostics' results of operations and, for non-indemnified claims, Quest Diagnostics' cash flows in the period in which such claims are settled. While none of the governmental or nongovernmental investigations or claims is covered by insurance, Quest Diagnostics does not believe that these matters will have a material adverse effect on Quest Diagnostics' overall financial condition. Corning Indemnity In connection with the Distributions, Corning has agreed to indemnify Quest Diagnostics against all monetary penalties, fines or settlements arising out of any governmental claims arising out of alleged violations of applicable federal fraud and health care statutes and relating to billing practices of Quest Diagnostics and its predecessors that have been settled or are pending on the Distribution Date. Corning has also agreed to indemnify Quest Diagnostics for 50% of the aggregate of all judgment or settlement payments made by Quest Diagnostics that are in excess of $42.0 million in respect of claims by private parties (i.e., nongovernmental parties such as private insurers) that relate to indemnified or previously settled governmental claims and that allege overbillings by Quest Diagnostics or any existing subsidiaries of Quest Diagnostics, for services provided prior to the Distribution Date; provided, however, such indemnification for nongovernmental claims will not exceed $25.0 million in the aggregate and all amounts indemnified against by Corning for the benefit of Quest Diagnostics will be calculated on a net after-tax basis. Such indemnification will not cover (i) any governmental claims that arise after the Distribution Date pursuant to service of subpoena or other notice of such investigation after the Distribution Date, (ii) any nongovernmental claims unrelated to the indemnified governmental claims or investigations, (iii) any nongovernmental claims not settled prior to five years after the Distribution Date, (iv) any consequential or incidental damages relating to the billing claims, including losses of revenues and profits as a consequence of exclusion for participation in federal or state health care programs or (v) the fees and expenses of litigation. The Distributions On May 13, 1996, the board of directors of Corning approved a plan to distribute to Corning shareholders the clinical laboratory testing business being conducted by Quest Diagnostics and the contract research business being conducted by Quest Diagnostics' wholly owned subsidiary, Covance (together, the "Distributions"). The Distributions will be effected by distributing all of the outstanding shares of Quest Diagnostics common stock (the "Quest Diagnostics Common Stock") to holders of Corning common stock (the "Corning Common Stock"), followed immediately by the distribution of all of the common stock of Covance (the "Covance Common Stock") to those same holders, as holders of Quest Diagnostics Common Stock. It is expected that the Distributions will be made on December 31, 1996 (the date on which the Distributions are to be made, the "Distribution Date"). Prior to the consummation of the offering of the Notes contemplated hereby (the "Offering"), the Company entered into a $450 million senior, secured credit facility (the "Credit Facility"), among the Company, the lenders listed therein, NationsBank, N.A., as Issuing Bank, Wachovia Bank of Georgia, N.A., as Swingline Bank, and Morgan Guaranty Trust Company of New York, as Administrative Agent. The Credit Facility is comprised of a $300 million six-year amortizing term loan ("Tranche A Loan"), a $50 million seven-year term loan ("Tranche B Loan" and together with the Tranche A Loan, the "Term Loans") and a $100 million six-year revolving working capital facility (the "Working Capital Facility"). Corning currently has approximately $1.2 billion of Quest Diagnostics intercompany debt. Approximately $145 million of net proceeds from the Offering, together with the $350 million of borrowings under the Term Loans, will be paid to Corning in satisfaction of a portion of the outstanding intercompany debt. Corning will contribute the remaining intercompany debt to Quest Diagnostics' capital. Borrowings under the Working Capital Facility, substantially all of which is expected to be available as of the Distribution Date, will provide for future working capital needs and other general corporate purposes. The Offering <TABLE> <CAPTION> <S> <C> Securities Offered $150,000,000 aggregate principal amount of % Senior Subordinated Notes due December 15, 2006 (the "Notes"). Maturity Date December 15, 2006. Interest Payment Date June 15 and December 15, commencing June 15, 1997. Optional Redemption by the Company The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after December 15, 2001, at the redemption prices set forth herein, plus accrued and unpaid interest, if any, to but excluding the date fixed for redemption. In addition, if as a result of an event outside the control of Corning, Quest Diagnostics and Covance, the Distributions do not occur prior to March 31, 1997, the Notes will be subject to redemption, as a whole and not in part, at the option of Quest Diagnostics, prior to June 30, 1997, at a redemption price equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to but excluding the date fixed for redemption. See "Description of the Notes--Optional Redemption." Change of Control Offer Upon a Change of Control, the Company has the obligation to offer to purchase all the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to but excluding the date of purchase. See "Description of the Notes-- Repurchase at the Option of Holders--Change of Control" for a discussion of the circumstances in which the Company may not be required to make an offer to purchase upon a Change of Control. Offers to Purchase In the event of certain asset sales, the Company will be required to offer to repurchase the Notes at 100% of their principal amount, plus accrued and unpaid interest, if any, to but excluding the date of purchase with the net proceeds of such asset sales. Subordination The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company, including all indebtedness of the Company under the Credit Facility. The Notes will rank Pari Passu in right of payment with any other senior subordinated indebtedness of the Company. Subsidiary Guarantees The Notes will be guaranteed, jointly and severally, and fully and unconditionally, on a senior subordinated basis by the Guarantors (the "Senior Subordinated Guarantees"). The obligations of any Guarantor with respect to its Senior Subordinated Guarantee will be subordinated in right of payment, to the same extent as the obligations of the Company in respect of the Notes, to all existing and future Senior Guarantees, which will include the guarantees of the Credit Facility. The Senior Subordinated Guarantees would also be subordinated to all existing and future indebtedness of the Guarantors if the Senior Subordinated Guarantees were avoided or subordinated in favor of the Guarantors' other creditors. See "Risk Factors--Fraudulent Conveyance." The obligations of a Guarantor under its Senior Subordinated Guarantee will be released in certain circumstances, including if the Guarantor ceases to guarantee the Credit Facility. See "Description of the Notes--Senior Subordinated Guarantees." Principal Covenants The indenture under which the Notes are issued (the "Indenture") will impose certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt and senior in right of payment to the Notes, enter into leases, incur liens, merge or consolidate with any other person, or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. Use of Proceeds The Company intends to use the proceeds from the sale of the Notes, together with the proceeds of borrowings under the Credit Facility, to repay certain intercompany indebtedness owed to Corning. See "Use of Proceeds." The Distributions The Notes are being offered in connection with the Distributions of the Quest Diagnostics Common Stock and the Covance Common Stock to holders of Corning Common Stock. The closing of the offering of the Notes is anticipated to occur prior to the Distributions. Listing The Notes have been approved for listing on the New York Stock Exchange, subject to official notice of issuance. Risk Factors See "Risk Factors" for a discussion of certain factors that should be considered in connection with an investment in the Notes. </TABLE> Summary Financial Data The following table summarizes certain historical and pro forma financial data of Quest Diagnostics at the dates and for each of the periods indicated. The selected financial data as of and for each of the years ended December 31, 1995, 1994 and 1993 have been derived from the audited combined financial statements of (the "Audited Financial Statements") and the notes thereto included elsewhere herein. The selected financial data as of and for the three and nine months ended September 30, 1996 and 1995 have been derived from the unaudited interim combined financial statements of Quest Diagnostics (the "Interim Financial Statements" and, together with the Audited Financial Statements, the "Financial Statements") and the notes thereto included elsewhere herein. In the opinion of Quest Diagnostics management, the unaudited interim combined financial statements include all adjustments, consisting of only normal recurring adjustments, that are necessary for a fair presentation of the financial position and results of operations for these periods. The unaudited interim results of operations for the three and nine months ended September 30, 1996 are not necessarily indicative of the results for the entire year ending December 31, 1996. The selected pro forma financial data have been derived from the unaudited pro forma combined financial information of Quest Diagnostics for the year ended December 31, 1995 and for the three and nine months ended September 30, 1996 (the "Pro Forma Financial Information") and the notes thereto included elsewhere herein. The pro forma statement of operations data gives effect to the Distributions and the Accounting Policy Change (as defined below) as if they had occurred on January 1, 1995 and the pro forma balance sheet data gives effect to the Distributions and the Accounting Policy Change as if they had occurred on September 30, 1996. The pro forma financial data does not purport to represent what Quest Diagnostics' results of operations would have been if the Distributions and the Accounting Policy Change had in fact occurred on such dates, nor does it purport to indicate the future financial position or results of future operations of Quest Diagnostics. The pro forma adjustments are based upon currently available information and certain assumptions that Quest Diagnostics management believes to be reasonable. The summary historical and pro forma financial data set forth below should be read in conjunction with "Selected Historical Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Financial Statements and the notes thereto and the Pro Forma Financial Information and the notes thereto. <TABLE> <CAPTION> Three Months Ended September 30, Nine Months Ended September 30, ------------------------------------------------------------------------------------------------ Pro Forma Historical Pro Forma Historical ------------------------------- ------------------------------- 1996(a) 1996 1995 1996(a) 1996 1995 --------------- --------------- --------------- ---------------- ---------------- -------------- (in thousands, except share, per share and percentage data) <S> <C> <C> <C> <C> <C> <C> Statement of Operations Data: Net revenues $ 405,352 $ 405,352 $ 399,959 $ 1,231,290 $1,231,290 $1,239,474 Costs and expenses: Cost of services 255,390 255,390 240,868 768,809 768,809 735,984 Selling, general and administrative 125,190 125,190 181,346(c) 371,439 371,439 399,635(c) Provision for restructuring and other special charges(d) 155,730 155,730 201,730 201,730 45,885 Interest expense, net 12,189 19,866 20,927 36,938 59,887 61,529 Amortization of intangible assets 7,672 10,328 11,293 23,803 31,772 33,678 Other, net 1,837 1,837 1,930 (198) (198) 4,429 --------------- --------------- --------------- ---------------- ---------------- -------------- Total 558,008 568,341 456,364 1,402,521 1,433,439 1,281,140 --------------- --------------- --------------- ---------------- ---------------- -------------- Income (loss) before taxes (152,656) (162,989) (56,405) (171,231) (202,149) (41,666) Income tax expense (benefit) (40,521) (43,553) (17,810) (34,215) (43,280) (3,642) --------------- --------------- --------------- ---------------- ---------------- -------------- Income (loss) before cumulative effect of change in accounting principle (112,135) (119,436) (38,595) (137,016) (158,869) (38,024) Cumulative effect of change in accounting principle --------------- --------------- --------------- ---------------- ---------------- -------------- Net income (loss) $ (112,135) $ (119,436) $ (38,595) $ (137,016) $ (158,869) $ (38,024) =============== =============== =============== ================ ================ ============== Pro forma shares outstanding(e) 28,901,735 28,901,735 Pro forma net loss per share $ (3.88) $ (4.74) Balance Sheet Data (at end of period): Cash $ 40,000 $ 48,319 $ 46,908 $ 40,000 $ 48,319 $ 46,908 Working capital 306,741 114,718 129,319 306,741 114,718 129,319 Total assets 1,612,459 1,886,378 1,896,058 1,612,459 1,886,378 1,896,058 Long-term debt 515,494 1,219,900 1,114,367 515,494 1,219,900 1,114,367 Total debt 517,379 1,231,785 1,226,211 517,379 1,231,785 1,226,211 Stockholder's equity 604,099 132,670 320,576 604,099 132,670 320,576 Ratio of earnings to fixed charges -- (f) -- (f) -- (f) -- (f) -- (f) -- (f) Supplemental Data: Net cash provided by operating activities $ 25,236 $ 25,236 $ 38,202 $ 41,937 $ 41,937 $ 53,789 Net cash used in investing activities (7,904) (7,904) (17,044) (53,097) (53,097) (77,911) Net cash provided by (used in) financing activities (6,618) (6,618) (18,006) 23,033 23,033 32,311 Bad debt expense $ 30,539 $ 30,539 $ 85,831(c) $ 81,891 $ 81,891 $ 127,297(c) Bad debt expense as a % of net revenues 7.5% 7.5% 21.5% 6.7% 6.7% 10.3% Rent expense $ 12,515 $ 12,515 $ 11,860 $ 37,315 $ 37,315 $ 35,060 Capital expenditures 11,912 11,912 16,441 58,802 58,802 56,062 Depreciation expense $ 14,672 $ 14,672 $ 14,275 $ 43,460 $ 43,460 $ 42,358 EBITDA(g) $ (118,123)(h) $ (118,123)(h) $ (9,910)(c) $ (67,030)(h) $ (67,030)(h) $ 95,899(c) EBITDA as a % of net revenues (29.1%) (29.1%) (2.5%) (5.4%) (5.4%) 7.7% Adjusted EBITDA(i) $ 37,607 $ 37,607 $ (9,910)(c) $ 134,700 $ 134,700 $ 141,784(c) Adjusted EBITDA as a % of net revenues 9.3% 9.3% (2.5%) 10.9% 10.9% 11.4% Supplemental Ratio Data: Adjusted EBITDA/interest expense, net 3.1x 3.6x (Adjusted EBITDA-capital expenditures)/interest expense, net 2.1x 2.1x (Total debt--cash)/annualized adjusted EBITDA 3.2x 2.7x </TABLE> (Footnotes on page 14) <TABLE> <CAPTION> Year Ended December 31, ----------------------------------------------------------- Pro Forma Historical ------------------------------------------- 1995(a) 1995 1994(b) 1993 --------------- --------------- ------------- ------------- (in thousands, except share, per share and percentage data) <S> <C> <C> <C> <C> Statement of Operations Data: Net revenues $ 1,629,388 $1,629,388 $1,633,699 $1,416,338 Costs and expenses: Cost of services 980,232 980,232 969,844 805,729 Selling, general and administrative 523,271(c) 523,271(c) 411,939 363,579 Provision for restructuring and other special charges(d) 50,560 50,560 79,814 99,600 Interest expense, net 50,748 82,016 63,295 41,898 Amortization of intangible assets 34,031 44,656 42,588 28,421 Other, net 6,221 6,221 3,464 6,423 --------------- --------------- ------------- ------------- Total 1,645,063 1,686,956 1,570,944 1,345,650 --------------- --------------- ------------- ------------- Income (loss) before taxes (15,675) (57,568) 62,755 70,688 Income tax expense (benefit) 6,835 (5,516) 34,410 25,929 --------------- --------------- ------------- ------------- Income (loss) before cumulative effect of change in accounting principle (22,510) (52,052) 28,345 44,759 Cumulative effect of change in accounting principle (10,562) --------------- --------------- ------------- ------------- Net income (loss) $ (22,510) $ (52,052) $ 28,345 $ 34,197 =============== =============== ============= ============= Pro forma shares outstanding(e) 28,901,735 Pro forma net loss per share $ (0.78) Balance Sheet Data (at end of period): Cash $ 36,446 $ 38,719 $ 39,410 Working capital 200,740 214,358 139,771 Total assets 1,853,385 1,882,663 1,861,162 Long-term debt 1,195,566 1,153,054 1,025,787 Total debt 1,207,714 1,165,626 1,123,307 Stockholder's equity 295,801 386,812 395,509 Ratio of earnings to fixed charges -- (f) -- (f) 1.77(f) 2.20(f) Supplemental Data: Net cash provided by operating activities $ 85,828 $ 85,828 $ 37,963 $ 99,614 Net cash used in investing activities (93,087) (93,087) (46,186) (473,687) Net cash provided by (used in) financing activities 4,986 4,986 7,532 392,956 Bad debt expense $ 152,590(c) $ 152,590(c) $ 59,480 $ 47,240 Bad debt expense as a % of net revenues 9.4% 9.4% 3.6% 3.3% Rent expense $ 46,900 $ 46,900 $ 49,400 $ 46,900 Capital expenditures 74,045 74,045 93,354 65,317 Depreciation expense $ 56,857 $ 56,857 $ 46,929 $ 38,058 EBITDA(g) $ 125,961(c) $ 125,961(c) $ 215,567 $ 179,065 EBITDA as a % of net revenues 7.7% 7.7% 13.2% 12.6% Adjusted EBITDA(i) $ 176,521(c) $ 176,521(c) $ 295,381 $ 278,665 Adjusted EBITDA as a % of net revenues 10.8% 10.8% 18.1% 19.7% Supplemental Ratio Data: Adjusted EBITDA/interest expense, net 3.5x (Adjusted EBITDA-capital expenditures)/ interest expense, net 2.0x </TABLE> (Footnotes on page 14) (Footnotes for preceding pages) (a) Adjusted to reflect the pro forma effects of the Distributions and the Accounting Policy Change. See "Selected Historical Financial Data" and "Pro Forma Financial Information."
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+Prospectus Summary This Summary is qualified by the more detailed information (including the financial statements and related notes) set forth elsewhere in this Prospectus which should be read in its entirety. Unless the context indicates, or it is specifically indicated otherwise, all references to (i) "Corning" include Corning Incorporated, a New York corporation, and its consolidated subsidiaries, (ii) "Quest Diagnostics" or the "Company" include Corning Clinical Laboratories Inc. (to be renamed Quest Diagnostics Incorporated prior to the Distributions), a Delaware corporation, and its direct and indirect subsidiaries (other than Covance) and assume that the Distributions have occurred, and (iii) "Covance" include Covance Inc. (formerly Corning Pharmaceutical Services Inc.), a Delaware corporation, and its direct and indirect subsidiaries and assume that the Distributions have occurred. Capitalized terms used but not defined in this Summary are defined elsewhere in this Prospectus. The Company Quest Diagnostics is one of the largest independent clinical laboratory testing companies in the United States. Quest Diagnostics offers a broad range of routine and specialty ("esoteric") testing services used by the medical profession in the diagnosis, monitoring and treatment of disease and other medical conditions. Quest Diagnostics' network, which processes approximately 60 million requisitions for diagnostic tests annually, consists of 17 regional laboratories across the United States and the Corning Nichols Institute ("Nichols") esoteric testing laboratory in San Juan Capistrano, California. In addition, Quest Diagnostics has 14 branch laboratories in the United States as well as one branch laboratory in Mexico City (branch laboratories are smaller than regional laboratories), approximately 200 "STAT" laboratories and approximately 850 patient service centers located throughout the United States. For the year ended December 31, 1995 and the nine months ended September 30, 1996, Quest Diagnostics had net revenues of $1,629 million and $1,231 million, respectively, and Adjusted EBITDA (income (loss) before income taxes plus net interest expense, depreciation and amortization and restructuring and other special charges) of $177 million and $135 million, respectively. Quest Diagnostics operates 24 hours a day, 365 days a year, utilizing a fully integrated collection and processing system. Quest Diagnostics generally performs and reports most routine procedures within 24 hours, employing a variety of sophisticated and computerized laboratory testing instruments. Quest Diagnostics provides daily pickup of specimens from most customers principally through an in-house courier system. The specimens are sent to one of the Company's laboratories where one or more tests are performed. Each patient specimen is accompanied by a test requisition form, which is completed by the customer, that indicates the tests to be performed and provides the necessary billing information. Each specimen and related requisition form is checked for completeness and then given a unique bar-coded identification number. Once the appropriate information is entered into the computer system, the tests are performed and the results are delivered to the doctor, primarily through computer interface or manually. Corning entered the clinical laboratory business in 1982 with the acquisition of MetPath Inc. ("MetPath"), which was founded in 1967 and was one of the first laboratories to expand beyond a regional market. Since January 1993, Quest Diagnostics has acquired over thirty laboratories, including Damon Corporation ("Damon"), Bioran Medical Laboratory ("Bioran") and Maryland Medical Laboratory, Inc. ("MML"). In 1994, Quest Diagnostics enhanced its presence in the esoteric testing market through the acquisition of Nichols, a preeminent clinical laboratory with a leading reputation for esoteric testing and test innovations. While Corning's ownership provided the Company with the capital to grow through acquisitions and to become one of the nation's largest independent clinical laboratory testing companies, the management of both Corning and Quest Diagnostics believe that Quest Diagnostics will be more competitive and operate more successfully in the future as an independent company, with a strong, focused and experienced management team to concentrate on customer needs. Independence will also enable Quest Diagnostics to motivate its employees by offering equity-based incentives tied directly to the performance of the Company and individual performance. Quest Diagnostics' management team has implemented a new business strategy, which focuses the business around three key strategic areas: clinical operations, customer focus and technological leadership and excellence. The Clinical Laboratory Testing Industry Clinical testing is a critical component in the delivery of quality health care service to patients. Currently, clinical laboratory testing is the first step in determining how a significant amount of all health care dollars are spent. Quest Diagnostics believes that in 1995 the entire United States clinical laboratory industry had revenues exceeding $30 billion. The clinical laboratory industry consists primarily of three types of providers: hospital-affiliated laboratories, independent clinical laboratories, such as Quest Diagnostics, and physician-office laboratories. The Company believes that in 1995 approximately 56% of the clinical testing revenues in the United States were attributable to hospital-affiliated laboratories, approximately 36% were attributable to independent clinical laboratories and approximately 8% were attributable to physicians in their offices and laboratories. Quest Diagnostics believes that consolidation will continue in the clinical laboratory testing business. In addition, Quest Diagnostics believes that it and the other large independent clinical laboratory testing companies may have the opportunity to increase their share of the overall clinical laboratories testing market due to a number of external factors, including cost efficiencies afforded by large-scale automated testing, Medicare reimbursement reductions and the growth of managed health care entities which require low-cost testing services and large service networks. In addition, legal restrictions on physician referrals and the ownership of laboratories as well as increased regulation of laboratories are expected to contribute to the continuing consolidation of the industry. Quest Diagnostics believes that a number of factors are likely to positively influence the volume of clinical laboratory testing performed in the United States in the future, including (1) the general aging of the population in the United States; (2) an expanded base of scientific knowledge which has led to the development of more sophisticated specialized tests and an increase in the awareness of physicians of the value of clinical laboratory testing as a cost-effective means of early detection of disease and monitoring of treatment; (3) an increase in the number and types of tests which are, due to advances in technology and increased cost efficiencies, readily available on a more affordable basis to physicians; (4) expanded substance-abuse testing by corporations and governmental agencies; and (5) increased testing for sexually transmitted diseases such as AIDS. The impact of these factors is expected to be offset in part by increased controls over the utilization of clinical laboratory tests by both Medicare and the private sector, particularly managed care organizations. Business Strategy Quest Diagnostics' overall goal is to be recognized by its customers, employees and competitors as the best provider of comprehensive and innovative clinical testing, information and services. To achieve this, Quest Diagnostics' management team has focused the business around three key strategic areas: clinical operations, customer focus and technological leadership and excellence. (bullet) Best Supplier. Quest Diagnostics seeks to be the best supplier of the highest quality and the lowest-cost testing services. Health care providers and patients expect accurate, timely and consistent laboratory test results at a fair price. (bullet) Lowest-cost provider. Quest Diagnostics' average cost per requisition varies significantly among its regional laboratories; there is an approximately $7.00 difference in cost per requisition between the most efficient regional laboratory and the average, and an approximately $13.00 difference in cost per requisition between the most and the least efficient regional laboratories. In many cases, these variations do not relate to testing volumes or mixes, space costs, service requirements or regional labor cost differences. To reduce costs, Quest Diagnostics has begun to replicate the best practices from each region throughout its national network. Management expects to achieve significant cost savings within the next three years as these programs are fully implemented. * (bullet) Highest Quality Provider. Quest Diagnostics is dedicated to providing accurate and timely test results and to being viewed by its customers as the highest quality provider of clinical testing services. Quest Diagnostics believes that implementation of best practices already developed in certain regions will permit the Company to be viewed by its customers as the highest quality provider of clinical testing services. (bullet) Preferred Provider. Quest Diagnostics seeks to be the preferred provider of laboratory testing services to existing and new health care networks on a selective basis determined by profitability of accounts. Quest Diagnostics believes that it will become the preferred provider to these networks as (1) large networks typically prefer to utilize large independent clinical laboratories that can service them on a national or regional basis and (2) the Company continues to pursue its primary strategy of becoming the highest quality, lowest-cost provider. To achieve this, Quest Diagnostics will employ a rigorous national and regional process to both select and pursue customers and allocate resources to support these efforts. *This is a forward looking statement and is based on current expectations. Actual results may vary materially from those projected. See "Business- Important Factors Regarding Forward Looking Statements." In particular, see factors (a), (d) and (j). (bullet) Account Profitability. Quest Diagnostics intends to refocus its sales efforts on pursuing and keeping profitable accounts. Quest Diagnostics is actively reviewing the profitability of its current accounts, including those with managed care organizations, and will either increase pricing or eliminate accounts that cannot be serviced profitably. (bullet) Regional Profitability. Quest Diagnostics presently believes that it has the leading market share among independent clinical laboratories in most routine testing markets of the northeast, mid-Atlantic and midwest regions. Approximately 65% of Quest Diagnostics' revenues and almost all of its EBITDA is generated from markets in which the Company believes that it has the leading market share. In most of these markets, Quest Diagnostics believes that it also is the lowest cost provider. Quest Diagnostics is evaluating its strategic alternatives relative to units whose profitability does not meet its internal goals. These alternatives may include joint ventures, alliances, or dispositions. Quest Diagnostics believes that, while the clinical laboratory industry is becoming national in scope, the Company can subcontract with other clinical laboratories to perform testing for national accounts in any markets in which the Company chooses not to compete. (bullet) Leading Innovator. Quest Diagnostics intends to remain a leading innovator in the clinical laboratory industry by continuing to introduce new tests, technology and services. Through its relationship with the academic community and pharmaceutical and biotechnology firms and a research and development budget exceeding $15 million per year, Quest Diagnostics believes it is one of the leaders in transferring innovation from academic biotechnology laboratories to the market. Recent Developments By a plea agreement and civil agreement and release dated October 9, 1996, between the Department of Justice ("DOJ") and Damon, all federal criminal matters within the scope of the various federal investigations against Damon, and all claims including the civil qui tam cases underlying the civil investigations were settled for an aggregate of $119 million, which sum was reimbursed to Quest Diagnostics by Corning. The Damon settlement does not exclude Quest Diagnostics from future participation in any federal health care programs on account of Damon's practices. Quest Diagnostics' aggregate reserve with respect to all governmental and private claims was $215 million at September 30, 1996 and is estimated to be reduced to $85 million as of the Distribution Date as a result of the payment of settled claims, primarily the Damon settlement of $119 million. Based on information available to management and Quest Diagnostics' experience with past settlements (including the fact that the aggregate amount of the Damon settlement was significantly in excess of established reserves) management has reassessed its reserve levels and believes that its current level of reserves is adequate. However, it is possible that additional information may become available which may cause the final resolution of these matters to be in excess of established reserves by an amount which could be material to Quest Diagnostics' results of operations and, for non-indemnified claims, Quest Diagnostics' cash flows in the period in which such claims are settled. While none of the governmental or nongovernmental investigations or claims is covered by insurance, Quest Diagnostics does not believe that these matters will have a material adverse effect on Quest Diagnostics' overall financial condition. Corning Indemnity In connection with the Distributions, Corning has agreed to indemnify Quest Diagnostics against all monetary penalties, fines or settlements arising out of any governmental claims arising out of alleged violations of applicable federal fraud and health care statutes and relating to billing practices of Quest Diagnostics and its predecessors that have been settled or are pending on the Distribution Date. Corning has also agreed to indemnify Quest Diagnostics for 50% of the aggregate of all judgment or settlement payments made by Quest Diagnostics that are in excess of $42.0 million in respect of claims by private parties (i.e., nongovernmental parties such as private insurers) that relate to indemnified or previously settled governmental claims and that allege overbillings by Quest Diagnostics or any existing subsidiaries of Quest Diagnostics, for services provided prior to the Distribution Date; provided, however, such indemnification for nongovernmental claims will not exceed $25.0 million in the aggregate and all amounts indemnified against by Corning for the benefit of Quest Diagnostics will be calculated on a net after-tax basis. Such indemnification will not cover (i) any governmental claims that arise after the Distribution Date pursuant to service of subpoena or other notice of such investigation after the Distribution Date, (ii) any nongovernmental claims unrelated to the indemnified governmental claims or investigations, (iii) any nongovernmental claims not settled prior to five years after the Distribution Date, (iv) any consequential or incidental damages relating to the billing claims, including losses of revenues and profits as a consequence of exclusion for participation in federal or state health care programs or (v) the fees and expenses of litigation. The Distributions On May 13, 1996, the board of directors of Corning approved a plan to distribute to Corning shareholders the clinical laboratory testing business being conducted by Quest Diagnostics and the contract research business being conducted by Quest Diagnostics' wholly owned subsidiary, Covance (together, the "Distributions"). The Distributions will be effected by distributing all of the outstanding shares of Quest Diagnostics common stock (the "Quest Diagnostics Common Stock") to holders of Corning common stock (the "Corning Common Stock"), followed immediately by the distribution of all of the common stock of Covance (the "Covance Common Stock") to those same holders, as holders of Quest Diagnostics Common Stock. It is expected that the Distributions will be made on December 31, 1996 (the date on which the Distributions are to be made, the "Distribution Date"). Prior to the consummation of the offering of the Notes contemplated hereby (the "Offering"), the Company entered into a $450 million senior, secured credit facility (the "Credit Facility"), among the Company, the lenders listed therein, NationsBank, N.A., as Issuing Bank, Wachovia Bank of Georgia, N.A., as Swingline Bank, and Morgan Guaranty Trust Company of New York, as Administrative Agent. The Credit Facility is comprised of a $300 million six-year amortizing term loan ("Tranche A Loan"), a $50 million seven-year term loan ("Tranche B Loan" and together with the Tranche A Loan, the "Term Loans") and a $100 million six-year revolving working capital facility (the "Working Capital Facility"). Corning currently has approximately $1.2 billion of Quest Diagnostics intercompany debt. Approximately $145 million of net proceeds from the Offering, together with the $350 million of borrowings under the Term Loans, will be paid to Corning in satisfaction of a portion of the outstanding intercompany debt. Corning will contribute the remaining intercompany debt to Quest Diagnostics' capital. Borrowings under the Working Capital Facility, substantially all of which is expected to be available as of the Distribution Date, will provide for future working capital needs and other general corporate purposes. The Offering <TABLE> <CAPTION> <S> <C> Securities Offered $150,000,000 aggregate principal amount of % Senior Subordinated Notes due December 15, 2006 (the "Notes"). Maturity Date December 15, 2006. Interest Payment Date June 15 and December 15, commencing June 15, 1997. Optional Redemption by the Company The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after December 15, 2001, at the redemption prices set forth herein, plus accrued and unpaid interest, if any, to but excluding the date fixed for redemption. In addition, if as a result of an event outside the control of Corning, Quest Diagnostics and Covance, the Distributions do not occur prior to March 31, 1997, the Notes will be subject to redemption, as a whole and not in part, at the option of Quest Diagnostics, prior to June 30, 1997, at a redemption price equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to but excluding the date fixed for redemption. See "Description of the Notes--Optional Redemption." Change of Control Offer Upon a Change of Control, the Company has the obligation to offer to purchase all the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to but excluding the date of purchase. See "Description of the Notes-- Repurchase at the Option of Holders--Change of Control" for a discussion of the circumstances in which the Company may not be required to make an offer to purchase upon a Change of Control. Offers to Purchase In the event of certain asset sales, the Company will be required to offer to repurchase the Notes at 100% of their principal amount, plus accrued and unpaid interest, if any, to but excluding the date of purchase with the net proceeds of such asset sales. Subordination The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company, including all indebtedness of the Company under the Credit Facility. The Notes will rank Pari Passu in right of payment with any other senior subordinated indebtedness of the Company. Subsidiary Guarantees The Notes will be guaranteed, jointly and severally, and fully and unconditionally, on a senior subordinated basis by the Guarantors (the "Senior Subordinated Guarantees"). The obligations of any Guarantor with respect to its Senior Subordinated Guarantee will be subordinated in right of payment, to the same extent as the obligations of the Company in respect of the Notes, to all existing and future Senior Guarantees, which will include the guarantees of the Credit Facility. The Senior Subordinated Guarantees would also be subordinated to all existing and future indebtedness of the Guarantors if the Senior Subordinated Guarantees were avoided or subordinated in favor of the Guarantors' other creditors. See "Risk Factors--Fraudulent Conveyance." The obligations of a Guarantor under its Senior Subordinated Guarantee will be released in certain circumstances, including if the Guarantor ceases to guarantee the Credit Facility. See "Description of the Notes--Senior Subordinated Guarantees." Principal Covenants The indenture under which the Notes are issued (the "Indenture") will impose certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt and senior in right of payment to the Notes, enter into leases, incur liens, merge or consolidate with any other person, or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. Use of Proceeds The Company intends to use the proceeds from the sale of the Notes, together with the proceeds of borrowings under the Credit Facility, to repay certain intercompany indebtedness owed to Corning. See "Use of Proceeds." The Distributions The Notes are being offered in connection with the Distributions of the Quest Diagnostics Common Stock and the Covance Common Stock to holders of Corning Common Stock. The closing of the offering of the Notes is anticipated to occur prior to the Distributions. Listing The Notes have been approved for listing on the New York Stock Exchange, subject to official notice of issuance. Risk Factors See "Risk Factors" for a discussion of certain factors that should be considered in connection with an investment in the Notes. </TABLE> Summary Financial Data The following table summarizes certain historical and pro forma financial data of Quest Diagnostics at the dates and for each of the periods indicated. The selected financial data as of and for each of the years ended December 31, 1995, 1994 and 1993 have been derived from the audited combined financial statements of (the "Audited Financial Statements") and the notes thereto included elsewhere herein. The selected financial data as of and for the three and nine months ended September 30, 1996 and 1995 have been derived from the unaudited interim combined financial statements of Quest Diagnostics (the "Interim Financial Statements" and, together with the Audited Financial Statements, the "Financial Statements") and the notes thereto included elsewhere herein. In the opinion of Quest Diagnostics management, the unaudited interim combined financial statements include all adjustments, consisting of only normal recurring adjustments, that are necessary for a fair presentation of the financial position and results of operations for these periods. The unaudited interim results of operations for the three and nine months ended September 30, 1996 are not necessarily indicative of the results for the entire year ending December 31, 1996. The selected pro forma financial data have been derived from the unaudited pro forma combined financial information of Quest Diagnostics for the year ended December 31, 1995 and for the three and nine months ended September 30, 1996 (the "Pro Forma Financial Information") and the notes thereto included elsewhere herein. The pro forma statement of operations data gives effect to the Distributions and the Accounting Policy Change (as defined below) as if they had occurred on January 1, 1995 and the pro forma balance sheet data gives effect to the Distributions and the Accounting Policy Change as if they had occurred on September 30, 1996. The pro forma financial data does not purport to represent what Quest Diagnostics' results of operations would have been if the Distributions and the Accounting Policy Change had in fact occurred on such dates, nor does it purport to indicate the future financial position or results of future operations of Quest Diagnostics. The pro forma adjustments are based upon currently available information and certain assumptions that Quest Diagnostics management believes to be reasonable. The summary historical and pro forma financial data set forth below should be read in conjunction with "Selected Historical Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Financial Statements and the notes thereto and the Pro Forma Financial Information and the notes thereto. <TABLE> <CAPTION> Three Months Ended September 30, Nine Months Ended September 30, ------------------------------------------------------------------------------------------------ Pro Forma Historical Pro Forma Historical ------------------------------- ------------------------------- 1996(a) 1996 1995 1996(a) 1996 1995 --------------- --------------- --------------- ---------------- ---------------- -------------- (in thousands, except share, per share and percentage data) <S> <C> <C> <C> <C> <C> <C> Statement of Operations Data: Net revenues $ 405,352 $ 405,352 $ 399,959 $ 1,231,290 $1,231,290 $1,239,474 Costs and expenses: Cost of services 255,390 255,390 240,868 768,809 768,809 735,984 Selling, general and administrative 125,190 125,190 181,346(c) 371,439 371,439 399,635(c) Provision for restructuring and other special charges(d) 155,730 155,730 201,730 201,730 45,885 Interest expense, net 12,189 19,866 20,927 36,938 59,887 61,529 Amortization of intangible assets 7,672 10,328 11,293 23,803 31,772 33,678 Other, net 1,837 1,837 1,930 (198) (198) 4,429 --------------- --------------- --------------- ---------------- ---------------- -------------- Total 558,008 568,341 456,364 1,402,521 1,433,439 1,281,140 --------------- --------------- --------------- ---------------- ---------------- -------------- Income (loss) before taxes (152,656) (162,989) (56,405) (171,231) (202,149) (41,666) Income tax expense (benefit) (40,521) (43,553) (17,810) (34,215) (43,280) (3,642) --------------- --------------- --------------- ---------------- ---------------- -------------- Income (loss) before cumulative effect of change in accounting principle (112,135) (119,436) (38,595) (137,016) (158,869) (38,024) Cumulative effect of change in accounting principle --------------- --------------- --------------- ---------------- ---------------- -------------- Net income (loss) $ (112,135) $ (119,436) $ (38,595) $ (137,016) $ (158,869) $ (38,024) =============== =============== =============== ================ ================ ============== Pro forma shares outstanding(e) 28,901,735 28,901,735 Pro forma net loss per share $ (3.88) $ (4.74) Balance Sheet Data (at end of period): Cash $ 40,000 $ 48,319 $ 46,908 $ 40,000 $ 48,319 $ 46,908 Working capital 306,741 114,718 129,319 306,741 114,718 129,319 Total assets 1,612,459 1,886,378 1,896,058 1,612,459 1,886,378 1,896,058 Long-term debt 515,494 1,219,900 1,114,367 515,494 1,219,900 1,114,367 Total debt 517,379 1,231,785 1,226,211 517,379 1,231,785 1,226,211 Stockholder's equity 604,099 132,670 320,576 604,099 132,670 320,576 Ratio of earnings to fixed charges -- (f) -- (f) -- (f) -- (f) -- (f) -- (f) Supplemental Data: Net cash provided by operating activities $ 25,236 $ 25,236 $ 38,202 $ 41,937 $ 41,937 $ 53,789 Net cash used in investing activities (7,904) (7,904) (17,044) (53,097) (53,097) (77,911) Net cash provided by (used in) financing activities (6,618) (6,618) (18,006) 23,033 23,033 32,311 Bad debt expense $ 30,539 $ 30,539 $ 85,831(c) $ 81,891 $ 81,891 $ 127,297(c) Bad debt expense as a % of net revenues 7.5% 7.5% 21.5% 6.7% 6.7% 10.3% Rent expense $ 12,515 $ 12,515 $ 11,860 $ 37,315 $ 37,315 $ 35,060 Capital expenditures 11,912 11,912 16,441 58,802 58,802 56,062 Depreciation expense $ 14,672 $ 14,672 $ 14,275 $ 43,460 $ 43,460 $ 42,358 EBITDA(g) $ (118,123)(h) $ (118,123)(h) $ (9,910)(c) $ (67,030)(h) $ (67,030)(h) $ 95,899(c) EBITDA as a % of net revenues (29.1%) (29.1%) (2.5%) (5.4%) (5.4%) 7.7% Adjusted EBITDA(i) $ 37,607 $ 37,607 $ (9,910)(c) $ 134,700 $ 134,700 $ 141,784(c) Adjusted EBITDA as a % of net revenues 9.3% 9.3% (2.5%) 10.9% 10.9% 11.4% Supplemental Ratio Data: Adjusted EBITDA/interest expense, net 3.1x 3.6x (Adjusted EBITDA-capital expenditures)/interest expense, net 2.1x 2.1x (Total debt--cash)/annualized adjusted EBITDA 3.2x 2.7x </TABLE> (Footnotes on page 14) <TABLE> <CAPTION> Year Ended December 31, ----------------------------------------------------------- Pro Forma Historical ------------------------------------------- 1995(a) 1995 1994(b) 1993 --------------- --------------- ------------- ------------- (in thousands, except share, per share and percentage data) <S> <C> <C> <C> <C> Statement of Operations Data: Net revenues $ 1,629,388 $1,629,388 $1,633,699 $1,416,338 Costs and expenses: Cost of services 980,232 980,232 969,844 805,729 Selling, general and administrative 523,271(c) 523,271(c) 411,939 363,579 Provision for restructuring and other special charges(d) 50,560 50,560 79,814 99,600 Interest expense, net 50,748 82,016 63,295 41,898 Amortization of intangible assets 34,031 44,656 42,588 28,421 Other, net 6,221 6,221 3,464 6,423 --------------- --------------- ------------- ------------- Total 1,645,063 1,686,956 1,570,944 1,345,650 --------------- --------------- ------------- ------------- Income (loss) before taxes (15,675) (57,568) 62,755 70,688 Income tax expense (benefit) 6,835 (5,516) 34,410 25,929 --------------- --------------- ------------- ------------- Income (loss) before cumulative effect of change in accounting principle (22,510) (52,052) 28,345 44,759 Cumulative effect of change in accounting principle (10,562) --------------- --------------- ------------- ------------- Net income (loss) $ (22,510) $ (52,052) $ 28,345 $ 34,197 =============== =============== ============= ============= Pro forma shares outstanding(e) 28,901,735 Pro forma net loss per share $ (0.78) Balance Sheet Data (at end of period): Cash $ 36,446 $ 38,719 $ 39,410 Working capital 200,740 214,358 139,771 Total assets 1,853,385 1,882,663 1,861,162 Long-term debt 1,195,566 1,153,054 1,025,787 Total debt 1,207,714 1,165,626 1,123,307 Stockholder's equity 295,801 386,812 395,509 Ratio of earnings to fixed charges -- (f) -- (f) 1.77(f) 2.20(f) Supplemental Data: Net cash provided by operating activities $ 85,828 $ 85,828 $ 37,963 $ 99,614 Net cash used in investing activities (93,087) (93,087) (46,186) (473,687) Net cash provided by (used in) financing activities 4,986 4,986 7,532 392,956 Bad debt expense $ 152,590(c) $ 152,590(c) $ 59,480 $ 47,240 Bad debt expense as a % of net revenues 9.4% 9.4% 3.6% 3.3% Rent expense $ 46,900 $ 46,900 $ 49,400 $ 46,900 Capital expenditures 74,045 74,045 93,354 65,317 Depreciation expense $ 56,857 $ 56,857 $ 46,929 $ 38,058 EBITDA(g) $ 125,961(c) $ 125,961(c) $ 215,567 $ 179,065 EBITDA as a % of net revenues 7.7% 7.7% 13.2% 12.6% Adjusted EBITDA(i) $ 176,521(c) $ 176,521(c) $ 295,381 $ 278,665 Adjusted EBITDA as a % of net revenues 10.8% 10.8% 18.1% 19.7% Supplemental Ratio Data: Adjusted EBITDA/interest expense, net 3.5x (Adjusted EBITDA-capital expenditures)/ interest expense, net 2.0x </TABLE> (Footnotes on page 14) (Footnotes for preceding pages) (a) Adjusted to reflect the pro forma effects of the Distributions and the Accounting Policy Change. See "Selected Historical Financial Data" and "Pro Forma Financial Information."
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+Prospectus Summary This Summary is qualified by the more detailed information (including the financial statements and related notes) set forth elsewhere in this Prospectus which should be read in its entirety. Unless the context indicates, or it is specifically indicated otherwise, all references to (i) "Corning" include Corning Incorporated, a New York corporation, and its consolidated subsidiaries, (ii) "Quest Diagnostics" or the "Company" include Corning Clinical Laboratories Inc. (to be renamed Quest Diagnostics Incorporated prior to the Distributions), a Delaware corporation, and its direct and indirect subsidiaries (other than Covance) and assume that the Distributions have occurred, and (iii) "Covance" include Covance Inc. (formerly Corning Pharmaceutical Services Inc.), a Delaware corporation, and its direct and indirect subsidiaries and assume that the Distributions have occurred. Capitalized terms used but not defined in this Summary are defined elsewhere in this Prospectus. The Company Quest Diagnostics is one of the largest independent clinical laboratory testing companies in the United States. Quest Diagnostics offers a broad range of routine and specialty ("esoteric") testing services used by the medical profession in the diagnosis, monitoring and treatment of disease and other medical conditions. Quest Diagnostics' network, which processes approximately 60 million requisitions for diagnostic tests annually, consists of 17 regional laboratories across the United States and the Corning Nichols Institute ("Nichols") esoteric testing laboratory in San Juan Capistrano, California. In addition, Quest Diagnostics has 14 branch laboratories in the United States as well as one branch laboratory in Mexico City (branch laboratories are smaller than regional laboratories), approximately 200 "STAT" laboratories and approximately 850 patient service centers located throughout the United States. For the year ended December 31, 1995 and the nine months ended September 30, 1996, Quest Diagnostics had net revenues of $1,629 million and $1,231 million, respectively, and Adjusted EBITDA (income (loss) before income taxes plus net interest expense, depreciation and amortization and restructuring and other special charges) of $177 million and $135 million, respectively. Quest Diagnostics operates 24 hours a day, 365 days a year, utilizing a fully integrated collection and processing system. Quest Diagnostics generally performs and reports most routine procedures within 24 hours, employing a variety of sophisticated and computerized laboratory testing instruments. Quest Diagnostics provides daily pickup of specimens from most customers principally through an in-house courier system. The specimens are sent to one of the Company's laboratories where one or more tests are performed. Each patient specimen is accompanied by a test requisition form, which is completed by the customer, that indicates the tests to be performed and provides the necessary billing information. Each specimen and related requisition form is checked for completeness and then given a unique bar-coded identification number. Once the appropriate information is entered into the computer system, the tests are performed and the results are delivered to the doctor, primarily through computer interface or manually. Corning entered the clinical laboratory business in 1982 with the acquisition of MetPath Inc. ("MetPath"), which was founded in 1967 and was one of the first laboratories to expand beyond a regional market. Since January 1993, Quest Diagnostics has acquired over thirty laboratories, including Damon Corporation ("Damon"), Bioran Medical Laboratory ("Bioran") and Maryland Medical Laboratory, Inc. ("MML"). In 1994, Quest Diagnostics enhanced its presence in the esoteric testing market through the acquisition of Nichols, a preeminent clinical laboratory with a leading reputation for esoteric testing and test innovations. While Corning's ownership provided the Company with the capital to grow through acquisitions and to become one of the nation's largest independent clinical laboratory testing companies, the management of both Corning and Quest Diagnostics believe that Quest Diagnostics will be more competitive and operate more successfully in the future as an independent company, with a strong, focused and experienced management team to concentrate on customer needs. Independence will also enable Quest Diagnostics to motivate its employees by offering equity-based incentives tied directly to the performance of the Company and individual performance. Quest Diagnostics' management team has implemented a new business strategy, which focuses the business around three key strategic areas: clinical operations, customer focus and technological leadership and excellence. The Clinical Laboratory Testing Industry Clinical testing is a critical component in the delivery of quality health care service to patients. Currently, clinical laboratory testing is the first step in determining how a significant amount of all health care dollars are spent. Quest Diagnostics believes that in 1995 the entire United States clinical laboratory industry had revenues exceeding $30 billion. The clinical laboratory industry consists primarily of three types of providers: hospital-affiliated laboratories, independent clinical laboratories, such as Quest Diagnostics, and physician-office laboratories. The Company believes that in 1995 approximately 56% of the clinical testing revenues in the United States were attributable to hospital-affiliated laboratories, approximately 36% were attributable to independent clinical laboratories and approximately 8% were attributable to physicians in their offices and laboratories. Quest Diagnostics believes that consolidation will continue in the clinical laboratory testing business. In addition, Quest Diagnostics believes that it and the other large independent clinical laboratory testing companies may have the opportunity to increase their share of the overall clinical laboratories testing market due to a number of external factors, including cost efficiencies afforded by large-scale automated testing, Medicare reimbursement reductions and the growth of managed health care entities which require low-cost testing services and large service networks. In addition, legal restrictions on physician referrals and the ownership of laboratories as well as increased regulation of laboratories are expected to contribute to the continuing consolidation of the industry. Quest Diagnostics believes that a number of factors are likely to positively influence the volume of clinical laboratory testing performed in the United States in the future, including (1) the general aging of the population in the United States; (2) an expanded base of scientific knowledge which has led to the development of more sophisticated specialized tests and an increase in the awareness of physicians of the value of clinical laboratory testing as a cost-effective means of early detection of disease and monitoring of treatment; (3) an increase in the number and types of tests which are, due to advances in technology and increased cost efficiencies, readily available on a more affordable basis to physicians; (4) expanded substance-abuse testing by corporations and governmental agencies; and (5) increased testing for sexually transmitted diseases such as AIDS. The impact of these factors is expected to be offset in part by increased controls over the utilization of clinical laboratory tests by both Medicare and the private sector, particularly managed care organizations. Business Strategy Quest Diagnostics' overall goal is to be recognized by its customers, employees and competitors as the best provider of comprehensive and innovative clinical testing, information and services. To achieve this, Quest Diagnostics' management team has focused the business around three key strategic areas: clinical operations, customer focus and technological leadership and excellence. (bullet) Best Supplier. Quest Diagnostics seeks to be the best supplier of the highest quality and the lowest-cost testing services. Health care providers and patients expect accurate, timely and consistent laboratory test results at a fair price. (bullet) Lowest-cost provider. Quest Diagnostics' average cost per requisition varies significantly among its regional laboratories; there is an approximately $7.00 difference in cost per requisition between the most efficient regional laboratory and the average, and an approximately $13.00 difference in cost per requisition between the most and the least efficient regional laboratories. In many cases, these variations do not relate to testing volumes or mixes, space costs, service requirements or regional labor cost differences. To reduce costs, Quest Diagnostics has begun to replicate the best practices from each region throughout its national network. Management expects to achieve significant cost savings within the next three years as these programs are fully implemented. * (bullet) Highest Quality Provider. Quest Diagnostics is dedicated to providing accurate and timely test results and to being viewed by its customers as the highest quality provider of clinical testing services. Quest Diagnostics believes that implementation of best practices already developed in certain regions will permit the Company to be viewed by its customers as the highest quality provider of clinical testing services. (bullet) Preferred Provider. Quest Diagnostics seeks to be the preferred provider of laboratory testing services to existing and new health care networks on a selective basis determined by profitability of accounts. Quest Diagnostics believes that it will become the preferred provider to these networks as (1) large networks typically prefer to utilize large independent clinical laboratories that can service them on a national or regional basis and (2) the Company continues to pursue its primary strategy of becoming the highest quality, lowest-cost provider. To achieve this, Quest Diagnostics will employ a rigorous national and regional process to both select and pursue customers and allocate resources to support these efforts. *This is a forward looking statement and is based on current expectations. Actual results may vary materially from those projected. See "Business- Important Factors Regarding Forward Looking Statements." In particular, see factors (a), (d) and (j). (bullet) Account Profitability. Quest Diagnostics intends to refocus its sales efforts on pursuing and keeping profitable accounts. Quest Diagnostics is actively reviewing the profitability of its current accounts, including those with managed care organizations, and will either increase pricing or eliminate accounts that cannot be serviced profitably. (bullet) Regional Profitability. Quest Diagnostics presently believes that it has the leading market share among independent clinical laboratories in most routine testing markets of the northeast, mid-Atlantic and midwest regions. Approximately 65% of Quest Diagnostics' revenues and almost all of its EBITDA is generated from markets in which the Company believes that it has the leading market share. In most of these markets, Quest Diagnostics believes that it also is the lowest cost provider. Quest Diagnostics is evaluating its strategic alternatives relative to units whose profitability does not meet its internal goals. These alternatives may include joint ventures, alliances, or dispositions. Quest Diagnostics believes that, while the clinical laboratory industry is becoming national in scope, the Company can subcontract with other clinical laboratories to perform testing for national accounts in any markets in which the Company chooses not to compete. (bullet) Leading Innovator. Quest Diagnostics intends to remain a leading innovator in the clinical laboratory industry by continuing to introduce new tests, technology and services. Through its relationship with the academic community and pharmaceutical and biotechnology firms and a research and development budget exceeding $15 million per year, Quest Diagnostics believes it is one of the leaders in transferring innovation from academic biotechnology laboratories to the market. Recent Developments By a plea agreement and civil agreement and release dated October 9, 1996, between the Department of Justice ("DOJ") and Damon, all federal criminal matters within the scope of the various federal investigations against Damon, and all claims including the civil qui tam cases underlying the civil investigations were settled for an aggregate of $119 million, which sum was reimbursed to Quest Diagnostics by Corning. The Damon settlement does not exclude Quest Diagnostics from future participation in any federal health care programs on account of Damon's practices. Quest Diagnostics' aggregate reserve with respect to all governmental and private claims was $215 million at September 30, 1996 and is estimated to be reduced to $85 million as of the Distribution Date as a result of the payment of settled claims, primarily the Damon settlement of $119 million. Based on information available to management and Quest Diagnostics' experience with past settlements (including the fact that the aggregate amount of the Damon settlement was significantly in excess of established reserves) management has reassessed its reserve levels and believes that its current level of reserves is adequate. However, it is possible that additional information may become available which may cause the final resolution of these matters to be in excess of established reserves by an amount which could be material to Quest Diagnostics' results of operations and, for non-indemnified claims, Quest Diagnostics' cash flows in the period in which such claims are settled. While none of the governmental or nongovernmental investigations or claims is covered by insurance, Quest Diagnostics does not believe that these matters will have a material adverse effect on Quest Diagnostics' overall financial condition. Corning Indemnity In connection with the Distributions, Corning has agreed to indemnify Quest Diagnostics against all monetary penalties, fines or settlements arising out of any governmental claims arising out of alleged violations of applicable federal fraud and health care statutes and relating to billing practices of Quest Diagnostics and its predecessors that have been settled or are pending on the Distribution Date. Corning has also agreed to indemnify Quest Diagnostics for 50% of the aggregate of all judgment or settlement payments made by Quest Diagnostics that are in excess of $42.0 million in respect of claims by private parties (i.e., nongovernmental parties such as private insurers) that relate to indemnified or previously settled governmental claims and that allege overbillings by Quest Diagnostics or any existing subsidiaries of Quest Diagnostics, for services provided prior to the Distribution Date; provided, however, such indemnification for nongovernmental claims will not exceed $25.0 million in the aggregate and all amounts indemnified against by Corning for the benefit of Quest Diagnostics will be calculated on a net after-tax basis. Such indemnification will not cover (i) any governmental claims that arise after the Distribution Date pursuant to service of subpoena or other notice of such investigation after the Distribution Date, (ii) any nongovernmental claims unrelated to the indemnified governmental claims or investigations, (iii) any nongovernmental claims not settled prior to five years after the Distribution Date, (iv) any consequential or incidental damages relating to the billing claims, including losses of revenues and profits as a consequence of exclusion for participation in federal or state health care programs or (v) the fees and expenses of litigation. The Distributions On May 13, 1996, the board of directors of Corning approved a plan to distribute to Corning shareholders the clinical laboratory testing business being conducted by Quest Diagnostics and the contract research business being conducted by Quest Diagnostics' wholly owned subsidiary, Covance (together, the "Distributions"). The Distributions will be effected by distributing all of the outstanding shares of Quest Diagnostics common stock (the "Quest Diagnostics Common Stock") to holders of Corning common stock (the "Corning Common Stock"), followed immediately by the distribution of all of the common stock of Covance (the "Covance Common Stock") to those same holders, as holders of Quest Diagnostics Common Stock. It is expected that the Distributions will be made on December 31, 1996 (the date on which the Distributions are to be made, the "Distribution Date"). Prior to the consummation of the offering of the Notes contemplated hereby (the "Offering"), the Company entered into a $450 million senior, secured credit facility (the "Credit Facility"), among the Company, the lenders listed therein, NationsBank, N.A., as Issuing Bank, Wachovia Bank of Georgia, N.A., as Swingline Bank, and Morgan Guaranty Trust Company of New York, as Administrative Agent. The Credit Facility is comprised of a $300 million six-year amortizing term loan ("Tranche A Loan"), a $50 million seven-year term loan ("Tranche B Loan" and together with the Tranche A Loan, the "Term Loans") and a $100 million six-year revolving working capital facility (the "Working Capital Facility"). Corning currently has approximately $1.2 billion of Quest Diagnostics intercompany debt. Approximately $145 million of net proceeds from the Offering, together with the $350 million of borrowings under the Term Loans, will be paid to Corning in satisfaction of a portion of the outstanding intercompany debt. Corning will contribute the remaining intercompany debt to Quest Diagnostics' capital. Borrowings under the Working Capital Facility, substantially all of which is expected to be available as of the Distribution Date, will provide for future working capital needs and other general corporate purposes. The Offering <TABLE> <CAPTION> <S> <C> Securities Offered $150,000,000 aggregate principal amount of % Senior Subordinated Notes due December 15, 2006 (the "Notes"). Maturity Date December 15, 2006. Interest Payment Date June 15 and December 15, commencing June 15, 1997. Optional Redemption by the Company The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after December 15, 2001, at the redemption prices set forth herein, plus accrued and unpaid interest, if any, to but excluding the date fixed for redemption. In addition, if as a result of an event outside the control of Corning, Quest Diagnostics and Covance, the Distributions do not occur prior to March 31, 1997, the Notes will be subject to redemption, as a whole and not in part, at the option of Quest Diagnostics, prior to June 30, 1997, at a redemption price equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to but excluding the date fixed for redemption. See "Description of the Notes--Optional Redemption." Change of Control Offer Upon a Change of Control, the Company has the obligation to offer to purchase all the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to but excluding the date of purchase. See "Description of the Notes-- Repurchase at the Option of Holders--Change of Control" for a discussion of the circumstances in which the Company may not be required to make an offer to purchase upon a Change of Control. Offers to Purchase In the event of certain asset sales, the Company will be required to offer to repurchase the Notes at 100% of their principal amount, plus accrued and unpaid interest, if any, to but excluding the date of purchase with the net proceeds of such asset sales. Subordination The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company, including all indebtedness of the Company under the Credit Facility. The Notes will rank Pari Passu in right of payment with any other senior subordinated indebtedness of the Company. Subsidiary Guarantees The Notes will be guaranteed, jointly and severally, and fully and unconditionally, on a senior subordinated basis by the Guarantors (the "Senior Subordinated Guarantees"). The obligations of any Guarantor with respect to its Senior Subordinated Guarantee will be subordinated in right of payment, to the same extent as the obligations of the Company in respect of the Notes, to all existing and future Senior Guarantees, which will include the guarantees of the Credit Facility. The Senior Subordinated Guarantees would also be subordinated to all existing and future indebtedness of the Guarantors if the Senior Subordinated Guarantees were avoided or subordinated in favor of the Guarantors' other creditors. See "Risk Factors--Fraudulent Conveyance." The obligations of a Guarantor under its Senior Subordinated Guarantee will be released in certain circumstances, including if the Guarantor ceases to guarantee the Credit Facility. See "Description of the Notes--Senior Subordinated Guarantees." Principal Covenants The indenture under which the Notes are issued (the "Indenture") will impose certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt and senior in right of payment to the Notes, enter into leases, incur liens, merge or consolidate with any other person, or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. Use of Proceeds The Company intends to use the proceeds from the sale of the Notes, together with the proceeds of borrowings under the Credit Facility, to repay certain intercompany indebtedness owed to Corning. See "Use of Proceeds." The Distributions The Notes are being offered in connection with the Distributions of the Quest Diagnostics Common Stock and the Covance Common Stock to holders of Corning Common Stock. The closing of the offering of the Notes is anticipated to occur prior to the Distributions. Listing The Notes have been approved for listing on the New York Stock Exchange, subject to official notice of issuance. Risk Factors See "Risk Factors" for a discussion of certain factors that should be considered in connection with an investment in the Notes. </TABLE> Summary Financial Data The following table summarizes certain historical and pro forma financial data of Quest Diagnostics at the dates and for each of the periods indicated. The selected financial data as of and for each of the years ended December 31, 1995, 1994 and 1993 have been derived from the audited combined financial statements of (the "Audited Financial Statements") and the notes thereto included elsewhere herein. The selected financial data as of and for the three and nine months ended September 30, 1996 and 1995 have been derived from the unaudited interim combined financial statements of Quest Diagnostics (the "Interim Financial Statements" and, together with the Audited Financial Statements, the "Financial Statements") and the notes thereto included elsewhere herein. In the opinion of Quest Diagnostics management, the unaudited interim combined financial statements include all adjustments, consisting of only normal recurring adjustments, that are necessary for a fair presentation of the financial position and results of operations for these periods. The unaudited interim results of operations for the three and nine months ended September 30, 1996 are not necessarily indicative of the results for the entire year ending December 31, 1996. The selected pro forma financial data have been derived from the unaudited pro forma combined financial information of Quest Diagnostics for the year ended December 31, 1995 and for the three and nine months ended September 30, 1996 (the "Pro Forma Financial Information") and the notes thereto included elsewhere herein. The pro forma statement of operations data gives effect to the Distributions and the Accounting Policy Change (as defined below) as if they had occurred on January 1, 1995 and the pro forma balance sheet data gives effect to the Distributions and the Accounting Policy Change as if they had occurred on September 30, 1996. The pro forma financial data does not purport to represent what Quest Diagnostics' results of operations would have been if the Distributions and the Accounting Policy Change had in fact occurred on such dates, nor does it purport to indicate the future financial position or results of future operations of Quest Diagnostics. The pro forma adjustments are based upon currently available information and certain assumptions that Quest Diagnostics management believes to be reasonable. The summary historical and pro forma financial data set forth below should be read in conjunction with "Selected Historical Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Financial Statements and the notes thereto and the Pro Forma Financial Information and the notes thereto. <TABLE> <CAPTION> Three Months Ended September 30, Nine Months Ended September 30, ------------------------------------------------------------------------------------------------ Pro Forma Historical Pro Forma Historical ------------------------------- ------------------------------- 1996(a) 1996 1995 1996(a) 1996 1995 --------------- --------------- --------------- ---------------- ---------------- -------------- (in thousands, except share, per share and percentage data) <S> <C> <C> <C> <C> <C> <C> Statement of Operations Data: Net revenues $ 405,352 $ 405,352 $ 399,959 $ 1,231,290 $1,231,290 $1,239,474 Costs and expenses: Cost of services 255,390 255,390 240,868 768,809 768,809 735,984 Selling, general and administrative 125,190 125,190 181,346(c) 371,439 371,439 399,635(c) Provision for restructuring and other special charges(d) 155,730 155,730 201,730 201,730 45,885 Interest expense, net 12,189 19,866 20,927 36,938 59,887 61,529 Amortization of intangible assets 7,672 10,328 11,293 23,803 31,772 33,678 Other, net 1,837 1,837 1,930 (198) (198) 4,429 --------------- --------------- --------------- ---------------- ---------------- -------------- Total 558,008 568,341 456,364 1,402,521 1,433,439 1,281,140 --------------- --------------- --------------- ---------------- ---------------- -------------- Income (loss) before taxes (152,656) (162,989) (56,405) (171,231) (202,149) (41,666) Income tax expense (benefit) (40,521) (43,553) (17,810) (34,215) (43,280) (3,642) --------------- --------------- --------------- ---------------- ---------------- -------------- Income (loss) before cumulative effect of change in accounting principle (112,135) (119,436) (38,595) (137,016) (158,869) (38,024) Cumulative effect of change in accounting principle --------------- --------------- --------------- ---------------- ---------------- -------------- Net income (loss) $ (112,135) $ (119,436) $ (38,595) $ (137,016) $ (158,869) $ (38,024) =============== =============== =============== ================ ================ ============== Pro forma shares outstanding(e) 28,901,735 28,901,735 Pro forma net loss per share $ (3.88) $ (4.74) Balance Sheet Data (at end of period): Cash $ 40,000 $ 48,319 $ 46,908 $ 40,000 $ 48,319 $ 46,908 Working capital 306,741 114,718 129,319 306,741 114,718 129,319 Total assets 1,612,459 1,886,378 1,896,058 1,612,459 1,886,378 1,896,058 Long-term debt 515,494 1,219,900 1,114,367 515,494 1,219,900 1,114,367 Total debt 517,379 1,231,785 1,226,211 517,379 1,231,785 1,226,211 Stockholder's equity 604,099 132,670 320,576 604,099 132,670 320,576 Ratio of earnings to fixed charges -- (f) -- (f) -- (f) -- (f) -- (f) -- (f) Supplemental Data: Net cash provided by operating activities $ 25,236 $ 25,236 $ 38,202 $ 41,937 $ 41,937 $ 53,789 Net cash used in investing activities (7,904) (7,904) (17,044) (53,097) (53,097) (77,911) Net cash provided by (used in) financing activities (6,618) (6,618) (18,006) 23,033 23,033 32,311 Bad debt expense $ 30,539 $ 30,539 $ 85,831(c) $ 81,891 $ 81,891 $ 127,297(c) Bad debt expense as a % of net revenues 7.5% 7.5% 21.5% 6.7% 6.7% 10.3% Rent expense $ 12,515 $ 12,515 $ 11,860 $ 37,315 $ 37,315 $ 35,060 Capital expenditures 11,912 11,912 16,441 58,802 58,802 56,062 Depreciation expense $ 14,672 $ 14,672 $ 14,275 $ 43,460 $ 43,460 $ 42,358 EBITDA(g) $ (118,123)(h) $ (118,123)(h) $ (9,910)(c) $ (67,030)(h) $ (67,030)(h) $ 95,899(c) EBITDA as a % of net revenues (29.1%) (29.1%) (2.5%) (5.4%) (5.4%) 7.7% Adjusted EBITDA(i) $ 37,607 $ 37,607 $ (9,910)(c) $ 134,700 $ 134,700 $ 141,784(c) Adjusted EBITDA as a % of net revenues 9.3% 9.3% (2.5%) 10.9% 10.9% 11.4% Supplemental Ratio Data: Adjusted EBITDA/interest expense, net 3.1x 3.6x (Adjusted EBITDA-capital expenditures)/interest expense, net 2.1x 2.1x (Total debt--cash)/annualized adjusted EBITDA 3.2x 2.7x </TABLE> (Footnotes on page 14) <TABLE> <CAPTION> Year Ended December 31, ----------------------------------------------------------- Pro Forma Historical ------------------------------------------- 1995(a) 1995 1994(b) 1993 --------------- --------------- ------------- ------------- (in thousands, except share, per share and percentage data) <S> <C> <C> <C> <C> Statement of Operations Data: Net revenues $ 1,629,388 $1,629,388 $1,633,699 $1,416,338 Costs and expenses: Cost of services 980,232 980,232 969,844 805,729 Selling, general and administrative 523,271(c) 523,271(c) 411,939 363,579 Provision for restructuring and other special charges(d) 50,560 50,560 79,814 99,600 Interest expense, net 50,748 82,016 63,295 41,898 Amortization of intangible assets 34,031 44,656 42,588 28,421 Other, net 6,221 6,221 3,464 6,423 --------------- --------------- ------------- ------------- Total 1,645,063 1,686,956 1,570,944 1,345,650 --------------- --------------- ------------- ------------- Income (loss) before taxes (15,675) (57,568) 62,755 70,688 Income tax expense (benefit) 6,835 (5,516) 34,410 25,929 --------------- --------------- ------------- ------------- Income (loss) before cumulative effect of change in accounting principle (22,510) (52,052) 28,345 44,759 Cumulative effect of change in accounting principle (10,562) --------------- --------------- ------------- ------------- Net income (loss) $ (22,510) $ (52,052) $ 28,345 $ 34,197 =============== =============== ============= ============= Pro forma shares outstanding(e) 28,901,735 Pro forma net loss per share $ (0.78) Balance Sheet Data (at end of period): Cash $ 36,446 $ 38,719 $ 39,410 Working capital 200,740 214,358 139,771 Total assets 1,853,385 1,882,663 1,861,162 Long-term debt 1,195,566 1,153,054 1,025,787 Total debt 1,207,714 1,165,626 1,123,307 Stockholder's equity 295,801 386,812 395,509 Ratio of earnings to fixed charges -- (f) -- (f) 1.77(f) 2.20(f) Supplemental Data: Net cash provided by operating activities $ 85,828 $ 85,828 $ 37,963 $ 99,614 Net cash used in investing activities (93,087) (93,087) (46,186) (473,687) Net cash provided by (used in) financing activities 4,986 4,986 7,532 392,956 Bad debt expense $ 152,590(c) $ 152,590(c) $ 59,480 $ 47,240 Bad debt expense as a % of net revenues 9.4% 9.4% 3.6% 3.3% Rent expense $ 46,900 $ 46,900 $ 49,400 $ 46,900 Capital expenditures 74,045 74,045 93,354 65,317 Depreciation expense $ 56,857 $ 56,857 $ 46,929 $ 38,058 EBITDA(g) $ 125,961(c) $ 125,961(c) $ 215,567 $ 179,065 EBITDA as a % of net revenues 7.7% 7.7% 13.2% 12.6% Adjusted EBITDA(i) $ 176,521(c) $ 176,521(c) $ 295,381 $ 278,665 Adjusted EBITDA as a % of net revenues 10.8% 10.8% 18.1% 19.7% Supplemental Ratio Data: Adjusted EBITDA/interest expense, net 3.5x (Adjusted EBITDA-capital expenditures)/ interest expense, net 2.0x </TABLE> (Footnotes on page 14) (Footnotes for preceding pages) (a) Adjusted to reflect the pro forma effects of the Distributions and the Accounting Policy Change. See "Selected Historical Financial Data" and "Pro Forma Financial Information."
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+Prospectus Summary This Summary is qualified by the more detailed information (including the financial statements and related notes) set forth elsewhere in this Prospectus which should be read in its entirety. Unless the context indicates, or it is specifically indicated otherwise, all references to (i) "Corning" include Corning Incorporated, a New York corporation, and its consolidated subsidiaries, (ii) "Quest Diagnostics" or the "Company" include Corning Clinical Laboratories Inc. (to be renamed Quest Diagnostics Incorporated prior to the Distributions), a Delaware corporation, and its direct and indirect subsidiaries (other than Covance) and assume that the Distributions have occurred, and (iii) "Covance" include Covance Inc. (formerly Corning Pharmaceutical Services Inc.), a Delaware corporation, and its direct and indirect subsidiaries and assume that the Distributions have occurred. Capitalized terms used but not defined in this Summary are defined elsewhere in this Prospectus. The Company Quest Diagnostics is one of the largest independent clinical laboratory testing companies in the United States. Quest Diagnostics offers a broad range of routine and specialty ("esoteric") testing services used by the medical profession in the diagnosis, monitoring and treatment of disease and other medical conditions. Quest Diagnostics' network, which processes approximately 60 million requisitions for diagnostic tests annually, consists of 17 regional laboratories across the United States and the Corning Nichols Institute ("Nichols") esoteric testing laboratory in San Juan Capistrano, California. In addition, Quest Diagnostics has 14 branch laboratories in the United States as well as one branch laboratory in Mexico City (branch laboratories are smaller than regional laboratories), approximately 200 "STAT" laboratories and approximately 850 patient service centers located throughout the United States. For the year ended December 31, 1995 and the nine months ended September 30, 1996, Quest Diagnostics had net revenues of $1,629 million and $1,231 million, respectively, and Adjusted EBITDA (income (loss) before income taxes plus net interest expense, depreciation and amortization and restructuring and other special charges) of $177 million and $135 million, respectively. Quest Diagnostics operates 24 hours a day, 365 days a year, utilizing a fully integrated collection and processing system. Quest Diagnostics generally performs and reports most routine procedures within 24 hours, employing a variety of sophisticated and computerized laboratory testing instruments. Quest Diagnostics provides daily pickup of specimens from most customers principally through an in-house courier system. The specimens are sent to one of the Company's laboratories where one or more tests are performed. Each patient specimen is accompanied by a test requisition form, which is completed by the customer, that indicates the tests to be performed and provides the necessary billing information. Each specimen and related requisition form is checked for completeness and then given a unique bar-coded identification number. Once the appropriate information is entered into the computer system, the tests are performed and the results are delivered to the doctor, primarily through computer interface or manually. Corning entered the clinical laboratory business in 1982 with the acquisition of MetPath Inc. ("MetPath"), which was founded in 1967 and was one of the first laboratories to expand beyond a regional market. Since January 1993, Quest Diagnostics has acquired over thirty laboratories, including Damon Corporation ("Damon"), Bioran Medical Laboratory ("Bioran") and Maryland Medical Laboratory, Inc. ("MML"). In 1994, Quest Diagnostics enhanced its presence in the esoteric testing market through the acquisition of Nichols, a preeminent clinical laboratory with a leading reputation for esoteric testing and test innovations. While Corning's ownership provided the Company with the capital to grow through acquisitions and to become one of the nation's largest independent clinical laboratory testing companies, the management of both Corning and Quest Diagnostics believe that Quest Diagnostics will be more competitive and operate more successfully in the future as an independent company, with a strong, focused and experienced management team to concentrate on customer needs. Independence will also enable Quest Diagnostics to motivate its employees by offering equity-based incentives tied directly to the performance of the Company and individual performance. Quest Diagnostics' management team has implemented a new business strategy, which focuses the business around three key strategic areas: clinical operations, customer focus and technological leadership and excellence. The Clinical Laboratory Testing Industry Clinical testing is a critical component in the delivery of quality health care service to patients. Currently, clinical laboratory testing is the first step in determining how a significant amount of all health care dollars are spent. Quest Diagnostics believes that in 1995 the entire United States clinical laboratory industry had revenues exceeding $30 billion. The clinical laboratory industry consists primarily of three types of providers: hospital-affiliated laboratories, independent clinical laboratories, such as Quest Diagnostics, and physician-office laboratories. The Company believes that in 1995 approximately 56% of the clinical testing revenues in the United States were attributable to hospital-affiliated laboratories, approximately 36% were attributable to independent clinical laboratories and approximately 8% were attributable to physicians in their offices and laboratories. Quest Diagnostics believes that consolidation will continue in the clinical laboratory testing business. In addition, Quest Diagnostics believes that it and the other large independent clinical laboratory testing companies may have the opportunity to increase their share of the overall clinical laboratories testing market due to a number of external factors, including cost efficiencies afforded by large-scale automated testing, Medicare reimbursement reductions and the growth of managed health care entities which require low-cost testing services and large service networks. In addition, legal restrictions on physician referrals and the ownership of laboratories as well as increased regulation of laboratories are expected to contribute to the continuing consolidation of the industry. Quest Diagnostics believes that a number of factors are likely to positively influence the volume of clinical laboratory testing performed in the United States in the future, including (1) the general aging of the population in the United States; (2) an expanded base of scientific knowledge which has led to the development of more sophisticated specialized tests and an increase in the awareness of physicians of the value of clinical laboratory testing as a cost-effective means of early detection of disease and monitoring of treatment; (3) an increase in the number and types of tests which are, due to advances in technology and increased cost efficiencies, readily available on a more affordable basis to physicians; (4) expanded substance-abuse testing by corporations and governmental agencies; and (5) increased testing for sexually transmitted diseases such as AIDS. The impact of these factors is expected to be offset in part by increased controls over the utilization of clinical laboratory tests by both Medicare and the private sector, particularly managed care organizations. Business Strategy Quest Diagnostics' overall goal is to be recognized by its customers, employees and competitors as the best provider of comprehensive and innovative clinical testing, information and services. To achieve this, Quest Diagnostics' management team has focused the business around three key strategic areas: clinical operations, customer focus and technological leadership and excellence. (bullet) Best Supplier. Quest Diagnostics seeks to be the best supplier of the highest quality and the lowest-cost testing services. Health care providers and patients expect accurate, timely and consistent laboratory test results at a fair price. (bullet) Lowest-cost provider. Quest Diagnostics' average cost per requisition varies significantly among its regional laboratories; there is an approximately $7.00 difference in cost per requisition between the most efficient regional laboratory and the average, and an approximately $13.00 difference in cost per requisition between the most and the least efficient regional laboratories. In many cases, these variations do not relate to testing volumes or mixes, space costs, service requirements or regional labor cost differences. To reduce costs, Quest Diagnostics has begun to replicate the best practices from each region throughout its national network. Management expects to achieve significant cost savings within the next three years as these programs are fully implemented. * (bullet) Highest Quality Provider. Quest Diagnostics is dedicated to providing accurate and timely test results and to being viewed by its customers as the highest quality provider of clinical testing services. Quest Diagnostics believes that implementation of best practices already developed in certain regions will permit the Company to be viewed by its customers as the highest quality provider of clinical testing services. (bullet) Preferred Provider. Quest Diagnostics seeks to be the preferred provider of laboratory testing services to existing and new health care networks on a selective basis determined by profitability of accounts. Quest Diagnostics believes that it will become the preferred provider to these networks as (1) large networks typically prefer to utilize large independent clinical laboratories that can service them on a national or regional basis and (2) the Company continues to pursue its primary strategy of becoming the highest quality, lowest-cost provider. To achieve this, Quest Diagnostics will employ a rigorous national and regional process to both select and pursue customers and allocate resources to support these efforts. *This is a forward looking statement and is based on current expectations. Actual results may vary materially from those projected. See "Business- Important Factors Regarding Forward Looking Statements." In particular, see factors (a), (d) and (j). (bullet) Account Profitability. Quest Diagnostics intends to refocus its sales efforts on pursuing and keeping profitable accounts. Quest Diagnostics is actively reviewing the profitability of its current accounts, including those with managed care organizations, and will either increase pricing or eliminate accounts that cannot be serviced profitably. (bullet) Regional Profitability. Quest Diagnostics presently believes that it has the leading market share among independent clinical laboratories in most routine testing markets of the northeast, mid-Atlantic and midwest regions. Approximately 65% of Quest Diagnostics' revenues and almost all of its EBITDA is generated from markets in which the Company believes that it has the leading market share. In most of these markets, Quest Diagnostics believes that it also is the lowest cost provider. Quest Diagnostics is evaluating its strategic alternatives relative to units whose profitability does not meet its internal goals. These alternatives may include joint ventures, alliances, or dispositions. Quest Diagnostics believes that, while the clinical laboratory industry is becoming national in scope, the Company can subcontract with other clinical laboratories to perform testing for national accounts in any markets in which the Company chooses not to compete. (bullet) Leading Innovator. Quest Diagnostics intends to remain a leading innovator in the clinical laboratory industry by continuing to introduce new tests, technology and services. Through its relationship with the academic community and pharmaceutical and biotechnology firms and a research and development budget exceeding $15 million per year, Quest Diagnostics believes it is one of the leaders in transferring innovation from academic biotechnology laboratories to the market. Recent Developments By a plea agreement and civil agreement and release dated October 9, 1996, between the Department of Justice ("DOJ") and Damon, all federal criminal matters within the scope of the various federal investigations against Damon, and all claims including the civil qui tam cases underlying the civil investigations were settled for an aggregate of $119 million, which sum was reimbursed to Quest Diagnostics by Corning. The Damon settlement does not exclude Quest Diagnostics from future participation in any federal health care programs on account of Damon's practices. Quest Diagnostics' aggregate reserve with respect to all governmental and private claims was $215 million at September 30, 1996 and is estimated to be reduced to $85 million as of the Distribution Date as a result of the payment of settled claims, primarily the Damon settlement of $119 million. Based on information available to management and Quest Diagnostics' experience with past settlements (including the fact that the aggregate amount of the Damon settlement was significantly in excess of established reserves) management has reassessed its reserve levels and believes that its current level of reserves is adequate. However, it is possible that additional information may become available which may cause the final resolution of these matters to be in excess of established reserves by an amount which could be material to Quest Diagnostics' results of operations and, for non-indemnified claims, Quest Diagnostics' cash flows in the period in which such claims are settled. While none of the governmental or nongovernmental investigations or claims is covered by insurance, Quest Diagnostics does not believe that these matters will have a material adverse effect on Quest Diagnostics' overall financial condition. Corning Indemnity In connection with the Distributions, Corning has agreed to indemnify Quest Diagnostics against all monetary penalties, fines or settlements arising out of any governmental claims arising out of alleged violations of applicable federal fraud and health care statutes and relating to billing practices of Quest Diagnostics and its predecessors that have been settled or are pending on the Distribution Date. Corning has also agreed to indemnify Quest Diagnostics for 50% of the aggregate of all judgment or settlement payments made by Quest Diagnostics that are in excess of $42.0 million in respect of claims by private parties (i.e., nongovernmental parties such as private insurers) that relate to indemnified or previously settled governmental claims and that allege overbillings by Quest Diagnostics or any existing subsidiaries of Quest Diagnostics, for services provided prior to the Distribution Date; provided, however, such indemnification for nongovernmental claims will not exceed $25.0 million in the aggregate and all amounts indemnified against by Corning for the benefit of Quest Diagnostics will be calculated on a net after-tax basis. Such indemnification will not cover (i) any governmental claims that arise after the Distribution Date pursuant to service of subpoena or other notice of such investigation after the Distribution Date, (ii) any nongovernmental claims unrelated to the indemnified governmental claims or investigations, (iii) any nongovernmental claims not settled prior to five years after the Distribution Date, (iv) any consequential or incidental damages relating to the billing claims, including losses of revenues and profits as a consequence of exclusion for participation in federal or state health care programs or (v) the fees and expenses of litigation. The Distributions On May 13, 1996, the board of directors of Corning approved a plan to distribute to Corning shareholders the clinical laboratory testing business being conducted by Quest Diagnostics and the contract research business being conducted by Quest Diagnostics' wholly owned subsidiary, Covance (together, the "Distributions"). The Distributions will be effected by distributing all of the outstanding shares of Quest Diagnostics common stock (the "Quest Diagnostics Common Stock") to holders of Corning common stock (the "Corning Common Stock"), followed immediately by the distribution of all of the common stock of Covance (the "Covance Common Stock") to those same holders, as holders of Quest Diagnostics Common Stock. It is expected that the Distributions will be made on December 31, 1996 (the date on which the Distributions are to be made, the "Distribution Date"). Prior to the consummation of the offering of the Notes contemplated hereby (the "Offering"), the Company entered into a $450 million senior, secured credit facility (the "Credit Facility"), among the Company, the lenders listed therein, NationsBank, N.A., as Issuing Bank, Wachovia Bank of Georgia, N.A., as Swingline Bank, and Morgan Guaranty Trust Company of New York, as Administrative Agent. The Credit Facility is comprised of a $300 million six-year amortizing term loan ("Tranche A Loan"), a $50 million seven-year term loan ("Tranche B Loan" and together with the Tranche A Loan, the "Term Loans") and a $100 million six-year revolving working capital facility (the "Working Capital Facility"). Corning currently has approximately $1.2 billion of Quest Diagnostics intercompany debt. Approximately $145 million of net proceeds from the Offering, together with the $350 million of borrowings under the Term Loans, will be paid to Corning in satisfaction of a portion of the outstanding intercompany debt. Corning will contribute the remaining intercompany debt to Quest Diagnostics' capital. Borrowings under the Working Capital Facility, substantially all of which is expected to be available as of the Distribution Date, will provide for future working capital needs and other general corporate purposes. The Offering <TABLE> <CAPTION> <S> <C> Securities Offered $150,000,000 aggregate principal amount of % Senior Subordinated Notes due December 15, 2006 (the "Notes"). Maturity Date December 15, 2006. Interest Payment Date June 15 and December 15, commencing June 15, 1997. Optional Redemption by the Company The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after December 15, 2001, at the redemption prices set forth herein, plus accrued and unpaid interest, if any, to but excluding the date fixed for redemption. In addition, if as a result of an event outside the control of Corning, Quest Diagnostics and Covance, the Distributions do not occur prior to March 31, 1997, the Notes will be subject to redemption, as a whole and not in part, at the option of Quest Diagnostics, prior to June 30, 1997, at a redemption price equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to but excluding the date fixed for redemption. See "Description of the Notes--Optional Redemption." Change of Control Offer Upon a Change of Control, the Company has the obligation to offer to purchase all the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to but excluding the date of purchase. See "Description of the Notes-- Repurchase at the Option of Holders--Change of Control" for a discussion of the circumstances in which the Company may not be required to make an offer to purchase upon a Change of Control. Offers to Purchase In the event of certain asset sales, the Company will be required to offer to repurchase the Notes at 100% of their principal amount, plus accrued and unpaid interest, if any, to but excluding the date of purchase with the net proceeds of such asset sales. Subordination The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company, including all indebtedness of the Company under the Credit Facility. The Notes will rank Pari Passu in right of payment with any other senior subordinated indebtedness of the Company. Subsidiary Guarantees The Notes will be guaranteed, jointly and severally, and fully and unconditionally, on a senior subordinated basis by the Guarantors (the "Senior Subordinated Guarantees"). The obligations of any Guarantor with respect to its Senior Subordinated Guarantee will be subordinated in right of payment, to the same extent as the obligations of the Company in respect of the Notes, to all existing and future Senior Guarantees, which will include the guarantees of the Credit Facility. The Senior Subordinated Guarantees would also be subordinated to all existing and future indebtedness of the Guarantors if the Senior Subordinated Guarantees were avoided or subordinated in favor of the Guarantors' other creditors. See "Risk Factors--Fraudulent Conveyance." The obligations of a Guarantor under its Senior Subordinated Guarantee will be released in certain circumstances, including if the Guarantor ceases to guarantee the Credit Facility. See "Description of the Notes--Senior Subordinated Guarantees." Principal Covenants The indenture under which the Notes are issued (the "Indenture") will impose certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt and senior in right of payment to the Notes, enter into leases, incur liens, merge or consolidate with any other person, or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. Use of Proceeds The Company intends to use the proceeds from the sale of the Notes, together with the proceeds of borrowings under the Credit Facility, to repay certain intercompany indebtedness owed to Corning. See "Use of Proceeds." The Distributions The Notes are being offered in connection with the Distributions of the Quest Diagnostics Common Stock and the Covance Common Stock to holders of Corning Common Stock. The closing of the offering of the Notes is anticipated to occur prior to the Distributions. Listing The Notes have been approved for listing on the New York Stock Exchange, subject to official notice of issuance. Risk Factors See "Risk Factors" for a discussion of certain factors that should be considered in connection with an investment in the Notes. </TABLE> Summary Financial Data The following table summarizes certain historical and pro forma financial data of Quest Diagnostics at the dates and for each of the periods indicated. The selected financial data as of and for each of the years ended December 31, 1995, 1994 and 1993 have been derived from the audited combined financial statements of (the "Audited Financial Statements") and the notes thereto included elsewhere herein. The selected financial data as of and for the three and nine months ended September 30, 1996 and 1995 have been derived from the unaudited interim combined financial statements of Quest Diagnostics (the "Interim Financial Statements" and, together with the Audited Financial Statements, the "Financial Statements") and the notes thereto included elsewhere herein. In the opinion of Quest Diagnostics management, the unaudited interim combined financial statements include all adjustments, consisting of only normal recurring adjustments, that are necessary for a fair presentation of the financial position and results of operations for these periods. The unaudited interim results of operations for the three and nine months ended September 30, 1996 are not necessarily indicative of the results for the entire year ending December 31, 1996. The selected pro forma financial data have been derived from the unaudited pro forma combined financial information of Quest Diagnostics for the year ended December 31, 1995 and for the three and nine months ended September 30, 1996 (the "Pro Forma Financial Information") and the notes thereto included elsewhere herein. The pro forma statement of operations data gives effect to the Distributions and the Accounting Policy Change (as defined below) as if they had occurred on January 1, 1995 and the pro forma balance sheet data gives effect to the Distributions and the Accounting Policy Change as if they had occurred on September 30, 1996. The pro forma financial data does not purport to represent what Quest Diagnostics' results of operations would have been if the Distributions and the Accounting Policy Change had in fact occurred on such dates, nor does it purport to indicate the future financial position or results of future operations of Quest Diagnostics. The pro forma adjustments are based upon currently available information and certain assumptions that Quest Diagnostics management believes to be reasonable. The summary historical and pro forma financial data set forth below should be read in conjunction with "Selected Historical Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Financial Statements and the notes thereto and the Pro Forma Financial Information and the notes thereto. <TABLE> <CAPTION> Three Months Ended September 30, Nine Months Ended September 30, ------------------------------------------------------------------------------------------------ Pro Forma Historical Pro Forma Historical ------------------------------- ------------------------------- 1996(a) 1996 1995 1996(a) 1996 1995 --------------- --------------- --------------- ---------------- ---------------- -------------- (in thousands, except share, per share and percentage data) <S> <C> <C> <C> <C> <C> <C> Statement of Operations Data: Net revenues $ 405,352 $ 405,352 $ 399,959 $ 1,231,290 $1,231,290 $1,239,474 Costs and expenses: Cost of services 255,390 255,390 240,868 768,809 768,809 735,984 Selling, general and administrative 125,190 125,190 181,346(c) 371,439 371,439 399,635(c) Provision for restructuring and other special charges(d) 155,730 155,730 201,730 201,730 45,885 Interest expense, net 12,189 19,866 20,927 36,938 59,887 61,529 Amortization of intangible assets 7,672 10,328 11,293 23,803 31,772 33,678 Other, net 1,837 1,837 1,930 (198) (198) 4,429 --------------- --------------- --------------- ---------------- ---------------- -------------- Total 558,008 568,341 456,364 1,402,521 1,433,439 1,281,140 --------------- --------------- --------------- ---------------- ---------------- -------------- Income (loss) before taxes (152,656) (162,989) (56,405) (171,231) (202,149) (41,666) Income tax expense (benefit) (40,521) (43,553) (17,810) (34,215) (43,280) (3,642) --------------- --------------- --------------- ---------------- ---------------- -------------- Income (loss) before cumulative effect of change in accounting principle (112,135) (119,436) (38,595) (137,016) (158,869) (38,024) Cumulative effect of change in accounting principle --------------- --------------- --------------- ---------------- ---------------- -------------- Net income (loss) $ (112,135) $ (119,436) $ (38,595) $ (137,016) $ (158,869) $ (38,024) =============== =============== =============== ================ ================ ============== Pro forma shares outstanding(e) 28,901,735 28,901,735 Pro forma net loss per share $ (3.88) $ (4.74) Balance Sheet Data (at end of period): Cash $ 40,000 $ 48,319 $ 46,908 $ 40,000 $ 48,319 $ 46,908 Working capital 306,741 114,718 129,319 306,741 114,718 129,319 Total assets 1,612,459 1,886,378 1,896,058 1,612,459 1,886,378 1,896,058 Long-term debt 515,494 1,219,900 1,114,367 515,494 1,219,900 1,114,367 Total debt 517,379 1,231,785 1,226,211 517,379 1,231,785 1,226,211 Stockholder's equity 604,099 132,670 320,576 604,099 132,670 320,576 Ratio of earnings to fixed charges -- (f) -- (f) -- (f) -- (f) -- (f) -- (f) Supplemental Data: Net cash provided by operating activities $ 25,236 $ 25,236 $ 38,202 $ 41,937 $ 41,937 $ 53,789 Net cash used in investing activities (7,904) (7,904) (17,044) (53,097) (53,097) (77,911) Net cash provided by (used in) financing activities (6,618) (6,618) (18,006) 23,033 23,033 32,311 Bad debt expense $ 30,539 $ 30,539 $ 85,831(c) $ 81,891 $ 81,891 $ 127,297(c) Bad debt expense as a % of net revenues 7.5% 7.5% 21.5% 6.7% 6.7% 10.3% Rent expense $ 12,515 $ 12,515 $ 11,860 $ 37,315 $ 37,315 $ 35,060 Capital expenditures 11,912 11,912 16,441 58,802 58,802 56,062 Depreciation expense $ 14,672 $ 14,672 $ 14,275 $ 43,460 $ 43,460 $ 42,358 EBITDA(g) $ (118,123)(h) $ (118,123)(h) $ (9,910)(c) $ (67,030)(h) $ (67,030)(h) $ 95,899(c) EBITDA as a % of net revenues (29.1%) (29.1%) (2.5%) (5.4%) (5.4%) 7.7% Adjusted EBITDA(i) $ 37,607 $ 37,607 $ (9,910)(c) $ 134,700 $ 134,700 $ 141,784(c) Adjusted EBITDA as a % of net revenues 9.3% 9.3% (2.5%) 10.9% 10.9% 11.4% Supplemental Ratio Data: Adjusted EBITDA/interest expense, net 3.1x 3.6x (Adjusted EBITDA-capital expenditures)/interest expense, net 2.1x 2.1x (Total debt--cash)/annualized adjusted EBITDA 3.2x 2.7x </TABLE> (Footnotes on page 14) <TABLE> <CAPTION> Year Ended December 31, ----------------------------------------------------------- Pro Forma Historical ------------------------------------------- 1995(a) 1995 1994(b) 1993 --------------- --------------- ------------- ------------- (in thousands, except share, per share and percentage data) <S> <C> <C> <C> <C> Statement of Operations Data: Net revenues $ 1,629,388 $1,629,388 $1,633,699 $1,416,338 Costs and expenses: Cost of services 980,232 980,232 969,844 805,729 Selling, general and administrative 523,271(c) 523,271(c) 411,939 363,579 Provision for restructuring and other special charges(d) 50,560 50,560 79,814 99,600 Interest expense, net 50,748 82,016 63,295 41,898 Amortization of intangible assets 34,031 44,656 42,588 28,421 Other, net 6,221 6,221 3,464 6,423 --------------- --------------- ------------- ------------- Total 1,645,063 1,686,956 1,570,944 1,345,650 --------------- --------------- ------------- ------------- Income (loss) before taxes (15,675) (57,568) 62,755 70,688 Income tax expense (benefit) 6,835 (5,516) 34,410 25,929 --------------- --------------- ------------- ------------- Income (loss) before cumulative effect of change in accounting principle (22,510) (52,052) 28,345 44,759 Cumulative effect of change in accounting principle (10,562) --------------- --------------- ------------- ------------- Net income (loss) $ (22,510) $ (52,052) $ 28,345 $ 34,197 =============== =============== ============= ============= Pro forma shares outstanding(e) 28,901,735 Pro forma net loss per share $ (0.78) Balance Sheet Data (at end of period): Cash $ 36,446 $ 38,719 $ 39,410 Working capital 200,740 214,358 139,771 Total assets 1,853,385 1,882,663 1,861,162 Long-term debt 1,195,566 1,153,054 1,025,787 Total debt 1,207,714 1,165,626 1,123,307 Stockholder's equity 295,801 386,812 395,509 Ratio of earnings to fixed charges -- (f) -- (f) 1.77(f) 2.20(f) Supplemental Data: Net cash provided by operating activities $ 85,828 $ 85,828 $ 37,963 $ 99,614 Net cash used in investing activities (93,087) (93,087) (46,186) (473,687) Net cash provided by (used in) financing activities 4,986 4,986 7,532 392,956 Bad debt expense $ 152,590(c) $ 152,590(c) $ 59,480 $ 47,240 Bad debt expense as a % of net revenues 9.4% 9.4% 3.6% 3.3% Rent expense $ 46,900 $ 46,900 $ 49,400 $ 46,900 Capital expenditures 74,045 74,045 93,354 65,317 Depreciation expense $ 56,857 $ 56,857 $ 46,929 $ 38,058 EBITDA(g) $ 125,961(c) $ 125,961(c) $ 215,567 $ 179,065 EBITDA as a % of net revenues 7.7% 7.7% 13.2% 12.6% Adjusted EBITDA(i) $ 176,521(c) $ 176,521(c) $ 295,381 $ 278,665 Adjusted EBITDA as a % of net revenues 10.8% 10.8% 18.1% 19.7% Supplemental Ratio Data: Adjusted EBITDA/interest expense, net 3.5x (Adjusted EBITDA-capital expenditures)/ interest expense, net 2.0x </TABLE> (Footnotes on page 14) (Footnotes for preceding pages) (a) Adjusted to reflect the pro forma effects of the Distributions and the Accounting Policy Change. See "Selected Historical Financial Data" and "Pro Forma Financial Information."
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+Prospectus Summary This Summary is qualified by the more detailed information (including the financial statements and related notes) set forth elsewhere in this Prospectus which should be read in its entirety. Unless the context indicates, or it is specifically indicated otherwise, all references to (i) "Corning" include Corning Incorporated, a New York corporation, and its consolidated subsidiaries, (ii) "Quest Diagnostics" or the "Company" include Corning Clinical Laboratories Inc. (to be renamed Quest Diagnostics Incorporated prior to the Distributions), a Delaware corporation, and its direct and indirect subsidiaries (other than Covance) and assume that the Distributions have occurred, and (iii) "Covance" include Covance Inc. (formerly Corning Pharmaceutical Services Inc.), a Delaware corporation, and its direct and indirect subsidiaries and assume that the Distributions have occurred. Capitalized terms used but not defined in this Summary are defined elsewhere in this Prospectus. The Company Quest Diagnostics is one of the largest independent clinical laboratory testing companies in the United States. Quest Diagnostics offers a broad range of routine and specialty ("esoteric") testing services used by the medical profession in the diagnosis, monitoring and treatment of disease and other medical conditions. Quest Diagnostics' network, which processes approximately 60 million requisitions for diagnostic tests annually, consists of 17 regional laboratories across the United States and the Corning Nichols Institute ("Nichols") esoteric testing laboratory in San Juan Capistrano, California. In addition, Quest Diagnostics has 14 branch laboratories in the United States as well as one branch laboratory in Mexico City (branch laboratories are smaller than regional laboratories), approximately 200 "STAT" laboratories and approximately 850 patient service centers located throughout the United States. For the year ended December 31, 1995 and the nine months ended September 30, 1996, Quest Diagnostics had net revenues of $1,629 million and $1,231 million, respectively, and Adjusted EBITDA (income (loss) before income taxes plus net interest expense, depreciation and amortization and restructuring and other special charges) of $177 million and $135 million, respectively. Quest Diagnostics operates 24 hours a day, 365 days a year, utilizing a fully integrated collection and processing system. Quest Diagnostics generally performs and reports most routine procedures within 24 hours, employing a variety of sophisticated and computerized laboratory testing instruments. Quest Diagnostics provides daily pickup of specimens from most customers principally through an in-house courier system. The specimens are sent to one of the Company's laboratories where one or more tests are performed. Each patient specimen is accompanied by a test requisition form, which is completed by the customer, that indicates the tests to be performed and provides the necessary billing information. Each specimen and related requisition form is checked for completeness and then given a unique bar-coded identification number. Once the appropriate information is entered into the computer system, the tests are performed and the results are delivered to the doctor, primarily through computer interface or manually. Corning entered the clinical laboratory business in 1982 with the acquisition of MetPath Inc. ("MetPath"), which was founded in 1967 and was one of the first laboratories to expand beyond a regional market. Since January 1993, Quest Diagnostics has acquired over thirty laboratories, including Damon Corporation ("Damon"), Bioran Medical Laboratory ("Bioran") and Maryland Medical Laboratory, Inc. ("MML"). In 1994, Quest Diagnostics enhanced its presence in the esoteric testing market through the acquisition of Nichols, a preeminent clinical laboratory with a leading reputation for esoteric testing and test innovations. While Corning's ownership provided the Company with the capital to grow through acquisitions and to become one of the nation's largest independent clinical laboratory testing companies, the management of both Corning and Quest Diagnostics believe that Quest Diagnostics will be more competitive and operate more successfully in the future as an independent company, with a strong, focused and experienced management team to concentrate on customer needs. Independence will also enable Quest Diagnostics to motivate its employees by offering equity-based incentives tied directly to the performance of the Company and individual performance. Quest Diagnostics' management team has implemented a new business strategy, which focuses the business around three key strategic areas: clinical operations, customer focus and technological leadership and excellence. The Clinical Laboratory Testing Industry Clinical testing is a critical component in the delivery of quality health care service to patients. Currently, clinical laboratory testing is the first step in determining how a significant amount of all health care dollars are spent. Quest Diagnostics believes that in 1995 the entire United States clinical laboratory industry had revenues exceeding $30 billion. The clinical laboratory industry consists primarily of three types of providers: hospital-affiliated laboratories, independent clinical laboratories, such as Quest Diagnostics, and physician-office laboratories. The Company believes that in 1995 approximately 56% of the clinical testing revenues in the United States were attributable to hospital-affiliated laboratories, approximately 36% were attributable to independent clinical laboratories and approximately 8% were attributable to physicians in their offices and laboratories. Quest Diagnostics believes that consolidation will continue in the clinical laboratory testing business. In addition, Quest Diagnostics believes that it and the other large independent clinical laboratory testing companies may have the opportunity to increase their share of the overall clinical laboratories testing market due to a number of external factors, including cost efficiencies afforded by large-scale automated testing, Medicare reimbursement reductions and the growth of managed health care entities which require low-cost testing services and large service networks. In addition, legal restrictions on physician referrals and the ownership of laboratories as well as increased regulation of laboratories are expected to contribute to the continuing consolidation of the industry. Quest Diagnostics believes that a number of factors are likely to positively influence the volume of clinical laboratory testing performed in the United States in the future, including (1) the general aging of the population in the United States; (2) an expanded base of scientific knowledge which has led to the development of more sophisticated specialized tests and an increase in the awareness of physicians of the value of clinical laboratory testing as a cost-effective means of early detection of disease and monitoring of treatment; (3) an increase in the number and types of tests which are, due to advances in technology and increased cost efficiencies, readily available on a more affordable basis to physicians; (4) expanded substance-abuse testing by corporations and governmental agencies; and (5) increased testing for sexually transmitted diseases such as AIDS. The impact of these factors is expected to be offset in part by increased controls over the utilization of clinical laboratory tests by both Medicare and the private sector, particularly managed care organizations. Business Strategy Quest Diagnostics' overall goal is to be recognized by its customers, employees and competitors as the best provider of comprehensive and innovative clinical testing, information and services. To achieve this, Quest Diagnostics' management team has focused the business around three key strategic areas: clinical operations, customer focus and technological leadership and excellence. (bullet) Best Supplier. Quest Diagnostics seeks to be the best supplier of the highest quality and the lowest-cost testing services. Health care providers and patients expect accurate, timely and consistent laboratory test results at a fair price. (bullet) Lowest-cost provider. Quest Diagnostics' average cost per requisition varies significantly among its regional laboratories; there is an approximately $7.00 difference in cost per requisition between the most efficient regional laboratory and the average, and an approximately $13.00 difference in cost per requisition between the most and the least efficient regional laboratories. In many cases, these variations do not relate to testing volumes or mixes, space costs, service requirements or regional labor cost differences. To reduce costs, Quest Diagnostics has begun to replicate the best practices from each region throughout its national network. Management expects to achieve significant cost savings within the next three years as these programs are fully implemented. * (bullet) Highest Quality Provider. Quest Diagnostics is dedicated to providing accurate and timely test results and to being viewed by its customers as the highest quality provider of clinical testing services. Quest Diagnostics believes that implementation of best practices already developed in certain regions will permit the Company to be viewed by its customers as the highest quality provider of clinical testing services. (bullet) Preferred Provider. Quest Diagnostics seeks to be the preferred provider of laboratory testing services to existing and new health care networks on a selective basis determined by profitability of accounts. Quest Diagnostics believes that it will become the preferred provider to these networks as (1) large networks typically prefer to utilize large independent clinical laboratories that can service them on a national or regional basis and (2) the Company continues to pursue its primary strategy of becoming the highest quality, lowest-cost provider. To achieve this, Quest Diagnostics will employ a rigorous national and regional process to both select and pursue customers and allocate resources to support these efforts. *This is a forward looking statement and is based on current expectations. Actual results may vary materially from those projected. See "Business- Important Factors Regarding Forward Looking Statements." In particular, see factors (a), (d) and (j). (bullet) Account Profitability. Quest Diagnostics intends to refocus its sales efforts on pursuing and keeping profitable accounts. Quest Diagnostics is actively reviewing the profitability of its current accounts, including those with managed care organizations, and will either increase pricing or eliminate accounts that cannot be serviced profitably. (bullet) Regional Profitability. Quest Diagnostics presently believes that it has the leading market share among independent clinical laboratories in most routine testing markets of the northeast, mid-Atlantic and midwest regions. Approximately 65% of Quest Diagnostics' revenues and almost all of its EBITDA is generated from markets in which the Company believes that it has the leading market share. In most of these markets, Quest Diagnostics believes that it also is the lowest cost provider. Quest Diagnostics is evaluating its strategic alternatives relative to units whose profitability does not meet its internal goals. These alternatives may include joint ventures, alliances, or dispositions. Quest Diagnostics believes that, while the clinical laboratory industry is becoming national in scope, the Company can subcontract with other clinical laboratories to perform testing for national accounts in any markets in which the Company chooses not to compete. (bullet) Leading Innovator. Quest Diagnostics intends to remain a leading innovator in the clinical laboratory industry by continuing to introduce new tests, technology and services. Through its relationship with the academic community and pharmaceutical and biotechnology firms and a research and development budget exceeding $15 million per year, Quest Diagnostics believes it is one of the leaders in transferring innovation from academic biotechnology laboratories to the market. Recent Developments By a plea agreement and civil agreement and release dated October 9, 1996, between the Department of Justice ("DOJ") and Damon, all federal criminal matters within the scope of the various federal investigations against Damon, and all claims including the civil qui tam cases underlying the civil investigations were settled for an aggregate of $119 million, which sum was reimbursed to Quest Diagnostics by Corning. The Damon settlement does not exclude Quest Diagnostics from future participation in any federal health care programs on account of Damon's practices. Quest Diagnostics' aggregate reserve with respect to all governmental and private claims was $215 million at September 30, 1996 and is estimated to be reduced to $85 million as of the Distribution Date as a result of the payment of settled claims, primarily the Damon settlement of $119 million. Based on information available to management and Quest Diagnostics' experience with past settlements (including the fact that the aggregate amount of the Damon settlement was significantly in excess of established reserves) management has reassessed its reserve levels and believes that its current level of reserves is adequate. However, it is possible that additional information may become available which may cause the final resolution of these matters to be in excess of established reserves by an amount which could be material to Quest Diagnostics' results of operations and, for non-indemnified claims, Quest Diagnostics' cash flows in the period in which such claims are settled. While none of the governmental or nongovernmental investigations or claims is covered by insurance, Quest Diagnostics does not believe that these matters will have a material adverse effect on Quest Diagnostics' overall financial condition. Corning Indemnity In connection with the Distributions, Corning has agreed to indemnify Quest Diagnostics against all monetary penalties, fines or settlements arising out of any governmental claims arising out of alleged violations of applicable federal fraud and health care statutes and relating to billing practices of Quest Diagnostics and its predecessors that have been settled or are pending on the Distribution Date. Corning has also agreed to indemnify Quest Diagnostics for 50% of the aggregate of all judgment or settlement payments made by Quest Diagnostics that are in excess of $42.0 million in respect of claims by private parties (i.e., nongovernmental parties such as private insurers) that relate to indemnified or previously settled governmental claims and that allege overbillings by Quest Diagnostics or any existing subsidiaries of Quest Diagnostics, for services provided prior to the Distribution Date; provided, however, such indemnification for nongovernmental claims will not exceed $25.0 million in the aggregate and all amounts indemnified against by Corning for the benefit of Quest Diagnostics will be calculated on a net after-tax basis. Such indemnification will not cover (i) any governmental claims that arise after the Distribution Date pursuant to service of subpoena or other notice of such investigation after the Distribution Date, (ii) any nongovernmental claims unrelated to the indemnified governmental claims or investigations, (iii) any nongovernmental claims not settled prior to five years after the Distribution Date, (iv) any consequential or incidental damages relating to the billing claims, including losses of revenues and profits as a consequence of exclusion for participation in federal or state health care programs or (v) the fees and expenses of litigation. The Distributions On May 13, 1996, the board of directors of Corning approved a plan to distribute to Corning shareholders the clinical laboratory testing business being conducted by Quest Diagnostics and the contract research business being conducted by Quest Diagnostics' wholly owned subsidiary, Covance (together, the "Distributions"). The Distributions will be effected by distributing all of the outstanding shares of Quest Diagnostics common stock (the "Quest Diagnostics Common Stock") to holders of Corning common stock (the "Corning Common Stock"), followed immediately by the distribution of all of the common stock of Covance (the "Covance Common Stock") to those same holders, as holders of Quest Diagnostics Common Stock. It is expected that the Distributions will be made on December 31, 1996 (the date on which the Distributions are to be made, the "Distribution Date"). Prior to the consummation of the offering of the Notes contemplated hereby (the "Offering"), the Company entered into a $450 million senior, secured credit facility (the "Credit Facility"), among the Company, the lenders listed therein, NationsBank, N.A., as Issuing Bank, Wachovia Bank of Georgia, N.A., as Swingline Bank, and Morgan Guaranty Trust Company of New York, as Administrative Agent. The Credit Facility is comprised of a $300 million six-year amortizing term loan ("Tranche A Loan"), a $50 million seven-year term loan ("Tranche B Loan" and together with the Tranche A Loan, the "Term Loans") and a $100 million six-year revolving working capital facility (the "Working Capital Facility"). Corning currently has approximately $1.2 billion of Quest Diagnostics intercompany debt. Approximately $145 million of net proceeds from the Offering, together with the $350 million of borrowings under the Term Loans, will be paid to Corning in satisfaction of a portion of the outstanding intercompany debt. Corning will contribute the remaining intercompany debt to Quest Diagnostics' capital. Borrowings under the Working Capital Facility, substantially all of which is expected to be available as of the Distribution Date, will provide for future working capital needs and other general corporate purposes. The Offering <TABLE> <CAPTION> <S> <C> Securities Offered $150,000,000 aggregate principal amount of % Senior Subordinated Notes due December 15, 2006 (the "Notes"). Maturity Date December 15, 2006. Interest Payment Date June 15 and December 15, commencing June 15, 1997. Optional Redemption by the Company The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after December 15, 2001, at the redemption prices set forth herein, plus accrued and unpaid interest, if any, to but excluding the date fixed for redemption. In addition, if as a result of an event outside the control of Corning, Quest Diagnostics and Covance, the Distributions do not occur prior to March 31, 1997, the Notes will be subject to redemption, as a whole and not in part, at the option of Quest Diagnostics, prior to June 30, 1997, at a redemption price equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to but excluding the date fixed for redemption. See "Description of the Notes--Optional Redemption." Change of Control Offer Upon a Change of Control, the Company has the obligation to offer to purchase all the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to but excluding the date of purchase. See "Description of the Notes-- Repurchase at the Option of Holders--Change of Control" for a discussion of the circumstances in which the Company may not be required to make an offer to purchase upon a Change of Control. Offers to Purchase In the event of certain asset sales, the Company will be required to offer to repurchase the Notes at 100% of their principal amount, plus accrued and unpaid interest, if any, to but excluding the date of purchase with the net proceeds of such asset sales. Subordination The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company, including all indebtedness of the Company under the Credit Facility. The Notes will rank Pari Passu in right of payment with any other senior subordinated indebtedness of the Company. Subsidiary Guarantees The Notes will be guaranteed, jointly and severally, and fully and unconditionally, on a senior subordinated basis by the Guarantors (the "Senior Subordinated Guarantees"). The obligations of any Guarantor with respect to its Senior Subordinated Guarantee will be subordinated in right of payment, to the same extent as the obligations of the Company in respect of the Notes, to all existing and future Senior Guarantees, which will include the guarantees of the Credit Facility. The Senior Subordinated Guarantees would also be subordinated to all existing and future indebtedness of the Guarantors if the Senior Subordinated Guarantees were avoided or subordinated in favor of the Guarantors' other creditors. See "Risk Factors--Fraudulent Conveyance." The obligations of a Guarantor under its Senior Subordinated Guarantee will be released in certain circumstances, including if the Guarantor ceases to guarantee the Credit Facility. See "Description of the Notes--Senior Subordinated Guarantees." Principal Covenants The indenture under which the Notes are issued (the "Indenture") will impose certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt and senior in right of payment to the Notes, enter into leases, incur liens, merge or consolidate with any other person, or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. Use of Proceeds The Company intends to use the proceeds from the sale of the Notes, together with the proceeds of borrowings under the Credit Facility, to repay certain intercompany indebtedness owed to Corning. See "Use of Proceeds." The Distributions The Notes are being offered in connection with the Distributions of the Quest Diagnostics Common Stock and the Covance Common Stock to holders of Corning Common Stock. The closing of the offering of the Notes is anticipated to occur prior to the Distributions. Listing The Notes have been approved for listing on the New York Stock Exchange, subject to official notice of issuance. Risk Factors See "Risk Factors" for a discussion of certain factors that should be considered in connection with an investment in the Notes. </TABLE> Summary Financial Data The following table summarizes certain historical and pro forma financial data of Quest Diagnostics at the dates and for each of the periods indicated. The selected financial data as of and for each of the years ended December 31, 1995, 1994 and 1993 have been derived from the audited combined financial statements of (the "Audited Financial Statements") and the notes thereto included elsewhere herein. The selected financial data as of and for the three and nine months ended September 30, 1996 and 1995 have been derived from the unaudited interim combined financial statements of Quest Diagnostics (the "Interim Financial Statements" and, together with the Audited Financial Statements, the "Financial Statements") and the notes thereto included elsewhere herein. In the opinion of Quest Diagnostics management, the unaudited interim combined financial statements include all adjustments, consisting of only normal recurring adjustments, that are necessary for a fair presentation of the financial position and results of operations for these periods. The unaudited interim results of operations for the three and nine months ended September 30, 1996 are not necessarily indicative of the results for the entire year ending December 31, 1996. The selected pro forma financial data have been derived from the unaudited pro forma combined financial information of Quest Diagnostics for the year ended December 31, 1995 and for the three and nine months ended September 30, 1996 (the "Pro Forma Financial Information") and the notes thereto included elsewhere herein. The pro forma statement of operations data gives effect to the Distributions and the Accounting Policy Change (as defined below) as if they had occurred on January 1, 1995 and the pro forma balance sheet data gives effect to the Distributions and the Accounting Policy Change as if they had occurred on September 30, 1996. The pro forma financial data does not purport to represent what Quest Diagnostics' results of operations would have been if the Distributions and the Accounting Policy Change had in fact occurred on such dates, nor does it purport to indicate the future financial position or results of future operations of Quest Diagnostics. The pro forma adjustments are based upon currently available information and certain assumptions that Quest Diagnostics management believes to be reasonable. The summary historical and pro forma financial data set forth below should be read in conjunction with "Selected Historical Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Financial Statements and the notes thereto and the Pro Forma Financial Information and the notes thereto. <TABLE> <CAPTION> Three Months Ended September 30, Nine Months Ended September 30, ------------------------------------------------------------------------------------------------ Pro Forma Historical Pro Forma Historical ------------------------------- ------------------------------- 1996(a) 1996 1995 1996(a) 1996 1995 --------------- --------------- --------------- ---------------- ---------------- -------------- (in thousands, except share, per share and percentage data) <S> <C> <C> <C> <C> <C> <C> Statement of Operations Data: Net revenues $ 405,352 $ 405,352 $ 399,959 $ 1,231,290 $1,231,290 $1,239,474 Costs and expenses: Cost of services 255,390 255,390 240,868 768,809 768,809 735,984 Selling, general and administrative 125,190 125,190 181,346(c) 371,439 371,439 399,635(c) Provision for restructuring and other special charges(d) 155,730 155,730 201,730 201,730 45,885 Interest expense, net 12,189 19,866 20,927 36,938 59,887 61,529 Amortization of intangible assets 7,672 10,328 11,293 23,803 31,772 33,678 Other, net 1,837 1,837 1,930 (198) (198) 4,429 --------------- --------------- --------------- ---------------- ---------------- -------------- Total 558,008 568,341 456,364 1,402,521 1,433,439 1,281,140 --------------- --------------- --------------- ---------------- ---------------- -------------- Income (loss) before taxes (152,656) (162,989) (56,405) (171,231) (202,149) (41,666) Income tax expense (benefit) (40,521) (43,553) (17,810) (34,215) (43,280) (3,642) --------------- --------------- --------------- ---------------- ---------------- -------------- Income (loss) before cumulative effect of change in accounting principle (112,135) (119,436) (38,595) (137,016) (158,869) (38,024) Cumulative effect of change in accounting principle --------------- --------------- --------------- ---------------- ---------------- -------------- Net income (loss) $ (112,135) $ (119,436) $ (38,595) $ (137,016) $ (158,869) $ (38,024) =============== =============== =============== ================ ================ ============== Pro forma shares outstanding(e) 28,901,735 28,901,735 Pro forma net loss per share $ (3.88) $ (4.74) Balance Sheet Data (at end of period): Cash $ 40,000 $ 48,319 $ 46,908 $ 40,000 $ 48,319 $ 46,908 Working capital 306,741 114,718 129,319 306,741 114,718 129,319 Total assets 1,612,459 1,886,378 1,896,058 1,612,459 1,886,378 1,896,058 Long-term debt 515,494 1,219,900 1,114,367 515,494 1,219,900 1,114,367 Total debt 517,379 1,231,785 1,226,211 517,379 1,231,785 1,226,211 Stockholder's equity 604,099 132,670 320,576 604,099 132,670 320,576 Ratio of earnings to fixed charges -- (f) -- (f) -- (f) -- (f) -- (f) -- (f) Supplemental Data: Net cash provided by operating activities $ 25,236 $ 25,236 $ 38,202 $ 41,937 $ 41,937 $ 53,789 Net cash used in investing activities (7,904) (7,904) (17,044) (53,097) (53,097) (77,911) Net cash provided by (used in) financing activities (6,618) (6,618) (18,006) 23,033 23,033 32,311 Bad debt expense $ 30,539 $ 30,539 $ 85,831(c) $ 81,891 $ 81,891 $ 127,297(c) Bad debt expense as a % of net revenues 7.5% 7.5% 21.5% 6.7% 6.7% 10.3% Rent expense $ 12,515 $ 12,515 $ 11,860 $ 37,315 $ 37,315 $ 35,060 Capital expenditures 11,912 11,912 16,441 58,802 58,802 56,062 Depreciation expense $ 14,672 $ 14,672 $ 14,275 $ 43,460 $ 43,460 $ 42,358 EBITDA(g) $ (118,123)(h) $ (118,123)(h) $ (9,910)(c) $ (67,030)(h) $ (67,030)(h) $ 95,899(c) EBITDA as a % of net revenues (29.1%) (29.1%) (2.5%) (5.4%) (5.4%) 7.7% Adjusted EBITDA(i) $ 37,607 $ 37,607 $ (9,910)(c) $ 134,700 $ 134,700 $ 141,784(c) Adjusted EBITDA as a % of net revenues 9.3% 9.3% (2.5%) 10.9% 10.9% 11.4% Supplemental Ratio Data: Adjusted EBITDA/interest expense, net 3.1x 3.6x (Adjusted EBITDA-capital expenditures)/interest expense, net 2.1x 2.1x (Total debt--cash)/annualized adjusted EBITDA 3.2x 2.7x </TABLE> (Footnotes on page 14) <TABLE> <CAPTION> Year Ended December 31, ----------------------------------------------------------- Pro Forma Historical ------------------------------------------- 1995(a) 1995 1994(b) 1993 --------------- --------------- ------------- ------------- (in thousands, except share, per share and percentage data) <S> <C> <C> <C> <C> Statement of Operations Data: Net revenues $ 1,629,388 $1,629,388 $1,633,699 $1,416,338 Costs and expenses: Cost of services 980,232 980,232 969,844 805,729 Selling, general and administrative 523,271(c) 523,271(c) 411,939 363,579 Provision for restructuring and other special charges(d) 50,560 50,560 79,814 99,600 Interest expense, net 50,748 82,016 63,295 41,898 Amortization of intangible assets 34,031 44,656 42,588 28,421 Other, net 6,221 6,221 3,464 6,423 --------------- --------------- ------------- ------------- Total 1,645,063 1,686,956 1,570,944 1,345,650 --------------- --------------- ------------- ------------- Income (loss) before taxes (15,675) (57,568) 62,755 70,688 Income tax expense (benefit) 6,835 (5,516) 34,410 25,929 --------------- --------------- ------------- ------------- Income (loss) before cumulative effect of change in accounting principle (22,510) (52,052) 28,345 44,759 Cumulative effect of change in accounting principle (10,562) --------------- --------------- ------------- ------------- Net income (loss) $ (22,510) $ (52,052) $ 28,345 $ 34,197 =============== =============== ============= ============= Pro forma shares outstanding(e) 28,901,735 Pro forma net loss per share $ (0.78) Balance Sheet Data (at end of period): Cash $ 36,446 $ 38,719 $ 39,410 Working capital 200,740 214,358 139,771 Total assets 1,853,385 1,882,663 1,861,162 Long-term debt 1,195,566 1,153,054 1,025,787 Total debt 1,207,714 1,165,626 1,123,307 Stockholder's equity 295,801 386,812 395,509 Ratio of earnings to fixed charges -- (f) -- (f) 1.77(f) 2.20(f) Supplemental Data: Net cash provided by operating activities $ 85,828 $ 85,828 $ 37,963 $ 99,614 Net cash used in investing activities (93,087) (93,087) (46,186) (473,687) Net cash provided by (used in) financing activities 4,986 4,986 7,532 392,956 Bad debt expense $ 152,590(c) $ 152,590(c) $ 59,480 $ 47,240 Bad debt expense as a % of net revenues 9.4% 9.4% 3.6% 3.3% Rent expense $ 46,900 $ 46,900 $ 49,400 $ 46,900 Capital expenditures 74,045 74,045 93,354 65,317 Depreciation expense $ 56,857 $ 56,857 $ 46,929 $ 38,058 EBITDA(g) $ 125,961(c) $ 125,961(c) $ 215,567 $ 179,065 EBITDA as a % of net revenues 7.7% 7.7% 13.2% 12.6% Adjusted EBITDA(i) $ 176,521(c) $ 176,521(c) $ 295,381 $ 278,665 Adjusted EBITDA as a % of net revenues 10.8% 10.8% 18.1% 19.7% Supplemental Ratio Data: Adjusted EBITDA/interest expense, net 3.5x (Adjusted EBITDA-capital expenditures)/ interest expense, net 2.0x </TABLE> (Footnotes on page 14) (Footnotes for preceding pages) (a) Adjusted to reflect the pro forma effects of the Distributions and the Accounting Policy Change. See "Selected Historical Financial Data" and "Pro Forma Financial Information."
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+Prospectus Summary This Summary is qualified by the more detailed information (including the financial statements and related notes) set forth elsewhere in this Prospectus which should be read in its entirety. Unless the context indicates, or it is specifically indicated otherwise, all references to (i) "Corning" include Corning Incorporated, a New York corporation, and its consolidated subsidiaries, (ii) "Quest Diagnostics" or the "Company" include Corning Clinical Laboratories Inc. (to be renamed Quest Diagnostics Incorporated prior to the Distributions), a Delaware corporation, and its direct and indirect subsidiaries (other than Covance) and assume that the Distributions have occurred, and (iii) "Covance" include Covance Inc. (formerly Corning Pharmaceutical Services Inc.), a Delaware corporation, and its direct and indirect subsidiaries and assume that the Distributions have occurred. Capitalized terms used but not defined in this Summary are defined elsewhere in this Prospectus. The Company Quest Diagnostics is one of the largest independent clinical laboratory testing companies in the United States. Quest Diagnostics offers a broad range of routine and specialty ("esoteric") testing services used by the medical profession in the diagnosis, monitoring and treatment of disease and other medical conditions. Quest Diagnostics' network, which processes approximately 60 million requisitions for diagnostic tests annually, consists of 17 regional laboratories across the United States and the Corning Nichols Institute ("Nichols") esoteric testing laboratory in San Juan Capistrano, California. In addition, Quest Diagnostics has 14 branch laboratories in the United States as well as one branch laboratory in Mexico City (branch laboratories are smaller than regional laboratories), approximately 200 "STAT" laboratories and approximately 850 patient service centers located throughout the United States. For the year ended December 31, 1995 and the nine months ended September 30, 1996, Quest Diagnostics had net revenues of $1,629 million and $1,231 million, respectively, and Adjusted EBITDA (income (loss) before income taxes plus net interest expense, depreciation and amortization and restructuring and other special charges) of $177 million and $135 million, respectively. Quest Diagnostics operates 24 hours a day, 365 days a year, utilizing a fully integrated collection and processing system. Quest Diagnostics generally performs and reports most routine procedures within 24 hours, employing a variety of sophisticated and computerized laboratory testing instruments. Quest Diagnostics provides daily pickup of specimens from most customers principally through an in-house courier system. The specimens are sent to one of the Company's laboratories where one or more tests are performed. Each patient specimen is accompanied by a test requisition form, which is completed by the customer, that indicates the tests to be performed and provides the necessary billing information. Each specimen and related requisition form is checked for completeness and then given a unique bar-coded identification number. Once the appropriate information is entered into the computer system, the tests are performed and the results are delivered to the doctor, primarily through computer interface or manually. Corning entered the clinical laboratory business in 1982 with the acquisition of MetPath Inc. ("MetPath"), which was founded in 1967 and was one of the first laboratories to expand beyond a regional market. Since January 1993, Quest Diagnostics has acquired over thirty laboratories, including Damon Corporation ("Damon"), Bioran Medical Laboratory ("Bioran") and Maryland Medical Laboratory, Inc. ("MML"). In 1994, Quest Diagnostics enhanced its presence in the esoteric testing market through the acquisition of Nichols, a preeminent clinical laboratory with a leading reputation for esoteric testing and test innovations. While Corning's ownership provided the Company with the capital to grow through acquisitions and to become one of the nation's largest independent clinical laboratory testing companies, the management of both Corning and Quest Diagnostics believe that Quest Diagnostics will be more competitive and operate more successfully in the future as an independent company, with a strong, focused and experienced management team to concentrate on customer needs. Independence will also enable Quest Diagnostics to motivate its employees by offering equity-based incentives tied directly to the performance of the Company and individual performance. Quest Diagnostics' management team has implemented a new business strategy, which focuses the business around three key strategic areas: clinical operations, customer focus and technological leadership and excellence. The Clinical Laboratory Testing Industry Clinical testing is a critical component in the delivery of quality health care service to patients. Currently, clinical laboratory testing is the first step in determining how a significant amount of all health care dollars are spent. Quest Diagnostics believes that in 1995 the entire United States clinical laboratory industry had revenues exceeding $30 billion. The clinical laboratory industry consists primarily of three types of providers: hospital-affiliated laboratories, independent clinical laboratories, such as Quest Diagnostics, and physician-office laboratories. The Company believes that in 1995 approximately 56% of the clinical testing revenues in the United States were attributable to hospital-affiliated laboratories, approximately 36% were attributable to independent clinical laboratories and approximately 8% were attributable to physicians in their offices and laboratories. Quest Diagnostics believes that consolidation will continue in the clinical laboratory testing business. In addition, Quest Diagnostics believes that it and the other large independent clinical laboratory testing companies may have the opportunity to increase their share of the overall clinical laboratories testing market due to a number of external factors, including cost efficiencies afforded by large-scale automated testing, Medicare reimbursement reductions and the growth of managed health care entities which require low-cost testing services and large service networks. In addition, legal restrictions on physician referrals and the ownership of laboratories as well as increased regulation of laboratories are expected to contribute to the continuing consolidation of the industry. Quest Diagnostics believes that a number of factors are likely to positively influence the volume of clinical laboratory testing performed in the United States in the future, including (1) the general aging of the population in the United States; (2) an expanded base of scientific knowledge which has led to the development of more sophisticated specialized tests and an increase in the awareness of physicians of the value of clinical laboratory testing as a cost-effective means of early detection of disease and monitoring of treatment; (3) an increase in the number and types of tests which are, due to advances in technology and increased cost efficiencies, readily available on a more affordable basis to physicians; (4) expanded substance-abuse testing by corporations and governmental agencies; and (5) increased testing for sexually transmitted diseases such as AIDS. The impact of these factors is expected to be offset in part by increased controls over the utilization of clinical laboratory tests by both Medicare and the private sector, particularly managed care organizations. Business Strategy Quest Diagnostics' overall goal is to be recognized by its customers, employees and competitors as the best provider of comprehensive and innovative clinical testing, information and services. To achieve this, Quest Diagnostics' management team has focused the business around three key strategic areas: clinical operations, customer focus and technological leadership and excellence. (bullet) Best Supplier. Quest Diagnostics seeks to be the best supplier of the highest quality and the lowest-cost testing services. Health care providers and patients expect accurate, timely and consistent laboratory test results at a fair price. (bullet) Lowest-cost provider. Quest Diagnostics' average cost per requisition varies significantly among its regional laboratories; there is an approximately $7.00 difference in cost per requisition between the most efficient regional laboratory and the average, and an approximately $13.00 difference in cost per requisition between the most and the least efficient regional laboratories. In many cases, these variations do not relate to testing volumes or mixes, space costs, service requirements or regional labor cost differences. To reduce costs, Quest Diagnostics has begun to replicate the best practices from each region throughout its national network. Management expects to achieve significant cost savings within the next three years as these programs are fully implemented. * (bullet) Highest Quality Provider. Quest Diagnostics is dedicated to providing accurate and timely test results and to being viewed by its customers as the highest quality provider of clinical testing services. Quest Diagnostics believes that implementation of best practices already developed in certain regions will permit the Company to be viewed by its customers as the highest quality provider of clinical testing services. (bullet) Preferred Provider. Quest Diagnostics seeks to be the preferred provider of laboratory testing services to existing and new health care networks on a selective basis determined by profitability of accounts. Quest Diagnostics believes that it will become the preferred provider to these networks as (1) large networks typically prefer to utilize large independent clinical laboratories that can service them on a national or regional basis and (2) the Company continues to pursue its primary strategy of becoming the highest quality, lowest-cost provider. To achieve this, Quest Diagnostics will employ a rigorous national and regional process to both select and pursue customers and allocate resources to support these efforts. *This is a forward looking statement and is based on current expectations. Actual results may vary materially from those projected. See "Business- Important Factors Regarding Forward Looking Statements." In particular, see factors (a), (d) and (j). (bullet) Account Profitability. Quest Diagnostics intends to refocus its sales efforts on pursuing and keeping profitable accounts. Quest Diagnostics is actively reviewing the profitability of its current accounts, including those with managed care organizations, and will either increase pricing or eliminate accounts that cannot be serviced profitably. (bullet) Regional Profitability. Quest Diagnostics presently believes that it has the leading market share among independent clinical laboratories in most routine testing markets of the northeast, mid-Atlantic and midwest regions. Approximately 65% of Quest Diagnostics' revenues and almost all of its EBITDA is generated from markets in which the Company believes that it has the leading market share. In most of these markets, Quest Diagnostics believes that it also is the lowest cost provider. Quest Diagnostics is evaluating its strategic alternatives relative to units whose profitability does not meet its internal goals. These alternatives may include joint ventures, alliances, or dispositions. Quest Diagnostics believes that, while the clinical laboratory industry is becoming national in scope, the Company can subcontract with other clinical laboratories to perform testing for national accounts in any markets in which the Company chooses not to compete. (bullet) Leading Innovator. Quest Diagnostics intends to remain a leading innovator in the clinical laboratory industry by continuing to introduce new tests, technology and services. Through its relationship with the academic community and pharmaceutical and biotechnology firms and a research and development budget exceeding $15 million per year, Quest Diagnostics believes it is one of the leaders in transferring innovation from academic biotechnology laboratories to the market. Recent Developments By a plea agreement and civil agreement and release dated October 9, 1996, between the Department of Justice ("DOJ") and Damon, all federal criminal matters within the scope of the various federal investigations against Damon, and all claims including the civil qui tam cases underlying the civil investigations were settled for an aggregate of $119 million, which sum was reimbursed to Quest Diagnostics by Corning. The Damon settlement does not exclude Quest Diagnostics from future participation in any federal health care programs on account of Damon's practices. Quest Diagnostics' aggregate reserve with respect to all governmental and private claims was $215 million at September 30, 1996 and is estimated to be reduced to $85 million as of the Distribution Date as a result of the payment of settled claims, primarily the Damon settlement of $119 million. Based on information available to management and Quest Diagnostics' experience with past settlements (including the fact that the aggregate amount of the Damon settlement was significantly in excess of established reserves) management has reassessed its reserve levels and believes that its current level of reserves is adequate. However, it is possible that additional information may become available which may cause the final resolution of these matters to be in excess of established reserves by an amount which could be material to Quest Diagnostics' results of operations and, for non-indemnified claims, Quest Diagnostics' cash flows in the period in which such claims are settled. While none of the governmental or nongovernmental investigations or claims is covered by insurance, Quest Diagnostics does not believe that these matters will have a material adverse effect on Quest Diagnostics' overall financial condition. Corning Indemnity In connection with the Distributions, Corning has agreed to indemnify Quest Diagnostics against all monetary penalties, fines or settlements arising out of any governmental claims arising out of alleged violations of applicable federal fraud and health care statutes and relating to billing practices of Quest Diagnostics and its predecessors that have been settled or are pending on the Distribution Date. Corning has also agreed to indemnify Quest Diagnostics for 50% of the aggregate of all judgment or settlement payments made by Quest Diagnostics that are in excess of $42.0 million in respect of claims by private parties (i.e., nongovernmental parties such as private insurers) that relate to indemnified or previously settled governmental claims and that allege overbillings by Quest Diagnostics or any existing subsidiaries of Quest Diagnostics, for services provided prior to the Distribution Date; provided, however, such indemnification for nongovernmental claims will not exceed $25.0 million in the aggregate and all amounts indemnified against by Corning for the benefit of Quest Diagnostics will be calculated on a net after-tax basis. Such indemnification will not cover (i) any governmental claims that arise after the Distribution Date pursuant to service of subpoena or other notice of such investigation after the Distribution Date, (ii) any nongovernmental claims unrelated to the indemnified governmental claims or investigations, (iii) any nongovernmental claims not settled prior to five years after the Distribution Date, (iv) any consequential or incidental damages relating to the billing claims, including losses of revenues and profits as a consequence of exclusion for participation in federal or state health care programs or (v) the fees and expenses of litigation. The Distributions On May 13, 1996, the board of directors of Corning approved a plan to distribute to Corning shareholders the clinical laboratory testing business being conducted by Quest Diagnostics and the contract research business being conducted by Quest Diagnostics' wholly owned subsidiary, Covance (together, the "Distributions"). The Distributions will be effected by distributing all of the outstanding shares of Quest Diagnostics common stock (the "Quest Diagnostics Common Stock") to holders of Corning common stock (the "Corning Common Stock"), followed immediately by the distribution of all of the common stock of Covance (the "Covance Common Stock") to those same holders, as holders of Quest Diagnostics Common Stock. It is expected that the Distributions will be made on December 31, 1996 (the date on which the Distributions are to be made, the "Distribution Date"). Prior to the consummation of the offering of the Notes contemplated hereby (the "Offering"), the Company entered into a $450 million senior, secured credit facility (the "Credit Facility"), among the Company, the lenders listed therein, NationsBank, N.A., as Issuing Bank, Wachovia Bank of Georgia, N.A., as Swingline Bank, and Morgan Guaranty Trust Company of New York, as Administrative Agent. The Credit Facility is comprised of a $300 million six-year amortizing term loan ("Tranche A Loan"), a $50 million seven-year term loan ("Tranche B Loan" and together with the Tranche A Loan, the "Term Loans") and a $100 million six-year revolving working capital facility (the "Working Capital Facility"). Corning currently has approximately $1.2 billion of Quest Diagnostics intercompany debt. Approximately $145 million of net proceeds from the Offering, together with the $350 million of borrowings under the Term Loans, will be paid to Corning in satisfaction of a portion of the outstanding intercompany debt. Corning will contribute the remaining intercompany debt to Quest Diagnostics' capital. Borrowings under the Working Capital Facility, substantially all of which is expected to be available as of the Distribution Date, will provide for future working capital needs and other general corporate purposes. The Offering <TABLE> <CAPTION> <S> <C> Securities Offered $150,000,000 aggregate principal amount of % Senior Subordinated Notes due December 15, 2006 (the "Notes"). Maturity Date December 15, 2006. Interest Payment Date June 15 and December 15, commencing June 15, 1997. Optional Redemption by the Company The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after December 15, 2001, at the redemption prices set forth herein, plus accrued and unpaid interest, if any, to but excluding the date fixed for redemption. In addition, if as a result of an event outside the control of Corning, Quest Diagnostics and Covance, the Distributions do not occur prior to March 31, 1997, the Notes will be subject to redemption, as a whole and not in part, at the option of Quest Diagnostics, prior to June 30, 1997, at a redemption price equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to but excluding the date fixed for redemption. See "Description of the Notes--Optional Redemption." Change of Control Offer Upon a Change of Control, the Company has the obligation to offer to purchase all the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to but excluding the date of purchase. See "Description of the Notes-- Repurchase at the Option of Holders--Change of Control" for a discussion of the circumstances in which the Company may not be required to make an offer to purchase upon a Change of Control. Offers to Purchase In the event of certain asset sales, the Company will be required to offer to repurchase the Notes at 100% of their principal amount, plus accrued and unpaid interest, if any, to but excluding the date of purchase with the net proceeds of such asset sales. Subordination The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company, including all indebtedness of the Company under the Credit Facility. The Notes will rank Pari Passu in right of payment with any other senior subordinated indebtedness of the Company. Subsidiary Guarantees The Notes will be guaranteed, jointly and severally, and fully and unconditionally, on a senior subordinated basis by the Guarantors (the "Senior Subordinated Guarantees"). The obligations of any Guarantor with respect to its Senior Subordinated Guarantee will be subordinated in right of payment, to the same extent as the obligations of the Company in respect of the Notes, to all existing and future Senior Guarantees, which will include the guarantees of the Credit Facility. The Senior Subordinated Guarantees would also be subordinated to all existing and future indebtedness of the Guarantors if the Senior Subordinated Guarantees were avoided or subordinated in favor of the Guarantors' other creditors. See "Risk Factors--Fraudulent Conveyance." The obligations of a Guarantor under its Senior Subordinated Guarantee will be released in certain circumstances, including if the Guarantor ceases to guarantee the Credit Facility. See "Description of the Notes--Senior Subordinated Guarantees." Principal Covenants The indenture under which the Notes are issued (the "Indenture") will impose certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt and senior in right of payment to the Notes, enter into leases, incur liens, merge or consolidate with any other person, or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. Use of Proceeds The Company intends to use the proceeds from the sale of the Notes, together with the proceeds of borrowings under the Credit Facility, to repay certain intercompany indebtedness owed to Corning. See "Use of Proceeds." The Distributions The Notes are being offered in connection with the Distributions of the Quest Diagnostics Common Stock and the Covance Common Stock to holders of Corning Common Stock. The closing of the offering of the Notes is anticipated to occur prior to the Distributions. Listing The Notes have been approved for listing on the New York Stock Exchange, subject to official notice of issuance. Risk Factors See "Risk Factors" for a discussion of certain factors that should be considered in connection with an investment in the Notes. </TABLE> Summary Financial Data The following table summarizes certain historical and pro forma financial data of Quest Diagnostics at the dates and for each of the periods indicated. The selected financial data as of and for each of the years ended December 31, 1995, 1994 and 1993 have been derived from the audited combined financial statements of (the "Audited Financial Statements") and the notes thereto included elsewhere herein. The selected financial data as of and for the three and nine months ended September 30, 1996 and 1995 have been derived from the unaudited interim combined financial statements of Quest Diagnostics (the "Interim Financial Statements" and, together with the Audited Financial Statements, the "Financial Statements") and the notes thereto included elsewhere herein. In the opinion of Quest Diagnostics management, the unaudited interim combined financial statements include all adjustments, consisting of only normal recurring adjustments, that are necessary for a fair presentation of the financial position and results of operations for these periods. The unaudited interim results of operations for the three and nine months ended September 30, 1996 are not necessarily indicative of the results for the entire year ending December 31, 1996. The selected pro forma financial data have been derived from the unaudited pro forma combined financial information of Quest Diagnostics for the year ended December 31, 1995 and for the three and nine months ended September 30, 1996 (the "Pro Forma Financial Information") and the notes thereto included elsewhere herein. The pro forma statement of operations data gives effect to the Distributions and the Accounting Policy Change (as defined below) as if they had occurred on January 1, 1995 and the pro forma balance sheet data gives effect to the Distributions and the Accounting Policy Change as if they had occurred on September 30, 1996. The pro forma financial data does not purport to represent what Quest Diagnostics' results of operations would have been if the Distributions and the Accounting Policy Change had in fact occurred on such dates, nor does it purport to indicate the future financial position or results of future operations of Quest Diagnostics. The pro forma adjustments are based upon currently available information and certain assumptions that Quest Diagnostics management believes to be reasonable. The summary historical and pro forma financial data set forth below should be read in conjunction with "Selected Historical Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Financial Statements and the notes thereto and the Pro Forma Financial Information and the notes thereto. <TABLE> <CAPTION> Three Months Ended September 30, Nine Months Ended September 30, ------------------------------------------------------------------------------------------------ Pro Forma Historical Pro Forma Historical ------------------------------- ------------------------------- 1996(a) 1996 1995 1996(a) 1996 1995 --------------- --------------- --------------- ---------------- ---------------- -------------- (in thousands, except share, per share and percentage data) <S> <C> <C> <C> <C> <C> <C> Statement of Operations Data: Net revenues $ 405,352 $ 405,352 $ 399,959 $ 1,231,290 $1,231,290 $1,239,474 Costs and expenses: Cost of services 255,390 255,390 240,868 768,809 768,809 735,984 Selling, general and administrative 125,190 125,190 181,346(c) 371,439 371,439 399,635(c) Provision for restructuring and other special charges(d) 155,730 155,730 201,730 201,730 45,885 Interest expense, net 12,189 19,866 20,927 36,938 59,887 61,529 Amortization of intangible assets 7,672 10,328 11,293 23,803 31,772 33,678 Other, net 1,837 1,837 1,930 (198) (198) 4,429 --------------- --------------- --------------- ---------------- ---------------- -------------- Total 558,008 568,341 456,364 1,402,521 1,433,439 1,281,140 --------------- --------------- --------------- ---------------- ---------------- -------------- Income (loss) before taxes (152,656) (162,989) (56,405) (171,231) (202,149) (41,666) Income tax expense (benefit) (40,521) (43,553) (17,810) (34,215) (43,280) (3,642) --------------- --------------- --------------- ---------------- ---------------- -------------- Income (loss) before cumulative effect of change in accounting principle (112,135) (119,436) (38,595) (137,016) (158,869) (38,024) Cumulative effect of change in accounting principle --------------- --------------- --------------- ---------------- ---------------- -------------- Net income (loss) $ (112,135) $ (119,436) $ (38,595) $ (137,016) $ (158,869) $ (38,024) =============== =============== =============== ================ ================ ============== Pro forma shares outstanding(e) 28,901,735 28,901,735 Pro forma net loss per share $ (3.88) $ (4.74) Balance Sheet Data (at end of period): Cash $ 40,000 $ 48,319 $ 46,908 $ 40,000 $ 48,319 $ 46,908 Working capital 306,741 114,718 129,319 306,741 114,718 129,319 Total assets 1,612,459 1,886,378 1,896,058 1,612,459 1,886,378 1,896,058 Long-term debt 515,494 1,219,900 1,114,367 515,494 1,219,900 1,114,367 Total debt 517,379 1,231,785 1,226,211 517,379 1,231,785 1,226,211 Stockholder's equity 604,099 132,670 320,576 604,099 132,670 320,576 Ratio of earnings to fixed charges -- (f) -- (f) -- (f) -- (f) -- (f) -- (f) Supplemental Data: Net cash provided by operating activities $ 25,236 $ 25,236 $ 38,202 $ 41,937 $ 41,937 $ 53,789 Net cash used in investing activities (7,904) (7,904) (17,044) (53,097) (53,097) (77,911) Net cash provided by (used in) financing activities (6,618) (6,618) (18,006) 23,033 23,033 32,311 Bad debt expense $ 30,539 $ 30,539 $ 85,831(c) $ 81,891 $ 81,891 $ 127,297(c) Bad debt expense as a % of net revenues 7.5% 7.5% 21.5% 6.7% 6.7% 10.3% Rent expense $ 12,515 $ 12,515 $ 11,860 $ 37,315 $ 37,315 $ 35,060 Capital expenditures 11,912 11,912 16,441 58,802 58,802 56,062 Depreciation expense $ 14,672 $ 14,672 $ 14,275 $ 43,460 $ 43,460 $ 42,358 EBITDA(g) $ (118,123)(h) $ (118,123)(h) $ (9,910)(c) $ (67,030)(h) $ (67,030)(h) $ 95,899(c) EBITDA as a % of net revenues (29.1%) (29.1%) (2.5%) (5.4%) (5.4%) 7.7% Adjusted EBITDA(i) $ 37,607 $ 37,607 $ (9,910)(c) $ 134,700 $ 134,700 $ 141,784(c) Adjusted EBITDA as a % of net revenues 9.3% 9.3% (2.5%) 10.9% 10.9% 11.4% Supplemental Ratio Data: Adjusted EBITDA/interest expense, net 3.1x 3.6x (Adjusted EBITDA-capital expenditures)/interest expense, net 2.1x 2.1x (Total debt--cash)/annualized adjusted EBITDA 3.2x 2.7x </TABLE> (Footnotes on page 14) <TABLE> <CAPTION> Year Ended December 31, ----------------------------------------------------------- Pro Forma Historical ------------------------------------------- 1995(a) 1995 1994(b) 1993 --------------- --------------- ------------- ------------- (in thousands, except share, per share and percentage data) <S> <C> <C> <C> <C> Statement of Operations Data: Net revenues $ 1,629,388 $1,629,388 $1,633,699 $1,416,338 Costs and expenses: Cost of services 980,232 980,232 969,844 805,729 Selling, general and administrative 523,271(c) 523,271(c) 411,939 363,579 Provision for restructuring and other special charges(d) 50,560 50,560 79,814 99,600 Interest expense, net 50,748 82,016 63,295 41,898 Amortization of intangible assets 34,031 44,656 42,588 28,421 Other, net 6,221 6,221 3,464 6,423 --------------- --------------- ------------- ------------- Total 1,645,063 1,686,956 1,570,944 1,345,650 --------------- --------------- ------------- ------------- Income (loss) before taxes (15,675) (57,568) 62,755 70,688 Income tax expense (benefit) 6,835 (5,516) 34,410 25,929 --------------- --------------- ------------- ------------- Income (loss) before cumulative effect of change in accounting principle (22,510) (52,052) 28,345 44,759 Cumulative effect of change in accounting principle (10,562) --------------- --------------- ------------- ------------- Net income (loss) $ (22,510) $ (52,052) $ 28,345 $ 34,197 =============== =============== ============= ============= Pro forma shares outstanding(e) 28,901,735 Pro forma net loss per share $ (0.78) Balance Sheet Data (at end of period): Cash $ 36,446 $ 38,719 $ 39,410 Working capital 200,740 214,358 139,771 Total assets 1,853,385 1,882,663 1,861,162 Long-term debt 1,195,566 1,153,054 1,025,787 Total debt 1,207,714 1,165,626 1,123,307 Stockholder's equity 295,801 386,812 395,509 Ratio of earnings to fixed charges -- (f) -- (f) 1.77(f) 2.20(f) Supplemental Data: Net cash provided by operating activities $ 85,828 $ 85,828 $ 37,963 $ 99,614 Net cash used in investing activities (93,087) (93,087) (46,186) (473,687) Net cash provided by (used in) financing activities 4,986 4,986 7,532 392,956 Bad debt expense $ 152,590(c) $ 152,590(c) $ 59,480 $ 47,240 Bad debt expense as a % of net revenues 9.4% 9.4% 3.6% 3.3% Rent expense $ 46,900 $ 46,900 $ 49,400 $ 46,900 Capital expenditures 74,045 74,045 93,354 65,317 Depreciation expense $ 56,857 $ 56,857 $ 46,929 $ 38,058 EBITDA(g) $ 125,961(c) $ 125,961(c) $ 215,567 $ 179,065 EBITDA as a % of net revenues 7.7% 7.7% 13.2% 12.6% Adjusted EBITDA(i) $ 176,521(c) $ 176,521(c) $ 295,381 $ 278,665 Adjusted EBITDA as a % of net revenues 10.8% 10.8% 18.1% 19.7% Supplemental Ratio Data: Adjusted EBITDA/interest expense, net 3.5x (Adjusted EBITDA-capital expenditures)/ interest expense, net 2.0x </TABLE> (Footnotes on page 14) (Footnotes for preceding pages) (a) Adjusted to reflect the pro forma effects of the Distributions and the Accounting Policy Change. See "Selected Historical Financial Data" and "Pro Forma Financial Information."
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+Prospectus Summary This Summary is qualified by the more detailed information (including the financial statements and related notes) set forth elsewhere in this Prospectus which should be read in its entirety. Unless the context indicates, or it is specifically indicated otherwise, all references to (i) "Corning" include Corning Incorporated, a New York corporation, and its consolidated subsidiaries, (ii) "Quest Diagnostics" or the "Company" include Corning Clinical Laboratories Inc. (to be renamed Quest Diagnostics Incorporated prior to the Distributions), a Delaware corporation, and its direct and indirect subsidiaries (other than Covance) and assume that the Distributions have occurred, and (iii) "Covance" include Covance Inc. (formerly Corning Pharmaceutical Services Inc.), a Delaware corporation, and its direct and indirect subsidiaries and assume that the Distributions have occurred. Capitalized terms used but not defined in this Summary are defined elsewhere in this Prospectus. The Company Quest Diagnostics is one of the largest independent clinical laboratory testing companies in the United States. Quest Diagnostics offers a broad range of routine and specialty ("esoteric") testing services used by the medical profession in the diagnosis, monitoring and treatment of disease and other medical conditions. Quest Diagnostics' network, which processes approximately 60 million requisitions for diagnostic tests annually, consists of 17 regional laboratories across the United States and the Corning Nichols Institute ("Nichols") esoteric testing laboratory in San Juan Capistrano, California. In addition, Quest Diagnostics has 14 branch laboratories in the United States as well as one branch laboratory in Mexico City (branch laboratories are smaller than regional laboratories), approximately 200 "STAT" laboratories and approximately 850 patient service centers located throughout the United States. For the year ended December 31, 1995 and the nine months ended September 30, 1996, Quest Diagnostics had net revenues of $1,629 million and $1,231 million, respectively, and Adjusted EBITDA (income (loss) before income taxes plus net interest expense, depreciation and amortization and restructuring and other special charges) of $177 million and $135 million, respectively. Quest Diagnostics operates 24 hours a day, 365 days a year, utilizing a fully integrated collection and processing system. Quest Diagnostics generally performs and reports most routine procedures within 24 hours, employing a variety of sophisticated and computerized laboratory testing instruments. Quest Diagnostics provides daily pickup of specimens from most customers principally through an in-house courier system. The specimens are sent to one of the Company's laboratories where one or more tests are performed. Each patient specimen is accompanied by a test requisition form, which is completed by the customer, that indicates the tests to be performed and provides the necessary billing information. Each specimen and related requisition form is checked for completeness and then given a unique bar-coded identification number. Once the appropriate information is entered into the computer system, the tests are performed and the results are delivered to the doctor, primarily through computer interface or manually. Corning entered the clinical laboratory business in 1982 with the acquisition of MetPath Inc. ("MetPath"), which was founded in 1967 and was one of the first laboratories to expand beyond a regional market. Since January 1993, Quest Diagnostics has acquired over thirty laboratories, including Damon Corporation ("Damon"), Bioran Medical Laboratory ("Bioran") and Maryland Medical Laboratory, Inc. ("MML"). In 1994, Quest Diagnostics enhanced its presence in the esoteric testing market through the acquisition of Nichols, a preeminent clinical laboratory with a leading reputation for esoteric testing and test innovations. While Corning's ownership provided the Company with the capital to grow through acquisitions and to become one of the nation's largest independent clinical laboratory testing companies, the management of both Corning and Quest Diagnostics believe that Quest Diagnostics will be more competitive and operate more successfully in the future as an independent company, with a strong, focused and experienced management team to concentrate on customer needs. Independence will also enable Quest Diagnostics to motivate its employees by offering equity-based incentives tied directly to the performance of the Company and individual performance. Quest Diagnostics' management team has implemented a new business strategy, which focuses the business around three key strategic areas: clinical operations, customer focus and technological leadership and excellence. The Clinical Laboratory Testing Industry Clinical testing is a critical component in the delivery of quality health care service to patients. Currently, clinical laboratory testing is the first step in determining how a significant amount of all health care dollars are spent. Quest Diagnostics believes that in 1995 the entire United States clinical laboratory industry had revenues exceeding $30 billion. The clinical laboratory industry consists primarily of three types of providers: hospital-affiliated laboratories, independent clinical laboratories, such as Quest Diagnostics, and physician-office laboratories. The Company believes that in 1995 approximately 56% of the clinical testing revenues in the United States were attributable to hospital-affiliated laboratories, approximately 36% were attributable to independent clinical laboratories and approximately 8% were attributable to physicians in their offices and laboratories. Quest Diagnostics believes that consolidation will continue in the clinical laboratory testing business. In addition, Quest Diagnostics believes that it and the other large independent clinical laboratory testing companies may have the opportunity to increase their share of the overall clinical laboratories testing market due to a number of external factors, including cost efficiencies afforded by large-scale automated testing, Medicare reimbursement reductions and the growth of managed health care entities which require low-cost testing services and large service networks. In addition, legal restrictions on physician referrals and the ownership of laboratories as well as increased regulation of laboratories are expected to contribute to the continuing consolidation of the industry. Quest Diagnostics believes that a number of factors are likely to positively influence the volume of clinical laboratory testing performed in the United States in the future, including (1) the general aging of the population in the United States; (2) an expanded base of scientific knowledge which has led to the development of more sophisticated specialized tests and an increase in the awareness of physicians of the value of clinical laboratory testing as a cost-effective means of early detection of disease and monitoring of treatment; (3) an increase in the number and types of tests which are, due to advances in technology and increased cost efficiencies, readily available on a more affordable basis to physicians; (4) expanded substance-abuse testing by corporations and governmental agencies; and (5) increased testing for sexually transmitted diseases such as AIDS. The impact of these factors is expected to be offset in part by increased controls over the utilization of clinical laboratory tests by both Medicare and the private sector, particularly managed care organizations. Business Strategy Quest Diagnostics' overall goal is to be recognized by its customers, employees and competitors as the best provider of comprehensive and innovative clinical testing, information and services. To achieve this, Quest Diagnostics' management team has focused the business around three key strategic areas: clinical operations, customer focus and technological leadership and excellence. (bullet) Best Supplier. Quest Diagnostics seeks to be the best supplier of the highest quality and the lowest-cost testing services. Health care providers and patients expect accurate, timely and consistent laboratory test results at a fair price. (bullet) Lowest-cost provider. Quest Diagnostics' average cost per requisition varies significantly among its regional laboratories; there is an approximately $7.00 difference in cost per requisition between the most efficient regional laboratory and the average, and an approximately $13.00 difference in cost per requisition between the most and the least efficient regional laboratories. In many cases, these variations do not relate to testing volumes or mixes, space costs, service requirements or regional labor cost differences. To reduce costs, Quest Diagnostics has begun to replicate the best practices from each region throughout its national network. Management expects to achieve significant cost savings within the next three years as these programs are fully implemented. * (bullet) Highest Quality Provider. Quest Diagnostics is dedicated to providing accurate and timely test results and to being viewed by its customers as the highest quality provider of clinical testing services. Quest Diagnostics believes that implementation of best practices already developed in certain regions will permit the Company to be viewed by its customers as the highest quality provider of clinical testing services. (bullet) Preferred Provider. Quest Diagnostics seeks to be the preferred provider of laboratory testing services to existing and new health care networks on a selective basis determined by profitability of accounts. Quest Diagnostics believes that it will become the preferred provider to these networks as (1) large networks typically prefer to utilize large independent clinical laboratories that can service them on a national or regional basis and (2) the Company continues to pursue its primary strategy of becoming the highest quality, lowest-cost provider. To achieve this, Quest Diagnostics will employ a rigorous national and regional process to both select and pursue customers and allocate resources to support these efforts. *This is a forward looking statement and is based on current expectations. Actual results may vary materially from those projected. See "Business- Important Factors Regarding Forward Looking Statements." In particular, see factors (a), (d) and (j). (bullet) Account Profitability. Quest Diagnostics intends to refocus its sales efforts on pursuing and keeping profitable accounts. Quest Diagnostics is actively reviewing the profitability of its current accounts, including those with managed care organizations, and will either increase pricing or eliminate accounts that cannot be serviced profitably. (bullet) Regional Profitability. Quest Diagnostics presently believes that it has the leading market share among independent clinical laboratories in most routine testing markets of the northeast, mid-Atlantic and midwest regions. Approximately 65% of Quest Diagnostics' revenues and almost all of its EBITDA is generated from markets in which the Company believes that it has the leading market share. In most of these markets, Quest Diagnostics believes that it also is the lowest cost provider. Quest Diagnostics is evaluating its strategic alternatives relative to units whose profitability does not meet its internal goals. These alternatives may include joint ventures, alliances, or dispositions. Quest Diagnostics believes that, while the clinical laboratory industry is becoming national in scope, the Company can subcontract with other clinical laboratories to perform testing for national accounts in any markets in which the Company chooses not to compete. (bullet) Leading Innovator. Quest Diagnostics intends to remain a leading innovator in the clinical laboratory industry by continuing to introduce new tests, technology and services. Through its relationship with the academic community and pharmaceutical and biotechnology firms and a research and development budget exceeding $15 million per year, Quest Diagnostics believes it is one of the leaders in transferring innovation from academic biotechnology laboratories to the market. Recent Developments By a plea agreement and civil agreement and release dated October 9, 1996, between the Department of Justice ("DOJ") and Damon, all federal criminal matters within the scope of the various federal investigations against Damon, and all claims including the civil qui tam cases underlying the civil investigations were settled for an aggregate of $119 million, which sum was reimbursed to Quest Diagnostics by Corning. The Damon settlement does not exclude Quest Diagnostics from future participation in any federal health care programs on account of Damon's practices. Quest Diagnostics' aggregate reserve with respect to all governmental and private claims was $215 million at September 30, 1996 and is estimated to be reduced to $85 million as of the Distribution Date as a result of the payment of settled claims, primarily the Damon settlement of $119 million. Based on information available to management and Quest Diagnostics' experience with past settlements (including the fact that the aggregate amount of the Damon settlement was significantly in excess of established reserves) management has reassessed its reserve levels and believes that its current level of reserves is adequate. However, it is possible that additional information may become available which may cause the final resolution of these matters to be in excess of established reserves by an amount which could be material to Quest Diagnostics' results of operations and, for non-indemnified claims, Quest Diagnostics' cash flows in the period in which such claims are settled. While none of the governmental or nongovernmental investigations or claims is covered by insurance, Quest Diagnostics does not believe that these matters will have a material adverse effect on Quest Diagnostics' overall financial condition. Corning Indemnity In connection with the Distributions, Corning has agreed to indemnify Quest Diagnostics against all monetary penalties, fines or settlements arising out of any governmental claims arising out of alleged violations of applicable federal fraud and health care statutes and relating to billing practices of Quest Diagnostics and its predecessors that have been settled or are pending on the Distribution Date. Corning has also agreed to indemnify Quest Diagnostics for 50% of the aggregate of all judgment or settlement payments made by Quest Diagnostics that are in excess of $42.0 million in respect of claims by private parties (i.e., nongovernmental parties such as private insurers) that relate to indemnified or previously settled governmental claims and that allege overbillings by Quest Diagnostics or any existing subsidiaries of Quest Diagnostics, for services provided prior to the Distribution Date; provided, however, such indemnification for nongovernmental claims will not exceed $25.0 million in the aggregate and all amounts indemnified against by Corning for the benefit of Quest Diagnostics will be calculated on a net after-tax basis. Such indemnification will not cover (i) any governmental claims that arise after the Distribution Date pursuant to service of subpoena or other notice of such investigation after the Distribution Date, (ii) any nongovernmental claims unrelated to the indemnified governmental claims or investigations, (iii) any nongovernmental claims not settled prior to five years after the Distribution Date, (iv) any consequential or incidental damages relating to the billing claims, including losses of revenues and profits as a consequence of exclusion for participation in federal or state health care programs or (v) the fees and expenses of litigation. The Distributions On May 13, 1996, the board of directors of Corning approved a plan to distribute to Corning shareholders the clinical laboratory testing business being conducted by Quest Diagnostics and the contract research business being conducted by Quest Diagnostics' wholly owned subsidiary, Covance (together, the "Distributions"). The Distributions will be effected by distributing all of the outstanding shares of Quest Diagnostics common stock (the "Quest Diagnostics Common Stock") to holders of Corning common stock (the "Corning Common Stock"), followed immediately by the distribution of all of the common stock of Covance (the "Covance Common Stock") to those same holders, as holders of Quest Diagnostics Common Stock. It is expected that the Distributions will be made on December 31, 1996 (the date on which the Distributions are to be made, the "Distribution Date"). Prior to the consummation of the offering of the Notes contemplated hereby (the "Offering"), the Company entered into a $450 million senior, secured credit facility (the "Credit Facility"), among the Company, the lenders listed therein, NationsBank, N.A., as Issuing Bank, Wachovia Bank of Georgia, N.A., as Swingline Bank, and Morgan Guaranty Trust Company of New York, as Administrative Agent. The Credit Facility is comprised of a $300 million six-year amortizing term loan ("Tranche A Loan"), a $50 million seven-year term loan ("Tranche B Loan" and together with the Tranche A Loan, the "Term Loans") and a $100 million six-year revolving working capital facility (the "Working Capital Facility"). Corning currently has approximately $1.2 billion of Quest Diagnostics intercompany debt. Approximately $145 million of net proceeds from the Offering, together with the $350 million of borrowings under the Term Loans, will be paid to Corning in satisfaction of a portion of the outstanding intercompany debt. Corning will contribute the remaining intercompany debt to Quest Diagnostics' capital. Borrowings under the Working Capital Facility, substantially all of which is expected to be available as of the Distribution Date, will provide for future working capital needs and other general corporate purposes. The Offering <TABLE> <CAPTION> <S> <C> Securities Offered $150,000,000 aggregate principal amount of % Senior Subordinated Notes due December 15, 2006 (the "Notes"). Maturity Date December 15, 2006. Interest Payment Date June 15 and December 15, commencing June 15, 1997. Optional Redemption by the Company The Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after December 15, 2001, at the redemption prices set forth herein, plus accrued and unpaid interest, if any, to but excluding the date fixed for redemption. In addition, if as a result of an event outside the control of Corning, Quest Diagnostics and Covance, the Distributions do not occur prior to March 31, 1997, the Notes will be subject to redemption, as a whole and not in part, at the option of Quest Diagnostics, prior to June 30, 1997, at a redemption price equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to but excluding the date fixed for redemption. See "Description of the Notes--Optional Redemption." Change of Control Offer Upon a Change of Control, the Company has the obligation to offer to purchase all the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to but excluding the date of purchase. See "Description of the Notes-- Repurchase at the Option of Holders--Change of Control" for a discussion of the circumstances in which the Company may not be required to make an offer to purchase upon a Change of Control. Offers to Purchase In the event of certain asset sales, the Company will be required to offer to repurchase the Notes at 100% of their principal amount, plus accrued and unpaid interest, if any, to but excluding the date of purchase with the net proceeds of such asset sales. Subordination The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company, including all indebtedness of the Company under the Credit Facility. The Notes will rank Pari Passu in right of payment with any other senior subordinated indebtedness of the Company. Subsidiary Guarantees The Notes will be guaranteed, jointly and severally, and fully and unconditionally, on a senior subordinated basis by the Guarantors (the "Senior Subordinated Guarantees"). The obligations of any Guarantor with respect to its Senior Subordinated Guarantee will be subordinated in right of payment, to the same extent as the obligations of the Company in respect of the Notes, to all existing and future Senior Guarantees, which will include the guarantees of the Credit Facility. The Senior Subordinated Guarantees would also be subordinated to all existing and future indebtedness of the Guarantors if the Senior Subordinated Guarantees were avoided or subordinated in favor of the Guarantors' other creditors. See "Risk Factors--Fraudulent Conveyance." The obligations of a Guarantor under its Senior Subordinated Guarantee will be released in certain circumstances, including if the Guarantor ceases to guarantee the Credit Facility. See "Description of the Notes--Senior Subordinated Guarantees." Principal Covenants The indenture under which the Notes are issued (the "Indenture") will impose certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt and senior in right of payment to the Notes, enter into leases, incur liens, merge or consolidate with any other person, or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. Use of Proceeds The Company intends to use the proceeds from the sale of the Notes, together with the proceeds of borrowings under the Credit Facility, to repay certain intercompany indebtedness owed to Corning. See "Use of Proceeds." The Distributions The Notes are being offered in connection with the Distributions of the Quest Diagnostics Common Stock and the Covance Common Stock to holders of Corning Common Stock. The closing of the offering of the Notes is anticipated to occur prior to the Distributions. Listing The Notes have been approved for listing on the New York Stock Exchange, subject to official notice of issuance. Risk Factors See "Risk Factors" for a discussion of certain factors that should be considered in connection with an investment in the Notes. </TABLE> Summary Financial Data The following table summarizes certain historical and pro forma financial data of Quest Diagnostics at the dates and for each of the periods indicated. The selected financial data as of and for each of the years ended December 31, 1995, 1994 and 1993 have been derived from the audited combined financial statements of (the "Audited Financial Statements") and the notes thereto included elsewhere herein. The selected financial data as of and for the three and nine months ended September 30, 1996 and 1995 have been derived from the unaudited interim combined financial statements of Quest Diagnostics (the "Interim Financial Statements" and, together with the Audited Financial Statements, the "Financial Statements") and the notes thereto included elsewhere herein. In the opinion of Quest Diagnostics management, the unaudited interim combined financial statements include all adjustments, consisting of only normal recurring adjustments, that are necessary for a fair presentation of the financial position and results of operations for these periods. The unaudited interim results of operations for the three and nine months ended September 30, 1996 are not necessarily indicative of the results for the entire year ending December 31, 1996. The selected pro forma financial data have been derived from the unaudited pro forma combined financial information of Quest Diagnostics for the year ended December 31, 1995 and for the three and nine months ended September 30, 1996 (the "Pro Forma Financial Information") and the notes thereto included elsewhere herein. The pro forma statement of operations data gives effect to the Distributions and the Accounting Policy Change (as defined below) as if they had occurred on January 1, 1995 and the pro forma balance sheet data gives effect to the Distributions and the Accounting Policy Change as if they had occurred on September 30, 1996. The pro forma financial data does not purport to represent what Quest Diagnostics' results of operations would have been if the Distributions and the Accounting Policy Change had in fact occurred on such dates, nor does it purport to indicate the future financial position or results of future operations of Quest Diagnostics. The pro forma adjustments are based upon currently available information and certain assumptions that Quest Diagnostics management believes to be reasonable. The summary historical and pro forma financial data set forth below should be read in conjunction with "Selected Historical Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Financial Statements and the notes thereto and the Pro Forma Financial Information and the notes thereto. <TABLE> <CAPTION> Three Months Ended September 30, Nine Months Ended September 30, ------------------------------------------------------------------------------------------------ Pro Forma Historical Pro Forma Historical ------------------------------- ------------------------------- 1996(a) 1996 1995 1996(a) 1996 1995 --------------- --------------- --------------- ---------------- ---------------- -------------- (in thousands, except share, per share and percentage data) <S> <C> <C> <C> <C> <C> <C> Statement of Operations Data: Net revenues $ 405,352 $ 405,352 $ 399,959 $ 1,231,290 $1,231,290 $1,239,474 Costs and expenses: Cost of services 255,390 255,390 240,868 768,809 768,809 735,984 Selling, general and administrative 125,190 125,190 181,346(c) 371,439 371,439 399,635(c) Provision for restructuring and other special charges(d) 155,730 155,730 201,730 201,730 45,885 Interest expense, net 12,189 19,866 20,927 36,938 59,887 61,529 Amortization of intangible assets 7,672 10,328 11,293 23,803 31,772 33,678 Other, net 1,837 1,837 1,930 (198) (198) 4,429 --------------- --------------- --------------- ---------------- ---------------- -------------- Total 558,008 568,341 456,364 1,402,521 1,433,439 1,281,140 --------------- --------------- --------------- ---------------- ---------------- -------------- Income (loss) before taxes (152,656) (162,989) (56,405) (171,231) (202,149) (41,666) Income tax expense (benefit) (40,521) (43,553) (17,810) (34,215) (43,280) (3,642) --------------- --------------- --------------- ---------------- ---------------- -------------- Income (loss) before cumulative effect of change in accounting principle (112,135) (119,436) (38,595) (137,016) (158,869) (38,024) Cumulative effect of change in accounting principle --------------- --------------- --------------- ---------------- ---------------- -------------- Net income (loss) $ (112,135) $ (119,436) $ (38,595) $ (137,016) $ (158,869) $ (38,024) =============== =============== =============== ================ ================ ============== Pro forma shares outstanding(e) 28,901,735 28,901,735 Pro forma net loss per share $ (3.88) $ (4.74) Balance Sheet Data (at end of period): Cash $ 40,000 $ 48,319 $ 46,908 $ 40,000 $ 48,319 $ 46,908 Working capital 306,741 114,718 129,319 306,741 114,718 129,319 Total assets 1,612,459 1,886,378 1,896,058 1,612,459 1,886,378 1,896,058 Long-term debt 515,494 1,219,900 1,114,367 515,494 1,219,900 1,114,367 Total debt 517,379 1,231,785 1,226,211 517,379 1,231,785 1,226,211 Stockholder's equity 604,099 132,670 320,576 604,099 132,670 320,576 Ratio of earnings to fixed charges -- (f) -- (f) -- (f) -- (f) -- (f) -- (f) Supplemental Data: Net cash provided by operating activities $ 25,236 $ 25,236 $ 38,202 $ 41,937 $ 41,937 $ 53,789 Net cash used in investing activities (7,904) (7,904) (17,044) (53,097) (53,097) (77,911) Net cash provided by (used in) financing activities (6,618) (6,618) (18,006) 23,033 23,033 32,311 Bad debt expense $ 30,539 $ 30,539 $ 85,831(c) $ 81,891 $ 81,891 $ 127,297(c) Bad debt expense as a % of net revenues 7.5% 7.5% 21.5% 6.7% 6.7% 10.3% Rent expense $ 12,515 $ 12,515 $ 11,860 $ 37,315 $ 37,315 $ 35,060 Capital expenditures 11,912 11,912 16,441 58,802 58,802 56,062 Depreciation expense $ 14,672 $ 14,672 $ 14,275 $ 43,460 $ 43,460 $ 42,358 EBITDA(g) $ (118,123)(h) $ (118,123)(h) $ (9,910)(c) $ (67,030)(h) $ (67,030)(h) $ 95,899(c) EBITDA as a % of net revenues (29.1%) (29.1%) (2.5%) (5.4%) (5.4%) 7.7% Adjusted EBITDA(i) $ 37,607 $ 37,607 $ (9,910)(c) $ 134,700 $ 134,700 $ 141,784(c) Adjusted EBITDA as a % of net revenues 9.3% 9.3% (2.5%) 10.9% 10.9% 11.4% Supplemental Ratio Data: Adjusted EBITDA/interest expense, net 3.1x 3.6x (Adjusted EBITDA-capital expenditures)/interest expense, net 2.1x 2.1x (Total debt--cash)/annualized adjusted EBITDA 3.2x 2.7x </TABLE> (Footnotes on page 14) <TABLE> <CAPTION> Year Ended December 31, ----------------------------------------------------------- Pro Forma Historical ------------------------------------------- 1995(a) 1995 1994(b) 1993 --------------- --------------- ------------- ------------- (in thousands, except share, per share and percentage data) <S> <C> <C> <C> <C> Statement of Operations Data: Net revenues $ 1,629,388 $1,629,388 $1,633,699 $1,416,338 Costs and expenses: Cost of services 980,232 980,232 969,844 805,729 Selling, general and administrative 523,271(c) 523,271(c) 411,939 363,579 Provision for restructuring and other special charges(d) 50,560 50,560 79,814 99,600 Interest expense, net 50,748 82,016 63,295 41,898 Amortization of intangible assets 34,031 44,656 42,588 28,421 Other, net 6,221 6,221 3,464 6,423 --------------- --------------- ------------- ------------- Total 1,645,063 1,686,956 1,570,944 1,345,650 --------------- --------------- ------------- ------------- Income (loss) before taxes (15,675) (57,568) 62,755 70,688 Income tax expense (benefit) 6,835 (5,516) 34,410 25,929 --------------- --------------- ------------- ------------- Income (loss) before cumulative effect of change in accounting principle (22,510) (52,052) 28,345 44,759 Cumulative effect of change in accounting principle (10,562) --------------- --------------- ------------- ------------- Net income (loss) $ (22,510) $ (52,052) $ 28,345 $ 34,197 =============== =============== ============= ============= Pro forma shares outstanding(e) 28,901,735 Pro forma net loss per share $ (0.78) Balance Sheet Data (at end of period): Cash $ 36,446 $ 38,719 $ 39,410 Working capital 200,740 214,358 139,771 Total assets 1,853,385 1,882,663 1,861,162 Long-term debt 1,195,566 1,153,054 1,025,787 Total debt 1,207,714 1,165,626 1,123,307 Stockholder's equity 295,801 386,812 395,509 Ratio of earnings to fixed charges -- (f) -- (f) 1.77(f) 2.20(f) Supplemental Data: Net cash provided by operating activities $ 85,828 $ 85,828 $ 37,963 $ 99,614 Net cash used in investing activities (93,087) (93,087) (46,186) (473,687) Net cash provided by (used in) financing activities 4,986 4,986 7,532 392,956 Bad debt expense $ 152,590(c) $ 152,590(c) $ 59,480 $ 47,240 Bad debt expense as a % of net revenues 9.4% 9.4% 3.6% 3.3% Rent expense $ 46,900 $ 46,900 $ 49,400 $ 46,900 Capital expenditures 74,045 74,045 93,354 65,317 Depreciation expense $ 56,857 $ 56,857 $ 46,929 $ 38,058 EBITDA(g) $ 125,961(c) $ 125,961(c) $ 215,567 $ 179,065 EBITDA as a % of net revenues 7.7% 7.7% 13.2% 12.6% Adjusted EBITDA(i) $ 176,521(c) $ 176,521(c) $ 295,381 $ 278,665 Adjusted EBITDA as a % of net revenues 10.8% 10.8% 18.1% 19.7% Supplemental Ratio Data: Adjusted EBITDA/interest expense, net 3.5x (Adjusted EBITDA-capital expenditures)/ interest expense, net 2.0x </TABLE> (Footnotes on page 14) (Footnotes for preceding pages) (a) Adjusted to reflect the pro forma effects of the Distributions and the Accounting Policy Change. See "Selected Historical Financial Data" and "Pro Forma Financial Information."
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+PROSPECTUS SUMMARY ------------------ This summary should be read in conjunction with, and is qualified in its entirety by, the more detailed information and the Company's consolidated financial statements, including the accompanying notes, appearing elsewhere in this Prospectus. Prospective investors should consider carefully the information set forth under the heading "Risk Factors." THE COMPANY Enterbank Holdings, Inc. (together with its consolidated subsidiaries the "Company") is a one-bank holding company headquartered in St. Louis County, Missouri. The Company conducts its banking activities through its wholly-owned subsidiary, Enterprise Bank (the "Bank"). The Bank began operations in 1988 as a newly-formed financial institution and has grown rapidly. The bank holding company structure was added in 1995. The philosophy of the organization is to provide a complete range of financial services to closely-held businesses, their owners and employees, and to professional persons. The Company's target market area consists of the entire St. Louis metropolitan area, including the City of St. Louis, the Missouri counties of St. Louis, St. Charles, Jefferson, Franklin, Lincoln and Warren and the Illinois county of St. Clair. The Company's goal is to grow its operation within its defined market niche by being well managed, well capitalized, and disciplined in its approach to managing and expanding its operations as growth opportunities arise. The Company was incorporated under the laws of the State of Delaware and was formed for the purpose of becoming a holding company for the ownership of the Bank. The Company's principle executive offices are located at 150 N. Meramec, Clayton, Missouri 63105, and its telephone number is (314) 725-5500. FINANCIAL SUMMARY At September 30, 1996, the Company had approximately $160.8 million in assets, $129.7 million in loans, $145.6 million in deposits, and $14.3 million in Shareholders' equity. From 1991 to 1995, the Company's net income increased from $207,000 to $1.3 million and net income per share increased from $.14 to $.79. During the same period, return on average equity increased from 2.42% to 11.13%. From December 31, 1991 to December 31, 1995, the Company's net loans increased from $53.3 million to $110.5 million, total assets increased from $80.5 million to $153.7 million and total deposits increased from $71.4 million to $141.1 million. During this same period, the Company's non-performing loans to total loans decreased from 1.35% to .10%. <PAGE> 6 As displayed in the following graphs, the Company has experienced significant growth in Earnings Per Share, Net Income, and Total Assets over the past five years. [EARNINGS PER SHARE GRAPH] [NET INCOME GRAPH] [TOTAL ASSETS GRAPH] 2 <PAGE> 7 <TABLE> The Offering <S> <C> Common Stock Offered 193,548 minimum - 451,612 maximum shares of Common Stock. Common Stock Outstanding After the Offering Maximum of 2,113,972 shares<F1> Use of Proceeds Of the $6,880,000 estimated net proceeds to the Company from the offering (assuming the sale of all 451,612 shares pursuant to the offering), approximately $6,580,000 will be used for general corporate purposes and the working and regulatory capital necessary to allow for the future growth and physical expansion of the Bank into the St. Charles County and Sunset Hills markets pursuant to the Bank's internal business plan. Approximately $300,000 will be used to retire the Company's bank debt. Risk Factors The securities offered hereby involve a high degree of risk and prospective purchasers should consider the factors discussed herein under "Risk Factors." Plan of Distribution The securities offered hereby are being offered solely by designated officers and directors of the Company. The Company has reserved in the aggregate up to 77,736 shares of Common Stock for sale to certain directors of the Company who previously have not been significant owners of the Company's common stock. See "Plan of Distribution." <FN> - ---------------- <F1> Does not include options to purchase 213,000 shares of common stock granted to officers and employees of the Company. See "Management - Stock Option Plans." </TABLE> SUMMARY OF SELECTED FINANCIAL DATA The table on the following page summarizes selected financial data for the nine month periods ended September 30, 1996 and 1995, and for the years ended December 31, 1995, 1994, 1993, 1992 and 1991. For the interim period information presented, the information was summarized from the Company's internal accounting records. For the fiscal year period information presented, the information was summarized from the Company's independently audited financial statements and/or internal accounting records, as applicable. As discussed in Note 1 to the accompanying consolidated financial statements, on May 9, 1995, Enterbank Holdings, Inc. was formed as a bank holding company. Enterbank Holdings, Inc. exchanged 1,463,400 shares of Enterbank Holdings, Inc. common stock for all 73,170 (100%) of the outstanding shares of Enterprise Bank in a twenty-for-one stock exchange. The merger represented a combination of entities under common control and, accordingly, was accounted for in a manner similar to a pooling of interest. Therefore, results of operations for periods presented prior to May 9, 1995 reflect the results of operations of Enterprise Bank. Additionally, Enterprise Capital Resources, Inc. was formed as a small business investment company in 1995 and, on May 11, 1995, Enterbank Holdings, Inc. acquired 100% of the outstanding shares of Enterprise Capital Resources, Inc. 3 <PAGE> 8 <TABLE> Summary of Selected Financial Data <CAPTION> Nine Months Ended September 30, Year Ended December 31, ----------------- ----------------------------------------------------- 1996 1995 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- ---- ---- (Dollars and number of shares in Thousands except per share data) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF INCOME DATA Interest income $ 9,108 $ 7,927 $ 10,914 $ 7,374 $ 5,770 $ 5,297 $ 5,583 Interest expense 3,990 3,511 4,887 2,570 2,083 2,355 3,126 Net interest income 5,118 4,416 6,027 4,804 3,687 2,942 2,457 Provision for possible loan losses 144 290 631 450 162 181 435 Net interest income after provision for possible loan losses 4,974 4,126 5,396 4,354 3,525 2,761 2,022 Noninterest income 780 608 836 805 744 652 683 Noninterest expense 3,696 3,237 4,187 3,551 3,106 2,623 2,370 Income before income tax expense 2,058 1,497 2,045 1,608 1,163 790 335 Income tax expense 792 587 741 607 411 285 128 Net income 1,266 910 1,304 1,001 752 505 207 Net income per common share 0.74 0.55 0.79 0.62 0.48 0.33 0.14 Cash dividends per common share $ 0.06 $ 0.05 $ 0.07 $ 0.06 $ 0.05 $ -- $ -- Weighted average common shares outstanding 1,497 1,463 1,463 1,461 1,460 1,460 1,460 BALANCE SHEET Cash and due from banks $ 7,029 $ 11,357 $ 8,110 $ 5,930 $ 4,872 $ 2,650 $ 3,091 Federal funds sold 5,625 25,280 16,230 11,300 10,125 9,450 12,275 Investments in debt securities: Available-for-sale 14,918 13,663 16,065 15,740 2,999 -- 6,149 Held-to-maturity 938 1,173 842 802 6,680 6,620 4,037 Total Investments 15,856 14,836 16,907 16,542 9,679 6,620 10,186 Loans, less unearned loan fees 129,721 97,698 110,464 85,687 72,215 57,553 53,380 Allowance for loan losses 1,555 1,290 1,400 1,000 722 606 565 Total assets 160,767 151,448 153,706 122,212 99,266 79,398 80,461 Total deposits 145,561 139,368 141,140 104,799 89,113 69,612 71,397 Notes payable 300 -- -- -- -- -- -- Shareholders' equity 14,323 11,677 12,052 10,781 9,943 9,264 8,759 Book value per common share 8.62 7.98 8.24 7.38 6.81 6.35 6.00 Tangible book value per common share $ 8.61 $ 7.97 $ 8.23 $ 7.38 $ 6.81 $ 6.34 $ 5.98 SELECTED RATIOS Return on average assets 1.15% 0.95% 0.99% 0.96% 0.84% 0.66% 0.32% Return on average equity 13.65 10.97 11.13 9.71 7.83 5.62 2.42 Total capital to risk-adjusted assets 10.84 11.07 10.27 10.75 13.16 14.65 15.80 Net yield on average earning assets 8.92 9.01 9.00 7.78 7.14 7.63 7.36 Cost of interest-bearing liabilities 4.85 4.90 4.94 3.36 3.11 4.10 6.28 Net interest margin 5.01 5.02 4.98 5.07 4.57 4.24 4.09 Nonperforming loans as a percent of loans 0.08 0.02 0.10 0.00 0.78 0.91 1.35 Nonperforming assets as a percent of assets 0.61 0.82 0.64 1.45 2.08 2.58 1.82 Net loan charge offs (recoveries) as a percent of average loans (0.01) 0.00 0.24 0.23 0.07 0.25 0.70 Allowance for possible loan losses as a percent of net loans 1.20 1.32 1.27 1.17 1.00 1.05 1.06 Leverage ratio 8.92% 7.73% 7.85% 8.89% 10.02% 11.66% 10.84% </TABLE> 4 <PAGE> 9
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+PROSPECTUS SUMMARY ------------------ The following summary is qualified in its entirety by the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. The Company ----------- First Cash, Inc. (the "Company") is the third largest publicly traded pawnshop operator in the United States with 54 stores in Texas, Oklahoma, Maryland and Washington, D.C. as of November 19, 1996. The Company's telephone number is (817) 460-3947 and corporate offices are located at 690 East Lamar Blvd., Suite 400, Arlington, Texas 76011. The Company engages in both consumer finance and retail sales activities. The Company provides a convenient source for consumer loans, lending money against pledged tangible personal property such as jewelry, electronic equipment, tools, firearms, sporting goods and musical equipment. The Company also functions as a retailer of previously-owned merchandise acquired in forfeited pawn transactions and over-the-counter purchases from customers, as well as new merchandise acquired in close-out purchases. For the fiscal year ended July 31, 1996, the Company's revenues were derived 65% from retail activities, and 35% from lending activities. The Company provides its customer base timely and convenient access to short-term credit not generally available from commercial banks, finance companies or other financial institutions. Management believes the pawnshop industry is highly fragmented with approximately 9,000 stores in the United States and is in the early stages of achieving greater efficiencies through consolidation. The four publicly traded pawnshop companies operate less than 8% of the total pawnshops in the United States. Management believes significant economies of scale, increased operating efficiencies, and revenue growth are achievable by increasing the number of stores under operation and introducing modern merchandising techniques, point-of-sale systems, improved inventory management and store remodeling. The Company's objectives are to increase consumer loans and retail sales through selected acquisitions and new store openings and to enhance operating efficiencies and productivity. During fiscal 1996, 1995 and 1994, the Company added 7, 7 and 10 stores to its network, respectively, net of stores sold or consolidated. See "Recent Developments." <TABLE> Registration of Issuance of Shares of Common Stock -------------------------------------------------- <S> <C> Common Stock outstanding on the date of this Prospectus..... 3,719,121 (1) Common Stock issued upon exercise of Options, the issuance of which is being registered hereby.............. 192,625 Common Stock issued upon exercise of Warrants, the issuance of which is being registered hereby.............. 1,310,162 Common Stock issued upon exercise of Convertible Debentures, the issuance of which is being registered hereby.......... 2,100,001 Use of proceeds............................................. Reduction of outstanding Credit Facility and working capital. See "Use of Proceeds." Nasdaq Symbol............................................... PAWN - ------------------ </TABLE> (1) Does not include (i) 215,625 shares issuable upon exercise of outstanding options, of which the issuance of 192,625 shares of Common Stock underlying the Options is being registered hereby, (ii) 3,218,412 shares issuable upon exercise of outstanding warrants, of which the issuance of 1,310,162 shares of Common Stock underlying the Warrants is being registered hereby, (iii) 2,100,001 shares issuable upon conversion of the Convertible Debentures. See "Management - Stock Options and Warrants," "- Certain Transactions," "Description of Capital Stock - Convertible Debentures," and "- Other Warrants." <TABLE> Summary Financial Information ----------------------------- (in thousands, except per share and store data) Year Ended July 31, 1996 1995 1994 ---- ---- ---- <S> <C> <C> <C> Income Statement Data: - ---------------------- Total revenues......................... $ 38,023 $ 32,184 $ 20,583 Cost of goods sold and expenses........ 35,666 30,492 18,986 -------- -------- -------- Income before income taxes............. 2,357 1,692 1,597 Provision for income taxes............. 917 592 462 -------- -------- -------- Net income............................. 1,440 1,100 1,135 Dividends on preferred stock........... - - 120 -------- -------- -------- Net income attributable to common stockholders.......................... $ 1,440 $ 1,100 $ 1,015 ======== ======== ======== Net income per common share............ $ .39 $ .30 $ .27 ======== ======== ======== Weighted average common shares outstanding.................... 3,669 3,719 3,792 Operating Data: - --------------- Stores in operation: Beginning of period..................... 43 36 26 Acquired................................ 7 5 10 Opened.................................. 1 2 2 Sold.................................... - - (1) Consolidated............................ (1) - (1) -------- -------- -------- End of period........................... 50 43 36 ======== ======== ======== Pawn loans................................ $ 11,701 $ 9,158 $ 7,320 Average loan balance per store(1)......... $ 234 $ 213 $ 203 Redemption rate(2)........................ 70% 71% 73% Average inventory per store(1)............ $ 175 $ 178 $ 167 Annualized inventory turnover............. 2.1x 2.0x 1.6x Gross profit percentage on merchandise sales........................ 32.7% 34.1% 32.2% </TABLE> <TABLE> July 31, 1996 ------------- Balance Sheet Data: As Adjusted - ------------------- Actual (3)(4)(5) ------ ----------- <S> <C> <C> Working capital........................... $ 21,098 $ 27,776 Total assets.............................. 51,945 58,623 Long-term liabilities..................... 28,655 18,655 Total liabilities......................... 31,362 21,362 Stockholders' equity...................... 20,583 37,261 - --------------- </TABLE> (1) Calculated as loans or inventory, as appropriate, at the end of the period divided by locations in operation at the end of the period. (2) The redemption rate represents the percentage of loans made, including loan renewals, with respect to which the customer either paid the outstanding principal and accrued interest or renewed by paying all outstanding accrued interest. (3) Assumes issuance of (i) 192,625 shares issuable upon exercise of Options, (ii) 1,310,162 shares issuable upon exercise of the Warrants, and (iii) 2,100,001 shares issuable upon conversion of the Convertible Debentures; the issuance of all these shares is being registered under the Securities Act. (4) Includes the conversion of $100,000 of Convertible Debentures, which were converted in October 1996. (5) Does not include 1,908,250 shares issuable upon exercise of outstanding warrants and 23,000 shares issuable upon exercise of outstanding options, of which the issuance is not being registered under the Securities Act. RECENT DEVELOPMENTS ------------------- In May 1996, the Company acquired three pawnshops in Baltimore, Maryland in an asset purchase including fixed assets, layaways and pawn loans from an affiliate of Mark Rothman, a principal stockholder of the Company, for an aggregate purchase price of $2,446,000 consisting of $2,400,000 cash paid to the seller, and legal, consulting and other fees of $46,000. In June 1996, the Company acquired three additional pawnshops in Baltimore, Maryland in an asset purchase including fixed assets, layaways, pawn loans and inventory from an unaffiliated corporation for an aggregate cash purchase price of $1,662,000 consisting of $1,590,000 paid to the seller, and legal, consulting and other fees of $72,000. The Company financed substantially all of the cash purchase price for both of these acquisitions through its Credit Facility. The purchase price for these acquisitions was determined based upon the volume of annual loan and sales transactions, outstanding loan balances, inventory on hand, and location and condition of the facilities. In August 1996, the Company entered into a management agreement to operate and manage pawnshops for JB Pawn, Inc., a Texas corporation. JB Pawn, Inc. will own and provide 100% of the financing for the pawnshops, and will incur all direct costs to operate the pawnshops, including but not limited to payroll, store operating expenses, cost of inventory, and pawn loans. The Company will receive a monthly management fee for each store managed, and will provide computer support, accounting, auditing, oversight and management of these stores. JB Pawn, Inc. is 100% owned and controlled by Mr. Jon Burke, a brother of a director of the Company. In the event that JB Pawn, Inc. receives an offer to purchase any of its pawnshops, the Company shall have a first right of refusal to match such offer. THE COMPANY ----------- The Company is the third largest publicly traded pawnshop operator in the United States with 54 stores in Texas, Oklahoma, Maryland and Washington, D.C. as of November 19, 1996. The Company engages in both consumer finance and retail sales activities. The Company provides a convenient source for consumer loans, lending money against pledged tangible personal property such as jewelry, electronic equipment, tools, firearms, sporting goods and musical equipment. The Company also functions as a retailer of previously-owned merchandise acquired in forfeited pawn transactions and over-the-counter purchases from customers, as well as new merchandise acquired in close-out purchases. For the fiscal year ended July 31, 1996, the Company's revenues were derived 65% from retail activities, and 35% from lending activities. The Company provides its customer base timely and convenient access to short-term credit not generally available from commercial banks, finance companies or other financial institutions. Management believes the pawnshop industry is highly fragmented with approximately 9,000 stores in the United States and is in the early stages of achieving greater efficiencies through consolidation. The four publicly traded pawnshop companies operate less than 8% of the total pawnshops in the United States. Management believes significant economies of scale, increased operating efficiencies, and revenue growth are achievable by increasing the number of stores under operation and introducing modern merchandising techniques, point-of-sale systems, improved inventory management and store remodeling. The Company's objectives are to increase consumer loans and retail sales through selected acquisitions and new store openings and to enhance operating efficiencies and productivity. During fiscal 1996, 1995 and 1994, the Company added 7, 7 and 10 stores to its network, respectively, net of stores sold or consolidated. The Company commenced operations in July 1988 with the acquisition of two stores. The Company added two stores in each of the three following fiscal years, 15 stores in fiscal 1992, three stores in fiscal 1993, 10 in fiscal 1994, seven in fiscal 1995 and seven in fiscal 1996. During fiscal 1994, the Company consolidated one store in the Dallas/Fort Worth metropolitan area with an existing store, in December 1993 the Company sold one store in the Dallas/Fort Worth metropolitan area, and in September 1995 the Company consolidated one store in the Mid-Atlantic area.. Of the 54 stores currently operated by the Company, 46 were acquired and 8 were start-ups by the Company. The Company continues to study possible acquisitions and to make contact with possible acquisition candidates. It is the Company's experience that after a suitable location has been identified and a lease and licenses are obtained, a new store can be ready for business within six weeks. The investment required to open a store includes inventory, funds available for pawn loans, store fixtures, security systems, and a computer system. Although the total investment varies and is difficult to predict for each new store, it has been the Company's experience that between $150,000 and $200,000 is required to finance new stores for the first six months of operation. Before making an acquisition, management studies a demographic analysis of the surrounding area, considers the number and size of competing pawnshops, and researches local regulatory issues. Specific store acquisition criteria include an evaluation of the volume of annual loan transactions, outstanding loan balances, historical redemption rates, the quality and quantity of inventory on hand, management expertise, and condition of the facility, including lease terms. See "Recent Developments" for a discussion of recent significant acquisitions. The Company was formed as a Texas corporation in July 1988 and in April 1991 the Company reincorporated as a Delaware corporation. Except as otherwise indicated, the term "Company" includes its wholly owned subsidiaries, American Loan & Jewelry, Inc. and Famous Pawn, Inc. The Company's principal executive offices are located at 690 E. Lamar Blvd, Suite 400, Arlington, Texas 76011, and its telephone number is (817)460-3947. INVESTMENT CONSIDERATIONS ------------------------- In addition to the other information contained in this Prospectus, the following factors should be carefully considered in evaluating the Company and its business before purchasing shares of the Common Stock offered hereby. Recent Developments; Risk of Leverage - ------------------------------------- As a result of the recent issuances of the Convertible Debentures, acquisition related debt and increases in the Company's Credit Facility, the Company's debt service requirements have been substantially increased over historical levels. Although the Company anticipates that existing cash flows and additional cash flows from the acquisitions partially funded by such indebtedness will be sufficient to support current levels of Company debt, debt service requirements will affect the profitability of the Company and may impair its ability to raise additional capital for further acquisitions or for capital investment in existing operations. At July 31, 1996, the Company had $28,655,000 of long-term liabilities, of which $27,027,000 represented long-term debt. The Company has incurred and will continue to incur interest expense on such indebtedness. Although interest rates have decreased over the last twelve months, interest rates may increase in the future. As interest rates increase, management's strategy to fund acquisitions through debt becomes more costly and may have an adverse impact on the Company's operations. Failure to make payments when due will result in default under and possible acceleration of one or more of the Company's debt instruments. Management believes that the net cash flows generated from operations will provide the Company with sufficient resources to meet the Company's present and foreseeable liquidity and capital needs, including those arising from debt obligations. However, in the event the Company's cash flow so generated is insufficient for these purposes, the Company may be required to raise additional capital. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources". Expansion of Business - --------------------- Since its inception, the Company has engaged in a series of acquisitions and, to a lesser degree, new store openings in order to expand its business. The Company's strategy for the near future is to emphasize expansion through both acquisition of existing stores, which enables the Company to realize increases in revenues and economies of scale more quickly, and opening new stores where demographics are favorable and competition is limited. The Company has not established definite plans to open a set number of stores or to acquire a set number of stores during the next 12-month period. While the Company continually looks for, and is presented with, potential acquisition candidates, the Company has no definitive plans or commitments for further acquisitions and is not currently negotiating any acquisitions. The Company has no immediate plans to open any other new stores. To a significant extent, the Company's future success is dependent upon its ability to continue to engage in successful acquisitions and new site selections. Potential risks associated with such a strategy are as follows: Management of Growth The success of the Company's growth strategy is dependent, in part, upon the ability to maintain adequate financial controls and reporting systems, to assimilate acquisition management into the Company's management structure, to manage a larger operation, and to obtain additional capital upon favorable terms. On average, a new store becomes profitable, on a basis in accordance with generally accepted accounting principles, approximately six months after establishment. Typically, acquired stores are profitable upon acquisition. There can be no assurance that the Company will be able to successfully finance acquisitions or manage a larger operation. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business - Business Strategy." Availability of Attractive Acquisitions The Company competes for acquisitions with other publicly held pawnshop companies, some of which have greater financial resources than the Company. As of the date of this Prospectus, the Company is not evaluating any material acquisitions. This competition could limit the availability of acquisition candidates and increase the cost of acquisitions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." Statutory Requirements The Company's ability to open new stores in Texas counties having a population of more than 250,000 may be adversely affected by a law which requires a finding of public need and probable profitability by the Texas Consumer Credit Commissioner as a condition to the issuance or activation of any new pawnshop license. In addition, the present statutory and regulatory environment of some states renders expansion into those states impractical. For example, certain states require public sale of forfeited collateral or do not permit service charges sufficient to make pawnshop operations profitable. Access to Capital The Company's need for expansion capital and its ability to obtain secured financing is complicated by the requirement in some states that it maintain a minimum amount of certain unencumbered net assets (currently $150,000 in Texas and $25,000 in Oklahoma) for each pawnshop location. The ability of the Company to continue to expand through acquisitions and new store openings is limited by access to capital. Availability of Qualified Store Management Personnel The Company's ability to expand may also be limited by the availability of qualified store management personnel. While the Company seeks to train existing qualified personnel for management positions and to create attractive compensation packages to retain existing management personnel, there can be no assurance that sufficient qualified personnel will be available to satisfy the Company's needs with respect to its planned expansion. Dependence on Key Personnel - --------------------------- The success of the Company is dependent upon, among other things, the services of Phillip E. Powell, chief executive officer. The Company has entered into an employment agreement with Mr. Powell. The loss of the services of Mr. Powell could have a material adverse effect on the Company. As of the date of this Prospectus, the Company has not obtained a "key-man" life insurance policy on Mr. Powell. See "Management - Employment Agreements." Limited Operating History - ------------------------- While many of the stores owned by the Company have been acquired as operating businesses, the Company was incorporated in July 1988, and, consequently, is subject to the uncertainties and risks associated with newly established businesses. There can be no assurance that acquired operations will continue to operate as efficiently as they have in the past. Moreover, there can be no assurance that the Company will be profitable in future periods or that it will be able to successfully manage a substantially larger operation. Governmental Regulation - ----------------------- The Company's pawnshop operations are subject to, and must comply with, extensive regulation, supervision and licensing under various federal, state and local statutes, ordinances and regulations. These statutes prescribe, among other things, service charges a pawnshop may charge for lending money and the rules of conduct that govern an entity's ability to maintain a pawnshop license. With respect to firearm and ammunition sales, a pawnshop must comply with the regulations promulgated by the Federal Bureau of Alcohol, Tobacco and Firearms, a division of the Department of the Treasury ("ATF"). State regulatory agencies have broad, discretionary authority to refuse to grant a license or to suspend or revoke any or all existing licenses of licensees under common control if it is determined that any such licensee has violated any law or regulation or that the management of any such licensee is not suitable to operate pawnshops. In addition, there can be no assurance that additional state or federal statutes or regulations will not be enacted at some future date which could inhibit the ability of the Company to expand, significantly decrease the service charges for lending money, or prohibit or more stringently regulate the sale of certain goods, such as firearms, any of which could significantly adversely affect the Company's prospects. See "Business-Regulation." Competition - ----------- The Company encounters significant competition in connection with the operation of its business. In connection with lending operations, the Company competes with other pawnshops (owned by individuals and by large operators) and certain financial institutions, such as consumer finance companies, which generally lend on an unsecured as well as on a secured basis. The Company's competitors in connection with its retail sales include numerous retail and discount stores. Many competitors have greater financial resources than the Company. These competitive conditions may adversely affect the Company's revenues, profitability and ability to expand. See "Business - Competition." Risks Related to Firearm Sales - ------------------------------ The Company regularly engages in sales of firearms, leaving it open to the risk of lawsuits from persons who may claim injury as a result of an improper sale. No such claims have been asserted against the Company as of the date hereof. The Company does not maintain insurance covering potential risks related to the sale of firearms. While there is federal and state gun control legislation under consideration, management does not believe such legislation will have a material adverse effect upon the Company's business. Risks Related to Rightful Owner Claims - -------------------------------------- In connection with pawnshops operated by the Company, there is the risk that acquired merchandise may be subject to claims of rightful owners. Historically, the Company has not found these claims to have a material adverse effect on results of operations, and, accordingly, the Company does not maintain insurance to cover the costs of returning merchandise to its rightful owners. The Company requires each customer obtaining a loan to provide appropriate identification. Shares Reserved for Issuance - ---------------------------- The Company has 5,534,038 shares of Common Stock reserved for issuance upon the exercise of the Options, Warrants, other outstanding warrants, and conversion of the Convertible Debentures, with exercise and conversion prices varying from $4.00 to $15.00 per share, and with varying exercise periods extending to June 1, 2004. The Company is registering under the Securities Act the issuance of an aggregate of 3,602,788 of these shares of Common Stock. The exercise, as well as the conversion, of these securities, could have a dilutive effect and could adversely affect the prevailing market price of the Common Stock. See "Management - Stock Options and Warrants," "- Certain Transactions," "Description of Capital Stock - Convertible Debentures," and "- Other Warrants."
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diff --git a/parsed_sections/prospectus_summary/1996/FDS_factset_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/FDS_factset_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and related notes appearing elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus (x) reflects a four for one split with respect to the Common Stock effected June 4, 1996, (y) assumes an initial public offering price of $16.00 per share and (z) assumes no exercise of the Underwriters' over-allotment option. See "Description of Capital Stock" and "Underwriting." In addition, unless the context requires otherwise, (i) references to the Company or FactSet refer to FactSet Research Systems Inc., a Delaware Corporation, and its subsidiaries, and (ii) references to a fiscal year refer to the fiscal year of the Company which ends on August 31 of each year. THE COMPANY OVERVIEW FactSet is a leading provider of on-line integrated database services to the financial community. The Company, which markets its services in the United States, Europe and the Pacific Rim, combines multiple large-scale databases into a single, coherent mainframe computer information system accessible from clients' personal computer terminals. The Company's aggregated data library provides a broad variety of financial and economic information, including fundamental data on more than 20,000 companies worldwide. By allowing clients the ability to simultaneously access multiple databases as if they were part of a single database and search for and download specific data directly into their spreadsheets and other work products, FactSet provides investment managers, investment banks and other financial institutions with a comprehensive, "one-stop" source for financial information and analytics. The Company's advanced, proprietary software tools enable clients to manipulate and analyze the data provided by the Company and present it in a wide variety of formats, including custom reports designed by the clients. At May 31, 1996, over 400 clients with more than 4,500 authorized workstations subscribed to the Company's services, including many leading investment managers and investment banks. The Company was formed in 1978 and has been profitable in each of the last 15 years. For the five fiscal years ended August 31, 1995, the Company sustained compound annual growth rates of revenue, operating income and net income of 21.8%, 23.2% and 23.8%, respectively. For the first six months of fiscal 1996, the Company's revenue, operating income and net income increased 17.6%, 21.0% and 23.6%, respectively, from the comparable period in fiscal 1995. FactSet currently acquires data from 30 information providers supplying over 50 databases, including COMPUSTATTM (fundamental data on North American corporations), Interactive Data Corporation (U.S. and Canadian securities prices), Exshare securities prices (international securities prices), FIRST CALLTM (U.S. and international earnings estimates), Worldscope (fundamental data on corporations in 37 countries), I/B/E/STM (U.S. and international earnings estimates) and Value Line (fundamental corporate data and earnings estimates). The Company maintains its databases on continually upgraded and fully redundant Digital Equipment Corporation AlphaTM mainframe computers, a platform that allows for monthly, daily, hourly and real-time refreshment of data. FactSet seeks to maintain, when possible, at least two sources for each item of data. Unlike services that charge fees based on actual system usage time, the Company charges fixed monthly amounts which vary among clients based on the number of sites and workstations from which the FactSet system is available and the number of accessible databases and specialized services to which a client subscribes. The Company believes that this pricing policy encourages clients to use the FactSet system regularly and thus to integrate the system into their decision-making processes. FactSet does not enter into formal contracts with clients, a practice which the Company believes enhances its marketing efforts by allowing clients to use the FactSet system without the requirement of a long-term commitment. The Company enjoys excellent client retention--FactSet's overall client retention rate (on a revenue basis) has been over 95% in each of the past six years. See Note 7 to the Summary Consolidated Financial and Operating Data. FACTSET'S COMPETITIVE ADVANTAGES Management believes that FactSet has several attributes that have been significant to its growth and profitability and provide it with competitive advantages over other financial data providers. These include (i) its ability to integrate financial data from over 50 third-party databases into an aggregated data library that allows users to access all data as if from one database; (ii) its internally developed, proprietary software that allows extensive manipulation of data, including downloading directly to custom spreadsheets developed by clients for use on the FactSet system; (iii) its sophisticated system architecture that allows users to access the computing power of its mainframe computer platform through its easy-to-use Windows (R)*-based programs; (iv) its advanced communications infrastructure, including its wide area network ("WAN"), through which approximately 25% of its clients and 50% of its authorized workstations are now connected to the FactSet system; (v) the proprietary structure of its integrated databases, which facilitates speed and efficiency in data retrieval; (vi) its superior client services, including its ability to work closely with clients to develop customized data solutions; and (vii) its ability to recruit, train and retain highly talented engineering and marketing personnel, as evidenced by the Company's greater than 85% average employee retention rate over the past five years. GROWTH STRATEGY The Company intends to continue to expand its operations while maintaining attractive levels of profitability. The Company plans to introduce new service enhancements, applications and databases designed to increase penetration of existing clients and attract new clients. The Company has recently expanded its marketing efforts to focus on specific industry segments, including investment banking and portfolio management, and on geographic expansion to Europe and the Pacific Rim, each of which the Company believes present significant opportunities for growth. The Company will also explore strategic acquisitions and alliances as such opportunities arise. The principal components of the Company's growth strategy are: . INTRODUCING NEW SERVICE ENHANCEMENTS AND APPLICATIONS. The Company continually seeks to develop and integrate new service enhancements and applications that make its system more useful to current clients and more attractive to new clients. In 1993, the Company deployed a wide area data transmission network that greatly improves the speed and quality of throughput to client sites and significantly enhances the ability of clients to quickly and efficiently add authorized workstations to their service subscriptions. FactSet's graphical user interface for Windows makes the FactSet system available in a user-friendly point-and-click screen environment familiar to most of today's personal computer users. FactSet has recently introduced its Alpha Testing application, which allows clients to analyze the relationship between a single or multiple variables and subsequent investment returns over time, and Cornerstone, a set of applications that allows quantitative analysts to quickly and efficiently access large amounts of data directly from the FactSet system. The Company is currently developing an interactive workstation application designed specifically for portfolio managers, which will allow integration - ------------ * Windows(R) is a registered trademark of the Microsoft Corporation. of data from user accounting systems into the FactSet system for manipulation and presentation in FactSet reports. . ATTRACTING NEW CLIENTS AND EXPANDING CLIENT RELATIONSHIPS. The Company believes that substantial opportunities exist to both attract new clients and increase its revenue from existing clients. While the Company has achieved excellent penetration of the largest investment managers (84 of the top 100 investment managers in the United States are FactSet clients), only approximately 30% of the estimated 900 investment managers in the United States with more than $500 million under management are FactSet clients. In addition, while 20 of the largest investment banks in the United States are FactSet clients, only approximately 44% of the estimated 151 securities firms in the United States with more than $20 million in capital are FactSet clients. The Company also believes that it should be able to increase revenue from exisiting clients through the introduction of new applications, databases and technological innovations, many of which are in response to client demand. In addition, the Company recently formed an investment banking group to focus exclusively on sales and marketing to the investment banking sector. FactSet also recently established technical development groups focused on the development of applications and services for specific user categories such as portfolio managers and quantitative research analysts. . INCREASING INTERNATIONAL PENETRATION. The Company is committed to the international expansion of its customer base and established offices in London in 1993 and Tokyo in 1994 to enhance its marketing efforts and its ability to serve clients in Europe and the Pacific Rim. The Company is supporting these efforts through the development of applications and the addition of databases targeted at the international financial community. The Company has been successful in the acquisition of a number of large clients in these regions and, as a result, the annual indicated subscription revenue from clients outside the United States increased 121.9% from $1.4 million at March 31, 1995 to $3.0 million at March 31, 1996. . PROVIDING SUPERIOR CONSULTATIVE SERVICES. Providing superior client support services is an integral part of the Company's business philosophy and has contributed to a client retention rate of over 95% in each of the past six years. The goal of the Company's 36 full-time client support consultants is to maximize the utility of the FactSet system to clients and thereby promote lasting and mutually-profitable client relationships. Client support consultants work with clients, often at client sites, to develop custom applications tailored to clients' information needs. The Company also conducts approximately 50 training seminars across the nation annually and maintains a client support hotline and a round-the-clock emergency beeper service. Consulting and training services are provided to clients free of charge. . INTEGRATING NEW DATABASES. The Company regularly adds new databases to its system. The integration of new databases, in addition to making the Company's system more useful to existing clients, enables the Company to tailor its services to the specific needs of additional user categories and markets. Recent additions to the Company's library of databases include EDGAR(R)* on FactSet, which provides access to continuously updated text and data contained in EDGAR SEC filings, the Toyo Kezai database, a source of fundamental corporate information on Japanese companies, Morgan Stanley Capital International, which provides performance data for non-United States stock markets and industry groups, and Russell U.S. Equity Profiles, which provides benchmark data on company investment styles and structure characteristics. The Company also is in the process of providing United States security prices that are updated within 20 minutes of their change (rather than once per day, as is the current practice). - ------------ * EDGAR(R) is a registered trademark of the Securities and Exchange Commission. THE OFFERING <TABLE> <S> <C> Common Stock offered (1)..................... 3,125,000 shares Common Stock to be outstanding after the Offering (1)(2)............................. 9,526,300 shares Proceeds of Offering......................... The Company will not receive any of the proceeds of the Offering. Promptly following the completion of the Offering, one of the Selling Stockholders will apply a portion of the proceeds to repay in full certain loans outstanding from the Company totalling $3,846,703. The Company has agreed to pay certain expenses of the Offering in an amount estimated at $290,000. Listing...................................... The Common Stock has been approved for listing on the New York Stock Exchange (the "NYSE") under the symbol "FDS." Risk Factors................................. Prospective investors should consider carefully the matters set forth under the caption "Risk Factors," as well as the other information set forth in this Prospectus. </TABLE> - ------------------- (1) Assumes the Underwriters do not exercise their option to purchase up to an additional 468,750 shares of Common Stock to cover over-allotments. (2) Excludes 1,451,000 shares of Common Stock issuable upon exercise of outstanding stock options granted to certain employees of the Company having an average exercise price of $2.66. In addition, the Company has reserved 950,000 shares of Common Stock for issuance in connection with options issuable under the Company's 1996 Stock Option Plan. See "Management--Company Stock Option Plans." SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA <TABLE> <CAPTION> YEARS ENDED AUGUST 31, SIX MONTHS ENDED ---------------------------------------------------- ---------------------------- FEBRUARY 28, FEBRUARY 29, 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER CLIENT DATA) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF INCOME DATA: Subscription revenue.............. $16,441 $19,279 $23,945 $29,019 $36,188 $ 17,597 $ 20,698 Expenses.............. 12,922 15,341 18,993 25,576 28,088 13,584 15,841 ------- ------- ------- ------- ------- ------------ ------------ Operating income...... 3,519 3,938 4,952 3,443(1) 8,100 4,013 4,857 Other income.......... 230 313 208 251 570 241 430 ------- ------- ------- ------- ------- ------------ ------------ Income before income taxes................ 3,749 4,251 5,160 3,694 8,670 4,254 5,287 Income taxes.......... 1,648 1,916 2,281 1,747 3,731 1,810 2,265 ------- ------- ------- ------- ------- ------------ ------------ Net income............ $ 2,101 $ 2,335 $ 2,879 $ 1,947(1) $ 4,939 $ 2,444 $ 3,022 ------- ------- ------- ------- ------- ------------ ------------ ------- ------- ------- ------- ------- ------------ ------------ Earnings per share(2)............... $ 0.48 $ 0.28 Weighted average number of shares outstanding (in thousands)(2)....... 10,254 10,755 STATEMENT OF FINANCIAL CONDITION DATA: Cash, cash equivalents and investments...... $ 5,302 $ 7,521 $ 6,173 $ 7,539 $12,725 $ 8,146 $ 11,621(3) Total assets.......... 11,397 13,708 20,435 22,345 28,663 21,565 30,731 Total liabilities..... 2,734 2,778 6,627 6,312 7,291 3,034 5,764 Stockholders' equity............... 8,663 10,930 13,808 16,033 21,373 18,531 24,967(3) OPERATING DATA: EBITDA(4)............. $ 4,931 $ 5,521 $ 6,783 $ 5,640(1) $10,520 $ 5,260 $ 6,264 EBITDA as a percentage of revenue........... 30.0% 28.6% 28.3% 19.4%(1) 29.1% 29.9% 30.3% Number of clients(5)........... 260 288 316 364 387 369 412 Average revenue per client(6)............ $65,764 $70,361 $79,288 $85,350 $96,373 $ 48,343 $ 53,483 Annual client retention rate(7)... 95.9% 96.7% 95.4% 95.5% 96.1% n/a n/a Number of employees... 45 52 59 83 102 94 119 </TABLE> - ------------ (1) Reflects the effect of special bonuses paid to certain executive officers of the Company in 1994 in the aggregate amount of $2.5 million. Excluding the special bonuses, operating income, net income, EBITDA and EBITDA as a percentage of revenue for fiscal 1994 would have been approximately $5,943,000, $3,264,000, $8,140,000, and 28.0%, respectively. (2) See Note 2 to the Consolidated Financial Statements of the Company. (3) On an adjusted basis, after deducting offering expenses payable by the Company estimated at $290,000 and the repayment of certain loans by one of the Selling Stockholders totalling $3,846,703, cash, cash equivalents and investments and stockholders' equity at February 29, 1996 would have been $15,177,845 and $24,676,505, respectively. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/GERNW_geron-corp_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/GERNW_geron-corp_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..19ee5574728fad6022a11fb5f3a620107ffe4ccf
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements, and notes thereto, appearing elsewhere in this Prospectus. Except as otherwise noted herein, all information in this Prospectus (i) assumes no exercise of the Underwriters' over-allotment option, (ii) assumes the issuance of shares of Common Stock with an aggregate purchase price equal to $2.5 million (277,777 shares at an assumed initial public offering price of $9.00 per share) to Kyowa Hakko Kogyo Co., Ltd. ("Kyowa Hakko") at a price per share equal to the Price to Public of the Common Stock offered hereby ("the Kyowa Hakko Stock Purchase"), (iii) assumes the issuance of 12,055 shares of Common Stock to be issued upon the exercise of outstanding warrants upon the closing of the Offering, (iv) reflects the filing of the Company's Amended and Restated Certificate of Incorporation, authorizing a class of 3,000,000 shares of undesignated Preferred Stock and effecting the 1-for-3.4 reverse stock split with respect to the Common Stock and (v) reflects the conversion of 6,366,234 outstanding shares of the Company's Preferred Stock, in accordance with the terms thereof, into 6,470,964 shares of Common Stock upon the closing of the Offering (at an assumed initial public offering price of $9.00 per share). THE COMPANY Geron is a biopharmaceutical company exclusively focused on discovering and developing therapeutic and diagnostic products based upon common biological mechanisms underlying cancer and other age-related diseases. As the pioneer in researching these mechanisms, the Company focuses on telomeres, which are structures at the ends of chromosomes that the Company has shown act as a molecular "clock" of cellular aging, and telomerase, an enzyme which appears to stop the "clock" and lead to cellular immortality. The Company and its collaborators have established that these mechanisms play a role in cancer and many other age-related diseases and conditions, and thus the Company believes it has a broadly applicable, proprietary platform for discovering and developing novel small molecule therapeutics and diagnostics for such diseases. The most advanced of the Company's three therapeutic programs is in the area of telomerase inhibition for the treatment of cancer. Geron will continue to build upon its leadership position in the field of telomere biology and telomerase regulation by selectively collaborating with companies and research institutions and by aggressively pursuing an extensive patent portfolio. The Company owns or has certain exclusive rights to three issued United States patents and 52 United States patent applications. Cancer and other age-related diseases and conditions, including skin aging, atherosclerosis, osteoporosis and Alzheimer's disease, are difficult and costly to diagnose and treat. In many cases, entirely effective means of treating and diagnosing these diseases and conditions are not currently available. Further, with the progressive "graying" of the population, the incidence of cancer and other age-related diseases and conditions is expected to increase and to place a steadily growing financial burden on the health care system. Significant improvements in the treatment and diagnosis of these diseases and conditions are expected to offer attractive commercial opportunities. For example, the current cancer drug therapy market in the United States is over $3.8 billion having grown at an annual compounded rate in excess of 15% between 1985 and 1995. Geron's scientific approach focuses on telomere shortening and telomerase regulation as common biological mechanisms underlying cancer and other age-related diseases and conditions. Geron and its collaborators have demonstrated both in vivo and in vitro that telomeres, the repeated sequences of DNA located at the ends of chromosomes, shorten throughout a normal cell's replicative lifespan. The Company and its collaborators have also shown that when telomeres reach a certain short length, cells stop dividing and become senescent. Senescent cells display an altered pattern of gene expression relative to replicatively young cells that leads to an imbalance in the production of proteins and other cell products. This imbalance, which occurs in many tissues throughout the body, can have a direct and destructive effect on surrounding tissues and appears to contribute to age-related diseases and conditions. Cancer cells escape senescence and maintain an extended ability to divide through mutations. Geron and its collaborators have shown that for most cancerous tumors to attain life threatening size, or for cancer to metastasize throughout the body, cancer cells must become immortal through an alteration which prevents their telomeres from shortening with each division. In almost all cases examined to date, a germ line enzyme called telomerase is abnormally reactivated in these cancer cells to repair their telomeres with each cell division, thereby conferring cellular immortality. Geron has shown telomerase to be present in all of the over 20 types of cancer that it has studied, including breast, prostate, lung, colon, and bladder cancers. The Company believes that telomerase inhibition has the potential to be a universal and highly specific cancer therapy. Geron has identified several series of small molecule compounds that selectively inhibit telomerase. In order to develop novel therapeutic and diagnostic products, the Company is focused on three programs: - - Telomerase Inhibition and Detection Geron's goal is to develop both small molecule telomerase inhibitors as potentially universal and highly specific cancer therapies and telomerase assays for the detection of cancer. Geron has demonstrated in vitro with a small molecule compound that telomerase inhibition results in renewed telomere shortening in cancer cells and eventual cancer cell death. Geron is currently optimizing a number of small molecule compounds as potential telomerase inhibitors in order to select a lead compound for preclinical development. With one of its collaborators, the Company has initiated studies of these small molecule compounds in animal models of human tumor growth. The Company has established a research and development collaboration with Kyowa Hakko, a leading oncology company in Japan, for the development and commercialization in certain Asian countries of a telomerase inhibitor for the treatment of cancer. The Company has retained all rights to a telomerase inhibitor outside these countries. The Company believes that telomerase is a universal and highly specific marker of cancer and that its detection and quantification may have significant clinical utility for cancer diagnosis, prognosis, monitoring and screening. In the research use only market, the Company has licensed its telomerase detection technologies to Oncor, Inc., Boehringer Mannheim GmbH and Dako Corporation. In May 1996, Oncor began commercial sale of the Company's proprietary Telomeric Repeat Amplification Protocol ("TRAP") assay for use in cancer research. The Company has also established collaborations with Dianon Systems, Inc. and Ventana Medical Systems, Inc. primarily for additional technology development and clinical assessment. - - Cell Senescence Modulation Geron seeks to develop therapeutics to treat age-related diseases and conditions through modulation of the biological processes leading to and regulating cell senescence. The Company is pursuing two distinct approaches to modulate cell senescence. The objective of the Cell Lifespan Extension program is to slow telomere loss, thereby extending the period of normal cell replication and delaying the destructive onset of cell senescence. Geron and its collaborators have demonstrated that telomere length and replicative senescence can be modulated with synthetic compounds. This research is initially directed at T cell therapy and bone marrow transplantation applications. The Genomics of Aging program applies proprietary genomics techniques to target and modulate the destructive genetic changes that occur in senescent cells. The Company has identified genes that are differentially expressed by replicatively young versus senescent cells and mortal versus immortal cells. This program is initially focused on skin aging and atherosclerosis. - - Primordial Stem Cell Therapies Geron seeks to generate a broad array of cell types from primordial stem cells ("PS cells") for cellular transplantation. PS cells are germ line cells that are unique in that they are both immortal, consistent with their normal telomerase expression, and capable of differentiation into any and all types of cells and tissues in the body. The Company is in the early stages of research directed towards growing and differentiating PS cells. This program is initially focused on differentiating PS cells into cardiomyocytes for the treatment of congestive heart failure and neurons for the treatment of Parkinson's disease. The Company's strategy combines the following key elements: focusing on fundamental mechanisms of cellular aging and cellular immortality to treat cancer and other age-related diseases and conditions; developing high value programs based on its common scientific platform; selectively pursuing strategic collaborations; retaining the ability to develop and market products independently; and enhancing its proprietary leadership position in the field.
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diff --git a/parsed_sections/prospectus_summary/1996/GES_guess-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/GES_guess-inc_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..ee2298582a10728e2930ab5e6ac67dcaf845abc4
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE NOTED, ALL COMMON STOCK SHARE AMOUNTS, PER SHARE DATA AND OTHER INFORMATION SET FORTH IN THIS PROSPECTUS (I) HAVE BEEN ADJUSTED TO REFLECT A 32.66 FOR 1 STOCK SPLIT, WHICH WILL BE EFFECTED PRIOR TO CONSUMMATION OF THE OFFERINGS, AND (II) ASSUME THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTIONS HAVE NOT BEEN EXERCISED. UNLESS THE CONTEXT REQUIRES OTHERWISE, THE "COMPANY" OR "GUESS," AS USED IN THIS PROSPECTUS, MEANS GUESS ?, INC. AND GUESS? EUROPE, B.V., A NETHERLANDS CORPORATION ("GEBV"), GUESS ITALIA S.R.L., AN ITALIAN CORPORATION ("GUESS ITALIA," AND TOGETHER WITH GEBV, "GUESS EUROPE"), AND RANCHE LIMITED, A HONG KONG CORPORATION ("RANCHE" OR "GUESS ASIA"), EACH OF WHICH IS A CONSOLIDATED SUBSIDIARY OF GUESS ?, INC. THE COMPANY Guess ?, Inc. (the "Company" or "Guess"), founded in 1981 by the Marciano brothers, designs, markets, distributes and licenses one of the world's leading lifestyle collections of casual apparel, accessories and related consumer products. The Company's apparel for men and women is inspired by an appreciation of the American lifestyle combined with a European flair and is marketed under the trademarks GUESS, GUESS U.S.A., GUESS? AND TRIANGLE DESIGN and GUESS COLLECTION. The lines include full collections of denim and cotton clothing, including jeans, pants, overalls, skirts, dresses, shorts, blouses, shirts, jackets and knitwear. In addition, the Company has granted licenses to manufacture and distribute a broad range of products that complement the Company's apparel lines, including watches, clothing for infants and children, eyewear, footwear, activewear, home products and other fashion accessories. The Company's product quality combined with captivating advertising images have created a global brand franchise with products that appeal to style-conscious consumers across a broad spectrum of ages. The Company generates net revenue from wholesale and retail operations and licensing activities, which accounted for 56%, 35% and 9%, respectively, of net revenue in 1995. The Company's total net revenue in 1995 was $486.7 million and pro forma net earnings (as described herein) were $43.3 million. The Company achieves premium pricing for its products by emphasizing superior styling and quality. The Company maintains rigorous control over the quality of its products by performing its own design and development work and by closely monitoring the workmanship of its contractors and licensees. The enduring strength of the GUESS brand name and image is reinforced by the Company's consistent emphasis on innovative and distinctive design. Under the direction of Maurice Marciano, the Company's design department creates full lines of casual apparel that appeal to both men and women. During 1995, net sales of apparel for men and for women accounted for approximately 48% and 52%, respectively, of net revenue from the sale of apparel products. Each of the lines consists of a broad array of basic, recurring styles, complemented by more fashion-oriented items which reflect contemporary trends. During 1995, net sales of basic and fashion items accounted for approximately 49% and 51%, respectively, of the Company's net revenue from the sale of apparel products. The Company seeks to reach a broad consumer base through multiple channels of distribution. As of March 31, 1996, GUESS brand products were distributed by the Company, its licensees and international distributors to better department stores and upscale specialty stores, 112 stores operated by the Company (of which 65 were retail stores and 47 were factory outlet stores) and 205 stores operated by licensees and distributors. As a critical element of its distribution to department stores, the Company and its licensees utilize shop-in-shops to enhance brand recognition, permit more complete merchandising of the lines and differentiate the presentation of GUESS products. As of December 31, 1995, the Company's and its licensees' IN CONNECTION WITH THE OFFERINGS, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. products were sold in approximately 1,600 shop-in-shops worldwide. In order to protect the Guess image and enhance the exclusivity of the brand, the Company began in 1993 to withdraw its products from certain wholesale accounts which did not meet the Company's merchandising standards. Sales to such discontinued accounts represented approximately $51.1 million, $32.9 million and $3.8 million of the Company's net revenue in 1993, 1994 and 1995, respectively. The Company's own network of stores, in addition to providing a key opportunity for growth, allows the Company to present and merchandise its entire collection and to test market new product concepts. The Company intends to capitalize on the worldwide recognition of its brand name and the breadth of Guess lifestyle products by expanding its international operations. The Company has established Guess Europe in Italy and Guess Asia in Hong Kong to design, source and market products in Europe and the Pacific Rim. Guess has granted licenses for the manufacture and sale of GUESS branded products similar to the Company's, including men's and women's denim and knitwear, in markets such as Canada, Argentina, Mexico, the Philippines, South Korea, Brazil and Japan. Although Guess is in the early stages of its international expansion, GUESS brand products are currently sold in over 70 countries primarily through licensees and distributors. See "Business -- Business Strategy -- Increase International Presence." The desirability of the GUESS brand name among consumers has allowed the Company to selectively expand its product offerings through licensing arrangements. The Company believes its licensing strategy significantly broadens the distribution of GUESS brand products while limiting the Company's capital investment and operating expenses. The Company carefully selects its licensees and maintains strict control over the design, advertising, marketing and distribution of all licensed products in order to maintain a consistent global GUESS brand image. The Company's 26 licensees manufacture and distribute a broad array of related consumer products in the United States and international markets. The Company's most significant licenses include GUESS WATCHES, BABY GUESS, GUESS KIDS and GUESS EYEWEAR, which together accounted for approximately 48.1% of the Company's net royalties in 1995. The Company continues to capitalize on the GUESS brand image by granting licenses to introduce related products. Recently, the Company licensed the GUESS HOME COLLECTION and GUESS OUTERWEAR, as well as various accessory products. Under Paul Marciano's direction and supervision, Guess has created a consistent, high profile image through the use of its distinctive black and white print ads. The Company's in-house Advertising Department directs the media placement of all advertising worldwide, including placement by its licensees and distributors. On numerous occasions since 1986, the Company's advertising has garnered prestigious awards for creativity and excellence, including CLIO, BELDING and MOBIUS awards. Such awards are generally awarded on the basis of the judgment of prominent members of the advertising industry. By retaining control over its advertising programs, the Company is able to maintain the integrity of the GUESS brand image while realizing a substantial cost savings compared to the use of outside agencies. The Company requires its licensees and distributors to invest a percentage of their net sales of licensed products and net purchases of Guess products, respectively, in advertising, promotion and marketing. From 1992 through 1995, the Company's advertising expenditures, together with amounts spent by its licensees and its distributors (as reported to the Company by such licensees and distributors), exceeded $160 million. The Company's business strategy is designed to increase sales and profitability, while preserving the integrity and expanding the product depth and global reach of the GUESS brand. To provide greater management depth, the Company has recently recruited several key executives with substantial industry experience to faciliate the implementation of its business strategy. The business strategy consists of the following key elements: (i) to maintain high brand recognition, (ii) to increase international operations through increasing sales to existing and new distributors, increasing royalties from the growth of licensees' businesses, increasing the number of licensee- and distributor-operated retail stores and shop-in-shops and expanding direct sales penetration through Guess Europe, (iii) to increase both product and geographic licensing arrangements, (iv) to deepen the Company's product offerings to include new fabrications and product lines, (v) to expand and improve the productivity of the Company-operated retail and factory outlet store network and (vi) to expand and upgrade domestic shop-in-shops. COMPANY HISTORY Maurice, Paul and Armand Marciano (the "Principal Executive Officers"), together with their brother Georges, began in the apparel business in France in 1972 and opened their first retail apparel stores in the United States in 1978 in California. The business of GUESS was founded in 1981 by the Marciano brothers. The Company was founded on the concept of a fashion jean with the first GUESS product being the "three-zip Marilyn" jean, which was stone-washed and adapted to fit the contours of a woman's body. Since that time, the Company's product offerings have grown to include full lines of men's and women's casual apparel. In August 1993, Georges Marciano sold his interest in Guess to the Company and a trust for the benefit of Paul Marciano. THE OFFERINGS Of the 7,000,000 shares of Common Stock, par value $.01 per share ("Common Stock"), to be sold in the Offerings, 5,600,000 shares are initially being offered in the United States and Canada by the U.S. Underwriters (the "U.S. Offering") and 1,400,000 shares are initially being offered outside the United States and Canada by the International Managers (the "International Offering," and together with the U.S. Offering, the "Offerings"). <TABLE> <S> <C> Common Stock offered by the Company hereby.......... 7,000,000 shares Common Stock to be outstanding after the Offerings (1)................................................ 42,523,924 shares Use of proceeds..................................... The estimated net proceeds to the Company of $122.9 million will be used to repay a substantial portion of the S Distribution Notes (as defined herein) (estimated to have an aggregate principal amount between $126.0 million and $136.0 million). Listing............................................. The Common Stock has been approved for listing on the New York Stock Exchange ("NYSE") under the symbol "GES," subject to official notice of issuance. </TABLE> - ------------------------ (1) Includes 2,842,105 shares of Common Stock to be issued to trusts controlled by and for the benefit of Maurice Marciano, Paul Marciano and Armand Marciano and their families, respectively (the "Principal Stockholders"), as part of the S Corporation Distribution (as defined herein), assuming an initial public offering price of $19.00 per share. See "Company History, the Reorganization and Prior S Corporation Status." Excludes approximately 5,000,000 shares of Common Stock reserved for issuance pursuant to awards under the Company's 1996 Equity Incentive Plan (the "1996 Equity Plan") and 1996 Non-Employee Directors' Stock Option Plan (the "Directors' Plan"), including options to purchase 1,209,010 shares of Common Stock to be granted immediately prior to the Offerings with an exercise price per share equal to the initial public offering price of the Common Stock. See "Management -- Employment Agreements," "-- 1996 Equity Incentive Plan" and "-- 1996 Non-Employee Directors' Stock Option Plan." ------------------------------ GUESS-Registered Trademark-, GUESS?-Registered Trademark-, GUESS? AND TRIANGLE DESIGN-Registered Trademark-, BABY GUESS-TM-, GUESS KIDS-Registered Trademark-, GUESS WATCHES-TM-, GUESS JEANS-TM-, GUESS U.S.A.-TM- and GUESS COLLECTION-TM- are included among the Company's trademarks. SUMMARY FINANCIAL DATA <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, ------------------ ------------------------------------------------ JULY 2, JUNE 30, 1991 1992 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF EARNINGS DATA: Net revenue (1)........................................ $450,531 $512,766 $520,224 $547,812 $486,733 $229,652 $257,406 Earnings from operations............................... 104,469 109,973 114,464 117,807 82,928 42,375 43,905(2) Earnings before income taxes........................... 102,527 111,224 105,281 101,181 66,814 34,269 36,467 Net earnings........................................... 99,832 108,368 103,471 97,641 63,919 32,994 34,869 SUPPLEMENTAL STATEMENT OF EARNINGS DATA (3): Earnings before income taxes........................... 102,527 111,224 105,281 101,181 66,814 34,269 36,467(2) Income taxes........................................... 41,011 44,490 42,112 40,472 26,726 13,708 14,477 -------- -------- -------- -------- -------- -------- -------- Net earnings........................................... $ 61,516 $ 66,734 $ 63,169 $ 60,709 $ 40,088 $ 20,561 $ 21,990 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Net earnings per share (4)............................. $ .97 $ .54 Weighted average common shares outstanding (4)......... 41,201 40,952 </TABLE> <TABLE> <S> <C> <C> <C> PRO FORMA STATEMENT OF EARNINGS DATA (5): Earnings from operations....................................................................... $ 87,985 $ 45,817 $47,271 Earnings before income taxes................................................................... 72,145 37,912 39,993 Income taxes................................................................................... 28,858 15,165 15,877 -------- -------- -------- Net earnings................................................................................... $ 43,287 $ 22,747 $24,116 -------- -------- -------- -------- -------- -------- Net earnings per share (4)..................................................................... $ 1.05 $ .59 Weighted average common shares outstanding (4)................................................. 41,201 40,952 </TABLE> <TABLE> <CAPTION> AS OF JUNE 30, 1996 ------------------------- AS ADJUSTED ACTUAL (6) --------- -------------- (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Working capital.................................................................... $ 84,415 $ 88,115 Total assets....................................................................... 229,735 237,179 Notes payable and long-term debt................................................... 152,768 152,731(7) Net stockholders' equity........................................................... 6,324 13,805 </TABLE> - ------------------------ (1) Includes net revenue from (i) sales to discontinued wholesale accounts that the Company determined did not meet its merchandising standards of $42.3 million, $51.1 million, $32.9 million and $3.8 million for 1992, 1993, 1994 and 1995, respectively, and $3.5 million and $407,000 for the six months ended July 2, 1995 and June 30, 1996, respectively, and (ii) wholesale sales of discontinued product lines of $82.6 million, $31.7 million, $5.3 million and $1.7 million for 1992, 1993, 1994 and 1995, respectively, and $1.5 million and $345,000 for the six months ended July 2, 1995 and June 30, 1996, respectively. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- General." (2) Includes non-recurring charges related to the write down of operating assets to be disposed of in contemplation of the Offerings of $3.6 million in the aggregate (the "Reorganization Charge") relating to (i) disposal of two currently active remote warehouse and production facilities which are not expected to be used in the Company's operations after the Offerings, resulting in a net book loss of $2.4 million, and (ii) the net book loss of $1.2 million incurred by the Company in connection with the sale of one of its aircraft to an unaffiliated third party for $6.0 million. On an after-tax basis, based upon the effective S corporation tax rate or C corporation tax rate, as the case may be, the effect of the $3.6 million Reorganization Charge would have been $3.4 million (historical) and $2.2 million (supplemental and pro forma). The effects of the Reorganization Charge have not been given pro forma effect for any of the periods presented. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Six Months Ended June 30, 1996 Compared to Six Months Ended July 2, 1995." (3) Reflects adjustments for Federal and state income taxes as if the Company had been taxed as a C corporation rather than an S corporation. (4) Reflects 32,681,819 shares of Common Stock outstanding prior to the Offerings and the assumed issuance of 8,519,000 and 8,270,000 shares of Common Stock at an assumed initial public offering price of $19.00 per share to generate sufficient cash to pay (i) the S Corporation Distribution (as defined herein) in an amount equal to retained earnings as of December 31, 1995 and June 30, 1996, respectively, and (ii) the $300,000 to be paid by the Company to the Marciano Trusts (as defined herein) in connection with the merger of Marciano International (as defined herein) with and into the Company. (5) Pro forma operating results reflect adjustments to historical operating results for (i) the elimination of salaries and bonuses paid to the Principal Executive Officers in excess of an aggregate of $4.9 million per year, or $1.2 million per quarter (the estimated CONTINUED ON THE FOLLOWING PAGE CONTINUED FROM PRIOR PAGE aggregate salaries and bonuses to be paid to the Principal Executive Officers under their respective employment agreements following the Offerings), (ii) the decrease in depreciation and operating costs of $2.6 million, $1.3 million and $1.2 million for the year ended December 31, 1995 and the six months ended July 2, 1995 and June 30, 1996, respectively, associated with an aircraft owned by the Company, which aircraft was sold in contemplation of the Offerings, (iii) the elimination of the minority interest in GEBV and Guess Italia through the merger of Marciano International with and into the Company in connection with the Reorganization (as defined herein), resulting in the inclusion in net earnings of $274,000, $201,000 and $160,000 for the year ended December 31, 1995 and the six months ended July 2, 1995 and June 30, 1996, respectively, which amounts had previously been recorded as minority interest, and (iv) adjustments for Federal and state income taxes as if the Company had been taxed as a C corporation rather than an S corporation. See "Company History, the Reorganization and Prior S Corporation Status" and "Management -- Employment Agreements." For additional pro forma statement of earnings data for 1993, 1994 and 1995 and for the six months ended July 2, 1995 and June 30, 1996, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." (6) The as adjusted amount reflects (i) the distribution of $122.9 million of S Distribution Notes and $54.0 million of Common Stock (2,842,105 shares assuming an initial public offering price of $19.00 per share) to the Principal Stockholders in respect of the earned and undistributed taxable S corporation earnings at June 30, 1996 that would have been distributed had the Company's S corporation status been terminated on June 30, 1996 and (ii) the sale of shares of Common Stock by the Company hereby at the assumed initial public offering price of $19.00 per share and the application of the estimated net proceeds therefrom to repay indebtedness under the S Distribution Notes. No adjustment has been made to give effect to the Company's earned and undistributed taxable S corporation earnings for the period from July 1, 1996 through the S Termination Date (as defined herein), which will be distributed as part of the S Corporation Distribution in the form of S Distribution Notes. Between July 1, 1996 and the S Termination Date, the Company anticipates the increase in the S Distribution Notes to be between approximately $3.1 million and $13.1 million. See "Use of Proceeds" and "Company History, the Reorganization and Prior S Corporation Status."
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+PROSPECTUS SUMMARY THE FOLLOWING INFORMATION IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. AS USED HEREIN, UNLESS THE CONTEXT OTHERWISE REQUIRES, THE "COMPANY" MEANS GRAY COMMUNICATIONS SYSTEMS, INC. AND ITS SUBSIDIARIES. THE COMPANY HAS NOT YET CONSUMMATED THE PHIPPS ACQUISITION (AS DEFINED) AND THERE CAN BE NO ASSURANCE THAT THE PHIPPS ACQUISITION WILL BE CONSUMMATED. HOWEVER, EXCEPT WITH RESPECT TO HISTORICAL FINANCIAL STATEMENTS AND UNLESS THE CONTEXT INDICATES OTHERWISE, THE PHIPPS BUSINESS (AS DEFINED) IS INCLUDED IN THE DESCRIPTION OF THE COMPANY. SEE "THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING." UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION GRANTED BY THE COMPANY TO THE UNDERWRITERS IN THIS OFFERING IS NOT EXERCISED. ALL INFORMATION IN THIS PROSPECTUS HAS BEEN ADJUSTED TO GIVE EFFECT TO A 3-FOR-2 SPLIT OF THE CLASS A COMMON STOCK, EFFECTED IN THE FORM OF A STOCK DIVIDEND DECLARED ON OCTOBER 2, 1995. UNLESS OTHERWISE INDICATED, ALL STATION RANK, IN-MARKET SHARE AND TELEVISION HOUSEHOLD DATA IN THIS PROSPECTUS ARE DERIVED FROM THE NIELSEN STATION INDEX, VIEWERS IN PROFILE, DATED NOVEMBER 1995, AS PREPARED BY A.C. NIELSEN COMPANY ("NIELSEN"). THE COMPANY The Company owns and operates seven network-affiliated television stations in medium-size markets in the southeastern United States, six of which are ranked number one in their respective markets (which includes two television stations that are part of the Phipps Business). Five of the stations are affiliated with the CBS Television Network, a division of CBS, Inc. ("CBS") and two are affiliated with the NBC Television Network, a division of the National Broadcasting Company, Incorporated ("NBC"). In connection with the Phipps Acquisition (described below), the Company will be required under current regulations of the Federal Communications Commission (the "FCC") to divest its NBC affiliates in Albany, Georgia and Panama City, Florida. For a discussion of the Company's plans regarding such divestiture, see "Risk Factors -- FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." The Company also owns and operates three daily newspapers, two weekly, advertising only publications ("shoppers"), and a paging business (which is part of the Phipps Business), all located in the Southeast. The Company derives significant operating advantages and cost saving synergies through the size of its television station group and the regional focus of its television and publishing operations. These advantages and synergies include (i) sharing television production facilities, equipment and regionally oriented programming, (ii) the ability to purchase television programming for the group as a whole, (iii) negotiating network affiliation agreements on a group basis and (iv) purchasing newsprint and other supplies in bulk. In addition, the Company believes that its regional focus can provide advertisers with an efficient network through which to advertise in the fast-growing Southeast. In 1993, after the acquisition of a large block of Class A Common Stock by a new investor, the Company implemented a strategy to foster growth through strategic acquisitions. Since 1994, the Company's significant acquisitions have included three television stations and two newspapers, all located in the Southeast. As a result of the Company's acquisitions and in support of its growth strategy, the Company has added certain key members of management and has greatly expanded its operations in the television broadcasting and newspaper publishing businesses. On September 10, 1996, J. Mack Robinson, a director of the Company, was appointed President and Chief Executive Officer of the Company on an interim basis, to succeed Ralph W. Gabbard, who had died suddenly. The Company expects to commence a search to locate a new President as soon as practicable following this Offering. On September 11, 1996, Robert S. Prather, Jr., a director of the Company, was appointed Executive Vice President-Acquisitions on an interim basis. In January 1996, the Company acquired (the "Augusta Acquisition") WRDW-TV ("WRDW"), a CBS affiliate serving Augusta, Georgia (the "Augusta Business"). In December 1995, the Company entered into an asset purchase agreement to acquire (the "Phipps Acquisition") two CBS-affiliated stations, WCTV-TV ("WCTV") serving Tallahassee, Florida/Thomasville, Georgia and WKXT-TV ("WKXT") in Knoxville, Tennessee, a satellite broadcasting business and a paging business (collectively, the "Phipps Business"). The Company believes that the Phipps Acquisition will further enhance the Company's position as a major regional television broadcaster and is highly attractive for a number of reasons, including (i) the stations' strategic fit in the Southeast, (ii) WCTV's leading station market position and WKXT's significant growth potential, (iii) strong station broadcast cash flows, (iv) opportunities for revenue growth utilizing the Company's extensive management expertise with medium-size stations and (v) opportunities for synergies between WCTV and WKXT and the Company's existing stations with regard to revenue enhancement and cost controls. The consummation of the Phipps Acquisition is currently expected to occur by September 30, 1996, although there can be no assurance with respect thereto. In August 1996, the Company sold the assets (the "KTVE Sale") of KTVE Inc. ("KTVE"), a television station serving Monroe, Louisiana/El Dorado, Arkansas for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing. For the year ended December 31, 1995, on a pro forma basis, the Company had net revenues, Media Cash Flow (the sum of broadcast cash flow, publishing cash flow and paging cash flow), operating cash flow and net (loss) of $90.6 million, $30.3 million, $28.1 million and $(3.6) million, respectively. For the six months ended June 30, 1996, on a pro forma basis, the Company had net revenues, Media Cash Flow, operating cash flow and net income of $47.3 million, $17.9 million, $16.3 million and $251,000, respectively. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the year ended December 31, 1995 increased 148.2%, 188.4% and 227.9%, respectively, while net income decreased 230.3% from the historical amounts for the year ended December 31, 1994. Net revenues, Media Cash Flow and operating cash flow on a pro forma basis for the six months ended June 30, 1996 increased 67.1%, 114.7% and 122.8%, respectively, while net income decreased 78.7% from the historical amounts for the six months ended June 30, 1995. The Company's pro forma net income for its television stations for the year ended December 31, 1995 and for the six months ended June 30, 1996 was $1.6 million and $1.4 million, respectively. The following table sets forth certain information for each of the Company's television stations. <TABLE> <CAPTION> PRO FORMA --------------------------------------- IN-MARKET SHARE YEAR ENDED DECEMBER SIX MONTHS ENDED STATION OF 31, 1995 JUNE 30, 1996 RANK HOUSEHOLDS ------------------- ------------------ NETWORK YEAR DMA CHANNEL/ IN VIEWING NET OPERATING NET OPERATING STATION AFFILIATION MARKET ACQUIRED RANK(1) FREQUENCY DMA(2) TV REVENUES INCOME(6) REVENUES INCOME(6) - -------- ------- ------------- ------- -------- --------- -------- --------- --------- -------- -------- -------- (IN THOUSANDS) (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> WKYT CBS Lexington, KY 1994 68 27/UHF(3) 1 33% $15,553 $5,247 $7,845 $2,701 WYMT CBS Hazard, KY 1994 68 57/UHF(3) 1(4) 24 3,721 831 2,107 530 WRDW CBS Augusta, GA 1996 111 12/VHF 1 36 8,888 1,853 4,489 1,149 WALB (5) NBC Albany, GA 1954 152 10/VHF 1 80 9,445 4,795 5,099 2,658 Panama City, WJHG (5) NBC FL 1960 159 7/VHF 1 53 3,843 270 2,409 476 PHIPPS ACQUISITION WKXT CBS Knoxville, TN 62 8/VHF 3 22 9,269 2,204 4,387 903 Tallahassee, WCTV CBS FL/ 116 6/VHF 1 60 11,862 4,229 6,212 2,254 Thomasville, GA </TABLE> - ------------------------------ (1) Ranking of designated market area as defined by Nielsen ("DMA") served by a station among all DMAs is measured by the number of television households within the DMA based on the November 1995 Nielsen estimates. (2) Represents station rank in DMA as determined by November 1995 Nielsen estimates of the number of television sets tuned to the Company's station as a percentage of the number of television sets in use in the market for the Sunday through Saturday 6 a.m. to 2 a.m. time period. (3) All stations in the market are UHF stations. (4) The market area served by WYMT is an 18-county trading area, as defined by Nielsen, and is included in the Lexington, Kentucky DMA. WYMT's station rank is based upon its position in the 18-county trading area. (5) The Company will be required under current FCC regulations to divest WALB and WJHG in connection with the Phipps Acquisition. For a discussion of the Company's plans, see "Risk Factors-FCC Divestiture Requirement" and "The Phipps Acquisition, the KTVE Sale and the Financing." (6) Represents pro forma income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes. The Company's three newspapers, THE ALBANY HERALD, THE ROCKDALE CITIZEN and the GWINNETT DAILY POST and two shoppers had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $21.9 million and $660,000, respectively, for the year ended December 31, 1995, and $11.3 million and $1.3 million for the six months ended June 30, 1996, respectively. The satellite broadcasting business and paging business, which are a part of the Phipps Business, had net revenues and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) on a pro forma basis of $6.2 million and $542,000 for the year ended December 31, 1995 and $3.5 million and $467,000 for the six months ended June 30, 1996, respectively. BUSINESS STRATEGY The Company's business strategy includes the following key elements: - STRONG LOCAL PRESENCE. Each of the Company's television stations seeks to achieve a distinct identity through its emphasis on local programming. A key objective is to build audience loyalty through the development of a strong local news franchise. Strong local news generates high viewership and results in higher ratings for programs both preceding and following the news, which increases revenues and Media Cash Flow. - REGIONAL FOCUS. The Company believes its regional focus has competitive advantages, including the ability to purchase and produce programming that can be used by multiple Company-owned stations as well as the opportunity to sell advertising on multiple stations as a single buy. In addition, the proximity of the Company's operations allows the sharing of equipment, management and marketing expertise. - TARGETED MARKETING. The Company seeks to increase its advertising revenues and Media Cash Flow by expanding existing relationships with local and national advertisers and by attracting new advertisers through targeted marketing techniques and carefully tailored programming. The Company works closely with advertisers to develop advertising campaigns that match specifically targeted audience segments including sponsoring and staging various special events such as fishing tournaments, boat shows and bridal expositions. - COST CONTROLS. Through its strategic planning and annual budgeting processes, the Company continually seeks to identify and implement cost savings opportunities at each of its stations and publications in order to increase Media Cash Flow. The Company's ownership of multiple stations and publications also benefits each operation in negotiating favorable terms with programming syndicators, newsprint suppliers, national sales representatives and other vendors. - SELECTIVE ACQUISITIONS. The Company has focused on acquiring television stations where the Company believes there is the potential for improvements in revenue share, audience share and cost control. The Company focuses on southeastern markets of medium size because the Company believes these markets offer superior opportunities in terms of projected population and economic growth, leading to higher advertising and circulation revenues. In assessing acquisitions, the Company targets stations and publications where it sees specific opportunities for revenue enhancement while controlling expenditures, utilizing management's significant experience with local and national advertising sales and in operating similar businesses. In appropriate circumstances, the Company will dispose of assets that it deems non-essential to its operating or growth strategy. THE PHIPPS ACQUISITION, THE KTVE SALE AND THE FINANCING The Company has entered into an agreement to acquire WCTV and WKXT, a satellite broadcasting business and a paging business in the Southeast. The purchase price for the Phipps Acquisition is approximately $185 million, including fees, expenses and working capital and other adjustments. The consummation of the Phipps Acquisition is expected to occur by September 30, 1996, although there can be no assurance with respect thereto. See "Risk Factors--Possible Non-Consummation of the Phipps Acquisition." Pursuant to an agreement, dated as of May 15, 1996 (the "KTVE Agreement"), with GOCOM Television of Ouachita, L.P., in August 1996, the Company sold the assets of KTVE for approximately $9.5 million in cash plus the amount of the accounts receivable on the date of the closing (approximately $870,000), to the extent collected by the buyer, to be paid to the Company 150 days following the date of closing. For the year ended December 31, 1995, KTVE had net revenues, Media Cash Flow and operating income (income before miscellaneous income (expense), allocation of corporate overhead, interest expense and income taxes) of $4.2 million, $916,000 and $437,000, respectively, and $2.3 million, $598,000 and $360,000, respectively, for the six months ended June 30, 1996. The Company estimates that the gain, net of estimated taxes, on the KTVE Sale was approximately $2.8 million. In addition to the KTVE Sale and the consummation of this Offering, the Concurrent Offering and the Phipps Acquisition, the Company intends to implement a financing plan (the "Financing") to increase liquidity and improve operating and financial flexibility. Pursuant to the Financing, the Company will (i) retire approximately $49.5 million aggregate principal amount of outstanding indebtedness under its senior secured bank credit facility (the "Old Credit Facility"), together with accrued interest thereon, (ii) retire approximately $25.0 million aggregate principal amount of outstanding indebtedness under its senior note due 2003 (the "Senior Note"), together with accrued interest thereon and a prepayment fee, (iii) issue $10.0 million liquidation preference of its Series A preferred stock (the "Series A Preferred Stock") in exchange for its outstanding $10.0 million aggregate principal amount 8% subordinated note (the "8% Note") issued to Bull Run Corporation ("Bull Run"), a principal shareholder of the Company, (iv) issue to Bull Run, J. Mack Robinson, the President, Chief Executive Officer and director of the Company, and certain of his affiliates $10.0 million liquidation preference of its Series B preferred stock (the "Series B Preferred Stock" and together with the Series A Preferred Stock, the "Preferred Stock") with warrants to purchase up to 500,000 shares of Class A Common Stock (representing 10.1% of the currently issued and outstanding Class A Common Stock after giving effect to the exercise of such warrants) for cash proceeds of $10.0 million and (v) enter into a new senior secured bank credit facility (the "Senior Credit Facility") to provide for a term loan and revolving credit facility aggregating $125.0 million. The cash required for the consummation of the Phipps Acquisition, the repayment of indebtedness and related transaction costs will be provided by the net proceeds of this Offering, the Concurrent Offering, the sale of the Series B Preferred Stock and the warrants, borrowings under the Senior Credit Facility and the Company's working capital. For a description of the Senior Credit Facility and the Preferred Stock, see "Description of Certain Indebtedness" and "Management--Compensation Committee Interlocks and Insider Participation--Issuances of Preferred Stock." The consummation of this Offering is not conditioned upon the consummation of the Financing, the Phipps Acquisition or the Concurrent Offering. If either the Phipps Acquisition is not consummated or the Company does not consummate one or more equity offerings (including this Offering) having gross proceeds of not less than $65.0 million (the "Minimum Equity Condition") prior to December 23, 1996, the Company is required to redeem the Notes on or prior to December 31, 1996 (the "Special Redemption Date") at a redemption price (the "Special Redemption Price") equal to 101% of the principal amount of the Notes plus accrued and unpaid interest to the date fixed for such redemption (the "Trust Funds"). See "Description of the Notes." The Concurrent Offering and the Financing are intended to provide financing for the Phipps Acquisition and operating and financial flexibility thereafter. Although the Concurrent Offering may be consummated prior to the Phipps Acquisition, the Notes are subject to the special redemption described above. The Senior Credit Facility will provide that no borrowings may be made thereunder until the closing of the Phipps Acquisition. Accordingly, if the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied, the Notes will be redeemed by the Company, the Old Credit Facility will remain in place and the Company will not borrow under the Senior Credit Facility. The following table sets forth the estimated sources and uses of funds relating to this Offering, the Concurrent Offering, the Phipps Acquisition and the Financing: <TABLE> <CAPTION> (IN MILLIONS) AMOUNT ---------- SOURCES OF FUNDS: <S> <C> The Class B Common Stock offered hereby (1) $73.5 The Concurrent Offering 160.0 Sale of Series B Preferred Stock and Warrants 10.0 Borrowings under the Senior Credit Facility 22.9 Working capital (2) 9.5 ---------- TOTAL $275.9 ---------- ---------- USES OF FUNDS: Consummation of Phipps Acquisition $185.0 Retire indebtedness under the Old Credit Facility (3) 49.5 Retire indebtedness under the Senior Note(4) 25.0 Fees and expenses (5) 16.4 ---------- TOTAL $275.9 ---------- ---------- </TABLE> - ------------------------------ (1) Assumes estimated gross proceeds from this Offering of $73.5 million and estimated net proceeds therefrom of $67.6 million. It is a condition of the release from escrow of the net proceeds of the Concurrent Offering that the Company shall have consummated one or more equity offerings having gross proceeds of not less than $65.0 million. To the extent that the gross proceeds of any such equity offerings are less than $73.5 million, the Company intends to borrow such difference under its Senior Credit Facility. It is anticipated that there will not be a significant interval between the closing of this Offering and the closing of the Concurrent Offering. (2) The source of these funds was the KTVE Sale. (3) Borrowings under the Old Credit Facility bear interest at formula rates based upon the applicable London inter-bank offered rate ("LIBOR") or prime rate at the time of borrowing plus a fixed spread and have a final maturity of 2003. As of June 30, 1996, the weighted average interest rate was 8.94%. (4) The indebtedness under the Senior Note bears interest at 10.7%. (5) Fees and expenses include underwriting costs for this Offering and the Concurrent Offering, fees payable in connection with the negotiation and execution of the Senior Credit Facility, fees payable in connection with the retirement of the Senior Note and legal, accounting and other transaction fees. If either the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied, the Company will redeem the Notes. The following table sets forth the estimated sources and uses of funds to consummate the Financing and to redeem the Notes if the Phipps Acquisition is not consummated: <TABLE> <CAPTION> (IN MILLIONS) AMOUNT ------------ <S> <C> SOURCES OF FUNDS: The Class B Common Stock offered hereby (1) $ 73.5 The Concurrent Offering 160.0 Sale of Series B Preferred Stock and Warrants 10.0 Working capital (2) 9.0 ------------ TOTAL $ 252.5 ------------ ------------ </TABLE> <TABLE> <S> <C> USES OF FUNDS: Redemption of the Notes $ 161.6(3) Retire indebtedness under the Old Credit Facility (4) 49.5 Retire indebtedness under the Senior Note(5) 25.0 Fees and expenses (6) 16.4 ---------- TOTAL $ 252.5 ---------- ---------- </TABLE> - ------------------------------ (1) Assumes estimated gross proceeds from this Offering of $73.5 million and estimated net proceeds therefrom of $67.6 million. It is a condition of the release from escrow of the net proceeds of the Concurrent Offering that the Company shall have consummated one or more equity offerings having gross proceeds of not less than $65.0 million. To the extent that the gross proceeds of any such equity offerings are less than $73.5 million, the Company intends to borrow such difference under its Senior Credit Facility. It is anticipated that there will not be a significant interval between the closing of this Offering and the closing of the Concurrent Offering. (2) The source of these funds was the KTVE Sale. (3) Amount shown excludes interest accrued on the Notes from the date of issuance to the date of redemption. (4) Borrowings under the Old Credit Facility bear interest at formula rates based upon the applicable LIBOR or prime rate at the time of borrowing plus a fixed spread and have a final maturity of 2003. As of June 30, 1996, the weighted average interest rate was 8.94%. (5) The indebtedness under the Senior Note bears interest at 10.7%. (6) Fees and expenses include underwriting costs for this Offering and the Concurrent Offering, fees payable in connection with the negotiation and execution of the Senior Credit Facility, fees payable in connection with the retirement of the Senior Note and legal, accounting and other transaction fees. If the Phipps Acquisition is not consummated due to a default by the Company, the Company will be required to pay $10.0 million as liquidated damages, however such amount is not included above. Prior to the consummation of the Phipps Acquisition and the satisfaction of the Minimum Equity Condition, the net proceeds of the Concurrent Offering, together with an amount sufficient to permit the Company to redeem the Notes on the Special Redemption Date at the Special Redemption Price, will be held by and pledged to the Trustee (as defined in the Indenture) under the Indenture for the benefit of the holders of the Notes. The Trust Funds will be invested in cash equivalents. The proceeds of this Offering will be used to repay indebtedness under the Old Credit Facility, to retire the Senior Note and to provide funds for the Phipps Acquisition. THE OFFERING <TABLE> <S> <C> Class B Common Stock offered hereby......... 3,500,000 Shares Common Stock to be outstanding after this Offering (1) Class A Common Stock.................... 4,467,205 Shares Class B Common Stock.................... 3,500,000 Shares Total................................. 7,967,205 Shares Use of Proceeds by the Company.............. The Company intends to use the proceeds of this Offering, together with the proceeds of the Concurrent Offering, the Financing and the Company's working capital for (i) the consummation of the Phipps Acquisition, (ii) the retirement of indebtedness under the Old Credit Facility, (iii) the retirement of indebtedness under the Senior Note and (iv) the payment of related fees and expenses. However, in the event the Phipps Acquisition is not consummated or the Minimum Equity Condition is not satisfied prior to December 23, 1996, the Company will be obligated to redeem the Notes. See "The Phipps Acquisition, the KTVE Sale and the Financing" and "Description of the Notes." New York Stock Exchange Symbols: Class A Common Stock.................... GCS Class B Common Stock.................... GCS.B Concurrent Offering......................... Concurrently with this Offering, the Company is offering $160,000,000 aggregate principal amount of its Notes by separate prospectus. The consummation of this Offering is not conditioned upon the consummation of the Financing, the Phipps Acquisition or the Concurrent Offering. </TABLE> - ------------------------ (1) Excludes (i) approximately 53,500 shares of Class A Common Stock issuable upon exercise of stock options outstanding under the Company's stock option plans as of June 30, 1996, (ii) 487,500 shares of Class A Common Stock issuable upon exercise of an outstanding warrant of the Company and (iii) 500,000 shares of Class A Common Stock issuable upon exercise of the warrant to be issued as part of the Financing. See "Management."
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diff --git a/parsed_sections/prospectus_summary/1996/HLIO_helios_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/HLIO_helios_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..bbe4efc3ce14a11916a2b9d4b72c2e9566915a0e
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/HLIO_helios_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Investors should consider carefully the risk factors related to the purchase of Common Stock of the Company. See "Risk Factors." Except as otherwise indicated herein, (i) the term the "Company" refers to Sun Hydraulics Corporation and its subsidiaries (see "The Reorganization"); and (ii) the information in this Prospectus (a) assumes the Underwriters' over-allotment option is not exercised, (b) assumes an initial public offering price for the Common Stock of $10.50 per share, (c) gives effect to a 9.90373 for 1 stock split of the Common Stock, to be paid in the form of a stock dividend in connection with the Reorganization to the stockholders of record of the Company on the day before the effective date of the Offering, and (d) gives effect to the consummation of the Reorganization prior to the completion of the Offering. THE COMPANY The Company is a leading designer and manufacturer of high-performance, screw-in hydraulic cartridge valves and manifolds which control force, speed and motion as integral components in fluid power systems. The innovative floating construction of the Company's screw-in cartridge valves provides demonstrable performance and reliability advantages compared to other available screw-in cartridge valves. Screw-in cartridge valves are an increasingly accepted alternative to conventional forms of hydraulic valving, offering significant design flexibility, as well as substantial size, weight and efficiency benefits afforded to designers of fluid power systems. Since the introduction of screw-in hydraulic cartridge valves in the late 1950s, manufacturers of these and similar products have captured approximately $550 million of the worldwide market for all non-aerospace hydraulic valves and manifolds, which management believes to be in excess of $3 billion. The Company has generated a profit each year since 1972 and has achieved an internal compound annual growth rate in net sales of 17% over the last ten years. The Company believes that its success is primarily a result of its innovative product design, consistent high quality and superior product performance. Fluid power involves the transfer and control of power through fluid under pressure. Fluid power systems are integral to a wide variety of manufacturing, material handling, agricultural and construction equipment. Due to its mechanical advantage, fluid power is widely employed to move and position materials, control machines, vehicles and equipment, and improve industrial efficiency and productivity. Fluid power systems typically are comprised of valves and manifolds that control the flow of fluids, a pump that generates pressure, and actuators such as cylinders and motors that translate pressure into mechanical energy. The Company designs and manufactures one of the most comprehensive lines of screw-in hydraulic cartridge valves in the world. These valves control direction, pressure, flow and loads, are available in up to five size ranges, and are suitable for flows from 5 to 400 gallons per minute and continuous operating pressures up to 5,000 pounds per square inch. The floating construction pioneered by the Company provides demonstrable performance and reliability advantages compared to competitors' product offerings due to its self-alignment characteristic that accommodates potential manufacturing deviations common in the thread-making operations of screw-in cartridge valves and manifolds. This floating construction significantly differentiates the Company from most of its competitors, who design and manufacture rigid screw-in cartridge valves that fit an industry common cavity. The Company believes that competitors' products typically do not offer the inherent reliability of the Company's products and do not provide equivalent operating performance because of the design constraints imposed by the industry common cavity. The Company also designs and manufactures the most comprehensive line of standard manifolds in the world. A manifold is a solid block of metal, usually aluminum, steel or ductile iron, which is machined to create threaded cavities and channels into which screw-in cartridge valves are installed and through which the hydraulic fluids flow. Fluid power engineers can package standard or customized manifolds with screw-in cartridge valves to create application-specific, multiple-function hydraulic control systems that are safe, reliable and provide greater control. In 1995, screw-in cartridge valves accounted for approximately 75% of the Company's net sales while standard and custom manifolds accounted for approximately 25% of net sales. The Company sells its products primarily through a global network of independent fluid power distributors to a diverse universe of end users, for use in various "mobile" applications, such as construction, agricultural and utility equipment (approximately 65% of net sales), and a broad array of "industrial" applications, such as machine tools and material handling equipment (approximately 35% of net sales). Sales to the Company's largest distributor represented approximately 6% of net sales in 1995, and the Company believes that aggregate sales by its distributors to the largest end user represented less than 3% of net sales in 1995. The Company believes that screw-in cartridge valves will continue to achieve significant growth at the expense of conventional hydraulic valves as design engineers recognize the inherent advantages of screw-in cartridge valves. The Company believes that additional growth potential for screw-in cartridge valve applications exists as a result of a trend toward miniaturization as end users require smaller, lighter-weight and more efficient components. Custom manifolds that utilize screw-in cartridge valves allow customers to design an optimal solution for control of their fluid power systems that significantly reduces assembly time and expense. The United States and Western Europe are the largest developed markets for screw-in cartridge valves, and the Company believes future growth prospects are particularly attractive in the Pacific Rim, Eastern Europe and India, where the adoption of screw-in cartridge valves is in an early stage. In 1995, approximately 34% of the Company's net sales were outside the United States. Management believes that the Company's success during its 26-year history is due in large part to its emphasis on innovative product designs and vertically integrated, state of the art manufacturing processes. Management attributes the Company's ability continuously to implement process improvements to its horizontal management structure that encourages employee contribution at all levels. The Company does not have a formal organizational chart and employee responsibilities do not devolve from titles or narrow job descriptions. This management philosophy is utilized throughout the Company's operations. The Company's objective is to enhance its position as one of the world's leading designers and manufacturers of screw-in hydraulic cartridge valves by (i) broadening the market for screw-in cartridge valve applications, (ii) continuing the geographic expansion of its markets, and (iii) selectively expanding its product lines. Key elements of the Company's strategy include the following: - Deliver Value Through High-Quality, High-Performance Products - Offer a Wide Variety of "Off-the-Shelf" Products - Capitalize on Custom Manifold Opportunities - Expand Global Presence - Maintain a Horizontal Organization with Entrepreneurial Spirit - Leverage Manufacturing Capability and Know-how as Competitive Advantages - Sell Through Distributors, Market to End Users The Company was incorporated in 1986 to take over the operation of the business of the Company's predecessor, Suninco, Inc. (f/k/a Sun Hydraulics Corporation) which was founded in 1970 by Robert E. Koski for the specific purpose of developing and promoting screw-in cartridge valve technology. Mr. Koski remains active in the business as Chairman of the Board of Directors. The address of the Company's executive offices is 1500 West University Parkway, Sarasota, Florida 34243, and its telephone number is 941/362-1200. THE OFFERING Common Stock offered by the Company............................. 2,000,000 shares Common Stock outstanding after the Offering............................ 6,000,000 shares(1) Use of Proceeds..................... To repay debt principally related to equipment financing and mortgage financing of the Company's existing and new Florida manufacturing plants, to pay the S Corporation Distribution and for general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market Symbol.............................. "SNHY" - --------------- (1) Does not include an aggregate of 1,000,000 shares of Common Stock reserved for issuance under the Company's 1996 Stock Option Plan. As of September 30, 1996, there were options to purchase 319,960 shares of Common Stock outstanding under the Company's 1996 Stock Option Plan and the Company has committed to issue immediately after the consummation of the Offering options to purchase an additional 289,348 shares of Common Stock. See "Management -- Stock Option Plan." SUMMARY FINANCIAL DATA <TABLE> <CAPTION> NINE MONTHS ENDED SEPTEMBER YEARS ENDED DECEMBER 31, 30, ----------------------------------------------- ----------------- 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF INCOME DATA: Net sales............................. $26,250 $28,331 $32,431 $42,853 $55,388 $42,718 $41,233 Cost of sales......................... 16,928 17,946 21,971 27,512 34,581 26,361 27,903 ------- ------- ------- ------- ------- ------- ------- Gross profit.......................... 9,322 10,385 10,460 15,341 20,807 16,357 13,330 Selling, engineering and administrative expenses............. 7,319 7,826 7,346 8,605 10,578 7,652 9,288(1) ------- ------- ------- ------- ------- ------- ------- Operating income...................... 2,003 2,559 3,114 6,736 10,229 8,705 4,042 Interest expense...................... 1,118 997 931 859 814 612 678 Miscellaneous (income) expense........ (320) (252) 249 66 (79) (81) 107 ------- ------- ------- ------- ------- ------- ------- Income before income taxes............ 1,205 1,814 1,934 5,811 9,494 8,174 3,257 Income tax provision (benefit)(2)..... 46 (201) (148) 408 633 478 727 ------- ------- ------- ------- ------- ------- ------- Net income............................ $ 1,159 $ 2,015 $ 2,082 $ 5,403 $ 8,861 $ 7,696 $ 2,530 ======= ======= ======= ======= ======= ======= ======= PRO FORMA STATEMENT OF INCOME DATA:(3) Income before income taxes............ $ 1,205 $ 1,814 $ 1,934 $ 5,811 $ 9,494 $ 8,174 $ 3,257 Income tax provision.................. 481 580 604 2,738 3,611 3,069 1,255 ------- ------- ------- ------- ------- ------- ------- Net income............................ $ 724 $ 1,234 $ 1,330 $ 3,073 $ 5,883 $ 5,105 $ 2,002 ======= ======= ======= ======= ======= ======= ======= Net income per common share(4)........ $ 1.13 $ 0.38 Weighted average shares outstanding(4)...................... 5,217 5,307 OTHER FINANCIAL DATA: Depreciation.......................... $ 1,953 $ 1,971 $ 2,112 $ 2,197 $ 2,556 $ 1,803 $ 2,288 Capital expenditures.................. 1,683 1,987 3,005 5,130 7,657 5,316 12,423 </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1996 ----------------------------------------- PRO FORMA ACTUAL PRO FORMA(6) AS ADJUSTED(7) ------- ------------ -------------- <S> <C> <C> <C> BALANCE SHEET DATA: Working capital............................................... $ 3,064 $ (6,841) $ 3,669 Total assets.................................................. 43,964 43,964 43,964 Total debt.................................................... 14,538 14,538 5,863 Shareholders' equity.......................................... 24,030(5) 12,180 30,760 </TABLE> - --------------- (1) Includes a non-recurring, non-cash compensation expense of approximately $1.4 million related to the termination of phantom stock compensation agreements and the issuance of options to Directors. See Note 16 of the Notes to Financial Statements. Excluding such expense, pro forma net income for the nine months ended September 30, 1996 would have been approximately $2.9 million. (2) The Company has previously operated as an S Corporation. Therefore, the historical income tax provision represents primarily foreign taxes. (3) The pro forma statement of income data is based on historical net income as adjusted to reflect a provision for income taxes calculated using the statutory rates in effect during the applicable periods, as if the Company had been a C Corporation since inception. See Notes 2 and 11 of the Notes to Financial Statements. (4) The pro forma net income per share data is based on the historical weighted average number of shares outstanding and as adjusted to reflect the assumed issuance of 1,066,000 shares (as of the beginning of each respective period) to fund the S Corporation Distribution as of September 30, 1996. See "S Corporation Distribution." (5) Shareholders' equity reflects the Reorganization. See "The Reorganization"
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/HSIC_henry_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/HSIC_henry_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..4b9397713520d2892720de32b4f24d3b70022338
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/HSIC_henry_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. The Company operates on a 52-53 week fiscal year that ends on the last Saturday in December; all references to the Company's operations for a particular year refer to the year ending on the last Saturday in December. Unless otherwise indicated, all information in this Prospectus assumes the Underwriters' over-allotment option is not exercised. See "Underwriting."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/KFRC_kforce-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/KFRC_kforce-inc_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a54ee29864197e7e828dd471ec4941f0b592895a
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/KFRC_kforce-inc_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following is a summary of the more detailed information and financial statements appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus assumes that the Underwriters' over-allotment option will not be exercised, and gives retroactive effect to a two-for-one stock split in the form of a 100% stock dividend to shareholders of record on May 15, 1996, which will be reflected on the Nasdaq National Market on May 23, 1996. Unless the context otherwise requires, references to the "Company" or "Romac" are to Romac International, Inc. THE COMPANY Romac International, Inc. is a specialty staffing services firm providing temporary, contract, and permanent placement of professional and technical personnel. The Company is organized into three divisions: the Professional Temporary Division provides professional temporary personnel in the fields of finance and accounting; the Contract Services Division provides information systems, manufacturing services, human resources, health care, and pharmaceutical personnel generally on a longer-term contractual basis; and the Search Division provides permanent placement of specialized personnel in the fields of accounting and finance, information systems, financial services, pharmaceutical research, health care, human resources, insurance, manufacturing services, and sales and marketing. The Company believes its range of services provides clients with integrated solutions to their temporary, contract, and permanent specialty staffing needs, allowing the Company to develop long-term, consultative relationships with its clients. The Company also believes the interaction among its three divisions generates increased placement opportunities and enhances the Company's ability to attract and place higher quality candidates. The Company principally serves Fortune 1000 companies in twelve metropolitan markets through Company-owned locations and five additional markets through franchisees and licensees. The Company's objective is to be the nationally recognized leader in providing specialty staffing services. The Company strives to differentiate itself from others in the staffing industry through innovative service offerings, a consultative and results-oriented approach to client relationships, and high-quality personnel placements. In pursuing its objective, the Company focuses exclusively on providing professional and technical personnel, rather than clerical or light industrial personnel, because of the generally higher profitability and the opportunity for growth of this market segment. The Company believes it has a recruiting advantage over those of its competitors that lack the ability to offer candidates temporary, contract, and permanent opportunities. Candidates seeking permanent employment frequently accept temporary or contract assignments through the Company until a permanent position becomes available. The Company also believes the ROMAC(R) name recognition, coupled with its industry expertise and innovative use of technology, provide it with competitive benefits. The Company's growth strategy is to increase revenue and profitability by expanding its services in existing markets and introducing its full range of services into new markets. In existing markets, the Company intends to further develop existing clients and expand its client base by (i) introducing its full range of services in all of its markets, (ii) taking advantage of the cross-selling opportunities provided by the complementary services offered by its three divisions, (iii) introducing new services, and (iv) acquiring complementary businesses. The Company intends to enter new markets by opening new Company-owned locations and making strategic acquisitions. In the last twelve months, the Company has entered four new markets: two through start-ups, one through franchise conversion to a Company-owned location, and one through acquisition. In addition, the Company has developed a major accounts program, which encourages large users of staffing services to "carve-out" the professional and technical segments of staffing contracts and award such business to the Company instead of large generalist staffing firms. As a result of this program, the Company has signed several contracts with major national corporations for certain of the Company's services. Management believes there is substantial opportunity for growth through the continued implementation of this strategy. The Company was formed by current management in August 1994 through the combination of a specialty staffing services firm in operation under the ROMAC(R) name since 1966 and three of its largest franchisees (the "1994 Combination"). Since the Company's initial public offering in August 1995, the Company has introduced Contract Services in its Philadelphia and Chicago locations, introduced Search services in its Houston location, and expanded into the Pittsburgh market through a new Company-owned location. The Company has also acquired certain assets of the following entities: Venture Networks Corporation, Inc. (Boston), PCS Group, Inc. (Louisville), and Strategic Outsourcing, Inc. (Boston) (collectively, the "Acquisitions"). These strategic acquisitions have enhanced the Company's Contract Services capabilities, increased the Company's geographic presence, and introduced human resource contract and outsourcing services, and outplacement services, to the Company's existing product offerings. The temporary staffing industry has grown rapidly in recent years as companies have utilized temporary employees to manage personnel costs while meeting specialized or fluctuating staffing requirements. According to a study by the National Association of Temporary and Staffing Services ("NATSS"), the United States temporary staffing industry grew from approximately $20.4 billion in revenue in 1991 to approximately $39.2 billion in revenue in 1995, a compound annual growth rate of 17.7%. Furthermore, according to the Staffing Industry Report, the professional and technical segments of the temporary staffing industry are estimated to have grown by 25.0% from 1994 to 1995 to $8.9 billion. This compares with estimated 1994 to 1995 growth of 15.0% and 8.0%, respectively, in the clerical and industrial segments. THE OFFERING Common Stock offered by the Company....... 1,610,000 shares Common Stock offered by the Selling Shareholders.............................. 1,070,000 shares Common Stock to be outstanding after the Offering(1)............................... 11,291,782 shares Use of Proceeds........................... For general corporate purposes including expansion of the Company's operations, purchase of capital equipment, and possible acquisitions Nasdaq National Market Symbol............. ROMC - --------------- (1) Does not include shares of Common Stock subject to outstanding options under the Company's stock option plans. See "Management -- Incentive Stock Option Plan" and "Management -- Director Compensation." SUMMARY CONSOLIDATED FINANCIAL DATA (In thousands, except per share data) Prior to September 1, 1994, the Company's business was conducted under separate ownership and management by FMA International, Inc. ("Romac-FMA"), which was a Romac franchisee, the Romac franchisor, and certain other Romac franchisees. The 1994 Combination became effective on August 31, 1994 and all of the financial data set forth below have been restated to give effect to the 1994 Combination, which has been accounted for as a pooling of interests. Since August 31, 1994, the Company's business has been conducted under common ownership and its operations have been conducted by the former management of Romac-FMA, which became the management of the Company. The information below reflects a two-for-one stock split in the form of a stock dividend to shareholders of record on May 15, 1996, which will be reflected on the Nasdaq National Market on May 23, 1996. <TABLE> <CAPTION> PRO FORMA PRO FORMA THREE MONTHS THREE MONTHS YEAR ENDED ENDED ENDED YEARS ENDED DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31, ----------------------------------------------- ------------ ---------------- ------------ 1991 1992 1993 1994 1995 1995(1) 1995 1996 1996(1) ------- ------- ------- ------- ------- ------------ ------ ------- ------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net service revenues....... $24,155 $31,250 $40,346 $40,789 $45,655 $ 58,485 $9,562 $16,889 $ 18,387 Gross profit............... 10,619 11,418 14,220 15,938 20,195 26,378 4,203 7,170 7,780 Income (loss) before taxes.................... (759) 1,091 1,113 (413) 5,021 5,835 1,212 1,709 1,800 Net income (loss)(2)....... (458) 714 650 (599) 3,013 3,501 727 1,025 1,092 Net income per share(3).... $ (0.07) $ 0.11 $ 0.10 $ (0.09) $ 0.36 $ 0.41 $ 0.09 $ 0.10 $ 0.11 Weighted average shares outstanding(4)........... 6,522 6,588 6,619 7,039 8,488 8,488 7,763 10,338 10,338 </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 --------------------- AS ACTUAL ADJUSTED(5) ------- ----------- <S> <C> <C> BALANCE SHEET DATA: Working capital............................................................................... $ 9,026 $44,470 Total assets.................................................................................. 23,168 58,612 Total long-term debt.......................................................................... 425 425 Shareholders' equity.......................................................................... $18,078 $53,522 </TABLE> - --------------- (1) The pro forma consolidated unaudited financial information has been prepared to reflect the Company's operations as if the Acquisitions had occurred on January 1, 1995, as further described elsewhere herein. See "Unaudited Pro Forma Financial Information." (2) Net income (loss) for the years ended December 31, 1994 and 1995, the pro forma year ended December 31, 1995, the three months ended March 31, 1995 and 1996, and the pro forma three months ended March 31, 1996, includes franchise termination income (net of tax) of $336,000, $261,000, $261,000, $261,000, $64,000, and $64,000, respectively. (3) Net income (loss) per share for the years ended December 31, 1994 and 1995, the pro forma year ended December 31, 1995, the three months ended March 31, 1995 and 1996, and the pro forma three months ended March 31, 1996, includes franchise termination income per share of $0.05, $0.03, $0.03, $0.03, $0.01, and $0.01, respectively. (4) Does not include 1,230,970 shares of Common Stock subject to outstanding options under the Company's stock option plans. See "Management -- Incentive Stock Option Plans" and "Management -- Director Compensation." (5) As adjusted to give effect to the sale by the Company of 1,610,000 shares of Common Stock offered hereby and after deducting underwriting discounts and commissions and estimated offering expenses and the application of the net proceeds therefrom, assuming a public offering price of $23.625 per share. See "Capitalization."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1996/LEN-B_lennar_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/LEN-B_lennar_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c9db82f36132884f6afc4f8b99713b58d92affd0
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/LEN-B_lennar_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION (INCLUDING THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS, OTHER THAN THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS, ASSUMES (I) A 1.4282 FOR 1.00 STOCK SPLIT OF THE COMMON STOCK TO BE EFFECTIVE IMMEDIATELY PRIOR TO THE OFFERING AND (II) THE UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED. INVESTORS SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS." THE COMPANY Pacific Greystone is a leading regional builder of high quality, single family homes primarily targeted to first time and move-up homebuyers in infill and emerging markets located throughout Northern and Southern California. The Company's operations are geographically diverse within California, with 53 residential projects in 12 counties. In December 1995, the Company further expanded its operations through the acquisition of four residential projects in Las Vegas, Nevada and three residential projects in Phoenix, Arizona. Since commencing its homebuilding operations in 1992, revenues have grown rapidly from $26.2 million to $293.9 million in 1995, with pretax income increasing from a loss of $5.7 million to a profit of $17.5 million over the same period. The number of homes closed during that period increased from 135 in 1992 to 1,374 in 1995. In the first quarter of 1996, revenues increased by 83% to $63.5 million as compared to $34.7 million for the same quarter of 1995, with pretax income increasing to $3.2 million in the first quarter of 1996 from $0.5 million in the first quarter of 1995. California is the third largest housing market (measured by permits issued) in the United States and the Company believes it is well-positioned to benefit from the recovery in the California housing market. In 1994, employment growth in California showed a positive trend for the first time in three years and during the twelve months ended March 1996, nonfarm employment growth was 2.4%, significantly outpacing the 1.5% gain nationwide. As a result, the unemployment rate in California has declined from 10.1% in January 1994 to 7.7% in March 1996, although it is still above the national average. Since May 1989, the percentage of California households able to afford a median-priced single family home has increased from 15% to 41% in March 1996. Single family building permits issued in California totaled 162,600 at the last cyclical peak in 1989 and declined to 68,673 in 1995, a decline of 57.7%. In the first three months of 1996, 15,541 single family permits were issued in California, a 15.0% increase above the 13,510 permits issued during the first three months of 1995. Pacific Greystone was founded in late 1991 by senior management and Warburg, Pincus Investors, L.P. ("Warburg") with the objective of becoming a major homebuilder with diverse geographic operations. The Company's initial efforts were focused in both Northern and Southern California due to management's belief that attractive opportunities were available in those regions as a result of the distressed conditions in the California homebuilding industry at that time. In September 1992, Pacific Greystone acquired the California homebuilding operations of A-M Homes (the "AM Operations") which had been active in homebuilding in California since 1979. Since inception, the Company has continued to expand its presence in Northern and Southern California through start-up operations in new markets, and entered the Las Vegas and Phoenix markets through acquisitions in December 1995. BUSINESS STRATEGY Pacific Greystone believes its rapid growth and success since its inception in 1991 is attributable, in part, to the following elements of its business strategy: EXPANSION THROUGH ACQUISITIONS AND START-UP OPERATIONS. The Company has successfully expanded its operations through selective acquisitions and by commencing start-up projects in new and existing markets. Within its existing markets, management believes there are opportunities to increase the number of residential projects with its current management and information systems. As part of its overall strategy to enter new geographic markets, the Company continually evaluates acquisition opportunities which combine attractive residential projects and management with local market expertise. MARKET SEGMENT DIVERSITY THROUGH INFILL AND EMERGING MARKET STRATEGY. Pacific Greystone focuses on two distinct market segments. - Infill markets generally include sites zoned for non-residential use within previously developed communities that will typically yield 50 to 100 residential lots. The Company has a particular expertise in identifying and redeveloping non-residential sites suitable for single family homes. Management views its infill expertise as an important competitive advantage over larger tract builders due to its belief that the housing market in infill areas is less volatile than in emerging markets. The supply of buildable lots in an infill market is often constrained, therefore competition is typically limited to resale housing. - Emerging markets tend to include raw land and improved residential lots in areas of active new home construction. As compared to infill markets, emerging markets provide greater growth potential during periods of strong housing demand since they typically have fewer entitlement issues and generate more buildable lots than an infill market. GEOGRAPHIC DIVERSITY WITHIN CALIFORNIA. Northern California and Southern California are distinct markets with unique economic and demographic trends. In 1995 and the first three months of 1996, the number of homes closed by Pacific Greystone were divided almost equally between Northern and Southern California. By having diverse operations within California, management believes that it minimizes the risks associated with any one particular locality, yet the Company is able to participate in two large markets with significant demand for housing. CONSERVATIVE LAND POLICIES. The Company maintains a conservative land acquisition policy designed to optimize profitability and return on capital while minimizing the risks associated with investments in land. Pacific Greystone generally limits the number of lots acquired to less than 150 in any one project. By limiting the size of its investment in any one project, management believes it is better able to adjust to changing buyer needs and reduce the risks associated with changing market conditions. The Company only purchases lots after entitlements are received. The Company's inventory strategy is to own a two to four year supply of residential lots. Pacific Greystone's owned residential lot inventory has been obtained since its formation in 1991, with approximately 84% acquired since January 1994. As of March 31, 1996, the Company owned and controlled 7,001 residential lots. EXPERIENCED MANAGEMENT WITH DECENTRALIZED OPERATING STRUCTURE. Pacific Greystone balances its local operating structure with centralized corporate-level management. The Company's local managers, who have significant experience in both the homebuilding industry and their respective markets, are responsible for operating decisions regarding project identification, house design, construction and marketing. Decisions related to overall Company strategy, project acquisition, financing and disbursements are centralized at the corporate level. The Company's senior operating and financial management is very experienced with the 12 most senior managers averaging 21 years of experience in the homebuilding industry. The Company was incorporated in Delaware in September 1991. The principal executive offices of the Company are located at 6767 Forest Lawn Drive, Suite 300, Los Angeles, California 90068, and its telephone number is (213) 436-6300. THE OFFERING <TABLE> <S> <C> Common Stock being offered by: The Company............................................... 4,562,900 Shares The Selling Stockholders.................................. 437,100 Shares Common Stock to be outstanding immediately after the Offering (1)............................................... 14,350,703 Shares Use of proceeds............................................. The redemption of outstanding Series A Preferred and general corporate purposes Proposed NYSE symbol........................................ GRY </TABLE> - ------------ (1) Includes 1,472,981 shares of Common Stock to be issued as payment of a portion of the accrued dividends on the Series A Cumulative Senior Preferred Stock of the Company (the "Series A Preferred") as described under "Dividends" (assuming an initial offering price to the public in the Offering, less underwriting discounts and commissions, of $13.95 per share), and 2,485,754 shares of Common Stock to be issued upon conversion of the Series C Cumulative Convertible Preferred Stock of the Company (the "Series C Preferred") and a portion of the accrued dividends thereon into Common Stock upon the consummation of the Offering, as described under "Dividends" (assuming an initial offering price to the public in the Offering of $15.00 per share). Excludes 14,282 shares of Common Stock subject to outstanding stock options, 574,000 shares subject to options to be granted upon consummation of the Offering and 326,718 additional shares of Common Stock reserved for issuance under the Company's Amended and Restated 1995 Eligible Directors' Stock Option Plan, 1996 Employee Stock Option and Award Plan and 1996 Employee Stock Purchase Plan. See "Management-- Directors' Compensation" and "--Executive Compensation." SUMMARY CONSOLIDATED FINANCIAL DATA (Dollars in thousands, except share amounts) <TABLE> <CAPTION> OCTOBER 10, THREE MONTHS 1991 ENDED (INCEPTION) TO YEAR ENDED DECEMBER 31, MARCH 31, DECEMBER 31, ------------------------------------------ -------------------- 1991(1) 1992(2) 1993 1994 1995 1995 1996 --------------- --------- --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues................... $ -- $ 26,209 $ 172,830 $ 260,185 $ 293,921 $ 34,733 $ 63,535 Cost of sales.............. -- (25,816) (144,395) (215,437) (247,827) (29,269) (51,840) ------ --------- --------- --------- --------- --------- --------- Gross margin............... -- 393 28,435 44,748 46,094 5,464 11,695 Equity in pretax income (loss) of unconsolidated joint ventures............ -- 608 1,096 2,581 1,742 659 (148) Selling, general and administrative expenses... (938) (7,133) (19,521) (29,059) (31,468) (5,970) (8,502) Interest and other, net.... 92 435 32 388 1,162 371 159 ------ --------- --------- --------- --------- --------- --------- Pretax income (loss)....... (846) (5,697) 10,042 18,658 17,530 524 3,204 Provision for income taxes..................... -- -- (3,966) -- (2,512) -- (1,307) ------ --------- --------- --------- --------- --------- --------- Net income (loss).......... $ (846) $ (5,697) $ 6,076 $ 18,658 $ 15,018 $ 524 $ 1,897 ------ --------- --------- --------- --------- --------- --------- ------ --------- --------- --------- --------- --------- --------- Gross margin as a percent of revenues............... -- 1.5% 16.5% 17.2% 15.7% 15.7% 18.4% Selling, general and administrative expenses as a percent of revenues..... -- 27.2% 11.3% 11.2% 10.7% 17.2% 13.4% PRO FORMA DATA:(3) Pro forma earnings per share..................... $ 0.72 $ 0.02 $ 0.13 --------- --------- --------- --------- --------- --------- Pro forma weighted average number of shares outstanding (in thousands)................ 14,343 14,351 14,351 --------- --------- --------- --------- --------- --------- OPERATING DATA:(4) Homes closed (units)....... -- 135 717 1,331 1,374 227 306 Average price of homes closed.................... -- $ 317 $ 264 $ 261 $ 235 $ 238 $ 209 Number of projects owned (at period end)........... -- 27 30 43 46 41 53 Net new orders (units)(5)................ -- 67 807 1,331 1,497 311 492 Backlog (units)(at period end)(6)................... -- 112 202 202 325 286 511 Sales value of backlog (at period end)(6)............ -- $ 33,811 $ 53,677 $ 50,388 $ 60,219 $ 67,611 $ 101,011 </TABLE> <TABLE> <CAPTION> AT MARCH 31, 1996 ------------------------ PRO FORMA AS ACTUAL ADJUSTED(7) --------- ------------- <S> <C> <C> BALANCE SHEET DATA: Housing inventories.................................................................... $ 246,780 $ 246,780 Total assets........................................................................... 296,064 304,444 Total liabilities...................................................................... 168,272 158,272 Total shareholders' equity............................................................. 127,792 146,172 </TABLE> - ------------ (1) See "Company Formation and Organization" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Does not include the results of operations of the AM Operations acquired in 1992. (2) Includes the results of operations of the AM Operations only from October 1, 1992. (FOOTNOTES CONTINUE ON NEXT PAGE) (3) Pro forma data were calculated as if the Offering was consummated on January 1, 1995 at an assumed initial offering price to the public in the Offering of $15.00 per share and giving effect to (a) the redemption of the Series A Preferred with approximately $44.7 million of the net proceeds of the Offering, (b) the declaration and payment of the accrued dividends on the Series A Preferred as described under "Dividends," (c) the conversion of all the outstanding shares of the Series C Preferred and a portion of the accrued dividends thereon into Common Stock as described under "Dividends," and (d) the adjustment to the weighted average number of shares of Common Stock outstanding to reflect a 1.4282 for 1.00 stock split. Since the number of shares issuable as payment for the accrued dividends on the Series A Preferred and upon conversion of the Series C Preferred and accrued dividends thereon is dependent upon the initial offering price to the public in the Offering, an increase or decrease of the initial offering price from $15.00 per share will affect the pro forma weighted average number of shares outstanding and could affect pro forma earnings per share. The pro forma earnings available to holders of Common Stock for purposes of this calculation is historical pretax income less an assumed provision for income tax at an effective rate of 40.8% for each period. (4) Includes consolidated and unconsolidated projects. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 4 to Consolidated Financial Statements. (5) Net new orders are net of cancellations received during the applicable period. (6) At December 31, 1995 and March 31, 1996, included 78 and 77 homes, respectively, with a sales value of $7.8 million and $7.5 million, respectively, in Las Vegas, and 67 and 92 homes with a sales value of $6.3 million and $9.1 million, respectively, in Phoenix. Backlog is the number of units subject to pending sales contracts, some of which are subject to contingencies. No assurance can be given that such backlog will result in closings. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Backlog." (7) Adjusted to reflect (i) the payment of accrued dividends on the Series A Preferred and the conversion of the Series C Preferred and accrued dividends thereon into Common Stock, each as described under "Dividends," and (ii) the sale of the shares of Common Stock offered hereby and the application of the estimated net proceeds therefrom. See "Use of Proceeds."
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors," and the Consolidated Financial Statements and notes thereto included elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. Unless the context otherwise requires, references in this Prospectus to the Company or Pediatrix include Pediatrix Medical Group, Inc., its predecessor and its subsidiaries and the professional associations and partnerships (the "PA Contractors") which are separate legal entities that contract with the Company to provide physician services in certain states and Puerto Rico, and references to PMG refer only to Pediatrix Medical Group, Inc. THE COMPANY Pediatrix is the nation's leading provider of physician management services to hospital-based neonatal intensive care units ("NICUs"). NICUs provide medical care to newborn infants with low birth weight and other medical complications, and are staffed with specialized pediatric physicians, known as neonatologists. Based upon its own market research, knowledge of the health care industry and experience in neonatology, the Company believes that it is the only provider of NICU physician management services that markets its services on a national basis. The Company also provides physician management services to hospital-based pediatric intensive care units ("PICUs"), units which provide medical care to critically ill children and are staffed with specially-trained pediatricians, and to pediatrics departments in hospitals. As of June 15, 1996, the Company provided services to 58 NICUs, eight PICUs and three pediatrics departments in 14 states and Puerto Rico and employed or contracted with 162 physicians. The Company staffs and manages NICUs and PICUs in hospitals, providing the physicians, professional management and administrative support, including physician billing and reimbursement expertise and services. The Company's policy is to provide 24-hour coverage at its NICUs and PICUs with on-site or on-call physicians. As a result of this policy, physicians are available to provide continuous pediatric support to other areas of the hospital on an as-needed basis, particularly in the obstetrics, nursery and pediatrics departments, where immediate accessibility to specialized care is critical. Pediatrix established its leading position in physician management services to NICUs by developing a comprehensive care model and management and systems infrastructure that address the needs of patients, hospitals, payor groups and physicians. Pediatrix addresses the needs of (i) patients by providing continuous, comprehensive, professional quality care, (ii) hospitals by recruiting, credentialing, and retaining neonatologists and hiring related staff to operate NICUs in a cost-effective manner thereby relieving hospitals of the financial and administrative burdens of operating the NICUs, (iii) payor groups by providing cost-effective care to patients, and (iv) physicians by providing administrative support, including billing and reimbursement expertise and services, to enable them to focus on providing care to patients, and by offering an opportunity for career advancement within Pediatrix. Of the approximately four million babies born in the United States in 1994, approximately 10% required neonatal treatment. Demand for neonatal services is primarily due to premature births, which are often characterized by low birth weight and other medical complications. A majority of high-risk mothers whose births require neonatal treatment are not identified until the time of delivery, thus heightening the need for continuous coverage by neonatologists. Across the United States, NICUs are concentrated primarily among hospitals located in metropolitan areas with a higher volume of births. NICUs are important to hospitals since obstetrics generates one of the highest volumes of admissions and obstetricians generally prefer to perform deliveries at hospitals with NICUs. Hospitals must maintain cost-effective care and service in these units to enhance the hospital's desirability to the community, physicians and managed care payors. The Company's objective is to enhance its position as the nation's leading provider of physician management services to NICUs by adding new units and increasing same unit growth. The key elements of the Company's strategy are as follows: - Continue to focus exclusively on neonatology and pediatrics - Acquire well-established neonatal physician group practices - Develop regional networks to facilitate relationships with third party payors - Increase same unit growth - Assist hospitals by promoting cost-effective, quality care - Continue to develop new business models to meet the challenges of managed care Since its initial public offering in September 1995 (the "IPO"), the Company has completed six acquisitions (the "Recent Acquisitions") of neonatal physician group practices, which (i) added 24 NICUs, four PICUs and one pediatrics department, (ii) added 50 physicians, (iii) established the Company in three new markets, Denver, Phoenix and El Paso and (iv) expanded the Company's presence in Southern California. To support this growth and to facilitate the integration of acquisitions, the Company has enhanced its management infrastructure. See "Recent Developments." The Company's net patient service revenue increased from $10.5 million in 1991 to $43.9 million for the year ended December 31, 1995 ($69.4 million for the year ended December 31, 1995 on a pro forma basis), representing a compound annual growth rate of 43.0% (60.4% on a pro forma basis). Over the same period, net income increased from $1.8 million in 1991 to $6.7 million for the year ended December 31, 1995, representing a compound annual growth rate of 38.1%. The Company's net patient service revenue was $17.8 million for the three months ended June 30, 1996, as compared with $9.1 million for the same period in 1995, representing an increase of 95.6%. Net income increased 150.0% to $3.0 million for the three months ended June 30, 1996 as compared with $1.2 million for the same period in 1995. Net income per share increased 100.0% to $0.22 per share for the three months ended June 30, 1996 as compared with $0.11 per share for the same period in 1995. The Company's net patient service revenue was $33.9 million for the six months ended June 30, 1996, as compared with $18.0 million for the same period in 1995, representing an increase of 88.3%. Net income increased 133.3% to $5.6 million for the six months ended June 30, 1996 as compared with $2.4 million for the same period in 1995. Net income per share increased 95.2% to $0.41 per share for the six months ended June 30, 1996 as compared with $0.21 per share for the same period in 1995. THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Company................... 1,500,000 shares Common Stock Offered by the Selling Shareholders...... 2,000,000 shares Common Stock Outstanding After the Offering........... 14,576,170 shares(1) Use of Proceeds by the Company........................ Estimated net proceeds of $69.2 million to the Company will be used for possible future acquisitions, working capital requirements for new hospital contracts and general corporate purposes. See "Use of Proceeds." Nasdaq National Market Symbol......................... "PEDX" </TABLE> - --------------- (1) Excludes (i) 2,430,954 shares of Common Stock reserved for issuance under the Company's amended and restated stock option plan (the "Stock Option Plan"), of which options for an aggregate of 1,941,029 shares of Common Stock were issued and outstanding as of June 15, 1996 and options for an aggregate of 444,127 shares of Common Stock were exercisable as of June 15, 1996, and (ii) 1,000,000 shares of Common Stock reserved for issuance under the Company's 1996 Qualified Employee Stock Purchase Plan and 1996 Non-Qualified Employee Stock Purchase Plan (collectively the "Stock Purchase Plans"), none of which had been issued as of June 15, 1996. See "Management -- Stock Option Plans." SUMMARY CONSOLIDATED FINANCIAL DATA <TABLE> <CAPTION> THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ------------------------------------------------------------ -------------------------- 1995 1996 ------------------ ----------------- PRO PRO 1991 1992 1993 1994 ACTUAL FORMA(1) 1995 ACTUAL FORMA(2) ------- ------- ------- ------- ------- -------- ------ ------- -------- (IN THOUSANDS, EXCEPT PER SHARE AND OTHER OPERATING DATA) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED INCOME STATEMENT DATA: Net patient service revenue........ $10,497 $15,438 $23,570 $32,779 $43,860 $69,423 $8,886 $16,127 $21,342 Operating expenses: Salaries and benefits............ 6,291 9,585 14,852 20,723 29,545 47,204 6,270 10,796 14,216 Supplies and other operating expenses....................... 1,044 1,743 2,230 2,774 3,451 8,568 607 1,213 2,017 Depreciation and amortization.... 39 60 95 244 363 1,763 74 233 460 Nonrecurring expense(3).......... -- 15,400 -- -- -- -- -- -- -- ------- ------- ------- ------- ------- -------- ------ ------- -------- Total operating expenses... 7,374 26,788 17,177 23,741 33,359 57,535 6,951 12,242 16,693 ------- ------- ------- ------- ------- -------- ------ ------- -------- Income (loss) from operations...... 3,123 (11,350) 6,393 9,038 10,501 11,888 1,935 3,885 4,649 Investment income.................. 81 160 45 208 804 537 107 499 92 Interest expense................... -- (49) (105) (90) (117) (124 ) (28) (35) (35 ) Other income (expense), net........ -- 45 (17) -- -- 58 -- -- -- ------- ------- ------- ------- ------- -------- ------ ------- -------- Income (loss) before income taxes............................ 3,204 (11,194) 6,316 9,156 11,188 12,359 2,014 4,349 4,706 Income tax provision (benefit)..... 1,358 (3,536) 2,166 3,749 4,475 5,262 805 1,737 1,904 ------- ------- ------- ------- ------- -------- ------ ------- -------- Net income (loss)(4)............... $ 1,846 $(7,658) $ 4,150 $ 5,407 $ 6,713 $ 7,097 $1,209 $ 2,612 $ 2,802 ======= ======= ======= ======= ======= ========= ====== ======= ========= Net income per common and common equivalent share(5).............. $ .47 $ .55 $ .58 $ .10 $ .19 $ .20 ======= ======= ========= ====== ======= ========= Weighted average shares outstanding(5)................... 11,430 12,216 12,216 11,614 13,726 13,726 ======= ======= ========= ====== ======= ========= OTHER OPERATING DATA: Number of units at end of period: NICU............................. 6 13 18 22 37 23 47 PICU............................. 2 2 3 5 4 5 7 Other pediatric services......... -- -- 1 1 2 2 3 Number of physicians at end of period........................... 25 42 52 75 114 77 131 Number of births(6)................ 16,127 23,289 32,532 39,541 59,186 10,991 25,337 NICU admissions.................... 2,563 3,600 4,777 5,823 7,611 1,528 2,798 NICU patient days.................. N/A N/A 59,024 64,615 87,672 17,248 33,424 </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 ------------------------------------ PRO PRO FORMA ACTUAL FORMA(7) AS ADJUSTED(8) ------- --------- -------------- (IN THOUSANDS) <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents........................................................... $7,084 $7,084 $ 76,326 Working capital..................................................................... 39,717 21,267 90,509 Total assets........................................................................ 77,371 77,956 147,198 Total liabilities................................................................... 11,809 12,394 12,394 Long-term debt, including current maturities........................................ 799 799 799 Stockholders' equity................................................................ 65,562 65,562 134,804 </TABLE> (1) Gives effect to the Recent Acquisitions and the acquisition of Neonatal Pediatric Intensive Care Medical Group, Inc. ("NAPIC") as if such transactions had occurred as of January 1, 1995. See "Recent Developments" and "Unaudited Pro Forma Condensed Consolidated Information." (2) Gives effect to the Recent Acquisitions as if such transactions had occurred as of January 1, 1995. See "Recent Developments" and "Unaudited Pro Forma Condensed Consolidated Information." (3) Reflects nonrecurring payments aggregating $15.4 million to certain of the Company's physicians as bonuses for prior services and for covenants not to compete occuring at the time of the investment in the Company by Summit Ventures III, L.P. and Summit Investors II, L.P. (collectively "Summit") in 1992. (4) Immediately prior to the consummation of the IPO, the outstanding shares of redeemable cumulative convertible preferred stock (the "Convertible Preferred Stock") were converted into 4,571,063 shares of Common Stock and unpaid dividends on the Convertible Preferred Stock of approximately $3.7 million were forgiven pursuant to the terms of the Series A Preferred Stock Purchase Agreement, dated as of October 26, 1992. Upon conversion, such amounts were credited to the common stock and additional paid-in capital accounts. The net income (loss) amounts do not include accrued and unpaid dividends with respect to the Convertible Preferred Stock. (5) Such amounts represent net income per common share and common equivalent share, pro forma, to give effect to the conversion of the Convertible Preferred Stock, which was not determined to be a Common Stock equivalent, into Common Stock in connection with the IPO for 1994 and 1995. The net income per common share is computed based upon the weighted average number of shares of Common Stock and Common Stock equivalents, including the number of shares of Common Stock issuable upon conversion of the Convertible Preferred Stock, outstanding during the period. Common Stock issued by the Company during the 12 months immediately preceding the initial filing of the registration statement relating to the IPO, plus Common Stock equivalents relating to the grant of Common Stock options during the same period, have been included in the calculation of weighted average number of Common Stock equivalents outstanding for 1994 and 1995, using the treasury stock method and the IPO price of $20 per share. (6) Represents number of births at the hospitals with which the Company provided physician management services during the periods indicated. (7) Adjusted to give effect to the acquisitions consummated in the second quarter of 1996 (the "1996 Second Quarter Acquisitions") described in "Recent Developments" and "Unaudited Pro Forma Condensed Consolidated Information," as if all of these transactions occurred as of March 31, 1996. (8) Adjusted to give effect to (i) the sale of 1,500,000 shares of Common Stock offered hereby by the Company and the application of the estimated net proceeds therefrom, as described under "Use of Proceeds" and (ii) the 1996 Second Quarter Acquisitions as if all of these transactions occurred as of March 31, 1996. See "Recent Developments" and "Unaudited Pro Forma Condensed Consolidated Information."
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diff --git a/parsed_sections/prospectus_summary/1996/MSM_msc_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/MSM_msc_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..ae26f7e242f61bf6950fba66dbd4dff7f5a34cc2
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information (including the financial statements and the notes thereto) included elsewhere in this Prospectus. Each prospective investor is urged to read this Prospectus in its entirety. Unless otherwise indicated, (i) all information in this Prospectus, including all adjusted and pro forma financial information, has been adjusted to give effect to the "Reorganization" (as such term is hereinafter defined), (ii) all references to the "Company" or "MSC" are to MSC Industrial Direct Co., Inc. and, unless the context otherwise requires, its subsidiaries, and (iii) the information in this Prospectus assumes that the Underwriters' over-allotment option will not be exercised. See "The Company" and "Underwriting." All references to a fiscal year are to the Company's fiscal year which ends on the Saturday nearest August 31 of such year. References to "this Offering" are to the offering of Class A Common Stock made by this Prospectus. References to the "Initial Public Offering" are to the Company's initial public offering of Class A Common Stock in December 1995. THE COMPANY MSC is one of the largest direct marketers of a broad range of industrial products to small and mid-sized industrial customers throughout the United States. The Company distributes a full line of industrial products, such as cutting tools, abrasives, measuring instruments, machine tool accessories, safety equipment, fasteners, welding supplies and electrical supplies, intended to satisfy its customers' maintenance, repair and operations ("MRO") supplies requirements. The Company offers over 300,000 stock keeping units through its 3,560 page master catalog and weekly, monthly and quarterly specialty and promotional catalogs, newspapers and brochures, which are supported by 32 customer service locations. Most of the Company's products are carried in stock, and orders for these products are typically fulfilled on the day on which the order is received. MSC has grown rapidly due to expanded product offerings, increased catalog distribution and supplemental mailings and geographic expansion. The Company's net sales have increased at a compound annual rate of 20%, from $118.9 million in fiscal 1991 to $248.5 million in fiscal 1995. During this same period, income from operations increased at a compound annual rate of 32% from $11.6 million to $34.2 million. These growth trends have continued during fiscal 1996. For the nine months ended June 1, 1996, net sales increased by $42.5 million, or 23.3%, to $224.5 million from $182.0 million for the nine months ended May 27, 1995, and income from operations, before taking into account the relocation costs associated with the move of the Company's Long Island distribution center to Harrisburg, Pennsylvania, increased by $6.7 million, or 26.4%, to $32.0 million from $25.4 million for the nine months ended May 27, 1995. The Company also expects to realize modest future growth from three acquisitions effected during fiscal 1996. MSC's business strategy is to provide an integrated, low cost solution to the purchasing, management and administration of its customers' MRO needs. MSC has positioned itself to add value to its customers' purchases by reducing their total MRO supplies cost, taking into account both the direct cost of products and the administrative, personnel and financial cost of obtaining and maintaining MRO supplies. MSC's extensive product offerings allow customers to reduce the administrative burden of dealing with many suppliers for their MRO needs. The Company guarantees same-day shipping of products, approximately 95% of which are generally kept in stock, thereby enabling its customers to reduce their inventory investment and carrying costs. The Company reduces its customers' administrative paperwork, costs of shipping and personnel costs related to internal distribution and purchase order management. The Company's customers include a wide range of purchasers of industrial supply products, from one-man machine shops to Fortune 500 companies. The Company focuses on selling relatively higher margin, lower volume products and has an average order size of approximately $130. MSC has in excess of 125,000 active customers (companies that have purchased at least one item during the past 12 months), which are typically small and mid-size companies. MSC's customers select desired products from the Company's various publications and place their orders by telephone, facsimile or direct computer link. The Company operates primarily in the United States through a network of three regional distribution centers and 32 branch offices. The Company's existing distribution centers are located in Long Island, New York, Atlanta, Georgia and Elkhart, Indiana. The Company has commenced plans to relocate its Long Island distribution center to Harrisburg, Pennsylvania. The Harrisburg, Pennsylvania distribution center is expected to commence shipping and be fully operational in the first half of fiscal 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The strategic locations of the Company's current distribution centers allow for next day delivery via low cost ground carriers in 28 states located primarily in the eastern United States. The Company's experience has been that areas accessible by next day delivery generate significantly greater sales than areas where next day delivery is not available. Accordingly, the Company's long-term strategy is to establish additional distribution centers in the West and Southwest, supported by local branch offices, to expand the Company's geographic coverage of next day delivery throughout the continental United States. The Company was formed as a holding company in October 1995 to hold all of the outstanding capital stock of Sid Tool Co., Inc. (the "Operating Subsidiary"), which has been in business since 1941. Immediately prior to the Initial Public Offering, a total of 24,000,000 shares of Class B Common Stock were issued to the then existing shareholders of the Operating Subsidiary in exchange for all of the capital stock of the Operating Subsidiary (the "Reorganization"). The Reorganization did not have any effect on the Company's or the Operating Subsidiary's operations, financial position or outlook. See Note 14 of Notes to Financial Statements. Prior to the Reorganization, the Operating Subsidiary was treated as an S Corporation under subchapter S of the Internal Revenue Code of 1986 and applicable state tax laws. Upon the consummation of the Reorganization, the status of the Operating Subsidiary as an S Corporation terminated and the Company and the Operating Subsidiary became subject to federal and state income taxes at applicable corporate tax rates. Prior to the Initial Public Offering, the Operating Subsidiary paid a dividend (the "S Corporation Dividend") to its then existing shareholders in the aggregate amount of approximately $62 million, which amount was equal to substantially all previously taxed, undistributed S Corporation earnings. The Company's principal executive office is located at 151 Sunnyside Boulevard, Plainview, New York 11803-1592 and its telephone number is (516) 349-7100. THIS OFFERING Class A Common Stock Offered............... 5,000,000 shares Capital Stock to be Outstanding After this Offering Class A Common Stock..................... 13,311,394 shares(1) Class B Common Stock..................... 20,475,000 shares(2) Total................................ 33,786,394 shares ========== Voting Rights.............................. The Class A Common Stock, par value $.001 per share (the "Class A Common Stock"), is entitled to one vote per share and the Class B Common Stock, par value $.001 per share (the "Class B Common Stock"), is entitled to ten votes per share on all matters requiring a shareholder vote. See "Risk Factors--Control of the Company" and "Description of Capital Stock." Use of Proceeds............................ The net proceeds to the Company from this Offering of approximately $__ million will be used to reduce outstanding indebtedness under the Company's revolving credit facility (the "Credit Facility") and for general corporate and working capital purposes. The Company will not receive any of the proceeds from the sale of the shares of Class A Common Stock offered by the Selling Shareholders. See "Use of Proceeds." Risk Factors............................... Certain factors should be considered in connection with an investment in the Class A Common Stock. See "Risk Factors." NYSE Symbol................................ "MSM" - ---------- (1) Excludes 2,000,000 shares of Class A Common Stock reserved for issuance under the Company's 1995 Stock Option Plan, of which options to purchase 791,941 shares of Class A Common Stock are outstanding. See "Management--1995 Stock Option Plan." (2) The Class B Common Stock is convertible into Class A Common Stock on a one-for-one basis at the option of the holder and automatically upon transfer of such shares to persons other than existing shareholders or certain of their family members. See "Principal and Selling Shareholders." SUMMARY FINANCIAL INFORMATION (amounts in thousands, except per share data) <TABLE> <CAPTION> Fiscal Year Ended Nine Months Ended ----------------------------------------------------------- ------------------ August 31, August 29, August 28, August 27, September 2, 1991 1992 1993 1994 1995 May 27, June 1, (52 weeks) (52 weeks) (52 weeks) (52 weeks) (53 weeks) 1995 1996 ----------------------------------------------------------- ------------------ (amounts in thousands, except per share data) <S> <C> <C> <C> <C> <C> <C> <C> Income Statement Data: Net sales ....................... $118,851 $125,454 $142,287 $174,682 $248,483 $182,025 $224,527 Gross profit .................... 52,309 55,385 61,796 74,852 103,288 75,534 93,263 Operating expenses .............. 40,722 42,454 44,376 50,234 69,049 50,170 61,214 Restructuring charge ............ -- -- -- -- -- -- 8,600 Income from operations .......... 11,587 12,931 17,420 24,618 34,239 25,364 23,449 Income taxes .................... 276 323 418 813 765 612 1,947 Net income ...................... 8,355 10,458 15,682 22,573 31,698 23,432 21,246 Pro forma net income(1) ......... 5,222 6,523 9,740 14,149 18,235 14,547 14,033(3) Pro forma net income per share(2) $ 0.57 $ 0.46 $ 0.44(3) ======== ======== ======== Pro forma number of shares outstanding(2) .................. 31,787 31,787 31,787 ======== ======== ======== Selected Operating Data(4): Active customers ................ 65 75 78 98 120 -- 125 Number of SKUs .................. 125 140 150 170 231 -- 302 Orders entered .................. N/A 967 1,103 1,348 1,833 -- 1,560 Number of publication titles (not in thousands) ................... N/A 12 13 20 38 -- 61 Number of publications mailed ... N/A 2,447 2,688 4,794 6,604 -- 5,167 Revenues per employee ........... $ 185 $ 189 $ 201 $ 214 $ 249 -- $ 262 </TABLE> <TABLE> <CAPTION> September 2, 1995 June 1, 1996 ----------- ------------------------ Actual As Adjusted(5) ------ -------------- <S> <C> <C> <C> Balance Sheet Data: Working capital ...................... $ 81,228 $143,735 $ Total assets ......................... 139,032 219,565 Short-term debt ...................... 9,208 51 Long-term debt, net of current portion 30,969 14,057 Shareholders' equity ................. 72,088 165,105 </TABLE> - ---------- (1) Gives pro forma effect to "C" corporation taxation at an assumed annual rate of 39.5%, to the elimination of $677 of pretax officer's compensation for fiscal 1995, and, for fiscal 1995, to a $3,000 adjustment for deferred compensation expense, which will be recorded ratably over a five year vesting period, attributable to the granting of restricted stock to certain key employees. Assuming $600 of such ongoing annual deferred compensation expense, pro forma net income in fiscal 1995 would have been $19,687 and pro forma net income per share would have been $0.62. See Note 14 of Notes to Financial Statements. (2) Pro forma net income per share is calculated by dividing pro forma net income by pro forma shares outstanding, which gives effect to (i) 23,475,000 shares of Class B Common Stock, (ii) 8,050,000 shares of Class A Common Stock sold in the Initial Public Offering, (iii) 156,657 shares of Class A Common Stock issued prior to the Initial Public Offering to certain of the Company's employees pursuant to the Company's 1995 Restricted Stock Plan and (iv) 105,263 shares of Class A Common Stock issued prior to the Initial Public Offering to shareholders of an affiliated corporation acquired by MSC. (3) Excluding the tax-effected impact of the restructuring charge of $8,600 in the nine month period ended June 1, 1996, pro forma net income for that period would have been $19,233, or $0.61 per share. (4) See "Management's Discussion and Analysis of Financial Condition and Results of Operations--General."
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diff --git a/parsed_sections/prospectus_summary/1996/NBIX_neurocrine_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/NBIX_neurocrine_prospectus_summary.txt
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+SUMMARY This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and Financial Statements and Notes thereto, appearing elsewhere in this Prospectus. THE COMPANY Neurocrine Biosciences, Inc. is a leading neuroimmunology company focused on the discovery and development of novel therapeutics to treat diseases and disorders of the central nervous and immune systems. The Company's neuroscience and immunology disciplines provide a unique biological understanding of the molecular interactions between the central nervous, immune and endocrine systems leading to therapeutic opportunities for diseases and disorders such as anxiety, depression, Alzheimer's disease, obesity and multiple sclerosis. Neurocrine is leveraging its resources through strategic alliances and novel financing mechanisms to build its internal product development and commercialization capabilities. To date, Neurocrine has entered into strategic alliances with Janssen Pharmaceutica, N.V. ("Janssen"), a subsidiary of Johnson & Johnson, focused on the treatment of anxiety, depression and substance abuse, and Ciba-Geigy Limited ("Ciba-Geigy") for the treatment of multiple sclerosis. In conjunction with a number of institutional investors, the Company has also established a research and development subsidiary in Canada, Neuroscience Pharma (NPI) Inc. ("NPI"), to develop additional compounds for the treatment of Alzheimer's disease and other neurodegenerative diseases and disorders. The Company employs advanced technologies, including high-throughput screening, combinatorial chemistry, molecular biology, gene sequencing and bioinformatics, to discover and design novel small molecule therapeutics. Neurocrine has utilized these technologies to advance its four research and development programs: Corticotropin Releasing Factor ("CRF"). CRF is the central regulator of the body's overall response to stress and functions as both an endocrine factor and a neurotransmitter. In conjunction with Janssen, the Company is developing compounds to block the effects of over-production of CRF, potentially offering new therapies for disorders such as anxiety, depression and substance abuse. Neurocrine is independently developing related compounds for the treatment of stroke. The Company is also developing compounds to block a protein in the brain that binds to CRF and holds it in an inactive state. These compounds may provide a novel therapeutic approach for diseases that are associated with decreased levels of CRF, such as Alzheimer's disease and obesity. Altered Peptide Ligands. In autoimmune diseases, certain T-cells inappropriately recognize the body's own tissues as foreign and attack healthy cells. Peptide ligands are naturally occurring molecules which can be altered to bind to disease-causing T-cells to inhibit their destructive capabilities. In conjunction with Ciba-Geigy, the Company is conducting preclinical testing of its altered peptide ligand drug candidate for the treatment of multiple sclerosis. Neurocrine is also independently developing compounds to treat diabetes. Neurosteroids. Neurosteroids are a class of steroidal compounds produced in the central nervous system that show a wide range of effects on neurons, including the potential to enhance memory. A physician-sponsored clinical trial is being conducted to test a naturally-occurring human steroid that may have memory enhancing properties in patients suffering from Alzheimer's disease. Neurogenomics. The immune system of the brain plays a role in neurological diseases and disorders. Neurocrine scientists are identifying novel genes in the brain which are involved in neurodegeneration. To date, approximately 2,000 novel genes have been identified and are undergoing evaluation as drug targets or as potential diagnostics and therapeutics for diseases and disorders such as Alzheimer's disease, stroke, multiple sclerosis, Parkinson's disease, epilepsy and AIDS dementia. The Company has retained certain marketing or co-promotion rights in North America to its products under development and plans to establish a North American sales and marketing organization focused on neurologists and certain other disease specialists. The Company intends to concentrate its resources on research and development activities by outsourcing its requirements for manufacturing, preclinical studies, and clinical research monitoring activities. The Company's offices are located at 3050 Science Park Road, San Diego, CA 92121, and its telephone number is (619) 658-7600. The Company was originally incorporated in the State of California in January 1992 and was reincorporated in the State of Delaware in May 1996. THE OFFERING <TABLE> <S> <C> Common Stock Offered by the 3,000,000 shares Company........................... Common Stock Outstanding After the 16,201,596 shares (1) Offering.......................... Use of Proceeds................... Research and development, capital expenditures, the acquisition of technology rights and general corporate purposes, including working capital. See "Use of Proceeds." Proposed Nasdaq National Market NBIX Symbol............................ </TABLE> SUMMARY FINANCIAL DATA (in thousands, except per share data) <TABLE> <CAPTION> THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ------------------------- --------------- 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues under collaborative re- search agreements: Sponsored research.............. $ -- $ -- $ 3,750 $ 625 $ 1,625 License fees.................... -- -- 2,000 2,000 -- Other revenues.................... -- 162 356 127 534 ------- ------- ------- ------- ------- Total revenues................ -- 162 6,106 2,752 2,159 Operating expenses: Research and development........ 2,804 6,231 7,740 1,848 1,794 General and administrative...... 1,550 2,223 2,728 737 571 ------- ------- ------- ------- ------- Total operating expenses...... 4,354 8,454 10,468 2,585 2,365 ------- ------- ------- ------- ------- Income (loss) from operations..... (4,354) (8,292) (4,362) 167 (206) Interest income, net.............. 118 627 839 220 187 Other income (expense)............ -- (41) 177 27 44 ------- ------- ------- ------- ------- Net income (loss)................. $(4,236) $(7,706) $(3,346) $ 414 $ 25 ======= ======= ======= ======= ======= Net income (loss) per share....... $ (0.64) $ (0.67) $ (0.27) $ 0.03 $ -- ======= ======= ======= ======= ======= Shares used in computing net in- come (loss) per share (2)........ 6,635 11,433 12,184 12,409 13,240 </TABLE> <TABLE> <CAPTION> MARCH 31, 1996 ------------------------- ACTUAL AS ADJUSTED (3) -------- --------------- <S> <C> <C> BALANCE SHEET DATA: Cash, cash equivalents and short-term investments (4)................................................ $ 20,562 $ 52,372 Total assets........................................ 28,080 59,890 Accumulated deficit................................. (15,871) (15,871) Total stockholders' equity.......................... 24,220 56,030 </TABLE> - -------- (1) Based on the number of shares outstanding at March 31, 1996. Includes the sale of 833,334 shares of Common Stock to Ciba-Geigy and JJDC at a price equal to the assumed initial public offering price per share. Excludes 3,618,638 shares of Common Stock issuable upon exercise of options and warrants outstanding as of March 31, 1996 at a weighted average exercise price of $5.74 per share. See "Business -- Strategic Alliances," "Management -- Stock Plans" and "Description of Capital Stock -- Warrants." (2) See Note 1 of Notes to Financial Statements for an explanation of the determination of the number of shares used to compute net income (loss) per share. (3) Adjusted to reflect the sale of 3,000,000 shares of Common Stock offered hereby at an assumed initial public offering price of $9.00 per share and 833,334 shares of Common Stock to Ciba-Geigy and JJDC at a price equal to the assumed initial public offering price per share, and the application of the estimated net proceeds therefrom. See "Use of Proceeds," "Business -- Strategic Alliances" and "Underwriting." (4) Excludes approximately $9.5 million held by NPI which is available to fund certain of the Company's research and development activities. See "Business -- Strategic Alliances."
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diff --git a/parsed_sections/prospectus_summary/1996/NOV_nov-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/NOV_nov-inc_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..1a3b0d65e86264b3b19bc79929411647fe3a6711
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus assumes (i) exercise of the Warrant to purchase 282,392 shares of Common Stock and, assuming an initial public offering price of $16.00 per share, (ii) all outstanding shares of the Company's Class A Common Stock are converted into 2,021,452 shares of Common Stock on the effective date of the Registration Statement of which this Prospectus is a part and (iii) 343,986 shares of Common Stock to be issued in connection with the Company's Value Appreciation Plans are issued and outstanding. Prospective purchasers of the Common Stock should carefully read this entire Prospectus and should consider, among other things, the matters set forth under "Risk Factors." Unless otherwise indicated, all information relating to the Company contained in this Prospectus assumes the over-allotment option described under "Underwriting" is not exercised. Certain capitalized terms which are used but not defined in this summary are defined elsewhere in this Prospectus. THE COMPANY National-Oilwell, Inc. (the "Company") is a worldwide leader in the design, manufacture and sale of machinery and equipment and in the distribution of maintenance, repair and operating ("MRO") products used in oil and gas drilling and production. The Company designs, manufactures and sells drawworks, mud pumps and power swivels (also known as "top drives"), which are the major mechanical components of rigs used to drill oil and gas wells. Many of these components are designed specifically for applications in offshore, extended reach and deep land drilling. These components are installed on new drilling rigs and used in the upgrade, refurbishment and repair of existing drilling rigs. A significant portion of the Company's business includes the sale of replacement parts for its own manufactured machinery and equipment. The Company estimates that approximately 65% of the mobile offshore rig fleet and the majority of the world's larger land rigs (2,000 horsepower and greater) manufactured in the last twenty years utilize certain drilling machinery components manufactured by the Company. In addition, the Company manufactures and sells a complete line of centrifugal and reciprocating pumps used in oilfield and industrial applications. The Company provides distribution services through its network of 121 distribution service centers located near major drilling and production activity worldwide, but principally in the United States and Canada. These distribution service centers have historically provided MRO products, including valves, fittings, flanges, replacement parts and miscellaneous expendable items. As oil and gas companies and drilling contractors have refocused on their core competencies and emphasized efficiency initiatives to reduce costs and capital requirements, the Company's distribution services have evolved to offer outsourcing and alliance arrangements that include comprehensive procurement, inventory management and logistics support. These arrangements have resulted in the Company working more closely with its customers in return for a more exclusive oilfield distribution arrangement. The Company's business is dependent on and affected by the level of worldwide oil and gas drilling and production activity, the aging worldwide rig fleet which was generally constructed prior to 1982, and the profitability and cash flow of oil and gas companies and drilling contractors. Drilling activity has recently increased in the offshore and deeper land markets both of which are particularly well served by the drilling machinery and equipment manufactured by the Company. As of June 30, 1996, the worldwide offshore mobile drilling rig utilization rate was over 90% and the number of active U.S. land rigs had increased approximately 15% compared to June 30, 1995. As drilling activity has increased, the Company has experienced increased demand for its manufactured products and distribution services as existing rigs are upgraded, refurbished and repaired, new rigs are constructed and expendable parts are used. The Company's oilfield equipment business and distribution services business accounted for 56% and 44%, respectively, of the combined earnings before interest, taxes, depreciation and amortization ("EBITDA") for the six months ended June 30, 1996. BUSINESS STRATEGY Beginning in 1993, a new executive and operating team was assembled to manage the Company's business. In January 1996, that new management team, together with an investor group led by The Inverness Group Incorporated and First Reserve Corporation, purchased the business of the Company from its former owners, USX Corporation and Armco Inc. Since 1993, the business strategy of the Company has been to enhance its operating performance and build a platform for growth by focusing on markets in which its product lines are market leaders and which are believed by management to provide the most significant growth potential. As part of that strategy, the Company disposed of certain of its non-core equipment manufacturing businesses and product lines and reengineered its distribution business during the years 1993 through 1995. See "The Company." The completion of the redirection of the Company's business in 1995, combined with the increase in the level of worldwide oil and gas drilling activity, has resulted in a substantial improvement in the Company's performance, with EBITDA before special items increasing from $6.2 million for the six months ended June 30, 1995 to $15.3 million for the six months ended June 30, 1996. See "The Company." The Company's current business strategy is to enhance its leading market positions and operating performance by: Leveraging Its Market Leading Installed Base. The Company estimates that approximately 65% of the mobile offshore drilling rigs and the majority of the world's larger land drilling rigs operating today use certain drilling machinery components manufactured by the Company. The Company believes this market-leading installed base presents substantial opportunities to capture a significant portion of the increased level of expenditures by its customers for the construction of new drilling rigs as well as the upgrade and refurbishment of existing drilling rigs. Capitalizing on Increasing Demand for Higher Horsepower Drilling Machinery. The Company believes the advanced age of the existing fleet of drilling rigs, coupled with increasing drilling activity involving greater water depths and extended reach, will increase the demand for new drilling rig construction and the upgrading and capacity enhancement of existing rigs. The Company's higher horsepower drawworks, mud pumps and power swivels provide, in many cases, the largest capacities currently available in the industry. Building on Distribution Strengths. The Company has developed and implemented integrated information and process systems that are designed for more effective procurement, inventory management and logistics activities. A critical element of the Company's strategy has been to regionally centralize its procurement, inventory and logistics operations, thus gaining cost and inventory utilization efficiencies while retaining its responsiveness to local markets. In addition, the strategic integration of the Company's distribution expertise, extensive distribution network and growing base of customer alliances provides an increased opportunity for cost effective marketing of the Company's manufactured equipment. Capitalizing on Alliance/Outsourcing Trends. As a result of efficiency initiatives, oil and gas companies and drilling contractors are frequently seeking alliances with suppliers, manufacturers and service providers, or outsourcing their procurement, inventory management and logistics requirements for equipment and supplies in order to achieve cost and capital improvements. The Company has entered into and is seeking alliance arrangements to better serve its customers, to better manage its own inventory, to increase the volume and scope of products sold to the customer without significantly increasing the Company's overhead costs, and to expand marketing opportunities to sell equipment manufactured by the Company. The Company believes that it is well positioned to provide broad procurement, inventory management and other services as a result of the Company's (i) large and geographically diverse network of distribution service centers in major oil and gas producing areas, (ii) purchasing leverage due to the volume of products sold, (iii) breadth of available product lines and (iv) information systems that offer customers enhanced online and onsite services. THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Company.......... 4,000,000 shares Common Stock to be Outstanding After the Offering................................... 17,712,378 shares(1) Use of Proceeds.............................. To repay certain outstanding indebtedness, essentially all of which was incurred to fund the acquisition of the Company, and for other general corporate purposes. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/NWPX_nwpx_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/NWPX_nwpx_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..27c2f752a92ad5c9f91201b84f9656fc9808fddb
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the financial statements and notes thereto appearing elsewhere in this Prospectus. Except as otherwise noted herein, all information in this Prospectus assumes that the Underwriters' over-allotment option is not exercised. Well-Life and Flame-Out are trademarks of the Company. Unless otherwise indicated, all references in this Prospectus to the Company are to Northwest Pipe Company and its subsidiaries, collectively. The principal executive offices of the Company are located at 12005 N. Burgard, Portland, Oregon 97283, and the Company's telephone number is (503) 285-1400. THE COMPANY Northwest Pipe Company manufactures and markets welded steel pipe in two business segments. In its water transmission business segment, the Company is a leading supplier in the United States and Canada of large diameter, high pressure steel pipe used primarily for water transmission (the "Water Transmission" business). In its tubular products business segment, the Company manufactures smaller diameter, electric resistance welded ("ERW") steel pipe for use in a wide range of construction, agricultural and industrial applications (the "Tubular Products" business). In 1995, Water Transmission and Tubular Products revenues represented approximately 63% and 37% of the Company's net sales, respectively. Headquartered in Portland, Oregon, the Company operates four manufacturing facilities. Water Transmission products are manufactured in Portland, Oregon, Denver, Colorado and Adelanto, California (near Los Angeles), and Tubular Products are manufactured in Portland, Oregon and Atchison, Kansas. From 1990 through 1995, the Company's annual net sales increased from $34.5 million to $97.7 million, while annual operating income increased from $1.0 million to $11.8 million. For the nine months ended September 30, 1996, net sales increased 42.4% to $102.4 million from $71.9 million for the same period in 1995, and operating income increased 82.6% to $15.0 million from $8.2 million for the same period in 1995. WATER TRANSMISSION Demand for water transmission products is driven primarily by projected population growth and movement, establishment of new water sources and replacement of aging waterworks infrastructure. The construction of new or expanded water systems is critical to attracting and supporting both population and economic growth. In addition, many existing water infrastructure systems must be repaired or replaced to satisfy current and expanding water needs. The Company believes it is strategically positioned to capitalize on growing water infrastructure requirements. With facilities located in Portland, Oregon and Adelanto, California, the Company has historically served the western United States and southwestern Canada. The recent acquisition of Thompson Pipe and Steel Company ("Thompson Pipe and Steel"), located in Denver, Colorado, has expanded the Company's effective market reach throughout the midwest and central United States. The Company is now a major supplier of large diameter, high pressure steel pipe in the United States and is actively seeking other opportunities to expand its presence in both domestic and international water infrastructure markets. The Company has identified several factors that contribute to the success of its Water Transmission business segment: - Active Markets. Demand for the Company's Water Transmission products continues to be strong as public agencies within the Company's market areas address their water transmission requirements. At September 30, 1996, the Company had identified more than 500 projects within its market areas scheduled to be bid through 1999. The Company estimates these projects include water transmission pipe with a value of approximately $2.0 billion. No assurance can be given that these projects will be let for bid, awarded to the Company or built as scheduled. - Key Locations and Manufacturing Capabilities. The Company's strategically located manufacturing facilities enable the Company to address the demand for steel water transmission pipe in most of the United States and Canada. The Company's manufacturing capabilities allow it to meet a broad range of contract specifications including different pipe diameters and thicknesses, various coating and lining materials, and a variety of specialty fabrications. - Substantial Share of Projects Bid. The dollar value of projects awarded to the Company as a percentage of the value of projects bid by the Company has increased as illustrated below: <TABLE> <CAPTION> PERIOD PERCENTAGE ---------------------------------------------------------- ---------- <S> <C> 1993...................................................... 27.7% 1994...................................................... 30.3% 1995...................................................... 35.0% Nine Months Ended September 30, 1996...................... 35.0% </TABLE> Management believes this increase is the result of the Company's emphasis on marketing activities, its focus on developing strong relationships with contractors, public works agencies and engineering firms and its increased experience in the southern California market. The rate for the first nine months of 1996 is not necessarily indicative of the rate that will be obtained for the full twelve months of 1996. In general, the Company does not expect substantial further improvement of its market share in its historical market areas. However, the Company believes its recent acquisition of Thompson Pipe and Steel provides opportunities to increase the Company's penetration of market areas east of the Rocky Mountains. TUBULAR PRODUCTS The Company's Tubular Products range in size from 4" to 16" in diameter and are marketed through a network of direct sales force personnel and independent distributors in the United States and Canada. The Company has historically focused on niche markets that typically generate strong margins due to limited competition. The tubular products industry, however, serves very large markets with products that generally have wall thicknesses greater than those that the Company has traditionally manufactured. The Company is currently expanding its business into these higher volume segments of the tubular products industry by building on its key strengths of location, established distribution channels and manufacturing expertise. The Company has identified several factors that contribute to the success of its Tubular Products business segment: - Well Positioned in Niche Markets. The Company has historically manufactured and continues to produce pipe products with light wall thicknesses in relation to diameters. These products are sold in niche markets with limited competition and typically generate high margins. The Company believes it is well positioned to maintain its competitive position. - Expanding Product Lines. The Company has adopted a strategy of expanding its product lines to better utilize the available capacity in each of its facilities. While the Company's new products generally produce lower margins than the Company's niche products, the increased volume contributes to the Company's profitability. - Diversified Demand. The Tubular Products business segment benefits from a customer base that extends across numerous industries. Demand for the Company's three primary Tubular Product groups are determined by different economic factors. The demand for products used in fire protection sprinkler systems is affected by non-residential construction activity, the demand for products used in irrigation and other agricultural applications is related to the farm economy and the demand for industrial products is determined by the overall economy. This diversification helps mitigate the Company's exposure to specific industry or general business cycles. ACQUISITIONS AND EXPANSION The Company believes there are opportunities to acquire companies in similar or related businesses and to expand its product lines. The Company believes such acquisitions and expansions will enable it to leverage its manufacturing, marketing and distribution capabilities. The Company's ability to pursue acquisitions and to expand its product lines will be enhanced by the reduction in debt and increased debt capacity resulting from this offering. Consistent with this strategy, the Company recently acquired Thompson Pipe and Steel and recently acquired and plans to install a new Tubular Products production line in its Portland, Oregon facility. In addition, the Company has from time to time evaluated and continues to evaluate other opportunities for acquisition and expansion and, consistent with this practice, the Company is currently engaged in preliminary discussions with other parties regarding possible acquisitions. Acquisitions. On May 31, 1996, the Company acquired Thompson Pipe and Steel, a manufacturer of steel water transmission pipe headquartered in Denver, Colorado for approximately $5.2 million. The Company believes this acquisition is a strong strategic fit that broadens its current geographic market for Water Transmission pipe into the midwest and central United States. The acquisition also provides additional manufacturing capacity that could be applied to projects in the Company's western markets. Thompson Pipe and Steel has operated in Denver since 1878. In 1990, Thompson Pipe and Steel added a manufacturing facility in Princeton, Kentucky. This facility was unprofitable and was closed in August, 1995. At the time of the closure of the Kentucky facility, Thompson Pipe and Steel had significant outstanding customer delivery commitments on projects in process. The completion of these projects out of its Denver facility caused continued and significant losses resulting from high manufacturing costs, increased freight expenses, and back charges related to late delivery and quality issues. As a result, Thompson Pipe and Steel lost $8.3 million in 1995 and $6.6 million through May 31, 1996. The Company's management does not believe that the closure of the Kentucky facility will have any continuing material adverse impact on the Company's future operations. Since acquiring Thompson Pipe and Steel, the Company has replaced the senior management team with its own personnel. Additionally, the Company has already eliminated several salaried positions, effectively reducing compensation expenses by approximately $1.5 million per year. Thompson Pipe and Steel had net sales of $37.6 million in 1995, approximately $25.3 million of which were attributable to the Denver facility. The Company will continue to operate the Denver plant but intends to sell the Kentucky facility. Product Line Expansion. The Company recently acquired and plans to install a new Tubular Products production line in its Portland, Oregon facility. The installed cost is expected to be approximately $10.0 million. See "Use of Proceeds". This new line will enable the Company to compete in new markets by making smaller diameter and heavier wall products than it has previously manufactured. These products will be targeted for use in industrial piping, oil and gas transmission, fire protection systems and other applications. While this new production line will focus on what are traditionally viewed as "commodity" products, the Company believes it will have significant competitive advantages in serving customers in the northwestern United States, including the following: - Geographic niche. The Company has a competitive advantage in customer service capability and freight costs because there are no other manufacturers of these products in the northwestern United States. - Existing customer base. The Company expects that many of the products it intends to manufacture will be sold to current customers through existing distribution channels. Consequently, the Company believes that it can readily increase sales volume without significantly increasing selling costs. - Reduced cost of entry. The Company has acquired existing equipment as the cornerstone of this new production line. Additionally, installing this line in its Portland facility enables the Company to take advantage of its trained work force, manufacturing expertise and support equipment. As a result, the Company estimates it can be in production in approximately one-half the time and at less than one-half the cost compared to the time and cost required to design and construct a new facility. - New raw material source. The Company currently purchases steel coil from sources which are a substantial distance from its Portland facility. Consequently, in bound freight is a significant cost. Oregon Steel Mills is in the process of adding steel coil manufacturing capabilities to its facility located approximately one mile from the Company's Portland facility. If Oregon Steel Mills completes this capital expansion and can supply the Company with steel coil at a competitive price, the Company expects a sizeable reduction in its in-bound freight costs. No assurance can be given that Oregon Steel Mills will complete its expansion or be able to supply steel coil to the Company. ENVIRONMENTAL DEVELOPMENTS The Company has entered into an agreement in principle with the United States Environmental Protection Agency and the Oregon Department of Environmental Quality with respect to a proposed settlement of litigation relating to the Company's potential liability for the costs of response actions at a Superfund site in Clackamas, Oregon on which the Company operated prior to its Chapter 11 bankruptcy in 1986. See "Risk Factors -- Superfund Site" and "Business -- Environmental Matters." THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company.................. 1,000,000 shares Common Stock offered by the Selling Shareholders..... 1,100,000 shares Common Stock to be outstanding after the offering.... 6,294,889 shares(1) Use of Proceeds...................................... To finance the acquisition and installation of a Tubular Products production line in the Company's Portland, Oregon facility, to repay certain indebtedness and for general corporate purposes. See "Use of Proceeds." Nasdaq National Market System symbol................. NWPX </TABLE> - --------------- (1) Does not include 301,309 shares of Common Stock issuable upon the exercise of stock options outstanding as of September 30, 1996, of which options to purchase 199,077 shares were exercisable on that date. SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, --------------------------------------------------- ------------------- 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- ------- -------- (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales......................... $62,098 $65,967 $54,437 $73,641 $97,715 $71,927 $102,449 Gross profit...................... 7,338 9,936 6,529 11,980 19,576 13,644 23,235 Operating income.................. 3,311 5,141 1,160 6,261 11,778 8,217 15,006 Income (loss) before income taxes........................... 680 2,716 (907) 3,453 8,330 5,591 13,409 Net income(1)..................... 408 1,662 263 2,161 5,107 3,492 8,046 Net income per share.............. $ 1.43 $ 1.03 $ 1.45 Weighted average shares used in net income per share............ 3,695 3,551 5,537 SUPPLEMENTAL PER SHARE DATA: Supplemental net income per share(2)........................ $ 1.00 $ 0.71 $ 1.28 Weighted average shares used in supplemental net income per share(2)........................ 6,489 6,416 6,527 OTHER DATA: Depreciation and amortization..... $ 1,663 $ 1,620 $ 1,170 $ 1,302 $ 1,362 $ 982 $ 1,372 Capital expenditures.............. 2,592 1,196 4,217 1,667 2,556 1,591 3,410 Backlog(3)........................ 30,106 17,266 13,027 45,698 41,689 44,009 45,913 Gross profit percentage........... 11.8% 15.1% 12.0% 16.3% 20.0% 19.0% 22.7% </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1996 -------------------------- AS ACTUAL ADJUSTED(4) -------- ----------- <S> <C> <C> BALANCE SHEET DATA: Working capital................................................... $ 22,463 $ 32,463 Total assets...................................................... 102,328 112,328 Short-term debt (including current portion of long-term obligations)................................................... 27,760 27,760 Long-term obligations, less current portion(5).................... 14,536 9,385 Stockholders' equity.............................................. 41,812 56,963 </TABLE> - --------------- (1) Net income for the year ended December 31, 1993 includes a $837,000 benefit reflecting the cumulative effect of a change in method of accounting for income taxes. See Note 14 of Notes to the Consolidated Financial Statements of the Company. (2) Supplemental net income per share and weighted average shares outstanding give effect as of the beginning of each period presented to (i) the Company's initial public offering in November, 1995, and (ii) the sale of 1,000,000 shares of Common Stock offered by the Company hereby and the application of the net proceeds therefrom at an assumed public offering price of $16.50 per share. (3) Figures given are as of the last day of the period indicated. The Company includes confirmed orders in backlog, including the balance of projects in process. The Company also includes projects for which the Company has been notified it is the successful bidder even though a binding agreement has not been executed. Projects for which a binding contract has not been executed could be canceled. Binding orders received by the Company may also be subject to cancellation or postponement, however cancellation would generally obligate the customer to pay the costs incurred by the Company. Backlog orders as of any particular date may not be indicative of actual operating results for any fiscal period. There can be no assurance that any amount of backlog ultimately will be realized. (4) Adjusted to give effect to the sale of 1,000,000 shares of Common Stock offered by the Company hereby at an assumed public offering price of $16.50 per share and the application of the net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1996/OPCH_option_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/OPCH_option_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..fe99f03d9d99c8e8e2768cb6f9067d52638ae080
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and consolidated financial statements, including the notes thereto, appearing elsewhere in this Prospectus. All references to the Company refer to MIM Corporation and its subsidiaries and predecessors (the "Company"). Unless otherwise indicated, the information in this Prospectus (i) assumes that the Underwriters' over-allotment option will not be exercised, (ii) assumes an initial public offering price per share of $15.00 and (iii) gives effect to the reorganization of the Company and its affiliates in May 1996. See "Certain Transactions--The Formation." All references herein to industry financial and statistical information are based on trade articles and industry reports that the Company believes to be reliable, although there can be no assurance to that effect. Investors should consider carefully the information set forth under the heading "Risk Factors." THE COMPANY MIM Corporation is a pharmacy management organization that provides a broad range of services designed to promote the cost-effective delivery of pharmacy benefits. The Company targets organizations involved in three key segments of the pharmaceutical health care industry--sponsors of public and private health plans (such as HMOs and other managed care organizations), retail pharmacies and pharmaceutical manufacturers--and offers services that provide financial benefits to each of them. The Company works with plan sponsors and local health care professionals to design, implement and manage innovative programs to control pharmacy benefit costs, primarily through financial risk sharing arrangements and increased substitution of lower-cost generic drugs for brand name drugs. Participating retail pharmacies receive management and support services, as well as financial incentives to purchase and dispense preferred generic drugs. Finally, the Company offers manufacturers of generic drugs the potential to increase their market share in regions covered by participating pharmacies as a result of the increase in generic drug utilization encouraged by the Company's programs. The Company has derived virtually all of its revenues to date from operations in the State of Tennessee under the TennCare Medicaid waiver program for formerly Medicaid-eligible, and certain uninsured and uninsurable, Tennessee residents. These revenues have been derived pursuant to a contract with RxCare of Tennessee, Inc. ("RxCare"), a professional services administrative organization owned by the Tennessee Pharmacists Association and representing approximately 1,200 retail pharmacies in Tennessee. At June 30, 1996, the Company provided pharmacy benefit management services, such as formulary design and compliance, drug usage evaluation, claims processing and disease management, to 19 health plan sponsors with an aggregate of approximately 1.1 million plan members. Substantially all of such members participate in six of such health plans, representing approximately 88% of the eligible participants in the TennCare program. During 1995, approximately 90% of the Company's $214 million in revenues was derived from contracts under which the Company was paid on a capitated basis (that is, on the basis of a fixed monthly fee per plan member). Since program inception in January 1994, the generic utilization rate as a percentage of all covered prescriptions under the Company's pharmacy benefit management programs has averaged 67%, compared to an estimated industry average of approximately 40% during 1994. The retail pharmaceutical market has grown in recent years, with over two billion prescriptions filled and estimated sales of approximately $77 billion in 1995. Approximately 42% of retail prescriptions during 1994 were paid by plan sponsors, with over 50 million people in the United States belonging to managed care organizations at the end of 1994. Industry sources estimate that by the year 2000 approximately 80 million people in the United States are expected to belong to managed care organizations and that such organizations are expected to be responsible for approximately 77% of all retail prescriptions. Managed care organizations and other plan sponsors have increasingly turned to pharmacy benefit managers to help administer and control the cost of the pharmacy benefit component of their overall benefit programs. The Company believes that a key element in successfully controlling pharmacy benefit costs is generic substitution. Sales of generic drugs at retail, which typically sell at a 30% to 70% discount to brand name drug equivalents, were approximately $6.3 billion in 1994. However, there were approximately $28 billion of off-patent brand name drug sales at retail during 1994 for which a generic equivalent was available. In addition, brand name drugs with estimated sales at retail of approximately $23 billion are scheduled to go off-patent from 1996 through 2006. The Company has developed the following strategy that it believes will allow it to capitalize upon these industry trends: Establish MIM as a National Pharmacy Benefit Manager. The Company has begun to market its pharmacy benefit management services to sponsors of public and private health plans outside of Tennessee on a capitated or cost savings sharing basis, thereby transferring from the plan sponsor to the Company all or some of the risk of controlling overall pharmacy benefit costs. Building upon the experience it has gained from managing capitated TennCare pharmacy benefit programs, the Company has begun to offer its innovative financial risk sharing programs to plan sponsors in similar highly price-competitive and emerging capitated markets, while also continuing to offer traditional fee-for-service programs. In addition, the Company will further develop its information systems to provide plan sponsors with real-time access to pharmacy and financial data. Strengthen Pharmacy Relationships. The Company believes that local pharmacists play a critical role in providing high quality cost-effective care, including the point-of-sale substitution of generic drugs when appropriate. The Company intends to increase pharmacy participation in its programs by continuing to offer financial incentives and discount drug purchasing services, as well as a broad range of pharmacy support programs for local retail pharmacists. Market Preferred Generics. The Company is currently marketing and promoting certain generic drugs of Zenith Goldline Pharmaceuticals, Inc. ("Zenith Goldline") in the State of Tennessee under the Company's preferred generics program. In general, the Company's preferred generics program encourages pharmacies to stock a particular manufacturer's generic drugs ("preferred generics") in lieu of brand name or other generic drugs in the same therapeutic class by arranging for discounts on the purchase of preferred generics by pharmacies. Under Company-managed pharmacy benefit programs, the Company also provides financial incentives to pharmacies to sell preferred generics. These arrangements and incentives are designed to encourage participating pharmacies to dispense and sell preferred generics to all of their customers, including those not covered by Company-managed pharmacy benefit plans. The Company intends to expand its preferred generics program with Zenith Goldline to other geographic areas and is negotiating similar arrangements with other generic drug manufacturers. The Company also plans, subject to economic and other conditions, to distribute generic and over-the-counter drugs under its own private label. Certain agreements may restrict the Company's ability to compete in certain areas of the Company's preferred generics business, its planned drug distribution business and certain other business areas. See "Business-- Preferred Generics" and "Certain Transactions--Relationship of Certain Executive Officers with Zenith and Zenith Goldline." ---------------- MIM Corporation was incorporated in Delaware in March 1996 for the purpose of combining the businesses and operations of Pro-Mark Holdings, Inc. and MIM Strategic Marketing, LLC. For a description of the transactions involved in connection therewith (the "Formation"), see "Certain Transactions--The Formation" and Note 1 to the consolidated financial statements included herein. The Company's principal executive offices are located at One Blue Hill Plaza, Pearl River, New York 10965, and its telephone number is (914) 735-3555. THE OFFERING Common Stock Offered by the Company........................ 4,000,000 shares(1) Common Stock to be Outstanding after the Offering............. 12,027,100 shares(1)(2) Use of Proceeds................. The Company intends to use the net proceeds from the Offering to expand the Company's preferred generics business, to fund addi- tional pharmacy benefit management programs, to enhance its management information system capabilities and for general corporate pur- poses, including working capital. See "Use of Proceeds." Proposed Nasdaq National Market Symbol......................... MIMS - -------- (1) Assumes no exercise of the Underwriters' over-allotment option. (2) Excludes 3,931,520 shares of Common Stock issuable upon exercise of outstanding options under the Company's stock option plans at July 31, 1996 at a weighted average exercise price of approximately $3.49 per share. SUMMARY CONSOLIDATED FINANCIAL DATA (In thousands, except for per share amounts) <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------ ----------------- 1994 1995 1995 1996 ----------- ----------- ------- -------- (unaudited) <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA Revenue.......................... $ 109,326 $ 213,929 $71,330 $135,320 Cost of revenue.................. 106,717 213,398 70,684 130,218 ----------- ----------- ------- -------- Gross profit................... 2,609 531 646 5,102 General and administrative expenses........................ 5,256 8,048 3,450 4,627 Executive stock option compensation expense(1)......... -- -- -- 26,640 ----------- ----------- ------- -------- Loss from operations........... (2,647) (7,517) (2,804) (26,165) Interest income, net............. 191 745 229 275 ----------- ----------- ------- -------- Loss before minority interest.. (2,456) (6,772) (2,575) (25,890) Less: minority interest ......... -- -- -- 6 ----------- ----------- ------- -------- Net loss......................... $ (2,456) $ (6,772) $(2,575) $(25,896) =========== =========== ======= ======== Net loss per common and common equivalent share................ $ (0.55) $ (1.43) $ (0.57) $ (3.23) =========== =========== ======= ======== Weighted average shares outstanding..................... 4,500 4,732 4,500 8,024 =========== =========== ======= ======== </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 ------------------------- DECEMBER 31, 1995 ACTUAL AS ADJUSTED (2) ----------------- -------- --------------- (unaudited) <S> <C> <C> <C> BALANCE SHEET DATA Cash and cash equivalents.......... $ 1,804 $ 2,964 $ 57,764 Working capital (deficit).......... (12,080) (12,340) 42,460 Total assets....................... 18,924 21,702 76,502 Accumulated deficit(1)............. (9,188) (35,706) (35,706) Stockholders' equity (deficit)..... (11,524) (10,768) 44,032 </TABLE> - -------- (1) The Company's net loss for the six months ended June 30, 1996 included a nonrecurring, noncash charge for compensation expense and a credit to additional paid-in capital of $26,640, representing the difference between the exercise price and the deemed fair market value of the Common Stock at the date of grant of options to purchase an aggregate of 3,600,000 shares of Common Stock granted by the Company's principal stockholder to certain executive officers and directors of the Company. See "Certain Transactions--Other Transactions" and Note 7 to the consolidated financial statements included herein. (2) Adjusted to give effect to the receipt of the estimated net proceeds of the Offering, based on an assumed initial public offering price of $15.00 per share. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1996/PEGA_pegasystem_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/PEGA_pegasystem_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e019536792547b28cf3fc92937c642d08d511098
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/PEGA_pegasystem_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Investors should carefully consider the information set forth under the heading "Risk Factors." The Company Pegasystems develops customer service management software to automate customer interactions across transaction-intensive enterprises. Many of the world's largest banks, mutual funds and credit card organizations use the Company's solutions to integrate, automate, standardize and manage a broad array of mission-critical customer service activities, including account set-up, record retrieval, correspondence, disputes, investigations and adjustments. The Company's systems can be used by thousands of concurrent users to manage customer interactions and to generate billions of dollars a day in resulting transactions. Work processes initiated by the Company's systems are driven by a highly adaptable "rule base" defined by the user-organization for its specific needs. The rule base facilitates a high level of consistency in customer interactions, yet drives different processes depending on the customer profile or the nature of the request. The Company's open, multi-tier, client/server systems operate on a broad variety of platforms, including UNIX, Windows/NT and IBM/MVS. The Company offers consulting, training and support services to facilitate the use of its solutions. Intensifying competition is forcing businesses to reduce costs while focusing on customer service management as an important means of differentiation. Due to the volume and precise nature of their transactions, it is especially critical for financial services organizations to implement cost-effective systems to manage customer interactions accurately and efficiently. The Company's solutions provide a service backbone that drives intelligent processing and seamlessly integrates an organization's geographically dispersed and product specific service operations and isolated computer systems. By bridging these "islands of automation" within large organizations, the Company's solutions increase the efficiency of service representatives and enable organizations to address multiple customer needs during a single contact. The Company's objective is to become the leading provider of mission-critical client/server customer service management software to organizations performing a high volume of complex interactions with demanding customers. To achieve this objective, the Company is pursuing a number of strategies, including expanding its marketing to additional business units within its existing customers; leveraging its relationships and expertise with large financial services organizations to penetrate the medium-sized financial services market; targeting new markets such as insurance, telecommunications and public utilities which have similar customer service management needs; and developing standard product templates to facilitate the more rapid implementation of its solutions. The Company markets its software and services primarily through a direct sales force which consisted of 13 people as of October 31, 1996. The Company intends to increase substantially the size and productivity of its sales force, both of which will be necessary if the Company is to achieve significant revenue growth in the future. The Company was incorporated in the Commonwealth of Massachusetts in April 1983 and has been profitable in each quarter since the first quarter of 1985. The Company's principal executive offices are located at 101 Main Street, Cambridge, Massachusetts 02142, and its telephone number is (617) 374-9600. Pegasystems, PegaCARD, PegaCLAIMS, PegaSHARES, PegaTRACE, PegaINDEX, PegaPRISM, PegaREELAY, PegaSEARCH, PegaVIEW-ACE, PegaSTAR, Integrated Service Backbone, Service Excellence Through Automation, and Virtual Archive are trademarks of the Company. This Prospectus also includes trademarks of companies other than the Company. The Offering <TABLE> <CAPTION> <S> <C> Common Stock offered by the Company 1,500,000 shares Common Stock offered by the Selling 745,000 shares Stockholders Common Stock to be outstanding after 28,002,200 shares (1) the offering Use of proceeds by the Company For general corporate purposes, including working capital, product development, capital expenditures and possible acquisitions. See "Use of Proceeds." Nasdaq National Market symbol PEGA </TABLE> - ------------- (1) Based on the number of shares of Common Stock outstanding on October 31, 1996, plus 120,000 shares of Common Stock issuable upon exercise of stock options to be exercised immediately prior to the closing of this offering. Excludes 2,392,250 shares of Common Stock issuable upon exercise of stock options outstanding as of October 31, 1996, at a weighted average exercise price of $4.39 per share, of which options to purchase 391,190 shares were then exercisable. See "Capitalization" and "Management--Stock Plans." Summary Consolidated Financial Data (in thousands, except per share data) <TABLE> <CAPTION> Nine Months Ended Year ended December 31, September 30, ------------------------------- --------------------- 1993 1994 1995 1995 1996 --------- --------- --------- ------------------- <S> <C> <C> <C> <C> <C> Consolidated Statement of Income Data: Total revenue $10,212 $16,263 $22,247 $14,355 $20,956 Income from operations 793 2,236 3,257 1,010 4,514 License interest income 1,305 1,457 1,486 1,122 1,127 Net income 1,233 2,193 2,878 1,290 3,567 Net income per common and common equivalent share $ 0.05 $ 0.09 $ 0.11 $ 0.05 $ 0.14 Weighted average number of common and common equivalent shares outstanding 24,231 24,102 25,551 25,600 25,952 </TABLE> <TABLE> <CAPTION> September 30, 1996 --------------------------- Actual As Adjusted (1) --------- ---------------- <S> <C> <C> Consolidated Balance Sheet Data: Cash and cash equivalents $25,419 $ 71,405 Working capital 34,521 80,507 Long-term license installments, net 18,032 18,032 Total assets 59,728 105,714 Stockholders' equity 48,136 94,122 </TABLE> - ------------- (1) Gives effect to (i) the sale of the 1,500,000 shares of Common Stock offered by the Company hereby at an assumed public offering price of $32.625 per share, after deducting the estimated underwriting discount and offering expenses payable by the Company, and (ii) the exercise of stock options to purchase 120,000 shares of Common Stock at an exercise price of approximately $0.33 per share, which exercise will occur immediately prior to the closing of this offering. See "Use of Proceeds" and "Capitalization." Unless otherwise indicated herein, all information in this Prospectus (i) has been adjusted to give effect to a 15-for-1 split of the outstanding Common Stock, in the form of a stock dividend, effective December 9, 1994, (ii) has been adjusted to give effect to a 3-for-1 split of the outstanding Common Stock, in the form of a stock dividend, effective July 10, 1996, and (iii) assumes no exercise of the Underwriters' over-allotment option. See "Description of Capital Stock" and "Underwriting."
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diff --git a/parsed_sections/prospectus_summary/1996/PYYX_pyxus_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/PYYX_pyxus_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..5b6928808b1d75f6ce4fbba0e6da28f17d69296b
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/PYYX_pyxus_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT REQUIRES OTHERWISE "DIMON" OR THE "COMPANY" REFERS TO DIMON INCORPORATED AND ITS CONSOLIDATED SUBSIDIARIES. UNLESS OTHERWISE INDICATED, ALL INFORMATION CONTAINED HEREIN ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. SEE "UNDERWRITING." THE COMPANY DIMON believes it is the world's second largest independent leaf tobacco merchant, with an estimated 30% share of the established worldwide leaf tobacco market. The Company is engaged in two international businesses -- the purchasing, processing and selling of leaf tobacco, primarily flue-cured, burley and oriental tobaccos, which are the primary components of American blend cigarettes, and the purchasing, transporting and selling of fresh-cut flowers to wholesalers and retailers. The Company is the successor to Dibrell Brothers, Incorporated ("Dibrell") and Monk-Austin, Inc. ("Monk-Austin"), which merged in April 1995 (the "Merger"). Increased demand and strong brand growth have resulted in increased production of branded American blend cigarettes in recent years. In addition, consumption of American blend cigarettes continues to increase even in some countries where total cigarette consumption is flat or declining. American blend cigarettes generally contain less tar and nicotine and taste milder than cigarettes historically consumed outside the U.S. Cigarette production in the U.S. reached record levels in 1995, totaling 741.84 billion units, an increase of 4.1% over 1994, according to the USDA, while exports of domestically produced cigarettes in 1995 totaled 35.1% of cigarette production in the U.S., up from 31.8% in 1994 and 30.9% in 1993. As American blend cigarettes have continued to gain market share, the demand for export quality flue-cured, burley and oriental tobacco sourced and processed by leaf tobacco merchants has grown accordingly. The world's large multinational cigarette manufacturers, with one exception, rely on independent leaf tobacco merchants such as the Company to supply the majority of their leaf tobacco needs. At the present time, there are four major global leaf tobacco merchants including the Company which process, source and ship leaf tobacco around the world. As a result of the strong worldwide demand for tobacco products and tightening of worldwide tobacco inventories, the global leaf tobacco industry has experienced substantial improvement in profitability in the nine months ended March 31, 1996. These factors, together with the increasing demand for American blend cigarettes and improved efficiency resulting from the Merger, have contributed to substantial improvement in the Company's net revenue, operating margins and net income. For the nine months ending March 31, 1996, compared to the same period in 1995, the Company's net revenue increased 7.5% to $1.7 billion from $1.5 billion, while operating income and net income increased to $74.2 million and $32.1 million as compared to $48.1 million and $9.8 million, respectively, for the same period last year. The global leaf tobacco industry is currently recovering after experiencing a disruption in demand and reduction in pricing during 1993 and 1994 which was primarily the result of legislation (the "75/25 Rule"), which was later repealed, requiring that cigarettes manufactured in the U.S. for domestic consumption and export contain at least 75% domestically grown tobacco. The Company sells tobacco predominantly to the large multinational cigarette manufacturers including Philip Morris Companies, Inc., Japan Tobacco, Inc., RJR Tobacco Company, Inc., Lorillard Tobacco Company, Reemstma Cigarettenfabriken GmbH and Rothmans International PLC. The Company, through its predecessors, generally has maintained relationships with its customers for over forty years. In fiscal 1995, the Company shipped approximately 37% of its tobacco sales to customers in the U.S., approximately 27% to customers in Europe and the remainder to customers located in Asia, South America and elsewhere. The Company has developed an extensive international network through which it purchases and sells tobacco grown globally. The Company purchases tobacco in approximately 26 countries, generally at auction or directly from growers. The Company believes it has access to a diverse supply of tobacco grown in a number of regions throughout the world and can respond quickly to factors that may cause fluctuations in the quality, yield or price of tobacco grown in any one region. The tobacco purchased by the Company is processed at 17 facilities around the world. In addition to facilities in Virginia and North Carolina, the Company owns or has an interest in processing facilities in Brazil and Zimbabwe, the two most significant non-U.S. exporters of flue-cured tobacco, Malawi and Mexico, two of the leading non-U.S. exporters of burley tobacco, and Greece and Turkey, the leading exporters of oriental tobacco. The Company also has processing facilities in Italy and Germany. In addition, the Company has entered into contracts, joint ventures and other arrangements for the purchase of tobacco grown in substantially all other countries that produce export-quality flue-cured and burley tobaccos, including Argentina, Canada, China, India and Tanzania. BUSINESS STRATEGY The Company's primary business objective is to capitalize on growth in worldwide consumption of American blend cigarettes by becoming the low-cost, preferred supplier of leaf tobacco to the large multinational manufacturers of American blend cigarettes. To achieve this objective, the Company has designed a strategy to position itself to meet the needs of its cigarette manufacturing customers throughout the world by expanding its global operations directly in the major tobacco exporting countries and by forming strategic partnerships with its major customers in countries with emerging tobacco production. The Company's ability to respond to the global expansion and changing needs of the large multinational cigarette manufacturers is a critical factor in developing and expanding customer relationships. The principal components of the Company's business strategy are as follows: INCREASE THE COMPANY'S OPERATIONS IN LOW-COST TOBACCO GROWING REGIONS. To ensure breadth and depth of supply of tobacco, particularly the tobaccos used in American blend cigarettes, the Company has expanded and plans to continue to expand its operations in South America, Africa and China, the largest production areas of flue-cured and burley tobaccos outside of the U.S. In 1995, the Company signed an agreement with the China National Tobacco Corporation to provide additional access to tobacco sources and a state-of-the-art processing facility in the province of Yunnan. The Company also made acquisitions in 1995 in Bulgaria, Greece and Turkey, which the Company believes positions DIMON as the largest worldwide merchant of oriental tobaccos. The Company intends to utilize both its agronomy expertise in helping to develop low-cost sources of American blend quality tobaccos and its existing relationships with the major multinational cigarette manufacturers to gain market share in these growth regions. CAPITALIZE ON OUTSOURCING TRENDS. The Company anticipates further outsourcing of leaf tobacco purchasing and processing by cigarette manufacturers. This outsourcing trend is driven by (i) higher margins in cigarette production, (ii) the increasing sophistication required in sourcing leaf tobacco on a global basis and (iii) continued privatization of tobacco and cigarette production operations in other countries. In 1994, the Company began providing all leaf tobacco auction buying in the U.S. for RJR, the second largest cigarette producer in the U.S. More recently, the Company began to purchase and process all of Lorillard's auction market tobacco requirements in the U.S. IMPROVE EFFICIENCY AND REDUCE OPERATING COSTS. In connection with the Merger, the Company initiated a restructuring plan for its operations. The plan was designed to eliminate unprofitable locations, consolidate duplicative processing facilities, reduce the salaried workforce, improve operating efficiencies and increase regional unit accountability. This initiative resulted in the recognition of various charges in fiscal 1995, aggregating $17.8 million, and in the first nine months of fiscal 1996, aggregating $5.6 million. These charges, together with additional anticipated charges of $6 million to $9 million in the fourth quarter of fiscal 1996, are expected to reduce the Company's annual operating costs and expenses by approximately $25 million in fiscal 1997 when the benefits are expected to be fully realized. EXPAND OPERATIONS IN NEW MARKETS. During the last decade, several of the large multinational cigarette manufacturers have expanded their global operations, particularly into Central and Eastern Europe and the former Soviet Union, in order to increase their access to and penetration of new markets. The Company believes this will increase demand for local sources of leaf tobacco and local tobacco processing due to the semi-perishable nature of unprocessed tobacco and the existence of domestic content laws in certain foreign countries. The Company believes these factors will cause manufacturers to place greater reliance on the services of financially strong leaf tobacco merchants with the ability to source and process tobacco on a global basis and to help develop higher quality local sources of leaf tobacco. THE OFFERING <TABLE> <S> <C> Shares offered by the Selling Stockholders.............................. 3,000,000 shares Common Stock to be outstanding after this Offering...................... 42,348,609 shares (1) Use of Proceeds......................................................... The Company will not receive any of the proceeds of this Offering NYSE Symbol............................................................. DMN </TABLE> (1) Excludes 1,250,105 shares of Common Stock issuable as of April 30, 1996 upon the exercise of outstanding stock options at a weighted average exercise price of approximately $16.65 per share, of which options to purchase 738,146 shares are exercisable as of April 30, 1996. Under the treasury stock method of computation, the issued options represent 43,537 Common Stock equivalents based on the closing price of the Common Stock on April 30, 1996. REFINANCING PLAN Concurrent with the execution of its business strategy, the Company has implemented a refinancing plan (the "Refinancing Plan") designed to reduce its financial leverage, decrease its reliance on short-term uncommitted lines of credit and diversify its sources of debt financing. The Refinancing Plan consists of (i) the call for redemption in March 1996 of the Company's approximately $54.3 million principal balance of 7 3/4% Convertible Subordinated Debentures due 2006 (the "7 3/4% Debentures"), (ii) the sale of $125 million % Senior Notes due 2006 (the "Notes"), expected to be completed in May 1996, and (iii) the execution of a $240 million Credit Agreement, dated as of March 15, 1996 (the "New Credit Facility"), replacing the Company's $250 million credit facility (the "Former Credit Facility"). SUMMARY HISTORICAL FINANCIAL INFORMATION The following table presents summary selected historical consolidated financial information of the Company, as of the dates and for the periods indicated. The historical financial data for the year ended June 30, 1995, have been derived from the Company's financial statements which, except as they relate to the former Dibrell's financial statements as of June 30, 1994, and for each of the two years in the period ended June 30, 1994, have been audited by Price Waterhouse LLP, independent accountants, and by Ernst & Young LLP, independent accountants, insofar as they relate to the former Dibrell's financial statements referred to above. The summary financial information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's financial statements and notes thereto included elsewhere in this Prospectus. <TABLE> <CAPTION> NINE MONTHS ENDED MARCH 31 YEAR ENDED JUNE 30 (IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 1995 1994 1993 1992 <S> <C> <C> <C> <C> <C> <C> INCOME STATEMENT DATA: (UNAUDITED) Net sales of goods and services........... $1,663,661 $1,547,534 $1,927,749 $1,449,078 $1,680,616 $1,698,314 Gross profit.............................. 182,533 142,990 170,233 131,792 222,788 216,832 Restructuring and merger costs............ 5,568 -- 25,955 -- -- -- Operating income.......................... 74,229 48,107 11,476 14,481 110,831 106,094 Income (loss) from continuing operations before income taxes, minority interest, equity in net income of investee companies, extraordinary items and cumulative effect of accounting changes................................. 52,119 24,313 (22,164) (5,355) 95,687 74,299 Income (loss) from continuing operations before extraordinary items and cumulative effect of accounting changes................................. 30,740 9,763 (30,165) (8,490) 65,287 55,607 Net income (loss)......................... $ 32,140 $ 9,763 $ (30,165) $ (8,490) $ 64,504 $ 58,180 Earnings (loss) per share, primary (1).... $ 0.83 0.26 (0.79) (0.22) 1.74 1.64 Weighted average shares outstanding, primary................................. 38,739 38,082 38,100 38,091 37,072 35,354 Earnings (loss) per share, fully-diluted (2)(3).................................. $ 0.80 -- -- -- 1.63 1.47 Weighted average shares outstanding, fully-diluted........................... 42,467 42,294 42,355 42,297 41,310 39,626 OTHER DATA: Gross Margin.............................. 11.0% 9.2% 8.8% 9.1% 13.3% 12.8% Operating Margin.......................... 4.5% 3.1% 0.6% 1.0% 6.6% 6.2% Tobacco inventory......................... $ 343,484 $ 295,724 $ 410,431 $ 403,211 $ 324,768 $ 289,201 Depreciation and amortization............. 24,234 21,891 31,852 28,862 24,559 24,087 Capital Expenditures...................... 20,609 18,845 35,892 32,382 42,232 34,818 <CAPTION> (IN THOUSANDS, EXCEPT PER SHARE DATA) 1991 <S> <C> INCOME STATEMENT DATA: Net sales of goods and services........... $1,633,019 Gross profit.............................. 193,122 Restructuring and merger costs............ -- Operating income.......................... 88,861 Income (loss) from continuing operations before income taxes, minority interest, equity in net income of investee companies, extraordinary items and cumulative effect of accounting changes................................. 56,956 Income (loss) from continuing operations before extraordinary items and cumulative effect of accounting changes................................. 34,106 Net income (loss)......................... $ 28,904 Earnings (loss) per share, primary (1).... 0.82 Weighted average shares outstanding, primary................................. 35,175 Earnings (loss) per share, fully-diluted (2)(3).................................. 0.81 Weighted average shares outstanding, fully-diluted........................... 35,491 OTHER DATA: Gross Margin.............................. 11.8% Operating Margin.......................... 5.4% Tobacco inventory......................... $ 209,541 Depreciation and amortization............. 14,813 Capital Expenditures...................... 24,334 </TABLE> <TABLE> <CAPTION> NINE MONTHS ENDED MARCH 31 1996 1995 (IN THOUSANDS) (UNAUDITED) <S> <C> <C> BALANCE SHEET DATA: Working capital....................................................................................... $ 298,762 $ 203,177 Total assets.......................................................................................... 1,011,291 987,456 Total debt............................................................................................ 388,710 474,582 Stockholders' equity.................................................................................. 311,232 283,229 </TABLE> (1) Includes non-recurring restructuring and merger costs of $.14 and $.68 per share for the nine months ended March 31, 1995, and the fiscal year ended June 30, 1995, respectively. (2) Includes non-recurring restructuring and merger-related costs of $.13 per share for the nine months ended March 31, 1995. (3) Anti-dilutive for the nine months ended March 31, 1995 and the years ended June 30, 1995 and 1994.
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diff --git a/parsed_sections/prospectus_summary/1996/ROCK_gibraltar_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/ROCK_gibraltar_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements (including the notes thereto) appearing elsewhere in this Prospectus. Investors should carefully consider the information set forth under "Risk Factors". Unless otherwise indicated, all information in this Prospectus assumes no exercise of the over-allotment option. Unless the context otherwise requires, the "Company" refers to Gibraltar Steel Corporation and its subsidiaries. THE COMPANY Gibraltar Steel Corporation (the "Company"), through its subsidiaries, is a leading processor of high value-added steel products. The Company's primary focus is on a broad range of products and services based on cold-rolled strip and coated sheet steel, and also heavy duty steel strapping. To complement these products and services, the Company offers specialized metallurgical heat treating services, operates two state-of-the-art materials management facilities, and has an equity interest in two commercial steel pickling operations. Processed cold-rolled strip steel products comprise a segment of the cold- rolled sheet steel market that is defined by more precise widths, improved surface conditions and tighter gauge tolerances than are supplied by primary manufacturers of flat-rolled steel products. The Company's cold-rolled strip steel products are sold to manufacturers in the automotive, hand tool, appliance and hardware industries, as well as to other customers who demand critical specifications in their raw material needs. The Company's coated steel products, which include galvanized, galvalume and pre-painted sheet products, are sold primarily to the commercial and residential metal building industry for roofing and siding applications. The Company's strapping products are used in heavy duty industrial applications. Heat treating, which refines the metallurgical properties of steel and other metals, is required to achieve critical performance characteristics in a wide variety of consumer and industrial applications. The Company attributes its operating and financial success to the aggressive pursuit of its business strategy, the key elements of which include: a focus on high value-added, high margin products and services; a commitment to internal growth and continuous cost reductions; a commitment to external expansion through the acquisition of related businesses with long-term growth potential; and a dedication to quality, service and customer satisfaction. The pursuit of its business strategy has allowed the Company to limit the impact of the cyclical nature of the steel industry and has enabled the Company to achieve pre-tax profits in every year since 1976. In addition, over the past five years the Company has increased its revenues and pre-tax profits by compound annual growth rates of approximately 22% and 38%, respectively. In implementing its business strategy, the Company has: . Acquired the Wm. R. Hubbell Steel Corporation ("Hubbell Steel") in April 1995, a leading national supplier and processor of coated sheet steel products for the commercial and residential metal building industry. Hubbell Steel contributed approximately $63 million to the Company's revenues in 1995. . Acquired Carolina Commercial Heat Treating, Inc. ("CCHT") in February 1996, a leading metallurgical heat treater in the southeastern United States. CCHT had 1995 revenues from processing customer-owned parts and materials of approximately $21.5 million. . Started up a new cold-rolled processing facility in Chattanooga, Tennessee in late 1994, increasing the Company's customer base and product distribution in the southeastern United States. This facility has a design capacity of approximately 84,000 tons per year. . Opened a second state-of-the-art materials management facility in Woodhaven, Michigan in the second half of 1995, which provides dedicated, specialized inventory management services and has a design throughput capacity of approximately 600,000 tons per year. . Through its joint venture, started up a second steel pickling operation in the second half of 1995, which added over 400,000 tons of annual pickling capacity. . During the second quarter of 1996, committed to substantially increase its cold-rolling capacity at its Cleveland operation through the construction of a new mill. The Company believes that this new mill, with a design capacity of approximately 120,000 tons per year and a maximum rolling width of 50 inches, will be the widest mill for the production of cold-rolled strip steel in North America, yielding substantial production efficiencies. Start-up of the new mill is expected in late 1997. The Company was incorporated under the laws of the State of Delaware in 1993. The Company's executive offices are located at 3556 Lake Shore Road, Buffalo, New York 14219, and its telephone number is (716) 826-6500. THE OFFERING <TABLE> <S> <C> Common Stock being offered by: The Company....................... 2,000,000 shares The Selling Stockholders.......... 1,000,000 shares ---------------- Total........................... 3,000,000 shares ================ Common Stock to be outstanding after the offering......................... 12,173,900 shares(1) Use of proceeds from the sale of Common Stock by the Company.......... To repay outstanding bank indebtedness. See "Use of Proceeds". NASDAQ symbol......................... ROCK </TABLE> - -------- (1) Excludes (i) an aggregate of 400,000 shares of Common Stock reserved for issuance under the Non-Qualified Plan (as hereinafter defined), of which 200,000 shares were subject to outstanding options as of June 17, 1996 at a weighted average exercise price of $10.75 per share, (ii) an aggregate of 600,000 shares of Common Stock reserved for issuance under the Incentive Plan (as hereinafter defined) of which 270,000 shares were subject to outstanding options as of June 17, 1996 at a weighted average exercise price of $10.81 per share, and (iii) an aggregate of 100,000 shares of Common Stock reserved for issuance under the Restricted Stock Plan (as hereinafter defined). See "Management--Employee Plans". SUMMARY FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> THREE MONTHS YEAR ENDED DECEMBER 31,(a) ENDED MARCH 31, ------------------------------------------------ ----------------- 1991 1992 1993 1994 1995(b) 1995 1996(c) -------- -------- -------- -------- -------- ------- ------- <S> <C> <C> <C> <C> <C> <C> <C> INCOME STATEMENT DATA(d): Net Sales............... $128,982 $145,680 $167,883 $200,142 $282,833 $58,765 $82,034 Cost of Sales........... 110,222 120,311 138,559 166,443 240,370 48,579 68,005 -------- -------- -------- -------- -------- ------- ------- Gross Profit............ 18,760 25,369 29,324 33,699 42,463 10,186 14,029 Selling, General and Administrative......... 11,924 14,915 16,390 17,520 22,095 5,090 7,354 -------- -------- -------- -------- -------- ------- ------- Income from Operations.. 6,836 10,454 12,934 16,179 20,368 5,096 6,675 Other Income (Expense): Interest Expense....... (2,262) (1,873) (1,621) (1,374) (3,984) (559) (1,073) Other Income........... -- -- 200 -- -- -- -- -------- -------- -------- -------- -------- ------- ------- (2,262) (1,873) (1,421) (1,374) (3,984) (559) (1,073) -------- -------- -------- -------- -------- ------- ------- Income Before Taxes..... 4,574 8,581 11,513 14,805 16,384 4,537 5,602 Income Taxes(e)......... 454 339 6,300 5,996 6,662 1,860 2,268 -------- -------- -------- -------- -------- ------- ------- Net Income............. $ 4,120 $ 8,242 $ 5,213 $ 8,809 $ 9,722 $ 2,677 $ 3,334 ======== ======== ======== ======== ======== ======= ======= Net Income Per Share... $ .87 $ .96 $ .26 $ .33 ======== ======== ======= ======= Pro Forma Net Income(f).............. $ 3,278 $ 5,853 $ 7,337 ======== ======== ======== Pro Forma Net Income Per Share(g)............... $ .32 $ .58 $ .72 ======== ======== ======== OTHER DATA: Capital Expenditures(h)........ $ 3,478 $ 5,750 $ 10,468 $ 16,171 $ 14,504 $ 5,527 $ 3,262 Depreciation and Amortization........... 3,217 3,226 3,399 3,445 4,538 924 1,395 </TABLE> <TABLE> <CAPTION> DECEMBER 31, ---------------- MARCH 31, 1994 1995 1996 -------- ------- --------- <S> <C> <C> <C> BALANCE SHEET DATA(i): Current Assets....................................... $ 70,552 $86,995 $101,472 Current Liabilities.................................. 22,028 29,480 40,048 Total Assets......................................... 126,380 167,423 208,370 Total Debt........................................... 38,658 59,054 82,847 Stockholders' Equity................................. 60,396 70,244 73,578 </TABLE> - -------- (a) One of the Company's subsidiaries historically had a fiscal year end of October 31. Effective with the year ended December 31, 1993, such entity adopted a calendar year end. See Note 1 to the Consolidated Financial Statements (as hereinafter defined). As a result of such change, other income for the year ended December 31, 1993 includes $200,000 of net income attributable to November and December 1992 for such entity. (b) Includes the results of Hubbell Steel from its acquisition on April 3, 1995. (c) Includes the results of CCHT from its acquisition on February 14, 1996. (d) See "Selected Financial Data" for unaudited pro forma presentations of the results of operations had the following occurred on January 1, 1995: (i) the consummation of the acquisitions of both Hubbell Steel and CCHT and borrowings to finance such acquisitions; and (ii) the consummation of this offering and the application of the estimated net proceeds therefrom to reduce indebtedness and the related reduction in interest expense. (e) Includes $5,100,000 for reinstatement of deferred income taxes upon termination of the S Corporation status of certain of the Company's subsidiaries during the year ended December 31, 1993. (f) Certain of the Company's subsidiaries historically were treated as S Corporations for federal and certain state income tax purposes. Immediately prior to consummation of the Company's initial public offering in November 1993, such S Corporation status was terminated. Pro forma net income assumes that each of the Company's subsidiaries had been subject to corporate income taxation as a C Corporation during periods prior to November 1993. See "Unaudited Pro Forma Financial Data".
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diff --git a/parsed_sections/prospectus_summary/1996/RRC_range_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/RRC_range_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..cd4208baee675a3bcabfea6f6db7c79463ced371
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+PROSPECTUS SUMMARY The following is qualified in its entirety by the more detailed information, Consolidated Financial Statements, Pro Forma Combined Financial Statements and notes thereto, appearing elsewhere in this Prospectus. Unless the context requires all references herein to the "Company" or "Lomak" include Lomak Petroleum, Inc. and its consolidated subsidiaries. Pro forma information gives effect to (i) the purchase by the Company of certain oil and gas properties from a subsidiary of Parker & Parsley Petroleum, Inc., (ii) the purchase by the Company of certain oil and gas properties from Transfuel, Inc. ("Transfuel") and (iii) the purchase by the Company of certain oil and gas properties from Bannon Energy Incorporated ("Bannon") (collectively referred to as the "Acquisitions"). The unaudited pro forma combined financial statements also give effect to the private placement of $2.03 Convertible Exchangeable Preferred Stock and Common Stock (the "Private Placements") and the application of the net proceeds therefrom. THE COMPANY Lomak is an independent oil and gas company with core areas of operation in Texas, Oklahoma and Appalachia. The Company has grown through a combination of acquisition, development and enhancement activities. Since January 1, 1991, 59 acquisitions have been consummated at a total cost of approximately $249 million and approximately $24 million has been expended on development activities. As a result, proved reserves and production have each grown during this period at an average rate of 56% per annum. At December 31, 1995, proved reserves totaled 298 Bcfe, having a pre-tax present value at constant prices on that date of $229 million and a reserve life of nearly 12 years. The Company as of December 31, 1995, operated over 6,200 properties which accounted for more than 93% of its reserves. In addition, the Company owns and operates approximately 1,900 miles of gathering systems in proximity to its principal gas properties. The Company also provides oil field services, including brine disposal and various well services primarily for certain of its own properties. The operations of the Company are considered to fall within a single industry segment; the exploration for, development and production of crude oil and natural gas. BUSINESS STRATEGY The Company's objective is to increase its asset base, cash flow and earnings through a balanced strategy of acquisition, development and enhancement activities in each of its current core operating areas of Texas, Oklahoma and Appalachia. In each core area, the Company establishes separate acquisition, engineering, geological, operating and other technical expertise. By implementing its strategy and focusing on each core area in this manner, the Company does not depend solely on any one activity type or region to expand its asset base, cash flow and earnings. To the extent purchases continue to be made in core areas, operating, administrative, drilling and gas marketing efficiencies should continue to be realized. The Company focuses primarily on acquisitions with prices of less than $30 million, where consolidation is likely, and those areas that it believes to be less competitive and to have a lower risk profile and longer reserve life than many alternate opportunities. Management believes smaller producing properties can be acquired at a lower relative cost than larger properties and that its focus on these properties, in part, has accounted for its ability to acquire 396 Bcfe of proved reserves since 1991 at an average cost of $.59 per Mcfe, well below the independent producer industry average of $.69 per Mcfe, as reported in Arthur Andersen LLP's Oil and Gas Reserve Disclosure Survey. ACCOMPLISHMENTS Despite periods of low energy prices prevalent since 1990, the Company's strategy and emphasis on cost control has resulted in significant growth in assets and reserves, and increased per share cash flow and earnings. Specifically, from January 1, 1990 through December 31, 1995, the Company has grown its asset base from $7 million to $215 million, while cash flow per share has risen from $.41 to $1.75 and earnings per share has increased from break-even to $.31. The Company has increased its financial and organizational strength and has begun to benefit from cost reductions and operating efficiencies. From 1990 through December 31, 1995, combined operating and overhead costs per Mcfe were reduced from $2.59 to $0.98.
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diff --git a/parsed_sections/prospectus_summary/1996/RUSHB_rush_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/RUSHB_rush_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..854c6296fa1f42ad1d26cfd0bbb07a4cb73575d4
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and combined financial statements and the related notes appearing elsewhere in this Prospectus. In this Prospectus, the term "Company" or "Rush Enterprises" refers to Rush Enterprises, Inc., a Texas corporation, its subsidiaries and Associated Acceptance, Inc. ("AA"), the insurance agency affiliated with the Company. Except as otherwise indicated, (i) all financial information and operating data in this Prospectus concerning the Company gives effect to the Reorganization that will be effected simultaneously with the closing of this offering and (ii) textual information includes the pro forma operations of Kerr Consolidated, Inc., which was acquired by the Company in December 1995. See "The Reorganization." Investors should carefully consider the information set forth under the heading "Risk Factors." Unless otherwise indicated, the information in this Prospectus does not give effect to the exercise of the Underwriters' over-allotment option. See "Underwriting." THE COMPANY Founded in 1965, Rush Enterprises operates a regional network of truck centers that provide an integrated one-stop source for the trucking needs of its customers, including retail sales of new Peterbilt and used heavy-duty trucks; after-market parts, service and body shop facilities; and a wide array of financial services, including the financing of new and used truck purchases, insurance products and truck leasing and rentals. The Company's truck centers are strategically located in high truck traffic areas on or near major highways in Texas, California, Oklahoma and Louisiana. The Company is the largest Peterbilt truck dealer in North America, representing approximately 14.0% of all new Peterbilt truck sales in 1995, and is the sole authorized vendor for new Peterbilt trucks and replacement parts in its market areas. The Company was named Peterbilt Dealer of the Year for North America for the 1993-1994 year. Peterbilt trucks, which are manufactured by PACCAR, Inc. ("PACCAR"), have a reputation as premium-quality vehicles which are skillfully designed and driver friendly, and are typically custom manufactured to satisfy the requirements of its customers. Peterbilt's premium reputation is an important aspect of the Company's marketing of new and used trucks, and management believes that such reputation has resulted in relatively higher resale prices for used Peterbilt trucks. The Company's customers, which include owner-operators, regional and national fleets, corporations and local governments, use heavy-duty trucks for over-the-road and off-highway transportation and handling of virtually all materials, including general freight, petroleum, wood products, refuse and construction materials. The Company currently operates eight full-service and six parts/service truck centers. The full-service facilities offer a complete line of the Company's products and services to fully implement the Company's one-stop strategy, while the parts/service facilities offer a variety of product and service combinations. The full-service truck centers range in size from 13,500 to 73,000 square feet, with from six to 50 service bays, and are situated on lots ranging from three to 14 acres, while the parts/service facilities range in size from 2,500 to 62,000 square feet, with from six to 25 service bays, and are situated on lots ranging from 0.4 to five acres. The Company's state-of-the-art service and body shop facilities are equipped for virtually any type of truck repair on any type of truck and are staffed by experienced, highly-trained and factory-certified service technicians. Each truck center is a designated Peterbilt warranty service center and most are authorized service centers for a number of manufacturers of heavy-duty truck components, including Cummins, Detroit Diesel, Caterpillar, Eaton and Rockwell. Rush truck centers are the sole authorized Peterbilt parts and accessories supplier in their territories and carry a wide variety of Peterbilt and other parts inventory, with an average of approximately 4,500 items from over 30 suppliers at each location. The Company utilizes a centralized state-of-the-art management information system that permits real-time parts tracking, control of inventory mix, automated reordering, monitoring of customer buying patterns and shifting of truck and parts inventories from location to location to satisfy customer demand. As part of its one-stop sales and service strategy, the Company offers third-party financing and insurance products to assist customers purchasing a new or used truck, as well as truck leasing and rentals. The Company's new and used truck financing is typically provided through Associates Commercial Corporation ("Associates"), the largest third-party provider of heavy-duty truck financing in North America, and Gatefold Outside Front Cover [LOGO] Picture of Peterbilt Truck Peterbilt Model 379 [LOGO] Gatefold Inside Front Cover Picture of man spray painting truck Paint & Body Repair Picture of man operating a computer After Market Parts Sales Picture of Peterbilt truck Peterbilt Model 357 Picture of parts showroom Parts Showroom Picture of Peterbilt trucks Truck Sales [LOGO] Picture of map indicating Rush Truck Center Locations Picture of service and repair shop Service Bays Picture of Peterbilt truck Lease & Rental Truck Picture of man operating computer Service Specialist PACCAR Financial. The Company is one of the largest originators of heavy-duty truck loans for Associates and because of its volume and low historical delinquency rate, benefits from favorable financing terms. The Company has an aggregate recourse liability of $600,000 per year in connection with customer defaults on such financings. The Company sells a complete line of property and casualty insurance, including collision and liability insurance on trucks, cargo insurance, standard automobile liability coverages, life, credit life, health, workers' compensation coverages and homeowner's insurance. The Company also engages in full-service Peterbilt truck leasing and rental under PACCAR's PacLease trade name at five locations and currently has 524 trucks in its lease and rental fleet. The Company believes that large, multi-location, full-service dealerships, which offer a large selection of new and used trucks, parts and sophisticated service and body shop facilities, are able to realize economies of scale and have a competitive advantage in the truck sales and services industry. As part of its strategy, the Company has begun to employ a Rush Truck Center branding program for its facilities to enhance the Company's name recognition and to communicate the standardized high level of quality products and services throughout its truck center network. The Company intends to brand each of its facilities as a Rush Truck Center through distinctive signage and uniform marketing programs. Currently five locations are branded Rush Truck Centers and the Company intends to establish all of its facilities as Rush Truck Centers by December 31, 1996. The retail heavy-duty truck industry is highly fragmented with over 1,700 dealerships nationwide, including 92 Peterbilt dealerships operating 178 locations. New heavy-duty truck sales historically have shown a high correlation to the rate of change in industrial production and gross domestic product. According to data published by the American Automobile Manufacturers Association ("AAMA"), during 1995, new heavy-duty truck sales in the United States surpassed 200,000 units at retail for the first time. Since 1986, however, annual domestic retail heavy-duty truck sales have averaged approximately 142,000 units. According to R. L. Polk & Co., 207,413 new heavy-duty trucks were registered in the United States during 1995. New Peterbilt truck registrations during this period were 20,035, for a national market share, based on new truck registrations, of 9.7%. In the Company's seven primary market areas 19,151 new heavy-duty trucks were registered, 2,657 of which represented new Peterbilts, resulting in an average market share of 13.9%. The Company's growth strategy is to continue the expansion of its existing facilities, to open new facilities in its existing and newly appointed territories and to acquire additional Peterbilt dealerships in new territories. Since 1990, at which time the Company operated one full-service facility, one sales facility, one parts/service facility and one leasing and rental facility located in Texas, the Company has undertaken an aggressive expansion program. The Company has subsequently opened four facilities in its existing territories, one facility in a new territory in Louisiana and acquired six facilities in new territories in California and Oklahoma. Management believes that it can operate new facilities effectively and improve the operating results of acquired dealers as a result of economies of scale, sophisticated management information systems, purchasing power, merchandising capability and the introduction of enhanced financial services and products. Additionally, the Company believes that its aggressive expansion program into California, Oklahoma and Louisiana and diversification into truck-related services, including financial services, leasing, renting and service and parts, has reduced cyclicality in the Company's operations due to geographic diversity and reduced reliance on new and used truck sales. The Company's plans include the opening of a full-service truck center in the Texas Rio Grande Valley area and a parts/service facility in Southern California, during 1996 and early 1997, at an anticipated cost of approximately $2.0 million and $1.0 million, respectively. The Company also intends to make strategic acquisitions of additional Peterbilt dealerships as favorable opportunities arise; however, there are currently no negotiations, commitments or agreements with respect to any such acquisitions. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company..................... 2,500,000 shares. Common Stock to be outstanding after the offering(1).... 6,250,000 shares. Use of proceeds......................................... For debt repayment and general corporate purposes, including working capital, funds for opening of additional locations and acquisitions of truck dealerships in new markets. Nasdaq National Market symbol........................... RUSH </TABLE> - --------------- (1) Excludes 500,000 shares issuable under the Company's Incentive Plan adopted in April 1996 and 250,000 shares reserved for issuance upon the exercise of warrants to be granted to the Representatives of the Underwriters and their designees, exercisable at 120% of the public offering price (the "Representatives' Warrants"). See "Management," "Description of Capital Stock" and "Underwriting." SUMMARY COMBINED AND PRO FORMA FINANCIAL AND OPERATING DATA The Summary Combined and Pro Forma Financial and Operating Data below has been taken or derived from the combined historical and pro forma financial statements and other records of the Company. The Financial and Operating Data presented below may not be comparable between periods in all material respects or indicative of the Company's future financial position or results of operations due primarily to acquisitions which occurred during the periods presented, including the acquisition of the Company's California and Oklahoma operations in February 1994 and December 1995, respectively. See "Business -- Recent Acquisitions" and Note 16 to the Company's Combined Financial Statements for a discussion of such acquisitions. The Summary Combined and Pro Forma Financial and Operating Data should be read in conjunction with the Company's Historical and Pro Forma Combined Financial Statements and accompanying notes contained in this Prospectus. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." <TABLE> <CAPTION> THREE MONTHS YEAR ENDED FOUR-MONTH ENDED AUGUST 31, PERIOD ENDED YEAR ENDED DECEMBER 31, PRO FORMA MARCH 31, ----------------- DECEMBER 31, ------------------------------ DECEMBER 31, ----------------- 1991 1992 1992 1993 1994 1995 1995(1) 1995 1996 ------- ------- ------------ -------- -------- -------- ------------ ------- ------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> SUMMARY OF INCOME STATEMENT DATA Revenues................... $73,605 $83,024 $ 28,415 $110,271 $206,386 $268,478.. $333,279 $64,002 $79,876 Cost of products sold...... 64,179 70,271 24,270 95,811 173,369 225,252 282,533 53,098 65,093 ------- ------- ------------ -------- -------- -------- ------------ ------- ------- Gross profit............... 9,426 12,753 4,145 14,460 33,017 43,226 50,746 10,904 14,783 Selling, general and administrative expenses................. 8,286 10,233 3,687 11,101 25,789 31,927 37,789 8,758 11,812 Depreciation and amortization expense..... 430 475 151 1,022 1,615 1,924 2,312 421 547 ------- ------- ------------ -------- -------- -------- ------------ ------- ------- Operating income........... 710 2,045 307 2,337 5,613 9,375 10,645 1,725 2,424 Interest expense........... 587 587 15 998 2,048 2,770 3,746 561 973 Minority interest.......... -- -- -- -- 123 162 -- 39 -- ------- ------- ------------ -------- -------- -------- ------------ ------- ------- Income from continuing operations............... $ 123 $ 1,458 $ 292 $ 1,339 $ 3,442 $ 6,443 $ 6,899 $ 1,125 $ 1,451 ======= ======= ========== ======== ======== ======== ========== ======= ======= PRO FORMA INCOME STATEMENT DATA (UNAUDITED) Income from continuing operations before taxes.................... $ 6,443 $ 6,899 $ 1,125 $ 1,451 Pro forma adjustment to reflect federal and state income taxes(2).......... 2,448 2,622 428 552 -------- ------------ ------- ------- Pro forma income from continuing operations.... $ 3,995 $ 4,277 $ 697 $ 899 ======== ========== ======= ======= Pro forma income from continuing operations per share(3)................. $ .93 $ 1.00 $ .16 $ .21 ======== ========== ======= ======= Weighted average shares outstanding used in the pro forma income from continuing operations per share calculation........ 4,297 4,297 4,297 4,297 ======== ========== ======= ======= Supplemental pro forma net income from continuing operations per share(4)................. $ .90 $ .96 $ .16 $ .21 ======== ========== ======= ======= Weighted average shares outstanding used in the supplemental pro forma income from continuing operations per share calculation.............. 4,726 4,726 4,398 4,699 ======== ========== ======= ======= </TABLE> <TABLE> <CAPTION> THREE MONTHS YEAR ENDED FOUR-MONTH ENDED AUGUST 31, PERIOD ENDED YEAR ENDED DECEMBER 31, MARCH 31, ----------------- DECEMBER 31, ------------------------------ ----------------- 1991 1992 1992 1993 1994 1995 1995 1996 ------- ------- ------------ -------- -------- -------- ------- ------- (IN THOUSANDS, EXCEPT OPERATING DATA) <S> <C> <C> <C> <C> <C> <C> <C> <C> OPERATING DATA Number of locations -- Full-service.......................... 1 1 1 2 6 8 6 8 Parts/service......................... 3 3 3 5 5 6 5 6 ------- ------- ------------ -------- -------- -------- ------- ------- Total locations................. 4 4 4 7 11 14 11 14 ------- ------- ------------ -------- -------- -------- ------- ------- Unit truck sales -- New trucks............................ 622 623 237 982 1,705 2,263 560 642 Used trucks........................... 436 675 229 647 889 1,135 220 327 ------- ------- ------------ -------- -------- -------- ------- ------- Total unit trucks sales......... 1,058 1,298 466 1,629 2,594 3,398 780 969 ------- ------- ------------ -------- -------- -------- ------- ------- Aggregate new and used truck finance contracts sold (in thousands)......... $17,676 $21,295 $ 10,100 $ 32,188 $ 45,453 $ 53,165 $13,527 $16,132 Truck lease and rental units............ 141 100 100 143 345 521 368 524 </TABLE> <TABLE> <CAPTION> AS OF MARCH 31, 1996 ---------------------------------------- AS ACTUAL PRO FORMA(5) ADJUSTED(6) ------- ------------ ----------- (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA Working capital............................................................... $ (491) $ (6,491) $17,389 Inventories................................................................... 41,437 41,437 41,437 Total assets.................................................................. 82,883 82,883 99,883 Floor plan financing.......................................................... 37,861 37,861 37,861 Line-of-credit borrowings..................................................... 20 6,020 20 Long-term debt, including current portion..................................... 17,484 17,484 13,084 Shareholders' equity.......................................................... 8,396 1,975 29,375 </TABLE> - --------------- (1) Reflects adjustment to give effect to the following purchase transactions as if such transactions had occurred January 1, 1995: (i) acquisition of Kerr Consolidated, Inc., and (ii) acquisition of the minority interest in South Coast Peterbilt. The pro forma information is not necessarily indicative of the results that actually would have been achieved had such transactions been consummated as of January 1, 1995, or that may be achieved in the future. See Pro Forma Combined Statement of Operations and the Notes thereto. (2) For all periods presented, the Company was an S corporation and was not generally subject to corporate income taxes. The pro forma income tax provision has been computed as if the Company were subject to corporate income taxes for all periods presented based on the tax laws in effect during the respective periods. See "S Corporation Distributions" and Note 14 to the Combined Financial Statements. (3) Pro forma income from continuing operations per share was computed by dividing pro forma income from continuing operations by the weighted average number of common shares outstanding, as adjusted for the stock split of the Common Stock and giving pro forma effect for the issuance of 547,400 shares of Common Stock, at an assumed initial public offering price of $12.00 per share, to repay the line-of-credit borrowings made to fund the $6.0 million distribution to the Company's sole shareholder of the undistributed taxable S corporation earnings as of March 31, 1996. See "S Corporation Distributions" and Notes 2 and 4 to the Combined Financial Statements. (4) Pro forma supplemental income from continuing operations per share was computed by dividing pro forma income from continuing operations by the weighted average number of common shares outstanding, as adjusted for the stock split of the Common Stock and giving pro forma effect for the issuance of 948,900 shares of Common Stock, at an assumed initial public offering price of $12.00 per share, to repay the line-of-credit borrowings made to fund the $6.0 million distribution to the Company's sole shareholder of the undistributed S corporation earnings at March 31, 1996, and repay certain balances of outstanding indebtedness as of January 1, 1995. See "Use of Proceeds" and Notes 2 and 4 to the Combined Financial Statements. (5) Adjusted to give effect to: (i) the deferred tax liability of approximately $421,000 resulting from the termination of the Company's status as an S corporation and (ii) a $6.0 million decrease in shareholder's equity at March 31, 1996, resulting from a distribution to the sole shareholder related to the termination of the Company's status as an S corporation. See "S Corporation Distributions," "Capitalization" and Notes 2 and 14 to the Combined Financial Statements. (6) Adjusted to give effect to the sale of 2,500,000 shares of Common Stock offered hereby at an assumed initial offering price of $12.00 per share and the application of the net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
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+SUMMARY............................................................................... 1 New Grace........................................................................... 1 The Distribution.................................................................... 2 Tax Consequences of the Distribution................................................ 2 Relationship with Grace New York after the Distribution............................. 2 Listing and Trading of New Grace Common Stock; No Current Public Market............. 3 SUMMARY SELECTED FINANCIAL INFORMATION OF GRACE CHEMICALS............................. 4 THE DISTRIBUTION...................................................................... 5 Manner of Effecting the Distribution................................................ 5 Conditions; Termination............................................................. 5 Fraudulent Transfer and Related Considerations...................................... 6 Certain Federal Income Tax Consequences of the Distribution......................... 6 Relationships After the Distribution................................................ 8 Listing and Trading of New Grace Common Stock; No Current Public Market............. 8 Dividend Policy and Share Repurchases............................................... 9 NMC Credit Agreement................................................................ 9 Other Arrangements.................................................................. 10 BUSINESS OF NEW GRACE................................................................. 12 BUSINESS OF GRACE CHEMICALS........................................................... 12 Overview and Strategy............................................................... 12 Chemical Industry Overview.......................................................... 13 Products and Markets................................................................ 14 Discontinued Operations............................................................. 18 Research Activities................................................................. 19 Patents and Other Intellectual Property Matters..................................... 19 Environmental, Health and Safety Matters............................................ 20 Legal Proceedings and Regulatory Matters............................................ 20 Properties.......................................................................... 28 PRO FORMA FINANCIAL INFORMATION....................................................... 29 Unaudited Pro Forma Condensed Consolidated Balance Sheet............................ 29 Unaudited Pro Forma Condensed Consolidated Statement of Operations.................. 30 NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS.......................................................................... 31 CAPITALIZATION........................................................................ 33 GRACE CHEMICALS SELECTED FINANCIAL INFORMATION........................................ 34 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION........................................................................... 35 Review of Operations................................................................ 35 Specialty Chemicals................................................................. 35 Statement of Operations............................................................. 37 Restructuring Costs, Asset Impairments and Other Costs.............................. 38 Discontinued Operations............................................................. 39 Financial Condition................................................................. 39 Asbestos-Related Matters............................................................ 41 Environmental Matters............................................................... 41 </TABLE> GRACE HOLDING, INC. (TO BE RENAMED W. R. GRACE & CO.) CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K <TABLE> <CAPTION> FORM S-1 ITEM NUMBER AND HEADING CAPTION OR LOCATION IN PROSPECTUS ------------------------------------- ------------------------------------------------- <C> <S> <C> 1. FOREPART OF THE REGISTRATION STATEMENT AND OUTSIDE FRONT COVER PAGE OF PROSPECTUS................... Outside Front Cover Page 2. INSIDE FRONT AND OUTSIDE BACK COVER PAGES OF PROSPECTUS.................. ADDITIONAL INFORMATION; TABLE OF CONTENTS 3. SUMMARY INFORMATION, RISK FACTORS AND RATIO OF EARNINGS TO FIXED CHARGES... SUMMARY; CONSOLIDATED FINANCIAL STATEMENTS OF W. R. GRACE & CO. FOR THE YEAR ENDED DECEMBER 31, 1995 4. USE OF PROCEEDS...................... Not Applicable 5. DETERMINATION OF OFFERING PRICE...... Not Applicable 6. DILUTION............................. Not Applicable 7. SELLING SECURITY HOLDERS............. Not Applicable 8. PLAN OF DISTRIBUTION................. THE DISTRIBUTION 9. DESCRIPTION OF SECURITIES TO BE REGISTERED........................... DESCRIPTION OF NEW GRACE CAPITAL STOCK; CERTAIN ANTI-TAKEOVER EFFECTS 10. INTERESTS OF NAMED EXPERTS AND COUNSEL.............................. VALIDITY OF SECURITIES 11. INFORMATION WITH RESPECT TO THE REGISTRANT........................... SUMMARY -- New Grace; BUSINESS OF NEW GRACE; BUSINESS OF GRACE CHEMICALS; SUMMARY -- Listing and Trading of New Grace Common Stock; No Current Public Market; THE DISTRIBUTION -- Listing and Trading of New Grace Common Stock; No Current Public Market; Consolidated Financial Statements of W. R. Grace & Co. for the year ended December 31, 1995; Consolidated Financial Statements of W. R. Grace & Co. for the Quarter Ended March 31, 1996; GRACE CHEMICALS SELECTED FINANCIAL INFORMATION; MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION; MANAGEMENT; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS; BENEFICIAL OWNERSHIP OF MANAGEMENT; CERTAIN RELATIONSHIPS AND TRANSACTIONS 12. DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES.......................... Not Applicable </TABLE> <TABLE> <CAPTION> PAGE ---- <S> <C> MANAGEMENT............................................................................ 43 Board of Directors.................................................................. 43 Committees of the Board of Directors................................................ 45 Compensation of Directors........................................................... 45 Executive Officers.................................................................. 46 Executive Compensation and Employee Benefits Prior to the Distribution.............. 46 Executive Compensation and Employee Benefits Following the Distribution............. 47 Employee Benefits and Compensation Agreement........................................ 47 Compensation Committee Interlocks and Insider Participation......................... 47 CERTAIN AGREEMENTS BETWEEN GRACE NEW YORK AND NEW GRACE............................... 48 CERTAIN RELATIONSHIPS AND TRANSACTIONS................................................ 48 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS....................................... 49 BENEFICIAL OWNERSHIP OF MANAGEMENT.................................................... 49 DESCRIPTION OF NEW GRACE CAPITAL STOCK................................................ 50 CERTAIN ANTI-TAKEOVER EFFECTS......................................................... 51 Classified Board of Directors....................................................... 51 Number of Directors; Removal; Filling Vacancies..................................... 51 No Shareholder Action by Written Consent; Special Meetings.......................... 52 Advance Notice Provisions for Shareholder Nominations and Shareholder Proposals..... 52 New Grace Preferred Stock........................................................... 53 Rights to Purchase Securities and Other Property.................................... 54 Amendment of Certain Provisions of the New Grace Certificate of Incorporation and New Grace By-laws................................................................ 54 Preferred Stock Purchase Rights..................................................... 55 Certain Anti-takeover Features...................................................... 57 Anti-takeover Statute............................................................... 57 LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS............................... 59 Limitation of Liability of Directors................................................ 59 Indemnification of Directors and Officers........................................... 59 Certain Other Information........................................................... 60 COMPARISON OF CERTAIN RIGHTS OF SHAREHOLDERS OF GRACE NEW YORK AND NEW GRACE.......... 61 Duties of Directors................................................................. 61 Size and Classification of the Board of Directors................................... 61 Removal of Directors; Filling Vacancies on the Board of Directors................... 62 Shareholder Nominations............................................................. 62 Action by Written Consent........................................................... 63 Special Meetings of Shareholders; Quorum............................................ 63 Shareholder Proposals............................................................... 64 Required Vote for Authorization of Certain Actions.................................. 64 Amendment of Corporate Charter and By-laws.......................................... 64 Appraisal Rights.................................................................... 65 Fair Price and Anti-Greenmail Provisions............................................ 65 Stock Rights Plan................................................................... 65 State Anti-takeover Statutes........................................................ 66 Limitation on Directors' Liability.................................................. 67 Indemnification of Officers and Directors........................................... 67 Cumulative Voting................................................................... 67 Conflict-of-Interest Transactions................................................... 68 </TABLE> reorganization, Grace Chemicals believes that it is better able to serve its multinational customers in all global regions, as well as to tailor its product offerings to meet local preferences. THE DISTRIBUTION At the Time of Distribution, Grace New York (through the Distribution Agent) will distribute, on a one-share-for-one-share basis, all of the issued and outstanding shares of New Grace Common Stock to the holders of shares of Grace New York Common Stock. No consideration will be required to be paid by the holders of Grace New York Common Stock for the New Grace Common Stock. It is expected that the mailing of certificates representing shares of New Grace Common Stock pursuant to the Distribution will occur as promptly as practicable following the time of Distribution. In connection with the Distribution, NMC will borrow and/or will assume Debt (as defined in the Reorganization Agreement) in an aggregate amount of $2.263 billion (as adjusted pursuant to the Reorganization Agreement) and will distribute the net cash proceeds to Grace Chemicals as a dividend (such assumption and dividend, the "Distribution Payment"). As of the date hereof, it is estimated that the Distribution Payment will be approximately $2.2478 billion. A portion of such net cash proceeds will be applied to further reduce Grace Chemicals' debt; the remaining net cash proceeds are expected to be used to purchase shares of New Grace Common Stock and to invest in core businesses. Pursuant to the Distribution Agreement, dated as of February 4, 1996, between Grace New York, Fresenius AG and Grace Chemicals (the "Distribution Agreement"), at the Time of Distribution, New Grace's name will be changed to "W. R. Grace & Co." See "THE DISTRIBUTION -- Manner of Effecting the Distribution -- Intercompany Transactions." The Distribution will be consummated contemporaneously with the Grace Merger and only after the satisfaction or waiver of all conditions to the Grace Merger. In addition, consummation of the Distribution is a condition to the consummation of the Grace Merger. The Distribution Agreement may be terminated, and the Distribution may be abandoned, only following termination of the Reorganization Agreement, by and in the sole discretion of the Grace New York Board of Directors (the "Grace New York Board"), without the approval of Grace New York shareholders or any other party. In the event of such termination or abandonment, Grace New York will have no liability to any person under the Distribution Agreement or any obligation to effect the Distribution thereafter. See "CERTAIN AGREEMENTS BETWEEN GRACE NEW YORK AND NEW GRACE." TAX CONSEQUENCES OF THE DISTRIBUTION The Distribution is expected to be tax-free to Grace New York and to the holders of Grace New York Common Stock who receive shares of New Grace Common Stock in the Distribution. See "THE DISTRIBUTION -- Certain Federal Income Tax Consequences of the Distribution." RELATIONSHIP WITH GRACE NEW YORK AFTER THE DISTRIBUTION As a result of the Distribution, New Grace will cease to be a subsidiary of Grace New York and will operate as a separate publicly held company. See "CERTAIN RELATIONSHIPS AND TRANSACTIONS." Under the credit agreement to be entered into by NMC shortly before the Distribution (the "NMC Credit Agreement," and the credit facilities provided thereunder, the "NMC Credit Facility"), Grace Chemicals has agreed to provide guarantees up to a maximum of $950 million. The NMC Credit Agreement is expected to provide that these guarantees will be released as to $800 million upon the occurrence of certain events after 45 days, but within 60 days, following the Effective Date, including (a) the receipt of an unconditional joint and several guarantee from Fresenius Medical Care and certain of its subsidiaries for the full amount of the NMC Credit Facility; or (b) the receipt of a letter of credit or other acceptable financial accommodation for the account of Grace Chemicals or Fresenius Medical Care in form and substance satisfactory to the lenders under the NMC Credit Agreement (the "Lenders"); or (c) a prepayment in certain specified amounts under the NMC Credit Facility. If such guarantees are not released within 60 days following the Effective Date, demand for payment will be made on Grace Chemicals under such guarantees as to $800 million. Grace Chemicals has been advised that it is the intention of Fresenius Medical Care to ANNEX A PROSPECTUS GRACE HOLDING, INC. (TO BE RENAMED W. R. GRACE & CO.) COMMON STOCK (PAR VALUE $.01 PER SHARE) This Prospectus of Grace Holding, Inc. (the "Prospectus") is being furnished in connection with the distribution ("Distribution") by W. R. Grace & Co., a New York corporation ("Grace New York"), of one share of Common Stock, par value $.01 per share (together with the associated rights, "New Grace Common Stock"), of Grace Holding, Inc., a Delaware corporation wholly owned by Grace New York (individually or together with its subsidiaries, "New Grace"), for each share of Common Stock, par value $1.00 per share, of Grace New York (together with the associated rights, "Grace New York Common Stock"). The Distribution, and certain related transactions, will be effected as follows. - Pursuant to the Agreement and Plan of Reorganization, as amended or supplemented from time to time (the "Reorganization Agreement," and the transactions contemplated thereby, the "Reorganization"), dated as of February 4, 1996, by and between Grace New York and Fresenius AG, a German corporation ("Fresenius AG"), W. R. Grace & Co.-Conn., a Connecticut corporation which conducts the packaging and specialty chemicals businesses of Grace New York ("Grace Chemicals"), will distribute the capital stock of National Medical Care, Inc., a Delaware corporation and the wholly owned principal health care subsidiary of Grace Chemicals ("NMC"), to Grace New York, resulting in Grace Chemicals, New Grace and NMC becoming sister companies. - Immediately thereafter, Grace New York will (1) contribute the capital stock of Grace Chemicals to New Grace and (2) effect the Distribution (the moment of the Distribution, the "Time of Distribution"). - Immediately following the Time of Distribution, Grace New York will be recapitalized (the "Recapitalization") so that each holder of one share of Grace New York Common Stock will thereafter also hold one share of a new series of Grace New York preferred stock, par value $.10 per share (a "New Preferred Share"). - Immediately following the Recapitalization, Grace New York (which will then be comprised only of NMC's health care business) will merge (the "Grace Merger") with a subsidiary of Fresenius Medical Care AG, a German corporation ("Fresenius Medical Care"), and, based on information available as of July 15, 1996, holders of Grace New York Common Stock (other than any Grace New York Common Stock as to which appraisal rights have been asserted and not withdrawn or otherwise lost, and certain other shares) will receive approximately 1.013 American Depositary Shares ("ADSs"), each representing one-third of an Ordinary Share, nominal value DM 5 per share, of Fresenius Medical Care ("FMC Ordinary Share"), in exchange for each share of Grace New York Common Stock. Such ADSs, together with the FMC Ordinary Shares allocated to NMC employees holding options with respect to Grace New York Common Stock, will represent 44.8% of the FMC Ordinary Shares outstanding on a fully diluted basis immediately following the Reorganization. Shares of Grace New York Preferred Stock, par value $100 per share ("Grace New York Preferred Stock"), will not be exchanged for FMC Ordinary Shares in the Grace Merger and will remain outstanding thereafter. In addition, immediately following the Distribution, Fresenius USA, Inc., a Massachusetts corporation and majority-owned subsidiary of Fresenius AG which acts as Fresenius AG's distributor in North America ("Fresenius USA"), will merge with another subsidiary of Fresenius Medical Care (the "Fresenius Merger"). - As promptly as practicable following the Grace Merger and the Fresenius Merger, Fresenius USA will be contributed to FNMC. For more information on the Reorganization, see the Joint Proxy Statement-Prospectus of Grace New York and Fresenius USA dated August 2, 1996 (the "Joint Proxy Statement-Prospectus"). Immediately prior to the Time of Distribution, the Certificate of Incorporation of Grace New York (the "Grace New York Certificate") will be amended to change the name of Grace New York to "Fresenius National Medical Care, Inc." ("FNMC"), and the Amended and Restated Certificate of Incorporation of New Grace (the "New Grace Certificate") will be amended to change the name of New Grace to "W. R. Grace & Co." The Distribution will result in 100% of the outstanding shares of New Grace Common Stock being distributed to the holders of Grace New York Common Stock. No consideration will be required to be paid by holders of Grace New York Common Stock for the shares of New Grace Common Stock. It is expected that certificates representing shares of New Grace Common Stock will be mailed by ChaseMellon Shareholder Services, L.L.C. (the "Distribution Agent") as promptly as practicable following the Time of Distribution. See "THE DISTRIBUTION." There is no current public trading market for New Grace Common Stock, although it is expected that a "when-issued" trading market will develop at or about the Time of Distribution. New Grace will apply to list the shares of New Grace Common Stock on the New York Stock Exchange ("NYSE") under the symbol "GRA." (Continued on next page) --------------------- A VOTE OF THE HOLDERS OF THE GRACE NEW YORK COMMON AND PREFERRED STOCKS IS REQUIRED IN CONNECTION WITH THE REORGANIZATION, AS DESCRIBED IN THE JOINT PROXY STATEMENT-PROSPECTUS. --------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. --------------------- THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES. The date of this Prospectus is August 2, 1996. <TABLE> <CAPTION> PAGE ---- <S> <C> Dividends and Other Distributions................................................... 68 Issuance of Rights or Options to Purchase Shares to Directors, Officers and Employees........................................................................ 68 Loans to Directors.................................................................. 69 Right to Inspect Corporate Books and Records; Right to Inspect Shareholder Lists.... 69 VALIDITY OF SECURITIES................................................................ 70 EXPERTS............................................................................... 70 ADDITIONAL INFORMATION................................................................ 70 INDEX OF DEFINED TERMS................................................................ 71 ANNEXES A - Form of Amended and Restated Certificate of Incorporation of W. R. Grace & Co.............................................................................. A-1 B - Form of Amended and Restated By-laws of W. R. Grace & Co........................ B-1 C - Summary of Grace Holding, Inc. 1996 Stock Incentive Plan........................ C-1 D - Summary of Grace Holding, Inc. 1996 Stock Retainer Plan for Nonemployee Directors....................................................................... D-1 E - Grace New York 1996 Proxy Excerpt............................................... E-1 F - Consolidated Financial Statements of W. R. Grace & Co. for the year ended December 31, 1995............................................................... F-1 G - Consolidated Financial Statements of W. R. Grace & Co. for the quarter ended March 31, 1996.................................................................. G-1 </TABLE> provide the unconditional joint and several guarantees referred to in the preceding sentence in a manner so as to cause the release of the Grace Chemicals guarantees as to $800 million not before 46 days, but on or prior to 50 days, following the Effective Date. However, no assurance can be given that such guarantees will be provided or that either or both of Grace Chemicals' guarantees will be released. In the event that Fresenius Medical Care does not provide such guarantees or otherwise effect the release of the Grace Chemicals guarantees as to $800 million, Grace Chemicals would be required to provide the letters of credit or repay the amounts specified in the NMC Credit Agreement and, thereafter, be subrogated to the rights of Lenders with respect to such repaid amounts after the Lenders under the respective facilities have been repaid in full; and Grace Chemicals has undertaken to the Lenders to maintain unused available credit in an amount to be determined while the Grace Chemicals guarantees are outstanding in order to facilitate such actions. In connection with Grace Chemicals' agreement to extend guarantees under the NMC Credit Agreement, Fresenius Medical Care and Grace Chemicals intend to enter into an agreement to induce Fresenius Medical Care to cause such guarantees to be released on the 50th day following the Effective Date. The balance of the Grace Chemicals guarantees as to the remaining $150 million will be released upon NMC (or Fresenius Medical Care, if Fresenius Medical Care guarantees the NMC Credit Facility), on a consolidated basis, achieving a ratio of senior debt to EBITDA (i.e., earnings before interest, taxes, depreciation and amortization) of equal to or less than 3.5. See "THE DISTRIBUTION -- NMC Credit Agreement." In addition, Grace Chemicals has entered into certain agreements and given certain guarantees in connection with the OIG Investigation. See "THE DISTRIBUTION -- Other Arrangements." LISTING AND TRADING OF NEW GRACE COMMON STOCK; NO CURRENT PUBLIC MARKET There is no current public trading market for the New Grace Common Stock. New Grace will apply to list the New Grace Common Stock on the NYSE under the symbol "GRA" (see "THE DISTRIBUTION -- Listing and Trading of New Grace Common Stock; No Current Public Market"). However, there can be no assurance as to the volume of trading and liquidity that will result or as to the prices at which New Grace Common Stock will trade after the Distribution. Until the New Grace Common Stock is fully distributed and an orderly market develops, the prices at which trading in New Grace Common Stock occurs may fluctuate.
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. The business of the Company described in this Prospectus consists of the historical businesses of two Tridex subsidiaries, Ithaca Peripherals Incorporated ("Ithaca") and Magnetec Corporation ("Magnetec"), excluding a printer ribbon business which will be transferred to Tridex by Magnetec no later than December 31, 1996. The financial condition and results of operations of the Company described in this Prospectus consist of the combined historical financial condition and results of operations of Ithaca and Magnetec, excluding the ribbon business but including certain corporate allocations from Tridex. See "Relationship Between the Company and Tridex -- Plan of Reorganization" and "-- Agreement Regarding Ribbon Business." Prior to the Offering, Ithaca has been merged with and into Magnetec. As used herein, references to "fiscal 1994" mean the fiscal year of the Company ended April 2, 1994 and references to "fiscal 1995" mean the fiscal year of the Company ended April 1, 1995. Unless otherwise specified, all information in this Prospectus assumes no exercise of the over-allotment option granted to the Underwriters. See "Underwriting." Investors should carefully consider the information set forth under the heading "Risk Factors." THE COMPANY Transact designs, develops, manufactures and markets transaction based printers and related products under the ITHACA and MAGNETEC brand names. The Company's printers are used to provide transaction records such as receipts, tickets, coupons, register journals and other documents. The Company focuses on four vertical markets: point-of-sale ("POS") (from which the Company derived approximately 57.6% of its net sales in the nine months ended December 31, 1995); gaming and lottery (approximately 27.0% of net sales); financial services (approximately 7.7% of net sales); and kiosks (approximately 7.7% of net sales). The Company sells its products directly to end users, original equipment manufacturers ("OEMs"), value added resellers ("VARs") and selected distributors, primarily in the United States and Canada. Transact manufactures and sells customizable and custom dot matrix and thermal printers for applications requiring up to 60 character columns in each of its four vertical markets. The Company also sells an 80 column laser printer for kiosk applications. The Company's customizable products include several series of printers which offer customers the ability to choose from a variety of features and functions. Options typically include different printing technologies, print speeds, paper handling capacities and numbers of print stations. In addition to its customizable printers, Transact manufactures custom printers for certain OEM customers. In collaboration with these customers, the Company provides engineering and manufacturing expertise for the design and development of specialized printers. Transact markets its products through a network of selected distributors, OEMs, VARs and systems integrators, as well as directly to end users. The Company's use of multiple sales channels allows it to reach customers of all sizes in each of its four vertical markets. Customers of the Company include OEM customers such as GTECH Holdings Corporation ("GTECH"), the leading worldwide supplier of on-line lottery systems, Interbold ("Interbold," a joint venture of Diebold Incorporated and IBM Corporation), a leading worldwide supplier of automated teller machines ("ATMs"), Indiana Cash Drawer ("ICD"), a leading distributor of POS products, and Ultimate Technology Corporation ("Ultimate"), a VAR and distributor of POS products. In May 1996, the Company entered into a strategic marketing agreement with Okidata of America, a division of Oki of America, Inc. ("Okidata"), and, pursuant to that agreement, a separate sales agreement with its affiliate Oki Europe Limited ("Oki Europe"), establishing Oki Europe as the exclusive distributor of the Company's POS and kiosk products in Europe, the Middle East and North Africa. The Company also has a significant supplier relationship with Okidata, which provides critical components for the Company's POS printers. The Company's goal is to become a leading worldwide supplier of transaction based printers and related products in each of its markets. The Company believes that significant opportunities exist to satisfy increasing demand for new and replacement POS equipment, to leverage its existing strategic relationship in the gaming and lottery market in order to take advantage of the proliferation of lottery and keno systems, to develop and supply new products for emerging applications in ATMs and kiosks, and to capture international market share as worldwide usage of transaction based electronics grows. Key elements of the Company's strategy for achieving its objectives are: (i) to focus on its four vertical markets; (ii) to expand its product lines; (iii) to increase its geographic market penetration; (iv) to emphasize its engineering expertise; and (v) to capitalize on the efficiencies of its flexible manufacturing systems. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SEPARATION FROM TRIDEX Upon completion of the Offering, Tridex will beneficially own approximately 82.4% (approximately 80.3% if the Underwriters' over-allotment option is exercised in full) of the Company's common stock, par value $.01 per share ("Common Stock"). Tridex has advised the Company that it intends to distribute its ownership interest in the Company to the stockholders of Tridex as soon as practicable after the completion of the Offering through a distribution of Common Stock of the Company to all Tridex stockholders as a tax-free dividend (the "Distribution"). The Distribution will be subject to certain conditions, including the receipt of a ruling from the Internal Revenue Service (the "IRS") confirming the tax-free nature of the transaction. See "The Company -- Background of the Offering and the Distribution." In connection with the Distribution, the Company and Tridex have entered into, or prior to completion of the Offering will enter into, certain agreements which govern various interim and ongoing relationships. See "Tridex as Principal Stockholder" and "Relationship Between the Company and Tridex." <TABLE> THE OFFERING <S> <C> Common Stock offered.................................. 1,150,000 shares Common Stock to be outstanding after the Offering..... 6,550,000 shares(1) Use of proceeds....................................... Repayment of indebtedness to Tridex, and for working capital and other general corporate purposes. Nasdaq National Market symbol......................... TACT </TABLE> <TABLE> SUMMARY FINANCIAL DATA (2) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS) <CAPTION> SIX MONTHS FISCAL YEARS ENDED NINE MONTHS ENDED ENDED ------------------------------------------ --------------------------- ------------------ MARCH 28, APRIL 3, APRIL 2, APRIL 1, DECEMBER 31, DECEMBER 31, JULY 1, JUNE 29, 1992 1993 1994 1995 1994 1995 1995 1996 --------- -------- -------- -------- ------------ ------------ ------- -------- <S> <C> <C> <C> <C> <C> <C> <C> <C> COMBINED STATEMENT OF INCOME DATA: Net sales................ $19,509 $25,949 $23,798 $33,362 $25,426 $25,497 $16,184 $20,225 Gross profit............. 5,204 8,016 8,213 11,013 8,391 7,968 5,474 6,807 Operating expenses....... 4,502 5,223 6,490 7,308 5,361 6,389 3,882 4,267 Operating income......... 702 2,793 1,723 3,705 3,030 1,579 1,592 2,540 Net income............... 372 1,632 1,093 2,304 1,883 916 953 1,733 <CAPTION> PRO AS OF FORMA ----------------------------------------------------------------------------------- -------- MARCH 28, APRIL 3, APRIL 2, APRIL 1, DECEMBER 31, DECEMBER 31, JUNE 29, JUNE 29, 1992 1993 1994 1995 1994 1995 1996 1996(3) --------- -------- -------- -------- ------------ ------------ -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> <C> COMBINED BALANCE SHEET DATA: Working capital......... $ 4,495 $ 6,254 $ 5,920 $ 6,301 $ 5,367 $ 6,281 $ 7,128 $ 8,433 Current ratio........... 2.55 2.74 2.92 2.69 2.41 2.64 2.56 2.85 Plant and equipment, net................... 1,250 1,709 1,696 2,237 2,140 3,041 3,558 3,558 Tridex investment in the Company............... 9,418 11,326 10,839 11,280 10,591 11,645 12,658 -- Stockholders' equity.... -- -- -- -- -- -- -- 13,963 Total assets............ 12,323 14,910 13,916 15,358 14,392 15,969 17,641 18,946 </TABLE> - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- <TABLE> PRO FORMA COMBINED STATEMENT OF INCOME DATA (4) <CAPTION> NINE MONTHS SIX MONTHS ENDED ENDED DECEMBER 31, JUNE 29, 1995 1996 ------------ ------------ <S> <C> <C> Net sales............................................................................ $25,497 $20,225 Gross profit......................................................................... 7,968 6,807 Operating income..................................................................... 1,991 2,505 Net income........................................................................... 1,157 1,712 Earnings per share................................................................... 0.18 0.26 <FN> - --------------- (1) Does not include (i) 600,000 shares to be reserved for issuance under the Company's 1996 Stock Plan (the "Stock Plan"), of which 309,300 are subject to options granted as of the date of the Offering (ii) 60,000 shares to be reserved for issuance under the Company's Non-Employee Directors' Stock Plan (the "Directors' Plan"), of which 30,000 are subject to options granted as of the date of the Offering and (iii) 115,000 shares of Common Stock issuable upon exercise of the Representative's Warrant. See "Underwriting." (2) The table sets forth selected financial data of the Company. The data should be read in conjunction with the historical financial statements, notes and other financial information included herein. The combined statement of income data for the fiscal years ended April 2, 1994 and April 1, 1995 and the nine months ended December 31, 1995, and the combined balance sheet data at April 1, 1995 and December 31, 1995 are derived from the audited financial statements of the Company. The combined statement of income data for the fiscal years ended March 28, 1992 and April 3, 1993, the nine months ended December 31, 1994, and the six months ended July 1, 1995 and June 29, 1996 and the combined balance sheet data at March 28, 1992, April 3, 1993, April 2, 1994, December 31, 1994 and June 29, 1996 are derived from unaudited financial statements but, in the opinion of the Company's management, reflect all the adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of such data. In December 1995, the Company's fiscal year end was changed to December 31 from the Saturday closest to March 31. The fiscal year ended April 3, 1993 was a 53 week year. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. The historical financial statements of the Company may not necessarily reflect the results of operations or financial position that would have been obtained had the Company been a stand alone entity. See "Management's Discussion and Analysis of the Results of Operations and Financial Condition."
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diff --git a/parsed_sections/prospectus_summary/1996/TEX_terex-corp_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/TEX_terex-corp_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..bd1368217376d4e2f7e64728f5bccd548020e61b
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. Investors should carefully consider the information set forth under the caption "Risk Factors." The Company Terex Corporation ("Terex" or the "Company") is a global provider of capital goods and equipment used in the mining, commercial building, infrastructure, manufacturing and construction industries. The Company's Material Handling Segment designs, manufactures and markets a complete line of internal combustion ("IC") and electric lift trucks, electric walkies, automated pallet trucks and related components and replacement parts. The Heavy Equipment Segment designs, manufactures and markets heavy-duty, off-highway, earthmoving and construction equipment and related components and replacement parts. The Mobile Cranes Segment designs, manufactures and markets mobile cranes, aerial platforms, container stackers and scrap handlers and related components and replacement parts. See "The Company" and "Business." The Mobile Cranes Segment was established as a separate business segment as a result of a significant acquisition in 1995. On May 9, 1995, the Company, through Terex Cranes, Inc., a Delaware corporation which is a wholly owned subsidiary of the Company ("Terex Cranes"), completed the acquisition (the "PPM Acquisition") of substantially all of the shares of P.P.M. S.A., a societe anonyme, and certain subsidiaries ("PPM Europe"), from Potain S.A., a societe anonyme, and all of the capital stock of Legris Industries, Inc., a Delaware corporation which owns 92.4% of the capital stock of PPM Cranes, Inc., a Delaware corporation ("PPM North America;" and PPM North America together with PPM Europe collectively referred to as "PPM"), from Legris Industries S.A., a societe anonyme ("Legris France"). PPM designs, manufactures and markets mobile cranes and container stackers primarily in North America and Western Europe under the brand names of PPM, P&H (trademark of Harnischfeger Corporation) and BENDINI. Concurrently with the completion of the PPM Acquisition, the Company contributed the assets (subject to liabilities) of its Koehring Cranes and Excavators and Marklift division to Terex Cranes. The former division now operates as Koehring Cranes, Inc., a wholly owned subsidiary of Terex Cranes ("Koehring"). Koehring manufactures mobile cranes under the LORAIN brand name and aerial lift equipment under the MARKLIFT brand name. PPM and Koehring comprise Terex Cranes, Inc., the Company's Mobile Cranes Segment. The Offering On December 20, 1993 (the "Issue Date"), the Company completed the private placement of (i) 1,300,000 common stock purchase warrants (the "Series A Warrants") exercisable for shares of common stock, par value $.01 per share (the "Common Stock"), of the Company and (ii) 1,200,000 shares of the Company's Series A Cumulative Redeemable Convertible Preferred Stock (the "Series A Preferred Stock"), to institutional investors for aggregate gross proceeds to the Company of $30.2 million. Jefferies & Company, Inc. ("Jefferies") was the placement agent for the sale of the Series A Warrants and Series A Preferred Stock. The Series A Warrants were issued pursuant to the terms of a Series A Warrant Agreement dated as of December 20, 1993 (the "Series A Warrant Agreement") between the Company and Chemical Mellon Shareholder Services L.L.C., as Series A Warrant Agent (the "Series A Warrant Agent"). In connection with the sale of the Series A Warrants, the Company and the purchasers of the Series A Warrants entered into a Registration Rights Agreement dated as of December 20, 1993 (the "Series A Warrant Registration Rights Agreement") relating to the Series A Warrants and the shares of Common Stock issuable upon exercise or redemption of the Series A Warrants (the "Warrant Shares"). Pursuant to the terms of the Series A Warrant Registration Rights Agreement, the Company agreed to file the Registration Statement of which this Prospectus forms a part and is required to maintain the effectiveness of such Registration Statement until all Series A Warrants and Warrant Shares have been sold pursuant to an effective registration statement or Rule 144 under the Securities Act. Summary of Terms of the Series A Warrants Issuer......Terex Corporation. Issue......Common Stock Purchase Warrants exercisable for shares of Common Stock. Aggregate Number of Series A Warrants......Initially 1,300,000; as of the date hereof, 1,264,756. Expiration Date......The Series A Warrants will expire at 5:00 p.m. New York time on December 31, 2000 (unless earlier redeemed). Optional Redemption......The Series A Warrants will be redeemable upon not less than 30 days prior written notice by the Company, in whole but not in part, at any time; provided, that the Company concurrently redeems all then outstanding shares of Series A Preferred Stock. Each Series A Warrant will be redeemable for a number of Warrant Shares equal to the Warrant Ratio on the date of redemption. Warrant Ratio......As of the date of this Prospectus, the number of Warrant Shares for which each Series A Warrant is exercisable (the "Warrant Ratio") is 2.41. The Warrant Ratio is subject to increase upon the occurrence of certain events relating to the Company's obligation to effect the registration of the Warrants and the Warrant Shares. The Warrant Ratio is also subject to adjustment upon the occurrence of certain dilutive events. Exercise Price......$.01 per Warrant Share purchased upon the exercise of the Series A Warrants.
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diff --git a/parsed_sections/prospectus_summary/1996/TMO_thermo_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/TMO_thermo_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..4668f3789af231c6e5d1544ccc231de709a9974b
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the financial statements and notes thereto appearing elsewhere in this Prospectus. Except as otherwise indicated, all information in this Prospectus assumes that the Underwriters' over-allotment option will not be exercised. Investors should carefully consider the information set forth under the heading "Risk Factors." THE COMPANY Thermo Fibergen Inc. (the "Company") was established as a subsidiary of Thermo Fibertek Inc. ("Thermo Fibertek") to develop and commercialize equipment and systems to recover valuable materials from increasing volumes of pulp residue generated by plants that produce recycled pulp and paper. The Company intends to finance, build and operate recovery plants on sites at, or immediately adjacent to, recycled pulp mills, employing a proprietary process to treat pulp residue. The Company's plants will recover and clean long cellulose fibers for resale to pulp mills, and will process the remaining recoverable components of pulp residue, such as fines (very short fibers not usable for papermaking) and minerals, into saleable products. On July 3, 1996, the Company's wholly owned GranTek Inc. subsidiary ("GranTek") acquired substantially all of the assets, subject to certain liabilities, of Granulation Technology, Inc. ("GT") and Biodac, a division of Edward Lowe Industries, Inc. (collectively, "GT/ELI"), for approximately $12,000,000 in cash, subject to a post-closing adjustment. GranTek employs patented technology to produce absorbent granules from pulp residue. These granules, marketed under the trade name BIODAC, are currently used as a carrier to deliver chemicals for agricultural, lawn and garden, and other needs. GranTek's Green Bay, Wisconsin, plant currently produces more than 30,000 tons of BIODAC per year. Environmental concerns and other factors have led to an increase in the use and production of recycled paper in recent years. However, paper companies that increase the use of recycled paper as a source of their papermaking fiber experience substantial increases in their pulp residue. These increases result from the pulp de-inking, filtering and cleaning process, in which approximately 25% of the recycled fiber entering a pulp mill is lost to the waste stream, and must be disposed of at a substantial cost. The Company believes the North American pulp and paper industry spent an estimated $900 million to treat and dispose of approximately 9 million tons of pulp residue in 1993. The Company believes that worldwide expenditures to treat and dispose of pulp residue in 1993 were approximately $2.5 billion. The Company's strategy is to generate revenues from several sources. First, the Company will seek to enter into long-term contracts with pulp and paper mills under which the Company will charge the customer a tipping fee to accept the customer's pulp residue. Second, the Company intends to sell much of the clean long fibers it recovers directly back to the customer for use in the papermaking process. The Company has not yet begun to recover long fibers; as described below, the Company expects to begin construction of its first commercial recovery plant employing its long fiber-recovery technology in 1997. Third, the Company will apply existing technologies, such as its granulation technologies, and expects to develop new technologies, to maximize the value of the other recoverable components of the pulp residue, such as fines and minerals, for sale into other markets. For example, the Company intends to further develop GranTek's technology to produce granules for oil and grease absorbents as well as for specialty absorbents, such as for the cat box filler market. The Company anticipates that the tipping fees it receives will generally be competitive with the pulp mills' current disposal costs. The Company believes that pulp mills will prefer to dispose of their residue streams by paying the Company a tipping fee for a number of reasons. Disposal of residue with the Company will provide pulp mills with a long-term disposal solution and will eliminate concerns over long-term capacity constraints at their landfills; will relieve the pulp mills of the responsibility for complying with changing treatment and disposal regulations; and will allow pulp mills to reduce their capital investments in dewatering and treatment equipment, and to focus their resources on the manufacture of paper. The Company is actively developing a process to recover long fibers from pulp residue, and has completed the construction of a mobile pilot recovery system which the Company is using for initial mill demonstrations of its fiber-recovery process. The Company expects that its first commercial plants will feature only GranTek's technology to process pulp residue into absorbent granules. The Company's strategy is to introduce this technology to pulp mill customers, to enter into long-term contracts with such customers and to construct its plants, and then, upon the completion of development, to retrofit existing GranTek plants with the Company's long fiber-recovery technology. The Company will also explore the construction of plants in certain niche markets that may feature only the Company's long fiber-recovery technology. The Company expects to begin construction of its first commercial recovery plant employing its long fiber-recovery technology before the end of 1997. - -------------------------------------------------------------------------------- <TABLE> THE OFFERING <S> <C> Units Offered(1)..................... 4,100,000 Common Stock to be Outstanding after the Offering(1)(2)................. 14,100,000 Proposed AMEX Symbol for the Units... TFGU Proposed AMEX Symbol for the Common Stock.............................. TFG Proposed AMEX Symbol for the Redemption Rights.................. TFGR Scheduled Optional Redemptions....... The holder of a Redemption Right may require the Company to redeem one share of Common Stock for an amount of cash equal to the initial public offering price during the month of September 2000 (the "First Redemption Period") and the month of September 2001 (the "Second Redemption Period"). The Redemption Rights will expire if at any time after the 90th day after the date of this Prospectus and (i) prior to the beginning of the First Redemption Period or (ii) after the end of the First Redemption Period and prior to the beginning of the Second Redemption Period, the closing price of the Common Stock has been at least 150% of the Redemption Price, as adjusted, for 20 of any 30 consecutive trading days. Thermo Electron Guarantees........... Redemption payments have been guaranteed by Thermo Electron. The obligations represented by Thermo Electron's guarantees (the "Guarantees") will be subordinated in right of payment to the prior payment in full of all Senior Indebtedness (as defined herein) of Thermo Electron, including Senior Indebtedness which may be incurred by Thermo Electron after the issuance of the Guarantees. Use of Proceeds...................... Funding the development and commercialization of the Company's fiber-recovery system, and general corporate purposes, including acquisitions. Federal Tax Consequences............. Special tax considerations may apply to an investment in the Units. Investors should read carefully "Certain Federal Income Tax Consequences" and are advised to consult with their own tax advisors regarding the consequences of an investment in the Units. </TABLE> THERMO ELECTRON Thermo Electron develops, manufactures and markets environmental monitoring and analysis instruments, biomedical products including heart-assist systems, mammography systems and respiratory care products, paper-recycling and papermaking equipment, alternative-energy systems, industrial process equipment, and other specialized products. Thermo Electron also provides environmental and metallurgical services and conducts advanced technology research and development. Thermo Electron performs its business through its divisions and wholly owned subsidiaries, as well as majority-owned subsidiaries that are partially owned by the public or by private investors. - --------------- (1) Each Unit consists of one share of Common Stock and one Redemption Right. The Common Stock and the Redemption Rights will trade together as Units until the 90th day after the date of this Prospectus, after which date the Common Stock and the Redemption Rights will trade separately. (2) Does not include 825,000 shares of Common Stock reserved for issuance under the Company's stock-based compensation plans. As of August 31, 1996, options to purchase 338,000 shares of Common Stock had been granted and were outstanding under these plans. See "Capitalization," "Management -- Compensation of Directors" and "-- Compensation of Executive Officers" and Note 5 of Notes to Financial Statements of the Company. - -------------------------------------------------------------------------------- <TABLE> SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <CAPTION> PRO FORMA COMBINED(1)(2) ----------------------- SIX MONTHS TWELVE SIX ENDED(1) MONTHS MONTHS FISCAL YEAR ------------------ ENDED ENDED ------------------------------------- JULY 1, JUNE 29, DECEMBER 30, JUNE 29, 1992(1) 1993 1994 1995 1995 1996 1995 1996 ------- ------- ------- ------- ------- -------- ------------ -------- <S> <C> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues..................... $ -- $ -- $ -- $ -- $ -- $ -- $ 4,233 $ 3,154 Gross Profit................. -- -- -- -- -- -- 992 1,071 Research and Development Expenses................... 147 106 128 601 276 548 904 637 Patent Litigation Expenses... -- -- -- -- -- -- 1,654 290 Operating Loss............... (147) (106) (128) (601) (276) (548) (2,648) (842) Interest and Other Income (Expense).................. -- -- -- -- -- 267 (1,469) 704 Net Loss..................... (147) (106) (128) (601) (276) (281) (4,117) (138) Loss per Share(3)............ (.01) (.01) (.01) (.06) (.03) (.03) (.41) (.01) Weighted Average Shares(3)... 10,073 10,073 10,073 10,073 10,073 10,073 10,073 10,073 </TABLE> <TABLE> <CAPTION> JUNE 29, 1996 ------------------------ PRO FORMA AS COMBINED(4) ADJUSTED(5) ------------ --------- <S> <C> <C> BALANCE SHEET DATA: Working Capital........................................................................ $ 359 $48,861 Total Assets........................................................................... 13,659 62,161 Common Stock Subject to Redemption..................................................... -- 48,502 Shareholder's Investment............................................................... 12,313 12,313 <FN> - --------------- (1) Derived from unaudited financial statements. (2) The pro forma combined statement of operations data was derived from the pro forma combined condensed statements of operations included elsewhere in this Prospectus. The pro forma combined statement of operations data sets forth the results of operations for the twelve months ended December 30, 1995 and the six months ended June 29, 1996, as if the acquisition of substantially all of the assets, subject to certain liabilities, of GT/ELI had occurred on January 1, 1995. (3) Pursuant to Securities and Exchange Commission requirements, loss per share has been presented for all periods. Weighted average shares for all periods include 10,000,000 shares issued to Thermo Fibertek in connection with the initial capitalization of the Company and the effect of the assumed exercise of stock options issued within one year prior to the Company's proposed initial public offering. (4) The pro forma combined balance sheet data as of June 29, 1996 is derived from the pro forma combined condensed balance sheet included elsewhere in this Prospectus, which was prepared as if the acquisition of substantially all of the assets, subject to certain liabilities, of GT/ELI had occurred on June 29, 1996. (5) Adjusted to reflect the sale by the Company of 4,100,000 Units offered hereby at an assumed initial public offering price of $12.75 per Unit, after deducting estimated underwriting discounts and commissions and offering expenses payable by the Company. </TABLE>
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diff --git a/parsed_sections/prospectus_summary/1996/TTEC_ttec_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/TTEC_ttec_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e383cfd192592ff42d3bdabbf32e410fce171521
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1996/TTEC_ttec_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE NOTED HEREIN, INFORMATION IN THIS PROSPECTUS (I) ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION, (II) REFLECTS A FIVE-FOR-ONE SPLIT OF THE COMPANY'S COMMON STOCK EFFECTED ON JULY 31, 1996 AND (III) REFLECTS THE CONVERSION ON JULY 31, 1996 OF ALL OUTSTANDING SHARES OF CONVERTIBLE PREFERRED STOCK, PAR VALUE $6.45 PER SHARE, OF THE COMPANY ("PREFERRED STOCK") INTO 9,300,000 SHARES OF COMMON STOCK (THE "PREFERRED STOCK CONVERSION") EFFECTED IN CONNECTION WITH THE COMPANY'S INITIAL PUBLIC OFFERING OF COMMON STOCK (THE "INITIAL PUBLIC OFFERING"). UNLESS OTHERWISE INDICATED, REFERENCES TO "TELETECH" AND THE "COMPANY" MEAN TELETECH HOLDINGS, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES OR, FOR PERIODS PRIOR TO DECEMBER 1994, MEAN TELETECH TELECOMMUNICATIONS, INC. AND TELETECH TELESERVICES, INC., COLLECTIVELY. SEE "THE COMPANY." THE COMPANY TeleTech is a leading provider of customer care solutions for Fortune 1000 companies. TeleTech's customer care solutions encompass a wide range of telephone- and computer-based customer acquisition, retention and satisfaction programs designed to maximize the long-term value of the relationships between TeleTech's clients and their customers. Such programs involve all stages of the customer relationship and consist of a variety of customer service and product support activities, such as providing new product information, enrolling customers in client programs, providing 24-hour technical and help desk support, resolving customer complaints and conducting satisfaction surveys. TeleTech works closely with its clients to rapidly design and implement large scale, tailored customer care programs that provide comprehensive solutions to their specific business needs. TeleTech delivers its customer care services primarily through customer-initiated ("inbound") telephone calls and also over the Internet. Services are provided by trained customer care representatives ("Representatives") in response to an inquiry that a customer makes by calling a toll-free telephone number or by sending an Internet message. Representatives respond to these inquiries from TeleTech call centers ("Call Centers") utilizing state-of-the-art workstations, which operate on TeleTech's advanced technology platform, enabling the Representatives to provide rapid, single-call resolution. This technology platform incorporates digital switching, client/server technology, object-oriented software modules, relational database management systems, proprietary call tracking management software, computer telephony integration and interactive voice response. TeleTech provides services from Call Centers leased and equipped by TeleTech ("fully outsourced") and, beginning in April 1996, also from Call Centers leased and equipped by clients ("facilities management"). TeleTech typically establishes long-term, strategic relationships, formalized by multi-year contracts, with selected clients in the telecommunications, technology, transportation, health care and financial services industries. TeleTech targets clients in these industries because of their complex product and service offerings and large customer bases, which require frequent, often sophisticated, customer interactions. For example, in the second half of 1995 the Company entered into significant, multi-year contracts with CompuServe and United Parcel Service. In the first nine months of 1996, the Company obtained significant, additional business from AT&T and entered into a multi-year contract with the United States Postal Service (the "Postal Service"). The Company was founded in 1982 and has been providing inbound customer care solutions since its inception. Between December 31, 1995 and March 31, 1996, the Company opened, acquired or initiated management of six Call Centers. As of October 1, 1996, TeleTech leased or managed ten Call Centers in the United States, two in the United Kingdom and one in each of Australia and New Zealand, equipped with a total of 4,976 state-of-the-art workstations. TeleTech currently plans to expand two existing U.S. Call Centers by the end of 1996. In addition, TeleTech has signed leases for two facilities in the United States in which it expects to open additional Call Centers in 1997. In the first six months of 1996, approximately 97% of the Company's call handling revenues were derived from inbound customer inquiries. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Selling Stockholders................................ 3,600,000 shares U.S. offering.............................. 2,880,000 shares International offering..................... 720,000 shares Common Stock to be outstanding after the Offering.................................... 55,092,330 shares(1) Use of proceeds to the Company............... All proceeds from the sale of Common Stock offered hereby (the "Offering") will be received by the Selling Stockholders.(2) Nasdaq National Market Symbol................ TTEC </TABLE> - ------------ (1) Excludes 4,993,430 shares of Common Stock issuable upon exercise of options outstanding at October 1, 1996, with a weighted average exercise price of $5.47 per share, other than options to acquire 144,900 shares that will be exercised, and which underlying shares will be sold in the Offering, by certain Selling Stockholders. See "Capitalization," "Management--Compensation of Directors," "Management--TeleTech Stock Option Plan," "Underwriters" and note 11 to the Company's Consolidated and Combined Financial Statements (the "Financial Statements"). (2) If the Underwriters' over-allotment option is exercised in full, the Company will use the net proceeds it will receive for working capital and general corporate purposes. See "Use of Proceeds." SUMMARY FINANCIAL INFORMATION (1) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OPERATING DATA) <TABLE> <CAPTION> YEAR ENDED ELEVEN YEAR ENDED SIX MONTHS ENDED JANUARY 31, MONTHS ENDED DECEMBER 31, JUNE 30, --------------------- DECEMBER 31, ------------------ ------------------ 1993 1993 1994 1995 1995 1996 ------- ------------ ------- ------- ------- ------- 1992 ----------- (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues.......................................... $ 5,751 $13,814 $19,520 $35,462 $50,467 $22,291 $56,619 Income (loss) from operations..................... (332) 250 837 2,196 4,596 1,821 6,279 Net income........................................ 214 52 548 1,695 4,156(2) 2,420(2) 3,318 Pro forma net income.............................. 214 52 299(3) 1,037(3) 4,156(2) 2,420(2) 3,318 Pro forma net income per share of Common Stock and equivalents (4).................................. $ -- $ -- $ .01(3) $ .02(3) $ .08(2) $ .04(2) $ .06 Weighted average shares outstanding (4)........... 43,753 43,753 43,753 43,753 54,304 54,281 54,328 OPERATING DATA: Number of Call Centers............................ 1 1 2 2 3 3 9 Number of workstations............................ 300 300 560 560 960 960 3,107 </TABLE> <TABLE> <CAPTION> JUNE 30, 1996 ------------------------ ACTUAL PRO FORMA (5) --------- ------------- (UNAUDITED) <S> <C> <C> BALANCE SHEET DATA: Working capital.......................................................................... $ 6,733 $ 58,310 Total assets............................................................................. 63,751 106,328 Long-term debt, net of current portion................................................... 7,354 7,354 Total stockholders' equity............................................................... 11,748 76,615 </TABLE> - ------------ (1) The Summary Financial Information presented in this table is derived from the "Selected Financial Information" and the Financial Statements included elsewhere in this Prospectus. (2) Includes the $2.4 million pre-tax net proceeds of a one-time payment made by a former client to TeleTech in connection with such client's early termination of a contract. (3) During 1993 and 1994, the Company was an S corporation under Subchapter S of the Internal Revenue Code of 1986, as amended (the "Code"), and, accordingly, was not subject to federal income taxes. Pro forma net income includes a provision for income taxes at an effective rate of 44.4% for the 11 months ended December 31, 1993 and 39.5% for the year ended December 31, 1994. (4) Calculated in the manner described in note 1 to the Financial Statements. (5) Reflects the application of the $52.6 million of net proceeds received by the Company from the Initial Public Offering and the Preferred Stock Conversion effected in connection therewith. RECENT DEVELOPMENTS For the three months ended September 30, 1996, TeleTech's revenues increased $37.4 million, or 295%, to $50.1 million from $12.7 million for the same period of 1995. Income from operations increased to $6.9 million, or 13.8% of revenues, for the three months ended September 30, 1996, from $1.2 million, or 9.6% of revenues, for the same period of 1995. Net income increased $3.2 million, or 371%, to $4.1 million for the three months ended September 30, 1996 from $862,000 for the same period of 1995. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Recent Developments."
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diff --git a/parsed_sections/prospectus_summary/1996/VERU_veru-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/VERU_veru-inc_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE COMPANY The Company today is a global start-up company. Its business consists of the manufacture and sale of the female condom, known in the United States as Reality(R) and under various other trade names in foreign countries. The Company was incorporated in its original form in Wisconsin in 1971. Over the past several years, the Company has expended significant time and resources in the development of the female condom and securing FDA approval to market the female condom in the United States. During this time, the Company also operated its original business of developing, manufacturing and marketing specialty chemical and branded consumer products for the leisure time, household and institutional health care markets and for third parties. Prior to entering the commercialization phase of the female condom, the Company's Board of Directors determined that the continued growth and development of the female condom and the Company's other products would require separate management and accountability. Accordingly, in April of 1994, the Board of Directors formed WPC Holdings, Inc. ("Holdings") as a wholly owned subsidiary of the Company and transferred to Holdings all of the assets and liabilities of the Company other than those related primarily to the female condom. Prior to this restructuring, the Board of Directors determined that the Company was not able to simultaneously devote the time and resources necessary to adequately and effectively develop its two entirely different businesses. After considering various alternatives, on March 10, 1995, the Board of Directors selected the female condom as the central focus for the Company's strategic direction. This resulted in a strategy to sell Holdings and change the Company's name to The Female Health Company. After negotiations with the two potential purchasers, the Company executed a purchase agreement in June 1995 agreeing to sell Holdings to WPC Acquisition Corporation, subject to approval of the Company's shareholders (the "Sale"). At a special meeting of the Company's shareholders held on January 18, 1996, the shareholders approved the Sale and on January 29, 1996, the Company effectuated the Sale. While the Company was in the process of preparing a proxy statement to request that the Company's shareholders approve the Sale, the Company became aware that the sole stockholder of Chartex Resources Limited (which, together with its wholly owned subsidiary, Chartex International, Plc, is referred to herein collectively as "Chartex"), the manufacturer and owner of certain worldwide rights to, and the Company's sole supplier of, the female condom, was considering various alternatives for Chartex's future, including a sale of its stock or assets to a third party or a liquidation. Because of this and the perceived benefits of an acquisition of Chartex, the Company negotiated with the sole stockholder to acquire Chartex, and on November 20, 1995 the Company executed an acquisition agreement to purchase the outstanding stock of Chartex (the "Chartex Acquisition"). The Company effectuated the Chartex Acquisition on February 1, 1996. As a result of the Sale and the Chartex Acquisition, the Company's sole business now consists of the manufacture, marketing and sale of the female condom. The Company owns certain global intellectual property rights for the female condom, including patents in the United States, the European Union, Japan and various other countries, regulatory approvals in certain countries, including a PMA in the U.S., and certain proprietary manufacturing technology. In addition, the Company owns a state of the art, FDA approved, manufacturing facility in London, England capable of producing 60 million female condoms per year. The Company also has an approximately (Pounds)39 million (approximately $60 million) tax loss carryforward in the U.K. The Company believes the female condom has global potential to prevent unintended pregnancy and sexually transmitted diseases, including AIDS ("STDs"). The World Health Organization ("WHO") estimates that worldwide there are 333 million new cases of STDs each year and the American Journal of Obstetrics and Gynecology (1993) noted that half of all pregnancies in women between the ages of 15 and 44 in the U.S. alone are unintended. Prevention of STDs and unintended pregnancies can significantly lower health care costs through the avoidance of expensive treatment for STDs and the expenses associated with unintended pregnancies. The Company intends to initially focus the majority of its marketing efforts on three key markets: the United States, Japan and the global public sector market. The Company will also seek to continue to establish marketing partners in other markets throughout the world. In the United States, the Company will continue the educational-based thrust of its marketing, focusing on advertisement and promotion directed toward young adults and city, county and state public sector programs. In Japan, the Company has entered into a relationship with a $1 billion division of a $5 billion Japanese health care company. This division will market the female condom in Japan once it receives Japanese regulatory approval, which is currently anticipated to occur in late 1996 or early 1997. As the third part of its main marketing focus, the Company intends to continue to develop its global public sector sales through sales to WHO, the United States Agency for International Development ("USAID") and their affiliates. The Company believes that in addition to these high priority markets, opportunities exist in several other markets worldwide. As appropriate and the Company's resources permit, additional markets may be introduced. Specifically, the female condom has not yet been introduced in Brazil, Canada, China, France, Germany, Italy, India, Mexico and Russia. To date, Chartex has entered into exclusive distributor arrangements with several companies in various countries, including Argentina, Austria, Belgium, Greece, Hong Kong, Korea, the Netherlands, Portugal, Singapore, Spain, Switzerland and Thailand. These exclusive distributor agreements generally require the distributor to purchase a specified minimum quantity of units per year during the term of the agreement and require the distributor to spend a specified minimum amount on promotional expenses. To date, the product has not been launched in any major markets other than the United States and the United Kingdom. However, the product has been launched in 14 other smaller countries representing less than 2% of the potential market, and the sales volume in these countries has been less than anticipated. Management believes the lower than expected sales in these countries resulted from Chartex's initial failure to utilize an education-based marketing strategy. Management believes that a steady education based approach to marketing the female condom will successfully develop the market. Experience to date suggests this is occurring. 21 studies conducted by various independent investigators in 17 countries with 3,500 participants reflected the following response ranges: 50% to 90% like the female condom 30% to 97% would recommend its use 25% to 86% preferred it to the male condom In addition, according to various studies, about 40% to 60% of women who try the female condom indicate that they would continue to use it. Significant scientific support has developed for the female condom. There are more than 20 studies underway in the U.S., including comparison to the male condom, effectiveness, propensity to use and acceptability. The U.S. government is providing more than $8 million to fund this research. There is also significant and growing public sector interest. USAID is conducting a 22-country needs assessment study. WHO has conducted several studies and has expressed serious interest in the female condom. In addition, the cities of Philadelphia and Chicago have initiated successful public sector outreach/distribution programs. Management believes that given the market need and the results of these studies, as the health care community and women become familiar with the female condom, use of the female condom throughout the world will increase. The Company's corporate offices are located at 919 North Michigan Avenue, Suite 2208, Chicago, Illinois, 60611, and its telephone number is (312) 280- 2281. The Company's operating unit is located at 875 North Michigan Avenue, Suite 3660, Chicago, Illinois 60611, and its telephone number is (312) 280-1119. THE OFFERING Shares Offered . . . . . . . . 1,776,580 shares of the $.01 par value Common Stock of the Company (the "Common Stock"), up to 1,596,000 of which will be sold by the Company (the "Shares") and up to 180,580 of which will be sold by the Selling Shareholders (see "Principal and Selling Shareholders" and "Plan of Distribution"). Shares to be Outstanding After the Offering . . . . . 8,108,312 shares of Common Stock (assuming all of the Shares are sold, the Company's primary placement agent receives 54,000 shares in connection with this offering, the Company's secondary placement agent receives 96,000 shares and that a Selling Shareholder exercises its warrant to purchase the 50,000 shares of Common Stock which are currently vested under a warrant). American Stock Exchange Symbol . . . . . . . . . . FHC SUMMARY FINANCIAL INFORMATION <TABLE> <CAPTION> Year Ended September 30, Six Months Ended ---------------------------------------- ------------------- March 31, ------------------- 1993 1994 1995 1995 1996 ------------ ------------ ------------ ------------ ------------------- <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net revenues............................ $ 25,379 $ 1,671,885 $ 2,179,155 $ 982,902 $ 730,508 Cost of products sold................... 25,379 1,138,905 2,558,420 690,972 1,197,455(1) Selling expense......................... -- 1,774,754 4,276,610 3,092,224 797,334 Research and new product development expenses................... 1,103,790 489,656 135,121 67,415 154,612 Reality exclusivity fees(2)............. 2,766,462 2,993,299 2,578,941 1,727,390 -- Loss from continuing operations............................. (3,971,861) (5,501,767) (8,446,958) (5,214,740) (2,439,492) Net loss................................ (3,736,000) (3,000,134) (8,382,359) (5,834,487) (2,443,953) Loss from continuing operations per common and dilutive common equivalent share.................................. (1.02) (1.13) (1.40) (0.92) (0.38) September 30, March 31, ------------ --------- 1993 1994 1995 1995 1996 ------------ ------------ ------------ ------------ ------------------- BALANCE SHEET DATA: CONTINUING OPERATIONS: Working capital (Deficit)............... (1,717,088) 3,216,970 (2,034,064) N/A(3) (656,912) Total assets............................ 3,615,142 9,245,775 6,575,025 N/A(3) 11,518,051 Long-term debt and capital lease obligations............................ -- 85,387 145,720 N/A(3) 2,799,657 Stockholders' equity.................... 763,073 5,638,456 387,612 N/A(3) 5,087,222 DISCONTINUED OPERATIONS: Working capital......................... 1,698,344 4,827,966 5,211,277 N/A(3) -- Total assets............................ 6,460,448 9,401,541 9,540,376 N/A(3) -- Long-term debt, capital lease obligations and minority interest...... 1,927,782 1,763,122 1,608,475 N/A(3) -- Stockholders' equity.................... 3,574,448 7,038,172 7,163,596 N/A(3) -- </TABLE> ____________________ (1) Includes a $300,000 charge for inventory obsolescence reserve in the quarter ended March 31, 1996 which was taken by the Company to reflect the aging of its current inventory and the Company's lower than anticipated sales volume. (2) Prior to June 30, 1995, the Company recorded charges relating to minimum royalties necessary to maintain exclusive rights to market and distribute Reality in the U.S., Canada and Mexico. Due to pending discussions with Chartex as to a potential acquisition or other arrangement between the companies, the Company ceased recording further exclusivity charges after June 30, 1995. In conjunction with the Company's acquisition of Chartex effective February 1, 1996, the balances of the Company's exclusivity liability and prepaid royalty asset were eliminated in the purchase accounting. Refer to Notes 1 and 7 of the Company's September 30, 1995 Consolidated Financial Statements for further information on these items. (3) Balance sheet information as of March 31, 1995 was not deemed necessary.
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diff --git a/parsed_sections/prospectus_summary/1996/WAT_waters_prospectus_summary.txt b/parsed_sections/prospectus_summary/1996/WAT_waters_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..923a07c0a9ca7f23ffb42d0232c74ee175f2049a
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Market data used throughout this Prospectus were obtained from internal company surveys and industry publications primarily based upon 1994 data which is the most recent data currently available. Industry publications generally state that the information contained therein has been obtained from sources believed to be reliable, but the accuracy and completeness of such information is not guaranteed. Waters has not independently verified this market data. Similarly, internal company surveys, while believed by Waters to be reliable, have not been verified by any independent sources. THE COMPANY GENERAL Waters is the world's largest manufacturer, distributor and provider of high performance liquid chromatography ("HPLC") instruments, chromatography columns and other consumables, and related service. In 1994, the Company's market share was approximately 21% of the estimated $1.5 billion global HPLC market, which the Company believes was two and one-half times greater than its next leading competitor. Waters serves a worldwide customer base with 65% of its 1995 net sales to customers outside of the U.S. HPLC is the largest product segment of the analytical instrument market. HPLC is utilized in a broad range of industries to detect, identify, monitor and measure the chemical, physical and biological composition of materials, and to purify a full range of compounds. Customers include manufacturers of pharmaceuticals (ethical, generic and over-the-counter), industrial chemicals and polymers, food, beverages, and consumer products, as well as biotechnology companies, environmental testing companies, universities, hospitals and government agencies. HPLC is used for research and development, methods development, manufacturing and quality control due to its ability to identify approximately 80% of all known compounds and to operate in an automated manner, increasing productivity at a low cost to the user. Examples of HPLC applications include identification of new drug compounds, nutritional content analysis for food and beverage labeling, environmental testing of waste water and hazardous materials and quality control for a wide range of consumer and industrial products. MARKET LEADERSHIP The Company has the largest HPLC market share in the United States, Europe and non-Japan Asia and has a leading position in Japan. The Company attributes its worldwide market leadership to its global brand and reputation, technological innovation, comprehensive high quality product range, extensive sales and service and to having the largest installed base of HPLC instruments. Global Brand and Reputation. HPLC is critical to the research and development and quality control efforts of customers and can have a significant impact on their overall productivity. As a result, customers, principally scientists who run research laboratories, value proven performance. Reputation and demonstrated results are critical to end-user decisions to select an equipment supplier. In many cases, once a manufacturer's equipment is adopted in the laboratory, the costs and/or risks of switching to a different manufacturer's instruments can be high. Today the Company believes it has the largest HPLC installed base in the industry and outsells its closest competitor by two and one-half times. The "Waters" name has been associated with the HPLC market since the early 1970s when the Company pioneered the commercial adoption of HPLC technology with the introduction of the first practical, reliable high pressure solvent delivery system. The Company also introduced the first bonded reverse phase HPLC column in 1973. An independent industry survey, based on responses from approximately 8,800 U.S. customers, conducted from April 1992 through November 1995, cites Waters as the HPLC vendor they are most likely to consider when they make their next HPLC purchase. Technological Innovation. In the HPLC industry, technological innovation is a key component of market growth. The Company believes that it is the leader in HPLC technological innovation based upon its product introductions over the past several years and that it spends significantly more on research and development than its competitors. Since 1990, Waters has introduced a number of new products and has redesigned each of the core components within its HPLC product line including the Millennium(R) data collection software, the 717 Autosampler and the 996 Photo Diode Array detector, all of which have achieved rapid market acceptance. Products introduced by Waters within the past four years accounted for approximately 37% of the Company's net sales for 1995. The Company has recently introduced and plans to introduce within the next 12 to 16 months several new product offerings, including new products based upon mass spectrometry detection, a redesigned approach to solvent delivery for HPLC systems and new products in its Symmetry(R) consumables line. Comprehensive, High Quality Product Range. Waters manufactures a comprehensive range of systems and components (solvent delivery systems, sample injectors, detectors and data management and system control software) and consumables (chromatography columns and sample preparation devices), and offers related services. With over 100 instrument models and nearly 1,500 types of chromatography columns and consumables, Waters offers the most comprehensive range of HPLC products in the industry. This diverse product range enables Waters to provide solutions for virtually any liquid chromatography application. The Company is committed to maintaining the highest quality manufacturing standards and believes that by controlling these processes, it produces among the highest quality HPLC products available. Waters is more vertically integrated in those manufacturing areas critical to product quality and performance than most of its competitors, especially in the areas of precision machining and chemical synthesis. The Company's manufacturing facilities employ advanced techniques that meet the strict International Standards Organization ("ISO") 9002 quality manufacturing standards and FDA mandated Good Manufacturing Practices and the Taunton and Milford facilities are approved by the FDA to produce Class 1 medical devices. Waters' broad array of high quality products enables it to leverage its core technologies across a broad range of applications. Extensive Sales and Service. To meet the needs of its worldwide customer base, the Company maintains 66 offices in 29 countries and has the world's largest direct sales, service and technical support organization focused on HPLC. Its more than 550 highly-trained and educated representatives worldwide have average experience of over seven years with Waters and over ten years in the industry. Waters believes it is one of the few HPLC industry participants that both sells directly to end-users in each of its markets and provides local technical service and aftermarket support to customers in virtually every industrialized market in the world. This global presence enables Waters to provide timely, responsive support and service to its customers, many of whom operate internationally, and enables it to capitalize on growth opportunities in emerging markets. By focusing dedicated resources on HPLC, Waters is able to develop specialized service in HPLC and believes it can deliver higher quality service than its competitors who focus on a broad range of instruments. Largest Installed Base of HPLC Instruments. The Company believes that, based on its estimated 40% share of the U.S. installed base, it has the largest installed base of the estimated 150,000 HPLC systems in the world. This installed base provides a strong source of ongoing revenue to the Company, with approximately 39% of 1995 net sales generated by service of its HPLC equipment and the sale of consumables. The Company believes it has a competitive advantage as the market leader with respect to repeat purchases since customers are more likely to buy new systems and consumables from manufacturers whose products are compatible with their existing instruments and with whom they have past experience with respect to quality, equipment support and service. Close relationships and continual contact with its large customer base provide the Company with sales opportunities and innovative product and application ideas. GROWTH STRATEGY The Company has implemented a growth strategy comprised of four major parts. The strategy focuses on accelerating new product introductions, better capitalizing on potential market opportunities, pursuing selective acquisitions and reengineering its operations to support its stand-alone HPLC business. New Product Introductions. The Company believes it is the HPLC technology leader based upon its product introductions over the past several years and is committed to introducing technologically advanced products. Since the beginning of 1991, the Company has invested approximately $105 million in HPLC research and development, which has resulted in its current pipeline of high value-added products. Major new product introductions launched in 1995 and 1996 and planned for the remainder of 1996 include: . Alliance(TM). In March 1996, the Company introduced its Alliance(TM) product which uses a new design for the fluidics element (solvent and sample management) of the HPLC system. Alliance(TM) brings new performance benefits to the HPLC marketplace, including improved accuracy, reproducibility, ease of use, serviceability, reduced space consumption at the laboratory bench and cost effectiveness. The new technology minimizes solvent consumption and facilitates system calibration. The Company believes this new product is improving its competitive position in the core markets for HPLC. . Integrity(TM) System. In October 1995, the Company shipped the first units of its Integrity(TM) system, the first product in a family of new HPLC-mass spectrometry ("HPLC-MS") benchtop products. Integrity(TM) is a system that integrates the automated separation, quantitation and detection capabilities of HPLC with the identification and characterization capabilities of mass spectrometry ("MS"). The Company's HPLC-MS benchtop equipment provides more complete data than HPLC or MS alone, is smaller, easier to use and substantially less expensive than traditional MS products and is suited for use by chemists and laboratories trained in HPLC methods, equipment and data analysis. The Company believes that Integrity(TM) will generate growth opportunities because of its lower cost (as compared with traditional MS) together with its integration of MS and HPLC. Waters' Integrity(TM) system is the first fully integrated benchtop HPLC-MS system. . Symmetry(R). In May 1994, the Company introduced the first products in its Symmetry(R) line of consumables products, which the Company believes outperforms existing products in the marketplace due to its applicability over a wide range of compounds and its ability to deliver more accurate, reproducible results. Symmetry(R) is the result of a proprietary redesigned manufacturing process for silica media. Waters anticipates that the Symmetry(R) line of products will encompass a wide variety of columns and other sample preparation devices. The Company introduced new Symmetry(R) products during the first nine months of 1996 and plans to introduce more Symmetry(R) products during the remainder of 1996. These products are expected to contribute to the growth of the Company's consumables business. . Beyond 1996. Waters is working to develop new products to build upon the HPLC-MS and Symmetry(R) technologies. Additionally, upgrades to its Millennium(R) software are expected to expand network capabilities and connectivity to other analytical systems. The Company has research and development efforts underway to develop new capillary scale liquid chromatography and capillary electrophoresis products. Such developments, if successful, could reduce solvent consumption and allow for detection of minute sample sizes which would be particularly useful in the life sciences industry where samples are expensive and quantities are limited. The separating capabilities of these techniques could expand the applicability of HPLC into new areas. For example, capillary technologies enable separation and analysis of extremely small amounts of various compounds which historically could not be analyzed using traditional HPLC systems. Capitalizing on Market Opportunities. Waters believes that it is well positioned to take advantage of potential growth opportunities, including: (i) industry innovations and new product introductions such as HPLC-MS and capillary scale separations; (ii) growth in principal end-use markets such as pharmaceuticals, industrial chemicals and polymers, food and beverage, consumer products and environmental testing; (iii) increased spending by the pharmaceutical and biotech industries to develop new drugs, generic versions of existing drugs and over-the-counter drugs; (iv) increased customer emphasis on productivity and devices which accelerate time-to-market; (v) increased worldwide environmental regulation generating additional need for HPLC data collection systems, detection systems and validation procedures; (vi) continued expansion of government-mandated labeling and testing of drugs, foods and vitamins both in the U.S. and abroad; and (vii) increased instrument purchases to replace an aging installed base. The Company is targeting emerging markets with easy-to-use systems (including its new Tiger(TM) product line) and plans to leverage its global presence to take advantage of specific growth opportunities in Eastern Europe, Latin America and the Pacific Rim. Selective Acquisitions. In addition to internally generated growth, Waters intends to expand sales and profitability through the acquisition of closely related businesses and product lines. In particular, Waters believes that acquisitions in the highly fragmented HPLC chromatography columns and other consumables market would provide opportunities to gain niche technologies, leverage the Company's assets and expand its customer base. In July 1995, Waters began implementing this strategy with the acquisition of Phase Separations Limited, a company with a strong proprietary position in chromatography consumables, which had revenues of approximately $8.4 million in 1994. Waters also plans to selectively invest in ancillary, high value added analytical laboratory instrument technologies that complement its existing HPLC technologies and provide application solutions to existing and new customers. On May 1, 1996, the Company acquired all of the capital stock of TA Instruments, Inc. ("TAI"), the global leader in thermal analysis (the "TAI Acquisition"). The TAI Acquisition will provide the Company with a stronger presence in its non-pharmaceutical industrial markets. The Company has no other agreements or understandings regarding any material acquisitions or joint ventures at this time. Reengineering Operations. As part of establishing the Company as a stand- alone entity following the Acquisition (as defined below) in 1994, the Company reengineered its operations in a manner appropriate to its independent HPLC business. The Company (i) consolidated its manufacturing facilities from five to two (one of which is dedicated to instruments and one of which is dedicated to consumables), (ii) restructured its European distribution system, creating a central distribution center in Holland and eliminating distribution facilities in 13 European countries, (iii) streamlined administration (including the elimination of a major administrative site) and (iv) reengineered its production processes to reduce cycle times. During this period, the Company reduced its overall workforce by approximately 120 employees. Although the implementation of all operational changes is not yet complete, the Company has already reduced annual expenses and substantially improved profitability. Excluding 1994 and 1995 nonrecurring charges related to the purchase of Phase Separations Limited in July 1995, the acquisition of the Predecessor (as defined below) in August 1994 and the Company's initial public offering completed in November 1995, operating income was $56.3 million for the year ended December 31, 1995 and represented a 72% increase over the prior year primarily as a result of these actions. Waters continues to review its operations in order to improve productivity and to reduce costs. Based upon the reengineering of its operations, the Company believes it can leverage its infrastructure to support additional sales without a corresponding increase in costs. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." RECENT DEVELOPMENTS The IPO and the Redemption. In November 1995, the Company consummated an initial public offering (the "IPO") of its Common Stock which included the sale by the Company of 6,250,000 shares at an initial public offering price of $15.00 per share. In connection with the IPO, certain stockholders of the Company sold an additional 4,812,500 shares of Common Stock. Proceeds from the sale of Common Stock received by the Company were used (i) to repay a portion of the indebtedness incurred under the Company's then existing credit facility and (ii) to redeem (the "Redemption") $25.0 million in aggregate principal amount of the Company's 12 3/4% Senior Subordinated Notes due 2004 (the "Senior Subordinated Notes"). Tender Offer. On March 7, 1996, the Company commenced a tender offer (the "Tender Offer") pursuant to which the remaining $75 million in aggregate principal amount of Senior Subordinated Notes which were not redeemed as a part of the Redemption were purchased on April 4, 1996. The aggregate purchase price paid by the Company in connection with the Tender Offer was $91.2 million. The TA Instruments Acquisition. On May 1, 1996 the Company acquired all of the capital stock of TAI for $84 million in cash, subject to certain adjustments, which was financed through drawings on the revolving credit facility under the Bank Credit Agreement. TAI develops, manufactures, sells and services thermal analysis instrumentation which is used for the physical characterization of polymers and related materials. The thermal analysis and rheology products offered by TAI employ the most prevalent techniques used in the analysis of polymers and other organic/inorganic materials. TAI is the global market leader in the field of thermal analysis. Net sales for TAI were approximately $47 million in 1995. The Company has completed this strategic acquisition in order to provide more comprehensive solutions to its polymer characterization customers in the industrial marketplace. The Company views the TAI Acquisition as a significant step toward the creation of a focused business unit geared toward the non- pharmaceutical industrial customer which would combine the thermal analysis and rheology businesses of TAI with Waters' current gel permeation chromatography (a form of HPLC) product line. There is a strong relationship between the information obtained through gel permeation chromatography and the types of information obtained from thermal analysis and rheology. Waters believes that bringing these related analytical technologies together on a common information management system platform will bring significant value to industrial customers working primarily with polymeric materials. The Secondary Offering. In June 1996, certain stockholders sold 11,500,000 shares of the Company's Common Stock in a secondary offering at a price of $26.50 per share. The Company did not receive any of the proceeds from the sale of such shares. BACKGROUND On August 18, 1994, the Company purchased the assets (the "Acquisition") of the Waters Chromatography Division (the "Predecessor") of Millipore Corporation ("Millipore"). References herein to the "Company" and "Waters" refer to the Company, the Predecessor and their direct and indirect subsidiaries. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Selling Stockholders........ 2,031,904 shares Common Stock to be Outstanding After the Offering(a)................. 28,897,821 shares Use of Proceeds.............. The Company is not selling shares in the Offering and will not receive any of the proceeds from the sale of the shares offered hereby. New York Stock Exchange Symbol...................... "WAT" </TABLE> - -------- (a) Excludes 4,939,221 shares that may be issued upon the exercise of options granted pursuant to the Company's performance incentive plans, 1,000,000 shares which may be issued pursuant to the 1996 Long-Term Performance Incentive Plan (as defined below), 250,000 shares which may be issued pursuant to the 1996 Employee Stock Purchase Plan (as defined below), and 50,000 shares which may be issued pursuant to the Non-employee Director Stock Option Plan (as defined below). See "Management." SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL DATA (A) (IN THOUSANDS, EXCEPT PER SHARE DATA AND PERCENTAGES) <TABLE> <CAPTION> PREDECESSOR COMPANY ---------------------------------------- ------------------------------------------------ FULL YEAR 1994 ----------------------- JANUARY 1 AUGUST 19 YEAR NINE MONTHS ENDED YEAR ENDED DECEMBER 31, TO TO ENDED SEPTEMBER 30, ---------------------------- AUGUST 18, DECEMBER 31, DECEMBER 31, -------------------- 1991 1992 1993 1994 1994 1995 1995 1996 -------- -------- -------- ---------- ------------ ------------ -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales.............. $300,647 $309,287 $304,927 $176,097 $131,057 $332,972 $242,516 $279,692 Cost of sales.......... 125,160 123,342 124,387 73,446 49,740 126,216 92,318 103,944 Revaluation of acquired -- -- -- -- 38,424(b) 925(b) 371(b) 6,100(b) inventory............. -------- -------- -------- -------- -------- -------- -------- -------- Gross profit........... 175,487 185,945 180,540 102,651 42,893 205,831 149,827 169,648 S,G&A expenses (c)..... 130,600 138,318 132,452 85,216 44,522 132,746 94,957 107,752 R&D expenses........... 18,505 19,142 18,525 13,399 6,790 17,681 12,860 15,286 Goodwill and purchased technology amortization.......... -- -- -- -- 1,227(b) 3,629 2,718 3,977 Expensed in-process R&D................... -- -- -- -- 53,918(b) -- -- 19,300(b) Management fee (d)..... -- -- -- -- 552 5,393 1,159 -- Restructuring -- -- 13,000 -- 3,500 -- -- -- charge(e)............. -------- -------- -------- -------- -------- -------- -------- -------- Operating income (loss)................ 26,382 28,485 16,563 4,036 (67,616) 46,382 38,133 23,333 Interest expense, net(f)................ 2,185 2,107 2,072 828 12,011 30,315 23,688 11,140 Unrealized (gains) losses on future cash flow hedges(g)........ -- -- -- -- (923) 1,142 (872) -- Realized (gains) losses on cash flow -- -- -- -- -- (2,317) 550 -- hedges(g)............ -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) from con- tinuing operations before income taxes... 24,197 26,378 14,491 3,208 (78,704) 17,242 14,767 12,193 Provision for income 6,423 6,180 4,169 916 1,487 3,129 2,670 7,476 taxes(h).............. -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) from con- tinuing operations.... 17,774 20,198 10,322 2,292 (80,191) 14,113 12,097 4,717 (Loss) income from dis- continued operations, net of tax(i)......... (59) 108 (9) (448) 787 -- -- -- Estimated (loss) on disposal of discontin- -- -- -- -- (8,000) -- -- -- ued operations(i)..... -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) before extraordinary item.... 17,715 20,306 10,313 1,844 (87,404) 14,113 12,097 4,717 Extraordinary item-- (loss) on early re- -- -- -- -- -- (12,112) -- (22,264) tirement of debt...... -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) before cumulative effect of change in accounting principle............. 17,715 20,306 10,313 1,844 (87,404) 2,001 12,097 (17,547) Cumulative effect of change in accounting -- (2,228) -- -- -- -- -- -- principle(j).......... -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss)...... 17,715 18,078 10,313 1,844 (87,404) 2,001 12,097 (17,547) Less: accretion of and dividend on preferred -- -- -- -- 330 902 676 689 stock(k).............. -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) available to common $ 17,715 $ 18,078 $ 10,313 $ 1,844 $(87,734) $ 1,099 $ 11,421 $(18,236) stockholders.......... ======== ======== ======== ======== ======== ======== ======== ======== Income (loss) per com- mon share: (Loss) income per com- mon share from continuing operations. $ (3.38) $ 0.54 $ 0.48 $ 0.13 (Loss) per common share from discontinued operations............ (0.30) -- -- -- Extraordinary (loss) -- (0.49) -- (0.71) per common share...... -------- -------- -------- -------- Net (loss) income per $ (3.68) $ 0.05 $ 0.48 $ (0.58) common share.......... ======== ======== ======== ======== Weighted average number of common shares...... 23,852 24,582 23,852 31,527 </TABLE> <TABLE> <CAPTION> PRO FORMA NINE MONTHS ENDED SEPTEMBER 30, PRO FORMA 1995 1996 -------------- --------- <S> <C> <C> PRO FORMA STATEMENT OF CONTINUING OPERATIONS DATA(L): Net sales...................................... $379,569 $ 293,887 Operating income............................... 58,921 49,719 Interest expense, net.......................... 20,279 11,727 Income from continuing operations.............. 32,962 30,187 Accretion of and dividend on preferred stock(k)...................................... 902 689 Income per common share from continuing operations(m)................................. 1.06 0.94 </TABLE> <TABLE> <CAPTION> PREDECESSOR COMPANY ------------------------------------- ------------------------------------------------------- FULL YEAR 1994 ------------------------- JANUARY 1 AUGUST 19 YEAR NINE MONTHS NINE MONTHS YEAR ENDED DECEMBER 31, TO TO ENDED ENDED ENDED ------------------------- AUGUST 18, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, 1991 1992 1993 1994 1994 1995 1995 1996 ------- ------- ------- ---------- ------------ ------------ ------------- ------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> OTHER DATA: Depreciation and amortization.......... $ 7,482 $ 8,857 $ 9,265 $6,323 $ 4,394 $13,774 $10,494 $ 12,060 Capital expenditures... 7,896 10,739 8,439 5,935 2,191 9,878 7,572 9,237 Adjusted operating income(n)............. 26,382 28,485 29,563 4,036(o) 28,778(o) 56,267 39,663 48,733 Adjusted operating income as a percentage of net sales(n)....... 8.8% 9.2% 9.7% 2.3%(o) 22.0%(o) 16.9% 16.4% 17.4% <CAPTION> SEPTEMBER 30, 1996 ------------- <S> <C> BALANCE SHEET DATA: Working capital................................................................................... $ 59,088 Total assets...................................................................................... 363,780 Total debt........................................................................................ 227,552 Redeemable preferred stock(k)..................................................................... 6,922 Stockholders' equity.............................................................................. 40,741 </TABLE> - ------- (a) The periods beginning August 19, 1994 reflect data of the Company and its subsidiaries. The periods prior to and including August 18, 1994 reflect data of the Predecessor, substantially all of the assets of which were acquired by Waters Corporation on August 18, 1994 from Millipore. Because of the revaluation of the assets and liabilities acquired and related impact to the statement of operations, the financial statements of the Predecessor for the periods prior to August 19, 1994 are not strictly comparable to those of the Company subsequent to that date. See "The Company--Background." (b) Results for the period from August 19, 1994 to December 31, 1994 included several charges related to the Acquisition. The Company recorded charges resulting from the revaluation of acquired inventory and for expensed in- process R&D. During this period, the Company also began recording amortization expense related to acquired goodwill and purchased technology. Results for the year ended December 31, 1995 included a charge resulting from the revaluation of acquired inventory arising from the acquisition of Phase Separations Limited. Results for the nine months ended September 30, 1996 included charges resulting from the revaluation of acquired inventory and for expensed in-process research and development arising from the TAI Acquisition. (c) For the year ended December 31, 1995, selling, general and administrative expenses included a $3,567 fourth quarter nonrecurring charge for the one- time acceleration of vesting of compensatory stock options. (d) Management fees were incurred in connection with the Management Services Agreement (as defined below) which services were terminated upon consummation of the IPO in November 1995. See "Certain Relationships and Related Transactions--Management Services Agreement." (e) In the fourth quarter of 1994, the Company recorded a $3,500 restructuring charge for the cost of actions taken in Japan and Europe to restructure sales and administrative functions and to reduce the size of its workforce. In the first quarter of 1993, the Predecessor recorded a restructuring charge of $13,000 to cover costs associated with reorganizing into market- focused business units, reducing the size of its workforce and closing certain facilities. (f) Predecessor interest expense was an allocation of Millipore's worldwide net interest expense based upon the ratio of the Predecessor's net assets to Millipore's net assets. No debt obligations of Millipore were reflected on the Predecessor's balance sheets. (g) The Company has periodically entered into forward exchange contracts to hedge the U.S. dollar value of a portion of its anticipated future international cash flows. The contract maturities were chosen to correspond to the expected (footnotes continued on next page) realization of the underlying cash flows. Generally accepted accounting principles require that any contracts outstanding at period end be valued at current market value even though they hedge anticipated future cash flows. Resulting unrealized gains (losses) on future cash flow hedges are reported separately from realized gains (losses) on cash flow hedges which are recorded when contracts mature. In December 1995, the Company ceased to hedge anticipated future international cash flows and therefore liquidated those particular forward foreign currency contracts. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
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diff --git a/parsed_sections/prospectus_summary/1998/AXTI_axt-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/AXTI_axt-inc_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including information under "Risk Factors," and the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, the information contained in this Prospectus: (i) gives effect to the reincorporation of the Company in Delaware prior to the effective date of this Prospectus; (ii) reflects the conversion of all outstanding preferred stock, par value $.001 (the "Preferred Stock") to Common Stock upon the closing of the Offering; and (iii) assumes that the Underwriters' over-allotment option will not be exercised. This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed under "Risk Factors." THE COMPANY American Xtal Technology, Inc. uses a proprietary vertical gradient freeze ("VGF") technique to produce high-performance compound semiconductor base materials, or substrates, for use in a variety of electronic and opto-electronic applications. The Company primarily manufactures and sells compound semiconductor substrates composed of gallium arsenide ("GaAs"). Sales of GaAs substrates accounted for 94.9% and 78.3% of the Company's product revenues for the year ended December 31, 1997 and the three months ended March 31, 1998, respectively. The Company also manufactures and sells indium phosphide ("InP") and germanium ("Ge") substrates and is currently developing other high-performance compound substrates such as gallium phosphide ("GaP") and gallium nitride ("GaN"). The Company manufactures substrates from crystals grown using the Company's proprietary VGF technique and then slices the substrates into wafers. The Company's substrates are sold to semiconductor device manufacturers for use in applications such as wireless and fiber optic telecommunications, lasers, light-emitting diodes ("LEDs"), satellite solar cells and consumer electronics. The Company's customers include EMCORE Corporation ("EMCORE"), Hewlett Packard Company ("Hewlett Packard"), Motorola, Inc. ("Motorola"), NEC Kansai, Ltd. ("NEC"), Nortel, Siemens AG ("Siemens"), Sony Corporation ("Sony"), Spectrolab, Inc. (a Hughes Electronics Company) ("Spectrolab") and TRW, Inc. ("TRW"). In recent years, semiconductor device manufacturers have increasingly utilized substrates other than silicon to improve the performance of semiconductor devices or to enable new applications. These alternative substrates are composed of a single element such as Ge, or multiple elements which may include, among others, gallium, aluminum, indium, arsenic, phosphorus and nitrogen. Substrates that consist of more than one element are referred to as "compound substrates" and include GaAs, InP, GaP and GaN. GaAs is currently the most widely used compound substrate. Compound substrates have electrical properties which allow semiconductor devices to operate at much higher speeds than silicon-based devices or at the same speed with lower power consumption. For example, electrons move up to five times faster in GaAs than in silicon. Compound substrates also have better opto-electronic characteristics than silicon which enable them to convert energy into light and lasers, or to detect light and convert light into electrical energy. The Company believes that its proprietary VGF technique, which it has developed over the past 11 years, provides certain significant advantages over traditional manufacturing methods for growing crystals for the production of high-performance semiconductor substrates. The Company believes that its proprietary technique produces high-quality crystals which are characterized by greater physical and chemical uniformity and fewer defects than crystals grown by competing methods. This often results in substrates with lower breakage rates, which increases manufacturing yields and reduces manufacturing costs for the Company and its customers. The Company believes that it is currently the only high-volume supplier of GaAs substrates manufactured by using the VGF technique and is positioned to become a leading manufacturer and supplier of other high-performance substrates. Key elements of the Company's business strategy include the following: - Advance its leadership in VGF technology through continued investment in research and development and participation in government sponsored research programs. - Extend its leadership in the GaAs market by continuing to provide high-quality, price-competitive substrates and leveraging its demonstrated success in certain segments of the GaAs market to further increase sales. - Leverage its VGF technology as a platform to rapidly develop and cost-effectively manufacture high-quality substrates for emerging applications in various markets. - Target high-volume markets by increasing its manufacturing capacity in order to lower unit production costs and provide high-performance substrates at competitive prices. - Leverage existing customer relationships by supplying customers with high-performance substrates in addition to GaAs and establishing arrangements to jointly develop GaAs and other substrates. For the years ended December 31, 1995, 1996 and 1997 and the three months ended March 31, 1998, the Company generated total revenues of $14.5 million, $16.2 million, $25.3 million and $9.7 million, respectively, and during the same periods, generated net income of $2.7 million, $2.0 million, $3.3 million and $1.4 million, respectively. The Company was incorporated in the State of California in December 1986. The Company will reincorporate in the State of Delaware in connection with the Offering. The Company's executive offices and manufacturing facilities are located at 4311 Solar Way, Fremont, California 94538, and its telephone number is (510) 683-5900. THE OFFERING <TABLE> <S> <C> Common Stock Offered Hereby.......................................... 2,500,000 shares Common Stock to be Outstanding after the Offering(1)................. 15,690,268 shares Use of Proceeds...................................................... For capital expenditures, product development, sales and marketing and general corporate purposes. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000019252_chaparral_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000019252_chaparral_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and related notes appearing elsewhere in this Prospectus. The Company Chaparral Resources, Inc. ("Company"), which was incorporated under the laws of the state of Colorado in 1972, is an independent oil and gas exploration and production company that was based in Denver, Colorado, until March 1, 1997, when the Company moved its headquarters to Houston, Texas. Historically, the Company produced and sold crude oil and natural gas to oil and gas purchasers in the Rocky Mountain and Western states of the United States. During early 1994, the management of the Company made a strategic decision to pursue international oil and gas projects, with initial emphasis on the Commonwealth of Independent States (part of the former Soviet Union) and, in early 1997, the Company divested itself of all of its remaining oil and gas properties in the United States. The Company's strategy is to obtain development rights to oil and gas fields located outside the United States where discoveries have been made and the Company estimates there are oil reserves, but the fields have either never been placed on production or the Company believes that the fields could be enhanced with efficient management and technical experience provided by the Company. The Karakuduk Oil Field Project ("Karakuduk Field" or "Karakuduk Project") described below is the Company's first oil field to be acquired under the Company's new corporate strategy. The Company has a net 50% beneficial interest in Karakuduk Munay, Inc. ("KKM"), a Kazakhstan joint stock company which holds a governmental license to develop the Karakuduk Field ("Karakuduk Field" or "Karakuduk Project"), a 16,900 acre oil field in the Republic of Kazakhstan which was discovered in 1972 with the drilling of 22 exploratory and development wells by the former Soviet Union. These wells were not produced commercially. In December 1997, KKM delivered oil from the first well that KKM had reentered in the Karakuduk Field. The Company is pursuing the further development and commercial production of the reserves of oil in the Karakuduk Field. See "Properties." The Company's address is 2211 Norfolk, Suite 1150, Houston, Texas 77098 and its telephone number is (713) 807-7100. <TABLE> <CAPTION> Chaparral Resources, Inc. Consolidated Balance Sheets December 31 November 30 1997 1996 ------------------------------------- <S> <C> <C> Assets Current assets: Cash and cash equivalents $ 3,423,000 $ 782,000 Accounts receivable: Joint interest participants -- 8,000 Oil and gas purchasers -- 53,000 Other 102,000 -- Prepaid expenses 62,000 3,000 Oil and gas properties under agreement for sale -- 306,000 ------------ ------------ Total current assets 3,587,000 1,152,000 Oil and gas properties and investments - full cost method Republic of Kazakhstan (Karakuduk Field)-- not subject to depletion (Notes 3 and 4): 19,922,000 13,234,000 Furniture, fixtures and equipment 13,000 193,000 Less accumulated depreciation (3,000) (176,000) ------------ ------------ 10,000 17,000 ------------ ------------ Other assets -- 95,000 ------------ ------------ Total assets $ 23,519,000 $ 14,498,000 ============ ============ See accompanying notes The Offering Common Stock Outstanding Prior to the Offering... 51,130,456 shares which do not include 30,000 shares granted subject to vesting requirements. Total Possible Shares of Common Stock Outstanding After the Offering................... 56,683,398 shares which include 5,552,942 shares issuable upon the exercise of various outstanding Warrants and the conversion of outstanding Series A Preferred Stock. See "Description of Securities--Preferred Stock." The 56,683,398 shares do not include any shares issuable upon the exercise of outstanding options. Use of proceeds.................................. Proceeds from any exercise of Warrants will be used by the Company for general corporate purposes. Securities being offered for resale by Selling Securityholders.................................. 11,969,174 shares of Common Stock and 5,552,942 shares of Common Stock issuable upon the exercise of outstanding Warrants and the conversion of outstanding Series A Preferred Stock. See "Description of Securities--Preferred Stock." NASDAQ symbol.................................... CHAR for Common Stock. - ------------------- The securities offered hereby involve a high degree of risk and should be considered only by persons who can afford the loss of their entire investment. See "Risk Factors." Selected Consolidated Financial Information The following selected consolidated financial information of the Company for the year ended December 31, 1997, for the month of December 1996 and for each of the years ended November 30, 1996, 1995, 1994 and 1993, are derived from the financial statements of the Company and should be read in conjunction with the consolidated financial statements appearing elsewhere in this Prospectus. 1. Financial Condition and Possible Need for Additional Financing. The Company has incurred operating losses for each of its last five fiscal years, including a loss of approximately $2,603,000 for the fiscal year ended December 31, 1997. As a result of such losses and other factors, the opinion on the Company's audited financial statements contains an explanatory paragraph regarding the Company's ability to continue as a going concern. Also, the Company will incur an operating loss for the three months ended March 31, 1998. At the end of December 1997, the Company first delivered oil from one well located on the Company's principal asset, an interest in the Karakuduk Field. However, the Karakuduk Field is substantially undeveloped and further development will require substantial amounts of additional capital. The license to KKM specifies that a minimum work plan be established, which must be expended unless waivers or deferrals are obtained from the licensing authority. The Company's subsidiary must provide funds required by KKM to satisfy the work plan in order to maintain the Company's interest in the Karakuduk Project. As of April 22, 1998, the Company had unrestricted cash available for operations of approximately $1,400,000. There is no assurance that the Company will have the financial resources to meet its expected cash requirements for 1998. The Company will be required to raise additional capital to finance the obligations under the license for the Karakuduk Project and to satisfy working capital needs. The Company may seek to raise additional capital through debt or equity offerings, encumbering properties or entering into arrangements whereby certain costs of exploration or development will be paid by others to earn an interest in the properties. The present environment for financing of small oil and gas companies, or the ongoing obligations of an oil and gas business, or the acquisition of oil and gas properties, is uncertain due, in part, to the substantial instability in oil and gas prices in recent years. There can be no assurance that the additional debt or equity financing that might be required in the future to fund the Company's operations and obligations will be available to the Company on economically acceptable terms. If sufficient funds are not available to meet the Company's obligations with respect to the Karakuduk Project, the Company's interest in such property might be lost. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Properties." 2. Risks Inherent in Oil and Gas Exploration. There can be no assurance that the Company, through KKM, will be able to discover, develop and produce sufficient reserves in the Karakuduk Field, or elsewhere, to recover the expenses incurred in connection with the exploration thereof and achieve profitability. The odds against discovering commercially exploitable oil or gas reserves are always substantial and, in the case of the Company, will be increased as a result of the concentration of its activities in areas that have not yet been significantly explored and where political or other unknown developments could adversely affect commercialization. The Company, through KKM, will be required to perform expensive geological and/or seismic surveys with respect to its properties and, depending on the results of such surveys, only <TABLE> <CAPTION> Chaparral Resources, Inc. Consolidated Statements of Cash Flows Year ended Month Ended Year Ended Year Ended December 31 December 31 November 30 November 30 1997 1996 1996 1995 ----------------------------------------------------------------- <S> <C> <C> <C> <C> Cash flows from operating activities Net loss $(2,603,000) $ (130,000) $(2,416,000) $ (704,000) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Equity loss from investment 832,000 -- 971,000 -- Depreciation and depletion 7,000 -- 4,000 74,000 Loss on the sale of oil and gas properties 3,000 (3,000) -- -- Bad debt expense 37,000 -- -- -- Write-down of oil and gas properties 30,000 -- -- 619,000 Stock issued for services and bonuses 195,000 -- -- 27,000 Amortization of note discount 198,000 -- -- 17,000 Loss on extinguishment of debt 214,000 -- 237,000 -- Changes in assets and liabilities: (Increase) decrease in: Accounts receivable (129,000) 51,000 25,000 218,000 Prepaid expenses (59,000) -- 10,000 -- Other 95,000 -- -- -- Increase (decrease) in: Accounts payable 177,000 (44,000) 108,000 (64,000) Accrued liabilities 19,000 (19,000) (317,000) (59,000) Accrued compensation -- -- 385,000 -- ---------------------------------------------------------------- Net cash provided by (used in) operating activities (984,000) (145,000) (993,000) 128,000 Cash flows from investing activities Additions to property and equipment (6,000) -- -- (86,000) Investment in foreign oil and gas properties (6,504,000) (17,000) (6,936,000) (1,088,000) Proceeds from sale of interest in oil and gas properties 282,000 -- 161,000 41,000 Decrease in cash value of insurance and annuities -- -- -- 40,000 Decrease in minority interest -- -- -- (16,000) Decrease in equipment inventory -- -- -- 1,000 Sale of bonds -- -- -- 299,000 Redemption of certificates of deposit -- -- -- 20,000 Increase in other assets -- -- (74,000) -- ---------------------------------------------------------------- Net cash used in investing activities (6,228,000) (17,000) (6,849,000) (789,000) subsequent drilling at substantial cost and high risk can determine whether commercial development of the properties is feasible. Oil and gas drilling is frequently marked by unprofitable efforts, not only from unproductive wells, but also from productive wells which do not produce sufficient amounts to return a profit on the amount expended and from developed oil or natural gas reserves which cannot be marketed. The Company will be subject to all of the risks normally incident to drilling for and producing oil and gas, including such events as blowouts, cratering, fires or accidents, any of which could result in damage to or loss of life and property. In accordance with industry practice, the Company is not fully insured against these risks nor are all such risks insurable. 3. Risks Inherent in Foreign Operations. Because of the Company's interests in KKM and the Karakuduk Project, the Company will be subject to certain risks inherent in the ownership and development of foreign properties, including without limitation, cancellation or renegotiation of contracts, royalty increases, tax increases, retroactive tax claims, expropriation, adverse changes in currency values, foreign exchange controls, import and export regulations, environmental controls, and other laws and regulations which may adversely affect the Company's interest in the Karakuduk Project. The Company's operations and agreements will also be governed by foreign laws. In the event of a dispute, the Company may be subject to arbitration in a foreign country or the jurisdiction of foreign courts or may not be successful in subjecting foreign persons to the jurisdiction of courts in the United States. In addition, the Company might be hindered or prevented from enforcing its rights with respect to a government agency, instrumentality or other entity because of the doctrine of sovereign immunity. Although certain members of management of the Company have had prior experience operating in foreign countries, the Company has no prior experience operating in any foreign country, including the Republic of Kazakhstan, and may encounter unexpected difficulties in conducting foreign operations. Although the Company believes that the recent and continuing political, social and economic developments in Kazakhstan have created opportunities for foreign investment, uncertainty exists about the status of Kazakhstan law and the autonomy of the parties involved with the Company in Kazakhstan. The Company has obtained a commitment for political risk insurance against certain political and commercial risks. As of the date hereof, the Company has not purchased the insurance and, even if the insurance is purchased, there is no certainty that the insurance will provide adequate protection to the Company's endeavors in Kazakhstan. See "Business--Risks of Foreign Operation." 4. Risks of Joint Ventures; Risks Associated With Indirect Investments. The exploration and development of the Company's Kazakhstan property is governed by the terms of an agreement (the "1995 Agreement") between KKM and the Ministry of Oil and Gas Industry for Kazakhstan, a license issued June 28, 1995, as amended, to KKM (the "Kazakhstan License") from the Republic of Kazakhstan, and the terms of a joint venture agreement between Central Asian Petroleum (Guernsey) Limited ("CAP-G") and KKM. The Company currently owns all of CAP-G. The 1995 Agreement requires KKM to advance 100% of the costs required for development of the Karakuduk Field and the joint venture agreement requires CAP-G to loan funds to KKM to pay all such costs. The 1995 Agreement and the Kazakhstan License include numerous requirements which must be met to maintain the interest in the Karakuduk Field. In addition, the Company's ability to utilize any revenue generated by the successful development of the Karakuduk Field and marketing of any petroleum produced, held indirectly and beneficially by the Company through CAP-G and KKM, may be limited. Limitations may result from governmental or other restrictions which may prevent or inhibit shipment or sale of petroleum products produced, or the distribution of funds from KKM to CAP-G or from CAP-G to the Company. See "Business--Karakuduk Project." 5. Competition. Foreign oil and gas exploration and the acquisition of producing and undeveloped properties is a highly competitive and speculative business. In seeking suitable opportunities, the Company competes in all areas of the oil and gas industry with a number of other companies, including large multi-national oil and gas companies and other independent operators which might have greater financial resources and more experience than the Company. The Company does not hold a significant competitive position in the oil and gas industry. 6. Markets. There is substantial uncertainty as to the prices at which reserves of oil and gas produced by the Company, if any, from the Karakuduk Field could be sold. It is possible that, under the market conditions prevailing in the future, the production and sale of oil from the Karakuduk Field may not be commercially feasible. The availability of ready markets and the price obtained for oil produced depends upon numerous factors beyond the control of the Company. The current market for oil is characterized by instability which has caused fluctuations in world oil prices in recent years and there can be no assurance of any price stability. The ability of the Company to realize the carrying value of its assets is dependent on being able to extract and transport hydrocarbons and finding appropriate markets for their sale. Currently, exports from the Republic of Kazakhstan are dependent on limited transport routes and, in particular, access to the Russian pipeline system. Domestic markets in the Republic of Kazakhstan might not permit world market price to be obtained. Management believes, however, that over the life of the Karakuduk Project, transportation restrictions will be alleviated and prices will be achievable for hydrocarbons extracted to allow full recovery of the carrying value of its assets. In this regard, KKM has entered into a protocol of intentions whereby the entity that operates the KazTrans Oil pipeline and KKM have undertaken to conclude a contract which will give KKM access to the pipeline. This access will allow KKM to ship oil to export markets. In addition to this protocol, on March 7, 1998, KKM signed a contract with the export-import firm of Munay-Impex, a subsidiary of KazakhOil, to export crude oil produced by KKM to both the Commonwealth of Independent States (CIS) and other countries in the amount up to 100,000 (one hundred thousand) metric tons according to the schedule of shipment of Kazakhstan oil during 1998. KKM will supply crude oil to Munay-Impex in amounts of not less than 5 to 10 thousand tons. KKM anticipates that the production facilities will be completed during the late second quarter or early third quarter of 1998, which will initially allow up to 12,000 barrels of oil per day to be transported to the main pipeline terminal. Until the production facilities are completed, any produced oil will first be placed into storage tanks and then trucked to the pipeline under the terms of the protocol. Production entered into the pipeline is considered inventory of KKM, until the 5 to 10 thousand ton minimum volume requirement has been met, at which time the production will be sold under the terms of the Munay-Impex contract. KKM expects to record revenues from the sale of crude oil by the end of the second quarter of 1998. 7. Reserves. As detailed in "Disclosures About Oil and Gas Producing Activities" following the Notes to Consolidated Financial Statements, estimated quantities of the Company's proved oil and natural gas reserves decreased 100% for the fiscal year ended November 30, 1996, as compared to the previous fiscal year. Reserves decreased due to production during the year, the sale of certain producing properties and the abandonment of certain properties which produced at uneconomic rates. The present value of the Company's proved reserves decreased 100% as of November 30, 1996, as compared to the end of the previous fiscal year, due to lower natural gas prices, production, the sale of proved reserves and abandonment of proved reserves. The Company claims no proved reserves as of December 31, 1997. Although the Company has a reserve report on the Karakuduk Field that was commissioned by the Company and that was reviewed by a petroleum engineering group retained by the Company, the reserve report is over three years old and did not consider the potential adverse impact of marketability on the price of any oil which might be produced due to the remote location of the Karakuduk Field or the potential of political instability. Therefore, the Company does not claim that any of the reserves specified in the reserve report are proven. As a result of the Company recently reentering a well in the Karakuduk Field and because of the Company's future drilling plans for the Karakuduk Field, the Company expects to be able to obtain an updated reserve report for the Karakuduk Field in late 1998 or early 1999. 8. Price Volatility. Assuming the Company is able to produce oil in the future, of which there are no assurances, the revenues that would be generated by the Company and estimated future net revenue will be highly dependent upon the prices of oil. The energy market makes it difficult to estimate future prices of oil. Various factors beyond the control of the Company affect prices of oil, including worldwide and domestic supplies, and demand for, oil, the ability of the members of the Organization of Petroleum Exporting Countries ("OPEC") to agree to and maintain oil price and production controls, political instability or armed conflict in oil-producing regions, the price of foreign Chaparral Resources, Inc. Notes to Consolidated Financial Statements December 31, 1997 1. Summary of Significant Accounting Policies and Organization Organization, Principles of Consolidation, and Basis of Presentation Chaparral Resources, Inc. was incorporated in the state of Colorado on January 13, 1972, principally to engage in the exploration, development and production of oil and gas properties. During 1997, Chaparral Resources, Inc. focused substantially all of its efforts on the exploration and development of the Karakuduk Field, located in the central Asian Republic of Kazakhstan. The consolidated financial statements include the accounts of Chaparral Resources, Inc. and its 100% owned subsidiaries, Central Asian Petroleum (Guernsey) Limited ("CAP-G"), Road Runner Services Company ("RRSC"), and Central Asian Petroleum, Inc. (Delaware). Hereinafter, Chaparral Resources, Inc. and its wholly-owned subsidiaries are collectively referred to as "the Company". All significant intercompany transactions have been eliminated. In order to unite the reporting period of the Company with that of its subsidiaries, the fiscal year of the Company was changed to a December 31 year end from the previous November 30 year end. This change took effect on May 29, 1997. As a result of this change, financial information is reported as of December 31, 1997, November 30, 1996, and November 30, 1995. Additionally, a statement of operations and cash flows for the month ended December 31, 1996, are presented. In 1995, the Company's ownership in CAP-G increased from 25% to 45%. The Company acquired an additional 45% interest in CAP-G in 1996. In 1997, the Company concluded the acquisition of the remaining 10% minority interest in CAP-G, increasing its total ownership to 100%. CAP-G owns a 50% interest in Karakuduk-Munay, Inc. ("KKM"), a Kazakhstan joint stock company, which is a participant in an agreement for the exploration, development and production of oil in the Karakuduk Field. In 1996, the Company accounted for its investment in KKM using pro rata consolidation. In 1997, the Company changed to the equity method in order to reflect the legal ownership right of the other shareholders in KKM. The consolidated financial statements for the year ended November 30, 1996 reported herein have been reclassified to reflect the equity method. There was no impact on previously reported earnings. imports, the level of consumer demand, the price and availability of alternative fuels, the availability of pipeline capacity and changes in existing federal regulation and price controls. As in the past, it is likely that oil prices will continue to fluctuate in the future which may adversely affect the Company's business. 9. Government Regulation and Environmental Risks. The Company's operations may be subject to regulation by governments or other regulatory bodies governing the area in which the Company's overseas operations are located. Regulations govern such things as drilling permits, production rates, environmental protection and pollution control, royalty rates and taxation rates. These regulations may substantially increase the costs of doing business and sometimes may prevent or delay the starting or continuation of any given exploration or development project. Moreover, regulations are subject to future changes by legislative and administrative action and by judicial decisions which may adversely affect the petroleum industry in general and the Company in particular. At the present time, it is impossible to predict the effect any current or future proposals or changes in existing laws or regulations will have on the Company's operations. The Company believes that it complies with all applicable legislation and regulations in all material respects. Based upon a study undertaken on behalf of the Company by an unaffiliated party, the Company does not believe that its business operations presently create any environmental liabilities for the Company. However, compliance with foreign laws and regulations which have been enacted or adopted regulating the discharge of materials into the environment could have an adverse effect upon the Company, the extent of which the Company is unable to assess. Since inception the Company has not made any material capital expenditures for environmental control facilities and has no plans to do so. 10. Dependence On Management. The Company is dependent upon the expertise and abilities of its current officers. If the Company loses the services of any one of its officers as a result of disability, death, or otherwise, its business could be adversely affected until a replacement could be found. 11. No Dividends. The Company has paid no cash dividends on its Common Stock since incorporation. At the present time, the Company does not anticipate paying any dividends on its Common Stock in the foreseeable future. Any future dividends will depend upon the earnings, if any, of the Company, dividend payments that the Company will have to make on any outstanding preferred stock, financial requirements of the Company and other factors. 12. Outstanding Warrants and Options. As of April 24, 1998, the Company had outstanding warrants and options entitling the holders to purchase a total of 7,649,500 shares of the Company's Common Stock. The exercise prices of the outstanding warrants and options currently range from $0.00001 per share to $2.25 per share. The holders of the outstanding warrants and options might have Chaparral Resources, Inc. Notes to Consolidated Financial Statements (continued) 1. Summary of Significant Accounting Policies and Organization (continued) Organization, Principals of Consolidation, and Basis of Presentation (continued) On February 1, 1997, KKM was informed that a Kazakhstan Presidential Edict had been issued announcing the liquidation of Munaygaz, the government-owned company which held a 20% interest in KKM. As a result of this action, KKM was required to re-register as required by Kazakh regulations. KKM was re-registered on July 24, 1997, with the government of Kazakhstan. The Company believes that KKM is now in compliance with all laws and regulations related to the registration requirements relating to Kazakhstan legal entities. The re-registered KKM is owned jointly by CAP-G (50%), KazakhOil (40%) and a private Kazakhstan joint stock company (10%). KazakhOil, the national petroleum company of Kazakhstan, represents the majority of the ownership interest in KKM held by the Kazakhstan government. On April 15, 1995, the Company sold its 87% interest in the Reservoir Creek Gathering System joint venture. Cash and Cash Equivalents Cash equivalents are defined as highly liquid investments purchased with an original maturity of three months or less. Oil and Gas Property and Equipment The Company and KKM use the full cost method of accounting for their oil and gas properties. All costs incurred directly associated with the acquisition, exploration and development of oil and gas properties are capitalized in cost pools for each country in which the Company operates. The limitation on such capitalized costs is determined in accordance with rules specified by the Securities and Exchange Commission. Capitalized costs are depleted using the units of production method based on proven reserves. Sales of Proved Oil and Gas Property Sales of oil and gas properties, whether or not being amortized currently, are accounted for as adjustments of capitalized costs, with no gain or loss recognized unless such adjustments significantly alter the relationship between capitalized costs and proved reserves of oil and gas. A significant alteration would not ordinarily be expected to occur for sales involving less than 25% of the reserve quantities of a given cost center. If gain or loss is recognized on such a sale, total capitalized costs within the cost center are allocated between the reserves sold and reserves retained on the same basis used to compute amortization, unless there are substantial economic differences between the properties sold and those retained, in which case capitalized costs are allocated on the basis of the relative fair values of the properties. the opportunity to profit from a rise in the market price (of which there is no assurance) of the shares of the Company's Common Stock underlying the warrants and options and their exercise may dilute the ownership interest in the Company held by other shareholders. 3,330,720 shares of Common Stock underlying outstanding warrants have been registered for resale. Resales of Common Stock issued upon exercise of warrants and options could adversely effect the market price for the Common Stock. 13. Preferred Stock. The Company currently has outstanding 50,000 shares of the Company's Series A Preferred Stock which have a liquidation preference over the Company's Common Stock of $5,000,000. Further, the Series A Preferred Stock is convertible at the option of the holders thereof at any time or from time to time on or prior to the redemption date into Common Stock. The conversion price of the Series A Preferred Stock is initially $2.25 per share. The number of shares of Common Stock issuable upon conversion of each share of Series A Preferred Stock is determined by dividing $100 by the conversion price per share. The Series A Preferred Stock is entitled to receive cumulative dividends at the annual rate of $5.00 per share and has a redemption price of $100.00 plus any unpaid dividends. Commencing on November 30, 2002, the Company will be required to redeem the Series A Preferred Stock to the extent of the lesser of (i) the number of shares of Series A Preferred Stock outstanding on each scheduled redemption date or (ii) one-third of the largest number of shares of Series A Preferred Stock outstanding at any time prior to the scheduled redemption date. The Company has the right to redeem all or any portion of any shares of Series A Preferred Stock prior thereto. Each holder of shares of Series A Preferred Stock is or will be entitled to vote on all matters in an amount equal to the largest number of full shares of Common Stock into which all shares of the Series A Preferred Stock held by such holders are convertible. The shares of Common Stock that are underlying the Series A Preferred Stock have been registered for resale. The holders of the outstanding Series A Preferred Stock might have the opportunity to profit from a rise in the market price (of which there is no assurance) of the shares of the Company's Common Stock into which the shares of the Series A Preferred Stock are convertible and their conversion may dilute the ownership interest in the Company held by other shareholders. Resales of shares of Common Stock issued upon conversion of the Series A Preferred Stock could adversely affect the market price of the Common Stock. Under the Company's Restated Articles of Incorporation + Amendments, the Board of Directors has the power, without further action by the holders of the Common Stock, to designate the relative rights and preferences of the remaining authorized but unissued shares of preferred stock of the Company, when and if issued. Such rights and preferences could include preferences as to liquidation, Chaparral Resources, Inc. Notes to Consolidated Financial Statements (continued) 1. Summary of Significant Accounting Policies and Organization (continued) Oil and Gas Properties Not Subject to Depletion Costs associated with acquisition and evaluation of unproved properties are excluded from the amortization computation until it is determined if proved reserves can be attributed to the properties. These unevaluated properties are assessed annually for possible impairment and the amount impaired, if any, is added to the amortization base. Costs of exploratory dry holes and geological and geophysical costs not directly associated with specific unevaluated properties are added to the amortization base as incurred. Sales of Unproved Properties Proceeds received from drilling arrangements are credited to the appropriate cost center and recognized as a lower amortization provision as reserves are produced. Revenue Recognition Revenues are recognized when economic performance has occurred as a result of the sale of oil and gas production, in accordance with the accrual method of accounting. Losses, if any, are provided for in the period in which the loss is determined to occur. Depreciation of Other Property and Equipment Furniture, fixtures and equipment are depreciated using the straight-line method over estimated useful lives, which range from three to ten years. Administrative Overhead Reimbursement The Company, as operator of drilling and/or producing properties, including equity investees, was reimbursed by the non-operators for administration, supervision, office services and warehousing costs on an annually adjusted fixed rate basis per well per month. These charges are applied as a reduction of general and administrative expenses for purposes of the statement of operations. Income Taxes The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes, which require that taxes be provided on the liability method based upon the tax rate at which items of income and expense are expected to be settled in the Company's tax return. Earnings Per Common Share Basic earnings (loss) per common share is calculated by dividing net income (loss) by the aggregate of the weighted average shares outstanding during the period. Diluted earnings (loss) per common share considers the dilutive effect, if any, of the average number of common stock equivalents that are outstanding during the period. Diluted earnings per share are not presented because the exercise of stock options and warrants and the effect of the convertible preferred stock outstanding would be antidilutive. Stock Based Compensation The Company follows the method of accounting for employee stock based compensation plans prescribed by APB No. 25, which is allowed by SFAS No. 123, Accounting for Stock-Based Compensation. In accordance with APB No. 25, the Company has not recognized compensation expense for stock options in situations where the exercise price of the options equals the market price of the underlying stock on the date of grant, otherwise known as the measurement date. redemption and conversion rights, voting rights, dividends or other preferences, any of which may be dilutive of the holders of the Common Stock. The ability of the Board of Directors to issue shares of preferred stock and determine the rights, preferences, privileges, designations and limitations of such stock, including the dividend rights, dividend rate, conversion rights, voting rights, terms of redemption and other terms and conditions of such preferred stock, could make it more difficult for a person to engage in, or discourage a person from engaging in, a change in control transaction without the cooperation of management of the Company. 14. Risks Associated With Forward-Looking Statements. This Prospectus contains certain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act and the Company intends that such forward-looking statements be subject to the safe harbors for such statements under such sections. The Company's forward-looking statements include the plans and objectives of management for future operations, including plans and objectives relating to the Karakuduk Project and future performance of the Company. The forward-looking statements and associated risks set forth in this Prospectus include or relate to the (i) success of the Company in developing, producing and selling expected reserves of oil in the Karakuduk Field, (ii) success of the Company in raising required financing to meet the funding obligations for KKM, (iii) success of the Company in producing and marketing proven oil and natural gas reserves and (iv) success of the Company in improving its overall financial operating results. The forward-looking statements herein are based on current expectations that involve a number of risks and uncertainties. Such forward-looking statements are based on assumptions that the Company will have adequate financial resources to fund the development of the Karakuduk Field, that significant reserves of oil will be developed in the Karakuduk Field which can be readily and profitably marketed and that there will be no material adverse change in the Company's operations or business. The foregoing assumptions are based on judgment with respect to, among other things, oil and natural gas reserve information available to the Company, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the Company's control. Accordingly, although the Company believes that the assumptions underlying the forward-looking statements are reasonable, any such assumption could prove to be inaccurate and, therefore, there can be no assurance that the results contemplated in forward-looking statements will be realized. In addition, as disclosed elsewhere in this "Risk Factors" section, there are a number of other risks presented by the Company's business and operations which could cause the Company's financial performance to vary markedly from prior results or results contemplated by the forward-looking statements. Management decisions, including budgeting, are subjective in many respects and periodic revisions must be made to reflect actual conditions and business developments, the impact of which may cause the Company to alter its capital investment and other expenditures, which may also adversely affect the Company's results of operations. In light of significant uncertainties inherent in forward-looking information included in this Prospectus, the inclusion of such information should not be regarded as a representation by the Company or any other person that the Company's objectives or plans will be achieved. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." Chaparral Resources, Inc. Notes to Consolidated Financial Statements (continued) 1. Summary of Significant Accounting Policies and Organization (continued) New Accounting Standards In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement No. 121 also addresses the accounting for long-lived assets to be disposed of. The Company adopted Statement No. 121 in 1997; the effect of the adoption is immaterial to the Company's overall financial results. In February 1997, the FASB issued SFAS No. 128, Earnings per Share. SFAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share exclude any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share are very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the SFAS 128 requirements. There is no impact of SFAS 128 on the calculation of both basic and diluted earnings per share for these periods because all potentially dilutive securities are antidilutive. In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. SFAS 130, which is effective for fiscal years beginning after December 15, 1997, establishes standards for reporting and presentation of comprehensive income and its components. SFAS 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company adopted SFAS 130 as of January 1, 1998. The impact of SFAS 130 on the Company's financial position and results of operations is not expected to be material. Fair Value of Financial Instruments All of the Company's financial instruments, including cash and cash equivalents, trade receivables, notes receivable, and notes payable, have fair values which approximate their recorded values as they are either short-term in nature or carry interest rates which approximate market rates. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Risks and Uncertainties The ability of KKM to realize the carrying value of its assets is dependent on being able to extract, transport and market hydrocarbons. Currently, exports from the Republic of Kazakhstan are restricted since they are dependent on limited transport routes and, in particular, access to the Russian pipeline system. Domestic markets in the Republic of Kazakhstan might not currently permit world market prices to be obtained. Management believes, however, that over the life of the project, transportation restrictions will be alleviated and prices will be achievable for hydrocarbons extracted to allow full recovery of the carrying value of its assets. See Note 2. USE OF PROCEEDS The Company intends to use the net proceeds, if any, from exercise of the Warrants for general corporate purposes. It is uncertain when, if ever, the Company will receive proceeds from exercise of the Warrants. See "Selling Securityholders," "Description of Securities" and "Plan of Distribution." MARKET PRICES OF COMMON EQUITY, DIVIDEND POLICY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock trades on the Nasdaq Small-Cap Market under the symbol CHAR. On April 24, 1998, the Company had approximately 2,024 shareholders of record of its Common Stock. No dividend has been paid on the Company's Common Stock and there are no plans to pay dividends on the Common Stock in the foreseeable future. The following table shows the range of high, low and closing sales prices of the Common Stock during each quarter of the last two calendar years and for the quarter ended March 31, 1998, as reported by the National Association of Securities Dealers, Inc. Price Range Trading Range ----------------------- Quarter Ended High Low Closing - ------------- ---- ------ ------- March 31, 1996 1 11/32 11/16 1 3/16 June 30, 1996 1 21/32 1 1/32 1 3/8 September 30, 1996 1 3/4 1 3/16 1 5/16 December 31, 1996 1 13/32 3/4 29/32 March 31, 1997 1 3/16 3/4 7/8 June 30, 1997* 1 3/4 13/16 September 30, 1997 1 1/4 11/16 1 5/32 December 31, 1997 3 3/32 1 1/16 2 1/2 March 31, 1998 2 7/16 2 3/8 2 7/16 * On May 29, 1997, the Company changed its fiscal year end from November 30 to December 31. Chaparral Resources, Inc. Notes to Consolidated Financial Statements (continued) 2. Going Concern The Company's financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of December 31, 1997, substantially all of the Company's assets are invested in the development of the Karakuduk Field, a shut-in oil field in the central Asian Republic of Kazakhstan, which will require significant additional funding. The Company has incurred recurring operating losses and has no operating assets presently generating cash to fund its operating and capital requirements. The Company's current cash reserves and cash flow from operations will not be sufficient to meet the capital spending requirements required of KKM by its operating license through fiscal 1998. Should the Company not meet its capital requirements under the license agreement to develop the Karakuduk Field, the Company's rights under the agreement can be terminated (see Note 14). The Company believes that additional financing will be available; however, there is no assurance that additional financing will be available, or if available, that it is timely or on terms favorable to the Company. The Company's continued existence as a going concern is dependent upon the success of future KKM operations, which are, in the near term, dependent on the successful financing and development of the Karakuduk Field, of which there is no assurance. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources - ------------------------------- Previously, the Company's primary source of capital was from oil and gas sales from domestic properties. All domestic properties have been sold or otherwise disposed. The only oil and gas interest of the Company at this time is the Company's investment in KKM through CAP-G. KKM is a closed joint stock company in Kazakhstan. The Company has raised capital to finance a portion of its obligations in connection with the acquisition of its interest in CAP-G and the development of the Karakuduk Field and to satisfy working capital needs in the short term. Since January 1, 1997, the Company raised $4,800,000 through the sale of Common Stock and warrants, $3,309,250 through the exercises of warrants and $5,000,000 through the sale of Series A Preferred Stock. The Company may seek to obtain additional capital through debt or equity offerings, encumbering properties, entering into arrangements whereby certain costs of development will be paid by others to earn an interest in the properties, or sale of a portion of the Company's interest in the Karakuduk Field. The present environment for financing the acquisition of oil and gas properties or the ongoing obligations of the oil and gas business is uncertain due, in part, to instability in oil and gas pricing in recent years. The Company's small size and the early stage of development of the Karakuduk Field may also increase the difficulty in raising any financing that may be needed in the future. There can be no assurance that the debt or equity financing that might be required to fund the Company's operations and obligations in the future will be available to the Company on economically acceptable terms if at all. The Company's financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred recurring operating losses and has no operating assets presently generating cash to fund its operating and capital requirements. The Company does not expect to record any revenues from KKM's operations until late second quarter of 1998, and expects to realize an overall operating loss for the year ended December 31, 1998. As of April 22, 1998, the Company's unrestricted cash available for operations was approximately $1,400,000. The Company's current cash reserves and cash flow from operations will not be sufficient to meet its capital requirements through fiscal 1998. In December 1997 the Company exercised an option to acquire the remaining 10% of CAP-G. The Company now owns all of CAP-G, providing a 50% beneficial interest in the Karakuduk Field. The Company was required to pay $1,625,000 (which includes $800,000 of costs the Company previously paid on behalf of the prior owner of the 10% interest) and issue 400,000 shares of Common Stock for the remaining 10% of CAP-G. Chaparral Resources, Inc. Notes to Consolidated Financial Statements (continued) 3. Acquisition of CAP-G As of December 31, 1997, the Company owns 100% of the outstanding common stock of CAP-G. This wholly-owned subsidiary was acquired on a step basis. The Company acquired 45% of the outstanding stock of CAP-G prior to December 1, 1995. In January and February 1996, the Company entered into agreements to acquire, for a total of $5,850,000 cash and 1,785,000 shares of the Company's restricted common stock, the remaining 55% of the outstanding stock of CAP-G. The Company consummated the purchase of 25% of the outstanding stock of CAP-G in April 1996 by paying $2,000,000 in cash and issuing 685,000 shares of the Company's common stock. The Company acquired an additional 5% of the outstanding common stock of CAP-G in April 1996 for $250,000 cash. To acquire an additional 15% of the outstanding common stock of CAP-G, the Company agreed to pay $1,975,000 in cash and issue 900,000 shares of the Company's common stock. This purchase was consummated on March 11, 1996, when the Company paid $750,000 in cash and issued 900,000 shares of the Company's common stock. The remaining cash balance of $1,225,000 for the purchase was to be paid in four quarterly equal payments of $306,250 between June 11, 1996 and March 11, 1997. The first payment of $306,250 was paid in June 1996 and an additional $175,000 was paid in September 1996. The agreement was subsequently revised so that the Company paid $200,000 in December 1996. The Company has now paid the $543,750 balance of the purchase price. Finally, in 1997 the Company exercised an option to acquire the remaining 10% of the outstanding common stock of CAP-G. The Company paid $1,625,000 (which includes $800,000 of loans the Company previously made to GAP-G on behalf of the prior owner of the 10% interest) and issued 400,000 shares of common stock, which includes an additional 200,000 shares above the original agreed amount. On September 17, 1997, the Company granted an option to an investor entitling the investor to acquire 5% of the issued and outstanding shares of CAP-G on or before October 31, 1997. Upon the closing of this agreement, the investor paid the Company $450,000 of the $1.5 million purchase price, with the remaining due on or before September 30, 1997. The option agreement expired and the Company was not required to return the deposit. The Company has recorded the $450,000 deposit as a reduction in the oil and gas properties and investments in Kazakhstan. The acquisition costs exceeding the underlying net assets at the time of each acquisition of CAP-G common stock have been added to Oil and Gas Investments reflected on the balance sheet. The equity in losses for 1997 and 1996 have been recorded at the full 50% interest due to the earlier agreements to acquire the remaining shares in CAP-G and the Company financing 100% of CAP-G's operations. 4. Oil and Gas Investments All costs capitalized related to the Karakuduk license are included in oil and gas properties not subject to depletion. Certain license acquisition costs and geological and geophysical expenditures incurred by the Company but not rebilled to KKM have been capitalized. Certain overhead costs and general administrative costs have been expensed as incurred by KKM. Substantially all of the Company's assets are invested in the development of the Karakuduk Field, a shut-in oil field in the central Asian Republic of Kazakhstan. Since the Karakuduk Field is in the early stage of development, the Karakuduk Field does not currently produce revenues sufficient to meet its cash outflow needs. The development of the Karakuduk Field, through KKM, will require substantial amounts of additional capital. The terms of the KKM revised license require a work plan from the commencement of operations through December 31, 1997, of at least $10 million which has been satisfied. Additional requirements of $34.5 million and $12 million exist for the years ending December 31, 1998 and 1999, respectively. Without additional funding and significant revenues from oil sales, of which there are no assurances, the Company will not be able to provide sufficient funds to satisfy these requirements and the Company's interest in the Karakuduk Field may be lost. The Company received an extension to June 30, 1998, from the Overseas Private Investment Corp. ("OPIC") for political risk insurance. OPIC granted the Company a binding executed letter of commitment on September 25, 1996. The Company has a standby facility for which it has made seven payments of $31,250. The Company expects to execute the contract on or before June 30, 1998. Year 2000 Issue - --------------- The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company does not expect to incur any material operating expenses or be required to invest heavily in computer system improvements to be Year 2000 compliant. The Company has no other material commitments for cash outlay and capital expenditures other than normal operations. Change in Fiscal Year End - ------------------------- In order to unite the reporting period of the Company with that of its subsidiaries, the fiscal year of the Company was changed to a December 31 year end from the previous November 30 year end. This change took effect on May 29, 1997. As a result of this change, year to date data is as of December 31 for 1997 and as of November 30 for 1996 and 1995. The activity for December 1996 only includes corporate activity and is immaterial. Chaparral Resources, Inc. Notes to Consolidated Financial Statements (continued) 4. Oil and Gas Investments (continued) Costs capitalized to Oil and Gas Investments consist of: <TABLE> <CAPTION> December 31, November 30, 1997 1996 ----------------------------------------- <S> <C> <C> Oil and Gas Investments: Investments in KKM common stock $ 100,000 $ 90,000 Advances to and interest due from KKM 9,820,000 4,023,000 Acquisition Costs 10,613,000 9,291,000 Other Capitalizable Costs 1,192,000 801,000 ----------------------------------------- Total Gross Oil and Gas Investments 21,725,000 14,205,000 Less: Equity losses (1,803,000) (971,000) ----------------------------------------- Total Oil and Gas Investment $ 19,922,000 $ 13,234,000 ========================================= The condensed financial statements of KKM are as follows: December 31, December 31, 1997 1996 ----------------------------------------- Condensed Balance Sheet Current Assets $ 796,000 $ 111,000 Non-Current Assets (primarily oil and gas properties, full cost method) 7,975,000 2,286,000 Current Liabilities 2,194,000 172,000 Non-Current Liabilities 573,000 353,000 Advances to and interest due from KKM 9,820,000 4,023,000 Common stock 200,000 200,000 Accumulated Deficit 4,016,000 2,351,000 Condensed Income Statement Revenues $ -- $ -- Cost and Expenses 1,665,000 1,942,000 Net Loss 1,665,000 1,942,000 </TABLE> The Karakuduk Field is still in a preliminary stage of development by KKM. The estimated future development expenditures in order to ascertain the quantities of proved reserves attributable to the Karakuduk Field are significant. All costs incurred related to the Phase I workover program have been capitalized to oil and gas properties not subject to depletion. None of the wells being recompleted were put into production, therefore the costs incurred to recomplete these wells were deemed equivalent to exploration costs of new oil and gas properties. In 1996, the Company entered into an agreement, effective January 1, 1997, to sell its remaining domestic oil and gas properties for a sales price of approximately $270,000. Accordingly, the Company's domestic oil and gas properties have been classified as oil and gas properties under agreement for sale in the balance sheet at November 30, 1996 and the full cost pool for the United States has been fully written down. Results of Operations Year Ended December 31, 1997 Compared with Year Ended - -------------------------------------------------------------------------------- November 30, 1996 - ----------------- As mentioned above, during 1997 the Company changed from a fiscal year ended November 30 to a fiscal year ended December 31. The Company's operations during the fiscal year ended December 31, 1997, and the month ended December 31, 1996, resulted in losses before extraordinary items of $2,389,000 and $130,000, respectively, due to the Company's ongoing transition to international exploration and production operations. The Company's operational loss for the month of December 1996, consisted of miscellaneous corporate level expenses and is immaterial to the overall operational results of the Company. Results for the fiscal year ended November 30, 1996, have also been reclassified to reflect the equity method of accounting for the Company's investment in KKM. In 1996, the Company accounted for KKM using proportional consolidation. The Company's net loss for the fiscal year ended November 30, 1996, $2,416,000 remained unchanged from the amount originally reported. Oil and gas revenues and production costs decreased by $147,000 and $37,000, respectively, from the year ended November 30, 1996, due to the disposition of all of the Company's domestic oil and gas properties during the first quarter of 1997. Interest income increased by $267,000 from the year ended November 30, 1996 due to increased financing of 100% of KKM's operations in Kazakhstan. As of December 31, 1997, the Company held a 50% equity interest in KKM. General and administrative costs and interest expense increased by $186,000 and $208,000, respectively, also due to KKM's increased operational activity in Kazakhstan. The Company's equity loss in KKM, however, decreased by $139,000 from the year ended November 30, 1996 due to additional capitalization of costs directly related to development of oil and gas properties held by KKM. The Company recognized a $36,000 loss on the disposition of the Company's domestic properties. In 1997, the Company recognized a $214,000 extraordinary loss on the extinguishment of long term debt. The Company did not have any other debt obligations outstanding as of December 31, 1997. Results of Operations Year Ended November 30, 1996 Compared with Year Ended - -------------------------------------------------------------------------------- November 30, 1995 - ----------------- The Company's operations during fiscal 1996 resulted in a loss before extraordinary item of $2,179,000 primarily due to the move from domestic operations into an international operation. Production costs were down from $115,000 in fiscal 1995 to $37,000 in fiscal 1996 as a result of continued Chaparral Resources, Inc. Notes to Consolidated Financial Statements (continued) 4. Oil and Gas Investments (continued) While the future ability of the Company to export hydrocarbons and therefore realize world market prices is uncertain under current restricted transport options in the Republic of Kazakhstan, management believes that over the life of the project as a whole, future cash flows justify the carrying amount of the oil and gas properties. No impairment provision has been reflected in these financial statements. 5. Long-Term Debt The Company has no long-term debt as of December 31, 1997. Long-term debt at November 30, 1996 consisted of convertible notes payable to private corporations and individuals in the amount of $1,350,000. Of the $1,350,000, $1,000,000 was received from two private companies, one of which is a stockholder of the Company. On December 6, 1996, the Company borrowed an additional $500,000 under the same terms from a private corporation. As additional consideration for these notes, the Company issued to the note holders, warrants to purchase 462,500 shares of the Company's common stock at $.25 per share, exercisable at any time, but no later than November 30, 1999. The notes were discounted by the fair value of the warrants, with the discount being amortized over the life of the notes. decreased production from the Company's domestic operations. General and administrative expenses increased from $166,000 in fiscal 1995 to $1,468,000 in fiscal 1996 as a result of consulting fees to M-D International Petroleum, Inc. of approximately $500,000, additional compensation recorded of approximately $385,000, consisting of $210,000 for bonuses to the former Chief Executive Officer and the former Chief Financial Officer of the Company and $175,000 for compensation related to 350,000 shares of the Company's Common Stock granted to the Chairman of the Board of the Company, and additional expenses for start-up costs in Kazakhstan. Interest expense also increased in relation to the financing of the projects. In fiscal 1996, there was no write down of oil and gas properties as there had been in fiscal 1995 which had totaled $619,000. The result of these changes was a loss of $2,416,000 or $0.08 per share for 1996 as compared to a loss of $704,000 or $0.04 per share for fiscal 1995, before extraordinary loss. For fiscal 1996, there was a $237,000 or $0.01 extraordinary per share loss on the extinguishment of long term debt which resulted in a net loss of $2,416,000 or $0.08 per share for 1996. Inflation - --------- The Company cannot control prices in its oil and gas sales and to the extent the Company is unable to pass on increases in operating costs, it may be affected by inflation. Management's Discussion of Changes in Standardized Measure - ---------------------------------------------------------- Standardized measure of discounted future net cash flows remained unchanged from the fiscal year ended November 30, 1996, and decreased 100% in the year ended November 30, 1996, as compared to the year ended November 30, 1995, due to the withdrawal of the Company from domestic operations. CHANGE IN ACCOUNTANTS On January 16, 1997, the Company engaged Ernst & Young LLP as the Company's principal independent accountant in place of Grant Thornton LLP. On July 23, 1996, the Company requested and received the resignation of Grant Thornton LLP. There were no disagreements during the Company's two fiscal years ended November 30, 1995, or any interim period subsequent thereto between the Company and Grant Thornton LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to the satisfaction of Grant Thornton LLP, would have caused Grant Thornton LLP to make reference in its reports to the subject matter of such disagreements. The opinion of Grant Thornton LLP on the Company's financial statements for the fiscal year ended November 30, 1995, contains no adverse opinion or disclaimer of opinion, nor was such opinion qualified as to uncertainty, audit scope or accounting principles, except that the opinion on the Company's financial statements for the fiscal year ended November 30, 1995, raised substantial doubt about the Company's ability to continue as a going concern. The decision to change accountants was approved by the Company's Board of Directors. Chaparral Resources, Inc. Notes to Consolidated Financial Statements (continued) 5. Long-Term Debt (continued) If the notes were still outstanding on May 31, 1997, the Company agreed to issue 185,000 warrants as additional consideration to the holders. Furthermore, if the notes were still outstanding on November 30, 1997, the Company agreed to issue 370,000 warrants as additional consideration to the holders. Under these provisions, the Company issued 125,000 of the 185,000 warrants due to the May 31, 1997 deadline and none due to the November 30, 1997 deadline. The additional warrants were discounted by the fair value of the warrants, with the discount being amortized over the life of the notes. On dates between May 1997 and November 1997 the notes were repaid by the Company at their face value. The Company recorded an extraordinary loss on extinguishment of debt of approximately $214,000. During 1995, the Company issued a note payable to a private corporation in the amount of $750,000. As additional consideration for this note, the Company issued to the holder warrants to purchase 500,000 shares of the Company's common stock, and to a private corporation, as a finder's fee, warrants to purchase 200,000 shares at $.25 per share, exercisable at any time, but no later than October 30, 1998. The note was discounted by the difference between the market value of the Company's common stock on the date of issuance and the exercise price of the warrants. During 1996, the note was repaid by the Company at the face value of $750,000. The Company recorded an extraordinary loss on extinguishment of debt for the unamortized discount of approximately $237,000. 6. Common Stock 1989 Stock Warrant Plan During 1989, the Board of Directors approved a stock warrant plan for key employees and directors. The Company has reserved 1,175,000 shares of its common stock for issuance under the plan. Under the plan, warrants must be granted and exercised within a 10-year period ending April 30, 1999. Immediately following approval of the plan by the Board of Directors, warrants for 1,175,000 shares were granted with an exercise price of $.28 per share. Warrants for 100,000, 225,000, and 100,000 shares were exercised for values of $28,000,$63,000, and $28,000 during 1997,1996, and 1995, respectively. 1997 Incentive Stock Plan On July 17, 1997, the shareholders of the Company approved the 1997 Incentive Stock Plan pursuant to which up to 1,000,000 shares of the Company's common stock may be granted to directors and employees of, or consultants to, the Company. As of December 31, 1997, none of the Company's common stock had been granted under the plan. 1997 Non-employee Directors' Stock Option Plan On July 17, 1997, the shareholders approved the 1997 Non-employee Directors' Stock Option Plan. As of the date of each annual meeting of the stockholders of the Company, each non-employee director then in office or elected to the Board of Directors of the Company on such date will receive a ten-year option to purchase 25,000 shares at an exercise price equal to the average stock price on the date of grant. The aggregate number of options to acquire shares under the plan which may be issued may not exceed 5% of the total outstanding number of shares on the date of grant. As of December 31, 1997, options for 200,000 shares with an exercise price of $0.83 have been issued under the plan. Non-Qualified Stock Options During 1997, the Company granted five year non-qualified options, generally with vesting periods of one year, to purchase 2,885,000 restricted shares of the Company's common stock to various directors of, and consultants to, the Company. Options relating to 1,442,500 shares have an exercise price of $.75 per share and options relating to 1,442,500 shares have an exercise price of $1.50 per share. BUSINESS OF THE COMPANY Business - -------- Chaparral Resources, Inc. ("Company"), which was incorporated under the laws of the state of Colorado in 1972, is an independent oil and gas exploration and production company that was based in Denver, Colorado, until March 1, 1997, when the Company moved its headquarters to Houston, Texas. Historically, the Company produced and sold crude oil and natural gas to oil and gas purchasers in the Rocky Mountain and Western states of the United States. During early 1994, the management of the Company made a strategic decision to pursue international oil and gas projects, with initial emphasis on the Commonwealth of Independent States (part of the former Soviet Union) and, in early 1997, the Company divested itself of all of its remaining oil and gas properties in the United States. The Company's strategy is to obtain development rights to oil and gas fields located outside the United States where discoveries have been made and the Company estimates there are oil reserves, but the fields have either never been placed on production or the Company believes that the fields could be enhanced with efficient management and technical experience provided by the Company. The Karakuduk Field is the Company's first oil field to be acquired under the Company's new corporate strategy. Karakuduk Project The Company currently owns all of the outstanding common stock of Central Asian Petroleum Guernsey Limited ("CAP-G") which has a 50% interest in Karakuduk-Munay, Inc. ("KKM"), which holds 100% of the right to develop the Karakuduk Oil Field Project in Kazakhstan ("Karakuduk Field" or "Karakuduk Project"). The Company acquired 45% of the outstanding stock of CAP-G prior to December 1, 1995. In January and February 1996, the Company entered into agreements to acquire, for a total of $5,850,000 cash and 1,785,000 shares of the Company's restricted Common Stock, up to an additional 55% of the outstanding stock of CAP-G. The Company consummated the purchase of 25% of the outstanding stock of CAP-G in April 1996 by paying $2,000,000 in cash and issuing 685,000 shares of the Company's Common Stock. The Company acquired an additional 5% of the outstanding stock of CAP-G in April 1996 for $250,000 cash. To acquire an additional 15% of the outstanding common stock of CAP-G, the Company agreed to pay $1,975,000 in cash and issue 900,000 shares of the Company's Common Stock. This purchase was consummated on March 11, 1996, when Chaparral Resources, Inc. Notes to Consolidated Financial Statements (continued) 6. Common Stock (continued) Non-Qualified Stock Options (continued) The Company issued various five-year, non-qualified stock options to employees, consultants and directors of the Company during the year. The Company granted options to purchase 126,000 shares of the Company's common stock, at an exercise price of $.75. The Company granted options to purchase another 131,000 shares of the Company's common stock, at an exercise price of $1.50 a share. The Company has recorded the fair value of these stock options on the date of grant at $227,000. In January 1998, the Company granted five-year, non-qualified options to purchase 633,000 shares of the Company's common stock at an exercise price of $.87 a share to various employees of, and consultants to, the Company. The Company also granted five-year, non-qualified options to purchase 60,000 shares of the Company's common stock at an exercise price of $2.25 a share, to various employees of, and consultants to, the Company. Furthermore, the Company granted 90,000 shares of the Company's common stock, subject to shareholder ratification, to the directors of the Company and granted 190,000 shares of the Company's common stock to various employees of, and consultants to, the Company. Common Stock Offerings and Common Stock Warrant Issuances During 1993, the Company sold a total of 2,685,750 shares of common stock and issued 1,342,875 warrants to purchase common stock with an exercise price of $.40. An additional 105,540 warrants to acquire shares of common stock were paid as commission. Prior to 1995, 650,625 of these warrants were exercised. During 1995, 165,375 of these warrants were exercised for the purchase of shares of common stock. The exercise price was $.40 per share, for a total of $66,000. During 1996, 632,325 of these warrants were exercised at an exercise price of $.40 per share, for a total of $252,930. All warrants issued in connection with the 1993 private placement have been exercised. During 1997, the Company entered into an agreement to allow the Company to acquire M-D, International Petroleum (MDI), a private company. Accordingly, on January 8, 1997 the Company agreed to issue 180,000 shares of the Company's common stock having a value of $90,000 to the potential joint venture partner. Simultaneously, the principal stockholders of MDI put 180,000 shares of the Company's common stock into escrow. These shares would be returned to the Company if the Company did not acquire MDI by July 7, 1997. Under the agreement, the Company was to acquire a 5% joint venture interest for the development of certain natural gas fields in Uzbekistan. The agreement of the Company to acquire MDI was contingent upon the potential joint venture partner successfully obtaining rights to develop the natural gas fields in Uzbekistan. As of July 7, 1997, EOGU had not obtained the agreement with Uzbekistan to develop the natural gas fields. Consequently, the agreement by the Company to acquire MDI was nullified and the escrowed shares were returned to the Company and retired. During February 1997, the Company entered into a severance agreement with Paul V. Hoovler, the former Chief Executive Officer and President of the Company, pursuant to which Mr. Hoovler received warrants to purchase 100,000 shares of the Company's common stock at an exercise price of $.85 per share and warrants to purchase 100,000 shares of the Company's common stock at an exercise price of $1.25 per share. the Company paid $750,000 in cash and issued 900,000 shares of the Company's Common Stock. The remaining cash balance of $1,225,000 for the purchase was to be paid in four quarterly equal payments of $306,250 between June 11, 1996 and March 11, 1997. The first payment of $306,250 was paid in June 1996 and an additional $175,000 was paid in September 1996. The agreement was subsequently revised so that the Company paid $200,000 in December 1996. The Company has now paid the $543,750 balance of the purchase price. In addition, in December 1997 the Company acquired the remaining 10% of the outstanding common stock of CAP-G for which the Company paid $1,625,000 (which includes $800,000 of costs the Company previously paid on behalf of the prior owner of the 10% interest) and issued 400,000 shares of Common Stock. Risks of Foreign Operations. As a result of the Company's interest in KKM and the Karakuduk Field, the Company will be subject to certain risks inherent in the ownership and development of foreign properties, including without limitation, cancellation or renegotiation of contracts, royalty increases, tax increases, retroactive tax claims, expropriation, adverse changes in currency values, foreign exchange controls, import and export regulations, environmental controls, and other laws and regulations which may adversely affect the Company's interest in the Karakuduk Field. The Company's operations and agreements will also be governed by foreign laws. In the event of a dispute, the Company may be subject to arbitration in a foreign country or the jurisdiction of foreign courts or may not be successful in subjecting foreign persons to the jurisdiction of courts in the United States. In addition, the Company might be hindered or prevented from enforcing its rights with respect to a government instrumentality because of the doctrine of sovereign immunity. Although certain members of management of the Company have had prior experience operating in foreign countries, the Company has no prior experience operating in any foreign country, including the Republic of Kazakhstan, and may encounter unexpected difficulties in conducting foreign operations. The Company has applied with Overseas Private Investment Corporation ("OPIC") for political risk insurance. OPIC insurance can cover the following political risks: o Currency Inconvertibility--deterioration of the investor's ability to convert profits, debt service and other remittances from local currency unto U.S. dollars; o Expropriation--loss of an investment due to expropriation, nationalization or confiscation by a foreign government; o Political Violence--loss of assets or income due to war, revolution, insurrection or politically motivated civil strife, terrorism and sabotage; and Chaparral Resources, Inc. Notes to Consolidated Financial Statements (continued) 6. Common Stock (continued) Common Stock Offerings and Common Stock Warrant Issuances (continued) During 1997, the Company sold 3,076,923 shares of the Company's common stock for $.65 per share for a total of $2,000,000 to a private investor. In connection with the transaction, the Company also issued a warrant to the investor to purchase up to an additional 4,615,385 shares of the Company's common stock for $3,000,000 or $.65 per share. The warrant was to expire on December 31, 1997. In October and November 1997, the private investor exercised warrants to acquire 4,615,385 shares of the Company's common stock. The same party exercised another warrant for 125,000 shares of the Company's common stock exercisable at an exercise price of $0.25 per share. In April 1997, a private investor converted a $500,000 promissory note (plus $2,000 of accrued interest) that had previously been issued by the Company into 772,991 shares of the Company's common stock at a conversion price of $.65 per share. On October 28, 1997, 423,076 shares of the Company's common stock were issued to a private investor by way of a "cashless" exercise of a warrant as allowed by the warrant. This warrant was originally exercisable for 500,000 shares at a conversion price of $.25 per share. In November 1997, a private investor converted a $1,000,000 promissory note (plus $48,000 of accrued interest) that previously had been issued by the Company into 1,396,741 shares of the Company's common stock at a conversion price of $.75 per share. During 1997, the Company issued 87,669 shares of the Company's common stock to a consultant in lieu of $78,000 of accrued fees that had not been paid. In December 1997, the Company exercised an option to acquire the remaining 10% of the outstanding shares of CAP-G (Note 3). As a part of the consideration, the Company issued 400,000 shares valued at $1,000,000. During 1996, the Company sold 14,000,000 shares of common stock in a private placement at a price of $.50 per share. In connection with the private placement, the Company issued a warrant to purchase 1,022,000 shares to the sales agent as a commission, at an exercise price of $10.00. As of December 31, 1997 and November 30, 1996, the warrant has not been exercised. During 1997, the Company sold 461,538 shares of the Company's common stock for $.65 per share for a total of $300,000 to a private investor. In connection with the transaction, the Company also issued warrants to the investor to purchase up to an additional 461,538 shares of the Company's common stock for $300,000 or $.65 per share. The private investor exercised a portion of the warrant on December 31, 1997, and received a total of 384,616 shares of the Company's common stock. The remaining warrants expired on the same day. SFAS 123 Disclosure SFAS 123 requires that pro forma information regarding net income and earnings per share be determined as if the Company had accounted for its employee stock option under the fair value method as defined in that Statement for options granted or modified after December 31, 1994. SFAS 123 requires disclosure of option plans for the previous three years, but since 1997 was the first year for stock option issuances to meet the new requirement, weighted average assumptions are calculated only for 1997. The fair value for applicable options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumption for 1997: risk free interest rates of 5.53%; dividend yield of 0%; volatility factors of the expected market price of the Company's common stock of 0.83; and a weighted average life expectancy of the options of 4.9 years. o Interference With Operations--loss of assets or income due to cessation of operations lasting six months or more caused by political violence. The coverage elections for each category of insurance are computed on a ceiling and an active amount. The coverage ceiling represents the maximum insurance available for the insured investment and future earnings under an insurance contract. The premiums for each category are based on a maximum insured amount ("MIA"), a current insured amount ("CIA") and a standby amount. The MIA represents the maximum insurance available for the insured investment under an insurance contract. The CIA represents the insurance actually in force during the contract period. The difference between the CIA and the MIA is the standby amount. There is a charge for standby coverage. The Company has applied with OPIC for all four political risk coverages on the Company's investment in the Karakuduk Field in western Kazakhstan. The MIAs sought for each coverage range from $23.4 to $40.2 million. The estimated yearly premium amounts for the CIAs for each coverage range up to $84,000. The estimated yearly standby premiums for each coverage range up to $88,000. The actual premium values may be higher or lower depending on the terms of the final contract between OPIC and the Company. The Investment Committee of OPIC approved the Company's Karakuduk operations for political risk insurance coverage by OPIC on December 19, 1995. The Company received an executed Letter of Commitment on September 25, 1996, from OPIC binding issuance of Political Risk Insurance for the Karakuduk project. Currently, the Company has a standby facility for which it has paid $218,750. The Company expects to execute the actual contract offered to the Company by OPIC on or before June 30, 1998. Under the terms of OPIC's Expropriation and Interference With Operations insurance coverage, the Company must be able to transfer to OPIC the shares of beneficial interests related to the insured investment, free and clear of all encumbrances. There are certain restrictions on the transfer of shares and assignment of the Company's beneficial interests in KKM. At such time as the Company obtains coverage, the Company will seek a waiver of the transfer restrictions from the shareholders of KKM that are not affiliated with the Company. The Company does not anticipate problems in obtaining the waiver. Markets In fiscal 1996, the only customer having purchases which accounted for 10% or more of the Company's revenue was Conoco Inc. which accounted for 32% of the Company's revenue. In early 1997, the Company divested itself of all of its remaining oil and gas properties in the United States. The Company's business is not seasonal, except that severe weather conditions limit the Company's exploration and drilling activities. Chaparral Resources, Inc. Notes to Consolidated Financial Statements (continued) 6. Common Stock and Common Stock Warrants (continued) Common Stock Offerings and Common Stock Warrant Issuances (continued) The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the option's vesting period. The Company's pro forma information follows: Year ended Month ended December 31, December 31, 1997 1996 ------------------------------------- Net Loss under APB 25 (2,603,000) (130,000) Effect of FASB 123 (525,000) -- Pro forma Net Loss (3,128,000) (130,000) Pro forma Basic and Diluted Earnings per Share $(0.08) -- A summary of the Company's stock option activity and related information for the periods ended follows: <TABLE> <CAPTION> Shares Weighted Weighted Under Average Exercise Average Contractual Option Price Life Remaining ------------------- -------------------- -------------------- <S> <C> <C> <C> Outstanding, November 30, 1996 - - - Granted 1,786,000 $ .763 4.4 years 1,556,000 $ 1.50 4.3 years Exercised - $ 0.00 - Canceled - $ 0.00 - ------------------- -------------------- -------------------- Outstanding, December 31, 1997 3,342,000 $ 1.11 - ------------------- -------------------- -------------------- Exercisable, December 31, 1997 200,000 $ 0.83 - ------------------- -------------------- -------------------- </TABLE> There is substantial uncertainty as to the prices at which any oil reserves produced by the Company from the Karakuduk Field in the future could be sold. It is possible that, under the market conditions prevailing in the future, the production and sale of oil from the Karakuduk Field may not be commercially feasible. The availability of ready markets and the price obtained for oil produced depends upon numerous factors beyond the control of the Company. The current market for oil is characterized by instability which has caused dramatic declines as well as increases in world oil prices in recent years and there can be no assurance of any price stability. KKM has entered into a protocol of intentions whereby the entity that operates the KazTrans Oil pipeline and KKM have undertaken to conclude a contract which will give KKM access to the pipeline. This access will allow KKM to ship oil to export markets. In addition to this protocol, on March 7, 1998, KKM signed a contract with the export-import firm of Munay-Impex, a subsidiary of KazakhOil, to export crude oil produced by KKM to both the Commonwealth of Independent States (CIS) and other countries in the amount up to 100,000 (one hundred thousand) metric tons according to the schedule of shipment of Kazakhstan oil during 1998. KKM will supply crude oil to Munay-Impex in amounts of not less than 5 to 10 thousand tons. KKM anticipates that the production facilities will be completed during the late second quarter or early third quarter of 1998, which will initially allow up to 12,000 barrels of oil per day to be transported to the main pipeline terminal. Until the production facilities are completed, any produced oil will first be placed into storage tanks and then trucked to the pipeline under the terms of the protocol. Production entered into the pipeline is considered inventory of KKM, until the 5 to 10 thousand ton minimum volume requirement has been met, at which time the production will be sold under the terms of the Munay-Implex contract. KKM expects to record revenues from the sale of crude oil by the end of the second quarter of 1998. Competition Foreign oil and gas exploration and the acquisition of producing and undeveloped properties is a highly competitive and speculative business. In seeking suitable opportunities, the Company competes in all areas of the oil and gas industry with a number of other companies, including large multi-national oil and gas companies and other independent operators with greater financial resources and, in some cases, with more experience than the Company. The Company does not hold a significant competitive position in the oil and gas industry. Regulation General. The Company's operations may be subject to regulation by governments or other regulatory bodies governing the area in which the Company's overseas operations are located. Regulations govern such things as drilling permits, production rates, and environmen- tal protection and pollution control, Chaparral Resources, Inc. Notes to Consolidated Financial Statements (continued) 6. Common Stock and Common Stock Warrants (continued) SFAS 123 Disclosure The following table summarizes all common stock purchase warrant activity for the year ended December 31, 1997: Number of Exercise Stock Price Warrants Range --------------------------------- Outstanding, November 30, 1995 2,407,325 $0.25 - $0.40 Granted 1,439,500 $0.00001 - $0.40 Exercised (857,325) $0.25 - $0.40 ---------------------------------- Outstanding, November 30, 1996 2,989,500 $0.00001 - $0.28 Granted 6,426,923 $0.01 - $1.25 Exercised (5,648,077) $0.25 - $0.65 Expired (153,846) $0.25 - $0.65 ---------------------------------- Outstanding, December 31, 1997 3,614,500 $0.00001 - $1.25 ================================== The following table summarizes the price ranges of all common stock purchase warrants outstanding as of December 31, 1997: Stock Warrants Outstanding as of December 31, 1997 Number of Warrants Exercise Price ----------------------------------------- 100,000 $0.85 100,000 $1.25 750,000 $0.28 742,500 $0.25 900,000 $0.01 1,022,000 $0.00001 ------------------------------------- 3,614,500 $0.00001 - $1.25 ===================================== 7. Redeemable Preferred Stock and Related Common Stock Warrants On November 24, 1997, the Company executed a Subscription Agreement ("Agreement") with an unaffiliated investor for 225,000 shares of three classes of Redeemable $5.00 Cumulative Convertible Preferred Stock ("Preferred Stock"). The investor agreed to purchase 75,000 shares of each of the Company's Series A, B and C Preferred Stock. Pursuant to the Agreement, the Company initially sold to the investor 50,000 shares of the Company's Series A Preferred Stock, no par value, for a purchase price of $100.00 per share, equal to the redemption value, or an aggregate purchase price of $5,000,000. The number of shares of common stock issuable upon conversion of each share of Series A Preferred Stock is determined by dividing $100 by the conversion price of $2.25 per share. The Company is not required to establish a sinking fund, however, the preferred stock dividends in arrears must be paid before dividends can be paid on the common stock. The basis difference representing issuance costs is being amortized directly to additional paid-in-capital for the period through the redemption date. royalty rates and taxation rates among others. These regulations may substantially increase the costs of doing business and sometimes may prevent or delay the starting or continuing of any given exploration or development project. Moreover, regulations are subject to future changes by legislative and administrative action and by judicial decisions which may adversely affect the petroleum industry in general and the Company in particular. At the present time, it is impossible to predict the effect any current or future proposals or changes in existing laws or regulations will have on the Company's operations. The Company believes that it complies with all applicable legislation and regulations in all material respects. Subsequent to December 31, 1997, the Kazakhstan government tax authority began conducting an audit of KKM. The Company believes that as of December 31, 1997, KKM has adequately provided for any potential tax liabilities which may exist. Environmental. Based upon a study undertaken on behalf of the Company by an unaffiliated party, the Company does not believe that its business operations presently impair environmental quality. However, compliance with foreign laws and regulations which have been enacted or adopted regulating the discharge of materials into the environment could have an adverse effect upon the Company, the extent of which the Company is unable to assess. Since inception the Company has not made any material capital expenditures for environmental control facilities and has no plans to do so. Employees As of April 27, 1998, the Company had 7 full-time employees and 1 part-time employee. CAP-G operates through its officers and directors and has no employees. KKM had 80 employees and retains independent contractors on an as needed basis through the Company's wholly owned subsidiary, Road Runner Services Company. Properties - ---------- The Karakuduk Field The Karakuduk Field is located in the Mangistau Region of the Republic of Kazakhstan. KKM's license to develop the Karakuduk Field covers an area of approximately 16,922.5 acres and has been granted to KKM for a period of 25 years. The agreement granting KKM the right to develop the Karakuduk Field was approved by the Ministry of Oil and Gas Industries of the Republic of Kazakhstan on August 30, 1995. The Karakuduk Field is geographically located, approximately 227 miles northeast of the regional capital city of Aktau, on the Ust-Yurt Plateau. The closest settlement is the Say-Utes Railway Station approximately 38 miles southeast of the field. The ground elevation varies between 590 and 656 feet above sea level. The region has a dry, continental climate, with fewer than 10 Chaparral Resources, Inc. Notes to Consolidated Financial Statements (continued) 7. Redeemable Preferred Stock and Related Common Stock Warrants (continued) The Series B Preferred Stock and Series C Preferred Stock, once issued, are convertible into common stock at the option of the holders thereof at any time prior to the redemption date. The conversion price of the Series B Preferred Stock is $3.00 per share; and the conversion price of the Series C Preferred Stock is $4.25 per share. The number of shares of common stock issuable upon conversion of each share of Series B Preferred Stock and Series C Preferred Stock is determined by dividing $100 by the conversion price per share. The Preferred Stock has scheduled redemptions beginning November 30, 2002. The five-year aggregate redemption amounts are as follows: ------------------------------- 1998 - 1999 - 2000 - 2001 - 2002 $5,000,000 ------------------------------- Total $5,000,000 =============================== Allen & Company Incorporated (Allen & Company), a significant shareholder of the Company, acted as placement agent in connection with the subscription for the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock pursuant to the Agreement. Allen & Company elected to receive its fees in the form of warrants to purchase 900,000 shares of the Company's common stock that were all originally exercisable through November 25, 2002, at an exercise price of $.01 per share. In March 1998, prior to the receipt of the funds for any additional purchases the investor was to make under the Agreement, the Company and the investor mutually released each other from any further obligations under the Agreement. The investor retained the initial 50,000 shares of Series A Preferred Stock. The Company is not required to issue any additional preferred stock under the Agreement and the investor has no other obligation to provide funds to the Company in exchange for such stock. inches of rainfall per year. Mean temperatures range from -25 degrees Fahrenheit in January to 100 degrees Fahrenheit in July. The operating environment is similar to that found in northern Arizona and New Mexico in the United States. The Karakuduk structure is an asymmetrical anticline located on the Aristan Uplift in the North Ustyurt Basin. Oil was discovered on the structure in 1972, when Kazakhstan was a republic of the former Soviet Union, from Jurassic age sediments between 8,500 and 10,000 feet. Twenty-two exploratory and development wells were drilled to delineate the field, however, none of the wells was ever placed on production. The productive area of the Karakuduk Field is 11,300 acres, with a minimum of seven separate productive horizons present in the Jurassic formation. Oil has been recovered in tests from all seven horizons within the Jurassic formation with flow rates ranging from 3 to 966 barrels per day. The Company estimates drilling a maximum 90 additional oil wells and 26 water injection wells may be required to fully develop the field. Peak oil production from the field is expected to occur by 2001, although the time or amount of development or production cannot presently be assured. Although the Company has a reserve report on the Karakuduk Field that was commissioned by the Company and that was reviewed by a petroleum engineering group retained by the Company, the reserve report is over three years old and did not consider the potential adverse impact of marketability on price of any oil which might be produced. Therefore, the Company does not claim that any of the reserves specified in the reserve report are proven. As a result of the Company recently reentering a well in the Karakuduk Field and because of the Company's future drilling plans for the Karakuduk Field, the Company expects to be able to obtain an updated reserve report for the Karakuduk Field in 1998 or early 1999. The Karakuduk Field is approximately 18 miles north of the Mukat-Mangishlak railroad, the Mangishlak-Astraghan water pipeline, the Beyneu-Uzen high voltage utility lines, and the Uzen-Atrau-Samara oil and gas pipelines. KKM has entered into a protocol of intentions whereby the entity that operates the KazTrans Oil pipeline and KKM have undertaken to conclude a contract which will give KKM access to the pipeline. This access will allow KKM to ship oil to export markets. In addition to this protocol, on March 7, 1998, KKM signed a contract with the export-import firm of Munay-Impex, a subsidiary of KazakhOil, to export crude oil produced by KKM to both the Commonwealth of Independent States (CIS) and other countries in the amount up to 100,000 (one hundred thousand) metric tons according to the schedule of shipment of Kazakhstan oil during 1998. KKM will supply crude oil to Munay-Impex in amounts of not less than 5 to 10 thousand tons. The planned development program for the Karakuduk Field will include a pressure maintenance operation that the Company believes could result in additional recoverable reserves. The ability of the Company to realize the carrying value of its assets is dependent on the Company being able to extract and transport hydrocarbons and finding appropriate markets for their sale. Currently, exports from the Republic of Kazakhstan are dependent on limited transport routes and, in particular, Chaparral Resources, Inc. Notes to Consolidated Financial Statements (continued) 8. Income Taxes The following is a summary of the provision for income taxes: <TABLE> <CAPTION> Year Ended One Month Ended Year Ended Year Ended December 31, December 31, November 30, November 30, 1997 1996 1996 1995 ----------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Income taxes (benefit) computed at federal statutory rate $ (910,000) $(46,000) $(762,000) $(241,000) Other (60,000) (3,000) (86,000) (57,000) Change in asset valuation allowance 970,000 49,000 848,000 298,000 ----------------------------------------------------------------------------------------- Income taxes $ -- $ -- $ -- $ -- ========================================================================================= The components of the Company's deferred tax assets and liabilities under FASB No. 109 are as follows: 1997 1996 1995 ------------------------------------------------------------- Deferred tax assets: Net operating loss carryforwards $ 5,812,000 $4,958,000 $4,131,000 Full cost pool capitalization -- 267,000 246,000 Valuation allowance (5,812,000) (5,225,000) (4,377,000) ------------------------------------------------------------- Deferred tax assets $ -- $ -- $ -- ============================================================= </TABLE> There were no deferred tax assets or income tax benefits recorded in the financial statements for net deductible temporary differences or net operating loss carryforwards due to the fact that the realization of the related tax benefits is not considered likely. At December 31, 1997, the Company has tax loss carryforwards for federal income tax purposes of approximately $11,653,000 available to offset future taxable income. These carryforwards will expire at various times between 1998 and 2012. The Company has issued a significant number of shares of common stock, stock warrants, and preferred stock during the year ended December 31, 1997. The Company is also currently negotiating for additional capital, which, if successful, will require additional shares of stock to be issued. The changes in ownership may significantly restrict the use of net operating loss carryforwards. At December 31, 1997, unused statutory depletion carryforwards, which have unlimited duration, are approximately $567,000. the unused investment tax carryover was approximately $86,000 at December 31, 1997 and expires through 2000. The loss carryforward at December 31, 1997 for financial reporting purposes is approximately $15,324,000, consisting of $13,408,000 in domestic and $1,916,000 foreign loss carryforwards, respectively. The difference between the loss carryforward for financial reporting and income tax purposes results principally from the difference in book and tax basis of oil and gas properties and organizational costs related to foreign activities. 9. Related Party Transactions The Company paid a director $24,000 during 1995 for public relations consulting services. During 1996, the Company paid a basic consulting fee of approximately $500,000 to MDI, of which the stockholders include two directors of the Company, for assistance in seeking means for meeting the Company's funding obligation for the Karakuduk Project. During 1997, the Company paid an additional $180,000 to MDI, but terminated the agreement in the first quarter of 1997. The Company leased office space under a non-cancelable operating lease, which expired on March 31, 1997 from a related party. Beginning April 1, 1997, the Company leased office space at a rate of approximately $2,000 per month. This lease expired in November 1997, was renewed and then later cancelled. In February 1998, the Company signed a new lease with an unrelated party. Rent expense was $37,000 for 1997, $46,000 for 1996, and $36,000 for 1995. The Company believes these rental expenses were at an arms length basis. access to the Russian pipeline system. Domestic markets in the Republic of Kazakhstan might not permit world market price to be obtained. Management believes, however, that over the life of the project, transportation restrictions will be alleviated and prices will be achievable for hydrocarbons extracted to allow the Company full recovery of the carrying value of its assets. KKM, according to its license agreement with the Government of Kazakhstan, has a priority use of the existing pipeline network. In this regard, on March 7, 1998, KKM entered into a contract with Munay-Impex, which is described above, for export of crude oil of up to 100,000 metric tons during 1998. Currently, oil is being produced through the field separators into storage tanks or directly into oil transport trucks for delivery to the pipeline under the terms of the contract. Because of uncertainties surrounding the Karakuduk Project, no proved reserves have been attributed to the field. The Karakuduk Project will require significant development costs for which the financing is not complete. There can be no assurance that the project will be adequately financed or that the field will be successfully developed. The license requires minimum work plans of approximately $10 million by December 31, 1997 (which has been satisfied), of approximately $34.5 million by December 31, 1998 and of approximately $12 million by December 31, 1999. Although KKM was previously permitted to defer the minimum work program, there are no assurances that KKM would receive permission for any future deferrals if requested by KKM. As part of the minimum work plan requirement, the Company has loaned CAP-G more than $12 million to fund KKM's current operations. KKM's 1998 budget of $34 million has been approved by the KKM Board of Directors through December 31, 1998. It is planned that this requirement will be funded by the Company through loans by its subsidiary CAP-G to KKM and by the sale of oil by KKM. In addition, the Company is attempting to obtain limited or non-recourse project financing for KKM, which may reduce the amount of loans from CAP-G. The Company currently is responsible for providing 100% of the balance of the funding necessary for the completion of development of the Karakuduk Field. The Company first delivered crude oil from the Karakuduk Field in December 1997. The oil is transported by truck to the export pipeline of Say-Utes which is 38 miles from the field. By the beginning of the third quarter of 1998, it is anticipated that any oil produced will be transported by pipeline from the field to a storage terminal to be built at Railroad Station #6, which is approximately 18 miles from the Karakuduk Field. Until the production facilities are completed, any produced oil will first be placed into storage tanks and then trucked to the pipeline under the terms of the protocol. Production entered into the pipeline is considered inventory of KKM, until the 5 to 10 thousand ton minimum volume requirement has been met, at which time the production will be sold under the terms of the Munay-Impex contract. KKM expects to record revenues from the sale of crude oil by the end of the second quarter of 1998. The first two workover wells reentered in the Karakuduk field were tested by KKM at a combined sustained flow rate of approximately 2,000 barrels of oil per day. Production has been established from the two uppermost oil-producing zones in the field. The Company plans to drill subsequent wells to attempt to Chaparral Resources, Inc. Notes to Consolidated Financial Statements (continued) 10. Major Customers The Company is presently engaged in exploration for and development of oil and gas. The Company sells its production under contracts with various purchasers, with certain domestic purchasers accounting for sales of 10% or more per year as follows: 1997 0% 1996 32% 1995 16% 11. Royalty Participation Plan During 1982, the Company adopted a Royalty Participation Plan for the employees of the Company. Under the plan, the Company may contribute to a trust fund, royalty interests acquired by the Company together with any proceeds of production received by the Company, which are attributable to such royalty interests. The net income of the trust fund will be distributed yearly to the participants based on years of service and position in the Company. No distributions were made in 1997. Distributions were $12,000 for 1996 and $12,000 for 1995. In February 1997, as part of the severance agreement with the former Chief Executive Officer of the Company (Note 14), the Company assigned its interest in the Royalty Participation Plan to the former Chief Executive Officer and President of the Company. 12. Accrued Compensation On August 19, 1996, the Company's Board of Directors awarded the former Chief Executive Officer and the former Vice President of the Company cash bonuses totaling $210,000 as recognition for past and present services to be used to exercise certain warrants granted in connection with the Company's 1989 Stock Warrant Plan. These bonuses will not become payable until the earlier of (i) completion of a sale or farmout by the Company of all or a portion of its interest in the Karakuduk Project, or (ii) the date when the Company makes a public disclosure of a sale or farmout of the Karakuduk Project. The Company does not expect any events to occur in the near future, therefore, the bonus payable is considered long-term in nature. In connection with the appointment of Mr. Howard Karren as the Chairman of the Board of Directors of the Company in 1996, the Company agreed to issue to Mr. Karren, or his designee, 350,000 shares of restricted common stock of the Company. In 1996, the Company recorded accrued compensation for this transaction in the amount of $175,000. During 1997, the common stock was issued. 13. Defined Contribution Plans Effective December 31, 1990, the Company adopted a new defined contribution plan (the "Plan") which covers all full-time eligible employees. Contributions are determined as a percent of each covered employee's salary and are funded as accrued. Plan contributions for the Company were $27,000 in 1995, of which $20,000 was attributable to the President of the Company. The Company also adopted a 401(k) plan covering all full-time employees, effective January 1, 1991. Employee contributions are in the form of salary reductions up to the maximum percentage allowable under the Internal Revenue Code. There are no employer matching contributions. During 1996, the Plan merged into the 401(k) plan; as such, there were no contributions made by the Company during 1997 or 1996. 14. Commitments and Contingencies Under the terms of the license agreement, approved by the Ministry of Oil and Gas Industries of the Republic of Kazakhstan, granting KKM the right to develop the Karakuduk Field, KKM has committed to minimum capital expenditures of approximately $10 million by December 31, 1997, an additional $34.5 million by December 31, 1998, and another $12 million by December 31, 1999. As of December 31, 1997, KKM has fully satisfied its 1997 capital commitments under the license agreement. obtain production from the additional zones. The wells, #21 and #10, are two of twenty-two wells drilled between 1972 and 1992 to delineate the Karakuduk Field. None of such wells were placed on limited production when originally drilled. Well #21 and well #10 currently have been placed on limited production to fill storage tanks and transport trucks that deliver oil to the export pipeline. KKM is acquiring additional trucks and equipment to increase the amount of daily production currently deliverable to the pipeline terminal. KKM also has begun preparations to workover additional wells and, if the wells are productive, will place them on production at such time as the field facility construction is completed. KKM has entered into a drilling contract with Challenger Drilling Company, Ltd. ("Challenger"), a company based in the United Kingdom, to use a mobile drilling rig for a six-well development program commencing in August, 1998. The rig is currently being upgraded in Houston, Texas, for shipment to Kazakhstan in June 1998. Challenger was awarded the contract by KKM as a result of a worldwide bidding process in which Challenger was the low bidder that met the requirements of a western-equipped rig. The Company has extended a short-term loan to Challenger to enable it to purchase additional equipment and spare parts required by KKM for the drilling program. Management of the Company believes the risk-to-reward considerations involved with the development of the Karakuduk Field are very positive and may lead to substantial growth of the Company over the next several years. However, the Company can provide no assurances that the Karakuduk Field will produce oil in any specific amounts or that the Company will ever realize a profit as a result of the Company's interest in the field. KKM was re-registered on July 24, 1997, with the government of Kazakhstan. The re-registration was required as a result of new legislation in Kazakhstan. The Company believes that KKM is now in compliance with all Kazakhstan laws and regulations related to the registration requirements relating to legal entities. The re-registered KKM includes as a shareholder KazakhOil, the national petroleum company which holds the majority of the interest of the government of Kazakhstan in KKM. The balance is owned by a private Kazakhstan joint stock company. The permits and licenses required to develop the Karakuduk Field have been obtained. However, there is no assurance that any further permits or licenses, if required, will be obtained. Also, because of uncertainties surrounding the project, no proved reserves have been attributed to the field. The project will require significant development costs for which the financing is not in place. There can be no assurance that the project will be financed or that the Karakuduk Field will be successfully developed. Further, the Company will face all of the risks inherent in attempting to develop an oil and gas property in a foreign country. Chaparral Resources, Inc. Notes to Consolidated Financial Statements (continued) 14. Commitments and Contingencies (continued) The Company has outstanding legal proceedings involving a lawsuit initiated by Heartland, Inc. of Wichita and Collins & McIlhenny, Inc. (Plaintiffs). The Complaint was filed on November 14, 1997 against the Company, Howard Karren, Whittier Trust Company and James A. Jeffs in the District Court of Harris County, Texas. Plaintiffs claim the Company breached an alleged agreement whereby Plaintiffs were to raise capital for the Company through a private placement of the Company's securities. The plaintiffs contend that the Company and Howard Karren made false representations in connection with the alleged contract and that Whittier Trust Company and James A. Jeffs interfered with the Company's performance of the alleged contract. Plaintiffs are seeking actual damages of $3,435,000 and exemplary damages of $25,000,000, plus attorney's fees. A motion for a summary judgment filed by the Plaintiff was denied by the Court. The Company has not recorded any provision related to this legal proceeding as management believes the Company will prevail. Subsequent to December 31, 1997, the Kazakhstan government tax authority began an audit of KKM. The Company believes KKM provided for all potential tax contingencies which may exist. 15. Subsequent Events In an agreement dated March 31, 1998, the Company has agreed to allow Allen & Company to retain, subject to certain performance criteria, the warrants to purchase 700,000 shares (presented as a $1,770,000 stock subscription receivable in equity) of the Company's common stock related to the $17,500,000 subscription not received under the original terms of the Agreement. The unearned warrants to purchase 700,000 shares of the Company's common stock held by Allen & Company are fully restricted from exercise unless Allen & Company assists the Company in raising additional capital for the Company that is acceptable to the Company's Board of Directors. For each $25 of additional capital raised, a warrant to purchase one share of common stock will be deemed to be earned. If, before November 25, 1999, Allen & Company fails to assist the Company in raising the additional capital for the Company under terms acceptable to the Company, the unearned portion of the warrants will expire. Effective on April 3, 1998, the Company sold 1,250,000 shares of the Company's Common Stock for $2.00 per share for a total of $2,500,000 to a private investor. Allen & Company Incorporated acted as placement agent in connection with the sale of the 1,250,000 shares and therefore earned warrants to an additional 100,000 shares of the Company's Common Stock. The warrants to purchase the additional 100,000 shares of the Company's Common Stock are exercisable through November 25, 2002, at an exercise price of $0.01 per share. The Company has agreed that, if at any time by March 31, 1999, the Company issues additional shares of the Company's common stock at a price of less than $2.00 per share, the investor will receive an additional number of shares of common stock which when added to the 1,250,000 shares divided into $2,500,000 is equal to the price at which the additional shares are sold. Further, the Company has agreed that if, by March 31, 1999, the Company issues or sells convertible securities (i.e., securities directly or indirectly convertible into or exchangeable for common stock), other than as a dividend or other distribution on any class of stock, the investor is entitled to exchange the 1,250,000 shares for the convertible securities. The amount of convertible securities to be issued to the investor is to be determined by dividing the market price of the common stock into the issue price of such convertible securities. Finally, the Company has agreed that, in the event that by March 31, 1999 (i) the Company has not received an investment of $7,500,000 and (ii) the average market price of the common stock for the twenty day trading period preceding March 31, 1999, is less than $2.00 per share, then the investor is entitled to an additional number of shares of common stock which when added to the 1,250,000 shares and divided into $2,500,000 is equal to the market price of the common stock on March 31, 1999. This last provision is not applicable if either of the provisions are satisfied on or before March 31, 1999. In the first quarter of calendar 1997, the Company disposed of all of its remaining interests in oil and gas properties in the United States. See also "Management's Discussion and Analysis of Financial Condition and Results of Operations." Reserves. As detailed in "Disclosures About Oil and Gas Producing Activities" following the Notes to Consolidated Financial Statements, estimated quantities of the Company's proved oil and natural gas reserves decreased 100% for the fiscal year ended November 30, 1996, as compared to the previous fiscal year. Reserves decreased due to production during the year, the sale of certain producing properties and the abandonment of certain properties which produced at uneconomic rates. The present value of the Company's proved reserves decreased 100% as of November 30, 1996, as compared to the end of the previous fiscal year, due to lower natural gas prices, production, the sale of proved reserves and abandonment of proved reserves. The Company claims no proved reserves as of December 31, 1997. Although the Company has a reserve report on the Karakuduk Field that was commissioned by the Company and that was reviewed by a petroleum engineering group retained by the Company, the reserve report is over three years old and did not consider the potential adverse impact of marketability on price of any oil which might be produced due to the remote location of the Karakuduk Field or the potential of political instability. Therefore, the Company does not claim that any of the reserves specified in the reserve report are proven. As a result of the Company recently reentering a well in the Karakuduk Field and because of the Company's future drilling plans for the Karakuduk Field, the Company expects to be able to obtain an updated reserve report for the Karakuduk Field in late 1998 or early 1999. Since January 1, 1997, the Company has not filed with or included in any reports to any other Federal authority or agency any estimates of total, proved net oil or gas reserves. Net Quantities of Oil and Gas Produced. The Company's net oil and gas production for each of the last three fiscal years and for the month of December 1996 (all of which prior to 1997 was from properties located in the United States) was as follows: Year ended November 30, Year ended Month of ----------------------- December 31, 1997 December 1996 1996 1995 ----------------- ------------- ---- ---- Oil (Bbls) Less than 1,000 -0- 1,737 8,224 Gas (Mcf) -0- -0- 96,906 132,924 Supplemental Information - Disclosures About Oil and Gas Producing Activities - Unaudited The following supplemental information regarding the oil and gas activities of the Company is presented pursuant to the disclosure requirements promulgated by the Securities and Exchange Commission and Statement of Financial Accounting Standards ("SFAS") No. 69, Disclosures About Oil and Gas Producing Activities. As discussed in Note 4, the Company entered into an agreement effective January 1, 1997 to sell its domestic oil and gas properties. Accordingly, the Company's domestic oil and gas properties were classified as oil and gas properties under an agreement for sale at November 30, 1996 and no disclosures for proved reserves or future cash flows have been made at November 30, 1996. The properties were sold in accordance with the above agreement. Due to the uncertainties surrounding the development of the Karakuduk Field, along with the limited amount of production established as of December 31, 1997, no proved reserves have been attributed to the field. The Company acquired no additional producing properties in 1997. Therefore, no disclosures for proved reserves or future cash flows have been made at December 31, 1997. Acquisition and exploratory costs incurred related to the Company's interest in the Karakuduk Field, however, are disclosed below. The exploration costs reflect the entire exploratory costs incurred by the Company and KKM. The following estimates of reserve quantities and related standardized measure of discounted net cash flow are estimates only, and do not purport to reflect realizable values or fair market values of the Company's reserves. The Company emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise than producing oil and gas properties. Additionally, the price of oil has been very volatile and downward changes in prices can significantly affect quantities that are economically recoverable. Accordingly, these estimates are expected to change as future information becomes available and the changes may be significant. All of the Company's proved reserves were located in the United States. Proved reserves are estimated reserves of crude oil and natural gas that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are those expected to be recovered through existing wells, equipment and operating methods. The standardized measure of discounted future net cash flows is computed by applying year-end prices of oil and gas (with consideration of price changes only to the extent provided by contractual arrangements) to the estimated future production of proved oil and gas reserves, less estimated future expenditures (based on year-end costs) to be incurred in developing and producing the proved reserves, less estimated future income tax expenses. The estimated future net cash flows are then discounted using a rate of 10% a year to reflect the estimated timing of the future cash flows. The average sales price per barrel of oil and Mcf of gas, and average production costs per barrel of oil equivalent ("BOE") excluding depreciation, depletion and amortization were as follows: Average Average Average Year Ended Month of Year Ended Sales Price Sales Price Production December 31, December November 30 Oil (Bbls) Gas (Mcf) Cost Per BOE - ------------ -------- ----------- ------------ ----------- ------------ 1997 * * * 1996 * * * 1996 17.53 1.17 2.07 1995 14.27 1.02 3.78 *The Company did not sell any significant quantities of oil or gas during these periods. The above table represents activities related only to oil and gas production. Productive Wells and Acreage. As of December 31, 1997, the Company had interests in one productive oil well and no productive gas wells. As of December 31, 1997, the Company had a net 50% beneficial interest in KKM which holds a governmental license to develop the Karakuduk Field, a 16,900 acre oil field in the Republic of Kazakhstan which was discovered in 1972 with the drilling of 22 exploratory and development wells by the former Soviet Union. These wells were not produced commercially. On December 31, 1997, KKM delivered by truck to the pipeline oil that KKM had recovered from testing well #21, the first well KKM reentered in the Karakuduk Field. Well #21 tested on a sustained flow of 526 barrels of oil per day. The well was subsequently shut-in until installation of a transfer system and a laboratory at Say-Utes was completed in February 1998. Well #10 has been reperforated and was produced at a sustained test flow rate of 1,450 barrels of oil per day with a 1/2" choke. Well #21 and well #10 currently have been placed on limited production to fill storage tanks and transport trucks that deliver oil to the export pipeline. KKM is acquiring additional trucks and equipment to increase the amount of daily production currently deliverable to the pipeline terminal. KKM also has begun preparations to workover additional wells and, if the wells are productive, will place them on production at such time as the field facility construction is completed. Drilling Activity. During the last fiscal year ended December 31, 1997, the month of December 1996 and the previous two fiscal years ended November 30, 1996, the Company did not participate in the drilling of any productive exploratory and development wells. The Company did participate in the reentry of one previous oil well which had never been placed on production. Present Activities. As of the date of this Prospectus, the Company was in the process of reentering well #20 and well #7. Offices. On March 16, 1998, the Company relocated its offices to 2211 Norfolk, Suite 1150, Houston, Texas 77098. The new offices are comprised of approximately 5,570 square feet and are leased for a five year term at an initial rental of approximately $7,891 per month. DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth the names and ages of the current directors and executive officers of the Company, the principal offices and positions with the Company held by each person and the date such person became a director or executive officer of the Company. <TABLE> <CAPTION> Name of Director or Executive Director Principal Occupation Officer and Position, in the Company Since Age During the last Five Years - ------------------------------------ ------- --- -------------------------- <S> <C> <C> <C> Howard Karren 1996 67 Chairman of the Board of the Chairman of the Board, Company since 1996; Chief Executive President and Chief Officer of the Company since Executive Officer January 1997 and President of the Company since February 1997. Senior Advisor to the Chairman and Chief Executive Officer of Enron Oil & Gas Co., an oil and gas company, from 1994 to 1996. President and Vice Chairman of Enron Oil & Gas International Co. from 1984 until 1994. Arlo G. Sorensen 1996 57 Chief Financial Officer and Chief Financial Officer Principal Accounting Officer of the Company since March 1997. Treasurer of the Company from February 1997 to February 1998. Trustee of M.H. Whittier Corporation, a private investment entity, since 1985. Chairman of the Board and a director of Whittier Trust Company, a trust company since 1988. David A. Dahl 1997 36 Secretary of the Company since Secretary August 1997; President of Whittier Energy Company, an oil and gas exploration and production company, since 1997, President of Whittier Ventures, LLC, a private investment entity, since January 1996, and a Vice President of Whittier Trust Company, a trust company, since April 1993, a Vice President of Merus Capital Management, an investment manager, from 1990 to 1993. Name of Director or Executive Director Principal Occupation Officer and Position, in the Company Since Age During the last Five Years - ------------------------------------ ------- --- -------------------------- Alan D. Berlin 1997 58 A partner of Aitken Irvin Lewin Berlin Vrooman & Cohn, LLP since 1995. Engaged in the private practice of law for over five years prior to joining Aitken Irvin Lewin Berlin Vrooman & Cohn LLP. Secretary of the Company from January 1997 to August 1997; President of the International Division of Belco Petroleum Corp. from 1985 to 1987 and held various other positions with Belco Petroleum Corp. from 1977 to 1985. Currently a director of Belco Oil & Gas Corp. Walter A. Carozza 1997 42 President of Victory Ventures LLC, a private equity reinvestment firm, since 1997. Manager of and investor in East River Ventures, LP, and M3 Partners, LC, venture capital funds, since 1996 and 1994, respectively. Involved in the financing and management of companies since 1986. A director of ETEX, Inc., Caring Technologies, Inc., Interlink Health Services, Inc. and The Rock Island Group, Inc. Ted Collins, Jr. 1997 59 President of Collins & Ware, Inc., an independent oil and gas company, since 1988. President of Enron Oil & Gas Co. or its predecessors, oil and gas companies, from 1982 to 1988; Executive Vice President and a director of American Quasar Petroleum Co. from 1969 to 1982. Mr. Collins is a director of Hanover Compression Company, Mid Coast Energy Resources, Inc. and Queen Sand Resources, Inc. Peter G. Dilling 1995 47 President and a director of M-D International Petroleum, Inc., an oil and gas company, since September 1994. A partner of M-D International, an unincorporated oil and gas business, from March 1993 to the present. Vice Chairman of the Board of the Company from March 1997 to August 1997. Name of Director or Executive Director Principal Occupation Officer and Position, in the Company Since Age During the last Five Years - ------------------------------------ ------- --- -------------------------- John G. McMillian 1997 71 Retired since 1995. Chairman, President and Chief Executive Officer of Allegheny & Western Energy Corporation, an oil and gas company, from 1987 to 1995; founder and former Chairman and Chief Executive Officer of Northwest Energy Company and owner and Chairman and Chief Executive Officer of Burger Board Company. A director of Marker International and Excalibur Technologies. Michael J. Muckleroy 1997 67 Independent oil operator since 1994. Chairman and Chief Executive Officer of Enron Liquid Fuels, a subsidiary of Enron Corp. which is engaged in the processing and marketing of oil and gas and manufacturing of appliances and distributing of liquid gas, from 1984 to 1994. Michael B. Young N/A 29 Treasurer and Controller of the Treasurer and Controller Company since February 1998; Tax Manager in the Oil & Gas Tax Practice of Arthur Andersen LLP, an accounting firm, from June 1991 to February 1998. </TABLE> The present term of office of each director will expire at the next annual meeting of shareholders. Each executive officer will hold office until his successor duly is appointed and qualified, until his resignation or death or until he is removed in the manner provided by the Company's Bylaws. In connection with the Company's acquisition of all of the stock of Central Asian Petroleum, Inc. ("CAP-D") in 1995, the former shareholders of CAP-D acquired certain rights to nominate directors of their choosing for election to the Company's board of directors. Pursuant to these rights, the former CAP-D shareholders caused the nomination of Jay W. McGee, who was elected a director at the 1995 annual meeting of shareholders. Mr. McGee subsequently resigned as a director and officer of the Company to become Co-Managing Director of KKM. The former shareholders of CAP-D had the right to nominate an additional director for election to the Company's board of directors at the Company's 1996 annual meeting of shareholders but failed to do so. If by June 30, 2000, the Karakuduk Field obtains 5,000 barrels of oil production per day averaged over any sixty (60) day period, or the Company's beneficial interest in the field is sold or the Company and the former shareholders jointly participate in a new exploratory development project, the former shareholders have the right to cause the Company to nominate one additional director at the Company's annual meeting of shareholders held in the year 2000. Report of Independent Auditors The Board of Directors and Stockholders Karakuduk-Munay, Inc. We have audited the accompanying balance sheets of Karakuduk-Munay, Inc. as of December 31, 1997 and 1996, and the related statements of expenses and accumulated deficit and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance with U.S. generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Karakuduk-Munay, Inc. as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with U.S. generally accepted accounting principles. The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has incurred recurring operating losses and relies solely on the foreign shareholder to provide all funding in the form of an interest bearing loan. The Company requires significant additional financing to meet its financial commitments and requirements through calendar year 1998 as described in Note 16. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. /s/ Ernst & Young --------------------------------------- ERNST & YOUNG Almaty, Kazakhstan March 13, 1998 (1) In connection with Howard Karren becoming a director of the Company, subject to a certain contingency which was satisfied in April 1996, the Company agreed to issue 350,000 shares of the Company's restricted common stock to Howard Karren, a director of the Company, or his designees. The $175,000 represents the fair market value of the 350,000 shares on April 5, 1996, the date the contingency was satisfied. The fair market value is based on the $0.50 per share sales price of sales by the Company of restricted stock to nonaffiliated parties in April 1996. (2) In addition, on August 19, 1996, the Company's board of directors awarded Mr. Hoovler a cash bonus of $140,000 as recognition of past and present services to the Company to be used by Mr. Hoovler to exercise certain warrants, granted to Mr. Hoovler pursuant to the Company's 1989 Stock Warrant Plan, to purchase 500,000 shares of the Company's Common Stock at an exercise price of $0.28 per share. This bonus will not become payable until receipt of notice from Mr. Hoovler, which notice may not be given and shall not be effective, until the earlier of (i) completion of a sale or farmout by the Company of all or a portion of its interest in the Karakuduk Oil Field in Kazakhstan, ("Karakuduk Field") or (ii) the date when the Company makes a public disclosure of a sale or farmout of the Karakuduk Field. At its sole option and discretion, the Company may, in lieu of making payment of such bonus to Mr. Hoovler, use all or a portion of such bonus as a direct offset to Mr. Hoovler's obligation to make any payment due to the Company upon exercise of the warrants. Anything mentioned above to the contrary notwithstanding, in the event Mr. Hoovler has exercised and paid for the warrants prior to the date the bonus becomes payable, the Company shall pay such bonus directly to Mr. Hoovler, but only upon completion of a sale or farmout of all or a portion of its interest in the Karakuduk Field. (3) Represents the amounts distributed pursuant to a royalty participation plan to Paul V. Hoovler. (4) Represents shares underlying warrants that were received by Mr. Hoovler as a part of a severance agreement with the Company. See "Executive Compensation--Termination of Employment Agreements." (5) The Company had a Deferred Compensation and Death Benefit Plan for Paul V. Hoovler. The Company paid Mr. Hoovler $40,000 annually from this plan until Mr. Hoovler voluntarily terminated his employment in February 1997 at which time he received the life insurance policy on his life which previously provided for the major portion of any costs to the Company. The plan was fully funded when the Company paid, during the Company's fiscal year ended November 30, 1991, the final payment of a premium of $18,000 on the life insurance policy. Karakuduk-Munay Inc Balance Sheets December 31, 1997 and 1996 (Amounts in US Dollars) ASSETS 1997 1996 ---------------------------- Cash $ 414,384 $ 36,889 Prepaid and Other Receivables (Note 4) 272,455 16,476 VAT Receivable (Note 5) 109,099 57,296 ------------ ------------ Total Current Assets 795,938 110,661 Materials and Supplies Inventory (Note 6) 511,858 28,421 Property, Plant and Equipment, net (Note 7) 1,589,057 451,935 Oil and Gas Properties - full cost method, not subject to depletion (Note 8) 5,874,525 1,805,588 ------------ ------------ TOTAL ASSETS $ 8,771,378 $ 2,396,605 ============ ============ LIABILITIES AND PARTNERS' DEFICIT Accounts Payable (Note 10) $ 2,100,722 $ 50,016 Accrued Liabilities (Note 10) 621,750 390,806 Miscellaneous Taxes Payable 45,106 49,406 ------------ ------------ Current Liabilities $ 2,767,578 $ 490,228 Loans Payable to Partner (Note 11) 9,819,497 4,023,095 Accrued Payable for compensation for land usage -- 34,000 Commitments and Contingencies (Note 14 & 16) PARTNER'S DEFICIT Charter Capital (Note 13) 200,000 200,000 Accumulated Deficit (4,015,697) (2,350,718) ------------ ------------ (3,815,697) (2,150,718) ------------ ------------ TOTAL LIABILITIES AND PARTNERS' DEFICIT $ 8,771,378 $ 2,396,605 ============ ============ See accompanying notes which form an integral part of these financial statements. <TABLE> <CAPTION> Option Grants in Last Fiscal Year The following table sets forth information concerning options (warrants) granted by the Company to Howard Karren and Paul V. Hoovler from December 1, 1996 through December 31, 1997. Number of Securities Underlying % of Total Options Market Options (Warrants) Granted Price on (Warrants) to Employees Exercise or Expiration Date of Name Granted During Period Base Price Date Grant(1) - ---- ------- ------------- ---------- ---- -------- <S> <C> <C> <C> <C> <C> Howard Karren 25,000 1.9% $0.828125 7/16/2007 $0.828125 Shares 500,000 36.6% $0.75 9/1/2002 $0.8125 Shares 500,000 36.6% $1.50 9/1/2002 $0.8125 Shares Paul V. Hoovler 100,000(2) 7.5% $0.85 2/12/2001 $0.828125 Shares 100,000(2) 7.5% $1.25 1/1/2002 $0.828125 Shares </TABLE> (1) The market price on the date of grant is based on the mean between the closing bid and asked prices of the Company's Common Stock on the date of grant or on the next day before the date of grant on which there were reported bid and asked prices of the Company's Common Stock. (2) Mr. Hoovler's warrants were received as a part of a severance agreement with the Company. See "Executive Compensation--Termination of Employment Agreements." Fiscal Year-End Option Values The following table sets forth information concerning unexercised options (warrants) held by Howard Karren and by Paul V. Hoovler at December 31, 1997: Number of Securities Underlying Unexercised Value of Unexercised Options as of In-the-Money Options at December 31, 1997(#) December 31, 1997($) ---------------------------- ----------------------------- Name Exercisable/ Unexercisable Exercisable/ Unexercisable - ---- ------------ ------------- ------------ ------------- Howard Karren..... 1,025,000 - 0 - $1,379,180(1) - 0 - Paul V. Hoovler... 600,000 100,000 $1,285,000(1) $125,000 - ----------------------- (1) The value was determined by multiplying the number of shares underlying the warrants by the difference between the exercise price and the closing sale price of the Company's Common Stock on December 31, 1997. Compensation of Directors On July 17, 1997, the shareholders of the Company approved a 1997 Incentive Stock Plan pursuant to which all non-employee directors were to receive an award of 250 shares of Common Stock of the Company for each meeting of the board of directors attended by such director. The directors have waived their rights to receive shares for the meetings in 1997. Also on July 17, 1997, the shareholders approved a 1997 Non-Employee Directors' Stock Option Plan pursuant to which each year each non-employee director will receive an option to purchase 25,000 shares of Common Stock of the Company. On January 23, 1998, the Board of Directors of the Company, subject to ratification of the grants by the shareholders of the Company at the next Annual Meeting of Shareholders, granted each director of the Company 10,000 shares of the Company's Common Stock for their service to the Company. There were no other standard or other arrangements for the compensation of the Company's directors in effect for the Company's fiscal year ended December 31, 1997. Termination of Employment Arrangements Paul V. Hoovler, the former Chief Executive Officer and President of the Company, entered into a severance agreement ("Agreement") with the Company effective February 12, 1997. Pursuant to the Agreement, Mr. Hoovler received his salary and unpaid vacation time accrued through February 12, 1997. Also, the Company agreed to amend the Company's 1989 Stock Warrant Plan to enable Mr. Hoovler to transfer the warrants granted to him in 1996 to a member of his family or a trust created by him. Further, Mr. Hoovler was granted warrants to purchase 100,000 shares of the Company's Common Stock at an exercise price of $0.85 per share, for a period of four years and warrants to purchase 100,000 shares of the Company's Common Stock at an exercise price of $1.25 per share that became exercisable on January 1, 1998, and remain exercisable for a period of four years from such date. Also, pursuant to the Agreement, the Company agreed to assign to Mr. Hoovler, or an entity controlled by Mr. Hoovler, the existing overriding royalty interest ("ORRI") that the Company holds in approximately 89 wells. Such assignment will be for a three-year period. In exchange for the assignment, Mr. Hoovler agreed to pay a former employee of the Company ten percent (10%) of the net revenues received from such ORRI during the three-year period. In addition, upon Mr. Hoovler's request, the Company agreed to assign its interest in the Company's royalty participation plan to Mr. Hoovler or an entity controlled by Mr. Hoovler. The Company also agreed to assign to Mr. Hoovler the Company's ownership interest in two life insurance policies that the Company held on Mr. Hoovler's life. Finally, pursuant to the Agreement, Mr. Hoovler was allowed to bid on or retain certain office furniture and equipment of the Company. SECURITY OWNERSHIP OF CERTAIN PERSONS The following table sets forth as of April 24, 1998, the number of shares of the Company's outstanding Common Stock beneficially owned by each of the Company's current directors and executive officers, sets forth the number of shares of the Company's outstanding Common Stock beneficially owned by all of the Company's current directors and executive officers as a group and sets forth the number of shares of the Company's outstanding Common Stock owned by each person who owned of record, or was known to own beneficially, more than 5% of the Company's outstanding shares of Common Stock: Name and Address of Beneficial Owner Amount and Nature of Percent or Name of Executive Officer or Director Beneficial Ownership(1) of Class - ---------------------------------------- ----------------------- -------- Allen & Company Incorporated............ 8,431,107(2) 16.1% 711 Fifth Avenue New York, New York 10022 Drake and Company....................... 2,490,000 4.9% Citibank Performance Portfolio A.A. c/o Citibank, N.A. 153 E. 53rd Street, 21st Floor New York, New York 10043 Whittier Ventures, LLC.................. 3,233,556(3) 6.3% 1600 Huntington Drive South Pasadena, California 91030 Howard Karren........................... 1,185,000(4) 2.3% David A. Dahl........................... 5,029,803(5) 9.8% Karakuduk-Munay Inc. Notes to the Financial Statements December 31, 1997 In terms of US Dollars 1. Organization and Background Information Formation - --------- Karakuduk-Munay Inc. (the "Company"), a Kazakhstan Joint Stock Company of Closed Type, was founded by "Munaygaz" State Holding Company (formerly Kazakhstanmunaygaz National Petroleum Company), "Jarkin" State Holding Company (formerly PGO Mangistauneftegazgeologiya), and Korporatsiya Mangistau Terra International (formerly Korporatsiya Kramds-Mangistau Inc.), collectively the "Kazakh Shareholders", and Central Asian Petroleum (Guernsey) Limited. The Company and the Ministry of Oil and Gas in the Republic of Kazakhstan entered into an agreement on August 30, 1995 ("Inception") referred to as the Agreement for Exploration, Development and Production of Oil in Karakuduk Oil Field in Mangistau Oblast of the Republic of Kazakhstan (the "Agreement"). The management and operational framework within which the Company must conduct its activities are dictated by the Agreement. The Company may be terminated under certain conditions specified in the Agreement. The term of the Agreement is 25 years commencing from the date of the Company's registration. The Agreement can be extended to a date agreed between the Ministry of Oil and Gas and the Company as long as production of petroleum and/or gas is continued in the exploration field. Changes in Shareholders - ----------------------- In accordance with the Edict # 410 dated 24 March 1997 and Edict # 1287 dated 26 August 1997 issued by the Government of the Republic of Kazakhstan, 40 % of the Charter Fund of the Company belonging to "Jarkin"/"Aksay" and "Munaygaz" were transferred to KazakhOil, the state owned oil and gas company. The Company and new shareholder have been legally re-registered with the Ministry of Justice of the Republic of Kazakhstan on July 24, 1997. Principal Activity The Company was established for the purposes of exploring, developing, and producing oil and gas deposits in the Karakuduk Field in the Republic of Kazakhstan acting on the basis of the Agreement which the Company entered into with the Ministry of Oil and Gas in the Republic of Kazakhstan on August 30, 1995. The Company's work program and minimum expenditure commitment was stipulated in License MG 249 dated June 28, 1995. These expenditure obligations were subsequently amended by Resolution P65-H of September 18, 1996, and by Resolution P97-H of December 8, 1997. The latter Resolution requires the Company to expenditure commitments of US$10 million by December 31, 1997, US$34.5 million by December 31, 1998, and US$12 million by December 31, 1999. Expenditure commitments through 1997 exceeded the commitment requirement. The excess is applicable against future obligations. Should the license terms not be adhered to, the License may be withdrawn by the Government of the Republic of Kazakhstan. The activity during 1997 has been primarily to conduct various studies into the most appropriate drilling and development strategy for the Karakuduk field. The Company also commenced construction of the field camp and access road to the field to facilitate the commencement of expansion of activities when production commences in 1998. The Company also worked over one well, which will be brought into production in 1998. The remaining operations conducted by the Company related to corporate affairs, re- registration of the Company necessitated by the transfer of shareholders, and other activity pertaining to the startup of the operations. Name and Address of Beneficial Owner Amount and Nature of Percent or Name of Executive Officer or Director Beneficial Ownership(1) of Class - ---------------------------------------- ----------------------- -------- Alan D. Berlin.......................... 35,000(6) * Walter A. Carozza....................... 35,000(7) * Ted Collins, Jr......................... 110,000 * Peter G. Dilling........................ 636,618(8) 1.3% John G. McMillian....................... 435,000(9) * Michael J. Muckleroy.................... 20,000 * Arlo G. Sorensen........................ 96,242(10) * Michael B. Young........................ 60,000(11) * All Directors and Officers as a Group (ten persons)................................ 7.642,663(12) 14.5% * Less than 1%. (1) To the knowledge of the Company's management, the beneficial owners listed have sole voting and investment power with respect to the shares shown unless otherwise indicated. The shares shown do not include any shares that any directors are entitled to receive pursuant to the 1997 Incentive Stock Plan for meetings held in 1998. (2) Based on Amendment No. 1 to Schedule 13D. Includes 1,228,720 shares underlying presently exercisable warrants. Does not include 600,000 shares underlying a warrant that is not exercisable. See "Certain Relationships and Related Transactions." (3) Includes 262,500 shares underlying presently exercisable warrants. (4) Includes 1,025,000 shares underlying presently exercisable options. Does not include 285,000 shares underlying an option granted to Mr. Karren in January 1998 because the directors are still discussing the terms of such grant. (5) Includes 75,000 shares underlying presently exercisable options owned by David A. Dahl, the 3,233,556 shares beneficially owned by Whittier Ventures LLC, 349,185 shares owned by Whittier Energy Company, 87,500 shares underlying presently exercisable warrants owned by Whittier Energy Company and 1,274,562 shares beneficially owned by Whittier Trust Company. David A. Dahl has no pecuniary interest in the shares beneficially owned by Whittier Ventures LLC, Whittier Energy Company or Whittier Trust Company but, as the Karakuduk-Munay Inc. Notes to the Financial Statements December 31, 1997 In terms of US Dollars 2. Basis of Presentation The Company maintains its accounting records and prepares its financial statements in US dollars and in accordance with accounting prescribed in the Accounting Procedure of the Agreement. The accompanying financial statements, prepared in accordance with U.S. generally accepted accounting principles, differ in minor respects (related to disclosure) from those issued for statutory purposes in Kazakhstan. The material accounting principles adopted by the Company are described below: Foreign Currency Translation - ---------------------------- Transactions arising in currencies other than US dollars are translated into US dollars in accordance with the temporal method. Cash and other monetary assets held and liabilities denominated in currencies other than US dollars are translated to US dollars at the rates of exchange ruling as of December 31, 1997 (75.55 Kazakh Tenge per US dollar). Non-monetary assets and liabilities denominated in currencies other than US dollars have been translated at the estimated historical exchange rate prevailing on the date of the transaction. Exchange gains and losses arising from translation of non-US dollar amounts at the balance sheet date are recognized as an increase or decrease in income for the period. By using the US dollar as its reporting currency for the financial statements and by using the temporal method of translation where applicable, the effects of inflation have been taken into consideration in all material respects since movements in the exchange rate between the US dollars and Tenge during 1995 to 1997 are considered a reasonable approximation of the general price index. The Tenge is not a convertible currency outside of the Republic of Kazakhstan. The translation of Tenge denominated assets and liabilities in these financial statements does not indicate that the Company could realize or settle these assets and liabilities in U.S. dollars. As of 31 December, 1997, US$103,966 of net monetary liabilities are denominated in Tenge. Interest Capitalization - ----------------------- Beginning in 1997, the Company capitalized certain borrowing costs as part of the cost of oil and gas properties. The Company has capitalized US$234,000 for 1997. Other interest costs are expensed as incurred. Depreciation, Depletion and Amortization - ---------------------------------------- Oil and Gas Assets - ------------------ The Company follows the full cost method of accounting for oil and gas properties. Accordingly, all costs directly associated with acquisition, exploration and development of oil and gas reserves are capitalized in cost pools for each country in which the Company operates. The limitation on such capitalized costs is determined in accordance with rules specified by the Securities and Exchange Commission. Capitalized costs are depleted using the units of production method based on proven reserves. President of Whittier Ventures LLC and Whittier Energy Company and as the Vice President of Whittier Trust Company, Mr. Dahl has voting power and investment power over such shares and, thus, may be deemed to beneficially own such shares pursuant to Rule 13d-3 adopted under the Securities Exchange Act of 1934, as amended. Mr. Dahl's address is the same as the address of Whittier Ventures, LLC. (6) Includes 25,000 shares underlying a presently exercisable option. (7) Includes 25,000 shares underlying a presently exercisable option. (8) Includes 25,000 shares underlying presently exercisable options. 601,618 shares are owned directly by Spectrum Development, Inc. which is controlled by Mr. Dilling, and the 601,618 shares include 301,618 of a total of 1,250,000 shares being held in escrow in connection with the acquisition of Central Asian Petroleum, Inc. Does not include 400,000 shares underlying an option that is not currently exercisable. (9) Includes 25,000 shares underlying a presently exercisable option. (10) Includes 75,000 shares underlying presently exercisable options and 11,242 shares owned by Whittier 1982 Oil Trust for which Mr. Sorensen is the trustee and has voting and investment power over such shares. Mr. Sorensen is a director of Whittier Ventures LLC and Whittier Energy Company. However, Mr. Sorensen disclaims beneficial ownership of the shares that are owned by Whittier Ventures LLC and Whittier Energy Company. (11) Includes 50,000 shares underlying a presently exercisable option. Does not include a grant for 30,000 shares that will vest with respect to 10,000 shares on each of January 30, 1999, 2000 and 2001, if Mr. Young is still employed by the Company on those dates. The shares will vest earlier if Mr. Young is terminated without due cause or if the Company is bought or merges with another Company. (12) Includes the shares as described in notes (5) through (11) above. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In early September 1994, the Company signed a letter of intent with Central Asian Petroleum, Inc., a Delaware corporation ("CAP-D"), and Overseas Consulting Services Company, Inc. ("OCSCO"), both private companies based in Houston, Texas, to jointly pursue the registration and development of the Karakuduk Field, a shut-in field in the central Asian Republic of Kazakhstan, that was discovered in the early 1970s but never placed on production. Karakuduk-Munay Inc. Notes to the Financial Statements December 31, 1997 In terms of US Dollars Oil and Gas Properties Not Subject to Depletion - ----------------------------------------------- Costs associated with acquisition and evaluation of unproved properties are excluded from the amortization computation until it is determined if proved reserves can be attributed to the properties. These unevaluated properties are assessed annually for possible impairment and the amount impaired, if any, is added to the amortization base. Costs of exploratory dry holes and geological and geophysical costs not directly associated with specific unevaluated properties are added to the amortization base as incurred. Property Plant and Equipment - ---------------------------- Depreciation of equipment is calculated on the straight line method based on the estimated useful life of the assets as follows: Office Buildings and Apartments 20 years Office Equipment 3 years Vehicles 5 years Field Buildings 15 years Field Equipment up to 10 years Inventory - --------- Inventory is valued using the first-in, first-out method and is at the lower of cost and net realizable value. Revenue Recognition - ------------------- Revenues are recognized when economic performance has occurred as a result of the sale of oil and gas production, in accordance with the accrual method of accounting. Losses, if any, are provided for in the period in which the loss is determined to occur. Income Taxes - ------------ The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes, which require that taxes be provided on the liability method based upon the tax rate at which items of income and expense are expected to be settled in the Company's tax return. Earnings Per Common Share - ------------------------- Basic earnings (loss) and diluted earnings (loss) per share are not presented due to the Company being of a "closed" nature and having no underlying shares outstanding. In mid-September 1994, the Company acquired a 25% interest in CAP-G. In April 1995, the Company acquired all of the stock of CAP-D, which also owned an interest in CAP-G. Following the acquisition of CAP-D, the Company's beneficial interest in CAP-G increased to 45%, giving the Company a 22.5% beneficial interest in KKM and the Karakuduk Field. Under terms of the acquisition, the former shareholders of CAP-D have certain rights to cause the Company to nominate persons selected by the former shareholders to the Company's Board of Directors. Jay W. McGee, a former shareholder of CAP-D, was first elected at the 1995 Company's Annual Meeting of Stockholders under the arrangement. Mr. McGee resigned as a director of the Company on October 1, 1997, and became the Co- Managing Director of CAP-G. Additionally, in connection with the acquisition, the Company may be required to pay a brokerage fee to Mr. McGee in the amount of up to $175,000. The Company paid Mr. McGee $50,000 in 1995 and the balance is payable upon the occurrence of certain milestones in development of the Karakuduk Field. The Company issued 4,250,000 shares of restricted Common Stock for CAP-D which were placed in escrow and are to be released to the former shareholders of CAP-D, including Messrs. Dilling and McGee and James A. Jeffs, a director of the Company until November 1996, or their affiliates, from time to time in connection with development of the Karakuduk Field. Of the 4,250,000 shares originally placed in escrow, 3,000,000 shares have been released and delivered to the former shareholders of CAP-D. The additional 55% interest in CAP-G was acquired by the Company from nonaffiliated parties. The previous management of the Company had been negotiating an agreement pursuant to which the Company would have acquired 100% of the issued and outstanding capital stock of MDI, a private company of which the shareholders include a director of the Company, Mr. Dilling, and two former directors of the Company, Messrs. Jeffs and McGee. At the time of the acquisition, the only asset that MDI would have had would have been a 5% interest in a joint venture that Enron Oil and Gas Uzbekistan Ltd. ("EOGU") was negotiating for the development of natural gas fields in the Republic of Uzbekistan. The agreement with MDI was not consummated. On January 8, 1997, the Company agreed to issue 180,000 shares of the Company's Common Stock to EOGU to obtain an option to acquire MDI. The Company also granted EOGU registration rights with respect to the 180,000 shares. In the interim, the principal shareholders of MDI, including Messrs. Dilling, Jeffs and McGee, agreed that if the Company did not acquire MDI within a specified time period, the principal shareholders would transfer 180,000 shares of the Company's Common Stock owned by them to the Company to replace the 180,000 shares issued by the Company to EOGU. Because such acquisition did not occur within the specified time period, such principal shareholders transferred the 180,000 shares to the Company and the shares were cancelled. The Company is no longer pursuing the acquisition of MDI. In May 1996 through February 1997, the Company paid a base consulting fee of $60,000 per month to MDI for assistance by MDI in seeking means for meeting the Company's funding obligations for the Karakuduk Project. The Company also assumed obligations of MDI to pay up to $42,000 during the six month period Karakuduk-Munay Inc. Notes to the Financial Statements December 31, 1997 In terms of US Dollars New Accounting Standards - ------------------------ In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement No. 121 also addresses the accounting for long-lived assets to be disposed of. The Company adopted Statement No. 121 in 1997; the effect of the adoption is immaterial to the Company's overall financial results. In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income . SFAS 130, which is effective for fiscal years beginning after December 15, 1997, establishes standards for reporting and presentation of comprehensive income and its components. SFAS 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company adopted SFAS 130 as of January 1, 1998. The impact of SFAS 130 on the Company's financial position and results of operations is not expected to be material. Fair Value of Financial Instruments - ----------------------------------- All of the Company's financial instruments, including loans payable to partner, cash and trade receivables have fair values which approximate their recorded values as they are either short-term in nature or carry interest rates which approximate market rates. Use of Estimates - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. ending September 30, 1996 to two other unaffiliated consultants engaged to assist MDI and the Company to acquire and review oil and natural gas exploration or development projects in the former Soviet Union. From March 1997 to August, 1997, the Company reimbursed MDI for MDI's expenses incurred in connection with the Karakuduk Project. Currently there are no transactions contemplated between the Company and MDI. In November and December, 1996, the Company borrowed $1,850,000 for interim financing pursuant to unsecured convertible promissory notes that bore interest at 8% per annum, which was payable monthly, and that were due and payable on or before May 29, 1998. The promissory notes were convertible into the Company's Common Stock at the lower of $0.75 per share or 75% of the market price of the Common Stock on the date of the conversion if the market price is less than $1.00 per share on such date. The proceeds from the first of such loans were received on November 22, 1996. Whittier Ventures, LLC, Whittier Energy Company and Victory Ventures LLC loaned $1,500,000 of the $1,850,000 that was loaned to the Company. Whittier Ventures, LLC, Whittier Energy Company and Victory Ventures LLC subsequently converted their loans into the Company's Common Stock as described below. In connection with such borrowings, the Company agreed to issue the lenders warrants that terminate on November 30, 1999, to purchase a total of 462,500 shares of the Company's Common Stock at $0.25 per share and agreed to add two directors selected by two of the lenders, Whittier Ventures LLC and Whittier Energy Company, to the Company's Board of Directors. The Company further agreed that the Company would issue the lenders warrants to purchase an additional 185,000 shares of the Company's Common Stock if the promissory notes are not paid or converted by May 31, 1997, and warrants to purchase an additional 370,000 shares of the Company's Common Stock if the promissory notes are not paid or converted by November 30, 1997. Just prior to November 30, 1997, the Company offered to repay the then outstanding promissory notes, including the promissory notes to Whittier Ventures LLC and Whittier Energy Company. The lenders advised the Company that they were considering whether or not to convert their promissory notes into shares of the Company's Common Stock and requested the Company to not repay the promissory notes by November 30, 1997. In connection with such requests, the lenders agreed that the lenders would not receive any of the warrants to purchase an additional 370,000 of the Company's Common Stock if the promissory notes were not paid or converted by November 30, 1997. The warrants that were issued are exercisable for a period of three years at $0.25 per share. Effective November 30, 1997, Whittier Ventures LLC and Whittier Energy Company converted the principal and accrued interest in their promissory notes into 1,047,556 shares and 349,185 shares, respectively, of the Company's Common Stock. Walter A. Carozza, a director of the Company, is the President of Victory Ventures LLC. On April 22, 1997, the Company sold 3,076,923 shares of the Company's Common Stock for $0.65 per share for a total of $2,000,000 to Victory Ventures LLC. In connection with the transaction, the Company also issued a Karakuduk-Munay Inc. Notes to the Financial Statements December 31, 1997 In terms of US Dollars Leases - ------ Rent expenses for non-cancelable operating leases are recognized on a straight line basis. 3. Going Concern These financial statements have been prepared assuming that Karakuduk-Munay Inc., will continue as a going concern. The Company has incurred an operating loss and relies solely on Central Asian Petroleum (Guernsey) Limited to provide all funding in the form of an interest bearing loan, as discussed in Note 11. The Company does not anticipate that its current cash reserves and cash flows from operations will be sufficient to meet its capital requirements through fiscal year 1998. Should the Company not meet its capital requirements under the license agreement to develop the Karakuduk Field, the Company's rights under the agreement may be terminated. The Company believes that additional financing will be available; however there is no assurance that additional financing will be available, or if available, that it can be obtained on terms favorable or affordable to the Company. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of liabilities that may result from the outcome of this uncertainty. 4. Prepaid and Other Receivables Prepayments and Other Receivables consists of outstanding travel advances at December 31, 1997, prepayment of taxes and prepayments of equipment to be added to Oil and Gas Assets in 1998 and can be summarized as follows: 1997 1996 Travel Advances to employees $ 18,606 $ 6,868 Import VAT, Custom duties and prepaid taxes 41,256 1,796 Advance payment for Oil and Gas Assets 212,593 7,812 --------- -------- Total $ 272,455 $ 16,476 ========= ======== The increase in these amounts reflects the higher activity level of operations towards the end of 1997. 5. VAT Receivable VAT receivable is a Tenge denominated asset and is due from the Republic of Kazakhstan. While theoretically refunds of excess VAT paid are due from the Republic within 10 days of a claim being made, and several refunds have been received by the Company in 1996 and 1997, current practice indicates that receipt is uncertain until such time as other taxes payable to the Republic by the Company, are available for offset against the VAT receivable. warrant to Victory Ventures LLC to purchase up to an additional 4,615,385 shares of the Company's Common Stock for $3,000,000 or $0.65 per share. In October, 1997, Victory Ventures LLC exercised a portion of the warrant by purchasing 2,307,692 shares of the Company's Common Stock. At the same time, the Company agreed to extend the expiration date of the remaining portion of the warrant to December 31, 1998. In November, 1997, Victory Ventures LLC exercised the remaining portion of the warrant by purchasing 2,307,693 shares of the Company's Common Stock and exercised another warrant that Victory Ventures LLC had received in connection with a loan made by Victory Ventures LLC in December, 1996, to the Company. The warrant related to 125,000 shares of the Company's Common Stock and was exercisable at a price of $0.25 per share. Victory Ventures LLC subsequently distributed to its members or sold to various persons all of the Company's Common Stock owned by Victory Ventures LLC so that, as of the date hereof, Victory Ventures LLC no longer owns any shares of the Company's Common Stock. In April, 1997, Victory Ventures LLC also converted a $500,000 promissory note (plus $2,000 of accrued interest) that had previously been issued by the Company to Victory Ventures LLC in December 1996 into 772,308 shares of the Company's Common Stock at a conversion price of $0.65 per share. On August 29, 1997, Whittier Ventures LLC loaned the Company $100,000. The loan was repaid on December 4, 1997, with interest at a rate of 1% per month. The loan was unsecured. On October 9, 1997, Whittier Ventures LLC loaned the Company an additional $200,000. The loan was repaid on December 4, 1997, with interest at a rate of 1% per month. The loan was unsecured. In September 1997, Howard Karren advanced $61,000 to CAP-G which was repaid by CAP-G to Mr. Karren without interest in December 1997. Mr. Karren also personally guaranteed payments to various suppliers. Aitken Irvin Lewin Berlin Vrooman & Cohn, LLP, a law firm in which Alan D. Berlin, a director of the Company, is a partner, provides legal services to the Company for which the law firm charges the Company an amount not in excess of the law firm's normal billing rates. The total amount of fees that were paid by the Company to the law firm during the Company's year ended December 31, 1997, did not exceed 5% of the law firm's gross revenues for the law firm's last full fiscal year. The Company believes that the fees paid to the law firm were reasonable for the services rendered. On November 24, 1997, the Company executed a Subscription Agreement ("Agreement") with an investor, which was not affiliated with the Company. Pursuant to the Agreement, the Company sold to the investor 50,000 shares of the Company's Series A Preferred Stock, no par value, for a purchase price of $100,000 per share or an aggregate purchase price of Five Million Dollars ($5,000,000). The investor also agreed to purchase an additional 25,000 shares of the Company's Series A Preferred Stock for an additional $2,500,000 and 150,000 shares of the Company's Series B and Series C Preferred Stock for $15,000,000. Karakuduk-Munay Inc. Notes to the Financial Statements December 31, 1997 In terms of US Dollars 6. Materials and Supplies Inventory 1997 1996 ------------------------------ Inventory in-house $224,998 $28,421 Inventory in-transit 286,860 - -------- ------- Total $511,858 $28,421 ======== ======= The above categories of Materials and Supplies Inventory represent workover materials, spare parts and diesel fuel for use in oil field operations. 7. Plant, Property and Equipment Upon full amortization of tangible assets, the right of ownership of the tangible assets shall be transferred to the Kazakhstan Ministry of Oil and Gas in accordance with the Agreement. The Company is entitled to the use of the fully amortized tangible assets during the whole term of the Agreement. A summary of property, plant and equipment at December 31, 1997 is provided in the table below: Cost Balance as at Balance as at December 31, 1996 December 31, 1997 ----------------- ---------------- US Dollars US Dollars Office Buildings and Apartments $ 29,469 $ 67,212 Office Equipment and Furniture 167,594 227,318 Vehicles 298,162 541,479 Field Buildings -- 329,936 Field Equipment and Furniture -- 169,190 Capital work-in process -- 444,872 ---------- ---------- Total 495,225 1,780,007 ---------- ---------- Accumulated Depreciation 43,290 190,950 ---------- ---------- Net Book Value $ 451,935 $1,589,057 ========== ========== Included in the additions to Field Buildings is US$89,962 relating to the residential camp that was previously classified within Oil and Gas Assets in 1996. In March 1998, prior to the receipt of the funds for any additional purchases the investor was to make under the Agreement, the Company and the investor mutually released each other from any further obligations under the Agreement. The investor retained the initial 50,000 shares of Series A Preferred Stock that are convertible into the Company's Common Stock at $2.25 per share. The number of shares of Common Stock issuable upon conversion of each share of Series A Preferred Stock will be determined by dividing $100 by the conversion price per share. The Company is not required to issue any additional preferred stock under the Agreement and the investor has no other obligation to provide funds to the Company in exchange for such stock. The Series B Preferred Stock and Series C Preferred Stock would have been convertible at the option of the holders thereof at any time or from time to time on or prior to the redemption date into Common Stock. The conversion price of the Series B Preferred Stock was initially $3.00 per share; and the conversion price of the Series C Preferred Stock was initially $4.25 per share. The number of shares of Common Stock issuable upon conversion of each share of Series B Preferred Stock and Series C Preferred Stock would have been determined by dividing $100 by the conversion price per share. Allen & Company Incorporated ("Allen & Company") acted as placement agent in connection with the sale of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock pursuant to the Agreement. Allen & Company elected to receive its fees in the form of warrants to purchase 900,000 shares of the Company's Common Stock that were all originally exercisable through November 25, 2002, at an exercise price of $0.01 per share. The Company has agreed to allow Allen & Company to retain the warrants to purchase 700,000 shares of the Company's Common Stock related to the $17,500,000 in funds not received under the original terms of the Agreement, provided Allen & Company raises additional capital for the Company within the two year period ending November 25, 1999. Based on a subsequent agreement, the unearned warrants to purchase 700,000 shares of the Company's Common Stock held by Allen & Company are fully restricted from exercise unless Allen & Company raises additional capital for the Company that is acceptable to the Company's Board of Directors. For each $25 of additional capital raised, a warrant to purchase one share of Common Stock will be deemed to be earned. If, before November 25, 1999, Allen & Company fails to raise additional capital for the Company under terms acceptable to the Company, the unearned portion of the warrants will expire. In April 1998, Allen & Company raised an additional $2,500,000 of capital for the Company through the sale by the Company of 1,250,000 shares of the Company's Common Stock at $2.00 per share. As a result, the warrants became exercisable as to an additional 100,000 shares of the Company's Common Stock. On July 17, 1997, the shareholders of the Company approved a 1997 Incentive Stock Plan pursuant to which all non-employee directors were to receive an award of 250 shares of Common Stock of the Company for each meeting of the board of Karakuduk-Munay Inc. Notes to the Financial Statements December 31, 1997 In terms of US Dollars 8. Oil and Gas Assets Not Subject to Amortization The Company has undertaken certain appraisal and feasibility work in 1997 in order to ascertain the most appropriate future development and drilling program for the Karakuduk field in Kazakhstan. The results are still being analyzed. There are no other licenses currently held by the Company and hence all costs capitalized as related to the Karakuduk license have not been amortized in 1997. Management fees related to the salary costs of individuals directly associated with exploration and appraisal activities on the Karakuduk field have been capitalized along with the license acquisition costs and geological and geophysical expenditures. Certain overhead costs and general and administrative costs have been expensed. Costs excluded from the amortization consist of the following at December 31, 1997 (US dollars): Exploration Year Acquisition and Appraisal Development Incurred Costs Costs Costs Total -------- ---------- ------------ ----------- ---------- 1995 $ 507,870 -- -- $ 507,870 1996 -- $1,297,718 -- 1,297,718 1997 -- 4,068,937 -- 4,068,937 ---------- ---------- ---------- ---------- Total $ 507,870 $5,366,655 -- $5,874,525 Management believe that over the life of the project as a whole, future cash flows justify the carrying amount of assets disclosed above. No impairment provision has therefore been deemed necessary in these financial statements. 9. Bonuses The Company was required to pay an unrecoverable (non-tax deductible) Signature Bonus to the Kazakhstan Ministry of Geology amounting to US$513,000 in accordance with the Agreement. This amount will be amortized using the units of production method over 25 years, when production commences. Production based bonuses will be payable to the Kazakhstan Ministry of Geology amounting to US$500,000 when cumulative production reaches ten million barrels and US$1,200,000 when cumulative production reaches fifty million barrels. The production bonuses will be considered tax deductible expenditures in the calculation of profits taxes. No amounts related to the production bonuses have been accrued as production had not commenced at December 31, 1997. directors attended by such director. The directors have waived their rights to receive shares for the meetings in 1997. Also on July 17, 1997, the shareholders approved a 1997 Non-Employee Directors' Stock Option Plan pursuant to which each year each non-employee director will receive an option to purchase 25,000 shares of Common Stock of the Company. The first options relating to a total of 200,000 shares that are exercisable at a price of $0.828125 per share were received effective July 17, 1997. On January 23, 1998, the Board of Directors of the Company, subject to ratification of the grants by the shareholders of the Company at the next Annual Meeting of Shareholders, granted each director of the Company 10,000 shares of the Company's Common Stock for their service to the Company. In connection with his employment, the Company granted Michael B. Young a five year option to purchase 50,000 shares of the Company's Common Stock at an exercise price of $2.25 per share and granted Mr. Young 40,000 shares of the Company's Common Stock that, subject to certain conditions, will vest 10,000 shares on each of January 30, 1998, 1999, 2000, and 2001. All unvested shares shall vest immediately if the Company is acquired or merges with another company or if Mr. Young is terminated without cause. SELLING SECURITYHOLDERS The following table sets forth certain information regarding the shares of Common Stock beneficially owned as of April 24, 1998, by each Selling Securityholder herein as adjusted to reflect the sale by all Selling Securityholders of the shares of Common Stock offered hereby by each Selling Securityholder. This list indicates any position, office or other material relationship with the Company that the Selling Securityholder had within the past three years, the number of shares of Common Stock owned by such Selling Securityholder prior to the offering, the maximum number of shares of Common Stock to be offered for such Selling Securityholder's account and the amount and the percentage (if one percent or more) of the shares of Common Stock to be owned by the Selling Securityholder after completion of the offering (assuming the Selling Securityholder sold the maximum number of shares of Common Stock). The Selling Securityholders are not required, and may choose not, to sell any of their shares of Common Stock. Further, certain of the Selling Securityholders may have already sold their shares of Common Stock prior to the date hereof. <TABLE> <CAPTION> Shares Shares Percent of Owned Shares Owned Shares Prior to Being After Owned After Name Offering Offered Offering Offering - ---- -------- ------- -------- -------- <S> <C> <C> <C> <C> Agassi, Andre.......................... 106,712 106,712 0 Agassi, Mike........................... 234 234 0 Karakuduk-Munay Inc. Notes to the Financial Statements December 31, 1997 In terms of US Dollars 10. Accounts Payable and Accrued Liabilities 1997 1996 ---------- -------- Accounts Payable $2,100,722 $ 50,016 Accrued Management Service Fee 573,750 318,750 Accrued Liabilities 48,000 72,056 Miscellaneous Taxes Payable 45,106 49,406 ---------- -------- Total $2,767,578 $490,228 ========== ======== Accounts Payable as of December 31, 1997 includes US$1.3 million in respect of the acquisition of the pipeline that is to link the oil field to the state pipeline. The remaining Accounts Payable represents payables for equipment to be installed in the oil field. 11. Loans Payable to Partner As discussed in Note 3, Central Asian Petroleum (Guernsey) Limited bears sole financial responsibility for the fulfillment of all funding for the Company. The various forms of funding from Central Asian Petroleum (Guernsey) Limited are treated as long term loans to the Company and bear interest at the rate of LIBOR plus 1%. The Agreement requires installment payments on the loan to be calculated and paid on a quarterly basis and to be equal to 65% of gross revenue after deduction of royalties due to the Republic of Kazakhstan. No production occurred in 1997 and therefore, no payments on the loan have been made or are due as of December 31, 1997. Management believe that no net repayment will occur in 1998 and hence the entire loan is treated as falling due in more than one year. The loan is made up as follows (US dollars): 1997 1996 ---------- ---------- Cash Funding $6,474,783 $2,340,000 Management Services Fee 2,295,000 1,275,000 Other Expenditures 520,143 268,148 Accrued Interest Payable 529,571 139,947 ---------- ---------- Total Interest and Loan Payable to Partner $9,819,497 $4,023,095 ========== ========== Management services are provided by Road Runner Services Company, a subsidiary of Chaparral Resources, Inc. the parent company of Central Asian Petroleum (Guernsey) Limited. The services are provided for a fixed fee of US$106,250 per month. Management services were provided to the Company for 1997 amounting to US$1,275,000. Shares Shares Percent of Owned Shares Owned Shares Prior to Being After Owned After Name Offering Offered Offering Offering - ---- -------- ------- -------- -------- Allen & Company Incorporated(1)........ 9,031,107 7,291,107 1,740,000 Allen, A. Clinton...................... 937 937 0 Allen, Lawson P........................ 468 468 0 Ardizzone, Ramon D..................... 2,399 2,399 0 Bailey, Clarke H....................... 49,362 49,362 0 Bailey, Higgins D...................... 492 492 0 Bailey, Scott H........................ 984 984 0 Barron, Thomas A....................... 937 937 0 Berrard, Steven R. Revocable Trust..... 79,983 79,983 0 Black Diamond Partners LP(2)........... 52,500 52,500 0 Brady, Pat............................. 47,019 47,019 0 Brennan, Bernadette.................... 1,200 1,200 0 Brenner, Karen......................... 3,999 3,999 0 Brookings Group LLC, The............... 1,600 1,600 0 Buelter, H. Tom TTE, U/A/D 08/19/96.... 15,997 15,997 0 Carlson, Clint D.(3)................... 188,334 188,334 0 CNA Trust Corporation.................. 7,998 7,998 0 Cuccia, Frederick J.................... 281 281 0 Cyrk Foundation, The................... 2,342 2,342 0 Cyrk, Inc.............................. 19,675 19,675 0 Cyrk International Foundation.......... 2,342 2,342 0 Denman, Robert and Beckie.............. 7,998 7,998 0 Dewey, Robert M., Jr................... 19,996 19,996 0 DiMartino, Joseph S.................... 39,992 39,992 0 Drazan, Jeffrey M...................... 164,651 164,651 0 Drazan, Sandra Living Trust............ 7,998 7,998 0 Drutman, Richard A..................... 99 99 0 Egan, Robert L......................... 5,999 5,999 0 Karakuduk-Munay Inc. Notes to the Financial Statements December 31, 1997 In terms of US Dollars 12. Tax Under Kazakh legislation, the Company is permitted to carryforward tax losses arising in each year. These can be applied against future tax profits arising in the subsequent five years; however, certain uncertainties exist as to the amount of the carryforward due to the issues discussed in Note 14 related to the method of calculation of tax losses for Kazakh purposes. The Agreement specifies profits taxes and other taxes applicable to the Company. As discussed in Note 9, the Signature Bonus is not recoverable or deductible in calculating income tax expense. The following is a summary of the provision for income taxes: Year ended December 31 1997 1996 1995 ------------------------------------- Income taxes (benefit) computed at statutory rate $(499,494) $(582,652) $(122,563) Change in asset valuation allowance 499,494 582,652 122,563 ------------------------------------- Income taxes $ -- $ -- $ -- ===================================== The components of the Company's deferred tax assets and liabilities under FASB No. 109 are as follows: Year ended December 31 1997 1996 1995 ----------------------------------------- Deferred tax assets: Net operating loss carryforwards $ 1,204,709 $ 705,215 $ 122,563 Valuation allowance (1,204,709) (705,215) (122,563) ----------------------------------------- Deferred tax assets $ -- $ -- $ -- ========================================= There were no deferred tax assets or income tax benefits recorded in the financial statements for net deductible temporary differences or net operating loss carryforwards due to the fact that the realization of the related tax benefits is not considered likely. At December 31, 1997, the Company has tax loss carryforwards of approximately US$4,016,000 available to offset future taxable income. These carryforwards will expire at various times between 2000 and 2002. The loss carryforward at December 31, 1997 for financial reporting purposes is approximately US$4,016,000. Shares Shares Percent of Owned Shares Owned Shares Prior to Being After Owned After Name Offering Offered Offering Offering - ---- -------- ------- -------- -------- Elsener, Charles, Jr................... 17,871 17,871 0 Elsener, Charles, Sr................... 272,399 272,399 0 Elsener, Paul.......................... 27,994 27,994 0 Encore Company, Inc.................... 468 468 0 Enron Oil & Gas Uzbekistan, Ltd........ 180,000 180,000 0 EPC PSP................................ 295 295 0 Exeter Finance Group, Inc.(4).......... 2,222,222 2,222,222 0 Faber, Timothy B....................... 19,996 19,996 0 Farrell, Vincent D., Jr................ 10,341 10,341 0 Friedman, Herbert M.................... 2,868 2,868 0 Genesi, Bob............................ 7,998 7,998 0 Goldfaden, Jeffrey G................... 799 799 0 Hackett, Montague H., Jr............... 39,992 39,992 0 Harman Investments, LP................. 9,370 9,370 0 Hart, M. Leo........................... 201,957 201,957 0 Hayes, Francis G....................... 1,600 1,600 0 Hicks, Thomas O........................ 159,966 159,966 0 Hoovler, M.R.(5) ...................... 607,457 250,000 357,457 Hoovler, P.V.(6) ...................... 1,489,522 700,000 789,522 Keller, William(7) .................... 802,750 40,000 762,750 Keough, Clark ......................... 100,000 100,000 0 Keough, Michael L...................... 7,998 7,998 0 Kouris, Jim............................ 1,200 1,200 0 L'Esperance, Dr. Francis A., Jr........ 23,995 23,995 0 Lewis, Sherman R., Jr.................. 27,994 27,994 0 Limit & Co............................. 239,949 239,949 0 Lively, Keith R........................ 15,997 15,997 0 Lufkin, Dan W.......................... 39,992 39,992 0 Karakuduk-Munay Inc. Notes to the Financial Statements December 31, 1997 In terms of US Dollars 13. Charter Capital The total Charter Fund contribution specified in the new Founders Agreement of Karakuduk-Munay (dated June 12, 1997) is $200,000. Each of the shareholder's portion of the Charter Fund and their respective participating interest in the Company is: <TABLE> <CAPTION> 1997 1996 ----------------------------------------------------- Charter Charter Shareholder: Contribution Percent Contribution Percent - ------------ ------------ ------- ------------ ------- <S> <C> <C> <C> <C> "Munaygaz" State Holding Company $ -- -- $ 40,000 20 % "Aksay" Company -- -- 40,000 20 % KazakhOil 80,000 40 % -- -- Korporatsiya Mangistau Terra International 20,000 10 % 20,000 10 % Central Asian Petroleum (Guernsey) Limited - CAP(G) 100,000 50 % 100,000 50 % -------- ----- -------- ----- Total Charter Capital $200,000 100 % $200,000 100 % </TABLE> During 1997, KazakhOil as the successor to Munaygaz state holding company, contributed US $ 40,000 as Munaygaz's initial charter contribution obligation that was previously settled by CAP(G). The CAP(G) 1996 contribution has been reclassified as additional funding of the Company's operations in 1997. 14. Contingencies Taxation - -------- The existing legislation with regard to taxation in the Republic of Kazakhstan is constantly evolving as the Government manages the transition from a command to a market economy. Tax and other laws applicable to the Company are not always clearly written and their interpretation is often subject to the opinions of the local or main State Tax Service. Instances of inconsistent opinions between local, regional and national tax authorities are not unusual. Management believes that it has paid or accrued all taxes that are applicable for current and prior years. Two tax audits in 1997 resulted in no additional tax or penalties levied against the Company. Basis of Accounting - ------------------- The Company maintains its statutory books and records and calculates its taxable loss in accordance with International Accounting Standards, which it believes it may do under the terms of its accounting procedures in the Agreement. The Republic of Kazakhstan currently requires companies to comply with Kazakh accounting regulations and to calculate tax profits or losses in accordance with these regulations as well as prevailing tax law. Therefore, there is currently uncertainty as to the extent of tax losses available to the Company. Shares Shares Percent of Owned Shares Owned Shares Prior to Being After Owned After Name Offering Offered Offering Offering - ---- -------- ------- -------- -------- Maasbach, Ruth......................... 15,997 15,997 0 Massachusetts Mutual Life Insurance Company...................... 46,261 46,261 0 MassMutual Corporate Investors......... 9,838 9,838 0 MassMutual Participation Investors..... 2,460 2,460 0 Moyers, Edward L....................... 1,874 1,874 0 Murphy, Tom G., Pension Plan(8) ....... 40,000 40,000 0 Network Fund III, Ltd.(9).............. 1,250,000 1,250,000 0 Newman, Harold J....................... 239,949 239,949 0 Newman, Paul L......................... 468 468 0 Pascal, Donald T....................... 4,380 4,380 0 Purdue, Cheryl......................... 295 295 0 Rawn, Carol Lee........................ 6,887 6,887 0 Rawn, James D.......................... 6,887 6,887 0 Rawn, Robert S......................... 6,887 6,887 0 Rawn, Stanley R., Jr................... 151,641 151,641 0 Reed Hobe Sound Trust U/A Dtd. 19,996 19,996 0 12/16/64 FBO Samuel P. Reed............ Reiss, James J., Jr.................... 9,838 9,838 0 Reynolds, Eric......................... 1,279 1,279 0 Saltz, Jack ........................... 846,154 846,154 0 Schneider, John A.(10) ................ 235,000 35,000 200,000 Schwab, David.......................... 11,998 11,998 0 Seefurth, Thomas....................... 984 984 0 Shlopak, Gregory P..................... 47,019 47,019 0 Spencer, John ......................... 4,468 4,468 0 Swiss Army Brands, Inc................. 87,634 87,634 0 Task (USA), Inc........................ 90,586 90,586 0 The 1990 Wendell Trust................. 39,992 39,992 0 Karakuduk-Munay Inc. Notes to the Financial Statements December 31, 1997 In terms of US Dollars 15. Current Kazakhstan Environment The ability of the Company to realize the carrying value of its assets is dependent on being able to transport hydrocarbons and finding appropriate markets for their sale. The Company has various options available to it in terms of possible exportation routes to potential markets, based on experience of other joint venture operations in the vicinity of the Company's activity. Domestic markets in the Republic of Kazakhstan currently do not permit world market prices to be obtained. 16. Capital Commitments and Operating Lease Commitment As specified in Note 1, under the terms of the license the Company has committed to minimum capital expenditure of US$34.5 million for the year ended December 31, 1998 (US$2 million already incurred in 1997) and US$12 million for the year ended December 31, 1999. Minimum lease payments under non-cancelable operating leases are due for the year ended December 31, 1998 amounting to US$24,929. On expiration of this lease, the Company may obtain legal title to the office building should negotiations with the landlord prove successful. At this stage there is no certainty that title will transfer, therefore all rental obligations have been expensed. 17. Subsequent Events Subsequent to December 31, 1997, the Kazakh Government Tax Authority began an audit of KKM. The Company believes KKM has provided for all potential tax contingencies which may exist. Shares Shares Percent of Owned Shares Owned Shares Prior to Being After Owned After Name Offering Offered Offering Offering - ---- -------- ------- -------- -------- Triangle Bridge Group, L.P............. 39,992 39,992 0 Truman, James.......................... 7,998 7,998 0 Weinberg, John L....................... 39,992 39,992 0 West, Kathy J., TTEE U/A Dtd. 12/06/96............................... 3,999 3,999 0 Whittier Energy Company(11)............ 436,685 436,685 0 Whittier Opportunity Fund I LLC........ 9,370 9,370 0 Whittier Ventures LLC(12).............. 3,233,556 1,233,556 2,000,000 Win Com, Inc........................... 984 984 0 Wolf, G. Theodore, II.................. 937 937 0 Wolf, G. Thomas........................ 937 937 0 Young, Michael B.(13).................. 60,000 10,000 50,000 ZD Air, Inc............................ 11,998 11,998 0 </TABLE> - ---------------------- (1) The shares owned include 1,828,720 shares underlying Warrants, all of which shares have been registered for resale upon exercise of the Warrants. See "Certain Relationships and Related Transactions." (2) Represents 52,500 shares underlying Warrants, all of which shares have been registered for resale upon exercise of the Warrants. (3) The shares owned include 35,000 shares underlying Warrants, all of which shares have been registered for resale upon exercise of the Warrants. (4) Represents shares of Common Stock into which Series A Preferred Stock is convertible. See "Description of Securities." (5) Matthew R. Hoovler is a former officer and a former director of the Company. The shares include 250,000 shares underlying Warrants, all of which shares have been registered for resale upon exercise of the Warrants. The shares owned include shares owned by Mr. Hoovler's wife and children and the shares being offered include shares being offered by Mr. Hoovler and his wife. (6) Paul V. Hoovler is a former officer and a former director of the Company. The shares include 700,000 shares underlying Warrants, all of which shares have been registered for resale upon exercise of the Warrants. The shares owned include 576,000 shares owned by the PVH Family Limited Partnership of which Mr. Hoovler is the General Partner. (7) Includes 40,000 shares underlying exercisable Warrants, all of which shares have been registered for resale upon exercise of the Warrants. (8) Includes 40,000 shares underlying exercisable Warrants, all of which shares have been registered for resale upon exercise of the Warrants. (9) The Company has agreed that, if at any time by March 31, 1999, the Company issues additional shares of the Company's common stock at a price of less than $2.00 per share, Network Fund III, Ltd. will receive an additional number of shares of common stock which when added to the 1,250,000 shares divided into $2,500,000 is equal to the price at which the additional shares are sold. Further, the Company has agreed that if, by March 31, 1999, the Company issues or sells convertible securities (i.e., securities directly or indirectly convertible into or exchangeable for common stock), other than as a dividend or other distribution on any class of stock, Network Fund III, Ltd. is entitled to exchange the 1,250,000 shares for the convertible securities. The amount of convertible securities to be issued to Network Fund III, Ltd. is to be determined by dividing the market price of the common stock into the issue price of such convertible securities. Finally, the Company has agreed that, in the event that by March 31, 1999 (i) the Company has not received an investment of $7,500,000 and (ii) the average market price of the common stock for the twenty day trading period preceding March 31, 1999, is less than $2.00 per share, then Network Fund III, Ltd. is entitled to an additional number of shares of common stock which when added to the 1,250,000 shares and divided into $2,500,000 is equal to the market price of the common stock on March 31, 1999. This last provision is not applicable if either of the provisions are satisfied on or before March 31, 1999. (10) Includes 35,000 shares underlying Warrants, all of which shares have been registered for resale upon exercise of the Warrants. (11) Includes 87,500 shares underlying Warrants, all of which shares have been registered for resale upon exercise of the Warrants. See "Certain Relationships and Related Transactions." (12) Includes 262,000 shares underlying Warrants, all of which shares have been registered for resale upon exercise of the Warrants. See "Certain Relationships and Related Transactions." (13) Michael B. Young is an officer of the Company. The shares include 50,000 shares underlying a presently exercisable option. Does not include a grant for 30,000 shares that will vest with respect to 10,000 shares on each of January 30, 1999, 2000 and 2001, if Mr. Young is still employed by the Company on those dates. The shares will vest earlier if Mr. Young is terminated without due cause or if the Company is bought or merges with another Company. DESCRIPTION OF SECURITIES The Company is authorized to issue 100,000,000 shares of $0.10 par value Common Stock and 1,000,000 shares of preferred stock, without par value. As of April 24, 1998, there were 51,130,456 shares of Common Stock and 50,000 shares of Series A Preferred Stock outstanding. The Series A Preferred Stock is convertible into 2,222,222 shares of Common Stock. An additional 7,649,500 shares of Common Stock are reserved for issuance upon exercise of outstanding warrants and options. Common Stock Holders of shares of Common Stock are entitled to one vote per share on all matters submitted to a vote of the shareholders of the Company. Except as may be required by applicable law, holders of shares of Common Stock will not vote separately as a class, but will vote together with the holders of outstanding shares of other classes of capital stock that have voting rights including the Series A Preferred Stock. There is no right to cumulate votes in the election of directors. A majority of the issued and outstanding voting stock constitutes a quorum at any meeting of shareholders and the vote by the holders of a majority of the outstanding voting stock is required to effect certain fundamental corporate changes such as liquidation, merger or amendment of the Restated Articles of Incorporation + Amendments. Holders of shares of Common Stock are entitled to receive dividends, if, as, and when declared by the Board of Directors out of funds available therefor, after payment of dividends required to be paid on outstanding shares of preferred stock. Upon liquidation of the Company, holders of shares of Common Stock are entitled to share ratably in all assets of the Company remaining after payment of liabilities, subject to the liquidation preference rights of any outstanding shares of preferred stock. Holders of shares of Common Stock have no conversion, redemption or preemptive rights. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any outstanding preferred stock. The outstanding shares of Common Stock are, and all shares of Common Stock issued upon exercise of warrants described in this Prospectus and payment therefor and upon conversion of promissory notes described in this Prospectus will be, validly issued, fully paid and nonassessable. Preferred Stock Under the Company's Restated Articles of Incorporation + Amendments, the Board of Directors has the power, without further action by the holders of the Common Stock, to designate the relative rights and preferences of one or more classes of preferred stock of the Company, when and if issued. Such rights and preferences could include preferences as to liquidation, redemption and conversion rights, voting rights, dividends or other preferences, any of which may be dilutive of the interest of the holders of the Common Stock. The Board of Directors' ability to issue shares of preferred stock and to determine the rights, preferences, privileges, designations and limitations of such stock, including the dividend rights, dividend rate, conversion rights, voting rights, terms of redemption and other terms and conditions of such stock, could make it more difficult for a person to engage in, or discourage a person from engaging in, a change in control transaction without the cooperation of management of the Company. On November 26, 1997, the Company filed an amendment to the Company's Restated Articles of Incorporation + Amendments to create Series A Preferred Stock. On November 24, 1997, the Company executed a Subscription Agreement ("Agreement") with an investor which was not affiliated with the Company. Pursuant to the Agreement, the investor purchased 50,000 shares of the Company's Series A Preferred Stock, no par value, for a purchase price of $100.00 per share or an aggregate purchase price of Five Million Dollars ($5,000,000). The Series A Preferred Stock will be entitled to receive cumulative dividends at the annual rate of $5.00 per share and will have a redemption price of $100.00 plus any unpaid dividends. Commencing on November 30, 2002, the Company will be required to redeem the Series A Preferred Stock to the extent of the lesser of (i) the number of shares of Series A Preferred Stock outstanding on each scheduled redemption date or (ii) one-third of the largest number of shares of Series A Preferred Stock outstanding at any time prior to the scheduled redemption date. The Company has the right to redeem all or any portion of any shares of Series A Preferred Stock prior thereto. Each holder of shares of Series A Preferred Stock is entitled to vote on all matters in an amount equal to the largest number of full shares of Common Stock into which all shares of the Series A Preferred Stock held by such holders are convertible. Further, the Series A Preferred Stock is convertible at the option of the holders thereof at any time or from time to time on or prior to the redemption date into Common Stock. The conversion price of the Series A Preferred Stock is initially $2.25 per share. The number of shares of Common Stock issuable upon conversion of each share of Series A Preferred Stock is determined by dividing $100 by the conversion price per share. The holders of the Series A Preferred Stock have demand registration rights with respect to the underlying Common Stock and the Company has agreed to register the underlying Common Stock on most registration statements filed by the Company. Certain Provisions of Restated Articles of Incorporation + Amendments The Company's Restated Articles of Incorporation + Amendments contain a provision, authorized under Colorado law, which limits the liability of directors of the Company for monetary damages for breach of fiduciary duty as an officer or director other than for intentional misconduct, fraud or a knowing violation of law or for payment of a dividend in violation of Colorado law. Such provision limits recourse for money damages which might otherwise be available to the Company or shareholders for negligence by individuals while acting as officers of the Company. Although this provision would not prohibit injunctive or similar actions against directors, the practical effect of such relief would be limited. This limitation of liability under state law does not apply to any liabilities which may exist under federal securities laws. Indemnification and Insurance Provisions The Company has officer and director liability insurance and the Company's Restated Articles of Incorporation + Amendments and bylaws provide that the Company shall indemnify its directors and officers to the fullest extent permitted by Colorado law. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. Transfer Agent American Securities Transfer & Trust, Inc., Denver, Colorado, is the transfer agent for the Common Stock. PLAN OF DISTRIBUTION The Selling Securityholders intend to sell their shares of Common Stock directly, through agents, dealers, or underwriters, in the over-the-counter market, or otherwise, on terms and conditions determined at the time of sale by the Selling Securityholders or as a result of private negotiations between buyer and seller. Sales of the shares of Common Stock may be made pursuant to this Prospectus or pursuant to Rule 144 or Regulation S adopted under the Securities Act of 1933, as amended. No underwriting arrangements exist as of the date of this Prospectus for the Selling Securityholders to sell their shares. Upon being advised of any underwriting arrangements that may be entered into by a Selling Securityholder after the date of this Prospectus, the Company will prepare a supplement to this Prospectus to disclose such arrangements. It is anticipated that the per share selling price for the shares will be at/or between the "bid" and "asked" prices of the Company's Common Stock as quoted in the over-the-counter market immediately preceding the sale. Expenses of any such sale will be borne by the parties as they may agree. LEGAL PROCEEDINGS On November 14, 1997, Heartland, Inc. of Wichita and Collins & McIlhenny, Inc. ("Plaintiffs") filed a lawsuit against the Company, Howard Karren, Whittier Trust Company and James A. Jeffs in the District Court of Harris County, Texas. The Company was served with the Complaint on December 3, 1997. Plaintiffs claim that the Company breached an alleged agreement with them whereby Plaintiffs were to raise capital for the Company through a private placement of the Company's securities, that the Company and Mr. Karren made false representations in connection with the alleged contract and that Whittier Trust Company and James A. Jeffs interfered with the Company's performance of the alleged contract. Plaintiffs are seeking actual damages of $3,435,000 and exemplary damages of $25,000,000 from each defendant, plus attorneys' fees. A motion for a summary judgment filed by the Plaintiff was denied by the Court. The defendants believe the allegations are without merit and intend to vigorously defend the lawsuit. LEGAL MATTERS The validity of the issuance of the shares of Common Stock being offered hereby have been passed upon for the Company by Smith McCullough, P.C., Denver, Colorado. EXPERTS The consolidated financial statements of the Company at December 31, 1997, and for the year then ended, for the one month period ended December 31, 1996, and at November 30, 1996 and for the year then ended, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, and for the year ended November 30, 1995, by Grant Thornton LLP, independent auditors, as set forth in their respective reports thereon (which each contains an explanatory paragraph describing conditions that raise substantial doubt about the Company's ability to continue as a going concern as described in Note 2 to the consolidated financial statements) appearing elsewhere herein, and are included in reliance upon such reports given upon the authority of such firms as experts in accounting and auditing. The financial statements of Karakuduk-Munay, Inc. at December 31, 1997 and 1996, and for each of the three years in the period ended December 31, 1997, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young--Kazakhstan, independent auditors, as set forth in their report thereon (which contains an explanatory paragraph describing conditions that raise substantial doubt about Karakuduk-Munay, Inc.'s ability to continue as a going concern as described in Note 3 to the financial statements) appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. <TABLE> <CAPTION> CHAPARRAL RESOURCES, INC. Cross Reference Sheet PART I INFORMATION REQUIRED IN THE PROSPECTUS Item Number Form S-1 Item Number Caption or Location in Prospectus - ------ -------------------- --------------------------------- <S> <C> <C> 1. Forepart of the Registration Statement and Outside Front of Registration Statement and Outside Front Cover of Prospectus Front Cover of Prospectus 2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back Cover Pages of Prospectus Prospectus 3. Summary Information, Risk Factors, and Ratio of Prospectus Summary and Risk Factors Earnings to Fixed Charges 4. Use of Proceeds Use of Proceeds 5. Determination of Offering Price Not Applicable 6. Dilution Not Applicable 7. Selling Security Holders Selling Securityholders 8. Plan of Distribution Plan of Distribution 9. Description of Securities to be Registered Front of Registration Statement, Outside Front Cover of Prospectus and Description of Securities 10. Interests of Named Experts and Counsel Not Applicable 11. Information With Respect to the Registrant (a) Description of Business Business of the Company (b) Description of Property Business of the Company (c) Legal Proceedings Legal Proceedings (d) Market Price of and Dividends on the Registrant's Market Prices of Common Equity, Dividend Common Equity and Related Stockholder Matters Policy and Related Stockholder Matters (e) Financial Statements Financial Statements (f) Selected Financial Data Prospectus Summary (g) Supplementary Financial Information Management's Discussion and Analysis of Financial Condition and Results of Operations (h) Management's Discussion and Analysis of Management's Discussion and Analysis of Financial Condition and Results of Financial Condition and Results of Operations Operations (i) Changes in and Disagreements with Accountants Change in Accountants on Accounting and Financial Disclosure (j) Directors, Executive Officers, Promoters Directors and Executive Officers and Control Persons (k) Executive Compensation Executive Compensation (l) Security Ownership of Certain Beneficial Owners Security Ownership of Certain Persons and Management (m) Certain Relationships and Related Transactions Certain Relationships and Related Transactions 12. Disclosure of Commission Position on Description of Securities Indemnification for Securities Act Liabilities iii </TABLE> PROSPECTUS CHAPARRAL RESOURCES, INC. 17,522,116 Shares of Common Stock This Prospectus relates to the resale by the holders (the "Selling Securityholders") named herein of up to 17,522,116 shares of the $0.10 par value common stock ("Common Stock") of Chaparral Resources, Inc. ("Company"), of which 11,969,174 shares are currently issued and outstanding, 3,330,720 shares are issuable upon the exercise of outstanding warrants ("Warrants") to purchase shares of Common Stock and 2,222,222 shares are issuable upon conversion of outstanding Series A Preferred Stock ("Preferred Stock"). See "Description of Securities--Preferred Stock.". The shares of Common Stock offered hereby for resale and the shares of Common Stock issuable upon exercise of the Warrants and upon conversion of the Preferred Stock were, or will be, issued in private transactions by the Company. See "Plan of Distribution" and "Selling Securityholders."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000053260_jayark_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000053260_jayark_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..ac7d5ed77246a7e438cbcdc0214573e6b3bdaad9
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1998/CIK0000053260_jayark_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS (AND NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS. EACH INVESTOR IS URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY PRIOR TO MAKING AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY. THE COMPANY Jayark Corporation ("Jayark" or the "Company") conducts its operations through AVES Audiovisual Systems, Inc. ("AVES"), a wholly owned subsidiary. AVES distributes for resale, as well as rents, a broad range of audiovisual, video and communications equipment and supplies. Its customer base includes schools, industry and hotels. The warehousing, sales and administrative operations of AVES are located in Houston, Texas. The Company was originally incorporated in New York in 1958. In 1991, the Company changed its state of incorporation to Delaware. In July 1998 the Company amended its Certificate of Incorporation increasing its authorized Common Stock to 30,000,000 shares and decreasing the par value of its Common Stock from $.30 to $.01 per share. THE RIGHTS OFFERING The Company is distributing to holders of record of Common Stock on July 31, 1998 one transferable Right for each share held. Primary Subscription......... Each Right entitles the holder to purchase 2 shares of Common Stock at a price per share of $.10 (the "Subscription Price"). See "The Rights Offering." Oversubscription............. There will be no oversubscription privilege available to stockholders other than the Koffman Group (see below). See "The Rights Offering." Record Date.................. July 31, 1998 (the "Record Date"). Expiration Date.............. October 13, 1998 (the "Expiration Date"). Transferability of Rights.................... The Rights are transferable. See "The Rights Offering -- Transferability of Rights." Subscription by Koffman Group................ The Koffman Group consists of David Koffman, Chairman of the Board of Directors and President of the Company, Richard Koffman, Milton Koffman, Jeffrey Koffman, Sara Koffman, Ruthanne Koffman, Elizabeth Koffman, Steven Koffman and three entities controlled by members of the Koffman family. The members of the Koffman Group have agreed with the Company that they will exercise in full the Rights issued to it on Primary Subscription at a price per share equal to the Subscription Price. In addition, the Koffman Group has agreed to purchase, at the Subscription Price, any shares of Common Stock not purchased by the other stockholders on Primary Subscription. The Koffman Group beneficially owns 4,957,179 shares of Common Stock as of the date of this Prospectus, which represents approximately 54% of the total votes entitled to be cast by the holders of all of the Company's outstanding voting securities. If all other stockholders exercise their Rights issued to them on Primary Subscription, the Koffman Group will beneficially own 14,871,537 shares of Common Stock after exercise in full of the Rights issued to it on Primary Subscription (representing approximately 54% of the Common Stock outstanding immediately following consummation of the Rights Offering). In the event that no other stockholders exercise their rights, the Koffman Group will own 23,399,577 shares of common stock (representing approximately 85% of the Common Stock outstanding immediately following consummation of the Rights Offering) after exercise in full of the Rights issued to it on Primary Subscription and after giving effects to the purchase by it of shares not subscribed for by the other stockholders on Primary Subscription. See "The Rights Offering -- Background of and Purposes for the Rights Offering" and "--Purchase of Shares by The Koffman Group". Dilution..................... To the extent a stockholder does not exercise it Rights, such stockholder's percentage equity interest in the Company and its voting power will be diluted substantially. Conversely, because the Subscription Price is greater than the net tangible book value per share of the Common Stock at April 30, 1998, to the extent that a stockholder does exercise its rights, there will be an immediate dilution on a per share basis from the Subscription Price paid by such stockholder to the pro forma net tangible book value per share of the Common Stock immediately following consummation of the Rights Offering. See "Risk Factors -- Dilution" and "The Rights Offering -- Dilutive Effects of Rights Offering." Common Stock Outstanding After the Offering..................... 27,663,597 shares Risk Factors................. An investment in the Common Stock offered hereby involves a high degree of risk. See "Risk Factors." Use of Proceeds..................... The net proceeds to the Company from the sale of the Common Stock offered hereby are estimated to be approximately $1,844,240 (before deducting estimated expenses) constituting cash and debt of the Company. After payment of the expenses of the offering, estimated to be approximately $50,000, such net proceeds will be used by the Company to retire $1,790,000 of notes payable and subordinated notes, including interest with related parties. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000058526_first_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000058526_first_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f95ac1b87b6429ddb3ef0220c2f1749d4b94bc26
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1998/CIK0000058526_first_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following is a brief summary of certain information contained elsewhere in this Prospectus. This Summary is qualified in its entirety by the more detailed information and financial statements appearing elsewhere in this Prospectus. THE COMPANY On July 9, 1997, First Medical Corporation ("FMC") merged with a wholly-owned subsidiary of the Company (the "Merger"). As a result of such merger, FMC became a wholly-owned subsidiary of the Company. See "Business - Merger with FMC." The Company, through its wholly-owned subsidiary, HallMark Electrical Supplies Corp. ("HallMark"), is engaged in the distribution of electrical supplies for the construction industry both domestically (primarily in the New York Metropolitan area) and for export. See "Business - Lehigh." FMC is an owner-manager and provider of management and consulting services to physicians, hospitals and other health care delivery organizations and facilities. FMC's diversified operations are currently conducted through three divisions: (i) a physician practice management division which provides physician management services including the operation of clinical facilities and management services to medical service organizations, (ii) an international division which currently manages western style medical centers in Eastern Europe and the Commonwealth of Independent States (formerly Russia) (the "CIS") and (iii) a recently formed hospital services division which provides a variety of administrative and clinical services to acute care hospitals and other health care providers. See "Business - FMC." The combined company is currently continuing both lines of business at this time. Unless the context otherwise indicates, the "Company" as used herein means First Medical Group Inc. and its wholly-owned subsidiaries, FMC and Hallmark and their subsidiaries, "Lehigh" means the Company before the Merger and the Company other than its wholly-owned subsidiary FMC and its subsidiaries after the Merger and "FMC" means First Medical Corporation and its subsidiaries. The Company's executive offices are located at 1055 Washington Blvd. Stamford, CT 06901, and its telephone number is (203) 327-0900.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000091167_smith-c-d_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000091167_smith-c-d_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..7d4fd28203f50e434e238b70751854a16639459a
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1998/CIK0000091167_smith-c-d_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. Investors should carefully consider the information set forth under the heading "Risk Factors." Unless otherwise indicated, all information in this Prospectus (i) assumes that the Underwriters' overallotment option is not exercised, (ii) reflects the exercise of warrants (the "Churchill Warrants") to purchase 1,080,078 shares of Common Stock held by Churchill ESOP Capital Partners ("Churchill") and (iii) has been adjusted to give effect to a 51-for-1 Common Stock split. The exercise of the Churchill Warrants and the Common Stock split will be effected immediately prior to consummation of the Offering. References throughout this Prospectus to fiscal years refer to the Company's fiscal years ending on the last day of February of such year. Unless otherwise indicated, references to the "Company" or "C.D. Smith" refer to C.D. Smith Healthcare, Inc. and its subsidiaries. THE COMPANY C.D. Smith is a leading regional full-line, full-service wholesale distributor of pharmaceuticals and related products. The Company distributes over 25,000 SKUs to more than 3,000 customers located predominantly in the midwestern United States and New England. The Company believes that it is the primary supplier to a majority of its customers, which include independent pharmacies, health care institutions and regional and national chain pharmacies. According to the 1998 Drug Store Market Guide, the Company is the second largest pharmaceutical wholesale distributor in metropolitan Kansas City and Boston and the third largest in Chicago. For fiscal 1998, the Company's pro forma net sales were $762.3 million. Since being acquired by its management and employees in 1991, C.D. Smith has grown from a small pharmaceutical distributor serving rural customers into a full-line, full-service regional wholesale distributor with a major presence in both rural and urban markets within its core territories. From 1994 through fiscal 1998, the Company's net sales grew internally (excluding the effect of acquisitions) at a compound annual rate of approximately 50.3%. The Company has achieved this growth principally by gaining new customers within its territories, converting customer relationships from secondary to primary supplier status and expanding its service territories. The Company attributes its success since 1991 primarily to the implementation of a comprehensive program aimed at meeting the specific needs of its customers. As a part of this program, the Company significantly expanded its sales and customer service staff. At May 31, 1998, C.D. Smith employed 37 direct sales representatives with an average of 28 years of industry experience who are supported by 25 telemarketers and customer service professionals. The Company added multiple operating shifts to extend the hours for customer order placement and to expand the territories in which it can offer reliable next-day delivery. The Company also broadened its product offerings and upgraded its customer ordering and information systems to enhance its ability to serve as a primary supply source. In 1994, the Company built a state-of-the-art distribution facility to accommodate its growth and has achieved key measures of efficiency that significantly exceed industry averages. The Company believes that providing exceptional customer service distinguishes C.D. Smith from other wholesale distributors and is key to its continued growth. In October 1997, the Company acquired General Drug Company, a full-service wholesale distributor with operations in the greater Chicago and Boston markets (the "General Drug Companies"). As part of this transaction (the "General Drug Acquisition"), the Company also acquired SBS Pharmaceuticals, Inc. ("SBS"), a pharmaceuticals repackaging and distribution business. C.D. Smith is currently integrating the operations of the General Drug Companies and believes it will realize substantial synergies by increasing the efficiency of the acquired distribution facilities, obtaining greater volume purchasing discounts and eliminating duplicative overhead functions. In addition, the Company is implementing its program of enhanced customer service in Chicago and Boston, which it believes will accelerate sales growth in those markets. In Chicago, the Company doubled the size of its sales force and added a second operating shift to accommodate late-day orders, commence Saturday deliveries and increase the territories served by the facility. In Boston, the Company has divested the marginally profitable tobacco and candy business, which has provided significant additional warehouse capacity for pharmaceuticals and related products. The Company also intends to expand the sales force and add a second operating shift in Boston. The wholesale pharmaceutical distribution industry has experienced rapid sales growth over the past twelve years, increasing from approximately $14.0 billion in sales in 1985 to over $74.6 billion in 1997. In addition, the percentage of pharmaceutical sales through wholesale distributors increased to approximately 80.0% in 1997, up from 45.0% in 1970. At the same time, there has been substantial consolidation of full-line pharmaceutical wholesale distributors in the United States, from approximately 139 at the end of 1980 to approximately 54 at the end of 1997. Industry analysts expect this consolidation trend to continue. The Company believes that it is well- positioned to capitalize on industry consolidation and intends to make additional selective acquisitions. OPERATING STRATEGY The Company's objective is to build on its position as a leading regional wholesale distributor to become a national pharmaceutical services company. The principal elements of the Company's strategy are as follows: Provide High Levels of Customer Service. C.D. Smith believes that its customer service focus is a significant competitive advantage, especially with independent pharmacy customers who may not receive personalized service from national wholesale distributors. C.D. Smith's experienced direct sales force makes regular personal visits to current and prospective customers and is supported by a knowledgeable in-house customer service staff. The Company operates its distribution facilities to meet its customers' requirements for accurate same-day or next-day delivery. The Company believes that its commitment to customer service has enabled it to achieve primary supplier status with many of its customers, resulting in significant net sales growth. Increase Sales from Existing Facilities. C.D. Smith intends to leverage its existing infrastructure and expertise to increase sales from each of its distribution facilities. Prior to their acquisition by the Company, each of the Chicago and Boston facilities operated a single shift, served customers within a small geographic area and carried a more limited inventory, which typically positioned them as secondary suppliers. The Company believes that adding a second operating shift and developing a customer-oriented sales force will enable both of these facilities to increase net sales by achieving primary supply relationships with customers in significantly expanded service territories. Similarly, C.D. Smith believes it can apply the General Drug Companies' greater experience with managed care and other institutional customers to increase net sales in its midwestern region. Continue Selective Acquisitions. The Company believes that it is well- positioned to make selective acquisitions to expand into new territories and to further penetrate current market territories. Through its participation in national industry groups and OptiSourceSM, a Company- operated generic pharmaceutical buying group that includes 16 other regional wholesale distributors, C.D. Smith maintains significant contact with numerous regional and local distributors and has identified several attractive acquisition candidates. Offer Broad Line of Products and Services. C.D. Smith provides its customers a broad line of over 25,000 SKUs of branded and generic pharmaceuticals, over-the-counter health care products and health and beauty aids from more than 1,000 vendors. The Company believes its products and services enable it to be the primary supplier to the majority of its customers and to further leverage its regional presence by meeting the secondary supply needs of many significant customers. Through OptiSource, the Company obtains lower wholesale prices through volume purchasing and maintains a major presence in the distribution of the rapidly growing generic pharmaceutical product category. Through SBS, the Company buys approximately 140 pharmaceuticals in bulk and repackages them into quantities requested by selected wholesalers. The Company is also developing its own private label program designed to help independent pharmacies compete more aggressively with regional and national chain pharmacies by providing store identification, promotional and advertising programs and a private label brand of over-the-counter pharmaceuticals and health and beauty aids. Expand Pharmaceutical Services. The Company intends to offer pharmaceutical services beyond its current product and service offerings. The Company believes that it can leverage its expertise in the pharmaceutical industry and its large, concentrated customer base to offer additional pharmacy-related services, such as pharmacy benefits management, managed care pharmaceutical formulary management and health care institution unit of use packaging. The Company intends to expand its service offerings through internal development and selective acquisitions. The Company believes that its operating strategy can be implemented without significant additional capital investment (other than possible acquisitions) and without incurring significant additional operating costs that would not be offset by anticipated revenue growth. The Company is a Missouri corporation with its corporate headquarters located at 3907 South 48th Terrace, St. Joseph, Missouri 64503. The telephone number is (816) 232-5471. THE OFFERING <TABLE> <S> <C> Common Stock offered: By the Company................................. 3,500,000 shares By the Selling Shareholders.................... 1,250,000 shares Total......................................... 4,750,000 shares Common Stock to be outstanding after this Offering....................................... 10,579,270 shares(1) Use of Proceeds(2).............................. To repay certain outstanding indebtedness. See "Use of Proceeds." NYSE symbol..................................... CDH </TABLE> - -------------------- (1) Excludes 848,578 shares subject to options issued under the Company's Amended and Restated 1996 Equity Compensation Plan, all of which are immediately exercisable at a weighted average exercise price of $0.73 per share. See "Management--Executive Compensation--Equity Compensation Plan" and "Principal and Selling Shareholders." (2) The Company will not receive any of the proceeds from the sale of Common Stock by the Selling Shareholders. See "Principal and Selling Shareholders."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1998/CIK0000091649_4front_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000091649_4front_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..aaf4c61fc7009f78c245c768d32922200d466c6b
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1998/CIK0000091649_4front_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION, INCLUDING INFORMATION UNDER "RISK FACTORS" AND CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED UNDER "RISK FACTORS." UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION TO PURCHASE FROM THE COMPANY UP TO 600,000 ADDITIONAL SHARES OF COMMON STOCK WILL NOT BE EXERCISED. THE COMPANY CONDUCTS OPERATIONS IN BRITISH POUNDS STERLING. FOR FINANCIAL REPORTING PURPOSES, BRITISH POUNDS ARE CONVERTED INTO U.S. DOLLARS AT THE PREVAILING RATE AS OF THE DATE OR AT THE WEIGHTED AVERAGE FOR THE PERIOD COVERED. UNLESS SPECIFICALLY STATED OTHERWISE HEREIN, ALL CONVERSIONS OF BRITISH POUNDS INTO U.S. DOLLARS REFERENCED IN THIS PROSPECTUS HAVE BEEN CONVERTED USING A CONVERSION RATE OF 1.670 AND 1.631 DOLLARS PER POUND IN RESPECT OF OPERATIONS DURING THE THREE MONTHS ENDED APRIL 30, 1998 AND 1997, RESPECTIVELY, AND 1.643, 1.607 AND 1.575 DOLLARS PER POUND IN RESPECT OF OPERATIONS DURING THE YEARS ENDED JANUARY 31, 1998, 1997 AND 1996, RESPECTIVELY, AND AT A RATE OF 1.671, 1.633, 1.602 AND 1.511 DOLLARS PER POUND IN RESPECT OF THE APRIL 30, 1998, JANUARY 31, 1998, 1997 AND 1996 BALANCE SHEETS. REFERENCES IN THIS PROSPECTUS TO A FISCAL YEAR OF THE COMPANY REFER TO THE 12-MONTH PERIOD ENDING OR ENDED ON JANUARY 31 OF THAT YEAR. THEREFORE, FISCAL 1998 REFERS TO THE 12-MONTH PERIOD ENDED JANUARY 31, 1998. THE COMPANY 4Front Technologies, Inc. ("4Front" or the "Company") is a leading provider of information technology ("IT") solutions, which consist of specialized computer services and complementary products, primarily to blue chip corporations and government authorities in the United Kingdom ("UK") and, to a growing extent, in Continental Europe. 4Front's solutions include hardware maintenance, help desk support, network services, specialized software services and products and the supply of high-end storage systems. 4Front's customers include British Petroleum, British Telecom, Computer Sciences Corporation, Dupont, IBM, JP Morgan, NatWest Capital Markets, Pfizer, Reuters and the UK Ministry of Defence. Accelerating technological advancement, migration of organizations toward multivendor distributed networks, and increased globalization of corporate activity have contributed to a significant increase in the sophistication and interdependency of corporate computing systems. The Company believes that the desire by corporations to focus upon their core activities while enjoying the benefits of such multivendor distributed networks, together with increasing skill shortages within the IT industry, have led them increasingly to rely upon specialist outsourcing service organizations such as the Company to support the development and maintenance of their IT systems. The UK computer services market, the fastest growing in Europe, is currently estimated at $18 billion annually, according to the 1997 Holway Report on Software and Computing Services in Europe (the "Holway Report"). The UK market grew by an estimated 19% between 1996 and 1997. The Western European computer services market is currently estimated at $110 billion, according to the Holway Report. This market grew by an estimated 13% between 1996 and 1997. Both the UK and the Western European computer services markets remain highly fragmented, with no single company serving more than 6% of the respective markets. The Company's objective is to leverage its position in the UK to become a leading independent provider of IT solutions in Europe. The key elements of the Company's strategy are to (i) leverage and promote the "4Front" brand, (ii) increase client penetration, (iii) further expand the range of services and products offered, (iv) continue to build the Company's market position in Continental Europe and (v) pursue strategic acquisitions and alliances. The Company's principal corporate offices are located at 5650 Greenwood Plaza Blvd., Suite 107, Englewood, Colorado 80111, telephone (303) 721-7341. The Company's principal operational offices are located at 57A Hatton Garden, London, EC1N 8JD, England, telephone +44-171-269-5800. THE OFFERING <TABLE> <S> <C> Common Stock offered by: The Company............................................... 3,433,992 shares The Selling Stockholders.................................. 566,008 shares Total................................................. 4,000,000 shares Common Stock offered for sale in: United States offering.................................... 3,200,000 shares International offering.................................... 800,000 shares Total................................................. 4,000,000 shares Common Stock to be outstanding after the Offering........... 11,019,317 shares(1) Use of proceeds............................................. Repayment of certain indebtedness and for working capital and general corporate purposes, including potential strategic acquisitions. Nasdaq National Market Symbol............................... FFTI Proposed EASDAQ Symbol...................................... FFTI </TABLE> - ------------------------ (1) Excludes 2,003,840 shares of Common Stock subject to outstanding stock options, exercisable at an average exercise price of $5.22 per share, and 979,457 shares of Common Stock, subject to outstanding warrants, exercisable at an average exercise price of $6.63 per share. Does not include 50,410 shares of Common Stock reserved for issuance upon the exercise of options. See "Management--Stock Options" and "--Stock Options and Benefit Plans." SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED JANUARY 31, APRIL 30, ----------------------------------------------------- -------------------- 1994 1995 1996(2) 1997(3) 1998 1997 1998 --------- --------- --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> <C> (UNAUDITED) CONSOLIDATED STATEMENT OF OPERATIONS DATA (1): Revenues: Services......................................... $ 1,986 $ 4,571 $ 7,869 $ 19,032 $ 45,302 $ 8,196 $ 16,437 Products......................................... 851 6,669 24,380 33,983 38,843 10,428 10,267 --------- --------- --------- --------- --------- --------- --------- Total revenues............................... 2,837 11,240 32,249 53,015 84,145 18,624 26,704 --------- --------- --------- --------- --------- --------- --------- Gross Profit: Services......................................... 1,341 2,669 4,979 12,391 22,761 4,048 8,808 Products......................................... 215 1,757 5,707 4,606 6,722 1,547 1,733 --------- --------- --------- --------- --------- --------- --------- Total gross profit............................. 1,556 4,426 10,686 16,997 29,483 5,595 10,541 --------- --------- --------- --------- --------- --------- --------- Selling, general and administrative................ 1,117 3,565 9,567 13,792 22,796 4,355 8,004 Depreciation and amortization...................... 63 216 560 976 2,213 406 716 Net income (loss).................................. $ 304 $ 355 $ (652) $ (2,344) $ 3,069 $ 631 $ 1,092 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Net income (loss) per share (Basic)................ $ 0.25 $ 0.20 $ (0.24) $ (0.45) $ 0.47 $ 0.10 $ 0.15 Net income (loss) per share (Diluted).............. $ 0.25 $ 0.20 $ (0.24) $ (0.45) $ 0.43 $ 0.09 $ 0.13 Weighted average number of shares: Basic............................................ 1,198 1,813 2,743 5,170 6,589 6,515 7,060 Diluted.......................................... 1,198 1,813 2,743 5,683 7,129 6,696 8,653 </TABLE> <TABLE> <CAPTION> APRIL 30, 1998 -------------------------- AS ACTUAL ADJUSTED(4) ----------- ------------- <S> <C> <C> (UNAUDITED) CONSOLIDATED BALANCE SHEET DATA: Current assets.......................................................... $ 40,403 $ 73,871 Current liabilities..................................................... 38,162 30,962 Total assets............................................................ 62,424 95,892 Long-term debt (including capital lease obligations).................... 487 487 Total stockholders' equity.............................................. $ 23,008 $ 63,676 </TABLE> - ------------------------ (1) The Company has grown substantially through acquisitions which materially affect the comparability of the financial data reflected herein. The Summary Consolidated Financial Information includes the results of operations of businesses which were acquired effective January 1994, November 1994, April 1995, August 1996, October 1996, September 1997 and October 1997, and which were accounted for under the purchase method of accounting. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview." (2) In fiscal 1996, the Company incurred the share of a joint venture's loss of $761. (3) In fiscal 1997, the Company incurred (i) a non-recurring charge of $2,286 which related to the Company's reorganization and restructuring of its maintenance support services business, including reduction of employee headcount, (ii) a write down of goodwill of $552 relating to the loss of certain contracts by an acquired company and (iii) the write down of an investment in a joint venture partner of $500 and the share of a joint venture's loss of $799. (4) Adjusted to give effect to the sale of 3,433,992 shares of Common Stock by the Company hereby at an assumed public offering price of $12 1/4 per share and the application of the net proceeds therefrom and from the exercise of certain options and warrants by the Selling Stockholders, after deducting the estimated underwriting discount and offering expenses payable by the Company. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000276331_starmet_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000276331_starmet_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY INFORMATION IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL DATA INCLUDING THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO (THE "CONSOLIDATED FINANCIAL STATEMENTS") APPEARING ELSEWHERE IN THIS PROSPECTUS. FOR PURPOSES OF THIS PROSPECTUS, UNLESS OTHERWISE INDICATED OR THE CONTEXT OTHERWISE REQUIRES, REFERENCES TO "STARMET" AND THE "COMPANY" REFER TO STARMET CORPORATION AND ITS SUBSIDIARIES. REFERENCES HEREIN TO A "FISCAL YEAR" REFER TO THE COMPANY'S FISCAL YEAR WHICH ENDS ON SEPTEMBER 30 (E.G., FISCAL 1997 MEANS THE COMPANY'S FISCAL YEAR ENDED SEPTEMBER 30, 1997). BERALCAST-REGISTERED TRADEMARK-, REP-REGISTERED TRADEMARK- AND PREP-REGISTERED TRADEMARK- ARE TRADEMARKS OF THE COMPANY. THIS PROSPECTUS ALSO CONTAINS TRADEMARKS AND TRADE NAMES OF PERSONS OTHER THAN THE COMPANY WHICH ARE THE PROPERTY OF THEIR RESPECTIVE OWNERS. EXCEPT AS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED. SEE "UNDERWRITING." THE COMPANY Starmet is an innovator in the design, development and processing of specialty metals, a precision manufacturer of technologically sophisticated metal components and products, and a leader in certain advanced materials conversion and recycling technologies. A central aspect of the Company's strategy is to continue to capitalize on its metallurgical, materials science and manufacturing expertise, developed primarily for military applications, in order to introduce new products for what the Company believes are high-growth opportunities in large commercial markets. In its specialty metals business, Starmet produces a wide range of products and components from advanced metals and alloys. Key among these materials is Beralcast, the Company's family of beryllium aluminum alloys, which is being commercially introduced for use in certain advanced applications. Based upon initial responses by the Company's customers and testing by independent laboratories, the Company believes that Beralcast is a cutting edge material with advanced properties which is ideally suited for certain demanding commercial and aerospace applications. Among its superior performance characteristics are its light weight, dimensional stability, stiffness, vibration damping qualities and workability. In its advanced recycling technologies and uranium services businesses, Starmet is a fully integrated processor of depleted uranium ("DU"), converting uranium hexafluoride ("UF(6)") to uranium tetrafluoride ("UF(4)") and DU metal which it manufactures into DU products such as feedstock used in the manufacture of nuclear reactor fuel by a third party, radiation shielding, anti-armor tank penetrator munitions and billets for conversion into tank armor. Starmet focuses its research and business development efforts on markets it has identified as offering significant opportunities for growth, particularly high-end computer disk drives as well as military and commercial aerospace and premium golf products, among others. For example, the Company has produced prototype and pre-production quantities of high-end disk drive arm sets, precision devices used in rigid computer disk drives, for evaluation by certain leading disk drive manufacturers in their high-speed, high-capacity disk drives. Beralcast's light weight, high stiffness to weight ratio and enhanced vibration damping qualities when compared to competing materials results in significantly increased data storage capacity and reduced data access time in high-end disk drives equipped with Beralcast disk drive arm sets, according to certain customers of the Company. The Company is in the process of or has completed product optimization with three leading manufacturers, two of which have spent in excess of $1.3 million to date for tooling and prototype production. While the Company is hopeful that its disk drive arm sets will achieve significant market penetration in upcoming generations of high-end disk drives, there can be no assurance that customers will purchase its Beralcast arm sets in significant quantities or that these products will be commercially successful. For military applications, the Company has received contracts from Lockheed Martin Corporation ("Lockheed Martin") for 58 separate Beralcast components to be used in its most advanced electro-optical and target acquisition systems that will be fitted on the RAH-66 Comanche ("Comanche"), the U.S. Army's next generation advanced reconnaissance and attack helicopter. According to the U.S. Army, Beralcast is the only known material capable of meeting critical Comanche requirements without significant costly redesigns. In addition, U.S. and other military forces have identified opportunities for the use of Beralcast components for other advanced military programs, such as the F-22 advanced tactical fighter, the updated Patriot missile, LANTIRN (a low altitude navigation and targeting system) and the French Rafael advanced fighter aircraft. The Company has delivered prototype parts pursuant to contracts for these applications and is awaiting follow-on funding for the next phases of development. The Company believes that further significant opportunities exist for the use of Beralcast products and components beyond these currently identified applications in commercial and military markets. The Company is expanding its manufacturing capacity and plans to invest a substantial portion of the proceeds of the offering in order to meet anticipated demand for Beralcast materials. One of the goals of the Company's planned capital expenditure program is to further reduce product costs, which the Company believes is essential to the commercialization of Beralcast. Since the introduction of its Beralcast alloys, the Company has realized significant reductions in manufacturing costs primarily as a result of its Comanche development work and anticipates that its manufacturing expansion program and ongoing experience with Beralcast will result in continued cost reductions. The Company expects that Beralcast's advantageous characteristics, including its light weight, dimensional stability and workability, will generally offset the higher costs of Beralcast products as compared to certain materials currently employed in markets in which the Company intends to compete. In addition, the Company is committed to maintaining its high quality manufacturing standards. The Company was recently certified under ISO 9002 at its Concord, Massachusetts facility and is the first small business and one of only fourteen companies nationwide to qualify for the U.S. Army's highest quality manufacturing certification. Furthermore, the Company holds regulatory facilities licenses for the processing of low-level radioactive materials, which management believes represent a competitive advantage and a significant barrier to entry to potential new competitors. The Company believes that it operates the only licensed U.S. production facility capable of offering a broad spectrum of processing, conversion, recycling, manufacturing and shielding services for DU and other low-level radioactive materials. Since its origins as a metallurgical laboratory affiliated with the Massachusetts Institute of Technology ("MIT") in 1942, the Company has developed a strong platform in the research and development of various materials science technologies. Throughout its history, the Company has maintained close relationships with MIT and several of the principal research laboratories affiliated with the United States government, namely the Los Alamos National Laboratories, the Lawrence Livermore National Laboratories, and the Sandia National Laboratories. Each of these research laboratories has been or is a party to cooperative research and development agreements with Starmet to jointly develop and improve various materials science technologies and to share such research. The Company has funded certain research programs led by MIT staff members and shared laboratory facilities with MIT. In addition, Dr. Kenneth Smith, a Professor of Chemical Engineering and former Associate Provost of MIT, has served on the Company's Board of Directors since 1985. The Company believes that these relationships, its patented and proprietary technology, internal and customer funded research and development efforts and its sole supplier or provider status in some instances position Starmet at the forefront of the development and commercialization of various materials science technologies, including casting, the manufacture of powdered metals, the development of various specialized alloys and advanced materials recycling. Over the course of its history, the Company has undergone several transitions in response to fundamental changes in its markets and to take advantage of new business opportunities. From its focus on high-volume commercial production of specialty metal powders during the 1970s and the precision manufacture of DU penetrators used in anti-armor munitions during the 1980s and 1990s, to the recent introduction of Beralcast, the Company has a history of developing and bringing to market products that are extensions of its strong foundation in materials science, such as spherical powders for use in early Xerox machines, bi-metal components for the Apollo space program and Beralcast components for the United States military's F-22 fighter and Comanche helicopter. SPECIALTY METAL PRODUCTS Starmet develops and manufactures a wide range of advanced metal products and components for commercial and aerospace applications. These products are manufactured from various metals and alloys, including the Company's Beralcast alloys, pure beryllium, titanium, steel and zirconium. Beralcast is an investment-castable family of beryllium aluminum alloys designed for use in secondary structural and electronic applications. The Company believes that it is the technological leader in the development and production of beryllium aluminum alloys. The Company's patented Beralcast alloys are more than 3 times stiffer than aluminum with 22 percent less weight and can be precision cast to simple and complex configurations. For many applications, product requirements demand lightweight, dimensionally stable, high stiffness and workable materials such as Beralcast. In such applications, certain customers have reported achieving up to 50% weight savings using Beralcast in place of aluminum. Certain disk drive manufacturers for which the Company has produced prototype and pre-production quantities of disk drive arm sets have advised the Company that Beralcast provides distinct performance advantages compared with competing materials for high-end disk drives. The Company believes that there is significant potential to penetrate the market for high-end disk drives. Shipments of rigid disk drives are expected to grow from an estimated 126 million units in 1997 to 201 million units in 2000 according to Disk/Trend, Inc. The Company estimates that high-end disk drives represent between 5% and 10% of this market. The Company also believes that Beralcast's light weight, dimensional stability, workability and other performance characteristics make it an ideal material for a number of other commercial applications including commercial satellite components and premium golf club heads and shafts. In addition to Beralcast products and components, the Company manufactures high-quality spherical metal powders which are used in porous adhesion coatings on medical prostheses and in other products. Management believes the Company's metal powders offer performance advantages over competing powders in these markets since they are cleaner, more uniformly spherical and have a higher percentage of particles within a desired size range from a given amount of raw material. ADVANCED RECYCLING TECHNOLOGIES AND URANIUM SERVICES Starmet develops and provides a variety of products and services based upon its longstanding metallurgical, radiological and chemical know-how, including, in particular, its expertise in processing and converting UF(6) and its derivative UF(4) into materials and products that can be utilized in a variety of specialized applications. Starmet owns and operates the only production facility in North America capable of converting natural UF(6) and depleted UF(6) into UF(4). Depleted UF(6) is a low-level radioactive by-product of the enrichment of uranium. From UF(4), the Company produces DU and natural uranium ("NU") metal which it manufactures into various uranium metal products. The Company's uranium metal products include DU penetrators used as anti-armor munitions, DU billets for conversion into tank armor, NU and DU feedstock supplied to the United States Enrichment Corporation's ("USEC") Atomic Vapor Laser Isotope Separation ("AVLIS") program for laser-based enrichment into nuclear reactor fuel, and industrial and medical shielding devices. Starmet also owns and operates the only FAA-approved facility in the United States licensed to repair DU counterweights, which are used in various wide-body commercial and military aircraft and which are periodically required to be refurbished. Within its shielding technology business, the Company has received exclusive commercial production rights to a patented shielding product known as DUCRETE shielding, which uses a uranium oxide aggregate mixed with concrete to form an enhanced radiation shielding product. The Company is exploring with the Department of Energy ("DoE") and several commercial customers specific applications for the use of DUCRETE shielding, including as containment vessels for spent fuel and other high-level radioactive waste products. In addition, the Company has the capability to recycle radioactively contaminated steel into storage boxes for containment of various radioactive wastes. Due to anticipated reduced U.S. government procurement plans, the Company expects that no revenues will be derived from DU penetrator operations after the second quarter of fiscal 1999. STRATEGY The Company's strategy is to grow revenues and profits by exploiting its materials expertise to manufacture products for currently identified markets and develop new applications for its technologies. Specific components of the Company's strategy include: APPLY TECHNOLOGICAL EXPERTISE TO COMMERCIAL APPLICATIONS. The Company intends to continue to capitalize on its metallurgical, materials science and manufacturing expertise, developed primarily for military applications, in order to introduce new products for what the Company believes are high-growth opportunities in large commercial markets. In these efforts, the Company will apply its skills in materials development, investment casting difficult alloys, manipulating and forming complex components, and manufacturing, processing and recycling certain advanced materials. An example is the development of the Company's Beralcast technology which the Company is applying to various applications in commercial and aerospace markets. DEVELOP NEW PRODUCTS AND MARKETS THROUGH CONTINUED RESEARCH AND DEVELOPMENT. The Company intends to continue to focus its own and customer funded research and development efforts on technological innovation designed to yield sophisticated, high-performance commercial products, materials and services. The Company intends to pursue this strategy by maintaining a strong internal research and development team, continuing its longstanding research relationships with major government research centers and working closely with customers. The primary goal of the Company's research and development efforts is to accelerate commercialization of its materials science technologies by addressing customer identified applications with significant market potential. INCREASE MANUFACTURING CAPACITY AND REDUCE MANUFACTURING COSTS. The Company intends to leverage its manufacturing expertise by shifting from prototype to full-scale production in order to meet anticipated customer demands. A substantial portion of the proceeds of the offering will be used to purchase additional manufacturing equipment, including new furnaces and automated production equipment, principally for the Company's Beralcast products. Among the goals of the Company's planned capital expenditure program are to increase manufacturing capacity, improve manufacturing efficiencies, enhance product quality and further reduce manufacturing costs. MAINTAIN FOCUS ON CUSTOMER SATISFACTION. The Company seeks to continue providing the highest possible level of customer service and customer satisfaction. For example, the Company engages in concurrent engineering with its customers to create value-added, customized products that provide solutions to specific technical issues. The Company seeks to implement design-to-cost programs with its customers to lower overall product costs. In addition, the Company has technical field offices at certain customer sites so that the Company can cooperate in design optimization and provide technical and sales support. The Company at its Concord facility is the first small business and one of only fourteen companies nationwide to qualify for the U.S. Army's highest quality manufacturing certification, and this facility is also ISO 9002 certified. The Company intends to continue its commitment to high-quality manufacturing. PURSUE SELECTED COOPERATIVE RELATIONSHIPS. In order to penetrate new markets and accelerate its expansion, the Company intends to pursue selected teaming arrangements, licenses, joint ventures and other cooperative business relationships. This strategy is designed to leverage the Company's technological expertise by increasing production capacity for the Company's products without the Company having to fund all related capital expenditures. This strategy is further designed to allow Starmet to take advantage of the existing distribution channels of its current or potential partners. As part of this strategy and to facilitate such cooperative relationships, in October 1997 the Company completed an internal reorganization to organize the Company's subsidiaries along functional business lines. A recent example of this co-development strategy is Trio Star, LLC ("Trio Star"), a business venture formed by the Company with R- Cubed Composites, Inc. (a subsidiary of Perstorp AB) and Advanced Product Labs, to jointly market, develop and supply structural components to the commercial satellite and aerospace markets. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company................ 2,250,000 shares Common Stock offered by the Selling Stockholders... 750,000 shares Total Common Stock offered hereby (1).............. 3,000,000 shares Common Stock to be outstanding after the offering (1)(2)............................................. 7,040,674 shares </TABLE> <TABLE> <S> <C> Use of Proceeds.................................... The Company intends to use the net proceeds of the offering to fund capital expenditures on fixed assets and equipment to increase manufacturing capacity, to repay all borrowings outstanding under the Company's Existing Credit Facility (as defined herein), to repay certain indebtedness owed to certain stockholders and for working capital and general corporate purposes. The Company will not receive any of the proceeds from the sale of shares of Common Stock offered by the Selling Stockholders. See "Use of Proceeds" and "Principal and Selling Stockholders." Nasdaq National Market symbol...................... STMT </TABLE> - ------------------------ (1) Assumes that the Underwriters' over-allotment option is not exercised. (2) Based on shares of Common Stock outstanding as of June 10, 1998. Does not include (i) an aggregate of 721,420 shares of Common Stock reserved for issuance upon the exercise of outstanding options or that may be granted under the Company's stock option plans (of which, options to purchase 594,920 shares were outstanding as of June 10, 1998), (ii) 126,044 shares of Common Stock reserved for issuance upon conversion of outstanding and immediately convertible subordinated debentures and (iii) 182,790 shares of Common Stock reserved for issuance upon exercise of outstanding and immediately exercisable warrants (not giving effect to anti-dilution provisions in the First Warrant (as defined herein) held by the Company's principal bank lender that will be triggered as a result of the offering). See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Shares Eligible for Future Sale."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000312340_saba_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000312340_saba_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including notes thereto, appearing elsewhere in this Prospectus. References to "Saba" or the "Company" are to Saba Petroleum Company and its subsidiaries unless the context otherwise requires. All share information included herein has been adjusted to reflect a two-for-one stock split in the form of a stock dividend paid in December 1996. Certain terms, including several technical terms commonly used in the oil and gas industry, are defined in the "Glossary" included as Appendix A to this Prospectus. Investors should carefully consider the information set forth under "Risk Factors." The principal executive offices of the Company are located at 3201 Airpark Drive, Suite 201, Santa Maria, California 93455, and the Company's telephone number at this location is (805) 347-8700. THE COMPANY Saba Petroleum Company is an independent energy company engaged in the acquisition, development and exploration of oil and gas properties in the United States and internationally. The Company has grown primarily through the acquisition and exploitation of producing properties in California, Louisiana and Colombia. The Company has assembled a portfolio of over 200 potential development drilling locations. Based on current drilling forecasts, the Company estimates that such locations represent a five-year drilling inventory. The preponderance of those drilling locations are in Colombia's Middle Magdalena Basin. The Company also has drilling locations in California, New Mexico and Louisiana. The Company uses advanced drilling and production technologies to enhance the returns from its drilling programs. On its California properties, the Company has used horizontal drilling and high- efficiency cavitation pumps, and drilled its first steam assisted gravity drainage ("SAGD") pair of wells in California in 1997, on which producing operations have been held in abeyance awaiting a permit and oil price increases. In 1998, the Company initiated exploration projects in California, Indonesia and Great Britain. At December 31, 1997, the Company had estimated proved reserves of 29.1 MMBOE, consisting of 23.9 MMBbls of oil and 31.3 Bcf of gas (5.2 MMBOE), with a PV-10 Value of $118.6 million. Since quantities of oil and gas recoverable from a property are price sensitive, declines in oil and gas prices from December 31, 1997 postings may be expected to result in a reduction of the quantities of oil and gas included in the Company's proved reserves and the PV-10 value of such reserves. See "Properties - Reserve Estimates." The Company also owns an asphalt refinery in Santa Maria, California, where it currently processes approximately 4,000 Bopd. See "Description of Property Asphalt Refinery". Incident to its gas and oil operations, the Company has acquired fee interests in real estate. See "Description of Property Real Estate Activities". In Colombia the Company holds a 50% interest in a 118-mile pipeline. See "Description of Property-Principal Properties- Colombian Properties". Recent Developments Going Concern Status The Company's auditors included an explanatory paragraph in their opinion on the Company's 1997 financial statements to state that there is substantial doubt as to the Company's ability to continue as a going concern. The cause for inclusion of the explanatory paragraph in their opinion is the apparent lack of the Company's current ability to service its bank debt as it comes due (See Note 8 to Consolidated Financial Statements). While the Company is attempting to address funding the current deficit, there is no assurance that it will be able to do so timely. Further, while the Company is in discussion with its primary lender to address the Company's non-compliance with the loan agreement's financial covenants at September 30, 1998, there is no assurance that the preconditions to the resolved discussions will be met or a satisfactory restructuring accomplished. Finally, as discussed below, the Company has terminated a definitive agreement that it had previously entered into with Omimex Resources, Inc. ("Omimex") to conclude a business combination. As a result of this termination, the Company's obligation to repay the principal sum of approximately $4.2 million, plus interest, as evidenced by a promissory note secured by a 50% interest in a 118-mile pipeline in Colombia owned by Sabacol, Inc., a wholly owned subsidiary of the Company ("Sabacol"), became due and payable in its entirety on or before December 14, 1998. There is no assurance that such promissory note will be paid in full by December 14, 1998. On December 11, 1998, Sabacol filed for protection of its assets under Chapter 11 of the United States Bankruptcy Code. (see "The Company - Recent Developments - Bankruptcy of Sabacol, Inc.") Terminated Business Combination In early 1998, the Board of Directors of the Company engaged CIBC- Oppenheimer, Inc. ("Oppenheimer"), an investment banking firm, to explore ways to enhance shareholder value. This engagement was prompted by several factors, predominately the declining price of Common Stock of the Company and the lack of working capital available to the Company. In March 1998, Oppenheimer presented the Board with its recommendations, which included exploring a possible business combination of the Company with another oil and gas company. In March 1998, the Company entered into a preliminary agreement with Omimex, a privately held Fort Worth, Texas oil and gas company which operates a substantial portion of the Company's producing properties, to enter into a business combination (the "Merger"). Subsequent to the execution of the preliminary agreement, the Company negotiated a required consent from the holders ("Holders") of its Series A Convertible Preferred Stock ("Series A Preferred Stock"). In the interim between the execution of the preliminary agreement and the definitive Plan and Agreement of Reorganization (the "Merger Agreement"), the price of oil continued to deteriorate as did the Company's financial condition and the price of the Common Stock. The Company's deteriorating financial condition precluded the Company from raising funds with which to redeem the Series A Preferred Stock as had been the Company's intention. In June 1998, the Company, Omimex, the shareholders of Omimex and, for limited purposes, Mr. Ilyas Chaudhary, an officer and director of the Company, at that time, (the "Parties") entered into the Merger Agreement. As part of the Merger Agreement, Omimex lent to the Company approximately $4.2 million ("Loan"), the proceeds of which were used to redeem $2 million of stated value of the Series A Preferred Stock (for approximately $2.15 million) and to pay $2 million on the Company's outstanding bank indebtedness. The loan by Omimex originally accrued interest at prime plus two percent and was due 90 days after termination of the Merger Agreement in the event that the merger was not consummated. The Merger Agreement provided that if another party acquired control of the Company and as a result thereof the Merger be cancelled, the Company was required to pay a break-up fee of $1 million to Omimex. In July 1998, the Company terminated the engagement of Oppenheimer effective August 1998. The Parties agreed by mutual consent to terminate and release each other from the Merger Agreement effective September 15, 1998 (the "Mutual Termination and Release Agreement") as the proposed business combination could not be completed by the expiration date of October 31, 1998 as required under the terms of the Merger Agreement. As part of the Mutual Termination and Release Agreement, the interest rate on the secured Loan payable to Omimex and due by December 14, 1998, in the principal amount of approximately $4.2 million was reduced from prime plus two percent to prime. In compliance with procedures for securing the Loan from Omimex, Sabacol's legal representative in Colombia executed, but did not present for notarial inscription by a Colombian notary public, a public deed or deeds to transfer to Omimex all of the Company's right, title and interest of the Company in and to the Velasquez-Galan pipeline held by the Company's wholly owned subsidiary, Sabacol, Inc. and delivered the deed(s) to Bank One, Texas, N.A., which is acting as the escrow agent. Sabacol also delivered to the escrow agent an irrevocable letter of authority authorizing the completion of the execution of the deed(s) before a Colombian notary public. The escrow agent had been instructed, pursuant to the terms of an escrow agreement entered into between Sabacol, Inc., Omimex and Bank One, Texas, N.A. that in the event full payment of the Loan was delivered by December 14, 1998, then the escrow agent shall have immediately delivered to Omimex the payment and to the Company the deeds and the irrevocable letter of authority relating thereto for cancellation. In the event payment of the loan in full is not delivered by December 14, 1998, then the escrow agent shall have immediately delivered to Omimex the deeds and the irrevocable letter of authority relating thereto. Thereafter, Omimex shall deliver the deeds and the irrevocable letter of authority to Omimex de Colombia, Ltd., a Delaware corporation and a wholly owned subsidiary of Omimex ("Omimex Colombia"), for completion of the execution of the deeds before a Colombian notary public by Sabacol's legal representative. Full payment of the Loan was not delivered by December 14, 1998 to the escrow agent. On December 11, 1998, Sabacol filed for protection of its assets under Chapter 11 of the United States Bankruptcy Code. (see "The Company - Recent Developments - Bankruptcy of Sabacol, Inc.") The deeds and the irrevocable letter of authority relating thereto were not delivered to Omimex on December 14, 1998 under the escrow agreement and the requirements to do so has been stayed pursuant to the Sabacol's petition for bankruptcy. Bank Indebtedness As indicated above, as part of the Merger Agreement, Omimex lent to the Company $4.2 million, of which $2 million was applied to the Company's existing bank indebtedness with Bank One, Texas, N.A. (the "Bank"). The Bank consented to the borrowing from Omimex described in the preceding section and the application of the proceeds of the loan, including the redemption of $2 million stated value of the Series A Preferred Stock. As a result of that payment and a payment of $300,000 which was made in May 1998 and continued to be payable each month thereafter by the Company, the Bank and the Company entered into a written amendment to the existing loan agreement extending the maturities of all three short term facilities to July 31, 1998. Approximately $4.5 million in principal amount of bank debt that matured for payment on July 31, 1998, has not been paid nor extended, and the borrowing base deficit of $2.2 million on the revolving loan at September 30, 1998, has not been satisfied, either by providing additional collateral to the Bank or reducing the principal balance that was outstanding at September 30, 1998. The Company's entire principal indebtedness to the Bank of $20.1 million was classified by the Company as currently payable at September 30, 1998. Additionally, the Company was not in compliance with the loan agreement's financial covenants at September 30, 1998. The Company and the Bank are in discussions to address such non-compliance. There is not any assurance that the Company will be successful in its discussions with the Bank to address such non-compliance. On November 12, 1998, Ilyas Chaudhary resigned as the Company's Chairman, Chief Executive Officer, and President in order to facilitate the closings of the pending transactions with Horizontal Ventures, inc. (see "The Comapny - Recent Developments - Transactions Involving Horizontal Ventures, Inc."). In connection with various borrowings from the bank, Mr. Chaudhary has guaranteed payment of approximately $3,000,000 of Company's debt to such bank. Sale of Certain Assets The Company has negotiated, and continues to pursue, the sale of certain producing oil and gas assets and real estate assets, the proceeds of which have been and will continue to be applied to reduce bank indebtedness and provide working capital. The Company sold its interest in over 150 producing wells in Michigan in July 1998 for a contract price of $3.7 million and two producing wells in Alabama in September 1998 for a contract price of $800,000. In December 1998, the Company entered into a letter of intent with Capco Development, Inc. to sell all of the outstanding stock of its wholly-owned subsidiary, Saba Energy of Texas, Inc. ("SETI"), for a contract price of $5 million and a closing scheduled for December 31, 1998, subject to certain conditions and adjustments. At the closing, those properties of SETI that will be part of the sale shall include certain interests located in Michigan, New mexico, Oklahoma, Texas, Utah, and Wyoming and excludes interests located in Louisiana. (see "Management - Certain Relationship and Related Transactions") Transactions Involving Horizontal Ventures, Inc. In October 1998, Horizontal Ventures, Inc. ("HVI") entered into certain transactions that relate to the acquisition of securities of the Company, which have been reported in a Schedule 13D filed by HVI. HVI is a publicly traded corporation engaged primarily in the business of exploiting proven producing reservoirs by utilizing a low cost proprietary horizontal drilling technology to increase production rates. On October 6, 1998, HVI entered into a Preferred Stock Transfer Agreement (the "Preferred Stock Transfer Agreement") with RGC International Investors, LDC ("RGC"), pursuant to which HVI acquired 690 shares of the 8,000 shares of issued and outstanding Series A Preferred Stock of the Company held by RGC in exchange for cash in the amount of $750,000, of which $500,000 was borrowed from International Publishing Holding s.a. ("IPH"), the largest shareholder of HVI. Under the Preferred Stock Transfer Agreement, HVI had the exclusive right until November 5, 1998 to acquire from RGC up to an additional 6,310 shares of Series A Preferred Stock held by RGC in exchange for cash in the amount of approximately $6.9 million, and such exclusive right was extended for an additional thirty days by HVI's payment of $500,000, to RGC. HVI however did not exercise its right to acquire the additional 6,310 shares of Series A Preferred Stock prior to the expiration of the extension period. The 690 shares of Series A Preferred Stock acquired by HVI, along with the accrued but unpaid dividends thereon, is currently convertible into an aggregate of 300,012 shares of the Company's Common Stock based on conversion price negotiated by HVI and the Company. See "Preferred Stock." HVI currently is negotiating with RGC to extend and amend the Preferred Stock Transfer Agreement to enable HVI to acquire the additional 6,310 shares of Series A Preferred Stock held by RGC. On October 8, 1998, HVI entered into a Common Stock Purchase Agreement (the "Common Stock Purchase Agreement") pursuant to which the Company agreed to sell and issue to HVI by December 4, 1998, an aggregate of 2.5 million shares of the Company's Common Stock in exchange for cash in the aggregate amount of $7.5 million. HVI delivered to the Company on November 6, 1998, $1.0 million in exchange for 333,333 shares of the Company's Common Stock as part of an interim closing of the Common Stock Purchase Agreement. On December 3, 1998, the Company and HVI extended the final closing date of the Common Stock Purchase Agreement from December 4, 1998 to January 31, 1999. Pursuant to an Option Agreement dated July 22, 1998, (the "Option Agreement") between HVI and IPH, HVI holds a call option to acquire the 500,000 shares of the Company's Common Stock held by IPH at an exercise price equal to 120% of the cost to IPH of acquiring such shares, which is estimated to be approximately $1.0 million. HVI has the option of paying such exercise price to IPH in the form of cash or shares of HVI common stock. HVI also has 3,080,000 shares of the Company's Common Stock in open market purchases and other negotiated transactions. Upon the execution of the Common Stock Purchase Agreement, Randeep S. Grewal, a director and executive officer of HVI, was appointed to the Company's Board of Directors. Upon the closing of the Common Stock Purchase Agreement, a second director designated by HVI is to be appointed to the Company's Board of Directors. In addition, a letter agreement between HVI and Saba dated October 8, 1998, provided that upon HVI's conversion of the 7,000 shares of Series A Preferred Stock purchased from RGC a third director designated by HVI was to be appointed to the Company's Board of Directors. In connection with the foregoing, the Company has agreed to obtain the resignations of three of its directors, resulting in the three designees of HVI representing a majority of seats on the Company's five member Board of Directors. On December 7, 1998, HVI and the Company disclosed that the Board of Directors of the Company approved HVI's proposal to merge with the Company. A majority of the Company's disinterested Board members voted in favor of the proposed merger. The Company's Board of Directors plans to call a special meeting of the Company's stockholders to approve the merger. Under the proposed merger, the Company's stockholders will receive one share of HVI common stock for each six shares of the Company's common stock outstanding. That exchange ratio is based upon (i) a total of 11,385,726 shares of Saba common stock outstanding (11,052,393 shares outstanding as of December 2, 1998 plus 333,333 shares issued to HVI on December 7, 1998), (ii) a price of $2.02 for the Company's common stock based on a 55 percent premium over the average closing price of the Company's common stock from November 2, 1998 through December 2, 1998, and (iii) the average closing price of HVI's common stock of $12.14 during the same period. Proforma financial statements of HVI and the Comapny as a combined company have been included with this Prospectus. See "Financial Statements." Preferred Stock The Company has outstanding 8,000 shares of Series A Preferred Stock. The Certificate of Designations, Preferences and Rights of the Series A Preferred provides that such shares are convertible into such number of shares of Common Stock as is determined by dividing the per share stated value ($1,000) of the shares of Series A Preferred Stock (as increased by accrued but unpaid dividends) by the average of the closing prices for the Common Stock for any three consecutive trading days during the preceding thirty day period ending one day prior to conversion (but in no event will the Conversion Price be greater than $9.345). The Series A Preferred Stock agreements effectively prohibited the Company from performing the Merger Agreement with Omimex without the consent of the Holders of the Series A Preferred Stock. Concurrently with the execution of the Merger Agreement, the Company and the Holders executed a letter agreement, which was approved by Omimex, pursuant to which the Company redeemed 2,000 shares of then outstanding Series A Preferred Stock in the face amount of $2.0 million at a total cost of $2.15 million, which included a 5% redemption premium of $100,000 and accrued dividends of $51,000 and modified the terms of the conversion rights of the Holders (the "Letter Agreement"). Under the Letter Agreement, the 8,000 shares of Series A Preferred Stock may currently be converted by the Holders and remains subject to redemption by the Company on the basis of (i) 115% of the stated value plus accrued dividends and (ii) issuance of a five-year warrant to purchase 200,000 shares of Common Stock at 105% of the average closing bid price of the Common Stock for the five consecutive trading days ending one trading day prior to redemption. The Certificate of Designations, Preferences, and Rights of the Series A Preferred Stock provides that the Company cannot issue more than 2,153,344 shares of Common Stock underlying the Series A Preferred Stock (19.9% of the total number of shares of the Company's Common Stock outstanding as of December 31, 1997) without stockholder approval or a waiver from the American Stock Exchange ("AMEX") Rule 713. AMEX Rule 713 provides that a company listed on AMEX may not issue 20% or more of the then outstanding shares of the company's common stock without first obtaining stockholder approval. Prior to the issuance of any shares of the Company's Common Stock underlying the Series A Preferred Stock in excess of 2,153,344 shares and the resale of those shares pursuant to this Prospectus, the Company will obtain stockholder approval of the issuance of those shares or a waiver from AMEX Rule 713. Bankruptcy of Sabacol, Inc. On December 15, 1998, the Company disclosed that Sabacol, Inc. a wholly- owned subsidiary of the Comapny ("Sabacol"), filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code in the Central District of California on December 11, 1998. Sabacol's assets, located solely in Colombia, consist of a 50% interest in a 118-mile pipeline and varying interests in heavy oil producing properties. (see "The Company - Recent Developments - Terminated Business Combination") At the time of filing, Sabacol had a net book value of approximately $5.3 million with liabilities of $4.6 million. For the nine months ended September 30, 1998, the average daily production of Sabacol's interest in the Colombian properties was 2300 Bopd and gross revenues were approximately $5.9 million with a negative cash flow. Sabacol had filed the bankruptcy petition to protect its asset base and to provide adequate time to develop a reorganization plan. There is no assurance, however, that a reorganization plan beneficial to Sabacol will be consummated. The filing is not expected to have any material adverse effect on the Company and does not change any terms of the proposed merger with Horizontal Ventures, Inc. American Stock Exchange In August 1998, the American Stock Exchange contacted the Company to inquire about the Company's continued listing eligibility following its report of losses, bank indebtedness, and going concern and to inquire about the independent status of the Company's outside directors. PRINCIPAL PROPERTY AREAS The Company owned interests in approximately 845 wells at September 30, 1998. The majority of these wells are concentrated along the central coast of California and in the Middle Magdalena Basin of Colombia. These regions, which primarily produce a low gravity/high viscosity or "heavy" oil, will be the focus of the Company's near-term development drilling activities. The Company also operates wells and has exploration and development activities in several states outside of California and, through a majority-owned subsidiary, in western Canada. The Company's evaluation of international projects resulted in the acquisition of exploration projects in Indonesia and Great Britain. United States California Approximately 20.3% of the Company's proved reserves at December 31, 1997 (5.9 MMBOE) were located in four onshore fields in California's central coast region (collectively, the "Central Coast Fields"). Daily production from the Central Coast Fields averaged 1,484 BOE for the nine months ended September 30, 1998, representing 23.3 % of the Company's total production. The Company operates all of its wells in the Central Coast Fields. The Company also holds interests in other California areas, which represented 7.2% (2.1 MMBOE) of the Company's proved reserves at December 31, 1997. Daily production from these other interests averaged 658 BOE for the nine months ended September 30, 1998, representing 10.3% of the Company's total production. Further, the Company has interests in several high risk exploratory projects. Louisiana Approximately 11.0% of the Company's proved reserves at December 31, 1997 (3.2 MMBOE) were located in two fields in Louisiana. An interest in one of these fields was first acquired during 1996, the other in 1997, with additional interests in both fields acquired in April of 1998. The Company's share of daily production from the Louisiana fields averaged 644 BOE for the nine months ended September 30, 1998, representing 10.1 % of the Company's total production. Other States In addition to its California and Louisiana properties, the Company owns producing properties in a number of other states, primarily New Mexico, Michigan, Texas and Oklahoma, which collectively represented 9.3% of the Company's proved reserves at December 31, 1997 (2.7 MMBOE). Daily production from these properties averaged 778 BOE for the nine months ended September 30, 1998, representing 12.2 % of the Company's total production. The Company however plans to sell some of the Company's non-core assets in some of those states. See "The Company - Recent Development - Sale of Certain Assets." International Colombia Approximately 43.3% of the Company's proved reserves at December 31, 1997 (12.6 MMBOE) were located in several fields in Colombia's Middle Magdalena Basin. Daily production from these fields averaged 2,302 Bopd for the nine months ended September 30, 1998, representing 36.2% of the Company's total production. The Company also holds a 50% interest in the 118-mile Velasquez- Galan Pipeline, which connects the fields to a 250,000 Bopd government-owned refinery at Barrancabermeja. See "The Company - Recent Developments - Terminated Business Combination." The Company and Omimex, the operator of the fields, have formulated a plan for drilling approximately 200 development wells. During 1997, the Company and the operator participated in the drilling or recompletion of thirteen wells in the Teca and South Nare Fields. All of the wells drilled were productive and the operator is installing steaming equipment. The Company and the operator also reentered a suspended well acquired from Texaco and drilled to an area under the Magdalena River and recompleted the well as productive of approximately 30 Bopd without artificial stimulation. Both the Company and the operator believe that another two wells should be drilled into the area in an effort to establish an additional commercial area. During the nine months ended September 30, 1998, the Company and the operator participated in the drilling and completion of seven wells in the Teca and South Nare Fields. Three additional wells were recompleted during the nine months ended September 30, 1998. Sabacol, the Company's wholly-owned subsidiary and owner of the Company's properties in Colombia, has filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code. See "The Company - Recent Developments - Terminated Business Combination; Bankruptcy of Sabacol, Inc." Canada Approximately 8.9% of the Company's proved reserves at December 31, 1997 (2.6 MMBOE) were located in Canada. Daily production from these properties, which are owned through an approximately 74%-owned subsidiary of the Company, averaged 495 BOE for the nine months ended September 30, 1998, representing 7.8% of the Company's total production. Other International Properties In September 1997, the Company and Pertamina, the Indonesian state-owned oil company, signed a production sharing contract covering 1.7 million unexplored acres on the Island of Java near a number of producing oil and gas fields. This agreement will require the Company to spend approximately $17.0 million over the next three years on this project, in addition to the approximate $1.4 million expended as of December 31, 1997. The Company is seeking a joint venture partner to share the costs of this project; however, the recent economic turmoil in Indonesia may affect the timing and terms of such agreement. In July 1997, the Company entered into an agreement to become the operator and a 75% working interest holder of two exploration licenses which cover a 123,000 acre exploration area in southern Great Britain. On March 31, 1998, the Company assigned a 3.75% carried working interest in the first well to be drilled on this concession as payment of a finder's fee. By agreement dated April 14, 1998, the Company sold one half of its net interest in this concession to Omimex at the Company's cost. A formal assignment has not been conveyed to Omimex and the Company continues to hold Omimex's interest in the prospect trust. The Company has incurred costs of approximately $766,000 as of September 30, 1998, in connection with the concession acquisition and drilling of an exploratory well on the concession. The well did not encounter hydrocarbons and has been abandoned. Results from the initial well did not condemn the entire prospect and data obtained from the test well is being evaluated for further interpretation. The Company has not yet executed the joint operating agreement for the prospect. While holding Omimex's interest in trust, the Company may be liable to Omimex if it were to execute the joint operating agreement that provides for foreclosure upon a working interest owner due to non-payment. SUMMARY FINANCIAL DATA The following table presents summary historical consolidated financial data of the Company as of and for each of the five years in the period ended December 31, 1997 and the nine months ended September 30, 1997 and 1998, which has been derived from the Company's consolidated financial statements. The information in this table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and notes thereto included elsewhere herein. (in thousands, except for per share data) <TABLE> Years Ended Nine Months Ended December 31, September 30, 1993 1994 1995 1996 1997 1997 1998 Statement of Operations Data <S> <C> <C> <C> <C> <C> <C> <C> Total revenues $10,530 $12,954 $17,694 $33,202 $35,996 $26,778 $18,683 Expenses: Production costs (1) 5,857 7,547 10,561 14,604 16,607 12,250 10,140 General and administrative 2,503 1,882 2,005 3,920 5,125 3,468 4,974 Depletion, depreciation and amortization 1,853 2,041 2,827 5,527 7,265 5,011 5,500 Writedown of oil and gas properties (6) - - - - - - 17,852 Interest expense 443 634 1,364 2,402 2,305 1,421 2,519 Net income (loss) (88) 509 547 3,765 2,397 2,548 (23,498) Net earnings (loss) per share - basic (2): (0.01) 0.06 0.07 0.43 0.23 0.24 (2.17) Weighted average common shares outstanding - basic (2): 7,065 7,996 8,327 8,804 10,650 10,596 10,994 Statement of Cash Flow Data Net cash provided by operating activities $503 $3,346 $1,736 $6,914 $14,954 $11,977 $4,683 Net cash used in investing activities (1,439) (3,930) (16,757) (11,856) (36,166) (30,813) (599) Net cash provided by (used in) financing activities 958 860 14,850 5,037 21,991 18,331 (4,397) Other Data EBITDA (3) $2,171 $3,568 $5,188 $14,652 $13,843 $10,780 $2,522 Capital expenditures (4) 2,372 6,573 17,015 12,776 35,270 29,080 9,216 Production (MBOE) 755 980 1,450 2,243 2,508 1,875 1,736 </TABLE> <TABLE> December 31, September 30, 1993 1994 1995 1996 1997 1998 <S> <C> <C> <C> <C> <C> <C> Balance Sheet Data Working capital (deficit) $(860) $(2,422) $2,471 $2,418 $(11,724) $(29,752) Total assets 13,261 18,108 39,751 49,117 77,657 53,921 Current portion of long-term debt 1,440 2,357 505 1,806 13,442 25,173 Long-term debt, net (5) 4,875 5,323 23,543 20,812 19,610 5,347 Redeemable preferred stock - - - - 8,511 7,169 Stockholders' equity 4,407 6,283 7,848 17,715 23,640 30 </TABLE> (1) Production costs include production taxes. (2) As adjusted for a two-for-one stock split in the form of a stock dividend paid in December 1996. (3) EBITDA represents earnings before interest expense, provision (benefit) for taxes on income, depletion, depreciation and amortization, and writedown of oil and gas properties. EBITDA is not required by GAAP and should not be considered as an alternative to net income or any other measure of performance required by GAAP or as an indicator of the Company's operating performance. This information should be read in conjunction with the Consolidated Statements of Cash Flows contained in the Consolidated Financial Statements of the Company and the Notes thereto. (4) Capital expenditures in 1995 include $10.0 million expended in connection with acquisitions of producing properties in Colombia. The acquisitions were principally responsible for the significant increase in results of operations reported by the Company in 1995 and 1996. For additional information, see Note 2 of Notes to Consolidated Financial Statements of the Company. (5) For information on terms and interest, see Note 8 of Notes to Consolidated Financial Statements of the Company. (6) See Note 4 of Notes to Consolidated Financial Statements for more information with respect to the write down of oil and gas properties. SUMMARY OIL AND GAS RESERVE DATA The following table sets forth certain summary information as of December 31, 1995, 1996 and 1997 regarding the Company's interests in estimated proved oil and gas reserves, the Company's estimated future net revenues therefrom (before income taxes), the PV-10 Value thereof and other data concerning the reserves of the Company for those years. Estimates are based upon average year-end prices of $11.30, $17.05 and $13.13 per BOE on December 31, 1995, 1996 and 1997, respectively, at each date holding prices constant throughout the life of the properties in accordance with regulations of the Securities and Exchange Commission (the "Commission"). This information is based upon numerous assumptions and is subject to various uncertainties. See "Risk Factors - Factors Relating to the Oil and Gas Industry and the Environment - Uncertainty of Estimates of Reserves and Future Net Revenues," "Business - Oil and Gas Reserves" and "Supplemental Information About Oil and Gas Producing Activities (Unaudited)" following the Notes to the Consolidated Financial Statements of the Company. This summary oil and gas reserve information is based on the reserve reports of Netherland, Sewell & Associates, Inc. and Sproule Associates Limited, independent petroleum engineers. There can be no assurance that volumes, prices and costs employed by the independent petroleum engineers will prove accurate. Since December 31, 1997, oil and gas prices have generally declined. At such date the price of West Texas Intermediate ("WTI") crude oil as quoted on the New York Mercantile Exchange was $18.30 per Bbl and the comparable price at November 30, 1998 was $11.22. Quotations for the comparable periods for natural gas were $2.45 per Mcf and $1.98 per Mcf, respectively. A decline in prices will result in a reduction in volumes of oil or gas which are ultimately recoverable, since certain remaining reserves will become marginal earlier. <TABLE> December 31, 1995 1996 1997 <S> <C> <C> <C> Estimated Net Proved Reserves: Oil (Mbbls) 12,532 26,679 23,925 Gas (Mmcf) 19,479 23,665 31,296 Total (MBOE) 15,778 30,623 29,141 Estimated future net revenues (before income taxes) (in thousands) $73,525 $253,902 $183,578 PV-10 Value (before income taxes) (in thousands)(1) $48,155 $155,939 $118,629 Reserve Replacement Data: Production replacement ratio (2) 5.9x 7.7x 1.4x All-in finding costs per BOE $2.02 $3.15 $4.49 </TABLE> (1) Present value of estimated future net revenues before income taxes, discounted at 10% per annum. (2) Calculated by dividing (i) reserve additions through acquisitions of reserves, extensions and discoveries and revisions during the year by (ii) production for such year. SUMMARY OPERATING DATA The following table sets forth certain summary operating data with respect to the Company's oil and gas operations for the periods indicated. <TABLE> Year Ended December 31, Nine Months Ended September 30, 1995 1996 1997 1997 1998 <S> <C> <C> <C> <C> <C> Production Data: Oil (Mbbls) 1,227 1,968 2,107 1,581 1,431 Gas (Mmcf) 1,337 1,651 2,408 1,767 1,831 Total (MBOE) 1,450 2,243 2,508 1,875 1,736 Average Sales Price Data (Per Unit): Oil (Bbls) $12.22 $14.45 $13.73 $13.81 $8.80 Gas (Mcf) 1.45 1.88 2.09 1.95 1.73 BOE 11.69 14.05 13.54 13.48 9.08 Selected Data per BOE: Production costs (1) $7.29 $6.51 $6.62 $6.53 $5.84 General and administrative 1.27 1.75 1.93 1.77 2.67 Depletion, depreciation and amortization 1.92 2.43 2.84 2.63 3.05 </TABLE> (1) Production costs include production taxes. CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION Certain statements contained in this Prospectus, such as those concerning the Company's business strategy, governmental regulation, drilling programs, potential acquisitions, future production amounts, values and revenues, capital requirements and other statements regarding matters that are not historical facts are "forward-looking" statements (as such term is defined in Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act")). Statements that the Company or management "believes", "expects", "anticipates", "intends", "plans", or that refer to future events or plans are intended to identify the statements which follow as "forward looking" statements. Because such forward looking statements include risks and uncertainties, actual results may differ materially from those expressed in or implied by such forward looking statements. Factors that could cause actual results to differ materially include, but are not limited to, those discussed herein under "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." In addition, such factors include the price and demand for oil and gas and refined products and the cost and supply of drilling equipment and materials.
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the financial statements and related notes thereto appearing elsewhere in this Prospectus. THE COMPANY Utah Resources International, Inc. ("URI" or the "Company") is a Utah corporation which was organized in 1966 as Utah Industrial, Inc. It was renamed Utah Resources International, Inc., in 1969. In 1981, the Company became a "reporting company" requiring it to file various reports with the Securities and Exchange Commission. The Company's executive offices are located at 297 West Hilton Drive, Suite #4, St. George, Utah 84770, (801) 628-8080. The Company is a real property development corporation. As of January 1, 1998, the Company directly owned approximately 400 acres of undeveloped land in St. George, Utah, approximately 354 acres of which are developable on which it conducts its real property development business, primarily through its wholly-owned subsidiary, Tonaquint, Inc. ("Tonaquint"). The Company also has interests in partnerships that own and are developing other real property in St. George, Utah. The Company also receives revenues from its ownership of overriding royalty interests in producing oil and gas leases in Utah and Wyoming, dating from the Company's historic business of acquiring and selling oil, gas and mineral leases. The Company's undeveloped real property is adjacent to Interstate Highway 15, which is a major traffic route from Salt Lake City, Utah to Las Vegas, Nevada and southern California. The Company's real estate development activities in recent years have concentrated on subdividing and selling improved lots for residential construction, as the financial condition of the Company and the St. George, Utah real estate market have permitted. The Company's lands include premium priced hillside view lots, as well as lower-priced lots. In addition, the Company pursues commercial real estate development of some of its undeveloped real property. THE OFFERING On July 3, 1996, the Company consummated a transaction with Inter-Mountain Capital Corp. ("IMCC"), whereby common stock representing 50.5% of the outstanding stock of the Company was transferred to IMCC for $3.35 per share, payable in accordance with the terms of the Stock Purchase Agreement by and between the Company and IMCC (the "Stock Purchase Agreement"). The transfer of such shares to IMCC was the product of the consummation of a Letter of Intent dated April 5, 1996, as amended (the "Letter of Intent"), the Stock Purchase Agreement, a settlement agreement by and among the Company, R. Dee Erickson, E. Jay Sheen, Lyle D. Hurd, Mark G. Jones, Mark Technologies Corporation, Anne Morgan, Victoria Morgan, IMCC, John Fife and Robinson & Sheen, L.L.C. (the "1996 Settlement Agreement") and a settlement agreement, by and among the Company, John H. Morgan, Jr., Daisy R. Morgan, IMCC, John Fife, Robinson & Sheen, L.L.C., R. Dee Erickson, Lyle D. Hurd, Jr., and E. Jay Sheen (the "Morgan Settlement Agreement") (the Letter of Intent, Stock Purchase Agreement, 1996 Settlement Agreement and Morgan Settlement Agreement together are the "Transaction Agreements"). The Transaction Agreements required, among other things, that the Company cause a reverse stock split to occur on the terms as provided therein and herein. A company with assets of over $10 million becomes a "reporting company" when its shareholders number 500 or more and it complies with applicable securities laws. To thereafter be allowed to become a "non-SEC reporting company" and cease reporting to the Securities and Exchange Commission, the number of shareholders must decline to less than 300 and the corporation must comply with applicable securities laws. The proposed transaction is designed to result in reducing the number of the Company's shareholders to less than 300, so that the Company will no longer be required to be a reporting company. At the Annual Meeting of Shareholders, scheduled for Monday, March 8, 1999 (the "Annual Meeting Date"), shareholders will be asked to consider and vote upon a proposal to amend the Company's Articles of Incorporation to effect a <PAGE> reverse split of the Company's issued and outstanding common stock as of 4:30 p.m. M.S.T., on Tuesday, March 16, 1999 (the "Effective Date") on the basis that each 1,000 shares of common, $.10 par value per share stock then outstanding ("Common Stock") will be converted into one share of common $100.00 par value per share stock (the "New Stock"), with shareholders holding less than 1,000 shares or any increment thereof (after being given an opportunity to purchase additional shares as needed to "round up" to the equivalent of 1,000 shares at a purchase price of $3.35 per share) being paid cash in exchange for their fractional shares at a pre-reverse-split price of $3.35 per share for each share outstanding as of Friday, February 5, 1999 (the "Record Date"). ROUND UP OPTION OFFERING If the reverse stock split is approved, any shareholder of the Company holding fewer than 1,000 shares of Common Stock or any increment thereof, may (i) after providing notice to the Company of his/her/its intent to exercise the Round Up Option, as defined herein, purchase additional shares in order to "round up" to the equivalent of 1,000 shares at a purchase price of $3.35 per share (the "Round Up Option"), or (ii) sell such shares to the Company based upon a pre-reverse-split price of $3.35 per share. Also, as indicated above, a shareholder holding 1,000 shares or more (a "Non-Exercising Shareholder") will have such shares converted into one share of New Stock of the Company for each 1,000 shares of the Company's Common Stock owned, with Non-Exercising Shareholders given the option to (i) purchase additional shares in order to round up to the next increment of 1,000 shares at a purchase price of $3.35 per share, pursuant to the Round Up Option, or (ii) sell such fractional shares to the Company based upon a pre-reverse-split price of $3.35 per share. PAYMENT TERMS TO SHAREHOLDERS WISHING TO EXERCISE THE ROUND UP OPTION In order for a fractional shareholder to round up (and forego the Cash Consideration) a shareholder must: (a) provide notice to the Company of its intent to exercise its option to "round up" no later than 10 days prior to the Effective Date, and (b) within 30 days after the Effective Date, each fractional shareholder must elect to round up by paying $3.35 in full and in cash for each 1/1000th share needed to round up the fractional shareholder's holdings to equal an aggregate of one whole share of New Stock. The amount of cash required to "round up" will be equal to the product of 1,000 minus the number of shares initially owned or that number of shares in excess of a multiple of 1,000 shares multiplied by $3.35. (For example, if a shareholder currently owns 500, 1,500 or 2,500 shares, the cost to "round up" would be $1,675 (500 x $3.35 = $1,675.)) A fractional shareholder who does not provide notice to the Company of its intent to exercise the "round up" option at least 10 days prior to the Effective Date shall only be entitled to receive the Cash Consideration and the fractional shareholder will be eliminated as a shareholder of the Company. A fractional shareholder who properly gave notice to the Company of its intent to exercise the "round up" option but who has not paid the full cash consideration within 30 days after the Effective Date, will be eliminated as a shareholder of the Company and shall only be entitled to receive the Cash Consideration. RETURNED SHARES OPTION OFFERING As required by the terms of the Transaction Agreements, subsequent to the proposed reverse split, and subject to applicable state and federal securities and state corporate law, any Common Stock redeemed through the reverse split (the "Returned Shares") may be acquired by the remaining shareholders of the Company, other than IMCC, as of a record date five days prior to the effectuation of the reverse split (the "Returned Shares Record Date"), in increments of 1,000 shares (the "Returned Shares Option"), at a purchase price equal to the pre-reverse-split price of $3.35 per share (the "Returned Shares Purchase Price"). Only those shares for which the Company has received, within 80 days following the Effective Date, a fully and properly executed letter of transmittal accompanied by the required documents will qualify as Returned Shares for purposes of this Returned Shares Option. Such Common Stock shall be purchased in blocks of 1,000 shares of Common Stock such that each purchase of a 1,000 share block of Common Stock shall be converted into 1 share of New Stock. In the event the Returned Shares Option offering is over-subscribed, then each of the remaining exercising shareholders may purchase the Returned Shares on a pro-rata basis (as determined by the number of shares held by each of the exercising shareholders as of the Returned Shares Record Date less those shares held by IMCC) in blocks of not less than 1,000 shares. In the event of such over-subscription, each qualified shareholder could elect to purchase that percentage of Returned Shares equal to x ------- (y -- z) where "x" equals the number of New Stock shares owned by the qualified shareholder wishing to purchase the Returned Shares, "y" equals the total number of issued shares of New Stock, and "z" equals the number of New Stock shares owned by IMCC. PAYMENT TERMS TO SHAREHOLDERS WISHING TO EXERCISE THE RETURNED SHARES OPTION OFFERING Twenty-five percent (25%) of the Returned Shares Purchase Price shall be payable in cash upon exercise, with the remaining balance of $2.51 per share being evidenced by a promissory note, payable in three years (the "Returned Shares Note"). Subject to applicable Internal Revenue Service rules, the Returned Shares Note shall bear simple interest at the short term applicable federal rate as stated in June 1996, which interest shall be payable annually in arrears. Payment of the Returned Shares Note will be secured by a pledge of the Returned Shares purchased, as converted into share(s) of New Stock, pursuant to a stock pledge agreement to be provided by the Company. Exercising shareholders purchasing Returned Shares shall be required to apply any dividends, distributions or other payments made to the shareholder of the Company on the Returned 2 <PAGE> Shares/New Stock to payment of the unpaid balance of the Returned Shares Note. Returned Shares purchased by an exercising shareholder shall be fully votable in accordance with the terms of the Company's organizational documents and other agreements binding the Company for so long as the exercising shareholder is not in default under the pledge agreement or the Returned Shares Note. <TABLE> <S> <C> COMMON STOCK OFFERED PURSUANT TO THE ROUND UP OPTION........ 429,192 Shares Assuming all of the fractional shareholders (those holding fewer than 1,000 shares of Common Stock or any increment thereof) elect to round-up The number of shares required to complete the Round Up Option Offering was detemined as of November 19, 1997 and may vary due to transfers made by shareholders. This figure does not reflect fractional shares which may be held by brokerage firms or other third party nominees. COMMON STOCK OFFERED PURSUANT TO THE RETURNED SHARES 103,808 Shares OPTION.................................................... Assuming no fractional shareholders elect to participate in the Round Up Option and all of the remaining shareholders elect to participate in the Returned Shares Option The number of shares available for the Returned Shares Option Offering may vary due to transfers made by shareholders. This figure does not reflect fractional shares which may be held by brokerage firms or other third party nominees. COMMON STOCK TO BE OUTSTANDING AFTER THE OFFERINGS Assuming the Round Up Option is fully subscribed............ 2,952,000 Shares Assuming the Returned Shares Option is fully subscribed..... 2,522,808 Shares COMMON STOCK TO BE OUTSTANDING AFTER THE CONVERSION TO NEW STOCK Assuming the Round Up Option is fully subscribed............ 2,952 Shares Assuming the Returned Shares Option is fully subscribed..... 2,522 Shares </TABLE>
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000355787_price_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000355787_price_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION (INCLUDING THE FINANCIAL STATEMENTS AND THE NOTES THERETO) INCLUDED ELSEWHERE IN THIS PROSPECTUS. EACH PROSPECTIVE INVESTOR IS URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY. UNLESS OTHERWISE INDICATED, ALL REFERENCES HEREIN TO "HOLDINGS" REFER TO PRICE COMMUNICATIONS CELLULAR HOLDINGS, INC. AND ALL REFERENCES HEREIN TO THE "COMPANY" REFER TO HOLDINGS AND ITS SUBSIDIARIES AND THEIR RESPECTIVE PREDECESSORS. ALL REFERENCES HEREIN TO "PCC" REFER TO PRICE COMMUNICATIONS CORPORATION AND, UNLESS THE CONTEXT REQUIRES OTHERWISE, ITS SUBSIDIARIES. REFERENCES HEREIN TO THE "ACQUISITION" REFER TO THE ACQUISITION BY PRICE COMMUNICATIONS WIRELESS, INC. ("PCW"), A WHOLLY OWNED DIRECT SUBSIDIARY OF HOLDINGS, OF PALMER WIRELESS, INC. ("PALMER") AND THE RELATED SALE OF THE FORT MYERS AND GEORGIA-1 SYSTEMS OF PALMER, AS DESCRIBED BELOW UNDER "THE PALMER ACQUISITION." AS USED IN THIS PROSPECTUS, THE TERMS "PCW" AND "PALMER" INCLUDE THEIR RESPECTIVE SUBSIDIARIES AND PREDECESSORS. EXCEPT FOR HISTORICAL FINANCIAL INFORMATION AND UNLESS OTHERWISE INDICATED, ALL INFORMATION PRESENTED BELOW RELATING TO THE COMPANY, PCC AND PCW INCLUDING POPS AND NET POPS (EACH AS DEFINED) AND THE SYSTEMS, GIVES EFFECT TO THE CONSUMMATION OF THE ACQUISITION (INCLUDING THE SALE OF THE FORT MYERS AND GEORGIA-1 SYSTEMS). ALL INFORMATION RELATING TO PCC SHARES HAS BEEN ADJUSTED TO GIVE EFFECT TO STOCK SPLITS. THE COMPANY The Company is currently engaged in the construction, development, management and operation of cellular telephone systems in the southeastern United States. At March 31, 1998, the Company provided cellular telephone service to 326,721 subscribers in Georgia, Alabama, Florida and South Carolina in a total of 16 licensed service areas composed of eight Metropolitan Statistical Areas ("MSAs") and eight Rural Service Areas ("RSAs"), with an aggregate estimated population of 3.3 million. The Company sells its cellular telephone service as well as a full line of cellular products and accessories, including pagers, principally through its network of retail stores. The Company markets all of its products and services under the nationally recognized service mark CELLULARONE-Registered Trademark-. OPERATIONS The Company has developed its business through the acquisition and integration of cellular telephone systems, clustering multiple systems in order to provide broad areas of uninterrupted service and achieve certain economies of scale, including centralized marketing and administrative functions as well as multi-system capital expenditures. The Company devotes considerable attention to engineering, maintenance and improvement of its cellular telephone systems in an effort to deliver high-quality service to its subscribers and to implement new technologies as soon as economically practicable. Through its participation in the North American Cellular Network ("NACN"), the Company is able to offer ten-digit dialing access to its subscribers when they travel outside the Company's service areas, providing them with convenient roaming access throughout large areas of the United States, Canada, Mexico and Puerto Rico served by other NACN participants. By marketing its products and services under the CELLULARONE-Registered Trademark- name, the Company also enjoys the benefits of association with a nationally recognized service mark. The Company's cellular telephone systems serve contiguous licensed service areas in Georgia, Alabama and South Carolina. The Company also has a cellular service area in Panama City, Florida. The following table sets forth as of March 31, 1998, with respect to each service area in which the Company owns a cellular telephone system, the estimated population, the Company's beneficial ownership percentage, the Net Pops (as defined) and the date of initial operation of such system by Palmer or a predecessor operator. <TABLE> <CAPTION> ESTIMATED OWNERSHIP DATE SYSTEM SERVICE AREA(1) POPULATION(2) PERCENTAGE NET POPS OPERATIONAL - ------------------------------------------------------------ ------------ ----------- ---------- ------------- <S> <C> <C> <C> <C> Albany, GA.................................................. 118,527 86.5% 102,526 4/88 Augusta, GA................................................. 439,116 100.0 439,116 4/87 Columbus, GA................................................ 254,150 85.2 216,518 11/88 Macon, GA................................................... 313,686 99.2 311,234 12/88 Savannah, GA................................................ 283,978 98.5 279,718 3/88 Georgia-6 RSA............................................... 199,516 96.3 192,134 4/93 Georgia-7 RSA............................................... 134,376 100.0 134,376 10/91 Georgia-8 RSA............................................... 157,451 100.0 157,451 10/91 Georgia-9 RSA............................................... 119,410 100.0 119,410 9/92 Georgia-10 RSA.............................................. 149,699 100.0 149,699 10/91 Georgia-12 RSA.............................................. 211,799 100.0 211,799 10/91 Georgia-13 RSA.............................................. 147,392 86.5 127,494 10/90 Dothan, AL.................................................. 136,160 94.6 128,807 2/89 Montgomery, AL.............................................. 318,371 92.8 295,430 8/88 Alabama-8, RSA.............................................. 171,993 100.0 171,993 7/93 <CAPTION> ------------ ---------- <S> <C> <C> <C> <C> Subtotal.................................................... 3,155,624 3,037,705 <CAPTION> ------------ ---------- <S> <C> <C> <C> <C> Panama City, FL............................................. 146,018 78.4 114,493 9/88 <CAPTION> ------------ ---------- <S> <C> <C> <C> <C> Total....................................................... 3,301,642 3,152,198 <CAPTION> ------------ ---------- ------------ ---------- </TABLE> - ------------------------ (1) Does not include the Alabama-5 RSA and South Carolina-7 RSA where the Company has interim operating authority ("IOA"). IOA is granted for an area to a license holder in an adjacent area when there are no license holders in such area. The Company has no subscribers in the South Carolina-7 RSA, but instead provides roaming access to its own subscribers and others when they travel in this service area, utilizing its existing cell sites. Construction permits were granted to third parties ("Permittees") for the Alabama-5 RSA and South Carolina-7 RSA. The Permittees are required to complete construction of their respective RSA within 18 months. After completing construction, a Permittee may give the Company thirty days prior written notice, at which point the Company would be required to sell all of its subscribers of its other systems who reside within the boundaries of the markets to the Permittee at cost. The Company, along with others, is currently in negotiations to purchase the Alabama-5 RSA and the South Carolina-7 RSA. No assurance can be given, however, that the Company will be successful in consummating such purchase. (2) Based on population estimates for 1997 from the spring 1998 edition of The Wireless Communication Industry published by Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") (the "DLJ Pop Book"). COMPANY STRATEGY The Company's four strategic objectives are to: (1) expand its revenue base by increasing penetration in existing service areas and encouraging greater usage among its existing customers; (2) provide high-quality customer service to create and maintain customer loyalty; (3) enhance performance by aggressively pursuing opportunities to increase operating efficiencies; and (4) expand its regional cellular communications presence by selectively acquiring additional interests in cellular telephone systems (including minority interests). Specifically, the Company strives to achieve these objectives through implementation of the following: AGGRESSIVE, DIRECT MARKETING. The Company employs a two-tier direct sales force. A retail sales force handles walk-in traffic at the Company's 37 retail outlets, and a targeted sales staff solicits certain industry and government subscribers. The Company's management believes that its internal sales force is far more likely than independent agents to successfully select and screen new subscribers and select pricing plans that realistically match subscriber means and needs and to personally keep in contact with new customers. FLEXIBLE, VALUE-ORIENTED PRICING PLANS. The Company provides a range of pricing plans, each of which includes a monthly access fee and, in most cases, a bundle of "free" minutes. Additional home rate minutes are charged at rates ranging from $0.05 per minute to $1.25 per minute depending on the customer's usage plan and the time of day. In addition, the Company offers wide area home rate roaming in the Company's systems and low flat rate roaming in a six state region in the southeastern United States. The Company believes that its bundled minute offerings will encourage greater customer usage. By bundling the number of minutes a customer can use for one flat rate, subscribers perceive greater value in their cellular service and become less usage sensitive, i.e., they can increase their cellular phone usage without seeing large corresponding increases in their cellular bill. CONTINUALLY ADOPTING STATE OF THE ART SYSTEM DESIGN. The Company's network allows the delivery of full personal communication services ("PCS") functionality to its digital cellular customers, including primarily caller ID, short message paging and extended battery life. The Company's network provides for "seamless handoff" between digital cellular and PCS operators that, like the Company, employ Time Division Multiple Access ("TDMA") technology, one of three industry standards and the one employed by AT&T, SBC and others; i.e, the Company's customers may leave the Company's service area and enter an area serviced by a PCS provider using TDMA technology without noticing the difference, and vice versa. The Company believes this innovation will allow the Company to be the roaming partner of choice for such PCS operators. The Company has a favorable agreement with AT&T with respect to PCS roaming and expects that other PCS operators may choose, like AT&T, to concentrate PCS buildout in urban centers rather than the more rural areas in which the Company concentrates. FOCUSING ON CUSTOMER SERVICE. Customer service is an essential element of the Company's marketing and operating philosophy. The Company is committed to attracting new subscribers and retaining existing subscribers by providing consistently high-quality customer service. In each of its cellular service areas, the Company maintains a local staff, including a market manager, customer service representatives, technical and engineering staff, sales representatives and installation and repair facilities. Each cellular service area handles its own customer-related functions such as credit evaluations, customer evaluations, account adjustments and rate plan changes. In addition, subscribers are able to report cellular telephone service or account problems 24 hours a day. To ensure high-quality service, Cellular One Group authorizes a third-party marketing research firm to perform customer satisfaction surveys of each of its licensees. Licensees must achieve a minimum satisfaction level in order to continue using the CELLULARONE-Registered Trademark- service mark. The Company has repeatedly ranked number one in certain customer satisfaction categories among all Cellular One operators (#1 MSA in its category in 1997, 1996, 1995, 1993, and 1992; #1 RSA in its category in 1995). AGGRESSIVE COST CONTROL EFFORTS. The Company believes that its monthly operating costs per subscriber rank among the lowest in the industry. The Company's management attributes this competitive advantage to a variety of factors, including the efficiencies associated with its direct sales force, extensive use of in-house technical and engineering staff, and maintenance of aggressive fraud control procedures, as well as general efforts to reduce corporate general and administrative expenses. The Company has also realized substantial savings on its interconnection charges from landline carriers by using its own microwave and fiber optic network to connect cellular switching equipment to cell sites without the use of landline carriers. The Company was incorporated in the State of Delaware in 1997. The address of the Company is 45 Rockefeller Plaza, New York, New York 10020. The Company's phone number is (212) 757-5600. PRICE COMMUNICATIONS CORPORATION PCC has historically been a nationwide communications company owning and then disposing of a number of television, radio, newspaper, cellular telephone and other communications and related properties. PCC's business strategy is to acquire communications properties at prices PCC considers attractive, finance such properties on terms satisfactory to PCC, manage such properties in accordance with its operating strategy and dispose of them if and when PCC determines such dispositions to be in its best interests. Prior to 1997 PCC owned a number of television, radio, newspaper and other media and related properties which were disposed of pursuant to PCC's long-standing policy of buying and selling media properties at times deemed advantageous by PCC's Board of Directors. On October 6, 1997, PCW acquired Palmer in the Acquisition, as described below. PCC is currently engaged through PCW in the construction, development, management and operation of cellular telephone systems in the southeastern United States. PCC was organized in New York in 1979 and began active operations in 1981. Its principal executive offices are located at 45 Rockefeller Plaza, New York, New York 10020, and its telephone number is (212) 757-5600. THE PALMER ACQUISITION Prior to the Merger described below, Holdings had no assets, liabilities or operations other than the proceeds from the issuance of the 13 1/2% Holdings Notes (as such term is defined below) and liabilities with respect thereto. On May 23, 1997, PCC, PCW and Palmer entered into an Agreement and Plan of Merger (the "Merger Agreement"). The Merger Agreement provided, among other things, for the merger of PCW with and into Palmer with Palmer as the surviving corporation (the "Merger"). On October 6, 1997, the Merger was consummated and Palmer changed its name to "Price Communications Wireless, Inc." Pursuant to the Merger Agreement, PCC acquired each issued and outstanding share of common stock of Palmer for a purchase price of $17.50 per share in cash and purchased outstanding options and rights under employee and director stock purchase plans for an aggregate price of $486.4 million. In addition, as a result of the Merger, PCW assumed all outstanding indebtedness of Palmer of approximately $378.0 million ("Palmer Existing Indebtedness"), making the aggregate purchase price for Palmer (including transaction fees and expenses) approximately $880.0 million. PCW refinanced all of the Palmer Existing Indebtedness concurrently with the consummation of the Merger. PCW entered into an agreement (the "Fort Myers Sale Agreement") to sell Palmer's Fort Myers, Florida MSA covering approximately 382,000 Pops for $168.0 million (the "Fort Myers Sale"). On October 6, 1997, the Fort Myers Sale was consummated, and generated proceeds to the Company of approximately $166.0 million. The proceeds of the Fort Myers Sale were used to fund a portion of the acquisition of Palmer. On October 21, 1997, PCC and PCW entered into an Asset Purchase Agreement with MJ Cellular Company, L.L.C. (the "Georgia Sale Agreement") which provided for the sale by PCW, for approximately $25.0 million, of substantially all of the assets of the non-wireline cellular telephone system serving the Georgia-l Whitfield RSA ("Georgia-1"), including the FCC licenses to operate Georgia-1 (the "Georgia-1 Sale"). The sale of the assets of Georgia-1 was consummated on December 30, 1997 and generated proceeds to the Company of approximately $24.2 million. A portion of the proceeds from the Georgia Sale were used to retire a portion of the debt used to fund the acquisition of Palmer. The Merger, the Fort Myers Sale and the Georgia-1 Sale are collectively referred to as the "Acquisition." In order to fund the Acquisition and pay related fees and expenses, PCW issued $175.0 million aggregate principal amount of 11 3/4% Senior Subordinated Notes due 2007 (the "11 3/4% PCW Notes") and entered into a syndicated senior loan facility providing for term loan borrowings in the aggregate principal amount of $325.0 million and revolving loan borrowings of $200.0 million (the "Credit Facility"). On October 6, 1997, PCW borrowed all term loans available thereunder and approximately $120.0 million of revolving loans. The Credit Facility was retired on June 16, 1998 with the net proceeds from the PCW Offering (as defined below). The Acquisition was also funded in part through a $44.0 million equity contribution from PCC (the "PCC Equity Contribution") which was in the form of cash and common stock of Palmer. Approximately $46.5 million of the purchase price for the Acquisition was raised out of the proceeds from the issuance and sale for $80.0 million (the "Holdings Offering") by Holdings of units consisting of $153.4 million principal amount at maturity of 13 1/2% Senior Secured Discount Notes due 2007 of Holdings (the "13 1/2% Holdings Notes") and warrants (the "Warrants") to purchase shares of PCC common stock, par value $.01 per share (the "PCC Shares"). The Company has the right to redeem all or part of the 13 1/2% Holdings Notes on or after August 1, 1998 at a redemption price equal to 120% of the accreted value thereof, including accrued and unpaid interest, if the closing price of the PCC Shares equals or exceeds certain specified prices for the ten consecutive trading days prior to the redemption date ($7.68 per share during the period from August 1, 1998 to July 31, 1999). The Notes are subject to a special mandatory redemption on August , 1998 at a cash price equal to 101% of the principal amount thereof together with accrued and unpaid interest to the date of redemption if all of the 13 1/2% Holdings Notes have not been redeemed prior thereto. See "Use of Proceeds." RECENT DEVELOPMENTS On June 16, 1998, PCW issued (the "PCW Offering") $525.0 million aggregate principal amount of 9 1/8% Senior Secured Notes due 2006 (the "PCW Secured Notes," and, together with the 11 3/4% PCW Notes, the "PCW Notes"). See "Description of the PCW Secured Notes." The net proceeds from the PCW Offering were used to retire the Credit Facility. THE OFFERING The following summary description of the Notes is qualified in its entirety by the more detailed information set forth under the caption "Description of Notes" contained elsewhere in this Prospectus. <TABLE> <S> <C> Issuer....................................... Price Communications Cellular Holdings, Inc. Notes Offered................................ $200,000,000 aggregate principal amount of Senior Exchangeable Payable-in-Kind Notes due 2008 (the "Notes"). Use of Proceeds.............................. The net proceeds from the Offering are estimated to be approximately $194.5 million, after deducting estimated fees and expenses. The Company intends to use $109.2 million of the net proceeds to redeem the 13 1/2% Holdings Notes and the remaining $85.3 million for general corporate purposes, including acquisitions. See "Use of Proceeds." Maturity Date................................ August 15, 2008. Interest; PIK................................ Interest is payable semi-annually in arrears on each February 15 and August 15 (the "Interest Payment Dates"), commencing February 15, 1999. The Notes will initially bear interest at a rate of % per annum. Such interest rate will be permanently reduced by 0.50% once cash interest begins to accrue on the Notes. Cash interest will begin to accrue on the Notes on February 15, 2003; PROVIDED that at any time prior to February 15, 2003, the Company may make an election on any interest payment date to commence the accrual of cash interest from and after such interest payment date, in which case, cash interest will be payable on each interest payment date thereafter. Interest payable on any interest payment date prior to the earlier of February 15, 2003 and the Company's election to commence the accrual of cash interest shall be payable through the issuance of additional Notes (valued at 100% of the principal amount thereof). There can be no assurances that the Company will not make an election to pay cash interest and thereby permanently reduce the interest rate shortly after consummation of this Offering. Special Mandatory Redemption................. The Notes are subject to a special mandatory redemption on August , 1998 at a cash price equal to 101% of the principal amount thereof together with accrued and unpaid interest to the date of redemption if all of the 13 1/2% Holdings Notes have not been redeemed prior thereto. See "Description of Notes--Special Mandatory Redemption." Mandatory Exchange........................... In the event the daily high price of PCC Shares equals or exceeds 115% of the Exchange Price for 10 out of 15 consecutive Trading Days, each outstanding Note will be mandatorily exchanged on the fifth Trading Day immediately succeeding such </TABLE> <TABLE> <S> <C> 10th Trading Day (unless the Company shall have elected on or prior to the second Trading Day immediately succeeding such 10th Trading Day to permanently terminate the mandatory exchange provisions of the Notes) into PCC Shares (subject to adjustment for certain events) per $1,000 principal amount of Notes (initially equivalent to a price of $ per share (the "Exchange Price")). Sinking Fund................................. None. Optional Redemption.......................... The Notes will be redeemable in whole or in part at the option of the Company, at any time on or after August 15, 2003, at the redemption prices set forth herein, plus accrued and unpaid interest, if any, to the date of redemption. See "Description of Notes -- Optional Redemption." Ranking...................................... The Notes will be general obligations of Holdings and rank PARI PASSU in right of payment to all other existing and future senior unsecured Indebtedness of Holdings. The Notes will be effectively subordinated to all liabilities of Holdings' subsidiaries. As of March 31, 1998, on a PRO FORMA basis after giving effect to the PCW Offering and the issuance and sale of the Notes and the application of the estimated net proceeds therefrom, Holdings, on a consolidated basis, would have had approximately $900.0 million of Indebtedness. At March 31, 1998, on a PRO FORMA basis as described above, Holdings' subsidiaries would have had outstanding $750.0 million of Indebtedness and $362.7 million of deferred taxes and other liabilities. Change of Control............................ Upon the occurrence of a Change of Control (as defined below), each Holder of Notes will have the right, subject to certain limitations, to require the Company to repurchase such holder's Notes at 101% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the repurchase date. Certain Covenants............................ The Indenture (as defined below) imposes certain limitations on the ability of the Company and its subsidiaries to, among other things, incur Indebtedness (as defined), make Restricted Payments (as defined), effect certain Asset Sales (as defined), enter into certain transactions with Related Persons (as defined), merge or consolidate with any other person or transfer all or substantially all of their properties and assets. See "Description of Notes--Certain Covenants."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000703904_southern_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000703904_southern_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus does not give effect to the exercise of the Underwriter's over-allotment option. Prospective investors should carefully consider the information set forth under the heading "Risk Factors." Throughout this Prospectus, unless the context clearly requires otherwise, references to "BancShares" should be deemed references to the combined activities of Southern BancShares (N.C.), Inc., a non-operating holding company, and its principal operating subsidiary, Southern Bank and Trust Company. As used herein, (i) the "Junior Subordinated Indenture" means the Junior Subordinated Indenture, to be dated as of , 1998, as amended and supplemented from time to time, between BancShares and Bankers Trust Company ("Bankers Trust"), as trustee (the "Debenture Trustee"), relating to the Junior Subordinated Debentures, (ii) the "Trust Agreement" means the Amended and Restated Trust Agreement relating to the Issuer Trust among BancShares, as Depositor, Bankers Trust, as Property Trustee (the "Property Trustee"), Bankers Trust (Delaware), as Delaware Trustee (the "Delaware Trustee") (collectively, the "Issuer Trustees"), the Administrators (as defined herein) named therein, and the holders, from time to time, of undivided beneficial interests in the assets of the Issuer Trust, and (iii) the "Guarantee" means the Guarantee Agreement relating to the Capital Securities between BancShares and Bankers Trust, as Guarantee Trustee (the "Guarantee Trustee"). Southern BancShares (N.C.), Inc. General BancShares is a registered bank holding company, incorporated under the laws of Delaware, and headquartered in Mount Olive, North Carolina. It was organized during 1986 as the successor to, and to effect a change in the state of incorporation of, the original bank holding company of BancShares' wholly-owned subsidiary, Southern Bank and Trust Company (the "Bank"). BancShares operates through the Bank which provides a variety of retail and commercial banking products and services to individuals and small- to medium-sized businesses located in the communities it serves. At March 31, 1998, BancShares had total consolidated assets of approximately $593.9 million, total consolidated deposits of approximately $516.0 million, and total consolidated shareholders' equity of approximately $57.0 million. The Bank is a North Carolina-chartered bank that currently maintains 42 banking offices in 38 eastern North Carolina communities. BancShares is focused on community-oriented banking via (i) localized lending, (ii) core deposit funding, (iii) conservative balance sheet management, and (iv) stable growth. BancShares' franchise includes many smaller communities where competition is limited due to the exit of larger institutions or to the limited products of smaller institutions. By outsourcing its core data processing requirements, BancShares can offer a complete array of financial services while maintaining its community banking orientation. BancShares' focus on non-metropolitan markets and its emphasis on customer service provide it with a stable source of core funding. At March 31, 1998, transaction accounts and non-interest bearing accounts equaled 25.23% and 12.41%, respectively, of total deposits. BancShares' return on average assets and return on average equity were 1.17% and 14.47%, respectively, for the year ended December 31, 1997, and an annualized 1.72% and 17.95%, respectively, for the three months ended March 31, 1998. Members of the Holding family, including Frank B. Holding, have been actively involved in the management of BancShares, and, currently, various members of the family control an aggregate of 51.55% of BancShares' common stock. See "Beneficial Ownership of Securities" and "Certain Relationships and Related Transactions." As a result, BancShares has been managed from a long-term perspective with primary emphasis being placed on balance sheet liquidity, loan quality, and earnings stability. At March 31, 1998, BancShares' loan-to-deposit ratio was 68.65%, over 65.23% of its $184.6 million investment portfolio was invested in U.S. government obligations with an average maturity of 15 months, and approximately 38.39% of the investment portfolio was classified as held-to-maturity. Consistent with its management philosophy, BancShares has emphasized a low-risk loan portfolio derived from its local markets. At March 31, 1998, BancShares' non-performing assets were $1.2 million, or 0.35% of gross loans and other real estate. Net charge-offs for 1997 were 0.07% of average loans and, for the first quarter of 1998, were an annualized 0.02% of average loans. The allowance for loan losses, at March 31, 1998, was 1.70% of gross loans and 504.27% of non-performing loans. BancShares' principal executive offices are located at 121 East Main Street, Mount Olive, North Carolina 28365, and its telephone number is (919) 658-7000. For additional information regarding BancShares and its financial condition and results of operations, see "Available Information," "Risks Factors -- Risk Factors Relating to BancShares," "Southern BancShares (N.C.), Inc.," "Capitalization," "Selected Consolidated Financial Data," "Business," "Supervision and Regulation," "Beneficial Ownership of Securities," "Directors and Executive Officers," "Executive Compensation," "Certain Relationships and Related Transactions," and "Southern BancShares (N.C.), Inc. and Subsidiary Index to Consolidated Financial Statements." Recent Acquisition Effective May 15, 1998, the Bank acquired Enfield Savings Bank, Inc. ("ESB"), a state-chartered savings bank headquartered in Enfield, North Carolina. In connection with the transaction, the Bank assumed aggregate deposit liabilities of approximately $15.6 million and purchased approximately $16.4 million in loans associated with one of ESB's offices which became a branch office of the Bank. The deposits and loans related to ESB's second office were transferred and assigned to an affiliated financial institution in a purchase and assumption transaction. See "Certain Relationships and Related Transactions." Southern Capital Trust I The Issuer Trust is a statutory business trust created under Delaware law on April 29, 1998 and which will be governed by the Trust Agreement. The Issuer Trust exists for the exclusive purposes of (i) issuing and selling the Trust Securities, (ii) using the proceeds from the sale of the Trust Securities to acquire the Junior Subordinated Debentures, and (iii) engaging in only those other activities necessary, convenient or incidental thereto (such as registering the transfer of the Trust Securities). Accordingly, the Junior Subordinated Debentures will be the sole assets of the Issuer Trust, and payments under the Junior Subordinated Debentures will be the sole source of revenue of the Issuer Trust. Upon issuance of the Capital Securities, the purchasers thereof will own all of the Capital Securities of the Issuer Trust. Upon issuance of the Common Securities, BancShares will own all of the Common Securities of the Issuer Trust which will represent an aggregate Liquidation Amount equal to at least 3% of the Issuer Trust's total capital. See "Southern Capital Trust I." The Offering Securities Offered.............. $20,000,000 aggregate Liquidation Amount of % Capital Securities (Liquidation Amount $10.00 per Capital Security). Offering Price.................. $10.00 per Capital Security plus accumulated Distributions, if any, from the date of original issuance. Distribution Dates.............. March 31, June 30, September 30 and December 31 of each year, commencing , 1998. Extension Periods............... So long as no Debenture Event of Default has occurred and is continuing, Distributions on Capital Securities may be deferred for the duration of any Extension Period selected by BancShares with respect to the payment of interest on the Junior Subordinated Debentures. No Extension Period may exceed 20 consecutive quarterly periods or extend beyond the Stated Maturity. See "Description of the Capital Securities -- Distributions," "Description of the Junior Subordinated Debentures -- Option to Extend Interest Payment Period" and "Certain Federal Income Tax Consequences -- Interest Income and Original Issue Discount." Ranking......................... The Capital Securities will rank pari passu, and payments thereon will be made pro rata, with the Common Securities except as described under "Description of the Capital Securities -- Subordination of Common Securities." The Junior Subordinated Debentures will be unsecured and subordinate and junior in right of payment to the extent and in the manner set forth in the Junior Subordinated Indenture to all Senior Indebtedness. See "Description of the Junior Subordinated Debentures." The Guarantee will constitute an unsecured obligation of BancShares and will rank subordinate and junior in right of payment to the extent and in the manner set forth in the Guarantee to all Senior Indebtedness. See "Description of the Guarantee." In addition, because BancShares is a holding company, the Junior Subordinated Debentures and the Guarantee will be effectively subordinated to all existing and future liabilities of BancShares' subsidiaries, including the Bank's deposit liabilities. See "Description of the Junior Subordinated Debentures -- Subordination." Redemption...................... The Trust Securities are subject to mandatory redemption (i) in whole, but not in part, at the Stated Maturity upon repayment of the Junior Subordinated Debentures, (ii) in whole, but not in part, contemporaneously with the optional redemption at any time by BancShares of the Junior Subordinated Debentures at any time within 90 days following the occurrence and during the continuation of a Tax Event, Investment Company Event or Capital Treatment Event, in each case subject to possible regulatory approval, and (iii) in whole or in part at any time on or after June 30, 2003, contemporaneously with the optional redemption by BancShares of the Junior Subordinated Debentures in whole or in part, in each case at the applicable redemption price. See "Description of the Capital Securities -- Redemption" and "Description of the Junior Subordinated Debentures -- Redemption." Ratings......................... The Capital Securities will not be rated by any rating service, nor is any other security issued by BancShares so rated. ERISA Considerations............ Prospective investors must carefully consider the restrictions on purchase set forth under "ERISA Considerations." Absence of Market for the Capital Securities............... The Capital Securities will be a new issue of securities for which there currently is no market. Although BancShares intends to apply to have the Capital Securities approved for quotation on the American Stock Exchange, Inc. ("AMEX"), there can be no assurance that such application will be approved, that an active trading market in the Capital Securities will develop or, if one does develop, that it will be maintained. Accordingly, there can be no assurance as to the development or liquidity of any market for the Capital Securities. See "Underwriting." American Stock Exchange, Inc.... BancShares intends to apply to have the Capital Securities approved for quotation on AMEX. See "Underwriting." For additional information regarding the Capital Securities, see "Southern Capital Trust I," "Accounting Treatment," "Use of Proceeds," "Description of the Capital Securities," "Description of the Junior Subordinated Debentures," "Description of the Guarantee," "Relationship Among the Capital Securities, the Junior Subordinated Debentures and the Guarantee," "Certain Federal Income Tax Consequences," and "ERISA Considerations." Use of Proceeds All net proceeds to the Issuer Trust from the sale of the Capital Securities will be invested by the Issuer Trust in the Junior Subordinated Debentures. All the net proceeds to be received by BancShares from the sale of the Junior Subordinated Debentures will be used for general corporate purposes, although it is likely that substantially all such proceeds will be used initially to make additional capital contributions to the Bank to fund its operations and continued expansion and to maintain its status as a "well capitalized" bank under bank regulatory capital guidelines. See "Supervision and Regulation." Portions of the net proceeds from the sale of the Junior Subordinated Debentures also may be used in the future for acquisitions by BancShares or the Bank, extensions of credit to the Bank, or for repurchases of outstanding common stock of BancShares. The proceeds from the Capital Securities will qualify as Tier 1 or core capital of BancShares under the risk- based capital guidelines of the Federal Reserve. See "Use of Proceeds" and "Accounting Treatment." Risk Factors Prospective investors should carefully consider the matters set forth under "Risk Factors" beginning on page 10. Selected Consolidated Financial Data The following table sets forth selected consolidated financial information for BancShares for the five years ended December 31, 1997, and the three-month periods ended March 31, 1998 and 1997. The selected consolidated financial data as of and for each of the years in the five-year period ended December 31, 1997 have been derived from BancShares' audited consolidated financial statements. The consolidated financial statements as of December 31, 1997 and 1996 and for each of the years in the three-year period ended December 31, 1997, and the report thereon of KPMG Peat Marwick LLP, independent certified public accountants, are included elsewhere in this Prospectus. The information presented as of and for the three-month periods ended March 31, 1998 and 1997 is derived from BancShares' unaudited consolidated financial statements for these periods. Those unaudited consolidated financial statements, which are included elsewhere in this Prospectus, include all adjustments, consisting only of normal recurring accruals which management considers necessary for a fair presentation of the financial condition and results of operations for such interim periods. Results for the three-month period ended March 31, 1998 are not necessarily indicative of results to be expected for the full year or any other interim period. The following information should also be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein. See also "Available Information," "Experts," and "Southern BancShares (N.C.), Inc. and Subsidiary Index to Consolidated Financial Statements." <TABLE> As of and For the Three Months Ended March 31, --------------------------- 1998 1997 ------------- ------------- (Dollars in thousands, except per share data) (Unaudited) <S> <C> <C> Summary of Operations Interest income .................................. $ 10,093 $ 9,255 Interest expense ................................. 4,802 4,363 --------- --------- Net interest income .............................. 5,291 4,892 Provision for loan losses ........................ 60 60 --------- --------- Net interest income after provision for loan losses .......................................... 5,231 4,832 Noninterest income ............................... 2,933 4,470 Noninterest expense .............................. 4,788 8,465 --------- --------- Income before income taxes ....................... 3,376 837 Income taxes ..................................... 809 80 --------- --------- Net income ....................................... $ 2,567 $ 757 ========= ========= Selected Period-End Balances Total assets ..................................... $ 593,889 $ 547,671 Investment securities and federal funds sold ..... 192,865 172,913 Loans ............................................ 354,206 328,791 Interest earning assets .......................... 551,371 507,804 Deposits ......................................... 515,977 480,896 Interest bearing liabilities ..................... 462,458 434,918 Shareholders' equity ............................. 57,013 44,735 Common shares outstanding ........................ 119,918 119,918 --------- --------- Selected Average Balances Total assets ..................................... $ 597,721 $ 541,812 Investment securities and federal funds sold ..... 197,217 176,842 Loans ............................................ 352,141 322,867 Interest earning assets .......................... 531,833 485,185 Deposits ......................................... 519,366 480,783 Interest bearing liabilities ..................... 463,966 427,421 Shareholders' equity ............................. 57,195 45,260 Common shares outstanding ........................ 119,918 119,918 --------- --------- Profitability Ratios Return on average total assets ................... 1.72% 0.56% Return on average shareholders' equity ........... 17.95 6.69 Dividend payout ratio (1) ........................ 5.65 18.89 --------- --------- Liquidity and Capital Ratios Average loans to average deposits ................ 67.80% 67.15% Average shareholders' equity to average total assets .......................................... 9.57 8.35 Tier 1 capital ratio ............................. 12.14 10.54 Total capital ratio .............................. 13.49 11.84 Leverage capital ratio ........................... 6.53 6.28 --------- --------- As of and For the Year Ended December 31, --------------------------------------------------------------------- 1997 1996 1995 1994 1993 ------------- ------------- ------------- ------------- ------------- (Dollars in thousands, except per share data) <S> <C> <C> <C> <C> <C> Summary of Operations Interest income .................................. $ 39,055 $ 36,776 $ 32,894 $ 27,164 $ 22,418 Interest expense ................................. 18,827 17,450 16,055 11,044 8,803 --------- --------- --------- --------- --------- Net interest income .............................. 20,228 19,326 16,839 16,120 13,615 Provision for loan losses ........................ 60 140 -- -- 300 --------- --------- --------- --------- --------- Net interest income after provision for loan losses .......................................... 20,168 19,186 16,839 16,120 13,315 Noninterest income ............................... 9,849 4,508 4,028 2,888 3,197 Noninterest expense .............................. 23,064 18,203 15,661 13,918 10,978 --------- --------- --------- --------- --------- Income before income taxes ....................... 6,953 5,491 5,206 5,090 5,534 Income taxes ..................................... 340 1,127 1,293 1,402 1,741 --------- --------- --------- --------- --------- Net income ....................................... $ 6,613 $ 4,364 $ 3,913 $ 3,688 $ 3,793 ========= ========= ========= ========= ========= Selected Period-End Balances Total assets ..................................... $ 590,752 $ 540,758 $ 496,980 $ 408,035 $ 411,604 Investment securities and federal funds sold ..... 190,373 179,709 164,526 123,852 145,732 Loans ............................................ 349,353 317,755 287,960 252,611 236,732 Interest earning assets .......................... 544,926 499,164 452,486 376,463 382,464 Deposits ......................................... 513,328 480,566 449,002 367,522 375,061 Interest bearing liabilities ..................... 458,339 422,941 396,631 326,442 338,515 Shareholders' equity ............................. 54,984 44,778 37,163 30,965 24,650 Common shares outstanding ........................ 119,918 119,918 119,918 121,767 130,031 --------- --------- --------- --------- --------- Selected Average Balances Total assets ..................................... $ 567,236 $ 519,541 $ 456,499 $ 407,554 $ 326,232 Investment securities and federal funds sold ..... 162,936 157,779 145,417 131,923 114,321 Loans ............................................ 340,195 310,389 270,563 242,217 191,360 Interest earning assets .......................... 507,971 469,792 415,980 374,140 305,681 Deposits ......................................... 498,303 459,552 407,252 367,618 294,264 Interest bearing liabilities ..................... 445,354 411,960 366,597 331,104 263,097 Shareholders' equity ............................. 45,703 40,234 34,657 28,445 23,126 Common shares outstanding ........................ 119,918 119,918 121,226 123,521 130,312 --------- --------- --------- --------- --------- Profitability Ratios Return on average total assets ................... 1.17% 0.84% 0.86% 0.90% 1.16% Return on average shareholders' equity ........... 14.47 10.85 11.29 12.97 16.40 Dividend payout ratio (1) ........................ 8.85 13.45 13.57 12.80 11.65 --------- --------- --------- --------- --------- Liquidity and Capital Ratios Average loans to average deposits ................ 68.27% 67.54% 66.44% 65.89% 65.03% Average shareholders' equity to average total assets .......................................... 8.06 7.74 7.59 6.98 7.09 Tier 1 capital ratio ............................. 11.43 9.33 8.87 9.08 8.01 Total capital ratio .............................. 12.78 10.66 10.19 10.39 9.27 Leverage capital ratio ........................... 6.07 5.46 5.60 5.20 4.23 --------- --------- --------- --------- --------- </TABLE> <TABLE> As of and For the Three Months Ended March 31, ----------------------- 1998 1997 ----------- ----------- (Dollars in thousands, except per share data) (Unaudited) <S> <C> <C> Per Share of Common Stock Net income applicable to common shares (2) ...... $ 20.58 $ 5.48 Cash dividends .................................. .38 .37 Book value (3) .................................. 475.43 373.05 -------- -------- Asset Quality Ratios Nonperforming assets to total gross loans and other real estate owned ........................ 0.35% 0.31% Net charge-offs to average loans ................ 0.02 ( 0.03) Total allowance for loan losses to total nonperforming assets ........................... 484.77 611.66 As of and For the Year Ended December 31, ------------------------------------------------------------ 1997 1996 1995 1994 1993 ----------- ------------ ----------- ----------- ----------- (Dollars in thousands, except per share data) <S> <C> <C> <C> <C> <C> Per Share of Common Stock Net income applicable to common shares (2) ...... $ 51.77 $ 33.00 $ 28.90 $ 27.04 $ 26.72 Cash dividends .................................. 1.50 1.50 1.00 1.00 1.00 Book value (3) .................................. 458.51 373.41 309.90 254.30 189.57 -------- --------- -------- -------- -------- Asset Quality Ratios Nonperforming assets to total gross loans and other real estate owned ........................ 0.21% 0.16% 0.22% 0.73% 0.62% Net charge-offs to average loans ................ 0.07 0.10 0.12 0.03 0.26 Total allowance for loan losses to total nonperforming assets ........................... 802.55 1,237.55 981.52 358.85 455.39 </TABLE> - --------- (1) For each indicated period, total common and preferred dividends paid divided by net income. (2) For each indicated period, net income less preferred dividends paid, divided by the average number of common shares outstanding. BancShares' adoption of Statement 128, "Earnings per Share," had no effect on its earnings per share disclosure since BancShares has no potentially dilutive securities. (3) At the end of each indicated period, shareholders' equity divided by the number of common shares outstanding.
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+PROSPECTUS SUMMARY The following information is not complete and is qualified in its entirety by the detailed information and the financial statements and accompanying notes appearing elsewhere in this Prospectus. The purchase of the Common Shares is subject to certain risks. See "RISK FACTORS." UNITED COMMUNITY FINANCIAL CORP. The Holding Company was incorporated under Ohio law in February 1998 for the purpose of purchasing all of the capital stock of the Company to be issued in connection with the Conversion. The Holding Company has not conducted and will not conduct any business before the completion of the Conversion, other than business related to the Conversion. Upon the consummation of the Conversion, the Holding Company will be a unitary savings and loan holding company, the principal assets of which initially will be the capital stock of the Company, the investments made with the net proceeds retained from the sale of Common Shares and a loan to be made by the Holding Company to the ESOP to fund the ESOP's purchase of Common Shares in the Conversion. See "USE OF PROCEEDS." Following the Conversion, the Board of Directors intends to manage the Holding Company to promote the long-term best interests of the Holding Company and its shareholders. Following the Conversion, the Company will have capital in excess of the level required to support its current asset size and operations. Management believes that the holding company structure and retention of proceeds could facilitate geographic expansion and diversification into other activities although there are no present arrangements, agreements or understandings, written or oral, to do so. The holding company structure will also facilitate the repurchase of shares in the open market, subject to OTS regulations and the discretion of the Holding Company's Board of Directors. The office of the Holding Company is located at 275 Federal Plaza West, Youngstown, Ohio 44503-1203, and its telephone number is (330) 742-0500. THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO The Company is a mutual savings and loan association which was organized under Ohio law in 1889. At December 31, 1997, the Company had total assets of approximately $1.0 billion, total deposits of $886.8 million and total equity of $141.4 million, which represented 13.5% of total assets. For the year ended December 31, 1997, the Company earned approximately $13.0 million, for a return on average assets of 1.23%. The Company is a community-oriented institution which operates from 14 offices located throughout Mahoning, Columbiana and Trumbull Counties in Northeastern Ohio. Nine of the Company's offices are located in Mahoning County, three are in Columbiana County and two are in Trumbull County. The Company's home office is located in Youngstown, which is approximately 75 miles northwest of Pittsburgh, Pennsylvania, and 75 miles southeast of Cleveland, Ohio. Approximately 431,000 people live in the Company's primary market area, which makes it the 7th largest metropolitan area in the State of Ohio. Based on FDIC-published data as of June 30, 1997, the Company had the largest deposit market share in Mahoning County, the third largest share in Columbiana County and the eleventh largest share in Trumbull County. The Company has customer relationships with over 47,000 households in its primary market area, and in 1997 the Company was the leading originator of purchase money residential mortgage loans in Mahoning County. CROSS REFERENCE SHEET Showing the location in the Prospectus of the Items of Form S-1 <TABLE> <CAPTION> Form S-1 Item and Caption Prospectus Heading - ------------------------- ------------------ <S> <C> <C> 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus........... Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus.................................... Cover Page, Back Cover Page 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges..................... PROSPECTUS SUMMARY; SELECTED FINANCIAL INFORMATION AND OTHER DATA; RISK FACTORS 4. Use of Proceeds...................................... USE OF PROCEEDS 5. Determination of Offering Price...................... Cover Page; THE CONVERSION - Pricing and Number of Common Shares to be Sold 6. Dilution............................................. RISK FACTORS; THE CONVERSION - Tax Considerations; COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITHOUT FOUNDATION; PRO FORMA DATA 7. Selling Security Holders............................. Not Applicable 8. Plan of Distribution................................. Cover Page; THE CONVERSION - General; - Subscription Offering; - Community Offering; - Public Offering; and - Plan of Distribution 9. Description of Securities to be Registered........... DESCRIPTION OF AUTHORIZED SHARES 10. Interest of Named Experts and Counsel................ Not Applicable 11. Information with Respect to the Registrant (a) Description of Business......................... THE BUSINESS OF THE COMPANY (b) Description of Property......................... THE BUSINESS OF THE COMPANY - Properties (c) Legal Proceedings............................... THE BUSINESS OF THE COMPANY - Legal Proceedings (d) Market Price and Dividends...................... Cover Page; PROSPECTUS SUMMARY - Dividend Policy; MARKET FOR COMMON SHARES; DIVIDEND POLICY (e) Financial Statements............................ FINANCIAL STATEMENTS (f) Selected Financial Data......................... SELECTED FINANCIAL INFORMATION AND OTHER DATA (g) Supplementary Financial Information............. Not Applicable (h) Management's Discussion and Analysis of Financial Condition and Results of Operations MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (i) Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... CHANGE IN ACCOUNTANTS (j) Directors and Executive Officers................ MANAGEMENT (k) Executive Compensation.......................... PROSPECTUS SUMMARY; RISK FACTORS - Potential Awards of Shares to Directors, Officers and Employees Pursuant to Benefit Plans; MANAGEMENT - Compensation; and - Stock Benefit Plans (l) Security Ownership of Certain Beneficial Owners and Management......................... THE CONVERSION - Intended Purchases by Directors and Executive Officers; - Limitations on Purchases of Common Shares; - Restrictions on Transfer of Common Shares by Directors and Officers (m) Certain Relationships and Related Transactions.................................. Not Applicable 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities..... Not Applicable </TABLE> TIME FOR DIRECTING TRANSFER The deadline for submitting a direction to transfer amounts to the Employer Stock Fund in order to purchase Common Shares issued in connection with the Conversion is ____________, 1998. The Investment Form should be returned to the Human Resource Department Company no later than 12:00 noon, Eastern Daylight Time, on such date. IRREVOCABILITY OF TRANSFER DIRECTION A Participant's direction to transfer amounts credited to such Participant's account in the Plan to the Employer Stock Fund in order to purchase Common Shares in connection with the Conversion shall be irrevocable. Participants, however, will be able to direct the reinvestment of their accounts under the Plan ("401(k) Accounts") after the Conversion as explained below. DIRECTION TO PURCHASE COMMON SHARES AFTER THE CONVERSION After the Conversion, a Participant will be able to direct that a certain percentage of such Participant's interests in the trust assets (the "Trust") be transferred to the Employer Stock Fund and invested in Common Shares, or to the other investment funds available under the Plan. Alternatively, a Participant may direct that a certain percentage of such Participant's interest in the Employer Stock Fund be transferred from the Employer Stock Fund to the other investment funds available under the Plan. Participants will be permitted to direct that future contributions made to the Plan by or on their behalf be invested in Common Shares. Following the initial election, the allocation of a Participant's interest in the Employer Stock Fund may be changed by the Participant as allowed by the Plan. Special restrictions apply to transfers directed by those Participants who are executive officers, directors and principal shareholders of the Holding Company who are subject to the provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). See "Restrictions on Resale" and "THE CONVERSION - Restrictions on Transfer of Common Shares by Directors and Officers" in the Prospectus. PURCHASE PRICE OF COMMON SHARES The funds transferred to the Employer Stock Fund for the purchase of Common Shares in the Conversion will be used by the Trustee to purchase Common Shares. The price paid for such Common Shares purchased in the Conversion will be $10.00 per share, the same price paid by all other persons who purchase Common Shares in the Conversion. The prices paid by the Trustee for Common Shares purchased in the open market will not exceed "adequate consideration" as defined in Section 3(18) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). The Subscription Offering, the Community Offering and the Public Offering are referred to collectively in this Prospectus as the "Offering." The minimum number of Common Shares any person may purchase in the Offering is 25. Each Eligible Account Holder, Supplemental Eligible Account Holder and Other Eligible Member may purchase in the Subscription Offering not more than 35,000 Common Shares. In connection with the exercise of subscription rights arising from a single deposit account in which two or more persons have an interest, however, the aggregate maximum number of Common Shares which the persons having an interest in such account may purchase in the Subscription Offering in relation to such account is 35,000 Common Shares. In the event shares are available for the Community Offering or the Public Offering, each person, together with any Associate (hereinafter defined) or other persons Acting in Concert (hereinafter defined), may purchase in the Community Offering and the Public Offering up to 35,000 Common Shares. Except for the ESOP, which may purchase up to 10% of the total Common Shares sold in the Offering and contributed to the Foundation, no person, together with his or her Associates and other persons Acting in Concert with him or her, may purchase more than 1% of the Common Shares sold in the Offering. Subject to OTS regulations, the purchase limitations may be increased or decreased after the commencement of the Offering in the sole discretion of the Boards of Directors of the Holding Company and the Company. If the purchase limitations are increased after the commencement of the Subscription Offering, persons who have subscribed for the maximum amount will be given the opportunity to increase their subscriptions. See "THE CONVERSION - Limitations on Purchases of Common Shares." Common Shares may be subscribed for in the Offering only by returning the accompanying Stock Order Form and Certification Form (the "Stock Order Form"), along with full payment of the purchase price per share for all Common Shares subscribed for, so that it is received by the Company no later than 12:00 noon, Eastern Daylight Time, on June __, 1998. Payment for Common Shares may be made (i) in cash, if delivered in person; (ii) by check, bank draft, or money order made payable to the Company; or (iii) by authorization of withdrawal from deposit accounts in the Company. Once tendered, subscription orders cannot be revoked without the consent of the Company or the Holding Company. No payments by wire transfer will be accepted. The Holding Company is not obligated to accept orders submitted on photocopied or telecopied Stock Order Forms. See "THE CONVERSION - Use of Stock Order Forms; and - Payment for Common Shares." THE COMPLETION OF THE CONVERSION IS CONTINGENT UPON (I) THE APPROVAL OF THE PLAN AND THE ADOPTION OF AMENDED ARTICLES OF INCORPORATION AND AN AMENDED CONSTITUTION BY THE COMPANY'S VOTING MEMBERS AT A SPECIAL MEETING OF MEMBERS OF THE COMPANY TO BE HELD AT ___:00 __.M., EASTERN DAYLIGHT TIME, ON JUNE ___, 1998, AT _______________________, YOUNGSTOWN, OHIO (THE "SPECIAL MEETING"), (II) THE SALE OF THE REQUISITE NUMBER OF COMMON SHARES AND (III) CERTAIN OTHER FACTORS. SEE "THE CONVERSION." The Company believes that, as competition intensifies in the financial services industry, customers will gravitate toward quality customer service, and a prime focus of the Company's competitive strategy is to emphasize personal service and convenience. Highlights of the Company's strategy include the following: o Increasing the loan portfolio. The Company is a very traditional savings and loan company. At December 31, 1997, one- to four-family real estate loans represented 74.2% of total loans. While the Company intends to remain committed to financing home ownership, it also believes it must gradually expand the types of loan products it offers in order to meet the needs of its market area and to improve profitability. As a result, in 1996, the Company began to commit substantial resources to the commercial lending area, which is headed and staffed by individuals with very extensive commercial banking experience. The Company is also attempting to increase the loan portfolio by utilizing a newly developed central information file that captures the necessary customer profile information to more effectively cross-sell additional services to its existing customer base. o Maintaining asset quality. The Company believes that high asset quality is a critical component of long-term financial success and, therefore, remains committed to a conservative credit culture. At December 31, 1997, nonperforming assets as a percentage of total assets were .98%, compared to 1.14% in 1993. Over the past five years this ratio has averaged .89%. Nonperforming loans as a percentage of total loans were 1.60% at December 31, 1997, compared to 2.04% at December 31, 1993. Over the past five years this ratio has averaged 1.54%. In addition, total charge-offs have averaged $251,400 a year over the past five years. o Managing interest rate risk. Although the Company's liabilities are more sensitive to changes in interest rates than its assets, the Company has attempted to mitigate this risk and enhance return by maintaining a relatively large portfolio of high quality investments. At December 31, 1997, total cash and investments (including mortgage-backed securities) was approximately $396.3 million, or 37.9% of total assets. Of that amount, approximately $132.8 million consisted of securities classified as "available for sale." As an Ohio savings and loan association, the Company is subject to supervision and regulation by the OTS, the Division and the FDIC. The Company is a member of the Federal Home Loan Bank (the "FHLB") of Cincinnati and the deposit accounts of the Company are insured up to applicable limits by the FDIC in the Savings Association Insurance Fund (the "SAIF"). See "REGULATION." The main office of the Company is located at 275 Federal Plaza West, Youngstown, Ohio 44503-1203, and its telephone number is (330) 742-0500. THE CONVERSION GENERAL. The Board of Directors of the Company initially adopted the Plan on December 9, 1997, and amended it on May 6, 1998. The Plan provides for the conversion of the Company from a mutual savings and loan association to a permanent capital stock savings and loan association incorporated under the laws of the State of Ohio. The OTS and the Division have approved the Plan, subject to the approval of the Plan by the Company's voting members at the Special Meeting, and to the satisfaction of certain other conditions. See "THE CONVERSION - Conditions and Termination." The Company has operated as an independent community oriented savings association since 1889. It is the intention of the Company to continue to operate as an independent savings association following the Conversion. OFFERING. Pursuant to the Plan, Common Shares are hereby offered at a price of $10 per share to (a) Eligible Account Holders, (b) the ESOP, (c) Supplemental Eligible Account Holders, (d) Other Eligible PROSPECTUS SUPPLEMENT UNITED COMMUNITY FINANCIAL CORP. THE HOME SAVINGS AND LOAN COMPANY 401(k) SAVINGS PLAN This Prospectus Supplement relates to the offer and sale to participants (the "Participants") in The Home Savings and Loan Company 401(k) Savings Plan of participation interests and common shares, without par value, of United Community Financial Corp. (the "Common Shares"), as set forth herein. In connection with the proposed conversion of The Home Savings and Loan Company of Youngstown, Ohio (the "Company" or the "Employer") from a mutual savings and loan association to a stock savings and loan association incorporated under Ohio law (the "Conversion"), United Community Financial Corp., the proposed holding company for the Company (the "Holding Company"), has been formed. The Board of Directors of the Company has adopted an amendment to the adoption agreement of The Home Savings and Loan Company 401(k) Savings Plan (the "Plan" or the "401(k) Plan") to permit the investment of Plan assets in Common Shares. The Plan will permit Participants to direct the trustee of the Plan (the "Trustees") to purchase Common Shares with amounts in the Plan attributable to such Participants. This Prospectus Supplement relates to the initial election of a Participant to direct the purchase of Common Shares in connection with the Conversion. This Prospectus Supplement does not cover reoffers or resales of the Common Shares. See "Restrictions on Resales." The Prospectus of the Holding Company dated May __, 1998 (the "Prospectus"), which you received with this Prospectus Supplement, includes detailed information regarding the Conversion, the Common Shares and the financial condition, results of operation and business of the Company and the Holding Company. This Prospectus Supplement, which provides detailed information regarding the Plan, should be read only in conjunction with the Prospectus. Terms not otherwise defined in this Prospectus Supplement are defined in the Plan or the Prospectus. A Participant's eligibility to purchase Common Shares in connection with the Conversion is subject to the Participant's general eligibility to purchase Common Shares in the Conversion and the minimum and maximum purchase limitations set forth in the Plan of Conversion. See "THE CONVERSION - Subscription Offering; Community Offering; Public Offering and - Limitations on Purchases of Common Shares" in the Prospectus. AN INVESTMENT IN THE COMMON SHARES INVOLVES CERTAIN RISKS. FOR A DISCUSSION OF SUCH RISKS AND OTHER FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS, SEE "RISK FACTORS" BEGINNING ON PAGE ___ OF THE PROSPECTUS. NATURE OF A PARTICIPANT'S INTEREST IN THE COMMON SHARES The Common Shares will be held in the name of the Trustee for the Plan, as trustee. Each Participant has an allocable interest in the investment funds of the Plan but not in any particular assets of the Plan. Accordingly, a specific number of Common Shares will not be directly attributable to the 401(k) Account of any Participant. Net earnings or losses will be allocated to the 401(k) Account of a Participant based on the particular investment designations of the Participants. Therefore, a Participant's 401(k) Account earnings should not be affected by the investment designations (including investments in Common Shares) of other Participants. VOTING AND TENDER RIGHTS OF COMMON SHARES The Trustee generally will exercise voting and tender rights attributable to all Common Shares held by the Trust as directed by the Administrator of the Plan. DESCRIPTION OF THE PLAN INTRODUCTION The Plan has been in effect since January 1993. Effective __, 1998, the Plan allows the employees of the Company to invest in the Common Shares through the Plan. The Plan is a profit sharing plan with a cash or deferred arrangement established in accordance with the requirements under Section 401(a) and Section 401(k) of the Internal Revenue Code of 1986, as amended (the "Code"). The Company intends that the Plan, in operation, will comply with the requirements under Section 401(a) and Section 401(k) of the Code. The Company will adopt any amendments to the Plan that may be necessary to ensure the qualified status of the Plan under the Code and applicable U.S. Treasury regulations. The Company will submit the Plan to the IRS for a determination that the Plan, as amended, is qualified under Section 401(a) of the Code and that it satisfies the requirements for a qualified cash or deferred arrangement under Section 401(k) of the Code. The Plan is an "individual account plan" other than a "money purchase pension plan" within the meaning of ERISA. As such, the Plan is subject to all of the provisions of Title I (Protection of Employee Benefit Rights) and Title II (Amendments to the Internal Revenue Code Relating to Retirement Plans) of ERISA, except the funding requirements contained in Part 3 of Title l of ERISA which by their terms do not apply to an individual account plan (other than a money purchase pension plan). The Plan is not subject to Title IV (Plan Termination Insurance) of ERISA. Neither the funding requirements contained in Part 3 of Title I of ERISA nor the plan termination insurance provisions contained in Title IV of ERISA will be extended to Participants or beneficiaries under the Plan. THE HOME SAVINGS AND LOAN COMPANY OF YOUNGSTOWN, OHIO [MAP OF STATE OF OHIO WITH COUNTIES OUTLINED ABOVE AN ENLARGED MAP OF TRUMBULL, MAHONING AND COLUMBIANA COUNTIES SHOWING THE LOCATIONS OF THE COMPANY'S OFFICES] Members and (e) directors, officers and employees of the Company. See "THE CONVERSION - Subscription Offering." To the extent Common Shares remain available after the satisfaction of all subscriptions received in the Subscription Offering, the Holding Company may offer Common Shares in the Community Offering, subject to certain limitations. Preference will be given in the Community Offering to natural persons who have a bona fide residence in Mahoning, Columbiana and Trumbull Counties, Ohio. The Boards of Directors of the Holding Company and the Company have the right to reject, in whole or in part, any order for Common Shares submitted in the Community Offering. See "THE CONVERSION - Community Offering." If Common Shares remain available after the completion of the Community Offering, the Holding Company may offer Common Shares in the Public Offering for sale on a best efforts basis by a syndicate of registered broker-dealers to be formed by Trident, McDonald & Company and Oppenheimer, subject to certain limitations. The Board of Directors of the Holding Company and the Company have the right to reject, in whole or in part, any order for Common Shares submitted in the Public Offering. See "THE CONVERSION - Public Offering." PURCHASE LIMITATIONS. The Plan authorizes the Boards of Directors of the Holding Company and the Company to establish limits on the number of Common Shares which may be purchased in the Offering. The minimum number of Common Shares any person may purchase in the Offering is 25. Each Eligible Account Holder, Supplemental Eligible Account Holder and Other Eligible Member may purchase in the Subscription Offering not more than 35,000 Common Shares. In connection with the exercise of subscription rights arising from a single deposit account in which two or more persons have an interest, however, the aggregate maximum number of Common Shares which the persons having an interest in such account may purchase in the Subscription Offering in relation to such account is 35,000 Common Shares. In the event shares are available for the Community Offering or the Public Offering, each person, together with any Associate or other persons Acting in Concert, may purchase in the Community Offering or the Public Offering up to 35,000 Common Shares. Purchases in the Subscription Offering, the Community Offering and the Public Offering are subject to the additional limitation that no person, together with his or her Associates and other persons Acting in Concert with him or her, may purchase more than 1% of the Common Shares sold in the Offering. Such limitations do not apply to the contribution to the Foundation or to the ESOP, which intends to purchase up to 8% of the total Common Shares sold in the Offering and contributed to the Foundation. Subject to applicable regulations, the purchase limitations may be increased or decreased after the commencement of the Offering at the sole discretion of the Boards of Directors. See "THE CONVERSION Limitations on Purchases of Common Shares." In addition to the purchase limitations established by the Plan, OTS regulations impose restrictions on certain acquisitions of more than 10% of the outstanding shares of the Company by any person or company, individually or Acting in Concert with others. See "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY AND THE COMPANY AND ANTI-TAKEOVER PROVISIONS." The sale of Common Shares in the Offering will be subject to the approval of the Plan by the voting members of the Company at the Special Meeting, to the final valuation of the Common Shares, as determined by the independent appraiser upon the completion of the Offering, and to certain other conditions. See "THE CONVERSION - Subscription Offering; - Community Offering; - Public Offering; and - Pricing and Number of Common Shares to be Sold." The Subscription Offering will terminate and subscription rights will expire if not exercised by 12:00 noon, Eastern Daylight Time, on June __, 1998. The Community Offering, if any, will be terminated on or before 12:00 noon Eastern Daylight Time June __, 1998, unless extended. Any continuation of the Community Offering or the Public Offering beyond __________ ___, 1998, will require the consent of the OTS and the Division, and persons who have subscribed for Common Shares in the Offering will be given the right to affirm, increase, decrease or rescind their subscriptions for Common Shares. Persons who do not affirmatively THESE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC"), THE OFFICE OF THRIFT SUPERVISION (THE "OTS"), THE FEDERAL DEPOSIT INSURANCE CORPORATION (THE "FDIC"), THE DIVISION OF FINANCIAL INSTITUTIONS OF THE DEPARTMENT OF COMMERCE OF THE STATE OF OHIO (THE "DIVISION"), OR THE SECURITIES COMMISSION OF ANY STATE, NOR HAS THE SEC, THE OTS, THE FDIC, THE DIVISION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus Supplement is ____________________, 1998. APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL RESTRICTIONS ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR HIS BENEFIT UNDER THE PLAN PRIOR TO THE PARTICIPANT'S TERMINATION OF EMPLOYMENT WITH THE COMPANY. A SUBSTANTIAL FEDERAL TAX PENALTY MAY ALSO BE IMPOSED ON WITHDRAWALS MADE PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE 59 1/2, UNLESS A PARTICIPANT RETIRES AS PERMITTED UNDER THE PLAN REGARDLESS OF WHETHER SUCH A WITHDRAWAL OCCURS DURING HIS EMPLOYMENT WITH THE COMPANY OR AFTER TERMINATION OF EMPLOYMENT. The following statements are summaries of certain material provisions of the Plan. They are not complete and are qualified in their entirety by the full text of the Plan, which has been filed as an exhibit to the registration statement of the Holding Company filed with the SEC. Copies of the Plan are available to all employees by filing a request with the Plan Administrator. Each employee is urged to read carefully the full text of the Plan. ELIGIBILITY AND PARTICIPATION Any employee of the Company who is age 20 or older is eligible to participate in the Plan and will become a Participant in the Plan on the first day of the Plan year quarter immediately following the completion of six months of service with the Company. The Plan fiscal year is the calendar year (the "Plan Year"). Employees who are Limited Service Employees (as defined in the Plan) or covered by a collective bargaining agreement which does not expressly provide for their coverage under the Plan, and employees who are nonresident aliens and who received no earned income from the Company which constitutes income from sources within the United States, are not eligible to participate in the Plan. Directors who are not employees of the Company are not eligible to participate in the Plan. As of April 30, 1998, there were approximately ___ employees eligible to participate in the Plan, and approximately ______ employees had elected to contribute to the Plan. CONTRIBUTIONS UNDER THE PLAN Participant Contributions. Each Participant in the Plan is permitted to elect to reduce such Participant's Compensation (hereinafter defined) pursuant to a salary reduction agreement by an amount not less than $5.00 per pay period nor more than 15% and have that amount contributed to the Plan on such Participant's behalf ("Deferred Compensation"). Such amounts are credited to the Participant's 401(k) Account. For purposes of the Plan, "Compensation" means a Participant's slaray as reported on their W-2 ("Basic Salary"). The annual compensation of each Participant taken into account under the Plan is limited to $160,000 (adjusted for cost of living as permitted by the Code). A Participant may elect quarterly to modify the amount contributed to the Plan under such Participant's salary reduction agreement. Deferred Compensation contributions are generally transferred by the Company to the Trustee of the Plan monthly. A Participant is always 100% vested in the Deferred Compensation amounts in his 401(k) Account. elect to continue their subscription or who elect to rescind their subscriptions during any such extension will have all of their funds promptly refunded with interest at the Conversion Rate (hereinafter defined). Persons who elect to decrease their subscriptions will have the appropriate portion of their funds promptly refunded with interest at the Conversion Rate. See "THE CONVERSION - Pricing and Number of Common Shares to be Sold." PROSPECTUS DELIVERY AND PROCEDURE FOR PURCHASING COMMON SHARES. Eligible Account Holders and Supplemental Eligible Account Holders MUST LIST ON THE STOCK ORDER FORM ALL DEPOSIT ACCOUNTS IN WHICH THEY CLAIM AN INTEREST, giving all names on each deposit account and the account numbers at the applicable date in order to protect their purchase priorities. Deposit accounts include savings accounts and non-interest-bearing demand deposits. THE FAILURE TO PROVIDE ACCURATE AND COMPLETE ACCOUNT INFORMATION ON THE STOCK ORDER FORM MAY RESULT IN A REDUCTION OR ELIMINATION OF YOUR ORDER. Full payment by check, cash (except by mail), money order, bank draft or withdrawal authorization (payment by wire transfer will not be accepted) must accompany an original Stock Order Form. THE HOLDING COMPANY IS NOT OBLIGATED TO ACCEPT AN ORDER SUBMITTED ON PHOTOCOPIED OR TELECOPIED STOCK ORDER FORMS. THE HOLDING COMPANY WILL NOT ACCEPT A STOCK ORDER FORM IF THE CERTIFICATION APPEARING ON THE REVERSE SIDE OF THE STOCK ORDER FORM IS NOT EXECUTED. THE HOLDING COMPANY IS NOT REQUIRED TO DELIVER A PROSPECTUS AND STOCK ORDER FORM BY ANY MEANS OTHER THAN THE U.S. POSTAL SERVICE. To ensure that each subscriber receives a prospectus at least 48 hours prior to the applicable expiration date, in accordance with Rule 15C2-8 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), no prospectus will be mailed later than five days or hand delivered any later than two days prior to the applicable expiration date. Execution of the Stock Order Form will confirm receipt or delivery of a prospectus under Rule 15C2-8. NON-TRANSFERABILITY OF SUBSCRIPTION RIGHTS. OTS and Ohio regulations provide that subscription rights are non-transferable. OTS regulations specifically prohibit any person from transferring or entering into any agreement or understanding before the completion of the Conversion to transfer the ownership of the subscription rights issued in the Conversion or the Common Shares to be issued upon the exercise of such subscription rights. Persons found to be selling or otherwise transferring their subscription rights or purchasing Common Shares on behalf of another person will be subject to forfeiture of such rights and possible further sanctions and penalties imposed by the OTS. THE COMPANY AND THE HOLDING COMPANY WILL REFER TO THE OTS ANY SITUATIONS THEY BELIEVE MAY INVOLVE A TRANSFER OF SUBSCRIPTION RIGHTS AND WILL NOT HONOR ORDERS KNOWN BY THEM TO INVOLVE THE TRANSFER OF SUCH RIGHTS. Each person exercising subscription rights will be required to certify that his or her purchase of Common Shares is solely for the subscriber's own account and that there is no agreement or understanding regarding the sale or transfer of such Common Shares. PRICING OF THE COMMON SHARES. Keller & Company, Inc. ("Keller"), a firm experienced in valuing thrift institutions, has prepared an independent valuation of the estimated pro forma market value of the Company, as converted, and the Holding Company. Keller's valuation of the estimated pro forma market value of the Company, as converted, and the Holding Company, excluding the shares to be contributed to the Foundation, is $250,000,000 as of February 24, 1998 (the "Pro Forma Value"). Based on the Pro Forma Value, the Adjusted Valuation Range established in accordance with the Plan is $212,500,000 to $289,375,000. Applicable regulations permit the Holding Company to issue up to total of 33,465,625 Common Shares with an aggregate purchase price of $334,656,250. The Holding Company will issue the Common Shares at a fixed price of $10 per share. The number of Common Shares to be issued will be determined by dividing the price per share into the aggregate pro forma value of the Company, as converted, and the Holding Company at the close of the Offering. If, due to changing market conditions, the final valuation is less than $212,500,000 or more than $334,656,250, subscribers will be given written notice of such final valuation and the right to affirm, increase, No person has been authorized to give any information or to make any representations other than as contained in the Prospectus or this Prospectus Supplement, and, if given or made, such information or representations must not be relied upon as having been authorized by the Holding Company, the Company or the Plan. This Prospectus Supplement does not constitute an offer to sell, or the solicitation of an offer to buy, any securities, to any person in any jurisdiction in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so or to any person to whom delivery of this Prospectus would be unlawful. Neither the delivery of this Prospectus Supplement and the Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that the information contained herein or incorporated by reference is correct as of any time subsequent to the date hereof. This Prospectus Supplement should be read only in conjunction with the Prospectus that is attached hereto and should be retained for future reference. Profit Sharing Contributions. The Company may make a discretionary contribution to the Plan annually in an amount not to exceed 15% of the total Compensation received by all Participants (a "Profit Sharing Contribution"). All contributions, including Deferred Compensation amounts are counted towards the 15% maximum. The Company may choose not to make a Profit Sharing Contribution in any given Plan Year. The total Profit Sharing Contribution made by the Company during a Plan Year is allocated among Participants in the same proportion as each Participant's Compensation bears to the total Compensation paid to Participants during the Plan year. A Participant must be an employee of the company on the last day of the Plan Year to receive an Employer contribution. A Participant is 100% vested in the Profit Sharing Contributions to his 401(k) Account after five years of service with the Company. Matching Contributions. The Company may make discretionary matching contributions ("Matching Contributions") to the Plan on behalf of Participants who make elective deferrals to the Plan. The Company may contribute an amount to a Participant's 401k) Account each year based on a percentage of a Participant's Deferred Compensation amount. A Participant is 100% vested in the Matching Contributions in his 401(k) Account after five years of service with the Company. Qualified Matching Contributions. The Company may make "qualified" matching contributions ("Qualified Matching Contributions") to the Plan on behalf of all Participants who are not Highly-Compensated Employees (hereinafter defined) and who are not officers of the Company. The Company's discretionary contribution will be based on a percentage of a Participant's Deferred Compensation amount. A Participant is always 100% vested in the Qualified Matching Contribution amounts in his 401(k) Account. Qualified Non-Elective Contributions. The Company may make discretionary qualified non-elective contributions ("Qualified Non-Elective Contributions") to the Plan. Allocations of Qualified Non-Elective Contributions are made to the 401(k) Accounts of Participants who are not Highly-Compensated Employees or officers of the Company and are based on the ratio each Participant's Compensation for the Plan Year bears to the total Compensation of all Participants for the Plan Year. A Participant is always 100% vested in the Qualified Non-Elective Contribution amounts in his 401(k) Account. Rollover Amount from Other Plans. An employee who has received a distribution from another plan qualified under Section 401(a) of the Code may, in accordance with Section 402(c) of the Code and procedures approved at the discretion of the Trustee, transfer the distribution received from the other plan to the Trustee. Any amounts rolled over from another plan will be contributed to the employee's "Rollover Account." Transfers from Other Plans. An employee who has cash, or other property representing an interest in another plan qualified under Section 401(a) of the Code may, in accordance with Section 402(c) of the Code and procedures approved at the discretion of the Trustee, transfer the cash or other property from the other plan to the Trustee in a Trustee-to-Trustee, Custodian-to- decrease or rescind their subscriptions. Any person who does not affirmatively elect to continue his subscription or elects to rescind his subscription before the date specified in the notice will have all of his funds promptly refunded with interest. Any person who elects to decrease his subscription will have the appropriate portion of his funds promptly refunded. See "THE CONVERSION - Pricing and Number of Common Shares to be Sold." INTENDED PURCHASES BY DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information regarding the intended purchases by the directors and executive officers of the Company and the Holding Company: <TABLE> <CAPTION> Name Aggregate Percent - ---- Total shares (1) purchase price (1) of total offering (2) ------------ -------------- ----------------- <S> <C> <C> <C> Richard M. Barrett 31,000 $310,000 .12% James E. Bennett, Jr. 1,000 10,000 -- Charles. B. Cushwa, III 60,000 600,000 .24 William A. Holdford 10,000 100,000 .04 Donald R. Inglis 35,000 300,000 .12 Gary Keller 60,000 600,000 .24 Patrick A. Kelly 60,000 600,000 .24 Douglas M. McKay 80,000 800,000 .32 Herbert F. Schuler, Sr. 90,000 900,000 .36 Clarence R. Smith, Jr. 25,000 250,000 .10 Robert J. Steele, Jr. 10,000 100,000 .04 Donald J. Varner 60,000 600,000 .24 John F. Zimmerman, Jr. 15,000 150,000 .06 ------- ---------- ---- All directors and executive 532,000 $5,320,000 2.12% officers as a group (13 persons) ======= ========== ==== - ----------------------------- </TABLE> (1) Includes intended purchases by Associates of directors and executive officers, to the extent known. (2) Assumes that 25,000,000 Common Shares, the mid-point of the Adjusted Valuation Range, will be sold in connection with the Conversion at $10 per share and that a sufficient number of Common Shares will be available to satisfy the intended purchases by directors and executive officers. See "Pricing and Number of Common Shares to be Sold." All purchases by executive officers and directors of the Company are being made for investment purposes only and with no present intent to resell. Directors and executive officers will pay the same $10 per share price for Common Shares purchased in the Conversion as all other subscribers. USE OF PROCEEDS. The net proceeds from the sale of Common Shares in the Conversion are estimated to be $209.3 million, $246.5 million, $285.5 million and $330.4 million at the minimum, mid-point, maximum and adjusted maximum, respectively, of the Adjusted Valuation Range. See "PRO FORMA DATA." The Holding Company will invest 50% of the net proceeds from the Conversion in the capital stock to be issued by the Company in connection with the Conversion and will make a loan to the ESOP to acquire 8% of the total Common Shares sold in the Offering and contributed to the Foundation. The Holding Company will retain the remaining 42% of the net proceeds and will use such funds for general corporate purposes. See "USE OF PROCEEDS." The 50% of the net proceeds invested in the Company by the Holding Company will initially be invested in overnight funds and short-term investments with maturities up to three years and utilized for general corporate purposes, including loan originations, enhanced customer services and possible acquisitions. See "USE OF PROCEEDS." <TABLE> <CAPTION> TABLE OF CONTENTS <S> <C> THE OFFERING......................................................................................................1 Securities Offered.............................................................................................1 Election to Purchase Common Shares in the Conversion...........................................................1 Value of Participation Interests...............................................................................1 Method of Directing Transfer...................................................................................1 Time for Directing Transfer....................................................................................2 Irrevocability of Transfer Direction...........................................................................2 Direction to Purchase Common Shares After the Conversion.......................................................2 Purchase Price of Common Shares................................................................................2 Nature of a Participant's Interest in the Common Shares........................................................3 Voting and Tender Rights of Common Shares......................................................................3 DESCRIPTION OF THE PLAN...........................................................................................3 Introduction...................................................................................................3 Eligibility and Participation..................................................................................4 Contributions Under the Plan...................................................................................4 Limitations on Contributions...................................................................................6 Investment of Contributions....................................................................................7 Benefits Under the Plan.......................................................................................11 Administration of the Plan....................................................................................13 Reports to Plan Participants..................................................................................13 Plan Administrator............................................................................................14 Amendment and Termination.....................................................................................14 Merger, Consolidation or Transfer.............................................................................14 Federal Income Tax Consequences...............................................................................14 ERISA and Other Qualifications................................................................................17 Restrictions on Resale........................................................................................17 SEC Reporting and Short-Swing Profit Liability................................................................18 LEGAL OPINIONS...................................................................................................19 </TABLE> Trustee or Custodian-to-Custodian transfer. Any amounts transferred from another plan will be contributed to the Participant's 401(k) Account. LIMITATIONS ON CONTRIBUTIONS Limitations on Annual Additions and Benefits. Pursuant to the requirements of the Code, the Plan provides that the amount of contributions and forfeitures allocated to each Participant's 401(k) Account during any Plan Year may not exceed the lesser of 25% of the Participant's "Section 415 Compensation" for the Plan Year or $30,000 (adjusted for increases in the cost of living as permitted by the Code). A Participant's "Section 415 Compensation" is a Participant's Compensation, excluding any Employer contribution to the Plan or to any other plan of deferred compensation or any distributions from a plan of deferred compensation. In addition, annual additions shall be limited to the extent necessary to prevent the limitations set forth in the Code for all of the qualified defined benefit plans and defined contribution plans maintained by the Company from being exceeded. To the extent that these limitations would be exceeded by reason of excess annual additions to the Plan with respect to a Participant, such excess will be disposed of in accordance with procedures set forth in the Plan. However, if the annual addition limitations are exceeded with respect to a Participant in both the Plan and the defined benefit pension plan and employee stock ownership plan maintained by the Company, the Participant's annual additions under the Plan will be reduced. Limitation on 401(k) Plan Contributions. The annual amount of Deferred Compensation of a Participant (when aggregated with any elective deferrals of the Participant under any other employer plan, a simplified employee pension plan or a tax deferred annuity) may not exceed $10,000, adjusted for increases in the cost of living as permitted by the Code. Contributions in excess of this limitation ("Excess Deferrals") will be included in the Participant's gross income for federal income tax purposes in the year they are made. In addition, any such Excess Deferral will again be subject to federal income tax when distributed by the Plan to the Participant, unless the Excess Deferral (together with any income allocable thereto) is distributed to the Participant not later than the first April 15th following the close of the taxable year in which the Excess Deferral is made. Any income on the Excess Deferral that is distributed not later than such date shall be treated, for federal income tax purposes, as earned and received by the Participant in the taxable year in which the Excess Deferral is made. Limitation on Plan Contributions for Highly Compensated Employees. Sections 401(k) and 401(m) of the Code limit the amount of Deferred Compensation that may be contributed to the Plan in any Plan Year on behalf of Highly Compensated Employees in relation to the amount of Deferred Compensation contributed by or on behalf of all other employees eligible to participate in the Plan. Specifically, the actual deferral percentage for a plan year (i.e., the average of the ratios, calculated separately for each eligible employee in each group, by dividing the amount of Deferred Compensation credited to the 401(k) Account of such eligible employee by such eligible employees compensation for the Plan Year) of the Highly Compensated Employees may not exceed the greater of (a) 125% of the actual deferral percentage of all other eligible employees, or (b) the lesser of (i) 200% of the actual deferral percentage of all other HOME SAVINGS CHARITABLE FOUNDATION In 1991, the Company established the Foundation, which is an exempt organization under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the "Code"). Except for 1993, each year since the Foundation was established, the Company has made annual contributions to the Foundation in furtherance of the Company's commitment to the communities that it serves. In connection with the Conversion, the Company intends to contribute up to 1,250,000 common shares to the Foundation. The Company believes that the contribution of common shares to the Foundation will benefit the long term value of the Company's community banking franchise by enabling the communities it serves to share in the potential growth and success of the Company and the Holding Company over the long term. See "THE CONVERSION - Contribution to the Foundation; and - Structure of the Foundation." The Company proposes to contribute to the Foundation a number of shares equal to 5% of the Common Shares issued in the Conversion, subject to the overall limitation of 1,250,000 common shares. Such contribution would equal 1,062,500 common shares at the minimum of the Adjusted Valuation Range and 1,250,000 common shares at the mid-point, maximum and adjusted maximum of the Adjusted Valuation Range. Such contribution, once made, will not be revocable by the Holding Company or the Company. The Company and the Holding Company do not anticipate making any other contributions to the Foundation during 1998 or the first five years following the Conversion. The Company may make donations to charitable institutions in an aggregate amount not to exceed $80,000 per year consistent with past practice. During 1996 and 1997, the Company directly donated approximately $57,000 and $64,000 to charitable institutions in its community. Assuming the sale of Common Shares at the maximum of the Adjusted Valuation Range and the contribution of 1,250,000 shares to the Foundation, the Holding Company will have 30,187,500 shares issued and outstanding, of which the Foundation will own 1,250,000 shares, or 4.14%. THE CONTRIBUTION OF COMMON SHARES TO THE FOUNDATION WILL RESULT IN DILUTION OF APPROXIMATELY 4.14% TO THE OWNERSHIP INTERESTS IN THE HOLDING COMPANY OF THE PERSONS PURCHASING SHARES IN THE CONVERSION. Keller, an independent appraiser of financial institutions, considered the effect of the contribution of shares to the Foundation when determining the pro forma market value of the Holding Company and the Company, as converted. Keller determined that the contribution would dilute the equity and earnings of the initial shareholders of the Holding Company and that the contribution would result in a charge to the Company's earnings, therefore resulting in a lower pro forma market value of the Holding Company and the Company, as converted. See "RISK FACTORS - Contribution to the Foundation." As a result of the contribution to the Foundation and its impact on the pro forma market value of the Holding Company and the Company, as converted, the Holding Company will offer 2,550,000, 3,000,000, 3,262,500 and 3,564,375 fewer shares at the minimum, mid-point, maximum and adjusted maximum of the Adjusted Valuation Range, than if such contribution were not being made. Based on the $10 price per share, the Holding Company will receive $25.5 million, $30.0 million, $32.6 million and $35.6 million less in gross proceeds than it would have received if the contribution to the Foundation were not being made. See "COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITHOUT FOUNDATION." Notwithstanding the impact of the contribution on the Offering, the Company and the Holding Company determined to contribute common shares to the Foundation to enhance the ties between the Company and the communities it serves by allowing the communities to share in the growth and success of the Company and the Holding Company over the long term. As a result of the contribution to the Foundation, the Company will recognize an expense for the full amount of the contribution, offset in part by a corresponding tax benefit, during the quarter in which the contribution is made, which is expected to be the second quarter of 1998. Such expense will reduce earnings and have a material impact on the Company's earnings for such quarter and for the year. For further discussion of the Foundation and its impact on purchasers in the Conversion, see "RISK FACTORS - Contribution to the eligible employees, or (ii) the actual deferral percentage of all other eligible employees plus two percentage points. In general, a Highly Compensated Employee includes any employee who, during the Plan Year or the preceding Plan Year, (1) was at any time a 5% owner (i.e., owns directly or indirectly more than 5% of the shares of the Employer or shares possessing more than 5% of the total combined voting power of all stock of the Employer) or (2) for the preceding year (a) received compensation from the Employer in excess of $80,000 (as adjusted periodically under applicable Code provisions), and (b) if the Employer elects the application of this clause for such preceding year, was in the top-paid group of employees for such preceding year. An employee is in the top-paid group of employees for any year if such employee is in the group consisting of the top 20% of employees when ranked on the basis of compensation paid during such year. Such amounts are adjusted annually to reflect increases in the cost of living. In order to prevent the disqualification of the Plan, any amounts contributed by Highly Compensated Employees that exceed the average deferral limitation in any Plan Year ("Excess Contributions"), together with any income allocable thereto, must be distributed to such Highly Compensated Employees before the close of the following Plan Year. However, the Company will be subject to a 10% excise tax on any Excess Contributions unless such Excess Contributions, together with any income allocable thereto, either are recharacterized or are distributed before the close of the first two and a half months following the Plan Year to which such Excess Contributions related. Top-Heavy Plan Requirements. If for any Plan Year the Plan is a Top-Heavy Plan (hereinafter defined), then (i) the Company may be required to make certain minimum contributions to the Plan on behalf of Non-Key Employees (hereinafter defined), and (ii) certain additional restrictions would apply with respect to the combination of annual additions to the Plan and projected annual benefits under any defined benefit plan or employee stock ownership plan maintained by the Company. In general, the Plan will be regarded as a "Top-Heavy Plan" for any Plan Year if, as of the last day of the preceding Plan Year, the aggregate balance of the Accounts of Participants who are Key Employees exceeds 60% of the aggregate balance of the Accounts of all Participants. "Key Employees" generally include any employee who, at any time during the Plan Year or any of the four preceding Plan Years, is (l) an officer of the Company having annual compensation in excess of $____________ (for 1998) who is in an administrative or policy-making capacity, (2) one of the ten employees having annual compensation in excess of $30,000 and owning, directly or indirectly, the largest interests in the Employer; (3) a 5% owner of the Employer, (i.e., owns directly or indirectly more than 5% of the shares of the Employer, or shares possessing more than 5% of the total combined voting power of all stock of the Employer or (4) a 1% owner of the Employer having annual compensation in excess of $______ (for 1998). Foundation," "PRO FORMA DATA," "COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITHOUT THE FOUNDATION" and "THE CONVERSION - Contribution to the Foundation -- Tax Considerations." TAX CONSEQUENCES The consummation of the Conversion is expressly conditioned upon the receipt by the Holding Company and the Company of a private letter ruling from the Internal Revenue Service (the "IRS") or an opinion of counsel to the effect that, for federal income tax purposes, the Conversion will constitute a tax-free reorganization as defined in Section 368(a) of the Code. The Holding Company and the Company intend to proceed with the Conversion based upon an opinion received from Vorys, Sater, Seymour and Pease LLP that states, in part, that (1) no gain or loss will be recognized by the Company in connection with the Conversion or the receipt from the Holding Company of proceeds from the sale of the Common Shares, (2) assuming that the subscription rights received by deposit account holders in connection with the Conversion have no ascertainable fair market value, no gain or loss will be recognized to the deposit account holders of the Company upon issuance to them of subscription rights or interests in the shapeType1fFlipH0fFlipV0fFilled0lineWidth25400fShadow0Liquidation Account (hereinafter defined) and (3) no taxable income will be realized by deposit account holders as a result of their exercise of such subscription rights. The Holding Company and the Company have received an opinion from Keller that the subscription rights have no ascertainable fair market value, although such opinion is not binding on the IRS. See "THE CONVERSION - Principal Effects of the Conversion -- Tax Consequences." MARKET FOR THE COMMON SHARES The Company and the Holding Company have never issued capital stock to the public and, consequently, there is no existing market for the Common Shares. The Holding Company has received conditional approval to have the Common Shares quoted on The Nasdaq National Market ("Nasdaq") under the symbol "UCFC". One of the conditions to the Nasdaq listing is the commitment of at least three brokerage firms to make a market in the Common Shares. Trident, McDonald & Company and Oppenheimer have informed the Holding Company that they intend to make a market in the Common Shares and expect that additional market makers will be identified. No assurance can be given, however, that an active or liquid market for the Common Shares will develop after the completion of the Conversion or, if such market does develop, that it will continue. There can be no assurance that the Common Shares may later be resold at the price at which they are purchased in the Conversion. See "RISK FACTORS - Absence of Established Market for the Common Shares." DIVIDEND POLICY Following the completion of the Conversion, the Board of Directors of the Holding Company intends to establish a dividend policy. The declaration and payment of dividends or other capital distributions by the Holding Company will be subject to the discretion of the Board of Directors of the Holding Company, to the earnings and financial condition of the Holding Company and the Company and to general economic conditions. The timing of the payment of dividends and the annual rate will depend upon a determination by the Board of Directors of the Holding Company that the net income, capital and financial condition of the Holding Company and the general economy justify the declaration and payment of dividends by the Holding Company. No assurance can be given, however, that dividends will be paid or, if paid, will continue in the future. In accordance with OTS policy, the Holding Company will not undertake an extraordinary tax-free return of capital to its shareholders during the first year following the completion of the Conversion. See "DIVIDEND POLICY" and "REGULATION - Office of Thrift Supervision -- Limitations on Capital Distributions." BENEFITS OF THE CONVERSION TO DIRECTORS, OFFICERS AND EMPLOYEES OF THE HOLDING COMPANY AND THE COMPANY GENERAL. In the aggregate, a number of shares equal to 22% of the total Common Shares sold in the Offering and contributed to the Foundation may be allocated, awarded or granted to directors, officers and employees of the Company or the Holding Company, pursuant to the ESOP, the Stock Option Plan INVESTMENT OF CONTRIBUTIONS All amounts credited to Participants' Accounts under the Plan are held in a custodial account (the "Custodial Account") of which McDonald & Company Securities, Inc. is the Custodian (the "Custodian"). The Custodian is appointed by the Trustee. The Plan provides that a Participant may direct the Trustee to invest all or a portion of his Accounts in various managed investment portfolios, described below. A Participant may elect to change his investment directions regarding both past contributions and for more additions to the Participant's accounts invested in these investment alternatives, as allowed by the Plan. Under the Plan, prior to the effective date of the Conversion, the 401(k) Account of a Participant held in the Trust will be invested by the Trustee at the direction of the Participant in the following managed portfolios: AIM Balanced Fund A The fund seeks to provide the highest return possible consistent with preservation of capital, by investing in a broadly diversified portfolio of high-yielding securities, including common stocks, preferred stocks, convertible securities and bonds. Although equity securities are purchased primarily for capital appreciation and fixed income securities purchased primarily for income purposes, income and capital appreciation potential are considered with all investments. AIM Charter Fund A The primary investment objective of the fund is capital appreciation; current income is a secondary objective. The fund invests primarily in dividend-paying common stocks which have prospects for both growth of capital and dividend income. AIM Income Fund A The fund seeks a high level of current income consistent with reasonable concern for safety of principal, by investing primarily in fixed-rate corporate debt and U.S. Government obligations. The fund may also invest in preferred stock issues and convertible corporate debt. The percent of the fund's assets in various types of securities will vary in light of the fund's investment objective and existing conditions. The fund may invest up to 40% of its assets in securities issued by foreign entities. AIM International Equity A The investment objective is to seek to provide long-term growth of capital by investing in a diversified portfolio of international equity securities considered to have strong earnings momentum. Any income realized by the fund will be incidental. Under normal market conditions the fund will invest at least 80% of its total assets in marketable equity securities of foreign companies which, with their predecessors, have been in continuous (hereinafter defined) and the RRP (hereinafter defined). Awards under the RRP and allocations pursuant to the ESOP will be made at no cost to the recipients. Stock options will be awarded with an exercise price at least equal to the fair market value of the common shares of the Holding Company at the time of award. Based on their stock ownership under these stock benefit plans, the directors and officers of the Holding Company and the Company will have a significant influence over the vote on any takeover attempt or proxy contest and may be able to defeat such a proposal. See "RISK FACTORS - Anti-Takeover Provisions Which May Discourage Sales of Common Shares For Premium Prices." The Board of Directors has determined that the ability of the Holding Company and the Company to utilize various types of stock benefit plans will assist the Company in attracting and retaining qualified directors and employees. See "THE CONVERSION - - Reasons for the Conversion." EMPLOYEE STOCK OWNERSHIP PLAN. In connection with the Conversion, the Holding Company has established the ESOP, which intends to use a loan from the Holding Company to purchase 8% of the total Common Shares sold in the Conversion and contributed to the Foundation. The loan will have a term of up to 15 years and an interest rate equal to the base rate on corporate loans, posted by at least 75% of the nation's 30 largest banks, as reported in The Wall Street Journal (the "Prime Rate") less 1/2%. Based on the Prime Rate as of May __, 1998, the ESOP rate could be 8.0%. All full-time employees of the Holding Company and the Company who meet certain age and years of service criteria will be eligible to participate in the ESOP. See "MANAGEMENT - Stock Benefit Plans -- Employee Stock Ownership Plan," and "RISK FACTORS Dilutive Impact of Benefit Plans on Net Earnings and Shareholders' Equity; and - Potential Awards of Shares to Directors, Officers and Employees Pursuant to Benefit Plans." STOCK OPTION PLAN. After the completion of the Conversion, the Holding Company intends to establish a stock option and incentive plan (the "Stock Option Plan"). The Board of Directors of the Holding Company anticipates that a number of shares equal to 10% of the Common Shares sold in the Offering and contributed to the Foundation will be reserved for issuance upon the exercise of options granted under the Stock Option Plan. The Stock Option Plan will be administered by a committee comprised of not fewer than three directors of the Company or the Holding Company (the "Stock Option Committee"). Persons eligible for awards under the Stock Option Plan will consist of directors, officers and employees of the Holding Company or the Company who hold positions with significant responsibilities or whose performance or potential contribution, in the judgment of the Stock Option Committee, will contribute to the future success of the Holding Company or the Company. The Holding Company will receive no monetary consideration for the granting of options under the Stock Option Plan. Upon the exercise of options, the Holding Company will receive a payment of cash, common shares of the Holding Company, or a combination of cash and common shares from option recipients in exchange for shares issued. Stock options will be awarded with an exercise price at least equal to the fair market value of the common shares of the Holding Company at the time of award. Under OTS regulations, no stock options may be awarded during the first year after the completion of the Conversion unless the Stock Option Plan is approved by the shareholders of the Holding Company at an annual or a special meeting of shareholders held not less than six months following the completion of the Conversion. If the Stock Option Plan is approved by the Holding Company shareholders at such meeting and implemented during the first year after the completion of the Conversion, the following restrictions will apply: (i) the number of shares which may be subject to options awarded under the Stock Option Plan to directors who are not full-time employees of the Holding Company may not exceed 5% per person and 30% in the aggregate of the available plan shares; (ii) the number of shares which may be subject to options awarded under the Stock Option Plan to any individual who is a full-time employee of the Holding Company or its subsidiaries may not exceed 25% of the available shares; (iii) stock options must be awarded with an exercise price at least equal to the fair market value of the common shares of the Holding Company at the time of the award; and (iv) stock options will become exercisable at the rate of one-fifth per year commencing no earlier than one year from the date the Stock Option Plan is approved by the shareholders, subject to acceleration of vesting only in the event of the death or disability of a participant. No decision has been made as to anticipated awards under the Stock Option Plan. See "MANAGEMENT - Stock Benefit Plans -- Stock Option Plan," and "RISK FACTORS - Dilutive Impact of Benefit Plans on Net Earnings and Shareholders' Equity; and Potential Awards to Directors, Officers and Employees Pursuant to Benefit Plans." operation for three years or more and which are listed on a recognized foreign securities exchange or traded in a foreign over-the counter market. It is expected that the fund's portfolio will generally be comprised of two basic categories of foreign companies: "core" companies, which AIM considers to have experienced consistent long-term growth in earnings and to have strong prospects for outstanding future growth, and companies that AIM believes are currently experiencing a greater than anticipated increase in earnings. AIM Value Fund A AIM Value Fund seeks long-term growth of capital. It will invest primarily in equity securities judged to be undervalued relative to the investment advisor's appraisal of the current or projected earnings of the companies issuing the securities, or relative to current market values of assets owned by the companies issuing the securities, or relative to the equity market generally. Income is a secondary objective. The primary thrust of AIM's search for undervalued equity securities is in four categories: (1) out-of-favor cyclical growth companies; (2) established growth companies that are undervalued; (3) companies with evidence of improving prospects; and (4) companies whose equity securities are selling at prices that do not reflect the current market value of their assets. AIM Money Market Fund This is a money market fund which is very similar to a savings account. The only source of growth is interest earned on your balance. A money market fund is generally regarded as a short-term investment to be used prior to utilizing a more long-term investment alternative such as a stock fund or bond fund. Additionally, a money fund may be utilized as a small portion of a balanced approach to investing your account. The trust's portfolio represents a high-quality selection of money market instruments such as U.S. Treasury bills, commercial paper and certificates of deposit. Because of the very short-term nature of these investments, this is the most conservative investment option. Consequently, it is also the investment option that may provide the least opportunity for the growth of an account. Effective upon the Conversion, a Participant may invest all or a portion of his Accounts in the portfolios described above and in the fund, described below: RECOGNITION AND RETENTION PLAN. After the completion of the Conversion, the Board of Directors of the Holding Company intends to establish a recognition and retention plan (the "RRP") and anticipates that a number of shares equal to 4% of the total Common Shares sold in the Conversion and contributed to the Foundation, with a total value ranging from $8.9 million at the minimum of the Adjusted Valuation Range to $13.9 million at the adjusted maximum of the Adjusted Valuation Range, will be purchased by, or issued to, the RRP. See "RISK FACTORS - Dilutive Impact of Benefit Plans on Net Earnings and Shareholders' Equity" for a discussion of the possible dilutive effects of the RRP. The RRP shares will be awarded at no cost to the recipients. The RRP will be administered by a committee comprised of not fewer than three directors of the Company or the Holding Company (the "RRP Committee"). Persons eligible for awards under the RRP will consist of directors, directors emeritus, officers and employees of the Holding Company or the Company who hold positions with significant responsibilities or whose performance or potential contribution, in the judgment of the RRP Committee, will contribute to the future success of the Holding Company or the Company. See "RISK FACTORS - Potential Awards of Shares to Directors, Officers and Employees Pursuant to Benefit Plans." Under OTS regulations, no RRP shares may be awarded during the first year after the completion of the Conversion unless the RRP is approved by the shareholders of the Holding Company at an annual or a special meeting of shareholders held not less than six months following the completion of the Conversion. If the RRP is approved by the Holding Company shareholders at such meeting and implemented during the first year after the completion of the Conversion, the following restrictions will apply: (i) the number of shares awarded under the RRP to directors or directors emeritus who are not full-time employees of the Holding Company may not exceed 5% per person and 30% in the aggregate of the eligible plan shares; (ii) the number of shares awarded under the RRP to any individual who is a full-time employee of the Holding Company or its subsidiaries may not exceed 25% of the eligible shares; and (iii) RRP awards will vest at the rate of one-fifth per year commencing no earlier than one year from the date the RRP is approved by the shareholders, subject to acceleration of vesting only in the event of the death or disability of a participant. No decision has been made as to anticipated awards under the RRP. See "MANAGEMENT - Stock Benefit Plans -- Recognition and Retention Plan." EMPLOYMENT AGREEMENTS. In connection with the Conversion, the Company will enter into employment agreements with Douglas M. McKay, the President, Chief Executive Officer, and Chairman of the Board of the Company, Donald J. Varner, the Secretary and Senior Vice President/Retail Banking Division of the Company, and Patrick A. Kelly, the Treasurer, Chief Financial Officer and Senior Vice President/Financial Division of the Company. Each employment agreement will provide for a term of three years and will also provide for severance payments in the event the agreement is terminated prior to the expiration of its term upon a change in control of the Company or for any reason other than just cause, as defined therein. See "MANAGEMENT - Employment Agreements." INVESTMENT RISKS An investment in the Common Shares involves certain risks, including the possible loss of principal invested. Special attention should be given to the matters discussed under "RISK FACTORS - Anticipated Low Return on Equity; Interest Rate Risk; - Risks Associated with Commercial Lending; - Possible Adverse Effects of Contribution of Shares to the Foundation; - Risks Associated with Economic Conditions in the Company's Market Area; - Geographic Concentration of Credit; - Competition in Primary Market Area; - Absence of Established Market for the Common Shares; - Dilutive Impact of Benefit Plans on Net Earnings and Shareholders' Equity; - Potential Awards of Shares to Directors, Officers and Employees Pursuant to Benefit Plans; - Legislation and Regulation Which May Adversely Affect Earnings and Operations; and - Anti-Takeover Provisions Which May Discourage Sales of Common Shares for Premium Prices." United Community Financial Employer Stock Fund which invests in Corp. Common Stock common shares, without par value, of United Community Financial Corp., the holding company of the Employer, an Ohio savings and loan association. A Participant may elect (in amounts not less than $5.00) to have both past and future contributions and additions to the Participant's 401(k) Account invested either in the Employer Stock Fund or in such other managed portfolios listed above. These elections will generally be effective the business day coinciding with or next following the day of the plan administrator's receipt of such investment directions. Any amounts credited to a Participant's 401(k) Accounts for which investment directions are not given will be invested in ________________. Because investment allocations only are required to be made in increments of 1%, Participants can invest their 401(k) Accounts in each of the available investment funds. The net gain (or loss) in the 401(k) Accounts from investments other than the Employer Stock Fund (including interest payments, dividends, realized and unrealized gains and losses on securities, and expenses paid from the Trust) are determined daily during the Plan Year. Net gain (or loss) in the 401(k) Account from investments (including interest, dividends, realized and unrealized gain and expenses paid) from the Employer Stock Fund will be determined quarterly. For purposes of such allocations, all assets of the Trust are valued at their fair market value. A. Funds under the Plan Prior to the Conversion. Prior to the Conversion, contributions under the Plan were invested in the five funds listed below. The annual percentage of returns on these funds, calculated prior to any fees being charged to the portfolio for 1995, 1996 and 1997 were: <TABLE> <CAPTION> 1997 1996 1995 ---- ---- ---- <S> <C> <C> <C> A. AIM Balanced Fund A 24.41% 19.25% 34.98% B. AIM Charter Fund A 24.73 19.58 35.68 C. AIM Income Fund A 11.92 8.58 22.03 D. AIM International Equity A 5.70 18.98 16.41 E. AIM Value Fund A 23.95 14.52 34.85 </TABLE> B. The Employer Stock Fund. The Employer Stock Fund will consist of investments in Common Shares made on and after the effective date of the Conversion. Any cash dividends paid on Common Shares held in the Employer Stock Fund will be credited to a cash dividend subaccount for each Participant investing in the Employer Stock Fund. The Trustee will, to the extent practicable, use all amounts held by it in the Employer Stock Fund (except the amounts credited to cash dividend subaccounts) to purchase Common Shares. It is expected that all purchases will be made at prevailing market prices. Under certain circumstances, the Trustee may be required to limit the SELECTED FINANCIAL INFORMATION AND OTHER DATA The following tables set forth certain information concerning the financial condition, earnings and other data regarding the Company at the dates and for the periods indicated. Such information should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this Prospectus. For information concerning the Company's financial condition and results of operations for the quarter ended March 31, 1998, see "RECENT DEVELOPMENTS."
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+PROSPECTUS SUMMARY The following summary should be read in conjunction with, and is qualified in its entirety by, the more detailed information and the Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Investors should consider carefully the risk factors related to the purchase of the Common Stock of the Company. See "Risk Factors." Unless otherwise indicated, the information in this Prospectus assumes: (i) the Underwriters' Over-Allotment Option will not be exercised, (ii) a 2-for-1 stock split effective as of June 25, 1998 for each share of Common Stock of the Company outstanding as of June 9, 1998, and (iii) an offering price of $15.25 per share, the last reported sale price on July 8, 1998. References herein to fiscal years are to the Company's fiscal year, which ends on September 30. Unless the context otherwise requires, the "Company" refers to Integral Systems, Inc. and its subsidiaries. This Prospectus contains forward-looking statements about business strategies, market potential, future financial performance and other matters. In addition, when used in this Prospectus, the words "intends to," "anticipates," "expects" and similar expressions are intended to identify forward-looking statements. Such statements involve many risks and uncertainties that could cause actual results to differ materially from such statements, including, without limitation, those risks and uncertainties described herein under "Risk Factors." A glossary of acronyms used in this Prospectus appears on page 53. THE COMPANY Integral Systems, Inc. builds satellite ground systems for command and control, integration and test, data processing, and simulation. Since its inception in 1982, the Company has provided ground systems for over 90 different satellite missions for communications, science, meteorology and earth resource applications. The Company has an established domestic and international customer base that includes government and commercial satellite operators, spacecraft and payload manufacturers and aerospace systems integrators. The Company has developed innovative software products that reduce the cost and minimize the development risk associated with traditional, custom-built systems. The Company believes that it was the first to offer a comprehensive commercial-off-the-shelf ("COTS") software product line for command and control. As a systems integrator, the Company leverages these products to provide turnkey satellite control facilities that can operate multiple satellites from any manufacturer. These systems offer significant cost savings for customers that have traditionally purchased a separate custom control center for each of their satellites. The Company has been profitable every year since its inception and has experienced recent growth that reflects the increased demand for its products and services. During the last five fiscal years, the Company's revenue has grown at an average annual rate of 21%, all through internal growth, reaching $20.1 million for fiscal year 1997. Additionally, for the six month period ended March 31, 1998, the Company's revenues grew 33.6% over the comparable prior six month period, increasing to $12.4 million. For over 15 years, the Company has provided flexible, reliable and affordable ground system solutions. This has allowed the Company to stay ahead of the competition and perform well in an industry that has traditionally been dominated by much larger aerospace firms. The Company believes that it has a unique combination of competitive advantages, including the following: . Experience. More experience with different types of satellites and operational scenarios than any competitor. . Technology. Internationally recognized and proven COTS products that were first to market and that continue to lead the competition in functionality. . Capabilities. Turnkey systems for customers who need a comprehensive range of products and services. . Delivery schedule and price. Ability to deliver systems faster and at a lower cost than the competition. INDUSTRY OVERVIEW According to a recent study by SpaceVest, an organization which invests in companies that supply, support or depend on space-related activities, space industry revenues will exceed $95 billion in 1998 and will grow at a rate of approximately 10% per year. Industry growth is further supported by a study recently cited in Space News predicting that nearly 1,700 satellites will be launched over the next 10 years. The 1998 space infrastructure revenues (for spacecraft manufacturing, ground sector, launch services and science/R&D) are expected to be approximately $53 billion, comprising over half of the total space market. The ground sector, which includes ground equipment, installations and operations, currently accounts for approximately $25 billion of total space infrastructure revenues. The ground sector is almost as large as all other sectors of the space infrastructure market combined. The Company estimates that the current worldwide command and control market represents approximately $4 billion. However, the Company also believes that the increasing acceptance of COTS products will lead to substantial price reductions and a subsequent decrease in market volume. The Company believes that its COTS software products leave it well positioned to capitalize on this market trend, resulting in an increase in both its revenues and market share. SOFTWARE PRODUCTS EPOCH 2000, the Company's flagship software product line, offers satellite operators a low-cost, adaptable system for satellite command and control that can be used with satellites from any manufacturer. These software products can also easily be integrated with any ground equipment on the market. EPOCH 2000 provides a full spectrum of capabilities for real-time telemetry and commanding, trending, database configuration and orbit analysis. In addition to command and control applications, the EPOCH 2000 technology supports spacecraft/payload integration and test as well as remote tracking station automation on a number of government and commercial programs. The Company plans to expand the EPOCH 2000 family to include other ground system capabilities that currently require custom software. SYSTEM INTEGRATION AND DEVELOPMENT SERVICES The Company provides services to support mission-specific requirements for both government and commercial customers. Most of the Company's ground system contracts have a service component. Depending on the application, the services may include tailoring of COTS software products, integration of third-party hardware and software and/or custom software development. The Company also provides post-delivery warranty and maintenance service for most of its systems. The Company believes that its expertise and experience in satellite systems and operations, computer software and hardware, engineering/mathematical analysis and end-user applications allow it to provide ground systems that exceed traditional expectations on system performance, cost and implementation schedule. The Company's experience, together with its innovative COTS software products and software tools, reduce the risks and lead time associated with ground system development. APPLICATIONS The Company believes that it has strengthened its position in the marketplace by developing a business base in certain critical application areas that offer continued growth potential. The Company provides products and services in different combinations in order to deliver systems for the following applications: . Command and Control. The Company's EPOCH 2000 product line provides the complete spectrum of capabilities for operating satellites from any manufacturer. The Company sells the EPOCH 2000 software as a stand alone product or bundled as a turnkey system with third-party hardware (e.g. antenna, radio frequency ("RF"), baseband and computer equipment). . Integration and Test. The Company provides integration and test ("I&T") systems for the spacecraft bus and payload. The I&T systems are based on the EPOCH 2000 product line and software tools developed by the Company for data visualization and analysis for payload I&T. . Station Automation. The Company has recently extended the EPOCH 2000 product line to include a new product, called the Low Earth Orbiting Terminal ("LEO-T"). The LEO-T software provides fully automated, un- manned operations of remote tracking stations for low Earth orbit ("LEO") satellites. . Data Processing. The Company offers software tools and custom development services for satellite payload data acquisition and processing. The Company's principal work in this area has been for meteorological satellites. . Simulation. The Company builds satellite simulators which are used for ground system checkout, training, spacecraft anomaly resolution and flight software validation. STRATEGY The Company believes that its ability to produce timely, cost-effective turnkey systems has positioned it as a market leader in satellite command and control. The Company's principal focus will be to extend its technological and business leadership to capitalize on the future growth in the space industry. The Company also intends to leverage its existing capabilities to produce new off-the-shelf products for other related areas, including payload data processing, equipment monitoring and control, and satellite I&T. These areas could substantially expand the potential market for the Company's products. The Company may elect to pursue the acquisition of complementary businesses to supplement internal development efforts to support such growth, although no specific acquisition plans are currently in place. Integral Systems, Inc. is a Maryland corporation incorporated in 1982. Its principal executive offices are located at 5000 Philadelphia Way, Suite A, Lanham, Maryland 20706, and its telephone number is (301) 731-4233. THE OFFERING Common Stock offered by the Company.................... 1,300,000 shares Common Stock offered by the Selling Stockholders....... 200,000 shares Common Stock to be outstanding after the Offering(1)................ 7,116,976 shares Use of Proceeds (2).... The net proceeds of the Offering will be used for: (i) product development, (ii) expansion of operations and facilities improvements, (iii) the development of prototype systems for evaluation and marketing purposes, (iv) working capital and general corporate purposes, including possible repayment of certain indebtedness, and (v) possible acquisitions of complementary businesses. See "Use of Proceeds." Nasdaq SmallCap Market "ISYS" symbol...................... - -------- (1) Does not include an aggregate of 1,518,444 shares of Common Stock (600,000 of which are subject to approval by the Company's stockholders) reserved for issuance by the Company upon the exercise of stock options as of June 30, 1998, of which options to purchase 719,894 shares were outstanding at a weighted average exercise price of $3.26. See "Management--Stock Option Plan" and Note 10 of Notes to Consolidated Financial Statements. (2) The Company will not receive any of the net proceeds from the sale of shares by the Selling Stockholders. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following table presents summary consolidated financial data of the Company for the years ended September 30, 1993, 1994, 1995, 1996 and 1997 and the six months ended March 31, 1997 and 1998. The historical financial data for the years ended September 30, 1993, 1994, 1995, 1996 and 1997 has been derived from the financial statements of the Company which have been audited by Rubino & McGeehin, Chartered, independent public accountants, as set forth in the financial statements and notes thereto presented elsewhere herein. The financial data for the six months ended March 31, 1997 and 1998, and as of March 31, 1998, has been derived from the Company's unaudited financial statements in a manner consistent with the audited financial statements. In the opinion of the Company's management, these unaudited financial statements include all adjustments necessary for a fair presentation of such information. Operating results for interim periods are not necessarily indicative of the results that might be expected for the entire fiscal year. The following information should be read in conjunction with the Company's financial statements and notes thereto presented elsewhere herein. See "Financial Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000720676_xcl-ltd_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000720676_xcl-ltd_prospectus_summary.txt
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+PROSPECTUS SUMMARY Because this is a summary, it does not contain all the information that may be important to you. You should carefully read the whole Prospectus and its appendices, as well as the information incorporated by reference into this Prospectus. Usually in this Prospectus, the terms "XCL" or the "Company" refer to XCL Ltd. and all of its subsidiaries. Except as otherwise noted, the reported reserve data are based on reserve estimates made by the Company's independent petroleum engineers. See "Glossary of Terms" for definitions of certain oil and gas terminology. The Company ----------- XCL is principally engaged in the exploration for and development of oil and gas in the Zhao Dong Block (the "Zhao Dong Block") located in the shallow waters of the Bohai Bay in the People's Republic of China ("China"). The Company obtained a second production sharing contract covering the Zhang Dong Block (the "Zhang Dong Block"), also in the shallow waters of Bohai Bay, effective October 1, 1998. To date the Company has not generated any profits from these operations. The Company's only historic revenues were derived from its financing activities and properties currently held for sale or investment or previously sold. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company is in the development stage with respect to its operations in China and has not generated any revenues from operations related to its properties and interests in China. The Zhao Dong Block is located in one of China's major oil- producing basins. Geologic information suggests that a portion of the Zhao Dong Block is an extension of the onshore Dagang oil field complex to the west. Approximately 700 million barrels have already been produced from that field and it is still under production. The Zhao Dong Block is also about 40 miles northwest of the Shengli oil field, the largest in the basin, from which about 4 billion barrels have already been produced. The Shengli oil field is still under production as well. Of course, production in those fields does not ensure that there will be production from the Zhao Dong Block. In early 1993, XCL became the first foreign company to enter into an onshore Production Sharing Agreement (the "Contract"), with China National Oil and Gas Exploration and Development Corporation ("CNODC") (which is a Chinese state enterprise). The Contract provides for exploration, development, and production of the Zhao Dong Block. CNODC is the arm of the China National Petroleum Company ("CNPC"), also a state enterprise, in charge of all onshore exploration and production activity in China out to five meters in water depth. CNODC operates in this area through its subsidiary, Dagang Oilfield (Group) Co. Ltd. ("Dagang"). The Contract provides that the "Foreign Contractor" (the Company and Apache Corporation ("Apache") as a group, working through a participation agreement) is to pay all exploration costs. The Contract also states that, when a commercial discovery is made, CNODC may choose to participate in development, with up to 51% of all development and operating costs and allocable remainder oil and gas production allocated to CNODC and the remaining interest to the Foreign Contractor. The Foreign Contractor's share is divided equally between XCL and Apache. See "Business -- The Contract" and "Business -- Apache Farmout." XCL and Apache have successfully tested six of ten wells drilled to date on the Zhao Dong Block, with total test rates exceeding 39,500 barrels of oil per day. Of the four wells not tested, one (the D-3) was proven productive by wire line samples and tests in several sands but was not drill-stem tested, while a second (the F-1) was drilled but not fully evaluated. Drilling activities on the F-1 have been abandoned. Development of the C- D Field for production is now proceeding. Based on the report of H.J. Gruy and Associates ("Gruy"), the Company's independent petroleum engineers, net proved reserves in the C-D Field are estimated to be 11.76 million barrels as of January 1, 1998, and the estimated present value of future pre-tax net cash flows is $64.8 million. The standardized measure of discounted future net cash flows determined in accordance with the rules prescribed by FASB No. 69 is $53.8 million. Future reserve values are based on year end prices and operating costs, production and future development costs based on current costs with no escalation. See "Business -- Oil and Gas Reserves" and "Supplemental Oil and Gas Information" in the Notes to the Consolidated Financial Statements. The Company's Development Program --------------------------------- The C-D Field was discovered by the drilling of the C-1 and D-1 Wells. The Field has been appraised by the C-2, C-2-2, C-2-2 sidetrack, C-3, D-2, and D-3 Wells. On the basis of the calculated reserves, Apache and XCL have prepared an Overall Development Plan ("ODP") for the Field. The ODP presently projects the drilling of 45 wells, of which 32 are producers, 8 are water injection wells for the purpose of reservoir pressure maintenance to achieve higher levels of recovery of ultimate reserves and 5 are water disposal wells. The ODP has been approved by the Joint Management Committee ("JMC"), which oversees operations on the Zhao Dong Block, and has been approved by CNPC subject to certain modifications that XCL and Apache are studying. CNODC has given notice that it will participate as to its full 51% share in the C-D Field. XCL, Apache and CNODC are currently collaborating on engineering studies to refine the ODP, both to reduce capital commitments for development and to accelerate production, and have, as a result, suggested some revisions to the original ODP. It is expected that these studies will assist the parties in determining the most efficient method for development, including the practicability of beginning production before all development operations have been completed. The Company has been informed by CNODC that they desire that production on the Zhao Dong Block begin as soon as practicable and the parties are assessing how that would be commercially feasible. Initial results indicate that 1999 production is possible and the Company, Apache and CNODC have decided to attempt to commence initial production in 1999. XCL's current estimate (which is subject to revision as the project moves forward) of the costs to develop the reserves in the C-D Field that are identified in the ODP by Apache (the "Operator") (which XCL understands are higher than the reserves identified by XCL's petroleum engineers) is approximately $185 million (of which XCL's share would be approximately $45.3 million). This is less than amounts projected by the Operator in the original ODP for several reasons. Cost reductions are expected in part based on design changes that would eliminate one drilling platform and one production platform from the ODP. While formal Chinese approval for these changes has not yet been obtained, all parties believe that such approval can be secured. Further, cost reductions are expected as a result of preliminary bids that suggest that cost estimates in the ODP have been too high. In addition, the initial ODP included estimates of contingencies larger than the industry standard. Finally, cost reductions from the Operator's projections are also based on the assumption that if the project moves forward with dispatch, the current weakness of certain Asian currencies could result in substantial reductions in the costs of steel and fabrication for the project. The revised ODP design anticipates that once production and loading facilities have been installed in the field, wells will be placed on production as they are drilled. In this case, cash flow from this production would be available to fund part of XCL's capital requirements for the development of the C-D Field. The Company's financial plans include the use of such cash flow as part of the Company's source of funds. Production tests of the C-4 Well, announced by XCL on October 7, 1997, indicate a combined daily rate from 8 zones of 15,359 barrels per day, and 6,107 Mcf of gas, plus a ninth zone daily rate of 4,600 Mcf and 14 barrels of condensate. This well suggests a new field discovery on the Zhao Dong Block. In August 1998, CNODC, XCL, and Apache commenced drilling a well to appraise the C-4 Well. If this drilling proves successful, early production from the two initial wells in the C-4 Well area may begin by mid-1999; initial feasibility studies indicate that this is possible. The capital costs attributable to such early production are not included in the 1998 work program and budget. Successful appraisal of the C-4 Well could also cause XCL and Apache to move promptly toward development of this area. The Company's Additional Ventures --------------------------------- The Company is also proceeding with certain other energy related ventures in China, including a joint venture with CNPC United Lube Oil Corporation to engage in the manufacturing, distribution and marketing of lubricating oil in China and Southeast Asian markets and a cooperative venture with the China National Administration of Coal Geology to explore and develop coalbed methane in two areas of China. See "Organizational Chart" below and "Business -- United/XCL Lube Oil Joint Venture" and "-- Coalbed Methane Project." Further, in August 1998 the Company, through its wholly owned subsidiary XCL-Cathay Ltd., signed a production sharing contract with CNODC for the 12,000- acre Zhang Dong Block which was approved in September 1998, effective October 1, 1998. See "Management's Discussion and Analysis of Financial Condition and Results of Operation -- Liquidity, Capital Resources and Management's Plans." Securities the Resale of Which are Being Registered --------------------------------------------------- This Prospectus offers for resale the following issued and outstanding Securities and Securities to be issued upon exercise or conversion of certain outstanding Securities and Warrants. See "Selling Security Holders." Amended Series A Preferred Stock - -------------------------------- o 294,118 Shares issued in an Equity Offering on May 20, 1997 in which the Company offered privately 294,118 units, each consisting of one share of Amended Series A Preferred Stock and one warrant to buy 21.8 shares of Common Stock (the "Equity Warrants"). o 11,816 Shares issued in partial payment of interest payable on the Company's Secured Subordinated Notes due April 5, 2000 (the "Subordinated Debt"), which were paid in full on October 15, 1997. o 726,905 Shares issued on recapitalization of the Company's Series A, Cumulative Convertible Preferred Stock ("Series A Preferred Stock") into shares of Amended Series A Preferred Stock and the payment of accrued and unpaid dividends thereon. o 63,706 Shares issued on recapitalization of the Company's Series E, Cumulative Convertible Preferred Stock ("Series E Preferred Stock") into shares of Amended Series A Preferred Stock and the payment of accrued and unpaid dividends thereon. o 12,917 Shares issued in payment of dividends on the Amended Series A Preferred Stock payable November 1, 1997. o 53,442 Shares issued in payment of dividends on the Amended Series A Preferred Stock payable May 1, 1998. o 56,295 Shares issuable in payment of dividends on the Amended Series A Preferred Stock payable November 2, 1998. _________ 1,219,199 Shares of Amended A Preferred Stock being registered for resale (including in each case listed above shares, if any, not yet issued attributable to fractional shares and tax withholding). Common Stock - ------------ o 1,731,285 Shares of Common Stock currently outstanding issued in private placement transactions between April 1996 and September 30, 1998 as follows: o 451,172 Shares issued in payment of interest payable on Subordinated Debt. o 4,858 Shares issued in payment of a finders fee for Regulation S Offerings conducted in Europe in December 1995, March 1996 and April 1996. o 584,696 Shares issued upon exercise of various stock purchase warrants. o 30,000 Shares issued in settlement of litigation. o 26,666 Shares issued in partial payment of a consulting fee. o 633,893 Shares issued upon conversion of all the outstanding shares of the Company's Series F, Cumulative Convertible Preferred Stock ("Series F Preferred Stock"). o 170,383 Shares issuable to meet various contractual obligations of the Company. o 14,044,255 Shares issuable upon conversion of the outstanding Amended Series A Preferred Stock. o 6,084,772 Shares issuable upon exercise of the Equity Warrants issued in the Equity Offering on May 20, 1997. o 6,400,000 Shares issuable upon exercise of warrants (the "Note Warrants") that were issued in a Note Offering on May 20, 1997 in which the Company privately offered 75,000 units, each unit consisting of one 13.50% Senior Secured Note due May 1, 2004 in the principal amount of $1,000 (collectively, the "Notes") and one Note Warrant to purchase 1,280 shares of Common Stock. o 1,280,512 Shares issuable upon the exercise of Warrants issued to Jefferies & Co., Inc. ("Jefferies") as an investment banking fee in connection with the Equity and the Note Offerings on May 20, 1997. o 2,859,514 Shares issuable upon exercise of various outstanding Warrants with exercise prices ranging from $.15 per share to $7.50 per share. o 1,022,000 Shares issuable upon conversion of Amended Series B, Cumulative Convertible Preferred Stock ("Amended Series B Preferred Stock"). __________ 33,592,721 Shares of Common Stock being registered for resale (including an indeterminable number of shares issuable in respect of anti-dilution adjustments applicable to the Amended Series A and Amended Series B Preferred Stock and the Warrants). Terms of the Securities ----------------------- Common Stock - ------------- Common Stock Issued and Outstanding................. 22,995,804 shares (See "Description of Capital Stock - - Common Stock") Amended Series A Preferred Stock - -------------------------------- Amended Series A Preferred Stock Outstanding........................ 1,181,614 shares Dividends................. Dividends are cumulative from May 20, 1997 (the "Issue Date") at the annual rate of $8.075 per share. Dividends are payable on each May 1 and November 1, when, as and if declared by the Board of Directors. Dividends are payable in additional shares of Amended Series A Preferred Stock (valued at $85.00 per share) through November 1, 2000, and thereafter in cash or, at the election of the Company, in shares of Amended Series A Preferred Stock (valued at $85.00 per share). See "Description of Capital Stock -- Preferred Stock - - Amended Series A Preferred Stock -- Dividend Rights." Liquidation Preference........ $85.00 per share, plus accrued and unpaid dividends. See "Description of Capital Stock -- Preferred Stock -- Amended Series A Preferred Stock -- Liquidation Rights." Conversion Rights.............Convertible at any time after May 20, 1998, at the option of the holder, unless previously redeemed, into shares of Common Stock at a conversion price of $7.50 per share of Common Stock. (This is equivalent to a conversion rate of 11.333 shares of Common Stock per share of Amended Series A Preferred Stock.) Conversion price is subject to adjustment upon the occurrence of certain events. See "Description of Capital Stock -- Preferred Stock --- Amended Series A Preferred Stock -- Conversion Rights." Mandatory Conversion Right......... The Company may, at its election, require the conversion of all the outstanding shares of Amended Series A Preferred Stock at any time after November 20, 1997 that the Common Stock has traded for 20 trading days during any 30 consecutive trading days at a Market Price (as defined below) equal to or greater than 150% of the prevailing conversion price. See "Description of Capital Stock - - Preferred Stock -- Amended Series A Preferred Stock -- Mandatory Conversion Rights." Special Conversion Rights......... The conversion price of the Amended Series A Preferred Stock will be reduced for a limited period in certain circumstances. In general, the reduction will occur if a Change of Control (as defined below) or a Fundamental Change (as defined below) occurs at a time when the Market Value of the Common Stock is below the then prevailing conversion price. No adjustment will occur upon a Fundamental Change if a majority of the consideration received by the holders of Common Stock consists solely of Marketable Stock (as defined below) and under certain other circumstances. See "Description of Capital Stock -- Preferred Stock -- Amended Series A Preferred Stock -- Special Conversion Rights." Optional Redemption.......... Redeemable, in whole or in part, at the option of the Company, on or after May 1, 2002, initially at a redemption price of $90.00 per share and, thereafter, at prices declining to $85.00 per share on and after May 1, 2006, plus all accrued and unpaid dividends, if any, to the redemption date. See "Description of Capital Stock -- Preferred Stock -- Amended Series A Preferred Stock -- Optional Redemption." Mandatory Redemption..........Mandatorily Redeemable, in whole, on May 1, 2007, at a redemption price of $85.00 per share, plus accrued and unpaid dividends to the redemption date, payable in cash or, at the election of the Company, in Common Stock. See "Description of Capital Stock -- Preferred Stock -- Amended Series A Preferred Stock -- Mandatory Redemption." Voting Rights................ In addition to any special voting rights granted by law, each share of Amended Series A Preferred Stock entitles the holder thereof to cast the same number of votes as the shares of Common Stock then issuable upon conversion thereof on any matter subject to the vote of the Common Stockholders (currently 11 votes per share), and (i) the holders of the Amended Series A Preferred Stock will be entitled to vote as a separate class to elect two directors if the equivalent of three semi-annual dividends payable on the Amended Series A Preferred Stock (whether consecutive or not) are in arrears, which rights will continue until the dividend arrearage has been paid in full, and (ii) the approval of the holders of two-thirds of the then outstanding Amended Series A Preferred Stock will be required for the issuance of any class or series of stock ranking prior to the Amended Series A Preferred Stock as to dividends or liquidation rights and for certain amendments to the Company's Amended and Restated Certificate of Incorporation that adversely affect the rights of holders of the Amended Series A Preferred Stock. See "Description of Capital Stock - - Preferred Stock -- Amended Series A Preferred Stock -- Voting Rights." Priority of Amended Series A Preferred Stock..........The Amended Series A Preferred Stock has priority over the Common Stock with respect to the payment of dividends and upon liquidation, dissolution or winding up of the Company. For additional information regarding the Common Stock and Amended Series A Preferred Stock, see "Description of Capital Stock -- Common Stock" and "-- Preferred Stock -- Amended Series A Preferred Stock."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000747201_carey_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000747201_carey_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated or the context otherwise requires, (i) the information contained in this Prospectus assumes no exercise of the Underwriters' over-allotment option to purchase 324,300 shares of Common Stock from the Company and certain Selling Stockholders, and (ii) references to "Carey" or the "Company" mean Carey International, Inc. and its subsidiaries. THE COMPANY Carey International, Inc. is one of the world's largest chauffeured vehicle service companies, providing services through a worldwide network of owned and operated companies, licensees and affiliates serving 420 cities in 65 countries. The "Carey" brand name has represented quality chauffeured vehicle service since the 1920s. The Company owns and operates service providers in Boston, Indianapolis, London, Los Angeles, New York, Philadelphia, San Francisco, South Florida and Washington, D.C. In addition, the Company generates revenues from licensing the "Carey" name and providing central reservation, billing and sales and marketing services to its licensees. The Company's worldwide network also includes affiliates in locations in which the Company has neither owned and operated companies nor licensees. Over the past five years, the Company has invested significant capital in developing its central reservations and billing system and worldwide service infrastructure. By leveraging its current infrastructure and position as a market leader, the Company is consolidating the highly fragmented chauffeured vehicle service industry through the acquisition of: (i) current Carey licensees, (ii) additional companies in markets in which the Company already owns and operates a chauffeured vehicle service company, and (iii) companies in other strategic markets in North America and Europe. Carey also intends to add to its global presence by acquiring or establishing strategic alliances with companies in the Pacific rim of Asia and Latin America. In June 1997, the Company completed its initial public offering of 3,335,000 shares of Common Stock (the "IPO") and simultaneously acquired Manhattan International Limousine Ltd. and an affiliate (together, "Manhattan Limousine"), one of the largest chauffeured vehicle service companies in the New York metropolitan area. Since June 1997, the Company has acquired six additional chauffeured vehicle service companies located in Boston, Indianapolis, London, Los Angeles and Miami. The Company also has added three new domestic licensees. In addition, in order to position itself for continued growth, Carey has enhanced its sales and marketing capabilities by, among other things, adding a Senior Vice President of Sales and Marketing, implementing a sales training program, increasing the size of its sales and marketing staff from 20 to 30 persons and expanding its emphasis on global and national accounts. The Carey network utilizes chauffeured sedans, limousines, vans and minibuses to provide services for airport pick-ups and drop-offs, inter-office transfers, business and association meetings, conventions, roadshows, promotional tours, special events, incentive travel and leisure travel. Businesses and business travelers utilize the Company's services primarily as a management tool, to achieve more efficient use of time and other resources. Carey's worldwide network of chauffeured vehicle service companies allows it to provide services with consistently high quality to its customers in virtually every major city in the expanding global travel market. The network is linked to over 300,000 reservation terminals in travel agencies, corporate travel departments and government offices by the Carey International Reservation System (the "CIRS"), the chauffeured vehicle service industry's most extensive centralized global reservation system. The Company estimates that the United States chauffeured vehicle service industry generated revenues of approximately $3.9 billion in 1996, and has undergone steady growth in recent years, with revenues increasing at a compound annual growth rate of 10.9% between 1990 and 1996. The industry is highly fragmented, with over 9,000 companies utilizing over 100,000 vehicles. The Company believes that during 1997, no chauffeured vehicle service company accounted for more than 3% of total United States industry revenues. The Company also believes that similar fragmentation exists in the chauffeured vehicle service industry outside the United States. The Company's objective is to increase its profitability and its market share in the chauffeured vehicle service industry by implementing the following growth strategies: Expand Through Acquisitions. Carey believes that there are significant opportunities to acquire additional chauffeured vehicle service companies that would benefit from the capital and management resources that the Company can provide. Carey intends to acquire current Carey licensees, as well as additional chauffeured vehicle service companies both in markets in which the Company already owns and operates such a business and in other strategic regions in North America and Europe. Carey also intends to acquire or establish strategic alliances with companies in the Pacific rim of Asia and Latin America. Carey believes it has a competitive advantage in acquiring licensees because of a right of first refusal contained in the substantial majority of its domestic license agreements. With the exception of Indianapolis, the Company believes that it has less than a 10% market share in each of the markets in which it owns and operates a chauffeured vehicle service company, and that there is significant potential for it to expand its business in such markets through acquisitions. As the Company acquires additional chauffeured vehicle service companies, it anticipates that cost savings can be achieved through the consolidation of certain administrative functions and the elimination of redundant facilities, equipment and personnel. Increase International Market Share. The Company believes it has significant opportunities to generate revenues from international markets. Through acquisitions and increased marketing efforts, the Company increased its international revenues 30.6%, from $7.6 million in its fiscal year ended November 30, 1996 to $9.9 million in its fiscal year ended November 30, 1997. Of its fiscal 1997 international revenues, approximately 72.0% was generated by the Company's owned and operated business in London, approximately 27.2% was generated by the Company's international licensees and the remainder was generated by the Company's international affiliates. In December 1997, the Company acquired in a "tuck-in" acquisition an additional chauffeured vehicle service company located in London. Carey believes that its network can capture a significant portion of the growing international market for chauffeured vehicle services by acquiring or licensing additional chauffeured vehicle service companies and otherwise implementing the Carey system outside the United States. The Company intends to increase its international presence by intensifying its sales and marketing efforts, strengthening its relationships with significant domestic and international business travel arrangers, and capitalizing on the capacity of the CIRS to operate on a global scale. By enhancing its international presence, the Company also expects to increase its revenues from providing chauffeured vehicle services to international travelers both visiting the United States and travelling abroad. Expand Licensee Network Worldwide. The Company will seek to expand its worldwide network and generate additional revenues from license and marketing fees by licensing additional chauffeured vehicle service companies in smaller markets that do not justify a Company-owned presence. Ultimately, as these less strategic markets grow in size and importance to the Company, the licensees in such markets may become acquisition candidates. Since the IPO, the Company has added licensees in Jacksonville, Florida, Maui, Hawaii and Syracuse, New York. Convert Salaried Chauffeurs to Independent Operators. The Company believes that it can improve its profitability by continuing to convert salaried chauffeurs to independent operators in certain businesses acquired by Carey. The objective of Carey's independent operator strategy is to instill in each chauffeur the sense of purpose, responsibility and dedication characteristic of an independent business owner, thereby increasing the profitability of the chauffeur and the Company. Carey's independent operator program allows the Company to reduce its labor and capital costs, convert fixed costs to variable costs and generate revenues from fees paid by independent operators. In 1979, the Company was organized as a Delaware corporation and commenced operations by acquiring certain rights to the "Carey" name held by a predecessor company. Predecessor companies operated chauffeured vehicle service businesses under the "Carey" name since the 1920s. The Company's principal executive offices are located at 4530 Wisconsin Avenue, N.W., Washington, D.C. 20016. Its telephone number at that location is (202) 895-1200. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company..... 1,350,000 Common Stock offered by the Selling Stockholders........................... 812,000 Common Stock to be outstanding after this offering.......................... 9,158,145(1) Use of Proceeds......................... To repay existing indebtedness, and for working capital and acquisitions. See "Use of Proceeds." Nasdaq National Market Symbol........... CARY </TABLE> - -------- (1) Based on 7,808,145 shares of Common Stock outstanding on May 6, 1998. Does not include 1,178,780 shares of Common Stock issuable upon the exercise of outstanding options and warrants. Of this amount, options and warrants to purchase 848,737 shares are presently exercisable. Also does not include 977,000 shares of Common Stock issuable upon the exercise of options granted subject to stockholder approval of the 1997 Equity Incentive Plan, as amended. For information regarding the Company's benefit plans, see "Management--Director Compensation" and "--Equity Incentive Plans" and "Shares Eligible for Future Sale." SUMMARY AND PRO FORMA CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> THREE MONTHS ENDED FISCAL YEAR ENDED NOVEMBER 30, FEBRUARY 28, ------------------------------------------------------- ---------------- 1993 1994 1995 1996 1997 1997 1998 ------- ------- ------- -------- ------------------ ------- ------- PRO ACTUAL FORMA(1) -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA(2)(3): Revenue, net.......... $33,651 $40,314 $48,969 $ 65,545 $ 86,378 $96,264 $15,595 $23,651 Cost of revenue....... 24,495 27,700 33,027 43,649 57,890 64,017 10,469 16,177 ------- ------- ------- -------- -------- ------- ------- ------- Gross profit.......... 9,156 12,614 15,942 21,896 28,488 32,247 5,126 7,474 Selling, general and administrative expense.............. 9,336 11,043 14,081 16,727 20,112 23,539 4,214 5,849 ------- ------- ------- -------- -------- ------- ------- ------- Operating income (loss)............... (180) 1,571 1,861 5,169 8,376 8,708 912 1,625 Interest income (expense) and other income (expense)..... (1,367) (1,446) (1,492) (1,380) (690) 4 (278) (27) ------- ------- ------- -------- -------- ------- ------- ------- Income (loss) before provision for income taxes................ (1,547) 125 369 3,789 7,686 8,712 634 1,598 Provision for income taxes................ 10 163 271 294 3,163 3,585 268 681 ------- ------- ------- -------- -------- ------- ------- ------- Net income (loss)..... $(1,557) $ (38) $ 98 $ 3,495 $ 4,523 $ 5,127 $ 366 $ 917 ======= ======= ======= ======== ======== ======= ======= ======= Net income (loss) per common share-- basic(4)............. $ (1.18) $ (0.04) $ 0.07 $ 2.57 $ 1.00 $ 0.67 $ 0.27 $ 0.12 ======= ======= ======= ======== ======== ======= ======= ======= Net income (loss) per common share-- diluted(4)........... $ (1.16) $ (0.03) $ 0.03 $ 1.01 $ 0.77 $ 0.64 $ 0.11 $ 0.11 ======= ======= ======= ======== ======== ======= ======= ======= Weighted average common shares used in computing net income per common share-- basic(4)............. 1,323 1,323 1,333 1,359 4,506 7,642 1,378 7,652 ======= ======= ======= ======== ======== ======= ======= ======= Weighted average common shares used in computing net income per common share-- diluted(4)........... 1,348 1,348 2,817 3,794 6,137 8,003 4,086 8,064 ======= ======= ======= ======== ======== ======= ======= ======= </TABLE> <TABLE> <CAPTION> FEBRUARY 28, 1998 ---------------------- ACTUAL AS ADJUSTED(5) ------- -------------- <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Working capital....................................... $ 3,577 $ 32,219 Total assets.......................................... 82,905 111,547 Long-term debt and capital leases, less current maturities .......................................... 3,532 2,200 Deferred revenue(6)................................... 13,638 13,638 Total stockholders' equity............................ 49,336 79,310 </TABLE> See footnotes on following page. - ------- (1) Gives effect to the following events as if they occurred on December 1, 1996: (i) the acquisition of Manhattan Limousine (using statement of operations data for Manhattan Limousine's six months ended March 31, 1997) and the amortization of associated goodwill, (ii) the conversion of certain preferred stock and subordinated debt into Common Stock, see Note 17 to the Company's Consolidated Financial Statements, and the elimination of interest expense associated with the subordinated debt, (iii) the issuance of shares of Common Stock to (a) repay certain debt of the Company, (b) pay the cash and note portions of the purchase price for Manhattan Limousine, (c) repay certain debt assumed in connection with the acquisition of Manhattan Limousine, (d) redeem certain preferred stock of the Company and (e) pay the stock portion of the purchase price in connection with the acquisition of Manhattan Limousine, (iv) the elimination of interest expense associated with debt repaid from the proceeds of the Company's June 1997 initial public offering of Common Stock and (v) other adjustments as described in the Pro Forma Consolidated Financial Statement and the notes thereto. (2) On October 31, 1997, the Company merged with Indy Connection Limousine, Inc. and a subsidiary ("Indy Connection"). The merger was accounted for as a pooling-of-interests and, accordingly, the consolidated financial statements of the Company have been restated to include the accounts and operations of Indy Connection for all periods presented. (3) The results of operations of chauffeured vehicle service companies acquired by the Company in New York (June 1997), Los Angeles (October 1997) and London (December 1997) have been included in the statement of operations data from their respective dates of acquisition. (4) Net income per common share has been restated to comply with Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings per Share. See Note 5 and Note 16 to the Company's Consolidated Interim Financial Statements and Consolidated Financial Statements, respectively. (5) Adjusted to give effect to the issuance and sale of the 1,350,000 shares of Common Stock offered by the Company hereby (at an assumed public offering price of $23.75) and the application of the net proceeds therefrom as described under "Use of Proceeds." (6) Represents the balance of the fees deferred in connection with independent operator agreements less amounts previously recognized. Such fees are recognized ratably over the terms of the agreements, which typically range from 10 to 20 years. See the Notes to the Company's Consolidated Financial Statements.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000758540_great_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000758540_great_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS." THE COMPANY Great Plains Software, Inc. (the "Company") is a leading provider of Microsoft Windows NT client/ server financial management software for mid-sized businesses. The Company's award-winning products and services automate essential business functions and enhance the strategic value of financial information. The Company's products and services are sold and implemented exclusively by its extensive network of independent sales and support organizations throughout the United States, Canada and select international markets. The Company's client/server product lines, Dynamics C/S+ and Dynamics, consist of a suite of financial and distribution applications, such as general ledger, accounts receivable, accounts payable, payroll and sales order and purchase order processing, and a suite of development and customization tools. In addition, the Dynamics CS+ product line includes a suite of field service applications. The Company's client/server products are designed to meet the broad spectrum of financial management needs of the middle market or midmarket (the "Midmarket"), which generally consists of mid-sized businesses with $1 million to $250 million in revenues and 10 to 2,500 employees. In order to meet the needs of the Midmarket, the Company designs, develops, markets, sells and supports client/server products that are cost-effective, scalable and easy to implement, customize and use. The Company's client/server products are optimized for Microsoft technologies, most notably Windows NT, Windows 95 and SQL Server, which are increasingly becoming the standard in the Midmarket. Moreover, by utilizing emerging Internet and electronic commerce technologies, the Company's financial management systems facilitate the ability of customers to conduct business over the Internet. The Company has made a significant investment in building an experienced, knowledgeable and highly motivated domestic and international service network, which consists of value added resellers (VARs), systems integrators, Big Six and other accounting firms, independent software vendors (ISVs) and specialized software consultants (together, the "Partners"). Through its Partner network, the Company provides customers with trained and knowledgeable software professionals who are available locally to implement its systems as well as provide ongoing service and support. Most of the Partners customize the Company's systems to fit individual business needs, and some Partners develop software applications that integrate with and extend the functionality of the Company's products to meet the requirements of specific industries. The Company believes that prompt and effective service and technical support are essential elements of a complete financial management software solution and dedicates significant resources to delivering timely, reliable and cost-effective service to its customers and Partners. The Company has received numerous industry awards for its customer and Partner service. The Company was founded in 1981 and was incorporated as a Minnesota corporation in 1983. The Company's offices are located at 1701 S.W. 38th Street, Fargo, North Dakota 58103, and its telephone number is (701) 281-0550. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Selling Stockholders... 500,000 shares Common Stock to be outstanding after the 13,704,889 shares(1) offering......................................... Nasdaq National Market symbol...................... "GPSI" </TABLE> - -------------- (1) Based on the number of shares of Common Stock outstanding on March 16, 1998. Excludes (a) 966,941 shares of Common Stock issuable upon exercise of stock options outstanding as of March 16, 1998, with a weighted average exercise price of $10.34 per share, of which options to purchase 198,718 shares were then exercisable and (b) 1,227,471 shares reserved for issuance under the Company's 1997 Stock Incentive Plan, 1997 Employee Stock Purchase Plan and Outside Directors' Stock Option Plan. See "Capitalization," "Management--Director Compensation" and "--Benefit Plans" and "Description of Capital Stock." SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) <TABLE> <CAPTION> NINE MONTHS ENDED YEAR ENDED MAY 31, -------------------------- ---------------------------------------------------------------- FEBRUARY 28, FEBRUARY 28, 1993 1994 1995 1996 1997 1997 1998 ----------- ----------- ----------- ----------- ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenues................. $ 28,870 $ 29,114 $ 37,897 $ 42,271 $ 57,120 $ 39,453 $ 59,426 Operating income (loss)........ 1,329 (9,976) 629 3,262 5,293 2,910 7,404 Income tax provision (benefit)(1)................. 102 (27) 45 (4,099) 2,207 1,220 4,035 Net income (loss)(1)........... 921 (10,330) 124 7,461 3,644 1,995 6,050 Basic net income per share(2)(3).................. $ .14 $ (1.52) -- $ .58 $ (1.78) $ .12 $ .46 Shares used in computing basic net income per share(2)...... 6,687,870 6,776,906 7,158,950 7,352,820 7,629,460 7,489,826 13,269,032 Diluted net income per share(2)..................... $ .13 $ (1.52) $ .01 $ .76 $ .36 $ .20 $ .43 Shares used in computing diluted net income per share(2)..................... 6,890,578 6,776,906 9,164,980 9,764,924 10,003,349 9,847,658 13,963,303 </TABLE> <TABLE> <CAPTION> FEBRUARY 28, 1998 ------------------- <S> <C> BALANCE SHEET DATA: Cash, cash equivalents and investments.......................................................... $ 71,822 Working capital................................................................................. 61,518 Total assets.................................................................................... 96,638 Deferred revenues............................................................................... 13,162 Total stockholders' equity...................................................................... 71,171 </TABLE> - ------------------ (1) Net income for the year ended May 31, 1996 includes an income tax benefit of $4.1 million related to the reversal of a valuation allowance. The reversal reflects the recognition of net operating loss carryforwards and other deferred tax assets and was a result of management's analysis of the Company's current levels of earnings and future outlook, which increased the likelihood of the Company realizing its deferred tax assets. For subsequent periods, the Company has provided for income taxes utilizing federal and state statutory income tax rates. See Note 9 of Notes to Consolidated Financial Statements. (2) For an explanation of the determination of the number of shares used in computing net income per share, see Note 14 of Notes to Consolidated Financial Statements. (3) For the fiscal years ending May 31, 1995, 1996 and 1997 and for the nine months ended February 28, 1997, basic net income per share is lower than the diluted net income per share due to the fact that net income available to common stockholders for the basic calculation is reduced by the increase in carrying value of the mandatorily redeemable preferred stock. Such increase in carrying value has a greater impact on the basic calculation than does the inclusion of the preferred shares in the diluted calculation. The mandatorily redeemable preferred stock was converted into shares of Common Stock in June 1997 in connection with the initial public offering.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000780034_supershutt_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000780034_supershutt_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..e8f95d6705e7c888bc2670fda5a9fc0f2a0dbf23
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, the historical Consolidated Financial Statements and Notes thereto and the Unaudited Pro Forma Combined Statements of Income and Notes thereto appearing elsewhere in this Prospectus. The Common Stock offered hereby involves a high degree of risk. See "Risk Factors." THE COMPANY SuperShuttle is a leading provider of branded, door-to-door airport shared ride services. SuperShuttle has Company-owned and franchise operations in 15 cities serving 18 airports, including New York, Los Angeles, San Francisco and Washington, D.C. The Company provided shared ride services through these operations to approximately 6.5 million passengers in 1997, with a fleet of approximately 800 vans. In fiscal 1997, the Company's net revenues and net income were approximately $33.4 million and $1.6 million, respectively. On a pro forma basis, giving effect to the Company's acquisition of its three largest franchises in Los Angeles, Orange County and Miami, and related businesses in southern Florida, net revenues and net income would have been approximately $74.8 million and $2.3 million, respectively. The Federal Aviation Administration projects that the number of airline passengers will increase from approximately 578 million in 1995 to approximately 928 million in 2007. With the number of airline passengers growing, travelers are increasingly challenged by traffic congestion, limited parking facilities and expensive parking and taxi rates. The airport ground transportation market is highly fragmented and consists primarily of a large number of local companies providing chauffeured vehicle, bus, van, taxi and sedan services. As a result, the quality, price and consistency of airport ground transportation services and, in particular, shared ride services, vary significantly by market. Furthermore, unlike the airline and car rental industries that offer consumers the choice of a number of nationally-branded service providers, the Company believes there are few, if any, national providers of shared ride ground transportation services. SuperShuttle offers consumers a branded reliable, safe, convenient and economical transportation alternative to generally more expensive airport parking and taxi services and less convenient mass transportation services. The Company efficiently groups passengers together by neighborhood thereby allowing customers to share rides to and from the airport. The Company's shared ride service is offered exclusively under the SuperShuttle brand, using the Company's distinctive trademarked bright blue and yellow vans, centralized reservation system, 1-800-BLUE-VAN telephone number and "no more than three stops" policy. Since 1994, the Company has invested significant financial and management resources in developing its proprietary information and management systems with the goal of expanding its services nationally. The Company believes that these systems, along with its established relationships with many major airports and municipalities, provide SuperShuttle with a strong platform to enter new service areas throughout the United States through both acquisitions and start-ups. Towards this goal, the Company recently acquired its three largest franchises in Los Angeles, Orange County and Miami and was awarded a shared ride service contract by the Port Authority of New York and New Jersey to service the three major New York City area airports. The Company also provides shuttle services for large corporations and paratransit services for municipalities, subcontracts with larger bus operators to arrange charter services and provides executive sedan services under the ExecuCar brand. The Company's goal is to become the leading provider of nationally-branded, door-to-door ground transportation services in the United States by: (i) increasing SuperShuttle brand recognition; (ii) leveraging its proprietary integrated operating systems to support growth and nationwide expansion; (iii) entering new geographic markets through acquisitions and start-ups; (iv) expanding into other segments of the ground transportation industry; and (v) providing superior customer service. The Company is incorporated in Delaware and its principal offices are located at 4610 South 35th Street, Phoenix, Arizona 85040. The Company's telephone number is (602) 232-2200. THE OFFERING Common Stock offered by the Company....... 3,000,000 shares Common Stock offered by a Selling Stockholder............................... 320,000 shares Common Stock to be outstanding after the offering.................................. 9,573,617 shares(1) Use of proceeds........................... For the repayment of certain indebtedness, general corporate purposes, potential acquisitions and capital expenditures. Proposed Nasdaq National Market symbol.... SHTL SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA AND SELECTED OPERATING DATA) <TABLE> <CAPTION> FISCAL YEAR ENDED SEPTEMBER 30, SIX MONTHS ENDED MARCH 31, ----------------------------------------- ----------------------------------- 1995 1996 1997 1997 1998 ------- ------- --------------------- ------- ------------------------- PRO PRO ACTUAL FORMA(2) ACTUAL FORMA(2) ------ -------- ------ -------- (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF INCOME DATA: Net revenues......................... $28,873 $32,304 $33,398 $74,796 $16,320 $16,458 $37,943 Gross profit......................... 12,142 13,544 13,704 28,697 6,621 6,861 14,461 Income (loss) from operations........ 680 (356) 619 3,352 (68) 638 2,242 Net income(3)........................ 835 40 1,561 2,251 634 2,880 3,395 Net income (loss) to common stockholders....................... $ 835 $ (51) $ 1,491 $ 2,181 $ 599 $ 2,845 $ 3,360 Net income (loss) per share: Basic(4)........................... $ 0.48 $ (0.03) $ 0.54 $ 0.33 $ 0.22 $ 1.03 $ 0.51 Diluted(4)......................... $ 0.39 $ (0.03) $ 0.43 $ 0.33 $ 0.17 $ 0.82 $ 0.51 Shares used in calculation of net income (loss) per share: Basic(4)........................... 1,748 1,853 2,754 6,566 2,746 2,761 6,574 Diluted(4)......................... 2,120 1,894 3,457 6,608 3,449 3,464 6,615 SELECTED OPERATING DATA: Company-owned operations(5).......... 3 4 5 8 4 5 8 Franchise operations(5).............. 8 8 8 5 9 8 5 Number of vans(6).................... 582 628 683 683 628 763 763 </TABLE> <TABLE> <CAPTION> MARCH 31, 1998 ----------------------------------- PRO AS ACTUAL FORMA(7) ADJUSTED(8) ------- ----------- ----------- (UNAUDITED) <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents(9)............................ $ 2,904 $ 2,904 $21,034 Working capital (deficit)............................... (3,604) (3,604) 14,663 Total assets............................................ 38,281 38,281 56,411 Long-term debt, net of current portion.................. 1,763 1,763 1,200 Series B Convertible Preferred Stock.................... 4,105 -- -- Total stockholders' equity.............................. 20,889 24,994 43,824 </TABLE> - ------------------------------ (1) Based on the number of shares outstanding as of May 31, 1998. Excludes, as of May 31, 1998, 382,250 shares of Common Stock issuable upon exercise of options outstanding under the Company's stock option plans and 106,356 shares of Common Stock reserved for issuance upon exercise of certain warrants. The weighted average exercise price of such stock options was $6.26 and the exercise price for the warrants was $6.00. (2) Represents actual operating results and balances for the periods presented and actual results and balances of each of the Company's Los Angeles, Orange County and Miami operations which were acquired in March 1998 (the "Acquired Companies") along with adjustments which give effect to events that are directly attributable to the Acquired Companies and which are expected to have a continuing impact. This pro forma information should be read in connection with the Unaudited Pro Forma Combined Statements of Income included elsewhere in this Prospectus. The Orange County and Los Angeles operations sold in June 1994 and September 1994, respectively, are the same operations acquired by the Company effective March 31, 1998. See Note 12.a. of Notes to Consolidated Financial Statements. (3) Includes approximately $2.1 million for the actual and pro forma results for the first six months of fiscal 1998 due to the reversal of a deferred tax valuation allowance. See Note 12 of Notes to Consolidated Financial Statements. (4) See Note 1 of Notes to Consolidated Financial Statements for a description of the calculation of basic and diluted income per share and Note 9 of Notes to Unaudited Pro Forma Combined Statements of Income for a description of the calculation of pro forma basic and diluted net income per share. (5) Numbers are at period end. The Company's Baltimore operation, a 50% owned franchise, is included in Company-owned operations. The Company's investment in the Baltimore operation is being accounted for under the equity method. (6) Includes SuperShuttle shared ride vans for both Company-owned and franchise operations. Excludes mini-buses, sedans and paratransit vehicles. (7) Pro forma consolidated balance sheet data gives effect to the conversion of the Series B Preferred Stock into Common Stock. (8) Adjusted to reflect the sale of the 3,000,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $7.00 per share after deducting underwriting discounts and estimated offering expenses and the application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000780148_wfs_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000780148_wfs_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..fca9de29b65e7767b035af4c2ecd60ceb1e798ac
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1998/CIK0000780148_wfs_prospectus_summary.txt
@@ -0,0 +1 @@
+SUMMARY OF PROSPECTUS The following summary is qualified in its entirety by reference to the detailed information appearing elsewhere in this Prospectus. See the Index of Principal Definitions for the location herein of certain capitalized terms. Trust...................... WFS Financial 1998-B Owner Trust (the "Trust"). Seller..................... WFS Financial Auto Loans, Inc. (the "Seller"), a wholly owned, limited-purpose operating subsidiary of WFS Financial Inc. The principal executive offices of the Seller are located at 23 Pasteur Road, Irvine, California 92618 and its telephone number is (714) 727-1000. Prior to May 29, 1996, the Seller was known as Western Financial Auto Loans, Inc. See "The Seller." WFS........................ WFS Financial Inc ("WFS" or, in its capacity as Master Servicer, the "Master Servicer"), a majority owned, operating subsidiary of Western Financial Bank (the "Bank"), a federally chartered savings association. The principal offices of WFS are located at 23 Pasteur Road, Irvine, California 92618 and its telephone number is (714) 727-1000. See "WFS." WII........................ WFS Investments, Inc. ("WII"), a California corporation and a wholly owned operating subsidiary of WFS. The principal office of WII is 23 Pasteur Road, Irvine, California 92618 and its telephone number is (714) 727-1000. See "WII." Securities Offered......... The securities offered are as follows: A. General................. The WFS Financial 1998-B Owner Trust Auto Receivable Backed Notes (the "Notes") will represent obligations of the Trust secured by the assets of the Trust (other than the Certificate Distribution Account and the Certificate Policy). The WFS Financial 1998-B Owner Trust Auto Receivable Backed Certificates (the "Certificates" and, together with the Notes, the "Securities") will represent fractional undivided interests in the Trust. The Trust will issue four Classes of Notes pursuant to an indenture to be dated as of 1, 1998 (the "Indenture"), between the Trust and Bankers Trust Company, as trustee (the "Indenture Trustee"), as follows: (i) $ aggregate principal amount of % Auto Receivable Backed Notes, Class A-1 (the "Class A-1 Notes"), (ii) $ aggregate principal amount of % Auto Receivable Backed Notes, Class A-2 (the "Class A-2 Notes"), (iii) $ aggregate principal amount of % Auto Receivable Backed Notes, Class A-3 (the "Class A-3 Notes") and (iv) $ aggregate principal amount of % Auto Receivable Backed Notes, Class A-4 (the "Class A-4 Notes"). Payments of principal and interest on the Notes will be made in accordance with the priorities set forth under "Certain Information Regarding the Securities -- Distributions on the Securities." The Trust will issue $ aggregate principal amount of % Auto Receivable Backed Certificates pursuant to an amended and restated trust agreement (the "Trust Agreement") to be dated as of the date of initial issuance of the Securities (the "Closing Date"), among the Seller, Financial Security Assurance Inc. ("Financial Security"), WII and Chase Manhattan Bank Delaware, as trustee (the "Owner Trustee" and, together with the Indenture Trustee, the "Trustees"). Payments in respect of the Certificates will be subordinated to payments on the Notes to the extent described herein. Each Class of Notes and the Certificates will be issued in minimum denominations of $1,000 and integral multiples of $1,000 in excess thereof. Definitive Securities will be issued only under the limited circumstances described herein. See "Certain Information Regarding the Securities -- Book-Entry Registration" and "-- Definitive Securities." B. Property of the Trust... Each Note will represent an obligation of, and each Certificate will represent a fractional undivided interest in, the Trust. The property of the Trust will primarily include (i) a pool of retail installment sales contracts and installment loans (the "Contracts") secured by the new and used automobiles and light-duty trucks financed thereby (the "Financed Vehicles"); (ii) certain monies due under the Contracts on and after 1, 1998 (the "Cut-Off Date"); (iii) security interests in the Financed Vehicles; (iv) a financial guaranty insurance policy (the "Note Policy") to be issued by Financial Security for the exclusive benefit of Noteholders, which will unconditionally and irrevocably guarantee payment of the Scheduled Payments on each Distribution Date; (v) a financial guaranty insurance policy (the "Certificate Policy" and, together with the Note Policy, the "Policies") to be issued by Financial Security for the exclusive benefit of Certificateholders, which will unconditionally and irrevocably guarantee payment of the Guaranteed Distributions on each Distribution Date; (vi) amounts on deposit in the Collection Account, the Note Distribution Account, the Certificate Distribution Account, the Spread Account and the Holding Account, including all Eligible Investments therein and all income from the investment of funds therein and all proceeds therefrom; (vii) proceeds from claims under certain insurance policies in respect of individual Financed Vehicles or obligors under the Contracts (the "Obligors"); and (viii) certain rights under the sale and servicing agreement to be dated as of 1, 1998 (the "Sale and Servicing Agreement"), among the Trust, the Seller and the Master Servicer. Pursuant to the Indenture, the property of the Trust (other than the Certificate Distribution Account and the Certificate Policy) will be held by the Master Servicer for the benefit of the Indenture Trustee and Financial Security on behalf of the holders of the Notes. C. Distribution Dates...... Distributions of interest and principal on the Securities will be made on 20, 20, 20 and 20 of each year (or, if any such day is not a Business Day, on the next succeeding Business Day) (each, a "Distribution Date"), commencing 20, 1998. Payments on the Securities on each Distribution Date will be paid to the holders of record of the related Securities on the Business Day immediately preceding such Distribution Date or, in the event that Definitive Securities are issued, as of the 15th day of the month immediately preceding the month in which such Distribution Date occurs (each, a "Record Date"). A "Business Day" will be any day other than a Saturday, a Sunday or a day on which banking institutions in New York, New York, Wilmington, Delaware, or Los Angeles, California are authorized or obligated by law, executive order or government decree to be closed. To the extent not previously paid prior to such dates, the outstanding principal amount of (i) the Class A-1 Notes will be payable on 20, 1999 (the "Class A-1 Final Distribution Date"), (ii) the Class A-2 Notes will be payable on 20, 200 (the "Class A-2 Final Distribution Date"), (iii) the Class A-3 Notes will be payable on 20, 200 (the "Class A-3 Final Distribution Date") and (iv) the Class A-4 Notes will be payable on 20, 200 (the "Class A-4 Final Distribution Date" and, together with the Class A-1 Final Distribution Date, the Class A-2 Final Distribution Date and the Class A-3 Final Distribution Date, the "Note Final Distribution Dates"). To the extent not previously paid in full prior to such date, the unpaid principal balance of the Certificates will be payable on 20, 200 (the "Certificate Final Distribution Date" and, together with the Note Final Distribution Dates, the "Final Distribution Dates"). Terms of the Notes......... The principal terms of the Notes will be as described below: A. Interest Rates.......... Interest will be borne on (i) the Class A-1 Notes at the rate of % per annum (the "Class A-1 Rate"), (ii) the Class A-2 Notes at the rate of % per annum (the "Class A-2 Rate"), (iii) the Class A-3 Notes at the rate of % per annum (the "Class A-3 Rate") and (iv) the Class A-4 Notes at the rate of % per annum (the "Class A-4 Rate" and, together with the Class A-1 Rate, the Class A-2 Rate and the Class A-3 Rate, the "Interest Rates"). B. Interest................ Interest on the outstanding principal amount of each Class of Notes will accrue at the related Interest Rate from and including the most recent Distribution Date on which interest has been paid (or from and including the Cut-Off Date with respect to the first Distribution Date) to but excluding the current Distribution Date (each, an "Interest Period"). Interest on the Class A-1 and the Class A-2 Notes will be calculated on the basis of the actual number of days elapsed in an Interest Period and a 360-day year. Interest on the Class A-3 and Class A-4 Notes will be calculated on the basis of a 360-day year consisting of twelve 30-day months. Interest on the Notes for any Distribution Date due but not paid on such Distribution Date will be due on the next Distribution Date, together with, to the extent permitted by applicable law, interest on such shortfall at the related Interest Rate. See "The Notes -- Payments of Interest" and "Certain Information Regarding the Securities -- Distributions on the Securities." C. Principal............... Principal of the Notes will be payable on each Distribution Date in an amount generally equal to the Note Principal Distributable Amount for such Distribution Date, calculated as described under "Certain Information Regarding the Securities -- Distributions on the Securities -- Deposits to the Distribution Accounts; Priority of Payments." On each Distribution Date, the Note Principal Distributable Amount will be applied in the following priority: first to reduce the principal amount of the Class A-1 Notes; second, after the principal amount of the Class A-1 Notes has been reduced to zero, to reduce the principal amount of the Class A-2 Notes; third, after the principal amount of the Class A-2 Notes has been reduced to zero, to reduce the principal amount of the Class A-3 Notes; and fourth, after the principal amount of the Class A-3 Notes has been reduced to zero, to reduce the principal amount of the Class A-4 Notes. Notwithstanding the foregoing, if the principal amount of a Class of Notes has not been paid in full prior to its Note Final Distribution Date, the Note Principal Distributable Amount for such Note Final Distribution Date will include an amount sufficient to reduce the unpaid principal amount of such Class of Notes to zero on such Note Final Distribution Date. See "The Notes -- Payments of Principal" and "Certain Information Regarding the Securities -- Distributions on the Securities -- Deposits to the Distribution Accounts; Priority of Payments." D. Optional Redemption..... In the event of an Optional Purchase, each Class of outstanding Notes will be redeemed in whole, but not in part, at a redemption price equal to the unpaid principal amount of such Class of Notes plus accrued interest thereon at the related Interest Rate. See "The Notes -- Optional Redemption." E. Mandatory Redemption.... Under certain conditions, the Notes may be accelerated upon the occurrence of an Event of Default under the Indenture. So long as no Insurer Default shall have occurred and be continuing, under certain circumstances Financial Security will have the right (in addition to its obligation to make Scheduled Payments on the Notes in accordance with the terms of the Note Policy), but not the obligation, to elect to accelerate the principal of the Notes and to cause the Master Servicer or the Trustee to sell or otherwise liquidate the property of the Trust and to deliver the proceeds to the Indenture Trustee for distribution in accordance with the terms of the Indenture. See "The Notes -- Events of Default." Terms of the Certificates............... The principal terms of the Certificates will be as described below: A. Interest................ On each Distribution Date, the Owner Trustee or any paying agent as the Owner Trustee may designate from time to time (the "Paying Agent") will distribute pro rata to Certificateholders of record as of the related Record Date accrued interest at the rate of % per annum (the "Pass-Through Rate") on the Certificate Balance, as defined below, as of the immediately preceding Distribution Date (after giving effect to distributions of principal to be made on such immediately preceding Distribution Date) or, in the case of the first Distribution Date, on the Original Certificate Balance. Interest in respect of a Distribution Date will accrue from and including the Cut-Off Date (in the case of the first Distribution Date), or from and including the most recent Distribution Date on which interest has been paid, to but excluding the current Distribution Date. Interest on the Certificates for any Distribution Date due but not paid on such Distribution Date will be due on the next Distribution Date, together with, to the extent permitted by applicable law, interest on such shortfall at the Pass-Through Rate. See "The Certificates -- Distributions of Interest" and "Certain Information Regarding the Securities -- Distributions on the Securities." The "Certificate Balance" will equal $ (the "Original Certificate Balance") on the Closing Date and on any date thereafter will equal the Original Certificate Balance reduced by all distributions of principal previously made in respect of the Certificates. Distributions on the Certificates will be subordinated to payments of interest and principal on the Notes as described under "The Certificates" and "Certain Information Regarding the Securities -- Distributions on the Securities." B. Principal............... No principal will be paid on the Certificates until the Distribution Date on which the principal amount of the Class A-1, Class A-2, Class A-3 and Class A-4 Notes has been reduced to zero. On such Distribution Date and each Distribution Date thereafter, principal of the Certificates will be payable in an amount equal to the Certificate Principal Distributable Amount for such Distribution Date, calculated as described under "Certain Information Regarding the Securities -- Distributions on the Securities -- Deposits to the Distribution Accounts; Priority of Payments." If not paid in full prior to the Certificate Final Distribution Date, the remaining Certificate Balance, if any, will be payable on that date. See "The Certificates -- Distributions of Principal." C. Optional Prepayment..... In the event of an Optional Purchase, the Certificates will be repaid in whole, but not in part, at a repayment price equal to the Certificate Balance plus accrued interest thereon at the Pass-Through Rate. See "The Certificates -- Optional Prepayment." Security for the Securities................. The principal security for the Securities will be as described below: A. The Contracts........... The Contracts will consist of retail installment sales contracts and installment loans, secured by liens on the Financed Vehicles, purchased from WFS by the Seller and from the Seller by the Trust, including the right to receive the payments thereunder on and after the Cut-Off Date. The Seller will be required to repurchase Contracts under certain circumstances if certain representations and warranties made by the Seller are incorrect in a manner that materially and adversely affects the Securityholders, the Indenture Trustee, the Owner Trustee or Financial Security. The Contracts were purchased from new and used car dealers or originated directly from consumers by WFS. The Contracts were originated in California and other states by new and used car dealers not affiliated with WFS, except for a limited number of Contracts originated directly from consumers by WFS. The Contracts will be selected by WFS from its portfolio of retail installment sales contracts and installment loans based upon the criteria to be specified in the Sale and Servicing Agreement. As of the Cut-Off Date, the Aggregate Scheduled Balance will be $ (the "Cut-Off Date Aggregate Scheduled Balance") and the Contracts will have an expected weighted average annual percentage rate of approximately % and an expected weighted average remaining maturity of approximately months. See "The Contracts Pool." Approximately % of the aggregate principal amount of the Contracts will be Rule of 78's Contracts and approximately % will be Simple Interest Contracts, based upon the anticipated Scheduled Balances of the Contracts as of the Cut-Off Date. All net collections received by the Master Servicer on or in respect of the Contracts, any Advances made by the Master Servicer and all amounts paid under the Policies will be deposited in or credited to the Collection Account or, in certain limited instances, the Holding Account. On each Distribution Date, the Indenture Trustee will distribute the amounts on deposit in the Collection Account with respect to such Distribution Date to the Note Distribution Account and, to the extent applicable, the Certificate Distribution Account. All payments to Noteholders will be made from the Note Distribution Account and to Certificateholders from the Certificate Distribution Account. See "Certain Information Regarding the Securities -- The Accounts and Eligible Investments" and "-- Distributions on the Securities." B. The Spread Account...... The Securityholders will be afforded certain limited protection, to the extent described herein, against losses in respect of the Contracts by the establishment of a segregated trust account in the name of the Indenture Trustee for the benefit of the Securityholders (the "Spread Account"). The Spread Account will be part of the Trust. The Spread Account will be created with an initial deposit by the Seller of $ (the "Spread Account Initial Deposit"). The funds in the Spread Account will thereafter be supplemented on each Distribution Date by the deposit of any Excess Amounts (as defined below), until the cash on deposit in the Spread Account is at least equal to the Specified Spread Account Balance. "Excess Amounts" in respect of a Distribution Date will be calculated as described under "Certain Information Regarding the Securities -- Distributions on the Securities -- Deposits to the Distribution Accounts; Priority of Payments" and will equal the funds on deposit in the Collection Account in respect of such Distribution Date, after giving effect to all distributions required to be made on such Distribution Date. The Specified Spread Account Balance will be calculated as described under "Certain Information Regarding the Securities -- Payment Priorities of the Notes and the Certificates; The Spread Account -- Calculation of Specified Spread Account Balance." On each Distribution Date, funds will be withdrawn from the Spread Account for distribution to Securityholders to cover any shortfalls in interest and principal required to be paid on the Securities (before giving effect to any claim under the Policies). If on the last day of any month (each, a "Calculation Day") or on any Distribution Date the amount on deposit in the Spread Account is greater than the Specified Spread Account Balance, any excess cash on deposit therein will be released therefrom and upon such distribution Securityholders will have no further rights in, or claims to, such amounts. See "Certain Information Regarding the Securities -- Withdrawals from the Spread Account." C. The Policies............ On the Closing Date, Financial Security will issue the Note Policy to the Indenture Trustee and the Certificate Policy to the Owner Trustee pursuant to the insurance, indemnity and pledge agreement to be dated as of 1, 1998 (the "Insurance Agreement"), among Financial Security, the Trust, the Seller, Bankers Trust Company as Collateral Agent for Financial Security, WII and WFS. Pursuant to the Note Policy, Financial Security will unconditionally and irrevocably guarantee to the Noteholders payment of the Scheduled Payments for each Distribution Date. Pursuant to the Certificate Policy, Financial Security will unconditionally and irrevocably guarantee to the Certificateholders payment of the Guaranteed Distributions for each Distribution Date. See "The Policies" and "Financial Security Assurance Inc." Optional Purchase.......... The Seller may, but will not be obligated to, purchase all of the Contracts in the Trust, and thereby cause early retirement of all outstanding Securities, on any Distribution Date as of which the Aggregate Scheduled Balance is 5% or less of the Cut-Off Date Aggregate Scheduled Balance (an "Optional Purchase"). See "Certain Information Regarding the Securities -- Termination." The Master Servicer........ WFS, as Master Servicer, will be obligated pursuant to the Sale and Servicing Agreement, subject to the limitations set forth therein, to service the Contracts and to repurchase certain of the Contracts under certain circumstances if certain representations and warranties made by WFS are incorrect or if WFS, as Master Servicer, breaches certain of its servicing obligations under the Sale and Servicing Agreement, in either case in a manner that materially and adversely affects such Contracts. See "The Master Servicer." Ratings.................... It is a condition of issuance that the Class A-1 Notes be rated A-1+ by Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P") and P-1 by Moody's Investors Service, Inc. ("Moody's" and, together with S&P, the "Rating Agencies"), and the Class A-2, Class A-3 and Class A-4 Notes and the Certificates each be rated AAA by S&P and Aaa by Moody's. See "Ratings of the Securities." Tax Status................. In the opinion of special tax counsel to the Seller, for both federal and California income tax purposes, the Notes will be characterized as debt, and the Trust will not be characterized as an association (or a publicly traded partnership) taxable as a corporation. Each Noteholder, by the acceptance of a Note, will agree to treat the Notes as indebtedness, and each Certificateholder, by the acceptance of a Certificate, will agree to treat the Trust as a partnership in which the Certificateholders are partners for federal income tax purposes. See "Certain Federal Income Tax Consequences" and "Certain California Income Tax Consequences." ERISA Considerations....... Subject to the considerations discussed under "ERISA Considerations," the Notes will be eligible for purchase by employee benefit plans that are subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Since the Certificates will be subordinated to the Notes to the extent described herein, employee benefit plans subject to ERISA will not be eligible to purchase the Certificates. Any benefit plan fiduciary considering purchase of the Securities should, among other things, consult with its counsel in determining whether all required conditions have been satisfied. See "ERISA Considerations." Legal Investment........... The Class A-1 Notes have been structured to be eligible securities for purchase by money market funds under Rule 2a-7 under the Investment Company Act of 1940, as amended. A money market fund should consult its legal advisors regarding the eligibility of the Class A-1 Notes under Rule 2a-7, the fund's investment policies and objectives and an investment in the Class A-1 Notes.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000785962_lamonts_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000785962_lamonts_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCE TO THE "COMPANY" OR "LAMONTS" REFERS TO LAMONTS APPAREL, INC. AFTER GIVING EFFECT TO THE PLAN OF REORGANIZATION AND THE RELATED TRANSACTIONS DESCRIBED BELOW. THE COMPANY Lamonts is a Northwest-based regional retailer with 38 stores in five states. The Company offers an assortment of moderately priced fashion apparel, and home and fashion accessories at competitive prices for the entire family. Lamonts purchases finished goods from approximately 1,200 vendors and uses a distribution center in Kent, Washington for processing and warehousing merchandise for distribution to its stores. Lamonts employs approximately 1,600 people in salaried, hourly, or part-time positions. The Company's stores average approximately 47,000 square feet and are generally located in shopping centers and malls. The Company's revenues for the 52 weeks ended January 31, 1998 ("Fiscal 1997") were approximately $201.6 million. As of January 31, 1998 Lamonts' total assets and total liabilities, at reorganization value, approximated $97.5 million and $77.5 million, respectively. Despite numerous attempts to restructure the Company's capital structure from 1992 through 1994, and as a result of the continued deterioration of the Company's financial position, on January 6, 1995 (the "Petition Date"), the Company filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. In Chapter 11, the Company continued to manage its affairs and operate its business as a debtor-in-possession. On October 31, 1997, the Company filed with the Bankruptcy Court its Plan of Reorganization, along with the proposed disclosure statement relating to the Plan of Reorganization (as amended, the "Disclosure Statement"). The Plan of Reorganization was confirmed by the Bankruptcy Court on December 18, 1997 and became effective on January 31, 1998. Under the Plan of Reorganization, among other things, certain indebtedness of Lamonts was cancelled in exchange for new equity interests (including certain of the Common Stock and Warrants being offered hereunder by the Selling Security Holders), certain indebtedness was reinstated, certain other pre-petition claims were discharged, certain claims were settled, existing equity interests were extinguished and new equity interests were issued (including certain of the Common Stock and Warrants being offered hereunder by the Selling Security Holders), executory contracts and unexpired leases were assumed or rejected, and the members of a new board of directors were designated. See "Plan of Reorganization." THE OFFERING Securities Offered by the Selling Security Holders <TABLE> <CAPTION> AGGREGATE NUMBER OF SHARES OF COMMON EXERCISE PRICE NUMBER AND TITLE OF EACH CLASS STOCK UNDERLYING PER SHARE OF OF SECURITIES OFFERED SECURITIES CONDITIONS TO EXERCISABILITY COMMON STOCK - ----------------------------------------------- ------------------- ------------------------------------ ------------------- <S> <C> <C> <C> 8,746,291 Shares of Class A Common Stock, par N/A N/A N/A value $.01 per share.......................... 1,810,380 Class A Warrants, each to purchase 1,810,380 Aggregate Equity Trading Value $.01 one share of Common Stock..................... equals or exceeds $20 million 581,184 Class B Warrants, each to purchase one 581,184 Aggregate Equity Trading Value $.01 share of Common Stock......................... equals or exceeds $25 million 228,639 Class C Warrants, each to purchase 3,200,946 Currently exercisable $1.25 fourteen shares of Common Stock............... 228,639 Class C Warrants, each to purchase one 228,639 Aggregate Equity Trading Value $.01 share of Common Stock......................... equals or exceeds $25 million(1) </TABLE> - ------------------------------ (1) No Class C Warrant with a per share exercise price of $.01 shall be exercisable by the holder thereof unless such holder has exercised in full such holder's portion of such Class C Warrant with a per share exercise price of $1.25. <TABLE> <S> <C> Securities Offered by the 5,821,149 shares of Common Stock issuable upon exercise Company......................... of the Warrants. Class A Warrants.................. Each Class A Warrant entitles its registered holder to purchase from the Company one share of Common Stock at an exercise price of $.01 per share, subject to adjustment from time to time upon the occurrence of certain events. The Class A Warrants are exercisable on or after the first date on which the Aggregate Equity Trading Value equals or exceeds $20 million and, if not previously exercised, will expire on January 31, 2008. See "Description of Capital Stock--Class A Warrants and Class B Warrants." Class B Warrants.................. Each Class B Warrant entitles its registered holder to purchase from the Company one share of Common Stock at an exercise price of $.01 per share, subject to adjustment from time to time upon the occurrence of certain events. The Class B Warrants are exercisable on or after the first date on which the Aggregate Equity Trading Value equals or exceeds $25 million and, if not previously exercised, will expire on January 31, 2008. See "Description of Capital Stock--Class A Warrants and Class B Warrants." Class C Warrants.................. Each Class C Warrant entitles its registered holder to purchase from the Company fourteen shares of Common Stock at an exercise price of $1.25 per share and one share of Common Stock at an exercise price of $.01 per share, in each case subject to adjustment from time to time upon the occurrence of certain events. The Class C Warrants to purchase the Initial Shares are currently exercisable and, if not previously exercised, will expire on January 31, 2002. The Class C Warrants to purchase the </TABLE> <TABLE> <S> <C> Adjustment Shares are exercisable on or after the first date on which the Aggregate Equity Trading Value equals or exceeds $25 million and, if not previously exercised, will expire on January 31, 2008; provided that the portion of each Class C Warrant to purchase an Adjustment Share shall not be exercisable by the holder thereof unless and until the portion of such Class C Warrant to purchase the Initial Shares has been exercised in full by such holder. The exercise price per share of Common Stock issuable pursuant to the exercise of the Class C Warrants is subject to a 25% increase and the expiration date for such Warrants is subject to a one year extension, in each case upon the happening of certain events. See "Description of Capital Stock--Class C Warrants." Common Stock to be outstanding after offering.................. 17,483,930 shares assuming (i) exercise of options ("Stock Options") to purchase 1,669,228 shares of Common Stock reserved for issuance under the Company's 1998 Stock Option Plan (the "Stock Option Plan"), and (ii) exercise of all Warrants issued and outstanding as of the date of this Prospectus (including Warrants not covered by this Prospectus). Excludes potential exercise of the warrants issuable by the Company 120 days following the Plan Effective Date to Gordian Group, L.P. ("Gordian"). See "Description of Capital Stock--Gordian Warrants." OTC Bulletin Board symbol for Class A Common Stock ........... LMNT OTC Bulletin Board symbol for Class A Warrants................ LMNTZ OTC Bulletin Board Symbol for Class B Warrants................ LMNTW OTC Bulletin Board Symbol for Class C Warrants................ LMNTH </TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA AND CERTAIN OPERATING DATA The following pro forma and historical data should be read in conjunction with, and is qualified in its entirety by, the Consolidated Financial Statements and Notes thereto, the "Pro Forma Financial Data" and the other information included elsewhere in this Prospectus. The historical financial data of the Company for Fiscal 1997, the 52 weeks ended February 1, 1997 ("Fiscal 1996") and the 53 weeks ended February 3, 1996 ("Fiscal 1995") have been derived from the historical consolidated financial statements of the Company audited by Coopers & Lybrand L.L.P., independent accountants, whose report with respect thereto is included elsewhere in this Prospectus. The pro forma data of the Company for Fiscal 1997 gives effect to the reorganization under the Plan of Reorganization and adoption of Fresh-Start Reporting and the amounts are presented as though the reorganization had been consummated at the beginning of Fiscal 1997. The historical consolidated balance sheet includes the effect of the reorganization, which was effective on January 31, 1998. The unaudited pro forma data does not purport to be indicative of the results of operations that would actually have been reported had such transactions actually been consummated on such date or of the results of operations that may be reported by the Company in the future. <TABLE> <CAPTION> PRO FORMA HISTORICAL ----------- --------------------------------------- 52 WEEKS 52 WEEKS 52 WEEKS 53 WEEKS ENDED ENDED ENDED ENDED JANUARY 31, JANUARY 31, FEBRUARY 1, FEBRUARY 3, 1998 1998 1997 1996 ----------- ----------- ----------- ----------- (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND STORE DATA) <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA Revenues(1)......................................................... $ 201,623 $ 201,623 $ 203,602 $ 199,548 Cost of merchandise sold............................................ 131,700 131,700 130,480 131,677 ----------- ----------- ----------- ----------- Gross profit........................................................ 69,923 69,923 73,122 67,871 ----------- ----------- ----------- ----------- Operating and administrative expenses............................... 67,633 67,844 67,173 71,372 Depreciation and amortization....................................... 7,012 7,141 7,999 9,232 Impairment of long-lived assets..................................... -- -- 4,170 -- ----------- ----------- ----------- ----------- Operating costs..................................................... 74,645 74,985 79,342 80,604 ----------- ----------- ----------- ----------- Loss from operations before other income/(expense), reorganization expenses, fresh-start revaluation and extraordinary item.......... (4,722) (5,062) (6,220) (12,733) Other income (expense): Interest expense.................................................. (5,770) (5,900) (5,053) (5,098) Other income (expense)............................................ 8 8 12 196 ----------- ----------- ----------- ----------- Loss from operations before reorganization expenses, fresh-start revaluation and extraordinary item................................ (10,484) (10,954) (11,261) (17,635) Reorganization expenses............................................. -- (5,995) 6,037 7,240 Fresh-start revaluation............................................. -- 70,495 -- -- ----------- ----------- ----------- ----------- Income (loss) from operations before extraordinary item............. (10,484) 53,546 (17,298) (24,875) Extraordinary item--gain on debt discharge.......................... -- 69,158 -- -- ----------- ----------- ----------- ----------- Net income (loss)................................................... $ (10,484) $ 122,704 $ (17,298) $ (24,875) ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- OTHER DATA Number of stores at end of period................................... 38 38 38 43 BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE Income (loss) from operations before extraordinary gain............. $ (1.16) $ 3.00 $ (0.97) $ (1.39) Extraordinary item--gain on debt discharge.......................... -- 3.86 -- -- Net income (loss)................................................... (1.16) 6.86 (0.97) (1.39) Weighted average number of shares................................... 9,000,000(2) 17,875,602 17,899,906 17,893,675 BALANCE SHEET DATA (AT END OF PERIOD) Working capital (deficit)........................................... $ (5,625) $ (3,357) $ (2,248) Total assets........................................................ 97,468 93,272 102,361 Liabilities subject to settlement under reorganization proceedings....................................................... -- 102,858 104,845 Long-term debt and obligations under capital leases, net of current maturities........................................................ 24,371 2,846 -- Stockholders' equity/(deficit)...................................... 19,956 (59,553) (42,556) </TABLE> - ---------------------------------- (1) The additional week in Fiscal 1995 accounted for $2.2 million of revenues. (2) Pursuant to the Plan of Reorganization, the Company issued 9,000,000 shares of Common Stock and granted warrants and options to purchase Common Stock. Such warrants and options have not been included in the calculation of net loss per common share because the effect of assuming their exercise would be anti-dilutive.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000790023_pacific_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000790023_pacific_prospectus_summary.txt
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+PROSPECTUS SUMMARY The Company Pacific Aerospace & Electronics, Inc. (the "Company") develops, manufactures and markets high-performance electronics and metal components and assemblies for the aerospace, defense, electronics and transportation industries. The Company is an active consolidator of companies, having acquired nine operating companies since 1990. Aeromet Acquisition On July 30, 1998, the Company nearly doubled its size by acquiring Aeromet International plc, a British limited company. Aeromet is one of the leading suppliers in the United Kingdom of magnesium and aluminum precision sand and investment castings, and of titanium and aluminum formed sheet products. Aeromet's casting and forming technologies and products complement the Company's U.S. precision metals product lines. The Company sells Aeromet's products primarily to the aerospace, defense and motorsport industries in Europe. Business Strengths Significant Customer Base. The Company counts among its customers many of the world's leading aerospace, defense, electronics and transportation companies. The Company believes that one of the key advantages of the Aeromet acquisition is the opportunity to access Aeromet's significant base of additional customers. The Company's leading customers are: U.S. Operations U.K. Operations ================================================================================ Boeing British Aerospace PACCAR Rolls Royce Raytheon/Hughes GKN Westland Aerospace Honeywell Lucas Aerospace Lockheed Martin Alenia (Aermachhi) Northrop Grumman Space Systems/Loral Westinghouse TRW Strong Position in Major Aerospace and Defense Programs. The Company supplies components and parts to Boeing for each of Boeing's 737, 747, 757, 767 and 777 commercial aircraft construction programs, and participates in the Airbus A300/310, A320 and A330/340 commercial aircraft construction programs. In addition, the Company participates in major U.S. and European defense and military aircraft programs. Diversity of Product Offerings and Capabilities. The Company manufactures a broad range of precision cast, machined and formed metal products and assembled electronics products. The Company collaborates with many of its customers to develop products that meet specific design or customization requests. In addition, many of the Company's custom-developed electronics components have become widely accepted in the industry. The Company believes that its experience and capabilities in working with the changing needs of its customers will allow it to continue to respond to changing market trends in its industries. Strong Technology Position. The Company uses specialized manufacturing techniques, advanced materials science, process engineering and proprietary technologies or processes to manufacture its products. In particular, the Company has a broad base of expertise in the following manufacturing processes: U.S. Operations U.K. Operations ================================================================================ Cast aluminum products: Cast magnesium and aluminum - - lost foam products: - - sand casting - precision die casting - - permanent mold casting - sand investment casting - "Sophia Process" licensed investment casting Electronics products: Formed metal products: - - precision machining - super plastic forming of - - explosive bonding titanium - - complex assembly - stretch forming of aluminum alloys The Company owns 32 U.S. patents used in the manufacture of its electronics products and maintains an ongoing program of evaluating and protecting its proprietary rights and processes. The Company has additional patent applications pending in the U.S., Canada, and Europe. Strategy The Company's objective is to generate profitable growth by taking advantage of available opportunities in its industries. The Company believes that pursuing the following business strategies will enable the Company to increase market penetration, create operating efficiencies and enhance its competitive position in its core markets. Leverage the Aeromet Platform. The Aeromet acquisition significantly enhanced the Company's commercial aerospace and defense industry presence. Aeromet provides the Company with a solid platform from which to access major European commercial aircraft and aircraft engine programs, as well as markets within the European defense and transportation industries. These markets would be difficult for the Company to enter without a physical presence in Europe. The Company also believes that Aeromet may provide a strategic opportunity for pursuing acquisitions of other European aerospace, defense and transportation companies on a model similar to that which the Company has pursued in the United States. Increase Margins Through Enhanced Marketing and Vertical Integration. The Company's strategy is to improve profit margins and revenues by increasing customer penetration, improving operating efficiencies, and developing new products and product enhancements. Key components of the Company's strategy are to: - - leverage the synergies among its operating companies, - - continue vertically integrating its manufacturing processes, and - - identify new products, services and markets by using the Company's expertise in advanced materials science and in the manufacture and assembly of precision products. The Company also intends to capitalize on the current shift of commercial aircraft manufacturers and defense contractors toward purchasing from a smaller number of suppliers that can supply more complete systems and pre-assembled parts. Assembled parts and systems generally are higher margin products than individual metal parts. By producing products that integrate the Company's metals casting, forming and machining knowledge with the Company's expertise in the manufacture of connectors, seals, filters, relays and electronic packages, the Company expects to improve its profit margins and position itself to capture a larger share of its customers' total product requirements. Leverage Product Development through Strategic and Proprietary Technologies. The Company generally develops new products from existing technologies in response to specific customer requests. The Company plans to continue developing new products for its customers and, where appropriate, to apply for additional patents for those new technologies. The Company may acquire additional strategic and proprietary technologies from third parties and expects to continue to develop its research and development capabilities. The Company does not expect to devote substantial resources to research and development that is not funded by customers. Pursue Strategic Acquisitions. The Company's consolidation strategy is to identify and acquire companies that it believes will: - - provide the opportunity for increased sales to the Company's existing customers and for new sales to the Company's potential customers, and - - extend or vertically integrate the Company's manufacturing capabilities or product lines. The Company believes that there are and will continue to be opportunities to grow the Company and to enhance profitability through acquisitions. The Company intends to continue to pursue acquisitions of companies and technologies that it believes will further this acquisition strategy. Industry Overview Aerospace Industry Commercial. The commercial aerospace supply industry is reported to be currently enjoying favorable trends driven by strong growth in the demand for aerospace components, delivery and use rates for commercial aircraft, actual and projected volume of passenger and freight traffic, average aircraft age and global fleet size. Based on forecasts by Boeing and Airbus, the Company believes that, through the near term, the world's airlines will continue to add capacity and order new aircraft in order to meet anticipated demand. Defense. The U.S. Department of Defense expects defense procurement funding to grow by 40%, from approximately $43 billion in 1998 to approximately $60 billion in 2001. The Company believes that both its electronics and aerospace business segments will benefit from this trend. Increase in Outsourcing. Aircraft manufacturers and defense contractors have been actively searching for ways to improve the quality and reduce the cost of their manufactured products. One approach is to outsource component manufacturing to independent suppliers in order to benefit from an independent supplier's lower cost structure and specialized manufacturing knowledge. Suppliers that demonstrate an ability to deliver a high quality product on the required delivery schedule at a reasonable cost should benefit from this shift. Consolidation. Commercial aircraft manufacturers are tending to purchase from suppliers that can supply more complete systems and pre-assembled parts. The U.S. Department of Defense is strongly encouraging defense contractors to take this approach as well. This shift and the increase in outsourcing appear to be leading to a consolidation in the supply base. The Company believes that this trend toward consolidation presents an opportunity for suppliers with the financial and management resources to complete acquisitions and expand their operations. Electronics Industry The electronics industry is enjoying revenue growth in the annual worldwide market for electronics and components. This growth has been fueled by several factors, including the rapid pace of technological advancement and development of new products. The Company expects these favorable trends in the electronics industry to continue and believes the outlook for the electronics component supply industry will continue to be strong. - -------------------------------------------------------------------------------- This Summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements and related notes appearing elsewhere in this Prospectus. Except as otherwise noted, (1) all references to a particular fiscal year of the Company refer to the twelve months ended May 31, and (2) all currency information is denominated in U.S. dollars. References to the "Company" in this Prospectus include Aeromet, unless otherwise noted or unless the context indicates otherwise. - -------------------------------------------------------------------------------- THE OFFERING Maximum Shares of Common Stock offered by the Selling Shareholders (the "Shares") (1) ............................ 3,236,109 Total outstanding shares of Common Stock as of October 20, 1998 (2) ....................................... 15,986,323 Total shares of Common Stock to be outstanding after the Offering ............................................... 19,222,432 Use of proceeds from the sale of the Shares ................ None to the Company. See "Plan of Distribution." Risk Factors ............................................... See "Risk Factors." Nasdaq Common Stock symbol ..................................PCTH - -------------- (1) This figure assumes conversion of the Preferred Stock into 3,000,000 shares of Common Stock (the "Conversion Shares") and the exercise of the Warrants for 236,109 shares of Common Stock (the "Warrant Shares"). (2) This figure excludes a total of 7,402,500 reserved but unissued shares of Common Stock. See "Risk Factors Shares Eligible for Future Sale." <TABLE> <CAPTION> Summary Financial Data of the Company (in thousands, except percentage and per share data) Years Ended May 31, Three-Month Periods Ended August 31, ------------------------------------------------------------- ------------------------------------ Historical Pro Forma Historical Pro Forma ------------------------------------------------ ------------ --------------------- ------------- 1994 1995 1996 1997 1998 1998(2) 1997 1998 1998(3) ------------------------------------------------ ------------ --------------------- ------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Statement of Operations Data: Net sales(1) $ 2,940 $11,035 $20,725 $34,175 $54,099 $115,505 $11,776 $19,178 $28,760 Gross profit 80 1,943 4,286 8,206 14,612 25,330 2,983 4,674 5,836 Income (loss)from operations (884) (846) (583) 1,947 4,740 9,370 976 898 1,215 Net income (loss) $(1,098) $(1,411) $ (999) $ 1,682 $ 3,614 $ (3,002) $ 811 $(4,411) $(5,469) Net income (loss) per share: Basic ........................ (.60) (.41) (.16) .18 .29 (.24) .07 (0.29) (.36) Diluted ...................... (.60) (.41) (.16) .17 .27 (.24) .07 (0.29) (.36) Shares used in computation of income (loss) per share: Basic 1,826 3,469 6,209 9,500 12,486 12,486 11,718 15,421 15,421 Diluted 1,826 3,469 6,209 10,036 13,606 12,486 11,718 15,421 15,421 Other Financial Data: EBITDA(4) $ (739) $ (437) $ 288 $ 3,305 $ 6,944 $ 15,692 $ 1,385 $ 2,049 $ 2,997 EBITDA margin -- -- 1.4% 9.7% 12.8% 13.6% 11.8% 10.7% 10.4% Depreciation and amortization $ 145 $ 409 $ 871 $ 1,358 $ 2,204 $ 6,322 $ 409 $ 1,151 $ 1,782 At May 31, At August 31, ------------------------------------------------ --------------------- 1994 1995 1996 1997 1998 1998 ------------------------------------------------ --------------------- Balance Sheet Data: Cash and cash equivalents $ 27 $ 1,079 $ 725 $ 3,048 $11,461 $18,998 Working capital (deficit) (1,237) 1,758 952 13,090 25,599 46,686 Total assets 7,894 11,630 27,649 35,752 78,580 171,465 Long-term debt (including current portion) 3,662 3,902 6,304 4,233 11,233 87,053 Shareholders' equity 1,226 5,454 12,539 25,619 56,142 61,500 - -------------- (1) The increases in net sales are attributable to acquisitions by the Company and internal growth. See "Business - Corporate History" and "MD&A - Results of Operations - Pacific Aerospace - Net Sales." (2) Presents the statement of operations data of the Company as if: (a) the Aeromet acquisition, (b) the acquisition of Electronic Specialty Corporation which occurred in the fourth quarter of fiscal 1998, and (c) the related financing transactions, occurred on June 1, 1997. (3) Includes Aeromet's June and July 1998 results of operations. (4) "EBITDA" represents income from operations plus depreciation and amortization expense. EBITDA should not be construed as an alternative to (a) net income, as defined by generally accepted accounting principles, as an indicator of the Company's operating performance or (b) cash flow, as defined by generally accepted accounting principles, as a measure of liquidity. </TABLE>
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000796226_fay_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000796226_fay_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2e52860d2f6655c88892df4628c01726d33a18c5
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary highlights certain information contained in this prospectus. You should carefully review the more detailed information and financial statements that appear elsewhere. In general, the term "Company" refers to The Leslie Fay Company, Inc. and its subsidiaries. The Company General The Company principally designs, arranges for the manufacture and sells diversified lines of moderate and better price women's dresses and sportswear. The Company's products cover a varied retail price range, offer the consumer a wide selection of styles, fabrics and colors suitable for different ages, sizes and fashion preferences and are appropriate for social, business and leisure activities. The Company believes that it is among the major producers of moderately priced dresses and sportswear and that it is one of the major resources to department store retailers of such products. The Leslie Fay business has been in continuous operation as an apparel company since 1947. Reorganization Under Chapter 11 On April 5, 1993, The Leslie Fay Companies, Inc. ("Old Leslie Fay") and certain of its wholly-owned subsidiaries (collectively, the "Debtors") filed a voluntary petition under chapter 11 of the Bankruptcy Code. On November 15, 1995, certain other wholly-owned subsidiaries of Old Leslie Fay (the "Retail Debtors") filed voluntary petitions under chapter 11 of the Bankruptcy Code. From their respective filing dates until June 4, 1997, the Debtors and the Retail Debtors operated or liquidated their businesses, as applicable, as debtors in possession subject to the jurisdiction and supervision of the United States Bankruptcy Court for the Southern District of New York. On October 31, 1995, the Debtors and the Committee of Unsecured Creditors filed a Joint Plan of Reorganization (as subsequently amended, the "Plan") pursuant to chapter 11 of the Bankruptcy Code. On December 5, 1996, the Debtors filed a Disclosure Statement for the Amended Joint Plan of Reorganization pursuant to chapter 11 of the Bankruptcy Code (as subsequently amended, the "Disclosure Statement"). The Debtors obtained Bankruptcy Court approval of the Disclosure Statement on February 28, 1997. The Debtors' creditors approved the Plan, and on April 21, 1997 the Bankruptcy Court confirmed it. On June 4, 1997, the Plan was consummated by the Company by (1) transferring the equity interest in both the Company and Sassco Fashions, Ltd. ("Sassco") to its creditors in exchange for relief from an aggregate amount of claims estimated at $338,000,000; (2) assigning to certain creditors the ownership rights to notes aggregating $110,000,000 payable by Sassco; and (3) transferring the assets and liabilities of the Company's Sassco Fashions product line to Sassco and the assets and liabilities of its Dress and Sportswear lines to three wholly-owned subsidiaries of the Company. The Company retained approximately $41,080,000 in cash, of which $23,580,000 has been or will be used to pay administrative claims as defined in the Plan. As provided in the Plan, the creditors of the Company became the stockholders of Sassco and of the reorganized Company. To effectuate this, the Company issued approximately seventy-nine (79%) percent of its 3,400,000 new shares of common stock to its creditors in July 1997. The remaining twenty-one (21%) percent are being held pending the resolution of certain litigation before the Bankruptcy Court. The existing stockholders of the Company at June 4, 1997 did not retain or receive any value for their equity interest in the Company, which was canceled. The Offering Common Stock offered by the Selling Stockholders.. 2,525,844 shares of common stock, $.01 par value Number of Shares of Common Stock outstanding before and after the offering................ 6,024,900 shares of common stock Trading Symbol.................................... LFAY Risk Factors...................................... You should note that an investment in the securities offered in this prospectus involves a high degree of risk. See "Risk Factors". Summary Financial Data You should read the following summary financial data of the Company in conjunction with the Consolidated Financial Statements and related Notes appearing elsewhere in this prospectus. <TABLE> <CAPTION> Reorganized Company Predecessor Company -------------------------------------------------------- --------------------------------------------------------- Thirty-Nine Pro Forma Pro Forma Thirty-One Twenty-Two Weeks Forty Weeks Fifty-Three Weeks Weeks Ended Ended Weeks Ended Ended Ended For the Years Ended ------------------------------------------------ October 3, October 4, January 3, January 3, Pro Forma June 4, 1998 1997(a) 1998(a) 1998(b) 1996(a) 1997(c) 1996 1995 1994 1993 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- (unaudited) (unaudited)(unaudited) (audited) (unaudited) (In thousands, except per share) (In thousands, except per share) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Net Sales..............$122,723 $106,166 $132,160 $73,091 $110,053 $197,984 $429,676 $442,084 $531,843 $661,779 Operating Income (Loss)............... 13,579 12,320 11,782 4,322 4,079 14,355 17,965 1,235 (27,278) (32,574) Reorganization Costs... - - - - - 3,379(d) 5,144(d) 16,575(d) 115,769(d) 45,139(d) Interest Expense and Financing Costs...... 680 989 1,113 336 2,298 1,372 3,932(e) 3,262(e) 5,512(e) 25,783 Tax Provision (Benefit) 3,983 2,072 2,684 677 130 451 (839)(f) (761)(f) 981(f) (8,258)(g) Other Non-Recurring Items................ - - - - - 136,341(h) - - - - Net Income (Loss)...... $8,916 $9,259 $7,985 $3,309 $1,651 $145,494 $9,728 $(17,841) $(149,540) $(95,238) Net Income (Loss) per Share - Basic....... $1.33 $1.36(i) $1.17(i) $0.49(i) $0.24(i) -(i) $0.52(i) $(0.95)(i) $(7.97)(i) $(5.07)(i) - Diluted..... $1.26 $1.36(i) $1.16(i) $0.49(i) $0.24(i) -(i) $0.52(i) $(0.95)(i) $(7.97)(i) $(5.07)(i) As of As of As of As of As of As of As of 10/03/98 01/03/98 06/04/97 12/28/96 12/30/95 12/31/94 01/01/94 -------- -------- -------- -------- -------- -------- -------- Total Assets .......... $65,402 $61,051 $77,789 $237,661 $245,980 $281,634 $421,341 Assets of Product Lines Held for Sale or Disposition......... - - - 3,003(j) 326(j) 21,063(j) - Long-Term Debt (Including Capital Leases)............. 29 49 108 - - - 8,022(k) </TABLE> - ------------------------------ (a) The unaudited proforma adjustments to the statements are as follows: Disposition of Sassco: The operating results of the Sassco Fashions line have been eliminated to give effect to the disposition as of the beginning of the period presented, including depreciation expense on its property, plant and equipment, an allocated corporate charge based on workload by department related to the Sassco Fashions line and direct charges associated with financing fees on its factoring agreement and fees incurred on letters of credit issued on its behalf. For periods including June 4, 1997, the gain recorded on the disposition of the Sassco Fashions line has been reversed. Disposition of Castleberry: The operating results of the Castleberry line have been eliminated to give effect to the disposition as of the beginning of the period presented, including depreciation expense on its property, plant and equipment and an allocated corporate charge based on workload by department related to the Castleberry line. Fresh-Start Reporting: The Company used fresh-start reporting to record the estimated effect of the Plan as if it had been effective as of the beginning of period presented. This includes adjustments for the following items: i) The elimination of the historical depreciation and amortization for the remaining product lines, including the amounts in cost of sales, on the beginning of period asset balances and the recording of the amortization credit for the "Excess of revalued net assets acquired over equity under fresh-start reporting" (assuming a three-year amortization period). ii) The elimination of historical reorganization expense that will not be incurred after June 4, 1997. iii) The elimination of the fresh-start revaluation charge and the reversal of the gain on debt discharge pursuant to the Plan. (b) Financial information for the thirty-one weeks ended January 3, 1998 represents the consolidated results of the reorganized entity after the consummation of the Plan. (c) Financial information for the twenty-two weeks ended June 4, 1997 represents the audited consolidated results prior to the Company's consummation of the Plan. The income statement information includes the results of Castleberry and Sassco Fashions lines prior to their sale or spin-off in connection with the consummation of the Plan. (d) The Company incurred reorganization costs in 1997, 1996, 1995, 1994 and 1993 while operating as a debtor in possession. Included in 1997, 1996, 1995, 1994 and 1993 is a provision of $0, $652,000, $3,181,000, $53,000,000, and $1,642,000, respectively, for a write-down of a portion of the excess purchase price over net assets acquired in the 1984 leveraged buyout of The Leslie Fay Company, related to certain of the Company's product lines, which the Company believes will be unrecoverable. (e) On January 2, 1994, the Company decided not to accrue interest on approximately $253,000,000 of pre- petition debt. During 1996 and 1995 the Company had direct borrowings under the FNBB Credit Agreement on one hundred and two (102) days in the second and third quarters of 1996 and ten (10) days in the third quarter of 1995, the highest amounts of which were $28,672,000 and $3,956,000, respectively. The Company had no direct borrowings under the predecessor credit agreement in 1994. Interest on direct borrowings was incurred at a rate of prime plus 1.5%. The terms of the FNBB Credit Agreement are described in Note 6(b) to the Audited Consolidated Financial Statements. (f) The Company recognized an income tax credit of $1,103,000 and $1,811,000 in 1996 and 1995, respectively, representing a reduction of foreign income tax liabilities as a result of negotiated settlements on prior years' estimated taxes. The Company only paid state, local and foreign taxes in 1996, 1995 and 1994. The elimination of the income tax benefit in 1994, which was realized in 1993, resulted from the complete utilization of tax refunds from prior years' taxes paid. (g) In 1993, the Company realized an income tax benefit as a result of the net losses incurred and the ability to recognize the carryback of those losses against prior years' taxes paid. (h) Amount consists of the following three components: Gain on Sale/Transfer of the Sassco Fashions line of $89,810,000 (net of $3,728,000 of income taxes), charge for Revaluation of Assets and Liabilities Pursuant to the Adoption of Fresh-Start Reporting of $(27,010,000) and Gain on Debt Discharge (an extraordinary item) of $73,541,000. (i) Net income (loss) per share for the pro forma forty weeks ended October 4, 1997, pro forma fifty-three weeks ended January 3, 1998, thirty-one weeks ended January 3, 1998 and pro forma 1996 was calculated based on 6,800,000 shares of new common stock, adjusted to give effect to the 2 for 1 stock split effected in July 1998, issued in connection with the consummation of the Plan. Earnings per common share for the twenty-two weeks ended June 4, 1997 is not presented because such presentation would not be meaningful. The old stock of 18,771,836 shares, used in calculating the net income (loss) per share in 1993 through 1996, was canceled under the Plan and the new stock was not issued until June 4, 1997. (j) The Company classified certain product lines as "Assets of Product Lines Held for Sale or Disposition", as the Company had announced its intention to dispose of these lines. (k) All long-term debt except capital leases was reclassified as "Liabilities subject to compromise" because of the Company's chapter 11 filing.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000799089_ascential_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000799089_ascential_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..5454bd28cbe53ef5a86de84d588a909e6a84b568
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1998/CIK0000799089_ascential_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. DISCUSSIONS CONTAINING SUCH FORWARD-LOOKING STATEMENTS MAY BE FOUND IN THE MATERIAL SET FORTH UNDER "PROSPECTUS SUMMARY," "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS" AS WELL AS IN THE PROSPECTUS GENERALLY. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. THE COMPANY Informix Corporation ("Informix" or the "Company") is a leading multinational supplier of information management software. The Company designs, develops, manufactures, markets and supports relational database management systems ("RDBMS"), connectivity interfaces and gateways and application development tools for graphical and character-based software applications as part of an RDBMS. Database management software permits multiple individual users, employing different application software, to access and manage the same data concurrently without corrupting the underlying database. RDBMS software extends the functionality and utility of non-relational database management software by simplifying the data retrieval process for end-users, who do not require specific knowledge about the structure of the database but need only to specify the data to be retrieved. Companies commonly employ RDBMS software for use in storing, managing and retrieving the large amounts of data necessary to support internal management information and decision-support systems as well as mission-critical data processing applications. The Company believes that technological advances, including the development and commercialization of the Internet, will lead to increasingly sophisticated customer requirements for data storage and management beyond the functionality offered by conventional RDBMS products. In recent years, the types and quantities of data required to be stored and managed has grown increasingly complex and includes, in addition to conventional character data, audio, video, text and three dimensional graphics. In 1996, the Company focused substantial resources in the development of object-relational database management systems ("ORDBMS") and tools for applications in multimedia and entertainment, digital media publishing and financial services. The Company markets its products to end-users on a worldwide basis directly through its sales force and indirectly through application resellers, original equipment manufacturers ("OEMs") and distributors. The principal geographic markets for the Company's products are North America, Europe, the Asia/ Pacific region and Latin America. In recent years, approximately half of the Company's total revenues have been generated outside North America. The Company's principal customers include businesses ranging from small corporations to Fortune 1000 companies, principally in the manufacturing, financial services, telecommunications, media, retail/wholesale, hospitality and government services sectors. The Company was initially incorporated in California in 1980 and reincorporated in Delaware in August 1986. Unless the context otherwise requires, references in this Prospectus to "Informix" and the "Company" refer to Informix Corporation, a Delaware corporation and, except as otherwise indicated, its subsidiaries. The Company's executive offices are located at 4100 Bohannon Drive, Menlo Park, California 94025, and its telephone number at that address is (650) 926-6300. THE OFFERING <TABLE> <S> <C> Common Stock outstanding prior to the offering................... 152,587,051 shares (1) Common Stock offered by the Selling Stockholders related to Series B Preferred............................................. 15,250,000 shares (3) 180,606,959 shares Common Stock to be outstanding after the offering................ (2)(3) Nasdaq National Market symbol.................................... IFMX </TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, --------------------------------------------------------- 1997 1993 -------- 1996 1995 1994 -------- ---------- ---------- ---------- (RESTATED) (RESTATED) (RESTATED) <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net revenues... $663,892 $734,540 $636,547 $451,969 $353,115 Operating income (loss)... (355,742) (61,326) 68,725 77,229 83,925 Net income (loss)... (356,867) (73,565) 38,600 48,293 54,989 Net income (loss) per share... $ (2.36) $ (0.49) $ 0.26 $ 0.34 $ 0.40 Weighted average number of common and common equivalent shares outstanding... 151,907 149,310 150,627 142,782 137,827 </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1997 -------------------------------- PRO FORMA ACTUAL ADJUSTED(2)(4) --------- --------------------- <S> <C> <C> BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........................... $ 155,465 $ 169,565 Working deficit............................................................. (140,148 (5) (126,048)(5) Total assets................................................................ 563,244 577,344 Long-term obligations....................................................... 6,311 6,311 Stockholders' equity........................................................ 59,064 73,164 </TABLE> - ------------------------------ (1) Based upon shares outstanding as of December 31, 1997. Excludes (i) 19,110,951 shares of Common Stock issuable upon exercise of options outstanding at December 31, 1997 under the Company's 1986 Employee Stock Option Plan, 1994 Stock Option and Award Plan, 1997 Non-Statutory Stock Option Plan, the 1992 Illustra Stock Option Plan and 1989 Outside Director Option Plan at a weighted average exercise price of $7.9906 (without giving effect to the option repricing in January 1998) and (ii) 8,654,476 shares of Common Stock reserved at December 31, 1997 for future issuance under the 1994 Stock Option and Award Plan, the 1997 Non-Statutory Stock Option Plan, the 1989 Outside Director Option Plan and the 1997 Employee Stock Purchase Plan. See "Management--Stock Plans," "Description of Capital Stock" and Note 7 of Notes to Consolidated Financial Statements. (2) Includes 12,769,908 shares of Common Stock issued upon conversion of 220,000 shares of Series A-1 Convertible Preferred Stock (the "Series A-1 Preferred") on February 13, 1998. See "Preferred and Selling Stockholders" and "Description of Capital Stock--Preferred Stock." (3) Assumes 12,500,000 shares of Common Stock issued upon conversion of the Series B Preferred and 2,700,000 shares of Common Stock issued upon exercise of the Warrants, in each case based upon an assumed Series B Preferred conversion price of $4.00. Also assumes payment of accrued dividends to holders of Series B Preferred in cash and not in shares of Common Stock. If the Company were to elect to make payment of such dividends in Common Stock, the number of shares of Common Stock outstanding after the offering would increase. See "Description of Capital Stock--Preferred Stock," and assumes the exercise of a warrant to purchase up to 50,000 shares of Common Stock issuable to Shemano in the event the closing sales price of the Company's Common Stock as reported on The Nasdaq Stock Market on May 17, 1998 does not exceed $12.50 (the "Shemano Warrant"). See "Certain Transactions." (4) Pro forma adjusted to give effect to (i) the conversion of the Series B Preferred at an assumed conversion price of $4.00 into 12,500,000 shares of Common Stock and Warrants to acquire 2,700,000 shares of Common Stock, assuming no exercise of the Warrants, and (ii) the assumed grant of the Shemano Warrant, and assuming no exercise of the Shemano Warrant. See "Description of Capital Stock--Preferred Stock," "Certain Transactions" and Note 6 of Notes to Consolidated Financial Statements. (5) Includes $180,048 million in advances from customers and financial institutions. See "Risk Factors--Working Capital Deficit," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 2 of Notes to Consolidated Financial Statements. ------------------------------ EXCEPT AS OTHERWISE NOTED, ALL INFORMATION AND DATA IN THIS PROSPECTUS RELATING TO THE COMPANY'S OUTSTANDING COMMON STOCK ASSUMES THE CONVERSION OF ALL OUTSTANDING SERIES B PREFERRED INTO 12,500,000 SHARES OF COMMON STOCK, BASED ON AN ASSUMED SERIES B PREFERRED CONVERSION PRICE OF $4.00, THE GRANT AND EXERCISE OF THE WARRANTS TO PURCHASE 2,700,000 SHARES OF COMMON STOCK AND THE GRANT AND EXERCISE OF THE SHEMANO WARRANT. SUCH INFORMATION AND DATA RELATED TO THE COMPANY'S COMMON STOCK AT DECEMBER 31, 1997 ALSO ASSUMES THAT THE FEBRUARY 1998 CONVERSION OF 220,000 SHARES OF SERIES A-1 PREFERRED INTO 12,764,908 SHARES OF COMMON STOCK OCCURRED ON OR PRIOR TO DECEMBER 31, 1997. SEE "DESCRIPTION OF CAPITAL STOCK-- PREFERRED STOCK" AND "--REGISTRATION RIGHTS."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000800193_tapistron_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000800193_tapistron_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d445c870bce0063f8b02b7269fea7e72a8c38bb6
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1998/CIK0000800193_tapistron_prospectus_summary.txt
@@ -0,0 +1 @@
+SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial data, including the financial statements and notes thereto, included elsewhere in this Prospectus. Unless the context otherwise indicates, the "Company" means Tapistron International, Inc. and includes its corporate and partnership predecessors and wholly-owned subsidiaries and affiliates. This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors." The Company's principal executive offices are located at 6203 Alabama Highway, Ringgold, Georgia 30736, and its telephone number is (706) 965-9300.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000807397_mark_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000807397_mark_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..b48c6ab3db66ec9cdb82e917745f6c8a7f430b1b
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1998/CIK0000807397_mark_prospectus_summary.txt
@@ -0,0 +1 @@
+SUMMARY The following is a summary of certain information contained in this Prospectus. This summary is qualified in its entirety by the more detailed information and financial statements appearing elsewhere in this Prospectus and the exhibits hereto. Certain capitalized items used and not otherwise defined in this summary have the meanings ascribed to them elsewhere in this Prospectus. THE COMPANY Mark Solutions, Inc. ("Mark") is a Delaware corporation which operates its businesses through wholly-owned subsidiaries and a division. Mark is engaged in the design, manufacture and/or installation of (i) modular steel cells for correctional institution construction and (ii) diagnostic support, picture, archiving and communication computer systems (PACS) marketed under the name "IntraScan". Modular Steel Cells. Mark markets its modular steel products by responding to public bids and by pursuing joint ventures and affiliations with other companies to solicit design, build and/or operate correctional facilities projects both domestically and internationally. Management believes that nationwide emphasis on expedient easing of overcrowding conditions in correctional institutions presents a significant growth opportunity; however, there can be no assurance of sustained business. Mark's modular cells can be manufactured and installed more efficiently than traditional housing alternatives by virtue of lower labor and construction costs and shorter installation time. IntraScan PACS System. Mark markets its IntraScan PACS systems to radiology departments, large healthcare facilities, hospitals and outpatient imaging group practices, primarily through a marketing agreement with Data General Corporation. Management believes that it can capitalize on the development of the domestic and international PACS market; however, there can be no assurance that significant business will develop. The IntraScan PACS system interfaces with medical imaging devices to store and recall images digitally from modalities including x-ray, CAT Scan, MRI, ultrasound, computed radiography and nuclear medicine. The IntraScan PACS system is "platform independent" allowing the software to operate with most computer hardware and operating systems. Mark was incorporated under the laws of the State of Delaware on September 29, 1986 under the name "Showcase Cosmetics, Inc.". Mark's principal executive offices are located at 1515 Broad Street, Bloomfield, New Jersey 07003 and its phone number is (973) 893-0500.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1998/CIK0000814250_ladish-co_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000814250_ladish-co_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..fb674f517bbc38b105e268de67541701a51acc77
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1998/CIK0000814250_ladish-co_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements and the related notes thereto included elsewhere in this Prospectus. As used in this Prospectus, unless the context otherwise requires, the term "Ladish" or "Company" means Ladish Co., Inc. Except as otherwise indicated, all information in this Prospectus has been adjusted to give effect to a one for six reverse split of the Common Stock which occurred effective December 12, 1997. Information in this Prospectus concerning the number of shares of Common Stock outstanding assumes that the Underwriters have not exercised their over- allotment option, and does not, except where otherwise indicated, assume the exercise of currently outstanding and exercisable warrants to purchase an aggregate of 7,588,614 shares (except that information as of the completion of the Offering assumes the exercise of warrants to purchase an aggregate of 2,620,914 shares, which are being exercised in connection with the Offering). THE COMPANY Ladish Co., Inc. ("Ladish" or the "Company") is a leading producer of highly engineered, technically advanced components for the jet engine, aerospace and general industrial markets. Ladish engineers, produces and markets high-strength, high-technology forged and formed metal components for a wide variety of load-bearing and fatigue- resisting applications in the jet engine, aerospace and industrial markets. The Company has been engaged in producing parts for aircraft engines and other military, aerospace and general industrial applications for over 50 years. Products developed by Ladish include (i) rotating jet engine parts, such as fan, compressor and turbine discs, and jet engine casings, (ii) other aerospace products, including structural aircraft components, landing gear components, flap tracks, helicopter rotor parts and shafts and large missile components and (iii) general industrial forgings such as large crankshafts for power generation equipment. These products require a high degree of engineering skill and technical expertise and are generally manufactured from titanium, high- temperature alloys, steel or aluminum. Components for such rigorous applications often necessitate manufacture through forging, which yields a seamless product with a high strength-to-weight ratio relative to castings. Principal customers include all of the major jet engine manufacturers, as well as both commercial and government aircraft and satellite manufacturers, power plants and manufacturers of farm and heavy-duty off-road equipment. Approximately 89% of the Company's 1997 sales were to the aerospace industry. Since late 1995, demand for forged components has strengthened, primarily due to increased demand from the commercial aerospace industry. The Company believes the principal reasons for the recent improvement in new aircraft orders include increased demand for air travel in Asia, the recent improved profitability of U.S. commercial airlines and U.S. Environmental Protection Agency rules requiring airlines to reduce noise, which, in turn, have prompted airlines to modernize their fleets. Accordingly, airlines have been retrofitting existing aircraft or purchasing new jet engines. In addition to the favorable trends in commercial aviation discussed above, world airframe manufacturers are seeking to improve the affordability and efficiency of their products by reducing the number of engines on airplanes. Newer engines, therefore, must be bigger and run faster and at higher temperatures, which in turn has increased demand for components that are structurally larger and more metallurgically complex. The Company believes that it is well positioned to capitalize on the current upturn in the commercial aerospace industry in wide-body aircraft as well as regional and business jets. The Company believes that the combination of its unique equipment, metallurgical expertise and leading-edge computer process modeling of forging, heat treating and machining operations, together with its industry-recognized core competencies in large and complex forgings, will enable the Company to compete effectively for this demand. BUSINESS STRATEGY The Company's goal is to generate profitable growth and to enhance shareholder value by capitalizing on Ladish's reputation for quality and value and its unique manufacturing equipment. To accomplish this goal, management intends to continue pursuing the following strategies: Maximize Benefits from Industry Upturn Ladish intends to capitalize on the current upturn in the aerospace industry by continuing to manufacture components that meet the demand by airframe manufacturers for stronger, larger and more metallurgically complex parts. The Company believes that it is well positioned to benefit from the reduction in excess capacity in the U.S. airline industry, the other trends in the commercial aerospace industry and the corresponding increase in demand for new aircraft and parts. Make Strategic Acquisitions As a part of the global consolidation of the aerospace industry, management believes there are numerous opportunities to grow and enhance the Company through strategic acquisitions. As an example of these opportunities, in June 1997, Ladish acquired substantially all of the assets and assumed a portion of the liabilities of Stowe Machine Co., Inc. ("Stowe"). Located in Windsor, Connecticut, Stowe provides finish machining services and products to the jet engine industry. Operating Stowe will further Ladish's efforts to capitalize on the upturn in the jet engine industry through the value-added services provided by Stowe to the Company's existing customer base and the vertical integration opportunities offered through Stowe. With a customer list which mirrors that of Ladish, Stowe provides Ladish with the ability to integrate vertically and offer further value-added services to its core markets. Leverage Core Competencies into New Products and Markets The Company's growth strategy also includes continuing to identify new products and markets where it can become a leading supplier by using its core competencies in metallurgy, precision metal-working and the management of complex manufacturing processes. The Company has expanded its processing technology to alloys such as aluminum-lithium in order to compete for both solid and liquid fuel motor cases for future generations of launch vehicles such as the Expendable Extended Launch Vehicle ("EELV"). In addition, the Company's ability to shear-form various alloys has enabled it to develop technically advanced domes, rings and cylinders for launch vehicles and seamless titanium drums used to manufacture copper foil for use by the telecommunications industry. Ladish's metallurgical expertise, combined with the world's largest counterblow hammer, has enabled it to become the leading supplier of titanium hemispheres in the commercial satellite industry and large steel crankshafts in the power generation industry. Additionally, the Company believes that its manufacturing, engineering and technical expertise gives it the ability to develop and process next generation jet engine components for increased performance of high-temperature materials as well as to develop products for non-aerospace applications such as farm and heavy-duty off-road machinery. For example, the Company is currently producing what the Company believes is the world's largest crankshaft in a closed-die for use in the international power generation market. Enhance Market Access Through Customer Cooperation and Strategic Alliances Ladish intends to continue its long-standing practice of working closely with its customers and strategic participants in the forging industry. The Company works closely with customers by using its manufacturing and technical expertise to engineer, tool and manufacture new products according to customer specification. In exchange, the Company is often designated as the sole-source supplier by its customers for the life of the program. In addition, Ladish's well-respected research and development departments have enabled the Company to establish and maintain strong relationships with GE, Rolls-Royce PLC ("Rolls-Royce"), Pratt & Whitney, Lockheed Martin Corp. and the United States Air Force on a number of development projects, many of which are customer funded. Management believes that these projects position the Company to win early production contracts on new equipment. In addition to working closely with customers, Ladish intends to develop strategic alliances with other participants in the forging industry to take advantage of synergy opportunities. In September 1995, the Company entered into a joint venture with Weber Metals, Inc. ("Weber"), a subsidiary of German conglomerate Otto Fuchs Metallwerke KG, whereby the Company combines its engineering and metallurgical expertise with the capabilities of Weber's 38,000 ton hydraulic press. The product which results from the combination of the Company's technology with Weber's press frees up Company capacity, reduces manufacturing costs and gives the Company access to high-temperature niches of the jet engine market. Under the terms of the Weber agreement, Ladish purchases forging time from Weber at a fixed rate. The resultant products are sold by Ladish, and the profits are divided between the parties according to a formula agreed between the parties on a product-by-product basis. The agreement has a term of ten years and is not terminable by either party during the first five years; after five years either party may give the other 365 days notice of its intent to terminate. No other such alliances have yet been formed. Improve Profitability Through Operating Efficiencies and Lower Costs Since mid-1995, the Company has significantly reduced overhead costs, improved worker productivity, shortened production cycle times and rationalized its product mix in order to improve operating margins and lower its break-even point. During this time, management has invested in new technologies, developed more efficient manufacturing processes and focused on selling higher value- added products. By reducing lot sizes, set-up times and process times throughout its facility, the Company has reduced its average cycle time by approximately 75% from 1994 to 1997. In addition, pieces per man-hour increased 16% from 1995 through 1997. Sales per employee have increased 22% from 1996 to 1997. As a result of the implementation of process improvement techniques coupled with applied synchronous manufacturing concepts, the Company has reduced its costs and improved product quality as measured by the reduction of rework and scrap. In addition, the Company is currently computerizing the operation of its hammers, which the Company believes will lead to additional operational efficiency and further improve the quality of its forgings. Ladish is also implementing cellular manufacturing techniques in an effort to further decrease production times and reduce costs. Focus on Core Business In the fourth quarter of 1996, the Company decided to focus its efforts on its core forging business and the markets it serves. Consequently, Ladish determined that its Industrial Products Division ("IPD"), with its commodity fitting and valve business, was not strategic to the future direction of the Company. In May 1997, the Company sold substantially all of the assets of IPD to a subsidiary of Trinity Industries, Inc. for cash consideration of $36.5 million and the assumption of certain liabilities. Ladish utilized proceeds from the sale of IPD to reduce debt and fund the Stowe acquisition, and intends to use the remainder of the proceeds to fund a significant portion of its underfunded pension liability. The sale has also allowed management to focus its time and energy on the growth of the core business and to identify strategic acquisition opportunities such as Stowe. HISTORY The Ladish forge shop was founded in 1905. For the next 75 years, Ladish Co. continued to grow its operations under the control of the Ladish family. During this period, Ladish Co. supplied forged products to virtually every industry, including the aerospace industry beginning in the 1930s, and became a leader within the commercial and military aerospace industry for forged products and material application. Beginning in 1981, Ladish Co. experienced a series of ownership changes. The Company was incorporated as the successor to Ladish Co. in connection with one of these transactions. From 1991 until the middle of 1995, the aerospace industry experienced a severe cyclical downturn. This decline resulted from a combination of reduced demand from the commercial airline industry, which was suffering from weak passenger revenues and overcapacity, and reduced military budgets as a result of the end of the Cold War. At the same time, the Company faced substantial debt service on $110 million of subordinated debentures publicly issued in connection with a 1987 leveraged buyout. In February 1993, the Company filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Under this "pre-packaged" plan, the subordinated debentures were converted to equity at a ratio of $1,000.00 of principal amount of subordinated debentures for approximately 43 shares of Common Stock, including the debentures held by the Company's largest current shareholder; no other class of creditor was affected. The plan was confirmed and the Company emerged from reorganization in April 1993. Beginning in 1995, the Company implemented a program to reduce overhead costs, improve worker productivity, shorten production cycle times and rationalize product mix. This program has resulted in improved operating margins and a lower break-even point. Over the same time period, the market for forged components strengthened due primarily to increased demand from the commercial airline industry. This resurgence in demand, which the Company believes is attributable to a number of factors affecting airlines in the U.S. and throughout the world, has resulted in strong revenue growth for the Company. The Company's income before taxes increased from $2.1 million in 1996 to $20.5 million in 1997, due principally to the substantial increase in net sales. The Company has elected to undertake an initial public offering at this time in order (i) to raise capital to reduce debt and other liabilities and thereby improve its balance sheet, and (ii) to create a more liquid market for the present and future shareholders of the Company. Certain officers and principal shareholders of the Company are Selling Shareholders in the Offering and will benefit in the amount of the net proceeds received for the shares of Common Stock sold by them hereunder. See "Principal and Selling Shareholders". THE OFFERING <TABLE> <C> <S> Common Stock offered by: The Company...................................... 2,336,000 shares Selling Shareholders............................. 4,049,459 shares ------------ Total(1)..................................... 6,385,459 shares ------------ ------------ Common Stock and equivalents to be outstanding after the Offering(1)(2)................................. 15,260,405 shares Use of Proceeds..................................... The proceeds to the Company from the sale of Common Stock by the Company are expected to be approximately $35 million (net of underwriting discounts and estimated expenses payable by the Company and assuming an offering price per share of $16.50, the midpoint of the range set forth on the cover page of this Prospectus). The net proceeds from the sale of shares by the Company will be used primarily to repay subordinated debt and a portion of outstanding indebtedness under the Company's senior credit facility, and to contribute to certain underfunded pension plans. Any remaining funds will be used for general corporate purposes, which may include acquisitions. The Company will not receive any proceeds from the sale of shares by the Selling Shareholders. See "Use of Proceeds" and "Principal and Selling Shareholders". Dividend policy..................................... The Company currently intends to retain all of its earnings to finance its operations and future growth and does not expect to pay any dividends for the foreseeable future. See "Dividend Policy". Nasdaq National Market symbol....................... "LDSH". </TABLE> - -------- (1) Does not include up to 957,819 shares of Common Stock issuable upon exercise of the Underwriters' over-allotment option in full. (2) Includes 7,588,614 shares subject to outstanding common stock purchase warrants as of the date of this Prospectus, but excludes (i) 322,500 shares issuable pursuant to outstanding options under the Incentive Plan (as hereinafter defined) and (ii) 496,188 shares reserved for issuance upon exercise of outstanding options previously granted to former employees and others. See "Management--Incentive Stock Option Plan", "Certain Relationships and Related Party Transactions", and Note 4 to Financial Statements. SUMMARY FINANCIAL DATA The following table sets forth certain historical financial data for the fiscal years 1995 through 1997. Such data were derived from the audited financial statements of the Company included elsewhere herein. The Company's Industrial Products Division, which was sold during 1997, has been treated as a discontinued operation and its results of operations are excluded from the table. The historical financial data are not necessarily indicative of the results of operations for any future period. See "Management's Discussion and Analysis of Financial Condition and Results of Operations".
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+PROSPECTUS SUMMARY Except as otherwise noted, (A) all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option, (B) all information in this Prospectus with respect to Vacation Ownership Interests is presented on an annual, as opposed to an alternate-year basis, and (C) all share information has been adjusted to give retroactive effect to a one-for-five reverse stock split (the "Reverse Stock Split"), declared effective by the Company as of January 12, 1998. Unless the context otherwise requires, references to the "Company" or "ILX" means ILX Resorts Incorporated and its consolidated subsidiaries. Unless otherwise indicated, all vacation ownership industry data contained herein is derived from information prepared by the American Resort Development Association ("ARDA"), an industry trade association. This Prospectus contains certain "forward-looking statements," including statements regarding, among other items, the Company's growth strategy, industry and demographic trends, the Company's ability to finance its operations and anticipated trends in its business. Actual results could differ materially from these forward-looking statements as a result of a number of factors, including, but not limited to, the Company's need for additional financing, intense competition in various aspects of its business, the risks of rapid growth, its dependence on key personnel and other factors described under "Risk Factors" commencing at page 15 and elsewhere in this Prospectus. THE COMPANY ILX is one of the leading developers, marketers and operators of timeshare resorts in the western United States. The Company's principal operations consist of (i) acquiring, developing and operating timeshare resorts, marketed by the Company as vacation ownership resorts, (ii) marketing and selling vacation ownership interests in timeshare resorts, which typically have entitled the buyers thereof to ownership of a fully-furnished unit for a one-week period on either an annual or an alternate year (i.e., biennial) basis ("Vacation Ownership Interests"), and (iii) providing purchase money financing to the buyers of Vacation Ownership Interests at its resorts. In addition, the Company receives revenues from the rental of its unused or unsold inventory of units at its vacation ownership resorts, and from the sale of food, beverages and other services at such resorts. The Company's current portfolio of resorts consists of four resorts in Arizona, one in Indiana, and one in Colorado, and the Company is constructing a seventh resort in Tucson, Arizona (collectively, the "ILX Resorts"). At December 31, 1997, the ILX Resorts (excluding the Tucson property currently under construction) represented an aggregate of 391 units and 20,171 sold and unsold one-week Vacation Ownership Interests. Upon completion of the Tucson property currently under construction, the Company expects to own an aggregate of 453 units, comprising 23,395 (sold and unsold) one-week Vacation Ownership Interests. As of December 31, 1997, the Company also owned an aggregate of approximately 84 Vacation Ownership Interests in destination resorts owned by others and located in Florida, Mexico and elsewhere, and had acquired the rights to market Vacation Ownership Interests in four destination resorts owned by an unaffiliated third party and located on the island of Kauai, Hawaii (collectively, the "Additional Interests"). The Company was founded in 1986 and commenced implementation of its current operating and growth strategies in the fourth quarter of 1991. During the period from December 31, 1991 through December 31, 1997, the Company increased the number of ILX Resorts from two to seven, and increased its total inventory of sold and unsold Vacation Ownership Interests from 9,915 weeks to 23,479 weeks (including 3,224 under construction at VCA-Tucson and the 84 Additional Interests). The Company's total revenues increased from $6.1 million in 1991 to $36.4 million in 1997. During this period, the Company's growth was fueled principally by the acquisition, redevelopment, ground-up development and expansion of certain ILX Resorts and the marketing and sale of Vacation Ownership Interests in these resorts. The Company believes it was able to purchase the ILX Resorts and the Additional Interests at relatively attractive prices because of its skill in locating, identifying and acquiring distressed or underdeveloped resorts and Vacation Ownership Interests. The Company successfully utilized this strategy in connection with its Los Abrigados Resort & Spa in Sedona, Arizona ("Los Abrigados") (175 units), the Kohl's Ranch Lodge in Payson, Arizona ("Kohl's Ranch") (52 units) and, most recently, the Roundhouse Resort in Pinetop/Lakeside, Arizona (59 existing units owned by current owners of Vacation Ownership Interests and planned expansion of approximately 100 units). Utilizing management's development expertise, the Company developed and implemented the Varsity Clubs of America ("Varsity Club") concept. This concept entails ground-up development of urban vacation ownership properties strategically situated in tourist destinations which are accessible to major population centers near prominent colleges and universities. The first Varsity Club, consisting of 62 units, was completed in August 1995 and is located approximately three miles from the University of Notre Dame in South Bend, Indiana ("VCA-South Bend"). Construction of a second Varsity Club, consisting of 62 planned units, located near the University of Arizona in Tucson, Arizona ("VCA-Tucson"), is scheduled for completion in April 1998. The scope of the Company's activities since 1991 have enabled the Company's management team, which has significant experience in the vacation ownership resort and real estate development industries, to establish substantial in-house capabilities in areas critical to the Company's operating and growth strategies, including property identification and acquisition, property development and rehabilitation, and Vacation Ownership Interest sales and marketing. The Company is pursuing a two-pronged operating strategy which focuses on marketing Vacation Ownership Interests in the Company's convenient access resorts ("CARs") and in its Varsity Clubs. CARs are typically high-quality vacation ownership resorts situated in settings of natural beauty and located within convenient and inexpensive travelling distance from major population centers (currently Phoenix and Denver). The Company's CARs are intended to facilitate more frequent "short-stay" getaways, which the Company believes is an increasingly popular vacation trend. As of December 31, 1997, the Company operated five CARs consisting of 329 units and held 5,355 unsold Vacation Ownership Interests in those CARs. The Company's inventory of CARs has been marketed primarily by ILX employees at the Company's on-site sales offices located at or near selected ILX Resorts. Although purchasers will continue to be able to purchase Vacation Ownership Interests at any individual ILX Resort or an Additional Interest, commencing in 1998, the Company's inventory of CARs will be marketed primarily through membership interests in its proprietary branded Premiere Vacation Club. The Premiere Vacation Club offers purchasers a deeded one-week membership interest which may be used at any time between certain specified dates at any one of the ILX Resorts included in the Premiere Vacation Club, or may be split into multiple stays of shorter duration at any combination of such resorts. In addition, Premiere Vacation Club membership interests may be exchanged for a stay at other resorts through the major national exchange networks in which owners of Vacation Ownership Interests in the ILX Resorts and Additional Interests (the "ILX Owners") may participate, such as Resort Condominiums International ("RCI") and Interval International ("II"). Substantially all of the Company's inventory of Vacation Ownership Interests, including those at its Varsity Clubs and those to be included in the Premiere Vacation Club, qualify as "red time," the highest demand classification for purposes of participation in such exchange networks. The Company believes that its Premiere Vacation Club concept will be appealing to customers because of its emphasis on flexible use options (e.g., floating days, two-day uses and the ability to split a purchased membership interest), locations within convenient driving distances from major metropolitan areas and other features (e.g., high quality amenities and food and beverage discounts at its participating ILX Resorts). In addition to marketing through its Premiere Vacation Club, the Company intends to aggressively pursue the expansion of its proprietary branded Varsity Club concept. The Company will focus on development of additional Varsity Clubs in areas with a significant base of existing tourism and access to major population centers, which are located near prominent colleges and universities in the western United States. The Company completed construction and commenced operations of its prototype Varsity Club property, VCA-South Bend, located near the University of Notre Dame, in 1995. Construction of a second Varsity Club, VCA-Tucson, located near the University of Arizona in Tucson, Arizona, is expected to be completed in April 1998. The Company intends to develop its Varsity Club properties at attractive locations for visiting tourists who may rent accommodations or purchase a Vacation Ownership Interest from the Company. In connection with the purchase of a Vacation Ownership Interest, Varsity Clubs offer area residents an urban "city club" experience with unlimited day-use privileges, as well as the opportunity to participate in the II Vacation Ownership Interest exchange network. The Company believes that Varsity Clubs offer features common to a "city club", including a fitness center, swimming pool, bar, restaurant/lounge, billiards and large sitting/welcome room. In addition, the Varsity Clubs concept enables the Company to enlarge the Company's target list of potential purchasers by utilizing an identification with the local university to market Vacation Ownership Interests to alumni, sports season ticket holders, parents of university students and corporate sponsors of university events, among others, who attend the sporting, academic and cultural events regularly hosted by various universities, thereby enlarging the Company's target base of potential purchasers. Varsity Clubs offer a flexible ownership structure which permits the purchase of Vacation Ownership Interests consisting of a single day, a collection of single days (such as selected days during an entire specified sports season) or a traditional one-week period, in addition to unlimited use of the common areas for "city club" use. The Company believes that direct marketing to a large target base of potential purchasers with university affiliations will enable the Company to achieve premium pricing with respect to those portions of its inventory which coincide with high demand for accommodations at prominent university-sponsored events. The Company also believes that its success in gaining access to alumni and other target potential purchasers with relationships to the University of Notre Dame or the University of Arizona may facilitate similar arrangements with other universities in the areas in which future Varsity Clubs are developed. The Company had more than 12,000 existing ILX Owners at December 31, 1997. During 1997, the Company sold 2,512 annual and biennial Vacation Ownership Interests at the ILX Resorts, compared to 2,320 and 2,195 during 1996 and 1995, respectively. The average sales price for a Vacation Ownership Interest (excluding sales of Upgrades, as defined below) was $10,994 for an annual interest and $6,506 for a biennial interest, resulting in a weighted average price (each biennial interest is treated as one-half of an annual interest) of $11,963 during the year ended December 31, 1996 and $11,444 for an annual interest and $6,899 for a biennial interest, resulting in a weighted average price of $12,656 during the year ended December 31, 1997. At December 31, 1997, the Company had an existing inventory of 7,105 unsold Vacation Ownership Interests (including Vacation Ownership Interests in the CARs, VCA-South Bend and the Additional Interests) and a master plan, subject to consumer demand, receipt of applicable permits and other contingencies generally applicable to real estate development, to construct up to 11,438 (including 3,224 to be constructed at VCA-Tucson) additional Vacation Ownership Interests through 1999 and thereafter at the existing ILX Resorts. See "Risk Factors -- Risks of Rapid Growth." Vacation Ownership Industry Trends The vacation ownership resort industry has experienced rapid growth. In 1997, the worldwide vacation ownership industry grew to approximately $6.0 billion in sales, compared to $3.2 billion in 1990. Also in 1997, ARDA estimated that the worldwide industry grew to 4.5 million owners as compared to 1.8 million owners in 1990. From 1980 through 1997, an estimated 6.9 million Vacation Ownership Interests were purchased for total sales of $53.6 billion. While demographics differ by property, historically, through 1997, the average ILX Owner has been between 40 and 55 years old and had an annual income in excess of $50,000. According to ARDA, in 1997 the median age and household income of a Vacation Ownership Interest owner in the United States was 50 years and $71,000, respectively. The Company expects the vacation ownership resort industry to continue to grow as the "baby-boom" generation moves through the 40 to 55 age bracket. According to the 1990 U.S. Census Bureau study, the 40 to 55 age group comprised 17.3% of the U.S. population, and households with an aggregate income exceeding $40,000 comprised 35.6% of U.S. households. The number of persons in the United States between the ages of 40 and 55 grew to an estimated 51.4 million in 1995 from 43.1 million in 1990 and is predicted to increase to approximately 59.5 million by 2000. This represents estimated growth of 19.3% between 1990 and 1995, and the U.S. Census Bureau predicted this population group to grow 15.8% from 1995 to 2000. In comparison, the U.S. Census Bureau reported that the total U.S. population grew and is projected to grow by less than 6.0% in the same time periods. The Company believes that a high level of fragmentation in the vacation ownership resort industry presents opportunities for growth. According to Ragatz Associates, a long-time vacation ownership industry consultant, there were approximately 200 operators of approximately 294 vacation ownership resorts actively selling Vacation Ownership Interests in 1996 in the United States, with no single operator controlling in excess of 10% of the United States market. See "Risk Factors -- Competition" "Business -- The Vacation Ownership Industry Overview" and "Business -- Competition." Growth Strategy The Company believes that its experienced management team, substantial in-house operating and development capabilities and two-pronged marketing strategy, position the Company to capitalize on the growth trends in the vacation ownership resort industry. The Company intends to continue to grow by implementing the following strategies: Focus on the Western United States. The ILX Resorts are primarily located in the western United States, and the Company will continue to focus its acquisition and development of additional vacation ownership resorts primarily in that region. The Company believes that the western region of the United States provides numerous opportunities to develop or acquire additional CARs by locating vacation ownership resorts in settings of natural beauty and, when possible, within convenient travelling distances of major population centers. The Company also believes the western United States has numerous universities located in or near large population centers which will be targeted as potential sites for future Varsity Club properties. By focusing its expansion in the western United States, the Company believes it can more easily incorporate additional resorts into its Premiere Vacation Club and market these resorts to ILX Owners and others using its existing sales, marketing and other resources. Further, demographic trends indicate that the population in the western United States will continue to grow at a rate faster than the rest of the country, providing a larger potential customer base in the future. Develop Additional Properties. The Company believes its inventory of Vacation Ownership Interests can be significantly and prudently increased through the development of additional Varsity Clubs, as well as development of additional CARs, to be marketed through its Premiere Vacation Club. The Company successfully completed development of its VCA-South Bend in August 1995, which will serve as the prototype for additional Varsity Clubs. Construction of the planned 62-unit VCA-Tucson near the University of Arizona commenced in August 1997 and is expected to be completed in April 1998 at an estimated aggregate cost of $7.5 million. The Company intends to develop additional Varsity Clubs using the same general design concepts, architectural plans and construction specifications which were established at VCA-South Bend, and which are being implemented in the development of VCA-Tucson. The Company believes there exist multiple sites in the western United States which are accessible to major population centers and local tourist attractions and are proximate to universities with prominent athletic and cultural activities so as to make them appropriate for the development of additional Varsity Clubs. The Company intends to initiate development of approximately five Varsity Clubs in the next three years. Areas in which the Company is currently investigating the potential development of additional Varsity Clubs include Tempe, Arizona; Boulder, Colorado; Las Vegas, Nevada; Palo Alto, California; Salt Lake City -- Provo, Utah; and Seattle, Washington. However, no contracts or commitments currently exist for any such proposed locations. See "Risk Factors -- Risks of Rapid Growth" and "Risk Factors -- Competition." Acquire and Redevelop Additional Resorts. The Company has historically expanded and enhanced its portfolio of vacation ownership resorts primarily through the acquisition and redevelopment of CARs located in settings of natural beauty, which the Company believes have been available at relatively attractive prices from sellers who have underutilized or underdeveloped the resorts or are in distressed situations. By acquiring such resorts at relatively favorable prices and utilizing the Company's substantial in-house development capabilities to expand and enhance the resorts' Vacation Ownership Interests inventory, the Company has been able to achieve favorable overall inventory investment costs relative to the vacation ownership industry. During 1996, the Company's average cost of Vacation Ownership Interests sold as a percentage of Vacation Ownership Interest sales at ILX Resorts was 15.8%, and for Vacation Ownership Interests which it acquired (as opposed to developed from ground up) the average cost was 13.7%. Both of the foregoing percentages compare favorably to the vacation ownership industry's median product cost as a percentage of net sales of between 20.1% and 25.0%, as reported in ARDA's Financial Performance Digest 1997. The Company has previously demonstrated its ability to acquire quality vacation ownership resorts at relatively attractive prices, and the Company intends to continue to seek similar opportunities in the future. Because of management's familiarity with the Company's geographic market and its skills in the property acquisition and development areas, the Company believes it will continue to be able to identify a substantial number of vacation ownership resorts for acquisition which are suitable for the Company's value-added management approach. Acquired resorts will be marketed primarily through the Premiere Vacation Club, as individual ILX Resorts or a combination thereof. The Company believes that its Premiere Vacation Club will afford greater flexibility in the acquisition of additional vacation ownership resorts to the extent that small or remote resorts which may not otherwise be attractive to purchasers of Vacation Ownership Interests at a single resort may significantly enhance the consumer appeal of a membership interest in the Premiere Vacation Club. The Company believes these types of resorts can be acquired at relatively attractive prices since other potential purchasers are likely to lack the resources to market such vacation ownership resorts effectively and, therefore, be unwilling to pay higher prices for them. Although it has no binding agreements and there can be no assurance that the Company will consummate any of such acquisitions, the Company is engaged in active negotiations with respect to several potential vacation ownership resort acquisitions. See "Risk Factors -- Risks of Rapid Growth." Expand Existing ILX Resorts. The Company intends to capitalize upon opportunities to expand the ILX Resorts. The Company believes development of additional units at existing ILX Resorts is generally the most economical means of growing the Company's Vacation Ownership Interest inventory and sales profits because the fixed costs associated with developing the necessary infrastructure (i.e., lobby areas, restaurants and pools) need not be incurred and may be spread over a larger number of units. Currently, the Company's expansion plans through 1999 include the development of approximately 20 units at Los Abrigados, 24 units at VCA-South Bend, 12 units at Kohl's Ranch and as many as 40 units at the Roundhouse Resort. The Company anticipates increasing its inventory of Vacation Ownership Interests through expansion of existing ILX Resorts by as many as approximately 8,300 weeks through 1999 (including 3,224 weeks currently under construction at VCA-Tucson). Increase Sales of Vacation Ownership Interests to ILX Owners. The Company seeks to increase sales and profitability at its ILX Resorts and with respect to the Additional Interests by selling upgrades, which consist of sales to existing ILX Owners of a Vacation Ownership Interest at a different ILX Resort or in the Premiere Vacation Club; during a more popular season or in a larger unit at the same ILX Resort; or of an annual interest to an owner of a biennial interest (collectively, "Upgrades"). The Company believes that ILX Owners have a better understanding of Vacation Ownership Interests than first-time buyers, are generally familiar with the ILX Resorts and, based on historical experience, have a demonstrated tendency to take vacations, which results in a higher percentage of sales from marketing efforts to ILX Owners than to prospective purchasers who have never purchased a Vacation Ownership Interest. The Company intends to begin marketing Upgrade sales in its Premiere Vacation Club to ILX Owners in early 1998. The Company's sales to ILX Owners have increased from $1.0 million of Upgrades in 1996 to $3.0 million of Upgrades in 1997. Increase Net Income from Customer Financing Transactions. From January 1, 1994 through December 31, 1997, approximately 20% to 25% of the Company's sales were on a cash basis and the Company provided financing for the remaining 75% to 80% of its sales of Vacation Ownership Interests. Buyers who finance their purchase of Vacation Ownership Interests are required by the Company to make a down payment of at least 10% of the total sales price and may pay the balance to the Company over a period of seven years pursuant to a promissory note wherein the Company is the lender ("Customer Notes"). At December 31, 1997, the Company retained a portfolio of Customer Notes with an aggregate principal amount of $14.5 million, of which $12.0 million are serviced by an outside vendor and have a weighted average yield of 13.8% per annum, which compares favorably to the Company's weighted average cost of borrowings for such Customer Notes of 12.4% per annum. Prior to 1995, the Company sold the majority of its Customer Notes and retained only the small remaining portion, which it used as collateral to obtain working capital (i.e., hypothecate). Since 1995, the Company has steadily increased the amount of Customer Notes which it retains and hypothecates and, as a result, at December 31, 1997, the Company had retained Customer Notes in an aggregate outstanding principal amount of $14.5 million as compared to $7.9 million at December 31, 1995. Because the Company has historically financed its operations through the sale of a substantial majority of its Customer Notes, the Company's net income from customer financing transactions (i.e., the spread between the interest charged to borrowing customers and the Company's borrowing costs) has been limited. Although there can be no assurance in this regard, the Company believes that the closing of this Offering and the reduction of its current indebtedness will allow the Company to arrange more favorable Customer Notes' financing, which will in turn enable the Company to retain a significantly greater percentage of its Customer Notes, and, thus, increase the net income in the event of favorable interest rate differences. See "Risk Factors -- Financing Customer Borrowings, Liquidity Risks." The Company believes its relatively high rate of cash sales and low rate of defaults on Customer Notes is due in part to the relatively high customer appeal of the ILX Resorts and the credit due diligence pre-approval process performed by the Company and its lenders. During 1996 and 1997, the Company provided for uncollectible Customer Notes by reserving 3% of its gross sales (including cash sales) as an allowance for doubtful accounts. At December 31, 1997, the Company had reserved $3.0 million for possible credit losses. Management believes this amount is sufficient to cover anticipated losses from defaults on Customer Notes, however there can be no assurance in this regard. At December 31, 1997, $3.2 million in principal, or 8.2%, of the retained Customer Notes and Customer Notes previously sold, which are recourse to the Company, were more than 90 days past due. See "Risk Factors -- Financing Customer Borrowings; Liquidity Risks" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Sales and Marketing All of the Company's sales and substantially all of the Company's marketing functions are currently performed in-house. Consequently, the Company invests significant resources attracting, training and seeking to retain its sales and marketing employees. The Company actively sells Vacation Ownership Interests through a sales staff of approximately 140 employees, including approximately 100 sales agents at four locations at or near selected ILX Resorts. Prospective first-time purchasers participate in a tour of the facilities as well as its related amenities, guided by a salesperson. At the conclusion of the tour, the terms of making a purchase, including financing alternatives, are explained to the customer. In addition to generating sales to first-time buyers, the Company's sales force seeks to generate sales of additional Vacation Ownership Interests or Upgrades to ILX Owners. Sales to ILX Owners generally have lower marketing costs as these buyers tend to be more familiar with the nature of purchasing a Vacation Ownership Interest and the amenities offered by the ILX Resorts. Although sales to ILX Owners have historically been a minor portion of the Company's total sales, the Company intends to increase its sales efforts with respect to ILX Owners. See "Business -- Growth Strategy." The Company's marketing strategy seeks to target prospective buyers who respond favorably to travel-related inducements because the Company believes such consumers are more likely to travel and, therefore, have a greater likelihood of purchasing a Vacation Ownership Interest. The Company's marketing activities are devoted primarily towards (i) hotel guests at the ILX Resorts, (ii) exchange program participants staying at the ILX Resorts, (iii) off-premise contacts with visitors to the local surroundings of the ILX Resorts and (iv) direct mail and telemarketing to residents of metropolitan areas within driving distances of the ILX Resorts. By targeting customers who live within driving distance of an ILX Resort or who are vacationing at or near an ILX Resort, the Company avoids the more expensive marketing costs of subsidized air fare and lodging typically associated with the vacation ownership industry. Consistent with this strategy, the Company's Varsity Club concept seeks to offer a branded "city club" experience for flexible use by local residents. In order to enlarge its base of potential purchasers, the Company's marketing efforts related to its Varsity Clubs seek to focus upon alumni, parents of university students and other persons or entities who have a preexisting affiliation with or other attraction to the local university. All of the Company's marketing activities emphasize the convenience of its CARs coupled with the opportunity to participate in exchange networks as well as the quality and breadth of amenities available at each of the ILX Resorts. See "Business -- Operating Strategies" and "Business -- Sales and Marketing." Recent Developments The Company has recently undertaken certain steps to enhance its operations and to seek to increase stockholder value, including the following: Los Abrigados Partnership Buy-In. In August 1997, the Company acquired the outstanding 21.5% minority interest in Los Abrigados Partners Limited Partnership ("LAP"), which owns and operates the Los Abrigados resort. The aggregate consideration paid by the Company in connection with this acquisition was $2.9 million. The 1996 pre-tax earnings attributable to the minority interest were $671,664. As part of the transaction, the Company succeeded to the capital accounts of the former limited partners in the amount of $2.9 million on the date of the transaction. Acquisition of Roundhouse Resort. In December 1997, the Company completed the acquisition of the Roundhouse Resort, an existing 59-unit vacation ownership resort with approximately five acres of developable land located in Pinetop/Lakeside, Arizona. The aggregate consideration paid by the Company in connection with this acquisition was approximately $715,000, including acquisition costs. Redevelopment of this property is expected to commence in late 1998 with initial construction of up to 40 additional units (consisting of an aggregate of 2,080 Vacation Ownership Interests). The Company also plans to market Upgrades to the approximately 2,500 owners of Vacation Ownership Interests who acquired the existing 59 units at this resort prior to its acquisition by the Company. The Company believes that up to a total of 100 additional units (including the aforementioned 40 units planned to be constructed during 1998 and 1999) can be built at this resort, subject to receipt of appropriate governmental permits. Sale of Lomacasi. In December 1997, the Company sold its 75% interest in the Lomacasi Resort in Sedona, Arizona ("Lomacasi") for aggregate consideration of $2.85 million, including the assumption by the buyer of indebtedness of $2.23 million and the receipt of 100,000 shares of the Company's Common Stock, valued at $6.25 per share. Lomacasi had operated at a loss since its acquisition by the Company in March 1996, and the Company believes that more attractive expansion opportunities exist at or nearby the ILX Resorts. Reverse Stock Split; New Listing. In January 1998, the Company's shareholders approved the one-for-five Reverse Stock Split of the outstanding shares of Common Stock, which became effective as of the close of business on January 12, 1998. Also, in February 1998, the Company commenced listing of its Common Stock on the American Stock Exchange. Prior thereto, the Company's Common Stock was quoted on the Nasdaq SmallCap Market. The Company initiated the Reverse Stock Split and the change of listing from the Nasdaq SmallCap Market to the American Stock Exchange with an objective of enhancing the long-term value of its Common Stock to its shareholders and increasing the liquidity of and market for its Common Stock. The Resorts The table below sets forth certain information, as of December 31, 1997, with respect to the ILX Resorts and the Additional Interests. The information set forth below does not include the Company's planned development of additional Varsity Clubs. <TABLE> <CAPTION> UNITS AT RESORT(1) TOTAL VACATION OWNERSHIP -------------------------- INTERESTS AT RESORTS(1) ------------------------------------------------- TOTAL UNITS AT PLANNED TOTAL INTERESTS UNSOLD INTERESTS PLANNED RESORTS LOCATION 12/31/97 EXPANSION(2) AT 12/31/97 AT 12/31/97 EXPANSION(2) ------- -------- ----------- ------------ --------------- ---------------- ------------ <S> <C> <C> <C> <C> <C> <C> Convenient Access Resorts Los Abrigados Resort & Spa Sedona, AZ 175 20 9,100 2,200 1,040 The Inn at Los Abrigados Sedona, AZ 10 0 510 510 0 Kohl's Ranch Lodge Payson, AZ 52 12 2,704 1,994 624 Roundhouse Resort(3) Pinetop/Lakeside, AZ 59 100 2,950 0 5,200 Golden Eagle Resort Estes Park, CO 33 2 1,683 651 102 --- --- ------ ----- ------ Total CARs 329 134 16,947 5,355 6,966 Varsity Clubs of America VCA-South Bend South Bend, IN 62 24 3,224 1,666 1,248 VCA-Tucson(4) Tucson, AZ 0 62 0 0 3,224 --- --- ------ ----- ------ Total VCAs 62 86 3,224 1,666 4,472 Additional Interests(5) N/A N/A 84 84 N/A --- --- ------ ----- ------ Total Vacation Ownership Interests(6) 391 220 20,255 7,105 11,438 === === ====== ===== ====== <CAPTION> VACATION OWNERSHIP INTERESTS SOLD(1) -------------------------------------------------------------- AVERAGE SALES IN 1997 ONLY PRICE IN 1997 DATE SALES THROUGH ----------------- ------------------ RESORTS COMMENCED 12/31/97 ANNUAL BIENNIAL ANNUAL BIENNIAL ------- ---------- -------- ------ -------- ------- -------- <S> <C> <C> <C> <C> <C> <C> Convenient Access Resorts Los Abrigados Resort & Spa 1989 6,900 361 553 $13,342 $8,819 The Inn at Los Abrigados 1998 0 0 0 0 0 Kohl's Ranch Lodge 1995 710 66 249 $11,848 $6,676 Roundhouse Resort(3) 1998 2,950 N/A N/A N/A N/A Golden Eagle Resort 1987 1,032 104 0 $ 9,494 N/A ------ --- ----- Total CARs 11,592 531 802 Varsity Clubs of America VCA-South Bend 1995 1,558 236 903 $10,385 $5,785 VCA-Tucson(4) 1998 0 N/A N/A N/A N/A ------ --- ----- Total VCAs 1,558 236 903 Additional Interests(5) 1987 N/A 40 N/A $ 4,964 N/A ------ --- ----- Total Vacation Ownership Interests(6) 13,150 807 1,705 ====== === ===== </TABLE> - --------------- (1) The Company sells both annual Vacation Ownership Interests (entitling the owner to the use of a unit for a one-week period on an annual basis) and biennial Vacation Ownership Interests (entitling the owner to the use of a unit for a one-week period on an alternate-year basis) with respect to 52 weeks per unit per year. Accordingly, the Company is generally able to sell 52 annual Vacation Ownership Interests or 104 alternate-year Vacation Ownership Interests per unit. With respect to "Vacation Ownership Interests Sold" and "Average Sales Price in 1997," the data is provided for both annual and biennial Vacation Ownership Interests sold. For purposes of calculating "Total Vacation Ownership Interests at Resorts" and "Vacation Ownership Interests Sold Through 12/31/97," numbers are based on sales of Vacation Ownership Interests on an annual basis only and reflect the sale of between 50 to 52 weeks per unit per year. To the extent that biennial Vacation Ownership Interests are sold, the actual number of unsold Vacation Ownership Interests would be increased. (2) The completion of planned additional vacation ownership units and Vacation Ownership Interests is subject to the receipt of applicable governmental permits, availability of necessary funds, consumer demand and other contingencies. (3) Information relating to inventory at this ILX Resort includes 59 units (2,950 weeks) purchased by owners prior to the Company's acquisition of this ILX Resort in December 1997. The Company's planned expansion at this resort consists of 40 units through 1999 and the remainder to be constructed thereafter, consistent with demand. (4) Development of VCA-Tucson is scheduled to be completed in April 1998 and initial marketing of Vacation Ownership Interests at this ILX Resort is anticipated to commence at that time. (5) The Company owns all of the 84 Vacation Ownership Interests set forth in the table. The Additional Interests also consist of an unspecified number of Vacation Ownership Interests with respect to which the Company has a marketing agreement pursuant to which it may make sales of such Vacation Ownership Interests at these resorts. (6) "Vacation Ownership Interests Sold Through 12/31/97" excludes the Additional Interests sold. CORPORATE BACKGROUND The Company was incorporated under the laws of Arizona in 1986 as "International Leisure Enterprises Incorporated," and thereafter changed its name to "ILX Incorporated" and in January 1998 to "ILX Resorts Incorporated." The Company's headquarters are located at 2111 East Highland Avenue, Suite 210, Phoenix, Arizona 85016. The Company's telephone number is (602) 957-2777. THE OFFERING <TABLE> <S> <C> Common Stock Offered By the Company(1).................................. 1,250,000 shares Common Stock Outstanding Before the Offering(2)............................. 2,589,373 shares Common Stock Outstanding After the Offering(1)(2)........................... 3,839,373 shares Use of Proceeds...................................... The Company intends to use the net proceeds from this Offering for the repayment of outstanding indebtedness. See "Use of Proceeds." American Stock Exchange Symbol....................... ILX Dividends............................................ The Company currently intends to retain future earnings to finance its operations and fund the growth of its business, and does not intend to pay cash dividends on its Common Stock in the foreseeable future. See "Risk Factors -- Absence of Common Stock Dividends; Rights of Preferred Stock" and "Dividend Policy." </TABLE> - --------------- (1) Excludes 187,500 shares of Common Stock issuable upon exercise of the Underwriters' over-allotment option in full. See "Underwriting." (2) Excludes (i) 60,400 shares of Common Stock issuable upon exercise of outstanding options with a weighted average exercise price of $8.02 per share, (ii) 132,646 shares of Common Stock issuable upon conversion of outstanding shares of Preferred Stock, (iii) 10,000 shares of Common Stock issuable upon the exercise of outstanding warrants at an exercise price of $7.50 per share, (iv) 20,000 shares of Common Stock issuable at a weighted average conversion price of $7.50 per share upon conversion of certain outstanding promissory notes issued by the Company (the outside conversion date is December 31, 1999) and (v) 103,060 shares of Common Stock held as treasury shares, each as of December 31, 1997. See "Management -- Stock Option Plans," "Description of ILX Securities and Pertinent Arizona Statutes," and the Company's Consolidated Financial Statements. SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION The Summary Consolidated Historical and Pro Forma Financial Information should be read in conjunction with the Consolidated Financial Statements and notes thereto included herein, "Selected Consolidated Historical and Pro Forma Financial Information" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." <TABLE> <CAPTION> HISTORICAL PRO FORMA ----------------------------------------------- ------------ YEAR ENDED DECEMBER 31, YEAR ENDED ----------------------------------------------- DECEMBER 31, 1993 1994 1995 1996 1997 1997(e) ------- ------- ------- ------- ------- ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> INCOME STATEMENT DATA (a) Timeshare revenues: Sales of Vacation Ownership Interests........ $12,264 $18,714 $21,354 $19,639 $23,981 $23,981 Resort operating revenue..................... 8,072 8,764 8,868 10,945 10,920 10,648 Interest income.............................. 360 403 627 997 1,510 1,510 ------- ------- ------- ------- ------- ------- 20,696 27,881 30,849 31,581 36,411 36,139 ------- ------- ------- ------- ------- ------- Cost of sales and operating expenses: Cost of Vacation Ownership Interests sold.... 1,457 2,393 3,530 3,101 3,219 3,219 Cost of resort operations.................... 6,962 7,525 8,985 10,407 10,473 10,229 Sales and marketing.......................... 6,718 10,142 10,972 10,486 13,895 13,890 General and administrative................... 667 2,056 3,779 2,304 2,975 2,956 Provision for doubtful accounts.............. 1,158 764 1,235 591 702 702 Depreciation and amortization................ 353 1,425 696 476 455 409 ------- ------- ------- ------- ------- ------- 17,315 24,305 29,197 27,365 31,719 31,405 ------- ------- ------- ------- ------- ------- Timeshare operating income..................... 3,381 3,576 1,652 4,216 4,692 4,734 Income from land and other, net................ 10 517 192 50 28 28 ------- ------- ------- ------- ------- ------- Total operating income......................... 3,391 4,093 1,844 4,266 4,720 4,762 Gain on sale of property....................... 0 0 0 0 356 0 Interest expense............................... (600) (666) (1,265) (1,975) (2,085) (1,175) ------- ------- ------- ------- ------- ------- Income before income taxes and minority interests.................................... 2,791 3,427 579 2,291 2,991 3,587 Income tax (expense) benefit................... 100 161 547 (679) (1,145) (1,455) ------- ------- ------- ------- ------- ------- Income before minority interests............... 2,891 3,588 1,126 1,612 1,846 2,132 Minority interests............................. (815) (1,440) (501) (561) (178) 0 ------- ------- ------- ------- ------- ------- Net income..................................... $ 2,076 $ 2,148 $ 625 $ 1,051 $ 1,668 $ 2,132 ======= ======= ======= ======= ======= ======= Net income per share (b): Basic........................................ $ 0.88 $ 0.86 $ 0.24 $ 0.38 $ 0.60 $ 0.54 ======= ======= ======= ======= ======= ======= Diluted...................................... $ 0.84 $ 0.83 $ 0.24 $ 0.37 $ 0.59 $ 0.53 ======= ======= ======= ======= ======= ======= </TABLE> <TABLE> <CAPTION> HISTORICAL PRO FORMA ----------------------------------------------- ------------ YEAR ENDED DECEMBER 31, YEAR ENDED ----------------------------------------------- DECEMBER 31, 1993 1994 1995 1996 1997 1997(e) ------- ------- ------- ------- ------- ------------ (DOLLARS IN THOUSANDS, EXCEPT AVERAGE PRICE OF VACATION OWNERSHIP INTERESTS SOLD) <S> <C> <C> <C> <C> <C> <C> OTHER DATA(a) Net income per share excluding gain on sale of property on a diluted basis(b)............... $ 0.84 $ 0.83 $ 0.24 $ 0.37 $ 0.51 $ 0.53 EBITDA(c)...................................... $ 3,062 $ 4,218 $ 2,140 $ 4,253 $ 5,089 $ 5,263 Cash flows provided by (used in): Operating activities......................... $ 2,438 $ 4,013 $ (703) $ 3,976 $ 2,809 Investing activities......................... $(1,433) $(2,149) $(3,156) $(3,520) $(6,480) Financing activities......................... $ 338 $ (288) $ 3,970 $ (679) $ 3,374 Operating data: Number of ILX Resorts at period end.......... 2 2 4 4 6 Number of Vacation Ownership Interests sold(d).................................... 1,013 1,604 1,877 1,562 1,660 Number of Vacation Ownership Interests in inventory at period end(d)................. 6,250 5,082 9,347 7,955 7,105 Average price of Vacation Ownership Interests sold (excluding revenues from Upgrades)(d)............................... $10,954 $10,795 $10,624 $11,963 $12,656 Average price of Vacation Ownership Interests sold (including revenues from Upgrades)(d)............................... $12,106 $11,667 $11,377 $12,573 $14,446 </TABLE> <TABLE> <CAPTION> Historical As Adjusted ----------------------------------------------- -------------- December 31, ----------------------------------------------- DECEMBER 31, 1993 1994 1995 1996 1997 1997(f) ------- ------- ------- ------- ------- -------------- (In thousands) <S> <C> <C> <C> <C> <C> <C> BALANCE SHEET DATA(a): Notes receivable.............................. $ 6,672 $ 6,751 $ 8,785 $11,746 $15,862 $15,862 Resort property held for Vacation Ownership Interest sales.............................. 9,749 9,408 14,852 15,248 14,667 14,667 Total assets.................................. 24,907 28,403 37,753 41,275 43,722 43,722 Notes payable................................. 5,409 7,332 13,528 16,434 22,051 14,214 Shareholders' equity.......................... 10,541 12,957 13,775 15,175 16,621 24,458 </TABLE> - --------------- (a) The summary consolidated historical financial information set forth above for each of the fiscal years 1993 through 1997, has been derived from the audited consolidated financial statements of the Company which have been restated to give effect to the Reverse Stock Split. (b) Gives retroactive pro forma effect to the Reverse Stock Split. (c) EBITDA represents net income before interest expense, income taxes, gain on sale of property and depreciation and amortization. EBITDA is presented because it is a widely accepted indicator of a company's financial performance. However, EBITDA should not be construed as an alternative to net income as a measure of the Company's operating results or to cash flows from operating activities (determined in accordance with generally accepted accounting principles) as a measure of liquidity. Since revenues from Vacation Ownership Interest sales include Customer Notes received by the Company, EBITDA does not reflect cash flow available to the Company. The Company's management interprets trends in EBITDA to be an indicator of the Company's financial performance, in addition to net income and cash flows from operating activities (determined in accordance with generally accepted accounting principles). The following table reconciles EBITDA to net income: <TABLE> <CAPTION> PRO FORMA HISTORICAL ------------ ---------------------------------------------- YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER ---------------------------------------------- 31, 1993 1994 1995 1996 1997 1997(e) ------ ------ ------ ------ ------ ------------ (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> Net income............................. $2,076 $2,148 $ 625 $1,051 $1,668 $2,132 Interest expense....................... 600 666 1,265 1,975 2,085 1,175 Income tax expense (benefit)........... (100) (161) (547) 679 1,145 1,455 Depreciation and amortization.......... 353 1,425 696 476 455 409 Amortization of guarantee fees......... 133 140 101 72 92 92 Gain on sale of property............... 0 0 0 0 (356) 0 ------ ------ ------ ------ ------ ------ EBITDA................................. $3,062 $4,218 $2,140 $4,253 $5,089 $5,263 ====== ====== ====== ====== ====== ====== </TABLE> (d) Vacation Ownership Interests are expressed in terms of annual intervals (biennial sales are counted as one-half of an annual sale). (e) The above unaudited pro forma income statement data for the year ended December 31, 1997 gives effect to (a) the purchase by the Company of the remaining minority interest in LAP for $2,920,000 consisting of $820,000 cash, 20,000 shares of Common Stock issued (valued at $125,000) and notes payable aggregating $1,975,000, bearing interest at 8% per annum, (b) the sale of the Company's general partnership interest in the Lomacasi Resort for approximately $2,850,000 consisting of the assumption by the buyer of indebtedness of approximately $2,225,000 and the receipt by the Company of 100,000 shares of the Company's common stock valued at $625,000, (c) the sale of 1,250,000 shares of Common Stock in this Offering (excluding the 187,500 shares subject to the Underwriters' over-allotment option) and (d) the application of the estimated net proceeds therefrom to repay certain indebtedness. These transactions are reflected as if they had occurred at the beginning of 1997, and exclude the non-recurring gain of $356,000 on the sale of Lomacasi. The adjustments consist of (i) elimination of the Lomacasi resort operations, the gain on the sale of Lomacasi and related interest expense and minority interest, (ii) elimination of the LAP minority interest, (iii) additional interest expense for the debt used to purchase the LAP minority interest, (iv) reduction in the number of shares outstanding by 80,000, consisting of the 100,000 shares received from the sale of the Company's general partnership interest in the Lomacasi Resort less the 20,000 shares issued in connection with the purchase of the LAP minority interest (v) reduction of interest expense to give effect to the repayment of certain indebtedness using the estimated net proceeds from this Offering and (vi) adjustment of the provision for income taxes for the effect of the pro forma adjustments. These adjustments are summarized as follows: <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, 1997 -------------- INCREASE (DECREASE) IN NET INCOME (IN THOUSANDS) <S> <C> Resort operating revenue.................................... $(272) Cost of resort operations................................... 244 Sales and marketing......................................... 5 General and administrative.................................. 19 Depreciation and amortization............................... 46 Gain on sale of property.................................... (356) Interest expense............................................ 910 Income tax expense.......................................... (310) Minority interest expense................................... 178 ----- Total....................................................... $ 464 ===== </TABLE> (f) As adjusted to give effect to this Offering and the application of the estimated net proceeds therefrom as described in Note (e) above as if this Offering and application of the estimated net proceeds therefrom occurred as of December 31, 1997.
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+Prospectus Summary.......................................................... 1 Risk Factors................................................................ 10 Bankruptcy of Related Entities............................................ 10 Indebtedness of the Company............................................... 11 Additional Financing Requirements......................................... 12 Customer Borrowings....................................................... 12 Development, Construction and Property Acquisition Activities............. 14 Real Estate Risks......................................................... 14 Vulnerability to Regional Conditions...................................... 15 Resort Management Contracts............................................... 15 Impact of Timeshare Interval Exchange Networks............................ 15 Potential Future Development of Resale Market for Timeshare Intervals..... 15 Dependence on Outside Vendors............................................. 15 Concentration in Timeshare Industry....................................... 16 Impact of Recession or Economic Slowdown.................................. 16 Seasonality and Variability of Quarterly Results.......................... 16 Integration of Eastern Resorts............................................ 16 Competition............................................................... 17 Dependence on Senior Management and Directors............................. 17 Regulation................................................................ 18 Possible Environmental Liabilities........................................ 19 Dependence on Computer System of Related Party............................ 19 Year 2000 Compliance...................................................... 20 Potential for Adverse Effects on Price of Common Stock.................... 21 Shares Eligible for Future Sale........................................... 21 Limited Public Market..................................................... 22 Withdrawal of Audited Reports............................................. 22 Use of Proceeds............................................................. 23 Dividend Policy............................................................. 23 Capitalization.............................................................. 24 Price Range of Common Stock................................................. 25 Pro Forma Condensed Consolidated Financial Data............................. 26 Selected Consolidated Historical Financial Data............................. 29 Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................... 32 The Timeshare Industry...................................................... 48 Business.................................................................... 51 Regulation.................................................................. 72 Management.................................................................. 75 Information Regarding Executive Compensation................................ 78 Bankruptcy of Affiliates and Related-Party Transactions..................... 83 Resignation of Accountants.................................................. 87 Description of Certain Indebtedness......................................... 88 Principal and Selling Stockholders.......................................... 91 Shares Eligible for Future Sale............................................. 92 Description of Capital Stock................................................ 94 Underwriting................................................................ 99 Notice to Canadian Residents................................................102 Legal Matters...............................................................104 Page Experts.....................................................................104 Available Information.......................................................104 Index to Financial Statements...............................................F-1 YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF THIS DOCUMENT. We provide loans to timeshare resort developers to acquire land and construct a resort, or to acquire a hotel, club or other previously developed property for conversion into a timeshare resort ("A&D Loans"). A&D Loans are generally collateralized by a first mortgage on the property with full recourse to the developer. In addition to A&D Loans, we provide financing both indirectly and directly to the consumers who purchase timeshare intervals. Consumers typically purchase such intervals with a 10% down payment, and the developer holds a receivable from the consumer for the remaining 90% of the purchase price ("Consumer Loans"). Through our timeshare development operations, we directly generate Consumer Loans. Our financing operations indirectly fund consumer purchases of timeshare intervals by purchasing developers' Consumer Loans ("Purchased Receivables") or making loans to developers secured by their Consumer Loans ("Hypothecation Loans"). The cost and tax benefits of Hypothecation Loans are generally more advantageous to developers, although Purchased Receivables result in greater upfront cash to the developer. In the case of Hypothecation Loans and Purchased Receivables, we have direct recourse against the developer and the consumers whose obligations underly these loans. o Acquisition and Development Loans. We generally obtain the exclusive right to finance consumer receivables resulting from the sale of timeshare intervals for any resort for which we make an A&D Loan. As a developer sells timeshare intervals, a portion of the proceeds from each sale is paid to the Company and applied to the A&D Loan ("release payment"). As of September 30, 1998, our A&D Loan portfolio had a weighted average interest rate of 12.0%. o Consumer Financing. Our Consumer Financing portfolio consists of our Consumer Loans, together with Hypothecation Loans and Purchased Receivables. We consider our Consumer Financing portfolio the most significant aspect of our financing business. After adjustment for the risks of default, the yield on our Consumer Financing portfolio is substantially higher than on our A&D Loan portfolio. As of September 30, 1998, our Consumer Financing portfolio had a weighted average interest rate of 13.6%. As of September 30, 1998, our total loan portfolio had an outstanding balance of $156.6 million, which included $37.3 million (24%) of A&D Loans, $116.3 million (74%) of Consumer Financing and $3.0 million (2%) of other loans. Resort Development We entered the resort development business in August 1998, when, as part of our strategy for diversification and growth, we acquired Eastern Resorts. Eastern Resorts, either on its own or through its predecessor, has been in the resort development business since 1981. It operates six resorts in and around Newport, Rhode Island and the Bentley Brook Mountain Club resort in the Berkshire mountains of western Massachusetts. As of September 30, 1998, Eastern Resorts operated resorts containing 325 units, representing 16,838 timeshare intervals, of which 4,363 remained unsold. We currently have under development 174 additional units, representing 9,048 intervals. In the first nine months of 1998, we sold approximately 1,000 timeshare intervals at an average price of $9,619. Our resort operations include: o Marketing and selling timeshare intervals in our resorts; o Providing financing to consumers who purchase our timeshare intervals; o Managing our resorts on behalf of homeowner associations; o Owning and managing two restaurants at our resorts; o Renting unoccupied timeshare intervals on an overnight basis; and o Acquiring property and constructing or converting timeshare resorts. Newport is one of the principal destination resorts in the northeastern United States. Newport is noteworthy for its jazz and folk music festivals, sailing, the historic summer mansions of leading American families and many other attractions. The Bentley Brook Mountain Club is a major new project at the Jiminy Peak ski resort in the Berkshire mountains of western Massachusetts. The Bentley Brook Mountain Club, which has direct access to ski slopes and is a short drive from the summer music festival at Tanglewood, offers a broad range of year-round outdoor activities. According to local visitors bureaus, Newport hosts approximately 3.75 million visitors, and Berkshire County hosts approximately 2.25 million visitors each year. All of our resorts are associated with Resort Condominiums International ("RCI"). This allows our customers to exchange their timeshare interval for one in over 3,200 other resorts around the world at any time of year. According to ARDA, the ability to exchange timeshare intervals worldwide is an important factor to customers deciding to purchase a timeshare interval. Each year, a substantial percentage of our owners takes advantage of the exchange opportunity. All of our resorts are designed to furnish customers with a high-quality vacation experience and offer many leisure amenities. Our resorts are situated in desirable locations that are accessible by car from Boston, the greater New York City area and other parts of the Northeast region. We estimate that more than 11 million households are within driving distance (200 miles) of our properties. The percentage of these households having an annual income in excess of $50,000 exceeds the national average. Growth Strategy Our goal is to increase shareholder value through growth and diversification in the timeshare industry and potentially the broader leisure and finance markets. As part of that objective, we seek to become a full-service lender and developer in the timeshare industry. Key elements of our current growth strategy include the following: o Increase Consumer Financing portfolio. We intend to increase our Consumer Financing business by increasing our originations of Consumer Loans and A&D Loans. We generally expect that each $1,000 invested in our own resorts or in A&D Loans to third-party developers will generate $3,000 to $4,000 in Consumer Financing. We believe we can increase our volume of A&D Loans, without lowering the interest rate we charge, by continuing to target high-quality, small to midsize development projects, and by expanding our financing activities to somewhat larger development projects that satisfy our underwriting criteria. To support this growth, we intend to expand our capital base through increased borrowings from financial institutions and the issuance of debt, equity or asset-backed securities in the capital markets. o Develop and acquire additional resorts. We intend to construct or acquire additional resorts in New England and in other locations as opportunities arise. We seek project sites in desirable locations that are within driving distance of areas with favorable demographic characteristics. We believe that our experience in resort development, knowledge of the timeshare industry, and market presence will help us to accomplish this strategy. We are seeking to obtain additional capital to finance this growth. o Reduce borrowing costs. By improving arrangements with our lenders and increasing our internally generated cash flow, as well as a result of general market conditions, we have reduced the weighted average interest rate we pay on our debt to 7.1% at September 30, 1998 from 9.6% at September 30, 1996. As we grow, we will continue to enhance our capital structure. This will allow us to compete even more effectively for new development projects and against larger lenders. o Increase sales and marketing efforts. We use extensive marketing programs to inform potential timeshare interval buyers about our resorts. By adding staff to reinforce our marketing efforts in the markets in which we currently operate, and expanding our efforts into new markets, we believe we can sell more timeshare intervals per year than we have in the past. In addition, we will continue to expand our internal marketing staff, which concentrates on selling additional timeshare intervals to our existing membership base. o Explore potential opportunities in broader leisure and finance markets. We are continually reviewing potential opportunities to expand into the broader leisure and finance markets, particularly those for which our existing businesses provide relevant experience and expertise. There is no assurance that such opportunities will be identified or, if we find them, that they will be successfully undertaken. Competitive Strengths We believe that the following qualities provide us with certain competitive strengths and operating efficiencies. o Exceptional customer service to developers. We provide exceptional customer service to existing and potential borrowers, including: o quick credit decisions; o flexible transaction structuring; o comprehensive loan servicing; and o direct access to senior management. o Proven underwriting criteria. We believe we can maintain low loan loss ratios as our loan portfolio grows by continuing to fund projects in attractive locations with favorable economic and demographic characteristics, as well as by broadening our analytical capabilities. Our ability to assess new development projects has been enhanced by our acquisition of Eastern Resorts. o Low marketing costs. We have been able to stabilize marketing costs through various means. By developing resorts in desirable tourist destinations, typically within driving distance of our customers, we can invite potential buyers to tour our resorts without relying on costly gift programs, such as subsidized airline tickets and lodging. Also, we expect our marketing costs, as a percentage of timeshare interval sales, to decrease as a result of the expansion of our internal marketing efforts. o In-house capabilities. We have developed significant in-house operational capabilities. This enables us to maintain greater control over all phases of our financing and development operations, and to improve our customer service while reducing overall costs. For example, we use internal personnel to supervise advances on and servicing of both A&D Loans and Consumer Financing. In addition, we have in-house marketing, sales, legal, accounting, financing, development, and property management capabilities. o Experienced management team. We have experienced management and personnel in both our financing and development businesses. Our Chairman, Chief Executive Officer and President, Richard C. Breeden, has overseen the restructuring of Equivest since 1996 and was responsible for our combination with Eastern Resorts. In addition, he is a former senior economic advisor to President Bush, former Chairman of the United States Securities and Exchange Commission (the "SEC") and former chairman of the worldwide financial services practice of Coopers & Lybrand LLP. Thomas J. Hamel, who leads our resort financing business, has 12 years of experience in financing timeshare resort projects and is well-known in the timeshare sector nationally. R. Perry Harris, who leads our timeshare development efforts, has been in the timeshare industry since 1981 and has earned recognition in the course of developing and marketing seven resorts in New England. Moreover, the top five executives of Eastern Resorts have an average of over 14 years experience in the timeshare industry and have been with Eastern Resorts for an average of 12 years. Our History Equivest was founded in 1983 as an insurance premium finance company. In January 1989, we made the initial public offering of our Common Stock, which was listed on The Nasdaq Stock Market's SmallCap Market. In 1993, BMDC and certain other investors acquired control of us. In 1994, BMDC acquired additional shares from the other large investors. In May 1995, we stopped generating new business as an insurance premium finance company. In February 1996, we acquired Resort Funding, which was then a wholly-owned subsidiary of BFG, known as Bennett Funding International, Ltd., from BFG in exchange for our preferred stock. Following this exchange, BFG and BMDC had beneficial ownership of approximately 88.9% of our voting stock. In August 1998, we complemented our resort-oriented specialty finance business with our acquisition of Eastern Resorts, a resort developer. In March 1996, BFG, BMDC and certain affiliates filed petitions for bankruptcy in the United States Bankruptcy Court for the Northern District of New York (the "Bankruptcy Court"). Prior to becoming an officer and director of the Company, Richard C. Breeden was appointed and remains the trustee in bankruptcy for the Estate (the "Trustee"). The Trustee decided not to challenge our acquisition of Resort Funding, after concluding that the business of Resort Funding had not been tainted by the allegedly fraudulent transactions which were the basis for a civil complaint filed by the SEC and a criminal complaint filed by the U.S. Attorney for the Southern District of New York against BFG, BMDC and related parties. See "Certain Relationships and Related-Party Transactions." The Estate has already received approval from the Bankruptcy Court to sell all of its stock in Equivest in the Offering. If market conditions prevent the Estate from selling all of its stock in the Offering, Bankruptcy Court approval would be required for a partial sale. It is the Estate's intention to sell its entire interest. Our principal executive offices are located at Two Clinton Square, Syracuse, New York 13202 and our telephone number is (888) 373-7678. We also own office space in Newport, Rhode Island. THE OFFERING Common Stock offered by: the Company..................... shares(1) the Selling Stockholders........ shares(2) Total..................... shares(1) Common Stock to be outstanding following the Offering.......... shares(3) Use of proceeds....................We intend to use the net proceeds to repurchase our Series 2 Class A Redeemable Preferred Stock, to repay existing indebtedness, including all remaining amounts outstanding under the modified Bridge Loan and Long Wharf Resort Loan, and for general corporate purposes. We will not receive any proceeds from the sale of the shares of Common Stock by the Selling Stockholders. See "Use of Proceeds." Proposed Nasdaq National Market symbol..................."EQUI" - -------------------- (1) Does not include shares of Common Stock that we may sell pursuant to the Underwriters' over-allotment option. See "Underwriting." (2) Includes shares to be sold by the Estate and shares to be sold by R. Perry Harris. See "Principal and Selling Stockholders." (3) Excludes (i) 3,500,000 shares of Common Stock reserved for issuance under the 1997 Long-Term Incentive Plan, (ii) an aggregate of 430,000 shares of Common Stock reserved for issuance upon the exercise of outstanding warrants, with exercise prices ranging from $3.50 to $8.00 per share, (iii) 67,113 shares of Common Stock issued to the Estate in October 1998, in satisfaction of certain indebtedness and (iv) 25,532 shares issued to the Estate in payment of dividends on the Series 2 Class A Preferred Stock in October 1998. See Note L to the Consolidated Financial Statements of Equivest, "Bankruptcy of Affiliates and Related-Party Transactions" and "Certain Indebtedness". SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA The summary consolidated historical and pro forma financial and operating data set forth below have been derived from the consolidated financial statements of the Company and the consolidated financial statements of Eastern Resorts, included in this Prospectus beginning with the "Index to Financial Statements" on Page F-l. The summary historical consolidated financial and operating data for the years ended December 31, 1995, 1996 and 1997 and for the nine month periods ended September 30, 1997 and 1998 have been derived from, and should be read in conjunction with, the consolidated financial statements of the Company and notes thereto. The unaudited historical financial statements of the Company for the nine month periods ended September 30, 1997 and 1998 include, in the opinion of management, all adjustments necessary for a fair presentation. Interim results are not necessarily indicative of results in future periods. The summary pro forma condensed consolidated statements of income have been derived from the historical financial statements of the Company and of Eastern Resorts, LLC. The pro forma condensed consolidated statements of income give effect to the acquisition of Eastern Resorts, using the purchase method of accounting as if such transactions had been consummated as of January 1, 1997 for the year ended December 31, 1997 and as of January 1, 1998 for the nine months ended September 30, 1998. The pro forma condensed consolidated statements of income should not be considered indicative of actual results that would have been achieved had the acquisition of Eastern Resorts been consummated for the periods indicated and do not purport to indicate results of operations for any future period. The summary consolidated historical and pro forma financial and operating data should be read in conjunction with the consolidated financial statements of the Company and Eastern Resorts and related notes, the Management's Discussion and Analysis of Financial Condition and Results of Operations, the Pro Forma Condensed Consolidated Financial Data and the Selected Consolidated Historical Financial Data included elsewhere in this Prospectus. <TABLE> <CAPTION> Year Ended December 31, Nine Months Ended September 30, ---------------------------------------------- -------------------------------------- Pro Pro Forma Forma 1995 1996 1997 1997 1997 1998 1998 ------ ------ ------ ------ ------ ------ ----- (Dollars in thousands except for per share data) Statement of Income Data: Revenue - ------- <S> <C> <C> <C> <C> <C> <C> <C> Interest income.................... $ 11,022 $ 12,998 $ 15,109 $ 17,135 $ 11,329 $ 15,011 $ 16,032 Timeshare interval sales........... -- -- -- 8,635 -- 1,103 9,830 Resort operations.................. -- -- -- 8,056 -- 1,214 8,294 Other income....................... 2,173 1,265 856 859 206 868 868 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total revenue.................. 13,195 14,263 15,965 34,685 11,535 18,196 35,024 Costs and expenses - ------------------ Provision for doubtful receivables. 794 179 925 1,278 225 650 1,116 Interest expense................... 5,982 8,271 8,077 10,227 6,302 5,318 6,696 Cost of timeshare intervals sold... -- -- -- 1,928 -- 273 2,368 Goodwill and other amortization.... 848 903 1,064 1,996 769 1,403 2,008 Sales and marketing................ -- -- -- 3,868 -- 567 4,273 Resort management.................. -- -- -- 7,348 -- 990 7,050 General and administrative......... 3,450 3,221 2,475 4,177 1,826 2,786 4,099 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total costs and expenses....... 11,074 12,574 12,541 30,822 9,122 11,987 27,610 Income before provision for income taxes (1)...................... 2,121 1,689 3,424 3,863 2,413 6,209 7,414 Provision for income taxes......... 595 29 193 673 180 2,300 2,970 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net income (1)..................... 1,526 1,660 3,231 3,190 2,233 3,909 4,444 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Preferred stock dividends.......... 604 527 731 731 561 450 450 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net income available to common stockholders (1)............... $ 922 $ 1,133 $ 2,500 $ 2,459 $ 1,672 $ 3,459 $ 3,994 =========== =========== =========== =========== =========== =========== =========== Net income per common share (diluted) (1).................. $ 0.05 $ 0.07 $ 0.15 $ 0.12 0.10 0.15 0.16 =========== =========== =========== =========== =========== =========== =========== Weighted average number of common shares outstanding (diluted)... 16,984,847 17,012,708 17,913,902 21,113,902 17,082,112 22,748,919 25,562,106 </TABLE> <TABLE> <CAPTION> <S> <C> <C> <C> <C> <C> Balance Sheet Data: Cash and cash equivalents.......... $ 1,303 $ 4,037 $ 4,620 $ 2,453 $ 2,505 Notes receivable (2)............... 80,387 95,866 120,791 99,538 137,154 Total assets....................... 88,601 113,204 133,484 115,763 188,732 Notes payable...................... 78,538 106,745 99,961 107,316 128,365 Preferred stock.................... 39 39 30 39 30 Stockholders' equity............... 2,377 4,037 32,528 6,270 51,661 Other Data: A&D Loan portfolio................. $ 32,838 $ 31,475 $ 39,390 $ 30,563 $ 37,258 Consumer Financing portfolio (3)... 51,820 67,771 96,377 73,192 116,340 </TABLE> - -------------- (1) For the year ended December 31, 1995, income before provision for income taxes, net income and net income per share amounts exclude a loss from operations of discontinued segment of approximately $2.2 million. (2) Net of allowance for doubtful receivables and developer hold backs. (3) Consumer Financing portfolio includes the Purchased Receivables and Hypothecation Loans of Resort Funding. It includes $17.1 million in Consumer Loans held by Eastern Resorts as of September 30, 1998. FORWARD-LOOKING STATEMENTS This Prospectus contains forward-looking statements, including statements related to strategies, business plans and goals, integrated operations of Resort Funding and Eastern Resorts, potential benefits of the acquisition of Eastern Resorts, resorts under development, financing plans, the outcome of various bankruptcy and other litigation involving us and the Estate, and other statements of expectations. These forward-looking statements are based on our current expectations and projections about future events. These statements may be identified by such forward-looking words or phrases as "believe," "expect," "should," "planned," "estimated," and "potential." These forward-looking statements are subject to risks, uncertainties and assumptions concerning us, including those discussed in "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere in this Prospectus. Because actual results or outcomes could be materially different from those expressed in any forward-looking statements, investors should not place undue reliance on any such forward-looking statements. We undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict all of these factors. Further, we cannot assess the impact of each such factor on our business or the extent to which any factor, or combination of factors, may cause actual results to be materially different from those contained in any forward-looking statements.
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+SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Investors are urged to read this Prospectus in its entirety. As used in this Prospectus, the term "Holdings" means Thermadyne Holdings Corporation, including its predecessors and subsidiaries; the term "Issuers" means Thermadyne Mfg. LLC, a wholly owned subsidiary of Holdings ("Thermadyne LLC"), and Thermadyne Capital Corp. ("Thermadyne Capital"), a wholly owned subsidiary of Thermadyne LLC; and the terms "Company" and "Thermadyne" mean Thermadyne LLC and its predecessors and subsidiaries. THE COMPANY OVERVIEW Thermadyne is a leading global manufacturer of cutting and welding products and accessories. The Company manufactures a broad range of gas (oxy-fuel) and electric arc cutting and welding products that are ultimately sold to end-user customers principally engaged in the aerospace, automotive, construction, metal fabrication, mining, mill and foundry, petroleum and shipbuilding industries. Thermadyne sells its products through a long-established domestic network of approximately 1,100 independent distributors who market Thermadyne products to over 10,000 end-user customers. For the twelve months ended March 31, 1998, the Company's net sales and Adjusted EBITDA (as defined herein), on a pro forma basis, were $548.2 million and $115.5 million, respectively. The Company's core products enjoy leading brand recognition, a reputation for quality and strong market positions. In 1994, following the Company's Restructuring (as defined herein), current management initiated a series of transactions to focus the Company's business exclusively on the cutting and welding industry. As part of this strategy, the Company divested three non-core businesses and acquired six cutting and welding businesses, which collectively generated approximately $169 million in annual revenues at the respective times of acquisition. As a result of this repositioning strategy, along with ongoing new product introductions, an extensive distribution network and market leading brands, the Company has achieved a compound annual growth in net sales and EBITDA of 20.3% and 12.5%, respectively, from 1993 to 1997. According to the United States Department of Commerce, domestic welding industry revenues totaled over $3.6 billion in 1997. The domestic industry has grown at an annual rate of 5.9% since 1989 and is expected to grow 4.2% in 1998. Global welding industry revenues are estimated to total over $10.0 billion, and management believes that growth in the international market has been faster than the domestic market, driven, in large part, by infrastructure spending in developing markets. International markets, including Australia and Italy, represented approximately 42% of the Company's net sales in 1997, up from approximately 20% of net sales in 1994. Although the industry has begun to experience global consolidation, it continues to be very fragmented. COMPETITIVE STRENGTHS Thermadyne possesses a number of competitive strengths that have allowed it to develop and maintain a strong position within the cutting and welding industry, including the following: Market Leading Brands. Management believes that the strength and longevity of the numerous Thermadyne brand names create a significant competitive advantage and position Thermadyne as one of the leaders in the cutting and welding industry. Each of the Company's major divisions maintains industry-leading brand names with significant market shares. Management believes that VICTOR(R), founded in 1913, is the leading brand name in domestic gas-operated cutting and welding torches and equipment; TWECO(R), founded in 1936, is the leading domestic manufacturer of metal inert gas ("MIG") and manual welding torches; ARCAIR(R) is the leading domestic brand name of tungsten inert gas ("TIG") torch and accessory products; THERMAL DYNAMICS(R), founded in 1957, is a leading domestic manufacturer of manual plasma cutting products; and CIGWELD(R), founded in 1922, is the leading brand name in the Australia/New Zealand cutting and welding (Continued from cover page) Each broker-dealer that receives New Senior Subordinated Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Subordinated Notes. The letter of transmittal accompanying this Prospectus (the "Letter of Transmittal") states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Senior Subordinated Notes received in exchange for Old Senior Subordinated Notes where such Old Senior Subordinated Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Issuers have agreed, for a period of 90 days after the Expiration Date, to make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." No public market existed for the Old Senior Subordinated Notes before the Exchange Offer. The Issuers currently do not intend to list the New Senior Subordinated Notes on any securities exchange or to seek approval for quotation through any automated quotation system, and no active public market for the New Senior Subordinated Notes is currently anticipated. The Issuers will pay all the expenses incident to the Exchange Offer. The Exchange Offer is not conditioned upon any minimum principal amount of Old Senior Subordinated Notes being tendered for exchange pursuant to the Exchange Offer. products market. Each of the manufacturing operations associated with these brands is ISO-9000 series certified. Diverse and Stable Customer Base. The Company's customer base includes cutting and welding product distributors as well as end-user customers principally engaged in the aerospace, automotive, construction, metal fabrication, mining, mill and foundry, petroleum and ship building industries. No one customer accounted for more than 9% of the Company's 1997 net sales. Further, the Company's top 20 customers have been associated with the Company for an average of over 10 years. Established, Effective Distribution Channels. The Company believes that its strong, established and long-standing relationships with over 1,100 independent cutting and welding products distributors in the United States provide a significant competitive advantage and support the Company's strong market position. Thermadyne's domestic distributor relationships are maintained by 11 area business managers who oversee the Company's relationships with large distributors and by separate product-specific sales forces for each of Thermadyne's business units. Management believes that this unique structure, which combines relationship managers with technically trained product specialists, will enable the Company to more effectively maintain and utilize its distributor networks. Management also believes that this established distribution network enables the Company to achieve market penetration when introducing newly developed or acquired products. Proven and Committed Senior Management Team. Thermadyne's management team has strategically repositioned the Company over the past four years to focus exclusively in its core cutting and welding markets. This repositioning was accomplished through divestitures of three non-core assets and acquisitions of six strategic businesses or product lines. In addition, management has initiated the development and introduction of significant new products and product lines. As a result of management's efforts, the Company achieved a 20.3% growth rate in net sales from 1993 to 1997. In connection with the Merger each member of the senior management team signed an employment contract with the Company. Additionally, the Company adopted an incentive plan to tie each member of senior management's compensation to the Company's financial performance. See "Executive Compensation." BUSINESS STRATEGY Thermadyne has developed a business strategy designed to enhance its strong market positions and continue to improve its growth and profitability. The primary elements of the Company's business strategy are as follows: Continue New Product Development and Enhancement. The foundation for Thermadyne's strong market positions and leading brand names is the development and introduction of new products and enhancements of existing products. The Company believes it is at the forefront of cutting and welding technology with a proven track-record of continual new product introductions and existing product enhancements that have resulted in 262 issued or pending United States and foreign patents. New products and product enhancements are designed to add value for customers, including enhanced safety features, improved productivity and ergonomics and an improved welding environment. Examples of recent new product introductions include robotic welding systems and accessories, high-purity instrumentation, automated plasma cutting and safety products as well as underwater cutting electrodes. During 1997, the Company introduced over 135 new products or product enhancements, and the Company expects to continue this effort in the future. Expand Strategic Acquisitions. The Company has completed six acquisitions since 1993, which collectively generated approximately $169 million in annual revenues at the respective times of acquisition, including over $135 million of revenues for Australia and Italy. The Company believes that numerous acquisition candidates exist globally, and the Company intends to continue to seek new acquisition opportunities in its cutting and welding business. Thermadyne intends to continue its focused acquisition strategy that includes the following principal elements: (i) entering and expanding in geographic areas where the Company does not currently have a significant presence through acquisitions of local cutting and welding businesses and (ii) expanding in geographic areas where the Company currently maintains a strong presence through the acquisition of complementary product lines. Leverage Existing Distribution Network. The Company intends to leverage its existing distribution network through the acquisition or introduction of new products and product enhancements. Management believes that when the Company acquires a local presence in a new geographic area, it can utilize the acquired distribution network to sell existing Thermadyne brands into that local market. In addition, the Company believes that significant opportunities exist to purchase complementary product lines and expand its business by selling the new product lines through Thermadyne's extensive distribution network. For example, through recent acquisitions the Company has expanded its offering of filler metals, conventional arc welding power supplies, safety equipment and engine-driven welding power sources and began marketing such products through its established distribution network. The Company intends to continue this strategy of penetrating new welding product markets by leveraging its extensive distribution network in conjunction with its new product development and focused acquisition strategies. Broaden International Presence. Thermadyne has maintained an international presence for over 30 years and continues to broaden its presence throughout the world. International sales accounted for approximately 42% of net sales in 1997 as compared to approximately 20% in 1994. The Company has established a dedicated international market presence and maintains the leading position in Australia/New Zealand and significant and growing positions in Europe, Asia and Latin America. Management intends to continue the expansion of its strong domestic brand names into the international market and to continue to penetrate the growing Asian and Latin American cutting and welding markets. Continue Cost Reduction Efforts. Thermadyne strives to continually improve manufacturing efficiencies and reduce unit costs. In December 1997, the Company implemented a cost reduction program that includes the following principal elements: (i) vendor rationalization and consolidation; (ii) manufacturing process and productivity improvements and product design changes; (iii) personnel rationalization and expense reductions; (iv) advertising and trade show expense reductions; (v) aircraft, charter and other travel expense reductions; and (vi) elimination of the annual sales meeting. These cost reduction initiatives are expected to generate approximately $10 million in savings on an annualized basis. In addition, the Company has initiated the implementation of a new global information system that is designed to allow the Company to further integrate administrative functions and improve information flow across business unit lines. Continue Dedicated Customer Service. The Company believes that effective and proactive customer service has enabled the Company to build and maintain its leading market positions and strong distributor relationships. Management plans to continue this strategy of enhancing distributor and end-user relationships through continuous customer service improvements. Each of Thermadyne's divisions maintains a dedicated, well trained, technically oriented and product-specific sales and customer service team. Management believes that the dedicated product teams provide Thermadyne with a significant competitive advantage. In addition, to further improve customer service, the Company has implemented a national accounts team of 11 area business managers to support the dedicated product sales and service teams and further support sales to the Company's key distributors. THE MERGER AND MERGER FINANCING On May 22, 1998, Holdings consummated the merger of Mercury Acquisition Corporation ("Mercury"), a corporation organized by DLJ Merchant Banking Partners II, L.P. ("DLJMB") and affiliated funds and entities (the "DLJMB Funds") with and into Holdings, with Holdings continuing as the surviving corporation (the "Merger"). In order to fund the payment of the cash portion of the Merger Consideration (as defined herein), the Option Cash Proceeds (as defined herein) and the ESPP Cash Proceeds (as defined herein), to refinance and/or retire outstanding indebtedness of the Company, and to pay expenses incurred in connection with the Merger, the Issuers issued the Senior Subordinated Notes and the Company entered into a syndicated senior secured loan facility providing for term loan borrowings in the aggregate principal amount of approximately $330 million and revolving loan borrowings of $100 million (the "New Credit Facility"). In connection with the Merger, the Company borrowed all term loans available under the New Credit Facility plus approximately $25 million of revolving loans. The remaining revolving loans will be available to fund the working capital requirements of the Company. The proceeds of such financings were distributed to Holdings in the form of a dividend. See "Description of New Credit Facility," "The Merger and Merger Financing" and "Certain Relationships and Related Transactions." Mercury issued approximately $94.6 million aggregate gross proceeds of its 12 1/2% Senior Discount Debentures due 2008 (the "Debentures"). In connection with the Merger, Holdings succeeded to the obligations of Mercury with respect to the Debentures. The DLJMB Funds also purchased 2,608,696 shares of common stock of Mercury ("Mercury Common Stock"), 2,000,000 shares of senior exchangeable preferred stock of Mercury ("Mercury Preferred Stock") and warrants to purchase 353,428 shares of Mercury Common Stock at an exercise price of $0.01 per share (the "DLJMB Warrants") for approximately $140 million (the "DLJMB Equity Investment"). As a result of the Merger, the proceeds of such purchases became an asset of Holdings, each share of Mercury Common Stock became a share of common stock of Holdings ("Holdings Common Stock"), each share of Mercury Preferred Stock became a share of senior exchangeable preferred stock of Holdings ("Holdings Preferred Stock") and each DLJMB Warrant to acquire Mercury Common Stock became exercisable for an equal number of shares of Holdings Common Stock. In addition, in connection with the Merger, certain members of senior management purchased 143,192 shares of Holdings Common Stock for approximately $4.9 million (the "Management Share Purchase"), of which approximately $3.6 million was provided through non-recourse loans from Holdings (the "Management Loans"). The equity and debt financings referred to above are collectively referred to herein as the "Merger Financing." THE EXCHANGE OFFER The Exchange Offer......... $1,000 principal amount at maturity of New Senior Subordinated Notes in exchange for each $1,000 principal amount at maturity of Old Senior Subordinated Notes. The Old Senior Subordinated Notes were sold on May 22, 1998, in a private placement to Donaldson, Lufkin & Jenrette Securities Corporation ("DLJSC" or the "Initial Purchaser"), which immediately resold to the Old Senior Subordinated Notes pursuant to Rule 144A promulgated under the Securities Act (the "Original Offering"). As of the date hereof, Old Senior Subordinated Notes representing $207 million aggregate principal amount at maturity are outstanding. The terms of the New Senior Subordinated Notes and the Old Senior Subordinated Notes are substantially identical in all material respects, except that the New Senior Subordinated Notes will be freely transferable by the holders thereof except as otherwise provided herein. See "Description of New Senior Subordinated Notes." Based on an interpretation by the Commission's staff set forth in no-action letters issued to third parties unrelated to the Issuers and the Guarantors, the Issuers and the Guarantors believe that New Senior Subordinated Notes issued pursuant to the Exchange Offer in exchange for Old Senior Subordinated Notes may be offered for resale, sold and otherwise transferred by any person receiving the New Notes, whether or not that person is the registered holder (other than any such holder or such other person that is an "affiliate" of the Issuers or any Guarantor within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that (i) the New Senior Subordinated Notes are acquired in the ordinary course of business of that holder or such other person, (ii) neither the holder nor such other person is engaging in or intends to engage in a distribution of the New Senior Subordinated Notes and (iii) neither the holder nor such other person has an arrangement or understanding with any person to participate in the distribution of the New Senior Subordinated Notes. See "The Exchange Offer -- Purpose and Effect." Each broker-dealer that receives New Senior Subordinated Notes for its own account in exchange for Old Senior Subordinated Notes, where those Old Senior Subordinated Notes were acquired by the broker-dealer as a result of its market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of these New Senior Subordinated Notes. See "Plan of Distribution." Registration Rights Agreement................ In connection with the Original Offering, the Issuers and the Guarantors entered into a Registration Rights Agreement with the Initial Purchaser (the "Registration Rights Agreement") requiring the Issuers to make the Exchange Offer. See "The Exchange Offer -- Purpose and Effect." Expiration Date............ The Exchange Offer will expire at 5:00 p.m., New York City time, September 3, 1998, or such later date and time to which it is extended (the "Expiration Date"). Withdrawal................. The tender of the Old Senior Subordinated Notes pursuant to the Exchange Offer may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Any Old Senior Subordinated Notes not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Exchange Offer. Interest on the New Senior Subordinated Notes.................... Interest on each New Senior Subordinated Note will accrue from the date of issuance of the Old Senior Subordinated Note for which the New Senior Subordinated Note is exchanged or from the date of the last periodic payment of interest on such Old Senior Subordinated Note, whichever is later. No additional interest will be paid on Old Senior Subordinated Notes tendered and accepted for exchange. Conditions to the Exchange Offer.................... The Exchange Offer is subject to certain customary conditions, certain of which may be waived by the Issuers. See "The Exchange Offer -- Conditions to the Exchange Offer." Procedures for Tendering Old Senior Subordinated Notes.................... Each holder of Old Senior Subordinated Notes wishing to accept the Exchange Offer must complete, sign and date the Letter of Transmittal, or a copy thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver the Letter of Transmittal, or the copy, together with the Old Senior Subordinated Notes and any other required documentation, to the Exchange Agent (as defined herein) at the address set forth herein. Persons holding the Old Senior Subordinated Notes through the Depository Trust Company ("DTC") and wishing to accept the Exchange Offer must do so pursuant to the DTC's Automated Tender Offer Program, by which each tendering participant will agree to be bound by the Letter of Transmittal. By executing or agreeing to be bound by the Letter of Transmittal, each holder will represent to the Issuers that, among other things, (i) the New Senior Subordinated Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Senior Subordinated Notes, whether or not such person is the registered holder of the Old Senior Subordinated Notes, (ii) neither the holder nor any such other person is engaging in or intends to engage in a distribution of such New Senior Subordinated Notes, (iii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Senior Subordinated Notes, and (iv) neither the holder nor any such other person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of the Issuers or any Guarantor. Pursuant to the Registration Rights Agreement, the Issuers are required to file a "shelf" registration statement for a continuous offering pursuant to Rule 415 under the Securities Act in respect of the Old Notes if (a) they are prohibited from consummating the Exchange Offer because the Exchange Offer is not permitted by applicable law or Commission policy or (b) any holder of Transfer Restricted Securities (as defined) notifies the Issuers in writing prior to the 20th business day following consummation of the Exchange Offer that (i) based on an opinion of counsel, it is prohibited by law or Commission policy from participating in the Exchange Offer or (ii) it is a broker-dealer and owns Senior Subordinated Notes acquired directly from the Issuers. Acceptance of Old Notes and Delivery of New Notes.... The Issuers and the Guarantors will accept for exchange any and all Old Senior Subordinated Notes which are properly tendered (and not withdrawn) in the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Senior Subordinated Notes issued pursuant to the Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offer -- Terms of the Exchange Offer." Exchange Agent............. State Street Bank and Trust Company is serving as Exchange Agent (the "Exchange Agent") in connection with the Exchange Offer. Federal Income Tax Considerations........... The exchange pursuant to the Exchange Offer should not be a taxable event for federal income tax purposes. See "Certain United States Federal Income Tax Considerations." Effect of Not Tendering.... Old Senior Subordinated Notes that are not tendered or that are improperly tendered and not accepted will, following the completion of the Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. The Issuers and the Guarantors will have no further obligation to provide for the registration under the Securities Act of such Old Senior Subordinated Notes. THE NEW SENIOR SUBORDINATED NOTES Securities Offered......... $207.0 million aggregate principal amount at maturity of 9 7/8% Senior Subordinated Notes due 2008. Issuers.................... The New Senior Subordinated Notes will be joint and several obligations of the Company and Thermadyne Capital. Thermadyne Capital is a Delaware corporation and wholly-owned subsidiary of the Company formed in connection with the Original Offering. Thermadyne Capital has no assets, no liabilities (other than the Senior Subordinated Notes), no substantial operations, and will be prohibited from engaging in any business activities. Maturity Date.............. June 1, 2008. Interest Payment Dates..... June 1 and December 1, commencing December 1, 1998. Optional Redemption........ The New Senior Subordinated Notes will be subject to redemption at any time on or after June 1, 2003 at the option of the Issuers, in whole or in part, in cash at the redemption prices set forth herein, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the applicable redemption date. Notwithstanding the foregoing, on or prior to June 1, 2001, the Issuers may redeem up to 35% of the aggregate principal amount of Senior Subordinated Notes ever issued under the Indenture in cash at a redemption price of 109.875% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the redemption date, with the net cash proceeds of one or more Public Equity Offerings; provided that at least 65% of the aggregate principal amount of Senior Subordinated Notes ever issued under the Indenture remains outstanding immediately after the occurrence of any such redemption. In addition, at any time prior to June 1, 2003, the Issuers may, at their option upon the occurrence of a Change of Control, redeem the New Senior Subordinated Notes, in whole but not in part, in cash at a redemption price equal to (i) the present value of the sum of all the remaining interest (excluding accrued and unpaid interest, if any), premium and principal payments that would become due on the New Senior Subordinated Notes as if the New Senior Subordinated Notes were to remain outstanding and be redeemed on June 1, 2003, computed using a discount rate equal to the Treasury Rate plus 50 basis points, plus (ii) accrued and unpaid interest and Liquidated Damages, if any, to the date of redemption. See "Description of New Senior Subordinated Notes -- Optional Redemption." Change of Control.......... Upon the occurrence of a Change of Control, each Holder of New Senior Subordinated Notes will have the right to require the Issuers to repurchase all or any part of such Holder's New Senior Subordinated Notes at an offer price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the date of repurchase. No assurance can be given that the Issuers will have sufficient resources to satisfy their repurchase obligation with respect to the New Senior Subordinated Notes following a Change of Control. See "Risk Factors -- Possible Inability to Repurchase New Senior Subordinated Notes upon Change of Control" and "Description of New Senior Subordinated Notes -- Repurchase at the Option of Holders -- Change of Control." Ranking.................... The New Senior Subordinated Notes will be general unsecured obligations of the Issuers and will be subordinated in right of payment to all existing and future Senior Indebtedness of the Issuers, including indebtedness pursuant to the New Credit Facility. The New Senior Subordinated Notes will rank pari passu with any future senior subordinated indebtedness of the Issuers and will rank senior to all Subordinated Indebtedness of the Issuers. The New Senior Subordinated Notes will be effectively subordinated to all liabilities of the Issuers' subsidiaries that are not Guarantors. On a pro forma basis after giving effect to the Merger, including the Merger Financing and the application of proceeds thereof, as of March 31, 1998, the Company and the Guarantors would have had outstanding approximately $379.5 million of Senior Indebtedness and the Company's non-Guarantor subsidiaries would have had approximately $87.0 million of outstanding liabilities, including trade payables. Note Guarantees............ The New Senior Subordinated Notes will be unconditionally guaranteed on a senior subordinated basis by the Guarantors. The Note Guarantees will be general unsecured obligations of the Guarantors, will be subordinated in right of payment to all existing and future Senior Indebtedness of the Guarantors, including indebtedness under the New Credit Facility, and will rank senior in right of payment to any future subordinated indebtedness of the Guarantors. See "Description of New Senior Subordinated Notes -- Note Guarantees." Certain Covenants.......... The Indenture pursuant to which the New Senior Subordinated Notes will be issued (the "Indenture") contains certain covenants that, among other things, limit the ability of the Issuers and their Restricted Subsidiaries (as defined herein) to: incur indebtedness and issue preferred stock, repurchase Capital Stock (as defined herein) and Indebtedness subordinated to the New Senior Subordinated Notes, engage in transactions with affiliates, engage in sale and leaseback transactions, incur or suffer to exist certain liens, pay dividends or other distributions, make investments, sell assets and engage in certain mergers and consolidations. Use of Proceeds............ There will be no cash proceeds to the Issuers from the exchange pursuant to the Exchange Offer. The net proceeds from the Original Offering, together with the initial borrowings under the New Credit Facility, the DLJMB Equity Investment and the issuance of the Debentures, were used to fund payment of the cash portion of the Merger Consideration, the Option Cash Proceeds and the ESPP Cash Proceeds, to refinance outstanding indebtedness of the Company and to pay the expenses incurred in connection with the Merger. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000823844_aquapenn_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000823844_aquapenn_prospectus_summary.txt
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+PROSPECTUS SUMMARY Unless otherwise indicated, all information in this Prospectus assumes that the Underwriters' over-allotment option will not be exercised and assumes (a) that the 0.6008-for-1 reverse stock split (the "Reverse Stock Split") of each outstanding share of Common Stock of the Company will occur immediately prior to this Offering, (b) an Offering price of $14.00 per share of Common Stock, (c) no exercise of outstanding options to purchase 844,124 shares of Common Stock, (d) the exercise of a warrant for 135,180 shares of Common Stock held by Weis Markets, Inc. and its subsidiaries (the "Weis Markets Warrant") and no exercise of remaining warrants to purchase 105,140 shares of Common Stock issuable pursuant to the Company's warrant agreements and (e) no issuance of the 75,001 shares of Common Stock subscribed for under the Company's 1996 Employee Stock Purchase Plan (the "Stock Purchase Plan") of which 74,298 shares were purchased in January 1998. Fiscal year references are to the fiscal year ended September 30. Unless otherwise provided, references to shares outstanding and to 1997 fiscal year results have been adjusted to give effect to the acquisition on October 15, 1997 of Dunsmuir Bottling Company d/b/a Castle Rock Spring Water ("Castle Rock"). All references to the "Company" or "AquaPenn" refer to AquaPenn Spring Water Company, Inc. and its subsidiaries. THE COMPANY AquaPenn produces, bottles and sells non-sparkling natural spring water products to regional and national customers under both retailers' and other customers' private labels and its proprietary brands Pure American(Registered), Great American(Registered), AquaPenn(Registered) and Castle Rock. The Company, founded in 1986, is one of the largest producers of private label natural spring water products in the United States, according to Beverage Marketing. Private label products accounted for approximately 43% of the Company's 1997 fiscal year net revenues. The Company's private label and branded customers include, among others, Delta Air Lines, Inc., Gerber Products Company, Sam's Club and Walgreen Co. The Company's net revenues have grown from $9.3 million in fiscal 1993 to $45.8 million in fiscal 1997, representing a compounded annual growth rate of 49.1%. Over the same time period, the Company's net income has grown from approximately $400,000 to approximately $2.3 million, representing a compounded annual growth rate of 55.1%. According to Beverage Marketing, the total U.S. market for bottled water has grown from 1.6 billion gallons sold in 1987 to over 3.1 billion gallons in 1996, and accounted for approximately $3.6 billion in wholesale sales during 1996. Non-sparkling water comprises over 87% of the U.S. bottled water market and generated $2.7 billion of wholesale sales in 1996, and is expected to continue to grow as a percentage of gallons sold in the future, according to Beverage Marketing. PET (an acronym for polyethylene terephthalate, a premium clear plastic) packaged products comprise approximately 39% of the domestically produced non-sparkling water market and have grown from approximately 83 million gallons in 1987 to approximately 580 million gallons in 1996, representing a compounded annual growth rate of approximately 24%. PET-packaged products accounted for approximately $921 million of wholesale sales in 1996. Approximately 82% of the Company's 1997 net revenues was generated by products packaged in PET containers. According to Beverage Marketing, PET bottled water is among the fastest growing beverage categories in the United States. Contributing to the growth in the consumption of non-sparkling water are consumer trends including health and fitness awareness, municipal tap water quality concern and maturing soft drink demand, as well as consumer demand for convenience and innovative packaging. The Company has adopted a strategy of producing regionally and selling its natural spring water products to both national and regional customers. By producing both private label and branded products in a full line of sizes and packaging, the Company can offer its customers "one-stop-shopping" supply arrangements. The Company's advanced packaging capability allows it to bottle natural spring water products in a variety of innovative packages. The Company maintains state-of-the-art production facilities, allowing it to achieve cost efficiencies, produce superior quality products, create innovative packaging and respond rapidly to customer shipment and production demands. The Company's sales and marketing staff aims to provide its customers with exceptional customer service and market responsiveness. AquaPenn's growth strategy includes increasing sales to existing customers, broadening its current customer base, adding new distribution channels and expanding its product line. The Company's active acquisition program includes obtaining the rights to additional spring water sites and acquiring natural spring water companies. In accordance with this strategy, the Company recently acquired the rights to natural spring water from Ginnie Springs, a spring located in north central Florida ("Ginnie Springs"), adjacent to which a new production facility is being constructed which is expected to be completed by the Spring of 1998. In addition, on October 15, 1997, the Company acquired Castle Rock, a bottler and distributor of natural spring water products located in northern California. Castle Rock has been distributing its natural spring water products throughout the western United States since it was incorporated under California law in 1990. The acquisition of the right to Ginnie Springs spring water and the acquisition of Castle Rock will allow the Company to serve its customers more efficiently. The Company's executive offices are located at One AquaPenn Drive, Milesburg, Pennsylvania 16853. The Company's telephone number is (814) 355-5556 and its web site is www.aquapenn.com. THE OFFERING <TABLE> <S> <C> Common Stock Offered by: the Company................................. 2,000,000 shares (1) the Selling Shareholders.................... 2,071,117 shares Common Stock to be Outstanding after the Offering.................................... 7,729,392 shares (1)(2) Use of Proceeds............................... For capital expenditures, including funding a portion of the expansion of the Company's Milesburg, Pennsylvania facility and a portion of the construction of the Ginnie Springs facility, repayment of debt associated with the acquisition of Castle Rock, repayment of outstanding balances under the Company's credit facilities and for other general corporate purposes. See "Use of Proceeds." Proposed NYSE symbol.......................... "APN" </TABLE> - ------------------ (1) Excludes the Underwriters' over-allotment option to purchase 610,668 shares of Common Stock. (2) Excludes 1,024,229 shares of Common Stock reserved for issuance upon exercise of outstanding options, warrants and subscriptions under the Stock Purchase Plan but gives effect to the conversion of all outstanding shares of the Company's Series A Non-Voting Convertible Preferred Stock (the "Convertible Preferred Stock") into 1,022,862 shares (after the Reverse Stock Split) of Common Stock effected in December 1997 (the "Preferred Stock Conversion"). See "Management -- Employment Agreements," "Management -- Stock Plans" and "Description of Capital Stock." SUMMARY FINANCIAL INFORMATION The following summary financial information including pro forma financial information should be read in conjunction with the Consolidated Financial Statements of the Company and the notes thereto, the Financial Statements of Castle Rock (Dunsmuir Bottling Company) and the notes thereto, the Unaudited Pro Forma Combined Financial Data and the notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus. The pro forma financial data set forth below are not necessarily indicative of the financial position or results of operations that would have been achieved had the acquisition of Castle Rock been consummated as of the dates indicated, or that may be achieved in the future. See "Unaudited Pro Forma Combined Financial Data" for a more detailed discussion of the pro forma adjustments. <TABLE> <CAPTION> YEARS ENDED SEPTEMBER 30, -------------------------------------------------------------------------------- PRO FORMA 1993 1994 1995 1996 1997 1997 (1) ---------- ----------- ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net revenues............... $9,275,537 $13,011,744 $22,956,053 $28,240,741 $38,015,315 $45,819,395 Gross profit............... 2,136,846 3,032,276 4,802,698 6,969,428 9,698,377 11,427,629 Selling, general and administrative........... 1,389,220 1,994,812 3,290,609 4,313,480 5,126,583 7,276,731 Income from operations..... 747,626 1,037,464 1,512,089 2,655,948 4,571,794 4,150,898 Net income................. $ 400,562 $ 688,995 $ 638,350 $ 1,485,228 $ 2,786,755 $ 2,318,779 Net income per common share (2)......... $ 0.12 $ 0.18 $ 0.16 $ 0.26 $ 0.47 $ 0.38 Weighted average number of common shares outstanding.............. 3,417,391 3,785,102 3,884,708 5,620,741 5,951,844 6,099,395 OTHER OPERATIONS DATA: EBITDA (3)............... $1,260,940 $ 1,606,457 $ 2,888,231 $ 4,613,823 $ 7,285,186 $ 7,158,553 </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1997 -------------------------------------------------------- PRO FORMA ACTUAL PRO FORMA (4) AS ADJUSTED (4)(5) ----------- ------------- ------------------ <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Working capital....................... $ 3,096,318 $ 644,984 $21,743,984 Total assets.......................... 26,580,185 34,740,069 53,285,069 Notes payable, including current portion............................. 4,817,467 9,536,121 1,736,121 Stockholders' equity.................. 18,064,347 20,130,064 46,475,064 </TABLE> - ------------------ (1) Gives effect to the acquisition of Castle Rock as if it had occurred as of October 1, 1996. (2) For information concerning the number of shares used in the computation of net income per common share, see Note 1 to the Consolidated Financial Statements. (3) "EBITDA" represents earnings before interest expense, income tax expense, depreciation and amortization, including amortization of leasehold improvements, acquisition and development costs, and debt expense and discount or premium relating to any indebtedness. EBITDA is not presented herein as an alternative measure of operating results (as determined in accordance with generally accepted accounting principles ("GAAP")) or cash flow (as determined in accordance with GAAP). See the Consolidated Statements of Cash Flows of the Company for the amounts of cash flows from each of investing, financing and operating activities for fiscal 1995, 1996 and 1997. (4) Gives effect to the acquisition of Castle Rock as if it had occurred as of September 30, 1997. (5) As adjusted to give effect to (i) the sale of 2,000,000 shares of Common Stock offered by the Company hereby assuming an Offering price of $14.00 per share, (ii) the receipt of proceeds from the exercise of the Weis Markets Warrant for 135,180 shares of Common Stock, (iii) the Preferred Stock Conversion, (iv) the payment of estimated underwriting discounts and commissions and Offering expenses and (v) the application of the estimated net proceeds from the Offering. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000824719_bankfirst_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000824719_bankfirst_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to, and should be read in conjunction with, the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless the context otherwise requires, all references herein to the "Company" shall mean BankFirst Corporation, the holding company for BankFirst ("BankFirst") and The First National Bank and Trust Company ("Athens") (collectively, BankFirst and Athens shall be referred to as the "Banks"). Unless otherwise indicated, the information in this Prospectus assumes an initial public offering price of $12.50 per share, assumes no exercise of the Underwriters' over-allotment option and per share data reflects shares issued upon exercise of certain stock options through June 30, 1998. Except where expressly stated otherwise, the financial information contained herein also reflects the merger (the "Merger") of the Company with First Franklin Bancshares, Inc. ("First Franklin"), the former holding company of Athens, which was consummated on July 2, 1998 and accounted for as a pooling of interests, and reflects the five for one stock split which occurred immediately thereafter. The Company The Company is a bank holding company headquartered in Knoxville, Tennessee that focuses on meeting the banking needs of East Tennessee businesses and residents through a relationship oriented, community bank business strategy. The Company conducts its banking business through BankFirst, a Tennessee banking corporation with 23 offices in Knox, Sevier, Blount, Loudon and Jefferson Counties, and through Athens, a national banking association acquired on July 2, 1998, with six offices in McMinn County. The Company's operations principally involve commercial and residential real estate lending, commercial business lending, consumer lending, construction lending and other financial services, including trust operations, credit card services and brokerage services. From 1992 to June 30, 1998, the organization has grown from a single community bank with five offices and approximately $66 million in assets, to a multi-bank organization with an established local banking presence in six counties with 29 offices and approximately $707 million in assets. The Company has broadened its mix of products and services and expanded its customer base through a combination of internal growth and consolidation with well-established East Tennessee banks and financial service companies. The Company's Athens subsidiary has been in business for over 125 years, its BankFirst subsidiary traces its history to the 1920's, and BankFirst's subsidiary, Curtis Mortgage Co., Inc. ("Curtis Mortgage"), was established in 1944. The Company's growth has been directed by a senior management team composed of individuals with established networks of customers and an average of 25 years of experience in East Tennessee banking. See "Management." The Company operates according to the following business strategies: Local Decision Making. The foundation of the Company's strategy is to operate a multi-community bank organization which emphasizes decision making at the local branch level. Each Bank has a separate board comprised of local businessmen allowing it to be responsive to the needs and trends of the local community. Each branch manager and individual loan officer is given significant authority and discretion to approve loans and to price loans and services in order to respond quickly and efficiently to the needs of Bank customers. Central Corporate Support. The Company supports the local bank branches by providing central management, pricing and service coordination, policy oversight, technological support and strategic planning. Central management also monitors the performance of individual branches and loan officers and, with the input of local loan officers, approves all loans above certain designated limits. The Company has recently implemented new information technology which allows local loan officers to better identify their more profitable customers, to expand the scope of services provided to such customers and to make more informed pricing decisions. Relationship Banking. The Company focuses on serving East Tennessee businesses and individuals through relationship banking, characterized by long term multi-service relationships. Drawing upon the experience and customer networks of its loan officers and assisted by centralized information technology, the Banks seek to effectively price and provide related bank services to enhance overall profitability. The Banks compete with other providers of financial services primarily through superior relationship management, rather than direct price competition. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Full Line of Banking Products. The Company's policy is to offer the personalized service and local decision-making characteristic of community banks while offering the wider variety of banking products associated with regional and super-regional financial institutions. The Company continues to enhance its product mix through both strategic acquisitions and internal development. The addition of Athens gives the Company an established trust department and a consumer finance subsidiary. The acquisition of Curtis Mortgage allows local servicing of mortgages. The Company has recently added a discount brokerage service and telephone banking and expects to offer personal computer banking. The Company is a Tennessee corporation whose principal offices are located at 625 Market Street, Knoxville, Tennessee 37902, and its telephone number is (423) 595-1100. The Offering Common Stock offered by the Company ....................... 1,200,000 shares Common Stock offered by the Selling Shareholders ......................... 400,000 shares Common Stock to be outstanding after the Offering ......................... 11,258,047 shares Use of Proceeds ......................... The net proceeds will be used for general corporate purposes of the Company and its direct and indirect subsidiaries. See "Use of Proceeds." Proposed Nasdaq National Market Symbol ........................ BKFR - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SUMMARY CONSOLIDATED FINANCIAL INFORMATION The following table sets forth summary financial information for the Company as of and for the six months ended June 30, 1998 and 1997, and as of and for the five years ended December 31, 1997, 1996, 1995, 1994 and 1993. This information is derived from and should be read in conjunction with the supplemental financial statements of the Company, including the notes thereto, that appear elsewhere in this Prospectus. The supplemental consolidated financial information has been prepared based on the pooling of interest method of accounting. <TABLE> <CAPTION> For the years ended December 31, June 30, June 30, ----------------------------------------------------------------- 1998 1997 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- ---- ---- (Dollars in thousands, except share and per share data) <S> <C> <C> <C> <C> <C> <C> <C> Summary of Operations Interest income - tax equivalent ... $ 28,873 $ 25,321 $ 51,893 $ 47,311 $ 42,677 $ 34,317 $ 29,301 Interest expense ................... 12,456 11,112 22,652 21,238 19,082 13,537 11,963 --------- --------- --------- -------- --------- --------- --------- Net interest income ................ 16,417 14,209 29,241 26,073 23,595 20,780 17,338 Tax equivalent adjustment (1) ...... (472) (303) (606) (613) (558) (600) (623) --------- --------- --------- -------- --------- --------- --------- Net interest income - adjusted ..... 15,945 13,906 28,635 25,460 23,037 20,180 16,715 Provision for loan losses .......... (1,067) (720) (2,935) (667) (553) (703) (924) Noninterest income ................. 3,965 2,517 5,657 5,243 4,369 4,382 3,916 Noninterest expenses ............... (13,918) (10,755) (21,323) (20,799) (19,157) (17,203) (14,013) --------- --------- --------- -------- --------- --------- --------- Income before income taxes ......... 4,925 4,948 10,034 9,237 7,696 6,656 5,694 Income tax expense ................. 1,746 1,562 3,406 3,188 2,517 1,727 1,828 --------- --------- --------- -------- --------- --------- --------- Net earnings ....................... $ 3,179 $ 3,386 $ 6,628 $ 6,049 $ 5,179 $ 4,929 $ 3,866 ========= ========= ========= ======== ========= ========= ========= Basic earnings per share (2) ....... $ 0.31 $ 0.34 $ 0.66 $ 0.63 $ 0.63 $ 0.66 $ 0.53 Diluted earnings per share (2) ..... 0.29 0.31 0.61 0.59 0.59 0.61 0.52 Dividends per common share (2) ..... 0.01 0.03 0.12 0.09 0.14 0.15 0.14 Cash dividends declared - common ........................... $ 114 $ 344 $ 1,214 $ 876 $ 1,152 $ 1,133 $ 1,039 Cash dividends declared - preferred ........................ 78 81 161 162 74 73 -- Book value per common share (2) ........................ 6.30 5.75 6.00 6.25 5.59 4.61 4.11 Average common shares outstanding (2) .................. 9,998,012 9,829,962 9,876,735 9,347,725 8,098,170 7,346,505 7,294,040 Selected Period-End Balances Total assets ....................... $ 706,599 $ 630,247 $ 650,717 $595,284 $ 545,718 $ 480,687 $ 418,337 Earning assets ..................... 641,821 578,775 604,031 559,927 504,430 444,866 388,644 Total securities ................... 126,664 134,957 127,736 134,781 135,627 121,390 116,851 Loans - net of unearned income ..... 505,707 444,198 464,967 412,793 350,652 306,905 253,692 Allowance for loan losses .......... 6,805 4,783 6,098 4,723 4,690 4,526 4,054 Total deposits ..................... 588,735 533,383 549,769 516,339 480,346 430,407 376,838 Repurchase agreements and Federal Funds purchased .......... 32,488 22,218 16,302 5,966 7,632 1,363 -- Long-term debt ..................... 12,314 11,897 12,121 12,154 8,407 8,416 3,657 Stockholders' equity ............... 62,938 56,530 59,896 53,826 42,512 34,074 29,958 Selected Average Balances Total assets ....................... $ 686,952 $ 622,556 $ 621,719 $566,616 $ 527,495 $ 467,616 $ 399,080 Earning assets ..................... 624,648 576,428 577,178 528,179 488,834 419,005 367,538 Total securities ................... 132,685 132,007 128,796 136,600 135,509 121,352 106,584 Loans - net of unearned income ..... 479,262 443,018 442,296 379,930 339,989 282,812 243,431 Allowance for loan losses .......... 6,431 4,760 4,796 4,802 4,541 4,384 3,747 Total deposits ..................... 562,417 529,925 529,820 492,435 468,068 416,426 343,359 Stockholders' equity ............... 61,627 56,499 55,546 47,787 38,282 31,195 28,686 </TABLE> - -------------------------------------------------------------------------------- <TABLE> <CAPTION> For the years ended December 31, June 30, June 30, -------------------------------------------------------------- 1998 1997 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> <C> <C> Selected Ratios Average loans to average deposits ...... 85.21% 83.60% 83.48% 77.15% 72.64% 67.91% 70.90% Allowance to period-end loans .......... 1.35 1.08 1.31 1.14 1.34 1.47 1.60 Equity to assets ....................... 8.97 9.08 9.08 8.43 7.26 6.67 7.19 Leverage capital ratio ................. 8.68 8.98 9.73 9.60 7.80 7.77 7.37 Return on assets ....................... 0.93 1.09 1.07 1.07 0.98 1.05 0.97 Return on equity ....................... 10.32 11.99 11.75 12.66 13.53 15.80 13.48 Dividend payout ratio (3) .............. 7.17 20.32 18.77 14.88 22.56 23.33 26.87 Net interest spread .................... 4.43 4.22 4.24 4.13 4.12 N/A N/A Net interest margin .................... 5.26 4.93 5.05 4.92 4.82 N/A N/A Average interest earning assets to average interest-bearing liabilities . 120.65 118.36 120.74 119.78 117.84 N/A N/A Noninterest expense to average assets .. 4.05 3.46 3.43 3.67 3.63 3.68 3.51 Efficiency ratio - tax equivalent (1) .. 68.29 64.30 61.10 66.42 68.51 68.37 65.93 Net charge-offs to average loans ....... 0.16 0.31 0.35 0.17 0.11 0.08 0.11 Nonperforming assets to total assets ... 0.83 0.82 0.57 0.46 0.33 0.30 0.24 Nonperforming loans to total loans ..... 1.00 1.07 0.61 0.59 0.30 0.37 0.24 Allowance to total loans ............... 1.35 1.08 1.31 1.14 1.34 1.47 1.60 Allowance to total nonperforming loans ................................ 134.38 101.04 214.27 195.33 450.10 398.77 673.42 </TABLE> - ---------- N/A - Information is not available. (1) Tax equivalent basis was calculated using a 34% tax rate for all periods presented. (2) Reflects a five for one stock split. Average common shares outstanding and per share data has been retroactively restated for the stock split. (3) Reflects dividends declared on common shares divided by net income available to common shareholders. - --------------------------------------------------------------------------------
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000831968_providence_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000831968_providence_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise specified, all information in this Prospectus assumes no exercise of the over-allotment option granted to the Underwriters. This Prospectus contains forward-looking statements that involve risks and uncertainties. Actual events or results may differ materially as a result of various factors, and investors should carefully consider the information set forth under the heading "Risk Factors." THE COMPANY P&W is a regional freight railroad operating in Massachusetts, Rhode Island, Connecticut and New York. The Company is the only interstate freight carrier serving the State of Rhode Island and possesses the exclusive and perpetual right to conduct freight operations over the Northeast Corridor between New Haven, Connecticut and the Massachusetts/Rhode Island border. Since commencing independent operations in 1973, the Company, through a series of acquisitions of connecting lines, has grown from 45 miles of track to its current system of approximately 545 miles. P&W operates the largest double stack intermodal terminal facilities in New England in Worcester, Massachusetts, a strategic location for regional transportation and distribution enterprises. The Company transports a wide variety of commodities for its customers, including construction aggregate, iron and steel products, chemicals, lumber, scrap metals, plastic resins, cement, processed foods and edible food stuffs, such as frozen foods, corn syrup and animal and vegetable oils. Its customers include The Dow Chemical Company, Exxon Corporation, Frito-Lay, Inc., General Dynamics Corporation, Getty Petroleum Marketing Inc., International Paper Company, Leggett & Platt, Incorporated, Mobil Oil Corporation, R.R. Donnelley & Sons, Stone Container Corporation and Tilcon Connecticut, Inc. In 1997, P&W transported over 31,000 carloads of freight and over 43,000 intermodal containers, representing an increase of 14.0% and 9.3%, respectively, over 1996 volumes. Carload and container volumes have increased 5.5% and 19.1%, respectively, in the first six months of 1998, compared to the same period in 1997. The Company also generates income through sales of properties, grants of easements and licenses and leases of land and tracks. P&W's connections to multiple Class I railroads, either directly or through connections with regional and short-line carriers, provide the Company with a competitive advantage by allowing it to offer creative pricing and routing alternatives to its customers. In addition, the Company's commitment to maintaining its track and equipment to high standards enables P&W to provide fast, reliable and efficient service. Over the past decade, consumer product companies have increasingly turned to intermodal transportation, i.e., the shipment of containerized cargo via more than one mode of transportation. By using a hub-and-spoke approach to shipping, multiple double stacked containers can be moved by rail to and from an intermodal terminal and then either delivered to their final destinations by trucks or transferred to ships for export. Headquartered in a major population center in New England, the Company is well situated to capitalize on this trend. There are a number of development projects underway in New England to increase port capacity along its extensive coastline and to improve the intermodal transportation and distribution infrastructure in the region. These projects include the Commonwealth of Massachusetts' $250 million highway reconstruction project to create a direct Worcester connection to the Massachusetts Turnpike and improve road connections to Worcester; the State of Connecticut's project to restore rail access to the Port of New Haven; and the State of Rhode Island's $120 million expansion and improvement of the Quonset Point/Davisville port and industrial park located near the entrance to Narragansett Bay ("Quonset/Davisville"). The Quonset/Davisville project, when completed, will create the largest on-dock double stack and tri-level auto rail facility in New England with substantial land to support port operations and development. The Company's objective is to become the dominant rail freight carrier in New England by capitalizing on these shipping trends and regional developments through implementation of the following strategies: . Acquire Connecting Rail Lines and Trackage Rights. Historically, P&W has grown through strategic acquisitions of other railroads and trackage rights which connect to the Company's system, coupled with upgrades of acquired rail infrastructure. For example, in April 1998, the Company acquired the Connecticut Central Railroad Company ("Conn Central"), a short-line railroad with operating rights over approximately 28 miles of track in central Connecticut, including an unused 11 mile line that P&W has begun to rebuild to gain access to the Hartford, Connecticut market. The Company believes that industry and regional developments have created and will continue to create opportunities for P&W to acquire additional rail properties and trackage rights on connecting lines. Such acquisitions should enable the Company to expand its customer base, spread fixed administrative costs over a larger revenue base and realize other operating efficiencies. The Company intends to aggressively pursue these acquisition opportunities. . Expand Service in New York City/Long Island Market. Pursuant to a 1997 agreement with CSX Corporation ("CSX") concerning the line between New Haven, Connecticut and Fresh Pond Junction (Queens), New York, the Company has the ability to market rail service for all general merchandise and intermodal traffic between parts of New York City and Long Island and the rest of North America via P&W's system. The New York City and Long Island metropolitan area is one of the country's largest markets for the consumption of products and freight transportation services. According to filings by public officials with the United States Surface Transportation Board ("STB"), the region generates 142 million tons of freight per year, 98 million tons of which is reported to be appropriate for rail transport. The Company also anticipates that increasing restrictions on landfill and other local disposal options, as evidenced by the imminent closing of the Fresh Kill landfill on Staten Island, will create additional opportunities for rail transport of municipal solid waste generated in this heavily populated area. Pursuant to a directive from the STB, CSX and the Company have begun discussions regarding the possible expansion of P&W's service in this area through haulage or trackage rights. . Pursue Opportunities to Upgrade, Expand and Enhance Existing Rail Infrastructure. Certain of the Company's growth opportunities are contingent upon anticipated enhancements to its existing rail system. The Quonset/Davisville project contemplates construction of an additional rail line with double stack and tri-level auto rail car clearances on trackage on the Northeast Corridor over which P&W possesses the exclusive and perpetual freight service easement. To realize the benefits of this project, the Company is in the process of making clearance improvements on its line from its connection with the Northeast Corridor at Central Falls, Rhode Island to Worcester. The Company is also working with the Commonwealth of Massachusetts to implement a statewide clearance improvement project that will include certain P&W rail lines in Worcester County. In addition, the Company has begun to identify and improve undergrade bridge structures to permit heavier loadings on key line segments. These improvements should permit the Company to capitalize on increased rail traffic anticipated from the Quonset/Davisville development, capture more international and domestic double stack containerized cargo and handle heavier rail cars and cargo. . Acquire and Develop Strategically Located Terminal Properties and Intermodal Facilities. Planned improvements associated with the Massachusetts highway reconstruction project will significantly expand the Company's facilities for intermodal and bulk transloading in Worcester. In addition, the project should enhance the Company's growth opportunities for intermodal transport by increasing the convenience of its terminal facilities as a hub for intermodal transportation to and from the region. To capitalize on such opportunities, the Company intends to pursue the identification and acquisition or lease of suitable properties in the Worcester area to increase its intermodal capacity. P&W is also exploring potential expansion opportunities for transload and intermodal yards in the I-395 Corridor in eastern Connecticut (which runs parallel to the Company's Groton, Connecticut to Worcester main line) and is planning an intermodal facility at its South Quay property in East Providence, Rhode Island. . Increase Existing System Revenues Through Expanded Customer Relationships. P&W's marketing and sales staff focuses on understanding and addressing the raw material requirements and transportation needs of its existing customers and businesses on its lines. The staff increases existing business by maintaining close working relationships with both customers and connecting carriers and assisting with development projects such as increasing track capacity, locating appropriate facilities and providing new shipment capabilities. In addition, the staff generates new business by targeting companies on its lines that underutilize rail services and by working with local economic development officials and realtors to attract new industries to locations on the Company's system. The Company has experienced a significant increase in the need for gondola rail cars. The Company expects delivery of 40 100-ton gondolas in the fourth quarter of 1998, which should enable P&W to meet this demand and increase its operating revenues. . Expand Locomotive and Rail Car Maintenance and Repair Capabilities. The Company has entered into an engineering contract for the preliminary design of an approximate $1.6 million expansion of its Worcester maintenance center. P&W's management believes this expansion will allow the Company to increase efficiency and enable it to provide expanded contract maintenance and repair services. MARCH OFFERING In March 1998, the Company completed an underwritten public offering of 1,000,000 shares of Common Stock (the "March Offering") and received net proceeds of approximately $12.5 million. The Company used $10.8 million of the net proceeds of the March Offering and $2.0 million from other sources to repay $12.8 million of debt, accrued liabilities and prepayment penalties. As of the date hereof, the Company has approximately $0.5 million of long-term debt and no short-term debt. The Company has ordered 40 100-ton gondolas with an aggregate purchase price of $2.0 million which are scheduled for delivery in the fourth quarter of 1998. In addition, the Company has entered into an engineering contract for the preliminary design of an approximate $1.6 million expansion of its Worcester maintenance center. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." THE OFFERING <TABLE> <S> <C> Common Stock Offered............... 750,000 shares Shares of Common Stock outstanding before this Offering.............. 3,473,044 shares Shares of Common Stock to be outstanding after this Offering... 4,223,044 shares Use of proceeds.................... Repay debt and general corporate purposes, including acquisition and rebuilding of connecting rail lines, equipment and locomotives as well as infrastructure improvements. See "Use of Proceeds." AMEX Symbol........................ PWX </TABLE> Except where otherwise indicated, all share and per share data in this Prospectus (i) give no effect to the 75,000 shares issuable upon exercise of the Underwriters' Warrants; (ii) assume no exercise of outstanding warrants and stock options to purchase 139,781 shares of Common Stock; and (iii) give no effect to the up to 7,500 shares issuable to the former shareholders of Conn Central. See "Business--Business Strategy," "Management--Stock Plans" and "Underwriting." SUMMARY FINANCIAL DATA The following table sets forth summary financial data of the Company as of and for the three years ended December 31, 1997 and the six months ended June 30, 1997 and 1998. Such data as of and for the three years ended December 31, 1997 are derived from the Company's audited financial statements. The financial data as of and for the six months ended June 30, 1997 and 1998 are derived from the Company's unaudited financial statements. It is management's opinion that the financial data as of and for the six months ended June 30, 1997 and 1998 contain all adjustments, consisting solely of normal recurring adjustments, which management considers necessary to fairly present the financial data set forth herein. The results for the six months ended June 30, 1998 are not necessarily indicative of the results to be expected for the full year. The summary financial data should be read in conjunction with the Company's audited financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus. <TABLE> <CAPTION> SIX MONTHS YEARS ENDED DECEMBER 31, ENDED JUNE 30, ---------------------------- ---------------- 1995 1996 1997 1997 1998 -------- -------- -------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <S> <C> <C> <C> <C> <C> INCOME STATEMENT DATA: Operating revenues........... $ 19,778 $ 19,456 $ 22,083 $10,278 $10,892 Operating expenses (a)....... 17,677 17,714 18,333 9,180 9,727 -------- -------- -------- ------- ------- Income from operations....... 2,101 1,742 3,750 1,098 1,165 Other income................. 581 1,660 638 415 2,596 Interest expense............. (1,175) (1,371) (1,358) (681) (463) -------- -------- -------- ------- ------- Income before income taxes and extraordinary item...... 1,507 2,031 3,030 832 3,298 Provision for income taxes... 590 780 1,100 310 1,174 -------- -------- -------- ------- ------- Income before extraordinary item........................ 917 1,251 1,930 522 2,124 Extraordinary loss from early extinguishment of debt (b).. -- -- -- -- 170 -------- -------- -------- ------- ------- Net income................... $ 917 $ 1,251 $ 1,930 $ 522 $ 1,954 ======== ======== ======== ======= ======= Diluted income per share (c)......................... $ 0.43 $ 0.54 $ 0.81 $ 0.23 $ 0.66 ======== ======== ======== ======= ======= Weighted average shares- diluted..................... 2,136 2,461 2,489 2,474 2,975 ======== ======== ======== ======= ======= </TABLE> <TABLE> <CAPTION> AT JUNE 30, 1998 ----------------------- ACTUAL AS ADJUSTED (D) ------- --------------- (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Total assets.......................................... $74,719 $81,779 Current portion, long-term debt....................... 188 -- Long-term debt, less current portion.................. 799 -- Shareholders' equity.................................. 54,543 62,097 </TABLE> - -------- (a) The $547,000 increase in operating expenses in the six months ended June 30, 1998 includes a $244,000 increase in profit sharing expenses primarily related to a substantial increase in Other Income realized in 1998. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000832175_telescan_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000832175_telescan_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..4ff43030c3496170d6784a28500f4430ca1d21cb
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1998/CIK0000832175_telescan_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY INFORMATION IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. THE COMPANY The Company provides state-of-the-art Internet services, innovative solutions for online technology and sophisticated networks and data retrieval tools. The Company develops, markets, and operates Internet sites and major online networks serving the financial industry. The Company's products and services, which are based upon its proprietary online operating system and user software, allow its customers to electronically access and analyze information through their own personal computer systems. The Company's primary product line is a system of Internet and online financial services and products provided directly to users as well as under private label agreements with third parties, which allow investors to (1) obtain financial news and information; (2) perform fundamental and technical analyses; (3) design and backtest personalized searches using current and historical information on more than 222,000 equities, indices and currencies; and (4) perform portfolio management and personal investment planning. Telescan, Inc. is a Delaware corporation, and unless otherwise indicated, all references to the Company or Telescan refer to Telescan, Inc. and its predecessors. The executive offices of the Company are located at 5959 Corporate Drive, Suite 2000, Houston, Texas 77036 and its telephone number is (281) 588-9700. RECENT DEVELOPMENTS In May 1998, the Company retained NationsBanc Montgomery Securities LLC to advise the Company in exploring strategic alternatives, including a potential change in ownership of the Company in order to maximize stockholder value. THE OFFERING This Prospectus relates to the resale of 120,000 shares of Convertible Preferred Stock and the underlying Common Stock (collectively, the "Shares") by Selling Stockholders. Each share of Convertible Preferred Stock is convertible, at any time through May 15, 2001, into shares of Common Stock at 95% of the lowest trade price as reported by Nasdaq Small-Cap Market for ten consecutive days prior to the Conversion Date (as hereinafter defined). Two days will be added to this time period each month after November 15, 1998 until the time period is lengthened to 22 days. The maximum conversion price is $8.62. Upon issuance of the Convertible Preferred Stock, an imputed dividend will be reflected based upon the discounted conversion feature, such dividend totaling approximately $44,000 will be deducted from earnings available to common stockholders. See "Description of Securities - Convertible Preferred Stock". The Company will not receive any proceeds from the sale of Shares by the Selling Stockholders. SUMMARY FINANCIAL DATA The summary financial data presented below for the five-year period ended December 31, 1997, have been derived from the audited historical consolidated financial statements of the Company. The summary financial data for the three months ended March 31, 1998 and 1997 have been derived from the unaudited historical financial statements of the Company. The historical financial data include the results of continuing operations, discontinued operations and operations of acquired businesses from their dates of acquisition. The summary financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein and the Company's consolidated financial statements and the notes thereto. ($ in thousands, except per share data) <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, YEARS ENDED DECEMBER 31, ---------------------- ---------------------------------------------------------------- STATEMENT OF OPERATIONS: 1998 1997 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> <C> Total revenues ....................... 3,032 3,626 14,939 12,129 10,935 8,524 6,515 Income (loss) from continuing operations .............. (812) 221 810 (2,274) (1,326) (2,572) 251 Income (loss) from discontinued operations ............ (46) (207) (558) (660) 112 (59) (282) Provision for operating loss during phase out period ............................. -- -- (56) -- -- -- -- ========= ========= ========= ========= ========= ========= ========= Net income (loss) .................... (858) 14 196 (2,934) (1,214) (2,631) (31) ========= ========= ========= ========= ========= ========= ========= Income (loss) per common share from continuing operations: Basic ............................ (0.07) 0.02 0.08 (0.21) (0.14) (0.01) 0.03 Diluted .......................... (0.07) 0.02 0.07 (0.21) (0.14) (0.01) 0.03 Income (loss) per common share from discontinued operations -including phase out period: Basic ............................ 0.00 (0.02) (0.06) (0.06) 0.01 (0.27) (0.04) Diluted .......................... 0.00 (0.02) (0.06) (0.06) 0.01 (0.27) (0.04) Net income (loss): Basic ............................ (0.08) -- 0.02 (0.28) (0.12) (0.28) -- Diluted .......................... (0.08) -- 0.02 (0.28) (0.12) (0.28) -- THREE MONTHS ENDED MARCH 31, YEARS ENDED DECEMBER 31, -------------- ------------------------------------------------------------ BALANCE SHEET DATA: 1998 1997 1996 1995 1994 1993 - --------------------------------------- ------------- ------ ------ ------ ----- ----- Working capital ....................... (29) 745 455 2,143 1,370 5,174 Total assets .......................... 11,584 12,259 11,408 10,136 7,780 9,712 Total long-term obligations ........................... 353 466 457 441 541 311 Total stockholders' equity .............................. 8,125 8,749 7,964 7,965 6,022 8,617 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000833210_jcp_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000833210_jcp_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..307917e99e413ed416b7b79a35db8f810378467a
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the detailed information appearing elsewhere in this Prospectus. Certain capitalized terms which are used herein are defined elsewhere in this Prospectus. See "Index of Key Terms." Unless the context otherwise requires, certain capitalized terms, when used herein, only relate to the Certificates. Other Series which may be issued pursuant to other similar prospectuses or disclosure documents may also use such capitalized terms in such prospectuses or documents. However, in such cases, reference to such terms will, unless the context otherwise requires, only be made in the context of the issuance of such other Series. Trust....................... JCP Master Credit Card Trust ("Trust") was formed pursuant to the Pooling and Servicing Agreement. The property of the Trust includes a portfolio of Receivables generated or to be generated by JCPenney and its affiliates in the ordinary course of business and arising under designated credit card accounts ("Accounts") in the portfolio (the "JCPenney Portfolio") of accounts (the "JCPenney credit card accounts") of JCPenney Card Bank, National Association, a wholly owned subsidiary of JCPenney ("JCP Card Bank"), all monies due or to become due in respect of the Receivables, all proceeds of the Receivables and proceeds of credit insurance policies relating to the Receivables and all monies on deposit in certain bank accounts of the Trust. JCP Card Bank, through JCPenney, has sold or transferred to JCPR, and JCPR has transferred to the Trust, all Receivables arising in the Accounts. Securities Offered.......... Each of the Certificates offered hereby represents an undivided interest in the Trust. Each such Certificate represents the right to receive payments of interest at the Class A Certificate Rate and payment of principal on the Class A Expected Final Distribution Date or, in certain limited circumstances, earlier as described herein, which will be funded from a varying percentage of the payments received with respect to the Receivables. JCPR may, at its option, repurchase the Certificates on any Distribution Date on or after the Class A Expected Final Distribution Date (as hereinafter defined). The interest of the holders of the Certificates (the "Certificateholders") in the Trust (the "Class A Investor Interest") will initially equal $550,000,000. The interest of the holder of the Class B Investor Interest (the "Class B Interest Holder") in the Trust (the "Class B Investor Interest") will initially equal $60,365,854. The interest of the holder of the Class C Investor Interest (the "Class C Interest Holder") in the Trust (the "Class C Investor Interest" and, together with the Class A Investor Interest and the Class B Investor Interest, the "Investor Interest" or the "Investor Amount") will initially equal $60,365,854. The Investor Interest will be reduced by the aggregate amount of (1) all transfers in respect of principal on the Certificates, the Class B Investor Interest and the Class C Investor Interest made to the Principal Funding Account (as hereinafter defined), (2) all distributions in respect of principal to Certificateholders, the Class B Interest Holder and the Class C Interest Holder (without duplication of amounts transferred pursuant to clause (1) of this sentence) and (3) Investor Charge Offs (as hereinafter defined). JCPR owns the remaining undivided interest in the Principal Receivables (as hereinafter defined) in the Trust not represented by the Certificates, the Series E Investor Interests or certificates of another Series ("JCPR Amount"). The Certificates will be issued pursuant to an Exchange (as hereinafter defined) as provided for in the Pooling and Servicing Agreement. See "Description of the Certificates and the Pooling and Servicing Agreement." The Certificates represent interests in the Trust and do not represent interests in or obligations of JCPR, JCPenney or any affiliate thereof, except to the extent provided herein. None of the Certificates, the Accounts, the Receivables or any collections thereon are insured or guaranteed by JCPR, JCPenney or any affiliate of either or by the Federal Deposit Insurance Corporation (the "FDIC") or any other governmental agency or instrumentality. The Series E Investor Interests are not being offered hereby and are expected to be initially retained by JCPR. JCPR reserves the right to sell the Class B Investor Interest or the Class C Investor Interest at any time. As of the date hereof, the Trust has two other issued and outstanding Series of certificates: (1) its 8.95% Asset Backed Certificates, Series B ("Series B Certificates") having an initial principal amount of $350,000,000; and (2) its 9.625% Asset Backed Certificates, Series C ("Series C Certificates") having an initial principal amount of $375,000,000. Accounts and Receivables.... The Accounts currently consist of substantially all the United States JCPenney credit card accounts in Cycles One, Two, Three and Four (four of the 10 billing cycles for JCPenney credit card accounts) that satisfied the criteria provided in the Pooling and Servicing Agreement as of the applicable cut-off date (the "Addition Date"). The Accounts include JCPenney credit card accounts originated by JCP Card Bank in which JCPenney has purchased the Receivables arising thereunder but do not include commercial accounts and accounts serviced by third parties in Puerto Rico, Mexico and Chile. Additional accounts added to such Cycles in the normal operation of JCPenney's credit card business and satisfying the criteria provided in the Pooling and Servicing Agreement are expected to be added to the Trust on a daily basis as a category of Additional Accounts (as hereinafter defined). The Receivables arising in the Accounts and the Additional Accounts (regardless of which category of such Accounts) consist of amounts charged by cardholders for merchandise and services (excluding insurance other than credit insurance) purchased from JCPenney and its affiliates ("Principal Receivables"), plus the related finance charges, amounts, if any, charged to the Accounts in respect of late charges and returned check fees and similar fees and charges (collectively, the "Finance Charge Receivables") and recoveries (net of estimated recovery expenses) of Receivables charged off pursuant to the Pooling and Servicing Agreement ("Recoveries"). The Receivables arising from the Accounts as of the beginning of September 30, 1998 totaled $1,444,269,021 in Principal Receivables and $3,767,072 in Finance Charge Receivables. The Finance Charge Receivables and Receivables in Defaulted Accounts (as hereinafter defined) have been or will be conveyed to the Trust but will not affect the Investor Amount or the JCPR Amount, each of which is determined on the basis of the amount of Principal Receivables in the Trust. Under the Pooling and Servicing Agreement, the Servicer may estimate the amounts of Principal Receivables and Finance Charge Receivables and allocate collections in respect thereof using a formula that assumes generally that, for all accounts within a particular billing cycle, a pro rata portion of the Finance Charge Receivables billed on a given cycle billing date is received on each processing day during such period. The determination of the amount of Finance Charge Receivables in the Accounts as of the Addition Date is made on the same basis. Any such estimates are binding for all purposes on the Certificateholders, the Trustee and JCPR. See "Description of the Certificates and the Pooling and Servicing Agreement--Investor Percentage and JCPR Percentage." JCPR has entered into a Receivables Purchase Agreement dated as of September 5, 1988, as amended, between JCPR, as purchaser, and JCPenney, as seller (together with any supplements thereto, the "Receivables Purchase Agreement"). Pursuant to the Receivables Purchase Agreement, JCPenney has sold or transferred to JCPR all its right, title and interest in and to the Receivables arising in the Accounts. JCPR in turn has transferred such Receivables to the Trust pursuant to the Pooling and Servicing Agreement. JCPR has also assigned to the Trust its rights with respect to the Receivables under the Receivables Purchase Agreement. See "Description of the Receivables Purchase Agreement." Subject to certain conditions, JCPR has the right to add accounts ("Additional Accounts") to, or remove accounts ("Removed Accounts") from, the Accounts from time to time. The total amount of Receivables in the Trust fluctuates from day to day because the amount of new Receivables arising in the Accounts and the amount of payments collected on existing Receivables usually differ each day. Because the JCPR Amount represents the interest in the Principal Receivables in the Trust not represented by the Certificates, the Series E Investor Interests or certificates of other Series, the JCPR Amount fluctuates from day to day as Receivables are collected and new Receivables are transferred to the Trust and as Receivables from Additional Accounts and Receivables from Removed Accounts are added to and removed from the Trust. See "The Accounts." The aggregate undivided interest in the Principal Receivables in the Trust evidenced by the Certificates and the Series E Investor Interests will never exceed the Investor Amount regardless of the total amount of Principal Receivables in the Trust. Denominations............... The Certificates will be offered for purchase in denominations of $1,000 and integral multiples thereof. Registration of The Certificates will initially be represented by Certificates................ Certificates registered in the name of Cede & Co. ("Cede"), as the nominee of The Depository Trust Company ("DTC"). No Certificate Owner will be entitled to receive a definitive certificate representing such person's interest, except if Definitive Certificates (as hereinafter defined) are issued under the limited circumstances described herein. All references herein to "Certificateholders" shall refer to Certificate Owners, except as otherwise specified herein. See "Description of the Certificates and the Pooling and Servicing Agreement--Definitive Certificates." Exchanges................... The Pooling and Servicing Agreement provides that the Trust will issue two types of certificates: (1) one or more Series of certificates that will be transferable and have the characteristics described below and (2) the Exchangeable Certificate, which will evidence the JCPR Amount and which will initially be held by JCPR and will generally not be transferable, except that certain interests therein may be transferred to JCPenney pursuant to the Receivables Purchase Agreement or to affiliates of JCPenney. See "Description of the Receivables Purchase Agreement." The Pooling and Servicing Agreement also provides that, pursuant to any one or more supplements to the Pooling and Servicing Agreement (each, a "Supplement"), JCPR may deliver the Exchangeable Certificate to the Trustee in exchange for one or more new Series and a reissued Exchangeable Certificate (any such exchange, an "Exchange"). Under the Pooling and Servicing Agreement, JCPR may define, with respect to any Series, certain terms of the Series. JCPR may offer any Series to the public or other investors. The Certificates, together with the Series E Investor Interests (collectively, "Series E"), will be the fifth Series to be offered by the Trust. Set forth under "Description of the Certificates and the Pooling and Servicing Agreement--Prior Issuance of Certificates Outstanding" is a chart which provides the principal terms and other relevant characteristics of the Series B Certificates and Series C Certificates which are the Series previously issued by the Trust currently outstanding. JCPR may offer, from time to time, additional Series to be issued by the Trust. Under the Pooling and Servicing Agreement and pursuant to a Supplement, an Exchange may occur only upon delivery to the Trustee of the following: (a) a Supplement in form satisfactory to the Trustee signed by JCPR and JCPenney and specifying certain terms of such Series, (b) any form of credit enhancement required by such Supplement, (c) if any form of credit enhancement is required by such Supplement, an appropriate agreement with respect thereto, (d) letters from each Rating Agency confirming that the issuance of the new Series will not result in the reduction or withdrawal of its rating of any prior outstanding Series, (e) an opinion of counsel to the effect that the certificates of such Series under existing law should be characterized as indebtedness of JCPR for federal income tax purposes and (f) the existing Exchangeable Certificate. These documents will be delivered to the Trustee prior to the issuance of the Certificates. See "Risk Factors--Additional Series." Seller and Servicer......... JCPR, which is the seller of the Certificates, the originator of the Trust and the transferor of the Receivables, is an indirect, wholly owned, limited purpose subsidiary of JCPenney. JCPenney, as Servicer, services the Receivables for the Trust pursuant to the Pooling and Servicing Agreement. Collections................. The Servicer deposits all collections of Receivables for all Series in an account established for such purpose ("Collection Account"); provided, however, that, subject to certain conditions, JCPenney, as Servicer, is generally permitted to retain all such collections for its own use until two business days preceding each Distribution Date. All amounts deposited in the Collection Account are allocated by the Servicer between amounts collected in respect of Principal Receivables and amounts collected in respect of Finance Charge Receivables, in each case based on the estimating procedures described herein. Such amounts are then allocated among each Series and JCPR based upon the Series' relative investor amounts and the JCPR Amount. See "Description of the Certificates and the Pooling and Servicing Agreement--Applications of Collections." Interest.................... Interest on the Certificates will be distributed monthly on each Distribution Date, commencing , 1998, at the Class A Certificate Rate. Interest is calculated on the basis of a 360-day year comprised of twelve 30-day months and, in the case of the first Monthly Period (as hereinafter defined), will accrue from , 1998 (the "Closing Date"). Interest payments are funded from the portion of Finance Charge Receivables and Net Recoveries, if any, collected during the preceding month allocable to the Investor Amount, and, if necessary, from certain other amounts. See "--Subordination of the Series E Investor Interests" and "--Additional Amounts Available to Certificateholders and the Class B Interest Holder." The term "Net Recoveries" means, with respect to any Monthly Period, the excess, if any, of Recoveries collected during such month over the aggregate amount of Receivables in Defaulted Accounts charged off during such Monthly Period. See "Description of the Certificates and the Pooling and Servicing Agreement." Revolving Period............ The "Revolving Period" with respect to the Certificates means the period from and including the Closing Date to, but not including, the earlier of (a) the commencement of the Controlled Accumulation Period or (b) the commencement of the Rapid Amortization Period. The controlled accumulation period with respect to the Certificates (the "Controlled Accumulation Period") is scheduled to begin at the end of the day on , 2003. During the Revolving Period, collections of Principal Receivables allocable to the Investor Interest will be paid from the Trust to JCPR (or, in certain circumstances, to the Class C Interest Holder) rather than to the Certificateholders. See "Description of the Certificates and the Pooling and Servicing Agreement." Controlled Accumulation Unless a Pay Out Event has occurred, the Period................. Controlled Accumulation Period will begin at the close of business on the last day of the Revolving Period and will end on the earlier of (i) the commencement of the Rapid Amortization Period or (ii) the payment of the Investor Interest in full. During the Controlled Accumulation Period, amounts equal to the least of (a) Available Investor Principal Collections for the related Monthly Period, (b) the sum of the applicable Controlled Accumulation Amount for such Monthly Period and the applicable Deficit Controlled Accumulation Amount, if any (such applicable sum, the "Controlled Deposit Amount") and (c) the sum of the Class A Adjusted Investor Interest (as hereinafter defined) and the Class B Adjusted Investor Interest (as hereinafter defined) on the applicable Transfer Date will be deposited on each Distribution Date beginning with the Distribution Date in the month following the commencement of the Controlled Accumulation Period in a trust account established for the benefit of the Certificateholders, the Class B Interest Holder and the Class C Interest Holder, and used to make principal distributions to the Certificateholders, the Class B Interest Holder and the Class C Interest Holder when due (the "Principal Funding Account"). The "Transfer Date" with respect to any Distribution Date is the business day preceding such Distribution Date. If, for any Monthly Period, the Available Investor Principal Collections for such Monthly Period exceed the applicable Controlled Deposit Amount, any such excess will be first paid to the Class C Interest Holder to the extent that the Class C Investor Interest exceeds the Required Class C Investor Interest or, subject to certain limitations, paid to JCPR. If, for any Monthly Period, the Available Investor Principal Collections for such Monthly Period are less than the applicable Controlled Deposit Amount, the amount of such deficiency will be the applicable "Deficit Controlled Accumulation Amount" for the succeeding Monthly Period. If a Pay Out Event occurs during the Controlled Accumulation Period, the Rapid Amortization Period will commence. Other Series offered by the Trust may or may not have accumulation periods like the Controlled Accumulation Period, and such periods may have different lengths and begin on different dates than the Controlled Accumulation Period. Thus, certain Series may be in their revolving periods while others are in periods during which collections of Principal Receivables are distributed to or held for the benefit of certificateholders of such other Series. Rapid Amortization Period... During the period from the day on which a Pay Out Event has occurred and ending on the earlier of (a) the payment of the Investor Amount in full or (b) the date on which Series E terminates (the "Rapid Amortization Period"), Available Investor Principal Collections will be distributed monthly on each Distribution Date first to the Certificateholders and, following payment of the Class A Investor Interest in full, to the Class B Interest Holder and, following payment of the Class B Investor Interest in full, to the Class C Interest Holder beginning with the Distribution Date in the month following the commencement of the Rapid Amortization Period. See "Description of the Certificates and the Pooling and Servicing Agreements--Investor Percentage and JCPR Percentage" and "--Pay Out Events." Subordination of the Series E Investor Interests........ The Series E Investor Interests will be subordinated, as described herein, to the extent necessary to fund payments with respect to the Certificates as described herein. In addition, the Class C Investor Interest will be subordinated to the extent necessary to fund certain payments with respect to the Class B Investor Interest. If the Class C Investor Interest is reduced to zero, the Class B Interest Holder will bear directly the credit and other risks associated with its interest in the Trust. To the extent the Class B Investor Interest is reduced, the percentage of collections of Finance Charge Receivables allocable to the Class B Investor Interest in subsequent Monthly Periods will be reduced. Moreover, to the extent the amount of such reduction in the Class B Investor Interest is not reimbursed, the amount of principal and interest distributable to the Class B Interest Holder will be reduced. Such reductions of the Class B Investor Interest will thereafter be reimbursed and the Class B Investor Interest increased on each Transfer Date by the amount, if any, of Excess Spread for such Transfer Date available for that purpose. See "Description of the Certificates and the Pooling and Servicing Agreement--Subordination." Additional Amounts Available to Certificateholders and the Class B Interest Holder..... With respect to any Transfer Date, Excess Spread will be applied to fund the Class A Required Amount and the Class B Required Amount, if any. The "Class A Required Amount" means the amount, if any, by which the sum of (a) the Class A Monthly Interest due on the related Distribution Date and any overdue Class A Monthly Interest and Class A Additional Interest, if any, (b) the Class A Servicing Fee for the related Monthly Period and any overdue Class A Servicing Fee and (c) the Class A Investor Default Amount, if any, for the related Monthly Period exceeds the Class A Available Funds for the related Monthly Period. The "Class B Required Amount" means the amount, if any, equal to the sum of (a) the amount, if any, by which the sum of (i) Class B Monthly Interest due on the related Distribution Date and any overdue Class B Monthly Interest and Class B Additional Interest, if any, and (ii) if JCPenney or an affiliate thereof is no longer the Servicer, the Class B Servicing Fee for the related Monthly Period and any overdue Class B Servicing Fee exceeds the Class B Available Funds for the related Monthly Period and (b) the Class B Investor Default Amount, if any, for the related Monthly Period. The "Required Amount" for any Monthly Period shall mean the sum of (a) the Class A Required Amount and (b) the Class B Required Amount, each for such Monthly Period. "Excess Spread" for any Transfer Date will equal the sum of (a) the excess of (i) Class A Available Funds for the related Monthly Period over (ii) the sum of the amounts referred to in clauses (a), (b) and (c) in the definition of "Class A Required Amount" above, (b) the excess of (i) Class B Available Funds for the related Monthly Period over (ii) the sum of the amounts referred to in clauses (a)(i) and (a)(ii) in the definition of "Class B Required Amount" above and (c) Class C Available Funds for the related Monthly Period not used under certain circumstances to pay the Class C Servicing Fee, as described herein. If, on any Transfer Date, Excess Spread is less than the Class A Required Amount, Reallocated Principal Collections allocable first to the Class C Investor Interest and then to the Class B Investor Interest with respect to the related Monthly Period will be used to fund the remaining Class A Required Amount. If Reallocated Principal Collections with respect to such Monthly Period are insufficient to fund the remaining Class A Required Amount for the related Transfer Date, then the Class C Investor Interest (after giving effect to reductions for any Class C Investor Charge-Offs and any Reallocated Principal Collections on such Transfer Date) will be reduced by the amount of such deficiency (but not by more than the Class A Investor Default Amount for such Monthly Period). In the event that such reduction would cause the Class C Investor Interest to be a negative number, the Class C Investor Interest will be reduced to zero, and the Class B Investor Interest (after giving effect to reductions for any Class B Investor Charge-Offs and Reallocated Class B Principal Collections on such Transfer Date) will be reduced by the amount by which the Class C Investor Interest would have been reduced below zero (but not by more than the excess, if any, of the Class A Investor Default Amount for such Monthly Period over the amount of such reduction, if any, of the Class C Investor Interest with respect to such Monthly Period). In the event that such reduction would cause the Class B Investor Interest to be a negative number, the Class B Investor Interest will be reduced to zero and the Class A Investor Interest will be reduced by the amount by which the Class B Investor Interest would have been reduced below zero (but not by more than the excess of the Class A Investor Default Amount, if any, for such Monthly Period over such reductions in the Class C Investor Interest and the Class B Investor Interest with respect to such Monthly Period) (such reduction, a "Class A Investor Charge- Off"). If the Class C Investor Interest and the Class B Investor Interest are reduced to zero, the Certificateholders will bear directly the credit and other risks associated with their undivided interest in the Trust. See "Description of the Certificates and the Pooling and Servicing Agreement--Reallocation of Cash Flows" and "-- Defaulted Receivables; Rebates." If, on any Transfer Date, Excess Spread not required to pay the Class A Required Amount and to reimburse Class A Investor Charge-Offs is less than the Class B Required Amount, Reallocated Principal Collections allocable to the Class C Investor Interest for the related Monthly Period not required to pay the Class A Required Amount will be used to fund the remaining Class B Required Amount. If such remaining Reallocated Principal Collections allocable to the Class C Investor Interest with respect to such Monthly Period are insufficient to fund the remaining Class B Required Amount for the related Transfer Date, then the Class C Investor Interest (after giving effect to reductions for any Class C Investor Charge-Offs, Reallocated Principal Collections and any adjustments made thereto for the benefit of the Certificateholders) will be reduced by the amount of such deficiency (but not by more than the Class B Investor Default Amount for such Monthly Period). In the event that such reduction would cause the Class C Investor Interest to be a negative number, the Class C Investor Interest will be reduced to zero, and the Class B Investor Interest will be reduced by the amount by which the Class C Investor Interest would have been reduced below zero (but not by more than the excess, if any, of the Class B Investor Default Amount for such Monthly Period over such reduction in the Class C Investor Interest with respect to such Monthly Period) (such reduction, a "Class B Investor Charge- Off"). In the event of a reduction of the Class A Investor Interest, the Class B Investor Interest or the Class C Investor Interest, the amount of principal and interest available to fund payments with respect to the Certificates and the Class B Investor Interest will be decreased. See "Description of the Certificates and the Pooling and Servicing Agreement--Reallocation of Cash Flows" and "--Defaulted Receivables; Rebates." Required Class C Investor The "Required Class C Investor Interest" means Interest.................... (a) initially, $ 60,365,854 (the "Initial Class C Investor Interest") and (b) with respect to any Transfer Date thereafter, an amount equal to 9.0% of the sum of the Class A Adjusted Investor Interest and the Class B Adjusted Investor Interest on such Transfer Date, after taking into account payments to be made on the related Distribution Date, and the Class C Adjusted Investor Interest (as hereinafter defined) on the prior Transfer Date after any adjustments made on such Transfer Date, but not less than $20,121,951; provided, however, that (i) if certain reductions in the Class C Investor Interest occur or if a Pay Out Event occurs, the Required Class C Investor Interest for such Transfer Date shall equal the Required Class C Investor Interest for the Transfer Date immediately preceding the occurrence of such reduction or Pay Out Event; (ii) in no event shall the Required Class C Investor Interest exceed the sum of the unpaid principal amount of the Certificates and the Class B Investor Interest as of the last day of the Monthly Period preceding such Transfer Date after taking into account payments to be made on the related Distribution Date; and (iii) the Required Class C Investor Interest may be reduced at any time to a lesser amount if the Rating Agency Condition is satisfied. See "Description of the Certificates and the Pooling and Servicing Agreement--Required Class C Investor Interest." "Rating Agency Condition" means the notification in writing by each Rating Agency to JCPR, the Servicer and the Trustee that a proposed action will not result in such Rating Agency reducing or withdrawing its then existing rating of the certificates of any outstanding Series or Class of a Series with respect to which it is a Rating Agency. If on any Transfer Date, the Class C Investor Interest is less than the Required Class C Investor Interest, certain Excess Spread amounts, if available, will be used to increase the Class C Investor Interest to the extent of such shortfall. If on any Transfer Date the Class C Investor Interest equals or exceeds the Required Class C Investor Interest, any such Excess Spread amounts will be distributed to the Class C Interest Holder and will not be available to the Certificateholders or the Class B Interest Holder. Repurchase; Final Payment of Principal; Mandatory Termination................. Under the Pooling and Servicing Agreement, JCPR has the option to repurchase the Investor Interest on any Distribution Date on or after the Class A Expected Final Distribution Date. The repurchase price will be equal to 100% of the Investor Interest plus accrued and unpaid interest thereon through the Distribution Date on which the repurchase occurs. In any event, if the Investor Amount is not zero on , 2007, final payment in respect of the Certificates will be required to be made on such date. See "Description of the Certificates and the Pooling and Servicing Agreement--Repurchase; Final Payment of Principal; Termination" and "Description of the Receivables Purchase Agreement--Certain Covenants." Record Date................. The last business day of the month preceding any Distribution Date. Trustee..................... The Fuji Bank and Trust Company. Tax Status.................. Skadden, Arps, Slate, Meagher & Flom LLP, special tax counsel to JCPR, is of the opinion that, under existing law, the Certificates will be characterized as indebtedness for federal income tax purposes. Under the Pooling and Servicing Agreement, JCPR and the Certificateholders agree to treat the Certificates as debt for income tax purposes. See "Certain U.S. Federal Income Tax Consequences" for additional information concerning the application of federal income tax laws. ERISA Considerations........ Under regulations issued by the Department of Labor, the Trust's assets would not be deemed "plan assets" of an employee benefit plan holding an interest in the Certificates if certain conditions are met, including that interests in such class of Certificates be held by at least 100 persons independent of JCPR and each other upon completion of the public offering of the Certificates. The Underwriters expect, although no assurance can be given, that the Certificates will be held by at least 100 such persons, and JCPR anticipates that the other conditions of the "publicly-offered security" exception contained in the regulations will be met with respect to the Certificates. No monitoring or other measures will be taken to ensure that any such conditions will be satisfied with respect to the Certificates. If the Trust's assets were deemed to be "plan assets" of such a plan, there is uncertainty as to whether existing exemptions from the "prohibited transaction" rules of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") and the Internal Revenue Code of 1986, as amended (the "Code") would apply to all transactions involving the Trust's assets. Accordingly, employee benefit plans contemplating purchasing Certificates should consult their own counsel before making such a purchase. See "ERISA Considerations."
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+PROSPECTUS SUMMARY The following summary is qualified by, and must be read in conjunction with, the more detailed information and financial statements and the notes thereto set forth elsewhere in this Prospectus. As used herein, the "Company" refers to Boots & Coots International Well Control, Inc., together with its consolidated subsidiaries, unless the context otherwise requires. THE COMPANY Boots & Coots International Well Control, Inc. (the "Company"), is a global- response oil and gas service company that specializes in responding to and controlling oil and gas well emergencies, including blowouts and well fires. In connection with such services, the Company has the capacity to supply the equipment, expertise and personnel necessary to contain the oil and hazardous materials spills and discharges associated with such oil and gas emergencies, to remediate affected sites and restore affected oil and gas wells to production. In addition to providing emergency response services, the Company provides snubbing and other non-critical well control services, including pre- event planning, training and consulting services. The Company also manufactures and markets oil and hazardous materials spill containment and recovery equipment. In addition, the Company provides environmental remediation services to the chemical manufacturing and transportation industries, as well as to various state and federal agencies, and provides materials and equipment procurement, transportation and logistics services to the energy industry. See "Business." The Company's business was established by six former key employees of the Red Adair Company, an oil well firefighting and blowout control company that dominated the industry during the 1960's and 1970's. Those key employees resigned their positions with the Red Adair Company and, in June 1995, formed IWC Services, Inc. ("IWC Services"), a subsidiary of the Company, after Mr. Adair retired and sold his business to outsiders. In 1997, the Company acquired all of the operating assets of Boots & Coots, L.P. ("Boots & Coots"), a provider of oil and gas well firefighting and blowout control services, and hired the majority of Boots & Coots' senior well control specialists. The Company's current staff of well control specialists has a combined total of over 220 years' experience in blowout control and oil and gas well firefighting and an excellent safety record. Throughout their careers, these professionals have worked in nearly all of the major oil and gas producing regions in the world and have controlled more than 4,000 blowouts and well fires, including the 1963 Devil's Cigarette Lighter fire, the 1988 Piper-Alpha Platform disaster and the 1991 Burgan Field fires that were started by Iraqi troops during their retreat from Kuwait during the Gulf War. See "Business" and "Management." RECENT DEVELOPMENTS The Company has undertaken a number of initiatives to respond to ongoing changes in the oil and gas well firefighting and blowout control business and to expand the scope of services it offers, including: (i) in September 1995, the Company entered into a global strategic alliance with Halliburton Energy Services, a division of Halliburton Company ("Halliburton"); (ii) in 1995 the Company began offering consulting services to oil and gas producers and well operators, including training, contingency planning, safety inspections and emergency response drills; (iii) in December 1996, the Company entered into an agreement with a consortium of oil producers to establish and maintain an industry supported "Emergency Response Center" on the North Slope of Alaska and in connection therewith, the Company has sold to such producers the equipment required to respond to a well blowout or fire and agreed to maintain the equipment and to conduct on-site safety inspections and emergency response drills; (iv) on July 31, 1997, the Company completed the purchase of the operating assets of Boots & Coots, L.P., one of its principal oil and gas well firefighting competitors, including all of the capital stock of its subsidiaries, Boots & Coots Overseas, Ltd. and Boots & Coots de Venezuela, S.A. (hereinafter collectively referred to as "Boots & Coots"), (v) on September 25, 1997, the Company completed the purchase of all of the outstanding capital stock of Abasco, Inc. ("Abasco"), a manufacturer of oil containment booms, mops and other oilfield emergency equipment and products, (vi) on January 2, 1998, the Company purchased all of the outstanding capital stock of ITS Supply Corporation ("ITS"), formerly the supply and logistics division of International Tool & Supply Company, Inc., (vii) on February 6, 1998, the Company announced the formation of an alliance with Global Special Risks, Inc. ("Global Special Risks"), pursuant to which Global Special Risks, a managing general insurance agent located in Houston, Texas, and New Orleans, Louisiana, will offer traditional well and blowout insurance combined with the Company's post-event response and pre-event planning and preventative services in a program known as "WELLSURE"(SM), (viii) on February 20, 1998, the Company completed the acquisition of all of the outstanding capital stock of Code 3, Inc. ("Code 3"), an emergency response hazardous materials and oil spill containment and remediation company, and (ix) on May 5, 1998, the Company announced that it had entered into a letter of intent to purchase Elmagco, Inc., d/b/a Baylor Company ("Baylor"), a manufacturer of an extensive line of industrial and oil field equipment. The Company believes that these initiatives, along with other components of the Company's business strategy, will strengthen the Company's competitive position in the worldwide oil, gas and petrochemical emergency response business while expanding its operations into complementary businesses. See "Business." HALLIBURTON ALLIANCE In response to changes in the emergency response segment of the oil field services industry, the Company has, among other things, entered into a global strategic alliance with Halliburton, a leader in the pumping, cementing, snubbing, production enhancement, coiled tubing and related services segment of the oil field services industry. The alliance between the Company and Halliburton (the "Halliburton Alliance"), which is called "WELLCALL"(SM), draws on the expertise and abilities of both companies to offer an integrated well control solution for oil and gas producers worldwide. The Halliburton Alliance provides a complete range of well control services including pre-event troubleshooting and contingency planning, snubbing, pumping, blowout control, debris removal, firefighting, relief and directional well planning, and other specialized services. As a result of the Halliburton Alliance, the Company is directly involved in all Halliburton well control projects that require firefighting expertise. Halliburton is a primary service vendor to the Company and the Company has exclusive rights to use certain tools and technologies developed by Halliburton. A component of the Company's business strategy is to pre-position in selected geographic locations throughout the world complete complements of specialty firefighting equipment and ancillary tools and equipment ("Emergency Response Center") as warranted to support its firefighting operations. The Company currently has Emergency Response Centers in Houston, Texas, Duncan, Oklahoma, Anaco, Venezuela and maintains an industry supported Emergency Response Center on the North Slope of Alaska. The Company believes that a majority of future Emergency Response Centers will be established at existing Halliburton facilities. It is also expected that the maintenance of the Emergency Response Center equipment and the initial mobilization of emergency response teams from such Emergency Response Centers will be handled by Halliburton employees who have been specially trained by the Company to act as "First Responders." The Halliburton Alliance also gives the Company direct access to the administrative and logistical support of Halliburton's credit department and global communications and currency management systems. This access is expected to improve the administrative efficiency of the Company's international operations. Management of the Company believes that the Halliburton Alliance provides a distinct strategic marketing advantage over certain competitors. See "Business--Halliburton Alliance." BAYLOR ACQUISITION On May 5, 1998, the Company announced that it had entered into a letter of intent to acquire Baylor, a Houston-based manufacturer of an extensive line of products for industrial, commercial oil and gas services, as well as governmental applications. Baylor's line of products include Elmagco(R) Brakes, brake controls, brake monitors, closed loop cooling systems, Thyrig(TH) Drive Systems, deepwater thrusters and mooring systems as well as AC generators sold under the trade names EMD, Delco and Baylor, worldwide. Baylor reported audited 1997 revenues of approximately $31 million and net income of approximately $3,409,000. The acquisition of Baylor is subject to customary conditions to closing, including the negotiation of definitive agreements and obtaining necessary regulatory approvals. Prudential Securities Incorporated has been retained by the Company as investment banking advisor for the transaction and other capital raising activities currently underway. The Company views the acquisition of Baylor as complementary to its business strategy of expanding its suite of services to include everything from pre- event engineering and contingency planning through the control and restoration to production of the well, as well as the Company's objective of achieving a more diversified revenue base. The purchase price to be paid by the Company for Baylor, subject to certain adjustments, is $30,000,000, of which $25,000,000 will be paid in cash at closing, with the remainder to be paid in shares of Common Stock of the Company. The basis for valuing the shares to be issued has yet to be determined. The letter of intent provides for a fee of $1,000,000 to be paid by the Company in the event that the Company unilaterally terminates negotiations, fails to enter into a definitive agreement by June 15, 1998, or fails to close the transaction by July 15, 1998, unless (A) a material adverse change occurs in comparison to December 31, 1997: (i) in the financial condition, operations or business prospects of Baylor and its subsidiaries, taken as a whole, (ii) in the fair market value of Baylor's assets, or (iii) the amount of Baylor's liabilities required to be accrued under generally accepted accounting principles; (B) the parties are unable, after using their best efforts, to obtain necessary regulatory approvals, (C) Begemann, Inc., the seller under the letter of intent, fails to proceed expeditiously in good faith to enter into a definitive agreement by June 15, 1998, or thereafter to close by July 15, 1998, or (D) the Company is unable, after using its best efforts in good faith, to negotiate a reasonably satisfactory employment agreement with H.B. Payne, Jr, President of Baylor. BUSINESS STRATEGY Over the next few years, the Company intends to continue to expand its operations and to build upon its demonstrated strengths. The Company intends to promote the Halliburton Alliance and the WELLSURE(SM) program, continue to integrate the acquired businesses of Boots & Coots, Abasco, ITS and Code 3, consummate the acquisition of Baylor, increase the geographical scope of its training and consulting programs, and establish additional Company-owned Emergency Response Centers at locations outside the United States. In general, the Company plans to offer a broader range of services to oil and gas producers worldwide, thereby increasing both the scope of its target market and its market share. The Company intends to expand its service capabilities through a combination of internal growth, additional acquisitions, joint ventures and strategic alliances. The implementation of the Company's business strategy, including the consummation of the acquisition of Baylor and any additional acquisitions, is expected to require substantial additional capital from outside sources. The completion of the acquisitions of Boots & Coots, Abasco, ITS and Code 3 required a substantial portion of the Company's cash reserves. The acquisition of Baylor is expected to require cash of approximately $25,000,000. In addition, the Company has short-term debt obligations incurred in connection with the acquisitions of Boots & Coots, ITS and Code 3 of approximately $9,250,000 which comes due on or before October 1, 1998, and the Company anticipates redeeming all of the Company's 10% Junior Redeemable Convertible Preferred Stock, $.00001 par value ("Redeemable Stock") issued in the Company's private placement of up to 400,000 Units, each consisting of one share of Redeemable Stock and one warrant representing the right to purchase five shares of Common Stock at $5.00 per share, before such shares become convertible into Common Stock. As of the date hereof, 112,000 shares of Redeemable Stock are issued and outstanding. See "Description of Securities--Description of Units." The Company is pursuing a number of financing alternatives to meet its capital requirements. However, the Company does not currently have any commitments in this regard. See "Risk Factors--Need for Additional Capital" and "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources." DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS This Prospectus includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). All statements other than statements of historical facts included or incorporated by reference in this Prospectus, including, without limitation, statements regarding the Company's financial position, business strategy, budgets, and plans and objectives of management for future operations are forward-looking statements. In addition, the words "anticipate," "estimate," "except," and similar expressions are intended to identify forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Company's expectations ("Cautionary Statements") are disclosed under "Risk Factors" and elsewhere in this Prospectus and the documents incorporated by reference herein. All written and oral forward- looking statements attributable to the Company, or persons acting on its behalf, are expressly qualified in their entirety by the Cautionary Statements. OFFICES The Company's principal executive office is located at 5151 San Felipe, Suite 450, Houston, Texas, 77056 (Telephone: (713) 621-7911). THE OFFERING SECURITIES OFFERED.......... 19,196,584 shares of Common Stock of the Company, including 3,833,541 shares underlying warrants to purchase Common Stock. See "Description of Securities." SECURITIES REGISTERED FOR THE SELLING SECURITY HOLDERS.................... All of the shares of Common Stock being registered hereby are being registered for the account of the stockholders of the Company listed on Schedule A hereto (each a "Selling Security Holder" and, collectively, the "Selling Security Holders.") The Selling Security Holders' Shares are being registered for resale only, and the Company will not receive any of the proceeds from any sales of such Shares by the Selling Security Holders. See "Use of Proceeds" COMMON STOCK OUTSTANDING(1).............. 30,728,298 shares USE OF PROCEEDS............. All of the Shares offered hereby are being registered for the account of the Selling Security Holders for resale only, and the Company will not receive any of the proceeds from any sales of such Shares by the Selling Security Holders. See "Use of Proceeds."
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Steri-Oss, Inc. currently conducts its business through its wholly-owned subsidiaries. THE COMPANY Steri-Oss, Inc. develops, manufactures and markets a broad line of dental implant systems. Dental implants are small titanium screws or cylinders that are surgically placed directly into the jaw and are used to replace missing teeth. The Company believes that its dental implant systems are superior to traditional restorative treatments such as bridges and dentures because the permanent nature of dental implants permits patients to regain most of the functionality of their natural teeth. Dental implants also may reduce the progressive atrophy of the jaw often caused by the absence of teeth. The Company has experienced significant growth over the last several years. The Company's net sales increased to $32.2 million for 1996 from $16.8 million for 1993. Net sales also increased 25.5% to $29.4 million for the nine months ended September 30, 1997 from $23.4 million for the comparable nine month period in 1996. The American Dental Association estimates that 110 million people in the United States are missing one or more teeth, representing approximately 40% of the United States population. Traditional restorative alternatives to address tooth loss have consisted primarily of dentures and bridges. Since the introduction of the first modern dental implants in 1982, implants have continued to gain acceptance as an attractive alternative to dentures and bridges. Medical Data International ("MDI") estimates that dental implant sales in the United States exceeded $130 million in 1996 and are expected to grow at a rate of approximately 6% per year. The Company estimates that sales of dental implants outside the United States were approximately $250 million in 1996 and are expected to grow at a rate of approximately 10% per year. The Company markets its products to dental professionals involved in the implant procedure, including oral surgeons, periodontists and implantologists who typically perform the implant surgery, as well as general dentists and prosthodontists who often prepare the crown or other prosthetic device that is affixed on top of the abutment. The Company currently distributes its products in the United States and Canada through its direct sales force consisting of more than 40 persons, which the Company believes is the largest North American direct sales force for dental implant products. The Company markets its products internationally (outside the United States and Canada) in more than 35 countries through 26 exclusive independent distributors. The Company seeks to build upon customer loyalty by providing high quality customer service and support. In addition to its educational courses and training seminars, the Company offers to send a technical sales representative to assist dental professionals with their first implant procedure using Steri-Oss products. The Company's objective is to become the leading worldwide developer, manufacturer and marketer of dental implants and related products, while increasing its profitability. The Company believes that over the last three years, it has been one of the fastest growing participants in the United States implant market. Furthermore, as a result of the Company's acquisition of the dental business of Interpore International ("Interpore") in May 1997, the Company believes its implant unit sales, on a combined basis in the United States in 1995, exceeded those of any of its competitors. To achieve its objective, the Company intends to: (i) increase market share in the United States and foreign markets; (ii) continue to develop innovative implant products; (iii) expand into additional dental specialty markets; (iv) acquire complementary dental implant businesses, products and technologies and (v) continue to improve operating efficiencies. The Company's predecessor sold its first dental implant in 1986 and was acquired by the Company from Bausch & Lomb Incorporated ("Bausch & Lomb") in November 1996 (the "Acquisition"). In connection with the Acquisition, the Company incurred $39.5 million of debt and issued $35.2 million of mandatorily redeemable Preferred Stock. In addition, $59.2 million of tax-deductible goodwill was recorded in connection with the Acquisition. Upon consummation of the Offering, approximately $15.5 million of debt and accrued interest will be retired and approximately $10.0 million of Class B 8% Cumulative Convertible Preferred Stock (the "Class B Preferred Stock") will be redeemed, together with accrued interest and dividends. The holders of Class A 8.8% Cumulative Redeemable Preferred Stock (the "Class A Preferred Stock") and Class C 8.0% Junior Cumulative Redeemable Preferred Stock (the "Class C Preferred Stock") have agreed to convert all of their shares of Preferred Stock into Common Stock upon consummation of the Offering, in lieu of exercising their redemption rights. THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Company........... 3,000,000 shares Common Stock Outstanding after the Offering... 10,056,719 shares (1) Use of Proceeds............................... The Company intends to use the net proceeds from the Offering to repay indebtedness, to redeem all outstanding shares of Class B Preferred Stock and for general corporate purposes, including working capital requirements. See "Use of Proceeds." Proposed Nasdaq National Market symbol........ STRI </TABLE> - --------------- (1) Excludes (i) 400,000 shares of Common Stock reserved for issuance under the 1997 Stock Incentive Issuance Plan (the "1997 Plan"), which includes options to purchase 330,000 shares of Common Stock outstanding as of December 15, 1997 that were granted at an exercise price equal to the initial public offering price in the Offering and (ii) outstanding options to purchase 733,344 shares of Common Stock granted at a weighted average exercise price of $0.58 per share. See Note 9 of Notes to Consolidated Financial Statements. ------------------------ Unless otherwise indicated, all references to the "Company" and "Steri-Oss" refer to Steri-Oss, Inc. and its combined subsidiaries and predecessors. Because the Company uses a 52/53 week fiscal year, fiscal periods may not end on the same day as the end of the respective calendar periods. For convenience of presentation, the consolidated financial data throughout this Prospectus has been shown as of and for the last day of the applicable period unless otherwise indicated. Except as otherwise indicated, the information contained in this Prospectus gives effect to the 50-for-1 stock split effected in October 1997 and assumes: (i) the conversion (the "Preferred Stock Conversion") of 22,000 shares of the Company's Class A Preferred Stock and 3,185 shares of the Company's Class C Preferred Stock into an aggregate of 2,256,719 shares of Common Stock upon consummation of the Offering (assuming an initial public offering price of $12.00 per share), (ii) the redemption upon consummation of the Offering of all outstanding shares of Class B Preferred Stock, (iii) the exercise of outstanding warrants to purchase 4,750,000 shares of Common Stock prior to the consummation of the Offering, (iv) no exercise of outstanding options to purchase 1,063,344 shares of Common Stock and (v) no exercise of the Underwriters' over-allotment option. The Company's principal executive offices are located at 22895 Eastpark Drive, Yorba Linda, California 92887. The Company's telephone number is (714) 282-6515. Steri-Oss(R), EZ Steps(R) and Replace(TM) are trademarks of the Company. This Prospectus also includes trademarks of companies other than the Company. SUMMARY CONSOLIDATED FINANCIAL DATA <TABLE> <CAPTION> NINE MONTHS ENDED PRO FORMA SEPTEMBER 30, YEARS ENDED DECEMBER 31, YEAR ENDED ----------------------- --------------------------- DECEMBER 31, PRO FORMA PRO FORMA 1993 1994 1995 1996(2) 1996(3) 1997(3)(4) ------- ------- ------- ------------ ---------- ---------- (in thousands, except share and per share data) <S> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA:(1) Net sales........................................... $16,845 $22,168 $27,361 $ 32,197 $ 23,387 $ 29,361 Gross profit........................................ 11,718 15,502 19,496 23,411 17,250 21,343 Selling, general and administrative expense......... 8,698 11,393 14,241 17,219 12,626 16,313 Research and development expense.................... 1,618 1,781 2,225 2,468 1,775 1,942 Noncash compensation expense........................ -- -- -- -- -- 569 Income from operations.............................. 1,402 2,328 3,030 3,724 2,849 2,519 Interest expense.................................... 50 -- -- 2,507 1,858 1,858 Income before income taxes.......................... 1,352 2,328 3,030 1,217 991 661 Net income.......................................... $ 516 $ 1,075 $ 1,458 $ 730 $ 595 $ 397 ======= ======= ======= ========== ========== ========== Net income per share(5)............................. $ 0.07 $ 0.06 $ 0.04 ========== ========== ========== Shares outstanding(5)............................... 10,754,618 10,754,618 10,754,618 OTHER DATA: Depreciation........................................ $ 161 $ 363 $ 595 $ 844 $ 558 $ 905 Amortization(6)..................................... 738 868 941 1,622 1,209 1,294 </TABLE> <TABLE> <CAPTION> AT SEPTEMBER 30, 1997 ------------------------- ACTUAL PRO FORMA(7)(8) ------- --------------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents............................................................................. $ 524 $ 2,524 Working capital....................................................................................... 2,578 5,129 Total assets.......................................................................................... 84,172 83,640 Total long-term debt(9)............................................................................... 77,702 25,689 Total stockholders' equity (deficit).................................................................. (2,171) 49,861 </TABLE> - --------------- (1) Represents the historical financial data of the Company's predecessor, Steri-Oss, Inc. ("S-O"), a wholly-owned subsidiary of Bausch & Lomb for 1993 through 1995, combined pro forma financial data of S-O and the Company for 1996 and pro forma financial data of the Company for 1997. (2) The financial data for the period from January 1, 1996 through November 15, 1996 for S-O and from November 16, 1996 through December 31, 1996 for the Company has been combined and adjusted to give effect to the Acquisition, the Preferred Stock Conversion, the Offering and the application of the net proceeds of the Offering, as if each had occurred on January 1, 1996, to present the pro forma operating results for the year ended December 31, 1996. The Acquisition was accounted for as a purchase for financial reporting purposes. (3) The pro forma statement of operations data for the nine months ended September 30, 1996 reflects adjustments as if the Acquisition, the Preferred Stock Conversion, the Offering and the application of the net proceeds of the Offering had occurred on January 1, 1996. The pro forma statement of operations data for the nine months ended September 30, 1997 reflects adjustments as if the Preferred Stock Conversion, the Offering and the application of the net proceeds of the Offering had occurred on January 1, 1996. Excludes the effect of the extraordinary charge described in footnote 7 below. (4) The financial data for the nine months ended September 30, 1997 includes the results of operations of the dental business of Interpore subsequent to its acquisition in May 1997. This acquisition was accounted for as a purchase for financial reporting purposes. (5) Share and per share data are not considered meaningful since S-O operated as a wholly-owned subsidiary of Bausch & Lomb from 1993 through November 15, 1996. Computed based on weighted average shares outstanding assuming the Preferred Stock Conversion and the Offering and the application of the net proceeds therefrom were consummated on January 1, 1996. Also includes the effect of Common Stock and equivalents issued within one year from the filing of the Registration Statement of which this Prospectus is a part at prices per share below the initial public offering price, using the treasury stock method using an assumed initial public offering price of $12.00 per share. (6) Pro forma data includes the effect of amortization over a 40 year period of $59.2 million of tax-deductible goodwill (approximately $1.5 million annually) recorded in connection with the Acquisition. (7) The pro forma balance sheet data reflects adjustments as if the Preferred Stock Conversion and the Offering and the application of the net proceeds therefrom had occurred on September 30, 1997 and includes the effect of an extraordinary charge of $7.5 million, net of the related tax benefit, relating to (i) the elimination of deferred financing costs of $4.6 million associated with the repayment of the Company's 16% Series A Subordinated Note and 14% Series B Subordinated Notes (collectively, the "Subordinated Notes") and a portion of the Company's secured credit facility (the "Bank Facility") with Union Bank of California, N.A. ("Union Bank") and First Source Financial LLP and the conversion and/or redemption of all mandatorily redeemable Preferred Stock, (ii) the charge of $1.9 million related to the Preferred Stock Conversion and (iii) the prepayment penalties of $1.0 million incurred in connection with the repayment of the Subordinated Notes. See "Unaudited Pro Forma Consolidated Financial Data." (8) Includes the effect of a compensation charge of $1.3 million related to options granted below the fair value per share at the date of grant, which options are either fully vested or vest immediately upon consummation of the Offering. See "Unaudited Pro Forma Consolidated Financial Data."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000848371_clipper_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000848371_clipper_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus, including information under "Risk Factors". THE COMPANY The Company is a leading designer, marketer and distributor of quality men's and women's rainwear and outerwear in the United States. The Company designs, markets and distributes its products under the Company-owned LONDON FOG(Reg. TM) and PACIFIC TRAIL(Reg. TM) and related brand names, as well as under the DOCKERS(Reg. TM), LEVI'S(Reg. TM) and SPERRY(Reg. TM) labels pursuant to licenses from the owners thereof, and sells its products through most major channels of distribution in its markets. The Company believes it has a dominant share of the men's rainwear market in department stores and a significant share of the men's outerwear and women's rainwear and outerwear markets in department stores. The Company also distributes its products to specialty retailers (including sport specialty retailers), national and regional chain stores, and discount and off-price retailers. In addition, the Company generates a significant portion of its sales from distributing its products through Company-operated retail stores. As of May 30, 1998, the Company operated 134 factory outlet stores, eight superstores and three Weather Stores(TM). In Fiscal 1998, the Company had net sales of approximately $336 million. The Company's products marketed under the LONDON FOG(Reg. TM) and the related FOG(Reg. TM) and TOWNE(Reg. TM) brands and under the SPERRY(Reg. TM) brand (licensed to the Company by the owner thereof) are referred to as the "London Fog Products" and the products marketed under the PACIFIC TRAIL(Reg. TM), INSIDE EDGE(Reg. TM) and BLACK DOT(Reg. TM) brands, and under the DOCKERS(Reg. TM) and LEVI'S(Reg. TM) brands (licensed to the Company by the owner thereof) are referred to as "Pacific Trail Products". BUSINESS STRENGTHS Management believes that the Company has several competitive advantages which are important to its business, including the following: IMAGE AND CONSUMER RECOGNITION. The LONDON FOG(Reg. TM) brand name was introduced in 1954 and has become one of the most well known apparel brand names in the United States, with a strong reputation for quality and value. The LONDON FOG(Reg. TM) brand name ranked 6th in the 1997 Fairchild 100 Consumer Survey of the most recognizable apparel and accessory brands. In the same survey, the LONDON FOG(Reg. TM) brand name ranked 1st among the outerwear brands. The Company has capitalized on the strength of the LONDON FOG(Reg. TM) brand name by expanding from its initial roots in formal men's rainwear to a broad range of rainwear, outerwear and related products each providing consumers with the quality, functionality and value they expect from the LONDON FOG(Reg. TM) brand. In addition, the PACIFIC TRAIL(Reg. TM) brand has developed a strong and growing niche as a competitively priced brand which targets value-conscious consumers who seek authentic, quality outerwear for recreational activities and casual wearing occasions. Management believes that the Company will be able to continue to capitalize on the strength of its brands by expanding into additional product categories, such as sportswear, and utilizing a sub-branding strategy to enable product and distribution channel extensions while preserving the identity of the LONDON FOG(Reg. TM) and PACIFIC TRAIL(Reg. TM) brand names. BROAD AND DIVERSIFIED DISTRIBUTION CHANNELS. The Company sells its products through a varied array of distribution channels. The Company believes that its ability to distribute its products through varied wholesale distribution channels (including department stores, specialty retailers, sport specialty retailers, national and regional chain stores, and discount and off-price retailers) and through its own retail stores (factory outlet stores and new retail concept stores) places the Company at a competitive advantage by reducing the Company's dependency on any one distribution channel. RETAILING AS A COMPETITIVE ADVANTAGE. For Fiscal 1998, approximately 42% of the Company's net sales were generated through its retail stores, predominantly through its factory outlet stores. The Company's factory outlet stores are located in many of the primary outlet malls throughout the United States and the Company expects to open 20-25 additional factory outlet stores this year. The Company believes that operating its own retail stores provides the Company with the following advantages: (i) mitigating the Company's inventory risk by providing a controlled channel for selling excess inventory; (ii) increasing the breadth and control of the distribution of its products; (iii) preventing the Company from being solely dependent on third party retailers; and (iv) enabling the testing of new products, new product categories and new merchandise concepts. The Company also believes that its experience in operating its own retail stores provides the Company with a better understanding of the needs of its wholesale customers and the ultimate consumers of the Company's products. To further capitalize on these advantages, the Company is seeking to expand the distribution of its products by testing new Company-operated retail concepts through its superstores, Weather Stores(TM) and other potential retail store concepts. VARIETY OF PRODUCTS AND TARGET CONSUMERS. Through its well-known LONDON FOG(Reg. TM), PACIFIC TRAIL(Reg. TM) and related brands, as well as under the DOCKERS(Reg. TM), LEVI'S(Reg. TM), AND SPERRY(Reg. TM) labels pursuant to licenses from the owners thereof, the Company provides consumers with a broad selection of quality products, including a full assortment of outerwear for the entire family, for different end uses and different lifestyles at a broad range of price points. The Company provides products for use in all weather conditions and for use in dress, casual, outdoor and active end-uses. The Company believes this segmentation of its product offerings, targeting specific products to meet specific consumer lifestyle and end use requirements, increases its ability to satisfy the product needs of a broad consumer base. The Company is continuing to increase the variety of products it offers through the development of its own focused men's and women's sportswear collections to be marketed solely through the Company's retail stores. In addition, the Company continues to pursue additional opportunities to develop and market products under other well known brand names through license arrangements, as evidenced by the Company's license to market outerwear under the FOSSIL(Reg. TM) and related labels beginning in the fall 1999 season. STABLE PRODUCT LINES. The Company believes that the stability and continuity of the Company's core product lines relative to the fashion industry generally, with a significant portion of annual revenues being generated by similar styles carried over from the previous year, makes the Company less sensitive to fashion risk. WORLDWIDE PRODUCT SOURCING. The Company's merchandise is produced worldwide by independent manufacturers selected, monitored and coordinated by local Company employees to assure conformity to strict quality, cost and delivery standards. The Company believes the use of independent manufacturers, together with the Company's dedicated sourcing personnel, increases its production flexibility and capacity and allows it to maintain control over all aspects of the sourcing process, while at the same time substantially reducing capital expenditures and avoiding the costs of managing a large production work force. INTEGRATED OPERATING STRUCTURE. The integration of the Company's design, product procurement, production planning, marketing and merchandising functions enables the Company to effectively distribute products to its wholesale and retail customers in a timely manner and to control inventory. BUSINESS STRATEGY The Company's mission is to be the international leader in the design, marketing and distribution of quality rainwear, outerwear and other related products that protect consumers in all weather conditions. To achieve this objective, the Company focuses on maximizing the market penetration of its brands by executing a life style/end-use segmentation approach to the design, merchandising and marketing of the Company's broad range of products. The Company aims to develop a clearer understanding of the target customer for each of the Company's brands and product lines, and to segment its products by types of target customers, which are differentiated by gender, age group and lifestyle and end-use requirements. In implementing this strategy, the Company has adopted an approach that divides its product offerings and brands into "dress," "casual," "outdoor," and "active" categories, through which the Company offers a broad range of products to satisfy different customer preferences and end-use requirements, all of which provide a consistently high standard of quality and value at price points consistent with the positioning of each brand. In addition to increasing the penetration of its existing brands and product lines, the Company's business plan includes seeking to add new brands (both through licensing of well-known, third party brands and development of new brands) and new product offerings to increase the breadth of coverage of the Company's products in terms of price, distribution channels and target consumers. Such new brands and product offerings must adhere to the Company's stringent standards of product quality, value and design while being positioned appropriately in the marketplace within the Company's overall life style/end-use segmentation approach. The Company may, in the future, under appropriate circumstances, enter into complementary acquisition opportunities consistent with the foregoing strategy in order to expand its stable of brand names and augment its product lines. The Company's business plans are designed to build upon the steps the Company has taken to grow its outerwear businesses, continuing the Company's transformation from a significant rainwear designer, marketer and distributor to a market force in all aspects of rainwear, outerwear and related products. This continued transformation is extremely important to the Company's future growth since the market for traditional rainwear is significantly smaller than the markets for either outerwear or other apparel products, such as sportswear, and the market demand for traditional rainwear continues to be adversely affected by the growth of casual attire in the workplace. Of Fiscal 1998 total net sales of $335.6 million, outerwear comprised 68%, rainwear comprised 27% and sportswear, accessories and other (primarily consisting of sales of goods purchased from licensees and other companies for sale in the Company's retail stores, such as hats, umbrellas, gloves, scarves and luggage) comprised 5%. This compares with Fiscal 1994 total net sales of $356.6 million, of which outerwear comprised 40%, rainwear comprised 42%, and sportswear, accessories and other (primarily consisting of a wholesale sportswear line consisting primarily of men's sweaters and knit shirts, which was discontinued at the end of Fiscal 1994, and men's and women's sportswear lines marketed solely through the Company's retail stores, which were discontinued during Fiscal 1996) comprised 18%. The Company's strategy of augmenting its range of brands, product offerings and target consumers was advanced significantly by the acquisition of Pacific Trail in April 1994. Pacific Trail, headquartered in Seattle since 1945 and inspired by the rugged outdoor lifestyle of the Pacific Northwest, is a leading designer, marketer and distributor of authentic, moderate-priced casual, outdoor and active outerwear for men, women and children. Wholesale sales of Pacific Trail Products in Fiscal 1998 were $85.8 million. After having discontinued its sportswear product lines in Fiscal 1996 as part of the Company's strategy to recover from the significant deterioration of its financial condition and operating results during Fiscal 1995 by streamlining the Company's operations and refocusing its operational and financial resources on its core rainwear and outerwear product categories, the Company has decided to reenter the business of marketing sportswear. Management plans to market focused lines of men's and women's sportswear through its retail stores, and expects that sportswear will be a growing product category for the Company. Management believes that the new sportswear lines will help broaden the appeal of the Company's stores to both existing and new customers, increase store sales, reduce the seasonality of the Company's sales and provide a product base to support potential additional Company-operated retail store concepts. A central part of the Company's growth plan is to increase its sales through Company-operated retail stores. The Company is already the dominant provider of men's rainwear and a significant provider of women's rainwear and men's and women's outerwear to department stores. However, department stores are becoming an increasingly competitive environment as a result of the increased emphasis on private label products at lower prices and lifestyle "collection" brands at higher prices. In addition, the consolidation of department store groups over the past several years has significantly reduced the number of potential customers for the Company's products. Also, delivery problems in fall 1994 and spring 1995 had an adverse effect on the Company's relations with some of its department store customers, which contributed to a significant decrease in wholesale sales of London Fog Products. Therefore, Company-operated retail stores are an increasingly important distribution channel to the Company. In Fiscal 1998, net sales at the Company's retail stores totaled $139.9 million (41.7% of total net sales), as compared to $96.5 million (35.2% of total net sales) in Fiscal 1996. Retail sales include sales at the Company's factory outlet stores, superstores and Weather Stores(TM). At May 30, 1998, the Company operated 134 factory outlet stores. A typical factory outlet store is approximately 4,700 square feet and is located in a manufacturers' outlet mall. Factory outlet stores appeal to the value-oriented consumer and sell excess inventory, out-of-season merchandise and seconds, as well as current season, first-quality products. As of May 30, 1998, the Company operated eight test superstores. The Company's superstores, the first of which was opened in May 1997 in North Canton, Ohio, were opened to test an alternative, larger format retail distribution channel for the Company's product offerings to supplement its traditional wholesale and factory outlet store retail distribution channels. A typical superstore is located in a suburban shopping mall or strip mall and offers a superior selection of current season, first quality product for the entire family at highly competitive prices. Based on initial sales results for these test retail superstores, management has determined that most of the existing superstores, many of which are larger than 25,000 square feet, are too large to generate acceptable profitability within an acceptable period of time. The Company is currently targeting 10,000 to 12,000 square feet as the optimal size to test for its larger format superstores. In connection with adopting a plan to restructure its superstores, during the quarter ended May 30, 1998, the Company recorded a restructuring charge of $3.5 million related to the planned closing or downsizing of five of the Company's eight superstores open as of May 30, 1998. The Company expects to open one additional large format superstore during the remainder of the current Fiscal year (other than potential relocations of existing superstores in connection with their downsizing pursuant to the Company's superstore restructuring plan), an approximately 11,000 square foot store expected to open in late fall 1998 in Columbus, Ohio. The Company will continue to evaluate the optimal size and the best locations for its future superstores. The Company's principal executive offices are located at 1332 Londontown Boulevard, Eldersburg, Maryland 21784. The telephone number of the Company is (410) 795-5900.
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus, including information under "Risk Factors". THE COMPANY The Company is a leading designer, marketer and distributor of quality men's and women's rainwear and outerwear in the United States. The Company designs, markets and distributes its products under the Company-owned LONDON FOG(Reg. TM) and PACIFIC TRAIL(Reg. TM) and related brand names, as well as under the DOCKERS(Reg. TM), LEVI'S(Reg. TM) and SPERRY(Reg. TM) labels pursuant to licenses from the owners thereof, and sells its products through most major channels of distribution in its markets. The Company believes it has a dominant share of the men's rainwear market in department stores and a significant share of the men's outerwear and women's rainwear and outerwear markets in department stores. The Company also distributes its products to specialty retailers (including sport specialty retailers), national and regional chain stores, and discount and off-price retailers. In addition, the Company generates a significant portion of its sales from distributing its products through Company-operated retail stores. As of May 30, 1998, the Company operated 134 factory outlet stores, eight superstores and three Weather Stores(TM). In Fiscal 1998, the Company had net sales of approximately $336 million. The Company's products marketed under the LONDON FOG(Reg. TM) and the related FOG(Reg. TM) and TOWNE(Reg. TM) brands and under the SPERRY(Reg. TM) brand (licensed to the Company by the owner thereof) are referred to as the "London Fog Products" and the products marketed under the PACIFIC TRAIL(Reg. TM), INSIDE EDGE(Reg. TM) and BLACK DOT(Reg. TM) brands, and under the DOCKERS(Reg. TM) and LEVI'S(Reg. TM) brands (licensed to the Company by the owner thereof) are referred to as "Pacific Trail Products". BUSINESS STRENGTHS Management believes that the Company has several competitive advantages which are important to its business, including the following: IMAGE AND CONSUMER RECOGNITION. The LONDON FOG(Reg. TM) brand name was introduced in 1954 and has become one of the most well known apparel brand names in the United States, with a strong reputation for quality and value. The LONDON FOG(Reg. TM) brand name ranked 6th in the 1997 Fairchild 100 Consumer Survey of the most recognizable apparel and accessory brands. In the same survey, the LONDON FOG(Reg. TM) brand name ranked 1st among the outerwear brands. The Company has capitalized on the strength of the LONDON FOG(Reg. TM) brand name by expanding from its initial roots in formal men's rainwear to a broad range of rainwear, outerwear and related products each providing consumers with the quality, functionality and value they expect from the LONDON FOG(Reg. TM) brand. In addition, the PACIFIC TRAIL(Reg. TM) brand has developed a strong and growing niche as a competitively priced brand which targets value-conscious consumers who seek authentic, quality outerwear for recreational activities and casual wearing occasions. Management believes that the Company will be able to continue to capitalize on the strength of its brands by expanding into additional product categories, such as sportswear, and utilizing a sub-branding strategy to enable product and distribution channel extensions while preserving the identity of the LONDON FOG(Reg. TM) and PACIFIC TRAIL(Reg. TM) brand names. BROAD AND DIVERSIFIED DISTRIBUTION CHANNELS. The Company sells its products through a varied array of distribution channels. The Company believes that its ability to distribute its products through varied wholesale distribution channels (including department stores, specialty retailers, sport specialty retailers, national and regional chain stores, and discount and off-price retailers) and through its own retail stores (factory outlet stores and new retail concept stores) places the Company at a competitive advantage by reducing the Company's dependency on any one distribution channel. RETAILING AS A COMPETITIVE ADVANTAGE. For Fiscal 1998, approximately 42% of the Company's net sales were generated through its retail stores, predominantly through its factory outlet stores. The Company's factory outlet stores are located in many of the primary outlet malls throughout the United States and the Company expects to open 20-25 additional factory outlet stores this year. The Company believes that operating its own retail stores provides the Company with the following advantages: (i) mitigating the Company's inventory risk by providing a controlled channel for selling excess inventory; (ii) increasing the breadth and control of the distribution of its products; (iii) preventing the Company from being solely dependent on third party retailers; and (iv) enabling the testing of new products, new product categories and new merchandise concepts. The Company also believes that its experience in operating its own retail stores provides the Company with a better understanding of the needs of its wholesale customers and the ultimate consumers of the Company's products. To further capitalize on these advantages, the Company is seeking to expand the distribution of its products by testing new Company-operated retail concepts through its superstores, Weather Stores(TM) and other potential retail store concepts. VARIETY OF PRODUCTS AND TARGET CONSUMERS. Through its well-known LONDON FOG(Reg. TM), PACIFIC TRAIL(Reg. TM) and related brands, as well as under the DOCKERS(Reg. TM), LEVI'S(Reg. TM), AND SPERRY(Reg. TM) labels pursuant to licenses from the owners thereof, the Company provides consumers with a broad selection of quality products, including a full assortment of outerwear for the entire family, for different end uses and different lifestyles at a broad range of price points. The Company provides products for use in all weather conditions and for use in dress, casual, outdoor and active end-uses. The Company believes this segmentation of its product offerings, targeting specific products to meet specific consumer lifestyle and end use requirements, increases its ability to satisfy the product needs of a broad consumer base. The Company is continuing to increase the variety of products it offers through the development of its own focused men's and women's sportswear collections to be marketed solely through the Company's retail stores. In addition, the Company continues to pursue additional opportunities to develop and market products under other well known brand names through license arrangements, as evidenced by the Company's license to market outerwear under the FOSSIL(Reg. TM) and related labels beginning in the fall 1999 season. STABLE PRODUCT LINES. The Company believes that the stability and continuity of the Company's core product lines relative to the fashion industry generally, with a significant portion of annual revenues being generated by similar styles carried over from the previous year, makes the Company less sensitive to fashion risk. WORLDWIDE PRODUCT SOURCING. The Company's merchandise is produced worldwide by independent manufacturers selected, monitored and coordinated by local Company employees to assure conformity to strict quality, cost and delivery standards. The Company believes the use of independent manufacturers, together with the Company's dedicated sourcing personnel, increases its production flexibility and capacity and allows it to maintain control over all aspects of the sourcing process, while at the same time substantially reducing capital expenditures and avoiding the costs of managing a large production work force. INTEGRATED OPERATING STRUCTURE. The integration of the Company's design, product procurement, production planning, marketing and merchandising functions enables the Company to effectively distribute products to its wholesale and retail customers in a timely manner and to control inventory. BUSINESS STRATEGY The Company's mission is to be the international leader in the design, marketing and distribution of quality rainwear, outerwear and other related products that protect consumers in all weather conditions. To achieve this objective, the Company focuses on maximizing the market penetration of its brands by executing a life style/end-use segmentation approach to the design, merchandising and marketing of the Company's broad range of products. The Company aims to develop a clearer understanding of the target customer for each of the Company's brands and product lines, and to segment its products by types of target customers, which are differentiated by gender, age group and lifestyle and end-use requirements. In implementing this strategy, the Company has adopted an approach that divides its product offerings and brands into "dress," "casual," "outdoor," and "active" categories, through which the Company offers a broad range of products to satisfy different customer preferences and end-use requirements, all of which provide a consistently high standard of quality and value at price points consistent with the positioning of each brand. In addition to increasing the penetration of its existing brands and product lines, the Company's business plan includes seeking to add new brands (both through licensing of well-known, third party brands and development of new brands) and new product offerings to increase the breadth of coverage of the Company's products in terms of price, distribution channels and target consumers. Such new brands and product offerings must adhere to the Company's stringent standards of product quality, value and design while being positioned appropriately in the marketplace within the Company's overall life style/end-use segmentation approach. The Company may, in the future, under appropriate circumstances, enter into complementary acquisition opportunities consistent with the foregoing strategy in order to expand its stable of brand names and augment its product lines. The Company's business plans are designed to build upon the steps the Company has taken to grow its outerwear businesses, continuing the Company's transformation from a significant rainwear designer, marketer and distributor to a market force in all aspects of rainwear, outerwear and related products. This continued transformation is extremely important to the Company's future growth since the market for traditional rainwear is significantly smaller than the markets for either outerwear or other apparel products, such as sportswear, and the market demand for traditional rainwear continues to be adversely affected by the growth of casual attire in the workplace. Of Fiscal 1998 total net sales of $335.6 million, outerwear comprised 68%, rainwear comprised 27% and sportswear, accessories and other (primarily consisting of sales of goods purchased from licensees and other companies for sale in the Company's retail stores, such as hats, umbrellas, gloves, scarves and luggage) comprised 5%. This compares with Fiscal 1994 total net sales of $356.6 million, of which outerwear comprised 40%, rainwear comprised 42%, and sportswear, accessories and other (primarily consisting of a wholesale sportswear line consisting primarily of men's sweaters and knit shirts, which was discontinued at the end of Fiscal 1994, and men's and women's sportswear lines marketed solely through the Company's retail stores, which were discontinued during Fiscal 1996) comprised 18%. The Company's strategy of augmenting its range of brands, product offerings and target consumers was advanced significantly by the acquisition of Pacific Trail in April 1994. Pacific Trail, headquartered in Seattle since 1945 and inspired by the rugged outdoor lifestyle of the Pacific Northwest, is a leading designer, marketer and distributor of authentic, moderate-priced casual, outdoor and active outerwear for men, women and children. Wholesale sales of Pacific Trail Products in Fiscal 1998 were $85.8 million. After having discontinued its sportswear product lines in Fiscal 1996 as part of the Company's strategy to recover from the significant deterioration of its financial condition and operating results during Fiscal 1995 by streamlining the Company's operations and refocusing its operational and financial resources on its core rainwear and outerwear product categories, the Company has decided to reenter the business of marketing sportswear. Management plans to market focused lines of men's and women's sportswear through its retail stores, and expects that sportswear will be a growing product category for the Company. Management believes that the new sportswear lines will help broaden the appeal of the Company's stores to both existing and new customers, increase store sales, reduce the seasonality of the Company's sales and provide a product base to support potential additional Company-operated retail store concepts. A central part of the Company's growth plan is to increase its sales through Company-operated retail stores. The Company is already the dominant provider of men's rainwear and a significant provider of women's rainwear and men's and women's outerwear to department stores. However, department stores are becoming an increasingly competitive environment as a result of the increased emphasis on private label products at lower prices and lifestyle "collection" brands at higher prices. In addition, the consolidation of department store groups over the past several years has significantly reduced the number of potential customers for the Company's products. Also, delivery problems in fall 1994 and spring 1995 had an adverse effect on the Company's relations with some of its department store customers, which contributed to a significant decrease in wholesale sales of London Fog Products. Therefore, Company-operated retail stores are an increasingly important distribution channel to the Company. In Fiscal 1998, net sales at the Company's retail stores totaled $139.9 million (41.7% of total net sales), as compared to $96.5 million (35.2% of total net sales) in Fiscal 1996. Retail sales include sales at the Company's factory outlet stores, superstores and Weather Stores(TM). At May 30, 1998, the Company operated 134 factory outlet stores. A typical factory outlet store is approximately 4,700 square feet and is located in a manufacturers' outlet mall. Factory outlet stores appeal to the value-oriented consumer and sell excess inventory, out-of-season merchandise and seconds, as well as current season, first-quality products. As of May 30, 1998, the Company operated eight test superstores. The Company's superstores, the first of which was opened in May 1997 in North Canton, Ohio, were opened to test an alternative, larger format retail distribution channel for the Company's product offerings to supplement its traditional wholesale and factory outlet store retail distribution channels. A typical superstore is located in a suburban shopping mall or strip mall and offers a superior selection of current season, first quality product for the entire family at highly competitive prices. Based on initial sales results for these test retail superstores, management has determined that most of the existing superstores, many of which are larger than 25,000 square feet, are too large to generate acceptable profitability within an acceptable period of time. The Company is currently targeting 10,000 to 12,000 square feet as the optimal size to test for its larger format superstores. In connection with adopting a plan to restructure its superstores, during the quarter ended May 30, 1998, the Company recorded a restructuring charge of $3.5 million related to the planned closing or downsizing of five of the Company's eight superstores open as of May 30, 1998. The Company expects to open one additional large format superstore during the remainder of the current Fiscal year (other than potential relocations of existing superstores in connection with their downsizing pursuant to the Company's superstore restructuring plan), an approximately 11,000 square foot store expected to open in late fall 1998 in Columbus, Ohio. The Company will continue to evaluate the optimal size and the best locations for its future superstores. The Company's principal executive offices are located at 1332 Londontown Boulevard, Eldersburg, Maryland 21784. The telephone number of the Company is (410) 795-5900.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000849240_hawk-corp_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000849240_hawk-corp_prospectus_summary.txt
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+SUMMARY The following summary is qualified in its entirety by the more detailed information and consolidated financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Hawk is a holding company, the principal assets of which consist of the capital stock of its manufacturing subsidiaries, Friction Products Co. ("FPC"), S.K. Wellman Corp. ("SKW"), Helsel, Inc. ("Helsel"), Logan Metal Stampings, Inc. ("Logan"), Hutchinson Products Corporation ("Hutchinson") and Sinterloy Corporation ("Sinterloy"). Unless otherwise indicated, the information in this Prospectus (1) reflects a 3.2299-for-one split of each share of Class A Common Stock, par value $.01 per share (the "Class A Common Stock"), and Class B Non-Voting Common Stock, par value $.01 per share (the "Class B Common Stock," and together with the Class A Common Stock, the "Common Stock") that occurred in January 1998, (2) assumes the Company's replacement of its existing senior revolving credit facility with a new $50.0 million unsecured revolving credit facility (the "New Revolving Credit Facility"), the Company's entry into a new $35.0 million five year unsecured term loan facility (the "New Term Loan Facility") and the payment in full, together with accrued interest thereon, of the Company's $30.0 million aggregate principal amount of 12% senior subordinated notes (the "Senior Subordinated Notes") concurrently with the closing of the Offering (the "Senior Subordinated Note Redemption"), (3) assumes completion of the Preferred Stock Redemption, as described in this Prospectus, concurrently with the closing of the Offering, (4) assumes the Company's redemption of $35.0 million of its 10 1/4% Senior Notes due 2003 (the "Senior Note Redemption") as soon as practicable after the closing of the Offering, and (5) assumes no exercise of the Underwriters' over-allotment option. THE COMPANY GENERAL Hawk designs, engineers, manufactures and markets specialized components, principally made from powder metals, used in a wide variety of aerospace, industrial and commercial applications. The Company believes it is a leading worldwide supplier of friction products for brakes, clutches and transmissions used in aerospace, industrial and specialty applications. Friction products represented 67.5% of Company sales in 1997 (62.4% in the first quarter of 1998). Hawk is also a leading supplier of powder metal components for industrial applications, including pump, motor and transmission elements, gears, pistons and anti-lock brake sensor rings. In addition, the Company designs and manufactures die-cast aluminum rotors for small electric motors used in appliances, business equipment and exhaust fans. The Company focuses on manufacturing products requiring sophisticated engineering and production techniques for applications in markets in which it has achieved a significant market share. Hawk believes it is the only independent supplier of original equipment and replacement friction materials to the manufacturers of braking systems for the Boeing 727, 737 and 757, the McDonnell Douglas DC-9, DC-10 and MD-80 and the Canadair CRJ aircraft. The Company believes it is also the largest supplier of friction materials to the general aviation (non-commercial, non-military) market, supplying friction materials for aircraft manufacturers such as Cessna, Lear, Gulfstream and Fokker. The Company believes that it is a leading supplier of friction materials to manufacturers of construction and agricultural equipment and truck clutches, including Caterpillar, John Deere, New Holland and Eaton. In addition, the Company is a major supplier of friction products for use in specialty applications, such as brakes for Harley-Davidson motorcycles, AM General Humvees and Bombardier, Polaris and Arctco ("Arctic Cat") snowmobiles. The Company's powder metal components are used primarily in industrial applications, often as lower cost replacements for parts manufactured by traditional forging, casting or stamping technologies. The Company targets three areas of the powder metal component marketplace: high precision components that are used in fluid power applications requiring tight tolerances; large structural powder metal parts used in construction, agricultural and truck applications; and smaller, high volume parts for which the Company can utilize its efficient pressing and sintering capabilities. The Company believes it is also the largest independent U.S. manufacturer of die-cast aluminum rotors for use in subfractional (less than 1/20 horsepower) electric motors. The Company believes that its diverse customer base and extensive sales to the aerospace and industrial aftermarkets reduce its exposure to economic fluctuations. The Company estimates that aftermarket sales of friction products have comprised approximately 50% of the Company's net friction product sales in recent years. The Company also believes that its principal tradenames are well-known in the domestic and international marketplace and are associated with quality and extensive customer support, including specialized product engineering and strong aftermarket service. Since its formation in 1989, Hawk has pursued a strategic growth plan by making complementary acquisitions and broadening its customer base. From 1994 through the 12 month period ended March 31, 1998, the Company's net sales and income from operations increased at a compound annual rate of 55.1% and 48.3%, respectively. The Company reported a loss before extraordinary item of $2.0 million in 1996, and may incur a net loss, after extraordinary charges, in the second quarter of 1998 as a result of the incurrence of non-recurring extraordinary charges of $3.6 million ($2.1 million after tax) in prepayment penalties and $1.7 million ($1.0 million after tax) as a result of the write-off of previously capitalized deferred financing costs, each arising from the Senior Note Redemption. For the first three months of 1998, the Company's net sales and income from operations increased 35.5% and 86.8%, respectively, compared to the corresponding period in 1997. Since 1994, sales growth has been primarily driven by the acquisitions of Helsel, SKW, Hutchinson and Sinterloy. These acquisitions more than tripled the net sales of the Company and, because the acquisitions were financed primarily with indebtedness, have caused the Company to become highly leveraged. As a result, the Company's interest expense grew at a compound annual rate of 68.8% from $3.3 million in 1994 to $15.7 million in 1997 pro forma for the Sinterloy acquisition. The Company's net sales, pro forma for all acquisitions, during the period from 1994 through the 12 month period ended March 31, 1998 grew internally at a compound annual rate of 11.7%. BUSINESS STRATEGY The Company's business strategy includes the following principal elements: - Focus on High-Margin, Specialty Applications. The Company operates primarily in aerospace, industrial and commercial markets that require sophisticated engineering and production techniques. In developing new applications, as well as in evaluating acquisitions, the Company seeks to compete in markets requiring such engineering expertise and technical capability, rather than in markets in which the primary competitive factor is price. The Company believes margins for its products in these markets are higher than in other manufacturing markets that use standardized products. The Company's gross margins in 1996, 1997 and the first three months of 1998 were 25.9%, 28.6% and 32.4%, respectively. - New Product Introduction. A key part of the Company's strategy is the introduction of new products which incorporate improved performance characteristics or reduced costs in response to customer needs. Because friction products are the consumable, or wear, component of brake, clutch and transmission systems, the introduction of new friction products in conjunction with a new system provides the Company with the opportunity to supply the aftermarket for the life of the system. For example, the ability to service the aftermarket for a particular aircraft braking system will likely provide the Company with a stable market for its friction products for the life of an aircraft, which can be 30 years or more. The Company also seeks to grow by applying its existing products and technologies to new specialized applications where its products have a performance or technological advantage. For example, the Company recently developed a powder metal pump element for a customer's power steering unit that improved pumping efficiency and dependability while reducing noise and cost. - Pursuit of Strategic Acquisitions. Many of the markets in which the Company competes are fragmented, providing the Company with attractive acquisition opportunities. The Company will continue to seek to acquire complementary businesses with leading market positions that will enable it to expand its product offerings, technical capabilities and customer base. Historically, the Company has been able to achieve significant cost reductions through the integration of its acquisitions. For example, since the acquisition of SKW in 1995, the Company has consolidated SKW's headquarters facility and one of SKW's two U.S. manufacturing facilities into its existing facilities, resulting in $5.4 million of annualized cost savings. - Expanding International Sales. To take advantage of worldwide growth in its end user markets, the Company expanded its international presence through the acquisition of SKW in 1995, which resulted in the addition of manufacturing facilities in Italy and Canada and a worldwide distribution network. The Company continues to expand its European operations to meet strong demand in established markets throughout Europe. The Company also believes that further opportunities to expand sales exist in emerging economies. Sales from the Company's international facilities have grown from $8.1 million in the second half of 1995 following the acquisition of SKW to $21.0 million in 1997. - Leveraging Customer Relationships. The Company's engineers work closely with customers to develop and design new products and improve the performance of existing products. The Company believes that its commitment to quality, service and just-in-time delivery enables it to build and maintain strong and stable customer relationships. The Company believes that more than 80% of its sales are from products and materials for which it is the sole source provider for specific customer applications. Each of the Company's ten largest customers have been customers of the Company or its predecessors for more than ten years. The Company believes that strong relationships with its customers provide it with significant competitive advantages in obtaining and securing new business opportunities. ------------------------ Unless the context otherwise requires, the terms "Company" and "Hawk" as used in this Prospectus refer to Hawk Corporation, a Delaware corporation, its consolidated subsidiaries and its predecessors by merger. The Company's principal executive offices are located at 200 Public Square, Suite 30-5000, Cleveland, Ohio 44114, and its telephone number is (216) 861-3553. Hawk has applied for the registration of the Wellman Friction Products trademark. Velvetouch(R), Fibertuff(R), Feramic(R), Velvetouch Feramic(R), Velvetouch Ceramic(R), Velvetouch Organik(R) and Velvetouch Metalik(R) are registered trademarks of the Company, and Hawk Brake is a tradename of the Company. Trademarks and tradenames of corporations other than the Company are also referred to in this Prospectus. THE OFFERING <TABLE> <S> <C> Class A Common Stock offered: By the Company........ 3,500,000 shares(1) By the Selling Stockholders....... 1,635,000 shares(1)(2) Total......... 5,135,000 shares(1) Class A Common Stock outstanding after the Offering.............. 9,187,750 shares(1)(2)(3) Class B Common Stock outstanding after the Offering.............. 0 shares Total Common Stock outstanding after the Offering.............. 9,187,750 shares(1)(2)(3) Use of proceeds......... To effect the Senior Subordinated Note Redemption, to effect the Senior Note Redemption, to effect the Preferred Stock Redemption and for working capital and general corporate purposes.(4) Proposed NYSE symbol.... HWK </TABLE> - --------------- (1) Does not include 770,250 shares that may be sold by certain of the Selling Stockholders pursuant to the Underwriters' over-allotment option. See "Principal and Selling Stockholders" and "Underwriting." (2) The Company will not receive any proceeds from the sale of Class A Common Stock by the Selling Stockholders except that if the Underwriters' over-allotment option is exercised certain of the Selling Stockholders will use a portion of the proceeds to prepay in part certain notes outstanding to the Company. See "Principal and Selling Stockholders" and "Certain Transactions -- Transactions Concurrent with the Offering." (3) Does not include 700,000 shares of Class A Common Stock reserved for issuance under the Company's 1997 Stock Option Plan (of which 310,000 shares will be reserved for options to be outstanding as of the closing of the Offering), or 31,250 shares of Class A Common Stock, based on an assumed public offering price of $16.00 per share, issuable upon conversion of 8.0% two-year notes that were issued by the Company in connection with the acquisition of Hutchinson. Up to $500,000 of the then-outstanding principal balance of the notes is convertible at the option of the holders thereof into shares of Class A Common Stock at the public offering price. (4) Certain of the shares to be redeemed in the Preferred Stock Redemption are owned by directors and executive officers of the Company. See "Use of Proceeds" and "Certain Transactions -- Transactions Concurrent with the Offering." SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL AND OPERATING DATA (in thousands, except per share data) <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, -------------------------------------------- ------------------ 1995 1996 1997 1997 1998 ------- -------- ----------------------- ------- ------- ACTUAL PRO FORMA(1) -------- ------------ <S> <C> <C> <C> <C> <C> <C> INCOME STATEMENT DATA: Net sales............................. $84,643 $123,997 $159,086 $167,709 $36,884 $49,978 Gross profit.......................... 23,479 32,113 45,436 49,388 10,516 16,191 Plant consolidation expense (2)....... -- 4,028 50 50 -- -- Income from operations................ 9,980 9,811 22,073 25,134 5,133 9,589 Interest expense...................... 7,323 11,270 15,307 15,707 3,679 3,824 Extraordinary item (3)................ -- (1,196) -- -- -- -- Net income (loss)..................... 762 (3,078) 2,874 4,507 898 3,313 Preferred stock dividend requirements........................ (326) (226) (320) (320) (80) (80) Net income (loss) attributable to common stockholders................. 436 (3,304) 2,554 4,187 818 3,233 Earnings (loss) per share: Basic earnings (loss) per share..... .11 (.71) .55 .90 .18 .69 Diluted earnings (loss) per share... .09 (.71) .45 .74 .14 .57 Basic Weighted Average Shares......... 4,133 4,664 4,664 4,664 4,664 4,664 Diluted Weighted Average Shares....... 4,968 4,664 5,688 5,688 5,688 5,688 OTHER DATA: Depreciation and amortization......... $ 5,527 $ 8,418 $ 10,497 $ 10,750 $ 2,427 $ 2,638 Capital expenditures (including capital leases)..................... 3,781 10,294 9,643 9,940 1,194 3,658 </TABLE> <TABLE> <CAPTION> MARCH 31, 1998 -------------------------------- ACTUAL AS ADJUSTED(4) -------------- -------------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................. $ 6,592 $ 21,872 Working capital........................................... 30,500 45,780 Total assets.............................................. 180,846 194,426 Total long-term debt...................................... 131,175 103,987 Detachable stock warrants, subject to put option (5)...... 9,300 -- Stockholders' equity...................................... 804 53,628 </TABLE> - --------------- (1) The pro forma income statement data and pro forma other data for the year ended December 31, 1997 include the historical operations of the Company and give effect to the Sinterloy acquisition as if it occurred as of January 1, 1997. This data should be read in conjunction with the more detailed information contained in the "Unaudited Pro Forma Consolidated Statements of Operations" and notes thereto included elsewhere in this Prospectus. (2) Reflects charges in 1996 and 1997 relating primarily to the relocation of machinery and equipment. (3) Reflects write-off of deferred financing costs, net of $798,000 in income taxes. (4) As adjusted balance sheet data assume the sale by the Company of 3,500,000 shares of Class A Common Stock in the Offering as of March 31, 1998 and the application of net proceeds thereof as set forth under "Use of Proceeds," the exchange of the detachable warrants for 1,023,793 shares of Class B Common Stock, the Preferred Stock Redemption, the Senior Note Redemption and the Company's entry into the New Term Loan Facility. (5) Effective June 30, 1995, the Company issued $30.0 million aggregate principal amount of 12% senior subordinated notes with detachable warrants that provide the holders the option to purchase 1,023,793 shares of the Company's Class B Common Stock at a nominal price. Beginning in the year 2001, the warrant holders have the right to put the warrants to the Company for cash, at prices based on the fair market value of the Company at the date of put, as determined by an independent third party. The warrant holders' put option is terminated upon the closing of an initial public offering. For financial reporting purposes, the carrying value of the warrants, including the put option (classified as detachable stock warrants, subject to put option, on the Company's balance sheet), was $9.3 million as of March 31, 1998, based on the estimated present value of the future fair market value of the Company.
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and consolidated financial statements and notes thereto of the Company appearing elsewhere in this Prospectus. Prospective investors should consider carefully the information under "Risk Factors." THE COMPANY Ansoft Corporation ("Ansoft" or the "Company") develops, markets and supports electronic design automation ("EDA") software based on fundamental electromagnetic principles. The Company's products are used by design engineers in a wide range of industries, including the rapidly evolving wireless communications and RF markets as well as the semiconductor, computer, automotive and consumer electronics industries. The Company's software is used in the design of high performance electrical devices and systems, such as cellular phones, communications systems, computer circuit boards and motors. As the marketplace demands higher levels of system performance and miniaturization, the need to model accurately the electromagnetic interaction in communication and computing devices and electromechanical systems is becoming increasingly important. The design requirement to fit more devices and interconnections into smaller spaces results in increased electromagnetic interaction. Moreover, high performance systems, with frequencies of approximately 500 MHz and beyond, exhibit a high level of electromagnetic interaction causing the degradation of the quality of electrical signals. Traditional EDA tools lack the requisite degree of precision in modeling electromagnetic interactions in components and systems and, as a result, the current process for designing and manufacturing wireless and electronic components and systems is often iterative, time-consuming and inaccurate. By using the Company's software, design engineers can more accurately predict electromagnetic interactions at the component and system level. This allows the Company's customers to produce more compact systems with higher performance while reducing time-to-market, lowering risk of design failure and eliminating costly and time-consuming product redesign. The Company believes that its software products, which are based on Maxwell's Equations, more accurately model electromagnetic interaction than do traditional EDA tools. The Company's software products are targeted at three markets: high-frequency ("HF"), signal integrity ("SI") and electromechanical ("EM"). The HF software enables users to design RF integrated circuits, antenna and radar systems and microwave components. The SI software enables users to design computer interconnects, IC packaging structures and electronic systems by accurately capturing the degradation in signal quality due to higher clock speeds and smaller physical dimensions. The EM software enables designers of electromechanical components and systems to optimize the electrical performance of their designs while increasing manufacturing yields. Ansoft products may be used as an independent design platform or integrated with complementary EDA tools within a customer's existing design environment and are available for Unix and Microsoft Windows 95/NT operating systems. The Company's objective is to become a leading worldwide supplier of EDA software. Using its proprietary electromagnetic technology as a primary competitive advantage, the Company pursues its objectives through the following strategies: leveraging its technology leadership to solve emerging electromagnetic design issues in high performance electrical devices and systems; capitalizing on the growing need for electromagnetic analysis in increasingly compact and complex electronic and electromechanical components and systems operating at higher speeds; and expanding its broad range of product applications to address emerging customer design requirements. Ansoft markets and sells its products through its direct sales force and distributors. As of December 31, 1997, the Company had a direct sales force of 35 representatives, supported by 56 employees in application engineering, marketing and sales administration. The Company has sold licenses for its products to over 500 organizations worldwide. Ansoft's customers include industry leaders in wireless communications and RF markets, as well as in the automotive, computer and consumer electronics industries. The Company's customers include Andrew Corporation, Applied Materials, GM, IBM, Intel, Lucent Technologies, Mitsubishi, Motorola, Nissan and Texas Instruments. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company................... 2,000,000 shares Common Stock outstanding after the offering(1)........ 11,204,369 shares Use of Proceeds....................................... For working capital, repayment of indebtedness and other general corporate purposes, including possible acquisitions. Nasdaq National Market Symbol......................... ANST </TABLE> SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> SIX MONTHS ENDED FISCAL YEAR ENDED APRIL 30, OCTOBER 31, -------------------------------------------------- ------------------ 1993 1994 1995 1996 1997 1996 1997 ------- ------- ------- ------ ------- ------- ------- <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Total revenue.............. $ 3,471 $ 5,121 $ 6,154 $8,695 $14,188 $ 5,652 $11,619 Income (loss) from operations(2)........... (774) (46) (289) 653 (7,552) (2,782) 1,064 Net income (loss)(2)....... $ (967) $ (140) $ (305) $1,300 $(6,450) $(2,404) $ 1,641 Net income (loss) per share(2)................ $ (0.40) $ (0.06) $ (0.06) $ 0.19 $ (0.81) $ (0.31) $ 0.17 Weighted average shares outstanding............. 2,394 2,394 5,528 6,873 7,955 7,878 9,859 </TABLE> <TABLE> <CAPTION> OCTOBER 31, 1997 -------------------------- ACTUAL AS ADJUSTED(3) ------- --------------- <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents........................................... $ 1,040 $24,794 Working capital..................................................... 3,096 28,759 Total assets........................................................ 21,762 45,516 Total stockholders' equity.......................................... $17,595 $43,258 </TABLE> - ------------------------------ (1) Based on the number of shares outstanding as of December 31, 1997. Excludes (i) 2,350,000 shares of Common Stock reserved for issuance under the Company's 1988 and 1995 Stock Option Plans, of which 1,193,917 shares were subject to outstanding options as of December 31, 1997, at a weighted average exercise price of $4.17 per share, and (ii) 260,000 shares reserved for issuance upon exercise of options outstanding as of December 31, 1997, at a weighted average exercise price of $5.23 per share. See "Management--Employee Stock Option Plans" and Note 8 of Notes to the Consolidated Financial Statements of the Company. (2) Includes acquired in process research and development charges of $8,754, or $1.10 per share, recognized in fiscal 1997. (3) As adjusted to reflect the sale of shares of Common Stock offered by the Company hereby at an assumed public offering price of $13.875 per share, including the repayment of approximately $1,909,000 in indebtedness. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000849667_american_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000849667_american_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and Financial Statements, including the Notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, all references in this Prospectus to (i) the "Company" and "AIPC" shall mean American Italian Pasta Company, a Delaware corporation, and its predecessor unless the context otherwise requires; and (ii) "pasta" shall mean dry pasta, including dry pasta used in shelf-stable, frozen and canned pasta products. Unless otherwise indicated, all information in this Prospectus assumes the U.S. Underwriters' over-allotment option is not exercised. THE COMPANY OVERVIEW AIPC is the second largest and one of the fastest-growing producers and marketers of pasta in North America. The Company commenced operations in 1988 with the North American introduction of new, highly-efficient durum wheat milling and pasta production technology. Management believes that the Company's singular focus on pasta, vertically-integrated facilities, continued technological improvements and development of a highly-skilled workforce enable AIPC to produce high-quality pasta at costs below those of many of its competitors. Management believes that the combination of the Company's cost structure, the average age of its competitors' North American pasta production equipment and the growing pasta consumption in North America creates significant opportunities for continued growth. The Company's revenue and operating income were $135.1 million and $20.7 million, respectively, for the twelve-month period ended December 31, 1997, and grew at compound annual growth rates ("CAGR") of 30% and 33%, respectively, over the five-year period ended December 31, 1997. The Company has rapidly established a significant market presence in North America by developing strategic customer relationships with food industry leaders that have substantial pasta requirements. North American pasta consumption exceeded 5.0 billion pounds in 1996 and is expected to grow based on industry and trade sources and the Company's own analysis. The Company has a long-term supply agreement with Sysco Corporation ("Sysco"), the nation's largest marketer and distributor of foodservice products. AIPC is now the exclusive producer of Mueller's(R) pursuant to a long-term manufacturing and distribution agreement with Bestfoods, formerly CPC International Inc. ("Bestfoods"). AIPC is also the primary supplier of pasta to Sam's Wholesale Club ("Sam's Club"), the largest club store chain in the United States, and supplies private label and branded pasta to six of the 10 largest grocery retailers in the United States, including Wal*Mart, A&P, Publix, Albertsons, American Stores and Winn-Dixie. In recent months, the Company has added several new customers including Harris Teeter, Spartan, Meijer and Ahold/Finast. In addition, AIPC has developed supply relationships with industrial users of pasta, such as Pillsbury, General Mills and Kraft Foods which use the Company's pasta as an ingredient in branded food products. The Company produces more than 80 dry pasta shapes in two vertically-integrated production and distribution facilities, strategically located in Excelsior Springs, Missouri and Columbia, South Carolina. The construction of the Missouri plant in 1988 represented the first use in North America of a vertically-integrated, high-capacity pasta plant using Italian pasta production technology. Management believes that this plant continues to be among the most efficient and highly-automated pasta facilities in North America. The South Carolina plant, which commenced operations in 1995, produces only pasta shapes conducive to high-volume production and employs a highly-skilled, self-managed workforce. The Company recently completed a significant portion of its capital expenditure program initiated in 1997 which increased the Company's annual pasta production capacity to approximately 500 million pounds and added a highly-automated durum wheat mill to its South Carolina plant. Management believes the South Carolina plant is now the largest and most efficient pasta producing facility in North America in terms of productivity and conversion cost per pound. The Company anticipates that the planned additional capacity expansion at the Missouri facility, including new high-speed, high-output pasta production lines and expansion of its distribution facility, will be completed by June 1998. This expansion will increase the Company's annual production capacity to more than 600 million pounds. PROPOSED HARVEST STATES ALLIANCE In November 1997, the Company announced a letter of intent with Amber Milling Company, a division of Harvest States Cooperatives ("Harvest States"), one of the largest agribusiness cooperatives in the United States. The proposed business arrangement contemplates AIPC constructing a highly efficient, state-of-the-art pasta production facility adjacent to Harvest States' recently constructed wheat mill in Kenosha, Wisconsin. Under the terms of the contemplated arrangement, Harvest States would transfer to AIPC the land and infrastructure for the facility and supply semolina and other raw materials to the proposed plant under a long-term supply agreement. AIPC anticipates the proposed facility would initially target the growing industrial pasta market. The Company estimates it would invest approximately $30 million in capital expenditures to construct the facility, with a targeted annual capacity of approximately 150 million pounds. The Harvest States alliance is subject to final negotiations and agreement, several pre-conditions and board of directors' approval from both parties prior to July 1, 1998. There can be no assurance that a definitive agreement will be reached or that, if reached, the Company will be able to implement successfully the Harvest States alliance. See "Risk Factors -- Failure to Implement Harvest States Alliance." Management believes the Harvest States alliance would create strategic advantages by: (i) accelerating the time line for constructing a third facility targeting the growing industrial pasta market; (ii) creating highly efficient capacity to support future growth; (iii) providing long-term access to the variety of raw materials needed to support the industrial pasta market (several of which AIPC cannot produce currently in its durum semolina mills); (iv) making available rail and highway infrastructure allowing for efficient distribution to AIPC's customers; and (v) providing access to Harvest States' durum wheat origination network, which is the largest in the United States, and handles over 50% of U.S. durum wheat. The Harvest States alliance would expand AIPC's vertical integration strategy to Harvest States' Kenosha mill, one of North America's newest and most efficient mills. Additionally, Harvest States' Kenosha mill uses the same high-quality, state-of-the-art milling equipment and technology as AIPC's existing mills, ensuring product consistency for existing customers. OPERATING STRATEGY The Company's operating strategy is to grow revenues and profitability by offering customers the highest quality pasta products at competitive prices with superior customer service. Key elements of the Company's operating strategy are to: - Continue to Lead the Industry as a Low Cost Producer of High Quality Pasta. AIPC has successfully implemented production and capital investment strategies designed to achieve low-cost production of high-quality products. AIPC has distinguished itself from most major pasta producers by vertically integrating the durum wheat milling function with the production process and strategically locating its distribution centers. Management believes that its facilities are among the most efficient pasta production facilities in North America in terms of productivity and conversion cost per pound, and that its vertically-integrated processes produce pasta of superior color, texture, flavor and consistency. The Company expects to realize additional operating efficiencies through the current expansion programs at its existing facilities, and ongoing improvement programs. - Expand Customer-Driven Strategy. The Company is committed to developing and maintaining strategic relationships with customers who (i) are food industry leaders requiring a significant volume of high-quality pasta; (ii) have committed marketing and sales resources to growing their pasta business; and (iii) pursue long-term supplier relationships. The Company has followed this strategy since commencing operations in 1988, beginning with an agreement with Sysco, and has developed strategic supply relationships with Bestfoods, Sam's Club and leading grocery retailers. Management believes that these strategic relationships increase sales and operating efficiencies, facilitate AIPC's investment in new technology, create distribution synergies, and enable closer involvement in its customers' pasta businesses. - Provide Superior Customer Service. The Company develops and enhances customer relationships by providing superior service and technical support to its customers. The Company has invested heavily in the development of a broad range of customer service programs, including electronic data interchange ("EDI") and efficient consumer response ("ECR") which streamline the order, invoicing and inventory management functions. The Company provides marketing, technical and service support to its customers by assisting customers with supply and category management decisions, producing pasta to its customers' specifications and making operational recommendations to its customers using pasta as an ingredient in their food products. GROWTH STRATEGY The Company continues to implement its growth strategy, which builds on the Company's operating strategy and industry trends. Key elements of the Company's growth strategy are to: - Continue Bestfoods Business Expansion. The Company was selected in 1997 to be the exclusive producer of Bestfoods' Mueller's brand pasta, the largest pasta brand in North America, and has transferred production of substantially all of Mueller's primarily to its recently expanded South Carolina facility. Management believes that the Company's experience in servicing large pasta supply agreements and its current expansion of its South Carolina and Missouri milling, pasta production and distribution facilities will enable AIPC to support potential future growth. Management anticipates Bestfoods' annual volume requirement will represent an approximately 60% increase over the Company's fiscal 1997 production volume. - Obtain Additional Private Label Volume. The Company intends to continue to grow its existing private label customer volume and secure additional private label customers by continuing to offer quality products, competitive pricing, category management and superior customer service. Management believes that AIPC's prospects for growth in the private label market have been enhanced since Borden Foods Holdings Corporation ("Borden"), historically the largest private label supplier in North America, discontinued its private label pasta business in 1997. - Increase Sales to Industrial Customers. The Company believes that industrial users of pasta will continue to require increasing quantities of pasta and that a greater portion of these requirements will be outsourced to more efficient producers of high-quality pasta, such as AIPC. Management has identified additional strategic opportunities with industrial users of pasta which may result in incremental growth, new product development and cost savings opportunities in the future. See "-- Proposed Harvest States Alliance." - Continue Product Innovation. In 1995, the Company introduced Pasta LaBella flavored pasta, a line of all natural, full-flavored pasta products utilizing patented flavoring technology and AIPC's proprietary production process. In addition to pursuing increased sales with institutional customers, the Company is exploring potential sales and marketing alliances to expand retail distribution of Pasta LaBella flavored pasta. AIPC also intends to continue assisting its customers with innovative products and packaging, and the development of additional value-added products intended to generate higher sales values and margins than traditional pasta products. RECENT DEVELOPMENTS On April 3, 1998, AIPC completed its second fiscal quarter. For the three-month period ended March 31, 1998, the Company reported net income of $.23 per share assuming dilution. Revenues for the three-month period ended March 31, 1998 increased $13.9 million, or 43.3%, to $46.0 million, from $32.1 for the three-month period ended March 31, 1997. Gross profit for the three-month period ended March 31, 1998 also increased $2.7 million, or 32.1%, to $11.1 million, from $8.4 million for the three-month period ended March 31, 1997, which was generally related to the growth in revenues. The gross margin percentage for the three-month period ended March 31, 1998 decreased to 24.1% from 26.2% for the three-month period ended March 31, 1997. The expected decrease was primarily due to changes in sales mix, specifically, the lower gross margin on Bestfoods Mueller's pasta sales, plant expansion costs and higher durum wheat costs. Operating profit for the three-month period ended March 31, 1998 increased $2.4 million, or 54.5%, to $6.8 million, from $4.4 million for the three-month period ended March 31, 1997. Second quarter operating profit as a percentage of revenues improved to 14.8%, a 1.1% gain over the second quarter of 1997. These improvements reflect the gross profit gains and the absence of product introduction costs, which were $.6 million in the three-month period ended March 31, 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." OWNERSHIP As of the date of this Prospectus, The Morgan Stanley Leveraged Equity Fund II, L.P. ("MSLEF"), Morgan Stanley Capital Partners III, L.P. and certain affiliated funds (the "MSCP Funds" and with MSLEF, the "Morgan Stanley Stockholders") own approximately 32.5% of the outstanding Common Stock. Upon consummation of the Offering, the Morgan Stanley Stockholders will own approximately 7.8% of the outstanding Common Stock (3.4% if the U.S. Underwriters' over-allotment option is exercised). See "Principal and Selling Stockholders" and "Underwriters." Shares of Class A Common Stock held by the Morgan Stanley Stockholders and certain related persons are, in certain circumstances, convertible into an equal number of shares of Class B non-voting common stock, par value $.001 per share, of the Company ("Class B Common Stock") and vice versa. See "Description of Capital Stock -- General." THE OFFERING <TABLE> <S> <C> Class A Common Stock offered by: The Company................................ 1,000,000 shares The Selling Stockholders................... 4,400,000 shares(1) ---------- Total................................... 5,400,000 shares ========== Class A Common Stock offered in: U.S. Offering.............................. 4,320,000 shares International Offering..................... 1,080,000 shares ---------- Total................................... 5,400,000 shares ========== Common Stock outstanding after the Offering................................... 17,978,680 shares(2) Use of proceeds.............................. The net proceeds to the Company from the Offering will be used to repay a portion of its indebtedness under its credit facility (the "Credit Facility") and for general corporate purposes. The Company will not receive any proceeds from the sale of Class A Common Stock by any Selling Stockholder. See "Use of Proceeds." New York Stock Exchange Symbol............... PLB </TABLE> - --------------- (1) Of such shares, 4,048,738 shares are being offered by The Morgan Stanley Stockholders, 150,000 shares are being offered by Thompson Holdings, L.P. ("Thompson Holdings"), a limited partnership of which Richard C. Thompson, a director of the Company, is the only limited partner, 90,631 shares are being offered by each of Horst W. Schroeder, Chairman of the Board, and Timothy S. Webster, President and Chief Executive Officer, and 20,000 shares are being offered by Norman F. Abreo. The shares offered by Messrs. Schroeder, Webster and Abreo were recently acquired by them pursuant to exercises of stock options under the Company's 1992 Stock Option Plan. The Morgan Stanley Stockholders, Thompson Holdings and Messrs. Schroeder, Webster and Abreo are sometimes referred to herein as the "Selling Stockholders." Such shares do not include up to 810,000 shares that may sold by the Selling Stockholders pursuant to the exercise of the U.S. Underwriters' over-allotment option. See "Principal and Selling Stockholders." (2) Assumes the U.S. Underwriters' over-allotment option will not be exercised. Does not include 2,002,402 shares of Class A Common Stock issuable upon exercise of stock options granted under the Company's three stock option plans, of which options to purchase 1,445,394 shares are currently outstanding but not exercisable and options to purchase 557,008 shares are currently outstanding and exercisable. See "Management -- Stock Option Plans."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000849745_hosokawa_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000849745_hosokawa_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus, including information under "Risk Factors". Except as otherwise noted, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option and a .899 for 1.0 reverse stock split to be effective July 16, 1998. Unless otherwise indicated, all references to "Hosokawa" or the "Company" refer collectively to Hosokawa Micron International Inc. and its subsidiaries, and all references to "HMC" refer collectively to Hosokawa Micron Corporation and its subsidiaries other than the Company. The Company The Company is a global leader in designing, engineering and manufacturing powder and particle, plastics and confectionery processing equipment and systems and product recovery equipment and systems. Through its extensive array of brandname products and industry expertise, the Company provides custom-designed technological solutions to its customers' specific requirements. The Company's customers include a diverse group of leading multinational industrial, chemical, pharmaceutical, film extrusion and plastics, minerals, metals and food companies. In the fiscal year ended September 30, 1997, approximately 33.0% of the Company's sales were in the United States, approximately 44.2% were in Europe and approximately 22.8% were in the rest of the world. The Company believes that its diverse customer base, geographic markets served and product lines have contributed to consistent sales and operating profit growth over the last three years. The Company's net sales and operating income in the fiscal year ended September 30, 1997 were $360.5 million and $14.6 million, respectively. Hosokawa's goal is to be the primary supplier of highly-engineered, state-of-the-art process technology systems to the industries it serves. In order to achieve this goal, the Company has adopted several business strategies, the principal elements of which are: o Research and Development. Research and development, a significant source of growth for the Company, focuses on product innovation and new product development. The Company has over 35 products currently under development, 10 of which have been introduced in the first six months of the fiscal year ending September 30, 1998. Management believes that research and development will continue to be a significant source of growth for the Company. As a percentage of net sales, research and development expenses for the fiscal years ended September 30, 1995, 1996 and 1997 were 3.3%, 3.4% and 3.4%, respectively. o Acquisitions. In the last 10 fiscal years, the Company has successfully completed seven acquisitions to enhance its position as a supplier of integrated processing and product recovery technology solutions. For the fiscal year ended September 30, 1997, 54.8% of net sales were attributable to acquisitions completed since fiscal year 1988. Hosokawa expects to continue growing through acquisitions. o Penetrating New Markets. Hosokawa believes that there is substantial opportunity to grow by increasing its presence in new markets, including emerging markets. The Company expects to expand into new geographic markets by servicing existing core clients and by targeting new markets where opportunities arise. Between the fiscal year ended September 30, 1994 and the fiscal year ended September 30, 1997, the Company's net sales in new markets increased at a 13.5% compound annual growth rate, from $34.1 million to $49.9 million. o Product Integration. Hosokawa will continue integrating existing products into flexible systems specifically designed to solve a customer's processing needs. For example, the Company was able to design a system to manufacture expanded glass using existing products from a number of the Company's operating subsidiaries. This enabled the Company to secure the order and increase its gross margin on the existing products for such order. The Company believes that this strategy will continue to increase margins. o Product Repositioning. Hosokawa will continue to focus on broadening the applications of its existing products, with minimal modifications, for expansion into new applications in markets that the Company believes may have higher margins. For example, the Company's Bepex Compactor, currently used for compaction and forming powders in the chemical industry, has potential application for the production of medicinal chewing gums for the pharmaceutical industry. o Cost Reductions. Hosokawa will also continue its efforts to reduce costs as a percentage of costs of goods sold in order to increase margins, such as through increased productivity, expanded subcontracting of manufacturing, improved monitoring of worldwide purchasing costs and improved working capital management. The Company designs, engineers, manufactures and installs its equipment and systems through the following four product lines: The powder and particle processing product line provides, among other products, separators, mixers, dryers, agglomerators and compacting equipment and systems used in applications where precise particle size and structure are critical. For the fiscal year ended September 30, 1997, this product line's net sales and percentage contribution to the Company's total net sales was $168.5 million and 46.7%, respectively. The plastics processing product line provides plastic film blowing and extrusion equipment and systems for the manufacture of single- and multi-layer plastic films used primarily in the packaging and bag-making industries. For the fiscal year ended September 30, 1997, this product line's net sales and percentage contribution to the Company's total net sales was $66.6 million and 18.5%, respectively. The confectionery processing product line provides a full line of equipment and systems for the production of hard, soft and chewy candies, granola, health and candy bars and convenience foods and breakfast bars. For the fiscal year ended September 30, 1997, this product line's net sales and percentage contribution to the Company's total net sales was $25.5 million and 7.1%, respectively. The product recovery product line provides product recovery and dust collection equipment and systems and filter media. For the fiscal year ended September 30, 1997, this product lines's net sales and percentage contribution to the Company's total net sales was $99.9 million and 27.7%, respectively. Background The Company is a 98.0%-owned subsidiary of HMC, a publicly-traded Japanese corporation headquartered in Osaka, Japan and listed on the Osaka and Tokyo stock exchanges. HMC was founded in Osaka, Japan in 1916. In 1986, HMC reorganized all of its non-Japanese operations under the umbrella of Hosokawa. The Company was incorporated in Delaware in 1986. See "Business--History of the Company." HMC currently engages in generally the same businesses as the Company except for the plastics and confectionery processing product lines. For the fiscal year ended September 30, 1997, HMC had net sales of $484.5 million, of which $357.1 million were attributable to net sales of the Company (excluding intercompany sales). The Company, in the normal course of business, conducts business with HMC and its affiliated companies other than the Company. For the fiscal year ended September 30, 1997, $3.4 million of net sales of the Company were to HMC and its other affiliated companies and $0.5 million in net sales of HMC and its other affiliated companies were to the Company. The Company also operates as licensor and licensee under various license agreements with HMC. Under such license agreements, the Company and HMC have allocated between them the rights (in certain cases on an exclusive basis and in others on a non-exclusive basis) to manufacture, sell and service certain products in certain geographic regions. See "Certain Transactions." HMC, after completion of the Offering, will own 70.4% of the outstanding Common Stock (67.5%, if the Underwriters' over-allotment option is exercised in full). See "Risk Factors -- Control of the Company." In addition, four members of the Company's Board of Directors are members of HMC's senior management. See "Management--Directors and Executive Officers." The Company's principal executive offices are located at 780 Third Avenue, Suite 3201, New York, New York 10017. Its telephone number is (212) 826-3830. The Offering <TABLE> <S> <C> Common Stock offered by: The Company ........................... 2,670,000 shares The Selling Stockholder ............... 750,000 shares --------- Total ............................... 3,420,000 shares Common Stock offered for sale in: The U.S. Offering ..................... 2,736,000 shares The International Offering ............ 684,000 shares --------- Total ............................... 3,420,000 shares Common Stock to be outstanding after the Offering .................... 12,165,517 shares(1)(2) Use of proceeds by the Company ......... To reduce existing short-term indebtedness, including under promissory notes issued to various banks and indebtedness incurred under a commercial paper program. See "Use of Proceeds." Proposed NYSE symbol ................... "HOS" </TABLE> - ---------------- (1) On April 16, 1998, the Board of Directors authorized and the Selling Stockholder approved a 0.89904874 for 1.0 reverse stock split of the Common Stock, effective July 16, 1998. (2) Excludes 87,657 shares of Common Stock reserved for issuance upon the exercise of outstanding options granted pursuant to the Company's 1997 Stock Option Plan at an exercise price of $9.89 per share and excludes 890,058 shares of Common Stock reserved for issuance under the Company's Stock Incentive Plan. See "Management--Stock Option Plan" and "--Stock Incentive Plan." Summary Consolidated Financial Data The following summary consolidated financial data with respect to the Company's results of operations for the years ended September 30, 1995, 1996 and 1997, has been derived from the audited consolidated financial statements of the Company included elsewhere in this Prospectus. The summary consolidated financial information with respect to the Company's results of operations for the years ended September 30, 1993 and 1994, has been derived from the audited consolidated financial statements of the Company which are not included in this Prospectus. The information for the interim periods is unaudited; however, in the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such information have been included. The interim results of operations may not be indicative of the results for the full year. The summary consolidated financial data presented below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus. <TABLE> <CAPTION> (Dollars in thousands except per share data) ---------------------------------------------------------------------- Year Ended September 30, ---------------------------------------------------------------------- 1993 1994 1995 1996(1) 1997 ------------- ------------- ------------- ------------- -------------- <S> <C> <C> <C> <C> <C> Statement of Operations Data: Net sales ............................... $ 283,311 $ 272,225 $ 339,048 $ 371,710 $ 360,472 Cost of sales ........................... 196,385 185,587 236,904 259,316 247,022 ---------- ----------- ----------- ----------- ------------ Gross profit ............................ 86,926 86,638 102,144 112,394 113,450 Selling, general and administrative expenses ............................... 81,550 69,767 82,989 85,690 85,355 Research and development expenses ....... 8,637 8,489 11,019 12,610 12,152 Amortization of intangibles ............. 2,291 2,171 2,281 2,336 2,228 Restructuring(2) ........................ 20,131 0 (3,239) 0 247 Other (income) .......................... (404) (1,258) (763) (493) (1,110) ---------- ----------- ----------- ----------- ------------ Operating (loss) income ................. (25,279) 7,469 9,857 12,251 14,578 Interest expense, net ................... 5,288 4,292 6,656 6,100 5,573 Other expense (income), net ............. (236) 207 (3,393) 416 756 ---------- ----------- ----------- ----------- ------------ (Loss) income before taxes on income (30,331) 2,970 6,594 5,735 8,249 Provision for income taxes .............. 382 1,669 1,828 2,931 3,996 ---------- ----------- ----------- ----------- ------------ (Loss) income before minority interest (30,713) 1,301 4,766 2,804 4,253 Minority interest ....................... (643) (283) 0 0 0 Net (loss) income before cumulative effect of change in accounting principle .............................. (31,356) 1,018 4,766 2,804 4,253 Cumulative effect at October 1, 1993 of change in accounting principle ...... 0 310 0 0 0 ---------- ----------- ----------- ----------- ------------ Net (loss) income ....................... (31,356) 1,328 4,766 2,804 4,253 Preferred dividends paid ................ 3,252 3,972 3,972 3,972 3,683 ---------- ----------- ----------- ----------- ------------ Net (loss) income available to common stockholders .................... $ (34,608) $ (2,644) $ 794 $ (1,168) $ 570 ========== =========== =========== =========== ============ Dividend declared per common share....... -- $ 0.33 $ 0.33 -- -- (Loss) earnings per common share: Basic (3) ............................... $ (21.56) $ (1.64) $ 0.49 $ (0.73) $ 0.25 Diluted(3) .............................. $ (21.56) $ (1.64) $ 0.49 $ (0.73) $ 0.25 Shares applicable in computing (loss) earnings per common share: Basic(3) ................................ 1,604,877 1,607,346 1,607,346 1,607,346 2,264,694 Diluted(3) .............................. 1,621,290 1,623,759 1,623,759 1,623,759 2,281,107 Pro forma interest expense(4) ........... $ 3,654 Pro forma net income(4) ................. $ 5,939 Pro forma earnings per share(4): Basic ................................... $ 0.46 Diluted ................................. $ 0.46 Adjusted diluted(4) ..................... $ 0.49 Shares used in computing pro forma earnings per common share(4): Basic ................................... 4,934,694 Diluted ................................. 4,951,107 Adjusted diluted(4) ..................... 12,181,930 Other Data: EBITDA(5) ............................... $ (13,728) $ 17,632 $ 20,991 $ 24,494 $ 27,031 Backlog ................................. 94,312 111,883 120,153 130,976 115,495 <CAPTION> (Dollars in thousands except per share data) ----------------------------- Six Months Ended March 31, ----------------------------- 1997 1998 -------------- -------------- <S> <C> <C> Statement of Operations Data: (unaudited) Net sales ............................... $ 183,750 $ 178,856 Cost of sales ........................... 126,945 122,469 ------------- ------------ Gross profit ............................ 56,805 56,387 Selling, general and administrative expenses ............................... 44,337 41,344 Research and development expenses ....... 6,256 6,023 Amortization of intangibles ............. 1,136 1,092 Restructuring(2) ........................ 0 0 Other (income) .......................... (645) (384) ------------- ------------ Operating (loss) income ................. 5,721 8,312 Interest expense, net ................... 2,756 2,686 Other expense (income), net ............. 718 407 ------------- ------------ (Loss) income before taxes on income 2,247 5,219 Provision for income taxes .............. 1,088 1,743 ------------- ------------ (Loss) income before minority interest 1,159 3,476 Minority interest ....................... 0 0 Net (loss) income before cumulative effect of change in accounting principle .............................. 1,159 3,476 Cumulative effect at October 1, 1993 of change in accounting principle ...... 0 0 ------------- ------------ Net (loss) income ....................... 1,159 3,476 Preferred dividends paid ................ 1,986 -- ------------- ------------ Net (loss) income available to common stockholders .................... $ (827) $ 3,476 ============= ============ Dividend declared per common share....... -- $ 0.21 (Loss) earnings per common share: Basic (3) ............................... $ (0.51) $ 0.37 Diluted(3) .............................. $ (0.51) $ 0.37 Shares applicable in computing (loss) earnings per common share: Basic(3) ................................ 1,607,346 9,495,517 Diluted(3) .............................. 1,623,759 9,511,930 Pro forma interest expense(4) ........... $ 1,796 $ 1,644 Pro forma net income(4) ................. $ 2,003 $ 4,402 Pro forma earnings per share(4): Basic ................................... $ 0.00 $ 0.36 Diluted ................................. $ 0.00 $ 0.36 Adjusted diluted(4) ..................... $ 0.16 $ 0.36 Shares used in computing pro forma earnings per common share(4): Basic ................................... 4,277,346 12,165,517 Diluted ................................. 4,293,759 12,181,930 Adjusted diluted(4) ..................... 12,181,930 12,181,930 Other Data: EBITDA(5) ............................... $ 11,926 $ 14,030 Backlog ................................. 130,407 129,019 </TABLE> <TABLE> <CAPTION> (Dollars in thousands except per share data) ------------------------------------------------------------------------------------ Year Ended Six Months Ended September 30, March 31, ------------------------------------------------------------ ----------------------- 1993 1994 1995 1996(1) 1997 1997 1998 ----------- ----------- ----------- ------------ ----------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> <C> (unaudited) Cash provided by (used in) operating activities ............................ 11,204 12,012 (1,882) 13,831 13,057 (6,394) 2,510 Cash used in investing activities ...... (8,976) (3,263) (9,628) (13,104) (9,359) (3,378) (5,053) Cash provided by (used in) financing activities ............................ 1,336 3,781 (7,402) 1,920 (2,136) 7,442 (1,313) </TABLE> <TABLE> <CAPTION> March 31, 1998 ----------------------------- Pro Forma, Actual As Adjusted(6) ------------- --------------- (Dollars in thousands) <S> <C> <C> Balance Sheet Data: Working capital ......................... $ (49,265) $ (15,950) Total assets ............................ 286,820 286,820 Short-term debt including current portion of long-term debt .............. 83,361 50,046 Long-term debt less current portion ..... 15,229 15,229 Stockholders' equity .................... 59,056 92,371 </TABLE> - ---------------- (1) Includes the results of Kreuter GmbH and Ter Braak B.V. from March 1996. (2) Restructuring includes costs recognized by the Company in connection with the liquidation of an Italian subsidiary and the restructuring of its manufacturing operations within the United States. In fiscal 1995, the Company substantially completed its restructuring program. Since the actual costs associated with the restructuring were less than originally provided for in fiscal 1993, such amount was reversed into income in fiscal 1995. In addition, in fiscal 1997 the Company recorded a charge of $843 (the charge was allocated as follows: cost of sales, $90 and restructuring, $753). This charge was partially offset by a reversal of a prior restructuring charge in the amount of $506 as actual restructuring costs were lower than anticipated. (3) The basic (loss) earnings per common share has been computed based upon the weighted average number of shares of Common Stock outstanding. Diluted (loss) earnings per common share has been computed based on weighted average number of shares of Common Stock outstanding, including shares that would have been outstanding assuming the issuance of Common Stock for all potentially dilutive instruments. The shares issuable upon the exercise of outstanding stock options represent the only potentially dilutive common shares. The amount of (loss) earnings and number of shares used in the calculation of basic and diluted (loss) earnings per common share were the same for the loss periods presented. Diluted loss per share does not include any incremental shares that would have been outstanding assuming the exercise of any stock options because those shares would have been anti-dilutive. Due to the exchange in fiscal 1997 of both classes of preferred stock for Common Stock, historical earnings per share are not indicative of future earnings per share. (4) Gives effect to the sale of 2,670,000 shares of Common Stock to be sold by the Company in the Offering at an estimated public offering price of $14.00 per share (the midpoint of the estimated range), and the application of the estimated net proceeds therefrom to repay debt, as if the transaction had occurred at the beginning of each period presented. See "Use of Proceeds." Adjusted diluted assumes the exchange of the preferred stock as of October 1, 1996, and, accordingly, no preferred stock dividends were paid. Adjusted diluted earnings per share were calculated using net income of $5,939 for the year ended September 30, 1997, $2,003 for the six months ended March 31, 1997 and $4,402 for the six months ended March 31, 1998. (5) EBITDA consists of operating (loss) income plus depreciation and amortization of intangibles. Adjusted EBITDA is defined as EBITDA adjusted to exclude the impact of restructuring activities resulting in adjustments in fiscal 1993, 1995 and 1997 of $20,131, $(3,239) and $337, respectively. For fiscal years ended September 30, 1993, 1995 and 1997, Adjusted EBITDA was $6,403, $17,752 and $27,368, respectively. The Company does not consider EBITDA and Adjusted EBITDA, nor should they be considered, as alternative measures of operating results or cash flows from operating activities as determined in accordance with generally accepted accounting principles. Instead, the Company includes them because they are widely used financial measures of the potential capacity of a company to incur and service debt. The presentation of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures used by other companies. (6) Gives effect to the sale of 2,670,000 shares of Common Stock to be sold by the Company in the Offering at an estimated public offering price of $14.00 per share (the midpoint of the estimated range), and the application of the estimated net proceeds therefrom to repay debt, as if the transactions had occurred as of March 31, 1998. See "Use of Proceeds."
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+SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Investors are urged to read this Prospectus in its entirety. As used in this Prospectus, the term "Mercury" means Mercury Acquisition Corporation, the term "Issuer" means Mercury before the Merger and Thermadyne Holdings Corporation after the Merger, the term "Holdings" means Thermadyne Holdings Corporation, the terms "Thermadyne" and the "Company" mean Thermadyne Holdings Corporation, its predecessors and subsidiaries, the term "Thermadyne LLC" means Thermadyne Mfg. LLC, a wholly owned and the principal operating subsidiary of Thermadyne Holdings Corporation, and the term "Thermadyne Capital" means Thermadyne Capital Corp., a wholly owned subsidiary of Thermadyne LLC. THE COMPANY OVERVIEW Thermadyne is a leading global manufacturer of cutting and welding products and accessories. The Company manufactures a broad range of gas (oxy-fuel) and electric arc cutting and welding products that are ultimately sold to end-user customers principally engaged in the aerospace, automotive, construction, metal fabrication, mining, mill and foundry, petroleum and shipbuilding industries. Thermadyne sells its products through a long-established domestic network of approximately 1,100 independent distributors who market Thermadyne products to over 10,000 end-user customers. For the twelve months ended March 31, 1998, the Company's net sales and Adjusted EBITDA (as defined herein), on a pro forma basis, were $548.2 million and $115.5 million, respectively. The Company's core products enjoy leading brand recognition, a reputation for quality and strong market positions. In 1994, following the Company's Restructuring (as defined herein), current management initiated a series of transactions to focus the Company's business exclusively on the cutting and welding industry. As part of this strategy, the Company divested three non-core businesses and acquired six cutting and welding businesses, which collectively generated approximately $169 million in annual revenues at the respective times of acquisition. As a result of this repositioning strategy, along with ongoing new product introductions, an extensive distribution network and market leading brands, the Company has achieved a compound annual growth in net sales and EBITDA of 20.3% and 12.5%, respectively, from 1993 to 1997. According to the United States Department of Commerce, domestic welding industry revenues totaled over $3.6 billion in 1997. The domestic industry has grown at an annual rate of 5.9% since 1989 and is expected to grow 4.2% in 1998. Global welding industry revenues are estimated to total over $10.0 billion, and management believes that growth in the international market has been faster than the domestic market, driven, in large part, by infrastructure spending in developing markets. International markets, including Australia and Italy, represented approximately 42% of the Company's net sales in 1997, up from approximately 20% of net sales in 1994. Although the industry has begun to experience global consolidation, it continues to be very fragmented. COMPETITIVE STRENGTHS Thermadyne possesses a number of competitive strengths that have allowed it to develop and maintain a strong position within the cutting and welding industry, including the following: Market Leading Brands. Management believes that the strength and longevity of the numerous Thermadyne brand names create a significant competitive advantage and position Thermadyne as one of the leaders in the cutting and welding industry. Each of the Company's major divisions maintains industry-leading brand names with significant market shares. Management believes that VICTOR(R), founded in 1913, is the leading brand name in domestic gas-operated cutting and welding torches and equipment; TWECO(R), founded in 1936, is the leading domestic manufacturer of metal inert gas ("MIG") and manual welding torches; ARCAIR(R) is the leading domestic brand name of tungsten inert gas ("TIG") torch and accessory products; THERMAL (Continued from Cover Page) Each broker-dealer that receives New Debentures for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Debentures. The letter of transmittal accompanying this Prospectus (the "Letter of Transmittal") states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Debentures received in exchange for Old Debentures where such Old Debentures were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company has agreed, for a period of 90 days after the Expiration Date, to make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." No public market existed for the Old Debentures before the Exchange Offer. The Company currently does not intend to list the New Debentures on any securities exchange or to seek approval for quotation through any automated quotation system, and no active public market for the New Debentures is currently anticipated. The Company will pay all the expenses incident to the Exchange Offer. The Exchange Offer is not conditioned upon any minimum principal amount of Old Debentures being tendered for exchange pursuant to the Exchange Offer. DYNAMICS(R), founded in 1957, is a leading domestic manufacturer of manual plasma cutting products; and CIGWELD(R), founded in 1922, is the leading brand name in the Australia/New Zealand cutting and welding products market. Each of the manufacturing operations associated with these brands is ISO-9000 series certified. Diverse and Stable Customer Base. The Company's customer base includes cutting and welding product distributors as well as end-user customers principally engaged in the aerospace, automotive, construction, metal fabrication, mining, mill and foundry, petroleum and ship building industries. No one customer accounted for more than 9% of the Company's 1997 net sales. Further, the Company's top 20 customers have been associated with the Company for an average of over 10 years. Established, Effective Distribution Channels. The Company believes that its strong, established and long-standing relationships with over 1,100 independent cutting and welding products distributors in the United States provide a significant competitive advantage and support the Company's strong market position. Thermadyne's domestic distributor relationships are maintained by 11 area business managers who oversee the Company's relationships with large distributors and by separate product-specific sales forces for each of Thermadyne's business units. Management believes that this unique structure, which combines relationship managers with technically trained product specialists, will enable the Company to more effectively maintain and utilize its distributor networks. Management also believes that this established distribution network enables the Company to achieve market penetration when introducing newly developed or acquired products. Proven and Committed Senior Management Team. Thermadyne's management team has strategically repositioned the Company over the past four years to focus exclusively in its core cutting and welding markets. This repositioning was accomplished through divestitures of three non-core assets and acquisitions of six strategic businesses or product lines. In addition, management has initiated the development and introduction of significant new products and product lines. As a result of management's efforts, the Company achieved a 20.3% growth rate in net sales from 1993 to 1997. In connection with the Merger each member of the senior management team signed an employment contract with the Company. Additionally, the Company adopted an incentive plan to tie each member of senior management's compensation to the Company's financial performance. See "Executive Compensation." BUSINESS STRATEGY Thermadyne has developed a business strategy designed to enhance its strong market positions and continue to improve its growth and profitability. The primary elements of the Company's business strategy are as follows: Continue New Product Development and Enhancement. The foundation for Thermadyne's strong market positions and leading brand names is the development and introduction of new products and enhancements of existing products. The Company believes it is at the forefront of cutting and welding technology with a proven track-record of continual new product introductions and existing product enhancements that have resulted in 262 issued or pending United States and foreign patents. New products and product enhancements are designed to add value for customers, including enhanced safety features, improved productivity and ergonomics and an improved welding environment. Examples of recent new product introductions include robotic welding systems and accessories, high-purity instrumentation, automated plasma cutting and safety products as well as underwater cutting electrodes. During 1997, the Company introduced over 135 new products or product enhancements, and the Company expects to continue this effort in the future. Expand Strategic Acquisitions. The Company has completed six acquisitions since 1994, which collectively generated approximately $169 million in annual revenues at the respective times of acquisition, including over $135 million of revenues in Australia and Italy. The Company believes that numerous acquisition candidates exist globally, and the Company intends to continue to seek new acquisition opportunities in its cutting and welding business. Thermadyne intends to continue its focused acquisition strategy that includes the following principal elements: (i) entering and expanding in geographic areas where the Company does not currently have a significant presence through acquisitions of local cutting and welding businesses and (ii) expanding in geographic areas where the Company currently maintains a strong presence through the acquisition of complementary product lines. Leverage Existing Distribution Network. The Company intends to leverage its existing distribution network through the acquisition or introduction of new products and product enhancements. Management believes that when the Company acquires a local presence in a new geographic area, it can utilize the acquired distribution network to sell existing Thermadyne brands into that local market. In addition, the Company believes that significant opportunities exist to purchase complementary product lines and expand its business by selling the new product lines through Thermadyne's extensive distribution network. For example, through recent acquisitions the Company has expanded its offering of filler metals, conventional arc welding power supplies, safety equipment and engine-driven welding power sources and began marketing such products through its established distribution network. The Company intends to continue this strategy of penetrating new welding product markets by leveraging its extensive distribution network in conjunction with its new product development and focused acquisition strategies. Broaden International Presence. Thermadyne has maintained an international presence for over 30 years and continues to broaden its presence throughout the world. International sales accounted for approximately 42% of net sales in 1997 as compared to approximately 20% in 1994. The Company has established a dedicated international market presence and maintains the leading position in Australia/New Zealand and significant and growing positions in Europe, Asia and Latin America. Management intends to continue the expansion of its strong domestic brand names into the international market and to continue to penetrate the growing Asian and Latin American cutting and welding markets. Continue Cost Reduction Efforts. Thermadyne strives to continually improve manufacturing efficiencies and reduce unit costs. In December 1997, the Company implemented a cost reduction program that includes the following principal elements: (i) vendor rationalization and consolidation; (ii) manufacturing process and product improvements and product design changes; (iii) personnel rationalization and expense reductions; (iv) advertising and trade show expense reductions; (v) aircraft, charter and other travel expense reductions; and (vi) elimination of the annual sales meeting. These cost reduction initiatives are expected to generate approximately $10 million in savings on an annualized basis. In addition, the Company has initiated the implementation of a new global information system that is designed to allow the Company to further integrate administrative functions and improve information flow across business unit lines. Continue Dedicated Customer Service. The Company believes that effective and proactive customer service has enabled the Company to build and maintain its leading market positions and strong distributor relationships. Management plans to continue this strategy of enhancing distributor and end-user relationships through continuous customer service improvements. Each of Thermadyne's divisions maintains a dedicated, well trained, technically oriented and product-specific sales and customer service team. Management believes that the dedicated product teams provide Thermadyne with a significant competitive advantage. In addition, to further improve customer service, the Company has implemented a national accounts team of 11 area business managers to support the dedicated product sales and service teams and further support sales to the Company's key distributors. THE MERGER AND MERGER FINANCING On May 22, 1998, Holdings consummated the merger of Mercury Acquisition Corporation ("Mercury"), a corporation organized by DLJ Merchant Banking Partners II, L.P. ("DLJMB") and affiliated funds and entities (the "DLJMB Funds"), with and into Holdings, with Holdings continuing as the surviving corporation (the "Merger"). In order to fund the payment of the cash portion of the Merger Consideration (as defined herein), the Option Cash Proceeds (as defined herein) and the ESPP Cash Proceeds (as defined herein), to refinance and/or retire outstanding indebtedness of the Company, and to pay expenses incurred in connection with the Merger, Thermadyne LLC and Thermadyne Capital issued $207 million principal amount of 9 7/8% Senior Subordinated Notes due 2008 (the "Senior Subordinated Notes") and Thermadyne LLC entered into a syndicated senior secured loan facility providing for term loan borrowings in the aggregate principal amount of approximately $330 million and revolving loan borrowings of $100 million (the "New Credit Facility"). In connection with the Merger, Thermadyne LLC borrowed all term loans available under the New Credit Facility plus approximately $25 million of revolving loans. The remaining revolving loans will be available to fund the working capital requirements of Thermadyne LLC. The proceeds of such financings were distributed to Holdings in the form of a dividend. See "Description of New Credit Facility," "The Merger and Merger Financing" and "Certain Relationships and Related Transactions." Mercury issued approximately $94.6 million aggregate proceeds of the Debentures. In connection with the Merger, Holdings succeeded to the obligations of Mercury with respect to the Debentures. The DLJMB Funds also purchased 2,608,696 shares of common stock of Mercury ("Mercury Common Stock"), 2,000,000 shares of senior exchangeable preferred stock of Mercury ("Mercury Preferred Stock") and warrants to purchase 353,428 shares of Mercury Common Stock at an exercise price of $0.01 per share (the "DLJMB Warrants") for approximately $140 million (the "DLJMB Equity Investment"). As a result of the Merger, the proceeds of such purchases became an asset of Holdings, each share of Mercury Common Stock became a share of Holdings ("Holdings Common Stock"), each share of Mercury Preferred Stock became a share of senior exchangeable preferred stock of Holdings ("Holdings Preferred Stock") and each DLJMB Warrant to acquire Mercury Common Stock became exercisable for an equal number of shares of Holdings Common Stock. In addition, in connection with the Merger, certain members of senior management purchased 143,192 shares of Holdings Common Stock for approximately $4.9 million (the "Management Share Purchase"), of which approximately $3.6 million was provided through non-recourse loans from Holdings (the "Management Loans"). The equity and debt financings referred to above are collectively referred to herein as the "Merger Financing." THE EXCHANGE OFFER The Exchange Offer......... $1,000 principal amount at maturity of New Debentures in exchange for each $1,000 principal amount at maturity of Old Debentures. The Old Debentures were sold on May 22, 1998, in a private placement to Donaldson, Lufkin & Jenrette Securities Corporation ("DLJSC" or the "Initial Purchaser"), which immediately resold the Old Debentures pursuant to Rule 144A promulgated under the Securities Act (the "Original Offering"). As of the date hereof, Old Debentures representing $174 million aggregate principal amount at maturity are outstanding. The terms of the New Debentures and the Old Debentures are substantially identical in all material respects, except that the New Debentures will be freely transferable by the holders thereof except as otherwise provided herein. See "Description of New Debentures." Based on an interpretation by the Commission's staff set forth in no-action letters issued to third parties unrelated to the Issuer, the Issuer believes that New Debentures issued pursuant to the Exchange Offer in exchange for Old Debentures may be offered for resale, sold and otherwise transferred by any person receiving the New Debentures, whether or not that person is the registered holder (other than any such holder or such other person that is an "affiliate" of the Issuer within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that (i) the New Debentures are acquired in the ordinary course of business of that holder or such other person, (ii) neither the holder nor such other person is engaging in or intends to engage in a distribution of the New Debentures and (iii) neither the holder nor such other person has an arrangement or understanding with any person to participate in the distribution of the New Debentures. See "The Exchange Offer -- Purpose and Effect." Each broker-dealer that receives New Debentures for its own account in exchange for Old Debentures, where those Old Debentures were acquired by the broker-dealer as a result of its market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of these New Debentures. See "Plan of Distribution." Registration Rights Agreement................ In connection with the Original Offering, the Issuer entered into a Registration Rights Agreement with the Initial Purchaser (the "Registration Rights Agreement") requiring the Issuer to make the Exchange Offer. See "The Exchange Offer -- Purpose and Effect." Expiration Date............ The Exchange Offer will expire at 5:00 p.m., New York City time, September 3, 1998, or such later date and time to which it is extended by the Issuer (the "Expiration Date"). Withdrawal................. The tender of the Old Debentures pursuant to the Exchange Offer may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Any Old Debentures not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Exchange Offer. Interest on the New Debentures and Old Debentures............... Interest on each New Debenture will accrue from the date of issuance of the Old Debenture for which the New Debenture is exchanged or from the date of the last periodic payment of interest on such Old Debenture, whichever is later. No additional interest will be paid on Old Debentures tendered and accepted for exchange. Conditions to the Exchange Offer...................... The Exchange Offer is subject to certain customary conditions, certain of which may be waived by the Issuer. See "The Exchange Offer -- Conditions to the Exchange Offer." Procedures for Tendering Old Debentures............... Each holder of Old Debentures wishing to accept the Exchange Offer must complete, sign and date the Letter of Transmittal, or a copy thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver the Letter of Transmittal, or the copy, together with the Old Debentures and any other required documentation, to the Exchange Agent (as defined herein) at the address set forth herein. Persons holding the Old Debentures through the Depository Trust Company ("DTC") and wishing to accept the Exchange Offer must do so pursuant to the DTC's Automated Tender Offer Program, by which each tendering participant will agree to be bound by the Letter of Transmittal. By executing or agreeing to be bound by the Letter of Transmittal, each holder will represent to the Issuer that, among other things, (i) the New Debentures acquired pursuant to the Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Debentures, whether or not such person is the registered holder of the Old Debentures, (ii) neither the holder nor any such other person is engaging in or intends to engage in a distribution of such New Debentures, (iii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Debentures, and (iv) neither the holder nor any such other person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of the Issuer. Pursuant to the Registration Rights Agreement, the Issuer is required to file a "shelf" registration statement for a continuous offering pursuant to Rule 415 under the Securities Act in respect of the Old Debentures if (a) it is prohibited from consummating the Exchange Offer because the Exchange Offer is not permitted by applicable law of Commission policy or (b) any holder of Transfer Restricted Securities (as defined) notifies the Issuer in writing prior to the 20th business day following consummation of the Exchange Offer that (i) based on an opinion of counsel, it is prohibited by law or Commission policy from participating in the Exchange Offer or (ii) it is a broker-dealer and owns Debentures acquired directly from the Issuer. Acceptance of Old Debentures and Delivery of New Debentures........... The Issuer will accept for exchange any and all Old Debentures which are properly tendered (and not withdrawn) in the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Debentures issued pursuant to the Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offer -- Terms of the Exchange Offer." Exchange Agent............. IBJ Schroder bank & Trust Company, is serving as Exchange Agent (the "Exchange Agent") in connection with the Exchange Offer. Federal Income Tax Considerations........... The exchange pursuant to the Exchange Offer should not be a taxable event for federal income tax purposes. See "Certain United States Federal Income Tax Considerations." Effect of Not Tendering.... Old Debentures that are not tendered or that are improperly tendered and not accepted will, following the completion of the Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. The Issuer will have no further obligation to provide for the registration under the Securities Act of such Old Debentures. THE NEW DEBENTURES Securities Offered......... $174 million aggregate principal amount at maturity of 12 1/2% Senior Discount Debentures due 2008. Maturity Date.............. June 1, 2008. Yield and Interest......... 12 1/2% (computed on a semi-annual bond equivalent basis) calculated from May 22, 1998. The New Debentures will accrete at a rate of 12 1/2%, compounded semi-annually, to an aggregate principal amount at maturity of $174 million on June 1, 2003. Cash interest will not accrue on the New Debentures prior to June 1, 2003. Commencing on June 1, 2003, cash interest on the New Debentures will accrue and be payable, at a rate of 12 1/2% per annum, semi-annually in arrears on each June 1 and December 1, commencing December 1, 2003. Optional Redemption........ The New Debentures will be subject to redemption at any time on or after June 1, 2003 at the option of the Issuer, in whole or in part, in cash at the redemption prices set forth herein, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the applicable redemption date. Notwithstanding the foregoing, on or prior to June 1, 2001, the Issuer may redeem up to 100% of the aggregate principal amount at maturity of Debentures ever issued under the Indenture in cash at a redemption price of 112.50% of the Accreted Value thereof, plus Liquidated Damages, if any, thereon to the redemption date, with the net cash proceeds of one or more Public Equity Offerings; provided that, in the event that the Issuer redeems less than 100% of the then outstanding Debentures, at least 60% of the aggregate principal amount at maturity of Debentures ever issued under the Indenture remains outstanding immediately after the occurrence of any such redemption. In addition, at any time prior to June 1, 2003, the Issuer may, at its option upon the occurrence of a Change of Control, redeem the Debentures, in whole but not in part, in cash at a redemption price equal to (i) the present value of the sum of all the remaining premium and principal payments that would become due on the Debentures as if the Debentures were to remain outstanding and be redeemed on June 1, 2003, computed using a discount rate equal to the Treasury Rate plus 50 basis points, plus (ii) Liquidated Damages, if any, to the date of redemption. See "Description of New Debentures -- Optional Redemption." Change of Control.......... Upon the occurrence of a Change of Control, each Holder of the New Debentures will have the right to require the Issuer to repurchase all or any part of such Holder's New Debentures at an offer price in cash equal to 101% of the Accreted Value thereof, in the case of any such purchase prior to June 1, 2003, or 101% of the aggregate principal amount at maturity thereof, in the case of any such purchase on or after June 1, 2003, in each case, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the date of repurchase. No assurance can be given that the Issuer will have sufficient resources to satisfy its repurchase obligations with respect to the New Debentures following a Change of Control. See "Risk Factors -- Possible Inability to Repurchase New Debentures upon Change of Control" and "Description of New Debentures -- Repurchase at the Option of Holders -- Change of Control." Ranking.................... The New Debentures will be senior obligations of the Issuer. The New Debentures will rank pari passu in right of payment with all future senior indebtedness of the Issuer and will rank senior in right of payment to all future indebtedness of the Issuer that is subordinated to the New Debentures. The New Debentures will be effectively subordinated to all liabilities of the Issuer's subsidiaries. On a pro forma basis, after giving effect to the Merger, including the Merger Financing and the application of the proceeds therefrom, as of March 31, 1998, the Issuer would have had outstanding approximately $682.0 million of Indebtedness and the Issuer's subsidiaries would have had approximately $733.2 million of liabilities outstanding, including Indebtedness under the Senior Subordinated Notes and the New Credit Facility and including trade payables. Original Issue Discount.... The Old Debentures were issued at an original issue discount for United States federal income tax purposes. Thus, although cash interest will not accrue on the Debentures prior to June 1, 2003, original issue discount (i.e., the difference between the sum of all principal and interest payable on the Debentures and the issue price of the Debentures) will accrue from the issue date of the Debentures and will be included as interest income periodically (including for periods ending prior to June 1, 2003) in a holder's gross income for United States federal income tax purposes in advance of receipt of the cash payments to which the income is attributable. See "Certain United States Federal Income Tax Considerations." Certain Covenants.......... The indenture pursuant to which the New Debentures will be issued (the "Indenture") contains certain covenants that, among other things, limit the ability of the Issuer and its Restricted Subsidiaries (as defined therein) to: incur indebtedness and issue preferred stock, repurchase Capital Stock (as defined herein) and certain Indebtedness, engage in transactions with affiliates, engage in sale and leaseback transactions, incur or suffer to exist certain liens, pay dividends or other distributions, make certain investments, sell assets and engage in certain mergers and consolidations. Use of Proceeds............ There will be no cash proceeds to the Issuer from the exchange pursuant to the Exchange Offer. The net proceeds from the Original Offering, together with the initial borrowings under the New Credit Facility, the DLJMB Equity Investment and the issuance of the Senior Subordinated Notes, were used to fund payment of the cash portion of the Merger Consideration, the Option Cash Proceeds and the ESPP Cash Proceeds, to refinance outstanding indebtedness of Thermadyne LLC and to pay the expenses incurred in connection with the Merger. See "Use of Proceeds."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1998/CIK0000851368_cost-u_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000851368_cost-u_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1916913c16c9321bbb48ced7d31ae9c6c9a1fa15
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1998/CIK0000851368_cost-u_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and Consolidated Financial Statements, including the Notes thereto, appearing elsewhere in this Prospectus. Prospective investors should carefully consider the information set forth under "Risk Factors." Unless otherwise indicated, the information contained in this Prospectus assumes that the Underwriters' over-allotment option is not exercised. THE COMPANY Cost-U-Less operates mid-sized warehouse club-style stores in U.S. territory island markets throughout the Pacific and Caribbean. The Company's seven island stores are located in Hawaii, the U.S. Virgin Islands, Guam and American Samoa. The Company has increased its net sales from $13.5 million in 1991 to $125 million in 1997, thereby achieving a compound annual growth rate of 45%. The Company believes it has developed a proven store concept, as well as effective operating methods and systems, which together provide it certain competitive advantages in pursuing the significant opportunities represented by the many regions that satisfy the Company's criteria for target island markets. By entering new island markets in the Pacific and Caribbean, the Company plans to open at least 26 additional stores within the next four years, including one in each of the last two quarters of fiscal 1998. The Company opened its first retail warehouse store in 1989. In 1992, the Company initiated its expansion by opening stores in relatively remote island locations. After experiencing success with its mid-sized store concept, the Company began experimenting in late 1992 with similar stores in various mainland markets while continuing to open stores in island markets. Facing increasing competition from larger discount retailers and warehouse clubs in its mainland markets while continuing to succeed against similar competitors in its island stores, management decided in 1995 to return its focus to its core island markets. In 1996, while further refining its island store concept, enhancing inventory control and management information systems, adjusting its island store product mix to include higher-margin items and local merchandise, and developing a prototype island store design, the Company continued the process of closing nearly all its mainland stores. The Company believes it is now well positioned to pursue an aggressive growth strategy focused on accelerating the roll-out of its island stores, starting with two new stores in Fiji, one of which opened in July 1998. The warehouse club industry has experienced strong growth in recent years and consumer acceptance of warehouse club stores has been quite high. According to Warehouse Club Focus, an industry research group, the U.S. warehouse club industry achieved compound annual growth rates of 8.4% in retail market share and 13.4% in industry sales from 1988 to 1997, and reached approximately $41.2 billion in total annual sales in 1997. The Company's growth rate has varied from that of the warehouse club industry and may continue to do so in the future. From 1990 to 1997, the Company's sales grew at a compound annual growth rate of 42%, although sales declined in 1996 and 1997. As the warehouse club industry has grown, retailing methods pioneered by warehouse club operators have been well tested and validated. These methods include emphasizing low overhead by using no-frills shopping environments and volume purchasing, as well as achieving operating efficiencies through limited handling of merchandise and floor-to-ceiling racked shelving. Although the Company employs many of the retailing methods associated with the larger companies that principally make up the warehouse club industry, including Costco Wholesale Corporation, BJ's Wholesale Club, Inc. and Sam's Club (a division of Wal-Mart), the Company operates fewer stores, locates its stores in smaller geographic areas with less concentrated population centers and relies to a greater degree on long-haul water transportation than do such companies. The Company believes, however, that these methods, in combination with its "no membership fee" policy, smaller store size and its localized merchandising strategy, make its warehouse club-style stores strongly appealing to island market consumers, and that additional factors unique to island markets, such as handling significant geographical or logistical challenges and dealing with various governmental or cultural issues, together lead to certain competitive advantages for the Company given its island operations expertise. In addition, the Company believes that traditional large-format warehouse clubs and discount retailers are generally unwilling to adapt their multiunit, continent-based operations to meet the unique characteristics and small populations of island markets. The Company estimates that there are at least 30 Pacific and Caribbean islands that meet or exceed its minimum requirements of 40,000 population and $125 million Gross Domestic Product, and believes these islands represent as many as 90 potential locations for its island concept stores. To achieve its anticipated growth, the Company plans to employ a multi- element business strategy designed to leverage the Company's core competencies in opening and operating stores in distant and diverse locations, while capitalizing on the inherent features of island markets. Through its past experience with island operations, the Company has (i) developed a cost- effective store prototype designed to endure severe island weather conditions, (ii) negotiated competitive transportation rates, and (iii) adopted innovative shipping techniques, including use of both cross-dock depots (whereby product is loaded directly from transportation vehicles to Company containers and shipped to Company stores with minimal storage time) and independent distribution facilities. In addition, the Company utilizes modern systems and merchandising techniques often unused by its local competitors, including sophisticated computerized systems, efficient shelving and state-of-the-art refrigeration and air-conditioning equipment, to provide a shopping environment the Company believes is superior to that of its local competition. Moreover, benefiting from its retail operating efficiencies, "no membership fee" policy, and access to volume purchasing discounts, the Company believes it is able to offer attractive consumer value while maintaining strong margins. The Company also sources a meaningful portion of its product selection from local island vendors while deriving the benefits of centralized purchasing. Further, the Company manages overhead through the use of efficient facilities, controlled operating expenditures and labor that the Company believes is less costly than that generally available in mainland markets. Finally, the Company intends to develop a strong relationship with CDC which, in conjunction with the Kula Fund, has strong ties to, and knowledge of, the Pacific Islands and Caribbean regions and a presence in most areas where the Company either operates or plans to operate. In addition to its island-operations expertise, the Company believes that its past success in island markets has also been attributable to a "first-mover" advantage. By opening stores in markets that other warehouse clubs and discount retailers have not yet entered, the Company believes that it will be better able to achieve significant market share and develop name recognition and customer loyalty, thus further discouraging entry by large-format discount competition. Accordingly, the Company's future growth is focused on expanding into relatively untapped markets. Concurrent with the sale of shares offered hereby, the Company will sell an additional 160,000 shares of Common Stock, at the per share Price to Public set forth on the cover page of this Prospectus, in a placement to Kula Fund, an affiliate of CDC, in reliance on Regulation S under the Securities Act of 1933, as amended (the "Concurrent Reg. S Placement"). To further develop its relationship with CDC, the Company is also issuing warrants to Kula Fund and intends to appoint a representative of CDC to the Board of Directors following completion of the Offering. See "Business--Business Strategy," "Certain Transactions" and "Underwriting." The Company's principal executive offices are located at 12410 S.E. 32nd Street, Bellevue, Washington 98005, and its telephone number is (425) 644-4241. The Company was incorporated in the state of Hawaii in April 1989 and reincorporated in Washington in January 1994. References to Cost-U-Less and the Company in this Prospectus include the Company, which operates the Hawaii and California stores and its distribution facilities, as well as operating subsidiaries in Guam, the U.S. Virgin Islands, American Samoa, Nevada, the Republic of Fiji, New Zealand, Netherlands Antilles, and the Republic of Vanuatu. The Company expects to form a separate corporation in each market for tax purposes and to obtain any collateral benefits from having its business entity locally organized.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000853002_analytical_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000853002_analytical_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d231adffeb5ac030a2209266a205150f2a7e26a0
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1998/CIK0000853002_analytical_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. As used in this Prospectus, unless the context requires otherwise, all references to the "Company" or "Analytical Graphics" shall mean Analytical Graphics, Inc. and its wholly-owned subsidiaries. Unless otherwise indicated, all information in this Prospectus (i) assumes no exercise of the Underwriters' over-allotment option; (ii) has been adjusted to give effect to a five-for-one stock split of the Common Stock effected on June 12, 1996 and a two and one quarter-for-one stock split of the Common Stock to be effected on August 6, 1998; and (iii) assumes the conversion of all outstanding shares of Series A Preferred Stock, par value $.01 per share (the "Series A Preferred Stock"), into an aggregate of 2,888,472 shares of Common Stock upon the consummation of this offering. See "Description of Capital Stock" and "Underwriting." THE COMPANY Analytical Graphics is the leading provider of commercial off-the-shelf ("COTS") software solutions for the space industry. The space industry includes a growing number of commercial satellite projects for telecommunications, data communications, navigation and imaging systems as well as government-sponsored space missions and defense programs. The Company's broad suite of software products support space systems throughout their life cycle, from concept and design to launch and on-orbit operation. The Company's base product, Satellite Tool Kit ("STK"), and related suite of 23 application modules enable space industry professionals to develop, simulate, track, operate and use satellites more effectively, resulting in enhanced productivity and functionality of satellite missions. The Company's customers utilize the Company's software solutions to perform mission-critical activities and consist of approximately 450 distinct organizations within government agencies, government contractors and commercial space developers. The government agencies and government contractors include NASA, the US Air Force, The Boeing Company, Hughes Electronics Corp., Lockheed Martin Corp. and TRW, Inc., and the commercial space developers include Globalstar L.P., Iridium, LLC, Orbital Sciences Corp., Space Imaging, Inc. and Teledesic, LLC. The space industry is a large and rapidly growing market with industry sources estimating revenues to increase from approximately $77 billion in 1996 to approximately $120 billion by the year 2000. The space industry is experiencing rapid growth due to increasing demand for worldwide telecommunications and Internet services, deregulation and privatization of the telecommunications and satellite industries, technological advances and expanding uses for satellites. Although government funded projects have dominated the space industry, advancements in space technology coupled with the sophistication, power and capabilities of modern information systems are fueling the growth of a commercially driven, consumer-oriented global space industry. Traditionally, space industry professionals have relied on time- consuming and expensive customized solutions developed in-house or by third party contractors to design, launch and operate satellite systems. Time constraints, cost-efficiency pressures and the increasing number and complexity of space systems have created a growing demand for COTS software solutions, which offer higher functionality, greater flexibility and shorter implementation times at a lower cost. As the leading provider of COTS solutions for the space industry, the Company is well positioned to capitalize on the growing need for sophisticated, mission-critical software solutions. The Company's objective is to be the leading global provider of software solutions to the space industry and to establish its software as the industry standard solution for space-related applications. The Company plans to achieve this objective by increasing market penetration and its customer base, continuing to develop and offer technologically advanced solutions, expanding its global presence, providing customers with comprehensive software solutions and pursuing strategic partnerships and acquisitions. To rapidly expand the use of its software, the Company offers its base product, STK, free of charge, while deriving its revenues from its suite of application modules. The Company believes that the wide dissemination of its base product will result in a rapid increase in the licensing and sales of its other application modules. To establish STK and its related suite of modules as the mission-wide software solution, the Company uses a focused sales and marketing program directed at a broad range of users across all space industry segments and conducts aggressive direct sales and marketing initiatives to further penetrate organizations currently using its products. The Company's revenues increased from $2.7 million for the year ending December 31, 1995 to $12.9 million for the year ending December 31, 1997, representing a compound annual growth rate of approximately 119%. From August 1, 1997 through June 30, 1998, the number of registered STK seats increased from approximately 1,300 to 14,400. Of the new registered users of STK, approximately 350 have licensed one or more of the Company's application modules. The Company was incorporated in the Commonwealth of Pennsylvania in January 1989. The Company's principal executive offices are located at 325 Technology Drive, Malvern, Pennsylvania 19355. Its telephone number is (610) 578-1000. THE OFFERING Common Stock offered by the Company... shares Common Stock offered by the Selling shares (1) Shareholders.......................... Common Stock to be outstanding after shares (2)(3) the offering.......................... Use of proceeds....................... For repayment of bank indebtedness, payment of cumulative dividends attributable to preferred stock, expansion of sales and marketing activities, research and development activities, working capital and general corporate purposes, including potential strategic acquisitions. Proposed Nasdaq National Market AGIX Symbol................................ - -------- (1) Includes an aggregate of shares of Common Stock to be issued upon the exercise by certain of the Selling Shareholders of currently exercisable stock options and warrants immediately prior to the consummation of this offering and to be sold by such shareholders in this offering. See "Principal and Selling Shareholders" and "Description of Capital Stock." (2) Includes an aggregate of shares of Common Stock to be issued upon the exercise by certain securityholders of a portion of the currently exercisable stock options and warrants immediately prior to the consummation of this offering (including the shares to be sold by certain Selling Shareholders as set forth in Note 1 above). The Company will receive an aggregate of approximately $ in proceeds upon the exercise of such options and warrants. See "Description of Capital Stock." (3) Excludes (i) 1,987,441 shares of Common Stock issuable upon the exercise of outstanding stock options as of June 30, 1998 with a weighted average exercise price of $1.39 per share, under the Company's 1995 Stock Plan, the Incentive Stock Option Plan and the Non-Qualified Stock Option Plan, (ii) 500,000 shares of Common Stock reserved for issuance upon the exercise of options available for grant under the 1998 Stock Plan, and (iii) 40,500 shares of Common Stock issuable upon the exercise of outstanding warrants with an exercise price of $6.67 per share. See "Risk Factors--Shares Eligible for Future Sale and Potential Adverse Effect on Market Price," "Management--Stock Option Plans," and "Description of Capital Stock-- Warrants." SUMMARY FINANCIAL DATA (in thousands, except per share data) <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------------- ----------------- 1993 1994 1995 1996 1997 1997 1998 ------ ------ ------ ------ ------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenues........ $1,107 $1,619 $2,736 $6,962 $12,862 $ 6,529 $ 6,506 Gross profit.......... 764 1,311 2,241 5,847 10,998 5,765 5,539 Operating income (loss)............... (14) 117 (969) 33 (1,368) 514 (2,456) Net income (loss)..... (12) 38 (926) 25 (1,416) 526 (2,592) Pro forma net loss per basic and diluted common share (1): Loss per share...... $(0.22) $(0.39) Weighted average shares............. 6,849 6,949 </TABLE> <TABLE> <CAPTION> AT JUNE 30, 1998 -------------------------- PRO FORMA AS AT DECEMBER 31, 1997 ACTUAL ADJUSTED(1)(2)(3) -------------------- ------- ----------------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents.... $ 854 $ 1,113 Working capital (deficien- cy)......................... (895) (940) Total assets................. 6,663 7,275 Total debt (including current portion) (4)................ 586 4,035 Series A preferred stock..... 2,662 2,713 Total stockholders' equity (deficit)................... (1,889) (4,178) </TABLE> - -------- (1) Gives pro forma effect to the automatic conversion of all issued and outstanding shares of Series A Preferred Stock (as defined) into 2,888,472 shares of Common Stock. See "Description of Capital Stock." (2) Gives pro forma effect to the issuance of shares of Common Stock upon the exercise by certain of the Selling Shareholders of a portion of the presently exercisable options and warrants and the receipt by the Company of the aggregate exercise price therefor. See "Description of Capital Stock." (3) Adjusted to give effect to the sale of shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $ per share, after deducting the estimated underwriting discounts and commissions and offering expenses payable by the Company and the anticipated application of the net proceeds therefrom. See "Use of Proceeds" and "Capitalization." (4) Excludes $2.3 million borrowed by the Company under the Revolving Credit Facility (as defined) subsequent to June 30, 1998. Fourth Quarter Extraordinary Charge Upon the consummation of this offering, the Company will repay all of the outstanding amounts under its Term Loan (as defined) and Revolving Credit Facility. As of July 31, 1998, the Company had $2.3 million and $4.0 million of outstanding borrowings under the Revolving Credit Facility and Term Loan, respectively. As a result, the Company will incur an extraordinary, one-time, non-cash charge of approximately $355,000 expected to be recognized in the fourth quarter of 1998 for the write-off of associated deferred financing costs. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations. "
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1998/CIK0000861184_wahlco_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000861184_wahlco_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..1d0161b846a77f4958f730ae4462b6405e7cf499
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1998/CIK0000861184_wahlco_prospectus_summary.txt
@@ -0,0 +1 @@
+SUMMARY The following summary is qualified in its entirety by the more detailed information, and the financial statements and notes thereto incorporated by reference, in this Prospectus. each investor should read this entire Prospectus before purchasing rights or subscribing for the shares of common stock offered hereby. THE COMPANY The Company designs, manufactures, and sells air pollution control equipment and related products and services, combined cycle gas turbine products and metallic and fabric bellows to electric utilities, independent power producers, cogeneration plants, and industrial manufacturers worldwide. The Company also provides mechanical plant installation services and rents associated equipment to users in the U.K. The Company operates through several subsidiaries which focus on specific geographical regions or products. These entities, located primarily in the United States and the U.K., are coordinated through common corporate management. The Company's principal executive offices are located at 3600 West Segerstrom Avenue, Santa Ana, California 92704, and its telephone number is (714) 979-7300. ADVERSE FINANCIAL CONDITION The Company has experienced losses for each of the past five years, and these losses have continued in 1997. For the 1996 fiscal year, losses totaled approximately $10.8 million. The Company's independent public accountants qualified their report on the Company's financial statements for the 1996 fiscal year, stating that there was substantial doubt about the Company's ability to continue as a going concern. For the nine-month period ended September 30, 1997, the Company reported a net loss of approximately $2.4 million. At September 30, 1997, the consolidated stockholders' equity of the Company was approximately negative $5.2 million. The Company anticipates that the net loss for the fourth quarter of 1997 will be larger than the net loss the Company reported for the third quarter, due to increased provisions for warranty work and bad debts related to a contract for the installation of multiple diverters in a foreign location. The Company has not determined the precise magnitude of the expected net loss for the fourth quarter of 1997 at this time. The systems, manufactured under subcontract, went through initial start-up trials commencing in September 1997, and the additional costs were identified in November and December. Commencing in 1993, the Company initiated a series of actions intended to cope with its adverse financial condition. These actions included layoffs and other steps designed to reduce overhead, and the sale of various Company assets. As a result, the Company's selling, general and administrative expenses have declined to an annual rate of approximately $12 million in 1997, as compared to an annual rate of approximately $29.9 million for 1992. In 1995, approximately $15 million of the Company's debt was canceled in connection with WESAC's acquisition of its Common Stock of the Company. See 'BUSINESS--The Company' and 'MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.' The Board of Directors believes that the Company's financial condition needs to be further strengthened, and therefore, it has determined, subject to stockholder approval, to implement the Restructuring Plan. See 'PLAN OF FINANCIAL RESTRUCTURING.'
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1998/CIK0000861895_tudor_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000861895_tudor_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..668ead5637c51006f4f58911ec5d915f539179aa
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1998/CIK0000861895_tudor_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this Prospectus. It is not complete and may not contain all of the information that is important to you. To understand this offering fully, you should read the entire Prospectus carefully, including the risk factors and financial statements. The Partnership Tudor Fund For Employees L.P. (the "Partnership") was organized on November 22, 1989 as a Delaware limited partnership. The Partnership's principal office is located at 600 Steamboat Road, Greenwich, CT 06830; Telephone No. (203) 863-6700; Facsimile No. (203) 863-8600. - -------------------------------------------------------------------------------- The General Partner Second Management LLC, a Delaware limited liability company, is the general partner of the Partnership (the "General Partner"). The General Partner manages the business of the Partnership. The principal address and telephone and facsimile numbers of the General Partner are the same as those of the Partnership. The Investor Services Department is located at One Liberty Plaza, 51st Floor, New York, NY 10006; Telephone No. (212) 602- 6770; Facsimile No. (212) 385-2761. - -------------------------------------------------------------------------------- The Trading Advisor Tudor Investment Corporation, an affiliate of the General Partner, is the trading advisor to the Partnership (the "Trading Advisor"). - -------------------------------------------------------------------------------- The Business of the Partnership The Partnership is engaged in the speculative trading of futures contracts, options on futures contracts, physical commodities, spot and forward contracts, currencies, debt securities, other commodities interests, swaps, and various other derivatives and hybrid instruments. In the past, the Partnership has focused the substantial majority of its trading in cash currencies and currency forward contracts, interest rate futures contracts, stock index futures contracts, precious metals futures contracts, energy futures contracts, agricultural futures contracts, and options on and in respect of the foregoing. - -------------------------------------------------------------------------------- Permitted Investors Units of interest in the Partnership (the "Units") may be purchased and owned only by: . employees of the General Partner or the Trading Advisor, or employees of any present or future affiliate or successor of the General Partner or the Trading Advisor, . the General Partner, the Trading Advisor, or any present or future affiliate or successor of the General Partner or the Trading Advisor, or . the Tudor Investment Corporation 401(k) Savings and Profit-Sharing Plan (the "TIC 401(k) Plan"). - -------------------------------------------------------------------------------- Purchase Requirements If you purchase Units, you must complete and sign a Subscription Agreement and Power of Attorney (Exhibits B through E) and confirm that your investment in the Partnership does not exceed 25% of your net worth. In addition, if you are purchasing Units as a participant in the TIC 401(k) Plan, you will be asked to read and sign certain additional representations. - -------------------------------------------------------------------------------- Minimum Investment You may invest a minimum of $1,000 in the Partnership. Investments in excess of such minimum must be made in increments of $1,000. RISK DISCLOSURE STATEMENT YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS YOU TO PARTICIPATE IN A COMMODITY POOL. IN DOING SO, YOU SHOULD BE AWARE THAT FUTURES AND OPTIONS TRADING CAN QUICKLY LEAD TO LARGE LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET ASSET VALUE OF THE POOL AND CONSEQUENTLY THE VALUE OF YOUR INTEREST IN THE POOL. IN ADDITION, RESTRICTIONS ON REDEMPTIONS MAY AFFECT YOUR ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE POOL. FURTHER, COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT, ADVISORY, AND BROKERAGE FEES. IT MAY BE NECESSARY FOR THOSE POOLS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS A COMPLETE DESCRIPTION OF EACH EXPENSE TO BE CHARGED THIS POOL BEGINNING AT PAGE 9 AND A STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT IS TO RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT, AT PAGE 10. THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER FACTORS NECESSARY TO EVALUATE YOUR PARTICIPATION IN THIS COMMODITY POOL. THEREFORE, BEFORE YOU DECIDE TO PARTICIPATE IN THIS COMMODITY POOL, YOU SHOULD CAREFULLY STUDY THIS DISCLOSURE DOCUMENT, INCLUDING A DESCRIPTION OF THE PRINCIPAL RISK FACTORS OF THIS INVESTMENT BEGINNING AT PAGE 3. YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY POOL MAY TRADE FOREIGN FUTURES OR OPTIONS CONTRACTS. TRANSACTIONS ON MARKETS LOCATED OUTSIDE THE UNITED STATES, INCLUDING MARKETS FORMALLY LINKED TO A UNITED STATES MARKET, MAY BE SUBJECT TO REGULATIONS WHICH OFFER DIFFERENT OR DIMINISHED PROTECTION TO THE POOL AND ITS PARTICIPANTS. FURTHER, UNITED STATES REGULATORY AUTHORITIES MAY BE UNABLE TO COMPEL THE ENFORCEMENT OF THE RULES OF REGULATORY AUTHORITIES OR MARKETS IN NON-UNITED STATES JURISDICTIONS WHERE TRANSACTIONS FOR THE POOL MAY BE EFFECTED. Offering Dates Units generally will be offered for sale at the Net Asset Value thereof as of the opening of business on the first day of each calendar quarter, i.e., January 1, April 1, July 1, and October 1. - -------------------------------------------------------------------------------- Break-Even Analysis The Partnership will need to generate Trading Profits equal to approximately 2% of your purchase price in order for you to be in a break-even position one year from the date of your purchase of Units. For example, for a minimum investment of $1,000, the Partnership would need to generate $20 of Trading Profits for you to break even. - -------------------------------------------------------------------------------- Fees and Expenses In addition to paying its ordinary operational expenses and transaction costs, the Partnership will be required to pay the following fees to the Trading Advisor: . A monthly management fee equal to 1/12 of 2% (a 2% annual rate) of the Partnership's Net Assets. . A quarterly incentive fee equal to 12% of the Partnership's Trading Profits. - -------------------------------------------------------------------------------- Risks An investment in the Partnership is speculative and involves a high degree of risk. It is possible that you could lose all or a part or your investment. - -------------------------------------------------------------------------------- Conflicts of Interest Because of the affiliation of the General Partner, the Trading Advisor, and the Partnership's foreign currency dealer counterparty, there are significant conflicts of interest in the structure and operation of the Partnership. - -------------------------------------------------------------------------------- Transfers You will only be permitted to transfer your Units to any of the following: . the General Partner, . the Trading Advisor, . a present or future affiliate or successor of the General Partner or the Trading Advisor, or . an employee of the General Partner, the Trading Advisor, or an employee of any present or future affiliate or successor of the General Partner or the Trading Advisor. - -------------------------------------------------------------------------------- Redemptions You will only be permitted to redeem your Units on the last day of each calendar quarter, i.e., March 31, June 30, September 30, or December 31. Units will be redeemed at the Net Asset Value thereof as of the applicable redemption date. - -------------------------------------------------------------------------------- Taxation You will be required to take your allocable share of the Partnership's income, gain, loss, deduction, or credit into account in computing your U.S. federal income tax liability regardless of whether you have received any cash distributions from the Partnership. <TABLE> <CAPTION> TABLE OF CONTENTS <C> <S> <C> 1. Name; Formation............................................................... A-1 2. Offices....................................................................... A-2 3. Business...................................................................... A-2 4. Term; Dissolution............................................................. A-3 (a) Term...................................................................... A-3 (b) Dissolution............................................................... A-3 5. Fiscal Year................................................................... A-3 6. General Partner's Net Worth.................................................... A-4 7. Capital Contributions......................................................... A-4 8. Allocation of Profits and Losses; Accounting; Related Matters................. A-8 (a) Capital Accounts...................................................... A-8 (b) Monthly Allocations................................................... A-8 (c) Allocation of Profit and Loss for Federal Income Tax Purposes......... A-9 (d) Definitions; Accounting............................................... A-11 (e) Expenses and Limitations Thereof...................................... A-12 (f) Limited Liability of Limited Partners................................. A-13 (g) Lender as Partner..................................................... A-15 (h) Return of Limited Partners' Capital Contributions..................... A-15 (i) Distributions......................................................... A-15 (j) General Partner as Limited Partner.................................... A-15 9. Management.................................................................... A-15 (a) Management of Partnership................................................. A-15 (b) Trading Policies.......................................................... A-18 (c) Additional Obligations and Responsibilities of General Partner............ A-19 10. Audits; Reports to Limited Partners........................................... A-22 11. Transfer and Redemption of Units.............................................. A-23 (a) Transfer.................................................................. A-23 (b) Redemption................................................................ A-25 12. Mandatory Redemption.......................................................... A-26 13. Admission of Additional Partners.............................................. A-27 14. Special Power of Attorney..................................................... A-27 15. Withdrawal of Partners........................................................ A-28 (a) Withdrawal of General Partner............................................. A-28 (b) Withdrawal of Limited Partners............................................ A-28 16. No Personal Liability for Return of Capital................................... A-29 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000863821_restoratio_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000863821_restoratio_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary should be read in conjunction with, and is qualified in its entirety by, the more detailed information and consolidated financial statements and notes thereto appearing elsewhere in this Prospectus. As used in this Prospectus, unless the context otherwise requires, the terms "Restoration Hardware" and the "Company" include Restoration Hardware, Inc. and its consolidated subsidiaries (Restoration Hardware of Blackhawk, Incorporated and, after March 20, 1998, The Michaels Furniture Company, Inc.) and their respective operations. Except as otherwise noted, all information in this Prospectus (i) assumes no exercise of the Underwriters' over-allotment option, (ii) assumes the conversion of all outstanding shares of the Company's Preferred Stock, par value $.0001 per share (the "Preferred Stock"), into shares of the Company's Common Stock, par value $.0001 per share (the "Common Stock"), to be effected upon the completion of the Offering and (iii) gives retroactive effect to a 7- for-1-split of the Common Stock effected in May 1998. See "Description of Capital Stock--Common Stock". The Company has a 52- or 53-week fiscal year, which ends on the Saturday closest to the end of January. Unless otherwise indicated, references herein to years refer to the Company's fiscal years. For example, references to 1997 shall mean the fiscal year ended January 31, 1998. THE COMPANY Restoration Hardware is a rapidly growing specialty retailer of home furnishings, functional and decorative hardware and related merchandise that reflect the Company's classic and authentic American point of view. Restoration Hardware's merchandising strategy and its stores' architectural style create a unique and attractive selling environment designed to appeal to an affluent, well educated 35 to 55 year old customer. In 1997, the Company recorded net sales of $97.9 million and operating income of $3.2 million, representing compound annual growth rates since 1995 of 171.9% and 163.3%, respectively. This growth has been driven primarily by the opening of five, ten and 21 stores in 1995, 1996 and 1997, respectively, and by strong comparable store sales growth of 12.9%, 24.5% and 11.1%, respectively, during each of these same periods. The Company plans to continue its store expansion program and expects to open approximately 25 new stores in 1998 and approximately 30 new stores in 1999. The Company operated 47 stores in 22 states at June 1, 1998. Restoration Hardware commenced business more than 18 years ago as a purveyor of fittings and fixtures for older homes. Since then, the Company has evolved into a unique home furnishings retailer offering consumers an array of distinctive, high-quality and often hard-to-find merchandise. The Company displays its broad assortment of merchandise in an architecturally inviting setting, which the Company believes appeal to both men and women. The Company creates an attractive and entertaining environment in its stores by virtue of its eclectic product mix, which combines classic, high-quality furniture, lighting, home furnishings and functional and decorative hardware with unusual "discovery" items such as the Original Russian Forever Flashlight and the Bite The Man dog toy. This environment features surprising combinations and assortments of merchandise. Customers encounter everything from nickel plated towel bars and four-function tape measures to velvet sofas and a solid cherry sleigh bed. Integral to the shopping experience, most product displays are complemented by the Company's unique and often whimsical in-store signage program. This signage, created and written by the Company's founder and CEO, Stephen Gordon, provides historical, anecdotal and sometimes nostalgic descriptions of products. The Company believes its signage program significantly enhances the store's ability to connect with the customer. The Company's focus on intriguing combinations of authentic, high-quality and functional products provides its customers a unique shopping experience that substantially differentiates the Company from its competitors and encourages repeat business. A typical Restoration Hardware store features approximately 7,000 square feet of selling space designed with a residential look and feel that the Company believes customers will want to recreate in their own homes. Each store carries approximately 4,500 stock keeping units ("SKUs"), many of which are frequently turned over to refresh the store offerings and encourage customers to rediscover the store. In 1997, the Company increased its SKU count by approximately 750 items, adding approximately 1,250 new SKUs and discontinuing approximately 500 SKUs. Products are displayed in an open and airy residential setting which encourages the customers to wander from room to room, passing through a foyer, adjacent hardware rooms, library, living room, bedroom and bath and garden areas. The following summarizes certain key operating characteristics of a Restoration Hardware store and is based upon the 20 stores operated by the Company for the full year ended January 31, 1998. <TABLE> <S> <C> Average 1997 net sales per selling square foot..................... $ 588 Average 1997 store-level operating income.......................... $468,910 Average 1997 store-level operating margin.......................... 15.5% </TABLE> The Company has over time increased the size of its stores to accommodate the space requirements of its furniture products and to provide customers an enjoyable and comfortable shopping environment. As a result of the larger store size, occupancy costs are expected to increase as a percentage of net sales and net sales per selling square foot are expected to decline. In addition, the Company expects comparable store sales to decrease in the future as its store base matures. BUSINESS STRATEGY The Company's goals are to establish Restoration Hardware as a leading lifestyle-oriented consumer brand and to realize substantial profitable growth. The Company's strategy for achieving these goals includes the following key elements: EXPANSION STRATEGY. Restoration Hardware believes that its retail concept has broad national appeal and that, as a result, it has significant new store expansion opportunities over the next several years. Accordingly, the Company plans to open approximately 25 new stores in 1998 and approximately 30 new stores in 1999. In preparation for this expected expansion, management has dedicated substantial resources to building the infrastructure and management information systems necessary to support a large national chain. The Company plans to continue to open stores in top tier malls, specialty centers and select street locations in affluent urban and suburban areas. The Company is opportunistic in selecting the best locations available that satisfy its demographic, financial and other criteria and does not necessarily cluster its store locations. Additionally, and in response to strong customer demand, the Company intends to introduce a catalog in September 1998. The Company believes its catalog operation will generate incremental sales in markets without stores, create additional store traffic in the Company's current markets and increase consumer awareness and loyalty. DIFFERENTIATED MERCHANDISING STRATEGY. The Company's merchandising strategy is to offer distinctive, high-quality, hard-to-find merchandise for the home. The Company offers a collection of merchandise not traditionally found in a single store environment, including classic American styled furniture, lighting, home furnishings, functional and decorative hardware, and discovery items. The merchandise selection is carefully edited to provide a consistent point of view throughout the store, emphasizing tasteful design, quality, value, functionality and a timeless, classic feel. The Company focuses on products that have a sense of history or authenticity to which customers can relate, believing that consumers have a strong desire to return to traditions from their past or create traditions where none previously existed. The Company's Teddy Chair, for instance, is a replica of a tailored, comfortable leather chair used by Theodore Roosevelt on his train travels from the Eastern United States to the West. Product selection also reflects a penchant for the playful, including the Atomic Robot Man, Moon Pies, the Acme Dog Biscuit Mix (complete with a bone-shaped cutter), as well as The Book of Campfire Songs and the Gonzo Wonder Sponge. In addition, unlike many other retailers, the Company focuses on purchasing products one item at a time rather than focusing only on product categories. No product is selected to simply round out a product category. Each item must stand on its own and is evaluated on its own merits. The Company does not have prescribed price points and finds it equally justifiable, from a merchandising point of view, to offer a vintage, Austrian, wind-proof lighter at $5 and a solid, red oak Mule Chest at $1,990. The Company's merchandise mix includes proprietary products and hard-to-find products selected from non-traditional distribution channels that appear unique to Restoration Hardware's customers. INNOVATIVE STORE ENVIRONMENT. The environment in a Restoration Hardware store is carefully designed to complement and highlight the unique merchandise mix and to create an attractive and fun shopping environment for the customer. The store design is based on residential interiors with a strong architectural presence that has a look and feel which the Company believes customers seek to recreate in their homes. The merchandise is displayed in a manner designed to enhance its visual appeal and maximize customer impulse buying. To further enhance the shopping experience, products are cross-merchandised creating surprises for the customer throughout the store. Products are often highlighted by personalized signage providing informative and sometimes amusing, anecdotal descriptions that seek to intrigue the customer with the story behind the merchandise selections. This signage, written by the founder and CEO Stephen Gordon, is informative and whimsical, and is designed to enhance the customer's connection to the product, thereby providing a powerful incentive to purchase. FOCUS ON HIGHLY DESIRABLE TARGET CUSTOMER. The Company focuses on attracting an affluent customer base of both men and women who typically are in their mid- 30s to mid-50s, well educated, generally own their home and report an average household income in excess of $75,000. The Company believes that its growth during recent years partially reflects growing interest among its customers in decorating and outfitting their homes. By focusing on its target customer, the Company believes it can successfully penetrate new markets throughout the United States, while building a loyal customer base for repeat business. EXCEPTIONAL CUSTOMER SERVICE. Restoration Hardware is committed to providing the highest level of customer service. Key elements of such service include: a high degree of product availability, excellent follow-through on requests and questions, useful product information, a hassle-free return policy and high- quality merchandise. To provide this service, the Company focuses on hiring mature, professional and quality-conscious staff. The Company conducts training in a number of areas, including product knowledge, and has a culture that empowers its staff to go to great lengths to satisfy its customers' needs. Finally, each store stocks the full array of products so customers may, in most cases, leave the store with their purchases. BUILDING THE BRAND AND OPERATING INITIATIVES. An integral part of the Company's strategy is to strengthen the Restoration Hardware brand. The Company believes that the opening of new stores, its daily interaction with customers and all other aspects of its business play a role in building its brand identity. To this end, the products, the architecture of the store, the signage, the in-store music program and the Company's culture all reflect Restoration Hardware's consistent and differentiated point of view. The Company continues to focus on several initiatives designed to both enhance the performance of the stores and strengthen the Company's emerging brand identity. These include: (1) continuing to expand proprietary offerings, (2) increasing the number of imported SKUs, (3) strengthening relationships with key vendors, (4) building the Company's catalog business and (5) refining the Company's web site. EXPERIENCED AND MOTIVATED MANAGEMENT TEAM. Over the past several years, Restoration Hardware has devoted significant resources to recruit and build its existing management team. The Company's executive officers and key managers have extensive experience in various retail environments. In addition, upon consummation of the Offering, executive officers and key managers will beneficially own approximately 30% of the Company's outstanding Common Stock. RECENT DEVELOPMENTS In March 1998, the Company acquired all of the outstanding capital stock of The Michaels Furniture Company, Inc. ("Michaels"), formerly known as Michael's Concepts In Wood, Inc., for an aggregate purchase price of approximately $5.0 million plus contingent future payments and stock incentives based on the performance of the acquired operations. Michaels had previously been an independent supplier of furniture to the Company accounting for approximately 7.3% of its merchandise purchases in 1997. The Company believes that the acquisition of Michaels will give Restoration Hardware a secure supply of a popular furniture line for its stores and catalog.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000866873_del-monte_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000866873_del-monte_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information appearing elsewhere in this Prospectus. Unless the context otherwise requires, "Del Monte" means Del Monte Foods Company, a Delaware corporation, and the "Company" means Del Monte and its consolidated subsidiaries. References herein to fiscal years and quarters are to the Company's fiscal year (which ends on June 30) and related fiscal quarters (which end on the last Sunday of September, December and March). References to the "Contadina Acquisition" are to the Company's acquisition of certain assets comprising Nestle USA, Inc.'s ("Nestle") U.S. business of manufacturing and marketing certain canned tomato products ("Contadina"). Unless otherwise indicated, all information in this Prospectus reflects (i) an increase in the number of authorized shares to 500 million shares of Common Stock and to 2 million shares of preferred stock and (ii) a 191.542-for-one stock split of the existing shares of Common Stock and assumes no exercise of the U.S. Underwriters' overallotment option. See "Description of Capital Stock." THE COMPANY GENERAL The Company, a branded marketer of premium quality, nutritious food products, is the largest producer and distributor of canned vegetables and canned fruit in the United States, with pro forma net sales of $1.1 billion and $1.4 billion for the nine months ended March 31, 1998 and the fiscal year ended June 30, 1997, respectively. Management believes that the Company's principal brand, Del Monte, which has been in existence since 1892, has the highest unaided brand awareness of any canned food brand in the United States. Del Monte brand products are found in substantially all national grocery chains and independent grocery stores throughout the United States. As the brand leader in three major processed food categories (canned vegetables, fruit and solid tomato products), the Company has a full-line, multi-category presence that management believes provides it with a substantial competitive advantage in selling to the retail grocery industry. The Contadina Acquisition contributes another established brand and positions the Company as the branded market leader in the high margin canned solid tomato products category and establishes a strong presence for the Company in the branded paste-based tomato products category. See "Business -- Company Products." The Company sells its products to national grocery chains and wholesalers through a nationwide sales network consisting primarily of independent food brokers. The Company's direct sales force also sells to warehouse club stores, selected mass merchandisers, such as Wal-Mart and Kmart, and larger mass merchandising outlets that include full grocery sections, such as Wal-Mart Supercenters and Kmart's SuperKs. In addition, the Company sells its products to the foodservice industry, food processors and the military through different independent food brokers. The Company also exports a small percentage of its products to certain foreign countries directly and through independent exporters based in the United States. See "Business -- Sales, Marketing and Distribution." The Company operates 15 production facilities in California, the Midwest, Washington and Texas, as well as six strategically located distribution centers. The Company has over 2,500 contracts to purchase vegetables and fruit from individual growers and cooperatives located in various geographic regions of the United States, principally California, the Midwest, the Northwest and Texas. This diversity of sourcing helps insulate the Company from localized disruptions during the growing season, such as weather conditions, that can affect the price and supply of vegetables, fruit and tomatoes. See "Business -- Supply and Production." In April 1997, the Company completed a recapitalization (the "Recapitalization") as a result of which Texas Pacific Group, a private investment group, obtained a controlling interest in the Company. Under a new senior management team introduced in connection with the Recapitalization, the Company began implementing a new business strategy designed to increase sales and improve operating margins by: (i) increasing market share and distribution of high margin value-added products; (ii) introducing product and packaging innovations; (iii) increasing penetration of high growth distribution channels, such as supercenters and DEL MONTE FOODS COMPANY REGISTRATION STATEMENT ON FORM S-1 (Cross Reference Sheet Furnished Pursuant to Item 501(b) of Regulation S-K) <TABLE> <CAPTION> ITEM NUMBER AND CAPTION IN FORM S-1 LOCATION IN PROSPECTUS ----------------------------------- ---------------------- <S> <C> 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus............................... Outside Front Cover Page of Prospectus 2. Inside Front Cover Page of Prospectus.... Inside Front Cover Page of Prospectus; Additional Information 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges....... Prospectus Summary; Risk Factors; Selected Consolidated Financial Data 4. Use of Proceeds.......................... Use of Proceeds 5. Determination of Offering Price.......... Outside Front Cover Page of Prospectus; Underwriters 6. Dilution................................. Risk Factors; Dilution 7. Selling Security Holders................. Not Applicable 8. Plan of Distribution..................... Outside Front Cover Page of Prospectus; Underwriters 9. Description of Securities to be Registered................................. Description of Capital Stock 10. Interest of Named Experts and Counsel.... Legal Matters; Experts 11. Information with Respect to the Registrant................................. Outside Front Cover Page of Prospectus; Prospectus Summary; Risk Factors; Use of Proceeds; Dividend Policy; Capitalization; Dilution; Unaudited Pro Forma Financial Data; Selected Consolidated Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Corporate History; Management; Principal Stockholders; Certain Relationships and Related Transactions; Description of Capital Stock; Description of Certain Indebtedness; Shares Eligible for Future Sale; Consolidated Financial Statements 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities.............................. Not Applicable </TABLE> EXPLANATORY NOTE This Registration Statement contains two separate prospectuses, one to be used in connection with an offering of Common Stock in the United States and Canada (the "U.S. Prospectus") and one to be used in a concurrent offering of Common Stock outside the United States and Canada (the "International Prospectus"). The U.S. Prospectus and the International Prospectus will be identical in all respects except for the front cover page. The form of the U.S. Prospectus is included herein and the form of the front cover page of the International Prospectus follows the back cover page of the U.S. Prospectus. AVAILABLE INFORMATION Del Monte is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Del Monte has filed with the Commission a Registration Statement on Form S-1 (the "Registration Statement," which term shall encompass all amendments, exhibits, annexes and schedules thereto) pursuant to the Securities Act of 1933, as amended (the "Securities Act"), and the rules and regulations promulgated thereunder, covering the shares of Common Stock being offered hereby (the "Offering"). This Prospectus does not contain all the information set forth in the Registration Statement. For further information with respect to Del Monte and the Offering, reference is made to the Registration Statement. Statements made in this Prospectus as to the contents of any contract, agreement or other document referred to herein are not necessarily complete. With respect to each such contract, agreement or other document filed as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the document or matter involved, and each such statement shall be deemed qualified in its entirety by such reference. The Registration Statement, including the exhibits thereto, and the reports, proxy statements and other information filed by Del Monte with the Commission can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, at the Regional Offices of the Commission at 7 World Trade Center, 14th Floor, New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission maintains a Web site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. Del Monte will furnish its stockholders with annual reports that include a description of operations and annual audited consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). The financial statements included in the annual reports will be examined and reported upon, with an opinion expressed, by Del Monte's independent auditors. Del Monte will also furnish quarterly reports for the first three quarters of each fiscal year containing unaudited consolidated financial statements prepared in accordance with GAAP. FORWARD-LOOKING STATEMENTS Certain statements in this Prospectus under the captions "Prospectus Summary," "Risk Factors," "Unaudited Pro Forma Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" and elsewhere constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Company, or industry results, to differ materially from any future results, performances or achievements expressed or implied by such forward-looking statements. Such risks, uncertainties and other important factors include, among others: general economic and business conditions; weather conditions; crop yields; industry trends; competition; raw material costs and availability; the loss of significant customers; changes in business strategy or development plans; availability, terms and deployment of capital; Year 2000 compliance; changes in, or the failure or inability to comply with, governmental regulations, including, without limitation, environmental regulations; industry trends and capacity and other factors referenced in this Prospectus. See "Risk Factors." These forward-looking statements speak only as of the date of this Prospectus. The Company expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. warehouse clubs; (iv) achieving cost savings through investments in new and upgraded production equipment and plant consolidations; and (v) completing strategic acquisitions. COMPETITIVE STRENGTHS Management believes that the following elements contribute to the Company's position as a leading branded producer, marketer and distributor of canned vegetables, fruit and tomato products in the United States and provide a solid foundation for the Company's business strategy. - - STRONG BRAND NAME RECOGNITION AND LEADING MARKET SHARES -- The Del Monte brand name, which has been in existence since 1892, is one of the leading brand names in the food industry. Based on the ability of consumers to name the Del Monte brand when asked to identify companies that manufacture canned foods, management believes that the Del Monte brand has the highest unaided brand awareness of any canned food brand in the United States. The Company recently acquired the Contadina brand, an established national brand with a strong reputation for quality. For the 52 weeks ended March 28, 1998, the Company's 19.5% market share of canned vegetables was larger than the combined market shares of the Company's two largest branded competitors, and its 41.9% market share of canned fruit was larger than the combined market shares of all other branded competitors. The Company, including its Contadina business, had a pro forma 16.3% market share in the high margin solid segment of the canned tomato market for the 52 weeks ended March 28, 1998. See "Business -- Company Products." <TABLE> <CAPTION> MARKET SHARE FOR THE 52 WEEKS ENDED MARCH 28, 1998 -------------------------------------------------------- MARKET NEXT LEADING BRANDED CATEGORY POSITION(A) PERCENTAGE Competitor's Percentage(a) -------- ------------- ---------- --------------------------- <S> <C> <C> <C> Canned vegetables......................... #1 19.5% 13.2% (Green Giant) Canned fruit.............................. #1 41.9% 11.4% (Libby's) Canned solid tomato products(b)........... #1 16.3% 11.2% (Hunt's) </TABLE> - --------------- (a) Excludes private label. (b) Pro forma to include Contadina sales. - - TECHNICAL EXPERTISE AND LOW COST PRODUCTION ADVANTAGES -- The Company has significant experience in developing new products and packaging alternatives and in engineering efficient food processing operations. These capabilities are leveragable across many food categories. The Company has developed proprietary vegetable seed varieties, which increase harvest and cannery recoveries and improve flavor and quality. The Company benefits from many long-term relationships with experienced, geographically diverse growers who work with the Company to maximize yields of raw product. These relationships also help to ensure a consistent supply of raw product. As a result of its technical expertise, proprietary seed varieties and raw product sourcing diversity, as well as its modern processing equipment and labeling, packaging, warehousing and distribution efficiencies, management believes that the Company is one of the lowest cost producers of canned vegetables, fruit and tomatoes in the United States. See "Business -- Company Products" and "Business -- Supply and Production." - - PREFERRED SUPPLIER STATUS -- Competitive pressures in the retail food industry are causing many retailers to prefer large suppliers such as the Company that are able to provide consumer-favored brands, full product lines and sophisticated inventory and category management programs. Del Monte anticipated this trend and has developed proprietary software tools to assist its customers and promote sales of its products. Del Monte's proprietary category management system is designed to address retailers' efforts to maximize profitability of shelf space dedicated to canned food categories. A substantial majority of the Company's customers that have employed Del Monte's category management system have increased the relative amount of shelf space dedicated to the Company's products as compared to competing products. The Company's proprietary vendor-managed inventory software allows Del Monte to manage directly its customers' inventories of the Company's products. This inventory management software is designed to reduce customers' overhead costs and to enable them to achieve lower average inventory levels while enhancing the Company's opportunities to sell its products. Retailers also rely on Del Monte's in-depth knowledge as the leading branded marketer in the canned fruit, vegetable and tomato categories, and they INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. PROSPECTUS (Subject to Completion) Issued July 28, 1998 14,706,000 Shares DEL MONTE FOODS COMPANY COMMON STOCK [DEL MONTE LOGO] ------------------------ OF THE 14,706,000 SHARES OF COMMON STOCK BEING OFFERED HEREBY, 11,765,000 SHARES ARE BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS AND 2,941,000 SHARES ARE BEING OFFERED INITIALLY OUTSIDE THE UNITED STATES AND CANADA BY THE INTERNATIONAL UNDERWRITERS. SEE "UNDERWRITERS." ALL OF THE SHARES OF COMMON STOCK BEING OFFERED HEREBY ARE BEING SOLD BY THE COMPANY. AT THE REQUEST OF THE COMPANY, THE UNDERWRITERS HAVE RESERVED FOR SALE, AT THE INITIAL PUBLIC OFFERING PRICE, UP TO 735,300 SHARES OF COMMON STOCK, WHICH MAY BE OFFERED TO DIRECTORS, OFFICERS, EMPLOYEES, RETIREES AND RELATED PERSONS OF THE COMPANY. ANY RESERVED SHARES THAT ARE NOT SO PURCHASED WILL BE OFFERED BY THE UNDERWRITERS TO THE GENERAL PUBLIC ON THE SAME BASIS AS THE OTHER SHARES OF COMMON STOCK OFFERED HEREBY. PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE SHARES OF COMMON STOCK OF THE COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE PER SHARE WILL BE BETWEEN $16 AND $18. SEE "UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS TO BE CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE. ------------------------ THE COMMON STOCK HAS BEEN APPROVED FOR LISTING, SUBJECT TO OFFICIAL NOTICE OF ISSUANCE, ON THE NEW YORK STOCK EXCHANGE AND THE PACIFIC EXCHANGE UNDER THE SYMBOL "DLM." ------------------------ SEE "RISK FACTORS" BEGINNING ON PAGE 11 OF THIS PROSPECTUS FOR RISKS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ PRICE $ A SHARE ------------------------ <TABLE> <CAPTION> UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS(1) COMPANY(2) -------- -------------- ------------ <S> <C> <C> <C> Per Share.......................................... $ $ $ Total(3)........................................... $ $ $ </TABLE> - --------------- (1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriters." (2) Before deducting expenses of the offering payable by the Company estimated at $6,200,000. (3) The Company has granted the U.S. Underwriters an option, exercisable within 30 days of the date hereof, to purchase up to an aggregate of 2,205,900 additional shares of Common Stock at the price to public, less underwriting discounts and commissions, solely for the purpose of covering overallotments, if any. If the U.S. Underwriters exercise such option in full, the total price to public, underwriting discounts and commissions and proceeds to Company will be $ , $ and $ , respectively. See "Underwriters." ------------------------ The shares of Common Stock are offered, subject to prior sale, when, as and if accepted by the Underwriters named herein and subject to the approval of certain legal matters by Brown & Wood LLP, counsel for the Underwriters. It is expected that delivery of the shares of Common Stock will be made on or about , 1998 at the office of Morgan Stanley & Co. Incorporated, New York, N.Y. against payment therefor in immediately available funds. MORGAN STANLEY DEAN WITTER BANCAMERICA ROBERTSON STEPHENS BEAR, STEARNS & CO. INC. BT ALEXS BROWN DONALDSON, LUFKIN & JENRETTE Securities Corporation , 1998 seek the Company's advice on marketing and promoting these categories. Finally, Del Monte has strong, well-developed relationships with all major participants in the retail grocery trade. The Company believes that these relationships will become increasingly important as consolidation among grocery retailers continues. The Company is seeking to use its category knowledge, customer relationships and software tools, along with its multi-category product line that can readily be ordered and shipped on a full truck-load basis, in order to become the preferred supplier in its product categories. See "Business -- Sales, Marketing and Distribution." - - EXTENSIVE NATIONAL SALES AND DISTRIBUTION SYSTEM -- The Company's extensive sales and distribution network is responsible for the distribution of finished goods to over 2,400 customer destinations nationwide. This network enables the Company to compete with other national brands and regional competitors, and to introduce new products on a regional or national basis. The Company operates six strategically located distribution centers offering customers a variety of services, including electronic data interchange and direct store shipments. Management believes that the Company's distribution system makes an important contribution to the Company's success and provides the Company with a competitive advantage over regional and private label competitors. See "Business -- Sales, Marketing and Distribution." - - EXPERIENCED MANAGEMENT TEAM -- Richard G. Wolford and Wesley J. Smith, the Company's Chief Executive Officer and Chief Operating Officer, respectively, are veteran senior managers with extensive food industry experience. Mr. Wolford has 30 years of experience in the food industry, 20 of which were with Dole. He was president of Dole Packaged Foods from 1982 to 1987, and during Mr. Wolford's tenure at Dole, Dole experienced increased profitability, sales volume and market share. Mr. Wolford played a key role in redefining the Dole brand and expanding the range of products sold under the brand. From 1988 to 1996, he was Chief Executive Officer of HK Acquisition Corp. where he developed food industry investments with venture capital investors and managed the investor-owned companies. Mr. Smith has 25 years of experience in the food industry, 23 of which were at Dole, where he oversaw the building of Dole's domestic fresh pineapple business and the restructuring of Dole's sizable Hawaiian operations. In addition, Mr. Smith was responsible for establishing Dole's juice business with minimal capital investment. See "Management." BUSINESS STRATEGY Following the consummation of the Recapitalization in 1997, the Company implemented a new business strategy designed to increase sales and improve operating margins. The key elements of this new business strategy are discussed below. - - LEVERAGE BRAND EQUITY TO INCREASE SALES AND MARKET SHARE OF HIGH MARGIN PRODUCTS -- The Company plans to leverage the Del Monte and Contadina brand names and its strong relationships with customers to increase sales of its existing product lines, focusing specifically on high margin products, such as its specialty fruits and vegetables, diced tomatoes and its Fruit Cup line, where the Company has historically had either low market share or low household penetration relative to its overall category position. - - FOCUS ON CONSUMPTION-DRIVEN MARKETING STRATEGY -- To enhance its ability to leverage its brand equity, the Company has refocused its marketing efforts and promotional strategy. To leverage its brand strength, the Company has increased consumer-targeted marketing programs, primarily through the distribution of free-standing coupon inserts, and has established clearly differentiated product positioning that emphasizes the Company's premium quality. The Company increased spending on consumer promotions from $12 million in fiscal 1996 to $46 million in fiscal 1997 and anticipates that its consumer spending in fiscal 1998 and 1999 will be generally consistent with levels of consumer spending in fiscal 1997. The Company has also improved the effectiveness of its trade promotion strategy. The Company has implemented performance-based programs under which trade spending, which consists of the costs of promotional activities with grocery chains and other customers, such as special displays, discounts and advertisements, is managed based on retailers' sales of the Company's products to consumers rather than on purchases from the Company. The Company believes that this performance-based strategy, coupled with the Company's category management capabilities, will continue to increase sales and reduce costs. [PHOTOGRAPHS DEPICTING COLLAGES OF COMPANY PRODUCTS TO BE INSERTED ON INSIDE FRONT COVER AND INSIDE BACK COVER PAGES] CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE MARKET PRICE OF THE SHARES OF COMMON STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING, AND MAY BID FOR, AND PURCHASE, THE SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS." - - IMPROVE PROFITABILITY THROUGH NEW PRODUCTS AND PACKAGING -- The Company is emphasizing new higher margin products and line extensions designed to leverage the Company's presence in its current product categories and to capitalize on its food technology expertise. The Company has successfully introduced flavored diced tomatoes, two lines of flavored canned fruit, Orchard Select, a premium fruit product packaged in glass, and Fruit Smoothie Blenders, a flavored fruit drink. These products extend the Company's traditional product lines and appeal to consumers' demands for high quality, convenient and nutritious food products. The Company is evaluating introductions of other new products packaged in glass and plastic to further expand its presence in the market beyond the processed food aisle. - - INCREASE PENETRATION OF HIGH-GROWTH DISTRIBUTION CHANNELS -- Changes in the retail grocery environment have resulted in substantial growth of alternative retailers such as warehouse clubs, mass merchandisers and supercenters. The Company believes it is well-positioned to benefit from these changes because these vendors generally seek leading brand name products that generate high inventory turnover. In addition, vendors in this category generally are attracted to large, technologically sophisticated suppliers such as the Company that have the ability to meet their stringent inventory and shelf management requirements. Based on internal estimates and the broad range of products supplied by the Company to such retailers, the Company believes it is currently the leading supplier of canned vegetables and fruit to Wal-Mart's Sam's Club, and is a major supplier to PriceCostco. Based on such estimates, the Company also believes it is currently the leading supplier of canned vegetables, fruit and solid tomato products as a group to Wal-Mart Supercenters. - - IMPLEMENT FURTHER COST SAVINGS -- The Company is aggressively pursuing cost reduction opportunities, which have already contributed to an increase in Adjusted EBITDA margins (excluding the results of Divested Operations (as defined below)) from 6.9% in 1995 to 10.2% in 1997 and 10.0% for the nine months ended March 31, 1998. Management's strategy is to improve profitability through the implementation of capital projects that offer rapid returns on investment, and through plant consolidations and increased operating efficiencies. The Company has announced plans to consolidate, over the next three fiscal years, six existing fruit and tomato operations in California into four facilities, including one large state-of-the-art facility acquired as part of the Contadina Acquisition. The Company continually evaluates its production facilities and believes that further consolidations may be warranted in the future. In addition, the Company plans to continue to invest in new, state-of-the-art production equipment to increase production efficiencies and strengthen its position as a low cost producer. - - COMPLETE STRATEGIC ACQUISITIONS -- The Company will pursue strategic acquisitions when there are opportunities to leverage the Company's key strengths in product development, food processing, marketing, sales and distribution. In evaluating potential acquisition candidates, the Company seeks, among other things: (i) strong brands, including those in new product lines, that can be expanded by leveraging the Company's technical and manufacturing expertise and/or its sales and distribution systems; (ii) new products that can achieve growth through re-branding; and (iii) economies of scale in manufacturing, distribution and capacity utilization. The Contadina Acquisition, for example, adds a leading national brand which strengthens the Company's market share in key tomato segments and allows the Company to realize cost savings through plant consolidations. The Contadina Acquisition also allows the Company to introduce new branded retail products and to increase sales to the branded foodservice market. The Company also recently announced an agreement with Nabisco, Inc. ("Nabisco") to reacquire rights to the Del Monte brand in South America and to purchase Nabisco's canned fruits and vegetables business in Venezuela (the "Del Monte South America Acquisition"). See "Recent Developments." The Company continuously reviews acquisition opportunities and at any time may be engaged in discussions with respect to an acquisition that may be material to its operations. With the exception of the Del Monte South America Acquisition, no agreement, understanding or arrangement has been reached, however, with respect to any such acquisition. The Company believes that any acquisition would likely require the incurrence of additional debt, which could exceed amounts available under the Bank Financing (as defined herein). As a result, completion of an acquisition could require the consent of the lenders under the Bank Financing and the amendment of the terms thereof, including for purposes of permitting the Company's compliance with its covenants thereunder. Following the Offering, TPG Partners, L.P. ("TPG Partners") and certain of its affiliates (with TPG Partners, "TPG") will own approximately 54.1% of the Common Stock (approximately 51.8% if the U.S. Underwriters' overallotment option is exercised in full) and will continue to have the power to control the management and policies of the Company and matters requiring stockholder approval. TPG is part of Texas Pacific Group, which was founded by David Bonderman, James G. Coulter and William S. Price, III in 1992 to pursue public and private investment opportunities. Texas Pacific Group's other investments include such branded consumer products companies as Beringer Wine Estates Holdings, Inc., Ducati Motors S.p.A., Favorite Brands International, Inc. and J. Crew Group, Inc. Del Monte, a Delaware corporation, maintains its principal executive office at One Market, San Francisco, California 94105, and its telephone number is (415) 247-3000. THE OFFERING <TABLE> <S> <C> Common Stock offered in: United States offering................................... 11,765,000 shares International offering................................... 2,941,000 shares Total................................................. 14,706,000 shares(1) Common Stock to be outstanding after the Offering.......... 50,196,461 shares(1) Use of proceeds............................................ Del Monte intends to use the net proceeds from the Offering to repay or redeem certain outstanding indebtedness and preferred stock. See "Use of Proceeds." Proposed New York Stock Exchange and Pacific Exchange symbol................................................... DLM Risk factors............................................... For a discussion of certain risks that should be considered by prospective investors, see "Risk Factors." These risks include, among others, the Company's substantial leverage and risks relating to competition in the processed food industry, the implementation of the Company's business strategy and the effects of severe weather conditions, as well as risks and considerations relating to the Common Stock, such as the lack of a prior trading market and the dilution that purchasers will experience upon completion of the Offering. </TABLE> - --------------- (1) Assumes the U.S. Underwriters' overallotment option is not exercised. SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA In April 1997, the Company completed the Recapitalization. The cash funding requirements for the Recapitalization aggregated $809 million and were funded primarily through a combination of an equity investment by TPG and certain other investors, bank financing and other indebtedness. See "Description of Certain Indebtedness" and Notes D and E to the audited consolidated financial statements of the Company as of and for the year ended June 30, 1997 appearing elsewhere herein. In December 1997, the Company completed the Contadina Acquisition for a total purchase price of $197 million, comprised of a base price of $177 million and an estimated net working capital adjustment of $20 million. The consideration was paid solely in cash. The purchase price was subject to adjustment based on the final calculation of net working capital as of the closing date. Nestle provided its estimate of the net working capital, which resulted in a payment to the Company of $2 million, and therefore a reduction in the purchase price to a total of $195 million. The Contadina Acquisition also included the assumption of certain liabilities of approximately $5 million, consisting primarily of liabilities in respect of reusable packaging materials, employee benefits and product claims. The Contadina Acquisition was accounted for using the purchase method of accounting. The following table presents summary historical and pro forma financial data of the Company. The summary historical consolidated financial data presented below as of June 30, 1995, 1996 and 1997 and for the years then ended and as of March 31, 1998 and for the nine months then ended were derived from the audited consolidated financial statements of the Company. The summary historical consolidated financial data presented below as of March 31, 1997 and for the nine months then ended was derived from the unaudited interim financial statements of the Company. Such historical financial information should be read in conjunction with the consolidated financial statements of the Company and the related notes thereto included elsewhere in this Prospectus. The unaudited pro forma statements of operations information was prepared by the Company as if the Contadina Acquisition, the Recapitalization and related financings had occurred as of July 1, 1996 and should be read in conjunction with the pro forma financial information set forth under "Unaudited Pro Forma Financial Data." The unaudited pro forma statements of operations information does not purport to represent what the Company's results of operations actually would have been if the Contadina Acquisition and the Recapitalization had occurred as of the date indicated or what such results will be for any future periods. <TABLE> <CAPTION> FISCAL YEAR ENDED JUNE 30, NINE MONTHS ENDED MARCH 31, ---------------------------------------------- ------------------------------------- ACTUAL PRO FORMA ACTUAL PRO FORMA -------------------------------- ----------- ----------------------- ----------- 1995 1996 1997 1997 1997 1998 1998 ------ ---------- ---------- ----------- ---------- ---------- ----------- <S> <C> <C> <C> <C> <C> <C> <C> (RESTATED) (RESTATED) (RESTATED) (RESTATED) <CAPTION> (IN MILLIONS, EXCEPT SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Net sales(a)............................. $1,527 $1,305 $1,217 $ 1,373 $936 $ 968 $ 1,060 Cost of products sold(a)................. 1,183 984 819 953(b) 634 655(b) 726(b) ------ ------ ------ ---------- ---- ---------- ---------- Gross profit............................. 344 321 398 420 302 313 334 Selling, advertising, administrative and general expense(a)..................... 264 239 327(c) 361 235 249 274 Acquisition expenses..................... -- -- -- -- -- 7 7 ------ ------ ------ ---------- ---- ---------- ---------- Operating income......................... 80 82 71 59 67 57 53 Interest expense......................... 76 67 52 93 37 58 72 Loss (gain) on sale of divested assets(d).............................. -- (123) 5 5 5 -- -- Other (income) expense(e)................ (11) 3 30 30 -- (1) (1) ------ ------ ------ ---------- ---- ---------- ---------- Income (loss) before income taxes, minority interest, extraordinary item and cumulative effect of accounting change................................. 15 135 (16) (69) 25 -- (18) Provision for income taxes............... 2 11 -- -- 2 -- -- Minority interest in earnings of subsidiary............................. 1 3 -- -- -- -- -- ------ ------ ------ ---------- ---- ---------- ---------- Net income (loss) before extraordinary item and cumulative effect of accounting change...................... 12 121 (16) (69) 23 -- (18) Extraordinary loss(f).................... 7 10 42 42 4 -- -- Cumulative effect of accounting change(g).............................. -- 7 -- -- -- -- -- ------ ------ ------ ---------- ---- ---------- ---------- Net income (loss)........................ 5 104 (58) (111) 19 -- (18) Preferred stock dividends................ 71 82 70 5 70 4 4 ------ ------ ------ ---------- ---- ---------- ---------- Net income (loss) attributable to common shares(h).............................. $ (66) $ 22 $ (128) $ (116) $(51) $ (4) $ (22) ====== ====== ====== ========== ==== ========== ========== Net loss per common share................ $ (3.37) $ (0.12) $ (0.65) Weighted average number of shares outstanding............................ 34,477,560 30,389,671 34,646,160 </TABLE> <TABLE> <CAPTION> FISCAL YEAR ENDED JUNE 30, NINE MONTHS ENDED MARCH 31, ---------------------------------------------- ------------------------------------- ACTUAL PRO FORMA ACTUAL PRO FORMA -------------------------------- ----------- ----------------------- ----------- 1995 1996 1997 1997 1997 1998 1998 ------ ---------- ---------- ----------- ---------- ---------- ----------- <S> <C> <C> <C> <C> <C> <C> <C> (RESTATED) (RESTATED) (RESTATED) (RESTATED) <CAPTION> (IN MILLIONS, EXCEPT SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> CERTAIN DATA AS ADJUSTED FOR THE OFFERING:(I) Interest expense(j)...................... $ 71 $ 54 Net income (loss)........................ (89) -- Net income (loss) per common share....... (1.77) 0.00 Weighted average number of shares outstanding............................ 50,196,461 50,196,461 OTHER DATA: Adjusted EBITDA (k)...................... $ 76 $ 92 $ 119 $ 85 $ 97 Adjusted EBITDA margin (k)............... 6.9% 8.6% 10.2% 9.5% 10.0% Cash flows provided by operating activities............................. $ 63 $ 60 $ 25 $ 26 $ 9 Cash flows provided by (used in) investing activities................... (21) 170 37 39 (205) Cash flows provided by (used in) financing activities................... (44) (224) (63) (65) 195 Depreciation and amortization(l)......... 35 26 24 $ 30 18 20 $ 23 Capital expenditures..................... 24 16 20 30 12 15 20 SELECTED RATIOS: Ratio of earnings to fixed charges(m).... 1.2x 2.8x -- -- 1.5x 1.0x -- Deficiency of earnings to cover fixed charges(m)............................. -- -- $ 16 $ 69 -- -- $ 18 </TABLE> <TABLE> <CAPTION> JUNE 30, MARCH 31, -------------------------------- ---------------------------------------- AS ACTUAL ACTUAL ADJUSTED(I) -------------------------------- ----------------------- -------------- 1995 1996 1997 1997 1998 1998 ------ ---------- ---------- ---------- ---------- -------------- <S> <C> <C> <C> <C> <C> <C> (RESTATED) (RESTATED) (RESTATED) (RESTATED) <CAPTION> (IN MILLIONS) <S> <C> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Working capital..................................... $ 99 $ 209 $ 118 $ 186 $ 220 $ 168 Total assets........................................ 960 736 667 739 928 914 Total debt, including current maturities............ 576 373 610 310 770 608 Redeemable preferred stock.......................... 215 213 32 213 32 -- Stockholders' deficit............................... (393) (288) (398) (243) (354) (163) </TABLE> Note: Financial data under the columns marked "restated" reflect the information from the Company's restated financial statements. - --------------- (a) In fiscal 1997, merchandising allowances primarily relating to in-store displays, store advertising and store coupons, which previously were recorded as cost of products sold, have been reclassified to selling expense. Such merchandising allowances totaled $106 million, $100 million, $143 million and $101 million in the fiscal years ended June 30, 1995, 1996 and 1997 and the nine months ended March 31, 1997, respectively. In addition, certain military distributor allowances, which previously were treated as a reduction in net sales, have been reclassified to selling expense. Such military distributor allowances amounted to $1 million, $1 million, $2 million and $2 million in fiscal years ended June 30, 1995, 1996 and 1997 and the nine months ended March 31, 1997, respectively. All financial information has been restated to conform to this presentation. (b) For the pro forma fiscal year ended June 30, 1997 and the historical nine months ended March 31, 1998, includes $4 million and $2 million, respectively, of inventory step-up as part of the purchase price allocation relating to the Contadina Acquisition. For the pro forma nine months ended March 31, 1998, excludes $2 million of inventory step-up as part of the purchase price allocation relating to the Contadina Acquisition. (c) In connection with the Recapitalization, which was consummated on April 18, 1997, expenses of approximately $25 million were incurred primarily for management incentive payments and, in part, for severance payments. (d) In November 1995, the Company sold its pudding business for $89 million, net of $4 million of related transaction fees. The sale resulted in a gain of $71 million. In March 1996, the Company sold its 50.1% ownership interest in Del Monte Pacific Resources Limited ("Del Monte Philippines") for $100 million, net of $2 million of related transaction fees. The sale resulted in a gain of $52 million. In the fiscal quarter ended December 1996, the Company sold its Mexican, Central American and Carribean subsidiaries (collectively "Del Monte Latin America"). The combined sales price of $50 million, reduced by $2 million of related transaction expenses, resulted in a loss of $5 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- General."
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE OR CONTRIBUTE TO SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS," ELSEWHERE IN THIS PROSPECTUS AND IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 1997. THE COMPANY Digital Biometrics, Inc. develops, manufactures, markets and integrates computer-based products and services for the identification of individuals. The Company is a leading vendor of products employing "biometric" technology, the science of identifying individuals by measuring distinguishing biological characteristics. The Company's principal product is the TENPRINTER(R) system for "live-scan" fingerprint capture used mainly in law-enforcement applications. The TENPRINTER is a computer-based system with patented high-resolution optics which captures, digitizes, prints and transmits forensic-grade fingerprint images. The Company also offers high-resolution single-fingerprint capture products for commercial and governmental identification applications. To capitalize on opportunities outside of its traditional law enforcement market, the Company recently established a systems integration services business focused on integrating biometric and other identification technologies into applications for government and commercial markets. The Company has also developed a prototype player tracking system for the gaming industry called TRAK-21(TM). The Company has reached an agreement in principle with Grand Casinos, Inc. to create a joint venture to carry out the productization of the TRAK-21 technology. It is anticipated that the joint venture will be responsible for marketing of the resultant product. During fiscal 1997, virtually all of the Company's revenues were derived from sales of TENPRINTER systems and related maintenance fees. Approximately 89% of customer accounts receivable at September 30, 1997 were from government agencies, of which 39% was from a single customer. For the last three fiscal years, sales to three customers in 1997 accounted for 43% of revenues, sales to two customers in 1996 accounted for 30%, and sales to two customers in 1995 accounted for 52%. Export sales were 5%, 15% and 21% of total revenues, for the years ended September 30, 1997, 1996 and 1995, respectively. The Company's strategy is to continue to market TENPRINTER systems to law enforcement agencies, but also to expand the Company's product and services offerings as well as its served markets. The law enforcement market for live-scan biometric products is well established. The Company believes, however, that there is increasing interest from other governmental and commercial markets in using biometric identification technologies and products to improve security and to assure proper access. The Company intends to aggressively pursue these emerging opportunities. The Company was organized in 1985 as a Minnesota corporation under the name C.F.A. Technologies, Inc., was reincorporated in Delaware in 1986 and changed its name to Digital Biometrics, Inc. in 1990. The Company's offices and facilities are located at 5600 Rowland Road, Minnetonka, Minnesota 55343, and its telephone number is (612) 932-0888. - -------------------- TENPRINTER(R), SQUID(R) and the Company's mechanical hand logo have been registered as trademarks with the U.S. Patent and Trademark Office. The Company has applied for registration of the TRAK-21(TM) trademark. In addition, FC-5(TM), FC-6(TM), FC-7(TM), FC-11(TM), FC-21(TM) and FC-22(TM) are trademarks of the Company. <PAGE> RISK FACTORS AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY IS HIGHLY SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, AS WELL AS THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY. INFORMATION CONTAINED IN THIS PROSPECTUS MAY CONTAIN "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, WHICH CAN BE IDENTIFIED BY THE USE OF THE FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL," "EXPECT," "ANTICIPATE," "ESTIMATE," OR "CONTINUE" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED. POTENTIAL PURCHASERS OF THE COMPANY'S COMMON STOCK ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS WHICH SPEAK ONLY AS OF THE DATE HEREOF. CONTINUING LOSSES AND GENERAL BUSINESS RISKS The Company has incurred net operating losses in each quarter since inception. As of September 30, 1997, the Company had an accumulated deficit of $35.3 million. The Company incurred a net loss from operations of $6.3 million for the fiscal year ended September 30, 1997, and anticipates that it will continue to incur net losses on an annual basis, at least through fiscal 1998. Future operating results will depend on many factors, including, among others, demand for and acceptance of the Company's products and services, including ongoing acceptance of maintenance and other services purchased by existing customers, the ability of the Company to control costs, the ability of the Company to develop, market and deploy new products and services and to build profitable revenue streams around those new offerings, the ability of the Company to manage the concentration of accounts receivable and other credit risks in large customers, the ability of the Company to create and maintain satisfactory distribution and operations relationships with AFIS vendors, the Company's success in attracting and retaining key personnel, the availability of funding where customer procurements are dependent on state or federal government grants and general tax funding, the timely and cost-effective availability of product components, and the ability of the Company to successfully integrate technologies and businesses it may acquire in the future. In addition, markets for the Company's products and services are characterized by significant and increasing competition, and the Company's financial results may be adversely affected by the actions of existing and future competitors, including the development of new technologies, the introduction of new products, and price reductions by such competitors to gain or retain market share. There can be no assurance that the Company's revenues will grow in future periods or, if they do grow, that the Company will ever become profitable or generate positive cash flow. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." WORKING CAPITAL AND LIQUIDITY Due primarily to continuing operating losses, the Company has not achieved positive cash flow. The Company has been and continues to be reliant on outside capital to sustain its operations. Although the Company believes that cash and cash equivalents, accounts receivable and working capital provided from operations, together with available financing sources, are sufficient to meet current and foreseeable operating requirements, including the investment required to capitalize on new business opportunities, such belief is subject to a number of contingencies beyond the Company's control. Risks related to the Company's ability to maintain adequate working capital and liquidity include, among others, the continued availability of bank credit after the expiration of the Company's current accounts receivable line of credit in January 1998, renewal of which is expected, but cannot be assured, the availability of future tranches of capital under the terms of the Company's 8% Convertible Subordinated Debenture Purchase Agreement entered into in December 1997, and the Company's ability to satisfy contract requirements to insure payment by customers of accounts receivable at such times and in such amounts as to enable the Company to meet its payment obligations. The Company has experienced problems from time to time in satisfying customer contract requirements and other <PAGE> negotiated commitments, particularly with respect to contracts which involve the delivery of new products or systems. These problems have resulted in substantial increased costs associated with the installation and service of such systems. There can be no assurance that additional financing will be available when required, or that if additional financing is available, that it will be on terms that are acceptable or favorable to the Company. See Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations." LOCAL GOVERNMENTAL CREDIT CONSIDERATIONS The Company extends substantial credit to state and local governments in connection with sales of products to law enforcement agencies. Approximately 89% and 70% of customer accounts receivable at September 30, 1997 and 1996, respectively, were from government agencies, of which 39% and 40%, respectively, were from individual customers. Sales to three customers in fiscal 1997 accounted for 43% of revenues; sales to two customers in fiscal 1996 accounted for 30% of revenues; and sales to two customers in fiscal 1995 accounted for 52% of revenues. Sales to sizeable customers requiring large and sophisticated networks of TENPRINTER systems and peripheral equipment often include technical requirements which may not be fully known at the time of order. In addition, contracts may specify performance criteria which must be satisfied before the customer accepts products or services. Collection of accounts receivable may be dependent on completion of customer requirements, which may be unpredictable and not fully understood at the time of acceptance of the order by the Company, and may involve investment of additional Company resources. These investments of additional resources are accrued when amounts can be estimated but may be uncompensated and negatively impact profit margins and the Company's liquidity. LAW ENFORCEMENT MARKET CHARACTERISTICS RESULTING IN IRREGULAR REVENUE CYCLES The Company's performance in any one reporting period is not necessarily indicative of sales trends or future performance. Law enforcement agencies are subject to political and budgetary constraints and the nature of the law enforcement market and government procurement processes are expected to continue to result in irregular and unpredictable revenue cycles for the Company. In many instances, customer procurements are dependent on the continued availability of state or federal government grants and general tax funding. The Company's ability to become profitable will depend on its ability to continually find new customers for its products and maintain its existing customer base in an increasingly competitive market. PUBLIC CONTRACT CONSIDERATIONS Currently, the Company's products are marketed primarily to law enforcement agencies. The Company markets directly or on an OEM basis to customers who supply products to law enforcement agencies. Sales to law enforcement agencies are dependent on the availability of funding for equipment purchases, the timing of agency budget and purchasing cycles and political constraints. As public agencies, prospective purchasers are also subject to public contract requirements which vary from jurisdiction to jurisdiction. Future sales to law enforcement agencies will depend on the Company's ability to meet public contract requirements, certain of which may be onerous or even impossible for the Company to satisfy. In addition, public contracts frequently are awarded only after formal competitive bidding processes, which have been and may continue to be protracted. There can be no assurance that the Company will be awarded any of the contracts for which its products are bid or, if awarded, that substantial delays or cancellations of purchases will not result from protests initiated by losing bidders. Public contracts may contain provisions that permit cancellation in the event that funds are unavailable to the public agency. See "Business - Law Enforcement and Regulatory Agency Markets." <PAGE> GOVERNMENT STANDARDS AND REQUIREMENTS Certain of the Company's products are required to meet standards such as image resolution and image quality as determined by either state and federal government agencies or other standard setting authorities. These standards have been subject to change and the Company cannot predict standards that may be imposed on its products in the future. Failure to meet current or future standards may adversely affect the business operations of the Company as sales to government agencies are dependent on compliance with government requirements. NEED TO UPGRADE PRODUCTS AND DEVELOP NEW TECHNOLOGIES The ability of the Company to compete successfully in the biometrics market will depend, in part, upon its ability to continually advance its technology and to develop and market new products and services. Continued participation by the Company in the law enforcement market for live-scan systems requires the investment of Company resources in continuous upgrading of the Company's products and technology sufficient for the Company to compete and meet regulatory and statutory standards. There can be no assurance that such resources will be available to the Company or that the pace of product and technology development established by management will be adequate to meet the competitive requirements of the marketplace. See "Business - Products." GAMING MARKET ENTRY RISKS The Company has recently announced an agreement in principle with Grand Casinos, Inc. to form a joint venture for the completion of productization and subsequent marketing of the resultant product(s) based on TRAK-21 technology. The terms and conditions of the joint venture have not yet been fully negotiated. There can be no assurance that a definitive agreement satisfactory to both parties will be reached. In the event that a joint venture is formed, it is susceptible to the normal business risks customary to a start-up operation. In particular, although prototype models of TRAK-21 have been successfully demonstrated, there can be no assurance that this technology will operate as required in live casino environments or that products based on TRAK-21 technology will be accepted by customers. In addition, it has not been determined whether or not the TRAK-21 system will be able to compete, on the basis of price and performance, with player tracking systems of competitors whose systems have been marketed for longer periods of time. There can be no assurance, therefore, that the joint venture, if implemented, will be profitable to the Company. See "Business - Gaming." SYSTEMS INTEGRATION AND NEW PRODUCT OPPORTUNITIES The Company has recently established a systems integration division designated as its as the Integrated Identification Solutions Division ("IIS"). This is a startup operation with the normal risks attendant to the establishment of a new business. The ability of this new enterprise to ultimately generate revenues and profits is as yet undetermined. The Company believes it must invest significant resources to attract key employees, build a technical infrastructure and market the capabilities of the division to prospective customers prior to attracting any significant base of customers. It cannot be known whether sufficient profits will ultimately be generated to provide a return on this investment. While the Company believes that it has identified areas of market opportunity not well served by current participants, competition can be expected to increase and such potential competitors may have greater financial, technical, marketing and other resources than the Company. See " - Competition" and "Business - Competition." There can be no assurance that the Company will be able to attract and retain systems integration personnel necessary for the success of IIS, which depends significantly upon the efforts and performance of its personnel. <PAGE> YEAR 2000 IMPACT ON COMPUTER SYSTEMS Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. These date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, in approximately two years, computer systems and software used by many companies may need to be upgraded to comply with such "Year 2000" requirements. In June 1996, the Company began converting its computer systems enabling proper processing of transactions in the Year 2000 and beyond. The operating system vendor has made software upgrades available to make its software compatible with Year 2000. The Company will also test its application software to ensure compatibility with Year 2000. The Company presently believes that, with modifications to existing software and conversions to new software, Year 2000 compatibility will not pose significant operational problems for the Company's computer systems as so modified and converted, although there can be no assurance that unforeseen difficulties or costs will not arise. LIMITED PROTECTION OF PROPRIETARY TECHNOLOGY The Company is dependent on proprietary technology. The Company currently relies upon a combination of patents, copyrights, trademarks and trade secrets to establish and protect its proprietary rights in its products. The Company maintains as proprietary the portions of the technology incorporated in its products. A number of United States patents have been issued to the Company and additional United States patent applications are pending which cover various aspects of the TENPRINTER system and SQUID system technologies. Although additional features of the Company's products may be patentable, the Company has chosen to preserve these features as trade secrets rather than applying for patent protection. There can be no assurance that the steps taken by the Company to protect its proprietary rights will be adequate to prevent misappropriation of its technology or that the Company's competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technology. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to the same extent as do the laws of the United States. No assurance can be given that any patents currently held or issued to the Company in the future will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide competitive advantages. Further, patents may be issued in the future to other companies covering features incorporated into the TENPRINTER system or other products of the Company. The Company has incurred substantial costs in seeking enforcement of its patents and could incur substantial costs in defending itself against patent infringement claims by others. The Company is not aware of any patents held by others that would prohibit the use of technology current used by the Company. Any infringement claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing requirements, if required, may not be available on terms acceptable to the Company or at all, which could have a material adverse effect upon the Company's business, operating results and financial condition. The Company has not been successful in enforcing its patent rights against Identix, Inc. ("Identix"), a competitor, and is appealing an adverse ruling in pending litigation. See "- Pending Litigation" and "Business - Legal Proceedings" and " - Proprietary Technology." DEPENDENCE ON SUPPLIERS Certain of the components included in the Company's products are obtained from a single supplier. The loss of supply from such supplier or a significant increase in price from such supplier could have a material adverse effect on the Company. In addition, the loss of a limited source supplier may result in the Company having to incur additional development costs to establish alternative sources. See "Business Suppliers." <PAGE> PRODUCT WARRANTY During the third quarter of fiscal 1997, the Company added $524,000 to its reserves for product warranty obligations. The Company believes that this addition to its reserves will be adequate to address customer warranty obligations arising from past product sales. There is, however, a risk that the Company may, for unforeseen reasons, be required to repair or replace products currently installed in customer locations or reimburse customers for products that fail or are determined not to be in compliance with contractual requirements or agency rules or regulations, and that actual costs may exceed the Company's reserves. RELIANCE ON KEY PERSONNEL The success of the Company depends significantly upon the efforts of its key personnel and may, in the future, depend on the ability to attract additional key personnel. The loss of the services of key employees may have a materially adverse effect on the Company's business, operating results and financial condition. See "Business - Employees" and "Management." COMPETITION The market for biometric identification devices in general, and the market for live-scan systems in particular, is characterized by significant and increasing competition. The most likely sources of additional competition are (i) entities currently outside the live-scan systems market but otherwise involved in biometric identification systems or (ii) one or more of the companies presently manufacturing AFIS systems, which may already be developing, or which may undertake to develop, a competitive live-scan product. NEC Technologies, in particular, currently markets a live-scan product, the LS-21, which includes features and components manufactured by Identix. These competitors may have financial, technical, marketing and other resources significantly greater than those of the Company. There can be no assurance that the Company's products will be able to compete successfully with the products of its competitors. The Company's business, operating results and financial condition may be adversely affected by the actions of existing and future competitors, including the development of new technologies, the introduction of new products, and price reductions by such competitors to gain or retain market share. See "Business - Competition." MARKETING AND OEM RELATIONSHIPS The Company has established numerous marketing and/or strategic relationships with other companies and has sold a significant amount of its product through OEM relationships. In addition, the Company is pursuing significant sales opportunities which, in large part, are dependent upon the efforts of these strategic partners. The loss of one or more of these relationships may have an adverse material effect on the business operations of the Company. See "Business - Products." LEGAL PROCEEDINGS On June 1, 1995, the Company filed a complaint for patent infringement against Identix, of Sunnyvale, California, in the United States District Court for the Northern District of California. The complaint alleged that Identix willfully and deliberately infringed a Company patent and sought, among other things, an injunction prohibiting further infringement as well as unspecified monetary damages. Identix responded to the complaint alleging, among other purported defenses, non-infringement and patent invalidity. On August 27, 1996, the judge assigned to the case granted a partial summary judgment in favor of Identix, dismissing the Company's claims of patent infringement with respect to Identix's Touchprint 600 product line. A predecessor product, the Touchprint 900, received a similar ruling in favor of Identix on December 20, 1996. In January 1997, the Company filed an appeal of the court's decision of non-infringement. These appeals are decided by the Federal Circuit which is a Court of Appeals in Washington D.C. On October 8, 1997, the appeal was argued before the Court. As of the date of this Prospectus, no appellate decision has been issued. Further, <PAGE> a prediction of the final outcome of the appeal is not possible. In the event the Company does not prevail in this litigation, its competitive position could be adversely affected. NO CASH DIVIDENDS The Company has paid no cash dividends on its Common Stock and does not intend to pay cash dividends in the foreseeable future. The Company presently intends to retain future earnings, if any, for use in its business. IMPACT OF SALE OF SHARES; DILUTION DUE TO CONVERSION OF CONVERTIBLE DEBENTURES, AND EXERCISE OF OPTIONS AND WARRANTS As of December 1, 1997, the Company had 12,361,038 shares of Common Stock outstanding, and had warrants and options outstanding to purchase an additional 1,763,393 shares of Common Stock, a majority of which are exercisable at prices ranging from $1.875 to $3.125 per share. In addition, on December 1, 1997, the Company sold $500,000 principal amount of 8% Convertible Subordinated Debentures due 2000 (the "Debentures") which, if converted at December 1, 1997, would have resulted in the issuance of 318,878 shares of Common Stock. The Company may sell up to an additional $2.0 million of the Debentures. The conversion of such debt would be related to the fair market value of the Company's Common Stock at the time of issuance or conversion of such debt. The sale of the Common Stock offered hereby and the sale of additional Common Stock which may become eligible for sale in the public market from time to time upon conversion of debt and the exercise of warrants and options could have the effect of depressing the market price of the Company's Common Stock. VOLATILITY OF MARKET PRICE OF COMMON STOCK From September 30, 1995 to September 30, 1997, the market price of the Company's Common Stock has varied significantly from $8.125 to $1.50 per share. Fluctuations in the market price may result from many factors, including but not limited to irregularities in quarter to quarter operating results, general market conditions, significant events and industry conditions, including activities of the various government agencies and activities of the Company's competitors. Some or all of the conditions which affect the market price are beyond the control of the Company and may result in adverse changes to the price of the Common Stock. EFFECT OF CERTAIN ANTI-TAKEOVER LAWS AND STOCKHOLDERS' RIGHTS PLAN Certain provisions of the Delaware General Corporation Law and the Rights Agreement between the Company and Norwest Bank Minnesota, National Association, adopted by the Company effective May 2, 1996 (the "Rights Plan"), may have the effect of discouraging, delaying or preventing a change in control of the Company or unsolicited acquisition proposals. Section 203 of the Delaware General Corporation Law restricts business combinations with interested stockholders without board approval. Pursuant to the Rights Plan, the Company declared a dividend of one common share purchase right (the "Right") for each outstanding share of Common Stock. Each Right will entitle the holder thereof to purchase from the Company after the Distribution Date (as described below), a number of shares of Common Stock to be determined under the Rights Plan at an initial purchase price of $35, subject to adjustment. One additional Right is deemed delivered with each share of Common Stock subsequently issued by the Company. The Rights become exercisable on the first day after the earlier of (i) ten business days after the public announcement of the acquisition by a person or group of 15% or more of the outstanding Common Stock or (ii) ten business days after the commencement, or the first public announcement, of an intention to acquire through tender or exchange offer 15% or more of the outstanding Common Stock (the "Distribution Date"). In the event that the Company does not have sufficient authorized but unissued shares of Common Stock to permit the delivery of the required number of shares upon the exercise in full of the Rights, then each Right shall entitle the holder thereof to purchase the number of shares of Common Stock equal to a fraction determined under the <PAGE> Rights Plan. As of the date hereof, the Company does not have sufficient authorized and unissued shares of Common Stock to fully implement the Rights Plan. The Rights Plan may discourage certain types of transactions involving an actual or potential change in control of the Company which could be beneficial to the Company or its stockholders. USE OF PROCEEDS The Shares offered hereby will be sold by the Selling Stockholders. The Company will not receive any of the proceeds from the sale of the Shares by the Selling Stockholders. See "Principal and Selling Stockholders." <PAGE> MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION The Company's Common Stock has been traded on the Nasdaq National Market System under the symbol "DBII." The following information sets forth the approximate high and low closing prices for the Common Stock for quarterly periods indicated as reported by the Nasdaq National Market System. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and do not necessarily represent actual transactions. Fiscal 1996 High Low ----------- -------- --------- First Quarter $ 8.25 $ 5.25 Second Quarter 5.88 2.63 Third Quarter 8.75 3.13 Fourth Quarter 6.63 3.00 Fiscal 1997 High Low ----------- -------- --------- First Quarter $ 3.88 $ 2.13 Second Quarter 2.94 1.81 Third Quarter 2.81 1.50 Fourth Quarter 2.69 1.56 Fiscal 1998 High Low ----------- -------- --------- First Quarter $ 2.50 $ 1.25 Second Quarter (through January 9, 1998) 1.50 1.28 As of November 30, 1997, the Company had approximately 7,200 record holders of its Common Stock. The closing price of its Common Stock on January 9, 1998, as reported by the Nasdaq National Market System, was $1.28. DIVIDEND POLICY Holders of Common Stock are entitled to such dividends as may be declared from funds legally available for such purpose by the Board of Directors in its sole discretion. The Company has never paid a dividend on its Common Stock and it is not anticipated that dividends will be paid in the foreseeable future. If, and to the extent that, any operating profits are realized, the Company intends to retain such profits for operating purposes. <PAGE> SELECTED FINANCIAL DATA The following selected financial data of the Company as of and for each of the years in the five-year period ended September 30, 1997 has been derived from financial statements audited by KPMG Peat Marwick LLP, independent certified public accountants. The selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited financial statements and notes thereto included elsewhere in this Prospectus. <TABLE> <CAPTION> YEAR ENDED SEPTEMBER 30 ----------------------- 1997 1996 1995 1994 1993 ------------ ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues $ 11,419,358 $ 8,327,272 $ 9,098,014 $ 8,005,390 $ 4,603,821 Cost of revenues 8,811,271 6,181,481 5,273,412 4,997,103 2,631,860 Cost of revenues - non-recurring charges 1,529,118 -- -- -- -- ------------ ------------ ------------ ------------ ------------ Gross margin 1,078,969 2,145,791 3,824,602 3,008,287 1,971,961 ------------ ------------ ------------ ------------ ------------ Expenses: Sales and marketing 2,057,099 3,369,441 2,394,916 1,786,075 1,157,439 Engineering and development 2,526,346 4,569,751 2,854,592 3,618,385 2,022,521 Depreciation and amortization 319,536 1,049,584 529,687 480,981 143,310 General and administrative 2,043,954 2,753,444 1,700,017 1,296,864 972,644 Non-recurring charges 330,319 -- -- -- -- ------------ ------------ ------------ ------------ ------------ Total expenses 7,277,254 11,742,220 7,479,212 7,182,305 4,295,914 ------------ ------------ ------------ ------------ ------------ Loss from operations (6,198,285) (9,596,429) (3,654,610) (4,174,018) (2,323,953) Other income (expense) (77,109) (2,090,474) 330,055 376,703 259,410 ------------ ------------ ------------ ------------ ------------ Net loss $ (6,275,394) $(11,686,903) $ (3,324,555) $ (3,797,315) $ (2,064,543) ============ ============ ============ ============ ============ Net loss per common share $ (0.53) $ (1.24) $ (0.43) $ (0.49) $ (0.32) ============ ============ ============ ============ ============ Weighted average common shares 11,766,220 9,451,015 7,814,144 7,696,551 6,440,341 ============ ============ ============ ============ ============ AS OF SEPTEMBER 30 ------------------ 1997 1996 1995 1994 1993 ------------ ------------ ------------ ------------ ------------ BALANCE SHEET DATA: Cash and cash equivalents $ 1,891,397 $ 466,990 $ 367,866 $ 592,971 $ 4,485,606 Accounts receivable, net 5,161,356 5,676,849 4,494,301 4,575,807 1,756,128 Inventory 2,294,593 3,633,659 1,875,682 2,539,479 1,660,885 Working capital 6,131,758 5,506,587 13,493,690 11,864,794 14,048,363 Total assets 10,699,238 17,309,371 25,451,666 15,846,448 18,398,215 Long-term obligations -- 2,374,739 8,863,578 -- -- Total liabilities 3,533,990 6,853,999 12,362,412 2,077,368 1,495,057 Stockholders' equity 7,165,248 10,455,372 13,089,254 13,769,080 16,903,158 </TABLE> The Company has paid no cash dividends on its Common Stock. <PAGE> CAPITALIZATION The following table sets forth the capitalization of the Company at September 30, 1997, and as adjusted to reflect the sale of $500,000 of 8% Convertible Subordinated Debentures due 2000 on December 1, 1997 (see "Recent Financing"). September 30, 1997 ----------------------------- Pro forma as Actual adjusted ------------ ------------ Long-term obligations ......................... $ -0- $ 363,000 Stockholders' equity: Common Stock, par value $.01 per share; 20,000,000 shares authorized; 12,361,038 shares issued and outstanding, shares as adjusted (1) ........................ 123,610 123,610 Additional paid-in capital (2) ............ 42,439,576 42,576,576 Deferred compensation expense ............. (73,500) (73,500) Unrealized losses on marketable securities (1,639) (1,639) Accumulated deficit ....................... (35,322,799) (35,322,799) ------------ ------------ Total stockholders' equity ............. 7,165,248 7,302,248 ------------ ------------ Total capitalization ............... $ 7,165,248 $ 7,665,248 ============ ============ - ----------------- (1) Assumes no exercise of: (a) options outstanding at September 30, 1997 to purchase 1,182,500 shares of Common Stock; (b) warrants outstanding as of September 30, 1997 and warrants issued as of December 1, 1997 for the purchase of 140,000 shares of Common Stock; and (c) Common Stock which may be issued upon conversion of outstanding Debentures or upon conversion of up to $2,000,000 of additional Debentures which may be issued pursuant to the Convertible Subordinated Debenture Purchase Agreement. See "Recent Financing." See "Description of Capital Stock." (2) An aggregate of $137,000 of the proceeds of the 8% Convertible Subordinated Debentures has been allocated to additional paid-in capital to reflect the beneficial in-the-money conversion feature contained in the Debentures, and the value of the detachable warrant to purchase 15,000 shares of the Company's Common Stock issued in connection with the Debentures. RECENT FINANCING To provide additional working capital, on December 1, 1997, the Company entered into a convertible subordinated debenture purchase agreement ("Purchase Agreement") with KA Investment LDC ("KA"), providing for the Company's issuance and sale of up to an aggregate of $2,500,000 of the Debentures in tranches of $500,000 each. Debentures in the aggregate principal amount of $500,000 were sold to KA on December 1, 1997 (the "Tranche 1 Closing"). This Prospectus relates to Shares which may be sold by KA upon its conversion of the Debentures, the payment of interest on the Debentures in Shares, exercise of warrants issued to KA and Miller, Johnson & Kuehn, Incorporated ("MJK"), and is a part of the Company's registration statement filed pursuant to the Registration Rights Agreement dated December 1, 1997 (the "Registration Rights Agreement") entered into by and between the Company and KA. Additional Debentures in the aggregate principal amount of $500,000 and warrants may be sold by the Company to KA (each a "Tranche Closing") upon request of the Company within 90 to 120 days of the Tranche 1 Closing and each additional Tranche Closing, if the Company meets all conditions to issuance including, but not limited to, conditions requiring the Company to have effective and maintain a registration statement with the Commission covering 200% of the shares issuable upon conversion of all of: the Debentures, payment of interest thereon, and exercise of the warrants, and a <PAGE> requirement that the Company's market capitalization be at least $12.0 million. The Debentures issued to KA on the Tranche 1 Closing are convertible in whole or in part at the option of KA, with accrued interest, into Common Stock, at a conversion price equal to the lesser of $1.96 per share or 80% of the average closing bid price of the Common Stock for the five consecutive trading days preceding the conversion date of the Debentures. Future tranches may be convertible on a similar basis but the conversion prices will be related to the lesser of the market price on the issue date and the market price on the conversion date of the Debentures. The Company has the right, exercisable at any time upon two trading days notice to KA given at any time the Company receives a conversion notice and the conversion price in effect in connection with such conversion notice is less than $1.25, to repay, from funds legally available therefor at the time of such repayment, all or any portion of the outstanding principal amount of the Debentures which have been tendered for conversion, at a price equal to the sum of 120% of the aggregate principal amount of Debentures to be repaid. In connection with the Purchase Agreement, the Company has agreed to issue Debentures to KA upon the sale of each tranche, together with warrants to purchase 15,000 shares of Common Stock exercisable for up to five years at $2.50 per share, up to a maximum of 75,000 shares of Common Stock. Net proceeds to the Company will be used for working capital, business development and other general corporate purposes. <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL This report contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. These statements include statements regarding intent, belief, or current expectations of the Company and its management and are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Stockholders and prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties that may cause the Company's actual results to differ materially from the results discussed in the forward-looking statements. See "Risk Factors." The Company is a developer, assembler, marketer and integrator of computer-based products and services for the identification of individuals. Most of the Company's sales have been to state and local law enforcement agencies and, to date, have consisted primarily of TENPRINTER systems and related peripheral equipment, software and services. The law enforcement market and the government procurement process is subject to budgetary, economic and political considerations which may vary significantly from state to state and among different agencies. These market characteristics, along with the recent and continuing development of and competition within the live-scan electronic fingerprint industry, have resulted in and are expected to continue to result in an irregular revenue cycle for the Company and, therefore, any prediction of future trends is inherently difficult. The Company generally recognizes product sales on the date of shipment, although recognition at some later milestone is not uncommon based on the terms of specific customer contracts. The Company's standard terms of sale are payment due net in thirty days, f.o.b. Digital Biometrics, Inc. Terms of sale and shipment for certain procurements by municipal or other government agencies may, however, be subject to negotiation which consequently may affect the Company's timing and criteria for revenue recognition. Revenue under contracts where a performance bond, collateral or customer acceptance is required is not recognized until collateral requirements have been satisfied and customer acceptance has occurred. In cases where the Company is required to purchase a performance bond or to deposit collateral in accordance with the terms of a contract, the Company's policy is to defer revenues under such contracts until the amount shipped exceeds the amount of the performance collateral or until the security is released by the bonding company. Maintenance revenues are recognized over the life of the contract on a straight-line basis. RESULTS OF OPERATIONS FISCAL 1997 COMPARED TO FISCAL 1996 Total revenues in 1997 increased by 37% to $11,419,000 from $8,327,000 in 1996 due primarily to an increase in the number of TENPRINTER systems sold, partially offset by volume and trade-in discounts. The increase in identification system product revenues from $6,821,000 in 1996 to $9,712,000 in 1997 resulted from an increase in sales of TENPRINTER systems, partially offset by volume and trade-in discounts. Product maintenance and service revenues increased from $1,506,000 in 1996 to $1,707,000 in 1997, due primarily to a larger installed base of TENPRINTER systems. Sales to three customers in 1997 accounted for 17%, 14% and 12% of total revenues. Sales to two customers in 1996 accounted for 18% and 12% of total revenues. Gross margins for 1997 and 1996 were 9% and 26% of revenues, respectively. Gross margin for 1997 includes non-recurring charges of $1,529,000 ($.13 per share) recognized during the third quarter comprised <PAGE> of $838,000 of inventory adjustments mainly due to technical obsolescence, $524,000 of warranty reserve funding for warranty items mainly associated with the introduction and rollout of the S-Series, $132,000 for estimated committed losses on maintenance contracts, and $35,000 for the write-off of tooling. Gross margin for 1996 includes a write-off of $350,000 for excess field service spare parts related to previous generations of TENPRINTER products. Gross margins on identification system product revenues were 19% in 1997 compared to 44% in 1996 (including the impact of the relevant 1997 non-recurring charges). This decrease is due primarily to the impact of 1997 non-recurring charges, volume discounts offered to certain customers, and installation and warranty costs on S-Series TENPRINTER systems. Product maintenance and support margins for 1997 (including the impact of relevant 1997 non-recurring changes) and 1996 were (47%) and (57%) of maintenance and support revenues, respectively. Product maintenance costs for 1996 include a write-off of $350,000 for excess field service spare parts related to previous generations of TENPRINTER products. Sales and marketing expenses decreased to 18% of total revenues in 1997 from 40% in 1996 due primarily to higher revenues, reduced demonstration equipment expense, reduced charges for the allowance for doubtful accounts and, to a lesser extent, a reduction in personnel and related expenses during fiscal 1997. Sales and marketing expenses in 1996 include a write-off of $282,000 related to previous generation TENPRINTER system demonstration equipment and a charge of $540,000 related to an increase for the allowance for doubtful accounts. Engineering and development expenses decreased to 22% of total revenues in 1997 from 55% in 1996 largely due to increased revenues and lower S-Series and TRAK-21 development expenses. Engineering and development expenses during 1996 include charges of $374,000 related to adjustments of unreimbursed manufacturing setup costs of an international development project, and are net of reimbursements for international development costs of $88,000. Depreciation and amortization costs for 1996 include a write-off of $549,000 for unamortized software of information systems products no longer actively marketed. General and administrative expenses in 1997 decreased to 18% of total revenues from 33% in 1996 primarily due to higher revenues, reduced legal costs of a patent infringement suit brought by the Company against a competitor and a 1996 charge of $380,000 related to CEO transition costs. Operating expenses during fiscal 1997 include non-recurring and non-cash charges of $330,000 recognized during the third quarter for the write-off of assets with no future value and, to a lesser extent, equipment disposals. Interest income decreased to $230,000 in fiscal 1997 from $586,000 in fiscal 1996, primarily as a result of lower balances of marketable securities. Interest expense decreased to $300,000 in fiscal 1997 from $2,676,000 in fiscal 1996, primarily due to a non-cash charge of $1,924,000 during fiscal 1996 for the intrinsic value of the beneficial conversion feature of the 1995 Convertible Debentures, and to a lesser extent, conversions of the 1995 Convertible Debentures. FISCAL 1996 COMPARED TO FISCAL 1995 Fiscal 1996 operating results include a fourth quarter charge of $2,474,000 ($.26 per share) related to a review of strategies and refocusing of the business conducted by prior management. This charge includes severance expenses, write-off of excess and obsolete inventory and demonstration equipment resulting from the introduction of the Company's new S-Series TENPRINTER, an increase in the allowance for doubtful accounts, unreimbursed international development costs and the write-off of unamortized technology rights <PAGE> as a result of the Company's decision in the fourth quarter to no longer pursue the technology acquired in the Design Data acquisition in 1994. Total revenues in 1996 decreased to $8,327,000 from $9,098,000 in 1995 due primarily to the inclusion in prior year revenues of $1,800,000 in fees related to an international development project. The increase in identification system product revenues from $6,069,000 in 1995 to $6,821,000 in 1996 resulted from an increase in sales of TENPRINTER systems partially offset by lower 1996 average selling prices. Product maintenance and service revenues increased from $1,229,000 in 1995 to $1,506,000 in 1996, due primarily to a larger installed base of TENPRINTER systems. Sales to two customers in 1996 accounted for 18% and 12% of total sales. Sales to two customers in 1995 accounted for 29% and 23% of total revenues. Gross margins for 1996 and 1995 were 26% and 42% of revenues, respectively. Gross margin for 1996 includes a fourth quarter write-off of $350,000 for excess field service spare parts related to previous generations of TENPRINTER products. Gross margins on identification system product revenues were 44% in 1996 compared with 50% in 1995. This decrease is due primarily to costs related to a six-month delay in the introduction of the S-Series TENPRINTER system. During this six-month period there were only nominal TENPRINTER system deliveries. The fourth quarter in particular was impacted with high initial costs of product introduction, including training and installation of field service providers. Product maintenance and support margins for 1996 and 1995 were (57%) and (34%) of maintenance and support revenues, respectively. The increased costs of product maintenance and support are due primarily to costs associated with the establishment of a field service office in Southern California. Product maintenance costs for 1996 also include a fourth quarter write-off of $350,000 for excess field service spare parts related to previous generations of TENPRINTER products. Sales and marketing expenses increased to 40% of total revenues in 1996 from 26% in 1995 due primarily to increased international marketing efforts, S-Series promotional expenses, a fourth quarter write-off of $282,000 related to previous generation TENPRINTER system demonstration equipment and a fourth quarter charge of $540,000 related to an increase in the allowance for doubtful accounts. Engineering and development expenses increased to 55% of total revenues in 1996 from 31% in 1995. Engineering and development expenses during 1996 include fourth quarter charges of $374,000 related to adjustments of unreimbursed manufacturing setup costs of an international development project. After adjustment, engineering and development expenses for 1996 and 1995 are net of reimbursements for international development costs of $88,000 and $773,000, respectively. Depreciation and amortization costs include a fourth quarter write-off of $549,000 for unamortized software of information systems products no longer actively marketed. General and administrative expenses in 1996 increased to 33% of total sales from 19% in 1995 due primarily to $757,000 of legal costs associated with a patent infringement suit brought by the Company against a competitor and a fourth quarter charge of $380,000 related to CEO transition costs. Interest income increased to $586,000 in fiscal 1996 from $378,000 in fiscal 1995, primarily as a result of increased levels of marketable securities. Interest expense increased to $2,676,000 in fiscal 1996 from $48,000 in fiscal 1995, due to interest expense on the 1995 8% Convertible Debentures and a non-cash charge of $1,924,000 for the intrinsic value of the beneficial conversion feature of the 1995 Convertible Debentures. INFLATION The Company does not believe inflation has significantly impacted revenues or expenses. <PAGE> NET OPERATING LOSS CARRYFORWARDS At September 30, 1997, the Company has carryforwards of net operating losses of approximately $30,700,000 that may allow the Company to reduce future income taxes that would otherwise be payable. Of this amount approximately $2,200,000 relates to compensation associated with the exercise of non-qualified stock options which, when realized, would result in approximately $880,000 credited to additional paid-in capital. The carryforwards expire annually beginning in 1999. The annual limitation on use of net operating losses is calculated by multiplying the value of the corporation immediately prior to the change in ownership by the long-term federal tax exempt rate. A total of $3,700,000 of the net operating loss carryforwards at September 30, 1997 is subject to an annual net operating loss limitation, estimated at $350,000, resulting from the change in control of the Company which occurred, for income tax purposes, on December 14, 1990, the date of the Company's initial public offering. If the limited carryforward amount for any tax year exceeds the regular taxable income for such year, then the unused portion may generally be carried forward to increase the annual limitation for the following year. Utilization of net operating losses aggregating $27,000,000 which were incurred subsequent to the change of ownership are not limited. However, any future ownership change could create a limitation with respect to these loss carryforwards. LIQUIDITY AND CAPITAL RESOURCES GENERAL For the period from the Company's inception in 1985 through September 30, 1997, the Company's cumulative deficit was $35,323,000. Losses are expected to continue until revenues and gross margin from sales of the Company's current and future products and services are sufficient to cover the level of operating expenses required for the Company's operations. The Company's business has included large contract awards from international, state and local law enforcement agencies and it is expected that this will continue. Collection of receivables related to billings of these contract amounts is often protracted. See "Risk Factors - Working Capital and Liquidity - Local Government Credit Considerations." The Company entered into a receivables financing line of credit effective October 1, 1996, for the lesser of eligible receivables or $3,500,000 with Norwest Business Credit. Borrowings under this line of credit are secured by all assets of the Company. The line bears interest at 1.5% above the prime rate (8.5% at September 30, 1997), is payable upon demand and expires in January 1998. The Company elected to use the proceeds from the sale of marketable securities to pay off all borrowings under this line of credit at September 30, 1997. For the period from September 30, 1997 through January 31, 1998, the minimum interest shall be $10,000 per the terms of the agreement. The Company anticipates renewal of the line upon expiration. The Company had a $4,000,000 line of credit with Norwest Bank Minnesota N.A. Borrowings under this line of credit were secured by marketable securities and were limited to 80% of the market value of marketable securities held as collateral by the bank. The Company elected to use the proceeds from the sale of marketable securities during fiscal 1997 to pay off all borrowings under the line at September 30, 1997 and terminate the line. The Company has a $200,000 line of credit with First Bank Minneapolis, secured by cash deposits. Borrowings under the line bear interest at the prime rate (8.5% on September 30, 1997), are payable upon demand and expires in March, 1998. There were no borrowings under the line at September 30, 1997. ISSUANCE OF 8% CONVERTIBLE SUBORDINATED DEBENTURES AND WARRANTS SUBSEQUENT TO FISCAL YEAR END To provide additional working capital, the Company entered into the Purchase Agreement on December 1, 1997, <PAGE> providing for the Company's issuance and sale of up to an aggregate of $2,500,000 of the Debentures in tranches of $500,000 each. Debentures in the aggregate principal amount of $500,000 were sold to KA on December 1, 1997 (the "Tranche 1 Closing"). Additional Debentures in the aggregate principal amount of $500,000 and warrants may be sold by the Company to KA (each a "Tranche Closing") may be issued upon request of the Company within 90 to 120 days of the Tranche 1 Closing and each additional Tranche Closing, if the Company meets all conditions to issuance including, but not limited to, conditions requiring the Company to have effective and maintain a registration statement with the Commission covering shares issuable upon conversion of the Debentures, payment of interest thereon and exercise of the warrants and a requirement that the Company's market capitalization be at least $12.0 million. The Debentures issued to KA on the Tranche 1 Closing are convertible in whole or in part at the option of the holder, with accrued interest, into Common Stock, at a conversion price equal to the lesser of $1.96 per share or 80% of the average closing bid price of the Common Stock for the five consecutive trading days preceding the conversion date of the Debenture. Future tranches may be convertible on a similar basis but the conversion prices will be related to the lesser of the market price on the issue date and the market price on the conversion date of the Debentures. Warrants for the purchase of 15,000 shares of Common Stock are required to be issued with each tranche. The Company has the right, exercisable at any time upon two trading days notice to the purchaser of the Debentures given at any time the Company receives a conversion notice and the conversion price in effect in connection with such conversion notice is less than $1.25, to repay, from funds legally available therefor at the time of such repayment, all or any portion of the outstanding principal amount of the Debentures which have been tendered for conversion, at a price equal to the sum of 120% of the aggregate principal amount of Debentures to be repaid. In connection with the Purchase Agreement, the Company has agreed to issue to the purchaser of the Debentures, upon the sale of each tranche, warrants to purchase 15,000 shares of Common Stock exercisable for up to five years at $2.50 per share up to a maximum of 75,000 shares of Common Stock. Also, in connection with the transaction, the Company paid $40,000 in fees to an investment banking firm, MJK, and issued a warrant to purchase 125,000 shares of Common Stock at an exercise price of $2.00 per share (the "MJK Warrant"). The estimated value of this warrant is $87,500 which is a debt issuance cost to be written off to interest expense and over the term of the Debentures. The Purchase Agreement includes a beneficial conversion feature. The intrinsic value of the beneficial conversion feature of each tranche will be allocated to additional paid-in capital with the resulting discount on the debt resulting in a non-cash interest expense charge to earnings (loss) over the vesting period of the conversion feature. The intrinsic value of the conversion feature of the first tranche is $125,000. Net proceeds to the Company will be used for working capital, the development of new business opportunities, and other general corporate purposes. ANALYSIS OF CASH FLOWS FROM OPERATIONS Net cash used in operating activities was $2,652,000 and $9,374,000 for the years ended September 30, 1997 and 1996, respectively. The decrease in cash used in operating activities was primarily a result of the decreased net loss in fiscal 1997 adjusted for changes in operating assets and liabilities. Cash flows from changes in operating assets and liabilities changed from cash used of $3,016,000 in fiscal 1996 to $2,389,000 of cash provided in fiscal 1997. This $5,405,000 change in cash flow from operating assets and liabilities resulted primarily from improved accounts receivable and inventory balances. Net cash provided by investing activities was $5,289,000 for the year ended September 30, 1997 as compared with $757,000 of net cash used in investing activities for the year ended September 30, 1996. The change was primarily due to proceeds from paydowns and sales of marketable securities, and to a lesser extent, reduced capital expenditures in fiscal 1997. Capital expenditures in 1996 were primarily for engineering and manufacturing test fixtures. The Company's business does not require significant amounts of cash for capital expenditures because substantial amounts of the manufacturing and assembly processes utilized in the production of current products are performed by outside vendors, as directed by the Company. Specifically, the Company purchases electronics modules and standard mechanical assemblies from manufacturers of such goods. In addition, sheet metal components, optical components and specialized electronics modules are designed by the Company and manufactured to the Company's specifications by outside sources. <PAGE> Net cash used in financing activities was $1,213,000 for the year ended September 30, 1997 as compared to net cash provided by financing activities of $10,230,000 in 1996. Borrowings under lines of credit were $1,255,000 at September 30, 1996. On September 29, 1995, the Company completed a private placement to offshore accredited investors of $10,900,000 of 8% Convertible Debentures due September 29, 1998 (the "1995 Debentures"), all of which were converted to 4,237,748 shares of common stock as of September 30, 1997. The average conversion price was $2.70 per share. Net proceeds to the Company during fiscal 1996 after placement fees but before legal and other expenses were $10,109,750. Interest accrued on the 1995 Debentures was also payable in Common Stock at the time of conversion at the conversion price as described above. In addition to the cash placement fee, a warrant to purchase 112,893 shares of the Company's Common Stock at $8.40 per share was granted to the placement agent for this offering. The warrant was valued at $112,893, which is reflected as a discount on the 1995 Debentures and was amortized as interest expense over the term of the 1995 Debentures. The intrinsic value of the beneficial conversion feature was allocated to additional paid-in capital with the resulting discount on the debt resulting in a non-cash interest expense charge to earnings (loss) over the vesting period of the conversion feature. Net proceeds to the Company were used for working capital, product development and other corporate purposes. At September 30, 1997, the Company had $1,891,000 in cash and cash equivalents and $155,000 in marketable securities which are classified as available for sale. The unrealized loss on marketable securities was $135,000 at September 30, 1996 and immaterial at September 30, 1997. These marketable securities were collateral for borrowings under a line of credit. Virtually all of the marketable securities were sold during fiscal 1997 with the proceeds used to pay off all borrowings under the Norwest lines of credit. There were no borrowings under lines of credit at September 30, 1997. <PAGE> BUSINESS GENERAL The Company develops, manufactures, markets and integrates computer-based products and services for the identification of individuals. The Company is a leading vendor of products employing "biometric" technology, the science of the identification of individuals through the measurement of distinguishing biological characteristics. The Company's principal product is the TENPRINTER system for "live-scan" fingerprint capture used mainly in law-enforcement applications. The TENPRINTER is a computer-based system with patented high-resolution optics which captures, digitizes, prints and transmits forensic-grade fingerprint images. The Company also offers high-resolution single-fingerprint capture products for commercial and governmental identification applications and has recently established a systems integration services business focused on the integration of biometric and other identification technologies into applications for government and commercial markets. During fiscal 1997, virtually all of the Company's revenues were derived from sales of TENPRINTER systems and related maintenance fees. Approximately 89% of customer accounts receivable at September 30, 1997 were from government agencies, of which 39% was from a single customer. For the years ended September 30, 1997, 1996 and 1995, sales to three customers in 1997 accounted for 43% of revenues, sales to two customers in 1996 accounted for 30%, and sales to two customers in 1995 accounted for 52%, respectively. Export sales were 5%, 15% and 21% of total revenues, for the years ended September 30, 1997, 1996 and 1995, respectively. The Company has also developed a prototype player tracking system for the gaming industry called TRAK-21. The Company has reached an agreement in principle with Grand Casinos, Inc. to create a joint venture to carry out the productization of TRAK-21. It is anticipated that the joint venture will be responsible for marketing of the resultant product. The Company's strategy is to continue to market TENPRINTER systems to law enforcement agencies, but also to expand the Company's product and services offerings as well as the markets which the Company serves. The law enforcement market for biometric products is well established. The Company believes that there is increasing interest from other governmental and commercial markets to employ biometric identification technologies and products to improve security and to assure proper access. The Company intends to aggressively pursue these emerging opportunities. BIOMETRIC TECHNOLOGIES The Company develops, manufactures, markets and integrates products in the field of "biometrics," the science of the identification of individuals through the measurement of distinguishing biological characteristics. This field consists of a variety of techniques at various stages of technical maturity and market acceptance. These techniques include fingerprinting, voice recognition, retinal and iris scanning, DNA analysis, facial and hand geometry, and handwriting analysis. A number of these techniques have been incorporated into a variety of computer-based hardware and software measurement technologies. The goal is that when used with databases of characteristics, which previously have been positively linked to specific individuals, these products enable the positive identification of an individual whose identity is under scrutiny. The Company believes the quality and reliability of the various non-fingerprint techniques range widely. For over a century, fingerprints have been and remain the method of choice to positively identify individuals. Forensic scientists endeavor to match latent fingerprints lifted from crime scenes with the fingerprints of suspected perpetrators. Criminal courts throughout the world accept the testimony of fingerprint experts and countless convictions have been achieved on the basis of fingerprint evidence. The computerization of fingerprint identification methods has greatly increased the speed of criminal identification processes and has been widely accepted in the law enforcement community. As yet, none of the other <PAGE> biometric identification technologies has achieved the degree of acceptance of fingerprints in law enforcement or any other markets. The Company currently offers products that employ "forensic-quality" fingerprint capture technologies. Forensic quality refers to the resolution and pixel gray-scale depth of the image. The Company's products have been employed by law enforcement organizations in a number of states and foreign countries since 1988. LAW ENFORCEMENT AND REGULATORY AGENCY MARKETS Fingerprint identification was the first biometric technique to achieve widespread acceptance. Prior to the introduction of sophisticated computer-based fingerprint capture and matching technologies, manually taken fingerprints were manually cross-checked against collections of paper-and-ink fingerprint records to identify individuals and to positively associate them with crime scenes. In the United States, over 8,500,000 fingerprint cards are submitted every year to the Federal Bureau of Investigation (FBI), and thousands are collected by state and local law enforcement agencies. To manage these large quantities of data, computerized databases for fingerprint classification and identification were introduced in the 1970s. These systems, known as Automatic Fingerprint Identification Systems ("AFIS"), greatly improved the speed and efficiency of fingerprint searches. Current AFIS systems are capable of performing several thousand comparisons of fingerprints per second. These systems present a trained fingerprint examiner with a short list of candidate prints from which the examiner makes a final visual determination of whether two prints are identical. AFIS systems are provided by a number of vendors, including NEC Technologies, Morpho/SAGEM, Printrak, TRW and others. The Company does not provide AFIS systems. With the introduction of AFIS systems it became apparent that, in practice, the quality of fingerprints taken using the traditional paper-and-ink method was often inadequate to meet the needs of this sophisticated technology. An unacceptably high percentage of conventionally inked fingerprints could not be read properly by AFIS systems because of poor image quality. In response to this problem, the Company and its competitors introduced sophisticated computer-based imaging systems to capture and digitize fingerprints. This process yields a much higher level of so-called "minutia" points, which are the basis for the identification techniques used by AFIS systems. The Company's TENPRINTER system consistently generates high quality fingerprint data, which at the user's option, may be transmitted over telephone lines to any location, including AFIS sites, other databases, or the FBI, or may be printed out locally and/or at remote locations on any number of card formats. The TENPRINTER system also permits the booking officer to review the quality of the prints as they are being taken, enabling the officer to screen out poor quality prints without having to redo the entire fingerprint card, thus improving the productivity of the booking process. The Company's sales have historically included large purchases by a relatively small number of customers. For the fiscal years ended September 30, 1997, 1996 and 1995 sales to three customers in 1997, two customers in 1996 and two customers in 1995 accounted for 43%, 30% and 52%, respectively, of annual revenues. This concentration of sales among few relatively large customers may continue in the foreseeable future. Furthermore, the nature of the law enforcement market and the government procurement process is expected to result in a continued irregular and unpredictable revenue cycle in this business segment for the Company. <PAGE> PRODUCTS THE TENPRINTER SYSTEM The Company's principal product, the TENPRINTER, is designed and marketed mainly as an input device to AFIS systems. Several large manufacturers produce and sell AFIS systems, which are computerized central fingerprint database systems capable of storing fingerprint information for an entire demographic unit such as a city, county, state or country. AFIS systems are designed to facilitate the work of a law enforcement agency's fingerprint technicians. An AFIS system is capable of electronically comparing a given set of fingerprints against all fingerprints in its database and producing a short list of potentially matching candidate prints. A fingerprint technician then visually compares the AFIS results with the fingerprints in question. Optimal use of an AFIS system depends in part on the clarity of the fingerprint images that are input to the AFIS. The TENPRINTER system consistently produces fingerprint images of higher clarity than those achieved by conventional "paper-and-ink" methods and is being marketed as a more accurate input to AFIS systems. The TENPRINTER system is a computer-based inkless live-scan system that electronically captures a fingerprint and creates a digital image. Fingerprints are captured by placing the fingers of a subject on a contact surface of an optical assembly. The optical image is converted into a digital image by an electronic photo-imaging detector. The digital image produced by the TENPRINTER system may be sent directly to the AFIS site by means of telecommunications or may be printed on a law enforcement agency's fingerprint cards. In the gray-scale printing technology available with the TENPRINTER system, the printed fingerprint includes the nuances normally seen in a conventional "paper-and-ink" fingerprint. While prices of AFIS systems and live-scan systems vary widely depending on the configuration of the systems, AFIS systems cost from $500,000 to several million dollars while live-scan systems are priced between approximately $30,000 and $80,000 per unit. The primary target market for the TENPRINTER is state and local law enforcement agencies that have purchased, are purchasing or have access to, AFIS systems. The assistance and support of the AFIS vendor is frequently important in the sale and installation of live-scan systems. Law enforcement agencies submit one copy of a fingerprint card to the FBI for every suspect charged with a felony. Over 8,500,000 such cards are submitted to the FBI each year. As a result, the FBI plays an important role in the fingerprint identification process in the United States. The FBI has put into place an extensive testing process for live-scan systems. When a live-scan system passes the testing process, the FBI will accept cards produced by that live-scan for submission to the FBI's Identification Division and for retention in the Division files. The Company's TENPRINTER system has received accreditation under the FBI Image Quality Standards ("IQS"). To the best of the Company's knowledge, competitors also have received or are in process of receiving such approval. Regulatory standards such as IQS continue to evolve and there can be no assurance that the Company will be able, without significant cost and expense, to comply with future requirements. The FBI has awarded contracts in connection with a multi-phase program of its well-publicized fingerprint automation and revitalization project which, when operational, will involve the paperless utilization of fingerprint data and, ultimately, the capability to eliminate fingerprint cards at the FBI level. The FBI system will accept electronic fingerprint images such as those produced by live-scan equipment or similar technologies and will replace the current card-based system in Washington with a new facility in West Virginia. The FBI has stated that 62,000 contributors currently submit fingerprint cards to the FBI. The Company believes that when the FBI's new system becomes operational, it may have a positive impact on demand for live-scan equipment. <PAGE> OTHER PRODUCTS FOR LAW ENFORCEMENT The SQUID(R) system is a lightweight, portable, hand-held unit designed for use in the patrol car. The SQUID system captures "on-the-spot" fingerprints which can then be relayed from the patrol car to a communications center where identification can take place. This product will permit patrol officers to obtain positive identification without transporting suspects to the police station. The SQUID system is being designed and manufactured to specifications of the FBI NCIC 2000 project which is currently planned to be operational in 1999. The SQUID system is currently being marketed on a limited basis. The Company has offered software development services and internally-developed mugshot products to a limited number of customers. ANCILLARY PRODUCTS The Company's TENPRINTER systems are normally configured in networked environments. Digitized TENPRINTER fingerprint records are frequently transmitted to multiple destinations, including central sites for printing and one or more criminal record databases, including AFIS systems. The Company has developed several ancillary products sold in conjunction with the TENPRINTER which facilitate central printing and remote transmission of digitized fingerprint images. The Company also offers various software programs which enhance the functionality of the TENPRINTER. ASSEMBLY, INSTALLATION AND MAINTENANCE The Company's TENPRINTER systems are assembled from purchased components at its facility in Minnetonka, Minnesota. Other than prototypes, for which the development time may vary, the time required for product delivery averages approximately 60 days from the date a purchase order is received. TENPRINTER systems are installed by Company employees or contractors. Installation has frequently required implementation into customer network configurations, many of which are complex. The Company has historically provided these services at little or no additional charge to the customer. Management intends to negotiate future orders requiring customers to compensate the Company for such services, although there can be no assurance that this will be accepted. The Company offers various levels of maintenance service for its equipment, which are delivered by Company employees or third party maintenance providers. These services have historically been provided, in the aggregate, below the Company's fully loaded cost. Management intends to change maintenance pricing to achieve profitability, although there can be no assurance that this effort will be successful. SALES AND DISTRIBUTION The Company sells TENPRINTER systems directly to end users through a direct sales force and through partnering relationships with AFIS suppliers including NEC Technologies and Morpho/SAGEM. Relationships with AFIS vendors are an important means of distribution to many customers and, consequently, are key to the Company. Furthermore, live-scan products must deliver output to AFIS systems, thereby requiring a technical relationship between the Company and AFIS suppliers to assure proper integration of TENPRINTER installations with the requirements of AFIS systems. See the section on "Competition" which follows. COMPETITION The market for live-scan systems is competitive. Live-scan products are offered by several companies including Identix and Printrak. NEC Technologies is both a strategic partner and in certain circumstances a <PAGE> competitor. The Company competes in the live-scan market primarily on the basis of image quality, features, performance, service and support and price. Continued growth in demand for live-scan fingerprint systems may attract additional competition. The vendors of AFIS systems are logical participants in the live-scan market, as evidenced by the entry of Printrak into the live-scan market and the marketing by NEC Technologies of a live-scan product, the LS-21, which includes features and components currently sourced from Identix. Other AFIS vendors and other potential additional competitors could enter the law enforcement market, and may have financial and other resources significantly greater than those of the Company. Also see "Management's Discussion and Analysis of Financial Condition and Results of Operations." SUPPLIERS The Company buys substantially all components of the TENPRINTER system from outside suppliers for assembly and testing by the Company. Some of these components are designed by the Company and/or are custom manufactured to its specifications. The Company may specify parts used in such components. The Company inspects and tests incoming parts and components, and conducts test and burn-in procedures on assembled finished products. Certain components used in manufacturing of TENPRINTER systems are currently supplied by a single vendor to obtain volume economies. Secondary sources are available but would take several months to bring into production. Delays in product deliveries to customers could occur until the secondary sources are secured. COMMERCIAL MARKETS SINGLE FINGERPRINT CAPTURE DEVICES Digital Biometrics has leveraged its expertise in forensic-quality fingerprint capture technology to create two forensic-quality single fingerprint capture devices, the FC-21(TM) and FC-22(TM). The FC series single fingerprint capture units have been marketed on a limited basis and are priced approximately from $1,250 to $2,500 per unit. Demand for single fingerprint capture devices for commercial applications appears to be growing. The Company is evaluating a more aggressive marketing effort of its FC products in commercial markets. SYSTEMS INTEGRATION In December 1997, the Company formed the Integrated Identification Solutions Division to provide systems integration services to commercial clients. The business objective of this division is to address what the Company believes is growing interest in the integration of biometric identification techniques into commercial applications which require heightened security than is currently available through traditional techniques such as personal identification numbers (PINs) and passwords. It is anticipated that this division may also provide integration services to governmental customers including law enforcement organizations. The Company believes that it has a strong basis for competition in the systems integration business due to its focus on biometric identification. However, the systems integration business is competitive and includes many firms with substantially greater resources than the Company. <PAGE> BACKLOG At September 30, 1997, the Company's firm backlog of orders for TENPRINTER systems and related products was approximately $2,282,000, as compared to a backlog of approximately $3,773,000 at September 30, 1996. GAMING Digital Biometrics has developed a prototype blackjack table wagering data capture system called TRAK-21. The TRAK-21 system was developed to enable casinos to track the wagering activity of its blackjack patrons. The Company has derived no revenues to date from this system. In November 1997, the Company announced an agreement in principle with Grand Casinos, Inc. to form a joint venture for the commercialization of this system. It is anticipated that if the system is successfully productized that the joint venture company will market the system to the gaming industry. There are a variety of companies providing blackjack player tracking information and capabilities to the gaming industry, the most prominent of which is Mikohn Gaming Corporation. The TRAK-21 Player Tracking System uses high-level image processing for automatically calculating wagers, which differentiates TRAK-21 from other systems (including Mikohn's) which use table and chip sensors to track player wagering. Components necessary for the manufacture of TRAK-21 systems are anticipated to be primarily standard parts available from a variety of suppliers. YEAR 2000 COMPLIANCE In June 1996, the Company began converting its computer systems enabling proper processing of transactions in the Year 2000 and beyond. The operating system vendor has made software upgrades available to make its software compatible with Year 2000. The Company will also test its application software to ensure compatibility with Year 2000. The Company presently believes that, with modifications to existing software and conversions to new software, Year 2000 compatibility will not pose significant operational problems for the Company's computer systems as so modified and converted, although there can be no assurance that unforeseen difficulties or costs will not arise. PROPRIETARY TECHNOLOGY The Company owns federally registered trademarks for the marks, TENPRINTER, the Company's mechanical hand logo, and SQUID. The Company has applied for a trademark registration for the mark TRAK-21. The Company also claims trademark rights in the product names FC-5, FC-6, FC-7, FC-11, FC-21 and FC-22, but has not filed federal trademark applications for such marks. The Company owns several United States patents and has U.S. patent applications pending which cover technology currently employed in its products. The Company has also filed for patent protection in several foreign countries. Although additional features of the Company's products may be patentable, the Company has chosen to preserve these features as trade secrets rather than applying for patent protection. The Company has obtained signed confidentiality agreements from all employees and from independent consultants who have access to confidential information. The Company is in the appeals process regarding a claim of patent infringement against a competitor. See "Item 3. Legal Proceedings." <PAGE> EMPLOYEES At November 30, 1997, the Company employed 81 persons on a full-time basis, none of whom is represented by a union. Of these persons, six have general management responsibilities and the remainder perform sales, marketing, engineering, customer service, assembly, or administrative functions. From time to time to meet critical demands, the Company has utilized additional individuals to perform services for the Company on a part-time or a consulting basis. Personnel will be hired in the future as the Company deems necessary. The Company believes that its employee relations are good. All employees of the Company have executed agreements which provide for the confidentiality of Company proprietary information and the ownership by the Company of inventions developed using Company resources. PROPERTIES The Company does not own any real properties. The Company's primary offices and facilities are located in approximately 31,000 square feet of space in an industrial park at 5600 Rowland Road, Minnetonka, Minnesota. The space is occupied under a lease expiring on April 30, 2001, and is believed to be adequate for the Company's current business needs. A field service and sales office is located in Los Angeles, California in approximately 3,400 square feet of space in an industrial office park. This space is occupied under a lease that expired in December 1997. This lease is a year-to-year arrangement, and is currently under negotiation for renewal. LEGAL PROCEEDINGS On June 1, 1995, the Company filed a complaint for patent infringement against Identix, Inc., of Sunnyvale, California, in the U.S. District Court for the Northern District of California. The complaint alleges that Identix willfully and deliberately infringed a Company patent through the manufacture, use and/or sale of competing products. The alleged infringement pertains to how rolled fingerprint images are obtained optically and how they are mathematically represented in storage. The Identix TP-600 and TP-900 devices are both alleged to infringe on the Company patent. This technology is a fundamental aspect of the fingerprint capture task in forensic quality live-scan. The complaint seeks, among other things, an injunction prohibiting further infringement as well as unspecified monetary damages. Identix responded to the complaint alleging, among other purported defenses, non-infringement and patent invalidity. On August 27, 1996, the judge assigned to the case granted a partial summary judgment in favor of Identix, dismissing the Company's claims of patent infringement with respect to the Identix Touchprint 600 product line. A predecessor product, the Touchprint 900, received a similar ruling in favor of Identix on December 20, 1996. In January 1997, the Company filed an appeal of the court's decision of non-infringement. These appeals are decided by the Federal Circuit which is a Court of Appeals in Washington D.C. On October 8, 1997, the appeal was argued before the Court. As of the date of this Prospectus no appellate decision has been issued. Further, a prediction of the final outcome of the appeal is not possible. In the event the Company does not prevail in this litigation, its competitive position could be adversely affected. Except for the foregoing, there are no material lawsuits pending or, to the Company's knowledge, threatened against the Company. <PAGE> MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information regarding the directors and executive officers of the Company. All of the directors of the Company serve until the next annual meeting of stockholders and until their respective successors are elected and qualified. Name Age Position - -------------------------------- ----- ------------------------------------- James C. Granger (1)............ 51 President, Chief Executive Officer, and Director C. McKenzie Lewis III (1)(2)(3). 51 Chairman and Director John J. Metil................... 47 Chief Operating Officer and Chief Financial Officer Barry A. Fisher................. 43 Vice President - Sales, Marketing and Business Development Roman A. Jamrogiewicz........... 45 Vice President - Engineering Michel R. Halbouty.............. 56 Vice President - Operations Jack A. Klingert (2)(3)......... 68 Director George Latimer (2)(3)........... 62 Director Stephen M. Slavin (1)(2)(3)..... 57 Director - ---------------------- (1) Member of Nominating Committee. (2) Member of Compensation and Personnel Committee. (3) Member of Audit Committee. JAMES C. GRANGER. Mr. Granger became the Company's President and Chief Executive Officer on January 1, 1997, and was appointed to the Board of Directors of the Company effective January 27, 1997. Prior to joining the Company, Mr. Granger was employed by ADC Telecommunications, Inc. as President of its Access Platforms System between March 1995 and December 1996. Between 1989 and February 1995, Mr. Granger was employed by Sprint/United Telephone, Orlando, Florida, in various senior marketing and management positions. Prior to 1989, Mr. Granger was employed by American Telephone & Telegraph in various management positions. C. MCKENZIE LEWIS III. Mr. Lewis was elected Chairman of the Company's Board of Directors on October 28, 1996 and has served as a Director of the Company since 1994. Between 1986 and 1996, Mr. Lewis served as Chief Executive Officer and President and a director of Computer Network Technology Corporation ("CNT"), a developer and manufacturer of high performance extended channel networking systems. Mr. Lewis has over 26 years experience in the computer and data communications industry. Mr. Lewis is currently Managing General Partner in MMP Partners Limited Partnership, a Minnesota limited partnership engaged primarily in making venture capital investments. JOHN J. METIL. Mr. Metil has served as the Company's Chief Operating Officer and Chief Financial Officer since joining the Company in April 1997. From August 1992 through April 1997, Mr. Metil served as Executive Vice President with the Zebulon Group, Inc. Previously, he was a co-founder and served as Chief Financial Officer of Tricord Systems, Inc., and held senior finance and corporate development positions at National Computer Systems, Control Data Corporation and Pillsbury Company. <PAGE> BARRY A. FISHER. Mr. Fisher has served as Vice President of Sales, Marketing and Business Development since joining the Company in March 1997. From July 1995 through March 1997, Mr. Fisher served as Vice President of Sales with American Connexions, a national sales management company. From January 1988 through July 1995, he served as Vice President of Sales for Recovery Engineering. From September 1976 through January 1988, he held senior management positions at the Tennant Company. ROMAN A. JAMROGIEWICZ. Mr. Jamrogiewicz has served as Vice President of Engineering since joining the Company in May 1997. From November 1997 through April 1997, Mr. Jamrogiewicz was employed with Alliant Techsystems and served as Business Segment Director and held positions of Director for Advanced Development, Program Director and Director of Software Engineering. MICHEL R. HALBOUTY. Mr. Halbouty has served as Vice President of Operations since joining the Company in May 1997. Mr. Halbouty served as Vice President of Manufacturing with NetStar, Inc., from May 1992 through May 1997. He has also held senior management positions with Lee Data Corporation and Control Data. JACK A. KLINGERT. Mr. Klingert served as the Company's Chairman from 1987 through October 28, 1996, and served as the Company's President and Chief Executive Officer beginning in 1987, retiring January 1997. Mr. Klingert has advised the Company that he does not intend to stand for reelection as a director of the Company in 1998. He has also served as a member of the Company's Board of Directors since 1987. Prior to joining the Company in April 1987, Mr. Klingert, from 1964 to 1987, held a number of senior level management positions with Control Data Corporation. From 1958 to 1964, Mr. Klingert worked on various classified scientific and systems programming projects in the Departments of Theoretical Physics and Computation at the Lawrence Livermore National Laboratories, Livermore, California. GEORGE LATIMER. Mr. Latimer has served on the Company's Board of Directors since 1990. From November 1995 through December 1997, Mr. Latimer served as Chief Executive Officer of the National Equity Fund, a syndication of financing for affordable housing in Chicago, Illinois. He is a Distinguished Visiting Professor of Urban Studies at Macalester College, Saint Paul, Minnesota. From July 1993 to November 1995, Mr. Latimer was Director, Office of Special Actions, U.S. Department of Housing and Urban Development ("HUD"). From February 1993 to July 1993, Mr. Latimer was employed as a consultant to HUD. From 1990 to 1993, Mr. Latimer was Dean of Hamline University School of Law, Saint Paul, Minnesota. From 1976 to 1990, Mr. Latimer served as the Mayor of Saint Paul, Minnesota. Mr. Latimer is a member of the Board of Directors of Piper Jaffray Investment Trust. STEPHEN M. SLAVIN. Mr. Slavin has served on the Company's Board of Directors since 1986. For more than six years, Mr. Slavin has been engaged in the private practice of law as a partner of the firm of Foley & Lardner, Chicago, Illinois. DIRECTOR COMPENSATION In 1992 the Board of Directors adopted the Company's 1992 Restricted Stock Plan. Under such plan, each time a non-employee director is elected or re-elected to the Board, he or she will be granted the number of shares of restricted stock equal to $18,000 divided by the fair market value of one share of Common Stock at the close of business on the day prior to the date of grant. The Restricted Stock is granted on the date of the annual stockholders' meeting to each non-employee director elected or re-elected at such meeting. Non-employee directors were previously compensated with annual stock option grants of 7,500 shares, exercisable at fair market value on the date of grant and expiring 10 years after issuance. Such options were granted pursuant to the Non-Employee Director Stock Option Plan (the "Directors' Plan") at the time of election or re-election at the annual stockholder's meeting. In September 1997, the Board awarded 3,000 shares of Common Stock to each of the Company's outside directors, Stephen M. Slavin, George Latimer, C. McKenzie Lewis III and Jack A. Klingert. <PAGE> EXECUTIVE COMPENSATION The following table sets forth certain information concerning compensation paid by the Company for the last three fiscal years to its Chief Executive Officer and other executive officers whose cash compensation exceeded $100,000 in fiscal year 1997. SUMMARY COMPENSATION TABLE <TABLE> <CAPTION> LONG-TERM COMPENSATION AWARDS ---------------------- ANNUAL COMPENSATION RESTRICTED SECURITIES NAME AND ------------------- STOCK UNDERLYING ALL OTHER PRINCIPAL POSITION YEAR SALARY($) BONUS($) AWARDS($) OPTIONS(#) COMPENSATION - --------------------------- ------ --------- -------- --------- ----------- ------------ <S> <C> <C> <C> <C> <C> <C> James C. Granger(1) 1997 $ 131,265 $ 32,816 $ -- 250,000 $ -- President and Chief Executive Officer Glenn M. Fishbine, 1997 120,000 -- -- -- 171,234(2) Senior Vice President - 1996 116,825 1,600 -- 35,000 4,500 Technology 1995 110,553 5,650 -- 45,000 4,253 </TABLE> - -------------------- (1) Mr. Granger has served as President and Chief Executive Officer of the Company since January 1, 1997. (2) Includes $3,737 in the form of Common Stock paid as a matching contribution under the Company's 401(k) plan, and severance compensation consisting of forgiveness of indebtedness totaling $167,497. STOCK OPTION GRANTS IN FISCAL YEAR 1997 <TABLE> <CAPTION> POTENTIAL REALIZABLE VALUE AT ASSUMED NUMBER OF ANNUAL RATES OF STOCK SECURITIES PERCENT OF TOTAL PRICE APPRECIATION FOR UNDERLYING OPTIONS GRANTED EXERCISE OR OPTION TERM(3) OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION ---------------------- NAME GRANTED(#)(1) FISCAL YEAR ($/SHARE)(2) DATE 5%($) 10%($) - ----------------- -------------- ---------------- ------------ ---------- ---------- ---------- <S> <C> <C> <C> <C> <C> <C> James C. Granger 250,000 25% $2.125 01/02/07 $334,100 $846,676 </TABLE> - -------------------- (1) Subject to acceleration at the discretion of the Compensation Committee or upon the death or disability of the optionee, each option becomes cumulatively exercisable with respect to 33 1/3% of the shares covered on each of the first three anniversaries of the grant date. (2) Fair market value per share on the date of grant or the effective date, whichever is less, in accordance with the 1990 Stock Option Plan. (3) The 5% and 10% assumed rates of appreciation are mandated by the rules of the Commission and do not represent the Company's estimate or projection of the future Common Stock price. AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1997 AND FISCAL YEAR END OPTION VALUES <TABLE> <CAPTION> NUMBER OF SECURITIES VALUE OF UNEXERCISED SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS ACQUIRED ON VALUE OPTIONS AT FISCAL YEAR END(#) AT FISCAL YEAR END($)(2) NAME EXERCISE(#) REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - -------------------- ----------- -------------- ----------- ------------- ----------- ------------- <S> <C> <C> <C> <C> <C> <C> James C. Granger -- -- -- 250,000 -- $109,375 Glenn M. Fishbine -- -- 98,467 38,333 -- -- </TABLE> - ---------------------- (1) Market value of underlying securities on date of exercise minus the exercise price. (2) Market value of underlying securities at year-end minus the exercise price for in-the-money options. <PAGE> CERTAIN TRANSACTIONS During fiscal year 1997, legal services were provided to the Company by Foley & Lardner, Chicago, Illinois. Mr. Stephen M. Slavin is a partner of such firm and a director of the Company. Pursuant to a transition agreement and general release between the Company and a founder of the Company, Mr. Glenn M. Fishbine, Mr. Fishbine continued to be compensated by the Company at his base salary through the one month transition period ending November 30, 1997, during which he has agreed to provide consulting services and advice to the Company. After the transition period, he was compensated by the Company in a lump sum severance payment equal to his base salary for two months. The Company has further agreed (i) to forgive, as of September 30, 1997, $167,497 of indebtedness of Mr. Fishbine to the Company, (ii) to release the shares of Common Stock pledge by Mr. Fishbine as collateral to secure payment of Mr. Fishbine's indebtedness to the Company, and (iii) that a stock pledge agreement between Mr. Fishbine and the Company would be terminated. Gordon L. Bramah is the Chairman of the Board of Directors of Bramah Limited ("Bramah"), which is a significant stockholder of the Company. In connection with early stage investments made by Bramah in the Company, the Company granted Bramah an exclusive license in the United Kingdom for the Company's technology. In October 1992, the exclusive license was reacquired by the Company in return for a royalty arrangement whereby Bramah will be paid a 15% royalty on sales of the first $1.0 million of the Company's products in the United Kingdom. As of September 30, 1997, the Company accrued approximately $63,000 for royalties to Bramah on sales in the United Kingdom during fiscal 1997. <PAGE> PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth, as of November 30, 1997, the number of shares of Common Stock beneficially owned by (i) each person known to be the beneficial owner of five percent or more of the Common Stock, (ii) each director, (iii) each executive officer named in the Summary Compensation Table above, (iv) all officers and directors as a group and (v) the Selling Stockholders, and as adjusted to reflect the sale of the shares of Common Stock offered hereby. Any shares reflected in the following table which are subject to an option or a warrant are deemed to be outstanding for the purpose of computing the percentage of Common Stock owned by the option or warrant holder but are not deemed to be outstanding for the purpose of computing the percentage of Common Stock owned by any other person. Except as otherwise indicated, each beneficial owner has sole voting and investment power over the outstanding shares of which he has beneficial ownership. Name of Beneficial Owner or Group Shares Beneficially Owned(1) - -------------------------------------------------- ---------------------------- Number Percent ---------- --------- Perkins Capital Management Inc.................... 1,317,250 10.9% 730 East Lake Street Wayzata, Minnesota 55391 Gordon L. Bramah.................................. 1,053,435 9.3% Littlemoore House Eckington, Sheffield S31 9EF England Bramah Limited.................................... 1,052,935 9.3% Littlemoore House Eckington, Sheffield S31 9EF England Jack A. Klingert.................................. 120,028 1.0% Stephen M. Slavin(2).............................. 103,501 * 330 North Wabash Avenue Chicago, Illinois 60611 George Latimer(3)................................. 28,550 * 1600 Grand Avenue St. Paul, Minnesota 55105 C. McKenzie Lewis III(4).......................... 58,379 * James C. Granger(5)............................... 95,333 * John J. Metil..................................... 1,000 * Barry A. Fisher................................... -- -- Roman A. Jamrogiewicz............................. -- -- Michael R. Halbouty............................... -- -- All officers and directors as a group (9 persons). 406,791 3.3% - -------------------- * Indicates an amount less than one percent. (1) The securities "beneficially owned" by a person are determined in accordance with the definition of "beneficial ownership" set forth in the regulations of the Commission and, accordingly, may include securities owned by or for, among others, the spouse, children or certain other relatives such person as well as other securities as to which the person has or shares voting or investment power or has the right to acquire within 60 days. The same shares may be beneficially owned by more than one person. <PAGE> (2) Includes 66,001 shares of Common Stock owned by Mr. Slavin and 37,500 shares of Common Stock that may be acquired subject to options. (3) Includes 21,050 shares of Common Stock beneficially owned by Mr. Latimer and an option for 7,500 shares of Common Stock. (4) Includes 12,579 shares of Common Stock beneficially owned by Mr. Lewis and an option and a warrant for the purchase of an aggregate of 45,800 shares of Common Stock. (5) Includes 12,000 shares of Common Stock owned by Mr. Granger and options for the purchase of an aggregate of 83,333 shares of Common Stock. The following table sets forth, as of the date hereof, the name of each Selling Stockholder, certain beneficial ownership information with respect to the Selling Stockholders, and the number of Shares that may be sold from time to time by each pursuant to this Prospectus. There can be no assurance that all of the Shares offered hereby will be sold. Because a Selling Stockholder may offer by this Prospectus all or some part of the Common Stock which he or she holds, no estimate can be given as of the date hereof as to the amount of Common Stock actually to be offered for sale by a Selling Stockholder or as to the amount of Common Stock that will be held by a Selling Stockholder upon the termination of such offering. See "Plan of Distribution." Shares shown below as beneficially owned are presented based upon information received from the Selling Stockholders, or from representatives of the Selling Stockholders, in connection with the preparation of the Registration Statement on Form S-1, of which this Prospectus is a part. Shares not outstanding but deemed beneficially owned by virtue of the right of a person or member of a group to acquire them within 60 days are treated as outstanding only when determining the amount and percentage owned by such person. <TABLE> <CAPTION> PERCENTAGE OF OUTSTANDING SHARES SHARES SHARES BENEFICIALLY BENEFICIALLY BENEFICIALLY OWNED SHARES OWNED UPON OWNED UPON PRIOR TO OFFERED COMPLETION OF COMPLETION OF NAME OF SELLING STOCKHOLDER OFFERING HEREBY THE OFFERING THE OFFERING - ---------------------------- ------------ ------- ------------- ------------- <S> <C> <C> <C> <C> KA Investments LDC 333,878(1) 3,646,429(2) -0- -0- David B. Johnson 46,875(3) 46,875(3) -0- -0- Paul R. Kuehn 46,875(3) 46,875(3) -0- -0- Eldon C. Miller 15,625(3) 15,625(3) -0- -0- Stanley Rahm 15,625(3) 15,625(3) -0- -0- </TABLE> - ------------------ (1) Includes (i) the number of shares of Common Stock issuable upon conversion of $500,000 of the Debentures purchased in the Tranche 1 Closing (as defined in "Capitalization - Recent Financing") assuming conversion at the conversion price in effect on December 1, 1997 (which price will fluctuate from time to time based on changes in the market price of the Common Stock and provisions in the Debentures, for determining the conversion price) and (ii) the number of shares issuable upon exercise of warrants issued to KA in connection with the Tranche 1 Closing. See "Capitalization - Recent Financing." (2) Assumes that KA purchases all of the Debentures for an aggregate of $2,500,000 and converts interest thereon into Common Stock. In order to provide for (i) fluctuations in the market price of the Common Stock, (ii) provisions in the Debentures for determining the conversion price of the Debentures and (iii) shares of Common Stock which may be issued in payment of interest on the Debentures, the aggregate number of shares issuable on conversion of the Debentures exceeds the aggregate number of shares of Common Stock issuable upon conversion of the Debentures, and interest thereon at conversion price in effect on the date hereof. The number of shares in this column represents the sum of (a) 200% of the aggregate number of shares of Common Stock issuable upon conversion of $2,500,000 of the Debentures and interest thereon, assuming the Debentures were issued on December 1, 1997 and held to maturity at the conversion price on that date, and (b) 75,000 shares issuable upon exercise of warrants issued in connection with the Debentures. (3) Assumes the full exercise of the MJK Warrant, which has been assigned to the Selling Shareholder to the extent of Shares in this column to be sold. MJK acted as the Company's placement agent in connection with the private placement of the Debentures with KA in December 1997. In connection with the private placement, the Company paid commissions to and reimbursed MJK for certain expenses, and issued the MJK Warrant to MJK. Except for <PAGE> the foregoing, there has been no material relationship between the Selling Stockholders and the Company or its affiliates within the past three years. The Company has agreed to bear all expenses (other than selling commissions and fees) in connection with the registration and sale of the Shares being offered by the Selling Stockholders in over-the-counter market transactions or in negotiated transactions. See "Plan of Distribution." DESCRIPTION OF CAPITAL STOCK COMMON STOCK The Company's authorized capital stock consists of 20,000,000 shares of Common Stock, $.01 par value per share. As of December 1, 1997, the Company had 12,361,038 shares of Common Stock outstanding, had Debentures outstanding convertible into 318,878 shares of Common Stock (assuming conversion on December 1, 1997) and had warrants and options outstanding to purchase an additional 1,763,393 shares of Common Stock, a majority of which are exercisable at prices ranging from $1.875 to $3.125 per share. There are an aggregate of 634,100 shares of Common Stock reserved for the grant of future options under existing stock option plans. Holders of shares of Common Stock have no preemptive rights to purchase additional shares of any class or series of the Company's stock. Holders of shares of Common Stock do not have cumulative voting rights. All of the issued and outstanding shares of Common Stock and the shares offered hereby, when issued and paid for as contemplated herein, are and will be duly authorized and validly issued, fully paid and nonassessable. Each share of Common Stock entitles the holder thereof to one vote, in person or by proxy, upon all matters submitted for a vote by the stockholders of the Company, except to the extent that such voting rights may be limited by the business combination provisions of Section 203 of the Delaware General Corporation Law. The Company is subject to Section 203 of the Delaware General Corporation Law, which provides that if a person acquires 15% or more of the stock of a Delaware corporation, such person becomes an "interested stockholder" and may not engage in a "business combination" with that corporation for a period of three years. The term "business combination" includes a merger, a sale of assets or a transfer of stock. The three-year moratorium does not apply if any of the following conditions are met: (i) the board of directors approves the acquisition of stock or the business combination before the person becomes an interested stockholder, (ii) the interested stockholder acquires 85% of the outstanding voting stock, not counting stock owned by individuals who are officers and directors of the corporation or (iii) the business combination is approved after the person becomes an interested stockholder by stockholders other than the interested stockholder. In addition, an interested stockholder is free to make a competing business combination proposal if continuing directors who are in office prior to the date such person becomes an interested stockholder approve a merger or other transaction involving 50% or more of the aggregate market value of the corporation's assets or outstanding voting stock with a person who is not an interested stockholder. STOCKHOLDER RIGHTS PLAN On May 2, 1996, the Board of Directors of the Company declared a dividend of one Common Share purchase right (a "Right") for each outstanding share of common stock, par value $ .01 per share (the "Common Shares"), of the Company and authorized the issuance of one Right for each Common Share which shall become outstanding between the Record Date and the earlier of the Distribution Date (as hereinafter defined) or the final expiration date of the Rights. The dividend was paid on May 22, 1996 (the "Record Date"), to the stockholders of record on that date. Each Right will entitle the registered holder to purchase from the Company a number of newly issued Common Shares at a price per share equal to 50% of the current market value of a Common Share on the Distribution Date. The number of Common Shares purchasable per Right will equal $35 (the "Purchase Price") divided by 50% of the current <PAGE> market price on the Distribution Date. In the event that the number of authorized but unissued Common Shares is insufficient to permit the exercise of the Rights in full, then the number of Common Shares issuable upon the exercise of each Right will be adjusted, as described below. The complete terms of the Rights are set forth in a Rights Agreement (the "Rights Agreement") between the Company and Norwest Bank Minnesota, National Association, as Rights Agent (the "Rights Agent"). The Rights become exercisable on the first day after the Distribution Date. The Distribution Date is defined as the earlier to occur of (i) ten business days following a public announcement that a person or group of affiliated or associated persons (not including the Company, any subsidiary of the Company, any Person holding Common Shares acquired in a transaction approved in advance in writing by a majority of the Disinterested Directors of the Board of Directors of the Company, any employee benefit plan of the Company or its subsidiaries or any entity holding Common Shares for or pursuant to any such plan, or any person who beneficially owns 7.5% or more of the Common Shares outstanding on the 20th day preceding the Record Date, to the extent of such ownership) (an "Acquiring Person"), has acquired beneficial ownership of 15% or more of the outstanding Common Shares, or (ii) ten business days following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 15% or more of such outstanding Common Shares. The Rights will expire on April 30, 2006 (the "Final Expiration Date"), unless the Final Expiration Date is extended or unless the Rights are earlier redeemed or exchanged by the Company, in each case, as described below. In the event that any person becomes an Acquiring Person, each holder of a Right, other than Rights beneficially owned by the Acquiring Person, will thereafter have the right to receive upon exercise thereof, at the then current Purchase Price, a number of Common Shares equal to the result obtained by dividing the then current Purchase Price by 50% of the market price per Common Share at the date such person became an Acquiring Person. Under certain circumstances, other equity and debt securities, property, cash or combinations thereof, including a combination with Common Shares that are equal in value to the number of Common Shares for which the Right is exercisable, may be issued in lieu of Common Shares for which the Right is exercisable. In such event, the purchase price per Common Share will be fifty percent (50%) of the then current per share market price of the Common Shares. The Purchase Price payable, and the number of Common Shares or other securities or property issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent dilution. In the event, following the first date of public announcement by the Company or an Acquiring Person that an Acquiring Person has become such (a "Shares Acquisition Date"), that the Company is, in effect, acquired in a merger or other business combination transaction of 50% or more of its consolidated assets or earning power is sold, proper provision will be made so that each holder of a Right, other than Rights that were or are beneficially owned by an Acquiring Person, will thereafter generally have the right to receive, upon the exercise thereof at the then current exercise price of the Right, that number of shares of common stock of the acquiring company which at the time of such transaction will have a market value of two times the exercise price of the Right. In the event that the Company does not have sufficient authorized but unissued Common Shares to permit the delivery of the required number of Common Shares upon the exercise in full of the Rights, then each Rights Certificate shall entitle the holder thereof (other than an Acquiring Person) to purchase a fractional number of the Common Shares then available. At any time prior to the close of business on the tenth business day after a Shares Acquisition Date, the Board of Directors of the Company may redeem the Rights in whole, but not in part, at a price of $ .01 per right (the "Redemption Price") which may be paid in cash or with Common Shares or other consideration deemed appropriate by the Board of Directors of the Company. Immediately upon any redemption of the Rights, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price. The terms of the Rights may be amended by the Board of Directors of the Company without the consent of the holders of the Rights at any time to cure any ambiguity or to correct or supplement any defective or inconsistent provisions and may, <PAGE> prior to the Distribution Date, be amended to change, delete or supplement any other provision in any manner which the Company may deem necessary or desirable. After the Distribution Date the terms of the Rights may be amended (other than to cure ambiguities or correct or supplement defective or inconsistent provisions) only so long as such amendment shall not adversely affect the interests of the holders of the Rights (which may not be an Acquiring Person in whose hands Rights are void). Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company, including without limitation, the right to vote or to receive dividends. A copy of the Rights Agreement was filed with the Commission as an exhibit to the Company's Registration Statement on Form 8-A, dated May 2, 1996. A copy of the Rights Agreement is available free of charge from the Company. This summary description of the Rights does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Company's Common Stock is Norwest Bank Minnesota, National Association, 161 North Concord Exchange, South St. Paul, Minnesota 55075-0738. <PAGE> PLAN OF DISTRIBUTION The Selling Stockholders may, from time to time, sell all or a portion of the Shares on the Nasdaq National Market, in privately negotiated transactions or otherwise, at fixed prices that may be changed, at market prices prevailing at the time of sale, at prices related to such market prices or at negotiated prices. The Shares may be sold by the selling Stockholders by one or more of the following methods, without limitation: (a) block trades in which the broker or dealer so engaged will attempt to sell the Shares as agent but may position and resell a portion of the block as principal to facilitate the transaction, (b) purchases by a broker or dealer as principal and resale by such broker or dealer for its account pursuant to this Prospectus, (c) an exchange distribution in accordance with the rules of such exchange, (d) ordinary brokerage transactions and transactions in which the broker solicits purchasers, (e) privately negotiated transactions, (f) short sales and (g) a combination of any such methods of sale. In effecting sales, brokers and dealers engaged by the Selling Stockholders may arrange for other brokers or dealers to participate. Brokers or dealers may receive commissions or discounts from the Selling Stockholders (or, if any such broker-dealer acts as agent for the purchaser of such shares, from such purchaser) in amounts to be negotiated which are not expected to exceed those customary in the types of transactions involved. Broker-dealers may agree with the Selling Stockholders to sell a specified number of such Shares at a stipulated price per share, and, to the extent such broker-dealer is unable to do so acting as agent for a Selling Stockholders, to purchase as principal any unsold Shares at the price required to fulfill the broker-dealer commitment to the Selling Stockholders. Broker-dealers who acquire Shares as principal may thereafter resell such Shares from time to time in transactions (which may involve block transactions and sales to and through other broker-dealers, including transactions of the nature described above) in the over-the-counter market or otherwise at prices and on terms then prevailing at the time of sale, at prices then related to the then-current market price or in negotiated transactions and, in connection with such resales, may pay to or receive from the purchasers of such Shares commissions as described above. The Selling Stockholders may also sell the Shares in accordance with Rule 144 under the Securities Act, rather than pursuant to this Prospectus. To the extent required, the amount of the Shares to be sold, purchase prices, public offering prices, the names of any agents, dealers or underwriters, and any applicable commissions or discounts with respect to a particular offer will be set forth by the Company in a Prospectus Supplement accompanying this Prospectus or, if appropriate, a post-effective amendment to the Registration Statement. The Selling Stockholders and agents who execute orders on their behalf may be deemed to be underwriters as that term is defined in Section 2(11) of the Securities Act and a portion of any proceeds of sales and discounts, commissions or other seller's compensation may be deemed to be underwriting compensation for purposes of the Securities Act. Offers on sales of the Shares have not been registered or qualified under the laws of any country, other than the United States. In order to comply with the securities laws of certain states, if applicable, the Shares will be sold in such jurisdictions only through registered or licensed brokers or dealers. In addition, in certain states the Shares may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available. From time to time the Selling Stockholders may engage in short sales, short sales against the box, puts and calls and other transactions in securities of the Company or derivatives thereof, and may sell and deliver the Shares in connection therewith or in settlement of securities loans. From time to time the Selling Stockholders may pledge their Shares pursuant to the margin provisions of its customer agreements with its brokers. Upon a default by the Selling Stockholders, the broker may offer and sell the pledged shares from time to time. Under applicable rules and regulations under the Exchange Act, any person engaged in a distribution of the Shares may not simultaneously engage in market-making activities with respect to such securities for a period of two to nine business days prior to the commencement of such distribution. In addition to and without limiting the foregoing, each Selling Stockholder and any other person participating in a distribution will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including without limitation Rules 10b-2, 10b-6 and 10b-7, which provisions may limit the timing of purchases <PAGE> and sales of any of the Shares by the Selling Stockholders or any such other person. All of the foregoing may affect the marketability of the Shares and the brokers' and dealers' ability to engage in market-making activities with respect to such securities. The Company has agreed to bear all expenses of registration of the Shares. Any commissions, discounts, concessions or other fees, if any, payable to broker-dealers in connection with any sale of the Shares will be borne by the Selling Stockholder selling such Shares. In accordance with the terms of the Warrants and the Registration Rights Agreement entered into with KA, the Company has agreed to indemnify the Selling Stockholders and their control persons with respect to certain liabilities in connection with the sale of the Shares pursuant to this Prospectus, including liabilities under the Securities Act and the Exchange Act. In addition, the Selling Stockholders have agreed to indemnify the Company, its directors, officers, agents and control persons against certain liabilities incurred as a result of information provided by the Selling Stockholders for use in this Prospectus. Insofar as indemnification for liabilities arising under the Securities Act may be permitted pursuant to the foregoing provisions, the Company has been informed that, in the opinion of the Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. LEGAL MATTERS The validity of the Shares will be passed upon by Briggs and Morgan, Professional Association, Minneapolis, Minnesota, counsel to the Company. EXPERTS The financial statements and financial statement schedule of the Company as of September 30, 1997 and 1996 and for each of the years in the three-year period ended September 30, 1997, have been included herein and elsewhere in the registration statement, in reliance upon the reports of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. <PAGE> INDEX TO FINANCIAL STATEMENTS Independent Auditors' Report......................................... F-2 Financial Statements: Balance Sheets as of September 30, 1997 and 1996............................................... F-3 Statements of Operations for the years ended September 30, 1997, 1996 and 1995............... F-4 Statements of Stockholders' Equity for the years ended September 30, 1997, 1996 and 1995............................................... F-5 Statements of Cash Flows for the years ended September 30, 1997, 1996 and 1995........... F-6 Notes to Financial Statements................................... F-7 <PAGE> INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Digital Biometrics, Inc.: We have audited the accompanying balance sheets of Digital Biometrics, Inc. as of September 30, 1997 and 1996, and the related statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended September 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Digital Biometrics, Inc. as of September 30, 1997 and 1996, and the results of its operations and its cash flows for each of the years in the three-year period ended September 30, 1997 in conformity with generally accepted accounting principles. /s/KPMG Peat Marwick LLP Minneapolis, Minnesota November 21, 1997, except as to note 14(a) which is as of November 24, 1997 and note 14(b) which is as of December 1, 1997 <PAGE> DIGITAL BIOMETRICS, INC. BALANCE SHEETS SEPTEMBER 30, 1997 AND 1996 <TABLE> <CAPTION> 1997 1996 ------------ ------------ <S> <C> <C> Current assets: Cash and cash equivalents $ 1,891,397 $ 466,990 Marketable securities (note 4) 154,808 -- Accounts receivable, less allowance for doubtful accounts of $441,276 and $692,534, respectively 5,161,356 5,676,849 Inventory (note 2) 2,294,593 3,633,659 Prepaid expenses and other costs 163,594 208,349 ------------ ------------ Total current assets 9,665,748 9,985,847 ------------ ------------ Property and equipment (note 3) 2,027,737 2,471,754 Less accumulated depreciation and amortization (1,113,185) (1,089,026) ------------ ------------ 914,552 1,382,728 ------------ ------------ Marketable securities (note 4) -- 5,690,371 Patents, trademarks, copyrights and licenses, net of accumulated amortization of $156,171 and $192,899, respectively (note 1) 118,938 123,017 Deferred issuance costs on convertible debentures, net of accumulated amortization of $196,854 and $172,476, respectively (note 7) -- 127,408 ------------ ------------ $ 10,699,238 $ 17,309,371 ============ ============ Current liabilities: Accounts payable $ 1,451,779 $ 1,103,174 Line of credit advances (note 5) -- 1,255,000 Deferred revenue 677,925 649,178 Accrued warranty 584,676 128,500 Other accrued expenses (note 6) 819,610 1,343,408 ------------ ------------ Total current liabilities 3,533,990 4,479,260 Convertible debentures (note 7) -- 2,374,739 ------------ ------------ Total liabilities 3,533,990 6,853,999 ------------ ------------ Stockholders' equity (note 10): Common stock, $.01 par value. Authorized, 20,000,000 shares; issued and outstanding 12,361,038 and 10,777,288 shares, respectively 123,610 107,773 Additional paid-in capital 42,439,576 39,743,380 Deferred compensation (73,500) (96,000) Unrealized losses on marketable securities (note 4) (1,639) (134,753) Notes receivable from sale of Common Stock -- (117,623) Accumulated deficit (35,322,799) (29,047,405) ------------ ------------ Total stockholders' equity 7,165,248 10,455,372 ------------ ------------ Commitments (note 12) $ 10,699,238 $ 17,309,371 ============ ============ </TABLE> See accompanying notes to financial statements. <PAGE> DIGITAL BIOMETRICS, INC. STATEMENTS OF OPERATIONS YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995 <TABLE> <CAPTION> 1997 1996 1995 ------------ ------------ ------------ <S> <C> <C> <C> Revenues: Identification systems (note 1) $ 9,712,259 $ 6,821,025 $ 6,069,382 Maintenance and other services 1,707,099 1,506,247 1,228,632 Other -- -- 1,800,000 ------------ ------------ ------------ 11,419,358 8,327,272 9,098,014 ------------ ------------ ------------ Cost of revenues: Identification systems (note 1) 6,614,314 3,814,167 3,040,428 Maintenance and other services 2,196,957 2,367,314 1,644,330 Non-recurring charges 1,529,118 -- -- Other -- -- 588,654 ------------ ------------ ------------ 10,340,389 6,181,481 5,273,412 ------------ ------------ ------------ Gross margin 1,078,969 2,145,791 3,824,602 ------------ ------------ ------------ Selling, general and administrative expenses: Sales and marketing 2,057,099 3,369,441 2,394,916 Engineering and development 2,526,347 4,569,751 2,854,592 Depreciation and amortization 319,536 1,049,584 529,687 General and administrative 2,043,953 2,753,444 1,700,017 Non-recurring charges 330,319 -- -- ------------ ------------ ------------ Total expenses 7,277,254 11,742,220 7,479,212 ------------ ------------ ------------ Loss from operations (6,198,285) (9,596,429) (3,654,610) ------------ ------------ ------------ Other income (expense): Interest income 230,347 585,708 377,881 Interest expense (note 7) (300,039) (2,676,182) (47,826) Loss on disposal of fixed assets (7,417) -- -- ------------ ------------ ------------ Total other income (expense) (77,109) (2,090,474) 330,055 ------------ ------------ ------------ Net loss $ (6,275,394) $(11,686,903) $ (3,324,555) ============ ============ ============ Loss per common share $ (0.53) $ (1.24) $ (0.43) ============ ============ ============ Weighted average common shares outstanding 11,766,220 9,451,015 7,814,144 ============ ============ ============ </TABLE> See accompanying notes to financial statements. <PAGE> DIGITAL BIOMETRICS, INC. STATEMENTS OF STOCKHOLDERS' EQUITY <TABLE> <CAPTION> Common Stock Additional --------------------- Paid-in Deferred Accumulated Shares Amount Capital Compensation Other Deficit Total ---------- --------- ----------- ---------- ---------- ------------ ------------ <S> <C> <C> <C> <C> <C> <C> <C> Balance September 30, 1994 7,787,959 $ 77,880 $28,846,828 $ (389,483) $ (730,198) $(14,035,947) $ 13,769,080 Restricted stock awards (note 10) 6,360 63 41,937 (42,000) -- -- -- Amortization of deferred compensation -- -- -- 214,799 -- -- 214,799 Exercise of employee stock options 30,500 305 70,550 -- -- -- 70,855 Stock award for retirement plan (note 9) 8,814 88 66,017 -- -- -- 66,105 Change in unrealized loss on marketable securities (note 4) -- -- -- -- 256,548 -- 256,548 Issuance of warrant in connection with convertible debentures (note 7) -- -- 112,893 -- -- -- 112,893 Intrinsic value of beneficial conversion feature of convertible debentures (note 7) -- -- 1,923,529 -- -- -- 1,923,529 Net loss -- -- -- -- -- (3,324,555) (3,324,555) ---------- --------- ----------- ---------- ---------- ------------ ------------ Balance September 30, 1995 7,833,633 78,336 31,061,754 (216,684) (473,650) (17,360,502) 13,089,254 Restricted stock awards (note 10) 17,456 175 71,825 (72,000) -- -- -- Amortization of deferred compensation -- -- -- 192,684 -- -- 192,684 Stock award for retirement plan (note 9) 16,831 168 94,506 -- -- -- 94,674 Change in unrealized loss on marketable securities (note 4) -- -- -- -- 41,724 -- 41,724 Debt conversion (note 7) 2,751,868 27,519 8,201,870 -- -- -- 8,229,389 Warrant exercise 157,500 1,575 313,425 -- -- -- 315,000 Forgiveness of notes receivable from sale of Common Stock (note 10) -- -- -- -- 179,550 -- 179,550 Net loss -- -- -- -- -- (11,686,903) (11,686,903) ---------- --------- ----------- ---------- ---------- ------------ ------------ Balance September 30, 1996 10,777,288 107,773 39,743,380 (96,000) (252,376) (29,047,405) 10,455,372 Restricted stock awards (note 10) 31,072 311 44,689 (18,000) -- -- 27,000 Amortization of deferred compensation -- -- -- 40,500 -- -- 40,500 Exercise of stock options 25,000 250 41,500 -- -- -- 41,750 Stock award for retirement plan (note 9) 41,798 418 88,403 -- -- -- 88,821 Change in unrealized loss on marketable securities (note 4) -- -- -- -- 133,114 -- 133,114 Debt conversion (note 7) 1,485,880 14,858 2,506,341 -- -- -- 2,521,199 Forgiveness of notes receivable from sale of Common Stock (note 10) -- -- -- -- 117,623 -- 117,623 Issuance of warrant as payment for services received (note 1) -- -- 15,263 -- -- -- 15,263 Net loss -- -- -- -- -- (6,275,394) (6,275,394) ---------- --------- ----------- ---------- ---------- ------------ ------------ Balance September 30, 1997 12,361,038 $ 123,610 $42,439,576 $ (73,500) $ (1,639) $(35,322,799) $ 7,165,248 ========== ========= =========== ========== ========== ============ ============ </TABLE> See accompanying notes to financial statements. <PAGE> DIGITAL BIOMETRICS, INC. STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995 <TABLE> <CAPTION> 1997 1996 1995 ------------ ------------ ------------ <S> <C> <C> <C> Cash flows from operating activities: Net loss $ (6,275,394) $(11,686,903) $ (3,324,555) Adjustments to reconcile net loss to net cash used in operating activities: Provision for doubtful accounts receivable (98,660) 651,000 48,000 Provision for technological obsolescence -- 631,243 486,738 Deferred compensation amortization and other 207,997 372,234 214,799 Depreciation and amortization 585,622 864,183 551,715 Write-off of intangible assets 20,048 548,788 -- Loss on sale of marketable securities 64,624 -- -- Loss on disposal and write-off of fixed assets and tooling 227,769 8,305 10,071 Interest expense amortization for the intrinsic value of the beneficial conversion feature of convertible debentures -- 1,923,529 -- Interest expense on debentures converted into Common Stock 227,539 329,754 -- Changes in operating assets and liabilities: Accounts receivable 614,153 (1,833,548) 33,506 Inventory 1,339,066 (2,389,220) 177,059 Prepaid expenses and other expenses (5,119) (63,424) (23,144) Accounts payable 348,605 641,843 (352,467) Deferred revenue 28,747 106,420 81,083 Accrued expenses 63,462 521,741 248,955 ------------ ------------ ------------ Net cash used in operating activities (2,651,541) (9,374,055) (1,848,240) ------------ ------------ ------------ Cash flows from investing activities: Purchase of property and equipment (242,613) (849,755) (491,318) Proceeds from disposal of property and equipment -- -- 7,599 Patents, trademarks, copyrights and licenses (70,516) (36,859) (101,966) Sales of marketable securities before maturity 5,602,327 130,043 687,965 ------------ ------------ ------------ Net cash (used in) provided by investing activities 5,289,198 (756,571) 102,280 ------------ ------------ ------------ Cash flows from financing activities: Net line of credit (payments) advances (1,255,000) (195,000) 1,450,000 Exercise of warrants and options 41,750 315,000 70,855 Issuance of convertible debentures -- 10,109,750 -- ------------ ------------ ------------ Net cash (used in) provided by financing activities (1,213,250) 10,229,750 1,520,855 ------------ ------------ ------------ Increase (decrease) in cash and cash equivalents 1,424,407 99,124 (225,105) Cash and cash equivalents at beginning of year 466,990 367,866 592,971 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 1,891,397 $ 466,990 $ 367,866 ============ ============ ============ Supplemental disclosure of cash flow information: Cash paid during the year for interest $ 222,132 $ 13,210 $ 47,826 ============ ============ ============ </TABLE> See accompanying notes to financial statements. <PAGE> DIGITAL BIOMETRICS, INC. NOTES TO FINANCIAL STATEMENTS (1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Digital Biometrics, Inc. (the "Company") is a developer, manufacturer, marketer and integrator of computer-based products and services for the identification of individuals. The Company is a leading vendor of products employing "biometric" technology, the science of the identification of individuals through the measurement of distinguishing biological characteristics. The Company's principal product is the TENPRINTER(R) system for "live-scan" fingerprint capture used mainly in law-enforcement applications. The TENPRINTER is a computer-based system with patented high-resolution optics which captures, digitizes, prints and transmits forensic-grade fingerprint images. The Company also offers high-resolution single- fingerprint capture products for commercial and governmental identification applications and has recently established a systems integration services business focused on the integration of biometric and other identification technologies into applications for government and commercial markets. Substantially all of the Company's revenues in fiscal 1997, 1996 and 1995 came from sales and maintenance of live-scan systems for law enforcement and related applications. STATEMENTS OF CASH FLOWS CASH AND CASH EQUIVALENTS: For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments and certificates of deposit purchased with an original maturity date of three months or less to be cash equivalents. SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: On December 31, 1996 and 1995, the Company issued 41,798 and 16,831 shares, respectively, of Common Stock to satisfy the Company's discretionary matching to employees electing participation in the Company's 401(k) retirement plan. These issuances increased Common Stock and additional paid-in capital by $88,821 and $94,674, respectively, and reduced accrued compensation by the same amount. On January 27, 1997, the Company issued two warrants in payment for services rendered in securing employment of certain executive officers of the Company. Each warrant entitles the holder to purchase 10,000 shares of the Company's Common Stock, exercisable at the price of $2.3125 per share, subject to antidilution provisions of the warrants. These warrants were valued at a combined amount of $15,263. Effective with the acceptance of the resignation of a director, 6,341 shares of restricted Common Stock, which were not yet vested, were forfeited. Effective with their election at the annual stockholders' meeting held on March 18, 1997, the Company granted 25,413 shares of restricted Common Stock to certain of its non-employee directors. The grant resulted in $54,000 in additional Common Stock issued and an equal amount of deferred compensation expense that is being amortized on a straight-line basis over the three-year restricted period. Effective September 30, 1997, the Company granted 12,000 shares of restricted Common Stock to its non-employee directors. The grant resulted in $27,000 in additional Common Stock issued and an equal amount of compensation expense. <PAGE> DIGITAL BIOMETRICS, INC. NOTES TO FINANCIAL STATEMENTS For the fiscal years ended September 30, 1997 and 1996, the Company has issued 1,485,880 and 2,751,868 shares, respectively, of Common Stock for the conversion of principal aggregating $2,450,000 and $8,450,000, respectively, of the 1995 8% Convertible Debentures plus $228,000 and $329,000, respectively, of accrued interest. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK The Company extends credit to state and local governments in connection with sales of products to law enforcement agencies. Approximately 89% and 70%, respectively, of customer accounts receivable at September 30, 1997 and 1996 were from government agencies, of which 39% and 40%, respectively, was from a single customer. For the years ended September 30, 1997, 1996 and 1995, sales to three customers in 1997 accounted for 43%, sales to two customers in 1996 accounted for 30%, and sales to two customers in 1995 accounted for 52%, respectively, of annual sales. Export sales were 5%, 15% and 21% of total revenues, for the years ended September 30, 1997, 1996 and 1995, respectively. MARKETABLE SECURITIES Marketable securities consist of collateralized mortgage-backed securities and U.S. Treasury zero coupon bonds. The Company classifies its marketable debt securities as available for sale and records these securities at fair market value. Net realized and unrealized gains and losses are determined on the specific identification cost basis. Unrealized gains and losses are reflected as a separate component of stockholders' equity. A decline in the market value of any available-for-sale or held-to-maturity security below cost that is deemed other than temporary results in a charge to operations resulting in the establishment of a new cost basis for the security. PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES Costs associated with patents, trademarks and copyrights are capitalized and amortized over 60 months or the remaining life of the patent, trademark or copyright, whichever is shorter. The cost of software licenses related to purchased software are capitalized and amortized over 36 months or the life of the license, whichever is shorter. Accumulated amortization for the years ended September 30, 1997 and 1996, was $156,171 and $192,899, respectively. The Company wrote off $20,048 of unamortized patents during fiscal 1997 for patents which were abandoned. The Company wrote off $548,788 of unamortized technology rights costs during the fourth quarter of fiscal 1996 as a result of the decision to no longer actively pursue the technology acquired in the Design Data acquisition in 1994. Management periodically assesses the amortization period and recoverability of the carrying amount of intangible assets based upon an estimation of their value and future benefits of the recorded asset. Management has concluded that the carrying amount of the intangible assets is realizable. REVENUE RECOGNITION Revenues from product sales are generally recognized on the date of shipment. The Company's standard terms of sale are payment due net in thirty days, f.o.b. Digital Biometrics, Inc. Terms of sale and shipment for certain procurements by municipal or other government agencies may, however, be subject to negotiation. Revenue under contracts where a performance bond, collateral or customer acceptance is required is not recognized until collateral requirements have been satisfied and customer acceptance has occurred. In cases where the Company is required to purchase a performance bond or to deposit collateral in accordance with the terms of a contract, the Company's policy is to defer revenues under such contracts <PAGE> DIGITAL BIOMETRICS, INC. NOTES TO FINANCIAL STATEMENTS until the amount shipped exceeds the amount of the performance collateral or until the security is released by the bonding company. Maintenance revenues are recognized over the life of the contract on a straight-line basis. The Company's performance for any period is not necessarily indicative of sales trends or future performance. The nature of the law enforcement market and the government procurement process are expected to result in an irregular and unpredictable revenue cycle for the Company. WARRANTY COSTS Estimated product warranty costs are accrued at date of shipment. ADVERTISING COSTS Advertising costs are expensed as incurred. ENGINEERING AND DEVELOPMENT ARRANGEMENTS Engineering and development costs are expensed as incurred. Engineering and development expenses during fiscal 1996 include fourth-quarter charges of $374,000 related to adjustments of unreimbursed manufacturing setup costs related to an international development project. After adjustments, engineering and development expenses for fiscal 1996 are net of a reimbursement of $87,700 from a company with which there was a teaming agreement for an international development project. NET LOSS PER COMMON SHARE Net loss per common share is determined by dividing the net loss by the weighted average number of shares of Common Stock and dilutive common share equivalents outstanding. Common share equivalents have been excluded from the computation of net loss per share, as their effect is anti-dilutive. EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128") which simplifies the standards for computing earnings per share. SFAS No. 128 replaces the presentation of primary earnings per share with a presentation of basic earnings per share, which excludes dilution. SFAS No. 128 must be adopted for financial statements issued for periods ending after December 15, 1997, with earlier application not permitted. All prior-period earnings per share amounts must be restated to conform to SFAS 128. The Company plans to adopt SFAS No. 128 during the first quarter of fiscal 1998. INCOME TAXES The Company has adopted the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement carrying amount and tax basis of assets and liabilities. The Company provides for deferred taxes at the enacted tax rate that is expected to apply when the temporary differences reverse. <PAGE> DIGITAL BIOMETRICS, INC. NOTES TO FINANCIAL STATEMENTS STOCK-BASED COMPENSATION Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), was effective for 1996. This statement provides for a fair value based method of accounting for grants of equity instruments to employees. SFAS No. 123 permits entities to continue to apply the intrinsic-value method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"); however, pro forma disclosures of net income (loss) and earnings (loss) per share must be presented as if the fair value based method had been applied in measuring compensation cost. The Company elected to continue with the intrinsic-value method prescribed by APB No. 25 and the pro forma disclosures in Note 10. ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (2) INVENTORY Inventory is valued at standard cost, which approximates the lower of first-in, first-out (FIFO) cost or market. Inventory consists of the following: <TABLE> <CAPTION> September 30, ------------------------------- 1997 1996 ----------- ----------- <S> <C> <C> Components and purchased subassemblies $ 1,054,606 $ 1,934,371 Work in process 699,097 717,696 Finished goods 540,890 981,592 ----------- ----------- $ 2,294,593 $ 3,633,659 =========== =========== </TABLE> (3) PROPERTY AND EQUIPMENT Furniture and equipment are recorded at cost. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives, generally three to five years. Leasehold improvements are amortized over the estimated useful life of the asset or lease term, whichever is shorter. Property and equipment consist of the following: September 30, -------------------------- 1997 1996 ----------- ----------- Leasehold improvements $ 200,942 $ 172,222 Office furniture and equipment 671,146 835,933 Manufacturing equipment 237,465 193,612 Engineering equipment and tooling 918,184 1,269,987 ----------- ----------- $ 2,027,737 $ 2,471,754 =========== =========== <PAGE> DIGITAL BIOMETRICS, INC. NOTES TO FINANCIAL STATEMENTS (4) MARKETABLE SECURITIES Marketable securities consist primarily of collateralized mortgage backed securities. Net realized and unrealized gains and losses are determined on the specific identification cost basis. Realized losses from sales of marketable securities during fiscal 1997 were $64,624. Unrealized gains and losses are reflected as a separate component of stockholders' equity. The unrealized loss for available-for-sale marketable securities is as follows: September 30, ----------------------------- 1997 1996 ---------- ----------- Fair market value $ 154,808 $ 5,690,371 Amortized cost 156,447 5,825,124 ---------- ----------- Unrealized gain (loss) $ (1,639) $ (134,753) ========== =========== (5) LINES OF CREDIT The Company entered into a receivables financing line of credit effective October 1, 1996, for the lesser of eligible receivables or $3,500,000 with Norwest Business Credit. Borrowings under this line of credit are secured by all assets of the Company. The line bears interest at 1.5% above the prime rate (8.5% at September 30, 1997), is payable upon demand and expires in January, 1998. The Company elected to use the proceeds from the sale of marketable securities to pay off all borrowings under the line at September 30, 1997. For the period from September 30, 1997 through January 31, 1998, the minimum interest shall be $10,000 per the terms of the agreement. The Company had a $4,000,000 line of credit with Norwest Bank Minnesota N.A. Borrowings under this line of credit were secured by marketable securities and were limited to 80% of the market value of marketable securities held as collateral by the bank. The Company elected to use the proceeds from the sale of marketable securities to pay off all borrowings under the line at September 30, 1997 and terminate the line. The Company has a $200,000 line of credit with First Bank Minneapolis, secured by cash deposits. Borrowings under the line bear interest at the prime rate and are payable upon demand. This line expires in March, 1998. There were no amounts borrowed under the line at September 30, 1997. (6) OTHER ACCRUED EXPENSES September 30, -------------------------- 1997 1996 ---------- ----------- Other accrued expenses consist of: Accrued salaries $ 265,707 $ 442,701 Accrued vacation 121,994 112,665 Accrued interest payable -- 205,529 Other accrued expenses 431,909 582,513 ---------- ----------- $ 819,610 $ 1,343,408 ========== =========== <PAGE> DIGITAL BIOMETRICS, INC. NOTES TO FINANCIAL STATEMENTS (7) CONVERTIBLE DEBENTURES On September 29, 1995, the Company completed a private placement to offshore accredited investors of $10,900,000 of 8% Convertible Debentures due September 29, 1998 (the "1995 Debentures"). Net proceeds to the Company after placement fees but before legal and other expenses were $10,109,750. The 1995 Debentures were convertible one-third after 45 days, one-third after 75 days and one third after 105 days at the option of the 1995 Debenture holders. The Company had the right to redeem the Debentures prior to conversion. The conversion price was equal to the lesser of $7.00 per common share or 85% of the average trading price for any five consecutive trading days before conversion. Interest accrued on the 1995 Debentures was payable in Common Stock at the time of conversion at the conversion price as described above. In addition to the cash placement fee, a warrant to purchase 112,893 shares of the Company's Common Stock at $8.40 per share was granted to the placement agent for this offering. The warrant was valued at $112,893, which was reflected as a discount on the 1995 Debentures and was amortized as interest expense over the term of the 1995 Debentures. The intrinsic value of the beneficial conversion feature of $1,923,529 was allocated to additional paid-in capital with the resulting discount on the debt resulting in a non-cash interest expense charge to earnings (loss) over the vesting period of the conversion feature. Net proceeds to the Company were used for working capital, product development and other general corporate purposes. All of the 1995 Debentures and accrued interest have been converted into Common Stock during fiscal 1996 and fiscal 1997. The Company has issued 4,237,748 shares of Common Stock for the conversion of principal aggregating $10,900,000 of the Convertible Debentures plus $557,000 of accrued interest at an average conversion price of $2.70 per share. For the fiscal year ended September 30, 1997, the Company has issued 1,485,880 shares of Common Stock for the conversion of principal aggregating $2,450,000 of the 1995 Convertible Debentures plus $228,000 of accrued interest at an average conversion price of $1.80 per share. (8) FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments are recorded in its balance sheet. The carrying amount for cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, line of credit advances and convertible debentures approximate fair value due to the immediate or short-term maturity of these financial instruments. The fair values of investments in marketable securities are based on quoted market prices and are summarized in note 4. (9) RETIREMENT PLAN Effective January 1, 1992, the Company adopted a profit-sharing and savings plan (the "Plan") classified as a defined contribution plan and qualifying under Section 401(k) of the Internal Revenue Code. The Plan allows employees to defer a portion of their annual compensation through pre-tax contributions to the Plan. At the discretion of the Board of Directors, the Company may make matching contributions up to an amount equal to 50% of the contributions made by each employee, subject to a maximum contribution for each employee of 5% of compensation. The Board may also make other discretionary contributions to the Plan. Matching contributions at September 30, 1997 and 1996 resulted in accrued compensation expense of $88,321 and $81,184, respectively. Matching contributions have been paid through the issuance of Company Common Stock. For the years ended September 30, 1997, 1996 and 1995, the Company incurred $95,958, $102,504 and $66,708 respectively, of expense related to this plan. <PAGE> DIGITAL BIOMETRICS, INC. NOTES TO FINANCIAL STATEMENTS (10) STOCKHOLDERS' EQUITY CAPITAL STOCK On December 31, 1996 and 1995, the Company issued 41,798 and 16,831 shares, respectively, of Common Stock to satisfy the Company's discretionary matching to employees electing participation in the Company's 401(k) retirement plan. These issuances increased Common Stock and additional paid-in capital by $88,821 and $94,674, respectively. STOCKHOLDER RIGHTS PLAN In May 1996, the Board of Directors adopted a Stockholder Rights Plan. The Plan is designed to enable the Company and its Board of Directors to develop and preserve long-term value for stockholders and to protect stockholders in the event an attempt is made to acquire control of the Company without an offer of fair value to all stockholders. Under the Plan, each stockholder of record beginning at the close of business on May 22, 1996, will receive as a dividend one right for each share of the Company's Common Stock held. The rights expire on April 30, 2006. STOCK OPTIONS In order to attract and retain employees and directors, while preserving cash resources, the Company has, since its inception, utilized stock option awards issued through various stock option plans and employment arrangements. As of September 30, 1997, there were issued and outstanding options for 1,182,500 shares of Common Stock issued to employees and directors of which options to purchase 182,467 shares were currently exercisable. On January 14, 1994, two executive officers exercised options for 88,438 and 135,000 shares of Common Stock, respectively, at an exercise price of $1.33 per share. Pursuant to terms of the stock option plans, the Company loaned the total exercise amount to the executive officer in return for non-interest bearing promissory notes, secured by Common Stock issued. The notes are reflected as a reduction of stockholders' equity. In connection with each executive's severance package, $117,623 and $179,550 of notes receivable were forgiven by the Company and recorded as compensation expense in fiscal 1997 and 1996, respectively. <PAGE> DIGITAL BIOMETRICS, INC. NOTES TO FINANCIAL STATEMENTS Information relating to stock options during fiscal 1997, 1996 and 1995 is as follows: Shares Weighted Under Average Option Price Range Exercise Price --------- -------------- -------------- Unexercised options outstanding - September 30, 1994 574,900 $1.67 - $14.75 $10.65 Options granted 339,500 $7.44 - $ 9.00 $ 7.90 Options exercised (30,500) $2.00 - $ 8.00 $ 2.32 Options forfeited (35,300) $7.44 - $12.00 $10.25 --------- -------------- ------ Unexercised options outstanding - September 30, 1995 848,600 $1.67 - $14.75 $ 9.87 Options granted 110,500 $5.50 - $ 6.25 $ 5.77 Options exercised -- -- -- Options forfeited (76,500) $7.44 - $13.63 $ 9.56 --------- -------------- ------ Unexercised options outstanding - September 30, 1996 882,600 $1.67 - $14.75 $ 9.38 Options granted 1,001,700 $1.56 - $ 3.13 $ 2.19 Options exercised (25,000) $1.67 $ 1.67 Options forfeited (676,800) $2.56 - $14.75 $ 9.80 --------- -------------- ------ Unexercised options outstanding - September 30, 1997 1,182,500 $1.56 - $14.75 $ 3.21 ========= ============== ====== The following table summarizes information concerning options outstanding and exercisable as of September 30, 1997: Outstanding Exercisable ----------- ----------- Number of options 1,182,500 182,467 Weighted average remaining contractual life, in years 8.93 6.11 Weighted average exercise price $3.21 $8.08 The Company applies APB Opinion No. 25 in accounting for options granted under its stock option plans and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net loss would have increased to the pro forma amounts indicated below: 1997 1996 ----------- ------------ Net loss - as reported $(6,275,394) $(11,686,903) Net loss - pro forma $(6,773,897) $(11,688,889) Loss per share - as reported $ (0.53) $ (1.24) Loss per share - pro forma $ (0.58) $ (1.24) <PAGE> DIGITAL BIOMETRICS, INC. NOTES TO FINANCIAL STATEMENTS The pro forma net loss reflects only options granted in 1997 and 1996. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net loss amounts presented above because compensation cost is reflected over the options' vesting period, typically three years, and compensation cost for options granted prior to October 1, 1995 is not considered. Principle assumptions used in applying the option valuation model were as follows: 1997 1996 ---- ---- Risk-free interest rate 5.75% 5.75% Expected life, in years 10 10 Expected volatility 127% 68% Expected dividend yield 0% 0% RESTRICTED STOCK Effective October 1, 1992, the Board of Directors adopted the 1992 Restricted Stock Plan (the "Plan") pursuant to which awards of restricted stock may be made to employees and non-employee directors of the Company. The Plan serves as a means of providing annual bonus amounts to executive employees and as the means of compensation of non-executive directors effective with each director's election at the annual meeting of stockholders. Restricted stock awards vest over a three-year period. The Company awarded 25,413, 17,456 and 8,860 shares, respectively, of Common Stock under the Plan with a fair market value of $54,000, $72,000 and $72,000, respectively, for the years ended September 30, 1997, 1996 and 1995. Effective September 30, 1997, the Company granted 12,000 shares of restricted Common Stock outside of the Plan to its non-employee directors. The grant resulted in $27,000 in additional Common Stock issued and an equal amount of compensation expense. WARRANTS The Company has warrants outstanding at September 30, 1997, for the purchase of 140,893 shares of its Common Stock. The warrants are currently exercisable and expire at various times through September 29, 2000. The exercise prices per share range from $2.125 to $8.40. <PAGE> DIGITAL BIOMETRICS, INC. NOTES TO FINANCIAL STATEMENTS (11) INCOME TAXES There is no provision for income taxes since a valuation allowance has been established equal to the corresponding net deferred tax asset. At September 30, 1997, the Company has carryforwards of net operating losses and research and development tax credits of $30,700,000 and $827,608, respectively. These carryforwards expire as follows: Net Research and Operating Development Loss Tax Credit ------------ ---------- 1999 $ 346,711 $ 15,236 2000 116,546 1,997 2001 - 6,343 2002 547,523 40,774 2003 993,803 68,109 2004 22,477 1,497 2005 1,387,756 - 2006 1,310,521 34,307 2007 2,084,429 63,736 2008 2,248,457 133,548 2009 4,605,122 307,704 2010 2,734,225 154,357 2011 7,268,776 - 2012 7,033,654 - ------------ ---------- $ 30,700,000 $ 827,608 ============ ========== Due to uncertainty of the realization of deferred tax assets, the Company has established a valuation allowance equal to net deferred tax assets. The change in the valuation allowance for the years ended September 30, 1997 and 1996, is as follows: 1997 1996 ----------- ----------- Balance at beginning of year $11,328,000 $ 8,099,000 Change in valuation allowance 2,523,000 3,229,000 ----------- ----------- $13,851,000 $11,328,000 =========== =========== The current and long-term deferred income tax asset and liability amounts as of September 30, 1997 and 1996, were composed of the following: 1997 1996 ------------ ------------ Current and long-term deferred income tax asset resulting from future deductible temporary differences are: Accounts receivable allowance $ 177,000 $ 277,000 Inventory capitalization 28,000 39,000 Other accrued expenses 538,000 704,000 Research and development tax credit carryforwards 828,000 828,000 Net operating loss carryforwards 12,280,000 9,480,000 ------------ ------------ 13,851,000 11,328,000 (13,851,000) (11,328,000) ------------ ------------ $ 0 $ 0 ============ ============ <PAGE> DIGITAL BIOMETRICS, INC. NOTES TO FINANCIAL STATEMENTS The aforementioned carryforwards are subject to the limitation provisions of Internal Revenue Code sections 382 and 383. These sections provide limitations on the availability of net operating losses and credits to offset current taxable income and related income taxes when an ownership change has occurred. The Company's initial public offering in December 1990, resulted in an ownership change pursuant to these provisions and, accordingly, the use of the above carryforwards is subject to an annual limitation. The annual limitation on use of net operating losses is calculated by multiplying the value of the corporation immediately prior to the change in ownership by the long-term federal tax exempt rate. A total of $3,700,000 of the net operating loss carryforwards at September 30, 1997, is subject to the annual net operating loss limitation, estimated at $350,000. If the limited carryforward amount for any tax year exceeds the regular taxable income for such year, then the unused portion may generally be carried forward to increase the annual limitation for the following year. Utilization of net operating losses aggregating $27,000,000 which were incurred subsequent to the change of ownership are not limited. However, any future ownership change could create a limitation with respect to these loss carryforwards. Approximately $2,200,000 of the $30,700,000 net operating loss carryforwards relates to compensation associated with the exercise of non-qualified stock options which, when realized, would result in approximately $880,000 credited to additional paid-in capital. (12) LEASE COMMITMENTS The Company leases its primary office and production facility under an operating lease that expires in April 2001. Annual base rent under the lease agreement is approximately $237,000 and the Company is obligated to pay a pro rata share for property taxes, maintenance and other operating expenses. The Company leases a separate sales and service office in Los Angeles, California, under an operating lease that expires in December 1997, and is on a year-to-year lease arrangement. The Company is currently negotiating the extension of this lease. Rent expense for operating leases for 1997, 1996 and 1995 was $396,800, $329,400 and $338,300, respectively. Future minimum payments on operating leases for the years ending September 30, 1998, 1999, 2000 and 2001 are $354,200, $372,200, $399,300 and $241,700, respectively. (13) LITIGATION On June 1, 1995, the Company filed a complaint for patent infringement against Identix, Inc., of Sunnyvale, California, in the United States District Court for the Northern District of California. The complaint alleges that Identix has willfully and deliberately infringed a Company patent through the manufacture, use and/or sale of competing products. The complaint seeks, among other things, an injunction prohibiting further infringement as well as unspecified monetary damages. Identix has responded to the complaint alleging, among other purported defenses, non-infringement and patent invalidity. On August 27, 1996, the judge assigned to the case granted a partial summary judgment in favor of Identix dismissing the Company's claims of patent infringement with respect to Identix's Touchprint 600 product line. A predecessor product, the Touchprint 900, received a similar ruling in favor of Identix on December 20, 1996. During January 1997, the Company filed an appeal of the court's decision of non- infringement. These appeals are decided by the Federal Circuit, which is a Court of Appeals in Washington D.C. On October 8, 1997, the appeal was argued before the Court. As of December 11, 1997, no appellate decision has been issued. A prediction of the final outcome of the appeal is not possible. In the event the Company does not prevail in this litigation, its competitive position could be adversely affected. Except for the foregoing there are no material lawsuits pending or, to the Company's knowledge, threatened against the Company. <PAGE> DIGITAL BIOMETRICS, INC. NOTES TO FINANCIAL STATEMENTS (14) SUBSEQUENT EVENTS (a) JOINT VENTURE WITH GRAND CASINOS, INC. On November 24, 1997, the Company entered into a letter of intent to form a joint venture with Grand Casinos Inc. to further develop, test and market the TRAK-21 automated player tracking system. It is anticipated that a definitive agreement will be reached in early 1998 with deployment of a system based on TRAK-21 technology in a Grand Casino property during 1998. (b) ISSUANCE OF 8% CONVERTIBLE SUBORDINATED DEBENTURES AND WARRANTS To provide additional working capital, on December 1, 1997, the Company entered into a convertible subordinated debenture purchase agreement ("Purchase Agreement") with a private investor, providing for the Company's issuance and sale of up to an aggregate of $2,500,000 of 8% Convertible Subordinated Debentures ("Debentures") in tranches of $500,000 each. The first tranche was sold on December 1, 1997. Additional tranches may be issued upon request of the Company within 90 days of each previous tranche, if the Company meets all conditions to issuance including, but not limited to, conditions requiring the Company to have effective and maintain a registration statement with the Securities and Exchange Commission covering shares issuable upon conversion of the Debentures and a requirement that the Company's market capitalization be at least $12 million. The initial tranche sold in the amount of $500,000 on December 1, 1997, is convertible in whole or in part at the option of the holder, with accrued interest, into Common Stock, at a conversion equal to the lesser of $1.96 per share or 80% of the average closing price of the five consecutive trading days preceding the conversion date of the Debentures. Future tranches may be convertible on a similar basis but the conversion prices will be related to the lesser of the market price on the issue date and the market price on the conversion date. The Company has the right, exercisable at any time upon two trading days notice to the purchaser of the Debentures given at any time the Company receives a conversion notice and the conversion price in effect in connection with such conversion notice is less than $1.25, to repay all or any portion of the outstanding principal amount of the Debentures which have been tendered for conversion, at a price equal to the sum of 120% of the aggregate principal amount of Debentures to be repaid. In connection with the Purchase Agreement, the Company has agreed to issue to the purchaser of the Debentures, upon the sale of each tranche, warrants to purchase 15,000 of Common Stock exercisable at $2.50 per share up to a maximum 75,000 shares. Also, in connection with the transaction, the Company paid $40,000 of fees to an investment banking firm and issued a warrant to purchase 125,000 shares of Common Stock at an exercise price of $2.00 per share. The estimated value of this warrant is $87,500, which is a debt issuance cost to be written off to interest expense over the term of the Debentures. The Purchase Agreement includes a beneficial conversion feature. The intrinsic value of the beneficial conversion feature of each tranche will be allocated to additional paid-in capital with the resulting discount on the debt resulting in a non-cash interest expense charge to earnings (loss) over the vesting period of the conversion feature. The intrinsic value of the conversion feature of the first tranche is $125,000. Net proceeds to the Company will be used for working capital, business development and other general corporate purposes. <PAGE> - ------------------------------------------------------------------------------- NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER DESCRIBED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE SELLING STOCKHOLDERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR SINCE THE DATE OF ANY DOCUMENTS INCORPORATED HEREIN BY REFERENCE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES DESCRIBED IN THIS PROSPECTUS OR AN OFFER OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. --------------------- TABLE OF CONTENTS --------------------- Page Available Information.................................... 2 Prospectus Summary....................................... 3 Risk Factors............................................. 4 Use of Proceeds.......................................... 10 Market for the Registrant's Common Equity and Related Stockholder Matters.............................. 11 Selected Financial Data.................................. 12 Capitalization........................................... 13 Management's Discussion And Analysis of Financial Condition And Results of Operations...................... 14 Business................................................. 21 Management............................................... 28 Certain Transactions..................................... 31 Principal and Selling Stockholders....................... 32 Description of Capital Stock............................. 34 Plan of Distribution..................................... 37 Legal Matters............................................ 38 Experts.................................................. 38 Index to Consolidated Financial Statements............... F-1 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 3,771,429 SHARES DIGITAL BIOMETRICS, INC. COMMON STOCK ------------------------ PROSPECTUS ------------------------ _______________, 1998 - ------------------------------------------------------------------------------- <PAGE> PART II - INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the various expenses payable by the Company in connection with the sale and distribution of the Shares being registered. All amounts shown are estimates, except the registration fee. SEC registration fee...................................... $ 1,769 Legal fees and expenses................................... 15,000* Accounting fees and expenses.............................. 15,000* Blue sky and related fees and expenses.................... 231 Miscellaneous (including Transfer Agent, printing NASDAQ listing fees) .................................. 22,500 --------- Total................................................ $ 54,500 ========= *Estimated ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Company's Certificate of Incorporation provides that directors of the Company shall not be liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director. The Company's Bylaws provide that the Company shall indemnify to the fullest extent permitted by law any person made or threatened to be made a party to any action, suit or proceeding, whether criminal, civil, administrative or investigative (a "Legal Action"), whether such Legal Action be by or in the right of the corporation or otherwise, by reason of the fact that such person is or was a director, officer, employee or agent of another corporation, partnership, joint venture, trust or any other enterprise. In addition, the Company's By-laws provide for indemnification of any person made or threatened to be made a party to any Legal Action by reason of the fact that such person is or was a director, officer, employee or agent of the Company and is or was serving as a fiduciary of, or otherwise rendering services to, any employee benefit plan of or relating to the Company. Section 145 of the Delaware General Corporation Law ("Delaware Law" or "GCL") generally provides that a corporation is in certain circumstances permitted, and in other circumstances may be required, to indemnify its directors, officers and controlling persons against certain expenses (including attorneys' fees) and other amounts paid in connection with certain threatened, pending or completed civil, criminal, administrative or investigative actions, suits or proceedings (including certain civil actions and suits that may be instituted by or in the right of the Company) in which such persons were or are parties, or are threatened to be made parties, by reason of the fact that such persons were or are directors or officers of the Company. Section 145 also permits the Company to purchase and maintain insurance on behalf of its directors and officers against any liability which may be asserted against, or incurred by, such persons in their capacities as directors or officers of the Company or which may arise out of their status as directors or officers of the Company, whether or not the Company would have the power to indemnify such persons against such liability under the provisions of such Section. To date, the Company has purchased such insurance. Section 102 of the Delaware Law allows a corporation, in its Certificate of Incorporation, to eliminate the personal liability of its directors to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, other than liability for (i) any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) any transaction from which the director derived an improper personal benefit and (iv) unlawful payment of dividends or unlawful stock purchases or redemptions. The Company has entered into an indemnification agreement (the "Indemnification Agreement") with each of its directors pursuant to which the Company has agreed to indemnify and hold harmless such individuals to the full extent permitted by law against all costs, charges and expenses (including attorneys fees), <PAGE> judgments, fines and amounts in paid in settlement actually and reasonably incurred by them in the following situations. (1) The Company shall indemnify a director of the Company (the "Indemnitee") to the fullest extent provided by applicable law and to such greater extent as applicable law may thereafter from time to time permit when he was or is a party or is threatened to be made party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company), by reason of the fact that he is or was or had agreed to become a director of the Company, or is or was serving or had agreed to serve at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against all costs, charges and expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by Indemnitee in connection with the defense or settlement thereof or any appeal therefrom, if Indemnitee acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Company, and, with respect to any criminal action or proceedings, had no reasonable cause to believe his conduct was unlawful. (2) The Company shall indemnify Indemnitee to the fullest extent provided by applicable law and to such greater extent as applicable law may thereafter from time to time permit when he was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding by or in the right of the Company to procure a judgment in its favor by reason of the fact that he is or was or had agreed to become a director of the Company, or is or was serving or had agreed to serve at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against all costs, charges and expenses (including attorneys' fees) judgments, fines and amounts paid in settlement actually and reasonably incurred by Indemnitee in connection with the defense or settlement thereof or any appeal therefrom if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Company, and except that no indemnification shall be made in respect of any claim, issue or matter as to which Indemnitee shall have been adjudged to be liable to the Company unless and only to the extent that the Court of Chancery or the court in which such action, suit or proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such amounts which the Court of Chancery or such other court shall deem proper. (3) Pursuant to Section 145(f) of Delaware Law, without limiting any right which Indemnitee may have pursuant to Section 2 of the Indemnification Agreement, the Certificate, the Bylaws, the GCL, any policy of insurance or otherwise, but subject to the limitations on the maximum permissible indemnity which may exist under applicable law at the time of any request for indemnity hereunder determined as contemplated by Section 4(a) of the Indemnification Agreement, the Company shall indemnify Indemnitee against any amount which he is or becomes legally obligated to pay relating to or arising out of any claim made against him because of any act, failure to act or neglect or breach of duty, including any actual or alleged error, misstatement or misleading statement, which he commits, suffers, permits or acquiesces in while acting in his capacity as a director of the Company, or, at the request of the Company, as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. The payments which the Company is obligated to make pursuant to Section 3 of the Indemnification Agreement shall include, without limitation, damages, judgments, settlements and charges, costs, expenses, expenses of investigation and expenses of defense of legal actions, suits, proceedings or claims and appeals therefrom, and expenses of appeal, attachment or similar bonds; provided, however that the Company shall not be obligated under Section 3(a) of the Indemnification Agreement to make any payment in connection with any claim against Indemnitee: (i) to the extent of any fine or similar governmental imposition which the Company is prohibited by applicable law from paying which results from a final, nonappealable order; or (ii) to the extent based upon or attributable to Indemnitee gaining in fact a personal profit to <PAGE> which he was not legally entitled, including without limitation profits made from the purchase and sale by Indemnitee of equity securities of the Company which are recoverable by Company pursuant to Section 16(b) of the Securities Exchange Act of 1934, as amended, and profits arising from transactions in publicly traded securities of the Company which were effected by Indemnitee in violation of Section 10(b) of the Securities Exchange Act of 1934, as amended, including Rule 10b-5 promulgated thereunder; or (iii) subject to the provisions of Section 7(c) of the Indemnification Agreement, to the extent based upon or attributable to any actions, suits or proceedings initiated or brought voluntarily by Indemnitee and not by way of defense, but indemnification may be provided by the Company if the Board finds it to be appropriate. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES The following transactions reflect the issuance during the previous three years of securities not registered under the Securities Act: (a) Sales of Debentures and Warrants. The Company entered into a Purchase Agreement with KA, providing for the Company's issuance and sale of up to an aggregate of $2,500,000 of the Debentures in tranches of $500,000 each. On December 1, 1997 the Company sold (i) $500,000 principal amount of 8% Convertible Subordinated Debentures, due December 1, 2000 (the "Debentures"); and (ii) a Warrant dated December 1, 1997 (the "KA Warrant") for the purchase of 15,000 shares of the Company's Common Stock. The Debenture and KA Warrant were issued to KA Investments LDC, an accredited investor, in a private placement transaction, in reliance upon Section 4(2) under the Securities Act of 1933, as amended (the "Act"). No public offering or general solicitation of investors was involved in connection with the transaction. In connection with the transaction, the Company employed the services of MJK, an investment banking firm, as placement agent, and paid MJK commissions totaling $40,000, and issued to MJK a warrant for the purchase of 125,000 shares of the Company's Common Stock (the "MJK Warrant"). The issuance of the MJK Warrant was made in reliance upon the exemption from registration provided in Section 4(2) of the Act. No public offering of the MJK Warrant was involved. The Debentures are convertible in whole or in part at the option of KA, with accrued interest, into Common Stock of the Company at the lesser of $1.96 per share or 80% of the average bid price of the Company's Common Stock for the five trading days immediately preceding the conversion date of the Debentures. The KA Warrants are exercisable for five years at $2.50 per share. The MJK Warrant is exercisable at $2.00 per share. The Company has agreed to register for resale under the Act the shares of Common Stock issuable upon conversion of the Debentures and the KA Warrant. The Company has granted incidental registration rights under the Act to MJK pursuant to the terms of the MJK Warrant. (b) Issuance of Warrants for Services. In consideration of services rendered or to be rendered, the Company issued warrants to purchase its Common Stock to the following persons or companies: NAME RELATIONSHIP NUMBERS EXERCISE ISSUE OR EFFECTIVE DATE - ---------------------- ------------ ------- -------- ----------------------- Andcor Companies, Inc. Consultant 20,000 $2.3125 January 27, 1997 C. McKenzie Lewis III Director 8,000 2.125 March 18, 1997 Dennis Wendell Consultant 150,000 1.875 October 23, 1997 Jeffrey Whalen Consultant 50,000 1.875 October 23, 1997 Joseph VanLoy Consultant 50,000 1.875 October 23, 1997 All of the foregoing warrants were issued directly by the Company in reliance of Section 4(2) of the Act. The warrants issued to Andcor Companies, Inc. expire on January 27, 2000, the warrant issued to Mr. Lewis expires on March 18, 2000, and the warrants issued to Messrs. Wendell, Whalen and VanLoy expire on August 17, 2002. <PAGE> (c) Shares Issued to Non-Employee Directors. Effective September 30, 1997, the Company issued 3,000 shares of its Common Stock directly to each of its outside directors, C. McKenzie Lewis III, George Latimer, Steven M. Slavin and Jack A. Klingert. The issuance aggregating 12,000 shares was made in reliance upon the exemption provided in Section 4(2) of the Act, in recognition of services provided by the outside directors, who serve without monetary compensation. The Common Stock was issued to the outside directors in October 1997. (d) On October 11, 1995, Digital Biometrics, Inc. completed a private placement to off-shore investors of $10,900,000 of 8% Convertible Debentures due September 29, 1998 (the "1995 Debentures"). Net proceeds to the Company after placement fees but before legal and other expenses were $10,109,750. The 1995 Debentures were convertible at the rate of one-third after 45 days, one-third after 75 days and one-third after 105 days at the option of the holder. The conversion price was equal to the lesser of $7.00 per common share or 85% of the average trading price for any five consecutive trading days before conversion. Interest accrued on the 1995 Debentures was also payable in common stock at the time of conversion at the conversion price as described above. The Company issued an aggregate of 4,237,748 shares of Common Stock ("Conversion Shares") in 1996 and 1997, upon the conversion of $10,900,000 of principal of 1995 Debentures and conversion of $557,000 of accrued interest. Conversions in fiscal 1996 were at an average conversion price of $3.19 per share, and conversions in fiscal 1997 were at an average conversion price of $1.80 per share. The 1995 Debentures and the Conversion Shares were issued in reliance upon Regulation S under the Act in offshore transactions to purchasers who were not U.S. persons as defined by Rule 902 of the Act. The 1995 Debentures were not offered to subscribers in the United States and at the time of any offer to the purchaser to purchase the 1995 Debentures, each subscriber was physically outside the United States; each purchaser represented that it was purchasing the 1995 Debentures for its own account and not on behalf of or for the benefit of any U.S. person and the sale and resale of the 1995 Debentures and Conversion Shares have not been prearranged with any buyer in the United States; and to the best knowledge of the purchaser each distributor, if any, participating in the offering of the 1995 Debentures, has agreed and the purchaser agreed that all offers and sales of the 1995 Debentures prior to the expiration of a period commencing on the closing of all 1995 Debentures offered and ending forty days thereafter would not be made to U.S. persons or for the account or benefit of U.S. persons and would otherwise be made in compliance with the provisions of Regulation S under the Act. The same representations were made with respect to the Conversion Shares. In connection with the sale of the 1995 Debentures, the Company engaged Swartz Investments, Inc. ("Swartz") as placement reimbursement agent, and paid Swartz placement fees and expense reimbursement totalling $790,250, and issued Swartz a warrant to purchase 112,893 shares of the Company's Common Stock at an exercise price of $8.40 per share. The warrant was issued to Swartz in a transaction not involving a public offering pursuant to the exemption provided in Section 4(2) of the Act. (e) Restrictions; Information. The foregoing securities are restricted as to sale or transfer, unless registered under the Act, and contain on certificates issued or to be issued upon exercise, restrictive legends preventing sale, transfer or other disposition unless registered under the Act. In addition, each of the recipients of the warrants received or had access to material information concerning the Company, including, but not limited to, the Company's reports on Forms 10-K, 10-Q and 8-K filed with the Securities and Exchange Commission. <PAGE> ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS. Exhibit 3.1 The Company's Certificate of Incorporation, as amended (incorporated by reference to the Registrant's Registration Statement on Form S-1, effective March 11, 1993, File No. 33-58650). 3.2 The Company's Bylaws, as amended (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997, filed on December 24, 1997, File No. 0-18856). 4.1 Specimen Common Stock Certificate (incorporated by reference to the Registrant's Registration Statement on Form S-1, effective August 14, 1991, File No. 33-41080). 4.2 8% Convertible Subordinated Debenture Due December 1, 2000 dated December 1, 1997 between the Company and KA Investments LDC (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997, filed on December 24, 1997, File No. 0-18856). 4.3 Rights Agreement dated May 2, 1996 between the Company and Norwest Bank, Minnesota, National Association, as Rights Agent (incorporated by reference to the Registrant's Registration on Form 8-A filed on May 9, 1996, File No. 0-18856). 5.1 Opinion of Briggs and Morgan, Professional Association, regarding validity of Common Stock. 10.1 Convertible Subordinated Debenture Purchase Agreement dated December 1, 1997 between Company and KA Investments LDC (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997, filed on December 24, 1997, File No. 0-18856). 10.2 Warrant dated December 1, 1997 between the Company and KA Investments LDC for the purchase of 15,000 shares of the Company's Common Stock (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997, filed on December 24, 1997, File No. 0-18856). 10.3 Warrant dated December 1, 1997 between the Company and Miller Johnson & Kuehn, Inc. for the purchase of 125,000 shares of the Company's Common Stock (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997, filed on December 24, 1997, File No. 0-18856). 10.4 Warrant dated March 18, 1997 between the Company and C. McKenzie Lewis for the purchase of 8,000 shares of the Company's Common Stock (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997, filed on December 24, 1997, File No. 0-18856). 10.5 Warrant dated August 25, 1997 issued October 23, 1997 between the Company and Dennis Wendell for the purchase of 125,000 shares of the Company's Common Stock (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997, filed on December 24, 1997, File No. 0-18856). 10.6 Warrant dated September 25, 1997 issued October 23, 1997 between the Company and Jeffrey Whalen for the purchase of 50,000 shares of the Company's Common Stock (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997, filed on December 24, 1997, File No. 0-18856). 10.7 Warrant dated September 1997 issued December 13, 1997 between the Company and Joseph VanLoy for the purchase of 50,000 shares of the Company's Common Stock (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997, filed on December 24, 1997, File No. 0-18856). <PAGE> 10.8 Warrant dated January 27, 1997 between the Company and Andcor Companies, Inc. for the purchase of 10,000 shares of the Company's Common Stock (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997, filed on December 24, 1997, File No. 0-18856). 10.9 Warrant dated January 27, 1997 between the Company and Andcor Companies, Inc. for the purchase of 10,000 shares of the Company's Common Stock (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997, filed on December 24, 1997, File No. 0-18856). 10.10 Registration Rights Agreement dated December 1, 1997 between the Company and KA Investments LDC (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997, filed on December 24, 1997, File No. 0-18856). 10.11 Agreement and General Release dated October, 1997 between the Company and Glenn M. Fishbine (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997, filed on December 24, 1997, File No. 0-18856). 10.12 $3.5 million Receivables Financing Line of Credit effective October 1, 1996, between the Company and Norwest Business Credit (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997, filed on December 24, 1997, File No. 0-18856). 10.13 Lease for Company premises dated November 7, 1989 (incorporated by reference from the Company's Registration Statement on Form S-18, effective December 6, 1990, File No. 33-36939C). 10.14 Amendment to Lease for Company Premises dated March 11, 1996 (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997, filed on December 24, 1997, File No. 0-18856). 10.15 1990 Stock Option Plan, as amended (incorporated by reference to the Registrant's Registration on Form 10-Q for the fiscal quarter ended March 31, 1997, filed on May 15, 1997, File No. 0-18856). 10.16 1992 Restricted Stock Plan (incorporated by reference from the Company's Registration Statement on Form S-1, effective March 11, 1993, File No. 33-58650). 10.17 Form of Director Indemnification Agreement entered into between Company and outside directors (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997, filed on December 24, 1997, File No. 0-18856). 11.1 Computation of Net Earnings (Loss) Per Common Share (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997, filed on December 24, 1997, File No. 0-18856). 23.1 Consent of Briggs and Morgan, Professional Association (contained in Exhibit 5.1). 23.2 Independent Certified Public Accountants Report on Financial Statement Schedule and consent of KPMG Peat Marwick LLP. 24.1 Power of Attorney (included on Signature Page). (b) FINANCIAL STATEMENT SCHEDULE. ITEM 17. UNDERTAKINGS The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: <PAGE> (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective Registration Statement. (iii) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement; provided, however, that the undertakings set forth in paragraphs (i) and (ii) above do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the Registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the Registration Statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, and controlling persons of the Registrant pursuant to the provisions summarized in Item 15 above, or otherwise, the Registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel, the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that (1) for purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance on Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective and (2) for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. <PAGE> SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-1 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Minneapolis, Minnesota on the 12th day of January, 1998. DIGITAL BIOMETRICS, INC. By /s/ James C. Granger ------------------------------------- James C. Granger Chief Executive Officer and President POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints James C. Granger and John J. Metil, or either of them (with full power to act alone), as his true and lawful attorneys-in-fact and agents, with full powers of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities indicated. Signature Title Date - --------- ----- ---- /s/ James C. Granger - ------------------------ James C. Granger Chief Executive Officer, January 12, 1998 President and Director (Principal Executive Officer) /s/ John J. Metil - ------------------------ John J. Metil Chief Operating Officer and January 12, 1998 Chief Financial Officer * - ------------------------ Stephen M. Slavin Director January 12, 1998 * - ------------------------ George Latimer Director January 12, 1998 * - ------------------------ C. McKenzie Lewis III Director January 12, 1998 * - ------------------------ Jack A. Klingert Director January 12, 1998 *By: /s/ John J. Metil - ------------------------ John J. Metil Attorney-In-Fact </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000872947_applied_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000872947_applied_prospectus_summary.txt
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+PROSPECTUS SUMMARY This Prospectus contains forward-looking statements. Such forward-looking statements include, but are not limited to, the Company's expectations regarding its future financial condition and operating results, product development, business and growth strategy, market conditions and competitive environment. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. The following summary is qualified in its entirety by the more detailed information and the Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus (i) assumes the Underwriter's Over-Allotment Option is not exercised, and (ii) assumes the Warrants and the warrants to purchase 160,000 Units issued to the Representatives in connection with this Offering (the "Representatives' Warrants") are not exercised. THE COMPANY Ophidian Pharmaceuticals, Inc. ("Ophidian" or the "Company"), a development stage company, is engaged in the research and development of pharmaceuticals with an emphasis on products for infectious diseases. Under a collaboration with Eli Lilly and Company ("Lilly"), the Company is developing a product for the treatment of Clostridium difficile-associated disease ("CDAD"). CDAD is a bacterial infection that has become a common side effect of antibiotic therapy. The CDAD product is a result of the Company's strategy to design new drugs for infectious diseases by targeting molecules involved in the host-pathogen interaction. Ophidian signed a collaborative development and license agreement and a stock purchase agreement with Lilly in June 1996 ("Lilly Agreements"). Under the Lilly Agreements, Ophidian has received $4.4 million in equity investments and development milestone payments. Lilly will pay the Company an additional $8.0 million if certain CDAD product development objectives are met and Lilly chooses to proceed with development. The Lilly Agreements provide for Lilly to fund and conduct clinical testing, registration and marketing of the CDAD product worldwide and Ophidian to manufacture bulk drug for clinical and commercial use. The CDAD product is a passive antibody formulation that neutralizes disease-causing toxins secreted by C. difficile during infection of the human intestinal tract. These toxins are responsible for the development of diarrhea, inflammation and symptoms of colitis caused by the C. difficile organism. CDAD is a common side effect of treatment with certain broad spectrum antibiotics. Based on surveys and research, the Company estimates that CDAD arises in approximately one percent of all hospitalized patients. An Investigational New Drug application ("IND") was filed with the United States Food and Drug Administration ("FDA") for initial human clinical testing of the CDAD drug in November of 1997. The Company anticipates that several years of clinical testing will be required prior to FDA marketing approval. The Company is also developing a drug to prevent disease caused by enterohemorrhagic Escherichia coli, ("EHEC"), including E. coli O157:H7. Ophidian has received research funding of $816,000 from the U.S. National Institutes of Health ("NIH") for this program. The public health problem of EHEC became widely recognized following outbreaks in the U.S. and Japan that afflicted thousands of persons as a result of contaminated food products, including ground beef. The Company has shown in animals that the injection of its passive antibodies that neutralize EHEC toxins can block progression of lethal disease symptoms. The Company is conducting pre-clinical development of its EHEC passive antibodies as a potential human therapeutic. Ophidian has devised a drug formulation and manufacturing technology for the production of avian polyclonal antibodies for passive immune therapy. The Company believes avian antibodies will be generally safe when administered orally because they are derived from hen eggs that are common in the human diet. Ophidian intends to manufacture and sell bulk drugs based on its avian antibody technology to its commercial partners for final formulation and marketing of drug products. Broad-spectrum antibiotics are the most commonly used drugs to treat infectious diseases, with worldwide sales of approximately $20 billion annually. However, increased microbial resistance to antibiotics and the emergence of new infectious agents have created a significant need for new approaches for the treatment of infectious diseases. In addition, broad-spectrum antibiotics can be detrimental to the patient because beneficial microbes are often killed along with the disease-causing pathogen. The Company's research strategy is to develop infectious disease drugs that target molecules involved in specific host-pathogen interactions. In contrast to typical antibiotics, the Company's products are designed to leave beneficial microbes undisturbed, support the action of the host's immune system, and reduce the potential for the development of microbial resistance. The Company has 57 United States or foreign patents, issued or pending, from its research and development programs and has acquired rights to several external patents to supplement its technology. The Company's business strategy is to create commercial opportunities from its technologies by manufacturing proprietary antibody pharmaceuticals, establishing royalty-bearing licenses for the sale of its proprietary products with marketing partners, licensing technology to pharmaceutical firms, and forming sponsored research agreements. Ophidian was incorporated in the State of Wisconsin in November 1989 and commenced business operations in August 1990. The Company's principal offices and laboratories are located at 5445 East Cheryl Parkway, Madison, Wisconsin, 53711, and its telephone number is (608) 271-0878. THE OFFERING Securities offered........... 1,600,000 Units, each unit consisting of one share of Common Stock and one Warrant. The Shares of Common Stock and Warrants will be detachable 90 days after issuance, subject to earlier separability in the discretion of the Representatives and the Company. Terms of Warrants............ Each Warrant entitles the registered holder thereof to purchase, at any time commencing , 1999 [12 months from the date of the Prospectus], until , 2003 [five years after the date of the Prospectus], one Share of Common Stock at a price of $7.32 per Share. Commencing , 2000 [24 months from the date of the Prospectus], the Warrants are subject to redemption by the Company, in whole, but not in part, at $.10 per Warrant provided that the average closing bid price of the Common Stock as reported on Nasdaq SmallCap equals or exceeds $14.64 per share for any 20 trading days within a period of 30 consecutive trading days ending on the fifth trading day prior to the date of the notice of redemption. See "Description of Securities." Common Stock Outstanding Prior to the Offering(1)... 7,289,930 shares Securities to be Outstanding After the Offering(1).......... 8,889,930 shares of Common Stock and 1,600,000 Warrants. Use of Proceeds.............. For technology development/new product discovery, product development expenses, capital expenditures, working capital and general corporate purposes. See "Use of Proceeds." Risk Factors and Dilution.... An investment in the securities offered hereby involves a high degree of risk and immediate and substantial dilution to the purchasers in this Offering. See "Risk Factors" and "Dilution." Symbols: Nasdaq SmallCap Units.... OPHDU Common Stock.......... OPHD Warrants.............. OPHDW - --------------- (1) Excludes (i) 646,608 shares of Common Stock issuable upon the exercise of outstanding stock options as of February 28, 1998, under the 1990 Incentive Stock Option Plan and the 1992 Employee Stock Option Plan (collectively, the "1990/1992 Stock Option Plans") at a weighted average exercise price of $2.74 per share, leaving a balance of 5,296 shares of Common Stock reserved for future grants of options under the 1990/1992 Stock Options Plans, (ii) Fitchburg Research Park Associates' warrant to purchase up to 114,290 shares at an exercise price of $.0025 per share, (iii) a consultant's option to purchase 100,000 shares at an exercise price of $4.50 per share, and (iv) options to purchase a maximum of 90,000 shares of Common Stock to be granted to six employees and three outside directors. SUMMARY FINANCIAL INFORMATION <TABLE> <CAPTION> THREE MONTHS ENDED YEARS ENDED SEPTEMBER 30, DECEMBER 31, ----------------------------------------------------------------- ---------------------- 1993 1994 1995 1996 1997 1996 1997 ---------- ---------- ----------- ----------- ----------- --------- ---------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Revenues......................... $1,746,596 $1,017,627 $ 386,979 $ 321,444 $ 671,881 $ 393,361 $ 115,185 Operating expenses: Research and development........ 842,000 1,156,428 1,215,366 1,339,048 2,432,102 428,998 666,632 General and administrative...... 404,709 753,549 916,294 1,119,409 1,005,797 256,151 355,100 ---------- ---------- ----------- ----------- ----------- --------- ---------- Total operating expenses........ 1,246,709 1,909,977 2,131,660 2,458,457 3,437,899 685,149 1,021,732 ---------- ---------- ----------- ----------- ----------- --------- ---------- Income (loss) from operations... 499,887 (892,350) (1,744,681) (2,137,013) (2,766,018) (291,788) (906,547) Investment income, net........... 106,576 191,040 144,750 50,761 281,483 75,864 46,102 Interest expense................. -- (4,082) (4,624) (3,320) (2,800) (718) (724) Other............................ -- 97 668 -- -- -- -- ---------- ---------- ----------- ----------- ----------- --------- ---------- Net earnings (loss)............. $ 606,463 $ (705,295) $(1,603,887) $(2,089,572) $(2,487,335) $(216,642) $ (861,169) ========== ========== =========== =========== =========== ========= ========== Net earnings (loss) per share(1)...................... Basic......................... $0.11 $(0.12) $(0.26) $(0.34) $(0.34) $(0.03) $(0.12) Diluted....................... $0.11 $(0.12) $(0.26) $(0.34) $(0.34) $(0.03) $(0.12) Shares used to compute net earnings (loss) per share(1)...................... Basic......................... 5,334,283 6,086,065 6,089,128 6,115,336 7,215,274 6,788,750 7,287,464 Diluted....................... 5,674,121 6,086,065 6,089,128 6,115,336 7,215,274 6,788,750 7,287,464 <CAPTION> INCEPTION (NOV. 11, 1989) TO DECEMBER 31, 1997 ------------------- <S> <C> STATEMENTS OF OPERATIONS DATA: Revenues......................... $ 4,388,327 Operating expenses: Research and development........ 8,306,647 General and administrative...... 5,070,359 ----------- Total operating expenses........ 13,377,006 ----------- Income (loss) from operations... (8,988,679) Investment income, net........... 865,822 Interest expense................. (38,710) Other............................ 765 ----------- Net earnings (loss)............. $(8,160,802) =========== Net earnings (loss) per share(1)...................... Basic......................... Diluted....................... Shares used to compute net earnings (loss) per share(1)...................... Basic......................... Diluted....................... </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1997 SEPTEMBER 30, ------------------------- ----------------------------------------------------------------- AS 1993 1994 1995 1996 1997 ACTUAL ADJUSTED(2) ---------- ----------- ----------- ----------- ---------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Working capital.................. $5,100,728 $ 2,507,268 $ 1,319,826 $ 3,328,103 $3,812,539 $ 2,725,172 $10,763,172 Total assets..................... 5,856,184 4,917,996 3,408,129 5,247,761 5,975,606 5,116,176 13,154,176 Deficit accumulated during development stage.............. (413,544) (1,118,839) (2,722,726) (4,812,298) (7,299,633) (8,160,802) (8,160,802) Total shareholders' equity....... 5,500,501 4,680,233 3,156,544 4,743,260 5,397,956 4,544,458 12,582,458 </TABLE> - --------------- (1) See Note 1 of Notes to Financial Statements "Net Loss Per Share" for a description of the shares used in calculating net earnings (loss) per share. (2) As adjusted to give effect to the estimated net proceeds from the sale of 1,600,000 Units offered by the Company at an assumed initial public offering price of $6.10 per Unit. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000880181_lifecodes_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000880181_lifecodes_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..fe882ce7a29c7708d1185539ad45fc1100355761
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including information set forth in 'Risk Factors,' 'Unaudited Pro Forma Condensed Combined Financial Data' and the Consolidated Financial Statements, including Notes thereto, included elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus has been adjusted to give retroactive effect to the split of the Common Stock at the rate of 3.65-for-1, effected August 26, 1998, and assumes (i) the consummation of the GeneScreen Acquisition described under the heading 'Business--Recent and Pending Acquisitions' and '--GeneScreen Acquisition' to be completed contemporaneously with the closing of this offering, (ii) the Underwriters' over-allotment option is not exercised and (iii) the conversion of 21,500 shares of Series A Convertible Preference Stock ('Preferred Stock') into 156,950 shares of Common Stock at a rate of 7.3 shares of Common Stock for each share of Preferred Stock upon the closing of this offering. This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ materially from those results discussed in those forward-looking statements and from results historically experienced. Factors that might cause such a difference include, but are not limited to, those discussed in 'Risk Factors.' THE COMPANY Lifecodes is a leading provider of DNA testing services and related products for human paternity and forensic identification ('identity testing') and for genetic typing of potential donors and recipients of bone marrow and organ transplants ('transplant testing'). Paternity testing seeks to establish the correct identity of a child's parents when such matters are disputed. Forensic testing seeks to link hair, saliva, blood or other biological specimens found at a crime scene to an alleged suspect. Transplant testing detects the genetic sequence of certain human leukocyte antigens ('HLA') contained in DNA which are believed to be a principal determinant of whether a donor's bone marrow or organ transplant may be rejected by the recipient's immune system ('rejection') or may attack the recipient's immune system ('graft vs. host disease'). The Company is one of the largest providers of paternity, forensic and transplant testing services in the United States and is one of the largest providers of transplant testing in Germany. In addition to testing services, the Company offers a product line consisting of reagents and a wide range of DNA probes, which are sold principally in either standard configurations or customized test kits. Lifecodes was the first company to commercially offer DNA testing for paternity and forensic identification. In 1987, the Company assisted law enforcement officials in obtaining the first conviction in the United States based on DNA testing. The Company's Cellmark subsidiary was the first and is one of only two commercial forensic laboratories accredited by the American Society of Crime Laboratory Directors for DNA testing and regularly performs casework and provides expert DNA testimony in criminal cases nationwide. The Company's HLA test kits are used by the Naval Medical Research Institute and by 15 of the 19 screening laboratories (including two of the Company's laboratories) performing DNA testing for the National Marrow Donor Program, which together are generally regarded as being among the most influential institutions worldwide in setting transplant testing standards. Historically, the Company has focused on developing and incorporating its DNA technology into products to be sold as stand-alone test kits and to a lesser extent as DNA testing services. Since 1997, the Company has emphasized offering testing services to end-users of DNA testing information in an effort to meet demand for an integrated DNA testing solution and to take advantage of access to new DNA testing process technologies from Molecular Dynamics, Inc., Amersham Pharmacia Biotech Inc. and Molecular Innovations, Inc. which the Company believes, when fully developed, will improve the speed, quality and breadth of information provided by its testing services at a reduced cost. In addition, the Company believes this strategy will allow the Company to exploit opportunities not otherwise available to it as a marketer of DNA testing products. Since January 1, 1998, the Company has substantially increased its testing service revenue base and expanded its market coverage and laboratory infrastructure by completing the acquisitions of (i) National Legal Laboratories ('NLL'), the fifth largest paternity testing laboratory in the United States, (ii) International Support for Bone Marrow Drives, Ltd. ('ISBMD'), one of the largest providers of HLA testing services in Germany, (iii) Micro Diagnostics, Inc. ('MDx'), a full service DNA testing laboratory and (iv) Helix Biotech Ltd. (ALTERNATE PAGE FOR ACQUISITION PROSPECTUS) PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including information set forth in 'Risk Factors,' 'Unaudited Pro Forma Condensed Combined Financial Data,' and the Consolidated Financial Statements, including Notes thereto, included elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus has been adjusted to give retroactive effect to the split of the Common Stock at the rate of 3.65-for-1, effected August 26, 1998, and assumes (i) the consummation of the GeneScreen Acquisition described under the heading 'Business--Recent and Pending Acquisitions' and '-- GeneScreen Acquisition.' to be completed contemporaneously with the closing of this offering and the Company's initial public offering of 2,900,000 shares of Common Stock at an initial public offering price of $ , (ii) the Underwriters' over-allotment option is not exercised and (iii) the conversion of 21,500 shares of Series A Convertible Preference Stock ('Preferred Stock') into 156,950 shares of Common Stock at a rate of 7.3 shares of Common Stock for each share of Preferred Stock upon the closing of this offering. This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ materially from those results discussed in those forward-looking statements and from results historically experienced. Factors that might cause such a difference include, but are not limited to, those discussed in 'Risk Factors.' THE COMPANY Lifecodes is a leading provider of DNA testing services and related products for human paternity and forensic identification ('identity testing') and for genetic typing of potential donors and recipients of bone marrow and organ transplants ('transplant testing'). Paternity testing seeks to establish the correct identity of a child's parents when such matters are disputed. Forensic testing seeks to link hair, saliva, blood or other biological specimens found at a crime scene to an alleged suspect. Transplant testing detects the genetic sequence of certain human leukocyte antigens ('HLA') contained in DNA which are believed to be a principal determinant of whether a donor's bone marrow or organ transplant may be rejected by the recipient's immune system ('rejection') or may attack the recipient's immune system ('graft vs. host disease'). The Company is one of the largest providers of paternity, forensic and transplant testing services in the United States and is one of the largest providers of transplant testing in Germany. In addition to testing services, the Company offers a product line consisting of reagents and a wide range of DNA probes, which are sold principally in either standard configurations or customized test kits. Lifecodes was the first company to commercially offer DNA testing for paternity and forensic identification. In 1987, the Company assisted law enforcement officials in obtaining the first conviction in the United States based on DNA testing. The Company's Cellmark subsidiary was the first and is one of only two commercial forensic laboratories accredited by the American Society of Crime Laboratory Directors for DNA testing and regularly performs casework and provides expert DNA testimony in criminal cases nationwide. The Company's HLA test kits are used by the Naval Medical Research Institute and by 15 of the 19 screening laboratories (including two of the Company's laboratories) performing DNA testing for the National Marrow Donor Program, which together are generally regarded as being among the most influential institutions worldwide in setting transplant testing standards. Historically, the Company has focused on developing and incorporating its DNA technology into products to be sold as stand-alone test kits and to a lesser extent as DNA testing services. Since 1997, the Company has emphasized offering testing services to end-users of DNA testing information in an effort to meet demand for an integrated DNA testing solution and to take advantage of access to new DNA testing process technologies from Molecular Dynamics, Inc., Amersham Pharmacia Biotech Inc. and Molecular Innovations, Inc. which the Company believes, when fully developed, will improve the speed, quality and breadth of information provided by its testing services at a reduced cost. In addition, the Company believes this strategy will allow the Company to exploit opportunities not otherwise available to it as a marketer of DNA testing products. Since January 1, 1998, the Company has substantially increased its testing service revenue base and expanded its market coverage and laboratory infrastructure by completing the acquisitions of (i) National Legal Laboratories ('NLL'), the fifth largest paternity testing laboratory in the United States, (ii) International Support for Bone Marrow Drives, Ltd. ('ISBMD'), one of the largest providers of HLA testing services in Germany, ('Helix'), a full service DNA testing laboratory serving the Canadian market (collectively, the 'Recent Acquisitions'). In addition, the Company has entered into an agreement to acquire GeneScreen Inc. ('GeneScreen') for cash and stock valued at $12.5 million (the 'GeneScreen Acquisition'). GeneScreen is a leading provider of paternity testing services and had revenues of $11.2 million during the year ended December 31, 1997. The GeneScreen Acquisition will close contemporaneously with this offering. See 'Business--Recent and Pending Acquisitions' and '--GeneScreen Acquisition.' The Company intends to increase its revenue and profitability by leveraging its DNA testing process technology, currently under development, across its existing and acquired laboratory operations and those which it may acquire in the future and, to a lesser extent, by taking advantage of operational efficiencies brought about as a result of a larger laboratory infrastructure. The Company's goal is to be the leading international supplier of integrated DNA testing solutions. The Company's business strategy to meet this goal consists of the following primary elements: (i) continuing to improve its DNA testing process to increase the speed, quality and breadth of information provided by its testing services and to lower its costs; (ii) pursuing strategic acquisitions; (iii) expanding internationally through joint venture and licensing arrangements; (iv) maintaining its industry leadership position by working to set industry standards; and (v) extending the Company's technologies into other diagnostic testing areas. THE OFFERING <TABLE> <S> <C> Common Stock being offered by: The Company............................................ 2,900,000 shares The Selling Stockholder................................ 300,000 shares Common Stock to be outstanding after the offering........... 6,630,090 shares(1) Use of proceeds............................................. For payment of the cash portion of the purchase price of the GeneScreen Acquisition, repayment of indebtedness, and for general corporate purposes, including working capital and possible future acquisitions. See 'Use of Proceeds.' Proposed Nasdaq National Market symbol...................... LFCD </TABLE> - ------------------ (1) Based upon the number of shares outstanding on August 31, 1998. Does not include: (i) 1,318,854 shares of Common Stock issuable upon the exercise of stock options and warrants outstanding as of such date, of which 1,061,639 stock options and warrants were then exercisable; and (ii) 1,099,462 additional shares available for grant under the 1992 Employee Stock Option Plan, the 1995 Employee Stock Option Plan and the 1998 Stock Plan. See 'Management--Stock Option Plans.' (ALTERNATE PAGE FOR ACQUISITION PROSPECTUS) (iii) Micro Diagnostics, Inc. ('MDx'), a full service DNA testing laboratory and (iv) Helix Biotech Ltd. ('Helix'), a full service DNA testing laboratory serving the Canadian market (collectively, the 'Recent Acquisitions'). In addition, the Company has entered into an agreement to acquire GeneScreen Inc. ('GeneScreen') for cash and stock valued at $12.5 million (the 'GeneScreen Acquisition'). GeneScreen is a leading provider of paternity testing services and had revenues of $11.2 million during the year ended December 31, 1997. The GeneScreen Acquisition will close contemporaneously with this offering. See 'Business--Recent and Pending Acquisitions' and '--GeneScreen Acquisition.' The Company intends to increase its revenue and profitability by leveraging its DNA testing process technology currently under development across its existing and acquired laboratory operations and those which it may acquire in the future and, to a lesser extent, by taking advantage of operational efficiencies brought about as a result of a larger laboratory infrastructure. The Company's goal is to be the leading international supplier of integrated DNA testing solutions. The Company's business strategy to meet this goal consists of the following primary elements: (i) continuing to improve its DNA testing process to increase the speed, quality and breadth of information provided by its testing services and to lower its costs; (ii) pursuing strategic acquisitions; (iii) expanding internationally through joint venture and licensing arrangements; (iv) maintaining its industry leadership position by working to set industry standards; and (v) extending the Company's technologies into other diagnostic testing areas. THE OFFERING <TABLE> <S> <C> Common Stock being offered by: The Company.......................... 681,818 shares Common Stock to be outstanding after the offering................................ 6,630,090 shares(1) Use of proceeds........................... The Company will not receive any cash proceeds from the sale of shares hereunder. See 'Use of Proceeds.' Proposed Nasdaq National Market symbol.... LFCD </TABLE> - ------------------ (1) Based upon the number of shares outstanding on August 31, 1998. Does not include: (i) 1,318,854 shares of Common Stock issuable upon the exercise of stock options and warrants outstanding as of such date, of which 1,061,639 stock options and warrants were then exercisable; and (ii) 1,099,462 additional shares available for grant under the 1992 Employee Stock Option Plan, the 1995 Employee Stock Option Plan and the 1998 Stock Plan. See 'Management--Stock Option Plans.' SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA <TABLE> <CAPTION> NINE MONTHS ENDED FISCAL YEAR ENDED SEPTEMBER 30, JUNE 30, --------------------------------------------------------- ----------------------- 1993 1994 1995 1996 1997 1997 1998 --------- --------- --------- --------- --------- ----------- --------- (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues........................... $ 2,402 $ 2,628 $ 3,534 $ 7,683 $ 15,065 $ 9,802 $ 16,519 Gross profit....................... 1,137 1,271 2,030 3,679 7,690 4,964 8,169 Income (loss) from operations...... (782) (205) 276 (334) 822 538 1,763 Net income (loss).................. (671) (391) 179 (576) 388 147 951 Net income (loss) per share Basic............................ $ (0.56) $ (0.26) $ 0.12 $ (0.32) $ 0.18 $ 0.07 $ 0.39 Diluted.......................... $ (0.56) $ (0.26) $ 0.10 $ (0.32) $ 0.14 $ 0.05 $ 0.28 Weighted average common shares outstanding Basic............................ 1,199,627 1,498,807 1,555,053 1,803,761 2,159,902 2,161,946 2,426,504 Diluted.......................... 1,199,627 1,498,807 1,792,504 1,803,761 2,792,318 2,795,695 3,363,236 </TABLE> <TABLE> <CAPTION> JUNE 30, 1998 ----------------------------------------- PRO FORMA ACTUAL PRO FORMA(1) AS ADJUSTED(2) ------- ------------ -------------- (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................................ $ 1,285 $ 1,285 $ 22,549 Working capital.......................................................... 200 (193) 20,323 Total assets............................................................. 14,280 15,533 44,560 Total indebtedness(3).................................................... 3,750 4,400 4,232 Stockholders' equity..................................................... 4,124 4,626 32,102 </TABLE> - ------------------ (1) Pro forma to reflect the acquisition of Helix as if it occurred on June 30, 1998. See 'Business--Recent and Pending Acquisitions.' (2) Adjusted to reflect the consummation of the GeneScreen Acquisition and the sale of 2,900,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $11.00 per share and the application of the estimated net proceeds therefrom. See 'Use of Proceeds' and 'Capitalization.' (3) Includes short-term and long-term borrowings and current maturities of long-term debt including capital lease obligations. Also includes approximately $931,000 of accounts receivable financing. (ALTERNATE PAGE FOR ACQUISITION PROSPECTUS) SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA <TABLE> <CAPTION> NINE MONTHS ENDED FISCAL YEAR ENDED SEPTEMBER 30, JUNE 30, --------------------------------------------------------- ----------------------- 1993 1994 1995 1996 1997 1997 1998 --------- --------- --------- --------- --------- ----------- --------- (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues........................... $ 2,402 $ 2,628 $ 3,534 $ 7,683 $ 15,065 $ 9,802 $ 16,519 Gross profit....................... 1,137 1,271 2,030 3,679 7,690 4,964 8,169 Income (loss) from operations...... (782) (205) 276 (334) 822 538 1,763 Net income (loss).................. (671) (391) 179 (576) 388 147 951 Net income (loss) per share Basic............................ $ (0.56) $ (0.26) $ 0.12 $ (0.32) $ 0.18 $ 0.07 $ 0.39 Diluted.......................... $ (0.56) $ (0.26) $ 0.10 $ (0.32) $ 0.14 $ 0.05 $ 0.28 Weighted average common shares outstanding Basic............................ 1,199,627 1,498,807 1,555,053 1,803,761 2,159,902 2,161,946 2,426,504 Diluted.......................... 1,199,627 1,498,807 1,792,504 1,803,761 2,792,318 2,795,695 3,363,236 </TABLE> <TABLE> <CAPTION> JUNE 30, 1998 ----------------------------------------- PRO FORMA ACTUAL PRO FORMA(1) AS ADJUSTED(2) ------- ------------ -------------- (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................................ $ 1,285 $ 1,285 $ 22,549 Working capital.......................................................... 200 (193) 20,323 Total assets............................................................. 14,280 15,533 44,560 Total indebtedness(3).................................................... 3,750 4,400 4,232 Stockholders' equity..................................................... 4,124 4,626 32,102 </TABLE> - ------------------ (1) Pro forma to reflect the acquisition of Helix as if it occurred on June 30, 1998. See 'Business--Recent and Pending Acquisitions.' (2) Adjusted to reflect the consummation of the GeneScreen Acquisition and the sale of 2,900,000 shares of Common Stock offered by the Company in the IPO at an assumed initial public offering price of $11.00 per share and the application of the estimated net proceeds therefrom. See 'Capitalization.'
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Consolidated Financial Statements and notes thereto appearing elsewhere in this Prospectus. Unless the context otherwise requires, the term "Company" when used herein shall mean Ocular Sciences, Inc., a Delaware corporation, its California predecessor and its subsidiaries. THE COMPANY Ocular Sciences is a rapidly growing manufacturer and marketer of soft contact lenses. The Company manufactures a broad line of soft contact lenses marketed for annual and disposable replacement regimens. The Company believes that its lens designs provide wearers with a higher level of comfort and greater ease of handling than those of its leading competitors. The Company's manufacturing technologies permit consistent, cost-effective reproduction of these designs, allowing the Company to offer its lenses at competitive prices. In addition, the Company has implemented marketing strategies designed to assist eyecare practitioners, both in independent practice and in retail chains, in retaining their patients and monitoring their patients' ocular health. These strategies provide a significant incentive for practitioners to prescribe the Company's lenses. Furthermore, the Company has continuously focused on lowering its non-manufacturing costs, or "cost-to-serve," enabling it to increase its profitability and its flexibility to reduce prices. To minimize its cost-to-serve, the Company utilizes a telemarketing sales force and directs its marketing efforts toward eyecare practitioners rather than consumers. Industry analysts estimate that approximately 50% of the world's population needs some type of vision correction. In the United States alone, over 130 million people require some form of vision correction. The United States currently represents the world's largest market for contact lenses, with approximately 26 million people, or 20% of those requiring vision correction, wearing contact lenses according to estimates by industry analysts. The soft contact lens market is characterized by increasing lens consumption. The number of soft contact lenses sold in the United States has increased at a compound annual growth rate of approximately 28% from 1987 to 1997, according to Health Products Research, a market research firm, largely as a result of the introduction in 1988 of soft contact lenses marketed for disposable replacement regimens. This increase in unit sales has provided manufacturing economies of scale that, together with heightened competition among eyecare practitioners, has led to significant reductions in average retail prices for soft contact lenses. Despite the decline in per unit prices, wearers' annual expenditures for lenses have increased as they have shifted to more frequent replacement regimens. The Company believes that sales in many international markets will grow at faster rates than the United States market and that this growth will be driven principally by an increase in the number of contact lens wearers, which currently is significantly lower than that in the United States, as the availability of low-priced soft contact lenses increases. The Company believes, based on a 1994 study sponsored by the American Academy of Ophthalmology and management's recent experience in the eyecare industry, that the eyecare profession suffers from a surplus of practitioners and believes that the resulting competitive pressure has been exacerbated by the increased prevalence of retail optical chains and mass merchandisers that provide eyecare services. The typical eyecare practitioner in both the private practice and retail chain channels depends heavily on sales of products, such as contact lenses and eyeglasses. The Company believes, based on a 1996 industry survey, that the typical optometric practice realizes approximately two-thirds of its revenue from sales of optical products, such as contact lenses and eyeglasses. Since the need for vision correction is chronic, repeat sales of contact lenses can provide the practitioner with a recurring, predictable revenue base. However, with the advent of disposable replacement regimens and the availability of nationally advertised lens brands through many competing channels of distribution, including mail-order and pharmacies, the prescribing practitioner risks losing recurring sales to alternate distribution channels. The Company believes that practitioners can increase their patient retention and provide better ongoing patient care by providing competitively-priced, high-quality products that are differentiated by brand from those offered by competing distribution channels. Accordingly, the Company has successfully implemented a strategy to address the needs of eyecare practitioners. The Company markets its lenses solely to eyecare practitioners, both in private practice and in retail optical chains, rather than to consumers. The Company believes that focusing on the eyecare practitioner, who strongly influences the selection of the brand of contact lenses worn by the patient, is critical to its ability to market contact lenses successfully. The Company does not sell to mail-order companies, pharmacies or other distribution channels that do not provide the eyecare services necessary to maintain overall ocular health. Over the last five years, the Company has established itself as a leader in the spherical annual replacement segment of the United States market with a market share estimated at approximately 24% of total unit sales in the fourth quarter of 1997. Since its introduction of lenses marketed for weekly disposable replacement regimens in 1993, the Company has steadily increased its share of this growing market, reaching approximately 12% of total unit sales in the United States during the fourth quarter of 1997, based on data published by the Contact Lens Institute. The Company's overall unit sales have increased at a compound annual growth rate of approximately 69% from 1993 through 1997, primarily due to increased sales of its lenses marketed for weekly disposable replacement regimens. During the same period, while the overall average selling prices of all of the Company's lenses declined approximately 59%, the Company reduced its per unit production costs by approximately 73% by spreading its relatively fixed manufacturing and operating costs over higher production volumes, and by improving its manufacturing and packaging processes. As a result, from 1993 through 1997, the Company's net sales and operating income have increased at compound annual growth rates of approximately 33% and 80%, respectively, while its operating margins have improved from 7.5% to 25.2% (in each case excluding non-recurring charges in 1993). The Company expects that the overall average selling price that it realizes across its products will continue to decline over time and does not expect there to be significant growth in its sales of lenses marketed for annual replacement. The Company does not believe that its recent net sales and operating income growth rates are indicative of its long-term growth rates. RECENT DEVELOPMENTS On January 29, 1998, the Company announced that its net sales in 1997 were $118.6 million, representing an increase of 31.0% over net sales of $90.5 million in 1996. Substantially all of this growth resulted from increased sales of the Company's lenses marketed for weekly disposable replacement regimens. Gross profit increased 43.7% to $77.5 million, or 65.4% of net sales in 1997, from $54.0 million, or 59.6% of net sales in 1996. The increase in gross profit from 1996 to 1997 was due primarily to increased net sales, and decreases in per unit production costs resulting from the implementation of certain process improvements and increases in manufacturing volume. Income from operations increased 71.7% to $29.9 million in 1997 from $17.4 million in 1996, and net income increased 102.8% to $20.6 million in 1997 from $10.2 million in 1996. In August 1997, the Company consummated its initial public offering, in which the Company sold 3,600,000 shares of Common Stock and selling stockholders sold 4,680,000 shares of Common Stock, at an initial public offering price of $16.50 per share. The net proceeds to the Company of $53.7 million were used to repay indebtedness, and are being used for expansion and automation of manufacturing facilities and other general corporate purposes. STRATEGY The Company believes that, by continuing to pursue its strategy focused on addressing the needs of the eyecare practitioner, it will be well-positioned to increase its sales and its share of the growing disposable replacement market. The principal elements of the Company's strategy include: Focus Marketing on Eyecare Practitioners. The Company's sales and marketing efforts are directed at eyecare practitioners because the practitioner strongly influences the brand of lenses purchased by the patient. The Company advertises and promotes its products solely to practitioners rather than to consumers. In addition, the Company does not sell its lenses to mail-order companies, pharmacies and other distribution channels that do not provide the eyecare services necessary to confirm lens fit and monitor ocular health. By bar-coding each unit shipped for disposable replacement regimens, the Company can identify diversion of its lenses to non-eyecare practitioner channels. The Company structures its branding and marketing strategies so that the patient will be more likely to refill prescriptions from the practitioner or retail chain from whom he or she received the initial prescription. As a result, the Company believes that it assists eyecare practitioners in retaining patient reorders and improves practitioners' ability to monitor their patients' ongoing ocular health, thereby providing a significant incentive for practitioners to prescribe the Company's lenses. Employ Brand Segmentation by Channel. The high-volume use of lenses marketed for disposable replacement regimens has resulted in increased mass-market advertising of competing products and intensified competition across distribution channels. Unlike its larger competitors, which promote nationally advertised consumer brands across multiple distribution channels, the Company advertises and promotes its lenses marketed for disposable replacement regimens under specific brand names for the private practice channel and other brand names for the retail chain channel. The Company also provides private label brands for its larger customers. Branding by distribution channel creates brand exclusivity and allows practitioners to differentiate lenses sold by them from lenses sold through competing channels, providing them with a greater ability to retain their patients' prescription refill business. The Company believes that, as a result, its channel-specific branding has become increasingly valuable to eyecare practitioners. By promoting the repeat purchase of lenses from the prescribing practitioner, the Company believes that its marketing strategies increase patient satisfaction and thereby encourage long-term loyalty to its products, while also motivating practitioners to prescribe its lenses. Produce Superior Performing Products. The Company believes that its contact lenses are superior in performance to those of its major competitors in terms of comfort and ease of handling. The Company's advanced dry cast molding process and sophisticated lens designs maximize wearers' comfort and improve shape retention of lenses, making them easier for wearers to handle. In addition, the Company's lenses are designed and manufactured to provide fitting characteristics similar to competitors' lenses. In general, this enables the practitioner to switch a patient to the Company's lenses without extensive refitting time. These advantages enable the Company to market its lenses to eyecare practitioners for both existing and new contact lens wearers. Emphasize Low-Cost Efficient Manufacturing. With the growth of the high-volume disposable market segment, low-cost, scaleable manufacturing has become increasingly important. The Company's dry cast molding technology allows it to manufacture high-quality lenses efficiently. As a result, the Company has been able to reduce its per unit production costs by approximately 73% over the last four years while increasing its production volumes by approximately 876%. The Company plans to implement highly automated production lines in its U.K. manufacturing facility, beginning in the second quarter of 1998, and plans to relocate its Puerto Rican manufacturing operations to a substantially larger new facility, which is expected to also include these highly automated production lines, in 1999. The Company believes that the increased unit volumes resulting from the growing disposable replacement regimen market and this continued investment in automation and capacity will enable it to further reduce per unit production costs and increase production volumes. Minimize Cost-to-Serve. A substantial portion of the Company's costs consists of the costs required to sell and market lenses and to take and fill an order. The Company focuses on lowering these non-manufacturing costs, or "cost-to-serve," in order to increase its profitability and its flexibility to reduce prices. The Company's primary means of minimizing cost-to-serve are its use of telemarketing rather than a traditional direct sales organization and its use of advertising targeted to practitioners rather than to consumers. This strategy differentiates the Company from its competitors, and the Company believes that the cost of its average sales call is substantially lower than that of its competitors that rely on field sales representatives since the Company's inside sales personnel can make more calls per day at a lower annual cost per salesperson. In addition, unlike its leading competitors, which market their products to consumers through expensive mass-media campaigns, the Company controls its operating expenses by marketing solely to the eyecare practitioners who prescribe contact lenses. In addition, the Company continues to invest in increased automation in its distribution operations in order to maintain its low cost-to-serve. Expand Internationally Through Strategic Relationships. The Company believes that many international markets for soft contact lenses will grow at faster rates than the United States market and that this growth will be driven by increased availability of low-priced lenses marketed for disposable replacement regimens in developed markets such as Europe, Japan and Canada and by increased disposable income in emerging markets in Asia and Latin America. However, many markets outside the United States do not have the level of demand necessary for local manufacturers to achieve the economies of scale required for low-cost lens production. Consistent with its strategy of minimizing cost-to-serve, the Company's international growth strategy is to establish strategic distribution and marketing relationships with regional optical companies, such as the contact lens division of Carl Zeiss Company ("Zeiss") in Europe and Seiko Contactlens, Inc. ("Seiko") in Japan, to capitalize on their existing market presence, customer relationships and local infrastructure. The Company anticipates that Seiko will receive initial approval to sell certain of the Company's contact lenses marketed for disposable replacement regimens in Japan by the fourth quarter of 1998. The Company has also established distribution relationships with other soft contact lens distributors in a number of countries in the Asian market. The Company believes that, as a result, it can target growing international markets effectively without significant investment in direct operations. BACKGROUND The Company was founded in 1985 and was principally a distributor of contact lenses until 1992. In September 1992, the Company began manufacturing operations by acquiring Precision Lens Laboratories Ltd. ("PLL"), a United Kingdom-based company and, until the acquisition, the primary supplier of the Company's lenses. This acquisition provided the Company with the facilities and technology to manufacture high-quality contact lenses. In October 1992, the Company acquired the contact lens business of Allergan, Inc. in North and South America, which had been operating under the name American Hydron ("American Hydron"). This acquisition provided the Company with a significantly expanded customer base, an additional line of contact lens products and a manufacturing facility in Puerto Rico. ------------------------ The Company was incorporated under the name O.S.I. Corporation in California in 1985 and was reincorporated in Delaware in July 1997. The Company's principal executive offices are located at 475 Eccles Avenue, South San Francisco, California 94080, and its telephone number is (650) 583-1400. THE OFFERING <TABLE> <S> <C> Common Stock offered: By the Company....................... 30,000 shares By the Selling Stockholders.......... 4,616,418 shares(1) Total............................. 4,646,418 shares(1) Common Stock to be outstanding after the offering...................... 21,900,776 shares(2) Use of proceeds........................ The proceeds to the Company will be used primarily to pay the expenses of this offering. The Company will not receive any of the proceeds from the sale of shares of Common Stock by the Selling Stockholders. See "Use of Proceeds." Nasdaq National Market symbol.......... OCLR </TABLE> SUMMARY CONSOLIDATED FINANCIAL INFORMATION <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ------------------------------------------------ 1993 1994 1995 1996 1997 ------- ------- ------- ------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Net sales............................................... $38,533 $48,503 $68,087 $90,509 $118,605 Gross profit............................................ 13,860 25,950 41,267 53,956 77,539 Total operating expenses................................ 15,377 17,492 26,015 36,521 47,609 Income (loss) from operations(3)........................ (1,517) 8,458 15,252 17,435 29,930 Net income (loss) applicable to common stockholders..... (4,509) 4,955 8,708 10,094 20,584 Net income per share (basic)(4)......................... $ (0.35) $ 0.38 $ 0.55 $ 0.61 $ 1.10 Net income per share (diluted)(4)....................... $ (0.35) $ 0.27 $ 0.46 $ 0.52 $ 0.98 Shares used in computing net income per share (basic)(4)............................................ 12,788 13,067 15,791 16,445 18,722 Shares used in computing net income per share (diluted)(4).......................................... 12,788 18,578 19,194 19,439 21,107 OTHER DATA: Lenses marketed for disposable replacement regimens as a percentage of total lenses sold....................... 19.1% 53.0% 73.4% 83.5% 89.6% Depreciation and amortization........................... $ 1,775 $ 2,137 $ 2,578 $ 4,904 $ 6,863 Capital expenditures.................................... 2,489 2,153 13,558 12,256 16,156 </TABLE> <TABLE> <CAPTION> AS OF DECEMBER 31, 1997(5) -------------------- (IN THOUSANDS) <S> <C> CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents, restricted cash and short-term and long-term investments................................... $ 47,429 Working capital........................................... 55,988 Total assets.............................................. 129,735 Total debt................................................ 3,879 Stockholders' equity...................................... 106,104 </TABLE> - --------------- (1) Assumes the Underwriters' overallotment option is not exercised. (2) Based on the number of shares outstanding as of February 15, 1998. Excludes 3,361,984 shares of Common Stock issuable upon the exercise of options outstanding as of such date under the Company's 1989 Stock Option Plan (the "1989 Plan"), the Company's 1997 Equity Incentive Plan (the "1997 Plan") and the Company's 1997 Directors Stock Option Plan (the "Directors Plan"). See "Management -- Employee Benefit Plans" and Note 11 of Notes to Consolidated Financial Statements. (3) Loss from operations for 1993 includes a non-recurring charge of $4.4 million, related to writedowns in the carrying value of certain assets purchased in connection with the Company's acquisition of American Hydron. (4) For an explanation of the determination of the number of shares used in computing net income per share (basic and diluted), see Notes 2 and 12 of Notes to Consolidated Financial Statements. (5) The sale by the Company of the 30,000 shares of Common Stock offered by it will provide net proceeds of $783,750 (after deducting underwriting discounts and commissions but before deducting estimated expenses of approximately $540,000), which will be used primarily to pay expenses of this offering. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000883787_3ci_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000883787_3ci_prospectus_summary.txt
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+SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial data appearing elsewhere in this Prospectus, including the information under "Risk Factors." THE COMPANY The Company was incorporated in Delaware in 1991 and is engaged in the business of medical waste management services. The Company operates in Alabama, Arkansas, Florida, Georgia, Kansas, Louisiana, Mississippi, Missouri, Oklahoma, Tennessee and Texas. The Company's customers include regional medical centers, major hospitals, clinics, medical and dental offices, veterinarians, pharmaceutical companies, retirement homes, medical testing laboratories and other generators of medical waste. Services to customers include collection, transportation, bar code identification, and destruction by controlled, high temperature incineration and use of a microwave facility. The Company also provides training to customers on compliance with regulations, use of containers, documentation and tracking. "Medical waste" or "biomedical waste" generally consists of any liquid or solid waste generated in the diagnosis, treatment or immunization of human beings or animals or in related research that may result in an infectious disease. State and federal regulations focus on regulated and infectious medical waste, such as pathological waste, including tissues, organs and body parts; blood and the products or components of blood; "sharps," including needles, scalpels, pipettes and other medical instruments; waste from surgery or autopsy; dialysis wastes, including contaminated disposable equipment and supplies; cultures and stocks of infectious agents, including cultures from medical and pathological laboratories; and various other biological wastes and discarded materials contaminated with or exposed to blood, excretion and secretions from human beings or animals. Medical waste or biomedical waste generally is not "hazardous waste" under state and federal environmental laws. The Company enters into medical waste disposal agreements with customers for the collection of their medical waste according to a schedule agreed upon between the parties. The Company accepts medical waste that has been packaged by customers in containers provided or approved by the Company. The Company then transports the medical waste in vehicles that are owned or leased by the Company to destruction facilities, including two incinerators and a microwave facility that are owned by the Company, and to an incinerator with which the Company has entered into an exclusive contract. Company employees who handle medical waste are trained in the proper techniques for the safe handling of medical waste. The Company also serves its customers by designing specialized on-site training systems for the identification, segregation, handling and packaging of medical waste. These systems are designed to assist customers in reducing their overall medical waste disposal costs, to promote safe handling and to foster a long-term working relationship between the Company and its customers. The systems also are designed to facilitate the proper packaging of medical waste for disposal before handling by Company employees. The Company uses a sophisticated bar code technology to track and record the movement of medical waste through all phases of its handling by the Company including collection, transportation and incineration, in compliance with applicable governmental regulations. The Company's executive offices are located at 910 Pierrepoint, #312, Shreveport, Louisiana 71106 and its telephone number is (318) 869-0440. <TABLE> <CAPTION> EXHIBIT NUMBER IDENTIFICATION OF EXHIBIT ------ ------------------------- <S> <C> <C> 4.4 -- Stock Escrow and Pledge Agreement dated July 1994, among 3CI, Med-Waste Disposal Service, Inc., Jim Shepherd, Mike Shepherd and Richard McElhannon (incorporated by reference to Exhibit 4.11 of 3CI's Annual Report on Form 10-K for the fiscal year ended September 30, 1992). 4.5 -- Revolving Promissory Note dated September 30, 1995 in the principal amount of $8,000,000 between 3CI and WSI (incorporated by reference to Exhibit 4.4 of the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1995). 4.6 -- Warrant dated March 18, 1998 issued to Klein Bank as escrow agent with respect to 1,002,964 shares of Common Stock. 4.7 -- Escrow Agreement dated March 6, 1998 between the Company and Klein Bank as escrow agent. 5.1 -- Opinion of Porter & Hedges, L.L.P. with respect to legality of securities. 10.1 -- Contract dated August 22, 1989 between 3CI and the City of Carthage, Texas, related to the incineration of medical waste (incorporated by reference to Exhibit 10 of 3CI's registration statement on Form S-1 (No. 33-45632) effective April 14, 1992). 10.2 -- Addendum dated March 30, 1992 to Contract between 3CI and the City of Carthage, Texas (incorporated by reference to Exhibit 10 (p) of 3CI's registration statement on Form S-1 (No. 33-45632) effective April 14, 1992). 10.3 -- First Amendment dated July, 1993 to Contract between 3CI and City of Carthage, Texas (incorporated by reference to Exhibit 10.3 of 3CI's Annual Report on Form 10-K for the fiscal year ended September 30, 1993). 10.4 -- 1992 Stock Option Plan of 3CI (incorporated by reference to Exhibit 10(m) of 3CI's registration statement on Form S-1 (No. 33-45632) effective April 14, 1992). 10.5 -- Security Agreement dated October 10, 1994, among 3CI Complete Compliance Corporation, 3CI Acquisition Corp./A/MED and River Bay (incorporated by reference to Exhibit 1.7 of 3CI's report on Form 8-K filed October 27, 1994). 10.6 -- Security Agreement dated October 10, 1994, between 3CI Complete Compliance Corporation and River Bay Corporation (incorporated by reference to Exhibit 1.8 of 3CI's report on Form 8-K filed October 27, 1994). 10.7 -- Mortgage, Security Agreement, Assignment of Leases and Financing Statement dated October 10, 1994, among 3CI Complete Compliance Corporation, 3CI Acquisition Corp., A/A/MED and River Bay Corporation (incorporated by reference to Exhibit 1.9 of 3CI's report on Form 8-K filed October 27, 1994). 10.8 -- Debt Subordination Agreement dated October 10, 1994, among 3CI Complete Compliance Corporation, 3CI Acquisition Corp./A/MED, River Bay Corporation, Marlan Baucum, Zeb Baucum, III, Diedra Baucum, The Smith County Bank and the Bank of Raleigh (incorporated by reference to Exhibit 1.10 of 3CI's report on Form 8-K filed October 27, 1994). 10.9 -- Employment Agreement dated August 31, 1995, between 3CI and Charles D. Crochet. 10.10 -- Modification of Purchase Transaction dated January 25, 1995, among 3CI, 3CI Acquisition Corp./A/MED, River Bay Corporation and Marlan Baucum (incorporated by reference to Exhibit 10.21 of 3CI's Annual Report on Form 10-K for the fiscal year ended September 30, 1995). 10.11 -- Settlement Agreement dated January 1996 between James Shepherd, Michael Shepherd and Richard T. McElhannon as Releasors, and the Company, Georg Rethmann, Dr. Herrmann Niehues, Juergen Thomas, Charles Crochet and Waste Systems, Inc., as Releasees. Letter Re: Change in Certifying Accountant (incorporated by reference to Exhibit 16.2 of 3CI's report on Form 8-K/A filed December 28, 1994). 10.12 -- Exchange Agreement between 3CI Complete Compliance Corporation and Waste Systems, Inc. dated as of June 24, 1997. </TABLE> THE OFFERING <TABLE> <S> <C> <C> Securities Offered by the Company . . . . . . . . . 1,002,964 Securities Offered by the Selling Stockholders . . 515,470 Common Stock outstanding after the offering(1) . . 10,714,275 Use of Proceeds . . . . . . . . . . . . . . . . . . All proceeds from the exercise of the Warrants will be used for general corporate purposes. The Company will not receive any proceeds form the sale of Common Stock by the Selling Stockholders. Nasdaq Small-Cap Market Symbol . . . . . . . . . . "TCCC" </TABLE> - ----------------- (1) Includes 1,002,964 shares of Common Stock issuable upon the exercise of the Warrants. Does not include (i) 162,500 shares of Common Stock issuable upon exercise of outstanding options and warrants and (ii) 7,750,000 shares of Common Stock issuable upon conversion of the Company's Series B Preferred Stock and Series C Preferred Stock.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000885542_peoples_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000885542_peoples_prospectus_summary.txt
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+SUMMARY The following is a brief summary of certain information contained in this Prospectus and is not intended to be a complete statement of all material facts regarding the matters set forth herein. It is qualified in its entirety by reference to more detailed information set forth in this Prospectus, the accompanying appendices, and the documents incorporated by reference herein. The Company and the Banks The Company is a bank holding company which owns The Peoples National Bank. The Peoples National Bank currently operates as a full service commercial bank in the Easley, Powdersville and Pickens, South Carolina areas. The deposits of The Peoples National Bank are insured to applicable limits by the Federal Deposit Insurance Corporation (the "FDIC"). The Company is in the process of making application to state and federal regulatory authorities for approval to acquire Bank of Anderson, N.A. Bank of Anderson, N.A. is a proposed national bank being organized in Anderson, South Carolina. The deposits of Bank of Anderson, N.A. will also be insured to applicable limits by the FDIC. Bank of Anderson, N.A. will operate as a wholly owned subsidiary of the Company with its own Board of Directors. The organizers and proposed directors of Bank of Anderson, N.A. are E. Stephen Darby, Robert E. Dye, Sr., Myrtle E. Gillespie, David C. King, Andrew M. McFall, III, D. Kirkland Oglesby, J. Calhoun Pruitt, Jr., Robert M. Rainey, and Larry D. Reeves. If all state and federal regulatory approvals are received for the Company to acquire Bank of Anderson, N.A. and for Bank of Anderson, N.A. to be chartered, the Company intends to use up to $4,500,000 of the aggregate proceeds of the offering completed July 22, 1998 to acquire all of the common stock of Bank of Anderson, N.A. and thereby capitalize Bank of Anderson, N.A. The principal activity of the Company is operation of The Peoples National Bank and, if approvals are received, will also be operation of Bank of Anderson, N.A. and, possibly, subject to regulatory approvals, acquisition and operation of commercial banks and/or other financial institutions in other markets in South Carolina. The Banks will emphasize their respective local affiliations and personalized service. The principal offices of the Company and The Peoples National Bank are located at 1800 East Main Street, Easley, South Carolina 29640. The Company's telephone number is (864) 859-2265. The principal office of Bank of Anderson, N.A. will be located at 201 East Greenville Street, near the intersection of East Greenville Street and Main Street, Anderson, South Carolina. The Offering The Company is offering hereby up to 425,000 shares of its common stock at a purchase price of $13.00 per share. The minimum individual purchase is 100 shares, and the maximum individual purchase is 10,000 shares. Proceeds of the offering will be used to support continued growth of the Company and for general corporate purposes of the Company. See "OFFERING AND METHOD OF SUBSCRIPTION" and "USE OF PROCEEDS." AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "SEC"). Copies of such reports, proxy statements and other information can be obtained, upon payment of prescribed fees, from the SEC at 450 Fifth Street, N.W., Room 2120, Judiciary Plaza, Washington, D.C. 20549. In addition, such reports, proxy statements and other information can be inspected at the SEC's facilities referred to above and at the SEC's Regional Offices at 7 World Trade Center, 13th Floor, New York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The SEC also maintains a site on the World Wide Web at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The Company has filed with the SEC a Registration Statement under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the Peoples Common Stock offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the Peoples Common Stock offered hereby, reference is hereby made to the Registration Statement, including the exhibits and schedules thereto. The Registration Statement can be inspected and copied at the public reference facilities of the SEC, 450 Fifth Street, N.W., Room 2120, Judiciary Plaza, Washington, D.C. 20549, and copies of such materials can be obtained by mail from the Public Reference Section of the SEC at such address at prescribed rates. In addition, microfiche of the Registration Statement and exhibits thereto are available for inspection and reproduction at the public reference facilities of the SEC at its Regional Offices at the addresses set forth above. The Company furnishes shareholders with annual reports containing audited financial information. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to termination of this offering shall be deemed to be incorporated by reference in this Prospectus and to be a part hereof from the respective dates of filing of such documents. Any statement contained herein will be deemed to be modified or superseded for the purpose of this Prospectus to the extent that a statement contained herein or in any subsequently filed document which also is, or is deemed to be, incorporated herein by reference modifies or supersedes such statement. Any such statement so modified or superseded will not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. No person is authorized to give any information or to make any representations other than those contained or incorporated by reference herein and, if given or made, such information or representations must not be relied upon as having been authorized. This document does not constitute an offer to exchange or sell or a solicitation by any one in any jurisdiction in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so or to any person to whom it is unlawful to make such offer or solicitation. Neither the delivery of this document nor any distribution of securities made hereunder shall, under any circumstances, create an implication that there has been no change in the affairs of the Company since the date hereof or that the information herein is correct as of any time subsequent to the date hereof. FORWARD LOOKING STATEMENTS This prospectus contains forward-looking statements with respect to the financial condition, results of operations, and business of the Company, The Peoples National Bank and Bank of Anderson, N.A. (in organization). These forward-looking statements involve certain risks and uncertainties. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following possibilities: (1) the Company and its subsidiary banks may not be able to operate SUMMARY The following is a brief summary of certain information contained in this Prospectus and is not intended to be a complete statement of all material facts regarding the matters set forth herein. It is qualified in its entirety by reference to more detailed information set forth in this Prospectus, the accompanying appendices, and the documents incorporated by reference herein. The Company and the Banks The Company is a bank holding company which owns The Peoples National Bank. The Peoples National Bank currently operates as a full service commercial bank in the Easley, Powdersville and Pickens, South Carolina areas. The deposits of The Peoples National Bank are insured to applicable limits by the Federal Deposit Insurance Corporation (the "FDIC"). The Company is in the process of making application to state and federal regulatory authorities for approval to acquire Bank of Anderson, N.A. Bank of Anderson, N.A. is a proposed national bank being organized in Anderson, South Carolina. The deposits of Bank of Anderson, N.A. will also be insured to applicable limits by the FDIC. Bank of Anderson, N.A. will operate as a wholly owned subsidiary of the Company with its own Board of Directors. The organizers and proposed directors of Bank of Anderson, N.A. are E. Stephen Darby, Robert E. Dye, Sr., Myrtle E. Gillespie, David C. King, Andrew M. McFall, III, D. Kirkland Oglesby, J. Calhoun Pruitt, Jr., Robert M. Rainey, and Larry D. Reeves. If all state and federal regulatory approvals are received for the Company to acquire Bank of Anderson, N.A. and for Bank of Anderson, N.A. to be chartered, the Company intends to use up to $4,500,000 of the aggregate proceeds of the offering completed July 22, 1998 to acquire all of the common stock of Bank of Anderson, N.A. and thereby capitalize Bank of Anderson, N.A. The principal activity of the Company is operation of The Peoples National Bank and, if approvals are received, will also be operation of Bank of Anderson, N.A. and, possibly, subject to regulatory approvals, acquisition and operation of commercial banks and/or other financial institutions in other markets in South Carolina. The Banks will emphasize their respective local affiliations and personalized service. The principal offices of the Company and The Peoples National Bank are located at 1800 East Main Street, Easley, South Carolina 29640. The Company's telephone number is (864) 859-2265. The principal office of Bank of Anderson, N.A. will be located at 201 East Greenville Street, near the intersection of East Greenville Street and Main Street, Anderson, South Carolina. The Offering The Company is offering hereby up to 425,000 shares of its common stock at a purchase price of $13.00 per share. The minimum individual purchase is 100 shares, and the maximum individual purchase is 10,000 shares. Proceeds of the offering will be used to support continued growth of the Company and for general corporate purposes of the Company. See "OFFERING AND METHOD OF SUBSCRIPTION" and "USE OF PROCEEDS." profitably; (2) Competitive pressure in the banking industry may increase significantly; (3) Costs or difficulties related to operation of Bank of Anderson, N.A. may be greater than expected; (4) Changes in the interest rate environment may reduce margins; (5) General economic conditions, either nationally or regionally, may be less favorable than expected, resulting in, among other things, a deterioration in credit demand and quality; (6) Changes may occur in the regulatory environment; (7) Changes may occur in business conditions and/or inflation; and (8) Changes may occur in the securities markets. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements which are other than statements of historical facts. Such forward-looking statements may be identified, without limitation, by the use of the words "anticipates," "estimates," "expects," "intends," "plans," "predicts," "projects," and similar expressions. The Company's expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis, including without limitation, management's examination of historical operating trends, data contained in the Company's records and other data available from third parties, but there can be no assurance that management's expectations, beliefs or projections will result or be achieved or accomplished. Risk Factors An investment in the shares offered hereby involves certain risks, including, among others, lack of substantial operating history, absence of active trading in the securities offered hereby and lack of assurance that active trading in such securities will develop, competition from other financial institutions with substantially greater financial and other resources, certain provisions of the Articles of Incorporation of the Company that may discourage or prevent take-over attempts, and other risks attendant to the operation of financial institutions. See "RISK FACTORS." Selected Financial Data. The following table presents on an historical basis selected unaudited consolidated financial data for The Peoples National Bank and the Company. The data is based on the financial statements of The Peoples National Bank and the Company. Reference is made to these statements and the related notes for more detailed data. All adjustments necessary to a fair statement of results of interim periods of the Company, in the opinion of management of the Company, have been included. Such adjustments were of a normal recurring nature. Selected Financial Data <TABLE> <CAPTION> Six Months Ended June 30, Years Ended December 31, ---------------------- ------------------------------------------------------------- 1998 1997 1997 1996 1995 1994 1993 (Amounts in thousands, except per share data) Balance Sheet <S> <C> <C> <C> <C> <C> <C> <C> Total Assets ........................... $ 122,284 $ 105,925 $ 113,416 $ 99,723 $ 84,162 $ 76,028 $ 65,808 Total Deposits ......................... 105,505 86,426 96,190 80,194 71,173 61,696 54,366 Total Loans (Net) ...................... 74,527 73,572 75,862 65,404 56,336 51,306 44,140 Investment Securities .................. 31,021 22,742 24,173 19,087 18,776 15,526 14,330 Total Earning Assets ................... 113,080 99,652 105,592 94,951 78,901 70,692 61,311 Shareholders' Equity ................... 10,166 8,994 9,510 8,378 7,531 5,677 5,050 Income Statement Net Interest Income .................... 2,302 2,226 4,809 4,192 3,699 3,254 2,789 Provision for Loan Losses .............. 2 101 324 260 108 95 153 Other Operating Income ................. 670 364 531 421 373 273 244 Other Operating Expenses ............... 1,843 1,441 3,072 2,751 2,700 2,431 2,150 Income Before Taxes .................... 1,127 1,048 1,943 1,602 1,265 1,000 731 Income Taxes ........................... 372 346 639 537 411 325 249 Net Income ............................. 755 702 1,304 1,065 854 675 482 Income Per Common Share* ............... 0.45 0.44 0.77 0.64 0.55 0.48 0.34 Cash Dividends Per Common Share ........ 0.07 0.06 0.125 0.115 0.10 0.00 0.00 Selected Ratios Return on Average Assets ............... 1.25% 1.37% 1.21% 1.21% 1.05% 0.96% 0.78% Return on Average Equity ............... 15.20% 16.01% 14.34% 13.30% 12.64% 12.60% 10.14% </TABLE> - --------- *Per share data has been retroactively restated for prior periods to reflect a two-for-one stock split in 1997. <TABLE> <CAPTION> TABLE OF CONTENTS Page <S> <C> AVAILABLE INFORMATION........................................................................................... i INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE................................................................. i FORWARD LOOKING STATEMENTS...................................................................................... i SUMMARY ....................................................................................................... 1 The Company and the Banks.............................................................................. 1 The Offering........................................................................................... 1 Risk Factors........................................................................................... 1 Selected Financial Data................................................................................ 2 RISK FACTORS.................................................................................................... 3 Short Operating History................................................................................ 3 Lack of Minimum Offering Requirement................................................................... 3 No Escrow of Subscription Funds........................................................................ 3 Delay in Obtaining Regulatory Approvals................................................................ 3 No Market for the Shares............................................................................... 4 Regulatory Restrictions On Dividends................................................................... 4 Certain Provisions of the Articles of Incorporation.................................................... 4 Industry Developments.................................................................................. 4 Competition............................................................................................ 4 Loan Losses; Capital Deficiency........................................................................ 5 Governmental Regulation of the Financial Services Industry............................................. 5 Monetary Policy and Other Economic Factors............................................................. 5 Year 2000 Compliance................................................................................... 5 Pending Rescission Offer............................................................................... 6 Potential Effect of Possible Borrowings................................................................ 6 THE COMPANY AND THE BANKS....................................................................................... 6 General .............................................................................................. 6 Recent Developments.................................................................................... 7 PENDING RESCISSION OFFER........................................................................................ 7 OFFERING AND METHOD OF SUBSCRIPTION............................................................................. 7 The Offering........................................................................................... 7 Determination of Offering Price........................................................................ 8 Method of Subscription................................................................................. 8 Plan of Distribution................................................................................... 8 Expiration Date or Extension of the Offering........................................................... 9 Issuance of Stock Certificates......................................................................... 9 USE OF PROCEEDS................................................................................................. 9 CONSOLIDATED CAPITALIZATION..................................................................................... 9 MARKET PRICE OF COMMON STOCK AND DIVIDENDS...................................................................... 10 INFORMATION ABOUT THE COMPANY AND THE BANKS..................................................................... 11 The Company and The Peoples National Bank.............................................................. 11 Market Area of The Peoples National Bank And Competition............................................... 12 Distribution of Assets, Liabilities and Shareholder's Equity; Interest Rates and Interest Differential.............................................................. 13 Loan Portfolio......................................................................................... 16 Summary of Loan Loss Experience........................................................................ 18 Investments............................................................................................ 19 Deposits .............................................................................................. 20 Return on Equity and Assets............................................................................ 21 Short-Term Borrowings.................................................................................. 22 Asset Liability Management............................................................................. 22 Interest Sensitivity................................................................................... 23 Liquidity.............................................................................................. 24 Capital Adequacy....................................................................................... 24 Monetary Policies...................................................................................... 25 Correspondent Banking.................................................................................. 26 Data Processing........................................................................................ 26 Year 2000.............................................................................................. 26 Employees.............................................................................................. 26 Properties............................................................................................. 26
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000889299_triumph_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000889299_triumph_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the financial statements (and notes thereto) appearing elsewhere in this Prospectus. Each investor is urged to read this Prospectus in its entirety prior to making an investment in the shares of Common Stock offered hereby. The Company The Company designs, manufactures and markets several leading brands of women's activewear, dancewear and legwear. Danskin(R), Dance France(R) and Round-the-Clock(R) are the Company's principal proprietary brands. The Company also manufactures the Givenchy(R) and Anne Klein(TM) women's legwear brands pursuant to license agreements. In addition to its branded merchandise, the Company manufactures and markets private label merchandise, principally legwear, for many major retailers, including most full line department stores. The Company currently operates as two divisions: the Danskin division (the "Danskin Division") for activewear, dancewear and legwear and the Pennaco division ("Pennaco") for legwear. Danskin(R) is a leading brand of women's activewear, legwear, and dancewear in the United States, enjoying a brand awareness factor of over 82% among American women. The Company manufactures and sells activewear, dancewear and legwear to girls and women under the Danskin(R) label and to large-size women under the Danskin Plus(R) label. Although known for its design of seasonal fashion offerings and its wide range of colors, currently approximately 65% of the Danskin Division's net revenues are attributable to basic styles, with black being the most popular color. The Company currently licenses the Danskin(R) brand to manufacturers of women's underwear, children's socks and cycling wear. The Danskin Division produces over 80% of its activewear products at its plant in York, Pennsylvania and is one of the only major suppliers of branded women's activewear with substantial domestic manufacturing capacity. The Company believes that its domestic manufacturing facilities allow it to respond to customer orders quickly and also allows its designers to respond quickly to market trends. See "Business--Operations." The Company's market includes products intended for activewear, dancewear and legwear. The Company has developed a diversified portfolio of quality branded and private label products that can be offered to consumers at varying price points through its channels of distribution. The Company's objectives are (i) to expand its portfolio of products in order to become a complete activewear and legwear resource by capitalizing on the strong name recognition of its proprietary and licensed brands and (ii) to expand its distribution channels for activewear through department stores and through international channels of distribution. Key elements of the Company's strategy include the following: (i) to expand the activewear and legwear product lines; (ii) expand international sales revenues; (iii) to pursue additional licensing opportunities; and (iv) to expand channels of distribution for the Company's products, including the selective opening of additional full-priced stores. See "Business--Strategy." Pennaco(TM) hosiery is widely recognized for its quality, fit and innovation. Pennaco is one of the oldest manufacturers of hosiery in the United States, is the second largest supplier of sheer hosiery to domestic, full line department stores and apparel specialty stores, and is the leading supplier of private label hosiery to such stores. The Company markets Round-the-Clock(R), a brand which has been in the market since 1919, as well as two licensed brands of hosiery: Givenchy(R) and Anne Klein(R). See Note 1 in the Notes to Consolidated Financial Statements. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The Company presently operates three full-priced stores and 45 outlet stores in 22 different states. The Company's outlet stores, in addition to offering in-line merchandise, also provide a distribution channel for irregular and excess inventory. The Company presently anticipates closing certain unprofitable outlet stores and selectively opening additional full-priced and outlet stores during the next two years. On September 22, 1997, the Company and Danskin Investors, an entity newly formed by an investment group led by Onyx Partners, Inc., entered into a securities purchase agreement (the "Securities Purchase Agreement") pursuant to which Danskin Investors purchased preferred stock and subordinated notes of the Company. In accordance with the Securities Purchase Agreement, in exchange for contributing in part to the capital of the Company and canceling in part the approximately $21.3 million face amount (the "Loan Amount") of the Company's term loan obligations (the "Term Loan") owing to First Union National Bank ("First Union") and contributing $4 million in cash to the capital of the Company (together, the "Capital Contribution"), Danskin Investors received (i) $15 million aggregate principal amount of subordinated notes (the "Subordinated Notes") and (ii) Series C Cumulative Convertible preferred stock, par value $.01 per share, of the Company having a liquidation preference of $500,000 (the "Series C Preferred Stock" and together with the Subordinated Notes, the "Securities"). The Capital Contribution was funded (i) through capital contributions made to Danskin Investors by its members and (ii) with $544,129 paid to the Company by the Oppenheimer Bond Fund for Growth ("BFG"), a significant stockholder of the Company, in exchange for a portion of the Securities. On October 8, 1997, the Company completed the refinancing of its obligations to First Union (the "Refinancing") with a new loan and security agreement (the "Loan and Security Agreement") with Century Business Credit Corporation ("CBCC" or the "Lender"), and the Series C Preferred Stock and the Subordinated Notes were automatically exchanged in accordance with their terms for (i) the Series D Preferred Stock of the Company, having a liquidation preference of $12 million, (ii) a seven-year warrant (the "Warrant") to purchase 10,000,000 shares of Common Stock at a per share price of $0.30, and (iii) $3 million aggregate principal amount of Remaining Subordinated Notes. Each share of Series D Preferred Stock entitles the holder thereof to one vote per share for each share of Common Stock that would be issued upon conversion of a share of Series D Preferred Stock (at an initial conversion rate of 16,666.66 shares of Common Stock for each share of Series D Preferred Stock so converted). As the majority holder of the Series D Preferred Stock, Danskin Investors is entitled to designate for election to the Board of Directors a majority of the members constituting the Board of Directors. On May 27, 1998 the Company, and each of Danskin Investors and BFG entered into separate securities purchase agreements (the "Stock Sale Agreements") pursuant to which each of Danskin Investors and BFG purchased, pro rata in proportion to their respective holdings of Remaining Subordinated Notes, 7,864,336 shares of Common Stock (the "Stock Sale") in exchange for approximately $2.4 million aggregate principal amount of the Remaining Subordinated Notes. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Danskin Investors, a significant stockholder of the Company and the holder of a majority of the Series D Preferred Stock, is entitled to cast 46,103,882 votes, or 78.5% of the votes entitled to be cast by the holders of all of the Company's voting securities, and is entitled to vote the Series D Preferred Stock, together with the holders of the Common Stock, as one class on all matters subject to a vote of stockholders of the Company. See "Risk Factors -- Control of the Company," "The Capital Contribution and the Refinancing," "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Management -- Board of Directors." The Company's principal executive offices are located at 111 West 40th St., New York, New York 10018, and its telephone number is (212) 764-4630. The Rights Offering The Company is distributing to holders of record of Common Stock on May 8, 1998 one transferable Right for each share of Common Stock held. Primary Subscription..................... Each Right entitles the holder to purchase .1966 shares of Common Stock at a price of $0.30 per share of Common Stock (the "Subscription Price"). See "The Rights Offering." Oversubscription................. There will be no oversubscription privilege available to stockholders participating in the Rights Offering. Danskin Investors and BFG will not receive Rights on Primary Subscription; however, Danskin Investors has agreed with the Company to purchase, at the Subscription Price, any shares of Common Stock not purchased by the stockholders on Primary Subscription. Danskin Investors is a significant stockholder of the Company and the holder of a majority of the Series D Preferred Stock, and is entitled to cast 46,103,882 votes, or 78.5%, of the votes entitled to be cast by the holders of all of the Company's voting securities. If all the stockholders exercise in full the Rights issued to them on Primary Subscription, Danskin Investors will beneficially own approximately 79.0% of the Common Stock immediately following consummation of the Rights Offering. In the event that none of the stockholders exercise their Rights, Danskin Investors will beneficially own approximately 82.1% of the Common Stock after giving effect to the purchase by it of the shares of Common Stock not subscribed for by the other stockholders on Primary Subscription. See "The Rights Offering -- Background of and Purposes for the Rights Offering" and "-- Purchase of Shares by Danskin Investors" and "The Capital Contribution and the Refinancing -- The Capital Contribution." Record Date...................... May 8, 1998 (the "Record Date"). Expiration Date.................. August 6, 1998 (the "Expiration Date"). - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Subscription Agent............... First Union National Bank. Transferability of Rights........................ The Rights are transferable. See "The Rights Offering -- Transferability of Rights." Dilution......................... To the extent a stockholder does not exercise its Rights, such stockholder's percentage equity interest in the Company and its voting power will be diluted. Conversely, because the Subscription Price is greater than the net tangible book value per share of the Common Stock at March 28, 1998, on a pro forma basis, to the extent that a stockholder does exercise its rights, there will be an immediate dilution on a per share basis from the Subscription Price paid by such stockholder to the pro forma net tangible book value per share of the Common Stock immediately following consummation of the Rights Offering. See "Risk Factors -- Dilution" and "The Rights Offering -- Dilutive Effects of Rights Offering." Common Stock Outstanding After the Offering......................... 20,862,524 shares, assuming no exercise of options or warrants. Risk Factors..................... An investment in the Common Stock offered hereby involves a high degree of risk. See "Risk Factors." Use of Proceeds......................... The gross proceeds to the Company from the sale of the Common Stock offered hereby will be $640,699. Such gross proceeds will be used by the Company to repay in full the Remaining Subordinated Notes held by Danskin Investors and BFG. See "Use of Proceeds." Tax Consequences..................... The receipt or exercise of Rights by a holder of Common Stock should not be treated as a taxable event for federal income tax purposes, but may have certain tax effects. See "The Rights Offering -- Federal Income Tax Consequences." - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SUMMARY CONSOLIDATED FINANCIAL INFORMATION <TABLE> <CAPTION> Fiscal Nine Fiscal Months Ended Fiscal Years Ended Three Months Fiscal Years Ended March December December Ended ------------------------------ ----------------- ----------------------------- ---------------------- 1993 1994 1995 1994 1995 1995 1996 1997 3/29/97 3/28/98 (unaudited)(unaudited) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Income Statement Data: Net revenues (1) $134,490 $131,497 $128,118 $95,967 $93,787 $125,938 $128,145 $121,986 $30,785 $28,251 -------- -------- -------- ------- ------- -------- -------- -------- ------- ------- Cost of goods sold (1) 87,500 86,004 87,346 65,409 62,181 84,118 83,610 81,822 19,955 17,778 Gross profit(1) 46,990 45,493 40,772 30,558 31,606 41,820 44,535 40,164 10,830 10,473 Selling ,general and administrative expenses 42,934 43,847 44,077 32,038 29,851 41,895 42,026 40,174 10,440 10,647 Non-recurring charges (2) -- 6,244 4,143 1,645 1,100 3,598 -- 300 -- 964 Interest expense 2,353 2,343 3,928 2,684 3,699 4,943 4,721 4,278 1,185 574 -------- -------- -------- ------- ------- -------- -------- -------- ------- ------- Total Income (loss) before extraordinary item 1,703 (6,941) (11,376) (5,809) (3,044) (86,616) (2,212) (4,588) (795) (1,712) Provision for (Benefit from) for income taxes (3) 195 370 (1,719) (1,524) 178 (20) 2,777 245 49 45 -------- -------- -------- ------- ------- -------- -------- -------- ------- ------- Income (loss) before cumulative effect of a change in accounting method and extraordinary item 1,508 (7,311) (9,657) (4,285) (3,222) (8,596) (4,989) (4,833) (844) (1,757) Cumulative effect of a change in accounting method -- 250 -- -- -- -- -- -- -- -- Extraordinary item (4) -- -- -- -- -- -- -- 5,245 -- -- Net Income (loss) 1,508 (7,061) (9,657) (4,285) (3,222) (8,596) (4,989) 412 (844) (1,757) -------- -------- -------- ------- ------- -------- -------- -------- ------- ------- Preferred Stock dividend 240 -- -- -- -- -- 202 425 125 305 Income (loss) applicable to Common Stock $ 1,268 ($ 7,061) ($ 9,657) ($4,285) ($3,222) ($ 8,596) ($ 5,191) ($ 13) ($969) ($2,062) ======== ======== ======== ======= ======= ======== ======== ======== ====== ======= Common Stock dividend - cash (5) $ 15,000 -- -- -- -- -- -- -- -- -- ======== ======== ======== ======= ======= ======== ======== ======== ====== ======= Net income (loss) per share: Net income (loss) per share before extraordinary items (5,6) $0.24 ($1.14) ($1.51) ($0.67) ($0.50) ($1.34) ($0.80) ($0.66) ($0.15) ($0.20) Net income per share for extraordinary items (4) -- -- -- -- -- -- -- 0.66 -- -- Cummulative effect of a change in accounting method -- $0.04 -- -- -- -- -- -- -- -- -------- -------- -------- ------- ------- -------- -------- -------- ------ ------- Net income (loss) per share after extraordinary items and cumulative effect of a change in accounting method $0.24 ($1.10) ($1.51) ($0.67) ($0.50) ($1.34) ($0.80) ($0.00) ($0.15) ($0.20) ======== ======== ======== ======= ======= ======== ======== ======== ====== ======= Weighted average number of common shares o-ustanding (5,6) 5,360 6,408 6,396 6,392 6,415 6,415 6,513 7,942 6,570 10,529 ======== ======== ======== ======= ======= ======== ======== ======== ====== ======= Net income (loss) per share on a fully diluted basis Net income (loss) per share before extraordinary items (5,6) $0.24 ($1.14) ($1.51) ($0.67) ($0.50) ($1.34) ($0.80) ($0.66) ($0.15) ($0.20) Net income per share for extraordinary items (4) -- -- -- -- -- -- -- 0.66 -- -- Cummulative effect of a change in accounting method -- 0.04 -- -- -- -- -- -- -- -- -------- -------- -------- ------- ------- -------- -------- -------- ------ ------- Net income (loss) per share after extraordinary items $0.24 ($1.10) ($1.51) ($0.67) ($0.50) ($1.34) ($0.80) ($0.00) ($0.15) ($0.20) ======== ======== ======== ======= ======= ======== ======== ======== ====== ======= Weighted average number of common shares oustanding (5,6) 5,360 6,408 6,396 6,392 6,415 6,415 6,513 7,942 6,570 10,529 ======== ======== ======== ======= ======= ======== ======== ======== ====== ======= Balance Sheet Data: Working capital $ 28,927 $ 17,066 $ 17,618 $19,585 $25,656 $ 25,656 $ 24,559 $ 19,070 $21,888 $17,244 Total assets 68,892 74,481 77,741 81,601 67,742 67,742 66,940 55,002 69,089 57,235 Long-term debt (excludes current obligations) 15,293 13,850 24,399 22,743 36,666 36,666 31,589 9,667 31,256 9,167 Total debt (7) 26,435 38,371 45,725 44,083 41,101 41,101 41,558 21,539 45,476 23,256 Total stockholders' equity (deficit) 22,416 13,408 5,195 9,233 1,519 1,519 801 1,681 (51) 78 </TABLE> - -------------------------------------------- (1) Pennaco recorded a $1.0 million pre-tax charge against income for the fiscal year ended March 27, 1993, related to production problems cause by an unauthorized change in product specifications by a yarn vendor. Net revenues and cost of goods sold were each adversely affected by $0.5 million for the fiscal year ended March 27, 1993. (2) Non-recurring charges of $300,000 for the fiscal year ended December 27, 1997, consisted of certain executive employee severance costs. Non-recurring charges were $1.1 million for the nine months ended December 30, 1995 and consisted of losses on certain license arrangements and certain executive employee severance costs. Non-recurring charges were $4.1 million (net of $0.7 million in related party interest income) for the fiscal year ended March 25, 1995. The non-recurring charges included costs associated with the potential acquisition of affiliated entities, a reserve for additional amounts due from Esmark, Inc. ("Esmark"), the Company's former parent, an accrual for certain executive compensation costs and costs associated with certain litigation, and the write-off of certain non-operating long-term assets. Non-recurring charges were $6.2 million for the fiscal year ended March 26, 1994. Fiscal nine months ended December 24, 1994 included $2.1 million (net of $0.5 million in related party interest income) related to the costs associated with the potential acquisition of affiliated entities, additional amounts due from affiliates, an accrual for certain executive compensation costs and certain costs associated with ongoing litigation. Such reserve was considered necessary principally due to the diminution in the market value of one of Esmark's principal assets, its 2,010,000 shares of Common Stock of the Company. See Note 13 in the Notes to Consolidated Financial Statements. (3) Fiscal year ended December 28, 1996, included a $4.5 million increase in the deferred tax valuation allowance, which reduced the net deferred tax asset to zero. (4) The recognized gain of $5.2 million represents the difference between (a) the recorded value of the Term Loan and (b) the fair value of the Subordinated Notes and the Series C Preferred Stock, less the write-off of deferred finance charges relating to the Amended and Restated First Union Loan and Security Agreement (the "First Union Loan Agreement") and the costs incurred in connection with the Capital Contribution and the Refinancing. This gain will be applied against the Company's net operating loss carryforward, which is fully reserved. Any remaining net operating loss carryforward available after offset may be subject to limitation under the change of control provisions of the Internal Revenue Code. See "Risk Factors -- "Management's Discussion and Analysis of Financial Condition and Results of Operations", and Notes 11 and 15 in the Notes to Consolidated Financial Statements. (5) On August 19, 1992, the Company consummated an initial public offering (the "Initial Public Offering") of 3,000,000 shares of Common Stock at $13.00 per share, which provided proceeds of $34.6 million, net of underwriting discounts and related costs. The net proceeds of the Initial Public Offering received by the Company were used to: (i) redeem all outstanding shares of a certain preferred stock outstanding for $5.2 million (including accrued dividends of approximately $0.2 million to the date of redemption); (ii) repay $13.9 million in debt obligations; (iii) pay $0.5 million to the Company's former lender, representing the balance of the purchase price of $2.0 million due for the Company's purchase of a warrant issued to such lender that provided for the purchase of 10% of the Common Stock of the Company by such lender; and (iv) pay to Esmark a dividend of $15.0 million that was declared prior to the date of the Initial Public Offering. Pursuant to a certain Warrant Purchase Agreement, dated as of September 22, 1997 the ("Contribution Closing Date"), by and between Donald Schupak, Chairman of the Board of Directors, and the Company, Mr. Schupak purchased a warrant (the "Schupak Warrant") to purchase up to 5,372,315 shares of Common Stock (the "Warrant Shares") for an aggregate purchase price of $1,611,694.50 (computed on the basis of $.30 a share), subject to adjustment. On the Contribution Closing Date, in consideration of the sale of the Schupak Warrant by the Company to Mr. Schupak, Mr. Schupak paid the Company the warrant price (the "warrant Price") comprised of (x) $20,000 in cash and (y) a seven year promissory note in the amount of $80,000 (the "Schupak Promissory Note"). Pursuant to a certain Warrant Purchase Agreement, dated as of the Contribution Closing Date, by and between David Chu, a director of the Company, and the Company, Mr. Chu purchased a warrant (the "Chu Warrant") to purchase 795,900 shares of Common Stock, subject to adjustment for an aggregate purchase price of $238,770 (computed on the basis of $.30 a share) subject to adjustment. In consideration of the sale of the Chu Warrant by the Company to Mr. Chu, Mr. Chu paid the Company the purchase price of $14,815 in the form of a promissory note which has been satisified in full. The value of the Schupak Warrant and the Chu Warrant in the financial statements are based upon an independent appraisal. See Note 16 to the Notes to Consolidated Financial Statements. (See "The Capital Contribution and the Refinancing.") Effective October 1, 1997, a total of 239,943 options, previously granted to certain current employees, were repriced with an exercise price of $.625. Specifically, options granted prior to that date which were originally granted at higher exercise prices (ranging from $1.875 to $4), were repriced with the exception of certain options held by executives and outside directors. Under provisions of the Company's 1992 Stock Option Plan ("The Stock Option Plan"), as a result of the change in control of the Company, 33,265 options, which were not vested on or prior to such change of control, have become fully vested. (6) In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 128 "Earnings Per Share", which requires presentation of basic earnings per share (EPS) and diluted earnings per share and requires the restatement of EPS for all prior periods reported. The Company has retroactively adopted this statement as of December 27, 1997. In connection with the closing of the Capital Contribution, (i) the Board of Directors declared a stock dividend on the Common Stock equal to one share of Common Stock for each 11.99 shares of Common Stock held of record as of the close of business on September 22, 1997 (these shares were retroactively applied in the accompanying financial statements for the earnings per share calculation) and (ii) the Board of Directors redeemed the rights issued pursuant to the Rights Agreement, dated as of June 5, 1996, between the Company and First Union, as rights agent, for $.01 per right in cash to holders of Common Stock held of record as of the close of business on September 22, 1997. Also in connection with the closing of the Capital Contribution options to purchase 3,291,797 shares of Common Stock were granted to certain key personnel by the Company at an exercise price of $0.30 per share (the "Key Personnel Stock Options"), 1,845,899 of which were exercisable immediately. See Note 15 in the Notes to Consolidated Financial Statements. (7) Effective October 8, 1997, the Company entered into the Loan and Security Agreement with CBCC, which provides for loans to the Company maturing on October 8, 2002, thereby refinancing all amounts owing to First Union. Proceeds of the Loan and Security Agreement were used to pay all of the Company's indebtedness to First Union and to establish working capital lines of credit. In connection with the closing of the Loan and Security Agreement, the Company paid CBCC a facility fee equal to $300,000. On the Refinancing Closing Date, two term loans were advanced to the Company in accordance with the terms of the Term Loan Facility in the aggregate principal amount of $10 million. See Note 11 in the Notes to Consolidated Financial Statements. (See the "Capital Contribution and the Refinancing.") In connection with an amendment to the First Union Loan Agreement in November 1994, $6.1 million in term loan refinancing was obtained, directly reducing revolving credit obligations. Bank debt obligations totaled $45.7 million as of March 25, 1995, with revolving credit obligations totaling $31.3 million and term obligations totaling $14.4 million. Effective June 22, 1995, the Company amended the First Union Loan Agreement, pursuant to which an additional $8.0 million in term loan refinancing was obtained, reducing revolving credit obligations to a balance of $22.0 million and increasing term loan obligations to $22.0 million. In addition, the maturity date of all obligations to First Union was extended from August 1996 to March 2002. Total First Union debt obligations as of December 28, 1996 and December 30, 1995 amounted to $41.6 million and $36.1 million, respectively, including revolving credit balances of $20.0 million and $14.1 million, respectively, and term loan obligations of $21.6 million and $22.0 million, respectively. Total revolving credit availability in excess of utilization under the terms of the First Union Loan Agreement amounted to $3.5 million and $8.5 million as of December 28, 1996 and December 30, 1995, respectively, and $2.0 million at March 25, 1995. See Note 11 in the Notes to Consolidated Financial Statements. - --------------------------------------------------------------------------------
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the financial statements and the notes thereto contained elsewhere in this Prospectus. Unless otherwise indicated or unless the context otherwise requires, all references in this Prospectus to the "Company" or "Revlon" mean Revlon Consumer Products Corporation and its subsidiaries. All market share and market position data in this Prospectus for the Company's brands and specific products are based upon retail dollar sales which are derived from A.C. Nielsen data. A.C. Nielsen measures retail sales volume of products sold in the United States self-select distribution channel, which is defined as the following channels of distribution: independent and chain drug stores, mass-volume retailers, supermarkets and combination supermarket/drug stores. Such data represents A.C. Nielsen's estimates based upon data gathered by A.C. Nielsen from market samples. Such data is therefore subject to some degree of variance. THE COMPANY REVLON is one of the world's best known names in cosmetics and is a leading mass market cosmetics brand. The Company's vision is to provide glamour, excitement and innovation through quality products at affordable prices. To pursue this vision, the Company's management team combines the creativity of a cosmetics and fashion company with the marketing, sales and operating discipline of a consumer packaged goods company. The Company believes that its global brand name recognition, product quality and marketing experience have enabled it to create one of the strongest consumer brand franchises in the world, with products sold in approximately 175 countries and territories. The Company's products are marketed under such well-known brand names as REVLON, COLORSTAY, REVLON AGE DEFYING, ALMAY and ULTIMA II in cosmetics; MOON DROPS, ETERNA 27, ALMAY TIME-OFF, ULTIMA II, JEANNE GATINEAU and NATURAL HONEY in skin care; CHARLIE and FIRE & ICE in fragrances; FLEX, OUTRAGEOUS, AQUAMARINE, MITCHUM, COLORSTAY, COLORSILK, JEAN NATE, PLUSBELLE, BOZZANO and COLORAMA in personal care products; and ROUX FANCI-FULL, REALISTIC, CREME OF NATURE, CREATIVE NAIL and AMERICAN CREW in professional products. To further strengthen its consumer brand franchises, the Company markets each core brand with a distinct and uniform global image, including packaging and advertising, while retaining the flexibility to tailor products to local and regional preferences. Revlon was founded by Charles Revson, who revolutionized the cosmetics industry by introducing nail enamels matched to lipsticks in fashion colors over 65 years ago. Today, the Company has leading market positions in many of its principal product categories in the United States self-select distribution channel, which the Company believes is the fastest-growing channel of distribution for cosmetics, skin care, fragrance and personal care products. The Company's leading market positions for its REVLON brand products include the number one positions in lip makeup and nail enamel (which the Company has occupied for the past 21 years), with the number one and two selling brands of lip makeup for 1997. The Company's market share in lip makeup and nail enamel has increased from 25.3% and 21.1%, respectively, for 1992, to 31.4% and 22.8%, respectively, for 1997. The Company has the number two position in face makeup (including the top three selling brands of foundation), where its market share has increased from 11.7% for 1992 to 21.2% for 1997. Propelled by the success of its new product launches and market share gains in its existing product lines, the Company captured in 1996 and continued to hold in 1997 the number one position overall in color cosmetics (consisting of lip, eye and face makeup and nail enamel) in the United States self-select distribution channel, where its market share has increased from 15.6% for 1992 to 21.6% for 1997. The Company also has leading market positions in several product categories in certain markets outside of the United States, including in Argentina, Australia, Brazil, Canada, Mexico and South Africa. The Company believes that it is an industry leader in the development of innovative and technologically advanced consumer and professional products. In June 1994, the Company launched COLORSTAY lipcolor, which uses patented transfer-resistant technology that provides long wear. COLORSTAY lip makeup achieved a 13.0% market share in the United States self-select distribution channel for 1997, making it the number one selling lip makeup in that channel, with a market share of more than twice that of any competitor's brand. The success of COLORSTAY lip makeup boosted the Company's total lip makeup market share to more than twice the market share of the next largest competitor. The Company capitalized on the highly successful launch of COLORSTAY lipcolor by introducing a collection of COLORSTAY cosmetics, including foundation, mascara, eye colors, eye liners and lip pencils. In 1997, the Company introduced patent-pending COLORSTAY hair color, which added a new category to the Company's COLORSTAY franchise and brings proprietary long wear technology to the growing at home hair color market. The Company has also introduced the COLORSTAY collection in international markets, where it has increased the Company's color cosmetics sales in such markets. The Company has applied the proprietary transfer-resistant technology developed for COLORSTAY to the ALMAY AMAZING collection, which is part of the Company's line of hypo-allergenic, dermatologist-tested, fragrance-free cosmetics and skin care products. In 1998, the Company intends to continue to introduce new products under its COLORSTAY and ALMAY brands. In April 1994, the Company introduced REVLON AGE DEFYING foundation, which uses proprietary technology designed to meet the needs of women in the over 35 age bracket. REVLON AGE DEFYING foundation was the number two selling foundation in the United States self-select distribution channel for 1997 and achieved a 7.9% market share for such period. The Company capitalized on this highly successful launch by introducing a collection of REVLON AGE DEFYING color cosmetics, including eye makeup, blush, pressed powder and compact makeup. With the addition of NEW COMPLEXION compact makeup in 1996, NEW COMPLEXION foundations achieved a 7.3% market share in the United States self-select distribution channel for 1997, giving Revlon the number one, two and three selling brands of foundation for 1997. In 1998, the Company intends to continue to introduce new products under its REVLON AGE DEFYING and NEW COMPLEXION brands. The Company has introduced, and intends to continue to introduce, innovative products designed to fulfill identified consumer needs. In 1996 the Company launched its STREETWEAR nail enamel targeted for the trend conscious cosmetics consumer. In line with the Company's successful strategy used in connection with the COLORSTAY and REVLON AGE DEFYING franchises, and to capitalize on STREETWEAR nail enamel's highly successful launch, the Company launched a collection of STREETWEAR lip, nail and eye products. In 1997, the Company also launched TOP SPEED nail enamel, which contains a patented speed drying polymer formula which sets in 90 seconds. MOISTURESTAY, which the Company introduced in March 1998, uses patent-pending technology to moisturize the lips, even after the color wears off. In the United States and increasingly in international markets, the Company's products are sold principally in the expanding self-select distribution channel. The trend in the cosmetics, skin care and fragrance industry has been the shift of consumer purchases from the demonstrator-assisted channel to the self-select distribution channel. The Company believes that it is well-positioned to continue to take advantage of the shifting consumer shopping patterns in international markets towards the self-select distribution channel, particularly in Western Europe, Latin America and the Far East. The Company also is expanding its presence in the new and emerging markets of Africa, China, Eastern Europe and Russia. In the United States, the self-select distribution channel, in which consumers select their own purchases without the assistance of an in-store demonstrator, includes independent drug stores and chain drug stores (such as Walgreens, CVS, Eckerds and Rite Aid), mass volume retailers (such as Wal-Mart, Target Stores and Kmart) and supermarkets and combination supermarket/drug stores (such as Pathmark, Albertson's, Kroger's and Smith's). Internationally, the self-select distribution channel includes retailers such as Boots in the United Kingdom and Western Europe, Shoppers Drug Mart in Canada and Wal-Mart worldwide. The foregoing retailers, among others, sell the Company's products. See "Business -- Overview." Business Strategy The Company's business strategy, which implements its vision and is intended to continue to improve its operating performance, is to: o Strengthen and broaden its core brands through globalization of marketing and advertising, product development and manufacturing and through increasing its emphasis on advertising and promotion. o Lead the industry in the development and introduction of technologically advanced innovative products that set new trends. o Expand the Company's presence in all markets in which the Company competes and enter new and emerging markets. o Continue to reduce costs and improve operating efficiencies, customer service and product quality by reducing overhead, rationalizing factory operations, upgrading management information systems, globally sourcing raw materials and components and carefully managing working capital. o Continue to expand market share and product lines through possible strategic acquisitions or joint ventures. See "Business -- Business Strategy." As a result of the implementation of its strategy, through December 31, 1997, the Company achieved 17 consecutive quarters of increased net sales, operating income and EBITDA (as defined herein) compared with the corresponding quarter of the respective prior year. Net sales, operating income (before a non-recurring charge of $7.6 million related to business consolidation costs and other, net) and EBITDA (before such non-recurring charge) increased 10.2%, 10.3% and 12.4%, respectively, for 1997 over 1996 and 11.8%, 38.3% and 27.4%, respectively, for 1996 over 1995. In addition, the Company's results improved to net income of $59.7 million for 1997 (excluding a $14.9 million extraordinary charge incurred in connection with the early extinguishment of indebtedness) (the "Adjusted 1997 Net Income") from net income of $25.6 million for 1996 (excluding a $6.6 million extraordinary charge incurred in connection with the early extinguishment of indebtedness) (the "Adjusted 1996 Net Income") and a net loss of $41.2 million for 1995. The Company has increased its investment in advertising and consumer-directed promotion while decreasing its selling, general and administrative ("SG&A") expenses as a percentage of net sales to 55.9% for 1997 compared with 57.2% for 1996 and 58.8% for 1995. Background On June 24, 1992, the Company succeeded to assets and liabilities of the cosmetics and skin care, fragrance and personal care products business of Revlon Holdings Inc. ("Holdings"), an indirect parent company of the Company. Holdings retained certain small brands that historically had not been profitable (the "Retained Brands") and certain other assets and liabilities. Unless the context otherwise requires, references to the Company or Revlon relating to dates or periods prior to its formation mean the cosmetics and skin care, fragrance and personal care products business of Holdings to which the Company has succeeded. On March 5, 1996, Revlon, Inc., the direct parent of the Company, completed an initial public offering (the "Revlon IPO") in which it issued and sold 8,625,000 shares of its Class A common stock, par value $.01 per share, for $24.00 per share. Revlon, Inc. contributed the net proceeds of $187.8 million (net of underwriters' discount and related fees and expenses) to the Company, which in turn used such funds to repay borrowings outstanding under the credit agreement in effect at that time (the "1995 Credit Agreement") and to pay fees and expenses related to entering into a new credit agreement (the "1996 Credit Agreement"), which was subsequently repaid in May 1997 with borrowings under the Company's existing credit agreement (the "Credit Agreement"). The Company's principal executive offices are located at 625 Madison Avenue, New York, New York 10022, and its telephone number is (212) 527-4000. The Company was incorporated in Delaware in April 1992. The following sets forth a summary organizational chart for the Company and Revlon Escrow. ---------------------------------- MAFCO HOLDINGS INC. ("MAFCO HOLDINGS") ---------------------------------- | |100% ---------------------------------- MACANDREWS & FORBES HOLDINGS INC. ("MACANDREWS & FORBES") ---------------------------------- | |100% ---------------------------------- REVLON HOLDINGS INC. ("HOLDINGS") ---------------------------------- | | ----------------------------- |100% | ---------------------------------- | REV | HOLDINGS INC. | ("REV HOLDINGS") | ---------------------------------- | | |100% |83.1% | ---------------------------------- | REVLON, INC. | ("REVLON, INC.") | ---------------------------------- | | | |100% ------------------------ ---------------------------------- REVLON ESCROW CORP. REVLON CONSUMER ("REVLON ESCROW") PRODUCTS CORPORATION ------------------------ (INCLUDING OPERATING SUBSIDIARIES) (THE "COMPANY" OR "REVLON") ---------------------------------- * REV Holdings beneficially owns 11,250,000 shares of Class A common stock of Revlon, Inc. (representing 56.6% of the outstanding shares of Class A common stock) and all of the outstanding 31,250,000 shares of Class B common stock, par value $.01 per share, of Revlon, Inc., which together represent approximately 83.1% of the outstanding shares of common stock of Revlon, Inc. and approximately 97.4% of the combined voting power of the outstanding shares of common stock of Revlon, Inc. See "Ownership of Common Stock." ** Subsequent to the Refinancing Transactions, the capital stock of Revlon Escrow was contributed to the Company and Revlon Escrow was dissolved. THE REFINANCING TRANSACTIONS Concurrently with the closing of the Offering, Revlon Escrow, a then subsidiary of Holdings, an indirect parent company of the Company, deposited the Escrowed Funds, which consisted of the net proceeds of the Offering (net of discounts to the Initial Purchasers), with the Escrow Agent. Pursuant to the Escrow Agreement, the Escrowed Funds were held in escrow and invested in Treasury Securities and other Permitted Investments, and were used to repurchase a portion of the 9 3/8% Senior Notes in open market transactions as permitted by the Escrow Agreement. On March 4, 1998, a portion of the Escrowed Funds were used to finance the redemption of the 10 1/2% Senior Subordinated Notes (the "10 1/2% Senior Subordinated Notes Redemption"). On April 1, 1998, a portion of the Escrowed Funds were used to finance the redemption of the 9 3/8% Senior Notes (the "9 3/8% Senior Notes Redemption"). The remaining Escrowed Funds were used to repay indebtedness under the working capital lines under the Credit Agreement. On March 4, 1998, the Company assumed Revlon Escrow's obligations under the Senior Subordinated Notes and the Senior Subordinated Notes Indenture, and all obligations of the Company under the 10 1/2% Senior Subordinated Notes Indenture were satisfied and discharged. On April 1, 1998, the Company assumed Revlon Escrow's obligations under the Senior Notes and the Senior Notes Indenture and all obligations of the Company under the 9 3/8% Senior Notes Indenture were satisfied and discharged. The remaining Escrowed Funds were released to the Company. The Offering, the 10 1/2% Senior Subordinated Notes Redemption, the 9 3/8% Senior Notes Redemption and the assumption by the Company of Revlon Escrow's obligations under the Notes are referred to collectively herein as the "Refinancing Transactions." Subsequent to the Refinancing Transactions, the capital stock of Revlon Escrow was contributed to the Company and Revlon Escrow was dissolved. THE EXCHANGE OFFER SECURITIES OFFERED ............ Up to $250,000,000 aggregate principal amount of 8 1/8% Senior Exchange Notes due 2006 and up to $650,000,000 aggregate principal amount of 8 5/8% Senior Subordinated Exchange Notes due 2008, each of which has been registered under the Securities Act. The terms of the New Notes and the Old Notes are identical in all material respects, except for certain transfer restrictions and registration rights relating to the Old Notes and except that, if the Exchange Offer is not consummated by August 3, 1998, the interest rate on the Old Notes from and including such date until but excluding the date of consummation of the Exchange Offer will increase by 0.5%. See "--Summary Description of the New Notes" and "Description of the Notes -- Registration Rights." THE EXCHANGE OFFER ............ The New Notes are being offered in exchange for a like aggregate principal amount of Old Notes. The issuance of the New Notes is intended to satisfy obligations of the Company contained in the Registration Agreement. For procedures for tendering the Old Notes, see "The Exchange Offer -- Procedures for Tendering Old Notes." TENDERS; EXPIRATION DATE; WITHDRAWAL ................... The Exchange Offer will expire at 5:00 p.m., New York City time, on May 5, 1998, or such later date and time to which it is extended (the "Expiration Date"). The tender of Old Notes pursuant to the Exchange Offer may be withdrawn at any time prior to the Expiration Date. Any Old Note not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Exchange Offer. See "The Exchange Offer -- Terms of the Exchange Offer; Period for Tendering Old Notes" and "The Exchange Offer -- Withdrawal Rights." CERTAIN CONDITIONS TO EXCHANGE OFFER ............... The Company shall not be required to accept for exchange, or to issue New Notes in exchange for, any Old Notes and may terminate or amend the Exchange Offer if at any time before the acceptance of the Old Notes for exchange or the exchange of the New Notes for such Old Notes certain events have occurred, which, in the reasonable judgment of the Company, make it inadvisable to proceed with the Exchange Offer and/or with such acceptance for exchange or with such exchange. Such events include (i) any threatened, instituted or pending action seeking to restrain or prohibit the Exchange Offer, (ii) a general suspension of trading in securities on any national securities exchange or in the over-the-counter market, (iii) a general banking moratorium, (iv) the commencement of a war or armed hostilities involving the United States and (v) a material adverse change or development involving a prospective material ad- verse change in the Company's business, properties, assets, liabilities, financial condition, operations, results of operations or prospects that may affect the value of the Old Notes or the New Notes. In addition, the Company will not accept for exchange any Old Notes tendered, and no New Notes will be issued in exchange for any such Old Notes, at any such time as any stop order shall be threatened or in effect with respect to the Registration Statement of which this Prospectus constitutes a part or the qualification of the Indentures under the Trust Indenture Act of 1939. See "The Exchange Offer -- Certain Conditions to the Exchange Offer." FEDERAL INCOME TAX CONSEQUENCES ................. The exchange pursuant to the Exchange Offer will not result in gain or loss to the holders or the Company for federal income tax purposes. See "Certain U.S. Federal Income Tax Considerations." USE OF PROCEEDS ............... There will be no proceeds to the Company from the exchange pursuant to the Exchange Offer. See "Use of Proceeds." EXCHANGE AGENT ................ U.S. Bank Trust National Association (formerly known as First Trust National Association) is serving as exchange agent (the "Exchange Agent") in connection with the Exchange Offer. CONSEQUENCES OF EXCHANGING OR FAILING TO EXCHANGE OLD NOTES Holders of Old Notes who do not exchange their Old Notes for New Notes pursuant to the Exchange Offer will continue to be subject to the provisions in the Indentures regarding transfer and exchange of the Old Notes and the restrictions on transfer of such Old Notes as set forth in the legend thereon as a consequence of the issuance of the Old Notes pursuant to exemptions from, or in transactions not subject to, the registration requirements of the Securities Act and applicable state securities laws. In general, the Old Notes may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. The Company does not currently anticipate that it will register Old Notes under the Securities Act. See "Description of the Notes -- Registration Rights." Based on interpretations by the staff of the Commission, as set forth in no-action letters issued to third parties, the Company believes that New Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be offered for resale, resold or otherwise transferred by holders thereof (other than any holder which is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such New Notes are acquired in the ordinary course of such holders' business and such holders have no arrangement with any person to participate in the distribution of such New Notes. However, the Company does not intend to request the Commission to consider, and the Commission has not considered, the Exchange Offer in the context of a no-action letter and there can be no assurance that the staff of the Commission would make a similar determination with respect to the Exchange Offer as in such other circumstances. Each holder, other than a broker-dealer, must acknowledge that it is not engaged in, and does not intend to engage in, a distribution of New Notes and has no arrangement or understanding to participate in a distribution of New Notes. If any holder is an affiliate of the Company, is engaged in or intends to engage in or has any arrangement or understanding with respect to the distribution of the New Notes to be acquired pursuant to the Exchange Offer, such holder (i) could not rely on the applicable interpretations of the staff of the Commission and (ii) must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. Each broker-dealer that receives New Notes for its own account in exchange for Old Notes must acknowledge that such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities and that it will deliver a prospectus in connection with any resale of such New Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for Old Notes where such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company has agreed that, for a period of 180 days after the Expiration Date, it will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." In addition, to comply with the state securities laws, the New Notes may not be offered or sold in any state unless they have been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied with. The offer and sale of the New Notes to "qualified institutional buyers" (as such term is defined under Rule 144A of the Securities Act) is generally exempt from registration or qualification under the state securities laws. The Company currently does not intend to register or qualify the sale of the New Notes in any state where an exemption from registration or qualification is required and not available. See "The Exchange Offer -- Consequences of Exchanging or Failing to Exchange Old Notes" and "Description of the Notes -- Registration Rights." SUMMARY DESCRIPTION OF THE NEW NOTES The terms of the New Notes and the Old Notes are identical in all material respects, except for certain transfer restrictions and registration rights relating to the Old Notes and except that, if the Exchange Offer is not consummated by August 3, 1998, the interest rate on the Old Notes from and including such date until but excluding the date of consummation of the Exchange Offer will increase by 0.5%. The New Notes will bear interest from the most recent date to which interest has been paid on the Old Notes or, if no interest has been paid on the Old Notes, from February 2, 1998. Accordingly, if the relevant record date for interest payment occurs after the consummation of the Exchange Offer registered holders of New Notes on such record date will receive interest accruing from the most recent date to which interest has been paid or, if no interest has been paid, from February 2, 1998. If, however, the relevant record date for interest payment occurs prior to the consummation of the Exchange Offer, registered holders of Old Notes on such record date will receive interest accruing from the most recent date to which interest has been paid or, if no interest has been paid, from February 2, 1998. Old Notes accepted for exchange will cease to accrue interest from and after the date of consummation of the Exchange Offer, except as set forth in the immediately preceding sentence. Holders of Old Notes whose Old Notes are accepted for exchange will not receive any payment in respect of interest on such Old Notes otherwise payable on any interest payment date the record date for which occurs on or after consummation of the Exchange Offer. THE SENIOR NOTES SENIOR NOTES OFFERED .......... Up to $250,000,000 principal amount of 8 1/8% Senior Exchange Notes due 2006, which have been registered under the Securities Act. MATURITY DATE ................. February 1, 2006. INTEREST PAYMENT DATES ........ February 1 and August 1, commencing August 1, 1998. OPTIONAL REDEMPTION ........... The Senior Notes may be redeemed at the option of the Company in whole or from time to time in part at any time on or after February 1, 2002 at the redemption prices set forth herein. In addition, at any time prior to February 1, 2001, the Company may redeem up to 35% of the aggregate principal amount of the Senior Notes originally issued at a redemption price of 108 1/8% of the principal amount thereof, plus accrued and unpaid interest, if any, thereon to the date fixed for redemption, with, and to the extent the Company receives, the net cash proceeds of one or more Public Equity Offerings (as defined herein), provided that at least $162.5 million aggregate principal amount of the Senior Notes remains outstanding immediately after the occurrence of each such redemption. See "Description of the Notes -- The Senior Notes -- Optional Redemption." CHANGE OF CONTROL ............. Upon a Change of Control, the Company will have the option to redeem the Senior Notes in whole at a redemption price equal to the principal amount thereof, plus accrued and unpaid interest, if any, thereon to the date of redemption plus the Applicable Premium and, subject to certain conditions, each holder of the Senior Notes will have the right to require the Company to repurchase all or a portion of such holder's Senior Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, thereon to the date of repurchase. RANKING ....................... The Old Senior Notes are, and the New Senior Notes will be, senior unsecured obligations of the Company and the Old Senior Notes rank, and the New Senior Notes will rank, pari passu in right of payment with all existing and future Senior Debt of the Company, including the 9 1/2% Senior Notes due 1999 (the "9 1/2% Senior Notes") and the indebtedness under the Credit Agreement, and senior to all future subordinated indebtedness of the Company. The Old Senior Notes are, and the New Senior Notes will be, effectively subordinated to the outstanding indebtedness and other liabilities of the Company's subsidiaries. As of December 31, 1997, after giving effect to the Refinancing Transactions, the outstanding indebtedness of the Company's subsidiaries would have been approximately $235.6 million. See "Risk Factors -- Substantial Level of Indebtedness," "Risk Factors -- Ability to Pay Principal of Notes," "Risk Factors -- Ranking of Notes and Subordination" and "Description of the Notes -- The Senior Notes." CERTAIN COVENANTS ............. The Senior Notes Indenture contains covenants that, among other things, limit (i) the issuance of additional debt and redeemable stock by the Company, (ii) the incurrence of liens, (iii) the issuance of debt and preferred stock by the Company's subsidiaries, (iv) the payment of dividends on capital stock of the Company and its subsidiaries and the redemption of capital stock of the Company, (v) the sale of assets and subsidiary stock, (vi) transactions with affiliates and (vii) consolidations, mergers and transfers of all or substantially all the Company's assets. The Senior Notes Indenture also prohibits certain restrictions on distributions from subsidiaries. All of these limitations and prohibitions, however, are subject to a number of important qualifications. See "Description of the Notes -- The Senior Notes." THE SENIOR SUBORDINATED NOTES SENIOR SUBORDINATED NOTES OFFERED . .................... Up to $650,000,000 principal amount of 8 5/8% Senior Subordinated Exchange Notes due 2008, which have been registered under the Securities Act. MATURITY DATE ................. February 1, 2008. INTEREST PAYMENT DATES ........ February 1 and August 1, commencing August 1, 1998. OPTIONAL REDEMPTION ........... The Senior Subordinated Notes may be redeemed at the option of the Company in whole or from time to time in part at any time on or after February 1, 2003 at the redemption prices set forth herein. In addition, at any time prior to February 1, 2001, the Company may redeem up to 35% of the aggregate principal amount of the Senior Subordinated Notes originally issued at a redemption price of 108 5/8% of the principal amount thereof, plus accrued and unpaid interest, if any, thereon to the date fixed for redemption, with, and to the extent the Company receives, the net cash proceeds of one or more Public Equity Offerings, provided that at least $422.5 million aggregate principal amount of the Senior Subordinated Notes remains outstanding immediately after the occurrence of each such redemption. See "Description of the Notes -- The Senior Subordinated Notes -- Optional Redemption." CHANGE OF CONTROL ............. Upon a Change of Control, the Company will have the option to redeem the Senior Subordinated Notes in whole at a redemption price equal to the principal amount thereof, plus accrued and unpaid interest, if any, thereon to the date of redemption plus the Applicable Premium and, subject to certain conditions, each holder of the Senior Subordinated Notes will have the right to require the Company to repurchase all or a portion of such holder's Senior Subordinated Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, thereon to the date of repurchase. RANKING ....................... The Old Senior Subordinated Notes are, and the New Senior Subordinated Notes will be, general unsecured obligations of the Company and the Old Senior Subordinated Notes are, and the New Senior Subordinated Notes will be, (i) subordinate in right of payment to all existing and future Senior Debt of the Company, including the Senior Notes, the 9 1/2% Senior Notes and the indebtedness under the Credit Agreement, (ii) pari passu in right of payment with all future Senior Subordinated Debt, if any, of the Company and (iii) senior in right of payment to all future subordinated debt, if any, of the Company. The Old Senior Subordinated Notes are, and the New Senior Subordinated Notes will be, effectively subordinated to the outstanding indebtedness and other liabilities of the Company's subsidiaries. As of December 31, 1997, after giving effect to the Refinancing Transactions, the outstanding indebtedness of the Company's subsidiaries would have been approximately $235.6 million. See "Risk Factors -- Substantial Level of Indebtedness," "Risk Factors -- Ability to Pay Principal of Notes," "Risk Factors --Ranking of Notes and Subordination" and "Description of the Notes -- The Senior Subordinated Notes." CERTAIN COVENANTS ............. The Senior Subordinated Notes Indenture contains covenants that, among other things, limit (i) the issuance of additional debt and redeemable stock by the Company, (ii) the incurrence of liens, (iii) the issuance of debt and preferred stock by the Company's subsidiaries, (iv) the payment of dividends on capital stock of the Company and its subsidiaries and the redemption of capital stock of the Company, (v) the sale of assets and subsidiary stock, (vi) transactions with affiliates, (vii) consolidations, mergers and transfers of all or substantially all the Company's assets and (viii) the issuance of additional subordinated debt that is senior in right of payment to the Senior Subordinated Notes. The Senior Subordinated Notes Indenture also prohibits certain restrictions on distributions from subsidiaries. All of these limitations and prohibitions, however, are subject to a number of important qualifications. See "Description of the Notes -- The Senior Subordinated Notes." GENERAL USE OF PROCEEDS ............... The Company will not receive any proceeds from the Exchange Offer. The Company used the net proceeds of the Offering, which were approximately $880 million (net of discounts to the Initial Purchasers and fees and expenses), to finance the 10 1/2% Senior Subordinated Notes Redemption and the 9 3/8% Senior Notes Redemption and to repay indebtedness under the working capital lines under the Credit Agreement. Pending such uses, the Escrowed Funds were held in escrow and invested in Treasury Securities and other Permitted Investments, and were used to repurchase a portion of the 9 3/8% Senior Notes in open market transactions as permitted by the Escrow Agreement. See "Use of Proceeds." EXCHANGE OFFER; REGISTRATION RIGHTS ....................... Holders of New Notes are not entitled to any registration rights with respect to the New Notes. Pursuant to the Registration Agreement, Revlon Escrow and the Company agreed that they would, at their cost, use their best efforts to cause a registration statement to be declared effective under the Securities Act for the exchange of Old Notes for registered notes. The Registration Statement of which this Prospectus is a part constitutes the registration statement for purposes of the Registration Agreement. See "Description of the Notes -- Registration Rights."
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED BY, AND MUST BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS SET FORTH ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE STATED, THIS PROSPECTUS ASSUMES THAT THE PUBLIC OFFERING PRICE FOR THE SHARES WILL BE $32.00. UNLESS OTHERWISE STATED, ALL DOLLAR AMOUNTS INCLUDED IN THIS PROSPECTUS ARE DENOMINATED IN UNITED STATES DOLLARS. THE COMPANY Deotexis, Inc. (the "Company") was incorporated in Nevada on March 6, 1992, has no operating history, has not generated or recognized any revenues, and is in the development stage. The Company was originally organized with the sole purpose of identifying a suitable candidate to acquire or with which to merge, and its existence has been maintained since formation with that objective in mind. On September 30, 1997, the Company, then known by its former name, Zeron Acquisitions II, Inc. ("Zeron"), and Zeron's two controlling stockholders at the time, entered into a Stock Purchase Agreement with Mr. Gerold Tebbe and Overton Holdings Limited, a Turks & Caicos Islands corporation wholly beneficially owned and controlled by Mr. Tebbe ("OHL"), pursuant to which OHL agreed to buy 4,183,125 newly-issued and non-registered shares of Common Stock, $.001 par value per share, of the Company, in exchange for (i) $4,000,000 in cash from OHL, and (ii) the contribution to the Company by Mr. Tebbe, or entities owned or controlled by him, of certain patents, patent applications and associated intellectual property, in return for nominal consideration and a reservation of a 1% royalty by Mr. Tebbe on all net income recognized by the Company from the commercial exploitation of such rights. (See "Certain Transactions--Stock Purchase Agreement.") OHL then gifted Shares to each of the other Selling Security Holders listed on Schedule A hereto, in the amounts set forth thereon opposite their respective names. See "Certain Transactions--Gift of Shares by OHL." The creative and technical expertise behind the Company's business is provided by Mr. Gerold Tebbe, who is a qualified textile designer with over twenty-five years of experience in the German and international textile industries. In 1970, Mr. Tebbe took over the management of his family's privately-held textile company, and refocused its activities on providing technical services to manufacturers of production machinery for woven and knitted materials. Thereafter, he rapidly built up an international customer base with sales in Europe, North America and Japan. His company became a leader in the process of transferring complex designs from the artist's drawing board onto high-volume production machines for the manufacture of patterned cloths. This proprietary technology gave his company a unique position in its market. In the 1980's, reacting to the competitive threat to the European textile industry from inexpensive imports from Asia and other low labor cost regions, Mr. Tebbe began to seek an alternative to his existing business. After experimenting with textile-based controlled-release delivery systems, he developed the product line the Company currently intends to market, which he started to test market on a preliminary basis in the late 1980's. At that point, a dispute arose over the validity of the patents and other intellectual property employed to produce the products the Company currently intends to market. That patent dispute was resolved in Mr. Tebbe's favor by the European Patent Office in late 1996. See "Risk Factors-- Litigation and Disputes." The Company intends to create an organization staffed by suitably qualified executives to support Mr. Tebbe. Initially, the Company plans to generate revenues by (1) using an acquired operating company in Europe or the United States to supply product to prospective customers who do not have the ability to license the technology and manufacture the Company's products themselves; and (2) licensing the technology and processes required to manufacture the Company's products to consumer products manufacturing and distribution companies in return for a licensing fee. The Company plans to appoint Senior Product Managers to take responsibility for sales and licensing agreements with potential customers. The Company anticipates that the Product Managers will have experience in the licensing business. In addition, the Company hopes to acquire an operating company with a management team in place in Europe or the United States. The Company anticipates that the Product Managers will either be employees of such an acquired company or members of the newly-hired management the Company will put in place as it proceeds to expand its operations following this Offering. (See "Plan of Operations--Senior Management" and "--Manufacturing and Distribution," and "Business--Licensing" and "--Manufacturing and Distribution.") While the Company has had preliminary discussions with several wholesale distributors and potential licensees, there can be no assurance that licensing agreements will be reached with those entities, or any others, on terms advantageous to the Company, if at all. In addition, though the Company has had preliminary discussions with a few operating companies that may be potential acquisition candidates, there can be no assurance that the Company will be able to identify a suitable company for acquisition in the United States, Europe, or any other location or, if such an entity is identified, that the Company will be able to complete such an acquisition on favorable terms. In the event the Company does not succeed in entering into licensing agreements, and consummating an acquisition, within its first six to twelve (6-12) months of operations, the Company's ability to produce its products and introduce them into the market in any significant way will be extremely limited. See "Risk Factors--'Licensing of Patents, Trademarks and Other Rights," and "--Planned Acquisition" and "Plan of Operations--Manufacturing and Distribution." The Company is engaged in the business of developing and commercializing certain patented textile-based controlled-release delivery systems for consumer products in certain sectors of the toiletries, cosmetics, apparel, household products and personal care products markets. The Company's goal is to build on its patented "know-how" in research and development, and to acquire manufacturing and marketing resources to become a profitable supplier of textile-based, controlled-release delivery systems to a wide range of industry sectors. The Company believes that its controlled-release delivery systems are unique in the way they combine microencapsulation technology with flexible fleece-type fabrics. The Company's first controlled-release delivery system was developed by Mr. Tebbe in 1987, and he filed a patent application for the technology relating thereto in that same year. The application was opposed in the European patent courts by The Procter & Gamble Company, one of the world's largest manufacturers and distributors of household and consumer products. In late 1996, the European Patent Office dismissed Procter & Gamble's challenge in favor of Mr. Tebbe's patent claims. The Company's technology was developed by Mr. Tebbe in Europe, where several products are now ready for further test-marketing and commercial launch by the Company. These products include: (1) the "Deotexis Deodorant Patch," a small, disposable adhesive patch which is designed for quick and easy attachment to any type of clothing, for use as a controlled-release anti-perspirant and deodorant; (2) the "Deotexis Perfume Patch," a small, disposable adhesive patch designed for easy and unobtrusive attachment to the inner surface of clothes, for controlled release of perfume; and (3) the "Deotexis Cold Scarf," a disposable scarf impregnated with herbal substances for use by persons seeking relief from the symptoms of colds and congestion. The Deotexis Deodorant Patch, the Deotexis Perfume Patch and the Deotexis Cold Scarf will be referred to herein collectively as the "Products." The Company anticipates, and its test production and marketing support this intention, that the Products will be competitively priced in relation to alternative products employing traditional delivery systems. The Products will be sold as over-the-counter items and not as prescription medications. The Company's research and development and marketing strategy will be to avoid marketing any products requiring resource-intensive Food and Drug Administration-type approvals. See "Risk Factors--Regulatory Compliance and Governmental Approvals." The Company believes that the Products address the problem of effectively maintaining personal freshness for extended time periods. The Products are intended to serve as substitutes for perfumes, toiletries, cosmetics, deodorants, emollients, decongestants and other personal care products marketed with traditional delivery systems. Products employing traditional delivery systems (powders, roll-ons, creams, sprays, etc.), in the Company's view, can be inconvenient to use and, after application, rapidly deteriorate and lose their efficacy. The Company's Products are intended to provide for the controlled- release of active substances in desired quantities over an extended period of time, thereby providing a superior delivery system that avoids the "peak and valley" effect resulting from use of traditional delivery systems currently on the market. The Company intends to market the Products as an alternative to similar consumer products employing traditional delivery systems, with the advantage of extended active substance effectiveness, and the convenience of a no-mess, no-spill solution to their personal care needs. Potential customers for the Company's products are consumers worldwide. Test-marketing in Europe has shown significant interest in the Deotexis Cold Scarf, based on its convenience, versatility and cost-effectiveness. The Company's marketing and product strategy reflects Mr. Tebbe's considerable experience with the test-marketing of the Company's Products and is designed to be responsive to the requirements of consumers and the marketplace. To reach consumer markets, the Company intends to sell its products through two separate channels: (1) wholesale distributors to drugstores and pharmacies; and (2) licensees, which are expected to be large and mid-sized corporations in the toiletries, cosmetics, apparel, household products and personal care products industries. The Company has had preliminary discussions with several major companies in both categories and believes it will be in a position to conclude sales and licensing agreements promptly after concluding its corporate organization and staffing, though there can be no assurance that any such contracts or agreements will be consummated. In addition, the Company is moving towards execution of a formal agreement with the German distributor, KuW Hummel Vertriebs GmbH ("Hummel"), that has been manufacturing and distributing the Deotexis Cold Scarf during the test-marketing phase of operations, pursuant to which Hummel will continue to manufacture and distribute the Deotexis Cold Scarf in return for payment of licensing fees and royalties to the Company. The Company anticipates that it will be able to conclude such an agreement with Hummel in the forty-five to sixty (45-60) days following this Offering. (See "Business--Agreement with KuW Hummel Vertriebs GmbH.") There can, however, be no assurance that such an agreement will be executed in that time-frame, or at all. The Company's marketing plan anticipates that some potential customers will require products manufactured by the Company or a Company sub-contractor. The Company therefore hopes to acquire an operating company with manufacturing capabilities in Europe or the United States within the first six to twelve (6-12) months of its operations, and thereafter use the Company's Products to diversify and expand the acquired company's sales. The Company's marketing plan further anticipates that other customers will enter into license agreements with the Company, under which, in return for a sales-based royalty payment to the Company, licensees will be entitled to the use of the Company's intellectual property to manufacture and distribute the Products. See "Business--Licensing," and "--Manufacturing and Distribution." The Company has also had indications that its proprietary technology may have applications in the pharmaceutical industry, particularly in the areas of controlled-release drug delivery systems and diagnostic systems. The Company plans to follow developments in the pharmaceutical industry closely, and to capitalize on any promising opportunities for the application or utilization of its intellectual property, very likely by following a licensing strategy and making its processes available to companies in this market in return for a sales-based royalty payment. See "Business--Potential Pharmaceutical Applications for the Company's Technology." THE OFFERING <TABLE> <S> <C> Securities Offered................ 1,673,250 shares of Common Stock of the Company. See "Description of Securities." Securities Registered for the Selling Security Holders........ All 1,673,250 shares of Common Stock being registered hereby are being registered for the account of Overton Holdings Limited, a Turks & Caicos Islands corporation ("OHL"), the majority stockholder of the Company, and for the additional stockholders of the Company listed on Schedule A hereto (each, along with OHL, a "Selling Security Holder" and, collectively, the "Selling Security Holders.") The Selling Security Holders' Shares are being registered for resale only, and the Company will not receive any of the proceeds from any sales of such Shares by the Selling Security Holders. See "Certain Transactions--Stock Purchase Agreement" and "--Gift of Shares by OHL." Common Stock Outstanding Prior to the Offering........... 4,546,875 shares After the Offering.............. 4,546,875 shares (1) Use of Proceeds................... All of the Shares offered hereby are being registered for the account of the Selling Security Holders for resale only, and the Company will not receive any of the proceeds from any sales of the Shares by the Selling Security Holders. See "Use of Proceeds." </TABLE> - ------------------------ (1) None of the Shares being offered hereby will be newly-issued shares; rather, the Shares are being registered for the account of the Selling Security Holders and are already outstanding. Therefore, the number of shares of the Company's Common Stock outstanding both prior to and after the Offering will be the same. This number does not take into account the as yet undetermined amount of shares of Common Stock that will be reserved for issuance pursuant to the Company's Director Stock Option Plan and Incentive Stock Option Plan. <TABLE> <S> <C> Risk Factors...................... The Company is a development stage company with no operating history or revenues to date. The Company has no manufacturing facilities or distribution network to manufacture and distribute its consumer products; it is dependent on the services and technical expertise of Mr. Gerold Tebbe, who has no prior experience operating a public company. The Company may face competition from large, well-established and well-funded international consumer products companies. The Company may have to expend significant funds to ensure that its products do not require Food and Drug Administration-type regulatory approvals in the markets where they are intended to be sold. The Company is beneficially controlled by Mr. Tebbe, as sole beneficial owner of OHL. The Company has not paid, and has no current intention of paying, any dividends on its Common Stock. Sales generated by the Company will, at least initially, be from foreign markets and therefore will be subject to any risks inherent in doing business in those foreign countries, and to foreign currency fluctuations in general. Full implementation of the Company's business plan is heavily dependent upon the acquisition of a manufacturing entity in the United States or Europe, and there can be no assurance that such an acquisition will ever be consummated. The Company's Common Stock is currently traded on the NASD OTC Electronic Bulletin Board. While the Company anticipates that at some future date it will apply for listing of the Shares on Nasdaq when it feels its level of operations warrants such an application, there can be no assurance that such listing will be obtained or maintained in the future. If the Shares are not quoted on Nasdaq, trading in the Shares will be subject to the Commission's so-called "penny stock" rules. For these reasons, among others, this Offering involves a high degree of risk and should be made only by investors who can afford the loss of their entire investment. See "Risk Factors." NASD OTC Electronic Bulletin Board Common Stock--DETX Symbol (2)...................... </TABLE> - ------------------------ (2) The Company's Common Stock is currently quoted on the NASD OTC Electronic Bulletin Board, under the symbol DETX. The Company anticipates that, at some future date when it has achieved a sufficient level of operations such that it will satisfy the initial and continued listing criteria of Nasdaq, the Company will apply for listing and its Common Stock and the Shares will be listed on Nasdaq. However, in the event that the initial listing of the Common Stock and the Shares does not occur, or in the event that at some time in the future after such initial listing, the Common Stock and the Shares are delisted or no longer quoted on Nasdaq, it is anticipated that the Common Stock and the Shares will be quoted on the NASD OTC Electronic Bulletin Board. The inclusion of the Common Stock and the Shares on Nasdaq or the NASD OTC Electronic Bulletin Board does not imply that an established public trading market will develop therefor or, if such a market develops, that such market will be sustained. See "Risk Factors--No Assurance of Public Trading Market or Nasdaq Inclusion" and "-- Potential Continued Listing on the NASD OTC Electronic Bulletin Board."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000894267_cowlitz_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000894267_cowlitz_prospectus_summary.txt
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+SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial data, including the financial statements and notes thereto, included elsewhere in this Prospectus. Except as otherwise noted, all information in this Prospectus (i) assumes no exercise of the Underwriters' over-allotment option and (ii) reflects an adjustment for all stock splits to the date of this Prospectus. Unless the context requires otherwise, references to the "Company" mean Cowlitz Bancorporation and its wholly-owned subsidiary, The Cowlitz Bank (the "Bank"). THE COMPANY With its five full-service offices, the Company has the largest market share of deposits among commercial banks in Cowlitz County, Washington, and is the only community bank headquartered in the county. The Company has grown from one branch with assets of $39.4 million, deposits of $31.0 million and shareholders' equity of $2.5 million at January 1, 1992 to five branches with assets of $173.3 million, deposits of $136.2 million and shareholders' equity of $13.9 million at December 31, 1997. The Company emphasizes personal service and customer relationships and believes that such emphasis is the primary reason for its rapid growth. The Bank was formed in 1977 and became a wholly-owned subsidiary of the Company in 1992. The Company was formed in 1991 to act as a holding company for the Bank. The Company offers or makes available a broad range of financial services to its customers, primarily small and medium-sized businesses, professionals and retail customers. In addition to its normal commercial and personal banking services, which include commercial and real estate lending, consumer lending, mortgage origination and trust services, the Company has developed relationships with a securities brokerage firm and an insurance agency with an estate planner to provide its customers access to a variety of financial services which are generally not available in community banks. In 1997, the Company established a trust department to offer trust services to individuals, corporations and institutions. It is the only such trust department located in Cowlitz County. By combining its array of traditional commercial banking products with these enhanced customer services, the Company is able to provide its customers with similar banking services offered by its larger competitors while retaining the character of a community bank and the level of personal service which larger banks generally no longer provide. Based on reports of the Federal Home Loan Bank of Seattle ("FHLB"), at June 30, 1996, the Company held approximately 25% of the deposits in commercial banks in Cowlitz County, which was the largest share of deposits of any commercial bank. Since June 30, 1996, the Company has taken several steps to increase its market share in Cowlitz County. Historically, the Company operated from one location in Longview. In November 1996, the Company opened a de novo branch in neighboring Kelso, Washington. Two recent acquisitions of competitors in Cowlitz County presented the Company with additional opportunities for in-market growth. In 1996, Wells Fargo Bank acquired First Interstate Bank, which was a principal competitor of the Company. The Company successfully bid for three Wells Fargo branches in Cowlitz County and acquired those branches in July 1997. In the second half of 1997, U.S. Bank was acquired by First Bank, which has recently announced its intention to close the U.S. Bank branch in Kelso, Washington, creating additional opportunities for the Company. The Company is aggressively marketing to its new customers from the former Wells Fargo branches as well as the customers of U.S. Bank in Kelso. The Company is introducing its full array of financial products to these new customers while emphasizing personal service as a way of increasing its market share within its existing market area. Management believes that the Company's historical growth and recent successful expansion activities strongly position the Company to continue to increase its market share in Cowlitz County and to expand into other similar markets. The Company's expansion since 1992 has been marked by the following highlights: <TABLE> <S> <C> <C> 1992 - Arranged $2 million in long-term debt for capital infusion into Cowlitz Bank - Increased assets by 85% to $73.1 million - Initiated quarterly dividends - Began relationship with Robert Thomas Securities 1993 - Increased earnings per share by 96% over prior year 1994 - Increased loans by 35% over prior year - Established mortgage department - Sold $2.2 million of common stock in Regulation A offering 1995 - Increased loans by 40% over prior year 1996 - Opened Kelso branch - Remodeled and expanded main branch to become the Cowlitz Financial Center 1997 - Acquired three Wells Fargo branches - Opened trust department - Began relationship with Commerce Business and Estate Services </TABLE> BUSINESS STRATEGY The Company's goal is to maintain its position as the leading community based provider of financial services in Cowlitz County and to become one of the leading community based providers of financial services in other selected areas of Washington and Oregon. The Company's growth strategy is based on providing both exceptional personal service and a wide range of financial services to its customers. The Company's strategy consists of the following: - Emphasize personal service and develop strong community ties. Based on its experience, the Company believes that providing a high level of personal service and customer attention attracts and retains customers. The Company's employees work with specific customers on an individual, personalized basis. As a result of this level of customer attention, the Company believes that it can make business decisions regarding its customers more quickly and efficiently than its competitors. The Company's philosophy is that of a true community bank -- to provide the highest level of service to its communities. The Company's "outstanding" Community Reinvestment Act ("CRA") rating is evidence of its commitment to serve all the citizens in its communities. The Company believes that its intense focus on customer service coupled with its deep community relationships serve to differentiate the Company from its competitors. - Provide a broad range of financial products and services. The Company believes that offering a wide range of financial products and services is an important competitive factor. In addition to deposit and loan products typically offered by commercial banks, the Company has developed a real estate loan division to originate mortgage loans and has established a trust department. To execute this strategy, the Company has hired experienced personnel to market and deliver these services. The Company leases space in its main financial center to a securities brokerage firm and an insurance agency in order to provide its customers with access to a wider range of financial services. This combination of products and services is designed to both increase its customer base and to enhance cross-selling opportunities to its customer base. - Increase business volume in existing market. The Company believes there is an opportunity to increase its business volume in its existing market area by promoting its complete array of financial products as well as emphasizing personal service, especially in relationships with new customers obtained in the acquisition of the Wells Fargo branches and by establishing new customer relationships as a result of the announced closure of a U.S. Bank branch in Kelso. The Company believes that additional opportunities for growth exist in Cowlitz County as a result of new business entrants such as BHP Coated Steel, Prudential Steel and Foster Farms. The Company presently has the largest share of deposits held by commercial banks in Cowlitz County and believes that its reputation for a high level of personal service will help it attract new customers as the larger banks continue their consolidation and reduction of personal service to their customers. - Explore opportunities for regional expansion through acquisition. The Company intends to explore the acquisition of other community banks and branches of larger banks in non-metropolitan communities in Washington and Oregon. The Company intends to retain the local character of institutions which it acquires and to promote deposit and asset growth in the acquired institutions through implementation of its customer service policies and product offerings. Although the Company is not presently engaged in any acquisition discussions, it believes that such opportunities are available and that its ability to consummate such acquisitions will be enhanced by completion of this Offering and the creation of a public market for the Company's Common Stock. The Company was organized in 1991 under Washington law to become the holding company for the Bank, a Washington state chartered bank that commenced operations in 1978. The principal executive offices of the Company are located at 927 Commerce Avenue, Longview, Washington 98632, and its telephone number is (360) 423-9800. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company..................... 1,000,000 Shares Common Stock to be outstanding after the Offering....... 3,619,796 Shares Use of proceeds......................................... To repay approximately $1.1 million of outstanding indebtedness, and to use approximately $9.6 million to increase the capital of the Company and for future acquisitions. Directed Shares......................................... 100,000 shares, or 10.0% of the Offering, have been reserved for existing shareholders, employees and customers and, subject to availability, other residents of Cowlitz County, consistent with the local orientation of the Company. Proposed Nasdaq National Market symbol.................. CWLZ </TABLE>
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000895364_duane_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000895364_duane_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and notes thereto included elsewhere in this Prospectus. The share data set forth in this Prospectus reflects a reclassification of the Company's capital stock, pursuant to which each holder of shares of class B common stock, $.01 par value per share ("Class B Common Stock"), is entitled to receive one share of Common Stock for approximately 8.326 shares of Class B Common Stock (the "Reclassification"). Unless otherwise stated in this Prospectus, references to the "Company" or "Duane Reade" shall mean Duane Reade Inc. (formerly known as Duane Reade Holding Corp.), its consolidated subsidiaries and their respective predecessors. The fiscal year of the Company ends on the last Saturday in December. Fiscal years 1992 through 1996 each consisted of 52 weeks. All data regarding the number of the Company's stores is as of November 25, 1997, unless otherwise specified. The Company Duane Reade is the largest drugstore chain in New York City, based on sales volume, with 58 of its 67 stores located in Manhattan's high-traffic business and residential districts. The Company operates almost twice as many stores in Manhattan as its next largest competitor. Since opening its first store in 1960, the Company has successfully executed a marketing and operating strategy tailored to the unique characteristics of New York City, the largest and most densely populated market in the United States. According to Drug Store News, Duane Reade is the leading drugstore chain in the United States in terms of sales per square foot, at $956 per square foot in 1996, which was more than two times the national average for drugstore chains. For the fiscal year ended December 28, 1996, the Company had sales of $381.5 million and EBITDA (as defined herein) of $35.3 million, increases of 13.2% and 28.6%, respectively, over the 1995 fiscal year. For the 39 weeks ended September 27, 1997, the Company had sales of $313.8 million and EBITDA of $29.7 million, increases of 11.6% and 24.9%, respectively, over the comparable 1996 period. For the fiscal year ended December 28, 1996 and the 39 week period ended September 27, 1997, the Company had net losses of $17.9 million and $14.2 million, respectively, and, on a pro forma basis, after giving effect to the Offering and the Refinancing Plan, the Company would have had net losses of $6.0 million and $4.3 million, respectively, for such periods. The Company enjoys strong brand name recognition in New York City, which it believes results from the Company's many locations in high-traffic areas of Manhattan and the 30 million shopping bags with the distinctive Duane Reade logo that the Company distributes annually. Independent surveys conducted in 1996 indicated that approximately 84% of the people who live or work in Manhattan recognize the Duane Reade name, and seven out of ten shopped at a Duane Reade store in the past twelve months. The Company was also recently named "Regional Drug Store Chain of the Year" for 1997 by Drug Store News. The Company has developed an operating strategy designed to capitalize on the unique characteristics of the New York City market, which include high-traffic volume, complex distribution logistics and high costs of occupancy, media advertising and personnel. The key elements of the Company's operating strategy are its (i) everyday low price format and broad product offering, (ii) low cost operating structure supported by its high volume stores and low advertising and distribution costs and (iii) ability to design and operate its stores in a wide variety of sizes and layouts. The Company believes that its everyday low price format and broad product offerings provide value and convenience for its customers and build customer loyalty. The Company's everyday low price format results in prices that the Company believes are, on average, lower than the prices offered by its competitors. The Company is able to keep its operating costs relatively low due to its high per store sales volume, low warehouse and distribution costs and low advertising expenditures. The Company's high volume stores allow it to effectively leverage occupancy costs, payroll and other store operating expenses. The Company's two primary distribution facilities are located within five miles of all but one of its 67 stores and, combined with the rapid turnover of inventory in Duane Reade's stores, result in relatively low warehouse and distribution costs. The Company's strong brand name recognition in New York City and everyday low price format allow the Company to minimize its use of costly media and print advertising and to rely instead on in-window displays and other less expensive promotional activities. The Company has demonstrated its ability to successfully operate stores using a wide variety of store configurations and sizes, which the Company believes is necessary to succeed in the New York City market. For example, the size of the Company's stores ranges from 2,600 to 12,300 square feet, and it operates 29 bi-level stores. The Company believes that its flexibility in configuring stores provides it with a competitive advantage in securing locations for its new stores, as many of its competitors target more standarized spaces for their stores, which are more difficult to find in New York City. In addition, the Company's management team has extensive experience and knowledge of the New York City real estate market, allowing it to aggressively pursue attractive real estate opportunities. The Company was founded in 1960. In 1992, Bain Capital acquired the Company from its founders and, in June 1997, investment funds affiliated with DLJ Merchant Banking Partners II, L.P. ("DLJMBPII") acquired approximately 91.5% of the outstanding capital stock of the Company from Bain Capital and certain other selling securityholders (the "Recapitalization"). Since the 1992 acquisition, the Company has incurred net losses in each fiscal year. In 1994 and 1995, the Company experienced rapid expansion, growing from 40 stores to 59 stores. However, as a result of liquidity constraints and the need for improved inventory controls, the Company was forced to suspend its store expansion program in late 1995. In early 1996, a strengthened management team led by Anthony Cuti, the Company's new Chairman and Chief Executive Officer, took several measures to improve operations, including improving inventory controls and decreasing out-of-stock occurrences, creating a loss prevention function to control inventory shrink and continuing to invest in management information systems ("MIS"). In 1997, the Company resumed its store expansion program, opening seven stores. During Mr. Cuti's tenure at the Company, EBITDA has increased by 53.2% from $26.9 million for the 52 weeks ended March 29, 1996 to $41.2 million for the 52 weeks ended September 27, 1997. The Company was incorporated in Delaware in 1992. The Company's principal executive offices are located at 440 Ninth Avenue, New York, New York 10001, and its phone number is (212) 273-5700. Growth Strategy The Company believes that, as a result of its successful operating history and market position in New York City, it is well positioned to capitalize on the growth opportunities in its market. The Company's strategy for continued growth is to (i) open additional stores in Manhattan and the surrounding boroughs, (ii) continue to capitalize on favorable pharmacy trends, (iii) make opportunistic acquisitions of independent drugstores and pharmacy files and (iv) continue to implement merchandising initiatives in non-pharmacy areas. OPEN ADDITIONAL STORES. The Company believes that the New York City drugstore market remains underpenetrated by drugstore chains, with only 50% of the estimated $2.65 billion in annual drugstore-related sales controlled by chains, compared to approximately 74% controlled by chains nationally. This provides significant opportunities for the Company to open additional stores in Manhattan as well as in the densely populated areas of the surrounding boroughs. Some of the Company's most successful stores have been opened in areas new to the Company, such as the residential areas of the Upper East and West sides of Manhattan, Brooklyn, the Bronx and Queens. The Company believes that its long-standing presence in, and knowledge of, the New York City real estate market, combined with the use of a proprietary site selection model that considers numerous demographic and traffic flow variables, have allowed it to identify attractive store locations. Since 1993, all of the Company's new stores have become profitable on an operating basis (i.e., prior to allocation of corporate expenses, goodwill amortization, interest expense and income taxes) within the first full year of operation. Over the next two years, the Company plans to open approximately 30 to 40 stores, primarily in New York City. CONTINUE TO CAPITALIZE ON FAVORABLE PHARMACY TRENDS. Sales of prescription and over-the-counter ("OTC") drugs have been growing rapidly throughout the drugstore industry. The Company expects demographic trends, such as the aging of the U.S. population, and industry changes, such as growth of managed care organizations, insurance companies, employers and other third-party payors (collectively, "Third Party Plans"), to continue to drive increases in the prescription and OTC drug businesses. Since 1994, the Company has focused on increasing its pharmacy sales by entering into agreements to service Third Party Plans and by upgrading the appearance and service level of its store pharmacies. While sales to customers covered by Third Party Plans generally result in lower gross profit margins due to competitive pricing, the Company believes that such lower margins are offset by the increased volume of pharmacy sales and the opportunity to leverage fixed expenses. The Company believes that its initiatives, which are designed to capitalize on industry trends, have resulted in the Company's pharmacy sales growing at an annual rate of approximately 30% since 1994. Although these initiatives have helped increase the average number of prescriptions filled by Duane Reade per store per week from 640 in 1994 to 865 during 1997, the Company's average remains well below the national industry chain store average of approximately 1,200, providing significant opportunity for continued pharmacy growth. The Company believes that continued pharmacy growth will increase overall customer traffic, thereby also benefitting its non-pharmacy sales. MAKE OPPORTUNISTIC ACQUISITIONS OF INDEPENDENT DRUGSTORES AND PHARMACY FILES. The Company believes that the growth of Third Party Plans and the continued penetration of chain drugstores such as Duane Reade have put increasing pressure on the approximately 1,400 independent drugstores in New York City. When appropriate, the Company considers acquiring small local chains or independent drugstores. The Company also pursues the purchase of pharmacy files of independent drugstores when such purchases are economically attractive to the Company. The pharmacy files of independent pharmacists tend to have a higher proportion of prescriptions not covered by Third Party Plans, which generate incremental revenue and higher margins. When appropriate, the Company retains the services of the pharmacist, whose personal relationship with the customers generally maximizes the retention rate of the purchased file. In 1997, the Company acquired one independent drugstore and seven such pharmacy files and intends to aggressively pursue additional purchases. CONTINUE TO IMPLEMENT MERCHANDISING INITIATIVES IN NON-PHARMACY AREAS. Management has recently undertaken a number of merchandising initiatives, including the expansion of certain high-margin categories such as greeting cards, cosmetics, vitamins, photofinishing and photo supplies and an expanded seasonal merchandising program. The Company also continues to focus on category management, which it believes will improve gross margins and increase non-pharmacy sales. For example, in 1997 the Company introduced one-hour photofinishing service in three of its stores and intends to introduce one-hour photofinishing service in approximately seven to ten additional stores in 1998. The Company has also increased its emphasis on the sale of its own private label products, which it believes provide a high-quality, lower priced alternative to name brand products while generating higher gross profit margins than name brand products. In addition, in the fourth quarter of 1997, Duane Reade completed installation of Point of Sale ("POS") scanners in all of its stores and, by the end of the first quarter of 1998, will have completed its "planogramming" (space management system) initiative in all of its stores. These systems and initiatives will allow the Company to better analyze sales trends and merchandise its stores more effectively, which the Company believes will ultimately increase its sales and profitability. The success of the Company's growth strategy is dependent on a number of factors, many of which are beyond the Company's control. The Company's ability to continue to successfully execute its new store opening program is subject to a number of factors, including the availability and cost of attractive new store locations, continued favorable retail and pharmacy trends, competition, the general economic environment and the ability of management to successfully oversee the Company's expanded operations. Due to the above factors, there can be no assurance that the Company will be successful in implementing the above growth strategy. Recent Developments The Company's 1997 fiscal year ended on December 27, 1997. While the final results for the year ended December 27, 1997 are not yet available, the Company currently estimates that net sales for the full 1997 fiscal year were approximately $429.8 million, including approximately $107.8 million from pharmacy sales. The information above is preliminary in nature only, and is subject in all respects to completion of various internal analyses and procedures necessary to finalize the Company's financial statements and to completion of the audit of the Company's financial statements for the fiscal year ended December 27, 1997. Refinancing Plan The Offering is part of a plan to refinance all of the Company's existing indebtedness (the "Refinancing Plan") in order to enhance the Company's financial flexibility to pursue growth opportunities and implement capital improvements. The successful consummation of the Refinancing Plan will reduce the Company's overall indebtedness, simplify the Company's capital structure and provide access to additional borrowings. The principal components of the Refinancing Plan are: (i) the sale by the Company of 6,700,000 shares of Common Stock in the Common Stock Offering for estimated net proceeds of $92.5 million; (ii) the execution of a new secured credit agreement (the "New Credit Agreement"), which will provide for borrowings of up to approximately $160.0 million; (iii) the issuance of the New Senior Subordinated Notes for estimated net proceeds of $77.1 million; (iv) the repayment of all outstanding borrowings under the Company's existing credit agreement (the "Existing Credit Agreement"), the outstanding principal amount of which was $89.8 million as of December 27, 1997; (v) the redemption of the Company's outstanding 15% Senior Subordinated Zero Coupon Notes due 2004 (the "Zero Coupon Notes") for $99.8 million (including a redemption premium of $7.0 million); (vi) the redemption of the Company's outstanding 12% Senior Notes due 2002 (the "Senior Notes") for $93.9 million (including a redemption premium of $4.0 million); and (vii) the merger of Daboco, Inc., a direct wholly-owned subsidiary of the Company, with and into the Company (the "Merger"). The Company believes that the Refinancing Plan will result in a reduction in overall interest expense because total interest expense associated with the New Credit Agreement and the Offering will be less than the total interest expense currently associated with the Senior Notes and the Zero Coupon Notes. See "Selected Consolidated Historical Financial and Operating Data." The Company expects that interest rates under the New Credit Agreement will be approximately the same as interest rates under the Existing Credit Agreement. See "Description of Certain Indebtedness--New Credit Agreement." The Company expects that total fees and expenses associated with the Refinancing Plan will be approximately $13.3 million. See "Use of Proceeds." The consummation of the Offering will be conditional upon the other components of the Refinancing Plan. The Offering Securities Offered ............ $80.0 million aggregate principal amount of % Senior Subordinated Notes due 2008. Maturity Date ................. , 2008. Interest Payment Dates ........ and , commencing , 1998. Mandatory Redemption .......... The Company will not be required to make mandatory redemption of, or sinking fund payments with respect to, the New Senior Subordinated Notes except as described below under "--Change of Control" and in the case of certain Asset Sales. See "Description of New Senior Subordinated Notes--Repurchase at the Option of Holders--Assets Sales." Optional Redemption ........... The New Senior Subordinated Notes will be redeemable, in whole or in part, at any time on or after , 2003, in cash at the redemption prices set forth herein, plus accrued and unpaid interest, if any, thereon to the redemption date. In addition, at any time on or prior to , 2001, the Company may, at its option, redeem up to 35% of the aggregate principal amount of the New Senior Subordinated Notes originally issued at a redemption price equal to % of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, thereon to the redemption date, with the net proceeds from offerings of Equity Interests (other than Disqualified Stock) of the Company; provided that at least 65% of the original aggregate principal amount of the New Senior Subordinated Notes will remain outstanding immediately following each redemption. See "Description of New Senior Subordinated Notes--Optional Redemption." Change of Control ............. Upon the occurrence of a Change of Control, each holder of New Senior Subordinated Notes will have the right to require the Company to offer to repurchase such holder's New Senior Subordinated Notes in cash at a price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, thereon to the date of repurchase. The New Credit Agreement will prohibit the Company from purchasing the New Senior Subordinated Notes and will also provide that certain change of control events with respect to the Company will constitute a default thereunder. Any future credit agreements or other agreements relating to Senior Debt to which the Company becomes a party may contain similar restrictions and provisions. In the event a Change of Control occurs at a time when the Company is prohibited from purchasing the New Senior Subordinated Notes, the Company could seek the consent of its lenders to the purchase of the New Senior Subordinated Notes or could attempt to refinance the borrowings that contain such prohibition. If the Company does not obtain such consent or repay such borrowings, the Company will remain prohibited from purchasing the New Senior Subordinated Notes by the relevant Senior Debt. In such case, the Company's failure to purchase the tendered New Senior Subordinated Notes would constitute an Event of Default under the indenture pursuant to which the New Senior Subordinated Notes will be issued (the "New Senior Subordinated Note Indenture"), which would, in turn, constitute a default under the New Credit Agreement and could constitute a default under other Senior Debt. In such circumstances, the subordination provisions in the New Senior Subordinated Note Indenture would likely restrict the payments to the holders of the New Senior Subordinated Notes. Furthermore, no assurance can be given that the Company will have sufficient resources to satisfy its repurchase obligation with respect to the New Senior Subordinated Notes following a Change of Control. In addition, the definition of Change of Control only provides protection to the holders of New Senior Subordinated Notes in the event of certain changes in the equity ownership and/or the composition of the board of directors of the Company and, as a result, the Company may, under certain circumstances, incur substantial additional indebt- edness or undergo restructuring or other corporate changes without triggering a Change of Control. See "Risk Factors--Possible Inability to Repurchase New Senior Subordinated Notes upon a Change of Control" and "Description of New Senior Subordinated Notes--Redemption at the Option of Holders--Change of Control." Ranking ....................... The New Senior Subordinated Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company, including indebtedness pursuant to the New Credit Agreement. The New Senior Subordinated Notes will rank pari passu with any future senior subordinated indebtedness of the Company and will rank senior to all subordinated indebtedness of the Company. The New Senior Subordinated Notes will be guaranteed, jointly and severally, on a senior subordinated basis by the Subsidiary Guarantors. The Subsidiary Guarantees will be subordinated in right of payment to all existing and future Senior Debt (including the guarantees under the New Credit Agreement) of the Subsidiary Guarantors. On a pro forma basis after giving effect to the Refinancing Plan and the application of the proceeds therefrom, as of September 27, 1997, the Company would have had outstanding approximately $130.0 million of Senior Debt, and the Company's and its subsidiaries would have had approximately $262.6 million of outstanding liabilities, including trade payables and the New Senior Subordinated Notes. Subsidiary Guarantees ......... The New Senior Subordinated Notes will be guaranteed, jointly and severally, on a senior subordinated basis by each of the Subsidiary Guarantors. The Subsidiary Guarantees will be subordinated in right of payment to all existing and future Senior Debt of the Subsidiary Guarantors, including the New Credit Agreement. Certain Covenants ............. The New Senior Subordinated Note Indenture will contain certain covenants that, among other things, limit the ability of the Company to: incur indebtedness and issue preferred stock, repurchase Capital Stock (as defined) and subordinated indebtedness, engage in transactions with affiliates, engage in sale and leaseback transactions, incur or suffer to exist certain liens, pay dividends or other distributions, make investments, sell assets and engage in certain mergers and consolidations. Use of Proceeds ............... The net proceeds from the Offering, together with borrowings under the New Credit Agreement and the net proceeds from the Common Stock Offering, will be used to complete the Refinancing Plan. See "Prospectus Summary--Refinancing Plan" and "Use of Proceeds." Summary Historical Financial and Operating Data (In thousands, except percentages and store data) The following table sets forth summary consolidated historical financial data for the fiscal years ended December 31, 1994, December 30, 1995 and December 28, 1996 and for the 39 week periods ended September 28, 1996 and September 27, 1997. This data should be read in conjunction with the consolidated historical financial statements of the Company, together with the notes thereto, included elsewhere in this Prospectus. <TABLE> <CAPTION> FISCAL YEAR 39 WEEKS ENDED ------------------------------------------------------------------ SEPTEMBER 28, SEPTEMBER 27, 1994 1995 1996 1996 1997 ---------- ---------- ---------- --------------- --------------- <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales ................................. $281,103 $336,922 $381,466 $281,093 $313,796 Gross profit .............................. 71,425 77,095 92,961 65,296 77,383 Nonrecurring charges (1) .................. -- -- -- -- 10,887 Operating income .......................... 11,042 12,166 14,542 11,849 11,268 Net interest expense ...................... 27,480 30,224 32,396 24,334 25,433 Net loss .................................. (16,438) (18,058) (17,854) (12,485) (14,165) OPERATING AND OTHER DATA: EBITDA (2)................................. $ 31,188 $ 27,443 $ 35,300 $ 23,814 $ 29,747 EBITDA as a percentage of net sales ...... 11.1% 8.2% 9.3% 8.5% 9.5% Capital expenditures....................... 9,947 6,868 1,247 913 4,931 Number of stores at end of period ........ 51 59 60 60 65 Same store sales growth (3) ............... 1.6% (3.5)% 8.3% 7.8% 7.9% Pharmacy same store sales growth (3) ..... 14.2% 7.0% 25.5% 25.1% 25.4% Average store size (square feet) at end of period ................................... 6,596 6,712 6,733 6,733 6,832 Sales per square foot (4).................. $ 970 $ 898 $ 956 $ 708 $ 751 Pharmacy sales as a % of net sales ....... 17.6% 19.0% 21.8% 21.5% 24.8% Third-Party Plan sales as a % of pharmacy sales .................................... 45.7% 58.2% 64.4% 63.3% 72.9% PRO FORMA DATA: Cash interest expense (net)(5)............. $ 20,550 $ 12,734 $ 12,833 Ratio of EBITDA to cash interest expense .. 1.7x 1.9x 2.3x Ratio of net debt to EBITDA (6)(7) ....... 4.7x </TABLE> <TABLE> <CAPTION> AS OF AS OF DECEMBER 28, 1996 SEPTEMBER 27, 1997 ----------------- ------------------------------- (ACTUAL) (AS ADJUSTED)(8) <S> <C> <C> <C> BALANCE SHEET DATA: Working capital .......................... $ 9,917 $ 29,849 $ 43,968 Total assets ............................. 222,476 239,520 257,860 Total debt and capital lease obligations 245,657 262,649 212,187 Stockholders' deficiency ................. (59,396) (73,561) (4,734) </TABLE> (footnotes on next page) (footnotes to Summary Historical Financial and Operating Data appearing on the preceding page) - ------------ (1) During the first quarter of fiscal 1997, the Company considered a public offering of its common stock and took certain steps in connection with these plans. Such plans were abandoned upon consummation of the Recapitalization discussed in Note 10 of the Notes to Consolidated Financial Statements (Unaudited) for the 39 weeks ended September 27, 1997. Costs and expenses incurred in connection with the abandoned public offering, the Recapitalization and the repurchase offers referred to in Note 10 of the Notes to Consolidated Financial Statements (Unaudited) aggregated approximately $10.9 million, including investment banking fees of $7.7 million (including $3.5 million to an affiliate of DLJMBPII and $0.6 million to certain affiliates of Bain Capital), legal and accounting fees of $1.6 million, stand-by commitment fees relating to certain change of control offers of $1.2 million to an affiliate of DLJMBPII, and other costs of $0.4 million, which the Company has treated as a non-recurring expense because such expenses are related to financing activities in connection with the Recapitalization and related events, which the Company does not expect to repeat. (2) As used herein, "EBITDA" means net income (loss) plus nonrecurring costs, interest, income taxes, depreciation, amortization and other non-cash items (primarily deferred rents). Management believes that EBITDA, as presented, represents a useful measure of assessing the performance of the Company's ongoing operating activities as it reflects the earnings trends of the Company without the impact of certain non-cash charges. Targets and positive trends in EBITDA are used as the performance measure for determining management's bonus compensation; EBITDA is also utilized by the Company's creditors in assessing debt covenant compliance. The Company understands that, while EBITDA is frequently used by security analysts in the evaluation of companies, it is not necessarily comparable to other similarly titled captions of other companies due to potential inconsistencies in the method of calculation. EBITDA is not intended as an alternative to cash flow from operating activities as a measure of liquidity, nor an alternative to net income as an indicator of the Company's operating performance nor any other measure of performance in conformity with generally accepted accounting principles ("GAAP"). A reconciliation of net loss to EBITDA for each period included above is set forth below (dollars in thousands): <TABLE> <CAPTION> FISCAL YEAR 39 WEEKS ENDED ------------------------------------ -------------------------------- SEPTEMBER 28, SEPTEMBER 27, 1994 1995 1996 1996 1997 ----------- ----------- ----------- --------------- --------------- <S> <C> <C> <C> <C> <C> Net loss ............. $(16,438) $(18,058) $(17,854) $(12,485) $(14,165) Net interest expense 27,480 30,224 32,396 24,334 25,433 Amortization ......... 18,238 11,579 16,217 8,514 3,826 Depreciation ......... 1,184 1,929 3,015 2,295 2,584 Nonrecurring charges -- -- -- -- 10,887 Other non-cash item . 724 1,769 1,526 1,156 1,182 ----------- ----------- ----------- --------------- --------------- EBITDA ............... $ 31,188 $ 27,443 $ 35,300 $ 23,814 $ 29,747 =========== =========== =========== =============== =============== </TABLE> (3) Same store sales figures include stores that have been in operation for at least 13 months. (4) The Company experienced a decline in sales per square foot from 1993 through 1995 as a result of the opening of additional stores in connection with the Company's expansion. The opening of such additional stores resulted in a decline in sales per square foot principally because (i) the average square footage for the new stores was greater than that of the existing store base and (ii) new stores generally take some time to reach a mature level of sales. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--General." (5) Cash interest expense (net) represents net interest expense less amortization of deferred financing costs and other non-cash interest charges for the year ended December 28, 1996 and the 39 week periods ended September 28, 1996 and September 27, 1997 on a pro forma basis giving effect to the Refinancing Plan, including the consummation of the Offering, the Common Stock Offering and the application of the net proceeds therefrom as set forth under "Use of Proceeds," as if such transactions had occurred at December 31, 1995. (6) Net debt represents total debt and capital lease obligations less cash, on a pro forma basis after giving effect to the Offering, the Common Stock Offering and the application of the net proceeds therefrom. (7) For purposes of this ratio, EBITDA represents historical EBITDA for the 52 weeks ended September 27, 1997, which was approximately $41,233. (8) Adjusted to give effect to (i) the Refinancing Plan, including the consummation of the Offering, and the Common Stock Offering and the application of the net proceeds therefrom as set forth under "Use of Proceeds," as if all such transactions had occurred at September 27, 1997, (ii) a provision of $75,000 for compensation expense related to previously issued stock options and (iii) an extraordinary loss of $23.6 million for the 39 weeks ended September 27, 1997 arising from the redemption of the Senior Notes and the Zero Coupon Notes and the write-off of the related unamortized deferred financing fees, as if all such transactions had occurred at September 27, 1997. See "Use of Proceeds" and "Capitalization."
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+PROSPECTUS SUMMARY This summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. Except where the context otherwise requires, all references in this Prospectus to the "Company" or "Ivex" are to Ivex Packaging Corporation and its direct and indirect wholly owned subsidiaries, and all references to "IPC" are to IPC, Inc. and its direct and indirect wholly owned subsidiaries. IPC is the only direct subsidiary of Ivex and is wholly owned. All share and per share data in this Prospectus assume no exercise of the Underwriters' over-allotment options. See "Underwriting." Special Note: Certain statements set forth below constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. See "Special Note Regarding Forward-Looking Statements." THE COMPANY Ivex is a vertically integrated specialty packaging company that designs and manufactures value-added plastic and paper-based flexible packaging products. The Company believes that it is the leading provider of customized packaging in specialty markets, ranking first or second in markets representing approximately 65% of the Company's revenues. Ivex has increased sales and profitability by focusing on niche markets that provide attractive margins and growth and where the Company's integrated manufacturing capabilities enhance its competitive position. Ivex serves a variety of markets, providing packaging for food, medical devices and electronic goods and protective packaging for industrial products. Over the past several years, the Company has executed a comprehensive growth strategy based upon (i) achieving internal growth through product extensions and further penetration into higher growth markets and (ii) growth through strategic acquisitions. The Company has completed eight acquisitions since 1995. Since 1994, Adjusted EBITDA and Adjusted EBIT (as defined herein) have increased at compound annualized growth rates of 17.8% and 23.9%, respectively. MARKETS Consumer Packaging. The Consumer Packaging product group designs and manufactures plastic and paper-based products for food packaging applications and for applications in the medical and electronics industries. The Company produces a broad array of items, including plastic containers for prepared foods, produce and baked goods; specialty paper products such as fluted baking cups and liners for cookies and other baked goods; microwaveable packaging materials; and protective packaging for medical devices and electronics products. The Consumer Packaging product group markets its products to a variety of end users, including national wholesale bakeries, supermarket chains, foodservice distributors, fast-food chains, major agricultural growers, medical equipment suppliers and electronics manufacturers. The Company also manufactures a variety of plastic sheet and film products from several different resins for internal use and sales to third party converters. Ivex is the leading producer of oriented polystyrene ("OPS") sheet in North America and, with its acquisition of Ultra Pac, Inc. in April 1998, is a leading producer of polyethylene terephthalate ("PET") food packaging in North America. The Consumer Packaging product group represented approximately 59% of the Company's net sales and 62% of the Company's Adjusted EBITDA during the 12 months ended March 31, 1998. Industrial Packaging. The Industrial Packaging product group manufactures and coats film, paper and foil products for protective packaging and specialty papers. The Company produces products for some of the fastest growing applications in the protective packaging industry, including film and paper maskings and self-sealing coated packaging applications. These products are marketed primarily to consumer durable goods manufacturers, automotive companies, other industrial manufacturers and integrated paper producers. The Company also manufactures a variety of recycled kraft paper made from post-consumer and post-industrial fibers and specialty lightweight paper made primarily from virgin pulp for internal use and sales to third party converters. The Industrial Packaging product group represented approximately 41% of the Company's net sales and 38% of the Company's Adjusted EBITDA during the 12 months ended March 31, 1998. The following photographs depict applications of the Company's plastic and paper packaging products. The Company is not the exclusive provider of packaging products to the companies whose name-branded products appear below. [photo of man] Medical Packaging [photo of woman] Supermarket Deli Containers [photo of food] Home Meal Replacement Packaging [photo of car] Surface Protection CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." BUSINESS STRATEGY Ivex seeks to differentiate itself from other packaging providers by offering customized packaging that addresses the specialized needs of its customers. The Company's goal is to be the number one or number two provider of customized packaging in its markets. Ivex believes it has a number of key strengths that support its ability to implement this strategy: Focus on Niche Markets. Ivex focuses primarily on markets with attractive margin and growth characteristics. The Company's markets include the in-store bakery, delicatessen and prepared food sections of supermarkets; foodservice outlets; medical equipment and electronics goods manufacturers; and users of industrial protective masking. The Company believes that these markets have been among the fastest growing for packaging products over the past several years. Each of these is characterized by few competitors, technological barriers to entry, significant customer service requirements and attractive growth potential. Broad Product Range. Ivex manufactures a broad range of plastic and paper-based stock and customized packaging products to provide a full service approach to fulfilling its customers' packaging needs. Through its multi-resin extrusion and thermoforming capabilities, Ivex is able to offer its customers a variety of plastic packaging solutions. The Company believes its breadth of product range and customization capabilities are competitive advantages that allow it to be more responsive to, and provide a single supply source for, many of its customers' packaging needs. Further, these capabilities enhance the Company's ability to adapt to changing market preferences. Flexible Design and Engineering. Ivex seeks to maximize opportunities within niche markets by providing its customers with lower-cost product development and shorter lead times than its competitors. The Company delivers these benefits through research and development and technical expertise such as computer-aided design and manufacturing and extensive in-house mold-making capabilities. Vertical Integration. Ivex pursues a vertically integrated operating strategy in order to maximize product quality, minimize the influence of external commodity price fluctuations and maintain its low-cost position. Within Consumer Packaging, the Company operates two polymerization, eight extrusion and thirteen thermoforming facilities. In 1997, the Company produced 37% of its polystyrene needs and 100% of its OPS sheet needs internally, resulting in a significant advantage over competitors that purchase these materials in the open market. Within Industrial Packaging, the Company's polyethylene film and paper facilities provide important source products and product development capabilities for many of the Company's protective packaging products. Proprietary Technology. Ivex's proprietary technology strengthens its product quality, market position and growth prospects in existing markets as well as new product and geographic markets. Examples of the Company's proprietary technology used by Consumer Packaging include extensive extrusion process technology, low residual monomer polymerization technology and the capability to manufacture OPS film to a gauge of less than one-thousandth of an inch. Because of its proprietary production technology, the Company's OPS is recognized as having a high level of quality within the industry. Within Industrial Packaging, the Company utilizes many customized adhesive and cohesive formulations in its surface protection and self-sealing products which strengthen its market position and product development capabilities. Broad Distribution Network. The geographic breadth of Ivex's manufacturing and distribution network, including 28 plants in North America and Europe and an extensive network of sales representatives, is another significant advantage over the Company's competitors, which are often smaller and regionally based. Ivex's distribution network allows it to meet the broad geographic needs of its larger customers from a single source, which is an advantage as customers seek to reduce their number of suppliers. Extensive geographic coverage also reduces transportation costs and contributes to the Company's cost competitiveness. GROWTH STRATEGY Over the past several years, Ivex has executed a comprehensive growth strategy based upon (i) internal growth through product extensions and further penetration into higher growth markets and (ii) growth through strategic acquisitions. Since 1994, Adjusted EBITDA and Adjusted EBIT have increased at compound annualized growth rates of 17.8% and 23.9%, respectively, and, excluding such acquisitions, of 10.9% and 17.2%, respectively. The Company believes it can continue growing sales and earnings through its growth strategy as well as through utilizing excess cash flow to reduce debt and interest expense. Internal Growth. Ivex intends to utilize its business strategy and strong market position to capitalize on a number of emerging industry trends. As supermarkets, bakeries and foodservice distributors consolidate packaging vendors to create efficiencies, the Company plans to use its broad product offerings and distribution capabilities to capture market share through increased sales to these customers. Consumer trends toward convenient, ready-to-eat food products and the increased utilization of clear plastic packaging for more appealing presentation within the delicatessen, bakery and produce sections of supermarkets are resulting in increasing use of OPS sheet. As the leading producer of OPS sheet in North America, Ivex believes that it will experience increased production and sales of OPS sheet. In addition, manufacturers are increasingly realizing the quality and cost/benefit advantage of using protective packaging and masking to protect products from damage or breakage during manufacturing, handling, storage and shipping. This trend creates additional demand for the Company's protective masking products and corrugated cushioning materials. Acquisitions. Ivex has pursued a disciplined acquisition program of "bolt-on" acquisitions that are easily integrated into the Company's operations and that meet certain defined strategic and financial return criteria. Since 1995, Ivex has completed eight acquisitions that achieve a number of strategic objectives: - apply existing technology to new products and markets (the acquisitions of Plastofilm Industries, Inc. and Crystal Thermoplastics, Inc. added medical and electronics end markets); - fill out or extend existing product lines and markets (the acquisition of Trio Products, Inc. added multi-resin capabilities, the acquisition of Packaging Products, Inc. expanded surface protection product offerings and the acquisition of Ultra Pac, Inc. expanded the Company's presence in PET packaging products); - expand geographical presence (the acquisitions of M&R Plastics, Inc. and AVPEX International in Canada and the European OPS business of Viskase Limited extended operations outside the United States); and - create rationalization opportunities (the integration of Plastofilm's extrusion operation into Trio created a lower-cost operation). As a market leader with a broad range of products and proven capabilities, the Company believes that it is well positioned to continue to successfully apply its acquisition and operating expertise to take advantage of consolidation opportunities within the highly fragmented specialty packaging market. ------------------------ The Company's principal executive offices are located at 100 Tri-State Drive, Suite 200, Lincolnshire, Illinois 60069, and its telephone number is (847) 945-9100. ULTRA PAC ACQUISITION On April 23, 1998, Ivex acquired all of the common stock of Ultra Pac, Inc. ("Ultra Pac"), a Rogers, Minnesota based specialty packaging company, for approximately $67 million. Ultra Pac is a leading North American producer of PET food packaging that designs and manufactures plastic containers and packaging for the food industry, including supermarkets, distributors of food packaging, wholesale bakeries, produce growers, delicatessens, food processors and foodservice companies. Ultra Pac had net sales of approximately $56.7 million in its fiscal year ended January 31, 1998. The acquisition is a continuation of Ivex's "bolt-on" acquisition strategy and represents the Company's eighth acquisition in the past three years. The integration of the Ultra Pac business into Ivex will further expand Ivex's leadership position in the specialty food packaging market. Because PET is highly complementary to OPS, Ultra Pac will broaden Ivex's product offerings in various thermoforming markets. This broader product offering should benefit customers by providing more raw material alternatives and greater product selection, thereby enabling Ivex to achieve deeper market penetration. The combination will also provide the opportunity for various cost structure improvement synergies. RISK FACTORS Purchasers of Common Stock in the Offerings should carefully consider the factors set forth under the caption "Risk Factors" and other information included in this Prospectus prior to making an investment decision. In particular, such factors include the Company's highly leveraged condition, historical losses, the Company's dependence on subsidiary distributions, volatility of raw material pricing, cyclical demand for certain of the Company's products, highly competitive markets, risks associated with the Company's growth strategy, environmental matters, limitation on use of net operating losses, anti-takeover provisions, restrictions on the ability of the Company to pay dividends, shares eligible for future sale and dilution and tangible net worth deficiency. See "Risk Factors." THE OFFERINGS <TABLE> <S> <C> Common Stock offered by the Company.................. 500,000 shares(1) Common Stock offered by the Selling Stockholders....................................... 3,500,000 shares Common Stock to be outstanding after the Offerings... 20,931,268 shares(1)(2) Use of Proceeds...................................... To repay a portion of the borrowings under the revolving credit portion of the Credit Facility (as defined herein), including a portion of the indebtedness which the Company incurred in connection with its acquisition of Ultra Pac. See "Description of Certain Indebtedness -- The Credit Facility" and "Use of Proceeds." NYSE Symbol.......................................... IXX </TABLE> - ------------------------- (1) Assumes no exercise of the over-allotment options granted by the Company to the Underwriters. (2) Excludes options exercisable for 812,461 shares of Common Stock issued under the 1993 Stock Option Plan (as defined herein) and 2,000,000 shares of Common Stock reserved for issuance under the 1997 Stock Incentive Plan (as defined herein). SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA The following summary selected consolidated financial data presented below for, and as of the end of, each of the years in the five year period ended December 31, 1997, are derived from and should be read in conjunction with the consolidated audited financial statements of the Company. The data as of and for the three months ended March 31, 1997 and 1998 are derived from the consolidated unaudited interim financial statements and include, in the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the data for such periods. The financial data of Ivex reflect the following acquisitions as of the respective acquisition dates: Packaging Products, Inc. ("PPI") as of September 11, 1995; Plastofilm Industries, Inc. ("Plastofilm") as of August 16, 1996; Trio Products, Inc. ("Trio") as of September 11, 1996; the OPS business based in the United Kingdom (the "European OPS Business") as of January 17, 1997; M&R Plastics Inc. ("M&R") as of February 21, 1997; AVPEX International Corporation ("AVP") as of August 8, 1997; and Crystal Thermoplastics, Inc. ("Crystal") as of November 3, 1997. The following summary selected financial data do not reflect the impact of any pro forma adjustments for the transactions contemplated hereby. <TABLE> <CAPTION> THREE MONTHS YEAR END31,DECEMBER ENDE31,ARCH -------------------------------------------------------- -------------------- 1993 1994 1995 1996 1997 1997 1998 --------- --------- --------- --------- -------- --------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales........................ $ 366,851 $ 390,975 $ 451,569 $ 451,807 $538,475 $ 127,864 $136,168 Gross profit..................... 72,213 74,271 85,160 100,383 119,660 26,370 31,497 Selling and administrative....... 39,274 41,662 42,567 47,462 58,924 14,419 15,824 Amortization of intangibles(1)... 4,372 1,140 1,904 621 1,111 171 316 Write-off of goodwill(1)......... 113,859 13,471 Acquisition related expense(2)... 1,100 Restructuring and special charges(3)..................... 4,350 4,960 53,329 --------- --------- --------- --------- -------- --------- -------- Income (loss) from operations.... (90,742) 31,469 22,258 52,300 6,296 11,780 15,357 Interest expense................. 37,179 39,820 43,270 42,732 41,889 11,129 6,497 --------- --------- --------- --------- -------- --------- -------- Income (loss) before income taxes and extraordinary item......... (127,921) (8,351) (21,012) 9,568 (35,593) 651 8,860 Income tax provision (benefit)... 1,177 942 1,113 900 (26,053) 327 3,545 --------- --------- --------- --------- -------- --------- -------- Income (loss) before extraordinary item............. (129,098) (9,293) (22,125) 8,668 (9,540) 324 5,315 Extraordinary item(4)............ (2,359) (26,730) --------- --------- --------- --------- -------- --------- -------- Net income (loss)................ $(129,098) $ (9,293) $ (24,484) $ 8,668 $(36,270) $ 324 $ 5,315 ========= ========= ========= ========= ======== ========= ======== Earnings (loss) per share -- basic and diluted: Income (loss) before extraordinary item........... $ (12.63) $ (.90) $ (2.14) $ .84 $ (0.75) $ 0.03 $ 0.26 ========= ========= ========= ========= ======== ========= ======== Net income (loss).............. $ (12.63) $ (.90) $ (2.37) $ .84 $ (2.85) $ 0.03 $ 0.26 ========= ========= ========= ========= ======== ========= ======== OTHER OPERATING DATA: Cash flow from (used by) operating activities........... $ 22,157 $ 15,647 $ 22,746 $ 49,202 $ 36,475 $ (2,407) $ 3,657 Cash flow used by investing activities..................... (8,261) (13,057) (29,871) (38,136) (68,191) (36,141) (6,953) Cash flow from (used by) financing activities........... (5,823) (6,102) 5,666 (13,074) 34,883 43,034 4,056 Adjusted EBIT(5)................. 28,567 31,469 41,828 52,300 59,625 11,780 15,357 Depreciation and amortization(1)................ 137,837 22,189 35,871 22,724 27,179 6,224 7,220 Adjusted EBITDA(6)............... 52,545 53,658 63,089 75,024 86,804 18,004 22,577 Capital expenditures............. 9,528 16,769 19,385 17,633 25,364 5,479 6,652 </TABLE> <TABLE> <CAPTION> DE31,BER MARCH 31, -------------------------------------------------------- -------------------- 1993 1994 1995 1996 1997 1997 1998 --------- --------- --------- --------- -------- --------- -------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Working capital(7)............... $ 34,729 $ 32,853 $ 38,090 $ 32,539 $ 41,741 $ 50,607 $ 50,557 Total assets..................... 297,674 304,246 294,911 315,901 427,723 366,251 438,874 Long-term debt................... 330,201 330,768 353,717 352,893 319,055 398,988 325,201 Stockholders' deficit............ (101,579) (111,266) (136,332) (127,344) (12,169) (126,818) (8,274) </TABLE> (1) Depreciation and amortization for the year ended December 31, 1995 includes the accelerated non-cash write-off of goodwill of $13,471 and the accelerated non-cash write-off of a non-compete agreement of $1,139. Depreciation and amortization for the year ended December 31, 1993 includes the accelerated non-cash write-off of goodwill totaling $113,859. (2) Acquisition related expense totaling $1,100 was incurred during 1993 in connection with an acquisition attempt. (3) Operating results for the year ended December 31, 1997 include a nonrecurring non-cash compensation charge of $53,329 in connection with the Company's conversion, concurrently with the 1997 Common Stock Offering (as defined herein) pursuant to the Amended and Restated Stock Option and Purchase Agreement (the "1993 Stock Option Plan"), dated as of January 1, 1993, of certain key executives' stock options which were exercisable for 16,321 shares of IPC's common stock (the "IPC Options") into 2,114,133 newly issued shares of Common Stock and newly issued stock options exercisable for 817,067 shares of Common Stock. The nonrecurring compensation charge consists of (i) a non-cash compensation charge of $33,826 associated with the conversion of the IPC Options into shares of Common Stock and (ii) a non-cash compensation charge of $19,503 associated with the accrual of future Company payments to senior management of an amount which (after taxes) will enable such management to pay interest on the loans made to them by the Company. Operating results for the year ended December 31, 1995 include the following special charges: $2,250 associated with IPC's special incentive agreement with certain executive officers, $1,950 of costs related to an attempted initial public equity offering and a reduction of land value of $760 associated with a donation of certain land to the Village of Chagrin Falls, Ohio. Operating results for the year ended December 31, 1993 include restructuring and special charges of $4,350, reflecting a $1,500 non-cash write-down of certain property held for sale and costs of $2,850 related to the reorganization of the Consumer Packaging product group, which include, among other things, severance, transition and relocation expenses. (4) During 1997, the Company recorded an extraordinary loss of $26,730 (net of tax of $15,035) associated with the refinancing of substantially all of its debt. In connection with the 1995 refinancing of IPC's credit facility, the Company wrote off deferred financing costs of $2,359. (5) Adjusted EBIT for the year ended December 31, 1997 includes income from operations adjusted to exclude a special charge of $53,329. Adjusted EBIT includes income from operations adjusted to exclude goodwill write-offs of $13,471 and $113,859 for the years ended December 31, 1995 and 1993, respectively, and acquisition related expenses of $1,100, restructuring charges of $2,850 and special charges of $1,500 for the year ended December 31, 1993. In addition, Adjusted EBIT for the year ended December 31, 1995 excludes the accelerated write-off of a non-compete agreement of $1,139 and special charges of $4,960. Ivex believes that Adjusted EBIT provides additional information for determining its ability to meet future debt service requirements. However, Adjusted EBIT is not a defined term under generally accepted accounting principles ("GAAP"). (6) Adjusted EBITDA includes income from operations adjusted to exclude depreciation and amortization expenses, goodwill write-offs of $13,471 and $113,859 for the years ended December 31, 1995 and 1993, respectively, and acquisition related expenses of $1,100, restructuring charges of $2,850 and special charges of $1,500 for the year ended December 31, 1993. In addition, Adjusted EBITDA for the years ended December 31, 1997 and 1995 excludes special charges of $53,329 and $4,960, respectively. Ivex believes that Adjusted EBITDA provides additional information for determining its ability to meet future debt service requirements. However, Adjusted EBITDA is not a defined term under GAAP and is not indicative of operating income or cash flow from operations as determined under GAAP. (7) Working capital is determined to be the excess of current assets over current liabilities (including the current portion of long-term debt).
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial data appearing elsewhere in this Prospectus. This Prospectus contains, in addition to historical information, forward looking statements that involve risks and uncertainties. Investors should carefully consider the information set forth under the heading "Risk Factors." Saf T Lok Incorporated (the "Company") was incorporated in Florida in July 1989 under the name of RGB Sales and Marketing, Inc. ("RGB"). In September 1989, the assets and certain of the liabilities of RGB Video Creations, Inc. ("RGB Video Creations") were purchased and assumed, respectively, and the assets were contributed to RGB as its initial capitalization. In October 1989, RGB commenced the business of operating a retail store that sold Amiga computers and produced a series of tutorial programs used with software written for the Amiga platform. On June 23, 1993, RGB completed an initial public offering of its Common Stock and on February 13, 1996 RGB acquired Saf T Lok Corporation, a Florida corporation, through a merger with a newly formed special purpose subsidiary. The acquisition marked the end of RGB's involvement in the video editing business. RGB changed its name to Saf T Lok Incorporated (the "Company") in connection with the merger in February 1996, and commenced RGB's involvement in the gun lock business. The Company's subsidiary, STL Lock, Inc. ("STL") (the Company and STL are jointly referred to herein as the "Company"), was organized to design, develop, manufacture, and market proprietary combination locks to prevent unauthorized use of fire arms, including unintentional discharge by children and assailants. As a development stage entity, the Company has been engaged in product and market research and development since February 1996. The Saf T Lok(TM), the Company's initial product, is a mechanical combination lock that attaches to a handgun. When unlocked, it does not hamper or interfere with the use of the gun. When the Saf T Lok(TM) is engaged it locks the "safety" in the "no fire" position, blocking the normal operation of the gun and preventing the gun from being fired. (Guns without safeties are locked using the basic Saf T Lok(TM) to block operation of other internal gun components.) There are no keys, batteries or other gadgets to lose or fail. The lock's body is positioned under and concealed by the gun grip. The lock's combination mechanism is located at the top of the grip, where it is easily accessible. With three small levers, each capable of 9 clicks, the Saf T Lok(TM) yields 1,000 combinations. There are approximately two dozen variations of the Saf T Lok(TM) which together with the magazine lock (discussed below) are designed to fit approximately 40% of the handguns produced yearly in the U.S. According to the Bureau of Alcohol, Tobacco and Firearms there were 2,581,961 handguns produced in the U.S. in 1994 and 1,722,930 handguns produced in 1995. The various models of the Saf T Lok(TM) and the magazine lock are also designed to fit a significant portion of the handguns existing in the U.S. retrofit market. In 1996, the Company conceived, developed, and produced a prototype of its second product (hereinafter, the "Magazine Lock") and is currently engaged in the market acceptance process. The Magazine Lock, still in the prototype phase, is a precision miniaturized all mechanical combination lock that functions the same as the Saf T Lok(TM) in handguns with magazines. It has two buttons that function in both directions, yielding 10,000 combinations. The Magazine Lock is housed in the bottom of the magazine, occupying the space of two to four cartridges, depending on the caliber. The Magazine Lock installs to the gun merely by inserting the Saf T Lok(TM) magazine. A lever runs from the lock, up the side of the magazine. When the lock is in the locked position the lever will engage the trigger bar or another part of the firing mechanism, and either pull it away from the sear mechanism or block the rearward movement, as necessary and appropriate. The lever also locks over the trigger bar, preventing the magazine from being removed. The Company's market includes both new and previously manufactured handguns in the United States (the "retrofit market"). The Company's initial markets are handgun owners who bought or are planning to buy guns for home defense and self protection as well as for law enforcement at all levels. Consumers purchasing hand guns must do so from federally licensed dealers, thus the Company is targeting consumers through the approximately 12,000 licensed firearms dealers in the U.S. Of these dealers, approximately 8000 dealers have annual sales in firearms and other products in excess of $200,000. The Company intends to minimize overhead by subcontracting the component manufacturing of the gun locks to specialists: die manufacturers cast the lock components, a grip manufacturer injection molds gun grips to house the Saf T Lok(TM) components. The Company assembles the gun locks in-house. After quality assurance testing, packaging, and handling, the Saf T Lok(TM) is ready for distribution. While the Magazine Lock is not yet in production, the manufacturing function for it will replicate that of the Saf T Lok.(TM) PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH HEREIN IN THE SECTION CAPTIONED "RISK FACTORS" WHICH IMMEDIATELY FOLLOWS THIS SECTION ON PAGE 3. ___________________________________ The Company's executive offices are located at 18245 S.E. Federal Highway, Tequesta, Florida 33469. Its telephone number at that location is (561) 743- 5625. ___________________________________ <PAGE>
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000910391_onhealth_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000910391_onhealth_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..7e998c21d34fa351a0ccf34fa66fcf3162a80008
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements and related notes thereto appearing elsewhere in this Prospectus. This Prospectus contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from the results discussed in the forward-looking statements. THE COMPANY IVI Publishing, Inc. ("IVI" or the "Company") was incorporated under the laws of the State of Minnesota in 1990. The Company corporate offices, previously located in Minnesota, are now located at 808 Howell Street, Suite 400, Seattle, Washington 98101 and its telephone number is (206) 583-0100. THE OFFERING Securities offered..................... 2,150,000 shares of Common Stock (plus an indeterminate number of additional shares of Common Stock issuable by the Company upon conversion of the Preferred Stock, including issuance of dividends on the Preferred Stock in the form of additional shares of Preferred Stock, and exercise of the Warrants). See "Description of Securities." Common Stock to be outstanding after the offering..................... Approximately 12,289,710 shares (assuming exercise of all Warrants and further assuming that the Preferred Stock and dividends issuable thereon, are converted into Common Stock at the maximum rate allowable by the terms of the agreements relating to the issuance of the Preferred Stock). Use of Proceeds........................ The Company will receive no proceeds from the sale of the Common Stock by the Selling Shareholders. Risk Factors........................... Investment in the Common Stock involves a high degree of risk. See "Risk Factors."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1998/CIK0000910719_sheffield_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000910719_sheffield_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..de886c712ed949ed0dd4c22c2f747c17d584af77
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and consolidated financial statements and notes thereto appearing elsewhere in this Prospectus. Except where otherwise indicated in this Prospectus (i) all references to a fiscal year refer to the fiscal year of the Company which ends on April 30 (for example, references to "fiscal 1997" mean the fiscal year ended April 30, 1997) and (ii) all references to the "Company" refer to Sheffield Steel Corporation and its subsidiaries and all references to "Sheffield" refer to Sheffield Steel Corporation. THE COMPANY The Company is a leading regional mini-mill producer of hot rolled steel bar products ("hot rolled bar"), concrete reinforcing bar ("rebar"), fabricated products, including fabricated and epoxy-coated rebar and steel fence posts, and various types of semi-finished steel ("billets"). The Company and its predecessors have been in the steelmaking business for over 68 years. The Company believes that it is among the lowest cost producers of billets in the United States as a result of its modern melt and cast operations, high labor productivity levels, low energy costs and competitive steel scrap costs. The Company's low cost billets serve as the feedstock for its downstream bar mill operations and finished products. The Company shipped approximately 470,000 tons of steel in the 12-month period ended October 31, 1997, resulting in sales of $175.1 million and EBITDA (as defined) of $20.7 million. The Company's primary manufacturing facility is located in Sand Springs, Oklahoma (the "Sand Springs Facility"), where it conducts a full range of steelmaking activities, including the melting and casting of billets and the processing of billets into rebar, steel fence posts and a range of hot rolled bar products. The Company currently has 600,000 tons of steelmaking capacity. The Company has recently completed construction, installation and final commissioning of a new $22 million rolling mill (the "New Rolling Mill") at the Sand Springs Facility which has increased productivity and efficiency in the manufacturing of rebar and has enabled the Company to produce certain higher quality hot rolled bar products that it was previously unable to produce. From the Sand Springs Facility, the Company also transfers billets to its two rolling mills in Joliet, Illinois (the "Joliet Facility"), where it produces high-end specialty hot rolled bar products. The Company also operates a rebar fabrication plant in Kansas City, Missouri (the "Kansas City Plant") and a short line railroad (the "Railway Company"). The Sand Springs Facility and the Joliet Facility received ISO 9002 quality certification in November 1995 and June 1996, respectively. Hot Rolled Bar. The Company sells a variety of specialty hot rolled bar products, including flats, squares, rounds and channels for end use applications that include farm equipment, auto parts, conveyor assemblies, pole line hardware, wrench handles and construction machinery. The Company sells its hot rolled bar products to original equipment manufacturers, cold drawn bar finishers and, to a lesser extent, steel service centers. In the hot rolled bar market, the Company differentiates itself from its competitors through the Joliet Facility's focus on specialty products and by targeting customers with special requirements as to bar shape, size and chemical composition and, in many cases, small volume needs. The Company believes that its targeted customer focus often allows it to act as the sole supplier of particular shapes, sizes or steel chemistries to many customers. The Company believes that these niche markets are unattractive to larger volume producers of hot rolled bar products. The Company's Sand Springs Facility provides it with a competitive geographical advantage in the south-central United States hot rolled bar market and enables the Company's customers to benefit from lower freight costs, shorter lead times and more timely deliveries. As a result of these competitive advantages and its strong reputation for quality and service, the Company has built a number of strong relationships with its hot rolled bar product customers. After the completion of the Shear Line Project (as defined), the Company expects to increase hot rolled bar product sales from its Sand Springs Facility as part of its business strategy to improve finished product mix. See "--Business Strategy--Improve Finished Goods Product Mix." For fiscal 1997, sales of hot rolled bar products accounted for approximately 44% of the Company's total sales. Rebar. The Company sells rebar to leading independent fabricators for end use applications in the commercial construction and public infrastructure markets. The Company has worked successfully to build and maintain long-term relationships with fabricators located in the south-central United States by providing them with competitive pricing, assured product availability and reliable, prompt delivery and service. The Company believes that it is the primary and, in most cases, the sole rebar supplier to its largest rebar customers. Although rebar demand is driven by trends in commercial and industrial construction and infrastructure investment, the levels of public and private sector investment in buildings, plants, facilities and infrastructure in the south-central United States market has helped the Company maintain relatively stable rebar sales volume during periods of overall reduced steel industry demand. For fiscal 1997, sales of rebar accounted for approximately 32% of the Company's total sales. Fabricated Products. The Company manufactures and sells two fabricated steel products: fence post and fabricated rebar, including epoxy-coated rebar. Fence post sales are concentrated in the Oklahoma, Kansas, Missouri, Texas and Arkansas market area. The Company believes that it is the primary supplier of fence posts in this market area, with more than half of the market share. The Company operates a rebar fabrication facility in Kansas City, the largest facility in the market area, where it shears and bends rebar to meet engineering or architectural specifications for construction projects. See "Business--Recent Developments." For fiscal 1997, sales of fabricated products accounted for approximately 14% of the Company's total sales. Sales of billets to third parties and Railway Company sales accounted for the remaining 10% of the Company's total sales for fiscal 1997. BUSINESS STRATEGY The Company has formulated an operating strategy to strengthen its market position and maximize profitability which has four major components: (i) improve finished goods product mix; (ii) continue to focus on and extend strong customer relationships; (iii) modernize melt shop operations; and (iv) streamline and strengthen organizational structure. Improve Finished Goods Product Mix. With the addition of the New Rolling Mill at the Sand Springs Facility, the Company has substantially increased its hot rolled bar production capacity. Accordingly, shipments of finished products have increased significantly as less profitable third party billet sales have been intentionally reduced. Billet sales, which accounted for 23.6% of tons shipped in fiscal 1994, accounted for only 7.3% of tons shipped for the 12- month period ended October 31, 1997. Shifting away from third party billet sales by increasing hot rolled bar production has also increased margins and reduced sales volatility for the Company, since hot rolled bar products are significantly more profitable than third party billet sales and demand is more stable. As part of its strategy to further improve product mix, the Company intends to remove a bottleneck at the Sand Springs Facility by improving the efficiency of the cooling bed and increasing the capacity of the shear line (the "Shear Line Project"). The completion of the Shear Line Project, scheduled for the end of fiscal 1998, is expected to (i) increase hot rolled bar production capacity by more than 100,000 tons per year; (ii) enable the Company to more fully utilize its existing 600,000 tons of steelmaking capacity; (iii) improve the quality of all mill products, especially hot rolled bar; and (iv) improve product mix by further reducing billet sales to third parties. The Shear Line Project is expected to have an aggregate capital cost of approximately $4.5 million and, upon completion and achievement of full operating capacity, is expected to result in an annual EBITDA (as defined) increase of approximately $9 million. Extend Strong Customer Relationships. The Company benefits from having a number of long-standing customer relationships in each of its product markets. The Company has built a reputation for providing consistent product quality, reliable, prompt product delivery and service, product availability and flexible scheduling to meet customer needs and a high level of follow up technical assistance and service. The ISO 9002 certification at both the Sand Springs Facility and the Joliet Facility is an indication of the Company's commitment to producing quality products. The Company believes that its business strategy to improve its finished product mix will strengthen its existing customer relationships and will aid it in developing new customer relationships. Modernize Melt Shop. The Company believes that it is among the lowest cost producers of billets in the United States as a result of its modern melt and cast operations, high labor productivity levels, low energy costs and competitive steel scrap costs. With the addition of the New Rolling Mill, which can utilize a larger billet, together with improvements in general operating practices, yields have improved, costs have been reduced and annual billet production capacity has increased from 525,000 tons to 600,000 tons per year. Through incremental capital investments, the Company intends to pursue additional modernization measures, such as the installation of a ladle arc furnace in the melt shop, which will further enhance production capability, increase production capacity, reduce manufacturing costs and improve the quality of finished products. Streamline and Strengthen Organizational Structure. The Company has improved strategic planning, strengthened financial reporting systems and aligned organizational structure and management incentives with the Company's business strategies and objectives. In accordance with the collective bargaining agreement reached in February 1997 that resulted in a 15% workforce reduction at the Sand Springs Facility, the Company has been able to implement multi- craft training and use greater flexibility in job assignments. Additional initiatives to streamline operations include the elimination of a centralized maintenance structure and close coordination of the melt shop, casting and rolling mill operations which have resulted in significant reductions in both billet and finished goods inventory. The Company has also put in place a new management team to manage the Sand Springs Facility manufacturing operations. These initiatives have resulted in improving the organizational structure of the Company, making it flexible and more responsive to customer needs and positioning it to implement its business strategy of improving finished product mix. The Company's principal executive offices are located at 220 North Jefferson, Sand Springs, Oklahoma 74063 and its telephone number is (918) 245-1335. THE EXCHANGE OFFER Registration Rights The Old First Mortgage Notes were sold by the Agreement.................. Company on December 5, 1997 to BT Alex Brown (the "Initial Purchaser"), who placed the Old First Mortgage Notes with institutional investors. In connection therewith, the Company executed and delivered for the benefit of the Holders of the Old First Mortgage Notes a registration rights agreement (the "Registration Rights Agreement") providing, among other things, for the Exchange Offer. The Exchange Offer.......... The New First Mortgage Notes are being offered in exchange for a like face amount of Old First Mortgage Notes. As of the date hereof, $110,000,000 aggregate face amount of Old First Mortgage Notes are outstanding. The Company will issue the New First Mortgage Notes to Holders promptly following the Expiration Date. See "Risk Factors Consequences of Failure to Exchange." Expiration Date............. 5:00 p.m., New York City time, on [ ], 1998, unless the Exchange Offer is extended, in which case the term "Expiration Date" means the latest date and time to which the Exchange Offer is extended. Accrued Interest on the New First Mortgage Notes and the Old First Mortgage Notes...................... Each New First Mortgagee Note will bear interest from its issuance date. Holders of Old First Mortgage Notes that are accepted for exchange will receive, in cash, accrued interest thereon to, but not including, the issuance date of the New First Mortgage Notes. Such interest will be paid with the first interest payment on the New First Mortgage Notes. Interest on the Old First Mortgage Notes accepted for exchange will cease to accrue upon issuance of the New First Mortgage Notes. Conditions to the Exchange The Exchange Offer is subject to certain Offer...................... customary conditions, which may be waived by the Company. See "The Exchange Offer--Conditions." Procedures for Tendering Old First Mortgage Notes... Each Holder of Old First Mortgage Notes wishing to accept the Exchange Offer must complete, sign and date the Letter of Transmittal, or a facsimile thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver such Letter of Transmittal, or such facsimile, together with the Old First Mortgage Notes and any other required documentation to the exchange agent (the "Exchange Agent") at the address set forth herein. By executing the Letter of Transmittal, each Holder will represent to the Company, among other things, that (i) the New First Mortgage Notes acquired pursuant to the Exchange Offer by the Holder and any beneficial owners of Old First Mortgage Notes are being obtained in the ordinary course of business of the person receiving such New First Mortgage Notes, (ii) neither the Holder nor such beneficial owner is participating in, intends to participate in or has an arrangement or understanding with any person to participate in the distribution of such New First Mortgage Notes and (iii) neither the Holder nor such beneficial owner is an "affiliate," as defined under Rule 405 of the Securities Act, of the Company. Each broker-dealer that receives New First Mortgage Notes for its own account in exchange for Old First Mortgage Notes, where such Old First Mortgage Notes were acquired by such broker or dealer as a result of market-making activities or other trading activities (other than Old First Mortgage Notes acquired directly from the Company), may participate in the Exchange Offer but may be deemed an "underwriter" under the Securities Act and, therefore, must acknowledge in the Letter of Transmittal that it will deliver a prospectus in connection with any resale of such New First Mortgage Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker or dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. See "The Exchange Offer-- Procedures for Tendering" and "Plan of Distribution." Special Procedures for Beneficial Owners.......... Any beneficial owner whose Old First Mortgage Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact such registered Holder promptly and instruct such registered Holder to tender on such beneficial owner's behalf. If such beneficial owner wishes to tender on such owner's own behalf, such owner must, prior to completing and executing the Letter of Transmittal and delivering his Old First Mortgage Notes, either make appropriate arrangements to register ownership of the Old First Mortgage Notes in such owner's name or obtain a properly completed bond power from the registered Holder. The transfer of registered ownership may take considerable time. See "The Exchange Offer--Procedures for Tendering." Guaranteed Delivery Holders of Old First Mortgage Notes who wish to Procedures................. tender their Old First Mortgage Notes and whose Old First Mortgage Notes are not immediately available or who cannot deliver their Old First Mortgage Notes, the Letter of Transmittal or any other documents required by the Letter of Transmittal to the Exchange Agent prior to the Expiration Date must tender their Old First Mortgage Notes according to the guaranteed delivery procedures set forth in "The Exchange Offer--Guaranteed Delivery Procedures." Withdrawal Rights........... Tenders may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. See "The Exchange Offer--Withdrawal of Tenders." Acceptance of Old First Mortgage Notes and Delivery of New First Mortgage Notes............. The Company will accept for exchange any and all Old First Mortgage Notes which are properly tendered in the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New First Mortgage Notes issued pursuant to the Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offer--Terms of the Exchange Offer." Exchange Agent.............. State Street Bank and Trust Company is serving as Exchange Agent in connection with the Exchange Offer. See "The Exchange Offer--Exchange Agent." SUMMARY DESCRIPTION OF THE NEW FIRST MORTGAGE NOTES The Exchange Offer applies to $110,000,000 aggregate face amount of Old First Mortgage Notes. The terms of the New First Mortgage Notes are identical in all material respects to the Old First Mortgage Notes, except that the New First Mortgage Notes have been registered under the Securities Act and, therefore, will not bear legends restricting their transfer and will not contain certain provisions providing for an increase in the interest rate on the Old First Mortgage Notes under certain circumstances relating to the timing of the Exchange Offer, which rights will terminate when the Exchange Offer is consummated. The New First Mortgage Notes will evidence the same debt as the Old First Mortgage Notes and will be entitled to the benefits of the Indenture, under which both the Old First Mortgage Notes were, and the New First Mortgage Notes will be, issued. See "Description of the First Mortgage Notes." The New First Mortgage $110,000,000 aggregate principal amount of 11 Notes...................... 1/2% Series B First Mortgage Notes due 2005. Maturity Date............... December 1, 2005. Interest Payment Dates...... Interest on the New First Mortgage Notes will accrue from the Issue Date and will be payable semi-annually in arrears on each June 1 and December 1, commencing [ ]. Ranking..................... The New First Mortgage Notes will be senior obligations of the Company and will rank pari passu in right of payment with all existing and future unsubordinated indebtedness of Sheffield, including any indebtedness outstanding under the Revolving Credit Facility, and senior in right of payment to all existing and future subordinated indebtedness of Sheffield. Security.................... All of the obligations of the Company under the New First Mortgage Notes will be secured by a first priority lien on substantially all of the existing and future property, including fee interests in real property and improvements constructed thereon, together with equipment, intellectual property and related intangibles, of the Company, subject to Permitted Liens (as defined). See "Description of First Mortgage Notes--Security." Optional Redemption......... The New First Mortgage Notes will be redeemable in whole or in part, at the option of the Company on or after December 1, 2001, at the redemption prices set forth herein plus interest to the date of redemption. In addition, at any time on or prior to December 1, 2000, the Company may, at its option, redeem up to 35% of the aggregate principal amount of the First Mortgage Notes originally issued with the net cash proceeds of one or more Public Equity Offerings, at a redemption price equal to 111.5% of the aggregate principal amount of the First Mortgage Notes to be redeemed plus accrued interest to the date of redemption; provided, however, that after giving effect to any such redemption at least 65% of the aggregate principal amount of the First Mortgage Notes originally issued remains outstanding. See "Description of First Mortgage Notes--Optional Redemption." Change of Control........... Upon a Change of Control, the Company will be required to make an offer to repurchase the First Mortgage Notes at a price equal to 101% of the principal amount thereof, plus accrued interest, to the date of repurchase. See "Description of First Mortgage Notes--Change of Control." Certain Covenants........... The Indenture governing the First Mortgage Notes (the "Indenture") contains certain covenants that limit the ability of the Company and its restricted subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur liens, impose restrictions on the ability of a restricted subsidiary to pay dividends or make certain payments to the Company and its restricted subsidiaries, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. In addition, under certain circumstances, the Company will be required to offer to repurchase the New First Mortgage Notes, in whole or in part, at a purchase price equal to 100% of the principal amount thereof plus accrued interest to the date of repurchase, with the proceeds of certain Asset Sales. See "Description of First Mortgage Notes--Certain Covenants." For additional information regarding the New First Mortgage Notes, see "Description of First Mortgage Notes."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000911167_ariel-corp_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000911167_ariel-corp_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..40665ae819ee8c5da7a104bf480ecea2262cd937
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1998/CIK0000911167_ariel-corp_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to, and should be read in conjunction with, the more detailed information and the financial statements (including the notes thereto) appearing elsewhere in this Prospectus. See "Glossary" on page 32 for explanations of certain technical terms used in this Prospectus. The Company Ariel Corporation ("Ariel" or the "Company"), incorporated in 1982 in Delaware is a technology company that has historically had digital signal processing ("DSP") as its core strength. DSP is an enabling technology driving the emerging or rapidly growing technology markets such as Internet Service Providers ("ISP's") and Remote Access Service ("RAS") markets. See "Industry Background". The Company offers one of the industry's highest density and most cost-effective remote access data solutions for open systems platforms. The Company's remote access products target open system servers spanning a broad range of applications including telecommuting, Internet processing, and unified messaging. Prior to 1996, the Company historically produced and sold DSP boards incorporating DSP processors developed by Texas Instruments, Inc. ("TI"), Motorola Inc., Lucent Technologies and Analog Devices, Inc. ("ADI") which are designed to run on industry standard interfaces. Beginning in 1996, the Company commenced shipping its first product aimed at the rapidly growing Computer Telephony Integration ("CTI") market. This product, the CTI-modem, incorporates multiple standard DSP chips in a single PC plug-in board and was targeted for the transaction processing market. To date, the majority of such shipments have been to one customer. During the third quarter of 1996, the Company began shipping its T1-modem product, which provides up to thirty V.34 modems in a single ISA bus slot connecting to T1, E1 ISDN and POTS lines. This product is incorporated in RAS systems by major OEM customers. The Company recently introduced its T1-Modem+ product, which can provide up to thirty 56 kbps modems in a single ISA bus slot. In May 1997, the Company introduced an open system networking solution called RASCAL, which can provide up to forty-eight 56 kbps modems and a single or dual T1/primary rate ISDN interface that allows Windows based NT systems manufactured by the various PC Original Equipment Manufacturers ("OEM's") to function as a remote access server. Additionally, in January 1996, the Company formed a communications system ("CSG") team to begin development of an asymmetrical digital subscriber line ("ADSL") carrier class product targeting the needs of major telecommunications and network service providers. The team developed Horizon, a carrier class product which is currently in a laboratory environment at a certain network service provider. In August 1997, the Company announced its intention to proactively seek a buyer for the Horizon product and team. The decision to seek a buyer was based on the Company's recent strategic decision to focus on the open RAS market space. The carrier class product does not fit well into the Company's markets and customer base. The Company is currently in discussion with several companies concerning the purchase of the Horizon product and team, but no definitive sale agreement has been reached as of the date of this Prospectus. The Company's principal executive offices are located at 2540 Route 130, Cranbury, New Jersey 08852. Its telephone number is (609) 860-2900, its e-mail address is ariel@ariel.com and its World Wide Web home page can be accessed at www.ariel.com. The Offering <TABLE> <CAPTION> <S> <C> Common Stock Offered: By the Selling Stockholders ........................... 250,000 Common Stock to be outstanding after the Offering ...... 9,479,125(1) Use of proceeds ....................................... General corporate purposes. Nasdaq ................................................ ADSP </TABLE> (1) Excludes 2,245,963 shares of Common Stock issuable upon exercise of outstanding stock options at September 30, 1997. See "Shares Eligible for Future Sale."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1998/CIK0000913358_tatham_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000913358_tatham_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2d9448599df4d2464b78a5f77c45c1fac2d6c8e5
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1998/CIK0000913358_tatham_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and pro forma and consolidated financial statements, including notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, (i) all current and prospective information in this Prospectus gives effect to the Reorganization Transactions (as defined), including the sale of substantially all of Tatham Offshore's existing assets, the related retirement of certain amounts of Tatham Offshore's Preferred Stock, the contribution to Tatham Offshore of two semisubmersible drilling rigs, and the assumption of certain debt which was completed on June 25, 1998, (ii) all references to "Tatham Offshore" are to Tatham Offshore, Inc. and its subsidiaries, (iii) all references to the "Company" are to Tatham Offshore, Inc. and its subsidiaries and DeepFlex Production Services, Inc. and its subsidiaries ("DeepFlex"), and (iv) all financial information and per share data in this Prospectus gives effect to the one for ten reverse stock split Tatham Offshore completed on November 24, 1997. In this Prospectus there are numerous references to DeepTech's rights, plans and responsibilities with respect to this Offering. Such rights, plans and responsibilities are DeepTech's and the Company hereby disclaims any obligation to exercise, effect or comply with any such rights, plans or responsibilities. Certain industry and other terms herein are defined in "Defined Terms." Historically, Tatham Offshore has been in the oil and gas exploration and development business, primarily in the Gulf of Mexico. In connection with DeepTech's impending merger (the "Merger") with El Paso Natural Gas Company ("El Paso") discussed below, the Company is refocusing its business from the oil and gas exploration and production business in the Gulf of Mexico to an integrated frontier investment strategy targeting Atlantic Canada with an initial emphasis on the offshore contract drilling business. The Company transferred its ownership of Tatham Offshore Development, Inc., which owns oil and gas producing properties to DeepTech on June 25, 1998 and will transfer its remaining oil and gas properties to Leviathan Gas Pipeline Partners, L.P., a New York Stock Exchange-listed master limited partnership in which DeepTech owns an effective 23.2% interest (the "Partnership"). In connection with the Merger and this Offering, DeepTech transferred its ownership of DeepFlex and therefore the FPS Laffit Pincay (the "Pincay") and the FPS Bill Shoemaker (the "Shoemaker" and, together with the Pincay, the "Rigs") to the Company on June 25, 1998. THE COMPANY The Company provides offshore contract drilling services to the oil and gas industry in the Gulf of Mexico and Atlantic Canada and is currently pursuing other opportunities in Atlantic Canada. The Company owns two semisubmersible drilling rigs, the Pincay and the Shoemaker. The Shoemaker is capable of conducting drilling operations in cold weather, hostile environments and currently satisfies all of the requirements to operate in Atlantic Canada waters. The Shoemaker is one of only two semisubmersible drillings rigs currently qualified to operate in Canadian waters. The Shoemaker currently operates and is under contract in the Gulf of Mexico. The Pincay, which was not under contract while certain upgrades and routine maintenance was performed at a shipyard in Texas, was put under contract in July 1998. The Rigs generated revenue totaling $51.3 million for the nine months ended March 31, 1998. The Rigs are currently chartered to the Sedco Forex Division of Schlumberger Technology Corporation ("Sedco Forex") pursuant to which Sedco Forex markets, manages, mans and operates the Rigs. Although Sedco Forex has the right to negotiate drilling contracts with respect to each Rig, the Company has the sole right to approve any drilling contracts, the working location of the Rigs and certain other matters. Pursuant to the charter agreements, Sedco Forex is paid a monthly fee for the management of each Rig which is comprised of a fixed amount and a variable amount based on performance. The amount to be paid to Sedco Forex under each of these agreements is dependent on the drilling rates received for the Rigs, the costs of operating and maintaining the Rigs and the utilization rates of the Rigs, among other things. The charter agreements for the Pincay and the Shoemaker, which were entered into in 1995 and 1996, respectively, have five-year terms, subject to mutual termination rights. If either or both agreements are not renewed, the Company believes that it can find an alternative company to manage and operate the Rigs for a reasonable fee and within a reasonable period of time. The Company's semisubmersible rigs are floating platforms that consist of an upper working and living deck resting on vertical columns connected to lower hull members. These Rigs operate in a semisubmerged THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. DEEPTECH MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED JULY 14, 1998 PROSPECTUS 28,073,450 SHARES OF COMMON STOCK 4,670,957 SHARES OF SERIES A 12% CONVERTIBLE EXCHANGEABLE PREFERRED STOCK TATHAM OFFSHORE, INC. [TATHAM OFFSHORE, INC. LOGO] DeepTech International Inc., a Delaware corporation ("DeepTech"), is granting at no cost to you or any of the other holders of its common stock, transferable rights (the "Rights") to purchase an aggregate of 28,073,450 shares of common stock, $0.01 par value per share ("Common Stock"), and 4,670,957 shares of Series A 12% Convertible Exchangeable Preferred Stock, $0.01 par value per share ("Series A Preferred Stock"), of Tatham Offshore, Inc., a Delaware corporation (the "Company"). In this Rights offering (the "Offering"), you will receive one Right for each share of DeepTech common stock that you own of record as of June 12, 1998 entitling you to purchase 1.046357 shares of Common Stock ("Underlying Common Shares"), and 0.174096 shares of Series A Preferred Stock ("Underlying Preferred Shares," and, together with the Underlying Common Shares, the "Underlying Shares") at a subscription price of $3.25 for the Underlying Shares purchasable under each Right. If any Underlying Shares remain unsubscribed after the exercise of Rights, Tatham Brothers, LLC, a Delaware limited liability company ("TBL"), and an affiliate of Mr. Thomas P. Tatham, Chairman of the Board and Chief Executive Officer of the Company and DeepTech, will purchase such number of unsubscribed Underlying Shares as will result in DeepTech receiving net proceeds from the Offering of not less than $75 million. To the extent any Underlying Shares remain unsubscribed after TBL's purchase of such Underlying Shares, the Company has agreed to purchase such remaining Underlying Shares, and DeepTech, subject to certain limitations, will contribute the proceeds from such purchase to the Company. The exercise period for the Rights will expire at 12:00 p.m., New York City time, on August 14, 1998 unless extended for a specified period by DeepTech's Board of Directors, provided, however, that the expiration will not be extended past October 1, 1998 (as extended, the "Expiration Date"). Once you exercise a Right and DeepTech accepts the exercise, you may not withdraw the exercise. There is no minimum number of shares that must be subscribed for in the Offering for it to be completed. DeepTech may cancel this Offering if, among other things, the merger of DeepTech and El Paso Natural Gas Company fails to occur. If the Offering is canceled, the Rights will expire worthless, and all of the trades will be canceled. See "The Offering-What Happens If The Rights Offering Is Canceled." In that event, if you have exercised your Rights, any payments made to the rights agent, ChaseMellon Shareholder Services, L.L.C., will be promptly returned to you. The Company will only receive proceeds from the Offering to the extent the subscription yields greater than $75 million of net proceeds to DeepTech and exceeds the amount of certain estimated tax payments of the Company to the extent unpaid. After the completion of this Offering, DeepTech will own none of the Company's capital stock. We have filed a Registration Statement with the Securities and Exchange Commission (the "SEC") covering the Underlying Shares. Our Common Stock is listed on The Nasdaq Stock Market's National Market and our Series A Preferred Stock is traded on the OTC Bulletin Board Service under the trading symbols "TOFF" and "TOFFL," respectively. The closing prices for our Common Stock and Series A Preferred Stock on June 12, 1998, were $3.00 and $1.50 per share, respectively. We have filed an application to have the Rights approved for quotation on the OTC Bulletin Board under the symbol "TOFFR". SEE "RISK FACTORS" ON PAGE 12 FOR A DISCUSSION OF FACTORS YOU SHOULD CONSIDER IN CONNECTION WITH THIS OFFERING. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES NOR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - The Common Stock and Series A Preferred Stock purchasable upon exercise of the Rights will be sold for an aggregate of $3.25. - We will receive no proceeds from this Offering unless the Rights holders and/or TBL exercise more than 23,076,924 Rights. - TBL will receive a commitment fee of between $5,769,230 and $7,500,000 in connection with this Offering. See "Business -- General -- Description of the Reorganization Transactions -- The Purchase Commitment Agreement." The date of this Prospectus is [ ], 1998. TATHAM OFFSHORE, INC. ORGANIZATIONAL CHART Currently, none of the companies for the prospective businesses that are connected by a dashed line have been formed. Each of these companies is in a preliminary, conceptual phase. The only company that currently has operating revenues is DeepFlex Production Services, Inc. through the operations of RIGCO North America, L.L.C. There can be no assurances that the Company will be able to obtain sufficient capital for any or all of the planned companies or projects or that the companies will prove to be economic. See "Risk Factors." position, remaining afloat, off bottom in a position in which the lower hull is from about 55 to 90 feet below the water line and the upper deck protrudes well above the surface. The Rigs are positioned by chain mooring lines with anchors on the seafloor and remain stable for drilling in the semisubmerged floating position due in part to their wave transparency characteristics at the water line. The Rigs are able to change draft through a water ballasting system that permits them to be submerged to a predetermined depth so that a portion of the hulls are below the water surface during drilling operations. FPS Bill Shoemaker. The Shoemaker is a self-propelled, twin pontoon, eight column, second generation semisubmersible drilling rig of Aker H-3 design. It can drill to depths of 25,000 feet, in water depths of up to 1,500 feet, and has a drilling variable load of approximately 3,850 short tons, a VARCO TDS-4S top-drive drilling system, a 10,000 psi blow-out prevention system, 2,000 barrel mud pits and eight 80,000 pound riser tensioners. This rig was built in 1976 and was extensively refurbished, repaired, renovated and upgraded in 1997 at a cost of approximately $56 million. The upgrades included installing a new heliport, a mud booster line, a third mud pump, a third level of personnel accommodations and a new electrical "SCR" system. In addition to the above, the Shoemaker underwent a complete winterization program in this upgrade, and, as a result, is again able to operate year-round in harsh environments such as the North Sea, offshore Newfoundland and eastern Canada, where it has operated in the past. After completion of the upgrade and refurbishment in July 1997, the Shoemaker was mobilized to the Grand Banks area offshore Newfoundland where it completed drilling an exploratory well for Amoco Canada Petroleum Company Ltd. in the West Bonne Bay Field on January 25, 1998. The Shoemaker is currently under contract to Shell Offshore Inc. in the Gulf of Mexico. The contract with Shell extends through January 1999 and Shell has an option to extend it for six months subject to the Company's approval of the contract drilling rate for the period. Sedco Forex has entered into a contract for the mobilization of the Shoemaker to the Grand Banks area in Atlantic Canada to conduct a two-well (with three options permitting up to an additional seven wells) program at predetermined rates for Husky Oil Operations Limited upon the completion of the Shell contract. FPS Laffit Pincay. The Pincay is a second generation semisubmersible drilling rig of Penrod/Reineke design. It can drill to depths of 25,000 feet in water depths of up to 1,200 feet. It has a drilling variable load of approximately 2,000 short tons, a 10,000 psi blow-out prevention system, 1,600 barrel mud pits and six 80,000 pound riser tensioners. This rig was built in 1976 and was completely refurbished, upgraded and renovated in 1996 with the installation of a VARCO TDS-3S top-drive system and a new electrical "SCR" system. During recent routine maintenance and certain upgrades, the Pincay was not under contract. In July 1998, however, Ocean Energy, Inc. contracted the Pincay to conduct a one-well (with 3 one-well options) program. The offshore contract drilling industry, as measured by offshore drilling rig utilization and dayrates, has improved substantially since early 1995. From the mid-1980s through the early 1990s, demand for offshore drilling rigs was declining or flat, and the industry fleet of offshore drilling rigs was reduced. In recent years, demand for offshore rigs has improved, but the supply of rigs is only now beginning to increase. The industry generally has emphasized upgrading and refurbishing existing rigs due to the high capital costs and long lead times associated with new construction. In the last year, several competitors have announced new-build deepwater drillships and semisubmersible rigs in response to increased demand for deepwater rigs. Recently, however, oil prices have declined substantially, which may cause drilling budgets to decline. Although downturns in oil prices do not generally have an immediate impact on the demand for deepwater drilling rigs, such declines are likely to put downward pressure on dayrates. BUSINESS STRATEGY As its principal focus, the Company intends to pursue an integrated investment strategy in Atlantic Canada by leveraging initially on the cash flow from, and utilization of, the Rigs. The Company believes that the Atlantic Canada region offers significant investment opportunities. The Company's plans include expanding its drilling fleet as well as diversifying its business to include substantial natural gas gathering and transmission facilities, related gas processing facilities, a facility for the generation of electricity and other related investments. In Atlantic Canada, as with any frontier region, there will be substantial risks associated with investments in such projects. Further, if recent declines in the price of crude oil are sustained for some period, the pace of development within the area could be affected and materially extend the time frame for the projects discussed herein to commence or become operational. However, the Company believes that by using an integrated investment approach related to the development of the region's hydrocarbon reserves, the potential for investment returns is maximized. The Company is contemplating pursuing the development of the projects described below. Each of these projects is in a preliminary, conceptual phase. In addition, (i) the Company does not currently possess the capital necessary to implement its business strategy completely and there can be no assurances that the Company will be able to obtain sufficient capital for any or all of the projects, (ii) there can be no assurances that these projects and other opportunities will prove to be economic or that they will occur, and (iii) many of these projects will require governmental approvals, almost all of which the Company has yet to receive. Moreover, if there are developments that the Company determines to be indicative of a lack of reasonable opportunity to realize benefits for the Company's stockholders, then the Company will pursue other opportunities, wherever located. POSSIBLE ATLANTIC CANADA PROJECTS Special Multipurpose, New Build Semisubmersible. As part of its strategy to enhance the number, size and capability of its available rigs, the Company has entered into a nonbinding Memorandum of Understanding with Friede-Goldman Inc. regarding the construction of a fifth-generation, state-of-the-art drilling rig (the "Planned Rig"). The Planned Rig, which is still in the design phase and estimated to cost approximately $300 million, would be Canadian built and flagged and would be able to drill throughout the region to depths of 25,000 feet in water depths to 5,000 feet. The Planned Rig's characteristics would make it suitable for use to develop any known proven or potential oil and gas reserves in Atlantic Canada. In addition, the Planned Rig would have heavy lift capability, enabling it to install subsea transmission, gathering and production systems, and provide repair and maintenance capability for such systems as well as allowing it to repair and maintain the pipeline system proposed by North Atlantic Pipeline Partners, L.P. ("North Atlantic Partners"). The Planned Rig's high (5,500 short tons) deckload capacity will enable it to inventory drilling equipment and other stores to better facilitate uninterrupted drilling operations. These additional capabilities should expand the market for the Planned Rig and enhance its competitiveness compared to lesser equipped rigs. Pipeline Activities. During 1997, Tatham Offshore Canada Limited, a wholly-owned subsidiary of the Company, was formed to pursue business opportunities in the Atlantic Canada region. In addition, the Company has caused to be formed two limited partnerships, one in Canada and one in the United States and both known collectively as "North Atlantic Partners," to construct and operate an offshore natural gas pipeline from the Grand Banks area offshore Newfoundland to the east coast of the United States with land falls in both Newfoundland and Nova Scotia. The General Partner of North Atlantic Partners (Canada) has filed an application with Canada's National Energy Board, and North Atlantic Partners (U.S.) has filed an application with the Federal Energy Regulatory Commission in the United States for authority to build a three-phase, 1,500 mile natural gas pipeline that would serve the growing hydrocarbon industry offshore Atlantic Canada. Because another pipeline has been given regulatory authority and is planned to begin construction this year, North Atlantic Partners is also assessing redesigning and downsizing the first phase of the pipeline so as to reduce the capital cost of that phase of the pipeline to approximately $600 million. As redesigned, the initial phase of the pipeline project would be approximately 375 miles long and would originate in the Jeanne d'Arc Basin of the Grand Banks area and extend to a point near Argentia, Newfoundland. To date, North Atlantic Partners has obtained nonbinding letters of intent for the use of its system to deliver gas to the United States which total approximately 500 MMcf per day. The Company believes that there is significant reserve potential from the areas offshore Atlantic Canada and as that reserve potential is developed, a second pipeline into the United States will be required to meet increased demand for natural gas on the east coast of the United States. Gas Processing Facility. The natural gas that will be produced in the Grand Banks area and potentially be transported through the North Atlantic Partners pipeline system is expected to contain significant quantities of natural gas liquids ("NGLs"), such as ethane, propane, butanes and natural gasoline. These NGLs can be recovered from the natural gas stream through processing. The Company is investigating the possibility of developing a gas processing plant in the Argentia area to process the natural gas from the Grand Banks area. In addition, the Company is evaluating opportunities to maximize economic value from potential processing operations, including exploring opportunities with petrochemical producers and with other potential users of NGLs. The successful development of any such processing project would be dependent on the construction of the pipeline system proposed by the North Atlantic Partners. Power Generation Facility. To develop a market for the Grand Banks area natural gas, in addition to a gas processing plant, the Company has examined the feasibility of building a gas fired power generating plant in the Argentia area. Electrical generation in Newfoundland is currently not gas fired, relying instead in large part, on less efficient, transported fuel oil. The successful development of any such power generation project would be dependent on the construction of the pipeline system and gas processing facility discussed above. Hydrocarbon Marketing Company. As part of its activities in the region, the Company has formed North Atlantic Hydrocarbon Marketing, Inc. ("North Atlantic Marketing") to buy natural gas and NGLs contained in the natural gas stream. North Atlantic Marketing would assume the marketing risk related to the natural gas stream, purchasing the natural gas and entrained liquids from producers and finding a market for those hydrocarbons. North Atlantic Marketing is in the process of finalizing a proposal to purchase the associated gas reserves produced from the Hibernia Field and plans to submit additional gas purchase proposals to the owners of the Terra Nova and White Rose development projects. There can be no assurances that such proposal will prove economic or will be accepted. Oil and Gas Development. Significant oil and gas exploration and production opportunities also exist throughout the region. The Company is actively seeking to acquire working interests for proven and probable reserves in Atlantic Canada and has had independent studies undertaken of the prospective reserves in the region. Those studies indicate that the region is one of the largest potential gas regions in North America. Unlike other international opportunities, the Company does not consider political risk as a factor in evaluating Canadian opportunities. Other Opportunities. Among other potential businesses the Company may enter, the Company is currently evaluating the feasibility of (i) an industrial gas distribution system, (ii) an ice management system designed to manage and reduce the risk of potential damage to its proposed offshore pipelines and subsea facilities owned by other parties, operated through the Company's subsidiary, Berg Masters Limited, (iii) a large diameter steel pipe rolling mill, (iv) methanol production, and (v) other opportunities related to or located in Atlantic Canada. There can be no assurances that such opportunities will prove economic, will be adequately financed or will occur. THE REORGANIZATION TRANSACTIONS On February 27, 1998, El Paso, El Paso Acquisition Company, a wholly owned subsidiary of El Paso ("Merger Sub"), and DeepTech executed an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which DeepTech will merge into El Paso or, under certain circumstances, Merger Sub. The material terms of the Merger and the transactions contemplated by the Merger Agreement and other agreements related to the Company (the "Reorganization Transactions") are: (i) DeepTech sold to the Company approximately $8.0 million of the intercompany debt DeepFlex owed to DeepTech (the "DeepFlex Debt") in exchange for (x) the delivery by the Company to DeepTech of all of the outstanding shares of capital stock of Tatham Offshore Development, Inc. ("TODI"), which owns the working interests in Ewing Bank Blocks 958, 959, 1002 and 1003 (the "Sunday Silence Project") located in the Gulf of Mexico, and (y) cancellation of a reversionary interest in certain oil and gas properties; (ii) in satisfaction of $12.0 million of the DeepFlex Debt, DeepFlex delivered to DeepTech all of the Tatham Offshore Common Stock and Series A Preferred Stock held by DeepFlex; (iii) the balance of the DeepFlex Debt was contributed to the capital of DeepFlex; (iv) DeepTech contributed all of the outstanding shares of capital stock of DeepFlex, which owns the Rigs, to Tatham Offshore (together with the transactions described in subsections (i) through (iii), the "Contribution," as described in "Business -- General -- Description of Reorganization Transactions -- The Contribution and Distribution Agreement); (v) the Company, through DeepFlex, assumed approximately $60 million of third party debt owed by DeepFlex; (vi) DeepTech will merge with and into El Paso or, under certain circumstances, with Merger Sub; and (vii) the Company will transfer the oil and gas properties it owns together with all related liabilities (other than TODI's) to the Partnership in consideration of redemption by the Company of 7,500 shares (including satisfaction of unpaid dividends) of the Company's Series B 9% Senior Convertible Preferred Stock (the "Series B Senior Preferred Stock") owned by the Partnership. See "Business -- General -- Description of Reorganization Transactions." The consummation of the Merger is subject to customary conditions precedent and requires consent from the holders of DeepTech's 12% Senior Secured Notes due 2000 and Senior Subordinated Notes due 2000, which such consents have been obtained. ALTHOUGH THE COMPANY UNDERSTANDS THAT DEEPTECH INTENDS TO ATTEMPT TO EFFECT THE OFFERING EVEN IF THE MERGER FAILS TO OCCUR, IF THIS OFFERING FAILS TO OCCUR, THE RIGHTS WILL EXPIRE WORTHLESS, AND ALL OF THE TRADES WILL BE CANCELED. There will not be a DeepTech stockholders' meeting to vote on the Merger because the holders of a majority of DeepTech's common stock have already approved the Merger. Accordingly, DeepTech is not soliciting proxies or holding a stockholders' meeting. Because DeepTech holds a majority of the Company's Common Stock, DeepTech was able to approve all actions that require stockholder approval without any further action on the Company's part. The Company is not soliciting proxies or holding a stockholders' meeting to approve this Offering or any of the Reorganization Transactions. Because DeepTech will no longer continue to operate the Company under a management agreement as has been the case, upon the completion of the Offering, the Company will hire a management team comprised of the DeepTech employees that were primarily responsible for Rig operations, financial reporting and planning, and additional personnel as required to implement the Company's Atlantic Canada strategy, some of whom are expected to be current DeepTech employees and some of whom are expected to be Canadian nationals. Mr. Tatham will continue as the Company's Chief Executive Officer and Chairman of the Board. At or prior to the closing of the Offering, the management fees due to DeepTech from DeepFlex that accrue from December 19, 1997 through the closing of the Merger will be contributed or forgiven. If the transactions contemplated by the Redemption Agreement (as discussed under "Business -- General -- Description of Reorganization Transactions -- The Redemption Agreement") are consummated, the management fees due to DeepTech from Tatham Offshore will be reduced by 50% effective retroactively to January 1, 1998 and the balance owed to DeepTech will be paid at the closing of the Merger. The Company's principal executive offices are at 7400 Chase Tower, 600 Travis Street, Houston, Texas 77002, and its telephone number is (713) 224-7400. THE OFFERING Description of the Rights Offering................. DeepTech will issue to you and the other record holders of DeepTech common stock as of 5:00 p.m., New York City time, on the Record Date (June 12, 1998), Rights entitling you and the other holders of the Rights to subscribe for and purchase (the "Subscription Privilege") an aggregate of 28,073,450 shares (the "Underlying Common Shares") of common stock, $0.01 par value per share ("Common Stock"), and 4,670,957 shares (the "Underlying Preferred Shares" and, together with the Underlying Common Shares, the "Underlying Shares") of Series A 12% Convertible Exchangeable Preferred Stock, par value $0.01 ("Series A Preferred Stock") of the Company. For each share of DeepTech common stock you hold on June 12, 1998, you will receive one Right to subscribe to purchase 1.046357 shares of Underlying Common Stock and 0.174096 Underlying Preferred Shares (the "Subscription") at a subscription price of $3.25 for the Underlying Shares comprising each Right (the "Subscription Price"). For a discussion of the allocation of the Subscription Price between the Underlying Common Shares and the Underlying Preferred Shares, see "Federal Income Tax Consequences -- Exercise of Rights." The partial exercise of a Right is prohibited, and in exercising a Right, you must purchase both the Underlying Common Shares and the Underlying Preferred Shares purchasable on exercise of the Right. If the total number of Rights you exercise allows you to purchase a fraction of a share, the number of shares you will be entitled to purchase upon exercise will be rounded down to the nearest whole number, with cash to be issued in lieu of fractional shares. If the Rights holders do not exercise enough of their Rights to purchase a sufficient number of Underlying Shares such that DeepTech will receive $75 million in net proceeds from the Offering, Tatham Brothers, LLC ("TBL"), an affiliate of Mr. Thomas P. Tatham, Chairman of the Board and Chief Executive Officer of the Company and DeepTech, will subscribe for and purchase, at the Subscription Price (the "Conditional Subscription"), that number of Underlying Shares not purchased by the Rights holders in this Offering, that will result in DeepTech receiving not less than $75 million in net proceeds from its sale of Underlying Shares in this Offering. TBL also has the option to purchase any unsubscribed shares, which would provide proceeds of greater than $75 million. The Company will purchase any Underlying Shares that TBL does not purchase from DeepTech, and DeepTech, subject to certain limitations, will contribute the proceeds from such purchase to the Company. In addition, to the extent this Offering yields net proceeds of greater than $75 million, the Company will receive such proceeds, which will be used, first, for certain estimated tax liabilities and, second, for general corporate purposes. See "The Offering -- Subscription Privileges," "-- Conditional Subscription" and "Use of Proceeds." ONCE YOU HAVE EXERCISED YOUR RIGHTS, YOU MAY NOT REVOKE SUCH EXERCISE. IF YOU DO NOT EXERCISE YOUR RIGHTS PRIOR TO THE EXPIRATION DATE, THEY WILL EXPIRE. ALTHOUGH THE COMPANY UNDERSTANDS THAT DEEPTECH INTENDS TO ATTEMPT TO EFFECT THE OFFERING EVEN IF THE MERGER FAILS TO OCCUR, IF THIS OFFERING FAILS TO OCCUR, THE RIGHTS WILL EXPIRE WORTHLESS, AND ALL TRADES WILL BE CANCELED. The Subscription Price on Exercise of the Rights... $3.25 for the Underlying Shares contained in each Right (1.046357 shares of Common Stock and 0.174096 shares of Series A Preferred Stock). When You Can Exercise Your Rights................... July 16, 1998 and ending on August 14, 1998 at 12:00 p.m., New York City time, unless extended for a specified period; provided, however, that the expiration will not extend past October 1, 1998, (the "Expiration Date"). How Your Rights Will Be Evidenced................ You will receive certificates ("Rights Certificates") that represent your transferable Rights. Number of Underlying Shares of our Stock Offered in the Rights Offering.......... 28,073,450 Shares of Common Stock. 4,670,957 Shares of Series A Preferred Stock. Description of the Series A Preferred Stock and Common Stock............. Each Right is exercisable for both Common Stock and Series A Preferred Stock of the Company. Taking the Reorganization Transactions into account, each share of the Series A Preferred Stock will be senior to all other classes of the Company's Preferred and Common Stock with respect to liquidation, dissolution or winding up of the Company. Additionally, each share of Series A Preferred Stock may be converted into such number of whole shares of Common Stock as is equal to (i) the sum of $1.50 and any accrued and unpaid dividends (approximately $0.31 per share as of March 31, 1998) thereon through the date of conversion divided by (ii) $6.53, which is subject to adjustment for certain events. Further, at any time until December 31, 1998, each share of Series A Preferred Stock may be exchanged for 0.4 Exchange Warrants, each of which entitles the holder to purchase one share of Common Stock at $6.53 per share. The Exchange Warrants expire on July 1, 1999. Each share of Common Stock is entitled to one vote per share on those matters upon which it is entitled to vote. Common Stock holders have neither cumulative voting rights nor preemptive rights. With respect to receiving dividends and sharing in the Company's assets upon liquidation, dissolution or winding up of the Company, the Common Stock ranks junior to all Preferred Stocks. Stock to be Outstanding After the Offering......... Depending on the number of shares of Common Stock and Series A Preferred Stock purchased in the Offering, we will have between 24,044,803 and 30,001,026 shares of Common Stock and between 16,566,631 and 17,557,648 shares of Series A Preferred Stock outstanding. This excludes 136,500 shares of Common Stock issuable upon the exercise of outstanding stock options and warrants, at a weighted average exercise price of $4.85 per share, of which options and warrants to purchase 31,500 shares of Common Stock, at a weighted average exercise price of $10.20 per share, were exercisable as of June 12, 1998. In addition, at June 12, 1998, pro forma for the Reorganization Transactions, the Company had outstanding shares of Preferred Stock (other than the Underlying Preferred Shares) convertible into 4,917,851 shares of Common Stock and a potential obligation to issue Common Stock upon conversion of approximately $11.3 million under a production payment agreement. See "Certain Transactions -- Historical -- Other." Proceeds................... There will only be proceeds to the Company from the Offering to the extent the Offering yields greater than $75 million of net proceeds to DeepTech. Such excess, if any, will be used, first, for certain estimated tax liabilities and, second, for general corporate purposes. See "Use of Proceeds." Nasdaq National Market and OTC Bulletin Board Symbols.................. While your Rights are exercisable, they will trade on the OTC Bulletin Board under the symbol "TOFFR". Our Common Stock and Series A Preferred Stock are traded on The Nasdaq National Market and the OTC Bulletin Board, respectively, under the symbols "TOFF" and "TOFFL," respectively. On June 12, 1998, the closing sale price of our Common Stock and Series A Preferred Stock was $3.00 and $1.50 per share, respectively. Rights Agent............... ChaseMellon Shareholder Services, L.L.C. (the "Rights Agent"). Procedure for Exercising Rights................... To exercise your Rights, you should properly complete and sign the Rights Certificate and forward it (or follow the Guaranteed Delivery Procedures), with payment of the Subscription Price for the Underlying Shares to be purchased, to the Rights Agent. The Rights Agent must receive your Rights Certificate or Notice of Guaranteed Delivery with payment of the Subscription Price on or prior to [ ] days before the Expiration Date. If you use the mail to forward Rights Certificates, we urge you to use insured, registered mail, return receipt requested. See "The Offering -- How You Can Exercise Your Rights." If paying by uncertified personal check, please note that the funds paid thereby may take at least five (5) business days to clear. Accordingly, Rights' holders who wish to make payment by means of uncertified personal checks are urged to make payment sufficiently in advance of the Expiration Date to ensure that such check is received and clears by the Expiration Date and are urged to consider paying the Subscription Price by means of certified or cashier's check or money order. If the aggregate Subscription Price you pay is insufficient to purchase the number of Underlying Shares for which you subscribed, then you will be deemed to have exercised the maximum number of Rights purchasable with the submitted Subscription Price. If you do not specify the number of Underlying Shares to be purchased, or if the aggregate Subscription Price you pay exceeds the amount necessary to purchase the number of Underlying Shares for which you indicated an intention to subscribe, then you will be deemed to have exercised all of the Rights you hold and any remaining funds will be returned to you. No interest will be paid on funds delivered in payment of the Subscription Price. See "The Offering -- How You Can Exercise Your Rights." Persons Holding Shares, or Wishing to Exercise Rights, Through Others... If you hold DeepTech common stock beneficially and receive the Rights distributable with respect to those shares through a broker, dealer, commercial bank, trust company or other nominee, or if you hold DeepTech common stock certificates directly and prefer to have such institutions effect transactions relating to the Rights on your behalf, you should contact the appropriate institution or nominee and request it to effect the transactions for you. If you wish to obtain a separate Rights Certificate, you should contact the nominee as soon as possible and request that the Rights Agent issue you a separate Rights Certificate. If you are a nominee, you may request any Rights Certificate you hold to be split into such smaller denominations as you wish, provided that the Rights Agent receives the Rights Certificate, properly endorsed, no later than [ ], New York City time, on [ ], 1998. See "The Offering -- How You Can Exercise Your Rights." Procedure for Exercising Rights by Foreign and Certain Other Stockholders............. The Rights Agent will not mail Rights Certificates to you if your address is outside the United States or if you have an Army Post Office ("APO") or a Fleet Post Office ("FPO") address, but will hold the Rights Certificates for your account. To exercise your Rights in such case, you must notify the Rights Agent, and take all other steps necessary to exercise the Rights, on or prior to the Expiration Date. If you are such a holder and do not follow the procedures set forth in the preceding sentence prior to the Expiration Date, your Rights will expire worthless. See "The Offering -- Foreign and Certain Other Stockholders." Federal Income Tax Consequences............. For United States income tax purposes, your receipt of Rights will be treated as a taxable distribution with respect to DeepTech common stock. See "Federal Income Tax Consequences."
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the financial statements of the Company and the notes thereto, which have been prepared in accordance with U.S. GAAP, included elsewhere in this Prospectus. Unless otherwise indicated, all information presented in this Prospectus (i) assumes no exercise of the Over-allotment Option and (ii) reflects the conversion of all outstanding shares of the Company's Class A, Class B, and Class C Convertible Preferred Stock into an aggregate of 3,526,418 shares of Common Stock upon the consummation of this Offering. Each reference to the "Company" or "Orthovita" refers to Orthovita(R), Inc. THE COMPANY Orthovita is a biomaterials company which began operations in 1993 to exploit technology based on research emanating from the Catholic University of Leuven, Belgium. The Company develops, manufactures and markets proprietary osteobiologic bone substitutes and bone cements. Orthovita has targeted its products for sale to the trauma, spine, implant cement, cranio-maxillofacial and dental implant surgery markets, which the Company estimates have an aggregate market potential of approximately US$1 billion. The Company believes that these markets will require, and that its products will address the need for, bone substitutes and bone cements that offer a broader range of performance attributes, better patient outcomes and lower cost than are currently available. The Company's biomaterials technology currently encompasses the following three products which address differing patient needs: ORTHOCOMP(TM), a composite, high strength, bone bonding cement that is fast setting, immediately load bearing and injectable; BIOGRAN(R), a resorbable, granular biomaterial that biologically transforms to remodeled bone in four to six months; and VITAGRAFT(TM), a resorbable setting cement that assists fracture healing and has indications for use in bone defects of younger patients. To date, the Company has only received regulatory approval for BIOGRAN for use in certain dental surgical applications and there can be no assurance that the Company will obtain regulatory approval for any of its other products or that it will successfully commercialize any of its products. On April 28, 1998, the Company entered into a global strategic alliance for the marketing and distribution of BIOGRAN and ORTHOCOMP for the dental implant surgery market with Implant Innovations, Inc. ("3i"), a leading dental implant company. On June 9, 1998, the Company entered into license and development and supply agreements with Howmedica Inc., a wholly-owned subsidiary of Pfizer Inc., whereby Howmedica has obtained the exclusive worldwide marketing, sales and distribution rights for ORTHOCOMP in joint inplant procedures. The global market for orthopaedic products used to address problems arising from skeletal impairments is currently estimated to be approximately US$8 billion. Among these products are bone substitutes to replace or reconstruct skeletal defects and augment fracture repair. The emergence of new, high strength, fast setting, biologically active bone substitutes promises significant improvements over current options for bone replacement, repair and fixation while also providing solutions to previously unmet market needs. These products will allow segmentation of the market between those younger patients with high bone vitality that require a fast setting, resorbable bone substitute, and those older patients and those with compromised bone physiology that require a fast setting, high load bearing solution. The Company is positioning ORTHOCOMP as a replacement for polymethylmethacrylate ("PMMA") cement, a product used in approximately 65% of joint implant procedures. Generally, Orthovita's portfolio of patent-protected products will address the specific requirements of a diversity of procedures based on patient and load bearing requirements. The Company will access multiple distribution channels by utilizing a combination of third-party alliances, direct sales and agent/distributors, and will leverage its large intellectual property portfolio by concentrating its technical staff on development of and approvals for products that are nearer to market commercialization. The Company was incorporated in 1992 under the laws of the Commonwealth of Pennsylvania with the power to conduct the business described herein. The Company's headquarters and principal place of business are located at 45 Great Valley Parkway, Malvern, Pennsylvania 19355, and its telephone number is +1- 610-640-1775. TRADEMARKS Orthovita and BIOGRAN are U.S. registered trademarks of the Company and application has been made to register ORTHOCOMP and VITAGRAFT as U.S. registered trademarks. All other trade names and trademarks appearing in this Prospectus are the property of their respective holders. THE OFFERING Common Stock offered hereby..................... 2,000,000 shares; 1,500,000 by the Company and 500,000 by the Selling Shareholders(1) Common Stock to be outstanding after this Offering(2)................ 10,212,640 shares Use of proceeds............. To fund expansion of manufacturing, marketing and sales activities, clinical trials, research and development activities and for working capital and general corporate purposes. See "Use of Proceeds." EASDAQ symbol.......... "VITA" EASDAQ Market Makers........ Quartz Capital Partners Limited Bank Brussels Lambert Herzog, Heine & Geduld - -------- (1) The Selling Shareholders comprise approximately 80 persons, none of whom or which (i) is an officer or member of the board of directors of the Company or (ii) with the exception of two holders who beneficially own 2.7% and 1.2% of the outstanding Common Shares, respectively, owns more than one percent of the outstanding Common Stock. (2) Includes 3,526,418 shares of Common Stock which will be outstanding upon the conversion of all the outstanding shares of the Company's Class A, Class B and Class C Preferred Stock upon the consummation of this Offering. Excludes (i) 1,154,494 shares of Common Stock issuable upon the exercise of options outstanding as of May 31, 1998 under the Company's 1993 Stock Option Plan and 1997 Equity Compensation Plan (collectively, the "Stock Option Plans") at a weighted average exercise price of US$3.34 per share, (ii) 345,506 shares reserved for future grants under the Stock Option Plans, (iii) 300,000 shares reserved for future issuance under the Company's Employee Stock Purchase Plan, and (iv) 1,013,552 shares of Common Stock issuable upon the exercise of warrants outstanding as of May 31, 1998 at a weighted average exercise price of US$3.49 per share. See "Management--Stock Option Plans" and "Description of Capital Stock." SUMMARY FINANCIAL INFORMATION (IN THOUSANDS EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, --------------------------------------------------- -------------------- 1993(1) 1994 1995 1996 1997 1997 1998 ------- --------- --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> <C> Net revenues............ US$ -- US$ 34 US$ 578 US$ 1,860 US$ 3,312 US$ 741 US$ 825 Cost of sales........... -- 11 696 887 1,097 285 214 Operating expenses...... 928 2,045 3,066 7,162 9,999 2,349 2,033 Other expenses.......... 30 37 152 251 169 230 91 Extraordinary item-- gain................... -- -- -- -- 397 397 -- ------- --------- --------- --------- --------- --------- --------- Net loss(/2/)........... US$(958) US$(2,059) US$(3,336) US$(6,440) US$(7,556) US$(1,726) US$(1,513) ======= ========= ========= ========= ========= ========= ========= Net loss per common share(/3/)............. US$ (1.60) US$ (0.36) US$ (0.33) ========= ========= ========= Shares used in computing net loss per common share(/3/)............. 5,050 4,792 5,186 ========= ========= ========= </TABLE> BALANCE SHEET DATA: <TABLE> <CAPTION> DECEMBER 31, 1997 MARCH 31, 1998 ----------------- ---------------------------------- PRO PRO FORMA AS ACTUAL ACTUAL FORMA(4) ADJUSTED(5) ----------------- --------- --------- ------------ <S> <C> <C> <C> <C> Working capital (deficit)............... US$(1,081) US$(2,620) US$(2,620) US$11,227 Total assets............. 4,862 3,407 3,407 17,255 Long-term debt........... 833 874 874 874 Redeemable convertible preferred stock......... 7,383 7,584 -- -- Total shareholders' equity (deficit)........ (7,713) (9,397) (1,812) 12,035 </TABLE> - -------- (1) For the period from inception (June 26, 1992) to December 31, 1993. The Company's operations did not commence until November 1993. (2) Before the accretion of the redemption premium on Class C Preferred Stock in 1997 and the first three months of 1998 of US$537 and US$201, respectively. (3) See Note 2 to Notes to Financial Statements for an explanation of the determination of the number of common shares used in computing net loss per common share. (4) Reflects the conversion of all the outstanding shares of the Company's Class A, Class B and Class C Preferred Stock into an aggregate of 3,526,418 shares of Common Stock upon the consummation of this Offering. (5) Represents pro forma data as adjusted to give effect to the sale of 1,500,000 shares of Common Stock offered by the Company (after deducting underwriting discounts and commissions and estimated offering expenses) and the application of the estimated net proceeds therefrom. See "Capitalization" and "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000917491_faro_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000917491_faro_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the consolidated financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Investors should carefully consider the information set forth under the heading "Risk Factors." This Prospectus contains forward-looking statements that involve risks and uncertainties. Future events and the Company's actual results could differ materially from the results in these forward-looking statements as a result of certain of the factors set forth in "Risk Factors" and elsewhere in this Prospectus. As used herein, the terms "FARO" and the "Company" refer to FARO Technologies, Inc. and its subsidiaries, except where the context indicates otherwise. THE COMPANY FARO Technologies, Inc. ("FARO" or the "Company") designs, develops, markets and supports portable, software-driven, three-dimensional ("3-D") measurement systems that are used in a broad range of manufacturing and industrial applications. The Company's principal products are the FAROArm(R) articulated measuring arm and its companion AnthroCam(R) software. Together, these products integrate the measurement and quality inspection function with computer-aided design ("CAD") and computer-aided manufacturing ("CAM") technology to improve productivity, enhance product quality and decrease rework and scrap in the manufacturing process. The Company's products bring precision measurement, quality inspection, and specification conformance capabilities, integrated with leading CAD software, to the factory floor. The Company is a pioneer in the development and marketing of 3-D measurement technology in manufacturing and industrial applications and currently holds or has pending 17 patents in the United States, 12 of which also are held or pending in other jurisdictions. The Company's products have been purchased by more than 600 customers worldwide, ranging from small machine shops to such large manufacturing and industrial companies as General Motors, Chrysler, Ford, Boeing, Lockheed Martin, General Electric, Westinghouse Electric, Caterpillar and Komatsu Dresser. The processes of product design and manufacturing have evolved rapidly during the past decade through the adoption of 3-D software and CAD/CAM technology. This evolution has been driven by increasing global and competitive pressures for shorter product cycles, greater customization and higher quality and lower cost products. Despite such technological advances in design and manufacturing, the measurement and quality inspection function of the manufacturing process generally remains limited to manual, analog technology or traditional, fixed-based coordinate measurement machines ("CMMs") that are largely restricted to a metrology laboratory and often lengthen the manufacturing process. These global and competitive pressures have created a significant demand for measurement systems that bridge the gap between the virtual 3-D world of the CAD process and the physical 3-D world of the factory floor. The Company believes that the FAROArm(R) and AnthroCam(R) provide that bridge by integrating CAD/CAM technology into a manufacturer's design, production and measurement and quality inspection processes, serving a much broader range of the manufacturing process than traditional measurement tools. The FAROArm(R) is a portable, six-axis, instrumented, articulated device that approximates the range of motion and dexterity of the human arm. AnthroCam(R) is the Company's proprietary companion software for the FAROArm(R). This CAD-based measurement software provides an interface between the FAROArm(R) and CAD technology for design, manufacturing and measurement and quality inspection applications. The Company's products provide its customers an affordable way to integrate CAD technology throughout the manufacturing process. These products are based on an open architecture and are designed to be used by shop personnel with minimal prior computer or CAD experience and to be operated in the often harsh environments typical of manufacturing facilities. The Company's objective is to enhance its position as a leading provider of portable, software-driven, 3-D measurement systems. To achieve this objective, the Company has adopted the following principal strategies: (i) focus on the portable 3-D measurement market; (ii) increase sales force and distribution; (iii) further penetrate its installed customer base; (iv) increase international sales; (v) leverage its technology; and (vi) expand its product line and service offerings. INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION DATED AUGUST 7, 1998 343,750 SHARES (FARO LOGO) COMMON STOCK --------------------- All 343,750 shares of Common Stock, par value $.001 per share (the "Common Stock") of FARO Technologies, Inc. (the "Company") offered hereby are being offered by certain selling shareholders of the Company (the "Selling Shareholders"). See "Principal and Selling Shareholders." The Company will pay certain of the expenses of this offering; however, the Selling Shareholders will bear the cost of all brokerage commissions and discounts incurred in connection with the sale of the shares to which this Prospectus relates. The Company will not receive any of the proceeds from the sale of the Common Stock offered hereby. Sales may be made on one or more exchanges or in the over-the-counter market, or otherwise at prices and at terms then prevailing or at prices related to the then current market price, or in negotiated transactions, or to one or more underwriters for resale to the public. The Common Stock is listed on the Nasdaq Stock Market's National Market under the symbol "FARO." On August 6, 1998, the last reported sale price of the Common Stock on the Nasdaq National Market was $9.375 per share. See "Price Range of Common Stock." --------------------- SEE "RISK FACTORS" ON PAGES 4 THROUGH 9 FOR CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. --------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. --------------------- The date of this Prospectus is , 1998. As a result of the successful implementation of the Company's strategies, total sales have increased from approximately $9.9 million in 1995 to $23.5 million in 1997 and $6.7 million in the three months ended March 31, 1998. The Company's results have significantly improved from net income of $1.6 million in 1995 to $3.2 million in 1997 and $1.0 million in the three months ended March 31, 1998. As part of the Company's strategy, on May 15, 1998, the Company acquired the German-based company, Cats computer aided technologies, Computeranwendungen in der Fertigungssteuerung, GmbH ("CATS"), which is engaged in the business of developing and selling portable measurement and quality inspection systems driven by CAD-based measurement software, primarily to the German automotive industry. The Company believes there will be significant synergies with CATS' CAD-based measurement software, which can be used in conjunction with retrofitted fixed-based CMMs to bridge the gap between the metrology laboratory and measurement and quality inspection functions on the factory floor. See "Business -- Recent Acquisition." The Company commenced operations in Canada in 1982 and reincorporated in Florida in 1992. The Company's executive offices and principal operating facilities are located at 125 Technology Park, Lake Mary, Florida 32746 and its telephone number is (407) 333-9911. SUMMARY CONSOLIDATED FINANCIAL DATA <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, -------------------------------------- ---------------------------------------------------- PRO FORMA PRO FORMA 1998 1998 1997 1997 1997 1996 1995 ----------- ----------- ---------- ----------- ----------- ----------- ---------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Sales......................... $ 7,214,951 $ 6,682,201 $4,889,471 $26,859,833 $23,516,385 $14,656,337 $9,862,242 Cost of sales................. 2,851,540 2,681,762 1,948,549 10,616,624 9,610,838 6,486,268 4,987,779(1) ----------- ----------- ---------- ----------- ----------- ----------- ---------- Gross profit.................. 4,363,411 4,000,439 2,940,922 16,243,209 13,905,547 8,170,069 4,874,463 Operating expenses: Selling..................... 1,978,708 1,583,536 1,158,559 6,887,388 5,676,113 3,731,762 2,008,301 General and administrative............ 598,582 598,582 302,523 1,519,657 1,519,657 744,206 503,184 Depreciation and amortization.............. 142,362 110,362 58,873 1,293,996 293,996 230,799 341,494(2) Research and development.... 563,832 386,444 178,073 2,052,604 1,075,505 730,124 363,871 Employee stock options(3)... 43,041 43,041 3,270 408,000 408,000 23,100 106,700 ----------- ----------- ---------- ----------- ----------- ----------- ---------- Total operating expenses............ 3,326,525 2,721,965 1,701,298 12,161,645 8,973,271 5,459,991 3,323,550 ----------- ----------- ---------- ----------- ----------- ----------- ---------- Income from operations........ 1,036,886 1,278,474 1,239,624 4,081,564 4,932,276 2,710,078 1,550,913 Interest and other income..... 317,273 317,273 (5,810) 499,752 499,752 25,145 62,212 Interest expense.............. (13,465) -- (34,262) (134,186) (110,768) (212,669) (355,468) ----------- ----------- ---------- ----------- ----------- ----------- ---------- Income before income taxes.... 1,340,694 1,595,747 1,199,552 4,447,130 5,321,260 2,522,554 1,257,657 Income tax expense (benefit)................... 432,000 572,356 479,821 1,789,000 2,114,630 1,115,892 (342,000) ----------- ----------- ---------- ----------- ----------- ----------- ---------- Net income.................... 908,694 1,023,391 719,731 $ 2,658,130 $ 3,206,630 $ 1,406,662 $1,599,657 ----------- ----------- ---------- =========== =========== =========== ========== Other Comprehensive Income Foreign Currency Translation Adjustments............... (43,786) (43,786) -- ----------- ----------- ---------- Other Comprehensive Income.................... (43,786) (43,786) -- ----------- ----------- ---------- Comprehensive Income.......... $ 864,908 $ 979,605 $ 719,731 =========== =========== ========== Net income per common share: Basic....................... $ 0.08 $ 0.10 $ 0.10 $ 0.30 $ 0.41 $ 0.20 $ 0.23(4) Assuming dilution........... $ 0.08 $ 0.10 $ 0.10 $ 0.29 $ 0.39 $ 0.19 $ 0.22 Weighted-average common shares outstanding: Basic....................... 10,861,522(5) 9,944,855 7,000,000 8,748,382(5) 7,831,715 7,000,000 7,000,000 Assuming dilution........... 11,147,823(5) 10,231,156 7,333,290 9,105,715(5) 8,189,048 7,349,041 7,166,739 </TABLE> <TABLE> <CAPTION> MARCH 31, ------------------------- PRO FORMA 1998 1998 ----------- ----------- <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Working capital............................................. $32,592,590 $38,077,590 Total assets................................................ 42,121,558 43,072,558 Total shareholders' equity.................................. 37,820,000 40,197,796 </TABLE> - --------------- (1) Includes $531,186 from a change in the estimated life of product development costs. See Note 1 to the Company's Consolidated Financial Statements, "Product Design Costs." (2) Includes a charge for unamortized patent costs of $192,570 due to the discontinuance of certain products sold in the medical field. (3) Reflects compensation expense incurred upon the vesting of options having an exercise price less than the fair market value of the Common Stock on the date of grant. The weighted average exercise price of such vested options is $0.36 per share. (4) Includes a benefit of $0.11 per share resulting from a reduction in the deferred tax asset valuation allowance. (5) Includes Common Stock issued in connection with the acquisition of CATS.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000918964_internatio_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000918964_internatio_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and is subject to, the more detailed information and the consolidated financial statements and notes thereto appearing elsewhere in this Prospectus. As used herein, unless the context otherwise requires, the terms the "Company" and "SCI" refer to Safety Components International, Inc. and its subsidiaries. This prospectus includes "forward-looking statements" within the meaning of section 27A of the Securities Act and Section 21E of the Exchange Act. All statements other than statements of historical facts included in this Prospectus, including, without limitation, statements regarding the Company's future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations, are forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "will," "expect," "intend," "estimate" "anticipate," "believe," or "continue," or the negative thereof or variations thereon or similar terminology. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Company's expectations ("cautionary statements") are disclosed under "Risk Factors" and elsewhere in this Prospectus, including, without limitation, in conjunction with the forward-looking statements included in this Prospectus. All subsequent written and oral forward-looking statements attributable to the Company, or persons acting on its behalf, are expressly qualified in their entirety by the cautionary statements. The Company SCI is a leading, low-cost independent supplier of automotive airbag fabric and cushions, with operations in North America, Europe and Asia. The Company sells airbag fabric domestically and cushions worldwide to all of the major airbag module integrators that outsource such products. The Company believes it produces approximately 40% of all airbag fabric utilized in North America and that it manufactures approximately 10% of all airbag cushions installed worldwide. The Company believes the JPS Acquisition (as defined) represents an important step in its airbag growth strategy because it will enable the Company to combine JPS' (as defined) low-cost operations and strong market position in airbag fabric with its low-cost operations and strong market position in airbag cushions to exploit worldwide growth in demand for airbag module systems ("airbags" or "airbag modules"). According to the automotive research firm, Tier One, the worldwide market for automotive airbag modules has grown from approximately 3.6 million installed airbag modules in 1991 to approximately 57.2 million in 1996. According to the same source, installed airbag modules are projected to more than double to approximately 123.1 million by the year 2000 as a result of increasing usage of airbags in Europe and Asia and growth in demand for side-impact airbags. As part of its airbag growth strategy, the Company has recently commenced manufacturing and supplying metal airbag module components to its customers, further increasing the content per airbag module supplied by the Company. Airbag fabric, cushions and related metal components accounted for $130.9 million or 75.6% of pro forma consolidated fiscal 1997 net sales. The Company believes that it is also, as a result of the JPS Acquisition, a leading manufacturer of value-added synthetic fabrics used in a variety of niche industrial and commercial applications such as ballistics luggage, industrial filtration systems, aircraft escape slides, military tents and certain industrial apparel. Industrial fabrics accounted for $22.6 million or 13.0% of pro forma consolidated fiscal 1997 net sales and are produced using the same machinery that produces airbag fabric. The ability to interchange airbag and specialty industrial fabrics using the same equipment and similar manufacturing processes allows the Company to effectively utilize its manufacturing assets and lower per unit overhead costs. The Company also produces defense related products, primarily projectiles and other metal components for small to medium caliber training and tactical ammunition, which accounted for $19.7 million or 11.4% of the Company's pro forma consolidated fiscal 1997 net sales. (1) Substantially all of the expenses incident to the Registration Statement and the sale of the shares of Common Stock offered hereby to the public will be borne by the Company, including without limitation, all registration and filing fees, but excluding fees of counsel to the Selling Stockholders and certain underwriting fees, discounts or commissions. See "Plan of Distribution." The date of this Prospectus is January 19, 1998. -------------------------------------------------- Growth Strategy The Company has experienced rapid growth in sales and profitability in recent years due to increased production and outsourcing of airbag cushions by its airbag module integrator customers. The Company has also recently benefited from the production of other airbag components in response to increased outsourcing of such parts by airbag module integrators. Installation of airbag modules is expected to double between 1996 and 2000 and the Company believes that it is well-positioned to benefit from this growth due to its global presence, low-cost integrated production capabilities and strong customer relationships. Specific elements of the Company's growth strategy include: Enhance Low-Cost Position. The ability to remain a low-cost supplier is a key element of the Company's automotive airbag growth strategy as it enables the Company to price its products competitively, gain market share and maintain or increase profit margins. To enhance its low-cost position, the Company is evaluating a number of cost reduction opportunities including: (i) consolidating its European production facilities; (ii) consolidating certain administrative functions; (iii) reducing labor costs through automation; (iv) reducing transportation costs; and (v) exploiting economies of scale, particularly as production volumes increase at its new Czech Republic facility. Labor costs are also expected to decline as the Chinese joint venture becomes a production source. In addition, the combination of the Company and the Division (as defined) also presents opportunities to further reduce airbag cushion production costs. Increase Airbag Volumes. The Company has been and believes it will continue to be successful in attaining product qualification and acceptance among airbag customers. Airbag cushion sales have increased from 783,000 units in fiscal year 1994 to 5.2 million units in fiscal year 1997 as a result of rapid growth in demand for airbag modules in North American and European markets and the continuing trend among airbag module integrators to purchase airbag components from third parties, such as the Company, specializing in the production of those components. The Company believes it is well-positioned to benefit from the continued strong demand for airbag modules due to its: (i) low-cost manufacturing strategy; (ii) established relationships with airbag module integrators; and (iii) its reputation for high product quality standards. Diversify Production Within Core Competence/Distribution Network. The Company intends to increase revenues and maximize plant efficiencies by providing related products to new and existing customers. The Company has successfully applied its manufacturing expertise to develop new products utilizing existing manufacturing capabilities. For example, the Company has expanded from parachute and metal parts production for the military into airbag cushions and metal products for airbag module integrators. Additionally, as a result of the JPS Acquisition, the Company believes that it is well-positioned to further diversify its business and exploit additional opportunities for growth by cross-marketing complementary manufacturing capabilities. Increase Content Per Airbag Module. The machining operations acquired through the acquisition in May 1997 of all of the issued and outstanding capital stock of Valentec International Corporation ("Valentec") has enabled the Company to increase the content per airbag module supplied to the Company's customers. The Company has recently started manufacturing and assembling end caps and retainer brackets to airbags produced for two of its largest airbag customers and believes that additional opportunities exist to increase the amount of content supplied to its customers. This strategy is intended to benefit the Company's customers by enabling them to consolidate suppliers while at the same time rendering the Company less dependent on industry volumes as content per airbag module increases. Expand Through Strategic Acquisitions. The Company intends to selectively pursue opportunities to acquire companies that offer complementary products or services to those industries currently served by the Company. This will enable existing and future customers to consolidate supply sources by obtaining a broader range of value added products and services from the Company. The Company also intends to evaluate new technologies and processes that will enable it to reduce product costs and/or increase the level of products or services provided to existing and future customers. The Company will also continue to evaluate acquisitions and joint ventures that will enable the Company to further integrate production of airbags and other products. AVAILABLE INFORMATION The Company has filed a Registration Statement on Form S-1 (together with all amendments thereto referred to herein as the "Registration Statement") under the Securities Act, with the Securities and Exchange Commission (the "Commission") covering the securities being offered by this Prospectus. This Prospectus does not contain all the information set forth or incorporated by reference in the Registration Statement and the exhibits and schedules relating thereto, certain portions of which have been omitted as permitted by the rules and regulations of the Commission. For further information with respect to the Company and the securities offered by this Prospectus, reference is made to the Registration Statement and the exhibits and schedules thereto which are on file at the offices of the Commission and may be obtained upon payment of the fee prescribed by the Commission, or may be examined without charge at the offices of the Commission. Statements contained in this Prospectus as to the contents of any contract or other documents referred to are not necessarily complete, and are qualified in all respects by such reference. The Company is currently subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files periodic reports, proxy statements and other information with the Commission. The Registration Statement, as well as such periodic reports, proxy statements and other information, can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington D.C. 20549; or at its regional offices located at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such material can also be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission also maintains a Web site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants, such as the Company, that file electronically with the Commission. The Common Stock is quoted on Nasdaq and periodic reports, proxy and information statements and other information concerning the Company can also be inspected at the offices of the National Association of Securities Dealers, Inc. at 1735 "K" Street, N.W., Washington, D.C. 20006. Significant Transactions The JPS Acquisition. On July 24, 1997, the Company, through its newly formed wholly-owned subsidiary, Safety Components Fabric Technologies, Inc., acquired all of the assets of the Air Restraint/Industrial Fabrics Division (the "Division") of JPS Automotive L.P. ("JPS Automotive"), a subsidiary of Collins & Aikman Corporation (the"JPS Acquisition") for $56.3 million in cash (including 18 looms delivered at closing) and the assumption of certain liabilities, subject to post closing adjustments. In addition, the Company made a payment to JPS Automotive at the closing to enable it to pay off existing indebtedness of the Division as of the closing of approximately $650,000 (the Division is sometimes hereinafter referred to as "JPS" or "SCFT"). The Company also purchased an adjacent building for approximately $1.3 million. SCFT is a leading, low-cost supplier of airbag fabric in North America and is also a leading manufacturer of value-added synthetic fabrics used in a variety of niche industrial and commercial applications. The Company believes the JPS Acquisition represents an important step in its airbag growth strategy because it has enabled, and will continue to enable, the Company to: (i) combine strong market positions in airbag fabric and cushions; (ii) integrate low-cost manufacturing capabilities in airbag fabric and cushions to exploit the worldwide growth in demand for airbag modules; (iii) interchange airbag and specialty industrial fabrics using the same equipment and manufacturing processes thereby allowing the Company to effectively utilize its manufacturing assets; and (iv) enhance and expand its customer base. See "Business--Significant Transactions--The JPS Acquisition." The Debt Offering. On July 24, 1997, the Company issued $90,000,000 aggregate principal amount of its 101/8% Senior Subordinated Notes due 2007, Series A (the "Old Notes") to BT Securities Corporation, BancAmerica Securities Inc. and Alex. Brown & Sons Incorporated (the "Initial Purchasers") in a transaction not registered under the Securities Act in reliance upon an exemption thereunder (the "Debt Offering"). The Debt Offering was conditioned upon, and a significant portion of the proceeds of the Debt Offering was used to finance, the JPS Acquisition. On September 2, 1997, the Company commenced an offer to exchange (the "Exchange Offer") the Old Notes for $90,000,000 aggregate principal amount of its 101/8% Senior Subordinated Notes due 2007, Series B (the "Exchange Notes," together with the Old Notes, the "Notes"). All of the Old Notes were exchanged for the Exchange Notes pursuant to the terms of the Exchange Offer, which expired on October 1, 1997. The Exchange Notes evidence the same debt as the Old Notes (which they replaced). However, the issuance of the Exchange Notes has been registered under the Securities Act and therefore the Exchange Notes do not bear legends restricting the transfer thereof. The Valentec Acquisition. Pursuant to a definitive Stock Purchase Agreement, effective as of May 22, 1997, the Company acquired in a tax-free stock for stock transaction all of the issued and outstanding capital stock of Valentec (the "Valentec Acquisition"). Valentec is a high-volume manufacturer of stamped and precision machined products for the automotive, commercial and defense industries. Valentec's machining capabilities and relationships with airbag module integrators have enabled the Company to increase the amount of content per airbag module supplied by the Company. Pursuant to this strategy, the Company has begun producing end caps and retainer brackets for two of its larger airbag module customers. In addition, the Company has been able to eliminate certain duplicative corporate functions at Valentec, resulting in improved efficiencies and cost savings. See "Business--Significant Transactions--The Valentec Acquisition."
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE DETAILED INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS. CERTAIN CAPITALIZED TERMS USED HEREIN ARE DEFINED IN THE "GLOSSARY OF TERMS" OR ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT REQUIRES OTHERWISE, CERTAIN CAPITALIZED TERMS, WHEN USED IN THIS PROSPECTUS, RELATE ONLY TO THE SECURITIES AND NOT TO OTHER SECURITIES ISSUED BY THE TRUST WHICH MAY BE OUTSTANDING FROM TIME TO TIME. <TABLE> <S> <C> Offered Securities.............. $337,500,000 aggregate principal amount of Class A Securities and $51,136,000 aggregate principal amount of Class B Securities are being offered hereby. The Offered Securities will be available for purchase in minimum denominations of $1,000 and in integral multiples of $1,000 in excess thereof. The Offered Securities will be issued in certificated registered form. See "Description of the Offered Securities--General." The Offered Securities represent the right to receive certain payments from the Trust only and do not represent interests in or recourse obligations of Fingerhut National Bank ("FNB"), Fingerhut Companies, Inc. ("FCI"), the Transferor, Fingerhut Corporation ("Fingerhut"), or any affiliate thereof. The Class B Securities will be subordinated to fund certain payments with respect to the Class A Securities as described herein. See "Description of the Offered Securities-- Subordination of the Class B Securities." Other Securities................ $61,364,000 aggregate principal amount of Collateralized Trust Obligations, which may be privately placed, and $61,364,000 aggregate principal amount of Class D Securities, which will initially be retained by the Transferor, are being issued concurrently. The Trust has previously issued three other Series (the "Previously Issued Series") only one of which will remain outstanding after the issuance of the Securities. Concurrently with Series 1998-2, the Trust will issue Series 1998-1 Securities comprised of $337,500,000 aggregate principal amount of % Asset Backed Securities, Series 1998-1, Class A, $51,136,000 aggregate principal amount of % Asset Backed Securities, Series 1998-1, Class B, $61,364,000 aggregate principal amount of Floating Rate Asset Backed Collateralized Trust Obligations, Series 1998-1, and $61,364,000 aggregate principal amount of Asset Backed Securities, Series 1998-1, Class D (collectively, the "Series 1998-1 Securities"). The Series 1998-1 Securities, Class A and Class B, will be offered publicly concurrently herewith by means of a separate prospectus. The Series 1998-1 Securities, Collateralized Trust Obligations, may be privately placed and the Series 1998-1 Securities, Class D, will initially be retained by the Transferor. The Series 1998-1 Securities will rank PARI PASSU with the Series 1998-2 Securities. See "Annex I: Other Series" for a summary of the terms of these other Series which will be outstanding on the Closing Date. See also "Description of the </TABLE> <TABLE> <S> <C> Offered Securities--Other Series." The Transferor from time to time may create other Series that evidence interests in assets of the Trust (other than any Enhancement for, or Collections allocated initially to, any other Series), by exchanging a portion of the Exchangeable Transferor Security and satisfying certain conditions described herein. In addition, on the Closing Date the Trust will issue to FNB a Participation. See "Description of the Offered Securities--Exchanges" and "--Participations." Only the Offered Securities are being offered hereby. Transferor...................... Fingerhut Receivables, Inc. is the Transferor. The principal executive offices of the Transferor are located at 4400 Baker Road, Suite F480, Minnetonka, MN 55343, telephone number (612) 936-5035. See "The Transferor and Related Parties-- Fingerhut Receivables, Inc." Servicer........................ FNB is the Servicer. The principal executive offices of the Servicer are located at 3904 West Technology Circle, Suite 102, Sioux Falls, South Dakota 57106, telephone number (605) 362-2380. A substitute Servicer may be appointed in certain circumstances. FNB has delegated a substantial portion of its servicing duties to Fingerhut pursuant to a subservicing agreement. See "The Receivables--Servicing," "The Transferor and Related Parties-- Fingerhut National Bank" and "Description of the Offered Securities--Certain Matters Regarding the Transferor and the Servicer." Trustee......................... The Bank of New York (Delaware) is the Trustee. Under certain circumstances specified herein, the Transferor and the holders of the Securities will have the right to remove the Trustee. See "Description of the Offered Securities--The Trustee." Trust........................... Fingerhut Master Trust was formed pursuant to the Pooling and Servicing Agreement, which has been supplemented by the Supplements thereto relating to the Previously Issued Series and will be supplemented by the Series 1998-2 Supplement relating to the Securities, the Supplement relating to the Series 1998-1 Securities, the Participation Supplement relating to the Participation to be issued to FNB on the Closing Date and the Supplements relating to any other Series that may be issued in the future and the Participation Supplements relating to any Participations that may be issued in the future. See "The Trust." As more fully described below and elsewhere herein, the Trust's assets include the Receivables and the proceeds thereof. Collections on the Receivables are deposited into the Collection Account maintained in the name of the Trust. Trust Assets.................... The Trust assets include (i) all Receivables generated by FNB or one of its affiliates from time to time satisfying certain criteria described herein (see "Description of the Offered Securities-- Eligible Receivables"), (ii) all monies and investments due or to become due with respect thereto (including, without limitation, the right to any Finance Charge Receivables), (iii) all proceeds of </TABLE> <TABLE> <S> <C> such Receivables, (iv) all right, title, and interest of the Transferor in, to, and under the Purchase Agreements and the Bank Purchase Agreement with respect to Receivables arising under Eligible Accounts, (v) the benefit of funds on deposit in certain bank accounts maintained for the benefit of securityholders of each Series, including the Excess Funding Account, (vi) the benefit of funds on deposit in the Revolving Receivables Reserve Account and certain other bank accounts maintained for the benefit of the Securityholders, (vii) recoveries (net of collection expenses) on Receivables which were previously charged off as uncollectible ("Recoveries") and (viii) all proceeds of the foregoing. The Offered Securities will not have the benefit of any Enhancement other than the subordination of the Class B Securities, the Collateralized Trust Obligations and the Class D Securities for the benefit of each more senior Class of Securities as described herein. See "Description of the Offered Securities--Subordination of the Class B Certificates." On and after the Initial Closing Date and prior to January 12, 1997, all Receivables that were transferred to the Trust by the Transferor were closed-end installment sale contracts originated by Fingerhut in connection with the sale of merchandise, financial service products or services. Such Receivables were sold by Fingerhut to the Transferor pursuant to the Fingerhut Purchase Agreement. Since January 12, 1997, FNB has been originating all receivables in connection with the sale of merchandise, financial service products and services by Fingerhut. These receivables, in the form of closed-end loans and revolving credit card loans extended by FNB under credit card accounts, have been sold on an ongoing basis by FNB to FCI pursuant to the Bank Purchase Agreement and, in the case of closed-end loans that are Eligible Receivables, have been sold by FCI to the Transferor pursuant to the FCI Purchase Agreement. Pursuant to the Pooling and Servicing Agreement, the Transferor automatically transfers to the Trust all of its right, title, and interest in and to the Receivables purchased by it pursuant to the Purchase Agreements, subject to certain restrictions on the automatic addition of new Obligors set forth herein. See "Risk Factors--Transfer of the Receivables; Insolvency Risk Considerations" for a discussion of certain legal considerations relating to such transfer. On March 18, 1998, the FCI Purchase Agreement and the Pooling and Servicing Agreement were amended to provide for the sale on an ongoing basis by FCI to the Transferor, and by the Transferor to the Trust, respectively, of the revolving credit card loans originated by FNB that are Eligible Receivables. Receivables..................... The Receivables consist of Closed End Receivables and Revolving Receivables. Receivables will not be Eligible Receivables and, therefore, will not be transferred to the Transferor and the Trust unless the Obligor thereof is a Back End Customer. Subject to </TABLE> <TABLE> <S> <C> certain restrictions on the addition of new Obligors set forth herein, all Receivables originated by FNB that are Eligible Receivables are purchased by the Transferor and thereafter automatically transferred to the Trust. The Transferor may elect at any time to suspend the automatic inclusion of receivables in accounts that would otherwise constitute Additional Accounts. See "Description of the Offered Securities--Addition of Trust Assets." The amount of Receivables fluctuates from day to day as new Receivables are generated and as existing Receivables are collected, written off as uncollectible, or otherwise adjusted. The Receivables consist of Principal Receivables and Finance Charge Receivables. "Finance Charge Receivables" include (i) with respect to consumer revolving credit card accounts, amounts billed from time to time to Obligors in respect of Periodic Finance Charges, overlimit fees, late charges, returned check fees, annual account fees or service charges, transaction charges and similar fees and charges (except for fees associated with ancillary products and services sold to Obligors) plus (ii) with respect to all Receivables, Recoveries, any other fees, other than prepaid insurance premiums, billed to Obligors, plus (iii) investment earnings on amounts credited to the Excess Funding Account, plus (iv) Discount Receivables. Discount Receivables are portions of the principal balance of Receivables which are recharacterized as Finance Charge Receivables based on a Discount Factor. The Discount Factor for Revolving Receivables generated in connection with sales by Fingerhut will initially be 9% and for Closed End Receivables generated in connection with sales by Fingerhut will initially be 25%. "Principal Receivables" are amounts payable by Obligors with respect to the Receivables other than such amounts that are Finance Charge Receivables or Default Amounts. See "Description of the Offered Securities--Finance Charge Collections; Principal Collections." Subject to the satisfaction of the Rating Agency Condition, Receivables originated by FNB or an affiliate of FNB other than in connection with the sale of merchandise or services by Fingerhut may be transferred to the Trust. These Receivables may be originated using criteria different from those applied, and may have different terms or characteristics than the Receivables originated, by FNB in connection with the sale of merchandise or services by Fingerhut. See "Description of the Offered Securities--Addition of Trust Assets." Subject to the satisfaction of the Rating Agency Condition, the Transferor may, but will not be obligated to, designate from time to time certain Accounts (the "Removed Accounts"), all Receivables in which shall be subject to removal from the Trust in an aggregate amount not greater than the lesser of (i) the excess of the Transferor Interest over the Minimum Transferor Interest and (ii) the excess of Aggregate Principal Receivables </TABLE> <TABLE> <S> <C> over the Minimum Aggregate Principal Receivables as of the last day of the related Monthly Period; PROVIDED, HOWEVER, that there will be no more than one such removal with respect to any Monthly Period. See "Description of the Offered Securities-- Removal of Accounts." Collections..................... The Servicer is obligated to deposit all collections of Receivables, other than the portion of Collections allocable to Participations, in the Collection Account. Collections on the Receivables will be applied as collections of Principal Receivables or collections of Finance Charge Receivables in accordance with the definitions thereof. See "Description of the Offered Securities--Finance Charge Collections; Principal Collections." Finance Charge Collections and Principal Collections are applied on each business day to the Transferor Interest, the holders of any Participation and the respective interests of the securityholders of each Series issued and outstanding from time to time in accordance with the Pooling and Servicing Agreement and applicable Supplements. In general, in accordance with the provisions of the Pooling and Servicing Agreement and the applicable Supplements, (i) Finance Charge Collections and certain other amounts are applied on each business day to fund interest on the securities of any Series then outstanding, to pay certain fees and expenses, to cover Series default amounts, to reimburse Series charge-offs and to make required payments to the Transferor, and (ii) Principal Collections and certain other amounts are applied on each business day to fund principal on the securities of any Series then outstanding, except that during any revolving period applicable to a Series, Principal Collections otherwise applied for the benefit of the securityholders of such Series which are not redirected to cover amounts payable from Finance Charge Collections in the event of a shortfall thereof are paid to the holder of the Exchangeable Transferor Security or paid to the securityholders of any other Series then outstanding. See "Description of the Offered Securities--Application of Collections--Payment of Fees, Interest and Other Items." Allocation of Trust Assets...... The right to receive payments from the Trust's assets will be allocated among the Class A Securityholders' Interest, the Class B Securityholders' Interest, the CTO Securityholders' Interest, the Class D Securityholders' Interest, the interest of the securityholders of the Previously Issued Series that remain outstanding and any other Series (including the interest of the securityholders of the Series 1998-1 Securities) issued pursuant to the Pooling and Servicing Agreement and applicable Supplements, the interest of the holders of any Participations and the Transferor Interest. The interest of the securityholders of any class of any Series in the assets of the Trust will be limited to the securityholders' interest for such class and Series, and such securityholders will not have any recourse against any assets of the Trust other than those allocated to such securityholders' interest pursuant to the Pooling and Servicing Agreement and </TABLE> <TABLE> <S> <C> any applicable Supplement. The Transferor Interest represents the right to receive payments from the assets of the Trust not allocated to the securityholders' interest of any Series issued pursuant to the Pooling and Servicing Agreement and applicable Supplements or the interest of the holder of any Participation. The principal amount of the Transferor Interest will fluctuate as the amount of Receivables in the Trust, the invested amount of each Series (including any Series consisting of variable funding securities), the amount of any Participation and the amounts on deposit in the Excess Funding Account change from time to time. See "Description of the Offered Securities--General," "-- Other Series," and "--Excess Funding Account." The Class A Securities will represent the right to receive payments of interest on the aggregate outstanding principal amount of the Class A Securities at the Class A Interest Rate and the payment of principal to the extent of the Class A Invested Amount (which may be less than the aggregate outstanding principal amount of the Class A Securities, in certain circumstances, if the Series Default Amount exceeds funds allocable thereto and the Class B Invested Amount, the CTO Invested Amount and the Class D Invested Amount are reduced to zero). See "Description of the Offered Securities--Subordination of the Class B Securities," "--Allocation Percentages" and "--Series Charge-Offs." The Class B Securities will represent the right to receive payments of interest on the aggregate outstanding principal amount of the Class B Securities at the Class B Interest Rate and the payment of principal to the extent of the Class B Invested Amount (which may be less than the aggregate outstanding principal amount of the Class B Securities, in certain circumstances, if the Series Default Amount exceeds funds allocable thereto and the CTO Invested Amount and the Class D Invested Amount are reduced to zero). See "Description of the Offered Securities-- Subordination of the Class B Securities," "--Allocation Percentages" and "--Series Charge-Offs." The Collateralized Trust Obligations will represent the right to receive payments of interest on the aggregate outstanding principal amount of the Collateralized Trust Obligations at the CTO Interest Rate and the payment of principal to the extent of the CTO Invested Amount (which may be less than the aggregate unpaid principal amount of the Collateralized Trust Obligations, in certain circumstances, if the Series Default Amount exceeds funds allocable thereto and the Class D Invested Amount is reduced to zero). See "Description of the Offered Securities--Allocation Percentages" and "--Series Charge-Offs." The Collateralized Trust Obligations are not being offered hereby. The Class D Securities will represent the right to receive payments of principal to the extent of the Class D Invested Amount and, to the extent the Transferor assigns an interest rate (the "Class D </TABLE> <TABLE> <S> <C> Interest Rate") to all or a portion of the Class D Securities, payments of interest at such rate on the Class D Securities or such portion thereof. The Class D Securities are not being offered hereby. The aggregate amount of Receivables in the Trust as of March 27, 1998 was $1,686,837,273, comprised of $417,752,162 of Finance Charge Receivables and $1,269,085,112 of Principal Receivables. As of March 27, 1998, the Principal Receivables consisted of $240,526,025 of closed-end installment sale contracts originated by Fingerhut, $930,597,170 of closed-end credit card loans originated by FNB and $48,650,283 of revolving credit card loans originated by FNB. The "Initial Invested Amount" will be equal to the sum of (i) an amount equal to the initial principal amount of the Class A Securities; (ii) an amount equal to the initial principal amount of the Class B Securities; (iii) an amount equal to the initial principal amount of the Collateralized Trust Obligations; and (iv) an amount equal to the initial principal amount of the Class D Securities. The aggregate principal amount of the Securities, except as otherwise provided herein, will remain fixed at the Initial Invested Amount during the period beginning on the Closing Date and ending with the date on which the first principal payment is made with respect to the Securities during the Amortization Period. No payment of principal with respect to the Class B Securities may be made until the final principal payment of the Class A Invested Amount with respect to the Class A Securities has been made. No payment of principal with respect to the Collateralized Trust Obligations may be made until the final principal payment of the Class A Invested Amount with respect to the Class A Securities and the final principal payment of the Class B Invested Amount with respect to the Class B Securities have been made. During the Controlled Amortization Period, the Class D Invested Amount may be reduced and the amount of the Transferor Interest correspondingly increased concurrently with payments of principal for the benefit of the Offered Securities and the Collateralized Trust Obligations to an amount equal to the Stated Class D Amount. See "Description of the Offered Securities--Principal Payments." The Class A Securityholders' Interest, the Class B Securityholders' Interest, the CTO Securityholders' Interest, and the Class D Securityholders' Interest will each include the right to receive (but only to the extent needed to make required payments under the Pooling and Servicing Agreement) varying percentages of Finance Charge Collections and Principal Collections during each Monthly Period. Finance Charge Collections prior to the occurrence of a Pay Out Event, the Default Amount at all times, and Principal Collections during the Revolving Period will be applied on each business day for the benefit of the Series 1998-2 Securityholders' Interest based on the Floating Percentage. On and after the date on which a Pay Out Event is deemed to occur, </TABLE> <TABLE> <S> <C> Finance Charge Collections will be applied on each business day for the benefit of the Series 1998-2 Securityholders' Interest based on the Fixed/Floating Percentage. During the Revolving Period, all Principal Collections that would otherwise be applied for the benefit of the Securityholders will be applied on each business day and paid to the holder of the Exchangeable Transferor Security (except for Shared Principal Collections used to make payments to other Series). During the Amortization Period, until the Class B Principal Payment Commencement Date, Principal Collections will be applied on each business day for the benefit of the Class A Securityholders' Interest based on the Fixed/Floating Percentage. On and after the Class B Principal Payment Commencement Date, Principal Collections will be applied on each business day for the benefit of the Class B Securityholders' Interest based on the Fixed/Floating Percentage. On and after the CTO Principal Payment Commencement Date, Principal Collections will be applied on each business day for the benefit of the CTO Securityholders' Interest based on the Fixed/Floating Percentage. See "Description of the Offered Securities--Allocation Percentages." Exchanges....................... The Pooling and Servicing Agreement provides that the Trustee may issue two types of securities, (i) investor securities in one or more Series, each of which may have multiple classes of securities of which one or more such classes may be transferable and (ii) the Exchangeable Transferor Security. In addition, the Trust may issue Participations representing participation interests in the assets of the Trust, as described below. The Exchangeable Transferor Security will evidence the Transferor Interest, will initially be held by the Transferor, and will be transferable only as provided in the Pooling and Servicing Agreement, including through the issuance of a Supplemental Security. See "Description of the Offered Securities-- Exchanges." The Pooling and Servicing Agreement also provides that, pursuant to any one or more Supplements, the Transferor may tender the Exchangeable Transferor Security or, if provided in the relevant Supplement, securities comprising any Series and the Exchangeable Transferor Security, to the Trustee in exchange for securities comprising one or more new Series and a reissued Exchangeable Transferor Security. However, at all times, the interest in the Principal Receivables in the Trust and amounts on deposit in the Excess Funding Account represented by the Transferor Interest must equal or exceed the Minimum Transferor Interest. Under the Pooling and Servicing Agreement, the Transferor may define, with respect to any new Series, the Principal Terms of such Series. See "Description of the Offered Securities--Exchanges." The Transferor may offer any Series for sale in transactions either registered under the Securities Act or exempt from registration thereunder, directly, through one or more underwriters or placement agents, in fixed-price offerings, </TABLE> <TABLE> <S> <C> or in negotiated transactions or otherwise. The Transferor currently intends to offer, from time to time, additional Series issued by the Trust. Under the Pooling and Servicing Agreement, an Exchange of the Exchangeable Transferor Security for securities comprising one or more Series and a reissued Exchangeable Transferor Security may occur only upon delivery to the Trustee of the following: (i) a Supplement specifying the Principal Terms of each Series to be issued in connection therewith, (ii) the applicable enhancement, if any, (iii) the agreement, if any, pursuant to which the enhancement provider agrees to provide the enhancement, if any, (iv) a Tax Opinion, (v) an opinion of counsel to the effect that the securities of such Series will be characterized as indebtedness or as a partnership interest for Applicable Tax State income tax purposes under existing law or that the issuance of such Series will not materially adversely affect the Applicable Tax State income tax characterization of any outstanding Series or the taxability of the Trust under Applicable Tax State income tax laws, (vi) written confirmation from each Rating Agency that the Exchange will not result in the Rating Agency reducing or withdrawing its original rating on any then outstanding Series rated by it, (vii) an officer's certificate of the Transferor stating that, after giving effect to such Exchange, the Transferor Interest would be at least equal to the Minimum Transferor Interest, and (viii) the existing Exchangeable Transferor Security and, if applicable, the existing securities representing the Series to be exchanged. See "Description of the Offered Securities-- Exchanges." Participations.................. The Pooling and Servicing Agreement provides that the Transferor may direct the Trustee to issue on behalf of the Trust one or more participation interests in the assets of the Trust or in any portion thereof (each interest, a "Participation"), the terms of which shall be defined in a supplement to the Pooling and Servicing Agreement (a "Participation Supplement"), which shall include, among other things, a conveyance to the holder of the Participation of all right, title and interest of the Trust in a specified percentage of the Receivables. The Trustee shall deliver the Participation to or upon the order of the Transferor upon the satisfaction of the Rating Agency Condition and certain other conditions described herein under "Description of the Offered Securities--Participations." Interest........................ Each Class A Security represents the right to receive interest accruing from the Closing Date at the rate equal to % per annum (such rate, the "Class A Interest Rate"). Each Class B Security represents the right to receive interest accruing from the Closing Date at the rate equal to % per annum (such rate, the "Class B Interest Rate" and together with the Class A Interest Rate sometimes referred to as an "Interest Rate" and collectively as the "Interest Rates"). Interest on the Offered </TABLE> <TABLE> <S> <C> Securities will be payable on June 15, 1998, and on each Distribution Date thereafter, in an amount equal to (i) with respect to the Class A Securities, one-twelfth of the product of (a) the Class A Interest Rate and (b) the outstanding aggregate principal amount of the Class A Securities as of the close of business on the first day of such Interest Accrual Period (or in the case of the first Distribution Date, the initial principal amount of the Class A Securities) and (ii) with respect to the Class B Securities, one-twelfth of the product of (a) the Class B Interest Rate and (b) the Class B Invested Amount as of the close of business on the first day of such Interest Accrual Period (or in the case of the first Distribution Date, the initial principal amount of the Class B Securities). Interest for the first Distribution Date will include accrued interest at the applicable Interest Rate from the Closing Date through June 14, 1998. Interest on the Offered Securities will be calculated on the basis of a 360-day year of twelve 30-day months. On the Closing Date, the Transferor will make a deposit to the Interest Funding Account in an amount equal to $2,000,000. Interest payments on the Class A Securities on each Distribution Date will be funded from Available Series 1998-2 Finance Charge Collections with respect to the preceding Monthly Period (or, with respect to the first Distribution Date, such Collections from and including the Closing Date to and including May 29, 1998), and from certain other funds allocated as set forth in the Pooling and Servicing Agreement to the Class A Securities, and deposited on each business day during such Monthly Period in the Interest Funding Account. See "Description of the Offered Securities--Interest Payments" and "--Application of Collections--Payment of Fees, Interest and Other Items." Subject to the prior payment of interest on the Class A Securities, interest payments on the Class B Securities on each Distribution Date will be funded from the portion of Available Series 1998-2 Finance Charge Collections with respect to the preceding Monthly Period (or, with respect to the first Distribution Date, such collections from and including the Closing Date to and including May 29, 1998), and from certain other funds allocated as set forth in the Pooling and Servicing Agreement to the Class B Securities, and deposited on each business day during such Monthly Period in the Interest Funding Account. See "Description of the Offered Securities--Interest Payments" and "--Application of Collections--Payment of Fees, Interest and Other Items." Revolving Period................ The "Revolving Period" with respect to the Securities means the period from and including the Closing Date to, but excluding, the earlier of (a) the commencement of the Controlled Amortization Period and (b) the commencement of the Early Amortization Period. The Controlled Amortization Period with respect to the Securities is scheduled to begin at the close of business on the </TABLE> <TABLE> <S> <C> last day of the July 2002 Monthly Period. During the Revolving Period, Principal Collections otherwise allocable to the Securityholders (other than any Shared Principal Collections paid to the holders of securities of other Series and any Redirected Principal Collections) will, subject to certain limitations, be paid from the Trust to the holder of the Exchangeable Transferor Security. See "Description of the Offered Securities--Pay Out Events" for a discussion of the events which might lead to the termination of the Revolving Period for the Securities prior to the end of the July 2002 Monthly Period. Principal Payment; Controlled Amortization.................. Unless a Pay Out Event shall have occurred with respect to the Securities, during the period commencing with the August 2002 Monthly Period and ending with the October 2003 Monthly Period, on each business day during such period, an amount equal to the lesser of (i) Available Series 1998-2 Principal Collections, and (ii) the Class A Controlled Amortization Amount for such Monthly Period plus any Class A Deficit Controlled Amortization Amount arising from prior Monthly Periods, will be deposited in the Principal Account. On any business day when the amount on deposit in the Principal Account equals or exceeds the Class A Controlled Distribution Amount for the related Distribution Date, the balance of all such funds remaining on deposit in the Collection Account will be treated as Shared Principal Collections and may be used to make payments on other Series or classes of such Series that may be accumulating principal or amortizing or paid to the holder of the Exchangeable Transferor Security. The funds on deposit in the Principal Account will be available to be paid to the Class A Securityholders on the September 2002 Distribution Date and on each Distribution Date thereafter until the Class A Invested Amount is paid in full. If the funds available for distribution to the Class A Securityholders on the November 2003 Distribution Date (the "Class A Expected Final Payment Date") are insufficient to pay the Class A Invested Amount in full, all such funds will be distributed to the Class A Securityholders at such time on a pro rata basis. Thereafter, until the Class A Invested Amount has been paid in full or the Termination Date has occurred, principal and interest payments will be made to Class A Securityholders monthly on each Distribution Date. No payment of principal to the Class B Securityholders will be made until the Class A Invested Amount has been paid in full. See "Description of the Offered Securities--Principal Payments." On and after the Class B Principal Payment Commencement Date, on each business day thereafter, an amount equal to the lesser of (i) Available Series 1998-2 Principal Collections, and (ii) the Class B Controlled Amortization Amount for such Monthly Period plus any Class B Deficit Controlled Amortization Amount arising from prior Monthly Periods, will be deposited in </TABLE> <TABLE> <S> <C> the Principal Account. On any business day when the amount on deposit in the Principal Account equals or exceeds the Class B Controlled Distribution Amount for the related Distribution Date, the balance of all such funds remaining on deposit in the Collection Account will be treated as Shared Principal Collections and may be used to make payments on other Series or classes of such Series which may be accumulating principal or amortizing or paid to the holder of the Exchangeable Transferor Security. The funds on deposit in the Principal Account will be available to be paid to the Class B Securityholders on the Class B Principal Payment Commencement Date and on each Distribution Date thereafter until the Class B Invested Amount is paid in full. If the funds available for distribution to the Class B Securityholders on the February 2004 Distribution Date (the "Class B Expected Final Payment Date") are insufficient to pay the Class B Invested Amount in full, all such funds will be distributed to the Class B Securityholders at such time on a pro rata basis. Thereafter, until the Class B Invested Amount has been paid in full or the Termination Date has occurred, principal and interest payments will be made to Class B Securityholders monthly on each Distribution Date. No payment of principal to the CTO Securityholders will be made until the Class B Invested Amount has been paid in full. See "Description of the Offered Securities--Principal Payments." Other Series offered by the Trust may or may not have amortization periods like the Amortization Periods for the Securities, and any such periods may have different lengths and begin on different dates than the Amortization Period described herein. Thus, certain Series may be in their revolving periods while others are in their amortization periods. In addition, other Series may allocate Principal Receivables based upon different investor percentages. See "Description of the Offered Securities--Exchanges" for a discussion of the potential terms of other Series. See "Annex I: Other Series" for a description of the terms of the Other Series that will remain outstanding upon the issuance of the Securities. Early Amortization Period....... During the Early Amortization Period, Principal Collections allocable to the respective Securityholders' Interest and certain other amounts (including Shared Principal Collections from any other Series, and amounts deposited in the Excess Funding Account) will no longer be reinvested in the Trust or otherwise used to maintain the Securityholders' Interest of such Series, but instead will be distributed as principal payments monthly on each Distribution Date beginning with the first Distribution Date following the Monthly Period in which a Pay Out Event occurs or is deemed to have occurred to the Class A Securityholders in respect of the Class A Invested Amount and, following the payment in full of the Class A Invested Amount, to the Class B Securityholders in respect of the Class B Invested Amount and, following the payment in full of the Class B Invested Amount, to </TABLE> <TABLE> <S> <C> the CTO Securityholders in respect of the CTO Invested Amount and, following the payment in full of the CTO Invested Amount, to the Class D Securityholders until the Class D Invested Amount is paid in full. See "Description of the Offered Securities--Pay Out Events." Shared Principal Collections.... To the extent that Principal Collections and other amounts that are initially applied for the benefit of the Securityholders' Interest are not needed to make payments to the Securityholders or required to be deposited in the Principal Account, they may be applied to cover principal payments due to or for the benefit of securityholders of another Series, including principal payments which the Transferor elects to make with respect to any Variable Funding Securities. Any such application will not result in a reduction in the Securityholders' Interest. In addition, Principal Collections and certain other amounts initially applied for the benefit of other Series, to the extent such collections are not needed to make payments to the securityholders of such other Series, and certain amounts that any Participation Supplements specify are to be treated as "Shared Principal Collections" may be applied to cover principal payments due to or for the benefit of the holders of the Securities. See "Description of the Offered Securities--Principal Payments" and "--Application of Collections." Excess Funding Account.......... At any time at which the Transferor Interest is less than the Minimum Transferor Interest, funds (to the extent available therefor as described herein) otherwise payable to the Transferor will be deposited in the Excess Funding Account on each business day until the Transferor Interest is at least equal to the Minimum Transferor Interest. Funds on deposit in the Excess Funding Account may, at the option of the Transferor, be withdrawn and paid to the Transferor to the extent that on any day the Transferor Interest exceeds the Minimum Transferor Interest. The portion of any funds on deposit in the Excess Funding Account at the beginning of the Amortization Period that are allocable to Series 1998-2 will be deposited in the Principal Account and applied as Class A Principal for the next succeeding Distribution Date. In addition, no funds allocated to investor securities of any Series will be deposited in the Excess Funding Account during any amortization period or early amortization period with respect to such Series until the principal account for such Series for such Distribution Date has been fully funded or the investor securities of such Series have been paid in full. See "Description of the Offered Securities--Excess Funding Account." </TABLE> <TABLE> <S> <C> Distribution of Available Series 1998-2 Finance Charge Collections............ Available Series 1998-2 Finance Charge Collections will be applied on each business day in a Monthly Period in the following order of priority: (i) an amount equal to the amount of Class A Monthly Interest and any overdue Class A Monthly Interest not previously deposited in the Interest Funding Account for such Monthly Period and interest on any overdue interest amounts will be deposited in the Interest Funding Account; (ii) an amount equal to the amount of Class B Monthly Interest and any overdue Class B Monthly Interest not previously deposited in the Interest Funding Account for such Monthly Period and interest on any overdue interest amounts will be deposited in the Interest Funding Account; (iii) an amount equal to the amount of CTO Monthly Interest and any overdue CTO Monthly Interest not previously deposited in the Interest Funding Account for such Monthly Period and interest on any overdue interest amounts will be deposited in the Interest Funding Account; (iv) an amount equal to the Monthly Servicing Fee plus any Monthly Servicing Fee that was due but not paid on any prior business day will be paid to the Servicer; (v) an amount equal to the Series Default Amount on such business day and, to the extent not previously paid, the Series Default Amount for each prior business day in such Monthly Period will be (a) during the Revolving Period, treated as Shared Principal Collections and (b) during the Amortization Period, treated as Available Series 1998-2 Principal Collections for the benefit of the Securities; (vi) an amount equal to the Series 1998-2 Percentage of any Adjustment Payment which the Transferor is required but failed to make pursuant to the Pooling and Servicing Agreement will be (a) during the Revolving Period, treated as Shared Principal Collections and (b) during the Amortization Period, treated as Available Series 1998-2 Principal Collections for the benefit of the Securities; (vii) an amount equal to unreimbursed Class A Charge-Offs will be (a) during the Revolving Period, treated as Shared Principal Collections or (b) during the Amortization Period, treated as Available Series 1998-2 Principal Collections for the benefit of the Securities; (viii) an amount equal to the accrued and unpaid interest on the outstanding aggregate principal amount of the Class B Securities not previously deposited in the Interest Funding Account for such Monthly Period will be deposited in the Interest Funding Account; </TABLE> <TABLE> <S> <C> (ix) an amount equal to the accrued and unpaid interest on the outstanding aggregate principal amount of the Collateralized Trust Obligations not previously deposited in the Interest Funding Account for such Monthly Period will be deposited in the Interest Funding Account; (x) an amount equal to unreimbursed Class B Charge-Offs will be (a) during the Revolving Period, treated as Shared Principal Collections and (b) during the Amortization Period, treated as Available Series 1998-2 Principal Collections for the benefit of the Securities; (xi) an amount equal to unreimbursed CTO Charge-Offs will be (a) during the Revolving Period, treated as Shared Principal Collections and (b) during the Amortization Period, treated as Available Series 1998-2 Principal Collections for the benefit of the Securities; (xii) an amount equal to unreimbursed Class D Charge-Offs will be (a) during the Revolving Period, treated as Shared Principal Collections and (b) during the Amortization Period, treated as Available Series 1998-2 Principal Collections for the benefit of the Securities; (xiii) an amount equal to the accrued and unpaid interest on the outstanding aggregate principal amount of the Class D Securities not previously deposited in the Interest Funding Account for such Monthly Period plus any additional interest (to the extent permitted by applicable law) at the Class D Interest Rate on interest that was payable during a prior Monthly Period but was not deposited in the Interest Funding Account or paid to the Class D Securityholders will be deposited in the Interest Funding Account; (xiv) an amount equal to the excess, if any, of the Specified Revolving Receivables Reserve Amount over the amount then on deposit in the Revolving Receivables Reserve Account will be deposited in the Revolving Receivables Reserve Account; (xv) at the option of the Transferor, on and after the Defeasance Reserve Account Funding Date, but prior to the date on which a Defeasance occurs, an amount equal to the excess, if any, of the Required Defeasance Reserve Account Amount over the Available Defeasance Reserve Account Amount will be deposited in the Defeasance Reserve Account; (xvi) an amount equal to any amount required to be deposited in a reserve account established for the benefit of the Collateralized Trust Obligations will be deposited in such reserve account; (xvii) an amount designated by the Transferor in writing will be deposited in the Payment Reserve Account; and </TABLE> <TABLE> <S> <C> (xviii) the remainder will be treated as Excess Finance Charge Collections. See "Description of the Offered Securities-- Application of Collections." Coverage of Interest Shortfalls from Transferor Finance Charge Collections........................... If any amounts are on deposit in the Excess Funding Account on any business day, the Servicer will determine the amount (the "Negative Carry Amount"), if any, equal to the excess of (x) the product of (a) the Base Rate and (b) the product of (i) the amounts on deposit in the Excess Funding Account and (ii) the number of days elapsed since the previous business day divided by 360 over (y) the aggregate amount of all earnings since the previous business day available from the Cash Equivalents in which funds on deposit in the Excess Funding Account are invested. The Servicer will apply an amount equal to the lesser of (i) the Series 1998-2 Percentage of the Finance Charge Collections allocable to the Exchangeable Transferor Security ("Transferor Finance Charge Collections") on such business day and (ii) the Negative Carry Amount for such business day in the manner specified for application of Available Series 1998-2 Finance Charge Collections. Revolving Receivables Reserve Account... The "Revolving Receivables Reserve Account" will be funded from Available Series 1998-2 Finance Charge Collections as described in clause (xiv) of "Distribution of Available Series 1998-2 Finance Charge Collections" up to an amount generally equal to the product of (x) the Floating Percentage and (y) 1% of the aggregate amount of Principal Receivables which are Revolving Receivables; provided, however, that such percentage may be reduced at the option of the Transferor at any time if the Rating Agency Condition shall have been satisfied. Funds on deposit in the Revolving Receivables Reserve Account will be withdrawn by the Servicer on each Transfer Date to the extent of any shortfalls in amounts to be paid or deposited as of the end of the day on the last business day of the preceding Monthly Period and will be applied as Available Series 1998-2 Finance Charge Collections as if such amounts were available on the last business day of the preceding Monthly Period. Sharing of Excess Finance Charge Collections........................... Finance Charge Collections on any business day in excess of the amounts necessary to make required payments on such business day will be applied to cover any shortfalls with respect to amounts payable from Finance Charge Collections allocable to any other Series then outstanding, pro rata based upon the amount of the shortfall, if any, with respect to such other Series. Any Excess Finance Charge Collections remaining after covering shortfalls with respect to all outstanding Series will be paid to the Transferor. </TABLE> <TABLE> <S> <C> Series Default Amount; Series Charge-Offs........................... A portion of all Receivables in Defaulted Accounts will be allocated to the Securityholders on each business day in an amount equal to the product of the Floating Percentage and the Default Amount on such business day (the "Series Default Amount"). If on any Determination Date the aggregate Series Default Amount and the Series 1998-2 Percentage of unpaid Adjustment Payments, if any, for the preceding Monthly Period exceeds the aggregate amount of Available Series 1998-2 Finance Charge Collections applied to the payment thereof as described in clauses (v) and (vi) of "Distribution of Available Series 1998-2 Finance Charge Collections," and the amount of (x) Transferor Finance Charge Collections and (y) Excess Finance Charge Collections, in each case to the extent applied to the payment thereof as described in "Coverage of Interest Shortfalls from Transferor Finance Charge Collections," and "Sharing of Excess Finance Charge Collections," respectively, and any Redirected Principal Collections applied with respect thereto, then the Class D Invested Amount will be reduced to the extent of such excess (but not in an amount greater than the sum of the remaining aggregate Series Default Amount and the remaining Series 1998-2 Percentage of unpaid Adjustment Payments for such Monthly Period). The Class D Invested Amount will thereafter be increased (but not in excess of the unpaid principal amount of the Class D Securities) on any business day by the amount of Available Series 1998-2 Finance Charge Collections applied for such purpose as described in clause (xii) of "Distribution of Available Series 1998-2 Finance Charge Collections." If the Class D Invested Amount is reduced to zero, the CTO Invested Amount will be reduced by an amount equal to the amount by which such excess would have caused the Class D Invested Amount to be reduced below zero (but not in excess of the sum of the remaining aggregate Series Default Amount and the remaining Series 1998-2 Percentage of unpaid Adjustment Payments for such Monthly Period). The CTO Invested Amount will thereafter be increased (but not in excess of the unpaid principal amount of the Collateralized Trust Obligations) on any business day by the amount of Available Series 1998-2 Finance Charge Collections applied for that purpose as described in clause (xi) of "Distribution of Available Series 1998-2 Finance Charge Collections." If the CTO Invested Amount is reduced to zero, the Class B Invested Amount will be reduced by an amount equal to the amount by which such excess would have caused the CTO Invested Amount to be reduced below zero (but not in excess of the sum of the remaining aggregate Series Default Amount and the remaining Series 1998-2 Percentage of unpaid Adjustment Payments for such Monthly Period). If and for so long as the CTO Invested Amount is reduced to zero, the Class B Securityholders will bear directly </TABLE> <TABLE> <S> <C> the credit and other risks associated with their undivided interest in the Trust. The Class B Invested Amount will thereafter be increased (but not in excess of the unpaid principal amount of the Class B Securities) on any business day by the amount of Available Series 1998-2 Finance Charge Collections applied for that purpose as described in clause (x) of "Distribution of Available Series 1998-2 Finance Charge Collections." If the Class B Invested Amount is reduced to zero, the Class A Invested Amount will be reduced by an amount equal to the amount by which such excess would have caused the Class B Invested Amount to be reduced below zero (but not in excess of the sum of the remaining aggregate Series Default Amount and the remaining Series 1998-2 Percentage of unpaid Adjustment Payments for such Monthly Period). If and for so long as the Class B Invested Amount is reduced to zero, the Class A Securityholders will bear directly the credit and other risks associated with their undivided interest in the Trust. The Class A Invested Amount will thereafter be increased (but not in excess of the unpaid principal amount of the Class A Securities) on any business day by the amount of Available Series 1998-2 Finance Charge Collections applied for that purpose as described in clause (vii) of "Distribution of Available Series 1998-2 Finance Charge Collections." See "Description of the Offered Securities--Series Charge-Offs." Paired Series........................... Subject to satisfaction of the Rating Agency Condition, the Securities may be paired with one or more other Series or a portion of one or more other series issued by the Trust (each, a "Paired Series") at or after the Amortization Period Commencement Date but prior to the occurrence of a Pay Out Event. If a Paired Series is issued with respect to Series 1998-2, following the issuance of such Paired Series, as the Invested Amount is reduced, the invested amount of the Paired Series would increase by an amount that otherwise would have increased the Transferor Interest. Upon payment in full of Series 1998-2, the increase in the invested amount of the Paired Series will be equal to the amount of the Invested Amount paid to Securityholders of Series 1998-2 since the issuance of such Paired Series. If a Pay Out Event occurs with respect to any such Paired Series prior to the payment in full of the Securities, the final payment of principal to the Securityholders may be delayed. See "Description of the Offered Securities--Paired Series." Subordination of the Class B Securities, the Collateralized Trust Obligations and the Class D Securities............ The Class B Securities will be subordinated as described herein to the extent necessary to fund payments of principal and interest on the Class A Securities. The Collateralized Trust Obligations will be subordinated as described herein to the extent necessary </TABLE> to fund payments of principal and interest on the Class A Securities and the Class B Securities. The Class D Securities will be subordinated as described herein to the extent necessary to fund payments of principal and interest on the Class A Securities, the Class B Securities and the Collateralized Trust Obligations. See "Description of the Offered Securities-- Subordination of the Class B Securities," "--Redirection of Cash Flows" and "--Redirected Principal Collections." If on any business day there is a positive Class A Required Amount, Class B Required Amount or CTO Required Amount, certain Principal Collections for such business day will be used to fund first the Class A Required Amount, second the Class B Required Amount and third the CTO Required Amount and the Invested Amounts of the Class D Securities, the Collateralized Trust Obligations or the Class B Securities may be reduced on the related Distribution Date as more fully described herein in "Description of the Offered Securities--Redirected Principal Collections." To the extent the Class B Invested Amount, the CTO Invested Amount or the Class D Invested Amount is reduced, the percentage of Finance Charge Collections applied for the benefit of the Series 1998-2 Securityholders, in subsequent Monthly Periods will be reduced. Moreover, to the extent the amount of such reduction in the Class B Invested Amount, the CTO Invested Amount, or the Class D Invested Amount is not reimbursed, the amount of principal distributable to the Class B Securityholders, the CTO Securityholders, or the Class D Securityholders, as applicable, from the Collection Account will be reduced. Principal payments with respect to the Class B Securities will not be made until the final payment of the Class A Invested Amount has been made to the Class A Securityholders. Principal payments with respect to the Collateralized Trust Obligations will not be made until the final payment of the Class A Invested Amount has been made to the Class A Securityholders and the final payment of the Class B Invested Amount has been made to the Class B Securityholders. During the Controlled Amortization Period, the Class D Invested Amount may be reduced and the amount of the Transferor Interest correspondingly increased concurrently with payments of principal to the Class A Securityholders, the Clasrityholders and the CTO Securityholders to an amount equal to the Stated Class D Amount. During the Early Amortization Period, principal payments with respect to the Class D Securities will not be made and, except as a result of Class D Charge-Offs or Redirected Principal Collections, the Class D Invested Amount will not be reduced to an amount equal to the Stated Class D Amount until the final payment of the Class A Invested Amount has been made to the Class A Securityholders, the final payment of the Class B Invested Amount has been made to the Class B Securityholders and the final payment of the CTO Invested Amount has been made to the CTO Securityholders. See "Description of the Offered Securities--Subordination of <TABLE> <S> <C> the Class B Securities," "--Redirection of Cash Flows" and "--Redirected Principal Collections." Defeasance.............................. On the date during the Amortization Period that (v) an amount has been deposited (i) in the Defeasance Funding Account equal to the sum of the outstanding aggregate principal amount of the Class A Securities, the Class B Securities and the Collateralized Trust Obligations, which amount shall be invested in Cash Equivalents and (ii) in the Defeasance Reserve Account equal to or greater than the excess of the sum of the Class A Monthly Interest, the Class B Monthly Interest and the estimated CTO Monthly Interest over the estimated amount of investment earnings on amounts in the Defeasance Funding Account, as estimated by the Transferor, for each of the Monthly Periods during the period from the date of such deposit to the Defeasance Funding Account through the CTO Expected Final Payment Date, (w) the Transferor shall have delivered to the Trustee an opinion of counsel to the effect that such deposit and termination of obligations will not result in the Trust being required to register as an "investment company" within the meaning of the Investment Company Act and an opinion of counsel to the effect that following such deposit none of the Trust, the Defeasance Reserve Account or the Defeasance Funding Account will be deemed to be an association (or publicly traded partnership) taxable as a corporation; (x) the Transferor shall have delivered to the Trustee a certificate of an officer of the Transferor stating that the Transferor reasonably believes that such deposit and termination of its obligations will not constitute a Pay Out Event or an event that, with the giving of notice or the lapse of time, would cause a Pay Out Event to occur; (y) the Rating Agency Condition has been satisfied and (z) the Transferor has satisfied certain other conditions, the Securities will no longer be entitled to the security interest of the Trust in the Receivables and other Trust assets (except those set forth above), and the percentages applicable to the rights of the Securityholders to Principal Collections, Finance Charge Collections and Default Amounts shall be reduced to zero. Upon the satisfaction of the foregoing conditions, the Class D Invested Amount shall be reduced to zero. See "Description of the Offered Securities--Defeasance." Optional Repurchase..................... The Class A Securities, the Class B Securities and the Collateralized Trust Obligations will be subject to optional repurchase by the Transferor on any Distribution Date if on such Distribution Date the sum of the Class A Invested Amount, the Class B Invested Amount and the CTO Invested Amount would be reduced to an amount less than or equal to 10 percent of the sum of the initial Class A Invested Amount, the initial Class B Invested Amount and the initial CTO Invested Amount, if certain conditions set forth in the Pooling and Servicing Agreement are met. The repurchase price will be equal to the sum of the Class A Invested Amount, the Class B Invested </TABLE> <TABLE> <S> <C> Amount and the CTO Invested Amount that would be remaining on such date after giving effect to any payments on such date plus accrued interest which would otherwise remain unpaid on the Class A Securities, the Class B Securities and the Collateralized Trust Obligations through the day preceding the Distribution Date on which the repurchase occurs. See "Description of the Offered Securities--Final Payment of Principal; Termination." Tax Status.............................. In the opinion of Special Tax Counsel, the Class A Securities and the Class B Securities will be characterized as debt for federal income tax purposes. Under the Pooling and Servicing Agreement, the Transferor, the Servicer, the Class A Securityholders and the Class B Securityholders, agree to treat the Class A Securities and the Class B Securities as debt for federal, state, and other tax purposes. See "Certain Federal Income Tax Consequences" for additional information concerning the application of federal income tax laws. ERISA Considerations.................... Under a regulation issued by the U.S. Department of Labor (the "Plan Assets Regulation"), the Trust's assets would not be deemed "plan assets" of an employee benefit plan holding an interest in the Class A Securities or Class B Securities if such Class of Securities qualify as "publicly-offered securities" within the meaning of the Plan Assets Regulation. To qualify as "publicly-offered securities" within the meaning of the Plan Assets Regulation, certain conditions must be met, including that interests in such Class of Securities be held by at least 100 persons independent of the Transferor and each other upon completion of the public offering being made hereby. Although no assurance is given, the Class A Securities may be held by at least 100 such persons, and the Transferor anticipates that the other conditions of the "publicly-offered security" exception contained in the Plan Assets Regulation will be met with respect to the Class A Securities. The Class A Securities may not be purchased by Plans subject to Title I of ERISA or Section 4975 of the Code if all of such conditions are not met. No monitoring or other measures will be taken to ensure that any such conditions will be met with respect to the Class A Securities. If the Trust's assets were deemed to be "plan assets" of such a plan, there is uncertainty whether existing exemptions from the "prohibited transaction" rules of the Employee Retirement Income Security act of 1974, as amended ("ERISA"), would apply to all transactions involving the Trust's assets. See "Employee Benefit Plan Considerations." The Class B Underwriter does not expect that the Class B Securities will be held by 100 or more independent investors and, therefore, do not expect that the Class B Securities will qualify as "publicly-offered securities" under the Plan Assets Regulation. Accordingly, the Class B Securities may not be acquired by employee benefit plan investors subject to Title I of ERISA or </TABLE> <TABLE> <S> <C> Section 4975 of the Internal Revenue Code of 1986, as amended (the "Code") or any substantially similar federal, state or local law, including, but not limited to, as applicable, an insurance company general account. Each Security Owner of a Class B Security, by its acceptance thereof, will be deemed to have represented and warranted that it is not an employee benefit plan investor subject to Title I of ERISA of Section 4975 of the Code or any substantially similar federal, state or local law. See "Employee Benefit Plan Considerations."
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+SUMMARY The following summary is qualified in its entirety by the more detailed information and Financial Statements and Notes thereto appearing elsewhere in this Prospectus. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed under "Risk Factors," as well as those discussed elsewhere in this Prospectus. Certain terms used herein are defined under the heading "Glossary of Terms." THE COMPANY SCC is the leading provider of 9-1-1 operations support systems ("OSS") services to incumbent local exchange carriers ("ILECs"), competitive local exchange carriers ("CLECs") and wireless carriers in the United States. The Company has redefined the U.S. market for 9-1-1 OSS by creating the first and largest 9-1-1 service bureau, the SCC National Data Services Center ("NDSC"), with over 70 million subscriber data records under management throughout North America. The Company manages the data that enable a 9-1-1 call to be routed to the appropriate public safety agency along with accurate and timely information about the caller's identification and location. Through SCC's NDSC, the Company offers a comprehensive, cost-effective solution to the 9-1-1 service provisioning needs of ILECs, CLECs and wireless carriers by enabling them to outsource virtually all aspects of the operations of their 9-1-1 data management services, including system activation, routine data administration, event transaction processing and performance management, with a high level of security and survivability. In addition, the Company licenses its 9-1-1 OSS software to carriers that wish to manage the delivery of 9-1-1 data management services in-house. Representative carriers using SCC's 9-1-1 OSS solution include Ameritech, AT&T Wireless Services, BellSouth, MCI, Sprint PCS and Worldcom Network SVCS. Today, 9-1-1 is a fundamental element of local exchange service and carriers' OSS infrastructure. 9-1-1 service involves the routing of emergency calls to the appropriate public safety answering point ("PSAP") responsible for dispatching police, fire and other emergency services. When a caller dials 9-1-1, information about the caller's location, telephone number and the jurisdictionally appropriate PSAP must be quickly accessed from carriers' network and mission-critical data servers. Thus, delivery of 9-1-1 service presents a difficult OSS challenge for carriers because it requires the coordination of data from multiple sources, the review and processing of the data, the resolution of data errors and conflicts, and the insertion of the data into network and mission-critical data servers. ILECs, CLECs and wireless carriers require a 9-1-1 solution that addresses these OSS challenges and cost effectively provides a high degree of data integrity and reliability, allows them to comply with regulatory mandates, and addresses their need to provide additional value-added services. ILECs are seeking to reduce the significant capital expenditures associated with supporting rapidly evolving 9-1-1 infrastructure and upgrading their 9-1-1 data management and network control services to meet PSAP requirements and technological advancements. CLECs and wireless carriers, many of which are relatively small and new to the markets in which they are now competing, are seeking to increase their own subscriber bases while minimizing their investment in OSS technology infrastructure and personnel, as well as the relationships with PSAPs necessary to provide 9-1-1 service. Carriers with these requirements may choose to develop their own proprietary solutions, to license the 9-1-1 software and manage the delivery of 9-1-1 service themselves, or to outsource their 9-1-1 OSS needs. Through SCC's NDSC, the Company provides the data management services that ILECs, CLECs and wireless carriers need to deliver 9-1-1 calls to the appropriate PSAP, along with critical information such as caller location and call-back number that PSAPs need to respond effectively to emergencies. Complex data screening and preparation are completed to initialize properly the underlying systems necessary for 9-1-1 call routing and information display for the call taker. SCC's NDSC frequently receives and processes electronic transmissions from ILECs, CLECs and wireless carriers detailing subscriber and coverage updates and public safety jurisdiction boundary changes from PSAPs. Records identified as potentially having problems are automatically separated for manual review and analysis by SCC data integrity analysts. Using the updated information, SCC's 9-1-1 OSS then provides the information to route the 9-1-1 call and transmit essential information to the emergency service provider. The Company's objective is to be the leading national provider of 9-1-1 OSS and other complementary services to ILECs, CLECs and wireless carriers. SCC focuses on developing innovative and automated solutions to provide customers with a comprehensive system for managing large amounts of dynamic subscriber information. Key elements of the Company's strategy are to: (i) maintain and extend its leadership position in the 9-1-1 wireline data management market; (ii) capitalize on emerging wireless carrier opportunities; (iii) maintain and extend its leadership position in national clearinghouse services; (iv) provide additional services to telecommunications carriers; (v) develop applications for new commercial products; and (vi) expand international operations. The Company was incorporated in July 1979 in the State of Colorado under the name of Systems Concepts of Colorado, Inc., and was reincorporated in September 1993 in the State of Delaware under the name SCC Communications Corp. The Company's principal executive offices are located at 6285 Lookout Road, Boulder, Colorado 80301. Its telephone number is (303)581-5600. THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Company................ 2,100,000 shares Common Stock Offered by the Selling Stockholders... 1,200,000 shares Common Stock to be Outstanding after the 10,442,853 shares(1) Offering......................................... Use of Proceeds.................................... For repayment of certain indebtedness, working capital and other general corporate purposes, and possible acquisitions. See "Use of Proceeds." Proposed Nasdaq National Market Symbol............. SCCX </TABLE> - ------------ (1) Based on shares outstanding as of April 30, 1998. Includes 6,383,723 shares of Common Stock to be issued upon conversion of convertible preferred stock and exercise of a warrant concurrently with the closing of the offering made hereby. Excludes 1,114,046 shares of Common Stock issuable upon exercise of stock options outstanding as of April 30, 1998 at a weighted average exercise price of $3.11 per share, and 286,078 shares of Common Stock reserved for grant of future options as of April 30, 1998, under the Company's 1990 Stock Option Plan. On the effective date of the Registration Statement of which this Prospectus is a part, an additional 500,000 share reserve will be created under the Company's 1998 Stock Incentive Plan. See "Management -- Benefit Plans -- 1998 Stock Incentive Plan." SUMMARY FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, --------------------------- --------------- 1995 1996 1997 1997 1998 ------- ------- ------- ------ ------ <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue......................................... $ 7,413 $14,802 $27,072 $5,132 $7,902 Costs and expenses.............................. 6,727 13,329 23,738 4,639 6,940 Other expense, net.............................. 368 527 879 150 301 Income from continuing operations before income taxes......................................... 318 946 2,455 343 661 Provision (benefit) for income taxes............ 16 9 (2,328) 24 46 Net income from continuing operations........... 302 937 4,783 319 615 Loss from discontinued operations, net of tax and disposal of discontinued division......... (1,746) (562) (2,908) (253) -- Net income (loss)............................... (1,444) 375 1,875 66 615 Net income (loss) from continuing operations per share(1): Basic......................................... $ (0.02) $ 0.15 $ 2.17 $ 0.07 $ 0.20 Diluted....................................... $ (0.02) $ 0.11 $ 0.54 $ 0.04 $ 0.07 Net income (loss) per share(1): Basic......................................... $ (1.07) $ (0.17) $ 0.61 $(0.07) $ 0.20 Diluted....................................... $ (1.07) $ 0.05 $ 0.21 $ 0.01 $ 0.07 </TABLE> <TABLE> <CAPTION> MARCH 31, 1998 ------------------------------------------ PRO FORMA ACTUAL PRO FORMA(2) AS ADJUSTED(3) -------- -------------- -------------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents............................... $ 1,177 $ 1,177 $23,109 Working capital......................................... (2,031) (2,031) 20,351 Total assets............................................ 23,328 23,328 45,260 Long-term debt.......................................... 9,642 9,642 6,998 Total stockholders' equity (deficit).................... (11,485) 4,810 29,836 </TABLE> - ------------ (1) See Note 2 of Notes to Financial Statements for an explanation of the determination of shares used in computing net income (loss) from continuing operations per share. (2) Reflects the conversion of convertible preferred stock into an aggregate of 6,188,575 shares of Common Stock and the exercise of an outstanding warrant to acquire 195,148 shares of Common Stock. See Note 4 of Notes to Financial Statements. (3) Reflects the conversion of convertible preferred stock into an aggregate of 6,188,575 shares of Common Stock, the exercise of an outstanding warrant to acquire 195,148 shares of Common Stock, the sale of 2,100,000 shares of Common Stock by the Company and the application of the estimated net proceeds therefrom (assuming an initial public offering price of $14.00). See "Use of Proceeds," "Capitalization" and Note 4 of Notes to Financial Statements. ------------------------------ Except as otherwise indicated herein, all information presented in this Prospectus (i) gives effect to a 1-for-3 reverse stock split, (ii) reflects the conversion of all outstanding shares of the Company's mandatorily redeemable, convertible preferred stock, par value $.001 (the "Convertible Preferred Stock"), into an aggregate of 6,188,575 shares of Common Stock and the exercise of an outstanding warrant to acquire 195,148 shares of Common Stock, (iii) gives effect to the filing of an Amended and Restated Certificate of Incorporation upon the closing of this offering to, among other things, create a new class of undesignated preferred stock and (iv) assumes no exercise of the Underwriters' over-allotment option.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000924645_media_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000924645_media_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH IN "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. SEE "CAUTIONARY LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS." ALL REFERENCES TO A PARTICULAR "FISCAL YEAR" OF THE COMPANY REFER TO THE 12 MONTHS ENDED MARCH 31 OF THE YEAR REFERENCED, UNLESS OTHERWISE NOTED. THE COMPANY Media Arts Group, Inc. is a leading designer, manufacturer, marketer and branded retailer of art-based home decorative accessories, collectibles and gift products based on the works of the award-winning artist Thomas Kinkade, Painter of Light. The Company's primary products are canvas and paper lithographs that feature Mr. Kinkade's unique use of light and his peaceful and inspiring themes. The Company believes that the Thomas Kinkade lifestyle brand appeals to a wide range of consumers because of its broad and inclusive message that celebrates home, family, nature and traditions. The Company strives to reach a broad consumer base by offering products at a variety of price points, controlling its distribution through branded retail stores and galleries and developing strategic marketing relationships with companies such as Hallmark Cards, Inc. ("Hallmark"), Avon Products, Inc. ("Avon") and QVC, Inc. ("QVC"). The Company believes that its focus on high quality products sold in Thomas Kinkade branded retail environments has allowed it to increase sales and profitability significantly. In the 12 month period ended December 31, 1997, the Company recorded an increase in net sales of 49.7% over the comparable prior 12 month period to $68.7 million, with a gross margin of 67.1% and an operating margin of 22.3%. In this same period, Thomas Kinkade Stores open for more than 12 months had average sales per square foot of $1,332. The Company's growth strategy includes a continued focus on building the Thomas Kinkade brand, building market awareness and increasing the number of Company owned Thomas Kinkade Stores and independently owned Signature Galleries. The Company distributes its products through a network of 17 Company owned Thomas Kinkade Stores and 67 independently owned Signature Galleries that exclusively sell Thomas Kinkade products. The Company plans to expand this network by adding approximately 10 Thomas Kinkade Stores and approximately 100 Signature Galleries in fiscal 1999. This controlled distribution strategy focuses on developing stores and galleries to provide warm and inviting shopping environments that showcase Thomas Kinkade products as they might appear in a customer's home. The Company also distributes its products through approximately 2,200 independent dealers that commit to varying levels of minimum purchases. Furthermore, the Company has established licensing and/or distribution arrangements with Hallmark for stationery items, ornaments and other gift products; Avon for gift products; and QVC for paper lithographs and other gift products. The Company's products include limited edition canvas and paper lithographs, open edition prints and gift products. The Company plans to introduce approximately 10 new limited edition images per year and intends to leverage its library of new images and over 160 existing Thomas Kinkade images into additional products. The Company's retail price points range from $50 for small gift prints to $150 to $15,000 for lithographs. The Company also offers a variety of products at lower price points, including books, mugs, decorative tins and gift baskets. The Company's canvas lithographs are manufactured at its San Jose, California production facility using a proprietary manufacturing process. Paper lithographs and most of the Company's gift items are manufactured by third parties. According to Packaged Facts, a consumer research organization, the home decorative accessories and collectibles market is expected to grow from $6.9 billion in 1996 to $9.2 billion by the year 2001. The Company's goal is to capitalize on the significant opportunity afforded by this market by developing Thomas Kinkade into a leading art-based brand. The Company's key business strategies include: (i) providing a wide array of branded home accessories; (ii) expanding controlled distribution through Thomas Kinkade Stores and Signature Galleries; (iii) expanding its dealer network and promoting existing dealers to higher purchase levels; (iv) developing strategic business relationships to expand consumer reach and product lines; and (v) providing high quality products. Media Arts Group, Inc. was incorporated in Delaware in 1993. The Company maintains its executive offices at 521 Charcot Avenue, San Jose, California 95131. The Company's telephone number is (408) 324-2020. The Company owns and uses a variety of trademarks, including the registered trademarks MAGI-Registered Trademark', Media Arts Group, Inc.-Registered Trademark- and Painter of Light-Registered Trademark- (registered for use with respect to books and certain paper goods). THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company........... 1,500,000 shares Common Stock offered by the Selling Stockholders.................................. 905,500 shares Common Stock to be outstanding after the offering...................................... 12,583,042 shares (1) Use of proceeds............................... The net proceeds to the Company from the offering will be used to repay certain indebtedness, to open new Thomas Kinkade Stores, for other capital expenditures and for general corporate purposes. See "Use of Proceeds." Nasdaq National Market symbol................. ARTS </TABLE> SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA AND SELECTED OPERATING DATA) <TABLE> <CAPTION> NINE MONTHS ENDED FISCAL YEAR ENDED MARCH 31, DECEMBER 31, ------------------------------- -------------------- 1995 1996 1997 1996 1997 --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF INCOME DATA: (2) Net sales............................................................. $ 33,485 $ 39,752 $ 47,018 $ 35,512 $ 57,209 Operating income...................................................... 6,397 5,547 6,791 5,318 13,864 Income from continuing operations before extraordinary loss........... 4,014 2,455 2,644 1,967 8,393 Net income (loss)..................................................... $ 3,789 $ (673) $ (10,986) $ (11,663) $ 8,393 Income from continuing operations before extraordinary loss per share (diluted) (3)....................................................... $ 0.42 $ 0.25 $ 0.26 $ 0.20 $ 0.73 Net income (loss) per share (diluted) (3)............................. $ 0.40 $ (0.07) $ (1.09) $ (1.17) $ 0.73 Shares used in per share calculations (3)............................. 9,479 9,906 10,108 9,930 11,532 SELECTED OPERATING DATA: Number of Thomas Kinkade Stores (4)................................... 7 15 16 16 17 Retail sales per square foot (4)(5)................................... $ 993 $ 986 $ 1,109 $ 856 $ 1,078 Number of Signature Galleries......................................... -- -- 17 14 67 </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1997 -------------------------- ACTUAL AS ADJUSTED (6) --------- --------------- <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: (2) Cash and cash equivalents.................................................................... $ 5,099 $ 17,105 Working capital.............................................................................. 13,498 26,004 Total assets................................................................................. 33,199 45,205 Long-term debt less current portion (7)...................................................... 3,909 1,200 Total stockholders' equity................................................................... 14,445 30,471 </TABLE> - ------------------------------ (1) Based on shares outstanding as of December 31, 1997. Excludes (i) 1,395,447 shares of Common Stock reserved for issuance under the Company's stock option plans and other stock option agreements, of which 1,076,666 shares were subject to outstanding options as of December 31, 1997 at a weighted average exercise price of $3.85 per share, 563,584 of which were immediately exercisable within 60 days of such date; (ii) 600,000 shares of Common Stock reserved for issuance to Thomas Kinkade under an option agreement dated December 3, 1997 at an exercise price of $12.375 per share, subject to stockholder approval; and (iii) 633,432 shares issuable under warrants and convertible notes at a weighted average exercise price of $7.54 per share. (2) Restated to reflect (i) discontinuance of John Hine Limited during the year ended March 31, 1997; and (ii) acquisitions of seven galleries during the year ended March 31, 1996 which have been accounted for as poolings of interests. See Notes 2 and 3 of Notes to Consolidated Financial Statements. (3) See Note 1 of Notes to Consolidated Financial Statements for an explanation of the determination of shares used in computing earnings per share. (4) In fiscal 1996, the Company acquired seven galleries which are included in the number of Thomas Kinkade Stores commencing with the fiscal year ended March 31, 1996. Since these galleries were acquired in transactions accounted for as a pooling of interests, the operating results of these galleries are included in the Company's Consolidated Statement of Income in all prior periods. (5) Includes sales by Thomas Kinkade Stores open for 12 or more months. (6) Adjusted to reflect the sale by the Company of 1,500,000 shares of Common Stock offered hereby at an estimated price of $13.125 per share and the application of the estimated net proceeds therefrom as if such transaction had occurred as of December 31, 1997. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000924654_ribogene_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000924654_ribogene_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and Financial Statements and Notes thereto appearing elsewhere in this Prospectus, including information under "Risk Factors." This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those described in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. Except as otherwise noted, all information in this Prospectus, including financial information, share and per share data: (i) assumes no exercise of the Underwriters' over-allotment option; (ii) reflects a 1-for-14 reverse split of the Company's Common Stock to be effected prior to or concurrently with the closing of the Offering; (iii) reflects reincorporation of the Company in Delaware prior to the closing of the Offering; and (iv) assumes the automatic conversion of all outstanding shares of the Company's Series A through Series G Preferred Stock into an aggregate of 2,385,039 shares of Common Stock, assuming an initial public offering price of $7.00 per share, which will occur concurrently with the closing of the Offering. The number of shares of Common Stock to be issued upon conversion of the Series F Preferred Stock and upon the exercise of the Placement Agent Unit Options will depend upon the initial public offering price. See "Certain Transactions" and "Description of Capital Stock." THE COMPANY RiboGene is a drug discovery company focused on the identification of novel leads and the development of potential drug candidates for the treatment of infectious diseases. The Company's drug discovery efforts target bacterial, fungal and viral infections, for which the efficacy of existing therapies is being threatened by the emergence of drug resistance or for which existing therapies have had limited effectiveness. The Company's drug discovery technology is based on the translational control of gene expression. Translation is the process used by cells to make proteins and is an essential cellular process for all living organisms, including infectious pathogens. The Company is using its platform technology to discover compounds that inhibit or interfere with pathogen specific translation mechanisms ("PSTMs"). RiboGene's extensive knowledge of translation allows the Company to identify components of the translation process unique to a particular pathogen and essential to its existence. The Company believes that targeting PSTMs may lead to the discovery of drugs that are effective against either drug-resistant pathogens or pathogens for which current therapies are not effective. Infectious diseases have increased significantly during the past 20 years and are now the third most common cause of death in the United States. Worldwide sales of antiinfective drugs were approximately $33.0 billion in 1996 and constituted the second largest pharmaceutical sales category. The antibacterial, antifungal and antiviral markets are estimated to be approximately $26.0 billion, $4.0 billion and $3.0 billion, respectively, based on 1996 sales. There are currently three antibacterial drugs that have each generated in excess of $1.0 billion in worldwide sales annually and one antifungal drug that generated nearly $1.0 billion. Of the 100 best selling brand name drugs worldwide, 20 are antiinfectives addressing bacterial, fungal and viral infections. The clinical efficacy of many bacterial and fungal antiinfectives is being threatened by emerging strains of drug-resistant pathogens. In the antiviral area, there are only a limited number of effective therapeutics currently marketed. The Company believes that its target-based approach is different from, and provides advantages over, traditional drug discovery techniques. Antiinfective drug discovery has historically used a limited number of biological targets which has restricted the ability to discover new drugs effective against drug resistant pathogens. RiboGene's PSTMs represent a new class of targets for drug discovery. By focusing discovery efforts on drugs which are effective inhibitors of PSTMs, the Company believes that it may be possible to discover drug candidates for which pathogens have not already developed resistance. In addition, because the Company selects only PSTM targets which are essential for the life of the pathogen and appear to bear little or no resemblance to their human counterpart, such compounds may in certain applications have better safety and efficacy profiles than existing therapies, or may provide a therapy where no other therapy currently exists. The Company's scientists and Scientific Advisory Board use their knowledge and expertise in the field of translation to identify unique targets specific to pathogens and to design and implement assays in order to identify selective compounds which demonstrate activity at the pathogen specific translation targets. By developing assays to discover compounds with identified mechanisms of action against desired targets, the Company believes that the compounds which demonstrate activity at these targets will be better characterized and more likely to result in lead candidates for optimization and further development. RiboGene has established antibacterial, antifungal and antiviral drug discovery programs. Within each program, the Company's drug discovery process consists of four phases: (i) target identification -- the selection and characterization of PSTM targets; (ii) assay development -- the design and implementation of screening systems to identify small-molecule compounds active against the PSTM targets; (iii) lead discovery -- the screening of compound libraries to identify small-molecule lead compounds; and (iv) lead optimization -- the refinement of lead compounds in order to develop drug candidates. In its antibacterial program, the Company has two principal targets in the lead discovery phase, deformylase and ppGpp degradase, for which it conducts research in collaboration with Dainippon Pharmaceutical Co., Ltd. ("Dainippon"), a major Japanese pharmaceutical company located in Osaka, Japan. The Company has several additional antibacterial targets, to which it has retained its rights, that are in the assay development phase. In its antifungal program, compounds directed toward two targets, EF3 and GCN4, are in the lead optimization phase and several others are in various phases of early research and development. In its antiviral program, which is currently focused exclusively on the hepatitis C virus ("HCV"), the Company has one target, HCV IRES, in the lead discovery phase and one target, HCV NS5A/PKR, in the assay development phase. In order to accelerate the discovery, development and commercialization of antiinfective drugs, the Company seeks to enter into collaborations with major pharmaceutical companies and, additionally, into research and licensing agreements with biotechnology companies, combinatorial chemistry companies and universities. These relationships are intended to provide the Company with funding, research and development support, access to additional compound libraries and targets, as well as to provide the Company with preclinical and clinical trial, manufacturing and marketing capabilities. In April 1996, the Company entered into a collaboration with Abbott Laboratories ("Abbott") for the Company's antifungal program (the "Abbott Collaboration"). On February 6, 1998, Abbott notified the Company of its termination of the Abbott Collaboration effective April 8, 1998. As of March 31, 1998, the Company had realized $3.2 million in research support revenues from Abbott and expects to realize $139,000 of revenue deferred at March 31, 1998. In connection with the Abbott Collaboration, Abbott made a $3.5 million equity investment in the Company and agreed to purchase an additional $4.0 million of Common Stock at a price per share equal to the initial public offering price concurrently with the closing of the Offering, assuming the Offering results in gross proceeds to the Company of $16.0 million. In January 1998, the Company entered into a collaboration with Dainippon (the "Dainippon Collaboration") for the two principal targets in the Company's antibacterial program. As part of the Dainippon Collaboration, Dainippon agreed to provide the Company with up to $6.0 million in research support payments ($2.0 million of which has been received), and to provide additional research and development support at Dainippon, over the three-year term of the research program. The Company may also be entitled to receive milestone payments upon the achievement of mostly late-stage clinical and regulatory milestones in the amount of up to $10.0 million for each product developed through the collaboration, consisting of up to $5.0 million through approval in Japan and up to $5.0 million through approval in one additional major market territory. RiboGene also has retained certain co-promotion rights for any products resulting from the collaboration. In connection with the Dainippon Collaboration, Dainippon made a $2.0 million equity investment in the Company by purchasing 756,144 shares of the Company's Series G Preferred Stock (the "Dainippon Shares"), which will automatically convert into 53,988 shares of Common Stock upon the closing of the Offering. The Company has also entered into agreements with ArQule, Inc., Pharmacopeia, Inc. and Trega Biosciences, Inc. to provide the Company with access to additional compound libraries for its drug discovery programs and with the University of Washington to acquire the rights to the HCV NS5A/PKR target for its antiviral program. RiboGene is a development stage company that has experienced operating losses every year since its inception. At March 31, 1998, the Company had an accumulated deficit of approximately $36.4 million. To date, the Company has not selected any compounds for further development, has not initiated any preclinical or clinical studies with any compounds and has not developed or commercialized any products that have generated revenues. Relatively few products based on genetic discoveries, and no drugs discovered using a translation-based discovery approach, have been developed and commercialized by others to date. The Company's PSTM technology is still in early stages and will require significant further research, development and preclinical and clinical testing in order to validate translation generally, and PSTM targets specifically, as an effective method to discover new antiinfectives. An investment in the shares of Common Stock offered hereby involves a high degree of risk. In addition to the other information contained in this Prospectus, the discussion of risk factors on pages 8 to 20 of this Prospectus should be considered carefully in evaluating an investment in the Common Stock. See "Risk Factors -- History of Losses; Uncertainty of Future Profitability; Going Concern Explanatory Paragraph in Auditors Report," "-- Early Stage of Development; Uncertainty of Product Development" and "-- Dependence on a Single Technological Approach." STATUS OF RIBOGENE DRUG DISCOVERY PROGRAMS LOGO The Company was incorporated in California in May 1989 as TransGene, Inc. and changed its name to RiboGene, Inc. in May 1990. In May 1998, the Company reincorporated in Delaware. The principal executive offices of the Company are located at 26118 Research Road, Hayward, California 94545 and its telephone number is (510) 732-5551. THE OFFERING <TABLE> <S> <C> Common Stock offered...................... 2,700,000 shares Common Stock to be outstanding after the Offering................................ 5,764,055 shares(1)(2) Use of proceeds........................... Expansion of internal chemistry capabilities, expansion and advancement of antibacterial, antifungal and HCV programs, establishment of new drug discovery programs, repayment of certain indebtedness and working capital and general corporate purposes. See "Use of Proceeds." American Stock Exchange symbol............ RBO </TABLE> - --------------- (1) Based upon shares outstanding at March 31, 1998. Includes: (i) an aggregate of 2,385,039 shares of Common Stock issuable upon the automatic conversion of all outstanding shares of the Company's Series A through Series G Preferred Stock concurrently with the closing of the Offering and (ii) 571,429 shares of Common Stock (assuming an initial public offering price of $7.00 and gross proceeds to the Company of at least $16.0 million) to be sold by the Company to Abbott for $4.0 million pursuant to a stock purchase agreement, dated as of April 26, 1996, as amended (the "Abbott Purchase Agreement"), concurrently with the closing of the Offering. The number of shares of Common Stock to be issued upon conversion of the Company's Series F Preferred Stock and to Abbott will depend upon the initial public offering price. See "Business -- Collaborative and Research Agreements," "Certain Transactions" and "Description of Capital Stock." (2) Excludes as of March 31, 1998: (i) an aggregate of 182,433 shares of Common Stock reserved for issuance under the Company's stock plans upon exercise of options outstanding at a weighted average exercise price of $3.57 per share; (ii) an aggregate of 1,506,486 shares of Common Stock reserved for future grants or purchases under the Company's equity incentive plans; (iii) 162,967 shares of Common Stock reserved for issuance upon exercise of the warrants (the "Class A Warrants") issued in connection with the private placement of the Series F Preferred Stock (the "Series F Private Placement"), with an exercise price equal to the initial public offering price; (iv) 166,319 shares of Common Stock reserved for issuance upon the exercise of warrants (other than Class A Warrants) outstanding at a weighted average exercise price of $16.75 per share; (v) 733,755 shares of Common Stock reserved for issuance upon exercise of options (the "Placement Agent Unit Options") to purchase 570,665 units (the "Placement Agent Units"), at an exercise price of $1.24 per unit, issued to the placement agent in connection with the Series F Private Placement and a financial advisory agreement, each Placement Agent Unit consisting of two shares of Series F Preferred Stock and one Class A Warrant (the "Placement Agent Class A Warrants"); (vi) 40,739 shares of Common Stock reserved for issuance upon the exercise of the Placement Agent Class A Warrants; and (vii) an aggregate of 270,000 shares of Common Stock reserved for issuance upon the exercise of warrants issued to the Representative at an exercise price equal to 165% of the initial public offering price of the Common Stock (the "Representative's Warrants"). The number of shares of Common Stock to be issued upon conversion of the Series F Preferred Stock and exercise of the Placement Agent Unit Options will depend upon the initial public offering price. See "Management -- Stock and Related Employee Benefit Plans," "Certain Transactions," "Description of Capital Stock" and "Underwriting." SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> PERIOD FROM INCEPTION THREE MONTHS (MAY 5, ENDED 1989) YEAR ENDED DECEMBER 31, MARCH 31, TO ---------------------------- --------------- MARCH 31, 1995 1996 1997 1997 1998 1998 -------- ------- ------- ------ ------ ----------- <S> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenues.......................... $ 407 $ 2,087 $ 2,971 $ 730 $1,006 $ 6,709 Operating expenses: Research and development.............. 4,663 4,077 4,130 999 1,177 23,875 General and administrative............ 2,758 1,372 1,551 360 459 12,098 Financial advisory costs.............. -- -- 1,396 -- -- 1,396 Restructuring costs................... -- 219 -- -- -- 219 Acquired in-process research and development........................ -- -- -- -- -- 5,000 -------- ------- ------- ------ ------ -------- Total operating expenses........... 7,421 5,668 7,077 1,359 1,636 42,588 -------- ------- ------- ------ ------ -------- Loss from operations.................... (7,014) (3,581) (4,106) (629) (630) (35,879) Interest expense, net................... (240) (282) (7) (9) (70) (518) -------- ------- ------- ------ ------ -------- Net loss................................ $ (7,254) $(3,863) $(4,113) $ (638) $ (700) $(36,397) ======== ======= ======= ====== ====== ======== Basic net loss per share(1)............. $(164.86) $(52.92) $(41.13) $(6.44) $(6.73) ======== ======= ======= ====== ====== Shares used in computing basic net loss per share(1).......................... 44 73 100 99 104 ======== ======= ======= ====== ====== Pro forma net loss per share(1)......... $ (1.95) $(0.28) ======= ====== Shares used in computing pro forma net loss per share(1)..................... 2,109 2,469 ======= ====== </TABLE> <TABLE> <CAPTION> MARCH 31, 1998 --------------------- DECEMBER 31, AS 1997 ACTUAL ADJUSTED(2) ------------ ------- ----------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........... $ 2,045 $ 3,272 $ 22,576 Working capital (deficit)................................... (1,745) (622) 19,993 Total assets................................................ 4,312 5,765 23,700 Deficit accumulated during development stage................ (35,697) (36,397) (36,430) Total stockholders' equity (deficit)........................ (162) 1,226 20,581 </TABLE> - --------------- (1) See Note 1 of Notes to Financial Statements for information concerning the computation of pro forma net loss per share. (2) As adjusted to reflect: (i) the issuance and sale of the 2,700,000 shares of Common Stock offered hereby (assuming an initial public offering price of $7.00 per share), and the receipt and application of the estimated net proceeds therefrom; and (ii) the issuance and sale of 571,429 shares of Common Stock (assuming an initial public offering price of $7.00 per share) to Abbott for $4.0 million, concurrently with the closing of the Offering. See "Use of Proceeds," "Capitalization" and "Business -- Collaboration and Research Agreements."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000926171_national_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000926171_national_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the detailed information appearing elsewhere in this Prospectus. The offering by NB Capital Corporation (the "Company") of up to 61,600 shares of its 8.35% Noncumulative Exchangeable Preferred Stock, Series A, par value US$.01 per share (the "Series A Preferred Shares") is referred to herein as the "Offer." The offering by the Company of up to 300,000 shares of its Series A Preferred Stock in exchange for up to all the outstanding shares of Series A Preferred Stock of the Company is referred to herein as the "Exchange Offer." References to dollars and US$ are to United States dollars; references to C$ and $ are to Canadian dollars. As of December 31, 1997, the Canadian dollar exchange rate was C$1.4313 = US$1.00 and certain amounts stated herein reflect such exchange rate. The Company General The Company is a Maryland corporation incorporated on August 20, 1997. The Bank was the organizer of the Company. All of the common stock, par value $.01, of the Company (the "Common Stock") is owned by National Bank of Canada (the "Bank"). The Company's principal business objective is to acquire, hold, finance and manage assets consisting of obligations secured by real property, as well as certain other qualifying REIT assets ("Mortgage Assets"). The Company will elect to be taxable as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"), and generally will not be liable for United States federal income tax to the extent that it distributes its income to its stockholders and maintains its qualification as a REIT. See "United States Federal Income Tax Considerations--Qualification of the Company as a REIT." The Bank has indicated to the Company that, for as long as any of the Series A Preferred Shares are outstanding, the Bank intends to continue to own all of the outstanding shares of the Common Stock. The Company was formed to provide investors with the opportunity to invest in Canadian residential mortgages and other real estate assets and to provide the Bank with a cost-effective means of raising capital. The Company began operations on September 3, 1997. The Company's charter (the "Charter") and bylaws (the "Bylaws") both become operational on August 20, 1997. Pursuant to the Charter, the duration of the Company will be perpetual, except that effective as of the close of business on the date the Company delivers a notice of an Exchange Event, without the need for any approval by the Board of Directors or the stockholders of the Company, the existence of the Company will terminate and the Company will be liquidated and its affairs wound up in accordance with Maryland law. Mortgage Assets The Mortgage Assets currently consist of sixteen "hypothecation loans" (the "Initial Mortgage Assets"), in an aggregate amount at December 31, 1997 of US$456 million, issued to the Company by NB Finance that are recourse only to the "Initial Mortgage Loans." The Initial Mortgage Loans consist of sixteen pools of, at December 31, 1997, 11,701 "Mortgage Loans" in an aggregate amount at December 31, 1997 of C$793 million (US$554 million). Accordingly, the Initial Mortgage Assets issued by NB Finance are overcollateralized by US$98 million, as of December 31, 1997. Mortgage Loans consist of CMHC-insured residential first mortgages that are secured by real property located in Canada. The Initial Mortgage Assets issued by NB Finance will mature semiannually beginning in 2000 and the proceeds thereof (net of distributions and expenses) are expected to be reinvested in additional Mortgage Assets as described under "Business and Strategy--Description of Mortgage Assets; Investment Policy." The Company acquired the Initial Mortgage Assets (which are U.S. dollar denominated) backed by the Initial Mortgage Loans (which are Canadian dollar denominated), rather than purchasing the Initial Mortgage Loans directly, in order to eliminate potential foreign exchange gain or loss and to provide a U.S. dollar denominated income stream that matched its obligations on the Preferred Stock. INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED MARCH __, 1998 PRELIMINARY PROSPECTUS National Bank of Canada NB Capital Corporation NB Finance, Ltd. 8.35% Noncumulative Exchangeable Preferred Stock, Series A, of NB Capital (Liquidation preference Corporation US$1,000 per share) Exchangeable into Preferred Shares of National Bank of Canada This Prospectus relates to the offer of up to 61,600 shares (the "Offer") of 8.35% Noncumulative Exchangeable Preferred Stock, Series A, par value US$.01 per share (the "Series A Preferred Shares"), of NB Capital Corporation (the "Company"), a wholly owned subsidiary of National Bank of Canada (the "Bank"). On September 3, 1997 (the "Issue Date"), 300,000 Series A Preferred Shares were issued and sold (the "Original Offering") to Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Initial Purchaser") in a transaction not registered under the Securities Act of 1933, as amended (the "Securities Act") in reliance upon an exemption from the registration requirements thereof. The Initial Purchaser simultaneously sold 238,400 Series A Preferred Shares in transactions exempt from the registration requirements of the Securities Act in the United States to persons reasonably believed by the Initial Purchaser to be "qualified institutional buyers" (as defined in Rule 144A under the Securities Act), to institutional "accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) and outside the United States to non-United States persons in offshore transactions in reliance on Regulation S under the Securities Act. The Initial Purchaser continues to hold up to 61,600 Series A Preferred Shares that may be offered and sold from time to time by the Initial Purchaser pursuant to this Prospectus. The Series A Preferred Shares are limited with respect to transferability. See "Summary--Series A Preferred Shares--Transfer Restrictions" and "Description of Capital Stock--Restrictions on Ownership and Transfer." The Company's principal business objective is to acquire, hold, finance and manage assets consisting of obligations secured by real property, as well as certain other qualifying real estate investment trust ("REIT") assets ("Mortgage Assets"). The Mortgage Assets of the Company currently consist of sixteen "hypothecation" loans (the "Initial Mortgage Assets") issued to the Company by NB Finance, Ltd., a wholly owned subsidiary of the Bank ("NB Finance"), that are recourse only to the "Initial Mortgage Loans." Hypothecation loans are loans secured by the pledge of mortgages as security therefor. The Initial Mortgage Loans consist of sixteen pools of, at December 31, 1997, 11,701 "Mortgage Loans." Mortgage Loans consist of residential first mortgages insured by Canada Mortgage and Housing Corporation, an agency of the Government of Canada ("CMHC"), that are secured by real property located in Canada. See "Risk Factors" commencing on page 13 for a discussion of certain factors that should be considered by potential holders of Series A Preferred Shares, including the following: o The Company's income consists principally of payments of interest and, therefore, is heavily dependent upon prevailing interest rates. Additionally, the Company's income is denominated in Canadian dollars. Consequently, a significant decline in interest rates or in the value of the Canadian dollar may have an adverse effect on the Company, its assets and its ability to make dividend payments with respect to the Series A Preferred Shares. o The Company's operations may be affected by prevailing real estate market conditions. Consequently, there can be no assurance that prevailing real estate market conditions will not adversely affect the Company's ability to pay dividends. o All of the residential real properties securing the Initial Mortgage Assets issued by NB Finance are, and in the future are expected to be, located outside the United States, primarily in Quebec. Consequently, the Company will be subject to the laws of a foreign jurisdiction with respect to any actions taken and may be subject to a greater risk of default than investments in comparable U.S. real property. o The Initial Mortgage Assets issued by NB Finance are recourse only to the Initial Mortgage Loans. Consequently, in the event of default on the Initial Mortgage Assets issued by NB Finance, the Company's only recourse will principally be foreclosure on the real property securing the Initial Mortgage Assets issued by NB Finance, and in certain circumstances, CMHC insurance may not be available or receipt of payment thereof may be delayed. o Dividends on the Series A Preferred Shares are not cumulative. Consequently, if the Board of Directors of the Company (the "Board of Directors") does not authorize and declare a dividend on the Series A Preferred Shares for any particular quarterly dividend period, the holders of the Series A Preferred Shares would not be entitled to recover such dividend even if funds are, or subsequently become, available for payment thereof. o As a subsidiary of the Bank, Canadian banking authorities could, under certain circumstances, impose certain restrictions on the operations of the Company. Consequently, under such circumstances, such restrictions could cause the Company to fail to qualify as a REIT as well as affect its ability to pay dividends. o The Company may not qualify as a REIT for United States federal income tax purposes. Consequently, the Company may be subject to United States federal income tax at normal corporate tax rates. o The Board of Directors may amend or revise the Company's policies and strategies in the future without a vote of stockholders, including holders of the Series A Preferred Shares. Consequently, the holders of Series A Preferred Shares cannot preclude the Board of Directors from making such amendments or revisions even though the ultimate effect to the holders of Series A Preferred Shares may be negative. o The assets of the Company consist of obligations that do not provide for complete amortization of principal over their term to maturity and, therefore, require a balloon payment. Consequently, holders of Series A Preferred Shares may be accepting a greater degree of risk relative to an investment with underlying assets that are comprised of fully amortizing obligations. o The Company has not obtained a third party valuation of its assets for the purposes of the Exchange Offer. Consequently, there can be no assurance that the fair market value of such assets does not differ from the purchase price thereof. o Under certain circumstances, including when the Bank is experiencing financial difficulties or its financial condition is deteriorating, the Series A Preferred Shares could be exchanged (an "Exchange Event") automatically for the Bank's 8.45% Noncumulative First Preferred Shares, Series Z (the "Bank Preferred Shares"). Consequently, the Bank Preferred Shares would represent an investment in the Bank and not in the Company at a time when the Bank is experiencing such financial difficulties or such deterioration of financial condition. o The Company is dependent upon the Bank and its affiliates in virtually every phase of its operations. However, the interests of the Company and the Bank may not be identical. Consequently, because of the relationship between the Company and the Bank and its affiliates, conflicts of interest may arise between the Company and the Bank. o The assignment of the Initial Mortgage Loans to the Company has not been registered. Consequently, a bona fide purchaser who completes all necessary registration formalities prior to the Company would be recognized as the owner of the Initial Mortgage Loans. o The Company is under no obligation, and currently has no intention, to list the Series A Preferred Shares on a national exchange. Additionally, there is no existing market for the Series A Preferred Shares and there can be no assurance as to the liquidity of any markets that may develop, the ability of holders to sell their Series A Preferred Shares or the sale price thereof. Consequently, holders of Series A Preferred Shares may find it difficult to sell their Series A Preferred shares or to sell their Series A Preferred Shares at a price equivalent to the purchase price thereof. The 300,000 Series A Preferred Shares issued and sold on the Issue Date bear legends restricting the transfer thereof. Pursuant to the Registration Rights Agreement among the Company, the Bank and the Initial Purchaser (the "Registration Rights Agreement"), the Company is obligated to offer in exchange (the "Exchange Offer") for such Series A Preferred Shares, up to 238,400 Series A Preferred Shares that do not bear such legends restricting transfer. Accordingly, the Series A Preferred Shares issued in connection with the Offer and the Exchange Offer are identical in all respects to the Series A Preferred Shares issued and sold on the Original Issuance Date, except that such Series A Preferred Shares will be freely transferrable. The Company has filed with the Commission a Registration Statement on Form S-11, of which this Prospectus constitutes a part, and a Registration Statement on Form S-4 to satisfy its obligations under the Registration Rights Agreement. -------------------- THE SECURITIES DESCRIBED HEREIN HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. CERTAIN PERSONS PARTICIPATING IN THIS EXCHANGE OFFER MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE PREFERRED SHARES. SUCH TRANSACTIONS MAY INCLUDE STABILIZING,THE PURCHASE OF THE PREFERRED SHARES TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. The principal executive offices of the Company are located at 125 West 55th Street, New York, New York 10019. The telephone number of the Company is (212) 632-8500. The Bank General The Bank was formed through a series of amalgamations and its roots date back to 1859 with the founding of the Banque Nationale in Quebec City. Its head office and principal place of business is located at the National Bank Tower, 600 de La Gauchetiere West, Montreal, Quebec, H3B 4L2, and its telephone number is (514) 394-5000. The Bank is a Schedule I bank under the Consolidated Bank Act (Canada), as amended (the "Bank Act"). The Bank Act is the charter governing all banks in Canada (both domestic banks and branches of foreign banks operating in Canada). "Schedule I" of the Bank Act lists all Canadian domestic banks. "Schedule II" of the Bank Act lists all subsidiaries of foreign banks with branches in Canada. The specific provisions of the Bank Act which govern a particular bank depend upon the schedule on which such bank is listed. As a Canadian domestic bank, the Bank is a "Schedule I Bank." The Bank, which ranks sixth among Canadian banks in terms of total assets, is present in each of Canada's provinces. It delivers an extensive range of financial services to individuals, commercial enterprises, financial institutions and governments both in Canada and abroad. Additional information regarding the Bank is included in the Bank's short-form prospectus related to the Bank Preferred Shares affixed to this Prospectus as Annex A. Preferred Shares of the Bank The authorized preferred capital of the Bank consists of an unlimited number of First Preferred Shares ("First Preferred Shares") and up to 15 million Second Preferred Shares which may be issued for a maximum aggregate consideration of C$1 billion and C$300 million, respectively, or the equivalent thereof in other currencies. The Board of Directors of the Bank may by resolution establish the terms of series of preferred shares. The Bank currently has six series of First Preferred Shares outstanding with an aggregate liquidation preference as of October 31, 1997 of C$376 million. Canadian Statutory Requirements Under Canadian law, the Bank is required to maintain adequate capital in relation to its operations. The Office of Superintendent of Financial Institutions Canada (the "Superintendent") has issued guidelines concerning the maintenance of adequate capital (the "Capital Guideline") and has statutory authority to direct the Bank to increase its capital even if the Bank is in compliance with the Capital Guideline. Pursuant to the Capital Guideline, requirements are applied to the Bank on a consolidated basis including all subsidiaries except insurance subsidiaries or other regulated financial institutions whose leverage is inappropriate for a deposit-taking institution and which, because of their size, would have a material impact on the leverage of the consolidated entity. Under the Capital Guideline, it is expected that the Bank's total assets, including specified off-balance sheet items, should be no greater than 20 times the Bank's total capital. It is also expected that the Bank's total capital not be less than 8% of risk-weighted assets and risk-weighted off-balance sheet items, unless a higher ratio is prescribed by the Superintendent. The Capital Guideline prescribes risk-weighting and the treatment of off-balance sheet items. The ratio of total capital to risk-weighted off-balance sheet items is the "risk-based capital ratio" and is based upon standards adopted by the Bank for International Settlement. The Capital Guideline recognizes two tiers of capital. Tier 1 capital comprises the highest quality capital elements based upon the attributes of permanence, freedom from mandatory fixed charges against earnings and Prospective investors should be aware that the acquisition of the securities described herein may have tax consequences both in the United States and in Canada. Such consequences for investors who are residents in, or citizens of, the United States may not be described fully herein. The enforcement by investors of civil liabilities under the federal securities laws of the United States may be affected adversely by the fact that the Bank is incorporated or organized under the laws of Canada, that some or all of its officers and directors may be residents of Canada, that some or all of the experts named in the registration statement may be residents of Canada and that all or a significant portion of the assets of the Bank and said persons may be located outside the United States. -------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS SHORT FORM PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. -------------- The date of this short form prospectus is March __, 1998. THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT SURRENDERS FOR EXCHANGE FROM, HOLDERS OF PREFERRED SHARES IN ANY JURISDICTION IN WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY EXCHANGE MADE PURSUANT HERETO SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION SET FORTH HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. FOR NEW HAMPSHIRE RESIDENTS: NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENSE HAS BEEN FILED WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE OF NEW HAMPSHIRE THAT ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY, OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT, ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH. ------------------- The date of this Prospectus is March __, 1998. subordination to the rights of depositors and other creditors. Tier 2 capital contributes to the overall strength of a bank as a going concern, but falls short in meeting the first two capital attributes described for Tier 1 capital. Tier 2 capital differentiates between Tier 2A hybrid (debt/equity) instruments and Tier 2B limited life instruments. Tier 1 capital elements consist of common shareholders equity, qualifying non-cumulative perpetual preferred shares and qualifying non-controlling interests in subsidiaries arising on consolidation from Tier 1 capital instruments. Tier 1 capital instruments and preferred shares qualifying as hybrid instruments in Tier 2A are intended to be permanent. Where the share or instrument provides for redemption by the issuer after 5 years with supervisory approval, the Superintendent would not normally prevent such redemption by a healthy and viable bank where the instrument is or has been replaced by equal or higher quality capital including an increase in retained earnings, or if the bank is downsizing. All capital instruments must be issued and fully paid for in money or, with the approval of the Superintendent, in property. Net of amortization, the amount of Tier 2 capital may not exceed 100% of Tier 1 capital after deducting goodwill and, consequently, the Capital Guideline requires the amount of Tier 1 capital to be not less than 4% of risk-weighted assets and risk-weighted off-balance sheet items, unless a higher ratio is prescribed by the Superintendent. Also under the Capital Guideline, the amount of Tier 2B capital net of amortization shall not exceed 50% of Tier 1 capital after deducting goodwill. After giving effect to the issuance of the Series A Preferred Shares on September 3, 1997, the Tier 1 risk-based capital ratio and total risk-based capital ratio levels of the Bank as of October 31, 1997 were 8.1% and 11.3%, respectively. The Bank's Tier 1 risk-based capital ratio and total risk-based capital ratio were 6.9% and 10.2% at October 31, 1996, 6.8% and 10.4% at October 31, 1995 and 6.9% and 11.1% at October 31, 1994. Section 485 of the Bank Act requires Canadian banks to maintain adequate capital and adequate and appropriate forms of liquidity and to comply with related regulations. Under subsection 485(3), the Superintendent may, by order, direct a bank to increase its capital or to provide additional liquidity in such forms and amounts as the Superintendent may require. The Superintendent may act under subsection 485(3) even if a bank is in compliance with all applicable guidelines and regulations. Exchange Event Each of the Series A Preferred Shares will be exchanged automatically (the "Automatic Exchange") for one Bank Preferred Share (i) immediately prior to such time, if any, at which the Bank fails to declare and pay or set aside for payment when due any dividend on any issue of its cumulative First Preferred Shares or the Bank fails to pay or set aside for payment when due any declared dividend on any of its non-cumulative First Preferred Shares, (ii) in the event that the Bank has a Tier 1 risk-based capital ratio of less than 4.0% or a total risk-based capital ratio of less than 8.0%, (iii) in the event that the Superintendent takes control of the Bank pursuant to the Bank Act, or proceedings are commenced for the winding-up of the Bank pursuant to the Winding-up and Restructuring Act (Canada), or (iv) in the event that the Superintendent, by order, directs the Bank to act pursuant to subsection 485(3) of the Bank Act and the Bank elects to cause the exchange (each, an "Exchange Event"). In connection with the Exchange Offer, the Bank Preferred Shares will be registered with the Commission. See "Risk Factors--Certain Risks Associated with the Bank" and "Description of Series A Preferred Shares--Automatic Exchange." NB Finance NB Finance was incorporated on September 3, 1997 under the laws of Bermuda. The Bank was the organizer of NB Finance. NB Finance was organized solely for the purpose of acquiring Mortgage Loans and issuing the Initial Mortgage Assets, and other similar obligations, to the Company. All of the ordinary shares of NB Finance are owned by the Bank. Pursuant to an order (the "OSFI Order") of the Canadian Office of the Superintendent of Financial Institutions ("OSFI"), the Canadian bank regulatory agency, the acquisition of the common stock of NB Finance by the Bank was approved on September 2, 1997. Such ENFORCEMENT OF LIABILITIES AND SERVICE OF PROCESS National Bank of Canada is a Canadian bank; all of the directors and executive officers of the Bank and certain of the Bank's advisers named in this short form prospectus are residents of countries other than the United States of America ("U.S."); and all or a substantial portion of the assets of such non-U.S. residents are located outside the U.S. As a result, it may not be possible for investors to effect service of process within the U.S. upon such persons or to enforce against them in the U.S. judgments of U.S. Courts predicated upon the civil liability provisions of the federal securities laws of the U.S. The Bank will expressly accept the jurisdiction of the Supreme Court of the State of New York or the U.S. District Court for the Southern District of New York, in either case in the Borough of Manhattan, The City of New York, for the purpose of any suit, action or proceeding arising out of the Series Z Preferred Shares offered hereby, and has appointed NB Capital Corporation, a subsidiary of the Bank, as its agent in The City of New York to accept service of process in any such action. The Bank has been advised by Desjardins Ducharme Stein Monast, Canadian counsel to the Bank, that there is doubt as to the enforceability in the Province of Quebec, in original actions or in actions for enforcement of judgments of U.S. Courts, of liabilities predicated solely upon the federal securities laws of the U.S. TRANSLATION OF FOREIGN CURRENCY In this short form prospectus, unless otherwise specified, all dollar amounts are expressed in Canadian dollars ("C$" or "$"). Solely for convenience, this short form prospectus contains translations of certain Canadian dollar amounts into U.S. dollar amounts. Unless otherwise specified, those amounts presented in U.S. dollars ("U.S.$" or "U.S. dollars") are translated from the Canadian dollar amounts at the rate of 1.4084 Canadian dollar per U.S. dollar, the Bank of Canada closing rate for U.S. dollars as at October 31, 1997. AVAILABLE INFORMATION The Company is not currently subject to the periodic reporting and other informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As a result of the Offer and the Exchange Offer, the Company will be required to file reports and other information with the Commission pursuant to the informational requirements of the Exchange Act. This Prospectus constitutes a part of a Registration Statement on Form S-11/Form F-9 (the "Registration Statement") filed by the Company with the Commission under the Securities Act. As permitted by the rules and regulations of the Commission, this Prospectus does not contain all of the information contained in the Registration Statement and the exhibits and schedules thereto, and reference is hereby made to the Registration Statement and the exhibits and schedules thereto for further information with respect to the Company and the Series A Preferred Shares. Statements contained herein concerning the provisions of any documents filed as an exhibit to the Registration Statement or otherwise filed with the Commission are not necessarily complete, and in each instance reference is made to the copy of such document so filed. Each such statement is qualified in its entirety by such reference. The Registration Statement may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, or at its regional offices located at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of such material can be obtained from the public reference section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates and may also be accessed electronically by means of the Commission's website at http://www.sec.gov. approval was, however, conditional upon (i) the Bank continuing to own at all times such common stock, (ii) NB Finance not incurring any indebtedness and (iii) NB Finance not engaging in any business activities other than the ownership of Mortgage Loans and activities incidental thereto. See "Business and Strategy--Description of the Initial Mortgage Loans." Accordingly, the Bank has indicated to the Company that it intends to maintain 100% ownership of the ordinary shares of NB Finance so long as the Initial Mortgage Assets issued by NB Finance or any other obligations of NB Finance are owned by the Company. The registered offices of NB Finance are located at Clarendon House, 2 Church Street, Hamilton HM11, Bermuda. NB Finance does not have a telephone number. NB Finance's Memorandum of Association (the "Memorandum") and bye-laws (the "Bye- laws") both became operational on September 3, 1997. Pursuant to the Bye-laws, the duration of NB Finance is perpetual until it is wound up in accordance with Bermuda law. Notwithstanding the foregoing, immediately following notice to NB Finance that the Company has delivered a notice of an Exchange Event, the Board of Directors of NB Finance will convene a special meeting of stockholders for the purpose of approving the voluntary winding-up of NB Finance in accordance with Bermuda law. Organizational Diagram The following diagram outlines the relationship between the Bank and the Company relevant to the Exchange Offer: [Description of diagram: The Bank on the top level of a two-tier diagram connected to the Company and NB Finance on the second level of the two-tier diagram. Lines connect the Bank and NB Finance and the Bank and the Company and indicate that the Bank owns 100% of the common stock of the Company and 100% of the common stock of NB Finance. Arrows indicate that the flow of Initial Mortgage Loans (footnote number 1) from the Bank to NB Finance and the flow of Initial Mortgage Assets (footnote number 2) from NB Finance to the Company. A line connects the Company to Investors and indicates that 100% of the Preferred Shares (footnote number 3) are owned by investors. The following footnotes are included: Footnote number 1: Secured by residential real property and recourse only to the Initial Mortgage Loans. Footnote number 2: CMHC-insured residential first mortgages originated by the Bank or acquired by the Bank from other NHA-Approved Lenders (as defined). Footnote number 3: Subject to automatic exchange of the Bank Preferred Shares in certain circumstances.] Summary Risk Factors The Preferred Shares offered hereby are subject to certain risks. See "Risk Factors." Among such risks are the following: o The Company's income consists principally of payments of interest and, therefore, is heavily dependent upon prevailing interest rates. Additionally, the Company's income is denominated in Canadian dollars. Consequently, a significant decline in interest rates or in the value of the Canadian dollar may have an adverse effect on the Company, its assets and its ability to make dividend payments with respect to the Series A Preferred Shares. o The Company's operations may be affected by prevailing real estate market conditions. Consequently, there can be no assurance that prevailing real estate market conditions will not adversely affect the Company's ability to pay dividends. DOCUMENTS INCORPORATED BY REFERENCE The following documents, filed with the Quebec Securities Commission, form an integral part of this short form prospectus: (a) Annual Information Form of the Bank dated December 19, 1996 and contained in the Bank's Annual Report for the year ended October 31, 1996; (b) Management's Discussion and Analysis of Operating Results and Financial Condition of the Bank dated December 19, 1996, and contained in the Bank's Annual Report for the year ended October 31, 1996; (c) Audited Consolidated Financial Statements of the Bank for the year ended October 31, 1997, together with the Auditors' Report thereon, which include comparative audited consolidated financial statements for the year ended October 31, 1996; and (d) Management Circular dated January 16, 1997 in connection with the Bank's annual meeting of shareholders held on March 12, 1997. Copies of the documents incorporated herein by reference may be obtained on request without charge from the Corporate Secretary of the Bank at National Bank Tower, 600 de La Gauchetiere Street West, Montreal, Quebec, H3B 4L2, telephone (514) 394-6080. The Bank is required to file with the U.S. Securities and Exchange Commission (the "Commission") all documents that it is required to send to its shareholders, including its Annual Report, notices of Shareholders' Meetings and Management Proxy Circulars. Such documents may be inspected and copied at the Public Reference Section of the Commission, 455 Fifth Street, N.W., Washington, DC 20549. Any documents of the type referred to in the preceding paragraph and any material change report (excluding confidential material change reports) filed by the Bank with the Quebec Securities Commission, after the date of this short form prospectus and prior to the termination of the offering, will be deemed to be incorporated by reference into this short form prospectus. Any statement contained in a document incorporated or deemed to be incorporated by reference into this short form prospectus will be deemed to be modified or superseded, for purposes of this short form prospectus, to the extent that a statement contained in this short form prospectus or in any other subsequently filed document which also is or is deemed to be incorporated by reference into this short form prospectus modifies or supersedes such statement. Any statement so modified or superseded will not be deemed, except as so modified or superseded, to constitute a part of this short form prospectus. The financial information incorporated in this short form prospectus has been prepared in accordance with Canadian generally accepted accounting principles including the accounting requirements of the Superintendent of Financial Institutions Canada. <TABLE> <CAPTION> TABLE OF CONTENTS <S> <C> PROSPECTUS SUMMARY.............................................................................................. 1 The Company............................................................................................ 1 The Bank .............................................................................................. 2 Summary Risk Factors................................................................................... 4 Business and Strategy.................................................................................. 5 Tax Status of the Company.............................................................................. 7 Series A Preferred Shares.............................................................................. 8 Selected Financial Data................................................................................ 12 RISK FACTORS.................................................................................................... 13 Interest Rate Risk and Maturity of Initial Mortgage Loans.............................................. 13 Currency Exchange Rate Risk............................................................................ 13 Real Estate Market Conditions.......................................................................... 13 Geographic Concentration of Real Property Securing the Initial Mortgage Asset.......................... 14 Limited Recourse Nature of Certain Mortgage Assets; Limitations on CMHC Insurance...................... 14 Tax Risks.............................................................................................. 14 Dividends Not Cumulative............................................................................... 16 Dividends and Other Regulatory Restrictions on Operations of the Company............................... 17 Risk of Future Revisions in Policies and Strategies by Board of Directors.............................. 17 Balloon Payments....................................................................................... 17 No Third Party Valuation of the Mortgage Assets; No Arm's-Length Negotiations with Affiliates.................................................................................... 17 Relationship with the Bank and Its Affiliates; Conflicts of Interest................................... 18 Dependence upon the Bank............................................................................... 18 Absence of Public Markets...............................................................................18 Risks Associated with the Bank......................................................................... 19 Canadian Legal Considerations.......................................................................... 20 THE COMPANY..................................................................................................... 21 USE OF PROCEEDS................................................................................................. 21 CAPITALIZATION.................................................................................................. 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF LIQUIDITY AND CAPITAL RESOURCES.............................................................................. 22 General .............................................................................................. 22 Liquidity and Capital Resources........................................................................ 23 Significant Accounting Policy.......................................................................... 23 BUSINESS AND STRATEGY........................................................................................... 23 General .............................................................................................. 23 Description of Dividend Policy......................................................................... 23 Description of the Company's Investment Policy......................................................... 24 Description of the Initial Mortgage Assets............................................................. 31 Description of the Initial Mortgage Loans.............................................................. 32 Effect of Interest Rate Fluctuation on Assets and Earnings............................................. 36 Servicing.............................................................................................. 37 </TABLE> o All of the residential real properties securing the Initial Mortgage Assets issued by NB Finance are, and in the future are expected to be, located outside the United States, primarily in Quebec. Consequently, the Company will be subject to the laws of a foreign jurisdiction with respect to any actions taken and may be subject to a greater risk of default than investments in comparable U.S. real property. o The Initial Mortgage Assets issued by NB Finance are recourse only to the Initial Mortgage Loans. Consequently, in the event of default on the Initial Mortgage Assets issued by NB Finance, the Company's only recourse will principally be foreclosure on the real property securing the Initial Mortgage Assets issued by NB Finance, and in certain circumstances, CMHC insurance may not be available or receipt of payment thereof may be delayed. o The sale of the Initial Mortgage Loans to NB Finance and the subsequent assignment thereof by NB Finance to the Company have not been registered. Consequently, a bona fide purchaser who completed all necessary registration formalities prior to the Company would be recognized as the owner of the Initial Mortgage Loans. o Dividends on the Series A Preferred Shares are not cumulative. Consequently, if the Board of Directors of the Company (the "Board of Directors") does not authorize and declare a dividend on the Series A Preferred Shares for any particular quarterly dividend period, the holders of the Series A Preferred Shares would not be entitled to recover such dividend even if funds are, or subsequently become, available for payment thereof. o As a subsidiary of the Bank, Canadian banking authorities could, under certain circumstances, impose certain restrictions on the operations of the Company. Consequently, under such circumstances, such restrictions could cause the Company to fail to qualify as a REIT as well as affect its ability to pay dividends. o The Company may not qualify as a REIT for United States federal income tax purposes. Consequently, the Company may be subject to United States federal income tax at normal corporate tax rates. o The Board of Directors may amend or revise the Company's policies and strategies in the future without a vote of stockholders, including holders of the Series A Preferred Shares. Consequently, the holders of Series A Preferred Shares cannot preclude the Board of Directors from making such amendments or revisions even though the ultimate effect to the holders of Series A Preferred Shares may be negative. o The assets of the Company consist of obligations that do not provide for complete amortization of principal over their term to maturity and, therefore, require a balloon payment. Consequently, holders of Series A Preferred Shares may be accepting a greater degree of risk relative to an investment with underlying assets that are comprised of fully amortizing obligations. o The Company has not obtained a third party valuation of its assets for the purposes of the Exchange Offer. Consequently, there can be no assurance that the fair market value of such assets does not differ from the purchase price thereof. o Under certain circumstances, including when the Bank is experiencing financial difficulties or its financial condition is deteriorating, the Series A Preferred Shares could be exchanged automatically for the Bank's 8.45% Noncumulative First Preferred Shares, Series Z (the "Bank Preferred Shares"). Consequently, the Bank Preferred Shares would represent an investment SHORT FORM PROSPECTUS SUMMARY This short form prospectus summary does not purport to be complete and is qualified in its entirety by the more detailed information and financial statements and notes hereto appearing elsewhere in this short form prospectus and in the documents incorporated by reference herein. Capitalized terms used in the summary and not defined herein have the meanings ascribed to such terms elsewhere in this short form prospectus or in the documents incorporated by reference herein. INCORPORATION AND HEAD OFFICE OF THE BANK The Bank was formed through a series of amalgamations and its roots date back to 1859 with the founding of Banque Nationale in Quebec City, Quebec, Canada. The Bank is chartered under the Bank Act (Canada) (the "Bank Act"). The head office and executive offices of the Bank are at the National Bank Tower, 600 de La Gauchetiere West, Montreal, Quebec, Canada H3B 4L2. BUSINESS OF THE BANK The Bank, which ranks sixth among Canadian banks in terms of total assets, is present in each of Canada's provinces. It delivers an extensive range of financial services to individuals, commercial enterprises, financial institutions and governments both in Canada and abroad. The Bank's main sectors and divisions are the following: Banking, which consists of Retail Banking, Commercial Banking and International; Trust Services; Insurance; Treasury, Brokerage and Corporate Banking; and Human Resources and Administration. BANKING Retail Banking Through its network of 637 branches at October 31, 1997, Retail Banking provides services to individuals and serves as support to the commercial banking centres and the Corporate Banking, International Commercial Operations and Treasury divisions. In addition to personal and mortgage loans, the Bank offers a broad range of transaction accounts and investment vehicles, such as term deposits and investment certificates, mutual funds (managed by the Bank or by third parties) and registered retirement savings plans and income funds, as well as credit card and travelers cheque services. In response to clients' growing demand for financial advisory services, the Bank embarked on a new phase in 1996 when it integrated more than 50 accredited financial planners into its branches. Clients can access their accounts at any of the Bank's 738 banking machines as well as at the more than 303,426 banking machines in North America and Europe which belong to the Cirrus, Interac and MasterCard ATM networks. Furthermore, through the Interac Direct Payment network, debit card holders can pay for their purchases without using cash at any of the Bank's 28,337 point-of-sale terminals. The Bank continues to assume a leadership role in customer service by offering its customers non-traditional services such as TelNat for banking by phone and Personal CompuTeller for banking by computer. The first service of its kind in Canada, Personal CompuTeller gives customers direct access to their transaction accounts via their personal computer. <TABLE> <S> <C> Employees.............................................................................................. 38 Competition............................................................................................ 38 Legal Proceedings...................................................................................... 39 MANAGEMENT...................................................................................................... 39 Directors and Executive Officers....................................................................... 39 Compensation of Executive Officers..................................................................... 40 Options Exercised and Year-End Option/SAR Holdings..................................................... 41 Pension Plan........................................................................................... 41 Independent Directors.................................................................................. 42 Audit Committee........................................................................................ 42 Compensation of Directors and Officers................................................................. 42 Limitation of Liability and Indemnification of Directors and Officers.................................. 42 The Bank as Advisor.................................................................................... 43 DESCRIPTION OF THE SERIES A PREFERRED SHARES.................................................................... 44 General .............................................................................................. 44 Dividends.............................................................................................. 44 Automatic Exchange..................................................................................... 45 Ranking .............................................................................................. 47 Voting Rights.......................................................................................... 47 Redemption............................................................................................. 48 Rights upon Liquidation................................................................................ 50 Independent Director Approval.......................................................................... 51 REGISTRATION RIGHTS............................................................................................. 51 DESCRIPTION OF CAPITAL STOCK.................................................................................... 54 Common Stock........................................................................................... 54 Preferred Stock........................................................................................ 55 Power to Issue Additional Shares of Common Stock and Preferred Stock................................... 56 Restrictions on Ownership and Transfer................................................................. 56 Supermajority Director Approval........................................................................ 58 Business Combinations.................................................................................. 58 Control Share Acquisitions............................................................................. 58 Form, Denomination, Book-Entry Procedures and Transfer................................................. 59 Depositary Procedures.................................................................................. 59 Certificated Series A Preferred Shares................................................................. 61 UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS................................................................. 61 Qualification of the Company as a REIT................................................................. 61 Stock Ownership Tests.................................................................................. 62 Asset Tests............................................................................................ 62 Gross Income Tests..................................................................................... 63 Distribution Requirement............................................................................... 63 Taxation of the Company................................................................................ 64 Tax Treatment of Automatic Exchange.................................................................... 64 Taxation of Series A Preferred Shares.................................................................. 64 Taxation of Tax-Exempt Entities........................................................................ 65 State and Local Taxes.................................................................................. 66 Taxation of Bank Preferred Shares...................................................................... 66 Certain United States Federal Income Tax Considerations Applicable to Foreign Holders.................. 66 </TABLE> in the Bank and not in the Company at a time when the Bank is experiencing such financial difficulties or such deterioration of financial condition. o The Company is dependent upon the Bank and its affiliates in virtually every phase of its operations. However, the interests of the Company and the Bank may not be identical. Consequently, because of the relationship between the Company and the Bank and its affiliates, conflicts of interest may arise between the Company and the Bank. o The assignment of the Initial Mortgage Loans to the Company has not been registered. Consequently, a bona fide purchaser who completes all necessary registration formalities prior to the Company would be recognized as the owner of the Initial Mortgage Loans. o The Company is under no obligation, and currently has no intention, to list the Series A Preferred Shares on a national exchange. Additionally, there is no existing market for the Series A Preferred Shares and there can be no assurance as to the liquidity of any markets that may develop, the ability of holders to sell their Series A Preferred Shares or the sale price thereof. Consequently, holders of Series A Preferred Shares may find it difficult to sell their Series A Preferred Shares or to sell their Series A Preferred Shares at a price equivalent to the purchase price thereof. Business and Strategy General The Company's principal business objective is to acquire, hold, finance and manage Mortgage Assets that will generate net income for distribution to stockholders. The Mortgage Assets of the Company initially consist solely of the Initial Mortgage Assets (sixteen hypothecation loans, in an aggregate amount at December 31, 1997 of US$456 million, issued by NB Finance to the Company that are recourse only to the Initial Mortgage Loans (which are sixteen pools of, at December 31, 1997, 11,701 CMHC-insured residential first mortgages, in an aggregate amount at December 31, 1997 of C$793 million (US$554 million) and that are secured by the residential real property underlying the Initial Mortgage Loans). See "Business and Strategy--Description of the Initial Mortgage Assets" and "--Description of the Initial Mortgage Loans." The Company has acquired substantially all of its Mortgage Assets from the Bank and/or affiliates of the Bank on terms that are comparable to those that could be obtained by the Company if such Mortgage Assets were purchased from unrelated third parties. The Company may also from time to time acquire Mortgage Assets comparable to the Initial Mortgage Assets issued by NB Finance acquired from the Bank or from unrelated third parties. As of the date of this Prospectus, the Company has not entered into any agreements with third parties with respect to the purchase of Mortgage Assets. Other than with respect to the temporary investment of payments of interest and principal on its Mortgage Assets, the Company anticipates that it will purchase Mortgage Assets from unrelated third parties only if neither the Bank nor any affiliate of the Bank has an amount or type of Mortgage Assets sufficient to meet the requirements of the Company. The Company's current investment policy and current intention is to invest at least 90% of its portfolio in the Initial Mortgage Assets issued by NB Finance and obligations that are comparable to the Initial Mortgage Assets issued by NB Finance. Accordingly, potentially 10% of the Company's portfolio could consist of investments in other assets permitted under the Company's investment policy. See "Business and Strategy--Description of the Company's Investment Policy" and "--Description of the Company's Management Policies." The Company intends and has the ability to hold the Mortgage Loans to maturity unless there is a prepayment by the customer or a Mortgage Loan is impaired. Therefore the Mortgage Loans will be recorded as a long-term investment in the balance sheet of the Company. To meet the new reality of consumer demand for fast, easy access to banking services, the Bank developed another delivery concept in the form of specially designed service units in supermarkets, open seven days a week. Commercial Banking The Commercial Banking division administers loans to independent businesses and offers them an array of complementary services. Of the 38 commercial banking centres in operation as at October 31, 1997, 20 were in Quebec, 9 in Ontario and 9 in Atlantic Canada. The centres are staffed by account managers, each of whom services a small number of business clients, and by experts in special financing methods. In addition to the specialized services offered by Treasury and International Commercial Operations, businesses can obtain a full range of services such as bankers' acceptances, operating loans and fixed or variable-rate term loans, as well as computerized payroll processing, bank reconciliation with cheques in consignment and pre-authorized payments. The Bank also serves mid-market companies through offices in 20 U.S. cities, including its own representative offices and the offices of its subsidiary National Canada Finance Corp. International The International division is responsible for all the services offered to the Bank's Canadian clients who are involved in foreign transactions. Available through centres in Moncton, Quebec City, Montreal, Toronto and Vancouver, as well as the branch network, these services include guarantees and letters of credit, foreign exchange transactions, foreign payments and documentary collections. In addition to these transaction services, the Bank offers financing adapted to the needs of exporters, such as discounted foreign receivables, identification of foreign partners or clients, as well as advisory services for establishing foreign trade or an international strategy. The International division has also made its presence felt abroad through its representative offices in New York, the Caribbean, Mexico, Santiago, London, Paris, Hong Kong, Seoul, Singapore, Taiwan and Shanghai; cooperation agreements with seven European financial institutions and a Mexican bank; and via a vast network of some 2,800 banking correspondents spanning 120 countries. Through this presence abroad, the International division can serve its clientele which includes Canadian clients, foreign companies, international banks which obtain traditional services such as correspondent banking, and immigrant investors to whom the Bank provides private banking services as well as other products designed specifically to meet their needs. The Bank has also developed partnerships with private enterprise and all three levels of public administration. Partnerships created in 1996 include the Action Asia Group, Montreal International, the Canada-Poland Development Fund and a France-Quebec network for independent businesses, as well as the agreement to accommodate Quebec trade delegates in the Bank's offices in Boston, Los Angeles, Chicago and Atlanta. Through its International division, the Bank is able to offer international products and services adapted to the increasingly sophisticated needs of its clients, including guarantees and letters of credit, foreign exchange transactions, foreign payments and management of foreign accounts. <TABLE> <S> <C> Information Reporting and Backup Withholding........................................................... 67 CANADIAN FEDERAL INCOME TAX CONSIDERATIONS...................................................................... 67 Automatic Exchange..................................................................................... 68 Taxation of Dividends.................................................................................. 68 Disposition of Bank Preferred Shares................................................................... 68 Redemption of Bank Preferred Shares.................................................................... 68 ERISA CONSIDERATIONS............................................................................................ 69 Status Under Plan Asset Regulations.................................................................... 69 Publicly-Offered Security Exception.................................................................... 70 Exemptions from Prohibited Transactions................................................................ 71 Unrelated Business Taxable Income...................................................................... 71 RATINGS ....................................................................................................... 72 INITIAL PURCHASER............................................................................................... 72 PLAN OF DISTRIBUTION............................................................................................ 72 LEGAL MATTERS................................................................................................... 73 EXPERTS ....................................................................................................... 73 ANNEX A </TABLE> ----------------------------- Until ____________, 1998, all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a prospectus. This is in addition to the obligations of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. Pursuant to the OSFI Order, NB Finance is not permitted to engage in any business activities other than the ownership of Mortgage Loans and activities incidental thereto. Management The Board of Directors of the Company is composed of five members, two of whom are Independent Directors. An "Independent Director" is a director who is not a current officer or employee of the Company or a current director, officer or employee of the Bank or any affiliate of the Bank. Pursuant to the terms of the Series A Preferred Shares, the Independent Directors must consider the interests of the holders of both the Preferred Stock and the Common Stock in determining whether any proposed action requiring their approval is in the best interests of the Company. The Company currently has six employees and does not anticipate that it will require additional employees. See "Management." The Board of Directors of NB Finance is composed of seven members, two of whom are Independent Directors. The Company currently has four employees and does not anticipate that it will require additional employees. See "Management." Year 2000 Issue Pursuant to the Advisory Agreement, dated as of September 3, 1997, between the Company and the Bank (the "Advisory Agreement"), the Bank administers the day-to-day activities of the Company. Pursuant to the Servicing Agreement, dated as of September 3, 1997, between the Company and the Bank (the "Servicing Agreement"), the Bank services the Mortgage Loans on behalf of the Bank. See "Risk Factors--Relationship with the Bank and Its Affiliates; Conflicts of Interest," "--Dependence upon the Bank," "Business and Strategy--Description of the Initial Mortgage Loans" and "Management--The Bank as Advisor." Accordingly, the Company does not have a material Year 2000 issue. The Bank, as originator and servicer of the Mortgage Loans that underlie the Mortgage Assets and administrator of the day-to-day activities of the Company, has formulated a detailed plan to address the Year 2000 issue. The Bank expects to invest C$35 million dollars from 1997 through 2000 to modify computer software and hardware in relation to the Year 2000 issue. According to such plan, 30% of computer software and 20% of computer hardware were converted and certified accurate by December 31, 1997. By December 31, 1998, the Bank expects 95% of computer software and 50% of computer hardware will be converted and certified accurate. By March 31, 1999, the Bank expects that the conversion and certification of all remaining computer software and hardware will be complete. The plan and budget also provide for monitoring such conversion through the Year 2000. Pursuant to the OSFI Order, NB Finance is not permitted to engage in any business activities other than the ownership of Mortgage Loans and activities incidental thereto. Accordingly, NB Finance does not have a material Year 2000 issue. Tax Status of the Company The Company will elect to be taxable as a REIT under sections 856 through 860 of the Code, commencing with its taxable year ending December 31, 1997. As a REIT, the Company generally will not be liable for United States federal income tax to the extent that it distributes its income to the holders of its Common Stock and Preferred Stock, including the Series A Preferred Shares, and maintains its qualification as a REIT. See "United States Federal Income Tax Considerations--Qualifications of the Company as a REIT." A REIT is subject to a number of organizational and operational requirements, including a requirement that it currently distribute to stockholders at least 95% of its "REIT taxable income." REIT taxable income is essentially taxable income, as determined in accordance with the Code, with certain adjustments. The TRUST SERVICES With its investment services, personal trust services and branches now integrated into the Bank's network, General Trust offers wealth management services for high net worth households. Its corporate trust services are geared to the needs of independent businesses and large corporations in Quebec. General Trust and National Bank Securities Inc., another Bank subsidiary, provide active fund management on behalf of their clients. National Bank Securities Inc. also offers its clients a wide selection of mutual funds and discount brokerage services. INSURANCE National Bank Life Insurance Company administers credit insurance plans for loans granted by the Bank and markets various general insurance products. Personal and group insurance products are delivered through National Bank Financial Services, a joint company formed by the Bank and Metropolitan Life. BROKERAGE AND CORPORATE BANKING The Corporate Banking division, with the support of specialized teams based in Montreal and Toronto, offers a broad range of services customized to clients' needs. In addition to providing traditional operating credit and term financing, these teams structure financing for acquisitions or recapitalizations and arrange high-yield financing, often through loan syndicates involving other institutions. They also offer advisory services for restructuring, mergers and acquisitions and for hybrid financings combining debt and equity. Together with the Treasury division, Corporate Banking offers financial risk management instruments for hedging interest rates, foreign exchange and import-export transactions. The division's specialists in banking operations can suggest a vast range of electronic products, such as point-of-sale debit and electronic data interchange (EDI), and tailor them to each client's requirements. The securities brokerage subsidiary Levesque Beaubien Geoffrion Inc. provides services to business clients and individuals, in addition to playing an important role in securing financing for various levels of government. This subsidiary is active on all the major markets through its network of 65 offices. Another subsidiary, Natcan Investment Management Inc., specializes in portfolio management for institutional clients and identifies investment opportunities in Canada the United States and abroad. Pension funds, insurance companies, mutual funds, foundations and religious orders are among the many clients for which this subsidiary manages assets in excess of $8.8 billion. CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS Certain statements contained in this Prospectus which are not historical facts contain forward-looking information with respect to the Company's plans, projections or future performance, the occurrence of which involve certain risks and uncertainties that could cause the Company's actual results or plans to differ materially from those expected by the Company. All written or oral forward-looking statements attributable to the Company are expressly qualified in their entirety by the foregoing cautionary statement. most significant of such adjustments are (i) no deduction is allowed for dividends received, (ii) a deduction is allowed for dividends paid (other than the portion of any dividend attributable to net income from foreclosure property) and for taxes imposed for failing to satisfy certain statutory REIT requirements, and (iii) net income from foreclosure property and net income derived from prohibited transactions is excluded from the determination. Notwithstanding its election to be taxable as a REIT, the Company may be subject to federal, state and/or local tax. See "Risk Factors--Tax Risks" and "United States Federal Income Tax Considerations." THE OFFERING Securities Offered: 300,000 Series Z Preferred Shares. The Exchange Offer: Simultaneously with the filing of this short form prospectus by the Bank, NB Capital Corporation, a 100% controlled subsidiary of the Bank, is offering to exchange (the "Exchangeable Offer") up to 300,000 shares of its 8.35% Noncumulative Exchangeable Preferred Stock, Series A (the "New Preferred Shares") for up to all of its outstanding 8.35% Noncumulative Exchangeable Preferred Stock, Series A (the "Old Preferred Shares") at the rate of one New Preferred Share for each Old Preferred Share tendered. The issuance of the New Preferred Shares is intended to satisfy certain obligations of NB Capital Corporation contained in the Registration Rights Agreement (as defined). See "The Exchange Offer". Registration Rights Agreement: The Old Preferred Shares were sold by the Company on September 3, 1997 to Merrill Lynch, Pierce, Fenner & Smith Incorporated as initial purchaser (the "Initial Purchaser") pursuant to the purchase agreement among the Company, the Bank and the Initial Purchaser (the "Purchase Agreement"). Pursuant to the Purchase Agreement, the Company and the Initial Purchaser entered into the Registration Rights Agreement on September 3, 1997. Pursuant to the Registration Rights Agreement, the Bank and the Company agreed to each file a registration statement within a certain time period and to use their best efforts to cause such registration statements to become effective within an additional time period with respect to the Exchange Offer. The Exchange Offer is intended to satisfy such rights under the Registration Rights Agreement which terminate upon the consummation of the Exchange Offer. See "Registration Rights Agreement." Automatic Exchange: The Series Z Preferred Shares are to be issued, if ever, in connection with the automatic exchange of the Old Preferred Shares and/or New Preferred Shares into which the Old Preferred Shares are exchangeable pursuant to the Exchange Offer. See "Automatic Exchange" and "The Exchange Offer." Ranking: The Series Z Preferred Shares rank senior to the Bank's common shares (the "Common Shares") and all other classes and series of shares of the Bank hereafter issued other than those expressly designated as being on a parity with or senior to the First Preferred Shares of the Bank, pari passu with the other First Preferred Shares of the Bank with respect to cash dividend payments and rights upon liquidation and junior to all claims of the Bank's creditors, including the claims of the Bank's depositors and holders of the Bank's outstanding subordinated debentures. Preferred shares ranking senior to the Series Z Preferred Shares may not be issued without the approval of holders of at least two-thirds of all series of First Preferred Shares. Dividends: Dividends on the Series Z Preferred Shares are payable at the rate of 8.45% per annum of the liquidation preference (being an amount equal to U.S.$84.50 per share), if, when and as declared by the Board of Directors of the Bank. If declared, dividends are payable quarterly in arrears on the 30th day of March, June, September and December in each year, or, if such day is not a business day, on the next business day. Dividends on the Series Z Series A Preferred Shares Issuer NB Capital Corporation, a Maryland corporation. Securities Offered 61,600 Noncumulative Exchangeable Preferred Shares, Series A of the Company. Ranking The Series A Preferred Shares rank senior to the Common Stock with respect to dividend rights and rights upon liquidation. In order to qualify as a REIT, the capital stock of the Company must be held by at least 100 holders during approximately 90% or more of the taxable year beginning in the Company's second taxable year and in each subsequent taxable year. See "United States Federal Income Tax Considerations--Stock Ownership Tests." The Company has issued shares of a series of cumulative, senior preferred stock ("Senior Preferred Stock") with an aggregate liquidation preference of up to US$450,000 and limited transferability to ensure that it meets, and will continue to meet, the 100 person ownership requirement for REIT status without having to constantly monitor the number of holders of Preferred Shares. Except for the Senior Preferred Stock, additional shares of Preferred Stock ranking senior to the Series A Preferred Shares may not be issued without the approval of holders of at least two-thirds of the Series A Preferred Shares. Additional shares of Preferred Stock ranking on a parity with the Series A Preferred Shares may not be issued without the approval of a majority of the Board of Directors and a majority of the Independent Directors. Dividends Dividends on the Series A Preferred Shares are payable at the rate of 8.35% per annum of the liquidation preference (an amount equal to US$83.50 per annum per share calculated by multiplying the annual dividend rate of 8.35% by the liquidation preference of US$1,000 per share, assuming authorization and declaration by the Board of Directors of four quarterly dividends), if, when and as authorized and declared by the Board of Directors. If authorized and declared, dividends are payable quarterly in arrears on the 30th day of March, June, September and December in each year, commencing June 30, 1998. Except for the initial period, which shall commence on and include __________ , 1998 and end on 1998, dividends accrue in each quarterly period from the first day of such period, whether or not dividends were paid with respect to the preceding period. Dividends on the Series A Preferred Shares are not cumulative and, accordingly, if no dividend is authorized and declared on the Series A Preferred Shares by the Board of Directors for a quarterly dividend period, holders of the Series A Preferred Shares will have no right to receive a dividend for that period, and the Company will have no obligation to pay a dividend for that period, whether or not dividends are authorized, declared and paid for any future period with respect to either the Series A Preferred Shares or the Common Stock. If no dividend is paid on the Series A Preferred Shares for a quarterly dividend period, the payment of dividends on the Common Stock will be prohibited for that period and at least the following three quarterly dividend periods. See "Description of Series A Preferred Shares--Dividends." Preferred Shares are not cumulative and, accordingly, if no dividend is declared on the Series Z Preferred Shares by the Bank for a quarterly dividend period, holders of the Series Z Preferred Shares will have no right to receive a dividend for that period, and the Bank will have no obligation to pay a dividend for that period, whether or not dividends are declared and paid for any future period. See "Description of the Series Z Preferred Shares--Dividends." The Bank's ability to pay cash dividends is subject to regulatory and other restrictions described herein. Redemption: The Bank may not redeem the Series Z Preferred Shares before September 3, 2007. After such date, the Series Z Preferred Shares may be redeemed for cash at the option of the Bank, in whole or in part at any time and from time to time, at the redemption prices set forth herein, plus the quarterly accrued and unpaid dividends, if any, thereon for the then-current dividend period to, but excluding, the date fixed for redemption. Redemption of the Series Z Preferred Shares will be subject to compliance with applicable regulatory and other restrictions, including the requirement of the prior consent of the Superintendent. See "Description of Series Z Preferred Shares-- Redemption." Voting Rights: Holders of Series Z Preferred Shares will not have any voting rights, except as expressly provided herein. On any matter on which holders of the Series Z Preferred Shares may vote, each Series Z Preferred Share will be entitled to one vote. See "Description of Series Z Preferred Shares--Voting Rights." Use of Proceeds: The Series Z Preferred Shares will only be issued, if ever, upon the automatic exchange of the Old Preferred Shares and/or New Preferred Shares resulting from the Exchange Offer. The proceeds from the sale of the Old Preferred Shares were used by NB Capital Corporation to acquire a portfolio of mortgage related assets. The automatic exchange of the Old Preferred Shares and/or New Preferred Shares into Series Z Preferred Shares will produce no proceeds to the Bank. See "Use of Proceeds." Absence of a Public Market: There is currently no public market for the Series Z Preferred Shares and such shares will not be listed on any securities exchange or for quotation through the National Association of Securities Dealers Automated Quotation System. Liquidation Preference The liquidation preference for each of the Series A Preferred Shares is US$1,000. Upon liquidation, holders of the Series A Preferred Shares will also be entitled to receive an amount equal to the quarterly accrued and unpaid dividend, if any, thereon to the date of liquidation. See "Description of Series A Preferred Shares--Rights Upon Liquidation." Registration Rights Agreement The Series A Preferred Shares were sold by the Company on the Issue Date pursuant to the Purchase Agreement dated August 22, 1997 among the Company, the Bank and the Initial Purchaser (the "Purchase Agreement"). Pursuant to the Purchase Agreement, the Company and the Initial Purchaser entered into the Registration Rights Agreement. The Offer and the Exchange Offer are intended to satisfy certain rights under the Registration Rights Agreement, which terminate upon the consummation of the Offer and the Exchange Offer. The holders of the Series A Preferred Shares are not entitled to any exchange or registration rights with respect to the Series A Preferred Shares. The Series A Preferred Shares are subject to the payment of additional interest under certain circumstances if the Company is not in compliance with its obligations under the Registration Rights Agreement. See "Exchange Offer; Registration Rights." Description of the Series A Preferred Shares The form and terms of the issued by the Company Series A Preferred Shares pursuant to the Offer and the Exchange Offer are the same as the form and terms of the Series A Preferred Shares sold by the Company on the Issue Date except that (i) such Series A Preferred Shares issued by the Company pursuant to the Offer and the Exchange Offer will be registered under the Securities Act and therefore will not bear legends restricting the transfer thereof and (ii) holders thereof will not be entitled to the registration rights available under the Registration Rights Agreement, which registration rights with respect to Series A Preferred Shares will terminate upon the consummation of the Offer and the Exchange Offer. See "Description of the Series A Preferred Shares." Redemption The Series A Preferred Shares are not redeemable prior to September 3, 2007 (except upon the occurrence of a Tax Event, as defined in "Description of Series A Preferred Shares--Redemption," on or after September 3, 2002). On and after September 3, 2007, the Series A Preferred Shares may be redeemed for cash at the option of the Company, in whole or in part, at any time and from time to time, at the redemption prices set forth herein, plus the quarterly accrued and unpaid dividend, if any, thereon to the date of redemption. Upon the occurrence of a Tax Event, on or after September 3, 2002, the Company will have the right to redeem the Series A Preferred Shares in whole (but not in part) at a redemption price equal to the Make-Whole Amount (as defined in "Description of Series A Preferred Shares--Redemption"), plus the quarterly accrued and unpaid dividend, if any, thereon to the date of redemption. Any redemption is subject to the prior written approval of the Superintendent. See "Description of Series A Preferred Shares--Redemption." The Series A Preferred Shares are not subject to any sinking fund or mandatory redemption and are not convertible into any other securities of the Company. CAPITALIZATION The following table sets forth the actual capital of the Bank at October 31, 1997 and as adjusted as of such date to give effect to the automatic exchange of the Old Preferred Shares and/or New Preferred Shares into Series Z Preferred Shares of the Bank. This table should be read in conjunction with the Consolidated Financial Statements of the Bank and the notes thereto included elsewhere in this Short Form Prospectus and in the documents incorporated herein by reference. <TABLE> <CAPTION> October 31, 1997 Actual As adjusted (1) (in millions of Canadian dollars) <S> <C> <C> Liabilities Deposits............................................................... $ 43,270 $ 43,270 Bankers acceptances.................................................... 2,273 2,273 Obligations related to securities sold short........................... 4,225 4,225 Securities sold under repurchase agreements............................ 9,038 9,038 Other liabilities...................................................... 3,134 3,134 ----------- ----------- Non-controlling interest............................................... 61,940 61,940 ---------- ---------- Bank debentures........................................................ 466 43 ----------- ------------ Shareholders' equity................................................... 1,069 1,069 ----------- ----------- First Preferred shares without par value: Unlimited number of shares authorized, issued and outstanding: 286,610 Series 5 shares................................................ 29 29 422,633 Series 7 shares................................................ 10 10 789,638 Series 8 shares................................................ 20 20 3,680,000 Series 10 shares............................................. 92 92 4,000,000 Series 11 shares ............................................ 100 100 5,000,000 Series 12 shares............................................. 125 125 300,000 Series Z shares(2)............................................. -- 423 ------------ ------------ Total ................................................................. 376 799 Common shares without par value: Unlimited number of shares authorized ................................. 170,461,483 shares issued and outstanding.............................. 1,309 1,309 Retained earnings ..................................................... 1,075 1,075 ----------- ----------- 2,760 3,183 ----------- ----------- Total liabilities and shareholders' equity............................. 66,235 66,235 =========== =========== Regulatory capital ratios Assets to capital multiple............................................. 16.4 16.4 Tier 1 risk-based ..................................................... 8.1% 8.1% Total risk-based ...................................................... 11.3% 11.3% </TABLE> - ----------------- (1) Adjusted to give effect to the automatic exchange of the Old Preferred Shares and/or New Preferred Shares into Series Z Preferred Shares of the Bank assuming that the limit on the amount of Preferred Shares includable as core capital is applicable to the Series Z Preferred Shares of the Bank. (2) Exchange rate is 1.4084 Canadian dollars for 1 U.S. dollar. Automatic Exchange Each of the Series A Preferred Shares will be exchanged automatically for one Bank Preferred Share upon the occurrence of an Exchange Event. See "Description of Series A Preferred Shares--Automatic Exchange." Voting Rights Holders of the Series A Preferred Shares will not have any voting rights, except as expressly provided herein. On any matter on which holders of the Series A Preferred Shares may vote, each of the Series A Preferred Shares will be entitled to one vote. See "Description of Series A Preferred Shares--Voting Rights." Ownership Limits Beneficial ownership by any individual of more than 5% of any outstanding series of Preferred Stock, including the Series A Preferred Shares offered hereby, is restricted in order to preserve the Company's status as a REIT for United States federal income tax purposes. See "Description of Capital Stock--Restrictions on Ownership and Transfer." Ratings The Series A Preferred Shares are rated "a2" by Moody's Investors Service, Inc. and "BBB+" by Standard & Poor's Ratings Services. A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organization. Use of Proceeds There will be no proceeds to the Company from the Offer. The Initial Purchaser will receive all of the net proceeds from the resale of the Series A Preferred Shares. ERISA Considerations Each holder of the Series A Preferred Shares will be deemed to have directed the Company to invest in the Initial Mortgage Assets issued by NB Finance (as well as the other assets held by the Company and identified at the time of purchase) and represented and agreed that either (A) no part of the assets to be used by it to acquire and hold such Series A Preferred Shares constitutes the assets of any (I) employee benefit plan (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) subject to Title I of ERISA, (II) plan (as defined in section 4975(e)(1) of the Code) or (III) entity whose underlying assets include "plan assets" under Department of Labor Regulation 29 C.F.R. Section 2510.3-101 (collectively, "Plans") or (B) one or more prohibited transaction statutory or class exemptions apply such that the use of such plan assets to acquire and hold such Series A Preferred Shares will not constitute a non-exempt prohibited transaction under ERISA or the Code. In addition, in the event that the Series A Preferred Shares are not treated as "publicly-offered securities" (within the meaning of the above-referenced regulations) as of the dates on which the Offer and the Exchange Offer are consummated or (if no Exchange Offer is consummated) is the shelf registration statement, which the Company is required to file, pursuant to the Registration Rights Agreement, in lieu of or in addition to the Registration Statement, in the event (i) the Company is not permitted to effect the Exchange Offer, (ii) for any reason, the Registration Statement is not declared effective within 180 days of the Issue Date, or (iii) in certain other circumstances (the "Shelf Registration Statement"), is declared effective, then during the period commencing on such date and ending on the date on which the Series A Preferred Shares become "publicly-offered securities," each Plan DESCRIPTION OF THE SERIES Z PREFERRED SHARES The following is a summary of the rights, privileges, restrictions and conditions of the First Preferred Shares as a class and of the Series Z Preferred Shares as a series. Certain Provisions of the First Preferred Shares as a Class The authorized first preferred share capital of the Bank consists of an unlimited number of First Preferred Shares, without par value, which may be issued for a maximum aggregate consideration of $1,000,000,000 or the equivalent thereof in foreign currencies. The Board of Directors of the Bank may by resolution divide any unissued First Preferred Shares into series and fix the number of shares in each series and determine the designation, rights, privileges, restrictions and conditions thereof. Priority The First Preferred Shares of each series will rank on a parity with First Preferred Shares of every other series and are entitled to preference over the Common Shares, and any other shares of the Bank ranking junior to the First Preferred Shares with respect to the payment of dividends and upon any distribution of assets in the event of liquidation, dissolution or winding-up of the Bank. Restriction The Bank will not, without the approval of the holders of the First Preferred Shares, create or issue any shares ranking in priority to or pari passu with the First Preferred Shares, nor create or issue any additional series of First Preferred Shares, unless all cumulative dividends have been declared and paid or set aside for payment and all declared and unpaid non-cumulative dividends have been paid or set aside for payment. Voting Rights The Board of Directors is empowered to set voting rights for each series. The holders of the First Preferred Shares are not entitled to any voting rights as a class except as provided above or by law or with respect to the right to vote on certain matters as specified under "Approval of the Holders of the First Preferred Shares." Approval of the Holders of the First Preferred Shares The provisions with respect to First Preferred Shares will not be deleted or modified except with a resolution carried by the affirmative vote of not less than 66 2/3% of the votes cast at a meeting of holders of First Preferred Shares at which a majority of the outstanding First Preferred Shares is represented or, if no quorum is present at such meeting, at any adjourned meeting at which no quorum requirements would apply. Certain Provisions of the Series Z Preferred Shares as a Series Issue Price The Series Z Preferred Shares will have an issue price of U.S.$1,000 per share. purchaser will be deemed to have appointed an independent fiduciary (the "Independent Fiduciary"), which will be identified by the Company to exercise any discretionary authority with respect to transactions involving both the Company and the Bank or any Bank affiliate. The Independent Fiduciary will be identified prior to any such transaction and will be subject to removal and replacement by a majority of the holders of the Series A Preferred Shares. Any Plan fiduciary that proposes to cause a Plan to invest in Series A Preferred Shares should consult with its counsel with respect to the potential applicability of ERISA and the Code to such investment and whether any exemption or exemptions would be applicable and determine on its own whether all conditions of such exemption or exemptions have been satisfied. Any such Plan fiduciary should also determine whether the investment in Series A Preferred Shares is permitted under the governing Plan instruments and is appropriate for the Plan in view of the overall investment policy and the composition and diversification of its portfolio. Transfer Restrictions The Series A Preferred Shares have not been registered under the Securities Act and, until so registered pursuant to an effective registration statement of which this Prospectus will form a part, may not be offered or sold except (i) to "Qualified Institutional Buyers" (as defined in Rule 144A under the Securities Act) in reliance upon the exemption from the registration requirements of the Securities Act provided by Rule 144A, (ii) to institutional "accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) who purchase Series A Preferred Shares with a liquidation preference of not less than US$100,000 (i.e., 100 Series A Preferred Shares) in transactions exempt from the registration requirements of the Securities Act or (iii) pursuant to offers and sales that occur outside the United States in compliance with Regulation S under the Securities Act. See "Description of Capital Stock--Restrictions on Ownership Transfer."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000934849_electropha_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000934849_electropha_prospectus_summary.txt
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+Prospectus Summary............................................................... 8 Risk Factors..................................................................... 12 Use of Proceeds.................................................................. 23 Price Range of Common Stock...................................................... 23 Dividend Policy.................................................................. 24 Capitalization................................................................... 24 Dilution......................................................................... 25 Selected Financial Data.......................................................... 27 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 29 Business......................................................................... 39 Management and Advisors.......................................................... 70 Executive Compensation........................................................... 75 Compensation of Directors and Advisors........................................... 76 Employment Agreements............................................................ 76 Stock Options.................................................................... 78 Limitation of Directors' and Officers' Liability and Indemnification............. 79 Certain Transactions............................................................. 80 Principal Stockholders........................................................... 82 Description of Capital Stock..................................................... 84 Delaware Anti-Takeover Law and Certain Charter Provisions........................ 89 Transfer Agent and Registrar..................................................... 90 Shares Eligible for Future Sale.................................................. 90 Plan of Distribution............................................................. 91 Legal Matters.................................................................... 92 Changes in and Disagreements with Accountants and Financial Disclosure........... 92 Experts.......................................................................... 93 Additional Information........................................................... 93 Index to Financial Statements.................................................... F-1 </TABLE> The Company was incorporated in Delaware in 1994. The Company's executive offices are located at 1109 NW 13th Street, Gainesville, Florida 32601 and its telephone number is (352) 367-9088. 6 <PAGE> EXPLANATORY NOTE The form of Prospectus filed as a part of this Registration Statement has two cover pages, the first of which is with respect to an offering of up to 5,000,000 shares of Common Stock to be sold by the Company and the second of which, the "Alternate Cover Page", is with respect to an offering of up to 9,462,828 shares of Common Stock that may be sold from time to time by certain selling stockholders of the Company named in the Prospectus. After the effective date of this Registration Statement, only this Prospectus bearing the first form of cover page, appropriately completed, will be distributed by the Company and only the selling stockholders use the Prospectus with the Alternate Cover Page. Copies of the form of Prospectus bearing the first form of Cover Page will be filed with the Securities and Exchange Commission, pursuant to Rule 424(b), within five days after the effective date of the Registration Statement. Copies of the form of Prospectus bearing the Alternate form of Cover Page, in the exact form in which it is to be used after the commencement of the public offering of the shares to which it relates, will be filed with the Securities and Exchange Commission, pursuant to Rule 424(b), within five days after the commencement of the public offering of such shares. 7 <PAGE> SUMMARY This section is only a summary and does not contain all the information about our business that may be important to you. You should read the entire Prospectus, especially the Risk Factors and the Consolidated Financial Statements, Pro Forma Financial Information and Notes sections, before deciding to invest in shares of our Common Stock. This summary describes our new business that emerged as a result of acquiring two other companies, acquiring technology rights from another company and selling a portion of our old business line. As a result, the business described in this Prospectus is very different from the business in which we had previously been engaged. ELECTROPHARMACOLOGY Our Business: Our business is to develop: (i) drug delivery technologies to better deliver pharmaceutical drugs to diseased tissues and (ii) drug design technologies to create new drugs aimed at the genes and proteins being discovered by scientists as the underlying causes of complex diseases. We are focusing on the use of our technologies to create products for complex diseases such as cancer, chronic tissue damage and inflammation. Our Concept: Drug Delivery - Improving the delivery of a drug to diseased tissues can reduce side effects and/or allow patients to take lower doses of toxic drugs, such as chemotherapeutic drugs for cancer or anti-inflammatory drug for arthritis. We are using mild electric fields and electromagnetic signals to improve drug delivery since these can be applied from outside the body without any need for an invasive process like additional surgery or injection. Drug Design - Our scientists have special expertise in designing and chemically synthesizing new drugs that are small molecules (like antibotics or chemotherapeutic drugs) as compared to large molecules (like the protein drugs made by the biotechnology industry). Our design strategy uses new information from biomedical research that is revealing the roles of specific genes and proteins in complex diseases. Each of our small molecule drugs is designed to selectively target a specific gene or a protein in order to either treat or detect a disease (or the stage of a complex disease). Our Market: Complex diseases like cancer, chronic tissue damage (such as ulcers, Alzheimer's disease or osteoporosis) or inflammation go through multiple stages and involve a complex interplay of multiple genes and proteins. As a result, we believe that the future of the biopharmaceutical product market will be based on delivering the right amount of drug at the right time to diseased tissues and using the drug that attacks the right gene or protein target for the appropriate stage of a complex disease. Our Business Strategy: We believe that our strength is in rapidly converting new technical ideas into product prototypes or new methods of treatment or diagnosis. Once we prove the clinical use and define the patients for whom our products or methods will have real benefit, we intend to form partnerships with larger companies for the future development, large scale manufacturing and worldwide marketing and sales of the final products. Our drug delivery technology can be used with many different drugs and our small molecule drug design technology can create drugs to target many different proteins and genes. Therefore, our strategy is to form partnerships with many companies and achieve broad penetration in both the diagnostic and the therapeutic product markets. 8 <PAGE> Recent Business Changes: We recently restructured the Company through a series of acquisitions, divestitures and recapitalizations and also entered into an agreement with affiliates of Elan Corporation, plc. ("Elan"), a large international company that is a world leader in drug delivery products and technologies: First, we acquired two private biotechnology companies, HealthTech Development Inc. ("HTD") and Gemini Biotech LP ("Gemini"). To effect the acquisitions, we formed a new partnership, Gemini Health Technologies LP (the "Partnership"), that will conduct the Company's business. The Partnership is owned by a wholly owned subsidiary of the Company and by the partners of Gemini. Pursuant to the acquisitions, HTD shareholders received 6,172,095 shares of our Common Stock and the partners of Gemini received 6,000,000 units in the Partnership that they will exchange for 6,000,000 shares of our Common Stock approximately one year from the date of the acquisition. After the exchange, we intend to dissolve the Partnership and will have changed our name to Gemini Health Technologies Inc. We sold our medical device product line called SofPulse to a subsidiary of ADM Tronics Unlimited, Inc. ("ADMT"). In consideration of the sale of the SofPulse device line, we received $150,000 in cash and 1,400,000 shares of ADMT common stock, which is traded on the Nasdaq Small Cap Market (stock symbol: ADMT). ADMT also issued an additional 1,525,000 shares of its common stock to pay about $650,000 of our unpaid bills. ADMT also issued us a warrant to purchase more shares of ADMT Common Stock if ADMT achieves certain sales goals on the SofPulse device line. We issued 1,872,000 shares of our Common Stock in exchange for all of our outstanding Preferred Shares and a large number of the warrants that we had issued over the past several years. As a result of all these transactions, our Company will have approximately 18,600,000 shares of Common Stock outstanding after the Gemini partners exchange their units in the Partnership for shares of Common Stock. We acquired from Elan a drug delivery technology, called iontophoresis, that uses mild electric current to push drugs across the skin. The special feature of Elan's iontophoresis technology is a flexible patch that can be shaped to fit any size or shape of skin surface anywhere on the body. We made an up-front payment of $7,500,000 to Elan and received worldwide rights to the technology for skin diseases and wound care. We also will pay royalties and additional license fees to Elan from the future revenues that we generate when we sell products based on the technology. Separately, Elan invested $7,500,000 to buy 7,500 shares of our Company's Preferred Stock and warrants to purchase our Common Stock. Elan also purchased $600,000 of our Common Stock (777,202 shares) and agreed to purchase an additional $1,400,000 of our Common Stock before year-end, which we will use to fund the development of our drug delivery and drug design products. Elan has the right to nominate a director for election to the Board of Directors of our Company. 9 <PAGE> Our Company is incorporated in Delaware and our executive offices are located at 1109 NW 13th Street, Gainesville, Florida 32601. Phone (352) 367-9088; Facsimile (352) 367-0720. Common Stock Offered by Us...................................................5,000,000 shares The Offering: This Prospectus, with a different cover page, also is being used in connection with the offering from time to time by certain of our stockholders of up to 9,462,828 outstanding shares of our Common Stock. The total number of shares of our Common Stock outstanding after our offering is expected to be approximately 23,506,000 shares (assuming the exchange by the Gemini partners of their partnership units for shares. Our stock is traded on OTC Bulletin Board ("OTCBB") under the symbol "EPHI". Use of Funds: We plan to use the monies raised by us in this offering to: o advance our drug delivery technologies into human clinical testing; o to grow our library of small molecule drug candidates for our drug design program which is now funded primarily by federal grants and the limited revenues that we generate by providing custom gene and protein synthesis services to researchers and biopharmaceutical companies; and o general working capital. If we do not sell all 5,000,000 shares of Common Stock being offered by the Company, then we will limit the number of number of product development programs we undertake until we enter into agreements with corporate partners for these programs. 10 <PAGE> SUMMARY FINANCIAL DATA <TABLE> <CAPTION> Six Months Year Ended December 31, Ended June 30, ----------------------------------------------------------------------- --------------------------------- Pro Forma Pro Forma 1993 1994 1995 1996 1997 1997 1997 1998 1998 ---- ---- ---- ---- ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Statement of Operations Data: Total revenue $ 410,373 $ 1,114,228 $ 1,996,663 $ 2,105,762 $ 2,401,249 $ 118,018 $1,514,751 $ 435,003 $ 416,962 Loss from operations (1,334,185) (1,946,687) (2,731,044) (3,027,392) (1,602,170) (13,257,473) (721,072) (525,107) (7,919,017) Net loss (1,350,159) (2,073,883) (3,069,586) (2,927,990) (1,647,917) (13,338,748) (719,502) (560,026) (7,909,863) Net loss per share, basic and diluted (1) (1.03) (1.31) (1.26) (0.89) (0.45) (0.92) (0.20) (0.14) (0.53) Shares used in the Computation 1,316,528 1,586,303 2,429,880 3,298,849 3,697,611 14,564,287 3,606,388 4,113,328 14,997,403 </TABLE> <TABLE> <CAPTION> June 30, 1998 ------------------------------------ Actual As Adjusted (1) ------ --------------- <S> <C> <C> Balance Sheet Data: Cash and cash equivalents 64,465 4,064,465 Working capital (deficit) (1,811,411) 2,188,589 Total assets 1,172,034 5,172,034 Accumulated deficit (15,865,337) (15,865,332) Total shareholders' equity (deficit) (612,011) 3,387,989 </TABLE> (1) As adjusted to give effect to the recent corporate reorganization (see "Business - Recent Corporate Reorganization") and Elan Transactions (see "Business - Elan Transactions") sale of 5,000,000 Common Shares by the Company hereby (after deducting estimated underwriting discounts and commissions and the estimated expenses of the Offering) and the receipt and application of the estimated net proceeds therefrom at the proposed public offering price of $0.80 per share. See "Use of Proceeds" and "Capitalization". 11 <PAGE>
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000934923_travis_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000934923_travis_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE INDICATED HEREIN, (I) THE TERM "COMPANY" REFERS TO TRAVIS INTERNATIONAL, INC. AND ITS SUBSIDIARIES AND (II) ALL INFORMATION IN THIS PROSPECTUS (A) ASSUMES THAT THE UNDERWRITERS' OVERALLOTMENT OPTION IS NOT EXERCISED, AND (B) GIVES EFFECT TO THE RECAPITALIZATION OF THE COMPANY'S COMMON STOCK, INCLUDING THE CONVERSION OF EACH SHARE OF THE COMPANY'S CLASS A COMMON STOCK INTO ONE SHARE OF COMMON STOCK, THE CONVERSION OF TWO SHARES OF THE COMPANY'S SERIES 2 PREFERRED STOCK INTO 6,120 SHARES OF COMMON STOCK AND A 3.06-FOR-ONE STOCK SPLIT. SEE "UNDERWRITING" AND "DESCRIPTION OF CAPITAL STOCK -- RECAPITALIZATION." THE COMPANY The Company is a diversified wholesale distributor of specialty products and provider of related value-added services. From 13 operating locations in five states in the southern and western United States, the Company distributes post-tension cable products, household fixture products, specialty industrial products and telecommunications equipment. In addition, the Company provides value-added services in connection with such products, including engineering and design assistance, just-in-time delivery, fabrication, warranty repair, installation and other technical assistance. During fiscal 1997, the Company sold its products to over 8,700 customers located primarily in the United States and, to a lesser extent, Canada, Mexico and other countries. The Company has three principal categories of customers: (i) residential builders and commercial construction contractors, (ii) distributors of industrial products and (iii) operators of central office telephone systems. The Company differs from many other distributors in that it operates exclusively in specialty markets. The specialty markets sought by the Company are defined by a number of characteristics that distinguish them from the markets for commodity-type products. Although not all specialty markets exhibit all of these characteristics, generally they include: (i) a small to medium total market size, (ii) above average gross margins and returns on assets due to the nature of the products or unique value-added services, (iii) a limited number of competitors and the absence of a dominant, national competitor, and (iv) a high degree of fragmentation at the distributor, supplier and customer levels. The Company believes specialty markets are less capable of being served by alternatives to wholesale distribution and offer greater opportunities than commodity-type markets to obtain substantial market shares in the niches the Company serves. The Company's objective is to become a leading diversified wholesale distributor of specialty products and related value-added services in the United States. In pursuing this objective, the Company endeavors to achieve significant product, customer, vendor and geographic diversity by establishing operations in a limited number of niche markets and to increase the sales and net income of those operations through further market penetration and the addition of locations and products sold within such markets. The Company focuses on markets where the demand for specialized products or value-added services offers opportunities to obtain higher margins than those typically attainable in markets for more standard, high-volume merchandise and where opportunities exist for consolidation. The Company implements its strategy through new market acquisitions that add new product groups, vendors and customers to the Company's base, through fill-in acquisitions that establish new locations or complementary product lines for its existing business and through internal development efforts to increase penetration of the markets in which it operates. The Company maintains a decentralized management structure that provides the managers of its operating subsidiaries with discretion in conducting their respective operations while affording them the benefits of the Company's executive management expertise. The Company leverages the expertise of its executive and operating managers to achieve commonalities among its operating subsidiaries that result in management efficiencies and cost savings. The Company believes that acquisitions are often the most cost-effective means to enter new specialty markets or to expand geographically within existing markets. Since 1994, the Company has completed ten acquisitions, two of which were new market acquisitions and eight of which were fill-in acquisitions. The Company has also grown through internal development. The Company has increased sales to existing customers by periodically expanding into new product lines and continually adding new products to existing lines. The Company also has added new customers in existing markets through targeted sales programs and the addition of new operating locations and sales offices. In addition, the Company's internal development is enhanced by a continued emphasis on value-added services, which provide it the opportunity to expand gross margins and to attract a more loyal and diverse group of customers. Using this approach of balanced expansion through acquisitions and internal development, the Company's revenues and operating income increased from approximately $14.5 million and $2.1 million, respectively, in fiscal 1994 to approximately $80.1 million and $6.1 million (including a one-time charge to expenses of approximately $1.2 million in connection with the retirement, at a discount, of future obligations under certain employment, consulting and non-competition agreements), respectively, in fiscal 1997. The Company was organized as a Delaware corporation in 1986. The Company's executive offices are located at 3000 Weslayan Street, Suite 350, Houston, Texas 77027, and its telephone number is (713) 622-7475. THE OFFERING Common Stock offered by the Company............................ 2,272,727 Common Stock offered by the Selling Stockholders....................... 636,364 Common Stock outstanding after the Offering(1)........................ 5,290,379 Use of Proceeds...................... To repay approximately $10.4 million of outstanding indebtedness, to pay approximately $1.4 million to retire current and future obligations under certain employment, consulting and non-competition agreements relating to a previous acquisition by the Company and for general corporate purposes, including working capital and possible acquisitions. See "Use of Proceeds." Nasdaq National Market Symbol........ The Company has applied to have its Common Stock approved for quotation on the Nasdaq National Market System under the symbol "TRVI." - ------------ (1) Excludes (i) up to 91,800 shares of Common Stock reserved for issuance upon exercise of outstanding warrants, (ii) 76,500 shares of Common Stock reserved for issuance upon conversion of the Company's Series 2 Preferred Stock, (iii) 543,610 shares of Common Stock reserved for issuance upon exercise of outstanding options granted under various stock option plans and (iv) 453,000 shares of Common Stock that may be issued from time to time in connection with options not yet granted under such plans. Upon consummation of the Offering, an aggregate of 356,326 options granted under such plans will be vested and exercisable. See "Management -- Compensation Plans" and "Shares Eligible for Future Sale."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000940659_endocardia_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000940659_endocardia_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY AND SHOULD BE READ IN CONJUNCTION WITH THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND THE NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS." Endocardial Solutions, Inc. ("ESI" or the "Company") designs, develops, and manufactures a minimally invasive diagnostic system that diagnoses, within the span of a few heartbeats, tachycardia, a potentially fatal abnormal heart rhythm. The Company believes that its proprietary EnSite catheter and clinical workstation (together, the "EnSite System") is a powerful new diagnostic tool that will enable electrophysiologists to rapidly and comprehensively map tachycardia and improve the selection of patient treatment options. The Company has conducted limited clinical trials of the EnSite System on patients in the United States and the United Kingdom for ventricular tachycardia and supraventricular (atrial) tachycardia. Although clinical data obtained to date are insufficient (and included patients who experienced complications) to demonstrate the safety and efficacy of the EnSite System under applicable United States and international regulatory guidelines, the Company anticipates that these and additional clinical trials will be used to support a pre-market approval ("PMA") application to obtain approval to market the EnSite System for the diagnosis of ventricular tachycardia in the United States. The process of obtaining FDA and other required regulatory approvals is lengthy, expensive and uncertain. See "Risk Factors--Limited Clinical Testing Experience; Safety and Efficacy Not Yet Established" and "--Lack of Regulatory Approval." Tachycardia are caused by irregular electrical activity in the heart which disrupts the heart's normal pumping action. Ventricular tachycardia ("VT") occur in the lower chambers of the heart and frequently lead to serious complications, including sudden cardiac death. Supraventricular tachycardia ("SVT"), including atrial fibrillation and flutter, originate in the upper chambers of the heart and often result in chest pain, fatigue and dizziness and, while generally not life-threatening, are a leading cause of stroke in the United States. It is estimated that in the United States approximately one million people suffer from VT and approximately three million suffer from some form of SVT. The Company estimates that a majority of these four million VT and SVT patients suffer from complex forms of tachycardia that have multiple points of origin in unpredictable locations in the heart ("complex tachycardia"). To date, electrophysiologists have generally been unable to adequately diagnose complex tachycardia due to the limited capabilities of present technology. Currently available single-point contact catheters require time-consuming and tedious procedures that generally produce an insufficient amount of data to effectively locate, diagnose and optimally treat complex tachycardia. The Company's EnSite System is designed to enable electrophysiologists to rapidly and precisely locate the multiple, unpredictable points of origin of complex tachycardia. The EnSite System applies proprietary mathematical algorithms to compute more than 3,000 points of electrical activity within a heart chamber, producing a high resolution, real-time, three-dimensional color display of the electrical activity in the heart chamber. The "virtual electrogram" function of the EnSite System allows electrophysiologists to instantly view the electrical activity at any of the more than 3,000 points. The EnSite System is also capable of tracking and displaying the location and movements of auxiliary catheters introduced into the chamber. The Company is a development stage company that has incurred significant operating losses since its inception. As of September 30, 1997, the Company had an accumulated deficit of approximately $22.8 million. See "Risk Factors--History of Operating Losses; Accumulated Deficit; Expectation of Future Losses." The Company's offices are located at 1350 Energy Lane, Suite 110, St. Paul, Minnesota 55108, and its telephone number is (612) 644-7890. The Company was incorporated in Minnesota in 1992 and was reincorporated in Delaware in 1995.
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial information, including the financial statements and the notes thereto, included elsewhere in this Prospectus. Unless the context otherwise requires, the terms "SIMCALA" and the "Company" refer to SIMCALA, Inc., the term "the Predecessor" refers to the Company prior to the Acquisition on March 31, 1998 and the term "SiMETCO" refers to a predecessor of the Company prior to the period beginning on February 10, 1995. The Company's fiscal year ends on December 31 of each calendar year. Unless otherwise specified, the pro forma financial information included herein gives effect to the Transactions, including the offering of the Series A Notes (the "Offering"), the Equity Contribution and the application of the net proceeds therefrom, as if the Transactions had occurred on January 1, 1997 with respect to the income statement information for the fiscal year ended December 31, 1997 and the three months ended March 31, 1998. THE EXCHANGE OFFER The Exchange Offer......... The Exchange Offer consists of this Prospectus and the related Letter of Transmittal, and is being made solely to eligible holders of Series A Notes. Upon the terms and subject to the conditions of the Exchange Offer, the Company is offering eligible holders of Series A Notes the opportunity to exchange its Series A Notes that have not been registered under the Securities Act for the Exchange Notes that have been registered under the Securities Act. Exchange Offer Expiration Date..................... The Exchange Offer expires at 5:00 p.m., Eastern Time on , , 1998 (the "Expiration Date") unless extended by the Company in its sole discretion. Exchange Notes Offered..... The Exchange Notes consist of $75,000,000 aggregate principal amount of 9 5/8% Senior Notes due 2006, Series B. Procedures for Tendering Series A Notes........... Brokers, dealers, commercial banks, trust companies and other nominees who hold Series A Notes through DTC (as defined herein) may effect tenders by book-entry transfer in accordance with DTC's Automated Tender Offer Program ("ATOP"). In order for Series A Notes to be tendered by a means other than by book-entry transfer, a Letter of Transmittal must be completed and signed in accordance with the instructions contained herein. The Letter of Transmittal and any other documents required by the Letter of Transmittal must be delivered to the Exchange Agent by mail, facsimile, hand delivery or overnight carrier, and either such Series A Notes must be delivered to the Exchange Agent or specified procedures for guaranteed delivery must be complied with. See "The Exchange Offer -- Procedures for Tendering." Letters of Transmittal and certificates representing Series A Notes should not be sent to the Company. Such documents should only be sent to the Exchange Agent. See "The Exchange Offer -- Exchange Agent." Conditions to the Exchange Offer.................... The Exchange Offer is subject to certain customary conditions, which may be waived, to the extent permitted by law, by the Company. See "The Exchange Offer-Conditions" and "-- Procedures for Tendering." Special Procedures for Beneficial Owners........ Any beneficial owner whose Series A Notes are held in book-entry form or are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to exchange such Series A Notes for the Exchange Notes should contact such registered holder promptly and instruct such registered holder to tender the Series A Notes for exchange on such beneficial owner's behalf. See "The Exchange Offer -- Procedures for Tendering." Guaranteed Delivery Procedures............... Holders of Series A Notes who wish to tender their Series A Notes and whose Series A Notes are not immediately available or who cannot deliver their Series A Notes, the Letter of Transmittal or any other documents required by the Letter of Transmittal to the Exchange Agent (or comply with the procedures for book-entry transfer) prior to the Expiration Date must tender their Series A Notes according to the guaranteed delivery procedures set forth in "The Exchange Offer -- Guaranteed Delivery Procedures." Withdrawal Rights.......... Tenders may be withdrawn at any time prior to 5:00 P.M., Eastern Time, on the Expiration Date pursuant to the procedures described under "The Exchange Offer -- Withdrawals of Tenders." Acceptance of Notes and Delivery of Exchange Notes.................... The Company will accept for exchange any and all Series A Notes that are properly tendered in the Exchange Offer, and not withdrawn, prior to 5:00 P.M., Eastern Time, on the Expiration Date. The Exchange Notes issued pursuant to the Exchange Offer will be delivered on the earliest practicable date following the Expiration Date. See "The Exchange Offer -- Terms of the Exchange Offer." Federal Income Tax Consequences............. The issuance of the Exchange Notes to holders of the Series A Notes pursuant to the terms set forth in this Prospectus will not constitute an exchange for federal income tax purposes. Consequently, no gain or loss would be recognized by holders of the Series A Notes upon receipt of the Exchange Notes. See "The Exchange Offer -- Certain Federal Income Tax Consequences of the Exchange Offer." Effect on Holders of the Notes.................... As a result of the making of this Exchange Offer, the Company will have fulfilled certain of its obligations under the Registration Rights Agreement, and holders of Series A Notes who do not tender their Series A Notes will generally not have any further registration rights under the Registration Rights Agreement or otherwise. Such holders will continue to hold the untendered Series A Notes and will be entitled to all the rights and subject to all the limitations, including, without limitation, transfer restrictions, applicable thereto under the Indenture, except to the extent such rights or limitations, by their terms, terminate or cease to have further effectiveness as a result of the Exchange Offer. Accordingly, if any Series A Notes are tendered and accepted in the Exchange Offer, the trading market, if any, for the untendered Series A Notes could be adversely affected. Exchange Agent............. IBJ Schroder Bank & Trust Company is serving as exchange agent (the "Exchange Agent") with respect to the Series A Notes. THE NOTES Maturity Date.............. April 15, 2006. Interest Payment Dates..... April 15 and October 15, commencing October 15, 1998. Optional Redemption........ On or after April 15, 2002, the Company may redeem the Notes, in whole or in part, at the redemption prices set forth herein, plus accrued and unpaid interest thereon and Liquidated Damages, if any, to the date of redemption. Notwithstanding the foregoing, at any time on or before April 15, 2001, the Company may redeem up to 30% of the original aggregate principal amount of the Notes with the net proceeds of a public offering of common stock of the Company or Holdings (to the extent the net proceeds therefrom are contributed to the Company as common equity) at the redemption prices set forth herein, plus accrued and unpaid interest thereon, if any, to the redemption date; provided, that at least 70% of the original aggregate principal amount of Notes remains outstanding immediately after the occurrence of such redemption (excluding Notes held by the Company or its subsidiaries); and, provided, further, that such redemption shall occur within 60 days of the date of the closing of such public offering. See "Description of the Notes -- Optional Redemption." Mandatory Redemption....... None. Ranking.................... The Notes are general unsecured obligations of the Company and rank senior to all existing and future subordinated indebtedness of the Company and pari passu in right of payment with all existing and future senior indebtedness of the Company, including indebtedness under the New Credit Facility. The obligations of the Company under the New Credit Facility, however, are secured by substantially all of the Company's assets and the real and personal property used in the Company's operations which is, as a result of the IRB Financing (as defined herein), owned by the Industrial Development Board of the City of Montgomery (the "Montgomery IDB") and leased to the Company. Such indebtedness effectively ranks senior in right of payment to the Notes to the extent of such assets. As of June 30, 1998, the Company had approximately $83.1 million of indebtedness outstanding ($6.3 million of which was pari passu in right of payment to the Notes and none of which was secured) and approximately $15.0 million of secured indebtedness available to be incurred under the New Credit Facility (as such availability is reduced by an approximately $6.1 million letter of credit issued thereunder). The terms of the Indenture permit the Company and its subsidiaries to incur additional indebtedness (including secured indebtedness), subject to certain limitations. See "Use of Proceeds," "Description of the Notes" and "Description of Other Indebtedness." Change of Control.......... Upon a Change of Control (as defined herein), the Company will be required to make an offer to repurchase all outstanding Notes at 101% of the principal amount thereof plus accrued and unpaid interest thereon and Liquidated Damages, if any, to the date of repurchase. See "Description of the Notes -- Repurchase at the Option of Holders -- Change of Control." Covenants.................. The Indenture restricts, among other things, the ability of the Company and its subsidiaries to incur additional indebtedness and issue preferred stock, incur liens, pay dividends or make certain other restricted payments, apply net proceeds from certain asset sales, enter into certain transactions with affiliates, merge or consolidate with any other person, and assign, transfer, lease, convey or otherwise dispose of substantially all of the assets of the Company. See "Description of the Notes -- Certain Covenants." Use of Proceeds............ The Company will not receive any proceeds from the issuance of the Exchange Notes pursuant to the Exchange Offer. The net proceeds to the Company from the sale of the Series A Notes, together with the Equity Contribution, have been used to fund the Acquisition (as defined herein), to repay certain indebtedness of the Company and to pay transaction fees and expenses and are being used for the Company's general corporate purposes. See "Use of Proceeds." Shelf Registration Statement................ If (i) the Exchange Offer is not permitted by applicable law or (ii) any holder of Transfer Restricted Notes (as defined herein) notifies the Company within 20 business days of the commencement of the Exchange Offer that (A) it is prohibited by law or Commission policy from participating in the Exchange Offer, (B) that it may not resell the Exchange Notes acquired by it in the Exchange Offer to the public without delivering a prospectus and this Prospectus is not appropriate or available for such resales or (C) that it is a broker-dealer and holds Series A Notes acquired directly from the Company or an affiliate of the Company, the Company will be required to provide the Shelf Registration Statement to cover resales of the Notes by such holders thereof. If the Company fails to satisfy these registration obligations, it will be required to pay Liquidated Damages to the holders of the Notes under certain circumstances. See "The Exchange Offer." Absence of an Established Trading Market for the Notes.................... The Series A Notes are new securities that were issued on March 31, 1998 (the "Issue Date" or "Closing Date"). There is currently no established trading market for the Series A Notes or the Exchange Notes. Although the Initial Purchaser has informed the Company that it currently intends to make a market in the Series A Notes and, upon issuance, the Exchange Notes, it is not obligated to do so and any such market making may be discontinued at any time without notice. Accordingly, there can be no assurance as to the development or liquidity of any market for the Notes. To the extent Series A Notes are exchanged in this Exchange Offer, the liquidity of the market for the remaining Series A Notes may be reduced. The Series A Notes have been designated eligible for trading in the PORTAL market. The Company does not intend to apply for listing of the Exchange Notes on any securities exchange or for quotation through Nasdaq. See "Risk Factors -- Absence of an Established Trading Market for the Notes." THE COMPANY The Company is a leading domestic manufacturer of silicon metal which is used in the chemical and aluminum industries. Silicon metal is an essential raw material used by the chemical industry to produce silicones and polysilicon and by the aluminum industry primarily as an alloying agent. The Company produces and sells higher margin chemical grade and specialty aluminum grade silicon metal, both of which contain the highest concentrations of silicon and the lowest levels of impurities when compared to lower grades of silicon metal. In 1997, approximately 55% and 45% of the silicon metal consumed in the United States was consumed by the chemical industry and the aluminum industry, respectively. Silicones are the basic ingredient used in numerous consumer products, including lubricants, cosmetics, shampoos, gaskets, building sealants, automotive hoses, water repellent fluids and high temperature paints and varnishes. Polysilicon is an essential raw material used in the manufacture of silicon wafers for semi-conductor chips and solar cells. Aluminum containing silicon metal as an alloy can be found in a variety of automobile components, including engine pistons, housing and cast aluminum wheels. Management believes that there are no commercially feasible substitutes for silicon metal in either the chemical or aluminum industries. In addition to silicon metal, the Company produces microsilica, a co-product of the silicon metal smelting process. Microsilica is a strengthening and filler agent which has applications in the refractory, concrete, fibercement, oil exploration and minerals industries. The Company is one of the three largest manufacturers, in terms of volume, of silicon metal in the United States, and its production facility, located in Mt. Meigs, Alabama (the "Facility") is the nation's second largest in terms of capacity. The Facility is the newest "greenfield" silicon metal manufacturing facility in the United States and is strategically located near abundant supplies of high quality raw materials necessary for the production of high grade silicon metal. A "greenfield" silicon metal manufacturing facility is a facility that is newly constructed to manufacture silicon metal, whereas a "brownfield" facility is an addition to or expansion of an existing silicon metal manufacturing facility. SIMCALA intends to use a portion of the net proceeds of the Offering to expand the Facility by constructing a fourth smelting furnace and the Company believes that after this expansion, the Facility will be the second largest silicon metal production facility in the world. The Company believes that the increased capacity resulting from the construction of a fourth furnace will enable it to benefit from levels of demand for silicon metal in the Western Industrialized Nations (as defined herein) which CRU estimates will exceed currently known sources of supply through 2005. Upon completion of the fourth furnace, the Company's production capacity will increase by approximately 12,000 metric tons to approximately 48,000 metric tons per year. The Company is one of the most cost efficient silicon metal manufacturers in the world, as measured by operating cost per metric ton of silicon metal sold. The Company estimates that it held a market share of approximately 13% of the total United States chemical market and approximately 13% of the total United States aluminum market in 1997, based on metric tons of silicon metal sold. In 1997, the Company had net sales and EBITDA of $62.2 million and $13.8 million, respectively. For the three months ended March 31, 1998, the Company had net sales and EBITDA of $14.8 million and $0.1 million, respectively. On a pro forma basis, the Company had net losses of $891,000 and $2.4 million for 1997 and the three months ended March 31, 1998, respectively. RECENT HISTORY AND TURNAROUND SIMCALA was incorporated in 1994 and acquired the Facility from SiMETCO, Inc. ("SiMETCO") on February 10, 1995. Under SiMETCO's management, the Facility was underutilized and inefficient and consistently incurred operating losses as a result of poor management and a focus on the lower margin, less stable secondary aluminum business. Immediately after the acquisition of the Facility, the Company hired C. Edward Boardwine, its current Chief Executive Officer. Mr. Boardwine installed a new senior management team which implemented a major turnaround program aimed at increasing the operating efficiency of the Facility and focusing on the production and effective marketing of higher margin chemical grade and specialty aluminum grade silicon metal. The Company's turnaround program included the following: - Increased Production. The Company increased production by improving the efficiency and yield of two furnaces that were operating when the acquisition of the Facility occurred and by recommissioning a third furnace that was not operational at the time of the Facility's acquisition. From 1994 to 1997, the Facility's annual production volume increased approximately 55%, from approximately 24,000 metric tons to approximately 37,100 metric tons. - Customer Relationships. The Company established relationships with the major consumers of higher margin chemical grade and specialty aluminum grade silicon metal. As part of this effort, the Company sought and obtained key customer certifications, requiring it to demonstrate the ability to consistently meet customers' proprietary quality and sizing requirements. The Company is currently a certified supplier of chemical grade silicon metal to G.E. Silicones ("G.E. Silicones"), a division of General Electric Company, and Dow Corning Corporation ("Dow Corning"), the two largest consumers of chemical grade silicon metal in the United States, and a certified supplier of specialty aluminum grade silicon metal to Alcan Ingot & Recycling ("Alcan") and Alumax Mill Products Inc. ("Alumax"). Production of chemical grade, primary aluminum grade and secondary aluminum grade silicon metal at the Facility changed from 29.6%, 15.1% and 55.3%, respectively, of total net sales in 1994 to 55%, 28.2% and 16.8%, respectively, of total net sales in 1997. This change in product mix has significantly increased the Company's profitability. - Facility Modernization. In 1996, the Company completed a $12.0 million facility modernization program pursuant to which all the Company's production and air abatement equipment was rebuilt. This program modernized the Facility and resulted in improved operating efficiency and greater consistency in the production of chemical and specialty aluminum grade silicon metal. To further enhance operating reliability, the Company is in the process of upgrading its raw material handling equipment. - Supplier Relationships. The Company discontinued relationships with suppliers of lower grade raw materials and established relationships with suppliers of higher quality raw materials in order to secure a reliable, long-term source of the ingredients necessary to produce high quality silicon metal. By using high quality raw materials, the Company has been able to decrease the levels of impurities in the silicon metal it produces, resulting in more efficient production of a consistently high quality product. - Workforce Efficiency. The Company improved the efficiency of its workforce by creating performance based incentives and establishing technical training programs. In addition, despite recommissioning a third furnace in the third quarter of 1995, the number of employees at the Facility from 1994 to 1997 remained constant at approximately 170 (consisting of approximately 124 hourly employees and 46 salaried employees). Consequently, the amount of silicon metal produced per hourly employee at the Facility improved from approximately 210 metric tons in 1994 to approximately 299 metric tons in 1997. As a result of the foregoing measures, net sales doubled to $62.2 million in 1997 from $31.1 million in 1994. During that period, EBITDA increased to $13.8 million from a loss of $3.0 thousand. On a pro forma basis, the Company had a net loss of $891,000 in 1997. In addition, operating cost per metric ton of silicon metal produced at the Facility decreased 9.6%, to $1,279.0 in 1997 from $1,415.0 in 1994. THE SILICON METAL INDUSTRY The silicon metal industry consists of two general markets: the chemical industry market and the aluminum industry market. The chemical industry market is subdivided into the silicones market and the polysilicon market, both of which require the highest grade of silicon metal. The aluminum industry market is subdivided into the primary aluminum market (producing aluminum from ore) and the secondary aluminum market (producing aluminum from scrap). The Company defines the primary aluminum market and the higher-end of the secondary aluminum market as the "specialty aluminum" market because the aluminum produced for those markets requires higher quality silicon metal. From 1987 to 1997, demand for silicon metal in the United States increased at an average annual rate of approximately 7.7% (on a non-compounded basis). This increase was driven by an average annual rate of growth of approximately 10.1% (on a non-compounded basis) in the United States chemical market. While the aluminum market has also grown during this period, demand for chemical grade silicon metal has increased 73.8% and, in 1997, chemical grade silicon metal represented approximately 55% of the silicon metal consumed in the United States. The major factors contributing to the growth of the chemical market are (i) the introduction of new silicon based product applications (such as emulsions, release agents and sealants) and (ii) the displacement of petrochemical based products (such as lubrication and hydraulic fluids). The growth in the aluminum market is primarily attributable to the increased use of aluminum in the transportation industry. According to CRU, demand for silicon metal in the United States is projected to increase over the next eight years at an average annual rate of approximately 5.3% (on a non-compounded basis). During that period, CRU projects that demand for chemical grade silicon metal in the United States will increase at an average annual rate of approximately 7.6% (on a non-compounded basis). COMPETITIVE STRENGTHS The Company believes that it has a strong competitive position attributable to a number of factors, including the following: - Preferred Supplier Status with Key Customers. SIMCALA has satisfied rigorous qualification requirements with its primary customers who purchase chemical grade and specialty aluminum grade silicon metal. Satisfying these requirements may take up to two years. As a result, the Company believes that these rigorous qualification requirements constitute a significant barrier to entry into the high grade silicon metal market. - Low Cost Producer. As a result of the major turnaround program executed by the current management team, the Company has been recognized by CRU as among the six most cost efficient silicon metal manufacturers in the world, as measured by cost per metric ton of silicon metal produced. - Production Facilities. The Facility has recently undergone an extensive facility modernization program which has resulted in improved operational efficiency and greater consistency in the production of chemical and specialty aluminum grade silicon metal. In addition, because the Facility was originally designed to support the addition of a fourth smelting furnace, the Company can increase capacity at a relatively low cost and in a relatively short time, without significantly disrupting operations. Management estimates that construction of the fourth furnace can be accomplished for $7.0 to $10.0 million less than and approximately one year of construction time less than the construction cost and time that would have been required if the Facility had not been designed to support a fourth furnace. Management estimates that the fourth furnace can be constructed at a cost of approximately $25.0 million in approximately two years. - Experienced, Highly Qualified Management Team. SIMCALA has assembled a highly qualified management team with over 75 years of combined experience in the silicon metal business. In particular, since 1969, C. Edward Boardwine, the Company's Chief Executive Officer, has worked in various capacities in the ferroalloy and silicon metal industries, most recently serving as Vice President--Silicon Metal Division of Elkem ASA, a position he held from 1990 until joining the Company in 1995. The Company believes that its management team has the operational and technical skill to continue to operate the Facility at world class levels of efficiency and to consistently produce high grade silicon metal. BUSINESS STRATEGY SIMCALA intends to capitalize on the aforementioned competitive strengths and has developed and is implementing the following business strategy aimed at increasing revenues and EBITDA: - Focus on Chemical and Specialty Aluminum Markets. The Company will remain focused on manufacturing high grade silicon metal for use by the chemical and specialty aluminum markets. Management has focused on the chemical market for four principal reasons: (i) as a result of diverse end-use applications of chemical grade silicon metal, demand has historically grown despite economic downturns, and demand and prices have historically been less volatile than the demand for, and the prices of, lower grade silicon metal; (ii) the United States market for chemical grade silicon metal is expected to grow at an average annual rate of approximately 7.6% (on a non-compounded basis) through the year 2005, according to CRU; (iii) sales of chemical grade silicon metal have historically provided higher profit margins than sales of lower grades of silicon metal because chemical grade silicon metal customers have paid higher prices for the required high quality silicon metal, resulting in part from the limited number of manufacturers able to supply silicon metal of such quality; and (iv) the Company's management has the operational and technical expertise necessary to consistently and efficiently produce high quality silicon metal. Similarly, management has focused on the specialty aluminum market because it is less susceptible to competition from low priced secondary grade silicon metal imports, and sales of specialty aluminum grade silicon metal have historically provided higher profit margins and been subject to less price volatility than sales of secondary grade silicon metal. In addition, because the United States International Trade Commission has concluded that there are no commercially feasible substitutes for silicon metal in either the chemical or aluminum industries, management believes that higher silicon metal prices will not result in customers purchasing silicon metal substitutes. - Maintain Low Cost Operations. Management intends to maintain the Company's position as one of the six most cost-efficient manufacturers of silicon metal in the world. The Company intends to achieve this objective by continuing to increase the yield from its three existing smelting furnaces and increasing capacity by commissioning a fourth furnace. The Company believes it will effectively be able to spread fixed costs over the resulting increased production volume to further reduce costs per metric ton of silicon metal sold. - Expand Capacity to Meet Increasing Demand. CRU projects that demand for silicon metal in the Western Industrialized Nations will exceed currently known sources of supply through 2005. The Company believes that it can take advantage of this increased demand by constructing a fourth smelting furnace. The Facility's infrastructure was originally designed and built to accommodate a fourth furnace. Within approximately two years, the Company believes a fourth furnace will enable it to increase its capacity by 12,000 metric tons of silicon metal and 5,000 metric tons of microsilica per year, making the Facility the second largest silicon metal production facility in the world. The Company intends to use a portion of the net proceeds from the Offering to fund in part the construction of a fourth furnace. Management believes that completion of a fourth furnace and the sale of the resulting silicon metal produced will increase profitability. CGW AND SUMMARY OF THE TRANSACTIONS CGW. CGW Southeast Partners III, L.P. ("CGW") is the most recently formed investment fund sponsored by Cravey, Green & Wahlen, Incorporated, the principals of which are Richard L. Cravey and Edwin A. Wahlen, Jr. The general partner of CGW is CGW Southeast III, L.L.C. (the "General Partner") and Messrs. Cravey and Wahlen are the only shareholders and directors of its manager. CGW and other investment funds sponsored by Cravey, Green & Wahlen, Incorporated seek to acquire, usually with participation by operating management, middle market businesses whose profitability can be significantly enhanced through the implementation of operating efficiencies, improved financial management or new growth strategies, including follow-on acquisitions. Investment funds sponsored by Cravey, Green & Wahlen, Incorporated have historically taken an active, hands-on role in the implementation of such efficiencies, management improvements and strategies with respect to their portfolio companies. The Transactions. On March 31, 1998, SAC Acquisition Corp., a Georgia corporation ("SAC") and then wholly owned subsidiary of Holdings, acquired all of the outstanding capital stock of the Company (the "Acquisition") from its stockholders (the "Selling Stockholders") for a cash payment of approximately $66.7 million (the "Cash Consideration"). See "The Transactions -- The Acquisition." The aggregate purchase price paid by SAC for the Acquisition was financed with the net proceeds of the Offering and the initial capital contribution by CGW and C. Edward Boardwine, Dwight L. Goff and R. Myles Cowan, II (each, a "Senior Manager" and collectively, the "Senior Management") of $22.0 million to Holdings (the "Equity Contribution"), which was then contributed by Holdings to SAC. Immediately following the Acquisition, SAC merged with and into the Company, with the Company being the surviving corporation (the "Merger"). As a result of the Merger, the Company became the obligor of the Notes and a wholly owned direct subsidiary of Holdings. See "The Transactions -- Financing of the Acquisition" and "Use of Proceeds." In connection with the Acquisition, the Company (i) repaid approximately $9.2 million of term loan indebtedness (including accrued interest thereon and fees) outstanding under its prior bank credit facility (the "Terminated Credit Facility") with a portion of the net proceeds of the Offering and (ii) replaced the Terminated Credit Facility and a related letter of credit reimbursement agreement (the "Terminated Reimbursement Agreement") with a new credit facility (the "New Credit Facility"). The New Credit Facility consists of a $15.0 million revolving credit facility which provides availability for borrowings and letters of credit. As part of the Company's industrial revenue bond financing (the "IRB Financing"), an approximately $6.1 million letter of credit was issued under the New Credit Facility to replace the letter of credit issued under the Terminated Reimbursement Agreement. The Acquisition, the Merger, the replacement of the Terminated Credit Facility and the Terminated Reimbursement Agreement with the New Credit Facility and the Equity Contribution, the Offering and the application of the net proceeds therefrom are referred to in this Prospectus as the "Transactions." See "The Transactions" and "Description of Other Indebtedness."
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+SUMMARY GENERAL The Millburn World Resource Trust, a Delaware business trust (the "Trust"), engages in the speculative trading of futures, commodity options and forward contracts on currencies, interest rates, energy and agricultural products, metals and stock indices. Millburn Ridgefield Corporation, a Delaware corporation (the "Managing Owner" or "Millburn Ridgefield"), acts as the managing owner (the functional equivalent of a general partner in a limited partnership), commodity pool operator and trading advisor of the Trust. Units of beneficial interest ("Units") in the Trust are continuously offered, at Net Asset Value, pursuant to the terms of this Prospectus. PERFORMANCE OF THE TRUST - The Trust began trading September 13, 1995 with an initial capitalization of $15,297,069. Through February 28, 1998, the Trust's performance has been profitable while exhibiting a high degree of volatility -- volatility which can be expected to continue. THE MILLBURN WORLD RESOURCE TRUST <TABLE> <CAPTION> Month-end Month-end Monthly Net Asset Month-end Monthly Net Asset Month-end Rate of Value Net Asset Rate of Value Net Asset 1995 Return Per Unit* Value* 1996 Return Per Unit* Value* ---- -------- --------- ----------- ---- ------ --------- --------- <S> <C> <C> <C> <C> <C> <C> <C> Sept.(1/2 mo.) (6.62)% $ 933.80 $14,284,924 Jan. (0.36)% $1,068.44 $32,925,030 Oct. (1.92)% 915.83 $17,807,742 Feb. (12.30)% 937.05 $34,377,923 Nov. 0.92 % 924.25 $20,363,730 Mar. 2.94 % 964.56 $40,010,844 Dec. 16.02 % 1,072.34 $26,457,277 Apr. 2.55 % 989.12 $42,739,498 May (7.88)% 911.19 $40,617,824 1995 COMPOUND RATE OF RETURN (3 1/2 MONTHS): 7.23% June 6.64 % 971.65 $45,108,706 July (0.36)% 968.18 $45,980,784 Month-end Aug. 1.49 % 982.59 $46,836,993 Monthly Net Asset Month-end Sept. 4.01 % 1,022.02 $47,529,825 Rate of Value Net Asset Oct. 8.09 % 1,104.75 $51,392,603 1997 Return Per Unit* Value* Nov. 4.10 % 1,149.99 $54,724,582 ---- -------- --------- ----------- Dec. 0.42 % 1,154.81 $56,365,318 Jan. 4.24 % $1,203.79 $59,451,235 Feb. 7.17 % 1,290.13 66,138,865 1996 COMPOUND RATE OF RETURN: 7.69% Mar. (4.29)% 1,234.76 63,855,510 Apr. (4.63)% 1,177.54 65,282,050 Month-end May 3.02 % 1,213.10 70,845,207 Monthly Net Asset Month-end June (1.73)% 1,192.13 70,064,574 Rate of Value Net Asset July 2.95 % 1,227.32 72,656,184 Aug. (10.22)% 1,101.91 67,398,662 1998 Return Per Unit* Value* Sept. 0.84 % 1,111.16 69,097,586 ---- ------ --------- -------- Oct. 0.74 % 1,119.39 69,586,678 Nov. (0.77)% 1,110.78 69,056,862 Jan. 3.07 % $1,218.74 $75,621,361 Dec. 6.45 % 1,182.43 73,570,903 Feb. (1.19)% 1,204.22 74,645,216 1998 COMPOUND RATE OF RETURN (2 MONTHS): 1.84% 1997 COMPOUND RATE OF RETURN: 2.39% COMPOUND ANNUAL RATE OF RETURN SINCE INCEPTION (29 1/2 MONTHS): 7.86% CUMULATIVE TOTAL RETURN SINCE INCEPTION (29 1/2 MONTHS): 20.42% </TABLE> - ------------------------ * The Month-end Net Asset Value per Unit and Month-end Net Asset Value figures above reflect a reduction for accrued Profit Shares, if any. GAAP aggregate Net Asset Value figures are reduced, as of December 31, 1995 and December 31, 1996 respectively, by $525,000 and $252,000 of unamortized organizational and initial offering cost reimbursement payments, which were accrued for GAAP but not for redemption purposes. The organizational and initial offering cost reimbursement was completed as of September 30, 1997. The redemption Net Asset Values are shown above. SUMMARY (CONT'D) OVERVIEW - A LEVERAGED, PROFESSIONALLY MANAGED INVESTMENT, THE TRUST TRADES IN A WIDE RANGE OF DOMESTIC AND INTERNATIONAL MARKETS WITH AN INCREASED EMPHASIS, AS COMPARED TO MILLBURN RIDGEFIELD'S OTHER CLIENT ACCOUNTS, ON THE TRADITIONAL COMMODITY MARKETS. - PERFORMANCE OBJECTIVES OF SUBSTANTIAL CAPITAL APPRECIATION WITH CONTROLLED VOLATILITY. - A BROADLY DIVERSIFIED PORTFOLIO OF INTERNATIONAL MARKET SECTORS. - MULTIPLE SYSTEMS ARE APPLIED IN EACH MARKET, PROVIDING "INTERNAL" DIVERSIFICATION TO THE TRUST'S TRADING APPROACH DESPITE ITS USE OF A SINGLE ADVISOR. - EQUALLY LIKELY TO BE PROFITABLE OR UNPROFITABLE IN "UP" AS IN "DOWN" MARKETS; TO DATE, THE PERFORMANCE OF THE TRUST HAS BEEN SIGNIFICANTLY NON-CORRELATED WITH THE GENERAL UNITED STATES DEBT AND EQUITY MARKETS. - PERFORMANCE NOT DEPENDENT UPON ANY SINGLE NATION'S ECONOMY OR CURRENCY. - THE POTENTIAL, IF SUCCESSFUL, TO PROVIDE A VALUABLE COMPONENT OF DIVERSIFICATION TO TRADITIONAL PORTFOLIOS. - OFFERING THE ADVANTAGES OF LIMITED LIABILITY IN HIGHLY LEVERAGED TRADING, AS WELL AS ADMINISTRATIVE CONVENIENCE IN A BUSINESS TRUST WHICH IMPLEMENTS COMPLEX TRADING STRATEGIES IN NUMEROUS AND DIVERSE INTERNATIONAL MARKETS. - THE TRUST EARNS INTEREST ON APPROXIMATELY 95% OF ITS DAILY NET ASSETS. - PERSONS INVESTING $1,000,000 OR MORE BENEFIT FROM DISCOUNTED BROKERAGE FEES, AT NO COST TO OTHER UNITHOLDERS. DISCOUNTED BROKERAGE FEES APPLY TO SUCH INVESTORS' ENTIRE ACCOUNTS, NOT JUST THAT PORTION CORRESPONDING TO CAPITAL CONTRIBUTIONS OF $1,000,000 OR MORE.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000944753_scriptgen_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000944753_scriptgen_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS AND RELATED NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS INDICATED OTHERWISE, ALL INFORMATION IN THIS PROSPECTUS (I) ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED, (II) GIVES RETROACTIVE EFFECT TO THE CONVERSION OF THE COMPANY'S SERIES A PREFERRED STOCK, SERIES B PREFERRED STOCK, SERIES C PREFERRED STOCK AND SERIES D PREFERRED STOCK TO COMMON STOCK, PAR VALUE $0.01 PER SHARE (THE "COMMON STOCK") UPON THE CONSUMMATION OF THE OFFERING, (III) GIVES EFFECT TO THE FILING OF AN AMENDMENT TO THE COMPANY'S RESTATED CERTIFICATE OF INCORPORATION CREATING A CLASS OF UNDESIGNATED PREFERRED STOCK AND (IV) GIVES RETROACTIVE EFFECT TO A SUBSEQUENT 1-FOR-3.07459 REVERSE SPLIT OF THE SHARES OF COMMON STOCK, TO BE EFFECTED BEFORE THE COMPLETION OF THE OFFERING. THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS ANTICIPATED IN THOSE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN OF THE FACTORS SET FORTH IN THIS PROSPECTUS. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS." THE COMPANY Scriptgen Pharmaceuticals, Inc. ("Scriptgen" or the "Company") utilizes its proprietary high throughput technologies to enable and accelerate the discovery of innovative small molecule drugs. Scriptgen's technology platform allows the Company and its collaborators to exploit the opportunities afforded by advances in genomics and combinatorial chemistry, and opens new avenues of drug discovery. The Company's technology platform identifies and validates novel gene targets for therapeutic intervention, and then uses novel assay systems to rapidly screen compounds against those targets, even before the gene targets' characteristics or functions are well understood. The Company believes that the application of its technologies addresses many of the limitations associated with traditional drug discovery and provides substantial cost savings opportunities. The Company commercializes its technology platform through (i) collaborations with pharmaceutical and technology companies and (ii) the Company's internal development program. The Company's core technologies include GATE (Genetics Assisted Target Evaluation), a family of high throughput target identification and validation systems, and ATLAS (Any Target Ligand Affinity Screen) and SCAN (Screen for Compounds with Affinity for Nucleic Acids), the high speed, solution based, assay systems which identify compounds that bind to virtually any protein or structured RNA, respectively. GATE measures the effects of transiently removing a specific gene from a cell, and by reproducing conditions that closely resemble drug mechanism of action, generates data more predictive of target behavior than traditional methods. ATLAS and SCAN rapidly measure the affinity (strength) of compounds that bind to targets even before the gene functions are well understood, enabling the Company to work with targets that are unsuitable for traditional high throughput screens. The Company believes ATLAS and SCAN increase dramatically the number of targets and compounds that may be screened in a given time period, and reduce to weeks what often requires months or years of assay development time when using traditional high throughput functional assays. The Company has used GATE to identify and validate novel infectious disease targets, and has used ATLAS and SCAN to identify lead compounds, two of which have progressed to pre-clinical development. ATLAS and SCAN are broadly applicable to research in multiple therapeutic areas, and have demonstrated utility in the areas of anti-infectives, oncology, cardiovascular, and respiratory and immunologic disorders. The Company's strategy is to maximize the commercial opportunities presented by its technology platform and pipeline of drug candidates by entering into multiple collaborations and retaining rights to independently develop certain products. Scriptgen has collaborative agreements with pharmaceutical and technology companies, and routinely evaluates opportunities to enter into collaborations with other potential partners. HOECHST MARION ROUSSEL. The Company is using its technology platform to seek to identify new fungal targets and antifungal drug candidates in a collaboration with Hoechst Marion Roussel ("HMR"). The Company expects to have received an aggregate of $9 million from HMR under the collaboration by the completion of the Offering, of which $6 million will be technology access fees and $3 million will be proceeds from the sale of Common Stock to HMR concurrent with the Offering. The Company will also receive research and development payments, and will receive payments when and if certain milestones are achieved and royalties on the sales of any new drug resulting from the collaboration. BIOCHEM PHARMA INC. Scriptgen is using its technology platform to identify drug candidates which are (i) active against the Hepatitis B virus (the "HBV Program") and (ii) which act as small molecule mimics of therapeutic proteins (the "Dimerescent Program"). Scriptgen will be responsible for all aspects of drug discovery. BioChem Pharma Inc. (together with its wholly owned subsidiary, BioChem Pharma Holdings Inc., "BioChem") will be responsible for pre-clinical and clinical development, and will retain worldwide commercialization rights. The Company will receive milestone payments when and if BioChem exercises options on drug candidates in the Dimerescent Program. The companies will share any profits generated by the HBV Program or the Dimerescent Program according to the terms of the agreement. In addition, BioChem acquired $20 million of preferred stock of Scriptgen and a warrant to purchase shares of Common Stock. ELI LILLY AND COMPANY. Scriptgen is using ATLAS to identify novel drug candidates active against two targets selected by Eli Lilly and Company ("Eli Lilly"). Two additional targets may be selected by Eli Lilly for high throughput screening in 1998, assuming certain milestones are met. In October 1997, Eli Lilly and the Company expanded the scope of the collaboration to screen additional compounds from the Company's compound library. Under the agreement with Eli Lilly, Scriptgen receives research and development payments and will receive payments when and if certain milestones are achieved and royalties on the sales of any new drug resulting from the collaboration. HOFFMANN-LA ROCHE INC. The Company is using ATLAS to identify drug candidates against a cancer-related target identified by Hoffmann-La Roche Inc. ("Roche"). Under the agreement with Roche, Scriptgen receives research and development payments and will receive payments when and if certain milestones are achieved and royalties on the sales of any new drug resulting from the collaboration. MONSANTO COMPANY. Scriptgen is using its technology platform in a collaboration with Monsanto Company ("Monsanto") to identify and validate novel fungal targets from plant pathogens and to identify novel antifungal agents. Under the agreement with Monsanto, Scriptgen receives research and development payments and will receive payments when and if certain milestones are achieved and royalties on the sales of any product developed by Monsanto for IN PLANTA applications. Scriptgen's internal development efforts have initially focused on anti-infectives, where it has identified novel cidal targets and lead compounds in the fungal, bacterial and viral areas. The Company has also completed feasibility studies on novel targets in a number of other areas, including oncology and immunologic disorders, and in several cases has identified drug candidates. The Company believes that the anti-infective market is attractive as an initial field of focus because of the large market potential, the particular suitability of the Company's proprietary technology and the relatively low technical and regulatory hurdles for this class of diseases. Scriptgen has progressed rapidly in the anti-infective area and has four lead compounds in development as well as a number of other potential drug candidates under review. Scriptgen has identified two small molecule lead compounds which demonstrate oral activity in animal models against a broad spectrum of fungal pathogens, including certain strains resistant to current drugs. The Company has also identified a small molecule lead compound which shows broad spectrum antibacterial efficacy against drug resistant strains and is currently in animal studies and one lead compound that has shown strong antiviral activity IN VITRO against Hepatitis B virus. The Company is evaluating a number of other potential development candidates. The Company has also applied its drug discovery technologies to develop novel coalescent compounds, which are small molecules connected by a molecular tether that bind to both active and neutral sites. Scriptgen believes such compounds may lead to more specific and potent therapeutics and allow for the discovery of small molecule mimics of therapeutic proteins. Scriptgen Pharmaceuticals, Inc. was incorporated in Delaware on September 17, 1992. The Company maintains its principal executive offices at 200 Boston Avenue, Medford, Massachusetts 02155. The Company's telephone number is (781) 393-8000. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company......................... 3,000,000 shares Common Stock to be outstanding after the Offering........... 11,669,189 shares (1)(2) Use of proceeds............................................. To fund research and development and for general corporate purposes, including working capital. Nasdaq National Market Symbol............................... SCRP </TABLE> - -------------- (1) Includes an aggregate of 250,000 shares of Common Stock (based on an assumed initial public offering price of $12.00 per share) to be issued to HMR in the Private Placement. Excludes: (i) 790,581 shares of Common Stock issuable upon exercise of outstanding options at a weighted average exercise price of $1.75 per share, (ii) 464,537 shares of Common Stock issuable at an exercise price of $13.47 per share upon exercise of an outstanding warrant (the "BioChem Warrant"), (iii) 49,763 shares of Common Stock issuable upon exercise of an outstanding warrant at an exercise price of $3.07 per share and 32,525 shares of Common Stock issuable upon exercise of an outstanding warrant at an exercise price of $5.53 per share and (iv) 1,950,000 shares of Common Stock reserved for issuance upon exercise of options or in connection with other awards that may be granted in the future under the Company's 1997 Equity Incentive Plan (the "1997 Plan") and Non-Employee Directors Stock Plan (the "Directors' Plan"). See "Certain Transactions--BioChem Offering," "Management--Employment Agreements," "--Stock Options," "--Employee Benefit Plans--1997 Equity Incentive Plan," "--Non-Employee Directors Stock Plan" and "--1994 Stock Option Plan," "Description of Capital Stock--Warrants" and Notes 6, 8 and 10 of Notes to Financial Statements. (2) In the event that the initial public offering price is less than $10.76 per share, the Company will be required to issue to BioChem, for no additional consideration, the number of additional shares of Common Stock equal to the amount by which (a) 19,993,640 divided by the initial public offering price, exceeds (b) 1,858,145. See "Certain Transactions--BioChem Offering." ------------------------ "SCRIPTGEN" AND THE SCRIPTGEN LOGO AS IT APPEARS ON THE COVER PAGE OF THIS PROSPECTUS ARE TRADEMARKS OF THE COMPANY FOR WHICH REGISTRATION APPLICATIONS HAVE BEEN FILED WITH THE UNITED STATES PATENT AND TRADEMARK OFFICE. ALL OTHER TRADEMARKS AND TRADENAMES REFERENCED IN THIS PROSPECTUS ARE THE PROPERTY OF THEIR RESPECTIVE OWNERS. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> PERIOD FROM YEAR ENDED NINE MONTHS ENDED SEPTEMBER 17, 1992 DECEMBER 31, SEPTEMBER 30, TO ------------------------------------------ ------------------------ DECEMBER 31, 1992 1993 1994 1995 1996 1996 1997 ------------------- --------- --------- --------- --------- ----------- ----------- (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue: Collaborative agreements.............. -- -- -- -- $ 975 $ 975 $ 467 SBIR grants........................... -- -- -- $ 260 232 222 138 ------ --------- --------- --------- --------- ----------- ----------- -- -- -- 260 1,207 1,197 605 ------ --------- --------- --------- --------- ----------- ----------- Cost of revenue: Collaborative agreements.............. -- -- -- -- 174 174 124 SBIR grants........................... -- -- -- 260 232 222 138 ------ --------- --------- --------- --------- ----------- ----------- -- -- -- 260 406 396 261 ------ --------- --------- --------- --------- ----------- ----------- Gross profit.......................... -- -- -- -- 801 801 344 Operating expenses: Research and development.............. $ 455 $ 1,833 $ 3,157 3,152 3,958 2,757 4,273 General and administrative............ 94 652 998 1,299 906 669 831 ------ --------- --------- --------- --------- ----------- ----------- 549 2,485 4,155 4,451 4,865 3,427 5,104 ------ --------- --------- --------- --------- ----------- ----------- Loss from operations.................. (549) (2,485) (4,155) (4,451) (4,064) (2,626) (4,761) Other income (expense), net 1 (62) (146) (128) 19 12 (15) ------ --------- --------- --------- --------- ----------- ----------- Net loss.............................. $ (549) $ (2,547) $ (4,301) $ (4,579) $ (4,044) $ (2,614) $ (4,775) ------ --------- --------- --------- --------- ----------- ----------- ------ --------- --------- --------- --------- ----------- ----------- Net loss per share (1).................. $ (0.21) $ (0.98) $ (1.25) $ (1.28) $ (1.20) $ (0.77) $ (1.35) ------ --------- --------- --------- --------- ----------- ----------- ------ --------- --------- --------- --------- ----------- ----------- Weighted average common and common equivalent shares outstanding (1)..... 2,556 2,607 3,435 3,591 3,360 3,374 3,528 ------ --------- --------- --------- --------- ----------- ----------- ------ --------- --------- --------- --------- ----------- ----------- Pro forma net loss per share (unaudited) (1)................................... $ (0.49) $ (0.53) --------- ----------- --------- ----------- Pro forma weighted average common and common equivalent shares outstanding (unaudited) (1)....................... 8,186 9,069 --------- ----------- --------- ----------- </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1997 ---------------------------------------- <S> <C> <C> <C> PRO FORMA ACTUAL PRO FORMA(2) AS ADJUSTED(3) --------- ------------- -------------- BALANCE SHEET DATA: Cash and cash equivalents............................................... $ 858 $ 20,858 $ 56,288 Working capital......................................................... (1,200) 18,800 54,230 Total assets............................................................ 2,478 22,478 57,908 Noncurrent portion of capital lease obligations......................... 501 501 501 Redeemable convertible preferred stock.................................. 20,279 -- -- Accumulated deficit..................................................... (21,169) (23,436) (23,436) Total stockholders' equity (deficit).................................... (20,744) 19,535 54,965 </TABLE> - -------------- (1) See Note 2 of Notes to Financial Statements for information concerning the computation of net loss per share and shares used in computing net loss per share. (2) Pro forma to give effect to the issuance of Series D Preferred Stock (convertible into 1,858,145 shares of Common Stock) to BioChem for consideration of $20 million (the "BioChem Offering") and the application of the proceeds therefrom, the value of the BioChem Warrant, the retirement of 358,748 shares of treasury stock and the conversion of the Series A, B, C and D Preferred Stock into shares of Common Stock upon the closing of the Offering. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." (3) Adjusted to give effect to: (i) the sale of 3,000,000 shares of Common Stock offered by the Company hereby (at an assumed initial public offering price of $12.00 per share) and the application of the net proceeds therefrom and (ii) the sale of 250,000 shares of Common Stock (at an assumed offering price of $12.00 per share) to HMR in the Private Placement and the application of the net proceeds therefrom. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000945131_communicat_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000945131_communicat_prospectus_summary.txt
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+SUMMARY The following summary is qualified in its entirety by the more detailed information and Financial Statements and the notes thereto appearing elsewhere in this Prospectus. Unless the context otherwise requires, (i) references to the "Combined Company" refer to Communications Systems International, Inc., GlobalTel Resources, Inc. and International Telephone Company, assuming the GlobalTel Merger and the ITC Acquisition are consummated, (ii) references to "CSI" refer to Communications Systems International, Inc., (iii) references to "GlobalTel" refer to GlobalTel Resources, Inc. and its two wholly owned subsidiaries, and (iv) references to "ITC" refer to International Telephone Company. THE COMPANY The Combined Company is a growing provider of international telecommunications services offering long distance, calling cards and enhanced voice and data services. With more than 16,700 customers in over 170 countries, the Combined Company primarily serves markets that have been historically underserved by large telecommunications providers and incumbent telephone operators ("ITOs"). The Combined Company presently focuses on international call-reorigination, capitalizing on the arbitrage opportunity created by differences between U.S. and international long-distance rates. Going forward, the Combined Company intends to leverage the expertise derived from its callreorigination business, and capitalize on the established customer base generated by its call-reorigination business, to provide higher margin telecommunications services such as call-through, enhanced fax and business grade Internet services. The world's larger telecommunications carriers, such as AT&T, MCI, British Telecom, Deutsche Telecom AG and France Telecom, have focused on developed telecommunications markets that are characterized by high teledensity (ratio of telephone lines to inhabitants), an advanced stage of deregulation, a large volume of international telecommunications traffic and a concentration of multinational corporations. These markets include the United States, the United Kingdom, Germany, France and Japan. The Combined Company focuses on what it characterizes as emerging telecommunications markets, which are (i) smaller developed countries such as Argentina, Austria, Brazil, Switzerland, Ireland, Singapore and South Africa, and (ii) markets that typically have less developed telecommunications infrastructures, are in an earlier stage of deregulation and have more monopolistic distribution profiles. Based on data from the International Telecommunications Union, the Combined Company has calculated that the approximately 145 countries that the Combined Company targets as emerging telecommunications markets generated approximately 23.0 billion minutes in outgoing international telecommunications traffic in 1995. The Combined Company's telecommunications services are marketed and sold through a network of independent sales agents, strategic relationships and in- house direct marketing. The Combined Company relies primarily on over 170 independent sales agents that cover over 170 countries. GlobalTel has an exclusive agreement with the International Business Network for World Commerce and Industry, Ltd. ("IBNET"), the managing member of the Consortium of Global Commerce, under which IBNET will market the services of GlobalTel, and ultimately the Combined Company, through several thousand individual chambers of commerce located in over 200 countries. In addition, GlobalTel has a strategic relationship with Novell that provides it with a distribution channel for its services, and ultimately those of the Combined Company, through a select number of Novell's network of over 25,000 value-added resellers. The Combined Company has a broad customer base including foreign offices of multinational corporations, including Microsoft Corporation, Mitsubishi Corporation and Chrysler Corporation; major international hotels, including the Inter-Continental Hotel and the Copacabana Palace in Rio de Janeiro, Brazil and Southern Sun Group's Holiday Inn Hotels in South Africa; and embassies and international agencies, including the United States embassies in Korea and Australia and the United Nations consulate in South Africa. The Combined Company provides telecommunications services through its (i) voice switching and global fax messaging infrastructure in Los Angeles, California, (ii) voice switching and billing center in Ft. Lauderdale, Florida, (iii) access to third party infrastructure through international telecommunications carriers and through Equant, a global data network services provider, and (iv) enhanced fax nodes in Hong Kong and Mexico City. The Combined Company uses both off-the-shelf technologies, which provide flexibility to adapt to the rapidly changing telecommunications environment, and proprietary automated call processing technologies (DIAL and LINK-US), which enhance the Combined Company's competitive position in serving high volume customers. The principal components of the Combined Company's strategy are to (i) increase penetration of emerging telecommunications markets by capitalizing upon its call-reorigination experience, strategic marketing relationships and proprietary technologies, (ii) pursue and implement additional strategic acquisitions of complementary international customer bases, products and infrastructure, (iii) exploit strategic marketing relationships to expand its customer base and establish new relationships with independent ISPs and other network providers in its target markets, (iv) provide an increasingly broad range of services, such as enhanced voice and data services and a suite of business grade Internet services, (v) employ flexible open architecture technology that is modular, scalable and allows for the integration of a variety of technologies, (vi) utilize proprietary call processing technologies to provide quality telecommunications services to high volume customers, (vii) increase revenue through targeted growth in its carrier and reseller business, and (viii) exploit operating and marketing synergies and efficiencies resulting from the GlobalTel Merger and the ITC Acquisition. CSI is a Colorado corporation formed in April 1993. The Combined Company intends to change its name to "CS GlobalTel, Inc." upon completion of the GlobalTel Merger. The Combined Company's executive offices are located at 8 South Nevada Avenue, Colorado Springs, Colorado 80903, and its telephone number is (719) 471-3332. The Combined Company's Internet address is http://www.csil.com. Unless otherwise indicated, the information contained in this Prospectus (i) assumes no exercise of the Underwriters' over-allotment option or outstanding options, warrants or convertible securities, and (ii) gives effect to a 1 for 4 reverse stock split that was completed in July 1998 and a proposed 1 for 2 reverse stock split that will be completed prior to the date of this Prospectus, subject to shareholder approval. CSI has entered into agreements (i) to merge (the "GlobalTel Merger") with GlobalTel, and (ii) to acquire all of the outstanding stock of ITC (the "ITC Acquisition"), both of which are expected to occur simultaneously with the completion of this offering. References to the present action of the Combined Company refer to activities or matters that are common to each of CSI, GlobalTel and ITC as of the date of this Prospectus. Statements regarding prospective activities or matters relating to the Combined Company refer to activities that may be undertaken or matters that may result following the GlobalTel Merger and the ITC Acquisition. See "Glossary of Terms" for definitions of certain technical and other terms used in this Prospectus. Certain information contained herein is derived from industry sources. Although the Combined Company believes that this information is reliable, it has not independently verified this information. The Combined Company claims proprietary rights in its logo and the terms "LINK-US" and "DIAL." Primecall(R) is a service mark of GlobalTel. Trade names, trademarks and service marks of other companies appearing in this Prospectus are the property of their respective holders. RECENT DEVELOPMENTS In May and July 1998, CSI sold to ProFutures Special Equities Fund, L.P. ("ProFutures") an aggregate of $1.75 million principal amount promissory notes bearing interest at a rate of 12% per annum (the "12% Notes") and 74,074 shares of Common Stock. In connection with the purchase of the 12% Notes and shares of Common Stock, ProFutures received warrants to purchase 600,000 shares of Common Stock. See "Description of Securities." In July 1998, the holders of certain promissory notes issued by GlobalTel agreed to exchange $1.3 million of principal amount including accrued interest in consideration of 175,768 shares of Common Stock, based on an assumed initial offering price of $9.00 per share. The holders of $847,500 principal amount of such notes agreed to extend the maturity date of their notes from January 1999 until August 30, 1999 in consideration of the Combined Company increasing the interest rate on the notes to 14% per annum and granted certain enhanced registration rights. See "Description of Securities." THE OFFERING Common Stock offered By CSI..................... 2,974,833 shares By the Selling Shareholders................ 125,167 shares Common Stock outstanding prior to the offering...... 2,566,096 shares(1) Common Stock outstanding after the offering......... 5,540,929 shares(1) Use of Proceeds............. To repay certain indebtedness of the Combined Company; to consummate the ITC Acquisition; to install equipment to facilitate transparent call- reorigination services for additional hotels and businesses; for technical development associated with the Combined Company's enhanced services; to pay certain deferred payables; and for general working capital to fund operating expenses. In addition, a portion of the proceeds will be used to fund the repurchase of securities tendered in connection with a rescission offer. See "Use of Proceeds," "Business" and "Rescission Offer." Risk Factors................ The Common Stock offered hereby is speculative and involves a high degree of risk and immediate substantial dilution and should not be purchased by investors who cannot afford the loss of their entire investment. See "Risk Factors" and "Dilution." Proposed Nasdaq National Market symbol......... CSGL - -------- (1) Includes 126,222 shares of Common Stock (the "Bridge Shares") to be issued immediately prior to the closing of this offering based on an assumed offering price of $9.00 per share in connection with the notes (the "Bridge Notes") issued by CSI in December 1997 (the "December 1997 Financing"), 581,643 shares of Common Stock issuable to GlobalTel shareholders in connection with the GlobalTel Merger and 525,102 shares to be issued in connection with certain promissory notes. Excludes (i) up to 540,532 shares of Common Stock issuable upon exercise of outstanding options, (ii) up to 980,659 shares of Common Stock issuable upon the exercise of outstanding warrants, (iii) an indeterminate number of shares of Common Stock issuable upon conversion of outstanding promissory notes in the aggregate principal amount of $30,000 which have a conversion price per share equal to 90% of the average bid and asked price of the Common Stock on the day before conversion, (iv) up to 310,000 shares of Common Stock issuable upon exercise of the Representatives' Warrants, and (v) up to 230,000 shares issuable in connection with the ITC Acquisition (collectively referred to herein as "Additional Securities"). See "Management," "Description of Securities" and "Underwriting." SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) The summary financial information set forth below is derived from the separate audited and unaudited financial statements of CSI, GlobalTel and ITC and the unaudited pro forma condensed combined financial statements of CSI, GlobalTel and ITC. Such information should be read in conjunction with such financial statements and the notes thereto and the reports of the Independent Public Accountants. <TABLE> <CAPTION> HISTORICAL--CSI HISTORICAL--GLOBALTEL --------------------------------------- -------------------------- 12 MONTHS SIX 12 MONTHS SIX ENDED EIGHT MONTHS MONTHS ENDED MONTHS APRIL 30, ENDED ENDED DECEMBER 31, ENDED ---------------- DECEMBER 31, JUNE 30, ---------------- JUNE 30, 1996 1997 1997 1998 1996 1997 1998 ------- ------- ------------ -------- ------- ------- -------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue......... $ 6,741 $11,865 $8,115 $ 4,527 $ 9,136 $12,862 $ 3,289 Cost of revenue........ 5,963 7,755 4,879 2,833 8,230 11,171 2,675 ------- ------- ------ -------- ------- ------- ------- Gross margin.... 778 4,110 3,236 1,694 906 1,691 614 Operating expenses: Sales and marketing...... 1,573 2,080 2,007 1,127 682 788 229 General and administrative.. 1,652 2,024 2,103 1,470 5,773 7,119 3,292 Depreciation and amortization ............... 58 103 92 89 98 253 176 ------- ------- ------ -------- ------- ------- ------- Total operating expenses....... 3,283 4,207 4,202 2,686 6,553 8,160 3,697 ------- ------- ------ -------- ------- ------- ------- Loss from operations..... (2,505) (97) (966) (992) (5,647) (6,469) (3,083) Interest expense, including amortization of debt discount.. (19) (162) (113) (1,238) (225) (1,368) (1,903) Other income (expense)...... -- -- (85) -- -- -- -- ------- ------- ------ -------- ------- ------- ------- Loss before income taxes and extraordinary item........... (2,524) (259) (1,164) (2,230) (5,872) (7,837) (4,986) Income tax (benefit)...... -- -- -- -- -- -- -- ------- ------- ------ -------- ------- ------- ------- Loss before extraordinary item........... (2,524) (259) (1,164) (2,230) (5,872) (7,837) (4,986) Extraordinary item--gain on extinguishment of debt........ -- -- 747 -- -- -- -- ------- ------- ------ -------- ------- ------- ------- Net loss........ $(2,524) $ (259) $ (417) $ (2,230) $(5,872) $(7,837) $(4,986) ======= ======= ====== ======== ======= ======= ======= Series A convertible preferred stock dividends...... -- -- -- -- -- (39) (31) ------- ------- ------ -------- ------- ------- ------- Net loss applicable to common shareholders... $(2,524) $ (259) $ (417) $ (2,230) $(5,872) $(7,876) $(5,017) ======= ======= ====== ======== ======= ======= ======= EBITDA(1)....... $(2,447) $ 6 $ (874) $ (903) $(5,549) $(6,216) $(2,907) Basic loss per share(excluding extraordinary item).......... $ (2.54) $ (.22) $ (.94) $ (1.77) $ (5.88) $ (6.48) $ (2.88) Weighted average number of shares outstanding.... 995 1,160 1,236 1,263 999 1,215 1,745 <CAPTION> HISTORICAL--ITC PRO FORMA AS ADJUSTED -------------------- ---------------------- SIX SIX 10 MONTHS MONTHS 12 MONTHS MONTHS ENDED ENDED ENDED ENDED OCTOBER 31, JUNE 30, DECEMBER 31, JUNE 30, 1997 1998 1997 1998 ----------- -------- ------------ --------- <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue......... $8,054 $4,919 $ 35,261 $12,735 Cost of revenue........ 6,790 3,738 27,050 9,246 ----------- -------- ------------ --------- Gross margin.... 1,264 1,181 8,211 3,489 Operating expenses: Sales and marketing....... 715 454 4,468 1,810 General and administrative.. 1,388 701 12,787 5,465 Depreciation and amortization.... 73 59 8,572 4,353 ----------- -------- ------------ --------- Total operating expenses........ 2,176 1,214 25,827 11,628 ----------- -------- ------------ --------- Loss from operations..... (912) (33) (17,616) (8,139) Interest expense, including amortization of debt discount.. (57) (25) (1,001) (1,718) Other income (expense)...... 119 23 -- -- ----------- -------- ------------ --------- Loss before income taxes and extraordinary item........... (850) (35) (18,617) (9,857) Income tax (benefit)...... -- -- -- -- ----------- -------- ------------ --------- Loss before extraordinary item........... (850) (35) (18,617) (9,857) Extraordinary item--gain on extinguishment of debt........ -- -- -- -- ----------- -------- ------------ --------- Net loss........ $ (850) $ (35) $ (18,617) $(9,857) =========== ======== ============ ========= Series A convertible preferred stock dividends...... -- -- -- -- ----------- -------- ------------ --------- Net loss applicable to common shareholders... $ (850) $ (35) $ (18,617) $(9,857) =========== ======== ============ ========= EBITDA(1)....... $ (839) $ 24 $ (9,044) $(3,786) Basic loss per share(excluding extraordinary item).......... $ (708) $ (29) $ (3.43) $ (1.80) Weighted average number of shares outstanding.... 1 1 5,424 5,471 </TABLE> <TABLE> <CAPTION> HISTORICAL-- PRO FORMA HISTORICAL--CSI GLOBALTEL HISTORICAL--ITC AS ADJUSTED --------------------- --------------------- -------------------- ----------- DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30, OCTOBER 31, JUNE 30, JUNE 30, 1997 1998 1997 1998 1997 1998 1998 ------------ -------- ------------ -------- ----------- -------- ----------- <S> <C> <C> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Cash.................... $ 429 $ 273 $ 849 $ 142 $ 848 $ 603 $17,087 Working capital (deficit).............. (2,612) (5,500) (4,934) (11,104) (1,259) (1,440) 2,584 Total assets............ 2,975 3,880 4,354 3,254 2,720 3,000 46,302 Long-term debt, net of current maturities and debt discount.......... -- -- 3,832 2,000 292 160 2,160 Common stock subject to rescission............. -- -- 2,455 2,455 -- -- 817 Total shareholders' equity (deficit)....... (1,112) (3,101) (8,534) (13,413) (781) (863) 25,672 </TABLE> (1) "EBITDA' is defined as the loss from operations, as indicated above, adjusted to add back depreciation and amortization. EBITDA is not a measure of financial performance under generally accepted accounting principles and should not be considered a substitute for measures of performance prepared in accordance with generally accepted accounting principles.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000945688_sportsline_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000945688_sportsline_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e75e2e6ea903dcb59a1db2d12d685ac1088c0f9e
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1998/CIK0000945688_sportsline_prospectus_summary.txt
@@ -0,0 +1 @@
+SUMMARY This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. The following summary is qualified in its entirety by the more detailed information, including "Risk Factors," and the financial statements and notes thereto, appearing elsewhere in this Prospectus. Except as otherwise noted, all information in this Prospectus assumes no exercise of outstanding options or warrants. The Company SportsLine USA is a leading Internet-based sports media company that provides branded, interactive information and programming as well as merchandise to sports enthusiasts worldwide. cbs.sportsline.com, the Company's flagship site on the World Wide Web (the "Web"), delivers real-time, in-depth and compelling sports content and programming that capitalizes on the Web's unique graphical and interactive capabilities. The Company's other Web sites include those devoted to (i) sports superstars such as Joe Namath, Michael Jordan (jordan.sportsline.com), Tiger Woods (tigerwoods.com), Shaquille O'Neal (shaq.com), Cal Ripken, Jr. (2131.com) and Wayne Gretzky (gretzky.com), (ii) specific sports such as golf (golfweb.com), cricket (cricinfo.org) and soccer (soccernet.com), (iii) international sports coverage (sportsline.com/u/worldwide) and (iv) electronic odds and analysis on major sports events (vegasinsider.com). The Company's objective is to become the leading Internet-based sports media company and to create a global sports brand. To this end, the Company focuses exclusively on sports and distinguishes itself from other content providers by offering innovative, timely and comprehensive sports content. The Company generates revenue from multiple sources. Since March 31, 1996, a majority of the Company's revenue has been derived from advertising. More than 200 advertisers have purchased sponsorships and advertisements from the Company, including numerous major automotive, consumer products, financial, publishing and entertainment, technology and telecommunications companies. Although most of the content on the Company's Web sites is free, users can purchase memberships and premium content and products. The Company also derives revenue from transactions on its Web sites, including the sale of limited edition collectibles and memorabilia, licensed apparel and other sports-related products, syndication of its programming in other media, and development of Web sites for third parties. The Company distributes a broad range of up-to-date news, scores, player and team statistics and standings, photos and audio and video clips obtained from CBS and other leading sports news organizations as well as the Company's superstar athletes; distributes instant odds and picks from well-known handicappers; produces and distributes entertaining, interactive and original programming such as editorials and analyses from its in-house staff and freelance journalists; produces and offers contests, games, fantasy league products and fan clubs; and sells sports-related merchandise and memorabilia. The Company also owns and operates a state-of-the-art radio studio from which it produces all-sports radio programming which is broadcast over the Internet and on traditional radio stations in association with the SportsFan Radio Network. A key element of the Company's strategy is to establish strategic relationships to increase consumer awareness of the SportsLine brand and build traffic on its Web sites. In March 1997, the Company established a strategic alliance with CBS Broadcasting, Inc. ("CBS") pursuant to which CBS acquired a minority ownership interest in the Company, and the Company's flagship Web site was renamed "cbs.sportsline.com." The CBS agreement provides for cbs.sportsline.com to receive, among other things, at least $57 million of network television advertising and on-air promotion through 2001, primarily during CBS television sports broadcasts such as the NFL, the NCAA Men's Basketball Tournament, NCAA Football, PGA Tour events, U.S. Open tennis and the Daytona 500. The Company believes that its relationship with CBS, in particular the branding of its flagship Web site as "cbs.sportsline.com" and the promotion the Company will receive on CBS television broadcasts, will enable it to establish SportsLine as a broadly recognized consumer brand. In July 1997, the Company entered into a strategic programming and distribution agreement with America Online Inc. ("AOL"), pursuant to which cbs.sportsline.com became the first "anchor tenant" on AOL's Sports Channel. In October 1998, the Company and AOL entered into a new three-year agreement (the "AOL Agreement") and significantly expanded their online relationship to provide Company-produced sports news and statistics, special features, major event coverage and merchandise on several key AOL brands around the world. Under the AOL Agreement, the Company became the premier provider of special features and major event coverage to the Sports Channel on the AOL service, as well as an anchor tenant in the Sports Web Center on aol.com, AOL's Web site. cbs.sportsline.com will also be the premier national sports partner with a presence on all Digital City local services, currently serving 50 cities, and an anchor tenant in the Sports Channel on CompuServe. In addition, SportsLine WorldWide will become the premier global provider of country-specific sports content to all of AOL's international services, and the Company will become the premier provider of licensed sports equipment and apparel as well as golf products within the Sports Channel on the AOL service. In July 1997, the Company entered into an agreement with Microsoft Corporation ("Microsoft") pursuant to which cbs.sportsline.com is bundled into Microsoft's "Active Desktop" as part of Microsoft's release of the latest version of Internet Explorer ("IE4"). cbs.sportsline.com is also featured as a default content "channel" in the Channel Finder of Netscape Communication Corporation's ("Netscape") Netcaster software, which utilizes "push" delivery to give users the ability to subscribe to dynamic Web content and to browse these channels and Web sites offline from their desktop. The Company's SportsLine WorldWide Web site offers coverage of international sports, such as cricket and soccer, through strategic relationships with major publishing organizations in Brazil (O Estado de Sao Paulo), France (Le Monde), Germany (Verlagsgruppe Fleet), the Netherlands (World Online) and Spain (El Pais). The Company has also established strategic marketing relationships with sports superstars, personalities, organizations and affinity groups. The Company was incorporated in Delaware in February 1994. Its principal executive offices are located at 6340 N.W. 5th Way, Fort Lauderdale, Florida 33309, and its telephone number is (954) 351-2120. Unless the context otherwise requires, the terms "Company" or "SportsLine USA" refer to SportsLine USA, Inc. and its subsidiaries, and the terms "cbs.sportsline.com," "vegasinsider.com," "golfweb.com" and "igogolf.com" refer to the Company's Web sites, located at http://cbs.sportsline.com, http://www.vegasinsider.com, http://www.golfweb.com and http://www.igogolf.com, respectively. All references to cbs.sportsline.com include, where appropriate, www.sportsline.com, which was the address of the Company's flagship Web site prior to March 1997. The Offering <TABLE> <CAPTION> <S> <C> Common Stock offered by the Selling Shareholders...................... 2,676,458 shares (1) Common Stock outstanding as of September 30, 1998.................. 19,121,282 shares (2) Use of proceeds............................. The Company will not receive any proceeds from the sale of the shares by the Selling Shareholders. See "Use of Proceeds." Nasdaq National Market symbol............... "SPLN" </TABLE> Summary Financial Information (3) (In thousands, except per share data) <TABLE> <CAPTION> Year Ended December 31, Six Months Ended June 30, ---------------------------------------- ---------------------------- 1995 1996 1997 1997 1998 --------- --------- --------- ----------- ----------- (unaudited) <S> <C> <C> <C> <C> <C> Statement of Operations Data: Revenue........................ $ 100 $ 3,058 $ 12,014 $ 3,507 $ 13,802 Gross margin (deficit)......... (718) (1,175) 1,583 (645) 5,418 Loss from operations........... (6,182) (16,372) (34,971) (14,824) (18,102) Net loss....................... $ (6,108) $ (16,103) $ (34,177) $ (14,465) $ (16,511) Net loss per share--basic and diluted..................... $ (1.59) $ (2.31) $ (3.08) $ (1.43) $ ( 0.96) Weighted average common and common equivalent shares outstanding--basic and diluted..................... 3,836 6,971 11,108 10,129 17,170 </TABLE> <TABLE> <CAPTION> June 30, 1998 ------------- (unaudited) <S> <C> Balance Sheet Data: Cash and marketable securities............................................................ $106,646 Working capital........................................................................... 113,385 Total assets.............................................................................. 128,668 Long-term obligations..................................................................... 346 Total shareholders' equity................................................................ 120,975 </TABLE> - ------------------- (1) Includes 876,986 Shares which are subject to Warrants that are not currently exercisable. (2) Excludes 2,398,403 shares of Common Stock issuable pursuant to stock options outstanding as of September 30, 1998 (of which options to purchase approximately 412,512 shares were exercisable) with a weighted average exercise price of $13.20 per share and 1,859,968 shares of Common Stock issuable upon the exercise of warrants outstanding as of September 30, 1998 (of which warrants to purchase approximately 1,394,482 shares were exercisable) with a weighted average exercise price of $8.87 per share. See "Management--Stock Plans" and Note 6 of Notes to Consolidated Financial Statements. Also excludes (i) 2,751,925 shares of Common Stock issuable pursuant to the Company's agreement with CBS (including 1,140,000 shares issuable upon the exercise of warrants to be granted to CBS), and (ii) 550,000 shares of Common Stock and warrants to purchase 450,000 shares of Common Stock issued to AOL in October 1998 pursuant to the AOL Agreement. See "Certain Transactions--CBS Agreement" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Recent Developments."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000948263_giga_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000948263_giga_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f8c77a74debc9d96b92c2cf50f80bdd130fe27ad
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1998/CIK0000948263_giga_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the Company's Consolidated Financial Statements (the 'Consolidated Financial Statements') and notes thereto appearing elsewhere in this Prospectus. Unless the context otherwise requires, references in this Prospectus to 'Giga' or the 'Company' are to Giga Information Group, Inc., a Delaware corporation, and its direct and indirect subsidiaries. Unless otherwise indicated, the information contained in this Prospectus (i) assumes no exercise of the Underwriters' over-allotment option, (ii) reflects the automatic conversion of all outstanding shares of the Company's Series A, Series B, Series C and Series D Preferred Stock (the 'Convertible Preferred Stock') into an aggregate of 4,686,784 shares of Common Stock upon the closing of the Offering (the 'Preferred Conversion'), (iii) reflects the repayment (the 'Bridge Repayment') of convertible promissory notes in the aggregate principal amount of $10.0 million (the 'Bridge Notes') issued in April 1998, (iv) reflects the filing by the Company, upon the closing of the Offering, of an amended and restated certificate of incorporation (the 'Restated Certificate'), (v) reflects a one-for-three reverse stock split of the Common Stock (the 'Reverse Stock Split') to be effected prior to the closing of this Offering and (vi) has been adjusted to reflect a four-for-one stock split of the Common Stock effected as a stock dividend in November 1995 (the 'Stock Split'). THE COMPANY The Company provides objective analyses and advice relating to developments and trends in the computing, telecommunications and related industries (collectively, the 'Information Technology' or 'IT' industries) to assist its customers in making technology-related decisions. IT is critical to the competitiveness and long-term viability of a wide range of organizations. The Company believes information overload, confusion and anxiety exists among IT decision-makers. As a result, an increasing number of organizations are turning to Continuous Information Service ('CIS') providers to monitor and analyze IT developments and to identify trends to support such organization's IT decision-making needs. Giga was founded by Gideon I. Gartner, who in 1979 founded Gartner Group, Inc., a CIS provider. Building on his extensive experience and success in the CIS industry, Mr. Gartner formed Giga with the objective of creating a new approach toward addressing the CIS needs of users and vendors of IT products and services. Giga has developed a range of innovative Continuous Information Services, as well as an effective, electronic information delivery mechanism, designed to provide integrated IT analyses and advice. Foremost among these innovations is the Company's unified advisory service ('Advisory Service') through which IT research and analysis are offered to customers as a single service intended to encompass the variety of IT coverage offered by other CIS providers through multiple and fragmented services. This original research and advice is provided by a staff of experienced industry analysts. To complement Giga's analysts, the Company provides its Advisory Service customers with access to an extensive network of external IT practitioners ('ExperNet'). These practitioners have current experience in diversified segments of the IT industry, which the Company believes cannot be efficiently covered by the traditional CIS approach. The Company also provides 'Continuous Advisory Consulting' services, a valuable complement to Giga's Advisory Service inquiry process, which enable customers to request more in-depth analysis targeted at the application of technology to their specific situation. Continuous Advisory Consulting services, which are provided on an on-going basis, may include assessments of strategic technology planning, implementation issues surrounding a major technology migration or a vendor's marketing plan. The Company has also introduced its 'IT Practice Services,' which integrate the results of documented surveys of the successful operating practices and techniques of IT professionals ('best practices') with strategic consulting, to allow customers to leverage the proven practices of their peers. Each IT Practice Service is designed to address issues faced by an executive in a specific job function within an organization. For example, the Company's 'Year 2000 Practices' is designed for the executive in charge of an organization's year 2000 activities. The Company organizes and sponsors a range of events on significant IT industry issues and trends, and produces publications based on conference topics or current IT issues (collectively, 'Events and Publications'). For example, the Company hosts its flagship annual conference, GigaWorld IT Forum, at which Giga's analysts present and update their most important research findings and recommendations and meet one-on-one in advisory sessions with clients. Giga has designed its innovative Advisory Service model to capitalize on the capabilities of the Internet. Advisory Service research is accessed and customized through the Company's intelligent, Internet-based information delivery interface ('GigaWeb'). GigaWeb is designed to make it easy and efficient for a customer to navigate through the full spectrum of Giga's original research and third party content, together with access to human expertise. In addition, the Company maintains an authoring environment and advanced client interface designed for electronic delivery and encourages collaboration among analysts and clients, which is facilitated through the Internet. Giga's objective is to become the leading third generation CIS provider, offering a significant price/performance advantage over its competitors. Key elements of the Company's strategy are to (i) utilize and enhance its price/performance advantage to increase the range of companies which can afford CIS products, (ii) leverage its existing customer base by providing non-advisory additional services such as IT Practice Services and Continuous Advisory Consulting, (iii) increase the number of Advisory Service subscribers within an organization and (iv) expand its worldwide distribution both domestically and internationally. The Company's executive offices are located at One Longwater Circle, Norwell, Massachusetts 02061 and its telephone number is (781) 982-9500.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000948929_schein_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000948929_schein_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a40d1474e610e4fcef028e45e38f1ed1cf8519e4
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1998/CIK0000948929_schein_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus, including information under "Risk Factors". Except as otherwise noted, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option and reflects (i) a 105-for-one stock split that will occur immediately prior to the effective date of the Offering and (ii) the conversion of each outstanding share of Class A Common Stock and Class B Common Stock into a single class of Common Stock upon the completion of the Offering. All references to the Company's operations for a particular fiscal year refer to the 52-53 week period ended on the last Saturday in December of that year, and all references to the Company's operations for a particular fiscal quarter refer to the three month period ended on the last Saturday in that quarter. Unless otherwise indicated, all references to "Schein Pharmaceutical," "Schein" or the "Company" refer collectively to Schein Pharmaceutical, Inc. and its predecessors and subsidiaries. THE COMPANY Schein Pharmaceutical believes it is one of the leading generic pharmaceutical companies in terms of United States revenues. The Company develops, manufactures and markets one of the broadest generic product lines in the pharmaceutical industry through the integration of its product development expertise, diverse, high-volume production capacity and direct sales and marketing force. The Schein product line includes both solid dosage and sterile dosage generic products, and the Company is also developing a line of specialty branded pharmaceuticals. The Company believes that its primary branded product, INFeD, is the leading injectable iron product in the United States in terms of revenues. The Company has a substantial pipeline of products under development. The Company enhances its internal product development, manufacturing and marketing capabilities through strategic collaborations. Schein generated net revenues of $490.2 million and operating income of $39.0 million during 1997. The Company believes it manufactures and markets the broadest generic product line of any U.S. pharmaceutical company in terms of number and types of products. The Company manufactures and markets approximately 160 chemical entities formulated in approximately 325 different dosages under approximately 200 Abbreviated New Drug Applications ("ANDAs") approved by the United States Food and Drug Administration ("FDA"). Schein is currently the sole manufacturing source for 47 generic pharmaceutical products, of which 45 are sterile dosage products. The Company's solid dosage products include both immediate-release and extended-release capsules and tablets; sterile dosage products include solutions, suspensions, powders and lyophilized (freeze-dried) products primarily for administration as injections, ophthalmics and otics. The manufacture of sterile dosage products is significantly more complex than the manufacture of solid dosage products, which limits competition in this product area. The Company currently manufactures approximately four billion solid dosage tablets and capsules and 75 million sterile dosage vials and ampules annually. Solid dosage generic products and sterile dosage generic products each accounted for approximately 40% of the Company's net revenues in 1997. Since introducing INFeD in 1992, the Company has been developing a portfolio of branded products, primarily in select therapeutic markets, such as iron management for the nephrology, oncology and hematology markets. INFeD is used in the treatment of certain types of anemia, particularly in dialysis patients, and accounted for approximately 21% of the Company's net revenues in 1997. The Company markets INFeD through a 20-person dedicated sales and marketing force, as well as through co-marketing collaborations with Bayer Corporation in the nephrology market and MGI Pharma, Inc. ("MGI") in the oncology market. The Company believes its 130-person direct sales and marketing force is one of the largest in the U.S. generic pharmaceutical industry. Through its customized marketing programs, the Company markets its products to approximately 60,000 customers representing all major customer channels, including pharmaceutical wholesalers, chain and independent drug retailers, hospitals, managed care organizations, other group purchasing organizations and physicians. Schein's objective is to become the leading generic pharmaceutical company in the approximately $7.4 billion generic prescription pharmaceutical industry in the United States. The Company's growth strategy is to: (i) leverage its diverse pharmaceutical development and manufacturing capabilities to extend the breadth of its generic product line; (ii) focus its product development on complex and other generic drugs that require specialized development or manufacturing technology and are therefore expected to encounter limited competition; (iii) develop and market branded drugs for select therapeutic categories; (iv) pursue strategic collaborations to supplement its product development and manufacturing resources; and (v) expand market penetration through direct sales and innovative marketing programs. The Company's commitment to product development has resulted in 24 ANDA approvals during the past three years. During the past three fiscal years, the Company, directly and through its strategic collaborations, has expended approximately $84.7 million on product pipeline development activities, which the Company believes is among the highest product development expenditure levels for any independent generic drug company. The Company pursues product development through its 150-person product development staff and various collaborations and licensing arrangements with other pharmaceutical and drug delivery technology companies. The Company's product development efforts focus on: (i) major branded drugs coming off patent; (ii) drugs for which patent protection has lapsed and for which there are few or no generic producers; (iii) drugs whose patents may be susceptible to challenge; (iv) proprietary and branded products focused in select therapeutic areas; and (v) generic products that require specialized development, formulation, drug delivery or manufacturing technology. The Company supplements its internal product development, manufacturing and marketing capabilities with external sources. During 1994, Schein entered into a strategic alliance with Bayer Corporation, through which Bayer Corporation became a 28.3% stockholder of Schein, and Bayer Corporation currently participates with Schein in several collaborations. In 1995, the Company acquired Marsam Pharmaceuticals Inc. ("Marsam"), expanding the Company's ability to develop and manufacture sterile penicillins and oral and sterile cephalosporins. In addition, the Company has entered into strategic collaborations involving product development arrangements with companies such as Ethical Holdings plc ("Ethical") and Elan Corporation plc ("Elan"); raw material supply arrangements with companies such as Johnson Matthey plc ("Johnson Matthey") and Abbott Laboratories ("Abbott"); and sales and marketing arrangements with Bayer Corporation and other companies such as MGI. THE OFFERING Common Stock offered hereby............. 3,000,000 shares Common Stock to be outstanding after 31,692,720 shares(1) the Offering........................... Use of proceeds......................... To reduce existing indebtedness, which may include a term loan, senior floating rate notes and a revolving credit loan. See "Use of Proceeds." Proposed NYSE symbol.................... SHP - ------------ (1) Excludes 3,745,770 shares of Common Stock reserved for issuance upon the exercise of outstanding options granted pursuant to the Company's 1993 Stock Option Plan, 1997 Stock Option Plan and the 1995 Non-Employee Director Plan as of February 28, 1998 at a weighted average exercise price of $16.84 per share. Upon closing of the Offering, the Company intends to grant up to an additional 936,915 options at an exercise price equal to the initial public offering price of the Common Stock offered hereby. See "Management--Stock Options." SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> YEAR ENDED DECEMBER --------------------------- 1995(1) 1996 1997 -------- -------- -------- <S> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net revenues...................................... $391,846 $476,295 $490,170 -------- -------- -------- Gross profit...................................... $141,339 $155,620 $160,409 Costs and expenses: Selling, general and administrative.............. 75,274 87,329 81,809 Research and development......................... 28,324 27,030 29,387 Amortization of goodwill and other intangibles... 3,399 10,195 10,196 Acquired in-process Marsam research and development(1).................................. 30,000 -- -- Operating income(1)............................... 4,342 31,066 39,017 Interest expense, net............................. 10,005 23,285 26,578 Other expense (income), net(2).................... (1,245) 1,193 (9,318) Income (loss) before taxes on income.............. (4,418) 6,588 21,757 Net income (loss)................................. $(14,900) $ 1,397 $ 11,102 ======== ======== ======== Basic and diluted earnings (loss) per share(3).... $ (0.52) $ 0.05 $ 0.39 ======== ======== ======== </TABLE> <TABLE> <CAPTION> DECEMBER 1997 ----------------------- ACTUAL AS ADJUSTED(4) -------- -------------- <S> <C> <C> BALANCE SHEET DATA: Working capital....................................... $ 73,249 $ 88,599 Total assets.......................................... 534,126 534,126 Short-term debt, including current portion of long- term debt............................................ 56,440 41,090 Long-term debt, less current maturities............... 198,705 173,705 Stockholders' equity.................................. 139,715 180,065 </TABLE> - ------------ (1) Includes the results of Marsam from September 1995, the date of purchase. In connection with the purchase of Marsam, the Company recognized acquired in-process research and development. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 2 to the Consolidated Financial Statements of the Company. (2) Other expense (income), net, includes equity in earnings (loss) of unconsolidated international ventures of $(0.4) million, $(3.4) million and $(3.4) million in 1995, 1996 and 1997, respectively and gain on sales of marketable securities of $12.7 million in 1997. (3) See Note 1 to the Consolidated Financial Statements of the Company for information concerning the computation of earnings per share. (4) Gives effect to the sale of shares of common stock to be sold by the Company in the Offering at an estimated public offering price of $15.00 per share, and the application of the estimated net proceeds therefrom to repay debt, as if the transactions had occurred as of December 1997. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000949091_smart_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000949091_smart_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS "FORWARD-LOOKING STATEMENTS" WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED UNDER "RISK FACTORS." UNLESS OTHERWISE INDICATED, ALL REFERENCES TO THE "COMPANY" INCLUDE SMART CHOICE AUTOMOTIVE GROUP, INC. AND ITS SUBSIDIARIES. EXCEPT AS OTHERWISE SPECIFIED, ALL INFORMATION IN THIS PROSPECTUS (I) HAS BEEN ADJUSTED TO REFLECT A 1-FOR-2 REVERSE SPLIT OF THE COMPANY'S COMMON STOCK, WHICH WILL BE EFFECTED PRIOR TO THE CONSUMMATION OF THE OFFERING AND (II) ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. THE COMPANY Smart Choice Automotive Group, Inc. currently operates 20 stores in Florida that sell used cars under the "First Choice" brand name. The Company's First Choice cars are three to six years old, have less than 80,000 miles and have undergone thorough inspection, reconditioning and, as necessary, repair. The Company also sells used cars that may not meet the First Choice criteria through four additional stores in Florida that operate under the "Team" brand name. Through its finance company subsidiary, the Company (referred to herein as a "self-financed" retailer of used cars) provides financing for its customers by originating retail automobile installment sales contracts secured by the cars it sells ("finance receivables" or "finance contracts"). The Company's customers typically have limited credit histories, low incomes and/or past credit problems. The Company intends to expand primarily by opening additional used car stores in Florida and extending its operations into other areas of the southeastern United States. The Company's objective is to become the leading self-financed retailer of used cars in the southeastern United States. Retail sales of new and used cars in the United States totaled approximately $673 billion in 1997. Used cars represented approximately 75% of cars sold in the United States and 55% of total sales in 1997, with approximately 41 million used cars sold at an average price of $9,029 per unit. Retail sales of used cars in Florida in 1997 totaled more than $24.4 billion (over 2 million vehicles). Approximately 36% of Florida's used car sales in 1997 (not including sales of used cars at new car dealerships) occurred at approximately 2,800 self-financed used car stores. Management believes that the quality and reliability of the Company's First Choice cars (i) reduce the probability of product failure (which management believes is a leading cause of defaults on finance contracts in the Company's industry), (ii) reduce losses on the Company's repossessions of cars and (iii) define the First Choice brand. Due to the quality and reliability of its First Choice cars, the Company is able to provide a 24 month/24,000 mile service contract to its customers, which is underwritten by a third party. The Company sells used cars at its First Choice stores for an average retail price of approximately $9,500, including the service contract on all cars sold. The Company's Team stores generally sell older and higher mileage cars than First Choice cars. Team cars, which sell for an average retail price of approximately $7,900, are primarily cars that have been repossessed by the Company, have been traded in by customers or have not been sold at the First Choice stores within approximately 180 days. Cars sold at Team stores are covered by a 12 month/12,000 mile service contract. The Company also manufactures and sells Corvette parts and accessories through its subsidiary Eckler Industries, Inc. ("Eckler's"), owns two new car dealerships in Florida, sells insurance and provides dealer training services. In late 1997, management undertook a comprehensive evaluation of its business to improve earnings and address the Company's operational and liquidity needs. As a result, management made a decision to emphasize used car sales, which typically have higher gross margins than new car sales. Accordingly, in December 1997, the Company terminated all plans to acquire or open new car dealerships and began to focus on achieving operational efficiencies at the Company's used car stores, all of which had been acquired or opened during 1997. In addition, the Company implemented overhead reductions and other cost saving procedures, made various management changes, completed a detailed analysis of the quality of its finance receivables portfolio and began a restructuring of its debt obligations. These efforts have led to substantially improved results in the first and second quarters of 1998. BUSINESS STRATEGY The Company intends to become the leading self-financed retailer of used cars in the southeastern United States by capitalizing on its operating strengths and executing the growth strategy described below. OPERATING STRENGTHS SELL RELIABLE, QUALITY CARS. The Company sells reliable, quality used cars. Management believes that product failure is a leading cause of defaults on finance contracts in the self-financed used car industry. Generally, the Company's First Choice cars are models having a good or superior reputation for quality and reliability, are three to six years old and have less than 80,000 miles. In addition, First Choice and Team used cars have undergone a comprehensive 110 point inspection, reconditioning and, as necessary, repair at the Company's reconditioning facilities. Due to the quality, reliability, condition and age of First Choice cars, the Company is able to provide a 24 month/24,000 mile service contract to its customers, which is underwritten by a third party, on all First Choice cars. Cars sold at Team stores, which are generally older and higher mileage cars, are covered by a similar 12 month/12,000 mile service contract. The third-party service contracts allow the Company's customers to have their cars repaired nationally by any one of approximately 375,000 ASE (Automotive Service Excellence) certified technicians. UTILIZE CENTRALIZED CREDIT APPROVAL AND STRICT UNDERWRITING PRACTICES. The Company separates the credit approval function and sales process for its used cars. Credit review and approval is conducted by experienced finance personnel at the Company's headquarters, distinct from the sales function. The Company's credit underwriting process strictly adheres to objective underwriting standards that have resulted in improved collection experience since February 1997. Underwriting criteria include employment continuity, ties to the local community, ability to make monthly payments and names, addresses and phone numbers of a sufficient number of persons who can verify the credit application information and would likely know where the applicant could be found in the event a collection problem arises. The Company regularly reviews its collection results to assess the effectiveness of its underwriting standards. APPLY RIGOROUS COLLECTION PRACTICES. The Company diligently and proactively pursues the collection of its finance receivables while maintaining a professional, customer-friendly atmosphere. The Company utilizes proven techniques in the collection process, including telephone calls, letters and various alternative payment mechanisms to facilitate payment. The Company's collection policy includes telephoning a borrower if the borrower's payment is one day late. The Company generally begins repossession procedures when the customer is two payments past due. Management believes that one of the reasons the Company generally experiences lower losses on defaults than its competitors is because the Company acts quickly to repossess cars on which defaults occur. As of June 30, 1998, 94.7% of the Company's finance receivables were current. MAXIMIZE RECOVERY ON REPOSSESSIONS. Management believes that the Company generally experiences lower losses on repossessions than other lenders in the self-financed used car industry due to (i) the quality of the cars it sells, (ii) the timeliness of its repossessions and (iii) its ability to remarket repossessions. The Company believes that its purchasing and reconditioning expertise result in cars that maintain their quality and value at the time of repossession. In addition, the speed with which the Company repossesses cars results in a repossessed car in better condition. Finally, the Company reconditions and remarkets approximately 70% of its repossessions through its Team stores, rather than through auctions (where cars are generally sold at lower prices). These practices allowed the Company to recover 53.2% (on a retail basis) of the principal amount of loans charged off for the six month period ended June 30, 1998. INCREASE OPERATING EFFICIENCY. Since late 1997, in an effort to increase operating efficiency by reducing administrative costs and enhancing administrative functions, the Company has combined certain administrative functions, such as accounting, treasury, insurance, employee benefits, strategic marketing and legal support. The Company intends to further increase its operating efficiency in such areas as advertising, reconditioning, raising capital and purchasing and transporting inventory. EMPLOY INTEGRATED MANAGEMENT INFORMATION SYSTEMS. Each used car store is linked to an integrated computer-based management information system (the "MIS") that allows the Company to obtain "real time" information on its operations. The Company uses the MIS to transmit data between its headquarters and its stores, to evaluate store performance daily, monitor inventory, sales, costs and customer payments and facilitate the Company's underwriting and collection of its finance contracts. PROMOTE FIRST CHOICE BRAND. The Company believes that its First Choice brand is synonymous with quality cars and customer service. By seeking to maintain continuity in the appearance of its store locations, the Company expects to promote its name recognition. The Company attempts to maintain a consistency between its facilities and its marketing materials through the use of standardized logos and a white, blue and yellow color theme. The Company recognizes that the purchase of a car is one of the most significant purchases that many of its customers will make. Consequently, the Company focuses on providing professional service, convenient locations and a diverse inventory selection. The Company provides to customers value-added programs such as its service contract, rapid turnaround for credit decisions, financing and convenient financing pre-qualification. By developing customer loyalty, the Company seeks to generate repeat and referral business. AVOID THIRD PARTY FINANCE RECEIVABLES. As part of its operating philosophy, the Company only originates and services finance receivables on used cars sold at its used car stores and new car dealerships. The Company does not intend to purchase third party finance receivables. See "Business--Financing Customers with Impaired Credit." GROWTH STRATEGY In order to become the leading self-financed retailer of used cars in the southeastern United States, the Company intends to open additional First Choice and Team stores both in geographic markets where the Company currently operates and in new markets. The choice of store locations in new and existing markets is based upon the presence of a suitable customer base. The Company's criteria for opening additional used car stores in existing markets include sufficient projected incremental sales volume, reconditioning capacity, geographic media coverage and market share. The Company believes that significant expansion opportunities satisfying these criteria are available within its existing markets. The Company's criteria for opening used car stores in new markets include the adequacy of radio and television coverage, demographic makeup of the market (including income level and age of population), availability of qualified managers, access to an adequate supply of quality used cars and availability of appropriate store locations. Initially, the stores in new markets will rely upon access to the Company's existing used car inventory at nearby stores and reconditioning facilities. As a new market matures, the Company will open a reconditioning center with sufficient capacity to support growth. The Company maintains its principal executive offices at 5200 South Washington Avenue, Titusville, Florida 32780 and its telephone number is (407) 269-0834. THE OFFERING <TABLE> <S> <C> Common Stock offered hereby .................... 2,500,000 shares Common Stock to be outstanding immediately after the Offering ............................ 9,053,756 shares(1) Use of proceeds ................................ Repayment of outstanding debt, which will provide the Company with increased borrowing capacity for future expansion. See "Use of Proceeds." Nasdaq SmallCap Market symbol .................. "SMCH" Proposed Nasdaq National Market symbol ......... "SMCH"(2) </TABLE> - ---------------- (1) Excludes 375,000 shares of Common Stock that may be sold by the Company upon exercise of the Underwriters' over-allotment option. Also excludes as of June 30, 1998 (i) 1,117,100 shares of Common Stock issuable upon exercise of stock options outstanding at June 30, 1998 with a weighted average exercise price of $9.28 per share, (ii) 878,770 shares of Common Stock issuable upon exercise of warrants with a weighted average exercise price of $12.00, (iii) 903,302 shares of Common Stock issuable upon conversion of approximately $9.5 million of convertible debt at an average conversion price of $10.48 per share and (iv) 535,012 shares of Common Stock issuable upon conversion of convertible preferred stock. See "Management" and "Description of Capital Stock." (2) The Company has applied for listing of the Common Stock on the Nasdaq National Market. <TABLE> <CAPTION> SUMMARY CONSOLIDATED FINANCIAL INFORMATION PREDECESSORS(1) THE COMPANY(1) --------------------- ------------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------------- PRO FORMA 1995 1996 1996 1997 1997(2) ---------- ---------- ----------- ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues Sales at used car stores ............................ $ 27,521 $ 33,867 $ -- $ 35,279 $ 43,259 Income on finance receivables(3) .................... 4,614 5,949 -- 6,899 8,764 Sales at new car dealerships(4) ..................... -- -- -- 9,863 23,803 Sales of Corvette parts and accessories ............. 12,973 14,893 -- 15,385 16,238 Income from insurance and training .................. -- -- -- 1,178 1,183 -------- -------- ------- ---------- ---------- Total revenues ....................................... 45,108 54,709 -- 68,604 93,247 Total costs of sales ................................. 31,960 40,867 -- 49,490 69,280 Selling, general and administrative expenses ......... 10,902 12,565 671 24,708 29,830 Compensation expense related to employee stock options ....................................... -- -- -- 4,650 4,650 Restructuring charges ................................ -- -- -- 2,118 2,118 -------- -------- ------- ---------- ---------- Income (loss) from operations ........................ 2,246 1,277 (671) (12,362) (12,631) Interest expense ..................................... (2,012) (2,402) (33) (6,455) (7,386) Other income (expense) ............................... (368) 261 -- 168 465 -------- -------- ------- ---------- ---------- Net income (loss) .................................... (134) (864) (704) (18,649) (19,552) Net income (loss) applicable to common stock (134) (864) (704) (18,982) (19,885) Net income (loss) per common share: Basic ............................................... -- -- $ (0.26) $ (4.28) $ (4.32) Diluted ............................................. -- -- (0.26) (4.28) (4.32) Supplemental(5) ..................................... -- -- -- -- -- Weighted average common shares outstanding during period: Basic ............................................... -- -- 2,744 4,430 4,604 Diluted ............................................. -- -- 2,744 4,430 4,604 <CAPTION> THE COMPANY(1) --------------------- SIX MONTHS ENDED JUNE 30, --------------------- 1997 1998 ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues Sales at used car stores ............................ $ 11,789 $ 40,603 Income on finance receivables(3) .................... 1,723 6,942 Sales at new car dealerships(4) ..................... -- 14,349 Sales of Corvette parts and accessories ............. 7,972 10,411 Income from insurance and training .................. 651 426 -------- -------- Total revenues ....................................... 22,135 72,731 Total costs of sales ................................. 14,461 50,118 Selling, general and administrative expenses ......... 10,020 15,082 Compensation expense related to employee stock options ....................................... 3,215 -- Restructuring charges ................................ -- -- -------- -------- Income (loss) from operations ........................ (5,561) 7,531 Interest expense ..................................... (1,748) (4,032) Other income (expense) ............................... 43 609 -------- -------- Net income (loss) .................................... (7,266) 4,108 Net income (loss) applicable to common stock (7,266) 3,944 Net income (loss) per common share: Basic ............................................... $ (1.73) $ 0.68 Diluted ............................................. (1.73) 0.66 Supplemental(5) ..................................... -- 0.60 Weighted average common shares outstanding during period: Basic ............................................... 4,199 5,790 Diluted ............................................. 4,199 6,841 </TABLE> <TABLE> <CAPTION> THE COMPANY(1) --------------------------------------------- AS OF AS OF DECEMBER 31, JUNE 30, 1997 1998 -------------- ---------------------------- (IN THOUSANDS) ACTUAL AS ADJUSTED(6) ---------- --------------- <S> <C> <C> <C> BALANCE SHEET DATA: Finance receivables--principal balances ......... $39,597 $ 62,205 $ 62,205 Inventories ..................................... 15,516 17,950 17,950 Total assets .................................... 89,105 116,218 116,218 Total debt ...................................... 69,654 86,244 68,281 Redeemable convertible preferred stock .......... 4,942 10 10 Total stockholders' equity ...................... 4,520 20,933 38,896 </TABLE> (FOOTNOTES ON NEXT PAGE) - ---------------- (1) On January 28, 1997, the Company, which was then named Eckler Industries, Inc., and was operating exclusively in the Corvette parts and accessories business, acquired Smart Choice Holdings, Inc. ("SCHI") in a transaction accounted for as an acquisition of Eckler's by SCHI (the "Predecessor Acquisition"). Accordingly, the financial statements of the Company for the period from June 21, 1996 to January 28, 1997 are those of SCHI, which was incorporated on June 21, 1996 and was a development stage company prior to the Predecessor Acquisition. Eckler's changed its name to Smart Choice Automotive Group, Inc. after the Predecessor Acquisition. From the date of the Predecessor Acquisition through February 14, 1997, the Company acquired three automotive sales and finance companies. Together with Eckler's, these companies are treated as predecessors of the Company (the "Predecessors"). The financial data for the Predecessors are presented on a combined basis. Such data is not comparable to that of the Company. See Note 1 to the Company's Consolidated Financial Statements. (2) Pro Forma Statement of Operations Data reflect the Predecessors and additional significant companies acquired by the Company during 1997 as if such acquisitions had occurred on January 1, 1997. (3) Income on finance receivables consists of income related to used cars sold at the Company's used car stores. (4) Sales at new car dealerships include sales of new and used cars, sales of parts and accessories, revenues from service, and finance and insurance commissions. (5) Supplemental net income per common share for the six months ended June 30, 1998 is based upon the weighted average number of shares of Common Stock used in the calculation of diluted net income per share increased by the number of shares (2,245,313) whose sale in the Offering is estimated to yield proceeds needed to reduce borrowings by $18.0 million and reduce interest expense by approximately $1.0 million. See "Use of Proceeds." (6) Gives effect to the sale of 2,500,000 shares of Common Stock offered hereby at an assumed public offering price of $8.00 per share and the initial application of the estimated net proceeds thereof in the manner described in the "Use of Proceeds" as of June 30, 1998. <TABLE> <CAPTION> PREDECESSORS THE COMPANY --------------------- ------------------------------------- AS OF OR FOR THE AS OF OR FOR THE YEAR ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, --------------------------------- ------------------------- 1995 1996 1997 1997 1998 ---------- ---------- ----------- ------------- ----------- <S> <C> <C> <C> <C> <C> OPERATING DATA: Used Car Stores Number of used car stores ..................................... * * 20 10 24 Average number of used cars sold per store per period ......... * * 188 122 185 Number of used cars sold per period ........................... * * 3,750 1,096 4,435 Average selling price per car ................................. * * $ 9,408 $ 10,756 $ 9,155 Gross profit(1) as a percentage of total sales ................ * * 27.3% 32.4% 35.0% Finance Receivables: Principal balance outstanding (000s) ........................... * * $39,597 $ 33,286 $62,205 Allowance for credit losses as a percentage of principal balance outstanding ................................ * * 17.3% 19.0% 15.0% Principal balance of contracts originated during the period (000s) ............................................ $15,560 $24,937 $27,687 $ 7,842 $35,276 Delinquencies as a percentage of contracts outstanding: Principal balances 31-60 days ................................. * * 4.0% 5.9% 2.2% Principal balances over 60 days ............................... * * 4.9% 6.1% 3.1% ------- ------- ------- --------- ------- Total over 31 days ............................................ * * 8.9% 12.0% 5.3% New Car Dealerships(2): Gross profit(1) as a percentage of total sales ................ * * 12.6% * 12.3% Corvette Parts and Accessories: Gross profit(1) as a percentage of total sales ................ * * 33.7% 38.4% 35.9% </TABLE> <TABLE> <CAPTION> AS OF OR FOR THE THREE MONTHS ENDED ------------------------- MAR. 31, JUNE 30, 1997 1997 ------------ ------------ <S> <C> <C> OPERATING DATA: Used Car Stores Number of used car stores .............................. 8 10 Average number of used cars sold per store ............. 52 68 Number of used cars sold per quarter ................... 416 680 Average selling price per car .......................... $ 11,503 $ 10,300 Gross profit(1) as a percentage of total sales ......... 29.2% 34.7% Finance Receivables: Number of contracts outstanding ......................... 2,146 6,505 Principal balance outstanding (000s) .................... $ 23,711 $ 33,286 Allowance for credit losses as a percentage of principal balance outstanding ......................... 15.8% 19.0% Principal balance of contracts originated during the period (000s) ..................................... $ 2,932 $ 4,910 Delinquencies as a percentage of contracts outstanding: Principal balances 31-60 days .......................... 7.5% 5.9% Principal balances over 60 days ........................ 6.7% 6.1% -------- -------- Total over 31 days ..................................... 14.2% 12.0% New Car Dealerships(2): Gross profit(1) as a percentage of total sales ......... * * Corvette Parts and Accessories: Gross profit(1) as a percentage of total sales ......... 37.5% 38.8% <CAPTION> AS OF OR FOR THE THREE MONTHS ENDED ----------------------------------------------- SEPT. 30, DEC. 31, MAR. 31, JUNE 30, 1997 1997 1998 1998 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> OPERATING DATA: Used Car Stores Number of used car stores .............................. 16 20 22 24 Average number of used cars sold per store ............. 82 67 105 88 Number of used cars sold per quarter ................... 1,317 1,337 2,316 2,119 Average selling price per car .......................... $ 8,308 $ 9,386 $ 9,432 $ 8,852 Gross profit(1) as a percentage of total sales ......... 39.7% 11.7% 36.7% 33.1% Finance Receivables: Number of contracts outstanding ......................... 6,616 6,857 7,787 9,036 Principal balance outstanding (000s) .................... $35,767 $39,597 $51,146 $ 62,205 Allowance for credit losses as a percentage of principal balance outstanding ......................... 17.1% 17.3% 16.6% 15.0% Principal balance of contracts originated during the period (000s) ..................................... $ 9,093 $10,752 $16,686 $ 18,590 Delinquencies as a percentage of contracts outstanding: Principal balances 31-60 days .......................... 5.0% 4.0% 2.7% 2.2% Principal balances over 60 days ........................ 5.9% 4.9% 3.4% 3.1% ------- ------- ------- -------- Total over 31 days ..................................... 11.0% 8.9% 6.1% 5.3% New Car Dealerships(2): Gross profit(1) as a percentage of total sales ......... 12.2% 12.8% 11.5% 13.3% Corvette Parts and Accessories: Gross profit(1) as a percentage of total sales ......... 33.6% 21.1% 35.9% 35.8% </TABLE> - ---------------- * Information not available for this period. (1) Reflects the difference between sales and cost of sales. (2) Includes sales of used and new cars, sales of parts and accessories, revenues from service, and finance and insurance commissions.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0000949966_tamarack_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0000949966_tamarack_prospectus_summary.txt
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+PROSPECTUS SUMMARY This Prospectus Summary is qualified in its entirety by reference to the detailed information appearing elsewhere in this Prospectus. An index of definitions is provided at page 33 for capitalized terms used in this Prospectus. The Notes will be issued by the Issuer, a newly-formed special purpose Texas corporation that has not commenced operations as of the date of this Prospectus. The property of the Issuer, to be purchased with the proceeds of the issuance of the Notes, will consist of Receivables (retail installment sale contracts secured by used automobiles and light trucks), certain monies due or received thereunder and security interests in the vehicles financed thereby. The Receivables will be originated by motor vehicle dealers and will be purchased on behalf of the Issuer by TFC, which will manage and administer the operations of the Issuer. Receivables may be purchased from time to time from affiliated dealers. No dealers have been selected, nor will they be selected prior to the effective date. THE NOTES WILL NOT BE GUARANTEED, NOR WILL THEY BE RATED BY ANY INDEPENDENT RATING AGENCY. The Issuer will purchase Receivables at a discount, generally 80% (but in no event more than 90%) of principal plus accrued interest. Dealers typically sell Receivables at a discount because the Receivables are sub-prime, and the sale provides immediate cash to the dealer. See "The Receivables--Receivables Purchase Criteria." The principal and interest from the Receivables are collected by the auto dealerships as servicers and remitted to the Issuer as the owner of the Receivables, in the form of weekly, biweekly and/or monthly installments. The Issuer reinvests periodic proceeds in excess of Noteholders' principal and interest payments, into additional Receivables of the same type. The Issuer holds title to the Receivables until the Receivables are paid in full. Dealers, as Servicers, are obligated to collect payments and submit them to the Issuer in full. The Issuer may purchase Receivables from Dealers subject to the requirement that the selling Dealer repurchase any Receivable that becomes overdue for more than 60 days, although the terms of any such requirement for any particular Dealer or group of Receivables purchased will be determined by the Issuer and such Dealer. Any such agreement could provide additional protection to the Issuer, to the extent a dealer fulfills that obligation. TFC's management has recognized the need for stable relationships with automobile dealers as dealers are adjusting to new trends in pre-owned car sales techniques. The recent introduction of the "automobile super store" has been strong competition for traditional established preowned car dealers, creating an important trend among established preowned car dealers toward stronger high quality customer relationships. TFC has designed the Issuer's dealer relationship criteria with a focus on traditional established dealers, so that dealers can establish better and more dependable customer relations which build loyalty and a stronger determination in the customer to meet contractual obligations and to return to the dealer's store to trade up and/or to purchase another car. The Issuer's strategic plan is based upon encouraging and supporting the dealerships in developing and maintaining a regular personal relationship with their customers by appointing the dealerships as Servicers. Funding experience in years prior to the formation of the Issuer led the Issuer's management to decide to focus on risk management first and secondarily on growth. In the business of purchasing car receivables, risk is proportionate to benefit. The greater the risk, the bigger the discount and the higher the interest charged. In order to achieve higher benefit and less risk, the strategic plan of the Issuer is to buy receivables only from pre-qualified dealers, and to seek to obtain the dealers' agreement to replace defaulting Receivables. The Issuer thereby will limit its risk, and reduce its overhead costs as well, by requiring that dealers collect and service the Receivables and by providing the dealer financial incentives for doing so in the form of a back-end servicing fee paid only upon final payment on the Receivable. This practice benefits the car dealer by allowing it to keep long term and repeat customer relationships. Tamarack Funding Tamarack Funding Corporation, or TFC, is a Texas corporation whose business purpose is the acquisition and collection of automobile sales contracts or receivables. TFC will administer and manage the ongoing operations of the Issuer, monitor the servicing of originating auto dealers, and administer payments, communications and reports to Noteholders. The officers of the Issuer are expected to perform only ministerial duties. TFC will arrange for the purchase of Receivables on behalf of the Issuer pursuant to a Master Contract Purchase Agreement (the "PURCHASE AGREEMENT"). Issuer Tamarack Lenders Corporation, a newly-formed special purpose Texas corporation and an affiliate of TFC, that has not commenced business as of the date of this Prospectus. Servicers Various auto dealerships, pursuant to Servicing Agreements with the Issuer (the "SERVICING AGREEMENTS"). Indenture Trustee Sterling Trust Company, Waco, Texas. All payments of amounts due and payable with respect to the Notes will be made on behalf of the Issuer by the Indenture Trustee. See "The Notes--The Trust Account". In addition, the Trustee will act on behalf of the Noteholders upon the occurrence of an Event of Default. See "The Indenture--Rights Upon Event of Default". The Notes Notes will be available for purchase in denominations of $1,000 and integral multiples thereof with a minimum of $10,000. The Class A-1 Notes will have a final maturity date one year following issuance. The Class A-2 Notes will have a final maturity date five years following issuance. Principal is payable upon maturity, but may be prepaid without penalty. The Notes will be unsecured general obligations of the Issuer. Interest Payments Each Class A-1 Note will bear interest at 9 1/2% per annum on its outstanding principal and each Class A-2 Note will bear interest at 12% per annum on its outstanding principal (with respect to each class of Notes, the "INTEREST RATE"). Interest will not accrue on the Notes, nor will the Notes be issued, until release of escrowed subscription funds to the Issuer, which will not occur until the minimum of $100,000 of the Notes, regardless of which class, is sold. Interest payments will be made monthly on the 15th day of each month, for interest accruing through such date (or, if not a business day, the next succeeding business day), commencing the second month after escrowed funds are released and the Notes are issued. Investors in this offering will receive an IRS Form 1099 following the end of each calendar year which will state the amount of interest on which to calculate income taxes. The Issuer's Assets The assets of the Issuer will consist of the Receivables and the proceeds thereof, including security interests in the vehicles financed thereby and any proceeds from claims on certain insurance policies covering the vehicles. Purchase and Servicing of Receivables TFC will purchase Receivables from various auto dealerships (the "DEALERS") on behalf of the Issuer, and the Dealers will agree to serve as Servicers of the Receivables they sell to the Issuer. The Servicers will agree to be responsible for servicing, managing and making collections on Receivables. TFC will be entitled to be reimbursed for expenses incurred by it on behalf of the Issuer up to a maximum of 5% of the total principal amount of Notes sold. Any such reimbursement will be payable by the Issuer only out of revenues, and only after current obligations on the Notes are met. Servicing Fees Servicers will receive a back-end servicing fee of 5% of the price paid by the Issuer for a Receivable, payable only when the Receivable has been paid in full by the obligor. In the event a Servicer fails to fulfill its servicing obligations and is terminated as a Servicer, either TFC will act as successor servicer for the same servicing fee or the Issuer will engage the services of another servicing company. There are no limits on the amount to be paid to successor servicers, in the event successor servicers are utilized. Federal Income Tax Consequences The Issuer has received an opinion from Donohoe, Jameson & Carroll, P.C., its tax counsel, that for federal income tax purposes the Notes will constitute indebtedness. See "Federal Income Tax Consequences" for additional information concerning the application of federal laws. No Ratings The Notes will not be rated by any rating agency. The Issuer has not sought, and is not required by the Indenture or any other document, to obtain a rating of the Notes by a rating agency. Risk Factors An investment in the Notes entails certain risks, including the following: - The Issuer will not have any significant assets other than the Receivables and the proceeds thereof. - The Notes have not been rated by any rating agency and will be highly illiquid. - The Notes are unsecured general obligations of the Issuer. - No public market for the Notes presently exists and none is expected to result from this offering. - Obligors under the Receivables are anticipated to be somewhat less creditworthy than typical purchasers of automobiles from new car dealers. - The Issuer anticipates that a portion of the Receivables will become delinquent and require repossession and resale of the related vehicle. The Issuer will be dependent upon the Servicers' ability to take the necessary steps in the event of a delinquency. - The Issuer will have numerous competitors engaged in the business of buying new and used motor vehicle retail installment contracts and notes at a discount, including companies with greater financial resources than the Issuer. For a more complete discussion of the risks involved, see "Risk Factors." Offering Termination Date [One year], 1999, unless sooner terminated by the Issuer for certain reasons. See "Plan of Distribution."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001000157_datawave_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001000157_datawave_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Consolidated Financial Statements, including the Notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus assumes that the Underwriters' over- allotment option will not be exercised and gives effect to (a) the 1-for-5 reverse stock split (the "Reverse Stock Split") to be effected prior to the Offering, (b) an assumed Offering price of $7.50 per Common Share and (c) no exercise of options and other warrants outstanding as of July 20, 1998 to purchase 1,051,247 Common Shares. Unless otherwise indicated, all monetary amounts in this Prospectus are expressed in United States dollars and, if converted from Canadian dollars, have been converted at historical monthly average rates. The exercise prices for unexercised options and warrants of the Company have been determined based upon the exchange rate applicable on March 31, 1998. See "Exchange Rate Information." Fiscal year references are to the fiscal years ended March 31. All references to the "Company" or "DataWave" refer to DataWave Systems Inc. and its consolidated subsidiaries. THE COMPANY DataWave Systems Inc. ("DataWave" or the "Company") designs, develops, produces, owns and manages a proprietary, intelligent, automated direct- merchandising network (the "DataWave System"). The Company uses the DataWave System to distribute prepaid calling cards, primarily under the AT&T brand. The DataWave System is scalable and flexible and can be modified to offer other premium prepaid products such as paging and overnight courier services, which are currently being tested, and cellular telecommunications services. The DataWave System is comprised of DataWave Telecard Merchandisers ("DTMs"), which are free-standing "smart" machines capable of dispensing multiple prepaid products and services, and over-the-counter "swipe" units ("OTCs"), for point- of-sale prepaid retailing, both of which are connected to the Company's proprietary server and database software through a wireless and/or land line wide area network. As of June 30, 1998, the DataWave System consisted of 688 DTMs and 455 OTCs. The DataWave System has been designed to work both with the telephone switches of other parties as well as switches operated by the Company, if any. In the United States, the Company has elected to operate solely with other parties' switches, such as those of AT&T and other long distance carriers, while in Canada the Company participates in a joint venture which operates its own switch. The United States prepaid calling card market has grown from approximately $75 million in sales in 1994 to almost $1.0 billion in 1996, and is expected to grow to approximately $2.6 billion in sales by 2001 according to industry data from The Yankee Group, an independent research company. The predominant channels of distribution for prepaid calling cards are through retail establishments and traditional vending machines, most of which sell "live" prepaid calling cards purchased in bulk. "Live" prepaid calling cards are preactivated with telephone time prior to sale to the retailer or placement in a machine. In comparison to other prepaid calling card distribution methods, the DataWave System distributes unactivated prepaid calling cards which are activated only upon purchase by the consumer. Because the cards are not preactivated, the Company avoids certain costs incurred by distributors of "live" prepaid calling cards, such as paying for long distance telephone time prior to sale to consumers, losses due to theft and other costs associated with the management of inventory. The DataWave System also features: (i) real-time remote monitoring of DTMs, including cash balances, card inventory and machine functioning; (ii) remote adjustable pricing of prepaid products and services at each DTM location; (iii) consumer convenience by permitting purchases of customer selected dollar amounts of long distance time, by cash or credit card, and providing detailed receipts and multilingual instructions; and (iv) scalability, enabling the Company to increase the number of DTMs with limited hardware and software upgrades and to offer multiple future prepaid products and services at existing and future locations. In January 1998, the Company entered into a series of agreements with AT&T Corp. ("AT&T") providing for, among other things, the purchase of long distance telephone service from AT&T, the right to resell the service under AT&T's brand name and the joint marketing and promotion of AT&T-branded prepaid calling cards (the "AT&T Prepaid Cards") and the DataWave System in the United States. The Company believes its relationship with AT&T will enable the Company to create and implement a marketing program that will bring the advantages of DataWave's technology and the AT&T brand to consumers within the United States and to provide businesses with a national merchandising program for AT&T Prepaid Cards. The Company believes that its relationship with AT&T will provide it with competitive advantages in the prepaid calling card market due to the national recognition of the AT&T brand, the quality long distance telephone and customer service provided by AT&T, the support of AT&T's sales and marketing capabilities and the development of joint relationships with current and future AT&T customers. In addition, the Company believes that working with AT&T will help DataWave gain access to additional sites and locations where AT&T has a presence. For example, AT&T has a significant presence as a telephone service provider to the hospitality industry, which the Company believes represents a significant segment of the prepaid calling card market. The Company's business strategy is to deliver premium prepaid products and services such as calling cards, cellular telecommunications, paging and overnight courier services through the DataWave System. Elements of the strategy include increasing the Company's penetration of premier site locations, expanding its strategic relationship with AT&T, delivering new, premium prepaid product and service offerings, developing relationships with other providers of premium prepaid products and services, and maintaining its electronic distribution network technological leadership. To pursue its business strategy in Canada, effective April 1, 1998, the Company combined its prepaid calling card business operations in Canada, Phone Line International (PLI) Inc. ("PLI"), with those of DCI Telecommunications, Inc. ("DCI") to create PhoneLine Cardcall International Inc. ("PhoneLine"), a joint venture operating as an independent, switch-based provider of prepaid calling cards. PhoneLine's primary distribution channel for these prepaid calling cards is directly through retail sites. The Company's objective with respect to PhoneLine is to utilize the DataWave System in conjunction with PhoneLine's current distribution operations to become a leading prepaid calling card provider in Canada. A substantial majority of the prepaid calling cards sold by PhoneLine are preactivated and are not sold through the DataWave System. As such, PhoneLine incurs certain of the same costs incurred by other sellers of "live" prepaid cards, such as losses due to theft and other costs associated with the management of inventory. In fiscal 1998, approximately 33% of the Company's revenues came from the sale of preactivated calling cards. In April 1998, the Company acquired Metrophone Telecommunications, Inc. ("Metrophone"), which owns and operates "intelligent" pay phones in Washington, California, Arizona and Oregon. As of June 30, 1998, Metrophone owned 357 intelligent pay phones and has agreed to install and manage an additional 774 pay phones pursuant to agreements with members of the National Association of RV Parks and Campgrounds ("ARVC"). The Company plans to bundle its service offerings by including DTMs and OTCs at certain existing and future pay phone locations. The Company's principal executive offices are located at 101 West 5th Avenue, Vancouver, British Columbia, Canada, V5Y 1H9. The Company's telephone number is (604) 874-1302. THE OFFERING <TABLE> <C> <S> Common Shares offered by the Company................ 3,000,000 shares Common Shares offered by the Selling Shareholders... 145,333 shares Common Shares to be outstanding after the Offering.. 8,374,675 shares(1) Use of proceeds..................................... To repay indebtedness and for general corporate purposes, primarily expansion of the DataWave System and purchase of intelligent pay phones. See "Use of Proceeds." Proposed Nasdaq National Market symbol.............. DWAVF </TABLE> - -------- (1) Excludes 1,051,247 Common Shares reserved for issuance upon exercise of options and warrants outstanding as of July 20, 1998. SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA AND SHARES OUTSTANDING) The following summary consolidated financial information should be read in conjunction with the Consolidated Financial Statements of the Company and the Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus. <TABLE> <CAPTION> YEAR ENDED MARCH 31, --------------------------------------------------- 1994 1995 1996 1997 1998 ------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues.................. $ -- $ 511 $ 1,263 $ 3,149 $ 9,676 Cost of revenues excluding depreciation and amortization............. -- 431 1,076 3,439 6,211 Other operating costs and expenses................. 667 1,259 2,470 3,003 3,034 Operating (loss) income... (667) (1,029) (2,283) (3,293) 431 Net (loss) income......... $ (693) $ (1,052) $ (2,328) $ (3,626) $ 65 ======= ========= ========= ========= ========= Net (loss) income per Common Share(1): Basic.................... $ (1.43) $ (0.67) $ (0.94) $ (1.11) $ 0.02 ======= ========= ========= ========= ========= Diluted.................. $ (1.43) $ (0.67) $ (0.94) $ (1.11) $ 0.01 ======= ========= ========= ========= ========= Weighted average number of Common Shares outstanding.............. 485,743 1,564,186 2,464,398 3,266,755 4,091,411 </TABLE> <TABLE> <CAPTION> MARCH 31, 1998 ------------------------- ACTUAL AS ADJUSTED(2) ---------- ------------- <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Working capital (deficit).......................... $ (43) $ 18,721 Total assets....................................... 5,094 23,360 Long-term obligations, excluding current portion of long-term debt.................................... 1,021 -- Shareholders' equity............................... 1,614 21,399 </TABLE> - -------- (1) For information concerning the number of shares used in the computation of net (loss) income per Common Share, see Note 2(l) of Notes to the Consolidated Financial Statements. (2) As adjusted to give effect to the sale of 3,000,000 Common Shares offered by the Company hereby assuming an Offering price of $7.50 per share, the payment of underwriting discounts and commissions and estimated Offering expenses and the application of net proceeds therefrom. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001000495_visual_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001000495_visual_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f9f21d76c6b1fa4c15c3430718ca409cab75feb8
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and consolidated financial statements and notes thereto appearing elsewhere in this Prospectus. Certain terms used in this Prospectus are defined in the Glossary. Unless otherwise indicated, all information in this Prospectus assumes no exercise of the over-allotment options granted to the Underwriters. See "Underwriting". THE COMPANY Visual Networks, Inc. ("Visual" or the "Company") designs, manufactures and sells wide-area-network ("WAN") service level management systems for statistically multiplexed technologies such as Frame Relay, ATM and IP/Internet. The Company's Visual UpTime system combines WAN access functionality with innovative software for performance monitoring, troubleshooting and network planning. Visual UpTime provides instrumentation for network performance measurement and analysis that allows WAN service providers ("providers") to achieve the service levels required by their customers ("subscribers") and to lower operating costs associated with statistically multiplexed services. The availability of performance monitoring and troubleshooting instrumentation also allows subscribers to verify the service levels being supplied by their service provider and monitor traffic traversing the WAN, a requirement for many subscribers wishing to use statistically multiplexed services to carry mission-critical data traffic. The Company believes Visual UpTime systems are deployed in configurations managing up to 1,300 circuits and the system is currently designed to support configurations of up to 30,000 circuits on a single managed network. The Company believes it is a worldwide leader in providing WAN service level management systems and has shipped systems for deployment on an aggregate of over 25,000 WAN circuits. The Company has developed relationships with major service providers such as AT&T Corp. ("AT&T"), Sprint/United Management Company ("Sprint"), MCI Telecommunications Corporation ("MCI"), Ameritech Corporation ("Ameritech"), Bell Atlantic Network Integration, Inc. ("Bell Atlantic") and BellSouth Communication Systems, Inc. ("BellSouth"). These service providers either resell Visual UpTime to their subscribers or integrate Visual UpTime into their networks to enable them to offer enhanced data transport service levels. Visual UpTime has been deployed in Frame Relay networks utilized by over 425 subscribers, including ABN-AMRO Bank, Cargill, Inc., Delta Air Lines, Inc., EDS Electronic Commerce Division ("EDS"), Federal Express Corporation ("FedEx"), Household International, Inc., Marriott International, Inc. ("Marriott"), Reynolds Metals, Inc. ("Reynolds") and Waste Management, Inc. For the year ended December 31, 1997, and the six months ended June 30, 1998, the Company had revenue of $27.3 million and $22.3 million, respectively. Vertical Systems Group ("Vertical Systems"), a leading WAN industry analyst, estimates that approximately 920,000 Frame Relay circuits and 30,000 ATM circuits will be installed worldwide from 1998 through 2000. To take advantage of this projected growth in these markets, the Company plans to expand its relationships with its service provider customers which together account for the majority of statistically-multiplexed traffic worldwide. The percentage of revenue attributable to sales to service providers increased from approximately 30% of revenue for the six months ended June 30, 1997, to approximately 60% of revenue for the six months ended June 30, 1998. Sprint, AT&T and MCI accounted for 27%, 7% and 2%, respectively, of revenue for the year ended December 31, 1997, and 33%, 12% and 11%, respectively, of revenue for the six months ended June 30, 1998. The Company was incorporated in Maryland in August 1993 under the name Avail Networks, Inc. and reincorporated in Delaware in December 1994 as Visual Networks, Inc. On May 15, 1998, the Company acquired Net2Net Corporation ("Net2Net"). This acquisition was accounted for as a pooling of interests transaction. References to "Visual" or the "Company" refer to Visual Networks, Inc. and its wholly-owned subsidiaries. The Company's principal executive offices are located at 2092 Gaither Road, Rockville, Maryland 20850, and its telephone number is (301) 296-2300. AVAILABLE INFORMATION Visual Networks, Inc. (the "Company") is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Reports, proxy statements and other information filed by the Company may be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, 7th Floor, New York, New York 10048. Copies of such materials may be obtained from the Web site that the Commission maintains at http://www.sec.gov. The Company has filed with the Commission a registration statement on Form S-1 (herein, together with all amendments and exhibits, referred to as the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"). This Prospectus does not contain all of the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information, reference is hereby made to the Registration Statement. ------------------------ Visual Networks and Visual UpTime are registered trademarks of the Company. This Prospectus contains other product names, trade names and trademarks of the Company and of other organizations. ------------------------ CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE OFFERINGS. IN ADDITION, CERTAIN UNDERWRITERS (AND SELLING GROUP MEMBERS, IF ANY) ALSO MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET, IN ACCORDANCE WITH RULE 103 UNDER THE SECURITIES EXCHANGE ACT OF 1934. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING". THE OFFERINGS The offering of 2,800,000 shares of Common Stock initially being offered in the United States (the "U.S. Offering") and the concurrent offering of 700,000 shares of Common Stock initially being offered outside the United States (the "International Offering") are collectively referred to herein as the "Offerings". The closing of the International Offering is conditioned upon the closing of the U.S. Offering and vice versa. See "Underwriting". <TABLE> <S> <C> Common Stock offered: By the Company: U.S. Offering........................................ 800,000 shares International Offering............................... 200,000 shares 1,000,000 shares By the Selling Stockholders(1): U.S. Offering........................................ 2,000,000 shares International Offering............................... 500,000 shares 2,500,000 shares Total.............................................. 3,500,000 shares Common Stock to be outstanding after the Offerings(2)..... 20,886,099 shares Nasdaq National Market symbol............................. "VNWK" Use of Proceeds........................................... General corporate purposes. See "Use of Proceeds". </TABLE> - --------------- (1) The Selling Stockholders may effect transactions in the Common Stock pursuant to Rule 144 promulgated under the Securities Act. (2) Excludes 2,101,686 shares of Common Stock issuable upon exercise of options outstanding as of June 30, 1998, at a weighted average exercise price of $5.05 per share. See "Capitalization" and "Management -- Stock Plans". SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) <TABLE> <CAPTION> FOR THE PERIOD FROM INCEPTION SIX MONTHS (AUGUST 12, 1993) YEAR ENDED DECEMBER 31, ENDED JUNE 30, THROUGH --------------------------------------- ----------------------- DECEMBER 31, 1993 1994 1995 1996 1997 1997 1998 ----------------- ----- ------- -------- ---------- ---------- ---------- (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenue.......................... $-- $ -- $ 567 $ 8,279 $ 27,345 $ 10,217 $ 22,306 Gross profit..................... -- -- 325 4,592 16,591 6,090 13,405 Merger-related costs(1).......... -- -- -- -- -- -- 7,347 Loss from operations............. (5) (439) (3,466) (12,359) (7,123) (4,502) (8,260) Net loss......................... $(5) $(438) $(3,403) $(12,193) $ (7,030) $ (4,436) $ (7,205) Pro forma basic and diluted net loss per common share(2)....... $ (0.45) $ (0.29) $ (0.38) Pro forma basic and diluted weighted average common shares outstanding(2)................. 15,532,537 15,485,515 18,862,904 </TABLE> <TABLE> <CAPTION> JUNE 30, 1998 -------------------------- ACTUAL AS ADJUSTED(3) -------- -------------- (UNAUDITED) <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $ 48,556 $ 73,152 Working capital............................................. 36,977 61,573 Total assets................................................ 61,470 86,066 Total stockholders' equity.................................. 40,011 64,607 </TABLE> - --------------- (1) During the six months ended June 30, 1998, the Company incurred certain merger-related costs in connection with its acquisition of Net2Net. See Note 1 of Notes to Consolidated Financial Statements. (2) For an explanation of the determination of the number of shares used in computing pro forma per share amounts, see Note 1 of Notes to Consolidated Financial Statements. (3) As adjusted to reflect the sale of Common Stock offered by the Company hereby and the application of the estimated net proceeds therefrom.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001002211_doane-pet_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001002211_doane-pet_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..729002ddf153730eb52df51da9d20d3dfec393a5
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless the context indicates otherwise, references in this Prospectus to the Company mean Doane Pet Care Company, a Delaware corporation. The Company's pro forma financial and operating data set forth herein gives effect to the acquisition by Holdings (the "Windy Hill Acquisition") of Windy Hill Pet Food Holdings, Inc. ("Windy Hill") in August 1998, the merger of the Company and Windy Hill (the "Windy Hill Merger") (which will be consummated upon completion of the Offering), the acquisition (the "IPES Acquisition") of IPES IBERICA, S.A. ("IPES") in April 1998 and the Refinancing Transactions. Investors should carefully consider the information set forth in "Risk Factors." THE COMPANY The Company is the largest manufacturer of dry pet food in the United States, producing approximately 26% of the total volumes sold in 1997 on a pro forma basis. The Company manufactures products for store brands owned by retail customers (also known as private labels), contract manufactures products for national branded pet food companies and produces and sells regional brands owned by the Company. The Company manufactures for its customers a full range of pet food products for both dogs and cats, including dry, canned, semi-moist, soft dry, soft treats and dog biscuits. The Company provides products that meet customer specifications across all retail channels and price points, from super premium to value products. Accordingly, the Company manufactures store brands for over 350 customers in the United States, including the three largest mass merchandisers, the five largest grocery companies and the largest national pet specialty retailer. The Company also manufactures dry pet food and treats for four of the six largest national branded pet food companies through co-manufacturing agreements pursuant to which the Company produces, packages and ships a portion of such companies' products. The Company has the most extensive manufacturing and distribution network in the industry, providing it with certain operational, cost and competitive advantages. The Company manufactures and distributes its products in the United States through 32 combination manufacturing and distribution facilities and nine additional distribution centers. The number and strategic location of the Company's facilities reduce distribution expenses, which represent a meaningful portion of the delivered cost of pet food due to its bulk and weight relative to its selling price. The Company's extensive network can further reduce expenses by enabling certain of its customers to bypass their distribution centers and deliver directly to their stores. Direct store delivery service currently accounts for approximately 45% of the Company's sales by volume. The Company has achieved strong internal growth. From 1992 to 1997, the Company increased sales volumes at a compound annual growth rate of 10.3%, exclusive of acquisitions. The Company believes its growth is primarily due to an increase in consumer acceptance of store brands and an increase in volume co-manufactured for national pet food companies. In addition, the Company has been the primary supplier of store brand pet food to WalMart Stores Inc. ("Wal*Mart") since 1970. The Company manufactures and distributes, under a direct store delivery program, a variety of products for Wal*Mart including its store brand, Ol' Roy, which is the largest selling brand of dry pet food in the United States by volume. In 1997, sales to Wal*Mart, including its Sam's Club division, accounted for 39% of the Company's sales on a pro forma basis. THE PET FOOD INDUSTRY The U.S. pet food industry is a $10 billion industry that has grown at a compound annual rate of 5% from 1992 to 1997 in terms of volume. Growth in the dry pet food and the biscuit and treats segments of the industry has exceeded the growth of the overall pet food industry by capturing market share from other segments, including canned pet food. Dry pet food sales have grown at a rate of 6.4% per year from 1992 to 1997 and accounted for approximately $5.2 billion of sales in the industry in 1997. Dry pet food has increased its market share from 49.2% to 52.0% over the same period. The biscuit and treats segment has grown at a rate of 6.3% per year from 1992 to 1997 and has increased its market share from 12.1% to 12.8% over the same period. Improved product quality and increased retailer support have generally enabled store brands to gain market share from national brands in many traditional branded categories, including pet food. Sales of store brand pet food accounted for in excess of 20% of the total pet food market in 1997 and have grown at a compound annual growth rate in excess of 7.5% over the past five years. In 1997, store brands have increased market share in each of the segments of the pet food industry over the past five years. Store brands represented approximately 29%, 29%, 23%, 18% and 17% of total sales volume of biscuits and treats, dry dog, dry cat, canned dog and canned cat food, respectively. Store brands now encompass a full range of pet food products at all price points, including economy, premium and super premium. RECENT DEVELOPMENTS Windy Hill Acquisition. In August 1998, Holdings acquired Windy Hill for approximately eight million shares of common stock of Holdings and the assumption of $181.6 million of indebtedness. The Windy Hill Merger will be consummated upon completion of the Offering. Windy Hill is a leading manufacturer of pet food products for both dogs and cats, including dry, canned, semi-moist, soft dry, soft treats and dog biscuits. With Windy Hill, the Company is the largest manufacturer of dog biscuits in the United States. In 1997, Windy Hill generated pro forma net sales and EBITDA of $304.0 million and $28.5 million, respectively. The Windy Hill Acquisition strengthens the Company's presence in the dry pet food and dog biscuit market segments, provides revenue synergies and enhances the Company's position as a low-cost manufacturer and distributer of pet food products. The Company believes the Windy Hill Acquisition provides the opportunity for revenue growth by (i) enabling the Company to offer regional brands, semi-moist, soft dry and canned pet food products to its traditional customer base and (ii) enabling Windy Hill to offer soft treats and other specialized dry food products to its traditional customer base. With the addition of Windy Hill's 19 plants, the Company believes cost savings can be achieved through optimizing production schedules and lowering distribution costs by reducing the distance products are shipped. The Windy Hill Acquisition also provides the Company with the opportunity to achieve cost savings by obtaining purchasing synergies and eliminating redundant overhead functions. IPES Acquisition. In April 1998, the Company acquired IPES for $28.3 million in cash. IPES, located in Spain, is a manufacturer of both store and regional brands. In fiscal 1997, IPES had net sales and EBITDA of $21.1 million and $4.1 million, respectively. The Company believes that the IPES Acquisition, together with the Company's investment in the Italian pet food manufacturer, Effeffe, S.p.a., provides the Company with a platform for growth in Europe. STRATEGY The Company's business objective is to increase revenues and earnings and to enhance its leadership position within the pet food industry. The key elements of the strategy to achieve the Company's business objective are as follows: Continue to be the Low Cost Quality Provider in the Pet Food Industry. The Company believes it is the low cost provider of quality dry pet food. The Company believes its position as the largest manufacturer of dry pet food provides it with certain economies of scale, including production efficiencies and packaging purchasing leverage. In addition, the number and strategic location of the Company's facilities enhance the Company's position as the low cost provider by reducing transportation costs for raw materials and finished goods. The Company also maintains in-house engineering, machining and fabrication capabilities that enable the Company to design, construct and maintain facilities on a cost-effective basis. Leverage Distribution System. The Company's manufacturing and distribution network enables it to service customers on a national basis and facilitates the Company's direct store delivery program, the scope of which the Company believes is unique in the industry. In addition, the Company has developed capabilities that allow it to provide vendor managed inventory ("VMI") to certain key customers. VMI allows the Company to communicate on-line with its customers, evaluate their inventory status and place orders on their behalf. The Company intends to leverage its manufacturing and distribution network by expanding sales of its full range of pet food products to its existing customers. For example, the Company recently completed the construction of a soft treat manufacturing facility and intends to expand sales of certain products acquired in the Windy Hill Acquisition including semi-moist, soft dry, canned and regional brands to its existing customers. Provide a Full Range of Pet Food Products. The Company offers customers a full range of pet food products for both dogs and cats, including dry, canned, semi-moist, soft dry, soft treats and dog biscuits. By offering a full range of products under a variety of brand formats (store, co-manufactured national and regional brands) and price points, the Company can be a significant source for its customers' total pet food requirements. This enables customers to realize administrative and distribution savings by aggregating a variety of products and brands into a single shipment. Focus on Diversified Brand Formats. The Company believes that store, co-manufactured national and regional brand formats offer significant growth opportunities. Sales of store brands have exceeded the overall growth in the pet food industry. The Company believes this growth will continue due to (i) an increased awareness of retailers concerning the advantages of store brands, including enhanced margins and customer loyalty, (ii) improved quality, innovation and variety of store brand products and (iii) increasingly informed and value-conscious consumers. The Company believes co-manufactured national brands offer growth opportunities as national branded pet food companies increasingly take advantage of the Company's low-cost status, quality products, extensive plant network and logistics capabilities. The Company believes that the regional brands acquired with the Windy Hill Acquisition complement its existing product lines and intends to capitalize on demand for such brands within the Company's existing customer base. Acquire Additional Pet Food Companies. To supplement its internal growth, the Company and Holdings have acquired eight pet food companies over the last three years. The Company believes that there are substantial opportunities in the United States and abroad to acquire additional pet food companies. The Company will continue to seek accretive acquisitions that offer complementary product lines, geographic scope, additional distribution channels and cost saving opportunities. Expand International Presence. The Company believes substantial opportunities exist to increase sales in international markets. The Company believes that the approximately $9.3 billion European pet food market is particularly attractive due to the strength and demand for store brand products and the strong growth of dry pet food products. The Company is currently expanding its manufacturing and distribution capabilities in Spain and Italy and intends to pursue acquisitions of additional pet food companies and expand its product offerings. In addition, the Company believes that an opportunity exists to expand export sales to the Pacific Rim and South America. THE OFFERING SECURITIES OFFERED......... $125,000,000 aggregate principal amount of % Senior Subordinated Notes due 2008. MATURITY DATE.............. , 2008. INTEREST PAYMENT DATES..... and of each year, commencing , 1999. OPTIONAL REDEMPTION........ The Notes will be redeemable, at the Company's option, in whole or in part from time to time on or after , 2003, initially at % of their principal amount and thereafter at prices declining to 100% at , 2006 until maturity, in each case together with accrued and unpaid interest to the redemption date. In addition, at any time on or prior to , 2001, the Company may redeem up to 35% of the aggregate principal amount of the Notes originally issued with the net cash proceeds of one or more Public Equity Offerings, at % of their principal amount, together with accrued and unpaid interest, if any, to the redemption date; provided that at least $81.3 million in principal amount of the Notes remains outstanding immediately after any such redemption. See "Description of the Notes -- Optional Redemption." RANKING.................... The Notes will be general unsecured obligations of the Company, will rank subordinate in right of payment to all existing and future Senior Debt of the Company and will rank senior or pari passu in right of payment to all existing and future subordinated indebtedness of the Company. The Notes will be effectively subordinated to all liabilities, if any, of any subsidiaries of the Company. As of March 31, 1998, on a pro forma basis, the Company would have had $116.9 million in aggregate principal amount Senior Debt outstanding, $101.2 million of trade payables and other accrued liabilities and $120.0 million of aggregate principal amount of senior subordinated indebtedness other than the Notes. On a pro forma basis, the Company would have had the capacity to borrow $86.8 million of Senior Debt under the New Credit Facility. See "Risk Factors -- Subordination of Notes." CHANGE OF CONTROL.......... Upon a Change of Control (as defined herein), each holder will have the right to require the Company to repurchase all or any part of such holder's Notes at a purchase price equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest to the date of purchase. See "Risk Factors -- Possible Inability to Repurchase the Notes upon Change of Control." CERTAIN COVENANTS.......... The Indenture will contain certain covenants restricting or limiting the ability of the Company and its subsidiaries to, among other things, (i) pay dividends or make other restricted payments, (ii) incur additional indebtedness and issue preferred stock, (iii) create liens, (iv) incur dividend and other payment restrictions affecting subsidiaries, (v) enter into mergers or consolidations, (vi) make asset sales, (vii) enter into transactions with affiliates and (viii) engage in other lines of business. Under certain circumstances, the Company will be required to offer to purchase all outstanding Notes at a purchase price in cash equal to 100% of their principal amount, plus accrued and unpaid interest to the date of purchase, with the proceeds of certain asset sales. These covenants are subject to certain exceptions and qualifications. See "Description of the Notes." USE OF PROCEEDS............ The net proceeds to the Company from the Offering (in conjunction with the net proceeds from the other Refinancing Transactions) will be used to repay certain indebtedness of the Company and Windy Hill and to repurchase the outstanding preferred stock of the Company. See "The Refinancing Transactions" and "Use of Proceeds." RISK FACTORS See "Risk Factors," beginning on page 11 hereof, for a discussion of certain factors that should be considered in evaluating an investment in the Notes. THE REFINANCING TRANSACTIONS The Company is undertaking the Offering in conjunction with a series of concurrent transactions in which the Company and Holdings are refinancing their capital structures (collectively, the "Refinancing Transactions"). The Refinancing Transactions are intended to provide the Company with a lower overall cost of capital and increase its financial flexibility. The sources of funds for the Refinancing Transactions include: (i) the establishment by the Company of a new $175.0 million credit facility (the "New Credit Facility") providing for $75.0 million of term loan borrowings and $100.0 million of revolving loan borrowings of which approximately $88.2 million in aggregate principal amount is expected to be drawn at the closing of the Refinancing Transactions; (ii) the Equity Offering, which will generate gross proceeds to Holdings of approximately $150 million (assuming no exercise of the over-allotment option granted to the underwriters in the Equity Offering); and (iii) the Offering. The estimated uses of funds for the Refinancing Transactions include: (i) the repayment of approximately $97.0 million in aggregate principal amounts outstanding under the existing credit facilities of the Company (the "Doane Credit Facility") and of Windy Hill (the "Windy Hill Credit Facility" and, together with the Doane Credit Facility, the "Existing Credit Facilities"); (ii) a tender offer and related consent solicitation for the repurchase of all of the $160.0 million in principal amount of 10 5/8% Senior Notes due 2006 of the Company (the "Doane Senior Notes"); (iii) the repayment of all of the $13.3 million outstanding principal amount and accrued interest of the 10.0% Subordinated Notes of Windy Hill (the "Seller Notes"); (iv) the repurchase of all of the approximately $42.5 million outstanding in liquidation value of 14.25% Senior Exchangeable Preferred Stock due 2007 of the Company (the "Doane Preferred Stock"); (v) the payment of approximately $34.2 million in prepayment premiums related to the tender offer for the Doane Senior Notes and the repurchase of the Doane Preferred Stock (collectively, the "Prepayment Premiums"); and (vi) the payment of approximately $16.2 million of underwriting, advisory, legal and other fees and expenses related to the Refinancing Transactions. The consummation of the Offering is contingent upon the consummation of the other Refinancing Transactions, including the Equity Offering. The consummation of the Refinancing Transactions is also subject to certain conditions precedent, including the Windy Hill Merger. See "The Refinancing Transactions," "Management's Discussion and Analysis of Financial Condition and Results of Operations--The Refinancing Transactions" and "Description of New Credit Facility." The following table sets forth the estimated sources and uses of funds for the Refinancing Transactions: <TABLE> <CAPTION> SOURCES OF FUNDS USES OF FUNDS ---------------- ------------- (IN MILLIONS) <S> <C> <C> <C> The Offering............... $125.0 Repurchase of the Doane Senior Notes................. $160.0 The Equity Offering........ 150.0 Repayment of the Existing Credit Facilities.......... 97.0 New Credit Facility........ 88.2 Repayment of the Seller Notes........................ 13.3 Repurchase of the Doane Preferred Stock.............. 42.5 Prepayment Premiums.................................. 34.2 Estimated Transaction Fees and Expenses.............. 16.2 ------ Total Sources......... $363.2 Total Uses........................................... $363.2 ====== ====== </TABLE> SUMMARY FINANCIAL INFORMATION The summary historical financial information for the periods ended September 30, 1995 and December 31, 1995, 1996 and 1997 are derived from the consolidated financial statements of the Company included elsewhere in this Prospectus. The summary historical information for the three month period ended March 31, 1997 and as of and for the three month period ended March 31, 1998 are derived from the unaudited consolidated financial statements of the Company that in the opinion of management reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial condition and results of operations as of such dates and for such periods. The results for the three month period ended March 31, 1998 are not necessarily indicative of the results that may be expected for the entire year. The unaudited condensed pro forma as adjusted income statement data give effect to the Windy Hill Merger, including the pro forma effects of each of the transactions included in the pro forma financial statements of Windy Hill, the IPES Acquisition and the Refinancing Transactions as if each of such transactions had occurred on January 1, 1997. The unaudited pro forma as adjusted balance sheet gives effect to the IPES Acquisition, the Windy Hill Merger, including the pro forma effects of each of the transactions included in the pro forma financial statements of Windy Hill, the Refinancing Transactions and the use of proceeds therefrom, in each case as if such transactions had occurred on March 31, 1998. Such pro forma data are presented for illustrative purposes only and do not purport to represent the Company's actual results if such events had occurred at the dates indicated, nor do such data purport to project the results of operations for any future period. The information set forth below is qualified in its entirety and should be read in conjunction with the consolidated financial statements and notes thereto of the Company, the financial statements and notes thereto of Windy Hill, "Unaudited Condensed Pro Forma Financial Statements," "Selected Consolidated Financial Data," and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus. <TABLE> <CAPTION> PREDECESSOR(1) THE COMPANY -------------- ------------------------------------------------------------------------------------ YEAR ENDED THREE MONTHS THREE DECEMBER 31, ENDED MARCH 31, NINE MONTHS MONTHS --------------------------------- --------------------------------- ENDED ENDED PRO FORMA PRO FORMA SEPTEMBER 30, DECEMBER 31, AS ADJUSTED AS ADJUSTED 1995 1995 1996 1997 1997 1997 1998 1998 -------------- ------------ -------- -------- ----------- -------- -------- ----------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> <C> INCOME STATEMENT DATA: Net sales............... $303,633 $114,958 $513,217 $564,741 $885,681 $141,741 $144,497 $229,802 Gross profit............ 56,239 17,774 66,441 81,845 153,856 19,016 24,530 44,410 Unusual item(2)......... 9,440 -- -- -- -- -- -- -- Non-recurring transition costs................. -- -- -- -- 1,571 -- -- 160 Income from operations............ 20,566 7,613 24,911 31,984 52,185 7,169 10,446 18,144 Interest expense, net... 3,611 5,806 22,471 22,463 31,460 5,672 5,422 7,836 Non-recurring finance charge(3)............. -- -- 4,815 -- -- -- -- -- Income (loss) before extraordinary items(4).............. $ 16,746 $ 1,024 $ (1,518) $ 6,234 $ 13,485 $ 995 $ 3,279 $ 6,711 OTHER DATA: EBITDA(5)............... $ 33,804 $ 10,063 $ 35,264 $ 43,216 $ 76,903 $ 9,838 $ 13,422 $ 24,631 Ratio of EBITDA to interest expense...... 9.4x 1.7x 1.6x 1.9x 2.4x 1.7x 2.5x 3.1x Ratio of earnings to fixed charges(6)...... 5.6x 1.3x 0.9x 1.4x 1.7x 1.3x 1.9x 2.3x Depreciation and amortization expense............... 3,694...... 2,359 15,972 12,141 24,073 2,882 3,215 6,127 Capital expenditures(7)....... 4,224 1,297 7,901 14,437 18,788 5,712 3,355 4,800 Pet food sold (thousands of tons).............. 774........ 288 1,189 1,237 1,829 309 323 478 </TABLE> <TABLE> <CAPTION> MARCH 31, 1998 -------------------------------------- PRO FORMA HISTORICAL PRO FORMA AS ADJUSTED ---------- --------- ------------- (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $ -- $ 4,644 $ 4,644 Working capital............................................. 37,202 40,075 69,900 Total assets................................................ 333,728 644,372 659,155 Total debt.................................................. 206,953 419,034 361,911 Stockholders' equity........................................ 35,743 62,743 166,926 </TABLE> (footnotes on next page) - ------------------------------ (1) Holdings was formed by a group of investors in 1995 to acquire the Company (the "1995 Acquisition"). For financial statement purposes, the 1995 Acquisition was accounted for as a purchase acquisition effective October 1, 1995. The effects of the 1995 Acquisition have been reflected in the Company's consolidated assets and liabilities at that date. As a result, the Company's consolidated financial statements for the periods subsequent to September 30, 1995 are presented on the successor's new basis of accounting, while financial statements for September 30, 1995 and prior periods are presented on the predecessor's historical cost basis of accounting. See Note 1 of the Consolidated Financial Statements of the Company. (2) Represents non-recurring bonus payments to senior management in connection with the 1995 Acquisition. (3) Represents non-recurring interim bridge debt financing costs that were written off concurrently with the issuance of the Doane Senior Notes. (4) Income before extraordinary items of the Company's predecessor does not include any provision for federal income taxes. Prior to the 1995 Acquisition, the Company's predecessor was organized as a subchapter S corporation. Consequently, the Company's predecessor did not pay federal, state or local income taxes except in those states that did not recognize subchapter S status or that required the payment of franchise taxes based on income. (5) EBITDA for any relevant period presented above is defined as net income plus interest expense, income taxes, depreciation, amortization, unusual item, nonrecurring expenses and transition costs reflected in the determination of net income. EBITDA is not a measure recognized by generally accepted accounting principles and should not be considered in isolation or as a substitute for operating income, as an indicator of liquidity or as a substitute for net cash provided by operating activities, which are determined in accordance with generally accepted accounting principles. EBITDA is included because management believes that certain investors may find it useful. See "Unaudited Condensed Pro Forma Financial Statements" and the Company's Consolidated Financial Statements and the Notes thereto included elsewhere in this Prospectus. (6) The ratio of earnings to fixed charges has been computed by dividing earnings available for fixed charges (earnings before income taxes plus fixed charges less capitalized interest) by fixed charges (interest expense plus capitalized interest). (7) Capital expenditures excludes payments for acquisitions.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001003282_internet_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001003282_internet_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS QUALIFY THE FOLLOWING SUMMARY IN ITS ENTIRETY, AND PROSPECTIVE PURCHASERS OF ANY OF THE SECURITIES OFFERED HEREBY SHOULD READ SUCH MORE DETAILED INFORMATION IN CONJUNCTION WITH THE FOLLOWING SUMMARY. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SECTION OF THIS PROSPECTUS UNDER THE CAPTION "RISK FACTORS." THE COMPANY OBTAINED CERTAIN INDUSTRY DATA USED IN THIS PROSPECTUS FROM INDUSTRY AND GOVERNMENT SOURCES, AND THE COMPANY HAS NOT INDEPENDENTLY VERIFIED SUCH DATA. CERTAIN TERMS USED HEREIN ARE DEFINED IN THE GLOSSARY ATTACHED HERETO. THIS PROSPECTUS MAKES REFERENCE TO TRADEMARKS OF OTHER COMPANIES, WHICH MARKS ARE THE PROPERTY OF SUCH COMPANIES. THE COMPANY The Company is a full service communications solutions provider of switched and Internet Protocol ("IP")-based communications products and services for small- and medium-sized business enterprises, as well as dial-up residential customers. The Company operates 9 Internet points of presence ("POPs") in Colorado and, through agreements with third-party providers, the Company can provide Internet access in 90 of the 100 largest metropolitan statistical areas in the United States. The Company monitors and controls its network through its Network Operations Center ("NOC") located in Denver, Colorado. The Company intends to provide to its customers on a nationwide basis comprehensive communications services, including dedicated Internet access, dial-up Internet access, IP telephony ("IP Telephony"), point-to-point private line, frame relay and local and long distance telephone service. In addition, the Company offers its customers value-added web services, including web site hosting, web site production and marketing, electronic commerce ("e-commerce") and web training. The Company had combined pro forma revenues for the year ended December 31, 1997 of $9,052,000 and provided dedicated access and web services to over 1,200 business customers and over 15,300 dial-up customers as of September 30, 1998. INDUSTRY BACKGROUND. The Company enables its customers to take advantage of emerging Internet technology. The emergence of the Internet, IP Telephony and the widespread adoption of IP as a data transmission standard in the 1990's are rapidly accelerating the standardization of networking protocols. This standardization has revolutionized business-to-business transactions and e- commerce for consumer shopping. Moreover, business enterprise networks are rapidly adopting data communications network plans incorporating IP-based technologies and migration paths to utilize the Internet as much as possible. Internet access and IP-based services represent two of the fastest growing segments of the over $200 billion telecommunications services marketplace according to International Data Corporation ("IDC"). IDC estimates that the number of Internet users in the United States who access the World Wide Web reached approximately 29.2 million in 1997 and is forecasted to grow to approximately 72.1 million by the year 2000. In addition, total Internet Service Provider ("ISP") revenues in the United States are projected to grow from $4.6 billion in 1997 to over $18 billion in 2000. In the past, much of the growth in ISP revenues has been driven by the dial-up or retail sector of the Internet. However, today businesses represent the largest and fastest growing segment of the Internet market. IDC predicts that U.S. corporate Internet access revenues will grow from approximately $1.9 billion in 1996 to over $6.6 billion in 2000 and that revenues from enhanced Internet services, such as web site hosting, security, e-commerce, virtual private networks and advanced Internet applications, will grow from approximately $352 million in 1997 to over $7 billion in 2000. The rapidly growing need for Internet access and technology has resulted in a highly fragmented industry with the proliferation of over 4,000 ISPs operating within the United States, according to industry estimates. These ISPs are primarily made up of a few large national providers focused on high bandwidth access and a large number of smaller providers with limited resources focused on serving local or regional markets. The Company believes that the solutions offered by these companies often fail to address certain elements required to ensure that customers' mission-critical Internet operations are reliable, scalable and high-performing and that these companies fail to provide a broad array of efficient and low-cost communications products and services. POSITIONING OF THE COMPANY. The Company offers a broad array of communications products and services tailored to meet customer needs and provides high quality customer support. The Company delivers its products and services through two divisions: Communication Services and Web Services. The Company believes that, based upon its experience, a growing number of businesses will demand one point-of-contact for communications solutions for the following reasons: (i) to ensure proper system/network integration; (ii) to obtain a single point of responsibility for products and services that might have numerous providers; and (iii) to continue to take advantage of evolving communications technologies. The Company intends to increase the breadth of its products and services delivered to its customers by adopting new technology, acquiring complementary businesses and capitalizing on strategic relationships. DIVISIONS AND SERVICES DIVISIONS SERVICES DESCRIPTION COMMUNICATION SERVICES INTERNET ACCESS CO-LOCATION T-1 or greater Internet access provided to customer's server located at the Company's POP DEDICATED ACCESS Fractional T-1, T-1 or greater Internet access provided to a customer's office DIAL-UP SERVICE Nationwide Internet access for consumer and small business customers using modems to dial into the Company's network WIRELESS ACCESS Evolving technology allowing up to 750 kbps wireless Internet access currently available in the Denver metro area TELEPHONY SERVICES E-PHONE Long distance calling using IPTelephony technology LONG DISTANCE Traditional long distance services LOCAL (C-LEC) Traditional local exchange telephone service on a resale or facilities-owned basis throughout Colorado DEDICATED LINE SERVICES Dedicated and frame relay networks to carry voice and data for business customers WEB SERVICES WEB SITE HOSTING A customer's web site is "hosted" on the Company's servers and connected to the Internet via a high-speed connection WEB SITE PRODUCTION Design, development and implementation of customer web sites WEB SITE MARKETING TRAFFIC BUILDER PLUS Unique web site marketing program whereby customer web sites are marketed exclusively to Internet users INFOHIWAY Search engine that contains a large and rapidly growing database of reference information on the World Wide Web ELECTRONIC COMMERCE E-SELL Turnkey solution for setting up an Internet store WEB TRAINING Various levels of Internet training for customers from basic access training to HTML programming BUSINESS STRATEGY The Company's objective is to become a leading national provider of a broad array of communications services, distinguished by a state-of-the-art network and high quality customer service and support. Key elements to the Company's business strategy include the items discussed below. There can be no assurance, however, that the Company will be able to fully implement its strategy or to implement its strategy to the extent that it can become profitable. PROVIDE A BROAD ARRAY OF COMMUNICATIONS SOLUTIONS TO ITS CUSTOMERS. The Company has built a portfolio of products, services and skill sets to develop and deliver comprehensive internetworking communications solutions to both business and residential customers. These products and services are organized under two divisions including Communication Services and Web Services. The Company plans to continue to add products and services to its portfolio and believes that a growing number of businesses and consumers will demand that one company provide all of their communications needs. The Company believes that this one point-of-contact service delivery model ensures: (i) high-performance, cost-effective network planning, design and implementation; (ii) maintenance of a single point of responsibility; and (iii) an ongoing customer relationship as a technology partner for communications applications. PROVIDE SUPERIOR CUSTOMER SERVICE AND TECHNICAL SUPPORT. The Company believes that highly differentiated customer service and technical support is a key competitive asset in the communications industry, and the ISP sector in particular. Because the Internet is an evolving and complex medium, customers require significant technical support. Consequently, the Company has developed a comprehensive strategy to attain maximum customer satisfaction. This strategy consists of the following elements: (i) maintaining a sufficient number of qualified service and technical support personnel through proactive recruitment, retention and training programs; (ii) utilizing the Company's extranet to provide real-time, interactive customer service; (iii) developing an on-line billing system enabling customer-controlled account customization and analysis; and (iv) further deploying and maintaining the Company's service delivery standards and guarantees. The Company believes that, due to its high quality customer service, it experiences low turnover rates and achieves a significant percentage of its subscriber growth from customer referrals. MAXIMIZE NETWORK UTILIZATION. Through its network and agreements with third-party providers, the Company provides Internet access in 90 of the 100 largest metropolitan statistical areas in the United States. The Company plans to continue to selectively add POPs where it can add value to its customers. The Company believes that the ISP industry has historically been divided between ISPs focused on business customers and ISPs focused on residential dial-up customers. The Company's business strategy is to maximize network utilization 24 hours a day by targeting both daytime business and evening-intensive consumer users. SELECTIVELY TARGET KEY CITIES TO EXPAND NATIONWIDE. The Company plans to expand its sales efforts nationally by focusing on targeted areas where there is a large concentration of businesses and favorable demographics. In markets where the Company is using third-party provider networks, the Company intends to initially target dial-up customers through advertising, promotions, public relations, telemarketing and customer referrals. Once the Company attains critical mass in these locations, it intends to establish its own POPs and begin targeting business and residential customers with its broad array of communications products and services. TAKE ADVANTAGE OF SIGNIFICANT CONSOLIDATION OPPORTUNITIES. The Company believes that the Internet industry is undergoing structural changes with an increasing use of the Internet for mission-critical applications, which is creating demand for high quality network operations, customer service and technical support. The Company also believes that there is a market opportunity to consolidate ISPs, Internet-based service companies and Internet technologies. Evidence of this strategy includes the Company's recent acquisitions of Infohiway, Inc. ("Infohiway") and Application Methods Incorporated (together with its affiliated entity, e-Sell Commerce Systems, Inc., "Application Methods"). Infohiway is a company that has developed a search engine that gives the Company on-line advertising opportunities for its customers. Application Methods' e-commerce solution, e-SELL, enables the Company to provide business customers with browser-based software to conduct business over the Internet. The Company believes these acquisitions enhance the Company's position as a full service provider of communications solutions. The Company will continue to evaluate opportunities to acquire companies that it believes will enhance its product and service offerings. In addition, the Company intends to supplement its organic national growth efforts by acquiring local ISPs in strategic locations to maximize economies of scale. There can be no assurance, however, that the Company will be able to identify, acquire, or profitably manage additional businesses, if any, without substantial costs, delays, or other operational or financial difficulties. In addition, there can be no assurance that acquired businesses, if any, will achieve anticipated revenues and earnings.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001004539_airplanes_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001004539_airplanes_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..7c1a59d10d070a24b52187c7e08d2071fca54feb
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the detailed information appearing elsewhere in this Prospectus. Capitalized terms used in this Prospectus Summary without definition have the meanings assigned in the text of this Prospectus. An Index referencing defined terms is attached as Appendix 1 hereto. Investors should thoroughly consider this Prospectus in its entirety, including the information set forth herein under "Risk Factors", prior to an investment in the 1998 Refinancing Certificates. OVERVIEW The separate 1998 Refinancing Trusts will issue Subclass A-6 Certificates (the "SUBCLASS A-6 CERTIFICATES"), Subclass A-7 Certificates (the "SUBCLASS A-7 CERTIFICATES"), Subclass A-8 Certificates (the "SUBCLASS A-8 CERTIFICATES") or Class B Certificates (the "CLASS B CERTIFICATES"). Any Subclass A-6 Certificate that is issued will represent a fractional undivided interest in a pair of corresponding Subclass A-6 Notes issued by Airplanes Limited and Airplanes Trust (together with, unless the context otherwise requires, their subsidiaries, "AIRPLANES GROUP") and held by the "1998 REFINANCING TRUST A-6". Any Subclass A-7 Certificate that is issued will represent a fractional undivided interest in a pair of corresponding Subclass A-7 Notes issued by Airplanes Limited and Airplanes Trust and held by the "1998 REFINANCING TRUST A-7". Any Subclass A-8 Certificate that is issued will represent a fractional undivided interest in a pair of corresponding Subclass A-8 Notes issued by Airplanes Limited and Airplanes Trust and held by the "1998 REFINANCING TRUST A-8". Any Class B Certificate that is issued will represent a fractional undivided interest in a pair of corresponding Class B Notes issued by Airplanes Limited and Airplanes Trust and held by the "1998 REFINANCING TRUST B". The proceeds of the underwritten offering of the 1998 Refinancing Certificates (the "OFFERING") will be used to refinance Airplanes Limited's and Airplanes Trust's Subclass A-1 Notes, Subclass A-2 Notes, Subclass A-3 Notes and Class B Notes. Airplanes Limited and Airplanes Trust have each fully and unconditionally guaranteed the other's obligations under their respective 1998 Refinancing Notes. AIRPLANES GROUP'S CAPITAL STRUCTURE AND PORTFOLIO Airplanes Limited and Airplanes Trust are special purpose vehicles that were established to acquire 229 aircraft from GPA in March 1996 for the purpose of refinancing substantially all of GPA's secured debt obligations at the time and enhancing GPA's ability to meet its remaining debt obligations. Airplanes Limited and Airplanes Trust funded this acquisition by causing Airplanes Pass Through Trust to issue $4,048 million of Pass Through Certificates (collectively, the "EXISTING CERTIFICATES" and, together with the 1998 Refinancing Certificates, the "CERTIFICATES") in four classes -- Class A, Class B, Class C and Class D. The Class A Certificates were further subdivided into five separate sub-classes. Each class and subclass of the Certificates represents fractional undivided beneficial interests in two corresponding classes or subclasses of notes (collectively, the "EXISTING NOTES" and, together with the 1998 Refinancing Notes, the "NOTES") issued by Airplanes Limited and Airplanes U.S. Trust. Airplanes Group received the net proceeds from an underwritten offering of the Existing Certificates (the "1996 OFFERING") in exchange for the Existing Notes and used such net proceeds, together with approximately $604 million in aggregate principal amount of a fifth class of Airplanes Group notes (the "CLASS E NOTES"), to pay the purchase price for the acquisition of certain subsidiaries of GPA Group which owned the 229 aircraft (the "ACQUISITION") and to refinance approximately $2.9 billion of secured indebtedness and other obligations of GPA owed under certain bank facilities. GPA is the holder of a majority in aggregate principal amount of the Class E Notes. Minimum interest at the rate of 1% and, in more limited circumstances, supplemental interest at the rate of 10%, will be paid on the outstanding principal balance of the Class E Notes only to the extent that Airplanes Group has sufficient cashflow after paying or providing for each of the items ranking prior to such payment under the priority of payments. GPA as the holder of the Class E Notes is effectively entitled to the residual value of the Aircraft after the repayment of the Class A, Class B, Class C and Class D Notes. See "Prospectus Summary -- Overview of Priority of Payments" and "Description of Securities -- The Notes and the Guarantees -- Priority of Payments" and "-- The Class E Notes". [This page intentionally left blank] Through the payment date in February 1998, GPA and the other holders of the Class E Notes had received aggregate payments of minimum interest on the Class E Notes of approximately $9.15 million. No payment of supplemental interest on the Class E Notes has been made to date. Based on the assumptions set forth under "Description of Securities -- The Certificates -- Assumptions" (the "ASSUMPTIONS"), the present value of the aggregate future payments of minimum interest on the Class E Notes to be paid from March 15, 1998 through October 15, 2012 (the payment date at which all amounts outstanding under the Notes are assumed to have been repaid) is approximately $35 million (using a discount rate of 15%). Based on the Assumptions, no supplemental interest on the Class E Notes is assumed to have been paid prior to such date. Based on the Assumptions, the Expected Portfolio Value (as defined under "Description of Securities -- The Notes and the Guarantees -- Principal Amortization of Floating Rate Notes") of the Aircraft at October 15, 2012 will equal approximately $950 million. Investors should not rely on the above amounts as an indication of the fair value of the Class E Notes. Moreover, as described under "Description of the Securities -- The Certificates -- Assumptions", it is highly likely that actual experience will vary from the Assumptions. Accordingly, the actual amount of future interest payments on the Class E Notes and the Expected Portfolio Value of the Aircraft will likely differ from the amounts set forth above. Of the $598 million of Subclass A-5 Notes and the $375 million of Class B Notes originally issued in March 1996, $490 million and $37 million, respectively, had been repaid as of February 17, 1998 in accordance with the terms of such Notes. Of the $604 million of Class E Notes issued, approximately $13 million was subsequently canceled pursuant to the purchase price adjustment provisions of the agreements pursuant to which the aircraft-owning subsidiaries of GPA Group were sold to Airplanes Group. Of the 229 aircraft and related leases acquired from GPA on March 28, 1996, Airplanes Limited indirectly acquired 206 of the aircraft and related leases through the acquisition of 95% of the capital stock of Airplanes Holdings Limited ("HOLDING CO.") and Airplanes Trust indirectly acquired 23 aircraft through the acquisition of the capital stock of AeroUSA, Inc. ("AEROUSA"), a Connecticut corporation. During the fiscal year ending March 31, 1997, in order to facilitate the structuring of certain leasing transactions, two aircraft were transferred from the indirect ownership of Airplanes Limited to AeroUSA. At January 23, 1998, ten of the original 229 aircraft had been sold, one had suffered a constructive total loss (a "constructive total loss" occurs when an aircraft is damaged and the cost of repair exceeds the value of the aircraft), and 212 of the remaining 218 owned aircraft (the "AIRCRAFT") in the portfolio of Aircraft owned by Airplanes Group (the "PORTFOLIO") were on lease to 74 operators in 38 countries. The leases with respect to the Aircraft at January 23, 1998 are referred to as the "EXISTING LEASES". The number of Aircraft in the Portfolio at January 23, 1998 gives effect to the delivery of three DC8 Aircraft to Emery Worldwide Airlines, Inc. ("EMERY"), as if all of such deliveries occurred prior to January 23, 1998. A contract for the sale of six DC8 aircraft (including the three aircraft mentioned above) to Emery was signed on December 30, 1997, for an aggregate price that meets the aggregate Note Target Price (as defined under "Description of Securities -- The Notes and Guarantees -- Trust Indenture Covenants"). Three Aircraft were delivered to Emery on December 30, 1997, and the remaining three Aircraft are expected to be delivered to Emery by March 20, 1998. See "The Aircraft, the Related Leases and Collateral". As of January 23, 1998, Holding Co. owned (i) 30 of the Aircraft and related Existing Leases, (ii) twelve wholly owned subsidiaries which owned 167 of the Aircraft (including Holding Co., the "AIRCRAFT OWNING COMPANIES") and (iii) ten other wholly owned subsidiaries ("SPECIAL LESSORS") which owned no Aircraft and whose business is to lease certain of the Aircraft from the Aircraft Owning Companies and sublease such Aircraft to various aircraft operators. The Special Lessors are largely incorporated in various European jurisdictions. Additional Special Lessors may be organized in other jurisdictions in the future. As of January 23, 1998, AeroUSA owned, directly and indirectly, 21 of the Aircraft. The indirect ownership of the Aircraft by two different entities, Airplanes Limited and Airplanes Trust, reflects GPA Group's corporate structure prior to the Acquisition. It would not have been tax-efficient in Ireland or the United States to have a single direct or indirect owner of the Aircraft following the Acquisition. The Aircraft Owning Companies, the Special Lessors and AeroUSA are referred to herein as the "TRANSFERRED COMPANIES". SERVICER GECAS acts as servicer (the "SERVICER") pursuant to the servicing agreement among Airplanes Limited, AeroUSA, Holding Co., Airplanes Trust, GPA Cash Manager Limited, as Cash Manager, and GECAS dated as of March 28, 1996 (the "SERVICING AGREEMENT") and performs certain aircraft-related services on behalf of Airplanes Group. Airplanes Limited, AeroUSA and Holding Co. have directed the Servicer to perform such services in a manner that is intended to be consistent with maximizing the cash flows derived from the Aircraft and the Existing Leases and future leases related thereto (the "FUTURE LEASES" and, together with the Existing Leases, the "LEASES") over time, subject to the constraints imposed by the Trust Indentures and by seeking to achieve a balanced and diversified portfolio (including, without limitation, with respect to lessees, geography and lease term lengths), in all cases taking into account then existing and anticipated market conditions affecting the operating lease market for used aircraft and the commercial aviation industry generally. The Servicer is not required pursuant to the terms of the Servicing Agreement to obtain rental rates designed to pay any amounts due and owing under the Notes and no assurance can be given that the rental rates of the Leases will be sufficient to pay interest and principal on the Notes in accordance with their terms. As described below under "The Parties -- GPA", GE Capital has the right to acquire at any time until October 29, 2001, 90% of the ordinary share capital of GPA Group. There can be no assurance, however, that GE Capital will elect to acquire any of such ordinary shares. Neither the Certificates nor the Notes are obligations of, or guaranteed by, or offered for sale by, GE Capital, GECAS or any of their affiliates. RANKING After the payment of amounts due and owing in respect of, among other things, taxes and obligations to lessees and various service providers (including, without limitation, the Servicer, the Administrative Agent and the Cash Manager), the cash flows derived primarily from the Leases will be applied, indirectly, towards the payment of amounts due to Certificateholders. Payments of interest on the Subclass A-6, Subclass A-7 and Subclass A-8 Notes and the corresponding Subclass A-6, Subclass A-7 and Subclass A-8 Certificates will rank equally with payments of interest on the other subclasses of Class A Notes. Payments of interest on the Class B Notes and the corresponding Class B Certificates will be made after payments of interest on the Class A Notes and certain payments of principal on the Class A Notes. Interest at the rate of 1% on the outstanding principal balance of the Class E Notes will be paid in priority to certain payments of principal on the 1998 Refinancing Notes and the corresponding 1998 Refinancing Certificates and, assuming Available Collections are sufficient therefor, this would result in maximum annual interest payments on the Class E Notes of $5.91 million. See "Prospectus Summary -- Overview of Priority of Payments" and "Description of Securities -- The Notes and the Guarantees -- Priority of Payments". GPA The Acquisition was structured, and Airplanes Group's activities since the Acquisition have been conducted, with the intent of establishing Airplanes Limited, Airplanes Trust, Holding Co., AeroUSA and their respective subsidiaries as legal entities distinct from GPA that would be unaffected by the bankruptcy or insolvency of GPA Group or any of its affiliates. If such entities were to be consolidated with GPA Group or otherwise affected by any bankruptcy or insolvency of the GPA Group and its affiliates, payments to Certificateholders could be materially adversely affected. See "Risk Factors -- Certain Bankruptcy Considerations". A majority of the Directors of Airplanes Limited and a majority of the Controlling Trustees of Airplanes Trust are independent of GPA, although certain significant transactions may only be approved by a unanimous vote of all the Directors of Airplanes Limited and all the Controlling Trustees of Airplanes Trust, respectively. LACK OF EXECUTIVE MANAGEMENT Airplanes Limited and Airplanes Trust have no employees or executive officers. Accordingly, the Directors and Controlling Trustees rely upon the Servicer, the Administrative Agent, the Cash Manager and other service providers for all asset servicing, executive and administrative functions pursuant to the respective service provider agreements. See "Management of Airplanes Group". THE 1998 REFINANCING CERTIFICATES The following table summarizes certain of the principal terms of the Offering. <TABLE> <CAPTION> SUBCLASS A-6 SUBCLASS A-7 SUBCLASS A-8 CLASS B CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES ---------------- -------------- -------------- -------------- <S> <C> <C> <C> <C> Aggregate Principal Amount... $850,000,000 $500,000,000 $750,000,000 $337,000,000 Expected Ratings: DCR........................ AA AA AA A Moody's.................... Aa2 Aa2 Aa2 A2 Standard & Poor's.......... AA AA AA A Interest Rate................ LIBOR+ % LIBOR+ % LIBOR+ % LIBOR+ % Initial Loan to Aircraft Value (Cumulative)(1)...... 60.2% 60.2% 60.2% 68.7% Expected Average Life........ 3.1 Years 3.0 Years 5.0 Years 6.1 Years Expected Final Payment Date....................... January 15, 2004 March 15, 2001 March 15, 2003 March 15, 2009 Final Maturity Date.......... March 15, 2019 March 15, 2019 March 15, 2019 March 15, 2019 </TABLE> - --------------- (1) "INITIAL LOAN TO AIRCRAFT VALUE" represents the initial aggregate principal amount of the 1998 Refinancing Certificates, plus the estimated outstanding aggregate principal balance at March 16, 1998 of the other subclasses of Class A Certificates, expressed as a percentage of (i) the aggregate Appraised Value of the Aircraft plus (ii) $120 million, the Liquidity Reserve Amount less the amount of Lessee Security Deposits at such date. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- The Accounts -- Liquidity Reserve Amount". RATINGS OF THE 1998 REFINANCING CERTIFICATES The ratings of the 1998 Refinancing Certificates address the likelihood of the timely payment of interest and the ultimate payment of principal and premium, if any, on the 1998 Refinancing Certificates. Payments of principal and interest on the 1998 Refinancing Notes will be payable only after any Expenses have been paid or provided for in full and only to the extent that Available Collections are sufficient therefor in accordance with the priority of payments established for the Notes. In addition, Airplanes Group's ability to pay Step-Up Interest or principal in full on the 1998 Refinancing Notes on the Expected Final Payment Date (as indicated in the table above, the "EXPECTED FINAL PAYMENT DATE") for the 1998 Refinancing Certificates (or on any other date prior to the Final Maturity Date (as indicated in the table above, the "FINAL MATURITY DATE")) has not been rated by any of the Rating Agencies. The ratings assigned to the 1998 Refinancing Certificates do not address the effect of any imposition of any withholding tax on any payments under the Leases, the 1998 Refinancing Notes, the 1998 Refinancing Guarantees, the 1998 Refinancing Certificates or otherwise. See "Risk Factors -- Tax Risks" and "Tax Considerations". A rating is not a recommendation to buy, sell or hold 1998 Refinancing Certificates inasmuch as ratings do not comment as to market price or suitability for a particular investor and may be subject to revision, suspension or withdrawal at any time by the assigning Rating Agency. In the event that a rating initially assigned to the 1998 Refinancing Certificates is subsequently lowered, suspended or withdrawn for any reason, no person or entity is obliged to provide any additional support or credit enhancement with respect to the 1998 Refinancing Certificates. THE AIRCRAFT AND LESSEES The following pie charts summarize Airplanes Group's exposure as of January 23, 1998 to various types of Aircraft, Lessees, ages of Aircraft, noise restrictions applying to Aircraft and the regions and countries in which Lessees are based. All percentages have been calculated by reference to the Appraised Value (as of January 23, 1998) of the Aircraft based on a Portfolio of 218 Aircraft (after giving effect to the delivery of three aircraft to Emery as if such deliveries had occurred prior to January 23, 1998). EXPOSURE TO INDIVIDUAL LESSEES <TABLE> <S> <C> Malev................... 2.37% Air Europa.............. 2.48% TAM..................... 2.55% Mexicana................ 2.83% Off-Lease............... 2.91% Transbrasil............. 3.02% Airtours................ 3.30% Avianca................. 3.55% Burlington Air.......... 4.14% THY..................... 4.74% Canadian Airlines....... 5.51% Aeromexico.............. 5.57% Varig................... 6.70% Other................... 50.33% </TABLE> Total Number of Lessees is 74 EXPOSURE TO TYPE OF AIRCRAFT <TABLE> <S> <C> DHC8-300CA.............. 3.09% B757-200................ 3.32% B737-200A............... 4.46% B737-500................ 6.14% MD11.................... 6.23% B767-300ER.............. 6.78% F100.................... 6.77% B737-300................ 6.41% DC8-71F................. 8.71% A320-200................ 9.67% Other................... 10.02% MD83.................... 12.99% B737-400................ 15.40% </TABLE> Total Number of Aircraft is 218 Narrow Body Aircraft: 203 (82.12%) Widebody Aircraft: 15 (16.88%) EXPOSURE TO COUNTRIES IN WHICH LESSEES ARE BASED <TABLE> <S> <C> Ireland................. 2.40% Italy................... 2.41% Sweden.................. 2.81% Off-Lease............... 2.91% Chile................... 2.92% China................... 3.56% Spain................... 4.50% UK...................... 4.65% Colombia................ 4.59% Canada.................. 6.18% Mexico.................. 8.59% Turkey.................. 8.68% USA..................... 10.99% Brazil.................. 13.94% Other................... 20.87% </TABLE> Total Number of Countries is 38 EXPOSURE OF AIRCRAFT TO NOISE RESTRICTIONS(1) <TABLE> <S> <C> Stage 2 Aircraft........ 6.56% Stage 3 Aircraft........ 93.44% </TABLE> Turboprop Aircraft are included as Stage 3 Aircraft EXPOSURE TO REGION IN WHICH LESSEES ARE BASED <TABLE> <S> <C> Other................... 2.35% Off-Lease............... 2.91% Asia and Far East....... 10.29% North America........... 17.17% Europe.................. 33.64% Latin America........... 33.64% </TABLE> Europe includes Turkey and Other includes CIS countries EXPOSURE TO YEAR OF AIRCRAFT MANUFACTURE OR SUBSEQUENT FREIGHTER CONVERSION <TABLE> <S> <C> 1987.................... 1.55% 1993.................... 3.30% 1989.................... 4.39% 1988.................... 5.03% 1990.................... 10.40% Other................... 12.86% 1991.................... 23.15% 1992.................... 39.35% </TABLE> (1) See "The Aircraft, Related Leases and Collateral -- Portfolio Information -- The Aircraft". PAYMENT FLOWS PAYMENT FLOWS GRAPH The flowchart under this heading provides a summary of payment flows within Airplanes Group. Payments under the Leases are received from the Lessees by AeroUSA, a subsidiary of Airplanes U.S. Trust and by Holding Co. and Aircraft Owning Companies and Special Lessors, all of which are subsidiaries of Airplanes Limited. The Lease payments are then used by the above named subsidiaries of Airplanes U.S. Trust and Airplanes Limited to pay interest and principal on intercompany loans to Airplanes U.S. Trust and Airplanes Limited. Airplanes U.S. Trust uses the funds received from AeroUSA to pay interest and principal on the Airplanes Trust Notes and Guarantees to Airplanes Pass Through Trust and to pay interest and principal on the Class E Notes to GPA, Inc. Airplanes Limited uses the funds it receives from the Aircraft Owning Companies and Special Lessors and Holding Co. to pay interest and principal on the Airplanes Limited Notes and Guarantees to Airplanes Pass Through Trust, to pay interest and principal on the Class E Notes to GPA Group(1) and to pay dividends on equity interest in Airplanes Limited to the Charitable Trusts. Finally, Airplanes Pass Through Trust uses the funds it receives from Airplanes U.S. Trust and Airplanes Limited to pay interest and principal on the Class A-D Certificates. - --------------- (1) Approximately $83 million (or 14%) of the aggregate principal amount of the Class E Notes are held by consolidated subsidiaries of GPA Group in which minority shareholders have interests representing approximately $23 million (or 4%) of the aggregate principal amount of the Class E Notes. See "The Parties -- GPA". OWNERSHIP STRUCTURE(1) OWNERSHIP GRAPH The flowchart under this heading sets forth the ownership structure of Airplanes Group. Airplanes Group consists of Airplanes Limited, a Jersey limited liability company and Airplanes U.S. Trust, a Delaware business trust. One-hundred percent of the equity interest in Airplanes Limited is held by the Charitable Trusts. Airplanes Limited holds 95% of the equity interest in Holding Co. GPA Group holds the remaining 5% equity interest in Holding Co. Holding Co. owns 100% of the equity interest in the Aircraft Owning Companies and Special Lessors. Together, Holding Co. and the Aircraft Owning Companies and Special Lessors own 197 Aircraft. The residual interest in Airplanes U.S. Trust is held by GPA, Inc. One-hundred percent of the equity interest in GPA, Inc. is held by GPA Group. Airplanes U.S. Trust owns 100% of the equity interest in AeroUSA and its wholly owned subsidiary(2). AeroUSA and its subsidiary together own 21 Aircraft. - --------------- (1) Airplanes Group may establish additional subsidiaries from time to time for the purpose of directly or indirectly leasing Aircraft from the Aircraft Owning Companies or any other subsidiary of Holding Co. or AeroUSA and sub-leasing them to operators where commercial or other reasons make it desirable to do so. Any additional subsidiaries will be subject to restrictions set forth in the Trust Indentures. (2) The shares of AeroUSA and its wholly-owned subsidiary are held by voting trusts with First Security Bank of Utah, National Association acting as trustee in order to satisfy regulations of the U.S. Federal Aviation Administration regarding the U.S. citizenship of the owners of U.S.-registered aircraft. Airplanes Trust holds voting trust certificates representing such respective shares. OVERVIEW OF PRIORITY OF PAYMENTS The following chart summarizes the order of priority of payments on the Notes, the Class E Notes and other obligations of Airplanes Group as described in more detail in "Description of the Securities -- The Notes and the Guarantees - -- Priority of Payments". Overview Graph Collections (i) Required Expense Amount (ii) Class A Interest and Swap Payments (iii) First Collection Account Top-Up (iv) Minimum Hedge Payment (v) Class A Minimum Principal (vi) Class B Interest (vii) Class B Minimum Principal (viii) Class C Interest (ix) Class D Interest (x) Second Collection Account Top-Up (xi) Class A Principal Adjustment Amount (xii) Class C Scheduled Principal (xiii) Class D Scheduled Principal (xiv) Modification Payments (xv) Class A Note Step-Up Interest (xvi) Class E Minimum Interest (xvii) Supplemental Hedge Payment (xviii) Class B Supplemental Principal (xix) Class A Supplemental Principal (xx) Class D Outstanding Principal (xxi) Class C Outstanding Principal (xxii) Class E Supplemental Interest (xxiii) Class B Outstanding Principal (xxiv) Class A Outstanding Principal (xxv) Subordinated Swap Payments (xxvi) Class E Accrued Unpaid Interest (xxvii) Class E Outstanding Principal THE OFFERING The 1998 Refinancing Trusts..................... Each 1998 Refinancing Trust will be formed under the laws of the State of New York pursuant to a Trust Agreement among Airplanes Limited, Airplanes Trust and Bankers Trust Company, as trustee for the holders of the Existing Certificates, and will acquire the 1998 Refinancing Notes and the 1998 Refinancing Guarantees and will issue and sell the 1998 Refinancing Certificates. The 1998 Refinancing Trusts together with the Existing Trusts are referred to as the "AIRPLANES PASS THROUGH TRUST" or the "TRUST". Bankers Trust Company will be trustee for the holders of the 1998 Refinancing Certificates (the "1998 REFINANCING TRUSTEE" and, together with the trustee for the holders of the Existing Certificates, the "TRUSTEE"). The Trust's principal office is located in care of the Trustee at 4 Albany Street, New York, New York 10006. See "The Parties -- The Trust and Trustee". Trust Assets............... The respective classes and subclasses of 1998 Refinancing Notes and 1998 Refinancing Guarantees, will represent substantially all of the assets of the corresponding 1998 Refinancing Trust (the "TRUST ASSETS"). Under the Trust Agreement, the Trustee may not transfer any of the 1998 Refinancing Notes or the 1998 Refinancing Guarantees except in connection with an exercise of remedies following a Note Event of Default. See "The Parties -- The Trust and Trustee". Payment Dates.............. Interest on the 1998 Refinancing Certificates will be payable monthly in arrears on the fifteenth day of each month, commencing April 15, 1998 (each a "PAYMENT DATE"); provided that if any Payment Date would otherwise fall on a day which is not a Business Day, the relevant Payment Date will be the first following day which is a Business Day. For the purposes of the Certificates, "BUSINESS DAY" means a day on which U.S. dollar deposits may be dealt in on the London inter-bank market and commercial banks and foreign exchange markets are open in New York, New York and London, England. See "Description of Securities -- The Certificates -- Payments and Distributions". Record Date................ The record date (the "RECORD DATE") with respect to each Payment Date will be the close of business on the day that is 15 days prior to such Payment Date, whether or not such day is a Business Day. See "Description of Securities -- The Certificates -- Payments and Distributions". Reference Date............. The reference date (the "REFERENCE DATE") with respect to each Payment Date will be the day that is two Business Days prior to such Payment Date. See "Description of Securities -- The Notes and the Guarantees -- Reference Agency Agreement". Calculation Date........... The fourth Business Day immediately preceding each Payment Date is the "CALCULATION DATE". Interest Accrual Period.... The period beginning on (and including) March 16, 1998 (the "CLOSING DATE") and ending on (but excluding) the first Payment Date and each successive period beginning on (and including) a Payment Date and ending on (but excluding) the next succeeding Payment Date is called an "INTEREST ACCRUAL PERIOD"; provided that the final Interest Accrual Period will end on but exclude the Final Maturity Date (or, if earlier with respect to any class or subclass of Notes, the date such class or subclass of Notes is paid in full). Account balances with respect to each Interest Accrual Period shall be determined by reference to the balance of funds on deposit in Accounts on the Calculation Date immediately preceding each Payment Date. See "Description of Securities -- The Certificates -- Payments and Distributions". Accrued Interest........... Any accrued interest that is not paid on a Payment Date will bear interest at the stated rate of the relevant class or subclass of the 1998 Refinancing Notes. Sources of Payments on the 1998 Refinancing Certificates and 1998 Refinancing Notes.................... The only source of payment for the 1998 Refinancing Certificates, the 1998 Refinancing Notes, the 1998 Refinancing Guarantees and the other obligations of Airplanes Group will be the payments made by the Lessees under the Leases, proceeds from dispositions, if any, of the assets of Airplanes Group, net payments, if any, under the Swap Agreements and other hedging instruments, net cash proceeds received from the sale of Refinancing Certificates and proceeds, if any, received in connection with disposals of the 1998 Refinancing Notes by the Indenture Trustees under certain circumstances. Payments on the 1998 Refinancing Notes and the 1998 Refinancing Guarantees and, correspondingly, on the 1998 Refinancing Certificates, will be made only to the extent of amounts on deposit in the Collection Account on the Calculation Date relating to each Payment Date net of Expenses (other than Permitted Accruals in respect of Modification Payments) then due and payable or reasonably anticipated to become due and payable during the next Interest Accrual Period (the "REQUIRED EXPENSE AMOUNT") and other amounts set forth in "Description of Securities -- The Notes and the Guarantees -- Priority of Payments" (the "AVAILABLE COLLECTIONS"). On each Payment Date, interest, principal and premium, if any, paid in respect of each class or subclass of the 1998 Refinancing Notes, to the extent received by the 1998 Refinancing Trustee, will be passed through to holders of the corresponding class or subclass of the 1998 Refinancing Certificates on the Record Date for such Payment Date (the "1998 REFINANCING CERTIFICATEHOLDERS" and together with the holders of the Existing Certificates, the "CERTIFICATEHOLDERS"). It is expected, based on the Assumptions, that funds to be received by the 1998 Refinancing Trustee in respect of the 1998 Refinancing Notes will be sufficient to pay interest, principal and premium, if any, on the 1998 Refinancing Certificates. See "Description of Securities -- The Certificates" and "-- The Notes and the Guarantees -- Priority of Payments", "Risk Factors -- Risks Relating to Payments on the 1998 Refinancing Certificates" and "-- Capital Markets Risks". 1998 Refinancing Guarantees................. Each of Airplanes Limited and Airplanes Trust shall unconditionally guarantee the obligations of the other under the 1998 Refinancing Notes (the "1998 REFINANCING GUARANTEES"). Payments under the 1998 Refinancing Guarantees will be subordinated in priority of payment in accordance with the priority of payments on each class or subclass of the 1998 Refinancing Notes. The guarantees on the Existing Notes are referred to herein as the "EXISTING GUARANTEES". The Existing Guarantees, together with the 1998 Refinancing Guarantees, are referred to herein as the "GUARANTEES". Use of Proceeds............ The purpose of the Offering is to refinance the Subclass A-1 Notes, Subclass A-2 Notes, Subclass A-3 Notes and Class B Notes of Airplanes Group. All of the proceeds from the offering will be used for such purpose. See "Use of Proceeds". Ratings of the 1998 Refinancing Certificates... It is a condition to the issuance of the 1998 Refinancing Certificates that each class or subclass of the 1998 Refinancing Certificates will receive ratings from Duff & Phelps Credit Rating Co. ("DCR"), Moody's Investors Service, Inc. ("MOODY'S") and Standard & Poor's Ratings Group, a division of The McGraw-Hill Companies, Inc. ("STANDARD & POOR'S" and, together with DCR and Moody's, the "RATING AGENCIES") as set forth under "Description of the Securities -- The Certificates -- Ratings". Listing.................... Application has been made to list the 1998 Refinancing Certificates on the Luxembourg Stock Exchange. See "Additional Information". Denominations.............. The 1998 Refinancing Certificates will be available for purchase in minimum denominations of $100,000 and integral multiples of $1,000 in excess thereof; provided that a single Certificate of each class or subclass may be issued in a denomination of less than $100,000. See "Description of the Securities -- The Certificates". Form....................... It is expected that the 1998 Refinancing Certificates will be issued in fully registered form only in the name of Cede & Co. as the nominee of DTC. No person acquiring an interest in the 1998 Refinancing Certificates will be entitled to receive a Definitive Certificate representing such person's interest in the corresponding 1998 Refinancing Trust, except in the event that Definitive Certificates are issued under the limited circumstances described herein. 1998 Refinancing Certificateholders will hold their 1998 Refinancing Certificates through DTC (in the United States) or Cedel Bank or Euroclear (in Europe), if they are participants in such systems, or indirectly through organizations which are participants in such systems. See "Book-Entry, Registration, Global Clearance and Settlement". Airplanes Limited.......... Airplanes Limited is a special purpose limited liability company formed under the laws of Jersey with its registered and principal office located at 22 Grenville Street, St. Helier, Jersey, JE4 8PX, Channel Islands (telephone: 011-44-1534-609-000) ("AIRPLANES LIMITED"). See "The Parties -- Airplanes Limited" and "Management of Airplanes Group". Airplanes Trust............ Airplanes U.S. Trust is a Delaware business trust ("AIRPLANES TRUST"), organized pursuant to the Airplanes Trust Agreement (the "AIRPLANES TRUST AGREEMENT") among GPA, Inc., a wholly owned subsidiary of GPA Group ("GPA, INC."), as settlor (the "SETTLOR"), Wilmington Trust Company, as trustee (the "DELAWARE TRUSTEE") and the Controlling Trustees thereunder. Airplanes Trust's principal office is located in care of the Delaware Trustee at 1100 North Market Street, Rodney Square North, Wilmington, Delaware 19890-0001 (telephone: 1-302-651-1000). See "The Parties -- Airplanes Trust" and "Management of Airplanes Group". Airplanes Group............ Airplanes Limited and Airplanes Trust and, unless the context otherwise requires, the subsidiaries of each of them on a combined basis. See "Prospectus Summary -- The Portfolio". Airplanes Limited 1998 Refinancing Notes... Airplanes Limited will issue the 1998 Refinancing Notes (the "AIRPLANES LIMITED 1998 REFINANCING NOTES") pursuant to a supplement to the trust indenture dated March 28, 1996 (as amended or supplemented, the "AIRPLANES LIMITED INDENTURE"), among Airplanes Limited, Airplanes Trust and Bankers Trust Company, as Airplanes Limited Indenture Trustee (the "AIRPLANES LIMITED INDENTURE TRUSTEE"). The Airplanes Limited 1998 Refinancing Notes, together with the Existing Notes issued by Airplanes Limited, are referred to as the "AIRPLANES LIMITED NOTES". See "Description of Securities -- The Notes and the Guarantees". Airplanes Trust 1998 Refinancing Notes... Airplanes Trust will issue the 1998 Refinancing Notes (the "AIRPLANES TRUST 1998 REFINANCING NOTES") pursuant to a supplement to the trust indenture dated March 28, 1996 (as amended or supplemented, the "AIRPLANES TRUST INDENTURE" and, together with the Airplanes Limited Indenture, the "TRUST INDENTURES"), among Airplanes Limited, Airplanes Trust and Bankers Trust Company, as Airplanes Trust Indenture Trustee (the "AIRPLANES TRUST INDENTURE TRUSTEE", and together with the Airplanes Limited Indenture Trustee, the "INDENTURE TRUSTEES"). The Airplanes Trust 1998 Refinancing Notes, together with the Existing Notes issued by Airplanes Trust, are referred to as the "AIRPLANES TRUST NOTES". See "Description of Securities -- The Notes and the Guarantees". 1998 Refinancing Notes..... The 1998 Refinancing Notes shall comprise the Airplanes Limited 1998 Refinancing Notes and the Airplanes Trust 1998 Refinancing Notes. The 1998 Refinancing Notes are expected to be divided into four classes or subclasses, the Subclass A-6 Notes, the Subclass A-7 Notes, the Subclass A-8 Notes and the Class B Notes. Each class or subclass of the 1998 Refinancing Notes will be entitled to receive interest from their date of delivery at a rate per annum equal to one month LIBOR on the applicable Reference Date plus the applicable margin set forth on the cover page of this Prospectus. The interest rates on each class or subclass of the 1998 Refinancing Notes will be determined for the initial Interest Accrual Period two Business Days prior to the scheduled delivery thereof. The 1998 Refinancing Notes and the other subclasses of Class A Notes are referred to collectively herein as the "FLOATING RATE NOTES" and the 1998 Refinancing Certificates and the other subclasses of Class A Certificates are referred to collectively herein as the "FLOATING RATE CERTIFICATES". The Existing Class C Notes and Class D Notes are collectively referred to herein as the "FIXED RATE NOTES" and the Existing Class C Certificates and Class D Certificates are collectively referred to herein as the "FIXED RATE CERTIFICATES". See "Description of Securities -- The Notes and the Guarantees". Status of 1998 Refinancing Notes.................... The 1998 Refinancing Notes will constitute direct obligations of Airplanes Limited and Airplanes Trust, as the case may be. None of the Trustee, the Indenture Trustees or the Certificateholders has or will have any security interest, mortgage, charge or other similar interest in any of the Aircraft or the Leases. The Security Trustee has been granted a security interest in one-third of the ordinary share capital of Holding Co. and its subsidiaries and in Airplanes Group's interests in the cash in the Accounts. In addition, the Accounts (except for certain Rental Accounts) are held in the name of the Security Trustee. See "Description of Securities -- The Notes and the Guarantees". Airplanes Group's ability to incur indebtedness is significantly constrained. However, Airplanes Group will have the ability, in certain circumstances, to refinance certain classes or subclasses of Certificates through the issuance and sale by separate trusts of new certificates (the "REFINANCING CERTIFICATES"). Such Refinancing Certificates will rank equally with the classes or subclasses of refinanced Certificates and will never rank higher in priority than the Class A Certificates. See "Description of Securities -- The Notes and the Guarantees -- Trust Indenture Covenants -- Limitations on Indebtedness". Payments on the 1998 Refinancing Notes... Interest, principal and premium, if any, on the 1998 Refinancing Notes will be paid only out of Available Collections with respect to any Interest Accrual Period received on or prior to the Calculation Date relating to such Interest Accrual Period. On each Payment Date, principal will be payable in respect of the 1998 Refinancing Notes and the Existing Notes to the extent of Available Collections, in an amount up to the Principal Distribution Amount, if any, on such Payment Date but only to the extent that funds are available for such purpose after having made the payments ranking in priority thereto. The expected principal payments on the 1998 Refinancing Notes have been determined on the basis of the Assumptions, which include, among other things, assumptions regarding the timing and amount of payments under the Existing Leases, assumptions regarding the terms of and payments under Future Leases and assumptions regarding the ability of the Trust to refinance maturing Certificates, including Subclass A-7 Certificates and Subclass A-8 Certificates, through the issuance and sale of Refinancing Certificates. On the basis of the Assumptions, the Subclass A-7 Certificates and Subclass A-8 Certificates are not expected to receive any payments of Principal Distribution Amount until they are repaid in full with an issue of Refinancing Certificates on or prior to their respective Expected Final Payment Dates on March 15, 2001, and March 15, 2003. Also on the basis of the Assumptions and following repayment in full of the Subclass A-5 Certificates, the Subclass A-6 Certificates are expected to receive, to the extent there are Available Collections sufficient therefor, all Principal Distribution Amounts payable with respect to the Class A Certificates until the Subclass A-6 Certificates have been repaid in full. The Outstanding Principal Balance of the Subclass A-5 Certificates was approximately $108 million at February 17, 1998. The Expected Final Payment Date of the Subclass A-5 Certificates is April 15, 1999, but, based on the payment performance of the Subclass A-5 Certificates to date, the Subclass A-5 Certificates are expected to be paid in full by August 17, 1998 (and by May 15, 1998 if three additional Aircraft, the sale of which has been agreed in principle, are sold to Emery prior to May 10, 1998). The Expected Final Payment Date of the Subclass A-6 Certificates is January 15, 2004. It is highly likely that the Assumptions will not correspond to actual experience and as a result the actual principal payments received are likely to vary from the expected principal payments in respect of such class or subclass of Certificates, and the actual maturity of any class or subclass of Certificates is likely to occur earlier or later than its Expected Final Payment Date. See "Description of Securities -- The Notes and the Guarantees -- Priority of Payments", "Risk Factors -- Risks Relating to Payments on the 1998 Refinancing Certificates" and "Risk Factors -- Capital Markets Risks". Step-Up Interest........... If any of the Subclass A-4, A-7 or A-8 Notes is not repaid on or before the Expected Final Payment Date for such subclass, such subclass of Notes will accrue interest thereafter at a rate equal to the stated interest rate therefor, plus 0.50% per annum (the "STEP-UP INTEREST"). For any period in which Step-Up Interest is accruing on any subclass of the Class A Notes, Step-Up Interest will also accrue on the Subclass A-5 Notes. Payments of Step-Up Interest will be subordinated to certain other obligations of Airplanes Group, including the payment of the Principal Adjustment Amount to the Class A Notes and the Minimum Principal Payment Amount of the Class B Notes and payment of the Scheduled Principal Payment Amount to the Class C Notes and Class D Notes and will not be rated by the Rating Agencies. See "Description of Securities -- The Notes and the Guarantees -- Interest". Priority of Payments....... On each Payment Date, distributions from Available Collections will be made in accordance with the priority of payments set forth in "Description of Securities -- The Notes and the Guarantees -- Priority of Payments". Payments on the Notes will be subordinated to all fees, costs, or expenses incurred by any Airplanes Group member in the course of the business activities permitted to be conducted by it under the Trust Indentures (the "EXPENSES") and (other than interest payments on the Class A Notes with respect to which such amounts rank equally) certain amounts due to the parties providing interest rate swaps and other hedging instruments (the "SWAP PROVIDERS"). Furthermore, payments on the Class D Notes and Class D Certificates will be effectively subordinated in priority of payment to payments on all other classes of Notes and Certificates, payments on the Class C Notes and Class C Certificates will be effectively subordinated in priority of payment to payments on the Class A and Class B Notes and Class A and Class B Certificates and payments on the Class B Notes and Class B Certificates will be effectively subordinated in priority of payment to payments on the Class A Notes and Class A Certificates. Redemption of the 1998 Refinancing Notes... Subject to certain conditions described in "Description of Securities -- The Notes and the Guarantees -- Redemption", the 1998 Refinancing Notes may be redeemed on any Payment Date, in whole or in part, at the Redemption Price, plus accrued but unpaid interest. Within each class or subclass of the 1998 Refinancing Notes, the Redemption Price will be applied pro rata among all such Notes. The Redemption Price of the 1998 Refinancing Notes redeemed (1) with the application of Available Collections, will equal the Outstanding Principal Balance of the amount of such class or subclass of Notes being redeemed, without premium and (2) with the application of funds other than Available Collections (including proceeds from Refinancing Certificates and proceeds from third parties), will equal the product of the applicable Redemption Premium set out below and the Outstanding Principal Balance of the amount of such class or subclass of Notes being redeemed. <TABLE> <CAPTION> REDEMPTION DATE REDEMPTION PREMIUM -------------------------- ---------------------------------------- SUBCLASS SUBCLASS SUBCLASS A-6 A-7 A-8 CLASS B NOTES NOTES NOTES NOTES -------- -------- -------- ------- <S> <C> <C> <C> <C> After the Closing Date.... 101.50% 101.00% 101.50% 102.00% On or after March 15, 1999.................... 101.00% 100.50% 101.00% 101.50% On or after March 15, 2000.................... 100.50% 100.00% 100.50% 101.00% On or after March 15, 2001.................... 100.00% 100.00% 100.25% 100.50% On or after March 15, 2002.................... 100.00% -- 100.00% 100.25% On or after March 15, 2003.................... 100.00% -- -- 100.00% </TABLE> In addition, each class or subclass of the 1998 Refinancing Notes may be redeemed on any Payment Date, in whole, but not in part, without premium, upon the occurrence of certain adverse tax events affecting Airplanes Group, at a Redemption Price equal to the Outstanding Principal Balance thereof, plus accrued and unpaid interest thereon. See "Description of the Securities -- The Notes and the Guarantees -- Redemption". Capital Stock of Airplanes Limited.................. Airplanes Limited has an authorized share capital of 10,000 ordinary shares, $1 par value per share ("CAPITAL STOCK"), of which 30 shares have been issued. The issued Capital Stock of Airplanes Limited is held by Juris Limited and Lively Limited, each a Jersey corporation, (together, the "NOMINEES"), for the benefit of certain charitable trusts established under the laws of Jersey (collectively, the "CHARITABLE TRUSTS"). See "The Parties -- Airplanes Limited". Airplanes Trust Residual Interest................. GPA, Inc., a wholly owned subsidiary of GPA Group, owns all of the residual ownership interest in Airplanes Trust (the "AIRPLANES TRUST RESIDUAL INTEREST"). Upon repayment in full of the Airplanes Trust Notes, the Airplanes Trust Class E Notes and the Airplanes Trust Refinancing Notes, if any, the AeroUSA Shares will revert to GPA through its ownership of the Airplanes Trust Residual Interest. See "The Parties -- Airplanes Trust". GPA Group.................. GPA Group is a public limited company incorporated in Ireland. Wholly owned subsidiaries of GPA Group act as the Administrative Agent and Cash Manager. See "The Parties -- GPA" and "Management of Airplanes Group -- Corporate Management." Appraised Value............ As described herein, Airplanes Group has obtained from Aircraft Information Services, Inc., BK Associates, Inc. and Airclaims Limited (the "APPRAISERS") three desktop appraisals (the "APPRAISALS") of the value of each of the Aircraft as of January 23, 1998. The Appraisers ascertain the value of each Aircraft on the basis of an open, unrestricted, stable market environment with a reasonable balance of supply and demand, and with full consideration of the Aircraft's "highest and best use", presuming an arm's-length, cash transaction between willing, able and knowledgeable parties, acting prudently, with an absence of duress and with a reasonable period of time available for marketing, adjusted to account for the maintenance status of each Aircraft (with certain assumptions as to use since the last reported status), (each value so ascertained for the Aircraft, a "BASE VALUE"). The average of the Base Values as of January 23, 1998 for each of the Aircraft in the Portfolio as of January 23, 1998 (with the exception of 9 Aircraft subject to finance leases as of January 23, 1998 which have been included in the computation of the Appraised Value of the Portfolio at Airplanes Group's net book value) is referred to herein as the "APPRAISED VALUE". (Finance leases are fixed term leases pursuant to which Airplanes Group retains title to the aircraft but substantially all of the risks and rewards associated with ownership, including the residual value of the aircraft, are transferred to the Lessee. The payment terms of a finance lease are structured on the basis that the lessee has economic ownership of the aircraft and makes a series of "rental" payments designed to pay for substantially all of the cost of the aircraft (the principal element) and the cost of financing the aircraft price (the interest element).) None of the Appraisals attribute any value to the relevant Lease, the Maintenance Reserves, cash and certain commitment fees that serve as security (collectively, the "SECURITY DEPOSITS") or certain letters of credit, third-party guarantees or bank guarantees or the cash equivalent thereof required under the relevant Leases (the "RELATED COLLATERAL"), if any, related to the particular Aircraft. The aggregate Appraised Value of the Portfolio at January 23, 1998 was approximately $3,813 million based on a portfolio of 218 Aircraft ($3,859 million based on a portfolio of 221 Aircraft, which includes the three Aircraft with respect to which a contract for sale was signed on December 30, 1997 and which are scheduled to be delivered to Emery by March 20, 1998). An appraisal is only an estimate of value and should not be relied upon as a measure of realizable value. The proceeds received upon a sale of any Aircraft are likely to be less than the Appraised Value thereof. See "Risk Factors -- Aircraft Risks -- Risk of Decline in Aircraft Values" and "The Aircraft, Related Leases and Collateral -- Appraisers' Report." Leases..................... At January 23, 1998, the average remaining term, weighted by Appraised Value (without giving effect to Purchase Options, early termination options or extension options) of the Existing Leases was approximately 32 months. All of the Existing Leases will expire under their terms prior to the last Final Maturity Date of the Certificates and, therefore, Airplanes Group must re-lease substantially all of the Aircraft one or more times prior to the last Final Maturity Date except to the extent that Aircraft are sold prior to such Final Maturity Date. Each Existing Lease is either (a) an operating lease for a fixed term pursuant to which Airplanes Group will retain title to the Aircraft and substantially all of the risks and rewards associated with ownership, including the residual value of the Aircraft (although, as of January 23, 1998, 141 of the Existing Leases contained, and a certain portion of the Future Leases may contain, Purchase Options, early termination options or extension options), or (b) a finance lease for a fixed term, pursuant to which Airplanes Group retains title to the Aircraft but substantially all of the risks and rewards associated with ownership, including the residual value of the Aircraft, are transferred to the Lessee. Only 9 of the Existing Leases (or 1.47% as a percentage of the Appraised Value of the Portfolio) were classified as finance leases as of January 23, 1998. See "Risk Factors -- Risks Relating to the Leases -- Inability to Re-Lease Aircraft on Favorable Terms" and "The Aircraft, Related Leases and Collateral -- The Leases." Lessees.................... As of January 23, 1998, there were 74 lessees (together with the lessees in respect of Future Leases, the "LESSEES") of the Aircraft pursuant to the Existing Leases in 38 different countries. Many of the Lessees are in a relatively weak financial condition and some face serious financial difficulties. At February 19, 1998, 29 Lessees and three former lessees were in arrears with respect to Rental Payments for periods greater than 30 days, amounting to $12.7 million (of which $2.0 million related to the three former lessees). Of the $12.7 million total, $2.9 million was in arrears for a period greater than 30 days, $1.4 million was in arrears for a period greater than 60 days and $8.4 million was in arrears for a period greater than 90 days. As of February 19, 1998, four additional Lessees were being allowed deferrals of Rental Payments, maintenance and miscellaneous payments totaling approximately $12.6 million (of which $0.1 million was outstanding for greater than 30 days, $0.1 million was outstanding for greater than 60 days and $12.4 million was outstanding for greater than 90 days). These Lessees are being allowed deferrals of rentals, maintenance and miscellaneous payments for periods of up to 70 months. See "Risk Factors -- Risk of Lessee Default. Rental Accounts............ The "RENTAL ACCOUNTS" are the accounts into which payments made by Lessees under the Leases are paid. The balance on deposit in each Rental Account is transferred within one Business Day of receipt thereof into the Collection Account, other than certain limited amounts required to be left on deposit for local legal or regulatory reasons. See "Description of Securities -- The Accounts". Lessee Funded Account...... The "LESSEE FUNDED ACCOUNT" is the account (or accounts) into which amounts received from Lessees in respect of Maintenance Reserves and Security Deposits that are required to be segregated from Airplanes Group's other funds ("SEGREGATED FUNDS") are deposited and held. Funds on deposit in the Lessee Funded Account are used to make certain maintenance and security deposit related payments to Lessees or may be applied against maintenance related payments otherwise required to be made by the Lessee during the term of the related Lease or upon expiration thereof or repossession of the Aircraft. In certain circumstances, on expiration of a Lease, surplus funds may be credited from the Lessee Funded Account to the Collection Account. Amounts on deposit in the Lessee Funded Account are not available to pay interest, principal or premium, if any, on the Certificates. See "Description of Securities -- The Accounts". Collection Account......... The "COLLECTION ACCOUNT" is the account into which all Collections received by or on behalf of Airplanes Group in the course of conducting its business are deposited. Except as noted below, the Collection Account is maintained at a balance at least equal to the Liquidity Reserve Amount. The Liquidity Reserve Amount is currently approximately $174 million and is intended to provide, to the extent that payments required in respect of the Leases are insufficient, for (i) Airplanes Group's maintenance obligations, (ii) Airplanes Group's obligation to repay Lessee Security Deposits and (iii) certain other contingencies in respect of the Aircraft (the "LIQUIDITY RESERVE AMOUNT"). The balance of funds in the Collection Account may fall below the Liquidity Reserve Amount at any time and Airplanes Group may continue to make certain payments required on the Notes in the circumstances described under "Description of Securities -- The Accounts -- Liquidity Reserve Amount". See "Description of Securities -- The Accounts". Expense Account............ The "EXPENSE ACCOUNT" is the account into which the Cash Manager deposits the Required Expense Amount (other than certain Expenses transferred directly to payees from the Collection Account) on each Payment Date. See "Description of Securities -- The Accounts". Servicer................... GECAS provides certain services with respect to the aircraft owned at any time by Airplanes Group and the related Leases in accordance with the terms of the Servicing Agreement. Airplanes Limited, AeroUSA and Holding Co. are jointly and severally obligated to pay the Servicer an annual asset-based servicing fee equal to approximately 0.495%, adjusted annually for inflation, of the agreed book value of each Aircraft being serviced by the Servicer. Such fees amounted to $22.7 million in the year ended March 31, 1997. The Servicer is also entitled to certain additional fees based, in part, on the annual cash flow generated by the Leases in excess of certain cash flow targets and on sales of Aircraft at the direction of the Airplanes Group, which fees are subject to an aggregate annual minimum in the amount of approximately $1.5 million. In the year ended March 31, 1997, the Servicer was paid $1.5 million in such additional fees. Pursuant to the Servicing Agreement, the Servicer provides certain services to Airplanes Group, including, among others, collecting Rental Payments and other receivables due under the Leases, monitoring the performance of maintenance and insurance obligations of Lessees, enforcing payment by Lessees under the Leases and remarketing, including re-leasing Aircraft on lease expiration or repossession from Lessees. The initial term of the Servicing Agreement expires on the earlier of (i) March 28, 2014 (which is prior to the Final Maturity Date of the 1998 Refinancing Certificates) or (ii) payment in full of all amounts Outstanding to be paid under the Notes. Airplanes Group and the Servicer each have the ability to terminate the Servicing Agreement prior to the expiration of its initial term under certain circumstances described under "Management of Airplanes Group -- The Servicer -- Term and Termination" and "-- Tax Status". The Servicer is not required pursuant to the terms of the Servicing Agreement to obtain rental rates designed to pay any amounts due and owing under the Notes and no assurance can be given that the rental rates of Leases or Rental Payments with respect thereto will be sufficient to pay interest and principal on the Notes in accordance with their terms. See "Management of Airplanes Group -- The Servicer." Neither the 1998 Refinancing Certificates nor the 1998 Refinancing Notes are obligations of, or guaranteed by, or offered for sale by, GE Capital, GECAS or any of their affiliates. Cash Manager............... GPA Cash Manager Limited, a wholly owned subsidiary of GPA Group, ("GPA CASH MANAGER") acts as Cash Manager (the "CASH MANAGER") pursuant to a Cash Management Agreement dated as of March 28, 1996, among Airplanes Limited, Airplanes Trust, the Cash Manager, GPA Group, the Indenture Trustees and the Security Trustee (the "CASH MANAGEMENT AGREEMENT"). The Cash Management Agreement, the Trust Indentures and the Security Trust Agreement, taken together, establish the rights of the Noteholders as among themselves with respect to the Aircraft owned by Airplanes Group, the related Leases and all proceeds therefrom, and govern the distribution of Available Collections to pay amounts due and owing under the Notes. The Cash Management Agreement and Trust Indentures taken together further provide for the creation and operation of the Accounts. See "Management of Airplanes Group -- Corporate Management". In the year ended March 31, 1997, the Cash Manager was paid $0.9 million in fees. Neither the 1998 Refinancing Certificates nor the 1998 Refinancing Notes are obligations of, or guaranteed or offered for sale by, the Cash Manager. Administrative Agent....... GPA Financial Services (Ireland) Limited, a wholly owned subsidiary of GPA Group ("GPA FINANCIAL"), acts as Administrative Agent (the "ADMINISTRATIVE AGENT") pursuant to an administrative agency agreement, dated as of March 28, 1996 (the "ADMINISTRATIVE AGENCY AGREEMENT"), among Airplanes Limited, Airplanes Trust, Holding Co., AeroUSA, the Administrative Agent and GPA Group. The Administrative Agent provides certain liability management, interest rate risk management, corporate administrative and accounting services to Airplanes Group and also provides certain financial modeling and computational services to Airplanes Group, including providing cash flow projections and forecasts to assist the Directors and the Controlling Trustees in making leasing, selling, refinancing, hedging and certain other decisions. See "Management of Airplanes Group -- Corporate Management". In addition, it monitors the performance of the Servicer (including the Servicer's compliance with the Servicing Agreement) and reports on such performance to Airplanes Group. In the year ended March 31, 1997, fees paid to the Administrative Agent were $7.6 million. Neither the 1998 Refinancing Certificates nor the 1998 Refinancing Notes are obligations of, guaranteed by or offered for sale by the Administrative Agent. Future Aircraft Dispositions............... Airplanes Group may sell Aircraft (i) pursuant to the exercise of Purchase Options held by Lessees, (ii) within Airplanes Limited and its subsidiaries and within Airplanes Trust and its subsidiaries, without limitation, and within the Airplanes Group, provided that such sale does not materially adversely affect the Certificateholders and (iii) in other circumstances, provided that any such sale does not cause a Note Event of Default under the Trust Indentures and certain other conditions are met. In addition, Airplanes Group may sell Aircraft at prices below the specified target prices in certain limited circumstances which may, in turn, affect the amount and timing of principal payments to Certificateholders and, in turn, affect the average life of the Certificates. See "Description of Securities -- The Notes and the Guarantees -- Trust Indenture Covenants", "-- Redemption" and "-- Defeasance". Operating Covenants........ Airplanes Group may not enter into any Future Lease (other than a renewal, extension or restructuring of any Lease) unless after entering into such Future Lease, Airplanes Group is in compliance with certain criteria in respect of, among others, geographic and other concentration limits (the "RE-LEASING GUIDELINES"); provided that Airplanes Group may enter into a Future Lease not meeting such criteria if the Rating Agencies shall have confirmed in writing that entering into such Lease will not result in the lowering or withdrawal by them of their current ratings on any class of the Certificates then outstanding. See "Description of Securities -- The Notes and the Guarantees -- Operating Covenants", "-- Concentration Limits", "-- Compliance with Law, Maintenance of Permits", "-- Appraisal of Portfolio", "-- Maintenance of Assets", "-- Notification of Indenture Trustee, Cash Manager and Administrative Agent", "-- Leases", "-- Opinions", "-- Insurance" and "-- Indemnity". Certain Taxation Matters... In the opinion of Davis Polk & Wardwell, United States Federal Tax Counsel to Airplanes Limited and Airplanes Trust, each of the 1998 Refinancing Trusts will be classified as a "grantor trust" for United States Federal income tax purposes and not as an association (or publicly traded partnership) taxable as a corporation and accordingly, each 1998 Refinancing Certificateholder will be treated as if it owned directly the portion of each 1998 Refinancing Note of Airplanes Limited and each 1998 Refinancing Note of Airplanes Trust represented by such 1998 Refinancing Certificate. Airplanes Limited will receive an opinion of Mourant du Feu & Jeune, Jersey Tax Counsel, that, among other things, payments by Airplanes Limited on the Airplanes Limited 1998 Refinancing Notes will not be subject to Jersey withholding tax. In addition, Airplanes Limited will receive an opinion of McCann FitzGerald, Irish Tax Counsel, that, among other things, payments by Airplanes Limited on the Airplanes Limited 1998 Refinancing Notes will not be subject to Irish withholding tax on the basis described in "Tax Considerations -- Irish Tax Considerations". Neither Airplanes Limited nor Airplanes Trust, nor any subsidiary of either of them, will be obliged to make any additional payments with respect to any class or subclass of the 1998 Refinancing Notes (or the Intercompany Loans), and thus no payments will be passed through to a corresponding class or subclass of the 1998 Refinancing Certificateholders, in respect of any withholding or deduction required to be made under applicable law from payments on any class or subclass of the 1998 Refinancing Notes or the Intercompany Loans. If any withholding or deduction is required with respect to any class or subclass of the 1998 Refinancing Notes and such class or subclass of the 1998 Refinancing Notes is not redeemed, the net amount of interest received by the 1998 Refinancing Trustee and passed through to such 1998 Refinancing Certificateholders and all entities acquiring a beneficial interest in such class or subclass of the 1998 Refinancing Certificates will be reduced by the amount of such withholding or deduction. See "Tax Considerations". Certain favorable Irish tax benefits currently existing in favor of Airplanes Group could be lost if the Servicer does not maintain certain employment levels in Shannon, Ireland. The Servicer has not agreed to, and there can be no assurances that the Servicer will, maintain any such employment levels at any time in the future. See "Risk Factors -- Risks Relating to Airplanes Group and Certain Third Parties -- Inability of Certificateholders or Trustee to Participate in Management", "-- Tax Risks -- Loss of Certain Irish Tax Benefits" and "Management of Airplanes Group -- The Servicer -- Tax Status". ERISA Considerations....... The 1998 Refinancing Certificates are eligible for purchase under certain circumstances by an employee benefit plan or other plan subject to Title I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and/or Section 4975 of the United States Internal Revenue Code of 1986, as amended (the "CODE"). See "ERISA Considerations". Any such plan should consider whether an investment in the 1998 Refinancing Certificates could result in a prohibited transaction or cause the assets of each 1998 Refinancing Trust to be plan assets.
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the detailed information appearing elsewhere in this Prospectus. Capitalized terms used in this Prospectus Summary without definition have the meanings assigned in the text of this Prospectus. An Index referencing defined terms is attached as Appendix 1 hereto. Investors should thoroughly consider this Prospectus in its entirety, including the information set forth herein under "Risk Factors", prior to an investment in the 1998 Refinancing Certificates. OVERVIEW The separate 1998 Refinancing Trusts will issue Subclass A-6 Certificates (the "SUBCLASS A-6 CERTIFICATES"), Subclass A-7 Certificates (the "SUBCLASS A-7 CERTIFICATES"), Subclass A-8 Certificates (the "SUBCLASS A-8 CERTIFICATES") or Class B Certificates (the "CLASS B CERTIFICATES"). Any Subclass A-6 Certificate that is issued will represent a fractional undivided interest in a pair of corresponding Subclass A-6 Notes issued by Airplanes Limited and Airplanes Trust (together with, unless the context otherwise requires, their subsidiaries, "AIRPLANES GROUP") and held by the "1998 REFINANCING TRUST A-6". Any Subclass A-7 Certificate that is issued will represent a fractional undivided interest in a pair of corresponding Subclass A-7 Notes issued by Airplanes Limited and Airplanes Trust and held by the "1998 REFINANCING TRUST A-7". Any Subclass A-8 Certificate that is issued will represent a fractional undivided interest in a pair of corresponding Subclass A-8 Notes issued by Airplanes Limited and Airplanes Trust and held by the "1998 REFINANCING TRUST A-8". Any Class B Certificate that is issued will represent a fractional undivided interest in a pair of corresponding Class B Notes issued by Airplanes Limited and Airplanes Trust and held by the "1998 REFINANCING TRUST B". The proceeds of the underwritten offering of the 1998 Refinancing Certificates (the "OFFERING") will be used to refinance Airplanes Limited's and Airplanes Trust's Subclass A-1 Notes, Subclass A-2 Notes, Subclass A-3 Notes and Class B Notes. Airplanes Limited and Airplanes Trust have each fully and unconditionally guaranteed the other's obligations under their respective 1998 Refinancing Notes. AIRPLANES GROUP'S CAPITAL STRUCTURE AND PORTFOLIO Airplanes Limited and Airplanes Trust are special purpose vehicles that were established to acquire 229 aircraft from GPA in March 1996 for the purpose of refinancing substantially all of GPA's secured debt obligations at the time and enhancing GPA's ability to meet its remaining debt obligations. Airplanes Limited and Airplanes Trust funded this acquisition by causing Airplanes Pass Through Trust to issue $4,048 million of Pass Through Certificates (collectively, the "EXISTING CERTIFICATES" and, together with the 1998 Refinancing Certificates, the "CERTIFICATES") in four classes -- Class A, Class B, Class C and Class D. The Class A Certificates were further subdivided into five separate sub-classes. Each class and subclass of the Certificates represents fractional undivided beneficial interests in two corresponding classes or subclasses of notes (collectively, the "EXISTING NOTES" and, together with the 1998 Refinancing Notes, the "NOTES") issued by Airplanes Limited and Airplanes U.S. Trust. Airplanes Group received the net proceeds from an underwritten offering of the Existing Certificates (the "1996 OFFERING") in exchange for the Existing Notes and used such net proceeds, together with approximately $604 million in aggregate principal amount of a fifth class of Airplanes Group notes (the "CLASS E NOTES"), to pay the purchase price for the acquisition of certain subsidiaries of GPA Group which owned the 229 aircraft (the "ACQUISITION") and to refinance approximately $2.9 billion of secured indebtedness and other obligations of GPA owed under certain bank facilities. GPA is the holder of a majority in aggregate principal amount of the Class E Notes. Minimum interest at the rate of 1% and, in more limited circumstances, supplemental interest at the rate of 10%, will be paid on the outstanding principal balance of the Class E Notes only to the extent that Airplanes Group has sufficient cashflow after paying or providing for each of the items ranking prior to such payment under the priority of payments. GPA as the holder of the Class E Notes is effectively entitled to the residual value of the Aircraft after the repayment of the Class A, Class B, Class C and Class D Notes. See "Prospectus Summary -- Overview of Priority of Payments" and "Description of Securities -- The Notes and the Guarantees -- Priority of Payments" and "-- The Class E Notes". [This page intentionally left blank] Through the payment date in February 1998, GPA and the other holders of the Class E Notes had received aggregate payments of minimum interest on the Class E Notes of approximately $9.15 million. No payment of supplemental interest on the Class E Notes has been made to date. Based on the assumptions set forth under "Description of Securities -- The Certificates -- Assumptions" (the "ASSUMPTIONS"), the present value of the aggregate future payments of minimum interest on the Class E Notes to be paid from March 15, 1998 through October 15, 2012 (the payment date at which all amounts outstanding under the Notes are assumed to have been repaid) is approximately $35 million (using a discount rate of 15%). Based on the Assumptions, no supplemental interest on the Class E Notes is assumed to have been paid prior to such date. Based on the Assumptions, the Expected Portfolio Value (as defined under "Description of Securities -- The Notes and the Guarantees -- Principal Amortization of Floating Rate Notes") of the Aircraft at October 15, 2012 will equal approximately $950 million. Investors should not rely on the above amounts as an indication of the fair value of the Class E Notes. Moreover, as described under "Description of the Securities -- The Certificates -- Assumptions", it is highly likely that actual experience will vary from the Assumptions. Accordingly, the actual amount of future interest payments on the Class E Notes and the Expected Portfolio Value of the Aircraft will likely differ from the amounts set forth above. Of the $598 million of Subclass A-5 Notes and the $375 million of Class B Notes originally issued in March 1996, $490 million and $37 million, respectively, had been repaid as of February 17, 1998 in accordance with the terms of such Notes. Of the $604 million of Class E Notes issued, approximately $13 million was subsequently canceled pursuant to the purchase price adjustment provisions of the agreements pursuant to which the aircraft-owning subsidiaries of GPA Group were sold to Airplanes Group. Of the 229 aircraft and related leases acquired from GPA on March 28, 1996, Airplanes Limited indirectly acquired 206 of the aircraft and related leases through the acquisition of 95% of the capital stock of Airplanes Holdings Limited ("HOLDING CO.") and Airplanes Trust indirectly acquired 23 aircraft through the acquisition of the capital stock of AeroUSA, Inc. ("AEROUSA"), a Connecticut corporation. During the fiscal year ending March 31, 1997, in order to facilitate the structuring of certain leasing transactions, two aircraft were transferred from the indirect ownership of Airplanes Limited to AeroUSA. At January 23, 1998, ten of the original 229 aircraft had been sold, one had suffered a constructive total loss (a "constructive total loss" occurs when an aircraft is damaged and the cost of repair exceeds the value of the aircraft), and 212 of the remaining 218 owned aircraft (the "AIRCRAFT") in the portfolio of Aircraft owned by Airplanes Group (the "PORTFOLIO") were on lease to 74 operators in 38 countries. The leases with respect to the Aircraft at January 23, 1998 are referred to as the "EXISTING LEASES". The number of Aircraft in the Portfolio at January 23, 1998 gives effect to the delivery of three DC8 Aircraft to Emery Worldwide Airlines, Inc. ("EMERY"), as if all of such deliveries occurred prior to January 23, 1998. A contract for the sale of six DC8 aircraft (including the three aircraft mentioned above) to Emery was signed on December 30, 1997, for an aggregate price that meets the aggregate Note Target Price (as defined under "Description of Securities -- The Notes and Guarantees -- Trust Indenture Covenants"). Three Aircraft were delivered to Emery on December 30, 1997, and the remaining three Aircraft are expected to be delivered to Emery by March 20, 1998. See "The Aircraft, the Related Leases and Collateral". As of January 23, 1998, Holding Co. owned (i) 30 of the Aircraft and related Existing Leases, (ii) twelve wholly owned subsidiaries which owned 167 of the Aircraft (including Holding Co., the "AIRCRAFT OWNING COMPANIES") and (iii) ten other wholly owned subsidiaries ("SPECIAL LESSORS") which owned no Aircraft and whose business is to lease certain of the Aircraft from the Aircraft Owning Companies and sublease such Aircraft to various aircraft operators. The Special Lessors are largely incorporated in various European jurisdictions. Additional Special Lessors may be organized in other jurisdictions in the future. As of January 23, 1998, AeroUSA owned, directly and indirectly, 21 of the Aircraft. The indirect ownership of the Aircraft by two different entities, Airplanes Limited and Airplanes Trust, reflects GPA Group's corporate structure prior to the Acquisition. It would not have been tax-efficient in Ireland or the United States to have a single direct or indirect owner of the Aircraft following the Acquisition. The Aircraft Owning Companies, the Special Lessors and AeroUSA are referred to herein as the "TRANSFERRED COMPANIES". SERVICER GECAS acts as servicer (the "SERVICER") pursuant to the servicing agreement among Airplanes Limited, AeroUSA, Holding Co., Airplanes Trust, GPA Cash Manager Limited, as Cash Manager, and GECAS dated as of March 28, 1996 (the "SERVICING AGREEMENT") and performs certain aircraft-related services on behalf of Airplanes Group. Airplanes Limited, AeroUSA and Holding Co. have directed the Servicer to perform such services in a manner that is intended to be consistent with maximizing the cash flows derived from the Aircraft and the Existing Leases and future leases related thereto (the "FUTURE LEASES" and, together with the Existing Leases, the "LEASES") over time, subject to the constraints imposed by the Trust Indentures and by seeking to achieve a balanced and diversified portfolio (including, without limitation, with respect to lessees, geography and lease term lengths), in all cases taking into account then existing and anticipated market conditions affecting the operating lease market for used aircraft and the commercial aviation industry generally. The Servicer is not required pursuant to the terms of the Servicing Agreement to obtain rental rates designed to pay any amounts due and owing under the Notes and no assurance can be given that the rental rates of the Leases will be sufficient to pay interest and principal on the Notes in accordance with their terms. As described below under "The Parties -- GPA", GE Capital has the right to acquire at any time until October 29, 2001, 90% of the ordinary share capital of GPA Group. There can be no assurance, however, that GE Capital will elect to acquire any of such ordinary shares. Neither the Certificates nor the Notes are obligations of, or guaranteed by, or offered for sale by, GE Capital, GECAS or any of their affiliates. RANKING After the payment of amounts due and owing in respect of, among other things, taxes and obligations to lessees and various service providers (including, without limitation, the Servicer, the Administrative Agent and the Cash Manager), the cash flows derived primarily from the Leases will be applied, indirectly, towards the payment of amounts due to Certificateholders. Payments of interest on the Subclass A-6, Subclass A-7 and Subclass A-8 Notes and the corresponding Subclass A-6, Subclass A-7 and Subclass A-8 Certificates will rank equally with payments of interest on the other subclasses of Class A Notes. Payments of interest on the Class B Notes and the corresponding Class B Certificates will be made after payments of interest on the Class A Notes and certain payments of principal on the Class A Notes. Interest at the rate of 1% on the outstanding principal balance of the Class E Notes will be paid in priority to certain payments of principal on the 1998 Refinancing Notes and the corresponding 1998 Refinancing Certificates and, assuming Available Collections are sufficient therefor, this would result in maximum annual interest payments on the Class E Notes of $5.91 million. See "Prospectus Summary -- Overview of Priority of Payments" and "Description of Securities -- The Notes and the Guarantees -- Priority of Payments". GPA The Acquisition was structured, and Airplanes Group's activities since the Acquisition have been conducted, with the intent of establishing Airplanes Limited, Airplanes Trust, Holding Co., AeroUSA and their respective subsidiaries as legal entities distinct from GPA that would be unaffected by the bankruptcy or insolvency of GPA Group or any of its affiliates. If such entities were to be consolidated with GPA Group or otherwise affected by any bankruptcy or insolvency of the GPA Group and its affiliates, payments to Certificateholders could be materially adversely affected. See "Risk Factors -- Certain Bankruptcy Considerations". A majority of the Directors of Airplanes Limited and a majority of the Controlling Trustees of Airplanes Trust are independent of GPA, although certain significant transactions may only be approved by a unanimous vote of all the Directors of Airplanes Limited and all the Controlling Trustees of Airplanes Trust, respectively. LACK OF EXECUTIVE MANAGEMENT Airplanes Limited and Airplanes Trust have no employees or executive officers. Accordingly, the Directors and Controlling Trustees rely upon the Servicer, the Administrative Agent, the Cash Manager and other service providers for all asset servicing, executive and administrative functions pursuant to the respective service provider agreements. See "Management of Airplanes Group". THE 1998 REFINANCING CERTIFICATES The following table summarizes certain of the principal terms of the Offering. <TABLE> <CAPTION> SUBCLASS A-6 SUBCLASS A-7 SUBCLASS A-8 CLASS B CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES ---------------- -------------- -------------- -------------- <S> <C> <C> <C> <C> Aggregate Principal Amount... $850,000,000 $500,000,000 $750,000,000 $337,000,000 Expected Ratings: DCR........................ AA AA AA A Moody's.................... Aa2 Aa2 Aa2 A2 Standard & Poor's.......... AA AA AA A Interest Rate................ LIBOR+ % LIBOR+ % LIBOR+ % LIBOR+ % Initial Loan to Aircraft Value (Cumulative)(1)...... 60.2% 60.2% 60.2% 68.7% Expected Average Life........ 3.1 Years 3.0 Years 5.0 Years 6.1 Years Expected Final Payment Date....................... January 15, 2004 March 15, 2001 March 15, 2003 March 15, 2009 Final Maturity Date.......... March 15, 2019 March 15, 2019 March 15, 2019 March 15, 2019 </TABLE> - --------------- (1) "INITIAL LOAN TO AIRCRAFT VALUE" represents the initial aggregate principal amount of the 1998 Refinancing Certificates, plus the estimated outstanding aggregate principal balance at March 16, 1998 of the other subclasses of Class A Certificates, expressed as a percentage of (i) the aggregate Appraised Value of the Aircraft plus (ii) $120 million, the Liquidity Reserve Amount less the amount of Lessee Security Deposits at such date. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- The Accounts -- Liquidity Reserve Amount". RATINGS OF THE 1998 REFINANCING CERTIFICATES The ratings of the 1998 Refinancing Certificates address the likelihood of the timely payment of interest and the ultimate payment of principal and premium, if any, on the 1998 Refinancing Certificates. Payments of principal and interest on the 1998 Refinancing Notes will be payable only after any Expenses have been paid or provided for in full and only to the extent that Available Collections are sufficient therefor in accordance with the priority of payments established for the Notes. In addition, Airplanes Group's ability to pay Step-Up Interest or principal in full on the 1998 Refinancing Notes on the Expected Final Payment Date (as indicated in the table above, the "EXPECTED FINAL PAYMENT DATE") for the 1998 Refinancing Certificates (or on any other date prior to the Final Maturity Date (as indicated in the table above, the "FINAL MATURITY DATE")) has not been rated by any of the Rating Agencies. The ratings assigned to the 1998 Refinancing Certificates do not address the effect of any imposition of any withholding tax on any payments under the Leases, the 1998 Refinancing Notes, the 1998 Refinancing Guarantees, the 1998 Refinancing Certificates or otherwise. See "Risk Factors -- Tax Risks" and "Tax Considerations". A rating is not a recommendation to buy, sell or hold 1998 Refinancing Certificates inasmuch as ratings do not comment as to market price or suitability for a particular investor and may be subject to revision, suspension or withdrawal at any time by the assigning Rating Agency. In the event that a rating initially assigned to the 1998 Refinancing Certificates is subsequently lowered, suspended or withdrawn for any reason, no person or entity is obliged to provide any additional support or credit enhancement with respect to the 1998 Refinancing Certificates. THE AIRCRAFT AND LESSEES The following pie charts summarize Airplanes Group's exposure as of January 23, 1998 to various types of Aircraft, Lessees, ages of Aircraft, noise restrictions applying to Aircraft and the regions and countries in which Lessees are based. All percentages have been calculated by reference to the Appraised Value (as of January 23, 1998) of the Aircraft based on a Portfolio of 218 Aircraft (after giving effect to the delivery of three aircraft to Emery as if such deliveries had occurred prior to January 23, 1998). EXPOSURE TO INDIVIDUAL LESSEES <TABLE> <S> <C> Malev................... 2.37% Air Europa.............. 2.48% TAM..................... 2.55% Mexicana................ 2.83% Off-Lease............... 2.91% Transbrasil............. 3.02% Airtours................ 3.30% Avianca................. 3.55% Burlington Air.......... 4.14% THY..................... 4.74% Canadian Airlines....... 5.51% Aeromexico.............. 5.57% Varig................... 6.70% Other................... 50.33% </TABLE> Total Number of Lessees is 74 EXPOSURE TO TYPE OF AIRCRAFT <TABLE> <S> <C> DHC8-300CA.............. 3.09% B757-200................ 3.32% B737-200A............... 4.46% B737-500................ 6.14% MD11.................... 6.23% B767-300ER.............. 6.78% F100.................... 6.77% B737-300................ 6.41% DC8-71F................. 8.71% A320-200................ 9.67% Other................... 10.02% MD83.................... 12.99% B737-400................ 15.40% </TABLE> Total Number of Aircraft is 218 Narrow Body Aircraft: 203 (82.12%) Widebody Aircraft: 15 (16.88%) EXPOSURE TO COUNTRIES IN WHICH LESSEES ARE BASED <TABLE> <S> <C> Ireland................. 2.40% Italy................... 2.41% Sweden.................. 2.81% Off-Lease............... 2.91% Chile................... 2.92% China................... 3.56% Spain................... 4.50% UK...................... 4.65% Colombia................ 4.59% Canada.................. 6.18% Mexico.................. 8.59% Turkey.................. 8.68% USA..................... 10.99% Brazil.................. 13.94% Other................... 20.87% </TABLE> Total Number of Countries is 38 EXPOSURE OF AIRCRAFT TO NOISE RESTRICTIONS(1) <TABLE> <S> <C> Stage 2 Aircraft........ 6.56% Stage 3 Aircraft........ 93.44% </TABLE> Turboprop Aircraft are included as Stage 3 Aircraft EXPOSURE TO REGION IN WHICH LESSEES ARE BASED <TABLE> <S> <C> Other................... 2.35% Off-Lease............... 2.91% Asia and Far East....... 10.29% North America........... 17.17% Europe.................. 33.64% Latin America........... 33.64% </TABLE> Europe includes Turkey and Other includes CIS countries EXPOSURE TO YEAR OF AIRCRAFT MANUFACTURE OR SUBSEQUENT FREIGHTER CONVERSION <TABLE> <S> <C> 1987.................... 1.55% 1993.................... 3.30% 1989.................... 4.39% 1988.................... 5.03% 1990.................... 10.40% Other................... 12.86% 1991.................... 23.15% 1992.................... 39.35% </TABLE> (1) See "The Aircraft, Related Leases and Collateral -- Portfolio Information -- The Aircraft". PAYMENT FLOWS PAYMENT FLOWS GRAPH The flowchart under this heading provides a summary of payment flows within Airplanes Group. Payments under the Leases are received from the Lessees by AeroUSA, a subsidiary of Airplanes U.S. Trust and by Holding Co. and Aircraft Owning Companies and Special Lessors, all of which are subsidiaries of Airplanes Limited. The Lease payments are then used by the above named subsidiaries of Airplanes U.S. Trust and Airplanes Limited to pay interest and principal on intercompany loans to Airplanes U.S. Trust and Airplanes Limited. Airplanes U.S. Trust uses the funds received from AeroUSA to pay interest and principal on the Airplanes Trust Notes and Guarantees to Airplanes Pass Through Trust and to pay interest and principal on the Class E Notes to GPA, Inc. Airplanes Limited uses the funds it receives from the Aircraft Owning Companies and Special Lessors and Holding Co. to pay interest and principal on the Airplanes Limited Notes and Guarantees to Airplanes Pass Through Trust, to pay interest and principal on the Class E Notes to GPA Group(1) and to pay dividends on equity interest in Airplanes Limited to the Charitable Trusts. Finally, Airplanes Pass Through Trust uses the funds it receives from Airplanes U.S. Trust and Airplanes Limited to pay interest and principal on the Class A-D Certificates. - --------------- (1) Approximately $83 million (or 14%) of the aggregate principal amount of the Class E Notes are held by consolidated subsidiaries of GPA Group in which minority shareholders have interests representing approximately $23 million (or 4%) of the aggregate principal amount of the Class E Notes. See "The Parties -- GPA". OWNERSHIP STRUCTURE(1) OWNERSHIP GRAPH The flowchart under this heading sets forth the ownership structure of Airplanes Group. Airplanes Group consists of Airplanes Limited, a Jersey limited liability company and Airplanes U.S. Trust, a Delaware business trust. One-hundred percent of the equity interest in Airplanes Limited is held by the Charitable Trusts. Airplanes Limited holds 95% of the equity interest in Holding Co. GPA Group holds the remaining 5% equity interest in Holding Co. Holding Co. owns 100% of the equity interest in the Aircraft Owning Companies and Special Lessors. Together, Holding Co. and the Aircraft Owning Companies and Special Lessors own 197 Aircraft. The residual interest in Airplanes U.S. Trust is held by GPA, Inc. One-hundred percent of the equity interest in GPA, Inc. is held by GPA Group. Airplanes U.S. Trust owns 100% of the equity interest in AeroUSA and its wholly owned subsidiary(2). AeroUSA and its subsidiary together own 21 Aircraft. - --------------- (1) Airplanes Group may establish additional subsidiaries from time to time for the purpose of directly or indirectly leasing Aircraft from the Aircraft Owning Companies or any other subsidiary of Holding Co. or AeroUSA and sub-leasing them to operators where commercial or other reasons make it desirable to do so. Any additional subsidiaries will be subject to restrictions set forth in the Trust Indentures. (2) The shares of AeroUSA and its wholly-owned subsidiary are held by voting trusts with First Security Bank of Utah, National Association acting as trustee in order to satisfy regulations of the U.S. Federal Aviation Administration regarding the U.S. citizenship of the owners of U.S.-registered aircraft. Airplanes Trust holds voting trust certificates representing such respective shares. OVERVIEW OF PRIORITY OF PAYMENTS The following chart summarizes the order of priority of payments on the Notes, the Class E Notes and other obligations of Airplanes Group as described in more detail in "Description of the Securities -- The Notes and the Guarantees - -- Priority of Payments". Overview Graph Collections (i) Required Expense Amount (ii) Class A Interest and Swap Payments (iii) First Collection Account Top-Up (iv) Minimum Hedge Payment (v) Class A Minimum Principal (vi) Class B Interest (vii) Class B Minimum Principal (viii) Class C Interest (ix) Class D Interest (x) Second Collection Account Top-Up (xi) Class A Principal Adjustment Amount (xii) Class C Scheduled Principal (xiii) Class D Scheduled Principal (xiv) Modification Payments (xv) Class A Note Step-Up Interest (xvi) Class E Minimum Interest (xvii) Supplemental Hedge Payment (xviii) Class B Supplemental Principal (xix) Class A Supplemental Principal (xx) Class D Outstanding Principal (xxi) Class C Outstanding Principal (xxii) Class E Supplemental Interest (xxiii) Class B Outstanding Principal (xxiv) Class A Outstanding Principal (xxv) Subordinated Swap Payments (xxvi) Class E Accrued Unpaid Interest (xxvii) Class E Outstanding Principal THE OFFERING The 1998 Refinancing Trusts..................... Each 1998 Refinancing Trust will be formed under the laws of the State of New York pursuant to a Trust Agreement among Airplanes Limited, Airplanes Trust and Bankers Trust Company, as trustee for the holders of the Existing Certificates, and will acquire the 1998 Refinancing Notes and the 1998 Refinancing Guarantees and will issue and sell the 1998 Refinancing Certificates. The 1998 Refinancing Trusts together with the Existing Trusts are referred to as the "AIRPLANES PASS THROUGH TRUST" or the "TRUST". Bankers Trust Company will be trustee for the holders of the 1998 Refinancing Certificates (the "1998 REFINANCING TRUSTEE" and, together with the trustee for the holders of the Existing Certificates, the "TRUSTEE"). The Trust's principal office is located in care of the Trustee at 4 Albany Street, New York, New York 10006. See "The Parties -- The Trust and Trustee". Trust Assets............... The respective classes and subclasses of 1998 Refinancing Notes and 1998 Refinancing Guarantees, will represent substantially all of the assets of the corresponding 1998 Refinancing Trust (the "TRUST ASSETS"). Under the Trust Agreement, the Trustee may not transfer any of the 1998 Refinancing Notes or the 1998 Refinancing Guarantees except in connection with an exercise of remedies following a Note Event of Default. See "The Parties -- The Trust and Trustee". Payment Dates.............. Interest on the 1998 Refinancing Certificates will be payable monthly in arrears on the fifteenth day of each month, commencing April 15, 1998 (each a "PAYMENT DATE"); provided that if any Payment Date would otherwise fall on a day which is not a Business Day, the relevant Payment Date will be the first following day which is a Business Day. For the purposes of the Certificates, "BUSINESS DAY" means a day on which U.S. dollar deposits may be dealt in on the London inter-bank market and commercial banks and foreign exchange markets are open in New York, New York and London, England. See "Description of Securities -- The Certificates -- Payments and Distributions". Record Date................ The record date (the "RECORD DATE") with respect to each Payment Date will be the close of business on the day that is 15 days prior to such Payment Date, whether or not such day is a Business Day. See "Description of Securities -- The Certificates -- Payments and Distributions". Reference Date............. The reference date (the "REFERENCE DATE") with respect to each Payment Date will be the day that is two Business Days prior to such Payment Date. See "Description of Securities -- The Notes and the Guarantees -- Reference Agency Agreement". Calculation Date........... The fourth Business Day immediately preceding each Payment Date is the "CALCULATION DATE". Interest Accrual Period.... The period beginning on (and including) March 16, 1998 (the "CLOSING DATE") and ending on (but excluding) the first Payment Date and each successive period beginning on (and including) a Payment Date and ending on (but excluding) the next succeeding Payment Date is called an "INTEREST ACCRUAL PERIOD"; provided that the final Interest Accrual Period will end on but exclude the Final Maturity Date (or, if earlier with respect to any class or subclass of Notes, the date such class or subclass of Notes is paid in full). Account balances with respect to each Interest Accrual Period shall be determined by reference to the balance of funds on deposit in Accounts on the Calculation Date immediately preceding each Payment Date. See "Description of Securities -- The Certificates -- Payments and Distributions". Accrued Interest........... Any accrued interest that is not paid on a Payment Date will bear interest at the stated rate of the relevant class or subclass of the 1998 Refinancing Notes. Sources of Payments on the 1998 Refinancing Certificates and 1998 Refinancing Notes.................... The only source of payment for the 1998 Refinancing Certificates, the 1998 Refinancing Notes, the 1998 Refinancing Guarantees and the other obligations of Airplanes Group will be the payments made by the Lessees under the Leases, proceeds from dispositions, if any, of the assets of Airplanes Group, net payments, if any, under the Swap Agreements and other hedging instruments, net cash proceeds received from the sale of Refinancing Certificates and proceeds, if any, received in connection with disposals of the 1998 Refinancing Notes by the Indenture Trustees under certain circumstances. Payments on the 1998 Refinancing Notes and the 1998 Refinancing Guarantees and, correspondingly, on the 1998 Refinancing Certificates, will be made only to the extent of amounts on deposit in the Collection Account on the Calculation Date relating to each Payment Date net of Expenses (other than Permitted Accruals in respect of Modification Payments) then due and payable or reasonably anticipated to become due and payable during the next Interest Accrual Period (the "REQUIRED EXPENSE AMOUNT") and other amounts set forth in "Description of Securities -- The Notes and the Guarantees -- Priority of Payments" (the "AVAILABLE COLLECTIONS"). On each Payment Date, interest, principal and premium, if any, paid in respect of each class or subclass of the 1998 Refinancing Notes, to the extent received by the 1998 Refinancing Trustee, will be passed through to holders of the corresponding class or subclass of the 1998 Refinancing Certificates on the Record Date for such Payment Date (the "1998 REFINANCING CERTIFICATEHOLDERS" and together with the holders of the Existing Certificates, the "CERTIFICATEHOLDERS"). It is expected, based on the Assumptions, that funds to be received by the 1998 Refinancing Trustee in respect of the 1998 Refinancing Notes will be sufficient to pay interest, principal and premium, if any, on the 1998 Refinancing Certificates. See "Description of Securities -- The Certificates" and "-- The Notes and the Guarantees -- Priority of Payments", "Risk Factors -- Risks Relating to Payments on the 1998 Refinancing Certificates" and "-- Capital Markets Risks". 1998 Refinancing Guarantees................. Each of Airplanes Limited and Airplanes Trust shall unconditionally guarantee the obligations of the other under the 1998 Refinancing Notes (the "1998 REFINANCING GUARANTEES"). Payments under the 1998 Refinancing Guarantees will be subordinated in priority of payment in accordance with the priority of payments on each class or subclass of the 1998 Refinancing Notes. The guarantees on the Existing Notes are referred to herein as the "EXISTING GUARANTEES". The Existing Guarantees, together with the 1998 Refinancing Guarantees, are referred to herein as the "GUARANTEES". Use of Proceeds............ The purpose of the Offering is to refinance the Subclass A-1 Notes, Subclass A-2 Notes, Subclass A-3 Notes and Class B Notes of Airplanes Group. All of the proceeds from the offering will be used for such purpose. See "Use of Proceeds". Ratings of the 1998 Refinancing Certificates... It is a condition to the issuance of the 1998 Refinancing Certificates that each class or subclass of the 1998 Refinancing Certificates will receive ratings from Duff & Phelps Credit Rating Co. ("DCR"), Moody's Investors Service, Inc. ("MOODY'S") and Standard & Poor's Ratings Group, a division of The McGraw-Hill Companies, Inc. ("STANDARD & POOR'S" and, together with DCR and Moody's, the "RATING AGENCIES") as set forth under "Description of the Securities -- The Certificates -- Ratings". Listing.................... Application has been made to list the 1998 Refinancing Certificates on the Luxembourg Stock Exchange. See "Additional Information". Denominations.............. The 1998 Refinancing Certificates will be available for purchase in minimum denominations of $100,000 and integral multiples of $1,000 in excess thereof; provided that a single Certificate of each class or subclass may be issued in a denomination of less than $100,000. See "Description of the Securities -- The Certificates". Form....................... It is expected that the 1998 Refinancing Certificates will be issued in fully registered form only in the name of Cede & Co. as the nominee of DTC. No person acquiring an interest in the 1998 Refinancing Certificates will be entitled to receive a Definitive Certificate representing such person's interest in the corresponding 1998 Refinancing Trust, except in the event that Definitive Certificates are issued under the limited circumstances described herein. 1998 Refinancing Certificateholders will hold their 1998 Refinancing Certificates through DTC (in the United States) or Cedel Bank or Euroclear (in Europe), if they are participants in such systems, or indirectly through organizations which are participants in such systems. See "Book-Entry, Registration, Global Clearance and Settlement". Airplanes Limited.......... Airplanes Limited is a special purpose limited liability company formed under the laws of Jersey with its registered and principal office located at 22 Grenville Street, St. Helier, Jersey, JE4 8PX, Channel Islands (telephone: 011-44-1534-609-000) ("AIRPLANES LIMITED"). See "The Parties -- Airplanes Limited" and "Management of Airplanes Group". Airplanes Trust............ Airplanes U.S. Trust is a Delaware business trust ("AIRPLANES TRUST"), organized pursuant to the Airplanes Trust Agreement (the "AIRPLANES TRUST AGREEMENT") among GPA, Inc., a wholly owned subsidiary of GPA Group ("GPA, INC."), as settlor (the "SETTLOR"), Wilmington Trust Company, as trustee (the "DELAWARE TRUSTEE") and the Controlling Trustees thereunder. Airplanes Trust's principal office is located in care of the Delaware Trustee at 1100 North Market Street, Rodney Square North, Wilmington, Delaware 19890-0001 (telephone: 1-302-651-1000). See "The Parties -- Airplanes Trust" and "Management of Airplanes Group". Airplanes Group............ Airplanes Limited and Airplanes Trust and, unless the context otherwise requires, the subsidiaries of each of them on a combined basis. See "Prospectus Summary -- The Portfolio". Airplanes Limited 1998 Refinancing Notes... Airplanes Limited will issue the 1998 Refinancing Notes (the "AIRPLANES LIMITED 1998 REFINANCING NOTES") pursuant to a supplement to the trust indenture dated March 28, 1996 (as amended or supplemented, the "AIRPLANES LIMITED INDENTURE"), among Airplanes Limited, Airplanes Trust and Bankers Trust Company, as Airplanes Limited Indenture Trustee (the "AIRPLANES LIMITED INDENTURE TRUSTEE"). The Airplanes Limited 1998 Refinancing Notes, together with the Existing Notes issued by Airplanes Limited, are referred to as the "AIRPLANES LIMITED NOTES". See "Description of Securities -- The Notes and the Guarantees". Airplanes Trust 1998 Refinancing Notes... Airplanes Trust will issue the 1998 Refinancing Notes (the "AIRPLANES TRUST 1998 REFINANCING NOTES") pursuant to a supplement to the trust indenture dated March 28, 1996 (as amended or supplemented, the "AIRPLANES TRUST INDENTURE" and, together with the Airplanes Limited Indenture, the "TRUST INDENTURES"), among Airplanes Limited, Airplanes Trust and Bankers Trust Company, as Airplanes Trust Indenture Trustee (the "AIRPLANES TRUST INDENTURE TRUSTEE", and together with the Airplanes Limited Indenture Trustee, the "INDENTURE TRUSTEES"). The Airplanes Trust 1998 Refinancing Notes, together with the Existing Notes issued by Airplanes Trust, are referred to as the "AIRPLANES TRUST NOTES". See "Description of Securities -- The Notes and the Guarantees". 1998 Refinancing Notes..... The 1998 Refinancing Notes shall comprise the Airplanes Limited 1998 Refinancing Notes and the Airplanes Trust 1998 Refinancing Notes. The 1998 Refinancing Notes are expected to be divided into four classes or subclasses, the Subclass A-6 Notes, the Subclass A-7 Notes, the Subclass A-8 Notes and the Class B Notes. Each class or subclass of the 1998 Refinancing Notes will be entitled to receive interest from their date of delivery at a rate per annum equal to one month LIBOR on the applicable Reference Date plus the applicable margin set forth on the cover page of this Prospectus. The interest rates on each class or subclass of the 1998 Refinancing Notes will be determined for the initial Interest Accrual Period two Business Days prior to the scheduled delivery thereof. The 1998 Refinancing Notes and the other subclasses of Class A Notes are referred to collectively herein as the "FLOATING RATE NOTES" and the 1998 Refinancing Certificates and the other subclasses of Class A Certificates are referred to collectively herein as the "FLOATING RATE CERTIFICATES". The Existing Class C Notes and Class D Notes are collectively referred to herein as the "FIXED RATE NOTES" and the Existing Class C Certificates and Class D Certificates are collectively referred to herein as the "FIXED RATE CERTIFICATES". See "Description of Securities -- The Notes and the Guarantees". Status of 1998 Refinancing Notes.................... The 1998 Refinancing Notes will constitute direct obligations of Airplanes Limited and Airplanes Trust, as the case may be. None of the Trustee, the Indenture Trustees or the Certificateholders has or will have any security interest, mortgage, charge or other similar interest in any of the Aircraft or the Leases. The Security Trustee has been granted a security interest in one-third of the ordinary share capital of Holding Co. and its subsidiaries and in Airplanes Group's interests in the cash in the Accounts. In addition, the Accounts (except for certain Rental Accounts) are held in the name of the Security Trustee. See "Description of Securities -- The Notes and the Guarantees". Airplanes Group's ability to incur indebtedness is significantly constrained. However, Airplanes Group will have the ability, in certain circumstances, to refinance certain classes or subclasses of Certificates through the issuance and sale by separate trusts of new certificates (the "REFINANCING CERTIFICATES"). Such Refinancing Certificates will rank equally with the classes or subclasses of refinanced Certificates and will never rank higher in priority than the Class A Certificates. See "Description of Securities -- The Notes and the Guarantees -- Trust Indenture Covenants -- Limitations on Indebtedness". Payments on the 1998 Refinancing Notes... Interest, principal and premium, if any, on the 1998 Refinancing Notes will be paid only out of Available Collections with respect to any Interest Accrual Period received on or prior to the Calculation Date relating to such Interest Accrual Period. On each Payment Date, principal will be payable in respect of the 1998 Refinancing Notes and the Existing Notes to the extent of Available Collections, in an amount up to the Principal Distribution Amount, if any, on such Payment Date but only to the extent that funds are available for such purpose after having made the payments ranking in priority thereto. The expected principal payments on the 1998 Refinancing Notes have been determined on the basis of the Assumptions, which include, among other things, assumptions regarding the timing and amount of payments under the Existing Leases, assumptions regarding the terms of and payments under Future Leases and assumptions regarding the ability of the Trust to refinance maturing Certificates, including Subclass A-7 Certificates and Subclass A-8 Certificates, through the issuance and sale of Refinancing Certificates. On the basis of the Assumptions, the Subclass A-7 Certificates and Subclass A-8 Certificates are not expected to receive any payments of Principal Distribution Amount until they are repaid in full with an issue of Refinancing Certificates on or prior to their respective Expected Final Payment Dates on March 15, 2001, and March 15, 2003. Also on the basis of the Assumptions and following repayment in full of the Subclass A-5 Certificates, the Subclass A-6 Certificates are expected to receive, to the extent there are Available Collections sufficient therefor, all Principal Distribution Amounts payable with respect to the Class A Certificates until the Subclass A-6 Certificates have been repaid in full. The Outstanding Principal Balance of the Subclass A-5 Certificates was approximately $108 million at February 17, 1998. The Expected Final Payment Date of the Subclass A-5 Certificates is April 15, 1999, but, based on the payment performance of the Subclass A-5 Certificates to date, the Subclass A-5 Certificates are expected to be paid in full by August 17, 1998 (and by May 15, 1998 if three additional Aircraft, the sale of which has been agreed in principle, are sold to Emery prior to May 10, 1998). The Expected Final Payment Date of the Subclass A-6 Certificates is January 15, 2004. It is highly likely that the Assumptions will not correspond to actual experience and as a result the actual principal payments received are likely to vary from the expected principal payments in respect of such class or subclass of Certificates, and the actual maturity of any class or subclass of Certificates is likely to occur earlier or later than its Expected Final Payment Date. See "Description of Securities -- The Notes and the Guarantees -- Priority of Payments", "Risk Factors -- Risks Relating to Payments on the 1998 Refinancing Certificates" and "Risk Factors -- Capital Markets Risks". Step-Up Interest........... If any of the Subclass A-4, A-7 or A-8 Notes is not repaid on or before the Expected Final Payment Date for such subclass, such subclass of Notes will accrue interest thereafter at a rate equal to the stated interest rate therefor, plus 0.50% per annum (the "STEP-UP INTEREST"). For any period in which Step-Up Interest is accruing on any subclass of the Class A Notes, Step-Up Interest will also accrue on the Subclass A-5 Notes. Payments of Step-Up Interest will be subordinated to certain other obligations of Airplanes Group, including the payment of the Principal Adjustment Amount to the Class A Notes and the Minimum Principal Payment Amount of the Class B Notes and payment of the Scheduled Principal Payment Amount to the Class C Notes and Class D Notes and will not be rated by the Rating Agencies. See "Description of Securities -- The Notes and the Guarantees -- Interest". Priority of Payments....... On each Payment Date, distributions from Available Collections will be made in accordance with the priority of payments set forth in "Description of Securities -- The Notes and the Guarantees -- Priority of Payments". Payments on the Notes will be subordinated to all fees, costs, or expenses incurred by any Airplanes Group member in the course of the business activities permitted to be conducted by it under the Trust Indentures (the "EXPENSES") and (other than interest payments on the Class A Notes with respect to which such amounts rank equally) certain amounts due to the parties providing interest rate swaps and other hedging instruments (the "SWAP PROVIDERS"). Furthermore, payments on the Class D Notes and Class D Certificates will be effectively subordinated in priority of payment to payments on all other classes of Notes and Certificates, payments on the Class C Notes and Class C Certificates will be effectively subordinated in priority of payment to payments on the Class A and Class B Notes and Class A and Class B Certificates and payments on the Class B Notes and Class B Certificates will be effectively subordinated in priority of payment to payments on the Class A Notes and Class A Certificates. Redemption of the 1998 Refinancing Notes... Subject to certain conditions described in "Description of Securities -- The Notes and the Guarantees -- Redemption", the 1998 Refinancing Notes may be redeemed on any Payment Date, in whole or in part, at the Redemption Price, plus accrued but unpaid interest. Within each class or subclass of the 1998 Refinancing Notes, the Redemption Price will be applied pro rata among all such Notes. The Redemption Price of the 1998 Refinancing Notes redeemed (1) with the application of Available Collections, will equal the Outstanding Principal Balance of the amount of such class or subclass of Notes being redeemed, without premium and (2) with the application of funds other than Available Collections (including proceeds from Refinancing Certificates and proceeds from third parties), will equal the product of the applicable Redemption Premium set out below and the Outstanding Principal Balance of the amount of such class or subclass of Notes being redeemed. <TABLE> <CAPTION> REDEMPTION DATE REDEMPTION PREMIUM -------------------------- ---------------------------------------- SUBCLASS SUBCLASS SUBCLASS A-6 A-7 A-8 CLASS B NOTES NOTES NOTES NOTES -------- -------- -------- ------- <S> <C> <C> <C> <C> After the Closing Date.... 101.50% 101.00% 101.50% 102.00% On or after March 15, 1999.................... 101.00% 100.50% 101.00% 101.50% On or after March 15, 2000.................... 100.50% 100.00% 100.50% 101.00% On or after March 15, 2001.................... 100.00% 100.00% 100.25% 100.50% On or after March 15, 2002.................... 100.00% -- 100.00% 100.25% On or after March 15, 2003.................... 100.00% -- -- 100.00% </TABLE> In addition, each class or subclass of the 1998 Refinancing Notes may be redeemed on any Payment Date, in whole, but not in part, without premium, upon the occurrence of certain adverse tax events affecting Airplanes Group, at a Redemption Price equal to the Outstanding Principal Balance thereof, plus accrued and unpaid interest thereon. See "Description of the Securities -- The Notes and the Guarantees -- Redemption". Capital Stock of Airplanes Limited.................. Airplanes Limited has an authorized share capital of 10,000 ordinary shares, $1 par value per share ("CAPITAL STOCK"), of which 30 shares have been issued. The issued Capital Stock of Airplanes Limited is held by Juris Limited and Lively Limited, each a Jersey corporation, (together, the "NOMINEES"), for the benefit of certain charitable trusts established under the laws of Jersey (collectively, the "CHARITABLE TRUSTS"). See "The Parties -- Airplanes Limited". Airplanes Trust Residual Interest................. GPA, Inc., a wholly owned subsidiary of GPA Group, owns all of the residual ownership interest in Airplanes Trust (the "AIRPLANES TRUST RESIDUAL INTEREST"). Upon repayment in full of the Airplanes Trust Notes, the Airplanes Trust Class E Notes and the Airplanes Trust Refinancing Notes, if any, the AeroUSA Shares will revert to GPA through its ownership of the Airplanes Trust Residual Interest. See "The Parties -- Airplanes Trust". GPA Group.................. GPA Group is a public limited company incorporated in Ireland. Wholly owned subsidiaries of GPA Group act as the Administrative Agent and Cash Manager. See "The Parties -- GPA" and "Management of Airplanes Group -- Corporate Management." Appraised Value............ As described herein, Airplanes Group has obtained from Aircraft Information Services, Inc., BK Associates, Inc. and Airclaims Limited (the "APPRAISERS") three desktop appraisals (the "APPRAISALS") of the value of each of the Aircraft as of January 23, 1998. The Appraisers ascertain the value of each Aircraft on the basis of an open, unrestricted, stable market environment with a reasonable balance of supply and demand, and with full consideration of the Aircraft's "highest and best use", presuming an arm's-length, cash transaction between willing, able and knowledgeable parties, acting prudently, with an absence of duress and with a reasonable period of time available for marketing, adjusted to account for the maintenance status of each Aircraft (with certain assumptions as to use since the last reported status), (each value so ascertained for the Aircraft, a "BASE VALUE"). The average of the Base Values as of January 23, 1998 for each of the Aircraft in the Portfolio as of January 23, 1998 (with the exception of 9 Aircraft subject to finance leases as of January 23, 1998 which have been included in the computation of the Appraised Value of the Portfolio at Airplanes Group's net book value) is referred to herein as the "APPRAISED VALUE". (Finance leases are fixed term leases pursuant to which Airplanes Group retains title to the aircraft but substantially all of the risks and rewards associated with ownership, including the residual value of the aircraft, are transferred to the Lessee. The payment terms of a finance lease are structured on the basis that the lessee has economic ownership of the aircraft and makes a series of "rental" payments designed to pay for substantially all of the cost of the aircraft (the principal element) and the cost of financing the aircraft price (the interest element).) None of the Appraisals attribute any value to the relevant Lease, the Maintenance Reserves, cash and certain commitment fees that serve as security (collectively, the "SECURITY DEPOSITS") or certain letters of credit, third-party guarantees or bank guarantees or the cash equivalent thereof required under the relevant Leases (the "RELATED COLLATERAL"), if any, related to the particular Aircraft. The aggregate Appraised Value of the Portfolio at January 23, 1998 was approximately $3,813 million based on a portfolio of 218 Aircraft ($3,859 million based on a portfolio of 221 Aircraft, which includes the three Aircraft with respect to which a contract for sale was signed on December 30, 1997 and which are scheduled to be delivered to Emery by March 20, 1998). An appraisal is only an estimate of value and should not be relied upon as a measure of realizable value. The proceeds received upon a sale of any Aircraft are likely to be less than the Appraised Value thereof. See "Risk Factors -- Aircraft Risks -- Risk of Decline in Aircraft Values" and "The Aircraft, Related Leases and Collateral -- Appraisers' Report." Leases..................... At January 23, 1998, the average remaining term, weighted by Appraised Value (without giving effect to Purchase Options, early termination options or extension options) of the Existing Leases was approximately 32 months. All of the Existing Leases will expire under their terms prior to the last Final Maturity Date of the Certificates and, therefore, Airplanes Group must re-lease substantially all of the Aircraft one or more times prior to the last Final Maturity Date except to the extent that Aircraft are sold prior to such Final Maturity Date. Each Existing Lease is either (a) an operating lease for a fixed term pursuant to which Airplanes Group will retain title to the Aircraft and substantially all of the risks and rewards associated with ownership, including the residual value of the Aircraft (although, as of January 23, 1998, 141 of the Existing Leases contained, and a certain portion of the Future Leases may contain, Purchase Options, early termination options or extension options), or (b) a finance lease for a fixed term, pursuant to which Airplanes Group retains title to the Aircraft but substantially all of the risks and rewards associated with ownership, including the residual value of the Aircraft, are transferred to the Lessee. Only 9 of the Existing Leases (or 1.47% as a percentage of the Appraised Value of the Portfolio) were classified as finance leases as of January 23, 1998. See "Risk Factors -- Risks Relating to the Leases -- Inability to Re-Lease Aircraft on Favorable Terms" and "The Aircraft, Related Leases and Collateral -- The Leases." Lessees.................... As of January 23, 1998, there were 74 lessees (together with the lessees in respect of Future Leases, the "LESSEES") of the Aircraft pursuant to the Existing Leases in 38 different countries. Many of the Lessees are in a relatively weak financial condition and some face serious financial difficulties. At February 19, 1998, 29 Lessees and three former lessees were in arrears with respect to Rental Payments for periods greater than 30 days, amounting to $12.7 million (of which $2.0 million related to the three former lessees). Of the $12.7 million total, $2.9 million was in arrears for a period greater than 30 days, $1.4 million was in arrears for a period greater than 60 days and $8.4 million was in arrears for a period greater than 90 days. As of February 19, 1998, four additional Lessees were being allowed deferrals of Rental Payments, maintenance and miscellaneous payments totaling approximately $12.6 million (of which $0.1 million was outstanding for greater than 30 days, $0.1 million was outstanding for greater than 60 days and $12.4 million was outstanding for greater than 90 days). These Lessees are being allowed deferrals of rentals, maintenance and miscellaneous payments for periods of up to 70 months. See "Risk Factors -- Risk of Lessee Default. Rental Accounts............ The "RENTAL ACCOUNTS" are the accounts into which payments made by Lessees under the Leases are paid. The balance on deposit in each Rental Account is transferred within one Business Day of receipt thereof into the Collection Account, other than certain limited amounts required to be left on deposit for local legal or regulatory reasons. See "Description of Securities -- The Accounts". Lessee Funded Account...... The "LESSEE FUNDED ACCOUNT" is the account (or accounts) into which amounts received from Lessees in respect of Maintenance Reserves and Security Deposits that are required to be segregated from Airplanes Group's other funds ("SEGREGATED FUNDS") are deposited and held. Funds on deposit in the Lessee Funded Account are used to make certain maintenance and security deposit related payments to Lessees or may be applied against maintenance related payments otherwise required to be made by the Lessee during the term of the related Lease or upon expiration thereof or repossession of the Aircraft. In certain circumstances, on expiration of a Lease, surplus funds may be credited from the Lessee Funded Account to the Collection Account. Amounts on deposit in the Lessee Funded Account are not available to pay interest, principal or premium, if any, on the Certificates. See "Description of Securities -- The Accounts". Collection Account......... The "COLLECTION ACCOUNT" is the account into which all Collections received by or on behalf of Airplanes Group in the course of conducting its business are deposited. Except as noted below, the Collection Account is maintained at a balance at least equal to the Liquidity Reserve Amount. The Liquidity Reserve Amount is currently approximately $174 million and is intended to provide, to the extent that payments required in respect of the Leases are insufficient, for (i) Airplanes Group's maintenance obligations, (ii) Airplanes Group's obligation to repay Lessee Security Deposits and (iii) certain other contingencies in respect of the Aircraft (the "LIQUIDITY RESERVE AMOUNT"). The balance of funds in the Collection Account may fall below the Liquidity Reserve Amount at any time and Airplanes Group may continue to make certain payments required on the Notes in the circumstances described under "Description of Securities -- The Accounts -- Liquidity Reserve Amount". See "Description of Securities -- The Accounts". Expense Account............ The "EXPENSE ACCOUNT" is the account into which the Cash Manager deposits the Required Expense Amount (other than certain Expenses transferred directly to payees from the Collection Account) on each Payment Date. See "Description of Securities -- The Accounts". Servicer................... GECAS provides certain services with respect to the aircraft owned at any time by Airplanes Group and the related Leases in accordance with the terms of the Servicing Agreement. Airplanes Limited, AeroUSA and Holding Co. are jointly and severally obligated to pay the Servicer an annual asset-based servicing fee equal to approximately 0.495%, adjusted annually for inflation, of the agreed book value of each Aircraft being serviced by the Servicer. Such fees amounted to $22.7 million in the year ended March 31, 1997. The Servicer is also entitled to certain additional fees based, in part, on the annual cash flow generated by the Leases in excess of certain cash flow targets and on sales of Aircraft at the direction of the Airplanes Group, which fees are subject to an aggregate annual minimum in the amount of approximately $1.5 million. In the year ended March 31, 1997, the Servicer was paid $1.5 million in such additional fees. Pursuant to the Servicing Agreement, the Servicer provides certain services to Airplanes Group, including, among others, collecting Rental Payments and other receivables due under the Leases, monitoring the performance of maintenance and insurance obligations of Lessees, enforcing payment by Lessees under the Leases and remarketing, including re-leasing Aircraft on lease expiration or repossession from Lessees. The initial term of the Servicing Agreement expires on the earlier of (i) March 28, 2014 (which is prior to the Final Maturity Date of the 1998 Refinancing Certificates) or (ii) payment in full of all amounts Outstanding to be paid under the Notes. Airplanes Group and the Servicer each have the ability to terminate the Servicing Agreement prior to the expiration of its initial term under certain circumstances described under "Management of Airplanes Group -- The Servicer -- Term and Termination" and "-- Tax Status". The Servicer is not required pursuant to the terms of the Servicing Agreement to obtain rental rates designed to pay any amounts due and owing under the Notes and no assurance can be given that the rental rates of Leases or Rental Payments with respect thereto will be sufficient to pay interest and principal on the Notes in accordance with their terms. See "Management of Airplanes Group -- The Servicer." Neither the 1998 Refinancing Certificates nor the 1998 Refinancing Notes are obligations of, or guaranteed by, or offered for sale by, GE Capital, GECAS or any of their affiliates. Cash Manager............... GPA Cash Manager Limited, a wholly owned subsidiary of GPA Group, ("GPA CASH MANAGER") acts as Cash Manager (the "CASH MANAGER") pursuant to a Cash Management Agreement dated as of March 28, 1996, among Airplanes Limited, Airplanes Trust, the Cash Manager, GPA Group, the Indenture Trustees and the Security Trustee (the "CASH MANAGEMENT AGREEMENT"). The Cash Management Agreement, the Trust Indentures and the Security Trust Agreement, taken together, establish the rights of the Noteholders as among themselves with respect to the Aircraft owned by Airplanes Group, the related Leases and all proceeds therefrom, and govern the distribution of Available Collections to pay amounts due and owing under the Notes. The Cash Management Agreement and Trust Indentures taken together further provide for the creation and operation of the Accounts. See "Management of Airplanes Group -- Corporate Management". In the year ended March 31, 1997, the Cash Manager was paid $0.9 million in fees. Neither the 1998 Refinancing Certificates nor the 1998 Refinancing Notes are obligations of, or guaranteed or offered for sale by, the Cash Manager. Administrative Agent....... GPA Financial Services (Ireland) Limited, a wholly owned subsidiary of GPA Group ("GPA FINANCIAL"), acts as Administrative Agent (the "ADMINISTRATIVE AGENT") pursuant to an administrative agency agreement, dated as of March 28, 1996 (the "ADMINISTRATIVE AGENCY AGREEMENT"), among Airplanes Limited, Airplanes Trust, Holding Co., AeroUSA, the Administrative Agent and GPA Group. The Administrative Agent provides certain liability management, interest rate risk management, corporate administrative and accounting services to Airplanes Group and also provides certain financial modeling and computational services to Airplanes Group, including providing cash flow projections and forecasts to assist the Directors and the Controlling Trustees in making leasing, selling, refinancing, hedging and certain other decisions. See "Management of Airplanes Group -- Corporate Management". In addition, it monitors the performance of the Servicer (including the Servicer's compliance with the Servicing Agreement) and reports on such performance to Airplanes Group. In the year ended March 31, 1997, fees paid to the Administrative Agent were $7.6 million. Neither the 1998 Refinancing Certificates nor the 1998 Refinancing Notes are obligations of, guaranteed by or offered for sale by the Administrative Agent. Future Aircraft Dispositions............... Airplanes Group may sell Aircraft (i) pursuant to the exercise of Purchase Options held by Lessees, (ii) within Airplanes Limited and its subsidiaries and within Airplanes Trust and its subsidiaries, without limitation, and within the Airplanes Group, provided that such sale does not materially adversely affect the Certificateholders and (iii) in other circumstances, provided that any such sale does not cause a Note Event of Default under the Trust Indentures and certain other conditions are met. In addition, Airplanes Group may sell Aircraft at prices below the specified target prices in certain limited circumstances which may, in turn, affect the amount and timing of principal payments to Certificateholders and, in turn, affect the average life of the Certificates. See "Description of Securities -- The Notes and the Guarantees -- Trust Indenture Covenants", "-- Redemption" and "-- Defeasance". Operating Covenants........ Airplanes Group may not enter into any Future Lease (other than a renewal, extension or restructuring of any Lease) unless after entering into such Future Lease, Airplanes Group is in compliance with certain criteria in respect of, among others, geographic and other concentration limits (the "RE-LEASING GUIDELINES"); provided that Airplanes Group may enter into a Future Lease not meeting such criteria if the Rating Agencies shall have confirmed in writing that entering into such Lease will not result in the lowering or withdrawal by them of their current ratings on any class of the Certificates then outstanding. See "Description of Securities -- The Notes and the Guarantees -- Operating Covenants", "-- Concentration Limits", "-- Compliance with Law, Maintenance of Permits", "-- Appraisal of Portfolio", "-- Maintenance of Assets", "-- Notification of Indenture Trustee, Cash Manager and Administrative Agent", "-- Leases", "-- Opinions", "-- Insurance" and "-- Indemnity". Certain Taxation Matters... In the opinion of Davis Polk & Wardwell, United States Federal Tax Counsel to Airplanes Limited and Airplanes Trust, each of the 1998 Refinancing Trusts will be classified as a "grantor trust" for United States Federal income tax purposes and not as an association (or publicly traded partnership) taxable as a corporation and accordingly, each 1998 Refinancing Certificateholder will be treated as if it owned directly the portion of each 1998 Refinancing Note of Airplanes Limited and each 1998 Refinancing Note of Airplanes Trust represented by such 1998 Refinancing Certificate. Airplanes Limited will receive an opinion of Mourant du Feu & Jeune, Jersey Tax Counsel, that, among other things, payments by Airplanes Limited on the Airplanes Limited 1998 Refinancing Notes will not be subject to Jersey withholding tax. In addition, Airplanes Limited will receive an opinion of McCann FitzGerald, Irish Tax Counsel, that, among other things, payments by Airplanes Limited on the Airplanes Limited 1998 Refinancing Notes will not be subject to Irish withholding tax on the basis described in "Tax Considerations -- Irish Tax Considerations". Neither Airplanes Limited nor Airplanes Trust, nor any subsidiary of either of them, will be obliged to make any additional payments with respect to any class or subclass of the 1998 Refinancing Notes (or the Intercompany Loans), and thus no payments will be passed through to a corresponding class or subclass of the 1998 Refinancing Certificateholders, in respect of any withholding or deduction required to be made under applicable law from payments on any class or subclass of the 1998 Refinancing Notes or the Intercompany Loans. If any withholding or deduction is required with respect to any class or subclass of the 1998 Refinancing Notes and such class or subclass of the 1998 Refinancing Notes is not redeemed, the net amount of interest received by the 1998 Refinancing Trustee and passed through to such 1998 Refinancing Certificateholders and all entities acquiring a beneficial interest in such class or subclass of the 1998 Refinancing Certificates will be reduced by the amount of such withholding or deduction. See "Tax Considerations". Certain favorable Irish tax benefits currently existing in favor of Airplanes Group could be lost if the Servicer does not maintain certain employment levels in Shannon, Ireland. The Servicer has not agreed to, and there can be no assurances that the Servicer will, maintain any such employment levels at any time in the future. See "Risk Factors -- Risks Relating to Airplanes Group and Certain Third Parties -- Inability of Certificateholders or Trustee to Participate in Management", "-- Tax Risks -- Loss of Certain Irish Tax Benefits" and "Management of Airplanes Group -- The Servicer -- Tax Status". ERISA Considerations....... The 1998 Refinancing Certificates are eligible for purchase under certain circumstances by an employee benefit plan or other plan subject to Title I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and/or Section 4975 of the United States Internal Revenue Code of 1986, as amended (the "CODE"). See "ERISA Considerations". Any such plan should consider whether an investment in the 1998 Refinancing Certificates could result in a prohibited transaction or cause the assets of each 1998 Refinancing Trust to be plan assets.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001005509_tmci_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001005509_tmci_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including information contained under the caption "Risk Factors," and financial statements, including notes thereto, appearing elsewhere in this Prospectus. THE COMPANY OVERVIEW TMCI Electronics, Inc. ("TMCI") provides custom manufacturing, value-added and distribution services to original equipment manufacturers ("OEMs") through its four significant subsidiaries: Touche Manufacturing Company, Inc. ("Touche"), Touche Electronics, Inc., ("TEI"), Enterprise Industries, Inc. ("EII") and Trinity Electronics, Inc. ("Trinity," collectively, with Touche, TEI and EII, the "Subsidiaries" and the Subsidiaries, collectively with TMCI, the "Company"). The customers of the Company are concentrated primarily into four (4) different segments: (1) mini and mainframe computers; (2) telecommunications equipment; (3) semiconductor capital equipment; and (4) medical test equipment. The principal executive offices of the Company are located at 1875 Dobbin Drive, San Jose, California 95133 and its telephone number is (408) 272-5700. SEE "RISK FACTORS," "MANAGEMENT," "BUSINESS" AND "CERTAIN TRANSACTIONS" FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED IN EVALUATING THE COMPANY AND ITS BUSINESS. THE OFFERING <TABLE> <S> <C> Common Stock Offered(1)(2)(3)............................... 1,960,312 shares Shares of Common Stock Outstanding as of August 7, 1998..... 4,196,416 shares Shares of Common Stock Outstanding After Issuance of Unissued Common Stock Being Registered Hereby(2)(3)....... 6,156,718 shares Use of Net Proceeds......................................... See "Use of Proceeds" Nasdaq SmallCap Market Symbols Common Stock................................................ TMEI Class A Warrants............................................ TMEIW </TABLE> - --------------- (1) Includes 404,539 shares currently outstanding and being registered for sale. (2) Excludes up to 2,672,000 shares of Common Stock issuable upon exercise of the Class A Warrants and 128,000 Units issuable upon exercise of the Unit Purchase Option issued to the underwriter in the March 1996 Offering or the securities underlying the Units. (3) Assumes that the Debentures are converted into the maximum 1,100,004 shares and that all warrants are issued and exercised. SELECTED FINANCIAL INFORMATION The following selected historical financial information of the Company is qualified by reference to and should be read in conjunction with the financial statements and notes thereto included in this prospectus. The selected financial information set forth below for each of the fiscal years ended December 31, 1997 and December 31, 1996 is derived from financial statements contained in this prospectus. The selected financial information for the years December 31, 1995 and December 31, 1994 is derived from financial statements of the Company audited by Moore Stephens, P.C., independent public accountants, which are included in the prospectus for the public offering of the Company completed on March 11, 1996. The selected financial data for the year ended December 31, 1993 is derived from unaudited financial statements of the Company which are not included in documents filed with the Commission. SELECTED FINANCIAL DATA (IN THOUSANDS EXCEPT FOR PER SHARE DATA) <TABLE> <CAPTION> FISCAL QUARTERS ENDED MARCH 31, (UNAUDITED) YEARS ENDED DECEMBER 31 --------------------- ----------------------------------------------- 1998 1997 1997 1996 1995(1) 1994(1) 1993(1) --------- --------- ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> <C> <C> Statement of Operations Data ------- ------- ------- ------- ------- ------- ------- Net Sales................................. $10,200 $ 7,443 $38,947 $26,140 $28,099 $20,869 $14,391 Net Income................................ 169 307 1,136 148 473 420 248 Net Income per Common Share from Operations-Basic (2).................... 0.04 0.09 0.31 0.05 0.25 0.22 0.08 Net Income Per Common Share from Operations-Diluted(2)................... 0.04 0.08 0.28 0.05 0.25 0.22 0.08 Balance Sheet Data Total Assets.............................. 34,680 18,176 28,543 15,482 12,412 9,332 6,982 Total Long Term Obligations............... 9,163 3,117 4,168 2,501 2,757 2,682 2,576 Shareholder's Equity...................... 16,468 9,246 13,299 8,639 2,180 957 257 </TABLE> - --------------- (1) For comparative purposes, the amounts have been combined to give retroactive effect to the acquisition by TMCI of all of the outstanding common stock of Touche and TEI. (2) See Note 3 to the financial statements for an explanation of the basis used to calculate net income per share and weighted average common shares and share equivalents.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001007519_praegitzer_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001007519_praegitzer_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..cbe703d4c26d9d912033e24ac51c6b25420006dd
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. EACH PROSPECTIVE INVESTOR IS URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY. EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. THE COMPANY The Company is a leader in providing electronics original equipment manufacturers ("OEMs") and contract manufacturers with a full range of printed circuit board ("PCB") and interconnect solutions, including schematic capture and design, quick-turnaround, prototyping and pre-production, and large volume production. The Company provides its solutions to four key electronics industry segments (with corresponding percentages of Company revenue for the fiscal year ended June 30, 1998): (i) data and telecommunications (31%), (ii) computers and peripherals (36%), (iii) industrial and instrumentation (25%) and (iv) business and consumer (8%). The Company's growth has been driven by sales to industry leaders whose products require increasingly complex and technologically advanced electronic interconnects. The Company's principal customers include Compaq, Hewlett Packard, Intel, Dell, EMC, IEC Electronics, SCI, Solectron, Motorola, Xylan and Xerox. The Company has obtained ISO 9002 certifications for five of its manufacturing facilities and has received awards from a number of its customers in recognition of its superior performance in meeting their PCB needs. In fiscal 1998 the Company served more than 650 customers worldwide. The 1997 worldwide PCB market was estimated at $29.7 billion by the Institute for Interconnecting Packaging Electronic Circuits ("IPC"), of which the U.S. market was $7.8 billion and was forecast to grow 6.5% annually through 2001. As electronics OEMs respond to competitive pressures, they place ever- greater emphasis on faster product time-to-market and greater PCB complexity in tight space tolerances, and face increasing pressure to shorten the design-to-manufacture cycles. Additionally, as OEMs increasingly focus on core competencies, non-core activities are contracted to independent specialty vendors. As a result of these market forces, outsourcing of PCBs and electronic interconnects has grown from 66% of total OEM requirements in 1991 to 93% in 1997. Addressing these trends, Praegitzer in 1997 implemented its One-Stop Shopping-TM- strategy to provide its customers with advanced technology and integrated manufacturing capabilities for the entire cycle of PCB creation. In the last three years, the Company has acquired production facilities in Redmond, Washington; Fremont, California; and Huntsville, Alabama, and a 51% interest in a production facility in Melaka, Malaysia. During this same period, Praegitzer acquired or opened 11 design centers in the U.S. and one in Israel. The Company has experienced 46.5% compound revenue growth during fiscal years 1995 through 1998, compared with a compound revenue growth rate for the U.S. PCB industry of 8.5%. Excluding revenue generated by acquired facilities, the Company's compound revenue growth rate during the same period would have been 21.7%. During this period the Company produced increasingly complex PCBs with higher density and layer counts. The Company's goal is to be the leading provider of electronic interconnect one-stop design and manufacturing services, while continuing to increase its technological and services advantages. The address of the Company's principal executive offices is 1270 SE Monmouth Cut Off Road, Dallas, Oregon 97338, and the Company's telephone number is (503) 623-1000. FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information included in this Prospectus contains statements that are forward-looking, such as statements relating to plans for future activities. This forward-looking information is subject to significant known and unknown risks, uncertainties and other factors that could significantly affect actual results, performance or achievements of the Company in the future and, accordingly, the actual results, performance or achievements may materially differ from those expressed or implied in any forward-looking statements made by the Company. These risks, uncertainties and factors include, but are not limited to, those relating to business conditions and growth in the electronics industry and general economies, both domestic and international, lower than expected customer orders, competitive factors (including increased competition, new product offerings by competitors and price pressures), the availability of parts and supplies at reasonable prices, technological difficulties and resource constraints encountered in developing new products, and outstanding indebtedness. For a more specific and detailed discussion of some of these risks, uncertainties and factors, see "Risk Factors." The words "believe," "expect," "anticipate," "intend" and "plan" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001007594_pcd-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001007594_pcd-inc_prospectus_summary.txt
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+PROSPECTUS SUMMARY This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, without limitation, those set forth under "Risk Factors" and elsewhere in this Prospectus. The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Investors should carefully consider the risk factors related to the purchase of Common Stock of the Company. See "Risk Factors." Except as otherwise noted, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. See "Capitalization," "Description of Capital Stock" and "Underwriting." As used herein, the terms "Company" and "PCD," unless otherwise indicated or the context otherwise requires, refer to PCD Inc., a Massachusetts corporation, and its subsidiaries, including Wells Electronics, Inc. and its subsidiaries ("Wells"). However, all financial information for periods ended before December 26, 1997, unless otherwise indicated or the context otherwise requires, is for PCD Inc. and its subsidiaries, excluding Wells. THE COMPANY PCD Inc. (the "Company") designs, manufactures and markets electronic connectors for use in integrated circuit ("IC") package interconnect applications, industrial equipment and avionics. Electronic connectors, which enable an electrical current or signal to pass from one element to another within an electronic system, range from minute individual connections within an IC to rugged, multiple lead connectors that couple various types of electrical/electronic equipment. Electronic connectors are used in virtually all electronic systems, including data communications, telecommunications, computers and computer peripherals, industrial controls, automotive, avionics and test and measurement instrumentation. The electronic connector market is both large and broad. Bishop & Associates, a leading electronic connector industry market research firm, estimates the total 1997 worldwide market at $23.4 billion with more than 2,000 manufacturers. The Company markets over 6,800 electronic connector products in three product categories, each targeting a specific market. These product categories are IC package interconnects, industrial interconnects and avionics terminal blocks and sockets. IC package interconnects are specially designed electro-mechanical devices that connect ICs to printed circuit boards during the various stages of the IC's production and application in electronic systems. These stages are test, burn-in, development and production. Industrial interconnects are used in industrial equipment systems both internally, as input/output ("I/O") connectors to link the rugged electrical environment of operating equipment to the electronic environment of controllers and sensors, and externally, to facilitate the interface between discrete factory wiring and cabling for standard computer interconnects. Avionics terminal blocks and sockets perform similar functions as industrial connectors, but are designed and built to operate in the harsher environment and meet the more critical performance requirements of avionics applications. Representative customers of the Company include Altera Corporation, The Boeing Company, Micron Technology, Inc., Rockwell International Corp. (through its subsidiary, the Allen-Bradley Company) and Siemens AG. The Company believes it is benefiting from three trends affecting the electronics industry: (i) the increasing complexity of ICs and corresponding evolution of IC package designs, which favor growth in PCD's IC package interconnect market; (ii) the global nature of semiconductor manufacturers, which requires suppliers with global design, manufacturing and marketing capabilities; and (iii) the use of increasingly complex electronic controllers and sensors in industrial and avionics applications, which creates opportunities in PCD's industrial equipment and avionics markets. Gatefold: Industrial interconnects are used in industrial equipment systems both internally, as input/output ("I/O") connectors to link the rugged electrical environment of operating equipment to the electronic environment of controllers and sensors, and externally, to facilitate the interface between discrete factory wiring and cabling for standard computer interconnects. [graphic of process control panel] INDUSTRIAL INTERCONNECTS AVIONICS TERMINAL BLOCK AND SOCKETS [graphics of connectors] [graphic of airplane] Avionics terminal blocks and sockets perform similar functions as industrial connectors, but are designed and built to operate in the harsher environment and meet the more critical performance requirements of avionics applications. The Company has maintained a consistent strategy over the past five years to identify and expand into selected electronic connector markets where it can establish a position of leadership. There are five key elements of the Company's strategy: selection of key markets -- market selection has contributed to the compound annual growth in sales of the Company (excluding Wells) of approximately 23.8% since 1993, and, after giving effect to the Wells acquisition, the Company's net sales in 1997, on a pro forma basis, were $71.4 million; total customer solution -- the Wells acquisition and the creation of the Control Systems Interconnect division are examples of broadening the Company's product offerings within targeted markets; customer responsiveness/short delivery cycle -- the introduction of just-in-time ("JIT") manufacturing, inventory control techniques and quick-change, in-house production tooling have substantially reduced the Company's delivery lead times; best cost producer -- the Company (excluding Wells) has experienced an improvement in gross profit as a percentage of net sales from 33.1% in 1993 to 49.3% in 1997; and penetration of worldwide markets -- international sales of the Company (excluding Wells) increased from 7.7% of net sales in 1993 to 35.8% in 1997, and, with the addition of operations of Wells in Europe and Asia, the Company expects that international sales will account for a significant portion of its revenues for the foreseeable future. WELLS ACQUISITION On December 26, 1997, the Company completed the acquisition (the "Wells acquisition") of Wells Electronics, Inc. ("Wells"). Wells designs, develops, manufactures and markets a broad line of test and burn-in sockets and plastic carriers for the global semiconductor industry. In combining the existing burn-in business of PCD with that of Wells, the Company now supports complete design, development, manufacturing and marketing of test and burn-in sockets in two of the world's largest IC package interconnect markets: the United States and Japan. The Company believes that benefits of the combination of PCD and Wells include: (i) complementary product lines that together provide an extensive product offering of burn-in sockets as well as test, development and production sockets; (ii) complementary major customers with little overlap; and (iii) improved project design capacity resulting from focusing new product development resources and eliminating project duplication. Over the last three years, Wells has employed a similar strategy to that of the Company. From fiscal 1995 (52 weeks ended June 3, 1995), to fiscal 1997 (53 weeks ended May 3, 1997), the net sales of Wells increased from $18.6 million to $27.5 million. With the inclusion of the net sales of Wells, consolidated pro forma net sales and income from operations (before deducting the non-recurring write-off relating to the Wells acquisition of acquired in-process research and development) for the Company totaled $71.4 million and $21.7 million, respectively, in 1997. The Company was incorporated in Massachusetts on November 9, 1976 under the name Precision Connector Designs, Inc. In February 1996, the Company changed its name to PCD Inc. The Company's executive offices are located at Two Technology Drive, Centennial Park, Peabody, Massachusetts 01960-7977. Its telephone number is (978) 532-8800. [graphic top left of test socket] Test sockets must withstand hundreds of thousands of insertions and withdrawals and offer high reliability. [graphic top right of burn-in socket] Burn-in sockets are utilized to screen for early failures by operating the IC at elevated voltages and temperatures. [graphic of integrated circuit] IC PACKAGE INTERCONNECTS IC package interconnects are specially designed electro-mechanical devices that connect ICs to printed circuit boards during the various stages of the ICs' production and application in electronic systems. These stages are test, burn-in, development and production. [graphics of connectors on right and left center of page] [graphic of computer keyboard] [graphic of development socket on bottom left of page] Development sockets are used to program programmable logic devices, and are often carried through to initial production. [graphic of production socket on bottom right of page] Production sockets provide a detachable electromechanical interface between the printed circuit board and the IC package which provides benefits to both systems manufacturer and end customer. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company......................... 2,000,000 shares Common Stock to be outstanding after the offering........... 8,020,182 shares (1) Use of proceeds............................................. For repayment of indebtedness, working capital and other general corporate purposes. See "Use of Proceeds." Nasdaq National Market symbol............................... PCDI </TABLE> - --------------- (1) Based on the number of shares of Common Stock outstanding as of December 31, 1997. Excludes 996,600 shares of Common Stock reserved for issuance under the Company's stock option plans, of which 719,850 shares were subject to outstanding options as of December 31, 1997 at a weighted average exercise price of $3.46 per share. Also excludes 525,000 shares of Common Stock subject to a common stock purchase warrant held by Emerson Electric Co. (the "Emerson Warrant"), which warrant was exercisable as of December 31, 1997 as to 150,000 shares; the Emerson Warrant has an exercise price of $1.00 per share. See "Capitalization," "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources," "Management -- Stock Awards" and "Certain Transactions." SUMMARY CONSOLIDATED FINANCIAL DATA <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ------------------------------------------------------------------ PRO FORMA PRO FORMA AS ADJUSTED 1995 1996 1997 (1) 1997 (2)(3) 1997 (2)(4) ------- ------- -------- -------------- ------------------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales................... $25,616 $26,857 $ 29,796 $ 71,386 $ 71,386 Gross profit................ 12,139 12,400 14,676 41,024 41,024 Write-off of acquired in- process research and development............... -- -- (44,438) -- -- Income (loss) from operations................ 6,472 6,955 (35,578) 21,710 21,710 Interest income (expense), net....................... 112 725 940 (12,833) (9,248) Net income (loss)........... $ 3,863 $ 4,785 $(22,836) $ 4,962 $ 7,149 ======= ======= ======== ======== ======== Net income (loss) per share (5): Basic..................... $ 0.85 $ 0.87 $ (3.83) $ 0.83 $ 0.90 ======= ======= ======== ======== ======== Diluted................... $ 0.75 $ 0.76 $ (3.83) $ 0.73 $ 0.82 ======= ======= ======== ======== ======== Weighted average number of common and common equivalent shares outstanding (5): Basic..................... 4,570 5,478 5,955 5,955 7,955 Diluted................... 5,184 6,292 5,955 6,769 8,769 OTHER DATA(6)(7): Depreciation................ 1,026 1,389 1,530 4,140 4,140 Amortization of intangible assets.................... -- -- -- 4,209 4,209 </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1997 --------------------------------- ACTUAL(8) AS ADJUSTED(4)(8) ------------- ----------------- (IN THOUSANDS) <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Working capital (deficit)................................ $(12,632) $(11,991) Total assets............................................. 126,592 126,592 Total debt............................................... 105,903 70,950 Stockholders' equity..................................... 8,995 44,270 </TABLE> - --------------- (1) Net loss for the year ended December 31, 1997 includes a non-recurring write-off relating to the Wells acquisition for acquired in-process research and development. Before deducting the write-off, net income per share -- basic was $1.04 (based on a weighted average number of shares outstanding of 5,954,657), and net income per share -- diluted was $0.94 (based on a weighted average number of common and common equivalent shares outstanding of 6,634,125). (2) Gives effect to the Wells acquisition assuming such transaction had occurred on January 1, 1997 and the elimination of the related non-recurring acquired in-process research and development expense and the addition of the annual amortization of acquired intangible assets so that the pro forma and the pro forma as adjusted include only recurring costs. See "Unaudited Pro Forma Condensed Consolidated Statement of Operations" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." (3) Before deducting the additional interest expense for the value of the exercisable portion of the Emerson Warrant, pro forma net income was approximately $6,762,000, pro forma net income per share -- basic was $1.14 (based on a weighted average number of shares outstanding of 5,954,657) and pro forma net income per share -- diluted was $1.00 (based on a weighted average number of common and common equivalent shares outstanding of 6,769,479). (4) Adjusted to reflect (i) the sale by the Company of 2,000,000 shares of Common Stock offered hereby (at an assumed public offering price of $20.00 per share), less underwriting discounts and commissions and estimated offering expenses payable by the Company; (ii) the application of the net proceeds from the offering; and (iii) the write-off of approximately $3.0 million of interest expense relating to the exercisable portion of the Emerson Warrant. Before deducting the additional interest expense for the value of the exercisable portion of the Emerson Warrant, pro forma as adjusted net income was approximately $8,949,000, pro forma as adjusted net income per share -- basic was $1.13 (based on a weighted average number of shares outstanding of 7,954,657) and pro forma as adjusted net income per share -- diluted was $1.02 (based on a weighted average number of common and common equivalent shares outstanding of 8,769,479). See "Use of Proceeds,"
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001009515_enstar-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001009515_enstar-inc_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY AND SHOULD BE READ IN CONJUNCTION WITH THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND THE NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. THE COMPANY ENStar Inc., a Minnesota corporation formed in 1995 ("ENStar" or the "Company"), is a holding company. Its principal subsidiaries are Americable, Inc. ("Americable"), Enstar Networking Corporation ("Enstar Networking") and Transition Networks, Inc. ("Transition"). Americable is a distributor of premise wiring, connectivity products and low-end networking electronics. Enstar Networking is a network integrator that provides services to design, build, maintain, and protect corporate network infrastructures. Transition is a manufacturer of connectivity devices used in local area network ("LAN") applications. ENStar also owns 1,025,000 shares of common stock of CorVel Corporation ("CorVel"), or an approximate 25% interest in CorVel, a provider of cost containment and managed care services designed to address the medical costs of workers' compensation. ENStar was formerly a wholly owned subsidiary of North Star Universal, Inc. ("NSU"). In connection with transactions (the "Reorganization Transactions") consummated pursuant to a reorganization agreement entered into between NSU and Michael Foods, Inc. ("Michael"), NSU transferred, on or prior to February 28, 1997, to ENStar certain of its assets, including its shares of common stock of Americable and Transition and its shares of CorVel, and certain other assets. Pursuant to the Reorganization Transactions, (i) NSU merged with Michael and (ii) the outstanding common stock of ENStar was distributed to the shareholders of NSU (the "Distribution"). As a result of the Distribution, ENStar ceased to be a subsidiary of NSU and became a publicly owned company whose stock is quoted on the Nasdaq National Market under the symbol "ENSR." In connection with the Reorganization Transactions, ENStar agreed to indemnify Michael against certain losses arising from the Reorganization Transactions and to assume certain liabilities of Michael. See "--Reorganization Transactions." Americable is a distributor of premise wiring, connectivity products, and low-end networking electronics. As a value-added distributor, Americable supplies a wide array of voice and data communication related products such as cable (both copper and fiber optic), cable assemblies, components (blocks, jacks, connectors, patch cords, patch panels) and networking hardware. Americable sells to a wide range of customers throughout the United States in the voice and data communications aftermarket, including contractors, resellers, systems intergrators, and installers. Americable also manufactures a wide variety of cable assemblies, subassemblies and specialty products for its customers. Some of these products are manufactured to standard specifications for sale by Americable through its distribution business, others are custom designed and manufactured by Americable to customer specifications. Enstar Networking, previously operated as the network integration business segment of Americable, was organized in April 1997 to distinctly focus the networking service activities from the traditional distribution and manufacturing operations of Americable. Enstar Networking provides services to design, build, maintain and protect corporate network infrastructures. Enstar Networking's mission is "to provide our clients with technical services and solutions that improve the performance and integrity of their networks." Enstar Networking offers customized, integrated solutions through three strategic business units: Security Integration Group; Network Integration Services; and Structured Wiring Services. CorVel is an independent nationwide provider of medical cost containment and managed care services designed to address escalating medical costs. CorVel's services include perferred provider organizations, automated medical fee auditing, medical case management, independent medical examinations, utilization review and vocational rehabilitation services. Such services are provided to insurance companies, third party administrators and employers to assist them in managing the medical costs and monitoring the quality of care associated with medical claims. The mailing address of ENStar's principal executive office is 6479 City West Parkway, Eden Prairie, Minnesota, 55344; its telephone number is (612) 941-3200. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION The following table sets forth certain selected historical consolidated financial information of ENStar that has been derived from and should be read in conjunction with ENStar's Consolidated Financial Statements, including the Notes thereto, which are included elsewhere in this Prospectus: <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, -------------------------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENTS OF OPERATIONS DATA(1) Revenues. . . . . . . . . . . . . . . . . . . . . . . . . $ 54,352 $ 64,123 $ 54,891 $ 47,193 $ 46,756 Operating income (loss) . . . . . . . . . . . . . . . . . (4,979) (53) 1,033 (702) (1,978) Interest expense, net . . . . . . . . . . . . . . . . . . (809) (204) (247) (348) (361) Income (loss) before income taxes and equity in earnings of unconsolidated subsidiary. . . . . . . . (5,788) (257) 786 (1,050) (2,339) Net income (loss) . . . . . . . . . . . . . . . . . . . . $ (2,261) $ 1,072 $ 1,572 $ 286 $ (1,524) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Basic and diluted net income (loss) per share (1) . . . . $ (0.69) $ 0.32 $ 0.49 $ 0.09 $ (0.48) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Weighted average common and common equivalent shares outstanding (1) . . . . . . . . . . . 3,289 3,309 3,217 3,235 3,146 CONSOLIDATED BALANCE SHEET DATA (END OF PERIOD) Total assets. . . . . . . . . . . . . . . . . . . . . . . $ 43,315 $ 36,015 $ 35,251 $ 32,243 $ 30,222 Long-term debt, including current maturities. . . . . . . 16,333 1,178 1,246 3,607 3,443 Shareholders' equity. . . . . . . . . . . . . . . . . . . 12,405 20,947 19,694 18,176 17,035 </TABLE> - -------------------- (1) Basic and diluted net income (loss) per share for 1993 to 1996 was computed using the weighted average number of outstanding shares of NSU Common Stock during each period presented adjusted for the Distribution of one share of ENStar Common Stock for every three shares of NSU Common Stock outstanding. - --------------------------------------------------------------------------------
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001009569_success_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001009569_success_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Company's Consolidated Financial Statements, including the accompanying notes, appearing elsewhere in this Prospectus. Unless the context clearly suggests otherwise, references to the "Company" include Success Bancshares and its subsidiaries, collectively, and references to "Success Bancshares" include the parent company only. Except as otherwise indicated, the information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. Prospective investors should carefully consider the matters set forth in "Risk Factors." THE COMPANY Success Bancshares is a bank holding company headquartered in Lincolnshire, Illinois. Together with its majority owned subsidiary, Success National Bank (the "Bank"), the Company had total assets of $378.7 million at December 31, 1997. Through the Bank, the Company engages in full service community banking. The Bank is also headquartered in Lincolnshire, Illinois, located approximately 35 miles north of downtown Chicago, and has eight branch offices, in addition to its headquarters. These branch offices are located in Deerfield (2), Libertyville, Lincolnwood (2), Chicago (Lincoln Park), Arlington Heights and Northbrook, Illinois. Through its branch network, the Company provides community banking services to individuals, small-to-medium-sized businesses, local governmental units and institutional clients primarily in the northern Chicagoland area. These services include traditional checking, NOW, money market, savings and time deposit accounts, as well as a number of innovative deposit products targeted to specific market segments. The Bank offers home equity, home mortgage, commercial real estate, commercial and consumer loans, safe deposit box facilities and other innovative and traditional services specially tailored to meet the needs of customers in its target markets. The Company's goal is to continue to offer innovative, attractive financial products to businesses and individuals in its target markets. As a community bank, the Bank stresses personalized service, local decision making, quick response to customers and strong relationships with business, civic and community organizations. Management believes this marketing and service approach enables the Bank to compete effectively with the money center, super regional and regional banks that have a presence in its target markets. The Company's goal is to foster continued profitable growth while maintaining strong credit quality. To achieve this goal, the Company's strategic plan is focused on providing a high level of service to its core customers while expanding its market share in its target markets. Key elements of the Company's strategic plan include: - MAINTAINING STRONG LOCAL PRESENCE AND DECISION-MAKING AUTHORITY. The Company's strong local presence combined with its focus on local decision making provide the Bank with the competitive advantage of being able to tailor products and services to meet the needs of the customers, to make decisions for customers quickly and to enjoy the symbiotic benefits of investing and participating in its community. - PROVIDING A HIGH LEVEL OF SERVICE THROUGH QUALITY EMPLOYEES. The Company intends to compete with larger institutions by providing a high level of individualized service and responsiveness, which the Company maintains by emphasizing the recruiting and training of competent and highly motivated employees who are able to make decisions and quickly respond to customers' needs. - POSITIONING FOR CONTROLLED MARKET EXPANSION. The Company will pursue disciplined growth by opening branches in areas where management believes local residents and small-to-medium-sized businesses would benefit from a community banking alternative. The Company believes that continued consolidation in the banking industry will provide attractive growth opportunities. The Company's strategic plan also includes opportunistically acquiring other financial institutions. <PAGE> 7 - INCREASING ITS PORTFOLIO OF HIGH QUALITY LOANS. The Company is committed to maintaining strong credit quality as it grows its loan portfolio. - FOCUSING ON CORE CUSTOMERS. The Company believes that focusing on establishing and maintaining long-term relationships with individuals and small-to-medium-sized businesses in its target markets will result in growth and increased profitability. - CREATING INNOVATIVE AND NICHE PRODUCTS. The Company intends to continue developing innovative loan and deposit products. The Company also intends to continue developing lending niches which generate loan growth and service its target markets. RECENT DEVELOPMENTS Expansion Since the consummation of its initial public offering in October 1997, the Company has worked to aggressively execute its strategic plan. - The Company has used its capital to grow its asset base from $345.6 million at September 30, 1997 to $378.7 million at December 31, 1997. - In addition to opening its Lincolnwood/International Office branch in November 1997, the Company's expansion plans currently include: <TABLE> <CAPTION> LOCATION PROJECTED BRANCH OPENING BY STATUS -------- --------------------------- ------ <S> <C> <C> Downtown Chicago June 30, 1998 Lease prepared for execution. Skokie September 30, 1998 Lease executed. Skokie/Oakton Street September 30, 1998 Lease executed; negotiating village approval. Mundelein September 30, 1998 Purchase agreement executed; remodeling in progress. Lake Zurich September 30, 1998 Final negotiations on branch purchase agreement and lease in progress. North Libertyville December 31, 1998 Construction in progress. </TABLE> - The Company is currently negotiating an agreement to purchase an industrial loan company with an aggregate asset base of $15 million located in the State of Hawaii. Although this acquisition is not located in the Company's primary target markets, management believes that it would be attractive given the limited number of banking institutions in the State of Hawaii and the local market knowledge of the President and Chief Executive Officer of Success Bancshares. Other - The Bank has applied to the Office of the Comptroller of the Currency (the "OCC") for authorization to undertake a transaction the result of which would be that Success Bancshares would acquire ownership of 100% of the outstanding capital stock of the Bank (the "Minority Acquisition"). As of December 31, 1997, Success Bancshares owned 100% of the outstanding preferred stock and 92% of the outstanding common stock of the Bank. The Company's principal executive offices are located at One Marriott Drive, Lincolnshire, Illinois 60069, and its telephone number is (847) 634-4200. 2 <PAGE> 8 SUCCESS CAPITAL Success Capital is a statutory business trust formed under Delaware law pursuant to (i) the Trust Agreement and (ii) the filing of a Certificate of Trust with the Secretary of State of the State of Delaware on April 21, 1998. The initial trust agreement will be amended and restated in its entirety substantially in the form to be filed as an exhibit to the Registration Statement of which this Prospectus forms a part. Success Capital was formed for the exclusive purposes of (i) issuing and selling the Trust Securities, (ii) using the proceeds from the sale of the Trust Securities to acquire the Junior Subordinated Debentures issued by Success Bancshares and (iii) engaging in only those other activities necessary, advisable or incidental thereto (such as registering the transfer of the Trust Preferred Securities). Accordingly, the Junior Subordinated Debentures will be the sole assets of Success Capital, and payments by Success Bancshares under the Junior Subordinated Debentures (and any proceeds derived therefrom) will be the sole revenues of Success Capital. The Common Securities will rank pari passu, and payments will be made thereon pro rata, with the Trust Preferred Securities, except that upon the occurrence and during the continuance of an event of default under the Trust Agreement resulting from an event of default under the Indenture, the rights of Success Bancshares as holder of the Common Securities to payment in respect of Distributions and payments upon liquidation, redemption or otherwise will be subordinated to the rights of the holders of the Trust Preferred Securities. See "Description of Trust Preferred Securities--Subordination of Common Securities of Success Capital Held by Success Bancshares." Success Bancshares will acquire Common Securities in an aggregate liquidation amount equal to 3% of the total capital of Success Capital. Success Capital has a term of 31 years, but may terminate earlier as provided in the Trust Agreement. Success Capital's principal executive offices are located at One Marriott Drive, Lincolnshire, Illinois 60069, and its telephone number is (847) 634-4200. 3 <PAGE> 9 THE OFFERING <TABLE> <S> <C> TRUST PREFERRED SECURITIES ISSUER.............. Success Capital SECURITIES OFFERED............................. 1,500,000 Trust Preferred Securities having a Liquidation Amount of $10 per Trust Preferred Security. The Trust Preferred Securities represent undivided beneficial interests in Success Capital's assets, which will consist solely of the Junior Subordinated Debentures (and any proceeds derived therefrom) and rights to payments thereunder. Success Capital has granted the Underwriters an option, exercisable within 30 days after the date of this Prospectus, to purchase up to an additional 225,000 Trust Preferred Securities at the initial offering price, solely to cover over-allotments, if any. OFFERING PRICE................................. $10 per Trust Preferred Security DISTRIBUTIONS.................................. The Distributions payable on each Trust Preferred Security will be fixed at a rate per annum of 8.95% of the Liquidation Amount, will be cumulative, will accrue from the date of issuance of the Trust Preferred Securities and will be payable quarterly in arrears on the 15th day of March, June, September and December of each year, commencing on June 15, 1998 (subject to possible deferral as described below). See "Description of Trust Preferred Securities- Distributions. EXTENSION PERIODS.............................. So long as no Debenture Event of Default shall have occurred and be continuing, Success Bancshares will have the right, at any time, to defer payments of interest on the Junior Subordinated Debentures by extending the interest payment period thereon for a period not exceeding 20 consecutive quarters with respect to each Extension Period, provided that no Extension Period may extend beyond the Stated Maturity of the Junior Subordinated Debentures or end on a date other than an Interest Payment Date. If interest payments are so deferred, Distributions on the Trust Preferred Securities will also be deferred and Success Bancshares will not be permitted, subject to certain exceptions described herein, to declare or pay any cash distributions with respect to Success Bancshares' capital stock or make any payments with respect to any debt securities that rank pari passu with or junior to the Junior Subordinated Debentures. During an Extension Period, Distributions will continue to accumulate interest thereon compounded quarterly. Because interest would continue to accrue and compound on the Junior Subordinated Debentures, to the extent permitted by applicable law, holders of the Trust Preferred Securities will be required to accrue income for United States federal income tax purposes without regard to whether holders receive Distributions. See "Risk Factors--Risks Relating to Trust Preferred Securities--Option to Defer Interest Payment Period; Tax and Market Price Consequences of a Deferral of Interest Payments," "Description of Junior Subordinated Debentures--Option to Defer Interest Payment Period" and "Certain Federal Income Tax Consequences--Interest Income and Original Issue Discount." </TABLE> 4 <PAGE> 10 <TABLE> <S> <C> REDEMPTION..................................... The Trust Preferred Securities are subject to mandatory redemption by Success Capital as described below upon repayment of the Junior Subordinated Debentures at their Stated Maturity in an amount equal to the amount of Junior Subordinated Debentures maturing on or being redeemed on such date, at a redemption price equal to the aggregate Liquidation Amount of the Trust Preferred Securities plus accumulated and unpaid Distributions thereon to such date. The Junior Subordinated Debentures will mature on May 19, 2028, which date may be advanced as set forth in the next sentence. Subject to Federal Reserve approval if then required under applicable capital guidelines, policies or regulations of the Federal Reserve, the Junior Subordinated Debentures are redeemable prior to maturity at the option of Success Bancshares (i) at any time or from time to time, in whole or in part, on or after May 19, 2003 or (ii) at any time, in whole (but not in part), within 90 days following the occurrence and during the continuance of a Tax Event, an Investment Company Event or a Capital Treatment Event, in each case at a redemption price equal to 100% of the principal amount of the Junior Subordinated Debentures so redeemed, together with any accrued but unpaid interest to the date of redemption. See "Description of Trust Preferred Securities--Redemption" and "Description of Junior Subordinated Debentures--Redemption." DISTRIBUTION OF THE JUNIOR SUBORDINATED DEBENTURES........................ Success Bancshares has the right at any time to dissolve Success Capital and, after satisfaction of liabilities to creditors of Success Capital as required by applicable law, to cause the Junior Subordinated Debentures to be distributed to holders of Trust Preferred Securities in liquidation of Success Capital, subject to Success Bancshares having received prior approval of the Federal Reserve to do so if then required under applicable capital guidelines, policies or regulations of the Federal Reserve. See "Description of Trust Preferred Securities--Dissolution of Success Capital and Distribution of Junior Subordinated Debentures." GUARANTEE...................................... Taken together, Success Bancshares' obligations under various documents described herein, including the Guarantee Agreement, provide a full guarantee of payments by Success Capital of Distributions and other amounts due on the Trust Preferred Securities. Under the Guarantee Agreement, Success Bancshares guarantees the payment of Distributions by Success Capital and payments on dissolution of Success Capital or redemption of the Trust Preferred Securities (subordinate to the right to payment of Senior and Subordinated Debt of Success Bancshares) to the extent of funds held by Success Capital. If Success Capital has insufficient funds to pay Distributions on the Trust Preferred Securities (i.e., if Success Bancshares has failed to make required payments under the Junior Subordinated Debentures), a holder of the Trust Preferred Securities would have the right to institute a legal proceeding directly against Success Bancshares to enforce payment of such Distributions to such holder. See "Description of Junior Subordinated Debentures--Enforcement of Certain Rights by Holders of Trust Preferred Securities," "Description of Junior Subordinated Debentures-- Debenture Events of Default" and "Description of Guarantee." </TABLE> 5 <PAGE> 11 <TABLE> <S> <C> RANKING........................................ The Trust Preferred Securities will rank pari passu, and payments thereon will be made pro rata, with the Common Securities, except as described under "Description of Trust Preferred Securities-- Subordination of Common Securities of Success Capital Held by Success Bancshares." The Guarantee and the Junior Subordinated Debentures are unsecured and subordinated to all Senior and Subordinated Debt of Success Bancshares. At December 31, 1997, the aggregate outstanding Senior and Subordinated Debt of Success Bancshares was approximately $18.6 million. In addition, because Success Bancshares is a holding company, all obligations of Success Bancshares relating to the securities described herein will be effectively subordinated to all existing and future liabilities of Success Bancshares' subsidiaries, including the Bank. Success Bancshares may cause additional Trust Preferred Securities to be issued by trusts similar to Success Capital in the future, and there is no limit on the amount of such securities that may be issued. In this event, Success Bancshares' obligations under the Junior Subordinated Debentures to be issued to such other trusts and Success Bancshares' guarantees of the payments by such trusts will rank pari passu with Success Bancshares' obligations under the Junior Subordinated Debentures and the Guarantee, respectively. VOTING RIGHTS.................................. The holders of the Trust Preferred Securities will have no voting rights except in limited circumstances relating only to the modification of the Trust Preferred Securities, the dissolution of Success Capital and certain other matters described herein. See "Description of Trust Preferred Securities--Voting Rights; Amendment of the Trust Agreement." PROPOSED NASDAQ NATIONAL MARKET(SM) SYMBOL........................................ SXNBP USE OF PROCEEDS................................ The proceeds to Success Capital from the sale of the Trust Preferred Securities offered hereby will be invested by Success Capital in the Junior Subordinated Debentures. Success Bancshares intends to invest (immediately following the consummation of the proposed Minority Acquisition) approximately $13,000,000 of the net proceeds in the Bank in the form of common stock of the Bank to increase its capital level to support anticipated growth. Prior to the consummation of the Minority Acquisition, Success Bancshares may invest up to $13,000,000 of the net proceeds in the Bank in the form of preferred stock of the Bank. See "Business--Recent Developments." Success Bancshares intends to use the remaining net proceeds for general corporate purposes, which may include, without limitation, funding additional investments in the Bank and possible future acquisitions. Pending the investment by Success Bancshares in the Bank, Success Bancshares will invest such proceeds in short-term, highly-rated marketable debt securities. See "Use of Proceeds." ERISA CONSIDERATIONS........................... Prospective purchasers should carefully consider the restrictions on purchase set forth in "ERISA Considerations." </TABLE> 6 <PAGE> 12 <TABLE> <S> <C> ABSENCE OF MARKET FOR TRUST PREFERRED SECURITIES..................................... The Trust Preferred Securities will be a new issue of securities for which there currently exists no market. Although the Underwriters have informed Success Bancshares and Success Capital that they currently intend to make a market in the Trust Preferred Securities, they are not obligated to do so, and any such market-making may be discontinued at any time without notice. Accordingly, there can be no assurance as to the development or liquidity of any market for the Trust Preferred Securities. See "Underwriting." RATING......................................... The Trust Preferred Securities will not be rated by any nationally recognized statistical rating organization. See "Risk Factors--Risks Relating to Trust Preferred Securities--Absence of Rating for Trust Preferred Securities." RISK FACTORS................................... An investment in the Trust Preferred Securities involves substantial risks that should be considered by prospective purchasers. In addition, because holders of the Trust Preferred Securities may receive Junior Subordinated Debentures on dissolution of Success Capital, and because payments on the Junior Subordinated Debentures are the sole source for Distributions on, and redemptions of, the Trust Preferred Securities, prospective purchasers of the Trust Preferred Securities are also making an investment decision with regard to the Junior Subordinated Debentures and should carefully review all of the information relating to the Junior Subordinated Debentures contained in this Prospectus. See "Risk Factors" and "Description of the Junior Subordinated Debentures." </TABLE> 7 <PAGE> 13 SUMMARY CONSOLIDATED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) The summary consolidated financial and other data should be read in conjunction with the Company's Consolidated Financial Statements, including the accompanying notes, appearing elsewhere in this Prospectus and with "Management's Discussion and Analysis of Financial Condition and Results of Operations." <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ----------------------------------------------------------------- 1997 1996 1995 1994 1993 ----------- ----------- ----------- ---------- ---------- STATEMENT OF INCOME DATA: <S> <C> <C> <C> <C> <C> Interest income..................... $ 24,912 $ 19,850 $ 18,675 $ 14,619 $ 10,960 Interest expense.................... 12,861 10,020 9,886 7,221 5,016 --------- --------- --------- -------- --------- Net interest income............. 12,051 9,830 8,789 7,398 5,944 Provision for loan losses........... 766 310 207 250 220 --------- --------- --------- -------- --------- Net interest income after provision for loan losses...... 11,285 9,520 8,582 7,148 5,724 Other operating income.............. 8,191 7,149 6,004 5,007 5,501 Other operating expenses............ 17,853 15,630 13,342 12,016 10,144 Minority interest in income of subsidiary bank................ 37 23 47 58 79 --------- --------- --------- -------- --------- Income before taxes.............. 1,586 1,016 1,197 81 1,002 Income tax expense (benefit)........ 499 233 260 (182) 176 --------- --------- --------- -------- --------- Net income....................... $ 1,087 $ 783 $ 937 $ 263 $ 826 ========== ========== ========== ========= ========== COMMON SHARE DATA: Earnings per common share Basic............................ $ 0.68 $ 0.66 $ 0.93 $ 0.27 $ 0.92 Diluted.......................... 0.65 0.63 0.86 0.26 0.84 Book value(1)....................... 10.30 8.99 7.48 5.83 7.27 Weighted average common shares outstanding(2)............ 1,531,000 1,061,000 1,011,000 990,000 899,000 </TABLE> <TABLE> <CAPTION> DECEMBER 31, ----------------------------------------------------------------- 1997 1996 1995 1994 1993 ---------- ----------- ----------- --------- ---------- BALANCE SHEET DATA: <S> <C> <C> <C> <C> <C> Loans, net.......................... $ 287,025 $ 203,299 $ 171,135 $ 139,491 $ 109,224 Total assets........................ 378,719 276,349 251,338 222,809 190,677 Deposits............................ 329,424 245,105 227,308 204,171 162,676 Borrowings, including repurchase agreements................... 16,163 18,975 14,395 11,174 19,644 Shareholders' equity (3)............ 30,070 10,100 8,085 5,973 6,706 </TABLE> 8 <PAGE> 14 <TABLE> <CAPTION> Year Ended December 31, ---------------------------------------------------------- 1997 1996 1995 1994 1993 ---------- --------- ---------- ---------- --------- <S> <C> <C> <C> <C> <C> PERFORMANCE DATA: Net interest margin(4) ................. 4.17% 4.25% 4.14% 4.14% 4.38% Return on average assets ............... 0.34 0.31 0.40 0.13 0.53 Return on average equity ............... 7.76 8.33 14.48 4.29 14.00 Loans to deposits ...................... 87.13 82.94 75.29 68.32 67.14 Average equity to average assets ....... 4.39 3.66 2.77 3.00 3.77 ASSET QUALITY RATIOS: Non-performing loans to total loans(5) . 0.63% 0.06% 0.37% 0.27% 1.25% Non-performing assets to total assets .. 0.56 0.04 0.25 0.17 0.72 Allowance for loan losses to total loans 0.72 0.70 0.70 0.71 0.78 Non-performing loans to allowance for loan losses ........... 87.54 8.28 53.74 38.10 160.35 Net loan charge-offs to average loans .. 0.05 0.04 0.01 0.08 0.01 RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND DIVIDENDS(6): Excluding deposit interest ............. 1.90 1.64 2.07 1.10 3.21 Including deposit interest ............. 1.12 1.09 1.12 1.01 1.20 OTHER: Banking facilities ..................... 9 7 7 5 4 Full-time equivalent employees ......... 162 144 150 120 114 </TABLE> - ---------- (1) Book value per share is calculated using total shareholders' equity divided by shares outstanding at end of period. (2) The increase in weighted average common shares outstanding from 1,061,000 at December 31, 1996 to 1,531,000 at December 31, 1997 is attributable to Success Bancshares' initial public offering of common stock consummated in October 1997. (3) The decrease in shareholders' equity from $6,706 in 1993 to $5,973 in 1994 is primarily attributable to the implementation of SFAS 115 Accounting for Certain Investments in Debt and Equity Securities on December 31, 1993. The unrealized net loss on securities available-for-sale, net of tax declined $1.6 million during 1994, and was recorded as a reduction in shareholders' equity. (4) Net interest income on a tax-equivalent basis divided by average interest-earning assets. (5) Non-performing loans consist of non-accrual loans and loans contractually past due 90 days or more and still accruing. (6) Earnings consist of income before income tax plus interest expense. Fixed charges consist of interest expense. 9 <PAGE> 15
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+PROSPECTUS SUMMARY The following is a summary of information set forth in more detail elsewhere in this Prospectus. Unless otherwise indicated, all information contained in this Prospectus assumes that the Underwriters' over-allotment option is not exercised. The number of shares and options outstanding and per share amounts reflect Columbia's 2-for-1 stock split effective September 11, 1998. Unless otherwise indicated, "Columbia" in this Prospectus mean Columbia and Columbia River Bank, its subsidiary, and references to the "Offering" mean the offering of shares of Common Stock pursuant to this Prospectus. For further definitions of certain terms used in this Prospectus, see "Glossary of Certain Key Terms." COLUMBIA BANCORP Columbia is a bank holding company headquartered in The Dalles, Oregon. It is the parent corporation of Columbia River Bank ("CRB"), a nine-branch, full service, community banking organization. Since 1993 Columbia has grown rapidly through merger and acquisition activity and new branch openings. Columbia's pending acquisition of Valley Community Bancorp ("Valley") is anticipated to close by early 1999. According to information reported as of June 30, 1998, by the State of Oregon Division of Finance and Corporate Securities, if the acquisition of Valley had been completed as of June 30, 1998, CRB and Valley, if combined, would rank as the 4th largest bank based in Oregon. See "Business -- Pending Acquisition of Valley Community Bancorp." CRB offers a broad range of financial services to its customers, primarily small and medium sized businesses, farmers and individuals. Columbia's seven Oregon branches serve the northern and eastern Oregon communities of The Dalles, Hood River, and Hermiston, and the central Oregon communities of Madras, Redmond, and Bend. CRB's two south central Washington branches serve the communities of Goldendale and White Salmon. Valley operates from McMinnville, Oregon, 36 miles southwest of metropolitan Portland. As of June 30, 1998, Columbia had total assets of $253.11 million, total deposits of $218.42 million, and shareholders' equity of $22.57 million. Columbia's net income for the year ended December 31, 1997 was $3.89 million, which was Columbia's tenth consecutive year of increasingly higher net income. For the year ended December 31, 1997, Columbia's return on average assets was 1.77%, and its return on average equity was 19.55%. The markets in which Columbia operates are relatively economically diverse, and therefore pose both opportunities and challenges to a community bank operating in all of these economies. Columbia's approach to meeting the challenge is to staff its branches and business groups with managers who are established in their communities and have developed a loyal customer following. Columbia's branches emphasize those products and services that are best suited for the geographic region served by the branch. These diverse economies also provide opportunities to limit Columbia's exposure to risks within any one economic sector. GROWTH HISTORY Columbia's subsidiary, CRB, was chartered in Oregon in 1976 as a one-branch community bank in The Dalles, and has since grown as a result of merger and acquisition activity, new branch openings, the introduction of new business lines, and the expansion of its existing products and community bank lending expertise. The majority of Columbia's growth has occurred since 1993, and is marked by the following highlights: 1993 - Opened first branch outside of The Dalles, in Hood River, Oregon - Completed first full year in which CRB offered investment products to customers through affiliation with Primevest Financial Services, Inc. 1994 - Began and concluded negotiations to merge with Juniper Banking Company, which added branches in Madras and Redmond, Oregon, and increased assets by $31 million; merger effective January 1, 1995 1995 - Opened branch in Safeway store in The Dalles - Introduced VISA check (debit) card 1996 - Columbia became CRB's holding company - Introduced 24-hour telephone banking - Acquired Klickitat Valley Bank, which added branches in White Salmon and Goldendale, Washington and increased assets by $78 million - Opened first branch in Bend, Oregon, the largest community in which Columbia operates 1997 - Established a residential mortgage lending group in Bend, Oregon to enhance Columbia's mortgage business - Achieved 12-month increases in assets, loans, and deposits of 16%, 31%, and 13%, respectively, all through internal growth - Introduced corporate sweep accounts for business customers 1998 - Signed agreement to acquire Valley Community Bancorp, a McMinnville, Oregon community banking organization with $37 million in assets as of June 30, 1998 - Opened branch in Hermiston, Oregon and announced plans to open a branch in Pendleton, Oregon and a second Bend, Oregon branch, which will include a business lending group. - From June 30, 1997 to June 30, 1998, assets increased by 15% and income increased 26% for the six-month period ended June 30, 1998 compared to the six month period ended June 30, 1997 BUSINESS STRATEGY Columbia's strategy is to continue building on its position as a leading community-based provider of financial services in Oregon and south central Washington. The key to the success of this strategy, in Columbia's view, is to continue to provide exceptional personal service to the communities it now serves, and to successfully expand into new communities by identifying and meeting their unique financial services needs. Columbia's target branch locations are in non-metropolitan regions, where it aims to deliver prompt, accurate, and friendly personal banking services. The components of Columbia's business strategy are outlined below: Successfully operate in non-metropolitan regions. In contrast to the present strategies of certain major regional banks, which have closed branches and reduced service levels in Columbia's identified communities, Columbia believes that the key to profitably operating in non-metropolitan communities is to: (i) provide a high level of service to the customer; (ii) staff branches with employees who have established ties to the community; (iii) attract and retain a highly skilled management team; and, (iv) allow branch personnel the flexibility to emphasize products and services which best fit their local economy. In addition, by decentralizing a portion of CRB's management function to the branch level, Columbia believes it can make business decisions regarding customers more quickly and knowledgeably than its major banking competitors. Columbia believes it is able to profitably attract and retain customers by providing and delivering such products and services tailored to their individual needs, and by delivering them with a high degree of personal attention. Maintain high asset quality. Columbia seeks to maintain high asset quality through a program that includes prompt and strict adherence to established credit policies, training and supervision of lending officers, and periodic professional independent loan review. Additionally, Columbia uses incentives to maintain high asset quality, including tying a portion of its loan officers' compensation to the quality of the loans they originate. Columbia also believes that its commitment to hire branch managers with long term ties to their communities is of significant assistance in determining the quality of loan transactions. The variety of economies in which Columbia's branches are located increases the diversification and, in Columbia's opinion, the strength of the overall loan portfolio. For the years ended December 31, 1995, 1996, and 1997, and for the six months ended June 30, 1998, Columbia's net charge-offs (recoveries) to average loans were (0.03)%, 0.29%, (0.04)%, and 0.26%, respectively. Seize merger and acquisition opportunities. In 1995, CRB merged with Juniper Banking Company of central Oregon, and in 1996 Columbia acquired Klickitat Valley Bank of south central Washington. After both transactions, Columbia was able to provide the same or increased levels of community banking products and services in these new market areas. In August 1998, Columbia entered into a definitive agreement to acquire McMinnville-based Valley. Columbia believes the economy in the McMinnville area affords it the opportunity to leverage two of its core competencies: small business lending and agricultural lending. Additionally, the pending acquisition will be Columbia's first entrance into Oregon's most populous region, the Willamette Valley. Management believes there are significant future growth opportunities in McMinnville and its surrounding communities. Continue to expand through new branches and new products. Columbia has grown through the establishment of new branches in Hood River and Bend, Oregon and more recently through the opening in September 1998 of a branch in Hermiston, Oregon. Additional branches in central and eastern Oregon are planned in order to take advantage of growth opportunities and to leverage existing nearby operations. In addition, Columbia's banking products, including its loan programs, and other services are designed to be responsive to the needs of local community businesses and individual customers. For example, in 1997 Columbia recognized an opportunity in rapidly growing central Oregon, and established a mortgage lending group in Bend to originate and sell residential mortgages. Columbia also offers investment products and services through its affiliation with the Primevest Financial Services, Inc. brokerage organization, through which it offers stocks, bonds, mutual funds, IRAs, retirement plans, and estate planning. Columbia's products and services are designed to both increase its customer base and to enhance cross-selling opportunities. Columbia maintains its administrative headquarters at 420 East Third Street, Suite 200, The Dalles, Oregon 97058. Its telephone number at that address is (541) 298-6649. THE OFFERING <TABLE> <S> <C> Common Stock offered by Columbia............. 1,000,000 shares(1) Common Stock to be outstanding after the 7,940,682 shares(2) Offering................................... Use of Proceeds.............................. To provide funds to finance Columbia's expansion plans (including the Valley acquisition, potential future acquisitions, and expansion of the branch network). Proposed Nasdaq National Market symbol....... CBBO </TABLE> - --------------- (1) Excludes 150,000 shares subject to the Underwriter's over-allotment option. (2) Reflects all shares issued and outstanding as of October 9, 1998. Does not include an aggregate of 408,838 shares of Common Stock reserved for issuance under Columbia's stock incentive plan, 328,838 of which are subject to outstanding options as of October 9, 1998. See "Management -- Executive and Employee Compensation Plans."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001010026_3dfx_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001010026_3dfx_prospectus_summary.txt
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+SUMMARY The following summary is qualified in its entirety by the more detailed information and the Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Prospective investors should consider carefully the information discussed under "Risk Factors." THE COMPANY 3Dfx Interactive is a leading developer of high performance, cost-effective 3D media processors, software and related technology for the interactive electronic entertainment market. The Company has developed 3D technology that enables a highly immersive, interactive and realistic 3D experience across multiple hardware entertainment platforms. Furthermore, the Company's technology facilitates the virtually seamless portability of software content across interactive electronic entertainment platforms, specifically the personal computer ("PC") and the coin-operated ("coin-op") arcade system. The Company's strategy is to provide a 3D media processor solution comprised of hardware and embedded software designed around a common architecture that will become the standard graphics engine for the interactive electronic entertainment market. To date, the Company's efforts have been largely focused on the multimedia add-in card market. The Company believes that its high profile brand image in the retail channel and its success in forging strong relationships with software content developers, combined with the benefits of its technology, provide powerful incentives for the leading PC OEMs and entertainment hardware manufacturers to utilize the 3Dfx solution. The growth of the interactive electronic entertainment market has been constrained by the absence of a high performance, cost-effective 3D solution, the lack of an architecture that facilitates virtually seamless porting across different platforms and the limited number of high quality 3D software titles. The implementation of 3D graphics is extremely complex and mathematically intensive and requires significant computing power. Consequently, despite the desirability of 3D graphics, high quality 3D continues to remain a niche technology not prevalent outside of high-end engineering workstation and professional applications. To date, attempts to bring high quality, affordable 3D solutions to the entertainment market have required consumers to accept a trade-off between visual realism, or fill rate, and gaming performance, or frame rate. Today, the interactive electronic entertainment industry is demanding a no-compromise 3D solution that will deliver both visual realism and performance at a cost-effective price. The solution must also drive content development by enabling developers to create a new generation of high quality 3D software that delivers a realistic and immersive experience. The Company's technology is optimized to alleviate the traditional consumer trade-off between visual quality and gaming performance by providing a 3D solution with both high fill rates and frame rates. To that end, the Company's technology enables a highly immersive, interactive 3D experience with compelling graphics, realistic motion and complex character and scene interaction at real time frame rates. In addition, the Company's technology embodies a single hardware/software architecture that can be deployed as the graphics engine for a number of interactive electronic entertainment platforms. To promote the rapid adoption of its products, the Company's architecture supports most industry standard 3D application programming interfaces ("APIs"), including Apple Computer's Rave3D, Microsoft's Direct3D and Silicon Graphics' OpenGL. Additionally, the Company has developed Glide, its proprietary low-level 3D API, which facilitates the virtually seamless portability of software content across multiple entertainment platforms utilizing the Company's 3D media processor, thereby leveraging the significant development and marketing expenses associated with a given title. Voodoo Graphics and Voodoo Rush, the Company's first products, and subsequent 3D media processors now under development are designed around a common architecture to be utilized as the graphics engine for PCs and coin-op arcade systems. For PC applications, Diamond, Elitetron and Orchid, among others, have introduced consumer multimedia add-in cards incorporating the Company's Voodoo Graphics 3D media processor for sale in the retail channel and for incorporation into PCs manufactured primarily by systems integrators. In the coin-op arcade market, the Voodoo Graphics 3D media processor is being utilized by Acclaim, Atari, Kaneko, Midway and Taito, among others. Voodoo Rush incorporates a 3D/2D solution into a single personal computer interface ("PCI") board. The Company has also developed Voodoo2, which is expected to be commercially available in the first quarter of 1998. The Company's next product, Banshee, is intended to be a high performance, fully-featured single chip, 3D/2D media processor for the PC and coin-op arcade markets. The Company expects to begin commercial shipments of Banshee in the second quarter of 1998. All of the Company's products are manufactured, tested and packaged by third-parties. THE OFFERING <TABLE> <S> <C> Common stock offered by the Company.......... 2,000,000 shares Common stock offered by the Selling Shareholders............................... 900,000 shares Common stock outstanding after the offering................................... 14,566,630 shares(1) Use of proceeds.............................. For capital expenditures and for working capital and other general corporate purposes, including expansion of sales and marketing and research and product development efforts and financing of accounts receivable and inventories. See "Use of Proceeds." Nasdaq National Market symbol................ TDFX </TABLE> SUMMARY FINANCIAL DATA (in thousands, except per share data) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ------------------------------- 1995 1996 1997 ------- -------- -------- <S> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues.................................................... $ -- $ 6,390 $ 44,069(2) Loss from operations........................................ (5,106) (14,810) (2,344) Net loss.................................................... (5,039) (14,751) (1,714) Basic net loss per share(3)................................. $ (0.82) $ (1.74) $ (0.16) Diluted net loss per share(3)............................... $ (0.82) $ (1.74) $ (0.16) Shares used in basic net loss per share calculations(3)..... 6,173 8,467 10,767 Shares used in diluted net loss per share calculations(3)... 6,173 8,467 10,767 </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1997 -------------------------- ACTUAL AS ADJUSTED(4) -------- -------------- <S> <C> <C> BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........... $ 34,921 $ 80,250 Working capital............................................. 37,456 82,785 Total assets................................................ 61,917 107,246 Accumulated deficit......................................... (21,504) (21,504) Total shareholders' equity.................................. 44,274 89,603 </TABLE> - --------------- (1) Based on shares outstanding as of December 31, 1997. Excludes (i) 2,505,984 shares of Common Stock issuable upon exercise of options outstanding as of December 31, 1997, with a weighted average exercise price of $6.38 per share, (ii) 93,636 shares of Common Stock issuable upon exercise of warrants outstanding as of December 31, 1997, with a weighted average exercise price of $5.97 per share, (iii) 881,308 shares of Common Stock reserved for future issuance as of December 31, 1997 under the Company's stock plans, and (iv) 500,000 shares of Common Stock reserved for issuance subsequent to December 31, 1997 under the Company's stock plans. In addition, the Company intends to seek shareholder approval at the 1998 Annual Meeting of Shareholders currently scheduled for May 1998 for (i) a 1,700,000 share increase in the number of shares reserved for issuance under the 1995 Stock Option Plan and (ii) an increase in the number of shares available for purchase under the 1997 Employee Stock Purchase Plan on the date of each annual meeting of shareholders commencing in 1999 of the lesser of 200,000 shares or 1% of the outstanding capitalization of the Company. See "Management -- Stock Plans," "Description of Capital Stock" and Notes 5, 6 and 10 of Notes to Financial Statements. (2) Includes $1.8 million of development contract revenues recognized under the Sega Agreement. No future revenues will be recognized under the Sega Agreement. See "Risk Factors -- Pending Litigation." (3) See Note 1 of Notes to Financial Statements for an explanation of shares used in basic and diluted net loss per share calculations. (4) Adjusted to give effect to the sale of 2,000,000 shares of Common Stock offered by the Company hereby at an assumed public offering price of $24.25 per share and the application of the estimated net proceeds therefrom after deducting estimated underwriting discounts and commissions and offering expenses payable by the Company. See "Use of Proceeds" and "Capitalization." Except as otherwise indicated herein, all information in this Prospectus assumes that the Underwriters' overallotment option is not exercised. See "Underwriting."
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+PROSPECTUS SUMMARY The following is a summary of certain information contained in this prospectus and is qualified in its entirety by the more detailed information and financial statements (including notes thereto) appearing elsewhere in the prospectus and in the Registration Statement. Investors should carefully consider the information set forth in this prospectus under the heading "High Risk Factors". The Company GREYSTONE INTERNATIONAL LIMITED (the "Company"), was organized under the laws of the Cayman Islands on March 22, 1995 under the name Zeron International Limited. The Company's name was changed pursuant to a meeting of the Company's Board of Directors on February 23, 1997. The Company was organized as a vehicle to acquire or merge with a business or company, (the "Target Business") (a "Business Combination"). Management believes that the Company's characteristics as an enterprise with liquid assets, nominal liabilities, and flexibility in structuring will make the Company an attractive combination candidate. None of the Company's officers, directors, promoters, their affiliates or associates have had any preliminary contact or discussions and there are no present plans, proposals, arrangements or understandings with any representative of the owners of any business regarding the possibility of an acquisition or merger transaction. The Company does not intend to engage in the business of investing, reinvesting or trading in securities as its primary business or pursue any business which would render the Company an "investment company" pursuant to the Investment Company Act of 1940. Since organization of the Company, its activities have been limited to the sale of initial shares in connection with its organization and its preparation in producing a registration statement and prospectus for its initial public offering. The Company will not engage in any substantive commercial business following the offering. (See "Proposed Business.") The Company maintains its office at c/o Givens Hall Bank and Trust, Ltd., Genesis Building, 3rd Floor, Jennet Street, Grand Cayman, Cayman Islands. The Company's phone number is (809) 949-8142. The Offering Securities offered....... 4,000 Shares of Common Stock, $.001 par value, being offered at $6.25 per Share. (See "Description of Securities".) Common Stock outstanding prior to the offering...... 396,000 shares. Common Stock to be outstanding after the offering............... 400,000 shares. Offering Conducted in Compliance with Rule 419 The Company is a blank check company and consequently this offering is being conducted in compliance with the Commission's Rule 419. Investors have certain rights and will receive the substantive protection provided by the rule. To that end, the securities purchased by investors and the funds received in the offering will be deposited and held in the Escrow Account until an acquisition meeting specific criteria is completed (hereinafter the "Deposited Funds" and "Deposited Securities".) Before the acquisition can be completed and before the Deposited Funds and Deposited Securities can be released to the Company and the investors, respectively, the Company is required to update the Registration Statement with a post-effective amendment, and within the five days after the effective date thereof, the Company is required to furnish investors with the prospectus produced thereby containing the terms of a reconfirmation offer and information regarding the proposed acquisition candidate and its business, including audited financial statements. According to Rule 419, investors must have no fewer than 20 and no more than 45 business days from the effective date of the post-effective amendment to decide to reconfirm their investment and remain an investor or alternately, require the return of their investment, minus certain deductions. Any investor not making any decision within said 45 day period will automatically have his investment funds returned. The rule further provides that if the Company does not complete an acquisition meeting the specified criteria within 18 months of the Effective Date, all of the Deposited Funds in the Escrow Account must be returned to investors. If the offering period is extended to its limit (6 months), the Company will have only 12 months in which to consummate a merger or acquisition. (See "Investors' Rights and Substantive Protection Under Rule 419 - Reconfirmation Offering.") Enforceability of Civil Liabilities The Company is incorporated in the Cayman Islands. Two (2) of the Company's officers and directors, as well as the Company's Cayman Islands counsel are resident outside of the United States (See "MANAGEMENT" and "LEGAL OPINIONS"). All or a substantial portion of the assets of such persons may be located outside the United States. As a result, it may be difficult for investors to effect service of process within the United States upon such person or to realize against them upon judgements of courts of the United States predicated upon civil liability provisions of the Federal securities laws of the United States, or solely upon the Federal securities laws. The Company has been advised by Quin & Hampson, Barristers and Attorneys-at-Law, Harbour Centre, 3rd Floor, P.O. Box 1348, Cayman Island, BWI, its Cayman Islands counsel, that judgements obtained in the United States courts in relation to liabilities predicated upon the federal securities laws of the United States will not be automatically enforced in the Cayman Islands and there will necessarily have to be a re-examination of the issues by the Cayman Islands court to determine liability or enforceability in the Cayman Islands. Furthermore, the Company has been advised by Quin & Hampson that actions based solely on the United States Federal securities laws will not be actionable in the Cayman Islands, unless such actions are based on fraud, negligence or breach of duties of officers or directors of the corporation. High Risk Factors Investments in the securities of the Company are highly speculative, involve a high degree of risk, and should be purchased only by persons who can afford to lose their entire investment. See "High Risk Factors" for special risks concerning the Company and "Dilution" for information concerning dilution of the book value of the investors shares from the public offering. (See "High Risk Factors" and "Dilution.") Determination of Offering Price The offering price of $6.25 per Share for the Shares offered hereby has been arbitrarily determined by the Company. This price bears no relation to the Company's assets, book value, or any other customary investment criteria, including the Company's prior operating history. Among factors considered by the Company in determining the offering price were estimates of the Company's business potential, the limited financial resources of the Company, the amount of equity and control desired to be retained by the present shareholders, the amount of dilution to public investors and the general condition of the securities markets. (See "High Risk Factors.") Use of Proceeds Of the $25,000 offering proceeds deposited into the Escrow Account (the "Deposited Funds"), 10% ($2,500) may be released to the Company prior to a reconfirmation offering whereby investors reconfirm their investment in accordance with procedures proscribed by Rule 419. (See "Investors' Rights and Substantive Protection Under Rule 419 - Reconfirmation Offering.") The Company is entitled to such funds, and the Company's current management intends to request release of these funds from the Escrow Account. The Company will receive the remainder of the Deposited Funds in the event a Business Combination is consummated pursuant to the provisions of Rule 419. The Deposited Funds will remain in the non-interest-bearing Escrow Account maintained by Atlantic Liberty Savings, which bank is to act as Escrow Agent pursuant to Rule 419 of Regulation C. No portion of the Deposited Funds will be expended to acquire a Target Business. The Deposited Funds will be transferred to the Target Company when a Business Combination is effected. The Company has incurred $32,331 in debt in connection with its organizational activities. Management is not aware of any circumstances under which this policy, through their own initiative, may be changed. Accordingly, no portion of the proceeds are being used to repay debt. Based on an oral agreement amongst members of management, management may not accrue compensation prior to the consummation of a Business Combination. Management is not aware of any circumstances under which such policy through their own initiative may be changed. Since the role of present management after a Business Combination is uncertain, the Company has no ability to determine what remuneration, if any, will be paid to such persons after such Business Combination. (See "Use of Proceeds.") SUMMARY FINANCIAL INFORMATION The following is a summary of the Company's consolidated financial information and is qualified in its entirety by the audited financial statements appearing herein. September 30 , 1997 Statement of Income Data: Net Sales .................. $ - 0 - Net Income ................. $ (50) Net Income Per Share ....... $ - 0 - Shares Outstanding ......... 396,000 As of Sept. 30, 1997 After Offering Balance Sheet Data Working Capital ............ $ (23,584) $ 1,416 Total Assets ............... $ 34,093 $26,762 Long Term Debt ............. $ - 0 - $ - 0 - Total Liabilities........... $ 32,331 $ - 0 - Shareholders' Equity ....... $ 1,762 $26,762 <PAGE> INVESTORS' RIGHTS AND SUBSTANTIVE PROTECTION UNDER RULE 419 Deposit of Offering Proceeds and Securities Rule 419 requires that offering proceeds after deduction for underwriting commissions, underwriting expenses and dealer allowances, if any, and the securities purchased by investors in this offering, be deposited into an escrow or trust account (the "Deposited Funds" and "Deposited Securities," respectively) governed by an agreement which contains certain terms and provisions specified by the Rule. Under Rule 419, the Deposited Funds and Deposited Securities will be released to the Company and to the investors, respectively, only after the Company has met the following three basic conditions. First, the Company must execute an agreement(s) for an acquisition(s) meeting certain prescribed criteria. Second, the Company must file a post-effective amendment to the Registration Statement which includes the terms of a reconfirmation offer that must contain conditions prescribed by the rules. The post-effective amendment must also contain information regarding the acquisition candidate(s) and its business(es), including audited financial statements. Third, the Company must conduct the reconfirmation offer and satisfy all of the prescribed conditions, including the condition that a certain minimum number of investors must elect to remain investors. After the Company submits a signed representation to the escrow agent that the requirements of Rule 419 have been met and after the acquisition(s) is consummated, the escrow agent can release the Deposited Funds and Deposited Securities. Accordingly, the Company has entered into an escrow agreement with Atlantic Liberty Savings, 186 Montague Street, Brooklyn, New York, 11201 (the "Escrow Agent") which provides that: (1) The proceeds are to be deposited into the Escrow Account maintained by the Escrow Agent promptly upon receipt. Rule 419 permits 10% of the Deposited Funds to be released to the Company prior to the reconfirmation offering. The Deposited Funds and dividends thereon, if any, are to be held for the sole benefit of the investors and can only be invested in bank deposits, in money market mutual funds or federal government securities or securities for which the principal or interest is guaranteed by the federal government. (2) All securities issued in connection with the offering and any other securities issued with respect to such securities, including securities issued with respect to stock splits, stock dividends or similar rights are to be deposited directly into the Escrow Account promptly upon issuance. The identity of the investors are to be included on the stock certificates or other documents evidencing the Deposited Securities. The Deposited Securities held in the Escrow Account are to remain as issued, and are to be held for the sole benefit of the investors who retain the voting rights, if any, with respect to the Deposited Securities held in their names. The Deposited Securities held in the Escrow Account may not be transferred, disposed of nor any interest created therein other than by will or the laws of descent and distribution, or pursuant to a qualified domestic relations order as defined by the Internal Revenue Code of 1986 or Table 1 of the Employee Retirement Income Security Act. (3) Warrants, convertible securities or other derivative securities relating to Deposited Securities held in the Escrow Account may be exercised or converted in accordance with their terms; provided that, however, the securities received upon exercise or conversion together with any cash or other consideration paid in connection with the exercise or conversion are to be promptly deposited into the Escrow Account. (4) The securities to be offered by the Selling Securityholders will be deposited in a separate subaccount within the Escrow Account prior to effectiveness of the registration statement relating to the Company's offering, and while held in such account will be subject to the same transfer restrictions as are applicable to the Deposited Securities. The Selling Securityholders' Securities may not be released from such subaccount or the escrow account until (i) the Deposited Securities are released to the investors in the Company's Offering, or (ii) all Deposited Funds have been returned to the investors in the Company's Offering in the event a Business Combination has not been consummated within 18 months after the date of this prospectus. Prescribed Acquisition Criteria Rule 419 requires that before the Deposited Funds and the Deposited Securities can be released, the Company must first execute an agreement to acquire an acquisition candidate(s) meeting certain specified criteria. The agreement(s) must provide for the acquisition(s) of a business(es) or assets for which the fair value of the business represents at least 80% of the offering proceeds, excluding any underwriting commissions, underwriting expenses and dealer allowances payable to non-affiliates. The Agreement(s) must include, as a condition precedent to their consummation, a requirement that the number of investors representing 80% of the maximum offering proceeds must elect to reconfirm their investment. For purposes of the offering, the fair value of the business(es) or assets to be acquired must be at least $20,000 (80% of $25,000). Post-Effective Amendment Once the agreement(s) governing the acquisition(s) of a business(es) meeting the above criteria has been executed, Rule 419 requires the Company to update the registration statement with a post-effective amendment. The post-effective amendment must contain information about the proposed acquisition candidate(s) and its business(es), including audited financial statements, the results of this offering and the use of the funds disbursed from the Escrow Account. The post-effective amendment must also include the terms of the reconfirmation offer mandated by Rule 419. The reconfirmation offer must include certain prescribed conditions which must be satisfied before the Deposited Funds and Deposited Securities can be released from escrow. Reconfirmation Offering The reconfirmation offer must commence after the effective date of the post-effective amendment. Pursuant to Rule 419, the terms of the reconfirmation offer must include the following conditions: (1) The prospectus contained in the post-effective amendment will be sent to each investor whose securities are held in the Escrow Account within 5 business days after the effective date of the post-effective amendment. (2) Each investor will have no fewer than 20 and no more than 45 business days from the effective date of the post-effective amendment to notify the Company in writing that the investor elects to remain an investor. (3) If the Company does not receive written notification from any investor within 45 business days following the Effective Date, the pro rata portion of the Deposited Funds (and any related interest or dividends) held in the Escrow Account on such investor's behalf will be returned to the investor within 5 business days by first class mail or other equally prompt means. (4) The acquisition(s) will be consummated only if a minimum number of investors representing 80% of the maximum offering proceeds, equaling $20,000 (80% of $25,000) elect to reconfirm their investment. (5) If a consummated acquisition (s) has not occurred by (18 months from the date of this prospectus), the Deposited Funds held in the Escrow Account shall be returned to all investors on a pro rata basis within 5 business days by first class mail or other equally prompt means. Release of Deposited Securities and Deposited Funds The Deposited Funds and Deposited Securities may be released to the Company and the investors, respectively, after: (1) The Escrow Agent has received a signed representation from the Company and any other evidence acceptable by the Escrow Agent that: (a) The Company has executed an agreement for the acquisition(s) of a Target Business(es) for which the fair market value of the business represents at least 80% of the maximum offering proceeds and has filed the required post-effective amendment; (b) The post-effective amendment has been declared effective, that the mandated reconfirmation offer having the conditions prescribed by Rule 419 has been completed and that the Company has satisfied all of the prescribed conditions of the reconfirmation offer. (2) The acquisition(s) of the business(es) with the fair value of at least 80% of the maximum proceeds ($20,000). HIGH RISK FACTORS THE SECURITIES OFFERED HEREBY ARE HIGHLY SPECULATIVE IN NATURE AND INVOLVE AN EXTREMELY HIGH DEGREE OF RISK AND SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT. SEE "DILUTION" FOR INFORMATION CONCERNING DILUTION OF THE BOOK VALUE OF THE INVESTORS' SHARES FROM THE PUBLIC OFFERING. 1. Anticipated Change in Control and Management. If the initial public offering is completely sold, management and current shareholders, including counsel for the Company, will own approximately 99% of the Common Stock of the Company. Therefore, management and current shareholders would continue to control the Company and be able to elect all the directors to the board. Upon the successful completion of a Business Combination, the Company anticipates that it will have to issue to the Target Company authorized but unissued Common Stock in the Company which when issued will comprise a majority of the then issued and outstanding shares of Common Stock of the Company. Therefore, the Company anticipates that upon the consummation of a Business Combination there will be a change of control in the Company which will most likely result in the resignation or removal of the Company's present officers and directors. If there is a change in management, no assurance can be given as to the experience or qualification of such persons either in the operation of the Company's activities or in the operation of the business, assets or property being acquired. (See "Proposed Business.") 2. New Business Development Stage. The Company was incorporated under the laws of the Cayman Islands on March 22, 1995 under the name Zeron International Limited, and has had no operations to date. The Company's name was changed to Greystone International Limited on February 23, 1997. The Company was formed to serve as a vehicle to effect a Business Combination. There is no assurance the Company's intended acquisition or merger activities will be successful or result in revenue or profit to the Company. Since the Company has not yet attempted to seek a Business Combination, and due to the Company's lack of experience, there is only a limited basis upon which to evaluate the Company's prospectus for achieving its intended business objectives. The Company faces all risks which are associated with any new business. Any investment in this Company should be considered an extremely high risk investment. As of the date of this prospectus, the Company has not entered into or negotiated any arrangements for a Business Combination with a Target Business. (See "Proposed Business.") 3. Use of Proceeds. 90% of the net proceeds of this offering, pursuant to Rule 419, must be held in escrow pending the consummation of a Business Combination which transaction must occur within eighteen (18) months of the Effective Date herein. The funds from this offering may not be sufficient in order for the Company to find a Business Combination. Rule 419 permits 10% of the net proceeds to be disbursed to the Company from the Rule 419 Escrow Account prior to the consummation of a Business Combination. The Company intends to request release of this money. In the event the Company does not request release of these funds, the Company will receive these funds in the event a business combination is consummated in accordance with Rule 419. (See "Use of Proceeds", "Business" and "Investors' Rights and Substantive Protection under Rule 419.") 4. No Access to Investors' Funds While Held In Escrow . The Company is offering for sale 4,000 Shares, at $6.25 per Share. The maximum offering period is six months. There is no commitment by any other person to purchase all or any portion of the Shares offered hereby, and consequently there is no assurance that all 4,000 Shares will be sold during the Offering Period. Investors have no right to the return or the use of their funds and cannot earn interest thereon until conclusion of the offering which may continue for a period of up to six months after the Effective Date. Even upon the sale of the 4,000 Shares, the investors funds (reduced to reflect payments for expense amounts, if any, otherwise released as permitted by Rule 419) may remain in the Escrow Account, which is non-interest bearing, and the investors will have no right to the return of or the use of their funds for a period of 18 months from the Effective Date. Investors will be offered return of their pro rata portion of the funds held in escrow only in connection with the reconfirmation offering required to be conducted upon execution of an agreement to acquire a target business which represents 80% of the maximum offering proceeds. If the Company is unable to locate a Target Business meeting the above acquisition criteria, investors will have to wait 18 months from the Effective Date before a pro rata portion of their funds is returned without interest thereon. 5. Failure of Sufficient Number of Investors to Reconfirm Investment. A Business Combination with a Target Business cannot be consummated unless, in connection with the reconfirmation offering required by Rule 419, the Company can successfully convince a sufficient number of investors representing 80% of the maximum offering proceeds to elect to reconfirm their investments. If, after completion of the reconfirmation offering, a sufficient number of investors do not reconfirm their investment, the business combination will not be consummated. In such event, none of the Deposited Securities held in escrow will be issued and the Deposited Funds will be returned to investors on a pro rata basis. Up to 30% of the Shares may be purchased by officers, directors, current shareholders of the Company and any of their affiliates or associates. Shares purchased by such insiders will be included in determining whether investors representing 80% of the maximum offering proceeds elect to reconfirm their investment. The substantive benefit of an objective 80% reconfirmation by investors may be reduced, as it is likely that such insiders will elect to reconfirm a proposed Business Combination. 6. Extremely Limited Capitalization. As of March 31, 1997, the Company had assets of $32,243 and $32,331 of liabilities. There was $1,591 available in the Company's treasury as of March 31, 1997. Upon the sale of all the Shares in this offering, the Company will receive net proceeds of approximately $25,000, all of which must be deposited in the Escrow Account. $2,500 may be used by the Company as capital in order to seek a Business Combination. The Company's management intends to request release of these funds from escrow. In the event the Company does not request release of these funds, the Company will receive the funds in the event a Business Combination is consummated in accordance with Rule 419. The costs of conducting the Company's business activities will be paid by the money in the Company's treasury. Assuming suitable prospects are identified, if ever, the Company may be unable to complete an acquisition or merger due to a lack of sufficient funds. Therefore, the Company may require additional financing in the future in order to consummate a Business Combination. Such financing may consist of the issuance of debt or equity securities. The Company can not give any assurances that such funds will be available, if needed, or whether they will be available on terms acceptable to the Company. It is unlikely that the Company will need additional funds, but it may occur if a Target Company insists the Company obtain additional capital. Such financing will not occur without shareholder approval. The Company has borrowed funds from its officers, directors or current shareholders in the past, and may do so in the future. If the Company does not consummate an acquisition or purchase within 18 months of the Effective Date, the Company must return all the funds, minus certain deductions, back to the investors. (See "Use of Proceeds," "Proposed Business," and "Investors' Rights and Substantive Protection Under Rule 419.") 7. No Transfer of Escrowed Securities. No transfer or other disposition of the Deposited Securities shall be permitted other than by will or the laws of descent and distribution, or pursuant to a qualified domestic relations order as defined by the Internal Revenue Code of 1986 as amended, or Title 7 of the Employee Retirement Income Security Act, or the rules thereunder. Pursuant to Rule 15g-8, it is unlawful for any person to sell or offer to sell the securities (or any interest in or related to the securities) held in the Rule 419 Escrow Account other than pursuant to a qualified domestic relations order (i.e., divorce proceedings). Therefore, any and all contracts for sale to be satisfied by delivery of the Deposited Securities (e.g. contracts for sale on a when as, and if issued basis) and sales of derivative securities to be settled by delivery of the securities are prohibited. It is further prohibited to sell any interest in the Deposited Securities (or any derivative securities) whether or not physical delivery is required. (See "Investors' Rights and Substantive Protection Under Rule 419.") 8. No Assurances of a Public Market. Pursuant to Rule 419, all securities purchased in an offering by a blank check company, as well as securities issued in connection with an offering to underwriters, promoters or others as compensation or otherwise, must be placed in the Rule 419 Escrow Account. These securities will not be released from escrow until the consummation of a merger or acquisition as provided for in Rule 419. There is no present market for the Common Stock of the Company and there is no likelihood of any active and liquid public trading market developing following the release of securities from the Rule 419 account. Thus, shareholders may find it difficult to sell their shares. To date, neither the Company nor anyone acting on its behalf has taken any affirmative steps to request or encourage any broker dealer to act as a market maker for the Company's Common Stock. Further, there have been no discussions or understandings, preliminary or otherwise, between the Company or anyone acting on its behalf and any market maker regarding the participation of any such market maker in the future trading market, if any, for the Company's Common Stock. Present management of the Company has no intention of seeking a market maker for the Company's Common Stock at any time prior to the reconfirmation offer to be conducted prior to the consummation of a Business Combination. The officers of the Company after the consummation of a Business Combination may employ consultants or advisors to obtain such market makers. Management expects that discussions in this area will ultimately be initiated by the management of the Company in control of the entity after a Business Combination is reconfirmed by the stockholders. There is no likelihood of any active and liquid trading market for the Company's Common Stock developing. (See "Market for the Company's Common Stock" and "Investors' Rights and Substantive Protection Under Rule 419.") 9. Unspecified Industry and Acquired Business; Unascertained Risks. To date, the Company has not selected any particular industry in which to concentrate its Business Combination efforts. In relation to its competitors, the Company is and will continue to be an insignificant participant in the business of seeking Business Combinations. A large number of established and well-financed entities, including venture capital firms, have recently increased their merger and acquisition activities. Nearly all such entities have significantly greater financial resources, technical expertise and managerial capabilities than the Company and, consequently, the Company will be at a competitive disadvantage in identifying suitable merger or acquisition candidates and successfully consummating a proposed merger or acquisition. Also, the Company will be competing with a large number of other small, blank check companies. (See "Conflicts of Interest - Management's Fiduciary Duty" and "Business.") 10. Conflict of Interest - Management's Fiduciary Duties. A conflict of interest may arise between management's personal pecuniary benefits and management's fiduciary duty to the shareholders of the Company. Investors should note that the present shareholders of the Company, which include counsels' interest, will own approximately 99% of the Company after the offering is completed and would therefore have continuing control of the Company. Joel Schonfeld, counsel to the Company, and Andrea Weinstein, Mr. Schonfeld's partner, own 5,333 and 2,667 shares of the Company's common stock, respectively. Mr. Schonfeld's shares comprise 1.3% of the outstanding shares before the offering, and 1.3% after the offering. Ms. Weinstein's shares comprise .7% of the outstanding shares before and after the offering. Rose-Marie Fox, President, Treasurer and a director of the Company owns 97,000 Shares, which comprise 24.5% of the outstanding shares before the offering, and 24.3% after the offering. Thus, Management of the Company beneficially owns 97,000 shares, which comprise 24.5% of the Company before the offering and 24.3% after the offering. Further, Management's interest in their own pecuniary benefits may at some point compromise their fiduciary duty to the Company's shareholders. No proceeds from this offering will be used to purchase directly or indirectly any shares of the Common Stock owned by management or any present shareholder, director or promoter. (See "Management.") 11. Conflicts of Interest. The Company's directors and officers are or may become, in their individual capacities, officers, directors, controlling shareholders and/or partners of other entities engaged in a variety of businesses. Each officer and director of the Company is engaged in business activities outside of the Company, and the amount of time they will devote to the Company's business will only be about 10 to 20 hours each per month. There exists potential conflicts of interest including, among other things, time, effort and Business Combinations with such other business entities. Conflicts with other blank check companies with which members of Management may become affiliated in the future may arise in the pursuit of Business Combinations. To aid the resolution of such conflicts, the Company will adopt a procedure whereby a special meeting of the Company's shareholders will be called to vote upon a Business Combination with an affiliated entity, and shareholders who also hold securities of such affiliated entity will be required to vote their shares of the Company's stock in the same proportion as the Company's publicly held shares are voted. Such procedure shall be in the form of an oral agreement between Management and the Company. Potential conflicts of interest may exist where there are competing searches for combination candidates among blank check affiliates. (See "MANAGEMENT - Conflicts of Interest" and "MANAGEMENT - Other Blank Check Companies."). The Company has agreed that when potential Target Businesses are brought to the officers and directors not in their capacity as officers and directors of the Company, the Company will not have priority to review these opportunities and ventures. In the event a potential Target Business is brought to the attention of a member of Management without regard to his/her affiliation with any particular blank check company, Management has full discretion to choose the blank check company to which they will present the Target Business. Management and the Company have entered into an oral agreement to this effect. There is presently no requirement contained in the Company's Articles of Association, Memorandum of Association or minutes which requires that officers and directors of the Company disclose to the Company Target Businesses which come to their attention. The officers and directors do, however, have a fiduciary duty of loyalty to the Company to disclose to the Company any Target Businesses which come to their attention in their capacity as an officer and/or director of the Company or otherwise. Included in this duty would be Target Businesses which the person learns about through his/her involvement as an officer and director of another Company. The Company will not purchase the assets of any Company which is beneficially owned by any officer, director, promoter or affiliate or associate of this Company. Management plans on examining a Target Business's financial statements (including balance sheets, statements of cash flow, stockholders' equity, etc.), its assets and liabilities and its projections for future growth. This information will also be considered by the shareholders who, based on this information, will determine, as part of the Rule 419 reconfirmation offering, whether a merger with such a Target Business is "beneficial" to the Company. (See "Management.") Management may hire consultants to introduce the Company to a Target Business. Management has no specific criteria for hiring such consultants; it will depend on the Business Combination proposed by them. As of the date hereof, the Company has had no discussions with or entered into any agreements with, a particular consultant. Pursuant to an oral agreement among management, no cash finder's fees may be paid to anyone, nor will the Company issue any securities (debts or equity) as finder's fees. While no finder's fees or other acquisition related compensation may be paid to officers or directors of the Company from revenues or other funds of a Target Business or by the issuance of debt or equity of such an entity, such compensation may be paid to affiliates or associates of the Company's officers and directors. 12. Potential Related Party Business Combination. The Company may acquire a business in which the Company's promoters, management or their affiliates own a beneficial interest. In such event, such transaction may be considered a related party transaction not at arms-length. No related party transaction is presently contemplated. If in the event a related party transaction is contemplated sometime in the future, the Company intends to seek shareholder approval through a vote of shareholders. However, shareholders objecting to any such related party transaction will be able only to request the return of the pro-rata portion of their invested funds held in escrow in connection with the reconfirmation offering to be conducted in accordance with Rule 419 upon execution of the acquisition agreement. 13. Possible Disadvantages of Blank Check Offering. The Company's business may involve the acquisition of or merger with a company which does not need substantial additional capital but which desires to establish a public trading market for its shares. A company which seeks the Company's participation in attempting to consolidate its operations through a merger, reorganization, asset acquisition, or some other form of combination may desire to do so to avoid what they may deem to be adverse consequences of themselves undertaking a public offering. Factors considered may include time delays, significant expense, loss of voting control and the inability or unwillingness to comply with various federal and state laws enacted for the protection of investors. In making an investment in the Company, investors should recognize that they may be doing so under terms which may ultimately be less favorable than making an investment directly in a company with a specific business. Investors herein may not be afforded an opportunity to specifically approve or consent to any particular stock buy-out transaction. (See "Proposed Business.") 14. Lack of Market Research or Identification of Acquisition or Merger Candidate. The Company has neither conducted nor have others made available to it results of market research concerning the feasibility of a Business Combination with a Target Business. Therefore, management has no assurances that market demand exists for an acquisition or merger as contemplated by the Company. Management has not identified any particular industry or specific business within an industry for evaluation by the Company. There is no assurance the Company will be able to form a Business Combination with a Target Business on terms favorable to the Company. (See "Proposed Business.") 15. Success Dependent on Management. The Company's officers and director have limited experience in the business activities in which the Company intends to engage. Management believes it has sufficient experience to implement the Company's plan, although there is no assurance that additional managerial assistance will not be required. Success of the Company depends on the active participation of its officers. These officers have not entered into employment agreements with the Company and they are not expected to do so in the foreseeable future. The Company has not obtained key man life insurance on any of its officers or directors. (See "Proposed Business", "Management" and "Use Of Proceeds.") 16. No Current Contemplated Business Combinations. As of the date of this prospectus, none of the Company's officers, directors, promoters, their affiliates or associates have had any preliminary contact or discussions and there are no present plans, proposals, arrangements or understandings with any representatives of the owners of any business (Target Business) regarding the possibility of a Business Combination. 17. Lack of Diversification. In the event the Company is successful in identifying and evaluating a suitable Business Combination, the Company will in all likelihood, be required to issue its Common Stock in an acquisition or merger transaction. Inasmuch as the Company's capitalization is limited and the issuance of additional Common Stock will result in a dilution of interest for present and prospective shareholders, it is unlikely the Company will be capable of negotiating more than one acquisition or merger. Consequently, the Company's lack of diversification may subject the Company to economic fluctuation within a particular industry in which a Target Company conducts business. (See "Proposed Business.") 18. Regulation. Although the Company will be subject to regulation under the Securities Act of 1933 and the Securities Exchange Act of 1934, management believes the Company will not be subject to regulation under the Investment Company Act of 1940. The regulatory scope of the Investment Company Act of 1940, as amended (the "Investment Company Act"), was enacted principally for the purpose of regulatory vehicles for pooled investments in securities, extends generally to Companies primarily in the business of investing, reinvesting, owning, holding or trading securities. The Investment Company Act may, however, also be deemed to be applicable to a Company which does not intend to be characterized as an Investment Company but which, nevertheless, engages in activities which may be deemed to be within the definition of the scope of certain provisions of the Investment Company Act. The Company believes that its principle activities will not subject it to regulation under the Investment Company Act. Nevertheless, there can be no assurances that the Company will not be deemed to be an Investment Company. The funds may be invested primarily in certificates of deposit, interest bearing savings accounts or government securities. In the event the Company is deemed to be an Investment Company, the Company may be subject to certain restrictions relating to the Company's activities, including restrictions on the nature of its investments and the issuance of securities. The Company has obtained no formal determination from the Securities and Exchange Commission as to the status of the Company under the Investment Company Act of 1940. 19. Taxation. In the course of any acquisition or merger the Company may undertake, a substantial amount of attention will be focused upon federal and state tax consequences to both the Company and the "target" company. Presently, under the provisions of federal and various state tax laws, a qualified reorganization between business entities will generally result in tax-free treatment to the parties to the reorganization. While the Company expects to undertake any merger or acquisition so as to minimize federal and state tax consequences to both the Company and the "target" company, there is no assurance that such Business Combination will meet the statutory requirements of a reorganization or that the parties will obtain the intended tax-free treatment upon a transfer of stock or assets. Additionally, in the event the Target Business is domiciled outside the United States, the reorganization will be subject to the tax laws of that foreign nation. A non-qualifying reorganization could result in the imposition of both federal and state taxes which may have a substantial adverse effect on the Company. (See "PROPOSED BUSINESS - Regulation" and "Taxation.") 20. No Dividends. The Company was only recently organized, has no earnings, and has paid no dividends to date. Since the Company was formed as a blank check company with its only intended business being the search for an appropriate Business Combination, the Company does not anticipate having any earnings until such time that a Business Combination is effected. However, there are no assurances that upon the consummation of a Business Combination, the Company will have earnings or issue dividends. Therefore, it is not expected that cash dividends will be paid, if at all, to stockholders until after a Business Combination is effected. (See "Dividends.") 21. Restricted Resale of the Securities. The 396,000 shares of the Company's Common Stock presently issued and outstanding as of the date hereof are "restricted securities" as that term is defined under the Securities Act of 1933 (the "Securities Act"), as amended, and in the future may be sold in compliance with Rule 144 of the Securities Act, or pursuant to a Registration Statement filed under the Securities Act. Rule 144 provides, in essence, that a person holding restricted securities for a period of one (1) year may sell those securities in unsolicited brokerage transactions or in transactions with a market maker, in an amount equal to one (1%) percent of the Company's outstanding Common Stock every three (3) months. Sales of unrestricted shares by affiliates of the Company are also subject to the same limitation upon the number of shares that may be sold in any three (3) month period. If all the Shares offered herein are sold, the holders of the restricted shares may each sell 3,960 shares during any three (3) month period after November 15, 1996. Additionally, Rule 144 requires that an issuer of securities make available adequate current public information with respect to the issuer. Such information is deemed available if the issuer satisfies the reporting requirements of sections 13 or 15(d) of the Securities and Exchange Act of 1934 and of Rule 15c2-11 thereunder. Rule 144(k) also permits the termination of certain restrictions on sales of restricted securities by persons who were not affiliates of the Company at the time of the sale and have not been affiliates in the preceding three (3) months. Such persons must satisfy a two (2) year holding period. There is no limitation on such sales and there is no requirement regarding adequate current public information. Investors should be aware that sales under Rule 144 or 144(k), or pursuant to a Registration Statement filed under the Act, may have a depressive effect on the market price of the Company's securities in any market which may develop for such shares. 22. Arbitrary Determination of Offering Price. The initial offering price of $6.25 per Share has been arbitrarily determined by the Company, and bears no relationship whatsoever to the Company's assets, earnings, book value or any other objective standard of value. Among the factors considered by the Company were the lack of operating history of the Company, the proceeds to be raised by the offering, the amount of capital to be contributed by the public in proportion to the amount of stock to be retained by present stockholders, the relative requirements of the Company, and the current market conditions in the over-the-counter market. 23. Control by Present Management and Shareholders. Assuming the sale of all the Shares offered, the Shares of Common Stock purchased by the public will represent approximately 1% of the Company's outstanding Common Stock after the completion of this offering. Therefore, the present stockholders, which includes counsel for the Company and its management, will own a 99% interest in the corporation and will continue to be able to elect all of the Company's directors, appoint its officers, and control the Company's affairs and operations. The Company's Articles of Association do not provide for cumulative voting. There are no arrangements, agreements or understandings between non-management shareholders and management under which non-management shareholders may directly or indirectly participate in or influence the management of the Company's affairs or to exercise their voting rights to continue to elect the current directors. Non-management shareholders will exercise their voting rights to continue to elect the current directors to the Company's board. (See "Principal Stockholders", "Dilution" and "Description of Securities"). 24. Immediate Substantial Dilution. As of September 30, 1997, the net tangible book value of the Company's Common Stock was approximately $.0 per share, substantially less than the $6.25 per share to be paid by the public investors. In the event all the Shares are sold, public investors will sustain an immediate dilution of approximately $6.25 per share in the book value of public investors' holdings. (See "Dilution.") 25. Purchase of Shares. The Company's officers, directors, current shareholders and any of their affiliates or associates may purchase a portion of the Shares offered in this offering. The aggregate number of Shares which may be purchased by such persons shall not exceed 30% of the number of Shares sold in this offering. Such purchases may be made in order to close the "all or nothing" offering. Shares purchased by the Company's officers, directors and principal shareholders will be acquired for investment purposes and not with a view towards distribution. 26. State Law Violations. The Company will use its best efforts to ensure that sales of Shares will only occur in those states in which such sales would not be a violation of any of said states laws. The Company will notify the Transfer Agent to aid in such compliance. The Company's securities may be sold in New York State and the District of Columbia only, and maybe be resold by investors in New York and the District of Columbia only. 27. Business Combination Through A Leveraged Transaction. The Company is not prohibited from consummating a Business Combination through a leveraged transaction. However, investors should be aware that such a transaction could result in the Company's assets being mortgaged and possibly foreclosed. The use of leverage to consummate a Business Combination may reduce the ability of the Company to incur additional debt, make other acquisitions or declare dividends. Such leverage may also subject the Company's operations to strict financial controls and significant interest expense. 28. Penny Stock Regulation. Broker-dealer practices in connection with transactions in "penny stocks" are regulated by certain penny stock rules adopted by the Securities and Exchange Commission. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document prepared by the Commission that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer's account. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from such rules the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that becomes subject to the penny stock rules. If the Company's Common Stock becomes subject to the penny stock rules, investors in this offering may find it more difficult to sell their shares. Rights of Shareholders under Cayman Islands Law May Be Different Than in U.S. Jurisdictions 29. General. The Company's corporate affairs are governed by its Memorandum and Articles of Association and by the Companies Law (Revised) of the Cayman Islands. Principles of law relating to such matters as the validity of corporate procedures, the fiduciary duties of the Company's management, directors and controlling shareholders, and the rights of the Company's shareholders may differ from those that would apply if the Company was incorporated in a jurisdiction within the United States. Further, the rights of shareholders under Cayman Islands law may not be as clearly established as the rights of shareholders under legislation or judicial precedent in existence in most United States jurisdictions. Thus, the public shareholders of the Company may have more difficulty in protecting their interest in the face of actions by the management, directors or controlling shareholders than they might have as shareholders of a corporation incorporated in a United States jurisdiction. See "Comparison of United States and Cayman Islands Corporate Laws." 30. Enforceability of Civil Liabilities/Ability to Serve Process. The courts of the Cayman Islands will not automatically enforce a judgement of the United States courts for liabilities which were predicated upon the securities laws of the United States. Such a matter would have to be examined by a court in the Cayman Islands and a new action commenced. Furthermore, Peter Anderson, Secretary and a director, is a resident of the Cayman Islands, and John B. Benbow, director and assistant secretary, is a resident of the Cayman Islands. No assurances can be given that potential litigants and/or investors who wish to commence litigation against Mr. Anderson or Mr. Benbow in their director and/or managerial capacities, will be capable of effecting valid service of process on them, or, if litigation is commenced and judgement rendered against Mr. Anderson or Mr. Benbow that such judgement would ever be enforced. Additionally, no assurances can be given that any foreign court would enforce judgements secured in United States court against Mr. Anderson or Mr. Benbow. The Company has not received any opinion of counsel on these matters. <PAGE>
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the financial statements and notes thereto appearing elsewhere in this Prospectus. Except as otherwise indicated, all information contained in this Prospectus assumes (i) no exercise of the Underwriters' over-allotment option and (ii) completion of, and the issuance of 3,007,930 shares of Common Stock to Thermo Instrument in connection with, the Company's acquisition of the Clinical Products Group of Life Sciences International from Thermo Instrument. The transfer of the Clinical Products Group to the Company will occur prior to the closing of this offering. See "Business -- Acquisitions" and "Relationship with Affiliates -- Related Party Transactions." Investors should carefully consider the information set forth under the heading "Risk Factors." THE COMPANY Thermo BioAnalysis provides advanced tools that are used by molecular and cellular scientists to understand diseases and to develop new drugs. The Company develops, manufactures and supplies a broad range of products, including biomolecular instruments and consumables, clinical laboratory equipment and supplies, and information management systems, that are used in biochemical research, clinical diagnosis and pharmaceutical production. The Company's products serve an addressable market estimated by industry sources to be $2.5 billion. The Company has more than 30,000 customers in the U.S. and over 35 foreign countries, including pharmaceutical, biotechnology, chemical and industrial companies, hospitals and medical laboratories, as well as academic institutions, government laboratories and private foundations. Of these organizations, biotechnology and pharmaceutical companies in particular are substantially increasing their spending on drug research and development and are increasingly dependent on advanced instrumentation and equipment to remain competitive. The Company focuses on the following three principal product areas: Biomolecular Instruments and Consumables. The Company's biomolecular instruments and consumables are based primarily on immunoassay technology and are widely used in pharmaceutical and biopharmaceutical research, as well as for clinical laboratory testing and diagnosis of patient samples. The Company is a market leader in open system microplate technology, which significantly improves the speed and efficiency of immunoassay testing. The Company's products also include a wide range of clinical and research laboratory consumables, including single and multi-channel pipettes. Additionally, the Company manufactures and markets a variety of proprietary products based on emerging technologies, including optical biosensor, polymerase chain reaction, MALDI-TOF mass spectrometry, DNA amplification and capillary electrophoresis technologies. Sales and related service of the Company's biomolecular instruments and consumables accounted for approximately 50% of the Company's total revenues in 1997 (including sales of several of the Company's biomolecular instruments and consumables that are also used in clinical applications). Clinical Laboratory Equipment and Supplies. The Company is a leader in the manufacture of cytology and histology equipment and consumables. These products are used to prepare microscope slides containing thin layers of specially stained cells from body fluid and tissue samples, which enable medical professionals to detect and diagnose cancers and other diseases. The Company also supplies pathology equipment for use in autopsies and forensic evaluations. Additionally, the Company supplies consumables for blood gas and ion-selective electrolyte analyzers that diagnose the type and stage of certain diseases by measuring the levels of gases and electrolytes in blood, plasma and urine samples. Sales and related service of the Company's clinical laboratory equipment and supplies accounted for approximately 31% of the Company's total revenues in 1997. Information Management Systems. The Company offers laboratory information management systems and chromatography data systems for use in laboratories, industrial applications and clinical testing facilities. The Company's information management systems are designed to facilitate the monitoring and analysis of samples and the organization and storage of data throughout the laboratory or clinical lifecycle. Sales and related service of the Company's information management systems accounted for approximately 12% of the Company's total revenues in 1997. During the past decade, life sciences researchers have made significant advances in identifying the basic mechanisms of biological activity at the molecular and cellular level. The clinical diagnostics market has also experienced significant growth as medical professionals have developed a better understanding of how to detect and diagnose diseases at the molecular and cellular level. Companies and medical professionals are trying to capitalize on the improved understanding of molecular and cell biology in order to develop novel drug therapies and diagnostic products for human and animal health. Reducing product development time and cost in life sciences research and testing has become an increasingly important challenge and a potential competitive advantage for pharmaceutical and biotechnology companies. This has created the need for increasingly sophisticated instrumentation and equipment that analyze samples faster and for information systems that analyze, process and store information more efficiently. These factors underlie the demand for biomolecular instruments and consumables, clinical equipment and supplies, and related products, as well as the introduction of advanced bioanalytical systems such as those developed and marketed by the Company. See "Business -- Industry Background." The Company seeks to become a leading provider of advanced tools that enable molecular and cellular scientists to understand diseases and to develop new drugs. The Company's strategy is to (i) broaden its product offerings by developing products internally and making strategic acquisitions, (ii) optimize its product mix by increasing the percentage of its revenues derived from consumable sales, (iii) continue to invest in research for product development and enhancement of existing products, (iv) continue to focus on product quality and (v) pursue and integrate strategic acquisitions as a means of broadening its product lines, improving its market share and enhancing growth. See "Business -- Strategy." The Company was incorporated in Delaware in February 1995 as a wholly owned subsidiary of Thermo Instrument. At that time, Thermo Instrument contributed all of the assets relating to its capillary electrophoresis product line, its MALDI-TOF mass spectrometry division and its Eberline health physics division to the Company in exchange for 6,500,000 shares of Common Stock and the assumption by the Company of substantially all of the liabilities relating to such businesses. Since its incorporation, the Company has acquired the businesses summarized in the table below. For more detailed information regarding each of these acquisitions, see "Business -- Acquisitions" and "Relationship with Affiliates -- Related Party Transactions." <TABLE> <CAPTION> ACQUIRED BUSINESS EFFECTIVE DATE PURCHASE PRICE PRINCIPAL PRODUCTS/TECHNOLOGY ----------------- -------------- -------------- ----------------------------- <S> <C> <C> <C> DYNEX............................. February 1996 $ 43.2 million Immunoassay testing systems and consumables Affinity Sensors and LabSystems(1)..................... March 1996 $ 9.0 million Optical biosensors; laboratory information management systems and chromatography data systems Labsystems OY and Hybaid Limited(2)................. March 1997 $ 97.4 million Immunoassay instruments and liquid handling equipment; thermal cyclers and consumables for DNA amplification Clinical Products Group(3)........ March 1997 $104.5 million Cytology, histology and pathology equipment and consumables; blood gas and electrolyte analyzers </TABLE> - --------------- (1) In March 1996, Thermo Instrument acquired a substantial portion of the businesses comprising the Scientific Instruments Division of Fisons plc ("Fisons"), a wholly owned subsidiary of Rhone-Poulenc Rorer Inc. In July 1996, the Company acquired the Affinity Sensors and LabSystems divisions of Fisons from Thermo Instrument, effective March 1996. (2) In March 1997, Thermo Instrument acquired Life Sciences International PLC ("LSI"). In May 1997, the Company agreed to acquire the Labsystems OY (unrelated to the LabSystems division of Fisons) and Hybaid Limited ("Hybaid") divisions of LSI from Thermo Instrument, effective March 1997. This transaction was completed in April 1998. Also effective March 1997, the Company acquired the Labsystems Japan division of LSI from Thermo Instrument. Labsystems Japan distributes products manufactured by Labsystems OY, Hybaid and other LSI companies. (3) In May 1998, the Company agreed to acquire the Clinical Products Group of LSI from Thermo Instrument. The Clinical Products Group is comprised of Shandon Inc. and its related businesses, including ALKO Diagnostic Corporation. Since the closing of this transaction is not subject to any material conditions, the Company and Thermo Instrument are treating this acquisition as effectively complete. The Company's financial statements include the results of the Clinical Products Group from the date of Thermo Instrument's acquisition of LSI in March 1997. In April 1998, the Company announced its intention to form a health physics joint venture with Thermo Instrument. In July 1998, the Company will contribute its Eberline health physics business in exchange for a 49% equity interest in the joint venture, and Thermo Instrument will contribute its National Nuclear and ESM Eberline Instruments businesses, along with $13.0 million in cash, for a 51% equity interest. The Eberline health physics business accounted for approximately 7% of the Company's total revenues in 1997. Profits and losses from the joint venture will be allocated (a) one-third to Thermo Instrument and two-thirds to the Company until the later of (i) July 2000 or (ii) such time as the joint venture has achieved consolidated division income (defined as operating income excluding payments pursuant to the Services Agreement (as defined in "Relationship with Affiliates -- Corporate Services Agreement")) of 17% for a full fiscal year and (b) to the members of the joint venture in accordance with their respective equity interests thereafter. The joint venture will provide instruments for the detection and monitoring of low-level radiation to ensure personal and environmental protection. See "Business -- Health Physics Joint Venture" and "Relationship with Affiliates -- Related Party Transactions." Unless the context otherwise requires, references in this Prospectus to the Company or Thermo BioAnalysis refer to Thermo BioAnalysis Corporation and its subsidiaries and the predecessor businesses that constitute the Company. The Company's principal executive offices are located at 504 Airport Road, Santa Fe, New Mexico 87504-2108, and its telephone number is (505) 471-3232. THE OFFERING <TABLE> <CAPTION> <S> <C> Common Stock Offered by the Company.................. 4,500,000 shares Common Stock to be Outstanding after the Offering(1)........................................ 18,593,648 shares AMEX Symbol.......................................... TBA Use of Proceeds...................................... Repayment of certain indebtedness owed to Thermo Instrument and for general corporate purposes, including acquisitions. See "Use of Proceeds." </TABLE> - --------------- (1) Does not include 1,272,900 shares of Common Stock reserved for issuance under the Company's stock-based compensation plans and 3,030,303 shares of Common Stock reserved for issuance upon the conversion of the Company's 4.875% Subordinated Convertible Note, due to Thermo Instrument, which was issued in July 1996 (the "Convertible Note"). Includes 3,007,930 shares of Common Stock to be issued to Thermo Instrument in connection with the Company's acquisition of the Clinical Products Group of LSI from Thermo Instrument. See "Capitalization," "Business -- Acquisitions" and Notes 3 and 6 of Notes to the Company's Consolidated Financial Statements. SUMMARY CONSOLIDATED FINANCIAL INFORMATION <TABLE> <CAPTION> THREE MONTHS ENDED(4) FISCAL YEAR(1) --------------------- --------------------------------------------------- MARCH 29, APRIL 4, 1993 1994 1995 1996 (2) 1997 (3) 1997 1998 ------- ------- ------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues.............................. $24,479 $25,127 $22,534 $71,649 $201,998 $26,801 $54,434 Gross Profit.......................... 11,469 10,951 9,498 33,842 99,172 12,953 27,851 Research and Development Expenses..... 2,242 2,042 1,325 7,298 14,057 2,352 3,923 Write-off of Acquired Technology...... -- -- -- 3,500 -- -- -- Operating Income...................... 4,313 3,855 3,369 2,057 23,169 2,616 6,029 Net Income (Loss)..................... 2,538 2,400 2,514 (436) 11,340 1,582 3,202 Earnings (Loss) per Share (5): Basic............................. .39 .37 .33 (.05) .86 .15 .23 Diluted........................... .39 .37 .33 (.05) .79 .14 .21 Weighted Average Shares (5): Basic............................. 6,500 6,500 7,694 8,542 13,232 10,624 14,086 Diluted........................... 6,500 6,500 7,694 8,542 16,367 13,694 17,299 </TABLE> <TABLE> <CAPTION> APRIL 4, 1998(4) -------------------------- ACTUAL AS ADJUSTED(6) -------- -------------- <S> <C> <C> BALANCE SHEET DATA (AT END OF PERIOD): Cash and Cash Equivalents................................... $ 43,526 $ 98,206 Debt Payable to Parent Company (7).......................... 37,861 -- Working Capital............................................. 52,972 145,513 Total Assets................................................ 324,866 379,546 Long-term Obligations....................................... 100,198 100,198 Shareholders' Investment.................................... 135,626 228,167 </TABLE> - --------------- (1) The Company has a fiscal year ending the Saturday nearest December 31. (2) Reflects the results of DYNEX since February 1996, and the Affinity Sensors and LabSystems divisions of Fisons since their acquisition by Thermo Instrument in March 1996, including the associated write-off of $3,500,000 of acquired technology. (3) Reflects the results of the Labsystems OY, Hybaid and Labsystems Japan divisions of LSI, and the Clinical Products Group of LSI, since their acquisition by Thermo Instrument in March 1997. Weighted average shares include the effect of assuming as outstanding from March 1997 the 1,300,000 shares issued as part of the purchase price for the Labsystems OY and Hybaid divisions of LSI, and the 3,007,930 shares issuable to Thermo Instrument as part of the purchase price for the Clinical Products Group of LSI. Pro forma data for the acquisitions of the Labsystems OY and Hybaid divisions of LSI and the Clinical Products Group of LSI is included elsewhere in this Prospectus. (4) Derived from unaudited financial statements. (5) Pursuant to Securities and Exchange Commission requirements, earnings (loss) per share have been presented for all periods. Weighted average shares for all periods include the 6,500,000 shares issued to Thermo Instrument in connection with the initial capitalization of the Company. (6) Adjusted to reflect (i) the sale by the Company of 4,500,000 shares of Common Stock offered hereby at an assumed public offering price of $21.938 per share (the closing price on the AMEX on May 20, 1998), after deducting the estimated underwriting discounts and commissions and offering expenses payable by the Company and (ii) the repayment of approximately $37.9 million of indebtedness owed to Thermo Instrument in connection with the Company's acquisition of the Clinical Products Group of LSI. (7) Represents existing indebtedness owed by the Clinical Products Group of LSI to Thermo Instrument, which was assumed by the Company in connection with the acquisition of the Clinical Products Group of LSI, and which is included in "Due to parent company and affiliated companies" in the Company's Consolidated Financial Statements.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001015483_dynamex_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001015483_dynamex_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, all information herein assumes no exercise of the Underwriters' over-allotment option. References herein to the "Company" or "Dynamex" mean Dynamex Inc., a Delaware corporation, and its subsidiaries unless the context otherwise requires. The pro forma financial information included in this Prospectus has been prepared to give effect to the IPO Acquisitions and the Pro Forma Completed Acquisitions (each as defined herein). See "Pro Forma Financial Information" included elsewhere in this Prospectus. THE COMPANY Dynamex is a leading provider of same-day delivery and logistics services in the United States and Canada. From its base as the largest nationwide same-day transportation company in Canada, over the last three years Dynamex has established a presence in 21 metropolitan markets in the United States and has continued to expand its system in Canada. Through internal growth and acquisitions, the Company has grown from $7.0 million in revenues and an operating loss for the fiscal year ended July 31, 1994 to revenues of $193.3 million and operating income of $11.5 million for the fiscal year ended July 31, 1997 on a pro forma basis. For the fiscal year ended July 31, 1997, 63.2% of these pro forma revenues were derived from the Company's U.S. operations. Through its network of branch offices, the Company provides same-day, door-to-door delivery services utilizing its ground couriers. For many of its inter-city deliveries, the Company uses third party air or motor carriers in conjunction with its ground couriers to provide same-day service. In addition to traditional on-demand delivery services, the Company offers scheduled distribution services, which encompass recurring, often daily, point-to-point deliveries or multiple destination deliveries that often require intermediate handling, and manages strategic stocking locations from which it makes on-demand deliveries to meet its customers' just-in-time inventory requirements. The Company also offers fleet and facilities management services. These services include designing and managing systems to maximize efficiencies in transporting, sorting and delivering customers' products on a local and multi-city basis. With its fleet management service, the Company manages and may provide a fleet of dedicated vehicles at single or multiple customer sites. The Company's on-demand delivery capabilities are available to supplement scheduled distribution arrangements or dedicated fleets as needed. Facilities management services include the Company's operation and management of a customer's mailroom. The Company believes that the same-day delivery segment of the transportation industry is benefitting from several recent trends. For example, the trend toward outsourcing has resulted in numerous shippers turning to third party providers for a range of services including same-day delivery, strategic stocking and management of in-house distribution. Many businesses that outsource their distribution requirements prefer to purchase such services from one source that can service multiple cities, thereby decreasing the number of vendors from which they purchase services. By providing an array of services in numerous branch offices, Dynamex has benefitted from this outsourcing trend and expects such trend to continue. Dynamex has also benefitted from the growth of "just-in-time" inventory practices designed to reduce inventory carrying costs. Additionally, technological developments such as e-mail and facsimile have increased the pace of business and other transactions, thereby increasing demand for the same-day delivery of a wide array of items, ranging from voluminous documents to critical manufacturing parts and medical devices. Consequently, Dynamex has experienced increasing demand for the same-day transportation of items that are not suitable for fax or electronic transmission, but for which there is an immediate need. Dynamex believes that the strong operational background of its senior management is important to building a company with a strong brand identity throughout the United States and Canada while simultaneously overseeing and encouraging individual managers to be successful in their local markets. Dynamex has grown significantly both internally and through acquisitions and intends to continue its focus on internal growth opportunities, including the benefits presented by the integration of recently acquired businesses, as well as selected acquisitions. Since the Company's initial public offering in August 1996 (the "IPO"), it has completed 20 acquisitions and believes it has many opportunities to make further acquisitions. Dynamex markets its services through a sales force comprised of national and local sales representatives. As a same-day transportation provider with a national network of branch offices in Canada and locations in 21 metropolitan markets in the United States, Dynamex is positioned to pursue large accounts whose same-day transportation requirements may encompass multiple city locations. Historically, local accounts, which often include large companies with multiple locations, have provided the bulk of the Company's sales. The Company's sales force will seek to generate additional business from these accounts in multiple locations. The Company's expansion of its national sales program and continuing investment in technology to support the Company's expanding operations, have been undertaken at a time when large companies are increasing their demand for delivery providers who offer a range of delivery services at multiple locations. Substantially all of the Dynamex drivers are owner-operators who provide their own vehicles, pay all expenses of operating their vehicles and receive a percentage of the delivery charge as compensation. Management believes that this creates a higher degree of responsiveness on the part of its drivers as well as significantly lowering the capital required to operate the business and reducing the Company's fixed costs. Management believes that its use of owner-operators is a primary factor in the Company reporting a return on assets (measured as operating income as a percentage of average assets) of 11.6% over the past two fiscal years. BUSINESS STRATEGY The Company intends to expand its operations in the U.S. and Canada to capitalize on the demand of local, regional and national businesses for innovative same-day transportation solutions. The key elements of the Company's business strategy are as follows: - Focus on Primary Services: The Company provides three primary services: (i) same-day on-demand delivery services, (ii) same-day scheduled distribution services and (iii) outsourcing services such as fleet management and facilities management. The Company focuses its same-day on-demand delivery business on transporting non-faxable, time sensitive items throughout metropolitan areas. By delivering items of greater weight over longer distances and providing value added on-demand services such as strategic stocking, the Company expects to raise the yield per delivery relative to the yield that would be generated by only delivering documents within a central business district. Additionally, the Company intends to capitalize on the market trend towards outsourcing transportation requirements by concentrating its logistics services in same-day scheduled distribution and fleet management. The delivery transactions in a fleet management, scheduled distribution or strategic stocking program are recurring in nature, thus creating the potential for long term customer relationships. Additionally, these value added services are generally less vulnerable to price competition than traditional on-demand delivery services. - Target National and Regional Accounts: The Company's sales force focuses on pursuing and maintaining national and regional accounts. The Company anticipates that its (i) existing multi-city network of locations combined with new locations to be acquired, (ii) ability to offer value added services such as strategic stocking and fleet management to complement its basic same-day delivery services and (iii) experienced, operations oriented management team and sales force will create further opportunities with many of its existing customers and attract new national and regional accounts. - Create Strategic Alliances: By forming alliances with strategic partners that offer services that compliment those of the Company, the Company and its partners can jointly market their services, thereby accessing one another's customer base and providing such customers with a broader range of value added services. For example, the Company has formed an alliance with Purolator Courier Ltd. ("Purolator"), the largest Canadian overnight courier company, whereby on an exclusive basis the Company and Purolator provide each other with certain delivery services and market each other's delivery services to their respective customers. See "Business -- Sales and Marketing." - Pursue Acquisitions: The Company believes that the highly fragmented nature of the delivery and logistics industry creates significant opportunities for same-day delivery and logistics companies with national marketing and operations. The Company will continue to seek to acquire high quality same-day delivery businesses in new markets as well as in markets in which it has already established a presence. Management expects that acquisitions in existing markets will provide access to an acquired company's customer base while creating operating efficiencies within these markets. Management believes that its operating and acquisition experience and the Company's ability to offer cash or Common Stock as purchase consideration are important advantages in pursuing acquisition candidates. The Company plans to augment the services offered by the companies it acquires with value added services such as fleet management and strategic stocking and to integrate the acquired businesses into the Company's operations. The principal executive offices of the Company are located at 1431 Greenway Drive, Suite 345, Irving, Texas 75038 and its telephone number is (972) 756-8180. THE OFFERING <TABLE> <S> <C> <C> Common Stock offered by: The Company.............................. 2,500,000 shares The Selling Stockholders................. 317,166 shares(1) --------- Total............................ 2,817,166 shares ========= Common Stock to be outstanding after the Offering................................. 9,959,623(2) Use of Proceeds to the Company............. To reduce outstanding indebtedness. See "Use of Proceeds." Nasdaq National Market Symbol.............. DYMX </TABLE> - - - - --------------- (1) See "Principal and Selling Stockholders." (2) Excludes 571,384 additional shares of Common Stock reserved for issuance under the Company's Stock Option Plan, of which (i) 166,384 shares of Common Stock are issuable upon exercise of options outstanding at a weighted average exercise price of $3.72 per share, (ii) 257,000 shares of Common Stock are issuable upon exercise of stock options outstanding at an exercise price $8.00 per share, (iii) 10,000 shares of Common Stock are issuable upon exercise of options outstanding at an exercise price of $7.25 per share, and (iv) 138,000 shares of Common Stock are issuable upon exercise of options outstanding at an exercise price of $10.375 per share. Of the 571,384 additional shares of Common Stock reserved for issuance under the Company's Stock Option Plan, 181,907 are immediately exercisable and 389,477 become exercisable over a period ranging from July 1998 through October 2002. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> SIX MONTHS ENDED FISCAL YEAR ENDED JULY 31, JANUARY 31, ---------------------------------------- ---------------------------- PRO PRO FORMA(1) FORMA(1) 1995 1996 1997 1997 1997 1998 1998 ------- ------- -------- -------- ------- ------- -------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Sales..................................... $21,032 $71,812 $131,867 $193,288 $56,846 $95,262 $100,153 Gross profit.............................. 6,696 21,794 44,674 65,847 18,747 31,125 33,130 Operating income (loss)................... (1,219) 2,707 7,813 11,465 2,666 5,381 5,756 Interest expense.......................... 403 1,655 1,481 3,986 508 1,899 2,143 Income (loss) before taxes(2)............. (1,622) 1,052 6,332 7,479 2,158 3,482 3,613 Income taxes.............................. 3 176 2,485 2,941 861 1,475 1,526 Net income (loss)(2)...................... $(1,625) $ 876 $ 3,847 $ 4,538 $ 1,297 $ 2,007 $ 2,087 ======= ======= ======== ======== ======= ======= ======== Net income (loss) per common share(2)(3) -- basic................................ $ (1.90) $ 0.34 $ 0.58 $ 0.61 $ 0.20 $ 0.27 $ 0.28 ======= ======= ======== ======== ======= ======= ======== -- assuming dilution.................... $ (1.90) $ 0.23 $ 0.56 $ 0.60 $ 0.20 $ 0.27 $ 0.28 ======= ======= ======== ======== ======= ======= ======== Weighted average shares: Common shares outstanding............... 855 2,543 6,670 7,412 6,223 7,387 7,412 Adjusted common shares.................. 855 3,732 6,839 7,581 6,443 7,558 7,582 OTHER DATA: Earnings (loss) before interest, taxes, depreciation and amortization(4)........ $ (529) $ 4,249 $ 11,356 $17,352 $ 4,183 $ 8,238 $ 8,726 Operating Ratio(5)........................ 105.8% 96.2% 94.1% 94.1% 95.3% 94.4% 94.3% EBITDA Margin(6).......................... (2.5%) 5.9% 8.6% 9.0% 7.4% 8.6% 8.7% Return on Assets(7)....................... -- 10.4% 12.7% 13.3% 11.0% 10.8% 10.4% </TABLE> <TABLE> <CAPTION> AS OF JANUARY 31, 1998 -------------------------- ACTUAL AS ADJUSTED(8) -------- -------------- <S> <C> <C> BALANCE SHEET DATA: Working capital............................................. $ 18,828 $ 18,828 Total assets................................................ 110,819 110,819 Long-term debt, excluding current portion................... 54,794 Stockholders' equity........................................ 42,788 </TABLE> - - - - --------------- (1) The pro forma income statement data for the fiscal year ended July 31, 1997 gives effect to the IPO, the IPO Acquisitions and the Pro Forma Completed Acquisitions as if the IPO and such acquisitions had occurred at the beginning of such period. The pro forma income statement data for the six months ended January 31, 1998 gives effect to the Pro Forma Completed Acquisitions that occurred during this period as if such acquisitions had occurred at the beginning of such period. See "Pro Forma Financial Information."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001016125_ultimate_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001016125_ultimate_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Consolidated Financial Statements and Notes thereto included elsewhere in this Prospectus. The Common Stock offered hereby involves a high degree of risk. See "Risk Factors" beginning on page 8. Unless otherwise indicated, all information in this Prospectus (i) assumes no exercise of the Underwriters' over-allotment option, (ii) assumes the conversion of all outstanding shares of Series A Convertible Preferred Stock and Series B Convertible Preferred Stock into shares of Common Stock, (iii) assumes the conversion of all outstanding shares of Class A Common Stock, Class B Common Stock and Class C Common Stock into shares of Common Stock, (iv) reflects the issuance of shares of Common Stock to the five former third-party resellers of the Company's products, the businesses of which were acquired in February and March 1998 (the "Acquired Resellers"), and (v) assumes a 10.119-for-1 split of the Company's Common Stock to be effected immediately prior to the consummation of the Offering. References to the Company's "fiscal" year mean the twelve months ended on December 31. References to the "Company" shall be deemed to include the Partnership (as defined), as appropriate. THE COMPANY The Ultimate Software Group, Inc. designs, markets, implements and supports technologically advanced, cross-industry human resource management and payroll ("HRMS/payroll") software solutions. The Company's solutions are marketed primarily to middle-market organizations with 300 to 15,000 employees, but are scaleable to address the needs of much larger organizations. The Company's products automate an organization's HRMS/payroll functions and are enabling tools in the cost-efficient management of the employee life cycle, from inception of employment through retirement. As part of its comprehensive HRMS/payroll solution, the Company provides high quality implementation, training and ongoing support services to its customers. In June 1997, the Company introduced its most recent product, UltiPro for Windows, a feature-rich, completely integrated HRMS/payroll solution with embedded Internet technology, employee self-service capability and Cognos Corporation's business intelligence tools for data analysis and generation of custom reports. The Company believes that UltiPro for Windows is the first 32-bit, object-oriented HRMS/payroll software solution which takes advantage of Microsoft SQL Server and Microsoft NT technologies. The Company believes that UltiPro for Windows provides middle-market organizations with a highly functional, cost-effective software solution that can accomodate emerging technologies and provides significant advantages over other HRMS/payroll software products, including greater scalability and transaction throughput, reduced total cost of ownership and ease of implementation, customization and use. In December 1997, Human Resource Executive, a leading human resource industry publication, selected UltiPro for Windows as the only HRMS/payroll software product to be included as one of its Top Ten HR Products of the Year. Because human resource management and payroll processing are core functions that require a significant allocation of resources, the HRMS/payroll functions have increasingly become mission-critical within many organizations. Traditionally, many organizations have utilized third-party outsourcing vendors in an attempt to address the increasingly high costs associated with the management of HRMS/payroll functions. However, outsourcing can be an inflexible and expensive alternative, particularly for middle-market organizations, because organizations give up control over critical processes, which can result in greater inefficiency and insufficient data for decision-making. As an alternative to outsourcing, many organizations have historically automated their HRMS/payroll functions by developing in-house legacy systems to address their needs. However, because of the use of proprietary programming languages and operating and database management systems, such in-house HRMS/payroll systems are typically cumbersome, time consuming to operate, incompatible with other information systems and expensive to implement, customize, update and support. With the advent of client/server technologies as an alternative to in-house legacy systems and the greater availability of affordable computing solutions, many middle-market organizations are increasingly seeking to automate and streamline the mission-critical processes associated with HRMS/payroll functions. However, first-generation client/server solutions lack certain critical performance criteria and sophisticated security features, are difficult to implement and have a high cost of ownership. In addition, first-generation client/server HRMS/payroll software is typically an add-on module with limited functionality in enterprise-wide, or Enterprise Resource Planning ("ERP'), systems. In recent years, a new generation of object-oriented, component-based client/server technologies has emerged, which addresses many of the limitations of first-generation client/server systems and facilitates integration with newer technologies and the Internet. According to International Data Corporation ("IDC"), a market research company, the United States market for HRMS/payroll software licenses totaled $1.1 billion in 1996 and is projected to grow to $2.9 billion by the year 2001. IDC further estimates that the worldwide market for HRMS/payroll software licenses will experience approximately the same rate of growth, moving from $1.6 billion in 1996 to $4.2 billion by 2001. The Company believes that the market for HRMS/payroll-related services is of equal or greater size than the market for HRMS/payroll software licenses and has similar growth characteristics. The Company reaches its customer base and target market through its direct sales force and a network of national, regional and local strategic partners. As of March 31, 1998, the Company had licensed its earlier DOS-based product, ULTIPRO for LAN, to approximately 750 organizations and its UltiPro for Windows solution to approximately 105 organizations. The Company's customers operate in a wide variety of industries, including manufacturing, food services, retail, healthcare, technology, finance, insurance, real estate, transportation, communications, services and sports. The Company's customers include: Bill Heard Enterprises, Inc., Callaway Gardens Resort, Inc., Discovery Zone, Inc., Duro Bag Manufacturing Company, First American Corporation, The Florida Marlins Baseball Club, Ingram Entertainment, Inc., The Krystal Company, National Realty Trust (Coldwell Banker), Telemundo Group, Inc., United States Filter Corporation and Winn Dixie Stores, Inc. The Company's objective is to be the leading provider of HRMS/payroll software solutions. The Company intends to achieve this objective by (i) extending its technology leadership by continuing to invest in research and development; (ii) leveraging its existing and new strategic alliances with leading software vendors in order to access a larger potential customer base and to leverage their technical and marketing expertise; (iii) integrating its products with other leading software applications in order to effectively address an organization's enterprise-wide management needs; (iv) expanding and leveraging its network of implementation partners to further increase its market penetration and to enable more rapid implementation of its products; (v) expanding the functionality of its existing and future products; and (vi) leveraging its existing client base as clients migrate from DOS to client/server environments. The Company is a Delaware corporation formed in April 1996 to assume the business and operations of The Ultimate Software Group, Ltd. (the "Partnership"), a limited partnership founded in 1990. The Company's headquarters are located at 3111 Stirling Road, Ft. Lauderdale, Florida 33312 and its telephone number is (954) 266-1000. THE OFFERING <TABLE> <CAPTION> <S> <C> Common Stock offered by the Company ................... 3,250,000 Common Stock to be outstanding after the Offering .... 15,870,709 (1) Use of Proceeds ....................................... Repayment of certain indebtedness in the approximate amount of $3.6 million, working capital and other general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol ................ ULTI </TABLE> (1) Excludes (i) 1,846,130 shares subject to options outstanding as of the date hereof and (ii) 3,213,370 additional shares reserved for issuance pursuant to options available for grant under the Company's Nonqualified Stock Option Plan. See "Management -- Stock Option Plan." Summary Consolidated Financial Data(1) <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, ------------------------------------ 1995 1996 1997 (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues ................................ $ 3,727 $ 9,312 $ 17,592 Gross profit ............................ 1,893 3,466 8,023 Operating loss .......................... (4,650) (20,284) (16,060) Net loss ................................ $(4,731) $(20,386) $(16,016) ========== =========== =========== Basic and diluted net loss per share(2) $ (0.71) $ (2.30) $ (1.37) ========== =========== =========== Basic and diluted weighted average shares outstanding(2)................... 6,660 8,854 11,710 ========== =========== =========== </TABLE> <TABLE> <CAPTION> THREE MONTHS ENDED ------------------------------------------------------------ MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, 1997 1997 1997 1997 1998 (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues: License .............................. $ 818 $ 792 $ 709 $ 4,913 $ 3,123 Service .............................. 1,958 1,652 1,900 3,571 4,075 Other ................................ 254 267 290 468 373 ----------- ---------- ----------- ---------- ----------- Total revenues....................... 3,030 2,711 2,899 8,952 7,571 Gross profit .......................... 885 682 586 5,870 3,624 Operating loss ........................ (4,698) (5,178) (5,356) (828) (2,716) Compensation related to modification of escrow agreement(3)................ -- -- -- -- (4,184) Net loss .............................. $(4,730) $(5,204) $(5,320) $ (762) $(6,929) =========== ========== =========== ========== =========== Basic and diluted net loss per share(2).............................. $ (0.46) $ (0.46) $ (0.42) $ (0.06) $ (0.55) =========== ========== =========== ========== =========== Basic and diluted weighted average shares outstanding(2)................. 10,330 11,264 12,599 12,621 12,621 =========== ========== =========== ========== =========== </TABLE> <TABLE> <CAPTION> AS OF MARCH 31, 1998 ---------------------------- PRO FORMA PRO FORMA(4) AS ADJUSTED(5) (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents .... $ 658 $33,865 Working capital (deficit) .... (9,483) 25,902 Total assets .................. 12,096 45,303 Long-term borrowings .......... 574 574 Stockholders' equity (deficit) (8,688) 26,697 </TABLE> (1) Consolidated financial data gives retroactive effect to the acquisitions of the Acquired Resellers, which were accounted for under the poolings-of-interest method of accounting, as if the Company and the Acquired Resellers had operated as one entity during the periods presented. See the Consolidated Financial Statements and the related Notes thereto included elsewhere in this Prospectus. (2) See Note 2 of the Notes to Consolidated Financial Statements for information regarding the computation of net loss per share. (3) See Note 15 of the Notes to Consolidated Financial Statements. (4) Pro forma to give effect to (i) the conversion of all outstanding shares of Series A Convertible Preferred Stock and Series B Convertible Preferred Stock into shares of Common Stock and (ii) the conversion of all outstanding shares of Class A Common Stock, Class B Common Stock and Class C Common Stock into shares of Common Stock. See Note 15 of the Notes to Consolidated Financial Statements. (5) Pro forma as adjusted to give effect to the sale of 3,250,000 shares of Common Stock offered hereby at an assumed initial public offering price of $12.00 per share, after deducting estimated underwriting discounts and commissions and Offering expenses payable by the Company and the application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001016182_fitness_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001016182_fitness_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. REFERENCE IS MADE TO, AND THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, CONTAINED ELSEWHERE IN THIS PROSPECTUS. ALL REFERENCES TO THE "COMPANY" OR "24 HOUR FITNESS" SHALL BE DEEMED TO REFER TO FITNESS HOLDINGS, INC. AND ITS SUBSIDIARIES AND ITS PREDECESSORS, AND ALL REFERENCES TO "HOLDINGS" SHALL BE DEEMED TO REFER TO FITNESS HOLDINGS, INC., IN EACH CASE UNLESS INDICATED OTHERWISE. ALL REFERENCES TO FISCAL YEARS CONTAINED HEREIN SHALL BE DEEMED TO REFER TO THE APPLICABLE FISCAL YEAR OF THE COMPANY, WHICH ENDS ON DECEMBER 31. UNLESS OTHERWISE INDICATED, THE SOURCES FOR ALL INDUSTRY DATA AND STATISTICS CONTAINED HEREIN ARE ESTIMATES CONTAINED IN OR DERIVED FROM INDUSTRY STUDIES BELIEVED BY THE COMPANY TO BE RELIABLE, AND ALL OF THE COMPANY'S OPERATING DATA IS PRESENTED AS OF APRIL 30, 1998. UNLESS OTHERWISE INDICATED, ALL INFORMATION CONTAINED IN THIS PROSPECTUS REFLECTS (I) A -FOR-1 STOCK SPLIT DECLARED ON , 1998 AND DISTRIBUTED ON , 1998 AND (II) NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTIONS. THE COMPANY The Company is a leading owner-operator of fitness centers, operating 173 facilities under the brand name "24 Hour Fitness" in nine western States. Through these facilities, the Company provides a broad array of fitness, sport, nutritional and other services to its 1.6 million members. The Company has grown to become the second largest commercial owner-operator of fitness centers in the United States in terms of revenues and number of fitness centers, and is the largest commercial owner-operator of fitness centers in California, the industry's largest market. The Company believes that it differentiates itself from its competitors by offering: (i) 24 hour access at a majority of its facilities; (ii) consistently well-equipped, well-maintained fitness centers; (iii) professionally trained staff focused on quality customer service; and (iv) month-to-month membership plans that feature low initiation fees and affordable monthly dues. The Company's net revenues have increased from $33.0 million in fiscal 1993 to $261.9 million in fiscal 1997, and its EBITDA has increased from a negative $0.5 million in fiscal 1993 to a positive $13.4 million in fiscal 1997. The Company operates 123 fitness-only centers and 50 multi-sport centers. Fitness-only centers are typically less than 25,000 square feet and offer aerobic, cardiovascular and weight lifting facilities. Multi-sport centers are typically between 25,000 and 60,000 square feet and, in addition to the services and amenities offered by fitness-only centers, offer one or more of the following additional amenities: squash courts, racquetball courts, basketball courts, swimming pools, steam and sauna rooms, and whirlpools. As part of its clustering strategy, the Company often locates multi-sport centers in a market with several fitness-only centers and offers its members the use of both types of facilities for a higher membership fee. The Company believes that the health and fitness center industry has been enjoying, and will continue to enjoy, a period of pronounced growth. The industry has benefited from, and helped to create, an increasing awareness among the general public of the importance of physical exercise as a condition for good health. The International Health, Racquet and Sportsclub Association ("IHRSA") reported that, in 1997, there were approximately 13,800 commercial health and fitness centers in the United States which generated aggregate revenue of approximately $9.0 billion. American Sports Data, Inc. ("ASDI"), a consumer panel research organization, reported that memberships in health and fitness centers have grown from 13.8 million in 1987 to 20.8 million in 1996. The Company estimates that there are fewer than 20 companies that own and operate more than 20 commercial health and fitness centers in the United States. The Company believes that the fragmented nature of this industry presents significant opportunities for the Company to grow its operations by continuing to pursue its acquisition strategy. As the second largest commercial multi-site owner-operator in the United States, the Company enjoys substantial economies of scale in management, advertising, and purchasing of equipment and supplies. The Company pursues a three-pronged growth strategy based upon (i) maximizing revenue growth and profit margins at existing fitness centers through growth in new memberships and sales of ancillary products and services, (ii) acquiring single-site and multi-site chains of fitness centers as a method of entering new markets and furthering its clustering strategy, and (iii) developing new fitness centers on a greenfield basis. OPERATING STRATEGY The Company pursues a disciplined operating strategy which has helped to successfully position "24 Hour Fitness" as a nationally recognized brand of fitness centers. The Company attributes its growth and performance to several factors, including the following: CONVENIENT ACCESS. Since the Company believes that convenience is a high priority for its members, a majority of the Company's facilities are open 24 hours a day, seven days a week. In addition, the Company's clustering strategy provides convenient access to multiple locations near its members' homes and places of work. WELL-EQUIPPED, WELL-MAINTAINED FITNESS CENTERS. The Company is committed to offering fitness centers that are fully equipped with the latest in sports technology and equipment, including complete lines of state-of-the-art cardiovascular equipment, free weights and weight training machines. The Company has a comprehensive maintenance and capital expenditure program designed to continually maintain and upgrade its exercise equipment and facilities. In addition, the Company believes that the cleanliness and maintenance of its facilities are important to existing and prospective members, and therefore employee compensation is linked to these factors. PROFESSIONALLY TRAINED, CUSTOMER-ORIENTED FITNESS SERVICE STAFF. Each of the Company's fitness centers features a professionally trained staff to assist and supervise members with their exercise regimens. Through training and ongoing educational requirements, the Company ensures that its fitness service staff provides safe, consistent and effective exercise assistance and supervision. AFFORDABLE PRICING STRUCTURE. Members of the Company's fitness centers enjoy quality health and fitness services at affordable prices. The Company's individual monthly dues for new members typically range from $19 to $35, and individual one-time initiation fees for new members typically range from $49 to $299, depending upon the type of membership plan, the particular fitness center and its amenities. These membership plans differentiate the Company from some of its competitors that charge a substantial one-time initiation fee. Emphasizing monthly dues encourages a focus on quality customer service which management believes results in higher customer satisfaction and improved member retention. In fiscal 1997, approximately 70% of the Company's net revenues were from monthly dues. In excess of 90% of the Company's dues collected monthly are paid by electronic funds transfer, which the Company believes significantly increases collection rates of, and reduces the cost of collecting, monthly dues. HIGH MEMBER RETENTION RATES. The Company devotes significant attention to retaining its members and, as a result, has been able to achieve what it believes to be some of the highest member retention rates among commercial multi-site fitness center owner-operators. These high member retention rates provide the Company with a stable base of recurring revenues and reduce costs associated with membership attrition. Existing members are also an important source of new member referrals. CLUSTERING OF FITNESS CENTERS. The Company seeks to establish a prominent presence in each of its markets by clustering several fitness centers in a particular area. This strategy enables the Company to achieve significant market penetration and to leverage management, advertising and purchasing expenses thereby achieving greater economies of scale. This strategy also promotes recognition of the "24 Hour Fitness" brand name and contributes to high member retention rates. STRONG BRAND NAME. The Company devotes substantial resources to advertising and marketing aimed at enhancing its brand image. The Company employs a full time corporate advertising staff that oversees its radio, television, print and direct response advertising, image advertising and promotional events aimed at attracting new members and developing the "24 Hour Fitness" brand name. The Company also allocates a portion of its advertising and promotion budget to local club managers to enable them to engage in local advertising and promotions at the individual facility level. HIGHLY EXPERIENCED MANAGEMENT TEAM. The Company's management team has been at the forefront of the fitness industry for over 15 years and is led by the Company's founder, Mark S. Mastrov, who started the Company with a single fitness center in 1983. As the Company's business has grown, Mr. Mastrov has recruited and developed an experienced management team. The seven senior members of this team have more than 94 cumulative years of experience in the health and fitness center industry. GROWTH STRATEGY From January 1, 1996 to April 30, 1998, the Company grew from 109 facilities to 173 facilities. The Company plans to continue to expand by opening and acquiring a total of at least 35 fitness centers in fiscal 1998 (of which 16 had been opened or acquired by April 30, 1998) and approximately 35 additional fitness centers in fiscal 1999. This planned expansion is expected to be accomplished through the construction of new greenfield facilities, the acquisition of individual fitness centers, primarily in existing markets, and the acquisition of multi-site operators in new and existing markets. The Company has developed a three-pronged growth strategy that builds on the successes of the Company's management in operating, developing and acquiring fitness centers. The key elements of this growth strategy are: INCREASE REVENUES AND OPERATING INCOME AT EXISTING FITNESS CENTERS. The Company seeks to leverage the operating performance of its existing fitness centers through growth in fitness center revenues. Due to the high fixed cost component of operating expenses, revenue growth at existing clubs generally results in significantly increased operating income and cash flow. Total combined revenues, before change in deferred revenues, at fitness centers which the Company operated at least 13 months increased 13.8% in fiscal 1996, 12.9% in fiscal 1997 and 16.9% in the three months ended March 31, 1998. The Company's strategy for increasing revenues and operating income in existing fitness centers emphasizes the following: - ATTRACT NEW MEMBERS. The Company uses a variety of methods to attract new members, including radio, television, print and direct response advertising, image advertising, existing member referral programs and sponsorship of numerous community programs. The Company also seeks to increase its membership by offering corporate membership programs and establishing relationships with health maintenance organizations ("HMOs"). The Company has approximately 5,000 companies participating in its corporate membership programs with approximately 200,000 members enrolled. - INCREASE ANCILLARY REVENUES. The Company has developed a broad portfolio of complementary services and products, including: one-on-one personal training services, weight loss and nutritional counseling, and retail offerings of athletic clothing, juices, sports drinks and nutritional supplements. The Company believes that further expansion of these ancillary products and services, particularly in its more recently opened or acquired fitness centers, will provide an opportunity to continue to increase net revenues. Revenues from ancillary services were $15.8 million for fiscal 1996 and $34.2 million for fiscal 1997, or approximately 8.8% and 13.1% of net revenues, respectively, for each period. ACQUIRE ADDITIONAL FITNESS CENTERS. Historically, acquisitions of fitness centers have played a key role in the Company's growth strategy. From January 1, 1996 through March 31, 1998, the Company acquired 46 additional fitness centers, of which 36 were acquired in acquisitions of multi-site operators. In addition, as of June 1, 1998, the Company had entered into letters of intent with respect to an additional two acquisitions of multi-site operators representing an additional 12 fitness centers. The Company purchases individual fitness centers primarily in existing markets in order to increase its economies of scale, further its clustering strategy and increase its market share. Acquisitions of underperforming fitness centers also provide the Company with opportunities to improve operating performance through the implementation of the Company's operating strategy. The Company has and will continue to pursue acquisitions of multi-site operators and individual fitness centers having a combination of attractive locations, strong management teams and significant growth potential. DEVELOP NEW LOCATIONS. From January 1, 1996 through March 31, 1998, the Company developed 19 greenfield fitness centers as a complement to its acquisition strategy. Developing greenfield sites allows the Company to control every aspect of the design and construction of a fitness center in accordance with its operational philosophy. The Company develops fitness centers on a greenfield basis both as a way of entering new markets and expanding its presence in existing markets. ------------------------ Holdings was incorporated in Delaware in November 1994 as a holding company for its principal operating subsidiary, 24 Hour Fitness, Inc., a California corporation, which was incorporated in June 1983. The Company's principal executive offices are located at 5020 Franklin Drive, Pleasanton, California 94588, and its telephone number is (925) 416-3100. THE OFFERINGS (1) <TABLE> <S> <C> Shares of Common Stock Offered: United States Offering..................... shares International Offering..................... shares Total.................................... shares Total Common Stock to be Outstanding after the Offerings.............................. shares Use of Proceeds (2).......................... Up to $ million of the net proceeds of the Offerings will be used to reduce the outstanding indebtedness under the Senior Credit Facility (as defined herein), approximately $6.0 million will be used to pay the Success Fee (as defined herein) under an existing contractual arrangement to Banque Nationale de Paris ("BNP"), the lender under the Senior Credit Facility, approximately $ million of the net proceeds to pay a fee to certain MDC Entities in connection with the termination of the existing Management Services Agreement with such entities and the remaining proceeds of the Offerings will be used for general corporate purposes. See "Use of Proceeds", "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview" and "Certain Relationships and Related Transactions." Proposed Nasdaq National Market Symbol....... FITN </TABLE> - ------------------------ (1) Excludes shares issuable upon the exercise of outstanding options and warrants. Immediately prior to the consummation of the Offerings, approximately of these options were fully vested. Upon consummation of the Offerings an additional options will vest pursuant to the terms of the Company's equity incentive plans. (2) Holdings will not receive any proceeds from the sale of shares of Common Stock by the MDC Entities (as defined herein), pursuant to the Underwriters' over-allotment options, if, and to the extent that, such options are exercised. See "Principal and Selling Stockholders." SUMMARY CONSOLIDATED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> HISTORICAL PRO FORMA THREE HISTORICAL FISCAL YEAR MONTHS FISCAL YEAR ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, MARCH 31, -------------------------------------------------------- --------------- --------- 1993 1994 1995 1996 1997 1997(1) 1997 --------- --------- ---------- ---------- ---------- --------------- --------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net revenues (2): Membership revenues....................... $ 35,612 $ 39,684 $ 108,668 $ 196,573 $ 258,776 $ 263,503 $ 61,696 Change in deferred revenues............... (4,227) (1,304) (18,683) (32,403) (31,069) (32,355) (10,131) --------- --------- ---------- ---------- ---------- --------------- --------- Net membership revenues................. 31,385 38,380 89,985 164,170 227,707 231,148 51,565 Ancillary revenues........................ 1,639 2,891 8,009 15,839 34,197 35,429 6,425 --------- --------- ---------- ---------- ---------- --------------- --------- Total net revenues...................... 33,024 41,271 97,994 180,009 261,904 266,577 57,990 Operating expenses: Fitness center operating expenses......... 26,044 32,689 83,947 162,054 226,809 230,314 50,981 General and administrative expenses (3)... 8,377 6,018 17,441 24,830 30,866 31,119 6,386 Depreciation and amortization............. 1,942 2,494 7,447 13,653 20,244 20,880 4,133 Provision for severance................... -- -- -- 3,600 635 635 -- Change in deferred membership origination costs (4)............................... (890) (718) (5,838) (10,244) (9,843) (9,843) (2,598) --------- --------- ---------- ---------- ---------- --------------- --------- Total operating expenses................ 35,473 40,483 102,997 193,893 268,711 273,105 58,902 --------- --------- ---------- ---------- ---------- --------------- --------- Income (loss) from operations............... (2,449) 788 (5,003) (13,884) (6,807) (6,528) (912) Interest expense (5)........................ 101 165 5,600 9,280 18,372 18,865 2,917 Debt offering costs (6)..................... -- -- -- -- 999 999 -- --------- --------- ---------- ---------- ---------- --------------- --------- Income (loss) before income taxes........... (2,550) 623 (10,603) (23,164) (26,178) (26,392) (3,829) Income tax benefit (expense)................ 956 (260) 3,853 8,394 9,171 9,260 1,371 --------- --------- ---------- ---------- ---------- --------------- --------- Net income (loss)........................... $ (1,594) $ 363 $ (6,750) $ (14,770) $ (17,007) $ (17,132) $ (2,458) --------- --------- ---------- ---------- ---------- --------------- --------- --------- --------- ---------- ---------- ---------- --------------- --------- Net income (loss) per share (7): Basic..................................... Diluted................................... Weighted average shares outstanding: Basic..................................... Diluted................................... SELECTED OPERATING DATA: EBITDA (8).................................. $ (507) $3,282 $2,444 $ (231) $13,437 $14,352 $3,221 Number of fitness centers open at period end....................................... 24 32 109 137 157 157 140 Average revenues per fitness center (9)..... $1,719 $1,472 $1,675 $1,793 $ 1,985 $ 1,986 $ 488 Comparable fitness center revenues increase (10)...................................... 4.5% 8.0% 8.5% 13.8% 12.9% 12.9% 12.0% <CAPTION> 1998 --------- <S> <C> STATEMENT OF OPERATIONS DATA: Net revenues (2): Membership revenues....................... $ 78,674 Change in deferred revenues............... (10,909) --------- Net membership revenues................. 67,765 Ancillary revenues........................ 12,889 --------- Total net revenues...................... 80,654 Operating expenses: Fitness center operating expenses......... 70,598 General and administrative expenses (3)... 7,585 Depreciation and amortization............. 5,391 Provision for severance................... -- Change in deferred membership origination costs (4)............................... (2,838) --------- Total operating expenses................ 80,736 --------- Income (loss) from operations............... (82) Interest expense (5)........................ 5,280 Debt offering costs (6)..................... -- --------- Income (loss) before income taxes........... (5,362) Income tax benefit (expense)................ 1,631 --------- Net income (loss)........................... $ (3,731) --------- --------- Net income (loss) per share (7): Basic..................................... Diluted................................... Weighted average shares outstanding: Basic..................................... Diluted................................... SELECTED OPERATING DATA: EBITDA (8).................................. $5,309 Number of fitness centers open at period end....................................... 172 Average revenues per fitness center (9)..... $ 544 Comparable fitness center revenues increase (10)...................................... 16.9% </TABLE> <TABLE> <CAPTION> AT MARCH 31, 1998 --------------------------- ACTUAL AS ADJUSTED(11) --------- ---------------- <S> <C> <C> SELECTED BALANCE SHEET DATA: Working capital deficit................................................................ $ (75,887) $ Total assets........................................................................... 266,912 Long-term debt, excluding current portion.............................................. 202,877 Stockholders' deficit.................................................................. (109,417) </TABLE> - ------------------------------ (1) Represents the pro forma results of the Company's operations assuming that the acquisition of Northwest Fitness, Inc. had occurred on January 1, 1997. See "Pro Forma Combined Financial Information." (2) Membership revenues in any given period are comprised of all cash collected for non-refundable, one time initiation fees and all membership dues collected in that period, regardless of when services are actually provided. The portion of these membership revenues relating to new member initiation fees are deferred and recognized on a straight line basis over the average expected life of the memberships, currently estimated at 32 months. The portion of these membership revenues relating to dues for services not yet provided are recognized as revenues in the period in which services are actually provided. Change in deferred revenues is the amount of cash collected in a prior period and recognized as revenue in the current period less the amount of cash collected in the current period and deferred and recognized as revenues in a future period. (3) On February 14, 1997 the Company issued approximately stock options pursuant to its equity incentive plans and recognized a compensation charge of $417,000 in connection with such issuance. Upon completion of the Offerings, certain of these options will vest pursuant to the terms of the Company's equity incentive plans which will cause the Company to recognize an additional compensation charge of $ million in the quarter in which this vesting occurs. Such vesting is currently expected to occur in the third quarter of 1998. (4) Change in deferred membership origination costs reflects commissions related to new membership sales which are deferred and recognized on a straight-line basis over the average expected life of the memberships, currently estimated at 32 months. (5) In connection with the Company's fiscal 1997 distributions to its stockholders of $57.5 million, the Company paid a $1.0 million success participation fee to its lender, which is included in interest expense. Upon completion of the Offerings, the Company will be obligated to make an additional Success Fee payment to its lender of approximately $6.0 million, which will be included in interest expense in the quarter in which such payment is made. See Note 12 to the Company's Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Overview." (6) Debt offering costs reflect the write-off of one-time costs associated with a contemplated offering of debt securities. (7) In fiscal 1997, the Company adopted Statement of Financial Accounting Standard No. 128 "Earnings per Share." All earnings per share amounts presented are in accordance with this statement. (8) EBITDA is defined as income (loss) from operations before depreciation and amortization. Income (loss) from operations excludes interest, taxes and the write-off of debt offering costs. EBITDA is presented because management believes it is a useful indicator of the Company's capacity to service and/or incur debt and as a measure of the Company's operating performance. EBITDA is not a measure of performance under Generally Accepted Accounting Principles ("GAAP") and should not be considered in isolation or as a substitute for income (loss) from operations or cash flows or as a measure of the Company's profitability or liquidity in assessing the Company's overall financial condition. The Company's measure of EBITDA may not be comparable to similar measures used by other companies. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources."
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the consolidated financial statements and notes thereto appearing elsewhere in this Prospectus. Prospective investors should consider carefully the information set forth under the heading "Risk Factors." As used in this Prospectus, the term "school" means a single location at which the Company offers programs of study and the term "institution" means a main campus and its additional locations (if any) as defined in the applicable regulations of the United States Department of Education ("Department of Education"). THE COMPANY The Company provides diversified career oriented postsecondary education to over 10,000 students at 24 schools located in ten states. The Company offers a variety of bachelor degree, associate degree and diploma programs designed to provide students with the knowledge and skills necessary to qualify them for entry level employment principally in the fields of healthcare, business, information technology, and fashion and design. The Company's curricula include programs leading to employment in ten of the 15 fastest growing occupations (measured by percentage growth from 1994 through 2005) as projected by the U.S. Department of Labor. At March 31, 1998, approximately 49% of the Company's students were enrolled in bachelor and associate degree programs. In 1996, there were 14.6 million students participating in postsecondary education programs, 44% of whom were over the age of 24 (Source: National Center for Educational Statistics, Digest of Education Statistics, 1996). The Company believes the demand for postsecondary career oriented education will increase over the next several years as a result of recognized trends, including (i) a projected 24% growth in the number of new high school graduates from approximately 2.5 million in 1994 to approximately 3.1 million in 2004, (ii) the increasing enrollment of high school graduates attending postsecondary educational institutions (65% in 1996 versus 53% in 1983) as they seek to enhance their skills or retrain for new technologies, and (iii) the increasing recognition of the income premium attributable to higher education degrees, with individuals holding associate degrees earning on average approximately 30% more income during their lifetimes than individuals holding only high school diplomas (Source: Department of Education). According to the Department of Education, there were 1,995 accredited, proprietary postsecondary institutions participating in the student financial aid programs ("Title IV Programs") administered by the Department of Education pursuant to Title IV of the Higher Education Act of 1965, as amended ("HEA") as of March 16, 1998. The ownership of these institutions is highly fragmented. Although the industry appears to be moving into a consolidation phase, management believes that no organization either holds a significant national market share or owns or operates more than 75 schools. COMPANY STRATEGY The Company's goal is to increase its market share in the expanding market for postsecondary education and improve profitability by (i) promoting internal growth at the Company's new and existing schools, (ii) acquiring additional schools, (iii) opening new schools as additional locations or branches of existing schools, and (iv) enhancing operating efficiencies. The Company has implemented the following strategies to achieve these goals: Internal Growth Strategy. The Company intends to increase student enrollment at its schools by continuing to enhance local marketing efforts and increasing the number and variety of program offerings at its schools. The Company intends to continue to increase the number and variety of programs offered at its schools by (i) developing new diploma and degree programs, including a centrally developed information technology diploma and degree program, (ii) replicating existing programs at selected schools where such programs were not previously offered, and (iii) introducing associate degree programs at all of its schools currently offering only diploma programs. INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED JUNE 30, 1998 PROSPECTUS 2,625,000 SHARES EDUCATIONAL MEDICAL, INC. (LOGO) COMMON STOCK ------------------ Of the 2,625,000 shares of common stock (the "Common Stock") offered hereby (the "Offering"), 626,001 shares are being sold by Educational Medical, Inc. (the "Company") and 1,998,999 shares are being sold by certain stockholders of the Company (the "Selling Stockholders"). The Company will not receive any of the proceeds from the sale of shares by the Selling Stockholders. See "Principal and Selling Stockholders." The Common Stock is listed on the Nasdaq National Market (the "Nasdaq") under the trading symbol "EDMD." The last sales price of the Common Stock as reported on the Nasdaq on June 26, 1998 was $9.875 per share. See "Price Range of Common Stock." SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY. ------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. <TABLE> <CAPTION> ========================================================================================================================= UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS - ------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Per Share $ $ $ $ - ------------------------------------------------------------------------------------------------------------------------- Total(3) $ $ $ $ ========================================================================================================================= </TABLE> (1) For information regarding indemnification of the Underwriters, see "Underwriting." (2) Before deducting expenses of the Offering, estimated at $425,000, which are payable by the Company. (3) The Company has granted the Underwriters a 30-day option to purchase up to 393,750 additional shares of Common Stock solely to cover over-allotments, if any. See "Underwriting." If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. Proceeds to Selling Stockholders will not be affected. ------------------ The shares of Common Stock are being offered by the several Underwriters named herein, subject to prior sale, when, as and if accepted by them and subject to certain conditions. It is expected that certificates for the shares of Common Stock offered hereby will be available for delivery on or about , 1998 at the office of Smith Barney Inc., 333 West 34th Street, New York, New York 10001. ------------------ SALOMON SMITH BARNEY LEGG MASON WOOD WALKER INCORPORATED June , 1998 Acquisition Strategy. The Company intends to continue to make selective acquisitions of additional schools and integrate them into its existing system. The Company believes that the fragmentation of the postsecondary education market provides significant opportunities to consolidate existing independently owned schools. The Company expects to utilize cash on hand, its bank credit facility, the Company's Common Stock, and seller financing in connection with such acquisitions. In general, the Company's principal acquisition criteria are: historical profitability; acceptable default rates with respect to federally guaranteed or funded student loans; established and marketable curricula; and demographic profiles in the area which indicate a potential for growth. The Company concentrates its acquisition efforts on schools which satisfy its general acquisition criteria and which offer curricula in the fields of study currently offered at the Company's schools and selected other fields of study. Additional Location Strategy. The Company intends to capitalize on its schools' existing infrastructure and curricula by opening additional locations by branching from its existing institutions in areas that exhibit strong enrollment potential and job placement opportunities. The Company's principal criteria for determining whether to open new schools are the demographic profile of the location and the economic and management cost of opening the new location. Operating Strategy. The Company provides each of its schools with certain services which the Company believes can be performed most efficiently and cost effectively by a centralized office. Such services include marketing analysis, accounting, information systems, financial aid and regulatory compliance. The Company intends to continue its strategy of operating with a decentralized management structure in which local schools' management is empowered to make most of the day-to-day operating decisions at each school and is primarily responsible for the profitability and growth of that school. The Company believes the combination of certain centralized services and decentralized management significantly increases its operating efficiency. FISCAL 1998 ACQUISITIONS The CHI Institute Acquisition. On February 14, 1998, the Company acquired the CHI Institute, which operates two schools (the "CHI Institute Schools") located in the Philadelphia, Pennsylvania area, by purchasing all of the stock of Computer Hardware Service Company, Inc. (the "CHI Institute Acquisition"). The purchase price of the CHI Institute Acquisition was $11,750,000, consisting of $1,500,000 in cash, promissory notes aggregating $8,750,000, and 151,900 shares of the Company's Common Stock, valued at an aggregate of $1,500,000. As part of the CHI Institute Acquisition, the Company also agreed to make adjusting payments to the sellers based on the ratio of certain assets to certain liabilities of the CHI Institute Schools at the time of the acquisition. These adjusting payments aggregated $1,084,230, all of which has been paid in fiscal 1999. The Company has accounted for the CHI Institute Acquisition as a purchase; therefore, the results of its operations are included in the Company's consolidated results of operations effective February 1, 1998. The CHI Institute Schools are located in Broomall and Southampton, Pennsylvania. As of March 31, 1998, approximately 1,019 students attended the CHI Institute Schools, which offer associate degree and diploma programs in business, healthcare, electronic engineering, and information technology. The Hesser Acquisition. On March 13, 1998, the Company acquired Hesser College, which operates four schools (the "Hesser Schools") located in New Hampshire, by purchasing all of the stock of Hesser, Inc. and the property in Manchester, New Hampshire at which its main campus is located (the "Hesser Acquisition"). The purchase price of the Hesser Acquisition was $15,000,000, consisting of $2,000,000 in cash, promissory notes aggregating $11,000,000, and 202,532 shares of the Company's Common Stock, valued at an aggregate $2,000,000. As part of the Hesser Acquisition, the Company also agreed to make adjusting payments to the sellers based on the ratio of certain assets to certain liabilities of the Hesser Schools at the time of the acquisition. These adjusting payments aggregated $2,683,372, of which $2,433,372 has been paid in fiscal 1999 and $250,000 of which is due April 1, 1999. The Company has accounted for the Hesser Acquisition as a purchase; therefore, the results of its operations are included in the Company's consolidated results of operations effective March 1, 1998. [ARTWORK CONCERNING FIELDS OF STUDY] CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING BY OVER-ALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING COVERING TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING." --------------------- This Prospectus contains certain forward-looking statements that involve substantial risks and uncertainties. When used in this Prospectus, the words "anticipate," "believe," "estimate," "expect" and similar expressions as they relate to the Company or its management are intended to identify such forward-looking statements. Actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Factors that could cause or contribute to such differences include general economic and business conditions, the Company's ability to identify, acquire and integrate additional schools, its ability to open additional schools, its continued compliance with Title IV funding requirements and other matters discussed in "Risk Factors." The Hesser Schools are located in Manchester, Nashua, Portsmouth and Salem, New Hampshire. As of March 31, 1998, approximately 2,512 students attended the Hesser Schools, which primarily offer bachelor degree and associate degree programs in business, healthcare, information technology, criminal justice and early childhood education. COMPANY HISTORY The Company began business by acquiring seven schools in fiscal 1989 and 1990, all of which offered programs in the healthcare field. In fiscal 1992, the Company continued to grow by acquisition and implemented a new strategy to diversify outside of the healthcare field by acquiring a fashion and design school. In fiscal 1993 and 1994, the Company acquired seven additional schools, which included schools offering programs in the fields of healthcare, business, fashion and design, and image technology. In fiscal 1997, the Company acquired two schools (the "Nebraska Schools") in Nebraska (the "Nebraska Acquisition"), three schools in Texas (the "Texas Acquisition") and one school in Maryland (the "Maryland Acquisition") (collectively, the Nebraska Acquisition, the Maryland Acquisition and the Texas Acquisition are called the "Fiscal 1997 Acquisitions"). The Fiscal 1997 Acquisitions included schools offering programs in the fields of healthcare, business and information technology. The Nebraska Acquisition was accounted for as a pooling of interests. In fiscal 1998, the Company acquired six schools through the CHI Institute Acquisition and the Hesser Acquisition (collectively, the "Fiscal 1998 Acquisitions"). The Fiscal 1998 Acquisitions included schools offering programs primarily in the fields of business, healthcare, information technology, electronic engineering, criminal justice and early childhood education. The number of students attending the Company's schools rose from 2,840 at March 31, 1993 to 10,008 at March 31, 1998. The Company's net revenues increased 138% from $25,100,000 for the year ended March 31, 1993 to $59,676,000 for the year ended March 31, 1998. The Company is a Delaware corporation incorporated in 1988. The Company operates the majority of its business through 14 subsidiaries. The Company's principal executive offices are located at 1327 Northmeadow Parkway, Suite 132, Roswell, Georgia 30076. Its telephone number is 770-475-9930 and its website address is http://www.edmd.com. Subject to shareholder approval at its next annual meeting of shareholders in September 1998, the Company has determined to change its name to "Quest Education Corporation." THE OFFERING Common Stock offered by the Company..... 626,001 shares Common Stock offered by the Selling Stockholders............................ 1,998,999 shares Total.............................. 2,625,000 shares Common Stock to be outstanding after the Offering................................ 8,369,195 shares(1) Use of proceeds by the Company.......... To repay certain outstanding indebtedness of the Company. The Company will not receive any of the proceeds from the sale of Common Stock by the Selling Stockholders. See "Use of Proceeds." Nasdaq National Market symbol........... "EDMD" - --------------- (1) Excludes at May 31, 1998 up to (i) 913,339 shares reserved for issuance under the Company's 1996 Stock Incentive Plan of which options to purchase 900,339 shares have been granted, (ii) 200,000 shares reserved for issuance under the Company's Non-Employee Director Stock Option Plan, of which options to purchase 112,000 shares have been granted, and (iii) 43,334 shares which may be purchased upon the exercise of outstanding warrants to purchase Common Stock. Includes 19,050 shares held in escrow under the terms of the Nebraska Acquisition and subject to possible return to the Company. SUMMARY CONSOLIDATED FINANCIAL AND OTHER OPERATING DATA The following table sets forth certain consolidated financial and other operating data for the Company. This information should be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. These historical and pro forma as adjusted results are not necessarily indicative of the results that may be expected in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Unaudited Pro Forma As Adjusted Condensed Consolidated Statement of Income." <TABLE> <CAPTION> YEAR ENDED MARCH 31, -------------------------------------------- PRO FORMA HISTORICAL AS ADJUSTED(1) --------------------------- -------------- 1996 1997 1998 1998 ------- ------- ------- -------------- (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net revenues......................................... $43,347 $49,450 $59,676 $80,965 School operating costs: Cost of education and facilities................... 19,651 23,151 27,087 35,769 Selling and promotion expenses..................... 6,534 7,531 8,644 12,852 General and administrative expenses................ 12,369 14,042 16,576 21,919 Amortization of goodwill and intangibles............. 883 886 1,285 1,757 Other expenses(2): Merger costs....................................... -- 391 -- -- Legal defense and settlement costs................. 1,115 -- -- 232 Loss on closure or relocation of schools........... 50 144 -- -- Impairment of goodwill and intangibles............. 764 -- -- -- ------- ------- ------- ------- Income from operations............................... 1,981 3,305 6,084 8,436 Interest (income) expense, net....................... 822 284 (253) 822 ------- ------- ------- ------- Income before income taxes and extraordinary item.... 1,159 3,021 6,337 7,614 Provision (benefit) for income taxes................. 632 (845) 2,485 3,046 ------- ------- ------- ------- Income before extraordinary item..................... 527 3,866 3,852 4,568 Extraordinary item, net of income taxes.............. -- 309 -- -- ------- ------- ------- ------- Net income......................................... $ 527 $ 3,557 $ 3,852 $ 4,568 ======= ======= ======= ======= PRO FORMA DATA(3): Pro forma income tax data: Income before income taxes......................... $ 1,159 $ 3,021 Provision for income taxes......................... 487 409 ------- ------- Income before extraordinary item................... 672 2,612 Extraordinary item, net of income taxes............ -- 309 ------- ------- Pro forma net income............................... $ 672 $ 2,303 ======= ======= PER SHARE DATA(4): Basic: Net income before extraordinary item............... $ 0.28 $ 0.58 $ 0.52 $ 0.55 Net income......................................... $ 0.28 $ 0.51 $ 0.52 $ 0.55 Diluted: Net income before extraordinary item............... $ 0.13 $ 0.41 $ 0.51 $ 0.53 Net income......................................... $ 0.13 $ 0.36 $ 0.51 $ 0.53 Weighted average number of shares outstanding: Basic.............................................. 2,371 4,484 7,382 8,335 Diluted............................................ 5,182 6,447 7,612 8,565 </TABLE> <TABLE> <CAPTION> YEAR ENDED MARCH 31, -------------------------------------------- PRO FORMA HISTORICAL AS ADJUSTED(1) --------------------------- -------------- 1996 1997 1998 1998 ------- ------- ------- -------------- <S> <C> <C> <C> <C> OTHER OPERATING DATA: Number of schools at end of year(5).................. 16 19 24 24 Number of students at end of year.................... 4,954 5,993 10,008 10,008 Number of new student starts during year............. 6,706 7,358 8,410 Monthly withdrawal rate during year(6)............... 4.1% 4.2% 3.6% </TABLE> <TABLE> <CAPTION> MARCH 31, 1998 --------------------------- PRO FORMA HISTORICAL AS ADJUSTED(1) ---------- -------------- (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $21,446 $21,446 Total assets................................................ 81,298 81,298 Notes payable and long term debt, including current portion................................................... 31,947 26,414 Total stockholders' equity.................................. 35,672 41,205 </TABLE> - --------------- (1) Pro forma to give effect to the Fiscal 1998 Acquisitions and as adjusted to give effect to the sale of 626,001 shares of Common Stock of the Company pursuant to the Offering and application of the net proceeds therefrom as if such transactions had occurred at the beginning of the year in the case of the statement of income data, and as of March 31, 1998 in the case of the balance sheet data. See "Use of Proceeds" and "Unaudited Pro Forma As Adjusted Condensed Consolidated Statement of Income."
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and Consolidated Financial Statements and notes thereto appearing elsewhere in this Prospectus. Certain information contained in this summary and elsewhere in this Prospectus, including information with respect to the Company's plans and strategy for its business, especially RSC's growth strategy, plans to raise additional capital and prospective acquisitions, are forward-looking statements. Prospective investors should carefully consider the factors set forth herein under the caption "Risk Factors" for a discussion of important factors that could cause actual results to differ materially from results referred to in the forward-looking statements. Unless otherwise indicated, all information set forth in this Prospectus assumes no exercise of the Underwriters' overallotment option. Capitalized terms used but not defined in this Prospectus Summary have the meanings ascribed to them elsewhere in this Prospectus. THE COMPANY The Company is a leading consolidator in the rapidly-growing equipment rental industry, with a demonstrated track record of 60 business acquisitions since its formation in 1992. The Company serves the needs of a wide variety of industrial, manufacturing, construction, government and homeowner markets through a network of 225 rental locations in 26 states and Canada (as of August 7, 1998). RSC rents a broad selection of equipment ranging from small items such as pumps, generators, welders and electric hand tools, to larger equipment such as backhoes, forklifts, air compressors, scissor lifts, aerial manlifts and skid-steer loaders. The Company also sells maintenance, repair and operations ("MRO") supplies, small tools, contractor supplies, parts and used rental equipment, and acts as a distributor for new equipment on behalf of certain national equipment manufacturers. Depending upon market needs, RSC also offers its customers 24 hours-a-day, seven days-a-week support services, including on-site maintenance and repair. The Company has a diverse customer base and rented equipment to over 100,000 customers in 1997, with the top ten customers representing less than 3% of total revenues. The Company's customers include industrial companies (such as manufacturers, petrochemical facilities, large chemical processing companies, paper mills, entertainment companies and public utilities), construction companies (such as contractors), governmental entities and homeowners. RSC's strategy is to expand its presence in existing markets and capitalize on opportunities to enter new geographic markets through a combination of acquisitions and start-up locations. From its formation in July 1992 through August 7, 1998, the Company has acquired 60 businesses consisting of 188 locations and has opened 62 start-up locations. As of August 7, 1998, the Company was party to non-binding letters of intent to acquire seven equipment rental businesses with a combined 14 locations in nine states. See "--Recent Developments." The Company also focuses on increasing revenues and profitability across its locations through investments in fleet expansion, the implementation of sophisticated information systems designed to improve asset utilization and targeted marketing efforts. For the year ended December 31, 1997 and the six months ended June 30, 1998, after giving effect to the acquisitions and other pro forma adjustments described under "Unaudited Pro Forma Consolidated Financial Data," the Company would have generated pro forma revenues of $475.5 million and $272.8 million, respectively, and operating income of $67.8 million and $45.3 million, respectively. See "Unaudited Pro Forma Consolidated Financial Data." The Company believes the rental equipment industry offers substantial consolidation opportunities for large, well capitalized equipment rental companies such as RSC. The equipment rental industry is highly fragmented, primarily consisting of relatively small entities serving discrete local market areas and a number of multi-location regional or national firms. This fragmentation is demonstrated by the following statistics derived from the Rental Equipment Register (the "RER") for 1997: (i) the largest 100 equipment rental companies had total rental revenues of approximately $4.2 billion, which would account for approximately 20% of the management-estimated $21 billion in industry rental revenues; (ii) no one company had a market share greater than 5%; (iii) the industry had approximately 17,000 participants; and (iv) there were only ten equipment rental companies having rental revenues in excess of $100 million. The Company believes RSC benefits from several competitive advantages, including sophisticated management information systems, volume purchasing discounts, professional management, a diverse customer base and geographic locations, a modern and well-maintained rental fleet, the ability to transfer equipment among rental locations to satisfy customer demand and national brand identity. Management believes the equipment rental industry benefits from the trend among businesses to outsource non-core operations in order to reduce capital investment and minimize the downtime, maintenance, repair and storage associated with equipment ownership. As a result of consolidation and industry growth, 1997 rental revenues of the top 100 rental equipment companies increased over 1996 rental revenues by approximately 35%, to more than $4.2 billion, according to estimates by the RER. See "Business--Competition." BUSINESS STRATEGY The Company's goal is to increase revenues and profitability by taking advantage of its strong market position and pursuing a business strategy that includes the following key elements: Small- to Medium-Sized Market Focus. The Company focuses on operating rental locations in underserved small- to medium-sized rental markets where the Company can capitalize on its competitive advantages relative to the small, local equipment rental businesses and equipment dealers who have traditionally served such markets. In addition, the Company believes small- to medium-sized markets provide an extensive selection of acquisition candidates and attractive start-up locations. The Company believes future acquisitions and start-up locations will provide opportunities to achieve greater geographic and customer diversification. Through its geographic diversification, the Company believes it can more effectively manage economic fluctuations than single-location businesses by transferring equipment to regions with higher demand. See "Business--Locations" and "--Growth Strategy." Cluster Strategy. Under its cluster strategy, RSC establishes a comprehensive pool of rental equipment at a central, readily-accessible "hub" location, and surrounds the hub with smaller "satellite" locations 30 to 150 miles away, which draw on this equipment pool to serve local customers' needs. The hub locations provide full-service rental fleet maintenance and repair operations for the satellite locations. The Company believes this strategy increases fleet utilization and allows RSC to bring the benefits of a large, high-quality and diversified rental equipment fleet to markets with populations as small as 25,000 where a full-scale rental facility might not otherwise be justified. See "Business--Fleet Management." Advanced Information Systems. The Company has made substantial investments in its management information systems in order to improve asset utilization and financial performance. Every rental location has on-line access to a centralized computer system that provides real-time transaction processing, extensive fleet management tools and financial management reports. Use of these systems allows the Company to improve its asset utilization by deploying assets to locations generating higher returns and identifying underperforming assets for disposition. These systems also allow an employee at any location to identify and reserve a specific piece of equipment anywhere in a region, and schedule delivery (generally within 24 hours) to a customer's job site. With the acquisition of Center, the Company obtained Center's proprietary information system, which, among other enhancements, automatically prioritizes equipment for maintenance based on type, age and recent use. The Company believes Center's system is scaleable over a large number of locations, and expects to add it to the Company's existing systems. See "--Recent Developments--Acquisition of Center Rental," "Business--Fleet Management" and "--Information Systems" Decentralized Management. Under the Company's decentralized management structure, RSC's region vice presidents and district managers, who currently average over 20 years of rental experience, are responsible for management, customer service, marketing strategies and business growth, including pursuing acquisitions and identifying start-up locations, in their regions. Each region vice president and district manager is compensated through a stock option program and cash bonus plan tied directly to the region's performance. A small corporate staff at the Company's headquarters focuses on corporate planning, financial reporting and analysis and overseeing execution of the Company's growth strategy. The Company has also centralized its purchasing and equipment disposal functions in order to maximize purchase discounts and sale prices for used rental equipment. Superior Customer Service. The Company believes it differentiates itself from many of its competitors by providing responsive customer service, a broad selection of high-quality rental equipment and "one-stop shopping" for a wide range of supplies, tools, parts and equipment. Depending upon market needs, RSC also offers value-added services to its customers such as a radio-dispatched transportation fleet and 24-hours-a-day, seven-days-a-week support services, including on-site maintenance and repair. The Company believes its rapid response time in delivering, servicing or replacing equipment at job sites generates customer loyalty. A cornerstone to the Company's customer service commitment is its extensive training system, Rental Service University ("RSU"), which provides formal training to Company employees relating to customer service, strategy, finance, information systems, fleet management, safety and risk management and human resources. See "Business--Products" and "--Sales and Marketing." GROWTH STRATEGY RSC's growth strategy is to continue to expand its presence in existing markets and capitalize on opportunities to enter new geographic markets through a combination of acquisitions and start-up locations. The Company is systematic in its selection of new markets for expansion and, together with Arthur D. Little, Inc., has developed a proprietary model to guide future expansion efforts by identifying and ranking desirable locations based on more than 25 demographic characteristics found in the Company's most successful geographic markets. The Company also seeks to increase revenues at new and existing locations through fleet expansion, improved asset utilization and targeted marketing efforts. The Company also has begun to increase revenues across existing locations by cross-selling both equipment rental services and MRO tools and supplies to its industrial customers. Acquisitions. RSC's acquisition efforts focus on acquiring stable, respected businesses in markets the Company believes offer opportunities for additional growth. The Company primarily targets acquisitions of businesses in small- to medium-sized markets where an existing owner has limited resources to expand the rental equipment fleet and/or the owner's decision to sell coincides with the decision to retire. The Company believes it can capitalize in such markets on its competitive advantages relative to the small, local equipment rental businesses and equipment dealers who have traditionally served such markets. Immediately after completing an acquisition, the Company generally integrates the operations of the acquired business into its management information systems, consolidates its equipment purchasing and disposal functions, and centralizes its fleet management, while seeking to provide consistent, high- quality service to the acquired business' customers. The Company has a proven track record in completing and integrating acquisitions. Proprietors of smaller businesses often place significant emphasis on the Company's reputation in these areas, and the Company believes this reputation provides it access to additional acquisition opportunities. Since its formation in 1992, RSC has acquired 60 businesses consisting of 188 locations (through August 7, 1998). See "Business--Business Strategy--Small- to Medium-Sized Market Focus" and "Business--Locations." Start-Up Locations. RSC also enters targeted markets through start-up locations where there is no quality business available for acquisition or where such a business cannot be acquired on terms acceptable to the Company. The Company's decision to open a start-up location is based upon its review of demographic information, business growth projections and the level of existing competition. RSC enhances the flexibility of start-up locations by entering into real estate leases with short initial terms and multiple option periods. In addition, RSC typically minimizes capital expenditures at a start-up location by redeploying and sharing equipment with an existing hub. If a start- up location does not meet expectations, the Company can redeploy the equipment elsewhere. Since the Company opened its first start-up location in October 1994, the Company has opened 61 additional start-up locations (through August 7, 1998). See "Business--Business Strategy--Cluster Strategy" and "Business-- Locations." Internal Growth. The Company focuses on achieving internal growth through an emphasis on disciplined fleet expansion, improved asset utilization and targeted marketing efforts. The Company intends to replace assets in, and increase the breadth and depth of, its existing rental equipment fleet through capital expenditures. In addition, RSC's information systems provide the data necessary to improve asset deployment based upon such factors as price realization, time utilization and individual asset return on investment. Through its national accounts marketing program, the Company targets large petrochemical, industrial and commercial customers. The Company offers these customers In-Plant Maintenance ("IPM") services whereby RSC locates equipment at a customer's facility and assumes complete responsibility for the maintenance of such equipment. The IPM program allows the Company to eliminate operating expenses such as equipment transportation and delivery, and to improve asset utilization rates. In addition, the Company has increased its MRO supply business and its tool room management and small tool trailer business. The Company has also created an Industrial Division, with a dedicated and specially trained sales force focusing exclusively on industrial customers. See "Business--Fleet Management," "--Information Systems" and "--Sales and Marketing." RECENT DEVELOPMENTS ACQUISITION OF CENTER RENTAL On December 2, 1997, the Company acquired all of the outstanding stock of Rent-It-Center, Inc. d/b/a Center Rental & Sales and substantially all of the assets of certain affiliated entities (collectively, "Center") for approximately $100.9 million in cash, 482,315 shares of common stock, par value $.01 per share, of the Company ("Common Stock") (of which 64,544 shares will be issued over seven years, subject to earlier issuance within three years if certain performance objectives are achieved) and the assumption of approximately $16.0 million of Center's debt (the "Center Acquisition"). Center was a leading independent equipment rental company that also sold a variety of equipment ranging from small tools to heavy equipment, including related commodity supplies. Center operated a total of 14 locations in Colorado, New Mexico, Texas, Kansas, Missouri and Nebraska, and had total combined revenues of approximately $49.8 million for its fiscal year ended October 31, 1997. Center operated on a "hub" and "satellite" strategy similar to that employed by the Company. Center's balance sheet was consolidated with the Company's under the purchase method of accounting as of December 2, 1997. Pursuant to the acquisition agreements, the Company assumed effective control of Center's operations on November 1, 1997, and has included Center's revenues, costs and expenses from such date in its consolidated statements of operations, net of related imputed purchase price adjustments. ACQUISITION OF VALLEY RENTALS On February 3, 1998, the Company acquired substantially all of the assets of JDW Enterprises, Inc. d/b/a Valley Rentals ("Valley") for $93.6 million in cash and 435,602 shares of Common Stock (the "Valley Acquisition"). Valley was a leading independent equipment rental company in the Southwest, operating a total of ten locations in Arizona and New Mexico, and had total revenues of approximately $36.7 million for its fiscal year ended December 31, 1997. This acquisition was recorded under the purchase method of accounting as of February 3, 1998. Valley was an excellent strategic fit with both the Company's operations and the Colorado and New Mexico locations of Center. Valley was a leader in the Arizona rental market, and operated on a limited "hub" and "satellite" system similar to the Company and Center. Valley's locations in the Southwest were a natural geographic extension of RSC's and Center's locations. OTHER ACQUISITIONS AND START-UPS On April 1, 1998, the Company acquired all of the outstanding stock of James S. Peterson Enterprises, Inc. d/b/a Metroquip Rental Centers ("Metroquip") for approximately $51.2 million in cash (including the payoff of assumed debt) and 193,090 shares of Common Stock. Up to an additional 95,727 shares of Common Stock may be paid to the seller over a three-year period if certain performance objectives are met. Metroquip rented, sold and supported aerial work platforms and contractors' equipment, operated a total of five locations in Minnesota and Nebraska, and had total revenues of approximately $25.2 million for its fiscal year ended December 31, 1997. Metroquip's balance sheet was consolidated with the Company's as of April 1, 1998. Pursuant to the acquisition agreement, the Company assumed effective control of Metroquip's operations on March 1, 1998 and has included Metroquip's revenues, costs and expenses from such date in its consolidated statements of operations, net of related imputed purchase price adjustments. On April 2, 1998, the Company acquired all of the outstanding stock of T&M Rental, Inc. ("T&M") for approximately $21.9 million in cash (including the payoff of assumed debt). Up to 33,132 shares of Common Stock may be paid to the seller over a three-year period if certain performance objectives are met. T&M was an independent rental company operating one location in Indiana, and had total revenues of approximately $5.8 million for its fiscal year ended February 28, 1998. T&M's balance sheet was consolidated with the Company's as of April 2, 1998. Pursuant to the acquisition agreement, the Company assumed effective control of T&M's operations on March 1, 1998 and has included T&M's revenues, costs and expenses from such date in its consolidated statements of operations, net of related imputed purchase price adjustments. On July 29, 1998, the Company acquired all of the outstanding stock of M.J. Struckel & Company, Inc. ("Struckel") for approximately $21.2 million in cash (including the payoff of assumed debt). Struckel rented and sold a variety of aerial equipment to customers in the construction industry, operated a total of three locations in Illinois and Missouri, and had total revenues of approximately $9.2 million for its fiscal year ended December 31, 1997. Struckel's balance sheet was consolidated with the Company's as of July 29, 1998. Pursuant to the acquisition agreement, the Company assumed effective control of Struckel's operations on July 1, 1998 and has included Struckel's revenues, costs and expenses from such date in its consolidated statements of operations, net of related imputed purchase price adjustments. Subsequent to June 30, 1998, the Company completed two additional acquisitions for a total combined purchase price of approximately $10.6 million in cash. These acquisitions had a combined six locations in Canada and Illinois. As of August 7, 1998, the Company was party to non-binding letters of intent to acquire seven equipment rental businesses with a combined 14 locations in Arizona, Idaho, Illinois, Maryland, Nevada, New Mexico, Oklahoma, Utah and Wisconsin for a total combined purchase price of approximately $52.9 million in cash (including the assumption of approximately $1.3 million of debt). These acquisitions are subject to a number of closing conditions, including the execution of definitive purchase agreements, RSC board of directors approval and, in some cases, expiration of early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"). Furthermore, in view of the fact that these letters of intent are non- binding and that the Company has not completed its due diligence investigations with respect thereto, the Company cannot predict whether these letters of intent will lead to definitive agreements, whether the terms of any such definitive agreements will be the same as the terms contemplated by the letters of intent or whether any transaction contemplated by such letters of intent will be consummated. ISSUANCE OF SENIOR SUBORDINATED NOTES On May 13, 1998, the Company issued $200.0 million aggregate principal amount of its 9% Senior Subordinated Notes due 2008 (the "Senior Subordinated Notes") in a private placement pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"). The net proceeds of the offering were used to repay indebtedness under the Revolver in order to provide borrowing availability for general corporate purposes, including acquisitions. THE OFFERINGS The offering of 3,424,064 shares of the Company's Common Stock, par value $.01 per share, in the United States and Canada (the "U.S. Offering") and the offering of 856,016 shares of the Company's Common Stock outside the United States and Canada (the "International Offering") are collectively referred to as the "Offerings." Common Stock Offered: <TABLE> <C> <S> By the Company...................................... 4,200,000 shares By the Selling Stockholders......................... 80,080 shares --------- Total........................................... 4,280,080 shares ========= Common Stock to be Outstanding After the Offerings(1).. 24,997,396 shares Use of Proceeds........................................ The net proceeds to be received by the Company from the Offerings will be used to reduce the Company's indebtedness under the Revolver in order to provide borrowing availability for general corporate purposes, including acquisitions. See "Use of Proceeds."
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the consolidated financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless the context otherwise requires, (i) all references herein to the "Company" include the Company, its subsidiaries and its predecessors taken as a whole, (ii) all references herein to a "fiscal" year refer to the fiscal year beginning on February 1 of that year (for example, "fiscal 1995" refers to the fiscal year beginning on February 1, 1995) and (iii) all information in this Prospectus assumes an initial offering price of $10 per share of Common Stock and no exercise of the Over-allotment Option. All share and per share data has been restated to give effect to a 1,626.19-for-1 stock split and reduction in par value per share of Common Stock from $.10 to $.01 which occurred after the beginning of fiscal 1997. This Prospectus contains certain forward-looking statements which involve certain risks and uncertainties. The Company's actual results could differ materially from the results anticipated in these forward-looking statements as a result of the factors set forth under "Risk Factors" and elsewhere in this Prospectus. THE COMPANY General Grand Court Lifestyles, Inc. (the "Company"), a fully integrated provider of adult living accommodations and services, acquires, develops and manages adult living communities. The Company's revenues have been, and are expected to continue to be, primarily derived from sales of partnership interests ("Syndications") of partnerships it organizes to acquire existing adult living communities. The Company manages the Syndicated adult living communities and is one of the largest operators of adult living communities in the United States. The Company currently manages 37 adult living communities containing 5,265 apartment units offering both independent and assisted-living services in 12 states in the Sun Belt and the Midwest. The Company also manages one nursing home. The Company has approximately 1,600 employees and directly conducts the day-to-day operations of the adult living communities it manages. As of January 31, 1998, the Company had an average occupancy rate at the adult living communities it manages of approximately 93%. Prior to 1986, the Company acquired, developed, arranged for the Syndication of, and in most cases managed, 170 multi-family properties containing approximately 20,000 apartment units, primarily in the Sun Belt and the Midwest. The Company is no longer engaged in the acquisition, development, Syndication or management of multi-family properties and the Company does not presently intend to do so in the future. The Company's only involvement with multi-family properties is as a holder of notes and receivables from the partnerships that own 128 multi-family properties containing 13,886 apartment units, which notes and receivables are paid from the cash flow and sale or refinancing proceeds these properties generate. As of October 31, 1997, the recorded value, net of deferred income, of these notes on the Company's Consolidated Balance Sheets was $107.1 million and the recorded amount of these receivables was $54.8 million. The Company intends to continue to arrange for future acquisitions of existing adult living communities utilizing mortgage financing and Syndications. As described below, the Company has instituted a development plan to construct new adult living communities. The Company intends to own the newly-constructed communities, or lease them pursuant to long term leases or similar arrangements, and to manage these communities. The Company does not intend to Syndicate any of its newly-constructed adult living communities. To the extent that the development plan to construct new adult living communities is successfully implemented, the Company anticipates that the percentage of its revenues derived from Syndications of acquired adult living communities would decrease and the percentage of its revenues derived from newly constructed adult living communities would increase. The Company also believes that, over time, revenues derived from newly constructed adult living communities will become the primary source of the Company's revenues. Largely as a result of anticipated start-up losses from the Company's newly developed adult living communities, the Company anticipates that it will incur operating losses for fiscal 1998. Partnership Offerings The Company has arranged for the acquisition of the 37 adult living communities and one nursing home that it manages by utilizing mortgage financing and by arranging Syndications of 41 limited partnerships ("Investing Partnerships") formed to acquire interests in the 37 other partnerships that own the adult living communities and the nursing home ("Owning Partnerships"). The 37 Syndicated adult living communities and one nursing home managed by the Company are owned by the respective Owning Partnerships and not by the Company. The Company is the managing general partner of all but one of the Owning Partnerships and manages all of the adult living communities and the one nursing home in its portfolio. The Company is also the general partner of 32 of the 41 Investing Partnerships. In a typical Syndication, the Company identifies an adult living community suitable for acquisition and forms an Owning Partnership (in which it is the managing general partner and initially owns all of the partnership interests) to acquire the property. An Investing Partnership is also formed ( in which the Company is also the general partner with a 1% interest) to purchase from the Company a 99% partnership interest in the Owning Partnership (the "Purchased Interest"), leaving the Company with a 1% interest in the Owning Partnership and a 1% interest in the Investing Partnership. The purchase price for the Purchased Interest is paid in part in cash and in part by a note from the Investing Partnership with a term of approximately five years ( a "Purchase Note"). Limited partners purchase partnership interests in the Investing Partnership by agreeing to make capital contributions over approximately five years to the Investing Partnership, which allows the Investing Partnership to pay the purchase price for the Purchased Interest, including the Purchase Note. The limited partnership agreement of the Investing Partnership provides that the limited partners are entitled to receive, for a period not to exceed five years, distributions equal to between 11% and 12% per annum of their then paid-in scheduled capital contributions. Although the Company incurs certain costs in connection with acquiring a community and arranging for the Syndication of partnership interests, the Company makes a profit on the sale of the Purchased Interest. In addition, as part of the purchase price for the Purchased Interest paid by the Investing Partnership, the Company receives a 40% interest in sale and refinancing proceeds after certain priority payments to the limited partners. The Company also enters into a management contract with the Owning Partnership pursuant to which the Company agrees to manage the adult living community. As part of the management fee arrangements, the management contract requires the Company, for a period not to exceed five years, to pay to the Owning Partnership (to the extent that cash flows generated by the property are insufficient) amounts sufficient to fund (i) any operating cash deficiencies of such Owning Partnership and (ii) any part of such 11% to 12% return not paid from cash flow from the related property (which the Owning Partnerships distribute to the Investing Partnerships for distribution to limited partners) (collectively, the "Management Contract Obligations"). The Company, therefore, has no direct obligation to pay specified returns to limited partners. Rather, the Company is obligated pursuant to the management contract to pay to the Owning Partnership amounts sufficient to make the specified returns to the limited partners, to the extent the cash flows generated by the property are insufficient to do so. The Owning Partnership then distributes these amounts to the Investing Partnership which, in turn, distributes these amounts to the limited partners. As a result of the Management Contract Obligations, the Company and its stockholders bear the risks of operations and financial viability of the related property for such five-year period. The management contract, however, rewards the Company for successful management of the property by allowing the Company to retain any cash flow generated by the property in excess of the amount needed to satisfy the Management Contract Obligations as an incentive management fee. After the initial five-year period, the limited partners are entitled to the same specified rate of return, but only to the extent there is sufficient cash flow from the property, and any amounts of cash flow available after payment of the specified return to limited partners are shared as follows: 40% to the Company as an incentive management fee and 60% for distribution to the limited partners. The management contract is not terminable during this initial five-year period and is terminable thereafter by either party upon thirty to sixty days notice. During the fiscal year ended January 31, 1997 and the nine months ended October 31, 1997, the Company paid approximately $5.6 million and $5.2 million, respectively, with respect to its Management Contract Obligations. The aggregate amount of such Management Contract Obligations relating solely to returns to limited partners for the last quarter of fiscal 1997 and for each of the fiscal years 1998 through 2002 based on existing management contracts is $3.9 million, $15.4 million, $17.4 million, $16.4 million, $11.2 million and $2.4 million, respectively. Such amounts of Management Contract Obligations are calculated based upon paid-in scheduled capital contributions of limited partners as of October 31, 1997 with respect to fiscal 1997, and remaining scheduled capital contributions with respect to fiscal years 1998 through 2002. Actual amounts of Management Contract Obligations in respect of such contracts will vary based upon the timing and amount of such capital contributions. Furthermore, such amounts of Management Contract Obligations are calculated without regard to any cash flow the related properties may generate, which cash flow would reduce such obligations, and are calculated without regard to the Management Contract Obligations relating to future Syndications. The Company anticipates that for at least the next two years, the aggregate Management Contract Obligations with respect to existing and future Syndications will exceed the aggregate cash flow generated by the related properties, which will result in the need to utilize cash generated by the Company from sources other than the operations of the Syndicated adult living communities to meet its Management Contract Obligations (including payment of required returns for distribution to limited partners) for these periods. The payment of expenses arising from obligations of the Company, including Management Contract Obligations, have priority over earnings that might otherwise be available for distribution to stockholders. The initial five-year term of the management contracts and the related Management Contract Obligations have expired for 10 Owning Partnerships, which Management Contract Obligations relate to fourteen Investing Partnerships. Although the Company has no obligation to fund operating shortfalls after the five-year term of the management contracts, as of October 31, 1997, the Company had advanced an aggregate of approximately $400,000 to two Owning Partnerships to fund operating shortfalls . In both cases, the Company had arranged for Syndications involving multi-family properties that the Company acquired from third parties and believed could be successfully converted to adult living communities. Receivables Relating To Multi-Family Properties Although prior to 1986, the Company developed, acquired, arranged for the Syndication of, and in most cases managed, multi-family properties, the Company does not own, and no longer has any direct involvement with, these multi-family properties. The Company's only involvement with the multi-family properties is that it holds Purchase Notes ("Multi-Family Notes") from Investing Partnerships which were formed to acquire interests in Owning Partnerships which own multi-family properties ("Multi-Family Owning Partnerships"). These Multi-Family Notes are secured by the Purchased Interests in the related Multi-Family Owning Partnerships. Although it has no obligation to do so, the Company has also made advances to various Multi-Family Owning Partnerships to support the operation of their properties, which advances are recorded as "Other Partnership Receivables" on the Company's Consolidated Balance Sheet. The Multi-Family Notes and the other receivables entitle the Company to receive all cash flow and sale or refinancing proceeds generated by the respective multi-family property until the Multi-Family Note and receivables are satisfied. As of October 31, 1997, the recorded value, net of deferred income, of Multi-Family Notes was $107.1 million. All but approximately $1.2 million of the $56.0 million of "Other Partnership Receivables" recorded on the Company's Consolidated Balance Sheet as of October 31, 1997 relate to advances to Multi-Family Owning Partnerships. In addition, many of the multi-family properties are dependent to varying degrees on housing assistance payment contracts with the United States government, most of which will expire over the next few years. In view of the foregoing, there can be no assurance that other Multi-Family Owning Partnerships will not default on their mortgages, file bankruptcy petitions, and/or lose their properties through foreclosure. The Company neither owns nor manages these properties, nor is it the general partner of these Multi-Family Owning Partnerships, but, rather, holds the related Multi-Family Notes and Other Partnership Receivables as receivables. Any such future mortgage defaults could, and any such future filings of Chapter 11 petitions or the loss of any such property through foreclosure would, cause the Company to realize a non-cash loss equal to the recorded value of the applicable Multi-Family Note plus any related advances, net of any deferred income recorded for such Multi-Family Note and any reserves for such note and receivables previously established by the Company, which would reduce such loss. In addition, the Company could be required to realize such a non-cash loss even in the absence of mortgage defaults, Chapter 11 Petitions or the loss of any such property through foreclosure if, at any time in which the Company's financial statements are issued, such note is considered impaired. Such impairment would be measured under applicable accounting rules. Such losses, if any, while non-cash in nature, could adversely affect the Company's business, operating results and financial condition. New Development Program Beginning in 1986, the Company has focused primarily on the acquisition, development and management of adult living communities. Through its management of 37 adult living communities containing 5,265 adult living apartment units and one nursing home, the Company has become an experienced provider of both independent and assisted-living services. The Company believes that its experience in the acquisition, development and management of adult living The Company's development plan is based upon a "prototype" adult living community that it has designed. The prototype incorporates attributes of the various facilities managed by the Company and contains certain design features that the Company believes are innovative and will appeal to the elderly. The prototype contains 142 adult living apartment units and will be located on sites of up to seven acres. The Company believes that its development prototype is larger than most assisted-living facilities, which typically range from 40 to 80 units. The Company believes that the greater number of units will allow the Company to achieve economies of scale in operations, resulting in lower operating costs per unit, without sacrificing quality of service. The Company believes that the common areas and amenities offered by its prototype represent the state of the art for independent-living facilities and are superior to those offered by smaller independent-living facilities or by most assisted-living facilities, whose smaller size limits the size and variety of common areas. The Company believes that its prototype adult living community is attractive to both independent-living residents who foresee their future need for assisted-living services and residents who initially seek assisted-living services. Each such community will offer residents a choice between independent-living and assisted-living services. As a result, the market for each facility will be broader than for facilities that offer only either independent-living or assisted-living services. Although the licensing requirements and the expense and difficulty of converting between independent-living units and assisted-living units typically make it impractical to accomplish such conversions, the Company's prototype is designed to allow, at any time, for conversion of units, at minimum expense, for use as either independent-living or assisted-living units. Each community, therefore, may adjust its mix of independent-living and assisted-living units as the market or existing residents demand. The Company believes that part of the appeal of this type of community is that residents will be able to "age in place" with the knowledge that they need not move to another facility if they require assistance with "activities of daily living" which the Company offers in the same community. In the Company's opinion, the ability to retain residents by offering them higher levels of services will result in stable occupancy with enhanced revenue streams. The Company believes that management and marketing are critical to the success of an adult living community. In order to attain high occupancy rates at newly developed properties, the Company plans to continue its marketing program which has resulted in an average occupancy rate at January 31, 1998 of approximately 93%. In addition, the Company plans to use the common facility design of its prototype and its "The Grand Court"(R) trademarked name to promote recognition of its properties nationally. The Company focuses exclusively on "private-pay" residents who pay for housing or related services out of their own funds, rather than relying on the few states that have enacted legislation which enables assisted-living facilities to receive Medicare funding similar to funding generally provided to skilled nursing facilities. The Company believes this "private-pay" focus will allow it to increase rental revenues as demographic pressure increases demand for adult living facilities and to avoid potential financial difficulties it might encounter if it were primarily dependent on Medicare or other reimbursement programs that may be scaled back as a result of health care reform, budget deficit reduction or other pending or future state or Federal government initiatives. Grand Court Lifestyles, Inc. is a Delaware corporation formed in 1996 to consolidate substantially all of the assets of its predecessors, J&B Management Company, Leisure Centers, Inc., and their affiliates. Unless the context otherwise indicates, all references to the Company include Grand Court Lifestyles Inc., its subsidiaries and predecessors. The Company's principal executive offices are located at 2650 N. Military Trail, Suite 350, Boca Raton, Florida 33431 and its telephone number is (561) 997-0323. The following diagram illustrates the typical relationship among the Company, the Owning Partnerships and the Investing Partnerships in a transaction where the Company acquires and Syndicates an adult living community. (Diagram illustrating the relationship among the Company, the Owning Partnerships and the Investing Partnerships in a transaction where the Company acquires and Syndicates an adult living community appears here. At the top of the diagram is a box containing the name "Grand Court Lifestyles, Inc." (the "Company box"). An arrow with the words "Manager of Adult Living Community" is drawn to the left of the diagram from the Company box to a box appearing at the bottom of the page entitled "Adult Living Community" (the "Adult Living Community box"). An arrow with the words "Sale of a General Partnership Interest in Owning Partnership" is drawn from the Company box to a box below it entitled "Investing Partnership" (the "Investing Partnership box"). In return, an arrow with the words "Cash, Purchase Note and Investor Notes as Consideration for Sale" is drawn from the Investing Partnership box to the Company box. An arrow with the words "Sale of Limited Partnership Interest" is drawn from the Investing Partnership box to a box appearing to its left entitled "Limited Partners" (the "Limited Partners box"). In return, an arrow with the words "Cash and Investor Notes as consideration for Sale" is drawn from the Limited Partners box to the Investing Partnership box. An arrow with the words "General Partner" is drawn from the Investing Partnership box to a box below entitled "Owning Partnership" (the "Owning Partnership box"). An arrow with the words "Owner of Adult Living Community" is drawn from the Owning Partnership box to the Adult Living Community box appearing directly below the Owning Partnership box. Arrows with the words "Directly or Through A Wholly-Owned Subsidiary - General Partner" is drawn to the right of the diagram from the Company box to the Investing Partnership box and the Owning Partnership box.) The following diagram illustrates the flow of funds when a syndicated adult living community experiences profitable or unprofitable operations during the Management Contract Obligations period. (Diagram illustrating the flow of funds when a syndicated adult living community experiences profitable or unprofitable operations during the Management Contract Obligations period appears here. In the middle of the diagram is a box entitled "Owning Partnership" (the "Owning Partnership box"). An arrow with the words "Specified Rate of Return" is drawn from the Owning Partnership box to the upper left portion of the diagram to a box entitled "Investing Partnership" (the "IP box"). An arrow with the words "Specified Rate of Return" is drawn from the IP box to a box appearing directly above entitled "Limited Partners". An arrow with the words "Incentive Management Fee Equal to Cash Flow above Specified Rate of Return to Limited Partners" is drawn from the Owning Partnership box to the upper right portion of the diagram to a box entitled "The Company" (the "Company box"). In return, an arrow with breaks and the words "Amount Equal to Cash Flow Shortfall and Specified Rate of Return to Limited Partners (Management Contract Obligation Payments)" is drawn from the Company box to the Owning Partnership box. An arrow with breaks and the words "(Unprofitable Operations) Cash Flow Shortfall" is drawn from the Owning Partnership box to a box below entitled "Adult Living Community" (the "ALC box"). In return, an arrow with the words "Cash Flow (Profitable Operations)" is drawn from the ALC box to the Owning Partnership box.) The following diagram illustrates how the cash generated from each of the following sources flows to the Company and how it is available to pay the Company's expenses, including Management Contract Obligations. (Diagram illustrating how cash generated from Adult Living Investing Partnerships, Adult Living Owning Partnerships, Multi-Family Investing Partnerships, Debt Holders and Newly Developed Adult Living Communities flows to the Company and how it is available to pay the Company's expenses, including Management Contract Obligations appears here.) At the top of the diagram is a box containing the words "Expenses, including Management Contract Obligations" (the "Expenses box"). An arrow with the words "Available Company Cash Flow" is drawn directly below the Expenses box from a box entitled "The Company" (the "Company box"). An arrow with the words "Capital Contributions" is drawn to the left of the diagram from a box entitled "Limited Partners" (the "LP box") to a box appearing directly above entitled "Adult Living Investing Partnerships" (the "ALIP box"). An arrow with the words "Purchase Price for Purchased Interest, Including Payments on Purchase Notes" is drawn from the ALIP box to the Company box. An arrow with the words "Net Cash Flow after Operating Expenses" is drawn from a box entitled "Adult Living Properties" (the "ALP box"), which appears directly to the right of the LP box, to a box appearing directly above entitled "Adult Living Owning Partnerships" (the "ALOP box"). An arrow with the words "Incentive Management Fees" is drawn from the ALOP box to the Company box. An arrow with the words "Net Cash Flow and Sale and Refinancing Proceeds" is drawn from a box entitled "Multi-Family Properties" (the "M-FP box") to a box appearing directly above the M-FP box and to the right of the ALP box entitled "Multi-Family Owning Partnership" (the "M-FOP box"). An arrow with the words "Net Cash Flow and Sale and Refinancing Proceeds" is drawn from the M-FOP box to a box appearing directly above entitled "Multi-Family Investing Partnerships" (the "M-FIP box"). An arrow with the words "Purchase Note and Receivables Payments" is drawn from the M-FIP box to the Company box. An arrow with the words "Management Fees" is drawn from the M-FP box to a box appearing directly to the right of the M-FP box entitled "Third Party Managing Agent". An arrow with the words "Proceeds of Debenture Debt and Unsecured Debt" is drawn from a box entitled "Debt Holders" (the "Debt Holders box"), which appears directly to the right of the M-FIP box, to the Company box. An arrow with the words "Cash Flow" is drawn from a box entitled "Newly Developed Adult Living Communities", which appears directly to the right of the Debt Holders box, to the Company box.) THE OFFERING <TABLE> <CAPTION> <S> <C> Common Stock to be sold by the Company(1)............................ 3,000,000 shares Common Stock outstanding before this Offering............................. 15,000,000 shares of Common Stock Common Stock to be outstanding after this Offering(1)(2): 18,000,000 shares of Common Stock Use of proceeds............................. The Company intends to use (i) approximately $3 million of its net proceeds from the Offering for working capital and general corporate purposes and (ii) the balance of approximately $23 million to finance development of new adult living communities. </TABLE> - ------------- (1) Excludes up to 450,000 additional shares of Common Stock to be sold by the Principal Stockholders upon exercise of the Over-allotment Option and up to 300,000 shares of Common Stock issuable upon exercise of the Representative's Warrants. See "Underwriting". (2) Excludes 2,500,000 shares of Common Stock reserved for issuance pursuant to the Company's stock option plans. As of the date hereof, there were not any options granted under the Company's stock option plans. See "Management-- Stock Plans". SUMMARY CONSOLIDATED FINANCIAL DATA (in thousands, except per share data and other data) The summary consolidated financial data have been taken or derived from, and should be read in conjunction with, the Company's consolidated financial statements and the related notes thereto, and the capitalization data included elsewhere in this Prospectus. The results of operations for an interim period have been prepared on the same basis as the year end financial statements and, in the opinion of management, contain all adjustments, consisting of only normally recurring adjustments, necessary for a fair presentation of the results for the full year. The results of operations for the nine months ended October 31, 1996 and 1997 may not give a true indication of results for the full year. All references herein to a "fiscal" year refer to the fiscal year beginning on February 1 of that year (for example, "fiscal 1995" refers to the fiscal year beginning on February 1, 1995). See "Capitalization" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." <TABLE> <CAPTION> Nine months Years Ended January 31, (5) ended October 31,(5) ------------------------------------------------------- -------------------- 1993 1994 1995 1996 1997 1996 1997 ---- ---- ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> <C> <C> Statement of Operations Data: Revenues: Sales......................... $ 18,170 $ 20,973 $ 22,532 $ 31,973 $ 36,021 $ 21,524 $31,401 Syndication fee income........ 6,484 7,654 5,587 8,603 7,690 4,976 6,529 Deferred income earned........ 792 7,502 4,399 9,971 5,037 708 4,246 Interest income............... 13,209 13,315 9,503 12,689 13,773 11,043 8,081 Property management fees from related parties ........... 560 3,854 4,351 4,057 2,093 1,604 3,250 Equity in earnings from partnerships............... 129 206 276 356 423 250 357 Other income.................. -- -- -- 1,013 -- -- 283 --------- -------- --------- -------- -------- -------- -------- Total Revenues 39,344 53,504 46,648 68,662 65,037 40,105 54,147 ========= ======== ========= ======== ======== ====== ======= Costs and expenses: Cost of sales................. 14,411 26,876 21,743 27,688 34,019 19,468 25,947 Selling....................... 7,027 6,706 6,002 7,664 7,176 4,603 6,186 Interest...................... 11,874 10,991 13,610 15,808 16,394 12,017 13,991 General and administrative.... 5,617 5,226 6,450 7,871 7,796 5,687 6,415 Loss on impairment of notes and receivables.............. -- -- -- -- 18,442 18,442 -- Write-off of registration costs -- -- -- -- -- -- 3,107 Officers' compensation(1)..... 1,200 1,200 1,200 1,200 1,200 900 900 Depreciation and amortization. 975 1,433 2,290 2,620 3,331 2,539 2,650 --------- -------- --------- -------- -------- -------- -------- Total Cost and Expenses 41,104 52,432 51,295 62,851 88,358 63,656 59,196 ========= ======== ========= ======== ======== ====== ======= Income (loss) before provision (benefit) for income taxes ... (1,760) 1,072 (4,647) 5,811 (23,321) (23,551) (5,049) Provision for income taxes...... -- -- -- -- -- -- -- --------- -------- --------- -------- -------- -------- -------- Net income (loss)(6)............. (1,760) 1,072 (4,647) 5,811 (23,321) (23,551) (5,049) Pro-forma income tax provision (benefit)(2).................. (704) 429 (1,859) 2,324 -- -- -- --------- -------- --------- -------- -------- -------- -------- Pro-forma net income (loss)(2).. $ (1,056) $ 643 $ (2,788) $ 3,487 $(23,321) $(23,551) $(5,049) ========= ======== ========= ======== ======== ====== ======= Pro-forma earnings (loss) per common share(2)............... $ (.07) $ .04 $ (.19) $ .23 $(1.55) $(1.57) $ (.34) ========= ======== ========= ======== ======== ====== ======= Pro-forma weighted average common shares used............ 15,000 15,000 15,000 15,000 15,000 15,000 15,000 ========= ======== ========= ======== ======== ====== ======= Other Data: Adult living communities operated (end of period).... 14 18 24 28 31 29 36 ========= ======== ========= ======== ======== ====== ======= Number of units (end of period)..................... 2,336 2,834 3,683 4,164 4,480 4,119 5,192 ========= ======== ========= ======== ======== ====== ======= Average occupancy percentage (3).............. 90.6% 90.4% 89.3% 94.7% 91.3% 93.4% 93.1% ========= ======== ========= ======== ======== ====== ======= </TABLE> <TABLE> <CAPTION> As of January 31, (as restated) (6) As of October 31, 1997 ---------------------------------------------- ---------------------- 1993 1994 1995 1996 1997 Actual Adjusted(4) ---- ---- ---- ---- ---- ------ ----------- <S> <C> <C> <C> <C> <C> <C> <C> Balance Sheet Data: Cash and cash equivalents $ 6,455 $ 9,335 $ 10,950 $ 17,961 $ 14,111 $ 9,679 $ 35,679 Notes and receivables-net 234,583 227,879 220,482 224,204 222,399 238,128 238,128 Total assets........... 251,116 248,854 248,553 260,023 261,661 288,074 314,074 Total liabilities...... 203,990 211,647 217,879 225,238 229,658 261,120 261,120 Stockholders' equity... 47,126 37,207 30,674 34,785 32,003 26,954 52,954 </TABLE> - ---------- (1) John Luciani and Bernard M. Rodin, the Chairman of the Board and President, respectively, of the Company received dividends and distributions from the Company's predecessors but did not receive compensation. Officers' Compensation is based upon the aggregate compensation currently received by such officers, $600,000 a year for each such officer. Amounts received by such officers in excess of such amount are treated as dividends for purposes of the Company's financial statements. In fiscal 1992 through fiscal 1996, such officers also received $360,000; $5,496,000; $943,000; $850,000; and $397,000 each as a dividend. See "Management." (2) The Company's predecessors were Sub-chapter S corporations and a partnership. The pro forma statement of operations data reflects provisions for federal and state income taxes as if the Company had been subject to federal and state income taxation as a C corporation during the years ended January 31, 1993 through January 31, 1996. (3) Average occupancy percentages were determined by adding all of the occupancy percentages of the individual communities and dividing that number by the total number of communities. The average occupancy percentage for each particular community was determined by dividing the number of occupied apartment units in the particular community on the given date by the total number of apartment units in the particular community. (4) "Adjusted" amounts give effect to the application by the Company of its net proceeds of this Offering (based upon an assumed initial public offering price of $10 per share of Common Stock, after deducting underwriting discounts and other offering expenses payable by the Company). See "Capitalization."
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION, INCLUDING "RISK FACTORS," AND CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS (I) REFLECTS A 1-FOR-1.37 REVERSE STOCK SPLIT EFFECTED ON NOVEMBER 21, 1997, (II) REFLECTS THE CONVERSION OF ALL OUTSTANDING SHARES OF PREFERRED STOCK OF THE COMPANY INTO COMMON STOCK UPON COMPLETION OF THIS OFFERING AND (III) ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED. EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THIS PROSPECTUS CONTAINS FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. THE CAUTIONARY STATEMENTS MADE IN THIS PROSPECTUS SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD LOOKING STATEMENTS WHEREVER THEY APPEAR IN THIS PROSPECTUS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL REFERENCES TO THE "COMPANY" AND "VYSIS" SHALL MEAN VYSIS, INC., A DELAWARE CORPORATION, AND ITS PREDECESSORS AND SUBSIDIARIES, AND ALL REFERENCES TO "AMOCO" SHALL MEAN AMOCO CORPORATION, AN INDIANA CORPORATION, AND ITS WHOLLY OWNED SUBSIDIARY, AMOCO TECHNOLOGY COMPANY, A DELAWARE CORPORATION. A GLOSSARY OF TECHNICAL TERMS USED IN THIS PROSPECTUS IS ANNEXED HERETO. GENOMIC DISEASE MANAGEMENT Genetic abnormalities are a fundamental source of human disease. Genetic based diseases and disorders include cancer, birth defects, mental retardation, coronary artery disease, autoimmune diseases and diabetes. Genomic Disease Management is an emerging field that seeks to develop new genetic tests based on correlations between genetic abnormalities and disease. Genomic Disease Management products, by providing new information not currently available through existing methods, enable physicians to diagnose disease more quickly and accurately, to determine the most appropriate treatment and to monitor disease progression and recurrence during therapy. Genomic Disease Management products also enable the detection of disease at the very early or developing stages when treatment is likely to be most effective. In addition, Genomic Disease Management products allow physicians to identify genetic predisposition to disease well before the disease is manifested, thus enabling early intervention either through lifestyle changes or preventive therapy. THE COMPANY Vysis is a leading Genomic Disease Management company that develops, commercializes and markets clinical products that provide information critical to the evaluation and management of cancer, prenatal disorders and other genetic diseases. The Company has assembled a management team experienced in developing, commercializing and marketing DNA based diagnostic products and associated genetic workstations. The Company was the first to obtain Food and Drug Administration ("FDA") clearance for a genomic product using fluorescence IN SITU hybridization ("FISH"). Vysis currently markets five FDA cleared clinical products in addition to distributing over 240 research products through its direct sales operations in the United States and Europe and a worldwide distribution network covering 28 countries. It has an installed base of over 320 proprietary genetic workstations at 224 laboratories in 18 countries. The Company has a pipeline of nine clinical products under development and an expanding list of clinical product leads based upon its collaborations with leading medical research institutions which include the University of California, San Francisco, the Mayo Clinic, St. Jude Children's Research Hospital, the University of Chicago and the Reproductive Genetics Institute. The Company's revenues have grown from $5.4 million in 1994 to $13.2 million in 1996. The Company's revenues for the first nine months of 1997 were $12.2 million compared to $9.0 million for the first nine months of 1996. The Company had net losses of $18.7 million, $17.7 million, and $18.2 million for the years ended December 31, 1994, 1995 and 1996, respectively. The net loss for the first nine months of 1996 as compared to 1997 has declined from $13.8 million to $11.5 million. The Company's business represents the consolidation of multiple research units and programs of Amoco. Over the past ten years, Amoco has invested over $80 million to fund Vysis' research and development in nucleic acid technologies and related business operations. As a result of this investment, Vysis has compiled a broad portfolio of intellectual property and expertise, which forms the basis of its core technologies. Vysis owns or has an exclusive license to 92 issued United States patents or allowed United States patent applications and 69 pending United States patent applications that protect its core technologies, diagnostic platforms and genetic targets. Upon completion of this offering, Amoco will beneficially own approximately 63% of the Company's outstanding Common Stock. The Company is currently focusing its cancer product development efforts on leukemia, breast, bladder, prostate and cervical cancers. The American Cancer Society estimates that approximately 1.4 million people in the United States were diagnosed with some form of cancer in 1997. Approximately 27,600 patients developed some form of leukemia in 1996. Breast cancer is the second leading cause of death from cancer among women aged 35 to 54, and prostate cancer is the second leading cause of death from cancer in men. The American Cancer Society estimates that in 1996 there were approximately 52,900 new cases of bladder cancer. Approximately 62 million Papanicolaou ("PAP") tests are performed annually in the United States to screen for cervical cancer. Studies indicate that early detection and the selection of appropriate therapies can improve the survival rates of certain types of cancer. Vysis' initial clinical cancer products are expected to improve patient survival rates and quality of life by providing information that will enable selection of the best possible therapy. Three of the Company's products for leukemia and other myeloid disorders are currently FDA cleared for clinical use in the United States. The Company's first breast cancer product, currently in late stage clinical trials, is for the detection of HER-2/neu gene amplification, an important predictive marker for the response to various therapeutic agents. The Company's prenatal testing products provide information on genetic abnormalities involved in mental retardation and other birth defects. The Company estimates that in the United States and Western Europe more than 600,000 amniocentesis procedures were performed in 1996. Using traditional technology, 7 to 10 days are required to complete chromosomal testing from amniocentesis specimens. In contrast, Vysis' clinical products provide accurate test results within 24 hours. The French regulatory agency, Agence du Medicament, has registered the Company's TriGen-TM- prenatal panel for the diagnosis of Down syndrome and sex chromosome abnormalities. Marketing of this product was initiated in France in June 1997. In the United States, the Company's AneuVysion-TM- prenatal panel for the diagnosis of Down syndrome, sex chromosome abnormalities and two additional chromosomal abnormalities, which together account for 85% to 90% of chromosomal causes of mental retardation and other birth defects, has been cleared by the FDA and its marketing was begun in October 1997. TECHNOLOGY PLATFORMS AND PRODUCTS Genomic Disease Management testing requires the ability to assess abnormalities of chromosomes, individual genes within chromosomes and specific DNA sequences within genes. No single technology is capable of assessing all of these different types of abnormalities. To address this issue, the Company has developed three complementary technology platforms that detect the full range of genetic abnormalities from large chromosomal aberrations to smaller abnormalities associated with abnormal numbers of the same gene and the smallest mutations within specific gene sequences. The Company believes these complementary technologies will enable the clinician to provide a comprehensive approach to genomic assessment in the management of disease. Vysis' three technology platforms include: the FISH SYSTEM, which detects chromosomal copy number and rearrangement (large genetic structures), the GCGH-TM- ARRAY SYSTEM, which detects gene copy number and expression (smaller genetic structures), and the MOLECULAR LAWN-TM- SYSTEM, which detects specific gene sequences and their mutations (smallest genetic structures). Each platform provides the advantage of being able to simultaneously detect multiple genetic abnormalities in the same specimen. Vysis expects to introduce a broad range of products based on each of these platforms. This product development strategy is expected to reduce the time to market and associated development costs for each product. - FISH SYSTEM: This platform uses FISH technology, which provides the ability to simultaneously assess multiple chromosomal and gene abnormalities in a single intact cell. FISH also provides the ability to perform cell by cell quantitative assessment of genetic changes in tissue specimens routinely used by pathologists for diagnosis. The Company's FISH System consists of instruments and image analysis workstations used with the Company's patented direct label FISH probes. Vysis believes that its direct label FISH probes are superior because the result produced is easier to obtain and interpret. Three of the Company's FISH System products for leukemia and other myeloid disorders are currently cleared for clinical diagnostic use in the United States. Additionally, a FISH based clinical diagnostic product for prenatal testing is registered and marketed in France, and a similar product has been cleared by the FDA for marketing in the United States. Clinical trials are underway for a breast cancer product (HER-2/neu), which is intended to allow physicians to choose the most effective and appropriate patient therapy. - GCGH ARRAY SYSTEM: This platform uses the Company's patented comparative genomic hybridization technology to survey the entire genome for chromosomal changes in a single test, when a suspected genetic aberration is unknown. Vysis is developing a ready-to-use array of DNA probes on a miniaturized chip ("gCGH Array"). A camera based array reader and customized software will be used to analyze each target on the array. This system is intended to enable simultaneous assessment of a large number of genes in a patient's specimen for abnormalities in the specific gene count. The Company is currently developing products that are intended to detect in a single specimen substantially all genes known to be amplified in certain cancers. The Company is also developing a prenatal product that is intended to simultaneously detect in a single test essentially all chromosomal abnormalities known to be associated with common mental retardation and other birth defects. - MOLECULAR LAWN SYSTEM: This platform uses the Company's patented Q-beta replicase ("QBR") amplification technology to detect specific gene sequences. QBR provides a quantitative measure of a specific gene sequence in either human, viral or bacterial DNA. Because the Molecular Lawn is a self contained system and is being specifically designed for clinical use, this QBR based system is intended to provide a more accurate, simple and cost-effective alternative to other amplification technologies such as polymerase chain reaction. This technology platform enables the detection of small genetic targets associated with disease predisposition and early detection of disease. The system includes a disposable test device and an automated reader that will provide both qualitative and quantitative results. The Company's initial product will be designed for the detection of Human Papilloma Virus, which causes cervical cancer. An integral part of the Company's technology platforms is its Image Analysis Software, which is comprised of proprietary algorithms that enable the automated display and analysis of FISH, gCGH Array and Molecular Lawn tests. The Company believes that this technology will be essential to the development of its future automated diagnostic systems. COMPANY STRATEGY The Company's goal is to strengthen its position as a leading Genomic Disease Management company providing products for the clinical assessment and management of cancer, prenatal disorders and other genetic diseases. The key elements of the Company's strategy are to: - Focus on clinical disease management by developing rapid, accurate, reliable, cost-effective and easy-to-use products that assess the genome at all levels. - Leverage the existing FISH System to develop products providing the highest near-term medical value and significant revenue potential while continuing to develop the next generation of Genomic Disease Management products utilizing the gCGH Array and Molecular Lawn platforms. - Capitalize on the Company's existing international sales and marketing infrastructure to expand access to market opportunities worldwide. - Obtain additional product leads through collaborations with leading medical research institutions, incorporation of research results from the Human Genome Project and continued expansion of the research product line to help establish new clinical correlations. - Continue to expand and strengthen the Company's intellectual property position. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company.......... 3,500,000 shares Common Stock to be outstanding after the offering (1)................................ 9,501,260 shares Use of Proceeds.............................. To accelerate product development, expand sales and marketing capability, acquire complementary technologies and intellectual property rights as opportunities arise and repay indebtedness. See "Use of Proceeds." Nasdaq Stock Market symbol................... VYSI </TABLE> - ------------------------ (1) Includes 4,525,547 shares issuable upon the conversion of the Company's outstanding Series A Preferred Stock and 403,741 shares issuable upon the conversion of the Company's outstanding Series B Preferred Stock, all of which preferred stock is owned by Amoco Technology Company ("ATC"). See "Description of Capital Stock." Excludes, as of December 31, 1997, 953,468 shares issuable upon exercise of outstanding stock options under the Company's Stock Incentive Plan. See "Management-- Stock Incentive Plan." SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ---------------------------------- ---------------------- 1994 1995 1996 1996 1997 ---------- ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues: Product sales....................................... $ 5,373 $ 6,296 $ 11,022 $ 7,324 $ 10,558 Grant and other revenue............................. 30 921 2,216 1,647 1,667 ---------- ---------- ---------- ---------- ---------- Total revenue..................................... 5,403 7,217 13,238 8,971 12,225 Cost of goods sold.................................... 3,486 4,022 5,529 3,742 4,773 ---------- ---------- ---------- ---------- ---------- Gross profit.......................................... 1,917 3,195 7,709 5,229 7,452 ---------- ---------- ---------- ---------- ---------- Operating expenses: Research and development............................ 11,639 8,871 9,456 6,536 7,762 Selling, general and administrative................. 8,937 12,025 16,286 12,500 10,785 ---------- ---------- ---------- ---------- ---------- Total operating expense........................... 20,576 20,896 25,742 19,036 18,547 ---------- ---------- ---------- ---------- ---------- Loss from operations.................................. (18,659) (17,701) (18,033) (13,807) (11,095) ---------- ---------- ---------- ---------- ---------- Interest income--Amoco................................ -- -- 107 107 -- Interest expense--Amoco............................... -- -- (255) (88) (367) ---------- ---------- ---------- ---------- ---------- Net loss.............................................. $ (18,659) $ (17,701) $ (18,181) $ (13,788) $ (11,462) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Pro forma net loss per share(1)....................... $ (2.98) $ (2.26) $ (1.88) ---------- ---------- ---------- ---------- ---------- ---------- Shares used in computing pro forma net loss per share(1)............................................ 6,107 6,107 6,107 </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1997 ----------------------- AS ACTUAL ADJUSTED(2) ---------- ----------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................................................ $ 294 $ 37,283 Working capital (deficit)................................................................ (7,762) 36,608 Total assets............................................................................. 15,093 52,082 Notes payable--Amoco..................................................................... 7,381 -- Accumulated deficit...................................................................... (26,457) (26,457) Total stockholders' equity............................................................... 56 44,426 </TABLE> - ------------------------ (1) See Note 1 to the Consolidated Financial Statements for information concerning the number of shares used in computing pro forma net loss per share. (2) As adjusted to give effect to the sale of 3,500,000 shares of Common Stock offered by the Company at an assumed initial public offering price of $14.00 per share and the application of the net proceeds therefrom. See "Use of Proceeds," "Capitalization" and "Description of Capital Stock."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001017782_msn_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001017782_msn_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. AS USED IN THIS PROSPECTUS, UNLESS THE CONTEXT OTHERWISE REQUIRES, THE TERMS THE "COMPANY" AND "TELSCAPE" REFER TO TELSCAPE INTERNATIONAL, INC., A TEXAS CORPORATION, AND ITS SUBSIDIARIES, COLLECTIVELY. THE COMPANY Telscape is a rapidly growing emerging multinational telecommunications carrier focused on Latin America. The Company provides international wholesale long distance services for calls originating in the United States and terminating in markets in Latin America. As a way to generate increased international long distance traffic to countries it serves, the Company markets long distance services principally to Hispanic consumers in the United States through the distribution of prepaid telephone calling cards ("Prepaid Cards") under the TELEFIESTA(R) brand name. In addition to these wholesale and retail international long distance services, the Company also provides a broad range of systems integration and value-added voice and data services to major public and private sector customers in Mexico. Telscape intends to significantly expand its facilities-based telecommunications operations over the next 18 months and to broaden its service offerings in markets where it has established, or expects to establish, a significant presence. In June 1998, Telereunion S.A. de C.V., a Mexican corporation and an affiliate of the Company ("Telereunion S. A."), received a 30-year, facilities-based carrier license from the Mexican government allowing it to construct and operate a network over which the Company can carry long distance traffic in Mexico (the "Mexican Concession"). To deliver its services, the Company, through Telereunion S.A., intends to construct a combined fiber-optic and microwave long distance network, connecting the United States, the Gulf region of Mexico and targeted Mexican cities (the "Mexican Network"). The Company's ability to construct the Mexican Network depends on its ability to raise capital, and on other factors, many of which are beyond its control. Telscape is a holding company, the principal assets of which are its operating subsidiaries in the United States and Mexico. As a holding company, Telscape is dependent upon dividends and distributions from its subsidiaries to meet its cash needs. MSN Communications, Inc. ("MSN"), Telscape USA, Inc. ("Telscape USA"), Telereunion, Inc. ("Telereunion") and TSCP International, Inc. ("Telscape International"), are wholly-owned subsidiaries of the Company, and INTERLINK Communications, Inc. ("INTERLINK") is 90%-owned by the Company. The Company's ownership interests in its Mexican subsidiaries are held through Telereunion. The chart on page 46 illustrates the Company's operational structure. The Company believes that it is well-positioned to capitalize on the opportunities presented by the large and growing international telecommunications services market. According to Global Telecommunications Traffic Statistics & Commentary 1997/98 published by TELEGEOGRAPHY in November 1997 (the "Telegeography Report"), revenues generated from the provision of international long distance services increased to $61.3 billion in 1996 from $23.9 billion in 1987, a compound annual growth rate of 11.0%. Management believes that Latin American traffic, including traffic between the United States and Latin America, will grow faster than the international telecommunications market as a whole as a result of the (i) underlying economic growth within Latin America, (ii) growth of regional trade as a result of free trade initiatives such as the North American Free Trade Agreement ("NAFTA"), Mercado Comun del Sur ("Mercosur") and the Andean Pact, (iii) deregulation and privatization of telecommunications carriers in the region, (iv) projected regional increases in telephone density, (v) growth in the Hispanic population in the United States and (vi) increasing demand for bandwidth-intensive applications. See "Business -- Industry." Telscape intends to capitalize on the growth in the Latin American telecommunications market by providing international long distance services to and from targeted Latin American countries. The Company also intends to position itself as an integrated telecommunications provider in Mexico by providing domestic and international long distance services over the Mexican Network. The Company believes that NOTE REGARDING FORWARD-LOOKING STATEMENTS The statements contained in this Prospectus that are not historical facts are "forward-looking statements" (as such term is defined in the Private Securities Litigation Reform Act of 1995), which can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "estimates," "will," "should," "plans," or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. Such statements include, but are not limited to, statements under the captions "Prospectus Summary," "Risk Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere in this Prospectus as to the Company's plans to implement its growth strategy, improve its financial performance, expand its infrastructure, develop new products and services, expand its sales force, expand its customer base and enter international markets. In addition, from time to time, the Company or its representatives have made or may make forward-looking statements, orally or in writing. Furthermore, such forward-looking statements may be included in, but are not limited to, various filings made by the Company with the Securities and Exchange Commission (the "Commission"), or press releases or oral statements made by or with the approval of an authorized executive officer of the Company. With respect to this Registration Statement, the Private Securities Litigation Reform Act of 1995 does not apply to the Company's subsidiaries that are guaranteeing the Company's obligations under the Notes. Management wishes to caution the reader that the forward-looking statements referred to above and contained herein in this Prospectus regarding matters that are not historical facts involve predictions. No assurance can be given that the future results will be achieved; actual events or results may differ materially as a result of risks facing the Company. Such risks include, but are not limited to, changes in business conditions, changes in the telecommunications industry and the general economy, competition, changes in service offerings, and risks associated with the Company's limited operating history, entry into developing markets, managing rapid growth, international operations, dependence on effective information systems, ability to consummate acquisitions or enter into joint ventures with companies on terms acceptable to the Company, and development of its network, as well as regulatory developments that could cause actual results to vary materially from the future results indicated, expressed or implied, in such forward-looking statements. See "Risk Factors." expanding its owned and leased transmission facilities in Latin America will allow it to increase the percentage of minutes of traffic carried over its own facilities and over transmission capacity owned or leased on a fixed cost basis ("on-net"), which will enable it to increase margins and profitability and ensure quality of service on both international and domestic long distance traffic. See "Business -- Network," "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Gross Margin." STRATEGY The Company's objective is to become a leading provider of high quality, competitively priced international long distance services between the United States and Latin America, and a leading provider of international long distance services, domestic long distance services and integrated value-added services to customers in Mexico and other targeted countries in Latin America. The key elements of the Company's strategy are to: (i) expand its Latin American presence; (ii) expand its network facilities; (iii) provide an integrated suite of service offerings; (iv) expand the scale and scope of its retail business; (v) pursue strategic alliances, joint ventures and acquisitions; and (vi) build brand awareness. For a discussion of the Company's business strategy, see "Business --Strategy." The Company's ability to pursue its business strategy depends on many factors, including the availability of financing, economic and regulatory conditions in its markets and competition. There can be no assurance that the Company's business strategy will be successful. See "Risk Factors." ------------------------ THE NOTES OFFERING <TABLE> <CAPTION> <S> <C> SECURITIES OFFERED.......................... $125.0 million in aggregate principal amount of % Senior Notes due 2008. ISSUER...................................... Telscape International, Inc. GUARANTORS.................................. All of the Company's wholly-owned U.S. subsidiaries (the "Guarantors"), including, as of the Issue Date, Telscape USA, Telereunion, MSN and TSCP International. MATURITY DATE............................... , 2008. INTEREST PAYMENT DATES...................... Interest on the Notes will accrue from the date of issuance and will be payable semi-annually on and of each year, commencing , 1999. GUARANTEES.................................. The Notes will be fully and unconditionally guaranteed on an unsecured senior basis (the "Guarantees") by the Guarantors. RANKING..................................... The Notes will be general unsecured senior obligations of the Company and will be PARI PASSU in right of payment to existing and future senior unsecured indebtedness of the Company. As of June 30, 1998, all of the Company's and the Guarantors' Indebtedness would have ranked PARI PASSU with or be effectively senior to the Notes and the Guarantees, respectively. The Notes will also be effectively subordinated to all secured indebtedness of the Company and its subsidiaries to the extent of the assets securing such indebtedness. As of June 30, 1998, after giving effect to the Notes Offering, the Company would have had approximately $136.1 million of senior indebtedness outstanding, of which $5.2 million would have been secured. The Guarantees will be general unsecured obligations of the Guarantors and will be PARI PASSU in right of payment to all existing and future senior unsecured indebtedness of the Guarantors. The Guarantees will also be effectively subordinated to all secured indebtedness of the Guarantors to the extent of the assets securing such indebtedness. As of June 30, 1998, after giving effect to the Notes Offering, the Guarantors would have had approximately $4.8 million (exclusive of the Guarantees of the Notes) of senior indebtedness outstanding, of which $1.9 million would have been secured. OPTIONAL REDEMPTION......................... The Notes will be redeemable, in whole or in part, at the option of the Company on or after , 2003, at the redemption prices set forth herein, plus accrued and unpaid interest to the date of redemption. In addition, at any time on or prior to , 2001, the Company may, at its option, redeem up to 35% of the aggregate principal amount of the Notes originally issued with the net cash proceeds of one or more Public Equity Offerings (as defined), at a redemption price equal to % of the aggregate principal amount of the Notes to be redeemed plus accrued and unpaid interest to the date of redemption; PROVIDED, HOWEVER, that, after giving effect to any such redemption, at least 65% of the aggregate principal amount of the Notes originally issued remains outstanding. CHANGE OF CONTROL........................... Upon a Change of Control (as defined), each holder will have the right, subject to certain conditions, to require the Company to repurchase such holder's Notes at a price equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest to the date of repurchase. CERTAIN COVENANTS........................... The Indenture governing the Notes (the "Indenture") will contain certain covenants that limit the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make investments and certain other restricted payments, consummate certain asset sales, enter into certain transactions with af- filiates, incur liens, impose restrictions on the ability of a subsidiary to pay dividends or make certain payments to the Company and its subsidiaries, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. In addition, under certain circumstances, the Company will be required to offer to purchase the Notes, in whole or in part, at a purchase price equal to 100% of the aggregate principal amount thereof plus accrued and unpaid interest, if any, to the date of repurchase, with the proceeds of certain Asset Sales (as defined). All of such covenants are subject to significant qualifications and exceptions. </TABLE> For additional information regarding the Notes, see "Description of the Notes." RECENT DEVELOPMENTS In July 1998, the Company filed a registration statement with the Commission to offer 3.64 million shares of its Common Stock (the "Equity Offering"). Due to recent market developments, on September 15, 1998, the Company withdrew the Equity Offering from the Commission. USE OF PROCEEDS The Company intends to use the net proceeds from the Notes Offering as follows: (i) approximately $98.0 million to complete the Mexican Network; (ii) approximately $15.0 million to acquire international switching and transmission facilities; and (iii) the balance to pursue joint ventures, strategic alliances or acquisitions and for working capital and other general corporate purposes. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001019101_texas_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001019101_texas_prospectus_summary.txt
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+SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. FOR THE PERIODS PRIOR TO JULY 1, 1996, THE FINANCIAL STATEMENTS AND OTHER INFORMATION SET FORTH HEREIN COMBINE THE HISTORICAL RESULTS OF TEXAS OLEFINS COMPANY, A TEXAS CORPORATION ("TOC"), ITS SUBSIDIARIES AND CLARKSTON CORPORATION ("CLARKSTON"). UNLESS THE CONTEXT OTHERWISE REQUIRES, AS USED HEREIN THE TERM "COMPANY" REFERS TO TOC AND ITS SUBSIDIARIES PRIOR TO THE CONSUMMATION OF THE ACQUISITION (AS DEFINED), AND TO HOLDINGS AND ITS SUBSIDIARIES FOLLOWING THE CONSUMMATION OF THE ACQUISITION. TOC WAS MERGED WITH AND INTO TEXAS PETROCHEMICALS CORPORATION, A TEXAS CORPORATION ("TPC"), IN CONNECTION WITH THE ACQUISITION. TPC IS A WHOLLY-OWNED SUBSIDIARY OF TPC HOLDING CORP., A DELAWARE CORPORATION ("TPC HOLDING"), WHICH IS A WHOLLY-OWNED SUBSIDIARY OF HOLDINGS. TPC CONDUCTS THE PRINCIPAL BUSINESS OF THE COMPANY. ALL REFERENCES TO FISCAL YEARS IN THIS PROSPECTUS UP TO AND INCLUDING FISCAL 1995 REFER TO THE FISCAL YEARS ENDED MAY 31 IN THE CALENDAR YEARS INDICATED. THE COMPANY HAS CHANGED ITS FISCAL YEAR END TO JUNE 30 AND INFORMATION FOR FISCAL YEARS ENDED SUBSEQUENT TO MAY 31, 1995 IS SO PRESENTED. ALL REFERENCES IN THIS PROSPECTUS TO THE COMPANY'S CAPACITY TO PRODUCE CERTAIN PRODUCTS REFLECT PRODUCTION LEVELS ACHIEVABLE IF PLANT OPERATIONS ARE DEDICATED TO MAXIMIZING OUTPUT OF THAT PARTICULAR PRODUCT, WHICH EXCEEDS ACTUAL CAPACITY AVAILABLE UNDER TYPICAL MULTI-PRODUCT PRODUCTION CONFIGURATIONS. UNLESS OTHERWISE INDICATED, INDUSTRY DATA CONTAINED HEREIN, OTHER THAN WITH RESPECT TO THE COMPANY, IS DERIVED FROM PUBLICLY AVAILABLE INDUSTRY TRADE JOURNALS AND OTHER PUBLICLY AVAILABLE INDUSTRY SOURCES, WHICH THE COMPANY HAS NOT INDEPENDENTLY VERIFIED BUT WHICH THE COMPANY BELIEVES TO BE RELIABLE. THE COMPANY The Company is the largest producer of butadiene and butene-1, and the third largest producer of methyl tertiary-butyl ether ("MTBE"), in North America, in terms of production capacity. In addition, the Company is the sole producer of diisobutylene and isobutylene concentrate in the United States and the largest domestic merchant supplier of high purity isobutylene to the chemical market. The Company's products include: (i) butadiene, primarily used to produce synthetic rubber; (ii) MTBE, used as an oxygenate and octane enhancer in gasoline; (iii) n-butylenes (butene-1 and butene-2), used in the manufacture of plastic resins, fuel additives and synthetic alcohols; and (iv) specialty isobutylenes, primarily used in the production of specialty rubbers, lubricant additives, detergents and coatings. For the year ended June 30, 1997, and the twelve months ended May 31, 1996, butadiene represented 27% and 25% of the Company's total revenues, respectively, MTBE represented 47% and 41%, respectively, n-butylenes 10% and 11%, respectively, specialty isobutylenes 13% and 16%, respectively, and other revenues the remaining 3% and 7%, respectively. The Company's revenues for the year ended June 30, 1997, the twelve months ended May 31, 1996 and the one month ended June 30, 1996 were $490.2 million, $455.6 million and $41.4 million, respectively, and EBITDA (as defined) for the year ended June 30, 1997, the twelve months ended May 31, 1996 and the one month ended June 30, 1996 were $50.4 million, $57.0 million and $3.7 million, respectively. Butadiene is the most widely used feedstock for synthetic rubber products and is also used in the manufacture of engineered plastics, nylon fibers and other products. The Company sells butadiene to a stable customer base , including The Goodyear Tire & Rubber Company, The Dow Chemical Company, American Synthetic Rubber Inc. and Bridgestone/Firestone, Inc. As the largest producer of butadiene in North America, the Company believes that many of its customers place significant value on its ability to provide a reliable domestic supply of butadiene and as a result have entered into long-term sales contracts with the Company. The Company extracts butadiene from crude butadiene, which is generated from the production of ethylene and is comprised of a number of valuable components, including butadiene, isobutylene, n-butylenes, isobutane and n-butane. Many U.S. ethylene producers rely on third parties such as the Company to process their crude butadiene streams, as the crude butadiene volumes they produce are not sufficient to justify the construction of on-site butadiene recovery facilities. The Company estimates that producers accounting for 65% of U.S. and Canadian ethylene production capacity do not internally process crude butadiene by-product streams. The Company is the largest non-integrated crude butadiene processorin North America and as a result of its strategic importance to ethylene producers, the Company has been able to secure long-term supply contracts covering the majority of its crude butadiene requirements. Such contracts provide for a fixed profit based on the Company's selling prices for butadiene, and account for the relatively stable profitability of the Company's butadiene operations. MTBE is a blending stock which reduces carbon monoxide and volatile organic compound emissions and enhances the octane content of gasoline, and has been one of the fastest growing petrochemicals, in terms of volume, over the past fifteen years. Today, MTBE is the preferred oxygenate for, and a major component of, reformulated gasoline ("RFG") and is used in over 30% of the U.S. gasoline pool. MTBE is produced by reacting methanol and isobutylene, and the Company's ability to produce isobutylene by three alternative methods enables it to produce MTBE by the most economical processes available to the Company. In addition, the Company has the ability to add incremental capacity to capitalize on expected future growth, at a significantly lower cost than the cost of adding new capacity. The Company believes that this incremental capacity gives it a competitive advantage over other producers who would have to incur greater cost to increase capacity. The Company sells MTBE to oil refiners and gasoline producers, including Mobil Oil Corporation, Lyondell Petrochemical Company and CITGO Petroleum Corporation on both a contract and spot basis at prices linked to prevailing market prices. The Company is the leading producer of high margin n-butylenes and specialty isobutylenes in North America. In recent years, the Company has increased its sales of these products by increasing its market share in polyolefin applications and the development of new end-use applications. The Company's principal customers for n-butylenes include Union Carbide Corporation, The Dow Chemical Company, NOVA Chemicals Ltd., Shell Chemical Company and Lyondell Petrochemical Company. The Company's principal customers for specialty isobutylenes include Bayer Inc., Mobil Chemical Company Inc., Rhone-Poulenc Inc., The Lubrizol Corporation and Schenectady International, Inc. Historically, the profitability of the Company's n-butylenes sales has been relatively stable as the majority of the sales of these products are made under contracts which link their selling prices to the prices of products (principally gasoline and butanes) whose prices fluctuate closely with those of the raw materials used to manufacture n-butylenes and specialty isobutylenes. The Company's principal feedstocks are crude butadiene, isobutane and methanol. One of the Company's intermediate feedstocks, isobutylene, is used in the manufacture of MTBE and specialty isobutylenes. As part of its production strategy, the Company uses its manufactured isobutylene first to maximize the production of high margin specialty isobutylenes, second, to satisfy its contractual MTBE requirements, and finally to produce MTBE for sale in the spot market. The Company maintains the production flexibility to upgrade n-butylenes contained in crude butadiene streams to either isobutylene or butene-1 using its patented skeletal isomerization process ("SKIP"). This flexibility allows the Company to meet its customers' needs through the most economical process, to produce additional products and to capitalize on favorable market conditions. The Company's manufacturing facility, located approximately one mile from the Houston Ship Channel, provides convenient access to other Gulf Coast petrochemical producers and is connected to several of its customers and raw materials suppliers through an extensive pipeline network. In addition, the Company's facility is serviced by rail, tank truck and barge. The Company's principal executive offices are located at Three Riverway, Suite 1500, Houston, Texas 77056. The Company's telephone number is (713) 627-7474. BACKGROUND INFORMATION Holdings, TPC Holding, and TPC Finance Corp., a Texas corporation ("Finance Co."), were organized in May 1996 to effect the acquisition (the "Acquisition") of TOC and its subsidiaries, including TPC, and to assume a raw materials supply contract from Clarkston. On July 1, 1996, Holdings issued and sold $43.8 million of its common stock ("Common Stock") to an investor group led by Gordon A. Cain and The Sterling Group, Inc. ("Sterling"), issued $6.2 million of its Common Stock for the shares contributed by certain shareholders of TOC and TPC, sold a sufficient amount of the Discount Notes and Common Stock, as an investment unit (the "Units") to the Huff Fund to raise $30 million in gross proceeds, and contributed the net proceeds thereof to TPC Holding. Finance Co. borrowed approximately $140.0 million under the Bank Credit Agreement and received approximately $169 million in net proceeds from the sale at such time of $175 million aggregate principal amount of 11 1/8% Senior Subordinated Notes due 2006 (the "Original Notes") and loaned the combined net proceeds to TPC Holding. TPC Holding used the capital contributions received from Holdings, cash on hand and the proceeds of the loan from Finance Co. to effect the Acquisition pursuant to a stock purchase agreement dated as of May 14, 1996 (the "Stock Purchase Agreement"), to fund the ESOP (as defined) and pay fees and expenses in connection with the transactions associated with the Acquisition. TOC and Finance Co. then merged into TPC. As a result of the foregoing, Holdings is the primary obligor on the Discount Notes, and TPC is the primary obligor on the Original Notes and the loans made pursuant to the Bank Credit Agreement, is a wholly-owned subsidiary of TPC Holding (which in turn is wholly-owned by Holdings) and operates the principal business of the Company. Holdings has guaranteed TPC's obligations under the Bank Credit Agreement. The Discount Notes and the Common Stock which constituted the Units became separately transferable immediately following the Acquisition. On March 13, 1997, TPC issued and sold $50,000,000 aggregate principal amount of 11 1/8% Series B Senior Subordinated Notes due 2006 (the "Notes"), the proceeds of which were used to, among other things, reduce TPC's indebtedness under the Bank Credit Agreement. The Original Notes and the Notes were issued under indentures referred to herein collectively as the "Notes Indenture." This prospectus has been prepared for use by the Huff Fund in connection with offers and sales of the Discount Notes. THE DISCOUNT NOTES <TABLE> <CAPTION> <S> <C> Discount Notes....................... $57,650,103.55 aggregate principal amount at final maturity of 13.5% Senior Discount Notes due 2007. Maturity Date........................ July 1, 2007. Interest Payment Dates............... January 1 and July 1 of each year after July 1, 2001. Optional Redemption.................. Except as described below, Holdings may not redeem the Discount Notes prior to July 1, 2001. On or after such date, Holdings may redeem the Discount Notes, in whole or in part, at any time at the redemption prices set forth herein plus accrued interest, if any, to the date of redemption. In addition, up to 30% of the aggregate Accreted Value of the Discount Notes may be redeemed at any time prior to July 1, 1998, at the option of Holdings, with the net proceeds of any Public Equity Offering following which there is a Public Market at a redemption price equal to 113.5% of the Accreted Value thereof, together with accrued and unpaid interest, if any, to the date of redemption. Change of Control.................... Upon the occurrence of a Change of Control, each holder will have the right to require Holdings to make an offer to purchase the Discount Notes at a price in cash equal to 101% of the principal amount thereof to July 1, 2001 and face principal amount of the Discount Notes after July 1, 2001, in each case plus accrued and unpaid interest to the date of purchase. See "Description of the Discount Notes -- Change of Control." Ranking.............................. The Discount Notes are senior unsecured obligations of Holdings, senior in right of payment to subordinated Indebtedness of Holdings, including Holdings' guarantee of the Notes. The Discount Notes rank PARI PASSU in right of payment with other senior unsecured Indebtedness of Holdings. The Discount Notes are effectively subordinated to secured indebtedness of Holdings, including Holdings' guarantee of Indebtedness of TPC under the Bank Credit Agreement, as to the assets of Holdings securing such Indebtedness, and to all Indebtedness and other liabilities and commitments (including trade payables and lease obligations) of Holdings' subsidiaries. As of March 3, 1998, (i) Holdings had approximately $96.0 million of secured senior Indebtedness outstanding (consisting of Holdings' guarantee of the Company's Indebtedness under the Bank Credit Agreement), $37.0 million of senior unsecured Indebtedness outstanding (consisting of the portion of the issue price of the Units allocated for accounting purposes to the Discount Notes) and (ii) Holdings' subsidiaries had approximately $326.3 million of Indebtedness outstanding (including the Notes). Substantially all of the operations of Holdings will be conducted through its subsidiaries and, therefore, Holdings will be dependent upon the cash flow of its subsidiaries to meet its obligations, including its obligations under the Discount Notes. See "Description of the Discount Notes." Restrictive Covenants................ The Discount Notes Indenture (as defined under "Description of the Discount Notes -- General") contains certain covenants that, among other things, limit the ability of Holdings and/or its Restricted Subsidiaries (as defined) to (i) incur additional indebtedness, (ii) pay dividends or make certain other restricted payments, (iii) make investments, (iv) enter into transactions with affiliates, (v) make certain asset dispositions, and (vi) merge or consolidate with, or transfer substantially all of its assets to, another person. The Discount Notes Indenture also limits the ability of Holdings' Re- stricted Subsidiaries to issue Capital Stock (as defined) and to create restrictions on the ability of such Restricted Subsidiaries to pay dividends or make any other distributions. In addition, Holdings is obligated, under certain circumstances, to offer to repurchase the Discount Notes at a purchase price equal to 100% of their Accreted Value (without premium), plus accrued and unpaid interest, if any, in accordance with the procedures set forth in the Discount Notes Indenture. However, all of these limitations and prohibitions will be subject to a number of important qualifications. See "Description of the Discount Notes -- Certain Covenants." Tax Consequences..................... Holdings has received an opinion of counsel regarding the material federal income tax consequences relevant to the purchase, ownership and disposition of the Discount Notes. See "Material Federal Income Tax Considerations." Guarantee............................ TPC Holding fully and unconditionally guarantees the due and punctual payment of the principal of, interest on and all other amounts payable under the Discount Notes when they become due and payable, whether upon maturity, upon acceleration, by call for redemption, upon repurchase or purchase pursuant to a Change of Control or Asset Disposition or otherwise. The guarantee will not be discharged with respect to any Discount Note except by payment in full of principal, interest and all other amounts payable. </TABLE> RECENT DEVELOPMENTS Holdings requested and obtained from the current holder of the entire principal amount of the Discount Notes a waiver, for a single transaction, of the requirements under Section 10.09(a)(ii) and (iii) of the Discount Notes Indenture to the extent such requirements would not be met by the investment by a Restricted Subsidiary of Holdings of up to $1,000 for a 50% interest in a corporation organized to conduct certain business in Venezuela. Section 10.09 of the Discount Notes Indenture states that the Company shall not permit any Restricted Subsidiary to make a Restricted Payment unless certain tests are met. The proposed investment of up to $1,000 in a corporation organized to conduct certain business in Venezuela would constitute a Restricted Payment and as a result the tests under Section 10.09 must be met or an exemption must be available. Because the Company could not meet the tests under Section 10.09 and an exemption was not available, the Company sought and obtained a waiver of Section 10.09(a)(ii) and (iii) of the Discount Notes Indenture. See "Description of the Discount Notes -- Certain Covenants -- Limitation on Restricted Payments" and "Description of the Discount Notes -- Certain Definitions -- Restricted Payment."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001020258_vision_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001020258_vision_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus and information under "Risk Factors." Unless the context otherwise requires, references in this Prospectus to the Company or Vision Twenty-One include Vision Twenty-One, Inc., its predecessors and its subsidiaries. As used herein, the term "Managed Providers" refers to the licensed optometrists and ophthalmologists employed by professional associations and providing eye care services at Company clinic facilities and ambulatory surgical centers ("ASCs"); "Managed Professional Associations" refers to the professional associations which are managed by the Company pursuant to long-term management agreements ("Management Agreements"); "Contract Providers" refers to the licensed optometrists and ophthalmologists who are credentialed, or in the process of being credentialed, to provide eye care services at optometry and ophthalmology clinics and ASCs pursuant to the Company's managed care contracts; "Affiliated Providers" refers collectively to the Managed Providers and the Contract Providers; "Initial Public Offering" refers to the Company's initial public offering of 2,100,000 shares of Common Stock on August 18, 1997; and "Secondary Offering" refers to the Company's second public offering of 2,300,000 shares of Common Stock on November 20, 1997. Except as otherwise indicated, the information contained in this Prospectus gives retroactive effect to a June, 1997 reverse stock split, resulting in an exchange of 1 share for 1.5 shares of Common Stock issued and outstanding at the time of such split. THE COMPANY The Company provides a wide range of management and administrative services to local area delivery systems ("LADS(sm)") established by the Company. LADS are developed to provide for integrated networks of optometrists, ophthalmologists, ASCs and retail optical centers which offer the full continuum of eye care services in local markets. The Company began operations in 1984, providing management services to seven optometrists practicing at eight clinic locations. The Company currently provides its services to LADS located throughout the United States through which its Affiliated Providers deliver eye care services. The Affiliated Providers consist of Managed Providers and Contract Providers. The Company's Affiliated Providers, in conjunction with select national retail optical chains, deliver eye care services under the Company's managed care contracts and discount fee-for-service plans covering the Company's exclusively contracted patient lives. The Company's goal is to enable each of its LADS to capture the leading market share of fee-for-service patients and managed care members. To achieve its goal, the Company is focused on the following strategies: (i) developing LADS in order to provide for a complete continuum of easily accessible, high quality and affordable eye care services, (ii) increasing patient revenue and cost efficiencies for each LADS through practice development and managed care initiatives and (iii) expanding into select new markets to create regional networks of LADS. The Company earns practice management fees by providing Managed Providers with a wide range of management and administrative services. These management and administrative services are designed to increase patient flow, while effecting cost efficiencies, and to permit the Managed Provider to concentrate on the delivery of easily accessible, high quality and affordable eye care services. The Company also earns revenues by entering into capitated managed care contracts with third-party insurers and payors and by administering indemnity fee-for-service plans for its Affiliated Providers. The Company believes it provides its Affiliated Providers with significant advantages in negotiating, obtaining and effectively administering managed care contracts through its experienced management team, management information systems, greater capital resources and more efficient cost structure. RECENT DEVELOPMENTS To date in 1998 and in addition to the other acquisitions finalized or pending and described below, the Company completed the acquisition of the business assets of 28 optometry clinics two ophthalmology clinics and 20 optical dispensaries located in Texas, Arizona, New Jersey and Minnesota. Business assets consist of certain non-medical and non-optometric assets, including accounts receivable, leases, contracts, equipment PROSPECTUS VISION TWENTY-ONE, INC. This Prospectus relates to up to 1,206,718 shares of Common Stock, par value $.001 per share ("Common Stock") of Vision Twenty-One, Inc. (together with its subsidiaries as applicable, the "Company"), which are being offered and sold by certain stockholders of the Company described herein, (the "Selling Stockholders"). Such shares represent the number of shares that have been issued by the Company to the Selling Stockholders in transactions exempt from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act") in connection with acquisitions made by the Company. The Common Stock is included in The Nasdaq Stock Market's National Market (the "Nasdaq National Market") under the symbol "EYES." On May 11, 1998, the last reported sales price for the Common Stock on the Nasdaq National Market was $8.3125 per share. See "Price Range of Common Stock." SEE "RISK FACTORS" ON PAGES 5 TO 16 FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY. The Common Stock may be sold by the Selling Stockholders from time to time directly to purchasers or through agents, underwriters or dealers. See "Plan of Distribution." If required, the names of any such agents or underwriters involved in the sale of the Common Stock in respect of which this Prospectus is being delivered and the applicable agent's commission or underwriter's discount, if any, will be set forth in an accompanying supplement to this Prospectus (the "Prospectus Supplement"). Furthermore, information concerning Selling Stockholders may change from time to time and the changes will be set forth in such a Prospectus Supplement. The Selling Stockholders will receive all of the net proceeds from the sale of the Common Stock pursuant to this Prospectus and will pay all underwriting discounts and selling commissions, if any, applicable to the sale of the Common Stock. The Company is paying all other expenses incident to the registration of the securities registered hereunder. The Selling Stockholders and any broker-dealers, agents or underwriters which participate in the distribution of the Common Stock may be deemed to be "underwriters" within the meaning of the Securities Act, and any commission received by them, or purchases by them of the Common Stock at a price less than prevailing market price, may be deemed to be underwriting commissions or discounts under the Securities Act. All sales of Common Stock registered hereby shall be sold in connection with this Prospectus. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DATE OF THIS PROSPECTUS IS MAY 12, 1998. and other tangible and intangible assets. Concurrently with these acquisitions, the Company entered into long-term Management Agreements with the related professional associations employing 31 optometrists and one ophthalmologist. These acquisitions were accounted for by recording assets and liabilities at fair value and allocating the remaining costs to the related Management Agreements. Additionally, the Company closed the acquisition of all of the outstanding stock of The Complete Optical Laboratory, Ltd., Corp., located in New Jersey which services the New Jersey optometry clinics acquired by the Company and the Company closed the acquisition of substantially all of the business assets of a managed care company located in Florida servicing over 82,700 patient lives. These acquisitions were accounted for under the purchase method of accounting. In connection with these acquisitions, the Company provided aggregate consideration of approximately $16.7 million, consisting of 786,952 shares of Common Stock and approximately $8.7 million in cash and promissory notes in the aggregate principal amount of $21,000, subject to closing adjustments. In addition, the Company is required to provide additional contingent consideration consisting of 33,695 shares of Common Stock and up to $600,000, to be paid to certain sellers if certain post-acquisition performance targets are met. In March 1998, the Company completed pooling of interests transactions with EyeCare One Corp. ("EyeCare One") and Vision Insurance Plan of America, Inc. ("VIPA"). EyeCare One was the parent company of Stein Optical which operates 16 optometric retail locations in Milwaukee, Wisconsin. VIPA holds a single service insurance license and delivers vision care benefits to approximately 19,000 patient lives in Wisconsin. These transactions were accounted for by the Company as pooling of interests, and the costs of approximately $500,000 incurred in connection with such transactions were charged to expense. In connection with these transactions, the Company issued 1,109,806 shares of Common Stock, subject to closing adjustments, valued at approximately $10.5 million. The Company has also entered into binding letters of intent to acquire the business assets of four optometry clinics, one ophthalmology clinic, four optical dispensaries and one ASC located in Arizona and Florida. Concurrently with the closing of these acquisitions, the Company expects to enter into long-term Management Agreements with the related professional associations employing four optometrists and two ophthalmologists. These acquisitions are expected to be accounted for by recording assets and liabilities at fair value and allocating the remaining costs to the related Management Agreements. In connection with these acquisitions, the Company is providing aggregate consideration of approximately $3.0 million, consisting of approximately 21,000 shares of Common Stock and approximately $2.8 million in cash, subject to closing adjustments.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1998/CIK0001020950_ragen_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001020950_ragen_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..9dcde2810e47051fac32cbd52f602097d42a2053
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This Prospectus contains certain forward-looking statements that involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the Company or industry trends to differ materially from those expressed or implied by such forward-looking statements. Such factors include, among others, those discussed in "Risk Factors" and elsewhere in this Prospectus. OVERVIEW Ragen MacKenzie is the leading regional brokerage firm headquartered in the Pacific Northwest. The Company's primary business is retail securities brokerage, which it conducts through its Seattle headquarters and 10 additional offices in Washington, Oregon and Alaska, which include four offices operated by independent contractors. One of the most important elements of Ragen MacKenzie's success has been the use of its proprietary equity research products to support a large portion of the Company's business. The Company's research department covers approximately 100 publicly traded companies headquartered in the Pacific Northwest and maintains a recommended list of selected regional and national stocks (the "Recommended List"). Other aspects of the Company's business include proprietary trading of certain fixed income securities, institutional brokerage services, correspondent brokerage services and investment banking services. The Company has experienced significant revenue growth over the past five years while increasing profitability. Total revenues have increased at a compound annual growth rate of 17.3% from fiscal 1993 through fiscal 1997, from $46.8 million to $88.6 million. The Company's significant revenue growth is due in part to growth in customer assets and the number of customer accounts, increases in the number and productivity of retail brokers and the substantial increases in stock values over the past several years. The Company's customer account balances doubled from $4.6 billion in September 1995 to $9.2 billion in March 1998. The Company's net income increased from $4.9 million to $15.4 million from fiscal 1993 through fiscal 1997, and its pretax profit margin was 29.4% for the six-month period ended March 27, 1998. The Company believes that its success has been primarily attributable to its proprietary research and its approach to the retail brokerage business, which is to attract and retain highly productive, experienced brokers in selected cities throughout the Pacific Northwest. As of March 27, 1998, Ragen MacKenzie's 78 retail brokers had on average more than 17 years of industry experience. The Company's retail brokers generated average commissions per broker of $403,600, $537,900 and $548,900 in fiscal 1995, 1996 and 1997, respectively. The industry average annual commissions per broker were $305,900 and $358,800 in 1995 and 1996, respectively (1997 comparative information is not yet available). Revenues from the Company's retail brokerage activities, excluding net interest earned on retail brokerage customer balances, grew at a compound annual growth rate of 14.9% from $21,439,000 to $37,326,000 from fiscal 1993 through fiscal 1997, and represented approximately 43.8%, 42.1% and 41.2%, respectively, of the Company's total revenues during fiscal 1996 and 1997 and for the six-month period ended March 27, 1998. Ragen MacKenzie's research department, which currently consists of nine professional research analysts, utilizes a value-oriented, contrarian approach to investing. The Company relies primarily on proprietary research products, rather than research products purchased from independent research organizations. The Company believes that the services provided by the research department have a significant impact on virtually all of Ragen MacKenzie's revenue-generating activities, including retail and institutional brokerage, correspondent brokerage services and investment banking. The size of the capital markets and the volume of trading in the securities markets have increased substantially in recent years, as has the demand for securities investments. Initial public offerings and total common equity issued in the United States public markets grew from $1.4 billion and $12.8 billion, respectively, in 1980, to $10.2 billion and $19.2 billion, respectively, in 1990, to $43.9 billion and $118.4 billion, respectively, in 1997. The combination of increasing flows of funds into the equity markets and new issuance activity has contributed to significantly higher trading volumes. From 1980 to 1997, average daily trading volume grew at a compound annual rate of 15.6% on the New York Stock Exchange (the "NYSE") and 20.7% on the Nasdaq National Market ("Nasdaq"). More recently, the combined NYSE and Nasdaq average daily trading volumes grew at a compound annual rate of 22.1% for the five years ended 1997 and increased 22.9% in 1997 over 1996. The Company is the leading regional brokerage firm headquartered in the Pacific Northwest, based on total revenues and net income in fiscal 1997, and has demonstrated a history of success and steady growth, capitalizing on national and regional trends in the securities industry. The Company believes that the Pacific Northwest will continue to experience positive economic development and that such development will present the Company with further opportunity for growth within the region. BUSINESS STRATEGY The Company believes that the quality and depth of its proprietary research will continue to help it attract and retain highly productive brokers and retail, institutional and correspondent customers. The Company intends to use the quality of its research to grow each aspect of its business and increase its visibility as the leading regional brokerage firm headquartered in the Pacific Northwest. The Company's strategy includes the following key elements: . Continued Focus on Proprietary Research Coverage. The Company plans to continue leveraging the competitive advantages provided by the quality and depth of its proprietary research coverage. The Company intends to increase the size of its research staff by recruiting, hiring and training additional research analysts. The Company also intends to continue focusing its research efforts on public companies headquartered in the Pacific Northwest, as well as a selected list of other public companies, in each case utilizing a value- oriented, contrarian philosophy of investment analysis. . Increase Number of Brokers. The Company intends to expand its retail brokerage services by continuing to recruit experienced, productive retail brokers. The Company believes that its proprietary research provides it with a significant competitive advantage in attracting and retaining experienced, productive retail brokers. From the beginning of fiscal 1993 to March 27, 1998, the Company increased the number of retail brokers from 51 to 78. For the 12 months ended March 27, 1998, the average production per retail broker for the Company was over $560,000. . Expand Correspondent Brokerage Business. The Company intends to increase market penetration and expand the geographic coverage of its correspondent brokerage business by leveraging efficiencies of its clearing operations and the quality of the Company's proprietary research coverage. The Company believes that expanding its correspondent business will positively impact margins, because it believes that such expansion will increase revenues without a significant increase in costs. . Expand Investment Banking Services. The Company intends to increase its investment banking business by recruiting experienced investment banking professionals and leveraging its research coverage of companies headquartered in the Pacific Northwest. The Company plans to capitalize on increased merger and acquisition activity in the Pacific Northwest, which it believes will result from the significant economic growth in the region. In light of recent consolidation among investment banking firms, the Company also intends to capitalize on its regional focus. . Supplement Internal Growth With Strategic Acquisitions. The Company intends to pursue, on an opportunistic basis, acquisitions of other firms with complementary businesses that would strengthen or expand the Company's product or financial service offerings and position within the Pacific Northwest. The Company plans to focus on smaller regional firms that may realize benefits from affiliation with a larger firm while retaining their regional focus. THE OFFERING <TABLE> <C> <S> Common Stock Offered by: The Company.................... 1,462,500 shares The Selling Shareholders....... 787,500 shares(1) Common Stock to Be Outstanding After the Offering............ 12,490,309 shares(2) Use of Proceeds................ To pay down current short-term borrowings that bear interest at 5.9% as of March 27, 1998. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." Proposed Nasdaq National Market Symbol........................ "RMGI"(3) </TABLE> - -------- (1) Shares of Common Stock owned by affiliates of Ragen MacKenzie Group Incorporated represent approximately 18.2% of the shares of Common Stock offered in the Offering and, assuming the exercise of the over-allotment option granted by certain Selling Shareholders to the Underwriters, approximately 22.7% of the aggregate number of shares of Common Stock offered in the Offering and pursuant to the over-allotment option. (2) Based on shares outstanding at May 21, 1998. Does not include (i) 1,027,866 shares of Common Stock issuable upon the exercise of stock options outstanding and exercisable under the Company's stock option plans as of May 21, 1998 with a weighted average per share exercise price of $5.45 and (ii) 512,655 shares of Common Stock issuable upon the exercise of stock options that the Company has agreed to issue upon satisfaction of certain performance goals or that have been issued and will vest upon satisfaction of certain performance goals. The number of shares of Common Stock offered by the Company and the Selling Shareholders in the Offering represent in the aggregate approximately 18.0% of the Common Stock to be outstanding after the Offering (assuming no exercise of the Underwriters' over- allotment option). (3) The Company is considering making application to have the Common Stock listed on the NYSE under the symbol "RMG." THE COMPANY Ragen MacKenzie Group Incorporated, a Washington corporation, was incorporated in April 1998 to serve as a holding company for all of the operations of Ragen MacKenzie Incorporated ("RMI") pursuant to the Reorganization described below. RMI was incorporated as a Washington corporation in 1987, the year in which it succeeded to the business of Cable, Howse & Ragen, a Washington limited partnership formed in 1982. The Reorganization took place on June 22, 1998. As a result of the Reorganization, Ragen MacKenzie Group Incorporated operates as a holding company and is the sole shareholder of RMI. Unless the context otherwise requires, references to "Ragen MacKenzie" and the "Company" refer to Ragen MacKenzie Group Incorporated and its predecessor and subsidiary, RMI. The Company's executive offices are located at 999 Third Avenue, Suite 4300, Seattle, Washington 98104, and its telephone number is (206) 343-5000. REORGANIZATION On June 22, 1998, RMI merged with a wholly owned subsidiary of Ragen MacKenzie Group Incorporated for the purpose of creating a holding company structure with Ragen MacKenzie Group Incorporated as the parent corporation of RMI (the "Reorganization"). Shareholders who were previously shareholders of RMI immediately prior to the Reorganization became shareholders of Ragen MacKenzie Group Incorporated immediately after the Reorganization. The primary purposes of the Reorganization are to provide flexibility for the business operations and management of the Company and to broaden the Company's alternatives for future financing. BENEFITS TO AFFILIATES AND CERTAIN EMPLOYEES FROM THE OFFERING Shares of Common Stock owned by employees, officers, directors and other affiliates of Ragen MacKenzie Incorporated or Ragen MacKenzie Group Incorporated represent approximately 33.5% of the shares of Common Stock offered in the Offering, and, assuming the exercise of the over-allotment option granted by certain Selling Shareholders to the Underwriters, approximately 41.6% of the aggregate number of shares of Common Stock offered in the Offering and pursuant to the over-allotment option. Officers, directors and employees of the Company that are participants in the Ragen MacKenzie Incorporated 1997 Share Repurchase Plan (the "Share Repurchase Plan") will receive in the aggregate payments of stock appreciation amounts of $1,459,040 after the Offering pursuant to the Share Repurchase Plan, based on an assumed initial public offering price of $15.00 per share. Individual stock appreciation amounts are based on the difference between the per share proceeds to the Company in the Offering (after deducting underwriting discounts and commissions) minus the book value redemption price received by such individual when he redeemed shares under the Share Repurchase Plan. Executive officers of the Company will be eligible to receive severance payments under certain noncompetition agreements that have terms which commence on the closing of the Offering. See "Management--Benefits to Affiliates and Certain Employees From the Offering." Except as otherwise noted, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. SUMMARY FINANCIAL INFORMATION(1) (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) <TABLE> <CAPTION> SIX-MONTH FISCAL YEAR ENDED PERIOD ENDED ------------------------------------------------- ------------------- SEPT. 24, SEPT. 30, SEPT. 29, SEPT. 27, SEPT. 26, MARCH 28, MARCH 27, 1993 1994 1995 1996 1997 1997 1998 --------- --------- --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENTS OF INCOME DATA: Principal transactions, net.................... $18,335 $20,412 $21,683 $23,526 $23,566 $11,240 $12,912 Commissions............. 17,986 18,275 19,553 28,516 30,758 14,588 17,821 Other................... 2,577 3,814 2,524 3,569 4,078 2,219 3,034 ------- ------- ------- ------- ------- ------- ------- Total operating revenues.............. 38,898 42,501 43,760 55,611 58,402 28,047 33,767 Interest income......... 7,876 11,316 18,641 24,210 30,179 13,932 18,365 ------- ------- ------- ------- ------- ------- ------- Total revenues......... 46,774 53,817 62,401 79,821 88,581 41,979 52,132 Interest expense........ 4,876 6,978 13,052 16,230 19,694 9,138 12,154 ------- ------- ------- ------- ------- ------- ------- Net revenues........... 41,898 46,839 49,349 63,591 68,887 32,841 39,978 ------- ------- ------- ------- ------- ------- ------- Non-interest expenses: Compensation and benefits(2)(3)......... 23,053 25,419 25,925 33,924 35,176 16,878 20,728 Key person death benefits plan(4)....... 1,150 800 2,450 -- (5,000) (5,000) -- Occupancy and equipment. 3,725 3,921 3,949 3,938 4,714 2,097 2,641 Communications.......... 2,028 2,620 2,588 2,776 3,276 1,528 1,774 Clearing and exchange fees................... 1,938 1,963 2,282 2,344 2,338 1,161 1,428 Other................... 2,028 2,359 2,381 3,854 3,534 1,837 1,634 ------- ------- ------- ------- ------- ------- ------- Total non-interest expenses.............. 33,922 37,082 39,575 46,836 44,038 18,501 28,205 ------- ------- ------- ------- ------- ------- ------- Income before taxes on income................. 7,976 9,757 9,774 16,755 24,849 14,340 11,773 Taxes on income......... 3,109 3,752 3,672 6,254 9,460 5,348 4,518 ------- ------- ------- ------- ------- ------- ------- Net income.............. $ 4,867 $ 6,005 $ 6,102 $10,501 $15,389 $ 8,992 $ 7,255 ======= ======= ======= ======= ======= ======= ======= Earnings per common share(5): Basic.................. $ 0.68 $ 0.79 $ 0.73 $ 1.10 $ 1.54 $ 0.91 $ 0.70 Diluted................ 0.63 0.72 0.68 1.04 1.44 0.85 0.66 </TABLE> <TABLE> <CAPTION> AS OF AND FOR THE SIX-MONTH PERIOD AS OF AND FOR THE FISCAL YEAR ENDED ENDED ------------------------------------------------- ------------------- SEPT. 24, SEPT. 30, SEPT. 29, SEPT. 27, SEPT. 26, MARCH 28, MARCH 27, 1993 1994 1995 1996 1997 1997 1998 --------- --------- --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> <C> OPERATING DATA: Pretax income as a percentage of net revenues............... 19.0% 20.8% 19.8% 26.3% 36.1% 43.7% 29.4% Annual return on average equity(6).............. 29.1% 25.0% 18.5% 23.3% 25.1% 31.1% 19.3% Assets in retail brokerage accounts (in millions)(7)........... N/A N/A $4,629 $5,862 $8,806 $6,571 $9,190 Number of employees(7).. 216 221 232 245 271 256 287 Number of retail brokers(7)............. 56 62 65 65 74 67 78 </TABLE> <TABLE> <CAPTION> AS OF MARCH 27, 1998 ------------------------ ACTUAL AS ADJUSTED(8) --------- -------------- <S> <C> <C> BALANCE SHEETS DATA: Total assets.......................................... $ 697,314 $698,001 Long-term borrowings.................................. -- -- Shareholders' equity.................................. 79,882 97,807 Book value per common share outstanding(9)............ 7.40 7.98 </TABLE> - -------- (1) The Company utilizes a 52- or 53-week fiscal year ending on the Friday on or immediately prior to September 30. Fiscal 1994 was a 53-week year and fiscal 1993 and fiscal 1995 through 1997 were 52-week years. The six-month periods ended March 28, 1997 and March 27, 1998 each contain 26 weeks. (2) Compensation and benefits includes a nondeductible expense recorded for the appreciation in book value between the option grant date and the option exercise date for stock options granted under RMI's 1989 Stock Option Plan (the "1989 Plan"), RMI's 1993 Stock Option Plan (the "1993 Plan") and RMI's 1996 Stock Option Plan (the "1996 Plan," collectively with the 1989 Plan and the 1993 Plan referred to as the "Assumed Plans") of $1,213,000, $1,471,000, $955,000, $3,125,000, $2,223,000, $1,323,000 and $1,150,000 during fiscal 1993 through 1997 and the six-month periods ended March 28, 1997 and March 27, 1998, respectively. Upon consummation of the Offering, the existing option plans will become fixed-award, fair- value-based plans and the Company will make future stock option grants pursuant to a newly formed fixed-award stock option plan. Accordingly, future changes in the market value of the Common Stock will generally not result in ongoing charges to compensation expense. (3) Compensation and benefits includes an expense recorded for the appreciation in book value between the grant date and the exercise date for stock appreciation rights ("Repurchase SARs") granted under RMI's book-value-based Share Repurchase Plan of $66,000 and $135,000 during fiscal 1997 and the six-month period ended March 27, 1998, respectively. No expenses were incurred during any other periods since no Repurchase SARs under the Share Repurchase Plan were outstanding during such periods. The Share Repurchase Plan will terminate upon consummation of the Offering. (4) Reflects amounts recorded for benefits under the Key Person Death Benefits Plan (the "Death Benefits Plan"). The Death Benefits Plan provided for certain payments to the estates of certain key employee-shareholders upon their deaths. The Death Benefits Plan was unfunded, but the Company had accrued amounts totaling $5,000,000 through the end of fiscal 1996 that were deemed necessary to pay plan benefits. In February 1997, the Board of Directors of RMI (the "RMI Board") approved the termination of the Death Benefits Plan and the Company recorded a pretax nonrecurring benefit of $5,000,000, which reflects the reversal of the amount previously accrued for plan benefits. The Company had no outstanding obligations or any future obligations under the Death Benefits Plan at termination date. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Death Benefits Plan."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001021907_trianon_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001021907_trianon_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..fef675d4249a7f680c3cc970905a71877612a730
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the consolidated financial statements appearing elsewhere in this Prospectus. In August 1998, the Company plans to change its name from MS Acquisition Corp. to . In this Prospectus, MS Acquisition Corp. is referred to as the "Company" from April 1, 1998, the effective date of the Combination for accounting purposes. The consolidated financial statements of the Company from April 1, 1998, reflect the consolidated results of Sofedit and MS Acquisition. The term "MS Acquisition" refers to MS Acquisition Corp. and its consolidated subsidiaries prior to April 1, 1998. The term "Sofedit" refers to Societe Financiere d'Etude et de Developpement Industriel et Technologique S.A. and its consolidated subsidiaries. The term "Aetna" refers to Aetna Industries, Inc. and its consolidated subsidiaries. The term "Aetna Holdings" refers to Aetna Holdings, Inc., the direct parent company of Aetna and wholly-owned subsidiary of the Company. Unless otherwise indicated, (i) the information in this Prospectus assumes that the Underwriters' Over-Allotment Option is not exercised and (ii) amounts stated in U.S. dollars are reported in compliance with U.S. GAAP. THE COMPANY The Company is a leading full-service supplier of highly engineered metal-formed components, complex modules and mechanical assemblies for automotive original equipment manufacturers ("OEMs") in Europe and North America. The Company believes it produces one of the broadest ranges of automotive stampings and other metal-formed products of any OEM supplier within these markets. The Company's products are manufactured through a variety of processes including complex stamping, high-pressure hydroforming and, beginning in 1999, hot stamping. The Company's products include: (i) structural components and modules for chassis, suspension, floor pan and engine cradle systems; (ii) large exterior door and body panel modules; (iii) mechanical assemblies such as pedal systems and door check mechanisms; and (iv) other complex components such as stamped pulleys and crankshaft pulley dampers. The Company's products are used by most of the major automotive OEMs worldwide, such as: Chrysler, General Motors Corporation including Opel, Vauxhall, and Saab ("GM"), Jaguar, Mercedes-Benz, Mitsubishi, Peugeot-Citroen, Porsche, Renault, Toyota, Volkswagen, including Audi, SEAT and SKODA ("Volkswagen"), and Volvo. On a pro forma basis, the Company's net sales for 1997 and the first six months of 1998 were $693.6 million and $375.3 million, respectively. The Company's international presence is the result of the April 1998 combination of Sofedit and Aetna, two leading stamping and metal-forming companies in Europe and North America, respectively. Today, the Company produces over 100 types of products for 60 models on 40 platforms from 23 plants in Europe and North America. The Company believes that the component supply segment of the automotive supply industry is highly fragmented but undergoing significant consolidation. This consolidation is being driven by OEM requirements for increased global sourcing for global platforms, and increased outsourcing of design and production. As a result of the Combination, the Company believes it is uniquely positioned to capitalize on these trends. The Company has a significant international presence with approximately 70% and 30% of its pro forma 1997 net sales generated from sales to customers in Europe and North America, respectively. The Company believes it is well-positioned on top-selling vehicles in Europe and North America. For example, the Company currently supplies products used on seven of the 10 top-selling vehicles in Europe, including the Renault Twingo, Megane and Clio, the Opel Astra and Vectra, and the Volkswagen Golf and Polo. The Company also supplies products used on such top-selling vehicles in North America as the Chrysler Jeep Cherokee, Jeep Grand Cherokee and Jeep Wrangler, Chrysler Cirrus/Dodge Stratus, Buick Riviera/Oldsmobile Aurora, Chevrolet Astro/GMC Safari, Pontiac Bonneville, Buick Park Avenue, Chevrolet Cavalier and Saturn LS. Approximately 78.5% of the Company's 1997 pro forma North American net sales were derived from the higher-growth light truck segment. The Company has a substantial number of new products for car and light truck platforms in the early stages of production, including platforms for Chrysler (two), GM (one), and CAMI (one) in North America and products for new vehicles for Renault (six), for Peugeot-Citroen (five) and one for each of Volkswagen, Mercedes-Benz, Mitsubishi, GM, Toyota and Volvo in Europe. In connection with the introduction of these new products, the Company made significant investments and incurred significant launch and other costs. The Company believes that it is now well-positioned to realize the benefits of these investments as they reach full production. COMPETITIVE STRENGTHS The Company believes it possesses the following distinct competitive strengths: (i) international presence; (ii) strong relationships with a diversified customer base; (iii) full-service technical, design and engineering capabilities; (iv) a highly motivated and experienced management team; and (v) a proven ability to identify and successfully manage acquisitions. The Company intends to capitalize on these competitive strengths to continue to generate consistent revenue growth and increased profitability in the future. International Presence. With 23 plants in Europe and North America, the Company believes it is one of a limited group of high-quality, full-service automotive suppliers able to provide significant volumes of stampings and mechanical assemblies on an international basis. The majority of the Company's facilities are strategically located near OEM production facilities. The Company also believes that its international approach has resulted in recent awards of new business from existing customers, including GM's Opel unit in Poland and Renault in Brazil, as well as awards of business from new customers such as BMW/Rover, CAMI, and Mitsubishi North America. Strong Relationships with a Diversified Customer Base. The Company's full-service capabilities have enabled it to become a leading supplier to nearly all of the world's major automotive OEMs, including Chrysler, GM, Jaguar, Mercedes-Benz, Mitsubishi, Peugeot-Citroen, Porsche, Renault, Toyota, Volkswagen and Volvo. Many of these major OEMs have become customers of the Company in the last five years, which has contributed to significant sales growth. During this period, the Company has solidified long-term relationships with Chrysler, GM, Peugeot-Citroen and Renault, each of which accounted for more than 7% of the Company's pro forma 1997 net sales, although no single customer accounted for more than 25% of the Company's pro forma 1997 net sales. Full-Service Technical, Design and Engineering Capabilities. The Company believes it is one of a few automotive suppliers in Europe and North America capable of meeting OEMs' demands for greater outsourcing of stampings and mechanical assemblies at the earliest stages of product design as well as continuous production stages. Supporting the Company's full-service capabilities are its computer-aided design systems, prototype plants, hydroforming expertise and large-bed presses, augmented by the efficiency of increasingly automated production lines. These full-service capabilities enable the Company to pursue its strategy of leveraging design and engineering skills to secure supply relationships for complex products which are typically higher value-added. The Company considers hydroforming to be an important technology and believes that applications for hydroforming are increasing, as illustrated by Volvo's recent selection of the Company to provide a hydroformed cross-member assembly for the Volvo S80 model. Highly Motivated and Experienced Management Team. The Company believes its management and employees are highly motivated to meet corporate objectives due to performance related incentive plans and the Company's decentralized management style. The Company believes its decentralized approach to decision making encourages employee participation in refining and improving production processes and product quality. The Company's incentive plans for management employees include discretionary annual bonuses and stock option plans based on their ability to meet certain defined financial and quality performance criteria. Moreover, members of the Company's senior management have an average of approximately 17 years of experience in the automotive industry. In addition, following the consummation of the Offering, the Company's senior management will beneficially own approximately % of the outstanding Common Stock. See "Management". Proven Ability to Identify and Successfully Manage Acquisitions. Since 1989, the Company's management has completed seven acquisitions and two strategic alliances. The Company's strategy has been to identify underperforming companies with potential for operating improvements. In such acquisitions, the Company has been able to apply its management expertise to increase efficiency and to improve quality. For example, the Company's management team was able to improve dramatically productivity and manufacturing efficiencies at the Lebranchu facility (the Company's largest facility in Europe, which was acquired in 1994) by approximately 57%, from 1995 to 1997, while net sales from the Lebranchu facility operations increased by approximately 39% for the same period. BUSINESS STRATEGY The Company's business strategy is designed to foster growth, improve manufacturing efficiency, reduce costs and increase productivity, thereby improving profitability. Key elements of this business strategy include: (i) leveraging and expanding its international presence to exploit future opportunities; (ii) capitalizing on technical design and engineering capabilities; (iii) exploiting new technologies such as high-pressure hydroforming; (iv) achieving continuous quality improvements and enhancing manufacturing efficiencies; and (v) pursuing strategic acquisitions. ------------------------------------ The Company's principal executive offices and European headquarters are located at 1, rue Thomas Edison, Quartier des Chenes-B.P. 605, 78056 St. Quentin en Yvelines Cedex, France and its telephone number is (33-1) 39-41-20-00. The Company's North American headquarters are located at 24331 Sherwood Avenue, Centerline, Michigan, United States of America and its telephone number is (810) 759-2200. THE OFFERING <TABLE> <S> <C> Common Stock offered hereby(1).............. shares of Common Stock. Common Stock to be outstanding after the Offering(1)(2)(3)......................... shares of Common Stock. Use of Proceeds(1).......................... The net proceeds of the Offering (estimated to be approximately $ million) will be used primarily to repay outstanding indebtedness. See "Use of Proceeds". NYSE Symbol................................. . </TABLE> - --------------- (1) Assumes no exercise of the Underwriters' Over-Allotment Option. See "Underwriting". (2) Does not include (i) shares of Common Stock reserved for issuance upon the exercise of stock options outstanding under the Stock Option Plan; and (ii) an additional shares of Common Stock reserved for future grants or awards under the Company's 1998 Equity Incentive Plan. See "Management -- 1998 Equity Incentive Plan". (3) Assumes the conversion of all of the issued shares of Preferred Stock of the Company into fully paid Common Stock. See "Description of Capital Stock -- Preferred Stock." SUMMARY UNAUDITED PRO FORMA AND HISTORICAL FINANCIAL DATA The following summary historical financial information is derived from the consolidated historical financial statements of the Company and Sofedit, as predecessor, and the notes thereto and the consolidated financial statements of MS Acquisition and the notes thereto, all included elsewhere in this Prospectus (the "Consolidated Financial Statements"). The unaudited pro forma combined condensed financial information is derived from the unaudited pro forma combined condensed financial data of the Company included elsewhere in this Prospectus (the "Unaudited Pro Forma Financial Data"). The historical Consolidated Financial Statements of the Company and Sofedit, as predecessor for each year in the three years ended December 31, 1997 were audited by Barbier Frinault & Autres (a member firm of Arthur Andersen). The historical Consolidated Financial Statements of MS Acquisition for each year in the three years ended December 31, 1995, December 28, 1996 and December 29, 1997 were audited by PricewaterhouseCoopers LLP. The historical and pro forma financial information of the Company for the six month periods ended June 30, 1997 and 1998 and the historical financial information of MS Acquisition for the three month periods ended March 30, 1997 and March 29, 1998 is unaudited, but in the opinion of management reflects all adjustments necessary for a fair presentation of such information. The Combination is accounted for as a reverse acquisition because the former shareholders of Sofedit owned approximately 75% of the fully diluted outstanding Common Stock of the Company immediately following the Combination. For accounting purposes, Sofedit is considered to be the acquiror of, and the predecessor to, the Company. The unaudited pro forma statement of operations data for the year ended December 31, 1997 give pro forma effect to: (i) the Combination; (ii) the Offering and the application of proceeds thereof; and (iii) the conversion of Preferred Stock into Common Stock, as if these events had occurred on January 1, 1997. The unaudited pro forma statement of operations data for the six months ended June 30, 1997 and 1998 give pro forma effect to: (i) the Combination; (ii) the Offering and the application of proceeds thereof; and (iii) the conversion of Preferred Stock into Common Stock, as if these events had occurred on January 1, 1997 and 1998, respectively. The unaudited pro forma consolidated balance sheet data as of June 30, 1998 gives effect to: (i) the Offering and the application of the proceeds thereof; and (ii) the conversion of the Preferred Stock into Common Stock. The unaudited historical statement of operations data of the Company for the six months ended June 30, 1998 represents the historical results of Sofedit, as predecessor, and, from April 1, 1998, the effective date of the Combination for accounting purposes, the consolidated results of MS Acquisition and Sofedit. The information provided below should be read in conjunction with the Consolidated Financial Statements and the Unaudited Pro Forma Financial Data. UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA OF THE COMPANY <TABLE> <CAPTION> PRO FORMA PRO FORMA ---------- ---------------- YEAR ENDED SIX MONTHS ENDED DEC. 31, JUNE 30, ---------- ---------------- 1997 1997 1998 ---------- ------ ------ (U.S. DOLLARS IN MILLIONS) <S> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA:(1)(2)(3) Net sales................................................... $693.6 $359.4 $375.3 Gross profit................................................ 82.2 48.4 44.2 Selling, general and administrative expenses................ 42.9 21.4 22.2 Research and development expenses........................... 7.4 4.1 4.2 Other (income) expense(4)................................... 7.6 2.8 2.2 ------ ------ ------ Operating income............................................ 24.3 20.1 15.6 Net interest expense........................................ 19.0 10.2 10.3 ------ ------ ------ Income before taxes......................................... 5.3 9.9 5.3 Income before discontinued operations....................... 4.3 6.7 3.2 Earnings per share before discontinued operations........... OTHER DATA:(1)(2)(3) EBITDA(5)................................................... $ 61.1 $ 40.8 $ 33.7 Capital expenditures........................................ 27.7 14.1 22.2 Depreciation and amortization............................... 36.8 20.7 18.1 </TABLE> <TABLE> <CAPTION> PRO FORMA JUNE 30, 1998 ------------- <S> <C> CONSOLIDATED BALANCE SHEET DATA (AT END OF PERIOD):(2)(3)(6)(7) Cash........................................................ $ Working capital(8).......................................... Total assets................................................ Total debt.................................................. Stockholders' equity........................................ </TABLE> - --------------- (1) The unaudited pro forma Consolidated Statement of Operations Data and Other Data for the year ended December 31, 1997 give pro forma effect to: (i) the Combination; (ii) the Offering and the application of proceeds thereof; and (iii) the conversion of Preferred Stock into Common Stock, as if these events had occurred on January 1, 1997. The unaudited pro forma Consolidated Statement of Operations Data and Other Data for the six months ended June 30, 1997 and June 30, 1998 give pro forma effect to: (i) the Combination; (ii) the Offering and the application of proceeds thereof; and (iii) the conversion of Preferred Stock into Common Stock, as if these events had occurred on January 1, 1997 and January 1, 1998, respectively. (2) The pro forma financial data do not reflect any cost savings expected to result from the Combination. (3) The unaudited pro forma Consolidated Statement of Operations Data and Other Data were translated from French francs using the average FF/$1.00 exchange rate for the respective year or six month period (FF5.85 per $1.00 for the year ended December 31, 1997, FF5.72 per $1.00 for the six months ended June 30, 1997 and FF6.08 per $1.00 for the six months ended June 30, 1998). Consolidated Balance Sheet Data were translated using the period end FF/$1.00 exchange rate for the applicable six month period (FF6.05 per $1.00 for June, 30, 1998). See "Exchange Rate Information". (4) In the year ended December 31, 1997, other expense includes: (i) a $2.6 million loss on the sale of a non-core subsidiary; and (ii) $2.5 million of restructuring costs related to the rationalization of certain of the Company's prototype facilities. In the six months ended June 30, 1997, other expense includes a $1.3 million initial accrual for a loss on the sale of a non-core subsidiary. (5) EBITDA is defined as income before the effect of changes in accounting, plus interest, income taxes, depreciation and amortization. Operating income EBITDA is presented because it is a widely accepted financial indicator of a company's ability to incur and service debt. However, EBITDA should not be considered in isolation as a substitute for net income or cash flow data prepared in accordance with generally accepted accounting principles or as a measure of a company's profitability. (6) The unaudited pro forma Consolidated Balance Sheet Data as of June 30, 1998 gives pro forma effect to: (i) the Offering and the application of proceeds thereof; and (ii) the conversion of Preferred Stock into Common Stock. (7) The pro forma Consolidated Balance Sheet Data is to be determined based upon the amount of debt repaid from the proceeds of the Offering. See "Use of Proceeds." (8) Working capital is defined as current assets (including cash) minus current liabilities. At June 30, 1998, the Company had sold receivables amounting to $55.5 million under its accounts receivable program. Such receivables are excluded from working capital. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition". SUMMARY HISTORICAL FINANCIAL DATA FOR SOFEDIT AND THE COMPANY <TABLE> <CAPTION> SOFEDIT THE COMPANY ----------------------------------------- -------------- HISTORICAL SIX HISTORICAL SIX YEAR ENDED DEC. 31, MONTHS MONTHS ------------------------ ENDED JUNE 30, ENDED JUNE 30, 1995 1996 1997 1997 1998 ------ ------ ------ -------------- -------------- (U.S. DOLLARS IN MILLIONS) <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA:(1)(2) Net sales............................... $464.9 $484.7 $487.9 $255.6 $322.3 Gross profit............................ 67.6 60.1 58.5 34.7 36.3 Selling, general and administrative expenses.............................. 28.4 29.2 26.1 14.0 18.2 Research and development expenses....... 4.4 7.6 7.4 4.1 4.2 Other (income) expense(3)............... 2.1 (0.6) 6.1 2.1 1.6 ------ ------ ------ ------ ------ Operating income........................ 32.7 23.9 18.9 14.5 12.3 Net interest expense.................... 15.3 12.9 9.7 5.4 9.0 ------ ------ ------ ------ ------ Income before taxes..................... 17.4 11.0 9.2 9.1 3.3 Income before discontinued operations... 16.0 11.4 7.2 6.7 1.9 Net income.............................. $ 12.8 $ 7.4 $ 4.7 $ 5.3 $ 0.4 OTHER DATA:(1)(2)(3) EBITDA(4)............................... $ 59.3 $ 48.8 $ 46.5 $ 29.4 $ 28.1 Capital expenditures.................... 28.6 33.2 15.1 7.9 18.9 Depreciation and amortization........... 26.6 24.9 27.6 14.9 15.8 CONSOLIDATED BALANCE SHEET DATA (AT END OF PERIOD):(1)(2) Cash.................................... -- $ 11.3 $ 11.6 -- $ 22.9 Working capital(5)...................... -- 19.0 8.5 -- 3.0 Total assets............................ -- 408.5 361.9 -- 575.9 Total debt.............................. -- 140.1 115.2 -- 278.0 Stockholders' equity.................... -- 62.4 65.3 -- (5.2) </TABLE> SUMMARY HISTORICAL FINANCIAL DATA FOR SOFEDIT AND THE COMPANY <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, --------------------------------------- 1995 1996 1997 ----------- ----------- ----------- (FRENCH FRANCS IN MILLIONS; U.S. GAAP) <S> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA:(5) Net sales................................................ FF2,320.0 FF2,479.3 FF2,848.1 Gross profit............................................. 337.5 307.4 341.4 Selling, general and administrative expenses............. 141.8 149.5 152.4 Research and development expenses........................ 21.8 38.9 43.2 Other (income) expense(3)................................ 10.4 (3.2) 35.6 --------- --------- --------- Operating income......................................... 163.6 122.1 110.2 Net interest expense..................................... 76.8 65.8 56.6 --------- --------- --------- Income before taxes...................................... 86.8 56.3 53.6 Income before discontinued operations.................... 79.7 58.1 42.1 Net income............................................... FF 64.0 FF 37.6 FF 27.6 OTHER DATA:(1)(6) EBITDA(4)................................................ FF 296.3 FF 249.2 FF 270.8 Capital expenditures..................................... 142.7 170.0 87.9 Depreciation and amortization............................ 132.7 127.1 160.6 CONSOLIDATED BALANCE SHEET DATA (AT END OF PERIOD):(1)(6) Cash..................................................... -- FF 59.4 FF 69.6 Working capital(5)....................................... -- 98.8 51.5 Total assets............................................. -- 2,139.4 2,167.2 Total debt............................................... -- 733.7 689.8 Stockholders' equity..................................... -- 327.0 391.0 </TABLE> - --------------- (1) Historical data for the six months ended June 30, 1997 are those of Sofedit, as predecessor of the Company. The historical data for the six months ended June 30, 1998 includes six months of results for Sofedit and the operations of MS Acquisition from April 1, 1998. Sofedit did not prepare a U.S. GAAP balance sheet as of December 31, 1995, or as of June 30, 1997. (2) The Consolidated Statement of Operations Data and Other Data were translated from French francs using the average FF/$1.00 exchange rate for the respective year or six-month period (FF4.96 per $1.00 for the year ended December 31, 1995, FF5.12 per $1.00 for the year ended December 31, 1996, FF5.85 per $1.00 for the year ended December 31, 1997, FF5.72 per $1.00 for the six months ended June 30, 1997 and FF6.08 per $1.00 for the six months ended June 30, 1998). The Consolidated Balance Sheet Data were translated using the period end FF/$1.00 exchange rate for the respective year or six month period (FF 6.05 per $1.00 for June 30, 1998). (3) In the year ended December 31, 1997, other expense includes: (i) a $2.6 million loss on the sale of a non-core subsidiary; and (ii) $2.5 million of restructuring costs related to the rationalization of certain of the Company's prototype facilities. In the six months ended June 30, 1997, other expense includes a $1.3 million initial accrual for a loss on the sale of a non-core subsidiary. In the year ended December 31, 1996, other expense includes a $1.5 million gain on the sale of certain assets. In the year ended December 31, 1995, other expense includes a $0.2 million gain on the sale of certain assets. (4) EBITDA is defined as income before the effect of changes in accounting plus interest, income taxes, depreciation and amortization. Operating income EBITDA is presented because it is a widely accepted financial indicator of a company's ability to incur and service debt. However, EBITDA should not be considered in isolation as a substitute for net income or cash flow data prepared in accordance with generally accepted accounting principles or as a measure of a company's profitability. (5) Working capital is defined as current assets (including cash) minus current liabilities. At December 31, 1996, December 31, 1997 and at June 30, 1998, the Company had sold, under its accounts receivable program, receivables amounting to $70.1 million, $53.8 million and $55.5 million, respectively. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition".
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the consolidated financial statements appearing elsewhere in this Prospectus. In August 1998, the Company plans to change its name from MS Acquisition Corp. to . In this Prospectus, MS Acquisition Corp. is referred to as the "Company" from April 1, 1998, the effective date of the Combination for accounting purposes. The consolidated financial statements of the Company from April 1, 1998, reflect the consolidated results of Sofedit and MS Acquisition. The term "MS Acquisition" refers to MS Acquisition Corp. and its consolidated subsidiaries prior to April 1, 1998. The term "Sofedit" refers to Societe Financiere d'Etude et de Developpement Industriel et Technologique S.A. and its consolidated subsidiaries. The term "Aetna" refers to Aetna Industries, Inc. and its consolidated subsidiaries. The term "Aetna Holdings" refers to Aetna Holdings, Inc., the direct parent company of Aetna and wholly-owned subsidiary of the Company. Unless otherwise indicated, (i) the information in this Prospectus assumes that the Underwriters' Over-Allotment Option is not exercised and (ii) amounts stated in U.S. dollars are reported in compliance with U.S. GAAP. THE COMPANY The Company is a leading full-service supplier of highly engineered metal-formed components, complex modules and mechanical assemblies for automotive original equipment manufacturers ("OEMs") in Europe and North America. The Company believes it produces one of the broadest ranges of automotive stampings and other metal-formed products of any OEM supplier within these markets. The Company's products are manufactured through a variety of processes including complex stamping, high-pressure hydroforming and, beginning in 1999, hot stamping. The Company's products include: (i) structural components and modules for chassis, suspension, floor pan and engine cradle systems; (ii) large exterior door and body panel modules; (iii) mechanical assemblies such as pedal systems and door check mechanisms; and (iv) other complex components such as stamped pulleys and crankshaft pulley dampers. The Company's products are used by most of the major automotive OEMs worldwide, such as: Chrysler, General Motors Corporation including Opel, Vauxhall, and Saab ("GM"), Jaguar, Mercedes-Benz, Mitsubishi, Peugeot-Citroen, Porsche, Renault, Toyota, Volkswagen, including Audi, SEAT and SKODA ("Volkswagen"), and Volvo. On a pro forma basis, the Company's net sales for 1997 and the first six months of 1998 were $693.6 million and $375.3 million, respectively. The Company's international presence is the result of the April 1998 combination of Sofedit and Aetna, two leading stamping and metal-forming companies in Europe and North America, respectively. Today, the Company produces over 100 types of products for 60 models on 40 platforms from 23 plants in Europe and North America. The Company believes that the component supply segment of the automotive supply industry is highly fragmented but undergoing significant consolidation. This consolidation is being driven by OEM requirements for increased global sourcing for global platforms, and increased outsourcing of design and production. As a result of the Combination, the Company believes it is uniquely positioned to capitalize on these trends. The Company has a significant international presence with approximately 70% and 30% of its pro forma 1997 net sales generated from sales to customers in Europe and North America, respectively. The Company believes it is well-positioned on top-selling vehicles in Europe and North America. For example, the Company currently supplies products used on seven of the 10 top-selling vehicles in Europe, including the Renault Twingo, Megane and Clio, the Opel Astra and Vectra, and the Volkswagen Golf and Polo. The Company also supplies products used on such top-selling vehicles in North America as the Chrysler Jeep Cherokee, Jeep Grand Cherokee and Jeep Wrangler, Chrysler Cirrus/Dodge Stratus, Buick Riviera/Oldsmobile Aurora, Chevrolet Astro/GMC Safari, Pontiac Bonneville, Buick Park Avenue, Chevrolet Cavalier and Saturn LS. Approximately 78.5% of the Company's 1997 pro forma North American net sales were derived from the higher-growth light truck segment. The Company has a substantial number of new products for car and light truck platforms in the early stages of production, including platforms for Chrysler (two), GM (one), and CAMI (one) in North America and products for new vehicles for Renault (six), for Peugeot-Citroen (five) and one for each of Volkswagen, Mercedes-Benz, Mitsubishi, GM, Toyota and Volvo in Europe. In connection with the introduction of these new products, the Company made significant investments and incurred significant launch and other costs. The Company believes that it is now well-positioned to realize the benefits of these investments as they reach full production. COMPETITIVE STRENGTHS The Company believes it possesses the following distinct competitive strengths: (i) international presence; (ii) strong relationships with a diversified customer base; (iii) full-service technical, design and engineering capabilities; (iv) a highly motivated and experienced management team; and (v) a proven ability to identify and successfully manage acquisitions. The Company intends to capitalize on these competitive strengths to continue to generate consistent revenue growth and increased profitability in the future. International Presence. With 23 plants in Europe and North America, the Company believes it is one of a limited group of high-quality, full-service automotive suppliers able to provide significant volumes of stampings and mechanical assemblies on an international basis. The majority of the Company's facilities are strategically located near OEM production facilities. The Company also believes that its international approach has resulted in recent awards of new business from existing customers, including GM's Opel unit in Poland and Renault in Brazil, as well as awards of business from new customers such as BMW/Rover, CAMI, and Mitsubishi North America. Strong Relationships with a Diversified Customer Base. The Company's full-service capabilities have enabled it to become a leading supplier to nearly all of the world's major automotive OEMs, including Chrysler, GM, Jaguar, Mercedes-Benz, Mitsubishi, Peugeot-Citroen, Porsche, Renault, Toyota, Volkswagen and Volvo. Many of these major OEMs have become customers of the Company in the last five years, which has contributed to significant sales growth. During this period, the Company has solidified long-term relationships with Chrysler, GM, Peugeot-Citroen and Renault, each of which accounted for more than 7% of the Company's pro forma 1997 net sales, although no single customer accounted for more than 25% of the Company's pro forma 1997 net sales. Full-Service Technical, Design and Engineering Capabilities. The Company believes it is one of a few automotive suppliers in Europe and North America capable of meeting OEMs' demands for greater outsourcing of stampings and mechanical assemblies at the earliest stages of product design as well as continuous production stages. Supporting the Company's full-service capabilities are its computer-aided design systems, prototype plants, hydroforming expertise and large-bed presses, augmented by the efficiency of increasingly automated production lines. These full-service capabilities enable the Company to pursue its strategy of leveraging design and engineering skills to secure supply relationships for complex products which are typically higher value-added. The Company considers hydroforming to be an important technology and believes that applications for hydroforming are increasing, as illustrated by Volvo's recent selection of the Company to provide a hydroformed cross-member assembly for the Volvo S80 model. Highly Motivated and Experienced Management Team. The Company believes its management and employees are highly motivated to meet corporate objectives due to performance related incentive plans and the Company's decentralized management style. The Company believes its decentralized approach to decision making encourages employee participation in refining and improving production processes and product quality. The Company's incentive plans for management employees include discretionary annual bonuses and stock option plans based on their ability to meet certain defined financial and quality performance criteria. Moreover, members of the Company's senior management have an average of approximately 17 years of experience in the automotive industry. In addition, following the consummation of the Offering, the Company's senior management will beneficially own approximately % of the outstanding Common Stock. See "Management". Proven Ability to Identify and Successfully Manage Acquisitions. Since 1989, the Company's management has completed seven acquisitions and two strategic alliances. The Company's strategy has been to identify underperforming companies with potential for operating improvements. In such acquisitions, the Company has been able to apply its management expertise to increase efficiency and to improve quality. For example, the Company's management team was able to improve dramatically productivity and manufacturing efficiencies at the Lebranchu facility (the Company's largest facility in Europe, which was acquired in 1994) by approximately 57%, from 1995 to 1997, while net sales from the Lebranchu facility operations increased by approximately 39% for the same period. BUSINESS STRATEGY The Company's business strategy is designed to foster growth, improve manufacturing efficiency, reduce costs and increase productivity, thereby improving profitability. Key elements of this business strategy include: (i) leveraging and expanding its international presence to exploit future opportunities; (ii) capitalizing on technical design and engineering capabilities; (iii) exploiting new technologies such as high-pressure hydroforming; (iv) achieving continuous quality improvements and enhancing manufacturing efficiencies; and (v) pursuing strategic acquisitions. ------------------------------------ The Company's principal executive offices and European headquarters are located at 1, rue Thomas Edison, Quartier des Chenes-B.P. 605, 78056 St. Quentin en Yvelines Cedex, France and its telephone number is (33-1) 39-41-20-00. The Company's North American headquarters are located at 24331 Sherwood Avenue, Centerline, Michigan, United States of America and its telephone number is (810) 759-2200. THE OFFERING <TABLE> <S> <C> Common Stock offered hereby(1).............. shares of Common Stock. Common Stock to be outstanding after the Offering(1)(2)(3)......................... shares of Common Stock. Use of Proceeds(1).......................... The net proceeds of the Offering (estimated to be approximately $ million) will be used primarily to repay outstanding indebtedness. See "Use of Proceeds". NYSE Symbol................................. . </TABLE> - --------------- (1) Assumes no exercise of the Underwriters' Over-Allotment Option. See "Underwriting". (2) Does not include (i) shares of Common Stock reserved for issuance upon the exercise of stock options outstanding under the Stock Option Plan; and (ii) an additional shares of Common Stock reserved for future grants or awards under the Company's 1998 Equity Incentive Plan. See "Management -- 1998 Equity Incentive Plan". (3) Assumes the conversion of all of the issued shares of Preferred Stock of the Company into fully paid Common Stock. See "Description of Capital Stock -- Preferred Stock." SUMMARY UNAUDITED PRO FORMA AND HISTORICAL FINANCIAL DATA The following summary historical financial information is derived from the consolidated historical financial statements of the Company and Sofedit, as predecessor, and the notes thereto and the consolidated financial statements of MS Acquisition and the notes thereto, all included elsewhere in this Prospectus (the "Consolidated Financial Statements"). The unaudited pro forma combined condensed financial information is derived from the unaudited pro forma combined condensed financial data of the Company included elsewhere in this Prospectus (the "Unaudited Pro Forma Financial Data"). The historical Consolidated Financial Statements of the Company and Sofedit, as predecessor for each year in the three years ended December 31, 1997 were audited by Barbier Frinault & Autres (a member firm of Arthur Andersen). The historical Consolidated Financial Statements of MS Acquisition for each year in the three years ended December 31, 1995, December 28, 1996 and December 29, 1997 were audited by PricewaterhouseCoopers LLP. The historical and pro forma financial information of the Company for the six month periods ended June 30, 1997 and 1998 and the historical financial information of MS Acquisition for the three month periods ended March 30, 1997 and March 29, 1998 is unaudited, but in the opinion of management reflects all adjustments necessary for a fair presentation of such information. The Combination is accounted for as a reverse acquisition because the former shareholders of Sofedit owned approximately 75% of the fully diluted outstanding Common Stock of the Company immediately following the Combination. For accounting purposes, Sofedit is considered to be the acquiror of, and the predecessor to, the Company. The unaudited pro forma statement of operations data for the year ended December 31, 1997 give pro forma effect to: (i) the Combination; (ii) the Offering and the application of proceeds thereof; and (iii) the conversion of Preferred Stock into Common Stock, as if these events had occurred on January 1, 1997. The unaudited pro forma statement of operations data for the six months ended June 30, 1997 and 1998 give pro forma effect to: (i) the Combination; (ii) the Offering and the application of proceeds thereof; and (iii) the conversion of Preferred Stock into Common Stock, as if these events had occurred on January 1, 1997 and 1998, respectively. The unaudited pro forma consolidated balance sheet data as of June 30, 1998 gives effect to: (i) the Offering and the application of the proceeds thereof; and (ii) the conversion of the Preferred Stock into Common Stock. The unaudited historical statement of operations data of the Company for the six months ended June 30, 1998 represents the historical results of Sofedit, as predecessor, and, from April 1, 1998, the effective date of the Combination for accounting purposes, the consolidated results of MS Acquisition and Sofedit. The information provided below should be read in conjunction with the Consolidated Financial Statements and the Unaudited Pro Forma Financial Data. UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA OF THE COMPANY <TABLE> <CAPTION> PRO FORMA PRO FORMA ---------- ---------------- YEAR ENDED SIX MONTHS ENDED DEC. 31, JUNE 30, ---------- ---------------- 1997 1997 1998 ---------- ------ ------ (U.S. DOLLARS IN MILLIONS) <S> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA:(1)(2)(3) Net sales................................................... $693.6 $359.4 $375.3 Gross profit................................................ 82.2 48.4 44.2 Selling, general and administrative expenses................ 42.9 21.4 22.2 Research and development expenses........................... 7.4 4.1 4.2 Other (income) expense(4)................................... 7.6 2.8 2.2 ------ ------ ------ Operating income............................................ 24.3 20.1 15.6 Net interest expense........................................ 19.0 10.2 10.3 ------ ------ ------ Income before taxes......................................... 5.3 9.9 5.3 Income before discontinued operations....................... 4.3 6.7 3.2 Earnings per share before discontinued operations........... OTHER DATA:(1)(2)(3) EBITDA(5)................................................... $ 61.1 $ 40.8 $ 33.7 Capital expenditures........................................ 27.7 14.1 22.2 Depreciation and amortization............................... 36.8 20.7 18.1 </TABLE> <TABLE> <CAPTION> PRO FORMA JUNE 30, 1998 ------------- <S> <C> CONSOLIDATED BALANCE SHEET DATA (AT END OF PERIOD):(2)(3)(6)(7) Cash........................................................ $ Working capital(8).......................................... Total assets................................................ Total debt.................................................. Stockholders' equity........................................ </TABLE> - --------------- (1) The unaudited pro forma Consolidated Statement of Operations Data and Other Data for the year ended December 31, 1997 give pro forma effect to: (i) the Combination; (ii) the Offering and the application of proceeds thereof; and (iii) the conversion of Preferred Stock into Common Stock, as if these events had occurred on January 1, 1997. The unaudited pro forma Consolidated Statement of Operations Data and Other Data for the six months ended June 30, 1997 and June 30, 1998 give pro forma effect to: (i) the Combination; (ii) the Offering and the application of proceeds thereof; and (iii) the conversion of Preferred Stock into Common Stock, as if these events had occurred on January 1, 1997 and January 1, 1998, respectively. (2) The pro forma financial data do not reflect any cost savings expected to result from the Combination. (3) The unaudited pro forma Consolidated Statement of Operations Data and Other Data were translated from French francs using the average FF/$1.00 exchange rate for the respective year or six month period (FF5.85 per $1.00 for the year ended December 31, 1997, FF5.72 per $1.00 for the six months ended June 30, 1997 and FF6.08 per $1.00 for the six months ended June 30, 1998). Consolidated Balance Sheet Data were translated using the period end FF/$1.00 exchange rate for the applicable six month period (FF6.05 per $1.00 for June, 30, 1998). See "Exchange Rate Information". (4) In the year ended December 31, 1997, other expense includes: (i) a $2.6 million loss on the sale of a non-core subsidiary; and (ii) $2.5 million of restructuring costs related to the rationalization of certain of the Company's prototype facilities. In the six months ended June 30, 1997, other expense includes a $1.3 million initial accrual for a loss on the sale of a non-core subsidiary. (5) EBITDA is defined as income before the effect of changes in accounting, plus interest, income taxes, depreciation and amortization. Operating income EBITDA is presented because it is a widely accepted financial indicator of a company's ability to incur and service debt. However, EBITDA should not be considered in isolation as a substitute for net income or cash flow data prepared in accordance with generally accepted accounting principles or as a measure of a company's profitability. (6) The unaudited pro forma Consolidated Balance Sheet Data as of June 30, 1998 gives pro forma effect to: (i) the Offering and the application of proceeds thereof; and (ii) the conversion of Preferred Stock into Common Stock. (7) The pro forma Consolidated Balance Sheet Data is to be determined based upon the amount of debt repaid from the proceeds of the Offering. See "Use of Proceeds." (8) Working capital is defined as current assets (including cash) minus current liabilities. At June 30, 1998, the Company had sold receivables amounting to $55.5 million under its accounts receivable program. Such receivables are excluded from working capital. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition". SUMMARY HISTORICAL FINANCIAL DATA FOR SOFEDIT AND THE COMPANY <TABLE> <CAPTION> SOFEDIT THE COMPANY ----------------------------------------- -------------- HISTORICAL SIX HISTORICAL SIX YEAR ENDED DEC. 31, MONTHS MONTHS ------------------------ ENDED JUNE 30, ENDED JUNE 30, 1995 1996 1997 1997 1998 ------ ------ ------ -------------- -------------- (U.S. DOLLARS IN MILLIONS) <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA:(1)(2) Net sales............................... $464.9 $484.7 $487.9 $255.6 $322.3 Gross profit............................ 67.6 60.1 58.5 34.7 36.3 Selling, general and administrative expenses.............................. 28.4 29.2 26.1 14.0 18.2 Research and development expenses....... 4.4 7.6 7.4 4.1 4.2 Other (income) expense(3)............... 2.1 (0.6) 6.1 2.1 1.6 ------ ------ ------ ------ ------ Operating income........................ 32.7 23.9 18.9 14.5 12.3 Net interest expense.................... 15.3 12.9 9.7 5.4 9.0 ------ ------ ------ ------ ------ Income before taxes..................... 17.4 11.0 9.2 9.1 3.3 Income before discontinued operations... 16.0 11.4 7.2 6.7 1.9 Net income.............................. $ 12.8 $ 7.4 $ 4.7 $ 5.3 $ 0.4 OTHER DATA:(1)(2)(3) EBITDA(4)............................... $ 59.3 $ 48.8 $ 46.5 $ 29.4 $ 28.1 Capital expenditures.................... 28.6 33.2 15.1 7.9 18.9 Depreciation and amortization........... 26.6 24.9 27.6 14.9 15.8 CONSOLIDATED BALANCE SHEET DATA (AT END OF PERIOD):(1)(2) Cash.................................... -- $ 11.3 $ 11.6 -- $ 22.9 Working capital(5)...................... -- 19.0 8.5 -- 3.0 Total assets............................ -- 408.5 361.9 -- 575.9 Total debt.............................. -- 140.1 115.2 -- 278.0 Stockholders' equity.................... -- 62.4 65.3 -- (5.2) </TABLE> SUMMARY HISTORICAL FINANCIAL DATA FOR SOFEDIT AND THE COMPANY <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, --------------------------------------- 1995 1996 1997 ----------- ----------- ----------- (FRENCH FRANCS IN MILLIONS; U.S. GAAP) <S> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA:(5) Net sales................................................ FF2,320.0 FF2,479.3 FF2,848.1 Gross profit............................................. 337.5 307.4 341.4 Selling, general and administrative expenses............. 141.8 149.5 152.4 Research and development expenses........................ 21.8 38.9 43.2 Other (income) expense(3)................................ 10.4 (3.2) 35.6 --------- --------- --------- Operating income......................................... 163.6 122.1 110.2 Net interest expense..................................... 76.8 65.8 56.6 --------- --------- --------- Income before taxes...................................... 86.8 56.3 53.6 Income before discontinued operations.................... 79.7 58.1 42.1 Net income............................................... FF 64.0 FF 37.6 FF 27.6 OTHER DATA:(1)(6) EBITDA(4)................................................ FF 296.3 FF 249.2 FF 270.8 Capital expenditures..................................... 142.7 170.0 87.9 Depreciation and amortization............................ 132.7 127.1 160.6 CONSOLIDATED BALANCE SHEET DATA (AT END OF PERIOD):(1)(6) Cash..................................................... -- FF 59.4 FF 69.6 Working capital(5)....................................... -- 98.8 51.5 Total assets............................................. -- 2,139.4 2,167.2 Total debt............................................... -- 733.7 689.8 Stockholders' equity..................................... -- 327.0 391.0 </TABLE> - --------------- (1) Historical data for the six months ended June 30, 1997 are those of Sofedit, as predecessor of the Company. The historical data for the six months ended June 30, 1998 includes six months of results for Sofedit and the operations of MS Acquisition from April 1, 1998. Sofedit did not prepare a U.S. GAAP balance sheet as of December 31, 1995, or as of June 30, 1997. (2) The Consolidated Statement of Operations Data and Other Data were translated from French francs using the average FF/$1.00 exchange rate for the respective year or six-month period (FF4.96 per $1.00 for the year ended December 31, 1995, FF5.12 per $1.00 for the year ended December 31, 1996, FF5.85 per $1.00 for the year ended December 31, 1997, FF5.72 per $1.00 for the six months ended June 30, 1997 and FF6.08 per $1.00 for the six months ended June 30, 1998). The Consolidated Balance Sheet Data were translated using the period end FF/$1.00 exchange rate for the respective year or six month period (FF 6.05 per $1.00 for June 30, 1998). (3) In the year ended December 31, 1997, other expense includes: (i) a $2.6 million loss on the sale of a non-core subsidiary; and (ii) $2.5 million of restructuring costs related to the rationalization of certain of the Company's prototype facilities. In the six months ended June 30, 1997, other expense includes a $1.3 million initial accrual for a loss on the sale of a non-core subsidiary. In the year ended December 31, 1996, other expense includes a $1.5 million gain on the sale of certain assets. In the year ended December 31, 1995, other expense includes a $0.2 million gain on the sale of certain assets. (4) EBITDA is defined as income before the effect of changes in accounting plus interest, income taxes, depreciation and amortization. Operating income EBITDA is presented because it is a widely accepted financial indicator of a company's ability to incur and service debt. However, EBITDA should not be considered in isolation as a substitute for net income or cash flow data prepared in accordance with generally accepted accounting principles or as a measure of a company's profitability. (5) Working capital is defined as current assets (including cash) minus current liabilities. At December 31, 1996, December 31, 1997 and at June 30, 1998, the Company had sold, under its accounts receivable program, receivables amounting to $70.1 million, $53.8 million and $55.5 million, respectively. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition".
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information including "Risk Factors" and the Panavision consolidated financial statements and notes thereto (the "Consolidated Financial Statements") contained elsewhere in this Prospectus. Unless the context otherwise requires, (i) the "Company" and "Panavision" refer to Panavision Inc. and its consolidated subsidiaries, collectively and include Panavision's predecessors, (ii) the "Panavision Recapitalization" shall include the financing therefor and the assumption of the Notes by Panavision, and (iii) the term "pro forma" will have the meaning assigned to it in "Unaudited Pro Forma Financial Data." THE COMPANY Panavision is a leading designer, manufacturer and supplier of high precision film camera systems, comprising cameras, lenses and accessories, for the motion picture and television industries. In 1997 in North America, Panavision equipment was utilized in over 80% of feature films produced by major motion picture studios and over 80% of episodic or "series" television productions shot on film (such as E.R. and SEINFELD). Unlike equipment manufactured by its competitors, Panavision camera systems are not available for sale and are rented exclusively through the Company's domestic and international owned and operated facilities as well as its network of independent agents. The Company believes that its position as an industry leader results from its control over the manufacturing and distribution process, its broad range of technologically superior and innovative products, its long-standing collaborative relationships with filmmakers and studios, the breadth of its camera equipment inventory and its dedication to customer service. Panavision is the only supplier of cinematography equipment that manufactures a complete camera system incorporating its own proprietary prime and zoom lenses, the most critical components of a camera system. Panavision is recognized in the motion picture and television industries as the preeminent brand name for cinematography equipment. Since the Company's inception in 1954, Panavision has continually introduced new camera systems, lenses, and accessories that have become industry standards. The Company's close relationship with producers, directors and cinematographers results in a cooperative effort to design and produce unique systems and accessories that meet filmmakers' creative needs. Panavision has received two OSCARS and 18 Awards for Scientific and Technical Achievement from the Academy of Motion Picture Arts and Sciences. Since 1990, two-thirds of the Academy Award nominees for Best Cinematography, and six of the seven cinematographers who have won the OSCAR for Best Cinematography, used Panavision camera systems. Panavision camera systems were used to film nine of the top ten box office movies shot on film in each of 1997 and 1996, including MEN IN BLACK, THE LOST WORLD: JURASSIC PARK, LIAR, LIAR, JERRY MAGUIRE, MY BEST FRIEND'S WEDDING, MISSION: IMPOSSIBLE, INDEPENDENCE DAY, RANSOM, TWISTER and A TIME TO KILL. Panavision camera systems were also used to film the 1998 blockbuster hits TITANIC and TOMORROW NEVER DIES, the latest James Bond film. In addition to Panavision's involvement in the motion picture industry, a predominant number of U.S. prime time episodic or "series" television programs that are shot on film use Panavision camera systems, including FRIENDS and N.Y.P.D. BLUE. Renting, rather than purchasing, equipment is more cost-effective for feature film, television and commercial producers given the periods of inactivity typically experienced between productions. In addition, renting camera systems from Panavision ensures continual access to state-of-the-art equipment as well as the availability of the proper equipment combinations for each specific project. Since the average cost of camera rental represents less than 1% of the average film budget, customers tend to place a higher priority on quality of service and the availability of a broad range of technologically superior equipment than on price considerations, which enables Panavision to receive a premium for its equipment. Panavision dominates an otherwise fragmented rental market for cinematographic equipment. Panavision is the only supplier of cinematographic equipment that has a network of rental offices and maintenance facilities throughout North America, Europe and the Asia Pacific Region and is the only major manufacturer located near Hollywood. As the only vertically integrated provider of camera systems to the film and television industries, Panavision is better able to meet its customers' needs effectively. In contrast, the Company's manufacturing competitors are located in Europe and sell their products to rental companies, which then rent the equipment to the ultimate user. The demand for cinematographic equipment is driven by the number and complexity of feature films, television programs and commercials being produced. Demand for film-based entertainment has continued to (continued from cover) will accrue from February 11, 1998, the date of original issuance of the Old Notes. Holders whose Old Notes are accepted for exchange may, in the limited circumstances described above have the right to receive, in cash, accrued interest (if any) thereon to, but not including, the consummation of the Exchange Offer, such interest to be payable on the February 1 or August 1 next following such date of consummation. Holders of Old Notes accepted for exchange will be deemed to have waived the right to receive any other payments or accrued interest on the Old Notes. The New Notes are being offered hereunder in order to satisfy certain obligations of the Company contained in the Registration Agreement dated February 6, 1998 among the Company and the other signatories thereto (the "Registration Agreement"). Based on interpretations by the staff of the Securities and Exchange Commission (the "Commission") as set forth in no-action letters issued to third parties, the Company believes that New Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be offered for resale, resold and otherwise transferred by holders thereof (other than any such holder which is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such New Notes are acquired in the ordinary course of such holder's business and such holder has no arrangement with any person to participate in the distribution of such New Notes. However, the Company does not intend to request the Commission to consider, and the Commission has not considered, the Exchange Offer in the context of a no-action letter and there can be no assurance that the staff of the Commission would make a similar determination with respect to the Exchange Offer as in such other circumstances. Each holder, other than a broker-dealer, must acknowledge that it is not engaged in, and does not intend to engage in, a distribution of such New Notes and has no arrangement or understanding to participate in a distribution of New Notes. Each broker-dealer that receives New Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for Old Notes where such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company has agreed that, for a period of 180 days after the Expiration Date (as defined herein), it will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." The Company will not receive any proceeds from the Exchange Offer. The Company will pay all the expenses incident to the Exchange Offer. Tenders of Old Notes pursuant to the Exchange Offer may be withdrawn at any time prior to the Expiration Date. In the event the Company terminates the Exchange Offer and does not accept for exchange any Old Notes, the Company will promptly return the Old Notes to the holders thereof. See "The Exchange Offer." Following consummation of the Exchange Offer, the Company may, in its sole discretion, commence one or more additional exchange offers to holders of Old Notes who did not exchange their Old Notes for New Notes in the Exchange Offer on terms which may differ from those contained in the Registration Agreement. This Prospectus, as it may be amended or supplemented from time to time, may be used by the Company in connection with any such additional exchange offers. There is no existing trading market for the New Notes, and there can be no assurance regarding the future development of a market for the New Notes, or the ability of holders of the New Notes to sell their New Notes or the price at which such holders may be able to sell their New Notes. Credit Suisse First Boston Corporation and Schroder & Co. Inc. (the "Initial Purchasers") have advised the Company that they currently intend to make a market in the New Notes. The Initial Purchasers are not obligated to do so, however, and any market-making with respect to the New Notes may be discontinued at any time without notice. The Company does not intend to apply for listing or quotation of the New Notes on any securities exchange or stock market. - ------------------------ Panavision(Registered), PRIMO ZOOM(Registered), Panaflex(Registered), Panahead(Registered), 3-Perf(Registered) and Panastar(Registered) are registered trademarks of the Company. Oscar(Registered) is a registered trademark of the Academy of Motion Picture Arts and Sciences. grow steadily in recent years as evidenced by the growth in the number of feature film starts in North America from 350 in 1992 to 576 in 1997, an increase in domestic box office receipts of 28.1% from 1992 to 1997, and an increase of approximately 6,400 exhibitor screens over the same period. Additionally, the number of action films and special effects in feature film and television productions have increased significantly, thereby increasing the equipment required and lengthening the rental period. In addition, an increase in the number of television networks and channels and in their demand for original programming has also driven the increased use of camera systems. OPERATIONS The Company's operations primarily consist of (i) camera rental services, (ii) design and manufacture of cameras and lenses, (iii) lighting rental services and (iv) sale of lighting filters and other consummable products. CAMERA RENTAL SERVICES. Panavision supplies cinematographic equipment, such as cameras, lenses and accessories to its customers on a project-by-project basis. The Company has a rental inventory of over 1,000 cameras (including non-Panavision manufactured equipment) and 5,000 lenses, as well as associated accessories. The Company rents its equipment through 24 owned and operated rental facilities which are strategically located in cities where the most feature films are produced, including Los Angeles, Toronto, London and Paris. The Company also rents its equipment through ten independent agents, including agents located in New York, Tokyo and Hong Kong. Panavision's network of owned and operated rental offices and independent agents provides it with a competitive advantage as it is the only rental company that offers clients equipment and service on a national and worldwide basis. The Company believes that its sales force, which is segmented by the end markets served, is the most experienced and knowledgeable in the industry. The rental process for feature film and episodic television takes about four to eight months from the time the producer approves the project until filming is completed and the equipment package is returned to Panavision for servicing. The decision makers for the various markets are the producers, directors and cinematographers. In general, after production is approved, the decision makers discuss the requirements with their Panavision sales representative and then finalize the equipment package. The equipment is subsequently prepped at the Panavision rental facility and shipped to the studio or location to commence principal photography. Once the equipment is returned, the Company services its equipment in preparation for the next rental. The average feature film rental is for 10 to 12 weeks, the average episodic television rental is for 32 weeks and the average commercial rental is for approximately 2 days. For the year ended December 31, 1997, approximately 34% of camera rental revenue was derived from feature film rentals, approximately 29% was derived from episodic television and movies of the week, approximately 31% was derived from commercials and approximately 6% was derived from other rentals. Panavision rents camera packages that include cameras, lenses and accessories. The average weekly rental package price for feature films and commercials has increased since 1992 due to the addition of value-added proprietary lenses and accessories as well as modest price increases on its existing inventory. Management believes that it has been able to achieve increases in the Company's equipment utilization rate because of Panavision's breadth and mix of equipment, along with an MIS system that enables the Company to transfer equipment to areas of greatest demand. The Company's Woodland Hills rental facility, its largest, generated approximately 32% of the Company's camera rental revenue during the year ended December 31, 1997 and has achieved an increase of approximately 25% in utilization of Panaflex cameras from 1993 through 1997. Although the Company believes it can achieve further modest increases in utilization, additional significant increases will be difficult to achieve because of (i) the need to have sufficient inventory available for the peak feature film and television production season (typically the third and fourth quarters), (ii) time needed for service and maintenance, (iii) slippage in movie production start dates and (iv) time needed to prepare and customize equipment for each given project. On June 5, 1997, the Company completed its acquisition (the "FSG Acquisition") of Visual Action Holdings plc's Film Services Group ("Film Services Group" or "FSG") for approximately $61 million in cash. FSG includes camera rental operations which rent primarily non-Panavision manufactured equipment in the United Kingdom, France, Australia and two U.S. cities, Chicago and Dallas, as well as smaller rental operations in New Zealand, Malaysia and Indonesia. Management intends to augment the existing FSG equipment inventory base with Panavision camera systems over time. Management believes that the FSG Acquisition has substantially improved its competitive position internationally as well as in the mid-western U.S. commercial market. AVAILABLE INFORMATION The Company has filed with the Commission a Registration Statement on Form S-1 (the "Registration Statement") under the Securities Act, with respect to the New Notes being offered by this Prospectus. This Prospectus does not contain all the information set forth in the Registration Statement and the exhibits thereto, to which reference is hereby made. Any statements made in this Prospectus concerning the provisions of certain documents are not necessarily complete and, in each instance, reference is made to the copy of such document filed as an exhibit to the Registration Statement. The Registration Statement and the exhibits thereto may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and will also be available for inspection and copying at the regional offices of the Commission located at 7 World Trade Center, New York, New York 10048 and at Citicorp Center, 500 West Madison Street (Suite 1400), Chicago, Illinois 60661. Copies of such material may also be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files periodic reports and other information with the Commission. The Commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants, such as the Company, that file electronically with the Commission and the address of such site is http://www.sec.gov. In the event the Company is not required to be subject to the reporting requirements of the Exchange Act in the future, the Company will be required under the Indenture, pursuant to which the Old Notes have been, and the New Notes will be, issued, to continue to file with the Commission and to furnish to holders of the Notes the information, documents and other reports specified in Sections 13 and 15(d) of the Exchange Act, including reports on Forms 10-K, 10-Q and 8-K, for so long as any Notes are outstanding. CAMERA AND LENS MANUFACTURING. The Company manufactures cameras, lenses and accessories designed by the Company's in-house research and development staff. The Company has over 100 non-union employees at its recently renovated and expanded 150,000 square foot manufacturing facility in Woodland Hills, California, located near Hollywood. Panavision is the only major manufacturer of cameras and lenses located in the Hollywood area, enabling the Company to develop close relationships with filmmakers and television producers as well as enabling the Company to rapidly respond to its customers' needs. While the breadth of the Company's rental inventory has allowed it to adequately service certain segments of the feature film and television industries, until mid-1996 capital constraints precluded Panavision from investing in additional rental equipment to expand its market share in other attractive markets, including both North American and international independent feature films and commercials. In 1997, the Company increased its camera manufacturing production to take advantage of what it believes to be favorable rates of return as well as high demand for its equipment, doubling the number of new camera systems manufactured in 1997 to 72 from 35 in 1996. Panavision expects to manufacture a similar number of camera systems in 1998. The Company believes that its existing manufacturing facility has sufficient capacity to increase manufacturing of camera systems beyond the level achieved in 1997. The Company is in the process of expanding its research and development group, which currently comprises approximately 40 mechanical, software, electronic and optical engineers, draftsmen and machinists. Additionally, the research and development group has a dedicated machine shop that manufactures prototype equipment. These internal capabilities enable the Company to develop proprietary technology in collaboration with filmmakers to address their unique requirements. For example, in 1997, the Company introduced a new sync-sound camera which is lighter and quieter than current Panavision cameras and incorporates enhanced view finding and video monitoring capabilities. In addition, the Company is in the process of developing a digital video assist device that will enable the director and cinematographer to perform certain immediate on-set digital editing functions. LEE LIGHTING AND LEE FILTERS. In addition to manufacturing and renting camera systems, Panavision also rents lighting, lighting grip, power generation and related transportation equipment through Lee Lighting Limited ("Lee Lighting"), the largest lighting rental company in the United Kingdom, as well as through its owned and operated facilities in Chicago, Dallas, Orlando, Toronto, Australia, Malaysia and Indonesia. Recently, Lee Lighting has supplied the entire lighting needs of such major feature films as THE AVENGERS, LOST IN SPACE, FOUR WEDDINGS AND A FUNERAL, ROB ROY, MISSION: IMPOSSIBLE, 101 DALMATIANS, EVITA and THE SAINT. Panavision also manufactures and sells lighting filters and other color-correction and diffusion filters through Lee Filters, located in the United Kingdom, with sales offices in Los Angeles and the New York metropolitan area. COMPETITIVE STRENGTHS Panavision's leading market position is demonstrated by its premier brand name recognition and its market share of over 80% of the major studio feature films and episodic television programs produced in North America in 1997. The Company's leading position results from the following competitive strengths which provide substantial barriers to entry for new competitors. CONTROL OVER MANUFACTURING AND DISTRIBUTION PROCESS. Panavision is the only vertically integrated renter of camera systems to the film and television industry. The Company's control over both the manufacturing and distribution processes enables it to (i) rapidly incorporate technological development and filmmakers' suggestions into new products, (ii) maintain product exclusivity and (iii) offer products with greater quality and higher performance at a premium price. REPUTATION FOR QUALITY AND TECHNOLOGICALLY ADVANCED PRODUCTS. Panavision is recognized as the industry leader in the development of high quality, technologically advanced camera systems and its products have become industry standards. Panavision has received two OSCARS and 18 other Academy Awards granted for Scientific and Technical Achievement, including a 1998 award for the Panavision/Frazier Lens System. In addition to the development of new products, Panavision is also better able to upgrade its existing inventory to meet continually changing market demands, thereby reducing obsolescence, achieving better control of inventory and product availability, and providing its customers with access to the latest technological advances. CLOSE RELATIONS WITH FILMMAKERS. As a result of Panavision's significant relationships with cinematographers, directors and producers and its dominant market position, Panavision gains early access to productions and is able to influence the selection of camera systems. Additionally, Panavision offers instruction and training in the handling of Panavision equipment to young directors and cinematographers while they are still in film school as well as thereafter, thereby developing loyalty to Panavision and providing a foundation for Panavision to sustain its strong market position. RANGE AND BREADTH OF CAMERA EQUIPMENT. Panavision believes that it has the world's largest inventory of camera systems, with over 1,000 cameras and 5,000 lenses. It also offers a broad range of choices, including equipment that is exclusively available through Panavision and its agents. The Company believes that the range and breadth of its camera inventory permit it to serve a greater number of productions throughout the world and make it the only company in the industry with the ability to serve multiple large-scale feature film productions simultaneously. DEDICATION TO CUSTOMER SERVICE. Panavision places special emphasis on customer service. The Company's customer service, repair and maintenance personnel are "on call" and available to assist customers 24 hours a day. In order to provide filmmakers with a high level of support, the Company sends marketing representatives and technicians to film production sets to provide advice or immediate assistance with any equipment needs or questions. The Company assigns to each production a sales representative who possesses skills and experience appropriate to the needs of that production in an attempt to foster a strong and lasting working relationship with the customer. In addition, as part of its customer service, the Company often develops, customizes or procures equipment for specific customers or projects. GROWTH STRATEGY The Company's growth strategy is to increase its market share in the worldwide commercial and feature film markets by leveraging its strong competitive position and brand name in the feature film and television industries in North America. The Company's strategy involves the following elements: INCREASE INVENTORY OF AVAILABLE CAMERA EQUIPMENT. Until mid-1996, the Company's growth was inhibited by equipment shortages resulting from limited manufacturing capacity and capital expenditure constraints in its prior credit facilities. The Company believes that its move to its current manufacturing facility in 1996 as well as its enhanced access to capital will enable the Company to continue to expand its equipment base in order to meet expected market demand and to capture a larger market share, particularly in the worldwide commercial and independent feature film markets. EXPAND NEW PRODUCT DEVELOPMENT. The Company intends to continue developing and manufacturing the next generation of technologically superior cameras, lenses and accessories. The Company is currently rolling out its Millennium camera system and focusing its development efforts on value-added accessories that increase the overall size and rental price of a camera package. The Company's move into a larger manufacturing facility enabled the Company to hire additional personnel and significantly increase its research and development of new products in an effort to extend its leadership in technology and product development and to further facilitate collaborative efforts with filmmakers. For example, the Company has recently introduced a new close focus macro-zoom lens and the Panavision/Frazier Lens System which provide filmmakers with unique creative tools that were previously unavailable. GEOGRAPHICAL EXPANSION AND STRATEGIC ACQUISITIONS. From time to time, the Company has pursued strategic acquisitions, such as the FSG Acquisition, as a means of expanding market share in existing markets and as a gateway to new geographical markets. The Company will continue to evaluate such opportunities as they arise, as well as other opportunities, such as strategic alliances or the expansion of its agent network. THE PANAVISION RECAPITALIZATION On June 4, 1998, as contemplated by (i) the Agreement of Recapitalization and Merger dated as of December 18, 1997 (the "Recapitalization Agreement"), by and among PX Holding Corporation, a Delaware corporation ("PX Holding"), PX Merger Corporation, a Delaware corporation ("PX Merger") and Panavision and (ii) the Amended and Restated Voting and Stockholders Agreement, dated as of April 16, 1998 (the "Stockholders Agreement"), by and among Warburg, Pincus Capital Company, L.P., a Delaware limited partnership ("Warburg"), Mafco Holdings Inc., a Delaware corporation ("Mafco Holdings"), and Panavision, Panavision consummated a merger whereby PX Merger was merged with and into Panavision (the "Merger"), with Panavision as the surviving corporation. Immediately prior to the consummation of the Merger, PX Holding purchased 5,784,199 shares of Panavision's common stock, par value $.01 per share (the "Company Common Stock"), from Panavision at a purchase price of $154,376,801 (the "PX Stock Purchase"). In connection with the Merger, holders of in excess of 88% of the shares of Company Common Stock held by shareholders other than Warburg elected to receive cash for their shares. As a result, pursuant to the Recapitalization Agreement, the right to receive cash for such shares was subject to proration. As a result of the Merger, (i) 5,466,142 shares of Company Common Stock were exchanged for $27.00 per share, or an aggregate of $147,585,240, and (ii) 745,380 shares of Company Common Stock were retained by holders either through election or proration. In addition, as part of the Panavision Recapitalization, Warburg exchanged 88%, or 11,190,960 shares, of the shares of Company Common Stock it beneficially owns (the "Warburg Shares") for preferred stock of Panavision that was redeemed immediately upon consummation of the Merger at a price equivalent to $26.50 in cash per share of Company Common Stock. In addition, pursuant to the Stockholders Agreement, Warburg granted to Mafco Holdings an option to purchase at $30.00 per share of Company Common Stock, and Mafco Holdings granted to Warburg an option to sell at $25.00 per share of Company Common Stock, the 1,526,040 Warburg Shares not exchanged for redeemable preferred stock as described above. Each such option is exercisable in whole, but not in part, during the period beginning one year, and ending two years, following consummation of the Merger. If Mafco Holdings acquired the remaining 1,526,040 shares of Company Common Stock upon the exercise by either Warburg or it of the option described above, then, assuming no changes in the number of shares of Company Common Stock outstanding prior to the date of such exercise, Mafco Holdings would then beneficially own 91% of the shares of Company Common Stock outstanding. The net proceeds of the Offering, borrowings under the New Credit Agreement and the proceeds from the PX Stock Purchase were used to fund the payment of the cash consideration and the fees and expenses in connection with the Merger as well as to retire existing indebtedness and to provide working capital for Panavision. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." In connection with the transactions contemplated by the Recapitalization Agreement, the assets of PX Escrow (consisting of funds held in escrow and deferred charges) and the obligations of PX Escrow under the Notes and the Indenture were assumed by Panavision (the "Panavision Assumption"). As a result of the Merger, PX Holding, a wholly owned subsidiary of Mafco Holdings, acquired a 72% interest in the Company. Warburg owns approximately 19% of the issued and outstanding Company Common Stock and approximately 9% is owned by public stockholders (including management). The following chart sets forth in simplified form the ownership of the common equity of Panavision following consummation of the Panavision Recapitalization. POST-PANAVISION RECAPITALIZATION ORGANIZATIONAL STRUCTURE ------------------------ | Mafco Holdings Inc. | | ("Mafco Holdings") | ------------------------ | |100% | ------------------------ |PX Holding Corporation| 100% | ("PX Holding") |-------------- ------------------------ | | | | ------------------------- | | PX Escrow Corp. | | | ("PX Escrow") | | ------------------------- | 72% - ------------------------- | ------------------------- | Public | | | Warburg, Pincus | | Stockholders |----- | ---- | Capital Company, L.P. | |(including Management) | |9% | 19%| | ("Warburg") | - ------------------------- | | | ------------------------- | | | ------------------------ | Panavision Inc. | | | ------------------------ THE EXCHANGE OFFER <TABLE> <S> <C> SECURITIES OFFERED........................ Up to $217,903,000 principal amount at maturity of 9 5/8% Senior Subordinated Discount Exchange Notes due 2006 which have been registered under the Securities Act. The terms of the New Notes and the Old Notes are identical in all material respects, except for certain transfer restrictions and registration rights relating to the Old Notes and except that, if the Exchange Offer is not consummated by December 1, 1998, interest will accrue on the Old Notes (in addition to the accretion of Original Issue Discount) from and including such date until but excluding the date of consummation of the Exchange Offer payable in cash semiannually in arrears on February 1 and August 1, commencing February 1, 1999, at a rate per annum equal to .50% of the Accreted Value of the Old Notes as of the August 1 or February 1 immediately preceding such interest payment date. See "--Summary Description of the New Notes" and "Description of the Notes--Registration Rights." THE EXCHANGE OFFER........................ The New Notes are being offered in exchange for a like aggregate principal amount of Old Notes. The issuance of the New Notes is intended to satisfy obligations of the Company contained in the Registration Agreement. For procedures for tendering the Old Notes, see "The Exchange Offer--Procedures for Tendering Old Notes." TENDERS; EXPIRATION DATE; WITHDRAWAL.............................. The Exchange Offer will expire at 5:00 p.m., New York City time, on November 9, 1998, or such later date and time to which it is extended (the "Expiration Date"). The tender of Old Notes pursuant to the Exchange Offer may be withdrawn at any time prior to the Expiration Date. Any Old Note not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Exchange Offer. See "The Exchange Offer--Terms of the Exchange Offer; Period for Tendering Old Notes" and "The Exchange Offer--Withdrawal Rights." CERTAIN CONDITIONS TO EXCHANGE OFFER...... The Company shall not be required to accept for exchange, or to issue New Notes in exchange for, any Old Notes and may terminate or amend the Exchange Offer if at any time before the acceptance of the Old Notes for exchange or the exchange of the New Notes for such Old Notes certain events have occurred, which, in the reasonable judgment of the Company, make it inadvisable to proceed with the Exchange Offer and/or with such acceptance for exchange or with such exchange. Such events include (i) any threatened, instituted or pending action seeking to restrain or prohibit the Exchange Offer, (ii) a general suspension of trading in securities on any national securities exchange or in the over-the-counter market, (iii) a general banking moratorium, (iv) the commencement of a war or armed hostilities involving the United States and (v) a material adverse change or development involving a prospective material adverse change in the Company's business, properties, assets, liabilities, financial condition, operations, results of operations or prospects that may affect the value of the Old Notes or the New Notes. In addition, the Company will not accept for exchange any Old Notes tendered, and no New Notes will be issued in exchange for any such Old Notes, at any such time as any stop order shall be threatened or in effect with respect to the Registration Statement of which this Prospectus constitutes a part or the qualification of the Indentures under the Trust Indenture Act of 1939. See "The Exchange Offer--Certain Conditions to the Exchange Offer." FEDERAL INCOME TAX CONSEQUENCES........... The exchange pursuant to the Exchange Offer will not result in gain or loss to the holders or the Company for federal income tax purposes. See "Certain U.S. Federal Income Tax Considerations." USE OF PROCEEDS........................... There will be no proceeds to the Company from the exchange pursuant to the Exchange Offer. See "Use of Proceeds." </TABLE> <TABLE> <S> <C> EXCHANGE AGENT............................ The Bank of New York is serving as exchange agent (the "Exchange Agent") in connection with the Exchange Offer. </TABLE> CONSEQUENCES OF EXCHANGING OR FAILING TO EXCHANGE OLD NOTES Holders of Old Notes who do not exchange their Old Notes for New Notes pursuant to the Exchange Offer will continue to be subject to the provisions in the Indenture regarding transfer and exchange of the Old Notes and the restrictions on transfer of such Old Notes as set forth in the legend thereon as a consequence of the issuance of the Old Notes pursuant to exemptions from, or in transactions not subject to, the registration requirements of the Securities Act and applicable state securities laws. In general, the Old Notes may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. The Company does not currently anticipate that it will register Old Notes under the Securities Act. See "Description of the Notes--Registration Rights." Based on interpretations by the staff of the Commission, as set forth in no-action letters issued to third parties, the Company believes that New Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be offered for resale, resold or otherwise transferred by holders thereof (other than any holder which is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such New Notes are acquired in the ordinary course of such holders' business and such holders have no arrangement with any person to participate in the distribution of such New Notes. However, the Company does not intend to request the Commission to consider, and the Commission has not considered, the Exchange Offer in the context of a no-action letter and there can be no assurance that the staff of the Commission would make a similar determination with respect to the Exchange Offer as in such other circumstances. Each holder, other than a broker-dealer, must acknowledge that it is not engaged in, and does not intend to engage in, a distribution of New Notes and has no arrangement or understanding to participate in a distribution of New Notes. If any holder is an affiliate of the Company, is engaged in or intends to engage in or has any arrangement or understanding with respect to the distribution of the New Notes to be acquired pursuant to the Exchange Offer, such holder (i) could not rely on the applicable interpretations of the staff of the Commission and (ii) must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. Each broker- dealer that receives New Notes for its own account in exchange for Old Notes must acknowledge that such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities and that it will deliver a prospectus in connection with any resale of such New Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for Old Notes where such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company has agreed that, for a period of 180 days after the Expiration Date, it will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." In addition, to comply with the state securities laws, the New Notes may not be offered or sold in any state unless they have been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied with. The offer and sale of the New Notes to "qualified institutional buyers" (as such term is defined under Rule l44A of the Securities Act) is generally exempt from registration or qualification under the state securities laws. The Company currently does not intend to register or qualify the sale of the New Notes in any state where an exemption from registration or qualification is required and not available. See "The Exchange Offer--Consequences of Exchanging or Failing to Exchange Old Notes" and "Description of the Notes--Registration Rights." SUMMARY DESCRIPTION OF THE NEW NOTES The terms of the New Notes and the Old Notes are identical in all material respects, except for certain transfer restrictions and registration rights relating to the Old Notes and except that, if the Exchange Offer is not consummated by December 1, 1998, interest will accrue on the Old Notes (in addition to the accretion of Original Issue Discount) from and including such date until but excluding the date of consummation of the Exchange Offer payable in cash semiannually in arrears on February 1 and August 1, commencing February 1, 1999 at a rate per annum equal to .50% of the Accreted Value of the Old Notes as of the August 1 or February 1 immediately preceding such interest payment date. <TABLE> <S> <C> NEW NOTES OFFERED......................... Up to $217,903,000 principal amount at maturity of 9 5/8% Senior Subordinated Discount Exchange Notes Due 2006, which have been registered under the Securities Act. MATURITY DATE............................. February 1, 2006. YIELD TO MATURITY; INTEREST............... 9 5/8% per annum (computed on a semiannual bond equivalent basis) calculated from February 11, 1998. There will be no periodic payments of interest on the New Notes through February 1, 2002. Thereafter, the New Notes will bear interest at a rate of 9 5/8% per annum, payable semi-annually on February 1 and August 1 of each year, commencing August 1, 2002. ORIGINAL ISSUE DISCOUNT................... The Old Notes were issued at an issue price of $688.38 per $1,000 aggregate principal amount at maturity. Because the New Notes will be treated as a continuation of the Old Notes, which were issued at an original issue discount ("Original Issue Discount") for federal income tax purposes, the New Notes will have Original Issue Discount. Prospective holders of New Notes should be aware that, although there will be no periodic payments of interest on the New Notes through February 1, 2002, accrued Original Issue Discount will be includable, periodically, in a holder's gross income for United States federal income tax purposes in advance of the receipt of cash payments to which such income is attributable. See "Certain U.S. Federal Income Tax Considerations." OPTIONAL REDEMPTION....................... Prior to February 1, 2002, the Notes are redeemable at the option of the Company, in whole but not in part, at a redemption price equal to the Accreted Value on the date of redemption plus the Applicable Premium. The Notes may be redeemed at the option of the Company in whole or from time to time in part at any time on and after February 1, 2002 at the redemption prices set forth herein on the date of redemption, together with accrued and unpaid interest to the date of redemption. Prior to February 1, 2001, in connection with certain public offerings of common stock, the Company may, at its option, redeem Notes at a redemption price equal to 109 5/8% of the Accreted Value of the Notes on the date of redemption, together with accrued and unpaid interest, if any, to the date of redemption; provided, however, that at least $141,637,000 aggregate principal amount at maturity of Notes remains outstanding after each such redemption. See "Description of the Notes--Optional Redemption." CHANGE OF CONTROL......................... Upon a Change of Control, each holder of the Notes will have the right to require the Company to repurchase all or a portion of such holder's Notes at a price equal to the Put Amount on the date of repurchase. See "Description of the Notes--Change of Control." RANKING................................... The Old Notes are, and the New Notes will be, unsecured obligations of the Company and the Old Notes are, and the New Notes will be, subordinate in right of payment to all existing and future Senior Debt of the Company. The Old Notes rank, and the New Notes will rank pari passu in right of payment with all existing and future Senior Subordinated Debt of the Company and senior to all future subordinated debt of the Company, if any is issued. At June 30, 1998, Panavision had outstanding approximately $305 million of Senior Debt, consisting of borrowings under the New Credit Agreement, and $156 million of Senior Subordinated Debt, consisting of the Notes. In addition, the Old Notes are, and the New Notes will be, effectively subordinated to all existing and future liabilities of Panavision's subsidiaries. At June 30, 1998, the outstanding liabilities of such subsidiaries were approximately $44 million. See "Risk Factors--Subordination to Senior Debt and Subsidiary Liabilities" and "Description of the Notes--Subordination." </TABLE> <TABLE> <S> <C> EXCHANGE OFFER; REGISTRATION RIGHTS....... Holders of New Notes are not entitled to any registration rights with respect to the New Notes. Pursuant to the Registration Agreement, PX Escrow and the Company agreed that they would, at their cost, use their best efforts to cause a registration statement to be declared effective under the Securities Act for the exchange of Old Notes for registered notes. The Registration Statement of which this Prospectus is a part constitutes the registration statement for purposes of the Registration Agreement. See "Description of the Notes--Registration Rights." CERTAIN COVENANTS......................... The Indenture under which the Notes were issued contains certain covenants with respect to the Company and its Subsidiaries (as defined herein) that limit, among other things, (i) the incurrence of additional indebtedness by the Company or its Subsidiaries, (ii) the payment of dividends or other distributions or the making of certain other restricted payments by the Company or its Subsidiaries, (iii) the sale of assets of the Company, (iv) certain transactions with affiliates or (v) certain mergers or consolidations or transfers of all or substantially all of the Company's assets. The Indenture also prohibits certain restrictions on distributions from certain subsidiaries. All these limitations and prohibitions, however, are subject to a number of important qualifications. See "Description of the Notes--Certain Covenants." USE OF PROCEEDS........................... The Company will not receive any proceeds from the Exchange Offer. The Company used the net proceeds of the Offering, which were approximately $144 million (net of discounts to the Initial Purchasers and fees and expenses), to finance the Panavision Recapitalization. Pending such use, the Escrowed Funds were held in escrow and invested in accordance with the provisions of the Escrow Agreement (as defined herein). See "Use of Proceeds."
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+PROSPECTUS SUMMARY The following summary information is qualified in its entirety by reference to, and should be read in conjunction with, the more detailed information and financial statements and the notes thereto included elsewhere in this Prospectus. The Company owns the trademarks SKY TRAK(R), SCAT TRAK(R), TRAK International(R), LULL(R), DYNA LUGGER(R), SNORKELIFT(R), WILDCAT(R) and MILLENNIA(TM). Other trademarks appearing in this Prospectus are the property of their respective holders. Unless otherwise indicated, or unless the context otherwise requires, the "Company" or "OmniQuip" as used in this Prospectus refers to OmniQuip International, Inc., its predecessors and subsidiaries, "Investments L.P." refers to Harbour Group Investments III, L.P., and "Uniquip L.P." refers to Uniquip-HGI Associates, L.P. Unless otherwise indicated, all information in this Prospectus assumes that the Underwriters' over-allotment option is not exercised. THE COMPANY The Company is the largest North American manufacturer of telescopic material handlers and, as a result of its recent acquisition of the Snorkel Division ("Snorkel") of Figgie International Inc. ("Figgie"), one of the leading North American producers of aerial work platforms. Other products manufactured by the Company include skid steer loaders and a range of other material handling equipment. OmniQuip's highly versatile products are used in a variety of applications for construction, industrial, maintenance, military and agricultural markets. The Company's principal products are marketed under the well-recognized and highly-regarded SKY TRAK, LULL, SNORKELIFT and WILDCAT brand names. Telescopic material handlers are especially useful in rough terrain environments and congested job sites, where their maneuverability and ability to raise, extend and lower payloads provide significant advantages over more traditional material handling equipment, such as cranes, straightmast forklifts and elevators. The Company's telescopic material handlers have a maximum lift capacity of 5,000 pounds to 10,000 pounds and can position payloads from 28 feet to 54 feet above the ground or 15 feet to 39 feet in front of the machine's chassis. The versatility of these units allows users to lower overall costs by substituting a single telescopic material handler for one or more other types of material handling equipment, as well as for certain labor intensive material handling tasks. The Company believes it manufactures the broadest product line of telescopic material handlers in North America. Shipments of commercial telescopic material handlers increased from approximately 950 units in calendar 1990 to approximately 3,300 units in 1997. Based upon industry reports, the Company believes that its North American market share of 1997 shipments of telescopic material handlers was approximately 36%. In addition, OmniQuip has been the principal supplier since 1988 of telescopic material handlers to the military. The Company has a contract to supply the U.S. Army with a new generation of telescopic material handlers to support the logistics requirements of the Rapid Deployment Forces. The Army has estimated that its requirements under the contract could range up to a maximum of 1,200 ATLAS vehicles, or a maximum contract value of $120 million, over a four-year period. Through December 31, 1997, the Company has sold approximately 100 units under this contract. The Company believes that this contract will enhance its ability to pursue sales to other branches of the United States armed forces and to foreign military agencies. See "Risk Factors--ATLAS Contract." Aerial work platforms are mobile, versatile units designed to position workers and materials easily in elevated work locations. Such highly versatile products allow users to increase productivity in certain labor intensive tasks in an enhanced safety environment compared to equipment traditionally used to reach elevated and difficult to reach positions such as scaffolding and ladders. The Company's broad product line includes self-propelled telescoping and/or articulating boom-type platforms, which have maximum elevation capabilities ranging from 33 feet to 126 feet from ground to platform height and self-propelled scissor-type platforms with maximum elevation capabilities ranging from 15 feet to 40 feet from ground to platform height. The Company also manufactures a small line of truck-mounted and trailer-mounted booms with elevation capabilities ranging from 40 feet to 69 feet in height. Shipments of aerial work platforms marketed under the SNORKELIFT and WILDCAT brand names increased from approximately 1,900 units in 1990 to approximately 4,200 units in 1997. The Company competes principally in selected segments of the material handling, construction and maintenance equipment markets which utilize engines of less than 130 horsepower. The Company believes that these segments have typically experienced a higher level of growth in recent years than general construction equipment markets. North American shipments of construction and allied equipment grew from $30.8 billion in 1990 to $41.6 billion in 1996, representing a nominal compound annual growth rate of 5.1%. According to industry estimates, shipments of telescopic material handlers in North America grew from approximately 2,500 units in 1990 to approximately 9,100 units in 1997, representing a real compound annual growth rate of 20.3%, and sales of aerial work platforms in North America grew from approximately 13,200 units in 1990 to approximately 40,600 units in 1997, representing a real compound annual growth rate of 17.4%. The Company believes higher growth rates for telescopic material handlers and aerial work platforms are attributable to a number of factors, including the following: increased productivity and safety provided by these products, high product versatility, significant growth in demand for equipment rentals, and growth in demand for these products for non-construction applications. The Company was formed in 1995 by Investments L.P. in connection with the acquisition of TRAK International, Inc. ("TRAK"), a manufacturer of telescopic material handlers and skid steer loaders. TRAK was the first company to introduce the arc boom forklift, the precursor to the telescopic material handler, in 1954. In August 1996, the Company acquired the business and substantially all of the assets of Lull Industries, Inc. ("Lull"), a manufacturer of telescopic material handlers, with a small product line of skid steer loaders, articulated forklifts and tenders, masonry tenders and motorized wheelbarrows. Lull's business was founded in 1956. In November 1997, the Company acquired the business and substantially all the assets of Snorkel. Snorkel is a manufacturer of aerial work platforms and was founded in 1959. The Company's strategy is to grow within segments of the material handling and light equipment markets which typically are not dominated by full-line construction equipment manufacturers, which are growing faster than the construction industry generally, and which typically utilize independent dealers for distribution rather than distributorships primarily dedicated to products made by a single manufacturer. The Company intends to achieve its business strategy by providing superior products, pursuing a multiple brand distribution strategy, acquiring complementary businesses, achieving cost savings from the integration of acquired operations, and leveraging its position as a leading North American manufacturer to expand its penetration of global markets. The Snorkel acquisition is consistent with the Company's objective of pursuing complementary acquisitions. Given the similarities in Snorkel's distribution systems, purchased components and manufacturing processes to those at TRAK and Lull, the Company believes that potential synergies exist in each of these areas. The Company will be able to distribute a broader product line to national rental fleets and other customers. Additionally, purchasing synergies may be realized in component purchasing. Finally, the Company believes certain of the manufacturing methods used at TRAK and Lull may be utilized to increase the efficiency of Snorkel's manufacturing processes, including its paint systems and final assembly operations. The Company's principal executive offices are located at 222 East Main Street, Port Washington, Wisconsin 53074, and its telephone number is (414) 268-8965. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Selling Stockholders: U.S. offering.................... 2,880,000 shares International offering........... 720,000 shares ------------------- Total Common Stock offered...... 3,600,000 shares Common Stock to be outstanding 14,260,000 shares after the Offering............... Use of proceeds................... The Company will not receive any proceeds from the sale of the Common Stock offered hereby. Nasdaq Symbol..................... OMQP Dividend Policy................... The Company expects to continue to pay a quarterly cash dividend of $0.01 per share. See "Price Range of Common Stock and Dividend Information." </TABLE> SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA The following summary historical consolidated and unaudited pro forma consolidated financial data were derived from the historical consolidated financial statements of the Company or TRAK, as the predecessor to the Company, and the pro forma financial information of the Company, included elsewhere herein. The information contained in this table should be read in conjunction with "Capitalization," "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Results of Operations and Financial Condition," "Pro Forma Financial Information," "Management's Discussion and Analysis of Pro Forma Results of Operations" and the financial statements included elsewhere herein. <TABLE> <CAPTION> PREDECESSOR(1) COMPANY PRO FORMA(4) -------------- -------------------------------------------------- --------------------- THREE MONTHS THREE FISCAL YEARS ENDED FISCAL YEAR MONTHS OCT. 1, 1994 AUG. 17, 1995 ENDED SEPT. 30, DECEMBER 31, ENDED ENDED THROUGH THROUGH ------------------ --------------- SEPT. 30, DEC. 31, AUG. 16, 1995 SEPT. 30, 1995 1996(2) 1997 1996 1997(3) 1997 1997 -------------- -------------- -------- -------- ------- ------- ------------ -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales............... $75,401 $12,723 $124,861 $264,213 $59,166 $84,575 $421,345 $100,467 Cost of sales........... 57,707 9,787 92,688 192,270 43,887 63,433 318,846 77,714 ------- ------- -------- -------- ------- ------- -------- -------- Gross profit............ 17,694 2,936 32,173 71,943 15,279 21,142 102,499 22,753 Selling, general and administrative expenses............... 10,903 1,670 16,311 27,717 5,755 9,459 43,309 11,467 ------- ------- -------- -------- ------- ------- -------- -------- Operating income........ 6,791 1,266 15,862 44,226 9,524 11,683 59,190 11,286 Interest expense........ 1,379 353 3,434 6,106 2,183 1,805 11,431 2,743 Other finance charges... 1,121 269 2,012 2,182 589 627 1,806 (742) ------- ------- -------- -------- ------- ------- -------- -------- Income before income taxes.................. 4,291 644 10,416 35,938 6,752 9,251 45,953 7,801 Provision for income taxes.................. 1,762 262 4,060 14,556 2,774 3,711 18,633 3,131 ------- ------- -------- -------- ------- ------- -------- -------- Income before extraordinary item and change in accounting principles............. 2,529 382 6,356 21,382 3,978 5,540 27,320 4,670 Extraordinary item, net(5)................. -- -- (314) (782) -- (545) -- -- Cumulative effect of change in accounting principles............. (241)(6) -- -- -- -- -- -- -- ------- ------- -------- -------- ------- ------- -------- -------- Net income.............. $ 2,288 $ 382 $ 6,042 $ 20,600 $ 3,978 $ 4,995 $ 27,320 $ 4,670 ======= ======= ======== ======== ======= ======= ======== ======== Basic and diluted earnings per share:(7)(8) Income before extraordinary item.... $ 0.03 $ 0.56 $ 1.66 $ 0.35 $ 0.39 $ 1.92 $ 0.33 Extraordinary item..... -- (0.03) (0.06) -- (0.04) -- -- ------- -------- -------- ------- ------- -------- -------- Net income............. $ 0.03 $ 0.53 $ 1.60 $ 0.35 $ 0.35 $ 1.92 $ 0.33 ======= ======== ======== ======= ======= ======== ======== </TABLE> <TABLE> <CAPTION> COMPANY -------------------------------- SEPT. 30, -------------------- DEC. 31, 1996(2) 1997 1997(3) -------- -------- -------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Working capital................................ $ 13,393 $ 14,402 $ 59,540 Total assets................................... 139,580 144,298 283,943 Short-term debt................................ 3,875 8,625 10,000 Long-term debt................................. 84,566 25,609 146,749 Stockholders' equity........................... 12,425(9) 70,398(9) 74,466 </TABLE> - -------- (Footnotes on following page) - -------- (1) The Company was organized in 1995 for the purpose of acquiring TRAK, the predecessor company. (2) Amounts as of and for fiscal year ended September 30, 1996 reflect the acquisition of Lull on August 15, 1996. (3) Historical amounts as of and for the three months ended December 31, 1997 reflect the acquisition of Snorkel on November 17, 1997. (4) See "Pro Forma Financial Information" included elsewhere herein. (5) Amount in fiscal year 1996 reflects the write-off of deferred finance charges, net of $200 of income tax benefits, in connection with the refinancing of debt. Amount in fiscal year 1997 reflects the write-off of deferred finance charges, net of $521 of income tax benefits, in connection with the refinancing of debt. Amount in the three months ended December 31, 1997 reflects the write-off of deferred finance charges, net of $371 of income tax benefits, in connection with the refinancing of debt. (6) In October 1994, TRAK adopted Statement of Financial Accounting Standards, No. 106, "Employer's Accounting for Postretirement Benefits Other Than Pensions" (SFAS 106). The cumulative effect of adopting SFAS 106 was to record a charge of $241, net of income tax benefits. (7) Basic and diluted earnings per share is based on weighted-average shares outstanding of 11,250,000 for the period August 17, 1995 through September 30, 1995, for the fiscal year ended September 30, 1996 and for the three months ended December 31, 1996, 12,845,000 for the fiscal year ended September 30, 1997 and 14,255,000 and 14,366,000, respectively, for the three months ended December 31, 1997. (8) Given the historical organization and capital structure of TRAK, as predecessor to the Company, earnings per share information is not considered meaningful for the predecessor. (9) The change in stockholders' equity as of September 30, 1997 versus September 30, 1996 includes $37,516 of proceeds from the Company's initial public offering of common stock which was completed in March 1997.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001026304_buckhead_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001026304_buckhead_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information contained elsewhere in this Prospectus. The shares of Common Stock offered hereby are not deposits or savings accounts or savings deposits and are not insured or guaranteed by the FDIC or any other governmental agency. The Company Buckhead Community Bancorp, Inc. (the "Company") was incorporated under the laws of the State of Georgia on October 15, 1996, primarily to hold all of the capital stock of its proposed national banking subsidiary, The Buckhead Community Bank, N.A. (Proposed) (the "Bank"). The Company may not acquire the capital stock of the Bank without the prior approval of the Federal Reserve Bank of Atlanta (the "Federal Reserve"), as the delegate of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), and the Georgia Department of Banking and Finance (the "Georgia Department"). The Company will file an application for Federal Reserve approval once it obtains preliminary approval of the application for a charter from the United States Office of the Comptroller of the Currency (the "OCC"). The Company initially will engage in no business other than owning and managing the Bank. The Bank The Organizers (as defined below) filed an application with the OCC on November 8, 1996, to charter the Bank as a national banking association. The Organizers also filed an application on November 8, 1996, with the Federal Deposit Insurance Corporation (the "FDIC") for insurance by the FDIC of the deposits of the Bank. The Bank may not conduct any banking business until the OCC grants final approval of the Bank's application and issues the Bank a charter and the FDIC grants deposit insurance to the Bank. The issuance of a charter will depend, among other things, upon compliance with certain legal requirements that may be imposed by the OCC, including initial capitalization of the Bank of an amount which the Organizers believe will be not less than $8,000,000. In order to receive deposit insurance, the Bank must also comply with certain legal requirements that may be imposed by the FDIC. See "The Offering" and "Supervision and Regulation." Additionally, the Company must obtain the approval of the Federal Reserve and the Georgia Department to become a bank holding company before acquiring the capital stock of the Bank. The Bank will engage in a general commercial banking business, emphasizing the needs of small businesses and professionals primarily in the Buckhead area of Atlanta, Georgia (the "Buckhead Area"). The Organizers expect that the Bank will be located near the center of the Buckhead Area, on East Paces Ferry Road between Peachtree Road and Piedmont Road. The Buckhead Area is an affluent section of the City of Atlanta about five miles north of downtown. The Buckhead market area extends roughly from the convergence of I-75 and I-85 at the north end of the downtown connector, northward to the northern city limits of Atlanta, bounded on the east by the DeKalb County line and on the west by the Cobb County line. The Bank will not initially have trust powers. The Bank may in the future offer a full-service trust department, but it cannot do so without the prior approval of the OCC. See "Proposed Business." Marvin Cosgray, the proposed President of the Bank, has over 26 years of experience in the commercial banking industry. The Organizers believe that the proposed President's banking experience and the extensive business experience and contacts of the Organizers in the Buckhead Area should create immediate business opportunities for the Bank. See "Management." The Organizers presently are engaged in completing the tasks necessary to open the Bank, although no assurances can be given that the Bank will open for business or that the projected opening date can be achieved. The principal executive offices of the Company are located at 415 East Paces Ferry Road, N.E., Atlanta, Georgia 30305-3398. The Organizers currently plan for the Bank to be located at the same address. The Organizers The organizers of the Company and the Bank (the "Organizers") are Hugh C. Aldredge, Marvin Cosgray, J. Rex Fuqua, Julian LeCraw, Sr., R. Charles Loudermilk, Sr., Larry P. Martindale and William T. Towles. Additional individuals may be added as Organizers, subject to regulatory approval. All of the Organizers will serve as directors of the Company and the Bank. See "Management." The Organizers (together with members of their immediate families) intend to purchase an aggregate of at least 690,000 shares of the Common Stock to be sold in this offering. The Organizers may subscribe for up to 100% of the shares to be sold in the offering if necessary to help the Company achieve the minimum subscription level necessary to release subscription proceeds from escrow, and some Organizers may decide to purchase additional shares even if the minimum subscription amount has been achieved. Any shares purchased by the Organizers in excess of their original commitment will be purchased for investment and not with a view to the resale of such shares. Because purchases by the Organizers may be substantial, investors should not place any reliance on the sale of a specified minimum offering amount as an indication of the merits of this offering or that an Organizer's investment decision is shared by unaffiliated investors. See "The Offering" and "Management." The Offering <TABLE> <CAPTION> <S> <C> Security Offered Common Stock of the Company, par value $.01 per share Offering Price $5.00 per share Number of Shares Offered Minimum: 1,600,000 Maximum: 2,400,000 Use of Proceeds The Company will use the net proceeds of the offering (gross proceeds less offering expenses, which are estimated to be $40,000) to capitalize the Bank through the purchase of capital stock of the Bank, subject to regulatory approval; to pay organizational expenses of the Company; and to provide working capital. The Company will use a minimum of $7,960,000 of the net proceeds, together with $40,000 of existing capital, to capitalize the Bank of a minimum of $8,000,000. The Company plans to retain sums in excess of the minimum necessary to capitalize the Bank at the Company and initially invest the sums in United States government securities or as a deposit at the Bank. The Company may be required by the OCC </TABLE> to capitalize the Bank at a level in excess of the minimum of $8,000,000, in which case the Company would have to receive net proceeds in the offering in excess of the minimum or obtain additional capital from other sources. If the OCC requires that the Bank be capitalized with an amount in excess of the minimum of $8,000,000, the Company plans to seek additional subscriptions up to the maximum subscription of $12,000,000. The Bank will use the capital received from the sale of its stock to the Company to provide working capital to be used for business purposes, including making loans and investments. See "Use of Proceeds - By the Bank." Return of Less Than If the conditions for releasing subscription Subscription Amount funds from escrow are met and such funds are released but final regulatory approval to commence banking operations is not obtained from the OCC or the FDIC or the Bank does not open for any other reason, it is possible that subscribers could be returned an amount less than their original investment. See "Risk Factors - Return of Less Than Subscription Amount." Conditions to Offering This offering will be terminated and all subscription funds, together with interest actually earned thereon, will be returned promptly to subscribers unless on or before September 30, 1998 (or such later date if the offering is extended by the Company for additional periods not to extend beyond March 31, 1999), (i) the Company has accepted subscriptions and payment in full for a minimum of 1,600,000 shares; (ii) the Company has obtained approval of the Federal Reserve and the Georgia Department to acquire the capital stock of the Bank and thereafter to become a bank holding company; and (iii) the Bank has received preliminary approval of its application for a charter from the OCC and of its application for deposit insurance from the FDIC. Subscription proceeds for shares will be deposited promptly in an escrow account with SunTrust Bank, Atlanta, as escrow agent (the "Escrow Agent"), under the terms of an escrow agreement (the "Escrow Agreement"), pending the satisfaction of the conditions set forth above or the termination of the offering. Subscriptions are binding on subscribers and may not be revoked by subscribers except with the consent of the Company. Any subscription proceeds accepted after satisfaction of the conditions set forth above but before termination of this offering will not be deposited in escrow but will be available for immediate use by the Company to fund offering and organizational expenses and for working capital. See "The Offering." Plan of Distribution Offers and sales of the Common Stock will be made on behalf of the Company primarily by certain of its officers and directors. The officers and directors will receive no commissions or other remuneration in connection with such activities, but they will be reimbursed for reasonable expenses incurred in the offering. Risk Factors An investment in the shares offered hereby involves certain risks, including, among others, lack of an operating history, dependence on key employees of the Bank, significant control of the Company by the Organizers, absence of an existing market for the Common Stock and lack of assurance that an active trading market in the Common Stock will develop, no intention to pay dividends in the foreseeable future, and competition from a number of other financial institutions with substantially greater financial and other resources than the Bank will have. See "Risk Factors."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001026459_aramex_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001026459_aramex_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..3b3b58da0c1a77bbdab9d4b377b4df6e004bc317
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+++ b/parsed_sections/prospectus_summary/1998/CIK0001026459_aramex_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Consolidated Financial Statements, including the Notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated or the context otherwise requires: (i) the 'Company' or 'Aramex' refers to Aramex International Limited, a Bermuda Company, its consolidated subsidiaries and its predecessor entity, and (ii) all information in this Prospectus assumes no exercise of the Underwriters' over allotment option. All references in this Prospectus to '$' shall mean United States dollars. For purposes of this Prospectus, the term 'Station' shall mean all of the Company's stations, including operations through wholly owned subsidiaries, sponsorship agreements, joint venture agreements, agency relationships and technical services and exclusive agency agreements. For the purposes of this Prospectus, the 'Middle East' shall include the following countries: Bahrain, Cyprus, Egypt, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Libya, Oman, the Palestinian Territories, Qatar, Saudi Arabia, Sudan, Syria, Turkey, the United Arab Emirates, and Yemen. For purposes of this Prospectus, the 'Indian Sub-Continent' shall include the following countries: Bangladesh, India, Pakistan and Sri Lanka. THE COMPANY Aramex is a leading provider of express package delivery, freight forwarding and other transportation services primarily to, from and within the Middle East and the Indian Sub-Continent. Since its founding in 1982, the Company has expanded its station network to include 95 locations in 32 countries with approximately 1,400 employees as of April 1, 1998. The Company also offers logistics, trucking and warehousing services to its clients and holds a majority interest in a direct marketing and mail order business, Middle East Direct Marketing ('MED'). From 1995 to 1997, the Company's total revenues increased from $43.6 million to $66.3 million and net income grew from $1.5 million to $3.1 million, respectively. The Company provides its services from its main hubs in Dubai (UAE), London, New York and Amman (Jordan). The Company believes that it has established itself as one of the leading transportation services companies in the Middle East because of its ability to provide a wide array of transportation solutions to its clients, its local market knowledge, reputation for quality service, and its expansive station network. In addition, because the Company does not own or operate its own aircraft, it is not constrained by restrictions on delivery schedules, shipment size or weight, providing it with greater flexibility to serve its clients. As a non-asset based solutions provider, the Company believes that its information technology systems are a significant asset and plans to continue to make significant investments in information systems and technology to provide a continued strong platform for enhanced service and future growth. Historically, the majority of the Company's business has been derived from its express package delivery operations. These express operations, combined with its station network, have provided the Company with a solid foundation for the development of additional revenue sources such as logistics, warehousing and inventory management. The Company has implemented a comprehensive quality control program and believes its efforts have enabled it to achieve a uniform service offering throughout its network of stations and has helped to establish a loyal base of customers. In recognition of this effort, the Company was awarded corporate ISO 9002 certification in December 1997, after receiving similar certification at certain stations beginning in August 1995. Each Aramex station is divided into teams specialized in cross marketing multiple services to industry-specific segments in their local market. Since each team targets one or more industry segments in its local market, it can develop and offer customized solutions for their clients where appropriate. The Company and Airborne Freight Corporation ('Airborne'), the parent of Airborne Express and the third largest domestic air express delivery carrier in the United States, are founding members of the Overseas Express Carrier Network (the 'OEC'). The OEC is a global alliance among certain leading independent express companies that functions as a worldwide delivery network for its members. For tracking and tracing of its express shipments worldwide, the Company utilizes the FOCUS tracking system which is owned and operated by Airborne. Airborne has been a shareholder of the Company since November 1996 and prior to the Offering owns 6.9% of the outstanding Common Stock of the Company. The Company believes that current and forecasted economic growth for the Middle East should result in an increase in demand for its services. According to the Boeing Commercial Airplane Group's ('Boeing') 1996/1997 World Air Cargo Forecast, it has been estimated that real gross domestic product ('GDP') for the Middle East will grow by approximately 3.5% per year from approximately $383 billion in 1995 to approximately $740 billion by 2015. Saudi Arabia, where the Company continues to expand its operations, is the largest market in the Middle East, representing 28% of the region's GDP. Because of its strategic location at the crossroads of Asia, Europe, and Africa, the Middle East is becoming a major center for world air freight distribution. In fact, the Middle East air freight market has grown at a reported average rate of 15% per year since 1995. It was reported by Boeing that, in early 1996, total air traffic through Dubai, where the Company operates one of its major hubs, increased 23% and transshipments increased 41% from 1995. As a result of its expansive station network and its local market knowledge, the Company believes it is well positioned to benefit from the economic growth forecasted for the Middle East which should result in an increased demand for express, freight forwarding and regional trucking and logistics services. The Company's goal is to be one of the leading providers of express package delivery, freight forwarding and logistics services in the Middle East, the Indian Sub-Continent and other contiguous emerging markets and to offer its customers a wide range of distinct delivery and transportation services. The Company intends to achieve this goal by implementing the following strategies: EXPAND MARKET AND GEOGRAPHIC PRESENCE -- The Company is focused on expanding its market and geographic presence in the Middle East, the Indian Sub-Continent and other contiguous emerging markets. The Company is currently deploying additional resources to expand its presence in Saudi Arabia and the Indian Sub-Continent. The emerging markets targeted by the Company, such as the Central Asian Republics and North Africa, are characterized by large populations and growing economies which are liberalizing and opening their markets to local and foreign investment. By expanding its distribution network in these regions, the Company's management believes it can (i) enhance its regional market presence; (ii) expand its customer base; and (iii) reduce its geographic revenue concentration. PROVIDE TOTAL TRANSPORTATION SOLUTIONS -- The Company plans to continue to capitalize on its reputation as a quality service provider of total transportation solutions in its markets. A large part of this strategy involves the continued development by the Company of customized solutions for its clients in the areas of (i) logistics management; (ii) multi-modal regional transportation and distribution (offering the options of express package delivery, air freight forwarding, and ground distribution); (iii) inventory management; and (iv) local warehousing. The Company's 'One Stop Shop' approach is designed to provide its customers with a total solution for their everyday transportation needs. To effectuate this strategy and in order to facilitate the Company's ability to provide comprehensive logistics services, the Company plans to build additional warehouse facilities in Amman and Dubai. CONTINUE EMPHASIS ON TECHNOLOGY -- The Company continues to make significant investments in technology as a vehicle to enhance service, increase sales and foster growth. The Company believes that continuing improvements in its communications network and information systems, such as linking all of the Company's offices via an on-line, real time communications network and the ability of customers to have direct connectivity to the Aramex information network, will yield continued improvements in operations and customer service and improve the Company's results of operations. The Company's on-going technology initiatives include, among others, the continued implementation of remote hand-held bar code and signature scanners to replace the manual process, an express information system to provide production and cost related information and analysis, and a software system that allows customers to track shipments from their own personal computer. MARKET ITS SERVICES THROUGH ARAMEX TEAMS -- The Company plans to continue to market its services through cross functional, personalized customer teams which possess the marketing skills, local market knowledge, service expertise and industry experience necessary to identify and effectively address individual client's transportation needs. This strategy provides each station with a degree of flexibility and independence to develop customized transportation solutions which the Company believes provides a competitive advantage in its markets. The Company believes its team based structure is an innovative substitute to the traditional sales force format and facilitates the cross-marketing of the Company's services. The Company is committed to strengthening and expanding the number of its customer teams by recruiting individuals who demonstrate leadership qualities, are motivated and energetic and comprehend the notion of teamwork and customer service. GROW THROUGH STRATEGIC ALLIANCES AND ACQUISITIONS -- The Company plans to pursue strategic alliances and may acquire complementary businesses in order to maximize penetration in new and existing geographic markets, expand the range of commercial services and increase the Company's name recognition. Whenever possible, the Company considers increasing its ownership in its joint ventures as well as converting its agency agreements to Company-controlled joint ventures, which permits the consolidation of these operations with the Company's operations. For example, in 1997, the Company acquired a 51% interest in the Ramallah (the Palestinian Authority) operations which were previously operated by a service provider agency. The Company's mailing address is P.O. Box 960913, Amman, 11196 Jordan and its principal executive office is located at 2 Badr Shaker Alsayyab Street, Um Uthayna, Amman, Jordan and the Company's telephone number is 962-6-5522192. The Company maintains an Internet site on the World Wide Web at http://www.aramex.com. Information contained in the Company's Internet site shall not be deemed to be a part of this Prospectus. ------------------------ ARAMEX(Registered) is a registered service mark of the Company. This Prospectus includes trademarks and service marks of companies other than those of the Company. ------------------------ THE OFFERING <TABLE> <S> <C> Common Stock offered hereby: By the Company........................................ 500,000 shares By the Selling Shareholders........................... 500,000 shares Common Stock to be outstanding after the Offering(l).... 4,929,688 shares Use of Proceeds......................................... For expansion of warehouse facilities, investments in technology and working capital and other general corporate purposes. See 'Use of Proceeds.' Nasdaq Symbol........................................... 'ARMXF' Risk Factors............................................ See 'Risk Factors.' </TABLE> - ------------------ (1) Excludes as of March 31, 1998, an aggregate of (i) 100,000 shares of Common Stock reserved for issuance upon exercise of warrants issued to the underwriter of the Company's initial public offering and its designees (the 'Commonwealth Warrants'), and (ii) 300,000 shares of Common Stock issuable upon exercise of outstanding options. See 'Principal and Selling Shareholders.'
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001026471_yurie_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001026471_yurie_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..ed081828d79ea57a0eeefb2a687aaa351136dd18
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1998/CIK0001026471_yurie_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and the Financial Statements, including the Notes thereto, appearing elsewhere in this Prospectus. THE COMPANY Yurie Systems, Inc. ("Yurie" or the "Company") designs, manufactures, markets and services asynchronous transfer mode ("ATM") access products for telecommunications service providers, Internet service providers, corporate end users and government end users. ATM is a standard for packaging and switching digital information that facilitates high speed information transmission with a high degree of efficiency. End users of telecommunications services have traditionally maintained separate wide area networks ("WANs") for transmitting voice, data, video and other electronic information among geographically dispersed locations. ATM technology is conducive to consolidating these networks. The network consolidation brought about by employing ATM access products can provide savings in WAN communication costs and simplify network management. Yurie is a leading supplier of ATM access products. The Company's LDR100, introduced in February 1995, was one of the first commercially available ATM access products. The LDR200, designed primarily for telecommunications carriers and Internet service providers, was released in September 1996. The LDR50, designed for mid-sized to large corporate offices, was released in March 1997. The Company designed its ATM access products to be flexible and scaleable, so that customers can realize the benefits of ATM while preserving their investments in existing equipment. The LDR products adhere to industry-wide technical standards, allowing users to integrate the products into current networks operating with other standards-compliant products. Yurie's proprietary adaptive queue management algorithm ("AQueMan") allows the LDR products to reduce network congestion while maintaining quality of service. The Company's Limitless ATM Network Protocol ("LANET") is capable of transporting ATM traffic over circuits of varying speed and quality, including poor quality circuits. The Company's ATM access products incorporate a variety of value-added features, including compact size, scaleability, reliability, and a broad variety of access interfaces. The Company's strategy centers on maintaining its technological leadership, developing the telecommunications service provider, private label partner and corporate end user markets while continuing to pursue government end user markets, developing international markets and building strategic relationships. To enhance its distribution efforts and pursue the telecommunications service provider and corporate end user markets, the Company has established a nationwide direct sales force which currently consists of 23 sales personnel. In pursuit of this strategy, Yurie has entered into private-label partner agreements with Bay Networks, and Lucent Technologies, Inc. These agreements permit each of Bay and Lucent to market and sell the Company's LDR products under non-exclusive licenses into commercial and government markets for three years, subject to renewal. None of these agreements have minimum purchase guarantees. Previously, Yurie and AT&T entered an agreement (the "AT&T Agreement"), under which AT&T had exclusive license to sell Yurie's products to government customers and, with Yurie's consent, to certain non-governmental customers. Pursuant to a recent amendment to the AT&T Agreement, AT&T no longer has minimum purchase guarantees nor holds an exclusive license to sell Yurie products in government markets. See "Business-- Strategic Relationships." The Company has a significant customer relationship with Splitrock Services, Inc., a Texas corporation that provides communications services specifically configured to meet the needs of large network users ("Splitrock'). Splitrock purchased the underlying network assets of Prodigy Services Corporation, an Internet service provider (the "Prodigy Network") in 1997. During the first nine months of 1997, Splitrock purchased $11.5 million of LDR products from the Company. Yurie and Splitrock have an agreement (the "Splitrock Agreement") that requires Splitrock to purchase a minimum of $20.0 million of LDR products in the period from July 1997 to December 1998. Through September 30, 1997, Splitrock had purchased $6.6 million of LDR products under this agreement. Under the Splitrock Agreement, Yurie provides services to support deployment and implementation of Yurie's products in Splitrock's network on a time and materials basis. Kwok L. Li, the Chief Technology Officer and Vice Chairman of the Board of Yurie, is the majority shareholder and Chairman of the Board of Directors of Splitrock. The Company was founded in February 1992 by Dr. Jeong H. Kim, the Company's Chief Executive Officer and Chairman of the Board of Directors. The Company began developing ATM products in 1994 and began product shipments in February 1995. Prior to 1994, the Company's business operations consisted primarily of telecommunications consulting and related service activities. In January 1997, the Company won Data Communications' Hot Product Award for WAN gear and in May 1997, Business Week magazine named the Company America's #1 Hot Growth Company. Yurie's executive offices are located at 8301 Professional Place, Landover, Maryland 20785-2237, its telephone number is (301) 352-4600, its e-mail address is info@yurie.com and its World Wide Web site address is http://www.yurie.com. RECENT DEVELOPMENTS On December 1, 1997, Yurie acquired Data Labs, Inc., a privately-held Delaware corporation ("Data Labs"), in a stock-for-stock merger (the "Data Labs Merger"). Yurie issued 358,414 shares of its common stock in the Data Labs Merger in exchange for all of the outstanding capital stock of Data Labs and the Data Labs common stock underlying all of the vested stock options and one- half of the unvested stock options held by Data Labs directors, officers and employees. The Data Labs Merger was treated as a pooling-of-interests for financial reporting purposes. Accordingly, supplemental consolidated financial statements referencing such a transaction are included in this Prospectus. On February 2, 1998, Yurie announced the signing of a three-year private- label partner agreement with Ericsson, Inc. ("Ericsson"), the U.S. subsidiary of Telefonaktiebolaget LM Ericsson. Under this agreement, Yurie granted Ericsson a non-exclusive license to resell Yurie's LDR products worldwide under the Ericsson name. Ericsson anticipates that it will provide systems integration and equipment management services related to Yurie's products to the Internet service providers to whom Ericsson will sell Yurie's equipment. There are no minimum purchase guarantees under this agreement. On February 5, 1998, Yurie announced that the Company's sales to Splitrock in the fourth quarter of 1997 totaled approximately $5.9 million, including product that Splitrock is expected to purchase or lease from Ericsson. Splitrock's purchases and/or leases from Ericsson will be credited against its minimum purchase guarantee in the Splitrock Agreement. On February 2, 1998, the Company announced that Ericsson and Splitrock had signed a letter of intent in which Ericsson agreed to provide Splitrock with certain services as well as LDR products that Ericsson has purchased or will purchase from Yurie.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001027429_physicians_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001027429_physicians_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..ae92f98fc9a2e90739596ceccfc9efdbeb119bc9
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the financial statements and notes thereto appearing elsewhere in this Prospectus and accordingly should be read in conjunction with such information, financial statements and notes thereto. Each prospective investor is urged to read this Prospectus in its entirety. As used in this Prospectus, unless the context otherwise requires, the "Company" refers to Physicians' Specialty Corp., a Delaware corporation, and its wholly-owned subsidiaries (i) PSC Management Corp. ("PSC Management"), PSC Acquisition Corp., ENT & Allergy Associates, Inc. and South Florida Otolaryngology, Inc. and (ii) ENT Center of Atlanta, Inc., Atlanta ENT Center for Physicians, Inc. and Atlanta-AHP, Inc. (collectively, the "ENT Networks"). Unless otherwise indicated, (i) all pro forma information in this Prospectus gives effect to the acquisition of the assets or equity of the Practices (as defined) and the Probable Practice Acquisitions (as defined) as if all of the transactions were consummated on January 1, 1997 and (ii) the information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. Investors should carefully consider the information set forth under the heading "Risk Factors." THE COMPANY Physicians' Specialty Corp. is the leading physician practice management company focusing on affiliating with and managing physician practices specializing in the treatment and management of diseases and disorders of the ear, nose and throat, head and neck ("ENT"). The Company provides comprehensive practice management services to ENT physician practices and health care providers, including specialists practicing in the fields of allergy, audiology, oral surgery, plastic surgery and sleep medicine (collectively, the "Related Specialties" or "Related Specialists"). The Company seeks to affiliate with physician practices and health care providers who provide high quality, cost effective medical and surgical services to fee-for-service patients and managed care enrollees. Services provided by the Company include financial and administrative management, enhancement of clinical operations, access to ancillary services, network development and payor contracting services, including the negotiation and administration of capitated arrangements. The Company is currently affiliated with 48 physicians, one temporo-mandibular joint ("TMJ") specialist and 52 allied health care professionals with 43 clinical offices in Alabama, Florida, Georgia and Illinois and expects to add 30 physicians and 25 allied health care professionals with 17 clinical offices in the New York metropolitan area and South Florida in connection with the Probable Practice Acquisitions. The Company holds, manages and administers capitated ENT managed care contracts covering an aggregate of approximately 332,000 enrollees of health maintenance organization ("HMO") plans of United HealthCare of Georgia, Inc. ("United HealthCare") and Cigna HealthCare of Georgia, Inc. ("Cigna") and enrollees of HMOs which have contracted with FPA Medical Management, Inc. ("FPA"). The Company's objective is to position its affiliated physicians as the leading providers of ENT and Related Specialty medical and surgical services in each of its markets. The Company's strategy is to establish a market presence by affiliating with and managing a market leading ENT practice which serves as a platform for the implementation of the Company's market development and physician practice management model. Following an initial practice affiliation, the Company seeks to affiliate with additional ENT and Related Specialty practices within that market. In March 1997, the Company acquired substantially all of the assets of Atlanta Ear, Nose & Throat Associates, P.C. ("Atlanta ENT"), an ENT physician practice in metropolitan Atlanta (the "Reorganization"), which expanded from three physicians in 1982 to 17 physicians in 1997. As a result of increasing the number of physicians at Atlanta ENT, utilizing allied health care professionals and expanding the geographic coverage of the practice, Atlanta ENT's revenue increased from $1.6 million in 1982 to $20.3 million in 1997, representing compound annual revenue growth of 18.5% during such period. By capitalizing on its experience in managing and administering capitated contracts with managed care organizations and developing provider panels, Atlanta ENT increased the number of enrollees to which its physicians provided ENT medical and surgical services from approximately 50,000 in 1982 to over 300,000 in 1997. In connection with the Reorganization, the Company also acquired substantially all of the assets of three additional ENT physician practices with five physicians in metropolitan Atlanta. Since the Reorganization, the Company has further expanded its presence in the Atlanta market by acquiring substantially all of the assets of five additional ENT physician practices with 12 physicians. As a result of these additional affiliations, the Company currently has 34 affiliated physicians and 40 allied health care professionals with 32 clinical offices in the greater Atlanta market and the Company believes Atlanta ENT is the largest independent (non-academic) ENT physician group practice in the United States. In addition to entering the Atlanta market in March 1997, the Company acquired substantially all of the assets of a two physician ENT practice in Birmingham, Alabama and since the Reorganization, the Company has entered into two additional markets by affiliating with a four physician ENT practice in the metropolitan Chicago area and three ENT physician practices employing nine physicians in South Florida. In May 1998, the Company entered into a stock purchase agreement (the "PDI Stock Purchase Agreement") relating to the affiliation with six ENT physician practices associated with Physicians' Domain, Inc., a New York based ENT physician practice management company ("Physicians' Domain" and together with the six ENT practices, "PDI"). Upon completion of the PDI transaction, the Company will add 26 physicians and 21 allied health care professionals with 14 clinical offices in the New York metropolitan area. In addition, the Company has non-binding letters of intent relating to the proposed acquisition of assets or equity of two ENT physician practices consisting of an aggregate of four physicians and four allied health care professionals with three clinical offices in South Florida (together with PDI, the "Probable Practice Acquisitions"). Although the Company expects to complete these acquisitions in the near future, there can be no assurance that any of these acquisitions will be completed or that the Company will be able to integrate any of these practices into its business. Although the Company primarily focuses on the growth of its affiliated practices, the Company also intends to evaluate and selectively expand into new markets. The Company believes its strategy of expanding its affiliated practices in existing markets optimally positions the practices for growth by adding physicians, allied health care professionals and ancillary services, which better enables the affiliated practices to meet the needs of patients and payors and realize operating efficiencies. This strategy is also designed to allow the Company's affiliated physicians to enhance practice performance by achieving or obtaining same practice revenue growth, geographic expansion, expansion in the breadth of services offered and managed care contracts. Based upon a 1997 American Group Practice Association study, the Company estimates that revenue generated by ENT physicians in the United States exceeded $6.2 billion in 1996. According to the American Academy of Otolaryngology-Head and Neck Surgery, Inc. (the "Academy"), there were approximately 8,600 ENT physicians in the United States as of December 31, 1996. Based upon membership in the Academy, the Company estimates that approximately 70% of all ENT practices consist of individual practitioners or small group practices (less than four physicians). The Company has observed that ENT physicians and Related Specialists are increasingly seeking to form larger group practices and affiliate with physician practice management companies which understand the needs of ENT physicians and can enhance practice performance. The Company believes that ENT physicians and Related Specialists desire to affiliate with the Company because of (i) the Company's ENT and Related Specialty focus, (ii) its management, (iii) its managed care expertise, (iv) the availability of expansion capital, (v) the management resources necessary to effectively manage the practice and develop ancillary services and (vi) the access to ENT specific proprietary management information systems, all of which are frequently unavailable to independent groups and solo specialty practitioners. The Company was incorporated in Delaware in July 1996. The Company's executive offices are located at 1150 Lake Hearn Drive, Suite 640, Atlanta, Georgia 30342 and its telephone number is (404) 256-7535. THE OFFERING Common Stock offered by the Company....... 2,000,000 shares Common Stock offered by the Selling Stockholders.............................. 114,000 shares Common Stock to be outstanding after the Offering.................................. 8,515,863 shares (1) Use of proceeds........................... To pay the cash portion of the purchase price of the PDI transaction, and to repay certain outstanding indebtedness of PDI, if the PDI transaction is consummated, for working capital and general corporate purposes, for the cash component of future acquisitions, capital equipment and information systems, and to pay a consulting fee. See "Use of Proceeds." Nasdaq National Market symbol............. ENTS - ------------------------------ (1) Excludes (i) 1,100,000 shares of Common Stock reserved for issuance under the Company's 1996 Stock Option Plan, under which options to purchase 646,940 shares of Common Stock have been granted at exercise prices ranging from $6.80 to $12.125 per share, (ii) 275,000 shares of Common Stock reserved for issuance under the Company's 1996 Health Care Professionals Stock Option Plan, under which options to purchase 65,000 shares of Common Stock have been granted at exercise prices ranging from $6.00 to $11.50 per share, (iii) 220,000 shares of Common Stock issuable upon exercise of the IPO Warrants (as defined) at an exercise price of $10.80 per share, (iv) 250,000 shares of Common Stock reserved for issuance under the Company's 1997 Employee Stock Purchase Plan, (v) an aggregate of 301,779 shares of Common Stock to be issued to certain affiliated physicians beginning in September 1998 and (vi) shares of Common Stock to be issued in connection with the Probable Practice Acquisitions with a value at the time of issuance of approximately $783,000. See "Business--Acquisition of ENT Practices--Post Reorganization Acquisitions," "--Probable Practice Acquisitions," "Management--Stock Option and Purchase Plans" and "Description of Capital Stock." SUMMARY COMBINED FINANCIAL DATA <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, 1997 ------------------------------------------------------ PRO FORMA FOR PRO FORMA FOR COMPLETED AND COMPLETED PROBABLE PRACTICE ACTUAL (1) ACQUISITIONS (2)(3) ACQUISITIONS (2)(4) ---------- ------------------- ------------------- (IN THOUSANDS, EXCEPT SHARE DATA) <S> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue Management fees......... $ 10,974 $ 25,511 $ 45,557 Capitation revenue...... 3,619 4,876 4,876 Net patient service revenue................... 967 1,263 1,263 ---------- ---------- ---------- Net revenue............... 15,560 31,650 51,696 Expenses Provider claims, wages, benefits.................. 7,819 14,829 22,818 General and administrative............ 4,371 9,588 17,460 Depreciation and amortization.............. 377 1,108 2,585 ---------- ---------- ---------- Operating expenses........ 12,567 25,525 42,863 ---------- ---------- ---------- Operating income.......... 2,993 6,125 8,833 Net income................ $ 2,060 $ 3,960 $ 4,591 ========== ========== ========== Diluted earnings per share..................... $ 0.42 $ 0.57 $ 0.65(7) Weighted average shares outstanding............... 4,966,778 6,926,508 7,038,456(7) Supplemental system-wide revenue(5).............. $ 25,191 $ 46,274 $ 70,771 <CAPTION> THREE MONTHS ENDED MARCH 31, 1998 --------------------------------------------------------- PRO FORMA FOR PRO FORMA FOR COMPLETED AND COMPLETED PROBABLE PRACTICE ACTUAL (1) ACQUISITIONS (2)(3)(4) ACQUISITIONS (3)(4) ---------- ---------------------- ------------------- (IN THOUSANDS, EXCEPT SHARE DATA) <S> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue Management fees......... $ 5,924 $ 6,155 $ 11,167 Capitation revenue...... 1,165 1,165 1,165 Net patient service revenue................... 309 309 309 ---------- ---------- ---------- Net revenue............... 7,398 7,629 12,641 Expenses Provider claims, wages, benefits.................. 3,319 3,415 5,412 General and administrative............ 2,257 2,350 4,318 Depreciation and amortization.............. 283 299 668 ---------- ---------- ---------- Operating expenses........ 5,859 6,064 10,398 ---------- ---------- ---------- Operating income.......... 1,539 1,565 2,243 Net income................ $ 957 $ 968 $ 1,126 ========== ========== ========== Diluted earnings per share..................... $ 0.14 $ 0.14 $ 0.16(7) Weighted average shares outstanding............... 7,033,786 7,033,786 7,107,433(7) Supplemental system-wide revenue(5).............. $ 12,004 $ 12,281 $ 18,405 </TABLE> <TABLE> <CAPTION> MARCH 31, 1998 ----------------------------------------- ACTUAL PRO FORMA (6) ------------------- ------------------- <S> <C> <C> <C> OPERATING DATA: Number of affiliated physicians (including physicians employed by the Company).......................... 48* 79* Number of allied health care professionals.......... 51 77 Number of other employees........................... 328 441 Number of clinical locations........................ 42 60 Number of capitated covered lives................... 332,405 332,405 </TABLE> - ------------------------------ * Includes one TMJ specialist. <TABLE> <CAPTION> MARCH 31, 1998 ------------------------------------------------------------------ PRO FORMA AS ACTUAL (1) PRO FORMA (2)(6) ADJUSTED (2)(6)(7) ------------------- ------------------- ---------------------- (IN THOUSANDS) <S> <C> <C> <C> BALANCE SHEET DATA: Working capital............. $ 11,028 $ 7,190 $ 17,963 Total assets................ 32,625 56,352 62,925 Total debt.................. 912 21,587 10,387 Stockholders' equity........ 26,430 27,212 44,985 </TABLE> - ------------------------------ (1) The historical consolidated financial information should be read in conjunction with the consolidated financial statements of the Company and the notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere herein. The consolidated financial statement data for the year ended December 31, 1997 have been derived from and are qualified by reference to the audited consolidated financial statements of the Company included elsewhere herein, which have been audited by Arthur Andersen LLP, the Company's independent public accountants. The consolidated financial statement data for the three months ended March 31, 1998 have been derived from the unaudited interim financial statements of the Company. (2) The summary unaudited pro forma combined financial data should be read in conjunction with the financial statements of the Company, Atlanta ENT, the ENT Networks, Cobb Ear, Nose & Throat Associates, P.C. ("Cobb") and Ear, Nose & Throat Associates, P.C., a medical practice whose shareholders own 50% of the equity of Physicians' Domain ("ENT Associates"), and the notes thereto included elsewhere herein, the unaudited pro forma combined financial statements of the Company and the notes thereto included elsewhere herein and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The summary unaudited pro forma combined data does not purport to represent what the Company's financial position or results of operations actually would have been had such transactions in fact occurred on the dates indicated, or to project the Company's financial position or results of operations for any future date or period. The pro forma adjustments are based on currently available information and certain assumptions that the Company believes are reasonable under the circumstances. (3) Represents the unaudited pro forma combined results of operations for the Company's affiliated practices (excluding Probable Practice Acquisitions) as if the acquisition of the assets or equity of these practices had occurred on January 1, 1997. (4) Represents the unaudited pro forma combined results of operations for the Company's affiliated practices and the Probable Practice Acquisitions (including the PDI practices, which consist of 26 physicians with 14 clinical offices in the New York metropolitan area) as if the acquisition of the assets or equity of the Company's affiliated practices and the Probable Practice Acquisitions had occurred on January 1, 1997. (5) The unaudited supplemental system-wide revenue is being presented for supplemental purposes only and should be read in conjunction with the Company's financial statements. In accordance with a recently issued Consensus Opinion issued by the Emerging Issues Task Force of the FASB ("EITF 97-2"), the Company is evaluating pertinent criteria contained in each of its management services agreements. Based upon the provisions of EITF 97-2, the Company anticipates that during 1998 it will begin consolidating the operating results of the majority of its managed physician practices. Upon adoption of consolidation, all previously issued Company financial statements will be restated to reflect consolidation of revenue. This restatement will not affect the Company's previously reported operating income. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001027584_wesley_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001027584_wesley_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. Unless otherwise stated in this Prospectus, references to (i) the "Company" or "Wesley Jessen" shall mean Wesley Jessen VisionCare, Inc., its consolidated subsidiaries and their respective predecessors; (ii) the "Predecessor" shall mean the operations of the Wesley Jessen division of Schering-Plough Corporation prior to the acquisition thereof by Bain Capital, Inc. ("Bain Capital") and management on June 28, 1995 (the "Wesley Jessen Acquisition"); and (iii) "Barnes-Hind" shall mean the contact lens business of the Barnes-Hind division of Pilkington plc ("Pilkington") prior to the acquisition thereof by the Company on October 2, 1996 (the "Barnes-Hind Acquisition," and together with the Wesley Jessen Acquisition, the "Acquisitions"). Statement of operations data presented herein on a pro forma basis give effect to, among other things, the Barnes-Hind Acquisition and the other transactions related thereto as if the Barnes-Hind Acquisition and such other transactions had occurred on January 1, 1996. See "Unaudited Pro Forma Financial Data." This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in such forward-looking statements. THE COMPANY Wesley Jessen is the leading worldwide developer, manufacturer and marketer of specialty soft contact lenses, based on its share of the specialty lens market. The Company's products include cosmetic lenses, which change or enhance the wearer's eye color appearance; toric lenses, which correct vision for people with astigmatism; and premium lenses, which offer value-added features such as improved comfort for dry eyes and protection from ultraviolet ("UV") light. The Company offers a broad range of both conventional contact lenses, which can typically be used for up to 24 months, and disposable contact lenses, which are intended to be replaced at least every two weeks. Founded in 1946 by pioneers in the contact lens industry, the Company has a long-standing reputation for innovation and new product introductions. The Company was acquired by Bain Capital and management in June 1995, and in October 1996 the Company strengthened its product offerings, technology and distribution capabilities through the acquisition of Barnes-Hind. For the year ended December 31, 1996, the Company's pro forma net revenues were $250.0 million and its pro forma operating profit was $25.9 million. The contact lens industry is large and rapidly growing. In 1995, manufacturers' sales of contact lenses worldwide totaled $1.8 billion, representing a compound annual growth rate of 11% from $1.1 billion in 1990. According to industry analysts, the U.S. market for contact lenses is expected to grow by approximately 10% per year through the year 2000. The Company believes that market growth outside the United States will likely exceed domestic growth because of lower contact lens penetration rates internationally. Future growth in the contact lens market is expected to result from (i) continued increases in the number of wearers, as more people use contact lenses as an alternative to eyeglasses, and (ii) increased revenues per wearer, as specialty products and disposable lenses grow in popularity. Because the hard contact lens portion of the industry is relatively mature, the Company expects that most future growth will occur in the soft lens portion, which is comprised of the clear lens segment (lenses that do not provide value-added features) and the specialty lens segment. The Company operates primarily in the specialty segment of the soft lens market, where it has the leading share in each of the cosmetic and premium lens segments and the second leading share in the toric lens segment. The Company has the leading position in the specialty segment of the soft lens market as a whole, which, at $600 million in net sales, accounted for approximately 30% of industry sales volume in 1996 and is projected to grow at approximately 15% per year through the year 2000. In recent years, in both the clear and specialty lens segments, there has been a pronounced shift in consumers' preferences toward disposable lenses and away from conventional lenses, which has led to a significant increase in contact lens expenditures per wearer. The Company estimates that currently more than 35% of U.S. soft lens wearers use disposable lenses, up from 21% in 1993. The Company believes that its leading portfolio of disposable specialty lenses has positioned it to benefit from the preference shift toward disposable lenses. The Company also offers a complete line of conventional and disposable clear lenses, which are positioned as companion products to the Company's cosmetic lenses. According to an independent research firm, more than 70% of all contact lens prescribers in the United States offer the Company's products, which permits the Company to rapidly launch new categories of products. Wesley Jessen develops proprietary technologies, manufacturing processes and products through a combination of its in-house staff of more than 50 engineers and scientists and Company-sponsored research by third-party experts. The Company markets and sells its products to consumers through the second largest advertising campaign in the industry and to eyecare practitioners through its 190-person salesforce and network of 67 independent distributors, which together sell the Company's products in more than 75 countries. Wesley Jessen believes that several characteristics of the contact lens industry, including the chronic need for corrective eyewear, the high degree of consumer loyalty to contact lens brands, significant barriers to entry and the industry's projected growth, make it an attractive market for the Company to serve. Competing successfully in the contact lens industry requires, among other things, (i) a significant investment in sales and marketing in order to persuade wearers to switch to a new product; (ii) the development and cost- efficient application of sophisticated manufacturing processes required to produce contact lenses; (iii) U.S. Food and Drug Administration ("FDA") product clearances; and (iv) a patent portfolio covering materials, design and processes. As a result, no new significant competitors have entered the soft contact lens industry in the last ten years. The Company believes it has achieved its leading worldwide market position in specialty soft contact lenses because of the following competitive strengths: . HIGH-QUALITY BRANDED PRODUCTS. Wesley Jessen produces a broad range of high-quality contact lenses that meet customers' demand for improved cosmetic, comfort, ease-of-care and vision-correction features, and are sold under brand names recognized by ophthalmologists and optometrists worldwide. . SUCCESSFUL DEVELOPMENT AND INTRODUCTION OF NEW PRODUCTS. The Company has a strong track record of developing new specialty contact lens products, with the five new product lines introduced since 1994 accounting for more than 30% of the Company's pro forma net sales in the year ended December 31, 1996. . BROAD PATENT PORTFOLIO. Wesley Jessen believes that its intellectual property, including more than 70 U.S. patents in product design, materials and manufacturing processes, makes imitation of the Company's products difficult, supports the Company's strong gross margins and provides the Company with a competitive advantage. . ESTABLISHED SALES AND DISTRIBUTION NETWORK. The Company believes its salesforce and distributor network constitute the largest and most sophisticated sales organization in the specialty contact lens segment, contributing to its strong relationships with eyecare practitioners. . STRONG INTERNATIONAL MARKET PRESENCE. For the year ended December 31, 1996, Wesley Jessen derived approximately 45% of its pro forma net sales from sales outside the United States. The Company's specialty contact lens products have leading market shares in Europe, Japan and Latin America. . LOW-COST, PROPRIETARY MANUFACTURING CAPABILITIES. The Company produces substantially all of its contact lens products in four state-of-the-art manufacturing facilities, which apply proprietary technology, allow the Company to be a flexible, low-cost manufacturer of specialty lenses and have sufficient capacity to meet the Company's rapidly growing needs for several years. . EXPERIENCED MANAGEMENT WITH A PROVEN RECORD OF IMPROVING PROFITABILITY. The Company's senior management, who on average have more than 10 years of experience in the contact lens industry, have increased the Company's operating margin 44 percentage points, comparing the six months immediately prior to the Wesley Jessen Acquisition with the comparable period in 1996. The Company's principal objective is to leverage these competitive strengths into continued expansion of its contact lens business in the faster-growing specialty contact lens segment and continued growth in revenues and earnings per share. The Company's strategy for achieving this objective is to (i) capitalize on favorable industry trends; (ii) increase the Company's market share using targeted marketing programs; (iii) develop and successfully launch new products, particularly category-creating products such as the Company's new line of disposable lenses offering UV protection; (iv) increase the international penetration of the Company's products; (v) realize synergies through completing the integration of Barnes-Hind; and (vi) benefit from the Company's significant operating leverage by utilizing excess manufacturing capacity, investing in new low-cost manufacturing and distribution technologies and achieving economies of scale in development, manufacturing and distribution. In addition to the above strategies for growth, the Company regularly considers the expansion of its contact lens business through acquisitions, joint ventures and other strategic alliances. THE IPO. In February 1997, the Company consummated an initial public offering (the "IPO") of its Common Stock, which included the sale by the Company of 2,821,000 shares of Common Stock at an initial public offering price of $15.00 per share. Proceeds from the sale of the Common Stock were used to reduce the Company's indebtedness outstanding under its then existing credit agreement. Immediately prior to the IPO, the Company effected a 3.133-for-one stock split of the existing Common Stock (the "Stock Split") and reclassified all classes of capital stock into shares of Common Stock (the "Reclassification"). The IPO and the application of the net proceeds therefrom, the Stock Split, the Reclassification and the refinancing of the then-existing bank credit agreement are collectively referred to herein as the "IPO Transactions." THE SECONDARY OFFERING. In August 1997, the Company completed a secondary offering of 4,341,040 shares of its Common Stock, of which 500,000 shares were sold by the Company and 3,841,040 shares were sold by certain selling stockholders, at a price of $23.50 per share (the "August 1997 Offering"). In connection with such offering, the Company amended and restated its then- existing bank credit agreement to, among other things, increase its borrowing availability to $135 million (as amended and restated, the "Bank Credit Agreement"). RECENT DEVELOPMENTS. The Company is currently in discussions with another contact lens manufacturer regarding a potential acquisition by the Company. If completed, the Company believes that this acquisition would be considered significant (as measured under Rule 3-05 of Regulation S-X). To date, no definitive agreements relating to such potential acquisition have been executed by the parties and, as a result, no assurances can be given that such acquisition will be completed.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001027706_netvalue_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001027706_netvalue_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..85506bd2e6becd8a6684525eb99ff6967ecfe097
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and the financial statements and notes thereto, appearing elsewhere in this Prospectus. Each prospective investor is urged to read this Prospectus in its entirety. Unless otherwise indicated, all information contained in this Prospectus, including share and per share data, assumes (i) no exercise of the Underwriter's over-allotment option or any other options or warrants outstanding as of the date hereof and (ii) no conversion of any preferred stock outstanding as of the date hereof. See "Description of Capital Stock." The Company netValue, Inc. (the "Company") is a development stage company whose products incentivize consumers to purchase products and services sold across all categories of trade. The Company has developed a patent-pending process to deliver coupons, discounts and other promotional incentives to Internet users. The netValue system utilizes various sophisticated and unique targeting engines to deliver these purchase incentives. The Company has also developed a technology to address coupon industry concerns regarding fraudulent coupon redemption. The Company's revenues will be generated by pursuing a combination of two business plan strategies. One strategy follows a wholesale software-licensing model. The other strategy follows a direct to consumer branded web site model. For the wholesale service, the Company plans to generate revenues through a combination of licensing fees and transaction fees. For its own branded web site, the Company plans to generate revenues through transaction fees and advertising fees. The Company provides software and backend systems that allow its wholesale business partners to market their own uniquely branded promotional commerce service. Potential business partners of the Company include manufacturers, service providers, national retailers, local merchants, wholesale distributors, traditional web site publishers and Internet Service Providers (the "Business Partners"). The Company currently has developed and plans to initially market three separate products to meet the needs of its Business Partners and various consumer segments. These products are Coupons OnlineSM, PromoCache SM and i-ValueSM. The Company's Coupons OnlineSM product allows manufacturers and service providers to deliver targeted, secure coupons and other incentives to consumers from any Internet web site. Consumers use the Company's web browser plug-in software to access and print coupon offers and other promotions from the web sites of manufacturers and marketers desiring to feature single product promotional offers. The Company's systems provide online targeting and validation for each consumer as well as delivery and validation of coupons and other targeted offers. The Company's PromoCache SM product is wholesaled to a broader range of manufacturers, retailers and distributors as well as more traditional web site publishers and Internet Service Providers. PromoCache SM creates themed promotional offers, in short time spans, from any web site. It automatically aggregates national and local offers from multiple databases using a series of simultaneous targeting engines and criteria. Consumers then view their own unique offer site, the equivalent of a personalized discount catalog. The Company's i-ValueSM product creates a desktop channel on the personal computers of consumers who subscribe to this service. It allows retailers, manufacturers and web site publishers to deliver targeted, secure coupons and other incentives to these consumers. Consumers subscribe to the service and receive electronic coupons and promotional incentives which are updated on a regular basis. Promotional offers can be individually tailored to meet each consumer's product category and brand shopping preferences. The Company began generating revenues during the first half of 1998. The Company generated over $70,000 from several major consumer package good manufacturers who began utilizing and marketing the Company's products. Separately, the Company has also entered into a licensing agreement with IQ Value, LLC ("IQ") and is scheduled to receive $3,000,000 in licensing fees. As of June 30, 1998, the Company had earned $1,250,000 of this fee. Accordingly, the Company has generated total revenues through June 30, 1998 of approximately $1,300,000. The Company has also signed major national retailers to contracts and is in negotiation with several other manufacturers and retailers. The Company was incorporated as a Delaware corporation on July 16, 1996 and is the successor by merger (the "Merger") to Coupons Online, L.L.C. ("COL"), a New Jersey limited liability company formed in December 1994 ("COL"). See "Certain Transactions - The Merger." All references in this Prospectus to the "Company" with respect to periods prior to July 16, 1996 are to COL. The Company's address is 1960 Bronson Road, Building No. 2, Fairfield, Connecticut 06430. Its phone number is (203) 319-7000. The Company's web site is located at www.netvalueinc.com. The Offering <TABLE> <CAPTION> <S> <C> Common Stock offered by the Company............................ 3,600,000 shares Common Stock outstanding before the Offering(1)................ 11,868,756 shares Common Stock to be outstanding after the Offering(1)........... 15,468,756 shares Use of proceeds by the Company................................. The Company plans to use the net proceeds from this Offering, estimated to be $15,385,000, in the following approximate amounts: $4,634,000 to repay short term notes payable including interest, $870,000 to pay outstanding accounts payable due, $183,500 to settle litigation in which the Company is a defendant and $9,697,500 to provide funds for working capital and general corporate purposes. See "Use Of Proceeds." </TABLE> - ----------------------- (1) Does not include 540,000 shares of Common Stock issuable upon the exercise of the Underwriter's over-allotment option, 4,029,750 shares of Common Stock issuable upon the exercise of outstanding options and warrants, 2,733,750 of Common Stock issuable to Rozel International Holdings Limited ("Rozel") upon the conversion of 218,700 shares of Series A Preferred Stock, and 10,000 shares of Common Stock issuable to Golden Eagle Partners, a creditor of the Company. Summary of Selected Financial Data The following summary of selected financial data should be read in conjunction with the financial statements and notes thereto appearing elsewhere herein. <TABLE> <CAPTION> Year Ended December 31, ----------------------- December 16, 1994 Three Months Ended (inception) through March 31, (Unaudited) March 31, 1998 1997 1998 (Unaudited) 1995 1996 1997 ---- ---- ---- <S> <C> <C> <C> <C> <C> <C> Statement of Operations Data (1) Revenues $ 0 $ 0 $ 0 $ 0 $ 72,000 $ 72,000 Operating expenses 746,945 3,316,522 9,364,898 3,822,153 2,158,681 15,604,188 Loss from operations (746,945) (3,316,522) (9,364,898) (3,822,153) (2,086,681) (15,532,188) Other income (expense) (615) 2,428 (1,870,339) (225,836) (791,384) (2,659,910) Net loss $(747,560) $(3,314,094) $(11,235,237) $(4,047,989) $(2,878,065) $(18,192,098) March 31, 1998 (Unaudited) -------------------------- Actual Pro Forma As Adjusted ---------- Transactions (4) Transactions (3) (5)(6) ---------------- ----------------------- Balance Sheet Data Working capital (deficit) $ (5,925,693) $2,323,535 $ 9,726,590 Total assets 1,406,730 2,492,000 13,332,057 Total liabilities 6,216,911 168,465 2,845,846 Notes payable and accrued interest (2) 3,251,065 (581,535) 0 Stockholders' equity (deficit) $ (4,810,181) $2,323,535 $10,486,211 </TABLE> (1) The historical financial data for the period from January 1, 1996 to September 18, 1996 and for the years prior to 1996 represents historical financial data for COL (predecessor to the Company). See Notes 1 and 2 of Notes to Financial Statements. (2) Notes payable and accrued interest amounts are included in the Total liabilities line item. (3) "As Adjusted" reflects the actual balances as of March 31, 1998 (unaudited) for each captioned item included under Balance Sheet Data, plus the sum of the Pro Forma Transactions and "As Adjusted" Transactions. (4) Includes 1998 proceeds from the sale of preferred stock and the proceeds from the Distribution and Licensing Agreement which the Company entered into with IQ Value, L.L.C. (the "IQ Agreement"). See Pro Forma Transaction table below. (5) Adjusted to reflect repayment of certain notes payable, accrued interest and other liabilities arising from the sale of the shares of Common Stock offered hereby and the application of the net proceeds thereof as described under "Use of Proceeds." See "As Adjusted" Transactions table below. (6) Does not include 540,000 shares of Common Stock issuable upon the exercise of the Underwriter's over-allotment option, 4,029,750 shares of Common Stock issuable upon the exercise of outstanding options and warrants, 2,733,750 shares of Common Stock issuable to Rozel International Holdings Limited ("Rozel") upon the conversion of 218,700 shares of Series A Preferred Stock, and 10,000 shares of Common Stock issuable to Golden Eagle Partners, a creditor of the Company. See "Use of Proceeds," "Capitalization" and "Underwriting." Pro Forma Transactions <TABLE> <CAPTION> (a) (b) (c) (d) Total ----- ----- ----- ----- ----- <S> <C> <C> <C> <C> <C> Working capital (deficit) $2,492,000 $ 0 $ 13,750 $(182,215) $2,323,535 Total assets 2,492,000 750,000 (750,000) 2,492,000 Total liabilities 750,000 (763,750) 182,215 168,465 Notes payable and accrued interest (763,750) 182,215 (581,535) Stockholders' equity (deficit) $2,492,000 $ 0 $ 13,750 $(182,215) $2,323,535 </TABLE> (a) Subsequent to March 31, 1998, the Company issued an aggregate of 249,200 shares of Series A Preferred Stock to Rozel and received aggregate proceeds of $2,492,000. Rozel subsequently converted 80,000 shares of Series A Preferred Stock to 1,000,000 shares of Common Stock. At the option of either the Company or Rozel, all shares of Series A Preferred Stock are convertible at any time into 12.5 shares of Common Stock. See "Description of Capital Stock - Preferred Stock." The Company sold shares of Series A Preferred Stock to raise additional funds needed to satisfy its working capital needs from January 1, 1998 through June 30, 1998. (b) Proceeds received from the IQ Agreement pursuant to which the Company received $500,000 in March 1998 (which was recorded as deferred revenue at March 31, 1998) and $750,000 upon the execution of the agreement in April 1998 (which the Company intends to record as deferred revenue). The Company intends to recognize license fee revenue from the IQ Agreement when the product is delivered to IQ. See "Business - Marketing and Sales Strategy - Distribution and Licensing Agreement with IQ Value, L.L.C."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001028339_new-era_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001028339_new-era_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary should be read in conjunction with, and is qualified in its entirety by, the more detailed information, including "Risk Factors" and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. THE COMPANY New Era of Networks, Inc. ("NEON" or the "Company") develops, markets and supports enterprise application integration ("EAI") software and services. The Company's architectural platform, NEONet, provides organizations with a structured software platform for the rapid and efficient integration and ongoing maintenance of disparate systems and applications across the enterprise. NEON's packaged software solutions support EAI across popular hardware platforms, operating systems, and database types. The NEONet architecture consists of four product categories: Enterprise Integration Engine, Enterprise Business Applications, Application Integration Libraries and Tools and Utilities. With the acquisition of Menhir Limited ("Menhir") in September 1997, the Company increased its international presence and added to its product portfolio Rapport, a customer management and contact information system developed primarily for the banking industry. Organizations are increasingly seeking to integrate powerful new software applications that operate across the enterprise and also serve as interfaces to customers and suppliers. At the same time, organizations are seeking to better leverage their existing information systems and take advantage of their prior technology investments by integrating previously independent application systems and databases. Effective application integration strategies are critical to an organization's ability to respond to changing market demands, seize new market opportunities, improve customer service and realize planned improvements in business processes. Organizations have historically addressed the need to integrate applications through a number of limited integration techniques, typically implemented in an ad hoc manner, addressing specific integration requirements as they arise over time. Accordingly, traditional techniques generally require extensive manual custom software coding, provide limited functionality, flexibility and scaleability, and require a costly and burdensome ongoing maintenance process. According to Gartner Group, Inc., an information technology industry research firm, 35% to 40% of all programming effort in a typical organization is devoted to developing and maintaining the extract and update programs whose only purpose is to transfer information between different databases. The Gartner Group refers to the complex morass of individual unstructured integration among disparate applications as "interapplication spaghetti." In January 1996, the Company introduced NEONet, an integrated solution that addresses the interapplication spaghetti problem and provides a scaleable infrastructure that supports rapid and efficient updates to integration implementations. The NEONet solution provides a comprehensive platform for EAI, including a family of software products for high-quality, high-performance development and ongoing management of application integration among disparate systems. NEONet consists of the following four main product categories for Enterprise Application Integration: (i) Enterprise Integration Engine, MQIntegrator, provides a robust messaging and queuing foundation that supports asynchronous interprocess and cross-platform communication, delivering superior synchronization and recoverability; (ii) Business Applications provide a comprehensive set of software solutions that enable applications to interoperate seamlessly, easily and efficiently; (iii) Application Integration Libraries pre-load leading packaged software format libraries from specific packaged applications into the Formatter, further enhancing the ease of installing and integrity of these applications; (iv) Tools and Utilities provide several extension tools and utilities to facilitate EAI, including NEONweb, NEONreplication, NEONmsgtrak and NEONaccess. NEON's objective is to establish NEONet as the leading standard for application integration across the enterprise. Key elements of the Company's strategy include leveraging strategic relationships, expanding into additional vertical markets, developing cross-industry applications, expanding global sales capabilities and maintaining technological leadership. Through March 31, 1998, the Company shipped products or provided services to approximately 160 customers worldwide. Representative customers of the Company include Abbey National Treasury Services, Aetna, Inc., Chase Manhattan Bank, CIGNA Corporation, Citibank, Disclosure Incorporated, Discover Brokerage Direct, Eaton Corporation, GTE Corporation, JP Morgan & Co., Merrill CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING." Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Physicians Computer Network, Monsanto Company, State Street Global Advisors, and Sumitomo Bank of California. As part of its strategy, the Company has established reseller and joint marketing relationships with IBM, PeopleSoft, Inc., Candle Corporation, Sun Microsystems, Inc., Hewlett-Packard Company, SAP AG, Ernst & Young, SunGard Financial Systems, Scopus Technology, Inc., Oracle Corporation, Tandem/Compaq and NIWS (Japan). The Company was incorporated in Illinois in June 1993, commenced operations in January 1994, and was reincorporated in Delaware in December 1995. Unless the context otherwise requires, references in this Prospectus to "NEON" or the "Company" refer to New Era of Networks, Inc., a Delaware corporation and its subsidiaries. The Company's principal executive offices are located at 7400 East Orchard Road, Suite 230, Englewood, Colorado 80111. Its telephone number is (303) 694-3933. THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Company................. 1,928,500 shares Common Stock Offered by the Selling Stockholders.... 1,071,500 shares Common Stock to be Outstanding after the Offering... 11,142,166 shares(1) Use of proceeds..................................... General corporate purposes, including working capital. See "Use of Proceeds." NASDAQ National Market Symbol....................... NEON Risk Factors........................................ The Common Stock offered hereby involves a high degree of risk. See "Risk Factors." </TABLE> - --------------- (1) Based upon shares outstanding as of March 31, 1998 (assuming no exercise of options after March 31, 1998). Excludes (i) 2,649,999 shares of Common Stock reserved for issuance pursuant to the Company's employee benefit plans, under which options to purchase 2,177,985 shares of Common Stock were outstanding as of March 31, 1998 at a weighted average exercise price of $9.09. --------------------- SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE DATA) <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, --------------------------------- ---------------------- 1995 1996 1997(1) 1997 1998 --------- --------- --------- --------- ---------- <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues: Software licenses........................... $ -- $ 3,383 $ 15,970 $ 2,447 $ 6,573 Services and maintenance.................... 1,271 3,762 6,676 1,227 3,009 ------- ------- ------- ------- ------- Total revenues................................ 1,271 7,145 22,646 3,674 9,582 Cost of revenues.............................. 751 3,328 5,343 1,050 1,748 ------- ------- ------- ------- ------- Gross profit................................ 520 3,817 17,303 2,624 7,834 Income (loss) from operations................. (1,490) (5,733) (4,251) (783) 496 Net income (loss)............................. $ (1,503) $ (5,672) $ (3,507) $ (784) $ 792 Net income (loss) per common share, basic..... $ (1.15) $ (4.19) $ (0.64) $ (0.57) $ 0.09 Net income (loss) per common share, diluted... $ (1.15) $ (4.19) $ (0.64) $ (0.57) $ 0.08 Weighted average shares of Common Stock outstanding, basic(2)....................... 1,308,997 1,353,276 5,479,151 1,375,606 9,154,642 Weighted average shares of Common Stock outstanding, diluted(2)..................... 1,308,997 1,353,276 5,479,151 1,375,606 10,166,297 </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1997 MARCH 31, 1998 ----------------- ------------------------- ACTUAL AS ADJUSTED(3) ------- -------------- <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments......... $22,724 $21,032 $69,982 Working capital........................................... 30,987 31,827 80,777 Total assets.............................................. 40,229 40,846 89,796 Stockholders' equity...................................... 34,731 36,354 85,304 </TABLE> - --------------- (1) Results include a $2.6 million charge for acquired in-process research and development. (2) See Note 2 of Notes to Consolidated Financial Statements for an explanation of the weighted average common shares outstanding used to compute net income (loss) per share. (3) Reflects the sale of 1,928,500 shares of Common Stock offered by the Company hereby at an assumed public offering price of $27.0625 per share, after deducting estimated underwriting discounts and commissions and estimated offering costs payable by the Company, and the application of the net proceeds therefrom. See "Capitalization" and "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001028637_corgi_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001028637_corgi_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the financial statements and notes thereto appearing elsewhere in this Prospectus. Except as otherwise noted, the term the "Company" refers to Zindart Limited and its subsidiaries (including Hua Yang), the term "Zindart" refers to Zindart Limited and its subsidiaries (excluding Hua Yang) and the term "Hua Yang" refers to Hua Yang Holdings Co., Ltd., its main operating subsidiary, Hua Yang Printing Holdings Co., Limited, and its other subsidiaries. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. THE COMPANY The Company is a turnkey manufacturer of high-quality die-cast, injection-molded and paper products that require a significant degree of engineering and hand-assembly expertise to produce. The Company manufactures die-cast collectibles, collectible holiday ornaments and toys and, through its acquisition of Hua Yang, hand-made books, specialty packaging and other paper products. The Company is headquartered in Hong Kong and its manufacturing operations are located in the neighboring Guangdong Province of the People's Republic of China (the "PRC"). The Company addresses the market need for vendors that can manufacture high-quality products in the required volumes and in a timely and cost-effective manner. The Company provides a turnkey manufacturing service that enables it to satisfy customers' requirements at every stage in the production process, including component sourcing, product engineering and model making, computer-aided mold design and production, and manufacturing and packaging of the finished product. This coordinated, one-stop production process provides the Company's customers with (i) shortened lead times from design to production, (ii) a single participant in the manufacturing process instead of multiple participants and (iii) increased efficiency, resulting in lower per-unit costs. The Company's customers include many well-known marketers of die-cast and injection-molded giftware and collectibles, as well as packagers and publishers of books. Customers for die-cast and injection-molded products include Hallmark Cards, Inc. ("Hallmark"), The Ertl Company ("Ertl"), Mattel(R) Toys ("Mattel(R)") and Hasbro, Inc. Customers for books, paper and packaging products include Mattel(R), Disney Publishing, Inc., Intervisual Books, Inc., Reader's Digest, Inc., The Metropolitan Museum of Art and Golden Books, Inc. The Company has successfully developed long-term relationships with many of its principal customers. The Company has been a leading supplier of die-cast collectibles to Ertl since 1978. The Company has also been a leading supplier of collectible holiday ornaments to Hallmark since 1982. Most recently, the Company expanded its business relationship with Mattel(R) to include die-cast collectibles, substantially increasing its sales to this key customer. In February 1998, Zindart acquired Hua Yang, a leading printer and manufacturer of hand-made books, specialty packaging and other paper products. The acquisition provides Zindart with its own packaging operation, which is an integral part of providing its customers with a fully-integrated turnkey manufacturing service. The Hua Yang Acquisition broadens Zindart's product lines and customer base, and is consistent with its goal of becoming the leading producer of high-quality hand-assembled consumer products in the PRC. Additionally, management believes that the acquisition will yield economies of scale through the consolidation of financial and administrative functions. The Company's manufacturing operations are strategically located within approximately 60 miles from Hong Kong. The PRC provides the Company with access to a large pool of engineers and technically-trained craftsmen, as well as an inexpensive labor force. In September 1997, the Company completed the construction of a large, modern facility for its die-cast and injection-molded products located on a 20-acre site in Dongguan, Guangdong Province (the "Dongguan Facility"). This new location encompasses 895,000 square feet of production and production support space as well as 385,000 square feet of dormitory space that can accommodate up to 10,000 employees. The Dongguan Facility enables the Company to provide dedicated production space for selected customers. The Company's hand-made book, specialty packaging and paper product manufacturing facilities are located between Dongguan and Hong Kong in Shenzhen (the "Shenzhen Facility"). The Company's net sales on a pro forma basis giving effect to the acquisition of Hua Yang increased 14.7% to $95.6 million in fiscal 1997 from $83.3 million in fiscal 1996. For the nine months ended December 31, 1997, net sales on a pro forma basis increased 17.8% to $88.8 million from $75.3 million in the nine months ended December 31, 1996. Zindart's principal executive offices are located at Flat C&D, 25/F Block 1, Tai Ping Industrial Centre, 57 Ting Kok Road, Tai Po, N.T., Hong Kong, its telephone number is 011-852-2665-6992 and its fax number is 011-852-2664-7066. The Company's e-mail address is investor@zindart.com. THE OFFERING Securities offered by the Company.................. 1,000,000 ADSs, each representing one Share. Securities offered by the Selling Shareholders....... 2,000,000 ADSs, each representing one Share. Shares to be outstanding after the Offering......... 8,399,667 Shares, of which 4,733,000 are represented by ADSs.(1) Use of proceeds............ For repayment of a portion of the indebtedness incurred in connection with the Hua Yang Acquisition and for general working capital purposes. The Company will not receive any of the net proceeds from the sale of ADSs by the Selling Shareholders. See "The Hua Yang Acquisition," "Use of Proceeds" and "Description of Senior Credit Facility." Over-allotment Option...... The Company and the Selling Shareholders have granted the Underwriters options to purchase up to a total of 450,000 additional ADSs solely for the purpose of covering over-allotments, if any. See "Underwriting." Nasdaq National Market symbol................... ZNDTY. - --------------- (1) Based on the number of Shares and ADSs outstanding at January 31, 1998. Includes 666,667 Shares issued to the shareholders of Hua Yang at the closing of the Hua Yang Acquisition, but excludes 333,333 Shares potentially issuable to such shareholders in 1999. See "The Hua Yang Acquisition." Also excludes 188,000 Shares reserved for issuance upon the exercise of outstanding options at an exercise price of $9.13 per Share and 476,500 Shares reserved for future grant under the Company's equity incentive plan. Except as otherwise noted herein, all information contained in this Prospectus assumes that (i) the Hua Yang Acquisition is completed, (ii) the distribution of all Shares by Zindart Pte Limited, a holding company that owns a majority of the Company's outstanding Shares, to its shareholders is completed and (iii) the Over-allotment Option will not be exercised. See "The Hua Yang Acquisition" and "Underwriting." This Prospectus includes trademarks of companies other than the Company. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following summary consolidated financial data are of Zindart alone, without giving any retroactive effect to the Hua Yang Acquisition. See "The Hua Yang Acquisition." The following summary consolidated statement of operations data for the years ended March 31, 1993, 1994, 1995, 1996 and 1997 and the following summary consolidated balance sheet data as of March 31, 1997 were derived from the audited financial statements of Zindart alone that are not included elsewhere in this Prospectus. The following summary consolidated statement of operations data for the nine months ended December 31, 1996 and 1997 and the following summary balance sheet data as of December 31, 1997 are derived from the unaudited financial statements of Zindart alone, which are not included elsewhere in this Prospectus and which, in the opinion of management, contain all adjustments necessary for a fair presentation of such data. The following summary consolidated financial data have been prepared in accordance with U.S. GAAP, except that they have not been restated to give effect to the Hua Yang Acquisition as a reorganization of companies under common control. The summary unaudited pro forma consolidated statement of operations data of the Company give effect to the Hua Yang Acquisition as if it had occurred (i) on April 1, 1996 for the year ended March 31, 1997 and (ii) on April 1, 1997 for the nine months ended December 31, 1997, with the expenses relating to the Hua Yang Acquisition recorded in the nine months ended December 31, 1997. The summary unaudited pro forma consolidated balance sheet data give effect to the Hua Yang Acquisition as if it had occurred on December 31, 1997. The summary pro forma financial data set forth below reflect pro forma adjustments that are based upon available information and certain assumptions that the Company believes are reasonable. The pro forma financial data are not necessarily indicative of the results that would have been achieved had such transactions been consummated as of the dates indicated or that may be achieved in the future. The following summary consolidated financial data should be read in conjunction with "The Hua Yang Acquisition," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Description of Senior Credit Facility," "Pro Forma Financial Data" and the Consolidated Financial Statements of the Company and Hua Yang and the notes thereto contained elsewhere in this Prospectus. <TABLE> <CAPTION> PRO FORMA ------------------------- NINE MONTHS ENDED NINE MONTHS YEARS ENDED MARCH 31, DECEMBER 31, YEAR ENDED ENDED ---------------------------------------------------- ------------------- MARCH 31, DECEMBER 31, 1993 1994 1995 1996 1997 1996 1997 1997 1997 -------- -------- -------- -------- -------- -------- -------- ---------- ------------ (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales.................. $ 35,603 $ 35,583 $ 36,879 $ 46,930 $ 62,207 $ 48,670 $ 55,960 $ 95,616 $ 88,773 Cost of goods sold......... (27,309) (25,037) (25,644) (34,116) (45,732) (36,280) (39,216) (69,388) (61,393) -------- -------- -------- -------- -------- -------- -------- ---------- ---------- Gross profit............. 8,294 10,546 11,235 12,814 16,475 12,390 16,744 26,228 27,380 Selling, general and administrative expenses................. (5,080) (6,351) (6,806) (6,498) (8,945) (6,560) (9,002) (15,136) (14,919) Interest income (expense), net...................... (1) (21) 91 (194) (723) (572) 291 (3,560) (1,555) Other income (expense), net...................... 122 80 502 (406) 400 175 160 340 (349) Amortization of goodwill... -- -- (10) (10) (10) (7) (7) (615) (464) -------- -------- -------- -------- -------- -------- -------- ---------- ---------- Income before income taxes.................. 3,335 4,254 5,012 5,706 7,197 5,426 8,186 7,257 10,093 Provision for income taxes.................... (302) (436) (483) (488) (635) (464) (701) (781) (1,221) -------- -------- -------- -------- -------- -------- -------- ---------- ---------- Income before minority interests.............. 3,033 3,818 4,529 5,218 6,562 4,962 7,485 6,476 8,872 Minority interests......... -- (83) (337) (622) (887) (734) (606) (887) (606) -------- -------- -------- -------- -------- -------- -------- ---------- ---------- Net income............... $ 3,033 $ 3,735 $ 4,192 $ 4,596 $ 5,675 $ 4,228 $ 6,879 $ 5,589 $ 8,266 ======== ======== ======== ======== ======== ======== ======== ========== ========== Earnings per common share.................... Basic.................... $ 0.61 $ 0.75 $ 0.84 $ 0.92 $ 1.11 $ 0.85 $ 1.02 $ 0.97 $ 1.12 ======== ======== ======== ======== ======== ======== ======== ========== ========== Diluted(1)............... $ 1.02 $ 1.11 ======== ========== Weighted average number of common shares outstanding(2) Basic.................... 5,000 5,000 5,000 5,000 5,103 5,000 6,719 5,769 7,386 ======== ======== ======== ======== ======== ======== ======== ========== ========== Diluted.................. 6,760 7,426 ======== ========== </TABLE> <TABLE> <CAPTION> MARCH 31, 1997 DECEMBER 31, 1997 --------- ----------------------------------- PRO FORMA PRO AS ACTUAL ACTUAL FORMA ADJUSTED(3) --------- ------- ----------- ----------- (UNAUDITED) <S> <C> <C> <C> <C> BALANCE SHEET DATA: Cash and bank deposits...................................... $12,531 $13,194 $ 8,802 $ 10,031 Working capital............................................. 18,207 21,084 30,195 31,424 Property, machinery, equipment and capital leases, net...... 11,746 19,831 29,310 29,310 Total assets................................................ 45,611 59,030 97,136 98,365 Short-term debt(4).......................................... 2,361 646 1,284 1,284 Long-term debt and capital lease obligations, non-current portion................................................... 1,402 1,005 31,772 21,772 Shareholders' equity........................................ 29,484 38,379 38,392 49,621 </TABLE> - ------------------------------ (1) Diluted earnings per common share reflects the dilution that would have resulted from the exercise of stock options. Pro forma diluted earnings per common share is computed by dividing net income for the period by the weighted average number of common shares outstanding and all dilutive securities outstanding during the period and is adjusted for the issuance of 666,667 Shares, which represents the number of Shares issued at the closing of the Hua Yang Acquisition. See "The Hua Yang Acquisition." (2) The pro forma weighted average number of common shares outstanding is adjusted for the issuance of 666,667 Shares, which represents the number of Shares issued at the closing of the Hua Yang Acquisition. See "The Hua Yang Acquisition." (3) As adjusted to reflect the sale of 1,000,000 ADSs by the Company at an assumed public offering price of $13.25 per ADS and the application of the net proceeds therefrom. See "Use of Proceeds" and "Description of Senior Credit Facility."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001028751_probusines_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001028751_probusines_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..d61ed374c13da51dfe9ad572318c2af82277a115
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION, INCLUDING "RISK FACTORS" AND THE FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION AND GIVES EFFECT TO THE THREE-FOR-TWO SPLIT OF THE COMPANY'S COMMON STOCK (THE "STOCK SPLIT") EFFECTED IN THE FORM OF A STOCK DIVIDEND PAID ON AUGUST 7, 1998. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. THE COMPANY The Company is a leading provider of employee administrative services for large employers. The Company's primary service offerings are payroll processing, payroll tax filing, benefits administration, including the enrollment and processing of flexible benefits plans and COBRA programs, and human resources software. The Company's proprietary PC-based payroll system offers the cost-effective benefits of outsourcing and high levels of client service, while providing the flexibility, control, customization and integration of an in-house system. As of June 30, 1998, the Company provided services to approximately 1,400 clients and provided payroll processing services to approximately 510 clients with an aggregate of approximately 575,000 employees and an average of approximately 1,100 employees. In addition to providing tax filing services for its payroll clients, as of June 30, 1998 the Company provided national tax filing services to 72 clients with an aggregate of approximately 1.1 million employees and an average of approximately 15,200 employees. For the quarter ended June 30, 1998, the Company processed 4.3 million checks for the Company's payroll clients. The Company's clients include: 3Com Corporation, Abbott Laboratories, Airtouch Communications Inc., Amoco Corporation, Inc., Ascend Communications, Inc., AST Research, Inc., Coach Leatherwear Co., Inc., Dell Computer Corporation, E*TRADE Group, Inc., First Data Corporation, The Gap, Inc., The Gillette Company, J.C. Penney Company, Inc., Kellogg USA Inc., LSI Logic Corporation, Michaels Stores, Inc., Netscape Communications Corp., Oracle Corporation, Sunglass Hut International, Inc., Toyota Motor Corporation, U.S. Bancorp, Watkins-Johnson Company and Williams-Sonoma, Inc. The demand for outsourcing employee administrative services has grown significantly and is expected to continue to grow over the next several years. According to G-2 Research, Inc., third-party payroll processing, payroll tax filing and benefits administration are expected to generate approximately $3.9 billion in revenue in 1998 and approximately $9.3 billion in revenue in 2003. Many large businesses have found that outsourcing non-core functions reduces costs, improves service, quality and efficiency, allows personnel to focus on core competencies and enhances productivity through access to advanced technologies. In recent years, payroll processing and benefits administration have increased in complexity due to continual changes in regulations and increasingly sophisticated employee benefits plans. The Company differentiates itself from its competitors through its proprietary PC-based technology, high quality, responsive and professional client service and focus on the needs of large employers. ProBusiness develops a business partnership with each client by assessing each client's payroll processing needs, reengineering and designing the client's payroll systems and processes and implementing a value-added and cost-effective solution. The Company maintains an ongoing relationship with each client using a strategic team of specialists led by a personal account manager who proactively manages each client's account and marshals the resources of the team to meet the client's specific needs. ProBusiness maintains a low client-to-account manager ratio to offer clients accessible and responsive account management. The Company believes that its low client-to-account manager ratio and focus on client service are key factors in enabling it to achieve a high payroll client retention rate, which was approximately 92% for fiscal 1998. The Company's objective is to be the premier provider of employee administrative services for large employers. The Company's strategy to accomplish this objective includes expanding its client base by increasing its direct sales force, developing a comprehensive and fully integrated suite of employee administrative services, offering additional services to existing clients, pursuing strategic acquisitions, investments and alliances and extending its technology leadership. The Company is committed to maintaining the high levels of professional and personal service that it believes have allowed it to establish a competitive advantage in its industry. THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Company................... 2,475,000 shares Common Stock to be Outstanding after this Offering.... 19,589,855 shares(1) For general corporate purposes, including capital expenditures and working capital, as well as for potential acquisitions. See "Use of Proceeds." Use of Proceeds....................................... Nasdaq National Market Symbol......................... PRBZ </TABLE> SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> YEAR ENDED JUNE 30, ------------------------------- 1996 1997 1998 --------- --------- --------- <S> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Revenue............................................................................. $ 13,863 $ 27,374 $ 46,317 Operating expenses: Cost of providing services........................................................ 6,435 13,659 23,859 General and administrative expenses............................................... 2,054 4,282 6,727 Research and development expenses................................................. 1,257 2,841 4,585 Client acquisition costs.......................................................... 5,388 11,706 17,858 Acquisition of in-process technology.............................................. 711 -- -- --------- --------- --------- Total operating expenses............................................................ 15,845 32,488 53,029 --------- --------- --------- Loss from operations................................................................ (1,982) (5,114) (6,712) Interest expense.................................................................... (473) (1,190) (557) Other income........................................................................ 69 59 752 --------- --------- --------- Net loss............................................................................ $ (2,386) $ (6,245) $ (6,517) --------- --------- --------- --------- --------- --------- Historical basic and diluted net loss per share(2).................................. $ (4.91) --------- --------- Shares used in computing historical basic and diluted net loss per share(2)......... 486 Pro forma basic and diluted net loss per share(2)................................... $ (0.59) $ (0.41) --------- --------- --------- --------- Shares used in computing pro forma basic and diluted net loss per share(2).......... 10,533 15,722 </TABLE> <TABLE> <CAPTION> JUNE 30, 1998 ------------------------- ACTUAL AS ADJUSTED(3) --------- -------------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents.............................................................. $ 13,771 $ 79,083 Payroll tax funds invested............................................................. 332,667 332,667 Working capital........................................................................ 3,323 68,635 Total assets........................................................................... 376,009 441,321 Payroll tax funds collected but unremitted............................................. 332,667 332,667 Capital lease obligations, less current portion........................................ 1,414 1,414 Total stockholders' equity............................................................. 26,746 92,058 </TABLE> - ------------------------------ (1) As of June 30, 1998 (after giving effect to the Stock Split). Excludes (i) 1,800,416 shares of Common Stock subject to outstanding options; (ii) 229,500 shares of Common Stock issuable upon exercise of outstanding warrants; (iii) 1,277,510 shares of Common Stock reserved for future grant under the Company's 1996 Stock Option Plan; and (iv) 579,886 shares of Common Stock reserved for issuance under the Company's 1997 Employee Stock Purchase Plan. See "Management -- Stock Plans," "Description of Capital Stock -- Warrants" and Notes 6 and 7 of Notes to Financial Statements. (2) See Note 1 of Notes to Financial Statements for an explanation of the determination of the shares used in computing historical and pro forma basic and diluted net loss per share. (3) Adjusted to reflect the sale of the 2,475,000 shares of Common Stock offered hereby at an assumed public offering price of $28.0625 per share, after deducting the estimated underwriting discount and estimated offering expenses payable by the Company, and application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001029787_town_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001029787_town_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL DATA, INCLUDING THE FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. REFERENCES TO FISCAL 1994, 1995, 1996, 1997 AND 1998 OF THE COMPANY REFER TO THE FISCAL YEAR ENDING ON MAY 31ST OF SUCH YEAR. FOLLOWING THE CONSUMMATION OF THE OFFERING, THE COMPANY INTENDS TO CHANGE ITS FISCAL YEAR END. AS A RESULT, THE COMPANY WILL HAVE A SHORT FISCAL YEAR END FOR THE SEVEN MONTHS ENDED DECEMBER 31, 1998. REFERENCES TO FISCAL 1999 AND BEYOND OF THE COMPANY REFER TO THE FISCAL YEAR ENDING DECEMBER 31ST OF SUCH YEAR. AS USED HEREIN, "TOWN SPORTS" AND THE "COMPANY" REFER TO TOWN SPORTS INTERNATIONAL, INC. AND ITS SUBSIDIARIES. UNLESS OTHERWISE INDICATED, THE INFORMATION SET FORTH IN THIS PROSPECTUS DOES NOT GIVE EFFECT TO THE EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. THE COMPANY Town Sports International, Inc. ("Town Sports" or the "Company") is one of the two leading owners and operators of fitness clubs in the Northeast and Mid-Atlantic regions of the United States. As of August 12, 1998, the Company operated 64 clubs that collectively served over 175,000 members. The Company develops clusters of clubs to serve densely populated major metropolitan regions in which a high percentage of the population commutes to work. The Company services such populations by clustering clubs near the highest concentrations of its target customers' areas of both employment and residence. The Company's target customer is college-educated, typically between the ages of 20 and 44 and earns an annual income in excess of $50,000. The Company's goal is to develop the premier health club network in each of the major metropolitan regions it enters. Management believes that clustering clubs allows the Company to achieve strategic operating advantages that enhance its ability to achieve this goal. When entering new regions, the Company develops its clusters by initially opening or acquiring clubs located in the more central urban markets of the region and then branching out from these urban centers to suburbs and ancillary communities. Capitalizing on this clustering of clubs, in fiscal 1998, approximately half of the Company's members participated in a membership plan that allows unlimited access to all of the Company's clubs for a higher membership fee. The Company has executed this strategy successfully in the New York region through the network of clubs it operates under its New York Sports Club ("NYSC") brand name. The Company is the largest fitness club operator in Manhattan with 23 locations and operates a total of 52 clubs under the NYSC name within a defined radius of New York City. The Company is in the process of more fully developing clusters within a smaller radius surrounding Washington, DC under its Washington Sports Club ("WSC") brand name and has begun establishing similar clusters surrounding Boston and Philadelphia under its Boston Sports Club ("BSC") and Philadelphia Sports Club ("PSC") brand names, respectively. The Company employs localized brand names for its clubs to create an image and atmosphere consistent with the local community and to foster recognition as a local network of quality fitness clubs rather than a national chain. The Company has experienced significant growth over the past several years through a combination of (i) acquiring existing, privately owned, single and multi-club businesses, and (ii) developing and opening "greenfield" club locations. From May 31, 1993 to August 12, 1998, the Company acquired 32 existing clubs, opened 14 greenfield clubs, sold one club and closed one club at the expiration of its lease to increase its total clubs under operation from 20 to 64. The Company plans to acquire or open at least 25 clubs prior to December 31, 1999. The Company has achieved revenue growth over the past five fiscal years at a compound annual rate of approximately 34.9% from $24.9 million in fiscal 1994 to $82.4 million in fiscal 1998. This growth has been driven not only by the addition of acquired and greenfield clubs, but also through comparable club revenue growth, which has ranged from 10.9% to 27.3% for the past five fiscal years and was 26.2% in fiscal 1998. Comparable club revenue growth has enabled the Company to increase revenue per weighted average club in each of the past five fiscal years. Revenue per weighted average club has risen from $1.8 million in fiscal 1994 to $2.3 million in fiscal 1998. Based on the Company's historical experience, a new club tends to achieve significant increases in revenues during its first three years of operation as it reaches maturity. Because clubs experience little incremental cost associated with such revenue increases, the Company realizes a greater proportionate increase in profitability. This operating leverage has allowed it to achieve EBITDA growth over the past five years at a compound annual rate of approximately 44.8% from $3.6 million in fiscal 1994 to $15.9 million in fiscal 1998. The Company's rate of EBITDA growth from fiscal 1997 to fiscal 1998 accelerated to 89.6%. The Company reported net income of $277,000 in fiscal 1998 versus a net loss of $936,000 in fiscal 1997. Management seeks to provide a broad array of high quality exercise programs and equipment that is both popular and effective, while reinforcing the quality exercise experience the Company strives to make available to its customers. While the Company does not generally build locations with amenities such as swimming pools or racquet and basketball courts, the Company does strive to establish at least one flagship club that has such amenities in each of its markets. Management believes that it is generally more economical to acquire clubs with such amenities than to develop them as greenfield clubs. Management engages in a detailed site analysis and selection process based upon information provided by the Company's proprietary development software to identify potential target areas for additional clubs based upon population demographics, traffic and commuting patterns, availability of sites and competitive market information. In addition to the Company's existing 64 clubs under operation and the 12 sites for which the Company has entered into lease commitments, management has identified approximately 125 target areas in which it plans to add clubs under the brand names NYSC, WSC, BSC or PSC. Management estimates that it will identify approximately 50 additional target areas in which to add clubs under these brand names. Once the Company begins to approach saturation of these regions, management will explore expansion opportunities in contiguous regions along the East Coast and the Mid-Atlantic. Since its inception, the Company has never closed a club prior to the expiration of a lease and has closed only one club at the expiration of a lease. The Company possesses an experienced management team, the top five executives of which have been working together at the Company since 1990. Management believes that it has the depth, experience and motivation to manage the Company's internal and external growth, and that the Company has put in place the infrastructure and systems to manage effectively the Company's planned expansion for the next three years. Management believes that the presence of such infrastructure will enable the Company over time to leverage certain fixed cost aspects of overhead to realize increased EBITDA margins as the Company continues to expand its club base. This operating leverage has already helped the Company to more than double its EBITDA margin to approximately 19.3% in fiscal 1998 compared to approximately 9.7% in fiscal 1997. In the aggregate, management owns Common Stock or options to purchase Common Stock which will represent approximately % of the Company's diluted shares upon the consummation of the Offering and the Affiliate Stock Purchase. The fitness club industry is a highly fragmented, growing industry. According to published industry sources, total fitness club industry revenues increased at a compound annual rate of approximately 8.6% from $5.5 billion in 1991 to $9.0 billion in 1997. Over that same period of time, fitness club memberships have increased at a compound annual rate of 5.1% from 16.7 million to 22.5 million, despite the fact that the number of fitness clubs has remained relatively stable. In 1997, approximately 13,800 fitness clubs were in operation. The ten largest club operators accounted for less than 8.0% of those clubs and approximately 17.2% of total industry revenues. In addition, approximately 65.0% of these clubs are operated by single club operators. Based upon this data, management believes that considerable consolidation will occur in the industry and the Company expects to play a significant role, on a regional basis, in this consolidation. The Company's clustering of clubs in major metropolitan regions has enabled the Company to develop four strategic operating advantages. First, the Company has developed a fully-automated, centrally controlled system which provides a streamlined enrollment process through which the Company sells its simplified membership plans. This streamlined process has resulted in approximately 90% of members paying monthly dues through electronic funds transfer ("EFT") in fiscal 1998. Substantially all other members prepay annual dues in full. Second, management believes the Company has developed a distinct brand image in the markets it serves as a local network of fitness clubs that consistently provides a quality experience across all clubs. Third, the Company has a policy of providing a high degree of customer service. Management believes that it can attract and retain quality full-time program instructors and professional fitness trainers as a result of the Company's ability to offer benefits to these full-time employees. Fourth, the Company has developed proprietary information systems which, in conjunction with its other systems, assist the Company in tracking sales, leads and membership statistics, developing targeted marketing programs and identifying new markets for club locations. In an effort to increase revenues, EBITDA and net income, the Company has developed four core growth strategies. First, the Company plans to continue to acquire single- and multi-club businesses with the flexibility to make payment in the form of the Company's common stock and/or cash. Second, the Company plans to continue to open new greenfield club locations in underserved markets and in markets where potential acquisitions are not available on acceptable terms. Third, the Company plans to continue to increase comparable club revenues by raising monthly dues on an annual basis and increasing its emphasis on providing value added services for incremental fees. Fourth, management believes that it has built the personnel and systems infrastructure to manage the Company's expansion plans over the next three years without significant incremental corporate overhead. RECENT DEVELOPMENTS On August 6, 1998, the Company acquired from Lifestyle Fitness of Springfield, Inc. and its affiliates (collectively, "Lifestyle") substantially all of the assets associated with Lifestyle's six fitness clubs located in New Jersey in a series of related transactions (the "Lifestyle Acquisition"). In addition, the Company assumed the obligations under a lease for a seventh club to be constructed in the same market area. For the twelve months ended June 30, 1998, Lifestyle generated revenues of approximately $7.9 million. The Company plans to operate these clubs under its NYSC brand name. THE OFFERING <TABLE> <S> <C> Common Stock offered hereby....... shares Common Stock to be outstanding after the Offering and the Affiliate Stock Purchase(1)..... shares Use of Proceeds................... To repay certain indebtedness of the Company, to open or acquire additional fitness clubs, to update management information systems and for general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market Symbol.......................... "TOWN" </TABLE> - ------------------------ (1) Does not include shares issuable upon the exercise of outstanding options issued pursuant to the Old Option Plan and the Equity Incentive Plan (each as defined), at a weighted average exercise price of $ . THE RECAPITALIZATION In December 1996, the Company consummated a recapitalization (the "Recapitalization") pursuant to which, among other things, Bruckmann, Rosser, Sherrill & Co., L.P. and certain of its employees and affiliates (collectively "BRS") and certain institutional investors acquired shares of Common Stock and series A preferred stock, representing approximately 73.0% of the Company's voting equity interests on a fully-diluted basis. In addition, certain members of the Company's management acquired shares of the Company's Common Stock and series B preferred stock, representing 27.0% of the Company's voting equity interests on a fully-diluted basis. See "The Recapitalization" and "Certain Relationships and Related Transactions--The Recapitalization." THE PREFERRED EXCHANGE Prior to the consummation of the Offering and the Affiliate Stock Purchase, holders of the Company's preferred stock and options to purchase preferred stock intend to exchange such stock and options for shares of the Company's Common Stock and options to purchase shares of Common Stock, respectively (the "Preferred Exchange"). See "The Preferred Exchange" and "Security Ownership."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001030179_med-emerg_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001030179_med-emerg_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION, FINANCIAL STATEMENTS AND THE NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED OR THE CONTEXT OTHERWISE REQUIRES, ALL INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE WARRANTS, THE OVER-ALLOTMENT OPTION OR THE UNDERWRITERS' WARRANTS. AS USED HEREIN, UNLESS OTHERWISE INDICATED OR THE CONTEXT OTHERWISE REQUIRES, THE "COMPANY" REFERS TO MED-EMERG INTERNATIONAL, INC. ("MEI"), ITS WHOLLY-OWNED SUBSIDIARIES, MED-EMERG URGENT CARE CENTRES, INC., 927563 ONTARIO INC. AND 927564 ONTARIO INC., ITS INDIRECT WHOLLY-OWNED SUBSIDIARIES, MED-EMERG, INC. ("MED") AND MED-PLUS HEALTH CENTERS LTD. ("MPHC"), WHO ARE WHOLLY-OWNED BY 927563 ONTARIO, INC. AND 927564 ONTARIO, INC., RESPECTIVELY, THE COMPANY ALSO OWNS 33.33% OF GLENDERRY WALK-IN CLINIC ("GWIC"), A PARTNERSHIP WHICH IT MANAGES AND OPERATES. THE COMPANY The Company specializes in the coordination and delivery of emergency related healthcare services in the Province of Ontario, Canada. The broad range of services offered by the Company include operational consulting and healthcare management services, physician and nurse staffing, and healthcare educational services. Due to increasing government fiscal restraint, Ontario's health care system is currently undergoing a significant restructuring by the provincial government. Based on a determination that the Ontario public healthcare system was not fiscally efficient, the Province of Ontario recently enacted the Savings and Restructuring Act, which gives its provincial government the ability to implement a health care system restructuring plan. The new legislation established the Health Services Restructuring Commission with broad decision making authority over every aspect of a public hospital's operations. This includes all aspects of operations, fiscal policy, public funding and even the continuance or cessation of a public hospital's existence. The objective of the legislation is to induce public hospitals' care delivery systems in the Ontario health care area to improve the quality of health care, and particularly to install efficiencies of cost in the delivery of medical services to the 11 million residents of the Province of Ontario (37% of all of Canada). Inefficient hospitals run the risk of the loss of public funding if they fail to meet the objectives of the Commission. Accordingly, the incentives are in place to induce public hospitals to find solutions to achieve the desired efficiencies, including outsourcing available from and through private sector organizations, such as the Company. The Company presently provides emergency medical services to hospitals and to other medical groups through its Emergency Medical Services Division ("EMS Division"), and clinical medical services to the public in Company-owned clinics through its Clinical Operations Division. The Company's recently launched Urgent Care Centres program, which provides on-site emergency medical services, is intended to expand clinic operations. The Company intends to aggressively market its facilities and services as a viable outsource alternative to public hospitals' present emergency room operations. THE EMS DIVISION The EMS Division of the Company provides physician staffing and administrative support to emergency departments and physician recruitment services to Canadian hospitals and emergency physician groups from a pool of approximately 189 independent, non-employee physicians and other healthcare professionals who have entered into physician contracts with the Company. Under the direction of the Company's management, the Company's physician pool provides emergency medical services to 16 hospital emergency rooms located in Ontario, Canada. See "Business -- Contractual Arrangements." Management believes that competitive pressures have focused the attention of many hospital administrators on the need for better management of their professional medical staff. In the experience of management, hospitals have increasingly turned to contract management firms with specialized skills to help solve physician contract and scheduling problems, to strengthen the management of their professional medical staff and specific clinical departments, to better control costs, and to assist in meeting their healthcare coverage needs and obligations. Using its management skills and experience, and the economies of scale which the size and specialization of its operations permit, the Company provides a management alternative to hospitals while offering a flexible practice and lifestyle alternative to physicians. The EMS Division also provides management consulting services to healthcare facilities and the Ministry of Health, Province of Ontario, and prepares business plans and feasibility studies to improve efficiency at such facilities. The marketing strategy for the Company's EMS Division is to procure contracts to oversee the management of entire emergency departments for hospitals. In Canada, as indicated by the Savings and Restructuring Act enacted by the provincial government of Ontario, there is significant pressure to increase cost effectiveness and efficiency of services within the public hospital sectors. Accordingly, public sector/private sector partnerships and joint ventures, such as the outsourcing of entire emergency department services including physician support, nursing support and administrative services may be an attractive, cost effective alternative for hospitals, and one to which the Company has addressed its marketing efforts. For the years ended December 31, 1996 and December 31, 1995, the EMS Division represented 81.2% and 86.5% of the Company's revenues, respectively. For the six months ended June 30, 1997 and June 30, 1996, the EMS Division represented 77.4% and 83.3% of the Company's revenues, respectively. THE CLINICAL OPERATIONS DIVISION The Company's Clinical Operations division owns and operates four clinics in Canada, including two in Toronto's International Airport. Generally, the clinics offer a variety of services, including family practice, walk-in services for patients, and chiropractic and massage therapy. In addition, the airport clinics provide walk-in services to the employees of the airport and emergency services to the approximately 28 million travelers who use the airport each year. The support staff at the airport clinics are employees of the Company. The emergency physicians, who are not employees of the Company, are on-call for the airport clinics and on-site for the other two clinics. The Company and its employees do not provide billable medical services. All billable medical services are provided by the non-employee physicians. In addition, the Company operates the Glenderry clinic in which it owns a 33.33% interest. The Company manages the walk-in clinic by providing scheduling, staffing, recruiting, billing, collections and accounting services to the clinic. In return for managing the clinic, the Company receives a monthly fee of $1,500. In addition, as a 33.33% owner of the clinic, the Company receives one third of all distributions made by the clinic and is responsible for 33.33% of any losses related to the clinic. For the years ended December 31, 1996 and December 31, 1995, the Clinical Operation's division represented 18.8% and 13.5% of the Company's revenues, respectively. For the six months ended June 30, 1997 and June 30, 1996, the Clinical Operation's division represented 22.6% and 16.7% of the Company's revenues, respectively. URGENT CARE CENTRES The Company intends to develop a chain of Urgent Care Centres beginning in the Province of Ontario and then expanding to other provinces in Canada. Management expects that these centres will offer on-site, emergency medical care services comparable to the services provided in a traditional emergency department. The Urgent Care Centre concept consists of a group of emergency trained physicians, a medical laboratory, a diagnostic radiology service and a pharmacy, each of which must be present for the others to co-exist, and each of which is provided by a separately owned company. The Company, through its wholly-owned subsidiary Med-Emerg Urgent Care Centre, Inc., intends to provide emergency medical services at the urgent care centre. Each emergency-trained physician working at an Urgent Care Centre will have critical care expertise to treat most clinical problems. Unlike most walk-in clinics and family physician offices, its Urgent Care Centres will be staffed to treat 90% of the cases seen in a typical Ontario emergency department. The Company opened its first centre in September 1997 and plans to open up to nine additional centres over the following eighteen months. The Company estimates that it will cost approximately $200,000 to establish the Company's participation in each of the remaining Urgent Care Centre. See "Use of Proceeds." Urgent Care Centres will be "community based" and offer convenient access to non-hospital based health care. Management believes that the centres will offer high quality service not only in clinical medical practice but also in consumer defined quality attributes such as waiting times, quality of environment, quality of personal interaction and courtesy. The Company intends to design Urgent Care Centres to be less costly to the publicly funded health care system than traditional emergency departments. As indicated below, there is a growing need for an alternative provider of emergency medical services due to the funding problems facing the Canadian health care system. At present, the vast majority of emergency services are delivered by qualified family or general practitioners in local communities rather than emergency specialists as are staffed in hospital emergency rooms. Notwithstanding that the number of physicians focusing on emergency medicine is relatively small when compared to the number of medical physicians, the demand for emergency care has grown significantly over the past ten years. GROWTH STRATEGY As part of its business strategy, the Company intends to pursue rapid growth, including possible acquisitions of, and joint ventures with, related and complementary businesses. The Company has no present commitments, undertakings or agreements for any specific acquisitions. The structure of the Company is as follows: Med-Emerg International, Inc. oversees the operations of each of its wholly-owned direct and indirect subsidiaries; Med-Emerg Urgent Care Centres, Inc. is a wholly-owned subsidiary of the Company which will oversee the Company's expansion and operations with respect to its planned Urgent Care facilities; 927563 Ontario Inc. and 927564 Ontario Inc. are now holding companies which, prior to the incorporation of Med-Emerg International, Inc., managed the businesses of their respective subsidiaries Med-Emerg, Inc. and Med-Plus Health Centres Ltd.; Med-Emerg, Inc., the wholly-owned subsidiary of 927563 Ontario Inc., is the operating company with respect to the Company's EMS Division and is the parent of Canadian Medical Center Prague, a limited liability company organized under the laws of the Czech Republic ("CMC"); and Med-Plus Health Centers Ltd., the wholly-owned subsidiary of 927564 Ontario Inc., is the operating company with respect to the Company's Clinical Operations Division. Med-Emerg International, Inc. was incorporated in the Province of Ontario on December 28, 1995 (under its former name 1162209 Ontario Inc.). Med-Emerg Urgent Care Centres, Inc. was incorporated in the Province of Ontario on December 2, 1996. 927563 Ontario Inc. and 927564 Ontario Inc. were incorporated in the Province of Ontario on March 22, 1991, Med-Emerg Inc. was incorporated in the Province of Ontario in July 1983 and Med Plus Health Centers Ltd. was incorporated in the Province of Ontario in March 1985. The Company's offices are located at 2550 Argentia Road, Suite 205, Mississauga, Ontario L5N 5R1 Canada and its telephone number is (905) 858-1368. THE OFFERING <TABLE> <S> <C> Common Stock Offered......... 1,250,000 shares of Common Stock Warrants Offered............. 1,250,000 Warrants. Each Warrant entitles the holder to purchase one share of Common Stock. See "Description of Securities." Offering Prices.............. US $4.25 per share of Common Stock US $0.10 per Warrant. Common Stock Outstanding Prior to the Offering(1)... 1,927,500 After the Offering(1)...... 3,177,500 Warrants Outstanding: Prior to the Offering...... 0 After the Offering......... 1,250,000 Terms of Warrants: Exercise Price............. The exercise price is US $4.50 per share, subject to adjustment in certain circumstances. Exercise Period............ The Warrants are exercisable for a period of four years commencing on February , 1999 and expiring on February , 2003. Redemption................. The Warrants are redeemable by the Company, commencing February , 2000, (or sooner with the consent of the Representative), at a redemption price of $0.10 per Warrant on not less than 30 days written notice, provided that the closing bid price per share of Common Stock, for 20 consecutive trading days ending on the third business day prior to the date of the redemption notice, is at least US $8.00, subject to adjustment for certain events. See "Description of Securities--Warrants." Risk Factors............... The securities offered hereby involve a high degree of risk and immediate substantial dilution to public investors. See "Risk Factors" and "Dilution". Use of Proceeds............ The net proceeds of the Offering will be used primarily for the development of a chain of Urgent Care Centres, expansion of the Emergency Services Division, the repayment of certain indebtedness and for working capital and general corporate purposes, including possible acquisitions. See "Use of Proceeds". </TABLE> <TABLE> <S> <C> <C> Proposed NASDAQ MDERF Symbols(2)............... Common Stock: MDEWF Warrants Proposed BSE Symbols(2).... Common Stock: MEI Warrants: MEIW </TABLE> - ------------------------ (1) Does not include 929,300 shares of Common Stock issuable upon exercise of outstanding options, 62,500 shares of Common Stock surrendered to the Company for cancellation without consideration prior to the Offering by certain investors in the Company's January 1997 private offering and 750,000 shares of Common Stock issuable upon conversion of 500,000 shares of Preferred Stock outstanding. The National Association of Securities Dealers, Inc. ("NASD") is of the opinion that two investors in the Company's January 1997 bridge financing were related persons of the Representative. Based upon this opinion, the NASD determined that the shares obtained by such investors in the January 1997 bridge financing would be deemed underwriting compensation in connection with this Offering, and that, therefore, the NASD was of the opinion that the total underwriting compensation payable to the Underwriters would be unfair and unreasonable. Accordingly, although the Representative disagreed [Alternate Page for Selling Securityholders Prospectus] THE SELLING SECURITYHOLDERS' OFFERING <TABLE> <S> <C> Securities Offered........................... 62,500 shares of Common Stock, no par value. See "Description of Securities." Common Stock Outstanding(1).................. 3,177,500 Risk Factors................................. The securities offered hereby involve a high degree of risk and immediate substantial dilution to public investors. See "Risk Factors" and "Dilution". NASDAQ Symbol(2)............................. Common Stock: MEDEF BSE Symbols(2)............................... Common Stock: MED </TABLE> - ------------------------ (1) Does not include 994,300 shares of Common Stock issuable upon exercise of outstanding options and 750,000 shares of Common Stock issuable upon conversion of 500,000 shares of Preferred Stock outstanding. See "Principal Stockholders" and "Management" and "Description of Securities." (2) The proposed Nasdaq and Boston Stock Exchange trading symbols do not imply that a liquid and active market will be developed or sustained for the Common Stock upon completion of this Offering. with this opinion, such investors agreed to surrender to the Company for cancellation without consideration an aggregate of 62,500 shares of Common Stock obtained in the January 1997 bridge financing. The Company will remain obligated to repay the promissory notes issued to such investors in the aggregate principal amount of $250,000, upon the closing of this Offering. See "Use of Proceeds", "Principal Stockholders," "Management" and "Description of Securities." (2) The proposed Nasdaq and Boston Stock Exchange trading symbols do not imply that a liquid and active market will be developed or sustained for the Common Stock and/or Warrants upon completion of the Offering. [Alternate Page for Selling Securityholders Prospectus] This page intentionally left blank SUMMARY CONSOLIDATED FINANCIAL INFORMATION The summary consolidated financial information set forth below is derived from and should be read in conjunction with the financial statements of the Company, including the notes thereto, appearing elsewhere in this Prospectus. All references to dollar amounts are stated in Canadian dollars unless otherwise noted. STATEMENT OF OPERATIONS DATA: <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED JUNE 30 DECEMBER 31 -------------------- ---------------------------------- 1997 1996 1996 1995 1994 --------- --------- ---------- ---------- ---------- <S> <C> <C> <C> <C> <C> On a Canadian GAAP basis: (1) Revenue............................................ $5,543,346 $5,288,293 $10,817,048 $10,983,553 $10,474,754 Physician Fees and Other Direct Costs.............. 4,014,092 4,151,324 8,554,396 8,406,631 7,977,679 Gross Profit....................................... 1,529,254 1,136,969 2,262,652 2,576,922 2,497,075 Operating Expenses (5)............................. 1,323,099 1,702,449 5,948,069 2,860,892 2,218,420 Operating Income (Loss)(2)......................... 206,155 (565,480) (3,685,417) (283,970) 278,655 Other Income (Expense)............................. (190,188) (12,614) (55,461) 54,930 (51,879) Provision for Income Taxes (recovery).............. 3,992 (60,232) (146,554) 71,447 52,245 Net Income (Loss).................................. 11,975 (517,862) (3,594,324) (300,487) 174,531 Net Income per Common Share(2)..................... $ 0.01 $ (0.16) $ (1.18) $ (0.13) $ 0.07 On a U.S. GAAP basis: (1) Operating Expenses(4)(5)........................... 1,336,884 1,704,154 6,006,643 2,860,892 2,218,420 Operating Income (Loss)............................ 192,370 (567,185) (3,743,991) (283,970) 278,655 Other Income (Expense)............................. (190,188) (12,614) (55,461) 54,930 (51,879) Provision for Income Taxes (recovery).............. 3,992 (60,232) (146,554) 71,447 52,245 Net Income (Loss).................................. (1,810) (519,567) (3,652,898) (300,487) 174,531 Primary Earnings (loss) Per Share.................. $ (0.00) $ (0.22) $ (1.51) $ (0.13) $ 0.08 </TABLE> BALANCE SHEET DATA: <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, 1997 ------------------------ AS ACTUAL ADJUSTED(3) ---------- ------------ <S> <C> <C> Working Capital............................................................ $(1,414,324) $4,628,316 Total Assets............................................................... $4,331,937 $8,368,118 Accumulated Deficit........................................................ $(9,274,205) $(9,549,524) Preference shares.......................................................... $6,120,000 $6,120,000 Common shares.............................................................. $2,401,839 $8,397,629 Contributed Surplus (6).................................................... $1,246,000 $1,246,000 Shareholders' Equity....................................................... $ 493,634 $6,214,105 </TABLE> - ------------------------ (1) The Company prepares its financial statements in accordance with accounting principles generally accepted in Canada ("Canadian GAAP") which may differ in certain respects from accounting principles in the United States ("U.S. GAAP"). For an explanation of the differences between Canadian GAAP and U.S. GAAP, see Note 18 to the Company's consolidated financial statements. (2) Net income per share reflects a weighted average of 1,928,293 shares of Common Stock outstanding at June 30, 1997, 3,038,214 shares of Common Stock outstanding at December 31, 1996, 3,211,786 shares of Common Stock outstanding at June 30, 1996, and 2,333,333 shares of Common Stock outstanding prior to such dates. (3) Reflects the surrender for cancellation without consideration of 62,500 shares of Common Stock to the Company by certain investors in the Company's January 1997 private offering and the issuance of 1,250,000 shares of the Company's Common Stock and 1,250,000 Warrants offered hereby and the application of the net proceeds therefrom. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001030339_ngen-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001030339_ngen-inc_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..677cef8b56a2c0e1afe9422b17e4d8c4e673639f
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and related notes appearing elsewhere in this Prospectus. Except as set forth in the financial statements and notes thereto or otherwise as specified herein, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option and reflects (i) the reincorporation of the Company from California into Delaware in November 1997, (ii) a two-for-three reverse split of the Company's Common Stock effected in April 1998 (all Preferred Stock share amounts and prices have been similarly adjusted) and (iii) the conversion of all of the Company's outstanding shares of Preferred Stock into 9,254,876 shares of Common Stock upon the closing of this offering. See "Description of Capital Stock" and "Underwriters." This Prospectus contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed below, as well as those discussed under "Risk Factors" and elsewhere in this Prospectus. THE COMPANY Nanogen, Inc. ("Nanogen" or the "Company") integrates advanced microelectronics and molecular biology into a platform technology with broad commercial applications in the fields of medical diagnostics, biomedical research, genomics, genetic testing and drug discovery. Nanogen's fully automated system, which incorporates a proprietary semiconductor microchip, provides a flexible tool for the rapid identification and analysis of any test sample containing charged molecules. Through the use of microelectronics, the Company's technology enables the active movement and concentration of charged molecules to and from designated microlocations, or test sites, on the semiconductor microchip. This electronic concentration of molecules greatly accelerates molecular binding at each microlocation. In addition, Nanogen's technology allows the simultaneous analysis of multiple test results, or multiplexing, from a single sample. The open architecture design of the Nanogen system enables the Company to offer microchips with arrays designed and built by Nanogen for specific applications or with arrays that can be customized by the end user. The Company believes its technology will accelerate the development of products that capitalize on the increasing availability of genetic information and its relationship to human disease. The Company further believes its semiconductor based platform technology provides a low cost, highly efficient, accurate and versatile integrated system that will shift the paradigm from current manual and mechanical methods to microelectronic systems, thereby significantly improving the quality of healthcare. The Company has established corporate alliances in certain areas of infectious disease diagnostics, drug discovery and genomics as part of its strategy to expand the applications and accelerate the commercialization of products derived from its technology. The Company is developing products to expedite the diagnosis of infectious disease through its joint venture with Becton, Dickinson and Company ("Becton Dickinson"). The Company has also entered into agreements for the establishment of a collaboration and joint venture with Hoechst AG ("Hoechst") to develop drug discovery tools, and a collaboration with Elan Corporation, plc ("Elan") for genomic applications. In addition to their commitments to provide research funding, these corporate partners have agreed to purchase an aggregate of $21.0 million of Common Stock directly from the Company in a private placement (the "Private Placement") to occur concurrent with this offering. The Company's collaborations permit integration of the Company's technology with the resources and technology of its partners, while allowing the Company to independently pursue diagnostics, drug discovery and genomics opportunities outside the scope of these collaborations. The Company's commercialization strategy is to establish its platform technology as the standard for molecular identification and analysis. Nanogen will provide its products initially to leading research institutions and opinion leaders to enable them to exploit the open architecture design in developing additional novel applications. Concurrently, the Company is developing commercial products in medical diagnostics, biomedical research, genomics, genetic testing and drug discovery either by itself or with its corporate partners. In addition, the Company believes its platform technology has the potential to address a broad range of applications, including combinatorial chemistry, industrial process control, forensics and environmental and ELECTRONIC STRINGENCY CONTROL <TABLE> <S> <C> Electronic stringency control is used to [Graphic depicting perfect match and single ensure the accuracy of the hybridization base pair mismatch] process. As part of this process, a positive electrical potential is applied to the electrode at each test site. A perfect match for the target is shown on the left; a single base pair mismatch G:A (see insert) is present on the right. To eliminate these mismatches, a precise [Graphic depicting mismatch being driven negative potential is applied. The mismatch away while perfect match remains bound to DNA is forced back into the solution away capture probe] from the test site in a matter of minutes. </TABLE> food pathogen testing. The Company also plans to develop fully integrated "sample-to-answer" systems for both the clinical research and point-of-care settings using microelectronics to process and analyze samples in a wide variety of applications. The Company was incorporated in California in 1991 as Nanophore, Inc. ("Nanophore"), a wholly-owned subsidiary of Nanotronics, Inc. ("Nanotronics"), and pursuant to a Plan of Corporate Separation and Reorganization, Nanophore issued shares of its common stock to the Nanotronics shareholders and commenced operations as Nanogen, Inc. in September 1993 (the "Spin-Off"). Nanogen reincorporated in Delaware in November 1997. The terms "Nanogen" and the "Company" refer to Nanogen, Inc., a Delaware corporation, and its predecessor. The Company's executive offices are located at 10398 Pacific Center Court, San Diego, California 92121 and its telephone number is (619) 546-7700. THE OFFERING <TABLE> <S> <C> Common Stock offered....................................... 3,600,000 shares Common Stock to be outstanding after the offering.......... 17,941,843 shares(1) Use of proceeds............................................ To fund research and development, expansion of manufacturing operations and activities, expansion of sales and marketing activities, working capital and for general corporate purposes. See "Use of Proceeds." Nasdaq National Market symbol.............................. NGEN </TABLE> SUMMARY FINANCIAL DATA <TABLE> <CAPTION> PERIOD FROM INCEPTION (SEPTEMBER 1, 1993) YEARS ENDED DECEMBER 31, TO DECEMBER 31, -------------------------------------- 1993 1994 1995 1996 1997 -------------------- ------- ------- ------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues: Contract and grant revenue............ $ -- $ -- $ 318 $ 1,644 $ 2,123 Sponsored research.................... -- -- -- -- 1,243 ------- ------- ------- ------- -------- Total revenues..................... -- -- 318 1,644 3,366 Operating expenses: Research and development.............. 183 1,345 3,356 6,931 11,769 General and administrative............ 225 1,065 1,646 2,427 3,910 ------- ------- ------- ------- -------- Total operating expenses........... 408 2,410 5,002 9,358 15,679 Interest income (expense), net.......... -- 34 96 (64) 975 ------- ------- ------- ------- -------- Net loss................................ $ (408) $(2,376) $(4,588) $(7,778) $(11,338) ======= ======= ======= ======= ======== Pro forma net loss per share -- basic and diluted(2)........................ $ (1.13) ======== Number of shares used in computing pro forma net loss per share -- basic and diluted(2)..................... 10,072 ======== </TABLE> <TABLE> <CAPTION> AS OF DECEMBER 31, 1997 -------------------------- ACTUAL AS ADJUSTED(3) -------- -------------- (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $ 19,498 $ 76,426 Working capital............................................. 16,775 73,703 Total assets................................................ 23,215 80,143 Capital lease obligations, less current portion............. 1,193 1,193 Accumulated deficit......................................... (26,488) (26,488) Total stockholders' equity.................................. 18,599 75,527 </TABLE> - --------------- (1) Based on the number of shares outstanding at February 28, 1998. Includes an aggregate of 1,909,089 shares of Common Stock (based on the assumed initial public offering price of $11.00 per share) to be issued in the Private Placement. Excludes 1,514,525 shares of Common Stock reserved for issuance and available for grant or sale under the Company's Stock Option Plans, under which there were options outstanding to purchase an aggregate of 521,109 shares of Common Stock as of February 28, 1998. Also excludes (i) 420,703 shares of Common Stock subject to outstanding warrants, (ii) 40,993 shares of Preferred Stock subject to outstanding warrants, which will convert into warrants to purchase 40,993 shares of Common Stock upon the closing of this offering and (iii) 6,000 shares of Preferred Stock subject to outstanding warrants which will expire on the day prior to effectiveness of the Registration Statement of which this Prospectus forms a part. See "Capitalization," "Management -- Stock Option Plans," "Description of Capital Stock -- Warrants," and Note 4 of Notes to Financial Statements. (2) Computed on the basis described in Note 1 of Notes to Financial Statements. (3) Adjusted to reflect the sale by the Company of (i) 3,600,000 shares of Common Stock offered hereby at an assumed public offering price of $11.00 per share and (ii) 1,909,089 shares of Common Stock to be issued in the Private Placement at an assumed price of $11.00 per share, and the application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001031283_entrust_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001031283_entrust_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..807c752d5eefe552340197b671798607244b9288
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Company's Consolidated Financial Statements, including the Notes thereto, appearing elsewhere in this Prospectus. Except as otherwise noted herein, all information in this Prospectus: (i) reflects the filing upon the closing of the Offerings of the Company's Amended and Restated Articles of Incorporation, which redesignates the Company's Series A Common Stock as Common Stock (the "Common Stock"); (ii) gives effect to the conversion upon the closing of the Offerings of all outstanding shares of the Company's Series B Common Stock and Series B Non-Voting Common Stock into an aggregate of 13,063,836 shares of Common Stock; (iii) assumes the issuance of 7,700,000 shares of Common Stock to Northern Telecom Limited upon the surrender of shares of the Company's Special Voting Stock and the concurrent exchange of Exchangeable Shares of Entrust Technologies Limited, a majority-owned subsidiary of the Company (the "Canadian Subsidiary"); (iv) gives effect to a four-for-one stock split in the form of a stock dividend effected in July 1998; and (v) assumes no exercise of the Underwriters' over-allotment option. See "Underwriting". Unless otherwise specified herein, references to the "Company" or "Entrust" mean Entrust Technologies Inc. and its subsidiaries. THE COMPANY Entrust Technologies Inc. ("Entrust" or the "Company") develops, markets and sells products and services that allow enterprises to manage trusted, secure electronic communications and transactions over today's advanced networks, including the Internet, extranets and intranets. The Entrust solution automates the management of digital certificates, which are similar to electronic passports, through public key infrastructure ("PKI") technology designed to assure the privacy and authenticity of internal and external electronic communications. The Entrust PKI is an integrated, open and scalable software framework that operates across multiple platforms, network devices and applications, including e-mail, browsers, electronic commerce, electronic forms, remote access and other product offerings from leading vendors. The Company's product suite was first released in 1994, and has since been licensed for use in global enterprises and government entities such as the Canadian government, Citibank, the FDIC, J.P. Morgan, NASA, the Republic of Singapore and the United Kingdom Post. In addition, over three million Entrust certificates have been issued to date for use by the Company's customers. The widespread adoption in recent years of public and private networks has revolutionized the manner in which organizations communicate and conduct business. These advanced networks provide an attractive medium for communications and commerce because of their global reach, accessibility, use of open standards and ability to permit interactions on a real-time basis. At the same time, they have afforded businesses a user-friendly, low-cost way to conduct a wide variety of commercial functions electronically. Today, organizations are increasingly utilizing these networks to access new markets, improve customer service and streamline business processes through applications such as e-mail, messaging, remote access, intranet-based applications, on-line customer support and supply chain applications. The very openness and accessibility that has stimulated the use of public and private networks has also driven the need for solutions that address the five critical network security needs: access control, confidentiality, integrity, authentication and non-repudiation. To address these needs, enterprises have increasingly adopted the public key authentication and verification technology offered by digital certificates. However, the mere issuance of digital certificates does not ensure that a user's access is properly monitored, that privileges associated with access are accurately and currently defined, or that the certificates in question have not been withdrawn or replaced. The proliferation of users and certificates greatly complicates management of these issues, which are critical to maintaining an effective security environment across and between enterprises. Moreover, unless digital certificates can be easily utilized on a consistent and reliable basis across multiple applications, organizations face the challenge and cost of maintaining a separate security infrastructure for each application, requiring separate keys and certificates, multiple passwords and inconsistent or incomplete security implementations. The Company's PKI solution provides highly functional and flexible management of network security features across an enterprise and between organizations. The Entrust PKI solution offers enterprises all of the functionality necessary for full life cycle management of public keys and digital certificates, including enterprise certificates for use across multiple applications, Web certificates for secure Web transactions and electronic commerce certificates for secure credit card transactions. Entrust products can support multiple applications and large numbers of simultaneous users, while seamlessly effecting complex certification and key recovery functions, enabling enterprises to significantly reduce their overall costs for addressing security requirements. The Company's objective is to maintain and enhance its position as the leading provider of comprehensive PKI solutions, building on its four years of product deployment experience and its 140-person research and development team that includes researchers with international reputations in their fields. The Company's marketing strategy is to target Global 2000 organizations and large government entities that have significant requirements for comprehensive PKI solutions and the resources to deploy them broadly. The Company also has an Entrust Partner Program to achieve widespread adoption of its PKI solution. This program includes VAR and OEM partners that create bundled solutions which allow customers to purchase total desktop applications incorporating Entrust functionality. These VAR and OEM partners include Digital Equipment Corporation, EDS, Hewlett-Packard, IBM and Tandem, which resell the Company's products with their hardware and networking solutions, as well as Check Point Software, Symantec and TimeStep, which plan to bundle the Company's PKI solutions with their own software products. The program also includes consultant and systems integration partners that recommend and implement Entrust-Ready security solutions as part of their overall service offerings to customers. These partners, which include Coopers & Lybrand, Deloitte & Touche and KPMG Peat Marwick, differentiate their offerings through the inclusion of PKI functionality to broaden the Company's sales channels. In order to promote the interoperability of the Company's PKI solution with a wide range of third party product offerings, the Company has developed relationships with leading technology providers such as Cisco, Lotus Development, Netscape and Shiva. The Company was originally established in January 1994 as the Secure Networks group of Northern Telecom Limited and its subsidiary, Northern Telecom Inc., to pursue the development and sale of PKI products and services, and was incorporated as a Maryland corporation in December 1996. The Company's principal executive offices are located at 2323 North Central Expressway, Richardson, Texas 75080, and its telephone number at that location is (972) 994-8000. ---------------- Entrust is a registered trademark, and Entrust-Ready, the Entrust design (Elmer), Entrust/Authority, Entrust/Admin, Entrust/Directory, Entrust/Entelligence, Entrust/Web Connector, Entrust/CommerceCA, Entrust/Lite, Entrust/Solo, Entrust/ICE, Entrust/Express, Entrust/Direct, Entrust/True Delete, Entrust/Toolkit, Entrust PKI, Entrust InSource, Entrust Partner and Entrust SecureSummit are trademarks or service marks, of Entrust Technologies Limited, a majority-owned subsidiary of Entrust Technologies Inc. Other trademarks and service marks used in this Prospectus are the property of their respective owners. THE OFFERINGS The offering of 5,653,334 shares of Common Stock initially being offered in the United States (the "U.S. Offering") and the concurrent offering of 1,413,333 shares of Common Stock initially being offered outside the United States (the "International Offering") are collectively referred to herein as the "Offerings". The closing of the International Offering is conditioned upon the closing of the U.S. Offering and vice versa. See "Underwriting". Common Stock offered: <TABLE> <S> <C> By the Company: U.S. Offering.......................... 4,320,000 shares International Offering................. 1,080,000 shares 5,400,000 By the Selling Stockholders: U.S. Offering ......................... 1,333,334 shares International Offering ................ 333,333 shares 1,666,667 Total ............................... 7,066,667 </TABLE> ------ <TABLE> ---------- <S> <C> Common Stock to be outstanding after the Offerings............................... 47,643,164 shares(1) Nasdaq National Market symbol.............. ENTU Use of proceeds by the Company............. For working capital and other general corporate purposes, including product development and potential acquisitions of complementary businesses, products or technologies. See "Use of Proceeds". </TABLE> - ------- (1) Includes 6,549,480 shares of Special Voting Stock and excludes (i) an aggregate of 9,587,960 shares of Common Stock reserved for issuance under the Company's Amended and Restated 1996 Stock Incentive Plan, of which 7,385,764 shares were subject to outstanding options as of June 30, 1998 at a weighted average exercise price of $2.96 per share, and (ii) an aggregate of 400,000 shares of Common Stock reserved for issuance under the Company's 1998 Employee Stock Purchase Plan. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ------------------------------- ---------------- 1994 1995 1996 1997 1997 1998 ------ ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DA- TA: Total revenues.............. $3,881 $ 3,973 $12,802 $25,006 $ 9,891 $20,938 Gross profit................ 2,696 2,989 9,252 20,090 7,551 17,028 Income (loss) from opera- tions...................... 27 (2,424) 56 (490) (4) (21,816) Net income (loss)........... 138 (2,123) 387 514 396 (21,439) Net income (loss) per basic share(1) .................. $ 0.02 $ 0.01 $ (0.69) Net income (loss) per di- luted share(1)............. $ 0.01 $ 0.01 $ (0.69) Shares used to compute net income (loss) per basic share(1)......... 30,700 30,700 30,849 Shares used to compute net income (loss) per diluted share(1)....... 41,743 41,064 46,686 </TABLE> <TABLE> <CAPTION> JUNE 30, 1998 ----------------------- ACTUAL AS ADJUSTED(2) ------- -------------- <S> <C> <C> BALANCE SHEET DATA: Cash, cash equivalents and short-term investments...... $ 4,369 $78,799 Working capital........................................ 3,138 77,568 Total assets........................................... 24,152 98,582 Shareholders' equity (deficit)......................... (6,733) 84,710 </TABLE> - ------- (1) See Note 2 of Notes to the Company's Consolidated Financial Statements for the calculation of basic and diluted net income (loss) per share. (2) Gives effect to the sale of the 5,400,000 shares of Common Stock offered by the Company pursuant to the Offerings at an assumed initial public offering price of $15.00 per share, after deducting the estimated underwriting discount and offering expenses. See "Use of Proceeds".
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001031624_u-s_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001031624_u-s_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d949444785852fadb0126b67489e4a3ca487a8c1
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1998/CIK0001031624_u-s_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Consolidated Financial Statements of the Company and the Notes thereto appearing elsewhere in this Prospectus. Except as otherwise indicated, all information in this Prospectus assumes that the Underwriters' overallotment option will not be exercised and gives effect to the following transactions which, except as indicated below, will occur simultaneously with or prior to the completion of the Offering: (i) the 1-for-7.63475 reverse split of the issued and outstanding Common Stock; (ii) the automatic conversion of all outstanding shares of the Company's Series A Convertible Preferred Stock, $.01 par value (the "Series A Preferred Stock"), and the Company's Series B Convertible Preferred Stock, $.01 par value (the "Series B Preferred Stock," and, together with the Series A Preferred Stock, the "Convertible Preferred Stock"), into 1,020,514 shares of Common Stock (the "Preferred Stock Conversion"); (iii) the automatic conversion of all outstanding warrants to purchase 488,890 shares of Series B Preferred Stock ("Series B Warrants") into warrants to purchase 168,091 shares of Common Stock ("Common Stock Warrants" and, together with the Series B Warrants "Warrants")and an increase in the exercise price from $8.39 per share to an exercise price per share equal to the initial public offering price (the "Series B Warrant Conversion"); (iv) the exercise of outstanding Common Stock Warrants to purchase 5,707 shares of Common Stock at an exercise price of $.08 per share which is deemed to have occurred because of the nominal exercise price (the "Deemed Warrant Exercise"); (v) the automatic conversion of the Company's convertible bridge notes ("Convertible Bridge Notes") in the aggregate principal amount of $2,550,000 into 182,143 shares of Common Stock (the "Convertible Bridge Note Conversion"); (vi) the repricing of Warrants to purchase an aggregate of 37,691 shares of Common Stock at original exercise prices ranging from $24.05 to $31.68 per share to a new exercise price per share equal to the initial public offering price (the "Warrant Exchange"); and (vii) the issuance of 2,255,199 shares of Common Stock issued in connection with Affiliation Transactions (as defined below). The information in this Prospectus assumes that the Offering will be completed at an initial public offering price of $14.00 per share. In addition, except as otherwise noted, all information in this Prospectus assumes (i) no exercise of outstanding employee and affiliate stock options (the "Options") to purchase 1,101,615 shares of Common Stock; (ii) no conversion of the Company's outstanding convertible notes (the "Convertible Affiliation Notes") in the aggregate principal amount of $19.4 million which are convertible into 1,383,233 shares of Common Stock; (iii) no conversion of the Company's outstanding convertible exchange notes ("Convertible Exchange Notes") which, together with Common Stock Warrants to purchase 200,000 shares of Common Stock at an exercise price per share equal to 120% of the initial public offering price, are being issued in the aggregate principal amount of $6,000,000 in exchange for the cancellation of all of the Company's then issued and outstanding shares of Series C Convertible Preferred Stock, $.01 par value ("Series C Preferred Stock"), and for the cancellation of Common Stock Warrants previously issued in connection with the sale of the Series C Preferred Stock (the "Series C Preferred Stock Exchange"); and (iv) no exercise of outstanding Common Stock Warrants to purchase an aggregate of 496,853 shares of Common Stock at exercise prices per share ranging from 100% to 120% of the initial public offering price. The information in this Prospectus reflects the cancellation of certain Warrants with exercise prices ranging from $24.05 to $31.68 per share and the issuance of replacement Warrants with an exercise price per share equal to the initial public offering price, the repricing of certain Warrants which now have an exercise price equal to the initial public offering price and the issuance of certain additional Warrants with an exercise price per share equal to 120% of the initial public offering price. The Series C Preferred Stock Exchange, the Series B Warrant Conversion and the Warrant Exchange are expected to occur on or about May 27, 1998. The issuance of Convertible Bridge Notes is expected to be completed on or about June 10, 1998 pursuant to an agreement to be entered into on or about May 27, 1998. See "Management -- Stock Incentive Plans," "Certain Transactions," "Description of Capital Stock" and "Underwriting." THE COMPANY The Company is an integrator and manager of specialist medical practices and ancillary services that currently is affiliated with 50 physicians providing care in 37 locations and, upon completion of the Initial Affiliation Transactions, will be affiliated with 123 physicians providing care in 89 locations in four states in the mid-Atlantic region. The Company believes that, as consumers demand higher quality care and payors focus on overall treatment costs rather than only physician fees, specialists increasingly will be the patient's preferred point of access to the health care delivery system and will control, directly or indirectly, a growing percentage of health care expenditures. The Company targets local service areas in which it can establish significant market density with its affiliated specialist physician practices and ancillary services, in order to derive significant operating leverage with payors, employers and consumers. The Company's affiliated specialists currently include orthopedic surgeons, physiatrists, neurologists, oncologists, urologists, obstetrician/gynecologists, radiologists, ophthalmologists, otolaryngologists, pain management specialists and occupational medicine specialists. In addition, the Company's affiliates provide ancillary services such as physical and occupational therapy and diagnostic imaging and, upon completion of the Initial Affiliation Transactions, will operate an ambulatory surgery center. Escalating health care costs have resulted in the growth of managed care, which frequently involves restricting access by insured parties to providers, decreasing levels of reimbursement to providers, reducing the number and duration of hospital inpatient stays and, more recently, transferring risk from payors to providers. Many payors have also attempted to control costs by reducing the utilization and reimbursement of specialists through the use of primary care "gatekeepers." Patients and employers, however, are becoming more conscious of not only the cost of care, but also of the quality of care and levels of customer service, and are often demanding greater physician choice and the option of seeking care directly from specialists. The Company believes that specialist physicians have a greater understanding of the treatment and management of complex disease and injury conditions and can therefore provide more timely, appropriate and, ultimately, less costly care to patients requiring more acute treatment. As a result, the Company believes that the market will increasingly demand greater access to specialists for acute care. In addition, consumers of health care will begin to differentiate among providers based on customer service in areas such as scheduling, patient follow-up and aftercare and the availability of a variety of services at the patient's point of access. The Company's objective is to make its Affiliated Practices a leading source of specialist physician and ancillary services in each of its local service areas. Key elements of the Company's strategy to attain this objective are to: (i) develop integrated local networks of specialists and ancillary service providers in suburban and rural markets in the mid-Atlantic region, in which the Company can achieve significant market density and operating leverage; (ii) enhance same practice growth in its affiliated physician practices through the addition of new physicians and new practice locations, enhancement of payor contracting, and improvement of practice management and practice marketing; (iii) increase ancillary and other revenues through, for example, physical and occupational therapy, diagnostic imaging and ambulatory surgery; (iv) grow in existing and new service areas through Affiliation Transactions and the Company's Provider Network (as defined below); (v) capitalize on its specialists' clinical leadership by establishing, marketing and providing complex disease and injury management services; and (vi) integrate the Company's management information systems in its affiliated physician practices. The Company conducts its operations primarily through affiliation with professional corporations ("PCs") in each state in which the Company provides services, which PCs provide specialist physician services and certain other health care services in their respective states. The Company does not engage in the practice of medicine. The Company, together with the PCs, establishes and develops its operations generally by entering into affiliation transactions ("Affiliation Transactions") pursuant to agreements ("Affiliation Agreements") with physicians desiring to become affiliated with the Company and the PCs ("Affiliated Physicians"). In the Affiliation Transactions, Affiliated Physicians generally transfer their medical practices ("Affiliated Practices") to the Company and the relevant PCs, with the Company acquiring all of the non-medical assets, such as leases, furniture, equipment and supplies, and the PC acquiring the medical assets, consisting primarily of pharmaceuticals and patient records and documentation. In return, the Affiliated Physicians receive a combination of cash, promissory notes ("Affiliation Notes"), Convertible Affiliation Notes, shares of Common Stock and/or Options in amounts negotiated between the Company and the respective Affiliated Physicians. In addition, the Affiliated Physicians generally enter into employment agreements with the relevant PCs, with terms ranging from five to ten years, and receive as compensation a percentage of the net revenues related to their Affiliated Practice, less certain expenses. The average percentage of pro forma net revenues paid to Affiliated Physicians as base compensation is approximately 38%. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Affiliation Transactions." The Company has entered into management agreements (the "Management Agreements") with each of the PCs. Pursuant to the Management Agreements, which have 40-year terms and provide for continuing renewal terms of five years (unless either party elects not to renew), the Company manages the business operations and all non-medical aspects of the business of the PCs and employs and supervises all personnel providing services on behalf of the PCs, except for the services of physicians and certain other licensed medical personnel (collectively, "Professionals") required by state law to be employed directly by the PCs. Physician services and other health care services are provided to patients by the PCs which employ the Affiliated Physicians and other Professionals, and the PCs are compensated for such services by private third party and managed care payors, Medicare and other governmental payors, and other sources. As compensation for the Company's services to the PCs under the Management Agreements, the PCs, other than the PC operating in New York (the "New York PC"), pay to the Company an amount equal to all billings by the PCs less expenses for physician and other Professional compensation and certain other expenses. The New York PC pays the Company an amount equal to the Company's costs plus a percentage of such costs. The Affiliated Practices and Affiliated Physicians are affiliated with the Company as a result of the significant control that the Company has pursuant to the Management Agreements over the PCs that own the Affiliated Practices and employ the Affiliated Physicians. See "Business -- Management and Services Agreement; Control of PCs." While certain of the Affiliated Practices have operated over extended periods of time, the Company has had limited operations to date. The Company consummated its first Affiliation Transactions in January 1997. Each Affiliation Transaction that has closed to date remains subject to a repurchase option, if the Offering is not completed by a specified date and accordingly is not considered completed for accounting purposes (the "Conditional Affiliation Transactions"); such repurchase option expires upon completion of the Offering. Pursuant to the Conditional Affiliation Transactions, the Company provides management services to 18 Affiliated Practices with a total of 50 Affiliated Physicians. The Company also has entered into agreements with respect to Affiliation Transactions that are expected to close upon completion of the Offering that would add 23 Affiliated Practices with a total of 73 Affiliated Physicians (the "IPO Affiliation Transactions" and, together with the Conditional Affiliation Transactions, the "Initial Affiliation Transactions"). Also, the Company has completed three incidental transactions (the "Completed Transactions"), including the acquisition of a provider of physical therapy services. In addition, in order to supplement its Affiliated Practices and Affiliated Physicians and to enhance contracting leverage, the Company is developing a provider network which includes physicians not affiliated with the Company (the "Provider Network"). Subject to certain established parameters agreed upon by the Company and the physicians participating in the Provider Network, the Company has non-exclusive authority on behalf of such physicians to contract with managed care organizations, insurance companies and other third-party payors for managed care contracts and for agreements establishing rates of payment and reimbursement for services provided by such participating physicians to the enrollees and beneficiaries of such payors. The Company was formed as a Pennsylvania corporation in July 1994. The Company's principal executive office is located in suburban Philadelphia at 220 Commerce Drive, Fort Washington, Pennsylvania 19034, and its telephone number is (215) 542-2170. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company.......... 3,500,000 shares Common Stock to be outstanding after the Offering................................... 7,481,578 shares Use of Proceeds.............................. To make required cash payments in connection with the IPO Affiliation Transactions; to repay the Convertible Affiliation Notes; to repay certain indebtedness of the Company and for working capital and other general corporate purposes, including possible future Affiliation Transactions and acquisitions. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001031911_ingenuus_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001031911_ingenuus_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified by the more detailed information and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. The Common Stock offered hereby involves a high degree of risk. See "Risk Factors." This Prospectus contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed in the forward-looking statements. Factors that may cause such a difference include, but are not limited to, those discussed in "Risk Factors." A Glossary of certain technical terms is included on page 37 of this Prospectus. THE COMPANY Aspec is a leading provider of merchant semiconductor intellectual property ("SIP") solutions for high-performance, complex IC designs, including system-on-a-chip ICs. Aspec's SIP consists of cell libraries, design tools, design methodologies and related engineering services which, when used in conjunction with EDA tools, simplify the process of designing complex ICs. The Company believes that its SIP provides designers with quick access to cell libraries at a lower cost than internally developed solutions. Aspec's SIP includes its AdverPro design verification tool which manages the IC design process, enabling EDA tools to exchange data while providing an accurate timing function and helping to ensure compliance with proper design procedures. Aspec's QuickPort design tool enables an IC designer to more rapidly and economically port a design from one foundry to another to secure alternate sourcing and to enable design reuse for next-generation process technologies. Aspec's SIP currently supports a range of advanced, deep submicron process technologies at leading semiconductor foundries, including Chartered Semiconductor, Hyundai Electronics, IBM, LG Semicon, Samsung Electronics, Sanyo Electric, Taiwan Semiconductor Manufacturing Corp. and United Microelectronics Corporation. Improvements in semiconductor manufacturing technology have enabled the design of complex ICs which integrate numerous silicon building blocks such as microprocessors, memories, graphics and I/O functions on a single IC to create a system-on-a-chip. Complex ICs are expected to proliferate as they enable a new generation of electronic systems that are faster, smaller, cheaper, more reliable and use lower power. The difficulties in designing increasingly complex ICs coupled with market demands for the more rapid introduction of electronic products has resulted in a significant and growing design gap. IC designers are increasingly turning to merchant SIP suppliers to help meet their needs for the more rapid design and development of complex ICs. The Company's strategy is to expand its position as a leading independent provider of merchant SIP solutions for the semiconductor industry. As part of this strategy, Aspec is committed to establishing its SIP as an industry standard by providing an open platform which supports most leading EDA tools and process technologies at leading semiconductor foundries. The Company believes that it has the broadest merchant SIP portfolio, and the Company intends to increase its SIP portfolio through the addition of more complex functional cores. Aspec also intends to broaden its SIP expertise by increasing its capability to offer chip-level design services, specialized library development services and collaborative engineering services. Aspec's cell libraries and design tools run on UNIX workstations and Windows NT-based PCs and currently support over 25 industry-standard EDA tools, including those produced by Avant!, Cadence, Mentor Graphics and Synopsys (including Viewlogic). The Company markets its products to customers primarily through a direct sales force and through a limited number of independent distributors. Aspec's products are used by ASIC and foundry companies, EDA companies, electronic system companies and IC companies. The Company's current customers include Acer, Advanced Micro Devices, Cadence Design Systems, Chartered Semiconductor, CommQuest, Compaq, Hyundai Electronics, IBM, Matrox, National Semiconductor, Nokia, Samsung Electronics, Sanyo Electric, United Microelectronics Corporation and Vitesse. Aspec Technology, Inc. was incorporated in California in December 1991 and reincorporated in Delaware in May 1997. The Company's executive offices are located at 830 East Arques Avenue, Sunnyvale, CA 94086, and its telephone number is (408) 774-2199. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company.......... 6,000,000 shares Common Stock to be outstanding after the offering................................... 28,439,557 shares(1) Use of proceeds.............................. Redemption of Series A Redeemable Preferred Stock and for working capital and other general corporate purposes. Proposed Nasdaq National Market symbol....... ASPC </TABLE> SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> THREE MONTHS ENDED FISCAL YEAR ENDED NOVEMBER 30, FEBRUARY 28, -------------------------------------------- --------------- 1993 1994 1995 1996 1997 1997 1998 ------ ------ ------ ------- ------- ------ ------ <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF INCOME DATA: Revenue............................ $3,689 $4,659 $6,640 $15,265 $22,392 $5,678 $6,925 Income from operations............. 1,398 1,366 1,408 4,122 3,539 1,820 1,646 Net income......................... 849 830 879 2,617 2,227 1,145 1,001 Accretion of Redeemable Preferred Stock(2)........................ -- -- -- 392 823 202 212 Income attributable to common stockholders.................... $ 849 $ 830 $ 879 $ 2,225 $ 1,404 $ 943 $ 789 Diluted earnings per share(3)...... $ 0.05 $ 0.04 $ 0.04 $ 0.10 $ 0.06 $ 0.04 $ 0.04 Diluted average shares outstanding(3).................. 18,468 19,407 20,172 22,396 22,532 22,974 22,222 </TABLE> <TABLE> <CAPTION> FEBRUARY 28, 1998 ------------------------- ACTUAL AS ADJUSTED(4) -------- -------------- <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Working capital........................................... $ 5,930 $ 48,115 Total assets.............................................. 17,116 59,301 Redeemable Preferred Stock................................ 14,380 -- Redeemable Common Stock................................... 7,116 -- Total stockholders' equity (deficiency)................... (11,378) 52,303 </TABLE> - ------------------------------ (1) Excludes outstanding options to purchase 2,275,190 shares of Common Stock at February 28, 1998 at a weighted average exercise price of $7.43 per share. See "Management -- Compensation Plans" and Note 7 of Notes to Consolidated Financial Statements. (2) In connection with the redemption of all outstanding shares of Series A Redeemable Preferred Stock from the proceeds of the offering, as required by the terms of such shares, the difference between the book value and the redemption value of approximately $4.1 million will be recorded as accretion of Preferred Stock when determining income attributable to common stockholders and earnings per share. This charge is expected to be recorded in the second quarter of fiscal 1998 when the offering is completed and, together with the anticipated charge to in-process research and development related to the proposed acquisition of SIS Microelectronics, Inc., will result in a loss attributable to common stockholders and a loss per share in that quarter. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 6 of Notes to Consolidated Financial Statements. (3) See Note 1 of Notes to Consolidated Financial Statements for an explanation of the determination of shares used in computing net earnings per share. (4) As adjusted to reflect the 6,000,000 shares of Common Stock offered by the Company hereby at an assumed public offering price of $11.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses, and the application of the estimated proceeds therefrom. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001033903_e-com_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001033903_e-com_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..5da9875a263149a26617528b8933bb2db1844a8c
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND RELATED NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS, IN ADDITION TO HISTORICAL INFORMATION, FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. THE COMPANY E.Com International, Inc. ("E.Com" or the "Company") develops, manufactures and markets integrated wireless mobile computing products for mobile computer users. The Company's Discovery I is a fully integrated smart handheld device that enables the user to send and receive wireless e-mail and faxes and access and retrieve certain information from the Internet, corporate networks and remote databases. The Company's Discovery II is a lower cost, fixed memory handheld device that permits pen-based wireless messaging, e-mail and faxes. The Company's PDxpress is a mobile, compact docking station that provides integrated wireless communications capabilities and related battery management functions for certain popular but now discontinued Hewlett Packard Company ("Hewlett Packard") handheld personal computers. The Company has completed development of these products and expects its first commercial sales of the Discovery I in the first quarter of 1998. E.Com's products are designed to exploit the rapid response capabilities of wireless data communications in industries with mobile employees and time-sensitive information requirements, such as field sales and service, public safety, health care, financial services, and delivery and courier services. Targeted likely users of the Company's products are away from their offices at least 20% of the time and have information processing and transmission requirements that extend beyond the capabilities of standard cellular phones and pagers, but require less memory and processing capabilities than standard laptop or handheld personal computers. Demand for wireless communications products, primarily cellular phones and paging and messaging devices, has exploded in recent years. At the same time, there have been significant advances in computer memory, speed, functionality and miniaturization in laptop, notebook and handheld computers. However, the successful integration of wireless communications products with computers has been relatively limited due to the complexities involved in developing and integrating (1) wireless networks over which data can be transmitted; (2) wireless network "gateways" to integrate and facilitate data communications between networks; and (3) easy to use, cost-effective wireless computing products for the end-user. E.Com believes that all necessary components for reliable, convenient wireless computing are now in place in the United States, that market demand is building and that many businesses and mobile employees are ready to embrace affordable, reliable, easy to use wireless products. In addition, E.Com believes that Asia-Pacific countries, where traditional telephone land lines are often economically and geographically impractical, are likely to begin relying on wireless data networks for more of their communication needs. E.Com's products are designed to address the critical wireless data communications and computing needs of mobile computer users. The Company's products incorporate proprietary software, integrated hardware, software and packet radio modems to enable wireless communication that is as easy as using a fax machine or network-wired computer. E.Com's products are lightweight, compact and durable, and are priced at the low-end to lower-mid-range of wireless mobile computing devices. All of E.Com's products enable mobile users to send and receive wireless e-mail and faxes. Further, the Company's Discovery I and PDxpress permit the mobile user to access and retrieve certain information from the Internet, corporate networks and remote databases. In addition, E.Com's products are energy efficient and can operate for up to 30 hours without recharging based upon E.Com's proprietary power and battery management systems. E.Com's objective is to develop and market highly functional, reasonably priced wireless mobile computing products for industries with mobile employees and time-sensitive information requirements. E.Com has designed its products to provide a broad range of performance capabilities at a significantly lower price than products with comparable features. By incorporating modular designs in its products, the Company can quickly customize or upgrade its products to accommodate state-of-the-art technology. E.Com intends to be a low-cost producer with the ability to respond quickly to customer demand and technological and market developments in wireless communications. While high-price customized wireless computing products provide excellent wireless connectivity, E.Com offers seamless integrated wireless connectivity at a reasonable price. The Company believes that its highly functional, lower-priced products will significantly expand the market for wireless mobile computing products. The Company has established strategic relationships with leading participants in the wireless data communications markets and is pursuing alliances with the largest systems integrators as well as other distribution arrangements with independent software vendors and distributors. Further, E.Com will offer to end-users of its products single-source technical support to solve any problems relating to its products' hardware, software or radio modems. E.Com was incorporated under the laws of the State of Oregon in 1996 and then acquired key product designs and technologies from EnBloc, Inc. ("EnBloc"). E.Com's corporate offices are located at 7737 SW Cirrus Drive, Beaverton, Oregon 97008 and its telephone number is (503) 671-9900. THE OFFERING Securities offered . . . . . . . . . . . . . . 2,375,577 shares of Common Stock; 1,571,093 Warrants, 106.7 Unit Warrants, 1,677,793 shares of Common Stock underlying the Warrants registered herein. (including 213,400 shares underlying the Unit Warrants). See "Description of Securities." Common Stock to be outstanding after the 4,053,370 shares (assuming offering . . . . . . . . . . . . . . . . . . . exercise of all Warrants and Unit Warrants). Use of Proceeds. . . . . . . . . . . . . . . . If all the Warrants were exercised at the exercise price of $3.50 and all Unit Warrants were exercised, the Company would receive $5,819,775.50. The Company expects to use the proceeds therefrom for further product development and working capital, including financing inventory and outstanding accounts receivable. Risk Factors . . . . . . . . . . . . . . . . . Investment in the Common Stock Warrants, and Unit Warrants involves a high degree of risk. See "Risk Factors."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001034365_faroudja_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001034365_faroudja_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a284129332c95e6b4499943b5e0c0b6268a1d461
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1998/CIK0001034365_faroudja_prospectus_summary.txt
@@ -0,0 +1 @@
+SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE FACTORS DISCUSSED UNDER "RISK FACTORS." THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS BASED UPON CURRENT EXPECTATIONS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. THE COMPANY Faroudja designs, develops and markets a range of video image enhancement products for the high-end home theater, industrial and broadcast markets through its wholly-owned subsidiary, Faroudja Laboratories, Inc. The Company is currently seeking to apply its technologies and experience to address opportunities in the emerging digital television ("DTV") and high definition television ("HDTV") broadcast and display environments and to facilitate the convergence of the personal computer ("PC") and the television ("TV"). Video images are pervasive in today's society as sources of entertainment and information. Images are displayed on a variety of electronic media including color TVs, projection systems and PCs. Historically, there has been a substantial difference in the quality of these various media, ranging from low quality TV pictures to very high quality cinema pictures. This difference resulted from a host of technical issues related to the capture, transmission and display of video images. Current technologies make it possible to replicate cinema quality on TVs, projection systems and PCs. The Company's products for the TV market substantially reduce the imperfections inherent in analog NTSC signals, which become increasingly apparent on large screen TV displays. The Company's technology improves picture quality by removing artifacts and noise, detecting and compensating for motion, enhancing resolution, and multiplying the number of lines displayed. Faroudja's product sales for the TV market include sales of stand alone products to home and industrial customers and board level products to original equipment manufacturer ("OEM") customers. Faroudja is developing products which support the transition from analog to DTV/HDTV broadcasting. As broadcasters make significant investments to satisfy regulatory requirements, the Company believes that product solutions which interface with additional necessary digital transmission equipment and current studio equipment will help broadcasters minimize transition costs and maintain flexibility in responding to evolving regulatory and market requirements. The Company has developed standards conversion and upscaling products which it believes will enable broadcasters to use much of the equipment present in their existing studios to produce programming in various DTV/HDTV video formats. The Company is currently commencing production of its first product in this field, the Digital Format Translator-TM-. The Company is also developing products and technologies that are intended to solve the problems associated with the display of high quality TV pictures on PC screens by significantly reducing the inherent noise and artifacts. The Company intends to establish additional relationships with companies whose technology, products and product strategies complement those of the Company. The Company markets its products for the TV market through a network of home theater, industrial and commercial dealers as well as OEM customers. For the broadcast market, the Company primarily sells directly. The Company intends to expand its international sales and marketing activities in order to increase export sales. The Company began operations in 1971 through two related companies, Faroudja Laboratories, Inc. ("FLI") and later Faroudja Research Enterprises, Inc. ("FRE"). The Company was incorporated in December 1996 under the laws of the state of Delaware to succeed to the business of FLI and FRE. The Company's principal executive offices are located at 750 Palomar Avenue, Sunnyvale, California 94086 and its telephone number is (408) 735-1492. All references to the "Company" shall mean Faroudja, Inc. and its predecessors and subsidiaries, unless the context otherwise requires. No dealer, sales representative, or any other person has been authorized to give any information or to make any representations in connection with this Prospectus other than those contained in this Prospectus, and, if given or made, such information or representation must not be relied upon as having been authorized by the Company or any Underwriter. This Prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, any securities other than the registered securities to which it relates or an offer to, or solicitation of, any person in any jurisdiction where such offer or solicitation would be unlawful. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the date hereof or that the information contained herein is correct as of any time subsequent to the date hereof. ------------------------------------ TABLE OF CONTENTS <TABLE> <CAPTION> PAGE <S> <C> SUMMARY ................................................................. 1 RISK FACTORS................................................................ 3 DIVIDEND POLICY............................................................. 10 PRICE RANGE OF COMMON STOCK................................................. 11 SELECTED CONSOLIDATED FINANCIAL DATA........................................ 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................. 14 BUSINESS ................................................................. 20 MANAGEMENT ................................................................. 32 CERTAIN TRANSACTIONS........................................................ 41 PRINCIPAL AND SELLING STOCKHOLDERS.......................................... 44 DESCRIPTION OF CAPITAL STOCK................................................ 48 SHARES ELIGIBLE FOR FUTURE SALE............................................. 51 PLAN OF DISTRIBUTION........................................................ 52 LEGAL MATTERS............................................................... 53 EXPERTS ................................................................. 53 Index to Consolidated Financial Statements................................. F-1 </TABLE> ------------------------------------ FAROUDJA, PICTURE PLUS, PRESENTATION PLUS, DIGITAL FORMAT TRANSLATOR, AND DIGITAL LIGHT PROCESSING are trademarks of the Company. All other trademarks or tradenames referred to in the Prospectus are the property of their respective owners. Digital Light Processing is a trademark of Texas Instruments Incorporated. The Company has filed with the Commission a Registration Statement on Form S-1 (herein together with all amendments and exhibits, referred to as the "Registration Statement") under the Securities Act with respect to the Common Stock offered hereby. This Prospectus does not contain all of the information contained in the Registration Statement and reference is made to the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission, and the exhibits and schedules thereto for further information with respect to the Company and the Common Stock offered hereby. Statements contained herein concerning the provisions of any documents are not necessarily complete, and in each instance reference is made to the copy of such document filed as an exhibit to the Registration Statement. Each such statement is qualified in its entirety by such reference. The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information filed by the Company and the Registration Statement, including the exhibits and schedules thereto, may be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at certain regional offices of the Commission located at Seven World Trade Center, 13th Floor, New York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Room 1025, Washington, D.C. 20549, at prescribed rates. The Commission maintains a World Wide Web site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that filed electronically with the Commission. Information concerning the Company is also available for inspection at the offices of The Nasdaq Stock Market, Reports Section, 1735 "K" Street, N.W., Washington, D.C. 20006. SUMMARY CONSOLIDATED FINANCIAL DATA (in thousands, except per share data) <TABLE> <CAPTION> THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ----------------------------------------------------------- --------------------------- 1993 1994 1995 1996 1997 1997 1998 ---- ---- ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Total revenues........................... $5,684 $8,065 $11,954 $13,126 $17,006 $ 3,585 $ 3,358 Gross profit............................. 3,557 5,067 7,739 8,329 11,745 2,586 2,254 Operating income (loss).................. 1,206 1,859 4,006 2,115 1,570 305 (265) Net income............................... $1,251 $1,929 $ 4,009 $ 1,511 $ 1,251 $ 249 $ 8 Net income per share(1) Basic.................................. $0.14 $0.03 $0.00 Diluted................................ $0.13 $0.03 $0.00 Shares used in per share calculation Basic.................................. 9,041 8,200 12,079 Diluted................................ 9,925 9,054 12,766 PRO FORMA DATA (2): Pro forma adjustments.................... $(701) $(939) $(192) Pro forma net income..................... 1,228 3,070 1,319 Pro forma net income per share(1) Basic.................................. $0.15 $0.43 $0.17 Diluted................................ 0.15 0.43 0.16 Shares used in per share calculation Basic.................................. 7,979 7,157 7,977 Diluted................................ 7,979 7,176 8,191 </TABLE> <TABLE> <CAPTION> MARCH 31, 1998 ------------------------ <S> <C> CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments................................................ $ 21,875 Working capital.................................................................................. 27,103 Total assets..................................................................................... 31,720 Total long-term debt............................................................................. --- Total stockholders' equity....................................................................... 29,463 </TABLE> - -------------------------- (1) See Note 1 of Notes to Consolidated Financial Statements for an explanation of the basis used to calculate net income per share. (2) Reflects the pro forma effect assuming the Company had been treated as a C Corporation rather than an S Corporation for federal and state income tax purposes, effective January 1, 1994. See "Certain Transactions - Subchapter S Distributions." RECENT OPERATING RESULTS On July 23, 1998, Faroudja reported it's second quarter financial results. Net revenues for the quarter ending June 30, 1998, were $3.4 million compared to net revenues of $4.3 million in the quarter ended June 30, 1997. Net revenues for the first six months of 1998, ended on June 30, 1998, were $6.7 million compared to $7.9 million net revenues for the six months in 1997 ended on June 30, 1997. The Company's net loss in the quarter ended June 30, 1998 was $754,000, or $0.06 per share on a diluted basis, compared to net income of $285,000, or $0.03 per share on a diluted basis for the quarter ended June 30, 1997. Net loss for the six months ended June 30, 1998, was $746,000, or $0.06 per share on a diluted basis compared to net income of $534,000 or $0.06 per share on a diluted basis for the six months ended June 30, 1997. On both a year-to-year and a sequential comparison, second quarter 1998 revenues and net income were negatively impacted by the absence of major royalty payments. See "Business--Strategic Relationships and Licensing." Spending in the second quarter was up significantly over the first quarter, as the Company focused its development efforts on its line of Digital Format Translators-TM-. See "Business--Broadcast Products."
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus assumes that (i) the 290-for-1 stock split, to be effected prior to the consummation of the Offering, has occurred, (ii) the Conversion Transaction, in which shares of the Company's Series A Preferred Stock having an aggregate liquidation value of approximately $24.1 million will be converted into shares of Common Stock at the initial public offering price, has been consummated and (iii) the Underwriters' over-allotment option is not exercised. The operations of Natural Nutrition Group, Inc. are conducted through its wholly-owned subsidiary, Health Valley Company ("Health Valley"). Unless the context otherwise requires, references in this Prospectus to the "Company" or "NNG" include Natural Nutrition Group, Inc. and Health Valley on and after April 15, 1996. All references to "Health Valley" and the "Predecessor Company" prior to April 15, 1996 refer to the combined operations of Health Valley Foods, Inc., Health Valley Manufacturing Company and their predecessors. THE COMPANY The Company is a leading manufacturer and marketer of premium natural and organic food products in the United States. The Company markets (i) breakfast cereals and granolas, (ii) granola bars, cereal bars, cookies, crackers and other baked goods and (iii) canned and instant soups and chilis, as well as other food products, primarily under its Health Valley(R) and Breadshop's(R) brands. The Company's branded products are made using only natural ingredients, without artificial flavors, colors, additives or preservatives. Many of the Company's products are also made with "organic" ingredients, which are grown without dependence upon artificial pesticides, chemicals or fertilizers. The Company currently markets over 200 products and believes it has the largest market share among marketers of natural food brands for its core product categories -- breakfast cereals and granolas, baked goods, and soups and chilis. Representative products of the Company include Health Valley(R) Spicy Vegetarian Chili, Breadshop's(R) Honey Gone Nuts(R) Cereal, Health Valley(R) Apple Cobbler Cereal Bars, Health Valley(R) Amazing Apple!(TM) Hot Breakfast Cereal and Health Valley(R) Soy Moo(R) Non-Dairy Beverage. The Company's products are sold primarily through natural and specialty food distributors and ultimately to consumers through natural food retailers, such as Whole Foods and Wild Oats, conventional grocery retailers, such as Fred Meyer and Kroger, and other retail channels. The Company estimates that in 1997 approximately 35% of its products were sold in the natural food retail channel, approximately 50% of its products were sold in the conventional grocery retail channel and approximately 15% of its products were sold in other retail channels. In 1997, the Company began to manufacture private label products for certain of its customers. The Company manufactures most of its products, unlike many natural food companies that rely on contract manufacturing. The Company's manufacturing operations are housed in a modern 150,000 square foot facility located in Irwindale, California. The Company believes that by manufacturing most of its products, it is able to better control the cost and quality of its products and provide better service to its customers. The Company estimates that it is generally utilizing less than 30% of the Irwindale facility's manufacturing capacity. As a result, the Company believes significant operating leverage can be achieved through growth. In addition, the Company's manufacturing capability has enabled it to produce private label products for retailers, which increases revenues and may also strengthen its business relationships with certain key customers. The natural and organic food market is highly fragmented and includes several hundred manufacturers and marketers. The Company believes that continued growth in this market combined with continued consolidation among retailers and distributors will lead to consolidation among natural and organic food manufacturers. Accordingly, a key element of the Company's growth strategy is to pursue strategic acquisitions of natural and organic food companies with products or brands that strengthen or complement the Company's product lines. The Company believes that its manufacturing capability, its sophisticated information systems and the experience and depth of its management team will enable the Company to identify and realize synergies in connection with acquisitions which may give the Company advantages over other potential acquirors. NATURAL FOOD MARKET According to Natural Foods Merchandiser ("NFM"), a leading industry publication, the market for natural products grew at a rate of 20% between 1995 and 1996 and reached approximately $11.5 billion in 1996. According to NFM, the organic food market, a segment of the natural products market, also grew at a rate of 20% between 1995 and 1996 and was estimated at $3.0 billion in 1996. The Company believes that growth in the natural and organic food market is being propelled by several factors, including (i) consumers taking charge of their health and well being through awareness of the link between diet and health and improved eating habits, (ii) consumer concern over the purity and safety of foods due to the presence of pesticide residues, artificial ingredients and other chemicals and (iii) consumer awareness of environmental issues. In recent years, changes in attitudes and beliefs have led to changes in dietary habits. For example, from 1980 to 1995, per capita consumption of grains and fruits -- two food groups of which the United States Department of Agriculture recommends increased consumption -- grew by 30% and 20%, respectively. Demographic trends are also favorable for natural and organic foods. The number of adults over the age of 35 is increasing rapidly. The U.S. Census Bureau projects that between 1990 and 2000 the number of adults between the ages of 35 and 54 will grow by 29% and the number of adults over age 54 will grow by 13%. Since these demographic groups are the most frequent purchasers of the Company's products, the Company believes the aging population will increase the number of ultimate consumers of the Company's products. COMPETITIVE STRENGTHS The Company believes that its current market position is attributable to the following competitive strengths: Strong Brand Name Recognition and Leading Market Shares The Health Valley(R) and Breadshop's(R) brand names, both of which have been marketed by the Company and its predecessors for over 25 years, are two of the leading brand names in the natural and organic food industry. The Company believes that the Health Valley(R)brand is one of the most recognized natural and organic food brands in the United States. The Company believes that it has the leading market share in the natural food and conventional grocery retail channels in each of its three core product categories -- (i) breakfast cereals and granolas, (ii) granola bars, cereal bars, cookies and other baked goods and (iii) canned and instant soups and chilis -- which accounted for over 90% of the Company's revenues in 1997. Expertise in Natural and Organic Ingredient Sourcing and Product Development The Company has significant expertise in the sourcing of natural and organic food ingredients and in the formulation of innovative natural products. The Company, together with its predecessors, has been working with natural and organic formulations, preparations and recipes for over 25 years. The Company has also developed proprietary techniques which increase shelf life, improve flavor and enhance the nutritional quality of the Company's food products, without relying on artificial ingredients or preservatives. Substantial Infrastructure NNG operates a modern manufacturing center in Irwindale, California which the Company estimates is generally operating at less than 30% utilization. In addition, the Company has sophisticated, scalable information systems capable of absorbing future growth. The Company believes the combination of excess manufacturing capacity and scalable information systems creates a significant opportunity to grow existing brands, develop new products, build its private label and contract manufacturing businesses and acquire complementary brands which can be manufactured by the Company without significant capital investment or additional fixed expenses. Experienced Management Team The natural and organic food industry is a relatively young industry, consisting primarily of comparatively small, privately-owned businesses. As a result, the management of such natural food companies often lacks the training and experience commonly found in other more mature segments of the food industry. The Company has recruited an experienced management team to oversee current operations and will continue to recruit seasoned management to support future growth and acquisitions. The Company's executive officers are veteran senior managers with extensive food industry experience. The Company believes that its larger size relative to most natural food companies enables it to recruit and retain more highly qualified and specialized management than many of its competitors. GROWTH STRATEGY The Company's objective is to be the leading manufacturer and marketer of premium branded natural and organic foods. The key elements of the Company's growth strategy are as follows: Concentrate on the Growing Natural and Organic Food Market The natural and organic food market is growing rapidly, and the Company is concentrating its branded marketing activities exclusively in this market segment. Grow the Company's Existing Brands The Company intends to build upon its leading position in its current core product categories through internal growth. Both the Health Valley(R) and Breadshop's(R) brands have been marketed for more than 25 years, fostering consumer awareness and loyalty and retail availability throughout the United States. The Company plans to invest in trade and consumer marketing in order to further increase the awareness and availability of its brands. Building on its brand equities, the Company believes it can strengthen its position in current product categories and successfully launch products in new categories. The Company plans to continue developing new products which appeal to consumers with respect to taste, nutrition, convenience and environmental impact. The Company also plans to launch new products for evening meal consumption, complementing its existing breakfast, lunch and snack products. For example, in the third quarter of 1998, the Company plans to launch an instant rice meal positioned to compete in the single serve home meal replacement market. In addition, the Company plans to introduce new food products that incorporate ingredients with specific nutritional benefits, or functional foods. Expand Sales in Grocery Retail Channel Complementing its ongoing efforts to increase sales in the natural food retail channel, the Company plans to improve the scope and quality of conventional grocery retail distribution for its brands. By informing grocery retailers about natural and organic food markets, consumer profiles and growth opportunities, the Company will seek to enhance conventional grocers' understanding of the appeal of natural and organic food products and increase their commitment to the segment. The Company believes that fostering understanding and commitment on the part of conventional grocers will result in improved shelf space and more effective in-store merchandising, which the Company believes will increase its sales in the conventional grocery retail channel. Pursue Strategic Acquisitions A key element of the Company's growth strategy is to pursue strategic acquisitions of natural and organic food companies with products or brands that strengthen or complement the Company's product lines. The Company believes such acquisitions may create opportunities to accelerate sales growth and leverage purchasing, manufacturing and operating expenses. The Company believes the fragmented nature of the natural food industry offers numerous opportunities to acquire companies that fit well with the Company's strategy. For example, the Company recently entered into a non-binding letter of intent to acquire a natural and organic food company with revenues of approximately $5.0 million and net income of less than $20,000 in 1997. See "Business -- Growth Strategy." Increase Private Label Business The Company believes its private label sales activities can lead to both increased revenues and improved relationships with key customers, thereby improving the market for its branded products. In conventional grocery retailing, private labels frequently account for 15% to 20% of sales. However, until recently, there have been very few private label natural food products. Due to the growth of the natural and organic food market, natural food marketers have begun to establish private label programs. During 1997, the Company established a private label division, recruited an experienced private label sales manager and began developing private label customer relationships and sales. The Company intends to become the supplier of choice for private label natural and organic foods in its core product categories. RISKS ASSOCIATED WITH THE COMPANY AND THE OFFERING The Common Stock offered hereby involves a high degree of risk. For a discussion of risks associated with the Company and the Offering, including the Company's limited operating history, history of net losses and acquisition strategy, as well as other factors that should be carefully considered by prospective investors, see "Risk Factors." --------------------- NNG was incorporated in Delaware in October 1995. NNG acquired Health Valley in April 1996 and The Bread Shop, Inc. ("Breadshop") in October 1996. NNG's principal executive offices are located at 135 South LaSalle Street, Suite 1134, Chicago, Illinois 60603 and its telephone number at that address is (312) 578-1110. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company........... 3,000,000 shares Common Stock to be outstanding after the Offering.................................... 10,476,772 shares(1) Use of proceeds............................... For repayment of revolving credit and term indebtedness, payment of cash dividends on the Series A Preferred Stock accruing from July 1, 1998 through the consummation of the Offering and general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol........ NNGI </TABLE> - --------------- (1) Includes (i) 2,679,808 shares of Common Stock being issued in the Conversion Transaction at the assumed initial public offering price of $9.00 per share, (ii) 600,300 shares subject to options which will have vested within 60 days of the consummation of the Offering with a weighted average exercise price of $0.62 per share and (iii) 40,000 shares subject to options which will be granted and which will be exercisable on the date of consummation of the Offering with an exercise price equal to the initial public offering price. Excludes (i) 115,420 shares subject to unvested options with a weighted average exercise price of $0.37 per share and (ii) 142,270 shares subject to options which will be granted, but will not be exercisable, on the date of consummation of the Offering with an exercise price equal to the initial public offering price. SUMMARY CONSOLIDATED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> PREDECESSOR COMPANY COMPANY ------------------------- ------------------------------------------------------- JANUARY 1, APRIL 15, THREE MONTHS ENDED YEAR ENDED 1996 TO 1996 TO YEAR ENDED MARCH 31, DECEMBER 31, APRIL 15, DECEMBER 31, DECEMBER 31, ------------------------- 1995(1) 1996(1) 1996(2) 1997 1997 1998 ------------ ---------- ------------ ------------ ----------- ----------- <S> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales........................... $73,351 $18,221 $ 39,942 $ 67,898 $ 16,299 $ 17,568 Cost of sales....................... 53,839 13,897 27,180 42,370 10,627 10,960 ------- ------- ---------- ----------- ----------- ----------- Gross profit........................ 19,512 4,324 12,762 25,528 5,672 6,608 Marketing, selling and distribution expenses.......................... 16,651 5,563 7,177 17,366 3,832 4,891 General and administrative expenses.......................... 6,541 2,937 5,034 5,425 1,241 1,202 Amortization of goodwill and trademarks........................ -- -- 114 334 83 90 ------- ------- ---------- ----------- ----------- ----------- Operating income (loss)............. (3,680) (4,176) 437 2,403 516 425 Other income(3)..................... 645 169 -- -- -- -- Interest expense, net............... 1,502 476 1,052 1,911 497 458 ------- ------- ---------- ----------- ----------- ----------- Income (loss) before income taxes... (4,537) (4,483) (615) 492 19 (33) ------- ------- ---------- ----------- ----------- ----------- Provision (benefit) for income taxes............................. 1,137 (1,166) 13 387 17 (25) ------- ------- ---------- ----------- ----------- ----------- Net income (loss)................... $(5,674) $(3,317) (628) 105 2 (8) ======= ======= Preferred dividends................. 1,330 2,082 514 571 ---------- ----------- ----------- ----------- Net loss attributable to common stockholders...................... $ (1,958) $ (1,977) $ (512) $ (579) ========== =========== =========== =========== Net loss per common share- basic and diluted................. $ (.62) $ (.48) $ (.13) $ (.14) ========== =========== =========== =========== Weighted average number of common shares outstanding................ 3,161,737 4,132,491 4,059,903 4,156,664 ========== =========== =========== =========== PRO FORMA STATEMENT OF OPERATIONS DATA(4): Income before income taxes.......... $ 2,370 $ 387 Provision for income taxes.......... $ 1,138 $ 143 ----------- ----------- Net income.......................... $ 1,232 $ 244 =========== =========== Net income per share................ $ 0.12 $ .02 =========== =========== Pro forma weighted average common shares outstanding................ 10,351,025 10,499,672 =========== =========== OPERATING AND OTHER DATA: EBITDA(5)........................... $ 333 $(3,018) $ 2,781 $ 5,848 $ 1,419 $ 1,342 Net cash provided by operating activities........................ 5,158 1,210 2,312 268 789 2,519 Net cash used in investing activities........................ (1,616) (115) (43,199) (857) (347) (206) Net cash provided by (used in) financing activities.............. (3,601) (559) 40,178 277 (754) (2,313) </TABLE> <TABLE> <CAPTION> MARCH 31, 1998 ------------------------ ACTUAL AS ADJUSTED(6) ------- -------------- <S> <C> <C> BALANCE SHEET DATA: Working capital............................................. $ 1,449 $ 8,375 Plant and equipment......................................... 22,603 18,424 Total assets................................................ 48,317 50,790 Long-term debt.............................................. 17,234 -- Redeemable preferred stock and accrued dividends............ 23,550 -- Total stockholders' equity (deficit)........................ (3,172) 40,359 </TABLE> (footnotes appear on following page) (footnotes from previous page) - --------------- (1) The combined statement of operations data for the year ended December 31, 1995 and the period January 1, 1996 to April 15, 1996 represent the combined results of Health Valley Foods, Inc. and Health Valley Manufacturing Company (collectively, the "Predecessor Company") and exclude NNG's operating losses for the periods, which were not material. The summary consolidated data include certain reclassification adjustments to conform the presentation of 1995 financial data with that of the Company. (2) The statement of operations data for the period from April 15, 1996 to December 31, 1996 represent the results of NNG for the year ended December 31, 1996, together with the results of operations of the Predecessor Company subsequent to its acquisition on April 15, 1996 and Breadshop subsequent to its acquisition on October 31, 1996. The operations of NNG for the period from January 1, 1996 to April 15, 1996 were not material. The results of the Company are not comparable to those of the Predecessor Company in light of the changes in the capital structure to fund the acquisitions, which included the issuance of preferred stock and the incurrence of additional debt. Additionally, the purchase accounting adjustments related to the acquisitions changed the cost basis of the Company's fixed assets, trademarks and resulting goodwill. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- General." (3) Other income for the years ended December 31, 1995 and 1996 primarily represents revenues from the sale of cookbooks, which was discontinued in 1996. (4) The pro forma statement of operations data reflect the elimination of the preferred dividends and reduction of interest expense (net of interest income on the remaining net proceeds of the Offering), and the related income tax effect, resulting from the Conversion Transaction and the use of a portion of the net proceeds of the Offering to repay certain indebtedness. See "Use of Proceeds." (5) EBITDA represents income (loss) before income taxes, interest expense (net of interest income), depreciation and amortization. EBITDA has been included because management uses it as a supplementary tool to measure the Company's ability to generate operating cash flow. Management also uses EBITDA to establish performance goals and related bonuses for selected Company employees. EBITDA subsequent to the acquisition of Health Valley on April 15, 1996 reflects the impact of the cost reduction efforts and overall improved operating results. EBITDA does not represent cash flow from operations as defined by generally accepted accounting principles and should not be considered as a substitute for net income as an indicator of the Company's operating performance or cash flow as a measure of liquidity. EBITDA, as presented, may not be comparable to other similarly titled measures of other companies. (6) As adjusted (i) for the Conversion Transaction, (ii) for the Offering and the application of the net proceeds therefrom and (iii) to reflect the $7.3 million in restructuring and other charges (before a tax benefit of $2.9 million) recorded in the second quarter of 1998. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Recent Operating Results." RECENT OPERATING RESULTS The following financial information for the quarter and the six months ended June 30, 1998 has recently become available. The information, together with the comparative information presented for the quarter and the six months ended June 30, 1997, is unaudited, but, in the opinion of management, includes all adjustments necessary for a fair presentation. Net sales for the three months ended June 30, 1998 were approximately $15.3 million, a decrease of $0.5 million, or 3.2%, from net sales of approximately $15.8 million for the comparable period in 1997. This decrease was primarily due to lower sales of canned and instant soups and chilis which the Company believes were due to exceptionally warm weather during the second quarter of 1998. Marketing, selling and distribution expenses for the three months ended June 30, 1998 were approximately $4.4 million compared to $3.8 million for the comparable period in 1997 and as a percentage of net sales increased 4.7% from the comparable period in 1997, as a result of increased promotional and advertising activities. Operating income for the second quarter of 1998, prior to the restructuring and other charges of approximately $7.3 million recorded in that quarter, was approximately $19,000 compared to approximately $669,000 for the comparable period in 1997, primarily due to the factors discussed above. After the $7.3 million charge, the Company had an operating loss of approximately $7.3 million for the three months ended June 30, 1998. For an explanation of the restructuring charge, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Recent Operating Results."
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+PROSPECTUS SUMMARY The following summary should be read in conjunction with, and is qualified in its entirety by, the more detailed information and the Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Investors should consider carefully the risk factors related to the purchase of the Common Stock of the Company. See "Risk Factors." Unless otherwise indicated, the information in this Prospectus assumes that the Underwriters' over-allotment option will not be exercised. References herein to fiscal years are to the Company's fiscal year which ends on September 30. Unless the context otherwise requires, the "Company" refers to Advanced Communication Systems, Inc. and its subsidiaries. A glossary of acronyms used in this Prospectus appears on page 52. THE COMPANY Advanced Communication Systems, Inc. provides communications and information technology services and solutions, predominantly to U.S. government agencies and to a lesser extent commercial and international customers. The Company operates primarily in three interrelated areas: communication systems design and support, information technology services ("IT Services") and systems integration. The Company believes that, from its inception in 1987, it has been a leader in U.S. Navy satellite communications. The Company's revenues have increased each year since fiscal 1987 and grew at a compound annual rate of 43.2% during the last five fiscal years, substantially all through internal growth, reaching $52.2 million for fiscal 1997. Additionally, for the six month period ended March 31, 1998, the Company's revenues grew 54.0% over the comparable prior six month period, increasing to $32.6 million. The Company's total funded and unfunded backlog was $217.6 million as of March 31, 1998. See "Business -- Backlog." The Company's primary objective is to provide superior communications and information technology services and solutions to its clients. Consistent with this objective, the Company completed three significant strategic acquisitions since its initial public offering in July 1997. In February 1998, the Company acquired Advanced Management Incorporated ("AMI"), a provider of a wide range of information technology services, including complex computer solutions and management services, to a variety of government and commercial entities, including clients outside the Company's traditional Department of Defense ("DOD") client base. In November 1997, the Company acquired Integrated Systems Control, Inc. ("ISC"), a provider of technical and engineering services to the DOD, primarily the U.S. Navy, in the areas of communications and information technology. In August 1997, the Company acquired RF Microsystems, Inc. ("RFM"), a provider of technical and engineering services to the DOD in the areas of communications, navigation, electronic warfare and digital signal systems. The Company believes that such acquisitions: (i) allow the Company to participate in increasingly large and complex procurement programs; (ii) increase its opportunities to cross-sell products and services to existing customers; (iii) bring new strength to the Company's technical capabilities through the cross-utilization of technology and engineering skills; and (iv) increase the overall depth and experience of the Company's management. See "Business -- Overview." The three main areas of the Company's business summarized below are communication systems, IT Services and systems integration. The Company believes that the convergence of its unique strengths in communications and information technologies has positioned the Company to address space and computer-based communications markets as an end-to-end provider of total solutions. - COMMUNICATION SYSTEMS. The Company designs, engineers, develops, integrates, installs and operates satellite and computer-based communication systems. It provides satellite communications engineering and technical services and program and system support primarily to program directorates and field activities of the U.S. Navy. Recently, the Company has expanded its communication systems business capabilities to provide a full range of systems engineering procurement and support for the Command, Control, Communication, Computer and Intelligence ("C4I") initiatives of the DOD. In addition, the Company has expanded its staff to include experts in program and financial management, and now provides support in these areas to its communication systems customers. The Company believes this combination of skills and capabilities is one of the factors that distinguishes it from its competitors in the communications systems business. The Company's communications systems business represented 63.8% of revenues for the six month period ended March 31, 1998. - IT SERVICES. The Company provides a full range of services and support in the areas of information management technology, information processing, network design and operations, database design and management, Internet and intranet services and multimedia training services. It provides these services to a wide range of customers, including the DOD, other federal agencies and commercial enterprises. The advanced technical capabilities gained by the Company while performing services for government customers have provided the Company with expertise in the information technology area, which the Company is leveraging to develop its commercial business. The Company's IT Services business represented 25.2% of revenues for the six month period ended March 31, 1998. - SYSTEMS INTEGRATION. The Company provides systems integration services for communication systems and, to a lesser extent, acts as a value-added reseller of computer hardware and software to both government and commercial customers. The Company's strategy in this business area is to concentrate on providing total communication systems integration solutions. Most of this communication systems integration business is performed under its contracts (the "GSA Schedule Contracts") with the General Services Administration ("GSA"), which permit the Company to sell approved products to U.S. government agencies and contractors without further competitive bidding. The Company's systems integration business represented 11.0% of revenues for the six month period ended March 31, 1998. Growth in the Company's business is being driven in part by the increasing trend in government and commercial organizations to focus on their core competencies and to outsource non-core functions such as information technology. In addition, the U.S. military is placing greater emphasis on increasing productivity while using fewer resources by employing systems that act as "force multipliers." Solutions and technologies such as those offered by the Company permit the use of fewer personnel and assets and result in more effective performance at lower levels of spending. Federal Sources, Inc., an independent market research firm specializing in the U.S. federal market, estimates that the U.S. government has budgeted $28 billion in its fiscal year 1998 for information technology services and products, including approximately $10 billion budgeted by the DOD. The Company believes that the commercial information technology market is significantly larger than the government market. The Company believes it has established a reputation in the industry for delivering creative solutions to complex problems through the use of highly skilled personnel and the most current technology. The Company has managed large and complex federal contracts and believes this capability positions it to capitalize on the expected future growth in outsourcing, both in the United States and internationally. To do so, the Company plans to continue to employ the following strategies: (i) maintain leadership in the military satellite communications industry; (ii) expand existing services and customer base; (iii) expand through additional strategic acquisitions and the use of teaming relationships; and (iv) develop additional international and commercial business. Advanced Communication Systems, Inc. is a Delaware corporation incorporated in 1987. Its principal executive offices are located at 10089 Lee Highway, Fairfax, Virginia 22030, and its telephone number is (703) 934-8130. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company................... 2,000,000 shares Common Stock offered by the Selling Stockholders...... 525,000 shares Common Stock to be outstanding after the offering (1)................................................. 8,579,000 shares Use of Proceeds....................................... The net proceeds of this offering will be used to repay existing bank debt and for general corporate purposes, including potential acquisitions. See "Use of Proceeds." Nasdaq National Market symbol......................... "ACSC" </TABLE> - --------------- (1) Based on shares outstanding as of April 15, 1998. Includes 25,000 shares which will be issued upon exercise of an option by one of the Selling Shareholders and sold in this offering. Does not include an aggregate of 738,500 shares of Common Stock reserved for issuance by the Company upon the exercise of stock options as of April 15, 1998, of which options to purchase 99,700 shares will be exercisable at the closing of this offering at a weighted average exercise price of $6.34. See "Management -- Stock Plans and Agreements" and Note 12 of Notes to the Company's Consolidated Financial Statements. SUMMARY FINANCIAL DATA <TABLE> <CAPTION> YEAR ENDED SEPTEMBER 30, SIX MONTHS ENDED MARCH 31, ------------------------------------------------------------ ----------------------------- PRO FORMA PRO FORMA COMBINED COMBINED 1993 1994 1995 1996 1997 (1) 1997 (2) 1997 1998 1998 (3) ------- ------- ------- ------- -------- --------- ------- ------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues................ $12,223 $19,106 $23,724 $31,665 $52,194 $88,620 $21,130 $32,550 $40,635 Direct costs............ 7,050 11,418 14,815 19,307 37,687 60,325 14,746 20,990 25,960 Indirect, general and administrative expenses.............. 4,612 7,177 8,202 10,253 11,128 21,452 5,025 8,821 11,336 Write-off of acquired in-process R & D costs................. -- -- -- -- 1,910 -- -- -- -- ------- ------- ------- ------- ------- ------- ------- ------- ------- Income from operations............ 561 511 707 2,105 1,469 6,843 1,359 2,739 3,339 Interest expense........ (92) (125) (185) (257) (136) (2,047) (134) (378) (942) Other income, net....... 14 52 52 57 153 153 44 15 15 ------- ------- ------- ------- ------- ------- ------- ------- ------- Income before taxes..... 483 438 574 1,905 1,486 4,949 1,269 2,376 2,412 Pro forma income taxes (4)................... 193 175 229 743 571 1,883 495 879 892 ------- ------- ------- ------- ------- ------- ------- ------- ------- Pro forma net income (4)................... $ 290 $ 263 $ 345 $ 1,162 $ 915 $ 3,066 $ 774 $ 1,497 $ 1,520 ======= ======= ======= ======= ======= ======= ======= ======= ======= Pro forma net income per share -- basic (4).... $ 0.28 $ 0.20 $ 0.59 $ 0.18 $ 0.23 $ 0.24 Pro forma net income per share -- diluted (4)................... $ 0.27 $ 0.19 $ 0.58 $ 0.18 $ 0.23 $ 0.23 Pro forma weighted average shares outstanding -- basic (5)............. 4,212 4,682 5,157 4,246 6,438 6,438 Pro forma weighted average shares outstanding -- diluted (5)................... 4,361 4,767 5,242 4,346 6,558 6,558 </TABLE> <TABLE> <CAPTION> MARCH 31, 1998 ------------------------- ACTUAL AS ADJUSTED (6) ------- --------------- (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Working capital............................................. $18,136 $18,220 Total assets................................................ 56,788 56,788 Total debt.................................................. 24,930 1,902 Stockholders' equity........................................ 18,955 41,983 </TABLE> - --------------- (1) Includes a one-time, non-cash charge reflecting the write-off of acquired in-process research and development costs in connection with the acquisition of RFM totaling $1.9 million. Excluding such charge, the Company's income from operations, pro forma net income and pro forma net income per share -- diluted would have been $3.4 million, $2.1 million and $0.44, respectively, for the year ended September 30, 1997. (2) Gives effect to the acquisition of AMI, RFM and ISC assuming such transactions had occurred on October 1, 1996 and the exclusion of the acquired in-process research and development costs of $1.9 million. See "Unaudited Pro Forma Condensed Consolidated Statements of Operations." (3) Gives effect to the acquisition of AMI assuming such transaction had occurred on October 1, 1997. See "Unaudited Pro Forma Condensed Consolidated Statements of Operations." (4) Prior to June 25, 1997, the Company elected to be treated as an S corporation and was not subject to federal and certain state income taxes. The pro forma income taxes data reflects federal and state income taxes based on estimated tax rates, as if the Company had elected C corporation status for the periods indicated. Amounts for the six month period ended March 31, 1998 are based on actual results. (5) See Note 2 of the Notes to the Company's Consolidated Financial Statements. Amounts for the six month period ended March 31, 1998 are based on actual weighted shares outstanding. (6) Gives effect to the sale of the 2,000,000 shares of Common Stock offered by the Company hereby at an assumed price of $12.375 per share, after deducting the estimated underwriting discount and estimated offering expenses, and the application of the net proceeds therefrom. See "Use of Proceeds."
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+PROSPECTUS SUMMARY The following summary should be read in conjunction with, and is qualified in its entirety by, the more detailed information, including "Risk Factors" and the financial statements and notes thereto, appearing elsewhere in this Prospectus. Unless the context otherwise requires, the information set forth in this Prospectus gives effect to the transactions described herein under "The Reorganization", and the terms "Staff Leasing" or "Company" refer to Staff Leasing, Inc. and to Staff Capital, L.P. (the "Partnership") and its consolidated subsidiaries after giving effect to such transactions. Unless otherwise indicated, the information set forth in this Prospectus does not give effect to the exercise of the Underwriters' over-allotment option. The term "Common Stock" refers to the common stock, par value $.01 per share, of the Company. THE COMPANY Staff Leasing, Inc. is the largest professional employer organization ("PEO") in the United States. As of December 31, 1997, the Company served over 9,200 clients with approximately 108,000 worksite employees, in Florida, Texas, Georgia, Arizona and Minnesota. The Company believes that it has more than twice the number of clients and worksite employees of any PEO competitor and that its 1997 revenues of $1.85 billion exceeded the PEO revenues of any competitor by more than $600 million. Staff Leasing provides its clients with a broad range of services, including payroll administration, risk management, benefits administration, unemployment services, and human resource consulting services. The Company's clients are typically small to medium-sized businesses with between five and 100 employees. Based upon data provided by the U.S. Small Business Administration, this segment of the U.S. economy is estimated by the Company to consist of six million businesses, with 53 million employees and $1.3 trillion in annual wages, and is projected to be a major source of employment growth in the U.S. economy. The Company's revenues have increased annually since its inception in 1984 and, during the last three years, have increased from $735.8 million in 1994 to $1.85 billion in 1997. Staff Leasing's services are designed to improve the productivity and profitability of its clients' businesses by: - Allowing managers of these businesses to focus on revenue-producing activities by relieving them of the time-consuming burdens associated with employee administration; - Helping these businesses to better manage certain employment-related risks, including those associated with workers' compensation and state unemployment taxes; - Improving the cash management of these businesses with respect to payroll-related expenses; and - Enabling these businesses to attract and retain employees by providing health and retirement benefits to worksite employees on a cost-effective and convenient basis. In providing these services, Staff Leasing becomes a co-employer of the worksite employees. Employment-related liabilities are contractually allocated between the Company and the client. The Company assumes responsibility for and manages the risks associated with: (i) worksite employee payroll; (ii) workers' compensation insurance coverage; and (iii) compliance with certain employment- related governmental regulations that can be effectively managed away from the client's business. The client retains the worksite employees' services in its business and remains responsible for compliance with other employment-related governmental regulations that are more closely related to worksite employee supervision. Staff Leasing charges its clients a service fee to cover the cost of certain employment-related taxes, workers' compensation insurance coverage and administrative and field services. This service fee is invoiced together with salaries and wages of the worksite employees and the client's portion of health and retirement benefit plan costs. The Company believes that it has a number of key advantages which enable it to compete effectively in its target markets, including the following: Size and geographic concentration. At December 31, 1997, the Company served over 86,500 worksite employees from its Florida branches. The Company's size and the geographic concentration of its business in Florida have enabled it to leverage its existing client base for referrals (the source of more than 57% of its new clients in 1997); capitalize on its vendor relationships; increase the productivity of its sales force and safety consultants; benefit from economies of scale in claims processing; and attract the leading health benefit provider in Florida. Comprehensive risk management focus. The Company assumes employer-related risks with the addition of each new client. A critical focus of the Company's operations is the management of workers' compensation and state unemployment tax risks, since approximately half of the Company's gross profits in 1997 was derived from the workers' compensation insurance coverage and state unemployment tax components of its service fees. Workers' compensation risk is managed by careful selection of clients, on-site loss prevention services by Staff Leasing's 30 safety consultants (as of December 31, 1997) and sophisticated claims management. Unemployment tax risk is controlled, in part, through aggressive management of its state unemployment tax exposure. Strategic vendor alliances. The Company has entered into strategic alliances with several large vendors. The Company's workers' compensation insurance coverage is provided by Liberty Mutual Insurance Company ("Liberty Mutual"), which is the largest workers' compensation insurance carrier in the United States. The coverage is provided under a fully insured, guaranteed cost arrangement, with no liability to the Company for costs in excess of the fixed rate paid to Liberty Mutual. This arrangement extends through December 31, 1999 and provides for: (i) a dedicated claims processing unit adjacent to the Company's headquarters; (ii) intensive training of the Company's safety consultants and risk assessors; (iii) technology sharing and joint development of automated underwriting systems; and (iv) favorable rates and payment terms. In terms of premiums paid, Staff Leasing is Liberty Mutual's third largest client. The Company's group health benefit plans in Florida, Texas and Georgia are provided by three Blue Cross/Blue Shield ("Blue Cross") entities, in Arizona are provided by HealthPartners of Arizona, Inc. and in Minnesota are provided by HealthPartners, Inc. on terms that allow the Company to better manage the costs of health benefits offered by it. In all states except Florida, the Company's health benefit plans are guaranteed cost arrangements. In Florida, the Company has a minimum premium arrangement with stop loss coverage per covered employee. Blue Cross/Blue Shield of Florida ("Blue Cross/Florida"), which is the largest health benefit provider in Florida, has also provided substantial marketing support to increase enrollment in the Company's Florida health benefit plan. In terms of the number of enrolled employees, Staff Leasing is Blue Cross/Florida's third largest client. Advanced technology infrastructure. The Company invested approximately $20.5 million in computer and telephone technology and related infrastructure from 1995 through 1997 to improve its service and provide operating efficiencies. This new infrastructure provides additional operating leverage and enables the Company to handle increasing levels of incoming calls and to process payrolls with increasing levels of accuracy. Growth in the PEO industry has been significant. According to the National Association of Professional Employer Organizations ("NAPEO"), the number of employees under PEO arrangements in the United States has grown from approximately 10,000 in 1984 to between 2.0 million and 3.0 million in 1997. Staffing Industry Analysts, Inc., an employment industry research firm, estimates that gross revenues in the PEO industry grew from $5.0 billion in 1991 to $21.6 billion in 1997, representing a compounded annual growth rate of approximately 28%. In order to take advantage of this opportunity, Staff Leasing is pursuing the following growth strategy: Increase the Company's penetration in its existing geographic markets. The Company believes that there is substantial potential for additional growth in its existing geographic markets. The Company believes that more than one percent of the Florida workforce is co-employed by the Company. However, the Company believes that its penetration of its target markets in Florida is less than ten percent. The Company believes that it has penetrated less than one percent of the small to medium-sized business markets in Texas, Georgia, Minnesota and Arizona. These states have had relatively high growth in small to medium-sized business formation and employment. The Company intends to further leverage its existing client referral base, which was the source of approximately 57% of the Company's new clients in 1997, and to utilize its extensive branch network to take advantage of these opportunities. Establish branch offices in new markets. The Company will enter new markets that possess favorable demographics, in terms of the number of potential clients within industries typically served by the Company, and a favorable regulatory environment with respect to PEOs and workers' compensation. The Company has successfully demonstrated its ability to grow outside of its Florida base through its Texas expansion. In December 1994, the Company opened its first Texas office in Dallas, followed by four additional offices in Texas in May 1995. These offices generated monthly aggregate branch gross profits in excess of monthly aggregate direct branch expenses within 12 months of opening. With over 12,600 worksite employees co-employed by its Texas operations at December 31, 1997, the Company believes it is now one of the three largest PEOs in that state. Following its initial success in Texas, the Company has continued branch expansion in Texas, Arizona, Georgia and Minnesota. In 1997, the Company opened six new offices. These included five traditional branch offices in Corpus Christi, Texas, Minneapolis, Minnesota, Phoenix and Tucson, Arizona and Savannah, Georgia and its first "spoke" office in Beaumont, Texas. The newly formatted "spoke" office structure allows the Company to economically penetrate smaller markets by leveraging the resources of the larger branch or "hub" offices. The Company opened two additional spoke offices in Fort Walton Beach, Florida and Fort Worth, Texas in the first quarter of 1998, and plans to open six additional offices in new markets during the remainder of 1998. See "Business -- Growth Strategy". Distribute new services and products. The Company believes it has direct access to, and information about, its clients and worksite employees that provide it with an important market advantage. The Company believes it can distribute additional products and services in a more convenient manner to its clients and worksite employees and on a more cost-effective basis than vendors of these services and products could were they to market them directly. For example, in January 1998 the Company formed a strategic alliance with ChoicePoint, Inc. ("ChoicePoint"), a leading provider of employment verification services. Through this alliance the Company is able to offer its clients additional services, including employee screening and verification of public records. See "Business -- Growth Strategy". Pursue strategic acquisitions. The Company believes the PEO industry is highly fragmented with, according to NAPEO, over 2,400 PEOs operating in the United States. The Company believes that its investment in infrastructure and its existing management resources may allow it to benefit from consolidation opportunities in its industry. Although the Company's primary focus is on internal growth, the Company will consider strategic acquisitions of PEOs and related businesses to provide further penetration of its existing markets and to establish a base in new markets from which to operate and expand. The Company will fund any such acquisitions with internal cash and/or through the issuance of debt or equity. Staff Leasing, Inc. is a Florida corporation which was organized in February 1997. Its principal executive offices are located at 600 301 Boulevard West, Bradenton, Florida 34205, and its telephone number is (941) 748-4540. THE OFFERING (A) Common Stock offered by the Selling Shareholders (b).................. 3,100,000 shares Common Stock to be outstanding after the Offering (c).................. 23,688,067 shares Use of Proceeds..................... The Company will not receive any of the proceeds from the sale of the shares. The Company, however, will receive approximately $1.0 million (net of expenses to be paid by the Company of $325,000) upon the exercise of warrants to be acquired by the Underwriters from certain Selling Shareholders. The shares to be issued upon exercise of the warrants are included in the Offering. See "Use of Proceeds". Nasdaq National Market symbol....... STFF - --------------- (a) The offering of 3,100,000 shares of Common Stock is referred to herein as the "Offering". The several underwriters of the Offering are collectively referred to herein as the "Underwriters". (b) Includes 177,709 shares of Common Stock to be issued upon the exercise of 177,709 warrants to purchase shares of Common Stock to be sold to the Underwriters. If the Underwriters' over-allotment option is exercised in full, the Selling Shareholders will offer and sell an additional 465,000 shares of Common Stock, which includes 24,123 shares of Common Stock to be issued upon the exercise of 24,123 additional warrants to be sold to the Underwriters. (c) Excludes 2,500,000 shares of Common Stock reserved for issuance under the Company's stock incentive plan. At December 31, 1997, there were 651,226 shares of Common Stock subject to outstanding options granted under this plan at a weighted average exercise price of $17.55 per share. Also excludes 1,174,544 shares of Common Stock issuable upon the exercise of warrants issued in the Reorganization, which will remain outstanding after the Offering and which have an exercise price of $7.24 per share. See "Management -- Stock Incentive Plan" and "The Reorganization". If the over-allotment option is exercised in full, there will be 23,712,190 shares of Common Stock outstanding and warrants outstanding which will be exercisable for 1,150,421 shares of Common Stock. RISK FACTORS See "Risk Factors" beginning on page 9 for information that should be considered by prospective investors. Such risk factors include the potential for additional subsidies of the Company's health benefit plans; the geographic market concentration and the concentration of clients in the construction industry; the failure to retain clients; the volatility in workers' compensation insurance rates and unemployment tax; dependence on key vendors; possible loss of the qualified status of the Company's 401(k) retirement plan and failure of certain of the Company's health and welfare plans to meet certain tax requirements; the possible adverse application of certain Federal and state laws; possible liability for client and employee actions; liability for worksite employee payroll and payroll taxes; state regulation of the PEO industry; competition and new market entrants; risks associated with expansion into additional states; dependence on key personnel; the failure to manage growth; risks associated with the year 2000; anti-takeover effects of certain charter and bylaw provisions and Florida law; control by existing shareholders; and potential volatility of stock price.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001037189_westport_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001037189_westport_prospectus_summary.txt
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+SUMMARY OF THE PROSPECTUS The following is a summary of the Prospectus. The Prospectus contains more detailed information under the captions referred to below, and this summary is qualified in its entirety by the information appearing elsewhere in this Prospectus. See also the Glossary. THE OFFERING Securities Offered......Units at Net Asset Value per Unit as of the end of each month during which SB conducts market-making activities. Net Asset Value is defined in the Glossary at page 101. Minimum Subscription....The minimum subscription is $5,000, except for subscriptions by employee-benefit plans (and subject to higher minimums imposed by certain states) which may be made for a minimum of $2,000. The minimum investment for subscribers who are already limited partners will be $1,000 (except in Maine, where the minimum additional subscription will be $5,000). The minimum subscription will purchase Units and fractional Units (rounded to four decimal places) as of the first day of the month which is at least 6 days after a subscription is accepted. See "Plan of Distribution". The General Partner and its affiliates are free to purchase Units for investment purposes provided that in no event will total contributions by these entities equal or exceed 10% of the total contributions to the Partnership at any time. Plan of Distribution....SB intends to make a market in the Units (to the extent that investors in the Partnership desire to redeem/transfer Units) by matching redemption/transfer requests with subscriptions for the Partnership's Units which were previously issued. SB is not obligated to conduct market-making activities and any such activities may be discontinued at any time without notice, at the sole discretion of SB. No assurance can be given as to the liquidity of, or the trading market for, the Units as a result of any market-making activities undertaken by SB. This Prospectus is to be used by SB in connection with offers and sales of the Units and fractional Units (rounded to four decimal places) in market-making transactions in the over-the-counter market at the prevailing Net Asset Value per Unit as of the last business day of the month ending at least 5 days after a subscription is accepted. Subscriptions will be accepted only to the extent that they can be matched with Units for which redemption/transfer requests have been received by the General Partner. All subscriptions accepted by the General Partner will be held in the escrow account until the first day of the month beginning at least 6 days after receipt of the subscription on which day subscription funds will be transferred to SB for further payment to transferring investors and the General Partner will cause the Partnership's records to reflect the change in ownership of the Units from the transferring investor to the subscribing investor. Sales of Units made by SB as a market-maker will not increase the number of Units outstanding in the Partnership nor the size of the Partnership. The General Partner may reject any subscription for any reason. A subscription may be revoked by a subscriber if SB determines not to conduct market-making activities as of the end of a month. Subscription amounts that are not used to purchase Units (because of fluctuations in Net Asset Value per Unit between the date the subscription is accepted and the effective date of purchase) will be returned to subscribers by SB. See "Plan of Distribution" and "Subscription Procedure." Use of Proceeds.........The Partnership will not receive any proceeds from the sale of any Units offered pursuant to this Prospectus. Proceeds received by SB as a result of its SMITH BARNEY WESTPORT FUTURES FUND L.P. CROSS REFERENCE SHEET <TABLE> <CAPTION> ITEM NUMBER AND CAPTION HEADING IN PROSPECTUS ----------------------- --------------------- <C> <S> <C> 1. Forepart of the Registration Statement and Outside Front Cover of Prospectus........................ Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus....................................... Inside Cover Page; Table of Contents 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges........................ Summary of the Prospectus; Risk Factors 4. Use of Proceeds.................................... Use of Proceeds 5. Determination of Offering Price.................... Cover Page; Plan of Distribution 6. Dilution........................................... * 7. Selling Security Holders........................... * 8. Plan of Distribution............................... Plan of Distribution 9. Description of Securities to be Registered......... Cover Page; Redemptions; The Limited Partnership Agreement 10. Interests of Named Experts and Counsel............. Legal Matters 11. Information With Respect to the Registrant......... Summary of the Prospectus; Risk Factors; Com- modity Futures Markets; Trading Policies; Financial Statements; The General Partner; The Advisor; Conflicts of Interest; Fees and Expenses to the Partnership; The Limited Partnership Agreement 12. Disclosure of Commission Position on Indemnifi- cation for Securities Act Liability.............. * </TABLE> - --------------- * Not applicable. SB is accepting subscriptions for Units with a minimum initial subscription per investor of $5,000 (except that the minimum initial investment is $2,000 for employee benefit plans, subject to higher minimums in certain states). This Prospectus is to be used by SB in connection with offers and sales of the Units and fractional Units (rounded to four decimal places) in market-making transactions at the prevailing Net Asset Value per Unit as of the last business day of the month ending at least 5 days after a subscription is accepted. Net Asset Value is defined in the Glossary at page 101. A subscription may be revoked by a subscriber if there are no Units available (i.e., no redemptions requested) as of the end of a month. See "Plan of Distribution" and "Subscription Procedure". The Partnership will dissolve no later than December 31, 2017. See "Summary of the Prospectus -- The Partnership -- Dissolution of the Partnership". - --------------- NOTES: (1) The Units are being offered by SB. SB will facilitate the transfer of ownership of currently outstanding Units from limited partners wishing to transfer their Units to subscribing investors upon approval by the General Partner of new subscriptions. No underwriting commissions will be paid in connection with this offering. SB may pay underwriting commissions of up to $50 per Unit sold out of its own funds. SB will pay a portion of the brokerage fees it receives to its registered representatives ("Financial Consultants") who sell Units in the offering and who are registered with the Commodity Futures Trading Commission ("CFTC") as associated persons of a futures commission merchant for continuing services to be provided by such persons to purchasers of Units. Those services will include (i) answering questions regarding daily net asset value and computations thereof, monthly statements, annual reports and tax information provided by the Partnership, (ii) providing assistance to investors including when and whether to redeem the Units or purchase additional Units (if available) and (iii) general servicing of accounts. A Financial Consultant may be credited with up to approximately 80% of the amount of brokerage fees attributable to Units sold by him. The brokerage fees will be paid for the life of the Partnership, although the rate at which such fees are charged may change. See "Plan of Distribution" and "The Commodity Broker/Dealer -- Brokerage Fees". No portion of SB's brokerage fees will be paid to any Financial Consultant who is not registered with the CFTC as an associated person of a futures commission merchant. (2) The Partnership began its initial offering of Units on May 30, 1997 and began trading on August 1, 1997 with an initial capitalization of $40,439,000. As of March 31, 1998, the Partnership's Net Assets were $114,810,781 and the Net Asset Value per Unit initially sold for $1,000 was $961.22. During the offering, subscription amounts will be held in escrow at European American Bank, New York, New York, until they are transferred to SB specifically for facilitating the transfers described herein. The funds held in escrow will be invested as SB shall from time to time direct by written instrument delivered to the escrow agent in an interest bearing bank money market account. Subscription proceeds resulting from SB's market-making activities will be offset by an equal amount of transfer proceeds paid by SB to transferring investors. No new Units will be sold as a result of this offering. Proceeds from the sale of Units made pursuant to this Prospectus will not increase the number of Units outstanding nor the size of the Partnership. If a subscription is accepted by the General Partner, such subscription will purchase available Units and fractional Units (rounded to four decimal places) in amounts provided by transferring investors in the Partnership. See "Plan of Distribution" and "Use of Proceeds". (3) The Limited Partnership Agreement requires the Partnership to bear all of its offering expenses. See "Fees and Expenses to the Partnership" and "Redemptions". (4) The minimum additional subscription (to the extent available due to redemptions) for investors who are already limited partners will be $1,000 (except in Maine, where the minimum additional subscription will be $5,000). In the case of sales to employee-benefit plans including qualified corporate pension and profit-sharing plans, "simplified employee pension plans," so-called, "Keogh" (H.R. 10) plans and Individual Retirement Accounts, and subject to higher minimum investment standards imposed by certain states as listed in Exhibit C hereto, the minimum purchase is $2,000. See "ERISA Considerations." ------------------------ market-making in the Units will be utilized by SB to pay amounts to transferring investors when a transfer of Unit ownership is to occur. A subscription will be either approved or rejected within four business days from the receipt of the subscription by the General Partner. All of the Partnership's assets are maintained in the Partnership's trading accounts at SB and are currently or may be used to trade in commodity interests including futures contracts, options and forward contracts. Such proceeds will be maintained in cash. See "Use of Proceeds". Purchase of Units by Retirement Plans...Participants in employee-benefit plans may be capable of purchasing Units with a portion of their retirement assets. See "ERISA Considerations". THE PARTNERSHIP The Partnership.........Smith Barney Westport Futures Fund L.P. is a limited partnership organized on March 21, 1997 under the laws of the State of New York. See "The Limited Partnership Agreement". Risk Factors............An investment in the Partnership is speculative and involves substantial risks. The risks of an investment in the Partnership include, but are not limited to: -- the speculative, volatile and highly leveraged nature of trading in commodity futures, forward and option contracts; -- the fees and expenses which the Partnership incurs regardless of the Partnership's trading performance, including a brokerage charge of 6.5% per year and a management fee of 4%; substantial incentive fees may be paid during a year even though the Partnership incurs a net loss for the full year; -- that the Partnership is subject to certain conflicts of interest (including those arising from the relationship between the General Partner and the commodity broker/dealer); -- no public market for Units exists; -- investors have limited voting rights with respect to the Partnership's affairs; -- profits earned in any year will result in an increase in a limited partner's tax liability. Dissolution of the Partnership...........The Partnership will dissolve and its affairs be wound up as soon as practicable upon the first to occur of the following: (i) December 31, 2017; (ii) the vote to dissolve the Partnership by limited partners owning more than 50% of the Units; (iii) assignment by the General Partner of all of its interest in the Partnership or withdrawal, removal, bankruptcy or any other event that causes the General Partner to cease to be a general partner under the New York Revised Limited Partnership Act unless the Partnership is continued as described in the Limited Partnership Agreement; (iv) Net Asset Value per Unit falls to less than $400 as of the end of any trading day; or (v) the occurrence of any event which shall make it unlawful for the existence of the Partnership to be continued. See "Risk Factors -- Dissolution of the Partnership, Cessation of Trading" and "The Limited Partnership Agreement -- Management of Partnership Affairs". INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED JUNE 19, 1998 120,000 OUTSTANDING UNITS OF LIMITED PARTNERSHIP INTEREST SMITH BARNEY WESTPORT FUTURES FUND L.P. ------------------ Smith Barney Westport Futures Fund L.P. (the "Partnership") is a limited partnership organized under the laws of the State of New York to engage in the speculative trading of a diversified portfolio of commodity interests including futures contracts, options and forward contracts. Smith Barney Inc. ("SB") acts as the commodity broker/dealer for the Partnership and its affiliate, Smith Barney Futures Management Inc., is the General Partner of the Partnership (the "General Partner"). See "The General Partner" and "The Commodity Broker/Dealer". All trading decisions are made for the Partnership by John W. Henry & Company, Inc. ("JWH(R)" or the "Advisor"). The Advisor is not affiliated with the General Partner or SB. See "The Advisor" and "Conflicts of Interest". SB intends to make a market in the Partnership's units of limited partnership interest (the "Units"), although it is not obligated to conduct market-making activities and any such activities may be discontinued at any time without notice, at the sole discretion of SB. The Units that may be offered from time to time pursuant to this Prospectus were issued and sold by the Partnership in a public offering which commenced May 30, 1997, and terminated on February 1, 1998. Units were sold at $1,000 per Unit prior to the commencement of trading and at Net Asset Value per Unit thereafter. When a redemption/transfer request is received by the General Partner, SB may, at its sole discretion, purchase such Units for its own account for immediate resale to subscribers. Such purchases and sales will be at Net Asset Value per Unit. If SB does not purchase the Units that are the subject of a redemption/transfer request, the redemption will be effected by the General Partner and, consequently, the number of Units outstanding in the Partnership will be reduced. No assurance can be given as to the liquidity of, or the trading market for, the Units as a result of any market-making activities undertaken by SB. The Partnership will not receive any proceeds from the sale of any Units offered pursuant to this Prospectus. No underwriting commissions are charged in connection with this offering. THESE ARE SPECULATIVE SECURITIES. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS. (SEE "RISK FACTORS" AT PAGES 9-15). THIS OFFERING INVOLVES SIGNIFICANT RISKS AND THE FOLLOWING LIST OF RISKS IS NOT COMPLETE: -- COMMODITY TRADING IS SPECULATIVE AND VOLATILE (AN INVESTOR COULD LOSE ALL OF HIS INVESTMENT.) -- AUTHORIZATION OF SUBSTANTIAL FEES TO GENERAL PARTNER AND AFFILIATES (THE PARTNERSHIP REQUIRES A RETURN OF 7.71% PER YEAR TO BREAK EVEN, ASSUMING A PARTNERSHIP SIZE OF $120,000,000. SUBSTANTIAL INCENTIVE FEES MAY BE PAID DURING A YEAR EVEN THOUGH THE PARTNERSHIP MAY INCUR A NET LOSS FOR THE FULL YEAR.) -- CONFLICTS OF INTEREST MAY EXIST IN THE MANAGEMENT OF THE PARTNERSHIP (INCLUDING THE RELATIONSHIP BETWEEN THE GENERAL PARTNER AND THE COMMODITY BROKER/DEALER; THE BROKERAGE RATE CHARGED BY THE COMMODITY BROKER/DEALER; DISTRIBUTION OF PROFITS; ACCOUNTS OF SB, THE GENERAL PARTNER AND THEIR AFFILIATES; CONTROL OF OTHER ACCOUNTS BY THE ADVISOR; OTHER ACTIVITIES AND POOLS OPERATED BY SB; AND INCENTIVE FEES CHARGED BY THE ADVISOR). THESE CONFLICTS OF INTEREST MAY ADVERSELY AFFECT THE NET PERFORMANCE OF THE PARTNERSHIP. -- NO PUBLIC MARKET FOR UNITS EXISTS. -- LIMITED PARTNERS MAY HAVE LIMITED VOTING RIGHTS WITH RESPECT TO THE PARTNERSHIP'S AFFAIRS. -- WHILE THE GENERAL PARTNER DOES NOT INTEND TO MAKE DISTRIBUTIONS, PROFITS EARNED IN ANY YEAR WILL RESULT IN AN INCREASE IN A LIMITED PARTNER'S TAX LIABILITY. (continued on next page) THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK. THE SECURITIES ARE SUITABLE FOR INVESTMENT ONLY BY A PERSON WHO CAN AFFORD TO LOSE HIS ENTIRE INVESTMENT. SEE "RISK FACTORS" AT PAGES 9-15. THIS OFFERING IS NOT A MUTUAL FUND OR ANY OTHER TYPE OF INVESTMENT COMPANY WITHIN THE MEANING OF THE INVESTMENT COMPANY ACT OF 1940 AND IS NOT SUBJECT TO REGULATION THEREUNDER. SEE "RISK FACTORS" AT PAGES 9-15. SUBSCRIBERS WILL BE REQUIRED TO MAKE CERTAIN REPRESENTATIONS AND WARRANTIES IN THE SUBSCRIPTION AGREEMENT. ------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE COMMODITY FUTURES TRADING COMMISSION HAS NOT PASSED UPON THE MERITS OF PARTICIPATING IN THIS POOL NOR HAS THE COMMISSION PASSED ON THE ADEQUACY OR ACCURACY OF THIS DISCLOSURE DOCUMENT. <TABLE> <S> <C> <C> <C> ========================================================================================================== - ---------------------------------------------------------------------------------------------------------- PROCEEDS TO PRICE TO UNDERWRITING THE PARTNERSHIP PUBLIC COMMISSIONS(1) (1)(2)(3) - ---------------------------------------------------------------------------------------------------------- Per Unit (minimum purchase: $5,000)(4).................. NAV (1) $0 ========================================================================================================== </TABLE> (Notes on page ii) ------------------ SMITH BARNEY INC. The date of this Prospectus and Disclosure Document is June 30, 1998 An annual report containing financial statements and the report of the Partnership's independent accountants will be distributed to limited partners not more than 90 days after the close of the Partnership's fiscal year. ------------------------ The Partnership is subject to the informational requirements of the Securities Exchange Act of 1934 and in accordance therewith files reports and other information with the Securities and Exchange Commission. Such reports and other information can be inspected and copied at public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and its Northeast regional office at 7 World Trade Center, Suite 1300, New York, NY 10048 and its Midwest regional office at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, IL 60661. Copies of such material can be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Partnership is an electronic filer. The Commission maintains a Web site (http://www.sec.gov) that contains such reports and other information regarding the Partnership. ------------------------ A COPY OF THE NASAA GUIDELINES FOR THE REGISTRATION OF COMMODITY POOL PROGRAMS, AS AMENDED AND ADOPTED AS OF AUGUST 30, 1990, WILL BE PROVIDED TO ANY PERSON, WITHOUT CHARGE, UPON REQUEST. SAID REQUEST MAY BE MADE IN WRITING TO THE PARTNERSHIP, C/O SMITH BARNEY FUTURES MANAGEMENT INC., 390 GREENWICH STREET, NEW YORK, NEW YORK 10013 OR BY CALLING (212) 723-5424. NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE MATTERS DESCRIBED HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY ANY PERSON WITHIN ANY JURISDICTION TO ANY PERSON TO WHOM SUCH OFFER WOULD BE UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF ITS ISSUE. UNTIL , 1998 (90 DAYS AFTER THE DATE HEREOF), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ------------------------ Offices.................The offices of the Partnership and the General Partner are located at c/o Smith Barney Futures Management Inc., 390 Greenwich Street, New York, New York 10013, (212) 723-5424. Trading Policies........The Partnership's objective is to achieve capital appreciation by engaging in speculative trading of a diversified portfolio of commodity interests which may include futures contracts, options, forward contracts and physicals. There can be no assurance that the Partnership's investment objective will be met. The Partnership's trading policies, in summary, are to invest Partnership funds only in commodity contracts traded in sufficient volume to permit the ease of taking and liquidating positions; that no additional positions in a commodity will be initiated by the Advisor if such positions would result in aggregate positions for all commodities requiring as margin more than 66 2/3% of the Partnership's assets allocated to that Advisor; that the Partnership will not employ the trading technique commonly known as "pyramiding"; that the Partnership will not utilize borrowings except short-term borrowings if the Partnership takes delivery of any cash commodities; that the Partnership may, from time to time, engage in spreads or straddles; and that the Partnership will not permit the churning of its trading accounts. See "Commodity Markets" and "Trading Policies". The terms "pyramiding", "spreads" and "straddles" are defined in the Glossary. Management..............The General Partner of the Partnership is Smith Barney Futures Management Inc., a corporation organized under the laws of the State of Delaware and an affiliate of Smith Barney Inc. ("SB"). SB acts as commodity broker/dealer for the Partnership. The General Partner administers the business and affairs of the Partnership and has selected the Advisor to make trading decisions for the Partnership. The Advisor is currently the Partnership's sole advisor. The General Partner, consistent with its fiduciary duties to the limited partners, may select additional or replacement advisors at any time in its sole discretion. However, the General Partner has no current intention of selecting additional advisors or replacing JWH. All of the Partnership's assets in its trading accounts at SB will be available for trading, subject to the trading policies of the Partnership. JWH utilizes its Original Investment Program, its Financial and Metals Portfolio, its Global Financial Portfolio and its Global Diversified Portfolio in its management of the Partnership's assets. As of March 31, 1998, the Partnership's assets were allocated to the programs in the following approximate percentages: 36% to the Original Investment Program; 24% to the Financial and Metals Portfolio; 26% to the Global Financial Portfolio; and 14% to the Global Diversified Portfolio. The Original Investment Program utilizes a very long-term, quantitative approach which always maintains a position, either long or short, in every market traded by the program. The Financial and Metals Portfolio uses quantitative trend analysis models, participates in four major market sectors -- global interest rates, currencies, stock indices and metals -- and attempts to identify and capitalize on intermediate and long term price movements in these markets using a systematic approach. The Global Financial Portfolio offers access to a small group of energy and financial markets, including currencies, global interest rates and stock indices. This program is designed to identify and capitalize on long-term price movements using a disciplined trend identification approach and always maintains a position -- long or short -- in every market traded by the program. The Global Diversified Portfolio utilizes a systematic approach which attempts RISK DISCLOSURE STATEMENT YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD BE AWARE THAT FUTURES AND OPTIONS TRADING CAN QUICKLY LEAD TO LARGE LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET ASSET VALUE OF THE POOL AND CONSEQUENTLY THE VALUE OF YOUR INTEREST IN THE POOL. IN ADDITION, RESTRICTIONS ON REDEMPTIONS MAY AFFECT YOUR ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE POOL. FURTHER, COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT, AND ADVISORY AND BROKERAGE FEES. IT MAY BE NECESSARY FOR THOSE POOLS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS A COMPLETE DESCRIPTION OF EACH EXPENSE TO BE CHARGED BY THIS POOL AT PAGES 16-18 AND A STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT IS, TO RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT, AT PAGES 18 AND 19. THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER FACTORS NECESSARY TO EVALUATE YOUR PARTICIPATION IN THIS COMMODITY POOL. THEREFORE, BEFORE YOU DECIDE TO PARTICIPATE IN THIS COMMODITY POOL, YOU SHOULD CAREFULLY STUDY THIS DISCLOSURE DOCUMENT, INCLUDING A DESCRIPTION OF THE PRINCIPAL RISK FACTORS OF THIS INVESTMENT, AT PAGES 9-15. YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY POOL MAY TRADE FOREIGN FUTURES OR OPTIONS CONTRACTS. TRANSACTIONS ON MARKETS LOCATED OUTSIDE THE UNITED STATES, INCLUDING MARKETS FORMALLY LINKED TO A UNITED STATES MARKET, MAY BE SUBJECT TO REGULATIONS WHICH OFFER DIFFERENT OR DIMINISHED PROTECTION TO THE POOL AND ITS PARTICIPANTS. FURTHER, UNITED STATES REGULATORY AUTHORITIES MAY BE UNABLE TO COMPEL THE ENFORCEMENT OF THE RULES OF REGULATORY AUTHORITIES OR MARKETS IN NON-UNITED STATES JURISDICTIONS WHERE TRANSACTIONS FOR THE POOL MAY BE EFFECTED. ------------------------ to identify and profit from market trends and to remain neutral (i.e., no position taken) during non-trending market periods. The limited partners do not participate in the management or control of the Partnership. Under the Limited Partnership Agreement, responsibility for managing the Partnership is vested solely in the General Partner. The General Partner is a fiduciary to the limited partners. As such, the General Partner must exercise good faith and fairness in all dealings affecting the Partnership. In the event that a limited partner believes the General Partner has violated its fiduciary responsibility to the limited partners, he may seek legal relief for himself or on behalf of the Partnership, if the General Partner has refused to bring the action, or if an effort to cause the General Partner to bring the action is not likely to succeed, or may have a right to bring a class action on behalf of all of the limited partners, under applicable laws, including partnership, commodities or securities laws, to recover damages from or require an accounting by the General Partner. Limited partners may also be afforded certain rights for reparations under the Commodity Exchange Act ("CEA") for violations of the CEA by the General Partner. The General Partner may be removed and successor general partners may be admitted upon the vote of a majority of the outstanding Units. See "The Limited Partnership Agreement" and "Fiduciary Responsibility". Any limited partner, upon written request addressed to the General Partner, may obtain from the General Partner a list of the names and addresses of record of all limited partners and the number of Units held by each limited partner. Upon receipt of a written request delivered in person or by certified mail, signed by limited partners owning at least 10% of the outstanding Units, that a meeting of the Partnership be called to consider any matter upon which limited partners may vote pursuant to the Limited Partnership Agreement, the General Partner, by written notice to each limited partner of record mailed within 15 days after such receipt, must call a meeting of the Partnership. Such meeting must be held at least 30 but not more than 60 days after the mailing of such notice and the notice must specify the date, a reasonable time and place, and the purpose of such meeting. See "Risk Factors" and "Fees and Expenses to the Partnership". Fiscal Year.............The fiscal year of the Partnership will commence on January 1 and end on December 31 each year ("fiscal year"). Fees and Expenses to the Partnership....The Partnership will pay substantial fees to the Advisor and SB. The Partnership will pay the Advisor a monthly management fee equal to 1/3 of 1% (4% per year) of month-end Net Assets. The Partnership will also pay the Advisor an incentive fee payable quarterly equal to 19% of the New Trading Profits earned by the Advisor for the Partnership, including unrealized appreciation on open positions, as of the end of each period. New Trading Profits does not include interest earned or accrued during the period. Since the Advisor's incentive fee is paid quarterly, substantial incentive fees may be paid during a year even though the Partnership may incur a net loss for the full year. Management and incentive fees are subject to an overall limitation in the Limited Partnership Agreement and the Revised Commodity Pool Guidelines of the North American Securities Administrators Association, Inc. (the "NASAA Guidelines"), as described under "Fees and Expenses to the Partnership -- Caps on Fees". The Customer Agreement provides that the Partnership will pay SB a monthly brokerage fee equal to 13/24 of 1% of month-end Net Assets (6.5% per year) in lieu of brokerage commissions on a per trade basis. (The brokerage fee -- TABLE OF CONTENTS <TABLE> <CAPTION> Page ---- <S> <C> Risk Disclosure Statement................. iv Summary of the Prospectus................. 1 The Offering............................ 1 The Partnership......................... 2 Statement of Financial Condition........ 8 Risk Factors.............................. 9 Fees and Expenses to the Partnership...... 16 Potential Benefits to Investors........... 19 Conflicts of Interest..................... 20 Trading Policies.......................... 23 The General Partner....................... 24 Background.............................. 24 Principals.............................. 24 Other Pools Operated by the General Partner............................... 28 The Advisor............................... 34 Fiduciary Responsibility.................. 61 The Commodity Broker/Dealer............... 62 Income Tax Aspects........................ 65 Summary of the Federal Income Tax Consequences for United States Taxpayers Who Are Individuals......... 65 Tax Consequences for Exempt Organizations......................... 71 State, Local and Other Taxes............ 71 Summary of the United States Federal Income Tax Consequences for Non-U.S. Taxpayers............................. 72 Basis of Summary of Income Tax Aspects............................... 72 Use of Proceeds........................... 73 Plan of Distribution...................... 73 Investment Requirements................... 74 </TABLE> <TABLE> <CAPTION> Page ---- <S> <C> Subscription Procedure.................... 75 The Limited Partnership Agreement......... 75 Liability of Limited Partners........... 76 Management of Partnership Affairs....... 76 Sharing of Profits and Losses........... 76 Additional Partners..................... 77 Restrictions on Transfer or Assignment............................ 77 Dissolution of the Partnership.......... 77 Removal or Admission of General Partner............................... 78 Amendments; Meetings.................... 78 Reports to Limited Partners............. 78 Power of Attorney....................... 79 Indemnification......................... 79 Redemption/Transfer....................... 79 ERISA Considerations...................... 80 Legal Matters............................. 83 Experts................................... 83 Additional Information.................... 83 Commodity Markets......................... 83 Commodity Futures....................... 83 Forward Contracts....................... 84 Uses of Commodity Markets............... 84 Options................................. 84 Regulation.............................. 85 Margins................................. 87 Financial Statements...................... 89 Glossary.................................. 101 Amended and Restated Limited Partnership Agreement -- Exhibit A.................. A-1 Subscription Agreement -- Exhibit B....... B-1 Suitability Requirements -- Exhibit C..... C-1 </TABLE> together with National Futures Association ("NFA"), exchange, floor brokerage, give-up, user and clearing fees -- is subject to the limitation imposed by the NASAA Guidelines, as described under "Fees and Expenses to the Partnership -- Caps on Fees".) See "Fees and Expenses to the Partnership -- The Commodity Broker/Dealer". SB will pay a portion of such brokerage fees to its Financial Consultants who have sold Units in this offering and who are registered as associated persons with the CFTC. Such Financial Consultants would be credited with a maximum of 5% of Net Assets per year in return for continuing services to be provided by them to Unit holders as described under "The Commodity Broker/Dealer -- Brokerage Fees". Brokerage fees will be paid for the life of the Partnership, although the rate at which such fees are paid may be changed. Based upon the trading experience of the Partnership the fee that the Partnership pays is estimated to equal $98 per round-turn transaction (as defined in the Glossary), of which $92 is brokerage commissions and $6 is other trading-related fees. The General Partner will review, at least annually, the brokerage rates charged to other comparable commodity pools to the extent practicable, to determine that the brokerage rates being paid by the Partnership are competitive with such other rates. The General Partner will renegotiate the Customer Agreement if its fiduciary duties so require. Brokerage fees will not exceed the limit imposed in the NASAA Guidelines. The General Partner, consistent with the restrictions imposed by the Limited Partnership Agreement attached hereto as Exhibit A, as well as the NASAA Guidelines discussed below, may negotiate for increased brokerage fees in appropriate circumstances. The Partnership shall seek the best prices and services available in its commodity futures brokerage transactions. The NASAA Guidelines provide that a brokerage commission is presumptively reasonable if it is 80% of the published retail rate plus pit brokerage fees or if it (including pit brokerage fees) is 14% annually of the average Net Assets of the Partnership (excluding Partnership assets not directly related to trading activity). See "The Commodity Broker/Dealer -- Brokerage Fees". The brokerage fee payable to SB for a year would equal a maximum of $7,800,000 per year assuming a Partnership size of $120 million and Net Assets that remain at the same level for the year. On these assumptions, Financial Consultants could be credited with a maximum of approximately $6,000,000. The Partnership will pay or reimburse SB if previously paid for NFA, exchange, clearing, user, give-up and floor brokerage fees, all of which are estimated to be up to .7% of Net Assets per year. The Partnership will effect all transactions in spot and forward foreign currencies with SB at prices quoted by SB which do not include a mark-up. The General Partner will bear such general and administrative expenses of the Partnership as may be incurred, but (except as noted below) the Partnership will pay all of its legal, accounting, filing, reporting and data processing expenses, incentive fees, management fees, brokerage fees, expenses of this offering and extraordinary expenses (only periodic filing and reporting fees are subject to an overall limitation in the Limited Partnership Agreement as described under "Fees and Expenses of the Partnership -- Cap on Fees"). The aggregate annual expenses of every character paid or incurred by the Partnership, including management fees, advisory fees and all other fees, except for incentive fees, commodity brokerage fees, the actual cost of legal and audit services and extraordinary expenses, when added to the customary and routine administrative expenses of the Partnership, shall in no event exceed, on an annual basis, 1/2 of 1% of Net Assets per month (6% per year). For the purpose of this limitation, customary and routine administrative expenses shall include all expenses of the Partnership other than commodity brokerage fees, incentive fees, the actual cost of legal and audit services and extraordinary expenses. Offering expenses related to the Partnership's Units will be borne by the Partnership. Such expenses are estimated at $225,000. The offering expenses that may be paid or reimbursed to SB by the Partnership are capped at 15% of the Partners' aggregate subscriptions. See "Fees and Expenses to the Partnership", "Plan of Distribution" and "Redemptions". The table below summarizes the fees and expenses to the Partnership: <TABLE> <CAPTION> ENTITY FORM OF COMPENSATION AMOUNT OF COMPENSATION ------------------ ---------------------------- ---------------------------- <S> <C> <C> Advisor..... (JWH) Monthly management fee 1/3 of 1% (4% per year) of (Subject to cap) month-end Net Assets. Quarterly incentive fee 19% of New Trading Profits (Subject to cap) earned by the Advisor for the Partnership in each calendar quarter. Commodity Brokerage fee 13/24 of 1% of month-end Net Broker....... (SB) (Subject to cap) Assets per month (6.5% per year)(1) (a portion of which will be credited to SB Financial Consultants who have sold Units in this offering), and reimbursement of other actual transaction fees paid in connection with trading estimated at .7% of Net Assets. Others............ Periodic legal, accounting, Actual expenses incurred filing and reporting fees, estimated at .32% of Net expenses of the offering Assets per year (exclusive as well as extraordinary of extraordinary expenses expenses). </TABLE> ---------------------------------------- (1) Brokerage fees will be paid for the life of the Partnership, but the rate at which such fees will be paid may change, provided that such fees (i) remain competitive with the brokerage rates paid by public commodity pools which are comparable to the Partnership, (ii) will not be increased for the first five years of trading if any Advisor is affiliated with the General Partner and (iii) will not exceed the limitations imposed by the NASAA Guidelines, which provide that brokerage fees (together with NFA, exchange, floor brokerage, give-up, user and clearing fees) will be considered presumptively reasonable if they do not exceed 14% annually of the Partnership's Net Assets (excluding Partnership assets not directly related to trading activity). SB may receive a benefit with respect to Partnership assets maintained in cash as described below under the heading "Fees and Expenses to the Partnership -- Commodity Broker/Dealer." Interest Income.........All of the Partnership's assets are maintained in cash in brokerage accounts at SB. SB deposited the Partnership's cash in segregated bank accounts as required by CFTC regulations. Such accounts do not earn interest. However, SB will pay monthly interest to the Partnership on 80% of the average daily equity maintained in cash in the Partnership's account at SB during each month at a 30-day Treasury bill rate determined weekly by SB based on the average non-competitive yield on 3-month U.S. Treasury bills maturing in 30 days (or on the maturity date closest thereto) from the date on which such weekly rate is determined. All assets in the Partnership's accounts may be used to meet margin requirements. SB intends to require the Partnership to meet its standard customer margin requirements which may be greater than exchange minimum levels. SB may benefit from the use of the Partnership's cash to the extent that such use reduces SB's interest expense in an amount greater than the amount of interest payments received by the Partnership. See "Commodity Markets -- Margins" and "The Commodity Broker/ Dealer -- Customer Agreement". Break-even Analysis.....The General Partner estimates that during each fiscal year, the Partnership would be required to make trading profits equal to 7.71% assuming a Partnership size of $120 million in order for the value of a Unit at year end to equal the initial value of that Unit at the beginning of the year. See "Fees and Expenses to the Partnership". Redemptions/Transfers...On 10 days' notice to the General Partner, a limited partner may cause some or all of his Units to be redeemed by the Partnership and/or purchased by SB for transfer at their Net Asset Value as of the last day of a month. Because Net Asset Value fluctuates daily, Limited Partners will not know the redemption value of their Units at the time their notice of redemption is submitted. The General Partner reserves the right to permit the redemption of Units more frequently than monthly (but no more frequently than daily), provided that such action is in the best interest of the Partnership taking into account potential tax consequences to Limited Partners. See "Redemptions". No fee is charged for redemptions. A redemption/transfer request may be effected by redemption of Units by the General Partner and/or purchase and transfer of Units pursuant to SB's market-making activities, at the option of SB. In either case, the limited partner wishing to redeem/transfer will receive Net Asset Value per Unit as of the month-end that the redemption or transfer is effective. The Partnership's assets are generally valued at fair market value, or in the absence of a fair market value, as determined in good faith by the General Partner. Options are generally valued at the last sale price or, in the absence of a last sale price, the last bid price. The value of a futures contract equals the unrealized gain or loss on the contract that is determined by marking it to the current settlement price for a like contract acquired on the day on which the futures contract is being valued. A settlement price may not be used if the market makes a limit move with respect to a particular commodity. Forward contracts and futures contracts, when no market quote is available, will be valued at their fair market value as determined by the General Partner. Distributions...........Distributions of profits, if any, will be made in the sole discretion of the General Partner and at such times as the General Partner may decide. In view of the fact that a limited partner may redeem his Units and no charge is assessed upon redemption, the General Partner has no current intention of making any distributions. In any event, the General Partner does not intend to make any distribution which would reduce the Net Asset Value of a Unit below $1,000, or if the size of a distribution would not warrant the administrative expense which would be involved, or if, in the opinion of the General Partner, a distribution would otherwise not be in the best interests of the Partnership or the limited partners. The determination of what is in the best interests of the Partnership or limited partners will be made on a case by case basis by the General Partner in its sole discretion and consistent with its fiduciary obligations to the Partnership and the limited partners. To the extent that profits are retained by the Partnership, the Net Assets of the Partnership will be greater, thereby increasing the amount of the brokerage fee which will be earned by SB. See "Conflicts of Interest". A limited partner's tax liability for profits of the Partnership may exceed the amount of any distributions received from the Partnership. See "Risk Factors -- Tax Consequences" and "Income Tax Aspects". Income Tax Aspects......The trading activities of the Partnership, in general, generate capital gain and loss and ordinary income. Counsel to the Partnership has opined that the Partnership will be treated as a partnership for federal income tax purposes. Accordingly, the Partnership will pay no federal income tax; rather, limited (This page has been left blank intentionally.) partners will be allocated their proportionate share of the taxable income or losses realized by the Partnership during the period of the Partnership's taxable year that Units were owned by them. Unrealized gains on "Section 1256 contracts" as defined in the Internal Revenue Code of 1986, as amended (the "Code") held by the Partnership at the end of its taxable year must be included in income under the "mark-to-market" rule and will be allocated to partners in proportion to their respective capital accounts. The mark-to-market rule does not apply to the Partnership's positions in futures contracts on most foreign exchanges and in foreign currency forward contracts not in the interbank market, unless the Partnership elects such treatment under Code Section 988. The Partnership should not generate to Exempt Organizations (as defined herein) unrelated business taxable income that would result from an investment in a publicly-traded partnership. See "Income Tax Aspects -- Tax Consequences for Exempt Organizations". <TABLE> <CAPTION> SELECTED FINANCIAL DATA. SMITH BARNEY WESTPORT FUTURES FUND L.P. <S> <C> <C> <C> STATEMENT OF FINANCIAL CONDITION DECEMBER 31, 1997 AND MARCH 31, 1998 MARCH 31, DECEMBER 31, 1998 1997 ------------ ------------ (UNAUDITED) ASSETS:................................... $116,954,683 $103,029,348 ============ ============ LIABILITIES AND PARTNERS' CAPITAL: LIABILITIES:.............................. $ 2,143,952 $ 1,773,741 ------------ ------------ PARTNERS' CAPITAL: General Partner, 1,212.9836 and 1,002.9801 Unit equivalents outstanding in 1998 and 1997, respectively...................... 1,165,943 1,014,504 Limited Partners, 118,229.9202 and 99,102.5475 113,644,788 100,241,103 ------------ ------------ Units of Limited Partnership Interest outstanding in 1998 and 1997, respectively............................ 114,810,731 101,255,607 ------------ ------------ $116,954,683 $103,029,348 ============ ============ Net Asset Value Per Unit.................. $ 961.22 $ 1,011.49 </TABLE> See the Partnership's financial statements beginning on page 89. RISK FACTORS INVESTMENT IN THE UNITS IS SPECULATIVE AND INVESTORS SHOULD NOT INVEST IN UNITS UNLESS THEY CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT. PROSPECTIVE PURCHASERS SHOULD CONSIDER THE FOLLOWING RISKS BEFORE SUBSCRIBING FOR UNITS. COMMODITY TRADING RISKS COMMODITY TRADING IS SPECULATIVE. Commodity futures markets are highly volatile. Profitability of the Partnership's commodity trading will depend on the ability of the Advisor to analyze the commodity markets, which are influenced by, among other things, changing supply and demand relationships, weather, government agricultural, commercial and trade programs and policies, national and international political and economic events and changes in interest rates. See "Commodity Futures Markets". The Advisor's technical trading methods do not generally take into account such fundamental factors except to the extent such factors are reflected in the technical input data analyzed by the Advisor. The Advisor may trade futures contracts on stock indices. Such contracts have experienced substantial volatility. While a volatile market can produce trends which might be identified by the trend-following strategies employed by the Advisor, such markets can also be without sustained price trends. Participation in a volatile market without significant trends could produce substantial losses for the Partnership. COMMODITY TRADING IS HIGHLY LEVERAGED. Because of the low margin deposits normally required in commodity futures trading, a high degree of leverage is typical of a commodity trading account. AS A RESULT, A RELATIVELY SMALL PRICE MOVEMENT IN A COMMODITY CONTRACT MAY RESULT IN SUBSTANTIAL LOSSES TO THE INVESTOR. For example, if at the time of purchase 10% of the price of the futures contract is deposited as margin, a 10% decrease in the price of the futures contract would, if the contract is then closed out, result in a total loss of the margin deposit before any deduction for the brokerage fee. Thus, like other leveraged investments, any purchase or sale of a commodity contract may result in losses to the Partnership in excess of the amount initially deposited by the Partnership as margin with respect to that contract. SB does not intend to require the Partnership to deposit and maintain margin with respect to its forward currency trading. The General Partner will, however, impose trading limits on forward trading. See "Commodity Markets -- Margins". COMMODITY TRADING MAY BE ILLIQUID. Most commodity exchanges limit fluctuations in commodity contract prices during a single day by regulations referred to as "daily price fluctuation limits" or "daily limits". During a single trading day no trades may be executed at prices beyond the daily limit. Once the price of a contract for a particular commodity has increased or decreased by an amount equal to the daily limit, positions in the commodity can be neither taken nor liquidated unless traders are willing to effect trades at or within the limit. Commodity futures prices have moved the daily limit for several consecutive days with little or no trading in the past. Similar occurrences could prevent the Partnership from promptly liquidating unfavorable positions and thus subject the Partnership to substantial losses. See "Commodity Markets -- Regulations". RISKS OF PURCHASING AND WRITING OPTIONS. The Partnership may engage in the trading of commodity options on exchanges. Such trading involves risks substantially similar to those involved in trading commodity futures contracts in that options are speculative and highly leveraged. Specific market movements of the commodities or futures contracts underlying an option cannot accurately be predicted. The purchaser of an option is subject to the risk of losing the entire purchase price of the option. The writer of an option is subject to the risk of loss resulting from the difference between the premium received for the option and the price of the commodity or futures contract underlying the option which the writer must purchase or deliver upon exercise of the option. The Advisor currently does not trade options, but may do so in the future. The Partnership may trade in over-the-counter currency options to the extent permitted by CFTC regulation. RISKS INHERENT IN TRADING STRATEGIES. Trading decisions of the Advisor will be based on technical analysis. The buy and sell decisions based on technical and trend-following strategies are not based on analysis of fundamental supply and demand factors, general economic factors or anticipated world events. The profitability of such trading programs depends upon occurrence in the future of major price moves or trends in commodities. In the past there have been periods without trends and such periods may recur. The past performance of such trading programs is not necessarily indicative of their future profitability, and no trading program can consistently determine which commodity futures contracts to enter into or when to enter into them. The best commodity trading program will not be profitable if there are no trends of the kind it seeks to identify and follow. Any factor which may lessen the prospect of major trends in the future (such as increased government control of, or participation in, the markets) may reduce the Advisor's ability to trade profitably in the future. Any factor which would make it more difficult to execute timely trades, such as a significant lessening of liquidity in a particular market, would also be detrimental to profitability. AS A RESULT OF THESE FACTORS AND THE GENERAL VOLATILITY OF THE COMMODITIES MARKETS, INVESTORS SHOULD VIEW THEIR INVESTMENT AS LONG TERM (AT LEAST 2 YEARS) IN ORDER TO PERMIT THE STRATEGIES OF THE ADVISOR TO FUNCTION OVER TIME. ALTHOUGH THE ADVISOR'S STRATEGIES MAY BE VIEWED AS LONG-TERM, SUCH STRATEGIES MAY ENTAIL THE FREQUENT OPENING AND CLOSING OF PARTICULAR TRADING POSITIONS. Further, commodity trading advisors may alter their strategies from time to time in an attempt better to evaluate market movements. As a result of such periodic modifications, it is possible that the trading strategies used by the Advisor in the future may be different from those presently in use. Further, the total amount of funds being managed by the Advisor may be substantially increased by the addition of the Partnership's account. Moreover, somewhat different trading strategies may be required for accounts of differing sizes or trading objectives. See the discussion of programs to be traded for the Partnership under "The Advisor". Limited partners will be notified by the Partnership of material changes in the Advisor's trading strategies. POSSIBLE EFFECTS OF SPECULATIVE POSITION LIMITS. The CFTC and U.S. exchanges have established limits referred to as "speculative position limits" on the maximum net long or net short position which any person may hold or control in particular futures and options on futures, and most exchanges have established limits referred to as "trading limits" on the amount of fluctuation in commodity futures contract prices on a single trading day. Currently, trading limits do not generally apply to currency futures contracts. See "Commodity Markets -- Regulation". All commodity futures and options accounts owned or controlled directly or indirectly by the Advisor or its principals, including the Partnership's account, are combined for speculative position limit purposes. The Advisor believes that established speculative position and trading limits will not adversely affect its trading for the Partnership. However, it is possible that the trading instructions of the Advisor for the Partnership may have to be modified and that positions held by the Partnership may have to be liquidated in order to avoid exceeding such limits. Such modification or liquidation, if required, could adversely affect the operations and profitability of the Partnership. Furthermore, in the unlikely event that positions in other pools operated by the General Partner but not advised by the Advisor or other accounts managed by SB or its employees are required to be aggregated with the Partnership's positions, it is more likely that the trading instructions of the Advisor for the Partnership would have to be modified and that positions held by the Partnership would have to be liquidated in order to avoid exceeding such limits. Neither CFTC nor exchange position nor trading limits apply to forward contracts in foreign currencies. POSSIBLE EFFECTS OF COMPETITION. The Partnership may experience increased competition for the best prices on the same commodity contracts, not only because of the utilization by other persons of trend following trading strategies, but also because at April 30, 1998, commodity accounts aggregating approximately $2.1 billion were being managed by the Advisor. Trading orders for such accounts similar to those of the Partnership are likely to occur contemporaneously. The Advisor enters trading orders either through the SB order desk or through a floor broker approved by the General Partner. Orders placed with SB are transmitted through a floor broker selected by SB and the order fill is then relayed to the Advisor. For orders entered through a floor broker approved by the General Partner such orders are given with instructions to the floor broker to give up the trade to SB for order clearance and the Advisor provides SB with a list of such "give up" trades initiated by the floor broker. There is no specific limit under any agreement between the Advisor and the Partnership as to the number of accounts which may be managed or advised by the Advisor, so that such competition could be further increased if the Advisor chooses to manage additional accounts in the future. The performance of the Partnership's investments in commodity interests could also be adversely affected by the manner in which particular orders are entered by the Advisor for all such accounts traded by the Advisor. TRADING IN FORWARD FOREIGN CURRENCIES. The Partnership will engage in the trading of forward contracts in foreign currencies. In this connection, the Partnership contracts with SB to make or take future delivery of a particular foreign currency. Although the foreign currency market is not believed to be necessarily more volatile than the market in other commodities, there is less protection against defaults in the forward trading of currencies than there is in trading such currencies on an exchange since such forward contracts are not guaranteed by an exchange or clearing house. Investors are not afforded the regulatory protections of such exchanges or the CFTC; rather, banks and dealers act as principals in such markets. Neither the CFTC nor banking authorities regulate trading in forward foreign currencies. There are no limits on daily price movements or on speculative positions in this market. Moreover, principals are not required to continue to make markets in these contracts. The CFTC has indicated that it may assert jurisdiction over forward contracts in foreign currencies and attempt to prohibit certain entities from engaging in such transactions. In the event that such prohibition included the Partnership, the Partnership would cease trading such contracts. The Advisor may trade forward contracts in foreign currencies extensively for the Partnership's account and thus, such a cessation of forward trading could have a substantial adverse effect on the performance of the Advisor for the Partnership. There are no limits on the Advisor's ability to trade currency forwards other than the trading policies of the Partnership. See "Trading Policies". TRADING ON FOREIGN EXCHANGES AND TRADING IN PHYSICAL COMMODITIES. The Partnership may trade in commodity contracts on exchanges located outside the U.S. such as the London International Financial Futures Exchange and the Sydney Futures Exchange. Trading on such exchanges is not regulated by the CFTC and may, therefore, be subject to more risks than trading on domestic exchanges such as the risks of exchange controls, expropriation, burdensome taxation, moratoria and political or diplomatic events. See "Commodity Markets -- Regulation". In addition, the rights and responsibilities of the Partnership in the event of an exchange or clearing house default or bankruptcy are likely to differ from those existing on U.S. exchanges. There are no limits on the Advisor's ability to trade on CFTC-approved foreign markets in accordance with the Partnership's trading policies. See "Trading Policies." The Partnership may engage in spot commodity transactions (transactions in physical commodities), including contracts on foreign currencies. Such spot transactions are not regulated by the CFTC. Some of such transactions may be entered into in conjunction with exchange for physical transactions. In any principal transactions entered by the Partnership, the Partnership is subject to the risk of the inability of, or refusal by, a counterparty to perform with respect to the underlying contract. Such transactions may be entered into with SB or an affiliate at prices quoted by SB which will not include a mark-up. RISKS OF PARTNERSHIP FUNDS HELD IN FOREIGN DEPOSITORIES. The Partnership's funds held in connection with contracts on U.S. contract markets that are priced and settled in a foreign currency may be held in accounts denominated in a foreign currency with a depository located outside the United States or its territories. The Partnership currently does not intend to maintain any of its assets with depositories located outside the United States or its territories. There are no limits on the amount of funds that may be held in foreign depositories or in funds that may be denominated in foreign currencies. See "Use of Proceeds". Such accounts are subject to the risk that events could occur which would hinder or prevent the availability of these funds for distribution to customers including the Partnership. Such accounts may also be subject to foreign currency exchange rate risks. The Partnership has agreed with SB, its futures commission merchant, that in order to avoid the possible dilution of other customer funds, any Partnership claims based on such funds will be subordinated in the unlikely event that both of the following conditions are met: (A) SB is placed in receivership or bankruptcy and (B) there are insufficient funds available for distribution denominated in the foreign currency as to which the Partnership has a claim to satisfy all claims against those funds. The Partnership has agreed with SB that if both conditions (A) and (B) occur, the Partnership's claim against SB's assets attributable to funds held overseas in a particular foreign currency may be satisfied out of segregated customer funds held in accounts denominated in dollars or other foreign currencies only after each customer whose funds are held in dollars or in such other foreign currencies receives its pro rata portion of such funds. RISKS OF PARTNERSHIP STRUCTURE SUBSTANTIAL FEES AND EXPENSES TO THE PARTNERSHIP. The Partnership is obligated to pay brokerage fees, legal, accounting and reporting expenses and filing fees regardless of whether the Partnership realizes profits. Incentive fees payable by the Partnership are based upon New Trading Profits earned by the Advisor for the Partnership at the end of each calendar quarter, including any unrealized appreciation on open commodity positions. Such appreciation may never be realized by the Partnership; however, any such lost appreciation would have to be recovered before another incentive fee would be payable. It should be noted that since the Advisor's incentive fee is paid quarterly, substantial incentive fees may be paid during a year even though the Partnership may incur a net loss for the full year. Therefore, it is possible that the Partnership could incur substantial incentive fees in a year in which it had no net trading profits or in which it actually lost money. A $1,000 Unit would have to increase 7.71% (assuming a partnership size of $120 million) in a given one-year period of trading operations (that is, $77.12) for the redemption value per Unit to equal $1,000. The Partnership is therefore required to make trading profits and interest income equal to the aforementioned percentage in order to avoid depletion or exhaustion of its assets from these expenses. See "Fees and Expenses to the Partnership". CONFLICTS OF INTEREST. Conflicts of interest exist in the structure and operation of the Partnership's business. These conflicts include (1) the conflict between the duty of the General Partner to act in the best interests of the Partnership and any advantage to SB, an affiliate of the General Partner, resulting from the trading of the Partnership's account, and (2) the probable competition for positions with the Partnership by SB, the Advisor, the General Partner and other commodity pools and accounts organized or advised by such persons, or their principals, affiliates or customers. The Limited Partnership Agreement requires the General Partner to review brokerage rates at least annually and to determine that such rates are competitive with those charged to other similar commodity pools. In addition, the General Partner, as a fiduciary to the limited partners, must resolve any conflict in favor of the limited partners. See "Conflicts of Interest". NO PUBLIC MARKET FOR UNITS EXISTS. Although a limited partner may transfer his Units as of the first day of any fiscal quarter, no market exists for their sale and none is likely to develop. In addition, a transferee of a Unit can only become a substituted limited partner with the General Partner's consent. See "The Limited Partnership Agreement -- Restrictions on Transfer or Assignment". However, a limited partner may require the Partnership to redeem some or all of his Units at their Net Asset Value as of the last day of any month beginning six months after trading commences on 10 days' notice to the General Partner. Under extraordinary circumstances, including market conditions that would prohibit the liquidation of positions, the Partnership may delay redemptions beyond the end of the applicable month. See "Redemptions". LIMITED PARTNERS WILL NOT PARTICIPATE IN MANAGEMENT. Purchasers of the Units are not entitled to participate in the management or control of the Partnership or the conduct of its business. Limited Partners have limited voting rights with respect to the Partnership's affairs. See "The Limited Partnership Agreement -- Management of Partnership Affairs". EXPIRATION OF MANAGEMENT AGREEMENT WITH THE ADVISOR. The Management Agreement between the General Partner and the Advisor expires on June 30, 1999. No assurance is given that the services of the Advisor will be available on the terms contained in its Management Agreement after its expiration (provided, however, that in any contract renewal or renegotiation the Advisor will carry forward all losses attributable to it), or that a new advisor would agree to such terms. See "The Advisor -- Management Agreement". In the event that a new advisor is selected, New Trading Profits earned by the new advisor will not be reduced by cumulative net realized trading losses, if any, incurred by the prior advisor. Any fees paid to a new or replacement advisor will comply with NASAA Guidelines. Subject to the caps of fees to which the Partnership is generally subject, the fees payable by the Partnership to the Advisor could increase following the termination of a management agreement, either according to the terms of a new management agreement, or if a new advisor were selected by the General Partner for the Partnership. DISSOLUTION OF THE PARTNERSHIP; CESSATION OF TRADING. The Partnership will dissolve on December 31, 2017, unless earlier dissolved pursuant to the Limited Partnership Agreement, regardless of its financial condition or market positions on such date. Liquidation of positions at such date may result in losses to the Partnership. The Partnership may cease trading and liquidate all open positions prior to its dissolution. The General Partner will dissolve the Partnership if Net Asset Value per Unit falls below $400 as of the end of a trading day. See "The Limited Partnership Agreement -- Dissolution of the Partnership" and "The Limited Partnership Agreement -- Management of Partnership Affairs". In the event of early cessation of trading, the Partnership would continue to accrue legal, accounting, reporting and filing expenses. NO INDEPENDENT REVIEW. The Partnership, the General Partner and SB are affiliated entities and are represented by single counsel. Therefore, to the extent the Partnership and this offering would benefit by independent review, such benefit will not be available in this offering. There may also be an absence of arm's-length negotiations with respect to some of the terms of this offering, including with respect to the Customer Agreement and Selling Agreement with SB. The General Partner believes that the terms received by the Partnership with respect to such negotiation are no less favorable to the Partnership than they would be as a result of arm's-length negotiations. The Advisor is represented by its own counsel. OPERATING HISTORY OF PARTNERSHIP AND GENERAL PARTNER. The CFTC requires commodity pool operators to disclose to prospective pool participants the actual performance record of their pools for at least the previous five years. You should note that the Partnership has been trading only since August 1, 1997. However, as of March 31, 1998, the General Partner operates twenty-one other active commodity pools. The performance records of these pools are set forth under the caption "The General Partner -- Other Pools Operated by the General Partner". Investors should note that the Advisor is not the sole advisor to each of such pools operated by the General Partner, and that the trading strategies of the other advisors of those pools may also vary from those employed by the Advisor and the Partnership. INVESTORS SHOULD NOTE THAT THE PERFORMANCE RECORDS OF THE GENERAL PARTNER'S OTHER COMMODITY POOLS ARE NOT INDICATIVE OF THE PERFORMANCE OF THE PARTNERSHIP. RELIANCE ON ADVISOR AND KEY PERSONNEL. The Partnership will rely on the Advisor to manage its portfolio. There can be no assurance that the trading systems and strategies used by the Advisor will prove to be successful under all or any market conditions. In addition, the Advisor relies on key personnel to implement its trading strategies and is therefore subject to the risk that those individuals may be unable to implement such trading strategies. The General Partner may terminate the Advisor in certain circumstances and may replace the Advisor with a new advisor or may make trading decisions for the Partnership itself, but it is extremely unlikely that the General Partner or replacement advisor would trade in the same way that the terminated Advisor traded for the Partnership. See "The Advisor -- Management Agreement". RESTRICTIONS ON TRANSFER OR ASSIGNMENT. The Limited Partnership Agreement provides that a limited partner may assign or transfer his Units upon notice to the General Partner. No assignment or transfer of Units will be effective against the Partnership or the General Partner until the commencement of the next month after the General Partner receives such notice. Without the consent of the General Partner (which consent may be withheld at its sole and absolute discretion for the purpose of preserving the Partnership's tax status or to avoid adverse legal consequences to the Partnership), no assignee may become a substituted limited partner. An assignee who becomes a substituted limited partner will be subject to all of the rights and liabilities of a limited partner of the Partnership. An assignee who does not become a substituted limited partner will be entitled to receive the share of the profits or the return of capital to which his assignor would otherwise be entitled, but will not be entitled to vote, to an accounting of Partnership transactions, to receive tax information or to inspect the books and records of the Partnership. A redemption/transfer request in the proper form will be deemed a notice of transfer. LEGAL AND REGULATORY RISKS TAX LIABILITY MAY EXCEED CASH DISTRIBUTIONS. Cash will be distributed to the partners in the sole discretion of the General Partner, and the General Partner may determine not to make a distribution in any particular year of the Partnership. The Partnership's taxable income for a fiscal year (including both realized income and income resulting from marking to market positions in regulated futures contracts) will be taxable to the partners in accordance with their pro rata shares of Partnership profits for tax purposes whether or not any cash has been distributed to the partners. As a result, cash distributions to a limited partner in a given year may be less than the taxes payable by that partner with respect to Partnership profits for that year. However, subject to certain conditions and exceptions, each partner may redeem his Units (as of the end of any month) in order to provide funds for the payment of taxes or for any other purpose. See "Redemptions" and "Income Tax Aspects". POSSIBILITY OF TAXATION AS A CORPORATION. The General Partner has been advised by Willkie Farr & Gallagher, its attorneys, that under current federal income tax laws and regulations and given the factual assumptions set forth under "Income Tax Aspects", the Partnership will be classified as a partnership and not as a corporation. Such opinion is not binding on the Internal Revenue Service. No ruling has been obtained from the Internal Revenue Service in this regard and the Partnership does not intend to apply for any such ruling. The facts and authorities relied upon by counsel in their opinion may change in the future. See "Income Tax Aspects -- Classification as a Partnership". If the Partnership were to be treated as a corporation for federal income tax purposes, income or loss of the Partnership would not be passed through to the partners, and the Partnership would be subject to tax on its income at the rate of tax applicable to corporations. In addition, all or a portion of distributions of Partnership income would generally be taxable to the partners as corporate dividends, and the partners' tax on such distributions would be in addition to the corporate tax paid by the Partnership on the same income. TAXATION OF COMMODITY INTERESTS. Commodity interests are subject to special tax rules, which rules will apply to the taxation of Partnership income and loss. There can be no assurance that the Internal Revenue Service will not issue regulations that would adversely affect the expected treatment of Partnership transactions or that such regulations would not be given retroactive effect. Finally, Willkie Farr & Gallagher cannot opine on whether and to what extent Partnership transactions would be taken into account by the Internal Revenue Service in determining the tax consequences of transactions entered into by a partner in his individual capacity. See "Income Tax Aspects". ABSENCE OF REGULATION APPLICABLE TO SECURITIES MUTUAL FUNDS AND THEIR ADVISORS. Since the purpose of the Partnership is to trade commodities, the Partnership has not registered as a securities investment company, or "mutual fund", subject to extensive regulation by the Securities and Exchange Commission imposed upon such entities under the Investment Company Act of 1940, as amended (the "1940 Act"). Therefore, investors may not be accorded the protective measures provided by such legislation. In addition, the Advisor is not registered as an investment adviser under the Investment Advisers Act of 1940, as amended or any similar state law. However, the General Partner is a CFTC-registered commodity pool operator and the Advisor is a CFTC-registered commodity trading advisor. See "Commodity Markets -- Regulation". Any determination that the Partnership be required to register as an investment company under the 1940 Act could have serious adverse consequences for the Partnership, the General Partner, the Advisor and the limited partners. In the event of such determination (or for any other reason), the General Partner may, in its discretion, withdraw from the Partnership, causing its dissolution. REGULATION OF COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS. The General Partner is a registered commodity pool operator and the Advisor is a registered commodity trading advisor, as required by Federal law. Any determination by the CFTC to terminate, suspend, revoke or not renew the registration of the General Partner would cause the General Partner to withdraw as general partner of the Partnership; the limited partners would then determine to select a replacement general partner (as provided in the Limited Partnership Agreement) or to dissolve the Partnership. Any determination by the CFTC to terminate, suspend, revoke or not renew the registrations of the Advisor would cause the General Partner to terminate the Management Agreement with the Advisor, as permitted in the Management Agreement. The General Partner could reallocate the Partnership's assets managed by the Advisor to other advisors, or appoint a new advisor (including itself). SALES AND DISTRIBUTION RISKS PARTICIPATION OF PROMOTERS. SB and the General Partner have been instrumental in the organization of the Partnership and may be deemed "promoters" of the Partnership within the meaning of Rule 405 under the Securities Act of 1933. No selling agent which is not affiliated with the General Partner and SB has made an investigation of the offering or has participated in the negotiation of its terms or the structuring of the Partnership. NO ASSURANCE THAT UNITS WILL BE AVAILABLE. The offering of Units is being made by SB acting in its market-making capacity. SB is not obligated to conduct market-making activities and any such activities may be discontinued at any time without notice, at the sole discretion of SB. SB will sell only Units for which redemption/transfer requests have been submitted by a limited partner. See "Plan of Distribution". CONSIDERATIONS FOR NON-U.S. INVESTORS. Non-U.S. investors should note that Units are denominated in U.S. dollars and that changes in rates of exchange between currencies may cause the value of the investment to diminish or to increase. Non-U.S. investors should consult their own tax advisors concerning local tax implications of this investment. The foregoing list of Risk Factors does not purport to be a complete explanation of the risks involved in this offering. Potential investors should read the entire Prospectus before determining to invest in the Units.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001037330_icon-cmt_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001037330_icon-cmt_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by and should be read in conjunction with the more detailed information and financial statements (including the notes thereto) (the 'Financial Statements') appearing elsewhere in this Prospectus. Unless otherwise indicated, all information contained in this Prospectus (i) assumes that the Underwriters' over-allotment option is not exercised, (ii) has been adjusted to give effect to a decrease in the number of shares of the Common Stock through a 1-for-2.75 reverse split of the Common Stock that was effected in December 1997, (iii) assumes the automatic conversion of the Company's Series A Convertible Participating Preferred Stock (the 'Series A Preferred Stock') and 10% PIK Series B Convertible Participating Preferred Stock (the 'Series B Preferred Stock') upon consummation of the Offering and (iv) reflects the filing of the Restated Certificate of Incorporation of the Company and the adoption of the Restated By-laws of the Company, both of which will occur prior to the consummation of the Offering. Certain terms used herein are defined under 'Glossary'. All references to the Company contained in this Prospectus, unless otherwise noted, include the Company's predecessor, Integration Consortium, Inc. ('ICI'). THE COMPANY Icon CMT Corp.'tm' ('Icon' or the 'Company') is an Internet solutions provider that offers a comprehensive range of services and products that enable corporate customers to implement their Internet, intranet and extranet strategies. Icon's mission is to provide end-to-end solutions to its customers by facilitating the distribution of the customers' information and applications over Icon's communications infrastructure as well as access to such information and applications. In order to provide end-to-end solutions, Icon offers services and products in three key areas: (i) communications services, including high quality Internet access and web/server hosting and management, enhanced by the Company's proprietary technologies; (ii) a range of professional services, including custom application and website development and design, systems integration and maintenance and support services; and (iii) product resales, including hardware and software, which are an integral component of systems design and integration. Icon differentiates itself by integrating its services and products in order to provide customized turnkey solutions for the needs of corporate customers. Unlike many of Icon's competitors who focus on a single service or product, the Company continuously expands the breadth of its services and its engineering expertise to optimize its end-to-end solutions. The emergence of the Internet and the widespread adoption of Internet Protocol ('IP') as a data transmission standard has resulted in an increasing number of corporations exploring opportunities to provide IP-based applications and services within their organization, and to their customers and business partners. The broad range of business applications, combined with security and performance requirements, have resulted in demand for high bandwidth networked systems and for integration and custom application development services. Revenues generated by the Internet communications services market in the United States, comprised of access and hosting, are expected to increase from $1.4 billion in 1996 to $28.1 billion in 2000 according to Forrester Research, Inc. while the worldwide Internet-related professional services market is expected to grow from $2.5 billion in 1996 to $13.8 billion in 2000 according to International Data Corporation. Icon focuses on the corporate market due to its high growth, low customer turnover and demand for a broad range of higher value-added Internet services and products. The Company's communications infrastructure is a key element of its end-to-end solutions. The Company maintains a nationwide Asynchronous Transfer Mode ('ATM') backbone that incorporates certain proprietary technologies and is managed to deploy and distribute information and applications. The Company manages its network to achieve utilization levels that enable it to operate in a reliable and high performance manner. The Company controls its network and provides hosting and management services from its state-of-the-art network operations center ('NOC'). By controlling its own network, the Company can develop, select and integrate appropriate technologies that enhance the speed, security, reliability, flexibility and overall performance of its communications infrastructure, enabling the Company to compete effectively and meet increasingly demanding customer requirements. Icon's growth strategy is based on leveraging its capability to provide end-to-end Internet solutions, which is often a decisive factor in attracting new customers, as well as generating additional revenue from the existing customer base. Icon's relationships with several customers, such as The Associated Press, Bear, Stearns & Co. Inc. ('Bear Stearns') and CBS, Inc. ('CBS') demonstrate how single service or product offerings evolved into broader solutions opportunities encompassing multiple communications and professional services and products. To maintain its competitive advantage, Icon intends to: (i) maintain its reliable and high performance communications infrastructure; (ii) expand the bandwidth and reach of its network; (iii) expand and integrate professional services offerings; (iv) continue to build efficient distribution of services and products through direct and indirect sales channels; and (v) potentially strengthen its market position through acquisitions. Icon's distribution strategy depends on a direct sales force, which has increased from 25 to 33 sales staff during the first nine months of 1997, dedicated to large accounts with significant revenue generating potential, and on indirect distribution channels, such as significant relationships with telecommunications providers like Bell Atlantic Internet Solutions, Inc. ('Bell Atlantic Internet Solutions') and Fiberlink Communications Corp. ('Fiberlink'), that extend the Company's reach without substantial costs. Bell Atlantic Internet Solutions makes Icon's communications services available to requesting corporate and residential customers and represents a rapidly growing revenue stream for Icon. In November 1997, Icon entered into a joint venture agreement with Teleway Corporation ('Teleway') that will extend the reach of the Company's network into Japan. Recently, Kokusai Denshain Denwa Co. Ltd. announced that it is in negotiations to acquire Teleway. The Company cannot predict the effect, if any, such acquisition would have on the joint venture. Icon serves major corporations, predominantly in the financial services, media, telecommunications and travel industries, including ABC Radio Network, ACC Long Distance Corp., Alliance Capital Management LP, The Associated Press, Barnes and Noble.com Inc., Bear Stearns, Bell Atlantic Internet Solutions, Bloomberg Financial Markets, CBS, C-NET: The Computer Network, Comedy Central Network, Daiwa Securities America, Inc., Deutsche Morgan Grenfell, Eastman Kodak Company, Fiberlink, Galileo International, Merrill Lynch & Co. Inc., Metropolitan Life Insurance Co., Moore Capital Management, Inc., Kobra International (Nicole Miller), Nomura Securities Co. Ltd., Omnipoint Communications, Swissair, Swissotel, Tudor Investment Company and John Wiley & Sons, Inc. ICI, the Company's predecessor, was incorporated in New York in February 1991. Icon was incorporated in Delaware in February 1995, and ICI was merged with and into Icon in December 1995. The Company's principal executive offices are located at 1200 Harbor Blvd., Weehawken, New Jersey 07087, and its telephone number is (201) 601-2000. The Company also maintains an office at 1700 Broadway, New York, New York 10019. Icon's e-mail address is info@icon.com, and its website, which is not a part of this Prospectus, is http://www.icon.com. THE OFFERING <TABLE> <S> <C> Common Stock offered hereby............................. 3,850,000 shares(a) Common Stock to be outstanding after the Offering....... 15,025,285 shares(b) Use of proceeds......................................... Expansion and upgrade of the Company's communications infrastructure and for working capital and general corporate purposes, including acquisitions. See 'Use of Proceeds'. Dividend policy......................................... The Company has not paid any dividend to stockholders and does not anticipate such dividends in the foreseeable future. See 'Dividend Policy'. Proposed NNM symbol..................................... ICMT </TABLE> - ------------ (a) In addition, the Company and the Selling Stockholders have granted the Underwriters an option to purchase 346,500 and 231,000 shares of Common Stock, respectively, solely to cover over-allotments, if any. Any shares of Common Stock purchased pursuant to the exercise of such option will be purchased first from the Selling Stockholders and thereafter from the Company. (b) Does not include (i) 2,181,818 shares of Common Stock reserved for issuance under the Company's Amended and Restated 1995 Stock Option Plan pursuant to which options to purchase 1,251,741 shares have been granted and (ii) 948,891 shares of Common Stock reserved for issuance upon exercise of outstanding warrants. See 'Management -- 1995 Option Plan' and 'Description of Capital Stock -- Warrants'.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001037535_telegroup_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001037535_telegroup_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including risk factors, the Company's consolidated financial statements and other financial data, appearing elsewhere in this Prospectus. References in this Prospectus to the "Company" and "Telegroup" refer to Telegroup, Inc. and its Subsidiaries (as defined), except where the context otherwise requires. See "Glossary of Terms" for definitions of certain technical and other terms used in this Prospectus. THE COMPANY Telegroup is a leading global provider of long distance telecommunications services. The Company offers a broad range of discounted international, national, value-added wholesale and enhanced telecommunications services to approximately 268,000 small and medium-sized business, residential and wholesale customers in over 180 countries worldwide. Telegroup has achieved its significant international market penetration by developing what it believes to be one of the most comprehensive global sales, marketing and customer service organizations in the global telecommunications industry. The Company operates a reliable, flexible, cost-effective, digital, facilities-based network (the "Telegroup Intelligent Global Network" or "TIGN") consisting of 19 Excel, NorTel or Harris switches, five enhanced services platforms, owned and leased capacity on seven digital fiber-optic cable links, leased parallel data capacity and the Company's Network Operations Center in Fairfield, Iowa. According to Federal Communications Commission ("FCC") statistics based on 1996 revenue, Telegroup was the thirteenth largest U.S. long distance carrier in 1996. Telegroup provides an extensive range of telecommunications services on a global basis under the Spectra, Global Access and other brand names. The Company's services are typically priced competitively with other alternative telecommunications providers and below the prices offered by the incumbent telecommunications operators ("ITOs"), which are often government-owned or protected telephone companies. While the Company offers a broad range of telecommunications services, the services offered in a particular market vary depending upon regulatory constraints and local market demands. Telegroup historically has offered traditional call-reorigination service (also known as "callback") to penetrate international markets having regulatory constraints. As major markets continue to deregulate, the Company continues to migrate an increasing portion of its customer base to "call-through" service, which includes conventional international long distance service and a "transparent" form of call-reorigination. The Company markets its call-through service under the brand name Global Access Direct and its traditional call-reorigination service under the brand name Global Access CallBack. Currently, the Company offers both international and national long distance service, prepaid and postpaid calling cards, toll-free service and enhanced services such as fax store and forward, fax-mail, voice-mail and call conferencing. The Company believes its broad array of basic and enhanced services enables the Company to offer a comprehensive bundled solution to its customers' telecommunications needs. The Company also resells switched minutes and enhanced service platforms on a wholesale basis to other telecommunications providers and carriers. See "Business--Services." Telegroup's extensive sales, marketing and customer service organization consists of a worldwide network of independent agents and an internal sales force who market Telegroup's services and provide customer service, typically in local languages and in accordance with the cultural norms of the countries and regions in which they operate. The Company's local sales, marketing and customer service organization permits the Company to continually monitor changes in each market and quickly modify service and sales strategies in response to changes in particular markets. In addition, the Company believes that it can leverage its global sales and marketing organization to quickly and efficiently market new and innovative service offerings. As of November 30, 1997, the Company had approximately 1,375 independent agents worldwide. Twenty- eight country coordinators ("Country Coordinators") are responsible for coordinating Telegroup's operations, including sales, marketing, customer service and independent agent support, in 72 countries. In addition, the Company has 31 internal sales personnel in the United States and one each in France, Germany and the United Kingdom, and intends to establish additional internal sales departments in selected core markets. The Company believes that its comprehensive global sales, marketing and customer service organization will enable the Company to increase its market share and position itself as the leading alternative international long distance provider in each of its target markets. The Company believes that it is the largest alternative international long distance provider in three of the largest international telecommunications markets in the world--France, the Netherlands and Switzerland. See "Business--Sales, Marketing and Customer Service." The Telegroup Intelligent Global Network includes a central Network Operations Center ("Network Operations Center") in Iowa City, Iowa, as well as switches, owned and leased transmission capacity and a proprietary distributed intelligent network architecture. The TIGN is designed to allow customer- specific information, such as credit limits, language selection, waiting voice- mail and faxes, and speed dial numbers to be distributed efficiently over a parallel data network wherever Telegroup has installed a TIGN switch. In addition, the open, programmable architecture of the TIGN allows the Company to rapidly deploy new features, improve service quality, and reduce costs through least cost routing. As of September 30, 1997, the TIGN consisted of (i) the Network Operations Center, (ii) 19 Excel, NorTel or Harris switches in New York City, Jersey City, New Jersey, London, Paris, Amsterdam, Zurich, Copenhagen, Frankfurt, Hong Kong, Sydney, Tokyo and Milan (iii) five enhanced services platforms in New York, Hong Kong, London, Paris and Sydney, (iv) owned and leased fiber-optic cable links connecting its New York and New Jersey switches to its switches in London, Amsterdam, Sydney and Los Angeles, and its London switches to its switches in Paris and Amsterdam, and (v) leased parallel data transmission capacity connecting Telegroup's switches to each other and to the networks of other international and national carriers. The Company intends to further develop the TIGN by upgrading existing facilities and by adding switches and transmission capacity principally in and between major markets where the Company has established a substantial customer base. See "Business-- Network and Operations." MARKET OPPORTUNITY The global market for national and international telecommunications equipment and services is undergoing significant deregulation and reform. The industry is being shaped by the following trends: (i) deregulation and privatization of telecommunications markets worldwide; (ii) diversification of services through technological innovation; and (iii) globalization of major carriers through market expansion, consolidation and strategic alliances. As a result of these factors, it is anticipated that the industry will experience considerable growth in the foreseeable future, both in terms of traffic volume and revenue. According to the International Telecommunications Union ("ITU"), a worldwide telecommunications organization under the auspices of the United Nations, the 1998 revenues of the global telecommunications industry is projected to exceed $1 trillion. The international telecommunications industry accounted for $52.8 billion in revenues and 60.3 billion minutes of use in 1995, increasing from $21.7 billion in revenues and 16.7 billion minutes of use in 1986, which represents compound annual growth rates of 10% and 15%, respectively. The ITU projects that global telecommunications services revenues will approach $900 billion by the year 2000. See "The Global Telecommunications Industry." BUSINESS STRATEGY Telegroup's objective is to become the leading provider of telecommunications services to small and medium-sized business and high-volume residential customers in its existing core markets and in selected target markets. Telegroup's strategy for achieving this objective is to deliver additional services to customers in its markets through the continued deployment of the TIGN and to expand its sales and marketing organization into new target markets. The Company's business strategy includes the following key elements: Expand the Telegroup Intelligent Global Network. Telegroup is currently expanding the TIGN by installing additional switches, purchasing ownership in additional fiber-optic cable and leasing additional dedicated transmission capacity in strategically located areas of customer concentration in Western Europe and the Pacific Rim. Through September 30, 1997, the Company has invested over $16.2 million in network facilities, and the Company anticipates the investment of an additional $40.3 million in network facilities over the next 15 months. During the next 15 months, the Company has scheduled the installation of additional switches in the United States, Spain, New Zealand, Korea, El Salvador and Brazil, and nodes in the United States, Sweden, Norway, Belgium, Greece and Austria. Telegroup will continue to purchase ownership in additional fiber-optic cables and lease additional dedicated transmission capacity to reduce the Company's per minute transmission costs. The Company's ability to achieve these goals is dependent upon, among other things, its ability to raise additional capital. The Company believes that the expansion of the TIGN will enable Telegroup to continue to migrate customers from traditional call- reorigination services to Global Access Direct. In order to maximize the Company's return on invested capital, the Company employs a success-based approach to capital expenditures, locating new switching facilities in markets where the Company has established a customer base by marketing its call- reorigination services. Maximize Operating Efficiencies. Telegroup intends to reduce its costs of providing telecommunications services by strategically deploying switching facilities, adding leased and owned fiber-optic capacity and entering into additional alternative "transit/termination agreements." This expansion of the TIGN will enable the Company to originate, transport and terminate a larger portion of its traffic over its own network, thereby reducing its overall telecommunications costs. The Company believes that through least cost routing and its cost effective Excel LNX switches and its other facilities, Telegroup will be able to further reduce the overall cost of its services. Expand Global Sales, Marketing and Customer Service Organization. The Company believes that its experience in establishing one of the most comprehensive global sales, marketing and customer service organizations in the global telecommunications industry provides it with a competitive advantage. The Company intends to expand its global sales, marketing and customer service organization in new and existing markets. In new target markets, the Company relies primarily on independent agents to develop a customer base while minimizing its capital investment and management requirements. As the customer base in a particular market develops, the Company intends to selectively acquire the operations of its Country Coordinator serving such market and recruit and train additional internal sales personnel and independent agents. The Company believes that a direct sales and marketing organization complements its existing independent agents by enabling Telegroup to conduct test marketing and quickly implement new marketing strategies. In addition to its sales offices in France, Germany and the United Kingdom, the Company intends to open or acquire additional offices in target markets in Europe and the Pacific Rim during 1998. Position Telegroup as a Local Provider of Global Telecommunications Services. Telegroup is one of the only alternative telecommunications providers that offers in-country and regional customer service offices in major markets on a global basis. At November 30, 1997, the Company had 28 Country Coordinators providing customer service in 72 countries. Telegroup believes this local presence provides an important competitive advantage, allowing the Company to tailor customer service and marketing to meet the specific needs of its customers in a particular market. Customer service representatives speak the local languages and are aware of the cultural norms in the countries in which they operate. The Company continually monitors changes in the local market and seeks to quickly modify service and sales strategies in response to such changes. In many instances, this type of dedicated customer service and marketing is not available to the Company's target customer base from the ITOs. Target Small and Medium-Sized Business Customers. The Company believes that small and medium-sized business customers focus principally on obtaining quality and breadth of service at low prices and have historically been underserved by the ITOs and the major global telecommunications carriers. Through the deployment of the TIGN, the Company will continue to migrate existing customers from traditional call-reorigination services to Global Access Direct, and to address the telecommunications needs of a wider base of small and medium-sized business customers. Telegroup believes that, with its direct, face-to-face sales force and dedicated customer service, it can more effectively attract and serve these business customers. Pursue Acquisitions, Joint Ventures and Strategic Alliances. The Company intends to expand its global sales, marketing and customer service organizations, increase its customer base, add network and circuit capacity, enter additional markets and develop new products and services through acquisitions, joint ventures and strategic alliances. The Company seeks to acquire controlling interests in companies that have established marketing organizations, existing customer bases, complementary network facilities, new services or technologies and experienced management teams. In addition, the Company intends to make selective acquisitions of its Country Coordinators' operations, in order to lower its selling, general and administrative expense and increase control over this distribution channel. The Company also expects to acquire the operations of other agents and marketing groups. The Company also intends to enter into joint ventures and strategic alliances with selected business partners to enable the Company to enter additional markets and to complement the Company's current operations and service offerings. The Company is continuously reviewing opportunities and believes that such acquisitions, joint ventures and strategic alliances are an important means of expanding its network and increasing network traffic volume, both of which are expected to lower its overall cost of telecommunications services. Broaden Market Penetration through Enhanced Service Offerings. The Company believes that offering a broad array of enhanced services is essential to retain existing customers and to attract new customers. The TIGN's enhanced services platform and its distributed intelligent network architecture permit the Company to provide a broad array of voice, data and enhanced services and to efficiently distribute customer information, such as language selection, waiting voice-mail and faxes and speed dial numbers throughout the TIGN. The Company offers a comprehensive solution to its customers' telecommunications needs by providing enhanced services, including fax store and forward, fax- mail, voice-mail and call conferencing and intends to introduce e-mail-to- voice-mail translation and voice recognition services. Telegroup believes that its provision of such enhanced services will enable it to increase its revenue from existing customers and to attract a broader base of small and medium-sized business customers. The Company was incorporated in Iowa in 1989. The address of the Company's principal place of business is 2098 Nutmeg Avenue, Fairfield, Iowa 52556, and its telephone number is (515) 472-5000. RECENT DEVELOPMENTS On July 14, 1997, the Company completed the initial public offering (the "IPO") of 4,000,000 shares of Common Stock, no par value (the "Common Stock"), at a price of $10.00 per share. The net proceeds to the Company from the sale of the 4,000,000 shares was approximately $35.6 million after deducting expenses and underwriting discounts. In addition, on August 12, 1997, the Company completed the sale of an additional 450,000 shares of Common Stock pursuant to the exercise of the underwriters' overallotment option, yielding net proceeds to the Company of approximately $4.2 million after deducting underwriting discounts. On August 14, 1997, the Company acquired 60% of the common stock of, and a controlling interest in, PCS Telecom, Inc. ("PCS Telecom") for approximately $1.3 million in cash and 40,000 shares of unregistered Common Stock. PCS Telecom is a developer and manufacturer of state of the art, feature-rich, calling card platforms used by Telegroup and numerous other companies. PCS Telecom, which currently has 25 employees, has installed its products both in international and domestic markets. Telegroup has purchased these platforms as part of its global strategy of providing enhanced services for the TIGN, and considers this acquisition to be a strategic purchase which is intended to ensure stability of supply of platforms to establish expeditiously an international facilities network for enhanced services. On September 5, 1997, the Company prepaid in full all of its outstanding $20 million in aggregate principal amount of 12% Senior Subordinated Notes due 2003 (the "Senior Subordinated Notes") at a redemption price equal to 107% of the principal amount thereof, plus accrued interest. The Company financed the prepayment of the Senior Subordinated Notes with a portion of the net proceeds from the IPO and $8.5 million of borrowings under a $15 million revolving credit facility with First Chicago NBD, Inc. (the "Revolving Credit Facility"). The Revolving Credit Facility expired on October 31, 1997. The Company currently anticipates entering into a new credit facility for available borrowings in an amount not expected to exceed $20 million with a bank or other financial institution (the "New Credit Facility"). There can be no assurance that the Company will enter into the New Credit Facility. On September 30, 1997, the Company issued $25 million aggregate principal amount of 8% Convertible Subordinated Notes due 2005 (the "Convertible Notes"). The net proceeds to the Company from the issuance of the Convertible Notes was approximately $24.3 million and approximately $15.0 million of such net proceeds were used to repay all amounts outstanding under the Revolving Credit Facility. See "Description of Other Indebtedness." On October 23, 1997, the Company consummated a private placement under Rule 144A of the Securities Act, pursuant to which the Company issued and sold $97 million aggregate principal amount at maturity of Senior Discount Notes (the "Senior Discount Notes"), receiving gross proceeds of approximately $72.3 million. The Senior Discount Notes were issued pursuant to the terms of an indenture dated October 23, 1997 (the "Indenture") between the Company and State Street Bank and Trust Company, as trustee (the "Trustee"). On November 25, 1997, the Company acquired certain property and equipment from Fastnet UK Limited ("Fastnet") for approximately $240,000. Fastnet has an agency agreement with the Company in which it coordinated retail sales and provided customer service and other services to the Company's customers in the United Kingdom. The Company intends to utilize the assets acquired to enhance the operations of Telegroup UK Limited, a wholly-owned subsidiary of the Company. In January 1998, the Company purchased the telephony portion of its Country Coordinator in Japan, Kabushiki Kaisha Cosmo Kaihatsu, for cash in the amount of approximately $450,000. Also, in January 1998, the Company acquired the operations of its Australian and New Zealand Country Coordinators for 297,554 shares of the Company's Common Stock in an unregistered sale and $150,000 in cash. The Company announced on January 28, 1998, that it proposes to make a tender offer for all of the shares of Newsnet ITN LTD. ("Newsnet") at a price of $0.60 per share. Prior to the announcement, the Company had acquired 2.35 million shares of Newsnet ordinary shares (representing approximately 9.9% of Newsnet's issued capital). The Company is also currently in discussions with other Pacific Rim based telecommunications firms regarding possible acquisition or strategic combination opportunities. On January 29, 1998, Steven J. Baumgartner was named President and Chief Operating Officer of the Company effective February 9, 1998. THE OFFERING Common Stock offered by the Selling Shareholders ......................... Up to 3,010,750 shares of Common Stock. See "Description of Common Stock." Common Stock outstanding before offering (1) ..... 31,491,687 shares Common Stock to be outstanding after the Offering (2) ............ 34,502,437 shares Use of proceeds .......... The Company will not receive any of the proceeds from the sale of Common Stock by the Selling Shareholders. Dividend policy .......... The Company does not expect to pay dividends on the Common Stock in the foreseeable future. See "Dividend Policy." Nasdaq National Market Symbol .................. TRGP - -------- (1) As of January 23, 1998, excludes (i) 1,914,386 shares of Common Stock issuable upon the exercise of options granted under the Stock Option Plan (as defined); (ii) 1,893,093 shares of Common Stock issuable upon the exercise of options available for grant under the Stock Option Plan; and (iii) 727,416 shares of Common Stock issuable upon the exercise of the Warrants (as defined). See "Management--Amended and Restated Stock Option Plan" and "Description of Capital Stock--Warrants." (2) Assumes that all of the Convertible Subordinated Notes are converted at a conversion rate of $12 per share. See "Description of Securities." SUMMARY FINANCIAL DATA The following table sets forth certain consolidated financial information for the Company for (i) the years ended December 31, 1994, 1995 and 1996, which have been derived from the Company's audited consolidated financial statements and notes thereto included elsewhere in this Prospectus, (ii) the year ended December 31, 1993, which has been derived from audited consolidated financial statements of the Company which are not included herein, and (iii) the year ended December 31, 1992, which has been derived from unaudited consolidated financial statements which are not included herein. The summary financial data as of September 30, 1997 and for the nine months ended September 30, 1996 and 1997 has been derived from the unaudited consolidated financial statements for the Company included elsewhere in this Prospectus. In the opinion of management, the unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, which consist only of normal recurring adjustments, necessary for a fair presentation of the financial position and the results of operations for these periods. The "As Adjusted" financial information is not necessarily indicative of the Company's financial position or the results of operations that actually would have occurred if the transactions described herein had occurred on the dates indicated or for any future period or date. The adjustments give effect to available information and assumptions that the Company believes are reasonable. The following financial information should be read in conjunction with "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's consolidated financial statements and notes thereto appearing elsewhere herein. <TABLE> <CAPTION> YEAR NINE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, AS ADJUSTED SEPTEMBER 30, AS ADJUSTED ----------------------------------------------- ------------ ----------------- ------------- 1992 1993 1994 1995 1996 1996(1) 1996 1997 1997(2) ----------- ------- ------- -------- -------- ------------ -------- -------- ------------- (UNAUDITED) (UNAUDITED) (IN THOUSANDS, EXCEPT RATIOS AND OTHER OPERATING DATA) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues: Retail................. $23,846 $29,790 $68,714 $128,139 $179,147 $179,147 $128,828 $169,720 $169,720 Wholesale.............. -- -- -- 980 34,061 34,061 18,951 68,758 68,758 ------- ------- ------- -------- -------- -------- -------- -------- -------- Total revenues......... 23,846 29,790 68,714 129,119 213,208 213,208 147,779 238,478 238,478 Cost of revenues........ 18,411 22,727 49,513 83,101 150,537 150,537 100,794 174,273 174,273 ------- ------- ------- -------- -------- -------- -------- -------- -------- Gross profit........... 5,435 7,063 19,201 46,018 62,671 62,671 46,985 64,205 64,205 ------- ------- ------- -------- -------- -------- -------- -------- -------- Operating expenses: Selling, general and administrative........ 3,935 7,341 19,914 39,222 59,652 59,652 42,648 63,174 63,174 Depreciation and amortization.......... 61 172 301 655 1,882 2,415 1,158 3,208 3,480 Stock option based compensation.......... -- -- -- -- 1,032 1,032 -- 257 257 ------- ------- ------- -------- -------- -------- -------- -------- -------- Total operating expenses.............. 3,996 7,513 20,215 39,877 62,566 63,099 43,806 66,639 66,911 ------- ------- ------- -------- -------- -------- -------- -------- -------- Operating income (loss)................ 1,439 (450) (1,014) 6,141 105 (428) 3,179 (2,434) (2,706) Interest expense....... 88 47 112 121 579 10,178 200 2,135 7,540 Extraordinary item, loss on extinguishment of debt, net of income taxes................. -- -- -- -- -- -- -- 9,971 10,473 ------- ------- ------- -------- -------- -------- -------- -------- -------- Net earnings (loss).... 1,386 (707) (538) 3,821 (118) (7,661) 2,050 (12,820) (17,633) ======= ======= ======= ======== ======== ======== ======== ======== ======== </TABLE> <TABLE> <CAPTION> YEAR NINE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, AS ADJUSTED SEPTEMBER 30, AS ADJUSTED ------------------------------------------- ------------ --------------- ------------- 1992 1993 1994 1995 1996 1996(1) 1996 1997 1997(2) ----------- ------ ------ ------ ------- ------------ ------ ------- ------------- (UNAUDITED) (UNAUDITED) (IN THOUSANDS, EXCEPT RATIOS AND OTHER OPERATING DATA) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Per share amounts(8): Earnings (loss) before extraordinary item.... $ .05 (.02) (.02) .13 (.00) (.23) .07 (.10) (.26) Net earnings (loss).... $ .05 (.02) (.02) .13 (.00) (.23) .07 (.47) (.64) Weighted-average shares................ 28,785 28,785 28,785 28,785 28,785 33,235 28,785 27,462 27,462 OTHER FINANCIAL DATA: EBITDA(3)............... $1,510 $ (278) $ (577) $6,994 $ 2,990 $4,341 $ 602 Net cash provided by (used in) operating activities............. 820 924 1,364 5,561 4,904 4,083 (1,002) Net cash (used in) investing activities... (667) (765) (700) (2,818) (11,262) (8,261) (13,325) Net cash (used in) provided by financing activities............. 21 (10) 957 (115) 15,924 3,877 58,648 Ratio of earnings to fixed charges(4)....... 15.18 -- -- 29.76 .84 .26 10.44 -- -- Capital expenditures.... 291 449 1,056 2,652 9,068 6,264 12,463 Dividends declared per common share........... -- -- -- .02 .02 .02 -- OTHER OPERATING DATA (AT PERIOD END): Retail customers(5): Domestic (US).......... 8,261 7,021 16,733 17,464 34,294 48,785 International.......... 0 5,301 28,325 56,156 109,922 167,444 Wholesale customers(6).. 0 0 0 4 18 26 Number of employees..... 54 97 217 296 444 576 Number of switches...... 0 1 2 3 7 19 </TABLE> <TABLE> <CAPTION> AS OF SEPTEMBER 30, 1997 ------------------------ ACTUAL AS ADJUSTED (7) -------- --------------- (UNAUDITED) (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents.............................. $ 58,215 $130,025 Working capital........................................ 39,035 110,845 Property & equipment, net.............................. 21,597 21,597 Total assets........................................... 139,658 214,590 Long term debt, less current portion................... 25,042 99,975 Total shareholders' equity............................. 40,922 40,922 </TABLE> - ------- (1) Adjusted to give effect to the issuance of the Convertible Notes, the offering of Senior Discount Notes and the elimination of interest and amortization expense for the Senior Subordinated Notes as if such transactions had occurred on January 1, 1996. As adjusted interest expense reflects (i) approximately $2.0 million on the Convertible Notes for the year ended December 31, 1996, and approximately $7.9 million on the Senior Discount Notes for the year ended December 31, 1996 (ii) the elimination of $0.3 million with respect to the Senior Subordinated Notes, for the year ended December 31, 1996 (iii) amortization of fees and costs totaling $0.5 million relating to the Convertible Notes and the offering of Senior Discount Notes for the year ended December 31, 1996 using amortization periods equal to the term of the respective issuances (iv) the elimination of $0.01 million of amortization of fees and costs relating to the Senior Subordinated Notes for the year ended December 31, 1996 and (v) the 4,450,00 shares issued in connection with the initial public offering and the underwriters' overallotment option. Interest income has not been adjusted to reflect interest earned on additional available cash. (2) Adjusted to give effect to the issuance of the Convertible Notes, the offering of Senior Discount Notes and the elimination of interest and amortization expense for the Senior Subordinated Notes as if such transactions had occurred on January 1, 1997. As adjusted interest expense reflects (i) approximately $1.5 million on the Convertible Notes for the nine-months ended September 30, 1997, and approximately $5.9 million on the Senior Discount Notes for the nine-months ended September 30, 1997, (ii) the elimination of $2.0 million with respect to the Senior Subordinated Notes, for the nine-months ended September 30, 1997, (iii) amortization of fees and costs totaling $0.4 million relating to the Convertible Notes and the offering of Senior Discount Notes for the nine-months ended September 30, 1997 using amortization periods equal to the term of the respective issuances and (iv) the elimination of $0.1 million of amortization of fees and costs relating to the Senior Subordinated Notes for the nine-months ended September 30, 1997. Interest income has not been adjusted to reflect interest earned on additional available cash. Adjusted also reflects the additional loss of $0.5 million (net of tax) on the extinguishment of debt as if such transaction had occurred on January 1, 1997. (3) EBITDA represents net earnings (loss) plus net interest expense (income), income taxes, depreciation and amortization, non-cash stock option based compensation and the extraordinary item, loss on extinguishment of debt. While EBITDA is not a measurement of financial performance under generally accepted accounting principles and should not be construed as a substitute for net earnings (loss) as a measure of performance, or cash flow as a measure of liquidity, it is included herein because it is a measure commonly used in the telecommunications industry. (4) The ratio of earnings to fixed charges was computed by dividing earnings by fixed charges. For this purpose, earnings consist of income from continuing operations, before income taxes and fixed charges of the Company and its subsidiaries. Fixed charges consist of the Company's and its subsidiaries' interest expense and the portion of rent expense representative of an interest factor. For the years ended December 31, 1993, 1994, 1996, 1996 as adjusted, and for the nine months ended September 30, 1997, and September 30, 1997 as adjusted, earnings were inadequate to cover fixed charges. The dollar amount of the coverage deficiency was $436,891, $886,700, $125,770, $10,258,419, $4,214,912 and $9,892,150, respectively. (5) Consists of retail customers who received invoices for the last month of the period indicated. Does not include active international customers who incurred charges in such month but who had outstanding balances as of the last day of such month of less than $50, as the Company does not render invoices in such instances. (6) Consists of wholesale customers who received invoices for the last month of the period indicated. (7) Adjusted to give effect to the offering of the Senior Discount Notes as if such transaction had occurred on September 30, 1997. (8) Earnings per common and common equivalent share have been computed using the weighted-average number of shares of common stock outstanding during each period as adjusted for the effects of Securities and Exchange Commission Staff Accounting Bulletin No. 83. Accordingly, options and warrants to purchase common stock granted within one year of the Company's initial public offering, which had exercise prices below the initial public offering price per share, have been included in the calculation of common equivalent shares, using the treasury stock method, as if they were outstanding for all periods presented. For the nine-month period ended September 30, 1997 and as adjusted, earnings per common share have been computed under the provisions of Accounting Principles Board Opinion No. 15, "Earnings Per Share." Common stock equivalents, which includes options and convertible subordinated notes, are not included in the loss per share calculation as their effect is anti-dilutive.
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+PROSPECTUS SUMMARY The following is a brief summary, which is necessarily incomplete, of certain information contained elsewhere in this Prospectus. Reference is made to, and this summary is qualified in its entirety by, the more detailed information contained herein, and in the exhibits and appendices hereto, all of which should be reviewed carefully. The information contained in this Prospectus gives effect to: (i) the reorganization (the "Mac-Gray Combination") of Mac- Gray Services, Inc., a Delaware corporation, that was formerly known as Mac- Gray Co., Inc. ("Mac-Gray Co."), and Mac-Gray, L.P., a Delaware limited partnership (the "Limited Partnership") and (ii) the acquisition (the "Sun Services Acquisition") of Sun Services of America, Inc., a Florida corporation ("SSA"), and R. Bodden Coin-Op-Laundry, Inc., a Florida corporation ("RBCO" and, together with SSA, "Sun Services"), both of which occurred on April 17, 1997. Unless the context requires otherwise, all references to Mac-Gray or the Company shall mean Mac-Gray Corporation and its subsidiaries and predecessors, including Mac-Gray Co. and the Limited Partnership, and businesses that it has acquired from their respective dates of acquisition, including Sun Services. See "Business." Certain of the information contained in this Prospectus may constitute forward-looking statements. There are a number of important factors that could cause actual results to differ materially from those indicated by such forward- looking statements. Such factors include, but are not limited to, those set forth in this Prospectus under the heading "Risk Factors." MAC-GRAY CORPORATION Mac-Gray derives its revenue principally through the operation and maintenance of card and coin-operated laundry rooms in multiple housing facilities such as apartment buildings, colleges and universities, condominiums and public housing complexes. Mac-Gray operates its laundry rooms under long- term leases with property owners, colleges and universities and governmental agencies. The leases typically grant Mac-Gray the exclusive right to operate laundry rooms of the lessor's premises for a fixed term, which is generally seven to ten years, in exchange for a percentage of the revenue collected. Mac- Gray's laundry room business consists of more than 120,000 laundry machines, operated in over 17,000 multiple housing laundry rooms located in 26 states east of the Rocky Mountains. Mac-Gray's principal offices are located at 22 Water Street, Cambridge, Massachusetts 02141, and its telephone number at that location is (617) 492-4040. RECENT DEVELOPMENTS On March 31, 1998, Mac-Gray entered into a Stock Purchase Agreement, pursuant to which Mac-Gray Services will acquire one hundred percent of the outstanding capital stock of Copico. Founded in 1978, Copico is a major provider of card and coin-operated reprographics equipment and services to the academic and public library markets in New England, New York and Florida. Copico provides and services copiers, laser printers and microform reader-printers for libraries of colleges, universities and graduate schools. Copico also is the sole provider of reprographics services to the New York public library system, as well as other public libraries. Copico had revenues of approximately $7.1 million for its fiscal year ended January 1, 1998 and has operations facilities in Canton, Massachusetts, New York, New York and Miramar, Florida. The purchase price will be approximately $10.95 million in cash, less the assumption of certain debt, and 250,000 shares of Mac-Gray Common Stock. Mac-Gray will fund the cash portion of the purchase price by drawing on its existing $50 million revolving credit facility with State Street Bank and Trust Company and CoreStates Bank (the "Credit Facility"). The transaction is subject to customary closing conditions and is expected to close during the second quarter of 1998. On March 12, 1998, Mac-Gray acquired Intirion Corporation, a Delaware corporation ("Intirion"), pursuant to an Agreement and Plan of Merger, dated as of December 22, 1997 (the "Merger Agreement"), by and among <TABLE> <CAPTION> PAGE ---- <S> <C> MANAGEMENT................................................................. 26 Directors and Executive Officers......................................... 26 Board of Directors....................................................... 27 Executive Compensation................................................... 28 1997 Stock Option and Incentive Plan..................................... 30 Stock Appreciation Rights................................................ 33 Employment Agreements with Executive Officers............................ 33 Compensation Committee Interlocks and Insider Participation.............. 33 Certain Relationships and Related Transactions........................... 33 PRINCIPAL STOCKHOLDERS..................................................... 35 UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION......................... 38 MARKET PRICES AND DIVIDEND DATA............................................ 39 DESCRIPTION OF CAPITAL STOCK............................................... 39 Authorized and Outstanding Capital Stock................................. 39 Certain Provisions of Charter and By-laws................................ 40 Statutory Business Combination Provision................................. 41 Transfer Agent and Registrar............................................. 42 THE SELLING SECURITYHOLDERS AND THE OFFERED SHARES......................... 42 Background............................................................... 42 Registration Rights Agreement............................................ 42 PLAN OF DISTRIBUTION....................................................... 44 LEGAL MATTERS.............................................................. 44 EXPERTS.................................................................... 44 INDEX TO FINANCIAL STATEMENTS.............................................. F-1 </TABLE> Mac-Gray, MI Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of Mac-Gray ("MIAC"), Intirion and Robert P. Bennett, pursuant to which Mac-Gray acquired Intirion by merging (the "Merger") MIAC with and into Intirion. Pursuant to the Merger, Mac-Gray issued 1,592,992 shares of Mac-Gray Common Stock and approximately $1 million in cash, which cash was paid to the holder of Intirion's Senior Redeemable Preferred Stock, par value $.01 per share (the "Intirion Senior Preferred Stock"). Intirion is a supplier of combination refrigerator/freezer/microwave ovens to multiple housing facilities such as colleges and universities, military bases, economy hotels and motels and assisted living facilities. For the twelve month period ended June 30, 1997, Intirion had total revenues of approximately $23.5 million. The transaction is being accounted for as a pooling of interests. On March 4, 1998, Mac-Gray entered into a Stock and Asset Purchase Agreement, pursuant to which Mac-Gray Services will acquire one hundred percent of the outstanding capital stock of Amerivend Corporation and the assets of Amerivend Southeast Corporation (together, "Amerivend"). Amerivend is a provider of card and coin-operated laundry equipment in Florida and Georgia. Amerivend is also the principal distributor of the Maytag Corporation's ("Maytag") commercial laundry products in Alabama, Georgia and Florida. Founded in 1959, Amerivend had 1997 revenues of $18.6 million and has offices in Miami, Orlando, Tampa and Atlanta. The purchase price, which is subject to certain adjustments, will be approximately $33.5 million in cash, including the payment of certain debt. The purchase price will be funded by Mac-Gray by drawing on the Credit Facility. The transaction is subject to customary closing conditions, including regulatory filings, and is expected to close in the second quarter of 1998. SELECTED HISTORICAL FINANCIAL DATA Set forth below are selected historical financial data of Mac-Gray as of the dates and for the periods indicated. The selected historical financial data of Mac-Gray for the three years in the period ended December 31, 1997 were derived from the historical consolidated financial statements of Mac-Gray that were audited by Price Waterhouse LLP, whose report appears elsewhere in this Prospectus. The selected consolidated financial data set forth below should be read in conjunction with, and are qualified by reference to, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited consolidated financial statements of Mac-Gray and the notes thereto included elsewhere in this Prospectus. On March 12, 1998, Mac-Gray completed its acquisition of Intirion which has been accounted for as a pooling of interests. Supplemental consolidated financial statements giving effect to the business combination between Mac-Gray and Intirion have been included in this Registration Statement beginning on page F-47. These supplemental financial statements will become the restated historical financial statements of Mac-Gray upon publication of the combined results of the companies covering a period subsequent to the combination. Estimated transaction costs of approximately $860,000 associated with the Intirion transaction will be expensed in the period they were incurred, primarily in the first quarter of 1998. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, --------------------------------------------- 1993 1994 1995 1996 1997(1) ------- ------- ------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> STATEMENT OF INCOME DATA: Revenue......................... $44,942 $48,031 $50,710 $ 64,427 $ 81,370 Cost of revenue: Commissions.................... 17,762 19,168 20,471 25,760 31,717 Laundry route expenditures..... 7,458 7,889 8,251 10,955 12,232 Depreciation and amortization.. 4,377 4,756 4,899 6,216 8,635 Cost of equipment sales........ 1,700 2,673 2,938 5,189 8,187 ------- ------- ------- -------- -------- Total cost of revenue.......... 31,297 34,486 36,559 48,120 60,771 Operating expenses: General and administration..... 3,383 3,085 3,901 3,952 4,699 Sales and marketing............ 2,445 2,501 2,531 3,803 5,165 Depreciation................... 421 442 455 517 503 ------- ------- ------- -------- -------- Total operating expenses....... 6,249 6,028 6,887 8,272 10,367 ------- ------- ------- -------- -------- Income from operations.......... 7,396 7,517 7,264 8,035 10,232 Interest expense............... (1,437) (1,217) (1,175) (1,956) (2,521) Other income (expense), net.... 71 70 55 (87) 181 ------- ------- ------- -------- -------- Income before provision for in- come taxes..................... 6,030 6,370 6,144 5,992 7,892 Provision for income taxes(2).. (330) (388) (374) (465) (5,206) ------- ------- ------- -------- -------- Net income...................... $ 5,700 $ 5,982 $ 5,770 $ 5,527 $ 2,686 ======= ======= ======= ======== ======== Net income per common share(4).. $ 0.90 $ 0.94 $ 0.91 $ 0.87 $ 0.37 ======= ======= ======= ======== ======== Weighted average common shares outstanding(4)................. 6,368 6,368 6,368 6,368 7,263 ======= ======= ======= ======== ======== Net income per common share--as- suming dilution(4)............. $ 0.90 $ 0.94 $ 0.91 $ 0.87 $ 0.36 ======= ======= ======= ======== ======== Weighted average common shares outstanding--assuming dilu- tion(4)........................ 6,368 6,368 6,368 6,368 7,391 ======= ======= ======= ======== ======== TAX ADJUSTED EARNINGS PER SHARE DATA(3): Pro forma net income........... $ 3,595 $ 4,735 ======== ======== Pro forma net income per common share(4)...................... $ 0.56 $ 0.65 ======== ======== Pro forma net income per common share--assuming dilution(4)... $ 0.56 $ 0.64 ======== ======== OTHER FINANCIAL DATA: EBITDA(5)...................... $12,265 $12,785 $12,673 $ 14,681 $ 19,551 Depreciation and amortization.. 4,798 5,198 5,354 6,733 9,138 Capital expenditures........... 5,407 5,679 4,421 7,635 8,681 Cash flows from operating ac- tivities...................... 9,405 10,650 10,417 13,650 10,942 Cash flows used in investing activities.................... (5,689) (5,613) (5,105) (22,070) (20,544) Cash flows provided by (used in) financing activities...... (3,744) (6,128) (3,549) 7,382 10,532 BALANCE SHEET DATA (AT END OF PERIOD): Working capital................ $(3,437) $(4,181) $(2,237) $ (6,069) $ (885) Total assets................... 32,713 33,292 36,754 54,108 84,374 Long-term debt, net of current portion....................... 15,718 13,544 11,843 23,325 5,395 Redeemable common stock(6)..... -- -- -- -- 7,797 Stockholders' equity........... 6,783 9,439 12,850 14,683 49,161 </TABLE> - -------- (1) The financial data for the year ended December 31, 1997 includes the results of the Sun Services Acquisition subsequent to the acquisition date of April 17, 1997. (2) The 1997 provision for income taxes includes a non-recurring charge of $4,037 as a result of the termination of Mac-Gray's S corporation status. (3) Tax adjusted earnings per share data have been adjusted to give effect to Mac-Gray's operations as if Mac-Gray were subject to federal and state income taxes on a corporate level (at an estimated income tax rate of 40%) during the periods presented. (4) Mac-Gray adopted Statement of Financial Accounting Standards No. 128 (SFAS 128) in 1997. In conjunction with the adoption of this standard, Mac-Gray has complied with Staff Accounting Bulletin No. 98 (SAB 98) issued by the Commission. Accordingly, earnings per share data have been restated for all periods presented to give effect to both pronouncements. Earnings per share data are reflective of the Mac-Gray Combination for all periods presented. (5) "EBITDA" is defined herein as income before provision for income taxes, plus depreciation and amortization expense and interest expense. EBITDA should not be considered as an alternative to net income as a measure of operating results or as an alternative to cash flows as a measure of liquidity and it is not a measure of performance or financial condition under generally accepted accounting principles. EBITDA is presented because Mac-Gray's management believes that certain investors may find it to be a useful tool for measuring Mac-Gray's ability to meet its future debt service obligations, make capital expenditures and satisfy working capital requirements. (6) Shares of Mac-Gray Common Stock issued in connection with the Sun Services Acquisition are redeemable pursuant to a contractual arrangement.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001038315_lai_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001038315_lai_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus assumes that the Underwriters' over-allotment option will not be exercised and reflects financial and other data of acquired companies only from the dates of acquisition. All references in this Prospectus to fiscal years are to LAI's fiscal years ended on the last day of February each year (e.g., fiscal 1998 refers to LAI's fiscal year ended February 28, 1998). Unless the context otherwise requires, references to the "Company" or "LAI" are to Lamalie Associates, Inc. and its subsidiaries. THE COMPANY LAI is one of the largest and fastest growing executive search firms in the world. LAI provides consulting services aimed specifically at solving its clients' leadership needs by identifying, evaluating and recommending qualified candidates for senior level positions. The Company, which conducts business under the name "LAI Ward Howell," principally serves Fortune 500 and large private companies. LAI provides executive search services exclusively on a retained basis, and charges a fee typically equal to one-third of the first year cash compensation for the position being filled. During fiscal 1998, the average first year cash compensation for positions being filled by LAI was approximately $226,000. Industry Revenue in the global executive search industry has grown at a 17% compound annual growth rate from approximately $3.5 billion in 1993 to approximately $6.5 billion in 1997. The industry is expected to continue to grow at a 15% annual rate with global revenue projected to reach $10.0 billion by the year 2000. LAI believes that a number of favorable trends are generating significant growth in the executive search industry, including: (i) a greater demand for managers with broad leadership skills, (ii) the rapid growth in outsourcing non-core activities, (iii) the growth in the number and scope of multinational businesses, (iv) an increase in executive turnover and (v) an increase in executive compensation levels. The executive search industry is highly fragmented, consisting of more than 4,000 firms worldwide. Retained search firms generally are compensated for an assignment whether or not they are successful in placing a recommended candidate, while contingency search firms are not compensated for an assignment unless they place a recommended candidate. Business LAI's objective is to be a global leader in providing comprehensive consulting services aimed specifically at solving its clients' senior leadership needs. To achieve this objective, LAI has developed a knowledge-based search practice organized around eight industry groups and one functional group. The industry groups execute searches for clients in the following business sectors: automotive; communications, entertainment and technology; consumer products and services; energy and natural resources; financial services; health care and pharmaceuticals; industrial; and insurance and risk management. The functional group executes searches for specific functional positions, including board of directors, human resources and legal. These practice groups enable LAI's consultants to better understand each client's business strategy and industry and position LAI as a consulting partner to its clients. LAI's clients are among the most prominent companies in their industries and include General Motors, Lucent Technologies, PepsiCo, Enron, Lehman Brothers, Bristol-Myers Squibb, AlliedSignal and Prudential. LAI emphasizes long-term relationships with clients, rather than one-time projects or assignments, and has represented the foregoing clients for an average of 14 years. More than 65% of the Company's fiscal 1998 fee revenue was attributable to companies for which LAI conducted one or more searches during the prior two fiscal years. LAI's knowledge-based practice consists of 114 consultants supported by 116 associates, researchers and information technology ("IT") professionals as of April 30, 1998. In order to readily identify the universe of qualified executive candidates, search consultants must understand a client's business practices, strategies, culture, industry and competitors. LAI's associates, researchers and IT professionals support the Company's consultants by, among other things, gathering and analyzing information obtained from numerous electronic databases, trade journals and directories, the Internet and other sources. LAI's research staff is organized by practice group, with most researchers specializing in one or two specific industries. LAI also maintains a proprietary database containing professional information on more than 100,000 executive candidates. Consultants can query this database on a variety of attributes, including demographic information, work experience, compensation and personal interview results. LAI's wide area computer network provides remote document sharing and data search capabilities, groupware features and real-time updates on ongoing search engagements. LAI's support functions are coordinated from its Tampa, Florida office. LAI believes that its industry specialization and technological capabilities enable it to consistently provide superior research and, ultimately, deliver higher quality search results to its clients. LAI has been successful in attracting and retaining some of the most productive executive search consultants in the industry, as measured by fee revenue per consultant. The Company attributes its success to its premium reputation, performance-based compensation system, entrepreneurial culture and commitment to providing strong research, technology and administrative support. The Company has increased its staff from 36 consultants located in seven domestic offices at the end of fiscal 1993 to 114 consultants located in 17 domestic offices and one international office as of May 1998. The Company has experienced an average annual turnover rate among its consultants of less than 8% over the last five fiscal years. Most of LAI's consultants held senior level positions with leading companies in LAI's targeted industry sectors and many had experience in the executive search business prior to joining LAI. The Company's Practice Leaders and Managing Partners have an average of more than 14 years experience in the executive search business. In addition, LAI believes its status as a public company provides a further competitive advantage in attracting and retaining highly qualified consultants. Common Stock and stock options are broadly held among LAI's consultants, and the Company believes that this equity ownership fosters a team-oriented working environment and aligns the interests of its consultants with the Company's investors. Strategy LAI believes that several competitive factors distinguish it from other executive search firms. These factors include (i) a focus on knowledge-based practice groups, which enables LAI's consultants to provide more specialized services and position LAI as a partner to its clients, (ii) a consultative approach that emphasizes a thorough understanding of each client's organizational structure, history, culture, strategic objectives and leadership needs, (iii) a commitment to improving consultant productivity through the use of industry focused research and innovative technology, (iv) an ability to attract, motivate and retain some of the most productive search consultants in the industry, (v) an entrepreneurial environment based on broad equity ownership by consultants, a performance-based compensation system and stock incentive plans and (vi) an ability to aggressively pursue acquisitions on a global scale using its publicly traded stock, stock options and a well capitalized balance sheet. LAI believes that global search fulfillment capabilities are critical to attracting and retaining multinational clients. To better leverage its knowledge-based expertise and technological capabilities, capitalize on its existing relationships with multinational clients and ensure the quality and consistency of its services, LAI recently initiated an international strategy of directly owning offices in major business and financial centers around the world. In May 1998, LAI opened an office in London, England and is currently targeting other major markets in which to establish offices. In international markets where LAI does not own an office, it will continue to provide clients with search fulfillment capabilities by using existing and developing new referral relationships with executive search firms located in those markets. Through these referral relationships, LAI executes domestic search assignments on behalf of non-U.S. executive search firms and refers to such firms international search assignments for LAI's domestic clients. Recent Acquisitions LAI recently completed two acquisitions which have significantly expanded the Company's practice group coverage, provided broader geographic reach and enhanced the Company's competitive position. On February 27, 1998, LAI completed the acquisition of Ward Howell International, Inc. ("WHI"), which was the ninth largest executive search firm in the United States with fee revenue of $26.5 million for the year ended December 31, 1997. On January 2, 1998, LAI completed the acquisition of Chartwell Partners International, Inc. ("CPI"), a prominent executive search firm based in California specializing primarily in the financial services industry. CPI had fee revenue of $3.4 million for the year ended December 31, 1997. The acquisitions of WHI and CPI strengthened LAI's existing practice groups, particularly in the areas of financial services, health care and technology, and added new practice groups in the areas of automotive, insurance, and media and entertainment. These acquisitions also have expanded the Company's domestic office network, adding six new offices and providing an active presence on the West Coast with offices in Los Angeles, San Francisco and Phoenix. LAI is a Florida corporation. Its headquarters are located at 200 Park Avenue, Suite 3100, New York, NY 10166-0136, and its telephone number is (212) 953-7900. The Company's World Wide Web address is www.laix.com. THE OFFERING Common Stock offered by the Company..... 2,089,540 shares Common Stock offered by the Selling Stockholders............................ 910,460 shares Common Stock to be outstanding after the Offering................................ 7,761,956 shares(1) Use of Proceeds......................... For general corporate purposes, including additional acquisitions and opening new offices in major business and financial centers around the world; computer software and hardware purchases, upgrades and enhancements; and working capital. See "Use of Proceeds." Nasdaq National Market symbol........... LAIX - --------------- (1) Does not include 1,192,115 shares of Common Stock issuable on the exercise of stock options outstanding as of May 29, 1998. See "Management -- Director Compensation" and "Management -- Incentive and Benefit Plans." SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA) <TABLE> <CAPTION> YEAR ENDED FEBRUARY 28 OR 29, --------------------------------------------------------------- PRO FORMA 1994 1995 1996 1997 1998 1998(1) -------- -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Fee revenue, net............................. $ 21,144 $ 28,262 $ 35,088 $ 46,437 $ 61,803 $ 91,730 Compensation and benefits.................... 17,725 23,991 30,693 39,928 46,513 69,053 General and administrative expenses.......... 2,080 2,333 4,467 6,685 8,680 13,736 -------- -------- -------- -------- -------- -------- Operating income (loss)...................... 1,339 1,938 (72) (176) 6,610 8,941 Net interest income (expense)................ 14 (6) (40) (376) 197 (649) -------- -------- -------- -------- -------- -------- Income (loss) before provision for income taxes...................................... 1,353 1,932 (112) (552) 6,807 8,292 Provision for income taxes................... 97 671 90 15 2,927 3,807 -------- -------- -------- -------- -------- -------- Net income (loss)................... $ 1,256 $ 1,261 $ (202) $ (567) $ 3,880 $ 4,485 ======== ======== ======== ======== ======== ======== Diluted earnings per share................... $ 0.82 ======== Pro forma net income (loss)(2)............... $ 785 $ 1,121 $ (202) $ (567) $ 3,880 $ 4,485 ======== ======== ======== ======== ======== ======== Pro forma diluted earnings per share......... $ 0.90 ======== Diluted weighted average shares outstanding................................ 4,751 4,961 OTHER DATA: Number of consultants employed as of fiscal year end................................... 38 46 54 62 111 Average fee revenue per consultant employed during entire fiscal year.................. $602,000 $689,000 $706,000 $740,000 $989,000 Average cash compensation of positions filled(3).................................. $172,000 $180,000 $196,000 $226,000 $226,000 </TABLE> <TABLE> <CAPTION> AS OF FEBRUARY 28, 1998 ------------------------ ACTUAL AS ADJUSTED(4) ------- -------------- <S> <C> <C> BALANCE SHEET DATA: Working capital............................................. $ 9,815 $ 52,036 Total assets................................................ 88,916 131,137 Total long-term debt........................................ 9,125 9,125 Total stockholders' equity.................................. 35,471 77,692 </TABLE> - --------------- (1) The unaudited pro forma financial information for the year ended February 28, 1998 (i) reflects the results of operations of LAI as if the acquisitions of WHI and CPI were completed on March 1, 1997, (ii) assumes that the WHI and CPI consultants were paid according to the LAI consultant compensation plan, the effect of which was to decrease compensation and benefits expense and increase operating income by approximately $3.6 million, (iii) reflects an increase in goodwill amortization and a decrease in net interest income as a result of the two acquisitions and (iv) was prepared using the historical audited financial statements of WHI and CPI for the year ended December 31, 1997. See Unaudited Pro Forma Combined Statement of Operations. (2) For periods prior to November 1, 1994, the Company had elected to be taxed as an S corporation for federal and certain state income tax purposes. The pro forma net income (loss) for each period shown reflects a provision for income taxes as if the Company were a C corporation for income tax purposes during such periods at an assumed effective tax rate of 42%. (3) Represents the average first year cash compensation of positions for which LAI conducted searches during the fiscal year. (4) Adjusted to give effect to the sale of 2,089,540 shares of Common Stock offered by the Company hereby and the application of the estimated net proceeds therefrom. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001038794_toyota_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001038794_toyota_prospectus_summary.txt
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+SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE DETAILED INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS. CERTAIN CAPITALIZED TERMS USED HEREIN ARE DEFINED ELSEWHERE IN THIS PROSPECTUS ON THE PAGES INDICATED IN THE "INDEX OF CAPITALIZED TERMS" BEGINNING ON PAGE 125 HEREOF. <TABLE> <S> <C> OVERVIEW.......................... Certain motor vehicle dealers ("Dealers") whose dealerships are located in California, Florida, Michigan, Pennsylvania and Ohio (the "Trust States") have assigned and will assign retail closed- end automobile and light duty truck leases to the Titling Trust pursuant to their dealer agreements with the Titling Trust. The Titling Trust was created in October 1996 to avoid the administrative difficulty and expense associated with retitling leased vehicles in connection with the securitization of automobile and light duty truck leases. The Titling Trust has issued to TMCC an Undivided Trust Interest (the "UTI") representing the entire beneficial interest in the unallocated Titling Trust Assets. SEE "The Trust and the SUBI -- The Trust". TMCC has instructed the trustee of the Titling Trust to allocate a separate portfolio of leases and leased vehicles from and among the Titling Trust Assets represented by the UTI and create a special unit of beneficial interest (the "SUBI") which represents the entire beneficial interest in such portfolio. Titling Trust Assets allocated to the SUBI will no longer be represented by the UTI. TMCC will sell the SUBI to the Transferor, and the Transferor will contribute a certificate representing substantially all of the SUBI (excluding the related rights to proceeds of the Residual Value Insurance Policies described herein) (the "SUBI Certificate") to the Trust. In return, the Trust will issue the Class A Certificates offered hereby and the Class B Certificates, and will create the Transferor Interest for the benefit of the Transferor. The "Transferor Interest" is the undivided interest in the Trust not evidenced by the Certificates and will be permanently retained by the Transferor. TMCC has in the past and may in the future cause the Titling Trust to allocate additional separate portfolios of leases and leased vehicles and to create other special units of beneficial interest similar to the SUBI relating to such portfolios ("Other SUBIs") for sale to the Transferor or one or more other entities. The Trust and the Certificateholders will have no interest in the UTI, any Other SUBI or any Titling Trust Assets evidenced by the UTI or any Other SUBI. THE TRUST......................... The Trust will be formed pursuant to the Agreement dated as of December 1, 1998, between the Transferor and U.S. Bank National Association ("U.S. Bank"), as Trustee. The property of the Trust will consist primarily of the SUBI Certificate, monies on deposit in certain accounts established as described herein, the TMCC Demand Notes (or other Permitted Investments of amounts held in the Certificateholders' Account) and the rights of the Trust under the Swap Agreement. </TABLE> (CONTINUED FROM FRONT COVER) The Certificates will consist of three classes of senior certificates, the Adjustable Rate Auto Lease Asset Backed Certificates, Class A-1 (the "Class A-1 Certificates"), the Adjustable Rate Auto Lease Asset Backed Certificates, Class A-2 (the "Class A-2 Certificates") and the Adjustable Rate Auto Lease Asset Backed Certificates, Class A-3 (the "Class A-3 Certificates" and, together with the Class A-1 Certificates and Class A-2 Certificates, the "Class A Certificates") and one or more Classes of subordinated certificates (the "Class B Certificates"). The Class A Certificates are the only Certificates offered hereby. The Initial Certificate Balance of the Class B Certificates will be $48,700,000, and the Class B Certificates will be subordinated to the Class A Certificates to the extent described herein. The Transferor will own the undivided interest in the Trust not represented by the Certificates (the "Transferor Interest"). The initial balance of the Transferor Interest will be $14,988,732.51. The SUBI Assets consisting of lease contracts implicitly bear interest at fixed interest rates and require the related obligors to make monthly payments thereon. By contrast, the Trust generally will be obligated to make quarterly payments with respect to interest accrued on the Class A Certificates and all or a portion of the Class B Certificates at adjustable rates and to pay in full the principal balances thereof only at maturity. In order to enable the Trust to receive monthly collections on assets having principal balances that decline monthly and to make quarterly interest payments and principal payments at maturity on securities whose balances generally are not expected to decline monthly, the Trust will invest certain collections in Permitted Investments (expected to be the TMCC Demand Notes) until such amounts (and the net investment income with respect thereto) are to be paid to Certificateholders. To enable the Trust to satisfy its obligations to make payments on the Certificates at the related adjustable interest rates, the Trust will enter into an interest rate swap agreement with TMCC (the "Swap Agreement"). Interest generally will accrue on the Class A-1 Certificates at the per annum rate equal to three-month LIBOR (determined as described herein) plus % per annum, on the Class A-2 Certificates at a per annum rate equal to three-month LIBOR (determined as described herein) plus % per annum and on the Class A-3 Certificates at a per annum rate equal to three-month LIBOR (determined as described herein) plus % per annum. In each case, payments in respect of interest so accrued generally will be made quarterly on March 25, June 25, September 25 and December 25 of each year (or, if such day is not a Business Day, on the next succeeding Business Day), commencing on March 25, 1999. The "Class A-1 Targeted Maturity Date" will be December 25, 2000 (or, if such day is not a Business Day, on the next succeeding Business Day), the "Class A-2 Targeted Maturity Date" will be December 25, 2001 (or, if such day is not a Business Day, on the next succeeding Business Day), the "Class A-3 Targeted Maturity Date" will be March 25, 2002 (or, if such day is not a Business Day, on the next succeeding Business Day) and the "Class B Targeted Maturity Date" will be December 25, 2003 (or if such day is not a Business Day, on the next succeeding Business Day). Principal of any Class of Class A Certificates generally will not be payable until the related Targeted Maturity Date. If a Class of Class A Certificates remains outstanding after all required payments in respect thereof have been made on the related Targeted Maturity Date, principal thereof and interest thereon will be distributed monthly thereafter on each Monthly Allocation Date until all required payments in respect of such Class have been made. Under such circumstances, interest will accrue on the Class A-1 Certificates at a per annum rate equal to one-month LIBOR (determined as described herein) plus % per annum, on the Class A-2 Certificates at a per annum rate equal to one-month LIBOR (determined as described herein) plus % per annum or on the Class A-3 Certificates at a per annum rate equal to one-month LIBOR (determined as described herein) plus % per annum, rather than at the rates specified above. The Class A Certificates will be payable solely from the assets of the Trust, including the SUBI Certificate, the TMCC Demand Notes and other Permitted Investments of amounts held in the SUBI Collection Account and the Certificateholders' Account and amounts payable by the Swap Counterparty under the Swap Agreement. Final payment of amounts due on each Class of Certificates is due on or before the related Stated Maturity Date. The Stated Maturity Date for the Class A-1 Certificates is December 25, 2002 (or, if such day is not a Business Day, on the next succeeding Business Day), for the Class A-2 Certificates is February 25, 2003 (or, if such day is not a Business Day, on the next succeeding Business Day), for the Class A-3 Certificates is February 25, 2004 (or, if such day is not a Business Day, on the next succeeding Business Day) and for the Class B Certificates is May 25, 2006 (or, if such day is not a Business Day, on the next succeeding Business Day). In general, the Certificates will be "sequential pay" certificates meaning that no principal allocations, applications or payments will be made on the Class A-2 <TABLE> <S> <C> THE TITLING TRUST................. The Titling Trust is a Delaware business trust formed pursuant to the Titling Trust Agreement. The primary business purpose of the Titling Trust is to take assignments of and serve as holder of title to substantially all of the lease contracts and the related leased vehicles originated by the Dealers beginning on dates prior to the execution of the SUBI Supplement. Pursuant to the Servicing Agreement, TMCC will service the lease contracts included in the Titling Trust Assets, including the Contracts. SEE "Additional Document Provisions -- The Trust Agreement" and "-- The Servicing Agreement" and "Certain Legal Aspects of the Titling Trust -- The Titling Trust". The Titling Trust is governed by an Amended and Restated Trust and Servicing Agreement (the "Titling Trust Agreement") among TMCC, as grantor, initial beneficiary and Servicer, TMTT, Inc., as trustee (the "Titling Trustee"), and U.S. Bank, as trust agent (the "Trust Agent"). TMTT, Inc. is a Delaware corporation and a wholly owned, special purpose subsidiary of U.S. Bank that was organized solely for the purpose of acting as Titling Trustee. TMTT, Inc. is not affiliated with TMCC or any affiliate thereof. SEE "The Titling Trust -- The Titling Trustee". TITLING TRUST ASSETS ALLOCATED AS SUBI ASSETS........ The Titling Trust Assets consist primarily of retail closed-end lease contracts and the automobiles and light duty trucks relating thereto. The SUBI will evidence a beneficial interest in a specified portion of the Titling Trust Assets allocated to the SUBI. Certain lease contracts (the "Initial Contracts") originated by the Dealers, the automobiles and light duty trucks relating thereto (the "Initial Leased Vehicles") and certain monies due under or payable in respect of the Initial Contracts and the Initial Leased Vehicles on or after November 1, 1998 (the "Cutoff Date") will be allocated to the SUBI on December 1, 1998 (the "Closing Date"). During the Revolving Period, payments made on or in respect of the SUBI Assets allocable to the Discounted Principal Balance thereof will be reinvested in additional retail closed-end lease contracts (the "Subsequent Contracts" and, together with the Initial Contracts, the "Contracts") assigned to the Titling Trust by Dealers and the related automobiles and light duty trucks (the "Subsequent Leased Vehicles" and, together with the Initial Leased Vehicles, the "Leased Vehicles"). At the time of such reinvestment, such Subsequent Contracts and Subsequent Leased Vehicles will be allocated to the SUBI and will no longer be UTI Assets. All such assets, together with certain other assets and rights, are the "SUBI Assets". SEE "Description of the Certificates -- Allocations, Applications and Payments -- The Revolving Period" and "The Trust and the SUBI -- The SUBI". The SUBI will evidence an indirect beneficial interest, rather than a direct legal interest, in the SUBI Assets. The SUBI will not represent a beneficial interest in any Titling Trust Assets </TABLE> Certificates until the Adjusted Class A-1 Certificate Balance has been reduced to zero, no principal allocations, applications or payments will be made on the Class A-3 Certificates until the Adjusted Class A-2 Certificate Balance and the Adjusted Class A-1 Certificate Balance have been reduced to zero and no principal allocations, applications or payments will be made on the Class B Certificates until the Adjusted Class A-1 Certificate Balance, the Adjusted Class A-2 Certificate Balance and the Adjusted Class A-3 Certificate Balance have been reduced to zero. From time to time during the Revolving Period described herein (generally expected to be the period from the Cutoff Date through the calendar day preceding November 1, 1999, but which may terminate earlier as described herein), Principal Collections on or in respect of the SUBI Assets will be reinvested in additional lease contracts originated as described herein and assigned to the Titling Trust, together with the automobiles and light duty trucks relating thereto, which at the time of reinvestment will become SUBI Assets. The SUBI will not evidence a direct interest in the SUBI Assets, nor will it represent a beneficial interest in any of the Titling Trust Assets other than the SUBI Assets. Payments made on or in respect of the Titling Trust Assets not represented by the SUBI will not be available to make payments on the Certificates. In the event of any Swap Termination described herein, the Trustee will liquidate the assets of the Trust and apply the proceeds (net of the expenses of such liquidation and reimbursements to be made to the Transferor, Servicer, Trustee and Titling Trustee and after giving effect to any swap termination payment to be made by the Trust under the Swap Agreement) to effect an early repayment of the Certificates. Under such circumstances, there can be no assurance as to how long such liquidation might take or that such net proceeds will be sufficient to reduce the outstanding balances of each Class of Certificates to zero. --------------------- It is a condition of issuance of each Class of Class A Certificates that they be assigned an Aaa rating by Moody's Investors Service, Inc. ("Moody's") and an AAA rating by Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. ("Standard & Poor's" and, together with Moody's, the "Rating Agencies"). A security rating is not a recommendation to buy, sell or hold a security and may be subject to revision, suspension or withdrawal at any time by the assigning rating organization. See "Summary -- Ratings". Certain persons participating in this offering may engage in transactions that stabilize, maintain or otherwise affect the price of the Class A Certificates. Such transactions may include stabilizing bids and the purchase of Class A Certificates to cover short positions. For a description of these activities, see "Underwriting". The Transferor, having made all reasonable inquiries, confirms that this Prospectus is true and accurate in all material respects and is not misleading, that the opinions and intentions expressed herein are honestly held and that there are no other facts the omission of which makes this Prospectus, including any information incorporated by reference herein, as a whole, or any of such information or the expression of any such opinions or intentions misleading. The Transferor accepts responsibility accordingly. No action has been taken or will be taken by the Transferor or the Underwriters that would permit a public offering of any Class A Certificates in any country or jurisdiction (other than the United States and certain states in the United States) where action for that purpose is required. Accordingly, the Class A Certificates may not be offered or sold, directly or indirectly, and neither this Prospectus nor any circular, prospectus, form of application, advertisement or other material may be distributed in or from or published in any country or jurisdiction except under circumstances that will result in compliance with any applicable laws and regulations. Persons into whose hands this Prospectus comes are required by the Transferor and the Underwriters to comply with all applicable laws and regulations in each country or jurisdiction in which they purchase, sell or deliver Class A Certificates or have in their possession or distribute this Prospectus, in all cases at their own expense. UNTIL FEBRUARY , 1999, ALL DEALERS EFFECTING TRANSACTIONS IN THE CLASS A CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. UPON RECEIPT OF A REQUEST BY AN INVESTOR WHO HAS RECEIVED AN ELECTRONIC PROSPECTUS OR A REQUEST BY SUCH INVESTOR'S REPRESENTATIVE WITHIN THE PERIOD DURING WHICH THERE IS A PROSPECTUS DELIVERY OBLIGATION, THE TRANSFEROR OR THE UNDERWRITERS WILL PROMPTLY DELIVER, OR CAUSE TO BE DELIVERED, WITHOUT CHARGE, A PAPER COPY OF THE PROSPECTUS. <TABLE> <S> <C> other than the SUBI Assets. Payments made on or in respect of the Titling Trust Assets other than the SUBI Assets will not be available to make payments on the Certificates. THE TRANSFEROR.................... Toyota Leasing, Inc. is a California corporation which is a wholly owned, special purpose subsidiary of TMCC. SEE "The Transferor". TMCC.............................. TMCC is a California corporation that has 34 branches in various locations in the United States, a branch in the Commonwealth of Puerto Rico and a centralized customer service center in Iowa. TMCC's primary business is providing retail leasing, retail and wholesale financing and certain other financial services to authorized Toyota and Lexus vehicle and Toyota industrial equipment dealers and their customers in the United States (excluding Hawaii) and Puerto Rico. TMCC is a wholly owned subsidiary of Toyota Motor Sales, U.S.A., Inc. ("TMS"), which is primarily engaged in the wholesale distribution of automobiles, light duty trucks, industrial equipment and related replacement parts and accessories throughout the United States (excluding Hawaii). TMS is a wholly-owned subsidiary of Toyota Motor North America, Inc. ("TMA"). Substantially all of TMS's products are either manufactured by its affiliates or are purchased from Toyota Motor Corporation ("TMC"), which wholly owns TMA, or affiliates of TMC. Pursuant to the Agreement and the Series 1998-C SUBI Servicing Supplement to the Titling Trust Agreement among TMCC, the Titling Trustee and the Transferor dated as of December 1, 1998 (the "Servicing Supplement" and, together with the Titling Trust Agreement, the "Servicing Agreement"), TMCC acts as servicer of the Titling Trust Assets, including the SUBI Assets (in such capacity, the "Servicer"). Pursuant to the terms of the Servicing Agreement, the Trustee is a third party beneficiary thereof. SECURITIES OFFERED A. GENERAL....................... The Certificates will represent fractional undivided beneficial interests in the Trust. The Adjustable Rate Auto Lease Asset Backed Certificates, Class A-1 (the "Class A-1 Certificates"), the Adjustable Rate Auto Lease Asset Backed Certificates, Class A-2 (the "Class A-2 Certificates") and the Adjustable Rate Auto Lease Asset Backed Certificates, Class A-3 (the "Class A-3 Certificates" and, together with the Class A-1 Certificates and Class A-2 Certificates, the "Class A Certificates") are senior certificates. The Adjustable Rate Auto Lease Asset Backed Certificates, Class B (the "Class B Certificates" and, together with the Class A Certificates, the "Certificates") are subordinated certificates. Only the Class A Certificates are being offered hereby. The Class B Certificates may be comprised of one or more Classes, each of which shall be pari passu with the other Classes of Class B Certificates. Certain Classes of Class B </TABLE> AVAILABLE INFORMATION The Transferor, as originator of the Trust, and the Trust, as issuer of the Certificates, have filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-1 (together with all amendments and exhibits thereto, the "Registration Statement") of which this Prospectus is a part, under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the Class A Certificates. This Prospectus does not contain all of the information set forth in the Registration Statement, certain parts of which have been omitted in accordance with the rules and regulations of the Commission. For further information, reference is made to the Registration Statement, which is available for inspection without charge at the public reference facilities of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and the regional offices of the Commission at Suite 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661 2511 and Suite 1300, Seven World Trade Center, New York, New York 10048. Copies of such information can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, copies of the Registration Statement and all of the documents incorporated by reference herein (including the Titling Trust Agreement and the Agreement) may be obtained at no charge at the office of Bankers Trust Company Luxembourg S.A., 14 Boulevard F. D. Roosevelt, L-2450, Luxembourg. The Servicer, on behalf of the Trust, will also file or cause to be filed with the Commission such periodic reports as are required under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations of the Commission thereunder. Electronic filings made through the Electronic Data Gathering Analysis and Retrieval System are publicly available through the Commission's Website at http://www.sec.gov. DOCUMENTS INCORPORATED BY REFERENCE Certain documents pursuant to which the Titling Trust was formed (the "Titling Trust Agreement"), the UTI and the SUBI are formed, the UTI Certificate and SUBI Certificate are issued (the "UTI Supplement" and "SUBI Supplement"), the assets of the Titling Trust and the SUBI Assets will be serviced (the "Servicing Agreement"), the TMCC Demand Notes will be issued (the "Indenture") and the swap will be executed (the "Swap Agreement") are incorporated by reference herein. Insofar as documents are incorporated herein as to which TMCC is a party, such documents relate solely to TMCC in its capacities as Servicer, issuer of the TMCC Demand Notes and as Swap Counterparty. TMCC is subject to the informational requirements of the Exchange Act, and in accordance therewith files reports and other information with the Commission. Such reports and other information can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following regional offices of the Commission: New York Regional Office, 7 World Trade Center, 13th Floor, New York, New York 10048; and Chicago Regional Office, Citibank Center, Suite 1800, 500 West Madison Street, Chicago, Illinois 60611 2511. In addition, certain of TMCC's securities are listed on the New York Stock Exchange and the aforementioned material may also be inspected at the offices of such exchange. TMCC's Annual Report on Form 10-K for the year ended September 30, 1997, and TMCC's Quarterly Reports on Form 10-Q for the quarters ended December 31, 1997, March 31, 1998 and June 30, 1998 have been filed with the Commission and are made a part of this Registration Statement. All reports filed by TMCC pursuant to Sections 13(a) or 15(d) of the Exchange Act subsequent to the date of the Registration Statement and prior to the termination of the offering of the Class A Certificates and all supplements to the Registration Statement filed from time to time shall be deemed to be incorporated by reference into the Registration Statement to be a part hereof from the date of filing such documents. Copies of the incorporated documents will be obtainable at no charge at the office of Bankers Trust Company Luxembourg S.A., 14 Boulevard F. D. Roosevelt, L-2450, Luxembourg. <TABLE> <S> <C> Certificates may not have the benefit of the Swap Agreement and shall bear interest at fixed rates (the "Fixed Rate Class B Certificates") while other Classes of Class B Certificates shall have the benefit of the Swap Agreement and shall bear interest at adjustable rates (the "Adjustable Rate Class B Certificates"). Information herein with respect to the Class B Certificates is provided for informational purposes only to provide more complete information with respect to the Class A Certificates. Although proceeds of the SUBI will be collected and allocated monthly, the Certificates will generally represent the right to receive quarterly payments of interest at the Class A-1 Rate, Class A-2 Rate, Class A-3 Rate or Class B Adjustable Rate (other than any Fixed Rate Class B Certificates which generally shall represent the right to recieve quarterly payments of interest at the Class B Fixed Rate), as the case may be, and, to the extent described herein, payments of principal on the related Targeted Maturity Date and payments of principal and interest on each subsequent Monthly Allocation Date. In addition, although the SUBI Assets consist primarily of lease contracts that implicitly bear interest at fixed rates, the Certificates (other than the Fixed Rate Class B Certificates) will bear interest at adjustable rates. Payments will be made to the Class A Certificateholders of record as of the day immediately preceding each relevant Certificate Payment Date or, if Definitive Certificates are issued, as of the last Business Day of the preceding month (each, a "Record Date"). A "Business Day" is a day other than a Saturday, a Sunday or a day on which banking institutions in New York, New York, Chicago, Illinois, or San Francisco, California are authorized or obligated by law, regulation, executive order or decree to be closed; provided that, solely for purposes of identifying any Certificate Payment Date with respect to the making of payments on the Class A Certificates in Luxembourg by a paying agent there located or any day on which a transfer of a Definitive Certificate may be made at the office of a transfer agent there located, "Business Day" shall also exclude any day on which banking institutions located in that jurisdiction are authorized by law, regulation, governmental order or decree to be closed, whether or not payments are made with respect to such Certificates in any other jurisdiction on such date, but such definition shall not be used for making any other calculation. On the Closing Date, the Trust will issue $189,000,000 aggregate initial principal amount of Class A-1 Certificates (the "Initial Class A-1 Certificate Balance"), $424,500,000 aggregate initial principal amount of Class A-2 Certificates (the "Initial Class A-2 Certificate Balance"), $72,800,000 aggregate initial principal amount of Class A-3 Certificates (the "Initial Class A-3 Certificate Balance") and $48,700,000 aggregate initial principal </TABLE> Any statement contained herein or made a part hereof, or contained in a document all or a portion of which is incorporated or deemed to be incorporated by reference herein, shall be deemed to be modified or superseded for the purposes of the Registration Statement to the extent that a statement contained therein (or in any subsequently filed document which is also incorporated or deemed to be incorporated by reference herein) modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of the Registration Statement. REPORTS TO CERTIFICATEHOLDERS U.S. Bank National Association, as Trustee, will provide to holders of the Certificates (the "Certificateholders" or "Holders") (which, in the case of the Class A Certificates, shall be Cede & Co., as the nominee of DTC, unless Definitive Certificates are issued under the limited circumstances described herein) unaudited monthly and annual reports concerning the Contracts and Leased Vehicles. For so long as the Class A Certificates are outstanding, each such report (including a statement of the Class Certificate Balance of each Class of Class A Certificates) also shall be delivered to the Luxembourg Stock Exchange on the same date such reports are to be delivered to Certificateholders. Copies of such reports may be obtained at no charge at the office of Bankers Trust Luxembourg S.A., 14 Boulevard F.D. Roosevelt, L-2450, Luxembourg. <TABLE> <S> <C> amount of Class B Certificates (the "Initial Class B Certificate Balance"). Interests in the assets of the Trust will be allocated among (i) the Class A-1 Certificateholders, the Class A-2 Certificateholders, the Class A-3 Certificateholders and the Class B Certificateholders (collectively, the "Investor Interest") and (ii) the Transferor Interest. The Transferor Interest will represent the interest in the Trust not represented by the Investor Interest. The Transferor Interest will initially equal $14,988,732.51 (2.00% of the Aggregate Net Investment Value as of the Cutoff Date) and on any day will equal the difference between the Aggregate Net Investment Value and the Adjusted Investor Balance. As more fully described herein, the Aggregate Net Investment Value can change daily, and the Transferor Interest can decrease daily as the Aggregate Net Investment Value decreases. The Transferor Interest may increase on a Monthly Allocation Date as the Adjusted Investor Balance declines. SEE "Description of the Certificates -- General". Amounts payable by the Trust in respect of interest on the Class A Certificates and any Adjustable Rate Class B Certificates will generally be limited to amounts payable by the Swap Counterparty in accordance with the Swap Agreement in exchange for the payments by the Trust to the Swap Counterparty, as described herein. As described more fully herein, the amount to be used for any such payment to the Swap Counterparty will be determined on the basis of calculations made each month on the basis of (i) the Adjusted Class A-1 Certificate Balance and the Class A-1 Notional Rate in the case of the Class A-1 Certificates, (ii) the Adjusted Class A-2 Certificate Balance and the Class A-2 Notional Rate in the case of the Class A-2 Certificates, (iii) the Adjusted Class A-3 Certificate Balance and the Class A-3 Notional Rate in the case of the Class A-3 Certificates, (iv) the portion of the Adjusted Class B Certificate Balance represented by the Adjustable Rate Class B Certificates and the Class B Notional Rate in the case of the Adjustable Rate Class B Certificates and (v) the amount of the investment income on certain of the TMCC Demand Notes at the related Required Rates, as described herein. The Fixed Rate Class B Certificates will not have the benefit of the Swap Agreement and will receive interest payments from amounts allocated in respect of interest directly from the Trust as set forth in the Agreement. As used herein for such purposes: "Class A-1 Certificate Balance" means (a) the Initial Class A-1 Certificate Balance less all amounts paid to Class A-1 Certificateholders on each relevant Certificate Payment Date in respect of principal and (b) zero, from and after the Certificate Payment Date on which the Adjusted Class A-1 Certificate Balance is reduced to zero. </TABLE> OVERVIEW OF TRANSACTION [CHART] <TABLE> <S> <C> "Adjusted Class A-1 Certificate Balance" means the Initial Class A-1 Certificate Balance less: (i) amounts allocated and deposited into the Certificateholders' Account in respect of the Adjusted Class A-1 Certificate Balance; (ii) without duplicating the foregoing, amounts paid to the Class A Certificateholders in respect of the Adjusted Class A-1 Certificate Balance; and (iii) the amount of unreimbursed Certificate Principal Loss Amounts allocated thereto. "Class A-1 Notional Rate" refers to the rate at which amounts will be deemed to accrue in respect of the Adjusted Class A-1 Certificate Balance for purposes of calculating the Class A-1 Notional Interest Accrual Amount to be paid to the Swap Counterparty, which rate will be % per annum. "Class A-2 Certificate Balance" means (a) the Initial Class A-2 Certificate Balance less all amounts paid to Class A-2 Certificateholders on each relevant Certificate Payment Date in respect of principal and (b) zero, from and after the Certificate Payment Date on which the Adjusted Class A-2 Certificate Balance is reduced to zero. "Adjusted Class A-2 Certificate Balance" means the Initial Class A-2 Certificate Balance less: (i) amounts allocated and deposited into the Certificateholders' Account in respect of the Adjusted Class A-2 Certificate Balance; (ii) without duplicating the foregoing, amounts paid to the Class A Certificateholders in respect of the Adjusted Class A-2 Certificate Balance; and (iii) the amount of unreimbursed Certificate Principal Loss Amounts allocated thereto. "Class A-2 Notional Rate" refers to the rate at which amounts will be deemed to accrue in respect of the Adjusted Class A-2 Certificate Balance for purposes of calculating the Class A-2 Notional Interest Accrual Amount to be paid to the Swap Counterparty, which rate will be % per annum. "Class A-3 Certificate Balance" means (a) the Initial Class B Certificate Balance less all amounts paid to Class A-3 Certificateholders on each relevant Certificate Payment Date in respect of principal and (b) zero, from and after the Certificate Payment Date on which the Adjusted Class A-3 Certificate Balance is reduced to zero. "Adjusted Class A-3 Certificate Balance" means the Initial Class A-3 Certificate Balance less: (i) amounts allocated and deposited into the Certificateholders' Account in respect of the Adjusted Class A-3 Certificate Balance; (ii) without duplicating the foregoing, amounts paid to the Class A Certificateholders in respect of the Adjusted Class A-3 Certificate Balance; and (iii) the amount of unreimbursed Certificate Principal Loss Amounts allocated thereto. </TABLE> <TABLE> <S> <C> "Class A-3 Notional Rate" refers to the rate at which amounts will be deemed to accrue in respect of the Adjusted Class A-3 Certificate Balance for purposes of calculating the Class A-3 Notional Interest Accrual Amount to be paid to the Swap Counterparty, which rate will be % per annum. "Class B Certificate Balance" means (a) the Initial Class B Certificate Balance less all amounts paid to Class B Certificateholders on each relevant Certificate Payment Date in respect of principal and (b) zero, from and after the Certificate Payment Date on which the Adjusted Class B Certificate Balance is reduced to zero. "Adjusted Class B Certificate Balance" means the Initial Class B Certificate Balance less: (i) amounts allocated and deposited into the Certificateholders' Account in respect of the Adjusted Class B Certificate Balance; (ii) without duplicating the foregoing, amounts paid to the Class B Certificateholders in respect of the Adjusted Class B Certificate Balance; and (iii) the amount of unreimbursed Certificate Principal Loss Amounts allocated thereto. "Class B Fixed Rate" refers to the rate at which interest will accrue in respect of the portion of the Class B Certificate Balance represented by any Fixed Rate Class B Certificates (and on any unreimbursed Certificate Principal Loss Amounts allocated thereto), which rate will not exceed % per annum. "Class B Notional Rate" refers to the rate at which amounts will be deemed to accrue in respect of the portion of the Adjusted Class B Certificate Balance represented by any Adjustable Rate Class B Certificates for purposes of calculating the Class B Notional Interest Accrual Amount to be paid to the Swap Counterparty, which rate will not exceed % per annum. "Initial Investor Balance" means the sum of the Initial Class A-1 Certificate Balance, the Initial Class A-2 Certificate Balance, the Initial Class A-3 Certificate Balance and the Initial Class B Certificate Balance. "Adjusted Investor Balance" means the sum of the Adjusted Class A-1 Certificate Balance, the Adjusted Class A-2 Certificate Balance, the Adjusted Class A-3 Certificate Balance and the Adjusted Class B Certificate Balance. "Class A-1 Notional Interest Accrual Amount" means the amount of interest that is deemed to accrue during a Monthly Interest Period at the Class A-1 Notional Rate on the sum of the Adjusted Class A-1 Certificate Balance and unreimbursed Certificate Principal Loss Amounts previously allocated thereto. "Class A-2 Notional Interest Accrual Amount" means the amount of interest that is deemed to accrue during a Monthly Interest Period at the Class A-2 Notional Rate on the sum of the </TABLE> <TABLE> <S> <C> Adjusted Class A-2 Certificate Balance and unreimbursed Certificate Principal Loss Amounts previously allocated thereto. "Class A-3 Notional Interest Accrual Amount" means the amount of interest that is deemed to accrue during a Monthly Interest Period at the Class A-3 Notional Rate on the sum of the Adjusted Class A-3 Certificate Balance and unreimbursed Certificate Principal Loss Amounts previously allocated thereto. "Class B Fixed Rate Interest Accrual Amount" means the amount of interest that accrues during a Monthly Interest Period at the Class B Fixed Rate on the sum of the portion of the Adjusted Class B Certificate Balance represented by the Fixed Rate Class B Certificates and unreimbursed Certificate Principal Loss Amounts previously allocated thereto. "Class B Notional Interest Accrual Amount" means the amount of interest that is deemed to accrue during a Monthly Interest Period at the Class B Notional Rate on the sum of the portion of the Adjusted Class B Certificate Balance represented by the Adjustable Rate Class B Certificates and unreimbursed Certificate Principal Loss Amounts previously allocated thereto. "Interest Payment Period" means (i) for each Class of Certificates (other than any Fixed Rate Class B Certificates) and any related Certificate Payment Date, the period from and including the preceding Certificate Payment Date to but excluding the current Certificate Payment Date and (ii) for any Fixed Rate Class B Certificates and any related Certificate Payment Date, the period from and including the 25th day of the calendar month that includes the preceding Certificate Payment Date to but excluding the 25th day of the calendar month that includes the current Certificate Payment Date, except that the first Interest Payment Period for each Class of Certificates will be the period from and including the Closing Date to but excluding March 25, 1999. Prior to the related Targeted Maturity Date, each Interest Payment Period generally will consist of approximately three months. Thereafter, the related Interest Payment Period generally will be comprised of approximately one month. "Monthly Interest Period" for each Class of Certificates and any Monthly Allocation Date means the period from and including the 25th day of the preceding calendar month to but excluding the 25th day of the current calendar month, except that the first Monthly Interest Period for each Class of Certificates will be the period from and including the Closing Date to but excluding December 25, 1998. A "Monthly Allocation Date" is the day on which Collections in respect of the Contracts and Leased Vehicles represented by the SUBI are allocated, and shall occur on the 25th day of each month (or, if such day is not a Business Day, on the next succeeding Business Day) commencing on December 28, 1998. </TABLE> <TABLE> <S> <C> As used herein: (i) "allocation" is used to connote a calculation made to determine which, if any, Collections are available for a stated purpose, (ii) "application" is used to connote the actual transfer, investment, deposit or other use of a specified amount for a stated purpose and (iii) "payment" is used to connote the actual transfer of money to a party. For example: On each Monthly Allocation Date during an Interest Payment Period, the Trustee will allocate a portion of the Investor Percentage of Interest Collections in respect of interest deemed to have accrued on the Adjusted Class A-1 Certificate Balance (and unreimbursed Certificate Principal Loss Amounts allocated thereto) at the Class A-1 Notional Rate during the related Monthly Interest Period, which portion of Interest Collections will be applied to make a deposit into the Certificateholders' Account for investment in a Permitted Investment that will mature on or prior to the next relevant Certificate Payment Date, on which date the proceeds thereof and certain other amounts will be paid by the Trust to the Swap Counterparty in exchange for an amount which the Trust will then pay to the Class A-1 Certificateholders in respect of the total amount of interest accrued on the Class A-1 Certificates at the Class A-1 Rate during the related Interest Payment Period. Payments in respect of the Certificates of each Class will be funded from payments received by the Trust on or in respect of the assets of the SUBI evidenced by the SUBI Certificate and, in certain circumstances, from amounts on deposit in the Reserve Fund, from earnings in respect of monies, if any, on deposit in the Certificateholders' Account, and monies that otherwise would be distributable in respect of the Transferor Interest. All amounts allocated for payment of interest on the Class A Certificates and any Adjustable Rate Class B Certificates (including net investment income on certain Permitted Investments) will be paid to the Swap Counterparty pursuant to the Swap Agreement, and the Swap Counterparty will pay the Trust amounts which will be used to make the payments to such Certificateholders in respect of interest described herein. Amounts allocated by the Trust in respect of interest accrued on any Fixed Rate Class B Certificates (including net investment income on certain Permitted Investments) will be paid by the Trust to the holders of such Certificates. No principal allocations, applications or payments will be made on the Class B Certificates until the Adjusted Class A-1 Certificate Balance, Adjusted Class A-2 Certificate Balance and Adjusted Class A-3 Certificate Balance are reduced to zero. In addition, the Class B Certificates will be subordinated to the Class A Certificates with respect to the allocation of losses to the extent described herein. SEE "Description of the Certificates -- Allocations, Applications and Payments". The Transferor </TABLE> <TABLE> <S> <C> Interest also will be subordinated to the Investor Interest, as described herein. B. PAYMENTS...................... INTEREST. Payments in respect of interest on each Class of Certificates will be made quarterly, on each Monthly Allocation Date in March, June, September and December, commencing in March 1999, until the related Targeted Maturity Date, as well as (i) on the related Targeted Maturity Date, (ii) if the Adjusted Class Certificate Balance of such Class has not been reduced to zero on its Targeted Maturity Date, on each Monthly Allocation Date following such Targeted Maturity Date until such Adjusted Class Certificate Balance is reduced to zero and (iii) in connection with a Swap Termination and related liquidation of the assets of the Trust or any exercise by the Transferor of its option to repurchase the SUBI Certificate, on the Monthly Allocation Date following the receipt by the Trust of the proceeds of such liquidation or sale, in each case to the extent of amounts available therefor as described herein (each such Monthly Allocation Date a relevant "Certificate Payment Date" with respect to such Class). For Interest Payment Periods commencing prior to the related Targeted Maturity Date, interest will accrue on the Class A-1 Certificates at three-month LIBOR plus % per annum, on the Class A-2 Certificates at three-month LIBOR plus % per annum, on the Class A-3 Certificates at three-month LIBOR plus % per annum and on the Adjustable Rate Class B Certificates at three-month LIBOR plus % per annum. For Interest Payment Periods commencing on or after the related Targeted Maturity Date, interest will accrue on the Class A-1 Certificates at one-month LIBOR plus % per annum, on the Class A-2 Certificates at one-month LIBOR plus % per annum, on the Class A-3 Certificates at one-month LIBOR plus % per annum and on the Adjustable Rate Class B Certificates at one-month LIBOR plus % per annum (the "Class A-1 Rate", "Class A-2 Rate", "Class A-3 Rate" and "Class B Adjustable Rate" respectively); provided, however, that for the initial Interest Payment Period the Class A-1 Rate, Class A-2 Rate, Class A-3 Rate and Class B Adjustable Rate will be based on an interpolated rate to be calculated two Business Days prior to the Closing Date. For each Interest Payment Period, interest will accrue on the Fixed Rate Class B Certificates at the Class B Fixed Rate. SEE "Description of the Certificates -- Calculation of Class A-1 Rate, Class A-2 Rate, Class A-3 Rate and Class B Adjustable Rate". Interest allocations, applications and payments with respect to each Class of Class A Certificates will have the same priority. Under certain circumstances, the amount available for interest allocations and applications or payments could be less than the amount of interest allocable and applicable or payable with respect to the Class A Certificates on any Monthly Allocation Date, in which case each Class of Class A Certificates will be </TABLE> <TABLE> <S> <C> allocated or paid its ratable share (based upon the aggregate amount of interest due thereon) of the aggregate amount available to be allocated and applied or paid in respect of interest on the Class A Certificates. As mentioned above, the amounts available to make interest payments with respect to the Class A Certificates and the Adjustable Rate Class B Certificates generally will be limited to amounts payable by the Swap Counterparty in accordance with the Swap Agreement. Except as described herein, on each relevant Certificate Payment Date, the Trust will be obligated to pay to the Swap Counterparty (i) the sum of (a) the relevant Class A-1 Notional Interest Accrual Amounts for the Monthly Interest Periods relating to such Certificate Payment Date, and (b) an amount equal to interest accrued at the related Required Rate during such Monthly Interest Periods on amounts deposited into the Certificateholders' Account in respect of the Adjusted Class A-1 Certificate Balance on prior Monthly Allocation Dates (such sum, the "Class A-1 Swap Interest Amount"), (ii) the sum of (a) the relevant Class A-2 Notional Interest Accrual Amounts for the Monthly Interest Periods relating to such Certificate Payment Date, and (b) an amount equal to interest accrued at the related Required Rate during such Monthly Interest Periods on amounts deposited into the Certificateholders' Account in respect of the Adjusted Class A-2 Certificate Balance on prior Monthly Allocation Dates (such sum, the "Class A-2 Swap Interest Amount"), (iii) the sum of (a) the relevant Class A-3 Notional Interest Accrual Amounts for the Monthly Interest Periods relating to such Certificate Payment Date, and (b) an amount equal to interest accrued at the related Required Rate during such Monthly Interest Periods on amounts deposited into the Certificateholders' Account in respect of the Adjusted Class A-3 Certificate Balance on prior Monthly Allocation Dates (such sum, the "Class A-3 Swap Interest Amount") and (iv) the sum of (a) the relevant Class B Notional Interest Accrual Amounts for the Monthly Interest Periods relating to such Certificate Payment Date, and (b) an amount equal to interest accrued at the related Required Rate during such Monthly Interest Periods on amounts deposited into the Certificateholders' Account in respect of the portion of the Adjusted Class B Certificate Balance represented by any Adjustable Rate Class B Certificates on prior Monthly Allocation Dates (such sum, the "Class B Swap Interest Amount") in exchange for payment by the Swap Counterparty of amounts equal to the amount of interest accrued on the Class A-1 Certificate Balance, Class A-2 Certificate Balance, Class A-3 Certificate Balance and the portion of the Class B Certificate Balance represented by the Adjustable Rate Class B Certificates, at the Class A-1 Rate, the Class A-2 Rate, the Class A-3 Rate and the Class B Adjustable Rate, respectively, during the related Interest Payment Period. </TABLE> <TABLE> <S> <C> If, however, the aggregate of the amounts paid or available to be paid by the Trust to the Swap Counterparty in respect of interest on the relevant Certificate Payment Date, in accordance with the priorities set forth herein, is less than such Class A-1 Swap Interest Amount, Class A-2 Swap Interest Amount, Class A-3 Swap Interest Amount or Class B Swap Interest Amount (the amount of any such insufficiency, a "Class A-1 Swap Interest Shortfall Amount", "Class A-2 Swap Interest Shortfall Amount", "Class A-3 Swap Interest Shortfall Amount" or "Class B Swap Interest Shortfall Amount", as the case may be), then under the Swap Agreement the corresponding payment due from the Swap Counterparty in exchange therefor (and, under the Agreement, the amount payable on such date in respect of interest accrued on the related Class of Certificates) will be reduced in the same proportion as the proportion that such Swap Interest Shortfall Amount represents of such Class A-1 Swap Interest Amount, Class A-2 Swap Interest Amount, Class A-3 Swap Interest Amount or Class B Swap Interest Amount, as the case may be. If on a subsequent Certificate Payment Date amounts are available, in accordance with the priorities set forth herein, to reimburse all or any part of any unreimbursed Class A-1 Swap Interest Shortfall Amount, Class A-2 Swap Interest Shortfall Amount, Class A-3 Swap Interest Shortfall Amount or Class B Swap Interest Shortfall Amount, then the Trust will be obligated under the Swap Agreement to pay such amounts to the Swap Counterparty and the corresponding payment due from the Swap Counterparty in respect of interest (and therefore any amounts payable on such date in respect of interest accrued on the related Class of Certificates) will be increased proportionately in the same proportion as such reimbursement represents of the current Class A-1 Swap Interest Amount, Class A-2 Swap Interest Amount, Class A-3 Swap Interest Amount or Class B Swap Interest Amount, as the case may be. Certificateholders will not be entitled to receive any interest on any Swap Interest Shortfall Amounts or corresponding reductions in amounts payable by the Swap Counterparty whether or not subsequently reimbursed as described above. SEE "Description of the Certificates -- Calculation of Class A-1 Rate, Class A-2 Rate, Class A-3 Rate and Class B Rate" and "Additional Document Provisions -- The Swap Agreement". In the event that, on any Monthly Allocation Date, the Class B Fixed Rate Interest Accrual Amount exceeds the amount of Available Interest allocable thereto, such deficiency may result in a Class B Interest Carryover Shortfall. Such Class B Interest Carryover Shortfall may be reimbursed on future Monthly Allocation Dates as described herein and shall not bear interest prior to such reimbursement. </TABLE> <TABLE> <S> <C> Interest will be calculated on the basis of: (i) in the case of the Class A-1 Notional Interest Accrual Amount, the Class A-2 Notional Interest Accrual Amount, the Class A-3 Notional Interest Accrual Amount, the Class B Notional Interest Accrual Amount and the Class B Fixed Rate Interest Accrual Amount, a 360-day year consisting of twelve 30-day months, and (ii) in the case of the Class A-1 Rate, the Class A-2 Rate, the Class A-3 Rate and the Class B Adjustable Rate and amounts due from the Swap Counterparty under the Swap Agreement, the actual number of days in the related Interest Payment Period and a 360-day year. PRINCIPAL. Principal of each Class of Certificates will be payable, (i) on the related Targeted Maturity Date; (ii) if the Adjusted Class A-1 Certificate Balance, Adjusted Class A-2 Certificate Balance, Adjusted Class A-3 Certificate Balance or Adjusted Class B Certificate Balance is not reduced to zero on the related Targeted Maturity Date, then for each such Class on each subsequent Monthly Allocation Date until the date on which the Adjusted Class A-1 Certificate Balance, Adjusted Class A-2 Certificate Balance, Adjusted Class A-3 Certificate Balance or Adjusted Class B Certificate Balance, as the case may be, is reduced to zero; and (iii) in connection with a Swap Termination or any exercise by the Transferor of its option to repurchase the SUBI Certificate, on the Monthly Allocation Date following the receipt of proceeds from such liquidation or sale (each such Targeted Maturity Date or Monthly Allocation Date, a relevant "Certificate Payment Date" with respect to such Class), in each case to the extent of amounts available therefor as described herein. The Targeted Maturity Date and the Stated Maturity Date (the date on which ultimate payment of a Class of Certificates is due) for each Class of Certificates are as follows: </TABLE> <TABLE> <CAPTION> CLASS TARGETED MATURITY DATE STATED MATURITY DATE - --------------------- ---------------------- ---------------------- <S> <C> <C> Class A-1............ December 25, 2000 December 25, 2002 Class A-2............ December 25, 2001 February 25, 2003 Class A-3............ March 25, 2002 February 25, 2004 Class B.............. December 25, 2003 May 25, 2006 </TABLE> <TABLE> <S> <C> provided, however, that if any such day is not a Business Day, then the related Targeted Maturity Date or Stated Maturity Date shall be the next succeeding Business Day. Except as described under "Description of the Certificates -- Termination of the Trust; Retirement of the Certificates", the Certificates will be "sequential pay" certificates meaning that no principal allocations, applications or payments will be made on the Class A-2 Certificates until the Adjusted Class A-1 Certificate Balance has been reduced to zero, no principal allocations, applications or payments will be made on the </TABLE> <TABLE> <S> <C> Class A-3 Certificates until the Adjusted Class A-2 Certificate Balance has been reduced to zero, and no principal allocations, applications or payments will be made on the Class B Certificates until the Adjusted Class A-3 Certificate Balance has been reduced to zero. Failure to pay in full a particular Class of Certificates on its Targeted Maturity Date because amounts allocable thereto are insufficient therefor will not constitute an Event of Servicing Termination or a Swap Termination, nor will it cause the payment of principal of or interest on other Classes of Certificates to be made on a monthly basis. THE REVOLVING PERIOD. The "Revolving Period" is the period from the Cutoff Date through the calendar day preceding the earliest to occur of December 1, 1999 (the "Accumulation Date"), an Accumulation Event or a Swap Termination. During the Revolving Period, all Principal Collections and all amounts allocated and applied in reimbursement of any Loss Amounts and Certificate Principal Loss Amounts allocated to the Investor Interest will be reinvested in Subsequent Contracts and Subsequent Leased Vehicles. Thus, except to the extent Certificate Principal Loss Amounts are allocated thereto and not reimbursed, the Adjusted Class A-1 Certificate Balance, Adjusted Class A-2 Certificate Balance, Adjusted Class A-3 Certificate Balance and Adjusted Class B Certificate Balance will not decline during the Revolving Period. Accumulation Events are described under "Description of the Certificates -- Accumulation Events". Events causing a Swap Termination under the Swap are described under "Additional Document Provisions -- Swap Agreement". An Accumulation Event or a Swap Termination will terminate the Revolving Period. SEE ALSO "Description of the Certificates -- Termination of the Trust; Retirement of the Certificates -- SWAP TERMINATION". While an Accumulation Event will terminate the Revolving Period, only a Swap Termination and related liquidation of the assets of the Trust or purchase of the SUBI Certificate by the Transferor may cause distributions in respect of principal with respect to a Class of Certificates prior to the related Targeted Maturity Date. During the Revolving Period, on one or more Business Days selected by the Servicer each month (each, a "Transfer Date"), the Servicer will direct the Titling Trustee to reinvest (i) Principal Collections and (ii) amounts applied to reimburse Loss Amounts and Certificate Principal Loss Amounts allocated to the Investor Interest in Subsequent Contracts and Subsequent Leased Vehicles. Upon such reinvestment, such Subsequent Contracts and Subsequent Leased Vehicles will become SUBI Assets. If on the last Business Day of any month during the Revolving Period commencing in January 1999 the Servicer determines that the amount of Principal Collections and </TABLE> <TABLE> <S> <C> reimbursed Loss Amounts and Certificate Principal Loss Amounts for the preceding Collection Period not reinvested in Subsequent Contracts and Subsequent Leased Vehicles as of the first day of such month exceeds $1,000,000, an Accumulation Event will be deemed to have occurred. SEE "Description of the Certificates -- Allocations, Applications and Payments -- Revolving Period". During the Revolving Period, Subsequent Contracts and Subsequent Leased Vehicles will be selected from the Titling Trust's portfolio of lease contracts and related vehicles not allocated to any Other SUBI, based on the criteria specified in the Titling Trust Agreement and Servicing Supplement as described under the "The Contracts -- Representations, Warranties and Covenants". Reinvestment of Principal Collections and reimbursed Loss Amounts and Certificate Principal Loss Amounts will be in the lease contracts having the earliest origination dates and the related vehicles that are Titling Trust Assets (excluding those previously allocated to any Other SUBI). SEE "The Contracts". With respect to any Monthly Allocation Date, the related "Collection Period" will be the preceding calendar month. With respect to any Collection Period, Collections will be allocated as "Principal Collections" up to the sum of: (i) the principal portion of each Monthly Payment due during such Collection Period with respect to each Contract that has not yet reached maturity, and as to which there has been no repossession, charge-off or Prepayment; (ii) amounts received during such Collection Period in connection with the Prepayment of any Contracts that are allocable to principal thereof (including the Residual Value thereof); and (iii) amounts received during such Collection Period as Liquidation Proceeds (net of Liquidation Expenses) with respect to any Contracts not specified in (i) or (ii) above, up to the sum of (a) the principal portion of all unpaid Monthly Payments through the maturity date specified in each related lease contract plus (b) the Residual Value of each related lease contract. For purposes of determining such Principal Collections, the principal component of all payments (including any payment in respect of the Residual Value thereof) made or to be made on or in respect of a Contract (or the related Leased Vehicle) with a Lease Rate less than 8.75% per annum will be discounted at a per annum rate of 8.75%, thereby effectively reallocating a portion of the payments received in respect of the principal component of the Contracts to Interest Collections and providing additional credit enhancement for the benefit of the Certificateholders. With respect to any Collection Period, "Collections" will include all net collections received in respect of the Contracts and Leased Vehicles during such Collection Period, such as Monthly Payments (including previously collected Payments Ahead that </TABLE> <TABLE> <S> <C> represent Monthly Payments due during such Collection Period), Prepayments, Advances, Reallocation Payments, Reallocation Deposit Amounts, Net Matured Leased Vehicle Proceeds, Net Charged-off Vehicle Proceeds and other Net Liquidation Proceeds, less (i) amounts representing Payments Ahead with respect to future Collection Periods, (ii) Additional Loss Amounts in respect of such Collection Period and (iii) reimbursement of Advances (including Inventory Advances and Nonrecoverable Advances). As described above, during the Revolving Period, amounts otherwise allocable on the related Monthly Allocation Date in reimbursement of Loss Amounts or Certificate Principal Loss Amounts allocable to the Investor Interest will be treated as Principal Collections and reinvested in Subsequent Contracts and Subsequent Leased Vehicles. SEE "Description of the Certificates -- Allocations, Applications and Payments -- ALLOCATIONS AND APPLICATIONS OF COLLECTIONS". With respect to any Collection Period "Interest Collections" generally will equal the amount by which Collections exceed Principal Collections. "Net Charged-off Vehicle Proceeds" will equal Charged-off Vehicle Proceeds net of Charged-off Vehicle Expenses, and "Net Liquidation Proceeds" will equal Liquidation Proceeds net of Liquidation Expenses. Following the Revolving Period, the amount of Principal Collections allocable to the Investor Interest in respect of a Collection Period (the "Principal Allocation") generally will mean the Investor Percentage of the Principal Collections in respect of such Collection Period allocable to the SUBI. The Investor Percentage will be calculated as described herein under "Description of the Certificates -- Calculation of Investor Percentage and Transferor Percentage". To the extent that on any Monthly Allocation Date any portion of the Investor Percentage of Interest Collections in respect of the related Collection Period remains after required allocations and applications have been made, including any required deposit into the Reserve Fund, up to but not exceeding the product of (i) one-twelfth of 0.25% and (ii) the Aggregate Net Investment Value as of the last day of such Collection Period will constitute the "Accelerated Principal Distribution Amount". The Accelerated Principal Distribution Amount will be allocable to the Certificateholders (or for reimbursements of Maturity Advances) in addition to (and in the same manner and priority as) ordinary allocations and applications of principal of the Certificates. SEE "Description of the Certificates -- Allocations, Applications and Payments -- ALLOCATIONS AND APPLICATIONS OF COLLECTIONS" and "Assets of the Trust -- The Accounts; Collections -- THE SUBI COLLECTION ACCOUNT" and "Certain Withdrawals from the SUBI Collection Account". </TABLE> <TABLE> <S> <C> C. ACCUMULATION PERIODS; TMCC DEMAND NOTES................. The Accumulation Period with respect to a Class of Certificates will commence on the earlier of the Accumulation Date or the day on which an Accumulation Event occurs and will end on the related Targeted Maturity Date or on the occurrence of a Swap Termination, if any. During the Revolving Period, amounts allocated on any Monthly Allocation Date as the related Class A-1 Notional Interest Accrual Amount, Class A-2 Notional Interest Accrual Amount, Class A-3 Notional Interest Accrual Amount, Class B Notional Interest Accrual Amount and Class B Fixed Rate Interest Accrual Amount will be deposited into the Certificateholders' Account and invested in Permitted Investments maturing on or prior to the succeeding relevant Certificate Payment Date. Following the Revolving Period, amounts allocated as described in the prior sentence will continue to be deposited and invested as described in the preceding sentence, and amounts allocated on any Monthly Allocation Date in reduction of the Adjusted Class A-1 Certificate Balance, the Adjusted Class A-2 Certificate Balance, the Adjusted Class A-3 Certificate Balance and the Adjusted Class B Certificate Balance (including reimbursements of Loss Amounts allocated to any such Class) will be deposited into the Certificateholders' Account and invested in Permitted Investments maturing on or prior to the related Targeted Maturity Date. Each such Permitted Investment is required to bear interest at the related Required Rate. Amounts so allocated on any Certificate Payment Date will not be so invested in Permitted Investments if currently payable or applicable to another purpose on such Certificate Payment Date. Such Permitted Investments are expected to be demand obligations issued by TMCC (each, a "TMCC Demand Note"). The TMCC Demand Notes are demand obligations insofar as the Trustee, on behalf of the Trust, will have the right to demand payment of amounts due thereunder prior to their stated maturity dates (i) if for any reason Standard & Poor's reduces TMCC's short-term debt to a rating less than A-1+ or TMCC's long-term debt to a rating less than AA, or Moody's reduces TMCC's short-term debt to a rating less than P-1 or TMCC's long-term debt to a rating less than Aa3 and the Trustee determines that at such time one or more Permitted Investments having substantially the same maturities, similar demand features and bearing interest at the relevant Required Rates are available and investment therein rather than in TMCC Demand Notes will not, by itself, cause a Rating Agency to reduce or withdraw its rating of any Class of Certificates or (ii) in connection with a Swap Termination. The Trustee will be required to exercise the demand feature of the TMCC Demand Notes upon any Swap Termination. </TABLE> <TABLE> <S> <C> Because TMCC is the issuer of the TMCC Demand Notes, and because such instruments will not be redeemable prior to their maturity dates other than as described above, if for any reason either Rating Agency reduces its rating of TMCC's debt after the date hereof, such Rating Agency may also downgrade the rating it has assigned to any Class of Certificates. On August 20, 1998, Moody's downgraded the long-term debt of TMC and its subsidiaries (including TMCC) to Aa1 from Aaa. On September 29, 1998, Standard & Poor's announced that it had placed the long-term debt of TMCC on Credit Watch with negative implications. The initial ratings of the Certificates are not affected by Moody's reduction of TMCC's rating or Standard & Poor's announcement. SEE "Risk Factors -- Risks Associated with Ratings of the Class A Certificates" and "Additional Document Provisions -- TMCC Demand Notes". D. THE SWAP...................... In order to enable the Trust to satisfy its obligations to make payments on the Class A Certificates and the Adjustable Rate Class B Certificates at an adjustable rate of interest, the Trust will enter into the Swap Agreement with TMCC, as Swap Counterparty (the "Swap Counterparty"). Pursuant to the Swap Agreement, the Trust generally will pay to the Swap Counterparty on each relevant Certificate Payment Date all amounts allocable in respect of the Class A-1 Swap Interest Amount, the Class A-2 Swap Interest Amount, the Class A-3 Swap Interest Amount or the Class B Swap Interest Amount, in each case subject to the payment priorities and limitations described herein. On each such date, the Swap Counterparty will make payments to the Trust of amounts due on such date under the Swap Agreement, which amounts will be used to make payments of interest accrued on the related Class of Certificates. As described herein, if the Trust makes payments of less than the Class A-1 Swap Interest Amount, Class A-2 Swap Interest Amount, Class A-3 Swap Interest Amount or Class B Swap Interest Amount, as the case may be, on any Certificate Payment Date, the Swap Counterparty's corresponding payment obligations under the Swap Agreement will be reduced proportionately. SEE "-- Payments -- Interest" above, and "The Swap Agreement -- Payments under the Swap Agreement" herein. The Swap Agreement provides for termination in connection with the occurrence of certain Events of Default and Termination Events. If the Swap Agreement is terminated as a result of an Event of Default or Termination Event (a "Swap Termination"), the principal of the Certificates will become due and payable without regard to their respective Targeted Maturity Dates, and the Trustee will be obligated to liquidate the Trust assets. In such event, the net proceeds realized from the liquidation of the assets of the Trust, if any, to the extent available after the payment of all other obligations of the Trust </TABLE> <TABLE> <S> <C> in respect of any amounts reimbursable to the Transferor, Servicer, Trustee or Swap Counterparty as described herein, will be allocated to make payments on the Certificates pursuant to the priorities described herein under "Description of the Certificates -- Termination of the Trust; Retirement of the Certificates -- SWAP TERMINATION". Such net proceeds may not be sufficient to reduce the outstanding balances of the Class A Certificates or Class B Certificates to zero. SEE "Risk Factors -- Risks Associated With Swap Agreement". Under such circumstances, Class A Certificateholders will have no recourse to any other assets for payment of the Class A Certificates, and will suffer a corresponding loss. The long-term debt obligations of TMCC currently are rated AAA by Standard & Poor's and Aa1 by Moody's. The Swap Agreement will not terminate merely as a result of a downgrade in any rating assigned to TMCC's debt obligations. However, because the ratings of each Class of Class A Certificates take into account the provisions of the Swap Agreement and the ratings currently assigned to the debt obligations of the Swap Counterparty, a downgrade, suspension or withdrawal of any rating of the debt of the Swap Counterparty by a Rating Agency may result in the downgrade, suspension or withdrawal of the rating assigned by either Rating Agency to such Class of Class A Certificates, with adverse consequences for the liquidity or market value thereof. SEE "Risk Factors -- Risks Associated with Swap Agreement" and "-- Risks Associated with Ratings of the Class A Certificates". In the event the long-term debt rating of the Swap Counterparty is reduced to a level below Aa3 by Moody's or AA by Standard & Poor's or the short-term debt rating of the Swap Counterparty is reduced to a level below P-1 by Moody's or A-1+ by Standard & Poor's, the Swap Counterparty may assign the Swap Agreement to another party (or otherwise obtain a replacement swap agreement on substantially the same terms as the Swap Agreement) and thereby be released from its obligations under the Swap Agreement; provided that (i) the new swap counterparty, by a written instrument, accepts all of the obligations of the Swap Counterparty under the Swap Agreement to the reasonable satisfaction of the Trustee, (ii) the Swap Counterparty delivers an opinion of independent counsel of recognized standing in form and substance reasonably satisfactory to the Trustee confirming that such transfer or replacement will not result in the new swap counterparty being required to withhold or deduct for taxes under the Swap Agreement, (iii) a Termination Event or Event of Default does not occur under the Swap Agreement as a result of such transfer or replacement and (iv) the ratings assigned to the Certificates after such assignment and release will be at least equal to the ratings assigned by Moody's and Standard & Poor's to the Certificates at the time of the reduction in the debt rating of the </TABLE> <TABLE> <S> <C> Swap Counterparty. Any cost of such transfer will be borne by the Swap Counterparty or the new swap counterparty and not by the Trust; provided, however, that the Swap Counterparty shall not be required to make any payment to the new swap counterparty to assign the Swap Agreement or to obtain a replacement swap. In the event that the Swap Counterparty does not elect to assign the Swap Agreement or enter into a replacement Swap Agreement, the Swap Counterparty may (but shall not be obligated to) establish any other arrangement satisfactory to the applicable Rating Agency, such that the ratings of the Certificates by the applicable Rating Agency will not be withdrawn or reduced. E. OPTIONAL PURCHASE............. The Transferor will have an option to purchase the SUBI Certificate on any Monthly Allocation Date on or after the Class A-3 Targeted Maturity Date if, either before or after giving effect to the allocations, applications or payments required to be made in respect of principal on such date, the Adjusted Investor Balance is less than or equal to $74,998,873.25 (10% of the Aggregate Net Investment Value as of the Cutoff Date) or amounts sufficient to effectively reduce the Adjusted Investor Balance to such amount have been deposited in the Collection Account on such date. Such a purchase would result in the retirement of the Certificates of each outstanding Class on such date. SEE "Description of the Certificates -- Termination of the Trust; Retirement of the Certificates". F. FORM AND DENOMINATIONS OF THE CLASS A CERTIFICATES.......... Except under limited circumstances, the Class A Certificates will be available only in book-entry form in minimum denominations of $1,000. Persons acquiring beneficial ownership interests in the Class A Certificates ("Certificate Owners") will hold their Certificates through The Depository Trust Company ("DTC"), in the United States, or Cedel Bank, societe anonyme ("Cedel Bank") or the Euroclear System ("Euroclear") in Europe or Asia. SEE "Description of the Certificates -- Book-Entry Registration" and "ANNEX I: Global Clearance, Settlement and Tax Documentation Procedures". G. LISTING....................... Application has been made for listing of the Class A Certificates on the Luxembourg Stock Exchange. THE SUBI.......................... The SUBI will be evidenced by two certificates collectively evidencing a 100% beneficial interest in the SUBI Assets, one of which, the SUBI Certificate, will be transferred by the Transferor to the Trust, and the other of which (evidencing the rights to proceeds of the Residual Value Insurance Policies) will be retained by the Transferor. The SUBI will not evidence an interest in any Titling Trust Assets other than the SUBI Assets. Payments made on or in respect of any Titling Trust Assets other than the SUBI Assets, as well as proceeds of the Residual Value Insurance Policies, will not be available to make payments on </TABLE> <TABLE> <S> <C> the Certificates. The Titling Trust Assets evidenced by the SUBI will primarily include the Contracts and Leased Vehicles allocated to the SUBI. SEE "The Trust and the SUBI" and "The Titling Trust". THE CONTRACTS. The Contracts will consist of retail closed-end lease contracts originated by the Dealers in the Trust States having original terms of not more than 60 months. Substantially all of the Contracts will be finance leases for accounting purposes and will have been written for a "capitalized cost" which represents the original principal balance of such Contract ("Capitalized Cost") (which may exceed the manufacturer's suggested retail price and may include certain origination fees), plus a lease charge which is based on an imputed interest rate (the "Lease Rate"). Substantially all the Contracts will provide for equal monthly payments (each, a "Monthly Payment") that when allocated between principal and the lease charge at the Lease Rate on a constant yield basis, will be sufficient to amortize the Capitalized Cost over the term of the lease to an amount equal to the Residual Value. A Residual Value is established at the origination of a lease contract (based on instructions provided to the Dealers by TMCC) and represents the estimated wholesale market value of the related leased vehicle at the end of the lease term, as such estimated value may be reduced in connection with payments received in respect of principal due during the period of any extension granted as described herein (the "Residual Value"). The amount to which the capitalized cost of a Contract has been amortized at any point in time is referred to herein as its "Outstanding Principal Balance". The Initial Contracts consist of 34,185 lease contracts. As of the Cutoff Date, the Initial Contracts had Lease Rates ranging from 1.09% to 13.77% and a weighted average Lease Rate of 6.81%. As of the Cutoff Date, the Initial Contracts had an aggregate Outstanding Principal Balance of $781,660,860.79, a weighted average original term of 38.3 months and a weighted average remaining term to scheduled maturity of 33.8 months. SEE "The Contracts". The "Discounted Principal Balance" for each Contract with a Lease Rate less than 8.75% will be its remaining Monthly Payments and Residual Value discounted by 8.75% (each such Contract, a "Discounted Contract"), and for each Contract with a Lease Rate at least equal to 8.75% will be its Outstanding Principal Balance. As of the Cutoff Date, the Aggregate Net Investment Value equaled the aggregate Discounted Principal Balance of the Initial Contracts or $749,988,732.51 (of which amount approximately 68.54% represented Residual Values). The "Aggregate Net Investment Value" as of any date will equal the sum of (i) the Discounted Principal Balances of all Contracts </TABLE> <TABLE> <S> <C> other than Charged-off, Liquidated, Matured and Additional Loss Contracts, (ii) the aggregate of the Residual Values of all Leased Vehicles covered by Matured Contracts to the extent that such Contracts have been terminated within the three immediately preceding Collection Periods but which Leased Vehicles as of the last day of the most recent Collection Period have remained unsold and not otherwise disposed of by the Servicer for no more than three full Collection Periods (the "Matured Leased Vehicle Inventory") plus certain related charges and (iii) during the Revolving Period, the amount of unreinvested Principal Collections and reimbursed Loss Amounts and Certificate Principal Loss Amounts. THE LEASED VEHICLES. The Leased Vehicles will be comprised of automobiles and light duty trucks. As of the times of origination of the Contracts, the related Leased Vehicles will include new vehicles, including dealer demonstrator vehicles driven fewer than 20,000 miles, or used vehicles up to four model years old at the time of origination of the related Contract, including certified used vehicles and vehicles previously sold under manufacturer's programs. Certified used vehicles are Toyota or Lexus vehicles that are purchased by dealers, reconditioned and certified to meet certain Toyota/Lexus required standards and sold or leased with an extended warranty from the manufacturer. Manufacturer's program vehicles are Toyota or Lexus vehicles that have been sold to rental car companies, repurchased by the manufacturer and subsequently purchased by the dealer to sell or lease as current year and one year old used vehicles with 20,000 miles or less. SEE "The Contracts -- General". The certificates of title to the Initial Leased Vehicles are, and the certificates of title to all Leased Vehicles will be, registered at all times prior to liquidation in the name of the Titling Trust or the Titling Trustee. The certificates of title will not reflect the indirect interest of the Trustee in the Leased Vehicles by virtue of its beneficial interest in the SUBI. Therefore, if the Certificates were recharacterized as secured loans, the Trustee would have a perfected security interest in the SUBI Certificate, Contracts and Contract Rights but not in the Leased Vehicles. SEE "Certain Legal Aspects of the Titling Trust -- Structural Considerations" and "-- Back-up Security Interests". THE SUBI COLLECTION ACCOUNT; COLLECTIONS..................... The SUBI Collection Account will be established and maintained for the benefit of the holders of interests in the SUBI. Except under certain limited circumstances, the Servicer will be permitted to deposit amounts collected in respect of payments made on or in respect of the Contracts or the Leased Vehicles during each Collection Period into the SUBI Collection Account on the Business Day preceding the related Monthly Allocation Date (the related "Deposit Date") rather than when </TABLE> <TABLE> <S> <C> received. Such payments will include, but will not be limited to, (i) Monthly Payments, not including Monthly Payments (or portions thereof) determined by the Servicer to be due in one or more future Collection Periods, (each, a "Payment Ahead") until the Collection Period during which such Payment Ahead is due, (ii) Prepayments, (iii) proceeds from the sale or other disposition of Leased Vehicles under Matured Contracts, including payments for excess mileage and excess wear and tear through the date of disposition of the related Leased Vehicles ("Matured Leased Vehicle Proceeds"), (iv) proceeds received in connection with the sale or other disposition of Repossessed Leased Vehicles or other vehicles that were covered by Charged-off Contracts ("Charged-off Vehicle Proceeds") and (v) other amounts received in connection with the realization of the amounts due under any Contract through the date of disposition of the related vehicle (together with Matured Leased Vehicle Proceeds and Charged-off Vehicle Proceeds, "Liquidation Proceeds"). The Servicer will be entitled to reimbursement for expenses incurred in connection with the realization of Matured Leased Vehicle Proceeds ("Matured Leased Vehicle Expenses"), Charged-off Vehicle Proceeds ("Charged-off Vehicle Expenses") and other Liquidation Proceeds (such expenses, together with Matured Leased Vehicle Expenses and Charged-off Vehicle Expenses, "Liquidation Expenses"), to be netted from such proceeds or from Collections or to be withdrawn from amounts on deposit in the SUBI Collection Account. In addition, the Servicer will be entitled to reimbursement for any Advances from amounts collected on the Contracts and Leased Vehicles. The Servicer also will be entitled to reimbursement of certain payments made and expenses and charges incurred by it in the ordinary course of servicing the Contracts (including payments it makes on behalf of the related lessees in connection with the payment of taxes, vehicle registration, clearance of parking tickets and similar items) from Collections with respect to the related Contracts, separate payment thereof by the related lessees or from amounts realized upon the final disposition of the related Leased Vehicle. To the extent such amounts are reimbursed prior to or at the final disposition of the related leased vehicle but remain unpaid by the related lessee, such amounts (together with any unpaid Monthly Payments under the related Contract) will be treated as Matured Leased Vehicle Expenses or Charged-off Vehicle Expenses, as the case may be, and will therefore reduce Matured Leased Vehicle Proceeds or Charged-off Vehicle Proceeds, as the case may be, and Liquidation Proceeds. On each Deposit Date, the following additional amounts also will be deposited into the SUBI Collection Account: (i) Advances by the Servicer, (ii) any Maturity Advances made by the Transferor and (iii) Reallocation Payments by TMCC </TABLE> <TABLE> <S> <C> (together with, under certain circumstances after the Revolving Period, Reallocation Deposit Amounts) in respect of certain Contracts as to which an uncured breach of certain representations and warranties or certain servicing covenants has occurred. In addition, to the extent set forth herein, amounts will be withdrawn from the Reserve Fund and deposited into the SUBI Collection Account on each Deposit Date to cover certain Loss Amounts or shortfalls in Collections. Thereafter, Interest Collections (and, with respect to the Deposit Date in any month following the termination of the Revolving Period, Principal Collections) on deposit in the SUBI Collection Account in respect of the related Collection Period will be available for allocation, application or payment of required amounts to Certificateholders and the Transferor. SEE "Assets of the Trust -- The Accounts; Collections -- THE SUBI COLLECTION ACCOUNT". The Certificateholders and the Transferor (as holder of the Transferor Interest) are entitled on any Monthly Allocation Date to be allocated or to receive Matured Leased Vehicle Proceeds up to, but not in excess of, the aggregate of the Residual Values of Leased Vehicles sold or otherwise disposed of from Matured Leased Vehicle Inventory during the related Collection Period. It is possible that in any Collection Period the Servicer could incur Matured Lease Vehicle Expenses that, if reimbursed from collections in respect of Matured Leased Vehicle Proceeds, would result in Net Matured Leased Vehicle Proceeds being less than the sum of the Residual Values of all Leased Vehicles so sold or otherwise disposed of. Any such shortfall will result in the realization of Residual Value Loss Amounts. On each Deposit Date on which Matured Leased Vehicle Proceeds received during the related Collection Period net of related Matured Leased Vehicle Expenses incurred during such Collection Period ("Net Matured Leased Vehicle Proceeds") exceed the aggregate Residual Value of the related Leased Vehicles (the "Residual Value Surplus"), such excess will be released to the Transferor and none of the Trust, the Certificateholders or the Swap Counterparty will have any further claim thereto or interest therein. THE RESERVE FUND.................. A Reserve Fund (the "Reserve Fund") will be maintained with the Trustee for the benefit of the Certificateholders and the Transferor. The Reserve Fund is designed to provide additional funds for the benefit of the Certificateholders in the event that on any Monthly Allocation Date Collections allocable to the Investor Interest for the related Collection Period are insufficient to allocate for or make applications or payments in respect of, among other things, (i) the Class A-1 Notional Interest Accrual Amounts, Class A-2 Notional Interest Accrual Amounts, Class A-3 Notional Interest Accrual Amounts, Class B Notional Interest Accrual Amounts or Class B Fixed Rate Interest Accrual Amounts, (ii) Loss Amounts and Certificate Principal Loss Amounts allocated to the Certificates and (iii) if </TABLE> <TABLE> <S> <C> such Monthly Allocation Date is a relevant Certificate Payment Date, any remaining shortfalls in amounts payable to the Swap Counterparty under the Swap Agreement or any Class B Swap Interest Shortfall Amounts or Fixed Rate Class B Interest Carryover Shortfall Amounts (the aggregate amount of such deficiency, the "Required Amount"). On the related Stated Maturity Date, monies on deposit in the Reserve Fund also may be applied and paid to reduce the Adjusted Class A-1 Certificate Balance, the Adjusted Class A-2 Certificate Balance, the Adjusted Class A-3 Certificate Balance or the Adjusted Class B Certificate Balance to zero, as well as to reimburse Loss Amounts and Certificate Principal Loss Amounts allocated thereto, should the Collections allocable for such purpose ultimately be insufficient to reduce any such balance to zero and to effect such reimbursements on such date; provided that Class B Reserve Amounts will not be so applied other than with respect to the Class B Certificates, except to the extent that the Class B Reserve Amount exceeds the amount necessary both to reduce the Adjusted Class B Certificate Balance to zero and to make such reimbursements to the Class B Certificateholders. Notwithstanding the foregoing, of the amounts on deposit in the Reserve Fund, an amount not to exceed $ (the "Class B Reserve Amount") generally will be available exclusively for payment of accrued and unpaid interest with respect to the Class B Certificates and, on and after the Class B Targeted Maturity Date, to reduce the Adjusted Class B Certificate Balance until the Adjusted Class B Certificate Balance is reduced to zero. Such amounts will not be so applied if other amounts are then on deposit in the Reserve Fund and available therefor. Following the initial allocation of amounts to the Class B Reserve Amount, no subsequent amounts deposited into the Reserve Fund will be allocated to the Class B Reserve Amount. In addition, on or after the Class B Targeted Maturity Date, if amounts remaining on deposit in the Reserve Fund (including Class B Reserve Amounts) are sufficient to (i) fund any amounts payable to the Trustee, Titling Trustee and Servicer, and (ii) reduce the Adjusted Certificate Balance of all Classes of outstanding Certificates to zero such funds will be so paid. The Reserve Fund will not be an asset of the Trust. SEE "Assets of the Trust -- The Accounts; Collections -- THE RESERVE FUND". The Reserve Fund will be created on the Closing Date with an initial deposit (the "Initial Deposit") by the Transferor of $28,124,577.47 (3.75% of the Aggregate Net Investment Value as of the Cutoff Date). Thereafter, on each Monthly Allocation Date, the Reserve Fund will be supplemented by amounts that would otherwise be released to the Transferor after making all required allocations, applications and payments, until the amount on deposit therein equals the applicable Specified Reserve Fund Balance. On each Monthly Allocation Date, all </TABLE> <TABLE> <S> <C> net investment income with respect to amounts on deposit therein and, after giving effect to all applications of amounts withdrawn from the Reserve Fund on such Monthly Allocation Date, monies on deposit therein in excess of the Specified Reserve Fund Balance, will be paid to the Transferor, free and clear of any interest of the Trust. SEE "Description of the Certificates -- Allocations, Applications and Payments -- ALLOCATIONS AND APPLICATIONS OF COLLECTIONS" and "Assets of the Trust -- The Accounts; Collections -- THE RESERVE FUND -- THE SPECIFIED RESERVE FUND BALANCE". Under certain circumstances it is possible that, as of any Monthly Allocation Date, the amount of funds actually on deposit in the Reserve Fund could be less than the Specified Reserve Fund Balance. Moreover, pursuant to the Agreement, the Specified Reserve Fund Balance may, under certain circumstances, be reduced on one or more Monthly Allocation Dates to the extent approved by each Rating Agency. SUBORDINATION..................... The Class B Certificates will be subordinated to the Class A Certificates so that on any Monthly Allocation Date (i) allocations and applications in respect of interest on the Class B Certificates generally will not be made until amounts have been appropriately allocated and applied in respect of the Class A-1 Notional Interest Accrual Amount, the Class A-2 Notional Interest Accrual Amount, the Class A-3 Notional Interest Accrual Amount, the Class A-1 Interest Carryover Shortfall Amount, the Class A-2 Interest Carryover Shortfall Amount and the Class A-3 Interest Carryover Shortfall Amount as of such Monthly Allocation Date, (ii) allocations, applications and payments in respect of principal of the Class B Certificates generally will not be made until the foregoing allocations and applications have been made and all allocations, applications and payments in reduction of the Adjusted Class A-1 Certificate Balance, the Adjusted Class A-2 Certificate Balance and the Adjusted Class A-3 Certificate Balance (as well as reimbursements of Loss Amounts and Certificate Principal Loss Amounts allocated thereto) have been made and (iii) Loss Amounts and Certificate Principal Loss Amounts will be allocated to the Class B Certificates until the Adjusted Class B Certificate Balance has been reduced to zero prior to the allocation thereof to the Adjusted Class A-1 Certificate Balance, the Adjusted Class A-2 Certificate Balance and the Adjusted Class A-3 Certificate Balance. To provide additional credit enhancement for the Certificates, Transferor Amounts will not be paid to the Transferor on any Monthly Allocation Date until all allocations, applications and payments required to be made with respect to the Adjusted Investor Balance have been made on such date and the amount on deposit in the Reserve Fund on such Monthly Allocation Date equals the Specified Reserve Fund Balance as described </TABLE> <TABLE> <S> <C> under "Description of the Certificates -- Allocations, Applications and Payments -- ALLOCATIONS AND APPLICATIONS OF COLLECTIONS". SEE "Description of the Certificates -- Certain Payments to the Transferor". ADVANCES.......................... On each Deposit Date, the Servicer will be obligated to make an Advance with respect to each outstanding delinquent Contract and certain Contracts as to which payments have been deferred that have not been reallocated to the UTI with an accompanying Reallocation Payment as described herein, provided that the Servicer will not be required to make any Advance to the extent that it determines such Advance may not be ultimately recoverable from Net Liquidation Proceeds or otherwise. In addition, the Servicer will have the option to make certain Advances with respect to off-lease vehicles held pending disposition. Each such Advance will be made by deposit into the SUBI Collection Account of an amount equal to the aggregate amount of Monthly Payments due but not received during the related Collection Period (each, an "Advance"). SEE "Additional Document Provisions -- The Servicing Agreement -- COLLECTIONS" and "-- Advances". MATURITY ADVANCES................. Pursuant to the Agreement, if on the related Targeted Maturity Date the aggregate of amounts available to be allocated, applied and paid in respect of the Adjusted Class A-1 Certificate Balance, the Adjusted Class A-2 Certificate Balance, the Adjusted Class A-3 Certificate Balance or the Adjusted Class B Certificate Balance are insufficient to reduce the Adjusted Class A-1 Certificate Balance, the Adjusted Class A-2 Certificate Balance, the Adjusted Class A-3 Certificate Balance or the Adjusted Class B Certificate Balance, as the case may be, to zero, or to reimburse Loss Amounts and Certificate Principal Loss Amounts allocated thereto, the Transferor will have the option to make an advance (a "Maturity Advance") in any amount up to the amount of such shortfall. Any such amounts advanced by the Transferor will be reimbursable to the Transferor from the Investor Percentage of Principal Collections on subsequent Monthly Allocation Dates as and to the extent described herein. SEE "Assets of the Trust -- The Accounts; Collections -- THE RESERVE FUND" and "-- Advances". SERVICING COMPENSATION............ The Servicer will be entitled to receive a monthly fee with respect to the SUBI Assets (the "Servicing Fee"), payable on each Monthly Allocation Date, equal to one-twelfth of 1% of the Aggregate Net Investment Value as of the first day of the related Collection Period (or, in the case of the first Monthly Allocation Date, as of the Cutoff Date). The Servicer also will be entitled to additional servicing compensation in the form of, among other things, late fees, Deferral Fees and other administrative fees or similar charges under the Contracts. SEE "Additional Document Provisions -- The Servicing Agreement -- SERVICING COMPENSATION". </TABLE> <TABLE> <S> <C> ERISA CONSIDERATIONS.............. Subject to considerations described below, the Class A Certificates are eligible for purchase by employee benefit plan investors as of the Closing Date. Under a regulation issued by the Department of Labor, the Trust's assets would not be deemed "plan assets" of an employee benefit plan holding any Class of Class A Certificates if certain conditions are met, including that Certificates of each such Class must be held, upon completion of the public offering made hereby, by at least 100 investors who are independent of the Transferor and of one another and that such Certificates are registered under the Exchange Act. Although no assurances can be given, and no monitoring or other measures will be taken to ensure, that such condition will be met, the Underwriters expect that each Class of Class A Certificates will be held by at least 100 independent investors at the conclusion of the offering. The Transferor anticipates that the other conditions of the regulation will also be met as of the Closing Date. If the Trust's assets were deemed to be "plan assets" of an employee benefit plan investor (e.g., if the 100 independent investor criterion is not satisfied), violations of the "prohibited transaction" rules of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), could result and generate excise tax and other liabilities under ERISA and section 4975 of the Internal Revenue Code of 1986, as amended (the "Code"), unless another statutory, regulatory or administrative exemption is available. It is uncertain whether existing exemptions from the "prohibited transaction" rules of ERISA would apply to all transactions involving the Trust's assets if such assets were treated for ERISA purposes as "plan assets" of employee benefit plan investors. SEE "ERISA Considerations". TAX STATUS........................ On the Closing Date, O'Melveny & Myers LLP will deliver a legal opinion to the effect that (i) the Trust will not be treated as an association or a publicly traded partnership taxable as a corporation and (ii) the Class A Certificates will properly be characterized as indebtedness, in each case for federal income tax purposes. SEE "Material Federal Income Tax Considerations". RATINGS........................... It is a condition of issuance that each of Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. ("Standard & Poor's" and, together with Moody's, the "Rating Agencies") rates the Class A-1, Class A-2 and Class A-3 Certificates in its highest rating category. The ratings of the Class A-1, Class A-2 and Class A-3 Certificates primarily address the likelihood of the payment in full of interest on and principal of the Class A-1, Class A-2 and Class A-3 Certificates pursuant to the Agreement and the Swap Agreement. Either Rating Agency may assign any such rating a special designation highlighting the risks relating to the Swap Agreement. At any </TABLE> <TABLE> <S> <C> time that amounts remain invested in TMCC Demand Notes, or so long as TMCC is the Swap Counterparty, a reduction or withdrawal of the ratings assigned by either Rating Agency to the debt securities of TMCC could result in the reduction or withdrawal of its rating of the Class A-1, Class A-2 or Class A-3 Certificates. On April 2, 1998, Moody's changed its outlook for Japan's Aaa debt rating from "stable" to "negative". On July 23, 1998, Moody's announced its decision to review for possible downgrade Japan's Aaa "country ceilings" for foreign currency-denominated debt and bank deposits as well as the Aaa-rated yen-denominated securities issued or guaranteed by the government of Japan. On July 3, 1998, Moody's placed the Aaa long-term debt ratings of TMC, TMCC's ultimate parent, and its subsidiaries (including TMCC) under review for possible downgrade. On August 20, 1998, Moody's downgraded the long-term debt of TMC and its subsidiaries (including TMCC) to Aa1 from Aaa and announced the conclusion of the rating review that began on July 3, 1998. On September 29, 1998, Standard & Poor's announced that it had placed the long-term debt of TMC and its subsidiaries (including TMCC) on Credit Watch with negative implications. The initial ratings of the Certificates are not affected by Moody's reduction of TMCC's rating or Standard & Poor's announcement. SEE "Risk Factors -- Risks Associated with Ratings of the Class A Certificates". The ratings of the Class A-1, Class A-2 and Class A-3 Certificates will not address the likelihood of the payment in full of the principal amount thereof on any particular date prior to the related Stated Maturity Date. A security rating is not a recommendation to buy, sell or hold securities, and may be subject to revision, suspension or withdrawal at any time by the assigning Rating Agency. SEE "Ratings of the Class A Certificates".
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001038827_physician_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001038827_physician_prospectus_summary.txt
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+SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. See "Risk Factors" for information that should be carefully considered by prospective investors. Unless otherwise indicated, all information in this Prospectus assumes: (i) a 0.314-for-1 stock split with respect to the Common Stock and Non-Voting Common Stock (the "Reverse Stock Split"), which will be effective prior to consummation of the Offering; (ii) no exercise of the Underwriter's over-allotment option; and (iii) conversion of all of the issued and outstanding shares of the Company's Class A Stock (Series 1 and Series 2), Series B Redeemable Convertible Preferred Stock, Series B Non- Voting Redeemable Convertible Preferred Stock and Prime Common Stock into 3,685,918 shares of Common Stock and 288,194 shares of Non-Voting Common Stock upon consummation of the Offering. THE COMPANY Physician Health Corporation is a physician management company focusing on the value-added integration of practice management, ancillary health care services, network development and administration, and payor contracting in selected markets. As of December 31, 1997, the Company provided payor contract administration and related services to 24 physician networks, one of which is owned by the Company, one of which is a nonprofit corporation of which the Company is the sole member (together, the "PHC Networks") and the remainder of which are independent entities that receive services from the Company (the "Affiliated Networks"). The PHC Networks and Affiliated Networks included approximately 3,300 physicians and 2.3 million covered lives under 29 managed care contracts including specialty capitated and global risk contracts. As of December 31, 1997, the Company was a party to practice management agreements with 25 physician practices ("Managed Practices") that employed 122 physicians ("Managed Physicians"). In addition, the Company directly owned and operated nine physician practices ("Owned Practices") through which it directly employed 50 physicians ("Employed Physicians"). Managed Practices and Owned Practices are collectively referred to as "PHC Practices," and Managed Physicians and Employed Physicians are collectively referred to as "PHC Physicians." As of December 31, 1997, there were an aggregate of 34 PHC Practices and 172 PHC Physicians. As of December 31, 1997, the Company also had interests in two businesses delivering ancillary health care services. The Company's objective is to continue building comprehensive and integrated networks of physicians in selected regional markets in order to: (i) establish a significant market presence enabling it to negotiate favorable payor contracts and (ii) provide a broad range of physicians and ancillary health care services to payors. To achieve these objectives, the Company seeks to: (a) leverage contracting expertise to enhance its strategic position in its markets; (b) selectively acquire key practices to strengthen market presence; (c) provide management expertise and capital for development of ancillary health care services; (d) negotiate and administer beneficial payor contracts; and (e) utilize information technology to improve practice performance and meet payor requirements. The Company believes that the expertise of its management team in network development, payor contracting and ancillary health care services, as well as PHC's flexible approach to entering new markets and structuring its operations, differentiate PHC from traditional physician practice management companies ("PPMs") and enhance its ability to attract physicians and to negotiate favorable payor contracts. PHC's acquisition of key practices is a part of its overall strategy of strengthening its networks and market presence and enhancing the Company's ability to contract with managed care payors and providers. The Company derives its revenues from four primary sources: (i) management fees from management of Managed Practices, including reimbursements of clinical operating expenses paid by PHC on behalf of Managed Practices; (ii) patient service revenues generated by Owned Practices; (iii) management fees from management of Affiliated Networks and administering managed care contracts; and (iv) revenues from the operation of ancillary health care services. For the nine months ended September 30, 1997 the Company's management fee revenue from management of Managed Practices, including reimbursement of clinical operating expenses, constituted approximately 64% of net revenue, patient service revenues generated by Owned Practices constituted approximately 14% of net revenues, management fees from management of Affiliated Networks and administering managed care contracts constituted approximately 22% of net revenue, and revenues from the operation of ancillary health care services constituted approximately 0% of net revenues. During the nine months ended September 30, 1997, the Company believes that the PHC Practices derived approximately 30% of their revenues from Medicare and Medicaid, approximately 10% of revenues from capitated contracts with managed care payors and approximately 60% of revenues under traditional fee-for-service arrangements. The Company commenced operations in 1994 as a wholly-owned subsidiary (the "Predecessor") of Surgical Health Corporation. PHC was incorporated in Delaware in August 1995 and acquired the Predecessor in November 1995. Prior to the acquisition of the assets and entry into a long-term practice management agreement with the first PHC Practice in November 1996, the Company principally engaged in network development and administration, payor contracting, practice administration, and development activities related to potential acquisitions. The Predecessor principally engaged in network development and administration, payor contracting and practice administration and derived its revenues from these activities. During October and November 1997, the Company acquired the assets of and entered into long-term practice management agreements with 17 Managed Practices with 83 Managed Physicians, acquired the assets of four Owned Practices and entered into employment agreements with 37 Employed Physicians associated with those Owned Practices, and acquired a sleep laboratory and a 51% interest in an ambulatory surgery center. The approximate aggregate consideration paid in connection with these acquisitions consisted of $27.2 million in stock value, $1.2 million in promissory notes and $9.3 million in cash. The Company's current regional markets are centered in Atlanta, Georgia; Cincinnati, Ohio; Dallas/Ft. Worth, Texas; Memphis, Tennessee; Orlando, Florida; and St. Louis, Missouri. The Company will continue to evaluate expansion into additional regional markets. The principal executive offices of the Company are located at One Lakeside Commons, Suite 300, 990 Hammond Drive, Atlanta, Georgia 30328 and its telephone number is (770) 673-1964. THE OFFERING <TABLE> <C> <S> Common Stock offered hereby........................ 3,000,000 shares Common Stock to be outstanding after the Offering.. 10,390,401 shares(1) Use of proceeds.................................... To repay certain indebtedness and for working capital and general corporate purposes, including future acquisitions of physician practices, acquisitions and development of ancillary health care services, and development of physician networks and payor contracts. See "Use of Proceeds." Proposed Nasdaq National Market symbol............. PHCO </TABLE> - -------- (1) Includes 288,194 shares of Non-Voting Common that will be immediately convertible into Common Stock. Excludes: (i) an aggregate of 1,076,578 shares of Common Stock issuable upon exercise of warrants outstanding at a weighted average exercise price of $3.10 per share; (ii) an aggregate of 1,664,265 shares of Common Stock issuable upon exercise of options outstanding at a weighted average exercise price of $13.70 per share under the Company's Amended and Restated 1995 Stock Option Plan (the "1995 Stock Option Plan"); (iii) 1,475,421 shares of Common Stock reserved for issuance under the 1995 Stock Option Plan following consummation of the Offering; and (iv) 693,612 shares of Common Stock issuable upon conversion of certain interests in subsidiaries of PHC. See "Management--1995 Stock Option Plan." SUMMARY CONSOLIDATED FINANCIAL DATA (in thousands, except per share data) <TABLE> <CAPTION> PREDECESSOR SUCCESSOR ------------------------ ---------------------------------------------------- PERIOD FROM PERIOD FROM INCEPTION NINE MONTHS JANUARY 1, (AUGUST 29, YEAR ENDED ENDED YEAR ENDED 1995 TO 1995) TO DECEMBER 31, SEPTEMBER 30, DECEMBER 31, OCTOBER 31, DECEMBER 31, ------------ ----------------- 1994 1995(1) 1995(1) 1996 1996 1997 ------------ ----------- ------------ ------------ ------- -------- <S> <C> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Net revenue................................ $812 $1,949 $ 456 $ 4,036 $ 2,720 $ 16,589 Operating expenses: Salaries and benefits..................... 531 1,533 662 2,915 2,123 4,880 Contract and professional services........ 38 125 70 194 370 746 Provision for bad debts................... -- -- 40 660 104 938 General and administrative................ 225 463 131 2,748 1,242 12,176 Depreciation and amortization............. 58 106 14 161 81 862 Write down of assets(2)................... -- -- -- 195 -- 715 Purchased research and development(3)..... -- -- -- -- -- 8,105 ---- ------ ------ ------- ------- -------- Total operating expenses.................. 851 2,227 917 6,873 3,920 28,422 ---- ------ ------ ------- ------- -------- Income (loss) from operations.............. (39) (278) (461) (2,837) (1,200) (11,833) Interest expense, net...................... 24 86 7 30 9 2,236 ---- ------ ------ ------- ------- -------- Income (loss) before minority interest and income taxes.............................. (63) (364) (468) (2,867) (1,209) (14,069) Minority interest.......................... -- -- (1) -- -- (2,035) ---- ------ ------ ------- ------- -------- Income (loss) before income taxes.......... (63) (364) (467) (2,867) (1,209) (12,034) Income tax expense......................... -- -- -- 17 -- 14 ---- ------ ------ ------- ------- -------- Net income (loss).......................... $(63) $ (364) (467) $(2,884) $(1,209) $(12,048) ==== ====== ====== ======= ======= ======== Net income (loss) per share................ N/A N/A $(0.50) $ (1.34) $ (0.56) $ (4.16) ==== ====== ====== ======= ======= ======== Weighted average outstanding shares........ N/A N/A 941 2,156 2,143 2,894 - -------------------------------------------------- ==== ====== ====== ======= ======= ======== </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1997 ------------------------------------ PRO FORMA ACTUAL PRO FORMA(4) AS ADJUSTED(5) ------- ------------ -------------- <S> <C> <C> <C> BALANCE SHEET DATA: Working capital........................... $(4,917) $ 1,922 $ 18,877 Total assets.............................. 52,697 111,466 128,421 Long-term debt............................ 14,049 28,902 7,902 Total stockholders' equity (deficit)...... (2,543) 52,601 90,556 </TABLE> - -------- (1) The Company commenced operations in 1994 as a wholly-owned subsidiary of Surgical Health Corporation. PHC was incorporated in Delaware in August 1995 and acquired the Predecessor in November 1995. (2) The $195,000 charge in 1996 is related to the write off of operating assets related to certain contracts that were entered into by the Predecessor and did not conform to the Company's business plan. The $715,000 charge in 1997 is related to the write off of deferred financing fees related to a credit arrangement with NationsCredit Commercial Corporation ("NationsCredit") that was terminated and the write off of operating assets related to contracts that were entered into by the Predecessor and did not conform to the Company's business plan. (3) The $8.1 million charge in 1997 is related to the write off of certain purchased research and development in association with the Arlington Cancer Center acquisition. (4) The pro forma Balance Sheet Data give effect to the asset acquisitions as if each had occurred on September 30, 1997. See "Unaudited Pro Forma Combined Balance Sheet." (5) Adjusted to reflect the sale of 3,000,000 shares of Common Stock offered hereby and the application of the estimated net proceeds therefrom. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001039064_travel_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001039064_travel_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..338df95ccc6f77a84f4ee3d010a4fadaf9a00eac
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE COMMON STOCK. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. UNLESS OTHERWISE INDICATED, ALL REFERENCES TO COMMON STOCK INCLUDE THE COMPANY'S RESTRICTED COMMON STOCK. SEE "DESCRIPTION OF CAPITAL STOCK--COMMON STOCK AND RESTRICTED COMMON STOCK." ALL REFERENCES TO THE "COMPANY" REFER TO TRAVEL SERVICES INTERNATIONAL, INC. AND ITS SUBSIDIARIES, AND ALL REFERENCES TO THE "OPERATING COMPANIES" REFER TO THE COMPANY'S OPERATING SUBSIDIARIES. THE COMPANY The Company is a leading specialized distributor of cruise vacations, domestic and international airline tickets and European auto rentals, and a leading provider of electronic hotel reservation services, to travel agents and travelers. The Company commenced operations in July 1997 concurrently with its initial public offering and the acquisition of five specialized travel distributors, and has since acquired an additional 13 operating companies and a software development company. To date, the Company has focused its acquisitions primarily on distributors of cruise vacations to take advantage of recognized growth opportunities in that segment, and has emerged as the largest distributor of cruise vacations in the world. The Company also looks for opportunities to expand into new segments of the leisure travel industry that are complementary to its existing lines of business. In June 1998, the Company entered the lodging travel services segment with the acquisition of Lexington Services Associates, Ltd. ("Lexington"), which the Company believes is the second largest electronic hotel reservation services company in the United States. In 1997, on a pro forma basis, the Company sold reservations for approximately 274,000 airline passengers, 213,000 cruise passengers, 259,000 European auto rentals and 1,316,000 room nights, representing gross sales volume in excess of approximately $600 million. The Company offers travel agents and travelers a combination of specialized expertise, the ability to compare travel options from multiple travel providers and competitive prices. Unlike traditional travel agents, who often lack extensive knowledge about the specific services being offered, specialized distributors focus their efforts on certain segments of the travel service industry and thus provide a greater level of expertise and service with respect to their segments. The Company's ability to provide in-depth knowledge about alternative services from multiple travel providers differentiates it from the internal sales departments of travel providers, who offer only that provider's services. The Company has preferred pricing and access to inventory through its negotiated arrangements with major airline, cruise line and European auto rental companies, including such travel providers as Continental Airlines, Inc., Delta Air Lines, Inc., Carnival Cruise Lines, Royal Caribbean Cruise Lines, Avis Europe Limited and Europcar International S.A. Recognizing the ability of specialized distributors to sell a significant amount of travel capacity, as well as their in-depth knowledge, travel providers are increasingly utilizing specialized distributors as a preferred source of distribution. The Company believes it is well positioned to take advantage of the growth trends in the domestic and international travel industries. Domestic travel and tourism spending by U.S. travelers was an estimated $417 billion in 1997, and is forecasted to increase at a compound annual growth rate of 6.7% through the year 2000. The number of U.S. citizen departures to Europe increased 11.1% to 10.1 million in 1997, and is forecasted to increase 5.6% to 10.5 million in 1998. The number of North American cruise passengers is expected to increase from 5.1 million in 1997 to 7.0 million by the year 2000, an 11.5% compound annual growth rate. The leisure travel services industry is highly fragmented, and includes numerous small specialized distributors that generally have made little investment in technology to improve their selling effectiveness, efficiency and access to information. Furthermore, most of these companies lack the sales volume necessary to obtain preferential pricing from travel providers or to create effective national marketing campaigns. The Company believes significant growth opportunities are available to a well capitalized company providing a broad offering of specialized travel services with a high level of customer service and state-of-the-art technology infrastructure. RECENT DEVELOPMENTS ACQUISITIONS. Since the completion of the Company's initial public offering and acquisition of five specialized travel distributors (the "Founding Companies") in July 1997, the Company has acquired 13 operating companies, consisting of nine distributors of cruise vacations, one distributor of international airline tickets, one distributor of European auto rentals, one electronic hotel reservation services company and one provider of a hotel directory and after hours travel services. In addition, the Company has acquired a software development company. These acquisitions have, among other things, enabled the Company to become the largest distributor of cruise vacations in the world, further strengthen its presence in the airline and European auto rental travel services segments, enter into the lodging travel services segment and accelerate the development of its technology systems. FINANCIAL PERFORMANCE. On a pro forma basis, in the three months ended March 31, 1998, as compared to the same prior year period, the Company's revenues increased 34.0% to $27.8 million from $20.8 million, and net income increased 26.2% to $2.2 million from $1.8 million. In 1997, the Company's pro forma net revenues were $92.9 million and pro forma net income was $7.9 million. CREDIT FACILITY. During the first quarter of 1998, the Company increased the amount available under its existing revolving line of credit to $30 million from $20 million. EXPANSION OF EXECUTIVE MANAGEMENT TEAM. The Company has expanded its executive management team in the areas of marketing and operations through the addition of two new executive officers, each of whom has more than 15 years experience in either the cruise line or auto rental segment of the travel industry. FORMATION OF INFORMATION SYSTEMS AND TECHNOLOGY GROUP. Since its initial public offering, the Company has formed an information systems and technology group consisting of 26 employees and consultants as of June 8, 1998. This group is in the process of developing state-of-the-art proprietary technology systems for the Company. GROWTH STRATEGY The Company seeks to become the leading specialized distributor of leisure travel services by continuing both its internal growth strategy and aggressive acquisition program. While the Company intends to continue to acquire specialized distributors of leisure travel services, strong internal revenue growth remains the core of the Company's growth strategy. Key elements of the Company's growth strategy include the following: /bullet/ INVESTMENT IN TECHNOLOGY. An essential element of the Company's growth strategy is the development of state-of-the-art information and telecommunication technologies for use by the Company, as well as by travel agents and travelers through the Internet. The Company plans to invest approximately $15 million over the next 18 months to complete the development of its "Universal" architecture, consisting of the Universal Agent and Universal Manager applications. The Universal Agent is expected to allow the Company to increase its productivity and capabilities by: (i) allowing Company agents to process reservations more quickly; (ii) enabling Company agents to offer customers more comprehensive product information; (iii) providing Company agents additional selling and cross-selling capabilities; (iv) allowing Company agents real time access to a comprehensive customer database; and (v) using the Internet to provide information and sell reservations. The Universal Manager, which will complement the Universal Agent application, is expected to allow the Company to consolidate fulfillment, back office and accounting procedures and effectively use the customer database to source new sales opportunities. The first stage of the Universal Agent is expected to be implemented in the summer of 1998 in connection with the airline segment of the Company's business, with applications for the Company's other travel segments expected to be implemented over the next 18 to 24 months. /bullet/ EMPHASIZE CROSS-SELLING. The Company intends to take advantage of significant cross-selling opportunities to further enhance revenue growth. The Company believes that the development and implementation of its technology will allow it to offer "one-stop shopping" for a variety of travel services while still providing extensive expertise within each leisure travel segment. /bullet/ CAPITALIZE ON ECONOMIES OF SCALE AND BEST PRACTICES. The Company believes that it can achieve significant economies of scale and that its sales volumes and relationships with travel providers enable it to obtain preferential pricing and access preferred travel provider inventories. The Company believes it can also benefit from greater purchasing power in certain key expense areas including telecommunications and advertising, as well as reduce total operating expenses by outsourcing, eliminating or consolidating certain duplicative marketing, back-office and administrative functions and by creating shared services centers. In addition, the Company has identified certain best practices, including marketing techniques, operations strategies and cost efficiencies, that can be implemented in order to generate incremental revenue and enhance profitability. /bullet/ EXPANSION THROUGH ACQUISITION. The Company continues to seek acquisitions in order to gain market share, add new areas of expertise, access new geographic markets and enter complementary business lines. The Company may also pursue international acquisitions that will enable the Company to expand its business model to include leisure travel originating in countries other than the U.S. and Canada. The Company will seek acquisition candidates that have long standing reputations and demonstrated growth and profitability. OPERATING STRATEGY The Company seeks to provide comprehensive, quality leisure travel services, while improving efficiencies in its operations. The components of the Company's operating strategy include the following: /bullet/ PROVIDE EXTENSIVE EXPERTISE IN SPECIFIC TRAVEL SEGMENTS. The Company is a specialist in several travel services segments. By leveraging this specialized knowledge, the Company provides a higher level of expertise and information for a broader array of travel services than may be available through traditional distribution channels. /bullet/ MAINTAIN AND ENHANCE STRONG STRATEGIC RELATIONSHIPS WITH TRAVEL PROVIDERS. The Company believes that its strategic relationships with travel providers are integral to its success. The Company has negotiated with many travel providers for pricing that is often lower than published fares and preferred access to capacity. These strategic relationships enable the Company to access multiple providers within each travel segment and to offer prices that are generally lower than would be available to travel agents and travelers. /bullet/ MARKET THROUGH MULTIPLE DISTRIBUTION CHANNELS. The Company believes that utilizing multiple distribution channels provides it with additional sales opportunities, decreases its reliance on any one channel and differentiates it from competitors who offer their products through a single channel. The Company currently utilizes three distinct channels of distribution: (i) call centers staffed with trained sales personnel; (ii) home-based agents (including franchisees) who service their local markets; and (iii) traditional travel agents. The Company also intends to expand its presence on the Internet in order to create a fourth distribution channel for selling its services. /bullet/ OFFER A HIGH LEVEL OF CUSTOMER SERVICE. The Company believes that maintaining a high level of customer service is essential to its ability to generate significant repeat business. In addition to the Company's competitive prices, customer service is an important differentiating factor to both the leisure traveler who is making a significant investment in a vacation and the travel agent who is seeking the ability to make travel arrangements with greater ease. /bullet/ DEVELOP A COMPREHENSIVE BRAND STRATEGY. The Company has reviewed various strategies in connection with the brand recognition and marketing of its services and intends to implement a comprehensive brand and marketing plan in the second half of 1998. This plan calls for the development of a new, identifiable national brand, while preserving existing brands that have a strong identity and loyal customer following. /bullet/ CAPITALIZE ON MANAGEMENT EXPERTISE. The Company's eight executive management personnel average more than 15 years of experience in various segments of the travel industry. In addition, the Company believes that the experienced local management teams at the Operating Companies have an in-depth understanding of their respective markets and businesses and have built strong relationships with travel providers and customers. ---------------- The Company was incorporated under the laws of the State of Delaware in 1996. The Company's Board of Directors has approved the reincorporation of the Company from Delaware to Florida, subject to stockholder approval at the Company's 1998 Annual Stockholders Meeting to be held in July 1998 . The Company's executive offices are located at 220 Congress Park Drive, Delray Beach, Florida 33445, and its telephone number is (561) 266-0860. THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Company ..... 1,500,000 shares(1) Common Stock Offered by the Selling Stockholders ................... 2,000,000 shares(1) Common Stock to be outstanding after this Offering .................... 12,635,528 shares(2) Use of Proceeds ......................... To repay amounts outstanding under its existing revolving line of credit, and for technology expenditures, working capital and potential acquisitions. See "Use of Proceeds." Risks of Offering ....................... See "Risk Factors." Dividend Policy ......................... The Company does not expect to pay any dividends in the foreseeable future. See "Dividend Policy." Nasdaq Stock Market symbol .............. TRVL </TABLE> - ---------------- (1) Assumes no exercise of the Underwriters' over-allotment option. See "Underwriting." (2) Based on 11,135,528 shares outstanding on June 9, 1998. Excludes (i) 1,207,663 shares issuable upon the exercise of options outstanding as of June 9, 1998, (ii) an aggregate of an additional 408,600 shares (after giving effect to the Offering) reserved for issuance under the Company's 1997 Long-Term Incentive Plan and 1997 Non-Employee Directors' Stock Plan and (iii) 878,187 shares reserved for issuance under the Company's shelf registration statement filed with the Commission on May 4, 1998. See "Management--Director Compensation; 1997 Non-Employee Directors' Stock Plan," "Management--1997 Long-Term Incentive Plan" and "Shares Eligible for Future Sale." SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) On July 28, 1997, the Company consummated its initial public offering and the combinations of the Founding Companies (the "Combinations"). For accounting purposes, Auto Europe, one of the Founding Companies, was designated as the "accounting acquiror." The other four Founding Companies were accounted for using the purchase method of accounting. From November 1997 through March 1998, the Company acquired five other operating companies under transactions accounted for using the pooling of interests method of accounting (the "Pooling Acquisitions"). Accordingly, the historical financial data for each year presented represent those of Auto Europe and the Pooling Acquisitions, and include the operations of the other four Founding Companies and the Company only since July 28, 1997. On June 1, 1998, the Company acquired Lexington Services Associates, Ltd. (the "Lexington Acquisition") which is accounted for using the purchase method of accounting. See "Selected Historical and Pro Forma Financial Data." <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, -------------------------------------------------------- PRO FORMA 1995 1996 1997 1997(1) ------------- ------------- ------------- -------------- <S> <C> <C> <C> <C> STATEMENT OF INCOME DATA: Net revenues ..................... $ 30,024 $ 36,720 $ 62,076 $ 92,899 Operating expenses ............... 19,079 24,762 39,342 56,734 ----------- ----------- ----------- ------------ Gross profit ..................... 10,945 11,958 22,734 36,165 General and administrative expenses ........................ 10,534 11,478 17,864 20,316 Goodwill amortization ............ -- -- 514 2,034 ----------- ----------- ----------- ------------ Income from operations ........... 411 480 4,356 13,815 Other expenses, net .............. 43 182 66 252 ----------- ----------- ----------- ------------ Income before provision for income taxes .................... 368 298 4,290 13,563 Provision for income taxes ....... 147 171 861 5,696 ----------- ----------- ----------- ------------ Net income ....................... $ 221 $ 127 $ 3,429 $ 7,867 =========== =========== =========== ============ Diluted earnings per share(2)..... $ 0.09 $ 0.05 $ 0.57 $ 0.71 =========== =========== =========== ============ Shares used in computing diluted earnings per share ...... 2,587,873 2,587,873 6,022,649 11,031,279 =========== =========== =========== ============ <CAPTION> THREE MONTHS ENDED MARCH 31, ---------------------------------------------------------- PRO PRO FORMA FORMA 1997 1998 1997(1) 1998(1) ------------- -------------- -------------- -------------- <S> <C> <C> <C> <C> STATEMENT OF INCOME DATA: Net revenues ..................... $ 11,302 $ 24,936 $ 20,760 $ 27,818 Operating expenses ............... 7,580 14,237 12,949 15,883 ----------- ------------ ------------ ------------ Gross profit ..................... 3,722 10,699 7,811 11,935 General and administrative expenses ........................ 3,046 6,977 4,104 7,404 Goodwill amortization ............ -- 407 509 607 ----------- ------------ ------------ ------------ Income from operations ........... 676 3,315 3,198 3,924 Other expenses, net .............. 63 43 153 84 ----------- ------------ ------------ ------------ Income before provision for income taxes .................... 613 3,272 3,045 3,840 Provision for income taxes ....... 257 1,374 1,279 1,612 ----------- ------------ ------------ ------------ Net income ....................... $ 356 $ 1,898 $ 1,766 $ 2,228 =========== ============ ============ ============ Diluted earnings per share(2)..... $ 0.14 $ 0.18 $ 0.16 $ 0.20 =========== ============ ============ ============ Shares used in computing diluted earnings per share ...... 2,587,873 10,817,991 10,887,375 11,419,101 =========== ============ ============ ============ </TABLE> MARCH 31, 1998 --------------------------------------------- PRO FORMA ACTUAL PRO FORMA(3) AS ADJUSTED(4) ---------- -------------- --------------- BALANCE SHEET DATA: Working capital ............. $ 411 $ (8,357) $ 20,252 Total assets ................ 100,524 121,377 149,986 Long-term debt .............. 12,699 22,699 4,099 Stockholders' equity......... 57,190 67,190 114,399 - --------------- (1) The pro forma financial data includes: (i) the results of the Company, each Founding Company and the Lexington Acquisition as if the Combinations and the Lexington Acquisition had occurred at the beginning of each respective period; (ii) amortization of goodwill resulting from the Combinations and the Lexington Acquisition; (iii) certain adjustments to salaries, bonuses, management fees and benefits to former owners and key management of the Founding Companies, the Lexington Acquisition and the Pooling Acquisitions, to which such persons have agreed prospectively ("Compensation Differential"); (iv) reversal of acquisition costs associated with Pooling Acquisitions; (v) provision for income taxes as if pro forma income was subject to corporate federal and state income taxes during the periods; and (vi) the issuance of 315,395 shares of Common Stock at an assumed offering price of $33.375 per share the net proceeds of which would be sufficient to repay debt incurred in connection with the Lexington Acquisition. See Note 4 to the Company's Consolidated Financial Statements. (2) Diluted earnings per share has been restated to comply with Statement of Financial Accounting Standards ("SFAS") No. 128, EARNINGS PER SHARE. See Note 2 to the Company's Consolidated Financial Statements. (3) Gives effect to the Lexington Acquisition which occurred on June 1, 1998. Does not include an additional $10.0 million of long-term debt incurred or any other pro forma adjustments in connection with the acquisition of The Cruise Line Inc. on April 1, 1998. (4) Adjusted to give effect to the issuance and sale of the 1,500,000 shares of Common Stock offered by the Company hereby (at an assumed public offering price of $33.375 per share based on the last reported sales price of the Common Stock on the Nasdaq Stock Market on June 16, 1998) and the application of the net proceeds therefrom as described under "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001039151_kendle_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001039151_kendle_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary should be read in conjunction with, and is qualified in its entirety by, the more detailed information, including "Risk Factors," appearing elsewhere in this Prospectus, and the Consolidated Financial Statements and notes thereto. Unless otherwise indicated, the information set forth in this Prospectus does not give effect to the exercise of the Underwriters' over-allotment option.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001040017_panacos_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001040017_panacos_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and Financial Statements and notes thereto appearing elsewhere in this Prospectus. Except as set forth in the Financial Statements or as otherwise indicated herein, information in this Prospectus: (i) reflects a 1-for-2.795 reverse split of the Company's outstanding Common Stock effected in February 1998; (ii) reflects the purchase of 384,024 shares of Common Stock by Pall in the Pall Private Placement at an assumed initial public offering price of $14.00 per share net of underwriting discounts and commissions; and (iii) assumes that the Underwriters' over- allotment option is not exercised. THE COMPANY VITEX is a leading developer of a broad portfolio of blood products and systems using its proprietary viral inactivation technologies. The Company's technologies are intended to address the risks of viral contamination in blood products, including plasma, plasma derivatives, red blood cells and platelets. Viral inactivation processes have the potential to eliminate viruses that are enveloped by lipid membranes such as hepatitis B virus ("HBV"), hepatitis C virus ("HCV") and HIV and non-enveloped viruses such as hepatitis A virus and parvovirus and other known and unknown pathogens. The first of the Company's virally inactivated products, VIPLAS/SD, was approved for marketing by the FDA on May 6, 1998, and the Company expects to commence commercialization of this product by the third quarter of 1998. VIPLAS/SD uses the Company's proprietary solvent/detergent ("S/D") viral inactivation technology to inactivate enveloped viruses. VIPLAS/SD, a pooled transfusion plasma, will be the first virally inactivated blood component introduced in the United States. The Company's other virally inactivated blood products are all under development and include: (i) Universal VIPLAS/SD, a product intended to provide the same benefits as VIPLAS/SD without the need for matching donor and recipient blood types; (ii) Universal VIPLAS/SD UVC, a product intended to inactivate enveloped and non- enveloped viruses; (iii) VIGuard Fibrin Sealant, a wound care product that is currently in Phase III clinical trials for two indications; (iv) VIGuard Albumin Solder, a wound care product with superior bonding strength for certain applications as compared to fibrin sealants; and (v) VIGuard RBCC and PC systems designed to broadly inactivate viruses and other pathogens in red blood cell and platelet concentrates. Plasma fractions, which the Company has produced since 1995, are sold principally to Bayer Corporation under a multi- year agreement. VITEX's predecessor was formed more than 15 years ago by New York Blood Center, Inc. (the "NYBC"), a world leader in research and development in the fields of hematology and transfusion medicine. The S/D viral inactivation process was developed by a scientific team led by the Company's Executive Vice President and Chief Scientific Officer while they were at the NYBC. The first plasma derivative product using the patented S/D process was commercialized in 1985, and, since then, the S/D process has been adopted by most plasma fractionators worldwide. The Company has an exclusive license to use the S/D process for producing its VIPLAS/SD line of products in North America. A Swiss blood products manufacturer, which had exclusive rights from the NYBC to the S/D process for transfusion plasma in Europe, has sold a product virtually identical to the Company's VIPLAS/SD product since 1991 without a single reported incidence of viral transmission. In addition to the S/D process, VITEX is developing other proprietary viral inactivation technologies, including ultraviolet light and light-activated compounds and quenchers, which are intended to inactivate both enveloped and non-enveloped viruses while maintaining the viability of blood components. VITEX's mission is to enable the global availability of safe blood products using the Company's proprietary viral inactivation systems. To achieve this objective, the Company intends to: (i) expand its technological leadership; (ii) build a broad product portfolio; (iii) leverage existing manufacturing capabilities and regulatory expertise; and (iv) establish strategic collaborations for sales, marketing, distribution and development. VITEX believes that establishing sales, marketing and distribution collaborations can accelerate the commercialization of the Company's products. The Company's strategic collaborations include agreements with: (i) Bayer Corporation to supply blood plasma fractions, which Bayer further processes into virally inactivated plasma derivatives; (ii) the American National Red Cross to distribute VIPLAS/SD, intended to be marketed under the brand name PLAS+(R)SD; (iii) United States Surgical Corporation to develop and distribute VIGuard Fibrin Sealant; and (iv) Pall Corporation to develop and distribute systems for viral inactivation of red blood cell and platelet concentrates. THE OFFERING <TABLE> <C> <S> Common Stock offered hereby........................ 3,000,000 shares Common Stock to be outstanding after the offering.. 11,875,148 shares(1) Use of proceeds.................................... For costs associated with the commercialization of VIPLAS/SD, clinical trials, research and development, capital investments and other general corporate purposes. Proposed Nasdaq National Market symbol............. VITX </TABLE> SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ---------------------------- ---------------- 1995 1996 1997 1997 1998 -------- -------- -------- ------- ------- (UNAUDITED) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues(2): Processing and products...... $ 438 $14,899 $15,843 $3,442 $ 3,713 Licensing fee................ -- 3,000 -- -- -- Research and development funding..................... -- 954 1,224 255 374 -------- -------- -------- ------- ------- Total revenues.............. 438 18,853 17,067 3,697 4,087 -------- -------- -------- ------- ------- Costs and expenses(3): Costs related to processing and products................ 284 9,139 10,346 2,303 2,489 Facility costs............... 6,740 1,449 5,980 1,003 2,356 Research and development..... 2,777 5,321 7,136 1,560 2,167 Marketing and sales.......... -- -- 1,075 -- 88 General and administrative... 1,330 2,478 3,278 736 747 Special charge related to processing and products(4)................. -- 4,100 -- -- -- Charge related to research collaboration(5)............ -- -- -- -- 2,202 -------- -------- -------- ------- ------- Total operating costs and expenses................... 11,131 22,487 27,815 5,602 10,049 -------- -------- -------- ------- ------- Loss from operations.......... (10,693) (3,634) (10,748) (1,905) (5,962) Interest expense, net......... (146) (491) (952) (95) (422) -------- -------- -------- ------- ------- Net loss...................... ($10,839) ($ 4,125) ($11,700) ($2,000) ($6,384) ======== ======== ======== ======= ======= Basic and diluted net loss per share(6)................. ($3.64) ($0.84) ($1.62) ($ 0.33) ($ 0.78) Weighted average common shares used in computing basic and diluted net loss per share(6)................. 2,982 4,897 7,241 6,043 8,146 </TABLE> <TABLE> <CAPTION> MARCH 31, 1998 ----------------------- ACTUAL AS ADJUSTED(7) ------- -------------- (UNAUDITED) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents............................. $ 4,716 $47,926 Working capital (deficit)............................. (3,253) 39,957 Total assets.......................................... 38,205 81,415 Long-term obligations, less current portion........... 14,441 14,441 Accumulated deficit................................... (33,048) (33,048) Total stockholders' equity............................ 11,263 54,473 </TABLE> - -------- (1) Includes 384,024 shares of Common Stock purchased by Pall in the Pall Private Placement. Excludes 1,551,833 shares of Common Stock issuable upon exercise of outstanding options as of March 31, 1998 at a weighted average exercise price of $6.63 per share and 35,939 shares of Common Stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $0.30 per share. See "Capitalization," "Dilution" and "Description of Capital Stock." (2) Includes related party amounts of $705,000 in 1996, $104,000 in 1997 and $30,000 and $24,000 for the three months ended March 31, 1997 and 1998. (3) Includes related party amounts of $853,000 in 1995, $817,000 in 1996, $784,000 in 1997 and $175,000 and $277,000 for the three months ended March 31, 1997 and 1998. (4) See note 6 to the Company's Financial Statements. (5) See note 17 to the Company's Financial Statements. (6) See note 2 to the Company's Financial Statements. (7) As adjusted to give effect to the sale of 3,000,000 shares of Common Stock offered hereby at an assumed initial public offering price of $14.00 per share, the sale of 384,024 shares of Common Stock pursuant to the Pall Private Placement and the application of the net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001040956_verio-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001040956_verio-inc_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..368840c700ce86fdb5d14f174582ce7120fb5261
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following is a summary of certain information contained elsewhere in this Prospectus. Reference is made to, and this Summary is qualified in its entirety by, the more detailed information, including the Company's Consolidated Financial Statements and notes thereto and the Unaudited Pro Forma Condensed Combined Financial Statements and notes thereto, each as contained herein. Unless otherwise indicated, the information in this Prospectus (i) assumes an initial public offering price of $22.50 per share, (ii) assumes that the Underwriters' over-allotment option will not be exercised, (iii) gives effect to the conversion of the Company's Series A, Series B, Series C and Series D-1 Preferred Stock, (iv) gives effect to the filing of the Company's amended Certificate of Incorporation, which will occur prior to the consummation of the Offering, and (v) gives effect to the NTT Investment (as defined). Unless the context otherwise requires, references herein to (i) "Verio" or the "Company" are to Verio Inc., a Delaware corporation (formerly known as World-Net Access, Inc.), and its subsidiaries, and (ii) the "Verio ISPs" are to those Internet service providers in which Verio has a direct or indirect equity investment, including subsidiaries and minority investments. Information concerning those entities in which the Company does not have a majority interest has been provided by those entities and is believed by the Company to be accurate. Verio and the Verio logo are trademarks of the Company. This Prospectus may contain trademarks, trade names and service marks of other parties. Capitalized terms used in this Prospectus, which are not otherwise defined herein, have the respective meanings ascribed to them in "Glossary of Terms." See "Risk Factors -- Forward-Looking Statements" for certain information relating to statements contained in this Prospectus that are not historical facts. THE COMPANY Verio is a leading national provider of Internet connectivity and enhanced Internet services to small and medium sized businesses. Since its inception in March 1996, the Company has rapidly established a national presence through the acquisition, integration, and growth of local Internet service providers ("ISPs") with a business customer focus. Verio believes that small and medium sized businesses represent an attractive target market for the provision of Internet services due to this market's low current penetration levels and customer churn rates, and the expanding Internet needs of these businesses. Because of their limited internal technical resources, small and medium sized businesses also typically require hands-on local support and highly reliable turnkey solutions for mission critical applications. Verio further believes that these needs currently are underserved by both the national and local ISPs. While national ISPs lack the local presence to provide customized, hands-on service, local ISPs typically lack the scale and resources required to provide dedicated, high-capacity Internet access, around-the-clock support and tailored product offerings at competitive prices. The Company believes it has a unique competitive advantage in serving small and medium sized business customers through the combination of the technical competency, hands-on support and entrepreneurial culture of locally based ISPs with the quality and economic efficiency of Verio's national network, operational infrastructure and financial strength. Verio has quickly built critical mass by acquiring the stock or assets of, or making significant investments in, over 35 ISPs that provide a comprehensive range of Internet connectivity and enhanced products and services to over 100,000 customer accounts in 36 of the top 50 Metropolitan Statistical Areas ("MSAs") in the country, with combined revenues of approximately $25.0 million for the three months ended December 31, 1997. The Company integrates and optimizes the operations of its ISPs by consolidating their operations into regional operating units with centralized regional management, connecting their local networks to Verio's high-speed, highly reliable national backbone, and providing them with Verio's integrated national support services. Total ISP revenues in the United States are projected to grow from $3.3 billion in 1996 to $18.3 billion in 2000, according to International Data Corporation ("IDC"). Industry analysts have reported that small and medium sized businesses represent a potential market of over seven million customers in the United States, and use of the Internet by this market segment is expected to grow substantially from its current low level of market penetration. IDC predicts that dedicated connections to the Internet for small and medium sized businesses will grow from approximately 90,000 in 1996 to just under 800,000 in 2000, representing a 73% compounded annual growth rate. Small and medium sized businesses generally seek an ISP with locally based personnel who are readily available to respond in-person to technical issues, who can assist in developing and implementing the customer's effective use of the Internet, and with whom they can establish a stable and long-term relationship. In addition, they are increasingly reliant on enhanced product offerings that address their specific business needs on a cost-effective basis, allowing them to compete with larger companies. For example, IDC estimates Web hosting revenues from small and medium sized businesses will grow from $84 million in 1996 to over $3.4 billion in 2000, representing 95% of the total Web hosting market. The rapid development and growth of the Internet has resulted in a highly fragmented industry of over 4,000 national and local ISPs in the United States, with no dominant ISP serving the needs of small and medium sized businesses. Independent regional and local ISPs have successfully captured approximately one-half of this market, despite the substantially greater resources of the national providers. However, rising costs and increasing demands from business customers have made it more difficult for the small ISP to meet its customer's demands on a cost-effective basis. Facing these competitive pressures, Verio believes that independent regional and local ISPs will continue to be attracted to and benefit from the consolidation opportunity provided by Verio. The goal of the Company is to be the premier, full-service national provider of Internet connectivity and enhanced Internet services to small and medium sized businesses. Key elements of the Company's strategy in accomplishing this goal are to: (a) continue its role as the leading consolidator of independent ISPs by acquiring additional local and regional ISPs focused on the Company's target market; (b) integrate the operations of its ISPs and capture operational economies of scale by leveraging its national infrastructure and support services; (c) develop and offer additional high-margin enhanced services to increase revenues from existing and future customers; and (d) build customer loyalty and gain market share by expanding the Company's local technical, distribution and service capabilities and establishing national Verio brand name recognition. Verio owns and operates a national network, providing a high bandwidth, highly reliable data transmission path connecting Verio's customers to the Internet. The Company's national network architecture is based on a combination of Asynchronous Transfer Mode ("ATM") and clear channel circuits operating at DS-3 and OC-3 speeds. The network interconnects more than 15 national nodes and over 180 local points of presence ("POPs") across the United States. The Company believes that aggregating the bandwidth and capacity requirements of each Verio ISP onto one national network provides operational control and efficiency, reduces costs, provides redundancy, and results in a higher quality service, thereby addressing some of the most significant challenges that an ISP faces in supporting its customers. The reliability of the national network is the result of many factors, including redundant routers and other critical hardware, carrier class facilities at POP locations (such as back up power, fire suppression and climate control), and redundant telecommunications lines. Verio's national infrastructure incorporates several other elements critical to maintaining the highest quality Internet service, such as peering relationships with other national ISPs, sophisticated network management tools, and a comprehensive range of national services to support its regional operations. These services include 7-day X 24-hour customer technical support, financial information management through a central, standardized accounting system, a sophisticated billing and collections system, and national marketing and product development programs. The Company continues to rollout its national infrastructure and support services to its ISPs. Of the over 35 ISPs acquired as of April 1998, 16 invoiced their customers through Verio's national billing service, 23 took advantage of Verio's customer technical support, 27 were linked to Verio's national backbone, 19 utilized Verio's national accounting system, and the network operations of 18 of these ISPs were monitored by Verio's national Network Operations Center ("NOC"). Verio believes that a critical factor in the successful implementation of its business strategy is the quality of its management team and Board of Directors. The Company's senior management team and Board of Directors have previously successfully executed similar consolidation strategies and have considerable experience in the management and growth of recurring revenue-based telecommunications businesses. Management believes that its experience in the deployment of similar systems and services in other emerging telecommunications industries can be leveraged to significantly improve the quality of services currently available in the Internet service industry. RECENT DEVELOPMENTS Since December 31, 1997, the Company has completed the acquisition of all of the remaining equity (each, a "Buyout") of 10 of the ISPs in which Verio did not initially acquire 100% ownership. Verio is in the process of integrating the ISPs it has acquired in each region into regional operating units to capture and promote operational and management efficiencies and economies of scale. On March 12, 1998, the Company announced the consolidation of the Verio ISPs' operations and marketing efforts under the Verio brand name. The Company continues to evaluate additional ISPs for investment or acquisition. Since December 31, 1997, the Company has acquired six ISPs, of which two expand the Company's Midwest presence, one joined the Northern California region, two joined the Northeast operations, and one is located in Florida and is the Company's first acquisition in the Southeast region. As a result of these further acquisitions, the Company now serves 36 of the top 50 MSAs in the U.S. In addition, the Company has executed non-binding letters of intent to acquire three additional ISPs which, if acquired, would further enhance the Company's market presence in the Midwest, Northeast and Southeast regions, and is continuing to aggressively seek and evaluate further acquisition candidates. While the Company expects that, from time to time in the future, it will enter into additional acquisition agreements, there can be no assurance as to the number, timing or size of future acquisitions, if any, or the effect any such acquisitions would have on the Company's operating or financial results. Mark D. Johnson, who served as the Company's President, Chief Operating Officer and a director of the Company, died on March 9, 1998. While Mr. Johnson played an important role in overseeing the Company's operations, the Company does not expect that his death will adversely affect the Company's operations, growth or financial prospects because of the strength of the Company's core management team. Justin Jaschke, Verio's Chief Executive Officer, has been appointed to serve as President of the Company and has assumed Mr. Johnson's responsibilities on behalf of the Company while Verio conducts an executive search to fill the positions that were held by Mr. Johnson. On March 25, 1998, the Company consummated the sale of $175.0 million principal amount of 10 3/8% Senior Notes due 2005 (the "1998 Notes"). In connection with the sale of the 1998 Notes, the Company repurchased the $50.0 million principal amount of the Company's 13 1/2% Senior Notes due 2004 (the "1997 Notes") held by Brooks Fiber Properties, Inc. ("Brooks") (the "Refinancing") for an aggregate net purchase price of approximately $54.5 million, plus accrued interest. See "Certain Transactions." On March 31, 1998, the Company signed a long-term agreement with Qwest Communications Corporation ("Qwest") to purchase long haul capacity and ancillary services on Qwest's planned 16,285 mile MacroCapacity(SM) Fiber Network. Over the first seven years of the agreement, Verio has committed to purchase, and Qwest has committed to provide, not less than $100.0 million of capacity and services at agreed upon prices. See "Management's Discussion and Analysis of Financial Condition and Result of Operations -- Costs and Expenses" and "Business -- Verio National Network." The Company will have the right to prepay its commitment under the agreement. The Company also may order capacity and services in excess of the commitment level, and after the seven-year commitment term, at the agreed upon prices. On April 6, 1998, Verio signed a credit agreement providing for a $57.5 million revolving credit facility (the "Bank Facility"). The Chase Manhattan Bank serves as agent for the lenders in the Bank Facility. The Company has drawn no funds to date under the Bank Facility. On April 7, 1998, the Company executed agreements establishing a strategic relationship with NTT. These agreements provide for an investment by NTT or one of its affiliates in the Company (the "NTT Investment"), concurrent with and conditioned upon the consummation of the Offering in an aggregate amount equal to the lesser of (i) 12.5% of the total number of outstanding shares of Common Stock, on a fully diluted and fully converted basis (taking into account the Offering and the NTT Investment) or (ii) the quotient of $100.0 million divided by 96.75% of the Price to Public in the Offering. Verio also executed a commercial services agreement with NTT's U.S. affiliate, NTT America, Inc. ("NTT America"), under which Verio will be designated as the preferred provider of Internet access and related services to customers of NTT America on a reseller basis. Verio and NTT will connect their backbones and establish a peering and transit relationship. In conjunction with its equity investment, NTT will be entitled to designate one member to serve on the Company's Board of Directors. See "Business -- NTT Strategic Relationship" and "Principal Stockholders -- NTT Investment." PRELIMINARY RECENT QUARTERLY RESULTS The Company expects to report revenue of approximately $21.2 million, loss from operations of approximately $14.7 million, and a net loss attributable to Common Stock of approximately $28.4 million for the quarter ended March 31, 1998, compared to total revenue of $13.4 million, loss from operations of $15.1 million, and a net loss attributable to Common Stock of $20.8 million for the quarter ended December 31, 1997. These March 31, 1998 quarterly results have been estimated based on preliminary information, and may vary from the final results to be reported by the Company. The Company's estimated revenue growth of approximately $7.8 million during the first quarter of 1998 is attributable primarily to acquisitions completed at the end of 1997, Buyouts and acquisitions completed during the first quarter of 1998, and internal growth. The Company's expected net loss attributable to Common Stock for the quarter ended March 31, 1998, includes an extraordinary charge of approximately $10.1 million incurred in connection with the Refinancing, as well as depreciation and amortization expenses of approximately $6.4 million (an increase of approximately $2.5 million over the quarter ended December 31, 1997), as a result of the Company's additional acquisitions and investments in capital assets. The Company's headquarters is located at 8005 South Chester Street, Suite 200, Englewood, Colorado 80112. The Company's phone number is (303) 645-1900. THE OFFERING Common Stock offered by the Company............................. 5,500,000 shares. Common Stock to be outstanding after the Offering........................ 32,164,187 shares(1). Use of Proceeds..................... The Company will receive approximately $114.46 million of net proceeds (after deducting the Underwriters' discounts and commissions and estimated expenses related to the Offering) from the Offering. The Company also will receive approximately $100.0 million in cash from the sale of the NTT Shares (based upon an assumed initial public offering of 5,500,000 shares of Common Stock at an assumed Price to Public of $22.50 per share). The net combined proceeds received by the Company are expected to be used to further the Company's acquisition and investment strategy, to continue the development and implementation of the national backbone, customer care center, network operations center and billing and accounting services, and to fund the Company's general working capital requirements. See "Use of Proceeds." Proposed Nasdaq National Market Symbol.............................. VRIO - --------------- (1) Includes: (i) 1,294,266 shares of Common Stock outstanding at April 24, 1998; (ii) 18,561,667 shares of Common Stock issuable upon conversion of the Series A, B and C Preferred Stock outstanding at April 24, 1998; (iii) 2,214,513 shares of Common Stock issuable upon conversion of the Series D-1 Preferred Stock issued in connection with acquisitions and Buyouts completed as of April 24, 1998; and (iv) 4,593,741 shares of Common Stock to be sold by the Company to NTT for approximately $100.0 million, (based upon an assumed initial public offering of 5,500,000 shares of Common Stock at an assumed Price to Public of $22.50 per share), concurrently with the Offering. Excludes (i) up to 9,200,000 shares of Common Stock that, effective upon the consummation of the Offering, will be reserved for issuance under the Company's employee stock option plans, of which 4,063,340 shares were issuable upon exercise of outstanding options as of April 24, 1998 at a weighted average exercise price of $10.05 per share, (ii) 2,112,480 shares of Common Stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $.01 per share, (iii) 3,000,000 shares of Common Stock reserved for issuance under the Company's 1998 Employee Stock Purchase Plan and (iv) 300,000 shares of Common Stock reserved for issuance under the Company's 1998 Non-Employee Director Stock Incentive Plan. See Notes to Consolidated Financial Statements. SUMMARY CONSOLIDATED FINANCIAL DATA (dollars in thousands, except per share amounts) The summary historical consolidated financial data as of and for the period from inception (March 1, 1996) to December 31, 1996 and as of and for the year ended December 31, 1997 have been derived from the audited Consolidated Financial Statements of the Company included elsewhere in this Prospectus. The information set forth below should be read in conjunction with the Unaudited Pro Forma Condensed Combined Financial Statements and the historical Consolidated Financial Statements of the Company and the notes thereto included elsewhere in this Prospectus. Results of operations for the year ended December 31, 1997 are not necessarily indicative of results of operations for future periods. The Company's development and expansion activities, including acquisitions, during the periods shown below may significantly affect the comparability of this data from one period to another. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." <TABLE> <CAPTION> HISTORICAL PRO FORMA(1)(2) ----------------------------------- --------------- PERIOD FROM INCEPTION YEAR ENDED YEAR ENDED (MARCH 1, 1996) TO DECEMBER 31, DECEMBER 31, DECEMBER 31, 1996 1997 1997 ------------------ ------------ --------------- <S> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenue............................... $ 2,365 $ 35,692 $ 88,265 Total costs and expenses.................... 8,645 75,981 146,126 -------- ---------- ----------- Loss from operations........................ $ (6,280) $ (40,289) $ (57,861) ======== ========== =========== Net loss attributable to common stockholders.............................. $ (5,145) $ (46,329) $ (64,131) ======== ========== =========== Loss per common share -- basic and diluted................................... $ (5.29) $ (40.47) $ (2.90) ======== ========== =========== Weighted average common shares outstanding -- basic and diluted.......... 971,748 1,144,685 22,090,352 OTHER DATA: EBITDA(3)................................... $ (5,611) $ (29,665) $ (31,950) Capital expenditures(4)..................... 3,430 14,547 </TABLE> <TABLE> <CAPTION> THREE MONTHS ENDED --------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1997 1997 1997 1997 --------- -------- ------------- ------------ <S> <C> <C> <C> <C> QUARTERLY STATEMENT OF OPERATIONS DATA: Total revenue........................................... $ 4,414 $ 8,249 $ 9,624 $ 13,405 Total costs and expenses................................ 10,006 17,103 20,365 28,507 ------- ------- -------- ---------- Loss from operations.................................... $(5,592) $(8,854) $(10,741) $ (15,102) ======= ======= ======== ========== Net loss attributable to common stockholders............ $(4,677) $(8,120) $(12,762) $ (20,770) ======= ======= ======== ========== OTHER DATA: EBITDA(3)............................................... $(4,346) $(6,306) $ (7,798) $ (11,215) ======= ======= ======== ========== </TABLE> <TABLE> <CAPTION> AS OF DECEMBER 31, 1997 ------------------------------------------ PRO FORMA HISTORICAL PRO FORMA(1) AS ADJUSTED(5) ---------- ------------ -------------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents............................... $ 72,586 $155,304 $369,760 Restricted cash and securities.......................... 40,554 27,822 27,822 Goodwill, net........................................... 83,216 152,241 152,241 Total assets............................................ 246,471 394,997 609,453 Long-term debt and capital lease obligations, net of current portions...................................... 142,321 272,694 272,694 Redeemable preferred stock.............................. 97,249 -- -- Stockholders' equity (deficit).......................... (27,001) 85,704 300,160 </TABLE> - --------------- (1) Pro forma for the Completed Acquisitions (as defined in the Company's Unaudited Pro Forma Condensed Combined Financial Statements) as if they had occurred on December 31, 1997 for balance sheet purposes and on January 1, 1997 for statement of operations data purposes, for the conversion of the Preferred Stock into Common Stock upon completion of the Offering, and for the proceeds from the sale of the 1998 Notes and the application of the proceeds therefrom to effect the Refinancing and to reflect the extraordinary charge of approximately $10.1 million for the loss on early extinguishment of $50.0 million of the 1997 Notes. See "Unaudited Pro Forma Condensed Combined Financial Statements."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001041577_atmi-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001041577_atmi-inc_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Prospective investors should consider carefully the information under "Risk Factors." THE COMPANY ATMI is a leading supplier of thin film materials, equipment and services used worldwide in the manufacture of semiconductor devices. The Company targets high growth consumable and equipment markets within the semiconductor industry with proprietary and patented products based on chemical vapor deposition ("CVD") technology. The Company currently provides: (i) a broad range of ultrahigh purity thin film materials and related delivery systems; (ii) a full line of point-of-use semiconductor environmental equipment and services; and (iii) specialty epitaxial thin film deposition services. Over the last three years, the Company has achieved a leadership position in each of its target markets by providing a more complete line of products than its competitors. ATMI's strategy is to continue its growth through product line expansion in each of its existing markets and to leverage its core technology to create new high growth businesses. The Company's customers include most of the leading semiconductor manufacturers in the world. The semiconductor industry has grown substantially in recent years as semiconductor devices have enabled a wide variety of consumer and industrial products, especially computing, networking and communications equipment. Fueling this growth are advances in device performance and reduced costs that have been made possible by innovations in the fabrication processes, equipment and the materials used in manufacturing advanced semiconductor devices. A primary element of semiconductor manufacturing includes the deposition of thin films of a variety of materials on a wafer substrate, usually made of silicon. For many processes, particularly for the deposition of semiconducting and insulating thin films, CVD has emerged as the optimal method of deposition. As a result, sales of CVD reactors and related CVD process consumables, equipment and services have experienced rapid growth. ATMI has capitalized on the growth of the semiconductor industry in general, and CVD processing in particular, by providing leading edge products and services in each of its target markets. The Company's ADCS division develops and markets ultrahigh purity thin film materials and proprietary delivery systems. ADCS is also the developer of the "Safe Delivery System," or SDS, which stores dangerous gases as solids in cylinders, providing increased safety and substantially greater operating efficiencies. The Company believes its EcoSys division is the only provider of point-of-use environmental equipment offering all of the key technologies for semiconductor effluent abatement. The Company's Epitronics division is a world leader in specialty epitaxial services, providing high quality processing of silicon and next-generation III- V and wide bandgap wafers. ADCS, EcoSys and Epitronics accounted for approximately 45%, 27% and 28%, respectively, of the Company's revenues in 1997. The Company's business mix consists predominantly of consumables and services which track "wafer starts," or the volume of silicon wafers processed into fully functional semiconductor devices. Consequently, ATMI believes that its overall business is less volatile than that of a typical semiconductor capital equipment supplier. The Company's objective is to achieve and enhance leadership positions in each of the markets it serves. Key elements of the Company's strategy include leveraging its substantial investment in patented CVD thin film technology, expanding product offerings in combination with tactical acquisitions to provide "one-stop shopping" capabilities in existing markets and targeting high growth semiconductor markets that require products consumed in the production process. ATMI aims to accelerate the introduction of new products through strategic development alliances and collaborative marketing efforts with leading semiconductor manufacturers, such as IBM, Lucent Technologies, Micron Technology, Siemens and Texas Instruments. ATMI is a holding company which performs executive, financial and administrative functions for its subsidiaries. ATMI was incorporated in Delaware in April 1997 and is the successor registrant to Advanced Technology Materials, Inc. ("ATM"), which was incorporated in Connecticut in 1986 and reincorporated in Delaware in 1987 and which is now a wholly-owned subsidiary of ATMI. As used in this Prospectus, "ATMI" and the "Company" mean either ATMI, Inc. itself or ATMI, Inc. and its consolidated subsidiaries, including its predecessor registrant, ATM, as the context may indicate. The Company's executive offices are located at 7 Commerce Drive, Danbury, Connecticut 06810, and its telephone number is (203) 794-1100. RECENT DEVELOPMENTS In October 1997, ATMI acquired Advanced Delivery & Chemical Systems Nevada, Inc. and its affiliates (collectively, the "ADCS Group"), a manufacturer and distributor of ultrahigh purity semiconductor thin film materials and related delivery systems, in exchange for 5,468,747 shares of Common Stock. The operations of the ADCS Group have been combined with the Company's NovaMOS business to create the ADCS division. Also in October 1997, ATMI acquired Lawrence Semiconductor Laboratories, Inc. and its affiliate (collectively, "LSL"), a provider of silicon epitaxial thin film deposition services, in exchange for 3,671,349 shares of Common Stock. The operations of LSL have been combined with the Company's Epitronics division, which now offers a wide spectrum of epitaxial services. Both transactions were accounted for as poolings of interest. On February 20, 1998, the Company announced that it had entered into a definitive merger agreement with NOW Technologies, Inc. ("NOW Technologies") pursuant to which NOW Technologies would become a wholly-owned subsidiary of the Company. The closing of the merger agreement is subject to the approval of the shareholders of NOW Technologies and appropriate government agencies and to the satisfaction of other customary conditions. While the exact number of shares of Common Stock to be issued by the Company to the shareholders of NOW Technologies will not be determined until the third trading day prior to the closing, the number of shares to be issued will range from 1.20 million to 1.64 million (excluding shares issuable upon exercise of outstanding options). The merger is intended to be treated as a tax-free reorganization and to be accounted for as a pooling of interests. NOW Technologies is a manufacturer and distributor of semiconductor materials packaging systems, particularly for advanced photoresist materials. For the twelve months ended December 31, 1997, NOW Technologies had total revenues of approximately $15.0 million. There can be no assurance that this transaction will be completed. Advanced Technology Materials(R) (logo), Novapure(R), Vector Technology(R), Vector(TM) (logo), Guardian(R), Phoenix(TM), ReCAT(R), EpiGrade(R), Sparta(R), SCRAM(R), EcoSys(TM), EcoSys(TM) (logo), Epitronics(TM), NovaSource(TM), VaporSource(TM), SDS(R), NovaMOS(TM), Emosyn(TM), COCKTAIL(TM), ADCS(R), ADCS(R) DESIGN, MINIBULK(R), SKINNIBULK(R), APC(TM), ULTRAPUR(TM), MARS(TM), DOUBLE DISTILLATION(TM) and COYOTE CLEAN(TM) and certain other product and business names used herein are trademarks of the Company. This Prospectus also includes trademarks of companies other than the Company. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company.... 2,000,000 shares Common Stock offered by the Selling Stockholders.......................... 2,000,000 shares Common Stock to be outstanding after the offering.......................... 20,174,026 shares (1) Use of proceeds........................ General corporate purposes and working capital, including potential acquisitions, capital expenditures and research and development. Nasdaq National Market symbol.......... ATMI </TABLE> SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> FISCAL YEAR ENDED DECEMBER 31, ----------------------------------------------- 1993 1994 1995 1996 1997 ------- ------- ------- ------- ------- CONSOLIDATED STATEMENTS OF INCOME DATA:(UNAUDITED) <S> <C> <C> <C> <C> <C> Product revenues......... $16,998 $27,537 $51,460 $78,815 $92,757 Contract revenues........ 6,070 7,223 8,712 9,846 9,120 ------- ------- ------- ------- ------- Total revenues........... 23,068 34,760 60,172 88,661 101,877 Operating income......... 2,134 3,732 8,866 15,002 10,459 (4) Net income............... $ 1,050 $ 5,535 (2) $ 5,088 $12,017 (3) $ 4,421 (4) Net income per share-- assuming dilution.... $ 0.07 $ 0.33 (2) $ 0.30 $ 0.65 (3) $ 0.24 (4) Weighted average shares outstanding--assuming dilution............... 14,610 16,637 17,127 18,394 18,660 </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1997 ------------------------ ACTUAL AS ADJUSTED (5) -------- --------------- (UNAUDITED) <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Working capital...................................... $ 39,933 $ 93,484 Total assets......................................... 103,146 156,697 Long-term debt, less current portion................. 14,526 14,526 Total stockholders' equity........................... 61,872 115,423 </TABLE> - -------------------- (1) Based on the number of shares of Common Stock outstanding at January 31, 1998. Excludes: (i) 1,989,264 shares of Common Stock reserved for issuance under the Company's stock plans, of which 1,796,261 shares of Common Stock are issuable upon exercise of options outstanding as of January 31, 1998 at a weighted average exercise price of $14.60 per share; and (ii) 50,000 shares of Common Stock issuable upon exercise of warrants outstanding as of January 31, 1998 at a weighted average exercise price of $11.45 per share. (2) Net income and net income per share--assuming dilution in 1994 include a non-recurring gain of approximately $3.6 million, or $0.22 per share, related to the restructuring of a joint venture and costs incurred in the acquisition of Vector Technical Group, Inc. ("Vector"). (3) Net income and net income per share--assuming dilution in 1996 include the effect of the ADCS Group's treatment as an S-Corporation for a portion of the year. If the ADCS Group had been taxed as a C-Corporation for all of 1996, the Company's net income and net income per share--assuming dilution would have been approximately $10.5 million and $0.57, respectively, for the year ended December 31, 1996. Net income and net income per share-- assuming dilution in 1996 also include the effect of a non-recurring charge of $2.0 million ($1.2 million, net of taxes) accrued in connection with patent litigation involving LSL, which resulted in a settlement payment in May 1997. (4) Operating income, net income and net income per share--assuming dilution in 1997 include the effect of a non-recurring charge of $9.0 million related to costs incurred in investigating, analyzing and completing the ADCS Group and LSL acquisitions. (5) As adjusted to reflect the sale of 2,000,000 shares of Common Stock offered by the Company hereby at an assumed public offering price of $28.47 per share and the anticipated application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001041652_iomed-llc_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001041652_iomed-llc_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and consolidated financial statements appearing elsewhere in this Prospectus, including information under "Risk Factors." Throughout this Prospectus, except where the context otherwise requires, reference to the "Company" means the Company and its subsidiaries. This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual operating results may differ significantly from the results discussed in these forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." THE COMPANY INTRODUCTION IOMED, Inc. (the "Company") develops, manufactures and commercializes controllable drug delivery systems using iontophoretic technology. Iontophoresis is a non-invasive method of enhancing and controlling the transport of water-soluble ionic drugs into and through the skin using a low level electrical current. The Company's proprietary iontophoretic drug delivery systems allow rapid onset and cessation of therapeutic action, as well as programmable dose control. The systems enable caregivers to monitor and control the onset of drug effectiveness and maintain, reduce or cease drug administration once a desired therapeutic effect is observed. Additionally, the Company is developing systems designed to permit patient control and selfadministration. The programming feature also enables caregivers to customize dosing patterns to meet each patient's specific needs. The flexibility of the Company's proprietary systems provides therapeutic control not possible with many alternative drug delivery methods, including oral tablets and capsules, injections, inhalants, and passive transdermal patches. The Company's systems may also increase bioavailability, safety and patient comfort. BUSINESS STRATEGY The Company's primary business goal is to establish its proprietary iontophoretic drug delivery systems as a cost effective preferred means of delivering a wide range of drugs. The Company's strategy for achieving this goal includes (i) pursuing product development of drug delivery systems for off-patent drugs with known safety and efficacy; (ii) entering into collaborative relationships with pharmaceutical companies for the delivery of new chemical entities and proprietary drugs; (iii) broadening the market penetration and potential applications of the Company's existing delivery systems; (iv) enhancing the Company's technology platform through internal research and development; (v) pursuing new technology through in-licensing and acquisitions; and (vi) retaining control of the manufacturing revenue stream. COMPANY PRODUCTS The Company currently markets two products, an iontophoretic system used to deliver dexamethasone sodium phosphate ("Dexamethasone"), a corticosteriod used in the treatment of acute local inflammation, and an iontophoretic system used to deliver Iontocaine, a proprietary drug used for local dermal anesthesia. The iontophoretic drug delivery systems the Company currently markets are comprised of a reusable programmable dose controller which is used to direct the electrical current to control drug dosing and a pair of proprietary disposable electrodes, one containing the drug and one serving as a grounding electrode to complete the electrical circuit through the skin. The drug delivery electrode may be applied to the patient's skin at a local treatment site (such as for joint or tendon soreness or to induce local dermal anesthesia), or at any suitable site on the body for systemic drug delivery. When an electrical current with the same positive or negative electric charge as the drug is applied to the drug electrode, the drug is repelled from the electrode and into and through the skin. Dexamethasone. The Company's acute local inflammation product is a system used principally by physical therapists and professional athletic trainers for the delivery of Dexamethasone. Since it was introduced in 1979, the Company's product has been used in over 11 million patient applications for the treatment of acute inflammatory conditions such as tendonitis (e.g., tennis elbow, golfers elbow and achilles tendonitis), bursitis and carpal tunnel syndrome. More than 9 million of these applications have occurred since 1990, when the Company introduced its present family of gel electrodes for use with its microprocessor controlled dose controllers. The product is currently marketed to the physical therapy market as a device, under a 510(k) pre-market notification by the United States Food and Drug Administration ("FDA"), for use in connection with delivering ions of soluble salts or other drugs. Recently, the FDA determined that all future iontophoretic drug delivery systems will be required to go through the New Drug Application process with the specific drug that is to be delivered. In order to address the new regulatory framework and to broaden the clinical basis for the treatment of acute local inflammation using the Company's iontophoretic delivery system for Dexamethasone, the Company has filed an Investigational New Drug application with the FDA and has initiated clinical studies to establish formally the safety and efficacy of its drug delivery system for Dexamethasone. If the clinical trials are successful and the Company receives regulatory approval, the Company believes it will be able to actively promote the iontophoretic delivery of Dexamethasone to general and family practice physicians, orthopedists, neurologists and sports and industrial medicine clinics. The Company believes the ability to promote iontophoresis with Dexamethasone will enhance its ability to establish its delivery system for Dexamethasone as a primary treatment option for acute local inflammatory conditions. Iontocaine. The Company's iontophoretic delivery system was approved by the FDA in January 1996 for use in inducing local dermal anesthesia, and the Company began marketing the product in early 1997. Iontocaine is the first drug with labeling specifically for iontophoretic delivery. In addition, Iontocaine is approved for use only with the Company's drug delivery systems. The Iontocaine product provides needle-free, long lasting local dermal anesthesia up to six times more rapidly and up to three times deeper than can be achieved using topical anesthetic creams. The Company is initially marketing its Iontocaine delivery system under the name Numby Stuff to pediatric hospitals in the United States for use in connection with inducing local dermal anesthesia prior to pediatric intravenous starts, blood draws, lumbar punctures and other similar invasive procedures. The Company plans to extend its marketing efforts for Iontocaine to include pediatric clinics, non-pediatric hospitals, and office based physician practices for use in connection with numerous therapeutic applications, including blood draws and minor dermatological procedures. The Company is also evaluating the use of Iontocaine in connection with gynecological procedures requiring dermal or mucosal anesthesia. The use of Iontocaine for mucosal applications will require additional FDA approval. Many pharmaceutical compounds, including peptides and oligonucleotides, have physical and chemical properties consistent with delivery by iontophoresis. Therefore, the Company believes its technology may be applicable to a number of other compounds and therapeutic applications. The Company is also independently developing a number of iontophoretic drug delivery systems for other indications, including conscious sedation, tocolysis (the remission of pre-term labor), and postoperative and chronic pain control. COLLABORATIVE RELATIONSHIPS Novartis. In July 1995, the Company entered into a research and development agreement with Ciba Pharmaceuticals Corporation, a predecessor to Novartis Pharmaceuticals Corporation ("Novartis"), an affiliate of Novartis Pharma, A.G., the international pharmaceutical company formed as a result of the merger of Ciba-Geigy Corporation and Sandoz Corporation in 1997. The collaboration was formed to evaluate the development of iontophoretic drug delivery systems for a number of Novartis compounds for use in several therapeutic applications. The joint effort is currently directed toward the development of a delivery system for a compound to treat osteoporosis. The Company believes this system could enter clinical trials during 1999. In connection with the collaboration, Novartis purchased a 20% equity interest in Dermion, Inc. ("Dermion"), a subsidiary of the Company that conducts most of its research and development activities. The Company, Dermion and Novartis amended the terms of their collaborative arrangement. Under the terms of the amendment, effective November 1, 1997, Novartis exchanged its interest in Dermion for 238,541 Common Shares of the Company and warrants to acquire, under certain conditions and through November 1, 2002, an additional 18,750 Common Shares at an exercise price of $21.60 per share. As a result, Dermion became a wholly-owned subsidiary of the Company. Pursuant to the agreements, Novartis is required to pay for research costs under the program and to make milestone payments upon the successful completion of certain later stage development objectives. In addition, the Company granted Novartis a perpetual, non-exclusive, royalty bearing license to the Company's iontophoretic technology as well as certain rights with respect to future technology developed or acquired by the Company. Elan. In March 1997, the Company entered into agreements with Elan Corporation, plc and certain of its affiliates (collectively, "Elan"), an international developer and manufacturer of advanced drug delivery technologies. The agreements provide the Company with exclusive, worldwide licenses to certain of Elan's iontophoretic drug delivery technology, including over 250 issued and 47 pending United States and foreign patents, as well as a significant body of know-how and clinical study results. The Company believes the Elan technology significantly expands its iontophoretic technology platform, enhances its competitive position and better positions the Company to shorten the development horizon of its iontophoretic drug delivery systems, including the miniaturized, integrated, wearable systems currently under development by the Company. The Company acquired the Elan technology by issuing two promissory notes, a $10.0 million note and a $5.0 million note (the "Elan Notes"). Under the agreement with Elan, Elan will purchase directly from the Company, in private placement transactions which will be completed concurrently with the closing of the Offering, $15.74 million of Common Shares (the "Elan Shares") at a price per share equal to the initial public offering price hereunder (approximately 2,099,000 shares assuming an initial public offering price of $7.50 per share). Simultaneously with such purchases, the Company will repay the Elan Notes, including interest thereon. The Company was incorporated in Utah in 1974 as Motion Control, Inc. In 1987, the Company merged with JMW Acquisition Corporation, and the name of the merged entity was changed to IOMED, Inc. All references to the Company include the Company's predecessor entities, as well as Dermion. The Company's principal executive offices are located at 3385 West 1820 South, Salt Lake City, Utah 84104, and its telephone number is (801) 975-1191. IOMED, Dermion, Phoresor, Iontocaine, Anestrode, TransQ, Numby Stuff and the Company's logo are registered trademarks of the Company or are marks in which the Company claims trademark rights. This Prospectus also includes references to trademarks of companies other than the Company. THE OFFERING <TABLE> <S> <C> Common Shares offered........................... 1,700,000 shares Common Shares to be outstanding after the Offering...................................... 7,234,737 shares(1) Use of Proceeds................................. For research and product development; preclinical and clinical studies; expansion of sales and marketing capabilities; consolidation and equipping of Company facilities; and working capital and other general corporate purposes. See "Use of Proceeds." American Stock Exchange symbol.................. IOX </TABLE> - --------------- (1) Based on Common Shares outstanding as of March 1, 1998. Includes the sale of the Elan Shares (approximately 2,099,000 Common Shares, assuming an initial public offering price of $7.50 per share) concurrently with the closing of the Offering, the mandatory conversion of 28,800 Series C Preferred Shares into 28,800 Common Shares in connection with the closing of the Offering and the issuance to Laboratories Fournier S.C.A. ("Laboratoires Fournier") of 29,723 Common Shares under the terms of an agreement between the Company and Laboratoires Fournier. Excludes (i) 339,158 Common Shares issuable upon exercise of options granted pursuant to the Company's stock option plans, at a weighted average exercise price of $4.86 per share; (ii) 308,400 Common Shares reserved for future grants of options or awards under the Company's stock option plans; (iii) 170,000 Common Shares issuable upon exercise of warrants to be issued to the Representatives at an initial exercise price of $9.38 per share, assuming an initial public offering price of $7.50 per share (the "Representatives' Warrants"); and (iv) 169,791 Common Shares issuable upon exercise of other outstanding warrants, at a weighted average exercise price of $18.04 per share. The number of Elan Shares is dependent upon the initial public offering price. See "Transactions Related to the Offering," "Business -- Collaborative Relationships and Licenses," "Management -- Employee Benefit Plans -- Stock Option Plans," "Certain Transactions," "Description of Capital Shares" and "Underwriting." SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT FOR PER SHARE DATA) <TABLE> <CAPTION> SIX MONTHS FISCAL YEAR ENDED JUNE 30, ENDED DECEMBER 31, --------------------------------------- ----------------------- 1995 1996 1997 1996 1997 ----------- ---------- ------------ ---------- ---------- (UNAUDITED) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Product sales............................ $ 6,964 $ 6,829 $ 7,483 $ 3,619 $ 4,071 Contract research revenues, royalties and license fees........................... -- 2,409 1,800 1,042 912 ----------- ---------- ------------ ---------- ---------- Total revenues.................. 6,964 9,238 9,283 4,661 4,983 Operating costs and expenses: Cost of products sold.................. 3,369 3,138 3,338 1,651 1,770 Research and development............... 1,467 1,099 1,488 793 727 Selling, general and administrative.... 3,338 3,283 3,501 1,587 2,207 Non-recurring charges.................. -- 430(1) 15,059(2) -- -- ----------- ---------- ------------ ---------- ---------- Total costs and expenses........ 8,174 7,950 23,386 4,031 4,704 ----------- ---------- ------------ ---------- ---------- Income (loss) from operations............ (1,210) 1,288 (14,103) 630 279 Interest expense......................... 32 9 242 2 574 Interest income and other, net........... 120 167 291 126 168 Minority interest........................ -- (17) 23 38 11 Income tax expense (benefit)............. (173) (79) 5 (2) -- ----------- ---------- ------------ ---------- ---------- Income (loss) from continuing operations............................. (949) 1,542 (14,082) 718 (138) Income from discontinued operations, net of income taxes(3)..................... 290 201 44 44 -- ----------- ---------- ------------ ---------- ---------- Net income (loss)........................ $ (659) $ 1,743 $ (14,038) $ 762 $ (138) =========== ========== ============ ========== ========== DILUTED PER COMMON SHARE DATA(4): Income (loss) from continuing operations............................. $ (0.47) $ 0.42 $ (4.52) $ 0.22 $ (0.04) Income from discontinued operations...... 0.14 0.05 0.01 0.02 -- ----------- ---------- ------------ ---------- ---------- Net income (loss)........................ $ (0.33) $ 0.47 $ (4.51) $ 0.24 $ (0.04) =========== ========== ============ ========== ========== Shares used in computing per share amounts................................ 2,038 3,710 3,109 3,228 3,212 </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1997 --------------------------- PRO FORMA ACTUAL AS ADJUSTED(5) -------- -------------- (UNAUDITED) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $ 5,316 $ 15,824 Total assets................................................ 8,902 19,410 Long-term obligations, including current portion............ 16,535(6) -- Accumulated deficit......................................... (21,676) (21,676) Shareholders' equity (deficit).............................. (8,775) 18,268 </TABLE> - --------------- (1) Costs incurred in connection with the settlement of certain trade dress litigation. See Note 3 of the Notes to Consolidated Financial Statements. (2) Reflects the write-off of certain in-process research and development (including related transaction costs) purchased from Elan. See Note 3 of the Notes to Consolidated Financial Statements. (3) Discontinued operations include the operating results (exclusive of any corporate allocations and net of applicable income taxes) of the Company's prosthetics division, which was sold in December 1996. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (4) See Note 1 of the Notes to Consolidated Financial Statements for information concerning the computation of per share amounts. (5) Adjusted to reflect the following: (i) the issuance and sale of 1,700,000 Common Shares offered hereby, at an assumed initial public offering price of $7.50 per share and the receipt of the net proceeds therefrom; (ii) the sale of the Elan Shares to Elan and the simultaneous repayment of the Elan Notes, including interest thereon, concurrently with the closing of the Offering; and (iii) the mandatory conversion of the outstanding Series C Preferred Shares into 28,800 Common Shares concurrently with the closing of the Offering. See "Transactions Related to the Offering" and "Use of Proceeds." (6) Reflects (i) $15,815,000 in notes, including accrued interest, issued to Elan; and (ii) $720,000 in redeemable, convertible preferred shares. See "Business -- Collaborative Relationships and Licenses."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001042162_ljl_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001042162_ljl_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..64c53a806b386bfa6d1893f9480e3a7e75b6e325
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION CONTAINED IN THIS PROSPECTUS: (I) GIVES EFFECT TO A 1-FOR-2 REVERSE STOCK SPLIT OF THE COMMON STOCK AND PREFERRED STOCK EFFECTED ON FEBRUARY 25, 1998, (II) ASSUMES THE CONVERSION OF ALL THE OUTSTANDING SHARES OF PREFERRED STOCK INTO SHARES OF COMMON STOCK TO BE EFFECTED UPON THE CLOSING OF THIS OFFERING AND (III) ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE DISCUSSION IN THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS. THE COMPANY LJL is developing and marketing proprietary technologies and products to accelerate and enhance the drug discovery process. LJL's proprietary integrated technology platform is comprised of instrumentation and fluorescence-based and other assay technologies designed to provide flexible solutions to the current and evolving high throughput screening ("HTS") requirements of drug discovery laboratories. The drug discovery process involves several stages including target identification, compound synthesis, assay development, screening and lead optimization. Target identification and compound synthesis historically have been the limiting factors in the drug discovery process. However, recent advancements in genomics and molecular biology as well as combinatorial chemistry have resulted in the generation of large numbers of targets and compounds. This growth in the number of targets and compounds has shifted the rate-limiting steps in the drug discovery process to assay development, screening and lead optimization. High throughput screening is the process of testing, or screening, a large number of compounds against a target in order to determine the compound's effect, if any, on the target. To address these bottlenecks, LJL is developing instrumentation and assays to provide integrated HTS solutions. LJL believes that its technology platform addresses the major limitations associated with current HTS systems and will allow its customers to accelerate the identification and optimization of lead compounds for development into new medicines. The Company's first HTS product, ANALYST, is a four-mode analyzer designed specifically for use in the HTS setting. The Company believes that ANALYST will provide several important advantages over currently available multi-mode analyzers, including increased throughput, improved analytical performance and flexibility, lower reagents costs and the ability to be quickly integrated into the existing HTS laboratory and to evolve with changing HTS needs. ANALYST is currently undergoing beta testing at three major pharmaceutical companies and two biotechnology companies. The Company expects to commence shipments of ANALYST in the first half of 1998. LJL's integrated technology platform also includes proprietary fluorescence-based and other assay technologies. Currently, LJL is developing a line of high value-added, application-specific reagents and assay kits optimized for use in HTS and specifically for use with ANALYST. The Company intends to develop its reagent and assay kits in a single-step format. The Company believes that a single-step format is better suited for the HTS environment because of its speed, automation capability and lower cost. Additionally, LJL has licensed a platform of novel fluorescence-based assay technologies known as Fluorescence Lifetime Assay Repertoire ("FLARe") which it believes will address a number of the current limitations associated with fluorescence-based HTS assays. The Company believes that its proprietary FLARe technology, which includes methods of assay detection using long-lifetime fluorescent reagents and phase/ modulation, will address the signal-to-noise problems normally associated with intensity-based fluorescence assays. LJL's first reagents and assay kits are expected to be introduced in 1998. From inception in 1988 through the first half of 1996, the Company developed and manufactured clinical diagnostics and research instruments for OEM customers. The Company believes these instruments are in use in more than 500 clinical diagnostics and research laboratories worldwide. In the second half of 1996, the Company implemented a new strategic business model to develop products for the HTS market to leverage its existing technology platform and product development and manufacturing expertise into this new market. As a result of the Company's shift in strategy to the HTS market, the Company incurred a substantial operating loss in 1997, and it expects to continue to incur operating losses for at least the next several years. LJL intends to leverage its proven product development and manufacturing track record to be the first to market with effective solutions to the problems facing HTS users. The Company believes that by establishing an installed base of instruments it will be able to generate recurring revenue from the sale of reagents and assay kits. Additionally, the Company believes that the market for its screening products can be extended into other stages of the drug discovery process, such as assay development and lead optimization. To further strengthen its market position, the Company plans to develop and acquire additional screening technologies and to provide early technology access to strategic customers. The Company's office is located at 404 Tasman Drive, Sunnyvale, CA 94089 and its telephone number is (408) 541-8787.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001042351_industrial_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001042351_industrial_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to, and should be read in conjunction with, the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless the context otherwise requires, all references herein to the "Company" or "IDG" shall mean Industrial Distribution Group, Inc. THE COMPANY Industrial Distribution Group, Inc. (the "Company" or "IDG") was formed in February 1997 to create a leading, nationwide supplier of cost-effective, flexible procurement solutions for manufacturers and other users of maintenance, repair, operating, and production ("MROP") products. The Company distributes a full line of industrial MROP products, emphasizing its specialized expertise in product applications. The Company's principal product categories include abrasives, cutting tools, hand and power tools, and coolants, lubricants, and adhesives. Utilizing its proprietary computerized Supply Management System, the Company's application and product specialists are able to analyze a customer's acquisition, possession, and application processes for MROP supplies and design programs to streamline the processes and reduce associated costs. Such programs may include improving a customer's production and procurement processes, standardizing MROP products, reducing the number of suppliers, or developing integrated supply arrangements that outsource to the Company some or all of a customer's MROP procurement and management functions. In September 1997, IDG completed its initial public offering of Common Stock and, at the same time, acquired the following nine industrial distribution companies: Associated Suppliers, Inc., B&J Industrial Supply Company, Cramer Industrial Supplies, Grinding Supplies Company, J.J. Stangel Co., Shearer Industrial Supply Company, Slater Industrial Supply Company, The Distribution Group, Inc. (formerly known as Industrial Distribution Group, Inc.), and Tri-Star Industrial Supply, Inc., collectively referred to as the "Founding Companies." Through September 15, 1998, the Company had completed the acquisition of 13 additional companies: Continental Air Tools, Inc., Northern Tool & Supply, Inc., E.C. Blackstone Company, Refco, Inc., Hawley Industrial Supplies, Inc., The New England Group Industrial Distributors, Inc., Industrial & Tool Suppliers, LLC, Buford Bros., Inc., Knox Industrial Supplies, Inc., LD Supply, Inc., Cardinal Machinery, Inc., Petry & Morrow, Inc., and JM Tool & Supply, Inc. The Company intends to establish a nationwide presence, with MROP product and service capabilities in all or most of the top 50 U.S. industrial markets. Currently, the Company has 73 operating locations in 64 cities, along with four small facilities abroad. The Company's more than 29,000 customers include a diverse group of major national and international corporations, including AlliedSignal, Black & Decker, Boeing, Chrysler, General Motors, Hoechst Celanese, PPG Industries, and Shell Oil, as well as small and large local and regional businesses. On a pro forma combined basis, the Company had net sales of approximately $332.2 million for the year ended December 31, 1997 (which includes three acquisitions accounted for as poolings (the "Pooled Companies"). The Company estimates that the size of the market for industrial MROP products in which it participates primarily is approximately $70 billion annually. However, the entire United States MROP market is estimated to be in excess of $175 billion annually, and includes electrical, PVF (pipes, valves, and fittings), power transmission, and other product categories in which the Company participates to a lesser extent. This larger market is highly fragmented, with the 50 largest distributors (all of which have annual sales over $90 million) accounting for less than 15% of the market. Manufacturers and other users of MROP products are seeking ways to enhance efficiencies and reduce MROP process and procurement costs in order to compete more effectively in the global economy. As a result, the industrial supply industry is experiencing consolidation, as customers focus on the convenience, cost savings, and economies of scale associated with a reduced number of suppliers capable of providing superior service and product selection. Further, as manufacturers focus on their core manufacturing or other production competencies, they are increasingly outsourcing their MROP procurement, management, and application processes in search of comprehensive MROP solutions, such as integrated supply. The Company believes that it will benefit from these industry trends. The Company believes that it has the size, scale of operations, and resources necessary to compete effectively in the evolving industrial MROP supply industry. The Company's size and scale of operations allow it to benefit from high volume purchasing, attract the highly skilled personnel required to deliver enhanced levels of service, and realize internal operating efficiencies. The Company's resources and product knowledge enable it to offer a comprehensive product line and invest in sophisticated inventory management and control systems needed to support its enhanced levels of customer service. Moreover, management believes that the Company's overall position enhances its ability to implement its acquisition strategy in the consolidating and fragmented MROP industry. OPERATING STRATEGY Superior Product Expertise and Comprehensive Product Line. One of the Company's core competencies is its extensive product expertise. With its understanding of the most appropriate product for specific customer applications, the Company can identify the MROP product best suited for a customer's specific need. This expertise benefits the customer in two ways, each of which lowers the customer's total MROP costs. First, the customer increases the efficiency of its manufacturing processes by minimizing downtime and other indirect costs. Second, by providing only that level of quality required by the application, the Company can lower the customer's MROP product costs. The Company's comprehensive product line supports its commitment to deliver the most appropriate product to its customers. In addition to maintaining over 100,000 stock keeping units ("SKUs"), as well as special items in stock for regular customers, the Company can provide virtually any MROP item, including special-order items. Flexible Procurement Solutions; Integrated Supply. The Company believes the key to serving customers in the changing MROP market is the ability to design and implement customized flexible procurement solutions for acquiring, possessing, and applying MROP products to satisfy each customer's particular needs and achieve its cost reduction objectives. The spectrum of services necessary to deliver such solutions is broad. For customers who are not yet prepared to outsource their entire MROP procurement and management functions, the Company provides a range of options from which customers may select the appropriate types and level of service. For customers who desire total procurement solutions designed and implemented through a single distributor, the Company offers its "fully integrated supply" programs, which permit customers to outsource to the Company the entire MROP procurement and management function, including ownership by the Company of inventory in the customer's on-site MROP supply room (or "tool crib"). Centralized Corporate Functions and Decentralized Operating Management. At the corporate level, on the one hand, the Company is consolidating functions such as financial, accounting, management information systems, employee benefits, and certain purchasing arrangements to eliminate duplicative administrative and other costs that otherwise would be incurred at each of its operating locations. The resulting operating efficiencies, along with the enhanced leverage from higher volume purchasing, should provide the Company an advantage over smaller regional and local competitors. At the operating subsidiary level, on the other hand, the Company is employing a decentralized management structure that focuses management at each operating subsidiary on day-to-day operating matters, profitability, and growth, as well as identifying potential acquisition candidates. The Company believes that its decentralized management philosophy will result in better customer service by allowing local management the flexibility to implement policies and make decisions based on first-hand assessments of the needs and desires of individual customers. Superior Customer Service. Providing superior quality and a comprehensive range of MROP services to customers is the IDG hallmark. As part of its commitment to customer service, the Company emphasizes quality assurance in all phases of its operations. The Company's sales and service personnel receive ongoing periodic training in TQM ("total quality management") and other team management skills to assure such quality performance. IDG also will seek certification under the International Standards Organization ("ISO") 9002 standards for distribution with respect to its principal locations and expects to make such certification a Company-wide objective for all future principal locations. GROWTH STRATEGY Internal Growth. Management believes that significant opportunities exist to increase revenues and earnings through internal expansion. Through focused marketing both inside and outside the United States, the Company will seek to add revenue by offering additional products and services to new and existing customers and identifying any unserved facilities of its larger existing customers. Where necessary to increase its market share, the Company will open or expand facilities in the vicinity of existing operations. The Company will also consider the desirability of internal expansion into new geographic markets. Acquisitions in Select Geographic Markets. The Company has launched an aggressive acquisition program to take advantage of consolidation opportunities within the highly fragmented industrial MROP market. The Company will continue to seek to acquire successful MROP distribution and related businesses that are large enough to establish a significant initial presence and to provide for future Company expansion in the particular market. The Company will continue to seek to retain the management of acquired businesses. Expansion into International Markets. The Company believes that the consolidation and outsourcing trends that provide growth opportunities in the United States offer comparable opportunities in international markets. The Company plans initially to extend its offering of flexible procurement solutions to foreign manufacturing facilities of its domestic customers to develop a base for potentially expanded international operations. The Company has been active in the Peoples Republic of China since 1988, establishing sales offices in Beijing (1994) and Shanghai (1996), and in Mexico since 1997. THE OFFERING AND SELLING SHAREHOLDERS This Prospectus, as appropriately supplemented or amended, may be used from time to time (i) by the Company to issue shares of Common Stock, up to an aggregate maximum of 3,740,751 shares ("New Issue Shares"), in connection with mergers or other acquisitions by the Company of other businesses, or to certain third parties who may provide professional, advisory, or other services to the Company (ii) by persons who, as of September 15, 1998, have been issued 1,192,115 shares of Common Stock or who, in the future, may be issued some or all of the New Issue Shares by the Company, or by their transferees ("Selling Shareholders"), in connection with resales by such persons, or (iii) by the Company to issue shares of Common Stock, up to an aggregate maximum of 67,134 shares ("Option Shares") pursuant to options to purchase such shares granted to certain Selling Shareholders in connection with the acquisition by the company of a business owned by such Selling Shareholders. The number of shares that may be offered and issued by the Company at any particular time in the future, and the number of shares that may be resold by persons who become Selling Shareholders in the future (and the identity and other information about such Selling Shareholders), are not presently known. Such information, to the extent known and required by applicable law in the future, will be provided in one or more supplements or amendments to this Prospectus. For certain information about persons who are presently known to be Selling Shareholders, see "Selling Shareholders", below. As of September 15, 1998, the Company had issued and outstanding 8,466,704 shares of Common Stock. --------------------- All references herein to the Company refer to the Company and its subsidiaries. The Company's principal executive offices are located at 2500 Royal Place, Tucker, Georgia 30084, where its telephone number is (770) 243-9000. SUMMARY FINANCIAL DATA The following summary financial data as of and for the years ended December 31, 1997, 1996, and 1995, have been derived from audited financial statements of the Company; the financial data as of and for the years ended December 31, 1994 and 1993, as well as the financial data as of June 30, 1998 and for the six months ended June 30, 1998 and 1997, have been derived from unaudited financial statements of the Company. All such financial statements of the Company reflect the requirements of the Securities and Exchange Commission's Staff Accounting Bulletin No. 97 ("SAB 97"), which deem the historical financial statements of B&J Industrial Supply Company ("B&J") -- one of the nine companies acquired by IDG to commence its current operations as a combined entity, effective for accounting purposes as of September 24, 1997 -- to be the historical financial statements of the Company for all periods prior to September 24, 1997. As a result, the Company's financial statements, and the following data, reflect the results of operations and financial condition of B&J and the Pooled Companies for the periods prior to September 24, 1997; the results of operations and financial condition of all nine Founding Companies and the Pooled Companies are reflected in the financial statements and data of the Company for only the period of time from and after September 24, 1997. Those facts account for a substantial difference in these financial data as of and for the year ended December 31, 1997 as compared to prior periods; they make comparisons of the data among the periods misleading; and they are a further reason that these historical results are not indicative of the results that the Company may achieve in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operation."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001043012_u-s_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001043012_u-s_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..2c58ddc999be37ffa81d1b58331e059af56eb182
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial and operating data appearing elsewhere in this Prospectus. The transactions related to the formation of the Company, the issuance of the Notes, the entering into of the Bank Credit Facility and the other transactions that occurred in connection with the Company's initial public offering of Common Units are referred to in this Prospectus as the "Transactions." See "Formation of the Company." Except as the context otherwise requires, references to, or descriptions of, assets and operations of the Company in this Prospectus include the assets and operations of the Operating Company and any other subsidiary and the predecessors of the Company. References to percentage ownership of the Company reflect the approximate effective ownership interest of the Unitholders and the General Partner in the Company and the Operating Company on a combined basis. For ease of reference, a glossary of certain terms used in this Prospectus is included as Appendix A to this Prospectus. U.S. TIMBERLANDS COMPANY, L.P. THE COMPANY The Company's business consists of the growing of trees and the sale of logs and standing timber. The Company owns approximately 617,000 fee acres of timberland and cutting rights on approximately 3,000 acres of timberland containing total merchantable timber volume estimated, as of January 1, 1998, to be approximately 2.1 billion board feet ("BBF") in Oregon east of the Cascade Range (the "Timberlands"). Logs harvested from the Timberlands are sold to unaffiliated domestic conversion facilities. These logs are processed for sale as lumber, plywood and other wood products, primarily for use in new residential home construction, home remodeling and repair and general industrial applications. The Company also owns and operates its own seed orchard and produces approximately five million conifer seedlings annually from its nursery, approximately half of which are used for its own internal reforestation programs, with the balance sold to other forest products companies. The Timberlands include substantial holdings of merchantable, good quality timber. The Timberlands' merchantable timber consists of Ponderosa Pine (approximately 44%) and Douglas fir (approximately 13%), species which have historically commanded premium prices over other softwood species, with the balance consisting of Lodgepole Pine, White Fir and other softwood species. The Timberlands have stands of varying ages and are unique in the forests east of the Cascade Range in Oregon in that approximately 180,000 acres are actively managed tree farms (the "Plantations"). The Plantations were first established by Weyerhaeuser Company ("Weyerhaeuser") in the early 1960s and acreage has been planted each year since then. Currently, the Plantations contain age classes ranging generally from two to 36 years old. Initial thinning of the Plantation stands, including the thinning of commercial quantities of merchantable timber, is expected to begin within the next five years. Because the timber on the Plantations is generally not yet considered merchantable, volumes of timber on the Plantations are not included in the Company's estimated merchantable timber volume. The balance of the Timberlands are composed of natural stands. On November 19, 1997, the Company acquired substantially all of the equity interests in USTK and the business and assets of U.S. Timberlands Management Company, L.L.C., formerly known as U.S. Timberlands Services Company, L.L.C. ("Old Services") (the "Acquisition") and completed its initial public offering of Common Units (the "Initial Offering"). In August 1996, USTK and Old Services acquired approximately 604,000 fee acres of timberland (the "Klamath Falls Timberlands"), containing an estimated merchantable timber volume of approximately 1.9 BBF and related assets from Weyerhaeuser (the "Weyerhaeuser Acquisition"). Most of the Klamath Falls Timberlands had been owned by Weyerhaeuser for more than 50 years. CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICES OF THE COMMON UNITS, INCLUDING OVER-ALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS, AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." The Company recently sold approximately 13,000 acres from the Klamath Falls Timberlands. On July 15, 1997, USTK acquired approximately 42,000 fee acres of timberland and cutting rights on approximately 3,000 acres of timberland (the "Ochoco Timberlands"), containing an estimated merchantable timber volume of approximately 280 million board feet ("MMBF") from Ochoco Lumber Company ("Ochoco") (the "Ochoco Acquisition"). Over 45% of the merchantable timber on the Ochoco Timberlands is at least 80 years old. The Company believes that the age classes and species mix of the Ochoco Timberlands fit well with the Klamath Falls Timberlands and provide the Company flexibility in developing its harvest plans. Most of the land comprising the Ochoco Timberlands had been owned by Ochoco since the 1920s. During the period from January 1, 1994 through the acquisition of the Klamath Falls Timberlands by USTK, approximately 58% of the logs harvested from the Klamath Falls Timberlands had been delivered to a plywood mill owned by Weyerhaeuser at Klamath Falls, Oregon. In recent years, substantially all of the timber harvested from the Ochoco Timberlands had been delivered to Ochoco's mills. The Company does not currently own any conversion facilities nor does it intend in the future to own any such facilities on a long-term basis; consequently all of the Company's sales are made to unaffiliated third parties. Concurrent with USTK's acquisition of the Klamath Falls Timberlands, USTK arranged for Collins Products LLC ("Collins"), a privately owned forest products company located within the Klamath Falls Timberlands area, to purchase Weyerhaeuser's Klamath Falls mill facilities. The Company has entered into a 10-year log supply agreement with Collins (the "Collins Supply Agreement") providing for the purchase by the plywood mill and delivery by the Company of a minimum of 34 MMBF of logs each year (approximately 25% of the Company's estimated annual harvest in the next three years) at market prices. The Collins Supply Agreement is extendable by Collins for two additional five-year terms. In addition to its sales under the Collins Supply Agreement, the Company sells logs to conversion facilities located in the area surrounding the Timberlands and operated by third parties. There are currently more than 50 primary conversion facilities located within a 150 mile radius of the Company's base of operations in Klamath Falls. The Company believes that it is well positioned to compete successfully in the timber business for the following reasons: (i) the Company has substantial holdings of timber properties which include over 2.1 BBF of merchantable, good quality timber, approximately 180,000 acres of plantation timberland and a full-scale seed orchard and nursery operation located in a region where conversion facilities have been experiencing shortages in the supply of wood fiber; (ii) the Company focuses on owning timberlands rather than operating conversion facilities, which minimizes the Company's cost structure and capital expenditures, allows the Company to seek the most favorable markets for its timber rather than being committed to supply its own facilities, and ensures that the Company will not compete with its customers; (iii) the Company's senior operating management team has an average of more than 29 years of experience in the forest products industry, including experience in identifying, evaluating, completing and integrating acquisitions of timber properties; (iv) the Company's lean operating structure allows it to efficiently manage its Timberlands, and should enable it to acquire additional timberlands without commensurate increases in overhead; and (v) the Company's computerized geographic information system ("GIS") enables the Company to evaluate the optimal timing and patterns of the harvest of its Timberlands and evaluate and integrate acquisitions of additional timberlands. BUSINESS STRATEGY The Company's business strategy is to manage its Timberlands in a manner that will enable it to pay the Minimum Quarterly Distribution on all the Units and to increase the per Unit value of the Company's assets and cash flow. Management intends to pursue this strategy in a number of ways: .Continue to increase productivity of the timberlands (continued from page i) . AS OF MARCH 31, 1998, THE COMPANY'S TOTAL LONG-TERM INDEBTEDNESS WAS $225.0 MILLION, REPRESENTING 61.6% OF THE COMPANY'S TOTAL CAPITALIZATION. AS A RESULT, THE COMPANY IS SIGNIFICANTLY LEVERAGED AND HAS INDEBTEDNESS THAT IS SUBSTANTIAL IN RELATION TO ITS PARTNERS' CAPITAL. . SUBJECT TO CERTAIN LIMITATIONS, THE COMPANY HAS THE RIGHT TO ISSUE ADDITIONAL COMMON UNITS AND SUBORDINATED UNITS (COLLECTIVELY, "UNITS") WITHOUT THE CONSENT OF THE HOLDERS OF UNITS ("UNITHOLDERS"). THE ISSUANCE OF SUCH ADDITIONAL UNITS COULD RESULT IN A DECREASE IN THE AMOUNT OF CASH AVAILABLE FOR DISTRIBUTION ON EACH SUBORDINATED UNIT. . THE MINIMUM QUARTERLY DISTRIBUTION ON THE UNITS IS NOT GUARANTEED. THE ACTUAL AMOUNT OF CASH DISTRIBUTIONS WILL DEPEND ON FUTURE COMPANY OPERATING PERFORMANCE AND WILL BE AFFECTED BY THE FUNDING OF RESERVES, OPERATING AND CAPITAL EXPENDITURES AND OTHER MATTERS WITHIN THE DISCRETION OF THE GENERAL PARTNER, AS WELL AS REQUIRED INTEREST AND PRINCIPAL PAYMENTS ON, AND THE OTHER TERMS OF, THE COMPANY'S INDEBTEDNESS. . HOLDERS OF UNITS HAVE ONLY LIMITED VOTING RIGHTS, AND THE GENERAL PARTNER MANAGES AND OPERATES THE COMPANY. THE GENERAL PARTNER MAY NOT BE REMOVED EXCEPT PURSUANT TO THE VOTE OF THE HOLDERS OF AT LEAST 66 2/3% OF THE OUTSTANDING UNITS (INCLUDING UNITS OWNED BY THE GENERAL PARTNER AND ITS AFFILIATES). . PRIOR TO MAKING ANY DISTRIBUTION ON THE UNITS, THE COMPANY WILL REIMBURSE THE GENERAL PARTNER AND ITS AFFILIATES (INCLUDING OFFICERS AND DIRECTORS OF THE GENERAL PARTNER) FOR ALL EXPENSES INCURRED ON BEHALF OF THE COMPANY (INCLUDING WAGES AND SALARIES OF EMPLOYEES, OFFICERS AND DIRECTORS OF THE GENERAL PARTNER), WHICH ARE DETERMINED BY THE GENERAL PARTNER IN ITS SOLE DISCRETION. . THE COMPANY'S OPERATIONS ARE SUBJECT TO CYCLICAL FLUCTUATIONS IN PRICE AND DEMAND FOR FOREST PRODUCTS AND SUPPLIES OF TIMBER. . THE COMPANY'S BUSINESS, INCLUDING THE ABILITY TO HARVEST ITS TIMBER, MAY BE AFFECTED BY VARIOUS FACTORS, INCLUDING ENVIRONMENTAL AND ENDANGERED SPECIES CONCERNS, FEDERAL AND STATE REGULATIONS, LIMITATIONS ON ACCESS ACROSS PUBLIC LANDS AND DAMAGE BY FIRE, INSECT INFESTATION AND OTHER NATURAL CAUSES. . CONFLICTS OF INTEREST MAY ARISE BETWEEN THE GENERAL PARTNER AND ITS AFFILIATES, ON THE ONE HAND, AND THE COMPANY AND THE UNITHOLDERS, ON THE OTHER. . THE PARTNERSHIP AGREEMENT CONTAINS CERTAIN PROVISIONS THAT LIMIT THE LIABILITY AND REDUCE THE FIDUCIARY DUTIES OF THE GENERAL PARTNER TO THE UNITHOLDERS. HOLDERS OF UNITS ARE DEEMED TO HAVE CONSENTED TO CERTAIN ACTIONS AND CONFLICTS OF INTEREST THAT MIGHT OTHERWISE BE DEEMED A BREACH OF FIDUCIARY OR OTHER DUTIES UNDER APPLICABLE STATE LAW. . THE AVAILABILITY TO A UNITHOLDER OF THE FEDERAL INCOME TAX BENEFITS OF AN INVESTMENT IN THE COMPANY DEPENDS ON THE CLASSIFICATION OF THE COMPANY AS A PARTNERSHIP FOR FEDERAL INCOME TAX PURPOSES. THE COMPANY WILL RELY UPON AN OPINION OF COUNSEL, AND NOT A RULING FROM THE INTERNAL REVENUE SERVICE, ON THAT ISSUE AND OTHERS RELEVANT TO A UNITHOLDER. . THE TAX CONSEQUENCES OF AN INVESTMENT IN THE COMPANY ARE COMPLEX. IT IS ANTICIPATED A UNITHOLDER MAY RECEIVE SUBSTANTIAL DISTRIBUTIONS THAT WOULD REDUCE SUCH HOLDER'S TAX BASIS, WITH THE RESULT THAT SUCH HOLDER MAY RECOGNIZE SUBSTANTIAL TAXABLE GAIN UPON A SALE OF SUCH HOLDER'S UNITS. .Maximize investment in Ochoco Timberlands .Pursue accretive acquisition opportunities .Implement flexible marketing satrategies .Consummate land sales INDUSTRY CONDITIONS The Company's ability to implement its business strategy over the long term and its results of operations will depend upon a number of factors, many of which are beyond its control. These factors include general industry conditions, domestic and international prices and supply and demand for logs, lumber and other wood products, seasonality and competition from other domestic and international supplying regions and substitute products. Supply The supply of logs available for purchase has been most affected in recent years by significant reductions in timber harvested from public timberlands, principally as a result of efforts to preserve the habitat of certain endangered species, as well as a change in the emphasis of government policy toward habitat preservation, conservation and recreation and away from timber management. Since the early 1970s, environmental and other similar concerns and governmental policies have substantially reduced the volume of timber under contract to be harvested from public lands. The pace of regulatory activity accelerated in the late 1980s. From January 1988 to January 1998, federal timber under contract in Washington and Oregon decreased approximately 88%. The resulting supply decrease caused prices for logs to increase significantly, reaching peak levels during late 1993 and early 1994. Although prices have declined from these record levels, current prices still exceed pre-1993 levels. The low supply of timber from public lands, which is expected to continue for the foreseeable future, has benefited private timber holders, such as the Company, through higher stumpage and log prices. Industry participants do not expect environmental restrictions to ease materially within any reasonable planning horizon. Consequently, many producers of lumber and wood products are attempting to adapt to the new supply environment by increasing their emphasis on raw material yields, entering into long term timber supply arrangements and value-added manufacturing, and accessing previously untapped supplies (such as private wood lot owners, timber with difficult access, alternative species and imports). These factors have tended to restrict prices from even greater increases. While raw material supply is expected to be an ongoing challenge for the lumber and wood products industry, such conditions are likely to cause the favorable operating environment for timber owners, such as the Company, to continue for the foreseeable future. In response to an increase in timber prices in the early 1990s, imports of logs and lumber from abroad (from countries such as Canada and New Zealand) increased. These imports, however, only partially offset the lost volume of timber from public timberlands and did not replace the mature, high-quality timber found in greater quantities on public timberlands. Since 1993, imports have decreased and their impact on timber prices currently is minimal. Demand Changes in general economic and demographic factors, including the strength of the economy and interest rates for home mortgages and construction loans, have historically caused fluctuations in housing starts and, in turn, in the demand and prices for lumber and commodity wood products. With the growth of the home center distribution business, the repair and remodeling markets have become a significant factor in terms of the demand for lumber and commodity wood products and have dampened the wide fluctuations that occurred when new housing starts were the primary factor. A large portion of the Company's property consists of Pine species, which The Subordinated Units covered by this Prospectus represent an aggregate 31.5% interest in the Company and U.S. Timberlands Klamath Falls, L.L.C. ("USTK"), a Delaware limited liability company which is the Company's subsidiary operating company (in such capacity, the "Operating Company"). The general partner of the Company is U.S. Timberlands Services Company, L.L.C., a Delaware limited liability company (the "General Partner" or "New Services"). The General Partner owns an aggregate 2% interest in the Company and the Operating Company. are used in the finishing market, for molding trim, doors and windows. This market is more affected by repair and remodeling than new housing construction. Prices for these species, primarily Ponderosa Pine, reached a peak in the spring of 1993 and as a result attracted imports of Radiata Pine from New Zealand and Chile. The market absorbed these relatively small quantities with little impact on prices. The demand for logs in the United States is also affected by the level of lumber imports. In response to increasing lumber imports from Canada, the United States and Canada signed an agreement in 1996 which restricts the availability of Canadian softwood lumber in the United States. The Company believes that to date this agreement has not had a material impact on the price or demand for logs in the United States, although its long- term effect is uncertain. Due to transportation costs, domestic conversion facilities in the Pacific Northwest tend to purchase raw materials within relatively confined geographic areas, generally within a 200-mile radius. The conversion facilities in the vicinity of the Timberlands need more wood supply to run at capacity than can be produced by nearby timberlands. As a result, the demand from this region is relatively steady, although prices fluctuate with market conditions. FORMATION OF THE COMPANY Upon the closing of the Acquisition, Old Services contributed all of its assets, including its timber operations, to the General Partner in exchange for interests therein. Immediately thereafter, USTK assumed certain indebtedness of U.S. Timberlands Holdings, L.L.C., an affiliate of USTK ("Holdings"), and the General Partner contributed its timber operations to USTK in exchange for a member interest in USTK. Then the General Partner contributed all but a 1% member interest in USTK to the Company in exchange for a general partner interest in the Company, the right to receive Incentive Distributions (as defined herein) and 1,387,963 Subordinated Units and Holdings contributed all of its interest in USTK to the Company in exchange for 2,894,157 Subordinated Units. The General Partner then distributed the Subordinated Units to Old Services. Approximately 143,398 Subordinated Units were used by Old Services to redeem interests in Old Services held by certain founding directors of the General Partner (the "Founding Directors"). As a result of such transactions, USTK became the Operating Company and the General Partner owns an aggregate 2% interest in the Company and the Operating Company on a combined basis, and the right to receive Incentive Distributions; Old Services owns 1,244,565 Subordinated Units; Holdings owns 2,894,157 Subordinated Units; and the Founding Directors own an aggregate of 143,398 Subordinated Units. The 4,282,120 Subordinated Units owned by Old Services, Holdings and the Founding Directors represent an aggregate 31.5% interest in the Company. Use of Proceeds The Company contributed the net proceeds from the sale of Common Units in the Initial Offering ($141.3 million) to the Operating Company. Concurrent with the closing of the Initial Offering, the Operating Company issued $225.0 million aggregate principal amount of unsecured 9 5/8% Senior Notes Due 2007 (the "Notes") in a public offering (the "Public Note Offering"). Net proceeds from the sale of the Notes ($218.3 million), together with the net proceeds from the sale of Common Units in the Initial Offering, $26.0 million borrowed by the Operating Company under the Acquisition Facility (defined below) and cash on hand ($25.6 million) were used by the Operating Company to repay $411.2 million of indebtedness of the Operating Company (including accrued interest). Concurrent with the closing of the Initial Offering, the Operating Company entered into a $25.0 million revolving credit facility to be used for working capital purposes (the "Working Capital Facility") and a $75.0 million revolving credit facility to be used for acquisitions and capital improvements (the "Acquisition Facility" and, together with the Working Capital Facility, the "Bank Credit Facility"). As of March 31, 1998, there were no amounts outstanding under the Bank Credit Facility. For additional information regarding the terms of the Notes and the Bank Credit Facility, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Description of Indebtedness." TABLE OF CONTENTS <TABLE> <S> <C> PROSPECTUS SUMMARY........................................................ 1 U.S. Timberlands Company, L.P. ......................................... 1 Summary Historical Financial and Operating Data......................... 6 Summary of Risk Factors................................................. 9 Company Structure and Management........................................ 13 Securities Covered by this Prospectus................................... 15 Summary of Tax Considerations........................................... 20 FORWARD-LOOKING STATEMENTS................................................ 23 RISK FACTORS.............................................................. 23 Risks Inherent in an Investment in the Company.......................... 23 Risks Inherent in the Company's Business................................ 26 Conflicts of Interest and Fiduciary Responsibilities.................... 29 Tax Risks............................................................... 30 FORMATION OF THE COMPANY.................................................. 33 USE OF PROCEEDS........................................................... 34 DISTRIBUTIONS AND MARKET FOR COMMON AND SUBORDINATED UNITS................ 34 CAPITALIZATION............................................................ 35 CASH DISTRIBUTION POLICY.................................................. 36 General................................................................. 36 Quarterly Distributions of Available Cash............................... 37 Distributions from Operating Surplus during Subordination Period........ 37 Distributions from Operating Surplus after Subordination Period......... 39 Incentive Distributions................................................. 39 Distributions from Capital Surplus...................................... 40 Adjustment of Minimum Quarterly Distribution and Target Distribution Levels................................................................. 40 Distributions of Cash Upon Liquidation.................................. 41 SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA............ 43 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................................................... 46 General................................................................. 46 Supply and Demands Factors.............................................. 46 Results of Operations................................................... 47 Liquidity and Capital Resources......................................... 52 Description of Indebtedness............................................. 54 Contingencies........................................................... 55 Effects of Inflation.................................................... 56 Other................................................................... 56 BUSINESS AND PROPERTIES................................................... 57 General................................................................. 57 Business Strategy....................................................... 58 Transaction Background.................................................. 58 The Timberlands......................................................... 59 Resource Management..................................................... 62 Federal and State Regulation............................................ 64 Litigation.............................................................. 66 Employees............................................................... 66 MANAGEMENT................................................................ 67 </TABLE> <TABLE> <S> <C> Company Management....................................................... 67 Directors, Executive Officers and Key Employees of the General Partner... 67 Reimbursement of Expenses of the General Partner and its Affiliates...... 70 Executive Compensation................................................... 70 Compensation of Directors................................................ 72 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............. 73 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................. 75 Rights of the General Partner............................................ 75 Contribution, Conveyance and Assumption Agreement........................ 75 Consulting Agreements.................................................... 75 Related Party Transactions............................................... 75 Repurchase of Certain Member Interests; Severance Payments............... 75 Advisory Services........................................................ 76 CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES....................... 77 Conflicts of Interest.................................................... 77 Fiduciary and Other Duties............................................... 79 DESCRIPTION OF THE SUBORDINATED UNITS...................................... 81 The Units................................................................ 81 Transfer Agent and Registrar............................................. 81 Transfer of Subordinated Units........................................... 81 THE PARTNERSHIP AGREEMENT.................................................. 83 Organization and Duration................................................ 83 Purpose.................................................................. 83 Power of Attorney........................................................ 83 Capital Contributions.................................................... 84 Limited Liability........................................................ 84 Issuance of Additional Securities........................................ 85 Amendment of Partnership Agreement....................................... 85 Merger, Sale or Other Disposition of Assets.............................. 87 Termination and Dissolution.............................................. 87 Liquidation and Distribution of Proceeds................................. 87 Withdrawal or Removal of the General Partner............................. 88 Transfer of General Partner's Interests and Incentive Distribution Rights.................................................................. 89 Change of Management Provisions.......................................... 89 Limited Call Right....................................................... 89 Meetings; Voting......................................................... 90 Status as Limited Partner or Assignee.................................... 90 Non-citizen Assignees; Redemption........................................ 91 Indemnification.......................................................... 91 Books and Reports........................................................ 91 Right to Inspect Company Books and Records............................... 92 Registration Rights...................................................... 92 UNITS ELIGIBLE FOR FUTURE SALE............................................. 93 SELLING UNITHOLDERS........................................................ 94 MANNER OF OFFERING......................................................... 95 TAX CONSIDERATIONS......................................................... 96 Legal Opinions and Advice................................................ 96 Partnership Status....................................................... 97 Limited Partner Status................................................... 98 </TABLE> The Company also granted to the underwriters of the Initial Offering an option to purchase up to 1,118,803 additional Common Units solely to cover over-allotments. Such option was exercised in its entirety on December 8, 1997. The Company used the net proceeds from the exercise of the underwriters' over- allotment option (approximately $21.9 million) to repay borrowings under the Acquisition Facility. TABLE OF CONTENTS <TABLE> <S> <C> Tax Consequences of Unit Ownership........................................ 98 Allocation of Company Income, Gain, Loss and Deduction.................... 100 Tax Treatment of Operations............................................... 101 Disposition of Subordinated Units......................................... 105 Uniformity of Units....................................................... 108 Administrative Matters.................................................... 109 State, Local and Other Tax Considerations................................. 111 INVESTMENT IN THE COMPANY BY EMPLOYEE BENEFIT PLANS..................................................... 112 </TABLE> <TABLE> <S> <C> VALIDITY OF THE SUBORDINATED UNITS.......................................... 113 EXPERTS..................................................................... 113 AVAILABLE INFORMATION....................................................... 113 INDEX TO FINANCIAL STATEMENTS............................................... F-1 APPENDIX A--Glossary of Certain Terms....................................... A-1 APPENDIX B--Application for Transfer of Subordinated Units.................. B-1 </TABLE> SUMMARY FINANCIAL AND OPERATING DATA The following tables set forth for the periods and at the dates indicated, summary financial and operating data for the Company. The summary operating statement data for the two years ended December 31, 1995, the eight months ended August 29, 1996 and the balance sheet data as of December 31, 1995 are derived from the audited financial statements of the southern Oregon timberlands operations of Weyerhaeuser (the "Predecessor") which were prepared by the Company and should be read in conjunction with such financial statements included elsewhere in this Prospectus. The summary combined financial data as of and for the four months ended December 31, 1996 and consolidated financial data as of and for the year ended December 31, 1997 are derived from the audited financial statements of the Company, and the summary consolidated financial data as of and for the three months ended March 31, 1997 and 1998 are derived from the unaudited financial statements of the Company included elsewhere in this Prospectus. In the opinion of management, the unaudited financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the unaudited period. See also "Management's Discussion and Analysis of Financial Condition and Results of Operations." The dollar amounts in the table below, except per Unit data, are in thousands. <TABLE> <CAPTION> PREDECESSOR COMPANY(a) --------------------------------------- ------------------------- JANUARY 1, AUGUST 30, 1996 1996 YEAR ENDED DECEMBER 31, THROUGH THROUGH YEAR ENDED --------------------------- AUGUST 29, DECEMBER 31, DECEMBER 31, 1993 1994 1995 1996 1996 1997 ----------- ------- ------- ---------- ------------ ------------ (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> OPERATING STATEMENT DATA: Revenues: Logs and stumpage sales................. $28,609 $29,102 $29,110 $14,077 $ 13,590 $ 60,445 Timberland and property sales................. 4,180 -- -- -- -- 15,244 By-products and other.. 3,537 3,240 2,623 1,501 429 1,656 ------- ------- ------- ------- -------- -------- Total revenues......... 36,326 32,342 31,733 15,578 14,019 77,345 Operating costs: Cost of products sold.. 15,697 16,351 14,951 9,225 6,179 17,778 Cost of timber and property sales........ 58 -- -- -- -- 8,746 Depreciation, depletion and road amortization.......... 1,443 1,455 1,486 927 3,323 17,303 Selling, general and administrative expenses.............. 4,034 4,454 4,235 2,730 9,284 6,250 ------- ------- ------- ------- -------- -------- Operating income (loss)................ 15,094 10,082 11,061 2,696 (4,767) 27,268 Interest expense(b).... -- -- -- -- 7,316 25,321 Amortization of deferred financing fees and debt guarantee fees(b)..... -- -- -- -- 1,326 4,193 Interest income........ -- -- -- -- (409) (1,452) Other (income) expense, net................... 297 140 (555) 1 36 574 ------- ------- ------- ------- -------- -------- Income (loss) before extraordinary items... 14,797 9,942 11,616 2,695 (13,036) (1,368) Extraordinary items, losses on extinguishment of debt(c)............... -- -- -- -- -- 9,337 ------- ------- ------- ------- -------- -------- Net income (loss)...... $14,797 $ 9,942 $11,616 $ 2,695 $(13,036) $(10,705) ======= ======= ======= ======= ======== ======== Limited partners' interests in net loss.................. $(10,679) ======== Basic income (loss) before extraordinary items per Unit(d): Common................. $ -- $ 3.05 Subordinated........... $ (3.04) $ (1.01) Diluted loss before extraordinary items per Unit(d)........... $ (3.04) $ (0.28) Basic net loss per Unit(d): Common................. $ -- $ (0.86) Subordinated........... $ (3.04) $ (2.30) Diluted net loss per Unit(d)............... $ (3.04) $ (2.04) </TABLE> <TABLE> <CAPTION> PREDECESSOR COMPANY(a) ----------------------------------------- ------------------------- JANUARY 1, 1996 AUGUST 30, YEAR ENDED DECEMBER 31, THROUGH 1996 THROUGH YEAR ENDED ----------------------------- AUGUST 29, DECEMBER 31, DECEMBER 31, 1993 1994 1995 1996 1996 1997 ----------- -------- ------- ---------- ------------ ------------ (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> CASH FLOWS AND OTHER DATA: EBITDDA(e)............. $ 16,595 $ 11,537 $12,547 $ 3,623 $ (1,444) $ 53,317 Capital expenditures-- Maintenance(f)........ 1,157 2,098 2,082 459 360 111,966 Cash flow from (used in) operations........ 15,124 13,173 11,810 5,512 (2,984) 26,283 Cash flow used in investing............. (1,157) (2,013) (1,859) (459) (291,450) (101,566) Cash flow from (used in) financing......... (13,967) (11,160) (9,951) (5,054) 311,047 69,295 BALANCE SHEET DATA (AT PERIOD END): Working capital........ $ 2,068 $ 211 $ 1,304 $ 524 $ 21,459 $ 1,835 Timber, timberlands and logging roads, net.... 21,495 20,885 20,822 21,275 273,457 359,349 Total assets........... 32,292 29,844 30,947 27,839 310,191 385,214 Long-term debt......... -- -- -- -- 305,000 225,000 Equity (deficit)(g).... 29,643 27,745 29,155 27,839 (2,936) 145,646 OPERATING DATA (UNAUDITED): Sales volumes: Log, stumpage and timber deed sales (MBF)(h).............. 66,250 68,302 63,822 32,760 30,210 138,983 Property sales (MBF)... 9,449 -- -- -- -- 41,530 Chip sales (BDT)....... 52,278 38,380 25,702 20,568 7,174 18,957 </TABLE> <TABLE> <CAPTION> COMPANY(a) -------------------- THREE MONTHS ENDED MARCH 31, -------------------- 1997 1998 --------- --------- (UNAUDITED) <S> <C> <C> OPERATING STATEMENT DATA: Revenues: Logs and stumpage sales................................. 8,827 7,740 Timberland and property sales........................... 3,494 -- By-products and other................................... 13 17 --------- --------- Total revenues.......................................... 12,334 7,757 Operating costs: Cost of products sold................................... 3,525 2,654 Cost of timber and property sales....................... 1,191 -- Depreciation, depletion and road amortization........... 2,360 2,760 Selling, general and administrative expenses............ 1,190 3,626 --------- --------- Operating income (loss)................................. 4,068 (1,283) Interest expense(b)..................................... 5,319 5,463 Amortization of deferred financing fees and debt guarantee fees(b)...................................... 999 169 Interest income......................................... (366) (176) Other (income) expense, net............................. 63 (25) --------- --------- Net loss................................................ (1,947) (6,714) ========= ========= Limited partners' interests in net loss................. (1,947) (6,580) ========= ========= Basis net loss per Unit: Common.................................................. -- (.51) Subordinated............................................ (.46) (.51) Diluted net loss per Unit............................... (.46) (.51) CASH FLOWS AND OTHER DATA: EBITDDA(e).............................................. 7,619 1,477 Capital expenditures--Maintenance(f).................... 199 100 Cash flow from operations............................... 3,425 973 Cash flow from (used in) investing...................... 9,801 (97) Cash flow used in financing............................. (1,191) -- BALANCE SHEET DATA (AT PERIOD END): Working capital (deficit)............................... 20,728 (2,047) Timber, timberlands and logging roads, net.............. 269,948 356,629 Total assets............................................ 308,978 380,902 Long-term debt.......................................... 305,000 225,000 Equity (deficit)(g)..................................... (6,074) 138,999 OPERATING DATA (UNAUDITED): Sales volumes: Log, stumpage and timber deed sales (MBF)(h)............ 21,373 18,393 Property sales (MBF).................................... 11,045 -- Chip sales (BDT)........................................ 217 678 </TABLE> - -------- (a) Due to the Weyerhaeuser Acquisition on August 30, 1996, the financial and operating data after August 30, 1996 are not comparable to financial and operating data of the Predecessor. See Note 1 of the Notes to the Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations"included elsewhere in this Prospectus. (b) See effect of interest expense and amortization of deferred financing fees and debt guarantee fees in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus. (c) See effect of debt extinguishment in Note 5 of the Notes to the Consolidated Financial Statements included elsewhere in this Prospectus. (d) No per Unit information is presented for periods ended August 29, 1996 and December 31, 1995 as the Predecessor had a different ownership structure and any per Unit information would not be relevant or meaningful to the user of the summary financial data. See discussion of per Unit information in Note 2 of the Notes to the Consolidated Financial Statements included elsewhere in this Prospectus. (e) EBITDDA is defined as operating income (loss) plus depreciation, depletion and road amortization and cost of timber and property sales. EBITDDA should not be considered as an alternative to net income, operating income, cash flows from operating activities or any other measure of financial performance presented in accordance with generally accepted accounting principles. EBITDDA is not intended to represent cash flow and does not represent the measure of cash available for distribution, but provides additional information for evaluating the Company's ability to make the Minimum Quarterly Distribution. In addition, EBITDDA does not necessarily represent funds available for management's discretionary use as it is calculated prior to debt service obligations and capital expenditures. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus. (f) Maintenance capital expenditures include the replacement of property, plant and equipment, capitalized seed orchard and nursery costs and additions to timber, timberlands and logging roads. See July 1997 acquisition of the Ochoco Timberlands in Note 3 of the Notes to the Consolidated Financial Statements included elsewhere in this Prospectus. (g) See discussion of the Company and the Predecessor's equity (deficit) in Note 1 of the Notes to the Consolidated Financial Statements included elsewhere in this Prospectus. (h) Revenues prior to 1997 consisted primarily of log sales. SUMMARY OF RISK FACTORS Limited partner interests are inherently different from capital stock of a corporation, although many of the business risks to which the Company will be subject are similar to those that would be faced by a corporation engaged in a similar business. Prospective purchasers of the Subordinated Units should consider the following risk factors in evaluating an investment in the Subordinated Units. RISKS INHERENT IN AN INVESTMENT IN THE COMPANY . During the Subordination Period, which will generally not end prior to December 31, 2002, distributions of cash to the Subordinated Unitholders are subordinate to the rights of the holders of Common Units to receive the Minimum Quarterly Distribution of $0.50 per Common Unit, plus any arrearages on Common Units for prior quarters. There can be no assurance that the Company will generate sufficient Available Cash to make distributions on the Subordinated Units or the Common Units. In addition there can be no assurance that the Company will ever meet the requirements necessary for the Subordination Period to end. Accordingly, there can be no assurance that the Subordinated Units will ever convert into Common Units. . The actual amount of cash distributions may fluctuate and will depend on the Company's future operating performance. Cash distributions are dependent primarily on cash flow, including cash flow from reserves and working capital borrowings, and not solely on profitability, which is affected by non-cash items. Therefore, cash distributions might be made during periods when the Company records losses and might not be made during periods when the Company records profits. Decisions of the General Partner with respect to the amount and timing of cash expenditures, borrowings, issuances of additional Units and reserves will affect the amount of Available Cash. Because the business of the Company is seasonal, it is likely that the General Partner will make additions to reserves during certain quarters in order to fund operating expenses, interest and principal payments and cash distributions to Unitholders with respect to other quarters. . Subject to certain limitations, the Company has the right to issue Units without the consent of the Unitholders. The effect of such issuances may be to dilute the value of the interests of the then-existing Unitholders in the net assets of the Company, to dilute the interests of Unitholders in distributions by the Company or to make it more difficult for a person or group to remove the General Partner or otherwise change the management of the Company. . The Notes and the Bank Credit Facility effectively prohibit the Company from making distributions to Unitholders during an event of default and from distributing to Unitholders the proceeds of harvests in excess of specified levels. The Notes also effectively prohibit the Company, with respect to any quarter that the Consolidated Fixed Charge Coverage Ratio (as defined in the indenture governing the Notes) is equal to or less than 1.75 to 1.00, from distributing to Unitholders more than $7.5 million less the aggregate amount of distributions made with respect to any of the immediately preceding 16 quarters during which the Consolidated Fixed Charge Coverage Ratio was equal to or less than 1.75 to 1.00. . The Klamath Falls and Ochoco Timberlands, prior to their acquisition by the Company, had been part of Weyerhaeuser and Ochoco, respectively, and had not been operated as separate businesses or divisions. In addition, prior to the Company's acquisition of the Timberlands, sales from the Timberlands were generally made to affiliated conversion facilities and not to unaffiliated customers. Although the Company has operated the Klamath Falls Timberlands since September 1996, and sales during such period have been made exclusively to unaffiliated customers, there can be no assurance that the Company will be able to manage successfully the Timberlands as a separate business on a profitable basis. For the years ended December 31, 1994 and 1995 and the eight-month period ended August 29, 1996, the Company had net income of $9.9 million, $11.6 million and $2.7 million, respectively. Since the Weyerhaeuser Acquisition, the Company had a net loss of $13.0 million and $10.7 million for the four- month period ended December 31, 1996 and the year ended December 31, 1997, respectively. . As of March 31, 1998, the Company's total long-term indebtedness was $225.0 million, representing 61.6% of the Company's total capitalization. As a result, the Company is significantly leveraged and has indebtedness that is substantial in relation to its partners' capital. The Company's leverage may adversely affect the ability of the Company to finance its future operations and capital needs, limit its ability to pursue acquisitions and other business opportunities and make its results of operations more susceptible to adverse economic or operating conditions. In addition, as of March 31, 1998, the Company had $100.0 million of unused borrowing capacity under the Bank Credit Facility. Future borrowings could result in a significant increase in the Company's leverage. . The General Partner manages and operates the Company. Unitholders have no right to elect the General Partner on an annual or other continuing basis, and have only limited voting rights on matters affecting the Company's business. The General Partner may not be removed except pursuant to the vote of the holders of at least 66 2/3% of the outstanding Units (including Units owned by the General Partner and its affiliates) and upon the election of a successor general partner by the holders of at least a Unit Majority. As a result, holders of Units have limited influence on matters affecting the operations of the Company. . The Company's Amended and Restated Agreement of Limited Partnership (the "Partnership Agreement") contains certain provisions that may have the effect of discouraging a person or group from attempting to remove the General Partner or otherwise change the management of the Company. The effect of these provisions may be to diminish the price at which the Subordinated Units will trade under certain circumstances. . Prior to making any distribution on the Common Units, the Company will reimburse the General Partner and its affiliates (including officers and directors of the General Partner) for all expenses incurred by the General Partner and its affiliates on behalf of the Company rather than by the Company directly (including wages and salaries of employees, officers and directors of the General Partner), which expenses are determined by the General Partner in its sole discretion. In addition, the General Partner and its affiliates may provide services to the Company for which the Company will be charged reasonable fees as determined by the General Partner. The reimbursement of such expenses and the payment of any such fees could adversely affect the ability of the Company to make distributions. . Prior to this offering, there has been no public market for the Subordinated Units. No assurance can be given as to the market prices at which the Subordinated Units will trade or that any trading market for the Subordinated Units will develop. The Company does not intend to apply for listing of the Subordinated Units on any securities exchange. . If at any time less than 20% of the then-issued and outstanding limited partner interests of any class are held by persons other than the General Partner and its affiliates, the General Partner will have the right, which it may assign to any of its affiliates or the Company, to acquire all, but not less than all, of the remaining limited partner interests of such class held by such unaffiliated persons at a price generally equal to the then-current market price of limited partner interests of such class. As a consequence, a holder of Units may be required to sell his Units at a time when he may not desire to sell them or at a price that is less than the price he would desire to receive upon such sale. A holder may also incur a tax liability upon such sale. . Under certain circumstances, Unitholders could lose their limited liability and could become liable for amounts improperly distributed to them by the Company. RISKS INHERENT IN THE COMPANY'S BUSINESS . The Company's results of operations are, and will continue to be, affected by the cyclical nature of the forest products industry. Prices and demand for logs have been, and in the future can be expected to be, subject to cyclical fluctuations. . Various factors, including environmental and endangered species concerns, have limited, and are likely to continue to limit, the amount of timber offered for sale by certain United States government agencies, which historically have been major suppliers of timber to the United States forest products industry. Although the Company believes that sales of timber by United States government agencies are likely to remain at relatively low levels for the foreseeable future, any reversal of policy that substantially increases such sales could significantly reduce prices for logs, which could have a material adverse effect on the Company. . Revenues, net income and cash flow from the Company's operations will be dependent to a significant extent on its ability to harvest timber at adequate levels. The Company's business, including the ability to harvest its timber, may be affected by various factors, including environmental and endangered species concerns, federal and state regulations, limitations on access across public lands and damage by fire, insect infestation and other natural causes. There can be no assurance that one or more of these factors will not prevent the Company from achieving future harvest levels necessary to maintain or increase revenues, net income or cash flows. . The forest products industry is highly competitive in terms of price and quality. Many of the Company's competitors have substantially greater financial and operating resources than the Company. Wood products are subject to increasing competition from a variety of non-wood products, which affects the demand for logs. In addition, competition from imported logs and end-use wood products from foreign sources into the United States may adversely affect the demand and prices for the Company's logs. To the extent there is a significant increase in competitive pressures, the Company's results of operations could be materially and adversely affected. . The Company intends to pursue acquisitions as one means of increasing the value of the Company's Units and its cash flow. The Company cannot predict whether it will be successful in consummating any such acquisitions or what the consequences of any such acquisitions would be. Moreover, there can be no assurance that general economic or industry conditions will be conducive to the Company's acquisition strategy, that the Company will be able to identify and acquire any such assets or businesses on economically acceptable terms, that any acquisitions will not be dilutive to earnings and distributions to the Unitholders or that any additional debt incurred to finance an acquisition will not affect the ability of the Company to make distributions to the Unitholders. . The Company believes that its success will depend to a significant extent upon the efforts and abilities of its senior operating management team. The failure by the General Partner to retain the key members of its senior operating management team could adversely affect the financial condition or results of operations of the Company. . The Company currently derives a significant portion of its revenues from sales of timber to certain key customers. For 1997, three of these customers, Collins, Crown Pacific Partners L.P. and Boise Cascade Corporation, purchased timber representing approximately 23%, 21% and 15%, respectively, of the Company's revenues. Collins made its purchases pursuant to the long-term Collins Supply Agreement, while the other purchases were made pursuant to short-term arrangements. The loss of these or other significant customers could materially adversely affect the Company's results of operations. CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES . The General Partner and its affiliates may have conflicts of interest with the Company and its limited partners. The Partnership Agreement contains certain provisions that limit the liability and reduce the fiduciary duties of the General Partner to the Unitholders, as well as provisions that may restrict the remedies available to Unitholders for actions that might, without such limitations, constitute breaches of fiduciary duty. Unitholders are deemed to have consented to certain actions and conflicts of interest that might otherwise be deemed a breach of fiduciary or other duties under applicable state law. . Decisions of the General Partner with respect to the amount and timing of timber harvests, stumpage sales, property sales, cash expenditures, borrowings, issuances of additional Units and creation of reserves in any quarter will affect whether, or the extent to which, there is sufficient Available Cash from Operating Surplus to meet the Minimum Quarterly Distribution and Target Distribution Levels on all Units in a given quarter. . The Partnership Agreement provides that the General Partner will generally be restricted from engaging in any business activities other than those incidental to its ownership of interests in the Company. Notwithstanding the foregoing, the Partnership Agreement permits affiliates of the General Partner to engage in any activities except for certain business activities in North America that are in competition with the Company. The General Partner's affiliates may, therefore, compete with the Company outside of North America. There can be no assurance that there will not be competition between the Company and affiliates of the General Partner in the future. TAX RISKS . The availability to a Unitholder of the federal income tax benefits of an investment in the Company depends on the classification of the Company as a partnership for federal income tax purposes. Assuming the accuracy of certain factual matters as to which the General Partner and the Company have made representations, Andrews & Kurth L.L.P., special counsel to the General Partner and the Company, is of the opinion that, under current law, the Company is classified as a partnership for federal income tax purposes and will continue to be so classified after giving effect to the offering of the Subordinated Units. . No ruling has been requested from the Internal Revenue Service (the "IRS") with respect to classification of the Company as a partnership for federal income tax purposes or any other matter affecting the Company. . A Unitholder will be required to pay income taxes on his allocable share of the Company's income, whether or not he receives cash distributions from the Company. . Investment in Units by certain tax-exempt entities, regulated investment companies and foreign persons raises issues unique to such persons. For example, much of the taxable income derived by most organizations exempt from federal income tax (including individual retirement accounts ("IRAs") and other retirement plans) from the ownership of a Unit will be unrelated business taxable income and thus will be taxable to such Unitholder. . In the case of taxpayers subject to the passive loss rules (generally, individuals and closely held corporations), losses generated by the Company will generally only be available to offset future income generated by the Company and cannot be used to offset income from other activities, including other passive activities or investments. Passive losses which are not deductible because they exceed the Unitholder's income generated by the Company may be deducted in full when the Unitholder disposes of his entire investment in the Company in a fully taxable transaction to an unrelated party. . The Company has applied for registration with the Secretary of the Treasury as a "tax shelter." No assurance can be given that the Company will not be audited by the IRS or that tax adjustments will not be made. Any adjustments in the Company's tax returns will lead to adjustments in the Unitholders' tax returns and may lead to audits of the Unitholders' tax returns and adjustments of items unrelated to the Company. . A Unitholder will likely be required to file state and local income tax returns and pay state and local income taxes in some or all of the various jurisdictions in which the Company does business or owns property. The Company will initially own property and conduct business in Oregon, which imposes a personal income tax. See "Risk Factors," "Cash Distribution Policy," "Conflicts of Interest and Fiduciary Responsibilities," "The Partnership Agreement" and "Tax Considerations" for a more detailed description of these and other risk factors and conflicts of interest that should be considered in evaluating an investment in the Subordinated Units. COMPANY STRUCTURE AND MANAGEMENT The operations of the Company are conducted through, and the operating assets are owned by, USTK, as the Operating Company. The Company owns a 98.9899% member interest in the Operating Company and the General Partner owns a 1% general partner interest in the Company and a 1.0101% managing member interest in the Operating Company. The General Partner therefore owns an aggregate 2% interest in the Company and the Operating Company on a combined basis. The Company's business is managed by the senior executives of the General Partner. The General Partner does not receive any management fee or other compensation in connection with its management of the Company, but is reimbursed for all direct and indirect expenses incurred on behalf of the Company (including wages and salaries of employees, officers and directors of the General Partner) and all other necessary or appropriate expenses allocable to the Company or otherwise reasonably incurred by the General Partner in connection with the operation of the Company's business. Conflicts of interest may arise between the General Partner and its affiliates, on the one hand, and the Company, the Operating Company and the Unitholders, on the other, including conflicts relating to the compensation of the directors, officers and employees of the General Partner and the determination of fees and expenses that are allocable to the Company. The General Partner has a conflicts committee (the "Conflicts Committee"), consisting of two independent members of its Board of Directors, that is available at the General Partner's discretion to review matters involving conflicts of interest. See "Management" and "Conflicts of Interest and Fiduciary Responsibilities." The principal executive offices of the Company are located at 1301 Fifth Avenue, Suite 3725, Seattle, Washington 98101-2636. The telephone number at such offices is (206) 652-5000. The principal executive offices of the General Partner are located at 625 Madison Avenue, Suite 10-B, New York, New York 10022. The telephone number at such offices is (212) 755-1100. The following chart depicts the organization and ownership of the Company and the Operating Company after giving effect to the sale of all of the Subordinated Units offered hereby. The percentages reflected represent the approximate ownership interest in each of the Company and the Operating Company individually and not on an aggregate basis. Except in the following chart, the ownership percentages referred to in this Prospectus reflect the approximate effective ownership interest of the Unitholders in the Company and the Operating Company on a combined basis. The 2% ownership percentage of the General Partner referred to in this Prospectus reflects the approximate effective ownership interest of the General Partner in the Company and the Operating Company on a combined basis. [GRAPHIC] SECURITIES COVERED BY THIS PROSPECTUS Securities Covered.......... 4,138,722 Subordinated Units. Units Outstanding After This Offering.............. 8,577,487 Common Units and 4,282,120 Subordinated Units, representing an aggregate 65.4% and 31.5% limited partner interest in the Company, respectively. Distributions of Available Cash....................... The Company generally distributes Available Cash 98% to Unitholders and 2% to the General Partner within 45 days after the end of each quarter. If distributions of Available Cash from Operating Surplus exceed specified target levels ("Target Distribution Levels") in excess of the Minimum Quarterly Distribution, the General Partner will receive a percentage of such excess distributions that will increase to up to 50% of the excess distributions above the highest Target Distribution Level. See "Cash Distribution Policy--Incentive Distributions." Distributions to Common and Subordinated Unitholders... With respect to each quarter during the Subordination Period, which will generally not end prior to December 31, 2002, the Common Unitholders will generally have the right to receive the Minimum Quarterly Distribution of $0.50 per Common Unit, plus any arrearages in the distribution of the Minimum Quarterly Distribution on the Common Units for prior quarters, and the General Partner will have the right to receive the related distribution on its interest, before any distribution of Available Cash from Operating Surplus is made to the Subordinated Unitholders. In addition, no distributions of Available Cash from Operating Surplus may be made on the Subordinated Units with respect to any quarter if the Consolidated Fixed Charge Coverage Ratio (as defined in the Partnership Agreement) for the four-quarter period ended with such quarter is equal to or less than 1.75 to 1.00. Subordinated Units will not accrue distribution arrearages. Upon expiration of the Subordination Period, Common Units will no longer accrue distribution arrearages and the Subordinated Units will be deemed to be Common Units for purposes of determining the priority and amounts of distributions. See "Cash Distribution Policy." Subordination Period........ The Subordination Period will end on the first to occur of the following dates: (a) the first day of any quarter beginning after December 31, 2002 in respect of which (i) distributions of Available Cash from Operating Surplus on the Common Units and the Subordinated Units with respect to each of the three consecutive four-quarter periods immediately preceding such date equaled or exceeded the sum of the Minimum Quarterly Distribution on all of the outstanding Common Units and Subordinated Units during such periods, (ii) the Adjusted Operating Surplus generated during each of the three consecutive four-quarter periods immediately preceding such date equaled or exceeded the sum of the Minimum Quarterly Distribution on all of the Common Units and Subordinated Units that were outstanding during such period on a fully diluted basis and the related distribution on the general partner interest in the Company, and (iii) there are no outstanding arrearages in the distribution of the Minimum Quarterly Distribution on the Common Units; and (b) the date on which the General Partner is removed as general partner of the Company upon the requisite vote by limited partners where Cause does not exist. Upon expiration of the Subordination Period, all remaining Subordinated Units will convert into Common Units on a one-for-one basis and will thereafter participate pro rata with the other Common Units in distributions of Available Cash. See "Cash Distribution Policy--Distribution from Operating Surplus during Subordination Period." Early Conversion of Subordinated Units......... Up to one-half of the Subordinated Units may convert into Common Units prior to the end of the Subordination Period. A portion of the Subordinated Units will convert into Common Units on the first day after the record date established for the distribution in respect of any quarter ending on or after (a) December 31, 2000 (with respect to one-quarter of the Subordinated Units) and (b) December 31, 2001 (with respect to one-quarter of the Subordinated Units), in respect of which (i) distributions of Available Cash from Operating Surplus on the Common Units and the Subordinated Units with respect to each of the three consecutive four- quarter periods immediately preceding such date equaled or exceeded the sum of the Minimum Quarterly Distribution on all of the outstanding Common Units and Subordinated Units during such periods, (ii) the Adjusted Operating Surplus generated during each of the two consecutive four-quarter periods immediately preceding such date equaled or exceeded the sum of the Minimum Quarterly Distribution on all of the Common Units and Subordinated Units that were outstanding during such period on a fully diluted basis and the related distribution on the General Partner's interest in the Company, and (iii) there are no outstanding arrearages in the distribution of the Minimum Quarterly Distribution on the Common Units; provided, however, that the early conversion of the second one-quarter of Subordinated Units may not occur until at least one year following the early conversion of the first one-quarter of Subordinated Units. See "Cash Distribution Policy--Distributions from Operating Surplus during Subordination Period." Incentive Distributions..... As an incentive, if quarterly distributions of Available Cash exceed the Target Distribution Levels, the General Partner will receive distributions which are generally equal to 15%, then 25% and then 50% of the distributions of Available Cash that exceed such Target Distribution Levels. The Target Distribution Levels are based on the amounts of Available Cash from Operating Surplus distributed with respect to a given quarter that exceed distributions made with respect to the Minimum Quarterly Distribution and arrearages in the distribution of the Minimum Quarterly Distribution on the Common Units, if any. See "Cash Distribution Policy--Incentive Distributions." The distributions to the General Partner described above that are in excess of its combined 2% interest are referred to herein as the "Incentive Distributions." Adjustment of Minimum Quarterly Distribution and Target Distribution Levels..................... The Minimum Quarterly Distribution and the Target Distribution Levels are subject to downward adjustments in the event that the Unitholders receive distributions of Available Cash from Capital Surplus or legislation is enacted or existing law is modified or interpreted by the relevant governmental authority in a manner that causes the Company to be treated as an association taxable as a corporation or otherwise taxable as an entity for federal, state or local income tax purposes. If, as a result of distributions of Available Cash from Capital Surplus, the Unitholders receive a full return of the initial public offering price of the Common Units and any unpaid arrearages in the distribution of the Minimum Quarterly Distribution on the Common Units, the distributions of Available Cash payable to the General Partner and its affiliates will increase to 50% of all amounts distributed thereafter. See "Cash Distribution Policy--General," "-- Distributions from Capital Surplus" and "-- Adjustment of Minimum Quarterly Distribution and Target Distribution Levels." Company's Ability to Issue Additional Units........... The Partnership Agreement generally authorizes the Company to issue an unlimited number of additional limited partner interests and other equity securities of the Company for such consideration and on such terms and conditions as shall be established by the General Partner in its sole discretion without the approval of the Unitholders. During the Subordination Period, however, the Company may not issue equity securities ranking prior or senior to the Common Units or an aggregate of more than 7,458,684 Common Units (excluding the 1,118,803 Common Units issued upon the exercise of the underwriters' over-allotment option in connection with the Initial Offering and Common Units issued upon conversion of Subordinated Units, in connection with the repayment of certain indebtedness or pursuant to employee benefit plans) or an equivalent number of securities ranking on a parity with the Common Units, without the approval of the holders of at least a majority of all of the holders of the Subordinated Units and of all of the holders of the Common Units (a "Unit Majority"). See "The Partnership Agreement--Issuance of Additional Securities." Limited Call Right.......... If at any time less than 20% of the issued and outstanding Subordinated Units are held by persons other than the General Partner and its affiliates, the General Partner may purchase all of the remaining Subordinated Units at a price generally equal to the then current market price of the Subordinated Units. See "The Partnership Agreement--Limited Call Right." Limited Voting Rights....... Unitholders will not have voting rights except with respect to the following matters, for which the Partnership Agreement requires the approval of at least a majority (and in certain cases a greater percentage) of all of the holders of the Subordinated Units and of all of the holders of the Common Units: a sale or exchange of all or substantially all of the Company's assets, the removal or the withdrawal of the General Partner, the election of a successor General Partner, a dissolution or reconstitution of the Company, a merger of the Company, issuance of limited partner interests in certain circumstances, approval of certain actions of the General Partner (including the transfer by the General Partner of its general partner interest or Incentive Distribution Rights under certain circumstances) and certain amendments to the Partnership Agreement, including any amendment that would cause the Company to be treated as an association taxable as a corporation. Holders of Subordinated Units will generally vote as a class separate from the holders of Common Units. After Subordinated Units convert into Common Units (either upon termination of the Subordination Period or upon early conversion), holders of such Common Units will vote as a single class together with the holders of the other Common Units. Under the Partnership Agreement, the General Partner generally will be permitted to effect amendments to the Partnership Agreement that do not adversely affect Unitholders. See "The Partnership Agreement." Removal and Withdrawal of the General Partner........ Subject to certain conditions, the General Partner may be removed upon the approval of the holders of at least 66 2/3% of the outstanding Units (including Units held by the General Partner and its affiliates) and the election of a successor general partner by the vote of the holders of at least a Unit Majority. A meeting of limited partners may be called only by the General Partner or by the holders of 20% or more of the limited partner interests of the class for which the meeting is called. The General Partner has agreed not to voluntarily withdraw as general partner of the Company and the Operating Company prior to December 31, 2007, subject to limited exceptions, without obtaining the approval of at least a Unit Majority and furnishing an Opinion of Counsel (as defined in the Glossary). See "The Partnership Agreement--Withdrawal or Removal of the General Partner" and "--Meetings; Voting." Consequences of Removal of General Partner in Certain Circumstances.............. If the General Partner is removed other than for Cause, (i) the Subordination Period will end and all outstanding Subordinated Units will immediately convert into Common Units on a one- for-one basis, (ii) any existing Common Unit Arrearages will be extinguished and (iii) the General Partner will have the right to convert its general partner interest (and its right to receive Incentive Distributions) into Common Units or to receive cash in exchange for such interests. See "The Partnership Agreement--Change of Management Provisions." Distributions Upon Liquidation................ In the event of a liquidation of the Company during the Subordination Period, the outstanding Common Units generally will be entitled to receive a distribution out of the net assets of the Company in preference to liquidating distributions on the Subordinated Units. Following conversion of the Subordinated Units into Common Units, all Units will be treated the same upon liquidation of the Company. See "Cash Distribution Policy--Distributions of Cash Upon Liquidation." Use of Proceeds............. All of the Securities covered by this Prospectus are being sold by the Selling Unitholders. The Company will not receive any of the proceeds from the sale of the Securities. SUMMARY OF TAX CONSIDERATIONS The tax consequences of an investment in the Company to a particular investor will depend in part on the investor's own tax circumstances. Each prospective investor should consult his own tax advisor about the United States federal, state and local tax consequences of an investment in Subordinated Units. The following is a brief summary of certain expected tax consequences of owning and disposing of Common Units. The following discussion, insofar as it relates to United States federal income tax laws, is based upon the opinion of Andrews & Kurth L.L.P., special counsel to the General Partner and the Company ("Counsel"), described in "Tax Considerations." This summary is qualified by the discussion in "Tax Considerations," particularly the qualifications on the opinions of Counsel described therein. PARTNERSHIP STATUS; CASH DISTRIBUTIONS In the opinion of Counsel, the Company will be classified for federal income tax purposes as a partnership, and the beneficial owners of Units will generally be considered partners in the Company. Accordingly, the Company will pay no federal income taxes, and a Unitholder will be required to report in his federal income tax return his share of the Company's income, gains, losses and deductions. In general, cash distributions to a Subordinated Unitholder will be taxable only if, and to the extent that, they exceed the tax basis in his Units. COMPANY ALLOCATIONS In general, income and loss of the Company will be allocated to the General Partner and the Unitholders for each taxable year in accordance with their respective percentage interests in the Company, as determined annually and prorated on a monthly basis and subsequently apportioned among the General Partner and the Unitholders of record as of the opening of the first business day of the month to which they relate, even though Unitholders may dispose of their Units during the month in question. At any time that distributions are made on the Common Units and not on the Subordinated Units, or that Incentive Distributions are made to the General Partner, gross income will be allocated to the recipients to the extent of such distribution. A Unitholder will be required to take into account, in determining his federal income tax liability, his share of income generated by the Company for each taxable year of the Company ending within or with the Unitholder's taxable year even if cash distributions are not made to him. As a consequence, a Unitholder's share of taxable income of the Company (and possibly the income tax payable by him with respect to such income) may exceed the cash actually distributed to him. Accordingly, no assurance can be given that the estimates will prove to be correct. The actual percentages could be higher or lower than as described above and any differences could be material. See "Tax Considerations--Tax Consequences of Unit Ownership--Ratio of Taxable Income to Distributions," and "--Tax Treatment of Operations--Timber Income." BASIS OF SUBORDINATED UNITS A Unitholder's initial tax basis for a Subordinated Unit purchased in this offering will generally be the amount paid for the Subordinated Unit. A Unitholder's basis will generally be increased by his share of Company income and decreased by his share of Company losses and distributions. LIMITATIONS ON DEDUCTIBILITY OF COMPANY LOSSES In the case of taxpayers subject to the passive loss rules (generally, individuals and closely held corporations), any Company losses will only be available to offset future income generated by the Company and cannot be used to offset income from other activities, including passive activities or investments. Any losses unused by virtue of the passive loss rules may be fully deducted when the Unitholder disposes of all of his investment in the Company in a taxable transaction with an unrelated party. SECTION 754 ELECTION The Company has made the election provided for by Section 754 of the Code, which will generally result in a Unitholder being allocated income and deductions calculated by reference to the portion of his purchase price attributable to each asset of the Company. DISPOSITION OF UNITS A Unitholder who sells Units will recognize gain or loss equal to the difference between the amount realized and the adjusted tax basis of those Units. Thus, distributions of cash from the Company to a Unitholder in excess of the income allocated to him will, in effect, become taxable income if he sells the Units at a price greater than his adjusted tax basis even if the price is less than his original cost. A portion of the amount realized (whether or not representing gain) may be ordinary income. STATE, LOCAL AND OTHER TAX CONSIDERATIONS In addition to federal income taxes, Unitholders will likely be subject to other taxes, such as state and local income taxes, unincorporated business taxes, and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which a Unitholder resides or in which the Company does business or owns property. Although an analysis of those various taxes is not presented here, each prospective Unitholder should consider their potential impact on his investment in the Company. The Company currently owns property and/or conducts business in Oregon and Washington. Oregon currently imposes a personal income tax. In certain states, tax losses may not produce a tax benefit in the year incurred (if, for example, the Company has no income from sources within that state) and also may not be available to offset income in subsequent taxable years. Some states may require the Company, or the Company may elect, to withhold a percentage of income from amounts to be distributed to a Unitholder. Withholding, the amount of which may be more or less than a particular Unitholder's income tax liability owed to the state, may not relieve the nonresident Unitholder from the obligation to file an income tax return. Amounts withheld may be treated as if distributed to Unitholders for purposes of determining the amounts distributed by the Company. Based on current law and its estimate of future Company operations, the Company anticipates that any amounts required to be withheld will not be material. It is the responsibility of each prospective Unitholder to investigate the legal and tax consequences, under the laws of pertinent states and localities, of his investment in the Company. Accordingly, each prospective Unitholder should consult, and must depend upon, his own tax counsel or other advisor with regard to those matters. Further, it is the responsibility of each Unitholder to file all U.S. federal, state and local tax returns that may be required of such Unitholder. Counsel has not rendered an opinion on the state or local tax consequences of an investment in the Company. OWNERSHIP OF UNITS BY TAX-EXEMPT ORGANIZATIONS AND CERTAIN OTHER INVESTORS An investment in Units by tax-exempt organizations (including IRAs and other retirement plans), regulated investment companies (mutual funds) and foreign persons raises issues unique to such persons. Much of the income allocated to a Unitholder which is a tax-exempt organization will be unrelated business taxable income and, thus, will be taxable to such Unitholder; no significant amount of the Company's gross income will be qualifying income for purposes of determining whether a Unitholder will qualify as a regulated investment company; and a Unitholder who is a nonresident alien, foreign corporation or other foreign person will be regarded as being engaged in a trade or business in the United States as a result of ownership of a Unit and, thus, will be required to file federal income tax returns and to pay tax on such Unitholder's share of Company taxable income. Furthermore, distributions to foreign Unitholders will be subject to federal income tax withholding. See "Tax Considerations--Uniformity of Units--Tax-Exempt Organizations and Certain Other Investors." TAX SHELTER REGISTRATION The Code generally requires that "tax shelters" be registered with the Secretary of the Treasury. It is arguable that the Company is not subject to this registration requirement. Nevertheless, the Company has applied for registration as a tax shelter with the Secretary of the Treasury. ISSUANCE OF THE REGISTRATION NUMBER DOES NOT INDICATE THAT AN INVESTMENT IN THE COMPANY OR THE CLAIMED TAX BENEFITS HAS BEEN REVIEWED, EXAMINED OR APPROVED BY THE IRS. See "Tax Considerations--Administrative Matters--Registration as a Tax Shelter."
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements, including the notes thereto, included elsewhere in this Prospectus, including information under "Risk Factors." For a description of the recent history of Ecuador, see "Annex A -- The Republic of Ecuador" and for the definitions of certain terms used herein, see "Annex B -- Glossary of Certain Telecommunications Terms." In this Prospectus, unless otherwise noted, (a) all information assumes that the Underwriters' over-allotment option is not exercised and (b) the financial statements included herein are presented in accordance with U.S. GAAP. As used in this Prospectus, (i) "Conecel" or the "Company" refers to Consorcio Ecuatoriano de Telecomunicaciones S.A. CONECEL, an Ecuadorian corporation, and (ii) "Conecel Holdings" refers to Conecel Holdings Limited, a special purpose British Virgin Islands company which currently owns approximately 85% of the capital stock of Conecel. THE COMPANY The Company is the leading provider of integrated wireless telecommunications services in Ecuador, offering cellular, international and national long distance, data transmission and cellular public telephone services, and is the only company in Ecuador licensed to provide all of these services. The Company is the largest cellular provider in Ecuador, having 104,061 cellular subscribers as of December 31, 1997 and a cellular network that covers approximately 10.2 million people, representing in excess of 85% of the country's population. The Company is also the largest cellular public telephone operator in Ecuador with 1,440 cellular public telephones in operation as of December 31, 1997. The Company's recently-commenced data transmission operations are currently providing data, voice and image connectivity over its cellular network to a number of major Ecuadorian companies, and beginning in the second quarter of 1998, the Company anticipates offering Internet gateway services to its customers. The Company's products and services are marketed through its approximately 900 combined internal sales representatives and independent distributors utilizing the Company's "Porta" trademarks, one of the best known brand names in Ecuador. The Company has experienced substantial growth, with total revenues and operating income having grown to approximately $75.0 million and $13.8 million, respectively, for the year ended December 31, 1997 from approximately $29.8 million and $1.4 million, respectively, for the year ended December 31, 1996. In addition, average minutes of usage per reported subscriber has increased to 295 minutes per month in 1997 from 190 minutes per month in 1996, a 55.3% increase. As a result, total minutes of usage per month of the Company's reported subscribers has increased to 31.2 million minutes for December 1997 from 7.7 million minutes for December 1996. THE ECUADORIAN TELECOMMUNICATIONS MARKET The lack of a highly-developed wireline telecommunications system in Ecuador has created a significant market opportunity for the Company. Ecuador currently has one of the least developed traditional wireline systems in Latin America with an average penetration rate, as of December 31, 1996, of only 6.4 telephone lines per 100 persons. Wireline penetration rates, by comparison, in Uruguay, Argentina, Chile, Venezuela, Colombia, Mexico, Brazil and Peru as of December 31, 1996, were 19.6%, 16.0%, 13.2%, 12.0%, 10.0%, 9.6%, 7.5% and 4.7%, respectively. The state-owned wireline system in Ecuador has yet to reach many of Ecuador's approximately 12 million people. Consequently, there are typically long waiting periods for new telephone lines that vary significantly by city and usually range from a few weeks or months in the best markets (including Quito and Guayaquil) to two years or longer in other markets. The lack of highly-developed wireline telecommunications systems in Ecuador has resulted in some subscribers looking to wireless telecommunications systems as a substitute (as well as a supplement) to wireline systems. In November 1997, the Government of Ecuador formed two regional operating entities, Andinatel, S.A. and Pacifictel, S.A. (together, the "Ecuadorian Wireline System"), in anticipation of the expected privatization of the state-owned wireline system (formerly known as Emetel, S.A.). The Ecuadorian cellular telephone industry has experienced significant growth since cellular services were first offered in March 1994, primarily as a result of the unfilled demand for traditional wireline telephone services, as well as the convenience, relatively short activation time and reliability of cellular telephones, and INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. Subject to Completion, Dated April 6, 1998 PROSPECTUS CONECEL LOGO CONSORCIO ECUATORIANO DE TELECOMUNICACIONES S.A. CONECEL 5,500,000 AMERICAN DEPOSITARY SHARES EACH REPRESENTING FOUR SHARES OF CLASS B COMMON STOCK Each American Depositary Share ("ADS") being offered hereby represents four shares of Class B Common Stock (the "Class B Common Stock") of Consorcio Ecuatoriano de Telecomunicaciones S.A. CONECEL, a corporation (sociedad anonima) organized and existing under the laws of the Republic of Ecuador (the "Company"). The ADSs are evidenced by American Depositary Receipts ("ADRs"). See "Description of American Depositary Receipts." Of the 5,500,000 ADSs being offered hereby (the "Offering"), 5,217,300 ADSs are being sold by the Company and 282,700 ADSs are being sold by certain shareholders of the Company (the "Selling Shareholders"). See "Principal and Selling Shareholders." The Company will not receive any of the proceeds from the sale of the ADSs by the Selling Shareholders. See "Underwriting." Prior to the Offering, there has been no public market for the ADSs, Class B Common Stock or any other equity securities of the Company in Ecuador, the United States or elsewhere. It is currently estimated that the initial public offering price of the ADSs in the Offering will be between $12.50 and $13.50 per ADS. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price of the ADSs. The Company has two classes of shares, the Class B Common Stock being offered and the Class A Common Stock ("Class A Common Stock") of the Company. The rights of holders of the Class B Common Stock and holders of Class A Common Stock are substantially the same, except that holders of Class B Common Stock are not entitled to vote other than in certain limited circumstances. See "Description of Capital Stock." The ADSs have been approved for listing, upon official notice of issuance, on the Nasdaq National Market ("Nasdaq") under the symbol "PRTA." SEE "RISK FACTORS" BEGINNING ON PAGE 10 OF THIS PROSPECTUS FOR A DISCUSSION OF CERTAIN RISKS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. <TABLE> <CAPTION> ========================================================================================================== Price to the Underwriting Discounts Proceeds to the Proceeds to the Public and Commissions(1) Company(2) Selling Shareholders - ---------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Per ADS........... $ $ $ $ - ---------------------------------------------------------------------------------------------------------- Total(3).......... $ $ $ $ ========================================================================================================== </TABLE> (1) The Company and the Selling Shareholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). See "Underwriting." (2) Before deducting offering expenses estimated at $950,000 payable by the Company. (3) The Company has granted to the Underwriters an option, exercisable within 30 days after the date hereof, to purchase up to an aggregate of 825,000 additional ADSs at the same price and on the same terms as set forth herein, solely to cover over-allotments, if any. If the option granted to the Underwriters is exercised in full, the total Price to the Public, Underwriting Discounts and Commissions and Proceeds to the Company will be $ , $ and $ , respectively. See "Underwriting." --------------------------- JOINT GLOBAL COORDINATORS AND BOOKRUNNERS UBS SECURITIES SBC WARBURG DILLON READ INC. --------------------------- The ADSs offered hereby are being offered by the several Underwriters, subject to prior sale, when, as and if delivered to and accepted by them and subject to various prior conditions, including their right to reject orders in whole or in part. It is expected that delivery of the ADRs evidencing the ADSs will be made on or about April , 1998 at the offices of UBS Securities LLC, New York, New York or through the facilities of The Depository Trust Company. --------------------------- UBS SECURITIES SBC WARBURG DILLON READ INC. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION LEHMAN BROTHERS --------------------------- The date of this Prospectus is April , 1998 more recently as a result of the introduction of the "calling party pays" interconnection system in Ecuador, in which the originator of the call pays the entire cellular charge of the call. BUSINESS STRATEGY The Company's current business strategy is to (i) take advantage of the strong demand for telecommunications services in Ecuador by aggressively marketing its cellular services to a broader potential subscriber base with an emphasis on maximizing shareholder return through a full range of competitively-priced service plans and by increasing the capacity of its cellular network to support additional subscribers, (ii) exploit the competitive advantages associated with its digital TDMA service (including a complete line of value-added telecommunications services) and high-quality international and national long distance services, (iii) leverage the local strengths associated with the Company's extensive distribution channels and continue to expand such channels by adding more independent distributors, (iv) differentiate its services by providing high-quality, reliable customer service and (v) capitalize on its strong brand name recognition throughout the country. The Company's long-term strategy is to expand the range of telecommunications products and services which it offers through its network to satisfy all of a customer's telecommunications needs, from national and international cellular telephone services to data transmission connectivity for Internet access, videoconferencing, e-mail and fax, and to consistently be the first company to introduce innovative telecommunications and multimedia technologies in Ecuador under its "Porta" brand name as such technologies become available in other parts of the world. As part of this strategy, beginning in the second quarter of 1998, the Company anticipates offering Internet gateway services to provide network access to local Internet service providers, as well as to the Company's existing customer base. BUSINESS OPERATIONS The Company's operations are currently focused in four principal areas: (i) cellular operations, (ii) international and national long distance service, (iii) data transmission services and (iv) public cellular telephones. For the year ended December 31, 1997, approximately 95% of the Company's revenues were attributable to cellular operations. Cellular Operations. The Company was the first company to provide cellular telephone services in Ecuador, commencing in March 1994, and is the current market leader. The Company owns and operates 63 cell sites, 17 cell repeaters and two switching centers connected through 57 microwave-based cellular transmission facilities (the "Network") that currently operate in a geographic area that covers approximately 85% of the country's population. The Network is based on a system using digital TDMA technology and equipment predominately supplied by Northern Telecom Limited ("Northern Telecom"). As of December 31, 1997, the geographic area covered by the Company's Network had an estimated aggregate population of approximately 10.2 million people, including the main metropolitan areas of Quito, the capital city with approximately 1.5 million people, Guayaquil, the main commercial center with approximately 2 million people, and Cuenca, with approximately 500,000 people. As of December 31, 1997, the Company had 104,061 reported cellular subscribers, resulting in a market penetration of approximately 0.88% and representing approximately 65% of the total cellular subscribers in Ecuador, based on the Company's estimates. To support the significant growth in its subscriber base, the Company has invested approximately $80.0 million through December 31, 1997 to construct its Network and, as of such date, had upgraded approximately 50% of the Network with digital TDMA technology. The Company anticipates that 90% of the Network will be digitalized by the end of 1998. The Company holds one of only two cellular telephone concessions granted by the Government of Ecuador, and is the only cellular operator providing digital wireless service in the country. The Company's cellular telephone concession (the "Cellular Concession"), which was awarded in August 1993, has a term of 15 years and is renewable at the option of the Government of Ecuador for an additional 15-year term. International and National Long Distance Service. The Company provides international and national long distance service to its cellular customers under the terms of its Cellular Concession. The Company began providing international long distance service to the United States in August 1996 and worldwide in March 1997 and routed an average of approximately 150,000 minutes per month of outbound international long distance traffic during 1997. The Company seeks to capitalize on the low call completion rate, poor voice [Inside Front Cover Page] COLOR GRAPHICS SHOWING THE COMPANY'S PRODUCTS, PRODUCT NAMES AND TRADEMARKS. quality and inability to encrypt transmissions of existing Ecuadorian long-distance telephone companies with analog-based systems, by providing high quality long distance service through its Network in conjunction with TeleData World Services, Inc. and SysNet Corp. The Company has established "roaming" arrangements to enable its subscribers to utilize their cellular telephones throughout most of Latin America, the United States and Canada. The Company has also recently entered into a roaming agreement with Iridium SudAmerica Corporation that is expected to enable the Company's subscribers to utilize cellular telephones throughout the rest of the world once the Iridium network is functioning, which is expected to be in September 1998. Data Transmission Services. The Company recently began providing data transmission services in Ecuador through the Network's existing teleport facilities and microwave network under the terms of its data transmission concession (the "Data Transmission Concession"). Data transmission service is one of the fastest-growing sectors of the Ecuadorian telecommunications market, primarily due to demand from companies in the financial, manufacturing, health care and travel industries, requiring instantaneous access to information around the world. Since March 1997, the Company has entered into ten data transmission service agreements, including agreements with a number of major Ecuadorian companies, and the Company is currently negotiating to enter into additional data transmission service agreements, however no assurance can be given that any agreements in negotiation will be concluded. The Data Transmission Concession, which was awarded to the Company in December 1994, has a term of 15 years and is renewable at the option of the Government of Ecuador for an additional 15-year term. In addition, under the terms of a recently awarded ten-year Internet service concession, the Company anticipates offering Internet gateway services to provide network access to local Internet service providers, as well as to the Company's existing customer base, beginning in the second quarter of 1998. Such gateway services will provide World Wide Web graphical information, database access and e-mail capabilities to these customers. Public Cellular Telephones. The Company is required to install and operate public telephones using cellular technology under the terms of its Cellular Concession. The capital and largest commercial cities in Ecuador have relatively few operational public telephones, and rural areas have significantly fewer. The Company believes that providing public cellular telephones complements its core cellular operations by (i) providing additional access to telephone service for new and existing customers, including a segment of the population that would not otherwise purchase telephone services, (ii) increasing utilization of the Network, thereby adding significant incremental revenues and cash flow, and (iii) expanding the Company's marketing of its branded products. As of December 31, 1997, the Company had 1,440 public cellular telephones in operation, which generated average monthly revenues of approximately $110 per telephone and had an average payback period of 18 months. The Company's public cellular telephones operate using prepaid phone cards, thereby minimizing the risks of fraud, vandalism and noncollection. The Company is a corporation (sociedad anonima) formed in June 1993 under the laws of the Republic of Ecuador. The Company's principal executive office is located at Amazonas 6017 y Rio Coca, Quito, Ecuador, and its main telephone number at this office is (5932) 469-129. In addition, the Company maintains an Internet home page which is located on the World Wide Web at http://www.porta.net. RECENT TRANSACTIONS The Company is currently controlled by the Parra family, a leading Ecuadorian family with interests in the country's banking, construction, real estate and agricultural industries (the "Parra Family"), through its 100% interest in Conecel Holdings, which currently owns approximately 85% of the capital stock of the Company. The remaining 15% of the capital stock of the Company is owned by Centro Empresarial, Cempresa C.A. ("Cempresa"), an Ecuadorian corporation that is also controlled by the Parra Family. Conecel Holdings acquired its shares in the Company in September 1997 from three former minority shareholders, including Grupo Iusacell, S.A. de C.V., the Mexican telecommunications affiliate of Bell Atlantic Corporation (which sold in the aggregate 47.37% of the outstanding shares for a purchase price of $51.0 million), and from Cempresa (which sold 37.63% of the outstanding shares for a purchase price of $27.5 million). Cempresa retained 15% of the outstanding shares and entered into an agreement, described below, concerning the subsequent distribution of such retained shares. In connection with such acquisition, on September 30, 1997, Conecel Holdings sold in a private transaction to qualified institutional buyers, $121.0 million aggregate principal amount of Conecel Holdings' 14% Series A Secured Notes due 2000 (the "Conecel Holdings Notes") and transferable warrants to purchase 1,633,500 shares of the Company's Class B Common Stock from Conecel Holdings (the "Warrants"). Concurrently with the closing of the Offering, Conecel Holdings will transfer its obligations under the Conecel Holdings Notes to the Company, which will use a substantial portion of the net proceeds of the Offering to redeem such Notes in part (though not less than 35% of the outstanding principal amount thereof) at a redemption price equal to 107% of the outstanding principal amount thereof, plus unpaid accrued interest to the redemption date. The Conecel Holdings Notes that are not redeemed by the Company will remain obligations of Conecel Holdings. See "Use of Proceeds." Following the Offering and the application of the proceeds thereof, the Company will continue to have outstanding $125.0 million aggregate principal amount of 14% Notes due 2002, the holders of which have waived compliance with certain covenants to permit the prepayment of a portion of the Conecel Holdings Notes from the net proceeds of the Offering. See "The Conecel Indebtedness." In addition, the holders of the Warrants that have agreed to sell shares hereunder are expected to exercise their Warrants for shares of Class B Common Stock and sell such shares as part of the Offering. See "Principal and Selling Shareholders." In September 1997, an entity wholly owned by the Parra Family preliminarily agreed to purchase from MasTec Inc. ("MasTec"), a Miami-based telecommunications engineering and construction company, the 40% interest in Cempresa which the Parra Family did not own, in exchange for $20.0 million in cash and 7,500,000 shares of the Company's Class B Common Stock owned by Cempresa (which it will convert from an equal number of shares of Class A Common Stock) (the "MasTec Transaction"). Pursuant to a definitive stock purchase agreement, the cash portion of the MasTec Transaction was paid in December 1997, with the share transfer to occur concurrently with the consummation of the Offering. Of the remaining shares of Class A Common Stock held by Cempresa, 3,000,000 shares will be transferred to Conecel Holdings, thereby increasing its ownership interest in the Company to approximately 89% of the outstanding capital stock (prior to the Offering), and 750,000 shares will be converted into Class B Common Stock and transferred to an unaffiliated entity for services rendered in connection with the MasTec Transaction. As a result of the foregoing, following the consummation of the Offering, the Parra Family will control 100% of the outstanding shares of Class A Common Stock of the Company and effectively possess full operating and Board control of the Company. See "Certain Relationships and Related Transactions." THE OFFERING ADSs Offered............... 5,500,000 ADSs. Each ADS represents four shares of Class B Common Stock. The ADSs are evidenced by ADRs. See "Description of American Depositary Receipts." ADSs offered by the Company.................... 5,217,300 ADSs. ADSs offered by the Selling Shareholders............. 282,700 ADSs. Over-Allotment Option...... The Company has granted the Underwriters an option to purchase up to an aggregate of 825,000 additional ADSs solely for the purpose of covering over-allotments, if any. See "Underwriting." Shares Outstanding(1)(2)... <TABLE> <CAPTION> AFTER GIVING PRIOR TO EFFECT TO THE OFFERING THE OFFERING(3) --------------- --------------- <S> <C> <C> Class A Common Stock...................... 63,394,162 63,394,162 Class B Common Stock...................... 11,605,838 32,475,038 ---------- ---------- Total............................ 75,000,000 95,869,200 ========== ========== </TABLE> Initial Offering Price..... It is anticipated that the initial offering price of the ADSs will be between $12.50 and $13.50 per ADS. Use of Proceeds............ The net proceeds to be received by the Company from its sale of the ADSs are estimated to be approximately $63.1 million (at an assumed initial public offering price of $13.00 per ADS). The Company will use a substantial portion of the net proceeds from the Offering to redeem a portion of the Conecel Holdings Notes (though not less than 35% of the outstanding principal amount thereof). The remaining net proceeds will be used by the Company for capital expenditures. The Company will not receive any of the proceeds from the sale of the ADSs by the Selling Shareholders. See "Use of Proceeds." Selling Shareholders....... The Selling Shareholders are certain warrantholders that have elected to exercise their Warrants and sell their shares of Class B Common Stock as part of the Offering and certain existing shareholders listed under "Principal and Selling Shareholders." See "Principal and Selling Shareholders." - --------------- (1) Effective January 23, 1998, the Company's authorized equity share capital of 150,000,000 shares was divided into two classes designated as Class A Common Stock and Class B Common Stock. See "Description of Capital Stock." (2) Gives effect to, before or concurrently with the consummation of the Offering, (a) the conversion by Conecel Holdings of 1,949,588 shares of Class A Common Stock into an equal number of shares of Class B Common Stock and the exercise of a portion of the Warrants by the holders thereof for 1,130,800 of such shares of Class B Common Stock to be sold in the Offering, (b) the conversion by Cempresa of 8,250,000 shares of Class A Common Stock into an equal number of shares of Class B Common Stock to transfer to MasTec and an unaffiliated entity in connection with the MasTec Transaction and (c) the conversion by Conecel Holdings of 1,406,250 shares of Class A Common Stock owned by Conecel Holdings into an equal number of shares of Class B Common Stock which are subject to a warrant held by UBS Securities LLC (the "UBS Warrants") issued in consideration for corporate finance advisory services rendered to the Company, Conecel Holdings and its affiliates since May 1995. Does not include an aggregate of 750,000 shares of Class B Common Stock reserved for issuance to executive officers, key employees and independent contractors of the Company under the Company's 1998 Stock Option Plan. See "-- Recent Transactions," "Management -- Stock Option Plan," "Certain Relationships and Related Transactions" and "Underwriting." (3) Assuming the Underwriters do not exercise their over-allotment option. Limited Voting Rights...... The rights of holders of Class B Common Stock and Class A Common Stock are substantially the same, except that holders of Class B Common Stock are not entitled to vote other than in certain limited circumstances. Accordingly, holders of Class A Common Stock will be able to control substantially all matters submitted generally to a vote of shareholders, including the election of directors. Shares of Class A Common Stock are convertible into Class B Common Stock at the option of the holders thereof. See "Description of Capital Stock." Dividends.................. Information relating to payment of dividends on the Class B Common Stock is set forth in "Dividend Policy" and "Description of Capital Stock." Listing.................... The ADSs have been approved for listing, upon official notice of issuance, on the Nasdaq National Market under the symbol "PRTA." It is not currently contemplated that the ADSs, the Class B Common Stock or any other equity securities of the Company will trade on any exchange or market other than in the United States; however the Company may reexamine such decision in the future. Risk Factors............... Prospective investors should carefully consider all information contained in this Prospectus, including the detailed description of the risk factors beginning on page 10, relating to investments in Ecuadorian companies generally and to an investment in the Company. Such risk factors include (i) factors relating to Ecuador, such as recent political and economic developments, border conflicts with Peru, inflation, currency fluctuations and devaluation (including the recent devaluation of the currency), regulatory and concession matters, risks due to Ecuador's share registration system, effects of El Nino on Ecuadorian economy, enforceability of certain civil liabilities and effects of developments in other markets; (ii) factors relating to the Company, such as high leverage and ability to service debt, risks related to payments from the Ecuadorian Wireline System, terms of interconnection agreements, limited operating history and net losses, risks associated with new industry and growth, ability to manage growth, dependence on key personnel, competition, rapid technological change, churn rate risks, dependence upon certain equipment suppliers, equipment failure and natural disasters, future capital needs, related party transactions and potential conflicts of interest, and alleged health risks associated with wireless telephones; and (iii) factors relating to the ADSs and Class B Common Stock, such as marketability and possible price volatility, the availability of preemptive rights, shares eligible for future sale, dilution, control by Parra Family and corporate disclosure. Taxation................... Dividends paid in cash or in any other form with respect to the Class B Common Stock, whether held directly or represented by an ADS, will be subject to an Ecuadorian withholding tax imposed at the rate of 25% on the gross amount of the dividend. Gains of a Non-Ecuadorian Holder (as defined below) from the sale or other disposition of ADSs and exchanges of ADSs for Class B Common Stock will not be subject to Ecuadorian income taxes or withholding thereof. Gains of a Non-Ecuadorian Holder from the sale or other disposition of Class B Common Stock inside (but not outside) Ecuador will be subject to Ecuadorian income tax at a maximum rate of 25%. See "Taxation -- Ecuadorian Taxation." For certain United States tax considerations with respect to purchasing, holding and disposing of the ADSs or the Class B Common Stock, see "Taxation -- United States Taxation." SUMMARY FINANCIAL AND OPERATING DATA (Dollars in thousands, except per share and operating data) The Company commenced providing cellular telephone services in March 1994. Accordingly, results for 1994 are not directly comparable with the other periods presented below. The summary financial information for each of the fiscal years in the four-year period ended December 31, 1997 are derived from financial statements included elsewhere herein that have been prepared in accordance with U.S. GAAP and audited by BDO Binder, independent auditors. BDO Binder is one of the world's largest accounting and consulting organizations. This information should be read in conjunction with, and is qualified in its entirety by reference to, the financial statements and the related notes thereto presented elsewhere in this Prospectus. Calculations of revenue per subscriber and airtime usage per subscriber are made on the basis of "reported subscribers." The unaudited pro forma data for the year ended December 31, 1997 gives effect to (i) the issuance by Conecel Holdings of 1,406,250 warrants issued in connection with certain corporate financial advisory services rendered to the Company, Conecel Holdings and its affiliates (ii) the issuance by Conecel Holdings of 1,633,500 Warrants in connection with the sale of the Conecel Holdings Notes and (iii) the issuance by Conecel Holdings of 316,088 Warrants as a result of the Company's failure to complete a public offering by March 31, 1998. The unaudited pro forma financial data is based on the historical financial statements of the Company and the assumptions and adjustments described in the accompanying notes. The Company believes that the assumptions on which the unaudited pro forma data are based are reasonable. The unaudited pro forma data is provided for informational purposes and does not purport to represent what the Company's financial position or results of operations actually will be for any period. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ---------------------------------------- 1994 1995 1996 1997(1) ------- -------- -------- -------- <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Service Revenues: Activation revenues....................................... $ 4,059 $ 2,066 $ 1,069 $ 972 Recurring charges(2)...................................... 7,571 24,664 27,223 65,487 Sales of equipment........................................ 1,083 3,090 1,532 8,557 ------- -------- -------- -------- Total............................................... 12,713 29,820 29,824 75,016 ------- -------- -------- -------- Cost of Revenues: Cost of services(3)....................................... (1,348) (6,155) (7,997) (12,262) Cost of equipment sold.................................... (957) (4,150) (2,336) (14,763) ------- -------- -------- -------- Total............................................... (2,305) (10,305) (10,333) (27,025) ------- -------- -------- -------- Gross profit................................................ 10,408 19,515 19,491 47,991 ------- -------- -------- -------- Operating Expenses: Selling expenses.......................................... (2,070) (3,567) (2,180) (7,920) Marketing expenses........................................ (2,229) (6,333) (4,353) (3,936) General and administrative expenses....................... (3,266) (5,813) (7,388) (12,205) Depreciation and amortization(1).......................... (2,205) (2,536) (4,189) (6,290) Settlement related to calling party pays(4)............... -- -- -- (3,560) Provision for bad debt.................................... (5) (1,946) -- (277) ------- -------- -------- -------- Total............................................... (9,775) (20,195) (18,110) (34,188) ------- -------- -------- -------- Operating income (loss)..................................... 633 (680) 1,381 13,803 ------- -------- -------- -------- Other income: Interest income........................................... 366 426 556 2,873 Other income.............................................. 75 266 1,602 888 ------- -------- -------- -------- Total............................................... 441 692 2,158 3,761 ------- -------- -------- -------- Other expenses: Interest expense(1)....................................... $(2,654) $ (5,016) $ (3,034) $(20,985) Remeasurement (loss) gain................................. (1,927) 899 (2,037) (6,293) ------- -------- -------- -------- Total............................................... (4,581) (4,117) (5,071) (27,278) ------- -------- -------- -------- Net income (loss)........................................... $(3,507) $ (4,105) $ (1,532) $ (9,714) ======= ======== ======== ======== Net income (loss) per share................................. $ (.31) $ (.11) $ (.02) $ (.13) ------- -------- -------- -------- Weighted average number of shares outstanding............... 11,484 38,288 75,000 75,000 ======= ======== ======== ======== </TABLE> <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, 1997 ------------ <S> <C> PRO FORMA DATA: Pro forma net loss(5)....................................... $(14,710)(5) ======== Pro forma net loss per share(5)............................. $ (.20) -------- Pro forma average number of shares outstanding.............. 75,000 ======== </TABLE> <TABLE> <CAPTION> AS OF AS OF DECEMBER 31, DECEMBER 31, 1997 --------------------------- ----------------------- AS 1994 1995 1996 ACTUAL ADJUSTED(6) ------- ------- ------- -------- ----------- <S> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Current assets.............................................. $ 6,353 $21,909 $11,000 $ 66,453 $ 79,623 Property and equipment, net................................. 15,747 31,315 32,156 74,520 74,520 Licenses and systems........................................ 1,949 1,845 1,698 52,015 52,015 Total assets................................................ 24,106 55,951 44,931 271,606 285,616 Current liabilities......................................... 20,556 22,854 15,126 48,517 42,782 Long-term debt(7)........................................... 1,667 12,812 11,052 246,000 203,253 Stockholders' equity (deficit).............................. 1,883 20,285 18,753 (22,911)(1) 39,581 </TABLE> <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, --------------------------------------------- 1994 1995 1996 1997 ------- -------- -------- --------- <S> <C> <C> <C> <C> OTHER FINANCIAL DATA: EBITDA(8)................................................... $ 2,838 $ 1,856 $ 5,570 $ 23,248 Net cash provided (used) by: Operating activities...................................... (2,558) 5,188 3,925 (10,256) Investing activities...................................... (5,356) (20,154) (4,883) (105,600) Financing activities...................................... 8,079 26,283 (10,360) 119,722 Capital expenditures........................................ 5,387 17,928 4,830 47,931 OPERATING DATA: Average airtime usage (minutes per month)(9)................ 207 165 190 295 Average number of reported subscribers...................... 7,199 23,429 28,382 65,251 Average monthly revenue per reported subscriber............. $134.63 $ 95.07 $ 83.07 $ 84.88(10) Percent of Ecuadorian population covered(11)................ 30% 60% 80% 85% Ending reported subscribers................................. 15,012 28,558 34,970 104,061 Ending market penetration................................... .13% .25% .29% .87% Average of average monthly churn............................ .79% .86% 3.96%(12) 2.13% </TABLE> - --------------- (1) Under accounting rules relating to "push-down" accounting, the Company is required to reflect certain assets and liabilities of Conecel Holdings on the Company's balance sheet. Due to "push-down" accounting, the Company had a stockholders' deficit as of December 31, 1997. Without giving effect to such accounting treatment, the Company's stockholders' equity would have been $15.3 million. Upon repayment in full or in part of the Conecel Holdings Notes, as a result of "push-down" accounting, the Company will continue to carry approximately $66.8 million of goodwill on its balance sheet which will be amortized over 30 years. The effect of such accounting treatment will be to decrease net income or increase net loss, as applicable, in the amount of approximately $2.2 million annually for future periods. Results of operation for 1997 include approximately $0.6 million of depreciation and amortization and approximately $6.2 million of interest expense associated with "push-down" accounting. (2) Includes monthly fees, airtime charges, roaming charges, national and international long distance revenues and public phone service revenues. (3) In May 1997, the Company prepaid the annual license fees that were payable to the Government of Ecuador pursuant to its Cellular Concession. Commencing June 1997, the Company was no longer required to make the annual cost payment to the Government of Ecuador and the full amount of the prepayment ($53.6 million) will be amortized as a pre-paid expense over the remainder of the term of such license and will continue to be reflected in cost of services. (4) Represents settlement of amounts due from Andinatel, S.A. and Pacifictel, S.A. (the successors to Emetel, S.A.) regarding calling party pays. See Note B to Notes to Financial Statements. (5) The pro forma adjustments for the year ended December 31, 1997 are as follows: <TABLE> <S> <C> Historical net loss......................................... $ (9,714) Pro forma adjustments: For warrants issued in connection with corporate finance advisory services....................................... (1,828) For warrants issued in connection with the Conecel Holdings Notes.......................................... (3,168) -------- Pro forma net loss.......................................... $(14,710) ======== </TABLE> The pro forma adjustments have been determined with an assumed public offering price of $3.25 per share of Class B Common Stock, however, the actual price may be higher or lower depending on the market conditions at the time of the Offering. The pro forma net loss is presented to reflect an estimate of the expenses the Company will record in 1998 when the value of the Class B Common Stock is determined for 1,949,588 warrants issued in connection with the issuance of the Conecel Holdings Notes and 1,406,250 warrants issued in connection with corporate finance advisory services. As of December 31, 1997, "Long-term debt" included $125.0 million aggregate principal amount of the Conecel Notes and, as a result of "push-down" accounting, $121.0 million aggregate principal amount of the Conecel Holdings Notes issued on September 30, 1997. See "Use of Proceeds." (6) Gives effect to the sale of the 5,217,300 ADSs offered by the Company hereby (at an assumed initial public offering price of $13.00 per ADS) and the application of the estimated net proceeds therefrom as set forth under "Use of Proceeds." (7) As of December 31, 1997, "Long-term debt" included $125.0 million aggregate principal amount of the Conecel Notes and, as a result of "push-down" accounting, $121.0 million aggregate principal amount of the Conecel Holdings Notes issued on September 30, 1997. (8) EBITDA represents earnings (net income (loss)) before interest, taxes, depreciation and amortization, remeasurement gain (loss) and other income. The Company has included information concerning EBITDA (which is not a measure of financial performance under U.S. GAAP), because it understands that it is used by certain investors as one measure of an issuer's ability to meet obligations for interest, income tax and amortization of debt before new capital expenditures for property and equipment. EBITDA should not be construed as an alternative to net income (as determined in accordance with U.S. GAAP) as an indicator of operating performance. EBITDA is calculated using financial statement information included herein. The Company's EBITDA may not be comparable to computations presented by other companies since all companies and analysts do not calculate EBITDA in the same fashion. In addition, EBITDA takes into account the annual license payments that were made by the Company to the Government of Ecuador pursuant to the Cellular Concession prior to the prepayment of the annual license fees in May 1997. As the license has been prepaid, the annual license cost, recorded at $400,000 in 1994, $1.6 million in 1995, $3.4 million in 1996 and $3.9 million in 1997, will be recorded as cost of services in the future in order to maintain continuity with historical data. The Company will amortize the prepayment amount over the remaining term of the Cellular Concession resulting in annual amortization of approximately $4.9 million. Excluding the minimum annual license cost, the Company would have reported an EBITDA of $3.2 million in 1994, $3.5 million in 1995 and $9.0 million in 1996. In 1997, EBITDA of $23.2 million was reduced by the inclusion in cost of services of the amortization of the Cellular Concession in the amount of $3.2 million. (9) Average airtime usage figures include airtime usage related to the Company's public cellular telephone operations and free minutes. (10) Average monthly revenue per reported subscriber ("ARPU") for 1997 includes recurring revenues received by the Company resulting from the sale of telephone equipment (e.g., handsets) under the Comodato programs and public cellular telephones. The Company does not believe that ARPU is significantly affected as a result of this treatment. (11) Based on publicly-available information compiled by the Central Bank of Ecuador, the population of Ecuador was approximately 11,173,500, 11,460,000, 11,689,000 and 11,700,000 people at the end of 1994, 1995, 1996 and 1997, respectively. (12) During 1996, the Company disconnected approximately 8,000 reported subscribers with non-performing accounts in order to upgrade the credit quality of its subscriber base. See "Business -- Subscriber Management -- Management of Churn and Credit Policy."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001043432_american_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001043432_american_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION, CONSOLIDATED FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) AND PRO FORMA COMBINED FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL REFERENCES HEREIN TO THE "COMPANY" SHALL MEAN (A) AMERICAN SKIING COMPANY AND ITS SUBSIDIARIES, EXCLUDING THE ACQUIRED RESORTS (AS DEFINED), WHEN USED WITH RESPECT TO HISTORICAL INFORMATION CONTAINED HEREIN OR (B) AMERICAN SKIING COMPANY AND ITS SUBSIDIARIES, INCLUDING THE ACQUIRED RESORTS, WHEN USED WITH RESPECT TO INFORMATION ABOUT EVENTS THAT HAVE OCCURRED OR WILL OCCUR AFTER THE ACQUISITION OR WHEN GIVING PRO FORMA EFFECT THERETO. SEE "THE TRANSACTIONS." ALL REFERENCES HEREIN TO (A) THE COMPANY'S "FISCAL" YEAR SHALL MEAN THE 52- OR 53-WEEK PERIOD ENDED OR ENDING ON THE LAST SUNDAY IN JULY, (B) THE ACQUIRED RESORTS' FISCAL YEAR SHALL MEAN THE ACQUIRED RESORTS' FISCAL YEAR ENDED ON MAY 31, (C) "SKI SEASON" SHALL MEAN THE PERIOD FROM THE OPENING OF THE FIRST OF THE COMPANY'S MOUNTAINS FOR SKIING THROUGH THE CLOSING OF THE COMPANY'S LAST MOUNTAIN FOR SKIING, TYPICALLY MID-NOVEMBER TO LATE MAY, (D) "SKIER VISITS" SHALL MEAN ONE GUEST ACCESSING A SKI MOUNTAIN ON ANY ONE DAY AND (E) REAL ESTATE RESIDENTIAL "UNITS" SHALL MEAN RESIDENTIAL REAL ESTATE OWNERSHIP INTERESTS, INCLUDING INDIVIDUAL INTERVAL INTERESTS. ALL DISCUSSION HEREIN WITH RESPECT TO THE SIZE OF A RESORT SHALL BE IN TERMS OF THE RELATIVE NUMBER OF SKIER VISITS AT SUCH RESORT. EXCEPT AS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS WITH RESPECT TO THE NUMBER OF OUTSTANDING SHARES OF COMMON STOCK AND CLASS A COMMON, (A) ASSUMES THAT STOCK OPTIONS TO PURCHASE 2,566,723 SHARES OF COMMON STOCK ARE NOT EXERCISED, (B) ASSUMES NO CONVERSION OF THE COMPANY'S 10 1/2% CONVERTIBLE PREFERRED STOCK OR THE 10 1/2% SUBORDINATED DEBENTURES, WHICH WERE CONVERTIBLE, AS OF JANUARY 23, 1998, INTO 2,188,991 SHARES OF COMMON STOCK, (C) GIVES EFFECT TO THE SALE OF 14,750,000 SHARES OF COMMON STOCK IN THE OFFERING AND TO THE ISSUANCE OF THE PRIVATELY PLACED STOCK, (D) ASSUMES THAT NO SHARES OF CLASS A COMMON STOCK ARE CONVERTED INTO SHARES OF COMMON STOCK AND (E) GIVES EFFECT TO THE EXCHANGE BY THE PRINCIPAL SHAREHOLDER OF ALL OF HIS SHARES OF COMMON STOCK OF THE COMPANY FOR CLASS A COMMON STOCK ON A 14.76 FOR 1 BASIS (THE "STOCK SPLIT"). PRIOR TO MAKING AN INVESTMENT IN THE SECURITIES, PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE INFORMATION DISCUSSED UNDER "RISK FACTORS." THE COMPANY The Company is the largest operator of alpine resorts in the United States. The Company owns and operates nine ski resorts, including two of the five largest resorts in the United States based on 1996-97 skier visits, with at least one resort in each major skiing market. These nine resorts generated approximately 4.9 million skier visits, representing approximately 9.4% of total skier visits in the United States during the 1996-97 ski season. The Company's existing resorts include Sunday River and Sugarloaf in Maine; Attitash Bear Peak in New Hampshire; Killington, Mount Snow/Haystack and Sugarbush in Vermont; and The Canyons, adjacent to Park City, Utah (collectively, the "Existing Resorts"). On November 12, 1997, pursuant to a definitive agreement entered into in August 1997 (the "Acquisition Agreement"), the Company acquired (i) the Steamboat ski resort and 168 acres of land held for development in Steamboat Springs, Colorado ("Steamboat") and (ii) the Heavenly ski resort near Lake Tahoe, California ("Heavenly" and, together with Steamboat, the "Acquired Resorts"). After giving pro forma effect to the Transactions (as defined), the Company's total revenues, EBITDA (as defined) and net loss to common shareholders for fiscal 1997 would have been approximately $261.9 million, $57.8 million and $5.5 million, respectively. In addition to operating alpine resorts, the Company develops mountainside real estate which complements the expansion of its on-mountain operations. The Company has created a unique interval ownership product, the Grand Summit Hotel, in which individuals purchase quartershare interval interests while the Company retains ownership of core hotel and commercial properties. The initial sale of quartershare units typically generates a high profit margin, and the Company derives a continuing revenue stream from operating the hotel's retail, restaurant and conference facilities and from renting quartershare interval interests when not in use by their owners. The Company also develops alpine villages at prime locations within certain of its resorts designed to fit that resort's individual characteristics. The Company's real estate development strategy was developed and implemented at the Sunday River resort, where over 1,350 units of residential real estate (including condominiums, townhouses and quartershares) have been developed and sold since 1983. New Grand Summit Hotels were recently completed at Attitash Bear Peak and Sunday River. One Grand Summit Hotel is currently under construction at each of Killington and Mount Snow/Haystack, with initial operations scheduled to commence in February, 1998. A hotel at Sugarbush is near completion of the permitting process. These hotels will have an aggregate of approximately 2,500 units. As of January 18, 1998, the Attitash Grand Summit Hotel had closed $1,284,300 in sales (26 units) in fiscal 1998, with an additional $625,100 in purchase and sales contracts pending. The Sunday River, Jordan Bowl Grand Summit Hotel had closed $6,321,700 in sales (126 units) in fiscal 1998 with $2,300,300 in pending purchase and sales contracts, as of January 18, 1998. Mount Snow and Killington Grand Summit Hotels had $11,893,500 (207 units) and $17,971,800 (295 units), respectively, in purchase and sales contracts pending, as of January 18, 1998. Grand Summit Hotels are in the planning stage at The Canyons and Steamboat. In addition, the Company has over 7,000 acres of real estate available for future development at its resorts, providing the capacity to support over 30,000 residential units during the next 15 to 20 years. The Company also operates golf courses at its resorts and conducts other off-season activities, which accounted for approximately 11% of the Company's resort revenues for fiscal 1997. See "Business--Operating Strategy--Expand Golf and Convention Business." For an organizational chart of the Company and its material operating subsidiaries, see "Business-- The Company." The mailing address of the Company and the address of its principal executive offices is Sunday River Access Road, Bethel, Maine 04217; telephone number (207) 824-8100. USE OF PROCEEDS The Company will not receive any proceeds from the sale of the Securities. The Selling Holders will receive all of the proceeds from any sale of the Securities, net of any underwriting or brokerage discounts or commissions in excess of those payable by the Company. RISK FACTORS See "Risk Factors" beginning on page 13 for a discussion of certain factors that should be considered carefully in evaluating an investment in the Securities. SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA THE COMPANY The summary historical financial data and the unaudited pro forma summary combined financial data (except other data) set forth below have been derived from and should be read in conjunction with the financial statements of the Company and the Acquired Resorts and the notes thereto included elsewhere in this Prospectus and "Pro Forma Financial Data." The unaudited pro forma summary combined financial data for the fiscal year ended July 27, 1997 give effect to the Transactions as if they had occurred on July 29, 1996 with respect to the statement of operations and other data, and on October 26, 1997 with respect to the balance sheet data. See "Pro Forma Financial Data." The unaudited pro forma summary combined financial data is not intended to be indicative of either future results of operations or results that might have been achieved had the Transactions actually occurred on the dates specified. <TABLE> <CAPTION> PRO FORMA FISCAL YEAR HISTORICAL FISCAL YEAR ENDED(1) ENDED(2) ----------------------------------------------------------- ----------- JULY 25, JULY 31, JULY 30, JULY 28, JULY 27, JULY 27, 1993 1994 1995 1996 1997 1997 ----------- ----------- ----------- --------- --------- ----------- HISTORICAL FISCAL QUARTERS ENDED ------------------------ OCTOBER 27, OCTOBER 26, 1996 1997 ----------- ----------- (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> <C> (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER SKIER VISIT AMOUNTS) STATEMENT OF OPERATIONS DATA: Net revenues: Resort........................ $ 23,645 $ 26,544 $ 46,794 $ 63,489 $ 166,923 $ 253,397 $ 11,728 $ 13,811 Real estate................... 6,103 6,682 7,953 9,933 8,468 8,468 1,569 810 ----------- ----------- ----------- --------- --------- ----------- ----------- ----------- Total net revenues.......... 29,748 33,226 54,747 73,422 175,391 261,865 13,297 14,621 Operating expenses: Resort........................ 14,705 15,787 29,725 41,799 109,774 157,744 15,034 17,808 Real estate................... 3,245 3,179 3,994 5,844 6,813 6,813 1,032 925 Marketing, general and administrative(3)........... 4,718 5,940 9,394 11,289 26,126 39,464 4,792 6,845 Stock compensation charge..... -- -- -- -- -- -- -- 14,254 Depreciation and amortization................ 1,984 2,421 3,910 6,783 18,293 35,993 1,527 1,506 ----------- ----------- ----------- --------- --------- ----------- ----------- ----------- Total operating expenses.... 24,652 27,327 47,023 65,715 161,006 240,014 22,385 41,338 ----------- ----------- ----------- --------- --------- ----------- ----------- ----------- Income (loss) from operations... 5,096 5,899 7,724 7,707 14,385 21,851 (9,088) (26,717) Interest expense................ 849 1,026 2,205 4,699 23,730 27,737 7,514 7,521 Net income (loss) available to common shareholders............. $ 5,839 $ 4,873 $ 5,119 $ (2,237) $ (5,926) $ (5,462) $ (10,293) $ (22,860) ----------- ----------- ----------- --------- --------- ----------- ----------- ----------- ----------- ----------- ----------- --------- --------- ----------- ----------- ----------- Pro forma loss per share........ $ (0.38) $ (0.18) $ (10.52) $ (1.48) --------- ----------- ----------- ----------- --------- ----------- ----------- ----------- Pro forma weighted average number of shares outstanding................... 15,416 30,840 978 15,457 --------- ----------- ----------- ----------- --------- ----------- ----------- ----------- OTHER DATA: Resort: Skier visits (000s)(4)(12).... 525 528 1,060 1,290 3,025 4,821 -- -- Season pass holders (000s)(12).................. 3.2 3.7 11.2 13.2 30.9 38.3 -- -- Resort revenues per skier visit(12)................... $ 45.04 $ 50.26 $ 44.15 $ 49.22 $ 55.18 $ 52.56 -- -- Resort EBITDA(5)(6)(12)....... $ 4,222 $ 4,817 $ 7,675 $ 10,401 $ 31,023 $ 56,189 -- -- Real estate: Number of units sold.......... 173 155 163 177 123 123 6 16 Number of units pre-sold(7)... -- -- -- 109 605 605 0 88 Real Estate EBIT(6)(8)........ $ 2,858 $ 3,503 $ 3,959 $ 4,089 $ 1,655 $ 1,655 $ 537 $ (115) STATEMENT OF CASH FLOWS DATA: Cash flows from operations.... $ 2,667 $ 5,483 $ 12,593 $ 7,465 $ 6,788 -- $ 2,342 $ (11,792) Cash flows from investing activities.................. (4,432) (9,041) (13,843) (122,583) (14,070) -- (13,608) (19,027) Cash flows from financing activities.................. $ 1,559 $ 3,764 $ 2,399 $ 116,941 $ 19,655 -- $ 11,068 $ 51,475 <CAPTION> PRO FORMA FISCAL QUARTER ENDED OCTOBER 26, 1997 ----------- <S> <C> STATEMENT OF OPERATIONS DATA: Net revenues: Resort........................ $ 18,234 Real estate................... 810 ----------- Total net revenues.......... 19,044 Operating expenses: Resort........................ 23,856 Real estate................... 925 Marketing, general and administrative(3)........... 9,642 Stock compensation charge..... 14,254 Depreciation and amortization................ 3,308 ----------- Total operating expenses.... 51,985 ----------- Income (loss) from operations... (32,941) Interest expense................ 8,473 Net income (loss) available to common shareholders............. $ (27,693) ----------- ----------- Pro forma loss per share........ $ (.90) ----------- ----------- Pro forma weighted average number of shares outstanding................... 30,822 OTHER DATA: Resort: Skier visits (000s)(4)(12).... -- Season pass holders (000s)(12).................. -- Resort revenues per skier visit(12)................... -- Resort EBITDA(5)(6)(12)....... -- Real estate: Number of units sold.......... 16 Number of units pre-sold(7)... 88 Real Estate EBIT(6)(8)........ $ (115) STATEMENT OF CASH FLOWS DATA: Cash flows from operations.... -- Cash flows from investing activities.................. -- Cash flows from financing activities.................. -- </TABLE> <TABLE> <CAPTION> AT JULY 27, 1997 ACTUAL --------------- AT OCTOBER 26, AT OCTOBER 26, 1997 1997 ------------------ PRO FORMA UNAUDITED ------------------ (UNAUDITED) <S> <C> <C> <C> (DOLLARS IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents............................. $ 15,558 $ 6,214 $ 31,027 Total assets.......................................... 337,340 392,107 696,270 Long-term debt, including current portion............. 236,330 291,281 325,426 Mandatorily redeemable preferred stock................ 16,821 19,252 -- 10 1/2% Convertible Preferred Stock................... -- -- 37,583 Common shareholders' equity........................... $ 15,101 $ 779 $ 241,380 </TABLE> RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS The following table sets forth the Company's ratio of earnings to combined fixed charges and preferred stock dividends on a historical basis for each of the five fiscal years ended July 27, 1997 and for the three months ended October 26, 1997. <TABLE> <CAPTION> PRO FORMA THREE FISCAL YEAR ENDED FISCAL YEAR MONTHS --------------------------------------------------------------- ENDED ENDED JULY 25, JULY 31, JULY 30, JULY 28, JULY 27, JULY 27, OCTOBER 26, 1993 1994 1995 1996 1997 1997 1997 ----------- ----------- ----------- ----------- ----------- ------------- ----------- <S> <C> <C> <C> <C> <C> <C> <C> Ratio of earnings to combined fixed charges and preferred stock dividends(1)....................... 6.756 5.763 3.503 1.332 .606 .775 (2.685) Deficiency of earnings as compared to combined fixed charges and preferred stock dividends(1) (dollars in thousands)............. N/A N/A N/A N/A N/A N/A $ 36,213 <CAPTION> PRO FORMA THREE MONTHS ENDED OCTOBER 26, 1997 ----------- <S> <C> Ratio of earnings to combined fixed charges and preferred stock dividends(1)....................... (3.021) Deficiency of earnings as compared to combined fixed charges and preferred stock dividends(1) (dollars in thousands)............. $ 35,372 </TABLE> - ------------------------------ (1) For purposes of this calculation, "earnings" consist of income (loss) before income taxes and fixed charges. "Fixed charges" consist of interest, amortization of debt issuance costs and the component of rental expense believed by management to be representative of the interest factor thereon. THE ACQUIRED RESORTS <TABLE> <CAPTION> FOR THE FISCAL QUARTERS HISTORICAL FISCAL YEAR ENDED MAY 31, ENDED AUGUST 31, --------------------------------------------------------------- ------------------------ <S> <C> <C> <C> <C> <C> <C> <C> 1993 1994 1995 1996 1997 1996 1997 ----------- ----------- ----------- ----------- ----------- ----------- ----------- <CAPTION> (DOLLARS IN THOUSANDS, EXCEPT (UNAUDITED) PER SKIER VISIT AMOUNTS) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA (9): Total revenues....................... $ 83,410 $ 82,034 $ 88,567 $ 84,732 $ 89,066 $ 5,400 $ 4,935 Operating expenses: Retail, ski rental and other....... 44,778 46,560 48,715 47,374 51,139 7,452 7,075 Marketing, general and administrative(10)............... 15,703 14,778 17,075 16,585 17,178 3,281 3,091 Writedown of assets(11)............ -- -- -- -- 2,000 -- -- Depreciation and amortization...... 14,481 14,544 14,643 14,477 12,516 3,156 2,491 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total operating expenses......... 74,962 75,882 80,433 78,436 82,833 13,889 12,657 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Operating income (loss)............ 8,448 6,152 8,134 6,296 6,233 (8,489) (7,722) Net loss........................... (3,906) (5,254) (3,906) (4,538) (3,406) (10,921) (10,206) OPERATING DATA: Skier visits (000s)(12).............. 1,867 1,750 1,858 1,732 1,796 -- -- Season pass holders (000s)(12)....... 5.7 6.6 6.9 7.0 7.5 -- -- Total revenues per skier visit(12)... $ 43.22 $ 45.23 $ 45.49 $ 47.46 $ 47.48 -- -- EBITDA(9)(10)(11)(12)................ $ 25,929 $ 23,596 $ 26,078 $ 24,074 $ 24,150 -- -- </TABLE> - ------------------------ (1) The historical results of the Company reflect the results of operations of the Attitash Bear Peak ski resort since its acquisition in July 1994, the results of operations of the Sugarbush ski resort since October 1994, the results of operations of the Mt. Cranmore ski resort from its acquisition in June 1995 through its divestiture in November 1996, the results of operations of S-K-I Ltd. since its acquisition in June 1996 and the results of operations of Pico Mountain since its acquisition in November 1996. (2) The results of operations of Wolf have not been reflected in the pro forma statement of operations data or other data. See "Pro Forma Financial Data" and "Risk Factors--Required Development at The Canyons; Historical Losses of Wolf."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001044478_bayard_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001044478_bayard_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and related notes appearing elsewhere in this Prospectus. Unless otherwise indicated, all information contained in this Prospectus (i) reflects a two-for-one stock split effected by means of a stock dividend to stockholders of record on August 22, 1997 and (ii) for the purposes of operating data, fleet statistics, shares outstanding and, where specified, operating results, gives pro forma effect to the October 16, 1997 acquisition (the "Bonray Acquisition") of Bonray Drilling Corporation ("Bonray"), as described below. Unless the context otherwise requires, the terms "Bayard" and the "Company" include Bayard Drilling Technologies, Inc. and its predecessors and subsidiaries. This Prospectus relates to the distribution of 2,955,000 shares of Common Stock currently held by DLB to the holders of record of shares of DLB Stock, on a pro rata basis, in connection with the Merger described in the materials accompanying this Prospectus. All of the information contained in this Prospectus should be read in conjunction with the Information Statement/Prospectus to which this Prospectus is attached as Annex D. THE COMPANY The Company is a leading provider of contract land drilling services to major and independent oil and gas companies. As of September 30, 1997, the Company's rig fleet consisted of 54 rigs (including 13 rigs acquired in the Bonray Acquisition), of which 48 were being marketed and six were to be refurbished and expected to be placed in operation within the next 12 months. The Company's fleet consists primarily of rigs capable of deep drilling applications (well depths of 15,000 feet or greater). The Company believes that deep drilling targets are more attractive to oil and gas companies due to new technologies, including (i) three-dimensional seismic techniques, (ii) increasingly accurate down hole measurement devices and (iii) improved guidance systems and directional drilling motors for horizontal and directional wells. Examples of currently active deep drilling areas include the Tuscaloosa trend in Louisiana, the Pinnacle Reef trend in East Texas, the Anadarko and Arkoma basins in Oklahoma and the Austin Chalk in Texas and Louisiana. As of September 30, 1997, the Company's fleet included 38 rigs capable of drilling to depths of 15,000 feet or greater, 25 of which are capable of drilling to depths of 20,000 feet or greater. Of these 38 rigs, 21 are diesel electric silicon controlled rectifier ("SCR") rigs which offer operators superior control and efficiency, particularly in deep, directional or horizontal applications. The Company's fleet is concentrated in its two core operating regions - -- the Mid-Continent region (which includes principally Oklahoma, North Texas and the Texas Panhandle) and the Gulf Coast region of Texas, Louisiana, Mississippi and Alabama. At September 30, 1997, the Company had 35 rigs marketed in Oklahoma (including 11 of the rigs acquired in the Bonray Acquisition) and was the most active land drilling contractor in the state. The Company's rigs operating in the Mid-Continent region are generally capable of drilling to depths of 10,000 feet or greater and are marketed by the Company to meet the specific well depth and mobility needs of producers in that region. At September 30, 1997, the Company had 13 rigs marketed in the Gulf Coast region, including 11 diesel electric SCR rigs. The Company's principal executive offices are located at 4005 Northwest Expressway, Suite 550E, Oklahoma City, Oklahoma 73116, and its telephone number at such offices is (405) 840-9550. FORMATION AND OTHER TRANSACTIONS The Company was formed in December 1996 through a series of affiliated entity transactions in which the Company became the successor to Anadarko Drilling Company ("Anadarko"), the contract drilling subsidiary of privately held AnSon Partners Limited Partnership (together with its affiliates, "APLP"). In connection with the formation of the Company (i) APLP contributed ten drilling rigs, including two rigs requiring refurbishment, for shares of Common Stock, (ii) Roy T. Oliver and related entities exchanged six additional drilling rigs for shares of Common Stock, (iii) Energy Spectrum Partners LP ("Energy Spectrum") contributed cash for shares of Common Stock and (iv) Chesapeake entered into drilling contracts with two-year terms for six of the Company's rigs in consideration for an option to purchase shares of Common Stock (together, the "Formation Transactions"). See "Business -- Formation and Other Transactions." Since the Formation Transactions, the Company has enhanced its original fleet through acquisitions and refurbishment of rigs as described below. o Trend Acquisition. In May 1997, the Company completed the acquisition of Trend Drilling Co. and its 14 rigs ("Trend") for $18 million in cash and 250,000 shares of Common Stock (the "Trend Acquisition"). o Ward Acquisition. Also in May 1997, the Company acquired the assets of Ward Drilling Company, Inc. including six drilling rigs ("Ward") for $8 million in cash, 400,000 shares of Common Stock and warrants to purchase an additional 200,000 shares of Common Stock (the "Ward Acquisition"). o Bonray Acquisition. In October 1997, the Company acquired Bonray from DLB for 3,015,000 shares of Common Stock. Bonray has operated a land drilling business in the Mid-Continent region since 1980 and prior to its acquisition by the Company was a wholly owned subsidiary of DLB. In the Bonray Acquisition, the Company acquired 13 rigs, including seven rigs with depth capacities of 15,000 feet or greater and two diesel electric SCR rigs. As of September 30, 1997, 12 of Bonray's rigs were operating and under contract and one was awaiting refurbishment. o Individual Rig Acquisitions. In addition to the Trend, Ward and Bonray Acquisitions, prior to the Initial Public Offering, the Company invested $5.5 million to acquire six rigs in five transactions involving purchases of individual rigs or rig components (the "Individual Rig Acquisitions" and, together with the Formation Transactions, the Trend Acquisition, the Ward Acquisition and the Bonray Acquisition, the "Consolidation Transactions"). In August 1997, the Company sold one rig. o Initial Public Offering. In November 1997, the Company completed the Initial Public Offering of 11,040,000 shares of Common Stock. Of the total shares sold in the Initial Public Offering, the Company sold 4,229,050 shares of Common Stock and certain shareholders sold 6,810,950 shares of Common Stock. o Refurbishment. The Consolidation Transactions included a number of rigs in need of refurbishment. From January 1, 1997 through September 30, 1997, the Company completed refurbishment of 12 rigs at an average cost of approximately $2.6 million per rig (including drill pipe). These rigs were placed in service at various dates between January and September 30, 1997. At September 30, 1997, the Company had six additional rigs in various stages of refurbishment. The Company completed refurbishment and placed one of such rigs in service during the fourth quarter of 1997, two more rigs in the first quarter of 1998 and anticipates placing the remaining three rigs in the remainder of 1998. The Company expects the cost to refurbish these six rigs to average approximately $3.5 million per rig (including drill pipe). o Recent Acquisitions. On January 9, 1998, the Company purchased six additional rigs from R. T. Oliver Drilling, Inc. for approximately $14 million in cash (the "Oliver Acquisition"). The Company expects to refurbish and purchase complementary equipment, including drill pipe, for these rigs at a cost of approximately $28.6 million. Additionally, since the Initial Public Offering, the Company has decided to refurbish three additional rigs, one of which was purchased for approximately $54,000 and two of which were assembled from inventoried components, bringing the Company's rig fleet total to 63 rigs, of which 51 are being marketed. THE MERGER Chesapeake, Merger Sub and DLB have entered into the Merger Agreement, which provides that, upon the terms and subject to the conditions set forth therein, Merger Sub will merge with and into DLB, with DLB continuing as the surviving corporation. Pursuant to the Merger Agreement, at the Effective Time, each share of DLB Stock issued and outstanding immediately prior thereto (other than shares of DLB Stock held by dissenting stockholders and other shares to be canceled pursuant to the Merger Agreement) will be converted into the right to receive (i) a fractional interest in a share of Chesapeake Stock equal to the quotient obtained by dividing 5,000,000 by the number of shares of DLB Stock issued and outstanding immediately prior to the Effective Time (the "DLB Stock Number"), (ii) an amount in cash determined by dividing $17,500,000 by the DLB Stock Number, (iii) a number of Shares determined by dividing 2,955,000 (representing the total number of Shares owned by DLB immediately prior to the Effective Time) by the DLB Stock Number, (iv) a contingent right to receive a pro rata share of the net cash proceeds from the sale of assets of an affiliate of DLB and (v) a contingent right to receive a pro rata share of certain net distributions related to the liquidation of WRT (the consideration referred to in clauses (i), (ii), (iii), (iv) and (v) being collectively referred to as the "Merger Consideration"). Based on the assumption that there will be 12,970,000 shares of DLB Stock outstanding immediately prior to the Effective Time, a holder of DLB Stock would receive 0.2277 Shares for each share of DLB Stock held. See "-- The Merger Share Distribution." Additionally, immediately prior to the Merger, DLB will distribute to holders of DLB Stock, on a pro rata basis, an aggregate of 10,792,220 shares of WRT Stock, resulting in the distribution of approximately 0.8318 shares of WRT Stock per share of DLB Stock held. The Merger has been approved by the Board of Directors of DLB. Under Oklahoma law, the affirmative vote of the holders of a majority of the outstanding shares of DLB Stock is required to approve the Merger. Holders of a majority of DLB Stock entitled to vote on the Merger have entered into irrevocable proxy agreements with Chesapeake whereby such stockholders have agreed to vote (or to execute a written consent in lieu of a vote with respect to) all shares of DLB Stock owned by them in favor of the proposal to approve the Merger Agreement and the Merger and have each granted Chesapeake a proxy to vote (or to execute a written consent in lieu of a vote with respect to) such shares in favor of the Merger. As a result, the approval of the Merger is assured. It is expected that the Merger will be consummated as soon as practicable following the twentieth business day after the mailing of the Information Statement/Prospectus to which this Prospectus is attached as Annex D. Holders of DLB Stock who do not execute written consents approving the Merger will be entitled to pursue dissenters' rights of appraisal under Section 1091 of the Oklahoma General Corporation Act. DLB is furnishing the holders of DLB Stock a package of information regarding the Merger that includes the Information Statement/Prospectus, the Merger Agreement, this Prospectus, information regarding the value of the Merger Consideration and the information on dissenters' rights of appraisal. For a more complete description of the terms of the Merger Agreement and the values attributed by DLB to the Merger Consideration, see the Information Statement/Prospectus to which this Prospectus is attached as Annex D. With respect to the terms of the Merger and the related appraisal rights, reference is made to the sections of the Information Statement/Prospectus entitled "Description of Merger," "Merger Agreement" and "Shareholders' Rights of Appraisal." With respect to the terms of the WRT Spin-Off, reference is made to the section of the Information Statement/Prospectus entitled "Summary--Merger Agreement--WRT Spin-Off." THE MERGER SHARE DISTRIBUTION <TABLE> <S> <C> Shares to be Distributed . . . . . . . . . 2,955,000 shares of Common Stock owned by DLB immediately prior to the Effective Time. Outstanding Common Stock . . . . . . . . . 18,183,945 shares(1) Merger Share Distribution Ratio . . . . . . For each share of DLB Stock held immediately prior to the Effective Time, each holder of DLB Stock will receive a number of Shares determined by dividing 2,955,000 (the total number of Shares owned by DLB immediately prior to the Effective Time) by the DLB Stock Number (such quotient being defined as the "Merger Share Distribution Ratio"). No fractional shares of Common Stock will be distributed in the Merger Share Distribution. The number of shares of Common Stock that any holder of DLB Stock would otherwise be entitled to receive will be rounded to the nearest whole number of such shares. Based on the assumption that there will be 12,970,000 shares of DLB Stock outstanding immediately prior to the Effective Time, a DLB stockholder would receive 0.2277 Shares for each share of DLB Stock held. To the extent outstanding options to acquire up to 1,713,750 shares of DLB Stock are exercised prior to the Effective Time, the number of Shares distributed per share of DLB Stock will be proportionately reduced. Assuming that all such options for DLB Stock are exercised prior to the Effective Time, the Merger Share Distribution Ratio would be equal to 0.2012 Shares for each share of DLB Stock held. All calculations and percentages set forth in this Prospectus regarding ownership of shares of Common Stock upon consummation of the Merger Share Distribution assume a Merger Share Distribution Ratio of 0.2277. Assuming a value of $16 per share (the last reported trading price on the AMEX of a Share on March 25, 1998), the market value of 0.2277 Shares would be $3.64. Common Stock Listing . . . . . . . . . . . The Common Stock is traded on the AMEX under the symbol "BDI." </TABLE> <TABLE> <S> <C> Effective Time . . . . . . . . . . . . . . It is expected that the Effective Time will occur promptly following the twentieth business day after the mailing of the Information Statement/Prospectus to which this Prospectus is attached as Annex D. Exchange Agent . . . . . . . . . . . . . . UMB Bank, N.A. Merger Share Distribution Date. . . . . . . As soon as reasonably practicable after the Effective Time, Chesapeake will mail to the stockholders of DLB a letter of transmittal to be used to effect the exchange of certificates evidencing shares of DLB Stock for the Shares and other Merger Consideration. In order to receive Shares and other Merger Consideration, holders of the DLB Stock will be required to surrender to the Exchange Agent stock certificates evidencing shares of DLB Stock together with a duly completed and executed letter of transmittal and any other required documents. Certificates for the Shares to which holders of DLB Stock are entitled will not be distributed until May 4, 1998, the date of the expiration of the lock-up period (180 days) of the Initial Public Offering (the "Lock-up Period"). Until such date, the Exchange Agent will hold the Shares in escrow. Federal Income Tax Considerations . . . . . The Merger Share Distribution, together with the Merger, will be treated as a taxable transaction to each holder of DLB Stock resulting in a capital gain or loss in an amount equal to the difference between (i) the amount of cash and the fair market value of the Common Stock and the Chesapeake Stock transferred in redemption of such holder's shares of DLB Stock and (ii) such holder's adjusted tax basis in the shares of DLB Stock redeemed. </TABLE> (1) Does not include (i) 806,600 shares of Common Stock subject to issuance pursuant to outstanding options awarded under the Company's 1997 Stock Option and Stock Award Plan (the "Employee Stock Plan"), (ii) 75,000 shares of Common Stock subject to issuance pursuant to options awarded under the Company's 1997 Non-Employee Directors' Stock Option Plan (the "Director Stock Plan") or (iii) 397,000 shares of Common Stock subject to issuance pursuant to other outstanding warrants issued by the Company. See "Management -- 1997 Stock Option and Stock Award Plan" and "Certain Relationships and Related Transactions." Further, this number does not include shares of Common Stock that may be issued, solely at the option of the Company, to redeem outstanding Subordinated Notes (as defined in "Management's Discussion and Analysis of Financial Condition and Results of Operations"). See "Certain Relationships and Related Transactions -- Certain Financing Arrangements -- Common Stock and Subordinated Notes." SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL AND OPERATING DATA The following table sets forth summary historical financial and operating data for the Company for each of the years in the three year period ended December 31, 1996, for the nine months ended September 30, 1996 and 1997, and as of December 31, 1996 and September 30, 1997. The financial results for the period ended and as of September 30, 1997 include the results of the Company's consolidated subsidiary, Trend, beginning May 1, 1997. The Company's historical results reflect the operations of its predecessor, Anadarko. The consolidated financial data for the nine months ended September 30, 1996 and 1997 is derived from the unaudited financial statements of the Company. In the opinion of management, the financial data for the nine months ended September 30, 1996 and 1997 reflects all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such data. The pro forma consolidated financial and operating data for the year ended December 31, 1996 and the nine months ended September 30, 1997 shown below give effect to (i) the Consolidation Transactions (to the extent not already reflected in the historical financial statements), (ii) the Chesapeake Transactions (as described in "Certain Relationships and Related Transactions - -- Chesapeake Transactions"), (iii) the exercise by The CIT Group/Equipment Financing, Inc. ("CIT") of a warrant for 150,000 shares of Common Stock (the "CIT Exercise"), and (iv) the Initial Public Offering and the application of the net proceeds to the Company therefrom (as set forth in footnote 1 to the Capitalization Table) as if they occurred on January 1, 1996 for purposes of operations data and September 30, 1997 for purposes of balance sheet data. The following information should be read together with Management's Discussion and Analysis of Financial Condition and Results of Operations, the historical financial statements of Bayard, Trend, Ward and Bonray, including the notes thereto, and the Pro Forma Consolidated Financial Data, including the notes thereto, included elsewhere in this Prospectus. <TABLE> <CAPTION> Year Ended December 31, Nine Months Ended September 30, ---- -------------------------------------- -------------------------------- 1994 1995 1996 1996 1996 1997 1997 Historical Pro Forma Historical Pro Forma (unaudited) (In thousands, except per share, rig and day rate data) <S> <C> <C> <C> <C> <C> <C> <C> Statement of Operations Data: Total revenues . . . . . . . . $ 9,910 $ 7,708 $ 9,853 $ 47,952 $ 6,787 $ 33,214 $ 58,840 --------- --------- --------- -------- --------- -------- -------- Operating expenses: Drilling and other . . . . . 8,572 6,122 7,699 38,073 5,244 24,246 43,245 Depreciation and amortization 1,557 791 1,126 7,730 727 4,918 8,551 General and administrative . 786 880 658 3,636 473 1,181 2,753 --------- --------- --------- -------- --------- -------- -------- Total operating 10,915 7,793 9,483 49,439 6,444 30,345 54,549 --------- --------- --------- -------- --------- -------- -------- expenses . . . . . . . . . . . Operating income (loss) . . . . (1,005) (85) 370 (1,487) 343 2,869 4,291 Interest expense and financing cost . . . . . . . . . . . . (18) (3) (11) (821) -- (2,172) (1,274) Other income (expense) . . . . 366 (134) 71 601 17 376 745 --------- --------- --------- -------- --------- -------- -------- Income (loss) before income (657) (222) 430 (1,707) 360 1,073 3,762 taxes . . . . . . . . . . . . . Income tax expense(1) . . . . . -- -- 163 -- 137 410 1,430 --------- --------- --------- -------- --------- -------- -------- Net income (loss) . . . . . . . $ (657) $ (222) $ 267 $ (1,707) $ 223 $ 663 $ 2,332 ========== ======== ======= ========= ========== ========= ========== Earnings per share (primary and fully diluted) . . . . . . . $ .02 $ (.11) $ .02 $ .06 $ .15 ======= ========= ========== ========= ========== Weighted average shares outstanding 11,317 15,901 11,317 11,317 15,901 ======= ======== ======== ======== ========== (fully diluted)(2) . . . . . Cash Flows: Operating activities . . . . $ 445 $ 310 $ (462) $ 589 $ 7,212 Investing activities . . . . (454) (1,710) (10,441) (6,363) (75,059) Financing activities . . . . 9 1,400 15,866 5,774 62,966 </TABLE> (continued on following page) <TABLE> <CAPTION> December 31, 1996 September 30, 1997 --------------- ----------------------- Historical Historical Pro Forma (unaudited) (In thousands) <S> <C> <C> <C> Balance Sheet Data: Cash and investments . . . . . . . . . . . . . . . . . . . . . . $ 4,963 $ 812 $ 55,799 Working capital (deficit), excluding current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . 4,974 (2,659) 54,019 Property, plant and equipment, net . . . . . . . . . . . . . . . 26,973 104,674 138,631 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . 34,673 128,064 227,177 Long-term debt, including current portion . . . . . . . . . . . . 7,000 54,948 19,567 Total stockholders' equity(3) . . . . . . . . . . . . . . . . . . 26,251 48,496 174,512 </TABLE> <TABLE> <CAPTION> Year Ended December 31, Nine Months Ended September 30, ---------------------------------------------- --------------------------------- 1994 1995 1996 1996 1996 1997 1997 Historical Pro Forma Historical Pro Forma (unaudited) (In thousands, except per share, rig and day rate data) <S> <C> <C> <C> <C> <C> <C> <C> Other Financial Data: EBITDA(4) . . . . . . . . . $ 552 $ 706 $ 1,496 $ 6,243 $ 1,070 $ 7,787 $ 12,842 Capital expenditures . . . 1,183 2,088 10,578 6,499 83,101 Drilling Rig Activity Data: Total rigs at end of period 7 8 17 54 8 41 54 Marketed rigs at end of 7 8 8 34 8 34 46 period . . . . . . . . . . . Average utilization rate of drilling 84% 86% 88% 87% 94% rigs available for service(5) . . . . . . . . . Average dayrate(6) . . . . $ 4,148 $ 4,298 $ 4,731 $ 4,678 $ 5,740 </TABLE> __________ (1) Income tax expense is presented on a pro forma basis (assuming a 38% statutory rate) for the year ended December 31, 1996 and for the nine months ended September 30, 1996. (2) Historical weighted average shares outstanding is calculated using the fully diluted shares outstanding through September 30, 1997 for the year ended December 31, 1996 and the nine months ended September 30, 1996 and 1997. The pro forma shares outstanding reflect the sale of a sufficient number of shares in the Initial Public Offering to retire certain indebtedness of the Company. See footnote (g) to "Notes to Unaudited Pro Forma Consolidated Financial Data." (3) No dividends were declared through September 30, 1997. See "Price Range of Common Stock and Dividends -- Dividend Policy."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001044612_amf_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001044612_amf_prospectus_summary.txt
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+SUMMARY The following summary is qualified in its entirety by reference to the more detailed information and financial statements appearing elsewhere in this Prospectus. As hereinafter used in this Prospectus, except as otherwise specifically set forth, "AMF Bowling" refers to AMF Bowling, Inc., and the "Company" or "AMF" refers to AMF Bowling and its subsidiaries. Except as otherwise indicated herein, all pro forma information has been prepared to give effect to the Acquisition (as hereinafter defined) of AMF as if it had occurred on January 1, 1996. EBITDA (which represents earnings before net interest expense, income taxes, depreciation and amortization, and other income and expenses) is not intended to represent and should not be considered more meaningful than, or an alternative to, other measures of performance determined in accordance with U.S. generally accepted accounting principles ("GAAP"). The fragmented nature of the bowling centers business makes it difficult to compile reliable industry-wide statistics. Accordingly, industry statistics provided in this Prospectus should be regarded as approximations with a potentially significant margin of error. Unless otherwise indicated, all information in this Prospectus assumes the discount to the Initial Purchasers and expenses payable by the Company in connection with the Private Placement and the subsequent offering by the Initial Purchasers aggregate approximately $11.0 million. THE COMPANY AMF is the largest bowling company in the world. The Company owns or operates 539 bowling centers worldwide which generate over 60 million customer visits per year. AMF is the U.S. market leader with 416 bowling centers, and is also the largest operator internationally, with an additional 123 bowling centers in eleven other countries. In addition, AMF has been a leader in the bowling equipment industry for over 50 years, having revolutionized ten pin bowling with the introduction of the first automatic pinspotter in 1946. AMF is one of only two bowling equipment manufacturers that compete on a global basis. Management believes that AMF bowling equipment accounts for approximately 41% of the world's installed base of bowling equipment. The worldwide bowling center and bowling equipment industry generates approximately $9 billion in annual revenue and includes approximately 13,000 bowling centers in over 80 countries. The U.S. bowling center and bowling equipment industry generates in excess of $4 billion of revenue annually and includes approximately 5,900 centers. Over 100 million people participate annually in bowling worldwide, according to the Federation Internationale des Quilleurs (the "FIQ"), the official organization of the worldwide bowling industry. The bowling center industry in both the U.S. and abroad is highly fragmented. In the U.S., the next closest competitor to AMF's 416 centers has approximately 123 centers. The next three largest operators collectively account for only approximately 54 of the total 5,900 centers. An investor group led by GS Capital Partners II, L.P. (together with affiliated investment funds, "GSCP"), an affiliate of Goldman, Sachs & Co. ("Goldman Sachs"), acquired AMF in May 1996 for a total purchase price of approximately $1.37 billion (the "Acquisition"). Following the Acquisition, management began to implement a long term strategy to consolidate the U.S. bowling center industry, to build a nationally recognized brand of bowling-based family recreation centers and to capitalize on long term demand for bowling products and centers in global markets. Since May 1996, the Company has acquired 225 centers in the U.S. and owns or operates 416 U.S. centers as of September 30, 1998. In addition, the Company has acquired 31 centers in selected international markets and owns or operates 123 international centers as of September 30, 1998. Recently, the Company has had to slow the pace of acquisitions. This slowdown reflects a need to focus on improving the performance of existing bowling centers, as well as financing constraints resulting from depressed results in the Company's bowling equipment segment. Recent operating results for U.S. bowling centers have declined in comparison with historical performance. In connection with curtailing its acquisition efforts over the near term, management will focus its attention on the improvement of constant-center (centers in operation for at least one full fiscal year) revenue growth and profitability. As part of its efforts to improve revenue growth and profitability, the Company has established a new senior management team to lead U.S. bowling centers, including the appointment of a President, U.S. Bowling Centers in September 1998. This new management team will concentrate on increasing customer satisfaction, improving training for center managers and staff, more effectively marketing and promoting bowling to increase bowling center traffic and continue to develop a nationally recognized brand of bowling-based family recreation centers. AMF has historically participated in the international demand for bowling products primarily through the sale of its New Center Packages ("NCPs"), which include all of the equipment necessary to outfit one new bowling lane. Beginning in the fourth quarter of 1997, the Company has seen a decline in the demand for NCPs primarily in Asia Pacific markets as a result of the region's economic difficulties which has led to reduced construction of new bowling centers. In response to this decline, management is implementing a significant cost reduction program, which should be completed by the end of 1998, designed to align more effectively the bowling products operations with existing and projected demand. Over the long term the Company continues to believe that international markets, including Asia Pacific, will represent attractive opportunities for the sale of bowling products. BACKGROUND AMF Bowling is a Delaware corporation which was incorporated in 1996 by GSCP to effect the Acquisition. AMF Bowling was initially incorporated under the name "AMF Holdings Inc." and was subsequently renamed "AMF Bowling, Inc." After the incorporation of AMF Bowling, GSCP sold certain equity interests in AMF Bowling to investment funds affiliated with The Blackstone Group, Kelso & Company, Bain Capital Inc. and Citicorp North America, Inc. and to certain officers and directors of AMF Bowling. AMF Group Holdings Inc. ("AMF Group Holdings"), a direct, wholly owned subsidiary of AMF Bowling, acquired substantially all of the assets of AMF's predecessor (the "Predecessor Company") on May 1, 1996 pursuant to the Stock Purchase Agreement, dated February 16, 1996, between AMF Group Holdings and the then-current stockholders of the Predecessor Company, as amended (the "Stock Purchase Agreement"). The purchase price for the Acquisition was approximately $1.37 billion. In connection with the Acquisition, AMF Bowling Worldwide, Inc. ("Bowling Worldwide"), a subsidiary of AMF Bowling, issued 10 7/8% Senior Subordinated Notes Due 2006 (the "Subsidiary Senior Subordinated Notes") and 12 1/4% Senior Subordinated Discount Notes Due 2006 (the "Subsidiary Senior Subordinated Discount Notes" and, collectively with the Subsidiary Senior Subordinated Notes, the "Subsidiary Notes") pursuant to certain indentures (collectively, the "Subsidiary Indentures"), and incurred substantial bank debt. On November 7, 1997, AMF Bowling completed an initial public offering (the "Initial Public Offering") of 15,525,000 shares of Common Stock, which trades on the NYSE under the symbol "PIN". The net proceeds of $279.1 million from the Initial Public Offering were contributed by AMF Bowling to Bowling Worldwide and used by Bowling Worldwide to reduce and refinance its bank debt pursuant to Bowling Worldwide's Third Amended and Restated Credit Agreement (as amended by Amendment No. 1 and Waiver to the Third Amended and Restated Credit Agreement, dated as of September 30, 1998, the "Credit Agreement") and to redeem a portion of the Subsidiary Senior Subordinated Discount Notes. On May 12, 1998, AMF Bowling completed the Private Placement of the Debentures to Goldman, Sachs & Co., Cowen & Company, Morgan Stanley & Co. Incorporated and Schroder & Co. Inc. (collectively, the "Initial Purchasers") in a private placement. The Initial Purchasers subsequently sold the Debentures in transactions exempt from registration to "qualified institutional buyers" pursuant to Rule 144A under the Securities Act. AMF Bowling's principal executive offices are located at 8100 AMF Drive, Richmond, Virginia, and the telephone number of AMF Bowling is (804) 730-4000.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001044642_toyota_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001044642_toyota_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..22016081a275ebed038dd0d394c02a1eb9067845
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+SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE DETAILED INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS. CERTAIN CAPITALIZED TERMS USED HEREIN ARE DEFINED ELSEWHERE IN THIS PROSPECTUS ON THE PAGES INDICATED IN THE "INDEX OF CAPITALIZED TERMS" BEGINNING ON PAGE 125 HEREOF. <TABLE> <S> <C> OVERVIEW.......................... Certain motor vehicle dealers ("Dealers") whose dealerships are located in California, Florida, Michigan, Pennsylvania and Ohio (the "Trust States") have assigned and will assign retail closed- end automobile and light duty truck leases to the Titling Trust pursuant to their dealer agreements with the Titling Trust. The Titling Trust was created in October 1996 to avoid the administrative difficulty and expense associated with retitling leased vehicles in connection with the securitization of automobile and light duty truck leases. The Titling Trust has issued to TMCC an Undivided Trust Interest (the "UTI") representing the entire beneficial interest in the unallocated Titling Trust Assets. SEE "The Trust and the SUBI -- The Trust". TMCC has instructed the trustee of the Titling Trust to allocate a separate portfolio of leases and leased vehicles from and among the Titling Trust Assets represented by the UTI and create a special unit of beneficial interest (the "SUBI") which represents the entire beneficial interest in such portfolio. Titling Trust Assets allocated to the SUBI will no longer be represented by the UTI. TMCC will sell the SUBI to the Transferor, and the Transferor will contribute a certificate representing substantially all of the SUBI (excluding the related rights to proceeds of the Residual Value Insurance Policies described herein) (the "SUBI Certificate") to the Trust. In return, the Trust will issue the Class A Certificates offered hereby and the Class B Certificates, and will create the Transferor Interest for the benefit of the Transferor. The "Transferor Interest" is the undivided interest in the Trust not evidenced by the Certificates and will be permanently retained by the Transferor. TMCC has in the past and may in the future cause the Titling Trust to allocate additional separate portfolios of leases and leased vehicles and to create other special units of beneficial interest similar to the SUBI relating to such portfolios ("Other SUBIs") for sale to the Transferor or one or more other entities. The Trust and the Certificateholders will have no interest in the UTI, any Other SUBI or any Titling Trust Assets evidenced by the UTI or any Other SUBI. THE TRUST......................... The Trust will be formed pursuant to the Agreement dated as of December 1, 1998, between the Transferor and U.S. Bank National Association ("U.S. Bank"), as Trustee. The property of the Trust will consist primarily of the SUBI Certificate, monies on deposit in certain accounts established as described herein, the TMCC Demand Notes (or other Permitted Investments of amounts held in the Certificateholders' Account) and the rights of the Trust under the Swap Agreement. </TABLE> (CONTINUED FROM FRONT COVER) The Certificates will consist of three classes of senior certificates, the Adjustable Rate Auto Lease Asset Backed Certificates, Class A-1 (the "Class A-1 Certificates"), the Adjustable Rate Auto Lease Asset Backed Certificates, Class A-2 (the "Class A-2 Certificates") and the Adjustable Rate Auto Lease Asset Backed Certificates, Class A-3 (the "Class A-3 Certificates" and, together with the Class A-1 Certificates and Class A-2 Certificates, the "Class A Certificates") and one or more Classes of subordinated certificates (the "Class B Certificates"). The Class A Certificates are the only Certificates offered hereby. The Initial Certificate Balance of the Class B Certificates will be $48,700,000, and the Class B Certificates will be subordinated to the Class A Certificates to the extent described herein. The Transferor will own the undivided interest in the Trust not represented by the Certificates (the "Transferor Interest"). The initial balance of the Transferor Interest will be $14,988,732.51. The SUBI Assets consisting of lease contracts implicitly bear interest at fixed interest rates and require the related obligors to make monthly payments thereon. By contrast, the Trust generally will be obligated to make quarterly payments with respect to interest accrued on the Class A Certificates and all or a portion of the Class B Certificates at adjustable rates and to pay in full the principal balances thereof only at maturity. In order to enable the Trust to receive monthly collections on assets having principal balances that decline monthly and to make quarterly interest payments and principal payments at maturity on securities whose balances generally are not expected to decline monthly, the Trust will invest certain collections in Permitted Investments (expected to be the TMCC Demand Notes) until such amounts (and the net investment income with respect thereto) are to be paid to Certificateholders. To enable the Trust to satisfy its obligations to make payments on the Certificates at the related adjustable interest rates, the Trust will enter into an interest rate swap agreement with TMCC (the "Swap Agreement"). Interest generally will accrue on the Class A-1 Certificates at the per annum rate equal to three-month LIBOR (determined as described herein) plus % per annum, on the Class A-2 Certificates at a per annum rate equal to three-month LIBOR (determined as described herein) plus % per annum and on the Class A-3 Certificates at a per annum rate equal to three-month LIBOR (determined as described herein) plus % per annum. In each case, payments in respect of interest so accrued generally will be made quarterly on March 25, June 25, September 25 and December 25 of each year (or, if such day is not a Business Day, on the next succeeding Business Day), commencing on March 25, 1999. The "Class A-1 Targeted Maturity Date" will be December 25, 2000 (or, if such day is not a Business Day, on the next succeeding Business Day), the "Class A-2 Targeted Maturity Date" will be December 25, 2001 (or, if such day is not a Business Day, on the next succeeding Business Day), the "Class A-3 Targeted Maturity Date" will be March 25, 2002 (or, if such day is not a Business Day, on the next succeeding Business Day) and the "Class B Targeted Maturity Date" will be December 25, 2003 (or if such day is not a Business Day, on the next succeeding Business Day). Principal of any Class of Class A Certificates generally will not be payable until the related Targeted Maturity Date. If a Class of Class A Certificates remains outstanding after all required payments in respect thereof have been made on the related Targeted Maturity Date, principal thereof and interest thereon will be distributed monthly thereafter on each Monthly Allocation Date until all required payments in respect of such Class have been made. Under such circumstances, interest will accrue on the Class A-1 Certificates at a per annum rate equal to one-month LIBOR (determined as described herein) plus % per annum, on the Class A-2 Certificates at a per annum rate equal to one-month LIBOR (determined as described herein) plus % per annum or on the Class A-3 Certificates at a per annum rate equal to one-month LIBOR (determined as described herein) plus % per annum, rather than at the rates specified above. The Class A Certificates will be payable solely from the assets of the Trust, including the SUBI Certificate, the TMCC Demand Notes and other Permitted Investments of amounts held in the SUBI Collection Account and the Certificateholders' Account and amounts payable by the Swap Counterparty under the Swap Agreement. Final payment of amounts due on each Class of Certificates is due on or before the related Stated Maturity Date. The Stated Maturity Date for the Class A-1 Certificates is December 25, 2002 (or, if such day is not a Business Day, on the next succeeding Business Day), for the Class A-2 Certificates is February 25, 2003 (or, if such day is not a Business Day, on the next succeeding Business Day), for the Class A-3 Certificates is February 25, 2004 (or, if such day is not a Business Day, on the next succeeding Business Day) and for the Class B Certificates is May 25, 2006 (or, if such day is not a Business Day, on the next succeeding Business Day). In general, the Certificates will be "sequential pay" certificates meaning that no principal allocations, applications or payments will be made on the Class A-2 <TABLE> <S> <C> THE TITLING TRUST................. The Titling Trust is a Delaware business trust formed pursuant to the Titling Trust Agreement. The primary business purpose of the Titling Trust is to take assignments of and serve as holder of title to substantially all of the lease contracts and the related leased vehicles originated by the Dealers beginning on dates prior to the execution of the SUBI Supplement. Pursuant to the Servicing Agreement, TMCC will service the lease contracts included in the Titling Trust Assets, including the Contracts. SEE "Additional Document Provisions -- The Trust Agreement" and "-- The Servicing Agreement" and "Certain Legal Aspects of the Titling Trust -- The Titling Trust". The Titling Trust is governed by an Amended and Restated Trust and Servicing Agreement (the "Titling Trust Agreement") among TMCC, as grantor, initial beneficiary and Servicer, TMTT, Inc., as trustee (the "Titling Trustee"), and U.S. Bank, as trust agent (the "Trust Agent"). TMTT, Inc. is a Delaware corporation and a wholly owned, special purpose subsidiary of U.S. Bank that was organized solely for the purpose of acting as Titling Trustee. TMTT, Inc. is not affiliated with TMCC or any affiliate thereof. SEE "The Titling Trust -- The Titling Trustee". TITLING TRUST ASSETS ALLOCATED AS SUBI ASSETS........ The Titling Trust Assets consist primarily of retail closed-end lease contracts and the automobiles and light duty trucks relating thereto. The SUBI will evidence a beneficial interest in a specified portion of the Titling Trust Assets allocated to the SUBI. Certain lease contracts (the "Initial Contracts") originated by the Dealers, the automobiles and light duty trucks relating thereto (the "Initial Leased Vehicles") and certain monies due under or payable in respect of the Initial Contracts and the Initial Leased Vehicles on or after November 1, 1998 (the "Cutoff Date") will be allocated to the SUBI on December 1, 1998 (the "Closing Date"). During the Revolving Period, payments made on or in respect of the SUBI Assets allocable to the Discounted Principal Balance thereof will be reinvested in additional retail closed-end lease contracts (the "Subsequent Contracts" and, together with the Initial Contracts, the "Contracts") assigned to the Titling Trust by Dealers and the related automobiles and light duty trucks (the "Subsequent Leased Vehicles" and, together with the Initial Leased Vehicles, the "Leased Vehicles"). At the time of such reinvestment, such Subsequent Contracts and Subsequent Leased Vehicles will be allocated to the SUBI and will no longer be UTI Assets. All such assets, together with certain other assets and rights, are the "SUBI Assets". SEE "Description of the Certificates -- Allocations, Applications and Payments -- The Revolving Period" and "The Trust and the SUBI -- The SUBI". The SUBI will evidence an indirect beneficial interest, rather than a direct legal interest, in the SUBI Assets. The SUBI will not represent a beneficial interest in any Titling Trust Assets </TABLE> Certificates until the Adjusted Class A-1 Certificate Balance has been reduced to zero, no principal allocations, applications or payments will be made on the Class A-3 Certificates until the Adjusted Class A-2 Certificate Balance and the Adjusted Class A-1 Certificate Balance have been reduced to zero and no principal allocations, applications or payments will be made on the Class B Certificates until the Adjusted Class A-1 Certificate Balance, the Adjusted Class A-2 Certificate Balance and the Adjusted Class A-3 Certificate Balance have been reduced to zero. From time to time during the Revolving Period described herein (generally expected to be the period from the Cutoff Date through the calendar day preceding November 1, 1999, but which may terminate earlier as described herein), Principal Collections on or in respect of the SUBI Assets will be reinvested in additional lease contracts originated as described herein and assigned to the Titling Trust, together with the automobiles and light duty trucks relating thereto, which at the time of reinvestment will become SUBI Assets. The SUBI will not evidence a direct interest in the SUBI Assets, nor will it represent a beneficial interest in any of the Titling Trust Assets other than the SUBI Assets. Payments made on or in respect of the Titling Trust Assets not represented by the SUBI will not be available to make payments on the Certificates. In the event of any Swap Termination described herein, the Trustee will liquidate the assets of the Trust and apply the proceeds (net of the expenses of such liquidation and reimbursements to be made to the Transferor, Servicer, Trustee and Titling Trustee and after giving effect to any swap termination payment to be made by the Trust under the Swap Agreement) to effect an early repayment of the Certificates. Under such circumstances, there can be no assurance as to how long such liquidation might take or that such net proceeds will be sufficient to reduce the outstanding balances of each Class of Certificates to zero. --------------------- It is a condition of issuance of each Class of Class A Certificates that they be assigned an Aaa rating by Moody's Investors Service, Inc. ("Moody's") and an AAA rating by Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. ("Standard & Poor's" and, together with Moody's, the "Rating Agencies"). A security rating is not a recommendation to buy, sell or hold a security and may be subject to revision, suspension or withdrawal at any time by the assigning rating organization. See "Summary -- Ratings". Certain persons participating in this offering may engage in transactions that stabilize, maintain or otherwise affect the price of the Class A Certificates. Such transactions may include stabilizing bids and the purchase of Class A Certificates to cover short positions. For a description of these activities, see "Underwriting". The Transferor, having made all reasonable inquiries, confirms that this Prospectus is true and accurate in all material respects and is not misleading, that the opinions and intentions expressed herein are honestly held and that there are no other facts the omission of which makes this Prospectus, including any information incorporated by reference herein, as a whole, or any of such information or the expression of any such opinions or intentions misleading. The Transferor accepts responsibility accordingly. No action has been taken or will be taken by the Transferor or the Underwriters that would permit a public offering of any Class A Certificates in any country or jurisdiction (other than the United States and certain states in the United States) where action for that purpose is required. Accordingly, the Class A Certificates may not be offered or sold, directly or indirectly, and neither this Prospectus nor any circular, prospectus, form of application, advertisement or other material may be distributed in or from or published in any country or jurisdiction except under circumstances that will result in compliance with any applicable laws and regulations. Persons into whose hands this Prospectus comes are required by the Transferor and the Underwriters to comply with all applicable laws and regulations in each country or jurisdiction in which they purchase, sell or deliver Class A Certificates or have in their possession or distribute this Prospectus, in all cases at their own expense. UNTIL FEBRUARY , 1999, ALL DEALERS EFFECTING TRANSACTIONS IN THE CLASS A CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. UPON RECEIPT OF A REQUEST BY AN INVESTOR WHO HAS RECEIVED AN ELECTRONIC PROSPECTUS OR A REQUEST BY SUCH INVESTOR'S REPRESENTATIVE WITHIN THE PERIOD DURING WHICH THERE IS A PROSPECTUS DELIVERY OBLIGATION, THE TRANSFEROR OR THE UNDERWRITERS WILL PROMPTLY DELIVER, OR CAUSE TO BE DELIVERED, WITHOUT CHARGE, A PAPER COPY OF THE PROSPECTUS. <TABLE> <S> <C> other than the SUBI Assets. Payments made on or in respect of the Titling Trust Assets other than the SUBI Assets will not be available to make payments on the Certificates. THE TRANSFEROR.................... Toyota Leasing, Inc. is a California corporation which is a wholly owned, special purpose subsidiary of TMCC. SEE "The Transferor". TMCC.............................. TMCC is a California corporation that has 34 branches in various locations in the United States, a branch in the Commonwealth of Puerto Rico and a centralized customer service center in Iowa. TMCC's primary business is providing retail leasing, retail and wholesale financing and certain other financial services to authorized Toyota and Lexus vehicle and Toyota industrial equipment dealers and their customers in the United States (excluding Hawaii) and Puerto Rico. TMCC is a wholly owned subsidiary of Toyota Motor Sales, U.S.A., Inc. ("TMS"), which is primarily engaged in the wholesale distribution of automobiles, light duty trucks, industrial equipment and related replacement parts and accessories throughout the United States (excluding Hawaii). TMS is a wholly-owned subsidiary of Toyota Motor North America, Inc. ("TMA"). Substantially all of TMS's products are either manufactured by its affiliates or are purchased from Toyota Motor Corporation ("TMC"), which wholly owns TMA, or affiliates of TMC. Pursuant to the Agreement and the Series 1998-C SUBI Servicing Supplement to the Titling Trust Agreement among TMCC, the Titling Trustee and the Transferor dated as of December 1, 1998 (the "Servicing Supplement" and, together with the Titling Trust Agreement, the "Servicing Agreement"), TMCC acts as servicer of the Titling Trust Assets, including the SUBI Assets (in such capacity, the "Servicer"). Pursuant to the terms of the Servicing Agreement, the Trustee is a third party beneficiary thereof. SECURITIES OFFERED A. GENERAL....................... The Certificates will represent fractional undivided beneficial interests in the Trust. The Adjustable Rate Auto Lease Asset Backed Certificates, Class A-1 (the "Class A-1 Certificates"), the Adjustable Rate Auto Lease Asset Backed Certificates, Class A-2 (the "Class A-2 Certificates") and the Adjustable Rate Auto Lease Asset Backed Certificates, Class A-3 (the "Class A-3 Certificates" and, together with the Class A-1 Certificates and Class A-2 Certificates, the "Class A Certificates") are senior certificates. The Adjustable Rate Auto Lease Asset Backed Certificates, Class B (the "Class B Certificates" and, together with the Class A Certificates, the "Certificates") are subordinated certificates. Only the Class A Certificates are being offered hereby. The Class B Certificates may be comprised of one or more Classes, each of which shall be pari passu with the other Classes of Class B Certificates. Certain Classes of Class B </TABLE> AVAILABLE INFORMATION The Transferor, as originator of the Trust, and the Trust, as issuer of the Certificates, have filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-1 (together with all amendments and exhibits thereto, the "Registration Statement") of which this Prospectus is a part, under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the Class A Certificates. This Prospectus does not contain all of the information set forth in the Registration Statement, certain parts of which have been omitted in accordance with the rules and regulations of the Commission. For further information, reference is made to the Registration Statement, which is available for inspection without charge at the public reference facilities of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and the regional offices of the Commission at Suite 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661 2511 and Suite 1300, Seven World Trade Center, New York, New York 10048. Copies of such information can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, copies of the Registration Statement and all of the documents incorporated by reference herein (including the Titling Trust Agreement and the Agreement) may be obtained at no charge at the office of Bankers Trust Company Luxembourg S.A., 14 Boulevard F. D. Roosevelt, L-2450, Luxembourg. The Servicer, on behalf of the Trust, will also file or cause to be filed with the Commission such periodic reports as are required under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations of the Commission thereunder. Electronic filings made through the Electronic Data Gathering Analysis and Retrieval System are publicly available through the Commission's Website at http://www.sec.gov. DOCUMENTS INCORPORATED BY REFERENCE Certain documents pursuant to which the Titling Trust was formed (the "Titling Trust Agreement"), the UTI and the SUBI are formed, the UTI Certificate and SUBI Certificate are issued (the "UTI Supplement" and "SUBI Supplement"), the assets of the Titling Trust and the SUBI Assets will be serviced (the "Servicing Agreement"), the TMCC Demand Notes will be issued (the "Indenture") and the swap will be executed (the "Swap Agreement") are incorporated by reference herein. Insofar as documents are incorporated herein as to which TMCC is a party, such documents relate solely to TMCC in its capacities as Servicer, issuer of the TMCC Demand Notes and as Swap Counterparty. TMCC is subject to the informational requirements of the Exchange Act, and in accordance therewith files reports and other information with the Commission. Such reports and other information can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following regional offices of the Commission: New York Regional Office, 7 World Trade Center, 13th Floor, New York, New York 10048; and Chicago Regional Office, Citibank Center, Suite 1800, 500 West Madison Street, Chicago, Illinois 60611 2511. In addition, certain of TMCC's securities are listed on the New York Stock Exchange and the aforementioned material may also be inspected at the offices of such exchange. TMCC's Annual Report on Form 10-K for the year ended September 30, 1997, and TMCC's Quarterly Reports on Form 10-Q for the quarters ended December 31, 1997, March 31, 1998 and June 30, 1998 have been filed with the Commission and are made a part of this Registration Statement. All reports filed by TMCC pursuant to Sections 13(a) or 15(d) of the Exchange Act subsequent to the date of the Registration Statement and prior to the termination of the offering of the Class A Certificates and all supplements to the Registration Statement filed from time to time shall be deemed to be incorporated by reference into the Registration Statement to be a part hereof from the date of filing such documents. Copies of the incorporated documents will be obtainable at no charge at the office of Bankers Trust Company Luxembourg S.A., 14 Boulevard F. D. Roosevelt, L-2450, Luxembourg. <TABLE> <S> <C> Certificates may not have the benefit of the Swap Agreement and shall bear interest at fixed rates (the "Fixed Rate Class B Certificates") while other Classes of Class B Certificates shall have the benefit of the Swap Agreement and shall bear interest at adjustable rates (the "Adjustable Rate Class B Certificates"). Information herein with respect to the Class B Certificates is provided for informational purposes only to provide more complete information with respect to the Class A Certificates. Although proceeds of the SUBI will be collected and allocated monthly, the Certificates will generally represent the right to receive quarterly payments of interest at the Class A-1 Rate, Class A-2 Rate, Class A-3 Rate or Class B Adjustable Rate (other than any Fixed Rate Class B Certificates which generally shall represent the right to recieve quarterly payments of interest at the Class B Fixed Rate), as the case may be, and, to the extent described herein, payments of principal on the related Targeted Maturity Date and payments of principal and interest on each subsequent Monthly Allocation Date. In addition, although the SUBI Assets consist primarily of lease contracts that implicitly bear interest at fixed rates, the Certificates (other than the Fixed Rate Class B Certificates) will bear interest at adjustable rates. Payments will be made to the Class A Certificateholders of record as of the day immediately preceding each relevant Certificate Payment Date or, if Definitive Certificates are issued, as of the last Business Day of the preceding month (each, a "Record Date"). A "Business Day" is a day other than a Saturday, a Sunday or a day on which banking institutions in New York, New York, Chicago, Illinois, or San Francisco, California are authorized or obligated by law, regulation, executive order or decree to be closed; provided that, solely for purposes of identifying any Certificate Payment Date with respect to the making of payments on the Class A Certificates in Luxembourg by a paying agent there located or any day on which a transfer of a Definitive Certificate may be made at the office of a transfer agent there located, "Business Day" shall also exclude any day on which banking institutions located in that jurisdiction are authorized by law, regulation, governmental order or decree to be closed, whether or not payments are made with respect to such Certificates in any other jurisdiction on such date, but such definition shall not be used for making any other calculation. On the Closing Date, the Trust will issue $189,000,000 aggregate initial principal amount of Class A-1 Certificates (the "Initial Class A-1 Certificate Balance"), $424,500,000 aggregate initial principal amount of Class A-2 Certificates (the "Initial Class A-2 Certificate Balance"), $72,800,000 aggregate initial principal amount of Class A-3 Certificates (the "Initial Class A-3 Certificate Balance") and $48,700,000 aggregate initial principal </TABLE> Any statement contained herein or made a part hereof, or contained in a document all or a portion of which is incorporated or deemed to be incorporated by reference herein, shall be deemed to be modified or superseded for the purposes of the Registration Statement to the extent that a statement contained therein (or in any subsequently filed document which is also incorporated or deemed to be incorporated by reference herein) modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of the Registration Statement. REPORTS TO CERTIFICATEHOLDERS U.S. Bank National Association, as Trustee, will provide to holders of the Certificates (the "Certificateholders" or "Holders") (which, in the case of the Class A Certificates, shall be Cede & Co., as the nominee of DTC, unless Definitive Certificates are issued under the limited circumstances described herein) unaudited monthly and annual reports concerning the Contracts and Leased Vehicles. For so long as the Class A Certificates are outstanding, each such report (including a statement of the Class Certificate Balance of each Class of Class A Certificates) also shall be delivered to the Luxembourg Stock Exchange on the same date such reports are to be delivered to Certificateholders. Copies of such reports may be obtained at no charge at the office of Bankers Trust Luxembourg S.A., 14 Boulevard F.D. Roosevelt, L-2450, Luxembourg. <TABLE> <S> <C> amount of Class B Certificates (the "Initial Class B Certificate Balance"). Interests in the assets of the Trust will be allocated among (i) the Class A-1 Certificateholders, the Class A-2 Certificateholders, the Class A-3 Certificateholders and the Class B Certificateholders (collectively, the "Investor Interest") and (ii) the Transferor Interest. The Transferor Interest will represent the interest in the Trust not represented by the Investor Interest. The Transferor Interest will initially equal $14,988,732.51 (2.00% of the Aggregate Net Investment Value as of the Cutoff Date) and on any day will equal the difference between the Aggregate Net Investment Value and the Adjusted Investor Balance. As more fully described herein, the Aggregate Net Investment Value can change daily, and the Transferor Interest can decrease daily as the Aggregate Net Investment Value decreases. The Transferor Interest may increase on a Monthly Allocation Date as the Adjusted Investor Balance declines. SEE "Description of the Certificates -- General". Amounts payable by the Trust in respect of interest on the Class A Certificates and any Adjustable Rate Class B Certificates will generally be limited to amounts payable by the Swap Counterparty in accordance with the Swap Agreement in exchange for the payments by the Trust to the Swap Counterparty, as described herein. As described more fully herein, the amount to be used for any such payment to the Swap Counterparty will be determined on the basis of calculations made each month on the basis of (i) the Adjusted Class A-1 Certificate Balance and the Class A-1 Notional Rate in the case of the Class A-1 Certificates, (ii) the Adjusted Class A-2 Certificate Balance and the Class A-2 Notional Rate in the case of the Class A-2 Certificates, (iii) the Adjusted Class A-3 Certificate Balance and the Class A-3 Notional Rate in the case of the Class A-3 Certificates, (iv) the portion of the Adjusted Class B Certificate Balance represented by the Adjustable Rate Class B Certificates and the Class B Notional Rate in the case of the Adjustable Rate Class B Certificates and (v) the amount of the investment income on certain of the TMCC Demand Notes at the related Required Rates, as described herein. The Fixed Rate Class B Certificates will not have the benefit of the Swap Agreement and will receive interest payments from amounts allocated in respect of interest directly from the Trust as set forth in the Agreement. As used herein for such purposes: "Class A-1 Certificate Balance" means (a) the Initial Class A-1 Certificate Balance less all amounts paid to Class A-1 Certificateholders on each relevant Certificate Payment Date in respect of principal and (b) zero, from and after the Certificate Payment Date on which the Adjusted Class A-1 Certificate Balance is reduced to zero. </TABLE> OVERVIEW OF TRANSACTION [CHART] <TABLE> <S> <C> "Adjusted Class A-1 Certificate Balance" means the Initial Class A-1 Certificate Balance less: (i) amounts allocated and deposited into the Certificateholders' Account in respect of the Adjusted Class A-1 Certificate Balance; (ii) without duplicating the foregoing, amounts paid to the Class A Certificateholders in respect of the Adjusted Class A-1 Certificate Balance; and (iii) the amount of unreimbursed Certificate Principal Loss Amounts allocated thereto. "Class A-1 Notional Rate" refers to the rate at which amounts will be deemed to accrue in respect of the Adjusted Class A-1 Certificate Balance for purposes of calculating the Class A-1 Notional Interest Accrual Amount to be paid to the Swap Counterparty, which rate will be % per annum. "Class A-2 Certificate Balance" means (a) the Initial Class A-2 Certificate Balance less all amounts paid to Class A-2 Certificateholders on each relevant Certificate Payment Date in respect of principal and (b) zero, from and after the Certificate Payment Date on which the Adjusted Class A-2 Certificate Balance is reduced to zero. "Adjusted Class A-2 Certificate Balance" means the Initial Class A-2 Certificate Balance less: (i) amounts allocated and deposited into the Certificateholders' Account in respect of the Adjusted Class A-2 Certificate Balance; (ii) without duplicating the foregoing, amounts paid to the Class A Certificateholders in respect of the Adjusted Class A-2 Certificate Balance; and (iii) the amount of unreimbursed Certificate Principal Loss Amounts allocated thereto. "Class A-2 Notional Rate" refers to the rate at which amounts will be deemed to accrue in respect of the Adjusted Class A-2 Certificate Balance for purposes of calculating the Class A-2 Notional Interest Accrual Amount to be paid to the Swap Counterparty, which rate will be % per annum. "Class A-3 Certificate Balance" means (a) the Initial Class B Certificate Balance less all amounts paid to Class A-3 Certificateholders on each relevant Certificate Payment Date in respect of principal and (b) zero, from and after the Certificate Payment Date on which the Adjusted Class A-3 Certificate Balance is reduced to zero. "Adjusted Class A-3 Certificate Balance" means the Initial Class A-3 Certificate Balance less: (i) amounts allocated and deposited into the Certificateholders' Account in respect of the Adjusted Class A-3 Certificate Balance; (ii) without duplicating the foregoing, amounts paid to the Class A Certificateholders in respect of the Adjusted Class A-3 Certificate Balance; and (iii) the amount of unreimbursed Certificate Principal Loss Amounts allocated thereto. </TABLE> <TABLE> <S> <C> "Class A-3 Notional Rate" refers to the rate at which amounts will be deemed to accrue in respect of the Adjusted Class A-3 Certificate Balance for purposes of calculating the Class A-3 Notional Interest Accrual Amount to be paid to the Swap Counterparty, which rate will be % per annum. "Class B Certificate Balance" means (a) the Initial Class B Certificate Balance less all amounts paid to Class B Certificateholders on each relevant Certificate Payment Date in respect of principal and (b) zero, from and after the Certificate Payment Date on which the Adjusted Class B Certificate Balance is reduced to zero. "Adjusted Class B Certificate Balance" means the Initial Class B Certificate Balance less: (i) amounts allocated and deposited into the Certificateholders' Account in respect of the Adjusted Class B Certificate Balance; (ii) without duplicating the foregoing, amounts paid to the Class B Certificateholders in respect of the Adjusted Class B Certificate Balance; and (iii) the amount of unreimbursed Certificate Principal Loss Amounts allocated thereto. "Class B Fixed Rate" refers to the rate at which interest will accrue in respect of the portion of the Class B Certificate Balance represented by any Fixed Rate Class B Certificates (and on any unreimbursed Certificate Principal Loss Amounts allocated thereto), which rate will not exceed % per annum. "Class B Notional Rate" refers to the rate at which amounts will be deemed to accrue in respect of the portion of the Adjusted Class B Certificate Balance represented by any Adjustable Rate Class B Certificates for purposes of calculating the Class B Notional Interest Accrual Amount to be paid to the Swap Counterparty, which rate will not exceed % per annum. "Initial Investor Balance" means the sum of the Initial Class A-1 Certificate Balance, the Initial Class A-2 Certificate Balance, the Initial Class A-3 Certificate Balance and the Initial Class B Certificate Balance. "Adjusted Investor Balance" means the sum of the Adjusted Class A-1 Certificate Balance, the Adjusted Class A-2 Certificate Balance, the Adjusted Class A-3 Certificate Balance and the Adjusted Class B Certificate Balance. "Class A-1 Notional Interest Accrual Amount" means the amount of interest that is deemed to accrue during a Monthly Interest Period at the Class A-1 Notional Rate on the sum of the Adjusted Class A-1 Certificate Balance and unreimbursed Certificate Principal Loss Amounts previously allocated thereto. "Class A-2 Notional Interest Accrual Amount" means the amount of interest that is deemed to accrue during a Monthly Interest Period at the Class A-2 Notional Rate on the sum of the </TABLE> <TABLE> <S> <C> Adjusted Class A-2 Certificate Balance and unreimbursed Certificate Principal Loss Amounts previously allocated thereto. "Class A-3 Notional Interest Accrual Amount" means the amount of interest that is deemed to accrue during a Monthly Interest Period at the Class A-3 Notional Rate on the sum of the Adjusted Class A-3 Certificate Balance and unreimbursed Certificate Principal Loss Amounts previously allocated thereto. "Class B Fixed Rate Interest Accrual Amount" means the amount of interest that accrues during a Monthly Interest Period at the Class B Fixed Rate on the sum of the portion of the Adjusted Class B Certificate Balance represented by the Fixed Rate Class B Certificates and unreimbursed Certificate Principal Loss Amounts previously allocated thereto. "Class B Notional Interest Accrual Amount" means the amount of interest that is deemed to accrue during a Monthly Interest Period at the Class B Notional Rate on the sum of the portion of the Adjusted Class B Certificate Balance represented by the Adjustable Rate Class B Certificates and unreimbursed Certificate Principal Loss Amounts previously allocated thereto. "Interest Payment Period" means (i) for each Class of Certificates (other than any Fixed Rate Class B Certificates) and any related Certificate Payment Date, the period from and including the preceding Certificate Payment Date to but excluding the current Certificate Payment Date and (ii) for any Fixed Rate Class B Certificates and any related Certificate Payment Date, the period from and including the 25th day of the calendar month that includes the preceding Certificate Payment Date to but excluding the 25th day of the calendar month that includes the current Certificate Payment Date, except that the first Interest Payment Period for each Class of Certificates will be the period from and including the Closing Date to but excluding March 25, 1999. Prior to the related Targeted Maturity Date, each Interest Payment Period generally will consist of approximately three months. Thereafter, the related Interest Payment Period generally will be comprised of approximately one month. "Monthly Interest Period" for each Class of Certificates and any Monthly Allocation Date means the period from and including the 25th day of the preceding calendar month to but excluding the 25th day of the current calendar month, except that the first Monthly Interest Period for each Class of Certificates will be the period from and including the Closing Date to but excluding December 25, 1998. A "Monthly Allocation Date" is the day on which Collections in respect of the Contracts and Leased Vehicles represented by the SUBI are allocated, and shall occur on the 25th day of each month (or, if such day is not a Business Day, on the next succeeding Business Day) commencing on December 28, 1998. </TABLE> <TABLE> <S> <C> As used herein: (i) "allocation" is used to connote a calculation made to determine which, if any, Collections are available for a stated purpose, (ii) "application" is used to connote the actual transfer, investment, deposit or other use of a specified amount for a stated purpose and (iii) "payment" is used to connote the actual transfer of money to a party. For example: On each Monthly Allocation Date during an Interest Payment Period, the Trustee will allocate a portion of the Investor Percentage of Interest Collections in respect of interest deemed to have accrued on the Adjusted Class A-1 Certificate Balance (and unreimbursed Certificate Principal Loss Amounts allocated thereto) at the Class A-1 Notional Rate during the related Monthly Interest Period, which portion of Interest Collections will be applied to make a deposit into the Certificateholders' Account for investment in a Permitted Investment that will mature on or prior to the next relevant Certificate Payment Date, on which date the proceeds thereof and certain other amounts will be paid by the Trust to the Swap Counterparty in exchange for an amount which the Trust will then pay to the Class A-1 Certificateholders in respect of the total amount of interest accrued on the Class A-1 Certificates at the Class A-1 Rate during the related Interest Payment Period. Payments in respect of the Certificates of each Class will be funded from payments received by the Trust on or in respect of the assets of the SUBI evidenced by the SUBI Certificate and, in certain circumstances, from amounts on deposit in the Reserve Fund, from earnings in respect of monies, if any, on deposit in the Certificateholders' Account, and monies that otherwise would be distributable in respect of the Transferor Interest. All amounts allocated for payment of interest on the Class A Certificates and any Adjustable Rate Class B Certificates (including net investment income on certain Permitted Investments) will be paid to the Swap Counterparty pursuant to the Swap Agreement, and the Swap Counterparty will pay the Trust amounts which will be used to make the payments to such Certificateholders in respect of interest described herein. Amounts allocated by the Trust in respect of interest accrued on any Fixed Rate Class B Certificates (including net investment income on certain Permitted Investments) will be paid by the Trust to the holders of such Certificates. No principal allocations, applications or payments will be made on the Class B Certificates until the Adjusted Class A-1 Certificate Balance, Adjusted Class A-2 Certificate Balance and Adjusted Class A-3 Certificate Balance are reduced to zero. In addition, the Class B Certificates will be subordinated to the Class A Certificates with respect to the allocation of losses to the extent described herein. SEE "Description of the Certificates -- Allocations, Applications and Payments". The Transferor </TABLE> <TABLE> <S> <C> Interest also will be subordinated to the Investor Interest, as described herein. B. PAYMENTS...................... INTEREST. Payments in respect of interest on each Class of Certificates will be made quarterly, on each Monthly Allocation Date in March, June, September and December, commencing in March 1999, until the related Targeted Maturity Date, as well as (i) on the related Targeted Maturity Date, (ii) if the Adjusted Class Certificate Balance of such Class has not been reduced to zero on its Targeted Maturity Date, on each Monthly Allocation Date following such Targeted Maturity Date until such Adjusted Class Certificate Balance is reduced to zero and (iii) in connection with a Swap Termination and related liquidation of the assets of the Trust or any exercise by the Transferor of its option to repurchase the SUBI Certificate, on the Monthly Allocation Date following the receipt by the Trust of the proceeds of such liquidation or sale, in each case to the extent of amounts available therefor as described herein (each such Monthly Allocation Date a relevant "Certificate Payment Date" with respect to such Class). For Interest Payment Periods commencing prior to the related Targeted Maturity Date, interest will accrue on the Class A-1 Certificates at three-month LIBOR plus % per annum, on the Class A-2 Certificates at three-month LIBOR plus % per annum, on the Class A-3 Certificates at three-month LIBOR plus % per annum and on the Adjustable Rate Class B Certificates at three-month LIBOR plus % per annum. For Interest Payment Periods commencing on or after the related Targeted Maturity Date, interest will accrue on the Class A-1 Certificates at one-month LIBOR plus % per annum, on the Class A-2 Certificates at one-month LIBOR plus % per annum, on the Class A-3 Certificates at one-month LIBOR plus % per annum and on the Adjustable Rate Class B Certificates at one-month LIBOR plus % per annum (the "Class A-1 Rate", "Class A-2 Rate", "Class A-3 Rate" and "Class B Adjustable Rate" respectively); provided, however, that for the initial Interest Payment Period the Class A-1 Rate, Class A-2 Rate, Class A-3 Rate and Class B Adjustable Rate will be based on an interpolated rate to be calculated two Business Days prior to the Closing Date. For each Interest Payment Period, interest will accrue on the Fixed Rate Class B Certificates at the Class B Fixed Rate. SEE "Description of the Certificates -- Calculation of Class A-1 Rate, Class A-2 Rate, Class A-3 Rate and Class B Adjustable Rate". Interest allocations, applications and payments with respect to each Class of Class A Certificates will have the same priority. Under certain circumstances, the amount available for interest allocations and applications or payments could be less than the amount of interest allocable and applicable or payable with respect to the Class A Certificates on any Monthly Allocation Date, in which case each Class of Class A Certificates will be </TABLE> <TABLE> <S> <C> allocated or paid its ratable share (based upon the aggregate amount of interest due thereon) of the aggregate amount available to be allocated and applied or paid in respect of interest on the Class A Certificates. As mentioned above, the amounts available to make interest payments with respect to the Class A Certificates and the Adjustable Rate Class B Certificates generally will be limited to amounts payable by the Swap Counterparty in accordance with the Swap Agreement. Except as described herein, on each relevant Certificate Payment Date, the Trust will be obligated to pay to the Swap Counterparty (i) the sum of (a) the relevant Class A-1 Notional Interest Accrual Amounts for the Monthly Interest Periods relating to such Certificate Payment Date, and (b) an amount equal to interest accrued at the related Required Rate during such Monthly Interest Periods on amounts deposited into the Certificateholders' Account in respect of the Adjusted Class A-1 Certificate Balance on prior Monthly Allocation Dates (such sum, the "Class A-1 Swap Interest Amount"), (ii) the sum of (a) the relevant Class A-2 Notional Interest Accrual Amounts for the Monthly Interest Periods relating to such Certificate Payment Date, and (b) an amount equal to interest accrued at the related Required Rate during such Monthly Interest Periods on amounts deposited into the Certificateholders' Account in respect of the Adjusted Class A-2 Certificate Balance on prior Monthly Allocation Dates (such sum, the "Class A-2 Swap Interest Amount"), (iii) the sum of (a) the relevant Class A-3 Notional Interest Accrual Amounts for the Monthly Interest Periods relating to such Certificate Payment Date, and (b) an amount equal to interest accrued at the related Required Rate during such Monthly Interest Periods on amounts deposited into the Certificateholders' Account in respect of the Adjusted Class A-3 Certificate Balance on prior Monthly Allocation Dates (such sum, the "Class A-3 Swap Interest Amount") and (iv) the sum of (a) the relevant Class B Notional Interest Accrual Amounts for the Monthly Interest Periods relating to such Certificate Payment Date, and (b) an amount equal to interest accrued at the related Required Rate during such Monthly Interest Periods on amounts deposited into the Certificateholders' Account in respect of the portion of the Adjusted Class B Certificate Balance represented by any Adjustable Rate Class B Certificates on prior Monthly Allocation Dates (such sum, the "Class B Swap Interest Amount") in exchange for payment by the Swap Counterparty of amounts equal to the amount of interest accrued on the Class A-1 Certificate Balance, Class A-2 Certificate Balance, Class A-3 Certificate Balance and the portion of the Class B Certificate Balance represented by the Adjustable Rate Class B Certificates, at the Class A-1 Rate, the Class A-2 Rate, the Class A-3 Rate and the Class B Adjustable Rate, respectively, during the related Interest Payment Period. </TABLE> <TABLE> <S> <C> If, however, the aggregate of the amounts paid or available to be paid by the Trust to the Swap Counterparty in respect of interest on the relevant Certificate Payment Date, in accordance with the priorities set forth herein, is less than such Class A-1 Swap Interest Amount, Class A-2 Swap Interest Amount, Class A-3 Swap Interest Amount or Class B Swap Interest Amount (the amount of any such insufficiency, a "Class A-1 Swap Interest Shortfall Amount", "Class A-2 Swap Interest Shortfall Amount", "Class A-3 Swap Interest Shortfall Amount" or "Class B Swap Interest Shortfall Amount", as the case may be), then under the Swap Agreement the corresponding payment due from the Swap Counterparty in exchange therefor (and, under the Agreement, the amount payable on such date in respect of interest accrued on the related Class of Certificates) will be reduced in the same proportion as the proportion that such Swap Interest Shortfall Amount represents of such Class A-1 Swap Interest Amount, Class A-2 Swap Interest Amount, Class A-3 Swap Interest Amount or Class B Swap Interest Amount, as the case may be. If on a subsequent Certificate Payment Date amounts are available, in accordance with the priorities set forth herein, to reimburse all or any part of any unreimbursed Class A-1 Swap Interest Shortfall Amount, Class A-2 Swap Interest Shortfall Amount, Class A-3 Swap Interest Shortfall Amount or Class B Swap Interest Shortfall Amount, then the Trust will be obligated under the Swap Agreement to pay such amounts to the Swap Counterparty and the corresponding payment due from the Swap Counterparty in respect of interest (and therefore any amounts payable on such date in respect of interest accrued on the related Class of Certificates) will be increased proportionately in the same proportion as such reimbursement represents of the current Class A-1 Swap Interest Amount, Class A-2 Swap Interest Amount, Class A-3 Swap Interest Amount or Class B Swap Interest Amount, as the case may be. Certificateholders will not be entitled to receive any interest on any Swap Interest Shortfall Amounts or corresponding reductions in amounts payable by the Swap Counterparty whether or not subsequently reimbursed as described above. SEE "Description of the Certificates -- Calculation of Class A-1 Rate, Class A-2 Rate, Class A-3 Rate and Class B Rate" and "Additional Document Provisions -- The Swap Agreement". In the event that, on any Monthly Allocation Date, the Class B Fixed Rate Interest Accrual Amount exceeds the amount of Available Interest allocable thereto, such deficiency may result in a Class B Interest Carryover Shortfall. Such Class B Interest Carryover Shortfall may be reimbursed on future Monthly Allocation Dates as described herein and shall not bear interest prior to such reimbursement. </TABLE> <TABLE> <S> <C> Interest will be calculated on the basis of: (i) in the case of the Class A-1 Notional Interest Accrual Amount, the Class A-2 Notional Interest Accrual Amount, the Class A-3 Notional Interest Accrual Amount, the Class B Notional Interest Accrual Amount and the Class B Fixed Rate Interest Accrual Amount, a 360-day year consisting of twelve 30-day months, and (ii) in the case of the Class A-1 Rate, the Class A-2 Rate, the Class A-3 Rate and the Class B Adjustable Rate and amounts due from the Swap Counterparty under the Swap Agreement, the actual number of days in the related Interest Payment Period and a 360-day year. PRINCIPAL. Principal of each Class of Certificates will be payable, (i) on the related Targeted Maturity Date; (ii) if the Adjusted Class A-1 Certificate Balance, Adjusted Class A-2 Certificate Balance, Adjusted Class A-3 Certificate Balance or Adjusted Class B Certificate Balance is not reduced to zero on the related Targeted Maturity Date, then for each such Class on each subsequent Monthly Allocation Date until the date on which the Adjusted Class A-1 Certificate Balance, Adjusted Class A-2 Certificate Balance, Adjusted Class A-3 Certificate Balance or Adjusted Class B Certificate Balance, as the case may be, is reduced to zero; and (iii) in connection with a Swap Termination or any exercise by the Transferor of its option to repurchase the SUBI Certificate, on the Monthly Allocation Date following the receipt of proceeds from such liquidation or sale (each such Targeted Maturity Date or Monthly Allocation Date, a relevant "Certificate Payment Date" with respect to such Class), in each case to the extent of amounts available therefor as described herein. The Targeted Maturity Date and the Stated Maturity Date (the date on which ultimate payment of a Class of Certificates is due) for each Class of Certificates are as follows: </TABLE> <TABLE> <CAPTION> CLASS TARGETED MATURITY DATE STATED MATURITY DATE - --------------------- ---------------------- ---------------------- <S> <C> <C> Class A-1............ December 25, 2000 December 25, 2002 Class A-2............ December 25, 2001 February 25, 2003 Class A-3............ March 25, 2002 February 25, 2004 Class B.............. December 25, 2003 May 25, 2006 </TABLE> <TABLE> <S> <C> provided, however, that if any such day is not a Business Day, then the related Targeted Maturity Date or Stated Maturity Date shall be the next succeeding Business Day. Except as described under "Description of the Certificates -- Termination of the Trust; Retirement of the Certificates", the Certificates will be "sequential pay" certificates meaning that no principal allocations, applications or payments will be made on the Class A-2 Certificates until the Adjusted Class A-1 Certificate Balance has been reduced to zero, no principal allocations, applications or payments will be made on the </TABLE> <TABLE> <S> <C> Class A-3 Certificates until the Adjusted Class A-2 Certificate Balance has been reduced to zero, and no principal allocations, applications or payments will be made on the Class B Certificates until the Adjusted Class A-3 Certificate Balance has been reduced to zero. Failure to pay in full a particular Class of Certificates on its Targeted Maturity Date because amounts allocable thereto are insufficient therefor will not constitute an Event of Servicing Termination or a Swap Termination, nor will it cause the payment of principal of or interest on other Classes of Certificates to be made on a monthly basis. THE REVOLVING PERIOD. The "Revolving Period" is the period from the Cutoff Date through the calendar day preceding the earliest to occur of December 1, 1999 (the "Accumulation Date"), an Accumulation Event or a Swap Termination. During the Revolving Period, all Principal Collections and all amounts allocated and applied in reimbursement of any Loss Amounts and Certificate Principal Loss Amounts allocated to the Investor Interest will be reinvested in Subsequent Contracts and Subsequent Leased Vehicles. Thus, except to the extent Certificate Principal Loss Amounts are allocated thereto and not reimbursed, the Adjusted Class A-1 Certificate Balance, Adjusted Class A-2 Certificate Balance, Adjusted Class A-3 Certificate Balance and Adjusted Class B Certificate Balance will not decline during the Revolving Period. Accumulation Events are described under "Description of the Certificates -- Accumulation Events". Events causing a Swap Termination under the Swap are described under "Additional Document Provisions -- Swap Agreement". An Accumulation Event or a Swap Termination will terminate the Revolving Period. SEE ALSO "Description of the Certificates -- Termination of the Trust; Retirement of the Certificates -- SWAP TERMINATION". While an Accumulation Event will terminate the Revolving Period, only a Swap Termination and related liquidation of the assets of the Trust or purchase of the SUBI Certificate by the Transferor may cause distributions in respect of principal with respect to a Class of Certificates prior to the related Targeted Maturity Date. During the Revolving Period, on one or more Business Days selected by the Servicer each month (each, a "Transfer Date"), the Servicer will direct the Titling Trustee to reinvest (i) Principal Collections and (ii) amounts applied to reimburse Loss Amounts and Certificate Principal Loss Amounts allocated to the Investor Interest in Subsequent Contracts and Subsequent Leased Vehicles. Upon such reinvestment, such Subsequent Contracts and Subsequent Leased Vehicles will become SUBI Assets. If on the last Business Day of any month during the Revolving Period commencing in January 1999 the Servicer determines that the amount of Principal Collections and </TABLE> <TABLE> <S> <C> reimbursed Loss Amounts and Certificate Principal Loss Amounts for the preceding Collection Period not reinvested in Subsequent Contracts and Subsequent Leased Vehicles as of the first day of such month exceeds $1,000,000, an Accumulation Event will be deemed to have occurred. SEE "Description of the Certificates -- Allocations, Applications and Payments -- Revolving Period". During the Revolving Period, Subsequent Contracts and Subsequent Leased Vehicles will be selected from the Titling Trust's portfolio of lease contracts and related vehicles not allocated to any Other SUBI, based on the criteria specified in the Titling Trust Agreement and Servicing Supplement as described under the "The Contracts -- Representations, Warranties and Covenants". Reinvestment of Principal Collections and reimbursed Loss Amounts and Certificate Principal Loss Amounts will be in the lease contracts having the earliest origination dates and the related vehicles that are Titling Trust Assets (excluding those previously allocated to any Other SUBI). SEE "The Contracts". With respect to any Monthly Allocation Date, the related "Collection Period" will be the preceding calendar month. With respect to any Collection Period, Collections will be allocated as "Principal Collections" up to the sum of: (i) the principal portion of each Monthly Payment due during such Collection Period with respect to each Contract that has not yet reached maturity, and as to which there has been no repossession, charge-off or Prepayment; (ii) amounts received during such Collection Period in connection with the Prepayment of any Contracts that are allocable to principal thereof (including the Residual Value thereof); and (iii) amounts received during such Collection Period as Liquidation Proceeds (net of Liquidation Expenses) with respect to any Contracts not specified in (i) or (ii) above, up to the sum of (a) the principal portion of all unpaid Monthly Payments through the maturity date specified in each related lease contract plus (b) the Residual Value of each related lease contract. For purposes of determining such Principal Collections, the principal component of all payments (including any payment in respect of the Residual Value thereof) made or to be made on or in respect of a Contract (or the related Leased Vehicle) with a Lease Rate less than 8.75% per annum will be discounted at a per annum rate of 8.75%, thereby effectively reallocating a portion of the payments received in respect of the principal component of the Contracts to Interest Collections and providing additional credit enhancement for the benefit of the Certificateholders. With respect to any Collection Period, "Collections" will include all net collections received in respect of the Contracts and Leased Vehicles during such Collection Period, such as Monthly Payments (including previously collected Payments Ahead that </TABLE> <TABLE> <S> <C> represent Monthly Payments due during such Collection Period), Prepayments, Advances, Reallocation Payments, Reallocation Deposit Amounts, Net Matured Leased Vehicle Proceeds, Net Charged-off Vehicle Proceeds and other Net Liquidation Proceeds, less (i) amounts representing Payments Ahead with respect to future Collection Periods, (ii) Additional Loss Amounts in respect of such Collection Period and (iii) reimbursement of Advances (including Inventory Advances and Nonrecoverable Advances). As described above, during the Revolving Period, amounts otherwise allocable on the related Monthly Allocation Date in reimbursement of Loss Amounts or Certificate Principal Loss Amounts allocable to the Investor Interest will be treated as Principal Collections and reinvested in Subsequent Contracts and Subsequent Leased Vehicles. SEE "Description of the Certificates -- Allocations, Applications and Payments -- ALLOCATIONS AND APPLICATIONS OF COLLECTIONS". With respect to any Collection Period "Interest Collections" generally will equal the amount by which Collections exceed Principal Collections. "Net Charged-off Vehicle Proceeds" will equal Charged-off Vehicle Proceeds net of Charged-off Vehicle Expenses, and "Net Liquidation Proceeds" will equal Liquidation Proceeds net of Liquidation Expenses. Following the Revolving Period, the amount of Principal Collections allocable to the Investor Interest in respect of a Collection Period (the "Principal Allocation") generally will mean the Investor Percentage of the Principal Collections in respect of such Collection Period allocable to the SUBI. The Investor Percentage will be calculated as described herein under "Description of the Certificates -- Calculation of Investor Percentage and Transferor Percentage". To the extent that on any Monthly Allocation Date any portion of the Investor Percentage of Interest Collections in respect of the related Collection Period remains after required allocations and applications have been made, including any required deposit into the Reserve Fund, up to but not exceeding the product of (i) one-twelfth of 0.25% and (ii) the Aggregate Net Investment Value as of the last day of such Collection Period will constitute the "Accelerated Principal Distribution Amount". The Accelerated Principal Distribution Amount will be allocable to the Certificateholders (or for reimbursements of Maturity Advances) in addition to (and in the same manner and priority as) ordinary allocations and applications of principal of the Certificates. SEE "Description of the Certificates -- Allocations, Applications and Payments -- ALLOCATIONS AND APPLICATIONS OF COLLECTIONS" and "Assets of the Trust -- The Accounts; Collections -- THE SUBI COLLECTION ACCOUNT" and "Certain Withdrawals from the SUBI Collection Account". </TABLE> <TABLE> <S> <C> C. ACCUMULATION PERIODS; TMCC DEMAND NOTES................. The Accumulation Period with respect to a Class of Certificates will commence on the earlier of the Accumulation Date or the day on which an Accumulation Event occurs and will end on the related Targeted Maturity Date or on the occurrence of a Swap Termination, if any. During the Revolving Period, amounts allocated on any Monthly Allocation Date as the related Class A-1 Notional Interest Accrual Amount, Class A-2 Notional Interest Accrual Amount, Class A-3 Notional Interest Accrual Amount, Class B Notional Interest Accrual Amount and Class B Fixed Rate Interest Accrual Amount will be deposited into the Certificateholders' Account and invested in Permitted Investments maturing on or prior to the succeeding relevant Certificate Payment Date. Following the Revolving Period, amounts allocated as described in the prior sentence will continue to be deposited and invested as described in the preceding sentence, and amounts allocated on any Monthly Allocation Date in reduction of the Adjusted Class A-1 Certificate Balance, the Adjusted Class A-2 Certificate Balance, the Adjusted Class A-3 Certificate Balance and the Adjusted Class B Certificate Balance (including reimbursements of Loss Amounts allocated to any such Class) will be deposited into the Certificateholders' Account and invested in Permitted Investments maturing on or prior to the related Targeted Maturity Date. Each such Permitted Investment is required to bear interest at the related Required Rate. Amounts so allocated on any Certificate Payment Date will not be so invested in Permitted Investments if currently payable or applicable to another purpose on such Certificate Payment Date. Such Permitted Investments are expected to be demand obligations issued by TMCC (each, a "TMCC Demand Note"). The TMCC Demand Notes are demand obligations insofar as the Trustee, on behalf of the Trust, will have the right to demand payment of amounts due thereunder prior to their stated maturity dates (i) if for any reason Standard & Poor's reduces TMCC's short-term debt to a rating less than A-1+ or TMCC's long-term debt to a rating less than AA, or Moody's reduces TMCC's short-term debt to a rating less than P-1 or TMCC's long-term debt to a rating less than Aa3 and the Trustee determines that at such time one or more Permitted Investments having substantially the same maturities, similar demand features and bearing interest at the relevant Required Rates are available and investment therein rather than in TMCC Demand Notes will not, by itself, cause a Rating Agency to reduce or withdraw its rating of any Class of Certificates or (ii) in connection with a Swap Termination. The Trustee will be required to exercise the demand feature of the TMCC Demand Notes upon any Swap Termination. </TABLE> <TABLE> <S> <C> Because TMCC is the issuer of the TMCC Demand Notes, and because such instruments will not be redeemable prior to their maturity dates other than as described above, if for any reason either Rating Agency reduces its rating of TMCC's debt after the date hereof, such Rating Agency may also downgrade the rating it has assigned to any Class of Certificates. On August 20, 1998, Moody's downgraded the long-term debt of TMC and its subsidiaries (including TMCC) to Aa1 from Aaa. On September 29, 1998, Standard & Poor's announced that it had placed the long-term debt of TMCC on Credit Watch with negative implications. The initial ratings of the Certificates are not affected by Moody's reduction of TMCC's rating or Standard & Poor's announcement. SEE "Risk Factors -- Risks Associated with Ratings of the Class A Certificates" and "Additional Document Provisions -- TMCC Demand Notes". D. THE SWAP...................... In order to enable the Trust to satisfy its obligations to make payments on the Class A Certificates and the Adjustable Rate Class B Certificates at an adjustable rate of interest, the Trust will enter into the Swap Agreement with TMCC, as Swap Counterparty (the "Swap Counterparty"). Pursuant to the Swap Agreement, the Trust generally will pay to the Swap Counterparty on each relevant Certificate Payment Date all amounts allocable in respect of the Class A-1 Swap Interest Amount, the Class A-2 Swap Interest Amount, the Class A-3 Swap Interest Amount or the Class B Swap Interest Amount, in each case subject to the payment priorities and limitations described herein. On each such date, the Swap Counterparty will make payments to the Trust of amounts due on such date under the Swap Agreement, which amounts will be used to make payments of interest accrued on the related Class of Certificates. As described herein, if the Trust makes payments of less than the Class A-1 Swap Interest Amount, Class A-2 Swap Interest Amount, Class A-3 Swap Interest Amount or Class B Swap Interest Amount, as the case may be, on any Certificate Payment Date, the Swap Counterparty's corresponding payment obligations under the Swap Agreement will be reduced proportionately. SEE "-- Payments -- Interest" above, and "The Swap Agreement -- Payments under the Swap Agreement" herein. The Swap Agreement provides for termination in connection with the occurrence of certain Events of Default and Termination Events. If the Swap Agreement is terminated as a result of an Event of Default or Termination Event (a "Swap Termination"), the principal of the Certificates will become due and payable without regard to their respective Targeted Maturity Dates, and the Trustee will be obligated to liquidate the Trust assets. In such event, the net proceeds realized from the liquidation of the assets of the Trust, if any, to the extent available after the payment of all other obligations of the Trust </TABLE> <TABLE> <S> <C> in respect of any amounts reimbursable to the Transferor, Servicer, Trustee or Swap Counterparty as described herein, will be allocated to make payments on the Certificates pursuant to the priorities described herein under "Description of the Certificates -- Termination of the Trust; Retirement of the Certificates -- SWAP TERMINATION". Such net proceeds may not be sufficient to reduce the outstanding balances of the Class A Certificates or Class B Certificates to zero. SEE "Risk Factors -- Risks Associated With Swap Agreement". Under such circumstances, Class A Certificateholders will have no recourse to any other assets for payment of the Class A Certificates, and will suffer a corresponding loss. The long-term debt obligations of TMCC currently are rated AAA by Standard & Poor's and Aa1 by Moody's. The Swap Agreement will not terminate merely as a result of a downgrade in any rating assigned to TMCC's debt obligations. However, because the ratings of each Class of Class A Certificates take into account the provisions of the Swap Agreement and the ratings currently assigned to the debt obligations of the Swap Counterparty, a downgrade, suspension or withdrawal of any rating of the debt of the Swap Counterparty by a Rating Agency may result in the downgrade, suspension or withdrawal of the rating assigned by either Rating Agency to such Class of Class A Certificates, with adverse consequences for the liquidity or market value thereof. SEE "Risk Factors -- Risks Associated with Swap Agreement" and "-- Risks Associated with Ratings of the Class A Certificates". In the event the long-term debt rating of the Swap Counterparty is reduced to a level below Aa3 by Moody's or AA by Standard & Poor's or the short-term debt rating of the Swap Counterparty is reduced to a level below P-1 by Moody's or A-1+ by Standard & Poor's, the Swap Counterparty may assign the Swap Agreement to another party (or otherwise obtain a replacement swap agreement on substantially the same terms as the Swap Agreement) and thereby be released from its obligations under the Swap Agreement; provided that (i) the new swap counterparty, by a written instrument, accepts all of the obligations of the Swap Counterparty under the Swap Agreement to the reasonable satisfaction of the Trustee, (ii) the Swap Counterparty delivers an opinion of independent counsel of recognized standing in form and substance reasonably satisfactory to the Trustee confirming that such transfer or replacement will not result in the new swap counterparty being required to withhold or deduct for taxes under the Swap Agreement, (iii) a Termination Event or Event of Default does not occur under the Swap Agreement as a result of such transfer or replacement and (iv) the ratings assigned to the Certificates after such assignment and release will be at least equal to the ratings assigned by Moody's and Standard & Poor's to the Certificates at the time of the reduction in the debt rating of the </TABLE> <TABLE> <S> <C> Swap Counterparty. Any cost of such transfer will be borne by the Swap Counterparty or the new swap counterparty and not by the Trust; provided, however, that the Swap Counterparty shall not be required to make any payment to the new swap counterparty to assign the Swap Agreement or to obtain a replacement swap. In the event that the Swap Counterparty does not elect to assign the Swap Agreement or enter into a replacement Swap Agreement, the Swap Counterparty may (but shall not be obligated to) establish any other arrangement satisfactory to the applicable Rating Agency, such that the ratings of the Certificates by the applicable Rating Agency will not be withdrawn or reduced. E. OPTIONAL PURCHASE............. The Transferor will have an option to purchase the SUBI Certificate on any Monthly Allocation Date on or after the Class A-3 Targeted Maturity Date if, either before or after giving effect to the allocations, applications or payments required to be made in respect of principal on such date, the Adjusted Investor Balance is less than or equal to $74,998,873.25 (10% of the Aggregate Net Investment Value as of the Cutoff Date) or amounts sufficient to effectively reduce the Adjusted Investor Balance to such amount have been deposited in the Collection Account on such date. Such a purchase would result in the retirement of the Certificates of each outstanding Class on such date. SEE "Description of the Certificates -- Termination of the Trust; Retirement of the Certificates". F. FORM AND DENOMINATIONS OF THE CLASS A CERTIFICATES.......... Except under limited circumstances, the Class A Certificates will be available only in book-entry form in minimum denominations of $1,000. Persons acquiring beneficial ownership interests in the Class A Certificates ("Certificate Owners") will hold their Certificates through The Depository Trust Company ("DTC"), in the United States, or Cedel Bank, societe anonyme ("Cedel Bank") or the Euroclear System ("Euroclear") in Europe or Asia. SEE "Description of the Certificates -- Book-Entry Registration" and "ANNEX I: Global Clearance, Settlement and Tax Documentation Procedures". G. LISTING....................... Application has been made for listing of the Class A Certificates on the Luxembourg Stock Exchange. THE SUBI.......................... The SUBI will be evidenced by two certificates collectively evidencing a 100% beneficial interest in the SUBI Assets, one of which, the SUBI Certificate, will be transferred by the Transferor to the Trust, and the other of which (evidencing the rights to proceeds of the Residual Value Insurance Policies) will be retained by the Transferor. The SUBI will not evidence an interest in any Titling Trust Assets other than the SUBI Assets. Payments made on or in respect of any Titling Trust Assets other than the SUBI Assets, as well as proceeds of the Residual Value Insurance Policies, will not be available to make payments on </TABLE> <TABLE> <S> <C> the Certificates. The Titling Trust Assets evidenced by the SUBI will primarily include the Contracts and Leased Vehicles allocated to the SUBI. SEE "The Trust and the SUBI" and "The Titling Trust". THE CONTRACTS. The Contracts will consist of retail closed-end lease contracts originated by the Dealers in the Trust States having original terms of not more than 60 months. Substantially all of the Contracts will be finance leases for accounting purposes and will have been written for a "capitalized cost" which represents the original principal balance of such Contract ("Capitalized Cost") (which may exceed the manufacturer's suggested retail price and may include certain origination fees), plus a lease charge which is based on an imputed interest rate (the "Lease Rate"). Substantially all the Contracts will provide for equal monthly payments (each, a "Monthly Payment") that when allocated between principal and the lease charge at the Lease Rate on a constant yield basis, will be sufficient to amortize the Capitalized Cost over the term of the lease to an amount equal to the Residual Value. A Residual Value is established at the origination of a lease contract (based on instructions provided to the Dealers by TMCC) and represents the estimated wholesale market value of the related leased vehicle at the end of the lease term, as such estimated value may be reduced in connection with payments received in respect of principal due during the period of any extension granted as described herein (the "Residual Value"). The amount to which the capitalized cost of a Contract has been amortized at any point in time is referred to herein as its "Outstanding Principal Balance". The Initial Contracts consist of 34,185 lease contracts. As of the Cutoff Date, the Initial Contracts had Lease Rates ranging from 1.09% to 13.77% and a weighted average Lease Rate of 6.81%. As of the Cutoff Date, the Initial Contracts had an aggregate Outstanding Principal Balance of $781,660,860.79, a weighted average original term of 38.3 months and a weighted average remaining term to scheduled maturity of 33.8 months. SEE "The Contracts". The "Discounted Principal Balance" for each Contract with a Lease Rate less than 8.75% will be its remaining Monthly Payments and Residual Value discounted by 8.75% (each such Contract, a "Discounted Contract"), and for each Contract with a Lease Rate at least equal to 8.75% will be its Outstanding Principal Balance. As of the Cutoff Date, the Aggregate Net Investment Value equaled the aggregate Discounted Principal Balance of the Initial Contracts or $749,988,732.51 (of which amount approximately 68.54% represented Residual Values). The "Aggregate Net Investment Value" as of any date will equal the sum of (i) the Discounted Principal Balances of all Contracts </TABLE> <TABLE> <S> <C> other than Charged-off, Liquidated, Matured and Additional Loss Contracts, (ii) the aggregate of the Residual Values of all Leased Vehicles covered by Matured Contracts to the extent that such Contracts have been terminated within the three immediately preceding Collection Periods but which Leased Vehicles as of the last day of the most recent Collection Period have remained unsold and not otherwise disposed of by the Servicer for no more than three full Collection Periods (the "Matured Leased Vehicle Inventory") plus certain related charges and (iii) during the Revolving Period, the amount of unreinvested Principal Collections and reimbursed Loss Amounts and Certificate Principal Loss Amounts. THE LEASED VEHICLES. The Leased Vehicles will be comprised of automobiles and light duty trucks. As of the times of origination of the Contracts, the related Leased Vehicles will include new vehicles, including dealer demonstrator vehicles driven fewer than 20,000 miles, or used vehicles up to four model years old at the time of origination of the related Contract, including certified used vehicles and vehicles previously sold under manufacturer's programs. Certified used vehicles are Toyota or Lexus vehicles that are purchased by dealers, reconditioned and certified to meet certain Toyota/Lexus required standards and sold or leased with an extended warranty from the manufacturer. Manufacturer's program vehicles are Toyota or Lexus vehicles that have been sold to rental car companies, repurchased by the manufacturer and subsequently purchased by the dealer to sell or lease as current year and one year old used vehicles with 20,000 miles or less. SEE "The Contracts -- General". The certificates of title to the Initial Leased Vehicles are, and the certificates of title to all Leased Vehicles will be, registered at all times prior to liquidation in the name of the Titling Trust or the Titling Trustee. The certificates of title will not reflect the indirect interest of the Trustee in the Leased Vehicles by virtue of its beneficial interest in the SUBI. Therefore, if the Certificates were recharacterized as secured loans, the Trustee would have a perfected security interest in the SUBI Certificate, Contracts and Contract Rights but not in the Leased Vehicles. SEE "Certain Legal Aspects of the Titling Trust -- Structural Considerations" and "-- Back-up Security Interests". THE SUBI COLLECTION ACCOUNT; COLLECTIONS..................... The SUBI Collection Account will be established and maintained for the benefit of the holders of interests in the SUBI. Except under certain limited circumstances, the Servicer will be permitted to deposit amounts collected in respect of payments made on or in respect of the Contracts or the Leased Vehicles during each Collection Period into the SUBI Collection Account on the Business Day preceding the related Monthly Allocation Date (the related "Deposit Date") rather than when </TABLE> <TABLE> <S> <C> received. Such payments will include, but will not be limited to, (i) Monthly Payments, not including Monthly Payments (or portions thereof) determined by the Servicer to be due in one or more future Collection Periods, (each, a "Payment Ahead") until the Collection Period during which such Payment Ahead is due, (ii) Prepayments, (iii) proceeds from the sale or other disposition of Leased Vehicles under Matured Contracts, including payments for excess mileage and excess wear and tear through the date of disposition of the related Leased Vehicles ("Matured Leased Vehicle Proceeds"), (iv) proceeds received in connection with the sale or other disposition of Repossessed Leased Vehicles or other vehicles that were covered by Charged-off Contracts ("Charged-off Vehicle Proceeds") and (v) other amounts received in connection with the realization of the amounts due under any Contract through the date of disposition of the related vehicle (together with Matured Leased Vehicle Proceeds and Charged-off Vehicle Proceeds, "Liquidation Proceeds"). The Servicer will be entitled to reimbursement for expenses incurred in connection with the realization of Matured Leased Vehicle Proceeds ("Matured Leased Vehicle Expenses"), Charged-off Vehicle Proceeds ("Charged-off Vehicle Expenses") and other Liquidation Proceeds (such expenses, together with Matured Leased Vehicle Expenses and Charged-off Vehicle Expenses, "Liquidation Expenses"), to be netted from such proceeds or from Collections or to be withdrawn from amounts on deposit in the SUBI Collection Account. In addition, the Servicer will be entitled to reimbursement for any Advances from amounts collected on the Contracts and Leased Vehicles. The Servicer also will be entitled to reimbursement of certain payments made and expenses and charges incurred by it in the ordinary course of servicing the Contracts (including payments it makes on behalf of the related lessees in connection with the payment of taxes, vehicle registration, clearance of parking tickets and similar items) from Collections with respect to the related Contracts, separate payment thereof by the related lessees or from amounts realized upon the final disposition of the related Leased Vehicle. To the extent such amounts are reimbursed prior to or at the final disposition of the related leased vehicle but remain unpaid by the related lessee, such amounts (together with any unpaid Monthly Payments under the related Contract) will be treated as Matured Leased Vehicle Expenses or Charged-off Vehicle Expenses, as the case may be, and will therefore reduce Matured Leased Vehicle Proceeds or Charged-off Vehicle Proceeds, as the case may be, and Liquidation Proceeds. On each Deposit Date, the following additional amounts also will be deposited into the SUBI Collection Account: (i) Advances by the Servicer, (ii) any Maturity Advances made by the Transferor and (iii) Reallocation Payments by TMCC </TABLE> <TABLE> <S> <C> (together with, under certain circumstances after the Revolving Period, Reallocation Deposit Amounts) in respect of certain Contracts as to which an uncured breach of certain representations and warranties or certain servicing covenants has occurred. In addition, to the extent set forth herein, amounts will be withdrawn from the Reserve Fund and deposited into the SUBI Collection Account on each Deposit Date to cover certain Loss Amounts or shortfalls in Collections. Thereafter, Interest Collections (and, with respect to the Deposit Date in any month following the termination of the Revolving Period, Principal Collections) on deposit in the SUBI Collection Account in respect of the related Collection Period will be available for allocation, application or payment of required amounts to Certificateholders and the Transferor. SEE "Assets of the Trust -- The Accounts; Collections -- THE SUBI COLLECTION ACCOUNT". The Certificateholders and the Transferor (as holder of the Transferor Interest) are entitled on any Monthly Allocation Date to be allocated or to receive Matured Leased Vehicle Proceeds up to, but not in excess of, the aggregate of the Residual Values of Leased Vehicles sold or otherwise disposed of from Matured Leased Vehicle Inventory during the related Collection Period. It is possible that in any Collection Period the Servicer could incur Matured Lease Vehicle Expenses that, if reimbursed from collections in respect of Matured Leased Vehicle Proceeds, would result in Net Matured Leased Vehicle Proceeds being less than the sum of the Residual Values of all Leased Vehicles so sold or otherwise disposed of. Any such shortfall will result in the realization of Residual Value Loss Amounts. On each Deposit Date on which Matured Leased Vehicle Proceeds received during the related Collection Period net of related Matured Leased Vehicle Expenses incurred during such Collection Period ("Net Matured Leased Vehicle Proceeds") exceed the aggregate Residual Value of the related Leased Vehicles (the "Residual Value Surplus"), such excess will be released to the Transferor and none of the Trust, the Certificateholders or the Swap Counterparty will have any further claim thereto or interest therein. THE RESERVE FUND.................. A Reserve Fund (the "Reserve Fund") will be maintained with the Trustee for the benefit of the Certificateholders and the Transferor. The Reserve Fund is designed to provide additional funds for the benefit of the Certificateholders in the event that on any Monthly Allocation Date Collections allocable to the Investor Interest for the related Collection Period are insufficient to allocate for or make applications or payments in respect of, among other things, (i) the Class A-1 Notional Interest Accrual Amounts, Class A-2 Notional Interest Accrual Amounts, Class A-3 Notional Interest Accrual Amounts, Class B Notional Interest Accrual Amounts or Class B Fixed Rate Interest Accrual Amounts, (ii) Loss Amounts and Certificate Principal Loss Amounts allocated to the Certificates and (iii) if </TABLE> <TABLE> <S> <C> such Monthly Allocation Date is a relevant Certificate Payment Date, any remaining shortfalls in amounts payable to the Swap Counterparty under the Swap Agreement or any Class B Swap Interest Shortfall Amounts or Fixed Rate Class B Interest Carryover Shortfall Amounts (the aggregate amount of such deficiency, the "Required Amount"). On the related Stated Maturity Date, monies on deposit in the Reserve Fund also may be applied and paid to reduce the Adjusted Class A-1 Certificate Balance, the Adjusted Class A-2 Certificate Balance, the Adjusted Class A-3 Certificate Balance or the Adjusted Class B Certificate Balance to zero, as well as to reimburse Loss Amounts and Certificate Principal Loss Amounts allocated thereto, should the Collections allocable for such purpose ultimately be insufficient to reduce any such balance to zero and to effect such reimbursements on such date; provided that Class B Reserve Amounts will not be so applied other than with respect to the Class B Certificates, except to the extent that the Class B Reserve Amount exceeds the amount necessary both to reduce the Adjusted Class B Certificate Balance to zero and to make such reimbursements to the Class B Certificateholders. Notwithstanding the foregoing, of the amounts on deposit in the Reserve Fund, an amount not to exceed $ (the "Class B Reserve Amount") generally will be available exclusively for payment of accrued and unpaid interest with respect to the Class B Certificates and, on and after the Class B Targeted Maturity Date, to reduce the Adjusted Class B Certificate Balance until the Adjusted Class B Certificate Balance is reduced to zero. Such amounts will not be so applied if other amounts are then on deposit in the Reserve Fund and available therefor. Following the initial allocation of amounts to the Class B Reserve Amount, no subsequent amounts deposited into the Reserve Fund will be allocated to the Class B Reserve Amount. In addition, on or after the Class B Targeted Maturity Date, if amounts remaining on deposit in the Reserve Fund (including Class B Reserve Amounts) are sufficient to (i) fund any amounts payable to the Trustee, Titling Trustee and Servicer, and (ii) reduce the Adjusted Certificate Balance of all Classes of outstanding Certificates to zero such funds will be so paid. The Reserve Fund will not be an asset of the Trust. SEE "Assets of the Trust -- The Accounts; Collections -- THE RESERVE FUND". The Reserve Fund will be created on the Closing Date with an initial deposit (the "Initial Deposit") by the Transferor of $28,124,577.47 (3.75% of the Aggregate Net Investment Value as of the Cutoff Date). Thereafter, on each Monthly Allocation Date, the Reserve Fund will be supplemented by amounts that would otherwise be released to the Transferor after making all required allocations, applications and payments, until the amount on deposit therein equals the applicable Specified Reserve Fund Balance. On each Monthly Allocation Date, all </TABLE> <TABLE> <S> <C> net investment income with respect to amounts on deposit therein and, after giving effect to all applications of amounts withdrawn from the Reserve Fund on such Monthly Allocation Date, monies on deposit therein in excess of the Specified Reserve Fund Balance, will be paid to the Transferor, free and clear of any interest of the Trust. SEE "Description of the Certificates -- Allocations, Applications and Payments -- ALLOCATIONS AND APPLICATIONS OF COLLECTIONS" and "Assets of the Trust -- The Accounts; Collections -- THE RESERVE FUND -- THE SPECIFIED RESERVE FUND BALANCE". Under certain circumstances it is possible that, as of any Monthly Allocation Date, the amount of funds actually on deposit in the Reserve Fund could be less than the Specified Reserve Fund Balance. Moreover, pursuant to the Agreement, the Specified Reserve Fund Balance may, under certain circumstances, be reduced on one or more Monthly Allocation Dates to the extent approved by each Rating Agency. SUBORDINATION..................... The Class B Certificates will be subordinated to the Class A Certificates so that on any Monthly Allocation Date (i) allocations and applications in respect of interest on the Class B Certificates generally will not be made until amounts have been appropriately allocated and applied in respect of the Class A-1 Notional Interest Accrual Amount, the Class A-2 Notional Interest Accrual Amount, the Class A-3 Notional Interest Accrual Amount, the Class A-1 Interest Carryover Shortfall Amount, the Class A-2 Interest Carryover Shortfall Amount and the Class A-3 Interest Carryover Shortfall Amount as of such Monthly Allocation Date, (ii) allocations, applications and payments in respect of principal of the Class B Certificates generally will not be made until the foregoing allocations and applications have been made and all allocations, applications and payments in reduction of the Adjusted Class A-1 Certificate Balance, the Adjusted Class A-2 Certificate Balance and the Adjusted Class A-3 Certificate Balance (as well as reimbursements of Loss Amounts and Certificate Principal Loss Amounts allocated thereto) have been made and (iii) Loss Amounts and Certificate Principal Loss Amounts will be allocated to the Class B Certificates until the Adjusted Class B Certificate Balance has been reduced to zero prior to the allocation thereof to the Adjusted Class A-1 Certificate Balance, the Adjusted Class A-2 Certificate Balance and the Adjusted Class A-3 Certificate Balance. To provide additional credit enhancement for the Certificates, Transferor Amounts will not be paid to the Transferor on any Monthly Allocation Date until all allocations, applications and payments required to be made with respect to the Adjusted Investor Balance have been made on such date and the amount on deposit in the Reserve Fund on such Monthly Allocation Date equals the Specified Reserve Fund Balance as described </TABLE> <TABLE> <S> <C> under "Description of the Certificates -- Allocations, Applications and Payments -- ALLOCATIONS AND APPLICATIONS OF COLLECTIONS". SEE "Description of the Certificates -- Certain Payments to the Transferor". ADVANCES.......................... On each Deposit Date, the Servicer will be obligated to make an Advance with respect to each outstanding delinquent Contract and certain Contracts as to which payments have been deferred that have not been reallocated to the UTI with an accompanying Reallocation Payment as described herein, provided that the Servicer will not be required to make any Advance to the extent that it determines such Advance may not be ultimately recoverable from Net Liquidation Proceeds or otherwise. In addition, the Servicer will have the option to make certain Advances with respect to off-lease vehicles held pending disposition. Each such Advance will be made by deposit into the SUBI Collection Account of an amount equal to the aggregate amount of Monthly Payments due but not received during the related Collection Period (each, an "Advance"). SEE "Additional Document Provisions -- The Servicing Agreement -- COLLECTIONS" and "-- Advances". MATURITY ADVANCES................. Pursuant to the Agreement, if on the related Targeted Maturity Date the aggregate of amounts available to be allocated, applied and paid in respect of the Adjusted Class A-1 Certificate Balance, the Adjusted Class A-2 Certificate Balance, the Adjusted Class A-3 Certificate Balance or the Adjusted Class B Certificate Balance are insufficient to reduce the Adjusted Class A-1 Certificate Balance, the Adjusted Class A-2 Certificate Balance, the Adjusted Class A-3 Certificate Balance or the Adjusted Class B Certificate Balance, as the case may be, to zero, or to reimburse Loss Amounts and Certificate Principal Loss Amounts allocated thereto, the Transferor will have the option to make an advance (a "Maturity Advance") in any amount up to the amount of such shortfall. Any such amounts advanced by the Transferor will be reimbursable to the Transferor from the Investor Percentage of Principal Collections on subsequent Monthly Allocation Dates as and to the extent described herein. SEE "Assets of the Trust -- The Accounts; Collections -- THE RESERVE FUND" and "-- Advances". SERVICING COMPENSATION............ The Servicer will be entitled to receive a monthly fee with respect to the SUBI Assets (the "Servicing Fee"), payable on each Monthly Allocation Date, equal to one-twelfth of 1% of the Aggregate Net Investment Value as of the first day of the related Collection Period (or, in the case of the first Monthly Allocation Date, as of the Cutoff Date). The Servicer also will be entitled to additional servicing compensation in the form of, among other things, late fees, Deferral Fees and other administrative fees or similar charges under the Contracts. SEE "Additional Document Provisions -- The Servicing Agreement -- SERVICING COMPENSATION". </TABLE> <TABLE> <S> <C> ERISA CONSIDERATIONS.............. Subject to considerations described below, the Class A Certificates are eligible for purchase by employee benefit plan investors as of the Closing Date. Under a regulation issued by the Department of Labor, the Trust's assets would not be deemed "plan assets" of an employee benefit plan holding any Class of Class A Certificates if certain conditions are met, including that Certificates of each such Class must be held, upon completion of the public offering made hereby, by at least 100 investors who are independent of the Transferor and of one another and that such Certificates are registered under the Exchange Act. Although no assurances can be given, and no monitoring or other measures will be taken to ensure, that such condition will be met, the Underwriters expect that each Class of Class A Certificates will be held by at least 100 independent investors at the conclusion of the offering. The Transferor anticipates that the other conditions of the regulation will also be met as of the Closing Date. If the Trust's assets were deemed to be "plan assets" of an employee benefit plan investor (e.g., if the 100 independent investor criterion is not satisfied), violations of the "prohibited transaction" rules of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), could result and generate excise tax and other liabilities under ERISA and section 4975 of the Internal Revenue Code of 1986, as amended (the "Code"), unless another statutory, regulatory or administrative exemption is available. It is uncertain whether existing exemptions from the "prohibited transaction" rules of ERISA would apply to all transactions involving the Trust's assets if such assets were treated for ERISA purposes as "plan assets" of employee benefit plan investors. SEE "ERISA Considerations". TAX STATUS........................ On the Closing Date, O'Melveny & Myers LLP will deliver a legal opinion to the effect that (i) the Trust will not be treated as an association or a publicly traded partnership taxable as a corporation and (ii) the Class A Certificates will properly be characterized as indebtedness, in each case for federal income tax purposes. SEE "Material Federal Income Tax Considerations". RATINGS........................... It is a condition of issuance that each of Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. ("Standard & Poor's" and, together with Moody's, the "Rating Agencies") rates the Class A-1, Class A-2 and Class A-3 Certificates in its highest rating category. The ratings of the Class A-1, Class A-2 and Class A-3 Certificates primarily address the likelihood of the payment in full of interest on and principal of the Class A-1, Class A-2 and Class A-3 Certificates pursuant to the Agreement and the Swap Agreement. Either Rating Agency may assign any such rating a special designation highlighting the risks relating to the Swap Agreement. At any </TABLE> <TABLE> <S> <C> time that amounts remain invested in TMCC Demand Notes, or so long as TMCC is the Swap Counterparty, a reduction or withdrawal of the ratings assigned by either Rating Agency to the debt securities of TMCC could result in the reduction or withdrawal of its rating of the Class A-1, Class A-2 or Class A-3 Certificates. On April 2, 1998, Moody's changed its outlook for Japan's Aaa debt rating from "stable" to "negative". On July 23, 1998, Moody's announced its decision to review for possible downgrade Japan's Aaa "country ceilings" for foreign currency-denominated debt and bank deposits as well as the Aaa-rated yen-denominated securities issued or guaranteed by the government of Japan. On July 3, 1998, Moody's placed the Aaa long-term debt ratings of TMC, TMCC's ultimate parent, and its subsidiaries (including TMCC) under review for possible downgrade. On August 20, 1998, Moody's downgraded the long-term debt of TMC and its subsidiaries (including TMCC) to Aa1 from Aaa and announced the conclusion of the rating review that began on July 3, 1998. On September 29, 1998, Standard & Poor's announced that it had placed the long-term debt of TMC and its subsidiaries (including TMCC) on Credit Watch with negative implications. The initial ratings of the Certificates are not affected by Moody's reduction of TMCC's rating or Standard & Poor's announcement. SEE "Risk Factors -- Risks Associated with Ratings of the Class A Certificates". The ratings of the Class A-1, Class A-2 and Class A-3 Certificates will not address the likelihood of the payment in full of the principal amount thereof on any particular date prior to the related Stated Maturity Date. A security rating is not a recommendation to buy, sell or hold securities, and may be subject to revision, suspension or withdrawal at any time by the assigning Rating Agency. SEE "Ratings of the Class A Certificates".
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001045830_united_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001045830_united_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information, including "Risk Factors" and the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Prospectus. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results suggested by the forward-looking statements and from the results historically experienced. Factors that may cause or contribute to such differences include, but are not limited to, those discussed under "Risk Factors" and elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus assumes (i) no exercise of the Underwriters' Over-Allotment Option, and (ii) no exercise of the Underwriters' Warrants. THE COMPANY United States Financial Group, Incorporated ("USFG" or the "Company") is incorporated under the laws of the State of Delaware and is a holding company for three active subsidiaries: Klein, Maus & Shire, Inc. ("KMS"); Sureal International, Inc. ("Sureal") and KMS Asset Management Group, Incorporated ("KMS-AMG"). KMS is a securities brokerage and investment banking firm registered with the Securities and Exchange Commission (the "SEC" or "Commission") and is a member firm of the National Association of Securities Dealers, Inc. (the "NASD"), Municipal Securities Rulemaking Board (known as the "MSRB"), and Securities Insurance Protection Corporation ("SIPC"). To date, KMS has co-managed a total of three public offerings of securities, raising an aggregate of approximately $15 million. KMS also regularly participates as a selling group member in public offerings managed by other underwriters. KMS also provides advisory services to over 3,000 high net worth individuals and institutions around the world. The Company believes that KMS' current and future success is attributable to its principal client base of high net worth international investors and institutions. The Company believes that KMS' client base puts KMS in a strong position to expand its investment banking activities without reliance on cold calling or high pressure marketing activities. KMS' growth plans are based on a corporate policy emphasizing generating revenues at a non-retail level, and maintaining a small sales force comprised of experienced financial consultants. Sureal distributes and sells high quality nutritional and air purification products in Russia and other republics of the former Soviet Union through a network marketing organization in which independent distributors purchase products for resale to retail customers as well as for their own personal use. The number of the Company's active distributors has increased from 333 at July 1995 to approximately 100,000 at May 31, 1997. Sureal's growth strategy is to expand its network of independent distributors to increase sales and to expand through acquisitions. In 1997, the Company formed KMS-AMG; however, to date, KMS-AMG has not generated any revenue. KMS-AMG was formed to serve as a financial advisor and money manager to institutions, individuals and governments. KMS-AMG currently acts as an advisor to several international corporations and individuals, as well as to quasi-public entities in Grenada, South Korea and Pakistan. KMS-AMG has agreements with or issued memorandums of understanding to the Grenadine and Pakistani governments whereby it will be acting as an advisor to Grenadine government on its tourism and infrastructure development project and to the Board of Investments in Pakistan which is establishing the first "Technology Science Park" in Pakistan. KMS-AMG's growth strategy is to increase revenue by expanding its money management business by increasing assets under management and increasing its international consultancy business by becoming advisors to additional institutions and governments of developing countries. The Company intends to use a substantial portion of the proceeds of this offering to engage in the business of acquiring undervalued or reasonably priced companies in industries well suited for roll up consolidation transactions. The Company's strategy is to locate acquisition candidates that operate in industry or market niches that are well established, are served in a fragmented way and do not compete directly with large competitors. Furthermore, these target companies must have experienced management teams and do not require significant expenditures for research and development. The Company was incorporated under the laws of the State of Delaware on August 10, 1995. The Company, KMS and KMS-AMG maintain offices at 110 Wall Street, New York, New York 10005, and their telephone number is (212) 785-4545. Sureal maintains offices in Orem, Utah. ---------------- THE OFFERING Securities offered by the Company (1)................ 2,025,000 shares of Common Stock Securities offered by the Selling Stockholder................ 175,000 shares of Common Stock Common Stock outstanding prior to the Offering (1)........... 11,517,636 shares Common Stock to be outstanding after the Offering (1)(2):....... 13,542,636 NASDAQ Symbol (3)........... USFG Use of proceeds............. The net proceeds of this Offering will be used for working capital and other general corporate purposes, including possible acquisitions, to develop and expand Sureal's and KMS-AMG's operations, open an office for KMS in Bahrain, expand KMS' proprietary trading operations and lease a seat for KMS on the New York Stock Exchange. See "Use of Proceeds." - ---------- (1) Assumes the conversion of 813,000 shares of Preferred Stock (including the portion that was issued by KMS) into 813,000 shares of Common Stock and includes the issuance of 750,000 shares of Common Stock to effect the Sureal Merger and the 2 for 1 reverse stock split effected December 8, 1997. (2) Such amount excludes the Underwriters' Overallotment Option of 303,750 shares of Common Stock and 202,500 shares of Common Stock underlying the Underwriters' Warrant. (3) The proposed Nasdaq symbol does not imply that a liquid and active market will develop or be sustained for the Common Stock upon completion of the Offering.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001046207_headlands_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001046207_headlands_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary does not purport to be complete and is qualified in its entirety by the more detailed information and the consolidated financial statements and related notes appearing elsewhere in this Prospectus. In addition to the other information in this Prospectus, the factors set forth under "Risk Factors" below should be considered carefully in evaluating an investment in the Common Stock offered hereby. Unless otherwise indicated, all information in this Prospectus (i) assumes that the Underwriters' over- allotment option will not be exercised and (ii) reflects a 14,000-for-1 stock split to be effected immediately prior to the Offering. See Note 18 to the Consolidated Financial Statements. See the "Index of Defined Terms" on page 78 for the location of definitions of capitalized and other terms used herein. OVERVIEW Headlands Mortgage Company (the "Company" or "Headlands") is a specialty mortgage banking company in the business of originating, selling, securitizing and servicing mortgage loans secured by one- to four-family residences. The Company was incorporated in California and commenced its mortgage banking business in 1986. As a specialty mortgage lender, the Company's strategy is to focus on specialized mortgage loan products for primarily high credit quality borrowers. The Company generally places an emphasis on credit scores obtained from three major credit bureaus to evaluate the credit quality of borrowers. The Company considers "high credit quality borrowers" to be those whose credit scores equal or exceed levels required for the sale or exchange of their mortgage loans through Fannie Mae or Freddie Mac. The specialized mortgage loans targeted by the Company provide a relatively greater "spread" (i.e., greater interest and other income to the originator relative to the costs associated with funding and selling the mortgage loans) compared to other mortgage loans that present a similar credit risk. The Company believes that its wholesale lending channel (which generates a majority of its total originations), supported by its correspondent and retail lending channels, provides an efficient and responsive origination system for the types of mortgage loans it seeks to originate. The Company seeks the most efficient method of execution for sales of its mortgage loans and in recent years has increasingly utilized securitization in addition to traditional whole loan sales. The Company's business objective is to increase mortgage loan originations through geographic expansion and by providing a diversified range of mortgage loan products through its wholesale, correspondent and retail lending channels. During the year ended December 31, 1996, the Company originated $2.3 billion of residential mortgage loans, 77% in California and 23% in other states. During the nine months ended September 30, 1997, the Company originated $2.5 billion of residential mortgage loans, 74% in California and 26% in other states. According to National Mortgage News (October 6, 1997), for the six months ended June 30, 1997 the Company was ranked as the second largest wholesale originator in the United States that is not publicly owned or affiliated with a public company, and ranked 14th among all wholesale originators. As of September 30, 1997, the Company's mortgage loan servicing portfolio totaled $4.0 billion of mortgage loan principal balances. The Company is led by President Peter T. Paul, the founder and major shareholder of the Company. Mr. Paul has 25 years of experience in the residential mortgage industry. Mr. Paul and the Chief Financial Officer of the Company have worked together since 1987, and various other members of the executive management team have worked together for more than six years. See "Management--Directors and Executive Officers." BUSINESS STRATEGY MORTGAGE LOAN ORIGINATION Mortgage Loan Product Development. An important element of the Company's mortgage loan origination strategy is to provide a variety of mortgage loan products that are designed to respond to consumer needs and competitive factors and be readily saleable at prices that will generate the Company's targeted rate of return. The Company seeks mortgage loan products with relatively greater "spreads" compared to other mortgage loan products that present a similar credit risk and chooses not to rely on discount pricing to increase mortgage loan origination volume. This approach generally focuses the Company's development process on mortgage loans that fail to satisfy one or more of the standardized criteria (other than credit quality of the borrower) required for sale or exchange through one of the national government-sponsored mortgage entities such as Fannie Mae or Freddie Mac ("Agencies") or one of the national privately-sponsored mortgage conduits. To date, the Company has tailored its loan products primarily for high credit quality borrowers as described above. The Company's secondary marketing department identifies a variety of new mortgage loan products that it believes will respond to consumer needs and that in many cases are not being widely offered by competitors. Such new mortgage loan products may be created by the Company itself or may be introduced by a competitor and identified by the Company as attractive for origination. The Company generally requires that all of its mortgage loan products be readily saleable through the Company's securitization programs or to secondary market investors. The Company presently has under development and review a variety of mortgage loan products that it expects to promote in 1998. Among the products that the Company intends to launch on a pilot basis is a mortgage loan for high credit quality borrowers that permits a higher loan-to-value ratio than is permitted in mortgage loans currently being originated by the Company. Another product to be introduced is a mortgage loan that is designed primarily for lower credit quality borrowers which will require more extensive mortgage insurance than is required on the Company's other loan products. All new mortgage loan products introduced by the Company are carefully pre-tested in the market over a period of time to assess both marketability to consumers and performance of the mortgage loan product as an investment for secondary market investors. Current Mortgage Loan Products. The Company presently offers a broad range of mortgage loan products in order to provide maximum flexibility to borrowers and third-party mortgage brokers and other entities through which it originates mortgage loans (the "Mortgage Sources"). The Company's current mortgage loan products can be categorized as follows: . Agency Mortgage Loans. These mortgage loans satisfy the underwriting --------------------- criteria for sale or exchange through one of the Agencies. . Non-agency Mortgage Loans. These mortgage loans fail to satisfy the ------------------------- criteria to be Agency mortgage loans for one or more reasons. Certain of these mortgage loans ("Jumbos") generally meet the Agency criteria but exceed the maximum loan size (currently $227,150 for single-family, one- unit mortgage loans in the continental United States). Jumbos are generally eligible for sale to one of the national privately-sponsored mortgage conduits. Certain other non-agency mortgage loans may fail to satisfy other elements of the Agency underwriting criteria, such as those relating to documentation, employment history, income verification, loan-to-value ratios, qualifying ratios or required borrower net worth. Beginning in 1995, the Company began to emphasize the origination of mortgage loans which failed to satisfy one or more of the Agency and national conduit underwriting criteria but which, from a credit risk standpoint (as determined primarily by credit score), presented a comparable risk profile. The Company refers to this category of mortgage loans generally as "Alternative A" mortgage loans. The Company focuses on an applicant's credit score, in conjunction with other factors, in underwriting its Alternative A mortgage loans. While some Alternative A mortgage loans exceed the maximum loan size eligible for sale through one of the Agencies, many have principal balances within the Agency limits. . Home Equity Mortgage Loans. Home equity mortgage loans are generally -------------------------- secured by second liens on the related property. Home equity mortgage loans can take the form of a home equity line of credit ("HELOC") or a closed-end loan. Both types of home equity mortgage loans are designed primarily for high credit quality borrowers and are underwritten according to the Company's criteria for second-lien mortgage loans. Home equity mortgage loans are originated in some instances in conjunction with the Company's origination of a first-lien mortgage loan on the related property. . Other Mortgage Loans. This category consists of mortgage loans for -------------------- borrowers who have impaired or limited credit profiles or higher debt-to- income ratios than would be acceptable for sale of such mortgage loans to one of the Agencies. Such mortgage loans may also fail to satisfy the Agency underwriting criteria in other ways. The Company categorizes these mortgage loans as "A-" or "B" loans and believes they would generally be considered "subprime" mortgage loans in the secondary mortgage market. The Company does not originate mortgage loans that it would categorize as "C" or "D" loans. In 1994, the Company originated a substantial volume of non-agency mortgage loans in the form of Jumbos which it sold to national mortgage conduits and other private investors. In 1995, the Company's volume of Jumbo originations declined with the general decrease nationwide in the origination volume of residential mortgage loans and the general increase in competition that reduced the spread available for this mortgage loan product. The increase in originations of non-agency mortgage loans and home equity mortgage loans in 1996 reflects the Company's successful development of its Alternative A mortgage loan products and its HELOC and closed-end second-lien products and the commencement of the Company's securitization programs for such mortgage loan products. The following table summarizes the Company's originations of the above categories of mortgage loans: <TABLE> <CAPTION> NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ---------------------------------- ---------------------- 1994 1995 1996 1996 1997 ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> Agency Mortgage Loans Number of mortgage loans................ 4,978 4,546 7,093 5,852 3,815 Volume of mortgage loans................ $ 643,770 $ 562,778 $ 885,050 $ 734,114 $ 475,473 Percent of total volume................. 26.71% 41.52% 38.75% 44.66% 18.81% Non-agency Mortgage Loans Number of mortgage loans................ 8,212 4,380 6,068 3,994 8,759 Volume of mortgage loans................ $1,736,830 $ 695,253 $1,137,572 $ 747,922 $1,625,080 Percent of total volume................. 72.06% 51.29% 49.81% 45.50% 64.31% Home Equity Mortgage Loans Number of mortgage loans................ 262 1,767 5,482 3,443 8,359 Volume of mortgage loans................ $ 12,110 $ 72,580 $ 234,308 $ 141,467 $ 400,782 Percent of total volume................. 0.50% 5.35% 10.26% 8.60% 15.86% Other Mortgage Loans Number of mortgage loans................ 137 214 250 174 221 Volume of mortgage loans................ $ 17,690 $ 24,993 $ 26,910 $ 20,346 $ 25,825 Percent of total volume................. 0.73% 1.84% 1.18% 1.24% 1.02% Total Mortgage Loans Number of mortgage loans................ 13,589 10,907 18,893 13,463 21,154 Volume of mortgage loans................ $2,410,400 $1,355,604 $2,283,840 $1,643,849 $2,527,160 Average principal balance............... $ 177 $ 124 $ 121 $ 122 $ 119 </TABLE> Mortgage Loan Origination Channels. The Company originates mortgage loans through its wholesale, correspondent and retail lending channels. Wholesale Lending. The Company's wholesale lending channel, established ----------------- in 1986, obtains its mortgage loan volume through a network of approximately 5,060 independent mortgage brokers approved by the Company (of which approximately 4,420 submitted mortgage loans in 1996). Mortgage brokers are qualified to participate in the Company's wholesale program after a formal application process, administered by the Company's Quality Assurance Department. The responsibilities of the Quality Assurance Department include the review of licensing, financial statements and resumes of key personnel and credit and reference investigations to determine the history, reputation and general lending expertise of the applicant. Approved mortgage brokers are monitored by the Company's wholesale account executive staff and the broker management division within the Quality Assurance Department. The Company underwrites each mortgage loan application obtained from its mortgage brokers and funds those mortgage loans which meet the Company's underwriting criteria. The Company believes that its wholesale lending channel is well-suited to originate the types of mortgage loans that the Company seeks to originate. The wholesale lending channel permits the Company to respond quickly to changes in market conditions and consumer preferences. The Company can move quickly to introduce a new mortgage loan product by disseminating it throughout the broker network. By revising the terms on which it will fund mortgage loans submitted by its mortgage brokers, the Company may also move quickly to increase the level of origination of certain mortgage loan products or to decrease originations of other mortgage loan products that, due to market or other changes, may no longer meet the Company's targeted rate of return or other origination objectives. The Company believes that its flexibility would be reduced if it maintained a large retail branch system with the attendant fixed investment and overhead costs. The wholesale lending channel also permits the Company to obtain non- agency and other types of mortgage loans from mortgage brokers that generally only originate Agency mortgage loans. The Company builds its relationship with those mortgage brokers by providing access to specialized mortgage loan products. Correspondent Lending. The correspondent lending program is designed to --------------------- allow the Company to acquire closed mortgage loans on terms similar to those it acquires on a wholesale basis from its mortgage brokers. The correspondent benefits by gaining access to the Company's broad range of innovative mortgage loan products. The correspondent lending program is designed to provide attractive mortgage loan products for small- to medium- sized mortgage companies, banks and thrifts located throughout the U.S. which may have limited access to the capital markets. Retail Lending. The retail channel, through a centralized operation, -------------- markets to existing and new customers. The Company markets to existing customers through inserts in the monthly mortgage statements, letters targeted to a specific group (i.e., borrowers with interest rates above a designated level) and outbound customer service calls. New customers are sought through national direct mail campaigns, regional radio advertising and telemarketing. New customers are also sought through several "affinity marketing" programs directed at trade groups and associations and other entities. MORTGAGE LOAN SALES As a mortgage banker, the Company originates all of its mortgage loans with the intent of selling such loans. A primary component of the Company's business strategy is to seek the most efficient method of selling its mortgage loans. In recent years, the Company has developed the capacity to access the capital markets by securitizing its mortgage loans in addition to selling them in whole loan sale transactions. The Company evaluates the sale of each mortgage loan type and compares prices available for each alternative method of sale, given current market conditions at the time and the risk characteristics of the mortgage loan type to determine which method of sale to utilize. The following table shows the method of sale for the Company's mortgage loans for the periods indicated: <TABLE> <CAPTION> NINE MONTHS YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30, -------------------------------- --------------------- 1994 1995 1996 1996 1997 ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> Mortgage loans sold through securitization......... $ 295,290 $ -- $ 597,965 $ 175,923 $1,442,468 Whole loan sales........ 2,502,396 1,330,484 1,532,119 1,323,468 1,031,351 ---------- ---------- ---------- ---------- ---------- Total................. $2,797,686 $1,330,484 $2,130,084 $1,499,391 $2,473,819 ========== ========== ========== ========== ========== </TABLE> Securitization. In the second half of 1996, the Company began to securitize substantially all of its non-agency mortgage loans and home equity mortgage loans. Securitization is the process of pooling mortgage loans and issuing securities such as mortgage pass-throughs or collateralized mortgage bonds or notes. The Company uses the cash generated from these transactions to fund originations of its mortgage loan products and to repay borrowings under its warehouse facilities. The Company believes that its ability to access the capital markets through securitization is important to its overall business strategy in several ways. Securitization is a very efficient method of selling the Company's non-agency and home equity mortgage loans. Under the non-agency mortgage loan securitization program, the Company generally sells the more senior classes of the securities produced by the securitization for cash and retains one or more of the subordinated classes. Such securities are carried on the balance sheet at their estimated fair market value (based on market prices for similar securities) under the line item "retained interests in securitizations." Due to the relatively high credit quality of the mortgage loans in these securitizations, the amount of subordinated securities taken back by the Company represents a relatively small percentage (generally less than 2%) of the total principal of the mortgage loans securitized. In addition, the market value of the classes of securities sold generally permits the Company to receive cash in an amount equal to or greater than its cost of funding the mortgage loans. As a result, the securitization of the Company's non-agency mortgage loans to date has not required a substantial amount of the Company's available cash. In the future, the Company may elect to retain additional classes of securities in such securitizations, which would require additional funds. Under the home equity mortgage loan securitization program, the Company generally sells the home equity mortgage loan securities for cash and a retained trust interest that represents (i) an interest (which is subordinated to payment on the securities sold) in the principal of the mortgage loans securitized (the "Principal Amount") and (ii) the right to the excess of future expected interest payments to be received on the mortgage loans securitized over the future interest payments required to be made on the securities sold (the "Interest-only Residual"). The estimated values of the Principal Amount and the Interest-only Residual are shown on the balance sheet under the line item "retained interests in securitizations." The securitizations of the Company's home equity mortgage loans generate negative cash flow compared to the cost of the mortgage loans securitized. The Company to date has elected to mitigate the extent of negative cash flow by selling a portion of the Interest- only Residual in connection with the home equity mortgage loan securitizations. In the future the Company may elect to retain the full amount of the Interest- only Residual in order to receive the future cash flows generated thereby. In such event, the negative cash flow at the time of effecting the securitization would be increased. Securitization also supports the Company's wholesale origination channel by increasing its flexibility in competing for non-agency mortgage loans. The parameters of mortgage loan characteristics that may be included in a pool to be securitized are generally broader than would be the case if the pool were to be sold in a traditional whole loan sale to a financial institution. Mortgage loan characteristics in securitizations are subject to the requirements of the rating agencies and of any third-party credit enhancer that may be involved, such as a monoline insurance company. The Company believes, however, that these requirements generally provide more flexibility in originating mortgage loans than would be the case under a traditional whole loan sale method. This additional flexibility enables the Company to compete more aggressively for mortgage loans and provide better service to its Mortgage Sources. Whole Loan Sales and Exchanges. Sales of mortgage loans and exchanges of mortgage loans for securities are conducted by the Company's Secondary Marketing Department. The Company's whole loan sales and exchanges of mortgage loans are generally made without recourse to the Company. The Company sells or exchanges substantially all of its Agency mortgage loans through normal secondary channels. The Company also generally sells its closed-end home equity mortgage loans in whole loan sales rather than in the home equity mortgage loan securitization program when the price received from whole loan sales is more attractive to the Company. From time to time the Company sells qualifying Jumbos to one of the privately-sponsored national mortgage conduit programs; such Jumbos are also included at times in the Company's non-agency mortgage loan securitization program along with the Alternative A mortgage loans. The Company sells substantially all of its other mortgage loans (i.e., subprime mortgage loans) on a whole loan basis (servicing released) in order to avoid the credit risk associated with such mortgage loans. OPERATIONS AND INFORMATION SERVICES The Company's focus on providing premium service to its Mortgage Sources and offering a broad range of conventional and specialized mortgage loan products demands the timely delivery of such mortgage loan products to the branches and the careful monitoring and tracking of the origination of such mortgage loan products through delivery to the ultimate investor. For this reason, the Company places great emphasis on its operations and technology capabilities. The Company uses a mortgage loan origination and administrative computer system that has largely eliminated many of the manual efforts associated with the Company's processing operations. The Information Services Department is dedicated to implementing, supporting and improving the software and hardware technology employed by the Company. The Company believes that its emphasis on operations and technology enables it to be an efficient originator and servicer of both conventional and specialized mortgage loan products. MORTGAGE LOAN SERVICING The Company also engages in mortgage loan servicing, which includes the processing of mortgage loan payments and the administration of mortgage loans. The Company's primary source of servicing rights is mortgage loans it has originated and sold, and for which it has retained the right to service. As of September 30, 1997, the Company's mortgage loan servicing portfolio consisted of approximately 36,985 one- to four-family residential mortgage loans with an aggregate principal balance of $4.0 billion. The Company can realize the value embedded in its mortgage loan servicing portfolio immediately by selling its mortgage loan servicing rights or, alternatively, it can realize the value gradually over the life of the mortgage loan servicing portfolio through the receipt of monthly mortgage loan servicing fees. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview." The Company intends to increase its mortgage loan servicing portfolio over time, although the Company may sell portions of its mortgage loan servicing portfolio on a strategic basis from time to time. The Company believes its Servicing Center, which became fully operational in 1994, has the capacity to substantially increase the number of mortgage loans that it services, thereby allowing the Company to achieve certain economies of scale. See "Business-- Mortgage Loan Servicing--General" and "Business--Mortgage Loan Servicing-- Purchase and Sale of Mortgage Servicing Rights." The delinquency rates (including foreclosures pending) for the Company's mortgage loan servicing portfolio were 1.48%, 2.10% and 1.96% at September 30, 1997, December 31, 1996 and December 31, 1995, respectively, as compared to national industry averages for all mortgage loans (including government-insured mortgage loans) of 5.35%, 5.40% and 5.13% at June 30, 1997, December 31, 1996 and 1995, respectively, according to the Mortgage Bankers Association of America (the "MBA"). The Company believes the low delinquency rates for its mortgage loan servicing portfolio are primarily a result of the credit quality of the mortgage loans it originates and the relative age of mortgage loans it services. Higher delinquency rates generally lead to higher servicing costs and reduce the value of the mortgage loan servicing portfolio. TERMINATION OF S CORPORATION STATUS Since inception of operations in 1986, the Company has elected to be treated for federal income tax purposes as an S corporation under Subchapter S of the Internal Revenue Code (the "Code"). On the closing of the Offering, the Company's S corporation status will be terminated and the Company will become fully subject to federal and state income taxes as a C corporation. In connection with the termination of S corporation status, certain payments in respect of previously earned and undistributed taxable income (the "Shareholders Distribution Amount") will be made from the net proceeds of the Offering to the Company's existing shareholders (the "Existing Shareholders") and certain accounting adjustments will be made. See "Risk Factors--Possible Liability Under Tax Indemnification Agreement" and "Termination of S Corporation Status." The principal executive office of the Company is located at 1100 Larkspur Landing Circle, Suite 101, Larkspur, California 94939, and its telephone number is (415) 461-6790. THE OFFERING <TABLE> <S> <C> Common Stock offered by The Company............................ 4,500,000 shares The Selling Shareholders............... 3,500,000 shares Common Stock to be outstanding after the Offering(1)............................. 18,500,000 shares Use of Proceeds.......................... The net proceeds of the Offering will be used (i) to pay the Shareholders Distribution Amount, (ii) to pay the full amount due under the Company's outstanding notes to stockholders, (iii) to support increased mortgage loan origination capacity, (iv) to support securitizations, and (v) for general corporate purposes. Pending such use, the net proceeds may be used to retire warehouse indebtedness or make short-term investments. See "Termination of S Corporation Status" and Notes 10 and 12 to the Consolidated Financial Statements. Proposed Nasdaq National Market Symbol... "HDLD" </TABLE> - -------- (1) Excludes 518,000 shares of Common Stock issuable upon exercise of stock options granted under the Company's Stock Option Plan (the "Stock Option Plan"). See "Management--Stock Option Plan."
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to, and should be read in conjunction with, the more detailed information and the financial statements, including the related notes thereto, appearing elsewhere in this Prospectus. Unless the context otherwise requires, the "Company" refers to U.S. Legal Support, Inc. and its subsidiaries. All share and per share data give effect to a 5-for-8 reverse stock split to be effected prior to completion of the Offering. Disclosures herein relating to the number of shares of Common Stock to be outstanding after the Offering are estimated, based upon an assumed initial public offering price of $11.00 per share (the mid-point of the estimated initial public offering price range) and give effect to the conversion of certain outstanding securities that are convertible into Common Stock as described herein. See "--The Offering." Pro forma information gives effect to: (i) acquisitions made by the Company; (ii) an adjustment to compensation expense for the difference between actual compensation paid to certain officers of businesses acquired and employment contract compensation negotiated in connection with such acquisitions; (iii) amortization expense relating to intangible assets recorded in connection with acquisitions made by the Company; (iv) the sale of the shares offered hereby and the application of the net proceeds therefrom; and (v) the incurrence of indebtedness under the Company's New Credit Agreement (as defined herein), as if such events had occurred on January 1, 1997. See "Selected Financial Data." Unless otherwise indicated, the information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. THE COMPANY The Company is one of the largest providers of legal support and staffing services in the United States, providing court reporting, certified record retrieval, legal placement and staffing and related services to law firms and corporations, including insurance companies, through 36 offices in five states and the District of Columbia. The Company seeks to become a national, full- service provider of legal support and staffing services through a combination of selective acquisitions and internal growth. Since succeeding to the operations of Looney & Company, a Texas corporation ("Looney"), in January 1997, the Company has acquired 13 businesses. During 1997, the Company provided legal support services to (i) Fortune 500 businesses such as The Boeing Company and Ford Motor Company; (ii) insurance companies such as ITT Hartford, St. Paul Fire & Marine and Kemper Insurance; and (iii) law firms throughout the country. For the year ended December 31, 1997, the Company had pro forma revenues of $39.1 million and pro forma operating income of $3.4 million, excluding a special charge of $3.3 million relating to expenses associated with a delayed public offering and costs associated with acquisitions terminated as a result of such delay. Based on available industry data, the Company estimates that the market for legal support and staffing services in the United States exceeds $5.0 billion annually. The industry is highly fragmented, with more than 1,000 court reporting and record retrieval firms and over 400 legal placement and staffing firms. The Company believes that the legal support and staffing services market is growing due to several trends, including an increase in the: (i) efforts by law firms and corporations, especially insurance providers, to control legal support expenses; (ii) outsourcing of legal support services by law firms, corporations and insurance providers to companies that specialize in providing such services at a lower cost; (iii) use of attorneys on a temporary basis by law firms and corporations; (iv) volume and complexity of litigation; and (v) national scope of litigation, particularly in class action and product liability lawsuits. Legal support and staffing services traditionally have been marketed to law firms. Increasingly, corporations, especially insurance providers, who ultimately pay the costs of legal support and staffing services, are seeking to control and reduce the costs associated with lawsuits, centralize their purchasing decisions and ensure consistent service quality. As a result, the Company believes that these companies are more frequently selecting the providers of legal support services, rather than delegating that selection to the law firms engaged to represent them. Currently, the industry is highly fragmented and consists primarily of local and regional firms that typically provide a single or limited number of legal support and staffing services. The Company believes that many legal support businesses lack: (i) a full range of legal support services; (ii) regional or national coverage; and (iii) access to capital and effective marketing programs. As a result, the Company believes that many legal support and staffing companies are unable to effectively service large, geographically dispersed clients. The Company is implementing a focused business strategy that includes establishing full service operations in multiple metropolitan areas; adopting best practices, policies and procedures; achieving operating efficiencies; and managing its business on a decentralized basis, with local management retaining primary responsibility for day-to-day operations and local marketing. The Company believes that allowing local management to retain appropriate autonomy will preserve existing client relationships, provide opportunities for internal growth and enhance the Company's competitiveness in attracting acquisition candidates. The Company has implemented a strategy designed to continue its growth in existing and new markets based on the following key elements: (i) actively pursue strategic acquisitions; (ii) expand its national sales program; (iii) capitalize on cross-selling opportunities; and (iv) develop and expand new and existing client relationships. The Company's acquisition strategy is to identify, acquire and integrate independent companies with strong management, profitable operating results and recognized local or regional market presence. The Company typically pursues acquisitions that will allow it to accomplish one or more of the following: (i) expand the geographic markets served by the Company; (ii) increase the Company's penetration of existing markets; (iii) establish or enhance customer relationships; and (iv) offer services complementary to those offered by the Company. The Company believes there are numerous attractive acquisition candidates due to the large size and fragmentation of the legal support and staffing services industry, including participants in the Company's referral network of over 200 court reporting affiliates, through which the Company supplies court reporting services to its clients in locations not served directly by the Company. The Company is a Texas corporation. Its principal executive offices are located at 1001 Fannin Street, Suite 650, Houston, Texas 77002, and its telephone number at that location is (713) 653-7100. THE OFFERING Common Stock offered by the 3,100,000 shares Company............................. Common Stock to be outstanding after the Offering................. Use of proceeds..................... 5,796,845 shares (1) (2) To repay indebtedness. See "Use of Proceeds." Nasdaq National Market symbol....... LEGL - -------- (1) Includes: (i) conversion of 1,272,762 shares of Series A Convertible Preferred Stock into 1,240,934 shares of Common Stock; (ii) conversion of 2,046,667 shares of Series B Convertible Preferred Stock into 200,065 shares of Common Stock; and (iii) conversion of $2.2 million principal amount of Convertible Subordinated Promissory Notes into 171,748 shares of Common Stock, in each case to be effected concurrently with the Offering. See "Capitalization," "Certain Transactions" and Notes 7 and 8 of Notes to Consolidated Financial Statements of U.S. Legal Support, Inc. (2) Excludes (i) 562,500 shares of Common Stock reserved for issuance under the Company's 1997 Stock Incentive Plan and the Company's Stock Option Plan for Non-Employee Directors, which include outstanding options to purchase 352,181 shares at a weighted average exercise price of $10.58 per share; (ii) 37,153 shares of Common Stock issuable upon the exercise of options granted to employees and consultants; and (iii) 82,410 shares of Common Stock issuable upon exercise of options granted in connection with certain of the acquisitions. See "Management," "Capitalization" and "Principal Shareholders." SUMMARY FINANCIAL DATA (1) (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> PRO FORMA(2)(3) ---------------------------- SIX MONTHS SIX MONTHS YEAR ENDED ENDED YEAR ENDED ENDED DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30, --------------------- ---------------- ------------ --------------- 1995 1996 1997(4) 1997(4) 1998 1997 1997 1998 ------ ------ ------- ------- ------- ------------ ------- ------- <S> <C> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF INCOME DATA: Revenues............... $9,104 $7,667 $24,291 $8,402 $20,698 $39,092 $18,878 $20,698 Cost of services....... 5,763 4,839 15,382 5,489 12,554 23,581 11,193 12,554 ------ ------ ------- ------ ------- ------- ------- ------- Gross profit........... 3,341 2,828 8,909 2,913 8,144 15,511 7,685 8,144 Selling, general and administrative expenses (5).......... 1,970 2,352 6,859 2,167 6,468 10,868 5,128 6,468 Depreciation and amortization (3)...... 231 212 681 177 537 1,214 607 537 Special charge (6)..... -- -- 3,266 -- -- 3,266 -- -- ------ ------ ------- ------ ------- ------- ------- ------- Operating income (loss)................ 1,140 264 (1,897) 569 1,139 163 1,950 1,139 Interest expense....... 230 238 1,971 650 2,858 474 234 238 ------ ------ ------- ------ ------- ------- ------- ------- Income (loss) before taxes................. 910 26 (3,868) (81) (1,719) (311) 1,716 901 Provision (benefit) for income taxes.......... 327 10 (156) -- -- 1,313 721 378 ------ ------ ------- ------ ------- ------- ------- ------- Net income (loss)...... 583 16 (3,712) (81) (1,719) (1,624) 995 523 Accretion of preferred stock................. -- -- (1,093) -- (1,265) -- -- -- ------ ------ ------- ------ ------- ------- ------- ------- Net income (loss) attributable to common shareholders.......... $ 583 $ 16 $(4,805) $ (81) $(2,984) $(1,624) $ 995 $ 523 ====== ====== ======= ====== ======= ======= ======= ======= Basic income (loss) per common share.......... $ (4.43) $(0.10) $ (2.75) $ (0.28) $ 0.17 $ 0.09 ======= ====== ======= ======= ======= ======= Basic weighted average shares outstanding (7)................... 1,084 852 1,084 5,797 5,797 5,797 ======= ====== ======= ======= ======= ======= Diluted income (loss) per common share...... $ (4.43) $(0.10) $ (2.75) $ (0.28) $ 0.17 $ 0.09 ======= ====== ======= ======= ======= ======= Diluted weighted average shares outstanding(7)........ 1,084 852 1,084 5,797 5,879 5,879 ======= ====== ======= ======= ======= ======= </TABLE> <TABLE> <CAPTION> JUNE 30, 1998 ----------------------- ACTUAL PRO FORMA (2) -------- ------------- <S> <C> <C> BALANCE SHEET DATA: Cash.................................................. $ 1,234 $ 1,234 Total assets.......................................... 42,572 42,052 Short-term debt....................................... 6,289 134 Long-term debt (net of current maturities)............ 26,542 6,241 Redeemable preferred stock............................ 8,973 -- Total shareholders' equity (deficit).................. (9,548) 28,061 </TABLE> - ------- (1) Prior to January 1997, the Company had no business operations. Therefore, the business of Looney & Company, for financial statement purposes, represents the predecessor business. (2) Pro forma information gives effect to: (i) the acquisitions; (ii) an adjustment to compensation expense for the difference between actual compensation paid to certain officers of businesses acquired and employment contract compensation negotiated in connection with the completed acquisitions; (iii) amortization expense relating to intangible assets recorded in conjunction with acquisitions; and (iv) the sale of the shares offered hereby and the application of the net proceeds therefrom, as if such events had occurred on January 1, 1997 (for statement of income data) and as of June 30, 1998 (for balance sheet data). The conversion of certain outstanding preferred stock and Convertible Subordinated Promissory Notes described in Note 7 below are contingent upon, and will close concurrently with, completion of the Offering. The pro forma results of operations are not necessarily indicative of the results that would have occurred had these transactions been completed as of such date or the results that may be attained in the future. (3) Pro forma depreciation and amortization amounts consist primarily of amortization of goodwill totaling $696,000, $364,000 and $364,000 for the year ended December 31, 1997 and the six months ended June 30, 1997 and 1998, respectively, recorded as a result of acquisitions by the Company. Goodwill is amortized over periods ranging from ten to 40 years and computed on the basis described in Note 2 of Notes to Consolidated Financial Statements of U.S. Legal Support, Inc. (4) The acquisitions by the Company have been accounted for as purchases, and therefore, the operations of the acquired businesses are included in the statement of income data from the respective dates of acquisition. See the Consolidated Financial Statements of U.S. Legal Support, Inc. included herein. (5) Includes a non-recurring charge of $360,000 in the fourth quarter of 1996 representing the estimated fair value of ownership interests granted to certain employees by the sole shareholder of Looney. (6) The fourth quarter of 1997 includes a special charge of $3.3 million for costs, which pertained to a delayed public offering and acquisitions terminated as a result of such delay. Excluding the effect of such special charge, pro forma operating income, income before taxes, net income and basic and diluted net income per common share for the year ended December 31, 1997 would have been $3.4 million, $3.0 million, $1.7 million and $0.30, respectively. (7) Gives effect to: (i) 1,084,098 shares of Common Stock outstanding prior to the Offering; (ii) 3,100,000 shares issued in the Offering; (iii) 1,612,747 shares of Common Stock issuable upon conversion of preferred stock and Convertible Subordinated Promissory Notes; and (iv) 81,719 dilutive Common Stock equivalents. See "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001046880_central_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001046880_central_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified by, and should be read in conjunction with, the more detailed information and consolidated financial statements and notes thereto appearing elsewhere in this Prospectus. Prospective investors should carefully consider the factors set forth herein under the caption "Risk Factors" and are urged to read this Prospectus in its entirety. Except as otherwise noted, all information in this Prospectus (i) reflects the completion of a reorganization (as defined in "The Reorganization") as of November 28, 1997 whereby Central European Distribution Corporation ("CEDC" or the "Company") became the parent holding company of Carey Agri International Poland Sp. z o.o. ("Carey Agri") and (ii) assumes no exercise of the Underwriters' over-allotment option, the Representatives' Warrants or options granted under the Company's 1997 Stock Incentive Plan. As used in this Prospectus, unless the context otherwise requires, references to the "Company" means CEDC and its wholly owned subsidiary, Carey Agri. The Company prepares its consolidated financial statements in accordance with generally accepted accounting principles in the United States ("U.S. GAAP") in U.S. Dollars. For the convenience of the reader, amounts in this Prospectus are expressed principally in U.S. Dollars. THE COMPANY The Company, formed in 1990, is a leading importer and distributor of alcoholic beverages in Poland. The Company operates the largest nationwide next-day alcoholic beverage delivery service in Poland through its eight regional branch offices located in Poland's principal cities, including Warsaw, Krakow, Gdynia and Katowice. The Company currently distributes approximately 300 brands in three categories: beer, spirits and wine. The Company imports and distributes eight international beers, including Guinness, Corona, Miller and Foster's. The Company currently distributes approximately 250 spirit products, including leading international brands of scotch, single malt and other whiskeys, rum, bourbon, vodkas, tequila, gins, brandy, cognacs, vermouths and specialty spirits, such as Jim Beam, Johnnie Walker, Ballantines, Smirnoff, Absolut, Finlandia, Bacardi, Gordon's London Dry and Tanqueray. In addition, the Company imports and distributes 45 wine products, including Sutter Home, Romanian Classics, Cinzano Asti, Martini Asti and Moet & Chandon. In addition to its distribution agreements with various alcoholic beverage suppliers, the Company believes that it is currently the only holder of the license needed to import cigars into Poland. The Company's net sales and net income for the three-month period ended March 31, 1998 were $9.8 million and $246,000, respectively, as compared to net sales of $8.0 million and a net loss of $7,000 for the three-month period ended March 31, 1997. The Company distributes its products throughout Poland to approximately 3,000 outlets, including off-trade establishments, such as small businesses and multi-store retail outlets where alcoholic beverages are not consumed on premises, and on-trade locations, such as bars, nightclubs, hotels and restaurants, where such products are consumed on premises. The Company believes that it will be able to utilize its distribution network to distribute additional complementary consumer products throughout Poland. In 1996, Poland was reportedly the fifth largest consumer of vodka in the world. The total market for alcohol products in Poland was $2.0 billion in 1996. Traditionally, the population of Poland has primarily consumed domestic vodka, but in recent years there has been a general shift in the population's consumption habits from vodka to other types of alcohol that are primarily imported, such as beer, wine and spirits. The shift in consumption habits in Poland is a result of: (i) stabilization of the Polish economy, including increased wages as well as a decrease in the rate of inflation from 250% in 1990 to 14.9% in 1997; (ii) an increase in tourism, which has created a demand for imported products; (iii) an increase in multinational firms doing business in Poland, which has brought both capital into the country and new potential customers for the Company's products; and (iv) increased availability and decreased prices for imported products. The principal components of the Company's business strategy are as follows: EXPAND DISTRIBUTION CAPACITY. The Company plans to increase its distribution capacity by expanding the number of its branch offices in Poland through the acquisition of existing wholesalers, particularly in areas where the Company does not distribute directly. Cities currently under consideration are Lublin (June 30, 1997 population--approximately 356,000), Lodz (June 30, 1997 population--approximately 815,000) and Bialystok (June 30, 1997 population-- approximately 281,000). The Company will seek to acquire successful wholesalers which are primarily involved in the vodka distribution business and are among the leading wholesalers in their region. The Company would then add its higher margin imported brands to complement and enhance the existing product portfolio. While the Company has identified potential wholesalers and has conducted exploratory talks about such acquisitions, it has not reached any definitive agreements regarding the terms and conditions of any such acquisition, including the purchase price to be paid to the sellers, and such acquisitions may not be available to the Company on acceptable terms, if at all. In such case, the Company would seek to enter these markets with its own branch offices. INCREASE PRODUCT OFFERINGS. The Company plans to expand its strategic product offerings in Poland through the acquisition of a high quality wine importer which offers a wide selection of specialty wines and by entering into new supplier agreements to import additional products. The Company is in exploratory talks with such a wine importer, but no definitive agreement has been reached. The Company began importing Bulgarian red and white varietal wines in October 1997. The Company is also in exploratory talks with spirit producers to import additional spirit brands. ENTER RETAIL MARKET. The Company has implemented its retail business strategy in Warsaw, where one location has been leased, remodeled and opened for business in February 1998. The Company believes that specialty retail sales of alcoholic beverages in Poland have yet to be developed. Currently, alcoholic beverages are sold in Poland through grocery stores, supermarkets, small shops and gas stations. These retail outlets sell, in general, fast moving items, primarily domestic beer and vodka, as well as a small number of the more popular imported products, which are brands often imported by the Company. There are currently few stores that specialize in alcoholic beverages in Warsaw, a metropolitan area with a population of approximately 2.4 million. The Company also believes that high quality alcohol retail outlets will create an additional demand for its current product portfolio, enhancing sales of products distributed, as well as provide a point of sale marketing opportunity for the Company's brands. The retail stores will stock additional products not currently distributed by the Company to complement the stores' appeal, such as cigars and other items associated with an alcohol retail outlet. The Company also intends to utilize the retail outlets as a training tool for its salesmen for product merchandising and promotions. In addition, the retail establishments will allow the Company's on-trade customers to have a supply point for immediate purchase at night and on Sundays when the Company's delivery system does not operate. CEDC was incorporated in Delaware in September 1997. Its executive offices are located at 211 North Union Street, #100, Alexandria, Virginia 22314 and its telephone number is (703) 838-5568. The executive offices of Carey Agri are located at ul. Lubelska 13, 03-802 Warsaw, Poland and its telephone number is 48-22-618-0577. THE OFFERING Common Stock to be Offered by the Company........................... 2,000,000 shares Common Stock to be Outstanding After the Offering(1)....................... 3,780,000 shares Use of Proceeds....................... The anticipated uses of the net pro- ceeds from this Offering, in approxi- mate amounts, are: (i) $2.0 million to prepay suppliers of alcohol beverages to secure more favorable purchase terms; (ii) $1.8 million to retire bank financing expected to be outstanding on the date of this Prospectus; (iii) $1.2 million to purchase equipment (vehicles and computer upgrades); (iv) $0.5 mil- lion to open nine retail stores; and (v) $5.2 million for working capital and general corporate purposes, includ- ing acquisitions of wholesalers of al- cohol beverages in Poland and an im- porter of wine and to add other alco- holic beverage brands. See "Use of Pro- ceeds." Proposed Nasdaq Symbol........... CEDC - -------- (1) Does not include: (i) 300,000 shares of Common Stock issuable upon exercise of the Underwriters' over-allotment option; (ii) 200,000 shares of Common Stock issuable upon exercise of the Representatives' Warrants; and (iii) 750,000 shares of Common Stock reserved for issuance under the Company's 1997 Stock Incentive Plan (the "Plan"), of which options for 82,500 shares have been granted. See "Management--Executive Compensation" and "Underwriting." SUMMARY CONSOLIDATED FINANCIAL DATA The following table sets forth summary consolidated financial data of the Company as of and for each of the five fiscal years in the period ended December 31, 1997 and the three months ended March 31, 1997 and 1998. The income statement data for the years ended December 31, 1995, 1996 and 1997 have been derived from the Company's consolidated financial statements, which were audited by Ernst & Young Audit Sp. z o.o., independent auditors. The income statement data for the years ended December 31, 1993 and 1994 and the three months ended March 31, 1997 and 1998 are unaudited, but include, in the opinion of management, all adjustments considered necessary for a fair presentation of such data. The "as adjusted" balance sheet data as of March 31, 1998 is as described in note (2) below. Operating results for interim periods are not necessarily indicative of the results that may be achieved for the entire fiscal year. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes thereto included elsewhere in this Prospectus. <TABLE> <CAPTION> THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ----------------------------------------------- ----------------------- 1993 1994 1995 1996 1997 1997 1998 ----------- ----------- ------- ------- ------- ----------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) INCOME STATEMENT DATA: <S> <C> <C> <C> <C> <C> <C> <C> Net sales............... $4,313 $6,788 $16,017 $23,942 $40,189 $7,970 $9,798 Cost of goods sold...... 3,157 5,480 13,113 19,850 34,859 6,907 8,280 Sales, general and administrative expenses............... 1,559 1,356 2,603 3,569 4,198 926 1,128 ------ ------ ------- ------- ------- ------ ------ Operating income (loss)................. (403) (48) 301 523 1,132 137 390 Interest expense and net realized and unrealized foreign currency transaction losses, net of other income........ 454 315 106 350 483 123 3 Income (loss) before income taxes........... (857) (363) 195 173 649 14 387 Net income (loss)....... $ (783) $ (331) $ 75 $ 62 $ 308 $ (7) $ 246 ====== ====== ======= ======= ======= ====== ====== Net income (loss) per common share, basic and dilutive (1)........... $(0.44) $(0.19) $ 0.04 $ 0.03 $ 0.17 $(0.00) $ 0.14 ====== ====== ======= ======= ======= ====== ====== Number of outstanding shares of Common Stock (1).................... 1,780 1,780 1,780 1,780 1,780 1,780 1,780 </TABLE> <TABLE> <CAPTION> MARCH 31, 1998 ----------------------- ACTUAL AS ADJUSTED (2) ------ --------------- (UNAUDITED) <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents......................... $ 175 $ 9,401 Working capital (deficit)......................... (539) 10,670 Total assets...................................... 9,111 17,796 Long-term debt and capital lease obligations, less current portion.................................. 72 5 Stockholders' equity.............................. 592 11,327 </TABLE> - -------- (1) Gives effect to the 1,780,000 shares issued in the Reorganization. See "The Reorganization." (2) Adjusted to reflect the sale by the Company of 2,000,000 shares of Common Stock offered hereby at an assumed initial public offering price of $6.50 per share (the midpoint of the range specified on the front cover of the Prospectus), after deduction of underwriting discounts and commissions and estimated offering expenses and the application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001047113_acsys-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001047113_acsys-inc_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..50b59af95fc0bcf82bb2e8fefc92143a39b0a0eb
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this Prospectus. It is not complete and does not contain all of the information that you should consider before investing in the Common Stock. You should read the entire Prospectus carefully, including the "Risk Factors" section and the financial statements and notes to the financial statements before making any decision to invest in the Common Stock ACSYS Acsys is one of the leading providers of specialty professional staffing services in the United States. We were formed as a Georgia corporation in March 1997 and since then have acquired 11 accounting and finance and information technology (IT) specialty professional staffing businesses. We operate 40 offices serving metropolitan markets across the United States, with a more significant presence in the Eastern and Midwestern United States. Our goal is to build a national specialty professional staffing business and to become a leader in the fragmented IT services industry. We believe that we can best achieve our goal through acquiring complementary companies, expanding our service offering and cross-selling to our combined customer base. We have clients across a broad spectrum of industries, including communications, consumer products, energy, financial services, health care, industrial, insurance, medicine, professional services, retail and technology. In February 1998, we completed our IPO of 2,842,500 shares of Common Stock at $8.50 per share, raising approximately $20.2 million after deducting underwriting discounts and offering expenses. Our principal executive offices are located at 75 14th Street, Suite 2200, Atlanta, Georgia 30309, and our telephone number is (404) 817-9440. ACSYS' STRATEGIES Operating Strategy Our operating strategy focuses on client relationships. We believe that the central function of our corporate management is to support the staffing consultants who directly interact with clients. We carry out our strategy through our decentralized "Hub-Center" management model, which we believe fosters an entrepreneurial environment. Division Presidents manage the Hub- Centers, located in major cities, and are responsible for achieving our operational and financial goals. We support our Division Presidents by giving them ready access to our corporate services which include marketing, public relations, management information systems support, training, human resources, accounting and other back office functions. We believe that our decentralized management structure enables us to be more responsive to our clients' needs. Our specialty professional focus also makes us more attractive to staffing consultants and temporary and permanent placement candidates. Growth Strategy Our goal is to build a national specialty professional staffing business with offices in major United States metropolitan markets by: . pursuing strategic acquisitions, . enhancing and expanding existing offices, . introducing new services, and . opening new offices. We seek to acquire specialty professional staffing businesses with strong management and a significant presence in what we believe to be desirable, growing markets. We also plan to enhance and expand our existing offices by: . adding quality personnel, . pursuing new clients, . expanding relationships with our current clients, and . replicating our most successful sales, marketing and business techniques in offices that are not currently using those techniques. We also intend to introduce new specialty professional staffing services in addition to our core services. Additionally, we plan to open new offices in both our current markets and new geographic markets. ACSYS' MARKET Temporary Staffing Sector We derived 77.6% and 78.5% of our pro forma service revenues from our temporary staffing operations for the nine months ended September 30, 1998 and the year ended December 31, 1997, respectively. Within the temporary staffing sector, we compete primarily in the specialty professional segments. Our temporary staffing services include accounting and finance and IT consulting principally in the area of implementing enterprise resource planning (ERP) software from the German company SAP AG. A significant part of the IT segment is the implementation of ERP software. ERP software helps companies better manage their business by redesigning their business processes in such areas as product development, service delivery, manufacturing, human resources, finance and accounting. Although these services may be offered by ERP software developers, in most cases ERP implementation and systems integration services are provided by third party service providers, like us. Specialty professional and IT staffing assignments generally have profit margins greater than those of traditional clerical and light industrial temporary staffing assignments. We believe that companies are increasingly accepting the idea of using specialty professional temporary employees in traditional permanent professional roles and are planning to use such employees as a continuing corporate strategy. Furthermore, companies are now outsourcing traditional accounting and finance services and ERP software implementation that historically were performed internally. Permanent Placement Sector We also operate in the placement and search sector of the staffing industry. We derived 22.4% and 21.5% of our pro forma service revenues from our permanent placement operations for the nine months ended September 30, 1998 and the year ended December 31, 1997, respectively. Permanent placement firms fulfill their clients' needs by identifying, evaluating and recommending qualified candidates for positions. We believe that companies increasingly rely on permanent placement firms for several reasons, including: . the increased difficulty of finding talented candidates, . the reduced costs and increased efficiency of outsourcing the recruiting process, and . the ability of placement firms to provide objective feedback on candidates and advice regarding the appropriate qualifications and compensation for a particular position. ACQUISITIONS SINCE OUR IPO On March 31, 1998, we acquired TGS Resource Group, Inc. ("TGS") (doing business as "Don Richard Associates of Richmond"), a company that provides accounting and finance temporary staffing services. We accounted for the acquisition as a purchase. On May 22, 1998, we acquired Icon Search & Consulting, Inc. ("ICON"), a company that provides IT temporary staffing and permanent placement services to companies that are implementing SAP's ERP software. We accounted for this acquisition as a pooling-of-interests. As a result, our consolidated financial statements included in this prospectus have been restated to include the accounts and results of operations of ICON. On July 1, 1998, we acquired KPD Systems, Inc. ("KPD"), a company that provides information technology staffing services. We accounted for the acquisition as a purchase. On August 4, 1998, we acquired Staffing Edge, Inc. ("Staffing Edge"), a company that provides temporary and permanent placement of professionals in the fields of accounting and finance, information technology, legal, engineering and high- end office/clerical and training services. We accounted for the acquisition as a purchase. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT FOR PER SHARE DATA) <TABLE> <CAPTION> NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, --------------------------------- --------------------------- PRO FORMA PRO FORMA 1995 1996 1997 1997 (2) 1997 1998 1998 (2) ------- ------- ------- --------- ------- -------- --------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA (1): Total service revenues.. $36,484 $56,742 $78,128 $107,804 $56,292 $89,371 $107,776 Gross profit............ 18,200 26,126 35,545 48,709 26,429 40,603 49,472 Operating income........ 3,459 4,097 2,372 7,314 3,015 4,195 7,912 Income before income taxes.................. 2,594 3,286 1,584 5,436 2,427 3,729 6,185 Net income (loss) (3)... $ 2,461 $ 2,867 $ 1,146 $ 3,044 $ 1,847 $ (1,456) $ 3,550 Pro forma basic net in- come per share, as ad- justed for income taxes (2)(3)(4).............. $ 0.21 $ 0.25 ======== ======== Pro forma diluted net income per share, as adjusted for income taxes (2)(3)(4)........ $ 0.21 $ 0.24 ======== ======== Weighted average shares used in computing pro forma basic net income per share (4).......... 14,385 14,462 Weighted average shares used in computing pro forma diluted net in- come per share (4)..... 14,489 14,918 </TABLE> <TABLE> <CAPTION> DECEMBER 31, SEPTEMBER 30, 1997 1998 ------------ ------------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents............................ $ 370 $ 1,175 Working capital...................................... 4,921 3,171 Total assets......................................... 33,352 85,188 Long-term debt, including current maturities......... 11,754 34,645 Redeemable Common stock.............................. 1,220 -- Shareholders' equity................................. 10,801 33,697 </TABLE> - -------- (1) All of the financial data set forth above have been restated to give effect to the acquisitions of Infinity Enterprises, Inc.; David C. Cooper & Associates, Inc.; DCCA Professional Temporaries, Inc.; EKT, Inc., Cama of Tampa, Inc.; Rylan Forbes Consulting Group, Inc.; AcSys Resources, Inc.; and ICON, which have been accounted for under the pooling of interests method of accounting (the "Pooling Acquisitions"). Additionally, the financial data set forth above includes results of operations of Infinity Enterprises, Inc., ICON and Cama of Tampa, Inc. from March 1, 1994, September 12, 1994, and January 1, 1996, respectively, the dates of their formation. The acquisitions of C.P.A. Staffing, Inc.; C.P.A. Search, Inc.; Career Placement Associates (together "CPA Staffing") in August 1997; TGS in March 1998; KPD in July 1998; and Staffing Edge in August 1998 have been accounted for under the purchase method of accounting and are included in the historical statements of operations from their respective dates of acquisition (the "Purchase Acquisitions"). The entities acquired in the Pooling Acquisitions and the Purchase Acquisitions are collectively referred to as the "Acquired Companies." See Note 1 of Notes to Consolidated Financial Statements. (2) The pro forma operations data reflect the Purchase Acquisitions as if they had occurred on January 1, 1997. In addition, the pro forma operations data reflect (i) the elimination of combination expenses incurred in connection with the Pooling Acquisitions, (ii) an adjustment to compensation expense for the difference between actual compensation paid to certain owners and key employees of the Acquired Companies and negotiated in conjunction with such acquisitions, (iii) the elimination of a division of Staffing Edge which was exited upon the acquisition of Staffing Edge and (iv) income tax expense computed as if we had terminated our status as an S corporation as of January 1, 1997. See Pro Forma Combined Financial Statements. (3) Prior to our IPO, we operated as an S corporation for income tax purposes except for ICON which is a C corporation. Accordingly, income tax expense prior to the IPO was generated from the operating activities of ICON. In connection with our IPO, we terminated our S corporation status and recorded a charge to income tax expense of approximately $3,000,000 in the nine months ended September 30, 1998, representing the tax effect of differences in the bases of assets and liabilities for financial reporting and income tax purposes. Pro forma net income reflects income tax expense as if we had terminated our status as an S corporation as of January 1, 1997. See Note 2 of Notes to Consolidated Financial Statements for information concerning the computation of the income taxes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001047121_preview_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001047121_preview_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..fcff123347fe33c839db0b749962ddc3e2e072e2
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This Prospectus contains forward-looking statements made within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," and similar expressions identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed or forecasted. Factors that may cause or contribute to such differences include, but are not limited to, those under "Risk Factors" and those appearing elsewhere in this Prospectus. The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Prospectus. THE COMPANY Preview Travel, Inc. ("Preview Travel" or the "Company") is a leading provider of branded online travel services for leisure and small business travelers. The Company operates its own Web sites (www.previewtravel.com, www.reservations.com and www.vacations.com), the primary travel service on America Online, Inc. ("AOL") (AOL keyword: previewtravel) and co-branded travel Web sites with Excite, Inc. ("Excite") (City.Net) and with Lycos, Inc. ("Lycos"). The Company offers one-stop travel shopping and reservation services, providing reliable, real-time access to schedule, pricing and availability information for over 500 airlines, 13,000 hotels and all major car rental companies. The Company's proprietary technology and user-friendly interface enable customers to easily and quickly access travel information 24 hours a day, seven days a week, to make informed choices about their travel purchases. In addition to its reservation and ticketing service, the Company offers vacation packages, discounted and promotional fares, travel news and destination content, including content licensed from Fodor's Travel Publications, Inc. ("Fodor's"). The Company complements its compelling content and user-friendly interface with a high level of customer service. To broaden its online presence and build brand recognition, the Company has entered into various strategic relationships. In 1997 the Company entered into long-term agreements with AOL, the leading online service provider with over eleven million members, and Excite, a leading search engine provider with over two million visitors per day. The Company is AOL's primary and preferred provider of online travel services and the exclusive provider of travel reservations services on Excite's Travel Channel (City.Net). In February 1998, the Company launched its Destinations Guides feature created with content licensed from Fodor's. In March 1998, the Company entered into a two-year agreement with Lycos, another leading search engine provider, under which the Company will be the exclusive multiservice provider of travel reservations on Lycos' Travel Web Guide and Travel Network. Through such strategic agreements, the Company's travel services are prominently featured on the AOL, Excite and Lycos travel channels and contextually integrated throughout the AOL, Excite and Lycos services. Preview Travel's objective is to be the leading provider of branded online travel services for leisure and small business travelers. The Company plans to attain this goal by delivering compelling value to customers, building customer loyalty and brand recognition, enhancing and expanding strategic relationships and broadening existing offerings. Since launching its online booking service in May 1996, the Company has experienced significant growth in its gross bookings. As of March 31, 1998, 3.4 million users had registered on the Company's online site, and over $136 million in gross bookings of travel services had been purchased by approximately 220,000 customers in over 409,000 transactions. Through its News Travel Network, Inc. division ("NTN"), Preview Travel produces entertainment programming for broadcast and cable television and the in-flight market. NTN also produces 90-second news inserts for local television station newscasts. NTN has compiled an extensive library of over 6,000 hours of proprietary, broadcast quality footage featuring over 2,000 destinations around the world. Preview Travel, Inc. (formerly Preview Media, Inc.) was incorporated in California in March 1985 and was reincorporated in Delaware in November 1997. The Company's principal corporate offices are located at 747 Front Street, San Francisco, California 94111. Its telephone number is (415) 439-1200. As used in this Prospectus, the "Company" refers to Preview Travel, Inc. and its subsidiaries. THE OFFERING <TABLE> <C> <S> Common Stock offered by the Company............... 1,500,000 shares Common Stock offered by the Selling Stockholders.. 1,600,000 shares Common Stock to be outstanding after the offering. 12,862,927 shares (1) Use of proceeds................................... Working capital, payment of obligations and general corporate purposes. See "Use of Proceeds." Nasdaq National Market symbol..................... PTVL </TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, QUARTER ENDED --------------------------- ------------------------------------------------- MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, 1995 1996 1997 1997 1997 1997 1997 1998 -------- ------- -------- --------- -------- --------- -------- --------- <S> <C> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Online revenues........ $ 579 $ 2,573 $ 6,010 $ 1,496 $ 1,174 $ 1,556 $ 1,784 $ 2,332 Television revenues.... 9,564 9,801 7,634 2,023 2,033 1,845 1,733 1,683 -------- ------- -------- ------- ------- ------- ------- ------- Total revenues....... 10,143 12,374 13,644 3,519 3,207 3,401 3,517 4,015 Gross profit........... 672 3,066 4,245 1,223 851 1,042 1,129 1,572 Loss from operations... (4,667) (5,501) (10,432) (1,526) (1,540) (2,514) (4,852) (4,959) Net loss............... $ (4,933) $(5,592) $(10,168) $(1,505) $(1,542) $(2,532) $(4,589) $(4,688) Basic and diluted net loss per share (2).... $ (4.02) $ (3.43) $ (3.54) $ (0.88) $ (0.90) $ (1.44) $ (0.73) $ (0.41) Weighted average shares used in net loss per share calculation (2)....... 1,228 1,631 2,869 1,702 1,712 1,753 6,306 11,353 SUPPLEMENTAL FINANCIAL DATA (UNAUDITED): Gross bookings (3)..... $ 2,043 $20,263 $ 80,389 $14,117 $17,816 $22,074 $26,383 $35,890 </TABLE> <TABLE> <CAPTION> MARCH 31, 1998 ----------------------- ACTUAL AS ADJUSTED (4) ------- --------------- <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents............................. $12,477 $60,372 Marketable securities................................. 11,407 11,407 Total assets.......................................... 38,404 86,659 Long-term obligations (5)............................. 2,968 2,968 Total stockholders' equity............................ 30,701 78,956 </TABLE> - ------------------- (1) Based on shares outstanding as of March 31, 1998. Excludes as of March 31, 1998 (a) 1,647,713 shares issuable upon exercise of outstanding options at a weighted average exercise price of $6.02 per share, (b) 31,666 shares issuable upon exercise of outstanding warrants at a weighted average exercise price of $5.97 per share and (c) an aggregate of 1,833,600 shares available for future issuance under the Company's 1988 Stock Option Plan, 1997 Stock Option Plan, 1997 Directors' Stock Option Plan and 1997 Employee Stock Purchase Plan. See "Management--Stock Plans" and Note 11 of Notes to Consolidated Financial Statements. (2) The loss per share information was computed applying the requirements of recently effective Statement of Financial Accounting Standards No. 128 and SEC Staff Accounting Bulletin No. 98. (3) Represents the total purchase price of all travel services booked through the Company's online reservation system. This presentation of gross bookings does not affect the Company's operating results, and gross bookings are not included in revenues. Management believes that gross bookings provide a more consistent comparison between historical periods than do online revenues. Gross bookings are not required by generally accepted accounting principles ("GAAP") and should not be considered in isolation or as a substitute for other information prepared in accordance with GAAP, and period-to-period comparisons of gross bookings are not necessarily meaningful as a measure of the Company's revenues due to, among other things, changes in commission rates, and, as with operating results, should not be relied upon as an indication of future performance. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (4) As adjusted to reflect the sale of 1,500,000 shares of Common Stock offered by the Company at an assumed public offering price of $34.25 per share after deduction of the estimated underwriting discount and offering expenses payable by the Company. See "Use of Proceeds" and "Capitalization." (5) Long-term obligations include capital lease obligations. ------- Except as otherwise noted herein, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. See "Underwriting."
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus, including information under "Risk Factors." References in this Prospectus to the "Company" include its wholly-owned subsidiaries, Monarch Pharmaceuticals, Inc. ("Monarch Pharmaceuticals"), King Pharmaceuticals of Nevada, Inc. and Parkedale Pharmaceuticals, Inc. ("Parkedale Pharmaceuticals") unless the context requires otherwise. Unless otherwise indicated, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. THE COMPANY The Company is a vertically integrated pharmaceutical company that manufactures, markets and sells branded and generic prescription pharmaceutical products. The Company seeks to capitalize on niche opportunities in the pharmaceutical industry created by cost containment initiatives and consolidation among large global pharmaceutical companies. The Company's strategy is to acquire branded pharmaceutical products and increase their sales by focused promotion and marketing, as well as by developing product line extensions and through product life cycle management. Industry consolidation and cost containment pressures have increased the level of sales necessary for an individual product to justify active marketing and promotion from large pharmaceutical companies. This has led such pharmaceutical companies to focus their marketing efforts on drugs with high volume sales, newer or novel drugs which have the potential for high volume sales and products which fit within core therapeutic or marketing priorities. As a result, major pharmaceutical companies increasingly have sought to divest small or non-strategic product lines, which can be profitable for niche pharmaceutical companies like the Company to manufacture and market. Since December 1994 the Company has successfully acquired 30 branded products from pharmaceutical companies including Warner-Lambert Company ("Warner-Lambert") and Glaxo Wellcome Inc. ("Glaxo Wellcome"). The Company markets a variety of branded prescription products, including a broad line of ophthalmic and other anti-infective products (including Cortisporin, Neosporin and Chloromycetin), cardiovascular products (Thalitone and Procanbid), proctology products (Anusol-HC and Proctocort), and respiratory products (including Quibron and Tussend). The Company also markets flu vaccine, hormonal products and other prescription pharmaceutical products. In addition, the Company manufactures and markets generic pharmaceutical products and companion animal health and drug products. The Company believes that its ability to identify and integrate promising branded pharmaceutical products and to leverage its marketing and manufacturing infrastructure uniquely positions the Company to continue to grow through acquisitions and internal growth. Specifically, the Company will pursue the following strategies: - Seek Attractively Priced Product Acquisition Opportunities. The Company generally seeks branded pharmaceutical products that (i) can benefit from focused marketing efforts in addition to product development, (ii) complement the Company's existing product lines, and (iii) have some patent protection or potential for market exclusivity or product differentiation. - Enhance Sales Through Focused Marketing Efforts. The Company currently has 100 sales representatives who market throughout the United States. This sales force is dedicated to aggressively promoting and marketing branded pharmaceutical products and is supported by telemarketers and customer service representatives who promote the Company's products in territories not currently covered by field representatives. The Company expects its sales and marketing staff to grow significantly as the Company continues to acquire additional branded pharmaceutical products. - Improve Margins Through Integrated Manufacturing. The Company believes that its broad integrated manufacturing capabilities enhance its ability to acquire a variety of pharmaceutical products and integrate such products at attractive operating margins, and to develop product line extensions. The Company operates two manufacturing plants and currently manufactures certain of its own branded and generic products and uses its excess manufacturing capacity to contract manufacture for other pharmaceutical companies. The Company produces a broad range of dosage forms, including sterile solutions, freeze-dried (lyophylized) products, injectables, tablets and capsules, liquids and suspensions, creams and ointments, suppositories and powders and is licensed by the Drug Enforcement Agency ("DEA") to procure and produce controlled substances. The Company's manufacturing capability is integrated with its support services including quality control, quality assurance, regulatory compliance, purchasing, production planning, packaging, distribution and inventory management. These integrated services enable the Company to maintain high quality standards for its products as well as provide reliable and timely service to its customers. - Expand Through New Product Development. The Company's product development efforts are currently focused on developing product line extensions, which allow the Company to leverage its brand names, enhance product differentiation, create market exclusivity and minimize sales lost to generic substitution. To date, the Company has introduced seven line extensions for its acquired products. In February 1998, the Company acquired from Warner-Lambert 15 branded pharmaceutical products, a manufacturing facility located in Rochester, Michigan (the "Parkedale Facility") and certain manufacturing contracts for third parties for $125.0 million (the "Sterile Products Acquisition"). The purchase price was financed through borrowings from a group of financial institutions (the "Credit Facility"). See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." ------------------ The Company was incorporated in the State of Tennessee in 1993. The Company's principal executive offices are located at 501 Fifth Street, Bristol, Tennessee 37620. Its telephone and facsimile numbers are (423) 989-8000 and (423) 274-8677, respectively. THE OFFERING Common Stock offered by: The Company................ 4,000,000 shares The Selling Shareholders... 2,250,000 shares ---------------------------------------- Total............ 6,250,000 shares ---------------------------------------- ---------------------------------------- Common Stock to be outstanding after the Offering(1).............. 32,000,000 shares Use of Proceeds............ Repayment of approximately $37.4 million of debt outstanding pursuant to the Credit Facility and for general corporate purposes including investments in facilities to accommodate new products acquired, development of branded product line extensions and generic products and expansion of sales force and acquisition of additional branded products. See "Use of Proceeds." Nasdaq National Market Symbol................... KING - --------------- (1) Does not include 3,500,000 shares of Common Stock available for future grants under the Company's 1997 Incentive and Nonqualified Stock Option Plan for Employees and its 1998 Non-Employee Director Stock Option Plan (the "Stock Option Plans"). Options for 270,150 shares of Common Stock were outstanding under the Stock Option Plans as of May 31, 1998. SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> THREE MONTHS FISCAL YEAR ENDED PRO FORMA ENDED PRO FORMA DECEMBER 31, AS ADJUSTED MARCH 31, AS ADJUSTED --------------------------- ------------- ----------------- ----------- 1995 1996 1997 1997(1)(2)(3) 1997 1998 1998(1)(3) ------- ------- ------- ------------- ------- ------- ----------- (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales................................... $25,441 $15,457 $47,351 $122,504 $ 8,786 $22,319 $33,163 Development revenues(4)..................... -- 5,000 558 558 -- 2,658 2,658 ------- ------- ------- -------- ------- ------- ------- Total revenue, net.................. 25,441 20,457 47,909 123,062 8,786 24,977 35,821 ------- ------- ------- -------- ------- ------- ------- Cost of sales............................... 12,130 8,782 13,034 60,513 2,063 7,364 11,847 Selling, general and administrative......... 8,605 12,106 19,123 27,145 4,394 6,832 7,906 Depreciation and amortization............... 1,777 982 2,395 9,804 423 1,091 2,137 ------- ------- ------- -------- ------- ------- ------- Total costs and expenses............ 22,512 21,870 34,552 97,462 6,880 15,287 21,890 ------- ------- ------- -------- ------- ------- ------- Gain on sale of product line, net(5)........ 13,102 -- -- -- -- -- -- ------- ------- ------- -------- ------- ------- ------- Operating income (loss)..................... 16,031 (1,413) 13,357 25,600 1,906 9,690 13,931 Total other (expenses) income............... (1,639) 1,066 (2,777) (12,464) (415) (2,679) (3,935) Income tax benefit (expense)................ (5,058) 107 (3,968) (4,991) (570) (2,650) (3,845) ------- ------- ------- -------- ------- ------- ------- Net income (loss) before extraordinary item...................................... 9,334 (240) 6,612 8,145 921 4,361 6,151 Extraordinary item(6)....................... 528 -- -- -- -- (286) -- ------- ------- ------- -------- ------- ------- ------- Net income (loss)........................... $ 9,862 $ (240) $ 6,612 $ 8,145 $ 921 $ 4,075 $ 6,151 ======= ======= ======= ======== ======= ======= ======= Diluted net income (loss) per share(7)...... $ 0.70 $ (0.02) $ 0.25 $ 0.27 $ 0.04 $ 0.15 $ 0.19 ======= ======= ======= ======== ======= ======= ======= Weighted average common shares outstanding(8)............................ 14,167 15,440 26,270 30,270 20,984 28,000 32,000 </TABLE> <TABLE> <CAPTION> MARCH 31, 1998 DECEMBER 31, ---------------------- 1997 ACTUAL AS ADJUSTED ------------ -------- ----------- <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $ 69 $ 4 $ 12,480 Working capital............................................. (424) 6,865 19,341 Total assets................................................ 104,863 267,760 280,236 Long-term debt (excluding current portion).................. 48,289 187,206 149,777 Shareholders' equity........................................ 29,334 33,412 83,317 </TABLE> - --------------- (1) The pro forma consolidated information gives effect to the recent acquisitions of the Company which include (i) the Proctocort product line on January 22, 1997, (ii) the Viroptic product line on May 15, 1997, (iii) the Cortisporin product line on March 21, 1997, (iv) the acquisition of Septra, Proloprim, Mantadil and Kemadrin, as well as the exclusive licenses, free of royalty obligations, to manufacture and market prescription formulations of Neosporin and Polysporin from Glaxo Wellcome on November 14, 1997 (the "Glaxo Acquisition") (collectively, the "Recent Acquisitions") and (v) the Sterile Products Acquisition on February 27, 1998, in each case as if the acquisitions had occurred on January 1, 1997. See "Pro Forma Consolidated Financial Statements."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001047762_icon_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001047762_icon_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Each prospective investor should carefully consider the information set forth under the heading "Risk Factors." Unless otherwise indicated herein, the information in this Prospectus (i) gives effect to a 8,000-for-1 stock split in the form of a dividend of the Company's Common Stock, effective as of the effectiveness of the Offering (the "Stock Split"), (ii) gives effect to the redemption of 4,000,000 shares of Common Stock by the Company simultaneously with the consummation of the Offering, (iii) gives effect to the redemption of 1,000 shares of Class B Common Stock by the Company simultaneously with consummation of the Offering, (iv) gives effect to the conversion of $1,112,760 (as of September 30, 1997) of indebtedness owed to a related party into 139,095 shares (assuming an initial public offering price of $8.00 per share) of Common Stock, and (v) assumes no exercise of the Underwriters' over-allotment option. See "Description of Capital Stock" and "Certain Transactions." The term "fiscal year" as used herein refers to the fiscal year of the Company ending on March 31 of such year. THE COMPANY GENERAL The Company is a specialty finance company engaged in equipment leasing and financing. The Company intends, through its new ICON Leasing subsidiary, to use the proceeds of the Offering primarily to acquire, hold for investment and remarket large ticket Seasoned Leases. A "large ticket" equipment lease involves equipment with an original equipment cost in excess of $1 million, and typically in excess of $10 million as in the case of aircraft and marine vessels. An equipment lease is considered a "Seasoned Lease" by the Company when its remaining term is short enough (often the last third of the lease term) that (i) the Company can confidently estimate the likely residual value of the underlying equipment at lease expiry, and (ii) most of the Company's total return from such lease is expected to be derived from the realization of such residual value at lease expiry by selling or re-leasing such equipment to the lessee or to a third party. The Company believes that currently there are relatively few participants in the market for large ticket Seasoned Leases and, consequently, opportunities exist for experienced participants to achieve attractive returns. To date, the only acquisitions of large ticket Seasoned Leases by the Company have been by its ICON Capital subsidiary on behalf of limited partnerships (the "ICON Partnerships") which ICON Capital sponsors and manages. Prior to August 1996, when current management assumed control, the ICON Partnerships were invested almost entirely in "small ticket" leases (those involving equipment with an original equipment cost less than $1 million and typically less than $150,000, as in the case of computers or office equipment). Under new management, since August 1996 ICON Capital has invested, or committed to invest, more than $207 million (as measured by gross purchase price) on behalf of the ICON Partnerships in large ticket Seasoned Lease transactions such as aircraft leased to Airbus Industries, US Airways, Inc., Continental Airlines, Inc. and Federal Express Corporation; marine vessels leased to Occidental Petroleum Corporation and SEACOR-Smit, Inc.; tractor-trailer equipment leased to Wal-Mart Stores, Inc.; drilling rig equipment leased to Rowan Cos., Inc.; and telecommunications equipment leased to America Online, Inc. and Texas Utilities Services, Inc. See "Business--Recent Transactions." The proceeds of the Offering will enable the Company to pursue Seasoned Lease acquisition opportunities for its own benefit rather than exclusively on behalf of the ICON Partnerships. Although the Company has no material history of results with respect to large ticket Seasoned Leases, the current management of the Company does have extensive experience with respect to such transactions. See "Business--Management." The Company's ICON Capital subsidiary is engaged in acquiring and managing for the benefit of the ICON Partnerships (i) large ticket Seasoned Leases, and (ii) to a lesser degree, small ticket leases. From the formation of the first ICON Partnership in 1988 to September 30, 1997, ICON Capital has raised funds for seven ICON Partnerships, the proceeds of which have been invested in more than $843 million of equipment (as measured by gross purchase price) subject to lease. Following the acquisition of ICON Capital by the Company in 1996, the ICON Partnerships have concentrated on acquiring large ticket Seasoned Leases. The Company intends to sponsor an eighth ICON Partnership after the subscription period for the seventh ICON Partnership ends in late 1998. After the Offering, the Company, through its ICON Funding Subsidiary, will also acquire and originate finance-type leases of, and loans secured by, small ticket equipment (collectively, "small ticket financing transactions") for its own benefit and for that of the ICON Partnerships. Prior to the Offering, ICON Funding engaged in small ticket financing transactions only for the benefit of the ICON Partnerships. ICON Funding intends to utilize warehouse finance facilities to fund future small ticket financing transactions, which will be refinanced through securitizations or other structured finance transactions. Because the Company has not invested prior to the Offering in large ticket Seasoned Leases for its own benefit and has only entered into such transactions for the ICON Partnerships since August 1996, historical returns with respect to all but one (see "Business--Recent Transactions") of these investments are not yet available. The Company does anticipate, however, that although ICON Capital and ICON Funding will continue to make material contributions to the Company's results of operations, the majority of its revenues and earnings will be derived from the large ticket Seasoned Lease acquisition and remarketing activities of ICON Leasing. See "Business--Current Businesses of the Company." MANAGEMENT The Company's three most senior executives, none of whom had any relationship with the Company prior to their participation in the acquisition of ICON Capital in 1996, have extensive experience in equipment lease financing and remarketing in general and Seasoned Lease acquisitions and remarketing in particular. The Company believes that these executives, who replaced the former management of ICON Capital, have a record of success in the acquisition and remarketing of Seasoned Leases. Beaufort J. B. Clarke, the Chairman and Chief Executive Officer of the Company, has more than twenty years of senior management experience in the leasing industry, including chief executive and other senior executive positions at Griffin Equity Partners, Inc. and Gemini Financial Holdings, Inc., both equipment leasing companies engaged in the acquisition of Seasoned Leases. Mr. Clarke was a Vice President and one of the founders of Encore International, Inc. (now known as AT&T Systems Leasing) prior to its acquisition by AT&T Capital Corporation. Paul B. Weiss and Thomas W. Martin, the Executive Vice Presidents of the Company, have approximately 10 and 15 years of experience in the industry, respectively. Each worked with Mr. Clarke at Griffin Equity Partners and Gemini Financial Holdings, where they and Mr. Clarke specialized in Seasoned Lease transactions, in addition to serving in other positions in the industry. These three individuals and the four senior vice presidents (three of whom have joined the Company since August 1996) of the Company have approximately 85 years of combined experience in the equipment leasing industry. See "Management." INDUSTRY OVERVIEW The Equipment Leasing Association of America ("ELA"), based on U.S. Department of Commerce data, estimates that in the United States, approximately $169 billion of the estimated $566 billion spent on productive capital assets in 1996 was financed by means of leasing. ELA estimates that 80% of all U.S. businesses use leasing or financing to acquire equipment. The size of the market for Seasoned Leases is primarily a function of the number of leases entered into in the past, adjusted downward for leases that have terminated. ELA estimates that from 1988 through the end of 1997, equipment leasing volume in the United States will be approximately $1.4 trillion. Sellers of Seasoned Leases are believed to have one or more of the following objectives in seeking and consummating such a sale: (i) realization of book profit by selling at a premium to book value because the fair market value of the equipment is above such book value; (ii) removal of the actual or perceived risk of residual loss upon return of equipment by a user at lease expiry; (iii) removal of actual or perceived credit risk from the seller's balance sheet; (iv) repositioning of the seller's tax-motivated investment portfolio resulting from a change in tax law, change in the seller's profit base or outlook, or the seller becoming subject to alternative minimum tax; and (v) freeing up capital for investment in core business activities (which may include making new lease investments in the case of leasing company sellers). The Company believes that the relative lack of competition in the market for large ticket Seasoned Leases is due to the fact that Seasoned Lease transactions often fail to meet many leasing companies' primary objectives. Many large equipment leasing companies are subsidiaries of financial institutions that have tax deferral objectives and are adverse to taking substantial equipment residual exposure. Many new equipment leases are highly structured and have a very long effective term to maximize the economic benefit of tax deferral and minimize residual value risk. In particular, most new equipment leases are designed to allow the initial lessor to recover most or all of its investment from contractual rent payments to be received under the lease. The Company believes that most large ticket Seasoned Lease acquisitions are completed in the final one-third of the term of an equipment lease, when the fair value of the equipment subject to lease is more likely to exceed the seller's book value. When acquired at a relatively late stage in the lease term, these large ticket Seasoned Leases have fewer tax deferral attributes (due to the short term) and more residual value exposure (because only a small amount of the secondary market purchaser's investment will be repaid from the remaining contractual rents) than new large ticket leasing deals. STRATEGY The Company intends to focus principally on the acquisition, management and remarketing of large ticket Seasoned Leases to provide attractive total returns consistent with prudent risk management. The Company will also pursue related equipment lease opportunities that complement its large ticket Seasoned Lease acquisition activity. The Company will employ the following strategies to achieve its objectives: Capitalize on Inefficiencies in the Market for Seasoned Leases. No formal market exists for prospective sellers of large ticket Seasoned Leases. Compared to the market for new equipment leasing, there are relatively few participants in the secondary market focusing principally on large ticket Seasoned Lease transactions, and even fewer considering transactions involving as many different equipment types as does the Company. The Company believes most companies engaged in equipment leasing have not actively pursued Seasoned Lease transactions primarily because these transactions may not meet, or may conflict with, the principal objectives of such companies (primarily to obtain tax deferral while avoiding residual value risk). As a result of this relative lack of competition, the Company has been and expects to continue to be able to find large ticket Seasoned Lease acquisition opportunities on attractive terms. Utilize the Experience and Resources of Management to Source Seasoned Lease Opportunities. The Company believes that the experience and creativity of senior management and its existing network of referral sources will provide the Company with a steady flow of Seasoned Lease acquisition opportunities. Potential sellers include companies that are no longer making lease investments; public companies that may from time to time seek out accounting gains to contribute to reported earnings; companies that could benefit from recovering and redeploying invested capital; banks and other financial institutions that have been parties to consolidation transactions and seek to dispose of assets that are not consistent with the surviving company's objectives; and companies that desire to limit residual value risk from leases held. The Company's willingness to work with a potential seller to identify its objectives and to creatively develop transaction structures, such as residual value option transactions and residual sharing arrangements, to meet that seller's objectives is in part responsible for the Company's success in sourcing Seasoned Lease acquisition opportunities. The Company also has an extensive referral network of leasing companies, leasing brokers, investment bankers, attorneys, lenders and appraisers that are expected to continue to refer Seasoned Lease acquisition opportunities to the Company. Apply a Disciplined, Value-Based Approach to Lease Investments. The Company uses a disciplined, value-based approach to evaluate Seasoned Lease acquisition opportunities in an effort to maximize return while minimizing credit and residual value risk. Since it began pursuing large ticket Seasoned Lease acquisitions on behalf of the ICON Partnerships in 1996, the Company has generally targeted transactions from which it believes, based on its transaction analysis and industry experience generally, it can achieve a total rate of return of at least 20% per annum, compounded monthly. In evaluating a transaction, the Company considers the type of equipment involved, the creditworthiness of the lessee, the provisions of the lease contract (including the equipment maintenance and return requirements), the time remaining to lease expiry, and management's experience in remarketing such equipment. The Company engages nationally recognized independent appraisers to assist it in determining the value likely to be realized from the leased equipment at lease expiry. In most transactions, the Company will seek out leasing opportunities where the remaining lease term is greater than two years and, on expiry of the lease, at least one-third of the economic useful life of the equipment is likely to remain, based on the equipment age or utilization history. To maximize its remarketing options (and its returns), the Company seeks to avoid investing in equipment that may become technologically obsolete or otherwise of limited utility (perhaps from excessive wear and tear). Also, the Company generally enters into leasing transactions involving equipment types that can be feasibly moved to other locations or are considered essential to the operations of the lessee and either impossible to replace or only replaceable at a significantly higher cost than its fair market value. The Company believes that there is a substantial pool of such leases, many of which involve equipment such as commercial aircraft, marine vessels, other transportation equipment, and telecommunications hardware. The creditworthiness of a lessee is also important because lessees with inadequate financial resources may be unable to afford to comply with the maintenance- and return- condition provisions of the lease contract, thus exposing the lessor to costs associated with repair and return of equipment. A large percentage of the Company's recent acquisitions on behalf of the ICON Partnerships has consisted of the purchase of large ticket Seasoned Leases where the lessee is rated investment grade (or is believed equivalent). Large ticket transactions of this type are expected to represent a majority of the Company's future Seasoned Lease acquisitions. Proactively Manage Lease Investments to Maximize Total Returns. The Company pursues numerous alternatives to maximize realization of residual values through the sale or re-lease of the equipment to the lessee or to a third party. In many cases, the amount of such realization may depend on the extent to which the Company elects to enforce its rights under the lease. In general, the Company also will hold its lease investments until maturity, unless various factors enable the Company to achieve what it believes would be a superior result from disposing of the asset prior to maturity. Senior management and the Company have also had success in working with lessees to restructure leases to achieve greater profitability, while achieving other objectives of the lessee such as lowering periodic payments in exchange for a longer lease term, which could benefit the Company to the extent that the present value of the revised payment schedule is greater than the original payment schedule. Pursue Related Opportunities Complementing Seasoned Lease Acquisitions. To complement its large ticket Seasoned Lease activity, the Company intends to expand its volume of small ticket financing transactions by adding sales and marketing people to expand its referral network, and placing additional emphasis on originating new lease opportunities by creating vendor programs. The Company also may occasionally encounter opportunities to acquire companies that operate in the large ticket or small ticket leasing business. These companies may have portfolios of equipment subject to lease or relationships that result in an additional volume of leasing or financing opportunities. To the extent that such acquisitions can be completed at reasonable cost to the Company and can immediately or over time add to the Company's portfolio of lease investments, the Company will consider such transactions. In addition, the Company may pursue an expanded presence in Europe. The Company believes that many European markets have less competition for attractive equipment leasing transactions. In the United Kingdom, for example, recent accounting and regulatory changes have, in the opinion of the Company, made the leasing of equipment a more attractive option relative to purchasing than it had been before such changes. To the extent that such international equipment leasing transactions can be structured to mitigate or remove certain risks, such as currency exchange, protecting a lessor's interest through equipment lien recordation, and taking advantage of beneficial local laws, the Company believes that the leasing industry in Europe may present significant opportunities. ---------------- ICON Holdings is a Delaware corporation incorporated in May 1996 for the purpose of acquiring ICON Capital Corp., and an affiliate thereof. The Company's principal executive offices are located at 600 Mamaroneck Avenue, Harrison, New York 10528 and its telephone number at such address is (914) 698-0600. See "The Company." THE OFFERING Common Stock offered by the Company......................... 10,000,000 Shares Common Stock to be outstanding after the Offering............. 14,139,095 Shares (1)(2)(3) Use of Proceeds................. To acquire Seasoned Leases and to enter into other equipment financing transactions (approximately 80-85% of the net proceeds), to redeem 4,000,000 shares of Common Stock for $7.2 million and other consideration, to repay indebtedness of approximately $4.8 million, and for general corporate purposes, including, but not limited to, working capital. See "Use of Proceeds" and "Certain Transactions." Proposed Nasdaq National Market symbol.......................... - -------- ICON (1) Does not include: (i) 2,000,000 shares of Common Stock reserved for issuance under the Company's 1997 Stock Option Plan, of which options to purchase approximately 1,200,000 shares of Common Stock are expected to be granted upon consummation of the Offering at an exercise price per share equal to the initial public offering price; (ii) 200,000 shares of Common Stock reserved for issuance under the Company's 1997 Non-Employee Directors Stock Plan, of which options to purchase 30,000 shares of Common Stock are expected to be granted upon the consummation of the Offering at an exercise price per share equal to the initial public offering price; (iii) 424,173 shares of Common Stock issuable under warrants to be granted to a related party upon the consummation of the Offering at an exercise price per share equal to the initial public offering price; and (iv) 494,868 shares of Common Stock subject to warrants to be granted to the Representative of the Underwriters at an exercise price per share equal to the initial public offering price. See "Executive Compensation--1997 Stock Option Plan," "-- 1997 Non-Employee Directors Plan," "--Employment and Severance Agreements," "Certain Transactions" and "Underwriting." (2) Does not include 4,000,000 shares of Common Stock to be redeemed by the Company simultaneously with the consummation of the Offering. See "Certain Transactions."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001047864_prima_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001047864_prima_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE INDICATED, ALL INFORMATION CONTAINED IN THIS PROSPECTUS: (I) REFLECTS THE ISSUANCE OF (A) 2,700,000 SHARES OF COMMON STOCK TO SUBSTANTIALLY ALL OF THE SHAREHOLDERS OF PRIMA INDUSTRIE S.P.A. ("PRIMA INDUSTRIE") IN EXCHANGE FOR THEIR STOCK INTERESTS IN PRIMA INDUSTRIE AND (B) 300 SHARES OF COMMON STOCK TO JAMES R. CURRIER, SR. AND GIOVANNI CIAMARONI FOR CASH; AND (II) ASSUMES NO EXERCISE OF THE OVER-ALLOTMENT OPTION. THE COMPANY The PRIMA Group International, Inc. (the "Company") is an international provider of software-controlled, robotic, precision laser cutting and welding systems (the "Products"). The Company designs, manufactures and sells two-dimensional ("2-D") Products that cut and weld shapes on a flat surface, and three-dimensional ("3-D") Products that trim, punch, slot and weld shaped or profiled materials. The Company's Products are used in automotive prototype development and the manufacture of consumer durable goods. The Company's customers include major European and North American automotive manufacturers such as BMW, Fiat, Ford, Chrysler, Mercedes-Benz, Nissan, Peugeot, Renault and Volvo. They are also used by Tier One suppliers (suppliers that provide goods and services directly to automotive manufacturers) for the manufacture of automotive components that are incorporated into the vehicles sold by these manufacturers. Prima Industrie and Prima Electronics are ISO 9001 certified, which means that they have each obtained certification under an international protocol that their respective production processes incorporate quality practices, disciplines and checks and balances on a fully documented basis. As part of the certification process, each company has been examined by a member of the International Organization for Standardization to assess compliance with the international protocol. The certification provides assurances to customers that the required goods or services will fully meet customer expectations. See discussion under "Business -- Quality." The Company believes that it has a leading position in the market for the manufacture and sale of 3-D precision laser cutting and welding systems. The Company's advantages are based on proprietary processes and technologies for automated robotic systems that integrate traditional machine tool equipment with lasers, laser optics and computer technology. These robotic systems utilize electronic process control systems that interface with computer-aided engineering/computer-aided design/computer-aided manufacturing ("CAE/CAD/CAM") software to convert engineering designs into instructions for machinery operations. The Company believes, based upon its own analysis of industry projections, that, by 2015, an additional 160 automotive assembly plants will be constructed outside Europe, the United States and Japan, representing an increase of 80% over the current 200 assembly facilities worldwide. These new plants and their Tier One suppliers will be equipped with advanced factory automation systems, potentially including those provided by the Company, in place of traditional manufacturing and assembly technologies. The Company expects vigorous demand for its Products in developing markets, as well as accelerating demand within Europe and the United States, as older automotive assembly operations are retrofitted, relocated or replaced. The Company, through Prima Electronics S.p.A. ("Prima Electronics"), its majority-owned subsidiary, designs and manufactures state-of-the-art software and hardware-based industrial process controls for the Company's equipment and for other industrial equipment manufacturers. Industrial process controls function as the "brains" of machinery, directing all aspects of its operation. Prima Electronics' primary outside customer is Atlas Copco Airpower NV ("Atlas Copco"), one of the world's leading suppliers of power generation and pneumatic equipment. In 1997, sales to Atlas Copco represented approximately 63% of the total revenues of Prima Electronics. All such sales were made pursuant to a supply contract between Prima Electronics and Atlas Copco. The supply contract covers the supply of products until December 31, 2001. Prior to December 31, 2001, the contract may be terminated only by the mutual consent of Prima Electronics and Atlas Copco, unless Prima Electronics fails to perform as required under the supply contract. After December 31, 2001, either party has the right to terminate the contract on 18 months' notice. See "History of the Company -- Prima Electronics." The Company's goal is to exploit its technological superiority to become the leading international provider of fully integrated, robotic systems for the precision cutting and finishing stages of the manufacturing process. The Company also intends to become a recognized supplier of industrial process controls for the machine tool industry. The specific elements of the Company's strategy to achieve these objectives are as follows: (Bullet) Achieve vertical and horizontal integration through strategic acquisitions and joint ventures; (Bullet) Enhance the Company's Products for use in higher volume production environments; (Bullet) Maintain and expand its current market share in 2-D and 3-D Products through aggressive global marketing; (Bullet) Market Prima Electronics' industrial process controls through worldwide distribution channels; (Bullet) Develop, as a discrete profit center, comprehensive warranty and service, training and support, preventive maintenance programs and upgrades for the Company's Products; and (Bullet) Expand the licensing of its technology for the manufacture and sale of the Company's 2-D Products outside Europe. THIS OFFERING <TABLE> <S> <C> Common Stock outstanding prior to this Offering....... 2,700,300 shares Common Stock offered.................................. 2,000,000 shares Common Stock to be outstanding after this Offering.... 4,580,300 shares (1) Use of Offering proceeds.............................. Future acquisitions; equity contribution to subsidiary; marketing and sales promotion; redemption of shares; research and development; non-competition payments to certain officers; and working capital. Nasdaq National Market symbol......................... TPGI </TABLE> - --------------- (1) Reflects the redemption by the Company of 120,000 Shares of Common Stock to be repurchased by the Company with a portion of the proceeds of this Offering. See "Use of Proceeds." SUMMARY CONSOLIDATED FINANCIAL DATA(1) (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, YEARS ENDED DECEMBER 31, ---------------- --------------------------------------------------- 1998 1997 1997 1996 1995 1994 1993 ------ ------ ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Total revenues..................................... $9,734 $6,659 $44,186 $42,315 $38,560 $28,396 $28,779 Operating income (loss)............................ 677 (7) 2,181 1,411 75 (3,798) (1,304) Gain on sale of assets............................. 11 2 441 1,059 -- -- -- Net income (loss) (2).............................. 281 (223) 1,363 1,335 (2,400) (5,270) (765) Pro forma earnings (loss) per share (2)(3)......... .10 (.08) .50 .49 (1.40) (2.70) (.38) Pro forma weighted average common and common equivalent shares outstanding (3)................ 2,700 2,700 2,700 2,700 1,721 1,954 2,033 </TABLE> <TABLE> <CAPTION> MARCH 31, 1998 ------------------------ AS ACTUAL ADJUSTED(4) ------- ------------ <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents......................................... $ 927 $ 9,383 Working capital................................................... 6,195 18,651 Total assets...................................................... 35,192 43,372 Total liabilities................................................. 29,569 25,569 Stockholders' equity.............................................. 5,623 17,803 </TABLE> - --------------- (1) This financial data reflects the financial condition and operations of Prima Industrie prior to the acquisition by the Company of substantially all of the issued and outstanding capital stock of Prima Industrie. (2) Net income includes gain on sale of equipment of $427,000 (net of tax) in 1997 and net gain on sale of subsidiaries of $766,000 (net of tax) in 1996. These items are considered by management to be nonrecurring. The effect on earnings per share of these amounts (net of tax) is $.16 in 1997 and $.28 in 1996. (3) The historical share and per share amounts have been retroactively restated to reflect the exchange of substantially all of the outstanding shares of Prima Industrie for 2,700,000 shares of Common Stock of the Company, which occurred on April 23, 1998. See Note 15 to the financial statements at page F-22. (4) Adjusted to reflect (a) the sale by the Company of 2,000,000 Shares offered hereby at an assumed Offering Price of $8.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company, (b) application of the estimated net proceeds therefrom as described herein, and (c) the acquisition by the Company of substantially all of the issued and outstanding capital stock of Prima Industrie. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001047936_pt_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001047936_pt_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified by the detailed information and the Company's financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. References in this Prospectus to the "Company" and "PT-1" refer to PT-1 Communications, Inc. and its subsidiary, except where the context otherwise requires. Certain technical and other terms used in this Prospectus are defined in the Glossary, which is located at page A-1. THE COMPANY PT-1 is a leading emerging provider of international long distance services to retail customers and telecommunications carriers. The Company currently provides its retail services by marketing prepaid telephone calling cards ("Prepaid Cards"), primarily under the PT-1 brand name, through an extensive network of distributors and believes that its Prepaid Cards are sold in more than 50,000 independent retail outlets throughout the United States. The Company targets retail markets with substantial international long distance calling requirements, and believes that its Prepaid Cards provide consumers with a convenient, attractively priced alternative to traditional presubscribed long distance services. PT-1 has used its significant retail international traffic to negotiate international termination arrangements with attractive rates and develop an efficient telecommunications network, enabling the Company to market its services competitively on a wholesale basis to other telecommunications carriers. The Company believes that it is the eighth largest provider of long distance services in the United States based upon revenues for the three months ended December 31, 1997. During that period, the Company generated revenues and net income of $116.8 million and $2.8 million, respectively. The Company was founded in April 1995 to capitalize on the growing market for international long distance services, and, until recently, operated under the name PhoneTime, Inc. PT-1 initially entered the retail international long distance market through the distribution of Prepaid Cards targeted at ethnic communities. After building significant international traffic, in 1996 the Company began to negotiate reduced transmission rates based upon volume with underlying carriers and began to invest in switching equipment and lease transmission capacity to further reduce its cost of service as a percentage of revenues. In August 1996, the Company began to leverage its significant volume of international traffic by selling international long distance services on a wholesale basis to other carriers. For the nine months ended December 31, 1997, revenues from retail sales and from wholesale sales were $258.7 million and $45.1 million, respectively. The Company believes its competitive strengths are its (i) established Prepaid Card brand names, (ii) extensive distribution infrastructure, including more than 50,000 retail outlets, (iii) substantial experience in identifying, targeting and marketing to communities and markets with significant international long distance usage, (iv) position as a leading provider of telecommunications traffic to various international destinations and (v) efficient telecommunications network. PT-1 believes that its competitive strengths will enable it to continue to profitably increase its retail and wholesale customer bases and its traffic volume and negotiate lower telecommunications costs. The Company's retail customers can use its Prepaid Cards at any touch tone telephone by dialing an access number, followed by a personal identification number (a "PIN") assigned to each Prepaid Card and the telephone number the customer wishes to reach. The Company's switch completes the call, and its debit card platform ("Debit Card Platform") reduces the Prepaid Card balance during the call. The Company offers Prepaid Cards that can be used to access the Company's network by dialing an 800 number or, in specific metropolitan markets, local area calling cards ("LAC Cards") that only require a local call. PT-1 believes that customers typically use its Prepaid Cards as their primary means of making long distance calls due to (i) attractive rates, (ii) reliable service, (iii) the ease of monitoring and budgeting their long distance spending and (iv) the appealing variety of Prepaid Cards offered by the Company to different market segments. The Company currently offers 24 Prepaid Cards and plans to introduce up to 10 additional Prepaid Cards by June 1998, including additional LAC Cards and Prepaid Cards targeted at specific ethnic communities ("Country Calling Cards"). During the three months ended December 31, 1997, the Company's eight largest sources of revenue (in declining order) were from traffic to Mexico, the Dominican Republic, Colombia, Haiti, Egypt, Jamaica, India and Ecuador. In July 1995, the Company introduced its first Prepaid Card, The PT-1 Card, targeted initially at ethnic communities in the New York metropolitan area. The Company issued its first LAC Card, The New York Phone Card, in July 1996. Since February 1997, the Company has introduced seven new LAC Cards (The New Jersey Phone Card, The Florida Card, The Boston Card, The Detroit Card, The Connecticut Card, The Chicago Card and The D.C.-Maryland-Virginia Card), the Alo Brasil and Hola Mexico Country Calling Cards, aimed at the Brazilian and Mexican communities in the United States, as well as The PT-1 Worldwide Phone Card and other Prepaid Cards. As of December 31, 1997, PT-1's telecommunications network included (i) four Nortel DMS250 Supernode switches, located in Edison, New Jersey (installed in November 1996 and operated for the Company by a third party), Flushing, New York (installed in August 1997), Jersey City, New Jersey (installed in November 1997) and Miami, Florida (installed in December 1997), (ii) Debit Card Platforms located in Edison, New Jersey (owned and operated for the Company by a third party), Jersey City, New Jersey and Flushing, New York, (iii) network points-of-presence ("POPs") in 31 cities in 14 states and (iv) leased transmission lines connecting the network POPs with the Company's switches. The Company purchases transmission capacity from approximately 35 local, domestic and international long distance carriers, including WorldCom, Inc. ("WorldCom") and Teleport Communications Group, Inc. ("Teleport") under various arrangements (including leased line, fixed cost arrangements and per-minute resale arrangements). In addition, the Company recently opened an office in the United Kingdom and expects to install a Nortel DMS300 switch in that country by the end of the third quarter of 1998. The Company intends to further expand its international network by installing additional switches and network POPs, entering into additional transmission agreements with foreign carriers and investing in undersea fiber optic cables. PT-1 believes that, by implementing the following strategies, it will (i) increase its market share of international minutes in existing and new geographic markets, thereby increasing revenues and (ii) reduce its operating costs as a percentage of revenues, thereby improving gross margins and enhancing its ability to provide competitive pricing. Continue to Target Consumers with Significant International Long Distance Usage. PT-1 primarily targets consumers with significant international long distance usage by delivering reliable international long distance services at attractive rates. The Company believes that the $61.3 billion international long distance market (as estimated by TeleGeography (1997/1998)) provides an appealing opportunity because of its higher revenues and gross profits per minute and its higher expected growth rate relative to the domestic long distance market. The Company believes its brand awareness, its large number of international retail customers and its international network traffic and infrastructure will enable it to continue to successfully market international long distance service originating in countries in North America, Latin America, Europe and in other countries to which PT-1's domestic customers direct a substantial volume of calls. Increase Retail Distribution of the Company's Products. The Company estimates that its Prepaid Cards are currently sold in more than 50,000 independent retail outlets, providing customers with convenient access to PT-1's services. The Company intends to increase this retail distribution infrastructure by expanding the number of distributors and retail outlets within existing geographic markets, entering new geographic markets and by bringing certain of its distributors in-house. The Company initially concentrated its marketing and distribution efforts in the New York metropolitan area but has expanded and is continuing to expand its market penetration in other regions of the United States with significant ethnic populations. The Company has recently opened a sales office in Toronto, Ontario to market its Prepaid Cards to Canadian residents. Expand Offerings of Retail Products and Services. PT-1 intends to introduce new LAC Cards in additional metropolitan areas, offer additional Country Calling Cards and market other innovative Prepaid Cards, further segmenting the Prepaid Card market. PT-1 also has recently begun to market "dial around" long distance service in certain target markets. The Company intends to expand its "dial around" business and intends to begin marketing presubscribed long distance service. The Company believes that its brand awareness, large number of international retail customers and its ability to provide attractively priced long distance services will enable it to successfully market convenient, attractively priced dial around and presubscribed long distance service to new and existing customers. Expand PT-1's International Telecommunications Network. PT-1 intends to continue to expand the international reach of its telecommunications network in order to reduce transmission and other operating costs per minute. PT-1 seeks to establish substantial traffic volume in a geographic region before investing in network infrastructure in that region, in order to reduce the risks associated with capital investment and maximize the efficiency of network expansion. The Company intends to expand its network to include (i) additional switches, Debit Card Platforms and network POPs in strategic geographic regions in the United States, Europe and elsewhere, (ii) additional leased capacity connecting the Company's switches and network POPs, thereby enabling the Company to originate and terminate an increased portion of its long distance services on its own network ("on-net") and (iii) access to undersea fiber optic cables to lower transmission costs with respect to certain segments of its international traffic. The Company believes its United Kingdom office will facilitate its negotiation of additional direct termination agreements with other United Kingdom and European based carriers and serve as a base for expanded wholesale and retail marketing activities. The Company also intends to negotiate additional termination arrangements with foreign carriers in countries where the Company terminates significant traffic, concurrently with the investment in undersea fiber optic cables. Increase Wholesale Carrier Revenues. The Company believes that its increasing volume of international retail traffic will allow it to continue to negotiate more favorable transmission rates and to negotiate attractive direct termination arrangements with foreign carriers. These factors, together with the continued expansion of the Company's telecommunications network, are expected to reduce the Company's transmission cost per minute thereby enabling PT-1 to offer attractive wholesale rates to other carriers. The Company intends to continue to increase wholesale carrier revenues, allowing it to improve the usage and the efficiency of its network and to further reduce the Company's overall transmission cost per minute. The Company's principal executive offices are located at 30-50 Whitestone Expressway, Flushing, New York 11354, and its telephone number is 718-939-9000. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company.... share --------- Common Stock offered by the Selling Shareholders.......................... share -------- Common Stock to be outstanding after the Offering.......................... share Use of proceeds........................ To fund expansion of the Company's network, repay indebtedness and for additional working capital and general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market Symbol................................ PTIC </TABLE> - -------------------- (1) Excludes (i) options outstanding as of April 30, 1998 to purchase 625,500 shares of Common Stock at a weighted average exercise price of $ per share (of which 213,489 are vested and exercisable as of April 30, 1998); (ii) warrants issued to certain employees of InterExchange, Inc. ("InterExchange") and outstanding on the date hereof to acquire shares of Common Stock with a fair market value of $3.0 million at an aggregate exercise price of $1.0 million (one-third of which vest and become exercisable upon completion of the Offering); (iii) shares of Common Stock valued at $850,000 issuable to certain employees of the Company pursuant to the Pannullo Transactions (as defined in "Certain Transactions"); and (iv) 2,874,500 shares of Common Stock available for issuance under the Company's 1997 Stock Incentive Plan. See "Dilution," "Management--Stock Incentive Plan," "Description of Capital Stock--The InterExchange Warrants" and "Certain Transactions--Transactions with The Interactive Telephone Company, Godotsoft, L.L.C. and Joseph Pannullo." SUMMARY FINANCIAL AND OTHER DATA <TABLE> <CAPTION> NINE MONTHS PERIOD FROM FISCAL ENDED DECEMBER 31, INCEPTION(1) TO YEAR ENDED ----------------------- MARCH 31, 1996 MARCH 31, 1997 1996 1997 --------------- -------------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND CERTAIN OTHER OPERATING DATA) <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues(2)............. $ 11,922 $ 169,635 $ 106,973 $ 303,840 Cost of services........ 13,812 166,184 108,188 278,782 ---------- ---------- ---------- ---------- Gross profit (loss)..... (1,890) 3,451 (1,215) 25,058 Operating expenses: Selling and marketing expenses.............. 318 1,762 1,231 2,856 General and administra- tive expenses......... 704 2,613 1,537 7,023 Stock based compensa- tion (3).............. -- -- -- 2,276 ---------- ---------- ---------- ---------- Total operating expenses............... 1,022 4,375 2,768 12,155 Operating profit (loss)................. (2,912) (924) (3,983) 12,903 Earnings (loss) before income taxes........... (2,910) (820) (3,916) 12,876 Income tax provision.... -- -- -- 3,590 ---------- ---------- ---------- ---------- Net earnings (loss)..... $ (2,910) $ (820) $ (3,916) $ 9,286 ========== ========== ========== ========== Net earnings (loss) per share (4): Basic................. $ $ $ $ Diluted............... Weighted average number of common shares and common share equivalents outstanding............ 71,048,600 70,705,413 71,048,600 46,529,346 OTHER FINANCIAL DATA: Gross profit (loss)..... $ (1,890) $ 3,451 $ (1,215) $ 25,058 Gross margin............ (15.85)% 2.03 % (1.14)% 8.25% EBITDA(5)............... $ (2,903) $ (849) $ (3,961) $ 13,941 EBITDA margin........... (24.35)% (0.50)% (3.70)% 4.59% Capital expenditures.... $ 74 $ 1,489 $ 918 $ 17,583 Cash provided by operating activities... 765 13,514 8,714 20,844 Cash used in investing activities............. (74) (3,630) (4,048) (23,911) Cash provided by (used in) financing activities............. 3 (5,000) -- 1,967 OTHER OPERATING DATA: Number of PINs activated (in thousands)......... N/A 31,087 20,845 44,384 Minutes terminated (in thousands) (6)......... 38,977 615,006 377,571 1,136,790 Revenues per minute terminated (2)......... .31 .28 .28 .27 Number of employees at end of period.......... 22 69 50 157 Number of switches at end of period.......... 0 1 0 3 </TABLE> <TABLE> <CAPTION> AS OF DECEMBER 31, 1997 (UNAUDITED) ------------------------ ACTUAL AS ADJUSTED(7) -------- -------------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................. $ 4,477 $50,349 Working capital........................... (24,764) 26,708 Property and equipment, net............... 18,525 18,525 Total assets.............................. 65,683 111,555 Long term debt, less current portion...... 5,000 -- Total shareholders' equity (deficiency)... (3,833) 42,039 </TABLE> - -------------------- (1) The Company was incorporated in New York on April 21, 1995 and had limited operations until July 1995. (2) Revenues are recorded net of distributor discounts. (3) Relates to (i) the grant to Mr. Pannullo, on May 9, 1997, of options to purchase 1,048,600 shares of Common Stock exercisable at a nominal price and (ii) the grant to certain other employees of the Company of options to purchase shares of Common Stock with a value of $850,000, exercisable at a nominal price. See "Certain Transactions--Transactions with The Interactive Telephone Company, GodotSoft, L.L.C and Joseph Pannullo." (4) See Note 1 to the Company's financial statements for an explanation of the method used to determine the number of shares used in computing net earnings (loss) per share and weighted average number of common shares and common share equivalents. (5) EBITDA consists of earnings (loss) before interest, income taxes, depreciation and amortization. EBITDA is a measure commonly used in the communications industry to analyze companies. EBITDA is not a measure of financial performance under generally accepted accounting principles, is not necessarily comparable to similarly titled measures of other companies and should not be considered as an alternative to net income as a measure of operating performance nor as an alternative to cash flow as a measure of liquidity. See the Company's Financial Statements included elsewhere in this Prospectus. (6) "Minutes terminated" represents minutes billed by underlying carriers for terminating the Company's long distance traffic. (7) Adjusted to reflect the sale of shares of Common Stock by the Company at an assumed price of $ per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001048181_united_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001048181_united_prospectus_summary.txt
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+PROSPECTUS SUMMARY SIMULTANEOUSLY WITH AND AS A CONDITION TO THE CLOSING OF THE OFFERING, UNITED OILFIELD SERVICES, INC. (THE "COMPANY") WILL ISSUE TO THE HOLDERS OF THE OUTSTANDING EQUITY SECURITIES OF UNITED WELLHEAD SERVICES, INC. ("WELLHEAD"), FLARE KING, INC. ("FLARE KING") AND HI-TECH COMPRESSOR COMPANY, L.C. ("HI-TECH") SHARES OF COMMON STOCK IN EXCHANGE FOR THE OWNERSHIP INTERESTS OF SUCH HOLDERS IN SUCH COMPANIES (THE "REORGANIZATION"). WELLHEAD, HI-TECH AND FLARE KING ARE AT TIMES REFERRED TO HEREIN INDIVIDUALLY AS A "FOUNDING COMPANY" AND COLLECTIVELY AS THE "FOUNDING COMPANIES." UNLESS THE CONTEXT INDICATES OTHERWISE, ALL REFERENCES TO THE "COMPANY" HEREIN INCLUDE THE FOUNDING COMPANIES. THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE PRO FORMA COMBINED AND HISTORICAL FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THE COMPANY Upon consummation of the acquisition of the Founding Companies, the Company will be a diversified energy service and manufacturing company that provides a variety of services and equipment to the exploration, production and transmission sectors of the oil and gas industry, with each Founding Company operating its business as a separate wholly owned subsidiary of the Company. The Founding Companies are engaged principally in the manufacture, reconditioning and distribution of wellhead equipment for the oil and gas industry, mainly the drilling, exploration and production segment (Wellhead), the manufacture of flare tips and ignition systems for plant production facilities (Flare King) and the assembly of rotary screw compressor units to enhance the production of oil and gas wells (Hi-Tech). The Reorganization will be effected simultaneously with and as a condition to the closing of the Offering. WELLHEAD. The operations of Wellhead consist of the manufacture, reconditioning, distribution, maintenance and sale of oilfield equipment and components, principally wellhead equipment, valves, drilling spools and manifolds. Wellhead obtains such equipment and components by acquiring and reconditioning used items, by manufacturing items at its facilities or by acquiring new products directly from manufacturers. Wellhead also reconditions for a fee out-of-service equipment for various oilfield concerns and performs onsite installations and repairs. FLARE KING. Flare King designs, manufactures, installs and services flare stacks and related ignition, reporting and control devices and systems to control the onshore and offshore burning of various waste gas compounds. Full-time experts qualified and trained in the science of gas flaring and full manufacturing facilities permit Flare King to respond quickly to specific customer needs both in developing appropriate flare systems and in installing and servicing such systems. Flare King also maintains a fleet of rental flare equipment to satisfy customer requirements during maintenance or construction or pending permanent installation. HI-TECH. Hi-Tech provides a broad range of natural gas compression equipment to customers principally in Louisiana, Texas, New Mexico, Oklahoma, Colorado and Wyoming. Hi-Tech also provides rental operations and maintenance services to its customers. As of September 30, 1997 Hi-Tech had a fleet of nine compression rental units with an aggregate capacity of approximately 500 horsepower. Hi-Tech's products and services are essential to the production, transportation, processing and storage of natural gas and are provided primarily to energy producers and processors. OFFICES. The Company, incorporated in Texas in October 1997, maintains its principal executive offices at 615 Upper North Broadway, Suite 950, Corpus Christi, Texas 78477 and its telephone number is (512) 882-3536. THE OFFERING <TABLE> <CAPTION> <S> <C> Common stock offered by the Company.............................. 1,100,000 shares Common stock to be outstanding after the Offering(1).................... 4,218,750 shares Use of Proceeds...................... To repay a portion of the indebtedness of the Founding Companies, to finance an expansion of the Company's sales and marketing operations, to expand inventory, to expand the compressor fleet, to fund research and development, for future acquisitions and for other corporate purposes, including working capital. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001048184_valley_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001048184_valley_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and consolidated financial statements (including the notes thereto) appearing elsewhere in this Prospectus. Valley Forge Dental Associates, Inc. (the "Company") is a dental practice management company. The Company seeks to affiliate with prominent dental practices in each of the Company's nine existing markets and in other markets which offer opportunities to establish dental networks. When affiliating with dental practices, the Company generally acquires substantially all of the assets of the practices and enters into long-term management services agreements (the "Management Services Agreements") with dental professional corporations to manage the non-clinical aspects of the dental operations. Pursuant to the Management Services Agreements, the Company provides a broad range of services to its affiliated dental practices such as support personnel, management information systems, budgeting and financial reporting, marketing, assistance with recruiting, hiring and training staff, and (except where restricted by state law) equipment procurement and office space. The professional corporations employ the dentists, hygienists and other clinical personnel of the affiliated practices. The Company does not employ dentists to practice dentistry nor does it otherwise control the practice of dentistry at its affiliated dental practices. The Company receives fees pursuant to the Management Services Agreements for the provision of management services to the affiliated dental practices. The Company's fees are based on either (i) the billings of the affiliated dental practice less the amounts necessary to pay professional compensation and other professional expenses or (ii) a license fee per location, reimbursement of the Company's direct costs allocated to the affiliated dental practice, reimbursement of costs and a fee for marketing services and an administrative fee per location. See "Business -- Management Services Agreements." The Company consolidates the results of the dental professional corporations which operate the affiliated practices with those of the Company as required by Emerging Issues Task Force Issue No. 97-2 "Application of FASB Statement No. 94, Consolidation of All Majority-Owned Subsidiaries, and APB Opinion No. 16, Business Combinations, to Physician Practice Management Entities and Certain Other Entities with Contractual Management Arrangements." Accordingly, management services fees represent intercompany transactions, which are adjusted in consolidation. The Company's net patient revenues, because of consolidation, represent the revenues of the affiliated dental practices. As used in this Prospectus, the terms "affiliated practices" and "affiliated dental practices" mean the 22 dental practices operated by the dental professional corporations and managed by the Company pursuant to the Management Services Agreements. This Prospectus contains forward-looking statements that are based on management's estimates, assumptions and projections. Important factors that could cause results to differ materially from those expected by management include the inability of the Company to carry out its growth strategy and the other factors discussed under "Risk Factors." See "Risk Factors" for a discussion of certain factors to be considered by prospective investors. THE COMPANY Valley Forge Dental Associates, Inc. (the "Company") is a leading provider of practice management services to multi-specialty dental practices in selected markets in Colorado, Florida, Georgia, Maryland, New Jersey, Ohio, Pennsylvania and Virginia. The Company seeks to achieve significant local market share by entering into long-term Management Services Agreements with professional corporations operating prominent dental practices, developing networks of affiliated dental practices and pursuing growth through the introduction to the networks of professional management, operational enhancements and acquisitions of the assets of dental practices. The Company provides its networks with operational assistance in staffing and scheduling, purchasing, advertising and marketing, recruiting, quality assurance and managed care contracting. By maintaining a strong focus on professional development and clinical excellence, the Company seeks to create a network of affiliated practices which are the preferred choice of patients and the favored partner for dentists in each market it serves. In addition to general dentistry, the affiliated dental practices provide specialty dental services including orthodontics, oral surgery, endodontics, periodontics and pediatric dentistry. At December 1, 1997, the Company had affiliated with 22 practices with 408 dental chairs and 173 dentists at 55 locations in nine markets. The Health Care Financing Administration estimates that the annual aggregate domestic market for dental services was approximately $45.9 billion for 1996, representing 4.2% of total health care expenditures in the United States and has grown at a compound annual growth rate of approximately 8.6% from 1980 to 1995. The size of the dental services industry is projected to reach $79.1 billion by 2005. The Company believes that the anticipated growth in the dental industry will be driven by several factors including: (i) an increase in the availability and types of dental insurance; (ii) an increasing demand for dental services from an aging population; (iii) the evolution of technology which makes dental care less traumatic and, therefore, more attractive to patients; (iv) an increased focus on preventive and cosmetic dentistry; and (v) the growth of managed care organizations that offer dental coverage to their members. According to the American Dental Association 1995 Survey of Dental Practice, there were approximately 151,000 actively practicing dental professionals in the United States, 88.1% of whom practiced either alone or with one other dentist. In addition, there were approximately 4,700 dental groups of three or more practitioners. According to the National Association of Dental Plans, an estimated 117 million people were covered by dental benefits in 1995. The Company's business strategy is to be the leading dental practice management company in each of its markets. Key elements of the Company's strategy for its networks of affiliated practices include: (i) having the affiliated practices provide local market responsive dental services; (ii) having the affiliated practices focus on the provision of quality patient care; (iii) achieving leading market share by developing comprehensive networks of leading clinical professionals employed by the affiliated practices; (iv) immediately integrating the assets and operations (other than clinical assets) of newly affiliated practices to achieve administrative and financial control and to align professional and operational incentives; (v) pursuing longer-term clinical, operational and financial enhancements to the affiliated dental practices; and (vi) capitalizing on managed care opportunities. The Company's ability to successfully implement its strategy and achieve its strategic goals is subject to a number of risks and uncertainties, including the need to obtain additional financing for acquisitions of assets of dental practices and for costs associated with implementing its management information systems and financial control and administrative procedures at all affiliated practices, including newly affiliated practices. The Company's strategy of acquiring the assets of prominent dental practices will require substantial borrowings and expenditures for related legal and accounting costs. See "Risk Factors -- Possible Inability to Implement Acquisition Strategy, Risks Associated with Integrating Acquisitions." The Company commenced operations in September 1995 with the acquisition of the assets of two dental practices and the establishment of long-term Management Services Agreements with the practices. Between January 1996 and October 1997 the Company acquired the assets of and affiliated with 20 additional practices. The 22 practices affiliated with the Company have an average operating history of 16 years and aggregate pro forma net patient revenues of $42.3 million for the nine months ended September 30, 1997. See "Business -- The Practices" and "Unaudited Pro Forma Financial Information." Since January 1, 1997, the Company has entered five new markets. The Company has generated growth within existing markets principally by enhancing the affiliated practice's ability to optimize the productivity of individual dentists, increase patient volume at existing dental offices, provide a more complete range of specialty dental services and by opening dental offices on a de novo (start-up) basis. THE OFFERING <TABLE> <S> <C> Common Stock being offered................... shares(1) Common Stock outstanding after the offering................................... shares(1)(2) Use of proceeds.............................. To repay certain indebtedness ($ ) and to redeem preferred stock ($ )(3). Proposed Nasdaq National Market Symbol....... VFDA </TABLE> - --------------- (1) Excludes up to shares of Common Stock that may be sold pursuant to the Underwriters' over-allotment option. See "Underwriting." (2) Based on the number of shares outstanding as of January 1, 1998. Excludes 76,000 shares issuable upon exercise of stock options outstanding as of January 1, 1998 at a weighted average exercise price of $8.58 per share and 213,992 shares issuable at a conversion price of $16.00 per share upon conversion of currently convertible subordinated notes issued in connection with an acquisition. In connection with certain acquisitions, assuming an initial offering price of $ , the Company is obligated to issue additional shares of Common Stock. See "Dilution," "Business -- Overview" and "Management -- Stock Option Plan" and Notes 8 and 14 of Notes to the Company's Consolidated Financial Statements. (3) The holders of $ of such indebtedness and of the 8% cumulative preferred stock (the "mandatorily redeemable preferred stock") are Abbingdon Venture Partners Limited Partnership, Abbingdon Venture Partners Limited Partnership -- II, Abbingdon Venture Partners Limited Partnership -- III and Business Capital Limited Partnership -- III, which are investment partnerships, of some or all of which Stephen F. Nagy, Chairman of the Board and a director of the Company and Timothy E. Foster, a director of the Company, are general partners of the general partner, and which are principal stockholders of the Company. See "Risk Factors -- Substantial Portion of Proceeds to be Used for Payments to Principal Stockholders" and "Certain Transactions." ------------------------ Unless otherwise indicated, all information in this Prospectus assumes no exercise of the Underwriters' option to purchase from the Company up to shares of Common Stock to cover over-allotments, if any. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA) <TABLE> <CAPTION> HISTORICAL ------------------ YEAR ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 19, 1995 DECEMBER 31, 1996 ---------------------------------------- (INCEPTION) TO -------------------------- 1997 DECEMBER 31, 1995 PRO FORMA 1996 1997 PRO FORMA ACTUAL ACTUAL AS ADJUSTED(1) ACTUAL ACTUAL AS ADJUSTED(1) ------------------ --------- -------------- ----------- --------- -------------- <S> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net patient revenues....... $ 989 $ 15,448 $ $ 11,061 $ 22,630 $ ----- ------- ------- ------ ------- ------- Cost of Revenues: Operating expenses....... 1,257 14,901 10,538 21,055 Depreciation............. 33 160 131 284 Amortization of intangible assets...... 26 279 201 571 ----- ------- ------- ------ ------- ------- Total Cost of Revenues..... 1,316 15,340 10,870 21,910 ----- ------- ------- ------ ------- ------- Income (loss) from operations........... (327) 108 191 720 Interest expense........... 41 495 341 1,096 ----- ------- ------- ------ ------- ------- Income (loss) before taxes................ (368) (387) (150) (376) Income taxes............... -- 276 203 -- ----- ------- ------- ------ ------- ------- Net income (loss)...... (368) (663) (353) (376) ----- ------- ------- ------ ------- ------- Accretion of mandatorily redeemable common stock.................... -- -- -- 307 -- ----- ------- ------- ------ ------- ------- Dividends on preferred stock.................... 16 64 48 48 -- ----- ------- ------- ------ ------- ------- Net income (loss) applicable to common shares................... $ (384) $ (727) $ $ (401) $ (731) $ ===== ======= ======= ====== ======= ======= Net income (loss) per common share(2).......... $ (.09) $ (.18) $ $ (.10) $ (.18) $ ===== ======= ======= ====== ======= ======= Unaudited pro forma net income (loss) applicable to common shares....... $ $ $ $ $ $ ===== ======= ======= ====== ======= ======= Unaudited pro forma weighted average number of shares(2)............. ===== ======= ======= ====== ======= ======= SELECTED STATISTICAL DATA (AT END OF PERIOD): Number of practices........ 2 4 22 4 19 Number of dentists......... 14 53 173 57 122 Number of offices.......... 6 16 55 16 46 Number of markets.......... 2 4 9 4 8 Number of states........... 3 5 8 5 7 </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1997 -------------------------------------------------- (UNAUDITED) PRO FORMA BALANCE SHEET DATA: ACTUAL PRO FORMA(3) AS ADJUSTED(4) -------------- ------------ -------------- <S> <C> <C> <C> Cash and cash equivalents................................ $ 2,138 $ 2,138 $ Working capital.......................................... (4,935) (5,355) Total assets(5).......................................... 36,388 55,531 Long-term debt........................................... 23,807 35,951 Mandatorily redeemable preferred stock................... 928 928 Stockholders' (deficit) equity........................... (834) 2,510 </TABLE> - --------------- (1) Adjusted on a pro forma basis to give effect to acquisitions which occurred during 1996 and 1997 as if such acquisitions had occurred as of the beginning of the respective periods. These adjustments also include adjustments to further give effect to the reduction in interest expense and dividends on the Company's mandatorily redeemable preferred stock resulting from the assumed use, as of the beginning of the respective periods, of the estimated net proceeds of the offering being made hereby, to retire outstanding debt and redeem the mandatorily redeemable preferred stock as described under "Use of Proceeds." The pro forma statement of operations data do not purport to represent what the Company's results of operations would have been if such acquisitions had occurred as of the beginning of the respective periods or to project the Company's results of operations for any future period. See "Unaudited Pro Forma Financial Information." (2) For information concerning the number of shares used in the computation of net income (loss) per common share, see Note (g) of Notes to the "Unaudited Pro Forma Combined Statement of Operations" included under "Unaudited Pro Forma Financial Information" and Note 2 of Notes to the Company's Consolidated Financial Statements. (3) Adjusted on a pro forma basis to give effect to acquisitions which occurred subsequent to September 30, 1997 as if they had occurred as of September 30, 1997. (4) Adjustments on a pro forma as adjusted basis include all pro forma adjustments and further give effect to the sale of shares of Common Stock offered hereby and the application of the estimated net proceeds therefrom as described under "Use of Proceeds." See "Unaudited Pro Forma Financial Information."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001048275_geneva_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001048275_geneva_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..d3b5d772a1fc48015e82e9c096df64a7928b1bc7
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to, and should be read in conjunction with, the more detailed information and Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated herein, the information in this Prospectus does not give effect to (i) the Representatives' Warrants or the exercise thereof; (ii) the Underwriters' over-allotment option or the exercise thereof; (iii) up to 375,000 shares of Common Stock reserved for issuance upon the exercise of options which may be granted pursuant to the Company's 1997 Stock Option Plan (the "1997 Plan"), none of which have been granted to date; and (iv) 375,000 shares of Common Stock reserved for issuance upon the exercise of options granted under the Company's Premier Option Plan (the "Premier Plan"). Except as otherwise indicated, the information herein reflects the consummation of the Exchange (as hereinafter defined). As used herein, the term "year" or "fiscal year" refers to the Company's fiscal year ending December 31. As used herein, the term "Company" refers to PMCC Financial Corp., a Delaware corporation, its wholly-owned subsidiary, Premier Mortgage Corp., a New Jersey corporation ("Premier"), the subsidiaries of Premier and the predecessors of the foregoing. This Prospectus contains certain forward-looking statements that involve certain risks and uncertainties. The Company's actual results could differ materially from those anticipated in such forward-looking statements as a result of certain factors, including those set forth in "Risk Factors." The Company PMCC Financial Corp. is a specialty consumer financial services company providing a broad array of residential mortgage products to customers ranging from prime credit borrowers seeking "conventional" or FHA/VA loans, to persons who cannot so qualify, i.e., so-called "B," "C" and "D" or "sub-prime" credit borrowers, seeking "non-conventional" loans. Since mid-1996, the Company has expanded and diversified its mortgage banking activities by opening a fully-staffed wholesale division, significantly increasing its "B," "C" and "D" mortgage originations and establishing a program to provide short-term funding to independent real estate agencies for one-to-four family residential rehabilitated properties. The Company's primary mortgage banking business objectives are to continue to offer a full range of mortgage products to all types of borrowers and to generate positive cash flow by selling substantially all originated loans for cash to institutional investors, usually without recourse, within a short period after such loans are originated, thereby reducing exposure to interest rate and credit risks. For the year ended December 31, 1996 and for the nine months ended September 30, 1997, the Company has had less than $50,000 of credit losses in each period from its mortgage banking activities. The Company has experienced significant growth in its mortgage banking activities in recent years, originating $47 million in mortgage loans in 1994, $71 million in mortgage loans in 1995, $133 million in mortgage loans in 1996 and $208 million in mortgage loans in the nine months ended September 30, 1997. For the nine months ended September 30, 1997, sub-prime loans originated by the Company accounted for 16% of its total mortgage originations. For its fiscal years ended December 31, 1995 and 1996 and for the nine months ended September 30, 1997, the Company had revenues from its mortgage banking activities of $3.4 million, $6.8 million and $10.1 million, respectively. There can be no assurance that the Company's historical rate of growth from its mortgage banking activities will continue in future periods. The Company originates residential first mortgages in New York and New Jersey by a staff of 31 experienced retail loan officers (as of September 30, 1997) who obtain customers through referrals from local real estate agents, builders, accountants, financial planners and attorneys, as well as from direct customer contact via advertising, direct mail and promotional materials. The Company's wholesale division originates mortgage loans through independent mortgage bankers and brokers, who submit applications to the Company on behalf of a borrower. For the nine months ended September 30, 1997, approximately 67% of the Company's mortgage originations were derived from its retail mortgage operations and approximately 33% from its wholesale operations. The Company's revenues from mortgage banking activities are primarily generated from the premiums it receives on the sale of mortgage loans it originates, and from interest earned during the period the Company holds mortgage loans for sale. The Company's mortgage loans, together with servicing rights to these mortgages, are sold usually on a non-recourse basis to institutional investors, in each case within approximately seven to 30 days of the date of origination of the mortgage. In general, when the Company establishes an interest rate at the origination of a mortgage loan, it attempts to contemporaneously lock in an interest yield to the institutional investor purchasing that loan from the Company. By selling these mortgage loans shortly after origination, the Company limits its exposure to interest rate fluctuations and credit risks. Furthermore, by selling its mortgage loans on a "servicing-released" basis, the Company avoids the administrative and collection expenses of managing and servicing a loan portfolio and it avoids a risk of loss of anticipated future servicing revenue due to mortgage prepayments in a declining interest rate environment. The Company also generates income by charging fees for short-term funding to independent real estate agencies for the purchase, rehabilitation and resale of vacant one-to-four family residences in New York City and Long Island, New York. The Company provides this funding to several independent real estate agencies who specialize in the rehabilitation and marketing of these properties. As security for providing the independent real estate agencies with the funding to accomplish the purchase, rehabilitation and resale of the property, title to the properties is held by the Company. The Company's income from this activity is limited to the fees and interest charged in connection with providing the funding and is not related to any gain or loss on the sale of the property. Because the Company holds the title to these properties, for financial reporting purposes the Company records as revenue the gross sales price of these properties when the properties are sold to the ultimate purchasers and it records cost of sales equal to the difference between such gross sales price and the amount of its contracted income pursuant to its contracts with the independent real estate agents. From the commencement of this activity on September 1, 1996 through December 31, 1996, the Company completed 35 transactions and recorded revenues of $5.1 million and cost of sales of $4.8 million. During the nine months ended September 30, 1997, the Company completed 118 such transactions and at September 30, 1997, the Company had 140 properties in various stages of rehabilitation and awaiting resale. The Company's revenues and costs of sales from this activity for the nine months ended September 30, 1997 were $17.5 million and $16.5 million, respectively . Although the Company expects to continue this activity in its markets, there can be no assurance that the Company's historical rate of growth of this activity will continue in future periods. (See "Risk Factors -- Potential Losses Incurred From the Funding of the Purchase, Rehabilitation and Resale of Residential Real Estate"; and "Possible Fluctuations in Quarterly Performance"). The growth of the Company's mortgage lending to "B," "C" and "D" credit borrowers reflects the establishment, in April 1997, of the Company's sub-prime lending division with experienced personnel, increased customer demand for sub-prime mortgage products and the availability of capital to the Company for these mortgage banking products. In most cases, "B," "C" and "D" credit borrowers have substantial equity in their residences, and, while some of these sub-prime customers have impaired credit, such customers also include individuals who seek an expedited mortgage process and persons who are self-employed or, due to other circumstances, have difficulty verifying their income. The Company believes that the demand for loans by "B," "C" and "D" credit customers is less dependent on general levels of interest rates or home sales and therefore less cyclical than conventional mortgage lending. The Company's sub-prime mortgage lending activity is subject to certain risks, including risks related to the significant growth in the number of sub-prime lenders in recent years, risks related to certain potential competition (see "Risk Factors -- Competition"), and risks related to credit impaired borrowers (see "Risk Factors -- Mortgage Lending to Sub-Prime Borrowers"). The Company's growth strategy includes the following elements which are subject to risk factors, as set forth in "Risk Factors," beginning on page 7: o increase the Company's "B," "C" and "D" mortgage originations through recruitment of experienced salespersons and acquisition of mortgage brokers or mortgage banks in the Northeast that specialize in mortgage products for this target market; o increase the Company's wholesale mortgage origination business in New York and expand into other states; o expand the Company's retail mortgage origination business into Connecticut, Pennsylvania, Florida and Maryland; o expand the Company's residential, rehabilitation, activities in conjunction with independent real estate agencies outside of New York City and Long Island, New York; and o recruit additional key personnel. Reorganization & Termination of S Corporation Status Premier was incorporated in New Jersey in 1989. From 1992 through the date of this Prospectus, Premier was treated as an S corporation for federal and certain state corporate income tax purposes. Premier received its mortgage banking licenses in New Jersey in 1991 and in New York in 1994. The Company, which was incorporated in Delaware in October 1997, has not yet been capitalized. Prior to the commencement of this Offering, the stockholders of Premier (the "Existing Stockholders") will exchange all of their outstanding shares of Premier for an aggregate 2,500,000 shares of Common Stock (the "Exchange"). As a result of the Exchange, the Company and Premier, which will become a wholly-owned subsidiary of the Company, will be fully subject to federal and state income taxes. See "Reorganization and Termination of S Corporation Status." The Company's principal executive office is located at 66 Powerhouse Road, Roslyn Heights, New York 11577 and its telephone number is (516) 625-3000. Risk Factors Prior to making an investment decision, prospective investors should carefully consider all of the information set forth in this Prospectus, and, in particular, should evaluate the factors set forth in "Risk Factors", beginning on page 7. The Offering Common Stock offered by the Company........................ 1,250,000 shares Common Stock outstanding prior to the Offering................ 2,500,000 shares Common Stock to be outstanding after the Offering............. 3,750,000 shares Use of Proceeds................. Geographic expansion of mortgage banking operations in the Northeast/mid-Atlantic region and Florida; expansion of residential rehabilitation activities in conjunction with independent real estate agencies; upgrade of information systems; Subchapter S corporation distributions to pay shareholder taxes; repayment of debt; and general corporate and working capital purposes. AMEX Symbol..................... "PFC" <TABLE> <CAPTION> At December 31, Balance Sheet Data: ----------------------------------------------- 1992 1993 1994 1995 1996 ------ ------ --------- --------- --------- <S> <C> <C> <C> <C> <C> Receivable from sales of loans ................... -- -- -- $1,357 $ 9,838 Mortgage loans held for sale, net ................ -- $ 32 $ 582 5,537 2,875 Residential rehabilitation properties being financed ........................................ -- -- -- -- 3,246 Total assets ..................................... $473 574 1,098 8,232 17,153 Borrowings under Warehouse Facility .............. -- -- 557 6,476 13,923 Amount due to affiliates and shareholder ......... -- 9 8 465 1,037 Total liabilities ................................ 68 69 633 7,117 15,258 Shareholders' equity ............................. 405 505 465 1,114 1,878 <CAPTION> At September 30, 1997 Balance Sheet Data: --------------------------------- Pro Forma Pro as Forma Adjusted Actual (1) (1)(4) ---------- ---------- --------- <S> <C> <C> <C> Receivable from sales of loans ................... $31,104 $31,104 $31,104 Mortgage loans held for sale, net ................ 19,809 19,809 19,809 Residential rehabilitation properties being financed ........................................ 12,408 12,408 12,408 Total assets ..................................... 64,819 64,819 73,269 Borrowings under Warehouse Facility .............. 55,881 55,881 55,881 Amount due to affiliates and shareholder ......... 3,328 3,328 3,328 Total liabilities ................................ 60,761 63,119 62,119 Shareholders' equity ............................. 4,058 1,700 11,150 </TABLE> - ------------- (1) Prior to the Exchange, Premier was treated as an S corporation for federal and state income tax purposes. See "Reorganization and Termination of S Corporation Status." The pro forma presentation for statement of operations data reflects the provision for income taxes as if Premier had always been a C corporation at assumed effective tax rates of approximately 42%. The pro forma statement of operations data also reflects an increase in officer compensation expense pursuant to proposed employment contracts. The pro forma presentation for balance sheet data reflects the deferred tax liability and the distribution payable to be recorded as of the date of the termination of the S corporation status. (2) Pro forma net income per share has been computed by dividing pro forma net income by the pro forma weighted average number of common shares and share equivalents outstanding including the estimated number of shares that would be necessary to fund a $1 million S Corporation distribution. (3) For the years ended December 31, 1994, 1995 and 1996, the Company estimates that the sub-prime loans accounted for less than 5% of the Company's total originations for those years and are included in conventional loans for those years. (4) Adjusted to give effect to the sale by the Company of the Shares at an assumed initial public offering price of $9.00 per share.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001048448_pamarco_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001048448_pamarco_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e7335285143058458dbd2502030d4d141b230135
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the consolidated financial statements and the notes thereto included elsewhere in this Prospectus. Unless otherwise indicated, all information presented in this Prospectus (i) assumes no exercise of the over-allotment option granted by certain Selling Stockholders to the Underwriters, (ii) reflects the conversion of the Company's Class A Common Stock, Class B Common Stock and Class C Common Stock into Common Stock prior to the consummation of the Offering and (iii) reflects a 2.35-for-1.0 split of the Common Stock prior to the consummation of the Offering. Unless the context otherwise indicates, Pamarco Technologies Inc. and its subsidiaries collectively are referred to herein as the "Company" and all references to the terms "Pamarco," "Dauphin," "Qualtech," "Armotek" and "Diamond" refer to the Company's subsidiaries and not to that of any other organization. THE COMPANY The Company is a leading manufacturer, remanufacturer and provider of a wide range of products and services for graphic arts systems. The Company's primary products include: a variety of replaceable steel-based rolls that are used to transfer ink, carry paper, print images or emboss patterns; printing presses used to print newspapers, inserts, magazines and other written or graphic materials; and related parts and accessories. Depending upon the rate of use and the application, these rolls and parts can require refurbishing or replacement up to several times per year at a cost ranging from $100 to $50,000. These products are sold to more than 5,000 active customers. While no single customer has accounted for more than five percent of the Company's total net sales, the Company's current customers include companies such as Armstrong World Industries, Inc., Baxter International Incorporated, Gannett Company, Jefferson Smurfit Group, Knight-Ridder, Inc., Mobil Oil Corporation, RR Donnelley & Sons, Inc., Ward Machinery Company and Weyerhauser, Inc. These particular customers accounted for an aggregate of 7.2%, 12.4% and 11.6% of net sales for the nine months ended September 30, 1997 and the years ended December 31, 1996 and 1995, respectively. The Company's targeted markets include: original equipment manufacturers of graphic arts systems ("OEMs"); flexible and carton packaging companies; corrugated container companies; decorative product manufacturers; paper manufacturers; newspaper publishers; and commercial printers. The Company has maintained long standing relationships with its customers as a result of its excellent technical capabilities, commitment to outstanding product quality and customer service, and long operating history. The name "Pamarco" is well known in the industry. For the nine month period ended September 30, 1997, approximately 63% of the Company's net sales were generated from replacement product sales and services such as the re-engraving of rolls, remanufacturing of printing presses and the refurbishment of narrow-width rubber rolls. For the same period, a majority of the Company's sales were to existing customers or new customers that had purchased graphic arts systems manufactured by the Company's OEM customers. In addition to existing applications of the Company's products, computerized graphic technologies are generating new applications for graphic arts systems ranging from special run newspapers and inserts, to the development of enhanced consumer packaging and to the greater proliferation of advertising and promotional materials. The Company believes that it is currently one of the top suppliers across most of its principal product offerings within the markets it serves. The Company's operations are conducted through its five operating subsidiaries from 13 facilities located in 10 states in the U.S. and three facilities located in the United Kingdom. Through these facilities, the Company has established a strong presence throughout the U.S. and Europe. For the nine month period ended September 30, 1997, the Company generated approximately 28.4% of its net sales from markets outside the U.S. and the Company believes that there is a significant opportunity to continue increasing its international sales. The Company has experienced significant growth, with net sales increasing 20.7% from $44.5 million for the fiscal year ended December 31, 1995 to $53.7 million for the fiscal year ended December 31, 1996 and 71.0% from $40.1 million for the nine months ended September 30, 1996 to $68.6 million for the nine months ended September 30, 1997. Excluding the effect of business acquisitions, the Company's net sales increased 10.8% and 28.4%, respectively, over the same periods. The Company was formed in July 1994 by an investment group led by Bradford Venture Partners, L.P. ("Bradford") and senior management to purchase all of the outstanding capital stock of Pamarco, Incorporated ("Pamarco") from a subsidiary of Smurfit International, B.V. Pamarco was primarily engaged in the engraving, re-engraving and manufacturing of anilox and embossing rolls. In acquiring Pamarco, Bradford and management sought to use Pamarco as a platform to consolidate the highly fragmented and large supplier base to graphic arts systems operators and manufacturers by capitalizing on Pamarco's industry reputation, management experience and distribution capabilities. According to the U.S. Department of Commerce, shipments of equipment manufactured in the U.S. used in the printing trades for foreign and domestic uses was approximately $3.2 billion in 1996. In addition to the significant growth potential as an industry consolidator, the Company believes that it will benefit from the significant trends currently affecting its markets, including the increasing preference of its customers to do business with a smaller number of better capitalized, more sophisticated suppliers who can offer a wider variety of products and services. Since its acquisition of Pamarco, the Company has completed the acquisitions of four additional businesses which offer products and services that complement those of Pamarco and enhance its ability to serve its targeted markets. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Acquisition Transactions," "Business -- Acquisition History" and "Certain Transactions." The following table sets forth certain information concerning the acquired businesses: <TABLE> <CAPTION> ACQUIRED ACQUISITION YEAR PRIMARY BUSINESS DATE FOUNDED PRINCIPAL PRODUCTS GEOGRAPHIC TERRITORY - --------- ------------- ------- ----------------------------------- ------------------------- <S> <C> <C> <C> <C> Pamarco July 1994 1946 Engraver, re-engraver and North America and Western manufacturer of anilox rolls for Europe. flexographic uses and manufacturer of embossing rolls for the converting industry. Dauphin January 1995 1974 Manufacturer and remanufacturer of U.S. and Western Europe. single-width offset printing presses and folders and supplier of related parts and services. Qualtech* June 1995 1992 Supplier of printing supplies and Western Europe. plates, primarily for flexographic uses. Armotek April 1996 1946 Engraver, re-engraver and Mid-Atlantic States. manufacturer of gravure, anilox and embossing rolls primarily for gravure and flexographic uses. Diamond January 1997 1970 Manufacturer and remanufacturer of U.S. rubber rolls primarily for offset uses and manufacturer of envelope printing presses and dampening units. </TABLE> - --------------- * Subsequently merged with the European subsidiary of Pamarco. BUSINESS STRATEGY The Company's objective is to expand its position as a leading provider of a wide range of products and services for graphic arts systems. The Company has developed a strategy to become a world-wide, single source provider of products and services under the Pamarco name. The Company believes this strategy provides it with a competitive advantage in serving the needs of its targeted markets, including the trend toward supplier consolidation. Key elements of this strategy include: Developing New Products. The Company intends to continue to develop new products that complement its existing product offerings and position it among the technological leaders in its industry. The Company believes that its manufacturing capabilities, distribution resources, industry experience and commitment to quality and technical innovation provide it with the capability to develop new products, offer its customers more complete product offerings and enter new markets. Growth through Acquisitions. The Company is actively pursuing acquisitions of manufacturers and providers of complementary products and services, particularly where the Company can capitalize on its well respected name, management expertise and distribution capability. The Company believes that the highly fragmented industry, the growing customer preference for fewer suppliers and its financial condition, industry relationships, acquisition record and management depth will allow it to achieve its objective of being the leading consolidator of suppliers to the graphic arts industry. Capitalize on Synergies from Acquired Businesses. The Company intends to capitalize on synergies among its acquired businesses to maximize its potential for cost reduction and operating efficiency. Continuously Improve Operating Processes. The Company intends to continue to improve its operating processes by identifying and developing new manufacturing technologies and processes and, if appropriate, identifying new third-party material and component sources. In addition, the Company intends to derive additional cost improvements and capacity enhancements from operational efficiencies within its acquired businesses by utilizing proven processes, systems and know-how across all of its operations. International Expansion. Utilizing the strength of Pamarco's well respected name, the Company seeks to increase its international sales through the development of strategic joint ventures and alliances, the expansion of international sales agents and foreign offices and the completion of additional acquisitions. The Company believes that its European operations provide a strong platform to increase its sales of domestically produced products in its existing international markets and is capitalizing on its name and the experience of its management to expand its presence in emerging foreign markets such as Latin America and Asia which have a growing demand for the Company's products and services. The Company's executive offices are located at the Murray Hill Officenter, 571 Central Avenue, Unit 119, New Providence, New Jersey 07974 and its telephone number is (908)665-8500. THE OFFERING <TABLE> <S> <C> Common Stock offered hereby: By the Company............................. 1,600,000 shares By the Selling Stockholders................ 1,200,000 shares Common Stock to be outstanding after this Offering(1)................................ 6,599,703 shares Use of proceeds by the Company............... To repay bank debt. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Proposed Nasdaq National Market symbol....... "PTIO" </TABLE> - --------------- (1) Excludes 399,911 shares of Common Stock issuable upon the exercise of options outstanding as of December 31, 1997 under the Company's Amended and Restated 1995 Stock Option Plan (the "Stock Option Plan") at a weighted average exercise price of $4.39 per share and 305,089 shares reserved for future grants under the Stock Option Plan. Upon the completion of this Offering, options to purchase a total of 222,047 shares of Common Stock will be immediately exercisable. See "Description of Capital Stock" and "Management--Stock Option Plan." SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION) The following table presents summary consolidated financial data for the Company and, prior to its acquisition by the Company, Pamarco, Incorporated (the "Predecessor"). The income statement data for the Predecessor for the period from January 1, 1994 to July 24, 1994 and for the Company and its subsidiaries for the period from July 25, 1994 to December 31, 1994 and for the years ended December 31, 1995 and 1996 have been derived from the audited Consolidated Financial Statements included elsewhere in this Prospectus. The Income Statement Data for the Predecessor for the years ended December 31, 1992 and 1993 were derived from audited financial statements not included in this Prospectus. The summary consolidated financial data set forth below should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements included elsewhere in this Prospectus. The summary consolidated financial data for the nine months ended September 30, 1996 and 1997 have been derived from the Company's unaudited consolidated financial statements. In the opinion of management, the unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly in all material respects the financial position, results of operations and cash flows as of and for the nine months ended September 30, 1996 and 1997. The results of operations for the nine months ended September 30, 1997 are not necessarily indicative of the results of operations that may be realized for the entire year. <TABLE> <CAPTION> THE PREDECESSOR(1) THE COMPANY ----------------------------- ------------------------------------------------------------------ JAN. 1 THROUGH JULY 25 YEAR ENDED JULY THROUGH YEAR ENDED NINE MONTHS ENDED DECEMBER 31, 24, DEC. 31, DECEMBER 31, SEPTEMBER 30, ------------------ ------- ---------- ------------------------ ------------------------ 1992 1993 1994 1994 1995 1996 1996 1997 ------- ------- ------- ---------- ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> <C> <C> <C> <C> INCOME STATEMENT DATA: Net sales......... $24,492 $25,671 $14,518 $ 13,299 $ 44,492 $ 53,708 $ 40,098 $ 68,566 Gross profit...... 7,485 7,715 4,486 4,254 12,815 15,769 11,781 22,422 Gain on fire(2)... -- -- -- -- 1,300 3,321 3,091 255 Income from operations....... 1,826 1,120 232 1,315 4,846 7,445 6,326 6,753 Income (loss) before taxes..... 1,523 744 (25) 960 3,867 6,345 5,492 5,516 Net income (loss)........... $ 901 $ 290 $ (15) $ 608 $ 2,321 $ 3,744 $ 3,373 $ 3,385 ======= ======= ======= ========== ======= ========== ========== ========== Net income per share............ .27 .61 .85 .78 .68 Shares used in computation of net income per share............ 2,260,655 3,800,610 4,427,775 4,349,789 4,995,649 Supplemental earnings per share(3)......... .78 .70 .62 Shares used in calculating supplemental earnings per share(3)......... 5,292,827 5,214,841 6,130,468 OTHER DATA: Capital expenditures..... $ 1,300 $ 1,275 $ 880 $ 941 $ 4,504 $ 7,095 $ 3,561 $ 5,270 Depreciation and amortization..... 962 1,054 700 397 1,365 1,835 1,334 2,259 EBITDA(4)......... 2,788 2,174 932 1,712 6,211 9,280 7,660 9,012 Cash flows from: Operating activities..... 2,218 669 742 362 2,357 4,986 2,448 3,214 Investing activities..... (1,921) (1,271) (880) (16,047) (9,221) (8,159) (4,644) (13,514) Financing activities..... (253) 527 171 15,812 7,012 4,279 2,641 10,380 </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1996 SEPTEMBER 30, 1997 ------------- ---------------------- AS ACTUAL ADJUSTED(5) <S> <C> <C> <C> BALANCE SHEET DATA: Cash................................................................................. $ 783 $ 1,430 $ 1,430 Working capital...................................................................... 9,481 14,305 15,857 Total assets......................................................................... 48,838 83,251 83,251 Total long-term debt, less current portion........................................... 13,316 21,555 4,613 Total debt........................................................................... 15,269 24,999 6,505 Total liabilities.................................................................... 26,641 49,543 31,049 Total stockholders' equity........................................................... 22,197 33,708 52,202 </TABLE> - --------------- (1) On July 25, 1994, the Company acquired the Predecessor. Accordingly, certain information provided for the years ended December 31, 1992 and 1993 and the period ended July 24, 1994 is not comparable to the Income Statement Data of the Company due to the effects of certain purchase accounting adjustments affecting post-acquisition periods. Predecessor information is based on the Predecessor's historical costs, whereas the Company's information reflects a new cost basis as a result of the acquisition of the Predecessor. (2) During 1995, the Company's facility in Roselle, New Jersey sustained major damage from a fire. Insurance proceeds received in excess of the carrying value of the destroyed facility and machinery and equipment and related expenses, as well as business interruption coverage, were recognized in income in the third quarter of 1995 and each subsequent quarter through the first quarter of 1997, as these amounts were settled with the Company's insurance carrier. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations." (3) Adjusted to give effect as of January 1, 1996 to the sale of 1,600,000 shares of Common Stock offered by the Company hereby and the anticipated use of net proceeds therefrom as set forth under "Use of Proceeds." (4) "EBITDA" is defined by the Company as income from operations plus depreciation and amortization. EBITDA does not present and should not be considered an alternative to net income or cash flow from operations as determined by GAAP and the Company's calculation thereof may not be comparable to that reported by other companies. The Company believes that it is widely accepted that EBITDA provides useful information regarding a company's ability to service and/or incur indebtedness. (5) Adjusted to give effect to the sale of 1,600,000 shares of Common Stock offered by the Company hereby and the anticipated use of net proceeds therefrom. See "Use of Proceeds."
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (I) ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION, (II) ASSUMES THE MID-POINT OF THE INITIAL PUBLIC OFFERING PRICE RANGE, (III) ASSUMES NO EXERCISE OF ANY OUTSTANDING OPTIONS TO PURCHASE COMMON STOCK, (IV) ASSUMES THAT THE TRANSFERS (THE "TRANSFERS") TO THE COMPANY OF THE OPERATING ASSETS AND RECEIVABLES OR STOCK OF 46 SEPARATE PODIATRIC PRACTICES (THESE INITIAL PRACTICES AND ANY ADDITIONAL PRACTICES TRANSFERRED ARE COLLECTIVELY REFERRED TO AS THE "AFFILIATED PRACTICES") IN EXCHANGE FOR SHARES OF THE COMPANY'S COMMON STOCK, CASH AND/OR THE ASSUMPTION OF CERTAIN INDEBTEDNESS HAS OCCURRED AND (V) ASSUMES THAT THE ANESTHECARE ACQUISITION (AS DEFINED BELOW) HAS OCCURRED. THIS PROSPECTUS CONTAINS SUMMARIES WITH RESPECT TO SELECTED TERMS OF CERTAIN DOCUMENTS. PROSPECTIVE INVESTORS SHOULD REFER TO THE ACTUAL DOCUMENTS SUMMARIZED THAT ARE EXHIBITS TO THE COMPANY'S REGISTRATION STATEMENT FOR COMPLETE INFORMATION CONCERNING THE DOCUMENTS. ALL SUMMARIES HEREIN ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO THE COMPLETE DOCUMENTS. THE COMPANY AMP was founded in August 1996 to provide practice management services and comprehensive foot care delivery systems to podiatric practices throughout the United States. AMP will generate revenue by providing to the Affiliated Practices professional management, marketing expertise, equipment and facilities often unavailable to podiatrists with small practices. The initial 46 Affiliated Practices consist of 66 doctors of podiatric medicine ("DPMs") operating 89 offices located in 7 states serving 57 cities. The Company intends to grow rapidly by affiliating with additional podiatric practices and by making available to the Affiliated Practices services that are ancillary and directly related to the Affiliated Practices' podiatric care. The Company has entered into definitive agreements to transfer cash and Common Stock and assume certain liabilities in exchange for stock or certain operating assets and receivables of the Affiliated Practices simultaneous with and as a condition to the closing of the Offering. The DPMs will join regional group practices organized by geographic location (the "Regional Group Practices") and will enter into physician engagement agreements with the Regional Group Practices. AMP will enter into a long-term management agreement with each Regional Group Practice under which AMP will receive fees for its services. The Company will own the operating assets and receivables of the Affiliated Practices, hire the non-physician employees, and otherwise assume the management of each practice. The initial Affiliated Practices were selected based upon their location, size, historical profitability and growth and reputation for high quality care. Based on management's knowledge of the U.S. podiatric industry gained from conversations with DPMs, surveys of the size of other podiatric practice management companies, affiliations and groups, and general industry research, management believes that the initial Affiliated Practices are leading podiatric practices in their respective markets and that, following the Transactions (as defined herein), AMP will be the largest provider of comprehensive podiatric practice management services in the United States. A key element of the Company's strategy is to provide ancillary services and facilities to the Affiliated Practices. These ancillary services and facilities are expected to include, among other things, ambulatory surgical centers, anesthesiology, pathology, radiology, MRIs, EKGs, laboratory work, pharmacy, physical history and exams, physical therapy, orthotics, pain management, home care, diabetic wound care, specialty shoes and other retail products. The Company intends to make available some or all of these ancillary services on a regional basis. The Affiliated Practices in each region will primarily or exclusively use AMP's ancillary services, enabling the Company to control the cost, quality and other important aspects of these services. Pursuant to this strategy, AMP has entered into a definitive agreement to purchase certain assets (including the name "AnestheCare, Inc.") of Pyramid Anesthesiology Group, Inc. (the "AnestheCare Acquisition"), an anesthesiology management services organization currently servicing 15 locations in metropolitan Atlanta, Georgia ("AnestheCare"). AnestheCare's current operations and ongoing business relationships will continue after the AnestheCare Acquisition. In addition, after the acquisition, AnestheCare will provide anesthesiology management services to certain of the Regional Group Practices. The Company is also acquiring Bellaire Surgicare, Inc. and Clayton Outpatient Surgical Center, Inc. (the "Ambulatory Surgery Center Acquisitions"), which own surgical centers. Podiatry is the practice of medicine whereby DPMs provide preventative, diagnostic, surgical and other foot care to patients. Podiatric care ranges from relatively simple procedures, such as treating foot infections, to complex surgeries, such as reconstructing the bones in the foot. Today, there are approximately 10,700 active DPMs throughout the United States handling 55 million patient visits per year. According to the American Podiatric Medical Association, billing receipts of all DPMs in the United States increased to approximately $2.3 billion in 1995 from approximately $1.3 billion in 1987, a compound annual growth rate of 7.7%. AMP's objective is to be the nation's leading provider of management services and comprehensive foot care delivery systems to podiatric practices. To achieve its objective, AMP will employ the following operating strategies: (i) enhance quality of DPM patient care, (ii) achieve operational efficiencies, (iii) develop Regional Group Practice structure, (iv) provide effective marketing, and (v) implement comprehensive foot care delivery systems. AMP intends to grow rapidly by: (i) growing Affiliated Practices, (ii) developing ancillary provider networks, and (iii) affiliating with new practices. THE TRANSACTIONS Of the 46 Transfers of the initial Affiliated Practices, 45 will be accounted for by the Company under SEC Staff Accounting Bulletin No. 48, "Transfers of Non-Monetary Assets by Promoters or Shareholders" ("SAB 48"), such that the non-monetary assets of these initial Affiliated Practices will be received by the Company at the transferor's historical cost basis for accounting purposes. Following the SAB 48 transactions and the consummation of the offering, AMP will consummate the AnestheCare Acquisition and AMP or a subsidiary will acquire the stock of Dr. Jerald N. Kramer, D.P.M., P.C., one of its Affiliated Practices (the "Kramer Transfer", and together with the other Transfers and the AnestheCare Acquisition, the "Transactions"). Dr. Kramer will receive cash in exchange for stock acquired by the Company in the Kramer Transfer, but Dr. Kramer will not enter into a management services agreement or a physician engagement agreement with a Regional Group Practice. The Ambulatory Surgery Center Acquisitions included in the Transfers, the AnestheCare Acquisition and the Kramer Transfer will not be accounted for under SAB 48. Instead, these and all future individual practice affiliations will be accounted for as purchases at fair market value and are expected to result in purchase prices in excess of net assets acquired (goodwill) which will require subsequent noncash amortization charges for intangible assets in the Company's statements of operations. The aggregate consideration to be paid by the Company in the Transfers is approximately $34.5 million, consisting of (i) approximately $18.3 million payable in shares of Common Stock at the initial public offering price attributed to the net non-monetary assets, (ii) approximately $4.7 million in cash and approximately $156,000 of assumed indebtedness attributed to the net non-monetary assets of the SAB 48 Transfers, (iii) $4.3 million in cash attributed to the net monetary assets of the SAB 48 Transfers, (iv) approximately $4.1 million payable in shares of Common Stock at the initial public offering price, approximately $1.0 million in cash, approximately $500,000 of assumed indebtedness attributed to the Ambulatory Surgery Center Acquisitions which are included in the Transfers but not accounted for under SAB 48, and (v) approximately $1.4 million in cash attributed to the Kramer Transfer. The consideration to be paid by the Company to AnestheCare is approximately $4.5 million in cash. Additional consideration of up to $1.5 million in cash and a number of shares of Common Stock equal to $500,000 valued at the initial public offering price will be held in escrow and may be paid to the owners of AnestheCare pending AnestheCare's achievement of certain performance targets over a three-year period beginning January 1, 1998. Proceeds from the Offering will be used to pay the cash portion of the consideration. SHELF REGISTRATION The Company may use shares subject to its shelf registration statement filed with the Securities and Exchange Commission (the "Commission") relating to the separate offering of up to 2,000,000 shares of Common Stock (the "Shelf Registration") to acquire certain operating assets of, or the stock of entities holding certain operating assets of, additional Affiliated Practices and providers of ancillary services and facilities, and to enter into management services agreements with these entities. The Company's principal executive offices are located at 3555 Timmons Lane, Suite 1550, Houston, Texas 77027, and its telephone number is (713) 621-5500. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company..... 3,700,000 shares Common Stock to be outstanding after the Offering.............................. 5,778,322 shares(1) Class B Common Stock to be outstanding after the Offering.................... 650,000 shares(2) Voting rights........................... Holders of Common Stock of the Company are entitled to one vote per share and the holders of Class B Common Stock of the Company are entitled to two-thirds ( 2/3) of a vote per share. The Company's Bylaws authorize a Board of Directors consisting of seven directors. Holders of Common Stock are entitled to elect as a class six members of the Board of Directors and the holders of the Class B Common Stock are entitled to elect as a class the remaining member of the Board of Directors; provided however, that if 65% or more of the Class B Common Stock outstanding on the date of this Prospectus has been converted into Common Stock, the Class B Common Stock shall no longer have the ability to elect a director as a class. The Common Stock and Class B Common Stock possess ordinary voting rights and vote together as a single class in respect of all other corporate matters. See "Description of Capital Stock." Conversion of the Class B Common Stock................................. CONVERSION RATIO. The Class B Common Stock is convertible into Common Stock, at the option of the holder thereof, upon the occurrence of a Conversion Event (as defined below). The maximum number of shares of Common Stock that may be issued upon conversion of the Class B Common Stock is 1,950,000. The Class B Common Stock converts into Class A Common Stock on a share-for-share basis, provided however, that if the Common Stock reaches certain average closing prices over 15 consecutive trading days during the next six years on the Nasdaq National Market, other over-the-counter market or an exchange, as then applicable (the "Trading Market"), then, as set forth below, the conversion ratio with respect to a certain number of shares of Class B Common Stock will immediately change so that such shares will thereafter be convertible into Common Stock at the ratio of three shares of Common Stock for each share of Class B Common Stock (each such share an "Adjusted Conversion Share"). CONVERSION ADJUSTMENT. On the date that the average closing price on the Trading Market for the preceding 15 consecutive trading days (the "Average Price") exceeds 150% of the price to the public in the Offering, 130,000 of the issued shares of Class B Common Stock will immediately become Adjusted Conversion Shares (and subject to the new 3-for-1 conversion ratio). Thereafter, the remaining 520,000 shares of Class B Common Stock will become Adjusted Conversion Shares in four remaining increments of 130,000 shares of Class B Common Stock each (20% of the total number of shares of Class B Common Stock issued) upon the attainment of new Average Prices. The Average Prices applicable to each new 20% increment will equal 120% of each immediately preceding Average Price applicable to the preceding 20% increment. Therefore, the five Average Prices at which each of the five total increments shall automatically become Adjusted Conversion Shares are $16.50, $19.80, $23.76, $28.51 and $34.21, respectively, based upon the initial assumed offering price of $11.00 per share. Upon a Conversion Event, each holder of Class B Common Stock will have the right to have each share of Class B Common Stock converted into that number of shares of Common Stock as each such share is entitled to based upon the Average Prices achieved, if any. Any additional Average Price attained after the occurrence of a Conversion Event will continue to act to create Adjusted Conversion Shares, as applicable. If any shares of Class B Common Stock are outstanding on the sixth anniversary of this Prospectus, such shares will automatically convert into a number of shares of Common Stock based upon the conversion ratio then applicable for such shares. Thus, on such anniversary if a portion of the shares of Class B Common Stock have become Adjusted Conversion Shares and a portion of the shares of Class B Common Stock are not Adjusted Conversion Shares, the Adjusted Conversion Shares shall be converted on a three-for-one basis and the non-Adjusted Conversion Shares shall be converted on a one-for-one basis. Shares of Class B Common Stock held by a holder shall automatically convert into Common Stock immediately prior to the disposition of such shares of Class B Common Stock by such holder. CONVERSION EVENTS. A Conversion Event shall be deemed to have occurred (i) in the event of a disposition of such share of Class B Common Stock by the holder thereof (excluding dispositions to such holder's affiliates), (ii) in the event any person not affiliated with the Company acquires beneficial ownership of 15% or more of the outstanding shares of capital stock of the Company, (iii) in the event any person not affiliated with the Company offers to acquire 15% or more of the outstanding shares of capital stock of the Company, (iv) in the event the holder of such shares elects to so convert at any time after the second anniversary of the date of this Prospectus, (v) on the sixth anniversary of the date of this Prospectus, or (vi) in the event the holders of a majority of the outstanding shares of Common Stock approve such conversion. In addition, the Company may elect to convert any outstanding shares of Class B Common Stock into shares of Common Stock in the event 95% or more of the outstanding shares of Class B Common Stock as of the date of this Prospectus have previously been converted into shares of Common Stock. Use of proceeds......................... To fund the cash portion of the consideration to be paid in the Transactions; to repay certain indebtedness and deferred expenses of the Company; to complete the purchase of the Company's management information system; and for general corporate purposes, which are expected to include (among other things) future transfers of DPM practices and certain development costs of ancillary services. See "Use of Proceeds." Proposed Nasdaq National Market symbol(3)............................. "AMPZ" </TABLE> - ------------ (1) Includes 2,078,332 shares of Common Stock issued in connection with the Transactions, but excludes 464,500 shares of Common Stock issuable upon exercise of outstanding options issued pursuant to the Company's 1997 Incentive and Non-Qualified Stock Option Plan to purchase Common Stock at the initial public offering price and 555,000 shares of Common Stock issuable upon exercise of the Underwriters' over-allotment option. The actual number of shares issued in connection with the Transactions will be determined by dividing $22,861,652 by the initial public offering price. In the event the price to the public is higher than the mid-point of the estimated initial public offering price range, the aggregate number of shares will be reduced accordingly, and in the event the price to the public is lower, the aggregate number of shares will be increased accordingly. See "Management -- Incentive and Non-Qualified Stock Option Plan" and "Certain Transactions -- Affiliated Practices." (2) The Class B Common Stock may be convertible into an aggregate of 1,950,000 shares of Common Stock. See "The Offering -- Conversion of Class B Common Stock." (3) As a contingency, pending the receipt of certain waivers to the Nasdaq Stock Market listing requirements, the Company has also applied to have the shares of Common Stock approved for quotation on the American Stock Exchange under the symbol "AMPZ." FORWARD-LOOKING STATEMENTS CERTAIN STATEMENTS CONTAINED IN THIS PROSPECTUS, INCLUDING STATEMENTS CONTAINING THE WORDS "BELIEVES," "ANTICIPATES," "INTENDS," "EXPECTS" AND WORDS OF SIMILAR IMPORT, CONSTITUTE "FORWARD-LOOKING STATEMENTS." THESE FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY OR ITS INDUSTRY TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING STATEMENTS. THESE RISK FACTORS INCLUDE, AMONG OTHERS, THE LIMITED COMPANY AND COMBINED OPERATING HISTORY, DEPENDENCE ON CERTAIN OPERATIVE AGREEMENTS, DEPENDENCE ON REGIONAL GROUP PRACTICES, DEPENDENCE ON IMPLEMENTATION AND INTEGRATION OF INFORMATION SYSTEMS, DEPENDENCE UPON KEY PERSONNEL, DEPENDENCE ON IMPLEMENTATION OF GROWTH STRATEGY, MOVEMENT TOWARD MANAGED CARE, CHANGES IN PAYMENT FOR MEDICAL SERVICES, POTENTIAL ADVERSE CONSEQUENCES OF GOVERNMENT REGULATION, FUTURE HEALTH CARE REFORM, COMPETITION, NEED FOR ADDITIONAL FUNDS, LIABILITY AND INSURANCE RISKS ASSOCIATED WITH PODIATRIC PRACTICES, NO PRIOR PUBLIC MARKET FOR THE COMMON STOCK, THE NUMBER OF SHARES ELIGIBLE FOR FUTURE SALE, SUBSTANTIAL PROCEEDS OF THE OFFERING PAYABLE TO AFFILIATED PRACTICES AND AFFILIATES, CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS, CERTAIN ANTI-TAKEOVER PROVISIONS IN THE COMPANY'S ARTICLES AND BYLAWS, IMMEDIATE AND SUBSTANTIAL DILUTION TO INVESTORS IN THE COMMON STOCK, NO INTENT TO PAY DIVIDENDS, AND OTHER FACTORS REFERENCED IN THIS PROSPECTUS. CERTAIN OF THESE FACTORS ARE DISCUSSED IN MORE DETAIL ELSEWHERE IN THIS PROSPECTUS, INCLUDING UNDER THE CAPTIONS "PROSPECTUS SUMMARY" AND "RISK FACTORS." GIVEN THESE UNCERTAINTIES, POTENTIAL INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS. THE COMPANY DISCLAIMS ANY OBLIGATION TO UPDATE ANY OF THESE FACTORS OR TO PUBLICLY ANNOUNCE THE RESULT OF ANY REVISIONS TO ANY OF THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN TO REFLECT FUTURE EVENTS OR DEVELOPMENTS. SUMMARY FINANCIAL DATA THE FOLLOWING INFORMATION IS DERIVED FROM THE FINANCIAL STATEMENTS OF THE COMPANY INCLUDED ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS INDICATED, THIS INFORMATION DOES NOT REFLECT THE EFFECTS OF THE TRANSACTIONS OR THE OFFERING. FOR CERTAIN INFORMATION CONCERNING THE TRANSACTIONS, SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS OF THE COMPANY AND UNAUDITED PRO FORMA COMBINED BALANCE SHEET AND THE NOTES THERETO. PERIOD FROM INCEPTION (AUGUST FOR THE 9, 1996) TO YEAR ENDED DECEMBER 31, 1996 DECEMBER 31, 1997 ----------------- ------------------ STATEMENT OF OPERATIONS DATA(1): Revenues.............................. $ -- $ -- Expenses.............................. 1,436,441 2,706,255 ----------------- ------------------ Net loss.............................. $(1,436,441) $ (2,706,255) ================= ================== DECEMBER 31, 1997 ------------------------------ HISTORICAL AS ADJUSTED(2) -------------- -------------- (UNAUDITED) BALANCE SHEET DATA: Cash and cash equivalents............. $ -- $ 12,890,000 Working capital (deficit)(3).......... (3,117,512) 15,986,000 Total assets(4)....................... 4,194,238 30,130,000 Long-term debt........................ -- 656,000 Stockholders' equity (deficit)........ (2,610,677) 28,508,000 - ------------ (1) The Company has conducted no significant on-going, non-developmental business operations to date and will not conduct significant business operations until the affiliation of the Company with the initial Affiliated Practices and the Offering are completed. Pursuant to a reimbursement and assumption agreement (the "Reimbursement and Assumption Agreement") dated January 20, 1998 between the Company and AFC, the Company will reimburse the affiliation-related expenses incurred by AFC since May 1996, including AFC's payroll, travel and entertainment, office equipment and professional fees. AFC currently holds 365,625 shares of Class B Common Stock which management plans to distribute to AFC members approximately 180 days after consummation of the Offering. (2) As adjusted gives effect to the Transactions, the sale of 3,700,000 shares of Common Stock offered by the Company, and the application of the estimated net proceeds therefrom. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001048982_artisan_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001048982_artisan_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..74a6697d6839748c0e0b41c3f8c1128518e97886
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary should be read in conjunction with and is qualified in its entirety by the more detailed information and Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001049129_hlm_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001049129_hlm_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2ab6100924535e8dac3a438144c04b211e812964
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (A) GIVES EFFECT TO AN EFFECTIVE 12.75-TO-1 STOCK SPLIT (EFFECTED IN A SERIES OF TRANSACTIONS) OF HLM DESIGN'S COMMON STOCK TO BE COMPLETED PRIOR TO THE CONSUMMATION OF THE OFFERING (THE "STOCK SPLIT"), (B) ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED, AND (C) GIVES EFFECT TO THE EXERCISE OF THE WARRANTS, INCLUDING THE WARRANTS HELD BY PACIFIC (AS DEFINED HEREIN) TO BE EXERCISED IMMEDIATELY PRIOR TO THE EFFECTIVE DATE OF THE REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS IS A PART. SEE "DESCRIPTION OF CAPITAL STOCK -- WARRANTS" AND "UNDERWRITING." UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES HEREIN TO THE "COMPANY" MEAN HLM DESIGN, INC. AND THE ARCHITECTURAL, ENGINEERING AND PLANNING FIRMS ("AEP FIRMS") IT MANAGES CONSIDERED AS ONE ENTERPRISE, REFERENCES TO A "MANAGEMENT AND SERVICES AGREEMENT" MEAN A LONG-TERM AGREEMENT BETWEEN HLM DESIGN AND AN AEP FIRM AS DESCRIBED HEREIN IN "BUSINESS -- HLM DESIGN OPERATIONS -- MANAGEMENT AND SERVICES AGREEMENTS", AND REFERENCES TO THE "MANAGED FIRMS" MEAN (I) WITH RESPECT TO THE PERIOD PRIOR TO THE DATE OF THIS PROSPECTUS, HLMI, HLMNC AND HLMO (EACH AS DEFINED BELOW) WHICH ARE THE AEP FIRMS CURRENTLY OPERATING UNDER MANAGEMENT AND SERVICES AGREEMENTS WITH HLM DESIGN, AND (II) WITH RESPECT TO THE PERIOD FROM AND AFTER THE DATE OF THIS PROSPECTUS, HLMI, HLMNC AND HLMO AND SUCH OTHER AEP FIRMS WITH WHICH HLM DESIGN SHALL, FROM TIME TO TIME, ENTER INTO MANAGEMENT AND SERVICES AGREEMENTS. "HLM" IS A REGISTERED TRADEMARK OF HLM DESIGN. THE COMPANY HLM Design, Inc. is a management company that enters into management and services relationships with full service AEP Firms. It was formed in March 1997 to pursue a strategy of consolidating non-professional operations and providing management expertise to individual AEP Firms. HLM Design believes it is the first company to pursue such a consolidation strategy in order to take advantage of operating efficiencies and provide geographic and service diversification for clients. Prior to March 1997, the current management team of HLM Design operated HLM Design of Northamerica, Inc. (formerly named Hansen Lind Meyer Inc.), an Iowa corporation ("HLMI"), HLM Design of the Southeast, P.C. (formerly named HLM of North Carolina, P.C.) ("HLMNC") and HLM Design of the Northwest, Architecture, Engineering and Planning, P.C. (formerly named HLM of Oregon, Architecture and Planning, P.C.) ("HLMO"). HLMI has been in operation for over thirty years. HLMNC and HLMO were organized in 1996 but have had no operations to date. These three AEP Firms have each entered into a Management and Services Agreement with HLM Design. The Managed Firms operate offices in Atlanta, Georgia, Iowa City, Iowa, Chicago, Illinois, Orlando, Florida, Bethesda, Maryland, Denver, Colorado, Sacramento, California, Philadelphia, Pennsylvania, Portland, Oregon and Charlotte, North Carolina. HLM DESIGN IS NOT ENGAGED IN THE PRACTICE OF ARCHITECTURE, ENGINEERING OR PLANNING. Joseph M. Harris and Vernon B. Brannon, executive officers and principal stockholders of HLM Design, are also the principal stockholders and officers of the Managed Firms, HLMI, HLMNC and HLMO. As officers of the Managed Firms, they caused the Managed Firms to enter into Management and Services Agreements with HLM Design and as stockholders of each of the Managed Firms they entered into Stockholders' Agreements (as described below). See "Certain Transactions -- Relationships with Managed Firms." A full-service AEP Firm provides a spectrum of services in various specialties to customers through a broad range of professionals, including architects, mechanical, electrical, structural and civil engineers, landscape architects, interior designers and construction administration personnel. HLM Design has chosen to focus its effort on the management of full-service AEP Firms because it believes these firms offer a competitive advantage -- the ability to provide a full line of high-quality, cost effective services -- over firms that provide a more narrow range of services. HLM Design believes that its consolidation strategy will assist in attracting new AEP Firms as a result of two major trends: (1) the increasing complexity, cost and competitiveness of the design practice conducted by AEP Firms requiring operating and cost efficiencies, and (2) AEP Firms' need for access to a wider pool of geographically dispersed professionals in order to provide solutions for the evolving needs of their clients. As a management company, HLM Design's relationship with the Managed Firms is contractual; it has no ownership interest in the Managed Firms. As a result, stockholders in HLM Design will have no direct or indirect ownership interest in the Managed Firms. HLM Design's strategy is to expand revenues through (1) the development of new long-term Management and Services Agreements with full-service AEP Firms throughout the United States and (2) the expansion of services to existing clients. Currently, HLM Design is not engaged in negotiations with any AEP Firms. HLM Design's principal executive office is located at 121 West Trade Street, Suite 2950, Charlotte, North Carolina and its telephone number is (704) 358-0779. OPERATING STRATEGY The Company provides, primarily through HLMI, a complement of architectural, engineering and planning services to a variety of clients in several industries. These services include, in addition to the provision of architectural and engineering services, all phases of a construction project starting with assistance in the funding process, development of a master plan, and construction oversight. The services also may involve the redesign of a workplace to make it efficient, reliable and easy to maintain. The Company has developed a strength and is recognized as a national leader in the following markets: (Bullet) Healthcare -- In the last five years, HLMI has designed and constructed more than 15 million square feet of healthcare facilities. Clients have ranged from 20-bed hospitals in the rural mid-west to America's most prestigious academic medical centers. Healthcare clients include Duke University Medical Center, University of Chicago Hospitals, University of Iowa Hospitals and Clinics, Rush-Presbyterian-St. Lukes Medical Center, Thomas Jefferson University Hospital and Georgetown University Medical Center. (Bullet) Justice -- HLMI has designed over 10 million square feet of justice facilities in the last ten years. It has designed jail and prison projects valued at over $500 million and has designed emerging court facility projects valued at over $555 million. (Bullet) High-tech Research Facilities -- HLMI has designed research facilities valued at over $500 million. The Company's clients in this market include some of the most prestigious in the country including Johns Hopkins University, the National Institutes of Health, the Mayo Foundation, and Georgetown University. Planning for high-tech research facilities is intended to optimize space utilization and provide flexibility to adapt to changing technology and funding constraints. All of the Company's architecture, engineering and planning services are provided through the Managed Firms, and not by HLM Design. GROWTH STRATEGY HLM Design intends to implement an aggressive, yet disciplined, expansion program by pursuing Management and Services Agreements with (i) large "regional" AEP Firms with established operating histories located in large metropolitan and high-growth suburban geographic markets that the Company does not currently serve and (ii) small firms that provide operational diversity in geographic areas that complement the services that are either currently provided by the Company in such geographic areas or that are intended to be provided in the future. HLM Design believes its approach will be attractive to these large and small AEP Firms because it will provide these firms with economies of scale and the synergies that result from increased purchasing power, a greater breadth of services, an increased pool of professionals, and geographical diversity. Furthermore, this strategy will give these regional and local AEP Firms, as a part of the Company, the ability to provide services to existing and future clients with national operations that might otherwise have turned to "non-local" firms to service their needs. The goal is for the Company to be the single source provider for large national clients that have geographically diverse operations. HLM Design generally expects that AEP Firms that sign Management and Services Agreements will retain existing high-quality professional employees and continue to operate in an effective and efficient manner with architects, engineers and planning professionals who understand the local market. HLM Design's management team will provide all management and administrative services to the AEP Firms. Management believes it is positioned to pursue larger, well established AEP Firms as a result of the depth of HLM Design's management team, HLM Design's capital structure and the reputation of the management team in the design industry. Management also believes its growth strategy can be achieved at less cost than that which would be incurred by AEP firms operating on a stand alone basis. CERTAIN RISK FACTORS The Common Stock offered hereby involves a high degree of risk. Prospective purchasers should consider that: (Bullet) HLM Design's operating and growth strategies are predicated upon its ability to achieve significant consolidation of AEP Firm operations and to generate profits from those firms; (Bullet) Conflicts of interest could arise between HLM Design and Joseph Harris and Vernon Brannon, the President and Chief Financial Officer, respectively, of HLM Design, in connection with the operation and enforcement of the provisions of Stockholders' Agreements and the Management and Services Agreements; (Bullet) HLM Design's revenues are currently derived from Management and Services Agreements with three firms, only one of which had active operations at October 31, 1997 and all of which are related to each other, and to HLM Design, by common and principal stockholders, Messrs. Harris and Brannon; (Bullet) HLM Design's operating and growth strategies require substantial capital resources resulting in the incurrence of long-term and short-term indebtedness and may result in the public or private issuance from time to time of additional debt or equity securities, including the issuance of such securities in connection with the execution of new Management and Services Agreements; (Bullet) AEP Firms that have entered into Management and Services Agreements with HLM Design have the right to terminate such agreements upon the filing by HLM Design of a petition in voluntary bankruptcy or assignment for the benefit of creditors, or upon other action taken voluntarily or involuntarily under any federal or state law for the benefit of debtors; (Bullet) Because of the unique structure of the relationship between HLM Design and its Managed Firms, many aspects of these relationships have not been the subject of prior regulatory interpretations and there can be no assurance that a review of the Company's business by applicable regulatory authorities will not result in determinations that may adversely affect the operations of the Company or prevent its continued operations; (Bullet) The Company's success depends to a significant degree upon the continued contributions of Messrs. Harris and Brannon; and (Bullet) There is no existing market for the Common Stock and no assurance can be given that one will develop following the Offering. PROSPECTIVE INVESTORS SHOULD ALSO BE AWARE THAT AS OF THE DATE HEREOF, HLM DESIGN HAS ENTERED INTO MANAGEMENT AND SERVICES AGREEMENTS ONLY WITH AFFILIATED ENTITIES AND NO ASSURANCES MAY BE GIVEN THAT HLM DESIGN WILL BE SUCCESSFUL IN ENTERING INTO SUCH AGREEMENTS WITH OTHER AEP FIRMS. See "Risk Factors" beginning on page 7 for a discussion of factors that should be considered by prospective purchasers of the Common Stock offered hereby. THE OFFERING <TABLE> <S> <C> Common Stock offered by HLM Design.................... 1,200,000 shares (1) Common Stock to be outstanding after the Offering..... 2,075,087 shares (1)(2)(3) Total............................................ 2,075,087 shares Use of proceeds....................................... The net proceeds of the Offering will be used to repay certain indebtedness of HLM Design, for working capital and for general corporate purposes, including the funding of HLM Design's entering into new Management and Services Agreements. See "Use of Proceeds." Trading............................................... The Company has been approved for quotation of the Common Stock on the Nasdaq SmallCap Market ("Nasdaq"), under the symbol "HLMD." </TABLE> - --------------- (1) Does not include up to an aggregate of 180,000 shares that may be sold by HLM Design upon exercise of the over-allotment option granted to the Underwriters. See "Underwriting." (2) Excludes (i) 159,955 shares of Common Stock reserved for future issuance under HLM Design's Stock Option Plan (as defined herein), including options to purchase an aggregate of 115,908 shares of Common Stock that have been granted and are currently effective or will become effective immediately before the completion of the Offering, and (ii) up to 57,954 shares of Common Stock reserved for future issuance under HLM Design's ESPP (as defined herein). (3) Gives effect to the Stock Split. All broker-dealers effecting transactions in the Common Stock in the State of Oklahoma must comply with the requirements of Section 660: 10-9-31 of the Rules of the Oklahoma Securities Commission and the Administrator of the Department of Securities to deliver a prospectus prior to or concurrently with any transaction in the Common Stock until 90 days after the effective date of the registration of the Common Stock in Oklahoma. California investors are subject to certain investor suitability standards. See "Underwriting." SUMMARY HISTORICAL FINANCIAL DATA The following summary historical and financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements of HLM Design and Affiliates and the Predecessor Company (as defined below) and the related notes thereto included elsewhere in this Prospectus. The following summary historical financial data for the Predecessor Company for each of the three fiscal years ended April 25, 1997 are derived from audited financial statements, which are included elsewhere in this Prospectus. The summary financial data (Predecessor Company) for the one month ended May 30, 1997 and the nine months ended January 24, 1997 are derived from the unaudited financial statements of HLMI, which are included elsewhere in this Prospectus. The selected financial data for the nine months ended January 30, 1998 are derived from the unaudited combined financial statements of HLM Design and, for the eight months ended January 30, 1998, of HLMI, HLMNC and HLMO, which are included elsewhere in this Prospectus. In the opinion of management, these unaudited financial statements reflect all adjustments necessary for a fair presentation of its results of operations and financial condition. The results of operations for an interim period are not necessarily indicative of results of operations for a full fiscal year or any other interim period. <TABLE> <CAPTION> PREDECESSOR COMPANY (1) ----------------------------------------------------------------------- NINE FOR THE YEAR ENDED MONTHS ONE MONTH ----------------------------------------- ENDED ENDED APRIL 30, APRIL 26, APRIL 25, JANUARY 24, MAY 30, 1995 1996 1997 1997 1997 ----------- ----------- ----------- ----------- ----------- INCOME STATEMENT DATA: <S> <C> <C> <C> <C> <C> Revenue........................................ $29,122,557 $28,554,424 $26,754,710 $19,442,280 $2,233,036 ----------- ----------- ----------- ----------- ----------- Costs and Expenses: Direct cost of revenue......................... 15,685,671 14,261,952 13,376,251 9,917,627 898,979 Operating costs................................ 14,098,729 13,104,278 12,414,739 9,359,733 1,163,141 ESOP expenses.................................. 573,837 584,202 408,765 406,652 Amortization on intangible assets.............. 5,952 99,145 107,670 81,807 9,571 ----------- ----------- ----------- ----------- ----------- Total costs and expenses....................... 30,364,189 28,049,577 26,307,425 19,765,819 2,071,691 ----------- ----------- ----------- ----------- ----------- Income (loss) from operations.................. (1,241,632) 504,847 447,285 (323,539 ) 161,345 ----------- ----------- ----------- ----------- ----------- Other income (expense): Net interest................................... (142,744) (383,552) (396,007) (280,027 ) (36,951 ) Non-operating income........................... 428,475 850,273 285,635 ----------- ----------- ----------- ----------- ----------- Total other income (expense)............... 285,731 466,721 (110,372) (280,027 ) (36,951 ) ----------- ----------- ----------- ----------- ----------- Income (Loss) Before Income Taxes.............. (955,901) 971,568 336,913 (603,566 ) 124,394 Income tax expense (benefit)................... (360,080) 435,459 219,799 (143,517 ) 43,000 ----------- ----------- ----------- ----------- ----------- Net income (loss) (3).......................... $ (595,821) $ 536,109 $ 117,114 $ (460,049 ) $ 81,394 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- BALANCE SHEET DATA: Working capital(deficiency).................... $(1,029,547) $(1,620,488) $(1,902,363) $ (686,632 ) $(2,238,531) Total assets................................... 10,519,859 12,577,992 12,874,503 13,402,269 17,639,673 Long-term debt................................. 840,302 564,577 103,792 769,742 2,476,008 Total liabilities.............................. 10,690,072 11,819,796 11,670,962 12,803,938 16,354,738 Warrants outstanding (4)....................... Stockholders' equity (deficiency) (5).......... (170,213) 758,196 1,203,541 598,331 1,284,935 <CAPTION> HLM DESIGN (COMBINED) NINE MONTHS ENDED JANUARY 30, 1998 (2) ----------- INCOME STATEMENT DATA: <S> <C> Revenue........................................ $21,543,416 ----------- Costs and Expenses: Direct cost of revenue......................... 9,979,581 Operating costs................................ 9,629,991 ESOP expenses.................................. Amortization on intangible assets.............. 114,549 ----------- Total costs and expenses....................... 19,724,121 ----------- Income (loss) from operations.................. 1,819,295 ----------- Other income (expense): Net interest................................... (748,621 ) Non-operating income........................... ----------- Total other income (expense)............... (748,621 ) ----------- Income (Loss) Before Income Taxes.............. 1,070,674 Income tax expense (benefit)................... 514,063 ----------- Net income (loss) (3).......................... $ 556,611 ----------- ----------- BALANCE SHEET DATA: Working capital(deficiency).................... $ (432,870 ) Total assets................................... 18,043,555 Long-term debt................................. 4,357,057 Total liabilities.............................. 17,194,658 Warrants outstanding (4)....................... 200,068 Stockholders' equity (deficiency) (5).......... 648,829 </TABLE> - --------------- (1) The "Predecessor Company" is HLMI. (2) Includes information for HLM Design and for the Managed Firms for the eight months from May 31, 1997 to January 30, 1998 on a combined basis. HLM Design's operations for the month ended May 30, 1997 reflected herein include no revenues or expenses. (3) Historical net income per share is not presented, as the historical capital structure prior to the Offering is not comparable with the capital structure of the Company that will exist after the Offering. (4) Reflects Warrants held by Pacific and Equitas as of January 30, 1998. Equitas exercised its Warrants in February 1998 and Pacific has undertaken that it will exercise its Warrants immediately prior to the effective date of the Registration Statement of which this Prospectus is a part. (5) Neither HLM Design nor the Predecessor Company has paid cash dividends from May 1, 1994 to January 30, 1998.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001049551_nb_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001049551_nb_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..591a5a07453b381e8c41f341d8938c76d59a1922
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1998/CIK0001049551_nb_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the detailed information appearing elsewhere in this Prospectus. The offering by NB Capital Corporation (the "Company") of up to 61,600 shares of its 8.35% Noncumulative Exchangeable Preferred Stock, Series A, par value US$.01 per share (the "Series A Preferred Shares") is referred to herein as the "Offer." The offering by the Company of up to 300,000 shares of its Series A Preferred Stock in exchange for up to all the outstanding shares of Series A Preferred Stock of the Company is referred to herein as the "Exchange Offer." References to dollars and US$ are to United States dollars; references to C$ and $ are to Canadian dollars. As of December 31, 1997, the Canadian dollar exchange rate was C$1.4313 = US$1.00 and certain amounts stated herein reflect such exchange rate. The Company General The Company is a Maryland corporation incorporated on August 20, 1997. The Bank was the organizer of the Company. All of the common stock, par value $.01, of the Company (the "Common Stock") is owned by National Bank of Canada (the "Bank"). The Company's principal business objective is to acquire, hold, finance and manage assets consisting of obligations secured by real property, as well as certain other qualifying REIT assets ("Mortgage Assets"). The Company will elect to be taxable as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"), and generally will not be liable for United States federal income tax to the extent that it distributes its income to its stockholders and maintains its qualification as a REIT. See "United States Federal Income Tax Considerations--Qualification of the Company as a REIT." The Bank has indicated to the Company that, for as long as any of the Series A Preferred Shares are outstanding, the Bank intends to continue to own all of the outstanding shares of the Common Stock. The Company was formed to provide investors with the opportunity to invest in Canadian residential mortgages and other real estate assets and to provide the Bank with a cost-effective means of raising capital. The Company began operations on September 3, 1997. The Company's charter (the "Charter") and bylaws (the "Bylaws") both become operational on August 20, 1997. Pursuant to the Charter, the duration of the Company will be perpetual, except that effective as of the close of business on the date the Company delivers a notice of an Exchange Event, without the need for any approval by the Board of Directors or the stockholders of the Company, the existence of the Company will terminate and the Company will be liquidated and its affairs wound up in accordance with Maryland law. Mortgage Assets The Mortgage Assets currently consist of sixteen "hypothecation loans" (the "Initial Mortgage Assets"), in an aggregate amount at December 31, 1997 of US$456 million, issued to the Company by NB Finance that are recourse only to the "Initial Mortgage Loans." The Initial Mortgage Loans consist of sixteen pools of, at December 31, 1997, 11,701 "Mortgage Loans" in an aggregate amount at December 31, 1997 of C$793 million (US$554 million). Accordingly, the Initial Mortgage Assets issued by NB Finance are overcollateralized by US$98 million, as of December 31, 1997. Mortgage Loans consist of CMHC-insured residential first mortgages that are secured by real property located in Canada. The Initial Mortgage Assets issued by NB Finance will mature semiannually beginning in 2000 and the proceeds thereof (net of distributions and expenses) are expected to be reinvested in additional Mortgage Assets as described under "Business and Strategy--Description of Mortgage Assets; Investment Policy." The Company acquired the Initial Mortgage Assets (which are U.S. dollar denominated) backed by the Initial Mortgage Loans (which are Canadian dollar denominated), rather than purchasing the Initial Mortgage Loans directly, in order to eliminate potential foreign exchange gain or loss and to provide a U.S. dollar denominated income stream that matched its obligations on the Preferred Stock. INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED MARCH __, 1998 PRELIMINARY PROSPECTUS National Bank of Canada NB Capital Corporation NB Finance, Ltd. 8.35% Noncumulative Exchangeable Preferred Stock, Series A, of NB Capital (Liquidation preference Corporation US$1,000 per share) Exchangeable into Preferred Shares of National Bank of Canada This Prospectus relates to the offer of up to 61,600 shares (the "Offer") of 8.35% Noncumulative Exchangeable Preferred Stock, Series A, par value US$.01 per share (the "Series A Preferred Shares"), of NB Capital Corporation (the "Company"), a wholly owned subsidiary of National Bank of Canada (the "Bank"). On September 3, 1997 (the "Issue Date"), 300,000 Series A Preferred Shares were issued and sold (the "Original Offering") to Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Initial Purchaser") in a transaction not registered under the Securities Act of 1933, as amended (the "Securities Act") in reliance upon an exemption from the registration requirements thereof. The Initial Purchaser simultaneously sold 238,400 Series A Preferred Shares in transactions exempt from the registration requirements of the Securities Act in the United States to persons reasonably believed by the Initial Purchaser to be "qualified institutional buyers" (as defined in Rule 144A under the Securities Act), to institutional "accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) and outside the United States to non-United States persons in offshore transactions in reliance on Regulation S under the Securities Act. The Initial Purchaser continues to hold up to 61,600 Series A Preferred Shares that may be offered and sold from time to time by the Initial Purchaser pursuant to this Prospectus. The Series A Preferred Shares are limited with respect to transferability. See "Summary--Series A Preferred Shares--Transfer Restrictions" and "Description of Capital Stock--Restrictions on Ownership and Transfer." The Company's principal business objective is to acquire, hold, finance and manage assets consisting of obligations secured by real property, as well as certain other qualifying real estate investment trust ("REIT") assets ("Mortgage Assets"). The Mortgage Assets of the Company currently consist of sixteen "hypothecation" loans (the "Initial Mortgage Assets") issued to the Company by NB Finance, Ltd., a wholly owned subsidiary of the Bank ("NB Finance"), that are recourse only to the "Initial Mortgage Loans." Hypothecation loans are loans secured by the pledge of mortgages as security therefor. The Initial Mortgage Loans consist of sixteen pools of, at December 31, 1997, 11,701 "Mortgage Loans." Mortgage Loans consist of residential first mortgages insured by Canada Mortgage and Housing Corporation, an agency of the Government of Canada ("CMHC"), that are secured by real property located in Canada. See "Risk Factors" commencing on page 13 for a discussion of certain factors that should be considered by potential holders of Series A Preferred Shares, including the following: o The Company's income consists principally of payments of interest and, therefore, is heavily dependent upon prevailing interest rates. Additionally, the Company's income is denominated in Canadian dollars. Consequently, a significant decline in interest rates or in the value of the Canadian dollar may have an adverse effect on the Company, its assets and its ability to make dividend payments with respect to the Series A Preferred Shares. o The Company's operations may be affected by prevailing real estate market conditions. Consequently, there can be no assurance that prevailing real estate market conditions will not adversely affect the Company's ability to pay dividends. o All of the residential real properties securing the Initial Mortgage Assets issued by NB Finance are, and in the future are expected to be, located outside the United States, primarily in Quebec. Consequently, the Company will be subject to the laws of a foreign jurisdiction with respect to any actions taken and may be subject to a greater risk of default than investments in comparable U.S. real property. o The Initial Mortgage Assets issued by NB Finance are recourse only to the Initial Mortgage Loans. Consequently, in the event of default on the Initial Mortgage Assets issued by NB Finance, the Company's only recourse will principally be foreclosure on the real property securing the Initial Mortgage Assets issued by NB Finance, and in certain circumstances, CMHC insurance may not be available or receipt of payment thereof may be delayed. o Dividends on the Series A Preferred Shares are not cumulative. Consequently, if the Board of Directors of the Company (the "Board of Directors") does not authorize and declare a dividend on the Series A Preferred Shares for any particular quarterly dividend period, the holders of the Series A Preferred Shares would not be entitled to recover such dividend even if funds are, or subsequently become, available for payment thereof. o As a subsidiary of the Bank, Canadian banking authorities could, under certain circumstances, impose certain restrictions on the operations of the Company. Consequently, under such circumstances, such restrictions could cause the Company to fail to qualify as a REIT as well as affect its ability to pay dividends. o The Company may not qualify as a REIT for United States federal income tax purposes. Consequently, the Company may be subject to United States federal income tax at normal corporate tax rates. o The Board of Directors may amend or revise the Company's policies and strategies in the future without a vote of stockholders, including holders of the Series A Preferred Shares. Consequently, the holders of Series A Preferred Shares cannot preclude the Board of Directors from making such amendments or revisions even though the ultimate effect to the holders of Series A Preferred Shares may be negative. o The assets of the Company consist of obligations that do not provide for complete amortization of principal over their term to maturity and, therefore, require a balloon payment. Consequently, holders of Series A Preferred Shares may be accepting a greater degree of risk relative to an investment with underlying assets that are comprised of fully amortizing obligations. o The Company has not obtained a third party valuation of its assets for the purposes of the Exchange Offer. Consequently, there can be no assurance that the fair market value of such assets does not differ from the purchase price thereof. o Under certain circumstances, including when the Bank is experiencing financial difficulties or its financial condition is deteriorating, the Series A Preferred Shares could be exchanged (an "Exchange Event") automatically for the Bank's 8.45% Noncumulative First Preferred Shares, Series Z (the "Bank Preferred Shares"). Consequently, the Bank Preferred Shares would represent an investment in the Bank and not in the Company at a time when the Bank is experiencing such financial difficulties or such deterioration of financial condition. o The Company is dependent upon the Bank and its affiliates in virtually every phase of its operations. However, the interests of the Company and the Bank may not be identical. Consequently, because of the relationship between the Company and the Bank and its affiliates, conflicts of interest may arise between the Company and the Bank. o The assignment of the Initial Mortgage Loans to the Company has not been registered. Consequently, a bona fide purchaser who completes all necessary registration formalities prior to the Company would be recognized as the owner of the Initial Mortgage Loans. o The Company is under no obligation, and currently has no intention, to list the Series A Preferred Shares on a national exchange. Additionally, there is no existing market for the Series A Preferred Shares and there can be no assurance as to the liquidity of any markets that may develop, the ability of holders to sell their Series A Preferred Shares or the sale price thereof. Consequently, holders of Series A Preferred Shares may find it difficult to sell their Series A Preferred shares or to sell their Series A Preferred Shares at a price equivalent to the purchase price thereof. The 300,000 Series A Preferred Shares issued and sold on the Issue Date bear legends restricting the transfer thereof. Pursuant to the Registration Rights Agreement among the Company, the Bank and the Initial Purchaser (the "Registration Rights Agreement"), the Company is obligated to offer in exchange (the "Exchange Offer") for such Series A Preferred Shares, up to 238,400 Series A Preferred Shares that do not bear such legends restricting transfer. Accordingly, the Series A Preferred Shares issued in connection with the Offer and the Exchange Offer are identical in all respects to the Series A Preferred Shares issued and sold on the Original Issuance Date, except that such Series A Preferred Shares will be freely transferrable. The Company has filed with the Commission a Registration Statement on Form S-11, of which this Prospectus constitutes a part, and a Registration Statement on Form S-4 to satisfy its obligations under the Registration Rights Agreement. -------------------- THE SECURITIES DESCRIBED HEREIN HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. CERTAIN PERSONS PARTICIPATING IN THIS EXCHANGE OFFER MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE PREFERRED SHARES. SUCH TRANSACTIONS MAY INCLUDE STABILIZING,THE PURCHASE OF THE PREFERRED SHARES TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. The principal executive offices of the Company are located at 125 West 55th Street, New York, New York 10019. The telephone number of the Company is (212) 632-8500. The Bank General The Bank was formed through a series of amalgamations and its roots date back to 1859 with the founding of the Banque Nationale in Quebec City. Its head office and principal place of business is located at the National Bank Tower, 600 de La Gauchetiere West, Montreal, Quebec, H3B 4L2, and its telephone number is (514) 394-5000. The Bank is a Schedule I bank under the Consolidated Bank Act (Canada), as amended (the "Bank Act"). The Bank Act is the charter governing all banks in Canada (both domestic banks and branches of foreign banks operating in Canada). "Schedule I" of the Bank Act lists all Canadian domestic banks. "Schedule II" of the Bank Act lists all subsidiaries of foreign banks with branches in Canada. The specific provisions of the Bank Act which govern a particular bank depend upon the schedule on which such bank is listed. As a Canadian domestic bank, the Bank is a "Schedule I Bank." The Bank, which ranks sixth among Canadian banks in terms of total assets, is present in each of Canada's provinces. It delivers an extensive range of financial services to individuals, commercial enterprises, financial institutions and governments both in Canada and abroad. Additional information regarding the Bank is included in the Bank's short-form prospectus related to the Bank Preferred Shares affixed to this Prospectus as Annex A. Preferred Shares of the Bank The authorized preferred capital of the Bank consists of an unlimited number of First Preferred Shares ("First Preferred Shares") and up to 15 million Second Preferred Shares which may be issued for a maximum aggregate consideration of C$1 billion and C$300 million, respectively, or the equivalent thereof in other currencies. The Board of Directors of the Bank may by resolution establish the terms of series of preferred shares. The Bank currently has six series of First Preferred Shares outstanding with an aggregate liquidation preference as of October 31, 1997 of C$376 million. Canadian Statutory Requirements Under Canadian law, the Bank is required to maintain adequate capital in relation to its operations. The Office of Superintendent of Financial Institutions Canada (the "Superintendent") has issued guidelines concerning the maintenance of adequate capital (the "Capital Guideline") and has statutory authority to direct the Bank to increase its capital even if the Bank is in compliance with the Capital Guideline. Pursuant to the Capital Guideline, requirements are applied to the Bank on a consolidated basis including all subsidiaries except insurance subsidiaries or other regulated financial institutions whose leverage is inappropriate for a deposit-taking institution and which, because of their size, would have a material impact on the leverage of the consolidated entity. Under the Capital Guideline, it is expected that the Bank's total assets, including specified off-balance sheet items, should be no greater than 20 times the Bank's total capital. It is also expected that the Bank's total capital not be less than 8% of risk-weighted assets and risk-weighted off-balance sheet items, unless a higher ratio is prescribed by the Superintendent. The Capital Guideline prescribes risk-weighting and the treatment of off-balance sheet items. The ratio of total capital to risk-weighted off-balance sheet items is the "risk-based capital ratio" and is based upon standards adopted by the Bank for International Settlement. The Capital Guideline recognizes two tiers of capital. Tier 1 capital comprises the highest quality capital elements based upon the attributes of permanence, freedom from mandatory fixed charges against earnings and Prospective investors should be aware that the acquisition of the securities described herein may have tax consequences both in the United States and in Canada. Such consequences for investors who are residents in, or citizens of, the United States may not be described fully herein. The enforcement by investors of civil liabilities under the federal securities laws of the United States may be affected adversely by the fact that the Bank is incorporated or organized under the laws of Canada, that some or all of its officers and directors may be residents of Canada, that some or all of the experts named in the registration statement may be residents of Canada and that all or a significant portion of the assets of the Bank and said persons may be located outside the United States. -------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS SHORT FORM PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. -------------- The date of this short form prospectus is March __, 1998. THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT SURRENDERS FOR EXCHANGE FROM, HOLDERS OF PREFERRED SHARES IN ANY JURISDICTION IN WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY EXCHANGE MADE PURSUANT HERETO SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION SET FORTH HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. FOR NEW HAMPSHIRE RESIDENTS: NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENSE HAS BEEN FILED WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE OF NEW HAMPSHIRE THAT ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY, OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT, ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH. ------------------- The date of this Prospectus is March __, 1998. subordination to the rights of depositors and other creditors. Tier 2 capital contributes to the overall strength of a bank as a going concern, but falls short in meeting the first two capital attributes described for Tier 1 capital. Tier 2 capital differentiates between Tier 2A hybrid (debt/equity) instruments and Tier 2B limited life instruments. Tier 1 capital elements consist of common shareholders equity, qualifying non-cumulative perpetual preferred shares and qualifying non-controlling interests in subsidiaries arising on consolidation from Tier 1 capital instruments. Tier 1 capital instruments and preferred shares qualifying as hybrid instruments in Tier 2A are intended to be permanent. Where the share or instrument provides for redemption by the issuer after 5 years with supervisory approval, the Superintendent would not normally prevent such redemption by a healthy and viable bank where the instrument is or has been replaced by equal or higher quality capital including an increase in retained earnings, or if the bank is downsizing. All capital instruments must be issued and fully paid for in money or, with the approval of the Superintendent, in property. Net of amortization, the amount of Tier 2 capital may not exceed 100% of Tier 1 capital after deducting goodwill and, consequently, the Capital Guideline requires the amount of Tier 1 capital to be not less than 4% of risk-weighted assets and risk-weighted off-balance sheet items, unless a higher ratio is prescribed by the Superintendent. Also under the Capital Guideline, the amount of Tier 2B capital net of amortization shall not exceed 50% of Tier 1 capital after deducting goodwill. After giving effect to the issuance of the Series A Preferred Shares on September 3, 1997, the Tier 1 risk-based capital ratio and total risk-based capital ratio levels of the Bank as of October 31, 1997 were 8.1% and 11.3%, respectively. The Bank's Tier 1 risk-based capital ratio and total risk-based capital ratio were 6.9% and 10.2% at October 31, 1996, 6.8% and 10.4% at October 31, 1995 and 6.9% and 11.1% at October 31, 1994. Section 485 of the Bank Act requires Canadian banks to maintain adequate capital and adequate and appropriate forms of liquidity and to comply with related regulations. Under subsection 485(3), the Superintendent may, by order, direct a bank to increase its capital or to provide additional liquidity in such forms and amounts as the Superintendent may require. The Superintendent may act under subsection 485(3) even if a bank is in compliance with all applicable guidelines and regulations. Exchange Event Each of the Series A Preferred Shares will be exchanged automatically (the "Automatic Exchange") for one Bank Preferred Share (i) immediately prior to such time, if any, at which the Bank fails to declare and pay or set aside for payment when due any dividend on any issue of its cumulative First Preferred Shares or the Bank fails to pay or set aside for payment when due any declared dividend on any of its non-cumulative First Preferred Shares, (ii) in the event that the Bank has a Tier 1 risk-based capital ratio of less than 4.0% or a total risk-based capital ratio of less than 8.0%, (iii) in the event that the Superintendent takes control of the Bank pursuant to the Bank Act, or proceedings are commenced for the winding-up of the Bank pursuant to the Winding-up and Restructuring Act (Canada), or (iv) in the event that the Superintendent, by order, directs the Bank to act pursuant to subsection 485(3) of the Bank Act and the Bank elects to cause the exchange (each, an "Exchange Event"). In connection with the Exchange Offer, the Bank Preferred Shares will be registered with the Commission. See "Risk Factors--Certain Risks Associated with the Bank" and "Description of Series A Preferred Shares--Automatic Exchange." NB Finance NB Finance was incorporated on September 3, 1997 under the laws of Bermuda. The Bank was the organizer of NB Finance. NB Finance was organized solely for the purpose of acquiring Mortgage Loans and issuing the Initial Mortgage Assets, and other similar obligations, to the Company. All of the ordinary shares of NB Finance are owned by the Bank. Pursuant to an order (the "OSFI Order") of the Canadian Office of the Superintendent of Financial Institutions ("OSFI"), the Canadian bank regulatory agency, the acquisition of the common stock of NB Finance by the Bank was approved on September 2, 1997. Such ENFORCEMENT OF LIABILITIES AND SERVICE OF PROCESS National Bank of Canada is a Canadian bank; all of the directors and executive officers of the Bank and certain of the Bank's advisers named in this short form prospectus are residents of countries other than the United States of America ("U.S."); and all or a substantial portion of the assets of such non-U.S. residents are located outside the U.S. As a result, it may not be possible for investors to effect service of process within the U.S. upon such persons or to enforce against them in the U.S. judgments of U.S. Courts predicated upon the civil liability provisions of the federal securities laws of the U.S. The Bank will expressly accept the jurisdiction of the Supreme Court of the State of New York or the U.S. District Court for the Southern District of New York, in either case in the Borough of Manhattan, The City of New York, for the purpose of any suit, action or proceeding arising out of the Series Z Preferred Shares offered hereby, and has appointed NB Capital Corporation, a subsidiary of the Bank, as its agent in The City of New York to accept service of process in any such action. The Bank has been advised by Desjardins Ducharme Stein Monast, Canadian counsel to the Bank, that there is doubt as to the enforceability in the Province of Quebec, in original actions or in actions for enforcement of judgments of U.S. Courts, of liabilities predicated solely upon the federal securities laws of the U.S. TRANSLATION OF FOREIGN CURRENCY In this short form prospectus, unless otherwise specified, all dollar amounts are expressed in Canadian dollars ("C$" or "$"). Solely for convenience, this short form prospectus contains translations of certain Canadian dollar amounts into U.S. dollar amounts. Unless otherwise specified, those amounts presented in U.S. dollars ("U.S.$" or "U.S. dollars") are translated from the Canadian dollar amounts at the rate of 1.4084 Canadian dollar per U.S. dollar, the Bank of Canada closing rate for U.S. dollars as at October 31, 1997. AVAILABLE INFORMATION The Company is not currently subject to the periodic reporting and other informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As a result of the Offer and the Exchange Offer, the Company will be required to file reports and other information with the Commission pursuant to the informational requirements of the Exchange Act. This Prospectus constitutes a part of a Registration Statement on Form S-11/Form F-9 (the "Registration Statement") filed by the Company with the Commission under the Securities Act. As permitted by the rules and regulations of the Commission, this Prospectus does not contain all of the information contained in the Registration Statement and the exhibits and schedules thereto, and reference is hereby made to the Registration Statement and the exhibits and schedules thereto for further information with respect to the Company and the Series A Preferred Shares. Statements contained herein concerning the provisions of any documents filed as an exhibit to the Registration Statement or otherwise filed with the Commission are not necessarily complete, and in each instance reference is made to the copy of such document so filed. Each such statement is qualified in its entirety by such reference. The Registration Statement may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, or at its regional offices located at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of such material can be obtained from the public reference section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates and may also be accessed electronically by means of the Commission's website at http://www.sec.gov. approval was, however, conditional upon (i) the Bank continuing to own at all times such common stock, (ii) NB Finance not incurring any indebtedness and (iii) NB Finance not engaging in any business activities other than the ownership of Mortgage Loans and activities incidental thereto. See "Business and Strategy--Description of the Initial Mortgage Loans." Accordingly, the Bank has indicated to the Company that it intends to maintain 100% ownership of the ordinary shares of NB Finance so long as the Initial Mortgage Assets issued by NB Finance or any other obligations of NB Finance are owned by the Company. The registered offices of NB Finance are located at Clarendon House, 2 Church Street, Hamilton HM11, Bermuda. NB Finance does not have a telephone number. NB Finance's Memorandum of Association (the "Memorandum") and bye-laws (the "Bye- laws") both became operational on September 3, 1997. Pursuant to the Bye-laws, the duration of NB Finance is perpetual until it is wound up in accordance with Bermuda law. Notwithstanding the foregoing, immediately following notice to NB Finance that the Company has delivered a notice of an Exchange Event, the Board of Directors of NB Finance will convene a special meeting of stockholders for the purpose of approving the voluntary winding-up of NB Finance in accordance with Bermuda law. Organizational Diagram The following diagram outlines the relationship between the Bank and the Company relevant to the Exchange Offer: [Description of diagram: The Bank on the top level of a two-tier diagram connected to the Company and NB Finance on the second level of the two-tier diagram. Lines connect the Bank and NB Finance and the Bank and the Company and indicate that the Bank owns 100% of the common stock of the Company and 100% of the common stock of NB Finance. Arrows indicate that the flow of Initial Mortgage Loans (footnote number 1) from the Bank to NB Finance and the flow of Initial Mortgage Assets (footnote number 2) from NB Finance to the Company. A line connects the Company to Investors and indicates that 100% of the Preferred Shares (footnote number 3) are owned by investors. The following footnotes are included: Footnote number 1: Secured by residential real property and recourse only to the Initial Mortgage Loans. Footnote number 2: CMHC-insured residential first mortgages originated by the Bank or acquired by the Bank from other NHA-Approved Lenders (as defined). Footnote number 3: Subject to automatic exchange of the Bank Preferred Shares in certain circumstances.] Summary Risk Factors The Preferred Shares offered hereby are subject to certain risks. See "Risk Factors." Among such risks are the following: o The Company's income consists principally of payments of interest and, therefore, is heavily dependent upon prevailing interest rates. Additionally, the Company's income is denominated in Canadian dollars. Consequently, a significant decline in interest rates or in the value of the Canadian dollar may have an adverse effect on the Company, its assets and its ability to make dividend payments with respect to the Series A Preferred Shares. o The Company's operations may be affected by prevailing real estate market conditions. Consequently, there can be no assurance that prevailing real estate market conditions will not adversely affect the Company's ability to pay dividends. DOCUMENTS INCORPORATED BY REFERENCE The following documents, filed with the Quebec Securities Commission, form an integral part of this short form prospectus: (a) Annual Information Form of the Bank dated December 19, 1996 and contained in the Bank's Annual Report for the year ended October 31, 1996; (b) Management's Discussion and Analysis of Operating Results and Financial Condition of the Bank dated December 19, 1996, and contained in the Bank's Annual Report for the year ended October 31, 1996; (c) Audited Consolidated Financial Statements of the Bank for the year ended October 31, 1997, together with the Auditors' Report thereon, which include comparative audited consolidated financial statements for the year ended October 31, 1996; and (d) Management Circular dated January 16, 1997 in connection with the Bank's annual meeting of shareholders held on March 12, 1997. Copies of the documents incorporated herein by reference may be obtained on request without charge from the Corporate Secretary of the Bank at National Bank Tower, 600 de La Gauchetiere Street West, Montreal, Quebec, H3B 4L2, telephone (514) 394-6080. The Bank is required to file with the U.S. Securities and Exchange Commission (the "Commission") all documents that it is required to send to its shareholders, including its Annual Report, notices of Shareholders' Meetings and Management Proxy Circulars. Such documents may be inspected and copied at the Public Reference Section of the Commission, 455 Fifth Street, N.W., Washington, DC 20549. Any documents of the type referred to in the preceding paragraph and any material change report (excluding confidential material change reports) filed by the Bank with the Quebec Securities Commission, after the date of this short form prospectus and prior to the termination of the offering, will be deemed to be incorporated by reference into this short form prospectus. Any statement contained in a document incorporated or deemed to be incorporated by reference into this short form prospectus will be deemed to be modified or superseded, for purposes of this short form prospectus, to the extent that a statement contained in this short form prospectus or in any other subsequently filed document which also is or is deemed to be incorporated by reference into this short form prospectus modifies or supersedes such statement. Any statement so modified or superseded will not be deemed, except as so modified or superseded, to constitute a part of this short form prospectus. The financial information incorporated in this short form prospectus has been prepared in accordance with Canadian generally accepted accounting principles including the accounting requirements of the Superintendent of Financial Institutions Canada. <TABLE> <CAPTION> TABLE OF CONTENTS <S> <C> PROSPECTUS SUMMARY.............................................................................................. 1 The Company............................................................................................ 1 The Bank .............................................................................................. 2 Summary Risk Factors................................................................................... 4 Business and Strategy.................................................................................. 5 Tax Status of the Company.............................................................................. 7 Series A Preferred Shares.............................................................................. 8 Selected Financial Data................................................................................ 12 RISK FACTORS.................................................................................................... 13 Interest Rate Risk and Maturity of Initial Mortgage Loans.............................................. 13 Currency Exchange Rate Risk............................................................................ 13 Real Estate Market Conditions.......................................................................... 13 Geographic Concentration of Real Property Securing the Initial Mortgage Asset.......................... 14 Limited Recourse Nature of Certain Mortgage Assets; Limitations on CMHC Insurance...................... 14 Tax Risks.............................................................................................. 14 Dividends Not Cumulative............................................................................... 16 Dividends and Other Regulatory Restrictions on Operations of the Company............................... 17 Risk of Future Revisions in Policies and Strategies by Board of Directors.............................. 17 Balloon Payments....................................................................................... 17 No Third Party Valuation of the Mortgage Assets; No Arm's-Length Negotiations with Affiliates.................................................................................... 17 Relationship with the Bank and Its Affiliates; Conflicts of Interest................................... 18 Dependence upon the Bank............................................................................... 18 Absence of Public Markets...............................................................................18 Risks Associated with the Bank......................................................................... 19 Canadian Legal Considerations.......................................................................... 20 THE COMPANY..................................................................................................... 21 USE OF PROCEEDS................................................................................................. 21 CAPITALIZATION.................................................................................................. 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF LIQUIDITY AND CAPITAL RESOURCES.............................................................................. 22 General .............................................................................................. 22 Liquidity and Capital Resources........................................................................ 23 Significant Accounting Policy.......................................................................... 23 BUSINESS AND STRATEGY........................................................................................... 23 General .............................................................................................. 23 Description of Dividend Policy......................................................................... 23 Description of the Company's Investment Policy......................................................... 24 Description of the Initial Mortgage Assets............................................................. 31 Description of the Initial Mortgage Loans.............................................................. 32 Effect of Interest Rate Fluctuation on Assets and Earnings............................................. 36 Servicing.............................................................................................. 37 </TABLE> o All of the residential real properties securing the Initial Mortgage Assets issued by NB Finance are, and in the future are expected to be, located outside the United States, primarily in Quebec. Consequently, the Company will be subject to the laws of a foreign jurisdiction with respect to any actions taken and may be subject to a greater risk of default than investments in comparable U.S. real property. o The Initial Mortgage Assets issued by NB Finance are recourse only to the Initial Mortgage Loans. Consequently, in the event of default on the Initial Mortgage Assets issued by NB Finance, the Company's only recourse will principally be foreclosure on the real property securing the Initial Mortgage Assets issued by NB Finance, and in certain circumstances, CMHC insurance may not be available or receipt of payment thereof may be delayed. o The sale of the Initial Mortgage Loans to NB Finance and the subsequent assignment thereof by NB Finance to the Company have not been registered. Consequently, a bona fide purchaser who completed all necessary registration formalities prior to the Company would be recognized as the owner of the Initial Mortgage Loans. o Dividends on the Series A Preferred Shares are not cumulative. Consequently, if the Board of Directors of the Company (the "Board of Directors") does not authorize and declare a dividend on the Series A Preferred Shares for any particular quarterly dividend period, the holders of the Series A Preferred Shares would not be entitled to recover such dividend even if funds are, or subsequently become, available for payment thereof. o As a subsidiary of the Bank, Canadian banking authorities could, under certain circumstances, impose certain restrictions on the operations of the Company. Consequently, under such circumstances, such restrictions could cause the Company to fail to qualify as a REIT as well as affect its ability to pay dividends. o The Company may not qualify as a REIT for United States federal income tax purposes. Consequently, the Company may be subject to United States federal income tax at normal corporate tax rates. o The Board of Directors may amend or revise the Company's policies and strategies in the future without a vote of stockholders, including holders of the Series A Preferred Shares. Consequently, the holders of Series A Preferred Shares cannot preclude the Board of Directors from making such amendments or revisions even though the ultimate effect to the holders of Series A Preferred Shares may be negative. o The assets of the Company consist of obligations that do not provide for complete amortization of principal over their term to maturity and, therefore, require a balloon payment. Consequently, holders of Series A Preferred Shares may be accepting a greater degree of risk relative to an investment with underlying assets that are comprised of fully amortizing obligations. o The Company has not obtained a third party valuation of its assets for the purposes of the Exchange Offer. Consequently, there can be no assurance that the fair market value of such assets does not differ from the purchase price thereof. o Under certain circumstances, including when the Bank is experiencing financial difficulties or its financial condition is deteriorating, the Series A Preferred Shares could be exchanged automatically for the Bank's 8.45% Noncumulative First Preferred Shares, Series Z (the "Bank Preferred Shares"). Consequently, the Bank Preferred Shares would represent an investment SHORT FORM PROSPECTUS SUMMARY This short form prospectus summary does not purport to be complete and is qualified in its entirety by the more detailed information and financial statements and notes hereto appearing elsewhere in this short form prospectus and in the documents incorporated by reference herein. Capitalized terms used in the summary and not defined herein have the meanings ascribed to such terms elsewhere in this short form prospectus or in the documents incorporated by reference herein. INCORPORATION AND HEAD OFFICE OF THE BANK The Bank was formed through a series of amalgamations and its roots date back to 1859 with the founding of Banque Nationale in Quebec City, Quebec, Canada. The Bank is chartered under the Bank Act (Canada) (the "Bank Act"). The head office and executive offices of the Bank are at the National Bank Tower, 600 de La Gauchetiere West, Montreal, Quebec, Canada H3B 4L2. BUSINESS OF THE BANK The Bank, which ranks sixth among Canadian banks in terms of total assets, is present in each of Canada's provinces. It delivers an extensive range of financial services to individuals, commercial enterprises, financial institutions and governments both in Canada and abroad. The Bank's main sectors and divisions are the following: Banking, which consists of Retail Banking, Commercial Banking and International; Trust Services; Insurance; Treasury, Brokerage and Corporate Banking; and Human Resources and Administration. BANKING Retail Banking Through its network of 637 branches at October 31, 1997, Retail Banking provides services to individuals and serves as support to the commercial banking centres and the Corporate Banking, International Commercial Operations and Treasury divisions. In addition to personal and mortgage loans, the Bank offers a broad range of transaction accounts and investment vehicles, such as term deposits and investment certificates, mutual funds (managed by the Bank or by third parties) and registered retirement savings plans and income funds, as well as credit card and travelers cheque services. In response to clients' growing demand for financial advisory services, the Bank embarked on a new phase in 1996 when it integrated more than 50 accredited financial planners into its branches. Clients can access their accounts at any of the Bank's 738 banking machines as well as at the more than 303,426 banking machines in North America and Europe which belong to the Cirrus, Interac and MasterCard ATM networks. Furthermore, through the Interac Direct Payment network, debit card holders can pay for their purchases without using cash at any of the Bank's 28,337 point-of-sale terminals. The Bank continues to assume a leadership role in customer service by offering its customers non-traditional services such as TelNat for banking by phone and Personal CompuTeller for banking by computer. The first service of its kind in Canada, Personal CompuTeller gives customers direct access to their transaction accounts via their personal computer. <TABLE> <S> <C> Employees.............................................................................................. 38 Competition............................................................................................ 38 Legal Proceedings...................................................................................... 39 MANAGEMENT...................................................................................................... 39 Directors and Executive Officers....................................................................... 39 Compensation of Executive Officers..................................................................... 40 Options Exercised and Year-End Option/SAR Holdings..................................................... 41 Pension Plan........................................................................................... 41 Independent Directors.................................................................................. 42 Audit Committee........................................................................................ 42 Compensation of Directors and Officers................................................................. 42 Limitation of Liability and Indemnification of Directors and Officers.................................. 42 The Bank as Advisor.................................................................................... 43 DESCRIPTION OF THE SERIES A PREFERRED SHARES.................................................................... 44 General .............................................................................................. 44 Dividends.............................................................................................. 44 Automatic Exchange..................................................................................... 45 Ranking .............................................................................................. 47 Voting Rights.......................................................................................... 47 Redemption............................................................................................. 48 Rights upon Liquidation................................................................................ 50 Independent Director Approval.......................................................................... 51 REGISTRATION RIGHTS............................................................................................. 51 DESCRIPTION OF CAPITAL STOCK.................................................................................... 54 Common Stock........................................................................................... 54 Preferred Stock........................................................................................ 55 Power to Issue Additional Shares of Common Stock and Preferred Stock................................... 56 Restrictions on Ownership and Transfer................................................................. 56 Supermajority Director Approval........................................................................ 58 Business Combinations.................................................................................. 58 Control Share Acquisitions............................................................................. 58 Form, Denomination, Book-Entry Procedures and Transfer................................................. 59 Depositary Procedures.................................................................................. 59 Certificated Series A Preferred Shares................................................................. 61 UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS................................................................. 61 Qualification of the Company as a REIT................................................................. 61 Stock Ownership Tests.................................................................................. 62 Asset Tests............................................................................................ 62 Gross Income Tests..................................................................................... 63 Distribution Requirement............................................................................... 63 Taxation of the Company................................................................................ 64 Tax Treatment of Automatic Exchange.................................................................... 64 Taxation of Series A Preferred Shares.................................................................. 64 Taxation of Tax-Exempt Entities........................................................................ 65 State and Local Taxes.................................................................................. 66 Taxation of Bank Preferred Shares...................................................................... 66 Certain United States Federal Income Tax Considerations Applicable to Foreign Holders.................. 66 </TABLE> in the Bank and not in the Company at a time when the Bank is experiencing such financial difficulties or such deterioration of financial condition. o The Company is dependent upon the Bank and its affiliates in virtually every phase of its operations. However, the interests of the Company and the Bank may not be identical. Consequently, because of the relationship between the Company and the Bank and its affiliates, conflicts of interest may arise between the Company and the Bank. o The assignment of the Initial Mortgage Loans to the Company has not been registered. Consequently, a bona fide purchaser who completes all necessary registration formalities prior to the Company would be recognized as the owner of the Initial Mortgage Loans. o The Company is under no obligation, and currently has no intention, to list the Series A Preferred Shares on a national exchange. Additionally, there is no existing market for the Series A Preferred Shares and there can be no assurance as to the liquidity of any markets that may develop, the ability of holders to sell their Series A Preferred Shares or the sale price thereof. Consequently, holders of Series A Preferred Shares may find it difficult to sell their Series A Preferred Shares or to sell their Series A Preferred Shares at a price equivalent to the purchase price thereof. Business and Strategy General The Company's principal business objective is to acquire, hold, finance and manage Mortgage Assets that will generate net income for distribution to stockholders. The Mortgage Assets of the Company initially consist solely of the Initial Mortgage Assets (sixteen hypothecation loans, in an aggregate amount at December 31, 1997 of US$456 million, issued by NB Finance to the Company that are recourse only to the Initial Mortgage Loans (which are sixteen pools of, at December 31, 1997, 11,701 CMHC-insured residential first mortgages, in an aggregate amount at December 31, 1997 of C$793 million (US$554 million) and that are secured by the residential real property underlying the Initial Mortgage Loans). See "Business and Strategy--Description of the Initial Mortgage Assets" and "--Description of the Initial Mortgage Loans." The Company has acquired substantially all of its Mortgage Assets from the Bank and/or affiliates of the Bank on terms that are comparable to those that could be obtained by the Company if such Mortgage Assets were purchased from unrelated third parties. The Company may also from time to time acquire Mortgage Assets comparable to the Initial Mortgage Assets issued by NB Finance acquired from the Bank or from unrelated third parties. As of the date of this Prospectus, the Company has not entered into any agreements with third parties with respect to the purchase of Mortgage Assets. Other than with respect to the temporary investment of payments of interest and principal on its Mortgage Assets, the Company anticipates that it will purchase Mortgage Assets from unrelated third parties only if neither the Bank nor any affiliate of the Bank has an amount or type of Mortgage Assets sufficient to meet the requirements of the Company. The Company's current investment policy and current intention is to invest at least 90% of its portfolio in the Initial Mortgage Assets issued by NB Finance and obligations that are comparable to the Initial Mortgage Assets issued by NB Finance. Accordingly, potentially 10% of the Company's portfolio could consist of investments in other assets permitted under the Company's investment policy. See "Business and Strategy--Description of the Company's Investment Policy" and "--Description of the Company's Management Policies." The Company intends and has the ability to hold the Mortgage Loans to maturity unless there is a prepayment by the customer or a Mortgage Loan is impaired. Therefore the Mortgage Loans will be recorded as a long-term investment in the balance sheet of the Company. To meet the new reality of consumer demand for fast, easy access to banking services, the Bank developed another delivery concept in the form of specially designed service units in supermarkets, open seven days a week. Commercial Banking The Commercial Banking division administers loans to independent businesses and offers them an array of complementary services. Of the 38 commercial banking centres in operation as at October 31, 1997, 20 were in Quebec, 9 in Ontario and 9 in Atlantic Canada. The centres are staffed by account managers, each of whom services a small number of business clients, and by experts in special financing methods. In addition to the specialized services offered by Treasury and International Commercial Operations, businesses can obtain a full range of services such as bankers' acceptances, operating loans and fixed or variable-rate term loans, as well as computerized payroll processing, bank reconciliation with cheques in consignment and pre-authorized payments. The Bank also serves mid-market companies through offices in 20 U.S. cities, including its own representative offices and the offices of its subsidiary National Canada Finance Corp. International The International division is responsible for all the services offered to the Bank's Canadian clients who are involved in foreign transactions. Available through centres in Moncton, Quebec City, Montreal, Toronto and Vancouver, as well as the branch network, these services include guarantees and letters of credit, foreign exchange transactions, foreign payments and documentary collections. In addition to these transaction services, the Bank offers financing adapted to the needs of exporters, such as discounted foreign receivables, identification of foreign partners or clients, as well as advisory services for establishing foreign trade or an international strategy. The International division has also made its presence felt abroad through its representative offices in New York, the Caribbean, Mexico, Santiago, London, Paris, Hong Kong, Seoul, Singapore, Taiwan and Shanghai; cooperation agreements with seven European financial institutions and a Mexican bank; and via a vast network of some 2,800 banking correspondents spanning 120 countries. Through this presence abroad, the International division can serve its clientele which includes Canadian clients, foreign companies, international banks which obtain traditional services such as correspondent banking, and immigrant investors to whom the Bank provides private banking services as well as other products designed specifically to meet their needs. The Bank has also developed partnerships with private enterprise and all three levels of public administration. Partnerships created in 1996 include the Action Asia Group, Montreal International, the Canada-Poland Development Fund and a France-Quebec network for independent businesses, as well as the agreement to accommodate Quebec trade delegates in the Bank's offices in Boston, Los Angeles, Chicago and Atlanta. Through its International division, the Bank is able to offer international products and services adapted to the increasingly sophisticated needs of its clients, including guarantees and letters of credit, foreign exchange transactions, foreign payments and management of foreign accounts. <TABLE> <S> <C> Information Reporting and Backup Withholding........................................................... 67 CANADIAN FEDERAL INCOME TAX CONSIDERATIONS...................................................................... 67 Automatic Exchange..................................................................................... 68 Taxation of Dividends.................................................................................. 68 Disposition of Bank Preferred Shares................................................................... 68 Redemption of Bank Preferred Shares.................................................................... 68 ERISA CONSIDERATIONS............................................................................................ 69 Status Under Plan Asset Regulations.................................................................... 69 Publicly-Offered Security Exception.................................................................... 70 Exemptions from Prohibited Transactions................................................................ 71 Unrelated Business Taxable Income...................................................................... 71 RATINGS ....................................................................................................... 72 INITIAL PURCHASER............................................................................................... 72 PLAN OF DISTRIBUTION............................................................................................ 72 LEGAL MATTERS................................................................................................... 73 EXPERTS ....................................................................................................... 73 ANNEX A </TABLE> ----------------------------- Until ____________, 1998, all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a prospectus. This is in addition to the obligations of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. Pursuant to the OSFI Order, NB Finance is not permitted to engage in any business activities other than the ownership of Mortgage Loans and activities incidental thereto. Management The Board of Directors of the Company is composed of five members, two of whom are Independent Directors. An "Independent Director" is a director who is not a current officer or employee of the Company or a current director, officer or employee of the Bank or any affiliate of the Bank. Pursuant to the terms of the Series A Preferred Shares, the Independent Directors must consider the interests of the holders of both the Preferred Stock and the Common Stock in determining whether any proposed action requiring their approval is in the best interests of the Company. The Company currently has six employees and does not anticipate that it will require additional employees. See "Management." The Board of Directors of NB Finance is composed of seven members, two of whom are Independent Directors. The Company currently has four employees and does not anticipate that it will require additional employees. See "Management." Year 2000 Issue Pursuant to the Advisory Agreement, dated as of September 3, 1997, between the Company and the Bank (the "Advisory Agreement"), the Bank administers the day-to-day activities of the Company. Pursuant to the Servicing Agreement, dated as of September 3, 1997, between the Company and the Bank (the "Servicing Agreement"), the Bank services the Mortgage Loans on behalf of the Bank. See "Risk Factors--Relationship with the Bank and Its Affiliates; Conflicts of Interest," "--Dependence upon the Bank," "Business and Strategy--Description of the Initial Mortgage Loans" and "Management--The Bank as Advisor." Accordingly, the Company does not have a material Year 2000 issue. The Bank, as originator and servicer of the Mortgage Loans that underlie the Mortgage Assets and administrator of the day-to-day activities of the Company, has formulated a detailed plan to address the Year 2000 issue. The Bank expects to invest C$35 million dollars from 1997 through 2000 to modify computer software and hardware in relation to the Year 2000 issue. According to such plan, 30% of computer software and 20% of computer hardware were converted and certified accurate by December 31, 1997. By December 31, 1998, the Bank expects 95% of computer software and 50% of computer hardware will be converted and certified accurate. By March 31, 1999, the Bank expects that the conversion and certification of all remaining computer software and hardware will be complete. The plan and budget also provide for monitoring such conversion through the Year 2000. Pursuant to the OSFI Order, NB Finance is not permitted to engage in any business activities other than the ownership of Mortgage Loans and activities incidental thereto. Accordingly, NB Finance does not have a material Year 2000 issue. Tax Status of the Company The Company will elect to be taxable as a REIT under sections 856 through 860 of the Code, commencing with its taxable year ending December 31, 1997. As a REIT, the Company generally will not be liable for United States federal income tax to the extent that it distributes its income to the holders of its Common Stock and Preferred Stock, including the Series A Preferred Shares, and maintains its qualification as a REIT. See "United States Federal Income Tax Considerations--Qualifications of the Company as a REIT." A REIT is subject to a number of organizational and operational requirements, including a requirement that it currently distribute to stockholders at least 95% of its "REIT taxable income." REIT taxable income is essentially taxable income, as determined in accordance with the Code, with certain adjustments. The TRUST SERVICES With its investment services, personal trust services and branches now integrated into the Bank's network, General Trust offers wealth management services for high net worth households. Its corporate trust services are geared to the needs of independent businesses and large corporations in Quebec. General Trust and National Bank Securities Inc., another Bank subsidiary, provide active fund management on behalf of their clients. National Bank Securities Inc. also offers its clients a wide selection of mutual funds and discount brokerage services. INSURANCE National Bank Life Insurance Company administers credit insurance plans for loans granted by the Bank and markets various general insurance products. Personal and group insurance products are delivered through National Bank Financial Services, a joint company formed by the Bank and Metropolitan Life. BROKERAGE AND CORPORATE BANKING The Corporate Banking division, with the support of specialized teams based in Montreal and Toronto, offers a broad range of services customized to clients' needs. In addition to providing traditional operating credit and term financing, these teams structure financing for acquisitions or recapitalizations and arrange high-yield financing, often through loan syndicates involving other institutions. They also offer advisory services for restructuring, mergers and acquisitions and for hybrid financings combining debt and equity. Together with the Treasury division, Corporate Banking offers financial risk management instruments for hedging interest rates, foreign exchange and import-export transactions. The division's specialists in banking operations can suggest a vast range of electronic products, such as point-of-sale debit and electronic data interchange (EDI), and tailor them to each client's requirements. The securities brokerage subsidiary Levesque Beaubien Geoffrion Inc. provides services to business clients and individuals, in addition to playing an important role in securing financing for various levels of government. This subsidiary is active on all the major markets through its network of 65 offices. Another subsidiary, Natcan Investment Management Inc., specializes in portfolio management for institutional clients and identifies investment opportunities in Canada the United States and abroad. Pension funds, insurance companies, mutual funds, foundations and religious orders are among the many clients for which this subsidiary manages assets in excess of $8.8 billion. CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS Certain statements contained in this Prospectus which are not historical facts contain forward-looking information with respect to the Company's plans, projections or future performance, the occurrence of which involve certain risks and uncertainties that could cause the Company's actual results or plans to differ materially from those expected by the Company. All written or oral forward-looking statements attributable to the Company are expressly qualified in their entirety by the foregoing cautionary statement. most significant of such adjustments are (i) no deduction is allowed for dividends received, (ii) a deduction is allowed for dividends paid (other than the portion of any dividend attributable to net income from foreclosure property) and for taxes imposed for failing to satisfy certain statutory REIT requirements, and (iii) net income from foreclosure property and net income derived from prohibited transactions is excluded from the determination. Notwithstanding its election to be taxable as a REIT, the Company may be subject to federal, state and/or local tax. See "Risk Factors--Tax Risks" and "United States Federal Income Tax Considerations." THE OFFERING Securities Offered: 300,000 Series Z Preferred Shares. The Exchange Offer: Simultaneously with the filing of this short form prospectus by the Bank, NB Capital Corporation, a 100% controlled subsidiary of the Bank, is offering to exchange (the "Exchangeable Offer") up to 300,000 shares of its 8.35% Noncumulative Exchangeable Preferred Stock, Series A (the "New Preferred Shares") for up to all of its outstanding 8.35% Noncumulative Exchangeable Preferred Stock, Series A (the "Old Preferred Shares") at the rate of one New Preferred Share for each Old Preferred Share tendered. The issuance of the New Preferred Shares is intended to satisfy certain obligations of NB Capital Corporation contained in the Registration Rights Agreement (as defined). See "The Exchange Offer". Registration Rights Agreement: The Old Preferred Shares were sold by the Company on September 3, 1997 to Merrill Lynch, Pierce, Fenner & Smith Incorporated as initial purchaser (the "Initial Purchaser") pursuant to the purchase agreement among the Company, the Bank and the Initial Purchaser (the "Purchase Agreement"). Pursuant to the Purchase Agreement, the Company and the Initial Purchaser entered into the Registration Rights Agreement on September 3, 1997. Pursuant to the Registration Rights Agreement, the Bank and the Company agreed to each file a registration statement within a certain time period and to use their best efforts to cause such registration statements to become effective within an additional time period with respect to the Exchange Offer. The Exchange Offer is intended to satisfy such rights under the Registration Rights Agreement which terminate upon the consummation of the Exchange Offer. See "Registration Rights Agreement." Automatic Exchange: The Series Z Preferred Shares are to be issued, if ever, in connection with the automatic exchange of the Old Preferred Shares and/or New Preferred Shares into which the Old Preferred Shares are exchangeable pursuant to the Exchange Offer. See "Automatic Exchange" and "The Exchange Offer." Ranking: The Series Z Preferred Shares rank senior to the Bank's common shares (the "Common Shares") and all other classes and series of shares of the Bank hereafter issued other than those expressly designated as being on a parity with or senior to the First Preferred Shares of the Bank, pari passu with the other First Preferred Shares of the Bank with respect to cash dividend payments and rights upon liquidation and junior to all claims of the Bank's creditors, including the claims of the Bank's depositors and holders of the Bank's outstanding subordinated debentures. Preferred shares ranking senior to the Series Z Preferred Shares may not be issued without the approval of holders of at least two-thirds of all series of First Preferred Shares. Dividends: Dividends on the Series Z Preferred Shares are payable at the rate of 8.45% per annum of the liquidation preference (being an amount equal to U.S.$84.50 per share), if, when and as declared by the Board of Directors of the Bank. If declared, dividends are payable quarterly in arrears on the 30th day of March, June, September and December in each year, or, if such day is not a business day, on the next business day. Dividends on the Series Z Series A Preferred Shares Issuer NB Capital Corporation, a Maryland corporation. Securities Offered 61,600 Noncumulative Exchangeable Preferred Shares, Series A of the Company. Ranking The Series A Preferred Shares rank senior to the Common Stock with respect to dividend rights and rights upon liquidation. In order to qualify as a REIT, the capital stock of the Company must be held by at least 100 holders during approximately 90% or more of the taxable year beginning in the Company's second taxable year and in each subsequent taxable year. See "United States Federal Income Tax Considerations--Stock Ownership Tests." The Company has issued shares of a series of cumulative, senior preferred stock ("Senior Preferred Stock") with an aggregate liquidation preference of up to US$450,000 and limited transferability to ensure that it meets, and will continue to meet, the 100 person ownership requirement for REIT status without having to constantly monitor the number of holders of Preferred Shares. Except for the Senior Preferred Stock, additional shares of Preferred Stock ranking senior to the Series A Preferred Shares may not be issued without the approval of holders of at least two-thirds of the Series A Preferred Shares. Additional shares of Preferred Stock ranking on a parity with the Series A Preferred Shares may not be issued without the approval of a majority of the Board of Directors and a majority of the Independent Directors. Dividends Dividends on the Series A Preferred Shares are payable at the rate of 8.35% per annum of the liquidation preference (an amount equal to US$83.50 per annum per share calculated by multiplying the annual dividend rate of 8.35% by the liquidation preference of US$1,000 per share, assuming authorization and declaration by the Board of Directors of four quarterly dividends), if, when and as authorized and declared by the Board of Directors. If authorized and declared, dividends are payable quarterly in arrears on the 30th day of March, June, September and December in each year, commencing June 30, 1998. Except for the initial period, which shall commence on and include __________ , 1998 and end on 1998, dividends accrue in each quarterly period from the first day of such period, whether or not dividends were paid with respect to the preceding period. Dividends on the Series A Preferred Shares are not cumulative and, accordingly, if no dividend is authorized and declared on the Series A Preferred Shares by the Board of Directors for a quarterly dividend period, holders of the Series A Preferred Shares will have no right to receive a dividend for that period, and the Company will have no obligation to pay a dividend for that period, whether or not dividends are authorized, declared and paid for any future period with respect to either the Series A Preferred Shares or the Common Stock. If no dividend is paid on the Series A Preferred Shares for a quarterly dividend period, the payment of dividends on the Common Stock will be prohibited for that period and at least the following three quarterly dividend periods. See "Description of Series A Preferred Shares--Dividends." Preferred Shares are not cumulative and, accordingly, if no dividend is declared on the Series Z Preferred Shares by the Bank for a quarterly dividend period, holders of the Series Z Preferred Shares will have no right to receive a dividend for that period, and the Bank will have no obligation to pay a dividend for that period, whether or not dividends are declared and paid for any future period. See "Description of the Series Z Preferred Shares--Dividends." The Bank's ability to pay cash dividends is subject to regulatory and other restrictions described herein. Redemption: The Bank may not redeem the Series Z Preferred Shares before September 3, 2007. After such date, the Series Z Preferred Shares may be redeemed for cash at the option of the Bank, in whole or in part at any time and from time to time, at the redemption prices set forth herein, plus the quarterly accrued and unpaid dividends, if any, thereon for the then-current dividend period to, but excluding, the date fixed for redemption. Redemption of the Series Z Preferred Shares will be subject to compliance with applicable regulatory and other restrictions, including the requirement of the prior consent of the Superintendent. See "Description of Series Z Preferred Shares-- Redemption." Voting Rights: Holders of Series Z Preferred Shares will not have any voting rights, except as expressly provided herein. On any matter on which holders of the Series Z Preferred Shares may vote, each Series Z Preferred Share will be entitled to one vote. See "Description of Series Z Preferred Shares--Voting Rights." Use of Proceeds: The Series Z Preferred Shares will only be issued, if ever, upon the automatic exchange of the Old Preferred Shares and/or New Preferred Shares resulting from the Exchange Offer. The proceeds from the sale of the Old Preferred Shares were used by NB Capital Corporation to acquire a portfolio of mortgage related assets. The automatic exchange of the Old Preferred Shares and/or New Preferred Shares into Series Z Preferred Shares will produce no proceeds to the Bank. See "Use of Proceeds." Absence of a Public Market: There is currently no public market for the Series Z Preferred Shares and such shares will not be listed on any securities exchange or for quotation through the National Association of Securities Dealers Automated Quotation System. Liquidation Preference The liquidation preference for each of the Series A Preferred Shares is US$1,000. Upon liquidation, holders of the Series A Preferred Shares will also be entitled to receive an amount equal to the quarterly accrued and unpaid dividend, if any, thereon to the date of liquidation. See "Description of Series A Preferred Shares--Rights Upon Liquidation." Registration Rights Agreement The Series A Preferred Shares were sold by the Company on the Issue Date pursuant to the Purchase Agreement dated August 22, 1997 among the Company, the Bank and the Initial Purchaser (the "Purchase Agreement"). Pursuant to the Purchase Agreement, the Company and the Initial Purchaser entered into the Registration Rights Agreement. The Offer and the Exchange Offer are intended to satisfy certain rights under the Registration Rights Agreement, which terminate upon the consummation of the Offer and the Exchange Offer. The holders of the Series A Preferred Shares are not entitled to any exchange or registration rights with respect to the Series A Preferred Shares. The Series A Preferred Shares are subject to the payment of additional interest under certain circumstances if the Company is not in compliance with its obligations under the Registration Rights Agreement. See "Exchange Offer; Registration Rights." Description of the Series A Preferred Shares The form and terms of the issued by the Company Series A Preferred Shares pursuant to the Offer and the Exchange Offer are the same as the form and terms of the Series A Preferred Shares sold by the Company on the Issue Date except that (i) such Series A Preferred Shares issued by the Company pursuant to the Offer and the Exchange Offer will be registered under the Securities Act and therefore will not bear legends restricting the transfer thereof and (ii) holders thereof will not be entitled to the registration rights available under the Registration Rights Agreement, which registration rights with respect to Series A Preferred Shares will terminate upon the consummation of the Offer and the Exchange Offer. See "Description of the Series A Preferred Shares." Redemption The Series A Preferred Shares are not redeemable prior to September 3, 2007 (except upon the occurrence of a Tax Event, as defined in "Description of Series A Preferred Shares--Redemption," on or after September 3, 2002). On and after September 3, 2007, the Series A Preferred Shares may be redeemed for cash at the option of the Company, in whole or in part, at any time and from time to time, at the redemption prices set forth herein, plus the quarterly accrued and unpaid dividend, if any, thereon to the date of redemption. Upon the occurrence of a Tax Event, on or after September 3, 2002, the Company will have the right to redeem the Series A Preferred Shares in whole (but not in part) at a redemption price equal to the Make-Whole Amount (as defined in "Description of Series A Preferred Shares--Redemption"), plus the quarterly accrued and unpaid dividend, if any, thereon to the date of redemption. Any redemption is subject to the prior written approval of the Superintendent. See "Description of Series A Preferred Shares--Redemption." The Series A Preferred Shares are not subject to any sinking fund or mandatory redemption and are not convertible into any other securities of the Company. CAPITALIZATION The following table sets forth the actual capital of the Bank at October 31, 1997 and as adjusted as of such date to give effect to the automatic exchange of the Old Preferred Shares and/or New Preferred Shares into Series Z Preferred Shares of the Bank. This table should be read in conjunction with the Consolidated Financial Statements of the Bank and the notes thereto included elsewhere in this Short Form Prospectus and in the documents incorporated herein by reference. <TABLE> <CAPTION> October 31, 1997 Actual As adjusted (1) (in millions of Canadian dollars) <S> <C> <C> Liabilities Deposits............................................................... $ 43,270 $ 43,270 Bankers acceptances.................................................... 2,273 2,273 Obligations related to securities sold short........................... 4,225 4,225 Securities sold under repurchase agreements............................ 9,038 9,038 Other liabilities...................................................... 3,134 3,134 ----------- ----------- Non-controlling interest............................................... 61,940 61,940 ---------- ---------- Bank debentures........................................................ 466 43 ----------- ------------ Shareholders' equity................................................... 1,069 1,069 ----------- ----------- First Preferred shares without par value: Unlimited number of shares authorized, issued and outstanding: 286,610 Series 5 shares................................................ 29 29 422,633 Series 7 shares................................................ 10 10 789,638 Series 8 shares................................................ 20 20 3,680,000 Series 10 shares............................................. 92 92 4,000,000 Series 11 shares ............................................ 100 100 5,000,000 Series 12 shares............................................. 125 125 300,000 Series Z shares(2)............................................. -- 423 ------------ ------------ Total ................................................................. 376 799 Common shares without par value: Unlimited number of shares authorized ................................. 170,461,483 shares issued and outstanding.............................. 1,309 1,309 Retained earnings ..................................................... 1,075 1,075 ----------- ----------- 2,760 3,183 ----------- ----------- Total liabilities and shareholders' equity............................. 66,235 66,235 =========== =========== Regulatory capital ratios Assets to capital multiple............................................. 16.4 16.4 Tier 1 risk-based ..................................................... 8.1% 8.1% Total risk-based ...................................................... 11.3% 11.3% </TABLE> - ----------------- (1) Adjusted to give effect to the automatic exchange of the Old Preferred Shares and/or New Preferred Shares into Series Z Preferred Shares of the Bank assuming that the limit on the amount of Preferred Shares includable as core capital is applicable to the Series Z Preferred Shares of the Bank. (2) Exchange rate is 1.4084 Canadian dollars for 1 U.S. dollar. Automatic Exchange Each of the Series A Preferred Shares will be exchanged automatically for one Bank Preferred Share upon the occurrence of an Exchange Event. See "Description of Series A Preferred Shares--Automatic Exchange." Voting Rights Holders of the Series A Preferred Shares will not have any voting rights, except as expressly provided herein. On any matter on which holders of the Series A Preferred Shares may vote, each of the Series A Preferred Shares will be entitled to one vote. See "Description of Series A Preferred Shares--Voting Rights." Ownership Limits Beneficial ownership by any individual of more than 5% of any outstanding series of Preferred Stock, including the Series A Preferred Shares offered hereby, is restricted in order to preserve the Company's status as a REIT for United States federal income tax purposes. See "Description of Capital Stock--Restrictions on Ownership and Transfer." Ratings The Series A Preferred Shares are rated "a2" by Moody's Investors Service, Inc. and "BBB+" by Standard & Poor's Ratings Services. A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organization. Use of Proceeds There will be no proceeds to the Company from the Offer. The Initial Purchaser will receive all of the net proceeds from the resale of the Series A Preferred Shares. ERISA Considerations Each holder of the Series A Preferred Shares will be deemed to have directed the Company to invest in the Initial Mortgage Assets issued by NB Finance (as well as the other assets held by the Company and identified at the time of purchase) and represented and agreed that either (A) no part of the assets to be used by it to acquire and hold such Series A Preferred Shares constitutes the assets of any (I) employee benefit plan (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) subject to Title I of ERISA, (II) plan (as defined in section 4975(e)(1) of the Code) or (III) entity whose underlying assets include "plan assets" under Department of Labor Regulation 29 C.F.R. Section 2510.3-101 (collectively, "Plans") or (B) one or more prohibited transaction statutory or class exemptions apply such that the use of such plan assets to acquire and hold such Series A Preferred Shares will not constitute a non-exempt prohibited transaction under ERISA or the Code. In addition, in the event that the Series A Preferred Shares are not treated as "publicly-offered securities" (within the meaning of the above-referenced regulations) as of the dates on which the Offer and the Exchange Offer are consummated or (if no Exchange Offer is consummated) is the shelf registration statement, which the Company is required to file, pursuant to the Registration Rights Agreement, in lieu of or in addition to the Registration Statement, in the event (i) the Company is not permitted to effect the Exchange Offer, (ii) for any reason, the Registration Statement is not declared effective within 180 days of the Issue Date, or (iii) in certain other circumstances (the "Shelf Registration Statement"), is declared effective, then during the period commencing on such date and ending on the date on which the Series A Preferred Shares become "publicly-offered securities," each Plan DESCRIPTION OF THE SERIES Z PREFERRED SHARES The following is a summary of the rights, privileges, restrictions and conditions of the First Preferred Shares as a class and of the Series Z Preferred Shares as a series. Certain Provisions of the First Preferred Shares as a Class The authorized first preferred share capital of the Bank consists of an unlimited number of First Preferred Shares, without par value, which may be issued for a maximum aggregate consideration of $1,000,000,000 or the equivalent thereof in foreign currencies. The Board of Directors of the Bank may by resolution divide any unissued First Preferred Shares into series and fix the number of shares in each series and determine the designation, rights, privileges, restrictions and conditions thereof. Priority The First Preferred Shares of each series will rank on a parity with First Preferred Shares of every other series and are entitled to preference over the Common Shares, and any other shares of the Bank ranking junior to the First Preferred Shares with respect to the payment of dividends and upon any distribution of assets in the event of liquidation, dissolution or winding-up of the Bank. Restriction The Bank will not, without the approval of the holders of the First Preferred Shares, create or issue any shares ranking in priority to or pari passu with the First Preferred Shares, nor create or issue any additional series of First Preferred Shares, unless all cumulative dividends have been declared and paid or set aside for payment and all declared and unpaid non-cumulative dividends have been paid or set aside for payment. Voting Rights The Board of Directors is empowered to set voting rights for each series. The holders of the First Preferred Shares are not entitled to any voting rights as a class except as provided above or by law or with respect to the right to vote on certain matters as specified under "Approval of the Holders of the First Preferred Shares." Approval of the Holders of the First Preferred Shares The provisions with respect to First Preferred Shares will not be deleted or modified except with a resolution carried by the affirmative vote of not less than 66 2/3% of the votes cast at a meeting of holders of First Preferred Shares at which a majority of the outstanding First Preferred Shares is represented or, if no quorum is present at such meeting, at any adjourned meeting at which no quorum requirements would apply. Certain Provisions of the Series Z Preferred Shares as a Series Issue Price The Series Z Preferred Shares will have an issue price of U.S.$1,000 per share. purchaser will be deemed to have appointed an independent fiduciary (the "Independent Fiduciary"), which will be identified by the Company to exercise any discretionary authority with respect to transactions involving both the Company and the Bank or any Bank affiliate. The Independent Fiduciary will be identified prior to any such transaction and will be subject to removal and replacement by a majority of the holders of the Series A Preferred Shares. Any Plan fiduciary that proposes to cause a Plan to invest in Series A Preferred Shares should consult with its counsel with respect to the potential applicability of ERISA and the Code to such investment and whether any exemption or exemptions would be applicable and determine on its own whether all conditions of such exemption or exemptions have been satisfied. Any such Plan fiduciary should also determine whether the investment in Series A Preferred Shares is permitted under the governing Plan instruments and is appropriate for the Plan in view of the overall investment policy and the composition and diversification of its portfolio. Transfer Restrictions The Series A Preferred Shares have not been registered under the Securities Act and, until so registered pursuant to an effective registration statement of which this Prospectus will form a part, may not be offered or sold except (i) to "Qualified Institutional Buyers" (as defined in Rule 144A under the Securities Act) in reliance upon the exemption from the registration requirements of the Securities Act provided by Rule 144A, (ii) to institutional "accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) who purchase Series A Preferred Shares with a liquidation preference of not less than US$100,000 (i.e., 100 Series A Preferred Shares) in transactions exempt from the registration requirements of the Securities Act or (iii) pursuant to offers and sales that occur outside the United States in compliance with Regulation S under the Securities Act. See "Description of Capital Stock--Restrictions on Ownership Transfer."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001049625_hawker_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001049625_hawker_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE FINANCIAL STATEMENTS AND RELATED NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE NOTES. THE COMPANY Hawker Pacific Aerospace repairs and overhauls aircraft and helicopter landing gear, hydromechanical components, and wheels, brakes and braking system components for a diverse international customer base, including commercial airlines, air cargo operators, domestic government agencies, aircraft leasing companies, aircraft parts distributors and original equipment manufacturers ("OEMs"). In addition, the Company distributes and sells new and overhauled spare parts and components for both fixed wing aircraft and helicopters. The Company acquired British Airways plc's ("British Airways") landing gear repair and overhaul operations (the "BA Assets") in the United Kingdom for approximately $19.5 million in February 1998 (the "BA Acquisition") and entered into a seven-year exclusive agreement to service British Airways' fleet of approximately 250 jet aircraft. The BA Acquisition provided the Company with an expanded operational base to service aircraft fleets on a worldwide basis from its western United States, United Kingdom and Netherlands facilities. During the twelve months ended June 30, 1998 the Company had in excess of 480 customers worldwide. Approximately 58.5% of the Company's revenue during the six months ended June 30, 1998 came from long-term contracts, compared to 31.8% for the same period in 1997. Customers that have entered into long-term contracts with the Company include American Airlines Inc. ("American Airlines"), British Airways, British Midland Engineering Services ("British Midlands"), Canadian Airlines International Ltd. ("Canadian Airlines"), Federal Express Corporation ("FedEx"), Scandinavian Airlines System ("SAS"), United Parcel Service Co. ("UPS"), the United States Coast Guard ("USCG") and US Airways Group, Inc. ("US Airways"). The Company has achieved a significant market presence. Through its predecessors, the Company has been providing aftermarket products and services to the aviation industry for over 30 years and believes it has gained an international reputation for superior quality of service, competitive pricing and rapid turnaround time. The Company's senior executives have, on average, over 20 years of industry experience and have served the Company for an average of seven years. The Company has also developed proprietary software to manage and schedule work flow and coordinate many aspects of shop flow operations when tracking landing gear that can have up to 2,500 parts. The Company believes that its management information systems are among the most advanced in its industry, permitting the Company to achieve greater operating efficiencies, offer a higher level of customer service than its competitors and provide complete traceability of aircraft parts. The Company can also manufacture certain replacement parts in-house, enabling it to reduce costs using proprietary or specialized equipment and techniques. The Company believes it is well positioned to benefit from the following aviation industry trends that are driving increased demand for third-party repair, overhaul and spare parts inventory management services: INCREASED WORLDWIDE AIR TRAFFIC. The Boeing Co.'s ("Boeing") 1998 CURRENT MARKET OUTLOOK (the "Boeing Outlook") estimates that the global aircraft fleet will grow from approximately 12,300 aircraft at the end of 1997 to over 17,700 aircraft in 2007 and 26,200 aircraft in 2017. OUTSOURCING BY AIRCRAFT OPERATORS. Industry analysts have forecasted the commercial landing gear service market to grow from $258 million in 1995 to $638 million by 2005. According to these industry sources, the outsourced portion of this market was $163 million in 1995, or 63% of the commercial market, and is estimated to grow to $480 million by 2005, or 75% of the commercial market. There has also been an increase in subcontracting of repair and overhaul services by European aircraft operators which formerly participated in repair consortiums. GREATER EMPHASIS ON TRACEABILITY. The Company believes that the increased regulatory and consumer emphasis on the traceability of aircraft parts is driving demand for more comprehensive third-party repair, overhaul and spare parts inventory management services. The Company's goal is to enhance its position as a leading worldwide aviation aftermarket service provider specializing in the repair and overhaul of landing gear, hydraulic systems and other componentry for aircraft, through the following strategies: EXPAND INTERNATIONAL OPERATIONS. The Company believes that the international aviation aftermarket offers the greatest potential for substantial growth. With service facilities in the western United States, the United Kingdom and the Netherlands, the Company is strategically situated to service customers in North America, Europe, Asia and the Middle East. Since the BA Acquisition in February 1998, the Company has successfully entered into long-term service agreements with British Midlands, SAS and UPS to be serviced from its United Kingdom facility. INCREASE SERVICE OFFERINGS. The Company seeks continued growth by offering landing gear repair and overhaul services to new and existing customers across a growing variety of aircraft, while expanding hydromechanical product lines as well as related wing and component services. FOCUS ON LONG-TERM SERVICE AGREEMENTS. The Company intends to increase the percentage of revenues derived from long-term service agreements. The Company's success in this effort includes the Company's September 1997 seven-year exclusive agreement with American Airlines to service landing gear on all Boeing 757 aircraft within its fleet and the February 1998 seven-year exclusive agreement with British Airways. While long-term agreements are often terminable on short notice, the Company believes that securing long-term service agreements will generate a more predictable and consistent flow of business. POTENTIAL GROWTH THROUGH ACQUISITIONS. The Company intends to evaluate and pursue strategic acquisitions of, or alliances with, companies that complement or expand the Company's services, geographic coverage or product lines. Hawker Pacific was incorporated in 1980 in California. Unless the context otherwise requires, all references henceforth to the "Company" or "Hawker Pacific" shall also include Hawker Pacific Aerospace Limited, a wholly-owned United Kingdom subsidiary formed in November 1997 (the "Subsidiary"). The Company's principal executive offices are located at 11240 Sherman Way, Sun Valley, California 91352, and its telephone number is (818) 765-6201. THE OFFERING <TABLE> <S> <C> Securities Offered................ $50,000,000 aggregate principal amount of % Convertible Subordinated Notes due 2005 (the "Notes") plus an additional $7,500,000 aggregate principal amount of Notes if the over- allotment option is exercised in full. Interest Payment Dates............ March 1 and September 1 of each year, commencing March 1, 1999. Maturity Date..................... October 1, 2005. Conversion Rights................. The Notes are convertible, in whole or in part, at the option of the Holder, at any time following the date of original issuance, unless previously redeemed or repurchased, into shares of Common Stock at a conversion price of $ per share, subject to adjustments under certain circumstances. See "Description of Notes--Conversion Rights." Optional Redemption............... The Notes are redeemable, in whole or in part, at the Company's option, at any time on or after October 1, 2001, upon not less than 30 nor more than 60 days notice. The Notes are redeemable in each case together with accrued and unpaid interest and liquidated damages, if any. See "Description of Notes--Redemption at the Option of the Company." Repurchase Events................. Each Holder of the Notes may require the Company to repurchase such Holder's Notes, in whole or in part, in the event of a Change in Control (as defined herein) at a purchase price equal to 100% of the principal amount of such Notes plus accrued and unpaid interest and liquidated damages, if any, to the date of repurchase. See "Description of Notes--Repurchase of Notes at the Option of the Holder upon a Change of Control." Subordination..................... The Notes are general unsecured obligations of the Company and are subordinate in right of payment to all existing and future Senior Indebtedness (as defined herein) of the Company and effectively subordinated to all obligations (including trade payables) of the Company's subsidiaries. The Indenture governing the Notes does not limit or prohibit the Company or its subsidiaries from incurring additional indebtedness, including Senior Indebtedness. See "Description of Notes--Subordination of Notes." Use of Proceeds................... The net proceeds to the Company from the sale of the Notes offered hereby are expected to be $47.5 million. The Company will use approximately $41.4 million of such net proceeds to pay off indebtedness under its existing credit facilities and long-term debt. The Company will use the balance of the net proceeds for general corporate purposes, including working capital for the expansion of operations and potential acquisition of complementary business. See "Use of Proceeds." </TABLE> <TABLE> <S> <C> Trading........................... Application has been made to list the Notes on the Nasdaq National Market. The Company's Common Stock is quoted on the Nasdaq National Market under the symbol "HPAC." Risk Factors...................... See "Risk Factors" for a discussion of factors to be considered before purchasing any Notes offered hereby. </TABLE> FORWARD-LOOKING STATEMENTS This Prospectus contains forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, such as statements of the Company's plans, objectives, expectations and intentions, that involve risks and uncertainties that could cause actual results to differ materially from those discussed in such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section entitled "Risk Factors" as well as those discussed elsewhere in this Prospectus. Such forward-looking statements speak only as of the date of this Prospectus. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained herein to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. SUMMARY OF CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE, PER SHARE DATA AND RATIOS) <TABLE> <CAPTION> SUCCESSOR(1) PREDECESSOR(1) ------------------------------------------------------------------- -------------------------- SIX MONTHS YEAR TEN MONTHS TWO MONTHS YEAR ENDED ENDED ENDED ENDED ENDED JUNE 30, DECEMBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, -------------------- 1995(2) 1996(2) 1996 1997 1997 1998 ------------- ----------- ------------ YEAR ------------ --------- --------- ENDED DECEMBER 31, 1996 ----------------- (PRO FORMA)(2)(3) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues................... $ 35,012 $ 32,299 $ 6,705 $ 39,004 $ 41,042 $ 20,358 $ 31,039 Cost of revenues........... 28,993 27,027 4,599 31,799 31,430 15,680 24,102 ------------- ----------- ------------ ----------------- ------------ --------- --------- Gross profit............... 6,019 5,272 2,106 7,205 9,612 4,678 6,937 Selling, general and administrative........... 4,837 5,044 1,059 6,161 5,897 2,794 4,090 Restructuring charges...... -- 1,196 -- 1,196 -- -- -- ------------- ----------- ------------ ----------------- ------------ --------- --------- Income (loss) from operations............... 1,182 (968) 1,047 (152) 3,715 1,884 2,847 Interest expense, net...... (1,598) (1,609) (196) (2,305) (2,428) (1,171) (1,449) Miscellaneous (net)........ -- -- -- -- (32) -- -- ------------- ----------- ------------ ----------------- ------------ --------- --------- (416) (2,577) 851 (2,457) 1,255 713 1,398 Income tax expense (benefit)................ (680) (971) 382 (934) 467 265 5 ------------- ----------- ------------ ----------------- ------------ --------- --------- Net income (loss).......... $ 264 $ (1,606) $ 469 $ (1,523) $ 788 $ 448 $ 1,393 ------------- ----------- ------------ ----------------- ------------ --------- --------- ------------- ----------- ------------ ----------------- ------------ --------- --------- Net income (loss) per share Basic.................... $ 0.15 $ (0.49) $ 0.25 $ 0.14 $ 0.26 ------------ ----------------- ------------ --------- --------- Diluted.................. $ 0.15 $ (0.49) $ 0.25 $ 0.14 $ 0.25 ------------ ----------------- ------------ --------- --------- Weighted average shares outstanding Basic.................... 3,120,603 3,120,603 3,145,079 3,120,603 5,420,012 Diluted.................. 3,120,603 3,120,603 3,145,079 3,120,603 5,573,074 EBITDA(4).................... $ 2,036 $ (149) $ 1,247 $ 1,098 $ 4,919 $ 2,491 $ 4,141 Adjusted EBITDA(4)(5)........ $ 2,663 $ 3,057 $ 1,247 $ 4,304 $ 4,919 $ 2,491 $ 4,141 Ratio of Adjusted EBITDA to Interest Expense(4)(5)..... 1.7 1.9 6.4 1.8 2.0 2.1 2.9 Ratio of Earnings to Fixed Charges(6)................. 0.8 -- 4.6 -- 1.5 1.6 1.8 STATEMENT OF CASH FLOWS DATA: Cash provided by (used in) operating activities..... $ (4,223) $ (230) $ 2,279 $ 1,663 $ 322 $ (586) $ (6,238) Cash used in investing activities............... $ (4,114) $ (1,199) $ (28,553) $ (29,752) $ (3,464) $ (534) $ (25,622) Cash provided by financing activities............... $ 8,010 $ 2,435 $ 27,329 $ 29,764 $ 2,247 $ 175 $ 32,274 </TABLE> <TABLE> <CAPTION> JUNE 30, 1998 -------------------------- ACTUAL AS ADJUSTED(7) --------- --------------- <S> <C> <C> BALANCE SHEET DATA: Working capital........................................................................ $ 9,833 $ 28,279 Total assets........................................................................... 79,204 87,537 Total long-term debt (excluding current portion)....................................... 29,054 50,000 Total shareholders' equity............................................................. 23,997 23,684 </TABLE> - ------------------------------ (1) Predecessor information represents the historical financial data of the Company when it was owned by BTR Dunlop, Inc. ("BTR"). Successor information represents the historical financial data after the acquisition of the Company by its existing shareholders (the "BTR Transaction"). See "Certain Transactions" and Note 1 of Notes to Consolidated Financial Statements. (2) Year ended December 31, 1995, the ten months ended October 31, 1996, and pro forma year ended December 31, 1996 include non-recurring charges to cost of revenues of $927,000, $1,063,000, and $1,063,000, respectively, relating to the merger of certain operations of Dunlop Aviation, Inc., the shutdown of certain of these operations and nonproductive inventory. Selling, general and administrative expenses in year ended December 31, 1995 include a net gain of $300,000, and in the ten months ended October 31, 1996 and pro forma year ended December 31, 1996 include expenditures of $947,000, all relating to an environmental claim and settlement. The foregoing shall be referred to as the "non-recurring charges." See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001050028_price_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001050028_price_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION (INCLUDING THE FINANCIAL STATEMENTS AND THE NOTES THERETO) INCLUDED ELSEWHERE IN THIS PROSPECTUS. EACH PROSPECTIVE INVESTOR IS URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY. UNLESS OTHERWISE INDICATED, ALL REFERENCES HEREIN TO "HOLDINGS" REFER TO PRICE COMMUNICATIONS CELLULAR HOLDINGS, INC. AND ALL REFERENCES HEREIN TO THE "COMPANY" REFER TO HOLDINGS AND ITS SUBSIDIARIES AND THEIR RESPECTIVE PREDECESSORS. ALL REFERENCES HEREIN TO "PCC" REFER TO PRICE COMMUNICATIONS CORPORATION AND, UNLESS THE CONTEXT REQUIRES OTHERWISE, ITS SUBSIDIARIES. REFERENCES HEREIN TO THE "ACQUISITION" REFER TO THE ACQUISITION BY PRICE COMMUNICATIONS WIRELESS, INC. ("PCW"), A WHOLLY OWNED DIRECT SUBSIDIARY OF HOLDINGS, OF PALMER WIRELESS, INC. ("PALMER") AND THE RELATED SALE OF THE FORT MYERS AND GEORGIA-1 SYSTEMS OF PALMER, AS DESCRIBED BELOW UNDER "THE PALMER ACQUISITION." AS USED IN THIS PROSPECTUS, THE TERMS "PCW" AND "PALMER" INCLUDE THEIR RESPECTIVE SUBSIDIARIES AND PREDECESSORS. EXCEPT FOR HISTORICAL FINANCIAL INFORMATION AND UNLESS OTHERWISE INDICATED, ALL INFORMATION PRESENTED BELOW RELATING TO THE COMPANY, PCC AND PCW INCLUDING POPS AND NET POPS (EACH AS DEFINED) AND THE SYSTEMS, GIVES EFFECT TO THE CONSUMMATION OF THE ACQUISITION (INCLUDING THE SALE OF THE FORT MYERS AND GEORGIA-1 SYSTEMS). ALL INFORMATION RELATING TO PCC SHARES HAS BEEN ADJUSTED TO GIVE EFFECT TO STOCK SPLITS. THE COMPANY The Company is currently engaged in the construction, development, management and operation of cellular telephone systems in the southeastern United States. At March 31, 1998, the Company provided cellular telephone service to 326,721 subscribers in Georgia, Alabama, Florida and South Carolina in a total of 16 licensed service areas composed of eight Metropolitan Statistical Areas ("MSAs") and eight Rural Service Areas ("RSAs"), with an aggregate estimated population of 3.3 million. The Company sells its cellular telephone service as well as a full line of cellular products and accessories, including pagers, principally through its network of retail stores. The Company markets all of its products and services under the nationally recognized service mark CELLULARONE-Registered Trademark-. OPERATIONS The Company has developed its business through the acquisition and integration of cellular telephone systems, clustering multiple systems in order to provide broad areas of uninterrupted service and achieve certain economies of scale, including centralized marketing and administrative functions as well as multi-system capital expenditures. The Company devotes considerable attention to engineering, maintenance and improvement of its cellular telephone systems in an effort to deliver high-quality service to its subscribers and to implement new technologies as soon as economically practicable. Through its participation in the North American Cellular Network ("NACN"), the Company is able to offer ten-digit dialing access to its subscribers when they travel outside the Company's service areas, providing them with convenient roaming access throughout large areas of the United States, Canada, Mexico and Puerto Rico served by other NACN participants. By marketing its products and services under the CELLULARONE-Registered Trademark- name, the Company also enjoys the benefits of association with a nationally recognized service mark. The Company's cellular telephone systems serve contiguous licensed service areas in Georgia, Alabama and South Carolina. The Company also has a cellular service area in Panama City, Florida. The following table sets forth as of March 31, 1998, with respect to each service area in which the Company owns a cellular telephone system, the estimated population, the Company's beneficial ownership percentage, the Net Pops (as defined) and the date of initial operation of such system by Palmer or a predecessor operator. <TABLE> <CAPTION> ESTIMATED OWNERSHIP DATE SYSTEM SERVICE AREA(1) POPULATION(2) PERCENTAGE NET POPS OPERATIONAL - ------------------------------------------------------------ ------------ ----------- ---------- ------------- <S> <C> <C> <C> <C> Albany, GA.................................................. 118,527 86.5% 102,526 4/88 Augusta, GA................................................. 439,116 100.0 439,116 4/87 Columbus, GA................................................ 254,150 85.2 216,518 11/88 Macon, GA................................................... 313,686 99.2 311,234 12/88 Savannah, GA................................................ 283,978 98.5 279,718 3/88 Georgia-6 RSA............................................... 199,516 96.3 192,134 4/93 Georgia-7 RSA............................................... 134,376 100.0 134,376 10/91 Georgia-8 RSA............................................... 157,451 100.0 157,451 10/91 Georgia-9 RSA............................................... 119,410 100.0 119,410 9/92 Georgia-10 RSA.............................................. 149,699 100.0 149,699 10/91 Georgia-12 RSA.............................................. 211,799 100.0 211,799 10/91 Georgia-13 RSA.............................................. 147,392 86.5 127,494 10/90 Dothan, AL.................................................. 136,160 94.6 128,807 2/89 Montgomery, AL.............................................. 318,371 92.8 295,430 8/88 Alabama-8, RSA.............................................. 171,993 100.0 171,993 7/93 <CAPTION> ------------ ---------- <S> <C> <C> <C> <C> Subtotal.................................................... 3,155,624 3,037,705 <CAPTION> ------------ ---------- <S> <C> <C> <C> <C> Panama City, FL............................................. 146,018 78.4 114,493 9/88 <CAPTION> ------------ ---------- <S> <C> <C> <C> <C> Total....................................................... 3,301,642 3,152,198 <CAPTION> ------------ ---------- ------------ ---------- </TABLE> - ------------------------ (1) Does not include the Alabama-5 RSA and South Carolina-7 RSA where the Company has interim operating authority ("IOA"). IOA is granted for an area to a license holder in an adjacent area when there are no license holders in such area. The Company has no subscribers in the South Carolina-7 RSA, but instead provides roaming access to its own subscribers and others when they travel in this service area, utilizing its existing cell sites. Construction permits were granted to third parties ("Permittees") for the Alabama-5 RSA and South Carolina-7 RSA. The Permittees are required to complete construction of their respective RSA within 18 months. After completing construction, a Permittee may give the Company thirty days prior written notice, at which point the Company would be required to sell all of its subscribers of its other systems who reside within the boundaries of the markets to the Permittee at cost. The Company, along with others, is currently in negotiations to purchase the Alabama-5 RSA and the South Carolina-7 RSA. No assurance can be given, however, that the Company will be successful in consummating such purchase. (2) Based on population estimates for 1997 from the spring 1998 edition of The Wireless Communication Industry published by Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") (the "DLJ Pop Book"). COMPANY STRATEGY The Company's four strategic objectives are to: (1) expand its revenue base by increasing penetration in existing service areas and encouraging greater usage among its existing customers; (2) provide high-quality customer service to create and maintain customer loyalty; (3) enhance performance by aggressively pursuing opportunities to increase operating efficiencies; and (4) expand its regional cellular communications presence by selectively acquiring additional interests in cellular telephone systems (including minority interests). Specifically, the Company strives to achieve these objectives through implementation of the following: AGGRESSIVE, DIRECT MARKETING. The Company employs a two-tier direct sales force. A retail sales force handles walk-in traffic at the Company's 37 retail outlets, and a targeted sales staff solicits certain industry and government subscribers. The Company's management believes that its internal sales force is far more likely than independent agents to successfully select and screen new subscribers and select pricing plans that realistically match subscriber means and needs and to personally keep in contact with new customers. FLEXIBLE, VALUE-ORIENTED PRICING PLANS. The Company provides a range of pricing plans, each of which includes a monthly access fee and, in most cases, a bundle of "free" minutes. Additional home rate minutes are charged at rates ranging from $0.05 per minute to $1.25 per minute depending on the customer's usage plan and the time of day. In addition, the Company offers wide area home rate roaming in the Company's systems and low flat rate roaming in a six state region in the southeastern United States. The Company believes that its bundled minute offerings will encourage greater customer usage. By bundling the number of minutes a customer can use for one flat rate, subscribers perceive greater value in their cellular service and become less usage sensitive, i.e., they can increase their cellular phone usage without seeing large corresponding increases in their cellular bill. CONTINUALLY ADOPTING STATE OF THE ART SYSTEM DESIGN. The Company's network allows the delivery of full personal communication services ("PCS") functionality to its digital cellular customers, including primarily caller ID, short message paging and extended battery life. The Company's network provides for "seamless handoff" between digital cellular and PCS operators that, like the Company, employ Time Division Multiple Access ("TDMA") technology, one of three industry standards and the one employed by AT&T, SBC and others; i.e, the Company's customers may leave the Company's service area and enter an area serviced by a PCS provider using TDMA technology without noticing the difference, and vice versa. The Company believes this innovation will allow the Company to be the roaming partner of choice for such PCS operators. The Company has a favorable agreement with AT&T with respect to PCS roaming and expects that other PCS operators may choose, like AT&T, to concentrate PCS buildout in urban centers rather than the more rural areas in which the Company concentrates. FOCUSING ON CUSTOMER SERVICE. Customer service is an essential element of the Company's marketing and operating philosophy. The Company is committed to attracting new subscribers and retaining existing subscribers by providing consistently high-quality customer service. In each of its cellular service areas, the Company maintains a local staff, including a market manager, customer service representatives, technical and engineering staff, sales representatives and installation and repair facilities. Each cellular service area handles its own customer-related functions such as credit evaluations, customer evaluations, account adjustments and rate plan changes. In addition, subscribers are able to report cellular telephone service or account problems 24 hours a day. To ensure high-quality service, Cellular One Group authorizes a third-party marketing research firm to perform customer satisfaction surveys of each of its licensees. Licensees must achieve a minimum satisfaction level in order to continue using the CELLULARONE-Registered Trademark- service mark. The Company has repeatedly ranked number one in certain customer satisfaction categories among all Cellular One operators (#1 MSA in its category in 1997, 1996, 1995, 1993, and 1992; #1 RSA in its category in 1995). AGGRESSIVE COST CONTROL EFFORTS. The Company believes that its monthly operating costs per subscriber rank among the lowest in the industry. The Company's management attributes this competitive advantage to a variety of factors, including the efficiencies associated with its direct sales force, extensive use of in-house technical and engineering staff, and maintenance of aggressive fraud control procedures, as well as general efforts to reduce corporate general and administrative expenses. The Company has also realized substantial savings on its interconnection charges from landline carriers by using its own microwave and fiber optic network to connect cellular switching equipment to cell sites without the use of landline carriers. The Company was incorporated in the State of Delaware in 1997. The address of the Company is 45 Rockefeller Plaza, New York, New York 10020. The Company's phone number is (212) 757-5600. PRICE COMMUNICATIONS CORPORATION PCC has historically been a nationwide communications company owning and then disposing of a number of television, radio, newspaper, cellular telephone and other communications and related properties. PCC's business strategy is to acquire communications properties at prices PCC considers attractive, finance such properties on terms satisfactory to PCC, manage such properties in accordance with its operating strategy and dispose of them if and when PCC determines such dispositions to be in its best interests. Prior to 1997 PCC owned a number of television, radio, newspaper and other media and related properties which were disposed of pursuant to PCC's long-standing policy of buying and selling media properties at times deemed advantageous by PCC's Board of Directors. On October 6, 1997, PCW acquired Palmer in the Acquisition, as described below. PCC is currently engaged through PCW in the construction, development, management and operation of cellular telephone systems in the southeastern United States. PCC was organized in New York in 1979 and began active operations in 1981. Its principal executive offices are located at 45 Rockefeller Plaza, New York, New York 10020, and its telephone number is (212) 757-5600. THE PALMER ACQUISITION Prior to the Merger described below, Holdings had no assets, liabilities or operations other than the proceeds from the issuance of the 13 1/2% Holdings Notes (as such term is defined below) and liabilities with respect thereto. On May 23, 1997, PCC, PCW and Palmer entered into an Agreement and Plan of Merger (the "Merger Agreement"). The Merger Agreement provided, among other things, for the merger of PCW with and into Palmer with Palmer as the surviving corporation (the "Merger"). On October 6, 1997, the Merger was consummated and Palmer changed its name to "Price Communications Wireless, Inc." Pursuant to the Merger Agreement, PCC acquired each issued and outstanding share of common stock of Palmer for a purchase price of $17.50 per share in cash and purchased outstanding options and rights under employee and director stock purchase plans for an aggregate price of $486.4 million. In addition, as a result of the Merger, PCW assumed all outstanding indebtedness of Palmer of approximately $378.0 million ("Palmer Existing Indebtedness"), making the aggregate purchase price for Palmer (including transaction fees and expenses) approximately $880.0 million. PCW refinanced all of the Palmer Existing Indebtedness concurrently with the consummation of the Merger. PCW entered into an agreement (the "Fort Myers Sale Agreement") to sell Palmer's Fort Myers, Florida MSA covering approximately 382,000 Pops for $168.0 million (the "Fort Myers Sale"). On October 6, 1997, the Fort Myers Sale was consummated, and generated proceeds to the Company of approximately $166.0 million. The proceeds of the Fort Myers Sale were used to fund a portion of the acquisition of Palmer. On October 21, 1997, PCC and PCW entered into an Asset Purchase Agreement with MJ Cellular Company, L.L.C. (the "Georgia Sale Agreement") which provided for the sale by PCW, for approximately $25.0 million, of substantially all of the assets of the non-wireline cellular telephone system serving the Georgia-l Whitfield RSA ("Georgia-1"), including the FCC licenses to operate Georgia-1 (the "Georgia-1 Sale"). The sale of the assets of Georgia-1 was consummated on December 30, 1997 and generated proceeds to the Company of approximately $24.2 million. A portion of the proceeds from the Georgia Sale were used to retire a portion of the debt used to fund the acquisition of Palmer. The Merger, the Fort Myers Sale and the Georgia-1 Sale are collectively referred to as the "Acquisition." In order to fund the Acquisition and pay related fees and expenses, PCW issued $175.0 million aggregate principal amount of 11 3/4% Senior Subordinated Notes due 2007 (the "11 3/4% PCW Notes") and entered into a syndicated senior loan facility providing for term loan borrowings in the aggregate principal amount of $325.0 million and revolving loan borrowings of $200.0 million (the "Credit Facility"). On October 6, 1997, PCW borrowed all term loans available thereunder and approximately $120.0 million of revolving loans. The Credit Facility was retired on June 16, 1998 with the net proceeds from the PCW Offering (as defined below). The Acquisition was also funded in part through a $44.0 million equity contribution from PCC (the "PCC Equity Contribution") which was in the form of cash and common stock of Palmer. Approximately $46.5 million of the purchase price for the Acquisition was raised out of the proceeds from the issuance and sale for $80.0 million (the "Holdings Offering") by Holdings of units consisting of $153.4 million principal amount at maturity of 13 1/2% Senior Secured Discount Notes due 2007 of Holdings (the "13 1/2% Holdings Notes") and warrants (the "Warrants") to purchase shares of PCC common stock, par value $.01 per share (the "PCC Shares"). The Company has the right to redeem all or part of the 13 1/2% Holdings Notes on or after August 1, 1998 at a redemption price equal to 120% of the accreted value thereof, including accrued and unpaid interest, if the closing price of the PCC Shares equals or exceeds certain specified prices for the ten consecutive trading days prior to the redemption date ($7.68 per share during the period from August 1, 1998 to July 31, 1999). The Notes are subject to a special mandatory redemption on August , 1998 at a cash price equal to 101% of the principal amount thereof together with accrued and unpaid interest to the date of redemption if all of the 13 1/2% Holdings Notes have not been redeemed prior thereto. See "Use of Proceeds." RECENT DEVELOPMENTS On June 16, 1998, PCW issued (the "PCW Offering") $525.0 million aggregate principal amount of 9 1/8% Senior Secured Notes due 2006 (the "PCW Secured Notes," and, together with the 11 3/4% PCW Notes, the "PCW Notes"). See "Description of the PCW Secured Notes." The net proceeds from the PCW Offering were used to retire the Credit Facility. THE OFFERING The following summary description of the Notes is qualified in its entirety by the more detailed information set forth under the caption "Description of Notes" contained elsewhere in this Prospectus. <TABLE> <S> <C> Issuer....................................... Price Communications Cellular Holdings, Inc. Notes Offered................................ $200,000,000 aggregate principal amount of Senior Exchangeable Payable-in-Kind Notes due 2008 (the "Notes"). Use of Proceeds.............................. The net proceeds from the Offering are estimated to be approximately $194.5 million, after deducting estimated fees and expenses. The Company intends to use $109.2 million of the net proceeds to redeem the 13 1/2% Holdings Notes and the remaining $85.3 million for general corporate purposes, including acquisitions. See "Use of Proceeds." Maturity Date................................ August 15, 2008. Interest; PIK................................ Interest is payable semi-annually in arrears on each February 15 and August 15 (the "Interest Payment Dates"), commencing February 15, 1999. The Notes will initially bear interest at a rate of % per annum. Such interest rate will be permanently reduced by 0.50% once cash interest begins to accrue on the Notes. Cash interest will begin to accrue on the Notes on February 15, 2003; PROVIDED that at any time prior to February 15, 2003, the Company may make an election on any interest payment date to commence the accrual of cash interest from and after such interest payment date, in which case, cash interest will be payable on each interest payment date thereafter. Interest payable on any interest payment date prior to the earlier of February 15, 2003 and the Company's election to commence the accrual of cash interest shall be payable through the issuance of additional Notes (valued at 100% of the principal amount thereof). There can be no assurances that the Company will not make an election to pay cash interest and thereby permanently reduce the interest rate shortly after consummation of this Offering. Special Mandatory Redemption................. The Notes are subject to a special mandatory redemption on August , 1998 at a cash price equal to 101% of the principal amount thereof together with accrued and unpaid interest to the date of redemption if all of the 13 1/2% Holdings Notes have not been redeemed prior thereto. See "Description of Notes--Special Mandatory Redemption." Mandatory Exchange........................... In the event the daily high price of PCC Shares equals or exceeds 115% of the Exchange Price for 10 out of 15 consecutive Trading Days, each outstanding Note will be mandatorily exchanged on the fifth Trading Day immediately succeeding such </TABLE> <TABLE> <S> <C> 10th Trading Day (unless the Company shall have elected on or prior to the second Trading Day immediately succeeding such 10th Trading Day to permanently terminate the mandatory exchange provisions of the Notes) into PCC Shares (subject to adjustment for certain events) per $1,000 principal amount of Notes (initially equivalent to a price of $ per share (the "Exchange Price")). Sinking Fund................................. None. Optional Redemption.......................... The Notes will be redeemable in whole or in part at the option of the Company, at any time on or after August 15, 2003, at the redemption prices set forth herein, plus accrued and unpaid interest, if any, to the date of redemption. See "Description of Notes -- Optional Redemption." Ranking...................................... The Notes will be general obligations of Holdings and rank PARI PASSU in right of payment to all other existing and future senior unsecured Indebtedness of Holdings. The Notes will be effectively subordinated to all liabilities of Holdings' subsidiaries. As of March 31, 1998, on a PRO FORMA basis after giving effect to the PCW Offering and the issuance and sale of the Notes and the application of the estimated net proceeds therefrom, Holdings, on a consolidated basis, would have had approximately $900.0 million of Indebtedness. At March 31, 1998, on a PRO FORMA basis as described above, Holdings' subsidiaries would have had outstanding $750.0 million of Indebtedness and $362.7 million of deferred taxes and other liabilities. Change of Control............................ Upon the occurrence of a Change of Control (as defined below), each Holder of Notes will have the right, subject to certain limitations, to require the Company to repurchase such holder's Notes at 101% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the repurchase date. Certain Covenants............................ The Indenture (as defined below) imposes certain limitations on the ability of the Company and its subsidiaries to, among other things, incur Indebtedness (as defined), make Restricted Payments (as defined), effect certain Asset Sales (as defined), enter into certain transactions with Related Persons (as defined), merge or consolidate with any other person or transfer all or substantially all of their properties and assets. See "Description of Notes--Certain Covenants."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001050167_global_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001050167_global_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following information is qualified in its entirety by the more detailed information and financial statements (including the notes thereto) appearing elsewhere in this Prospectus. Except as otherwise indicated herein, the information in this Prospectus (i) assumes that the Underwriters' over- allotment options will not be exercised, (ii) reflects the reclassification of the Company's Class B Common Stock as Common Stock, the increase in the authorized shares of Common Stock to 50,000,000 shares, the effecting of a 132- for-1 stock split of the Company's outstanding Class B Common Stock and Class C Common Stock, and the authorization of 10,000,000 shares of Preferred Stock pursuant to an amendment to the Company's Amended and Restated Certificate of Incorporation completed in May 1998, and (iii) assumes the automatic conversion into Common Stock of all outstanding shares of Class C Common Stock upon the closing of the Offering. Except where the context indicates otherwise, all references herein to "Global" or the "Company" refer to the Company and its direct and indirect subsidiaries. REDEMPTION OF CLASS A COMMON STOCK. In connection with and upon the consummation of the Offering, each outstanding share of Class A Common Stock will be redeemed (the "Class A Redemption") in exchange for a cash payment equal to (a) the original purchase price per share of Class A Common Stock ($90) plus (b) yield equal to 8.0% per annum from the time of purchase through May 31, 1998 plus a pro rata number of shares of Common Stock representing in the aggregate the entitlement of the holders of Class A Common Stock to receive 10% of the pre-Offering value of the Company (approximately 3.41 shares of Common Stock per share of Class A Common Stock). The Company will use approximately $35,570,000 of the net proceeds of the Offering, and will issue 1,158,329 shares of Common Stock, to effect the Class A Redemption. Golder, Thoma, Cressey, Rauner Fund IV Limited Partnership ("FUND IV") and Jackson National Life Insurance Company ("JNL"), affiliates of the Company, will receive approximately $23,191,000 and $3,833,000, respectively, and 738,294 and 130,233 shares of Common Stock, respectively, and Thomas Johnson, Global's President, Chief Executive Officer and a director of the Company, Neal Berney, a director of the Company, and Raymond Schilling, Michael Mueller, and Alfred Vieira, executive officers of the Company, will receive approximately $572,000, $225,000, $12,000, $23,000 and $12,000, respectively, and 18,457, 6,620, 369, 695 and 369 shares of Common Stock, respectively, in connection with the Class A Redemption. Except as otherwise indicated herein, the information in this Prospectus assumes the Class A Redemption will be effected. See "Risk Factors-- Benefits of the Offering to Existing Stockholders" and "Certain Transactions-- The Recapitalization." THE COMPANY Global Imaging Systems is a consolidator in the highly fragmented office imaging solutions industry. The Company is a rapidly growing provider of a broad line of office imaging solutions, which includes the sale and service of automated office equipment (copiers, facsimile machines, printers and duplicators), electronic presentation systems, and document imaging management systems ("DIM" systems or "document technology systems"), as well as network integration and management services. Since its founding in June 1994, the Company has acquired 24 companies primarily in the Northeast, Southeast, and Pacific Northwest, of which nine are "core" companies, at which all administrative functions are concentrated, and the remaining 15 are "satellite" companies whose administrative functions have been transferred to, and which have been integrated into, the core companies. The Company's operating philosophy is to "think globally, act locally." Under the Company's decentralized management system, Global's core companies typically continue to operate under their pre-acquisition names and with their pre-acquisition management even after being acquired by Global, thus permitting existing client relationships to be preserved. The Company believes that its emphasis on superior customer service and the contractual nature of its service business provide a significant source of recurring revenue. The Company's revenues grew from $37.0 million for the year ended March 31, 1996 to $164.4 million for the year ended March 31, 1998. Pro forma revenues for the year ended March 31, 1998 were $215.4 million. Operating results improved from a net loss of $192,000 for the fiscal year ended March 31, 1996 to net income of $4.5 million for the fiscal year ended March 31, 1998. Pro forma net income for the fiscal year ended March 31, 1998 was $3.7 million. At March 31, 1998 the Company had a pro forma net tangible book value (net tangible assets less total liabilities and equity attributable to the Class A Common Stock, as adjusted for the Class A Redemption) of negative $98.0 million, and a pro forma retained earnings deficit (as adjusted for the Class A Redemption) of $354,000. Global seeks to become the provider of choice for all of its customers' office imaging needs by offering a full range of products and services and superior customer service. While Global's clientele includes large, Fortune 500 companies, its growth has been, and is expected to continue to be, largely driven by serving middle market businesses. The Company sells and services a variety of office imaging solutions, including copiers, facsimile machines, printers, duplicators, LCD projectors, smartboards, overhead projectors, video teleconferencing equipment, optical scanning equipment, micrographics equipment, and the design and installation of equipment related to computer networks. In addition, the Company offers a variety of ongoing services, including supply and service contracts, network management contracts, technical support and training. The Company's strategic objective is to continue to grow profitably in both existing markets and new markets through internal growth and by acquiring additional office imaging solutions companies. Global intends to enter new geographic markets by acquiring additional core companies and expanding its core markets through the acquisition of satellite companies, which are typically in close proximity to core companies. Global's strategy for stimulating internal growth is to expand its product and service offerings, take advantage of cross-selling opportunities, and market aggressively to existing and new customers. The Company is currently organized into nine core companies with operations in 46 locations in 15 states, plus the District of Columbia. Global targets for acquisition as core companies businesses that are leading competitors in the markets they serve. The Company's goal is to acquire core and satellite companies throughout the United States and Canada. The market for sales and service of office imaging solutions is highly fragmented. Of an estimated 3,700 dealer and distributor outlets in the United States primarily engaged in the sale of automated office equipment and related service, parts, and supplies, approximately 3,100 dealer outlets are unaffiliated, according to Industry Analysts, Inc. The Company believes that the black and white copier and related service and supplies market generated sales of approximately $21.9 billion in the U.S. in 1996, and is expected to grow to an estimated $31.2 billion in sales in 2001, while the color copier and related service and supplies market generated sales of approximately $1.3 billion in the U.S. in 1996, and is expected to grow to an estimated $4.4 billion in sales in 2001. The network consulting and integration services market generated sales in the U.S. of approximately $5.8 billion in 1996 and is expected to grow to approximately $12.4 billion in sales by 2001, according to International Data Corporation. The network management services market (as a discrete segment) generated sales of approximately $1.5 billion in the U.S. in 1996, and is expected to grow to approximately $3.7 billion in sales by 2001, according to International Data Corporation. The markets for electronic presentation systems and document technology systems generated sales estimated at approximately $719 million and $4.7 billion, respectively, in the U.S. in 1996, and are expected to grow to an estimated $1.5 billion and $14.7 billion in sales in 2001, according to Pacific Media Associates and AIIM International, respectively. STRATEGY The Company's goal is to become the provider of choice for all of its customers' office imaging needs by offering a full range of products and services and superior customer service. The Company's strategy to achieve this goal contains the following elements: Serve as a Single Source Provider of Office Imaging Solutions. The Company believes that offering a full spectrum of products and services will give it a competitive advantage and enable the Company to capitalize on its customer relationships by cross-selling its products and services. As the technology that drives copiers, facsimiles, printers, electronic presentation equipment and DIM equipment continues to converge, there is a greater role for computers and networks in the functioning of these products. Accordingly, customers are demanding more integrated office imaging solutions. The Company intends to expand its offerings to provide products and services in the automated office equipment market, the electronic presentation systems market, the DIM systems market and the network integration markets in each of its geographic markets. The Company believes that as and to the extent it becomes engaged in these markets, an increasing percentage of the Company's revenues and gross profits will be derived from sales of equipment and supplies, which typically have lower gross profit margins than sales of service and rentals. Make Strategic Acquisitions. Global actively seeks to acquire core companies in targeted geographic markets and to expand these core acquisitions through internal growth and the acquisition of satellite companies. As part of its acquisition strategy, Global looks for companies that are led by an experienced management team that will continue to manage the company after it is acquired, that have a strong regional market share, and that can grow internally and through the acquisition of satellite companies. A key component of the Company's growth strategy is to acquire satellite companies in or near its core companies' markets. Core company management frequently assists Global in identifying appropriate satellite companies to acquire. In evaluating potential satellite acquisitions the Company considers, among other factors, its proximity to a core company, whether the product lines sold by the satellite are complementary with those of the core company, and the service base that the potential satellite company has under service contract. Stimulate Internal Growth. The Company seeks to stimulate internal growth in its core companies by increasing the productivity of their sales forces through the use of performance benchmarks developed by the Company, expanding product and service offerings, increasing the size of its core companies' sales forces and aggressively cross-selling its products and services. Optimize Profitability and Operating Efficiency. Global's senior management has developed an industry management model that encompasses a comprehensive set of performance benchmarks. These performance benchmarks, which are used as the primary form of internal reporting from the core companies to Global, allow the Company and local management to monitor and improve the operations of each core company. Through the use of these benchmark criteria, Global seeks to train the managers of its core and satellite companies to optimize their business mix and improve performance. Global works to reduce costs by consolidating the back-office functions of its satellite acquisitions into the core operations, enabling its core companies to decrease technician driving time and increase the productivity of sales personnel and administrators. Global also reduces costs through the standardization of financial reporting, cash and inventory management, payroll, billing, collections, insurance and employee benefit programs, and by negotiating advantageous relationships with equipment manufacturers, other suppliers and lessors. Operate with a Decentralized Management Structure. Global vests responsibility for day-to-day operating decisions at the core company level. The Company believes that this decentralized approach permits local management to maintain focus and motivation and provides optimal customer support. Local management is supported by a senior management team that focuses on the Company's growth strategy as well as corporate planning and financial reporting and analysis. The Company's executive offices are located at 13902 North Dale Mabry, Suite 300, Tampa, Florida 33618, and its telephone number is (813) 960-5508. The Company was incorporated in Delaware in June 1994. THE OFFERING <TABLE> <C> <S> Common Stock Offered Hereby........................ 6,000,000 shares Common Stock to be Outstanding after the Offering.. 17,583,639 shares (1) Use of Proceeds.................................... To repay existing indebtedness and to pay the cash portion of the redemption price of all of the outstanding shares of the Company's Class A Common Stock. See "Use of Proceeds." Nasdaq National Market symbol...................... GISX </TABLE> - - -------- (1) Does not include an aggregate of 1,820,000 shares reserved for grants or purchases under the Company's 1998 Stock Option and Incentive Plan, including 519,750 shares of Common Stock issuable upon the exercise of options that will become outstanding upon the closing of the Offering at an exercise price equal to the initial public offering price. Of these, options to purchase 250, 20,250, 10,250, 10,250 and 5,250 shares, respectively, will be issued to Messrs. Johnson, Berney, Schilling, Mueller and Vieira. See "Management--1998 Stock Option and Incentive Plan."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001050504_pentacon_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001050504_pentacon_prospectus_summary.txt
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+PROSPECTUS SUMMARY CONCURRENTLY WITH THE CLOSING OF ITS INITIAL OFFERING (THE "OFFERING") ON MARCH 10, 1998, PENTACON ACQUIRED, IN SEPARATE TRANSACTIONS (COLLECTIVELY, THE "ACQUISITIONS"), FOR CONSIDERATION INCLUDING CASH AND SHARES OF ITS COMMON STOCK, THE FOLLOWING FIVE ENTITIES ENGAGED IN THE FASTENER AND SMALL PARTS DISTRIBUTION BUSINESS: ALATEC PRODUCTS, INC. ("ALATEC"), AXS SOLUTIONS, INC. ("AXS"), CAPITOL BOLT & SUPPLY, INC. ("CAPITOL"), MAUMEE INDUSTRIES, INC. ("MAUMEE") AND SALES SYSTEMS, LIMITED ("SSL" AND, TOGETHER WITH ALATEC, AXS, CAPITOL AND MAUMEE, THE "FOUNDING COMPANIES"). UNLESS OTHERWISE INDICATED, REFERENCES HEREIN TO "PENTACON" MEAN PENTACON, INC., AND REFERENCES TO THE "COMPANY" MEAN PENTACON AND THE FOUNDING COMPANIES, COLLECTIVELY. THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE FINANCIAL INFORMATION AND PER SHARE DATA IN THIS PROSPECTUS HAVE BEEN ADJUSTED FOR THE EFFECTS OF CERTAIN PRO FORMA ADJUSTMENTS TO THE HISTORICAL FINANCIAL STATEMENTS. UNLESS OTHERWISE INDICATED, ALL REFERENCES TO COMMON STOCK INCLUDE BOTH COMMON STOCK, $0.01 PAR VALUE PER SHARE, AND RESTRICTED VOTING COMMON STOCK, $0.01 PAR VALUE PER SHARE (THE "RESTRICTED COMMON STOCK"), OF THE COMPANY. THE COMPANY The Company is a leading distributor of fasteners and other small parts and provider of related inventory procurement and management services to original equipment manufacturers ("OEMs") on a worldwide basis. Fasteners and small parts include screws, bolts, nuts, washers, pins, rings, fittings, springs, electrical connectors and similar parts. Pentacon was founded in March 1997 to aggressively pursue the consolidation of the highly fragmented fastener distribution industry. According to an industry study by The Freedonia Group, Inc., sales by fastener manufacturers in 1996 were approximately $8.0 billion in the United States and $25.0 billion globally. The United States fastener market is estimated to have over 1,900 distributors. The Company believes that the OEM fastener and small part distribution industry is in the early stages of consolidation, and the Company plans to lead the consolidation of the industry. The Company believes that its broad selection of fasteners and small parts, high-quality services, professional management team, and strong competitive position as a publicly owned fastener distributor focused on the OEM market, will allow it to be the leading consolidator. Fasteners and other small parts constitute a majority of the total number of parts needed by an OEM to manufacture many products, but represent only a small fraction of the total materials cost. The cost for an OEM to internally manage its inventory of fasteners and small parts is relatively high due to (i) the large number of fasteners and other small parts in the inventory, (ii) the risk of interruptions for just-in-time ("JIT") manufacturing operations, and (iii) the need to perform quality assurance testing of the fasteners and small parts. The Company believes that OEMs are increasingly outsourcing their fastener and other small parts inventory procurement and management needs to distributors in order to focus on their core manufacturing businesses and to reduce costs. To further reduce costs, many manufacturers are seeking to consolidate the number of distributors they use and are selecting national distributors with extensive product lines who can also provide inventory-related services. To capitalize on these trends, the Company offers a broad array of fasteners and small parts and provides a variety of related procurement and inventory management services, including inventory management information systems ("MIS") and reports, JIT delivery, quality assurance, advisory engineering services, component kit production and delivery, small component assembly and electronic data interchange ("EDI"). Upon consummation of the Offering, Pentacon acquired the five Founding Companies, which have been in business an average of 25 years and which had combined net sales of $120.0 million for the twelve months ended December 31, 1996 and $151.8 million for the twelve months ended December 31, 1997. While total U.S. sales of fasteners have increased at a compound annual rate of approximately 4.1% during the four years ended December 31, 1996, the combined net sales of the Founding Companies have increased at a compound annual rate of approximately 13.3% per year over the same period. The Company believes that it has generated superior growth primarily by expanding the breadth of its product offerings and value-added services, which has allowed the Founding Companies to increase market share at existing customers and attract new customers. The Company operates a national sales and distribution network with 24 facilities in 14 states. Through this network and international agents, the Company serves more than 2,600 customers in over 25 countries. These customers manufacture a wide variety of products including diesel engines, locomotives, power turbines, motorcycles, telecommunications equipment, refrigeration equipment and aerospace equipment. The Company's largest customers include Cummins Engine Company, General Electric Corporation, Harley-Davidson, Inc., the Hughes Aircraft subsidiary of General Motors Corporation, The Trane Company, Dana Corporation and The Boeing Company. The Company anticipates that its ability to provide a comprehensive product line and offer related services over a broad geographic area will assist the Company in obtaining additional nationwide accounts with large national and international OEMs. BUSINESS STRATEGY The Company intends to become the leading fastener and small parts distributor on a worldwide basis. Key elements of the Company's strategy to achieve its objective are: PROVIDE VALUE-ADDED SERVICES. The Company seeks to continually develop and supply inventory-related services designed to reduce its customers' operating costs. Quality assurance, JIT delivery and component kit production are examples of such services currently provided by the Company to its customers. By supplying such services, the Company becomes more integrated into the customers' internal manufacturing processes and is better able to anticipate its customers' needs, which the Company believes results in improved profitability and customer retention. DELIVER SUPERIOR CUSTOMER SERVICE. OEMs and other fastener customers choose fastener suppliers based, in significant part, on the quality of the service supplied. The Company believes that its superior customer service depends on its well-trained, technically competent workforce and that its workforce provides an advantage over other fastener distributors. The Company intends to review the training and operating practices at each Founding Company to identify and adopt those "best practices" in providing customer service that can be successfully implemented throughout its operations. As part of its commitment to superior customer service, the Company intends to have each of its operating companies certified under or be in compliance with the International Standards Organization ("ISO") standards for distribution companies. Two of the Founding Companies are already ISO-9002 certified. The other Founding Companies have commenced application for ISO-9002 or similar certification, and the Company expects the substantial majority of its currently uncertified locations to be ISO compliant or certified in 1998. ACCELERATE INTERNAL SALES GROWTH. One of the primary goals of the Company is to accelerate internal growth by both expanding the range of products and services provided to existing customers and aggressively pursuing new customers domestically and abroad. The Company believes it will be able to expand sales to existing customers by capitalizing on (i) the diverse products and the marketing expertise of the Founding Companies, (ii) cross-selling opportunities across the Company's customer base, and (iii) the additional financial resources that are expected to be available after consummation of the Offering. The Company believes its broad geographic coverage will present opportunities to capture additional business from existing customers that operate on a national and international basis. The Company intends to implement a company-wide marketing program and to adopt the "best practices" used by the Founding Companies to identify, obtain and maintain new customers. EXPAND OPERATING MARGINS. The Company believes that the combination of the Founding Companies will provide significant opportunities to increase its profitability. The key components of this strategy are to increase operating efficiencies and centralize appropriate administrative functions. The Company intends to use its increased purchasing power to improve contractual relationships and gain volume discounts from its suppliers. The Company also intends to improve productivity through enhanced inventory management procedures, increased utilization of the Company's laboratories and distribution facilities, and the consolidation of information systems and employee benefits. AGGRESSIVELY PURSUE ACQUISITIONS. The Company believes that the fastener distribution industry is highly fragmented and in the early stages of consolidation. The Company intends to pursue an aggressive acquisition program targeting fastener distributors that will help the Company increase its presence in markets it currently serves, sell to new markets, develop new customer relationships with major OEMs, increase its presence in the international markets and expand its range of products and services. The Company believes there is a significant number of acquisition candidates available and that it will be regarded as an attractive acquiror due to its position as an industry leader, its ability to offer cash and/or publicly traded stock for acquisitions, and the potential for improved growth and profitability as part of the Company.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001050518_world_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001050518_world_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..0d974def34725472ad6f5a5f315702924abcbc93
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+SUMMARY The following summary is qualified in its entirety by reference to the detailed information appearing elsewhere in this Prospectus. See the Index of Capitalized Terms at page 99 for the location herein of certain capitalized terms. <TABLE> <S> <C> Overview.................................. Certain motor vehicle dealers ('Dealers') in the World Omni Financial Corp. ('World Omni') network of dealers have assigned, and will assign, closed-end retail automobile and light duty truck leases to World Omni LT, an Alabama trust (the 'Origination Trust'). The Origination Trust was created in 1993 to avoid the administrative difficulty and expense associated with retitling leased vehicles in the securitization of automobile and light duty truck leases. The Origination Trust has issued to Auto Lease Finance L.P. ('ALF L.P.') an Undivided Trust Interest (the 'UTI') representing the entire beneficial interest in the unallocated assets of the Origination Trust. ALF L.P. will instruct the trustee of the Origination Trust to allocate a separate portfolio of leases and leased vehicles within the Origination Trust and create a special unit of beneficial interest (the 'SUBI') which will represent the entire beneficial interest in such portfolio. Upon its creation, such portfolio will no longer be a part of the Origination Trust Assets represented by the UTI. ALF L.P. will sell its interest in the SUBI to World Omni Lease Securitization L.P. (the 'Transferor') and the Transferor will in turn contribute the entire interest in the SUBI to the World Omni 1998-A Automobile Lease Securitization Trust (the 'Trust'). In return, the Trust will issue certain securities, including the Class A-1 Notes, Class A-2 Notes, Class A-3 Notes and Class A-4 Notes being offered hereby. The undivided equity interest in the Trust will be permanently retained by the Transferor. ALF L.P. has caused and from time to time in the future may cause additional special units of beneficial interest similar to the SUBI ('Other SUBIs') to be created out of the UTI and sold to the Transferor or one or more other entities. The Trust and the Noteholders will have no interest in the UTI, any Other SUBI or any assets of the Origination Trust evidenced by the UTI or any Other SUBI. The Trust................................. The Trust will be created pursuant to a securitization trust agreement dated as of October 1, 1998 (the 'Agreement'), among the Transferor, PNC Bank, Delaware, as owner trustee (in such capacity (together with its successors and assigns), the 'Owner Trustee') and The Bank of New York ('BONY'), as indenture trustee (in such capacity, the 'Indenture Trustee'). The property of the Trust will consist primarily of the SUBI, which will evidence a beneficial interest in certain specified assets of the Origination Trust (including Insured Residual Value Loss Amounts paid under the Residual Value Insurance Policy), Class A Net Swap Receipts and monies on deposit in the Reserve Fund and in certain other accounts established as described herein. The Origination Trust was formed by ALF L.P., as grantor and initial beneficiary, and VT Inc., as trustee (the 'Origination Trustee'). The sole general partner of ALF L.P. is Auto Lease Finance LLC (as successor by merger to Auto Lease Finance, Inc.), </TABLE> <PAGE> <TABLE> <S> <C> a Delaware single member limited liability company ('ALF LLC') which is a wholly owned, special purpose subsidiary of World Omni. ALF LLC may not transfer its general partnership interest in ALF L.P. so long as any financings involving interests in the Origination Trust (including the transaction described herein) are outstanding. World Omni is the sole member of ALF LLC and the sole limited partner of ALF L.P. VT Inc. is an Alabama corporation and a wholly owned, special purpose subsidiary of U.S. Bank National Association ('U.S. Bank') that was organized solely for the purpose of acting as Origination Trustee. VT Inc. is not affiliated with World Omni or any affiliate thereof. For further information regarding the Origination Trustee, see 'The Origination Trust--The Origination Trustee'. The Origination Trust Assets consist of retail closed-end lease contracts assigned to the Origination Trust by Dealers, the automobiles and light duty trucks relating thereto and all proceeds thereof and payments made under certain insurance policies relating to such contracts, the related lessees or such leased vehicles, including the Residual Value Insurance Policy. The SUBI initially will evidence a beneficial interest in a specified portion of the Origination Trust Assets, including: (i) certain lease contracts (the 'Initial Contracts') originated by Dealers located throughout the United States; (ii) the automobiles and light duty trucks relating thereto (the 'Initial Leased Vehicles'); (iii) certain monies due under or payable in respect of the Initial Contracts and the Initial Leased Vehicles on or after September 1, 1998 (the 'Initial Cutoff Date'); (iv) payments made under certain insurance policies (including Insured Residual Value Loss Amounts paid under the Residual Value Insurance Policy) relating to the Initial Contracts, the related lessees and the Initial Leased Vehicles; and (v) certain related assets and rights (collectively, the 'SUBI Assets'). For further information regarding the SUBI Assets, see 'The Trust and the SUBI--The SUBI'. Prior to the time when principal is first distributed to Noteholders as described herein, payments made on or in respect of the SUBI Assets allocable to principal will be reinvested in additional retail closed-end lease contracts (the 'Subsequent Contracts' and, together with the Initial Contracts, the 'Contracts') originated and assigned to the Origination Trust by Dealers located throughout the United States and the automobiles and light duty trucks relating thereto (the 'Subsequent Leased Vehicles' and, together with the Initial Leased Vehicles, the 'Leased Vehicles'). At the time of such reinvestment, the related Subsequent Contracts and Subsequent Leased Vehicles, together with certain related Origination Trust Assets, will become SUBI Assets. For further information regarding the Subsequent Contracts and Subsequent Leased Vehicles, see 'Summary--The Revolving Period; Subsequent Contracts and Subsequent Leased Vehicles' and 'The Trust and the SUBI--The SUBI'. The Dealers comprising the sources for Contracts and Leased Vehicles are members of World Omni's network of dealers. These Dealers offer automobiles and light duty trucks for lease pursuant to </TABLE> 2 <PAGE> <TABLE> <S> <C> World Omni-approved terms and documentation. For further information regarding World Omni's lease business, see 'World Omni'. The SUBI will evidence an indirect beneficial interest, rather than a direct legal interest, in the SUBI Assets. The SUBI will not represent a beneficial interest in any Origination Trust Assets other than the SUBI Assets. Payments made on or in respect of Origination Trust Assets other than the SUBI Assets will not be available to make payments on the Notes. For further information regarding the SUBI, see 'Summary--Security for the Notes--The SUBI', 'The Trust and the SUBI--The SUBI' and 'The Origination Trust'. The Transferor............................ The Transferor is a Delaware limited partnership, the sole general partner of which is World Omni Lease Securitization LLC (as successor by merger to World Omni Lease Securitization, Inc.), a Delaware single member limited liability company ('WOLS LLC'), which is a wholly owned, special purpose subsidiary of World Omni. WOLS LLC may not transfer its general partnership interest in the Transferor so long as any financings involving interests formerly or partially held by it in the Origination Trust (including the transaction described herein) are outstanding. World Omni is the sole member of WOLS LLC and the sole limited partner of the Transferor. World Omni................................ World Omni is a Florida corporation that is a wholly owned subsidiary of JM Family Enterprises, Inc., a Delaware corporation ('JMFE'). JMFE also wholly owns Southeast Toyota Distributors, Inc. ('SET'), which is the exclusive distributor of Toyota automobiles and light duty trucks in Florida, Alabama, Georgia, North Carolina and South Carolina (the 'Five State Area'). As more fully described under 'World Omni', World Omni provides consumer lease and installment contract financing to retail customers of, and floorplan and other dealer financing to, Dealers that are located throughout the United States. World Omni is the sole member of both ALF LLC and WOLS LLC. Pursuant to an amended and restated servicing agreement dated as of July 1, 1994, as amended, to be supplemented by a servicing supplement dated as of October 1, 1998 (collectively, the 'Servicing Agreement'), each between World Omni and the Origination Trustee, World Omni will act as the initial servicer of the Origination Trust Assets, including the SUBI Assets (in such capacity, the 'Servicer'). The Owner Trustee and the Indenture Trustee will be third party beneficiaries of the Servicing Agreement, as described under 'Additional Document Provisions--The Servicing Agreement--Indenture Trustee and Owner Trustee as Third-Party Beneficiaries'. Securities Offered........................ The Automobile Lease Asset Backed Notes (the 'Notes') will consist of four classes of senior Notes (the 'Class A-1 Notes', the 'Class A-2 Notes', the 'Class A-3 Notes' and the 'Class A-4 Notes', respectively, and collectively, the 'Class A Notes') and one class of subordinated notes (the 'Class B Notes'). Generally, no principal payments will be made on the Class A-2 Notes until the </TABLE> 3 <PAGE> <TABLE> <S> <C> Class A-1 Notes have been paid in full, no principal payments will be made on the Class A-3 Notes until the Class A-1 Notes and the Class A-2 Notes have been paid in full, and no principal payments will be made on the Class A-4 Notes until the Class A-1 Notes, Class A-2 Notes and Class A-3 Notes have been paid in full, in each case as more fully described under 'Description of the Notes-- Distributions on the Notes--Application and Distributions of Principal--Amortization Period'. The Class B Notes will be subordinated to the Class A Notes so that (i) interest payments will not be made in respect of the Class B Notes until interest in respect of the Class A Notes has been paid, (ii) principal payments will not be made in respect of the Class B Notes until the Class A-1, Class A-2 and Class A-3 Notes have been paid in full and (iii) if other sources available to make payments of principal and interest on the Class A-4 Notes are insufficient, amounts that otherwise would be paid in respect of the Class B Notes generally will be available for that purpose, as more fully described under 'Description of the Notes--Distributions on the Notes'. The undivided equity interest in the Trust will be permanently retained by the Transferor (the 'Transferor Interest'). The Transferor Interest will be subordinated to the Notes as described under 'Summary--Security for the Notes--Subordination of the Transferor Interest'. Only the Class A Notes are being offered hereby. The Class A Notes will be issued in book-entry form in minimum denominations of $1,000 and integral multiples thereof, as set forth under 'Description of the Notes--Book-Entry Registration' and '--Definitive Notes'. The Class B Notes will initially be held by an affiliate of the Transferor. Information concerning the Class B Notes is provided herein only for a better understanding of the Class A Notes. Each Note will represent the right to receive monthly payments of interest at the related Note Rate and, to the extent described herein, monthly payments of principal during the Amortization Period. These payments will be funded from a portion of the payments received by the Trust on or in respect of the SUBI (i.e., from a portion of the payments received on or in respect of the Contracts and the Leased Vehicles) and, in certain circumstances, from Transferor Amounts that otherwise would be distributable in respect of the Transferor Interest, Insured Residual Value Loss Amounts paid under the Residual Value Insurance Policy, Class A Net Swap Receipts and monies on deposit in the Reserve Fund. On the date of initial issuance of the Notes (the 'Closing Date'), the Trust will issue $430,000,000 aggregate principal amount of Class A-1 Notes (the 'Initial Class A-1 Note Balance'), $440,000,000 aggregate principal amount of Class A-2 Notes (the 'Initial Class A-2 Note Balance'), $410,000,000 aggregate principal amount of Class A-3 Notes (the 'Initial Class A-3 Note Balance'), $351,383,000 aggregate principal amount of Class A-4 Notes (the 'Initial Class A-4 Note Balance' and, together with the Initial Class A-1 Note Balance, the Initial Class A-2 Note Balance and the Initial Class A-3 Note Balance, the 'Initial Class A Note Balance') and $92,592,000 aggregate principal amount of Class B Notes (the 'Initial Class B Note Balance' and, together with the </TABLE> 4 <PAGE> <TABLE> <S> <C> Initial Class A Note Balance, the 'Initial Note Balance'). The aggregate principal amounts of the Class A-1, Class A-2, Class A-3 and Class A-4 Notes and the Class B Notes will, except in certain circumstances described under 'Summary--The Revolving Period; Subsequent Contracts and Subsequent Leased Vehicles', remain fixed at their respective Initial Class Note Balances during the Revolving Period and, to the extent described herein, will decline thereafter during the Amortization Period as principal is paid on the Notes. The 'Class Note Balance' of any Class of Notes on any day will equal the Initial Class Note Balance, reduced by the sum of all distributions made in respect of principal (including any reimbursements of Loss Amounts allocable to such Class and Note Principal Loss Amounts in respect of such Class) on or prior to such day on the related Class of Notes and those Note Principal Loss Amounts in respect of such Class, if any, which have not been reimbursed as described herein. The 'Class A Note Balance' will mean the sum of the Class A-1, Class A-2, Class A-3 and Class A-4 Note Balances. The 'Note Balance' with respect to the Notes will mean the sum of the Class A Note Balance and the Class B Note Balance. The amount of the Transferor Interest will initially equal $39,682,871.20 (which amount will equal approximately 2.25% of the Aggregate Net Investment Value as of the Initial Cutoff Date) and on any day will equal the difference between the Aggregate Net Investment Value, calculated as described under 'Summary-- Security for the Notes--The SUBI' and 'Summary--The Contracts', and the Note Balance. As more fully described under 'Description of the Notes--General', the Aggregate Net Investment Value can change daily. Registration of the Notes................. Each Class of Class A Notes initially will be represented by one or more notes registered in the name of Cede & Co. ('Cede'), as the nominee of The Depository Trust Company ('DTC'). A person acquiring an interest in the Class A Notes (each, a 'Note Owner') will hold his or her interest through DTC, in the United States, or Cedel Bank, societe anonyme ('Cedel') or the Euroclear System ('Euroclear'), in Europe. Transfers within DTC, Cedel or Euroclear, as the case may be, will be in accordance with the usual rules and operating procedures of the relevant system. Cross-market transfers between persons holding directly or indirectly through DTC, on the one hand, and counterparties holding directly or indirectly through Cedel or Euroclear, on the other, will be effected in DTC through Citibank, N.A. or Morgan Guaranty Trust Company of New York, the relevant depositaries (collectively, the 'Depositaries') of Cedel or Euroclear, respectively, and each a participating member of DTC. No Note Owner will be able to receive a definitive Note representing such person's interest, except in the limited circumstances described under 'Description of the Notes--Definitive Notes'. Unless and until definitive Notes are issued, Note Owners will not be recognized as holders of record of Class A Notes and will be permitted to exercise the rights of such holders only indirectly through DTC. For further information regarding book-entry registration of the Class A Notes, see </TABLE> 5 <PAGE> <TABLE> <S> <C> 'Description of the Notes--General' and '--Book-Entry Registration'. Interest.................................. On the fifteenth day of each month or, if such day is not a Business Day, on the next succeeding Business Day, beginning December 15, 1998 (each, a 'Distribution Date'), distributions in respect of the Class A Notes will be made to the holders of record of the Class A-1, Class A-2, Class A-3 and Class A-4 Notes (respectively, the 'Class A-1 Noteholders', the 'Class A-2 Noteholders', the 'Class A-3 Noteholders' and the 'Class A-4 Noteholders', and collectively, the 'Class A Noteholders') as of the day immediately preceding such Distribution Date or, if Definitive Notes are issued, the last day of the immediately preceding calendar month (each such date, a 'Record Date'). On each Distribution Date, the Indenture Trustee will distribute interest to the Class A Noteholders, based on the related Class Note Balance as of the immediately preceding Distribution Date (after giving effect to reductions in such Class Note Balance as of such immediately preceding Distribution Date) or, in the case of the first Distribution Date, on the Initial Class Note Balance, in the case of (i) the Class A-1 Notes, at an annual percentage rate equal to One-Month LIBOR plus 0.35% (the 'Class A-1 Note Rate'), (ii) the Class A-2 Notes, at an annual percentage rate equal to One-Month LIBOR plus 0.40% (the 'Class A-2 Note Rate'), (iii) the Class A-3 Notes, at an annual percentage rate equal to One-Month LIBOR plus 0.45% (the 'Class A-3 Note Rate') and (iv) the Class A-4 Notes, at an annual percentage rate equal to One-Month LIBOR plus 0.55% (the 'Class A-4 Note Rate'). One-Month LIBOR shall generally equal the London interbank offered quotations for one-month United States dollar deposits determined as of the applicable LIBOR Determination Date as described herein. See 'Description of the Notes--Determination of One-Month LIBOR'. All such payments will be calculated on the basis of the actual number of days from and including the prior Distribution Date (or in the case of the initial Distribution Date, the Closing Date) to but excluding the related Distribution Date and a 360-day year. The final maturity date for each Class of Class A Notes (the 'Stated Maturity Date') will be the December 2004 Distribution Date. A 'Business Day' will be a day other than a Saturday or Sunday or a day on which banking institutions in New York, New York, Chicago, Illinois, Wilmington, Delaware, Deerfield Beach, Florida, or Mobile, Alabama, are authorized or obligated by law, executive order or government decree to be closed. As described under 'Description of the Notes--Distributions on the Notes-- Distributions of Interest', distributions in respect of interest on the Class B Notes will be subordinated to distributions in respect of interest on the Class A Notes under certain circumstances. Class A Interest Rate Swap................ On the date of issuance of the Notes, the Trust will enter into the Class A Interest Rate Swap with the Class A Swap Counterparty. The Class A Interest Rate Swap will have a notional amount (the 'Notional Amount') as of any Deposit Date or Distribution Date, equal to the Class A Note Balance, as of the close of business on the preceding Distribution Date after giving effect to distributions on </TABLE> 6 <PAGE> <TABLE> <S> <C> such Distribution Date; provided, however, with respect to the first Deposit Date and Distribution Date, the Notional Amount will be equal to the Initial Class A Note Balance. Pursuant to the Class A Interest Rate Swap, (x) on each Distribution Date, a payment will be made by the Trust to the Class A Swap Counterparty (if the following is a positive number), or (y) on each Deposit Date a payment will be made by the Class A Swap Counterparty to the Trust (if the following is a negative number), of an amount equal to (i) one-twelfth of the product of (A) the Notional Amount and (B) the Swap Rate (or, with respect to the first Deposit Date and Distribution Date, an amount specified in the Agreement) minus (ii) the product of (A) a fraction, the numerator of which is the actual number of days from and including the prior Distribution Date to but excluding the related Distribution Date (or, with respect to the first Deposit Date and Distribution Date, the actual number of days from the date of issuance of the Notes to but excluding the first Distribution Date) and the denominator of which is 360, (B) the Notional Amount and (C) One-Month LIBOR with respect to the related Distribution Date. If such amount is positive it will be referred to herein as the 'Class A Net Swap Payment', and if such amount is negative, it will be referred to herein as the 'Class A Net Swap Receipt'. The 'Swap Rate' is 5.03%. Any Class A Net Swap Receipt in respect of a Deposit Date will be deposited in the Distribution Account and will be available to make distributions of interest due on the Class A Notes on the related Distribution Date. Any Class A Net Swap Payment in respect of a Distribution Date will be paid out of funds on deposit in the SUBI Collection Account. See 'The Class A Interest Rate Swap'. Class A Swap Counterparty................. Merrill Lynch Derivative Products AG will be the swap counterparty with respect to the Class A Interest Rate Swap (in such capacity, the 'Class A Swap Counterparty'). See 'The Class A Interest Rate Swap--The Class A Swap Counterparty'. The Revolving Period; Subsequent Contracts and Subsequent Leased Vehicles.......... No principal will be payable on the Notes until the January 2000 Distribution Date or, upon the occurrence of an Early Amortization Event, until the Distribution Date in the month immediately succeeding the month in which such Early Amortization Event occurs. From and including the Closing Date and ending on the day immediately preceding the commencement of the Amortization Period (i.e., the earlier of December 1, 1999 or the date of an Early Amortization Event) (the 'Revolving Period'), all Principal Collections and reimbursements of Loss Amounts will be reinvested in Subsequent Contracts and Subsequent Leased Vehicles so as to maintain the Class A-1, Class A-2, Class A-3, Class A-4 and Class B Note Balances at constant levels during the Revolving Period, except to the extent there are unreimbursed Note Principal Loss Amounts in respect of any such Class, in which case the Note Balance of the related Class of Notes will decrease, although such amounts may be reimbursed as described under 'Description of the Notes--Distributions on the Notes--Distributions of Interest'. The events that might lead to the termination of the Revolving Period </TABLE> 7 <PAGE> <TABLE> <S> <C> prior to its scheduled termination date are described under 'Description of the Notes--Early Amortization Events'. On any calendar day (i) in each month (beginning December 1998) during the Revolving Period and (ii) if no Early Amortization Event has occurred, in the month in which the Amortization Date occurs, on one or more days selected by the Servicer (each, a 'Transfer Date'), the Servicer will direct the Origination Trustee to reinvest Principal Collections and certain Loss Amounts that otherwise would be reimbursed to the Noteholders in certain lease contracts and the related leased vehicles of the Origination Trust that are not evidenced by the SUBI or any Other SUBI. Upon such reinvestment, the related Subsequent Contracts and Subsequent Leased Vehicles will become SUBI Assets. If on the twenty-fifth calendar day of any month (beginning December 1998) during the Revolving Period the amount of Principal Collections and such otherwise reimbursable Loss Amounts as of the last day of the immediately preceding month that have not been reinvested in Subsequent Contracts and Subsequent Leased Vehicles exceeds $1,000,000, an Early Amortization Event will occur, the Revolving Period will terminate as of such day and all unreinvested Principal Collections and all such reimbursable Loss Amounts will be distributed as principal to Noteholders on the immediately succeeding Distribution Date. For further details concerning the application of Principal Collections and Loss Amounts, see 'Summary--Amortization Period; Principal Payments', 'Risk Factors--Risk of Absence of Funds for Reimbursement of Loss Amounts', 'The Trust and the SUBI--The SUBI' and 'Description of the Notes--Distributions on the Notes-- Application and Distributions of Principal--Revolving Period'. The Subsequent Contracts and Subsequent Leased Vehicles will be selected from the Origination Trust's portfolio of lease contracts and related vehicles that are not allocated to (or reserved for allocation to) any Other SUBI, based on the same criteria as are applicable to the Initial Contracts and the other criteria described under 'The Contracts--Representations, Warranties and Covenants'. If allocations are being made in respect of any one or more previous Other SUBI(s) at the same time out of the Origination Trust's general pool of unreserved lease contracts, reinvestment will be made first in respect of such previous Other SUBI(s). For further information regarding the Subsequent Contracts and Subsequent Leased Vehicles, see 'The Contracts'. 'Principal Collections' will mean, with respect to any Collection Period, all Collections allocable to the principal component of any Contract (including any payment in respect of the related Leased Vehicle, but other than any payment as to which a Loss Amount has been realized and allocated during any prior Collection Period), discounted to the extent required below. A 'Collection Period' will be each calendar month. For purposes of determining Principal Collections, the principal component of all payments made on or in respect of a Contract (or the related Leased Vehicle) with a Lease Rate less than 7.75% (each, a 'Discounted Contract') will be discounted to present value at a rate of 7.75%, thereby effectively reallocating a portion of the payments received in respect of the </TABLE> 8 <PAGE> <TABLE> <S> <C> principal component of the Contracts to Interest Collections and providing additional credit enhancement for the benefit of the Noteholders. 'Collections' with respect to any Collection Period will include all net collections received on or in respect of the Contracts and Leased Vehicles during such Collection Period other than Insured Residual Value Loss Amounts paid under the Residual Value Insurance Policy, such as Monthly Payments (including amounts in the SUBI Collection Account that previously constituted Payments Ahead but which represent Monthly Payments due during such Collection Period), Prepayments, Advances, Net Matured Leased Vehicle Proceeds, Net Repossessed Vehicle Proceeds and other Net Liquidation Proceeds and any Undistributed Transferor Excess Collections in respect of the immediately preceding Collection Period, but shall not include, and (as appropriate) shall be net of (i) Payments Ahead with respect to one or more future Collection Periods, (ii) amounts paid to the Servicer in respect of outstanding Advances, Matured Leased Vehicle Expenses, Repossessed Vehicle Expenses, other Liquidation Expenses and Insurance Expenses, (iii) late payment charges, payments of insurance premiums, excise taxes or similar items and (iv) Additional Loss Amounts in respect of such Collection Period. In addition, if such Collection Period occurs during the Revolving Period, amounts otherwise payable to the Noteholders on the related Distribution Date as reimbursement of Loss Amounts allocable to the Notes (as described under 'Description of the Notes-- Distributions on the Notes--Distributions of Interest') will be treated as Principal Collections and reinvested in Subsequent Contracts and Subsequent Leased Vehicles as described above. 'Interest Collections' with respect to any Collection Period generally will equal the amount by which Collections exceed Principal Collections. 'Net Repossessed Vehicle Proceeds' will equal Repossessed Vehicle Proceeds net of Repossessed Vehicle Expenses, and 'Net Liquidation Proceeds' will equal Liquidation Proceeds net of Liquidation Expenses. 'Net Matured Leased Vehicle Proceeds' will be Matured Leased Vehicle Proceeds received during a Collection Period net of Matured Leased Vehicle Expenses incurred during such Collection Period. Amortization Period; Principal Payments................................ The 'Amortization Period' will commence on the earlier of December 1, 1999 (the 'Amortization Date') or the day on which an Early Amortization Event occurs, and will end when each Class of Notes has been paid in full and all Note Principal Loss Amounts and Class B Note Principal Carryover Shortfalls, if any, have been repaid in full, together with accrued interest thereon, or when the Trust otherwise terminates. During the Amortization Period, Principal Collections and certain reimbursed Loss Amounts will no longer be reinvested in Subsequent Contracts and Subsequent Leased Vehicles as described above. Instead, on each Distribution Date beginning with the Distribution Date in the month following the month in which the Amortization Period commences and ending on the Distribution Date on which the Class A-3 Notes have been paid in full, all Principal Collections for the related Collection Period that are allocable to the Notes will be distributed as principal payments first to the Class A-1 Noteholders until the Class A-1 </TABLE> 9 <PAGE> <TABLE> <S> <C> Notes have been paid in full, second, to the Class A-2 Noteholders until the Class A-2 Notes have been paid in full, third, to the Class A-3 Noteholders until the Class A-3 Notes have been paid in full and thereafter the Class A Percentage and the Class B Percentage of any remaining such Principal Collections will be distributed as principal payments to the Class A-4 Noteholders and to the holders of record of the Class B Notes (the 'Class B Noteholders' and, together with the Class A Noteholders, the 'Noteholders'), respectively. On each Distribution Date after the Class A-3 Notes have been paid in full, the Class A Percentage and the Class B Percentage of Principal Collections for the related Collection Period allocable to the Notes will be distributed to the Class A-4 Noteholders and the Class B Noteholders, respectively, until the related Class of Notes has been paid in full. Certain Loss Amounts incurred during the Amortization Period will be reimbursed to the Noteholders as described below. The 'Class A Percentage' will mean the Class A Note Balance immediately after the Class A-3 Notes have been paid in full, as a percentage of the Note Balance at such time, and the 'Class B Percentage' will mean the Class B Note Balance immediately after the Class A-3 Notes have been paid in full, as a percentage of the Note Balance at such time. The Class A Percentage and the Class B Percentage will not change after they are set. In no event will the principal distributed in respect of any Class of Notes exceed its Note Balance. In addition, under certain circumstances, (i) Class A Noteholders will be entitled to receive reimbursement of Loss Amounts as a distribution of principal from sources other than Principal Collections and (ii) principal allocable to the Class B Notes may instead be distributed in respect of Loss Amounts allocable to the Class A-4 Notes, Class A-4 Note Principal Loss Amounts and accrued and unpaid interest thereon, as described under 'Description of the Notes--Distributions on the Notes-- Distributions of Interest', 'Description of the Notes--Distributions on the Notes--Application and Distributions of Principal' and 'Risk Factors--Risk of Absence of Funds for Reimbursement of Loss Amounts'. See 'Description of the Notes--Early Amortization Events' for a description of the events that might lead to the commencement of the Amortization Period prior to the Amortization Date. During the Amortization Period, the amount of Principal Collections allocable to the Notes in respect of a Collection Period (the 'Principal Allocation') generally will mean the Principal Collections in respect of such Collection Period multiplied by the Investor Percentage for such Principal Collections. The 'Investor Percentage' for purposes of the Principal Allocation will equal the percentage equivalent of a fraction (not to exceed 100%), the numerator of which is the Note Balance and the denominator of which is the Aggregate Net Investment Value, calculated as described under 'Summary--The Contracts', as of the last day of the last Collection Period (i) preceding the Amortization Date or (ii) preceding the month, if any, during which an Early Amortization Event occurs. See 'Description of the Notes--Calculation of </TABLE> 10 <PAGE> <TABLE> <S> <C> Investor Percentage and Transferor Percentage' for a description of calculation of the Investor Percentage relating to Interest Collections and Loss Amounts. Allocations based upon the Principal Allocation for Principal Collections during the Amortization Period may result in distributions of principal with respect to a Collection Period during the Amortization Period to Noteholders in amounts that are greater relative to the declining balance of the Note Balance than would be the case if no fixed Investor Percentage were used to determine the percentage of Principal Collections distributed in respect of the Notes. Additionally, to the extent that on any Distribution Date during the Amortization Period any portion of the Investor Percentage of Interest Collections in respect of the related Collection Period remains after required distributions have been made, such excess interest will be deposited into the Reserve Fund until the amount on deposit therein equals the Reserve Fund Cash Requirement. Any remaining excess interest, up to but not exceeding the product of (i) one-twelfth of 0.25% and (ii) the Aggregate Net Investment Value as of the last day of such Collection Period (the 'Accelerated Principal Distribution Amount'), will be distributed as an additional payment of principal to the Noteholders in the same manner and priority as principal is distributed in respect of the Notes as described in the preceding paragraphs. See 'Description of the Notes--Distributions on the Notes--Distributions of Interest' and 'Description of the Notes-- The Accounts--The SUBI Collection Account--Withdrawals from the SUBI Collection Account' for further information regarding the foregoing matters. Optional Redemption....................... The Notes will be subject to redemption if the Transferor exercises its option to purchase all of the assets of the Trust, which option may be exercised on any Distribution Date if, either before or after giving effect to any payment of principal required to be made on such Distribution Date, the Note Balance has been reduced to an amount less than or equal to 10% of the Initial Note Balance, at a purchase price determined as described under 'Description of the Notes--Termination of the Trust; Redemption of the Notes'. Security for the Notes.................... The security for the Notes will consist primarily of the following: A. The SUBI............................. The SUBI will evidence a beneficial interest in the SUBI Assets. The Origination Trust was created pursuant to a trust agreement (the 'Origination Trust Agreement'), among ALF L.P., as grantor and initial beneficiary, the Origination Trustee and U.S. Bank, as trust agent (in such capacity, the 'Trust Agent'). The SUBI and the entire beneficial interest in the SUBI Assets will be evidenced by a certificate (the 'SUBI Certificate') that will be issued by the Origination Trust pursuant to a supplement to the Origination Trust Agreement dated as of October 1, 1998 (the 'SUBI Supplement' and, together with the Origination Trust Agreement, the 'SUBI Trust Agreement'). The Indenture Trustee and the Owner Trustee will be third party beneficiaries of the SUBI Trust Agreement. The Origination Trust Assets evidenced by the SUBI will primarily include the Contracts and the Leased Vehicles. The SUBI will not </TABLE> 11 <PAGE> <TABLE> <S> <C> evidence an interest in any Origination Trust Assets other than the SUBI Assets, and payments made on or in respect of all other Origination Trust Assets will not be available to make payments on the Notes. For more information regarding the SUBI, see 'The Trust and the SUBI' and 'The Origination Trust'. B. The Residual Value Insurance Policy............................... On the Closing Date, Federal Insurance Company, a wholly owned subsidiary of The Chubb Corporation ('Federal' or the 'RV Insurer'), will issue an insurance policy (the 'Residual Value Insurance Policy') to the Transferor (with the Origination Trustee, the Owner Trustee, the Indenture Trustee and ALF L.P. also named as insureds), which will provide coverage for the Insured Residual Value Loss Amount for any Collection Period. The aggregate maximum amount payable under the Residual Value Insurance Policy with respect to any Leased Vehicle will be the lesser of $60,000 and its insured residual value, calculated as described under 'Security for the Notes--The Residual Value Insurance Policy'. Additionally, the aggregate maximum amount payable under the Residual Value Insurance Policy will not exceed the aggregate insured residual values of all Leased Vehicles. Prior to each Distribution Date, the Servicer will make a claim for any Insured Residual Value Loss Amount under the Residual Value Insurance Policy. The proceeds of any such claim will be used to make the payments described under 'Description of the Notes-- Distributions on the Notes--Distributions of Interest'. For a fuller description of these mechanics, see 'Security for the Notes--The Residual Value Insurance Policy'. The 'Insured Residual Value Loss Amount' for any Collection Period will be the lesser of (i) the Investor Percentage of the Residual Value Loss Amount, and (ii) any shortfall in the amount required to make all payments (other than deposits into the Reserve Fund) required to be made on the related Distribution Date that are described under 'Description of the Notes--Distributions on the Notes--Distributions of Interest', after application of the Investor Percentage of Interest Collections and Transferor Amounts otherwise payable in respect of the Transferor Interest, as described below under 'Summary--Security for the Notes--Subordination of the Transferor Interest'. C. The Reserve Fund..................... The Trust will have the benefit of the Reserve Fund maintained with the Indenture Trustee for the benefit of the Noteholders and the Transferor (as holder of the Transferor Interest). The Reserve Fund is designed to provide additional funds for the benefit of the Noteholders in the event that on any Distribution Date Interest Collections allocable to the Notes for the related Collection Period, plus the Class A Net Swap Receipt, plus Transferor Amounts otherwise distributable in respect of the Transferor Interest, plus any Insured Residual Value Loss Amount paid under the Residual Value Insurance Policy for the related Collection Period, less any Class A Net Swap Payment are insufficient to pay, among other things, the sum of (i) accrued interest and any overdue interest (with interest thereon) at the applicable Note Rate on the Notes on such Distribution Date, (ii) any Loss Amount for such Collection Period </TABLE> 12 <PAGE> <TABLE> <S> <C> allocable to the Notes, calculated as described under 'Description of the Notes--Calculation of Investor Percentage and Transferor Percentage', and (iii) any unreimbursed Note Principal Loss Amounts, together with interest thereon at the applicable Note Rate. Monies on deposit in the Reserve Fund also will be available to Noteholders should Collections ultimately be insufficient to pay in full any Class of Notes. For further information regarding the Reserve Fund, see 'Security for the Notes--The Reserve Fund'. The Reserve Fund will be created with an initial deposit by the Transferor of $17,636,578.71 (the 'Initial Deposit') (which amount will equal 1.0% of the Aggregate Net Investment Value as of the Initial Cutoff Date). On each Distribution Date, the funds in the Reserve Fund will be supplemented by (i) certain Interest Collections, as more fully described under 'Description of the Notes--Distributions on the Notes--Distributions of Interest', (ii) income realized on the investment of amounts on deposit in the Reserve Fund and (iii) in certain circumstances, the deposit of monies in respect of the related Collection Period remaining in the Distribution Account after making all payments required to be made therefrom on such Distribution Date prior to such deposit, including monies that would otherwise be distributed or applied in respect of the Transferor Interest, until the amount on deposit in the Reserve Fund equals the Reserve Fund Cash Requirement then in effect, calculated as described under 'Security for the Notes--The Reserve Fund--The Reserve Fund Cash Requirement'. The Transferor may be required under certain circumstances to deposit funds into the Reserve Fund in an amount equal to certain Reserve Fund supplemental requirements. For a description of the circumstances under which the Transferor will be required to make such deposits, see 'Security for the Notes--The Reserve Fund'. For further information regarding deposits into the Reserve Fund, see 'Description of the Notes--Distributions on the Notes-- Distributions of Interest'. After giving effect to all payments from the Reserve Fund on a Distribution Date, monies that are in excess of the Reserve Fund Cash Requirement generally will be paid to the Transferor, free and clear of any lien of the Trust. D. Subordination of the Transferor Interest............................. The Transferor Interest will initially equal $39,682,871.20, and will represent the entire equity interest in the Trust. However, to provide additional credit enhancement for the Notes, on each Distribution Date, no payments will be made to the Transferor in respect of the Transferor Interest until all payments required to be made on such Distribution Date that are described under 'Description of the Notes--Distributions on the Notes--Distributions of Interest' have been made and the amount on deposit in the Reserve Fund equals the Reserve Fund Cash Requirement. For a description of certain payments made to the Transferor, see 'Description of the Notes-- Certain Payments to the Transferor'. The Contracts............................. The Contracts will consist of a pool of retail closed-end lease contracts originated by Dealers located throughout the United States, </TABLE> 13 <PAGE> <TABLE> <S> <C> each of which will have an original term of not more than 60 months. Each Contract will be a finance lease for accounting purposes and will have been written for a 'capitalized cost' (which may exceed the manufacturer's suggested retail price), plus an implicit rate in each Lease calculated as an annual percentage rate (the 'Lease Rate') on a constant yield basis. The Contracts will provide for equal monthly payments (the 'Monthly Payments') such that at the end of the related Contract term such capitalized cost will have been amortized to an amount equal to the residual value of the related Leased Vehicle established at the time of origination of such Contract (the 'Residual Value'). The amount to which the capitalized cost of a Contract has been amortized at any point in time is referred to herein as its 'Outstanding Principal Balance'. The Initial Contracts consist of 74,744 lease contracts. As of the Initial Cutoff Date, the Lease Rate of the Initial Contracts ranged from 3.20% to 13.00%, with a weighted average Lease Rate of 8.65%. The aggregate of the original principal balances of the Initial Contracts as of their respective dates of origination was $1,894,114,728.78. As of the Initial Cutoff Date, the aggregate Outstanding Principal Balance of the Initial Contracts was $1,772,260,190.52, the aggregate Residual Value of the Initial Leased Vehicles was $1,218,938,715.18 and the Initial Contracts had a weighted average original term of 41.15 months and a weighted average remaining term to scheduled maturity of 32.86 months. See 'The Contracts' for further information regarding the Initial Contracts. The Initial Contracts were, and the Subsequent Contracts will be, identified by the Servicer from the Origination Trust's portfolio of lease contracts originated by Dealers located throughout the United States that are not evidenced by (or reserved for allocation to) any Other SUBI, based upon the criteria specified in the SUBI Trust Agreement and described under 'The Contracts--Characteristics of the Contracts' and '--Representations, Warranties and Covenants'. The 'Aggregate Net Investment Value' as of any day will equal the sum of (i) the Discounted Principal Balance of all Contracts other than Charged-off, Liquidated, Matured and Additional Loss Contracts, (ii) the aggregate Residual Value of all Leased Vehicles to the extent that the related Contracts have reached their scheduled maturities (each, a 'Matured Contract') within the three immediately preceding Collection Periods but which Leased Vehicles as of the last day of the most recent Collection Period have remained unsold and not otherwise disposed of by the Servicer for no more than two full Collection Periods (the 'Matured Leased Vehicle Inventory') and (iii) during the Revolving Period, the amount of Principal Collections and Loss Amounts that otherwise would be reimbursed to the Noteholders, if any, that have not been reinvested in Subsequent Contracts and Subsequent Leased Vehicles. The 'Discounted Principal Balance' of (i) a Discounted Contract will equal the present value of all remaining Monthly Payments on such Contract and the Residual Value of the related Leased Vehicle, calculated using a discount rate of 7.75%, and (ii) all Contracts other than Discounted Contracts will equal their Outstanding Principal Balance. As of the Initial Cutoff Date, the </TABLE> 14 <PAGE> <TABLE> <S> <C> aggregate Discounted Principal Balance of the Initial Contracts and the Aggregate Net Investment Value was $1,763,657,871.20. The Leased Vehicles....................... The Leased Vehicles will be comprised of automobiles and light duty trucks. As of the times of origination of the Contracts, the related Leased Vehicles will be either new vehicles, dealer demonstrator vehicles or manufacturers' program vehicles, as described under 'The Contracts--General'. Manufacturers' program vehicles are vehicles which have been sold directly by manufacturers to rental car companies and returned to the manufacturer for resale. The certificates of title to the Initial Leased Vehicles have been, and the certificates of title to the Subsequent Leased Vehicles will be, registered at all times in the name of the Origination Trustee (in its capacity as trustee of the Origination Trust). Such certificates of title will not reflect the indirect interest of the Trust in the Leased Vehicles by virtue of its ownership of the SUBI or any security interest of the Indenture Trustee. Therefore, the Indenture Trustee will not have a perfected lien in the Leased Vehicles, although it will have a perfected security interest in the SUBI Certificate and certain other assets. For further information regarding the titling of the Leased Vehicles and the interest of the Indenture Trustee therein, see 'The Origination Trust--Contract Origination; Titling of Leased Vehicles' and 'Certain Legal Aspects of the Contracts and the Leased Vehicles--Back-up Security Interests'. The Accounts.............................. The Indenture Trustee will maintain the SUBI Collection Account for the benefit of the Noteholders. Within two Business Days of receipt, payments made on or in respect of the Contracts or the Leased Vehicles generally will be deposited by the Servicer into the SUBI Collection Account. Such payments will include, but will not be limited to, Monthly Payments made by lessees, Monthly Payments determined by the Servicer to be due in one or more future Collection Periods (each, a 'Payment Ahead'), Prepayments, proceeds from the sale or other disposition of Leased Vehicles relating to Matured Contracts (including payments for excess mileage and excess wear and use, but excluding Insured Residual Value Loss Amounts paid under the Residual Value Insurance Policy) ('Matured Leased Vehicle Proceeds'), proceeds received in connection with the sale or other disposition of Leased Vehicles that have been repossessed ('Repossessed Vehicle Proceeds') and other amounts received in connection with the realization of the amounts due under any Contract (excluding Insured Residual Value Loss Amounts paid under the Residual Value Insurance Policy) (together with Matured Leased Vehicle Proceeds and Repossessed Vehicle Proceeds, 'Liquidation Proceeds'). The Servicer will be entitled to reimbursement for expenses incurred in connection with the realization of Matured Leased Vehicle Proceeds ('Matured Leased Vehicle Expenses'), Repossessed Vehicle Proceeds ('Repossessed Vehicle Expenses') and other Liquidation Proceeds (such expenses, together with Matured Leased Vehicle Expenses and Repossessed Vehicle Expenses, 'Liquidation Expenses'), either from amounts on deposit in the SUBI Collection Account or as a deduction from </TABLE> 15 <PAGE> <TABLE> <S> <C> Matured Leased Vehicle Proceeds, Repossessed Vehicle Proceeds or other Liquidation Proceeds, as appropriate, deposited into the SUBI Collection Account. For further details regarding these deposits and reimbursements, see 'Description of the Notes--The Accounts-- The SUBI Collection Account'. On the Business Day immediately preceding each Distribution Date (each, a 'Deposit Date'), the following amounts will be deposited into the SUBI Collection Account: (i) Advances by the Servicer and (ii) Reallocation Payments by World Omni (together with, under certain circumstances during the Amortization Period, Reallocation Deposit Amounts) in respect of certain Contracts as to which an uncured breach of certain representations and warranties or certain servicing covenants has occurred. Thereafter, Interest Collections (and, with respect to the Deposit Date in any month following the month during which the Amortization Period commences, Principal Collections) on deposit in the SUBI Collection Account in respect of the related Collection Period will be deposited into the Distribution Account maintained by the Indenture Trustee for the benefit of the Noteholders and the Transferor. Any Insured Residual Value Loss Amount paid under the Residual Value Insurance Policy will be deposited into the SUBI Collection Account (if it relates to the Revolving Period) or the Distribution Account (if it relates to the Amortization Period) within one Business Day of receipt by the Servicer. Any Required Amount will be withdrawn from the Reserve Fund and deposited into the Distribution Account on each Distribution Date. Any Class A Net Swap Receipt will be deposited into the Distribution Account on the Deposit Date. All payments to Noteholders will be made from the Distribution Account. Any funds remaining in the Distribution Account on a Distribution Date in respect of the related Collection Period following the payment of amounts required to be paid therefrom generally will be paid to the Transferor. For further information regarding these deposits and payments, see 'Description of the Notes--The Accounts--The Distribution Account' and '--The SUBI Collection Account'. Advances.................................. On each Deposit Date the Servicer will be obligated to make, by deposit into the SUBI Collection Account, an advance equal to the aggregate Monthly Payments due but not received during the related Collection Period with respect to Contracts that are 31 days or more past due as of the end of such Collection Period, and the Servicer may (but shall not be required to) make such an advance with respect to Contracts that are one or more days, but less than 31 days, past due as of the end of such Collection Period (each, an 'Advance'). The Servicer will not be required to make any Advance to the extent that it determines that such Advance may not be ultimately recoverable by the Servicer from Net Liquidation Proceeds or otherwise. For further information regarding Advances, see 'Additional Document Provisions--The Servicing Agreement--Advances'. Servicing Compensation.................... The Servicer will be entitled to receive a monthly fee with respect to the SUBI Assets (the 'Servicing Fee'), payable on each Distribution Date, equal to one-twelfth of 1% of the Aggregate Net Investment Value as of the first day of the related Collection Period </TABLE> 16 <PAGE> <TABLE> <S> <C> (or, in the case of the first Distribution Date, one-twelfth of 1% of the Aggregate Net Investment Value as of the Initial Cutoff Date). The Servicer also will be entitled to additional servicing compensation in the form of, among other things, late fees and other administrative fees or similar charges under the Contracts. For further information regarding Servicer compensation, see 'Additional Document Provisions--The Servicing Agreement-- Servicing Compensation'. Tax Status................................ Cadwalader, Wickersham & Taft, special federal income tax counsel to the Transferor, is of the opinion that the Class A Notes will be characterized as indebtedness for federal income tax purposes, as described under 'Material Income Tax Considerations--Federal Taxation'. Each Class A Noteholder, by its acceptance of a Class A Note, and each Note Owner, by its acquisition of an interest in the Class A Notes, will agree to treat the Class A Notes as indebtedness for federal, state and local income tax purposes. Prospective investors are advised to consult their own tax advisors regarding the federal income tax consequences of the purchase, ownership and disposition of the Class A Notes, and the tax consequences arising under the laws of any state or other taxing jurisdiction. For further information regarding material federal income tax considerations with respect to the Class A Notes, see 'Material Income Tax Considerations--Federal Taxation'. ERISA Considerations...................... As more fully described under 'ERISA Considerations', an employee benefit plan subject to the requirements of the fiduciary responsibility provisions of the Employee Retirement Income Security Act of 1974, as amended ('ERISA'), or the provisions of Section 4975 of the Internal Revenue Code of 1986, as amended, contemplating the purchase of Class A Notes should consult its counsel before making a purchase, and the fiduciary of such plan and such legal advisors should consider the matters discussed herein. Ratings................................... It is a condition of issuance of the Class A Notes that each of Moody's Investors Service, Inc. ('Moody's'), Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ('Standard & Poor's') and Fitch IBCA, Inc. ('Fitch' and, together with Moody's and Standard & Poor's, the 'Rating Agencies') rates each Class of Class A Notes in its highest rating category. The ratings of the Class A Notes should be evaluated independently from similar ratings on other types of securities. A rating is not a recommendation to buy, sell or hold the related Class A Notes, inasmuch as such rating does not comment as to market price or suitability for a particular investor. The ratings of the Class A Notes will be based primarily upon the value of the Initial Contracts, the Residual Value Insurance Policy (see 'Security for the Notes--The Reserve Fund--Other Reserve Fund Requirements' for information regarding the effect of a downgrade by a Rating Agency of the credit rating of the RV Insurer), the Reserve Fund, the Class A Interest Rate Swap, the Class A Swap Counterparty (see 'Risk Factors--Risks Associated with the Class A Swap Counterparty' for information regarding the effect of (i) a downgrade by a Rating Agency of the counterparty rating of the Class A Swap Counterparty </TABLE> 17 <PAGE> <TABLE> <S> <C> and (ii) a payment default by the Class A Swap Counterparty) and the terms of the Transferor Interest and the Class B Notes. There is no assurance that any such rating will not be lowered or withdrawn by the assigning Rating Agency if, in its judgment, future circumstances so warrant. In the event that a rating with respect to any Class of Class A Notes is qualified, reduced or withdrawn, no person or entity will be obligated to provide any additional credit enhancement with respect to such Class of Class A Notes. Any reduction in the rating assigned to the Class A Swap Counterparty or the RV Insurer may result in a reduction in the rating of the Class A Notes. For further information concerning the ratings assigned to the Class A Notes, including the limitations of such ratings, see 'Ratings of the Class A Notes'. </TABLE> 18 <PAGE> RISK FACTORS RISK OF LIMITED LIQUIDITY; ABSENCE OF SECONDARY MARKET There is currently no market for the Class A Notes. The Underwriters expect, but will not be obligated, to make a market in each Class of Class A Notes. There can be no assurance that a secondary market for the Class A Notes will develop or, if one does develop, that it will provide the related Noteholders with liquidity of investment or will continue for the life of the related Class A Notes. RISK OF ABSENCE OF FUNDS FOR REIMBURSEMENT OF LOSS AMOUNTS In the event that Loss Amounts are incurred in respect of the Contracts and the Leased Vehicles during a Collection Period, if the related Distribution Date occurs during the Revolving Period, an amount equal to the Investor Percentage of such Loss Amounts will not be reimbursed to the Noteholders but will be treated as if such amount constituted Principal Collections received during the Collection Period in which such Distribution Date occurs. Accordingly, to the extent that amounts are available for the reimbursement of such Loss Amounts as described herein, such amount will be available for reinvestment in Subsequent Contracts and Subsequent Leased Vehicles. If the related Distribution Date occurs during the Amortization Period and to the extent such amounts are available, they will be distributed to the Noteholders, in the following order and priority: first to the Class A-1 Noteholders until the Class A-1 Notes have been paid in full, second to the Class A-2 Noteholders until the Class A-2 Notes have been paid in full, third to the Class A-3 Noteholders until the Class A-3 Notes have been paid in full and thereafter the Class A Percentage and the Class B Percentage of any such remaining reimbursable amounts will then be distributed to the Class A-4 Noteholders and the Class B Noteholders, respectively. If the Note Balance of the Class B Notes has been reduced to zero, such amounts will be allocated to the Class A Noteholders, pro rata, based on the Class A-1, Class A-2, Class A-3 and Class A-4 Allocation Percentages. Such distribution of principal will be made from: (i) any remaining portion of the Investor Percentage of the Interest Collections for the related Collection Period, (ii) Transferor Amounts otherwise payable to the Transferor in respect of the Transferor Interest; (iii) Insured Residual Value Loss Amounts paid under the Residual Value Insurance Policy; (iv) amounts on deposit in the Reserve Fund; and (v) in the case of the Class A-4 Notes, amounts otherwise payable as principal to the Class B Noteholders, to the extent available after the distributions described under clauses (i) through (ix) of 'Description of the Notes--Distributions on the Notes--Distributions of Interest'. So long as World Omni is the Servicer, the Servicing Fee will be subordinated to (among other things) the reimbursement of Loss Amounts, and amounts that otherwise would be used to pay the Servicing Fee will be included in any remaining portion of the Investor Percentage of Interest Collections as described in clause (i) above. Such remaining portion also may include Undistributed Transferor Excess Collections in respect of the preceding Collection Period. With respect to any Distribution Date, the 'Class A-1 Allocation Percentage' will mean the Class A-1 Note Balance as a percentage of the Note Balance, calculated as of the last day of the related Collection Period. The 'Class A-2 Allocation Percentage', the 'Class A-3 Allocation Percentage' and the 'Class A-4 Allocation Percentage' will be calculated in the same manner as the Class A-1 Allocation Percentage, appropriately modified to relate to the Class A-2, Class A-3 or Class A-4 Notes, as the case may be. Higher Loss Amounts that occur during the Amortization Period may therefore accelerate the rate of return of principal on the Notes. To the extent that Principal Collections and Loss Amounts that otherwise would be reimbursed to the Noteholders are reinvested in Subsequent Contracts during the Revolving Period, the aggregate Residual Value of the Leased Vehicles as a percentage of the Aggregate Net Investment Value will increase. Loss Amounts that are not reimbursed will be allocated first to the Class B Notes until the Note Balance of the Class B Notes has been reduced to zero and then to the Class A Notes, pro rata, based on the Class A-1, Class A-2, Class A-3 and Class A-4 Allocation Percentages. Furthermore, to the extent that Loss Amounts (including Residual Value Loss Amounts) ultimately exceed the sources available for repayment thereof, investors in the Class A Notes could incur a loss on their investment. World Omni's agreements with its Dealers generally do not provide for recourse to the Dealer for unpaid amounts in respect of a defaulted lease contract. For further information on Dealer repurchase obligations, see 'The Origination Trust--Contract Origination; Titling of Leased Vehicles'. 'Loss Amounts' will include Charged-off Amounts, Residual Value Loss Amounts and Additional Loss Amounts. The 'Residual Value Loss Amount' for any Collection Period generally will represent the aggregate 19 <PAGE> net losses on dispositions of Matured Leased Vehicle Inventory, and will be equal to the sum of (a) the aggregate of the Residual Values of all those Leased Vehicles that were included in Matured Leased Vehicle Inventory but that had remained unsold and not otherwise disposed of by the Servicer for at least two full Collection Periods as of the last day of such Collection Period, (b) the excess, if any, of (i) the aggregate of the Residual Values of all Leased Vehicles previously included in Matured Leased Vehicle Inventory but that were sold or otherwise disposed of during such Collection Period, over (ii) Net Matured Leased Vehicle Proceeds for such Collection Period, and (c) any losses (up to the respective Discounted Principal Balance) on Contracts terminated on or prior to their Maturity Dates during such Collection Period by agreement between the Servicer and the lessee in connection with the payment of less than their respective Outstanding Principal Balances pursuant to World Omni's pro-active lease termination program, as described under 'Maturity, Prepayment and Yield Considerations'. As more fully described under 'Security for the Notes--The Residual Value Insurance Policy', the Residual Value Insurance Policy will be drawn upon to pay any Insured Residual Value Loss Amount, as described under 'Description of the Notes--Distributions on the Notes--Distributions of Interest', after application of the Investor Percentage of Interest Collections, the Class A Net Swap Receipt and Transferor Amounts otherwise payable in respect of the Transferor Interest. For a discussion of the recent leased vehicle residual value loss experience of World Omni, see 'World Omni--Delinquency, Repossession and Loss Data'. The amount of Residual Value losses will vary based on a variety of factors, including the effect of World Omni's pro-active lease termination program, more fully described under 'Maturity, Prepayment and Yield Considerations', and the supply of, and demand for, vehicles similar to the Leased Vehicles in the used car market. No assurance can be given as to the likely levels of Residual Value losses over the life of the Notes. MATURITY AND PREPAYMENT RISKS No principal will be paid to any Class A Noteholders until the January 2000 Distribution Date or, upon the occurrence of an Early Amortization Event, until the Distribution Date in the month immediately succeeding the month in which such Early Amortization Event occurs. During the Revolving Period, Principal Collections and reimbursements of Loss Amounts will be reinvested in Subsequent Contracts and Subsequent Leased Vehicles. Accordingly, the continuation of the Revolving Period will be dependent, in part, upon the continued origination and assignment to the Origination Trust of lease contracts and leased vehicles meeting the eligibility criteria described herein. An unexpectedly high rate of Principal Collections (including Prepayments) received during the Revolving Period or a significant decline in the number of qualifying lease contracts available to be assigned to the Origination Trust could result in the occurrence of an Early Amortization Event and the commencement of the Amortization Period prior to the Amortization Date. The retail automobile and light duty truck leasing business in the United States may be affected by a variety of social, economic and geographic factors. Economic factors include interest rates, unemployment levels, the rate of inflation and consumer perceptions of economic conditions. However, it is not possible to determine or predict whether or to what extent economic, geographic or social factors will affect retail automobile and light duty truck leasing in general, or that of World Omni or its Dealers in particular. As a result, there can be no assurance that the Revolving Period will not terminate prior to the Amortization Date due to the occurrence of an Early Amortization Event. Since an Early Amortization Event would result in the commencement of distributions of principal to Class A-1 Noteholders on the Distribution Date in the succeeding month, it could shorten the final maturity of and affect the yield on each Class of Class A Notes. See 'Description of the Notes--Early Amortization Events' for a description of the events that might lead to the early commencement of the Amortization Period and a description of the results of an Early Amortization Event. The rate of payment of principal on the Notes during the Amortization Period will depend on the rate of payments on or in respect of the Contracts and the Leased Vehicles (including scheduled payments on and prepayments and liquidations of the Contracts) and losses with respect thereto, which cannot be predicted with certainty. In addition, because payments made on or in respect of the Contracts and the Leased Vehicles will ordinarily be distributed to Noteholders during the Amortization Period according to the timing of their receipt, the rate of principal payments on the Notes and the yield to maturity of the Class A Notes generally will be directly related to the rate at which payments on or in respect of the Contracts and the Leased Vehicles are made. 20 <PAGE> Moreover, if on any Distribution Date relating to the Amortization Period any Excess Collections exist at a time when the amount on deposit in the Reserve Fund is at least equal to the Reserve Fund Cash Requirement, the related Accelerated Principal Distribution Amount will be distributed as principal to Noteholders as more fully described under 'Description of the Notes--Distributions on the Notes--Distributions of Interest'. The rate of payment of principal of the Class A Notes may also be affected by payment by World Omni of Reallocation Payments (together with, under certain circumstances during the Amortization Period, Reallocation Deposit Amounts) in respect of certain Contracts as to which an uncured breach of certain representations and warranties or certain servicing covenants has occurred and the exercise by the Transferor of its right to purchase all of the assets of the Trust at its option under certain circumstances pursuant to the Agreement, thereby triggering a redemption of the Notes. A substantial increase in the rate of payments on or in respect of the Contracts and Leased Vehicles (including prepayments and liquidations of the Contracts) during the Amortization Period or a high level of Loss Amounts may shorten the final maturity of and may significantly affect the yields on each Class of Class A Notes. See 'Description of the Notes--Termination of the Trust; Redemption of the Notes', 'The Contracts--Representations, Warranties and Covenants' and 'Additional Document Provisions--The Servicing Agreement--Collections' for further information regarding these matters. Each of the Contracts may be prepaid by the related lessee without penalty in full or in part at any time upon payment of a $250 processing fee. As more fully described under 'Maturity, Prepayment and Yield Considerations', World Omni actively encourages lessees under lease contracts with remaining terms of less than one year to either buy, trade in or refinance the related leased vehicles prior to the scheduled maturities of such lease contracts. As a part of this program, during the last several months of a lease contract World Omni may selectively offer certain incentives to encourage lease terminations, which may result in residual value losses. As also more fully described under 'Maturity, Prepayment and Yield Considerations', World Omni estimates that over calendar years 1995, 1996, 1997 and the six months ended June 30, 1998, an average of approximately 73% of the number of retail automobile and light duty truck lease contracts in its portfolio (including lease contracts owned by the Origination Trustee on behalf of the Origination Trust and by certain special purpose finance subsidiaries of World Omni) with scheduled maturities during this period terminated prior to maturity. Such early terminations primarily were due either to voluntary prepayments or to repossession of the leased vehicles due to default by the lessees under the related lease contracts. No assurance can be given that the Contracts will experience the same rate of prepayment or default or any greater or lesser rate than World Omni's historical rate for the retail automobile and light duty truck lease contracts in its portfolio (including lease contracts owned by the Origination Trustee on behalf of the Origination Trust and by certain special purpose finance subsidiaries of World Omni). For further information regarding these topics and related yield information, see 'Maturity, Prepayment and Yield Considerations'. RISKS ASSOCIATED WITH SEQUENTIAL PAYMENT OF PRINCIPAL ON THE NOTES In general, no principal payments (including Covered Loss Amounts) will be made on the Class A-2, Class A-3, Class A-4 or Class B Notes until the Class A-1 Notes have been paid in full, on the Class A-3, Class A-4 or Class B Notes until the Class A-1 and Class A-2 Notes have been paid in full, or on the Class A-4 or Class B Notes until the Class A-1, Class A-2 and Class A-3 Notes have been paid in full. On each Distribution Date during the Amortization Period, all Principal Collections (and Covered Loss Amounts) for the related Collection Period that are allocable to the Notes will be distributed first to the Class A-1 Noteholders until the Class A-1 Notes have been paid in full, second to the Class A-2 Noteholders until the Class A-2 Notes have been paid in full, third to the Class A-3 Noteholders until the Class A-3 Notes have been paid in full and thereafter the Class A Percentage and the Class B Percentage of any such remaining Principal Collections (and Covered Loss Amounts) will then be distributed as principal payments to the Class A-4 Noteholders and the Class B Noteholders, respectively. Principal payments in respect of the Class A-4 and Class B Notes will be based on the fixed Class A Percentage and Class B Percentage, which will be calculated when the Class A-1, Class A-2 and Class A-3 Notes have been paid in full. Since Uncovered Loss Amounts will be allocated first to the Class B Notes until the Note Balance of the Class B Notes has been reduced to zero and then to the Class A Notes, pro rata, based on the Class A-1, Class A-2, Class A-3 and Class A-4 Allocation Percentages, Class A-2 Notes may be allocated more 21 <PAGE> Loss Amounts than the Class A-1 Notes as a relative percentage of their respective Initial Note Balances, Class A-3 Notes may be allocated more Loss Amounts than the Class A-1 or Class A-2 Notes as a relative percentage of their respective Initial Note Balances, and Class A-4 Notes may be allocated more Loss Amounts than the Class A-1, Class A-2 or Class A-3 Notes as a relative percentage of their respective Initial Note Balances, primarily because Loss Amounts will be allocated on each Distribution Date based on the then-current Class A-2, Class A-3 and Class A-4 Allocation Percentages, which will increase as the Note Balance of each Class of Class A Notes senior in priority of payment decreases during the Amortization Period. In addition, the Investor Percentage of the net proceeds of any sale or other disposition of the SUBI, the SUBI Certificate or other property of the Trust, which may occur under certain circumstances involving an Insolvency Event with respect to the Transferor (as described under 'Description of the Notes--Early Amortization Events'), to the extent such net proceeds constitute Principal Collections, will be distributed first, on a pro rata basis, to the Class A Swap Counterparty based on the termination payment, if any, due and to the Class A Noteholders based on the respective Class A Note Balances until the Class A Swap Counterparty and the Class A Notes have been paid in full, and second, to the Class B Noteholders. See 'Additional Document Provisions--The Indenture--Events of Default'. RISKS ASSOCIATED WITH GEOGRAPHIC, ECONOMIC AND OTHER FACTORS The Dealers which originated and will originate the Contracts are located (and, therefore, the lessees generally are and will be located) throughout the United States, with the largest percentage of Initial Contracts originated in (and the largest percentage of Subsequent Contracts expected to be originated in) the Five State Area. Less than 5% of the total number of Initial Contracts were originated in any State other than a State in the Five State Area. For a further breakdown of these percentages, see 'The Contracts--Characteristics of the Contracts--Distribution of the Initial Contracts by State'. Due to the geographic concentration of Contracts in the Five State Area, adverse economic conditions in one of more of the States therein may have a disproportionate impact on the performance of the SUBI Assets. Economic factors such as unemployment, interest rates, the rate of inflation and consumer perceptions of the economy may affect the rate of prepayment and defaults on the Contracts and the ability to sell or otherwise dispose of Leased Vehicles relating to Matured Contracts for an amount at least equal to their respective Residual Values. These economic factors, as well as other factors such as consumer perceptions of used vehicle values, also may affect the ability to realize the Residual Values of Leased Vehicles upon sale. Certain shortfalls in respect of the Residual Values of Leased Vehicles relating to Matured Contracts will be covered by the Residual Value Insurance Policy, as and to the extent described under 'Security for the Notes--The Residual Value Insurance Policy'. RISKS ASSOCIATED WITH CONSUMER PROTECTION LAWS Numerous federal and state consumer protection laws, including the federal Consumer Leasing Act of 1976 and Regulation M promulgated by the Board of Governors of the Federal Reserve System, impose requirements on retail lease contracts such as the Contracts. These laws apply to the Origination Trust as the assignee and co-lessor of the Contracts and may also apply to the Trust as owner of the SUBI Certificate which represents a beneficial interest in, among other things, the Contracts. The failure by the Origination Trust to comply with such requirements may give rise to liabilities on the part of the Origination Trust, and claims by such parties may be subject to set-off as a result of such noncompliance. Many States, including each of the States in the Five State Area, have adopted Lemon Laws that provide vehicle users certain rights in respect of substandard vehicles which may apply to one or more of the Leased Vehicles. A successful claim under a Lemon Law could result in, among other things, the termination of the related Contract and/or require the refunding of a portion of payments that previously have been paid. World Omni will make representations and warranties that each Contract complies with all requirements of law in all material respects. If any such representation and warranty proves incorrect, has certain material adverse effects and is not timely cured, World Omni will be required to make a Reallocation Payment (together with, under certain circumstances during the Amortization Period, Reallocation Deposit Amounts) into the SUBI Collection Account and reallocate the related Contract and Leased Vehicle out of the SUBI, as described under 'The Contracts--Representations, Warrants and Covenants' and 'Description of the Notes--Reallocation Payments and Reallocation Deposit Amounts'. For further information regarding consumer protection laws, see 'Certain Legal Aspects of the Contracts and the Leased Vehicles--Consumer Protection Laws'. 22 <PAGE> RISKS ASSOCIATED WITH ERISA LIABILITIES The Origination Trust Assets, including the SUBI Assets, could become subject to liens in favor of the Pension Benefit Guaranty Corporation (the 'PBGC') to satisfy unpaid ERISA obligations of any member of an 'affiliated group' that includes World Omni, SET, JMFE and their respective affiliates. Such a PBGC lien would have priority over the interest of Noteholders in any SUBI Assets that are not subject to a prior perfected security interest in favor of the Indenture Trustee (i.e., the Leased Vehicles). The ratings of the Class A Notes may be downgraded in the event of any unfunded ERISA liability of any member of such affiliated group, as described under 'Additional Document Provisions--The Servicing Agreement--Compliance with ERISA'. The ratings of the Class A Notes address the likelihood of the payment of principal of and interest on the Class A Notes pursuant to their terms, as described under 'Ratings of the Class A Notes'. However, the Transferor believes that the likelihood of any such liability being asserted against the Origination Trust Assets or, if so asserted, being successfully pursued, is remote. Such affiliated group maintains only one plan (which is neither a multi-employer or multiple employer plan) that would subject it to a lien if the plan were to terminate with assets insufficient to cover its liabilities. That plan historically has had assets that significantly exceeded its liabilities. However, no assurance can be given that these conditions will continue in the future. RISKS ASSOCIATED WITH VICARIOUS TORT LIABILITY Although the Origination Trust will own the Leased Vehicles and the Trust will have an interest therein evidenced by the SUBI, the Leased Vehicles will be operated by the related lessees and their respective invitees. State laws differ as to whether anyone suffering injury to person or property involving a leased vehicle may bring an action against the owner of the vehicle merely by virtue of that ownership. To the extent that applicable State law permits such an action, the Origination Trust and the Origination Trust Assets may be subject to liability to such an injured party. However, the laws of many States, including each of the States in the Five State Area, either do not permit such suits, or the lessor's liability is capped at the amount of any liability insurance that the lessee was required to, but failed to, maintain. For further information in this regard, see 'Certain Legal Aspects of the Contracts and the Leased Vehicles--Vicarious Tort Liability'. Notwithstanding the foregoing, in the event that vicarious liability on the Origination Trust as owner of a Leased Vehicle were imposed and the coverage provided by the Contingent and Excess Liability Insurance Policies were insufficient to cover such a loss with respect to a Leased Vehicle or, in certain circumstances, a leased vehicle that is an Other SUBI Asset or a UTI Asset, investors in the Class A Notes could incur a loss on their investment. See 'Security for the Notes--The Contingent and Excess Liability Insurance Policies' and 'Certain Legal Aspects of the Origination Trust and the SUBI--The SUBI'. All of the Contracts will contain provisions requiring the lessees to maintain levels of insurance satisfying applicable state law. In addition, in the event that any such insurance has lapsed or has not been maintained in full force and effect or the Servicer has failed to maintain the right to receive the proceeds of such insurance, the Servicing Agreement will require World Omni to pay all such amounts as would otherwise have been recoverable as Insurance Proceeds. For further information regarding insurance matters, see 'World Omni-- Insurance' and 'Additional Document Provisions--The Servicing Agreement--Insurance on Leased Vehicles'. Under Florida law, the owner of a motor vehicle that is subject to a lease having an initial term of at least one year is exempt from liability arising out of an accident in which the leased vehicle is involved if the lessee is required by the lease to maintain certain specific levels of insurance, and such insurance is maintained either by the lessee or the lessor, as further described under 'Certain Legal Aspects of the Contracts and the Leased Vehicles--Vicarious Tort Liability'. However, a court applying the law of another jurisdiction might reach another result. Moreover, actions by third parties might arise against the owner of a leased vehicle based on legal theories other than negligence, such as a product defect or improper vehicle preparation prior to the origination of the related lease contract. Even if the Origination Trust were to be the subject of an action for damages as a result of its ownership of a Leased Vehicle, however, it will be the beneficiary of the Contingent and Excess Liability Insurance Policies with respect thereto, as more fully described under 'Security for the Notes--The Contingent and Excess Liability Insurance Policies'. Although the Origination Trust's insurance coverage exceeds $10 million per claim, with an allowance for multiple claims in any policy period, in the event that all such insurance coverage were exhausted and damages were assessed against the Origination Trust, claims could be imposed against the assets of the Origination Trust, including the Leased Vehicles. If any such claims are imposed against any SUBI Assets or, in certain limited circumstances, any 23 <PAGE> Other SUBI Assets or UTI Assets, investors in the Class A Notes could incur a loss on their investment. For further information regarding the potential for third-party claims against the Origination Trust Assets, see 'The Origination Trust--Allocation of Origination Trust Liabilities', 'Certain Legal Aspects of the Origination Trust and the SUBI-- The SUBI', 'Certain Legal Aspects of the Contracts and the Leased Vehicles--Vicarious Tort Liability' and 'ERISA Considerations'. RISKS IN THE EVENT OF AN INSOLVENCY OF WORLD OMNI; SUBSTANTIVE CONSOLIDATION WITH WORLD OMNI The Transferor has taken steps in structuring the transactions contemplated hereby that are intended to ensure that the voluntary or involuntary application for relief under the United States Bankruptcy Code or similar applicable state laws ('Insolvency Laws') by World Omni will not result in the consolidation of the assets and liabilities of ALF LLC, ALF L.P., WOLS LLC, the Transferor, the Origination Trust or the Trust with those of World Omni. With respect to WOLS LLC and ALF LLC, these steps include their creation as separate, special purpose finance subsidiaries of World Omni pursuant to limited liability company agreements containing certain limitations (including the requirement that each must have a board of managers, known as a 'board of directors', including at all times at least two 'independent directors' and restrictions on the nature of their respective businesses and on their ability to commence a voluntary case or proceeding under any Insolvency Law without the affirmative vote of a majority of their respective directors, including each independent director). With respect to the Transferor and ALF L.P., these steps include their creation as separate, special purpose limited partnerships of which WOLS LLC and ALF LLC, respectively, are the sole general partners, pursuant to limited partnership agreements containing certain limitations (including restrictions on the nature of their respective businesses and on their ability to commence a voluntary case or proceeding under any Insolvency Law without the affirmative vote of all of the directors of their respective general partners, including each independent director). Reallocation Payments made by World Omni in respect of certain Contracts as to which an uncured breach of certain representations and warranties or certain servicing covenants has occurred (and, if during the Amortization Period such payment would cause the Transferor Interest to be less than zero, payment of the related Reallocation Deposit Amount), payments made by World Omni in respect of certain insurance policies required to be obtained and maintained by lessees pursuant to the Contracts, unreimbursed Advances made by World Omni, as Servicer, pursuant to the Servicing Agreement, and payments made by World Omni to the Transferor, pursuant to the Support Agreement or otherwise, may be recoverable by World Omni as debtor-in-possession or by a creditor or a trustee in bankruptcy of World Omni as a preferential transfer from World Omni if such payments were made within one year prior to the filing of a bankruptcy case in respect of World Omni. In addition, the insolvency of World Omni could result in the replacement of World Omni as Servicer, which could result in a temporary interruption of payments on the Notes and an Event of Servicing Termination under the Servicing Agreement. Additionally, if prior to the Amortization Date a conservator, receiver or bankruptcy trustee were appointed by the Transferor, or if certain other events relating to the bankruptcy or insolvency of the Transferor were to occur (each, an 'Insolvency Event') the Amortization Period would commence. On the Closing Date, Williams & Connolly, counsel to ALF LLC, ALF L.P., the Transferor, WOLS LLC and World Omni, will render an opinion based on a reasoned analysis of analogous case law (although there is no precedent based on directly similar facts) that, subject to certain facts, assumptions and qualifications specified therein, under present reported decisional authority and statutes applicable to federal bankruptcy cases, if World Omni were to become a debtor in a case under the Bankruptcy Code, it would not be a proper exercise by a federal bankruptcy court of its equitable discretion to disregard the independent forms so as to substantively consolidate the assets and liabilities of ALF LLC, ALF L.P., the Transferor, WOLS LLC, the Origination Trust or the Trust with those of World Omni. In addition, on the Closing Date, counsel to the Transferor will render an opinion to the effect that (i) the transfer of the SUBI Certificate by the Transferor to the Trust constitutes a sale of the SUBI Certificate and the beneficial interest in the SUBI Assets evidenced thereby, subject in each case to the rights of the Transferor as the holder of the Transferor Interest and the rights of the Indenture Trustee as pledgee of the SUBI Certificate, or (ii) if such transfer does not constitute a sale, then the Agreement creates a valid perfected security interest of the Trust in the Transferor's right, title and interest in the SUBI Certificate. For further information regarding the risk of insolvency, see 'Certain Legal Aspects of the Origination Trust and the SUBI--Insolvency Related Matters'. 24 <PAGE> The Origination Trust has been registered under the business trust provisions of certain state laws, including those of Alabama and Florida. As such, the Origination Trust may be subject to the Insolvency Laws, and claims against the Origination Trust Assets could have priority over the beneficial interest therein represented by the SUBI. In addition, claims of a third party against the Origination Trust Assets, including the SUBI Assets, to the extent such claims are not covered by insurance, would take priority over the holders of beneficial interests in the Origination Trust, such as the Indenture Trustee, as more fully described under 'Security for the Notes--The Contingent and Excess Liability Insurance Policies' and 'Certain Legal Aspects of the Contracts and Leased Vehicles--Vicarious Tort Liability'. RISKS ASSOCIATED WITH THE CLASS A SWAP COUNTERPARTY The Contracts bear interest at a fixed rate while the Class A Notes bear interest at a floating rate. The Trust will enter into the Class A Interest Rate Swap with the Class A Swap Counterparty to mitigate the basis risk associated with an increase in floating rates that results in the weighted average of the Note Rates on the Class A Notes exceeding the weighted average Lease Rates on the Contracts. If a Class A Net Swap Receipt is due to the Trust, a default by the Class A Swap Counterparty may affect the Trust's ability to make interest payments on the Class A Notes, which could result in a loss to the Class A Noteholders. In addition, an Early Amortization Event will occur in the event that either (a) the Class A Swap Counterparty fails to make a required payment within five calendar days of the date such payment was due or (b) the Class A Swap Counterparty or the Trust fails, within 30 calendar days of the date on which the counterparty ratings of the Class A Swap Counterparty fall below the required ratings of any of the Ratings Agencies as specified in the Agreement, to (i) obtain a replacement interest rate swap agreement with terms substantially the same as the Class A Interest Rate Swap or (ii) establish any other arrangement satisfactory to the applicable Rating Agency, in any case such that the Rating Agency will not reduce or withdraw its ratings of any Class of the Class A Notes. For a discussion of the prepayment risks associated with the occurrence of an Early Amortization Event, see '--Maturity and Prepayment Risks'. Following an Indenture Event of Default or an Insolvency Event and the sale of the SUBI at the direction of the Noteholders, so long as the Class A Swap Counterparty has not breached any of its obligations, it may be entitled to a termination payment. Amounts available to make such a payment shall be paid pro rata (based on the amount of the termination payment due to the Class A Swap Counterparty, on the one hand and the Class A Note Balance on the other) between the Class A Swap Counterparty and the Class A Noteholders. See 'Additional Document Provisions--The Indenture--Events of Default'. In such event, the Class A Noteholders may suffer a loss. In addition, if the Trust defaults in its obligation to pay Class A Net Swap Payments to the Class A Swap Counterparty, the Trust may no longer have the benefit of the Class A Interest Rate Swap. As a result of a termination of the Class A Interest Rate Swap, there may not be funds available to pay interest on the Class A Notes at the applicable Note Rate. RISKS ASSOCIATED WITH EVENT OF DEFAULT Investors should be aware that the amount of principal or interest required to be paid to holders of any Class of the Class A Notes prior to the maturity date for that Class of Class A Notes generally will be limited to amounts available in the Distribution Account for payment to Noteholders. Therefore, the failure to pay principal or interest on a Class of Class A Notes generally will not result in the occurrence of an Indenture Event of Default until the Stated Maturity Date for the Class A Notes. See 'Additional Document Provisions--The Indenture'. Accordingly, Noteholders may not seek to enforce any remedies for the failure to pay principal or interest on a Class of Class A Notes until the Stated Maturity Date for the Class A Notes. RISKS ASSOCIATED WITH YEAR 2000 COMPLIANCE Year 2000 compliance refers to the ability of computer systems to respond to the problems created by the fact that many computer programs have been written using two digits rather than four digits to define the applicable year. As a consequence, unless modified, such systems are not able to differentiate between 2000 and 1900 and may generate erroneous data or cause interruptions in system processing. While certain aspects of World Omni's businesses could operate on a manual basis for a period of time, in the event Year 2000 25 <PAGE> compliance for its significant information technology ('IT') systems were not reached, World Omni believes that it would be unable to sustain its current level of performance and customer service. World Omni is therefore committed to taking all appropriate actions to achieve Year 2000 compliance for its significant IT systems before the millennium change date. World Omni has identified all significant IT applications that will require remediation, which in some cases will involve the replacement of systems, to ensure Year 2000 compliance. Before the end of 1998, World Omni will have initiated formal communications with all significant third party suppliers that provide operational support and non-IT systems to determine the extent to which it would be vulnerable in the event that one or more of those third parties fail to remediate their own Year 2000 issues. While World Omni believes that it does not have significant exposure to significant suppliers' Year 2000 problems, it is seeking compliance assurances from such significant suppliers. As of October 15, 1998, substantially all of World Omni's IT systems have been remediated. All remaining in-house developed software is scheduled for completion by November 1998. Except for three systems for which testing is scheduled to be completed during the second quarter of 1999, all of World Omni's significant vendor software is scheduled to be compliant by the end of 1998. The three systems that will be tested during the second quarter of 1999 have been certified by the vendors to be Year 2000 compliant. The total costs of the Year 2000 project have not had nor are they anticipated to have a material impact on World Omni's financial position or results of operations or its ability to perform its obligations and its duties as Servicer. World Omni does not anticipate that Year 2000 issues with respect to its computer systems will have a material adverse effect on the Trust or the Origination Trust, the Origination Trust Assets, the SUBI Assets or the servicing of such Origination Trust Assets or SUBI Assets. The date on which World Omni believes it will complete the Year 2000 modifications is based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party modification plans and other factors. However, there can be no assurances that these estimates will be achieved, and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes and similar uncertainties. THE TRUST AND THE SUBI GENERAL The Trust and the Noteholders will have no interest in the UTI, any Other SUBI or any assets of the Origination Trust evidenced by the UTI or any Other SUBI. Payments made on or in respect of the Origination Trust Assets not represented by the SUBI will not be available to make payments on the Notes. For further information regarding the Origination Trust, see 'The Origination Trust'. THE TRUST Pursuant to the Agreement, the Transferor will create the Trust by transferring and assigning the SUBI, represented by the SUBI Certificate, to the Trust in exchange for the Notes and a certificate evidencing the Transferor Interest. (Agreement, Section 2.02). The property of the Trust will primarily include (i) the SUBI, which evidences the entire beneficial interest in certain specified Origination Trust Assets (i.e., the SUBI Assets), (ii) Class A Net Swap Receipts, (iii) such amounts as from time to time may be held in the Distribution Account and the Reserve Fund, and investments of such amounts and (iv) the Owner Trustee's and the Trust's rights as a third-party beneficiary to the Servicing Agreement and the SUBI Trust Agreement. The Trust also will have a beneficial interest in such amounts as from time to time may be held in the SUBI Collection Account and investments of such amounts. If the protection provided to the Class A Noteholders by (i) the Investor Percentage of certain excess Interest Collections; (ii) Class A Net Swap Receipts; (iii) amounts otherwise payable to the Transferor in respect of the Transferor Interest; (iv) so long as World Omni is the Servicer, amounts otherwise payable in respect of the Servicing Fee; (v) Insured Residual Value Loss Amounts paid under the Residual Value Insurance Policy; (vi) available monies on deposit in the Reserve Fund; (vii) the subordination of interest payments otherwise payable to the Class B Noteholders; and (viii) in the case of the Class A-4 Notes, the subordination of principal payments otherwise payable to the Class B Noteholders is insufficient, the Class A Noteholders ultimately will 26 <PAGE> have to look to (a) payments made on or in respect of the Contracts and the Leased Vehicles (including under certain related insurance policies) and (b) the proceeds of Dealer repurchase obligations, if any, to make distributions on or in respect of the SUBI Assets to the Indenture Trustee which in turn will be distributed to the Noteholders. In such event, certain factors, such as the fact that the Trust will not have a direct ownership interest in the Contracts or the Leased Vehicles or a perfected security interest in the Leased Vehicles (which will be titled in the name of the Origination Trustee, in its capacity as trustee of the Origination Trust) may limit the amount realized to less than the amount due from the related lessees. Investors in the Class A Notes may thus be subject to delays in payment and may incur losses on their investment in the Class A Notes as a result of defaults or delinquencies by lessees and because of depreciation in the value of the related Leased Vehicles. See 'The Origination Trust--Allocation of Origination Trust Liabilities', 'Security for the Notes--The Reserve Fund', 'Additional Document Provisions--The Servicing Agreement--Insurance on Leased Vehicles', 'Certain Legal Aspects of the Origination Trust and the SUBI--The SUBI' and 'Certain Legal Aspects of the Contracts and the Leased Vehicles' for a discussion of these matters. THE SUBI The SUBI will be issued pursuant to the SUBI Trust Agreement and will evidence a beneficial interest in certain specified Origination Trust Assets consisting of (i) the Contracts, the Leased Vehicles and all proceeds or payments received or due on or after the related Cutoff Date; and (ii) all other related Origination Trust Assets, including (A) the SUBI Collection Account (which account, and the funds therein, will be pledged to the Indenture Trustee for the benefit of the Noteholders), (B) the right to receive payments made to World Omni, the Origination Trust or the Origination Trustee under any insurance policy relating to the Contracts, the related lessees or the Leased Vehicles, including Insured Residual Value Loss Amounts payable under the Residual Value Insurance Policy, (C) the right to receive the proceeds of any Dealer repurchase obligations in respect of the Contracts or Leased Vehicles, and (D) all proceeds of the foregoing (collectively, the 'SUBI Assets'). (SUBI Trust Agreement, Sections 4.02, 11.01 and 11.02). As described under 'Summary--The Revolving Period; Subsequent Contracts and Subsequent Leased Vehicles' and 'Description of the Notes--Distributions on the Notes--Application and Distributions of Principal', during the Revolving Period, Principal Collections and reimbursement of Loss Amounts will be reinvested in Subsequent Contracts and Subsequent Leased Vehicles which will become SUBI Assets at the time of such reinvestment. The SUBI will not represent a direct interest in the SUBI Assets, nor will it represent an interest in any Origination Trust Assets other than the SUBI Assets. Payments made on or in respect of such other Origination Trust Assets will not be available to make payments on the Notes or to cover expenses of the Origination Trust allocable to the SUBI Assets. Pursuant to the SUBI Trust Agreement, on the Closing Date the Origination Trustee will issue the SUBI Certificate, which will evidence the SUBI, to the Transferor. The Transferor will transfer and assign the SUBI Certificate to the Trust pursuant to the Agreement, and the Trust will pledge the SUBI Certificate to the Indenture Trustee pursuant to the Indenture. THE ORIGINATION TRUST GENERAL The Origination Trust is an Alabama trust formed pursuant to the Origination Trust Agreement. The primary business purpose of the Origination Trust is to take assignments of, and serve as record holder of title to, substantially all of the fixed rate retail closed-end lease contracts and the related leased vehicles originated through Dealers in the World Omni network of dealers since November 1993. Pursuant to the Servicing Agreement, World Omni will service the lease contracts included in the Origination Trust Assets, including the Contracts. For further information regarding the Origination Trust and the servicing of the Origination Trust Assets, see 'Additional Document Provisions--The SUBI Trust Agreement' and '--The Servicing Agreement' and 'Certain Legal Aspects of the Origination Trust and the SUBI--The Origination Trust'. Except as otherwise described under 'Additional Document Provisions--The SUBI Trust Agreement', pursuant to the Origination Trust Agreement the Origination Trust has not and will not (i) issue interests therein or securities thereof other than the SUBI, the SUBI Certificate, Other SUBIs representing divided interests in 27 <PAGE> other portfolios of Origination Trust Assets (the 'Other SUBI Assets') and certificates representing Other SUBIs or portions thereof (the 'Other SUBI Certificates'), the UTI representing a divided interest in the remaining portfolio of Origination Trust Assets not allocated as SUBI Assets or Other SUBI Assets (the 'UTI Assets') and one or more certificates representing the UTI or portions thereof (the 'UTI Certificates'); (ii) borrow money (except from World Omni) in connection with funds used to acquire lease contracts and the related leased vehicles; (iii) make loans; (iv) invest in or underwrite securities, other than Permitted Investments or as otherwise permitted by the Origination Trust Agreement or the SUBI Trust Agreement; (v) offer securities in exchange for property (other than the SUBI Certificate, the Other SUBI Certificates and the UTI Certificates); or (vi) repurchase or otherwise reacquire its securities except in connection with financing or refinancing the acquisition of lease contracts and the related leased vehicles or as otherwise permitted by each such financing or refinancing. (SUBI Trust Agreement, Section 5.01). The Origination Trust will not be permitted to acquire lease contracts otherwise than through dealers in the World Omni network of Dealers, unless such lease contracts are (in World Omni's reasonable judgment) originated generally in accordance with World Omni's then-current lease contract underwriting standards. (SUBI Trust Agreement, Section 2.01). ALLOCATION OF ORIGINATION TRUST LIABILITIES The Origination Trust Assets are comprised of several portfolios of assets other than the SUBI Assets, including six portfolios of Other SUBI Assets and the remaining portfolio of UTI Assets. ALF L.P. has pledged (and may in the future pledge) the UTI as security for obligations to third-party lenders, and has created and sold and may in the future create and sell or pledge Other SUBIs in connection with other financings. The Origination Trust Agreement will permit the Origination Trust, in the course of its activities, to incur certain liabilities relating to its assets other than the SUBI Assets, or relating to its assets generally, and to which, in certain circumstances, the SUBI Assets may be subject. Pursuant to the Origination Trust Agreement, as among the beneficiaries of the Origination Trust and their pledgees, an Origination Trust liability relating to a particular Origination Trust Asset will be allocated to and charged against the allocated portfolio of Origination Trust Assets to which it belongs. Origination Trust liabilities that are incurred with respect to the Origination Trust Assets generally will be borne pro rata among all portfolios of Origination Trust Assets. The Origination Trustee, the beneficiaries of the Origination Trust (including the Trust) and their pledgees (including the Indenture Trustee) will be bound by this allocation. In particular, the Origination Trust Agreement will require the holders from time to time of Other SUBI Certificates and any UTI Certificates to waive any claim that they might otherwise have with respect to the SUBI Assets and to fully subordinate any claims to the SUBI Assets in the event that this waiver is not given effect. Similarly, by virtue of holding Notes or a beneficial interest in the Notes, Noteholders and Note Owners will be deemed to have waived any claim that they might otherwise have with respect to Other SUBI Assets and the UTI Assets. For further information regarding these matters, see 'Additional Document Provisions--The SUBI Trust Agreement--The SUBI, the Other SUBIs and the UTI' and 'Certain Legal Aspects of the Origination Trust and the SUBI--The SUBI'. ALF LLC AND ALF L.P. ALF LLC, a single member limited liability company, is a wholly owned, special purpose finance subsidiary of World Omni and was organized under the laws of Delaware in September 1998 (as successor by merger to Auto Lease Finance, Inc.), solely for the purpose of acting as the successor general partner of ALF L.P. (and to engage directly in activities in which ALF L.P. may engage). ALF L.P. was formed as a limited partnership under the laws of Delaware in June 1994 solely for the purpose of being grantor and initial beneficiary of the Origination Trust, holding the UTI and the UTI Certificates, acquiring interests in the SUBI and the Other SUBIs and engaging in related transactions. ALF LLC's limited liability company agreement and ALF L.P.'s limited partnership agreement limit their respective activities to the foregoing purposes and to any activities incidental to and necessary for such purposes. ALF LLC generally may not transfer its general partnership interest in ALF L.P. so long as any financings involving interests in the Origination Trust (including the transaction described herein) are outstanding. World Omni is the sole member of ALF LLC and the sole limited partner of ALF L.P. The principal office of ALF L.P. is located at 6150 Omni Park Drive, Mobile, Alabama and its telephone number is (334) 639-7500. 28 <PAGE> THE ORIGINATION TRUSTEE The Origination Trustee is a wholly owned, special purpose subsidiary of U.S. Bank that was organized in 1993 solely for the purpose of acting as Origination Trustee. U.S. Bank, as Trust Agent, serves as agent for the Origination Trustee to perform certain functions of the Origination Trustee pursuant to the Origination Trust Agreement. (Origination Trust Agreement, Section 5.03). The Origination Trust Agreement provides that in the event that U.S. Bank no longer can be the Trust Agent, the designee of ALF L.P. (who may not be ALF L.P. or any affiliate thereof) will have the option to purchase the stock of the Origination Trustee for a nominal amount. If ALF L.P.'s designee does not timely exercise this option, then the Origination Trustee will appoint a new trust agent, and that new trust agent (or its designee) will next have the option to purchase the stock of the Origination Trustee. If none of these options is timely exercised, U.S. Bank may sell the stock of the Origination Trustee to another party. (Origination Trust Agreement, Section 6.10). PROPERTY OF THE ORIGINATION TRUST The property of the Origination Trust consists of (i) fixed rate retail closed-end lease contracts originated throughout the United States and assigned to the Origination Trust by World Omni or Dealers since November 1993 and all monies due from lessees thereunder; (ii) the automobiles and light duty trucks leased pursuant thereto and all proceeds thereof; (iii) all of World Omni's rights (but not its obligations) with respect to such lease contracts and leased vehicles, including the right to receive proceeds of Dealer repurchase obligations, if any; (iv) the rights to proceeds from residual value, physical damage, credit life, disability and all other insurance policies, if any, covering the lease contracts, the related lessees or the leased vehicles, including, but not limited to, the Contingent and Excess Liability Insurance Policies, the Residual Value Insurance Policy and other residual value insurance policies that may relate to Other SUBI Assets or the UTI Assets; (v) all security deposits with respect to such lease contracts to the extent due to the lessor thereunder; and (vi) all proceeds of the foregoing (collectively, the 'Origination Trust Assets'). From time to time after the date of this Prospectus, World Omni will cause Dealers to originate additional retail closed-end lease contracts and to assign such lease contracts to the Origination Trustee on behalf of the Origination Trust and, as described below, title the related leased vehicles in the name of the Origination Trustee on behalf of the Origination Trust. (Origination Trust Agreement, Section 2.01). CONTRACT ORIGINATION; TITLING OF LEASED VEHICLES All lease contracts originated by the Origination Trust have been, or will be, underwritten using the underwriting criteria described under 'World Omni--Lease Contract Underwriting Procedures'. In connection with the origination of each lease contract, the Origination Trustee, on behalf of the Origination Trust, will be listed as the owner of the related leased vehicle on the related certificate of title. Liens will not be placed on such certificates of title, and new certificates of title will not be issued, to reflect the interest of the Owner Trustee, as holder of the SUBI Certificate, or the Indenture Trustee, as pledgee of the SUBI Certificate, in the Leased Vehicles. The certificates of title to the Leased Vehicles will, however, reflect a first lien recorded in favor of Bank of America Trust Company of Florida, N.A. or AL Holding Corp. (collectively, the 'Administrative Lienholders'). Such lien (the 'Administrative Lien') will exist solely to assure delivery of the certificates of title to the Leased Vehicles to the Servicer. Neither of the Administrative Lienholders will have any interest in any of the Leased Vehicles. Pursuant to agreements between World Omni and the Dealers, each Dealer is obligated, after origination of lease contracts and assignment thereof to the Origination Trustee on behalf of the Origination Trust, to repurchase such lease contracts which do not meet certain representations and warranties made by such Dealer. These representations and warranties relate primarily to the origination of the lease contracts and the titling of the related leased vehicles, and do not typically relate to the creditworthiness of the related lessees or the collectibility of such lease contracts. The Dealer agreements do not generally provide for recourse to the Dealer for unpaid amounts in respect of a defaulted lease contract, other than in connection with the breach of the foregoing representations and warranties. The rights of World Omni to receive proceeds of such Dealer repurchase obligations will constitute Origination Trust Assets (and accordingly will constitute SUBI Assets to the extent they relate to the Contracts and Leased Vehicles), although the related Dealer agreements will not constitute Origination Trust Assets. 29 <PAGE> USE OF PROCEEDS The net proceeds from the sale of the Class A Notes (i.e., the proceeds of the public offering of the Class A Notes minus expenses relating thereto) will be applied by the Transferor to purchase the SUBI Certificate from ALF L.P. THE TRANSFEROR The Transferor is a limited partnership formed under the laws of Delaware in June 1994. The sole general partner of the Transferor, WOLS LLC, is a single member limited liability company and a wholly owned, special purpose finance subsidiary of World Omni that was organized under the laws of Delaware in September 1998 (as successor by merger to World Omni Lease Securitization, Inc.), solely for the purpose of acting as the successor general partner of the Transferor (and to engage directly in activities in which the Transferor may engage). WOLS LLC generally may not transfer its general partnership interest in the Transferor so long as any financings involving interests formerly or partially held by it in the Origination Trust (including the transaction described herein) are outstanding. World Omni is the sole member of WOLS LLC and the sole limited partner of the Transferor. The principal office of the Transferor is located at 6150 Omni Park, Mobile, Alabama 36609 and its telephone number is (334) 639-7500. The Transferor and WOLS LLC were organized solely for the purpose of acquiring interests in the SUBI and the Other SUBIs, issuing asset-backed notes and certificates and engaging in related transactions. The limited partnership agreement of the Transferor and the limited liability company agreement of WOLS LLC limit their respective activities to the foregoing purposes and to any activities incidental to and necessary for such purposes. A support agreement dated as of October 1, 1995, as amended (the 'Support Agreement'), between the Transferor and World Omni provides that World Omni will, directly or indirectly, retain 100% ownership of the Transferor and that under certain circumstances World Omni will make contributions or loans or provide or arrange for financial assistance to the Transferor in order to ensure that the Transferor maintains positive partners' capital. The Support Agreement will provide that World Omni's total obligations thereunder will not exceed $100 million. The Support Agreement does not constitute a guarantee by World Omni of the Notes or any other obligations of the Transferor. The Support Agreement provides that no person other than the Transferor and WOLS LLC may take any action to enforce the Support Agreement. Although World Omni intends to comply with all of its obligations under the Support Agreement, because (as described above) it can only be enforced by the Transferor and WOLS LLC, there can be no assurance that the Indenture Trustee or the Noteholders would be able to enforce the Support Agreement directly against World Omni. WORLD OMNI GENERAL The Initial Contracts were, and the Subsequent Contracts will be, assigned to the Origination Trust by Dealers. World Omni is a Florida corporation and a wholly owned subsidiary of JM Family Enterprises, Inc. ('JMFE'), a Delaware corporation. JMFE is primarily engaged, through its subsidiaries, in providing Toyota dealerships in the Five State Area, as well as other automotive dealerships throughout the United States, with a full range of distribution and financial services. WOLS LLC and ALF LLC are wholly owned, special purpose finance subsidiaries of World Omni. In addition to the lease contract financing described below, World Omni provides retail installment contract financing to retail customers of certain automotive dealers and wholesale floorplan financing and capital and mortgage loans to dealers and customers of Southeast Toyota Distributors, Inc. ('SET'), World Omni's sister corporation, as well as to other automotive dealers within and outside the Five State Area. SET is the exclusive distributor of Toyota cars and light duty trucks, parts and accessories in the Five State Area. As such, SET is the sole provider of Toyotas to Dealers in the Five State Area. SET distributes Toyota vehicles pursuant to a Distributor Agreement, which first was entered into in 1968 and has been renewed through October 1999, with Toyota Motor Sales, USA, Inc. ('TMS'), a California corporation that is wholly owned by Toyota Motor Corporation, the largest automotive company in Japan. In addition, for a fee SET processes Lexus vehicles in the Five State Area and processes Lexus parts in a nine state area. SET's consolidated revenues for the years ended December 31, 1997, December 31, 1996 and December 31, 1995 were approximately $4.5 billion, 30 <PAGE> $4.2 billion and approximately $3.8 billion, respectively. Since March 1996, substantially all financial services provided by World Omni to, by and through SET's Toyota Dealers in the Five State Area have been provided under the name 'Southeast Toyota Finance'. World Omni (either directly or through the Origination Trust and certain special purpose finance subsidiaries of World Omni) owns and leases vehicles primarily through more than 1,000 Dealers located throughout the United States. Pursuant to written agreements with World Omni, each Dealer offers automobiles and light duty trucks for set lease periods pursuant to World Omni approved terms and a World Omni supplied form of closed-end retail motor vehicle lease and disclosure statement. Each Dealer is responsible for obtaining certain credit-related information about a prospective lessee and for forwarding such information for review and credit evaluation to one of World Omni's central operations centers, which are located in St. Louis, Missouri (the 'St. Louis Center') and Deerfield Beach, Florida (the 'Deerfield Office'), as applicable. At the St. Louis Center or the Deerfield Office, each application is reviewed, evaluated and 'scored' as described under 'World Omni--Lease Contract Underwriting Procedures'. The results of this computer-based evaluation are then sent to one of World Omni's purchase offices for final review and credit evaluation. The related purchase office then advises the Dealer if such applicant is acceptable to World Omni. If a prospective lessee is accepted, the Dealer will prepare all necessary paperwork to sell the vehicle from its inventory to World Omni or its designee, and to enter into a lease contract with its customer and assign the lease contract to World Omni or, at World Omni's direction, a different assignee. Substantially all retail lease contracts originated by World Omni Dealers are assigned to, and the related leased vehicles are titled in the name of, the Origination Trustee on behalf of the Origination Trust. For further information regarding the underwriting of lease contracts, see 'World Omni-- Lease Contract Underwriting Procedures'. World Omni's lease contracts are serviced primarily through the St. Louis Center and a center located in Mobile, Alabama (the 'Mobile Center'), which handle collection activities, operational accounting, insurance verification and dealer and customer inquiries for World Omni. In addition, the St. Louis Center and the Deerfield Office verify that all documents supplied by a Dealer with respect to a lease contract conform with World Omni's requirements. World Omni initiated operations in 1982, and as of December 31, 1997, December 31, 1996 and December 31, 1995, World Omni and its affiliates had approximately 305,000, 232,000 and 156,900 retail lease contracts outstanding, respectively. Aggregate net outstanding principal balances of retail lease contracts at such dates (including retail lease contracts that were sold but are still being serviced by World Omni), were $6.5 billion, $4.6 billion and $2.8 billion, respectively. Of these amounts, the related leased vehicles had an estimated aggregate residual value as of the end of their lease terms of approximately $4.8 billion, $3.3 billion and $2.0 billion, respectively. For the years ended December 31, 1997, December 31, 1996 and December 31, 1995, World Omni's consolidated gross revenues were approximately $359 million, $275 million and $228 million, respectively. The principal executive offices of World Omni are located at 120 Northwest 12th Avenue, Deerfield Beach, Florida 33442 and its telephone number is (954) 429-2200. CERTAIN ADMINISTRATIVE AND LEGAL PROCEEDINGS As part of its regular examination process of the consolidated Federal income tax returns of JMFE and its subsidiaries (which include World Omni) for certain prior years, the Internal Revenue Service (the 'IRS') currently is reviewing, among other things, certain transactions that were consummated in prior years that are similar to the transactions described in this Prospectus. The IRS has proposed treating (a) such transactions as sales rather than financings for Federal income tax purposes, which would affect World Omni's depreciation deductions and (b) each of the Origination Trust and securitization trusts created for such transactions as an association taxable as a corporation rather than a trust for Federal income tax purposes. In connection with each transaction, World Omni received an opinion of tax counsel to the effect that such transactions were properly treated as financings for Federal income tax purposes and that neither the Origination Trust nor the securitization trusts created for such transactions would be treated as an association taxable as a corporation for Federal income tax purposes. While management believes that any challenge by the IRS, if made, would be unsuccessful, there can be no assurance of this result. Furthermore, in connection with this examination, the IRS has proposed changes to a number of other positions that were taken on such tax returns. 31 <PAGE> Management is vigorously defending its positions and believes that the ultimate resolution of all of the issues referred to above will not have a material adverse effect on Noteholders, JMFE's or World Omni's operations and financial condition or the financial condition of the Origination Trust. If, however, the IRS were to prevail on certain issues it could have a material adverse effect on JMFE's or World Omni's operations and financial condition or the financial condition of the Origination Trust. Nevertheless, management believes that, even if the IRS were to prevail on all of these issues it would not result in any material impairment of World Omni's ability to perform its obligations and its duties as Servicer under the Servicing Agreement. However, there can be no assurance of this result. LEASE CONTRACT UNDERWRITING PROCEDURES World Omni has underwritten retail motor vehicle lease contracts since February 1983. The Initial Contracts were, and the Subsequent Contracts will be, underwritten by the Origination Trust, in each case through World Omni's purchase offices. The World Omni underwriting standards are intended to evaluate a prospective lessee's credit standing and repayment ability. Generally, a prospective lessee is required by the Dealer to complete a credit application on a form prepared or approved by World Omni. As part of the description of the applicant's financial condition, the applicant is required to provide current information enumerating, among other things, employment history, residential status and annual income. Upon receipt by the applicable office, all application data is entered into a centralized computer network (owned and maintained by a division of JMFE) that automatically obtains an independent credit bureau report and then 'scores' the application with the use of a scorecard. The scorecard enables World Omni to review an application and establish the probability that the proposed lease contract will be paid in accordance with its terms. The credit scores rank-order applications according to credit risk, which is the likelihood that the account will be delinquent or repossessed. The application also is evaluated against a 'cutoff score' established by World Omni as the minimum acceptable score to purchase a lease contract, which is revised from time to time as changes occur in economic conditions and World Omni's lease contract portfolio. This numerical credit scoring system was developed by Fair, Isaac & Company ('Fair, Isaac'), a lending and leasing consulting firm, specifically for World Omni based upon an analysis of the historical performance of the retail automobile and light duty truck lease and installment sale contract portfolios of World Omni. To determine the appropriate characteristics for credit scoring, Fair, Isaac reviewed a random sample of 10,000 retail lease contracts and 10,000 retail installment sale contracts from World Omni's portfolio. Fair, Isaac then compiled a list of various characteristics that cumulatively carried the most weight in predicting historical performance and assigned point values and weighting to each of these characteristics. The weighting system is particularly significant because the weightings are beyond the control of a dealer and cannot be manipulated. Fair, Isaac determined that the most accurate determinant of the performance of a lease or installment sale contract was the credit bureau report. Based on such historical performance, Fair, Isaac prepared two retail credit and two lease scorecards (which differ according to the geographical location of the dealer and whether the vehicle is new or used), each of which assigned at least a 50% weighting to the credit bureau report. The Fair, Isaac scorecard system was implemented in the fourth quarter of 1990 and was used for substantially all lease contracts originated from that time until February 1997. In an effort to increase the predictiveness of the scorecards, World Omni implemented an updated scorecard system, also developed by Fair, Isaac specifically for World Omni, in February 1997. The updated scorecard system includes three retail credit and two lease scorecards (which, for lease scorecards, differ according to the geographic location of the dealer and, for retail scorecards, whether the vehicle is new or used and the credit 'depth' of the applicant). The revised scorecards place a greater emphasis upon the credit bureau report. Each of these numerical scoring models is intended to provide a means of analysis to assist in decision making, but the final decision rests with World Omni's credit specialists. Under World Omni's guidelines, a credit specialist generally may not override the scorecard analysis of applications above or below the cutoff score by more than a limited percentage of such applications (depending on vehicle make and geographic location). Both the number of overrides granted by each credit specialist and the aggregate number of overrides granted by all credit specialists are tracked by World Omni daily in order to insure the statistical validity of the scoring models. Detailed reporting on all aspects of the numerical scoring model is utilized to track performance of World Omni's retail automobile and light duty truck lease contract portfolio and to enable World Omni to fine tune the scoring model according to statistical indications in order to continually assure the statistical validity of 32 <PAGE> the scoring models. In limited circumstances, lessees with established credit histories with World Omni may be pre-approved for new leases without the use of a numerical scorecard and, under certain circumstances, lessees having certain minimum credit bureau scores may be automatically approved. For the six months ended June 30, 1998 and the years ended December 31, 1997, December 31, 1996 and December 31, 1995, World Omni, either directly or through the Origination Trust or certain special purpose finance subsidiaries of World Omni, on average, booked approximately 59%, 63%, 70% and 71%, respectively, of all credit applications relating to leased vehicles. These averages generally reflect adjustments in underwriting criteria in connection with the use of the Fair, Isaac scorecard system. Substantially all of the Initial Contracts were, and substantially all Subsequent Contracts will be, underwritten using the updated numerical scorecards. See 'The Contracts--Characteristics of the Contracts' for further information on the identity and characteristics of the Contracts. After an application has been approved by a World Omni purchase office and the prospective lessee has agreed to the terms of the related lease contract, including an assignment of the lease contract from the Dealer to World Omni (or, at the direction of World Omni, an assignee thereof), World Omni receives from the Dealer a lease contract package containing, among other things, the standard form lease contract between the Dealer and the lessee, the customer's application, applicable insurance information (company, agent and additional insured(s), with the lessor named as loss payee) and any payments due from the customer. World Omni determines whether such package complies with its requirements. The specifics of the lease contract are compared to the application approved by the purchasing department, and the rate, truth-in-leasing disclosures and purchase price from the Dealer are verified. INSURANCE Each lease contract requires the lessee to maintain automobile bodily injury and property damage liability insurance that must name the Dealer's assignee (with respect to the Contracts, the Origination Trustee on behalf of the Origination Trust) as an additional insured. Each lease contract further requires the lessee to maintain (all risks) comprehensive and collision insurance covering damage to the leased vehicle and naming the Dealer's assignee (with respect to the Contracts, the Origination Trustee on behalf of the Origination Trust) as loss payee. The insurance coverage is verified independently by World Omni (through its third-party contracted agents) upon execution of the lease contract. COLLECTION, REPOSSESSION AND DISPOSITION PROCEDURES Collection efforts are made by World Omni as Servicer, which, in some cases, are enhanced by the use of an automated dialing system. Notwithstanding the centralization of collection efforts, repossessions continue to be handled locally, as independent contractors are employed in connection with repossessions. In general, guidelines for collection of lease contracts and repossession of leased vehicles include the following: <TABLE> <CAPTION> NUMBER OF DAYS DELINQUENT ACTION ------------------------- ------ <S> <C> 22-45........................................... Telephone contact with the lessee is initiated 46-89........................................... Telephone and/or field collections continue 60-90........................................... The leased vehicle is normally repossessed </TABLE> Occasionally, situations occur in the collection process when a lessee has become delinquent and is willing but unable to bring the related account current (i.e., a skipped payment). In this situation, at the discretion of collection department management, but subject to extensive guidelines, the lease contract may be extended, provided that the lessee pays an extension fee (each, an 'Extension Fee') equal to the lesser of (i) the product of 1.15% multiplied by the outstanding principal balance of such lease contract, and (ii) one-half of the related monthly contract payment. In circumstances deemed appropriate by collection department management, World Omni may reduce or waive the payment by the lessee of an Extension Fee. However, the Servicing Agreement will require that all Extension Fees relating to the Contracts be deposited into the SUBI Collection Account and that a Contract may not be extended more than five times. Moreover, no extensions of a Contract may be made for more than five months in the aggregate or to a date later than the last day of the month immediately preceding the month in which the Final Scheduled Distribution Date occurs, as described under 'Additional Document Provisions--The Servicing Agreement--Collections'. World Omni disposes of off-lease vehicles through several outlets, including a Toyota 'certified' program, in which vehicles are inspected and given body work, repairs and maintenance as needed, certified as meeting the 33 <PAGE> program standards, and then may be sold to automobile dealers primarily in World Omni's dealer network for retail sale. World Omni also disposes of off-lease vehicles through large regional automobile auctions (which are utilized for off-lease vehicle sales in addition to liquidation of repossessed vehicles) and negotiated sales of groups of vehicles to rental companies, fleet lessors and others. DELINQUENCY, REPOSSESSION AND LOSS DATA The following tables set forth certain delinquency, repossession and loss data with respect to World Omni's retail automobile and light duty truck lease contract portfolio originated by Dealers located throughout the United States, including lease contracts assigned to the Origination Trust and lease contracts originated by World Omni and assigned to special purpose finance subsidiaries of World Omni, as of and for the years ended December 31, 1993 through December 31, 1997 and as of and for the six month period ended June 30, 1998. As shown on these tables, World Omni's delinquency rates trended up in 1995 and 1996, consistent with recent trends in overall consumer credit and, to a lesser extent, due to some disruption in collection activity caused by the implementation of a new collection system at the Mobile Center in 1996. During the six month period ended June 1998, delinquencies declined due to the generally higher credit quality of World Omni's non-Toyota lease portfolio, which has increased as a percent of its total lease portfolio, and due to a general improvement in the credit quality of Toyota leases booked by World Omni over the past year. Net Repossession Losses as a percentage of Average Net Receivables increased in both 1995 and 1996. The increase in 1995 was driven primarily by an increase in the Average Net Repossession Loss per Liquidated Lease Contract which was generally due to higher average amounts being financed and higher residual values. These same factors continued to cause an increase in the Average Net Repossession Loss per Liquidated Lease Contract during 1996. In addition, loss severity during 1996 was negatively affected by a general weakening in the used car market. The higher frequency of repossession in 1996 was due to a general trend of weaker overall consumer credit quality nationally as well as World Omni adjusting, to a limited extent, its credit policies. Net Repossession Losses as a percent of Average Net Receivables remained substantially unchanged during 1997 and the first half of 1998. Average Net Repossession Loss per Liquidated Lease Contract increased during this period as a result of increases in residual values financed and a continuation of the soft market for used vehicles. The Number of Repossessions as a percentage of Average Lease Contracts Outstanding during 1997 and the first half of 1998 declined due to the general improvement in the credit quality of World Omni's lease portfolio, as noted above. Residual value losses and the number of vehicles returned to and sold by World Omni has increased steadily since 1994. In 1995, losses and returns increased as a result of special programs on shorter term leases. Losses in 1996 increased over 1995 as a result of generally higher residual values, higher losses on shorter term leases (i.e. leases with terms 24 months or shorter) and an increase in the losses on leases with other maturities. There are no short term leases included in the Initial Contracts nor will any be included in the Subsequent Contracts. In addition, during 1996 there was some weakening in the used car market relative to the prior three years. Generally, the 1996 trends continued through 1997 and the first half of 1998, resulting in higher vehicle returns and losses during this period. For the entire year 1997 and the first half of 1998, the used vehicle market was relatively weak. If the used vehicle market continues to experience weakness, World Omni's returns and losses in the future could be negatively affected. Based upon prior experience, World Omni does not believe that its loss experience or those recent negative trends will materially adversely affect Class A Noteholders or World Omni's business. However, no assurances can be given in this regard. The data presented in the following tables are for illustrative purposes only. Delinquency, repossession and loss experience may be influenced by a variety of economic, social, geographic and other factors. In addition, the data presented below may be affected by the growth and relative lack of seasoning of the portfolio. Accordingly, there is no assurance that World Omni's delinquency, repossession and loss experience with respect to its retail automobile and light duty truck lease contracts and the related leased vehicles in the future, or the experience with respect to the Contracts and the Leased Vehicles, will be similar to that set forth below. 34 <PAGE> RETAIL VEHICLE LEASE CONTRACT DELINQUENCY EXPERIENCE <TABLE> <CAPTION> AS OF DECEMBER 31, AT JUNE 30, ------------------------------------------------------------ 1998 1997 1996 1995 1994 1993 ----------- ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> Dollar Amount of Lease Contracts(1)....................... $ 6,952,408 $6,527,588 $4,641,992 $2,798,830 $1,823,823 $1,039,888 Ending Number of Lease Contracts..... 323,593 304,863 231,942 156,471 114,298 71,198 Percentage of Lease Contracts Delinquent(2)(3)(4) 31-60 Days......................... 1.17% 1.27% 1.42% 1.12% 0.97% 0.88% 61-90 Days......................... 0.20 0.23 0.13 0.08 0.03 0.04 91 Days or More.................... 0.04 0.06 0.03 0.01 0.01 0.00 ----------- ---------- ---------- ---------- ---------- ---------- Total........................... 1.41% 1.56% 1.58% 1.21% 1.01% 0.92% </TABLE> - ------------------ (1) Based on the sum of all principal amounts outstanding under lease contracts (inclusive of the residual values of the related leased vehicles). (2) Excludes lease contracts the related lessees of which are bankrupt or have commenced bankruptcy proceedings. As of June 30, 1998 approximately 371 lease contracts involving bankrupt lessees were delinquent for at least 61 days. (3) The period of delinquency is based on the number of days payments are contractually past due. (4) As a percentage of the total number of lease contracts at period end. RETAIL VEHICLE LEASE CONTRACT REPOSSESSION AND LOSS EXPERIENCE <TABLE> <CAPTION> AS OF DECEMBER 31, AT JUNE 30, ------------------------------------------------------------ 1998 1997 1996 1995 1994 1993 ----------- ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> Dollar Amount of Lease Contracts(1)....................... $ 6,952,408 $6,527,588 $4,641,992 $2,798,830 $1,823,823 $1,039,888 Ending Number of Lease Contracts..... 323,593 304,863 231,942 156,471 114,298 71,198 Average Lease Contracts Outstanding........................ 314,579 268,305 194,492 133,069 93,023 58,605 Repossessions: Number of Repossessions............ 3,099 5,843 4,297 2,519 1,776 1,287 Number of Repossessions as a Percentage of: Lease Contracts Outstanding(4)..... 1.92% 1.92% 1.85% 1.61% 1.55% 1.81% Average Lease Contracts Outstanding(4)..................... 1.97% 2.18% 2.21% 1.89% 1.91% 2.20% Losses: Average Net Receivables Outstanding........................ $ 6,753,172 $5,602,946 $3,718,336 $2,243,790 $1,426,382 $ 817,452 Net Repossession Losses(2)........... $ 21,073 $ 35,351 $ 23,196 $ 11,347 $ 6,283 $ 3,811 Average Net Repossession Loss per Liquidated Lease Contract(1)(3).... $ 6,800 $ 6,050 $ 5,398 $ 4,505 $ 3,538 $ 2,961 Net Repossession Losses as a Percentage of Average Net Receivables(4)..................... 0.62% 0.63% 0.62% 0.51% 0.44% 0.47% </TABLE> - ------------------ (1) Based on the sum of all principal amounts outstanding under lease contracts (inclusive of the residual values of the related leased vehicles). (2) Includes losses on charged-off accounts, but does not include expenses incurred to dispose of vehicles. (3) Dollars not in thousands. (4) The number for June 30, 1998 has been annualized. 35 <PAGE> RESIDUAL VALUE LOSS EXPERIENCE(1) <TABLE> <CAPTION> AS OF DECEMBER 31, AT JUNE 30, ----------------------------------------------- 1998 1997 1996 1995 1994 1993 ----------- ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> Total Number of Leased Vehicles Scheduled to Terminate....................................... 41,151 78,002 36,413 25,677 14,775 17,218 Number of Leased Vehicles Returned to and Sold by World Omni...................................... 16,318 22,555 5,018 4,611 779 2,050 Full Termination Ratio(2)......................... 39.7% 28.9% 13.8% 18.0%(3) 5.3% 11.9% Total Losses/Gains on Vehicles that Reached Scheduled Term (4).............................. $31,258(5) $27,338(5) $ 3,700 $ 1,893 $ (168) $ 503 Average Loss/Gain(4)(6)........................... $ 1,916 $ 1,212 $ 737 $ 411 $ (216) $ 245 </TABLE> - ------------------ (1) Because the terms of the retail closed-end lease contracts originated by World Omni have gradually shifted from five years to three years since 1992, the residual value loss experience for the periods in the table may not be fully comparable. (2) The ratio of line 2 over line 1 expressed as a percentage. (3) The ratio for the year ended December 31, 1995 includes special program short-term lease contracts referenced under 'Delinquency, Repossession and Loss Data' above. Excluding those vehicles, the ratio would have been 7.1%. (4) Figures do not include expenses incurred in disposal of vehicles returned to World Omni. (5) Does not include losses related to World Omni's incentive programs of approximately $5,976,422 and $1,879,447 at June 30, 1998 and December 31, 1997, respectively. (6) Dollars not in thousands. 36 <PAGE> THE CONTRACTS GENERAL The Initial Contracts consist of a pool of 74,744 closed-end retail lease contracts, having an aggregate Outstanding Principal Balance as of the Initial Cutoff Date of $1,772,260,191, selected from the Origination Trust's portfolio of retail closed-end automobile and light duty truck lease contracts that are not evidenced by or reserved for allocation to an Other SUBI. During the Revolving Period, Principal Collections (and reimbursement of Loss Amounts) will be reinvested in Subsequent Contracts and Subsequent Leased Vehicles, which at the time of such reinvestment will become SUBI Assets. See 'Description of the Notes--Distributions on the Notes-- Application and Distributions of Principal--Revolving Period'. The Initial Contracts were originated by Dealers located throughout the United States and assigned to the Origination Trust, and the Subsequent Contracts will be originated by Dealers located in the United States and assigned to the Origination Trust, in accordance with the underwriting procedures described under 'World Omni--Lease Contract Underwriting Procedures'. The Initial Contracts have been selected based upon the criteria specified in the SUBI Trust Agreement and described under 'The Contracts--Characteristics of the Contracts--General' and '--Representations, Warranties and Covenants'. The Subsequent Contracts will be selected from the other lease contracts of the Origination Trust that also meet the foregoing criteria. Principal Collections (and reimbursements of Loss Amounts) will be reinvested in eligible leases selected by World Omni in its discretion, except that (i) certain leases have been, and may in the future be, allocated to (or reserved for allocation to) Other SUBIs and therefore not be available for reinvestment of such amounts from the SUBI, and (ii) to the extent that reinvestment of such amounts from the SUBI and any one or more previous Other SUBIs are at any time being made out of the Origination Trust's general pool of available lease contracts that have not been so reserved, such reinvestment will first be made with respect to such previous Other SUBI(s). World Omni will represent and warrant that, except as otherwise described in the immediately preceding sentence, no adverse selection procedures were employed or will be employed in selecting the Initial Contracts or the Subsequent Contracts for inclusion in the SUBI Assets and that it is not aware of any bias in the selection of such Contracts that would cause the delinquencies or losses on such Contracts to be worse than other retail closed-end automobile and light duty truck lease contracts held in the Origination Trust's portfolio; however, there can be no assurance that the delinquencies or losses on the Contracts will not be worse. Subsequent Contracts may be originated by World Omni using different underwriting criteria than those which were applied to the Initial Contracts. For this reason, the characteristics of the Subsequent Contracts may vary from those of the Initial Contracts. Each Contract will have been written for an original term of not more than 60 months, for a 'capitalized cost' (which may exceed the manufacturer's suggested retail price), plus an implicit Lease Rate. The Initial Contracts were, and the Subsequent Contracts will be, written on a constant yield basis and provide for equal Monthly Payments such that at the end of the lease term the capitalized cost has been amortized to an amount equal to the Residual Value of the related Leased Vehicle. At the times of origination of the related Contracts, the related Leased Vehicles were, in the case of the Initial Contracts, or will be, in the case of the Subsequent Contracts, new vehicles, dealer demonstrator vehicles driven fewer than 6,000 miles or manufacturers' program vehicles. Manufacturers' program vehicles are vehicles which have been sold directly by manufacturers to rental car companies and returned to the manufacturer for resale, generally after a period of eight to twelve months. Such vehicles generally are then resold to dealers through an automobile auction. All of the Contracts will be closed-end leases. Under a 'closed-end lease', at the end of its term, if the lessee does not elect to purchase the related leased vehicle by exercise of the purchase option contained in such lease contract, the lessee is required to return the leased vehicle to or upon the order of the lessor, at which time the lessee will then owe only incidental charges for excess mileage, excessive wear and use and other items as may be due under such lease. In contrast, under an 'open-end lease', the lessee is also obligated to pay at the end of the lease term any deficit between the fair market value of the leased vehicle at that time and the residual value established at the time of origination of such lease. Each lessee will be permitted to purchase the Leased Vehicle at the end of the term of the related Contract. The purchase price will be a fixed dollar amount equal to the Residual Value plus any applicable taxes and all other incidental charges which may be due under the Contract. In addition, each Contract will allow the related lessee 37 <PAGE> voluntarily to terminate such Contract by paying certain miscellaneous charges and a termination amount more fully described below. In most instances, the Contracts are not expected to run to their full terms, as more fully described under 'Risk Factors--Maturity and Prepayment Risks' and 'Maturity, Prepayment and Yield Considerations'. Each Contract will provide that the lessor may terminate such Contract and repossess the Leased Vehicle in the event of a default by the lessee. Events of default under the Contracts will include, but will not be limited to, failure to make payment when due, certain events of bankruptcy or insolvency, failure to maintain the insurance required by the Contract, failure to maintain or repair the Leased Vehicle as required or to comply with any other term or condition of the Contract and the making of a material misrepresentation by the lessee in the lease application. In the forms of contract used by the Dealers to evidence the Contracts, upon early termination where the lessee is not in default and does not exercise its option to purchase the Leased Vehicle, the amount owed by the lessee (the 'Early Termination Charge') will be determined by adding (i) the amount of the Monthly Payment times the number of Monthly Payments not yet made, plus (ii) any other amounts unpaid by the lessee, other than excess mileage and excessive wear and use charges, arising under the Contract and not prohibited by applicable law, plus (iii) any official fees and taxes related to the termination of the Contract, plus (iv) the Residual Value, plus (v) a disposition fee in the amount set forth in the Contract (either $250.00 or $350.00), minus (vi) the 'Realized Value' (as described below) of the Leased Vehicle, minus (vii) the unearned lease charges calculated in accordance with an actuarial method. Under the actuarial method of determining the unearned lease charges under clause (vii) above, the Contracts will provide that the monthly lease charges (including those for the month in which the early termination occurs) are earned in advance on the scheduled due dates of the Monthly Payments and that the Monthly Payments are deemed to have been received on their scheduled due dates. If, instead, there is an early termination and the lessee is in default, the amount owed by a lessee in default will be determined by adding (i) the Early Termination Charge, plus (ii) all collection, repossession, storage, preparation and sale expenses of the Leased Vehicle, plus (iii) attorneys' fees and disbursements incurred after default and referral to an attorney not to exceed 15% of the amount a lessee owes (or such lesser rate as may be required under applicable law), plus (iv) simple interest at a rate of 15% per year (or such lesser rate as may be required under applicable law) on all expenses incurred by the lessor and all obligations that a lessee owes after termination of the Contract, other than earned but unpaid lease charges. The 'Realized Value' of a Leased Vehicle is the price the Servicer receives at the time of disposition of the Leased Vehicle. World Omni shall sell the Leased Vehicles at wholesale or otherwise determine its wholesale value in a commercially reasonable manner. However, each Contract provides that the lessee has the right to obtain from a qualified independent appraiser acceptable to the lessor a written appraisal of the wholesale value of the Leased Vehicle that could be realized at sale. This appraised value then would be used as the wholesale value for purposes of calculating sums due from the lessee. Although World Omni cannot predict whether any lessee will challenge the wholesale sale price determined by World Omni, management of World Omni is unaware of any such challenge by any lessee under its retail closed end automobile and light duty truck lease contracts. See 'Maturity, Prepayment and Yield Considerations' for further information related to the relationship between payments on the Contracts and the effective yield on the Notes. In the event of early termination of a Contract where the lessee is in default, the amounts collected with respect to such Contract and the related Leased Vehicle (after deducting the costs and other sums retained by the Servicer in connection therewith) may be less than the Outstanding Principal Balance of such Contract, which shortfall can be due to, among other things, the use of wholesale appraisal of a Leased Vehicle as described above. In the event that a Contract reaches the date on which the last Monthly Payment is due, as such date may have been extended (the 'Maturity Date'), but the related Leased Vehicle cannot be sold or otherwise disposed of for a net amount at least equal to its Residual Value, there may be an additional shortfall in amounts otherwise expected to be received in respect of the SUBI. In the event that any of the foregoing shortfalls are not covered from the Investor Percentage of certain excess Interest Collections, amounts otherwise payable to the Transferor in respect of the Transferor Interest, the Servicing Fee otherwise payable to the Servicer (so long as World Omni is the Servicer), Insured Residual Value Loss Amounts paid under the Residual Value Insurance Policy, amounts on deposit in the Reserve Fund, the subordination of interest payments otherwise payable to the Class B Noteholders and, in the case of the Class A-4 Notes, the subordination of principal payments otherwise payable to the Class B Noteholders, in each case to the extent described herein, investors in the Class A Notes could suffer a loss on their investment. 38 <PAGE> CHARACTERISTICS OF THE CONTRACTS General The Initial Contracts were, and the Subsequent Contracts will be, selected by reference to several criteria, including, as of the related Cutoff Date, that each Contract (i) is written with respect to a Leased Vehicle that was at the time of the origination of the related lease contract a new vehicle, a limited mileage dealer demonstrator vehicle, or a manufacturers' program vehicle; (ii) was originated in the United States after November 1, 1993 in the case of the Initial Contracts and on or before November 30, 1999 in the case of the Subsequent Contracts; (iii) has a Maturity Date on or after October 1, 1999 and no later than July 31, 2003 in the case of the Initial Contracts and no later than November 30, 2004 in the case of the Subsequent Contracts; (iv) fully amortizes to an amount equal to the Residual Value of the related Leased Vehicle based on a fixed Lease Rate calculated on a constant yield basis and provides for level payments over its term (except for payment of the Residual Value); (v) was not more than 60 days past due as of the Initial Cutoff Date or the related Subsequent Cutoff Date, as the case may be; and (vi) has never been extended for more than five months in the aggregate. (SUBI Trust Agreement, Section 10.01). Appearing below is some additional information regarding the characteristics of the Initial Contracts and the Initial Leased Vehicles: INITIAL CONTRACTS <TABLE> <CAPTION> AVERAGE MINIMUM MAXIMUM ------- ------- ------- <S> <C> <C> <C> Original Principal Balance................................. $25,341.36 $7,418.92 $93,142.44 Outstanding Principal Balance(1)........................... $23,711.07 $7,424.24 $87,971.62 Residual Value............................................. $16,308.18 $2,958.66 $59,855.40 Lease Rate(1).............................................. 8.65%(2) 3.20% 13.00% Seasoning (months)(1)...................................... 8.29(2) 2 26 Remaining Term (months)(1)................................. 32.86(2) 13 58 </TABLE> - ------------------ (1) As of the Initial Cutoff Date. (2) Weighted by Outstanding Principal Balance as of the Initial Cutoff Date. Distribution of the Initial Leased Vehicles by Make As of the Initial Cutoff Date, the composition of the Initial Leased Vehicles by make of vehicle was as follows: <TABLE> <CAPTION> PERCENTAGE OF NUMBER OF NUMBER OF VEHICLE MAKE INITIAL CONTRACTS INITIAL CONTRACTS - ------------ ----------------- ----------------- <S> <C> <C> Toyotas..................................................... 32,184 43.06% United States manufacturers................................. 39,110 52.33 Other Japanese manufacturers................................ 452 0.60 Other foreign manufacturers................................. 2,998 4.01 ------ ------ Total..................................................... 74,744 100.00% </TABLE> 39 <PAGE> Distribution of the Initial Contracts by Lease Rate The distribution of the Initial Contracts as of the Initial Cutoff Date by Lease Rate was as follows: <TABLE> <CAPTION> INITIAL PERCENTAGE OF AGGREGATE PERCENTAGE OF CUTOFF DATE INITIAL CUTOFF DATE NUMBER OF NUMBER OF OUTSTANDING OUTSTANDING LEASE RATE RANGE INITIAL CONTRACTS INITIAL CONTRACTS PRINCIPAL BALANCE PRINCIPAL BALANCE - ---------------- ----------------- ----------------- ----------------- ----------------- <S> <C> <C> <C> <C> 3.00% to 3.99%........ 59 0.08% $ 1,142,258.43 0.06% 4.00% to 4.99%........ 1,242 1.66 24,217,701.96 1.37 5.00% to 5.99%........ 4,944 6.61 90,405,348.30 5.10 6.00% to 6.99%........ 5,055 6.76 97,959,285.95 5.53 7.00% to 7.99%........ 5,682 7.60 122,075,968.40 6.89 8.00% to 8.99%........ 25,777 34.49 692,520,176.96 39.08 9.00% to 9.99%........ 25,336 33.90 592,913,077.18 33.46 10.00% to 10.99%........ 4,475 5.99 103,029,360.44 5.81 11.00% to 11.99%........ 1,809 2.42 40,999,427.11 2.31 12.00% to 12.99%........ 365 0.49 6,997,585.79 0.39 ------ ------ ----------------- ------ Total................. 74,744 100.00% $1,772,260,190.52 100.00% </TABLE> Distribution of the Initial Contracts by Maturity The distribution of the Initial Contracts as of the Initial Cutoff Date by year of maturity was as follows: <TABLE> <CAPTION> INITIAL PERCENTAGE OF AGGREGATE PERCENTAGE OF CUTOFF DATE INITIAL CUTOFF DATE NUMBER OF NUMBER OF OUTSTANDING OUTSTANDING YEAR OF MATURITY INITIAL CONTRACTS INITIAL CONTRACTS PRINCIPAL BALANCE PRINCIPAL BALANCE - ---------------- ----------------- ----------------- ----------------- ----------------- <S> <C> <C> <C> <C> 1999.................... 106 0.14% $ 2,246,431.78 0.13% 2000.................... 18,422 24.65 423,222,581.93 23.88 2001.................... 43,242 57.85 1,004,267,992.68 56.67 2002.................... 9,772 13.08 254,408,921.28 14.35 2003.................... 3,202 4.28 88,114,262.85 4.97 ------ ------ ----------------- ------ Total................. 74,744 100.00% $1,772,260,190.52 100.00% </TABLE> Distribution of the Initial Contracts by State The distribution of the Initial Contracts as of the Initial Cutoff Date by State of origination, broken out for States representing 5% or more of the number of Initial Contracts, was as follows: <TABLE> <CAPTION> INITIAL PERCENTAGE OF AGGREGATE PERCENTAGE OF CUTOFF DATE INITIAL CUTOFF DATE NUMBER OF NUMBER OF OUTSTANDING OUTSTANDING STATE BALANCE INITIAL CONTRACTS INITIAL CONTRACTS PRINCIPAL BALANCE PRINCIPAL BALANCE - ------------- ----------------- ----------------- ----------------- ----------------- <S> <C> <C> <C> <C> Florida................. 24,020 32.14% $ 528,123,058.45 29.80% North Carolina.......... 10,876 14.55 242,246,242.50 13.67 Georgia................. 8,751 11.71 197,891,535.75 11.17 Alabama................. 5,213 6.97 117,433,482.94 6.63 All other states........ 25,884 34.63 686,565,870.88 38.73 ------ ------ ----------------- ------ Total................. 74,744 100.00% $1,772,260,190.52 100.00% </TABLE> REPRESENTATIONS, WARRANTIES AND COVENANTS The Initial Contracts and Initial Leased Vehicles will be described in a schedule appearing as an exhibit to the SUBI Trust Agreement, which schedule will be amended from time to time as Subsequent Contracts and Subsequent Leased Vehicles become SUBI Assets during the Revolving Period (collectively, the 'Schedule of Contracts and Leased Vehicles'). The Schedule of Contracts and Leased Vehicles will identify each Contract by identification number, will identify each Leased Vehicle by its vehicle identification number and will set forth as to each such Contract, 40 <PAGE> among other things, its: (i) date of origination; (ii) Maturity Date; (iii) Monthly Payment; (iv) original Outstanding Principal Balance; (v) Outstanding Principal Balance and Discounted Principal Balance as of the related Cutoff Date; and (vi) Residual Value. (Servicing Agreement, Sections 1.01 and 10.01). In the Servicing Agreement, representations and warranties will be made with respect to each Contract and Leased Vehicle to the effect described in the text of the first paragraph under 'The Contracts--Characteristics of the Contracts-- General', and certain other representations and warranties will be made, including, among other things, that each such Contract and, to the extent applicable, the related Leased Vehicle or lessee: (a) was originated by a Dealer located in the United States in the ordinary course of its business and in compliance with World Omni's normal credit and collection policies and practices; (b) is owned by the Origination Trustee, on behalf of the Origination Trust, free of all liens, encumbrances or rights of others (other than the Administrative Lien); (c) was originated in compliance with, and complies with, all material applicable legal requirements; (d) all material consents, licenses, approvals or authorizations of, or registrations or declarations with, any governmental authority required to be obtained, effected or given by the originator of such Contract and the Origination Trustee in connection with (i) the origination of such Contract, (ii) the execution, delivery and performance by such originator of the Contract and (iii) the acquisition by the Origination Trust of such Contract and Leased Vehicle, have been duly obtained, effected or given and are in full force and effect as of such date of creation or acquisition; (e) is the legal, valid and binding obligation of the lessee; (f) to the knowledge of the Servicer, is not subject to any right of rescission, setoff, counterclaim or any other defense of the related lessee to pay the Outstanding Principal Balance due under such Contract and no such right of rescission, offset, defense or counterclaim has been asserted or threatened; (g) the related Dealer, the Servicer and the Origination Trustee have each satisfied all obligations required to be fulfilled on its part with respect thereto; (h) is payable solely in United States dollars in the United States; (i) the lessee thereunder is located in the United States and is not (i) ALF LLC (or its predecessor), ALF L.P., WOLS LLC (or its predecessor), the Transferor or any of their respective affiliates or (ii) the United States or any state or local government thereof, or any agency, department or instrumentality of the United States or any state or local government thereof; (j) requires the lessee to maintain insurance against loss or damage to the related Leased Vehicle under an insurance policy that names the Origination Trustee as loss payee, and the related Leased Vehicle is covered by the Residual Value Insurance Policy; (k) the related certificate of title therefor is registered in the name of the Origination Trustee (or a properly completed application for such title has been submitted to the appropriate titling authority); (l) is a closed-end lease that (i) requires equal monthly payments to be made within 60 months of the date of origination of such Contract and (ii) requires such payments to be made by the lessee thereof within 30 days after the billing date for such payment; (m) is fully assignable and does not require the consent of the lessee as a condition to any transfer, sale or assignment of the rights of the originator; (n) has a Residual Value that does not exceed the lesser of (i) $60,000 and (ii) an amount reasonably established by the Servicer consistent with its policies and practices regarding the setting of residual values as applied with respect to closed-end retail automobile and light duty truck leases; (o) has never been extended by more than five months in the aggregate or otherwise modified except in accordance with World Omni's normal credit and collection policies and practices; (p) the lessee thereunder has not made a claim under the Soldiers' and Sailors' Civil Relief Act of 1940; (q) is not an Other SUBI Asset; (r) the lessee thereunder is not bankrupt or currently the subject of a bankruptcy proceeding; (s) is not more than 60 days past due; (t) is a finance lease for accounting purposes; and (u) is a 'true lease' for applicable state law purposes. (SUBI Trust Agreement, Section 10.01; Servicing Agreement, Sections 8.01 and 9.01). The Servicing Agreement will provide that the reinvestment of Principal Collections (and Loss Amounts that otherwise would be reimbursed to the Noteholders) in Subsequent Contracts and Subsequent Leased Vehicles during the Revolving Period will be subject to the satisfaction of certain conditions precedent, including, among other things, that, unless the Indenture Trustee receives confirmation (written or oral) from each Rating Agency to the effect that the use of a different criteria will not result in the qualification, reduction or withdrawal of its then-current rating on any Class of Class A Notes or the Class B Notes, after giving effect to such reinvestment, (i) each Subsequent Contract will be allocated as a SUBI Asset based upon its Discounted Principal Balance as of the relevant Cutoff Date; (ii) the weighted average remaining term of the Contracts (including the Subsequent Contracts) is not greater than 38 months and (iii) the weighted average Residual Value of the Leased Vehicles relating to the Contracts (including the Subsequent Contracts), as a percentage of the aggregate Outstanding Principal Balance of the Contracts (including the Subsequent Contracts), in each case as of the related dates of origination, is not greater than 67%. (Servicing Agreement, Section 8.02). 41 <PAGE> The Servicing Agreement will provide that upon the discovery by the Origination Trustee, World Omni, the Owner Trustee, the Indenture Trustee or the Transferor of a breach of any representation, warranty or covenant referred to in the second preceding paragraph that materially and adversely affects the owners of interests in the SUBI or the Noteholders in the related Contract or Leased Vehicle, which breach is not cured in all material respects within 60 days after World Omni discovers such breach or is given notice thereof, World Omni will be required to deposit (or cause to be deposited) into the SUBI Collection Account an amount (the 'Reallocation Payment') equal to the Discounted Principal Balance of such Contract as of the last day of the Collection Period during which the related cure period ended, plus an amount equal to any imputed lease charge on such Contract at the related Lease Rate that was delinquent as of the end of such Collection Period. The foregoing payment obligation will survive any termination of World Omni as Servicer under the Servicing Agreement. (Servicing Agreement, Sections 8.03 and 11.01). MATURITY, PREPAYMENT AND YIELD CONSIDERATIONS All of the Contracts will be prepayable, in whole or in part, at any time without penalty. The prepayment experience with respect to the Contracts will affect the life of the Class A Notes. In general, the rate of prepayments on the Contracts may be influenced by a variety of economic, social, geographic and other factors. The Origination Trust was formed and began to accept assignments of lease contracts in November 1993. All of the lease contracts assigned to the Origination Trust for allocation as SUBI Assets since that time have been, and all of the lease contracts to be assigned to the Origination Trust subsequent to the date of this Prospectus will be, assigned by Dealers using World Omni's underwriting standards. Under its pro-active lease termination program, World Omni actively encourages lessees under lease contracts with remaining terms of less than one year to either buy, trade in or refinance the related leased vehicles prior to the related scheduled maturities of such lease contracts. World Omni estimates that over calendar years 1995, 1996, 1997 and the six months ended June 30, 1998 an average of approximately 73% of the number of retail automobile and light duty truck lease contracts in its portfolio (including those owned by the Origination Trustee on behalf of the Origination Trust and by certain special purpose finance subsidiaries of World Omni) that were scheduled to mature during such period were terminated prior to maturity, either because of voluntary prepayments or repossession of the leased vehicles due to default by the lessees under the related lease contracts. As a part of its pro-active lease termination program, World Omni actively monitors its overall portfolio, and selectively offers incentives to encourage customer loyalty and to minimize anticipated residual value losses on lease contracts scheduled to reach maturity in the near term. These incentives generally occur during the last year of a lease contract (typically, the last six months), and for the years 1996, 1997 and the six months ended June 30, 1998 the losses relating to these incentives were $223,303, $1,879,447 and $5,976,422, respectively. World Omni may continue the use of these incentive programs in the future. All such losses relating to the Contracts will constitute Residual Value Loss Amounts and, therefore, will be covered by the Residual Value Insurance Policy. The distribution of the Initial Contracts by year of maturity is set forth under 'The Contracts-- Characteristics of the Contracts--Distribution of the Initial Contracts by Maturity', and historical levels of lease contract defaults, leased vehicle repossessions and losses and residual value losses are discussed under 'World Omni--Delinquency, Repossession and Loss Data'. No assurances can be given that the Contracts will experience the same rate of prepayment or default or any greater or lesser rate than World Omni's historical rate, or that the Residual Value experience of Leased Vehicles related to Contracts that have reached their Maturity Dates will differ from World Omni's historical residual value loss experience, for all of the retail automobile and light duty truck lease contracts in its portfolio (including those owned by the Origination Trustee on behalf of the Origination Trust and by certain special purpose finance subsidiaries of World Omni). The effective yield on, and average life of, each Class of Class A Notes will depend upon, among other things, the amount of scheduled and unscheduled payments on or in respect of the Contracts and the Leased Vehicles and the rate at which such payments are paid to the Class A Noteholders. In the event of prepayments of the Contracts (and payment of the Residual Value of the related Leased Vehicles) or payment of any Accelerated Principal Distribution Amounts during the Amortization Period, Class A Noteholders who receive such amounts may not be able to reinvest the related payments of principal received on the Class A Notes at yields as high as 42 <PAGE> the related Note Rate. The timing of changes in the rate of prepayments on the Contracts and payments in respect of the Leased Vehicles may also affect significantly an investor's actual yield to maturity and the average life of the related Class of Class A Notes. A substantial increase in the rate of payments on or in respect of the Contracts and Leased Vehicles (including prepayments and liquidations of the Contracts) during the Amortization Period may shorten the final maturity of and may significantly affect the yield on the Class A Notes. Additionally, although monies on deposit in the Accounts and Principal Collections (and Loss Amounts that otherwise would be reimbursed to the Noteholders) that have not been reinvested in Subsequent Contracts and Subsequent Leased Vehicles during the Revolving Period will be invested in Permitted Investments, and all gain on other income from such investments will be available for making the distributions described under 'Description of the Notes--Distributions on the Notes--Distributions of Interest', no assurance can be made as to the rate of return that will be realized on such Permitted Investments. Any reinvestment risk resulting from the rate of prepayment of the Contracts (and payment of the Residual Value of the related Leased Vehicles), the making of the foregoing investments or payment of any Accelerated Principal Distribution Amounts and the distribution of any such amounts to Class A Noteholders will be borne entirely by the Class A Noteholders. The yield to an investor who purchases Class A Notes in the secondary market at a price other than par will vary from the anticipated yield if the rate of prepayment on the Contracts is actually different than the rate anticipated by such investor at the time such Class A Notes were purchased. In sum, an investor's expected yield will be affected by the following factors: (i) the price the investor paid for the Class A Notes, (ii) the rate of prepayments in respect of the Contracts and Leased Vehicles and (iii) the investor's assumed reinvestment rate. These factors do not operate independently, but are interrelated. For example, if the rate of prepayments on or in respect of the Contracts and Leased Vehicles is slower than anticipated, the investor's yield will be lower if interest rates are higher than the investor anticipated and higher if interest rates are lower than the investor anticipated. Conversely, if the rate of prepayments on or in respect of the Contracts and Leased Vehicles is faster than anticipated, the investor's yield will be higher if interest rates are higher than the investor anticipated and lower if interest rates are lower than the investor anticipated. In general, during the Amortization Period, no principal payments will be received by Class A-2 Noteholders until the Class A-1 Notes have been paid in full, by Class A-3 Noteholders until the Class A-1 and Class A-2 Notes have been paid in full or by Class A-4 and Class B Noteholders until the Class A-1, Class A-2 and Class A-3 Notes have been paid in full. In addition, the Class A Percentage and the Class B Percentage of Principal Collections allocable to the Notes will be calculated when the Class A-1, Class A-2 and Class A-3 Notes have been paid in full, and then used to determine the distribution of principal payments on the Class A-4 Notes and the Class B Notes, as described under 'Risk Factors--Maturity and Prepayment Risks' and '--Risks Associated with Sequential Payment of Principal on the Notes', which may affect the maturity and yield on the Class A-4 Notes. An amount equal to the Covered Loss Amount will be reimbursed first to the Class A-1 Noteholders until the Class A-1 Notes have been paid in full, second to the Class A-2 Noteholders until the Class A-2 Notes have been paid in full, third to the Class A-3 Noteholders until the Class A-3 Notes have been paid in full and thereafter the Class A Percentage and the Class B Percentage of any such remaining reimbursable amounts will then be distributed to the Class A-4 Noteholders and the Class B Noteholders, respectively; provided that if the Note Balance of the Class B Notes has been reduced to zero, Covered Loss Amounts will be reimbursed to the Class A Noteholders, pro rata, based on the Class A-1, Class A-2, Class A-3 and Class A-4 Allocation Percentages. Uncovered Loss Amounts will be allocated first to the Class B Notes until the Note Balance of the Class B Notes has been reduced to zero and then to the Class A Notes, pro rata, based on the Class A-1, Class A-2, Class A-3 and Class A-4 Allocation Percentages. In addition, the Investor Percentage of the net proceeds of any sale or other disposition of the SUBI, the SUBI Certificate and other property of the Trust, which may occur under certain circumstances involving an Indenture Event of Default (as described under 'Additional Document Provisions--The Indenture--Events of Default'), to the extent such net proceeds constitute Principal Collections, will be distributed first, on a pro rata basis, to the Class A Swap Counterparty based on the termination payment, if any, due and to the Class A Noteholders based on the respective Class A Note Balances until the Class A Swap Counterparty and the Class A Notes have been paid in full, and second, to the Class B Noteholders. 43 <PAGE> The following information is provided solely to illustrate the effect of prepayments of the Contracts on the Class A-1 Note Balance, the Class A-2 Note Balance, the Class A-3 Note Balance and the Class A-4 Note Balance and the weighted average life of each Class of Class A Notes under the assumptions stated below and is not a prediction of the prepayment rates that might actually be experienced with respect to the Contracts. Prepayments on automobile lease contracts may be measured by a prepayment standard or model. The prepayment model used with respect to the Contracts is based on a prepayment assumption (the 'Prepayment Assumption') expressed in terms of percentages of ABS. 'ABS' refers to a prepayment model which assumes a constant percentage of the original number of Contracts in a pool prepay each month. However, as used herein, a 100% Prepayment Assumption assumes that, based on the assumptions in the next paragraph, the original Outstanding Principal Balance of a Contract will prepay as follows: (i) 0.30% ABS for the first six months of the life of the Contract, (ii) 0.50% ABS for the seventh through twelfth month of the life of the Contract, (iii) 0.65% ABS for the thirteenth through eighteenth month of the life of the Contract, (iv) 0.85% ABS for the nineteenth through twenty-fourth month of the life of the Contract, (v) 1.10% ABS for the twenty-fifth through thirtieth month of the life of the Contract and (vi) 1.60% ABS following the thirtieth month of the life of the Contract until the original Outstanding Principal Balance of the Contract has been paid in full. Neither ABS nor the Prepayment Assumption purports to be a historical description of prepayment experience or a prediction of the anticipated rate of prepayment of lease contracts, including the Contracts. There can be no assurance that the Contracts will prepay at the indicated levels of the Prepayment Assumption or at any other rate. The tables below were prepared on the basis of certain assumptions, including that: (i) all Collections (including Monthly Payments and net sale proceeds in respect of the Leased Vehicles relating to Matured Contracts) are timely received, and that no Contracts are ever delinquent; (ii) no Reallocation Payment or Reallocation Deposit Amount is made in respect of any Contract; (iii) there are no Loss Amounts; (iv) the Transferor exercises its optional purchase option of the property of the Trust as described herein; (v) all distributions of principal (including any Accelerated Principal Distribution Amount) and interest on the Class A Notes are made on the dates specified herein; (vi) the Servicing Fee is 1% per annum of the Aggregate Net Investment Value; (vii) all prepayments are full Prepayments; (viii) the Revolving Period ends on December 1, 1999; (ix) the Initial Contracts have assumed Lease Rates of 7.75%, and were originated eight months prior to the Initial Cutoff Date; (x) the Closing Date is November 19, 1998; (xi) all Principal Collections in respect of each Collection Period during the Revolving Period are reinvested, on a Transfer Date that is the fifteenth day of the following calendar month, in Subsequent Contracts that have stated terms of three years, Lease Rates of 7.75% and Residual Values equal to 65% of the original Outstanding Principal Balances thereof, were originated on October 30, 1998 and that otherwise have terms that are substantially similar to those of the Initial Contracts; and (xii) One-Month LIBOR remains constant at 5.283%, and the Swap Rate is 5.03%. No representation is made as to what the actual levels of losses and delinquencies on the Contracts will be. Since the tables below were prepared on the basis of the foregoing assumptions, there will be discrepancies between the characteristics of the Contracts that actually will be allocated as SUBI Assets in respect of Principal Collections made during the Revolving Period and Loss Amounts with respect to the Revolving Period that otherwise would be reimbursed to the Noteholders, and the characteristics of the Contracts assumed in preparing the tables to be allocated as SUBI Assets in respect of Principal Collections made during the Revolving Period and Loss Amounts with respect to the Revolving Period that otherwise would be reimbursed to the Noteholders, as well as other discrepancies between the foregoing assumptions and the actual experience in respect of the Contracts. Any such discrepancy may increase or decrease the percentage of the outstanding Class A-1 Note Balance, the Class A-2 Note Balance, the Class A-3 Note Balance or the Class A-4 Note Balance, as the case may be, and the weighted average lives of each Class of Class A Notes set forth in the tables. In addition, since the Contracts will have characteristics which differ from those assumed in preparing the tables, distributions of principal on the Class A Notes may be made earlier or later than set forth in the tables. Investors are urged to make their investment decisions on a basis that includes their determination as to anticipated prepayment rates under a variety of the assumptions discussed herein. The following tables set forth the percentages of the Initial Note Balance of each Class of Class A Notes that would be outstanding after each of the dates shown, based on a rate equal to 0%, 50%, 100%, 150% and 200% of the Prepayment Assumption. As used in the table, '0% Prepayment Assumption' assumes no prepayments on a Contract, '50% Prepayment Assumption' assumes that a Contract will prepay at 50% of the Prepayment Assumption, and so forth. 44 <PAGE> PERCENTAGE OF INITIAL CLASS A PRINCIPAL BALANCE REMAINING AND WEIGHTED AVERAGE LIFE OF CLASS A-1 NOTES <TABLE> <CAPTION> PREPAYMENT ASSUMPTIONS ------------------------------------ DISTRIBUTION DATE 0% 50% 100% 150% 200% - ----------------- ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> Initial Percentage.......................................................... 100% 100% 100% 100% 100% May 1999.................................................................... 100 100 100 100 100 November 1999............................................................... 100 100 100 100 100 May 2000.................................................................... 75 65 52 35 13 November 2000............................................................... 0 0 0 0 0 May 2001.................................................................... 0 0 0 0 0 Weighted Average Life (Years)(1)............................................ 1.64 1.56 1.49 1.43 1.36 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- </TABLE> - ------------------ (1) The weighted average life of the Class A-1 Notes is determined by (i) multiplying the amount of each principal payment by the number of years from the Closing Date to the related Distribution Date, (ii) adding the results, and (iii) dividing the sum by the Initial Class A-1 Note Balance. PERCENTAGE OF INITIAL CLASS A PRINCIPAL BALANCE REMAINING AND WEIGHTED AVERAGE LIFE OF CLASS A-2 NOTES <TABLE> <CAPTION> PREPAYMENT ASSUMPTIONS ------------------------------------ DISTRIBUTION DATE 0% 50% 100% 150% 200% - ----------------- ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> Initial Percentage.......................................................... 100% 100% 100% 100% 100% May 1999.................................................................... 100 100 100 100 100 November 1999............................................................... 100 100 100 100 100 May 2000.................................................................... 100 100 100 100 100 November 2000............................................................... 100 80 51 0 0 May 2001.................................................................... 0 0 0 0 0 Weighted Average Life (Years)(1)............................................ 2.29 2.18 2.02 1.84 1.70 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- </TABLE> - ------------------ (1) The weighted average life of the Class A-2 Notes is determined by (i) multiplying the amount of each principal payment by the number of years from the Closing Date to the related Distribution Date, (ii) adding the results, and (iii) dividing the sum by the Initial Class A-2 Note Balance. PERCENTAGE OF INITIAL CLASS A PRINCIPAL BALANCE REMAINING AND WEIGHTED AVERAGE LIFE OF CLASS A-3 NOTES <TABLE> <CAPTION> PREPAYMENT ASSUMPTIONS ------------------------------------ DISTRIBUTION DATE 0% 50% 100% 150% 200% - ----------------- ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> Initial Percentage.......................................................... 100% 100% 100% 100% 100% May 1999.................................................................... 100 100 100 100 100 November 1999............................................................... 100 100 100 100 100 May 2000.................................................................... 100 100 100 100 100 November 2000............................................................... 100 100 100 97 0 May 2001.................................................................... 87 69 37 0 0 November 2001............................................................... 0 0 0 0 0 Weighted Average Life (Years)(1)............................................ 2.67 2.61 2.48 2.20 1.77 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- </TABLE> (Footnote on next page) 45 <PAGE> (Footnote from previous page) - ------------------------ (1) The weighted average life of the Class A-3 Notes is determined by (i) multiplying the amount of each principal payment by the number of years from the Closing Date to the related Distribution Date, (ii) adding the results, and (iii) dividing the sum by the Initial Class A-3 Note Balance. PERCENTAGE OF INITIAL CLASS A PRINCIPAL BALANCE REMAINING AND WEIGHTED AVERAGE LIFE OF CLASS A-4 NOTES <TABLE> <CAPTION> PREPAYMENT ASSUMPTIONS ------------------------------------ DISTRIBUTION DATE 0% 50% 100% 150% 200% - ----------------- ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> Initial Percentage.......................................................... 100% 100% 100% 100% 100% May 1999.................................................................... 100 100 100 100 100 November 1999............................................................... 100 100 100 100 100 May 2000.................................................................... 100 100 100 100 100 November 2000............................................................... 100 100 100 100 87 May 2001.................................................................... 100 100 100 70 0 November 2001............................................................... 54 41 0 0 0 May 2002.................................................................... 0 0 0 0 0 Weighted Average Life (Years)(1)............................................ 3.14 3.01 2.93 2.62 2.35 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- </TABLE> - ------------------ (1) The weighted average life of the Class A-4 Notes is determined by (i) multiplying the amount of each principal payment by the number of years from the Closing Date to the related Distribution Date, (ii) adding the results, and (iii) dividing the sum by the Initial Class A-4 Note Balance. CLASS A NOTE FACTORS AND TRADING INFORMATION; REPORTS TO CLASS A NOTEHOLDERS The 'Class A-1 Note Factor', the 'Class A-2 Note Factor', the 'Class A-3 Note Factor' and the 'Class A-4 Note Factor' will each be a seven-digit decimal that the Servicer will compute each month indicating the Class A-1, Class A-2, Class A-3 or Class A-4 Note Balance, as the case may be, as of the close of business on the Distribution Date in such month as a fraction of the Initial Note Balance of the related Class of Class A Notes. Each Note Factor will initially be 1.0000000 and will remain unchanged during the Revolving Period, except in certain limited circumstances where there are unreimbursed Class A-1, Class A-2, Class A-3 or Class A-4 Note Principal Loss Amounts. During the Amortization Period, each Note Factor will decline to reflect reductions in the related Note Balance resulting from distributions of principal and unreimbursed Class A-1, Class A-2, Class A-3 or Class A-4 Note Principal Loss Amounts, if any. The portion of the Class A Note Balance for a given month allocable to a Class A Noteholder can be determined by multiplying the original denomination of the holder's Class A Note by the related Note Factor for that month. Pursuant to the Agreement, The Bank of New York, as Indenture Trustee, will provide to all registered holders of the Class A Notes (which shall be Cede as the nominee of DTC unless Definitive Notes are issued under the limited circumstances described herein) unaudited monthly reports concerning payments received on or in respect of the Contracts and the Leased Vehicles, the Aggregate Net Investment Value, the Investor Percentage, the Class A-1, Class A-2, Class A-3 and Class A-4 Note Factors and various other items of information. Note Owners may obtain copies of such reports upon a request in writing to the Indenture Trustee. In addition, Class A Noteholders during each calendar year will be furnished information for tax reporting purposes not later than the latest date permitted by law. For further details concerning information furnished to Noteholders and Note Owners, see 'Description of the Notes--Statements to Noteholders' and 'Description of the Notes--Book-Entry Registration'. 46 <PAGE> DESCRIPTION OF THE NOTES The Notes will be issued pursuant to the Indenture (the 'Indenture'), a form of which, together with forms of the Agreement, the SUBI Trust Agreement and the Servicing Agreement, has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. The following summaries of all material provisions of the foregoing documents and the summaries of all material provisions included under 'The Trust and the SUBI', 'The Origination Trust--Property of the Origination Trust', 'The Contracts--Characteristics of the Contracts--General', 'The Contracts--Characteristics at the Contracts--Representations, Warranties and Covenants', 'Security for the Notes' and 'Additional Document Provisions' do not purport to be complete and are subject to, and qualified in their entirety by reference to, the provisions of such documents. Where particular provisions of or terms used in the Indenture, the Agreement, the SUBI Trust Agreement and the Servicing Agreement are referred to, the actual provisions (including definitions of terms and Section references) are incorporated by reference as part of such summaries. GENERAL The Class A Notes will be issued in denominations of $1,000 and integral multiples thereof in book-entry form. (Indenture, Section 2.02). The Class A Notes will initially be represented by notes registered in the name of Cede, the nominee of DTC. No Note Owner will be entitled to receive a note representing such owner's Note, except as set forth below. Unless and until Class A Notes are issued in fully registered certificated form ('Definitive Notes') under the limited circumstances described below, all references herein to distributions, notices, reports and statements to Class A Noteholders will refer to the same actions made with respect to DTC or Cede, as the case may be, for the benefit of Note Owners in accordance with DTC procedures. (Indenture, Section 2.10). See 'Description of the Notes--Book-Entry Registration' and '--Definitive Notes'. The outstanding principal amount of each class of Notes (each, a 'Class') at any time will be equal to the initial principal amount of such Class of Notes, less the sum of (i) all payments made on or prior to such date allocable to principal, (ii) the amount of Note Principal Loss Amounts allocable to such Class of Notes, if any, which have not been reimbursed as described herein and (iii) in the case of the Class B Notes, any unreimbursed Class B Note Principal Carryover Shortfall. (Agreement, Section 1.01). See 'Description of the Notes-- Distributions on the Notes'. Each Note will represent the right to receive payments of interest at the related Note Rate and, to the extent described herein, payments of principal during the Amortization Period funded from the Investor Percentage of distributions to the Trust of Interest Collections and Principal Collections and Accelerated Principal Distribution Amounts allocable to Notes of the related Class, Transferor Amounts otherwise payable to the Transferor in respect of the Transferor Interest, the Servicing Fee (so long as World Omni is the Servicer) and Insured Residual Value Loss Amounts payable under the Residual Value Insurance Policy, in each case to the extent described herein. As described under 'Description of the Notes--Distributions on the Notes', the right of the Class B Notes to receive payments of interest and principal also will be subordinated to the right of the Class A Notes to receive such payments. The Transferor will permanently retain the certificate representing the Transferor Interest (the 'Transferor Certificate'), which will represent the entire equity interest in the Trust including the right to receive the Transferor Percentage of Interest Collections and Principal Collections calculated as described under 'Description of the Notes--Calculation of Investor Percentage and Transferor Percentage'. The Transferor Certificate will be subordinated to the Notes to the extent described under 'Description of the Notes--Certain Payments to the Transferor'. During the Revolving Period, the Note Balance will remain constant except in certain limited circumstances where there are unreimbursed Note Principal Loss Amounts. During the Amortization Period, the Note Balance will decline as the Investor Percentage of Principal Collections and Accelerated Principal Distribution Amounts are distributed to the Noteholders and as Note Principal Loss Amounts are incurred. The Aggregate Net Investment Value can change daily as principal is paid on or in respect of the Contracts and the Leased Vehicles, as Reallocation Payments in respect of certain Contracts as to which an uncured breach of certain representations and warranties or certain servicing covenants has occurred are paid by World Omni during the Amortization Period, together with, under certain circumstances, Reallocation Deposit Amounts, as liquidation losses and other losses in respect of the Contracts and Leased Vehicles are incurred and as Leased Vehicles in Matured Leased Vehicle Inventory are sold or otherwise disposed of. 47 <PAGE> TRANSFER OF THE SUBI On the Closing Date, pursuant to the Agreement, the Transferor will deliver the SUBI Certificate to the Owner Trustee and transfer and assign to the Trust, without recourse, all of its right, title and interest in and to the SUBI, represented by the SUBI Certificate. The Owner Trustee will, concurrently with such delivery, transfer and assignment, deliver the Notes and the Transferor Certificate on behalf of the Trust to or upon the order of the Transferor. (Agreement, Sections 2.02 and 4.02). Pursuant to the Agreement, the Transferor will represent and warrant that immediately prior to the transfer and assignment of the SUBI Certificate to the Trust, it had good title to, and was the sole legal and beneficial owner of the SUBI Certificate, free and clear of liens and claims. (Agreement, Section 5.01). REALLOCATION PAYMENTS AND REALLOCATION DEPOSIT AMOUNTS As more fully described under 'The Contracts--Representations, Warranties and Covenants' and 'Additional Document Provisions--The Servicing Agreement--Collections', under certain circumstances World Omni will be required to make Reallocation Payments in respect of certain Contracts (and the related Leased Vehicles) discovered not to be in compliance with World Omni's representations or warranties or Contracts as to which certain servicing procedures have not been followed, in either case that materially and adversely affects such Contract. Upon any such payment during the Amortization Period (but not during the Revolving Period), the Aggregate Net Investment Value will decline by an amount equal to the Discounted Principal Balance of such Contract, thereby reducing the amount of the Transferor Interest by the same amount, and such Contract and the related Leased Vehicle will no longer constitute SUBI Assets as they will be reallocated and become UTI Assets. If such deduction would cause the Transferor Interest to become less than zero, World Omni will be required to deposit (or cause to be deposited) in the SUBI Collection Account the amount (the 'Reallocation Deposit Amount') by which the Transferor Interest would be reduced to less than zero. Notwithstanding the foregoing, in the event a Reallocation Deposit Amount is required to be made, reallocation of the related Contract (and the related Leased Vehicle) will not be considered to have occurred unless such deposit is actually made. (Servicing Agreement, Section 8.03). CALCULATION OF INVESTOR PERCENTAGE AND TRANSFEROR PERCENTAGE Pursuant to the Servicing Agreement, the Servicer will allocate between the Notes and the Transferor Certificate, based on the applicable Investor Percentage and the Transferor Percentage for the related Collection Period, all Interest Collections and (during the Amortization Period) Principal Collections collected or received in respect of the related Collection Period. In addition, similar allocations will be made by the Servicer at the end of each Collection Period in respect of (i) an amount equal to the Discounted Principal Balance of any Contract that became a Charged-off Contract during such Collection Period (all such amounts in any Collection Period, the 'Charged-off Amount'), (ii) the Residual Value Loss Amount for such Collection Period and (iii) any Additional Loss Amounts incurred during such Collection Period. A 'Charged-off Contract' will be a Contract (a) with respect to which the related Leased Vehicle has been repossessed and sold or otherwise disposed of or (b) which has been written off by the Servicer in accordance with its normal policies for writing off lease contracts other than with respect to repossessions. (SUBI Trust Agreement, Section 10.01; Agreement, Sections 1.01 and 3.03; Servicing Agreement, Section 9.02). For convenience, this Prospectus refers to the Investor Percentage with respect to Interest Collections, Principal Collections, Charged-off Amounts, Residual Value Loss Amounts and Additional Loss Amounts as if the Investor Percentage were the same percentage at all times in each case. The Investor Percentage may be a different percentage for each Collection Period, and will vary primarily as a result of changes in the Aggregate Net Investment Value. The Investor Percentage in respect of any Collection Period will mean, with respect to (i) Loss Amounts and Interest Collections, the percentage equivalent of a fraction (not to exceed 100%) the numerator of which is the Note Balance on the last day of the immediately preceding Collection Period (or, in the case of the first Collection Period, the Initial Note Balance) and the denominator of which is the Aggregate Net Investment Value on the last day of the immediately preceding Collection Period (or, in the case of the first Collection Period, as of the Initial Cutoff Date) and (ii) Principal Collections during the Amortization Period, the percentage equivalent 48 <PAGE> of a fraction (not to exceed 100%) the numerator of which is the Note Balance and the denominator of which is the Aggregate Net Investment Value, in each case as of the last day of the last Collection Period preceding (a) the Amortization Date or (b) the date on which an Early Amortization Event occurs. The 'Transferor Percentage' will in all cases, be equal to 100% minus the applicable Investor Percentage. (Agreement, Section 1.01). As a result of the calculations described above, Interest Collections in each Collection Period will be allocated to the Noteholders based on the relationship of the Note Balance to the Aggregate Net Investment Value (which may change daily and from Collection Period to Collection Period). As described above, the Investor Percentage applied when allocating Principal Collections may vary monthly during the Revolving Period, because the Note Balance as a percentage of the Aggregate Net Investment Value may fluctuate monthly. During the Amortization Period, however, the Principal Allocation will be determined by reference to a fixed percentage which will equal the Investor Percentage with respect to Principal Collections as of the last day of the Revolving Period. CERTAIN PAYMENTS TO THE TRANSFEROR On each Distribution Date, the Indenture Trustee will pay to the Transferor, from amounts on deposit in the Distribution Account in respect of the related Collection Period, the following amounts (the 'Transferor Amounts'): (i) if such Distribution Date is in respect of the Revolving Period, the Transferor Percentage of Interest Collections and (ii) if such Distribution Date occurs in any month following the month in which the Amortization Period commences, the Transferor Percentage of Interest Collections and, to the extent that the Transferor Interest is equal to or greater than zero, the Transferor Percentage of Principal Collections. The foregoing payments will be made net of the Transferor Percentage of the Servicing Fee, Capped Origination Trust Administrative Expenses, Capped Trust Administrative Expenses, Capped Contingent and Excess Liability Premiums and Uncapped Administrative Expenses payable in respect of the related Collection Period. Any Principal Collections not paid to the Transferor because the Transferor Interest is less than or equal to zero ('Unallocated Principal Collections') will be retained in the Distribution Account for payment to Noteholders. Notwithstanding the foregoing, no Transferor Amounts will be paid to the Transferor on a Distribution Date unless (i) the amounts described in clauses (i) through (xvi) of the first paragraph under 'Description of the Notes--Distributions on the Notes--Distributions of Interest' have been paid in full and (ii) the amount on deposit in the Reserve Fund, after giving effect to all withdrawals therefrom and other deposits thereto on such Distribution Date, is at least equal to the Reserve Fund Cash Requirement. (Agreement, Section 3.03). DETERMINATION OF ONE-MONTH LIBOR The Servicer will determine One-Month LIBOR for each Distribution Date on the second business day prior to the preceding Distribution Date (or, in the case of the initial Distribution Date, the second business day prior to the date of issuance of the Notes) (each a 'LIBOR Determination Date'). For purposes of calculating One-Month LIBOR, a business day is any day on which dealings in deposits in U.S. Dollars are transacted in the London interbank market. 'One-Month LIBOR' means, as of any LIBOR Determination Date, the rate for deposits in U.S. Dollars for a period of the Designated Maturity (commencing on the previous Distribution Date) which appears on the Telerate Page 3750 as of 11:00 a.m., London time, on such date. If such rate does not appear on Telerate Page 3750, the rate for that day will be determined on the basis of the rates at which deposits in U.S. Dollars are offered by the Reference Banks at approximately 11:00 a.m., London time, on that day to prime banks in the London interbank market for a period of the Designated Maturity (commencing on the previous Distribution Date). The Servicer will request the principal London office of each of the Reference Banks to provide a quotation of its rate. If at least two such quotations are provided, the rate for that day will be the arithmetic mean of the quotations. If fewer than two quotations are provided as requested, the rate for that day will be the arithmetic mean of the rates quoted by major banks in New York City, selected by the Servicer, at approximately 11:00 a.m., New York City time, on that day for loans in U.S. Dollars to leading European banks for a period of the Designated Maturity (commencing on the previous Distribution Date). 'Designated Maturity' shall mean, for any LIBOR Determination Date, one month. 49 <PAGE> 'Telerate Page 3750' means the display page currently so designated on the Dow Jones Telerate Service (or such other page as may replace that page on that service for the purpose of displaying comparable rates or prices). 'Reference Banks' means four major banks in the London interbank market selected by the Servicer. DISTRIBUTIONS ON THE NOTES General On the second Business Day prior to each Distribution Date (each, a 'Determination Date'), the Servicer will inform the Indenture Trustee of, among other things, the amount of Interest Collections and Principal Collections, the Investor Percentage, the Transferor Percentage, the Class A-1, Class A-2, Class A-3 and Class A-4 Note Factors, the Class A-1, Class A-2, Class A-3, Class A-4 and Class B Allocation Percentages, the amount of Advances to be made by the Servicer, the Required Amount, if any, to be withdrawn from the Reserve Fund and the Servicing Fee and other servicing compensation payable to the Servicer, in each case with respect to the Collection Period immediately preceding the Collection Period in which such Determination Date occurs. On or prior to each Determination Date, the Servicer shall also determine the Reserve Fund Cash Requirement, the Class A Net Swap Receipt or the Class A Net Swap Payment, the amounts to be distributed to the Noteholders and to the Transferor in respect of the Transferor Interest and the Reserve Fund Supplemental Requirement (if any). (Servicing Agreement, Sections 9.02 and 10.01). Distributions of Interest On each Distribution Date, the Indenture Trustee will make the following payments in the amounts and order of priority described below. The Indenture Trustee will distribute, from amounts on deposit in the Distribution Account, the Investor Percentage of Interest Collections collected during or received in respect of the related Collection Period, together with (i) Transferor Amounts that would otherwise be payable to the Transferor in respect of the Transferor Interest on such Distribution Date, plus (ii) to the extent necessary to make the distributions described below other than in clause (ix), the sum of any Insured Residual Value Loss Amounts paid under the Residual Value Insurance Policy in respect of such Collection Period and the amount withdrawn from the Reserve Fund in respect of the Required Amount, if any, plus (iii) to the extent needed to make distributions described in clauses (iii), (x) and (xi), to the Class A-4 Noteholders during the Amortization Period, amounts that would otherwise be distributable to the Class B Noteholders in respect of the Class B Percentage of the Investor Percentage of Principal Collections in respect of such Collection Period: (i) in the event of an Indenture Event of Default as a result of the Indenture Trustee having received written instructions from holders of Notes evidencing Voting Interests of not less than a majority in interest of the Class A Notes (voting together as a single class) or a majority in interest of the Class A Notes and Class B Notes (voting together as a single class) to sell or dispose of the SUBI, to the Indenture Trustee, the Investor Percentage of Capped Indenture Trustee Administrative Expenses, and to the Owner Trustee, the Investor Percentage of Capped Owner Trustee Administrative Expenses; (ii) first from the Class A Net Swap Receipt and then from the amounts remaining after the application of clause (i) above, to (A) each Class of Class A Noteholders, interest at the related Note Rate on the Class A-1, Class A-2, Class A-3 or Class A-4 Note Balance, as applicable, as of the immediately preceding Distribution Date (after giving effect to any reduction in such Note Balance on such immediately preceding Distribution Date) or, in the case of the first Distribution Date, on the Initial Class A-1, Class A-2, Class A-3 or Class A-4 Note Balance, as applicable, calculated on the basis of the actual number of days from and including the prior Distribution Date (or in the case of the initial Distribution Date, the Closing Date) to but excluding the related Distribution Date and a 360-day year, together with any unpaid Class A-1, Class A-2, Class A-3 or Class A-4 Interest Carryover Shortfall, as applicable and (B) the Class A Swap Counterparty, the Class A Net Swap Payment, if any, with respect to such Distribution Date, plus any Class A Net Swap Payments previously due but not paid; provided, however, if the funds available are not sufficient to make the distributions specified in subclauses (ii)(A) and (ii)(B), such funds will be allocated pro rata between the 50 <PAGE> Class A Noteholders and the Class A Swap Counterparty based on the respective amounts due in each such subclause; (iii) to each Class of Class A Noteholders, accrued and unpaid interest at the related Note Rate, on any unreimbursed Class A-1, Class A-2, Class A-3 and Class A-4 Note Principal Loss Amount, as applicable; (iv) from amounts remaining after the application of clauses (i), (ii) and (iii) above, to, or for the benefit of, the Class B Noteholders, interest at a rate per annum not expected to exceed 7.75% (the 'Class B Note Rate' and, together with the Class A-1, Class A-2, Class A-3 and Class A-4 Note Rates, the 'Note Rates'), on the Class B Note Balance as of the immediately preceding Distribution Date (after giving effect to any reduction in the Class B Note Balance on such immediately preceding Distribution Date) or, in the case of the first Distribution Date, on the Initial Class B Note Balance, calculated on the basis of a 360-day year consisting of twelve 30-day months, together with any unpaid Class B Interest Carryover Shortfall; (v) to the Servicer, reimbursement of the Investor Percentage of Capped Contingent and Excess Liability Premiums; (vi) to the Origination Trustee, the Investor Percentage of Capped Origination Trust Administrative Expenses; (vii) in circumstances other than as set forth in clause (i) above, to the Indenture Trustee, the Investor Percentage of Capped Indenture Trustee Administrative Expenses, and to the Owner Trustee, the Investor Percentage of Capped Owner Trustee Administrative Expenses; (viii) in the event that World Omni is not the Servicer, to such other Servicer, the Investor Percentage of (a) the Servicing Fee and (b) any unpaid Servicing Fees payable in respect of compensation to such other Servicer with respect to one or more prior Collection Periods; (ix) to the Reserve Fund, until the amount on deposit therein equals the Reserve Fund Cash Requirement; (x) to the Class A Noteholders, (a) so long as the Note Balance of the Class B Notes has not been reduced to zero, an amount equal to the Covered Loss Amount for the related Distribution Date, sequentially, commencing with the Class A-1 Noteholders until the Note Balance of each such Class has been reduced to zero, or (b) if the Note Balance of the Class B Notes has been reduced to zero, pro rata, based on the Class A-1, Class A-2, Class A-3 and Class A-4 Allocation Percentages, an amount equal to the sum of the Covered Loss Amount and the Uncovered Loss Amount for the related Distribution Date; (xi) to each Class of Class A Noteholders, the aggregate of the amounts allocable to such Class pursuant to clause (x) above that were not previously distributed pursuant to such clause or this clause (each such amount, a 'Class A-1 Note Principal Loss Amount', 'Class A-2 Note Principal Loss Amount', 'Class A-3 Note Principal Loss Amount' or 'Class A-4 Note Principal Loss Amount', respectively); (xii) to the Class B Noteholders, accrued and unpaid interest at the Class B Note Rate on any unreimbursed Class B Note Principal Loss Amount and any unreimbursed Class B Note Principal Carryover Shortfall; (xiii) to the Class B Noteholders, an amount equal to the Uncovered Loss Amount incurred during the related Collection Period; (xiv) to the Class B Noteholders, the aggregate of the amounts allocable pursuant to clause (xiii) above that were not previously distributed pursuant to such clause or this clause (each such amount, a 'Class B Note Principal Loss Amount'), together with any Class B Note Principal Carryover Shortfall; (xv) in the event that World Omni is the Servicer (and it has not elected to waive the Servicing Fee with respect to the related Collection Period), to the Servicer, the Investor Percentage of (a) the Servicing Fee for the related Collection Period and (b) any unpaid Servicing Fee with respect to one or more prior Collection Periods; and (xvi) to the Indenture Trustee, the Owner Trustee and the Origination Trustee, as applicable, the Investor Percentage of all specified expenses incurred with respect to the Indenture, the Notes, the Trust or 51 <PAGE> the Origination Trust in excess of the Capped Administrative Expenses that have been paid but have not yet been reimbursed (the 'Uncapped Administrative Expenses'). (Agreement, Sections 1.01 and 3.03). Notwithstanding the foregoing, as more fully described under 'Description of the Notes--Distributions on the Notes--Application and Distributions of Principal', on any Distribution Date relating to a Collection Period during the Revolving Period, for purposes of reinvestment, amounts otherwise payable to Noteholders pursuant to clauses (x), (xi), (xiii) and (xiv) above (whether from Interest Collections, Transferor Amounts that otherwise would be payable to the Transferor, Insured Residual Value Loss Amounts paid under the Residual Value Insurance Policy, or from amounts on deposit in the Reserve Fund) will be treated as Principal Collections for the Collection Period in which such Distribution Date occurs. Accordingly, such amounts will be available to be reinvested in Subsequent Contracts and Subsequent Leased Vehicles during the Revolving Period. (Agreement, Section 3.03). The balance, if any, of the Interest Collections and the Class A Net Swap Receipt allocated to the Notes for the related Collection Period, after giving effect to the distributions in clauses (i) through (xvi) above, will constitute 'Excess Collections'. On each Distribution Date that occurs (i) during the Revolving Period, Excess Collections will be paid to the Transferor and (ii) during the Amortization Period, an amount equal to the related Accelerated Principal Distribution Amount will be paid to Noteholders as a payment of principal and any remaining Excess Collections will be paid to the Transferor. On any Distribution Date, the Transferor may (at its option) instruct the Indenture Trustee not to pay any or all of such remaining Excess Collections to it, but instead to redeposit such amount ('Undistributed Transferor Excess Collections') into the SUBI Collection Account for application as Collections in respect of the Collection Period during which such Distribution Date occurs. The Transferor will have no further claim to any Undistributed Transferor Excess Collections so deposited into the SUBI Collection Account, except insofar as they become Excess Collections that are payable to the Transferor for a succeeding Collection Period. To the extent that an Accelerated Principal Distribution Amount is paid to Noteholders on a Distribution Date in any month following the month during which the Amortization Period commences, such amount will be distributed first to the Class A-1 Noteholders until the Class A-1 Notes have been paid in full, second, to the Class A-2 Noteholders until the Class A-2 Notes have been paid in full, third, to the Class A-3 Noteholders until the Class A-3 Notes have been paid in full, and thereafter the Class A Percentage and the Class B Percentage of any remaining amount will be distributed to the Class A-4 Noteholders and the Class B Noteholders, respectively. If any Transferor Amounts are required to be applied to make any of the distributions in clauses (i) through (xvi) above, the Interest Collections that are part of the Transferor Amounts will be applied before any Principal Collections that are part of the Transferor Amounts are so applied. (Agreement, Sections 1.01 and 3.03). In the event on any Distribution Date there remains any shortfall in amounts required to be distributed to the Class A-1 Noteholders, Class A-2 Noteholders, Class A-3 Noteholders and Class A-4 Noteholders under clause (ii) and on any Distribution Date on which the Note Balance of the Class B Notes has been reduced to zero, there remains any shortfall in amounts required to be distributed to the Class A-1 Noteholders, Class A-2 Noteholders, Class A-3 Noteholders and Class A-4 Noteholders under clauses (iii), (x) or (xi) above, then the amount available will be distributed pro rata to such Noteholders based on the Class A-1 Allocation Percentage, the Class A-2 Allocation Percentage, the Class A-3 Allocation Percentage and the Class A-4 Allocation Percentage, respectively. (Agreement, Section 3.03). If and to the extent that the full amount distributable on a Distribution Date pursuant to clauses (i) through (xvi) above exceeds the Investor Percentage of Interest Collections for the related Collection Period (plus in the case of clause (ii) above, the Class A Net Swap Receipt, for such Distribution Date), then (i) Transferor Amounts otherwise distributable to the Transferor will be applied to such shortfall, (ii) if such Transferor Amounts are insufficient to cover such shortfall, then the proceeds of a claim under the Residual Value Insurance Policy for any Insured Residual Value Loss Amount will be applied to such shortfall (other than any shortfall in amounts to be deposited into the Reserve Fund as set forth in clause (ix) above), and (iii) if available Transferor Amounts and any claim under the Residual Value Insurance Policy are insufficient to cover such shortfall, then the Required Amount will be withdrawn from the Reserve Fund and applied to such shortfall (other than any shortfall in amounts to be deposited into the Reserve Fund as set forth in clause (ix) above). (Agreement, Section 3.03). 52 <PAGE> 'Interest Collections' with respect to any Collection Period will be calculated as described under 'Summary--The Revolving Period; Subsequent Contracts and Subsequent Leased Vehicles'. (SUBI Trust Agreement, Section 10.01). 'Capped Origination Trust Administrative Expenses' will equal the amounts sufficient to pay specified administrative costs and expenses of the Origination Trust that are up to but not exceeding $100,000 in any calendar year. (SUBI Trust Agreement, Section 10.01). 'Capped Indenture Trustee Administrative Expenses' will equal the amounts sufficient to pay the Indenture Trustee's compensation and certain other expenses up to but not exceeding $50,000 in any calendar year (or $100,000 in a calendar year in which an Indenture Event of Default occurs with respect to which the Indenture Trustee sells or otherwise disposes of the SUBI). 'Capped Owner Trustee Administrative Expenses' will equal amounts sufficient to pay the Owner Trustee's compensation and certain other expenses up to but not exceeding $5,000 in any calendar year. (Agreement, Section 1.01). 'Capped Contingent and Excess Liability Premiums' will equal the amounts sufficient to pay the premiums then due on the portion of the Contingent and Excess Liability Insurance Policies, up to but not exceeding $550,000 in any calendar year. 'Covered Loss Amounts' for any Distribution Date will equal the lesser of (i) the Investor Percentage of Loss Amounts for such Distribution Date and (ii) amounts available for distribution described under 'Description of the Notes--Distributions on the Notes--Distributions of Interest' remaining after application of clauses (i) through (ix) thereunder. 'Uncovered Loss Amounts' for any Distribution Date will equal the excess of (i) the Investor Percentage of Loss Amounts for such Distribution Date over (ii) Covered Loss Amounts for such Distribution Date. A 'Note Principal Loss Amount' with respect to any Distribution Date will equal the sum of any Class A-1, Class A-2, Class A-3, Class A-4 and Class B Note Principal Loss Amount and will represent a loss of principal in respect of Loss Amounts allocable to the Notes and will arise when the Investor Percentage of Interest Collections, Insured Residual Value Loss Amounts paid under the Residual Value Insurance Policy, the Required Amount, the Transferor Amounts and, with respect to any Class A-4 Note Principal Loss Amount, amounts otherwise payable in respect of principal to the Class B Noteholders are not sufficient to cover such loss. As described under 'Description of the Notes--General', any Note Principal Loss Amounts allocable to a Class of Class A Notes which are not reimbursed as provided herein will reduce the Note Balance of such Class of Class A Notes. (Agreement, Section 1.01). The 'Class A-1 Interest Carryover Shortfall' with respect to any Distribution Date will equal the excess, if any, of (i) the amount of interest distributable on the Class A-1 Notes for such Distribution Date and any outstanding Class A-1 Interest Carryover Shortfall from the immediately preceding Distribution Date plus interest at the Class A-1 Note Rate on such outstanding Class A-1 Interest Carryover Shortfall from such immediately preceding Distribution Date through the current Distribution Date, over (ii) the amount of interest distributed to the Class A-1 Noteholders on such Distribution Date. The 'Class A-2 Interest Carryover Shortfall', the 'Class A-3 Interest Carryover Shortfall', the 'Class A-4 Interest Carryover Shortfall' and the 'Class B Interest Carryover Shortfall' will be calculated in the same manner as the Class A-1 Interest Carryover Shortfall, appropriately modified to relate to the Class A-2 Notes, the Class A-3 Notes, the Class A-4 Notes and the Class B Notes, respectively. (Agreement, Section 1.01). The 'Class B Note Principal Carryover Shortfall', with respect to any Distribution Date relating to the Amortization Period from and after the Distribution Date on which the Class A-3 Notes are paid in full, will equal the amount, if any, of the Class B Percentage of the Investor Percentage of Principal Collections for such Distribution Date that is instead applied to the distribution of principal to the Class A Noteholders, pursuant to clauses (iii), (x) and (xi) above. The Class B Percentage of the Investor Percentage of Principal Collections will be applied for such purposes only to the extent that the other amounts available therefor are insufficient. The 'Class B Allocation Percentage' with respect to any Distribution Date will mean the Class B Note Balance as a percentage of the Note Balance, calculated as of the last day of the related Collection Period. 53 <PAGE> The 'Voting Interests' of the (i) Class A Notes will be allocated among the Class A-1, Class A-2, Class A-3 and Class A-4 Noteholders or Note Owners, as the case may be, in accordance with their respective Class Note Balances, as the context may require, and (ii) Class B Notes will be allocated among the Class B Noteholders in accordance with the Class B Note Balance represented thereby. Notwithstanding the foregoing, in certain circumstances, any Class A Notes or Class B Notes, as the case may be, held or beneficially owned by ALF LLC, ALF L.P., the Transferor, WOLS LLC, World Omni or any of their respective affiliates shall be excluded from such determination. (Agreement, Section 1.01). The 'Required Amount' will equal the lesser of (i) the amount on deposit in the Reserve Fund on the related Deposit Date after all deposits thereto (including pursuant to clause (ix) above) and (ii) the amount, if any, by which (a) the full amount distributable on the related Distribution Date pursuant to clauses (i) through (viii) and (x) through (xvi) above exceeds (b) the sum of (1) the Investor Percentage of Interest Collections for the related Collection Period above (plus in the case of clause (ii) above, the Class A Net Swap Receipt for the related Distribution Date), (2) any Transferor Amounts applied to cover such distributable amount on such Distribution Date, and (3) any Insured Residual Value Loss Amounts paid under the Residual Value Insurance Policy with respect to the related Collection Period. (Agreement, Sections 1.01, 3.03 and 3.04). For further details regarding the Reserve Fund, see 'Security for the Notes--The Reserve Fund'. Application and Distributions of Principal Revolving Period. No principal will be payable to the Class A Noteholders until the January 2000 Distribution Date or, upon the occurrence of an Early Amortization Event, until the Distribution Date in the month immediately succeeding the month in which such Early Amortization Event occurs. On a Transfer Date related to any Collection Period during the Revolving Period, the Servicer will identify lease contracts and the related leased vehicles of the Origination Trust that meet the eligibility criteria described under 'The Contracts' and are not evidenced by the SUBI or any Other SUBI. On each Transfer Date, the Servicer, acting on behalf of the Origination Trustee, will allocate as SUBI Assets additional lease contracts and related leased vehicles so identified having aggregate Discounted Principal Balances as of the last day of the preceding Collection Period (each, a 'Subsequent Cutoff Date' and, together with the Initial Cutoff Date, the 'Cutoff Dates') approximately equal to, but not greater than, all Principal Collections collected or received since the Initial Cutoff Date (including Loss Amounts that otherwise would be reimbursed to the Noteholders which for this purpose are treated as Principal Collections, as described under 'Description of the Notes-- Distributions on the Notes--Distributions of Interest') that have not yet been reinvested in Subsequent Contracts and Subsequent Leased Vehicles as described herein. Upon such allocation, the related lease contracts and leased vehicles will become Subsequent Contracts and Subsequent Leased Vehicles and accordingly will become SUBI Assets. No partial interest in lease contracts (and the related leased vehicles) will be so allocated as SUBI Assets. Coincident with such allocation, the Servicer, acting on behalf of the Indenture Trustee, will transfer from the SUBI Collection Account an amount of unreinvested Principal Collections equal to the aggregate Discounted Principal Balances of the related Subsequent Contracts as of the related Subsequent Cutoff Date to an account maintained by the Origination Trustee to hold collections with respect to the Origination Trust Assets that are not SUBI Assets. Any Principal Collections (and Loss Amounts that otherwise would be reimbursed to the Noteholders) that are not so reinvested may be reinvested in additional Subsequent Contracts and Subsequent Leased Vehicles on one or more subsequent Transfer Dates prior to the end of the Revolving Period. In the event that on the twenty-fifth day of any month (beginning December 1998) during the Revolving Period the amount of such Principal Collections and Loss Amounts as of the last day of the immediately preceding month that have not been reinvested in Subsequent Contracts and Subsequent Leased Vehicles exceeds $1,000,000, an Early Amortization Event will occur, the Revolving Period will terminate prior to the Amortization Date and any unreinvested Principal Collections at the end of the Revolving Period will be distributed as principal to the Trust and then to Noteholders on the immediately succeeding Distribution Date. (Servicing Agreement, Section 8.02; SUBI Trust Agreement, Section 11.02; Agreement, Section 8.01). 54 <PAGE> 'Collections' and 'Principal Collections' with respect to any Collection Period will be calculated as described under 'Summary--The Revolving Period; Subsequent Contracts and Subsequent Leased Vehicles'. (SUBI Trust Agreement, Section 10.01). Amortization Period. On each Distribution Date beginning with the Distribution Date in the month following the month in which the Amortization Period commences and ending on the Distribution Date on which the Class A-3 Notes have been paid in full, the Indenture Trustee will distribute an amount equal to the Investor Percentage of all Principal Collections collected or received in respect of the related Collection Period allocable to the Notes as principal first to the Class A-1 Noteholders until the Class A-1 Notes have been paid in full, second, to the Class A-2 Noteholders until the Class A-2 Notes have been paid in full, third, to the Class A-3 Noteholders until the Class A-3 Notes have been paid in full, and thereafter the Class A Percentage and the Class B Percentage of any such remaining Principal Collections will be distributed as principal to the Class A-4 Noteholders and the Class B Noteholders, respectively. The Indenture Trustee will also distribute to Class A-1 Noteholders on the Distribution Date in the month following the month in which the Amortization Period commences the Class A Percentage of the Investor Percentage of the sum of (i) any Principal Collections that were not reinvested in Subsequent Contracts and Subsequent Leased Vehicles as of the end of the Revolving Period and (ii) any Unallocated Principal Collections on deposit in the Distribution Account at the time the Amortization Period commences. The aggregate distributions of principal to the Noteholders of each Class of Class A Notes will not exceed the Initial Note Balances of such Class of Notes. (SUBI Trust Agreement, Section 11.02; Indenture, Section 2.06; Agreement, Section 3.03). In general, no principal payments (including amounts with respect to Covered Loss Amounts) will be made on the Class A-2 Notes until the Class A-1 Notes have been paid in full, on the Class A-3 Notes until the Class A-1 and Class A-2 Notes have been paid in full, or on the Class A-4 or Class B Notes until the Class A-1, Class A-2 and Class A-3 Notes have been paid in full. Following the reduction of the Note Balance of the Class B Notes to zero, principal payments will be distributed on a pro rata basis to the Class A Notes. Uncovered Loss Amounts will be allocated first to the Class B Notes until the Note Balance of the Class B Notes has been reduced to zero and then to the Class A Notes, pro rata, based on the Class A-1, Class A-2, Class A-3 and Class A-4 Allocation Percentages. Amounts with respect to Uncovered Loss Amounts will not be allocated or reimbursed to any Noteholder once the related Notes have been paid in full. In addition, the Investor Percentage of the net proceeds of any sale or other disposition of the SUBI, the SUBI Certificate or other property of the Trust, which may occur under certain circumstances involving an Indenture Event of Default (as described under 'Additional Agreement Provisions--The Indenture--Events of Default'), to the extent such net proceeds constitute Principal Collections, will be distributed first, on a pro rata basis, to the Class A Swap Counterparty based on the termination payment, if any, due and to the Class A Noteholders based on the respective Class A Note Balances until the Class A Swap Counterparty and the Class A Notes have been paid in full, and second, to the Class B Noteholders. See 'Additional Document Provisions--The Indenture--Events of Default.' In addition, on any Distribution Date relating to the Amortization Period from and after the Distribution Date on which the Class A-3 Notes are paid in full, but only to the extent that other amounts available therefor are insufficient, amounts that would otherwise be distributable to the Class B Noteholders in respect of the Class B Percentage of the Investor Percentage of Principal Collections collected or received in respect of the related Collection Period will instead be distributed as principal payments to the Class A-4 Noteholders up to an amount equal to the sum of (i) the Class A-4 Allocation Percentage of the Investor Percentage of Loss Amounts incurred during the related Collection Period, (ii) any Class A-4 Note Principal Loss Amounts and (iii) accrued and unpaid interest on any Class A-4 Note Principal Loss Amounts, as set forth under 'Description of the Notes--Distributions on the Notes--Distributions of Interest'. Principal payments made during the Amortization Period in respect of the Class A-1 Notes, the Class A-2 Notes or Class A-3 Notes, as applicable, will consist primarily of the Investor Percentage of all Principal Collections during the related Collection Period. Principal payments made in respect of the Class A-4 Notes and the Class B Notes (once the Class A-1 Notes, Class A-2 Notes and Class A-3 Notes have been paid in full) will be based upon a calculation of the Class A Percentage and the Class B Percentage of the Investor Percentage of such Principal Collections. 55 <PAGE> THE ACCOUNTS The Distribution Account On or prior to the Closing Date, the Servicer will establish a trust account with and in the name of the Indenture Trustee for the benefit of the Noteholders and the Transferor, as holder of the Transferor Certificate, from which all payments with respect to the Notes will be made (the 'Distribution Account'). (Agreement, Section 3.01). Within one Business Day of receipt, the Servicer will deposit all Insured Residual Value Loss Amounts paid under the Residual Value Insurance Policy (if they relate to the Amortization Period) into the Distribution Account (Agreement, Section 3.02). On each Deposit Date, all Principal Collections and Interest Collections with respect to the related Collection Period and the Class A Net Swap Receipt will be remitted to the Distribution Account. Such deposits will be made from, among other sources, (i) monies on deposit in the SUBI Collection Account or the Reserve Fund and (ii) the Transferor in the case of exercise of its right to purchase the SUBI represented by the SUBI Certificate when the Note Balance is less than or equal to 10% of the Initial Note Balance. The SUBI Collection Account On or prior to the Closing Date, the Origination Trustee will establish a trust account with and in the name of the Indenture Trustee for the benefit of the Noteholders and the Transferor, as holder of the Transferor Certificate, into which collections on or in respect of the Contracts and the Leased Vehicles generally will be deposited (the 'SUBI Collection Account' and, together with the Distribution Account and the Reserve Fund, the 'Accounts'). (SUBI Trust Agreement, Section 12.01). Deposits into the SUBI Collection Account. Deposits into the SUBI Collection Account will include, but will not be limited to, the following payments made in respect of the SUBI Assets: (i) Monthly Payments; (ii) early payments of the Outstanding Principal Balance of a Contract, including an amount equal to the Residual Value of the related Leased Vehicle (each, a 'Prepayment'); (iii) Matured Leased Vehicle Proceeds, Repossessed Vehicle Proceeds and other Liquidation Proceeds, and Insurance Proceeds; (iv) Extension Fees; (v) Payments Ahead; (vi) Advances made by the Servicer; (vii) Reallocation Payments by World Omni (together with, under certain circumstances during the Amortization Period, Reallocation Deposit Amounts) in respect of certain Contracts as to which an uncured breach of certain representations and warranties or certain servicing covenants has occurred; (viii) Undistributed Transferor Excess Collections and (ix) with respect to the Revolving Period, Insured Residual Value Loss Amounts paid under the Residual Value Insurance Policy. (Servicing Agreement, Sections 2.02, 8.02, 9.02 and 9.04; SUBI Trust Agreement, Section 12.01). 'Insurance Proceeds' will include recoveries pursuant to the Contingent and Excess Liability Insurance Policies and the comprehensive, collision, public liability and property damage insurance policy required to be obtained and maintained by the lessee pursuant to each Contract (or payment by the Servicer under the Servicing Agreement of such amounts under the circumstances described in 'Additional Document Provisions--The Servicing Agreement--Insurance on Leased Vehicles'), and amounts paid by any insurer under any other insurance policy relating to the Contracts, the related lessees or the Leased Vehicles, but will not include Insured Residual Value Loss Amounts paid under the Residual Value Insurance Policy. (SUBI Trust Agreement, Section 10.01). Monthly Payments made by the lessees under the Contracts normally will be paid by mail and deposited into a lock box maintained by the Servicer, and then deposited in the SUBI Collection Account within two Business Days after receipt. Within two Business Days after receipt by the Servicer of all other payments on or in respect of the Contracts or the Leased Vehicles other than Security Deposits and Insured Residual Value Loss Amounts paid under the Residual Value Insurance Policy, including without limitation any Monthly Payments delivered directly to the Servicer or World Omni (in the event that World Omni is no longer the Servicer), Matured Leased Vehicle Proceeds, Repossessed Vehicle Proceeds and other Liquidation Proceeds, Insurance Proceeds, Extension Fees, Payments Ahead and Prepayments (regardless of whether made by lessees or other persons), such payments shall be remitted to the SUBI Collection Account. (Servicing Agreement, Sections 2.02 and 9.02). Notwithstanding the foregoing, the Servicer may remit all payments collected or received by it on or in respect of the Contracts and the Leased Vehicles to the SUBI Collection Account on a less frequent basis if (i) it 56 <PAGE> obtains a letter of credit, surety bond or insurance policy (collectively, the 'Servicer Letter of Credit') under which demands for payment may be made to secure timely remittance of monthly collections to the SUBI Collection Account and (ii) the Indenture Trustee is provided with confirmation (written or oral) from each Rating Agency to the effect that the use of such alternative remittance schedule will not result in the qualification, reduction or withdrawal of its then-current rating of any Class of Notes. (Servicing Agreement, Section 9.02). Net Deposits. So long as World Omni is the Servicer, the Servicer will be permitted to deposit in the Distribution Account only the net amount distributable to the Indenture Trustee, as pledgee of the SUBI, and the Transferor on the related Deposit Date. The Servicer, however, will account to the Indenture Trustee, the Origination Trustee, the Noteholders and the Transferor as if all of the deposits and distributions described herein were made individually. (Agreement, Section 3.05; Servicing Agreement, Section 9.02). This 'net deposit' provision will be for the administrative convenience of the parties involved and will not affect amounts required to be deposited into the Accounts. Withdrawals from the SUBI Collection Account. On each Deposit Date, all Principal Collections and Interest Collections on deposit in the SUBI Collection Account in respect of the related Collection Period (including that portion of Payments Ahead representing Monthly Payments due in such Collection Period) will be deposited into the Distribution Account. During the Revolving Period, however, Principal Collections will be retained in the SUBI Collection Account for reinvestment in Subsequent Contracts and Subsequent Leased Vehicles as described under 'Description of the Notes--Distributions on the Notes--Application and Distributions of Principal--Revolving Period'. (Agreement, Section 3.02; SUBI Trust Agreement, Section 12.01; Servicing Agreement, Sections 2.02, 8.02 and 9.02). In the event that on any date the Servicer supplies the Origination Trustee and the Indenture Trustee with an officer's certificate setting forth the basis for such withdrawal, the Indenture Trustee shall remit to the Servicer, without interest and prior to any other distribution from the SUBI Collection Account on such date, monies from the SUBI Collection Account representing (i) unreimbursed Matured Leased Vehicle Expenses, Repossessed Vehicle Expenses and other Liquidation Expenses; (ii) delinquent Monthly Payments with respect to which the Servicer has made an unreimbursed Advance; and (iii) an amount equal to any unreimbursed Advances that the Servicer has concluded are Nonrecoverable Advances. (Servicing Agreement, Section 9.02). For further information regarding Nonrecoverable Advances, see 'Additional Document Provisions--The Servicing Agreement--Advances'. Maintenance of the Accounts The Accounts will be maintained with the Indenture Trustee so long as either (i) the short-term unsecured debt obligations of the Indenture Trustee are rated at least P-1 by Moody's and A-1 by Standard & Poor's (and, if such obligations are rated by Fitch, at least F-1 by Fitch) (the 'Required Deposit Ratings') or (ii) the Indenture Trustee is a depository institution or trust company having a long-term unsecured debt rating from Moody's of at least Baa3 and corporate trust powers and the related Account is maintained in a segregated trust account in the corporate trust department of the Indenture Trustee. If the Indenture Trustee at any time does not qualify under either of these criteria, the Servicer shall, with the assistance of the Indenture Trustee, cause the related Account to be moved to a depository institution organized under the laws of the United States or any state thereof whose short-term unsecured debt obligations are rated at least equal to the Required Deposit Ratings or moved to a segregated trust account located in a corporate trust department of a depository institution or trust company as described above. (Agreement, Sections 3.01 and 3.04; SUBI Trust Agreement, Sections 12.01 and 12.03; Servicing Agreement, Section 9.02). Permitted Investments Upon receipt of directions from the Servicer, the Indenture Trustee shall invest funds on deposit in the Accounts in one or more Permitted Investments maturing (i) no later than the Business Day immediately preceding the Deposit Date immediately succeeding the date of such investment, in the case of amounts on deposit in the SUBI Collection Account or the Reserve Fund or (ii) on the Business Day immediately preceding the Distribution Date immediately succeeding the date of such investment in the case of amounts on deposit in the Distribution Account. Notwithstanding the foregoing, (a) investments on which the entity at which the related 57 <PAGE> Account is located is the obligor may mature on the related Deposit Date or Distribution Date, as the case may be, and (b) investments during the Revolving Period of Principal Collections on deposit in the SUBI Collection Account may mature on such dates as in the Servicer's discretion will maintain sufficient cash to acquire Subsequent Contracts and Subsequent Leased Vehicles on the related Transfer Dates. All income or other gain from the foregoing investments generally shall be retained in the related Account with such gain in respect of funds in the SUBI Collection Account and the Distribution Account generally being treated as Interest Collections received in respect of the related Collection Period. Any loss resulting from such investments shall be charged to the related Account. (SUBI Trust Agreement, Section 12.01; Agreement, Sections 3.01 and 3.04; Servicing Agreement, Section 9.02). 'Permitted Investments' will be specified in the SUBI Trust Agreement and will be limited to investments that meet the criteria of Moody's and Standard & Poor's (and, if such investments are rated by Fitch, of Fitch) from time to time as being consistent with its then-current rating of each Class of Notes. (Agreement, Section 1.01). EARLY AMORTIZATION EVENTS As described above, the Revolving Period will continue until the close of business on the last day of November 1999 and the Amortization Period will begin on December 1, 1999 and continue to the earlier of the payment in full of the Notes and the termination of the Trust, unless an Early Amortization Event occurs prior to any of such dates, thereby commencing the Amortization Period. An 'Early Amortization Event' will mean any of the following events: (i) failure by the Servicer (a) to make any payment or deposit required with respect to the SUBI, the SUBI or the Notes under the Agreement, the SUBI Trust Agreement or the Servicing Agreement, within five Business Days after the date the payment or deposit is required to be made, or (b) to deliver a Servicer's Certificate within ten Business Days after any Determination Date; (ii) failure by the Transferor or the Servicer duly to observe or perform in any material respect any other of its covenants or agreements in the Agreement (other than those described in clause (i) above), the SUBI Trust Agreement or the Servicing Agreement, which failure materially and adversely affects the rights of holders of the SUBI or Noteholders and which continues unremedied for 60 days after the giving of written notice of such failure (a) to the Transferor or the Servicer, as the case may be, by the Indenture Trustee or the Origination Trustee or (b) to the Transferor or the Servicer, as the case may be, and to the Indenture Trustee by holders of Notes evidencing not less than 25% of the Voting Interests of the Class A Notes and the Class B Notes, voting together as a single class; (iii) failure to cure the inaccuracy of certain representations, warranties and certificates of the Transferor or the Servicer in the Agreement, the SUBI Trust Agreement or the Servicing Agreement, which failure materially and adversely affects the rights of holders of the SUBI or Noteholders and which continues uncured for 60 days after notice is given as described in clause (ii) above; provided that an Early Amortization Event pursuant to this subparagraph (iii) will not be deemed to occur if a related Reallocation Payment is due in connection with such breach and has been paid by the Servicer in accordance with the Indenture, the Agreement, the backup security agreement (the 'Backup Security Agreement'), the SUBI Trust Agreement or the Servicing Agreement; (iv) the occurrence of certain Insolvency Events relating to the Transferor; (v) creation of any lien or encumbrance not otherwise permitted by the Indenture, the Agreement, the Backup Security Agreement, the SUBI Trust Agreement or the Servicing Agreement on the SUBI Assets, which lien or encumbrance is not released or bonded over within 60 days of its creation; (vi) the Transferor, the Trust or the Origination Trust becomes subject to registration as an 'investment company' for purposes of the Investment Company Act of 1940, as amended; (vii) if on the twenty-fifth day of any month (beginning December 1998) the amount of Principal Collections and Loss Amounts that otherwise would be available to be reimbursed to the Noteholders as of the last day of the immediately preceding month that have not been reinvested in Subsequent Contracts and Subsequent Leased Vehicles exceeds $1,000,000; 58 <PAGE> (viii) an Event of Servicing Termination or an Event of Default under the Indenture (an 'Indenture Event of Default') occurs; (ix) if on any Distribution Date the aggregate amount withdrawn from the Reserve Fund and deposited into the Distribution Account on or prior to such Distribution Date (without giving effect to any deposits into the Reserve Fund) exceeds $4,409,144.68 (i.e., 0.25% multiplied by the Aggregate Net Investment Value as of the Initial Cutoff Date); (x) any Leased Vehicle is no longer covered by the Residual Value Insurance Policy or one or more policies with substantially similar coverage and provisions issued by an insurer acceptable to each Rating Agency, or an alternative mechanism to support Residual Values of Leased Vehicles implemented in accordance with the procedures required for amendment of the Agreement (as described in 'Additional Document Provisions--Additional Agreement Provisions--Amendment'); (xi) the failure of the Class A Swap Counterparty to make a required payment within five calendar days of the date such payment was due; or (xii) the failure of the Trust or the Class A Swap Counterparty, within 30 calendar days of the date on which the counterparty ratings of the Class A Swap Counterparty fall below the required ratings of any of the Ratings Agencies as specified in the Agreement, to (i) obtain a replacement interest rate swap agreement with terms substantially the same as the Class A Interest Rate Swap or (ii) establish any other arrangement satisfactory to the applicable Rating Agency, in any case such that the Rating Agency will not reduce or withdraw its ratings of any Class of the Class A Notes. The Amortization Period will commence on the day as of which an Early Amortization Event is deemed to have occurred. (Agreement, Section 8.01). In such event, distributions of principal to the Noteholders will begin on the Distribution Date in the month following the month in which the Early Amortization Event occurs. If, because of the occurrence of an Early Amortization Event, the Amortization Period begins earlier than the Amortization Date, Class A-1 Noteholders will begin receiving distributions of principal earlier than they would otherwise have under the Agreement, and Class A-2, Class A-3 and Class A-4 Noteholders may begin receiving distributions of principal earlier than they would otherwise have under the Agreement, which may shorten the final maturity of the related Class of Class A Notes. STATEMENTS TO NOTEHOLDERS On each Distribution Date, the Indenture Trustee will include with each distribution to each Noteholder as of the close of business on the related Record Date (which, in the case of the Class A Notes, shall be Cede as the nominee of DTC unless Definitive Notes are issued under the limited circumstances described herein) a statement, setting forth with respect to such Distribution Date or the related Collection Period, among other things, the following: (i) the Investor Percentages for Interest Collections and Principal Collections for such Collection Period; (ii) the amount being distributed to Noteholders (the 'Note Distribution Amount'); (iii) the amount of the Note Distribution Amount allocable to interest and to principal on each Class of Notes; (iv) the amount of the Note Distribution Amount allocable to any Class A-1 Interest Carryover Shortfall, any Class A-2 Interest Carryover Shortfall, any Class A-3 Interest Carryover Shortfall, any Class A-4 Interest Carryover Shortfall and any Class B Interest Carryover Shortfall; (v) the amount, if any, of any unpaid Class A-1 Interest Carryover Shortfall, unpaid Class A-2 Interest Carryover Shortfall, unpaid Class A-3 Interest Carryover Shortfall, unpaid Class A-4 Interest Carryover Shortfall and unpaid Class B Interest Carryover Shortfall, after giving effect to distribution of the Note Distribution Amount; (vi) the Note Balance, the Class A-1 Note Balance, the Class A-2 Note Balance, the Class A-3 Note Balance, the Class A-4 Note Balance, the Class B Note Balance, the Class A-1 Note Factor, the Class A-2 59 <PAGE> Note Factor, the Class A-3 Note Factor, the Class A-4 Note Factor, the Class A-1 Allocation Percentage, the Class A-2 Allocation Percentage, the Class A-3 Allocation Percentage, the Class A-4 Allocation Percentage and the Class B Allocation Percentage as of such Distribution Date, in each case after giving effect to distribution of the Note Distribution Amount; (vii) the aggregate amount, if any, of the reimbursement of Covered Loss Amounts and Uncovered Loss Amounts included in distribution of the Note Distribution Amount and the amount thereof allocated to each Class of Noteholders; (viii) the amount of the Note Distribution Amount allocable to reimbursement of previous Class A-1 Note Principal Loss Amounts, Class A-2 Note Principal Loss Amounts, Class A-3 Note Principal Loss Amounts, Class A-4 Note Principal Loss Amounts and Class B Note Principal Loss Amounts, in each case together with the amount of accrued interest thereon included in such distribution; (ix) the amount, if any, of the aggregate unreimbursed Class A-1 Note Principal Loss Amounts, Class A-2 Note Principal Loss Amounts, Class A-3 Note Principal Loss Amounts, Class A-4 Note Principal Loss Amounts and Class B Note Principal Loss Amounts, after giving effect to distribution of the Note Distribution Amount; (x) the amount of any unreimbursed Class B Note Principal Carryover Shortfall; (xi) the Investor Percentage of the Servicing Fee; (xii) the amount of any Required Amount included in the Note Distribution Amount, the balance on deposit in the Reserve Fund on such Distribution Date, after giving effect to withdrawals therefrom and deposits thereto on such Distribution Date, the change in such balance from the immediately preceding Distribution Date, the Reserve Fund Cash Requirement and any Reserve Fund supplemental requirement; (xiii) the Transferor Amount, if any, included in the Note Distribution Amount; (xiv) the Aggregate Net Investment Value as of the end of such Collection Period; (xv) the aggregate amount of Payments Ahead on deposit in the SUBI Collection Account and the change in such amount from the immediately preceding Distribution Date; (xvi) the amounts of Advances made in respect of such Collection Period and the amount of unreimbursed Advances on such Distribution Date; (xvii) certain information used in determining compliance with the Charge-off Test Rate and the Delinquency Test; (xviii) the Insured Residual Value Loss Amount, if any, for such Distribution Date; and (xix) the Class A Net Swap Receipt or the Class A Net Swap Payment, for such Distribution Date. Each amount set forth pursuant to clauses (ii) through (v) and (vii) through (x) above will be expressed in the aggregate and as a dollar amount per $1,000 of original principal balance of a Class A Note or Class B Note, as applicable. Copies of such statements may be obtained by Noteholders or Note Owners by a request in writing addressed to the Indenture Trustee. In addition, within the prescribed period of time for tax reporting purposes after the end of each calendar year during the term of the Agreement, the Indenture Trustee will mail to each person who at any time during such calendar year shall have been a Class A or Class B Noteholder or a Note Owner, a statement containing the sum of the amounts described in clauses (ii) through (vi) and (viii) through (xi) above for the purpose of preparing such person's federal income tax return. (Agreement, Section 3.06). TERMINATION OF THE TRUST; REDEMPTION OF THE NOTES The respective obligations and responsibilities of the Transferor and the Indenture Trustee created by the Agreement will terminate upon the earliest to occur of (i) the disposition of the SUBI, or its expiration or termination by virtue of the maturity, sale or other liquidation, as the case may be, of the last outstanding Contract and Leased Vehicle evidenced by the SUBI, and the distribution of all proceeds thereof, together with all amounts on deposit in the Accounts and the Reserve Fund, in the manner prescribed in the Agreement, (ii) the 60 <PAGE> day following the Distribution Date on which the Notes have been paid in full and after which there is no unreimbursed Note Principal Loss Amount or Class B Note Principal Carryover Shortfall (together with accrued interest thereon) and (iii) the purchase of the corpus of the Trust and the resulting redemption of the Notes as described below. In order to avoid excessive administrative expenses, the Transferor will be permitted at its option to purchase all of the assets of the Trust on any Distribution Date if, either before or after giving effect to any payment of principal required to be made on such Distribution Date, the Note Balance is less than or equal to 10% of the Initial Note Balance. The purchase price will be equal to the greater of (i) the sum of the Class A Note Balance and the Class B Note Balance, in each case plus accrued and unpaid interest thereon at the related Note Rate, plus certain other accrued and unpaid amounts, if any, due to the Noteholders or the Servicer, and (ii) the Aggregate Net Investment Value as of the last day of the preceding Collection Period. If the Transferor purchases the assets of the Trust, the Indenture Trustee will furnish a redemption notice to each Noteholder not more than 30 days and not less than 15 days prior to the applicable Redemption Date. Failure to give notice of redemption, or any defect in the notice, to any Noteholder of any Note selected for redemption will not impair or affect the validity of the redemption of any Note. The Notes will, on the Redemption Date, become due and payable and no interest will accrue on the Notes for any period after such Redemption Date. (Agreement, Sections 7.01 and 7.02; Indenture, Section 2.06). The final distribution to any Noteholder will be made only upon surrender and cancellation of such Noteholder's Note at an office or agency of the Indenture Trustee specified in the notice of termination. Any funds remaining that are payable in such final distribution to a Noteholder, after the Indenture Trustee has taken certain measures to locate such Noteholder and such measures have failed, will be distributed to the Transferor. (Indenture, Section 2.06). BOOK-ENTRY REGISTRATION Note Owners may hold through DTC (in the United States), or Cedel or Euroclear (in Europe), which in turn hold through DTC, if they are participants in such systems, or indirectly through organizations that are participants in such systems ('Participants'). Cede, as nominee for DTC, will hold the Class A Notes. Cedel and Euroclear will hold omnibus positions on behalf of their Participants through customers' securities accounts in the Depositaries which in turn will hold such positions in customers' securities accounts in the Depositaries' names on the books of DTC. Unless and until Definitive Notes are issued, it is anticipated that the only Class A Noteholder will be Cede, as the nominee of DTC. Note Owners will only be permitted to exercise their rights indirectly through DTC. Transfers between Participants in DTC ('DTC Participants') will occur in accordance with DTC rules. Transfers between Participants in Cedel ('Cedel Participants') and Participants in Euroclear ('Euroclear Participants') will occur in accordance with their respective rules and operating procedures. Cross-market transfers between persons holding directly or indirectly through DTC, on the one hand, and directly or indirectly through Cedel Participants or Euroclear Participants, on the other, will be effected in DTC in accordance with DTC rules on behalf of Cedel or Euroclear by its Depositary. However, each such cross-market transaction will require delivery of instructions to Cedel or Euroclear by the counterparty in such system in accordance with its rules and procedures and within its established deadlines (European time). Cedel or Euroclear will, if the transaction meets its settlement requirements, deliver instructions to its Depositary to take action to effect final settlement on its behalf by delivering or receiving securities in DTC, and making or receiving payment in accordance with normal procedures for same-day funds settlement applicable to DTC. Cedel Participants and Euroclear Participants may not deliver instructions directly to the related Depositaries. Because of time-zone differences, credits of securities received in Cedel or Euroclear as a result of a transaction with a DTC Participant will be made during subsequent securities settlement processing and dated the business day following the DTC settlement date. Such credits or any transactions in such securities settled during such processing will be reported to the relevant Cedel Participants or Euroclear Participants on such business day. Cash received in Cedel or Euroclear as a result of sales of Class A Notes by or through a Cedel Participant or Euroclear Participant to a DTC Participant will be received with value on the DTC settlement date but will be available in the relevant Cedel or Euroclear cash account only as of the business day following settlement in DTC. 61 <PAGE> DTC is a limited-purpose trust company organized under the New York Banking Law, a 'banking organization' within the meaning of the New York Banking Law, a member of the Federal Reserve System, a 'clearing corporation' within the meaning of the UCC in effect in the State of New York and a 'clearing agency' registered pursuant to the provisions of Section 17A of the Exchange Act. DTC holds securities that DTC Participants deposit with DTC. DTC also facilitates the clearance and settlement of securities transactions among DTC Participants through electronic computerized book-entry changes in accounts of DTC Participants, thereby eliminating the need for physical movement of securities certificates. DTC Participants include securities brokers and dealers (including the Underwriters), banks, trust companies, clearing corporations and certain other organizations. Indirect access to the DTC system also is available to banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a DTC Participant, either directly or indirectly (the 'Indirect DTC Participants'). The rules applicable to DTC and DTC Participants are on file with the Commission. Note Owners that are not DTC Participants or Indirect DTC Participants but that desire to purchase, sell or otherwise transfer ownership of, or an interest in, Class A Notes under the DTC System may do so only through DTC Participants or Indirect DTC Participants. DTC Participants will receive a credit for the Class A Notes in DTC's records. The ownership interest of each Note Owner in turn will be recorded on the DTC Participants' and Indirect DTC Participants' respective records. Note Owners will not receive written confirmation from DTC of their purchase, but Note Owners are expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the DTC Participant or Indirect DTC Participant through which the Note Owner entered into the transaction. Transfers of ownership interests in the Class A Notes will be accomplished by entries made on the books of DTC Participants acting on behalf of Note Owners. To facilitate subsequent transfers, all Class A Notes deposited by DTC Participants with DTC will be registered in the name of Cede, as nominee of DTC. The deposit of Class A Notes with DTC and their registration in the name of Cede will effect no change in beneficial ownership. DTC will have no knowledge of the actual Note Owners and its records will reflect only the identity of the DTC Participants to whose accounts such Class A Notes are credited, which may or may not be the Note Owners. DTC Participants and Indirect DTC Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to DTC Participants, by DTC Participants to Indirect DTC Participants and by DTC Participants and Indirect DTC Participants to Note Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Principal and interest payments with respect to the Class A Notes will be made to DTC. DTC's practice is to credit DTC Participants' accounts on each Distribution Date in accordance with their respective holdings shown on DTC's records unless DTC has reason to believe that it will not receive payment on such Distribution Date. Payments by DTC Participants and Indirect DTC Participants to Note Owners will be governed by standing instructions and customary practices, as in the case with securities held for the accounts of customers in bearer form or registered in 'street name', and will be the responsibility of such DTC Participant and Indirect DTC Participant and not of DTC, the Indenture Trustee, the Owner Trustee, the Origination Trustee, the Servicer or the Transferor, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal of and interest on the Class A Notes to DTC will be the responsibility of the Indenture Trustee, disbursement of such payments to DTC Participants will be the responsibility of DTC and disbursement of such payments to Note Owners will be the responsibility of DTC Participants and Indirect DTC Participants. As a result, under the book-entry format, Note Owners may experience some delay in their receipt of payments. Because DTC can only act on behalf of DTC Participants, who in turn act on behalf of Indirect DTC Participants and certain banks, the ability of a Note Owner to pledge Class A Notes to persons or entities that do not participate in the DTC system, or otherwise take actions with respect to such Class A Notes, may be limited due to the lack of a physical Note for such Class A Notes. Neither DTC nor Cede will consent or vote with respect to the Class A Notes. Under its usual procedures, DTC mails an 'Omnibus Proxy' to the Indenture Trustee as soon as possible after any applicable record date for such a consent or vote. The Omnibus Proxy assigns Cede's consenting or voting rights to those DTC Participants 62 <PAGE> to whose accounts the Class A Notes are credited on that record date (identified in a listing attached to the Omnibus Proxy). None of the Transferor, the Servicer, the Origination Trustee, the Owner Trustee nor the Indenture Trustee will have any liability for any aspect of the records relating to or payments made on account of beneficial ownership interests of the Class A Notes held by Cede, as nominee of DTC, or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. Cedel is incorporated under the laws of Luxembourg as a professional depository. Cedel holds securities for Cedel Participants and facilitates the clearance and settlement of securities transactions between Cedel Participants through electronic book-entry changes in accounts of Cedel Participants, thereby eliminating the need for physical movement of certificates. Transactions may be settled in Cedel in any of 34 currencies, including United States dollars. Cedel provides to Cedel Participants, among other things, services for safekeeping, administration, clearance and settlement of internationally traded securities and securities lending and borrowing. Cedel interfaces with domestic markets in several countries. As a professional depositary, Cedel is subject to regulation by the Luxembourg Monetary Institute. Cedel Participants are recognized financial institutions around the world, including underwriters, securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. Indirect access to Cedel is also available to others, such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Cedel Participant, either directly or indirectly. Euroclear was created in 1968 to hold securities for Euroclear Participants and to clear and settle transactions between Euroclear Participants through simultaneous electronic book-entry delivery against payment, thereby eliminating the need for physical movement of certificates and any risk from lack of simultaneous transfers of securities and cash. Transactions may now be settled in any of 34 currencies, including United States dollars. The Euroclear System includes various other services, including securities lending and borrowing, and interfaces with domestic markets in more than 25 countries generally similar to the arrangements for cross-market transfers with DTC described above. Euroclear is operated by the Brussels, Belgium office of Morgan Guaranty Trust Company of New York (the 'Euroclear Operator'), under contract with Euroclear Clearance System S.C., a Belgian cooperative corporation (the 'Cooperative'). All operations are conducted by the Euroclear Operator, and all Euroclear securities clearance accounts and Euroclear cash accounts are accounts with the Euroclear Operator, not the Cooperative. The Cooperative Board establishes policy for the Euroclear System. Euroclear Participants include banks (including central banks), securities brokers and dealers and other professional financial intermediaries. Indirect access to the Euroclear System is also available to other firms that clear through or maintain a custodial relationship with a Euroclear Participant, either directly or indirectly. The Euroclear Operator is the Belgian branch of a New York banking corporation which is a member bank of the Federal Reserve System. As such, it is regulated and examined by the Board of Governors of the Federal Reserve System and the New York State Banking Department, as well as the Belgian Banking Commission. Securities clearance accounts and cash accounts with the Euroclear Operator are governed by the Terms and Conditions Governing Use of Euroclear and the related Operating Procedures of the Euroclear System and applicable Belgian law (collectively, the 'Terms and Conditions'). The Terms and Conditions govern transfers of securities and cash within Euroclear, withdrawals of securities and cash from Euroclear and receipts of payments with respect to securities in Euroclear. All securities in Euroclear are held on a fungible basis without attribution of specific certificates to specific securities clearance accounts. The Euroclear Operator acts under the Terms and Conditions only on behalf of Euroclear Participants, and has no record of or relationship with persons holding through Euroclear Participants. Distributions with respect to Class A Notes held through Cedel or Euroclear will be credited to the cash accounts of Cedel Participants or Euroclear Participants in accordance with the relevant system's rules and procedures, to the extent received by its Depositary. Such distributions will be subject to tax reporting and withholding in accordance with relevant United States tax laws and regulations. For further information in this regard, see 'Material Income Tax Considerations--Federal Taxation--Federal Income Tax Consequences to Foreign Investors' herein and 'Global Clearance, Settlement and Tax Documentation Procedures--Certain U.S. Federal Income Tax Documentation Requirements' in Annex I hereto. Cedel or the Euroclear Operator, as the case may be, will take any other action permitted to be taken by a Class A Noteholder on behalf of a Cedel 63 <PAGE> Participant or Euroclear Participant only in accordance with its relevant rules and procedures and subject to the related Depositary's ability to effect such actions on its behalf through DTC. Although DTC, Cedel and Euroclear have agreed to the foregoing procedures in order to facilitate transfers of Class A Notes among Participants of DTC, Cedel and Euroclear, they are under no obligation to perform or continue to perform such procedures and such procedures may be discontinued at any time. DEFINITIVE NOTES Definitive Notes will be issued to Note Owners rather than to DTC only if (i) DTC is no longer willing or able to discharge its responsibilities with respect to the Class A Notes, and neither the Indenture Trustee nor the Transferor is able to locate a qualified successor, (ii) the Transferor, at its option, elects to terminate the book-entry system through DTC or (iii) after an Indenture Event of Default, Note Owners representing in the aggregate more than 50% of the Voting Interests of the Class A Notes (voting together as a single class) advise the Indenture Trustee through DTC or its successor in writing that the continuation of a book-entry system through DTC or its successor is no longer in the best interest of Note Owners. Upon the occurrence of any of the events described in the immediately preceding paragraph, the Indenture Trustee will be required to notify all Note Owners, through Participants, of the availability through DTC of Definitive Notes. Upon surrender by DTC of the certificates representing the related Class A Notes and the receipt of instructions for re-registration, the Indenture Trustee will issue Definitive Notes to Note Owners, who thereupon will become Noteholders for all purposes of the Agreement. (Indenture, Section 2.12). Payments on the related Class A Notes will thereafter be made by the Indenture Trustee directly to holders of such Class A Notes in accordance with the procedures set forth herein and to be set forth in the Indenture. Interest payments and any principal payments on the Definitive Notes on each Distribution Date will be made to holders in whose names the Definitive Notes were registered at the close of business on the Record Date with respect to such Distribution Date. Payments will be made by check mailed to the address of such holders as they appear on the Note Register or, under the circumstances to be provided by the Agreement, by wire transfer to a bank or depository institution located in the United States and having appropriate facilities therefor. (Indenture, Section 2.06). The final payment on any Class A Notes (whether Definitive Notes or global certificates registered in the name of Cede representing the Class A Notes), however, will be made only upon presentation and surrender of such Definitive Notes or global certificates at the office or agency specified in the notice of final distribution to Class A Noteholders. (Indenture, Section 2.06). Definitive Notes will be transferable and exchangeable at the offices of the Indenture Trustee or the Note Registrar to be set forth in the Agreement. No service charge will be imposed for any registration of transfer or exchange, but the Indenture Trustee may require payment of a sum sufficient to cover any tax or other governmental charge imposed in connection therewith. (Indenture, Section 2.04). THE INDENTURE TRUSTEE The Bank of New York will be the Indenture Trustee under the Indenture. The Corporate Trust Office of the Indenture Trustee is located at 101 Barclay Street, Floor 12 East, New York, New York 10286. The Bank of New York is not affiliated with World Omni, although it does act as a service provider to World Omni. The Indenture Trustee may resign at any time, in which event the Trust will be obligated to appoint a successor Indenture Trustee. Noteholders representing in the aggregate more than 50% of the Voting Interests of the outstanding Notes (voting together as a single class) may remove the Indenture Trustee by delivering notice thereof to the Indenture Trustee and the Trust. The Trust may also remove the Indenture Trustee if the Indenture Trustee ceases to be eligible to continue as such under the Indenture, becomes legally unable to act or becomes insolvent. In such circumstances, the Trust will be obligated to appoint a successor Indenture Trustee. Any resignation or removal of the Indenture Trustee and appointment of a successor Indenture Trustee will not become effective until acceptance of the appointment by such successor Indenture Trustee. (Indenture, Section 6.10). The Indenture Trustee must be a corporation organized under the laws of a state of the United States, the District of Columbia or the Commonwealth of Puerto Rico, authorized to exercise corporate trust powers under 64 <PAGE> those laws, and subject to supervision or examination by or state laws, with a combined capital and surplus of at least $50,000,000 and a long-term deposit rating no lower than Baa3 by Moody's, or must be otherwise acceptable to each Rating Agency. As co-trustee or separate trustee need not meet these eligibility requirements. (Indenture, Sections 6.08 and 6.14 ). Noteholders representing in the aggregate more than 50% of the Voting Interests of the outstanding Notes (voting together as a single class) generally will have the power to direct any proceeding for any remedy available to the Indenture Trustee under the Agreement, and the exercise of any trust or power conferred on the Indenture Trustee by the Agreement (including actions by the Indenture Trustee in its capacity as a party to, or a third-party beneficiary of, the SUBI Trust Agreement or the Servicing Agreement). However, the Indenture Trustee will not be required to follow such a direction if, after being advised by counsel, it concludes that the action is unlawful, or if it in good faith determines that the proceedings directed would be illegal, would subject it to personal liability or would be unduly prejudicial to the rights of other Noteholders. (Indenture, Section 5.14). A Noteholder may institute proceedings under the Indenture, but only if such holder previously has given to the Indenture Trustee written notice of default and unless the Noteholders representing in the aggregate not less than 25% of the Voting Interests of the outstanding Notes (voting together as a single class) have made written request upon the Indenture Trustee to institute such proceeding in its own name as Indenture Trustee and have offered to the Indenture Trustee reasonable indemnity and the Trustee for 60 days has neglected or refused to institute any such proceeding. (Indenture, Section 5.09). The Indenture Trustee will be under no obligation to exercise any of the rights or powers vested in it by the Agreement or to make any investigation of matters arising thereunder or to institute, conduct or defend any litigation thereunder or in relation thereto at the request, order or direction of any of the Noteholders, unless such holders have offered to the Indenture Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby. (Indenture, Section 6.03). Noteholders will have no express right to institute a proceeding directly under the SUBI Trust Agreement or the Servicing Agreement. List of Noteholders Upon a written request of the Servicer, the Indenture Trustee, as Note Registrar, will provide to the Servicer within 15 days after receipt of such request a list of the names and addresses of all Noteholders. In addition, three or more Noteholders or Noteholders representing in the aggregate not less than 25% of the Voting Interests of any Class of outstanding Notes, upon compliance by such Noteholders with certain provisions of the Agreement, may request that the Indenture Trustee, as Note Registrar, afford such Noteholders access during business hours to the current list of Noteholders for purposes of communicating with other Noteholders with respect to their rights under the Indenture. (Indenture, Section 7.02). For further information regarding communications with Noteholders, see 'Description of the Notes--Book-Entry Registration' and '--Definitive Notes'. The Indenture will not provide for the holding of any annual or other meetings of Noteholders. 65 <PAGE> SECURITY FOR THE NOTES GENERAL The Notes will be secured by all of the property of the Trust, which will primarily consist of the SUBI as evidenced by the SUBI Certificate, as more fully described under 'The Trust and the SUBI--The SUBI'. The property of the Trust will also include such amounts as from time to time are held in the Reserve Fund and the Distribution Account. As described under 'Certain Legal Aspects of the Origination Trust and the SUBI--The SUBI' and 'Certain Legal Aspects of the Contracts and the Leased Vehicles--Back-up Security Interests', the Indenture Trustee also will have a security interest in the Contracts and Contract Rights susceptible of perfection by the filing of a financing statement under the Uniform Commercial Code (the 'UCC'). The Indenture Trustee will also have a security interest in the SUBI Collection Account, the Distribution Account and the Reserve Fund, the Contingent and Excess Liability Insurance Policies and the Residual Value Insurance Policy described below and will be a third-party beneficiary of the SUBI Trust Agreement and the Servicing Agreement. In no event will the Owner Trustee or the Indenture Trustee be deemed to have a perfected security interest in the Leased Vehicles. THE RESERVE FUND On or prior to the Closing Date, the Owner Trustee will establish a trust account with and in the name of the Indenture Trustee for the benefit of the Noteholders and the Transferor, as holder of the Transferor Certificate (the 'Reserve Fund'). The monies on deposit in the Reserve Fund will, as described below, be applied on each Distribution Date to pay certain shortfalls in respect of amounts collected with respect to the related Collection Period to be paid from the Distribution Account and certain other shortfalls in respect of the Residual Values of the Leased Vehicles, should, among other things, Transferor Amounts and Insured Residual Value Loss Amounts paid under the Residual Value Insurance Policy with respect to such Collection Period not be sufficient to cover such shortfalls. In addition, to the extent not otherwise required to make any of the payments described under 'Description of the Notes--Distributions on the Notes--Distributions of Interest', monies on deposit in the Reserve Fund will be available to make payments to the Noteholders should Collections ultimately be insufficient to reduce the Class A-1 Note Balance, the Class A-2 Note Balance, the Class A-3 Note Balance, the Class A-4 Note Balance or the Class B Note Balance to zero. (Agreement, Sections 3.03 and 3.04). The Reserve Fund Cash Requirement. The Reserve Fund will be created on or prior to the Closing Date with the deposit by the Transferor of the Initial Deposit. On each Distribution Date, the funds in the Reserve Fund will be supplemented by (i) certain Interest Collections, (ii) all income realized on the investment of amounts on deposit in the Reserve Fund in Permitted Investments, net of losses resulting from such investments, and (iii) the deposit of monies in respect of the related Collection Period remaining in the Distribution Account after making all payments required to be made therefrom on such Distribution Date prior to such deposit, including monies that otherwise would be distributed to the Transferor as Transferor Amounts, until the amount on deposit therein equals the Reserve Fund Cash Requirement then in effect. Except as otherwise described below, the 'Reserve Fund Cash Requirement' with respect to any Distribution Date will equal the lesser of (i) $17,636,578.71 (i.e., 1.0% of the Aggregate Net Investment Value as of the Initial Cutoff Date) and (ii) the Note Balance as of the related Distribution Date (after giving effect to reductions in the Note Balance on such Distribution Date). So long as all of the Reserve Fund Tests (as described under 'Security for the Notes--The Reserve Fund--Reserve Fund Tests') are satisfied and there is no RV Insurer Trigger Event or Downgrade Trigger Event, the Reserve Fund Cash Requirement is expected to be $17,636,578.71 for each Date relating to the Revolving Period. (Agreement, Sections 3.03 and 3.04). Other Reserve Fund Requirements. On each Deposit Date on which withdrawals are to be made from the Reserve Fund in order (a) to deposit into the Distribution Account an amount equal to the Required Amount, or (b) to make any other payments to Noteholders or otherwise from the Reserve Fund, as described under 'Description of the Notes--Distributions on the Notes--Distributions of Interest', to the extent that the amount on deposit in the Reserve Fund is insufficient to make such deposits or payments (a 'Reserve Fund Deficiency'), the Transferor shall be required to deposit into the Reserve Fund an additional cash amount which is limited to the lesser of (i) such Reserve Fund Deficiency, and (ii) $8,818,289.36 (i.e., 0.5% of the Aggregate 66 <PAGE> Net Investment Value as of the Initial Cutoff Date), less all amounts previously deposited by or on behalf of the Transferor into the Reserve Fund to satisfy a Reserve Fund Deficiency (the 'Reserve Fund Supplemental Requirement'). In the event (i) a conservator, receiver or bankruptcy trustee is appointed by the RV Insurer, or if certain other events relating to the bankruptcy or insolvency of the RV Insurer occur, or (ii) the Residual Value Insurance Policy has been declared void or unenforceable by a court of competent jurisdiction in a final judgment as to which the time for noting an appeal has expired and all appeals have been decided, if one or more policies with substantially similar aggregate coverage and provisions have not been issued by an insurer acceptable to each Rating Agency nor has an alternative mechanism been implemented to support the Residual Values of the Leased Vehicles in accordance with the procedures required for amendment of the Agreement (as described in 'Additional Document Provisions--Additional Agreement Provisions--Amendment') (each such event, an 'RV Insurer Trigger Event'), then, within 60 days of notice thereof, the Transferor shall be required to deposit into the Reserve Fund an additional cash amount equal to the difference between (x) the greater of the Initial Deposit and the amount then on deposit in the Reserve Fund, and (y) $61,728,025.49 (i.e., 3.5% of the Aggregate Net Investment Value as of the Initial Cutoff Date) (the 'RV Insurer Reserve Fund Supplemental Requirement'). From such time until one or more policies are issued with substantially similar aggregate coverage and provisions issued by an insurer acceptable to each Rating Agency, or an alternative mechanism is implemented to support the Residual Values of the Leased Vehicles as described above, the Reserve Fund Cash Requirement shall be $61,728,025.49 (i.e., 3.5% of the Aggregate Net Investment Value as of the Initial Cutoff Date). In the event that the RV Insurer's claims paying ability is downgraded to 'Aa3' or lower by Moody's, or below 'AAA' by Standard & Poor's (or, if such ability is rated by Fitch, below 'AAA' by Fitch) (a 'Downgrade Trigger Event'), then within 60 days thereof, the Transferor shall either (i) cause one or more policies to be issued with substantially similar aggregate coverage and provisions by an insurer acceptable to each Rating Agency, or cause an alternative mechanism to be implemented to support the Residual Values of the Leased Vehicles in accordance with the procedures required for amendment of the Agreement (as described in 'Additional Document Provisions--Additional Agreement Provisions--Amendment'), or (ii) deposit into the Reserve Fund any amount that the Rating Agencies may require in order to maintain their then-current ratings on each Class of Notes (the 'Downgrade Reserve Fund Supplemental Requirement'). For so long as the Transferor elects to comply with the requirements of clause (ii) rather than clause (i), the Reserve Fund Cash Requirement shall be such amount as the Rating Agencies may require in order to maintain their then-current ratings on each Class of Notes and the Rating Agencies may impose additional conditions to the maintenance of their then-current ratings on each Class of Notes, including the addition of further triggers for the application of the Alternate Reserve Fund Formula described below (which tests generally would be expected to relate to the Residual Values of the Leased Vehicles). If the Transferor cannot comply with either clause (i) or clause (ii), or determines in good faith that such compliance would not be commercially reasonable, then all Excess Collections in respect of any Distribution Date, after giving effect to all payments required to be made therefrom on such Distribution Date, will be deposited into the Reserve Fund, rather than being paid to the Transferor, regardless of the Reserve Fund Cash Requirement, and the then-current ratings on each Class of Notes may be downgraded. On the Distribution Date following the date on which the Transferor complies with clause (i) or clause (ii), monies on deposit in the Reserve Fund in excess of the Reserve Fund Cash Requirement shall be distributed to the Transferor (or to the Noteholders to the extent allocable to the Accelerated Principal Distribution Amount). (Agreement, Sections 1.01 and 3.04). Payment of the Reserve Fund Supplemental Requirement, the RV Insurer Reserve Fund Supplemental Requirement and the Downgrade Reserve Fund Supplemental Requirement will be obligations of the Transferor with respect to the Reserve Fund. In the event that there is a Reserve Fund Deficiency, an RV Insurer Trigger Event or a Downgrade Trigger Event, the Reserve Fund Supplemental Requirement, the RV Insurer Reserve Fund Supplemental Requirement or the Downgrade Reserve Fund Supplemental Requirement, as the case may be, will supplement the cash available in the Reserve Fund to the limited extent described above. There can be no assurance that the Transferor will have sufficient cash to fund all or a part of any Reserve Fund Deficiency or to meet its obligation to pay any Reserve Fund Supplemental Requirement, RV Insurer Reserve Fund Supplemental Requirement or Downgrade Reserve Fund Supplemental Requirement. However, pursuant to the Support 67 <PAGE> Agreement, World Omni has agreed under certain circumstances to provide or arrange for financial assistance in order to ensure that the Transferor maintains positive partners' capital. The Support Agreement will not constitute a guarantee by World Omni of any obligations of the Transferor, including payment of any Reserve Fund Supplemental Requirement, RV Insurer Reserve Fund Supplemental Requirement or Downgrade Reserve Fund Supplemental Requirement. See 'The Transferor' for further information in this regard. Reserve Fund Tests. Notwithstanding the foregoing calculations of the Reserve Fund Cash Requirement and the supplemental requirements discussed above, in the event that the Charge-off Rate Test or the Delinquency Test (collectively, the 'Reserve Fund Tests') is not satisfied as of any Determination Date and no RV Insurer Trigger Event or Downgrade Trigger Event has occurred and is continuing, the Reserve Fund Cash Requirement for the related Distribution Date will be an amount calculated pursuant to a formula (the 'Alternate Reserve Fund Formula') that will be equal to the lesser of (i) two times the Reserve Fund Cash Requirement and (ii) the Note Balance as of such Distribution Date (after giving effect to any reduction in the Note Balance on such Distribution Date). The Alternate Reserve Fund Formula will be utilized to determine the Reserve Fund Cash Requirement on all future Distribution Dates until the Distribution Date as of which the related Reserve Fund Test is satisfied and all other Reserve Fund Tests are satisfied. Notwithstanding the foregoing, as described under 'Additional Document Provisions--The Servicing Agreement--Compliance with ERISA', in the event that the ERISA Compliance Test is not satisfied on any Determination Date, all Excess Collections (as described under 'Description of the Notes--Distributions on the Notes--Distribution of Interest') in respect of each Distribution Date thereafter will be deposited in the Reserve Fund until the Distribution Date following the Determination Date on which the ERISA Compliance Test has been satisfied. (Agreement, Section 1.01). The 'Charge-off Rate Test' will not be satisfied if, with respect to any Determination Date the average of the Charge-off Rates for the three immediately preceding calendar months (or the month of November 1998 in the case of the December 1998 Determination Date, or the months of November and December 1998 in the case of the January 1999 Determination Date) is greater than 2.75%. The 'Delinquency Test' will not be satisfied if, with respect to any Determination Date the average of the Delinquency Rates for the three immediately preceding calendar months (or the month of November 1998 in the case of the December 1998 Determination Date, or the months of November and December 1998 in the case of the January 1999 Determination Date) is greater than 1.75%. The 'Charge-off Rate' with respect to any calendar month will be the Discounted Principal Balance of all Contracts that became Charged-off Contracts during such month, less all Net Repossessed Vehicle Proceeds and other Net Liquidation Proceeds collected during such month with respect to Charged-off Contracts, all divided by the average of the Aggregate Net Investment Value as of the last day of such month and the preceding month. Such result will then be multiplied by twelve to produce an annualized rate. The 'Delinquency Rate' for any calendar month will be the number of Current Contracts that are 61 days or more delinquent, whether or not the related Leased Vehicles have been repossessed (or repossession proceedings in respect thereof have been initiated), but which have not yet been sold or otherwise disposed of, divided by the aggregate number of Current Contracts, in each case as of the last day of such month. (Agreement, Section 1.01). 'Current Contracts' will be all Contracts other than Charged-off, Liquidated, Matured and Additional Loss Contracts. A 'Liquidated Contract' will be a Contract that has been the subject of a Prepayment in full or otherwise has been paid in full. An 'Additional Loss Contract' will be a Contract that has been sold or otherwise disposed of by the Servicer, acting on behalf of the Origination Trust, to pay an Additional Loss Amount. (Agreement, Section 1.01). The Transferor may, from time to time after the date of this Prospectus, request each Rating Agency to approve (a) a formula for determining the Reserve Fund Cash Requirement, the Reserve Fund Supplemental Requirement, the RV Insurer Reserve Fund Supplemental Requirement and/or the Downgrade Reserve Fund Supplemental Requirement that is different from the one described above (including using different Reserve Fund Tests or different cures for failures thereof) that would result in a decrease in the amount of the Reserve Fund Cash Requirement, the Reserve Fund Supplemental Requirement, the RV Insurer Reserve Fund Supplemental Requirement and/or the Downgrade Reserve Fund Supplemental Requirement or (b) a change in the manner by which the Reserve Fund is funded, which change could include borrowings by the Transferor to fund all or a portion of the Initial Deposit (which borrowings would be payable from assets or cash flow otherwise payable to the Transferor) or to meet the Reserve Fund Cash Requirement, the Reserve Fund Supplemental Requirement, the RV Insurer Reserve Fund Supplemental Requirement and/or the Downgrade 68 <PAGE> Reserve Fund Supplemental Requirement. If each Rating Agency confirms (in writing or orally) to the Indenture Trustee to the effect that the use of any such new formula or change will not result in a qualification, reduction or withdrawal of its then-current rating of any Class of Notes, and the Transferor's counsel delivers an opinion as and to the extent required, as described under 'Additional Document Provisions--Additional Agreement Provisions--Amendment', then such new formula or change will be implemented and, to the extent necessary, the Agreement will be amended, without the consent of any Noteholder or Note Owner. (Agreement, Section 9.01). Withdrawals from the Reserve Fund. On each Deposit Date the Indenture Trustee shall withdraw from the Reserve Fund, to the extent available, and deposit in the Distribution Account an amount equal to the Required Amount. Amounts on deposit in the Reserve Fund will also be available to make certain other payments to Noteholders and the Transferor as described under 'Security for the Notes--The Reserve Fund'. Monies on deposit in the Reserve Fund on a Distribution Date in excess of the Reserve Fund Cash Requirement will be released to the Transferor. Any such amounts received by the Transferor shall be free of any claim of the Trust, the Indenture Trustee or the Noteholders and shall not be available to the Indenture Trustee or the Trust for the purpose of making deposits to the Reserve Fund or making payments to the Noteholders, nor shall the Transferor be required to refund any amount properly received by it. (Agreement, Sections 3.03 and 3.04). THE RESIDUAL VALUE INSURANCE POLICY On or prior to the Closing Date the RV Insurer will issue the Residual Value Insurance Policy to the Transferor (with the Origination Trustee, the Indenture Trustee, the Owner Trustee and ALF L.P. also named as insureds), which will provide coverage for the Insured Residual Value Loss Amount for any Collection Period, and will cover only the Leased Vehicles and not any UTI Asset or Other SUBI Asset. Insured Residual Value Loss Amounts payable under the Residual Value Insurance Policy will only arise in connection with the disposition of Leased Vehicles relating to Matured Contracts and in connection with losses on Contracts terminated on or prior to their Maturity Dates by agreement between the Servicer and the lessee in connection with the payment of less than their respective Outstanding Principal Balances pursuant to World Omni's pro-active termination program, as described under 'Maturity, Prepayment and Yield Considerations'. The Residual Value Insurance Policy may not be cancelled by the RV Insurer. The Residual Value Insurance Policy will not have any deductibles or provide for co-insurance, but the aggregate maximum amount payable under the Residual Value Insurance Policy with respect to any Leased Vehicle will be the lesser of $60,000 and its insured residual value. Additionally, the aggregate maximum amount payable under the Residual Value Insurance Policy will not exceed the aggregate insured residual values of all Leased Vehicles. For these purposes, the residual value of a Leased Vehicle generally will be determined by reference to World Omni's residual value lease policies communicated to its Dealers, as amended or supplemented from time to time (which amount generally will be equal to its Residual Value), as adjusted for extensions of the related Contract. On the tenth day of each calendar month or if such day is not a Business Day, the next succeeding Business Day, the Servicer will determine whether, on the upcoming Distribution Date, there will be any Insured Residual Value Loss Amount for the related Collection Period. If so, the Servicer will make a claim for the Insured Residual Value Loss Amount under the Residual Value Insurance Policy. Pursuant to the Residual Value Insurance Policy, so long as all conditions precedent to liability set forth therein are satisfied and no exclusions apply, the RV Insurer will pay any such claim within five days. Within one Business Day after receipt, the Servicer will deposit the proceeds of any such claim into the SUBI Collection Account, if the payment relates to the Revolving Period, so that the proceeds will be available for reinvestment in Subsequent Contracts and Subsequent Leased Vehicles, and into the Distribution Account, if the payment relates to the Amortization Period, so that the proceeds will be available to make the payments described under 'Description of the Notes--Distributions on the Notes--Distributions of Interest' by the relevant Distribution Date. Federal is incorporated under the laws of the State of Indiana and is one of the Chubb Group of Insurance Companies. Federal is a wholly owned subsidiary of The Chubb Corporation, a publicly owned holding company incorporated under the laws of the State of New Jersey. The Residual Value Insurance Policy is an obligation of Federal and not of The Chubb Corporation or any other affiliate of Federal. Federal is located at Federal Insurance Company, 15 Mountain View Road, Warren, New Jersey 07059 and the telephone number is (908) 903-2000. 69 <PAGE> At December 31, 1997, Federal had total assets of approximately $10.8 billion, total liabilities of approximately $8.3 billion and surplus to policyholders of approximately $2.5 billion, in each case as reported on a statutory accounting basis in conformity with accounting practices prescribed or permitted by the Indiana Insurance Department (which varies from generally accepted accounting principles in certain respects). As of the date of the Prospectus, Federal's financial strength ratings were 'Aaa' by Moody's and 'AAA' by Standard & Poor's. Federal files annual statements with the insurance department of the State of Indiana and other states in which it is licensed to write insurance. Copies of the annual statement of Federal for the year-ended December 31, 1997 are available upon request from the Indenture Trustee. Audited financial statements of Federal prepared in accordance with Indiana insurance regulations for the three years ended December 31, 1997 are included in this Prospectus. The Servicing Agreement will require that World Omni pay the premiums due on the Residual Value Insurance Policy and will provide that as long as any Notes are outstanding, no insured party may terminate or cause the termination of any Residual Value Insurance Policy unless one or more policies are issued with substantially similar aggregate coverage and provisions issued by an insurer acceptable to each Rating Agency, or an alternative mechanism is implemented to support the Residual Values of the Leased Vehicles in accordance with the procedures required for amendment of the Agreement (as described in 'Additional Document Provisions--Additional Agreement Provisions--Amendment'). The foregoing obligations of World Omni will survive any termination of World Omni as Servicer under the Servicing Agreement (Servicing Agreement, Section 9.10). World Omni will be obligated to reimburse Federal for a specified percentage of claims paid under the Residual Value Insurance Policy, although the failure to make such reimbursement will not affect Federal's obligation to pay claims under the Residual Value Insurance Policy. THE CONTINGENT AND EXCESS LIABILITY INSURANCE POLICIES In addition to the physical damage and liability insurance coverage required to be obtained and maintained by the lessees pursuant to the Contracts, and as additional protection in the event that any lessee fails to maintain all such required insurance, World Omni maintains contingent liability insurance with Lexington Insurance Company which provides coverage of up to $2.0 million per occurrence (with no annual or aggregate cap on the number of claims thereunder) for bodily injury and property damage suffered by third persons caused by any vehicle owned by any insured. World Omni also maintains substantial amounts of excess insurance coverage for which the Origination Trustee is an additional named insured (together with the aforementioned contingent liability insurance policy, the 'Contingent and Excess Liability Insurance Policies'). These insurance policies collectively provide insurance coverage in excess of $10 million per accident, and permit multiple claims in any policy period. To the extent that such coverage were exhausted and damages were assessed against the Origination Trust, claims could be imposed against the assets of the Origination Trust. In such event, investors in the Class A Notes could incur a loss on their investment. However, the Origination Trustee will be an additional named insured under the Contingent and Excess Liability Insurance Policies and payments made thereunder will constitute SUBI Assets. To the extent that payments under the Contingent and Excess Liability Insurance Policies are made to third party claimants, they will reduce the Additional Loss Amounts that otherwise would be required to be paid out of the SUBI Assets. See 'Risk Factors--Risks Associated with Vicarious Tort Liability', 'Certain Legal Aspects of the Origination Trust and the SUBI--The SUBI' and 'Certain Legal Aspects of the Contracts and the Leased Vehicles--Vicarious Tort Liability' for a discussion of related risks. With respect to damage to the Leased Vehicles, each lessee is required by the related Contract to maintain comprehensive and collision insurance. As more fully described under 'Additional Document Provisions--The Servicing Agreement--Insurance on Leased Vehicles', World Omni, under certain limited circumstances where the lessee does not maintain required insurance, will be required to make payments in respect of damaged Leased Vehicles. In the event that all of the foregoing insurance coverage were exhausted and no third-party reimbursement for such damage to a Leased Vehicle were available, investors in the Class A Notes could incur a loss on their investment. The Servicing Agreement will provide that so long as any Notes are outstanding, neither the Origination Trustee nor World Omni may terminate or cause the termination of any Contingent and Excess Liability Insurance Policy unless, among other things, a replacement insurance policy providing at least the same amount 70 <PAGE> of coverage and which does not provide for any annual or aggregate cap on payments thereunder is obtained and each Rating Agency has delivered a letter to the Indenture Trustee to the effect that the obtaining of any such replacement insurance will not cause its then-current rating of any Class of Notes to be qualified, reduced or withdrawn. The foregoing obligations of World Omni will survive any termination of World Omni as Servicer under the Servicing Agreement. (Servicing Agreement, Section 9.10). THE CLASS A INTEREST RATE SWAP GENERAL On the date of issuance of the Notes, the Trust will enter into the Class A Interest Rate Swap with the Class A Swap Counterparty. The Class A Interest Rate Swap will have a Notional Amount as of any Deposit Date or Distribution Date equal to the Class A Note Balance, as of the close of business on the preceding Distribution Date after giving effect to distributions on such Distribution Date; provided, however, with respect to the first Deposit Date and Distribution Date, the applicable Notional Amount will be equal to the Initial Class A Note Balance. Pursuant to the Class A Interest Rate Swap, (x) on each Distribution Date, a payment will be made by the Trust to the Class A Swap Counterparty (if the following is a positive number) or (y) on each Deposit Date, a payment will be made by the Class A Swap Counterparty to the Trust (if the following is a negative number), of an amount equal to (i) one-twelfth of the product of (A) the Notional Amount and (B) the Swap Rate (or, with respect to the first Deposit Date and Distribution Date, an amount specified in the Agreement) minus (ii) the product of (A) a fraction, the numerator of which is the actual number of days from and including the prior Distribution Date to but excluding the related Distribution Date (or, with respect to the first Deposit Date and Distribution Date, the actual number of days from the date of issuance of the Notes to but excluding the first Distribution Date) and the denominator of which is 360, (B) the Notional Amount and (C) One-Month LIBOR with respect to the related Distribution Date. If such amount is positive with respect to the Class A Interest Rate Swap, it will be referred to herein as the 'Class A Net Swap Payment', and if such amount is negative, it will be referred to herein as the 'Class A Net Swap Receipt'. Any Class A Net Swap Receipt in respect of a Deposit Date will be deposited in the Distribution Account and will be available to make distributions of interest due on the related Notes on the related Distribution Date. Any Class A Net Swap Payment in respect of a Distribution Date will be paid out of certain funds on deposit in the SUBI Collection Account. The Class A Interest Rate Swap will terminate on the earliest of (a) the Stated Maturity Date, (b) the Distribution Date on which the Note Balance of each Class A Note is reduced to zero and (c) the date designated by either the Indenture Trustee or the Class A Swap Counterparty as an early termination date with respect to the Class A Interest Rate Swap following a payment default by the Class A Swap Counterparty or the Trust, respectively, or certain other customary early termination events, including illegality and certain tax events. In the event the counterparty rating of the Class A Swap Counterparty is withdrawn or reduced below AA-by Standard & Poor's or its counterparty rating is withdrawn or reduced below Aa3 by Moody's (or, if its counterparty rating is rated by Fitch, at least AA- by Fitch), the Class A Swap Counterparty and the Trust will, within 30 calendar days after such rating withdrawal or reduction, use reasonable efforts to (i) obtain a replacement interest rate swap agreement with terms substantially the same as the Class A Interest Rate Swap or (ii) establish any other arrangement satisfactory to the Rating Agencies, such that the ratings of the Class A Notes by the applicable Rating Agency will not be withdrawn or reduced. In the event that following such 30 calendar days, no such replacement interest rate swap agreement is obtained or any other such satisfactory arrangement established within such period, an Early Amortization Event will occur. In addition, in the event the Class A Swap Counterparty fails to make any payment required under the Class A Interest Rate Swap within five calendar days of the date such payment was due, an Early Amortization Event will occur. See 'Description of the Notes--Early Amortization Events'. 71 <PAGE> THE CLASS A SWAP COUNTERPARTY Merrill Lynch Derivative Products AG is a Swiss share company with its principal place of business located at Stauffacherstrasse 5, CH 8004, Zurich, Switzerland. It is a subsidiary of Merrill Lynch & Co., Inc. a Delaware corporation with its principal place of business located at World Financial Center, North Tower, 250 Vesey Street, New York, New York 10281. As of the date of the Prospectus, the Class A Swap Counterparty's counterparty ratings were 'Aaa' by Moody's and 'AAA' by each of Standard & Poor's and Fitch. ADDITIONAL DOCUMENT PROVISIONS AMENDMENT OF TRANSACTION DOCUMENTS The Indenture, the Agreement, the SUBI Supplement, the Servicing Agreement and the other agreements and instruments relating to the transactions discussed herein (collectively, the 'Transaction Documents') may be amended by the respective parties thereto, without the consent of the Noteholders, to cure any ambiguity, to correct or supplement any provision therein which may be inconsistent with any other provision therein, to add any other provisions with respect to matters or questions arising under the Indenture which are not inconsistent with provisions of the Indenture or to add or amend any provision therein in connection with permitting transfers of the Class B Notes; provided that any such action will not, in the good faith judgment of the parties, materially and adversely affect the interests of any Noteholder, and the Indenture Trustee shall have been furnished with an opinion of counsel to the effect that such amendment will not adversely and materially affect the legal interest of any Noteholder. (Indenture, Section 9.02; Agreement, Section 9.01). See 'Security for the Notes--The Reserve Fund--The Reserve Fund Cash Requirement'. The Transaction Documents may also be amended from time to time by the respective parties thereto, (including with respect to changing the formula for determining the Reserve Fund Cash Requirement, the Reserve Fund Supplemental Requirement, the RV Insurer Reserve Fund Supplement Requirement and/or the Downgrade Reserve Fund Supplemental Requirement, changing the remittance schedule for collection deposits in the Distribution Account, changing the definition of 'Permitted Investments', or replacing the Residual Value Insurance Policy with an alternative mechanism) if (a) the Indenture Trustee has been furnished with confirmation (written or oral) from each Rating Agency to the effect that such amendment would not cause its then-current rating on any Class of Notes to be qualified, reduced or withdrawn or (b) the Indenture Trustee has received the consent of the holders of Notes evidencing more than 50% of the Voting Interests of the Class A Notes and the Class B Notes (voting together as a single class) for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or of modifying in any manner the rights of each Class of Noteholders; provided, however, that: (i) any amendment eliminating the Reserve Fund or the Residual Value Insurance Policy, reducing the Reserve Fund Cash Requirement to less than the lesser of (A) $17,636,578.71 and (B) the Note Balance as of the related Distribution Date (after giving effect to reductions in the Note Balance on such Distribution Date), or eliminating or reducing the RV Insurer Reserve Fund Supplement Requirement shall also require an opinion of the Transferor's counsel to the effect that, after such amendment, for federal income tax purposes the Trust will not be treated as an association taxable as a corporation, and the Class A Notes will, and the Class B Notes should, properly be characterized as indebtedness that is secured by the assets of the Trust; and (ii) (A) no such amendment shall increase or reduce in any manner the amount of, or accelerate or delay the timing of, collections of payments on the SUBI or the SUBI Certificate or distributions that shall be required to be made on any Class of Notes or the applicable Note Rate and (B) no amendment of any type shall reduce the percentage of the aggregate Voting Interests of the Notes of any Class required to consent to any such amendment, in each case without the consent of all Noteholders and Note Owners. (Indenture, Section 9.02; Agreement, Section 9.01). THE INDENTURE Events of Default 'Indenture Events of Default' will be any of the following events: (a) the Trust defaults in the payment of any interest or principal on any Note for a period of five Business Days after any such payment is due; (b) the Trust defaults in the observance or performance in any material respect of any other covenant or agreement made 72 <PAGE> in the Indenture, or any representation or warranty of the Trust made in the Indenture was incorrect in any material respect as of the time made, which default materially and adversely affects the rights of the Noteholders and which continues uncured for a period of 60 days after written notice shall have been given to the Trust by the Indenture Trustee or to the Trust and the Indenture Trustee by the Holders of at least 25% of the aggregate outstanding principal amount of the Notes; or (c) certain insolvency events with respect to the Trust. Investors should be aware that the amount of principal or interest required to be paid to holders of any Class of the Notes prior to the maturity date for that Class of Notes generally will be limited to amounts available in the Distribution Account for payment to Noteholders. Therefore, the failure to pay principal or interest on a Class of Notes generally will not result in the occurrence of an Indenture Event of Default until the Stated Maturity Date for such Class of Notes. (Indenture, Section 5.01). If an Indenture Event of Default occurs and is continuing, then the Indenture Trustee or Noteholders representing in the aggregate not less than 25% of the Voting Interests of the outstanding Notes (voting together as a single class) may declare all the Notes to be immediately due and payable, by a notice in writing to the Trust (and to the Indenture Trustee if given by Noteholders), and upon any such declaration the Notes will become immediately due and payable, except that upon an insolvency event with respect to the Trust, the Notes will become immediately due and payable automatically without the giving of any notice. At any time after such a declaration of acceleration of maturity has been made and before a judgment or decree for payment of the money due has been obtained by the Indenture Trustee, Noteholders representing in the aggregate more than 50% of the Voting Interests of the outstanding Notes (voting together as a single class) by written notice to the Trust and the Indenture Trustee, may rescind and annul such declaration and its consequences under certain circumstances. (Indenture, Section 5.02). After acceleration of the Notes, the Indenture Trustee may institute a proceeding to collect amounts due or foreclose on Trust property, exercise remedies as a secured party, sell the SUBI (in accordance with the procedures described below) or elect to have the Trust maintain possession of the SUBI and continue to apply collections as if there had been no declaration of acceleration. (Indenture, Section 5.04 and 5.05). The Indenture Trustee will be under no obligation to exercise any of the rights or powers under the Indenture at the request or direction of any of the holders of the Notes, if such Noteholders shall not have offered to the Indenture Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in complying with such request or direction. Subject to the provisions for indemnification and certain limitations contained in the related Indenture, Noteholders representing in the aggregate more than 50% of the Voting Interests of the outstanding Notes (voting together as a single class) will have the right to direct the time, method and place of conducting any proceeding or any remedy available to the Indenture Trustee, and Noteholders representing in the aggregate more than 50% of the Voting Interests of the outstanding Notes (voting together as a single class) may, in certain cases, waive any default with respect thereto, except a default in the payment of principal or interest or a default in respect of a covenant or provision of the Indenture that cannot be modified without the waiver or consent of all the holders of the outstanding Notes. (Indenture, Section 5.14 and 5.15). No holder of a Note will have the right to institute any proceeding with respect to the Indenture, unless (i) such holder previously has given to the Indenture Trustee written notice of a continuing Indenture Event of Default, (ii) Noteholders representing in the aggregate not less than 25% of the Voting Interests of the outstanding Notes (voting together as a single class) have made written request to the Indenture Trustee to institute such proceeding in its own name as Indenture Trustee, (iii) such holder or holders have offered the Indenture Trustee reasonable indemnity, (iv) the Indenture Trustee has for 60 days failed to institute such proceeding, and (v) no direction inconsistent with such written request has been given to the Indenture Trustee during such 60-day period by more than 50% of the Voting Interests of the outstanding Notes (voting together as a single class). (Indenture, Section 5.09). If an Indenture Event of Default occurs, the Indenture Trustee may, and, upon receipt of written instructions from Noteholders representing in the aggregate Voting Interests of not less than a majority of interest of the outstanding Class A Notes (voting together as a single class) or more than 50% of the Voting Interests of the outstanding Notes (voting together as a single class), shall (subject to its election to maintain possession of the SUBI as described above), publish a notice stating that the Indenture Trustee intends to sell or dispose of the 73 <PAGE> SUBI and the SUBI Certificate and the other property of the Trust in a commercially reasonable manner. Following such publication, unless otherwise prohibited by applicable law, the Indenture Trustee will sell or otherwise dispose of the SUBI, the SUBI Certificate and such other property in a commercially reasonable manner and on commercially reasonable terms; provided that such sale shall not be made without the consent of all the Noteholders if proceeds realized as a result of such sale would not be sufficient to discharge in full the amounts then due and unpaid upon the Notes for principal and interest. The net sale or disposition proceeds of the SUBI, the SUBI Certificate and such other property will be distributed to the Noteholders in the priority provided for herein, and the principal portion of the Investor Percentage of such proceeds will be distributed first, on a pro rata basis, to the Class A-1, Class A-2, Class A-3 and Class A-4 Noteholders based on their respective Class Note Balances until the Class A-1, Class A-2, Class A-3 and Class A-4 Notes have been paid in full, and second, to the Class B Noteholders. If such proceeds, together with all amounts on deposit in the Accounts, the Reserve Fund, amounts otherwise payable to the Transferor in respect of the Transferor Interest, Insured Residual Value Loss Amounts paid under the Residual Value Insurance Policy, the Servicing Fee (if World Omni is the Servicer) and, in the case of the Class A-4 Notes, certain amounts otherwise distributable in respect of the Class B Notes, are insufficient to pay the Note Balance of a Class of Class A Notes, any unreimbursed Note Principal Loss Amount in respect of such Class of Class A Notes and any accrued and unpaid interest thereon in full, the related Class A Noteholders will suffer a corresponding loss. (Indenture, Section 5.08 and 5.17). Following an Indenture Event of Default and the sale of the SUBI at the direction of the Noteholders, so long as the Class A Swap Counterparty has not breached any of its obligations, it may be entitled to a termination payment. Such payment shall be pro rata with amounts to be paid to the Class A Noteholders. Annual Compliance Statement The Trust will be required to file annually with the Indenture Trustee a written statement as to the fulfillment of its obligations under the Indenture. (Indenture, Section 3.09). Indenture Trustee's Annual Report The Indenture Trustee will be required to mail each year to all Noteholders a brief report relating to its eligibility and qualification to continue as Indenture Trustee, any amounts advanced by it under the Indenture, the amount, interest rate and maturity date of certain indebtedness owing by the Trust to the Indenture Trustee in its individual capacity, the property and funds physically held by the Indenture Trustee as such and any action taken by it that materially affects the Notes and that has not been previously reported. (Indenture, Section 7.03). Satisfaction and Discharge of Indenture The Indenture will be discharged with respect to the collateral securing the Notes upon the delivery to the Indenture Trustee for cancellation of all Notes or, with certain limitations, upon deposit with Indenture Trustee of funds sufficient for the payment in full of all such Notes. (Indenture, Section 4.01). No Petition The Indenture Trustee (or any co-trustee or separate trustee appointed pursuant to the Indenture) will agree not to institute, or join in, any bankruptcy or similar proceeding against the Trust until one year and one day after the payment of the Notes in full. (Indenture, Section 6.17). ADDITIONAL AGREEMENT PROVISIONS Certain provisions of the Agreement are described under 'Description of the Notes'. The following summarizes certain additional provisions of the Agreement. No Petition Each of the Indenture Trustee and the Owner Trustee will agree not to institute, or join in, any bankruptcy or similar proceeding against the Transferor, WOLS LLC, ALF L.P., ALF LLC, the Origination Trust or the Origination Trustee until one year and one day after the later of (i) payment of the Notes in full and (ii) final 74 <PAGE> payment of all other financings involving interests in the Origination Trust (including the transaction described herein and all other transactions involving the UTI and each Other SUBI). (Agreement, Section 6.16). The Owner Trustee PNC Bank, Delaware will be the Owner Trustee under the Agreement. The Corporate Trust Office of the Owner Trustee is currently located at 222 Delaware Avenue, 17th Floor, Wilmington, DE 19801. PNC Bank, Delaware is not affiliated with World Omni, although it does act as a service provider to World Omni. The Owner Trustee may resign at any time, in which event the Transferor will be obligated to appoint a successor Owner Trustee. The Transferor may also remove the Owner Trustee if the Owner Trustee ceases to be eligible to continue as such under the Agreement, becomes legally unable to act or becomes insolvent. In such circumstances, the Transferor will be obligated to appoint a successor Owner Trustee. Any resignation or removal of the Owner Trustee and appointment of a successor Owner Trustee will not become effective until acceptance of the appointment by such successor Owner Trustee. (Agreement, Section 6.10). The Owner Trustee has indicated that an agreement has been signed whereby Chase Manhattan Bank Delaware will acquire the corporate trust business of PNC Bank, Delaware. The Owner Trustee has indicated that the consummation of this transaction is subject to the satisfaction of a number of conditions precedent, but the Owner Trustee presently anticipates that the transaction will close during the fourth quarter of 1998. Any corporation into which PNC Bank, Delaware may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which PNC Bank, Delaware may be a party, or any corporation to which PNC Bank, Delaware may transfer all or substantially all of its corporate trust business shall automatically succeed to the rights of the Owner Trustee under the Agreement, provided that such successor Owner Trustee satisfies the eligibility requirements (as is the case with Chase Manhattan Bank Delaware) described in the Agreement. (Agreement, Section 6.06). THE SUBI TRUST AGREEMENT The SUBI, the Other SUBIs and the UTI ALF L.P. is the grantor and (as holder of the UTI) a beneficiary of the Origination Trust. In its capacity as grantor, ALF L.P. will from time to time assign, transfer, grant and convey (or cause to be assigned, transferred, granted and conveyed) to the Origination Trustee in trust the Origination Trust Assets. (SUBI Trust Agreement, Section 2.01). ALF L.P. will hold the UTI, which represents a beneficial interest in all Origination Trust Assets other than the SUBI Assets and the Other SUBI Assets. (SUBI Trust Agreement, Section 4.01). ALF L.P. has pledged (and may in the future pledge) the UTI as security for obligations to third-party lenders, and has created and sold (and may in the future create and sell or pledge) Other SUBIs in connection with financings similar to the transaction described herein. Each holder or pledgee of the UTI and any Other SUBI will be required to expressly disclaim any interest in the Origination Trust Assets other than the UTI Assets or the Other SUBI Assets, respectively, and to fully subordinate any claims to such other Origination Trust Assets in the event that this disclaimer is not given effect. Except under the limited circumstances described under 'Certain Legal Aspects of the Origination Trust and The SUBI--The SUBI' and as follows the SUBI Assets will not be available to make payments in respect of, or pay expenses relating to, the UTI or any Other SUBIs, and the Other SUBI Assets evidenced by any Other SUBIs will not be available to make payments on, or pay expenses relating to, the SUBI, the UTI or any other SUBI. Each Other SUBI will be created pursuant to a supplement to the Origination Trust Agreement (each, an 'Other SUBI Supplement') which will amend the Origination Trust Agreement only with respect to the Other SUBI to which it relates. The SUBI Supplement will amend the Origination Trust Agreement only as it relates to the SUBI and no Other SUBI Supplement will amend the Origination Trust Agreement as it relates to the SUBI. (SUBI Trust Agreement, Section 4.02). All Origination Trust Assets, including the SUBI Assets, will be owned by the Origination Trustee on behalf of the beneficiaries of the Origination Trust. The SUBI Assets will be segregated from the rest of the Origination Trust Assets on the books and records of the Origination Trustee and the Servicer and the holders of other beneficial interests in the Origination Trust (including the UTI and any Other SUBIs) will have no rights to the SUBI Assets. Liabilities of the Origination Trust shall be allocated to the SUBI Assets, the UTI Assets or Other 75 <PAGE> SUBI Assets, respectively, if incurred with respect thereto, or will be allocated pro rata among all Origination Trust Assets if incurred with respect to the Trust Assets generally. (SUBI Trust Agreement, Section 7.01; Servicing Agreement, Section 2.02). 'Additional Loss Amounts' will be incurred in the event of any uninsured liability to third parties (i.e., litigation risk) on the part of the Origination Trust as ultimately is borne by the SUBI Assets, whether such liability is incurred (i) with respect to the SUBI Assets and is therefore allocated to the SUBI Assets pursuant to the SUBI Trust Agreement, (ii) with respect to the Origination Trust Assets generally and therefore a pro rata portion of such liability is allocated to the SUBI Assets pursuant to the SUBI Trust Agreement or (iii) with respect to UTI Assets or Other SUBI Assets if such UTI Assets or Other SUBI Assets are insufficient to pay such liability. See 'Certain Legal Aspects of the Origination Trust and The SUBI--The SUBI' for a discussion of related risks. For purposes of making calculations with respect to distributions on the Notes, 'Additional Loss Amounts' will include both losses incurred with respect to the foregoing uninsured liabilities and monies reserved within the SUBI Collection Account against future losses in respect of such liabilities by the Servicer on behalf of the Trustee. (SUBI Trust Agreement, Sections 7.01 and 10.01). Special Obligations of ALF L.P. as Beneficiary and Grantor ALF L.P., as grantor, will be liable for all debts and obligations arising with respect to the Origination Trust Assets or the operation of the Origination Trust; provided, however, that its liability with respect to any pledge of the UTI and any assignee or pledgee of a SUBI or SUBI Certificate or Other SUBI or Other SUBI Certificate shall be as set forth in the financing documents relating thereto. ALF LLC, as the general partner of ALF L.P., the grantor, is required at all times to maintain a minimum net worth of $10 million. To the extent that ALF L.P. shall have paid or suffered any liability or expense with respect to the Origination Trust Assets or the operation of the Origination Trust, ALF L.P. shall be indemnified, defended and held harmless out of the assets of the Origination Trust against any such liability or expense (including reasonable attorneys' fees and expenses). (SUBI Trust Agreement, Sections 4.03 and 11.10). Origination Trustee Duties and Powers; Fees and Expenses Pursuant to the SUBI Trust Agreement, the Origination Trustee will be required to, among other things, (i) apply for and maintain (or cause to be applied for and maintained) all licenses, permits and authorizations necessary and appropriate to accept assignments of the Contracts and the Leased Vehicles and to carry out its duties as Origination Trustee, including motor vehicle dealer licenses, and (ii) file (or cause to be filed) applications for certificates of title as are necessary and appropriate so as to cause the Origination Trustee to be recorded as the holder of legal title of record to the Leased Vehicles. (SUBI Trust Agreement, Section 5.01). In carrying out the foregoing duties, the Origination Trustee will be required to exercise the same degree of care and skill as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. (SUBI Trust Agreement, Section 5.02). The Origination Trustee may be replaced by ALF L.P. only if it ceases to be qualified in accordance with the terms of the SUBI Trust Agreement and shall be removed if certain representations and warranties made by the Origination Trustee therein prove to have been materially incorrect when made, or in certain events of bankruptcy or insolvency. (SUBI Trust Agreement, Section 6.03). The Indenture Trustee, as pledgee of the SUBI Certificate, on behalf of the Noteholders may, or at the direction of Noteholders representing in the aggregate more than 50% of the Voting Interests of the outstanding Notes (voting together as a single class) will, exercise its powers under the SUBI Trust Agreement to cause the Origination Trustee to remove or replace the Trust Agent for a material breach of its obligations. (SUBI Trust Agreement, Sections 5.03 and 10.02). The Origination Trustee will make no representations as to the validity or sufficiency of the SUBI, the SUBI Certificate (other than the execution and authentication of the SUBI Certificate), or of any Contract, Leased Vehicle or related document, will not be responsible for performing any of the duties of ALF L.P. or the Servicer and will not be accountable for the use or application by any owners of beneficial interests in the Origination Trust Assets of any funds paid in respect of the Origination Trust Assets, or the investment of any of such monies before such monies are deposited into the accounts relating to the SUBI, the Other SUBIs and the UTI. The Origination Trustee will not independently verify the Contracts or the Leased Vehicles. (SUBI Trust Agreement, Section 5.04). The duties of the Origination Trustee will generally be limited to the acceptance of assignments of 76 <PAGE> lease contracts, the titling of the related leased vehicles in the name of the Origination Trustee, the creation of the SUBI, the Other SUBIs and the UTI, the maintenance of the SUBI Collection Account and accounts relating to the Other SUBIs and the UTI and the receipt of the various certificates, reports or other instruments required to be furnished to the Origination Trustee under the SUBI Trust Agreement, in which case it will only be required to examine them to determine whether they conform to the requirements of the SUBI Trust Agreement. (SUBI Trust Agreement, Section 5.01). The Origination Trustee will be under no obligation to exercise any of the rights or powers vested in it by the SUBI Trust Agreement or to make any investigation of matters arising thereunder or to institute, conduct or defend any litigation thereunder or in relation thereto at the request, order or direction of ALF L.P., the Servicer or by the holders of a majority in interest in the SUBI, unless such party or parties have offered to the Origination Trustee reasonable security or indemnity against the costs, expenses and liabilities that may be incurred therein or thereby. The reasonable expenses of every such exercise of rights or powers or examination shall be paid by the party or parties requesting such exercise or examination or, if paid by the Origination Trustee, shall be a reimbursable expense of the Origination Trustee. (SUBI Trust Agreement, Sections 5.03 and 6.08). The Origination Trustee may enter from time to time into one or more agency agreements (each, an 'Agency Agreement') with such person or persons, including without limitation any affiliate of the Origination Trustee (each, a 'Trust Agent'), as are by experience and expertise qualified to act in a trustee capacity and otherwise acceptable to ALF LLC. The Origination Trustee has engaged U.S. Bank as the Trust Agent. Pursuant to the Agency Agreement (which currently is a part of the SUBI Trust Agreement), the Trust Agent shall perform each and every obligation of the Origination Trustee under the SUBI Trust Agreement. (SUBI Trust Agreement, Section 5.03). The Origination Trustee shall be paid out of Origination Trust Assets reasonable compensation and reimbursement of all reasonable expenses (including reasonable attorneys' fees). (SUBI Trust Agreement, Section 6.08). However, with regard to the SUBI Assets, this requirement is subject to the provisions regarding Capped Origination Trust Administrative Expenses described under 'Description of the Notes--Distributions on the Notes--Distributions of Interest'. Indemnity of Origination Trustee and Trust Agents The Origination Trustee and each Trust Agent will be indemnified and held harmless out of and to the extent of the Origination Trust Assets with respect to any loss, liability or expense, including reasonable attorneys' fees and expenses (collectively 'Claims'), arising out of or incurred in connection with (i) any of the Origination Trust Assets (including without limitation any Claims relating to lease contracts or leased vehicles of the Origination Trust, any personal injury or property damage claims arising with respect to any such leased vehicle or any claim with respect to any tax arising with respect to any Origination Trust Asset) or (ii) the Origination Trustee's or the Trust Agent's acceptance or performance of the trusts and duties contained in the Agreement or any Agency Agreement. Notwithstanding the foregoing, neither the Origination Trustee nor any Trust Agent will be indemnified or held harmless out of the Origination Trust Assets as to any Claim (i) for which World Omni shall be liable pursuant to the Servicing Agreement, (ii) incurred by reason of the Origination Trustee's or such Trust Agent's willful misfeasance, bad faith or negligence or (iii) incurred by reason of the Origination Trustee's or Trust Agent's breach of its respective representations and warranties pursuant to the SUBI Trust Agreement or the Servicing Agreement. Such indemnities may result in Additional Loss Amounts to the extent payable in respect of the SUBI Assets or allocated to the SUBI. (SUBI Trust Agreement, Section 5.05). Termination The Origination Trust and the respective obligations and responsibilities of ALF L.P. and the Origination Trustee shall terminate upon the last to occur of (i) the payment to ALF L.P. and each permitted purchaser, assignee and pledgee of any of ALF L.P.'s interests in the Origination Trust (including the Indenture Trustee, with respect to the SUBI) of all amounts and obligations required to be paid to them, and the expiration or termination of all financings secured by the Origination Trust Assets by their respective terms and (ii) the maturity or liquidation and the disposition of all Origination Trust Assets and the disposition to or upon the order of ALF L.P. or any permitted purchaser, assignee or pledgee of all net proceeds thereof. (SUBI Trust Agreement, Section 8.01). 77 <PAGE> No Petition The Origination Trustee and the Trust Agent will agree not to institute, or join in, any bankruptcy or similar proceeding against the Transferor, WOLS LLC, ALF L.P. or ALF LLC until one year and one day after final payment of all financings involving interests in the Origination Trust. (SUBI Trust Agreement, Section 6.09). Each pledgee or assignee of any UTI or other SUBI must give a similar non-petition covenant. (SUBI Trust Agreement, Sections 4.01 and 4.02). Owner Trustee and Indenture Trustee as Third-Party Beneficiaries As the holder of the SUBI, the Trust, and as the pledgee of the SUBI, the Indenture Trustee, will be third-party beneficiaries of the SUBI Trust Agreement. Therefore, the Owner Trustee on behalf of the Trust or the Indenture Trustee may, and, upon the direction of Noteholders representing in the aggregate more than 50% of the Voting Interests of the outstanding Notes (voting together as a single class), the Indenture Trustee will, exercise any right conferred by the SUBI Trust Agreement upon a holder or pledgee of any interest in the SUBI. (SUBI Trust Agreement, Section 10.02). THE SERVICING AGREEMENT General Pursuant to the Servicing Agreement, the Servicer will perform on behalf of the Origination Trustee all of the obligations of the lessor under the Contracts, including, but not limited to, collecting and posting payments, responding to inquiries of the lessees, investigating delinquencies, sending payment statements and reporting tax information to the lessees, paying costs of disposition of Leased Vehicles related to Charged-off Contracts, Matured Contracts and Additional Loss Contracts and policing the Contracts, commencing legal proceedings to enforce a Contract on behalf of the Origination Trust, administering the Contracts, including accounting for collections and furnishing monthly and annual statements to the Origination Trustee with respect to distributions and generating federal income tax information. The Origination Trustee will furnish the Servicer with all powers of attorney and other documents necessary or appropriate to enable the Servicer to carry out such servicing and administrative duties under the Servicing Agreement. The Indenture Trustee and the Owner Trustee will be third-party beneficiaries of the Servicing Agreement. (Servicing Agreement, Sections 2.01 and 12.12). Custody of Contract Documents and Certificates of Title To assure uniform quality in servicing the Contracts and World Omni's own portfolio of automobile and light duty truck lease contracts and to reduce administrative costs, the Origination Trustee will appoint World Omni, as Servicer, to be its agent, bailee and custodian of the Contracts, the certificates of title relating to the Leased Vehicles and insurance policies and other documents relating to the Contracts, the related lessees and the Leased Vehicles. Such documents will not be physically segregated from other automobile and light duty truck lease contracts, certificates of title and insurance policies and other documents relating to such lease contracts and leased vehicles of World Omni, or those which World Omni services for others, including those leased vehicles constituting Origination Trust Assets that are not evidenced by the SUBI. The accounting records and computer systems of World Omni will reflect the interests of the holders of interest in the SUBI in the Initial Contracts, the Subsequent Contracts, the Initial Leased Vehicles, the Subsequent Leased Vehicles and all related Contract Rights, and UCC financing statements reflecting certain interests in the Contracts and the Contract Rights will be filed, as more fully described under 'Certain Legal Aspects of the Contracts and Leased Vehicles--Back-up Security Interests'. The Servicer will be responsible for filing all periodic sales and use tax or property (real or personal) tax reports, periodic renewals of licenses and permits, periodic renewals of qualification to act as a trust and a business trust and other periodic governmental filings, registration or approvals arising with respect to or required of the Origination Trustee or the Origination Trust. (Servicing Agreement, Sections 2.01 and 2.07). Collections The Servicer will service, administer and collect all amounts due on or in respect of the Contracts. The Servicer will make reasonable efforts to collect all such amounts and, in a manner consistent with the Servicing Agreement, will be obligated to service the Contracts generally in accordance with customary and usual 78 <PAGE> procedures of institutions which service closed-end automobile and light duty truck lease contracts and, to the extent more exacting, the procedures used by the Servicer in respect of lease contracts serviced by it for its own account. (Servicing Agreement, Sections 2.01 and 2.02). Consistent with its usual procedures, the Servicer may, in its discretion, extend the Maturity Date of any Contract by up to five months in the aggregate, provided that no Contract may be extended more than five times and that the new Maturity Date of any Contract so extended must not be later than the last day of the month immediately preceding the month in which the Class B Stated Maturity Date occurs. The amount of any Extension Fee received by the Servicer in connection with the extension of a Contract will be deposited into the SUBI Collection Account. In the event that the Servicer extends a Contract in contravention of the foregoing, the Servicing Agreement will require the Servicer to deposit into the SUBI Collection Account an amount equal to the Reallocation Payment in respect of such Contract on the Deposit Date relating to the Collection Period in which such extension was granted, at which time such Contracts and the related Leased Vehicles will no longer constitute SUBI Assets as they will be reallocated as UTI Assets. (Servicing Agreement, Sections 2.02 and 9.02). See 'World Omni--Collection, Repossession and Disposition Procedures' for further details regarding collection procedures. As more fully described under 'Description of the Notes--The Accounts--The SUBI Collection Account', unless the Servicer obtains a Servicer Letter of Credit, the Servicer will deposit or cause to be deposited all payments received on or in respect of the Contracts and the Leased Vehicles (other than Security Deposits) into the SUBI Collection Account within two Business Days after receipt. Notification of Liens and Claims The Servicer will be required to notify the Transferor (in the event that World Omni is not acting as the Servicer), the Indenture Trustee and the Origination Trustee as soon as practicable of all liens or claims of whatever kind made by a third party that would materially adversely affect the interests of, among others, the Transferor, the Origination Trust or any SUBI Asset (with respect to, among other things, any Contract or Leased Vehicle). Following its learning of any such lien or claim with respect to any Leased Vehicle, the Servicer will take whatever actions it deems reasonably necessary to cause such lien or claim to be removed. (Servicing Agreement, Sections 2.08 and 9.09). See 'Certain Legal Aspects of the Origination Trust and the SUBI--The SUBI' and 'Certain Legal Aspects of the Contracts and the Leased Vehicles--Back-up Security Interests' for a discussion of the risk of liens on certain SUBI Assets and other Origination Trust Assets. Advances On each Deposit Date, the Servicer will be obligated to make, by deposit into the SUBI Collection Account, an advance in an amount equal to the aggregate Monthly Payments due but not received during the related Collection Period with respect to Contracts that are 31 days or more past due as of the end of the related Collection Period, and the Servicer may (but shall not be required to) make such an advance with respect to Contracts that are one or more days, but less than 31 days, past due as of the end of the related Collection Period (collectively, an 'Advance'). (Servicing Agreement, Section 9.04). Notwithstanding the foregoing, the Servicer will not be required to make an Advance to the extent that such Advance would constitute a Nonrecoverable Advance. (Servicing Agreement, Section 9.04). A 'Nonrecoverable Advance' will be any Advance that, in the reasonable judgment of the Servicer, may not be ultimately recoverable by the Servicer from Net Liquidation Proceeds or otherwise. (Servicing Agreement, Section 6.01). In making Advances, the Servicer will assist in maintaining a regular flow of scheduled principal and interest payments on the Contracts, rather than to guarantee or insure against losses. Accordingly, all Advances shall be reimbursable to the Servicer, without interest, if and when a payment relating to a Contract with respect to which an Advance has previously been made is subsequently received. In addition, the Servicer will be reimbursed for all Nonrecoverable Advances from collections on or in respect of the Contracts and Leased Vehicles in general. (Servicing Agreement, Section 9.02). 79 <PAGE> Security Deposits The Origination Trustee's rights related to the Contracts will include all rights under the Contracts to the security deposits paid by the lessees at the time of origination of the Contracts (the 'Security Deposits'). As part of its general servicing obligations, the Servicer will retain possession of each Security Deposit remitted by the lessees as an agent for the Origination Trust and will apply the proceeds of such Security Deposits in accordance with the terms of the Contracts, its customary and usual servicing procedures and applicable law. However, in the event that any Contract becomes a Charged-off Contract or the related Leased Vehicle is repossessed, the related Security Deposit will, to the extent provided by applicable law and such Contract, constitute Liquidation Proceeds. (Servicing Agreement, Section 2.04). The Origination Trustee may not have an interest in the Security Deposits that is enforceable against third parties until such time as they are deposited into the SUBI Collection Account. The Servicer will not be required to segregate Security Deposits from its own funds, and any income earned from any investment thereof by the Servicer shall be for the account of the Servicer as additional servicing compensation. Insurance on Leased Vehicles Each lessee is required to maintain in full force and effect during the term of a Contract a comprehensive and collision physical damage insurance policy covering the actual cash value of the related Leased Vehicle and naming the Origination Trustee, on behalf of the Origination Trust, as loss payee. Each lessee also is required to maintain bodily injury and property damage liability insurance in amounts equal to the greater of the amount prescribed by applicable state law or industry standards as set forth in the Contract and naming the Origination Trustee, on behalf of the Origination Trust, as an additional insured. (Servicing Agreement, Section 2.11). Since lessees may choose their own insurers to provide the required coverage, the specific terms and conditions of their policies vary. If a lessee fails to obtain or maintain the required insurance, the related Contract will be in default. It is the practice of World Omni not to obtain insurance on behalf of and at the expense of the related lessee but rather to repossess the related Leased Vehicle. In the event that a required insurance policy has lapsed, has not been maintained in full force and effect or the Servicer has failed to maintain the right to receive the proceeds thereof for damage to or destruction of the related Leased Vehicle, the Servicing Agreement will require World Omni to pay promptly into the SUBI Collection Account all such amounts as would otherwise have been recoverable as Insurance Proceeds. This obligation will survive any termination of World Omni as Servicer under the Servicing Agreement. (Servicing Agreement, Section 2.11). World Omni does not require lessees to carry credit disability, credit life or credit health insurance or other similar insurance coverage which provides for payments to be made on the Contracts on behalf of such lessees in the event of disability or death. To the extent that such insurance coverage is obtained on behalf of a lessee, payments received in respect of such coverage may be applied to payments on the related Contract to the extent that the lessee's beneficiary chooses to do so. Realization Upon Charged-off Contracts The Servicer will use commercially reasonable efforts to repossess and liquidate the Leased Vehicle relating to a Contract that comes into and continues in default and for which no satisfactory arrangements can be made for collection of delinquent payments. Such liquidation may be through repossession of such Leased Vehicle and disposition at a public or private sale, or the Servicer may take any other action permitted by applicable law. The Servicer may enforce all rights under any such Contract, sell the Leased Vehicle in accordance with the Contract and commence and prosecute any proceedings in connection with the Contract. In connection with any such repossession, the Servicer will follow such practices and procedures as it deems necessary or advisable and as are normal and usual for responsible holders of closed-end automobile and light duty truck lease contracts and, to the extent more exacting, the practices and procedures used by the Servicer in respect of any such lease contracts serviced by it for its own account, and in any event in compliance with all applicable laws. The Servicer will be required to repair the Leased Vehicle if it reasonably determines that such repairs will increase the related Net Repossessed Vehicle Proceeds. The Servicer will be responsible for all costs and expenses incurred in connection with the sale or other disposition of Leased Vehicles related to Charged-off Contracts and other Contracts as to which a lessee has defaulted and the related Leased Vehicles, but will be entitled to reimbursement to the extent that such costs constitute Repossessed Vehicle Expenses or other Liquidation Expenses or expenses recoverable 80 <PAGE> under an applicable insurance policy. Proceeds from the sale or other disposition of repossessed Leased Vehicles will constitute Repossessed Vehicle Proceeds and will be deposited into the SUBI Collection Account. The Servicer will be entitled to reimbursement of all related Repossessed Vehicle Expenses from amounts on deposit in the SUBI Collection Account upon presentation to the Indenture Trustee of an officer's certificate of the Servicer and Principal Collections in respect of a Collection Period will include all Net Repossessed Vehicle Proceeds collected during such Collection Period. (Servicing Agreement, Sections 2.06 and 9.02). Matured Leased Vehicle Inventory Upon the scheduled maturity of a Contract, the related lessee has the option to acquire the related Leased Vehicle for an amount equal to its Residual Value plus any applicable taxes and all other incidental charges which may be due under such Contract. If the lessee chooses not to exercise this option but instead returns the Leased Vehicle to the Servicer, such Leased Vehicle will be placed in Matured Leased Vehicle Inventory, and the Servicer, acting on behalf of the Origination Trust, will sell or otherwise dispose of the Leased Vehicle in a manner similar to that for other off-lease Leased Vehicles. (Servicing Agreement, Section 2.06). Principal Collections in respect of a Collection Period will include all Net Matured Leased Vehicle Proceeds collected during such Collection Period. All related Matured Leased Vehicle Proceeds will be deposited into the SUBI Collection Account. Related Matured Leased Vehicle Expenses may be released from amounts on deposit in the SUBI Collection Account upon presentation of an officer's certificate by the Servicer. (SUBI Trust Agreement, Section 10.01; Servicing Agreement, Section 9.02). Records, Servicer Determinations and Reports The Servicer will retain or cause to be retained all data (including, without limitation, computerized records, operating software and related documentation) relating directly to or maintained in connection with the servicing of the Contracts. Upon the occurrence and continuance of an Event of Servicing Termination and termination of the Servicer's obligations under the Servicing Agreement, the Servicer will use commercially reasonable efforts to effect the orderly and efficient transfer of the servicing of the Contracts to a successor servicer. (Servicing Agreement, Sections 2.03 and 9.03). The Servicer will perform certain monitoring and reporting functions on behalf of the Transferor, the Indenture Trustee, the Owner Trustee, the Origination Trustee and the Noteholders, including the preparation and delivery to the Indenture Trustee, the Origination Trustee and each Rating Agency of a monthly certificate, on or before each Determination Date, setting forth all information necessary to make all distributions required in respect of the related Collection Period (the 'Servicer's Certificate'), and the preparation and delivery of monthly statements setting forth information described under 'Description of the Notes--Statements to Noteholders', and an annual officer's certificate specifying the occurrence and status of any Event of Servicing Termination. (Servicing Agreement, Sections 3.03, 10.01 and 10.03). Evidence as to Compliance The Servicing Agreement will provide that a firm of nationally recognized independent accountants will furnish to the Indenture Trustee on or before April 30 of each year, beginning April 30, 1999, a statement as to compliance by the Servicer during the preceding twelve months ended December 31 (or since the Closing Date in the case of the first such statement) with certain standards relating to the servicing of the Contracts, the Servicer's accounting records and computer files with respect thereto and certain other matters. (Servicing Agreement, Sections 3.02 and 10.02). The Servicing Agreement will also provide for delivery to the Indenture Trustee, on or before April 30 of such year, beginning April 30, 1999, of a certificate signed by an officer of the Servicer stating that the Servicer has fulfilled its obligations under the Agreement throughout the preceding twelve months ended December 31 (or since the Closing Date in the case of the first such certificate) or, if there has been a default in the fulfillment of any such obligation, describing each such default. (Servicing Agreement, Sections 3.03 and 10.03). Copies of such statements and certificates may be obtained by Note Owners or Class A Noteholders by a request in writing addressed to the Indenture Trustee at its Corporate Trust Office. (Agreement, Section 3.06). 81 <PAGE> Compliance with ERISA On or before each Determination Date, the Servicer shall provide the Indenture Trustee and each Rating Agency with an officer's certificate stating that none of SET, JMFE, World Omni nor any of their respective affiliates for purposes of ERISA (i) maintains an ERISA plan which, as of its last valuation date, had unfunded current liability, (ii) anticipates that the value of the assets of any ERISA plan it maintains would not be sufficient to cover any current liability or (iii) is contemplating benefit improvements with respect to any plans then maintained or the establishment of any new ERISA plans, either of which would cause it to maintain an ERISA plan with unfunded current liability (the 'ERISA Compliance Test'). In the event that the Servicer does not timely make the foregoing certifications, or any such certification is incorrect, all Excess Collections in respect of any Distribution Date, after giving effect to all payments required to be made therefrom on such Distribution Date, will be deposited into the Reserve Fund, regardless of the Reserve Fund Cash Requirement. On the Distribution Date following the date on which the ERISA Compliance Test is satisfied, monies on deposit in the Reserve Fund in excess of the Reserve Fund Cash Requirement shall be distributed to the Transferor (or to the Noteholders to the extent allocable to the Accelerated Principal Distribution Amount). See 'Security for the Notes--The Reserve Fund--The Reserve Fund Cash Requirement' for a more complete description of the Reserve Fund Cash Requirement. (Servicing Agreement, Section 10.03; Agreement, Sections 1.01, 3.03 and 3.04). Servicing Compensation The Servicer will be entitled to compensation for the performance of its servicing obligations under the Servicing Agreement. The Servicer will be entitled to receive on each Distribution Date the Servicing Fee in respect of the related Collection Period equal to one-twelfth of the product of 1.00% and the Aggregate Net Investment Value as of the first day of the month preceding the month in which such Distribution Date occurs (or, in the case of the first Distribution Date, as of the Initial Cutoff Date). The Servicing Fee will be calculated and paid based upon a 360-day year consisting of twelve 30-day months. So long as World Omni is the Servicer, it may, by notice to the Indenture Trustee and the Origination Trustee, on or before a Determination Date, elect to waive the Servicing Fee with respect to the related Collection Period, so long as World Omni believes that sufficient collections will be available from Interest Collections on one or more future Distribution Dates to pay such waived Servicing Fee, without interest. In such event, the Servicing Fee for such Collection Period shall be deemed to equal zero for all purposes of the Agreement and the Servicing Agreement. The Servicer will also be entitled to additional servicing compensation in the form of late fees and other administrative fees or similar charges paid with respect to the Contracts, and earnings from the investment of Security Deposits as described above under 'Additional Document Provisions--The Servicing Agreement--Security Deposits'. The Servicer will not be entitled to retain any Extension Fee paid in connection with an extended Contract, as such amounts will be required to be deposited into the SUBI Collection Account. The Servicer will pay all expenses incurred by it in connection with its servicing activities under the Servicing Agreement, including the payment of Uncapped Administrative Expenses, and will not be entitled to reimbursement of such expenses except to the extent any such expenses constitute Liquidation Expenses in respect of a Contract or Leased Vehicle or reasonable issuance expenses under an applicable insurance policy, or to the extent that Uncapped Administrative Expenses are reimbursed out of Interest Collections. (Servicing Agreement, Sections 2.05 and 9.06). The Servicing Fee will compensate the Servicer for performing the functions of a third party servicer of the Contracts as an agent for the Origination Trustee under the Servicing Agreement, including collecting and posting payments, responding to inquiries of lessees on the Contracts, investigating delinquencies, sending payment statements and reporting tax information to lessees, paying costs of sale or other disposition of Leased Vehicles relating to defaulted Contracts and Leased Vehicles included in Matured Leased Vehicle Inventory, policing the SUBI Assets, administering the Contracts, including making Advances, accounting for collections, furnishing monthly and annual statements to the Indenture Trustee with respect to distributions and generating federal income tax information. (Servicing Agreement, Section 2.05). 82 <PAGE> Servicer Resignation and Termination The Servicer may not resign from its obligations and duties under the Servicing Agreement unless it determines that its duties thereunder are no longer permissible by reason of a change in applicable law or regulations. No such resignation will become effective until a successor servicer has assumed the Servicer's obligations under the Servicing Agreement. The Servicer may not assign the Servicing Agreement or any of its rights, powers, duties or obligations thereunder except as otherwise provided therein or except in connection with a consolidation, merger, conveyance, transfer or lease made in compliance with the Servicing Agreement. (Servicing Agreement, Sections 2.10 and 9.11). The rights and obligations of the Servicer under the Servicing Agreement may be terminated following the occurrence and continuance of an Event of Servicing Termination, as described under 'Additional Document Provisions--The Servicing Agreement--Rights Upon Event of Servicing Termination'. (Servicing Agreement, Sections 4.01 and 11.01). Indemnification by the Servicer The Servicer will indemnify the Origination Trustee and its agents for any and all liabilities, losses, damages and expenses that may be incurred by them as a result of any act or omission by the Servicer in connection with the performance of its duties under the Servicing Agreement. (Servicing Agreement, Section 9.08). Events of Servicing Termination 'Events of Servicing Termination' under the Servicing Agreement with respect to the SUBI Assets will consist of, among other things: (i) any failure by the Servicer to deliver to the Indenture Trustee for distribution to Noteholders any required payment, which failure continues unremedied for five Business Days after discovery of such failure by an officer of the Servicer or receipt by the Servicer of notice thereof from the Indenture Trustee, the Origination Trustee or holders of Notes evidencing not less than 25% of the Voting Interests of the Class A Notes and the Class B Notes, voting together as a single class; (ii) any failure by the Servicer duly to observe or perform in any material respect any other of its covenants or agreements in the Servicing Agreement which failure materially and adversely affects the rights of holders of interests in the SUBI or the Noteholders and which continues unremedied for 60 days after written notice of such failure is given as described in clause (i) above; (iii) failure by the Servicer to deliver to the Origination Trustee or the Indenture Trustee any report required to be delivered to the Origination Trustee or the Indenture Trustee pursuant to the Servicing Agreement within ten Business Days after the date such report is due; (iv) any representation, warranty or statement of the Servicer made in the Servicing Agreement or any other document relating to the Origination Trust to which the Servicer is a party or by which it is bound or any certificate, report or other writing delivered pursuant to the Servicing Agreement shall prove to be incorrect in any material respect as of the time when the same shall be made which continues unremedied for 30 days after written notice of such failure is given as described in clause (i) above; (v) failure by the Servicer to maintain or pay when due the premium in respect of any Contingent and Excess Liability Insurance Policy or the Residual Value Insurance Policy; (vi) any failure by the Transferor to timely deposit into the Reserve Fund an amount equal to the RV Insurer Reserve Fund Supplemental Requirement after an RV Insurer Trigger Event; and (vii) the occurrence of certain Insolvency Events relating to the Servicer. Notwithstanding the foregoing, a delay in or failure of performance referred to under clause (i) for a period of ten Business Days, under clause (ii) for a period of 90 days, under clause (iii) for a period of 20 Business Days or under clause (iv) for a period of 60 days, shall not constitute an Event of Servicing Termination if such failure or delay was caused by act of God or other similar occurrence. Upon the occurrence of any such event, the Servicer shall not be relieved from using all commercially reasonable efforts to perform its obligations in a timely manner in accordance with the terms of the Servicing Agreement and the Servicer shall provide to the Indenture Trustee, the Origination Trustee, the Transferor and the Noteholders prompt notice of such failure or delay by it, together with a description of its efforts to so perform its obligations. (Servicing Agreement, Sections 4.01 and 11.01). 83 <PAGE> Rights Upon Event of Servicing Termination As long as an Event of Servicing Termination remains unremedied, the Origination Trustee, upon the direction of the Indenture Trustee or Noteholders representing in the aggregate more than 50% of the Voting Interests of the outstanding Notes (voting together as a single class) may terminate all of the rights and obligations of the Servicer under the Servicing Agreement with respect to the SUBI Assets. In the event of such a termination affecting the SUBI Assets, the Trust Agent generally will succeed to the rights, powers, responsibilities, duties and liabilities of the Servicer under the Servicing Agreement with respect to the SUBI Assets (excluding certain specific obligations listed in the Servicing Agreement) or provide for a new Servicer to be approved by each Rating Agency. The Trust Agent or other new Servicer, will receive substantially the same servicing compensation to which the Servicer otherwise would have been entitled. If, however, a bankruptcy trustee or similar official has been appointed for the Servicer, and no Event of Servicing Termination other than such appointment has occurred, such trustee or official may have the power to prevent the Origination Trustee, the Indenture Trustee or such Noteholders from effecting a transfer of servicing. Notwithstanding the termination of the Servicer's rights and powers in such event, the Servicer will remain obligated to perform certain specific obligations listed in the Servicing Agreement and to reimburse the Trust Agent for any losses incurred in performing certain such obligations, and will be entitled to payment of certain amounts payable to it for services rendered prior to such termination. (Servicing Agreement, Sections 4.01 and 11.01). Noteholders representing in the aggregate more than 50% of the Voting Interests of the outstanding Notes (voting together as a single class), with the consent of the Origination Trustee and the Indenture Trustee (which consents shall not be unreasonably withheld), may waive any default by the Servicer in the performance of its obligations under the Servicing Agreement and its consequences with respect to the SUBI Assets, other than a default in making any required deposits to or payments from an Account in accordance with the Servicing Agreement or in respect of a covenant or provision of the Servicing Agreement that cannot be modified or amended without the consent of each Noteholder (in which event the related waiver will require the approval of holders of all of the Notes). No such waiver will impair the rights of the Noteholders with respect to subsequent defaults. (Servicing Agreement, Section 4.01). No Petition The Servicer will agree not to institute, or join in, any bankruptcy or similar proceeding against the Transferor, WOLS LLC, ALF L.P., ALF LLC, the Origination Trustee or the Origination Trust until one year and one day after final payment of all financings involving interests in the Origination Trust. (Servicing Agreement, Section 5.14). Termination The Servicing Agreement shall terminate upon the earlier to occur of (i) the termination of the Origination Trust, (ii) the discharge of the Servicer in accordance with its terms or (iii) the termination of the Agreement. (Servicing Agreement, Section 5.01). Indenture Trustee and Owner Trustee as Third-Party Beneficiaries As the holder of the SUBI, the Owner Trustee, and as the pledgee of the SUBI, the Indenture Trustee, will be third-party beneficiaries of the Servicing Agreement. (Servicing Agreement, Section 12.12). 84 <PAGE> CERTAIN LEGAL ASPECTS OF THE ORIGINATION TRUST AND THE SUBI THE ORIGINATION TRUST The Origination Trust may be deemed to be a business trust under Alabama law. In an Alabama business trust, the trust property is managed for the profit of the beneficiaries, as opposed to a common 'asset preservation' trust, in which the trustee is charged with the mere maintenance of trust property. The principal requirement for the formation of a business trust in Alabama is the filing of the trust instrument with the appropriate state authority. The Origination Trust Agreement has been, and the SUBI Trust Agreement will be, so filed. The Origination Trust also has been qualified as a business trust authorized to transact business in certain other states where it is required to be qualified. Because the Origination Trust has been registered as a business trust for Alabama and other state law purposes, like a corporation, it may be eligible to be a debtor in its own right under the United States Bankruptcy Code, as further described under 'Risk Factors--Risks in the Event of an Insolvency of World Omni; Substantive Consolidation with World Omni'. QUALIFICATION OF VT INC. AS FIDUCIARY State laws, including the laws in the Five State Area, differ as to whether a corporate trustee that leases vehicles in that state, such as VT Inc., must qualify as a fiduciary. The consequences of the failure to be qualified as a fiduciary in a State where such qualification is required differ by State, and could include penalties against VT Inc. and its directors and officers ranging from fines to the inability of VT Inc. to maintain action in the courts of that State. World Omni believes that VT Inc. does not exercise sufficient discretion in the performance of its duties under the SUBI Trust Agreement or take such other discretionary actions that it should be considered to be exercising fiduciary powers within the meaning of any applicable State law. However, no assurance can be given that World Omni will prevail in this view. Because no State in which (i) this issue is uncertain, (ii) VT Inc. has not taken the actions necessary to qualify as a fiduciary and (iii) the consequences of such failure would be material represents a significant percentage of the value of the SUBI Assets, World Omni believes that the failure to be qualified as a fiduciary in any State where such qualification may ultimately be required will not materially and adversely affect the Noteholders. However, no assurance can be given in this regard. World Omni, as Servicer, has agreed to indemnify VT Inc., as Origination Trustee for, among other things, any and all liabilities, losses, damages and expenses that may be incurred by the Origination Trustee as a result of any act or omission by the Servicer in connection with its undertakings to identify from time to time the periodic governmental filings, registrations and approvals arising with respect to or required of the Origination Trustee or the Origination Trust. THE SUBI The SUBI will be issued pursuant to the SUBI Trust Agreement and will evidence a beneficial interest in the SUBI Assets. The SUBI will not represent a direct interest in the SUBI Assets, nor will it represent an interest in any Origination Trust Assets other than the SUBI Assets. Under the allocation of Origination Trust liabilities described under 'Additional Document Provisions--The SUBI Trust Agreement--The SUBI, the Other SUBIs and the UTI', payments made on or in respect of such other Origination Trust Assets will not be available to make payments on the Notes or to cover expenses of the Origination Trust allocable to the SUBI Assets. Any liability to third parties arising from or in respect of a Contract or Leased Vehicle will be borne by the holders of interests in the SUBI (including the Trust). If any such liability arises from a contract or leased vehicle that is an Other SUBI Asset or a UTI Asset, the Origination Trust Assets (including the SUBI Assets) will not be subject to such liability unless such Other SUBI Assets or UTI Assets are insufficient to pay the liability. In such event, because there will be no other assets from which to satisfy any such liability, to the extent that it is owed to entities other than the Origination Trustee and the beneficiaries of the Origination Trust, the other Origination Trust Assets, including the SUBI Assets, will be available to satisfy such liabilities. Under such circumstances, investors in the Class A Notes could incur a loss on their investment. 85 <PAGE> Similarly, to the extent that a third-party claim that otherwise would be allocable to an Other SUBI or UTI is satisfied out of the SUBI Assets rather than Other SUBI Assets or UTI Assets, and the claim exceeds the value of the portfolio to which it should be allocated, the Origination Trustee will not be able to reallocate the remaining Origination Trust Assets so that each portfolio will bear the expense of the claim as nearly as possible if the claim has been properly allocated. In such circumstances, investors in the Class A Notes could incur a loss on their investment. Because the Trust and the Indenture Trustee will not own directly or have a direct security interest in the Leased Vehicles and certain other SUBI Assets, and since their respective interests therein generally will be an indirect beneficial ownership interest and a security interest in such indirect beneficial ownership interest, perfected liens of third-party creditors of the Origination Trust in one or more of such SUBI Assets will take priority over the interests of the Trust and the Indenture Trustee in such SUBI Assets. Therefore, a general creditor of the Origination Trust may obtain a lien on one or more such SUBI Assets regardless of whether its claim would be allocated to such SUBI Assets under the terms of the Origination Trust Agreement. Potentially material examples of such liens could include tax liens arising against the Transferor or the Trust, liens arising under various federal and state criminal statutes, certain liens in favor of the Pension Benefit Guaranty Corporation (the 'PBGC'), judgment liens arising from successful claims under federal and state consumer protection laws and Lemon Laws with respect to leases and leased vehicles included in the Origination Trust Assets and judgment liens arising from successful claims against the Origination Trust arising from the operation of the leased vehicles constituting Origination Trust Assets. See 'Risk Factors--Risks Associated with Consumer Protection Laws', '--Risks Associated with ERISA Liabilities' and '--Risks Associated with Vicarious Tort Liability' and 'Certain Legal Aspects of the Contracts and the Leased Vehicles--Vicarious Tort Liability' and '--Consumer Protection Laws' for a further discussion of these risks. The Origination Trust Agreement provides that, to the extent that such a third-party claim is satisfied out of one or more SUBI Assets rather than Other SUBI Assets or UTI Assets, as the case may be, the Origination Trustee will reallocate the remaining Origination Trust Assets (i.e., the Other SUBI Assets and the UTI Assets) so that each portfolio will bear the expense of the claim as nearly as possible as if the claim had been allocated as provided in the Origination Trust Agreement as set forth under 'Additional Document Provisions--The SUBI Trust Agreement--The SUBI, the Other SUBIs and the UTI'. INSOLVENCY RELATED MATTERS As described under 'The Origination Trust--Allocation of SUBI Assets' and 'Certain Legal Aspects of the Origination Trust and the SUBI--The SUBI', each holder or pledgee of the UTI and any Other SUBI will be required to expressly disclaim any interest in the SUBI Assets, and to fully subordinate any claims to the SUBI Assets in the event that this disclaimer is not given effect. Although no assurance can be given, in the unlikely event of a bankruptcy of ALF L.P., the Transferor believes that the SUBI Assets would not be treated as part of ALF L.P.'s bankruptcy estate and that, even if they were so treated, the subordination by holders and pledgees of the UTI and Other SUBIs should be enforceable. In addition, as described under 'Risk Factors--Risks in the Event of an Insolvency of World Omni; Substantive Consolidation with World Omni', the Transferor has taken steps in structuring the transactions contemplated hereby that are intended to make it unlikely that the voluntary or involuntary application for relief by World Omni under any Insolvency Laws will result in consolidation of the assets and liabilities of ALF LLC, ALF L.P., WOLS LLC, the Transferor, the Origination Trust or the Trust with those of World Omni. If, however, (i) a court concluded that the assets and liabilities of ALF LLC, ALF L.P., the Transferor, WOLS LLC, the Origination Trust or the Trust should be consolidated with those of World Omni in the event of the application of applicable Insolvency Laws to World Omni, (ii) a filing were made under any Insolvency Law by or against ALF LLC, ALF L.P., the Transferor, WOLS LLC, the Origination Trust or the Trust or (iii) an attempt were made to litigate any of the foregoing issues, delays in payments on the Notes and possible reductions in the amount of such payments could occur. LEGAL PROCEEDINGS None of ALF LLC, ALF L.P., the Transferor or WOLS LLC is a party to any legal proceeding. World Omni is a party to, and is vigorously defending, numerous legal proceedings, all of which it believes constitute ordinary routine litigation incidental to the business and activities conducted by World Omni. The Origination Trustee, on 86 <PAGE> behalf of the Origination Trust, has been named as a defendant in various cases which it believes constitute ordinary routine litigation incidental to the business and activities conducted by the Origination Trustee as an assignee of lease contracts and leased vehicles. For a description of a pending IRS review, see 'World Omni--Certain Administrative and Legal Proceedings' and 'Material Federal Income Tax Considerations--Possible Alternative Treatment of the Class A Notes.' CERTAIN LEGAL ASPECTS OF THE CONTRACTS AND THE LEASED VEHICLES BACK-UP SECURITY INTERESTS Absent prior perfection of a security interest by the Trust or the Indenture Trustee in the SUBI Assets, the holder of a perfected lien in one or more SUBI Assets would have priority over the respective interests of the Indenture Trustee and Trust in such SUBI Assets. Therefore, certain actions have been taken to ensure that the Indenture Trustee will be deemed to have a perfected security interest in the SUBI Certificate (and the SUBI evidenced thereby) and in the Contracts and the rights thereunder susceptible of perfection by the filing of a financing statement under the Uniform Commercial Code (the 'UCC') in effect in the States of Alabama, Illinois and Florida. In particular, on or prior to the Closing Date, UCC-1 financing statements will be filed in the States of Alabama, Florida and Illinois to effect this perfection. By virtue of its possession of the SUBI Certificate, the Indenture Trustee also will be deemed to have a perfected security interest therein (and in the SUBI evidenced thereby). However, no action will be taken to perfect any lien that the Indenture Trustee may be deemed to have in the Leased Vehicles. Therefore, to the extent that a valid lien is imposed by a third party against a Leased Vehicle, the interest of the lienholder will be superior to the unperfected beneficial interest of the Indenture Trustee in such Leased Vehicle. Although the Servicing Agreement will require the Servicer to contest all such liens and cause the removal of any liens that may be imposed, if any such liens are imposed against the Leased Vehicles, investors in the Class A Notes could incur a loss on their investment. For further information relating to potential liens on the SUBI Assets, see 'Additional Document Provisions--The Servicing Agreement--Notification of Liens and Claims' and 'Certain Legal Aspects of the Origination Trust and the SUBI--The SUBI'. The Indenture Trustee's back-up security interest in the Contracts could be subordinate to the interest of certain other parties who take possession of the Contracts before the filing described above has been completed. Specifically, the Indenture Trustee's security interest in a Contract could be subordinate to the rights of a purchaser of such Contract who takes possession thereof without knowledge or actual notice of the Indenture Trustee's security interest. The Contracts will not be stamped to reflect the foregoing back-up security arrangements. As noted under 'Certain Legal Aspects of the Origination Trust and the SUBI--The SUBI', various liens could be imposed upon all or part of the SUBI Assets that, by operation of law, would take priority over the Indenture Trustee's interest therein. Such liens could include tax liens arising against the Transferor or the Trust, mechanic's, repairmen's, garagemen's and motor vehicle accident liens and certain liens for personal property taxes, in each case arising with respect to a particular Leased Vehicle, liens arising under various state and federal criminal statutes and certain liens, more fully described under 'Risk Factors--Risks Associated with ERISA Liabilities', in favor of the PBGC. Additionally, any perfected security interest of the Indenture Trustee in all or part of the property of the Trust could also be subordinate to claims of any trustee in bankruptcy or debtor-in-possession in the event of a bankruptcy of the Transferor prior to any perfection of the transfer of the assets transferred by the Transferor to the Trust pursuant to the Agreement, as more fully described under 'Risk Factors--Risks in the Event of an Insolvency of World Omni; Substantive Consolidation with World Omni'. VICARIOUS TORT LIABILITY Although the Origination Trust will own the leased vehicles, they will be operated by the lessees and their respective invitees. State laws, including the laws in the Five State Area, differ as to whether anyone suffering injury to person or property involving a leased vehicle may bring an action against the owner of the vehicle merely by virtue of that ownership. 87 <PAGE> In Alabama and Georgia, a victim of such an accident has no such cause of action against the owner of a leased vehicle arising from the negligent operation of such leased vehicle unless the owner has negligently entrusted or negligently continues to entrust the vehicle to an inappropriate lessee. In Florida, under Section 324.021(9)(b), Florida Statutes, the owner of a motor vehicle that is subject to a lease having an initial term of at least one year is exempt from liability arising out of an accident in which the leased vehicle is involved if the lessee is required under the lease to maintain certain specified levels of insurance and such insurance is in effect. In 1991, in a case involving finance leases, the Florida Supreme Court ruled that this statute is constitutional and that a Florida owner/lessor that complies with the statute will not be deemed the owner of the leased vehicle for purposes of financial responsibility for liability or tort claims arising out of the negligent operation of the leased vehicle or the negligent acts of the operator. In 1992, the Florida Supreme Court held that this statute is applicable to true leases as well as finance leases. In March 1996, the Florida Supreme Court strictly interpreted the requirements of Section 324.021(9)(b), ruling that the existence of a lessor's blanket contingent liability insurance policy did not satisfy the statutory requirement that the lessee have insurance in effect at the time of the accident and denying the lessor the liability exemption provided in the statute. However, effective with respect to actions brought on or after June 1, 1996, the statute was amended to provide that a lessor's blanket contingent liability insurance policy with certain required policy limits will be deemed to satisfy the statute's requirements for the liability exemption. The Origination Trust's insurance coverage meets these requirements. In North Carolina, a lessor of a motor vehicle generally is not responsible to injured parties for a lessee's negligent use of the leased vehicle when all control has been relinquished to the lessee, unless the lessor knew or in the exercise of reasonable care should have known that the leased vehicle was defective or unsafe at the time of delivery to the lessee and the defect or unsafe condition caused injury, or if the lessor negligently entrusted the vehicle to an incompetent lessee. As more fully described under 'Risk Factors--Risks Associated with Vicarious Tort Liability', following an accident involving a Leased Vehicle, under certain circumstances the Origination Trust may be the subject of an action for damages as a result of its ownership of such Leased Vehicle. To the extent that applicable state law permits such an action, the Origination Trust and the Origination Trust Assets may be subject to liability. However, the laws of many States, including each of the States in the Five State Area, either do not permit such suits, or the lessor's liability is capped at the amount of any liability insurance that the lessee was required to, but failed to, maintain. Although the Origination Trust's insurance coverage is substantial, in the event that all applicable insurance coverage were exhausted and damages were assessed against the Origination Trust, claims could be imposed against the assets of the Origination Trust, including the Leased Vehicles. However, such claims would not take priority over any SUBI Assets to the extent that the Indenture Trustee has a prior perfected security interest therein (such as with respect to the Contracts) as further described under 'Certain Legal Aspects of the Contracts and the Leased Vehicles--Back-up Security Interests'. If any such claims were imposed against the assets of the Origination Trust, investors in the Class A Notes could incur a loss on their investment. REPOSSESSION OF LEASED VEHICLES In the event that a default by a lessee has not been cured within a certain period of time after notice, the Servicer will ordinarily retake possession of the related leased vehicle. Some jurisdictions require that the lessee be notified of the default and be given a time period within which to cure the default prior to repossession. Generally, this right to cure may be exercised on a limited number of occasions in any one-year period. In these jurisdictions, if the lessee objects or raises a defense to repossession, an order must be obtained from the appropriate state court, and the vehicle must then be repossessed in accordance with that order. Other jurisdictions permit repossession without notice (although in Florida, Georgia and North Carolina a course of conduct in which the lessor has accepted late payments has been held to create a right of the lessee to receive prior notice), but only if the repossession can be accomplished peacefully. If a breach of the peace cannot be avoided, judicial action is required. In Georgia, a leased vehicle may be repossessed without notice, but only if the repossession can be accomplished without a breach of the peace. If a breach of the peace cannot be avoided, the lessor must seek a writ of possession in a state court action or pursue other judicial action to repossess such leased vehicle. 88 <PAGE> After the Servicer has repossessed a Leased Vehicle, it may provide the lessee with a period of time within which to cure the default under the related Contract. If by the end of such period the default has not been cured, the Servicer will attempt to sell the Leased Vehicle. The Net Repossessed Vehicle Proceeds therefrom may be less than the remaining amounts due under the Contract at the time of default by the lessee. DEFICIENCY JUDGMENTS The proceeds of sale of a leased vehicle generally will be applied first to the expenses of resale and repossession and then to the satisfaction of the amounts due under the related lease contract. While some states impose prohibitions or limitations on deficiency judgments if the net proceeds from resale of a leased vehicle do not cover the full amounts due under the related lease contract, a deficiency judgment can be sought in those states (including each of the States in the Five State Area) that do not prohibit directly or limit such judgments. However, in some states (including Florida), a lessee may be allowed an offsetting recovery for any amount not recovered at resale because the terms of the resale were not commercially reasonable. In any event, a deficiency judgment would be a personal judgment against the lessee for the shortfall, and a defaulting lessee would be expected to have little capital or sources of income available following repossession. Therefore, in many cases, it may not be useful to seek a deficiency judgment. Even if a deficiency judgment is obtained, it may be settled at a significant discount. In Georgia, amounts recoverable by the lessor of a leased vehicle from a lessee upon default or early termination are not considered to be 'deficiency judgments', but damages for breach or early termination of the related lease contract. In the case of liquidated damages provided for in the Contracts, the only limitation or prohibition on such damages is that they are reasonable in light of the anticipated harm caused by the default. Georgia law does not require that any excess proceeds from disposition of a leased vehicle be paid to a lessee. Under the Georgia Motor Vehicle Warranty Rights Act, however, where a lessor or lessee has exercised its rights against the manufacturer and obtained a replacement vehicle and the lessor realizes a gain from disposition of the replacement vehicle, the lessor must refund to the lessee the lesser of any offset for use paid by the lessee to the manufacturer or the gain realized by the lessor. CONSUMER PROTECTION LAWS Numerous federal and state consumer protection laws impose requirements upon lessors and servicers involved in consumer leasing. The federal Consumer Leasing Act of 1976 and Regulation M, issued by the Board of Governors of the Federal Reserve System, for example, require that a number of disclosures be made at the time a vehicle is leased, including the amount of any down payment, a description of the lessee's liability at the end of the lease term, the amount of any periodic payments, the circumstances under which the lessee may terminate the lease prior to the end of the lease term, the capitalized cost of the vehicle and a warning regarding possible charges for early termination. The various consumer protection laws would apply to the Origination Trustee as a 'co-lessor' of the Contracts and may also apply to the Trust as holder of a beneficial interest in the Contracts. The failure to comply with such consumer protection laws may give rise to liabilities on the part of the Servicer, the Origination Trust and the Origination Trustee, including liabilities for statutory damages and attorneys' fees. In addition, claims by the Servicer, the Origination Trust and the Origination Trustee may be subject to set-off as a result of such noncompliance. Courts have applied general equitable principles in litigation relating to repossession and deficiency balances. These equitable principles may have the effect of relieving a lessee from some or all of the legal consequences of a default. In several cases, consumers have asserted that the self-help remedies of lessors violate the due process protection provided under the Fourteenth Amendment to the Constitution of the United States. Courts have generally found that repossession and resale by a lessor do not involve sufficient state action to afford constitutional protection to consumers. Many states, including each State in the Five State Area, have adopted laws (each, a 'Lemon Law') providing redress to consumers who purchase or lease a vehicle that remains out of conformance with its manufacturer's warranty after a specified number of attempts to correct a problem or after a specific time period. Should any Leased Vehicle become subject to a Lemon Law, a lessee could compel the Origination Trust to 89 <PAGE> terminate the related Contract and refund all or a portion of payments that previously have been paid. Although the Origination Trust may be able to assert a claim against the manufacturer of any such defective Leased Vehicle, there can be no assurance any such claim would be successful. Historically, less than one-half of one percent of all automobiles and light duty trucks leased by World Omni (including lease contracts owned by the Origination Trustee on behalf of the Origination Trust or by certain special purpose subsidiaries of World Omni) have become the subject of an action under any of the Lemon Laws of any jurisdiction. As noted below, World Omni will represent and warrant to the Owner Trustee and the Indenture Trustee as of the Initial Cutoff Date and as of each Subsequent Cutoff Date that none of the Initial Leased Vehicles or the related Subsequent Leased Vehicles, as the case may be, is out of compliance with any law, including a Lemon Law. Nevertheless, there can be no assurance that one or more Leased Vehicles will not become subject to return (and the related Contract terminated) in the future under a Lemon Law. Representations and warranties will be made in the Servicing Agreement that each Contract complies with all requirements of law in all material respects. If any such representation and warranty proves to be incorrect with respect to any Contract, and is not timely cured, World Omni will be required under the Servicing Agreement to deposit an amount equal to the Reallocation Payment (together with, in certain circumstances during the Amortization Period, an amount equal to the Reallocation Deposit Amount) in respect of such Contract into the SUBI Collection Account unless the breach is cured. See 'Additional Document Provisions--The SUBI Trust Agreement--The SUBI, the Other SUBIs and the UTI' and 'The Contracts--Representations, Warranties and Covenants' for further information regarding the foregoing representations and warranties. OTHER LIMITATIONS In addition to laws limiting or prohibiting deficiency judgments, numerous other statutory provisions, including applicable Insolvency Laws, may interfere with or affect the ability of a lessor to enforce its rights under an automobile or light duty truck lease contract. For example, if a lessee commences bankruptcy proceedings, the lessor's receipt of rental payments due under the lease contract is likely to be delayed. In addition, a lessee who commences bankruptcy proceedings might be able to assign the lease contract to another party even though the lease prohibits assignment. MATERIAL INCOME TAX CONSIDERATIONS FEDERAL TAXATION General Set forth below is a discussion representing the opinion of Cadwalader, Wickersham & Taft, special federal income tax counsel to the Trust, as to material federal income tax consequences to holders of the Class A Notes who are original owners and who hold the Class A Notes as capital assets under the Internal Revenue Code of 1986, as amended (the 'Code'). This discussion does not purport to be complete or to deal with all aspects of federal income taxation or any aspects of state or local taxation that may be relevant to Class A Noteholders or Note Owners in light of their particular circumstances, nor to certain types of Class A Noteholders or Note Owners subject to special treatment under the federal income tax laws (for example, banks and life insurance companies). This discussion is based upon present provisions of the Code, the regulations promulgated thereunder and judicial and ruling authorities, all of which are subject to change, which change may be retroactive. The parties do not intend to seek a ruling from the IRS on any of the issues discussed below. Moreover, there can be no assurance that if such a ruling were sought, the IRS would rule favorably. Taxpayers and preparers of tax returns (including those filed by any partnership or other issuer) should be aware that under applicable Treasury Regulations a provider of advice on specific issues of law is not considered an income tax return preparer unless the advice is (i) given with respect to events that have occurred at the time the advice is rendered and is not given with respect to the consequences of contemplated actions and (ii) is directly relevant to the determination of an entry on a tax return. Accordingly, taxpayers should consult their respective tax advisors and tax return preparers regarding the preparation of any item on a tax return, even where the anticipated tax treatment has been discussed herein. Prospective investors should consult their own tax advisors with regard to 90 <PAGE> the federal income tax consequences of the purchase, ownership or disposition of the Class A Notes, as well as the tax consequences arising under the laws of any state, foreign country or other taxing jurisdiction. Characterization of the Class A Notes as Indebtedness The Transferor, the Owner Trustee, each Noteholder, and each Note Owner (by acquiring a beneficial interest in a Class A Note) will express in the Agreement and in the Indenture their intent that, for federal, state and local income and franchise tax purposes, the Class A Notes will be indebtedness, secured by the assets of the Trust. The Transferor and the Owner Trustee, by entering into the Agreement and the Indenture, and each Noteholder and each Note Owner, by acquiring a beneficial interest in a Class A Note, will agree to treat the Class A Notes as indebtedness for federal, state and local income and franchise tax purposes. In general, the characterization of a transaction for federal income tax purposes is based upon economic substance, and the substance of the transaction in which the Class A Notes are issued is consistent with the treatment of the Class A Notes as debt for federal income tax purposes. The determination of whether the economic substance of a property transfer is a sale or a loan secured by the transferred property depends upon numerous factors designed to determine whether the transferor has relinquished (and the transferee has obtained) substantial incidents of ownership in the property. The primary factors examined are whether the transferee has the opportunity to gain if the property increases in value, and has the risk of loss if the property decreases in value. Based upon its analysis of such factors, Cadwalader, Wickersham & Taft is of the opinion that, for federal income tax purposes the characterization of the Class A Notes should be governed by the substance of the transaction and accordingly, (i) the Trust will not be treated as an association taxable as a corporation and (ii) the Class A Notes will properly be characterized as indebtedness that is secured by the Trust assets. Taxation of Interest and Discount Income Assuming that the Note Owners are owners of debt obligations for federal income tax purposes, interest generally will be taxable as ordinary income for federal income tax purposes when received by the Note Owners utilizing the cash method of accounting and when accrued by Note Owners utilizing the accrual method of accounting. Interest received on the Class A Notes may also constitute 'investment income' for purposes of certain limitations of the Code concerning the deductibility of investment interest expense. Original Issue Discount. Under regulations issued with respect to the original issue discount ('OID') provisions of the Code, the Class A Notes will be deemed to have been issued with OID in an amount equal to the excess of the 'stated redemption price at maturity' of the Class A-1, Class A-2, Class A-3 or Class A-4 Notes, as the case may be (generally equal to their principal amount as of the date of original issuance plus all interest other than 'qualified stated interest' payable prior to or at maturity), over their original issue price (in this case, the initial offering price at which a substantial amount of the related Class of Class A Notes is sold to the public). The issue price of a Class A Note is the first price at which a substantial amount of Class A Notes are sold to the public (excluding bond houses, brokers, underwriters or wholesalers). If less than a substantial amount of a particular Class of Class A Notes is sold for cash on or prior to the Closing Date, the issue price of such Class will be treated as the fair market value of such Class on the Closing Date. The Trust will treat the issue price of a Class A Note as including the amount paid by a Class A Noteholder for accrued interest that relates to a period prior to the issue date of the Class A Note; a Class A Noteholder may, however, elect to treat such accrued interest as a separate asset received on the first Distribution Date. The stated redemption price at maturity of a Class A Note includes the original principal amount of the Class A Note, but generally will not include distributions of interest if such distributions constitute 'qualified stated interest'. Qualified stated interest generally means interest payable at a single fixed rate or qualified variable rate provided that such interest payments are unconditionally payable at intervals of one year or less during the entire term of the Class A-1, Class A-2, Class A-3 or Class A-4 Notes, as the case may be. Under the OID provisions of the Code, interest will only be treated as qualified stated interest if it is 'unconditionally payable'. Interest will be treated as 'unconditionally payable' only if Noteholders have reasonable remedies to compel payment of interest deficiencies (e.g., default and acceleration rights). Because Class A Noteholders will not be entitled to penalty payments of interest on interest deficiencies, and Class A Noteholders will have no default and acceleration rights in the event of interest shortfalls, interest paid on the Class A Notes may not be treated by the IRS as qualified stated interest, and, in such event, would be treated as OID. A Class A Noteholder must include OID income over 91 <PAGE> the term of the related Class A Note under a constant yield method. In general, OID must be included in income in advance of the receipt of cash representing that income, regardless of the Noteholder's method of accounting. A holder of a Class A Note must include such OID in gross income as ordinary interest income as it accrues under a method taking into account an economic accrual of the discount. In general, OID must be included in income in advance of the receipt of the cash representing that income. The amount of OID on a Class A Note will be considered to be zero if it is less than a de minimis amount determined under the Code. Under the de minimis rule, OID on a Class A Note will be considered to be zero if such OID is less than 0.25% of the stated redemption price at maturity of the Class A Note multiplied by the weighted average maturity of the Class A Note. Noteholders generally must report de minimis OID pro rata as principal payments are received, and such income will be capital gain if the Class A Note is held as a capital asset. However, accrual method holders may elect to accrue all de minimis OID as well as market discount under a constant interest method. The holder of a Class A Note issued with OID must include in gross income, for all days during its taxable year on which it holds such Class A Note, the sum of the 'daily portions' of such original issue discount. The amount of OID includible in income by a Noteholder will be computed by allocating to each day during a taxable year a pro rata portion of the original issue discount that accrued during the relevant accrual period, assuming no change in the initial Note Rate. Adjustments would be made for each accrual period to the extent the current Note Rate was greater or less than the initial Note Rate. If a Noteholder purchases a Class A Note issued with OID at an 'acquisition premium' (i.e., at a price in excess of the adjusted issue price of the Class A Note, but less than or equal to the 'stated redemption price at maturity'), the amount includible by such Noteholder in income in each taxable year as OID will be reduced by that portion of the premium properly allocable to such year. Although the matter is not entirely clear, the Transferor currently intends to report all stated interest on the Class A Notes as qualified stated interest and not as OID. Market Discount. Note Owners should be aware that the resale of a Class A Note may be affected by the market discount rules of the Code. These rules generally provide that, subject to a de minimis exception, if a holder acquires a Class A Note at a market discount (i.e., at a price below its 'adjusted issue price') and thereafter recognizes gain upon a disposition of the Class A Note, the lesser of such gain or the portion of the market discount that accrued while the Class A Note was held by such holder will be treated as ordinary interest income realized at the time of the disposition. A Class A Noteholder may elect to include market discount currently in gross income in taxable years to which it is attributable, computed using either a ratable accrual or a yield to maturity method. A Class A Noteholder who does not make such election may be required to defer a portion of the deduction for interest on indebtedness incurred to purchase or carry the Class A Note. Premium. A Note Owner who purchases a Class A Note for more than its stated redemption price at maturity will be subject to the premium amortization rules of the Code, provided that the Class A Note was held as a capital asset. Under those rules, the Note Owner may elect to amortize such premium on a constant yield method. Amortizable premium reduces interest income on the related Class A Note. If the Note Owner does not make such an election, the premium paid for the Class A Note generally will be included in the tax basis of the Class A Note in determining the gain or loss on its disposition or upon receipt of a principal payment. Each Note Owner should consult his own tax advisor regarding the impact of the original issue discount, market discount, and premium amortization rules. Sales of Class A Notes In general, a Note Owner will recognize gain or loss upon the sale, exchange, redemption or other taxable disposition of a Class A Note measured by the difference between (i) the amount of cash and the fair market value of any property received (other than amounts attributable to, and taxable as, accrued stated interest) and (ii) the Note Owner's tax basis in the Class A Note (as increased by any OID or market discount previously included in income by the holder and decreased by any deductions previously allowed for amortizable bond premium and by any payments, other than qualified stated interest payments, received with respect to such 92 <PAGE> Class A Note). Subject to the market discount rules discussed above and to the more than one-year holding period requirement for long-term capital gain treatment, any such gain or loss generally will be long-term capital gain or loss, provided that the Class A Note was held as a capital asset. The federal income tax rates applicable to capital gains for taxpayers other than individuals, estates and trusts are currently the same as those applicable to ordinary income; however, the maximum ordinary income rate for individuals, estates and trusts is generally 39.6%, whereas the maximum long-term capital gains rate for such taxpayers is 20% for capital assets held for more than one year. Moreover, capital losses generally may be used only to offset capital gains. Federal Income Tax Consequences to Foreign Investors The following information describes the United States federal income tax treatment of investors that are not United States persons ('Foreign Investors') if the Class A Notes are treated as debt. The term 'Foreign Investor' means any person other than (i) a citizen or resident of the United States, (ii) a corporation, partnership or other entity organized in or under the laws of the United States or any state or political subdivision thereof (other than a partnership that is not treated as a United States person under any applicable Treasury regulations), (iii) an estate whose income is subject to United States federal income tax, regardless of its source or (iv) a trust whose administration is subject to the primary supervision of a United States court and which has one or more United States persons who have authority to control all substantial decisions of the trust. Notwithstanding the preceding sentence, to the extent provided in regulations, certain trusts in existence on August 20, 1996 and treated as United States persons prior to such date that elect to continue to be so treated also shall be considered U.S. Persons. The Code and Treasury regulations generally subject interest paid to a Foreign Investor to a withholding tax at a rate of 30% (unless such rate were changed by an applicable treaty). The withholding tax, however, is eliminated with respect to certain 'portfolio debt investments' issued to Foreign Investors. Portfolio debt investments include debt instruments issued in registered form for which the United States payor receives a statement that the beneficial owner of the instrument is a Foreign Investor. The Class A Notes will be issued in registered form; therefore, if the information required by the Code is furnished (as described below) and no other exceptions to the withholding tax exemption are applicable, no withholding tax will apply to the Class A Notes. For the Class A Notes to constitute portfolio debt investments exempt from United States withholding tax, the withholding agent must receive from the Note Owner an executed IRS Form W-8 signed under penalty of perjury by the Note Owner stating that the Note Owner is a Foreign Investor and providing such Note Owner's name and address. The statement must be received by the withholding agent in the calendar year in which the interest payment is made, or in either of the two preceding calendar years. A Note Owner that is a nonresident alien or foreign corporation will not be subject to United States federal income tax on gain realized on the sale, exchange or redemption of such Class A Note, provided that (i) such gain is not effectively connected with a trade or business carried on by the Note Owner in the United States, (ii) in the case of a Note Owner that is an individual, such Note Owner is not present in the United States for 183 days or more during the taxable year in which such sale, exchange or redemption occurs and (iii) in the case of gain representing accrued interest, the conditions described in the immediately preceding paragraph are satisfied. Backup Withholding A Note Owner may be subject to a backup withholding at the rate of 31% with respect to interest paid on the Class A Notes if the Note Owner, upon issuance, fails to supply the Trustee or his broker with such Note Owner's taxpayer identification number, fails to report interest, dividends or other 'reportable payments' (as defined in the Code) properly, or under certain circumstances, fails to provide the Trustee or his broker with a certified statement, under penalty of perjury, that such Note Owner is not subject to backup withholding. Information returns will be sent annually to the IRS and to each Note Owner setting forth the amount of interest paid on the Class A Notes and the amount of tax withheld thereon. 93 <PAGE> NEW WITHHOLDING REGULATIONS On October 6, 1997, the Treasury Department issued new regulations (the 'New Regulations') which make certain modifications to the withholding, backup withholding and information reporting rules described above. The New Regulations attempt to unify certification requirements and modify reliance standards. The New Regulations will generally be effective for payments made after December 31, 1999, subject to certain transition rules. Prospective investors are urged to consult their own tax advisors regarding the New Regulations. POSSIBLE ALTERNATIVE TREATMENT OF THE CLASS A NOTES Although, as described above, it is the opinion of Cadwalader, Wickersham & Taft that the Class A Notes will properly be characterized as debt for federal income tax purposes, such opinion will not be binding on the IRS and thus no assurance can be given that such a characterization shall prevail. If the IRS were to contend successfully that the Class A Notes did not represent debt for federal income tax purposes, certain adverse tax consequences to the Class A Noteholders could result. For example, income to certain tax-exempt entities (including pension funds) generally would be 'unrelated business taxable income', and income to foreign holders generally would be subject to U.S. withholding tax and reporting requirements. As described under 'World Omni--Certain Administrative and Legal Proceedings', as part of its regular examination process of the consolidated Federal income tax returns of JMFE and its subsidiaries (which include World Omni) for certain prior years, the IRS currently is reviewing, among other things, certain transactions that were consummated in prior years that are similar to the transactions described in this Prospectus. The IRS has proposed treating (a) such transactions as sales rather than financings for Federal income tax purposes, which would affect World Omni's depreciation deductions and (b) each of the Origination Trust and securitization trusts created for such transactions as an association taxable as a corporation rather than a trust for Federal income tax purposes. In connection with each transaction, World Omni received an opinion of tax counsel to the effect that such transactions were properly treated as financings for Federal income tax purposes and that neither the Origination Trust nor the securitization trusts created for such transactions would be treated as an association taxable as a corporation for Federal income tax purposes. While management believes that any challenge by the IRS, if made, would be unsuccessful, there can be no assurance of this result. Prospective investors are advised to consult with their own tax advisors regarding the federal income tax consequences of the purchase, ownership and disposition of the Class A Notes. FLORIDA INCOME TAXATION The Florida Administrative Code includes a rule (the 'Loan Rule'), promulgated under the Florida Income Tax Code, which provides that a financial organization earning or receiving interest from loans secured by tangible property located in Florida will be deemed to be conducting business or earning or receiving income in Florida, and will be subject to Florida corporate income tax irrespective of the place of receipt of such interest. A 'financial organization' is defined to include any bank, trust company, savings bank, industrial bank, land bank, safe deposit company, private banker, savings and loan association, credit union, cooperative bank, small loan company, sales finance company or investment company. If the Loan Rule were to apply to an investment in the Class A Notes, then a financial organization investing in the Class A Notes would be subject to Florida corporate income tax on a portion of its income at a maximum rate of 5.5%, and would be required to file an income tax return in Florida, even if it has no other Florida contacts. English, McCaughan & O'Bryan, P.A., special Florida counsel to the Transferor, is of the opinion that if the matter were properly presented to a court having jurisdiction, and assuming interpretation of relevant law on a basis consistent with existing authority, such court would hold that the Loan Rule would not apply to an investment in the Class A Notes or the receipt of interest thereon by a financial organization with no other Florida contacts. Consequently, prospective investors are urged to consult their own tax advisers as to the applicability of Florida taxation to their investments in the Notes and to their ability to offset any such Florida tax against any other state tax liabilities that such investors might have. 94 <PAGE> ERISA CONSIDERATIONS Subject to the following discussion, the Class A Notes may be acquired by pension, profit-sharing or other employee benefit plans, as well as an individual retirement accounts and Keogh plan (each a 'Benefit Plan'). Section 406 of the Employee Retirement Income Security Act of 1974, as amended ('ERISA'), and Section 4975 of the Code prohibit a Benefit Plan from engaging in certain transactions with persons that are 'parties in interest' under ERISA or 'disqualified persons' under the Code with respect to such Benefit Plan. A violation of these 'prohibited transaction' rules may result in an excise tax or other penalties and liabilities under ERISA and the Code for such persons or the fiduciaries of the Benefit Plan. In addition, Title I of ERISA also requires fiduciaries of a Benefit Plan subject to ERISA to make investments that are prudent, diversified and in accordance with the governing plan documents. Certain transactions involving the Trust might be deemed to constitute prohibited transactions under ERISA and the Code with respect to a Benefit Plan that purchased Class A Notes if assets of the Trust were deemed to be assets of the Benefit Plan. Under a regulation issued by the United States Department of Labor (the 'Regulation'), the assets of the Trust would be treated as plan assets of a Benefit Plan for the purposes of ERISA and the Code only if the Benefit Plan acquired an 'equity interest' in the Trust and none of the exceptions to plan assets contained in the Regulation was applicable. An equity interest is defined under the Regulation as an interest other than an instrument which is treated as indebtedness under applicable local law and which has no substantial equity features. Although there is little guidance on the subject, the Transferor believes that, at the time of their issuance, the Class A Notes should be treated as indebtedness of the Trust without substantial equity features for purposes of the Regulation. This determination is based in part upon the traditional debt features of the Class A Notes, including the reasonable expectation of purchasers of Class A Notes that the Class A Notes will be repaid when due, as well as the absence of conversion rights, warrants and other typical equity features. The debt treatment of the Class A Notes for ERISA purposes could change if the Trust incurred losses. However, without regard to whether the Class A Notes are treated as an equity interest for purposes of the Regulation, the acquisition or holding of Class A Notes by or on behalf of a Benefit Plan could be considered to give rise to a prohibited transaction if the Trust, the Indenture Trustee, the Owner Trustee, the Origination Trustee, the Transferor or World Omni is or becomes a party in interest or a disqualified person with respect to such Benefit Plan. Certain exemptions from the prohibited transaction rules could be applicable to the purchase and holding of Class A Notes by a Benefit Plan depending on the type and circumstances of the plan fiduciary making the decision to acquire such Class A Notes. Included among these exemptions are: Prohibited Transaction Class Exemption ('PTCE') 96-23, regarding transactions effected by 'in-house asset managers'; PTCE 95-60, regarding investments by insurance company general accounts; PTCE 91-38, regarding investments by bank collective investment funds; PTCE 90-1, regarding investments by insurance company pooled separate accounts; and PTCE 84-14, regarding transactions effected by 'qualified professional asset managers'. By acquiring a Note, each purchaser will be deemed to represent that either (i) it is not acquiring the Class A Notes with the assets of a Benefit Plan; or (ii) the acquisition and holding of the Class A Notes will not give rise to a nonexempt prohibited transaction under Section 406(a) of ERISA or Section 4975 of the Code. Due to the complexities of these rules and the penalties imposed upon persons involved in prohibited transactions, it is important that the fiduciary of a Benefit Plan considering the purchase of Class A Notes consult with its counsel regarding whether the assets of the Trust would be considered plan assets, and the applicability of the prohibited transaction provisions of ERISA and the Code to such investment. Moreover, each Benefit Plan fiduciary should determine whether, under the general fiduciary standards of investment prudence and diversification, an investment in the Class A Notes is appropriate for the Benefit Plan, taking into account the overall investment policy of the Benefit Plan and the composition of the Benefit Plan's investment portfolio. 95 <PAGE> UNDERWRITING Under the terms and subject to the conditions contained in an Underwriting Agreement dated November 6, 1998 (the 'Underwriting Agreement'), the Underwriters named below (the 'Underwriters'), for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated is acting as representative (the 'Representative'), have severally but not jointly agreed to purchase from the Transferor the following respective principal amounts of Class A-1 Notes, Class A-2 Notes, Class A-3 Notes and Class A-4 Notes: <TABLE> <CAPTION> PRINCIPAL AMOUNT PRINCIPAL AMOUNT PRINCIPAL AMOUNT PRINCIPAL AMOUNT UNDERWRITER OF CLASS A-1 NOTES OF CLASS A-2 NOTES OF CLASS A-3 NOTES OF CLASS A-4 NOTES - ----------- ------------------ ------------------ ------------------ ------------------ <S> <C> <C> <C> <C> Credit Suisse First Boston Corporation......................... 169,850,000 173,800,000 161,950,000 138,796,285 Merrill Lynch, Pierce, Fenner & Smith Incorporated.............. 169,850,000 173,800,000 161,950,000 138,796,285 First Union Capital Markets, a division of Wheat First Securities, Inc................................. 30,100,000 30,800,000 28,700,000 24,596,810 NationsBanc Montgomery Securities LLC................................. 30,100,000 30,800,000 28,700,000 24,596,810 Salomon Smith Barney Inc.............. 30,100,000 30,800,000 28,700,000 24,596,810 ------------ ------------ ------------ ------------ Total............................ $430,000,000 $440,000,000 $410,000,000 $351,383,000 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ </TABLE> The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent that the Underwriters will be obligated to purchase all the Class A Notes if any are purchased. The Underwriting Agreement provides that, in the event of a default by an Underwriter, in certain circumstances the purchase commitments of the non-defaulting Underwriter may be increased or the Underwriting Agreement may be terminated. The Underwriters have agreed to reimburse the Transferor for certain of its expenses incurred in connection with the offering of the Class A Notes. The Transferor has been advised by the Representative that the Underwriters propose to offer the Class A-1 Notes, the Class A-2 Notes, the Class A-3 Notes and the Class A-4 Notes to the public initially at the public offering prices set forth on the cover page of this Prospectus and to certain dealers at such prices less a concession of 0.105%, 0.120%, 0.130% and 0.150% of the principal amount per Class A-1 Note, Class A-2 Note, Class A-3 Note and Class A-4 Note, respectively, and the Underwriters and such dealers may allow a discount of 0.100%, 0.100%, 0.125 and 0.125% of the principal amount per Class A-1 Note, Class A-2 Note, Class A-3 Note and Class A-4 Note, respectively, on sales to certain other dealers. After the initial public offering, the public offering price and concessions and discounts to dealers may be changed by the Underwriters. The Transferor and World Omni have jointly and severally agreed to indemnify the Underwriters against certain liabilities, including civil liabilities under the Securities Act, or contribute to payments which the Underwriters may be required to make in respect thereof. It is expected that delivery of the Class A Notes will be made against payment therefor on or about the date specified in the last paragraph of the cover page of this Prospectus, which is the ninth business day following the date hereof. Under Rule 15c6-1 of the Commission under the Exchange Act, trades in the secondary market generally are required to settle in three business days, unless the parties to any such trade expressly agree otherwise. Accordingly, purchasers who wish to trade Class A Notes on the date hereof will be required, by virtue of the fact that the Class A Notes initially will settle nine business days after the date hereof, to specify an alternate settlement cycle at the time of any such trade to prevent a failed settlement. Purchasers of Class A Notes who wish to trade Class A Notes on the date hereof should consult their own advisor. Upon receipt of a request by an investor who has received an electronic Prospectus from an Underwriter or a request by such investor's representative within the period during which there is an obligation to deliver a Prospectus, the Transferor or the Underwriters will promptly deliver, or cause to be delivered, without charge, a paper copy of the Prospectus. The Underwriters may engage in over-allotment, stabilizing transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Exchange Act. Over-allotment involves syndicate sales in excess of the offering size, which creates a syndicate short position. Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. Syndicate 96 <PAGE> covering transactions involve purchases of the Class A Notes in the open market after the distribution has been completed in order to cover syndicate short positions. Penalty bids permit the Underwriters to reclaim a selling concession from a syndicate member when the Class A Notes originally sold by such syndicate member are purchased in a syndicate covering transactions and penalty bids may cause the prices of the Class A Notes to be higher than they would otherwise be in the absence of such transactions. These transactions, if commenced, may be discontinued at any time. Neither the Transferor nor any Underwriter makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the prices of the Class A Notes. In addition, neither the Transferor nor any Underwriter makes any representation that the Underwriters will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. NOTICE TO CANADIAN RESIDENTS RESALE RESTRICTIONS The distribution of the Class A Notes in Canada is being made only on a private placement basis exempt from the requirement that the Transferor prepare and file a prospectus with the securities regulatory authorities in each province where trades of the Class A Notes are effected. Accordingly, any resale of the Class A Notes in Canada must be made in accordance with applicable securities laws which will vary depending on the relevant jurisdiction, and which may require resales to be made in accordance with available statutory exemptions or pursuant to a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the Class A Notes. REPRESENTATIONS OF PURCHASERS Each purchaser of Class A Notes in Canada who receives a purchase confirmation will be deemed to represent to the Transferor and the dealer from whom such purchase confirmation is received that (i) such purchaser is entitled under applicable provincial securities laws to purchase such Class A Notes without the benefit of a prospectus qualified under such securities laws, (ii) where required by law, that such purchaser is purchasing as principal and not as agent, and (iii) such purchaser has reviewed the text above under 'Notice to Canadian Residents--Resale Restrictions'. RIGHTS OF ACTION AND ENFORCEMENT The securities being offered are those of foreign issuers and Ontario purchasers will not receive the contractual right of action prescribed by Section 32 of the Regulation under the Securities Act (Ontario). As a result, Ontario purchasers must rely on other remedies that may be available, including common law rights of action for damages or rescission or rights of action under the civil liabilities provisions of the U.S. federal securities laws. All of the issuer's directors and officers as well as the experts named herein may be located outside of Canada and, as a result, it may not be possible for Ontario purchasers to effect service of process within Canada upon the issuer or such persons. All or a substantial portion of the assets of the issuer and such persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against the issuer or such persons in Canada or to enforce a judgment obtained in Canadian courts against such issuer or persons outside of Canada. Following a recent decision of the U.S. Supreme Court, it is possible that Ontario purchasers will not be able to rely upon the remedies set out in Section 12(2) of the Securities Act if the securities are being offered under a U.S. private placement memorandum. NOTICE TO BRITISH COLUMBIA RESIDENTS A purchaser of Class A Notes to whom the Securities Act (British Columbia) applies is advised that such purchaser is required to file with the British Columbia Securities Commission a report within ten days of the sale of any Class A Notes acquired by such purchaser pursuant to this offering. Such report must be in the form attached to British Columbia Securities Commission Blanket Order BOR #95/17, a copy of which may be obtained from the Transferor. Only one such report must be filed in respect of Class A Notes acquired on the same date and under the same prospectus exemption. 97 <PAGE> RATINGS OF THE CLASS A NOTES It is a condition of issuance that each of Moody's, Standard & Poor's and Fitch rates each Class of Class A Notes in its highest rating category. The ratings of the Class A Notes will be based primarily upon the value of the Initial Contracts, the Residual Value Insurance Policy (see 'Security for the Notes--The Reserve Fund--Other Reserve Fund Requirements' for information regarding the effect of a downgrade by a Rating Agency of the credit rating of the RV Insurer), the Reserve Fund, the Class A Interest Rate Swap, the Class A Swap Counterparty (see 'Risk Factors--Risks Associated with the Class A Swap Counterparty' for information regarding the effect of (i) a downgrade by a Rating Agency of the credit rating of the Class A Swap Counterparty and (ii) a payment default by the Class A Swap Counterparty) and the terms of the Transferor Interest and the Class B Notes. There is no assurance that any such rating will not be lowered or withdrawn by the assigning Rating Agency if, in its judgment, future circumstances so warrant. In the event that a rating with respect to any Class of Class A Notes is qualified, reduced or withdrawn, no person or entity will be obligated to provide any additional credit enhancement with respect to such Class of Class A Notes. Any reduction in the rating assigned to the Class A Swap Counterparty or the RV Insurer may result in a reduction in the rating of the Class A Notes. The ratings of the Class A Notes should be evaluated independently from similar ratings on other types of securities. A rating is not a recommendation to buy, sell or hold the related Class A Notes, inasmuch as such rating does not comment as to market price or suitability for a particular investor. The ratings of each Class of Class A Notes addresses the likelihood of the payment of principal of and interest on such Notes pursuant to their terms. There can be no assurance as to whether any rating agency other than Moody's, Standard & Poor's and Fitch will rate the Class A Notes, or, if one does, what rating will be assigned by such other rating agency. A rating on any Class of Class A Notes by another rating agency, if assigned at all, may be lower than the ratings assigned to such Class A Notes by each of Moody's, Standard & Poor's and Fitch. LEGAL MATTERS Certain legal matters with respect to the Class A Notes will be passed upon for the Transferor by Williams & Connolly, Washington, D.C. Certain other legal matters will be passed upon for the Transferor with respect to New York and Illinois law, by McDermott, Will & Emery, New York, New York and Chicago, Illinois, with respect to Alabama law, by Hand Arendall, L.L.C., Birmingham, Alabama, and with respect to Florida law, by English, McCaughan & O'Bryan, P.A., Fort Lauderdale, Florida. Cadwalader, Wickersham & Taft, New York, New York will act as special federal income tax counsel to the Transferor. Stroock & Stroock & Lavan LLP, New York, New York will act as counsel for the Underwriters. EXPERTS The statutory-basis balance sheets of Federal Insurance Company at December 31, 1997 and 1996, and the related statutory-basis statements of income, surplus to policyholders, and cash flows for each of the three years in the period ended December 31, 1997, appearing in this Registration Statement and related Prospectus have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon (which report expresses an adverse opinion under generally accepted accounting principles and an unqualified opinion under accounting practices prescribed or permitted by the Indiana Insurance Department) appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. 98 <PAGE> INDEX OF CAPITALIZED TERMS Set forth below is a list of the capitalized terms used in this Prospectus and the pages on which the definitions of such terms may be found. ABS....................................................... 44 Accelerated Principal Distribution Amount................. 11 Accounts.................................................. 56 Additional Loss Amounts................................... 76 Additional Loss Contract.................................. 68 Administrative Lien....................................... 29 Administrative Lienholders................................ 29 Advance................................................... 16 Agency Agreement.......................................... 77 Aggregate Net Investment Value............................ 14 Agreement................................................. 1 ALF LLC................................................... 2 ALF L.P................................................... 1 Alternate Reserve Fund Formula............................ 68 Amortization Date......................................... 9 Amortization Period....................................... 9 Backup Security Agreement................................. 58 Benefit Plan.............................................. 95 BONY...................................................... 1 Business Day.............................................. 6 Capped Contingent and Excess Liability Premiums........... 53 Capped Indenture Trustee Administrative Expenses.......... 53 Capped Origination Trust Administrative Expenses.......... 53 Capped Owner Trustee Administrative Expenses.............. 53 Cede...................................................... 5 Cedel..................................................... 5 Cedel Participants........................................ 61 Charged-off Amount........................................ 48 Charged-off Contract...................................... 48 Charge-off Rate........................................... 68 Charge-off Rate Test...................................... 68 Claims.................................................... 77 Class..................................................... 47 Class A Interest Rate Swap................................ ii Class A Net Swap Payment.................................. 7 Class A Net Swap Receipt.................................. 7 Class A Note Balance...................................... 5 Class A Noteholders....................................... 6 Class A Notes............................................. Cover Class A Percentage........................................ 10 Class A Swap Counterparty................................. 7 Class A-1 Allocation Percentage........................... 19 Class A-1 Interest Carryover Shortfall.................... 53 Class A-1 Note Factor..................................... 46 Class A-1 Note Principal Loss Amount...................... 51 Class A-1 Note Rate....................................... 6 Class A-1 Noteholders..................................... 6 Class A-1 Notes........................................... ii Class A-2 Allocation Percentage........................... 19 Class A-2 Interest Carryover Shortfall.................... 53 99 <PAGE> Class A-2 Note Factor..................................... 46 Class A-2 Note Principal Loss Amount...................... 51 Class A-2 Note Rate....................................... 6 Class A-2 Noteholders..................................... 6 Class A-2 Notes........................................... ii Class A-3 Allocation Percentage........................... 19 Class A-3 Interest Carryover Shortfall.................... 53 Class A-3 Note Factor..................................... 46 Class A-3 Note Principal Loss Amount...................... 51 Class A-3 Note Rate....................................... 6 Class A-3 Noteholders..................................... 6 Class A-3 Notes........................................... ii Class A-4 Allocation Percentage........................... 19 Class A-4 Interest Carryover Shortfall.................... 53 Class A-4 Note Factor..................................... 46 Class A-4 Note Principal Loss Amount...................... 51 Class A-4 Note Rate....................................... 6 Class A-4 Noteholders..................................... 6 Class A-4 Notes........................................... ii Class B Allocation Percentage............................. 53 Class B Interest Carryover Shortfall...................... 53 Class B Note Principal Carryover Shortfall................ 53 Class B Note Principal Loss Amount........................ 51 Class B Note Rate......................................... 51 Class B Noteholders....................................... 10 Class B Notes............................................. ii Class B Percentage........................................ 10 Class Note Balance........................................ 5 Closing Date.............................................. 4 Code...................................................... 90 Collection Period......................................... 8 Collections............................................... 9 Commission................................................ iii Contingent and Excess Liability Insurance Policies........ 70 Contracts................................................. 2 Cooperative............................................... 63 Covered Loss Amounts...................................... 53 Current Contracts......................................... 68 Cutoff Dates.............................................. 54 Dealers................................................... 1 Deerfield Office.......................................... 31 Definitive Notes.......................................... 47 Delinquency Rate.......................................... 68 Delinquency Test.......................................... 68 Deposit Date.............................................. 16 Depositaries.............................................. 5 Designated Maturity....................................... 49 Determination Date........................................ 50 Discounted Contract....................................... 8 Discounted Principal Balance.............................. 14 Distribution Account...................................... 56 Distribution Date......................................... ii Downgrade Reserve Fund Supplemental Requirement........... 67 Downgrade Trigger Event................................... 67 100 <PAGE> DTC....................................................... 5 DTC Participants.......................................... 61 Early Amortization Event.................................. 58 Early Termination Charge.................................. 38 ERISA..................................................... 17 ERISA Compliance Test..................................... 82 Euroclear................................................. 5 Euroclear Operator........................................ 63 Euroclear Participants.................................... 61 Events of Servicing Termination........................... 83 Excess Collections........................................ 52 Exchange Act.............................................. iii Extension Fee............................................. 33 Fair, Isaac............................................... 32 Federal................................................... 12 Fitch..................................................... 17 Five State Area........................................... 3 Foreign Investors......................................... 93 Indenture................................................. 47 Indenture Event of Default................................ 59 Indenture Events of Default............................... 72 Indenture Trustee......................................... Cover Indirect DTC Participants................................. 62 Initial Class A Note Balance.............................. 4 Initial Class A-1 Note Balance............................ 4 Initial Class A-2 Note Balance............................ 4 Initial Class A-3 Note Balance............................ 4 Initial Class A-4 Note Balance............................ 4 Initial Class B Note Balance.............................. 4 Initial Contracts......................................... 2 Initial Cutoff Date....................................... 2 Initial Deposit........................................... 13 Initial Leased Vehicles................................... 2 Initial Note Balance...................................... 4 Insolvency Event.......................................... 24 Insolvency Laws........................................... 24 Insurance Proceeds........................................ 56 Insured Residual Value Loss Amount........................ 12 Interest Collections...................................... 9 Investor Percentage....................................... 10 IRS....................................................... 31 IT........................................................ 26 JMFE...................................................... 3 Lease Rate................................................ 14 Leased Vehicles........................................... 2 Lemon Law................................................. 89 LIBOR Determination Date.................................. 49 Liquidated Contract....................................... 68 Liquidation Expenses...................................... 15 Liquidation Proceeds...................................... 15 Loan Rule................................................. 94 Loss Amounts.............................................. 19 Matured Contract.......................................... 14 Matured Leased Vehicle Expenses........................... 15 101 <PAGE> Matured Leased Vehicle Inventory.......................... 14 Matured Leased Vehicle Proceeds........................... 15 Maturity Date............................................. 38 Mobile Center............................................. 31 Monthly Payments.......................................... 14 Moody's................................................... 17 Net Liquidation Proceeds.................................. 9 Net Matured Leased Vehicle Proceeds....................... 9 Net Repossessed Vehicle Proceeds.......................... 9 New Regulations........................................... 94 Nonrecoverable Advance.................................... 79 Note Balance.............................................. 5 Note Distribution Amount.................................. 59 Note Owner................................................ 5 Note Principal Loss Amount................................ 53 Note Rates................................................ 51 Noteholders............................................... 10 Notes..................................................... ii Notional Amount........................................... 6 OID....................................................... 91 One-Month LIBOR........................................... 49 Origination Trust......................................... Cover Origination Trust Agreement............................... 11 Origination Trust Assets.................................. Cover Origination Trustee....................................... 1 Other SUBI Assets......................................... 28 Other SUBI Certificates................................... 28 Other SUBI Supplement..................................... 75 Other SUBIs............................................... 1 Outstanding Principal Balance............................. 14 Owner Trustee............................................. Cover Participants.............................................. 61 Payment Ahead............................................. 15 PBGC...................................................... 23 Permitted Investments..................................... 58 Prepayment................................................ 56 Prepayment Assumption..................................... 44 Principal Allocation...................................... 10 Principal Collections..................................... 8 PTCE...................................................... 95 Rating Agencies........................................... 17 Realized Value............................................ 38 Reallocation Deposit Amount............................... 48 Reallocation Payment...................................... 42 Record Date............................................... 6 Reference Banks........................................... 50 Registration Statement.................................... iii Regulation................................................ 95 Repossessed Vehicle Expenses.............................. 15 Repossessed Vehicle Proceeds.............................. 15 Representative............................................ 96 Required Amount........................................... 54 Required Deposit Ratings.................................. 57 Reserve Fund.............................................. 66 102 <PAGE> Reserve Fund Cash Requirement............................. 66 Reserve Fund Deficiency................................... 66 Reserve Fund Supplemental Requirement..................... 67 Reserve Fund Tests........................................ 68 Residual Value............................................ 14 Residual Value Insurance Policy........................... 12 Residual Value Loss Amount................................ 19 Revolving Period.......................................... 7 RV Insurer................................................ 12 RV Insurer Reserve Fund Supplemental Requirement.......... 67 RV Insurer Trigger Event.................................. 67 Schedule of Contacts and Leased Vehicles.................. 40 Securities Act............................................ iii Security Deposits......................................... 80 Servicer.................................................. 3 Servicer Letter of Credit................................. 57 Servicer's Certificate.................................... 81 Servicing Agreement....................................... 3 Servicing Fee............................................. 16 SET....................................................... 3 Southeast Toyota Finance.................................. 31 St. Louis Center.......................................... 31 Standard & Poor's......................................... 17 Stated Maturity Date...................................... 6 SUBI...................................................... Cover SUBI Assets............................................... ii SUBI Certificate.......................................... 11 SUBI Collection Account................................... 56 SUBI Supplement........................................... 11 SUBI Trust Agreement...................................... 11 Subsequent Contracts...................................... 2 Subsequent Cutoff Date.................................... 54 Subsequent Leased Vehicles................................ 2 Support Agreement......................................... 30 Swap Rate................................................. 7 Telerate Page 3750........................................ 50 Terms and Conditions...................................... 63 TMS....................................................... 30 Transaction Documents..................................... 72 Transfer Date............................................. 8 Transferor................................................ Cover Transferor Amounts........................................ 49 Transferor Certificate.................................... 47 Transferor Interest....................................... ii Transferor Percentage..................................... 49 Trust..................................................... Cover Trust Agent............................................... 11 UCC....................................................... 66 Unallocated Principal Collections......................... 49 Uncapped Administrative Expenses.......................... 52 Uncovered Loss Amounts.................................... 53 Underwriters.............................................. 96 Underwriting Agreement.................................... 96 Undistributed Transferor Excess Collections............... 52 103 <PAGE> U.S. Bank................................................. 2 U.S. Person............................................... 107 UTI....................................................... 1 UTI Assets................................................ 28 UTI Certificates.......................................... 28 Voting Interests.......................................... 54 WOLS LLC.................................................. 3 World Omni................................................ Cover 104 <PAGE> ANNEX 1 GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES Except in certain limited circumstances, the globally offered Class A Notes (the 'Global Securities') will be available only in book-entry form. Investors in the Global Securities may hold such Global Securities through any of DTC, Cedel or Euroclear. The Global Securities will be tradeable as home market instruments in both the European and U.S. domestic markets. Initial settlement and all secondary trades will settle in same-day funds. Secondary market trading between investors holding Global Securities through Cedel and Euroclear will be conducted in the ordinary way in accordance with their normal rules and operating procedures and in accordance with conventional eurobond practice (i.e., seven calendar day settlement). Secondary market trading between investors holding Global Securities through DTC will be conducted according to the rules and procedures applicable to U.S. corporate debt obligations. Secondary cross-market trading between Cedel or Euroclear and DTC Participants holding Notes will be effected on a delivery-against-payment basis through the respective Depositaries of Cedel and Euroclear (in such capacity) and as DTC Participants. Non-U.S. holders (as described below) of Global Securities will be subject to U.S. withholding taxes unless such holders meet certain requirements and deliver appropriate U.S. tax documents to the securities clearing organizations or their participants. Initial Settlement All Global Securities will be held in book-entry form by DTC in the name of Cede, as nominee of DTC. Investors' interests in the Global Securities will be represented through financial institutions acting on their behalf as direct and indirect Participants in DTC. As a result, Cedel and Euroclear will hold positions on behalf of their participants through their respective Depositaries, which in turn will hold such positions in accounts as DTC Participants. Investors electing to hold their Global Securities through DTC will follow the settlement practices applicable to U.S. corporate debt obligations. Investor securities custody accounts will be credited with their holdings against payment in same-day funds on the settlement date. Investors electing to hold their Global Securities through Cedel or Euroclear accounts will follow the settlement procedures applicable to conventional eurobonds, except that there will be no temporary global security and no 'lock-up' or restricted period. Global Securities will be credited to the securities custody accounts on the settlement date against payment in the same-day funds. Secondary Market Trading Since the purchaser determines the place of delivery, it is important to establish at the time of the trade where both the purchaser's and seller's accounts are located to ensure that settlement can be made on the desired value date. Trading between DTC Participants. Secondary market trading between DTC Participants will be settled using the procedures applicable to U.S. corporate debt obligations in same-day funds. Trading between Cedel and/or Euroclear Participants. Secondary market trading between Cedel Participants or Euroclear Participants will be settled using the procedures applicable to conventional eurobonds in same-day funds. Trading between DTC seller and Cedel or Euroclear Purchaser. When Global Securities are to be transferred from the account of a DTC Participant to the account of a Cedel Participant or a Euroclear Participant, the purchaser will send instructions to Cedel or Euroclear through a Cedel Participant or Euroclear Participant at least one business day prior to settlement. Cedel or Euroclear will instruct the respective Depositary, as the case may be, to receive the Global Securities against payment. Payment will include interest accrued on the Global Securities from and including the last coupon payment date to and excluding the settlement date, on the basis of actual days elapsed and a 360 day year. Payment will then be made by the respective Depositary to the DTC Participant's account against delivery of the Global Securities. After settlement has been completed, the Global 105 <PAGE> Securities will be credited to the respective clearing system and by the clearing system, in accordance with its usual procedures, to the Cedel Participant's or Euroclear Participant's account. The Global Securities credit will appear the next day (European time) and the cash debit will be back-valued to, and the interest on the Global Securities will accrue from, the value date (which would be the preceding day when settlement occurred in New York). If settlement is not completed on the intended value date (i.e., the trade fails), the Cedel or Euroclear cash debit will be valued instead as of the actual settlement date. Cedel Participants and Euroclear Participants will need to make available to the respective clearing systems the funds necessary to process same-day funds settlement. The most direct means of doing so is to pre-position funds for settlement, either from cash on hand or existing lines of credit, as they would for any settlement occurring within Cedel or Euroclear. Under this approach, they may take on credit exposure to Cedel or Euroclear until the Global Securities are credited to their accounts one day later. As an alternative, if Cedel or Euroclear has extended a line of credit to them, Cedel Participants or Euroclear Participants can elect not to pre-position funds and allow that credit line to be drawn upon the finance settlement. Under this procedure, Cedel Participants or Euroclear Participants purchasing Global Securities would incur overdraft charges for one day, assuming they cleared the overdraft when the Global Securities were credited to their accounts. However, interest on the Global Securities would accrue from the value date. Therefore, in many cases the investment income on the Global Securities earned during that one-day period may substantially reduce or offset the amount of such overdraft charges, although this result will depend on each Cedel Participant's or Euroclear Participant's particular cost of funds. Since the settlement is taking place during New York business hours, DTC Participants can employ their usual procedures for sending Global Securities to the respective Depositary for the benefit of Cedel Participants or Euroclear Participants. The sale proceeds will be available to the DTC seller on the settlement date. Thus, to the DTC Participant a cross-market transaction will settle no differently than a trade between two DTC Participants. Trading between Cedel or Euroclear seller and DTC purchaser. Due to time zone differences in their favor, Cedel Participants and Euroclear Participants may employ their customary procedures for transactions in which Global Securities are to be transferred by the respective clearing systems, through the respective Depositaries, to a DTC Participant. The seller will send instructions to Cedel or Euroclear through a Cedel Participant or Euroclear Participant at least one business day prior to settlement. In these cases, Cedel or Euroclear will instruct the respective Depositaries, as appropriate, to deliver the bonds to the DTC Participant's account against payment. Payment will include interest accrued on the Global Securities from and including the last coupon payment date to and excluding the settlement date on the basis of actual days elapsed and a 360 day year. The payment will then be reflected in the account of the Cedel Participant or Euroclear Participant the following day, and receipt of the cash proceeds in the Cedel Participant's or Euroclear Participant's account would be back-valued to the value date (which would be the preceding day, when settlement occurred in New York). Should the Cedel Participant or Euroclear Participant have a line of credit with its respective clearing system and elect to be in debit in anticipation of receipt of the sale proceeds in its account, the back-valuation will extinguish any overdraft charges incurred over that one-day period. If settlement is not completed on the intended value date (i.e., the trade fails), receipt of the cash proceeds in the Cedel Participant's or Euroclear Participant's account would instead be value as of the actual settlement date. Finally, day traders that use Cedel or Euroclear and that purchase Global Securities from DTC Participants for delivery to Cedel Participants or Euroclear Participants should note that these trades would automatically fail on the sale side unless affirmative action were taken. At least three techniques should be readily available to eliminate this potential problem: (a) borrowing through Cedel or Euroclear for one day (until the purchase side of the day trade is reflected in their Cedel or Euroclear accounts) in accordance with the clearing system's customary procedures; (b) borrowing the Global Securities in the U.S. from a DTC Participant no later than one day prior to settlement, which would give the Global Securities sufficient time to be reflected in their Cedel or Euroclear account in order to settle the sale side of the trade; or 106 <PAGE> (c) staggering the value dates for the buy and sell sides of the trade so that the value date for the purchase from the DTC Participant is at least one day prior to the value date for the sale to the Cedel Participant or Euroclear Participant. CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS A beneficial owner of Global Securities holding through Cedel or Euroclear (or through DTC if the holder has an address outside the U.S.) will be subject to the 30% U.S. withholding tax that generally applies to payments of interest (including original issue discount) on registered debt issued by U.S. Persons, unless (i) each clearing system, bank or other financial institution that holds customers' securities in the ordinary course of its trade or business in the chain of intermediaries between such beneficial owner and the U.S. entity required to withhold tax complies with applicable certification requirements and (ii) such beneficial owner takes one of the following steps to obtain an exemption or reduced tax rate: Exemption for non-U.S. Persons (Form W-8). Beneficial owners of Global Securities that are non-U.S. Persons can obtain a complete exemption from the withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If the information shown on Form W-8 or the Tax Certificate changes, a new Form W-8 or Tax Certificate, as the case may be, must be filed within 30 days of such change. Exemption for non-U.S. Person with effectively connected income (Form 4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S. branch, for which the interest income is effectively connected with its conduct of a trade or business in the United States, can obtain an exemption from the withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income Effectively Connected with the Conduct of a Trade or Business in the United States). Exemption or reduced rate for non-U.S. persons resident in treaty countries (Form 1001). Non-U.S. Persons that are beneficial owners of Global Securities residing in a country that has a tax treaty with the United States can obtain an exemption or reduced tax rate (depending on the treaty terms) by filing Form 1001 (Ownership, Exemption or Reduced Rate Certificate). If the treaty provides only for a reduced rate, withholding tax will be imposed at that rate unless the filer alternatively files Form W-8. Form 1001 may be filed by the Note Owner or his agent. Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete exemption from the withholding tax by filing Form W-9 (Payer's Request for Taxpayer Identification Number and Certification). U.S. Federal Income Tax Reporting Procedure. The beneficial owner of a Global Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files by submitting the appropriate form to the person through whom it holds (the clearing agency, in the case of persons holding directly on the books of the clearing agency). Form W-8 and form 1001 are effective for three calendar years and Form 4224 is effective for one calendar year. The term 'U.S. Person' means (i) a citizen or resident of the United States, (ii) a corporation, partnership or other entity organized in or under the laws of the United States or any state or political subdivision thereof (other than a partnership that is not treated as a United States person under any applicable Treasury regulations), (iii) an estate whose income is subject to United States federal income tax, regardless of its source or (iv) a trust whose administration is subject to the primary supervision of a United States court and which has one or more United States persons who have authority to control all substantial decisions of the trust. Notwithstanding the preceding sentence, to the extent provided in regulations, certain trusts in existence on August 20, 1996 and treated as United States persons prior to such date that elect to continue to be so treated also shall be considered U.S. Persons. This summary does not deal with all aspects of U.S. Federal income tax withholding that may be relevant to foreign holders of the Global Securities. Investors are advised to consult their own tax advisors for specific tax advice concerning their holding and disposing of the Global Securities. 107 <PAGE> INDEX TO FINANCIAL STATEMENTS OF FEDERAL INSURANCE COMPANY <TABLE> <CAPTION> PAGE ---- <S> <C> Report of Independent Auditors............................................................................. F-1 Financial Statements Balance Sheets (Statutory Basis) as of December 31, 1997 and 1996........................................ F-2 Statements of Income (Statutory Basis) for Years Ended December 31, 1997, 1996 and 1995.................. F-3 Statements of Surplus to Policyholders (Statutory Basis) for Years Ended December 31, 1997, 1996 and 1995.................................................................................................. F-4 Statements of Cash Flows (Statutory Basis) for Years Ended December 31, 1997, 1996 and 1995 ............. F-5 Notes to Financial Statements............................................................................ F-6 </TABLE> THE FINANCIAL STATEMENTS OF FEDERAL INSURANCE COMPANY ("FEDERAL") INCLUDED HEREIN HAVE BEEN PREPARED ON A STATUTORY BASIS, RATHER THAN IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES BECAUSE STATE INSURANCE DEPARTMENTS RESPONSIBLE FOR OVERSIGHT OF FEDERAL'S FINANCIAL CONDITION REQUIRE FINANCIAL STATEMENTS TO BE PRESENTED ON A STATUTORY BASIS. AS A RESULT, THE CHUBB CORPORATION DOES NOT PREPARE FINANCIAL STATEMENTS IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRNCIPLES FOR FEDERAL, IT'S WHOLLY OWNED SUBSIDIARY. 108 <PAGE> REPORT OF INDEPENDENT AUDITORS The Board of Directors Federal Insurance Company We have audited the accompanying statutory-basis balance sheets of Federal Insurance Company (Company) as of December 31, 1997 and 1996, and the related statutory-basis statements of income, surplus to policyholders, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As described in Note 1, these financial statements have been prepared in conformity with accounting practices prescribed or permitted by the Indiana Insurance Department, the jurisdiction of domicile of the Company, which practices differ from generally accepted accounting principles. The variances from such practices and generally accepted accounting principles are also described in Note 1. The effects on the financial statements of these variances are not reasonably determinable but are presumed to be material. In our opinion, because of the effects of the matter described in the preceding paragraph, the financial statements referred to above do not present fairly, in conformity with generally accepted accounting principles, the financial position of Federal Insurance Company at December 31, 1997 and 1996 or the results of its operations or its cash flows for each of the three years in the period ended December 31, 1997. However, in our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Federal Insurance Company at December 31, 1997 and 1996 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with accounting practices prescribed or permitted by the Indiana Insurance Department. ERNST & YOUNG LLP New York, New York February 20, 1998 F-1 <PAGE> FEDERAL INSURANCE COMPANY BALANCE SHEETS--STATUTORY BASIS DECEMBER 31, 1997 AND 1996 (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> 1997 1996 ---- ---- <S> <C> <C> ADMITTED ASSETS Invested Assets: Short Term Investments, at Amortized Cost.......................................... $ 714,065 $ 682,368 Tax Exempt Bonds, at Amortized Cost................................................ 5,221,481 3,969,560 Taxable Bonds, at Amortized Cost................................................... 1,922,965 1,419,181 Equity Securities, at Market....................................................... 465,563 208,469 Investments in Consolidated Subsidiaries........................................... 1,042,295 1,226,495 Investments in Unconsolidated Subsidiaries......................................... 220,182 478,651 Receivable for Securities.......................................................... 29,838 25,038 Other Invested Assets.............................................................. 237,340 209,976 ----------- ---------- Total Invested Assets (Note 2).................................................. 9,853,729 8,219,738 Cash................................................................................. 5,310 5,538 Premiums Receivable.................................................................. 625,601 590,599 Interest and Dividends Due and Accrued............................................... 126,395 112,004 Reinsurance Recoverable on Paid Losses............................................... 49,763 49,222 Equities and Deposits in Pools and Associations...................................... 66,276 73,213 Amounts Due from Associated Companies................................................ 51,388 -- Other Assets......................................................................... 174,057 179,287 ----------- ---------- 10,952,519 9,229,601 Deduct: Non-Admitted Assets.......................................................... 127,261 109,840 ----------- ---------- Total Admitted Assets........................................................... $10,825,258 $9,119,761 ----------- ---------- ----------- ---------- LIABILITIES AND SURPLUS TO POLICYHOLDERS Outstanding Losses and Loss Expenses (Notes 7 and 8)................................. $ 6,065,735 $4,893,548 Unearned Premiums.................................................................... 1,683,472 1,252,261 Working Funds Due to Manager......................................................... 136,598 136,747 Amounts Due to Associated Companies.................................................. -- 51,293 Federal and Foreign Income Tax (Note 4).............................................. -- 6,899 Provision for Reinsurance............................................................ 45,454 33,093 Accrued Expenses and Other Liabilities............................................... 338,883 282,435 ----------- ---------- Total Liabilities............................................................... 8,270,142 6,656,276 ----------- ---------- Commitments and Contingent Liabilities (Notes 6 and 8) Common Capital Stock................................................................. 13,987 13,987 Paid-In Surplus...................................................................... 378,890 472,986 Unassigned Funds..................................................................... 1,972,505 1,649,830 Unrealized Appreciation of Investments............................................... 189,734 326,682 ----------- ---------- Total Surplus to Policyholders (Note 9)......................................... 2,555,116 2,463,485 ----------- ---------- Total Liabilities and Surplus to Policyholders.................................. $10,825,258 $9,119,761 ----------- ---------- ----------- ---------- Common Capital Stock: Shares Authorized............................................................. 3,499,971 3,499,971 Shares Issued and Outstanding................................................. 3,496,678 3,496,678 Par Value Per Share........................................................... $ 4 $ 4 </TABLE> See accompanying notes. F-2 <PAGE> FEDERAL INSURANCE COMPANY STATEMENTS OF INCOME--STATUTORY BASIS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS) <TABLE> <CAPTION> 1997 1996 1995 ---- ---- ---- <S> <C> <C> <C> Net Premiums Written.................................................... $3,676,579 $2,582,131 $2,247,891 Increase in Unearned Premiums Net of Accrued Retrospective Premiums..................................... 428,188 137,785 59,804 ---------- ---------- ---------- Premiums Earned (Note 7)........................................... 3,248,391 2,444,346 2,188,087 ---------- ---------- ---------- Losses and Loss Expenses (Note 7)....................................... 2,139,189 1,697,816 1,498,753 Underwriting Expenses................................................... 1,120,121 790,017 694,096 Dividends to Policyholders.............................................. 23,089 14,581 11,983 ---------- ---------- ---------- 3,282,399 2,502,414 2,204,832 ---------- ---------- ---------- Underwriting Loss.................................................. (34,008) (58,068) (16,745) ---------- ---------- ---------- Investment Income Before Expenses....................................... 977,002 559,686 488,374 Realized Capital Gains.................................................. 53,132 34,693 54,207 Investment Expenses..................................................... 7,540 5,325 4,772 ---------- ---------- ---------- Investment Income.................................................. 1,022,594 589,054 537,809 ---------- ---------- ---------- Other Income (Loss) (including gain or loss on foreign exchange)..................................................... 1,786 (9,617) (6,973) ---------- ---------- ---------- Income Before Federal and Foreign Income Tax............................ 990,372 521,369 514,091 Federal and Foreign Income Tax (Note 4)................................. 164,440 83,186 81,143 ---------- ---------- ---------- Net Income.............................................................. $ 825,932 $ 438,183 $ 432,948 ---------- ---------- ---------- ---------- ---------- ---------- </TABLE> See accompanying notes. F-3 <PAGE> FEDERAL INSURANCE COMPANY STATEMENTS OF SURPLUS TO POLICYHOLDERS--STATUTORY BASIS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS) <TABLE> <CAPTION> 1997 1996 1995 ---- ---- ---- <S> <C> <C> <C> Common Stock Balance, Beginning and End of Year.................................... $ 13,987 $ 13,987 $ 13,987 ---------- ---------- ---------- Paid-In Surplus Balance, Beginning of Year............................................ 472,986 472,986 472,986 Distribution of Bellemead Development Corporation to Parent.............................................. (94,096) -- -- ---------- ---------- ---------- Balance, End of Year.................................................. 378,890 472,986 472,986 ---------- ---------- ---------- Unassigned Funds Balance, Beginning of Year............................................ 1,649,830 1,347,361 1,030,157 Net Income............................................................ 825,932 438,183 432,948 Dividends Declared to Parent.......................................... (280,000) (250,000) (240,000) Decrease (Increase) in Provision for Reinsurance...................... (12,361) 9,505 7,142 Decrease (Increase) in Non-Admitted Assets............................ (17,421) 71 23,583 Increase (Decrease) in Unassigned Funds of Consolidated Subsidiaries.......................................... (193,261) 89,809 104,309 Other, Net............................................................ (214) 14,901 (10,778) ---------- ---------- ---------- Balance, End of Year.................................................. 1,972,505 1,649,830 1,347,361 ---------- ---------- ---------- Unrealized Appreciation of Investments Balance, Beginning of Year............................................ 326,682 433,116 359,800 Distribution of Bellemead Development Corporation to Parent.............................................. (175,664) -- -- Change During the Year................................................ 38,716 (106,434) 73,316 ---------- ---------- ---------- Balance, End of Year.................................................. 189,734 326,682 433,116 ---------- ---------- ---------- Total Surplus to Policyholders..................................... $2,555,116 $2,463,485 $2,267,450 ---------- ---------- ---------- ---------- ---------- ---------- </TABLE> See accompanying notes. F-4 <PAGE> FEDERAL INSURANCE COMPANY STATEMENTS OF CASH FLOWS--STATUTORY BASIS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS) <TABLE> <CAPTION> 1997 1996 1995 ---- ---- ---- <S> <C> <C> <C> Cash From Operations Premiums Collected Net of Reinsurance................................... $3,644,597 $2,527,854 $2,208,727 Losses and Loss Expenses Paid (net of salvage and subrogation).......... 967,543 1,717,314 1,174,235 Underwriting Expenses Paid.............................................. 1,079,486 787,594 675,171 Other Underwriting Income (Expenses).................................... (97,527) 163,458 50,852 ---------- ---------- ---------- Cash from Underwriting............................................. 1,500,041 186,404 410,173 Investment Income (net of investment expense)........................... 959,457 542,767 467,142 Other Income (Expenses)................................................. 2,275 11,223 (18,511) Dividends to Policyholders Paid......................................... (8,862) (10,912) (10,105) Federal Income Taxes Paid............................................... (181,083) (72,964) (99,528) ---------- ---------- ---------- Net Cash from Operations........................................... 2,271,828 656,518 749,171 ---------- ---------- ---------- Cash From Investments Proceeds from Investments Sold or Matured: Bonds................................................................. 1,826,979 2,378,073 2,425,520 Equity Securities..................................................... 77,626 155,359 47,286 Other Invested Assets................................................. 72,019 33,972 53,119 Miscellaneous Proceeds................................................ 2,894 15,801 19,386 ---------- ---------- ---------- Total Investment Proceeds.......................................... 1,979,518 2,583,205 2,545,311 ---------- ---------- ---------- Cost of Investments Acquired: (Long Term Only) Bonds................................................................. 3,591,204 2,806,024 3,026,615 Equity Securities..................................................... 304,742 196,520 82,286 Other Invested Assets................................................. 55,568 47,323 10,669 Miscellaneous Applications............................................ 314 389 3,765 ---------- ---------- ---------- Total Investments Acquired......................................... 3,951,828 3,050,256 3,123,335 ---------- ---------- ---------- Net Cash from Investments.......................................... (1,972,310) (467,051) (578,024) ---------- ---------- ---------- Cash From Financing and Miscellaneous Sources Other Cash Provided..................................................... 14,458 639 12,834 ---------- ---------- ---------- Cash Applied: Dividends to Stockholders Paid........................................ 280,000 250,000 240,000 Other Applications.................................................... 2,507 11,963 23,319 ---------- ---------- ---------- Total Cash Applied................................................. 282,507 261,963 263,319 ---------- ---------- ---------- Net Cash from Financing and Miscellaneous Sources.................. (268,049) (261,324) (250,485) ---------- ---------- ---------- Net Change in Cash and Short Term Investments........................... 31,469 (71,857) (79,338) Cash and Short Term Investments: Beginning of Year..................................................... 687,906 759,763 839,101 ---------- ---------- ---------- End of Year........................................................... $ 719,375 $ 687,906 $ 759,763 ---------- ---------- ---------- ---------- ---------- ---------- </TABLE> See accompanying notes. F-5 <PAGE> FEDERAL INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Federal Insurance Company (Company) is a wholly-owned property and casualty insurance subsidiary of The Chubb Corporation (Chubb). The Company is domiciled in the State of Indiana and underwrites most forms of property and casualty insurance, principally in the United States. The geographic distribution of business in the United States is broad with a particularly strong market presence in the Northeast. The Company is a member of an affiliated group of U.S. based property and casualty insurance companies, including several wholly-owned subsidiaries. For purposes of this report, the affiliated group of companies, including Federal Insurance Company, is collectively referred to as the Companies. The financial statements reflect estimates and judgments made by management that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Certain amounts in the prior year financial statements have been reclassified to conform with the 1997 presentation. These financial statements have been prepared in conformity with accounting practices prescribed or permitted by the Indiana Insurance Department. Such accounting practices vary in certain respects from generally accepted accounting principles (GAAP), including: (i) investments in bonds are reported at amortized cost and are not classified as held-to-maturity or available for sale; under GAAP, those bonds classified as available for sale are carried at market value, (ii) the costs of acquiring new business are charged to operations as incurred rather than being deferred and amortized over the period in which the related premiums are earned, (iii) certain assets designated 'non-admitted' are excluded, (iv) outstanding losses and loss expenses are reported net of amounts recoverable from reinsurers; unearned premiums are reported net of the unearned portion of premiums ceded, (v) a provision is made for statutory liabilities with respect to unearned premiums and losses reinsured with non-admitted reinsurers and for certain overdue amounts from admitted reinsurers to the extent funds are not held, (vi) no provision is made for deferred federal income tax, and (vii) investments in wholly-owned U.S. and foreign property and casualty insurance subsidiaries, various other subsidiaries which are not material and, in 1996 and 1995, a wholly-owned non-property and casualty insurance subsidiary (see Note 1(f)) are included at statutory net asset value and are not consolidated; dividends declared by such subsidiaries are included in investment income. Net income of the U.S. property and casualty insurance subsidiaries is included as a change in unassigned funds. Net income of the other subsidiaries is included as a change in unrealized appreciation of investments. The effects of the foregoing variances from GAAP on the statutory basis financial statements have not been determined, but are presumed to be material. (b) Invested assets are carried at values prescribed by the National Association of Insurance Commissioners (NAIC). Short term investments, which have an original maturity of one year or less, are carried at amortized cost. Bonds are generally carried at amortized cost. Premiums and discounts arising from the purchase of mortgage-backed securities are amortized using the interest method over the estimated remaining term of the securities, adjusted for anticipated prepayments. Equity securities are carried at market value. Investments in unconsolidated subsidiaries and other invested assets are accounted for on the equity basis. F-6 <PAGE> FEDERAL INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) Realized gains and losses on the sale of investments are determined on the basis of the cost of the specific investments sold and are credited or charged to income. Unrealized appreciation or depreciation of equity securities, unconsolidated subsidiaries and other invested assets are excluded from income and credited or charged directly to surplus to policyholders. (c) Premiums are earned on a monthly pro rata basis over the terms of the policies. Unearned premiums represent the portion of premiums written applicable to the unexpired terms of policies in force. (d) Liabilities for outstanding losses and loss expenses include the accumulation of individual case estimates for claims reported as well as estimates of unreported claims and claim settlement expenses, less estimates of anticipated salvage and subrogation recoveries. Estimates are based upon past claim experience modified for current trends as well as prevailing economic, legal and social conditions. Such estimates are continually reviewed and updated. Any resulting adjustments are reflected in current operating results. (e) The methods and assumptions used to estimate the fair value of financial instruments are as follows: (i) The carrying value of short term investments approximates fair value due to the short maturities of these investments. (ii) Fair values of bonds with active markets are based on quoted market prices. For bonds that trade in less active markets, fair values are obtained from independent pricing services. Fair values of bonds are principally a function of current interest rates. Care should be used in evaluating the significance of these estimated market values which can fluctuate based on such factors as interest rates, inflation, monetary policy and general economic conditions. (iii) Fair values of equity securities are based on quoted market prices. (f) In 1997, the Company distributed its investment in Bellemead Development Corporation to Chubb; in connection with the distribution, paid-in surplus was reduced by $94,096,000 representing the cost of the investment, and unrealized appreciation of investments was reduced by $175,664,000 representing the increase in the statutory net asset value of Bellemead Development Corporation from the date of acquisition through the date of transfer. This non-cash transaction has been excluded from the statement of cash flows. 2. INVESTED ASSETS (a) The cost of equity securities, investments in unconsolidated subsidiaries and other invested assets at December 31, 1997 and 1996 were as follows (in thousands): <TABLE> <CAPTION> 1997 1996 ---- ---- <S> <C> <C> Equity Securities......................................................................... $410,001 $183,461 Unconsolidated Subsidiaries............................................................... 173,362 256,557 Other Invested Assets..................................................................... 191,791 171,857 </TABLE> (b) The components of unrealized appreciation of investments at December 31, 1997 and 1996 were as follows (in thousands): <TABLE> <CAPTION> 1997 1996 ---- ---- <S> <C> <C> Gross Unrealized Appreciation............................................................. $256,947 $378,349 Gross Unrealized Depreciation............................................................. 67,213 51,667 -------- -------- $189,734 $326,682 -------- -------- -------- -------- </TABLE> F-7 <PAGE> FEDERAL INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 2. INVESTED ASSETS--(CONTINUED) (c) The amortized cost and estimated market value of bonds were as follows (in thousands): <TABLE> <CAPTION> DECEMBER 31, 1997 ---------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ---- ----- ------ ----- <S> <C> <C> <C> <C> Tax Exempt Bonds............................................. $5,221,481 $326,053 $ 148 $5,547,386 Taxable Foreign Bonds........................................ 150,320 5,524 1,864 153,980 Mortgage-Backed Securities................................... 896,007 22,843 1,510 917,340 Taxable U.S. Government Bonds................................ 286,812 4,470 97 291,185 Taxable Corporate Bonds...................................... 589,826 21,129 1,998 608,957 ---------- -------- ------ ---------- Total Bonds................................................ $7,144,446 $380,019 $5,617 $7,518,848 ---------- -------- ------ ---------- ---------- -------- ------ ---------- </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1996 ---------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ---- ----- ------ ----- <S> <C> <C> <C> <C> Tax Exempt Bonds............................................. $3,969,560 $203,905 $ 1,860 $4,171,605 Taxable Foreign Bonds........................................ 114,334 3,921 332 117,923 Mortgage-Backed Securities................................... 711,638 10,415 4,886 717,167 Taxable U.S. Government Bonds................................ 380,154 982 3,479 377,657 Taxable Corporate Bonds...................................... 213,055 5,238 977 217,316 ---------- -------- ------- ---------- Total Bonds................................................ $5,388,741 $224,461 $11,534 $5,601,668 ---------- -------- ------- ---------- ---------- -------- ------- ---------- </TABLE> (d) The amortized cost and estimated market value of bonds at December 31, 1997 by contractual maturity were as follows (in thousands): <TABLE> <CAPTION> ESTIMATED AMORTIZED MARKET COST VALUE ---- ----- <S> <C> <C> Due in One Year or Less..................................................... $ 123,395 $ 124,380 Due after One Year through Five Years....................................... 962,548 988,779 Due after Five Years through Ten Years...................................... 2,277,937 2,409,492 Due after Ten Years......................................................... 2,884,559 3,078,857 Mortgage-Backed Securities.................................................. 896,007 917,340 ---------- ---------- Total Bonds............................................................... $7,144,446 $7,518,848 ---------- ---------- ---------- ---------- </TABLE> Actual maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations. 3. RELATED PARTY TRANSACTIONS During 1997, 1996 and 1995, Chubb & Son Inc. (C&S), a subsidiary of Chubb, had agreements with the Companies pursuant to which the Companies participated in the U.S. insurance business written through C&S. C&S arranged for the exchange of reinsurance between the Companies (See Note 7). The terms of the agreements included that C&S be reimbursed for all expenses incurred on behalf of the Companies. Such expenses are included primarily in underwriting expenses. On December 31, 1997, the agreements with C&S were terminated. Effective January 1, 1998, new agreements were entered into substituting Federal, through its Chubb & Son division, in place of C&S. F-8 <PAGE> FEDERAL INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 3. RELATED PARTY TRANSACTIONS--(CONTINUED) Investment income includes dividends from subsidiaries of $507,370,000, $177,225,000 and $122,000,000 in 1997, 1996 and 1995, respectively. 4. FEDERAL AND FOREIGN INCOME TAX The Company is a member of an affiliated group which files a consolidated federal income tax return. Intercompany tax transactions and allocations are governed by an intercompany tax allocation agreement between Chubb and the Companies. Under the written agreement, which is in accordance with Section 1552(a)(1) of the Internal Revenue Code, each of the Companies with taxable income is allocated a current tax provision based on the ratio of its taxable income to the total taxable income of those Companies having taxable income. The provision for federal and foreign income tax gives effect to differences between income for statutory reporting purposes and taxable income. The principal differences are (i) interest income on tax exempt bonds and (ii) the accelerated recognition of taxable income through the discounting of outstanding losses and loss expenses and the reduction of unearned premium reserves for tax purposes. 5. EMPLOYEE BENEFITS The employees of C&S are afforded benefits under retirement and other postretirement benefit programs. The Company contributes its proportionate share towards the cost of these programs. The Company participates in a non-contributory, defined benefit pension and retirement plan covering employees of C&S. The benefits are generally based on an employee's years of service and average compensation during the last five years of employment. Vested benefits are fully funded. The employers' policy is to make annual contributions that meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974. Each participating affiliate is charged for its allocable share of such contributions. No pension expense was allocated to the Company in 1997. Pension costs allocated to the Company in 1996 and 1995 were $4,077,000 and $7,886,000, respectively. As of January 1, 1997, the most recent actuarial valuation date, the plan's total accumulated benefit obligation was $281,561,798, based on an assumed interest rate of 7.75%, including vested benefits of $262,361,598; the fair value of plan assets was $410,535,285. C&S provides certain other postretirement benefits, principally health care and life insurance, to retired employees and their beneficiaries and covered dependents. Substantially all employees may become eligible for these benefits upon retirement if they meet minimum age and years of service requirements. These benefits are not funded in advance. Benefits are paid as covered expenses are incurred. Health care coverage is contributory. Retiree contributions vary based upon a retiree's age, type of coverage and years of service. Life insurance coverage is non-contributory. The Company accrues the expected cost of providing postretirement benefits to retirees and other fully eligible or vested plan participants and their beneficiaries and covered dependents. The Companies elected to amortize the transition obligation, which represents their unfunded and unrecognized accumulated postretirement benefit obligation as of January 1, 1993, over 20 years. The unamortized transition obligation of C&S was $32,086,000 and $34,225,000 at December 31, 1997 and 1996, respectively. Net postretirement benefit costs include the expected cost of such benefits for newly vested employees, interest cost, gains and losses arising from differences in actuarial assumptions and actual experience and amortization of the transition obligation. Net postretirement benefit costs allocated to the Company for the years ended December 31, 1997, 1996 and 1995 and the postretirement benefit liability at December 31, 1997 and 1996 were not significant. F-9 <PAGE> FEDERAL INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 5. EMPLOYEE BENEFITS--(CONTINUED) The estimated amount of the postretirement benefit obligation of C&S for active nonvested employees as of December 31, 1997 and 1996 was $53,950,000 and $53,349,000, respectively. The weighted average discount rate used in determining the actuarial present value of the accumulated postretirement benefit obligation at December 31, 1997 and 1996 was 7.5% and 7.75%, respectively. At December 31, 1997, the weighted average health care cost trend rate used to measure the accumulated postretirement cost for medical benefits was 11.3% for 1998 and was assumed to decrease gradually to 6.0% for the year 2005 and remain at that level thereafter. 6. LEASES The Companies occupy office facilities under lease agreements which expire at various dates through 2019; such leases are generally renewed or replaced by other leases. In addition, the Companies lease data processing, office and transportation equipment. Leases are the obligation of the Company. The Company contributes its proportionate share of the rental cost under such leases. Most leases contain renewal options for increments ranging from three to five years; certain lease agreements provide for rent increases based on price-level factors. All leases are operating leases. At December 31, 1997, future minimum rental payments required under non-cancellable operating leases were as follows (in thousands): Years ending December 31: 1998.................................................... $ 55,769 1999.................................................... 58,245 2000.................................................... 58,872 2001.................................................... 51,583 2002.................................................... 45,211 After 2002.............................................. 315,731 -------- $585,411 -------- -------- 7. REINSURANCE The Company participates in pooling arrangements with affiliated insurers whereby these companies assume and cede reinsurance with each other. These arrangements vary as a function of the line of business and location of the risk. A substantial amount of the reinsurance of the Company is effected under these pooling arrangements. Effective January 1, 1997, the Company's pro rata participation in the pooled property and casualty business increased. In the ordinary course of business, the Company assumes and cedes reinsurance with other insurance companies and is a member of various pools and associations. These arrangements provide greater diversification of business and minimize the maximum net loss potential arising from large risks. A large portion of the reinsurance is effected under contracts known as treaties and in some instances by negotiation on individual risks. Certain of these arrangements consist of excess of loss and catastrophe contracts which protect against losses over stipulated amounts arising from any one occurrence or event. Ceded reinsurance contracts do not relieve the Company of its obligation to the policyholders. F-10 <PAGE> FEDERAL INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 7. REINSURANCE--(CONTINUED) The effect of reinsurance on premiums earned for the years ended December 31, 1997, 1996 and 1995 was as follows (in thousands): <TABLE> <CAPTION> 1997 1996 1995 ---- ---- ---- <S> <C> <C> <C> Direct............................................. $ 2,932,452 $ 2,868,065 $ 2,846,006 Assumed............................................ 1,436,560 1,158,882 1,078,779 Ceded.............................................. (1,120,621) (1,582,601) (1,736,698) ----------- ----------- ----------- Net................................................ $ 3,248,391 $ 2,444,346 $ 2,188,087 ----------- ----------- ----------- ----------- ----------- ----------- </TABLE> For many years, a portion of the U. S. insurance business written by the Company was reinsured on a quota share basis with a subsidiary of Royal & Sun Alliance Insurance Group plc. Effective January 1, 1997, the reinsurance agreement with Royal & Sun Alliance was terminated. The ceded reinsurance premiums earned of the Company included $266,796,000 and $366,066,000 in 1996 and 1995, respectively, from such reinsurance. Reinsurance recoveries which have been deducted from losses and loss expenses were $711,805,000, $1,048,760,000 and $1,118,230,000 in 1997, 1996 and 1995, respectively. 8. OUTSTANDING LOSSES AND LOSS EXPENSES The process of establishing loss reserves is an imprecise science and reflects significant judgmental factors. In many liability cases, significant periods of time, ranging up to several years or more, may elapse between the occurrence of an insured loss, the reporting of the loss and the settlement of the loss. Judicial decisions and legislative actions continue to broaden liability and policy definitions and to increase the severity of claim payments. As a result of this and other societal and economic developments, the uncertainties inherent in estimating ultimate claim costs on the basis of past experience have increased significantly, further complicating the already complex loss reserving process. The uncertainties relating to asbestos and toxic waste claims on insurance policies written many years ago are exacerbated by judicial and legislative interpretations of coverage that in some cases have tended to erode the clear and express intent of such policies and in other cases have expanded theories of liability. The industry is engaged in extensive litigation over these coverage and liability issues and is thus confronted with a continuing uncertainty in its efforts to quantify these exposures. In 1993, Pacific Indemnity Company (Pacific Indemnity), a wholly-owned property and casualty insurance subsidiary of the Company, entered into a global settlement agreement with Continental Casualty Company (a subsidiary of CNA Financial Corporation), Fibreboard Corporation, and attorneys representing claimants against Fibreboard for all future asbestos-related bodily injury claims against Fibreboard. This agreement is subject to final appellate court approval. The settlement relates to an insurance policy issued to Fibreboard Corporation by Pacific Indemnity. The Pacific Indemnity policy was 100% reinsured by the Company. Pursuant to the global settlement agreement, a $1,525,000,000 trust fund will be established to pay future claims, which are claims that were not filed in court before August 27, 1993. The Company, as reinsurer of the Pacific Indemnity policy, will contribute $538,172,000 to the trust fund and Continental Casualty will contribute the remaining amount. In December 1993, upon execution of the global settlement agreement, the Company and Continental Casualty paid their respective shares into an escrow account. The Company's share is included in its short term investments. Upon final court approval of the settlement, the amount in the escrow account, including interest earned thereon, will be transferred to the trust fund. All of the parties have agreed to use their best efforts to seek final court approval of the global settlement agreement. Pacific Indemnity and Continental Casualty reached a separate agreement for the handling of all asbestos-related bodily injury claims pending on August 26, 1993 against Fibreboard. As reinsurer of Pacific Indemnity, the Company's obligation under this agreement with respect to such pending claims is approximately F-11 <PAGE> FEDERAL INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 8. OUTSTANDING LOSSES AND LOSS EXPENSES--(CONTINUED) $635,000,000, all of which has been paid. The agreement further provides that the total responsibility of Pacific Indemnity and Continental Casualty with respect to pending and future asbestos-related bodily injury claims against Fibreboard will be shared on an approximate 35% and 65% basis, respectively. Pacific Indemnity, Continental Casualty and Fibreboard entered into a trilateral agreement to settle all present and future asbestos-related bodily injury claims resulting from insurance policies that were, or may have been, issued to Fibreboard by the two insurers. The trilateral agreement will be triggered if the global settlement agreement is ultimately disapproved. The Company's obligation, as reinsurer of Pacific Indemnity, under the trilateral agreement is therefore similar to, and not duplicative of, that under those agreements described above. The trilateral agreement reaffirms portions of an agreement reached in March 1992 between Pacific Indemnity and Fibreboard. Among other matters, that 1992 agreement eliminates any Pacific Indemnity liability to Fibreboard for asbestos-related property damage claims. In July 1995, the United States District Court of the Eastern District of Texas approved the global settlement agreement and the trilateral agreement. The judgments approving these agreements were appealed to the United States Court of Appeals for the Fifth Circuit. In July 1996, the Fifth Circuit Court affirmed the 1995 judgments of the District Court. The objectors to the global agreement appealed to the United States Supreme Court. In June 1997, the United States Supreme Court set aside the ruling by the Fifth Circuit Court that had approved the global agreement and ordered the Fifth Circuit Court to reconsider its approval in light of a June 1997 ruling by the Supreme Court rejecting an unrelated settlement that included several former asbestos manufacturers. In January 1998, the Fifth Circuit Court again affirmed the global settlement agreement, ruling that it was legally distinct from the other settlement. It is expected that objectors to the settlement will petition the Supreme Court to review the decision. The Supreme Court would then have to decide whether to take the appeal. The trilateral agreement, however, was never appealed to the United States Supreme Court and is now final. As a result, management continues to believe that the uncertainty of the Company's exposure, as reinsurer of Pacific Indemnity, with respect to asbestos-related bodily injury claims against Fibreboard has been eliminated. Since 1993, a California Court of Appeal has agreed, in response to a request by Pacific Indemnity, Continental Casualty and Fibreboard, to delay its decisions regarding asbestos-related insurance coverage issues that are currently before it and involve the three parties exclusively, while the approval of the global settlement is pending in court. Continental Casualty and Pacific Indemnity have dismissed disputes against each other which involved Fibreboard and were in litigation. The Company has additional potential asbestos exposure, primarily on insureds for which excess liability coverages were written. Such exposure has increased due to the erosion of much of the underlying limits. The number of claims against such insureds and the value of such claims have increased in recent years due in part to the non-viability of other defendants. The remaining asbestos exposures are mostly peripheral defendants, including a mix of manufacturers and distributors of certain products that contain asbestos as well as premises owners. Generally, these insureds are named defendants on a regional rather than a nationwide basis. Notices of new asbestos claims and new exposures on existing claims continue to be received as more peripheral parties are drawn into litigation to replace the now defunct mines and bankrupt manufacturers. Legal guidelines regarding coverage for asbestos claims have begun to articulate more consistent standards regarding the extent of the insurers' coverage obligation and the method of allocation of costs among insurers. However, the universe of potential claims is still unknown. Therefore, uncertainty remains as to the Company's ultimate liability for asbestos-related claims. Hazardous waste sites are another significant potential exposure. Under the federal 'Superfund' law and similar state statutes, when potentially responsible parties (PRPs) fail to handle the clean-up, regulators have the F-12 <PAGE> FEDERAL INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 8. OUTSTANDING LOSSES AND LOSS EXPENSES--(CONTINUED) work done and then attempt to establish legal liability against the PRPs. The PRPs disposed of toxic materials at a waste dump site or transported the materials to the site. Insurance policies issued to PRPs were not intended to cover the clean-up costs of pollution and, in many cases, did not intend to cover the pollution itself. As the costs of environmental clean-up have become substantial, PRPs and others have increasingly filed claims with their insurance carriers. Litigation against insurers extends to issues of liability, coverage and other policy provisions. There is great uncertainty involved in estimating the Company's liabilities related to these claims. First, the underlying liabilities of the claimants are extremely difficult to estimate. At any given clean-up site, the allocation of remediation costs among governmental authorities and the PRPs varies greatly. Second, different courts have addressed liability and coverage issues regarding pollution claims and have reached inconsistent conclusions in their interpretation of several issues. These significant uncertainties are not likely to be resolved in the near future. Uncertainties also remain as to the Superfund law itself. Superfund's taxing authority expired on December 31, 1995. It is currently not possible to predict the direction that any reforms may take, when they may occur or the effect that any changes may have on the insurance industry. Reserves for asbestos and toxic waste claims cannot be estimated with traditional loss reserving techniques. Case reserves and expense reserves for costs of related litigation have been established where sufficient information has been developed to indicate the involvement of a specific insurance policy. In addition, incurred but not reported reserves have been established to cover additional exposures on both known and unasserted claims. These reserves are continually reviewed and updated. A reconciliation of the beginning and ending liability for outstanding losses and loss expenses, net of reinsurance recoverable, and a reconciliation of the net liability to the corresponding liability on a gross basis is as follows (in thousands): <TABLE> <CAPTION> 1997 1996 1995 ---- ---- ---- <S> <C> <C> <C> Gross liability, beginning of year...................................... $8,020,224 $7,896,430 $7,483,942 Reinsurance recoverable, beginning of year.............................. 3,126,676 2,992,274 2,908,174 ---------- ---------- ---------- Net liability, beginning of year........................................ 4,893,548 4,904,156 4,575,768 ---------- ---------- ---------- Net incurred claims and claim expenses related to: Current year.......................................................... 2,167,893 1,678,276 1,450,452 Prior years........................................................... (28,704) 19,540 48,301 ---------- ---------- ---------- 2,139,189 1,697,816 1,498,753 ---------- ---------- ---------- Net payments for claims and claim expenses related to: Current year.......................................................... 640,581 489,074 375,139 Prior years........................................................... 326,421 1,219,350 795,226 ---------- ---------- ---------- 967,002 1,708,424 1,170,365 ---------- ---------- ---------- Net liability, end of year.............................................. 6,065,735 4,893,548 4,904,156 Reinsurance recoverable, end of year.................................... 2,578,451 3,126,676 2,992,274 ---------- ---------- ---------- Gross liability, end of year.......................................... $8,644,186 $8,020,224 $7,896,430 ---------- ---------- ---------- ---------- ---------- ---------- </TABLE> F-13 <PAGE> FEDERAL INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 8. OUTSTANDING LOSSES AND LOSS EXPENSES--(CONTINUED) A reconciliation of the beginning and ending gross and net liability for outstanding losses and loss expenses related to asbestos and toxic waste claims for 1997, 1996 and 1995 is as follows (in thousands): <TABLE> <CAPTION> 1997 1996 1995 ---- ---- ---- <S> <C> <C> <C> Gross of reinsurance: Liability, beginning of year............................................ $1,086,500 $1,437,764 $1,348,131 Incurred losses and loss adjustment expenses............................ 159,562 219,231 263,919 Calendar year payments for losses and loss adjustment expenses.......... 73,311 570,495 174,286 ---------- ---------- ---------- Liability, end of year.................................................. $1,172,751 $1,086,500 $1,437,764 ---------- ---------- ---------- ---------- ---------- ---------- Net of reinsurance: Liability, beginning of year............................................ $ 908,189 $1,289,883 $1,225,501 Incurred losses and loss adjustment expenses............................ 127,837 153,614 204,727 Calendar year payments for losses and loss adjustment expenses.......... (367) 535,308 140,345 ---------- ---------- ---------- Liability, end of year.................................................. $1,036,393 $ 908,189 $1,289,883 ---------- ---------- ---------- ---------- ---------- ---------- </TABLE> In 1997, 1996 and 1995, increases in outstanding losses and loss expenses relating to asbestos and toxic waste claims were substantially offset by favorable claim severity trends for certain liability classes. Management believes that the aggregate outstanding loss and loss expense reserves of the Company at December 31, 1997 were adequate to cover claims for losses which had occurred, including both those known and those yet to be reported. In establishing such reserves, management considers facts currently known and the present state of the law and coverage litigation. However, given the expansion of coverage and liability by the courts and the legislatures in the past and the possibilities of similar interpretations in the future, particularly as they relate to asbestos and toxic waste claims, as well as the uncertainty in determining what scientific standards will be deemed acceptable for measuring hazardous waste site clean-up, additional increases in loss reserves may emerge which would adversely affect results in future periods. The amount cannot reasonably be estimated at the present time. 9. DIVIDEND RESTRICTIONS Indiana Insurance laws restrict the Company as to the amount of shareholder dividends it may pay without prior approval. The restrictions are generally based on net investment income and on statutory surplus. Dividends in excess of such thresholds are considered 'extraordinary' and require prior approval. F-14 <PAGE> - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRANSFEROR OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF THE TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE TRANSFEROR SINCE SUCH DATE. ------------------------ TABLE OF CONTENTS PAGE ---- Available Information.......................... iii Overview of Transaction........................ iv Summary........................................ 1 Risk Factors................................... 19 The Trust and the SUBI......................... 26 The Origination Trust.......................... 27 Use of Proceeds................................ 30 The Transferor................................. 30 World Omni..................................... 30 The Contracts.................................. 37 Maturity, Prepayment and Yield Considerations............................... 42 Class A Note Factors and Trading Information; Reports to Class A Noteholders............... 46 Description of the Notes....................... 47 Security for the Notes......................... 66 The Class A Interest Rate Swap................. 71 Additional Document Provisions................. 72 Certain Legal Aspects of the Origination Trust and the SUBI................................. 85 Certain Legal Aspects of the Contracts and the Leased Vehicles.............................. 87 Material Income Tax Considerations............. 90 ERISA Considerations........................... 95 Underwriting................................... 96 Notice to Canadian Residents................... 97 Ratings of the Class A Notes................... 98 Legal Matters.................................. 98 Experts........................................ 98 Index of Capitalized Terms..................... 99 Global Clearance, Settlement and Tax Documentation Procedures Terms............... 105 Index to Financial Statements of Federal Insurance Company............................ 108 ------------------------ UNTIL FEBRUARY 4, 1999, ALL DEALERS THAT EFFECT TRANSACTIONS IN THE CLASS A NOTES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. UPON RECEIPT OF A REQUEST BY AN INVESTOR WHO HAS RECEIVED AN ELECTRONIC PROSPECTUS OR A REQUEST BY SUCH INVESTOR'S REPRESENTATIVE WITHIN THE PERIOD DURING WHICH THERE IS A PROSPECTUS DELIVERY OBLIGATION, THE TRANSFEROR OR THE UNDERWRITERS WILL PROMPTLY DELIVER, OR CAUSE TO BE DELIVERED, WITHOUT CHARGE, A PAPER COPY OF THE PROSPECTUS. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- WORLD OMNI 1998-A AUTOMOBILE LEASE SECURITIZATION TRUST $1,631,383,000 $430,000,000 FLOATING RATE AUTOMOBILE LEASE ASSET BACKED NOTES, CLASS A-1 $440,000,000 FLOATING RATE AUTOMOBILE LEASE ASSET BACKED NOTES, CLASS A-2 $410,000,000 FLOATING RATE AUTOMOBILE LEASE ASSET BACKED NOTES, CLASS A-3 $351,383,000 FLOATING RATE AUTOMOBILE LEASE ASSET BACKED NOTES, CLASS A-4 WORLD OMNI LEASE SECURITIZATION L.P. (TRANSFEROR) WORLD OMNI FINANCIAL CORP. (SERVICER) --------------------------- PROSPECTUS --------------------------- JOINT BOOK RUNNERS CREDIT SUISSE FIRST BOSTON MERRILL LYNCH & CO. CO-MANAGERS FIRST UNION CAPITAL MARKETS NATIONSBANC MONTGOMERY SECURITIES LLC SALOMON SMITH BARNEY November 6, 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- <PAGE> PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND PAYMENT. Expenses in connection with the offering of the Class A Notes being registered herein are estimated as follows: SEC registration fee....................................... $ 453,542 Legal fees and expenses.................................... 250,000 Accounting fees and expenses............................... 60,000 Blue sky fees and expenses................................. 25,000 Rating agency fees......................................... 250,000 Trustee fees and expenses.................................. 25,000 Printing................................................... 100,000 Miscellaneous.............................................. 10,458 ----------- Total.................................................... $ 1,174,000* ----------- ----------- - ------------------ * Does not include premium for Residual Value Insurance Policy, which will be paid by the Servicer. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 17-108 of the Delaware Revised Uniform Limited Partnership Act provides that, subject to such standards and restrictions, if any, as are set forth in its partnership agreement, a limited partnership may, and shall have the power to, indemnify and hold harmless any partner or other person from and against any and all claims and demands whatsoever. Pursuant to Section 4.08 of the Agreement of Limited Partnership of World Omni Lease Securitization L.P. (the 'Transferor'), the Transferor will, to the fullest extent permitted by law, indemnify World Omni Lease Securitization LLC, the general partner of the Transferor, and its managers, officers, members, agents, affiliates and employees acting within the scope of their authority against their losses and expenses sustained by reason of their acts on behalf of the Transferor or in furtherance of the interests of the Transferor, if the acts were not fraudulent or in bad faith and did not constitute willful or wanton misconduct or gross negligence. Pursuant to Section 4.08 of the Agreement of Limited Partnership of Auto Lease Finance L.P. ('ALF L.P.'), ALF L.P. will, to the fullest extent permitted by law, indemnify Auto Lease Finance LLC, the general partner of ALF L.P., and its managers, officers, members, agents, affiliates and employees acting within the scope of their authority against their losses and expenses sustained by reason of their acts on behalf of ALF L.P. or in furtherance of the interests of ALF L.P., if the acts were not fraudulent or in bad faith and did not constitute willful or wanton misconduct or gross negligence. Reference is also made to Section 7 of the Underwriting Agreement (see Exhibit 1.1), which provides for indemnification by the Transferor under certain circumstances. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Not applicable. II-1 <PAGE> ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits: <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION - ------ ----------------------------------------------------------------------------------------------------------- <S> <C> <C> 1.1 -- Form of Underwriting Agreement* 3.1 -- Certificate of Formation of World Omni Lease Securitization LLC* 3.2 -- Limited Liability Company Agreement of World Omni Lease Securitization LLC, dated as of September 18, 1998* 3.3 -- Amended and Restated Agreement of Limited Partnership of World Omni Lease Securitization L.P. between World Omni Lease Securitization, Inc. and World Omni Financial Corp., dated as of July 1, 1994 (incorporated by reference from Exhibit 3.3 to the Registration Statement on Form S-1, File No. 33-85036 (the '1994-B Registration Statement') 3.4 -- Assignment of General Partnership Interest and Amendment to Amended and Restated Limited Partnership Agreement of World Omni Lease Securitization, L.P. among World Omni Lease Securitization, Inc., World Omni Lease Securitization LLC and World Omni Financial Corp., dated as of September 23, 1998* 3.5 -- Certificate of Formation of Auto Lease Finance LLC* 3.6 -- Limited Liability Company Agreement of Auto Lease Finance LLC, dated as of September 23, 1998* 3.7 -- Amended and Restated Agreement of Limited Partnership of Auto Lease Finance L.P. between Auto Lease Finance Inc. and World Omni Financial Corp., dated as of July 1, 1994 (incorporated by reference from Exhibit 10.7 to the 1994-B Registration Statement) 3.8 -- Assignment of General Partnership Interest and Amendment to Amended and Restated Limited Partnership Agreement of Auto Lease Finance L.P. among Auto Lease Finance Inc., Auto Lease Finance LLC and World Omni Financial Corp., dated as of September 23, 1998* 3.9 -- Form of Securitization Trust Agreement among World Omni Lease Securitization L.P., PNC Bank, Delaware, as Owner Trustee and The Bank of New York, as Indenture Trustee (including form of Transferor Certificate)* 4.1 -- Form of Indenture between World Omni 1998-A Automobile Lease Securitization Trust and The Bank of New York, as Indenture Trustee (including forms of Class A Notes)* 5.1 -- Opinion of McDermott, Will & Emery with respect to legality* 8.1 -- Opinion of Cadwalader, Wickersham & Taft with respect to federal income tax matters* 8.2 -- Opinion of English, McCaughan & O'Bryan, P.A. with respect to certain Florida tax matters* 10.1 -- Second Amended and Restated Trust Agreement among Auto Lease Finance L.P., VT Inc. and U.S. Bank National Association (as successor to Bank of America Illinois), dated as of July 1, 1994 (incorporated by reference from Exhibit 10.1 to the 1994-B Registration Statement) 10.2 -- Amendment No. 1 to Second Amended and Restated Trust Agreement among Auto Lease Finance L.P., VT Inc. and U.S. Bank National Association (as successor to Bank of America Illinois), dated as of November 1, 1994 (incorporated by reference from Exhibit 10.8 to the 1994-B Registration Statement) 10.3 -- Amendment No. 2 to the Second Amended and Restated Trust Agreement among Auto Lease Finance L.P., VT Inc. and U.S. Bank National Association (as successor to Bank of America Illinois), dated as of September 23, 1998* 10.4 -- Form of Supplement 1998-A to Trust Agreement among Auto Lease Finance L.P., VT Inc. and U.S. Bank National Association (as successor to Bank of America Illinois) (including form of SUBI Certificate)* 10.5 -- Second Amended and Restated Servicing Agreement between VT Inc. and World Omni Financial Corp., dated as of July 1, 1994 (incorporated by reference from Exhibit 10.3 to the 1994-B Registration Statement) </TABLE> II-2 <PAGE> <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION - ------ ----------------------------------------------------------------------------------------------------------- <S> <C> <C> 10.6 -- Amendment No. 1 to Second Amended and Restated Servicing Agreement between VT Inc. and World Omni Financial Corp., dated as of September 23, 1998* 10.7 -- Form of Supplement 1998-A to Servicing Agreement between VT Inc. and World Omni Financial Corp.* 10.8 -- Second Amended and Restated Assignment Agreement among World Omni Financial Corp., Auto Lease Finance L.P. and VT Inc., dated as of July 1, 1994 (incorporated by reference from Exhibit 10.9 to Registration Statement on Form S-1, File No. 33-95404) 10.9 -- Amendment No. 1 to Second Amended and Restated Assignment Agreement among World Omni Financial Corp., Auto Lease Finance L.P. and VT Inc., dated as of October 1, 1995 (incorporated by reference from Exhibit 10.10 to Registration Statement on Form S-1, File No. 333-00794 (the '1996-A Registration Statement')) 10.10 -- Support Agreement between World Omni Financial Corp. and World Omni Lease Securitization L.P., dated as of October 1, 1995 (incorporated by reference from Exhibit 10.11 to the 1996-A Registration Statement) 10.11 -- Amendment No. 1 to Support Agreement between World Omni Financial Corp. and World Omni Lease Securitization L.P., dated as of May 1, 1996 (incorporated by reference from Exhibit 10.12 to Registration Statement on Form S-1, File No. 333-11449) 10.12 -- Amendment No. 2 to Support Agreement, dated as of October 1, 1996 between World Omni Financial Corp., and World Omni Lease Securitization L.P., dated as of October 1, 1996 (incorporated by reference from Exhibit 10.10 to Registration Statement on Form S-1, File No. 333-21917 (the '1997-A Registration Statement')) 10.13 -- Amendment No. 3 to Support Agreement between World Omni Financial Corp. and World Omni Lease Securitization L.P., dated as of April 1, 1997 (incorporated by reference from Exhibit 10.11 to the 1997-A Registration Statement) 10.14 -- Amendment No. 4 to Support Agreement between World Omni Financial Corp. and World Omni Lease Securitization L.P., dated as of October 1, 1997* 10.15 -- Amendment No. 5 to Support Agreement between World Omni Financial Corp. and World Omni Lease Securitization L.P., dated as of September 23, 1998* 10.16 -- Form of Amendment No. 6 to Support Agreement between World Omni Financial Corp. and World Omni Lease Securitization L.P.* 10.17 -- Form of Residual Value Insurance Policy* 10.18 -- Form of Class A Interest Rate Swap* 23.1 -- Consent of McDermott, Will & Emery (included as part of Exhibit 5.1)* 23.2 -- Consent of Cadwalader, Wickersham & Taft (included as a part of Exhibit 8.1)* 23.3 -- Consent of English, McCaughan & O'Bryan, P.A. (included as part of Exhibit 8.2)* 23.4 -- Consent of Williams & Connolly* 23.5 -- Consent of Hand Arendall, L.L.C.* 23.6 -- Consent of Ernst & Young LLP** 24.1 -- Power of Attorney (included on page II-5 of Registration Statement)* 25.1 -- Form T-1 of The Bank of New York* </TABLE> - ------------------ * Previously filed. ** Filed herewith. (b) Financial Statement Schedules: Not applicable. II-3 <PAGE> ITEM 17. UNDERTAKINGS. The undersigned registrants hereby undertake as follows: (a) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933 (the 'Act'); (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the 'Calculation of Registration Fee' table in the effective registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (b) That, for the purpose of determining any liability under the Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (c) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (d) To provide to the Underwriters at the closing date specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to provide prompt delivery to each purchaser. (e) Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of any registrant pursuant to the foregoing provisions, or otherwise, each registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than payment by a registrant of expenses incurred or paid by a director, officer or controlling person of such registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, each registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (f) For purposes of determining any liability under the Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by each registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act will be deemed to be part of this registration statement as of the time it was declared effective. (g) For purposes of determining any liability under the Act, each post-effective amendment that contains a form of prospectus will be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time will be deemed to be the initial bona fide offering thereof. II-4 <PAGE> SIGNATURES Pursuant to the Requirements of the Securities Act of 1933, Each Registrant Has Duly Caused This Amendment No. 3 to the Registration Statement on Form S-1 to be Signed on its Behalf by the Undersigned, Thereunto Duly Authorized, in the City of Deerfield Beach and State of Florida, on the 9th Day of November, 1998. WORLD OMNI LEASE SECURITIZATION L.P., on behalf of itself and as originator of the World Omni 1998-A Automobile Lease Securitization Trust By: WORLD OMNI LEASE SECURITIZATION LLC as General Partner By: /s/ A. TUCKER ALLEN -------------------------------------- A. Tucker Allen Vice President and Corporate Treasurer AUTO LEASE FINANCE L.P., on behalf of itself and as originator of World Omni LT By: AUTO LEASE FINANCE LLC as General Partner By: /s/ A. TUCKER ALLEN -------------------------------------- A. Tucker Allen Vice President and Corporate Treasurer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS AMENDMENT NO. 3 TO THE REGISTRATION STATEMENT ON FORM S-1 HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED. <TABLE> <CAPTION> SIGNATURE TITLE DATE --------- ----- ---- <C> <S> <C> /s/ A. TUCKER ALLEN Director and Vice President and Corporate November 9, 1998 - ------------------------------------ Treasurer of the General Partner of each of A. Tucker Allen World Omni Lease Securitization L.P. and Auto Lease Finance L.P. (Principal Financial and Accounting Officer) * Director of the General Partner of each of World November 9, 1998 - ------------------------------------ Omni Lease Securitization L.P. and Auto Lease Colin W. Brown Finance L.P. * Director of the General Partner of each of World November 9, 1998 - ------------------------------------ Omni Lease Securitization L.P. and Auto Lease Jeffrey B. Shapiro Finance L.P * Director of the General Partner of each of World November 9, 1998 - ------------------------------------ Omni Lease Securitization L.P. and Auto Lease Christopher C. Wheeler Finance L.P. *By: /s/ A. TUCKER ALLEN ------------------------------- A. Tucker Allen Attorney in Fact </TABLE> II-5 <PAGE> EXHIBIT INDEX (a) Exhibits: <TABLE> <CAPTION> EXHIBIT SEQUENTIAL NUMBER DESCRIPTION PAGE NO. - ------ ------------------------------------------------------------------------------------------------ ---------- <S> <C> <C> <C> 1.1 -- Form of Underwriting Agreement* 3.1 -- Certificate of Formation of World Omni Lease Securitization LLC* 3.2 -- Limited Liability Company Agreement of World Omni Lease Securitization LLC, dated as of September 18, 1998* 3.3 -- Amended and Restated Agreement of Limited Partnership of World Omni Lease Securitization L.P. between World Omni Lease Securitization, Inc. and World Omni Financial Corp., dated as of July 1, 1994 (incorporated by reference from Exhibit 3.3 to the Registration Statement on Form S-1, File No. 33-85036 (the '1994-B Registration Statement') 3.4 -- Assignment of General Partnership Interest and Amendment to Amended and Restated Limited Partnership Agreement of World Omni Lease Securitization, L.P. among World Omni Lease Securitization, Inc., World Omni Lease Securitization LLC and World Omni Financial Corp., dated as of September 23, 1998* 3.5 -- Certificate of Formation of Auto Lease Finance LLC* 3.6 -- Limited Liability Company Agreement of Auto Lease Finance LLC, dated as of September 23, 1998* 3.7 -- Amended and Restated Agreement of Limited Partnership of Auto Lease Finance L.P. between Auto Lease Finance Inc. and World Omni Financial Corp., dated as of July 1, 1994 (incorporated by reference from Exhibit 10.7 to the 1994-B Registration Statement) 3.8 -- Assignment of General Partnership Interest and Amendment to Amended and Restated Limited Partnership Agreement of Auto Lease Finance L.P. among Auto Lease Finance Inc., Auto Lease Finance LLC and World Omni Financial Corp., dated as of September 23, 1998* 3.9 -- Form of Securitization Trust Agreement among World Omni Lease Securitization L.P., PNC Bank, Delaware, as Owner Trustee and The Bank of New York, as Indenture Trustee (including form of Transferor Certificate)* 4.1 -- Form of Indenture between World Omni 1998-A Automobile Lease Securitization Trust and The Bank of New York, as Indenture Trustee (including forms of Class A Notes)* 5.1 -- Opinion of McDermott, Will & Emery with respect to legality* 8.1 -- Opinion of Cadwalader, Wickersham & Taft with respect to federal income tax matters* 8.2 -- Opinion of English, McCaughan & O'Bryan, P.A. with respect to certain Florida tax matters* 10.1 -- Second Amended and Restated Trust Agreement among Auto Lease Finance L.P., VT Inc. and U.S. Bank National Association (as successor to Bank of America Illinois), dated as of July 1, 1994 (incorporated by reference from Exhibit 10.1 to the 1994-B Registration Statement) 10.2 -- Amendment No. 1 to Second Amended and Restated Trust Agreement among Auto Lease Finance L.P., VT Inc. and U.S. Bank National Association (as successor to Bank of America Illinois), dated as of November 1, 1994 (incorporated by reference from Exhibit 10.8 to the 1994-B Registration Statement) 10.3 -- Amendment No. 2 to the Second Amended and Restated Trust Agreement among Auto Lease Finance L.P., VT Inc. and U.S. Bank National Association (as successor to Bank of America Illinois), dated as of September 23, 1998* 10.4 -- Form of Supplement 1998-A to Trust Agreement among Auto Lease Finance L.P., VT Inc. and U.S. Bank National Association (as successor to Bank of America Illinois) (including form of SUBI Certificate)* </TABLE> <PAGE> <TABLE> <CAPTION> EXHIBIT SEQUENTIAL NUMBER DESCRIPTION PAGE NO. - ------ ------------------------------------------------------------------------------------------------ ---------- <S> <C> <C> <C> 10.5 -- Second Amended and Restated Servicing Agreement between VT Inc. and World Omni Financial Corp., dated as of July 1, 1994 (incorporated by reference from Exhibit 10.3 to the 1994-B Registration Statement) 10.6 -- Amendment No. 1 to Second Amended and Restated Servicing Agreement between VT Inc. and World Omni Financial Corp., dated as of September 23, 1998* 10.7 -- Form of Supplement 1998-A to Servicing Agreement between VT Inc. and World Omni Financial Corp.* 10.8 -- Second Amended and Restated Assignment Agreement among World Omni Financial Corp., Auto Lease Finance L.P. and VT Inc., dated as of July 1, 1994 (incorporated by reference from Exhibit 10.9 to Registration Statement on Form S-1, File No. 33-95404) 10.9 -- Amendment No. 1 to Second Amended and Restated Assignment Agreement among World Omni Financial Corp., Auto Lease Finance L.P. and VT Inc., dated as of October 1, 1995 (incorporated by reference from Exhibit 10.10 to Registration Statement on Form S-1, File No. 333-00794 (the '1996-A Registration Statement')) 10.10 -- Support Agreement between World Omni Financial Corp. and World Omni Lease Securitization L.P., dated as of October 1, 1995 (incorporated by reference from Exhibit 10.11 to the 1996-A Registration Statement) 10.11 -- Amendment No. 1 to Support Agreement between World Omni Financial Corp. and World Omni Lease Securitization L.P., dated as of May 1, 1996 (incorporated by reference from Exhibit 10.12 to Registration Statement on Form S-1, File No. 333-11449) 10.12 -- Amendment No. 2 to Support Agreement, dated as of October 1, 1996 between World Omni Financial Corp., and World Omni Lease Securitization L.P., dated as of October 1, 1996 (incorporated by reference from Exhibit 10.10 to Registration Statement on Form S-1, File No. 333-21917 (the '1997-A Registration Statement')) 10.13 -- Amendment No. 3 to Support Agreement between World Omni Financial Corp. and World Omni Lease Securitization L.P., dated as of April 1, 1997 (incorporated by reference from Exhibit 10.11 to the 1997-A Registration Statement) 10.14 -- Amendment No. 4 to Support Agreement between World Omni Financial Corp. and World Omni Lease Securitization L.P., dated as of October 1, 1997* 10.15 -- Amendment No. 5 to Support Agreement between World Omni Financial Corp. and World Omni Lease Securitization L.P., dated as of September 23, 1998* 10.16 -- Form of Amendment No. 6 to Support Agreement between World Omni Financial Corp. and World Omni Lease Securitization L.P.* 10.17 -- Form of Residual Value Insurance Policy* 10.18 -- Form of Class A Interest Rate Swap* 23.1 -- Consent of McDermott, Will & Emery (included as part of Exhibit 5.1)* 23.2 -- Consent of Cadwalader, Wickersham & Taft (included as a part of Exhibit 8.1)* 23.3 -- Consent of English, McCaughan & O'Bryan, P.A. (included as part of Exhibit 8.2)* 23.4 -- Consent of Williams & Connolly* 23.5 -- Consent of Hand Arendall, L.L.C.* 23.6 -- Consent of Ernst & Young LLP** 24.1 -- Power of Attorney (included on page II-5 of Registration Statement)* 25.1 -- Form T-1 of The Bank of New York* </TABLE> - ------------------ * Previously filed. ** Filed herewith. (b) Financial Statement Schedules: Not applicable. </TEXT> </DOCUMENT> <DOCUMENT> <TYPE>EX-23.6 <SEQUENCE>2 <DESCRIPTION>CONSENT OF INDEPENDENT AUDITORS <TEXT> Exhibit 23.6 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated February 20, 1998, with respect to the statutory-basis financial statements of Federal Insurance Company included in Amendment No. 3 to the Registration Statement (Form S-1 No. 333-63367) and related Prospectus of World Omni 1998-A Automobile Lease Securitization Trust for the registration of its Automobile Lease Asset Backed Notes. ERNST & YOUNG LLP New York, New York November 9, 1998 </TEXT> </DOCUMENT> </SEC-DOCUMENT> -----END PRIVACY-ENHANCED MESSAGE-----
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial data, including the Financial Statements and notes thereto, included elsewhere in this Prospectus. Unless otherwise stated, the information contained in this Prospectus has been adjusted to give effect to the Reclassification (as defined) and a 139 for one stock split of the Common Stock. Unless otherwise stated in this Prospectus or unless the context otherwise requires, "NES" or the "Company" shall mean National Equipment Services, Inc., including (i) all of its 13 acquired businesses and (ii) Falconite, Inc. ("Falconite"), which the Company has a definitive agreement to acquire concurrent with the Offerings (collectively, the "Acquired Businesses"). References herein to various financial information on a "pro forma basis" (i) give effect to acquisitions of the Acquired Businesses as if such transactions had been completed as of the first day of the related period, (ii) give effect to the Offerings assuming no exercise of the Underwriters' overallotment option and (iii) reflect certain adjustments described in "Selected Pro Forma Financial Data." THE COMPANY GENERAL National Equipment Services, Inc. is a leading participant in the growing and highly fragmented $18 billion equipment rental industry. Through its 14 businesses acquired or to be acquired since January 1997, NES specializes in the rental of specialty and general equipment to industrial and construction end-users. The Company rents over 750 different types of machinery and equipment and distributes new equipment for nationally recognized original equipment manufacturers. The Company also sells used equipment as well as complementary parts, supplies and merchandise, and provides repair and maintenance services to its customers. NES is geographically diversified, with 79 locations across 19 states, and is a leading competitor in each of the geographic markets it serves. For the year ended December 31, 1997, on a pro forma basis, the Company generated revenues of $218.6 million, an increase of 29.4% compared to 1996 combined revenues of $168.9 million. Management believes that the Company offers one of the most modern and well maintained fleets of specialty or general equipment in each of its markets. The average age of the Company's equipment fleet is approximately three years. Specialty equipment includes electric and pneumatic hoists, hydraulic and truck-mounted cranes, liquid storage tanks, pumps and highway safety equipment. General industrial and construction equipment includes aerial work platforms, air compressors, cranes, earth-moving equipment and rough terrain forklifts. The Company rents and sells this equipment to industrial and construction end- users, which represented approximately 53% and 44%, respectively, of the Company's revenues for the year ended December 31, 1997, on a pro forma basis. NES is led by a senior management team with significant industry experience and an impressive track record of acquiring and integrating companies in the equipment rental industry. Prior to founding the Company, the NES senior management team was responsible for building Brambles Equipment Services ("Brambles"), the U.S. equipment rental business of an Australian public company, into a leading participant in the industry. At Brambles, this team executed a growth strategy that combined a disciplined acquisition program with significant organic growth. Management believes that the team's extensive industry experience allows them to more easily identify quality acquisition targets and successfully integrate these businesses through effective financial and operating controls and the proper deployment of capital. The Company's local operations are managed by experienced professionals who have an average of over 15 years of experience in the industry and have extensive knowledge of and relationships in their local markets. These managers are typically former owners of the businesses acquired by the Company. The Company also benefits from the financial expertise of Golder, Thoma, Cressey, Rauner, Inc., an established investment firm specializing in the consolidation of fragmented industries. Golder, Thoma, Cressey, Rauner Fund V, L.P., an affiliate of Golder, Thoma, Cressey, Rauner, Inc., is the Company's principal equity investor. INDUSTRY OVERVIEW Revenues for the $18 billion equipment rental industry have grown at a compound annual rate of approximately 24% from 1984 to 1997 according to surveys conducted by the Associated Equipment Distributors and have grown in 12 of the past 13 years. Management believes that the equipment rental industry growth will continue to be driven by the trend among customers to outsource non-core operations in order to reduce their capital investment and minimize the downtime, maintenance, repair and storage costs associated with equipment ownership. While customers traditionally have rented equipment for specific purposes such as supplementing capacity during peak periods and in connection with special projects, customers are increasingly looking to rental operators to provide an ongoing, comprehensive supply of equipment, enabling such customers to benefit from the economic advantages and convenience of rental. According to a survey published in 1997 by The CIT Group, contractors intended to increase the percentage of equipment they rent without a purchase option to an estimated 15% of their total equipment requirements in 1997 from less than 5% in 1994. The highly fragmented equipment rental industry consists of a large number of relatively small independent businesses typically serving discrete local markets within 30 to 50 miles of the store location, and a small number of multi-location regional or national operators. According to Rental Equipment Register, there are more than 12,000 participants in the industry, with the largest 100 rental companies accounting for less than 20% of 1996 industry revenues. Management believes that the rental equipment industry offers substantial consolidation opportunities for large, well-capitalized equipment rental companies such as NES. Relative to smaller companies with only one or two rental locations, multi-regional operators such as NES benefit from a number of competitive advantages, including access to capital, the ability to offer a broader range of modern, high-quality equipment, standardized management information systems, volume purchasing discounts and the ability to service larger, multi-regional accounts. In addition, management believes that multi-regional operators are less affected by changes in local economic conditions. GROWTH STRATEGY Management believes that NES is well positioned to benefit from industry trends of growth and consolidation. The Company's strategic objective is to continue to grow profitably in both existing and new markets by acquiring additional specialty and general equipment rental companies, by increasing revenues from industrial customers, by maximizing higher margin rental revenues and by leveraging its new remanufacturing center. The Company intends to attain its objective by continuing to execute the following growth strategy: Acquire Specialty and General Equipment Rental Businesses. The Company seeks to acquire strong and successful specialty and general equipment rental businesses. In 1997, NES generated approximately 33% and 67% of its revenues on a pro forma basis from specialty and general equipment businesses, respectively. The Company routinely evaluates attractive markets for expansion where a leading position can be created by acquiring an existing business. The Company generally targets acquisition candidates that (i) are profitable businesses with a proven track record, (ii) generate a high percentage of revenues from rentals with a significant portion derived from industrial customers, (iii) are led by a strong management team that is willing to continue with the business, (iv) have a strong local market share or participate in a high-growth market and (v) provide opportunities to expand their customer base through better access to and employment of capital. The Company also seeks to acquire smaller businesses in locations already served by the Company that offer product lines or services that are complementary to those at existing locations. Since January 1997, the Company has completed 13 acquisitions and expects to complete the acquisition of Falconite concurrent with the Offerings. Management believes that with over 12,000 participants, the equipment rental industry will continue to offer a significant number of businesses that fit the Company's acquisition profile. Increase Revenues from Industrial Customers. The Company is committed to increasing its revenues derived from industrial customers. Management believes that these revenues are more stable than revenues from construction customers due to the fact that industrial customers typically utilize rental equipment for ongoing and periodic maintenance work on their existing facilities as well as for material handling applications. Industrial customers tend to rent equipment for longer periods and use equipment under less severe conditions than contractors, thereby increasing the Company's equipment utilization and decreasing the Company's equipment maintenance costs. The good condition and quality of rental equipment are essential for industrial customers in order to avoid costly slowdowns or shutdowns of plant facilities. Management believes that larger well-capitalized companies such as NES are better able to provide well-maintained and high quality equipment. The Company intends to continue to expand its industrial customer base by providing additional equipment and services to its existing industrial customers and establishing new relationships through its existing businesses as well as through acquisitions. For the year ended December 31, 1997, on a pro forma basis, revenues derived from industrial end-users represented approximately 53% of the Company's total revenues. Maximize High-Margin Rental Revenues Through Efficient Fleet Management. The Company is focused on growing its high-margin rental revenues by expanding fleet inventory, efficiently managing fleet inventory in order to maximize equipment utilization, optimizing fleet maintenance, and systematically evaluating the optimal timing of used equipment sales. The Company's acquisition targets have typically operated under capital constraints, which prevented them from purchasing rental equipment sufficient to meet customer demand and consequently resulted in lost revenue opportunities. In pursuing acquisitions, NES evaluates the target's customer base and fleet inventory and, following its acquisition, typically provides capital to expand the equipment fleet and improve utilization, resulting in significant increases in rental revenues. Leverage New Remanufacturing Center. As part of the acquisition of Falconite, the Company will acquire a recently-constructed 45,000 square foot equipment remanufacturing facility in the Paducah, Kentucky area. The Company believes this facility will enhance its ability to perform major repair operations and maintain its rental fleet in top condition. Management anticipates that the center will increase rental gross profit margins by reducing capital expenditure requirements and related rental equipment depreciation. The Company also expects that the center will provide an additional source of revenue by allowing NES to perform repair and rebuild services for third party equipment owners. The center incorporates four production lines to simultaneously refurbish equipment by replacing or rebuilding all major components including engines, transmissions and mechanical, hydraulic and electrical systems. RECENT ACQUISITIONS In the first quarter of 1998, the Company completed seven acquisitions to add to the six businesses acquired in 1997. These first quarter 1998 acquisitions generated 1997 pro forma revenues of $89.3 million and added 32 locations. For additional information on these first quarter 1998 acquisitions, see Note 13 to the Company's Consolidated Financial Statements included elsewhere herein. In addition, the Company has entered into a definitive agreement to acquire all of the outstanding stock of Falconite for an aggregate purchase price of $175.0 million concurrent with the Offerings. Falconite is a leading aerial rental equipment company serving a diverse range of more than 5,500 active commercial customers from 29 locations in nine southern and mid-western states. Falconite's rental fleet consists primarily of large equipment, such as aerial work platforms, cranes and forklifts. Falconite's customers operate in a wide range of industries, including automotive, chemical, commercial construction, pulp and paper, and utilities. Falconite generated 1997 pro forma revenues of $72.6 million. The agreement to acquire Falconite is subject to customary conditions. THE OFFERINGS <TABLE> <S> <C> Common Stock Offered: Company.......................... 14,285,714 shares Selling Stockholders............. 2,914,286 shares Total.......................... 17,200,000 shares Common Stock to be Outstanding after the Offerings............... 28,415,429 shares of Common Stock (1) Use of Proceeds.................... The Company intends to use the net proceeds to the Company from the Offerings to (i) fund the acquisition of Falconite, (ii) repay indebtedness outstanding under the Credit Facility (as defined) and (iii) fund the Mandatory Redemption (as defined). New York Stock Exchange Symbol..... NSV </TABLE> - -------- (1) Excludes 1,260,000 shares of Common Stock issuable upon the exercise of outstanding options and 1,890,000 additional shares of Common Stock reserved for issuance under the Incentive Plan (as defined). See "Management--Long Term Incentive Plan." RECLASSIFICATION, STOCK SPLIT AND MANDATORY REDEMPTION Immediately prior to the consummation of the Offerings, each outstanding share of Old Common Stock (as defined) will be converted into one share of Common Stock and each outstanding share of Old Preference Stock (as defined) will be converted into a number of shares of Common Stock based on a specified formula (the "Reclassification"). Each share of Common Stock will then be split into 139 shares of Common Stock (the "Stock Split"). If the Offerings were consummated on March 31, 1998, and under no circumstances other than in connection with the consummation of the Offerings, the Company would have used $27.5 million of the proceeds of the Offerings to fund a mandatory redemption of the shares of Common Stock issued in the Reclassification with respect to the aggregate liquidation value and cumulative yield of the Old Preference Stock (the "Mandatory Redemption"). See "Use of Proceeds," "Description of Capital Stock--Old Preference Stock and Old Common Stock" and "Description of Capital Stock--Reclassification, Stock Split and Mandatory Redemption." SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) The Company was founded in June 1996 to acquire and integrate equipment rental companies. In 1997, the Company acquired six businesses in separate transactions. In 1998, the Company acquired seven businesses in separate transactions and has a definitive agreement to acquire Falconite concurrent with the Offerings. While the Acquired Businesses were or will be acquired at various dates during 1997 and 1998, the following pro forma operating, per share and other data are presented as if all such acquisitions and the Offerings had occurred on January 1, 1997. The following pro forma balance sheet data give effect to the aforementioned acquisitions and the Offerings as if they had occurred on March 31, 1998. See "Capitalization." The summary historical and pro forma financial information should be read in conjunction with the information contained in "Selected Pro Forma Financial Data," "Selected Historical Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements and notes thereto included elsewhere herein. <TABLE> <CAPTION> YEAR ENDED THREE MONTHS ENDED THREE MONTHS ENDED DECEMBER 31, 1997 MARCH 31, 1997 MARCH 31, 1998 -------------------- --------------------- -------------------- ACTUAL PRO FORMA(A) ACTUAL PRO FORMA(A) ACTUAL PRO FORMA(A) ------- ------------ ------- ------------ ------- ------------ <S> <C> <C> <C> <C> <C> <C> OPERATING DATA: Total revenues......... $41,288 $218,628 $ 2,319 $45,238 $22,151 $52,831 Gross profit........... 15,573 90,260 843 17,179 8,651 20,663 Operating income (loss)................ 6,187 38,917 (28) 5,565 3,313 6,878 Interest expense, net.. 4,336 15,857 262 3,964 3,100 3,964 Income (loss) before income taxes.......... 1,923 23,377 (290) 1,743 290 2,929 Income tax expense (benefit)............. 818 9,809 (135) 731 151 1,186 Net income (loss)...... 1,105 13,568 (155) 1,012 139 1,743 PER SHARE DATA: Basic earnings (loss) per share............. $ 0.09 $ 0.50 $ (0.02) $ 0.04 $ 0.01 $ 0.06 Basic shares outstanding........... 11,855 27,116 9,506 27,116 11,299 27,376 Diluted earnings (loss) per share............. $ 0.08 $ 0.48 $ (0.01) $ 0.04 $ 0.01 $ 0.06 Diluted shares outstanding........... 13,642 28,415 11,116 28,415 15,300 28,415 OTHER DATA: Rental fleet purchases. $15,336 $ 86,030 $ 853 $26,919 $12,385 $17,073 EBITDA(b).............. 12,744 77,995 395 15,314 6,924 16,848 </TABLE> <TABLE> <CAPTION> AT MARCH 31, 1998 --------------------- ACTUAL PRO FORMA(A) -------- ------------ <S> <C> <C> BALANCE SHEET DATA: Cash.......... $ 3,773 $ 2,158 Rental equipment, net.......... 104,937 210,573 Total assets.. 242,303 431,695 Total debt.... 193,954 159,028 Total stockholders' equity....... 26,860 236,614 </TABLE> (a) For an explanation of the calculation of the pro forma adjustments, see "Selected Pro Forma Financial Data."
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and Financial Statements, including the related Notes, appearing elsewhere in this Prospectus. Except as otherwise specified, all information in this Prospectus (i) assumes no exercise of the Underwriters' over-allotment option (see "Underwriting"), (ii) regarding outstanding shares, excludes shares of Class A Common Stock reserved for issuance under the Company's 1998 Stock Incentive Plan and (iii) gives effect to the reincorporation of the Company in Delaware (the "Reincorporation"), which will be effected prior to the consummation of the Offering and whereby the existing California corporation will be merged into a newly formed Delaware corporation and pursuant to which each outstanding share of common stock of the existing California corporation will be exchanged for shares of Class B Common Stock, par value $0.001 per share (the "Class B Common Stock"), of the new Delaware corporation. All references herein to the "Company" refer to DiTech Funding Corporation. THE COMPANY Introduction. The Company is a specialty finance company engaged in the business of marketing, directly originating, selling and servicing mortgage loans. The Company's direct marketing strategy uses extensive national cable television and radio advertising in order to build name recognition. The Company offers borrowers a wide range of mortgage products, which currently includes prime first mortgage loans, prime high-loan-to-value ("HLTV") first and second mortgage loans and, to a lesser extent, prime home equity lines of credit and subprime first and subprime HLTV second mortgage loans. The Company's advertisements solicit potential borrowers to call the Company's toll-free telephone number (1-800-71-FIXED) or to visit the Company's internet web site. During the five-quarter period ended March 31, 1998, the Company directly originated approximately 95% of its loans. In April 1995, the Company began originating loans secured by properties in the Southern California market. Since then, the Company has steadily expanded across the United States, originating $302 million in loans secured by properties in 7 states in 1995, $621 million in loans secured by properties in 46 states plus the District of Columbia in 1996, $1.2 billion in loans secured by properties in 49 states plus the District of Columbia in 1997 and $640 million in loans secured by properties in 49 states plus the District of Columbia for the three-month period ended March 31, 1998. The Company sells substantially all of the prime first mortgage loans it originates through whole loan sales. Typically such whole loan sales include a sale of the servicing rights related to such loans (referred to in the mortgage industry as sales "servicing released"). The whole loan sales, together with the Company's warehouse lines of credit, historically have provided positive operating cash flow to support the Company's operations and enabled it to pool its more profitable HLTV second mortgage loans for sale or securitization. For the year ended December 31, 1997, the Company sold $1.0 billion of loans that it originated, of which $927.7 million were sold through whole loan sales and $120.0 million were sold through a securitization transaction. For the three-month period ended March 31, 1998, the Company sold $497.3 million of loans through whole loan sales. For the year ended December 31, 1997, the Company had revenues of $32.8 million and pre-tax earnings of $13.8 million. For the three-month period ended March 31, 1998, the Company had revenues of $12.3 million and pre-tax earnings of $1.7 million. Strategy. The Company pursues a business strategy that includes: - Creating strong name recognition through the addition of new and innovative products, and advertising prices directly to consumers through targeted, direct-response, radio and cable television advertising. - Targeting sophisticated, experienced customers with superior credit who are seeking loans at competitive interest rates. - Originating loans directly to borrowers without incurring the cost of mortgage loan brokers or other intermediaries, thus reducing the potential for adverse loan selection and the risk of broker fraud. - Utilizing a highly efficient, centralized operation to reduce overhead. - Responding rapidly and effectively to evolving market conditions, mortgage products and demand through a varied product offering. - Providing prospective borrowers no risk and low cost loan origination processing by offering to advance the cost of the prospective borrowers' credit report and property appraisal. - Increasing penetration of existing geographic markets, particularly outside of California, in order to reduce the Company's current concentration in California and thereby mitigate risks associated with local and regional economic cycles. - Developing an efficient and effective in-house servicing capability. Loan Products. The Company targets high credit quality borrowers by offering loans at competitive interest rates. The Company utilizes the credit scoring methodology developed by Fair, Isaac and Company ("FICO") as a significant component of its evaluation of potential borrowers' credit. Approximately 99% of all loans originated by the Company during the three-month period ended March 31, 1998 were made to borrowers who the Company considers to be "prime" or "A" credit borrowers. With respect to first mortgage loans, management generally considers "prime" or "A" credit borrowers to be those borrowers whose loans are acceptable to Federal National Mortgage Association ("FNMA") or Federal Home Loan Mortgage Corporation ("FHLMC") for purchase or whose loans are acceptable to private investors under their nonconforming prime purchase programs. With respect to HLTV second mortgages loans, management generally considers "prime" or "A" credit borrowers to be those borrowers with FICO scores of 640 or greater. While prime first mortgage loans were the Company's first product and historically have been the Company's primary product, both in terms of number and dollar amount of loans, the Company has steadily expanded into HLTV second mortgage loans targeted at high credit quality borrowers with little or no equity in their homes. Customers for prime first mortgage loans are typically seeking to purchase new homes or to refinance the mortgages on their existing homes, whereas customers for HLTV second mortgage loans are typically seeking to consolidate high interest credit card debt or seeking funds for home improvement or other consumer purposes. Because HLTV borrowers typically have little or no equity in their homes, the Company relies principally upon the creditworthiness of borrowers for repayment of HLTV second mortgage loans. For the year ended December 31, 1997, the Company originated 4,966 prime first mortgage loans in the aggregate dollar amount of $952 million and 3,960 HLTV second mortgage loans in the aggregate dollar amount of $177 million. For the three-month period ended March 31, 1998, the Company originated 2,597 prime first mortgage loans in the aggregate dollar amount of $531 million and 1,712 HLTV second mortgage loans in the aggregate dollar amount of $94 million. The Company believes its consumer direct origination channels, high credit quality customer base and reputation for competitive financial products will allow it to meet consumers' needs in various markets and interest rate environments. In November 1997, the Company introduced its "Dream" loan product, which is an HLTV first mortgage loan that allows a high credit quality borrower to borrow up to 125% of the lesser of the purchase price or the appraised value of a new home. Management believes that its Dream loan will appeal to high credit quality homeowners who reside in areas in which property values have declined and to high credit quality first-time homebuyers in high property value areas who do not have the down payment that has traditionally been required. For the three-month period ended March 31, 1998, the Company originated 26 such loans in an aggregate amount of $5.3 million. During 1996 the Company began to offer subprime first mortgage loans (3% of the number and 2% of the dollar amount of loans originated for the year ended December 31, 1997), in order to accommodate the small portion of its borrowers who do not qualify for a prime loan. The Company also recently introduced its "Reward" loan program, which is a subprime HLTV second mortgage loan program. Reward loans are limited to a 110% combined loan-to-value ratio. As an incentive to Reward loan customers, a portion of the origination fees are rebated to the borrower two years after the origination date if the loan is still outstanding and if the borrower is current on his or her payments. The Company is considering a similar rebate program for its HLTV second mortgage loan programs. Loan Sales. The Company sells its prime first mortgage loans, home equity lines of credit and most subprime mortgage loans on a whole loan basis to third party investors, servicing released. During the year ended December 31, 1997 and the three months ended March 31, 1998 the Company received cash gain premiums from whole loan sales of 1.70% and 1.78%, respectively, of the principal balance sold. As a fundamental part of its business and financing strategy, the Company intends to sell substantially all of its HLTV first and second mortgage loans through securitization transactions. As of March 31, 1998, the Company had securitized $120 million of HLTV second mortgage loans and no HLTV first mortgage loans. In a loan securitization, the Company sells loans that it has originated to a trust for cash (generated by the issuance of bonds or certificates by the trust) and a retained interest in the loans securitized ("Residuals"). The Residuals are generally subordinate to the senior bonds issued by the trust, such that the Residuals will absorb all losses before the investors in the senior bonds issued by the trust incur any losses. The net gain recognized by the Company in the loan securitization represents the excess of the cash received and the assets retained by the Company (Residuals and any mortgage servicing assets) over the carrying value of the loans sold less transaction costs. The Company accounts for the Residuals as trading assets and estimates the fair value of the Residuals by calculating the present value of the estimated expected future cash flows received by the Company after being released from the trust (the "Cash Out Method") using a discount rate the Company believes market participants would use for similar financial instruments. The Company's estimate of fair value is very subjective and contingent upon a number of assumptions about future events, primarily future prepayments and future losses related to the securitized loans. Should such future events, prepayments or losses be different from those assumed, the fair value of the residual will have to be re-estimated and the resulting change in the fair value estimate may have a material effect on the financial position and results of operations of the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Loan Sales and Securitization." The Company recognized net gains on sales from its October 1997 securitization in an amount equal to approximately 8.3% of the unpaid principal balance of the securitized loans, excluding non-refundable fees and direct loan origination costs recognized on such sales. Such net gains consisted of the Residual (approximately 10.1% of the unpaid principal balance of the securitized loans) plus mortgage servicing rights (approximately 0.7% of such unpaid principal balance) minus securitization transaction costs, accrued interest contributed and prefunding interest expenses (which aggregated approximately 2.5% of such unpaid principal balance). Servicing. In April 1998 the Company established a loan servicing center in Mountainside, New Jersey, where the Company services Company-originated HLTV first and second mortgage loans. The loan servicing center is staffed by experienced servicing representatives. Management believes that the efficiency of its loan servicing efforts will be enhanced by the fact that the majority of the Company's HLTV mortgage loans provide for automatic funds transfer from the borrower's bank account. Also, the Company recently reached an agreement with GMAC Mortgage Corporation ("GMAC") for GMAC to perform certain servicing oversight functions on an interim basis with respect to the Company's HLTV mortgage loans, including those loans included in the Company's October 1997 securitization. See "Risk Factors -- Recent Commencement of Servicing Operations" and "Business -- Loan Servicing." Under the arrangement, GMAC will monitor the Company's servicing operation until various rating agencies determine that the Company has established an adequate servicing history. The Company's non-HLTV loans are typically sold servicing-released through whole loan sales within 30 days following origination, and are serviced at its headquarters in Irvine, California prior to such sale. Tax Status. Since its inception, the Company has elected to be treated for federal income and certain state tax purposes as an S Corporation under Subchapter S of the Internal Revenue Code of 1986, as amended (the "Code"). In connection with the Offering, the Company expects to terminate its S Corporation status. As a result, for the quarter in which the Offering closes, the Company will record a one-time non-cash charge to earnings for deferred income taxes based upon the change in the Company's status to a C Corporation. If such a charge had been recorded at March 31, 1998, the amount charged to earnings would have been approximately $6.3 million. If the Closing Date had occurred on June 30, 1998, the Company estimates that the amount of the charge would have increased by approximately $3.4 million to $9.7 million. This amount is expected to increase by the amount of deferred income taxes related to any earnings from July 1, 1998 through the Closing Date. See "Prior S Corporation Status," Note 15 to the Financial Statements and Note 5 to the Condensed Unaudited Financial Statements. The Company maintains its principal office at 1920 Main Street, Suite 400, Irvine, California 92614. Its telephone number is (949) 622-8150. THE OFFERING <TABLE> <S> <C> Class A Common Stock offered: By the Company(1)................................ By the Selling Stockholder(1).................... Capital Stock to be outstanding after the Offering......................................... Class A Common Stock(1)(2)....................... Class B Common Stock(1).......................... Total......................................... Voting Rights...................................... Each share of Class A Common Stock is entitled to one vote, and each share of Class B Common Stock is entitled to four votes, in each case on most matters requiring a stockholder vote. See "Description of Capital Stock." Use of Proceeds.................................... The net proceeds from the Offering will be used to repay certain indebtedness of the Company (including the S Corporation Distribution Note), to fund future loan originations and for general corporate purposes. See "Use of Proceeds." Proposed NYSE Symbol............................... "DIT" </TABLE> - --------------- (1) Assumes that the Underwriters' option to purchase up to an additional shares of Class A Common Stock from the Company and shares of Class A Common Stock from the Selling Stockholder to cover over-allotments is not exercised. See "Underwriting." (2) Exclusive of shares of Class A Common Stock reserved for issuance upon the exercise of options available for grant under the Company's 1998 Stock Incentive Plan. See "Management -- 1998 Stock Incentive Plan."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001051490_extended_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001051490_extended_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and the Company's consolidated financial statements and the notes thereto, appearing elsewhere in the Prospectus. In this Prospectus, the words "expects," "anticipates," "believes," "intends," "will" and similar expressions identify forward-looking statements, which are based upon information currently available to the Company, speak only as of the date hereof and are subject to certain risks and uncertainties. The Company assumes no obligation to update any forward-looking statements. The Company's actual results may differ materially from the results discussed in such forward-looking statements. Factors that may cause such a difference include, but are not limited to, those discussed in "Risk Factors." Unless otherwise indicated, all share numbers contained in this Prospectus assume that no stockholder receiving the Rescission Offer exercises such rights to rescind its purchase of Rescission Stock. THE COMPANY Extended Systems provides distributed and mobile computing solutions that address the needs of the virtual enterprise. The Company designs, develops, markets and sells two product families: distributed connectivity products and mobile systems products. The Company's distributed connectivity products include a virtual private networking server, an Internet access server, network print servers and a database management system with remote access capabilities. The Company's mobile systems products include wireless connectivity products that comply with the standards of the Infrared Data Association ("IrDA"), infrared software and port replicators that connect portable computers to desktop peripherals and the network. During the last decade, businesses and other organizations have moved from centralized computer systems to distributed local and wide area networks based on client/server architectures. The proliferation of these distributed networks has enabled the enterprise-wide deployment of mission-critical applications beyond the traditional on-site facilities of the organization. As a result, both mobile and local employees have greater access to business-critical information. The corporation has evolved into a "virtual enterprise" characterized by resource and information sharing among employees, suppliers, distributors and customers throughout the world. As the mobile workforce continues to grow, there is increasing demand to access business networks from multiple locations, including different locations within the organization's main office, remote offices and various locations while traveling, such as hotels and airports. International Data Corporation ("IDC") forecasts that the market for remote access servers will increase from $1.9 billion in 1996 to $7.6 billion in 2001, and IDC expects the installed base of remote access server ports to increase from 4.2 million in 1996 to 60.5 million in 2001. Increased demand for mobile connectivity has been driven by higher demand for access to communication and mission-critical applications across the network, as well as by the proliferation of notebook computers and other innovative mobile computing devices. PC manufacturers have introduced notebook computers with powerful new features and computing power comparable to desktop computers. IDC reported that 74% of all notebook computers sold in 1997 served as the user's primary computer. In addition, a majority of the notebook computer models sold today by major PC manufacturers contain an infrared port, based upon the IrDA standard, that enables wireless connectivity to the network, other computers, printers and other devices through an infrared connection. The Company's products provide a number of advantages to the virtual enterprise. The distributed connectivity products include ExtendNet VPN, ExtendNet IAS, ExtendNet print servers and Advantage Database Management Servers. ExtendNet VPN enables a business to extend its network environment beyond physical connections to the LAN or WAN, permitting seamless, secure access to the network by mobile users over the Internet and eliminating the need for multiple modems and telephone lines. ExtendNet IAS provides remote offices and small businesses with Internet connectivity, allowing multiple users to easily access a single Internet connection while intelligently managing usage to reduce costs. The ExtendNet print server products enable the effective deployment of complex printing applications across distributed networks worldwide. The Advantage Database Server is a scalable, high performance database management system that enables organizations to extend applications and databases across the distributed network and, when coupled with the Advantage Internet Server, over the Internet. The mobile systems products include the JetEye infrared wireless connectivity products, IrDA connectivity software and port replicators. The JetEye infrared wireless connectivity products enable mobile users to easily access networks or peripherals while moving between offices and conference rooms without the need for bulky cables and wired connections. The QuickBeam, JetBeam and IrLite software products enable infrared communications in mobile computing devices. The port replicator products provide notebook computers quick, cost-effective access to desktop peripherals and the network. The Company's objective is to be a leading supplier of distributed and mobile computing solutions that meet the needs of the virtual enterprise. The Company leverages its expertise in distributed and mobile computing to provide networking solutions that meet the evolving needs of the virtual enterprise. The Company is committed to developing, introducing and manufacturing new products and enhancing existing products by expanding and leveraging its core technologies. In addition, the Company intends to pursue strategic acquisitions of, or investments in, companies with complementary products, technologies or distribution networks in order to broaden its product lines and to provide a more complete virtual enterprise networking solution. The Company markets and sells its products worldwide primarily through distributors, OEMs and resellers. The Company has distribution agreements with companies located in more than 28 countries, including with key distributors such as Ingram Micro and Tech Data. The Company intends to establish additional distribution relationships to strengthen its geographic reach. The Company's in-house sales and marketing staff actively supports the sales efforts of distributors and resellers and is largely responsible for generating end user demand by soliciting prospective customers and providing technical support. Extended Systems was founded in 1984 and reincorporated in Delaware in 1985. The Company's principal offices are located at 5777 North Meeker Avenue, Boise, Idaho 83713, and its telephone number at that location is (208) 322-7575. References in this Prospectus to "Extended Systems" and the "Company" refer to Extended Systems Incorporated and its subsidiaries. THE OFFERING <TABLE> <S> <C> Common Stock subject to the Rescission Offer............ 163,334 shares Common Stock outstanding................................ 8,173,855 shares(1) Nasdaq National Market symbol........................... XTND </TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> NINE MONTHS ENDED YEAR ENDED JUNE 30, MARCH 31, ----------------------------------------------- ----------------- 1993 1994 1995 1996 1997 1997 1998 ------- ------- ------- ------- ------- ------- ------- (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net revenue..................... $23,104 $29,607 $28,588 $34,670 $39,535 $28,024 $36,344 Gross profit.................... 14,309 17,809 16,687 19,841 24,248 17,248 21,411 Income from operations.......... 4,652 7,400 3,456 4,199 5,308 3,942 4,174 Net income...................... 2,194 4,290 1,798 2,279 2,676 1,966 2,246 Earnings per share: Basic......................... $ 0.34 $ 0.67 $ 0.28 $ 0.33 $ 0.39 $ 0.29 $ 0.32 Diluted....................... 0.30 0.61 0.26 0.32 0.38 0.28 0.31 Number of shares used in earnings per share calculation: Basic......................... 6,472 6,433 6,368 6,826 6,870 6,869 7,010 Diluted....................... 7,399 7,464 6,867 7,029 7,133 7,124 7,293 </TABLE> <TABLE> <CAPTION> MARCH 31, 1998 -------------- (UNAUDITED) <S> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $16,218 Working capital............................................. 24,352 Total assets................................................ 38,502 Long-term debt.............................................. 7,641 Total stockholders' equity.................................. 25,093 </TABLE> - --------------- (1) Excludes 2,483,504 shares of Common Stock issuable upon exercise of stock options outstanding as of March 31, 1998 with a weighted-average exercise price of $7.83 per share, 2,520,000 shares of Common Stock reserved for future issuance under the Company's stock option, director option and stock purchase plans, and 558,531 shares of Common Stock issuable upon conversion of promissory notes. Does not reflect the rescission of any shares which may be repurchased pursuant to the Rescission Offer. See "Capitalization,"
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001051591_gsv-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001051591_gsv-inc_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and consolidated financial statements and notes thereto included elsewhere in this Prospectus. The Company was incorporated in Delaware in October 1997 and is the parent company of CyberShop, L.L.C., a New Jersey limited liability corporation that was established on December 1, 1994. As of March 18, 1998 the members of CyberShop, L.L.C. contributed all of their membership interests in exchange for 4,000,000 shares of the Common Stock of the Company (the "Contribution"). Except as otherwise specified, all information in this Prospectus: (i) assumes no exercise of the Underwriters' over-allotment option or the Underwriters' Warrants and (ii) gives effect to the Contribution. The term "Company" includes, unless the context otherwise requires, CyberShop International, Inc. and CyberShop, L.L.C. THE COMPANY CyberShop is an online retailer that currently offers over 40,000 products from more than 400 manufacturers through its online stores on the Internet and America Online, Inc. ("AOL"). The Company seeks to provide a convenient shopping experience that incorporates traditional department store and mail-order features into an interactive, easy-to-use and compelling online environment. The Company believes that online technology, and the Internet in particular, is an advantageous medium for the selling of merchandise relative to traditional retail stores and mail-order catalogs. Leveraging online technology and the global reach of the Internet, the online retailing model provides CyberShop with virtually unlimited online shelf space and the ability to reach a geographically unlimited consumer base 24 hours a day. The online retailing model also enables the Company to avoid the facilities and personnel costs associated with maintaining traditional retail stores and the costs of printing and distributing catalogs and staffing large "call centers" associated with mail-order companies. The Company's strategy is to offer quality merchandise, provide effective customer service, and capitalize on the inherent economies of the online retailing model. The Company, which launched its Internet store in September 1995, is still in early stages of development. The Company believes that its ability to achieve profitability will depend primarily on its ability to increase revenues generated by transactions relating to sales of merchandise through its online stores. CyberShop's management team has experience in a broad range of retailing environments, including department stores, specialty retailing stores, television merchandising and direct mail. CyberShop's online stores are accessed at CYBERSHOP.COM on the Internet and in the Department Store and Gift areas of the AOL Shopping Channel. CyberShop's online stores provide high quality color pictures and detailed information relating to products that are conveniently organized into departments by brand and category such as housewares, consumer electronics, gifts and gourmet food, similar to those of traditional department stores. Shoppers can search for, browse and select products throughout the store and place selected merchandise in a virtual shopping bag that facilitates the process of collecting items, subtotaling purchases and reaching the purchase decision. In addition to offering a broad selection of quality branded merchandise at a guranteed competitive price, the Company's customers benefit from cost savings, including free domestic delivery for most purchases over $100 and discounts on future purchases under the Company's frequent buyer program. Most customer orders are completed by credit cards utilizing industry standard secured encryption. The Company believes that relationships with merchandise manufacturers are important to its business. CyberShop has established strategic relationships with manufacturers which allow for prompt updates on merchandise information and for most products to be rapidly shipped directly from suppliers. Supplier direct shipping enables the Company to avoid inventory related risks, limit overhead costs and provide prompt delivery. Through its Gifts Wrapped & Ready boutique the Company also offers pre-wrapped gift items which are shipped from inventory maintained at an independent warehouse facility or from the Company's suppliers within 24 hours after an order is placed. As part of its marketing strategy, the Company has formed a strategic alliance with AOL pursuant to a marketing agreement. This agreement provides for CyberShop to be featured on the AOL Shopping Channel as one of three anchor tenants within the Department Store area and to be prominently featured in the Gift area. In addition, the Company plans to establish strategic alliances with other online companies and begin a targeted advertising campaign to attract additional customers to its online stores. The Company believes both online and traditional media exposure are critical to maximizing brand recognition and driving traffic to its online stores. The Company leverages its database of customer demographic profiles to proactively market merchandise via e-mail. International Data Corporation ("IDC"), an independent market research organization, estimates that the total value of goods and services purchased on the Internet was $296 million in 1995, $2.6 billion in 1996 and will increase to $220 billion by the year 2001. The number of Company customers grew from approximately 2,250 at December 31, 1996 to approximately 12,800 at December 31, 1997. The Company believes it has effectively positioned itself to capitalize on the potential growth of online commerce by selectively targeting quality branded manufacturers and strategic online partners. The Company's office is located at 130 Madison Avenue, New York, New York 10016 and its telephone number is 212-532-3553. THE OFFERING <TABLE> <S> <C> Common Stock offered hereby ......................... 2,300,000 shares Common Stock outstanding after the Offering ......... 6,300,000 shares (1) Use of proceeds ..................................... The net proceeds from the Offering will be used by the Company to expand marketing and ad- vertising efforts and potential strategic alliances with Internet search engines and guides and online communities, to repay a secured loan made by the Trustees of the General Electric Pension Trust, to develop and market an online gift registry, to fund payments due to AOL, and for working capital and other general corporate purposes, including expansion of the Company's technical infrastructure and possible future stra- tegic alliances and acquisitions. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001051628_annuity_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001051628_annuity_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements, including the notes thereto, included elsewhere in this Prospectus. Unless the context otherwise requires, references herein to the "Company" mean Annuity and Life Re (Holdings), Ltd., together with its wholly-owned subsidiary, Annuity and Life Reassurance, Ltd. ("Annuity Reassurance"), through which the Company expects to conduct all its operations. The Company and Annuity Reassurance were incorporated on December 2, 1997 in Bermuda and neither has any operating history. Annuity Reassurance has been licensed in Bermuda as a long-term insurer, which license authorizes it to write reinsurance on annuity and life insurance-related risks. See "Glossary of Selected Annuity and Life Insurance Terms" for definitions of certain terms used in this Prospectus. Unless otherwise noted, this Prospectus assumes that the Underwriters' over-allotment option will not be exercised. THE COMPANY The Company and Annuity Reassurance were recently organized in Bermuda to provide annuity and life reinsurance. The Company intends to market its reinsurance products to select insurers and reinsurers on a worldwide basis, with its primary target market initially being North America. Upon consummation of the Offering, the Company expects to be the first publicly-traded Bermuda-based reinsurance company focused principally on writing annuity and life reinsurance. By focusing on annuity and life reinsurance, the Company will seek to participate in what it believes to be a market with significant growth potential. As of year end 1996, according to LIMRA International, Inc., an independent research organization ("LIMRA"), United States annuity assets under management totaled approximately $919 billion, and, according to A.M. Best Company, Inc. ("A.M. Best"), approximately $17.6 trillion of life insurance was in force in the United States. Management believes that annuity reinsurance presents an attractive opportunity because of the large potential size of the market coupled with the limited number of companies currently providing such reinsurance on a third-party basis. Furthermore, management believes that the demand for the Company's life reinsurance products should be aided by growth in new life reinsurance business production which management estimates, based on industry surveys, grew at a compounded annual rate of approximately 28% from 1993 to 1996, excluding retrocessional and group life reinsurance. The Company's business strategy has been developed to respond to a number of trends in the insurance and reinsurance industries, which trends management believes are increasing the demand for annuity and life reinsurance, including: - Increasing risk-based capital and reserve requirements being applied to annuity issuers and life insurers by regulatory bodies and rating agencies; - Continuing consolidation in the annuity and life insurance industry, including strategic decisions to divest large blocks of business through the use of reinsurance; - Increasing demutualization activity by mutual life insurers leading to increasing demand for reinsurance; - Growing use of multiple reinsurance partners by annuity issuers and life insurers; and - Expanding price sensitivity among purchasers of reinsurance. Management believes that through controls on overhead costs and the absence of a corporate level tax in Bermuda on the Company's revenues and earnings, the Company will be able to capitalize on these trends by having one of the lowest cost structures in the annuity and life reinsurance industry. The Company expects that its low cost structure will enable it to offer its products at attractive prices and to compete effectively in the annuity and life reinsurance market. Upon consummation of the Offering and the Direct Sales, the Company will have an equity capitalization of approximately $319.1 million. Management believes that this level of capitalization will demonstrate a strong financial position and a high level of commitment to the annuity and life reinsurance market and will enable the Company to compete for desirable business and establish long-term relationships with a select group of primary insurers and reinsurers. As a newly-formed entity, the Company's capital is presently unencumbered by issues of loss reserve adequacy, unrealized losses in its investment portfolio and uncollectible reinsurance. In addition, although the Company does expect that it may seek a working capital line of credit to finance its operations, the Company does not presently have any indebtedness. In part because of the Company's expected capitalization following the Offering and the Direct Sales, A.M. Best has assigned Annuity Reassurance a preliminary Best Rating of "A-" (Excellent), and Standard & Poor's Ratings Service ("Standard & Poor's") and Duff & Phelps Credit Rating Co. ("Duff & Phelps") have assigned Annuity Reassurance preliminary claims paying ability ratings of "A-" and "A," respectively. The A.M. Best and Duff & Phelps ratings are contingent on the Company raising gross proceeds of $250 million in the Offering. The Standard & Poor's rating is contingent on the Company raising gross proceeds of $200 million in the Offering. A.M. Best assigns an "A-" (Excellent) rating to companies that have, in its opinion, on balance, excellent financial strength, operating performance and market profile, as well as strong abilities to meet their ongoing obligations to policyholders. Standard & Poor's assigns an "A-" rating to companies that have, in its opinion, good financial security, but their capacity to meet policyholder obligations is somewhat susceptible to adverse economic and underwriting conditions. Duff & Phelps assigns an "A" rating to companies that it characterizes as having high claims paying ability, average protection factors and an expectation of variability in risk over time due to economic or underwriting conditions. Each rating represents the respective rating agency's opinion of the Company's ability to meet its obligations to its policyholders. The Company's principal executive office is located at Victoria Hall, Victoria Street, P.O. Box HM1262, Hamilton, HM FX, Bermuda, and its telephone number is (441) 296-7667. BUSINESS STRATEGY The Company's objective is to develop an efficient, low cost annuity and life reinsurance business that will enable it to achieve attractive total rates of return for its shareholders through prudent underwriting of insurance risks and careful management of its investment portfolio. The Company will seek to achieve this objective through the implementation of its business strategy, the principal components of which are: - - Maintain Low Cost Structure Management believes that the price of reinsurance is the primary determinant used by its potential clients in selecting an annuity or life reinsurer. Consequently, a key component of the Company's business strategy is to maintain a low cost structure. The Company intends to focus on writing primarily treaty reinsurance and reinsuring large blocks of business where the underlying policies meet the underwriting criteria of the primary insurer. The Company anticipates that this focus will permit it to make fewer underwriting assessments than would typically be required with respect to the underwriting of a large number of individual policies. As a consequence, the Company expects to limit its number of employees initially to approximately ten and to use third-party service providers to perform certain functions. As a part of this strategy, the Company has contracted with Marsh & McLennan Management Services (Bermuda) Limited ("Marsh & McLennan") to provide claims processing and other administrative services. By minimizing its personnel and overhead costs, the Company expects to be better able to control expense levels as market conditions for writing reinsurance fluctuate. In addition, the Company also expects to benefit from the absence of a corporate level tax in Bermuda on the Company's revenues and earnings. As a result of these factors, the Company expects to have one of the lowest cost structures in the annuity and life reinsurance industry. - - Utilize a Disciplined Underwriting Approach The Company's reinsurance underwriting strategy is to utilize an experienced underwriting team to select opportunities with acceptable risk/return profiles based on sophisticated actuarial and investment modeling techniques. The principal risks associated with the reinsurance of both annuity and life insurance products are mortality risk and investment risk. Mortality risk is actuarially quantifiable when spread across large numbers of insureds. The Company will be exposed to investment risk when the products it reinsures guarantee an investment return or fixed benefit. The Company intends to manage these risks by using modeling techniques to structure its investments in an effort to match its anticipated liabilities under reinsurance policies. In addition, the Company's underwriting guidelines limit the maximum aggregate net risk on any one life to $1.0 million and require any purchaser of reinsurance from the Company to retain at least 10% of the total risk being reinsured. Waivers of the Company's underwriting guidelines, including waivers of the 10% retention requirement, must be approved by the Company's Board of Directors. Initially, the Company intends to supplement its underwriting analyses with commercially available actuarial models and may retain consultants to assist in the analysis of the risks that it reinsures, while it develops its own proprietary models. The Company believes that its focus on annuity and life reinsurance will enable it to structure its reinsurance products to meet the specific requirements of its clients while managing its exposure to the risks being assumed. Furthermore, the reinsurance of annuity and life insurance products will not expose the Company to the catastrophic risks normally associated with property/casualty reinsurance, which the Company does not intend to write. - - Employ Professional Investment Management The Company will seek to generate attractive levels of investment income through a professionally managed fixed income investment portfolio. Annuity Reassurance has entered into an investment advisory agreement with Pacific Investment Management Company ("PIMCO"), which is anticipated to manage initially approximately 50% of Annuity Reassurance's investment portfolio. Annuity Reassurance has also retained Alliance Capital Management L.P. and The Prudential Investment Corporation (together with PIMCO, the "Investment Managers"). Annuity Reassurance may also retain other investment managers from time to time. Each Investment Manager will have discretionary authority over the portion of Annuity Reassurance's investment portfolio allocated to it, subject to the investment guidelines established by Annuity Reassurance (the "Investment Guidelines"). Annuity Reassurance's investment portfolio will principally consist of investment grade fixed income securities and will be invested in an effort to match Annuity Reassurance's anticipated liabilities under the reinsurance policies it writes. Assets held in the investment portfolio that Annuity Reassurance believes exceed such anticipated liabilities, if any, will be invested in an attempt to maximize total return as well as to provide for diversification of risk and maintenance of liquidity, and up to 25% of such assets may be invested in fixed income securities that are rated below investment grade. The Investment Guidelines require Annuity Reassurance's overall fixed income portfolio to maintain a minimum weighted average rating of "A." The Investment Guidelines prohibit any investment in common equity securities or equity-based futures and options other than pursuant to strategies intended to hedge the equity-based investment risk associated with annuity and life insurance products which Annuity Reassurance reinsures. - - Capitalize on Skill and Experience of Management and Board of Directors The Company has assembled a senior management team of experienced insurance and reinsurance professionals to implement its strategy. The Company's President and Chief Executive Officer, Lawrence S. Doyle, has over 32 years of experience in the insurance and reinsurance industries and was formerly the President and Chief Executive Officer of a Bermuda-based start up reinsurance company, GCR Holdings Limited and its subsidiary Global Capital Reinsurance Limited (together, "GCR"). Mr. Doyle founded GCR in 1993 as a reinsurer specializing in catastrophe risk and was largely responsible for the development of a new client base, the hiring of marketing, underwriting and administrative personnel and the overall development of the business. In 1997, GCR was acquired by EXEL Limited, and Mr. Doyle became an Executive Vice President of EXEL Limited. Before founding GCR, Mr. Doyle was Senior Vice President of Hartford Insurance Group in charge of international operations, where he was employed for 27 years, the last six of which he was also the President of Hartford Fire International. Robert J. Reale, a Senior Vice President and the Chief Underwriter of the Company, has over 19 years of experience in the insurance and reinsurance industries and was formerly a Vice President of Swiss Re Life & Health America, Inc. ("Swiss Re"). Mr. Reale also served as the President of Swiss-Am Reassurance Company and Atlantic International Reinsurance Company (Barbados), both affiliates of Swiss Re. While employed by Swiss Re, Mr. Reale was assigned overall pricing responsibility for that company's United States life and annuity reinsurance market. William W. Atkin, the Chief Financial Officer and Treasurer of the Company, has over 24 years experience in the insurance industry. Mr. Atkin formerly served as an Executive Vice President, the Chief Financial Officer and a director of Security Mutual Life Insurance Company of New York where he was responsible for that company's operating plans, annuity product line and relationships with credit rating agencies, investment advisors, banks and independent accountants. Richard Tucker, a Vice President of the Company, has over 18 years of experience in the insurance and reinsurance industries and was formerly a Senior Vice President and a director of PaineWebber Life Insurance Company. While employed by PaineWebber Life Insurance Company, Mr. Tucker was responsible for that company's financial and administrative operations, development of variable annuity products and negotiation of annuity reinsurance agreements. Robert P. Mills, Jr., a Vice President and the Chief Actuary of the Company, has over 26 years of experience in the insurance and reinsurance industries. Mr. Mills was formerly an Assistant Vice President and Actuary for Allmerica Financial where he was responsible for reinsurance administration and pricing. The Company's Board of Directors consists of several individuals with extensive experience in the insurance and financial services industries. Management believes that the reputation and expertise possessed by the Company's officers and directors should provide the Company with a marketing advantage. STRATEGIC INVESTORS In connection with the formation of the Company, management determined it would be desirable to have a core group of investors composed of companies in the insurance or reinsurance industries. In furtherance of this goal, the Company has entered into agreements with The Prudential Insurance Company of America ("Prudential Insurance"), EXEL Limited ("EXEL"), Risk Capital Reinsurance Company ("Risk Capital"), Insurance Partners, L.P. ("Insurance Partners") and Insurance Partners Offshore (Bermuda), L.P. ("Insurance Partners Offshore") for the purchase for investment directly from the Company of an aggregate of 5,638,299 Common Shares and Class B Warrants to purchase an aggregate of 397,500 Common Shares. Such purchases will be completed simultaneously with the consummation of the Offering for an aggregate purchase price for the Common Shares and the Class B Warrants of $79.5 million. The aggregate purchase price to be paid by the Strategic Investors is based on a price of $14.10 for (i) one Common Share and (ii) the right to purchase approximately seven one-hundredths of a Common Share under the Class B Warrants. The exercise price of the Class B Warrants will be $15.00 per share. Prudential Insurance is the largest life insurance company in the United States based on total assets at December 31, 1997. EXEL is a diversified Bermuda-based insurer and reinsurer. Risk Capital provides reinsurance and other forms of capital, either on a stand-alone basis or as part of integrated solutions for insurance companies with capital needs that cannot be met by reinsurance alone. Insurance Partners and Insurance Partners Offshore are investment partnerships formed to sponsor acquisitions, recapitalizations, demutualizations and other structured transactions in the property/casualty, life and health insurance and reinsurance industries. THE OFFERING <TABLE> <S> <C> Common Shares Offered in the Offering....................... 17,078,765 shares Direct Sales(1)............................................. 5,859,420 shares Common Shares to be Outstanding after the Offering and the Direct Sales(2)........................................... 22,938,185 shares Use of Proceeds from the Offering and the Direct Sales...... The net proceeds of the Offering and Direct Sales are estimated to be approximately $236.6 million and $82.6 million, respectively. Substantially all of the net proceeds will be contributed to the capital of Annuity Reassurance to support its reinsurance underwriting capacity. See "Use of Proceeds." Nasdaq National Market Symbol............................... ALREF </TABLE> - --------------- (1) Unless otherwise noted, this Prospectus assumes that upon consummation of the Offering the sale of 5,638,299 Common Shares and Class B Warrants to purchase 397,500 Common Shares to the Strategic Investors has been completed and the 221,121 Common Shares offered by the Company to certain of its directors and officers have been purchased. Such directors and officers have indicated their intention to make such purchases, but are not obligated to do so. (2) The Annuity Re Purpose Trust, a Bermuda trust (the "Purpose Trust"), owns 12,000 Common Shares, which constitute all of the currently outstanding Common Shares. Upon consummation of the Offering, the Purpose Trust has agreed to sell such Common Shares to the Company for an aggregate price of $12,000 and such Common Shares will be cancelled. Common Shares to be outstanding after the Offering and the Direct Sales excludes the 12,000 Common Shares currently held by the Purpose Trust, 2,752,573 Common Shares issuable upon exercise of outstanding Class A Warrants, 397,500 Common Shares issuable upon exercise of Class B Warrants to be included in the Direct Sales, 1,250,461 Common Shares issuable upon exercise of options to be granted to management and certain directors upon consummation of the Offering and 161,139 Common Shares reserved for future issuance pursuant to the Company's Initial Stock Option Plan (the "Stock Option Plan"). If the Underwriters' over-allotment option is exercised in full, upon consummation of the Offering and the Direct Sales 25,499,999 Common Shares will be outstanding, the number of Common Shares issuable upon exercise of outstanding Class A Warrants will increase to 3,059,990 Common Shares, the number of Common Shares issuable upon exercise of options to be granted to management and certain directors upon consummation of the Offering will increase to 1,370,865 Common Shares and the number of Common Shares reserved for future issuance pursuant to the Stock Option Plan will increase to 181,635 Common Shares. The number of Common Shares issuable upon exercise of the Class B Warrants will not change if the Underwriters' over-allotment option is exercised. The Class A Warrants, Class B Warrants and options are not currently exercisable. See "Management -- Stock Option Plan,"
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001051721_iridium_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001051721_iridium_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..550045483c18f5f7ea4fc78bd3910a5a33ca5b36
--- /dev/null
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+SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements and related notes thereto included elsewhere in this Prospectus. Prospective investors are urged to read this Prospectus in its entirety. See "Glossary" for definitions of certain terms used in this Prospectus. IRIDIUM Iridium Operating LLC ("Iridium") is developing and commercializing a global mobile wireless communications system that will enable subscribers to send and receive telephone calls virtually anywhere in the world -- all with one phone, one phone number and one customer bill. The IRIDIUM communications system (the "IRIDIUM System") will combine the convenience of terrestrial wireless systems with the global reach of Iridium's satellite system. The IRIDIUM System encompasses four components: the "space segment," which will include the low earth orbit satellite constellation and the related control facilities; the ground stations or "gateways," which will link the satellites to terrestrial communications systems; the Iridium subscriber equipment, which will provide mobile access to the satellite system and terrestrial wireless systems; and the terrestrial wireless interprotocol roaming infrastructure, which will facilitate roaming among the Iridium satellite system and multiple terrestrial wireless systems that use different wireless protocols. The first launch of Iridium satellites occurred on May 5, 1997. Iridium expects to commence commercial operations in September 1998. The satellite constellation is being designed, assembled and delivered in orbit by Motorola, Inc. ("Motorola"), a leading international provider of wireless communications systems, phones and pagers, semiconductors and other electronic equipment. Motorola also is the principal investor in Iridium, having provided investments, guarantees and conditional agreements to provide guarantees totaling over $1.1 billion, including its conditional commitment to guarantee up to an additional $350 million of borrowings under the Guaranteed Bank Facility described below. Other strategic investors include leading wireless communications service providers from around the world, as well as experienced satellite manufacturers and experienced launch providers. Iridium is a wholly owned subsidiary of Iridium LLC, a Delaware limited liability company ("Iridium LLC" or "Parent"). On December 18, 1997, substantially all of the assets and liabilities of Parent were transferred to Iridium pursuant to the Asset Drop-Down Transaction. See "Ownership Structure and Strategic Investors -- Asset Drop-Down Transaction." Iridium Capital Corporation ("Capital"), a Delaware corporation, is a wholly owned subsidiary of Iridium. The Notes will be the joint and several obligations of Iridium and Capital (the "Issuers"), although Capital will not receive any of the net proceeds from the issuance of the Notes. Capital has no assets and does not conduct any operations. The Notes will be guaranteed by Iridium Roaming LLC ("Roaming"), Iridium IP LLC ("IP") and Iridium Facilities Corporation ("Facilities" and, together with Roaming and IP, the "Initial Guarantors" and, together with the Issuers, the "Iridium Parties"). Each of Roaming and IP is a Delaware limited liability company, Facilities is a Delaware corporation and each of Roaming, Facilities and IP is a wholly owned subsidiary of Iridium. The principal executive office for each of the Iridium Parties is located at 1575 Eye Street, N.W., Washington, DC 20005, telephone (202) 408-3800. IRIDIUM SERVICES AND MARKET Global mobile satellite service ("MSS") systems such as the IRIDIUM System are designed to address two broad trends in the communications market: (i) the worldwide growth in the demand for portable wireless communications -- according to industry sources, the worldwide wireless communications market had approximately 200 million subscribers at year-end 1997 and is estimated to grow to over 400 million subscribers by year-end 2000; and (ii) the growing demand for communications services to and from areas where landline or terrestrial wireless service is not available or accessible. The IRIDIUM System architecture and Iridium voice, data, facsimile and INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED APRIL 29, 1998 PROSPECTUS IRIDIUM LOGO IRIDIUM OPERATING LLC IRIDIUM CAPITAL CORPORATION $350,000,000 % SENIOR NOTES DUE 2005, SERIES D FULLY AND UNCONDITIONALLY GUARANTEED, AS DESCRIBED HEREIN, BY IRIDIUM ROAMING LLC IRIDIUM IP LLC IRIDIUM FACILITIES CORPORATION Iridium Operating LLC ("Iridium") and Iridium Capital Corporation ("Capital" and, together with Iridium, the "Issuers") are offering (the "Offering") % Senior Notes due 2005, Series D (the "Notes"). Interest on the Notes will accrue from , 1998 at the rate of % per annum. Interest on the Notes is payable in cash semi-annually on January 15 and July 15 of each year, commencing on July 15, 1998. The Notes will be redeemable at the option of either Issuer, in whole or in part, at any time on or after July 15, 2002 at the redemption prices set forth herein, together with, as applicable, accrued and unpaid interest, if any, to the redemption date. At any time on or prior to July 15, 2000, either Issuer may redeem in the aggregate up to 33 1/3% of the original aggregate principal amount of the Notes, with the cash proceeds to Iridium of one or more Equity Offerings (as defined), at a redemption price equal to % of the principal amount of any Notes being redeemed plus accrued and unpaid interest to the date of redemption; provided that at least 66 2/3% of the original aggregate principal amount of the Notes must remain outstanding after each such redemption. See "Description of Notes -- Optional Redemption." (continued on next page) ---------------------------------------------------------------------------- SEE "RISK FACTORS" ON PAGE 17 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NOTES. ---------------------------------------------------------------------------- THE NOTES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ---------------------------------------------------------------------------- <TABLE> <CAPTION> - -------------------------------------------------------------------------------------------------------------------------- PRICE TO UNDERWRITING PROCEEDS TO PUBLIC(1) DISCOUNTS(2) IRIDIUM(1)(3) - -------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> PER SERIES D SENIOR NOTE % % % TOTAL $ $ $ - -------------------------------------------------------------------------------------------------------------------------- </TABLE> (1) Plus accrued and unpaid interest on the Notes, if any, from the date of issuance. (2) The Issuers and the Initial Guarantors (as defined) have agreed to jointly and severally indemnify the Underwriters (as defined) against certain liabilities, including liabilities under the Securities Act. See "Underwriting." (3) Before deducting estimated expenses of $850,000 payable by Iridium. ---------------------------------------------------------------------------- The Notes are being offered by Chase Securities Inc., Barclays Capital Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriters"), subject to prior sale, when, as and if issued by the Issuers and delivered to and accepted by the Underwriters. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of the Notes will be made in New York, New York in book-entry form through the facilities of The Depository Trust Company on or about , 1998. CHASE SECURITIES INC. BARCLAYS CAPITAL MERRILL LYNCH & CO. , 1998 paging services are primarily designed to serve customers who place the greatest value on global mobile communications services. Iridium believes there is a significant market comprised of individuals and businesses who need global communications capability and are willing to pay for the convenience of a hand-held wireless phone or belt-worn pager. The availability of terrestrial wireless communications service is often constrained by the limited geographic coverage of terrestrial systems, the incompatibility of differing wireless protocols or the absence of roaming agreements among wireless operators. The combination of Iridium World Cellular Services, Iridium World Satellite Services and Iridium World Page Services will extend wireless access globally and allow customers of Iridium to be reached by phone or pager, and to place phone calls from or to virtually anywhere in the world with one phone and one phone number. Iridium World Cellular Services is expected to enable customers to roam on an international basis among terrestrial wireless networks, including those using different protocols, that have roaming agreements with Iridium. Iridium World Satellite Services will extend voice services to the regions of the world not served by terrestrial systems. Iridium intends to offer global paging (Iridium World Page Services) both in combination with its voice services and as a stand-alone service. Iridium believes that the signaling capabilities of the IRIDIUM System will enable Iridium to track the location of a voice customer effectively and with minimal customer cooperation, thereby allowing Iridium to direct pages and calls as customers travel globally. Iridium also expects to offer, commencing in 1999, a broad range of in-flight passenger communications services with participating airlines, including global incoming and outgoing voice, data and facsimile services. In addition, Iridium expects to market Iridium World Services to governmental, industrial and rural users of wireless communications systems. Iridium believes it will be the only wireless communications system in operation prior to 2000 that will be able to offer this array of global communications services. See "Risk Factors -- Consequences of Satellite Service Limitations on Customer Acceptance" and "-- Consequences of Iridium Phone and Pager Characteristics on Customer Acceptance." To estimate potential demand for its services, Iridium has engaged in extensive market analysis, including primary market research which involved screening over 200,000 persons and interviewing more than 23,300 individuals from 43 countries and 3,000 corporations with remote operations. Based on this market analysis, Iridium has identified five target markets for Iridium World Services: traveling professionals; corporate/industrial; government; rural; and aeronautical. Iridium expects the traveling professional and corporate/industrial markets will provide most of the demand for Iridium World Services. Iridium believes that individuals in these markets are more likely to need and have the ability to afford hand-held, global mobile communications capability than, for example, individuals who live in remote areas outside existing distribution channels for wireless communications services. Iridium estimates that the addressable traveling professional market, which it defines as all employed adults living in urban areas who own a wireless phone and travel at least four times per year beyond the coverage of their current wireless phone, will include approximately 42 million individuals by 2002. The global corporate/industrial addressable market, which consists of companies with more than 1,000 employees in industries with operations that are likely to need mobile satellite services, is estimated by Iridium to include over 8,800 companies by 2002. Iridium believes that its market analysis was properly designed, appropriate in scope and implemented in a systematic basis and, accordingly, provides a reasonable basis for Iridium's marketing and strategic planning. Iridium believes that its unique service package is well tailored to meet the demands of, and will give Iridium an advantage over competing MSS systems in, these target markets. Based upon its market analysis, Iridium estimates that it will have customer counts in the year 2002 in the range of 2.2 million to 2.5 million for Iridium World Satellite Services (satellite voice and paging) and Iridium World Services (the combination of Iridium World Satellite Services and Iridium World Cellular Services), 1.0 million to 1.3 million for stand-alone Iridium World Cellular Services and 350,000 to 500,000 for stand-alone Iridium World Page Services. (continued from previous page) Upon the occurrence of a Change of Control (as defined), each holder of Notes may require the Issuers to repurchase all or a portion of such holder's Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, to the purchase date. See "Description of Notes -- Change of Control." The Notes will be senior obligations of the Issuers ranking pari passu in right of payment to the Initial Senior Notes (as defined) and all other existing and future senior Indebtedness (as defined) of the Issuers, other than Indebtedness that is expressly subordinated to the Notes. However, subject to certain limitations set forth in the Indenture (as defined), Iridium and its Subsidiaries (as defined) may incur other senior Indebtedness, including Indebtedness that is secured by the assets of Iridium and its Subsidiaries. The Notes will be effectively subordinated to any secured Indebtedness of the Issuers to the extent of the value of the assets securing such Indebtedness. The Notes will be fully and unconditionally guaranteed, on an unsecured senior basis, by Iridium Roaming LLC ("Roaming"), Iridium IP LLC ("IP") and Iridium Facilities Corporation ("Facilities" and, together with Roaming and IP, the "Initial Guarantors" and, together with the Issuers, the "Iridium Parties"). Each of Roaming and IP is a Delaware limited liability company, Facilities is a Delaware corporation and each of Roaming, Facilities and IP is a wholly owned subsidiary of Iridium. In addition, the Notes will be fully and unconditionally guaranteed (the "Subsidiary Guarantees") on an unsecured, senior basis by all future Guarantor Subsidiaries (as defined). As of March 31, 1998, after giving pro forma effect to the issuance of $350 million in aggregate principal amount of Notes and the application of $175 million of the net proceeds from the Notes to a permanent reduction of the Guaranteed Bank Facility (as defined), the Iridium Parties would have had outstanding (i) approximately $350 million of senior secured Indebtedness, (ii) approximately $1,210 million of unsecured senior Indebtedness (other than the Notes) that ranks pari passu with the Notes (including $1,100 million in aggregate principal amount of Initial Senior Notes and borrowings of $110 million under the Guaranteed Bank Facility), and (iii) approximately $285 million of Indebtedness that is subordinated to the Notes. Such outstanding amounts of Indebtedness do not reflect the anticipated temporary reduction in the Guaranteed Bank Facility. See "Use of Proceeds," "Risk Factors -- Significant Additional Funding Needs," "-- Ranking of the Notes" and "Description of Notes." ---------------------------------------------------------------------------- CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES, INCLUDING OVERALLOTMENT, STABILIZING TRANSACTIONS AND SYNDICATE SHORT COVERING TRANSACTIONS AT LEVELS WHICH MIGHT NOT OTHERWISE PREVAIL IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES SEE "UNDERWRITING." ---------------------------------------------------------------------------- FORWARD LOOKING INFORMATION Iridium is a development stage enterprise with no operating history. Accordingly, all statements in this Prospectus that are not clearly historical in nature are forward looking. Examples of such forward looking statements include the statements concerning Iridium's operations, prospects, markets, technical capabilities, funding needs, financing sources, pricing, launch schedule, commercial operations schedule, estimates of the size of addressable markets for mobile satellite services, estimates of customer counts, estimates of retail usage fees for Iridium World Satellite Services, the last year in which Iridium will have negative cash flow and a net increase in year-end borrowings, and future regulatory approvals, as well as information concerning expected characteristics of competing systems and expected actions of third parties such as equipment suppliers, gateway operators, service providers and roaming partners. These forward looking statements are inherently predictive and speculative and no assurance can be given that any of such statements will prove to be correct. Actual results and developments may be materially different from those expressed or implied by such statements. See "Risk Factors" for a discussion of various factors which, among others, could result in any of such forward looking statements proving to be inaccurate. Iridium currently has no customers and its estimates of target markets and customer counts are based upon a number of assumptions, one or more of which is likely to be incorrect. The assumptions underlying Iridium's market analysis relate to the expected performance characteristics of the IRIDIUM System, the expected competition in the markets for personal satellite communications services and terrestrial cross protocol wireless services and the accuracy of the respondents' responses to Iridium's market research questions. Such assumptions include, without limitation, (i) that the IRIDIUM System will provide continuous service to virtually anywhere in the world with service characteristics at least as favorable as those described in this Prospectus from September 23, 1998 forward, (ii) that Iridium will face competition from satellite systems, terrestrial wireless systems and other communications systems that is no greater than Iridium's expectations regarding competition as described in this Prospectus and (iii) that Iridium's market research was properly designed and implemented to determine actual market interest and that the respondents provided truthful responses. There can be no assurance that actual target markets and actual customer counts will not be materially different from Iridium's estimates or that Iridium will not revise such estimates substantially from time to time. For a more detailed description of Iridium's target markets see "Business -- The Iridium Market," and for further discussion of the forward looking nature of Iridium's estimates, and various of the factors which could cause actual addressable markets and actual customer counts to differ materially from these estimates, see "Risk Factors -- Risk of Error in Forward Looking Statements." THE IRIDIUM SYSTEM The satellite constellation of the IRIDIUM System, which will consist of 66 operational satellites arranged in six polar orbital planes, is being assembled and delivered in orbit by Motorola pursuant to a fixed price contract, subject to certain adjustments. Motorola also will operate and maintain the satellite constellation for five years (extendible to seven years at Iridium's option) under a fixed price contract, subject to certain adjustments. Iridium believes the IRIDIUM System will have greater signal strength than other proposed MSS systems, thereby allowing it to better serve hand-held phones and providing a higher degree of in-building penetration for paging services. The IRIDIUM System utilizes adaptations of proven technologies, including GSM cellular call processing technology, intersatellite links, FDMA/TDMA radio transmission technology, a 2,400 bps vocoder and business support software. The Iridium satellites will feature cross-link antennas allowing telephone calls and signaling information to be passed globally from satellite to satellite. These intersatellite links, which enable the satellites to function as switches in the sky, will allow the IRIDIUM System to (i) select the optimal space-to-ground path of each call, thereby enhancing system reliability and capacity while reducing the costs associated with the use of terrestrial phone systems, (ii) communicate with subscribers in all regions of the world (including mid-ocean and remote areas) regardless of their proximity to a gateway, (iii) provide full global coverage with a relatively small number of gateways, thereby lowering total ground segment build-out and operating costs and (iv) provide enhanced ability to track the location of a voice customer, allowing Iridium to direct calls and pages as customers travel globally. In addition, the communications, station keeping and control systems of the Iridium satellites can be upgraded, maintained and reconfigured in orbit through the remote loading of software. Iridium believes that its primary technological challenge in implementing the IRIDIUM System is the integration of these proven technologies into a single system. Iridium expects to provide virtually global service initially through up to 12 gateways, although it will be able to provide such global service with fewer than nine gateways. Each of these gateways will be owned, operated and financed by one or more investors in Iridium or their affiliates. See "Risk Factors -- Potential for Delay and Cost Overruns -- Construction and Operation of Gateways." Iridium subscriber equipment will support voice, data and paging services. Iridium expects that portable, hand-held Iridium phones and pagers will be manufactured by at least two experienced suppliers, Motorola and Kyocera Corporation ("Kyocera"), both of which have hand-held Iridium phones under development. The phones are expected to be available in satellite-only and "multi-mode" models. The multi-mode phone being developed by Motorola uses changeable terrestrial radio cassettes ("TRCs") which can be inserted into the phone. TRCs are being developed for GSM 900 MHz and CDMA/AMPS/NAMPS 800 MHz so that with a single multi-mode phone and the appropriate TRC, a subscriber will be able to access the IRIDIUM System and those terrestrial wireless systems. Kyocera's multi-mode phone is expected to be configured as a satellite phone casing into which terrestrial wireless phones using different protocols can be inserted. The Iridium belt-worn pager will have the capability to receive alphanumeric messages virtually anywhere in the world. In an effort to ensure that sufficient quantities of phones and pagers are available for distribution in advance of the commencement of commercial operations, Iridium intends to enter into standby commitments with Motorola (the "Motorola Standby Purchase Commitment") and Kyocera (the "Kyocera Standby Purchase Commitment" and together with the Motorola Standby Purchase Commitment, the "Standby Equipment Purchase Commitments") to purchase an aggregate of up to approximately $400 million of subscriber equipment. These Commitments would be triggered on or after January 1, 1999, but only to the extent such subscriber equipment is not purchased by and shipped to gateway operators or service providers prior to January 1, 1999. In the event Iridium is required to make significant purchases pursuant to these Commitments, it expects to use (i) up to approximately $175 million in additional borrowings guaranteed by Motorola (in respect of purchases from Motorola) and (ii) up to approximately $122.5 million in additional borrowings guaranteed by Kyocera (in respect of purchases by Kyocera). See "Certain Relationships and Related Transactions of Iridium" and "Risk Factors -- Significant Additional Funding Needs." Iridium World Cellular Services will support roaming among the two principal types of terrestrial wireless protocols -- IS-41 (AMPS, NAMPS and CDMA) and GSM 900. Roaming between these protocols requires cross protocol translation which will be accomplished for Iridium World Cellular Services through the Iridium Interoperability Unit ("IIU"), being developed under the direction of Motorola. The IIU will permit system management information, including customer authentication and location, to be relayed between systems that use different technologies. PRICING STRATEGY, DISTRIBUTION AND MARKETING Iridium intends to implement a pricing strategy for its voice services similar to the prevailing pricing structure for terrestrial wireless calls. Prices for terrestrial wireless calls generally reflect two components -- a charge based on the landline "dial-up" rate for a comparable call (primarily the long distance charges) and a mobility premium for the convenience of wireless service (including any roaming charges). Pricing for both Iridium World Satellite Services and Iridium World Cellular Services is expected to be based on this structure. For international Iridium World Satellite Services calls, which Iridium expects will constitute the majority of calls over the Iridium satellite system, the "dial-up" rate component will be designed to approximate the rates for comparable landline point-to-point international long distance calls. Iridium has analyzed and will continue to analyze published international direct dial rates around the world as well as published international calling card rates of many of the largest international telecommunications carriers in establishing the "dial-up" rate component. Iridium intends to set the global mobility premium with reference to the premium charged by other wireless services, including cross-protocol international terrestrial wireless roaming services and competing MSS systems. Iridium will set the wholesale prices for its services to allow for a suggested retail price that will approximate the "dial-up" plus mobility premium price. Iridium's wholesale price will be designed to compensate Iridium, as the network provider, and the originating and terminating gateways, as well as to cover the PSTN tail charges. The home gateway will mark up the wholesale price and the service provider will establish the final retail price. Iridium expects that for international wireless calls, Iridium's suggested retail prices will be competitive with other global MSS systems. In addition, from a regulatory approval perspective, in markets where the monopoly telecommunica- tions provider and the licensing authority are the same entity, a pricing strategy that takes into account the "dial-up" alternatives allows Iridium to respond to concerns that Iridium will capture the local monopoly provider's long-distance revenues by undercutting terrestrial "dial-up" rates. For Iridium World Cellular Services pricing, the "dial-up" rate component is primarily the long distance charge, if any, which will be passed through to the customer. The mobility premium will be set to compensate the parties involved, primarily the serving network for its airtime charges, the visited gateway for customer authentication and Iridium for protocol translation services. The retail price will include the markup of the home gateway and service provider. Iridium believes that its Iridium World Cellular Services suggested retail prices will be comparable to prices charged by other cross-protocol roaming services. In addition to airtime charges, Iridium subscribers will pay a monthly subscription fee in the same manner that terrestrial wireless customers pay monthly charges. Iridium will permit service providers that are wireless network operators to offer Iridium World Satellite Services as additional features to their existing wireless services, permitting their customers to remain customers of the wireless network and to roam onto the IRIDIUM System. These customers will pay a feature charge to Iridium for the roaming privilege that will be significantly below the Iridium monthly subscription fee, but they will pay an additional roaming premium for calls made over the IRIDIUM System. Initially, Iridium World Page Services subscribers will pay a fixed monthly subscription fee for unlimited paging. Iridium expects to implement per page pricing after commencement of commercial operations, with the cost per page based, in part, on the size of the geographic area covered by the page. The monthly paging subscription fees will be reduced for persons who are also subscribers to Iridium World Cellular Services and Iridium World Services. Iridium's distribution strategy reflects its role as a wholesaler of Iridium World Services and is primarily designed to leverage off established retail distribution channels by using existing distributors of wireless services as Iridium service providers and marketing Iridium World Services to their customers. Iridium will implement the distribution of Iridium World Services through its gateway operators, all of which have agreed to become or to engage Iridium service providers within their exclusive gateway territories. Iridium service providers will generally have primary responsibility for marketing Iridium World Services within their territories in accordance with marketing policies and programs established by Iridium. They will also be responsible for customer service, billing and collection. Iridium anticipates its gateway operators will generally seek to utilize more than one method of distribution in their markets. Iridium expects that its service providers also will include affinity partners (e.g., airlines, hotels and car rental companies). Iridium's marketing strategy is to position Iridium as the premier brand in global wireless communications services. Iridium believes that its principal target markets -- traveling professional and corporate/industrial -- can be accessed through established marketing channels, which will permit more effective marketing compared to MSS systems targeting individuals in remote areas where marketing opportunities and distribution channels are limited. Iridium is coordinating with its gateway partners to determine the optimum allocation of marketing expenditures based on the market analysis that Iridium has conducted. Iridium plans to engage in direct marketing to certain markets, such as the utility, oil and gas, mining and maritime industries. Based on a review of its marketing plan, Iridium intends to increase its global advertising budget, in order to promote its brand identity, by approximately $80 million, a substantial portion of which is expected to be utilized prior to commencement of commercial operations (the "Global Advertising Program Increase"). See "Risk Factors -- Significant Additional Funding Needs." Iridium believes that a coordinated and comprehensive global marketing strategy, supported by its market research, will promote a consistent message and permit Iridium to establish a global brand identity. STRATEGIC INVESTOR GROUP AND IRIDIUM WORLD COMMUNICATIONS LTD. Iridium LLC is the parent and sole member of Iridium. Each of the strategic investors in the IRIDIUM System is a member of Parent. See "Ownership Structure and Strategic Investors." The Iridium investor team includes enterprises from around the world with skills and experience in developing, manufacturing, licensing and distributing satellite and telecommunications products and services. IWCL, the publicly held member of Parent, and the Iridium strategic investors have collectively invested, or committed to invest, approximately $3.1 billion in Iridium (directly or indirectly through Parent), including equity, debt, guarantees (other than in respect of subscriber equipment purchases) and the Reserve Capital Call (as defined). These investments represent approximately 69% of Iridium's projected total funding needs through September 23, 1998, the date on which Iridium expects to commence commercial operations, and approximately 56% of Iridium's projected total funding needs through December 31, 1999, the last year in which Iridium projects negative cash flow and a net increase in year-end borrowings. By partnering with strategic investors, Iridium benefits from the development, manufacturing and launch expertise of leading worldwide satellite development and launch organizations and from the wireless telecommunications distribution and regulatory expertise of leading telecommunications companies. The Iridium investor team includes leading telecommunications companies in North America (Motorola, Sprint and BCE Mobile Communications Inc.), Europe (Telecom Italia and o.tel.o communications GmbH & Co.) and Asia (DDI in Japan, UCOM in Thailand, P.T. Bakrie Communications Corporation in Indonesia and SK Telecom in South Korea). Iridium expects that these investors will use their wireless communications sales and services organizations to market Iridium World Services and equipment in their territories, which include their existing base of approximately 33 million wireless subscribers. In addition, because of the prominence of many of these investors, Iridium believes that their efforts to obtain necessary regulatory approvals have been, and will continue to be, of great importance. The investor team also includes organizations with significant satellite communications development, manufacturing and launch expertise including Raytheon, Lockheed Martin, Telespazio, Khrunichev and China Aerospace. Iridium expects subscriber equipment for use with the IRIDIUM System will be manufactured and sold by Motorola and Kyocera, two of the world's leading manufacturers of wireless phones. IWCL was formed to act as a publicly held member of Parent and to have no other business. On June 13, 1997, IWCL consummated an initial public offering (the "IWCL IPO"), whereby IWCL issued 12,000,000 shares of its Class A Common Stock and applied the net proceeds of approximately $225 million to purchase 12,000,000 Class 1 Membership Interests in Parent ("Class 1 Interests"). In connection with the IWCL IPO, IWCL was admitted as a member of Parent. IWCL owns approximately 8.5% of the outstanding Class 1 Interests. See "Ownership Structure and Strategic Investors" and "Certain Matters Regarding Relationship Among IWCL, Parent and Iridium." PROGRESS TO DATE Iridium, Motorola and the various gateway owners have made substantial progress in the development and implementation of the IRIDIUM System and related activities and expect to commence global commercial service on schedule in September 1998. As of April 15, 1998, Motorola had launched 65 Iridium satellites in 13 separate launches. Motorola has informed Iridium that, as of April 23, 1998, four of those 65 satellites are not functioning and will not become part of the constellation, but that Iridium will not bear the financial impact of the loss of the four satellites and that such loss will not affect the scheduled completion date for commercial service in September 1998. Motorola currently plans to launch seven satellites before the end of May 1998 in two launches in order to complete the initial deployment of the satellite constellation. Motorola also has contracted with launch service providers to perform launches to replace non-functioning satellites. In early July of 1997, the IRIDIUM System logged its first test paging message to a prototype pager from orbiting satellites. In addition, the north-south and east-west satellite cross-links have been tested using data packets and limited voice testing has occurred. See "Risk Factors -- Potential for Delay and Cost Overruns -- Deployment of Satellites," "-- Limited Life of Satellites; Cost of Maintaining the Space Segment; Risk of Satellite Failure or Damage" and "-- Satellite Launch Risks -- Number of Launches; Compressed Launch Schedule." Motorola has completed construction of most of the terrestrial facilities necessary to command the in-space movements of the IRIDIUM System's satellites, including the Satellite and Network Operations Center (the "SNOC") and the associated tracking, telemetry and command ("TT&C") facilities. Iridium expects to provide virtually global service initially through up to 12 gateways. The construction of the 12 gateway facilities is substantially complete and the telecommunications equipment has been installed at 11 locations. However, two gateways are significantly behind schedule in their preparations for the commencement of commercial operations. See "Risk Factors -- Potential for Delay and Cost Overruns -- Construction and Operation of Gateways." Motorola has produced a functional prototype of the Iridium phone, and Motorola has produced a functional prototype of the Iridium belt-worn pager. Iridium has also made substantial progress in the development of its Iridium business support systems, which will be used for the provision of its billing and customer support functions. Iridium expects to begin internal voice trials in May 1998 and customer trials in August 1998. See "Risk Factors" for a description of certain of the risks that could impair the ability of Iridium to commence commercial operations on schedule in September 1998. Iridium has made significant progress to date in securing the worldwide regulatory approvals necessary to build and operate the IRIDIUM System. At the 1992 World Administrative Radio Communication Conference ("WARC-92"), the International Telecommunications Union (the "ITU") allocated 16.5 MHz of spectrum in the 1610-1626.5 MHz band to MSS systems. The U.S. Federal Communications Commission (the "FCC") conditionally assigned the IRIDIUM System exclusive use of 5.15 MHz of the 16.5 MHz for use in the United States. The space segment of the IRIDIUM System has been licensed in the United States. Iridium believes that coordination through the ITU has been completed successfully between the IRIDIUM System and all existing or planned systems that have been identified under the ITU's coordination process. No other action is required from any other country to license the space segment. Seven licenses and two experimental licenses to build and operate gateways have been received. Each country in which Iridium intends to operate must authorize use of Iridium subscriber equipment, including allocation of subscriber link frequencies. The FCC has issued a conditional license covering Iridium World Satellite Services in the United States and as of March 15, 1998, 57 additional administrations had granted all or a substantial portion of the authorizations necessary to operate the IRIDIUM System in their territories. Iridium's gateway owners are dedicating substantial effort to obtaining licensing for Iridium World Services in the countries in their service territories with particular focus on obtaining licenses by the commencement of commercial operations in those countries which are expected to account for most of the demand for and usage of Iridium World Services. See "Risk Factors -- Risks Associated with Licensing and Spectrum Allocation -- Significant Regulatory Approvals Required for Operation of the IRIDIUM System," "-- Significant Remaining Regulatory Approvals" and "Regulation of Iridium" for a discussion of the conditions to these licenses and the additional regulatory approvals outside the United States that remain to be obtained. BUSINESS STRATEGY Iridium's strategy is to launch and operate the premier global mobile wireless network. The key components of this strategy are set forth below: Provide a unique service package to traveling professionals enabling them to be reached and make calls virtually anywhere in the world. Iridium World Satellite Services will complement terrestrial wireless services and provide the traveling professional with communications capability in areas where terrestrial wireless service is unavailable, inconvenient, of poor quality or unreliable. Iridium intends to offer Iridium World Cellular Services and Iridium World Page Services as complements to Iridium World Satellite Services and as stand-alone services. Iridium believes that it will be the only wireless communications system in operation prior to 2000 that will be able to offer virtually global mobile voice and paging services, including: - Global coverage. An Iridium World Services subscriber will generally have worldwide wireless coverage wherever Iridium World Services are authorized, including mid-ocean and remote areas. The availability of the Iridium World Satellite Services will not be limited by the customer's proximity to a gateway. Iridium believes this feature will make Iridium World Satellite Services particularly well suited for aeronautical and shipping communications and for service in land areas where LEO MSS systems using "bent pipe" technology are not expected to have the more extensive gateway infrastructure needed by such systems to provide global coverage. - Convenient roaming onto terrestrial wireless networks. Iridium will offer subscribers a combination of Iridium World Satellite Services and Iridium World Cellular Services. With the addition of Iridium World Cellular Services, customers will be able to overcome (i) the incompatibility of differing wireless protocols and (ii) the service limitations of satellite-only voice services in buildings and urban canyons. Iridium expects to be able to deliver all of its voice services with one phone, one phone number and one customer bill. - Global paging with belt-worn pagers. The Iridium belt-worn pager will have the capability of receiving alphanumeric messages of up to 200 characters and numeric messages of up to 20 digits virtually anywhere in the world. With Iridium World Page Services, users of Iridium World Satellite Services or Iridium World Cellular Services will generally be able to update their location on the IRIDIUM System by briefly turning on their phone, thereby allowing the IRIDIUM System to send a targeted page. Iridium believes that it will be the first company, and the only company prior to 2000, which will offer global paging to a belt-worn pager. - Greater signal strength. The IRIDIUM System is designed to provide greater signal strength than proposed competing MSS systems. Iridium believes this greater signal strength will allow it to better serve hand-held phones, and provide a higher degree of in-building signal penetration for pagers, than competing MSS systems. Be the first to market with a global wireless communications system. Iridium plans to capitalize on the substantial design, development, fabrication and testing efforts and financial investment to date of its strategic investors to bring Iridium World Services to market at the earliest practicable date, which is currently expected to be September 23, 1998. Iridium believes that it will be the only wireless communications system in operation prior to 2000 that will be able to offer global mobile voice and paging services in each country in which Iridium World Services are authorized. Adapt proven technologies through an industrial team led by Motorola. The IRIDIUM System adapts proven technology, including GSM cellular call processing technology, intersatellite links, FDMA/TDMA radio transmission technology, a 2,400 bps vocoder and business support software. Iridium believes that the primary technological challenge is the integration of these proven technologies into a single system. Motorola, the principal investor in Iridium, is a leading international provider of wireless communications systems, cellular phones, pagers, semiconductors and other electronic equipment. The industrial team assembled by Motorola to build and deliver in orbit the IRIDIUM System consists of major companies experienced in aerospace and telecommunications, including Telespazio, Lockheed Martin, Raytheon, Boeing, Khrunichev and China Aerospace. Capitalize on the strengths of its strategic investors. A number of the Iridium strategic investors provide telecommunications services in various parts of the world and have significant operating, regulatory and marketing experience in their service territories. Iridium expects that its investors with existing wireless communications sales and service organizations will use these organizations to market and distribute Iridium World Services and equipment to potential subscribers. Because of the prominence of many of these investors, Iridium believes that their efforts to obtain the necessary regulatory approvals have been, and will continue to be, of great importance. Utilize existing wireless distribution channels. Iridium's strategy is to target primarily traveling professionals, who are generally wireless phone users. Iridium's strategy is to provide customers with an enhancement to their existing terrestrial wireless service through existing marketing and distribution channels rather than to focus on individuals who have no or limited landline or wireless communications experience and live in areas where no marketing and distribution channels currently exist. SOURCES AND USES OF FUNDS BY IRIDIUM The following table and the accompanying notes describe the currently estimated sources and uses of funds by Iridium from inception of its predecessors through September 23, 1998 (the date on which Iridium expects to commence commercial operations) giving pro forma effect to the Offering and the use of $175 million of the net proceeds therefrom to permanently reduce the Guaranteed Bank Facility (and, therefore, the corresponding Motorola Guarantee). Prospective investors are urged to read the notes accompanying the table and should note that significant additional funds will be needed to service Iridium's cash needs prior to its expected generation of positive cash flow from operations. The projection of total sources and total uses of funds is forward looking and could vary, perhaps substantially, from actual results, due to events outside Iridium's control, including unexpected costs and unforeseen delays. See "Risk Factors -- Risk of Error in Forward Looking Statements." PRE-OPERATIONAL PERIOD(1) (DOLLARS IN MILLIONS) <TABLE> <CAPTION> SOURCES OF FUNDS ---------------- <S> <C> Secured Bank Facility(2)........... $ 629 The Notes(3)....................... 342 The Units, Series B Notes and Series C Notes(4)................ 1,038 Guaranteed Bank Facility(5)........ 270 14 1/2% Senior Subordinated Notes due 2006......................... 238 Series A Class 2 Interests of Parent(6)........................ 31 Class 1 Interests of Parent(7)..... 1,952 ------ Total Pre-operational Sources..................... $4,500 ====== Additional pre-operational amounts available under Secured Bank Facility......................... $ 121 </TABLE> <TABLE> <CAPTION> USES OF FUNDS ------------- <S> <C> Space System Contract(8)........... $3,450 Terrestrial Network Development Contract(9)...................... 151 Business support systems and other expenditures(10)(13)............. 177 Net interest and financing costs(11)(13).................... 259 Net expenses and working capital(12)(13).................. 463 ------ Total Pre-operational net uses(13).................... $4,500 ====== </TABLE> - --------------- (1) Assumes that the IRIDIUM System will commence commercial operations on September 23, 1998. Iridium anticipates total cash needs of $5.5 billion (net of assumed revenues following commencement of commercial operations) through year-end 1999, the last year in which Iridium projects negative cash flow and a net increase in year-end borrowings. Many factors, including Iridium's ability to generate significant revenues and purchases under its Standby Equipment Purchase Commitments, could affect this estimate. See "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Iridium currently expects to satisfy its additional funding requirements through the incurrence of debt. Iridium expects to seek additional secured bank financing in order to meet its expected funding requirements following the commencement of commercial operations. Such additional bank financing may require credit support from the Iridium strategic investors, vendors or others for which Iridium will be required to pay compensation. There can be no assurance that such additional bank financing will be obtained by Iridium on terms and conditions that are acceptable to it, and if such additional bank financing is unavailable, there can be no assurance that Iridium will be able to obtain alternative financing on terms and conditions acceptable to it. The availability of any financing is subject to, among other things, market conditions at the time of any proposed financing. See "Risk Factors -- Significant Additional Funding Needs," and "Management's Discussion and Analysis of Financial Condition and Results of Operations." (2) As of March 31, 1998 Iridium had drawn $350 million under a Credit Agreement with Chase Securities Inc., The Chase Manhattan Bank, Barclays Bank PLC and a syndicate of lenders with respect to a senior bank facility in a principal amount of $1 billion (the "Secured Bank Facility"), of which $250 million is not available prior to the defined commercial activation date. The Secured Bank Facility is secured by substantially all of Iridium's assets. The Secured Bank Facility is further secured by the Reserve Capital Call (as defined) and all of the membership interests in Iridium. See "Description of Other Indebtedness -- Secured Bank Facility." The availability of additional amounts under the Secured Bank Facility is subject to significant conditions, including technical conditions relating to the IRIDIUM System, conditions relating to regulatory approvals and conditions relating to other financing sources. In connection with the Offering, Iridium has requested that the lenders under the Secured Bank Facility agree to amendments to the Secured Bank Facility (the "Requested SBF Amendments") that would increase the approved budget under the Secured Bank Facility for the development, construction and commercialization of the IRIDIUM System by $175 million (and would make corresponding adjustments in various covenants restricting the amount Iridium is permitted to spend on project costs) and would increase the amount of Indebtedness Iridium is permitted to incur during the term of the Secured Bank Facility. The Offering is not contingent on Iridium receiving the Requested SBF Amendments and there can be no assurance that the lenders under the Secured Bank Facility will agree to the Requested SBF Amendments. Borrowings under the Secured Bank Facility mature on September 30, 1998, subject to Iridium's right to extend such maturity up to June 30, 1999 if it can demonstrate by July 1, 1998 that it has sufficient available or committed funding for the budgeted project costs through such extended maturity. See "Use of Proceeds" and "Description of Other Indebtedness." (3) Reflects the net proceeds of the Offering to Iridium, after deducting the expenses of the Offering and the discounts to the Underwriters. See "Use of Proceeds." (4) Reflects the net proceeds received directly or indirectly by Parent from the offering of (i) 300,000 Units, each consisting of $1,000 principal amount of Series A Notes and one Warrant, representing the right to purchase 5.2 shares of Class A Common Stock of IWCL, (ii) $500 million aggregate principal amount of Series B Notes, and (iii) $300 million aggregate principal amount of Series C Notes. See "Description of Other Indebtedness." (5) As of March 31, 1998, Iridium had $285 million outstanding under a $450 million unsecured borrowing facility with a syndicate of banks (the "Guaranteed Bank Facility"). Borrowings under the Guaranteed Bank Facility are guaranteed by Motorola (the "Motorola Guarantee"). A portion of the proceeds from the issuance of the Initial Senior Notes was used to permanently reduce the Guaranteed Bank Facility from $750 million to $450 million. Iridium intends to use approximately $175 million of the net proceeds from the Offering to permanently reduce the Guaranteed Bank Facility from $450 million to $275 million. See "Use of Proceeds." The Guaranteed Bank Facility matures on June 30, 1999. Parent, Iridium and Motorola are parties to a Memorandum of Understanding, and, in connection with the Offering, Parent, Iridium and Motorola intend to enter into an Amended and Restated Memorandum of Understanding (as amended and restated the "Motorola MOU"). Pursuant to the Motorola MOU, Motorola is expected to agree to extend the Motorola Guarantee until after the Stated Maturity (as defined) of the Initial Senior Notes (which is the same date as the Stated Maturity of the Notes) if the Guaranteed Bank Facility is so extended. There can be no assurance, however, that the bank lenders would agree to extend the term of the Guaranteed Bank Facility if requested by Iridium. Pursuant to the Motorola MOU, Motorola is expected to agree that Motorola will (i) guarantee up to $350 million of additional Indebtedness (including principal and interest) of Iridium under the Guaranteed Bank Facility or another credit agreement with identical terms (the "Motorola Additional Guarantee"), provided that such increase (or separate credit agreement) is put in place prior to February 28, 1999, and (ii) guarantee up to $175 million of additional Indebtedness (including principal and interest) under the Guaranteed Bank Facility or a credit agreement having the identical terms (other than maturity) as the Guaranteed Bank Facility to be used by Iridium only for payments to Motorola in respect of the Motorola Standby Purchase Commitment and other amounts overdue to Motorola (the "Motorola Equipment Guarantee"). For a description of the Motorola MOU, the Motorola Additional Guarantee and the Motorola Equipment Guarantee see "Certain Relationships and Related Transactions of Iridium -- Motorola Related Matters." There can be no assurance that the bank lenders would agree to increase the amount of their commitments under the Guaranteed Bank Facility in respect of the Motorola Additional Guarantee or the Motorola Equipment Guarantee. See "Description of Other Indebtedness." Pursuant to the existing covenants under the Secured Bank Facility, and assuming that $270 million is outstanding under the Guaranteed Bank Facility, Iridium would have the ability to borrow no more than $175 million of the additional $350 million in borrowings under the Motorola Additional Guarantee. Pursuant to the Requested SBF Amendments, however, the relevant debt limit would be raised to permit the entire amount of any such additional $350 million of borrowings. See "Risk Factors -- Significant Additional Funding Needs" and "-- Risk of Highly Leveraged Capital Structure." (6) The Series A Class 2 Interests of Parent pay a 14 1/2% dividend which, at the option of Parent, may be paid in-kind until 2001 and paid in cash thereafter. The Series A Class 2 Interests are convertible at any time into Class 1 Interests. If all dividends permitted to be paid in-kind are paid in-kind, at the time when the Series A Class 2 Interests convert to a cash dividend, there will be 62,668 Series A Class 2 Interests outstanding convertible into 1,159,985 Class 1 Interests, subject to anti-dilution adjustments. The Series A Class 2 Interests are not obligations of Iridium. (7) Includes approximately $224 million net proceeds to Parent from the issuance of Class 1 Interests in connection with the IWCL IPO consummated on June 13, 1997. Includes approximately $41 million (exclusive of interest) due from South Pacific Iridium Holdings Limited ("SPI"), an affiliate of P.T. Bakrie Communications Corporation, an Indonesian corporation, pursuant to a definitive purchase agreement under which SPI purchased 7,500,000 Class 1 Interests at $13.33 per Class 1 Interest on May 30, 1997. SPI paid $40 million on May 30, 1997. Payment of the second installment occurred on August 26, 1997 in the amount of $10 million (including interest), and a partial prepayment of the third installment in the amount of $9 million (including interest) occurred on September 9, 1997. The outstanding amount of $41 million (plus interest) becomes due on May 15, 1998. See "Risk Factors -- Risks Associated with International Operations and Developing Markets" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." (8) As of March 31, 1998, $3.1 billion of this amount had been incurred. See "Risk Factors -- Potential for Delay and Cost Overruns," "-- Risks Associated with Principal Supply Contracts" and "-- Satellite Launch Risks -- Impact of Excusable Delays." (9) As of March 31, 1998, $148 million of this amount had been incurred. The total cost of the Terrestrial Network Development Contract is estimated to be approximately $284 million, with approximately $133 million of such total due at or after September 23, 1998, the expected date of the commencement of commercial operations. See "Risk Factors -- Risks Associated with Principal Supply Contracts." (10) As of March 31, 1998, $105 million of this amount had been incurred. See "Risk Factors -- Potential for Delay and Cost Overruns -- Development and Implementation of Software." (11) Based on assumed interest payment obligations, interest rates and borrowing levels and Iridium's estimates of associated costs. Actual interest and financing costs will depend upon applicable interest rates and the amount and timing of actual borrowings. (12) Comprised of operating expenses of $683 million and net of interest income of $18 million and working capital of $202 million. (13) Amounts in these categories include increased financing expenses of approximately $6 million, comprised of higher interest expenses resulting from the refinancing of a portion of the Guaranteed Bank Facility with net proceeds of the Offering and a change in the form of Iridium's payments to Motorola in respect of the Motorola Guarantee from the issuance of warrants to purchase Class 1 Interests to the payment in cash and a substantially reduced amount of warrants (the "High Yield Compensation"), and increased working capital and expenses of approximately $86 million. Such increased working capital expenses include a portion of the expenditures associated with (i) the Global Advertising Program Increase; (ii) the provision of software by Iridium in connection with the construction and operation of the China gateway; (iii) the cost of an IRIDIUM System software upgrade for capacity enhancement; and (iv) contingency funding to cover other expenses prior to September 23, 1998. Iridium will not effect a substantial portion of the Global Advertising Program Increase if it does not receive the Requested SBF Amendments. See "Use of Proceeds," "Description of Other Indebtedness," "Certain Relationships and Related Transactions of Iridium -- Motorola MOU and Agreement Regarding Guarantee" and "-- Agreements Regarding the China Gateway," and "Risk Factors -- Significant Additional Funding Needs." THE OFFERING Issuers.................... Iridium Operating LLC, a Delaware limited liability company, and Iridium Capital Corporation, a Delaware corporation. Notes Offered.............. $350 million aggregate principal amount of % Senior Notes due 2005, Series D, of Iridium and Capital, as joint and several obligors. Maturity Date.............. July 15, 2005. Interest Payment Dates..... Interest on the Notes will accrue from , 1998 at an annual rate of %. Interest on each Note will be payable semi-annually in arrears on January 15 and July 15 of each year, commencing July 15, 1998. Security................... None. Optional Redemption........ Except as described below, the Issuers may not redeem the Notes prior to July 15, 2002. On or after such date, either Issuer may redeem the Notes, in whole or in part, at any time at the redemption prices set forth herein, together with accrued and unpaid interest to the date of redemption. At any time and from time to time on or prior to July 15, 2000, either Issuer may, subject to certain requirements, redeem in the aggregate up to 33 1/3% of the original aggregate principal amount of the Notes with the cash proceeds to Iridium of one or more Equity Offerings (as defined) at a redemption price equal to % of the principal amount of the Notes being redeemed, plus accrued and unpaid interest thereon to the date of redemption; provided that at least 66 2/3% of the original aggregate principal amount of the Notes must remain outstanding immediately after each such redemption. See "Description of Notes -- Optional Redemption." Change of Control.......... Upon the occurrence of a Change of Control (as defined), each holder of Notes will have the option to require the Issuers to repurchase all or a portion of such holder's Notes at 101% of the principal amount of the Notes, plus accrued and unpaid interest to the purchase date. However, certain highly leveraged transactions may not be deemed to be a Change of Control, including, without limitation, transactions with affiliates which comply with the other covenants included in the Indenture. See "Description of Notes -- Change of Control." Additionally, there can be no assurance that the Issuers will have the financial resources necessary to repurchase the Notes upon a Change of Control. See "Risk Factors -- Change of Control" and "Description of Notes -- Change of Control." Subsidiary Guaranties...... The Notes will be fully guaranteed on an unsecured, senior basis by all present or future Guarantor Subsidiaries. Iridium currently has no subsidiaries other than Capital, Roaming, Facilities and IP. Roaming, Facilities and IP are Guarantor Subsidiaries. Neither Capital nor any of the Guarantor Subsidiaries has any outstanding Indebtedness other than as co-issuers or guarantors of outstanding Indebtedness of Iridium. See "Description of Notes -- Subsid- iary Guarantees" and "-- Certain Covenants -- Future Guarantor Subsidiaries." Ranking.................... The Notes will be senior obligations of the Issuers. The Notes will rank pari passu in right of payment with the Initial Senior Notes and all other existing and future senior Indebtedness of the Issuers, other than any Subordinated Obligations (as defined). The Notes will be effectively subordinated to any secured Indebtedness of the Issuers to the extent of the value of the assets securing such Indebtedness. The Subsidiary Guarantees will be unsecured, senior obligations of the Guarantor Subsidiaries. Neither Capital nor any of the Initial Guarantors has any outstanding Indebtedness other than as co-issuers or guarantors of outstanding Indebtedness of Iridium. As of March 31, 1998, after giving pro forma effect to the issuance of $350 million in aggregate principal amount of Notes and the application of $175 million of the net proceeds from the Notes to a permanent reduction of the Guaranteed Bank Facility, the Iridium Parties would have had outstanding (i) approximately $350 million of senior secured Indebtedness and (ii) approximately $1,210 million of unsecured senior Indebtedness (other than the Notes) that ranks pari passu with the Notes (including the Initial Senior Notes and borrowings of $110 million under the Guaranteed Bank Facility). In addition, as of March 31, 1998, Iridium had approximately $285 million of Indebtedness that is subordinated to the Notes. Such outstanding amounts of Indebtedness do not reflect the anticipated temporary reduction in the Guaranteed Bank Facility. See "Use of Proceeds," "Description of Other Indebtedness" and "Risk Factors -- Significant Additional Funding Needs." Use of Proceeds............ The net proceeds from the Offering to be received by Iridium are estimated to be approximately $342 million. Iridium will use $175 million of the net proceeds from the Offering to permanently reduce the commitment of the bank lenders under the Guaranteed Bank Facility from $450 million to $275 million (and, therefore, correspondingly reduce the Motorola Guarantee) and will use the remainder of the net proceeds primarily to make milestone payments in connection with the construction and deployment of the IRIDIUM System and to a lesser extent for other general corporate purposes. Pending such use, Iridium intends to temporarily reduce the amount outstanding under the revolving Guaranteed Bank Facility and to invest the remainder in short-term investment grade debt securities. See "Summary -- Sources and Uses of Funds by Iridium" and "Use of Proceeds." Restrictive Covenants...... The Indenture governing the Notes will limit (i) the incurrence of additional Indebtedness by Iridium and the Restricted Subsidiaries (as defined); (ii) the payment of dividends on, and redemption of, Capital Stock (as defined) of Iridium and the Restricted Subsidiaries and the redemption of certain Subordinated Obligations (as defined) of Iridium and the Restricted Subsidiaries; (iii) certain other restricted payments, including certain investments; (iv) sales of assets and Restricted Subsidiary stock; (v) certain transactions with affiliates; (vi) the sale or issuance of capital stock of Restricted Subsidiaries; (vii) the creation of liens; (viii) the lines of business in which Iridium and the Restricted Subsidiaries may operate; and (ix) consolidations, mergers and transfers of all or substantially all of the Issuers' assets. The Indenture will also prohibit certain restrictions on distributions from Restricted Subsidiaries. However, all of these limitations and prohibitions are subject to a number of important qualifications and exemptions. See "Description of Notes -- Certain Covenants" and "-- Merger and Consolidation."
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+SUMMARY OF THE PROSPECTUS This summary of certain provisions of this Prospectus is intended for quick reference only and is not complete. The remainder of this Prospectus contains more detailed information; you should read the entire Prospectus and all exhibits to the Prospectus before deciding to invest in any Series of the Trust. The definitions of any capitalized terms not found in this Summary can be found in the Glossary on page 124. This Prospectus is intended to be used beginning _______________, 1998. The Trust World Monitor Trust (the "Trust") was formed as a Delaware business trust on December 17, 1997, with separate Series of Interests. Its term will expire on December 31, 2047 (unless terminated earlier in certain circumstances). The principal offices of the Trust and the Managing Owner are located at One New York Plaza, 13th floor, New York, New York 10292-2013 and their telephone number is (212) 778-7866. See "Trust Agreement." The Series The Trust's Interests will be offered in three separate and distinct Series: Series A, Series B and Series C. Each Series will: - engage in the speculative trading of a diversified portfolio of futures, forward (including interbank foreign currencies) and options contracts and may, from time to time, engage in cash and spot transactions - have one-year renewable contracts with its own independent professional trading advisor that will manage 100% of the Series' assets and make the trading decisions for the Series segregate its assets from the other Series and maintain separate, distinct records for each Series, trade and account for its assets separately from the other Series and the other Trust assets - calculate the Net Asset Value of its Interests separately from the other Series - have an investment objective of increasing the value of your Interests over the long term (capital appreciation), while controlling risk and volatility Series A Trading for Series A will be directed by Eagle Trading Systems, Inc. ("Eagle"). Eagle has been operating its various trading systems since 1993. As of January 31, 1998, Eagle had approximately $304 million in investor funds under management. Eagle will be allocated 100% of Series A's assets, which, in turn, will be allocated initially 50% to its Eagle-Global System and 50% to its Eagle-FX System. See "The Series - Series A." Series A will trade a diversified portfolio with a a foreign exchange focus, assuming sufficient market opportunities in the fx markets exist. Series B Trading for Series B will be directed by Eclipse Capital Management, Inc. ("Eclipse Capital"). Eclipse Capital has been operating its trading systems since August 1, 1986. As of January 31, 1998, Eclipse Capital had approximately $320 million in investor funds under management. Eclipse Capital will be allocated 100% of Series B's assets, which will be traded according to its Global Monetary program. Series B will trade a diversified portfolio with a financial investment focus, assuming sufficient market opportunities in the financial markets exist. See "The Series - Series B." Series C Trading for Series C will be directed by Hyman Beck & Company, Inc. ("HB & Co."). HB & Co. has been operating its trading systems since March 1991. As of January 31, 1998, HB & Co. had approximately $284 million in investor funds under management. HB & Co. will be allocated 100% of Series C assets, which will be traded according to a modified and up-leveraged version of its Asset Allocation Program, which constitutes a new trading approach for which there is no past performance record. Series C will trade a diversified portfolio among several markets. See "The Series - Series C." Summary Risk Factors INTERESTS IN EACH SERIES ARE SPECULATIVE SECURITIES AND AN INVESTMENT IN ANY SERIES OF THE TRUST INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD BE AWARE THAT THE FOLLOWING RISKS, LISTED IN DESCENDING ORDER OF SIGNIFICANCE, APPLY TO EACH SERIES: - Futures, forward and options trading is speculative, volatile and highly leveraged - you could lose a substantial portion or even all of your investment - The trading advisors' programs may not perform for each Series as they have performed in the past - you should not rely on past performance to predict the results of an investment in a Series. This is especially true for Series C, as HB & Co. will utilize a new trading approach for which there is no past performance record - Each of the Trust's Series relies on its trading advisor for success - if an advisor does not trade well, the Series will not be profitable - Each Series is traded by a single advisor, concentrating the risk in a single advisor's trading decisions, rather than dispersing the risk among several advisors - There is no guarantee that any Series will meet its intended objective; accordingly, you could lose a substantial portion, or even all, of your investment - Your annual tax liability is anticipated to exceed cash distributions to you - Substantial charges will be attributed to each of the Trust's Series. We estimate that each Series will have to achieve net trading profits (after taking interest income into account) of 4.15% per annum in order to offset fees, and of approximately 7.15% to also offset the 3% redemption charge imposed on any Interests that you may redeem as of the end of the 12th month following the effective date of their purchase - If you redeem an Interest in any Series during the first 12 full months following the effective date of your purchase, you will be charged a redemption fee (4% in the first 6-month period, 3% in the second 6-month period) unless you exchange that Interest for an Interest in another Series or you invest your redemption proceeds in another futures fund sponsored by Prudential Securities - Actual and potential conflicts of interest exist among Prudential Securities, the Managing Owner and the Trading Advisors. Conflicts related to, for example, the brokerage fee and effecting transactions or trading for their own accounts and other accounts may create an incentive for Prudential Securities, the Managing Owner and the Trading Advisors to benefit themselves rather than Limited Owners - You will have limited voting rights and no control over the Trust's business - Although the Trust offers weekly purchase, exchange and redemption rights, liquidity is limited because of transfer restrictions and the absence of any exchange listing or trading market for the Interests of any Series - Although an investment in the Series is designed to diversify your portfolio, we cannot assure you that diversification will create profits for you The Trustee Wilmington Trust Company, a Delaware banking corporation, is the Trust's sole Trustee (the "Trustee"). The Trustee delegated to the Managing Owner all of the power and authority to manage the business and affairs of the Trust and has only nominal duties and liabilities to the Trust. The Managing Owner The Managing Owner is a wholly-owned subsidiary of Prudential Securities and will administer the business and affairs of each Series (excluding commodity trading decisions, except in certain limited, and essentially emergency, situations). See "Actual and Potential Conflicts of Interest." The Managing Owner will make a contribution to each Series necessary to maintain at least a 1% interest in the profits and losses of each Series at all times. See "Managing Owner's Commitment." Under the Trust Agreement, the Managing Owner has agreed to accept liability for the obligations of each Series that exceed that Series' assets. See "Trust Agreement." Prudential Securities Prudential Securities, the parent company of the Managing Owner, is the Trust's selling agent and clearing broker. As clearing broker for each Series, Prudential Securities will execute and clear each Series' futures and options transactions, and will perform certain administrative services for each Series. See "Brokerage Agreement." Because of Prudential Securities' affiliation with the Managing Owner, the fee any Series of the Trust will pay to Prudential Securities was not negotiated at arm's length. See "Actual and Potential Conflicts of Interest." Each Series also will engage in foreign currency forward transactions with Prudential Securities, which in turn will engage, as a principal, in back-to-back transactions with Prudential-Bache Global Markets Inc. and its subsidiaries ("PBGM"), also affiliates of Prudential Securities. PBGM will attempt to earn a profit on the spread in such transactions; and even though PBGM is an affiliate, PBGM will charge a competitive spread. All compensation to be paid to Prudential Securities will be within the overall limits set forth in the guidelines for the Registration of Commodity Pool Programs imposed by the North American Securities Administrators Association, Inc. ("NASAA") (the "NASAA Guidelines"). Liabilities You Assume Although the Managing Owner has unlimited liability for any obligations of a Series that exceed that Series' assets, your investment in a Series is part of the assets of that Series, and it will therefore be subject to the risks of that Series' trading. You cannot lose more than your investment in any Series in which you invest, and you will not be subject to the losses or liabilities of any Series in which you have not invested. We have received opinions of Rosenman & Colin LLP, counsel to the Trust, and Richards, Layton & Finger, P.A., special Delaware counsel to the Trust and the Trustee, that creditors of and equity holders in any particular Series will have recourse only to the assets of that Series and to the assets of the Managing Owner, rather than to the assets of any other Series, provided that certain requirements are met, including, without limitation, treating each Series as separate from all other Series. See "Trust Agreement - Liabilities" for a more complete explanation. Limitation of Liabilities The debts, liabilities, obligations, claims and expenses of a particular Series shall be enforceable against the assets of that Series only, and not against the assets of the Trust generally or the assets of any other Series. Who May Subscribe To subscribe in the Interests of any Series: - You must generally have a net worth (exclusive of home, home furnishings and automobiles) of at least $150,000 or a net worth, similarly calculated, of at least $45,000 and an annual gross income of at least $45,000, although several states impose higher requirements - see "State Suitability Requirements" in the Subscription Agreement, Exhibit D to this Prospectus; - You may not invest more than 10% of your liquid net worth in any Series or combination of Series; - IRAs, Keogh and other employee benefit plans are subject to special suitability requirements and should not invest more than 10% of their assets in any combination of Series. See "Who May Subscribe." What You Must Understand Before You Subscribe You should not subscribe for Interests unless you understand: - the fundamental risks and possible financial hazards of the investment; - the trading strategies to be followed in the Series in which you will invest; - the tax consequences of this investment; - that if you decide to sell securities in your Prudential Securities account to subscribe for Interests, you may have income tax consequences from that sale; - the fees and expenses to which you will be subject; - your rights and obligations as a Limited Owner. See "Risk Factors," "The Series," "Fees and Expenses," and "Federal Income Tax Consequences." Your Minimum Subscription and Interest Pricing Minimum required subscriptions and Interest prices are as follows: - Your minimum initial subscription is $5,000 or, for IRAs, $2000; - You may purchase Interests in all or any combination of Series so long as your total minimum subscription amount is satisfied; - The minimum initial purchase in any one Series is $1,000; - The price per Interest during the Initial Offering Period is $100; - During the Continuous Offering Period, each Series' Interests will be offered and sold at their weekly Net Asset Value, and existing Limited Owners will be able to purchase additional Interests in increments of $100; - No front-end sales charges or selling commissions will be charged, and no Series' Net Asset Value will be diluted by the Trust's organization and offering expenses. Each Series will, however, pay Brokerage Fees of 7.75% per annum and Management Fees of 2% per annum. See the "Projected Twelve-Month Break-Even Analysis" in this Summary and "Fees and Expenses." How to Subscribe To subscribe for any Series' Interests: - You must complete and sign a Subscription Agreement (Exhibit D); - You will be required to have a securities account with Prudential Securities (or with an Additional Seller, as defined in the Glossary) and to have funds in that account equal to the amount of your subscription at the time you subscribe; - We will accept subscriptions in cash only. You may revoke your subscription only within five (5) Business Days (as defined in the Glossary) after you submit a Subscription Agreement to Prudential Securities (or an Additional Seller), and may not revoke it after that time. Any subscription may be rejected in whole or in part by the Managing Owner for any reason. Initial Offering We will offer Interests of each Series for a period of up to 120 days from the date of this Prospectus (unless extended) (the "Initial Offering Period"). This Initial Offering Period may be shorter for a particular Series if that Series' "Subscription Minimum" - the amount of subscription funds required before a Series can begin trading - is reached before that date. See "The Offering." Series Subscription Minimums The Subscription Minimums that must be accepted before each Series will break escrow and commence trading are as follows: - Series A - $4,000,000 - Series B - $3,000,000 - Series C - $3,000,000 If any Series does not sell its Subscription Minimum and have at least 150 subscribers (see "Who May Subscribe") by the expiration of its Initial Offering Period, all of that Series' subscription monies, along with any interest earnings, will be returned to the subscribers promptly - within ten (10) Business Days after the Initial Offering Period, or as soon thereafter as practicable if payment cannot be made within that time period. Escrow of Funds During the Initial Offering Period, Prudential Securities or an Additional Seller will debit your account for the full amount of your subscription within two (2) Business Days of receipt and acceptance of your final subscription documents. Subscription funds for each Series received during the Initial Offering Period will then be deposited in each Series' escrow account at The Bank of New York and held there until the funds are either released for trading purposes or returned to the subscribers. Funds held in escrow will not be subject to any fees or other deductions. You will earn interest on your escrowed subscription funds, which will be distributed to you within ten (10) days after the close of the Initial Offering Period of a Series if the Subscription Minimum for that Series is not met (or as soon thereafter as practicable if payment cannot be made within that time period). If the Subscription Minimum for a Series is met, interest earned on your escrowed subscription funds will be contributed to that Series and you will receive a commensurate number of additional Interests (or fractions of Interests) upon your admission as a Limited Owner. See "The Offering - Escrow of Funds." Continuous Offering After trading commences, Interests in each Series will be sold once each week until each Series' "Subscription Maximum" - the total amount of Interests registered for sale with the Securities and Exchange Commission - has been issued (the "Continuous Offering Period"), either though sale or exchange (see "Exchange of Interests" below). For purposes of describing the purchase, exchange and redemption of Interests during the Continuous Offering Period, the following terms will be used: "Dealing Day" means the first Business Day of each week. "Valuation Point" means the close of business on Friday of each week. The sale price, or Net Asset Value per Interest, is set at a Valuation Point, and subscriptions for new Interests become effective on a Dealing Day. Generally, therefore, Interests are priced at the close of business on a Friday, and new purchases become effective on the following Monday at that price. To purchase Interests, you must submit your Subscription Agreement (Exhibit D) at least five (5) Business Days (or two (2) Business Days if you are purchasing additional Interests as described below) before any given Dealing Day, and additional time may be required before your subscription is approved by the Managing Owner. Because of this waiting period, the purchase price of your Interests will not be fixed on the date you submit your subscription but will be finalized on the Valuation Point immediately preceding the Dealing Day on which your purchase is eligible to become effective. There may be a considerable difference between the Net Asset Value of an Interest on the date you submit your subscription and the Dealing Day on which your purchase becomes effective. Purchases of Additional Interests in a Series If you are a Limited Owner of Interests in a particular Series and wish to purchase additional Interests in that same Series, you must submit your Subscription Agreement (Exhibit D) at least two (2) Business Days before any given Dealing Day, and your subscription for additional Interests must be approved by the Managing Owner. Additional Interests will be sold at their Net Asset Value on the Valuation Point immediately preceding the Dealing Day on which your purchase of additional Interests is eligible to become effective. Purchases of additional Interests are subject to changes in Net Asset Value between the date you submit your subscription and the Dealing Day on which you purchase becomes effective. Exchange of Interests Once trading commences, Interests you own in one Series may be exchanged for Interests of one or more other Series for as long as the Interests in the Series for which exchange is being made are offered for sale (an "Exchange"). To make an Exchange, you must complete an Exchange Request (Exhibit C). You must submit your Exchange Request at least five (5) Business Days before any given Dealing Day, and the Exchange must be approved by the Managing Owner. Exchanges will be made at the applicable Series' then-current Net Asset Values per Interest (which include, among other things, accrued but unpaid incentive fees due to those Series' Trading Advisors) at the Valuation Point immediately preceding the Dealing Day on which your Exchange is eligible to become effective. Exchanges, like subscriptions, are subject to changes in Net Asset Value per Interest between the date you submit an Exchange Request and the Dealing Day on which your Exchange becomes effective. The Exchange of Interests will be treated as a redemption of Interests in one Series (with the related tax consequences) and the simultaneous purchase of Interests in the Series you exchange into. See "Federal Income Tax Consequences." No "exchange" charges will be imposed. See "Exchange of Interests" under "The Offering." Subscription and Exchange Effective Dates During Continuous Offering Period The effective date of accepted subscriptions and Exchanges during the Continuous Offering Period is the first Dealing Day to occur at least five (5) Business Days after you have submitted your subscription or Exchange Request and it has been approved. If you are an existing Limited Owner in a Series who is purchasing additional Interests in the same Series, the effective date of your accepted subscription will be the first Dealing Day to occur at least two (2) Business Days after you have submitted your subscription and it has been approved. Segregated Accounts/ Interest Income Except for that portion of each Series' assets used as margin to maintain that Series' forward currency contract positions, the proceeds of the offering for each Series will be deposited in cash in segregated and separate trading accounts maintained for each Series at Prudential Securities in accordance with CFTC segregation requirements. Prudential Securities credits each Series with 100% of the interest earned on its average net assets (other than those assets held in the form of U.S. Government securities) on deposit with Prudential Securities each week. Currently, this amount is estimated to be the Federal Funds rate. Organization and Offering Expenses Prudential Securities or an affiliate is responsible for the payment of all of the expenses associated with the organization of the Trust and the offering of each Series' Interests, and no Trust Series will be required to reimburse these expenses. As a result, 100% of each Series' offering proceeds will be available for that Series' trading activities. See "The Series," "The Offering" and "Fees and Expenses." Transfer of Interests The Trust Agreement restricts the transferability and assignability of the Interests of each Series. There is not now, nor is there expected to be, a primary or secondary trading market for the Interests of any Series. Redemption of Interests Once trading commences, Interests you own in a Series may be redeemed, in whole or in part. Redemptions are made each week at the beginning of the Dealing Day. To redeem your Interests, you must deliver your Redemption Request at least two (2) Business Days prior to a given Dealing Day. Redemptions are made at the Net Asset Value per Interest (which includes, among other things, accrued but unpaid incentive fees due to that Series' Trading Advisor) on the Valuation Point immediately preceding the Dealing Day on which your redemption is eligible to become effective (the "Redemption Price"). Redemptions are subject to changes in Net Asset Value between the date you deliver your Redemption Request and the Dealing Day on which your redemption becomes effective. If you redeem your Interests on or before the end of six full months following purchase of the effective date of the Interests being redeemed, you will be charged a redemption fee of 4% of the Redemption Price; if you redeem your Interests after six months, but on or before the end of twelve full months following the purchase of the effective date of the Interest being redeemed, you will be charged a 3% redemption fee on the Redemption Price. The effective date of purchase will be the date on which the applicable Series break(s) escrow for subscriptions made during the Initial Offering Period, and for subscriptions during the Continuous Offering Period will be the applicable Dealing Day. Redemption fees will be paid to the Managing Owner. See " Redemption of Interests" under "The Offering" and "Actual and Potential Conflicts of Interest - Prudential Securities' Advising on Redemptions." Redemption fees will not be charged if you effect an Exchange or if you invest your redemption proceeds concurrently in another futures fund sponsored by Prudential Securities. Distributions The Managing Owner will make distributions to you at its discretion. Because the Managing Owner does not presently intend to make ongoing distributions, your income tax liability for the profits of any Series in which you have invested will, in all likelihood, exceed any distributions you receive from that Series. See "Federal Income Tax Consequences." Income Tax Consequences We have obtained an opinion of Rosenman & Colin LLP to the effect that, based on the facts set forth in this prospectus, the Managing Owner's representations, and under current federal income tax law, each Series in the Trust will be treated as a partnership . As long as each Series is treated as a partnership for federal income tax purposes, the Trust and each Series in the Trust will not be subject to federal income tax. Instead, as a Limited Owner, you generally will recognize taxable income in an amount equal to your allocable share of trading profits and other income generated from the Series in which you have purchased Interests (whether or not any cash is distributed to you). Your ability to deduct losses and expenses relating to the Trust's trading activities may be subject to significant limitations. A Limited Owner may deduct his share of any losses in the Series in which he has an interest (whether ordinary or capital) only up to the amount of his adjusted basis in his Interests. Additionally, the excess of a Series' capital losses over capital gains is deductible by a non-corporate Limited Owner only against his capital gain income each year (and up to $3,000 per year against his ordinary income). Furthermore, special tax risks will apply to tax-exempt Limited Owners and to non-United States investors. For a more complete discussion of tax risks relating to this investment, see "Risk Factors - Tax Risks" and "Federal Income Tax Consequences." Reports and Accounting As of the end of each month and as of the end of each Fiscal Year, we will furnish you with those reports required by the CFTC and the National Futures Association ("NFA"), including, but not limited to, an annual audited financial statement certified by independent public accountants and any other reports required by any other governmental authority, such as the SEC, that has jurisdiction over the activities of the Trust. You also will be provided with appropriate information to permit you (on a timely basis) to file your federal and state income tax returns. Fiscal Year December 31. Financial Information The Trust has only recently been organized and has no financial history. Financial information concerning the Trust and the Managing Owner is set forth under "Financial Statements." Glossary of Terms See the "Glossary of Terms" for the definition of certain key terms used in this Prospectus. SUMMARY OF FEES AND EXPENSES - - Brokerage Fee - an annual percentage of each Series' Net Asset Value: Series A: 7.75% Series B: 7.75% Series C: 7.75% which equates to an estimated amount per round-turn transaction: Series A: $67 Series B: $34 Series C: $48 Prudential Securities will receive this amount for brokerage services it renders, out-of-pocket trading costs it incurs, as well as for assisting the Managing Owner in managing non-commodities assets. The brokerage fee is determined at the close of business each Friday, and the sum of the amounts determined weekly will be paid monthly. Differences in amounts per round-turn reflect estimated differences in frequency of trading, not higher per trade costs. - - Management Fee - an annual percentage of each Series' Net Asset Value: Series A: 2% Series B: 2% Series C: 2% Each Trading Advisor will receive a management fee for its trading advisory services. The management fee is determined at the close of business each Friday, and the sum of the amounts determined weekly will be paid monthly. - - Incentive Fee - a percentage of each Series' New High Net Trading Profits: Series A: 23% Series B: 20% Series C: 23% Each Trading Advisor can receive an incentive fee for the profit (realized and unrealized) it achieves for a Series. The incentive fee is determined as of the close of business on the last Friday of each calendar quarter but will accrue weekly for purposes of determining a Series' Net Asset Value for each week. FEES PAID BY THE INVESTORS - - Redemption Fee - 4% or 3% of the Net Asset Value of an Interest: Redemptions made during first 6-month period following purchase - 4% Redemption Fee Redemptions made during second 6-month period following purchase - 3% Redemption Fee The Managing Owner will receive 4% and 3%, respectively, of the Redemption Price of Interests redeemed during the first and second successive six-month periods following the effective date of their purchase. This redemption fee will not be charged if you effect an Exchange or invest your redemption proceeds in another futures fund sponsored by Prudential Securities. The above fees constitute all fees to be paid, either directly or indirectly, to Prudential Securities and/or its affiliates or to the Trading Advisors. FEES PAID BY PRUDENTIAL SECURITIES OR ITS AFFILIATES: - - Organization and Offering Expenses Approximately $250,000 per Series Include legal, accounting, filing fees and printing costs - - Routine Operational/Administrative Expenses Approximately $80,000 per Series per year Include filing, accounting, photocopying, postage and computer services costs - - Routine Legal, Auditing and Other Expenses Approximately $60,000 per Series per year Include expenses of third party service providers, including the Trustee PROJECTED TWELVE-MONTH "BREAK-EVEN" ANALYSIS THE FOLLOWING IS THE PROJECTED TWELVE-MONTH BREAK-EVEN ANALYSIS FOR EACH SERIES. THE ANALYSIS TAKES INTO ACCOUNT ALL FEES AND EXPENSES ENUMERATED ABOVE (OTHER THAN ADVISORY INCENTIVE FEES AND EXTRAORDINARY EXPENSES WHICH ARE IMPOSSIBLE TO PREDICT), EXPRESSED BOTH AS A DOLLAR AMOUNT AND AS A PERCENTAGE OF A $5,000 INITIAL INVESTMENT: <TABLE> <CAPTION> SERIES A SERIES B SERIES C Description of Dollar Percentage Dollar Percentage Dollar Percentage Charges Break-Even Break-Even Break-Even Break-Even Break-Even Break-Even <S> <C> <C> <C> <C> <C> <C> Brokerage Fees $387.50 7.75% $387.50 7.75% $387.50 7.75% Advisory Management Fees $100.00 2.00% $100.00 2.00% $100.00 2.00% Advisory Incentive Fees (1) - - - - - - Total $487.50 9.75% $487.50 9.75% $487.50 9.75% Less Estimated Interest Income (2) ($280.00) (5.60%) ($280.00) (5.60%) ($280.00) (5.60%) Estimated 12-Month Break-Even Without Redemption Charges (3) $207.50 4.15% $207.50 4.15% $207.50 4.15% Redemption Charges (3) $150.00 3.0% $150.00 3.0% $150.00 3.0% Estimated 12-Month Break-Even Level After Redemption Charges $357.50 7.15% $357.50 7.15% $357.50 7.15% </TABLE> 1 Advisory Incentive Fees are only paid on "New High Net Trading Profits." New High Net Trading Profits are determined after deducting Brokerage and Advisory Management Fees, and does not include interest income. Each Series could pay advisory Incentive Fees in years in which the Series breaks even, or even loses money, due to the quarterly, rather than annual, nature of such fees. 2 Each Series will be credited with 100% of the interest income earned on that Series' assets. Currently estimated to be the Federal Funds rate of approximately 5.60%. 3 A redemption fee of 4% will be assessed on an Interest redeemed on or before the end of the sixth full month after the effective date of its purchase. A redemption fee of 3% will be assessed on an Interest redeemed after the end of the sixth, but on or before the end of the 12th, full month after its purchase. Because this break-even analysis is a twelve-month computation, only the 3% redemption fee, which is imposed at the end of the twelve-month period, is used. Redemption fees will not be charged if you effect an Exchange or if you invest your redemption proceeds concurrently in another futures fund sponsored by Prudential Securities.
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+SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. FOR THE PERIODS PRIOR TO JULY 1, 1996, THE FINANCIAL STATEMENTS AND OTHER INFORMATION SET FORTH HEREIN COMBINE THE HISTORICAL RESULTS OF TEXAS OLEFINS COMPANY, A TEXAS CORPORATION ("TOC"), ITS SUBSIDIARIES AND CLARKSTON CORPORATION ("CLARKSTON"). UNLESS THE CONTEXT OTHERWISE REQUIRES, AS USED HEREIN THE TERM "COMPANY" REFERS TO TOC AND ITS SUBSIDIARIES PRIOR TO THE CONSUMMATION OF THE ACQUISITION (AS DEFINED), AND TO HOLDINGS AND ITS SUBSIDIARIES FOLLOWING THE CONSUMMATION OF THE ACQUISITION. TOC WAS MERGED WITH AND INTO TEXAS PETROCHEMICALS CORPORATION, A TEXAS CORPORATION ("TPC"), IN CONNECTION WITH THE ACQUISITION. TPC IS A WHOLLY-OWNED SUBSIDIARY OF TPC HOLDING CORP., A DELAWARE CORPORATION ("TPC HOLDING"), WHICH IS A WHOLLY-OWNED SUBSIDIARY OF HOLDINGS. TPC CONDUCTS THE PRINCIPAL BUSINESS OF THE COMPANY. ALL REFERENCES TO FISCAL YEARS IN THIS PROSPECTUS UP TO AND INCLUDING FISCAL 1995 REFER TO THE FISCAL YEARS ENDED MAY 31 IN THE CALENDAR YEARS INDICATED. THE COMPANY HAS CHANGED ITS FISCAL YEAR END TO JUNE 30 AND INFORMATION FOR FISCAL YEARS ENDED SUBSEQUENT TO MAY 31, 1995 IS SO PRESENTED. ALL REFERENCES IN THIS PROSPECTUS TO THE COMPANY'S CAPACITY TO PRODUCE CERTAIN PRODUCTS REFLECT PRODUCTION LEVELS ACHIEVABLE IF PLANT OPERATIONS ARE DEDICATED TO MAXIMIZING OUTPUT OF THAT PARTICULAR PRODUCT, WHICH EXCEEDS ACTUAL CAPACITY AVAILABLE UNDER TYPICAL MULTI-PRODUCT PRODUCTION CONFIGURATIONS. UNLESS OTHERWISE INDICATED, INDUSTRY DATA CONTAINED HEREIN, OTHER THAN WITH RESPECT TO THE COMPANY, IS DERIVED FROM PUBLICLY AVAILABLE INDUSTRY TRADE JOURNALS AND OTHER PUBLICLY AVAILABLE INDUSTRY SOURCES, WHICH THE COMPANY HAS NOT INDEPENDENTLY VERIFIED BUT WHICH THE COMPANY BELIEVES TO BE RELIABLE. THE COMPANY The Company is the largest producer of butadiene and butene-1, and the third largest producer of methyl tertiary-butyl ether ("MTBE"), in North America, in terms of production capacity. In addition, the Company is the sole producer of diisobutylene and isobutylene concentrate in the United States and the largest domestic merchant supplier of high purity isobutylene to the chemical market. The Company's products include: (i) butadiene, primarily used to produce synthetic rubber; (ii) MTBE, used as an oxygenate and octane enhancer in gasoline; (iii) n-butylenes (butene-1 and butene-2), used in the manufacture of plastic resins, fuel additives and synthetic alcohols; and (iv) specialty isobutylenes, primarily used in the production of specialty rubbers, lubricant additives, detergents and coatings. For the year ended June 30, 1997, and the twelve months ended May 31, 1996, butadiene represented 27% and 25% of the Company's total revenues, respectively, MTBE represented 47% and 41%, respectively, n-butylenes 10% and 11%, respectively, specialty isobutylenes 13% and 16%, respectively, and other revenues the remaining 3% and 7%, respectively. The Company's revenues for the year ended June 30, 1997, the twelve months ended May 31, 1996 and the one month ended June 30, 1996 were $490.2 million, $455.6 million and $41.4 million, respectively, and EBITDA (as defined) for the year ended June 30, 1997, the twelve months ended May 31, 1996 and the one month ended June 30, 1996 were $50.4 million, $57.0 million and $3.7 million, respectively. Butadiene is the most widely used feedstock for synthetic rubber products and is also used in the manufacture of engineered plastics, nylon fibers and other products. The Company sells butadiene to a stable customer base , including The Goodyear Tire & Rubber Company, The Dow Chemical Company, American Synthetic Rubber Inc. and Bridgestone/Firestone, Inc. As the largest producer of butadiene in North America, the Company believes that many of its customers place significant value on its ability to provide a reliable domestic supply of butadiene and as a result have entered into long-term sales contracts with the Company. The Company extracts butadiene from crude butadiene, which is generated from the production of ethylene and is comprised of a number of valuable components, including butadiene, isobutylene, n-butylenes, isobutane and n-butane. Many U.S. ethylene producers rely on third parties such as the Company to process their crude butadiene streams, as the crude butadiene volumes they produce are not sufficient to justify the construction of on-site butadiene recovery facilities. The Company estimates that producers accounting for 65% of U.S. and Canadian ethylene production capacity do not internally process crude butadiene by-product streams. The Company is the largest non-integrated crude butadiene processorin North America and as a result of its strategic importance to ethylene producers, the Company has been able to secure long-term supply contracts covering the majority of its crude butadiene requirements. Such contracts provide for a fixed profit based on the Company's selling prices for butadiene, and account for the relatively stable profitability of the Company's butadiene operations. MTBE is a blending stock which reduces carbon monoxide and volatile organic compound emissions and enhances the octane content of gasoline, and has been one of the fastest growing petrochemicals, in terms of volume, over the past fifteen years. Today, MTBE is the preferred oxygenate for, and a major component of, reformulated gasoline ("RFG") and is used in over 30% of the U.S. gasoline pool. MTBE is produced by reacting methanol and isobutylene, and the Company's ability to produce isobutylene by three alternative methods enables it to produce MTBE by the most economical processes available to the Company. In addition, the Company has the ability to add incremental capacity to capitalize on expected future growth, at a significantly lower cost than the cost of adding new capacity. The Company believes that this incremental capacity gives it a competitive advantage over other producers who would have to incur greater cost to increase capacity. The Company sells MTBE to oil refiners and gasoline producers, including Mobil Oil Corporation, Lyondell Petrochemical Company and CITGO Petroleum Corporation on both a contract and spot basis at prices linked to prevailing market prices. The Company is the leading producer of high margin n-butylenes and specialty isobutylenes in North America. In recent years, the Company has increased its sales of these products by increasing its market share in polyolefin applications and the development of new end-use applications. The Company's principal customers for n-butylenes include Union Carbide Corporation, The Dow Chemical Company, NOVA Chemicals Ltd., Shell Chemical Company and Lyondell Petrochemical Company. The Company's principal customers for specialty isobutylenes include Bayer Inc., Mobil Chemical Company Inc., Rhone-Poulenc Inc., The Lubrizol Corporation and Schenectady International, Inc. Historically, the profitability of the Company's n-butylenes sales has been relatively stable as the majority of the sales of these products are made under contracts which link their selling prices to the prices of products (principally gasoline and butanes) whose prices fluctuate closely with those of the raw materials used to manufacture n-butylenes and specialty isobutylenes. The Company's principal feedstocks are crude butadiene, isobutane and methanol. One of the Company's intermediate feedstocks, isobutylene, is used in the manufacture of MTBE and specialty isobutylenes. As part of its production strategy, the Company uses its manufactured isobutylene first to maximize the production of high margin specialty isobutylenes, second, to satisfy its contractual MTBE requirements, and finally to produce MTBE for sale in the spot market. The Company maintains the production flexibility to upgrade n-butylenes contained in crude butadiene streams to either isobutylene or butene-1 using its patented skeletal isomerization process ("SKIP"). This flexibility allows the Company to meet its customers' needs through the most economical process, to produce additional products and to capitalize on favorable market conditions. The Company's manufacturing facility, located approximately one mile from the Houston Ship Channel, provides convenient access to other Gulf Coast petrochemical producers and is connected to several of its customers and raw materials suppliers through an extensive pipeline network. In addition, the Company's facility is serviced by rail, tank truck and barge. The Company's principal executive offices are located at Three Riverway, Suite 1500, Houston, Texas 77056. The Company's telephone number is (713) 627-7474. BACKGROUND INFORMATION Holdings, TPC Holding, and TPC Finance Corp., a Texas corporation ("Finance Co."), were organized in May 1996 to effect the acquisition (the "Acquisition") of TOC and its subsidiaries, including TPC, and to assume a raw materials supply contract from Clarkston. On July 1, 1996, Holdings issued and sold $43.8 million of its common stock ("Common Stock") to an investor group led by Gordon A. Cain and The Sterling Group, Inc. ("Sterling"), issued $6.2 million of its Common Stock for the shares contributed by certain shareholders of TOC and TPC, sold a sufficient amount of the Discount Notes and Common Stock, as an investment unit (the "Units") to the Huff Fund to raise $30 million in gross proceeds, and contributed the net proceeds thereof to TPC Holding. Finance Co. borrowed approximately $140.0 million under the Bank Credit Agreement and received approximately $169 million in net proceeds from the sale at such time of $175 million aggregate principal amount of 11 1/8% Senior Subordinated Notes due 2006 (the "Original Notes") and loaned the combined net proceeds to TPC Holding. TPC Holding used the capital contributions received from Holdings, cash on hand and the proceeds of the loan from Finance Co. to effect the Acquisition pursuant to a stock purchase agreement dated as of May 14, 1996 (the "Stock Purchase Agreement"), to fund the ESOP (as defined) and pay fees and expenses in connection with the transactions associated with the Acquisition. TOC and Finance Co. then merged into TPC. As a result of the foregoing, Holdings is the primary obligor on the Discount Notes, and TPC is the primary obligor on the Original Notes and the loans made pursuant to the Bank Credit Agreement, is a wholly-owned subsidiary of TPC Holding (which in turn is wholly-owned by Holdings) and operates the principal business of the Company. Holdings has guaranteed TPC's obligations under the Bank Credit Agreement. The Discount Notes and the Common Stock which constituted the Units became separately transferable immediately following the Acquisition. On March 13, 1997, TPC issued and sold $50,000,000 aggregate principal amount of 11 1/8% Series B Senior Subordinated Notes due 2006 (the "Notes"), the proceeds of which were used to, among other things, reduce TPC's indebtedness under the Bank Credit Agreement. The Original Notes and the Notes were issued under indentures referred to herein collectively as the "Notes Indenture." This prospectus has been prepared for use by the Huff Fund in connection with offers and sales of the Discount Notes. THE DISCOUNT NOTES <TABLE> <CAPTION> <S> <C> Discount Notes....................... $57,650,103.55 aggregate principal amount at final maturity of 13.5% Senior Discount Notes due 2007. Maturity Date........................ July 1, 2007. Interest Payment Dates............... January 1 and July 1 of each year after July 1, 2001. Optional Redemption.................. Except as described below, Holdings may not redeem the Discount Notes prior to July 1, 2001. On or after such date, Holdings may redeem the Discount Notes, in whole or in part, at any time at the redemption prices set forth herein plus accrued interest, if any, to the date of redemption. In addition, up to 30% of the aggregate Accreted Value of the Discount Notes may be redeemed at any time prior to July 1, 1998, at the option of Holdings, with the net proceeds of any Public Equity Offering following which there is a Public Market at a redemption price equal to 113.5% of the Accreted Value thereof, together with accrued and unpaid interest, if any, to the date of redemption. Change of Control.................... Upon the occurrence of a Change of Control, each holder will have the right to require Holdings to make an offer to purchase the Discount Notes at a price in cash equal to 101% of the principal amount thereof to July 1, 2001 and face principal amount of the Discount Notes after July 1, 2001, in each case plus accrued and unpaid interest to the date of purchase. See "Description of the Discount Notes -- Change of Control." Ranking.............................. The Discount Notes are senior unsecured obligations of Holdings, senior in right of payment to subordinated Indebtedness of Holdings, including Holdings' guarantee of the Notes. The Discount Notes rank PARI PASSU in right of payment with other senior unsecured Indebtedness of Holdings. The Discount Notes are effectively subordinated to secured indebtedness of Holdings, including Holdings' guarantee of Indebtedness of TPC under the Bank Credit Agreement, as to the assets of Holdings securing such Indebtedness, and to all Indebtedness and other liabilities and commitments (including trade payables and lease obligations) of Holdings' subsidiaries. As of March 3, 1998, (i) Holdings had approximately $96.0 million of secured senior Indebtedness outstanding (consisting of Holdings' guarantee of the Company's Indebtedness under the Bank Credit Agreement), $37.0 million of senior unsecured Indebtedness outstanding (consisting of the portion of the issue price of the Units allocated for accounting purposes to the Discount Notes) and (ii) Holdings' subsidiaries had approximately $326.3 million of Indebtedness outstanding (including the Notes). Substantially all of the operations of Holdings will be conducted through its subsidiaries and, therefore, Holdings will be dependent upon the cash flow of its subsidiaries to meet its obligations, including its obligations under the Discount Notes. See "Description of the Discount Notes." Restrictive Covenants................ The Discount Notes Indenture (as defined under "Description of the Discount Notes -- General") contains certain covenants that, among other things, limit the ability of Holdings and/or its Restricted Subsidiaries (as defined) to (i) incur additional indebtedness, (ii) pay dividends or make certain other restricted payments, (iii) make investments, (iv) enter into transactions with affiliates, (v) make certain asset dispositions, and (vi) merge or consolidate with, or transfer substantially all of its assets to, another person. The Discount Notes Indenture also limits the ability of Holdings' Re- stricted Subsidiaries to issue Capital Stock (as defined) and to create restrictions on the ability of such Restricted Subsidiaries to pay dividends or make any other distributions. In addition, Holdings is obligated, under certain circumstances, to offer to repurchase the Discount Notes at a purchase price equal to 100% of their Accreted Value (without premium), plus accrued and unpaid interest, if any, in accordance with the procedures set forth in the Discount Notes Indenture. However, all of these limitations and prohibitions will be subject to a number of important qualifications. See "Description of the Discount Notes -- Certain Covenants." Tax Consequences..................... Holdings has received an opinion of counsel regarding the material federal income tax consequences relevant to the purchase, ownership and disposition of the Discount Notes. See "Material Federal Income Tax Considerations." Guarantee............................ TPC Holding fully and unconditionally guarantees the due and punctual payment of the principal of, interest on and all other amounts payable under the Discount Notes when they become due and payable, whether upon maturity, upon acceleration, by call for redemption, upon repurchase or purchase pursuant to a Change of Control or Asset Disposition or otherwise. The guarantee will not be discharged with respect to any Discount Note except by payment in full of principal, interest and all other amounts payable. </TABLE> RECENT DEVELOPMENTS Holdings requested and obtained from the current holder of the entire principal amount of the Discount Notes a waiver, for a single transaction, of the requirements under Section 10.09(a)(ii) and (iii) of the Discount Notes Indenture to the extent such requirements would not be met by the investment by a Restricted Subsidiary of Holdings of up to $1,000 for a 50% interest in a corporation organized to conduct certain business in Venezuela. Section 10.09 of the Discount Notes Indenture states that the Company shall not permit any Restricted Subsidiary to make a Restricted Payment unless certain tests are met. The proposed investment of up to $1,000 in a corporation organized to conduct certain business in Venezuela would constitute a Restricted Payment and as a result the tests under Section 10.09 must be met or an exemption must be available. Because the Company could not meet the tests under Section 10.09 and an exemption was not available, the Company sought and obtained a waiver of Section 10.09(a)(ii) and (iii) of the Discount Notes Indenture. See "Description of the Discount Notes -- Certain Covenants -- Limitation on Restricted Payments" and "Description of the Discount Notes -- Certain Definitions -- Restricted Payment."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001051885_scovill_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001051885_scovill_prospectus_summary.txt
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+SUMMARY The following summary information is qualified in its entirety by, and should be read in conjunction with, the financial statements and more detailed information included elsewhere in this Prospectus. Unless the context requires otherwise, references to the "Company" or "Fasteners" mean Scovill Fasteners Inc. and its subsidiaries. Unless otherwise indicated, all pro forma information herein assumes that the Transactions (as defined) occurred at the beginning of the periods to which such information relates, in the case of statement of operations data, and on September 30, 1997, in the case of balance sheet data. THE COMPANY The Company, whose business has been in continuous operation since 1802, is a leading designer, manufacturer and distributor of apparel fasteners and specialty industrial fasteners. The Scovill name is the oldest and one of the most well-known brands in the fasteners industry. In the twelve-month period ended September 30, 1997, the Company sold more than 10 billion fastener units worldwide. The Company has achieved and maintained its reputation by offering its customers an integrated system of high quality fasteners, proprietary attaching machines, technical service, on-site maintenance and customized applications and design services tailored to individual customer needs. The Company has two main product groups: the Apparel Group and the Industrial Group. The Apparel Group, through its Gripper and DuraMark brands, produces snaps, tack buttons, rivets, burrs and other snap fastener products used in numerous apparel applications. The Company's customers and end-users include many leading apparel design and manufacturing companies, including Wrangler, OshKosh B'Gosh, Gerber Childrenswear, William Carter Company, Tommy Hilfiger, Polo Ralph Lauren, Liz Claiborne and L.L. Bean. The Company believes that it supplies the majority of the snap fasteners sold to U.S. infantswear and childrenswear manufacturers and a substantial portion of the snap fasteners sold to U.S. apparel manufacturers. The Industrial Group, primarily through its DOT and PCI product lines, produces specialty industrial fasteners including large snaps, windshield clips, turn buttons, eyelets, grommets, screw studs, gypsy studs and other specialty fasteners. These products are used in a broad range of industries, including marine textile, automotive, aerospace, military, medical/surgical products, luggage, leather goods, electronic equipment, sporting and recreational goods and consumer batteries. The end-users of the Company's products include a wide variety of companies, including Ford, Boeing, Baxter, Samsonite, U.S. Marine for its Bayliner Boats, Johnston & Murphy, Eveready Battery, Riddell for its football helmets and the U.S. Army. The Company believes that it sells a significant portion of the specialty industrial fasteners sold in the product markets in which it competes. INDUSTRY The Company operates in an industry characterized by customer switching costs, a broad customer base in which no single customer dominates as a purchaser of fasteners, substantial economies of scale and few manufacturers who can match the level of service that the Company provides. Customers in the apparel and specialty industrial fastener industries tend to be more quality- driven than price-driven in their purchase decisions because (i) a particular fastener constitutes a very small portion of the overall cost of a customer's end product, (ii) defective or improperly attached fasteners can result in costly rework or scrap and (iii) the customers' cost of attaching a fastener is typically substantially more than the cost of the fastener itself, which leads customers to focus on the speed, precision and flexibility of the fastener attaching system. These factors result in steady, long-term customer relationships for those industry participants that offer quality and service. The apparel snap fastener market includes snap fasteners, tack buttons, rivets and burrs and excludes other apparel devices such as zippers, buttons and Velcro. The primary customers for apparel snap fasteners include manufacturers of basic garments such as jeans, infantswear, childrenswear and outerwear. Demand for apparel snap fasteners is related to apparel industry trends generally, which, in turn, are affected by demographics. The production of each category of apparel depends upon population trends and consumer spending in each apparel category. According to U.S. Department of Commerce estimates, the value of domestic shipments of apparel and other finished textiles has averaged over 4% growth per year since 1976. During that time, the domestic apparel industry generally has exhibited low cyclicality, with the value of such shipments having increased in all but two years. In foreign markets, the Company believes that expected population growth over the next several years and improved standards of living will result in increased apparel sales abroad. The specialty industrial fastener market is large and highly fragmented. The market is comprised of a variety of niche segments with specialized customers, competitors and products in which the Company generally earns higher margins than it does in the apparel market. The Company estimates that the market segments in which it currently competes constitute less than 10% of the overall market. The Company believes that there is no dominant manufacturer that competes in all of its markets, and the Company intends to broaden its participation through new products and product line extensions. COMPETITIVE STRENGTHS The Company attributes its historical success and significant opportunities for continued growth to the following competitive strengths: Leading Market Position. The Company is the oldest and most established manufacturer of a variety of apparel and specialty industrial fasteners in the United States. The Company's fasteners have been used in many products throughout its history, from U.S. military uniforms since the War of 1812 to the flight suits worn by NASA shuttle astronauts. The Company's reputation for high quality and its well-known brand names, including Scovill, Gripper and DOT, make it a leading presence in domestic markets and provide it with a platform for enhanced global expansion. The Company believes that it supplies the majority of the snap fasteners sold to U.S. infantswear manufacturers, a substantial portion of the snap fasteners sold to U.S. apparel manufacturers generally and a significant portion of the specialty industrial fasteners sold in the product markets in which it competes. "Total System" Approach. In addition to manufacturing and distributing fasteners to its customers, the Company also leases approximately 8,000 proprietary attaching machines to attach its products to those of its customers, primarily in the apparel industry. The Company's large size enables it to (i) employ what the Company believes to be the industry's only existing dedicated field service force that provides on-site maintenance, which minimizes equipment down-time, (ii) have ready access, through its servicing relationships, to its customers' facilities, providing the Company with opportunities to cross-sell products and to test new fastener machinery, (iii) continue to develop next-generation attaching machines, such as the new Gemini system, which has lower manufacturing and maintenance costs and improved fastener application flexibility and attaching speed, and (iv) maintain an applications development and design lab that enables customers to outsource design functions to the Company. The Company's "total system" approach enables it to compete based on its ability to decrease its customers' costs and improve the quality of their products, rather than on the unit price of the Company's fasteners. Large Installed Base of Attaching Machines. The Company has the industry's largest installed base of attaching machines in the United States, which enables it to generate a recurring stream of cash flow from high volume sales of fasteners. These machines are designed to be used only with the Company's fasteners. The Company believes that customers are reluctant to switch to other manufacturers in order to avoid the costs associated with retraining personnel, reduced productivity and the business interruption that results from the need to replace an entire network of machines in a plant or a production line in order to maintain the compatibility of the network. The Company has been able to maintain a high level of customer retention. In 1996, approximately 99% of all of its attaching machine leases were renewed. Broad Customer Base and Product Line. The Company's customers include many large and well-known apparel and industrial manufacturing companies. The Company is a leading supplier for private-label infantswear sold at Kmart, Wal*Mart, Target and Sears stores. In 1997, no single customer accounted for more than 7% of the Company's total net sales, and the Company's 10 largest customers accounted for approximately 28% of the Company's total net sales. The Company's broad line of products for apparel and specialty industrial use reduces its exposure to any one customer segment and to fashion trends. Reputation for High Quality. The Company has built its reputation by producing high quality products designed and manufactured to precise specifications. The Company has developed many of the safety standards for infantswear adopted by the American Society of Testing Methods (the "ASTM"), and the Company's senior quality manager is currently chairman of the ASTM subcommittee responsible for establishing testing methodologies for the apparel fastener industry. These methodologies provide the basis for determining compliance with requirements for apparel set by the Consumer Products Safety Commission. Experienced Management Team. The Company's senior management team has an average of over 15 years of experience in the fastener industry. Since its formation in 1992, the management team has delivered significant revenue and EBITDA improvements by successfully reorganizing the business and positioning the Company for growth. Management has achieved these results by rationalizing existing operations, exiting an unprofitable product line and integrating domestic and international acquisitions. This team has successfully identified, integrated and consolidated three significant acquisitions since 1992 and established a platform for international growth. Senior management rolled over an aggregate of $3.3 million of their stock options in KSCO into equity of Parent, representing approximately one-half of the proceeds they would have received in the Acquisition. BUSINESS STRATEGY The Company seeks to enhance its competitive position while increasing its net sales and operating cash flow by continuing to implement the following components of its business strategy: Continue to Strengthen Customer Relationships. The Company intends to continue to distinguish itself from competitors as a full-service provider. The Company will continue to foster long-term partnerships with its customers by providing a broad range of high quality products, consistent delivery performance, comprehensive product support, efficient attaching machinery and dedicated field service. The introduction of the Gemini attaching machine, which accommodates rapid and cost-efficient switching of fastener types and is designed to address ergonomic concerns, illustrates the Company's commitment to customer service. The Company also continues to develop and implement value- added services, such as specialized billing and delivery systems. Reduce Customers' CPAF. The Company intends to develop new means to continue its commitment to lower its customers' cost per attached fastener ("CPAF"). Customers incur significant costs beyond the unit price of fasteners; an individual fastener typically represents only 10% of an average customer's CPAF. CPAF is also a function of factors such as attaching speed, production errors, equipment downtime due to changeover and maintenance and the attaching machinery lease expense or cost. The Company's "total system" approach and its focus on CPAF are designed to reduce the remaining costs associated with the attaching of its fasteners. Seek Higher Margin Specialty Applications. The Company intends to take advantage of its diverse and flexible manufacturing capabilities to enhance its line of specialty applications, which offers higher margins. Examples of specialty applications are stainless steel buckles for football, hockey and cycling helmets; engineered eyelets for consumer electronics; and male/female connectors for batteries. The Company intends to develop new applications for current products, engineer new products and re-engineer those products obtained through acquisitions. Unlike smaller manufacturers, the Company possesses its own tooling, stamping, plating and finishing equipment and, therefore, can develop specialty applications without significant capital expenditures. Strengthen "Retail Pull." The Company seeks to have large retailers specify the use of the Company's products in their private label apparel lines. The Company has been designated as the sole or preferred fastener supplier for the private-label infantswear manufactured for and sold by Wal*Mart, Kmart, Target and Sears. Additionally, the Company's reputation for high quality and consumer awareness has led to Kmart's joint branding on garment tags to highlight the names of Scovill and Klikit, a Gripper brand. The Company intends to expand its international opportunities by leveraging existing relationships with customers that move sourcing abroad and by expanding its distribution channels overseas to better serve them. The Company believes that the high quality of its products, its "total system" approach and its Asian distribution channels enhance the Company's ability to effect this strategy. Leverage Existing Manufacturing Base. The Company intends to continue to leverage its existing manufacturing base by incrementally expanding the capacity of the Clarkesville facility. By optimizing its operations, adding shifts and outsourcing particular activities, the Company believes that it can significantly increase the output of the Clarkesville facility with limited capital expenditures. Through the addition of increased revenue at minimal incremental fixed costs, the Company has been able to increase EBITDA margins. The Company expects to increase revenue through new product development and tuck-in acquisitions, such as the 1996 acquisitions of Rau Fastener Company, L.L.C. ("Rau") and PCI Group, Inc. ("PCI"), whose operations were consolidated into the Company's Clarkesville, Georgia facility. Pursue Attractive Acquisition Opportunities. The Company will continue to evaluate opportunities to expand its sales and product offerings through smaller, easily integrated domestic add-on acquisitions. The Company may also explore larger international acquisitions, primarily in Europe and Asia. The criteria for identifying attractive acquisition candidates include (i) revenue potential, (ii) increases in manufacturing, production and other cost efficiencies and (iii) diversification and expansion of the Company's product lines and customer base. THE TRANSACTIONS SAI and Parent were formed by Saratoga Partners III, L.P. ("Saratoga") to effect the acquisition of the Company. On October 10, 1997, SAI entered into a Stock Purchase Agreement (the "Stock Purchase Agreement") with KSCO Acquisition Corporation ("KSCO"), which owned all of the capital stock of Fasteners, and the stockholders and optionholders of KSCO. Under the Stock Purchase Agreement, SAI agreed to purchase all of the capital stock of KSCO for a purchase price in cash of approximately $168.8 million less the amount of indebtedness of the Company existing immediately prior to closing of the acquisition (including indebtedness that will not be repaid in connection with the Transactions). Concurrently with the consummation of the Offerings, SAI merged with and into KSCO, and KSCO merged with and into Fasteners, with Fasteners surviving the mergers. Following such mergers, the Notes became obligations of Fasteners. The purchase of KSCO capital stock by SAI and the mergers of SAI and KSCO into Fasteners are together referred to herein as the "Acquisition." In connection with the Acquisition, Saratoga and certain other investors made a $36.6 million equity investment, consisting of (i) $0.4 million in shares of Parent's Common Stock, par value $0.0001 per share (the "Common Stock"), and (ii) $36.2 million aggregate liquidation preference of Parent's Series B Preferred Stock, par value $0.0001 per share (the "Series B Preferred Stock") (collectively, the "Saratoga Investment"). Management and the Chairman of the Board rolled over $3.4 million of their stock options in KSCO into options to purchase Common Stock and Series B Preferred Stock (the "Management Investment"). The Saratoga Investment and the Management Investment are referred to as the "Equity Investments." Concurrently with the Notes Offering, Parent sold, for gross proceeds of $10.0 million, 100,000 Units, each Unit consisting of $100 liquidation preference of Parent's Series A Cumulative Redeemable Exchangeable Preferred Stock (the "Senior Preferred Stock") and one warrant (the "Warrants") to purchase Common Stock. The net proceeds of the Equity Investments and the Units Offering totalled $49.4 million, after fees and expenses to Parent of $0.6 million. Parent contributed (the "Equity Contribution") such amount to Fasteners in the form of common equity. In connection with the Acquisition, Fasteners entered into a new senior secured credit facility (the "New Credit Facility"), consisting of a $28.0 million term loan (the "Term Loan") and a $25.0 million revolving credit facility (the "Revolving Credit Facility"). See "Description of Other Indebtedness--New Credit Facility." Proceeds from the Equity Contribution, the Notes Offering and the Term Loan were used to finance the purchase price in the Acquisition, repurchase attaching machinery subject to a synthetic lease (the "Synthetic Lease"), repay the Company's then existing credit facility (the "Existing Credit Facility") and pay related fees and expenses. The Acquisition, the repurchase of attaching machinery subject to the Synthetic Lease, the repayment of the Existing Credit Facility, the Offerings, the Equity Contribution, the borrowing of the Term Loan and the payment of related fees and expenses are collectively referred to herein as the "Transactions." The following table illustrates the sources of funds to the Company and uses of funds by the Company relating to the Transactions, assuming they were consummated on September 30, 1997: <TABLE> SOURCES OF FUNDS (Dollars in millions) <S> <C> Notes.......................... $100.0 Term Loan...................... 28.0 Equity Contribution(a)......... 49.4 ------ Total........................ $177.4 ====== <CAPTION> USES OF FUNDS <S> <C> Cash to selling stockholders... $ 98.1 Repurchase of equipment subject to Synthetic Lease.... 29.2 Repay Existing Credit Facili- ty............................ 39.3 Fees and expenses(b)........... 10.8 ------ Total........................ $177.4 ====== </TABLE> - -------- (a) Parent funded the Equity Contribution from the Equity Investments and the Units Offering (net of estimated fees and expenses). (b) Excludes estimated fees and expenses of Parent related to the Units Offering of $0.6 million. The diagrams on the next page illustrate the Transactions and the post- closing structure of the Company. Saratoga is a private investment fund which, together with its related funds (collectively, the "Saratoga Funds"), has managed corporate buyout partnerships totaling $500 million in committed and contributed capital. The Saratoga Funds have invested in 22 companies with an aggregate purchase valuation of approximately $2.4 billion. Individual acquisition valuations have ranged from $20 million to $400 million. In all of these acquisitions, the Saratoga Funds have been the lead investor, either with sole voting control or in partnership with other investors. [FLOW CHART OF TRANSACTION STRUCTURE AND POST-CLOSING STRUCTURE APPEARS HERE] THE EXCHANGE OFFER REGISTRATION RIGHTS AGREEMENT... The Initial Notes were sold by the Company on November 26, 1997 to the Initial Purchasers who resold the Initial Notes (i) to "qualified institutional buyers" (as defined in Rule 144A under the Securities Act) in reliance upon Rule 144A under the Securities Act and (ii) outside the United States to persons other than U.S. persons in reliance upon Regulation S under the Securities Act. In connection therewith, SAI, Parent and the Initial Purchasers entered into the Registration Rights Agreement dated as of November 26, 1997 (the "Registration Rights Agreement"), providing for, among other things, the Exchange Offer. THE EXCHANGE OFFER.............. The Company is offering to exchange up to $100,000,000 aggregate principal amount of Exchange Notes for up to $100,000,000 aggregate principal amount of Initial Notes issued in the Initial Offering in reliance upon an exemption from registration under the Securities Act. Upon consummation of the Exchange Offer, the terms of the Exchange Notes (including principal amount, interest rate, maturity and ranking) will be identical in all material respects to the term of the Initial Notes for which they may be exchanged pursuant to the Exchange Offer, except that the Exchange Notes have been registered under the Securities Act and therefore will not bear legends restricting their transfer and will not contain terms providing for an increase in the interest rate thereon under certain circumstances described in the Registration Rights Agreement. MINIMUM CONDITION............... The Exchange Offer is not conditioned upon any minimum aggregate principal amount of Initial Notes being tendered for exchange. EXPIRATION DATE................. The Exchange Offer will expire at 5:00 p.m., New York city time, on , 1998, unless extended (the "Expiration Date"). EXCHANGE DATE................... The date of acceptance for exchange of the Initial Notes will be the first business day practicable following the Expiration Date. CONDITIONS TO THE EXCHANGE OFFER........................... The obligation of the Company to consummate the Exchange Offer is subject to certain conditions. See "The Exchange Offer-- Conditions." The Company reserves the right to terminate or amend the Exchange Offer at any time prior to the Expiration Date upon the occurrence of any such condition. [ALTERNATE PAGE TO PROSPECTUS] THE NOTES As used in this section of the Summary and in the "Description of Notes," the "Company" refers only to Scovill Fasteners Inc. and does not include its subsidiaries. ISSUER.......................... Scovill Fasteners Inc. SECURITIES OFFERED.............. $100,000,000 principal amount of 11 1/4% Senior Notes due 2007, Series B. MATURITY DATE................... November 30, 2007. INTEREST PAYMENT DATES.......... May 30 and November 30 of each year, commencing May 30, 1998. MANDATORY REDEMPTION............ None, except as set forth below under "Change of Control." GUARANTEES; SUBORDINATION....... The Notes are guaranteed by Parent (the "Parent Guarantee") and, under certain circumstances, by Restricted Subsidiaries (as defined) of the Company (the "Subsidiary Guarantees," and together with the Parent Guarantee, the "Guarantees"). No Subsidiary Guarantees were required on the date of original issuance of the Notes (the "Issue Date"). The Notes and each Guarantee are senior unsecured obligations of the Company and the Guarantor thereof, respectively. The Notes and each Guarantee rank pari passu in right of payment with all other existing and future unsecured and unsubordinated obligations of the Company and the Guarantor thereof, respectively, and senior to all existing and future indebtedness of the Company and such Guarantor that is expressly subordinated to the Notes and such Guarantee, respectively. In addition, the Notes and each Guarantee are effectively subordinated to all secured obligations of the Company and the Guarantor thereof, respectively, to the extent of the assets securing such obligations. At December 31, 1997, Parent had (i) approximately $130.4 million of consolidated unsubordinated indebtedness outstanding (including the Notes and $30.4 million of secured indebtedness) and (ii) no indebtedness that would have been subordinated to the Notes. The Notes are structurally subordinated to all obligations (including trade payables and accrued liabilities) of the Company's subsidiaries, other than any subsidiary that issues a Subsidiary Guarantee. The indenture pursuant to which the Notes were issued (the "Indenture") permits the Company and its subsidiaries to incur additional indebtedness, including secured indebtedness, subject to certain limitations. The Indenture does not limit Parent's ability to incur indebtedness. WITHDRAWAL RIGHTS............... Tenders may be withdrawn at any time prior to the Expiration Date. Any Initial Notes not accepted for any reason will be returned without expense to the tendering holders thereof as promptly as practicable after the expiration or termination of the Exchange Offer. PROCEDURES FOR TENDERING INITIAL NOTES................... See "The Exchange Offer--Procedures for Tendering." FEDERAL INCOME TAX CONSEQUENCES.................... The exchange of Initial Notes for Exchange Notes by Holders will not be a taxable exchange for federal income tax purposes, and Holders should not recognize any taxable gain or loss or any interest income as a result of such exchanges. CERTAIN REPRESENTATIONS......... Each Holder desiring to participate in the Exchange Offer will be required to represent, among other things, that (i) it is not an "affiliate" (as defined in Rule 405 of the Securities Act) of the Company, (ii) it is not engaged in, and does not intend to engage in, and has no arrangement or understanding with any person to participate in, a distribution of the Exchange Notes and (iii) it is acquiring the Exchange Notes in the ordinary course of its business (a Holder unable to make the foregoing representations is referred to as a "Restricted Holder"). TRANSFER RESTRICTIONS ON EXCHANGE NOTES.................. Based upon interpretations by the staff of the Commission, the Company believes that Exchange Notes issued pursuant to the Exchange Offer to Participating Broker- Dealers may be offered for resale, resold, and otherwise transferred by a Participating Broker-Dealer upon compliance with the prospectus delivery requirements, but without compliance with the registration requirements of the Securities Act. The Company has agreed that for a period of nine months following consummation of the Exchange Offer it will make this Prospectus available, for use in connection with any such resale, to any Participating Broker-Dealer that notifies the Company in the Letter of Transmittal that it may be subject to such prospectus delivery requirements. The Company believes that during such period of time, delivery of this Prospectus, as it may be amended or supplemented, will satisfy the prospectus delivery requirements of a Participating Broker-Dealer engaged in market-making or other trading activities. See "The Exchange Offer" and "Plan of Distribution." Based upon interpretations by the staff of the Commission, the Company believes that Exchange Notes issued pursuant to the Exchange Offer may be offered for resale, resold, and otherwise transferred by a Holder thereof (other than a Restricted Holder or a Participating Broker-Dealer) without compliance with the registration and prospectus delivery requirements of the Securities Act. [ALTERNATE PAGE TO PROSPECTUS] OPTIONAL REDEMPTION............. The Notes are redeemable at the option of the Company, in whole or in part, at any time on or after November 30, 2002, at the redemption prices set forth herein, plus accrued and unpaid interest and Liquidated Damages, if any, to the redemption date. The Company may also redeem Notes at its option, at any time on or prior to November 30, 2000, at a redemption price equal to 111.25% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, to the redemption date, with the net proceeds of one or more Public Equity Offerings; provided, however, that at least $65 million in aggregate principal amount of the Notes remains outstanding following each such redemption. See "Description of Notes-- Optional Redemption." CHANGE OF CONTROL............... Upon the occurrence of a Change of Control, the Company will be required to offer to purchase all or any part of each holder's Notes at 101% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, to the date of purchase. There can be no assurance that the Company will have the financial resources necessary, or be permitted by its debt or other agreements, to purchase the Notes upon a Change of Control. See "Risk Factors-- Change of Control" and "Description of Notes--Change of Control." CERTAIN COVENANTS............... The Indenture contains certain covenants that, among other things, limit the ability of the Company and the Restricted Subsidiaries to incur additional indebtedness, pay dividends or make other distributions, enter into sale and leaseback transactions, make certain investments, incur certain secured indebtedness, enter into certain transactions with affiliates, or enter into certain mergers or consolidations or sell all or substantially all of the assets of the Company and the Restricted Subsidiaries. These covenants are subject to a number of significant exceptions and qualifications. See "Description of Notes-- Certain Covenants." USE OF PROCEEDS................. The Company will receive no cash proceeds from the sale of the Exchange Notes. EFFECT ON HOLDERS OF INITIAL NOTES........................... As a result of the making of this Exchange Offer, and upon acceptance for exchange of all validly tendered Initial Notes pursuant to the terms of the Exchange Offer, the holders of the Initial Notes will have no further registration or other rights under the Registration Rights Agreement, except under certain limited circumstances. Holders of the Initial Notes who do not tender their Initial Notes in the Exchange Offer will continue to hold such Initial Notes and will be entitled to all the rights and limitations applicable thereto under the Indenture dated as of November 26, 1997 among SAI, Parent, and United States Trust Company of New York, as trustee (the "Trustee"), relating to the Initial Notes and the Exchange Notes (as amended, the "Indenture"). All untendered, and tendered but unaccepted, Initial Notes will continue to be subject to the restrictions on transfer provided for in the Initial Notes and the Indenture. To the extent that Initial Notes are tendered and accepted in the Exchange Offer, the trading market, if any, for the Initial Notes could be adversely affected. See "Risk Factors-- Consequences of Failure to Exchange." CHANGE OF CONTROL............... Upon the occurrence of a Change of Control, the Company will be required to offer to purchase all or any part of each holder's Notes at 101% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, to the date of purchase. There can be no assurance that the Company will have the financial resources necessary, or be permitted by its debt or other agreements, to purchase the Notes upon a Change of Control. See "Risk Factors-- Change of Control" and "Description of Notes--Change of Control." CERTAIN COVENANTS............... The Indenture contains certain covenants that, among other things, limit the ability of the Company and the Restricted Subsidiaries to incur additional indebtedness, pay dividends or make other distributions, enter into sale and leaseback transactions, make certain investments, incur certain secured indebtedness, enter into certain transactions with affiliates, or enter into certain mergers or consolidations or sell all or substantially all of the assets of the Company and the Restricted Subsidiaries. These covenants are subject to a number of significant exceptions and qualifications. See "Description of Notes-- Certain Covenants." USE OF PROCEEDS................. The Company will receive no cash proceeds from the Exchange Offer. The proceeds from the offering of the Initial Notes were used as set forth under "The Transactions." CONCURRENT UNITS OFFERING Concurrent with the Notes Offering, Parent offered 100,000 Units, each Unit consisting of $100 liquidation preference of Senior Preferred Stock and one warrant to purchase shares of Common Stock. The Senior Preferred Stock will be exchangeable, at the option of Parent, into Parent's Subordinated Exchange Debentures due 2009 (the "Exchange Debentures"), subject to certain conditions. The Senior Preferred Stock will be mandatorily redeemable on November 30, 2009. Dividends on the Senior Preferred Stock will be payable quarterly in arrears, in cash or, prior to November 30, 2002 at Parent's option, in additional shares of Senior Preferred Stock. See "Description of Units."
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+SUMMARY This summary is qualified by the more detailed information set forth elsewhere in this Prospectus, which should be read in its entirety, including the discussion of certain factors set forth under "Risk Factors." Unless the context requires otherwise, each reference to "Omega" and "the Company" herein includes its direct and indirect subsidiaries. OVERVIEW The Company is a newly-formed corporation that was incorporated in Maryland on November 13, 1997 as a wholly-owned subsidiary of Omega. Omega created the Company to engage in the investment advisory and management services currently being provided by Omega in order to distinguish between the lines of business Omega conducts. The Distribution allows the current holders of Omega Common Shares to continue to participate in the business operations being conducted by the Company (through ownership of Omega Worldwide Common Stock) as well as the real estate operations being conducted by Omega (through ownership of Omega Common Shares). The sale of shares of Omega Worldwide Common Stock pursuant to the Secondary Offering allows Omega to replenish its capital base following the contribution of the Assets (as defined below) to the Company. The Rights Offering and Primary Offering allow the Company to raise capital to pursue further business opportunities. After the consummation of the Distribution and the Offerings, Omega will continue to own 1,000,000 shares of Omega Worldwide Common Stock (approximately 9% of the issued and outstanding shares of Omega Worldwide Common Stock assuming no Additional Shares are issued). THE COMPANY The Company................... The Company will provide investment advisory and management services and hold equity and debt interests in companies engaged in providing sale/leaseback and other capital financing to healthcare service providers throughout the world. The Company will seek to leverage its management expertise in financing healthcare providers by providing seed equity and debt capital and investment advisory services to newly-formed or existing real estate and finance companies principally in countries other than the United States. Private healthcare and its finance, particularly for the aging population in developed countries, represents a growing priority in which capital is a major consideration. Based upon management's experience in establishing Principal Healthcare Finance Limited, a private company incorporated with limited liability in the Isle of Jersey ("Principal"), the Company will seek to extend its investments in healthcare finance on a global basis. The Company may also consider investment in other actively managed real estate opportunities which it develops. Principal was formed on June 28, 1995 and was a wholly-owned subsidiary of Omega until October 1996. Principal provides capital and medium-term financing to the private-sector healthcare industry in the United Kingdom by acquiring and leasing back to experienced operators, existing and newly-built nursing homes or residential care facilities. At December 31, 1997, Principal owned and leased to eight operators a total of 154 facilities (approximately 7,200 beds) in the United Kingdom. The Company will use its and Omega's extensive resources to identify, develop and structure attractive opportunities to invest in healthcare real estate ownership and finance on a global basis. The Company intends to invest its capital in two principal ways: first, to increase its existing investment in Principal, as needed to establish its dominant position in private healthcare finance in the United Kingdom; and second, to establish similar relationships with existing or newly-formed entities in other suitable developed countries. The Company also will coordinate and integrate its investment activity with Omega so as to take advantage of investment opportunities which would not be suitable for Omega due to its REIT status. The Company does not intend to operate property or businesses in the healthcare or any other industry but may perform advisory services and invest in less than majority positions in healthcare operating firms, healthcare services or otherwise. The Company anticipates that a substantial portion of the firms it will develop and to which it will provide seed capital will consist of companies which have the potential for public trading in the markets in which they operate. In connection with the formation and capitalization of the Company, Omega will contribute to the Company prior to the consummation of the Offerings and the Distribution, the following significant assets (collectively, the "Assets") pursuant to a Contribution Agreement with the Company (the "Contribution Agreement"): -- 3,337,500 Class A voting ordinary shares of Principal. The Company will also receive warrants to purchase 10,000,000 ordinary shares of Principal expiring June 30, 2001 at an exercise price of L1.50 (approximately $2.40) per share and 554,583 ordinary shares of Principal expiring December 31, 2000 at an exercise price of L1.00 (approximately $1.60) per share. The Company's investment now represents 33.375% of the outstanding shares prior to exercising any warrants. The exercise of all issued and outstanding warrants, absent the issuance of additional shares by Principal, would increase the Company's ownership interest in Principal to approximately 54%. -- The Company will replace Omega as holder with respect to L15,000,000 (approximately $24,000,000) of escalating fixed rate subordinated debt provided by Omega to Principal and maturing on December 31, 2000. Omega will also transfer to the Company the benefit of a ten-year British pound currency swap contract under which the Company will have the right to exchange L20,000,000 (approximately $32,000,000) for $31,740,000 on October 15, 2007. Pursuant to this contract, the risk to the Company of exchange rate changes during the term of the swap agreement will be mitigated. These assets are collectively referred to herein as the "Principal Assets." -- Amended and Restated Advisory Agreement with Principal (the "Management Agreement") pursuant to which the Company will provide the following services for Principal: marketing of its services; identification and evaluation of potential investments; administration of the business and day-to-day affairs of Principal; monitoring and evaluating the financial and operational performance of the healthcare operating organizations financed by Principal; and developing new products and services. The Company will also provide advice upon and facilitate capital markets transactions and arrangements of credit facilities and permanent financing for Principal. Pursuant to the Management Agreement, the Company will receive an annual fee equal to 0.9% of Principal's assets (as defined in the Management Agreement) and may earn an additional incentive fee. See "Business -- The Principal Assets." In exchange for the contribution of the Assets, Omega will receive 8,499,000 shares of Omega Worldwide Common Stock and up to 5,000,000 shares of Series B Preferred Stock, par value $1.00 per share, of the Company (the "Series B Preferred"). Pursuant to the Contribution Agreement, the Company will automatically issue 65,000 shares of Series B Preferred to Omega for each $0.0625 above $8.625 per share of Omega Worldwide Common Stock that more than 12,000 shares of Omega Worldwide Common Stock are traded on any single date prior to 30 days after the Trading Date. The Series B Preferred will receive a cumulative 8% per annum dividend which is payable annually based on a liquidation value of $10.00 per share. The Series B Preferred has no voting rights. Each share of Series B Preferred will convert into one share of Omega Worldwide Common Stock immediately after Omega distributes the Series B Preferred to its shareholders or otherwise transfers the Series B Preferred to any unaffiliated third party. Prior to the consummation of the Offerings and the Distribution, the Company will enter into an agreement with Omega (the "Opportunity Agreement"), pursuant to which the Company and Omega will agree to provide each other with rights to participate in certain transactions and to make certain investments individually or jointly. The Company and Omega will also enter into a Services Agreement pursuant to which Omega will provide management and other employees, office space and administrative services to the Company. See "Business -- The Opportunity Agreement" and "Certain Transactions." Business Strategy............. The Company intends to perform the Management Agreement with Principal, to enter into additional contracts to provide advisory services and to pursue additional opportunities for global investments in healthcare real estate and finance. The Company believes that it has, or will have access to, sufficient liquidity and management expertise to invest in and manage the healthcare real estate assets successfully. The Company's investment and operating strategies reflect the experience of its management in the establishment of Principal as a means of extending, principally outside the United States, real estate based healthcare financing like that which Omega now conducts in the United States. The Company intends to expand its investments in real estate and healthcare finance and to enter into agreements similar to the Management Agreement with other entities engaged in activities similar to Principal and Omega, including entities established by the Company. The Company will also invest in other entities like Principal conducting financing activities in the healthcare industry in other areas of the world. To pursue additional opportunities, the Company plans to capitalize on its relationship with Omega and Omega's ability to structure transactions creatively and to take advantage of investment opportunities presented to Omega in which it cannot or chooses not to invest. Management.................... Essel W. Bailey, Jr., Susan A. Kovach and David A. Stover are President and Chief Executive Officer, Vice President, General Counsel and Secretary, and Vice President and Chief Financial Officer, respectively, of the Company. Each currently serves in the same capacity at Omega. F. Scott Kellman is Chief Operating Officer of Omega and a Vice President of the Company. James P. Flaherty is Chief Operating Officer of the Company and Vice President-International of Omega. Todd P. Robinson is Vice President of the Company, but serves in a non-executive capacity, as Assistant Vice President, of Omega. See "Management." Preferred Share Purchase Rights........................ The Company expects to authorize Preferred Share Purchase Rights prior to the consummation of the Offerings and the Distribution. If so adopted, shares of Omega Worldwide Common Stock sold pursuant to the Primary Offering and Secondary Offering and issued in the Distribution and upon exercise of the Rights will also initially represent an equivalent number of associated Preferred Share Purchase Rights of the Company. See "Certain Antitakeover Provisions -- Rights Agreement." Certain Antitakeover Provisions.................... Certain provisions of the Company's charter (the "Charter") and Bylaws (the "Bylaws"), as each will be in effect as of the consummation of the Offerings and the Distribution, and of the Maryland General Corporation Law (the "MGCL"), may make more difficult an acquisition of control of the Company in a transaction not approved by the Omega Worldwide Board of Directors (the "Omega Worldwide Board"). See "Description of Omega Worldwide Capital Stock" and "Certain Antitakeover Provisions." The Rights Plan will also make more difficult an acquisition of control of the Company in a transaction not approved by the Omega Worldwide Board. The Rights Plan and certain provisions of the Charter will not apply to Omega and its affiliates. See "Certain Antitakeover Provisions -- Rights Plan." Post-Distribution Dividend Policy........................ The primary objective of the Company is to achieve long-term growth. The Company intends to use its available funds to pursue business opportunities and, so long as such opportunities exist, does not anticipate the payment of any cash dividends on Omega Worldwide Common Stock in the foreseeable future. The authorization of dividends will be subject to the discretion of the Omega Worldwide Board. See "Dividend Policy." Interests of Executive Officers...................... Essel W. Bailey, Jr., Susan A. Kovach and David A. Stover are President and Chief Executive Officer, Vice President, General Counsel and Secretary, and Vice President and Chief Financial Officer, respectively, of Omega and serve in similar executive officer capacities for the Company. Mr. Bailey is also a director of the Company and Omega. F. Scott Kellman is Chief Operating Officer of Omega and Vice President of the Company. James P. Flaherty is Vice President-International of Omega and Chief Operating Officer of the Company. Todd P. Robinson serves in a non-executive capacity, as Assistant Vice President, of Omega, but serves in an executive capacity as Vice President of the Company. These officers have a significant interest in Omega and as such will receive shares of the Company. They will also receive options to acquire shares of the Company and they intend to purchase shares of the Company. See "Risk Factors -- Potential Conflicts of Interest" and "Certain Transactions." Transfer Agent and Registrar..................... First Chicago Trust Company of New York will be the Transfer Agent and Registrar for the Company after the Distribution and the Offerings. THE PRIMARY OFFERING Securities Offered............ 500,000 shares of Omega Worldwide Common Stock. Omega Worldwide Common Stock outstanding after Primary Offering.................... 11,250,000 shares (assuming consummation of the Secondary Offering, Rights Offering and Distribution and that no Additional Shares are issued). Use of Proceeds............... The Primary Offering is intended to provide funds to the Company for working capital and acquisitions and investments. See "Use of Proceeds." THE SECONDARY OFFERING Securities Offered............ 2,300,000 shares of Omega Worldwide Common Stock. Omega Worldwide Common Stock outstanding after Secondary Offering.................... 11,250,000 shares (assuming consummation of the Primary Offering, Rights Offering and Distribution and that no Additional Shares are issued). Trading Market................ There is currently no public market for Omega Worldwide Common Stock. The Omega Worldwide Common Stock has not been approved for listing on any national securities exchange, although application has been made to report the Omega Worldwide Common Stock on NASDAQ under the symbol "OWWI". Listing will not occur nor will there be any trading in Omega Worldwide Common Stock prior to the Trading Date. See "Risk Factors -- Absence of a Public Market for Omega Worldwide Common Stock" and "The Distribution -- Listing and Trading of Omega Worldwide Common Stock." Use of Proceeds............... The Company will not receive any of the proceeds from the sale of the Omega Worldwide Common Stock in the Secondary Offering. Rights Offering Obligation.... Shareholders of Omega as of the Record Date who purchase shares of Omega Worldwide Common Stock pursuant to the Secondary Offering will agree to exercise all Rights they may receive pursuant to the Rights Offering. THE RIGHTS OFFERING Securities Offered............ 2,250,000 Rights, exercisable for an aggregate of 2,250,000 shares of Omega Worldwide Common Stock, with 1,000,000 Additional Shares authorized for issuance to ensure that the Rights Investors will have the right to purchase an aggregate of 1,000,000 Unsubscribed Shares. Rights Record Date............ April 3, 1998. Subscription Right............ One Right, per every 4.0 shares of Omega Worldwide Common Stock, issued by the Company to each holder of Omega Worldwide Common Stock on the Rights Record Date. Each Right entitles the holder to purchase one share of Omega Worldwide Common Stock at the Subscription Price. See "The Rights Offering." Oversubscription Privilege.... A holder of Omega Worldwide Common Stock on the Rights Record Date who validly exercises all of such shareholder's Rights may also oversubscribe, at the Subscription Price, for additional shares of Omega Worldwide Common Stock. Only holders of Omega Worldwide Common Stock on the Rights Record Date will be entitled to the Oversubscription Privilege. See "The Rights Offering -- Oversubscription Privilege." Unsubscribed Shares........... Certain directors and officers of Omega and their affiliates will agree to acquire the Unsubscribed Shares at the Subscription Price and will be guaranteed the right to purchase an aggregate of 1,000,000 Unsubscribed Shares by the issuance of Additional Shares. See "The Rights Offering -- Unsubscribed Shares." Expiration Date............... April 23, 1998 at 5:00 p.m., Eastern Standard Time, or such later date as the Company may determine in its sole discretion. After such time, the Rights will become void and have no value. Subscription Price............ $7.50 per share. Method of Exercising Rights and Oversubscription Privilege................... Holders of Omega Worldwide Common Stock must properly complete the Rights Certificate accompanying this Prospectus indicating the number of Rights being exercised and whether the Oversubscription Privilege is being exercised. Prior to the Expiration Date, the subscriber must mail or deliver the Rights Certificate and the full Subscription Price for the shares subscribed for pursuant to the exercise of the Rights and the Oversubscription Privilege to the Subscription Agent. See "The Rights Offering -- Method of Exercising Rights" and "The Rights Offering -- Oversubscription Privilege." Transferability of Rights..... The Rights are not transferable. Subscription Agent............ First Chicago Trust Company of New York Use of Proceeds............... The Rights Offering is intended to provide funds to the Company for working capital and acquisitions and investments. See "Use of Proceeds." Federal Income Tax Consequences................ A shareholder of the Company generally should not recognize any gain or loss upon the receipt of a Right, the exercise of a Right or the lapse of a Right. See "The Rights Offering -- Federal Income Tax Consequences of the Rights Offering." Risk Factors.................. Shareholders should consider certain factors discussed under "Risk Factors," including risks associated with the assets that the Company will acquire and own, the Company's lack of operating history, potential conflicts of interest and the Company's dependence on Omega. THE DISTRIBUTION Distributing Company.......... Omega Healthcare Investors, Inc. Shares to be Distributed...... Approximately 5,200,000 shares of Omega Worldwide Common Stock, all of which are held by Omega. Distribution Ratio............ One share of Omega Worldwide Common Stock for every 3.77 Omega Common Shares. No certificates representing fractional shares of the Company will be issued in connection with the Distribution. In lieu of fractional shares, the Distribution Agent (as defined below) will aggregate and sell the fractional shares and distribute the cash proceeds on a pro rata basis to those holders otherwise entitled to a fractional interest. No payment need be made by, or will be accepted from, Omega shareholders for Omega Worldwide Common Stock to be received by them in the Distribution, nor will Omega shareholders be required to surrender or exchange Omega Common Shares, in order to receive Omega Worldwide Common Stock. See "The Distribution -- Manner of Effecting the Distribution." Background of and Reasons for the Distribution........ The Company will provide investment advisory and management services and hold equity and debt interests in companies engaged in providing sale/leaseback and other capital financing to healthcare service providers throughout the world. In connection with its management and other activities, the Company will operate under the Opportunity Agreement pursuant to which the Company and Omega will agree to provide each other with rights to participate in certain transactions and to make certain investments individually or jointly. In particular, the Company will have the right to pursue certain opportunities that Omega may determine it is unable to pursue (whether due to its status as a REIT or for other reasons) or does not elect to pursue. See "Business -- The Opportunity Agreement." The Distribution of Omega Worldwide Common Stock will provide Omega shareholders as of the Record Date with the ability to benefit from both the real estate operations of Omega and the business operations of the Company. Federal Income Tax Consequences................ An Omega shareholder will be treated as receiving a distribution from Omega in an amount equal to the fair market value of the Omega Worldwide Common Stock received by such shareholder plus any cash received in lieu of fractional shares. Depending on an Omega shareholder's adjusted tax basis and the amount of Omega's current and accumulated earnings and profits, the Distribution will result in ordinary income, a tax-free return of capital, capital gain or a combination thereof. Management anticipates that for a typical Omega shareholder the Distribution likely will result in an increase in the shareholder's tax-free return of capital and capital gain, but this result cannot be assured. See "The Distribution -- Federal Income Tax Consequences of the Distribution." Distribution Agent............ First Chicago Trust Company of New York Record Date................... February 1, 1998 (the "Record Date"). Distribution Date............. April 2, 1998 (the "Distribution Date"). Commencing on or after the Distribution Date, the Distribution Agent will begin mailing account statements reflecting ownership of Omega Worldwide Common Stock to holders of Omega Common Shares on the Record Date. Omega shareholders will not be required to make any payment or to take any other action to receive the Omega Worldwide Common Stock to which they are entitled in the Distribution. See "The Distribution -- Manner of Effecting the Distribution." Trading Market................ There is currently no public market for Omega Worldwide Common Stock. The Omega Worldwide Common Stock has not been approved for listing on any national securities exchange although application has been made to report the Omega Worldwide Common Stock on NASDAQ under the symbol "OWWI". Listing will not occur nor will there be any trading in Omega Worldwide Common Stock prior to the Trading Date. See "Risk Factors -- Absence of a Public Market for Omega Worldwide Common Stock" and "The Distribution -- Listing and Trading of Omega Worldwide Common Stock." BENEFITS OF THE OFFERINGS TO SELLING SHAREHOLDER As a result of the sale of 2,300,000 shares of the Company by Omega in the Secondary Offering, Omega will receive gross proceeds of $17,250,000 (based on an initial public offering price of $7.50 per share). The Company will not receive any proceeds from the sale of shares by Omega. Omega will, after the Offerings, own 1,000,000 shares of the Company valued at $7,500,000 (based on the initial public offering price of $7.50 per share). Omega may at any time after the Offerings sell or distribute to its shareholders its remaining equity interests in the Company. SUMMARY PRO FORMA FINANCIAL DATA The following table sets forth certain unaudited summary financial information for the Company on a combined pro forma basis. This summary information is qualified by, and should be read in conjunction with, the financial statements and notes thereto included elsewhere in this Prospectus. The pro forma information for the year ended November 30, 1997, assumes completion, in each case as of December 1, 1996 in determining operating data, and, in each case as of November 30, 1997, in determining balance sheet data, of the formation and capitalization of the Company, the related contribution of the Assets by Omega, and receipt of the proceeds of the Rights Offering. The pro forma financial information is not necessarily indicative of what the Company's financial position or results of operations would have been assuming the above events actually occurred as of the dates indicated, nor do they purport to project the Company's financial position or results of operations at any future date or for any future period. OMEGA WORLDWIDE, INC. CONDENSED PRO FORMA BALANCE SHEET NOVEMBER 30, 1997 (UNAUDITED) <TABLE> <CAPTION> PRO FORMA AS ADJUSTED HISTORICAL ADJUSTMENTS(A) FOR PROCEEDS(B) PRO FORMA ---------- -------------- --------------- --------- <S> <C> <C> <C> <C> ASSETS Cash.................................... $1,000 $ $16,125,000 $16,126,000 Investment in Principal Healthcare Finance Limited...................... Subordinated loan.................. 23,805,000 23,805,000 Common stock....................... 5,296,612 5,296,612 Omega (UK) Limited and other assets..... 150,000 150,000 ------ ----------- ----------- ----------- TOTAL ASSETS.............................. $1,000 $29,251,612 $16,125,000 $45,377,612 ====== =========== =========== =========== SHAREHOLDER'S EQUITY Common stock............................ $ 100 $ 849,900 $ 225,000 $ 1,075,000 Paid-in Capital......................... 900 28,401,712 15,900,000 44,302,612 ------ ----------- ----------- ----------- TOTAL LIABILITIES & EQUITY................ $1,000 $29,251,612 $16,125,000 $45,377,612 ====== =========== =========== =========== </TABLE> - ------------------------- (A) Contribution by Omega of investment in Principal, recorded at Omega's carrying value, in exchange for 8,499,000 fully paid shares of Omega Worldwide Common Stock. The Subordinated Loan earns interest at the rate of 11.83% with annual increases of 3%, and is due in December 2000. The common stock investment represents 33.375% of the outstanding voting stock of Principal. These investments are stated at Omega's original cost basis in pounds sterling as adjusted for translation to dollars. Omega has not previously recognized any writedowns or other adjustments to these investments. Based on circumstances at the date of the respective transactions, no values were ascribed to the warrants issued by Principal (See Note 7 to Principal's financial statements concerning valuation of warrants). The currency swap arrangement was entered into in order to hedge the currency risk associated with the Company's investment in Principal. The carrying value of the investment in Principal is based on the rate established in the forward exchange contract, and therefore no amount is assigned to the swap arrangement. Foreign exchange rate contracts mitigate the effect of currency movements because any gain or loss on the contract offsets any losses or gains, respectively, on the investment in Principal. (B) Proceeds of issuance of 2,250,000 shares of the company to its shareholders pursuant to the Rights Offering at $7.50 per share (less estimated offering and registration costs of $750,000). The Rights Investors will agree to purchase all of the Unsubscribed Shares at the Subscription Price. The Rights Investors will purchase 1,000,000 shares of Omega Worldwide Common Stock on the day after the Rights Record Date. The Subscription Agent will send each Rights Investor a written confirmation of the number of shares of Omega Worldwide Common Stock allocated to such Rights Investor on or promptly after the business day after the Expiration Date in the event the number of Unsubscribed Shares exceed 1,000,000. The Rights Investors must deliver payment for the remaining shares of Omega Worldwide Common Stock allocated to them, if any, on or prior to the fourth business day after the Expiration Date. The Company believes that all the Rights Investors are accredited investors and have the financial ability to fulfill their obligations to deliver such payments. (C) The carrying value of the investment in Common Stock of Principal exceeds the Company's proportionate share of Principal's equity by approximately $960,000 at August 31, 1997. The Company will amortize this amount over a period of 10 years. OMEGA WORLDWIDE, INC. CONDENSED PRO FORMA STATEMENT OF INCOME YEAR ENDED NOVEMBER 30, 1997 (UNAUDITED) <TABLE> <CAPTION> HISTORICAL PRO FORMA ---------- --------- <S> <C> <C> Revenue Advisory fees............................................. $ $ 1,764,000(A) Interest -- Subordinated Loan at the contractual yield (See Note 5 to Principal's financial statements)....... 2,843,000 ----------- Total Revenues......................................... 0 4,607,000 Expenses Costs of Services Provided................................ 1,174,000(B) General and Administrative................................ 507,000(C) -- ----------- Total Expenses......................................... 0 1,681,000 -- ----------- 0 2,926,000 Equity in loss of Principal................................. (331,000)(D) -- ----------- Income before income taxes.................................. 0 2,595,000 Provision for federal income taxes.......................... 0 (882,000)(E) -- ----------- Net income.................................................. $0 $ 1,713,000(F) == =========== Shares Outstanding.......................................... 11,250,000 Net income per share........................................ $0.15 </TABLE> - ------------------------- (A) Fees pursuant to management agreement at 0.9% of the Aggregate Book Value of Invested Assets. Invested assets for purposes of determining the reported fee amount are as follows (in $1,000); December $113,681; January $113,681; February $116,508; March $119,333; April $122,137; May $122,137; June $200,440; July $276,029; August $277,659; September $283,139; October $283,139; November $324,432, resulting in average net assets for the period ended November 30, 1997 of approximately $196 million. Management believes that the assignment of the existing management contract by Omega to the Company will not materially affect the revenue-producing activity or cost structure for services provided to Principal. (B) Actual historical costs of services provided by Omega (UK) Limited for the year ended November 30, 1997, Omega (UK) Limited, is the primary service provider for activities related to Principal. The reported amount represents direct costs incurred in the delivery of the services for which fee income has been recognized. (C) Comprises allocated share of costs of Omega pursuant to the provisions of the Services Agreement. Indirect costs incurred by Omega for the year ended November 30, 1997, which are allocated based on the relationship of assets under the Company's management to the combined total of those assets and Omega's assets. "Assets under the Company's management" refers to gross real estate investment. The net assets used for purposes of the allocation of these costs are as follows (in $1,000): <TABLE> <CAPTION> OMEGA COMPANY COMBINED ----- ------- -------- <S> <C> <C> <C> Quarter ended March 31, 1997.................. $670,965 $116,404 $ 787,369 Quarter ended June 30, 1997................... 682,316 272,716 955,032 Quarter ended September 30, 1997.............. 688,350 279,363 967,713 Quarter ended December 31, 1997*.............. 850,000 292,250 1,142,250 Average for 1997............................ 75.55% 24.45% 100.00% </TABLE> - ------------------------- * Data as of November 30, 1997 The Company's direct administrative costs, including the cost the Company expects it will incur on its own behalf for state taxes, investor relations, legal and accounting and similar items, are estimated to be approximately $650,000 to $700,000, are not factually supportable and therefore have been omitted. (D) Represents the Company's share (33.375%) of loss of Principal for the fiscal year ended August 31, 1997, plus amortization of $96,000 related to the excess of the carrying value of its investment over its proportionate share of Principal's underlying equity. Omega's ownership interest in Principal has been through an affiliate in which Omega owns only nonvoting stock. Accordingly, Omega stated its investment on the basis of its cost. On or about April 1, 1998, the affiliate will be liquidated, resulting in a pro-rata distribution of its investment in the voting shares of Principal to its shareholders including Omega. As a result of the liquidation of the affiliate, coupled with the recapitalization of Principal which occurred on January 15, 1998, Omega's nonvoting ownership interest will be converted to voting interest in Principal. Accordingly, of the shares of Principal received by Omega from the liquidation of the affiliate, 3,337,500 voting shares will be contributed to the Company. The Company's share of annual earnings which result from Principal's real estate acquisitions after August 31, 1997 is estimated to approximate $30,040 representing its share (33.375%) of the following pro-forma earning (in $1,000). <TABLE> <S> <C> <C> <C> Rent Income......................................... $ 6,745 ------- Costs and Expenses: Interest.......................................... $(4,697) Advisory fee...................................... (562) Depreciation...................................... (1,026) ------- Total Expenses...................................... (6,321) ------- Earnings before income taxes........................ 424 Provision for income taxes.......................... (335) ------- Net earnings........................................ $ 89 ======= </TABLE> The Company's share is deemed immaterial and has been omitted from the equity in loss of Principal. The Company will account for its investment in Principal using the equity method of accounting, and at no time does the Company expect its ownership will be more than 50%. Management has not selected the Company's year end. Should November 30 be the selected date, the equity in net earnings of Principal would be recognized on a three month lag basis. For the period of three months ended November 30, 1997, Principal reported net earnings before the extraordinary charge for prepayment of debt of $438,000 and a net loss after extraordinary charge of $1,123,000. The Company's share of net earnings before the extraordinary charge for the period is $146,000 ($.01 per share) and its share of net loss after the extraordinary charge for the period is $375,000 ($.03 per share). (E) There are no corporate income taxes in the State of Michigan. (F) The Company may issue up to 5,000,000 shares of Series B Preferred to Omega in the event the Company's Common Stock trades above $8.625 during the 30-day period following the Trading Date. Dividends related to such stock (8% per annum) would be recorded as a reduction in net earnings available to common shareholders and Income Applicable to Common Stock (net of preferred stock dividends) would be presented on the face of the income statement. Should more than 12,000 shares of Omega Worldwide Common Stock trade at the level of $13.4375 per share on a given date during the 30-day period following the Trading Date, all of the authorized shares of Preferred Stock would be issued to Omega. The Company's annual preferred dividends for this issue would be $4,000,000 (the equivalent of $.36 per common share) which amount would be reported as a reduction of earnings available to the Company's common shareholders.
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and Consolidated Financial Statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless the context indicates otherwise, references herein to the "Company" or "First Wave" shall mean First Wave Marine, Inc. and its predecessors and subsidiaries and assumes the consummation of the Exchange (as defined herein), and all financial data is given for such combined entity unless specified otherwise. All references to shares of Common Stock of the Company, $.01 par value (the "Common Stock") give effect to the 10.65-for-one stock split effected November 20, 1997. THE COMPANY First Wave is a leading provider of shipyard and related environmental services to the offshore support vessel, offshore barge and inland marine industries. The Company offers a full range of repair, conversion, new construction and related environmental services, including cleaning, degassing and wastewater treatment. Following the consummation of a pending acquisition, the Company will significantly expand its operations and capacity, particularly into the offshore drilling industry. The Company will be the largest shipyard operator in the Houston-Galveston area with five of the eight major shipyard facilities in this strategic location. First Wave believes that, following the pending acquisition, it will be the only "one-stop" source of all shipyard services for all segments of the offshore support vessel, offshore barge and inland marine markets in Texas. Since it acquired its first facility in December 1993, First Wave has significantly improved revenues and profitability. The Company's success has been the product of a focused strategy to build a high quality, dedicated workforce, provide a high level of customer service and optimize the mix of its services to maximize capacity utilization. As a result, revenues grew to $28.0 million in 1996 from $15.3 million in 1994 while EBITDA improved to $4.4 million from a loss of $23,000 over the same period. In the first nine months of 1997, the Company generated revenues of $24.5 million and EBITDA of $7.2 million, compared to revenues and EBITDA of $19.9 million and $1.8 million, respectively, in the first nine months of 1996. The Company believes that as a result of its strategy and planned expansion, it is well positioned to meet the growing demand for its services. First Wave is experiencing strong demand growth for all of its services primarily as a result of: (i) higher repair activity due to the aging offshore support vessel and barge fleets; (ii) greater customer requirements for repair and related environmental services due to increased utilization and consolidation of the offshore support vessel and barge fleets; (iii) increasing customer demand to convert and upgrade vessels in response to changing market conditions; and (iv) increased levels of new vessel construction. To meet this demand, First Wave plans to utilize capacity available at its newly acquired facilities, as well as expand into new markets, in particular the offshore drilling industry. The Company believes that this will enable it to perform a greater number of projects and increase its revenues, while leveraging the economies of scale available to a geographically concentrated multi-shipyard operator. BUSINESS STRATEGY The Company's strategy is to leverage its reputation as an efficient, reliable, customer driven shipyard operator providing a diversified range of shipyard services to the offshore support vessel, offshore drilling, offshore barge and inland marine industries. The Company intends to utilize its proven strengths in order to expand into the Gulf of Mexico offshore drilling market. Key elements of this strategy are: [photograph of power generation barge under tow] Hull of power generation barge constructed by First Wave [aerial photograph of shipyard] East Pelican Island Shipyard servicing offshore drilling rigs [photograph of offshore supply boat] Offshore support vessel serving Gulf Coast drilling rigs [photograph of ocean-going ship] Offshore petrochemical carrier serving oil and gas industry [photograph of welder] [photograph of inland tank barge by onshore gas free facility] Inland tank barge, degassing facility, Brady Island Shipyard - Maintaining a High Quality Dedicated Workforce. The Company invests in its employees through training, superior benefits and the fostering of a close-knit, supportive culture. As a result, the Company has not experienced the significant labor shortages and attrition suffered by many Gulf Coast shipyards and has consistently posted an award-winning safety record. Management believes the Company has been able to maintain stable manpower levels and has flattened the labor force highs and lows typical in the shipyard industry through a superb relationship with its labor force, sophisticated forecasting of labor needs, the implementation of its strategic alliances and optimization of its mix of new construction and repair services. - Development of Strategic Alliances with Key Customers. The Company has developed a "contract rate" system which it uses to form strategic alliances with its key customers. The contract rate system enables the Company to baseload its facilities with pre-booked work, improve planning and execution of jobs through a cooperative process with the customer and more effectively project its revenues and labor needs for the year. In return, the alliance partner receives volume based pricing, assures itself of needed drydock capacity, gains the ability to accurately budget its work, benefits from improved turnaround on jobs and receives other services on a preferred basis. - Continuous Optimization of the Mix of Shipyard Services. The Company generally negotiates flexible delivery dates for new construction which greatly contributes to the efficiency of its shipyards. During periods when demand for repair services is lower, the Company shifts workers to new construction as a means of absorbing excess labor. By continuously optimizing its mix of activities, the Company ensures that its quality work force remains intact and motivated, and costs associated with attrition are reduced. As a result of this strategy, the Company believes that it can maximize its margins by allocating labor to higher margin repair work or can absorb excess labor by shifting it to new construction, as demand dictates. - One-Stop Source for Shipyard Services. In addition to its core shipyard repair and construction services, the Company offers a range of related environmental services at its facilities, including tank cleaning, degassing and wastewater treatment. Following the pending acquisitions, complementary services such as these will enable the Company to become the only one-stop source of all shipyard services for all segments of the offshore support vessel, offshore barge and inland marine markets in Texas. - Focus on Core Geographic Areas: Houston and Galveston. The Houston-Galveston area is a very strategic location for its shipyards, since three of the largest U.S. fleets of inland tank barges are based in the Houston Ship Channel area. Additionally, the growing offshore support vessel and barge fleets in the Gulf of Mexico can be efficiently served from the Company's Houston and Galveston locations. Management believes the expansion of the East Pelican Island and West Pelican Island facilities in Galveston to service the offshore drilling industry is especially strategic since Galveston is in close proximity to offshore Gulf of Mexico drilling activity, thereby minimizing rig transit costs and downtime. - Leveraging Economies of Scale. With all of its shipyards within a 50-mile corridor, management can more effectively operate the facilities and consolidate overhead. Additionally, the proximity of the shipyards allows for centralizing many administrative functions. Management believes the uniformity of state regulations and the volume leverage gained from using single suppliers among all its facilities, as well as the potential interchangeability of the labor force, provides economic benefits for the Company. - Expansion into the Offshore Gulf of Mexico Market. Upon consummation of the Bludworth Acquisition and the completion of the improvements to the East Pelican Island shipyard, the Company will have two adjacent shipyard facilities in Galveston, Texas, which will enable it to take advantage of the rising demand for shipyard services to the oil and gas industry in the Gulf of Mexico. Management has planned its expansion to diversify the Company's business lines into services for offshore drilling rigs, larger offshore support vessels and oil and gas related ship conversions. RECENT DEVELOPMENTS Greens Bayou Acquisition. The Company acquired the Greens Bayou Facility on August 11, 1997. This facility is specifically designed to service the barge industry with seven haul-up facilities, including a major six-position rail transfer system. The Company believes it can efficiently operate this Houston area shipyard by consolidating overhead with its nearby Brady Island shipyard. These two shipyards will share accounting, training, sales, estimating, risk management and general administrative functions. The potential interchangeability of the labor force with the Brady Island facility, as well as the ability of Greens Bayou barge customers to use Brady Island's environmental services, should also result in economic benefits for the Company. The facility provides necessary capacity for the Company to meet excess demand for its inland barge services, especially due to the increasing utilization of its Brady Island drydocks for the offshore support vessel market. East Pelican Island Acquisition. After acquiring PMB Engineering Inc.'s lease of the 110-acre East Pelican Island facility in Galveston, Texas, the Company signed an amendment to such lease with Galveston Wharves providing for a term of up to 99 years. For 1998, the Company has budgeted $24.4 million in capital improvements to this facility. Upon completion of these planned capital improvements, First Wave will be able to expand its business lines into providing shipyard services for offshore drilling rigs, larger offshore support vessels and oil and gas related ship conversions. The Bludworth Acquisition. On October 15, 1997, the Company entered into a purchase agreement to acquire (the "Bludworth Acquisition") all of the outstanding capital stock of John Bludworth Marine, Inc. ("Bludworth"). The purchase price consists of $15.0 million in cash and the issuance of a $4.0 million promissory note. Bludworth is an established regional shipbuilder focusing on offshore support vessel repair, as well as inland barge repair and inland boat construction and repair. The Bludworth Acquisition expands the Company's Houston-Galveston base of operations in a cost efficient manner, adding significant new drydock capacity within its area of operation and diversifying its current mix of services to include expanded capabilities in the offshore and the inland boat segment of the marine industry. The Bludworth Acquisition provides the Company with two additional shipyards: (i) the JBM Pasadena facility in Pasadena, Texas, which is near the Company's other Houston shipyards and (ii) the West Pelican Island facility which is adjacent to the East Pelican Island facility in Galveston, Texas. The Bludworth Acquisition will close simultaneously with the Offering. Additional Galveston Shipyard. The Company has entered into a non-binding letter of intent to purchase certain shipyard assets, including real property and improvements, in Galveston, Texas ("Other Galveston Assets") for $4.5 million. There can be no assurance that such transaction will be consummated or consummated on the terms described herein. SUMMARY SHIPYARD INFORMATION The Company's shipyards are presented below, indicating the markets served at each location. All shipyards offer or will offer repair, conversion and new construction services. In addition, the Brady Island facility offers environmental services. <TABLE> <CAPTION> OFFSHORE OFFSHORE NO. OF SUPPORT INLAND INLAND OFFSHORE DRILLING ACRES VESSELS BARGES BOATS BARGES RIGS SHIPS ------ -------- ------ ------ -------- -------- ----- <S> <C> <C> <C> <C> <C> <C> <C> HOUSTON AREA SHIPYARDS: Brady Island......................... 23 X X X X Greens Bayou......................... 20 X X JBM Pasadena(a)...................... 63 X X X X GALVESTON SHIPYARDS: East Pelican Island.................. 110 X X X X West Pelican Island(a)............... 23 X X X X </TABLE> - --------------- (a) To be acquired in the Bludworth Acquisition. SUMMARY The Company believes that the additional financial resources and increased financial flexibility afforded by the Offering will position the Company to fund its strategic expansion plan and to participate in the ongoing consolidation of the shipbuilding industry. Management believes that the expansion of the Company's capacity and capabilities as a result of recent and pending acquisitions have positioned First Wave to benefit from the improved demand for shipyard services in the offshore oil and gas and inland marine industries. THE OFFERING NOTES OFFERED.............. $90,000,000 aggregate principal amount of % Senior Notes due 2008. MATURITY................... , 2008. INTEREST................... The Notes will bear interest at a rate of % per annum, payable semi-annually in arrears on and of each year, commencing , 1998. RANKING.................... The Notes will be senior obligations of the Company, will rank pari passu in right of payment with all existing and future unsecured senior Indebtedness (as defined herein) of the Company and will rank senior in right of payment to any future Subordinated Indebtedness (as defined herein) of the Company. As of December 31, 1997, after giving pro forma effect to the sale of the Notes and the application of the net proceeds therefrom, on a consolidated basis the Company would have had approximately $90.2 million of unsecured senior Indebtedness outstanding and no Subordinated Indebtedness outstanding. The Notes will be effectively subordinated to all secured Indebtedness of the Company to the extent of the assets securing such Indebtedness. As of December 31, 1997, after giving pro forma effect to the sale of the Notes and the application of the net proceeds therefrom, on a consolidated basis the Company would have had approximately $9.5 million of secured senior Indebtedness outstanding. The Company is a holding company and substantially all of its operations are conducted through its operating subsidiaries. Accordingly, except in the case of Restricted Subsidiaries (which will guarantee the obligations of the Company under the Notes), the Notes will be effectively subordinated to all Indebtedness and other obligations of the Company's subsidiaries. The Indenture pursuant to which the Notes will be issued permits the Company and its subsidiaries to incur additional Indebtedness, including senior Indebtedness and secured Indebtedness, subject to certain limitations. See "Capitalization" and "Description of Notes -- Ranking" and "-- Certain Covenants -- Incurrence of Indebtedness." SECURITY................... Upon the consummation of the Offering, the Company will purchase and pledge to the Trustee (as defined herein), for the benefit of the holders of the Notes, the Pledged Securities, which will be in such amount as will be sufficient, upon receipt of scheduled interest and principal payments, to provide for payment in full when due of the first two scheduled semi-annual interest payments on the Notes. The Company expects to use approximately $9.5 million of the net proceeds from the sale of the Notes to purchase the Pledged Securities, although the actual purchase price for such securities will vary depending on the interest rates of Government Securities (as defined herein) prevailing at the time of the purchase of the Pledged Securities. The Pledged Securities will be pledged as security for the repayment of the principal of and interest on the Notes and all other obligations under the Indenture. When an interest payment is due, the Company may either deposit sufficient funds to pay the interest sched- uled to be paid or direct the Trustee to release from the Pledge Account (as defined herein) funds sufficient to pay the interest scheduled. In the event the Company exercises the former option, the Pledge Agreement provides the Company may direct the Trustee to release proceeds or the Pledged Securities from the Pledge Account in a like amount. If the Company makes the first two scheduled interest payments on the Notes in a timely manner and no Default (as defined herein) or Event of Default (as defined herein) is then continuing, the remaining Pledged Securities, if any, will be released from the Pledge Account and the Notes will thereafter be unsecured obligations of the Company. See "Description of Notes -- Security." SUBSIDIARY GUARANTEES...... The obligations of the Company under the Notes will be fully and unconditionally guaranteed on a senior unsecured basis jointly and severally by all Restricted Subsidiaries. All of the Company's existing Subsidiaries will initially be Restricted Subsidiaries (the "Initial Restricted Subsidiaries"), and future Restricted Subsidiaries of the Company will be required to issue Subsidiary Guarantees. All future subsidiaries of the Company will not necessarily be Restricted Subsidiaries. Each Subsidiary Guarantee will be a senior unsecured obligation of the applicable Restricted Subsidiary, will rank pari passu in right of payment with all existing and future unsecured senior Indebtedness of such Restricted Subsidiary and will rank senior in right of payment to any Subordinated Indebtedness of such Restricted Subsidiary. As of December 31, 1997, after giving effect to the sale of the Notes and the application of the estimated net proceeds therefrom, the aggregate amount of outstanding senior Indebtedness of the Initial Restricted Subsidiaries would, without regard to the Subsidiary Guarantees, have been approximately $9.7 million. Furthermore, the holders of the Notes will not share in the proceeds from the sale of or other realization upon any assets of such Restricted Subsidiary in which the Restricted Subsidiary has granted security interests until the repayment of the indebtedness secured thereby. Under certain circumstances, a Restricted Subsidiary may be designated an Unrestricted Subsidiary (as defined herein) and its Subsidiary Guarantee released. See "Description of Notes -- Subsidiary Guarantees." OPTIONAL REDEMPTION........ The Notes will be redeemable, at the option of the Company, in whole or in part, at any time on or after , 2003, at the redemption prices set forth herein, plus accrued and unpaid interest thereon to the applicable redemption date. Notwithstanding the foregoing, on or prior to , 2001, the Company may redeem at any time or from time to time up to 35% of the aggregate principal amount of the Notes at a redemption price equal to % of the principal amount thereof, plus accrued and unpaid interest thereon to the applicable redemption date, with the net proceeds of a Public Equity Offering; provided, that at least 65% of the aggregate principal amount of the Notes initially issued remains outstanding after giving effect to the redemption thereof. See "Description of Notes -- Optional Redemption." CHANGE OF CONTROL.......... Upon the occurrence of a Change of Control, the Company will be required to make an offer to repurchase all of the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest thereon to the repurchase date. See "Description of Notes -- Repurchase at the Option of Holders -- Change of Control." CERTAIN COVENANTS.......... The Indenture will contain certain covenants that, among other things, limit the ability of the Company and its Restricted Subsidiaries to incur additional Indebtedness, pay dividends or make other distributions, repurchase any capital stock or Subordinated Indebtedness, make certain investments, create certain liens, enter into certain transactions with affiliates, sell assets, enter into certain mergers and consolidations, allow Restricted Subsidiaries to create certain dividend and other payment restrictions, enter into sale and leaseback transactions, and issue or sell capital stock of Restricted Subsidiaries. See "Description of Notes -- Certain Covenants." EVENTS OF DEFAULT.......... The Indenture will contain certain events of default, including a default in the payment when due of interest, principal or premium, if any, on the Notes, the failure by the Company to comply with certain provisions of the Indenture, certain defaults under other Indebtedness, the failure by the Company to pay certain judgments rendered against the Company, certain events of bankruptcy or insolvency, certain events of breach, default, repudiation or unenforceability of the Pledge Agreement, and the failure of the Subsidiary Guarantees to be in full force and effect. The Company is required to deliver to the Trustee annually a statement regarding compliance with the Indenture, and the Company is required, upon becoming aware of any default to deliver to the Trustee a statement specifying such default. See "Description of Notes -- Events of Default and Remedies." USE OF PROCEEDS............ To fund the Bludworth Acquisition, to fund the Company's anticipated capital requirements over the next 12 months, including capital expenditures to upgrade the East Pelican Island and West Pelican Island shipyard facilities in Galveston, to repay a portion of the Company's indebtedness, to fund the purchase of the Pledged Securities and for general corporate purposes. See "Use of Proceeds."
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and Consolidated Financial Statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless the context indicates otherwise, references herein to the "Company" or "First Wave" shall mean First Wave Marine, Inc. and its predecessors and subsidiaries and assumes the consummation of the Exchange (as defined herein), and all financial data is given for such combined entity unless specified otherwise. All references to shares of Common Stock of the Company, $.01 par value (the "Common Stock") give effect to the 10.65-for-one stock split effected November 20, 1997. THE COMPANY First Wave is a leading provider of shipyard and related environmental services to the offshore support vessel, offshore barge and inland marine industries. The Company offers a full range of repair, conversion, new construction and related environmental services, including cleaning, degassing and wastewater treatment. Following the consummation of a pending acquisition, the Company will significantly expand its operations and capacity, particularly into the offshore drilling industry. The Company will be the largest shipyard operator in the Houston-Galveston area with five of the eight major shipyard facilities in this strategic location. First Wave believes that, following the pending acquisition, it will be the only "one-stop" source of all shipyard services for all segments of the offshore support vessel, offshore barge and inland marine markets in Texas. Since it acquired its first facility in December 1993, First Wave has significantly improved revenues and profitability. The Company's success has been the product of a focused strategy to build a high quality, dedicated workforce, provide a high level of customer service and optimize the mix of its services to maximize capacity utilization. As a result, revenues grew to $28.0 million in 1996 from $15.3 million in 1994 while EBITDA improved to $4.4 million from a loss of $23,000 over the same period. In the first nine months of 1997, the Company generated revenues of $24.5 million and EBITDA of $7.2 million, compared to revenues and EBITDA of $19.9 million and $1.8 million, respectively, in the first nine months of 1996. The Company believes that as a result of its strategy and planned expansion, it is well positioned to meet the growing demand for its services. First Wave is experiencing strong demand growth for all of its services primarily as a result of: (i) higher repair activity due to the aging offshore support vessel and barge fleets; (ii) greater customer requirements for repair and related environmental services due to increased utilization and consolidation of the offshore support vessel and barge fleets; (iii) increasing customer demand to convert and upgrade vessels in response to changing market conditions; and (iv) increased levels of new vessel construction. To meet this demand, First Wave plans to utilize capacity available at its newly acquired facilities, as well as expand into new markets, in particular the offshore drilling industry. The Company believes that this will enable it to perform a greater number of projects and increase its revenues, while leveraging the economies of scale available to a geographically concentrated multi-shipyard operator. BUSINESS STRATEGY The Company's strategy is to leverage its reputation as an efficient, reliable, customer driven shipyard operator providing a diversified range of shipyard services to the offshore support vessel, offshore drilling, offshore barge and inland marine industries. The Company intends to utilize its proven strengths in order to expand into the Gulf of Mexico offshore drilling market. Key elements of this strategy are: [photograph of power generation barge under tow] Hull of power generation barge constructed by First Wave [aerial photograph of shipyard] East Pelican Island Shipyard servicing offshore drilling rigs [photograph of offshore supply boat] Offshore support vessel serving Gulf Coast drilling rigs [photograph of ocean-going ship] Offshore petrochemical carrier serving oil and gas industry [photograph of welder] [photograph of inland tank barge by onshore gas free facility] Inland tank barge, degassing facility, Brady Island Shipyard - Maintaining a High Quality Dedicated Workforce. The Company invests in its employees through training, superior benefits and the fostering of a close-knit, supportive culture. As a result, the Company has not experienced the significant labor shortages and attrition suffered by many Gulf Coast shipyards and has consistently posted an award-winning safety record. Management believes the Company has been able to maintain stable manpower levels and has flattened the labor force highs and lows typical in the shipyard industry through a superb relationship with its labor force, sophisticated forecasting of labor needs, the implementation of its strategic alliances and optimization of its mix of new construction and repair services. - Development of Strategic Alliances with Key Customers. The Company has developed a "contract rate" system which it uses to form strategic alliances with its key customers. The contract rate system enables the Company to baseload its facilities with pre-booked work, improve planning and execution of jobs through a cooperative process with the customer and more effectively project its revenues and labor needs for the year. In return, the alliance partner receives volume based pricing, assures itself of needed drydock capacity, gains the ability to accurately budget its work, benefits from improved turnaround on jobs and receives other services on a preferred basis. - Continuous Optimization of the Mix of Shipyard Services. The Company generally negotiates flexible delivery dates for new construction which greatly contributes to the efficiency of its shipyards. During periods when demand for repair services is lower, the Company shifts workers to new construction as a means of absorbing excess labor. By continuously optimizing its mix of activities, the Company ensures that its quality work force remains intact and motivated, and costs associated with attrition are reduced. As a result of this strategy, the Company believes that it can maximize its margins by allocating labor to higher margin repair work or can absorb excess labor by shifting it to new construction, as demand dictates. - One-Stop Source for Shipyard Services. In addition to its core shipyard repair and construction services, the Company offers a range of related environmental services at its facilities, including tank cleaning, degassing and wastewater treatment. Following the pending acquisitions, complementary services such as these will enable the Company to become the only one-stop source of all shipyard services for all segments of the offshore support vessel, offshore barge and inland marine markets in Texas. - Focus on Core Geographic Areas: Houston and Galveston. The Houston-Galveston area is a very strategic location for its shipyards, since three of the largest U.S. fleets of inland tank barges are based in the Houston Ship Channel area. Additionally, the growing offshore support vessel and barge fleets in the Gulf of Mexico can be efficiently served from the Company's Houston and Galveston locations. Management believes the expansion of the East Pelican Island and West Pelican Island facilities in Galveston to service the offshore drilling industry is especially strategic since Galveston is in close proximity to offshore Gulf of Mexico drilling activity, thereby minimizing rig transit costs and downtime. - Leveraging Economies of Scale. With all of its shipyards within a 50-mile corridor, management can more effectively operate the facilities and consolidate overhead. Additionally, the proximity of the shipyards allows for centralizing many administrative functions. Management believes the uniformity of state regulations and the volume leverage gained from using single suppliers among all its facilities, as well as the potential interchangeability of the labor force, provides economic benefits for the Company. - Expansion into the Offshore Gulf of Mexico Market. Upon consummation of the Bludworth Acquisition and the completion of the improvements to the East Pelican Island shipyard, the Company will have two adjacent shipyard facilities in Galveston, Texas, which will enable it to take advantage of the rising demand for shipyard services to the oil and gas industry in the Gulf of Mexico. Management has planned its expansion to diversify the Company's business lines into services for offshore drilling rigs, larger offshore support vessels and oil and gas related ship conversions. RECENT DEVELOPMENTS Greens Bayou Acquisition. The Company acquired the Greens Bayou Facility on August 11, 1997. This facility is specifically designed to service the barge industry with seven haul-up facilities, including a major six-position rail transfer system. The Company believes it can efficiently operate this Houston area shipyard by consolidating overhead with its nearby Brady Island shipyard. These two shipyards will share accounting, training, sales, estimating, risk management and general administrative functions. The potential interchangeability of the labor force with the Brady Island facility, as well as the ability of Greens Bayou barge customers to use Brady Island's environmental services, should also result in economic benefits for the Company. The facility provides necessary capacity for the Company to meet excess demand for its inland barge services, especially due to the increasing utilization of its Brady Island drydocks for the offshore support vessel market. East Pelican Island Acquisition. After acquiring PMB Engineering Inc.'s lease of the 110-acre East Pelican Island facility in Galveston, Texas, the Company signed an amendment to such lease with Galveston Wharves providing for a term of up to 99 years. For 1998, the Company has budgeted $24.4 million in capital improvements to this facility. Upon completion of these planned capital improvements, First Wave will be able to expand its business lines into providing shipyard services for offshore drilling rigs, larger offshore support vessels and oil and gas related ship conversions. The Bludworth Acquisition. On October 15, 1997, the Company entered into a purchase agreement to acquire (the "Bludworth Acquisition") all of the outstanding capital stock of John Bludworth Marine, Inc. ("Bludworth"). The purchase price consists of $15.0 million in cash and the issuance of a $4.0 million promissory note. Bludworth is an established regional shipbuilder focusing on offshore support vessel repair, as well as inland barge repair and inland boat construction and repair. The Bludworth Acquisition expands the Company's Houston-Galveston base of operations in a cost efficient manner, adding significant new drydock capacity within its area of operation and diversifying its current mix of services to include expanded capabilities in the offshore and the inland boat segment of the marine industry. The Bludworth Acquisition provides the Company with two additional shipyards: (i) the JBM Pasadena facility in Pasadena, Texas, which is near the Company's other Houston shipyards and (ii) the West Pelican Island facility which is adjacent to the East Pelican Island facility in Galveston, Texas. The Bludworth Acquisition will close simultaneously with the Offering. Additional Galveston Shipyard. The Company has entered into a non-binding letter of intent to purchase certain shipyard assets, including real property and improvements, in Galveston, Texas ("Other Galveston Assets") for $4.5 million. There can be no assurance that such transaction will be consummated or consummated on the terms described herein. SUMMARY SHIPYARD INFORMATION The Company's shipyards are presented below, indicating the markets served at each location. All shipyards offer or will offer repair, conversion and new construction services. In addition, the Brady Island facility offers environmental services. <TABLE> <CAPTION> OFFSHORE OFFSHORE NO. OF SUPPORT INLAND INLAND OFFSHORE DRILLING ACRES VESSELS BARGES BOATS BARGES RIGS SHIPS ------ -------- ------ ------ -------- -------- ----- <S> <C> <C> <C> <C> <C> <C> <C> HOUSTON AREA SHIPYARDS: Brady Island......................... 23 X X X X Greens Bayou......................... 20 X X JBM Pasadena(a)...................... 63 X X X X GALVESTON SHIPYARDS: East Pelican Island.................. 110 X X X X West Pelican Island(a)............... 23 X X X X </TABLE> - --------------- (a) To be acquired in the Bludworth Acquisition. SUMMARY The Company believes that the additional financial resources and increased financial flexibility afforded by the Offering will position the Company to fund its strategic expansion plan and to participate in the ongoing consolidation of the shipbuilding industry. Management believes that the expansion of the Company's capacity and capabilities as a result of recent and pending acquisitions have positioned First Wave to benefit from the improved demand for shipyard services in the offshore oil and gas and inland marine industries. THE OFFERING NOTES OFFERED.............. $90,000,000 aggregate principal amount of % Senior Notes due 2008. MATURITY................... , 2008. INTEREST................... The Notes will bear interest at a rate of % per annum, payable semi-annually in arrears on and of each year, commencing , 1998. RANKING.................... The Notes will be senior obligations of the Company, will rank pari passu in right of payment with all existing and future unsecured senior Indebtedness (as defined herein) of the Company and will rank senior in right of payment to any future Subordinated Indebtedness (as defined herein) of the Company. As of December 31, 1997, after giving pro forma effect to the sale of the Notes and the application of the net proceeds therefrom, on a consolidated basis the Company would have had approximately $90.2 million of unsecured senior Indebtedness outstanding and no Subordinated Indebtedness outstanding. The Notes will be effectively subordinated to all secured Indebtedness of the Company to the extent of the assets securing such Indebtedness. As of December 31, 1997, after giving pro forma effect to the sale of the Notes and the application of the net proceeds therefrom, on a consolidated basis the Company would have had approximately $9.5 million of secured senior Indebtedness outstanding. The Company is a holding company and substantially all of its operations are conducted through its operating subsidiaries. Accordingly, except in the case of Restricted Subsidiaries (which will guarantee the obligations of the Company under the Notes), the Notes will be effectively subordinated to all Indebtedness and other obligations of the Company's subsidiaries. The Indenture pursuant to which the Notes will be issued permits the Company and its subsidiaries to incur additional Indebtedness, including senior Indebtedness and secured Indebtedness, subject to certain limitations. See "Capitalization" and "Description of Notes -- Ranking" and "-- Certain Covenants -- Incurrence of Indebtedness." SECURITY................... Upon the consummation of the Offering, the Company will purchase and pledge to the Trustee (as defined herein), for the benefit of the holders of the Notes, the Pledged Securities, which will be in such amount as will be sufficient, upon receipt of scheduled interest and principal payments, to provide for payment in full when due of the first two scheduled semi-annual interest payments on the Notes. The Company expects to use approximately $9.5 million of the net proceeds from the sale of the Notes to purchase the Pledged Securities, although the actual purchase price for such securities will vary depending on the interest rates of Government Securities (as defined herein) prevailing at the time of the purchase of the Pledged Securities. The Pledged Securities will be pledged as security for the repayment of the principal of and interest on the Notes and all other obligations under the Indenture. When an interest payment is due, the Company may either deposit sufficient funds to pay the interest sched- uled to be paid or direct the Trustee to release from the Pledge Account (as defined herein) funds sufficient to pay the interest scheduled. In the event the Company exercises the former option, the Pledge Agreement provides the Company may direct the Trustee to release proceeds or the Pledged Securities from the Pledge Account in a like amount. If the Company makes the first two scheduled interest payments on the Notes in a timely manner and no Default (as defined herein) or Event of Default (as defined herein) is then continuing, the remaining Pledged Securities, if any, will be released from the Pledge Account and the Notes will thereafter be unsecured obligations of the Company. See "Description of Notes -- Security." SUBSIDIARY GUARANTEES...... The obligations of the Company under the Notes will be fully and unconditionally guaranteed on a senior unsecured basis jointly and severally by all Restricted Subsidiaries. All of the Company's existing Subsidiaries will initially be Restricted Subsidiaries (the "Initial Restricted Subsidiaries"), and future Restricted Subsidiaries of the Company will be required to issue Subsidiary Guarantees. All future subsidiaries of the Company will not necessarily be Restricted Subsidiaries. Each Subsidiary Guarantee will be a senior unsecured obligation of the applicable Restricted Subsidiary, will rank pari passu in right of payment with all existing and future unsecured senior Indebtedness of such Restricted Subsidiary and will rank senior in right of payment to any Subordinated Indebtedness of such Restricted Subsidiary. As of December 31, 1997, after giving effect to the sale of the Notes and the application of the estimated net proceeds therefrom, the aggregate amount of outstanding senior Indebtedness of the Initial Restricted Subsidiaries would, without regard to the Subsidiary Guarantees, have been approximately $9.7 million. Furthermore, the holders of the Notes will not share in the proceeds from the sale of or other realization upon any assets of such Restricted Subsidiary in which the Restricted Subsidiary has granted security interests until the repayment of the indebtedness secured thereby. Under certain circumstances, a Restricted Subsidiary may be designated an Unrestricted Subsidiary (as defined herein) and its Subsidiary Guarantee released. See "Description of Notes -- Subsidiary Guarantees." OPTIONAL REDEMPTION........ The Notes will be redeemable, at the option of the Company, in whole or in part, at any time on or after , 2003, at the redemption prices set forth herein, plus accrued and unpaid interest thereon to the applicable redemption date. Notwithstanding the foregoing, on or prior to , 2001, the Company may redeem at any time or from time to time up to 35% of the aggregate principal amount of the Notes at a redemption price equal to % of the principal amount thereof, plus accrued and unpaid interest thereon to the applicable redemption date, with the net proceeds of a Public Equity Offering; provided, that at least 65% of the aggregate principal amount of the Notes initially issued remains outstanding after giving effect to the redemption thereof. See "Description of Notes -- Optional Redemption." CHANGE OF CONTROL.......... Upon the occurrence of a Change of Control, the Company will be required to make an offer to repurchase all of the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest thereon to the repurchase date. See "Description of Notes -- Repurchase at the Option of Holders -- Change of Control." CERTAIN COVENANTS.......... The Indenture will contain certain covenants that, among other things, limit the ability of the Company and its Restricted Subsidiaries to incur additional Indebtedness, pay dividends or make other distributions, repurchase any capital stock or Subordinated Indebtedness, make certain investments, create certain liens, enter into certain transactions with affiliates, sell assets, enter into certain mergers and consolidations, allow Restricted Subsidiaries to create certain dividend and other payment restrictions, enter into sale and leaseback transactions, and issue or sell capital stock of Restricted Subsidiaries. See "Description of Notes -- Certain Covenants." EVENTS OF DEFAULT.......... The Indenture will contain certain events of default, including a default in the payment when due of interest, principal or premium, if any, on the Notes, the failure by the Company to comply with certain provisions of the Indenture, certain defaults under other Indebtedness, the failure by the Company to pay certain judgments rendered against the Company, certain events of bankruptcy or insolvency, certain events of breach, default, repudiation or unenforceability of the Pledge Agreement, and the failure of the Subsidiary Guarantees to be in full force and effect. The Company is required to deliver to the Trustee annually a statement regarding compliance with the Indenture, and the Company is required, upon becoming aware of any default to deliver to the Trustee a statement specifying such default. See "Description of Notes -- Events of Default and Remedies." USE OF PROCEEDS............ To fund the Bludworth Acquisition, to fund the Company's anticipated capital requirements over the next 12 months, including capital expenditures to upgrade the East Pelican Island and West Pelican Island shipyard facilities in Galveston, to repay a portion of the Company's indebtedness, to fund the purchase of the Pledged Securities and for general corporate purposes. See "Use of Proceeds."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1998/CIK0001052020_eae_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001052020_eae_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and Consolidated Financial Statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless the context indicates otherwise, references herein to the "Company" or "First Wave" shall mean First Wave Marine, Inc. and its predecessors and subsidiaries and assumes the consummation of the Exchange (as defined herein), and all financial data is given for such combined entity unless specified otherwise. All references to shares of Common Stock of the Company, $.01 par value (the "Common Stock") give effect to the 10.65-for-one stock split effected November 20, 1997. THE COMPANY First Wave is a leading provider of shipyard and related environmental services to the offshore support vessel, offshore barge and inland marine industries. The Company offers a full range of repair, conversion, new construction and related environmental services, including cleaning, degassing and wastewater treatment. Following the consummation of a pending acquisition, the Company will significantly expand its operations and capacity, particularly into the offshore drilling industry. The Company will be the largest shipyard operator in the Houston-Galveston area with five of the eight major shipyard facilities in this strategic location. First Wave believes that, following the pending acquisition, it will be the only "one-stop" source of all shipyard services for all segments of the offshore support vessel, offshore barge and inland marine markets in Texas. Since it acquired its first facility in December 1993, First Wave has significantly improved revenues and profitability. The Company's success has been the product of a focused strategy to build a high quality, dedicated workforce, provide a high level of customer service and optimize the mix of its services to maximize capacity utilization. As a result, revenues grew to $28.0 million in 1996 from $15.3 million in 1994 while EBITDA improved to $4.4 million from a loss of $23,000 over the same period. In the first nine months of 1997, the Company generated revenues of $24.5 million and EBITDA of $7.2 million, compared to revenues and EBITDA of $19.9 million and $1.8 million, respectively, in the first nine months of 1996. The Company believes that as a result of its strategy and planned expansion, it is well positioned to meet the growing demand for its services. First Wave is experiencing strong demand growth for all of its services primarily as a result of: (i) higher repair activity due to the aging offshore support vessel and barge fleets; (ii) greater customer requirements for repair and related environmental services due to increased utilization and consolidation of the offshore support vessel and barge fleets; (iii) increasing customer demand to convert and upgrade vessels in response to changing market conditions; and (iv) increased levels of new vessel construction. To meet this demand, First Wave plans to utilize capacity available at its newly acquired facilities, as well as expand into new markets, in particular the offshore drilling industry. The Company believes that this will enable it to perform a greater number of projects and increase its revenues, while leveraging the economies of scale available to a geographically concentrated multi-shipyard operator. BUSINESS STRATEGY The Company's strategy is to leverage its reputation as an efficient, reliable, customer driven shipyard operator providing a diversified range of shipyard services to the offshore support vessel, offshore drilling, offshore barge and inland marine industries. The Company intends to utilize its proven strengths in order to expand into the Gulf of Mexico offshore drilling market. Key elements of this strategy are: [photograph of power generation barge under tow] Hull of power generation barge constructed by First Wave [aerial photograph of shipyard] East Pelican Island Shipyard servicing offshore drilling rigs [photograph of offshore supply boat] Offshore support vessel serving Gulf Coast drilling rigs [photograph of ocean-going ship] Offshore petrochemical carrier serving oil and gas industry [photograph of welder] [photograph of inland tank barge by onshore gas free facility] Inland tank barge, degassing facility, Brady Island Shipyard - Maintaining a High Quality Dedicated Workforce. The Company invests in its employees through training, superior benefits and the fostering of a close-knit, supportive culture. As a result, the Company has not experienced the significant labor shortages and attrition suffered by many Gulf Coast shipyards and has consistently posted an award-winning safety record. Management believes the Company has been able to maintain stable manpower levels and has flattened the labor force highs and lows typical in the shipyard industry through a superb relationship with its labor force, sophisticated forecasting of labor needs, the implementation of its strategic alliances and optimization of its mix of new construction and repair services. - Development of Strategic Alliances with Key Customers. The Company has developed a "contract rate" system which it uses to form strategic alliances with its key customers. The contract rate system enables the Company to baseload its facilities with pre-booked work, improve planning and execution of jobs through a cooperative process with the customer and more effectively project its revenues and labor needs for the year. In return, the alliance partner receives volume based pricing, assures itself of needed drydock capacity, gains the ability to accurately budget its work, benefits from improved turnaround on jobs and receives other services on a preferred basis. - Continuous Optimization of the Mix of Shipyard Services. The Company generally negotiates flexible delivery dates for new construction which greatly contributes to the efficiency of its shipyards. During periods when demand for repair services is lower, the Company shifts workers to new construction as a means of absorbing excess labor. By continuously optimizing its mix of activities, the Company ensures that its quality work force remains intact and motivated, and costs associated with attrition are reduced. As a result of this strategy, the Company believes that it can maximize its margins by allocating labor to higher margin repair work or can absorb excess labor by shifting it to new construction, as demand dictates. - One-Stop Source for Shipyard Services. In addition to its core shipyard repair and construction services, the Company offers a range of related environmental services at its facilities, including tank cleaning, degassing and wastewater treatment. Following the pending acquisitions, complementary services such as these will enable the Company to become the only one-stop source of all shipyard services for all segments of the offshore support vessel, offshore barge and inland marine markets in Texas. - Focus on Core Geographic Areas: Houston and Galveston. The Houston-Galveston area is a very strategic location for its shipyards, since three of the largest U.S. fleets of inland tank barges are based in the Houston Ship Channel area. Additionally, the growing offshore support vessel and barge fleets in the Gulf of Mexico can be efficiently served from the Company's Houston and Galveston locations. Management believes the expansion of the East Pelican Island and West Pelican Island facilities in Galveston to service the offshore drilling industry is especially strategic since Galveston is in close proximity to offshore Gulf of Mexico drilling activity, thereby minimizing rig transit costs and downtime. - Leveraging Economies of Scale. With all of its shipyards within a 50-mile corridor, management can more effectively operate the facilities and consolidate overhead. Additionally, the proximity of the shipyards allows for centralizing many administrative functions. Management believes the uniformity of state regulations and the volume leverage gained from using single suppliers among all its facilities, as well as the potential interchangeability of the labor force, provides economic benefits for the Company. - Expansion into the Offshore Gulf of Mexico Market. Upon consummation of the Bludworth Acquisition and the completion of the improvements to the East Pelican Island shipyard, the Company will have two adjacent shipyard facilities in Galveston, Texas, which will enable it to take advantage of the rising demand for shipyard services to the oil and gas industry in the Gulf of Mexico. Management has planned its expansion to diversify the Company's business lines into services for offshore drilling rigs, larger offshore support vessels and oil and gas related ship conversions. RECENT DEVELOPMENTS Greens Bayou Acquisition. The Company acquired the Greens Bayou Facility on August 11, 1997. This facility is specifically designed to service the barge industry with seven haul-up facilities, including a major six-position rail transfer system. The Company believes it can efficiently operate this Houston area shipyard by consolidating overhead with its nearby Brady Island shipyard. These two shipyards will share accounting, training, sales, estimating, risk management and general administrative functions. The potential interchangeability of the labor force with the Brady Island facility, as well as the ability of Greens Bayou barge customers to use Brady Island's environmental services, should also result in economic benefits for the Company. The facility provides necessary capacity for the Company to meet excess demand for its inland barge services, especially due to the increasing utilization of its Brady Island drydocks for the offshore support vessel market. East Pelican Island Acquisition. After acquiring PMB Engineering Inc.'s lease of the 110-acre East Pelican Island facility in Galveston, Texas, the Company signed an amendment to such lease with Galveston Wharves providing for a term of up to 99 years. For 1998, the Company has budgeted $24.4 million in capital improvements to this facility. Upon completion of these planned capital improvements, First Wave will be able to expand its business lines into providing shipyard services for offshore drilling rigs, larger offshore support vessels and oil and gas related ship conversions. The Bludworth Acquisition. On October 15, 1997, the Company entered into a purchase agreement to acquire (the "Bludworth Acquisition") all of the outstanding capital stock of John Bludworth Marine, Inc. ("Bludworth"). The purchase price consists of $15.0 million in cash and the issuance of a $4.0 million promissory note. Bludworth is an established regional shipbuilder focusing on offshore support vessel repair, as well as inland barge repair and inland boat construction and repair. The Bludworth Acquisition expands the Company's Houston-Galveston base of operations in a cost efficient manner, adding significant new drydock capacity within its area of operation and diversifying its current mix of services to include expanded capabilities in the offshore and the inland boat segment of the marine industry. The Bludworth Acquisition provides the Company with two additional shipyards: (i) the JBM Pasadena facility in Pasadena, Texas, which is near the Company's other Houston shipyards and (ii) the West Pelican Island facility which is adjacent to the East Pelican Island facility in Galveston, Texas. The Bludworth Acquisition will close simultaneously with the Offering. Additional Galveston Shipyard. The Company has entered into a non-binding letter of intent to purchase certain shipyard assets, including real property and improvements, in Galveston, Texas ("Other Galveston Assets") for $4.5 million. There can be no assurance that such transaction will be consummated or consummated on the terms described herein. SUMMARY SHIPYARD INFORMATION The Company's shipyards are presented below, indicating the markets served at each location. All shipyards offer or will offer repair, conversion and new construction services. In addition, the Brady Island facility offers environmental services. <TABLE> <CAPTION> OFFSHORE OFFSHORE NO. OF SUPPORT INLAND INLAND OFFSHORE DRILLING ACRES VESSELS BARGES BOATS BARGES RIGS SHIPS ------ -------- ------ ------ -------- -------- ----- <S> <C> <C> <C> <C> <C> <C> <C> HOUSTON AREA SHIPYARDS: Brady Island......................... 23 X X X X Greens Bayou......................... 20 X X JBM Pasadena(a)...................... 63 X X X X GALVESTON SHIPYARDS: East Pelican Island.................. 110 X X X X West Pelican Island(a)............... 23 X X X X </TABLE> - --------------- (a) To be acquired in the Bludworth Acquisition. SUMMARY The Company believes that the additional financial resources and increased financial flexibility afforded by the Offering will position the Company to fund its strategic expansion plan and to participate in the ongoing consolidation of the shipbuilding industry. Management believes that the expansion of the Company's capacity and capabilities as a result of recent and pending acquisitions have positioned First Wave to benefit from the improved demand for shipyard services in the offshore oil and gas and inland marine industries. THE OFFERING NOTES OFFERED.............. $90,000,000 aggregate principal amount of % Senior Notes due 2008. MATURITY................... , 2008. INTEREST................... The Notes will bear interest at a rate of % per annum, payable semi-annually in arrears on and of each year, commencing , 1998. RANKING.................... The Notes will be senior obligations of the Company, will rank pari passu in right of payment with all existing and future unsecured senior Indebtedness (as defined herein) of the Company and will rank senior in right of payment to any future Subordinated Indebtedness (as defined herein) of the Company. As of December 31, 1997, after giving pro forma effect to the sale of the Notes and the application of the net proceeds therefrom, on a consolidated basis the Company would have had approximately $90.2 million of unsecured senior Indebtedness outstanding and no Subordinated Indebtedness outstanding. The Notes will be effectively subordinated to all secured Indebtedness of the Company to the extent of the assets securing such Indebtedness. As of December 31, 1997, after giving pro forma effect to the sale of the Notes and the application of the net proceeds therefrom, on a consolidated basis the Company would have had approximately $9.5 million of secured senior Indebtedness outstanding. The Company is a holding company and substantially all of its operations are conducted through its operating subsidiaries. Accordingly, except in the case of Restricted Subsidiaries (which will guarantee the obligations of the Company under the Notes), the Notes will be effectively subordinated to all Indebtedness and other obligations of the Company's subsidiaries. The Indenture pursuant to which the Notes will be issued permits the Company and its subsidiaries to incur additional Indebtedness, including senior Indebtedness and secured Indebtedness, subject to certain limitations. See "Capitalization" and "Description of Notes -- Ranking" and "-- Certain Covenants -- Incurrence of Indebtedness." SECURITY................... Upon the consummation of the Offering, the Company will purchase and pledge to the Trustee (as defined herein), for the benefit of the holders of the Notes, the Pledged Securities, which will be in such amount as will be sufficient, upon receipt of scheduled interest and principal payments, to provide for payment in full when due of the first two scheduled semi-annual interest payments on the Notes. The Company expects to use approximately $9.5 million of the net proceeds from the sale of the Notes to purchase the Pledged Securities, although the actual purchase price for such securities will vary depending on the interest rates of Government Securities (as defined herein) prevailing at the time of the purchase of the Pledged Securities. The Pledged Securities will be pledged as security for the repayment of the principal of and interest on the Notes and all other obligations under the Indenture. When an interest payment is due, the Company may either deposit sufficient funds to pay the interest sched- uled to be paid or direct the Trustee to release from the Pledge Account (as defined herein) funds sufficient to pay the interest scheduled. In the event the Company exercises the former option, the Pledge Agreement provides the Company may direct the Trustee to release proceeds or the Pledged Securities from the Pledge Account in a like amount. If the Company makes the first two scheduled interest payments on the Notes in a timely manner and no Default (as defined herein) or Event of Default (as defined herein) is then continuing, the remaining Pledged Securities, if any, will be released from the Pledge Account and the Notes will thereafter be unsecured obligations of the Company. See "Description of Notes -- Security." SUBSIDIARY GUARANTEES...... The obligations of the Company under the Notes will be fully and unconditionally guaranteed on a senior unsecured basis jointly and severally by all Restricted Subsidiaries. All of the Company's existing Subsidiaries will initially be Restricted Subsidiaries (the "Initial Restricted Subsidiaries"), and future Restricted Subsidiaries of the Company will be required to issue Subsidiary Guarantees. All future subsidiaries of the Company will not necessarily be Restricted Subsidiaries. Each Subsidiary Guarantee will be a senior unsecured obligation of the applicable Restricted Subsidiary, will rank pari passu in right of payment with all existing and future unsecured senior Indebtedness of such Restricted Subsidiary and will rank senior in right of payment to any Subordinated Indebtedness of such Restricted Subsidiary. As of December 31, 1997, after giving effect to the sale of the Notes and the application of the estimated net proceeds therefrom, the aggregate amount of outstanding senior Indebtedness of the Initial Restricted Subsidiaries would, without regard to the Subsidiary Guarantees, have been approximately $9.7 million. Furthermore, the holders of the Notes will not share in the proceeds from the sale of or other realization upon any assets of such Restricted Subsidiary in which the Restricted Subsidiary has granted security interests until the repayment of the indebtedness secured thereby. Under certain circumstances, a Restricted Subsidiary may be designated an Unrestricted Subsidiary (as defined herein) and its Subsidiary Guarantee released. See "Description of Notes -- Subsidiary Guarantees." OPTIONAL REDEMPTION........ The Notes will be redeemable, at the option of the Company, in whole or in part, at any time on or after , 2003, at the redemption prices set forth herein, plus accrued and unpaid interest thereon to the applicable redemption date. Notwithstanding the foregoing, on or prior to , 2001, the Company may redeem at any time or from time to time up to 35% of the aggregate principal amount of the Notes at a redemption price equal to % of the principal amount thereof, plus accrued and unpaid interest thereon to the applicable redemption date, with the net proceeds of a Public Equity Offering; provided, that at least 65% of the aggregate principal amount of the Notes initially issued remains outstanding after giving effect to the redemption thereof. See "Description of Notes -- Optional Redemption." CHANGE OF CONTROL.......... Upon the occurrence of a Change of Control, the Company will be required to make an offer to repurchase all of the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest thereon to the repurchase date. See "Description of Notes -- Repurchase at the Option of Holders -- Change of Control." CERTAIN COVENANTS.......... The Indenture will contain certain covenants that, among other things, limit the ability of the Company and its Restricted Subsidiaries to incur additional Indebtedness, pay dividends or make other distributions, repurchase any capital stock or Subordinated Indebtedness, make certain investments, create certain liens, enter into certain transactions with affiliates, sell assets, enter into certain mergers and consolidations, allow Restricted Subsidiaries to create certain dividend and other payment restrictions, enter into sale and leaseback transactions, and issue or sell capital stock of Restricted Subsidiaries. See "Description of Notes -- Certain Covenants." EVENTS OF DEFAULT.......... The Indenture will contain certain events of default, including a default in the payment when due of interest, principal or premium, if any, on the Notes, the failure by the Company to comply with certain provisions of the Indenture, certain defaults under other Indebtedness, the failure by the Company to pay certain judgments rendered against the Company, certain events of bankruptcy or insolvency, certain events of breach, default, repudiation or unenforceability of the Pledge Agreement, and the failure of the Subsidiary Guarantees to be in full force and effect. The Company is required to deliver to the Trustee annually a statement regarding compliance with the Indenture, and the Company is required, upon becoming aware of any default to deliver to the Trustee a statement specifying such default. See "Description of Notes -- Events of Default and Remedies." USE OF PROCEEDS............ To fund the Bludworth Acquisition, to fund the Company's anticipated capital requirements over the next 12 months, including capital expenditures to upgrade the East Pelican Island and West Pelican Island shipyard facilities in Galveston, to repay a portion of the Company's indebtedness, to fund the purchase of the Pledged Securities and for general corporate purposes. See "Use of Proceeds."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1998/CIK0001052021_louisiana_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001052021_louisiana_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..2cd52f4bc075e433b22e63f9cd858ae5d423b580
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and Consolidated Financial Statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless the context indicates otherwise, references herein to the "Company" or "First Wave" shall mean First Wave Marine, Inc. and its predecessors and subsidiaries and assumes the consummation of the Exchange (as defined herein), and all financial data is given for such combined entity unless specified otherwise. All references to shares of Common Stock of the Company, $.01 par value (the "Common Stock") give effect to the 10.65-for-one stock split effected November 20, 1997. THE COMPANY First Wave is a leading provider of shipyard and related environmental services to the offshore support vessel, offshore barge and inland marine industries. The Company offers a full range of repair, conversion, new construction and related environmental services, including cleaning, degassing and wastewater treatment. Following the consummation of a pending acquisition, the Company will significantly expand its operations and capacity, particularly into the offshore drilling industry. The Company will be the largest shipyard operator in the Houston-Galveston area with five of the eight major shipyard facilities in this strategic location. First Wave believes that, following the pending acquisition, it will be the only "one-stop" source of all shipyard services for all segments of the offshore support vessel, offshore barge and inland marine markets in Texas. Since it acquired its first facility in December 1993, First Wave has significantly improved revenues and profitability. The Company's success has been the product of a focused strategy to build a high quality, dedicated workforce, provide a high level of customer service and optimize the mix of its services to maximize capacity utilization. As a result, revenues grew to $28.0 million in 1996 from $15.3 million in 1994 while EBITDA improved to $4.4 million from a loss of $23,000 over the same period. In the first nine months of 1997, the Company generated revenues of $24.5 million and EBITDA of $7.2 million, compared to revenues and EBITDA of $19.9 million and $1.8 million, respectively, in the first nine months of 1996. The Company believes that as a result of its strategy and planned expansion, it is well positioned to meet the growing demand for its services. First Wave is experiencing strong demand growth for all of its services primarily as a result of: (i) higher repair activity due to the aging offshore support vessel and barge fleets; (ii) greater customer requirements for repair and related environmental services due to increased utilization and consolidation of the offshore support vessel and barge fleets; (iii) increasing customer demand to convert and upgrade vessels in response to changing market conditions; and (iv) increased levels of new vessel construction. To meet this demand, First Wave plans to utilize capacity available at its newly acquired facilities, as well as expand into new markets, in particular the offshore drilling industry. The Company believes that this will enable it to perform a greater number of projects and increase its revenues, while leveraging the economies of scale available to a geographically concentrated multi-shipyard operator. BUSINESS STRATEGY The Company's strategy is to leverage its reputation as an efficient, reliable, customer driven shipyard operator providing a diversified range of shipyard services to the offshore support vessel, offshore drilling, offshore barge and inland marine industries. The Company intends to utilize its proven strengths in order to expand into the Gulf of Mexico offshore drilling market. Key elements of this strategy are: [photograph of power generation barge under tow] Hull of power generation barge constructed by First Wave [aerial photograph of shipyard] East Pelican Island Shipyard servicing offshore drilling rigs [photograph of offshore supply boat] Offshore support vessel serving Gulf Coast drilling rigs [photograph of ocean-going ship] Offshore petrochemical carrier serving oil and gas industry [photograph of welder] [photograph of inland tank barge by onshore gas free facility] Inland tank barge, degassing facility, Brady Island Shipyard - Maintaining a High Quality Dedicated Workforce. The Company invests in its employees through training, superior benefits and the fostering of a close-knit, supportive culture. As a result, the Company has not experienced the significant labor shortages and attrition suffered by many Gulf Coast shipyards and has consistently posted an award-winning safety record. Management believes the Company has been able to maintain stable manpower levels and has flattened the labor force highs and lows typical in the shipyard industry through a superb relationship with its labor force, sophisticated forecasting of labor needs, the implementation of its strategic alliances and optimization of its mix of new construction and repair services. - Development of Strategic Alliances with Key Customers. The Company has developed a "contract rate" system which it uses to form strategic alliances with its key customers. The contract rate system enables the Company to baseload its facilities with pre-booked work, improve planning and execution of jobs through a cooperative process with the customer and more effectively project its revenues and labor needs for the year. In return, the alliance partner receives volume based pricing, assures itself of needed drydock capacity, gains the ability to accurately budget its work, benefits from improved turnaround on jobs and receives other services on a preferred basis. - Continuous Optimization of the Mix of Shipyard Services. The Company generally negotiates flexible delivery dates for new construction which greatly contributes to the efficiency of its shipyards. During periods when demand for repair services is lower, the Company shifts workers to new construction as a means of absorbing excess labor. By continuously optimizing its mix of activities, the Company ensures that its quality work force remains intact and motivated, and costs associated with attrition are reduced. As a result of this strategy, the Company believes that it can maximize its margins by allocating labor to higher margin repair work or can absorb excess labor by shifting it to new construction, as demand dictates. - One-Stop Source for Shipyard Services. In addition to its core shipyard repair and construction services, the Company offers a range of related environmental services at its facilities, including tank cleaning, degassing and wastewater treatment. Following the pending acquisitions, complementary services such as these will enable the Company to become the only one-stop source of all shipyard services for all segments of the offshore support vessel, offshore barge and inland marine markets in Texas. - Focus on Core Geographic Areas: Houston and Galveston. The Houston-Galveston area is a very strategic location for its shipyards, since three of the largest U.S. fleets of inland tank barges are based in the Houston Ship Channel area. Additionally, the growing offshore support vessel and barge fleets in the Gulf of Mexico can be efficiently served from the Company's Houston and Galveston locations. Management believes the expansion of the East Pelican Island and West Pelican Island facilities in Galveston to service the offshore drilling industry is especially strategic since Galveston is in close proximity to offshore Gulf of Mexico drilling activity, thereby minimizing rig transit costs and downtime. - Leveraging Economies of Scale. With all of its shipyards within a 50-mile corridor, management can more effectively operate the facilities and consolidate overhead. Additionally, the proximity of the shipyards allows for centralizing many administrative functions. Management believes the uniformity of state regulations and the volume leverage gained from using single suppliers among all its facilities, as well as the potential interchangeability of the labor force, provides economic benefits for the Company. - Expansion into the Offshore Gulf of Mexico Market. Upon consummation of the Bludworth Acquisition and the completion of the improvements to the East Pelican Island shipyard, the Company will have two adjacent shipyard facilities in Galveston, Texas, which will enable it to take advantage of the rising demand for shipyard services to the oil and gas industry in the Gulf of Mexico. Management has planned its expansion to diversify the Company's business lines into services for offshore drilling rigs, larger offshore support vessels and oil and gas related ship conversions. RECENT DEVELOPMENTS Greens Bayou Acquisition. The Company acquired the Greens Bayou Facility on August 11, 1997. This facility is specifically designed to service the barge industry with seven haul-up facilities, including a major six-position rail transfer system. The Company believes it can efficiently operate this Houston area shipyard by consolidating overhead with its nearby Brady Island shipyard. These two shipyards will share accounting, training, sales, estimating, risk management and general administrative functions. The potential interchangeability of the labor force with the Brady Island facility, as well as the ability of Greens Bayou barge customers to use Brady Island's environmental services, should also result in economic benefits for the Company. The facility provides necessary capacity for the Company to meet excess demand for its inland barge services, especially due to the increasing utilization of its Brady Island drydocks for the offshore support vessel market. East Pelican Island Acquisition. After acquiring PMB Engineering Inc.'s lease of the 110-acre East Pelican Island facility in Galveston, Texas, the Company signed an amendment to such lease with Galveston Wharves providing for a term of up to 99 years. For 1998, the Company has budgeted $24.4 million in capital improvements to this facility. Upon completion of these planned capital improvements, First Wave will be able to expand its business lines into providing shipyard services for offshore drilling rigs, larger offshore support vessels and oil and gas related ship conversions. The Bludworth Acquisition. On October 15, 1997, the Company entered into a purchase agreement to acquire (the "Bludworth Acquisition") all of the outstanding capital stock of John Bludworth Marine, Inc. ("Bludworth"). The purchase price consists of $15.0 million in cash and the issuance of a $4.0 million promissory note. Bludworth is an established regional shipbuilder focusing on offshore support vessel repair, as well as inland barge repair and inland boat construction and repair. The Bludworth Acquisition expands the Company's Houston-Galveston base of operations in a cost efficient manner, adding significant new drydock capacity within its area of operation and diversifying its current mix of services to include expanded capabilities in the offshore and the inland boat segment of the marine industry. The Bludworth Acquisition provides the Company with two additional shipyards: (i) the JBM Pasadena facility in Pasadena, Texas, which is near the Company's other Houston shipyards and (ii) the West Pelican Island facility which is adjacent to the East Pelican Island facility in Galveston, Texas. The Bludworth Acquisition will close simultaneously with the Offering. Additional Galveston Shipyard. The Company has entered into a non-binding letter of intent to purchase certain shipyard assets, including real property and improvements, in Galveston, Texas ("Other Galveston Assets") for $4.5 million. There can be no assurance that such transaction will be consummated or consummated on the terms described herein. SUMMARY SHIPYARD INFORMATION The Company's shipyards are presented below, indicating the markets served at each location. All shipyards offer or will offer repair, conversion and new construction services. In addition, the Brady Island facility offers environmental services. <TABLE> <CAPTION> OFFSHORE OFFSHORE NO. OF SUPPORT INLAND INLAND OFFSHORE DRILLING ACRES VESSELS BARGES BOATS BARGES RIGS SHIPS ------ -------- ------ ------ -------- -------- ----- <S> <C> <C> <C> <C> <C> <C> <C> HOUSTON AREA SHIPYARDS: Brady Island......................... 23 X X X X Greens Bayou......................... 20 X X JBM Pasadena(a)...................... 63 X X X X GALVESTON SHIPYARDS: East Pelican Island.................. 110 X X X X West Pelican Island(a)............... 23 X X X X </TABLE> - --------------- (a) To be acquired in the Bludworth Acquisition. SUMMARY The Company believes that the additional financial resources and increased financial flexibility afforded by the Offering will position the Company to fund its strategic expansion plan and to participate in the ongoing consolidation of the shipbuilding industry. Management believes that the expansion of the Company's capacity and capabilities as a result of recent and pending acquisitions have positioned First Wave to benefit from the improved demand for shipyard services in the offshore oil and gas and inland marine industries. THE OFFERING NOTES OFFERED.............. $90,000,000 aggregate principal amount of % Senior Notes due 2008. MATURITY................... , 2008. INTEREST................... The Notes will bear interest at a rate of % per annum, payable semi-annually in arrears on and of each year, commencing , 1998. RANKING.................... The Notes will be senior obligations of the Company, will rank pari passu in right of payment with all existing and future unsecured senior Indebtedness (as defined herein) of the Company and will rank senior in right of payment to any future Subordinated Indebtedness (as defined herein) of the Company. As of December 31, 1997, after giving pro forma effect to the sale of the Notes and the application of the net proceeds therefrom, on a consolidated basis the Company would have had approximately $90.2 million of unsecured senior Indebtedness outstanding and no Subordinated Indebtedness outstanding. The Notes will be effectively subordinated to all secured Indebtedness of the Company to the extent of the assets securing such Indebtedness. As of December 31, 1997, after giving pro forma effect to the sale of the Notes and the application of the net proceeds therefrom, on a consolidated basis the Company would have had approximately $9.5 million of secured senior Indebtedness outstanding. The Company is a holding company and substantially all of its operations are conducted through its operating subsidiaries. Accordingly, except in the case of Restricted Subsidiaries (which will guarantee the obligations of the Company under the Notes), the Notes will be effectively subordinated to all Indebtedness and other obligations of the Company's subsidiaries. The Indenture pursuant to which the Notes will be issued permits the Company and its subsidiaries to incur additional Indebtedness, including senior Indebtedness and secured Indebtedness, subject to certain limitations. See "Capitalization" and "Description of Notes -- Ranking" and "-- Certain Covenants -- Incurrence of Indebtedness." SECURITY................... Upon the consummation of the Offering, the Company will purchase and pledge to the Trustee (as defined herein), for the benefit of the holders of the Notes, the Pledged Securities, which will be in such amount as will be sufficient, upon receipt of scheduled interest and principal payments, to provide for payment in full when due of the first two scheduled semi-annual interest payments on the Notes. The Company expects to use approximately $9.5 million of the net proceeds from the sale of the Notes to purchase the Pledged Securities, although the actual purchase price for such securities will vary depending on the interest rates of Government Securities (as defined herein) prevailing at the time of the purchase of the Pledged Securities. The Pledged Securities will be pledged as security for the repayment of the principal of and interest on the Notes and all other obligations under the Indenture. When an interest payment is due, the Company may either deposit sufficient funds to pay the interest sched- uled to be paid or direct the Trustee to release from the Pledge Account (as defined herein) funds sufficient to pay the interest scheduled. In the event the Company exercises the former option, the Pledge Agreement provides the Company may direct the Trustee to release proceeds or the Pledged Securities from the Pledge Account in a like amount. If the Company makes the first two scheduled interest payments on the Notes in a timely manner and no Default (as defined herein) or Event of Default (as defined herein) is then continuing, the remaining Pledged Securities, if any, will be released from the Pledge Account and the Notes will thereafter be unsecured obligations of the Company. See "Description of Notes -- Security." SUBSIDIARY GUARANTEES...... The obligations of the Company under the Notes will be fully and unconditionally guaranteed on a senior unsecured basis jointly and severally by all Restricted Subsidiaries. All of the Company's existing Subsidiaries will initially be Restricted Subsidiaries (the "Initial Restricted Subsidiaries"), and future Restricted Subsidiaries of the Company will be required to issue Subsidiary Guarantees. All future subsidiaries of the Company will not necessarily be Restricted Subsidiaries. Each Subsidiary Guarantee will be a senior unsecured obligation of the applicable Restricted Subsidiary, will rank pari passu in right of payment with all existing and future unsecured senior Indebtedness of such Restricted Subsidiary and will rank senior in right of payment to any Subordinated Indebtedness of such Restricted Subsidiary. As of December 31, 1997, after giving effect to the sale of the Notes and the application of the estimated net proceeds therefrom, the aggregate amount of outstanding senior Indebtedness of the Initial Restricted Subsidiaries would, without regard to the Subsidiary Guarantees, have been approximately $9.7 million. Furthermore, the holders of the Notes will not share in the proceeds from the sale of or other realization upon any assets of such Restricted Subsidiary in which the Restricted Subsidiary has granted security interests until the repayment of the indebtedness secured thereby. Under certain circumstances, a Restricted Subsidiary may be designated an Unrestricted Subsidiary (as defined herein) and its Subsidiary Guarantee released. See "Description of Notes -- Subsidiary Guarantees." OPTIONAL REDEMPTION........ The Notes will be redeemable, at the option of the Company, in whole or in part, at any time on or after , 2003, at the redemption prices set forth herein, plus accrued and unpaid interest thereon to the applicable redemption date. Notwithstanding the foregoing, on or prior to , 2001, the Company may redeem at any time or from time to time up to 35% of the aggregate principal amount of the Notes at a redemption price equal to % of the principal amount thereof, plus accrued and unpaid interest thereon to the applicable redemption date, with the net proceeds of a Public Equity Offering; provided, that at least 65% of the aggregate principal amount of the Notes initially issued remains outstanding after giving effect to the redemption thereof. See "Description of Notes -- Optional Redemption." CHANGE OF CONTROL.......... Upon the occurrence of a Change of Control, the Company will be required to make an offer to repurchase all of the outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest thereon to the repurchase date. See "Description of Notes -- Repurchase at the Option of Holders -- Change of Control." CERTAIN COVENANTS.......... The Indenture will contain certain covenants that, among other things, limit the ability of the Company and its Restricted Subsidiaries to incur additional Indebtedness, pay dividends or make other distributions, repurchase any capital stock or Subordinated Indebtedness, make certain investments, create certain liens, enter into certain transactions with affiliates, sell assets, enter into certain mergers and consolidations, allow Restricted Subsidiaries to create certain dividend and other payment restrictions, enter into sale and leaseback transactions, and issue or sell capital stock of Restricted Subsidiaries. See "Description of Notes -- Certain Covenants." EVENTS OF DEFAULT.......... The Indenture will contain certain events of default, including a default in the payment when due of interest, principal or premium, if any, on the Notes, the failure by the Company to comply with certain provisions of the Indenture, certain defaults under other Indebtedness, the failure by the Company to pay certain judgments rendered against the Company, certain events of bankruptcy or insolvency, certain events of breach, default, repudiation or unenforceability of the Pledge Agreement, and the failure of the Subsidiary Guarantees to be in full force and effect. The Company is required to deliver to the Trustee annually a statement regarding compliance with the Indenture, and the Company is required, upon becoming aware of any default to deliver to the Trustee a statement specifying such default. See "Description of Notes -- Events of Default and Remedies." USE OF PROCEEDS............ To fund the Bludworth Acquisition, to fund the Company's anticipated capital requirements over the next 12 months, including capital expenditures to upgrade the East Pelican Island and West Pelican Island shipyard facilities in Galveston, to repay a portion of the Company's indebtedness, to fund the purchase of the Pledged Securities and for general corporate purposes. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001052054_symbolic_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001052054_symbolic_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and Financial Statements and Notes thereto, appearing elsewhere in this Prospectus. The discussion in this Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "Risk Factors", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" as well as those discussed elsewhere in this Prospectus. Unless otherwise indicated, all information contained in this Prospectus (i) reflects the conversion of all outstanding shares of Non-voting Common Stock (the "Non-voting Common Stock") and Preferred Stock of the Company into shares of voting Common Stock (the "Common Stock") of the Company and (ii) assumes no exercise of the Underwriters' over-allotment option. Certain terms used herein are defined under the heading "Glossary of Terms". THE COMPANY Evolving Systems, Inc. ("Evolving Systems" or the "Company") is a leading provider of selected software solutions and services that enable telecommunications carriers to address the technical challenges to their operational support systems created by the industry's rapidly changing competitive and regulatory environment. The Company develops, markets, sells and supports standard software products that enable established and new telecommunications companies to address local number portability ("LNP") requirements and the impact of LNP on such companies' support systems. The Company also provides custom software development services to leading telecommunications companies. The Company's first-to-market LNP software solution, which enables carriers to meet the requirement that customers retain their local phone number when changing service providers, has been selected for use by two of the five Regional Bell Operating Companies ("RBOCs") and two leading local and long distance carriers. The Company believes that the implementation of LNP will require significant changes in a broad range of carriers' software and systems that perform mission-critical functions such as ordering, provisioning, service assurance and billing, collectively known as Operational Support Systems ("OSS"). Historically, telecommunications carriers operated in a highly regulated environment with both local and long distance telephone service providers operating as monopolies with little competition. The Telecommunications Act of 1996 and regulations promulgated thereunder (collectively, the "Act") provide for the introduction of competition in local telephone service, allowing long distance, wireless and other carriers to enter local telephone markets. The Act requires RBOCs, wireless and other incumbent local exchange carriers (collectively, "ILECs") to offer LNP. The Act also mandates that carriers unbundle local services and facilities, thereby allowing competing telecommunications carriers access to ILECs' OSS. These requirements pose significant technological challenges to existing OSS, which are already strained by the incremental changes necessitated by long distance deregulation and the introduction of value-added services such as voice mail and call waiting. Existing carriers must develop new systems that are interoperable with their legacy systems, not only to support the LNP and unbundling requirements of the Act but also to enable them to respond to increasing competitive challenges. In addition, carriers entering local telephone markets require LNP solutions that do not depend on an existing OSS infrastructure and that can be deployed quickly and cost-effectively. Thus, the Company believes that carriers' OSS are evolving from back-office legacy systems to strategic business systems that play an increasingly important role in enhancing competitiveness as well as enabling compliance with the requirements of the Act. Recognizing the opportunity created by the ongoing deregulation of local telephone service, the Company has capitalized on its historic strength as a leading architect and developer of solutions to satisfy technically challenging OSS requirements to position itself as a provider of next-generation OSS solutions while continuing to provide custom software development services. From its inception in 1985 through 1996, the Company focused on providing custom software development services to a limited number of telecommunications companies. In order to capitalize on the market demand for OSS solutions to implement LNP, the Company made a strategic decision in 1996 to expand its focus to include development of standard software products to address a variety of needs created by LNP. The Company's current LNP software products, OrderPath, NumberManager and NodeMaster, allow carriers to accommodate customer requests to change carriers while retaining the same telephone number and to obtain and disseminate call routing data to the carriers' networks. To date, customers for the Company's LNP solutions include Ameritech Corporation ("Ameritech"), Pacific Bell, Inc. ("Pacific Bell")/SBC Communications, Inc. ("Southwestern Bell"), Sprint Corporation ("Sprint") and WorldCom, Inc. ("WorldCom"). The Company's primary custom software development customers include GTE Corporation ("GTE"), Lockheed-Martin IMS Corporation ("Lockheed") and Lucent Technologies, Inc. ("Lucent"), formerly part of American Telephone & Telegraph Company ("AT&T"). The Company intends to leverage its initial LNP success and substantial custom software expertise to address the evolving needs of carriers and telecommunications service providers by developing and providing a family of innovative OSS solutions. The Company's LNP and future OSS products are being designed to provide comprehensive, flexible, reliable and scalable solutions to meet the rapidly changing needs of today's multi-carrier environment. The Company is developing its OSS platform, an OSS environment that supports multiple applications and includes a scalable, extensible database, application program interfaces ("APIs") for third-party developers to write compatible applications, business logic that governs the data dissemination throughout other OSS platforms and standard legacy application interfaces to facilitate rapid implementation. The Company's approach seeks to offer carriers time-to- market advantages, protection of legacy system investments and cost-effective OSS deployment, staffing, operation and maintenance. RECENT RESULTS The Company's unaudited results of operations for the three months ended March 31, 1998 reflect an increase in revenue of 63% to $13.1 million from $8.1 million for the three months ended March 31, 1997 and an increase in net income to $440,000 from a net loss of $191,000 for the three months ended March 31, 1997. Results of operations for the three months ended March 31, 1998 include all adjustments, consisting only of normal recurring adjustments, which management considers necessary for a fair presentation and should not be considered indicative of results to be expected for any future period. See "Risk Factors--Fluctuations in Quarterly Results of Operations" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Quarterly Results of Operations". THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company............. 3,285,000 shares Common Stock offered by the Selling Stockholders................................... 1,315,000 shares Common Stock to be outstanding after this offering....................................... 11,025,747 shares(1) Proposed Nasdaq National Market symbol.......... EVOL Use of proceeds................................. Repayment of indebtedness, working capital and other general corporate purposes. See "Use of Proceeds". </TABLE> -------- (1) Based on the number of shares outstanding as of December 31, 1997. Excludes (i) 1,887,401 shares of Common Stock issuable upon exercise of options outstanding as of December 31, 1997 under the Company's Amended and Restated Stock Option Plan, at a weighted average exercise price of $4.92 per share, and (ii) 910,633 shares of Common Stock issuable upon exercise of warrants outstanding as of December 31, 1997, at a weighted average exercise price of $.80 per share. Assumes no other exercise of stock options or warrants after December 31, 1997. See "Management--Employee Benefit Plans", "Description of Capital Stock--Warrants" and Note 4 of Notes to Financial Statements. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ---------------------------------------- 1993 1994 1995 1996 1997 ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> Revenue: License fees and related services.. $ -- $ -- $ -- $ 882 $20,034 Other services..................... 17,810 33,032 45,355 36,036 22,686 ------- ------- ------- ------- ------- Total revenue...................... 17,810 33,032 45,355 36,918 42,720 Cost of revenue: License fees and related services.. -- -- -- 450 6,339 Other services..................... 11,327 18,181 26,589 24,081 18,885 ------- ------- ------- ------- ------- Total cost of revenue.............. 11,327 18,181 26,589 24,531 25,224 ------- ------- ------- ------- ------- Gross margin........................ 6,483 14,851 18,766 12,387 17,496 Operating income ................... 4,109 8,150 6,815 246 882 Income (loss) before income taxes... 4,062 8,014 6,126 (1,176) (513) Provision for (benefit from) income taxes.............................. -- -- -- 81 (791) ------- ------- ------- ------- ------- Net income (loss)................... $ 4,062 $ 8,014 $ 6,126 $(1,257) $ 278 ======= ======= ======= ======= ======= Pro forma (1): Income (loss) before income taxes.. $ 4,062 $ 8,014 $ 6,126 $(1,176) Provision for (benefit from) income taxes............................. 1,626 3,007 2,301 (298) ------- ------- ------- ------- Net income (loss).................. $ 2,436 $ 5,007 $ 3,825 $ (878) ======= ======= ======= ======= Net income (loss) per common share (2)(3)............................. $ 2.65 $ 5.24 $ 4.00 $ (0.82) $ 0.18 ======= ======= ======= ======= ======= Diluted net income (loss) per common share (2).......................... $ 2.65 $ 5.24 $ 4.00 $ (0.82) $ 0.03 ======= ======= ======= ======= ======= </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1997 ----------------------- PRO FORMA ACTUAL AS ADJUSTED (4) ------- --------------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents.............................. $ 1,171 $ 29,177 Working capital........................................ 5,366 33,721 Total assets........................................... 27,859 55,865 Long-term obligations.................................. 16,465 4,579 Stockholders' equity................................... 1,698 42,066 </TABLE> - -------- (1) Prior to January 6, 1996, the Company was an S corporation for federal and state income tax purposes, and accordingly, the Company's income was taxed directly to the Company's stockholders. Pro forma adjustments reflect the federal and state income tax expense if the Company had not been an S corporation prior to January 6, 1996. (2) See Note 1 of Notes to Financial Statements for a discussion of the computation of net income (loss) per common share and weighted average common shares outstanding. (3) Supplemental net income (loss) per share for the year ended December 31, 1996 and 1997, assuming the subordinated debt with stockholders was not outstanding during any of the periods, would have been $(.28) and $.37, respectively. See "Use of Proceeds". (4) Pro forma as adjusted to reflect the receipt of the estimated net proceeds from the sale of 3,285,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $13.50 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company. The pro forma as adjusted balances also reflect the anticipated application of the net proceeds, excluding any loss on extinguishment of debt on the repayment of the Subordinated Notes and the Stockholder Notes (as defined herein), as well as the conversion of all shares of Preferred Stock into Common Stock. See "Capitalization" and "Use of Proceeds".
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001052102_total_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001052102_total_prospectus_summary.txt
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+PROSPECTUS SUMMARY Simultaneous with the closing of the Offering, we will consummate the acquisition of two-thirds of the issued and outstanding ownership interests in Total Logistic Control. The following summary is qualified in its entirety by the more detailed information, and the consolidated financial statements of C2 and Total Logistic Control and notes thereto, appearing elsewhere in this Prospectus. The Company C2 was formed on December 11, 1997. We operate through Total Logistic Control, our only non-cash asset. Total Logistic Control provides refrigerated and dry (non-refrigerated) third-party logistic services including warehousing, transportation, distribution and international freight forwarding. The third-party logistics industry is comprised generally of asset-based entities that provide services through their warehousing and fleet operations and non-asset based entities that provide strategic solutions to, and arrange for, the distribution and warehousing needs of their customers. We believe that Total Logistic Control's ability to offer customers "one-stop shopping" through its complement of services, which include both asset and non-asset based solutions, provides it with a competitive advantage. Total Logistic Control's integrated logistic services generally combine transportation, warehousing and information services to manage the distribution channel for a customer's products from the point of manufacturing to the point of consumption. This combination allows us to capitalize on the growing trend of corporations toward reducing costs by outsourcing large components of their logistics function. Total Logistic Control's operations are conducted through a network of 12 distribution warehouses, comprised of an aggregate of 34 million cubic feet of refrigerated and frozen storage capacity in seven locations and five dry distribution centers, primarily in the upper Midwest. Total Logistic Control provides transportation and logistic services utilizing owned equipment as well as through carrier management services utilizing third party common and contract carriers. Total Logistic Control's refrigerated warehousing operations include: temperature sensitive storage services, freezing services, vegetable processing and packaging services. Its transportation and distribution services include: full service truckload, less-than-truckload and pooled consolidation in both temperature controlled and dry (non-temperature controlled) freight equipment, dedicated fleet services and other specialized services. Total Logistic Control also provides: a full range of international freight management services, fully computerized inventory management, assembly, repackaging and just-in-time production supply services. We believe Total Logistic Control is the nation's seventh largest provider of public refrigerated warehouse space. Two of its refrigerated distribution centers are located in Rochelle, Illinois; and two are located in Kalamazoo, Michigan. Total Logistic Control's other refrigerated distribution centers are located in Milwaukee, Wisconsin; Beaver Dam, Wisconsin (located approximately 60 miles northwest of Milwaukee); Wauwatosa, Wisconsin (a suburb of Milwaukee); and Holland, Michigan (located approximately 20 miles southwest of Grand Rapids). Two of Total Logistic Control's dry distribution centers are located in Zeeland, Michigan and the others are located in Kalamazoo, Michigan; Munster, Indiana; and South Brunswick, New Jersey. Total Logistic Control's customers consist primarily of national, regional and local firms engaged in food processing, consumer product manufacturing, wholesale distribution and retailing. 1.9 Environmental Law or Environmental Laws. Environmental Law or Environmental Laws means all laws, rules, regulations, statutes, ordinances, decrees or orders of any governmental entity now or at any time in the future in effect relating to (i) the control of any potential pollutant or protection of the air, water or land, (ii) solid, gaseous or liquid waste generation, handling, treatment, storage, disposal or transportation, and (iii) exposure to hazardous, toxic or other substances alleged to be harmful. The term "Environmental Law" or "Environmental Laws" includes, without limitation, (1) the terms and conditions of any license, permit, approval or other authorization by any governmental entity and (2) judicial, administrative or other regulatory decrees, judgments and orders of any governmental entity. The term "Environmental Law" or "Environmental Laws" includes, but is not limited to the following statutes and the regulations promulgated thereunder: the Clean Air Act, 42 U.S.C. ss. 7401 et seq., The Clean Water Act, 33 U.S.C. ss. 1251 et seq., the Resource Conservation Recovery Act, 42 U.S.C. ss. 6901 et seq., the Superfund Amendments and Reauthorization Act, 42 U.S.C. ss. 11011 et seq., the Toxic Substances Control Act, 15 U.S.C. ss. 2601 et seq., the Water Pollution Control Act, 33 U.S.C. ss. 1251, et seq., the Safe Drinking Water Act, 42 U.S.C. ss. 300f et seq., CERCLA and any state, county or local regulations similar thereto. 1.10 Environmental Liabilities. Environmental Liabilities means any and all liabilities, responsibilities, claims, suits, losses, costs (including remediation, removal, response, abatement, clean-up, investigative or monitoring costs and any other related costs and expenses), other causes of action recognized now or at any later time, damages, settlements, expenses, charges, assessments, liens, penalties, fines, pre-judgment and post-judgment interest, attorney fees and other legal fees (i) pursuant to any agreement, order, notice, requirement, responsibility or directive (including directives embodied in Environmental Laws), injunction, judgment or similar documents (including settlements) arising out of or in connection with any Environmental Laws, or (ii) pursuant to any claim by a governmental entity or other person or entity for personal injury, property damage, damage to natural resources, remediation or similar costs or expenses incurred or asserted by such entity or person pursuant to common law or statute. 1.11 Weatherford Indemnified Parties. Weatherford Indemnified Parties shall have the meaning set forth in Section 6.1(a) hereof. 1.12 Christiana Company. Christiana Company means any corporation, partnership, limited liability company, association or other entity, of which Christiana or any Christiana Company now or at any time in the past owned, directly or indirectly, an ownership interest in (whether or not such ownership interest constituted control of the entity and whether or not such interest represented a passive or active investment), including those companies named on Schedule 1.12 hereto. 1.13 Christiana Taxes. Christiana Taxes means any and all taxes (other than Weatherford Related Taxes as defined in the Merger Agreement) to which Christiana or any Christiana Company may be obligated relating to or arising from (i) the current or past operations or assets of Christiana or any Christiana Company through the Effective Date, (ii) the Logistic Sale, (iii) the Merger, (iv) any tax return filed by any current or past member of computing, any Capital Account or share of Profits and Losses, other items, or Distributions pursuant to any provision of this Operating Agreement. (iv) Determination of Allocable Amounts. For purposes of determining the Profits and Losses, or any other items of income, gain, loss, or deduction allocable to any fiscal period, Profits and Losses, and any other such items shall be determined on a daily, monthly, or other basis, as determined by the Board of Managers using any permissible method under section 706 of the Code and the Treasury Regulations under that section. (v) Income Tax Consequences. The Members are aware of the income tax consequences of the allocations made by this Article IV and agree to be bound by the provisions of this Article IV in reporting their shares of income, gain, loss, and deductions for income tax purposes. 4.3 Construction. The provisions of this Article IV (and other related provisions in this Operating Agreement) pertaining to the allocation of items of Company income, gain, loss, deductions, and credits shall be interpreted consistently with the Treasury Regulations, and to the extent unintentionally inconsistent with such Treasury Regulations, shall be deemed to be modified to the extent necessary to make such provisions consistent with the Treasury Regulations. 5. DISTRIBUTIONS 5.1 Current Tax Distributions. To the extent permitted by law and consistent with the Company's obligations to its creditors, the Company shall make distributions ("Tax Distributions") in accordance with this Section 5.01 on or before April 15, June 15, September 15 and December 15 of each year. The aggregate amount of the Tax Distribution made with respect to a given date shall be the product of (1) the Company's estimated federal taxable income (computed without taking into account any asset change in value due to the Purchase Agreement for the calendar quarter that includes such date, multiplied by (2) the sum of (i) the highest corporate federal income tax rate as stated in the Internal Revenue Code, plus (ii) the highest corporate Wisconsin income tax rate as stated in Wisconsin law, minus (iii) the product of (i) and (ii). The aggregate amount of each Tax Distribution shall be distributed to the Members in proportion to the number of Units held by such Members. 5.2 Other Distributions. At such times and in such form as may be determined by Member Approval, distributions (in addition to the distributions described in Sections 5.01 and 5.03) shall be made to the Members in proportion to the number of Units held by each such Member. 5.3 Amounts Withheld. All amounts withheld pursuant to the Code or any provision of any state or local tax law with respect to any payment or distribution to the Members shall be treated as amounts distributed to the Members pursuant to this Article V for all purposes under this Operating Agreement. The following summarizes certain financial data regarding Total Logistic Control (amounts in thousands): Year Ended June 30, 1998 1997 1996 -------- -------- -------- Revenues $ 90,179 $ 84,208 $ 76,976 Income from operations 6,974 6,311 5,689 Net income 3,741 12,181(3) 1,536(2) EBITDA(1) 13,571 13,143 12,552 Cash flows from operating activities 12,305 9,294 11,043 Cash flows from investing activities (1,653) (1,822) (16,262) Cash flows from financing activities (10,335) (7,277) 4,883 - --------------- (1) EBITDA is defined as income (loss) before taxes plus fixed charges. Fixed charges consist of interest expense, depreciation and amortization, and gains or losses on the disposal of assets. EBITDA is not a measure of financial performance under generally accepted accounting principles and should not be considered as an alternative to net income as a measure of performance nor as an alternative to cash flow as a measure of liquidity. Since all companies do not calculate EBITDA uniformly, it may not be an accurate measure of comparison. (2) Net income for the year ended June 30, 1996 reflects the impact of an income tax provision as Total Logistic Control was a C-Corporation during this period. For comparative purposes, net income for the year ended June 30, 1996 would have been $2,611 absent a provision for income taxes of $1,075. (3) Includes $11,171 of income related to an adjustment of deferred income taxes resulting from a change in Total Logistic Control's tax status from a C-Corporation to a limited liability company. Total Logistic Control was formed on June 30, 1997 as a result of the combination of Wiscold, Inc. ("Wiscold") and Total Logistic Control, Inc. ("Total Logistic Inc.") (two former wholly-owned subsidiaries of Christiana) into Total Logistic Control. Christiana acquired Wiscold in September of 1992 and Total Logistic Inc. in January of 1994. C2 is a Wisconsin corporation with its executive offices located at 700 North Water Street, Suite 1200, Milwaukee, Wisconsin 53202, and its telephone number is (414) 291-9000. Total Logistic Control is a Delaware limited liability company with is principal executive offices located at 8300 Logistic Drive, Zeeland, Michigan 49464, and its telephone number is (616) 748-0701. Christiana's consolidated group, (v) any Tax to which Christiana may be alleged to be liable by reason of being affiliated with any other Person for all periods prior to the Effective Date, (vi) property taxes with respect to the assets of Christiana or any Christiana Company for all periods prior to the Effective Date and (vii) any transfer taxes or value added taxes in connection with the transactions contemplated by the Logistic Sale and the Merger. 1.14 Liability. Liability means any and all claims, demands, liabilities, responsibilities, disputes, causes of action and obligations of every nature whatsoever, liquidated or unliquidated, known or unknown, matured or unmatured, or fixed or contingent. 1.15 Member. Member means each person who has been admitted to TLC as a member as provided in the Delaware Limited Liability Company Act (the "DLLCA") and the Operating Agreement. 1.16 Membership Units. Membership Units means the basis by which a Member's ownership interest in TLC issued pursuant to the Operating Agreement is measured. 1.17 Merger. Merger means the merger of Christiana Acquisition, Inc. with and into Christiana Companies, Inc. as contemplated by the Merger Agreement. 1.18 Merger Agreement. Merger Agreement means the Amended and Restated Agreement and Plan of Merger dated December 12, 1997, by and among Weatherford, Christiana Acquisition, Inc., Christiana Companies, Inc. and C2, Inc. 1.19 Operating Agreement. Operating Agreement shall mean the form of Operating Agreement attached hereto as Exhibit A. 1.20 Person. Person means an individual, corporation, limited liability company, partnership, governmental authority or any other entity. 1.21 Properties. Properties means the properties currently or previously owned or operated by Christiana or any Christiana Company. 1.22 Retained Liabilities. Retained Liabilities shall mean and be limited solely to (i) those accounts payable relating to Christiana that are reflected on the Effective Date balance sheet of Christiana, (ii) those accounts payable reflected on the Effective Date balance sheet of Christiana and agreed to by Weatherford prior to the Effective Date, (iii) the obligations of Christiana that arise after the Effective Date (other than obligations relating to matters existing or occurring on or prior to the Effective Date and indemnification, warranty and product liability, wrongful death or property claims associated with actions or omissions prior to the Effective Date or any business conducted prior to the Effective Date) and (iv) Weatherford Related Taxes (as defined in the Merger Agreement). 5.4 Distribution Restrictions. The Company shall make no distribution if, and to the extent, that after such distribution, the Company would not be able to pay its debts as they become due in the usual course of business, or the fair value of the Company's total assets would be less than the sum of its total liabilities. 6. MANAGEMENT 6.1 Voting and Decisions. Subject to the provisions of Section 6.02, the management of the Company shall be vested in a Board of Managers. The initial Board of Managers shall consist of six Managers. Each Manager shall be elected by the vote or written consent of the Members owning at least a majority of the Units in the Company provided, however, that Christiana Companies, Inc. and C2, Inc. shall at all times each be entitled to elect, without the consent of any other Member, a number of Managers that is proportionate to the number of Units in the Company held by Christiana Companies, Inc. and C2, Inc., respectively. 6.2 Restriction on Transactions. The following actions shall require Member Approval: (i) The authorization or issuance of additional Units except for the issuance of up to 101 Units to Company management for management incentive options with five year cliff vesting; (ii) The authorization or payment of any distribution with respect to Units, except for payment of any distribution that is necessary for C2, Inc. to fulfill its obligation with respect to Section 5.2 of the Purchase Agreement; (iii) The direct or indirect purchase or acquisition by the Company or any Subsidiary of the Company of Units; (iv) The approval of any merger, consolidation or other similar transaction involving the Company or any subsidiary of the Company or sale of all or substantially all of the operating assets of the Company or any subsidiary of the Company in one or more transactions; (v) The creation of any new direct or indirect Subsidiary of the Company; (vi) The making of any tax election; (vii) The liquidation or dissolution of the Company or any Subsidiary of the Company; (viii) Any transaction between the Company or any Subsidiary of the Company and any affiliate of a Member (other than a transaction between the Company and a Subsidiary of the Company); The Merger and the Acquisition The Merger will result in Christiana becoming a wholly-owned subsidiary of Weatherford. The terms and conditions of the Merger are set forth in an Agreement and Plan of Merger, dated December 12, 1997, as amended, by and among Christiana, Weatherford, a wholly-owned subsidiary of Weatherford and C2. On August 17, 1998, at a special meeting of Christiana Shareholders, 89% of all Christiana Shareholders, and 98% of Christiana Shareholders voting in person or by proxy, approved the Merger. The Merger was not completed because a decrease in the price of Weatherford Common Stock from $46 3/8 on December 12, 1997 (the last trading date prior to a public announcement of the Merger) to below $30 prevented the Merger from being treated as a "tax-free" reorganization under the Internal Revenue Code of 1986, as amended (the "Code"). For the Merger to qualify as a "tax-free" reorganization under the Code, at least 80% of the total consideration received by Christiana Shareholders must be in the form of Weatherford Common Stock. Pursuant to the Merger Agreement, prior to amendment, each outstanding share of Christiana Common Stock was to be converted into a right to receive: o The number of shares of Weatherford Common Stock held by Christiana immediately prior to the Merger divided by the number of shares of Christiana Common Stock issued and outstanding immediately prior to the Merger. At the time of the First Special Meeting, this resulted in total Weatherford Share Consideration of 3,897,462 shares of Weatherford Common Stock (approximately 0.74913 shares of Weatherford Common Stock for each share of Christiana Common Stock); o Cash in an amount equal to the cash of Christiana as of the effective time of the Merger less the sum of (i) Christiana's accrued taxes (without giving effect to the value of certain tax deductions to be retained by Christiana) and other liabilities as of such time that are not assumed by C2 and (ii) $10.0 million (approximately $4.00 for each share of Christiana Common Stock) (the "Cash Consideration"); and o A contingent cash payment of up to $10.0 million payable five years after the effective date of the Merger (approximately $1.92 for each share of Christiana Common Stock) (the "Contingent Cash Consideration"). This $10.0 million is the amount of Christiana cash excluded from the calculation of Cash Consideration above and, under the Merger Agreement, was required to be maintained to satisfy claims against Christiana and various indemnity obligations. Based on the above, the Weatherford Common Stock had to be trading at or above $30 per share on the last trading date prior to the closing of the Merger to constitute at least 80% of the total consideration received in the Merger. The Merger Agreement was amended and restated on October 14, 1998 ("Amendment No. 2") to: o Eliminate the requirement that Christiana hold $10.0 million of cash for five years to satisfy certain contingent liabilities and indemnification obligations, which eliminates the Contingent Cash Consideration; o Require Christiana to use the $10.0 million to purchase Weatherford Common Stock in the open market prior to the Special Meetings; o Require Christiana to purchase up to an additional $5.0 million of Weatherford Common Stock in the open market if necessary to qualify the Merger as a "tax-free" reorganization under the Code; and o Extend the date on which either party may terminate the Merger Agreement (if the Merger is not then consummated) to January 31, 1999. Christiana purchased __________ shares of Weatherford Common Stock for a total price of $10.0 million. These purchases increase the amount of Weatherford Common Stock owned by Christiana to __________. It also increases the amount of Weatherford Common Stock to be received by Christiana Shareholders in the Merger. Before the Effective Time, Christiana will sell two-thirds of its interest in C2 1.23 Taxes. Taxes means all federal, state, local, foreign and other taxes, charges, fees, duties, levies, imposts, customs or other assessments, including, without limitation, all net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, profit share, license, lease, service, service use, value added, withholding, payroll, employment, excise, estimated, severance, stamp, occupation, premium, property, windfall profits or other taxes, fees, assessments, customs, duties, levies, imposts, or charges of any kind whatsoever with any interest, penalties, additions to tax, fines or other additional amounts imposed thereon or related thereto, and the term Tax means any one of the foregoing Taxes. 1.24 Waste Materials. Waste Material means any (i) toxic or hazardous materials or substances; (ii) solid wastes, including asbestos, polychlorinated biphenyls, mercury, buried contaminants, chemicals, flammable or explosive materials; (iii) radioactive materials; (iv) petroleum wastes and spills or releases of petroleum products; and (v) any other chemical, pollutant, contaminant, substance or waste that is regulated by any governmental entity under any Environmental Law. 2. Purchase and Sale of Membership Units; Purchase Price. 2.1. Purchase and Sale of Membership Units. (a) Effective as of the closing, Christiana shall sell, transfer, assign, convey and deliver, and C2 shall purchase and accept, 666.667 Membership Units. (b) CHRISTIANA MAKES NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO THE MEMBERSHIP UNITS OR THE ASSETS (CURRENT, FIXED, PERSONAL, REAL, TANGIBLE OR INTANGIBLE) OF TLC AND ITS SUBSIDIARIES, INCLUDING, BUT NOT LIMITED TO, CONDITION OR WORKMANSHIP THEREOF, OR THE ABSENCE OF ANY DEFECTS THEREIN, WHETHER LATENT OR PATENT, CAPACITY, SUITABILITY, UTILITY, SALABILITY, AVAILABILITY, COLLECTIBILITY, OPERATIONS, CONDITIONS, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, IT BEING THE EXPRESS AGREEMENT OF C2, TLC AND CHRISTIANA THAT, EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, C2 WILL ACQUIRE THE MEMBERSHIP UNITS AND INTEREST IN THE ASSETS OF TLC THROUGH SUCH OWNERSHIP INTEREST IN THEIR PRESENT CONDITION AND STATE OF REPAIR, ON AN "AS IS AND WHERE IS, WITH ALL FAULTS" BASIS. 2.2 Assumption. Effective as of the closing, as an inducement to Sub to merge with Christiana, C2 hereby unconditionally assumes and undertakes to pay, satisfy and discharge when due the Assumed Liabilities. Notwithstanding the foregoing, Christiana hereby retains and C2 will have no liability with respect to the Retained Liabilities. In addition, effective as of the Closing, as a further inducement to Sub to merge with Christiana, TLC hereby unconditionally (ix) The payment of any compensation to any Member or any affiliate of a Member or the entering into any employee benefit plan or compensatory arrangement with or for the benefit of any Member or affiliate of any Member except as permitted under Section 6.18; (x) Any amendment to this Operating Agreement or the Certificate; and (xi) Any other matter for which Member Approval is required under the Act. 6.3 Regular Meetings. A regular meeting of the Managers shall be held without other notice other than this Operating Agreement at such time and place as the Board of Managers shall determine. The Board of Managers may provide, by resolution, the time and place, either within or without the State of Delaware, for the holding of additional regular meetings without other notice than such resolution. An annual meeting of Members shall be held without notice other than this Operating Agreement immediately following the annual meetings of Managers. 6.4 Special Meetings. Special meetings of the Board of Managers or Members may be called at the request of any two Managers or any Member. The person or persons authorized to call special meetings of the Board of Managers may fix any place, either within our without the State of Delaware, as the place for holding any special meeting of the Board of Managers called by them. 6.5 Quorum. (i) Managers. A majority of the number of Managers shall constitute a quorum for the transaction of business at any meeting of the Board of Managers, but if less than such majority is present at a meeting, a majority of the Board of Managers or Members present may adjourn the meeting from time to time without further notice. (ii) Members. All Members shall be required to be present to constitute a quorum for the transaction of business of a meeting of the Members. A Member may not unreasonably fail to attend a meeting of Members where such failure would cause irreparable damage to the Company, its business or its assets. 6.6 Notice. Notice of any special meeting shall be given at least five business days prior thereto by written notice delivered personally or mailed to each Manager at his business address, or by telegram; provided, however, telephonic meetings may be called on only two business days' notice. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail, so addressed, with postage thereon prepaid. If notice is given by telegram, such notice shall be deemed to be delivered when the telegram is delivered to the telegraph company. Any Manager or Member may waive notice of any meeting. The attendance of a Manager or Member at a meeting shall constitute a waiver of notice of such meeting, except where a Manager or Member attends a meeting for the express purpose of for approximately $10.7 million. The purchase price of $10.7 million must be paid no later than thirty (30) days after the Effective Time (the "Payment Date"). The Acquisition will be effected pursuant to the terms of an Agreement, dated December 12, 1997, by and among C2, TLC, Christiana and Weatherford which is attached as Annex A. The Merger Agreement requires TLC to pay Christiana (i) a distribution in the amount of $20 million (the "TLC Dividend") and (ii) the entire principal amount of $3,000,000 advanced to Wiscold pursuant to a note dated September 1, 1992 (the "Wiscold Note"), together with all accrued interest thereon. TLC will use its revolving credit facility, which has a maximum limit of up to $65,000,000, to pay the TLC Dividend, to repay the Wiscold Note and to refinance existing bank debt of approximately $30,000,000. Under the Purchase Agreement, the Company must assume, pay and discharge when due all liabilities known or unknown, fixed or contingent (including all expenses related to the Merger) to which Weatherford, Christiana or Christiana Affiliates may become liable in any way as a result of the business, operations or assets of Christiana or any Christiana Affiliate (including TLC) on or prior to the Effective Time. The Assumed Liabilities include Liabilities resulting from, arising out of or relating to: o any Christiana Affiliate, o the business, operations or assets of Christiana or Christiana Affiliate on or prior to the Effective Time, o any taxes to which Christiana or any Christiana Affiliate may be obligated for periods ending on or before the Effective Time (except for Christiana taxes expressly retained by Christiana pursuant to the Merger Agreement), o any obligation, matter, fact, circumstance or action or omission by any person relating to or arising from the business, operations or assets of Christiana or a Christiana Affiliate existing on or prior to the Effective Time, o any product or service provided by Christiana or any Christiana Affiliate prior to the Effective Time, o the Merger, the Acquisition or any transaction contemplated thereby, o previously conducted operations of Christiana or any Christiana Affiliate and o C2's ownership interest in TLC. In addition, TLC agreed to assume, pay and discharge when due the Assumed Liabilities relating to any historical business operations or assets of TLC. The Purchase Agreement provides that C2 and TLC, jointly and severally, will indemnify Christiana and any Christiana Affiliates from and against any and all the Liabilities that are based upon, arise out of, or relate to: o any breach of the Purchase Agreement by the Company or TLC; o any acts or omissions of Christiana and any Christiana Affiliates on or before the Effective Time; o the Assumed Liabilities; o any taxes resulting from the transactions contemplated by the Purchase Agreement other than any tax Liability for income of Weatherford attributable to Christiana under the equity method of accounting either before or after the Effective Time; assumes and undertakes to pay, satisfy and discharge when due the Assumed Liabilities to the extent such Assumed Liabilities relate to any of the historical businesses, operations or assets of TLC and its subsidiaries. The closing shall occur on or prior to the closing of the Merger. 2.3. Purchase Price. The aggregate purchase price ("Purchase Price") for the 666.667 Membership Units shall be (i) $10,666,667, payable on the same date that funds are paid by Weatherford to the Exchange Agent (as defined in the Merger Agreement) pursuant to Section 1.8(c) of the Merger Agreement by C2 to Christiana in the form of a certified or cashier's check, or, at the option of Christiana, by wire transfer of immediately available funds to an account designated by Christiana and (ii) the assumption by C2 at the closing of the Assumed Liabilities. 2.4 Absolute Assumption. It is the intent of the parties that the Liabilities and Environmental Liabilities assumed by C2 and TLC under this Agreement shall be without regard to the cause thereof or the negligence of any Person, whether such negligence be sole, joint or concurrent, active or passive, and whether such Liability or Environmental Liability is based on strict liability, absolute liability or arising as an obligation of contribution. C2 and TLC each hereby waives and releases for itself and on behalf of Affiliates (other than Christiana, Weatherford and their respective Affiliates) any claims, defenses or claims for contribution that it has or may have against Christiana, Weatherford or any of their respective Affiliates with respect to the Assumed Liabilities. 3. Representations of Christiana. 3.1. Organization. Christiana is a corporation duly organized and validly existing under the laws of the state of Wisconsin. TLC is a limited liability company duly organized, validly existing and in good standing under the laws of the state of Delaware. 3.2. Title. The 666.667 Membership Units being transferred pursuant to this Agreement without any representation or warranty of any kind, including any implied representations of the title. 4. Representations of C2 and TLC. 4.1. Organization. TLC is a limited liability company duly organized and validly existing under the laws of the state of Delaware. C2 is a corporation duly organized and validly existing under the laws of the state of Wisconsin. 4.2. Corporate Power. Each of C2 and TLC has full power, legal right and authority to enter into this Agreement, and to carry out the transactions contemplated hereby. The execution of this Agreement, and full performance hereunder, has been duly authorized by C2's Board of Directors and TLC's Members. objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Managers need be specified in the notice or waiver of notice of such meeting. 6.7 Manner of Acting. The act of the majority of the Managers present at a meeting at which a quorum is present shall be the act of the Board of Managers ("Manager Approval"). 6.8 Vacancies. Subject to the provisions of Section 6.01 hereof, any vacancy occurring in the Board of Managers shall be filled by the affirmative vote of a majority of the remaining Managers through less than a quorum of the Board of Managers. A Manager elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office. 6.9 Presumption of Assent. A Manager of the Company who is present at a meeting of the Board of Managers at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless such Manager's dissent shall be entered into the minutes of the meeting or unless such Manager shall file his or her written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the secretary of the Company immediately after the adjournment of the meeting. Such right to dissent shall not apply to a Manager who voted in favor of such action. 6.10 Resignation of Manager. A Manager may resign from his or her position as a Manager at any time by notice to the Board of Managers. Such resignation shall become effective as set forth in such notice. 6.11 Action Without Meeting. Any action required or permitted by this Operating Agreement or by law to be taken at a meeting of the Board of Managers or by the Members may be taken without a meeting if a written consent or consents, describing the action so taken, is signed by all of the Managers or Members, respectively, entitled to vote with respect to the subject matter thereof and delivered to the Company for inclusion in the Company's records. 6.12 Telephonic Meetings. Except as herein provided and notwithstanding any place set forth in the notice of the meeting or this Operating Agreement, Members, Board of Managers and any committees thereof may participate in regular or special meetings by, or through the use of, any means of communication by which (a) all participants may simultaneously hear each other, such as by conference telephone, or (b) all communication is immediately transmitted to each participant, and each participant can immediately send messages to all other participants. If a meeting is conducted by such means, then at the commencement of such meeting, the presiding person shall inform the participating Managers and Members that a meeting is taking place at which official business may be transacted. Any participants in a meeting by such means shall be deemed present in person at such meeting. Notwithstanding the foregoing, no action may be taken at any meeting held by such means on any particular matter, which the presiding person determines, in his or her sole discretion, to be inappropriate under the circumstances for o any taxes that result from the Merger subsequently being determined to be taxable; o any environmental Liabilities arising out of conditions existing on, at or underlying any properties currently or previously owned or operated by Christiana or any Christiana Affiliates; and o certain other Liabilities. As soon as possible after the Effective Time, but no later than the Payment Date, the parties to the Merger Agreement will determine the Cash Consideration. On the Payment Date, Weatherford will pay the Cash Consideration due ech Christiana Shareholder to Firstar Trust Company (the "Subscription Agent") (which will also act as escrow agent in the Merger), and the Subscription Agent will promptly distribute such cash according to the election made by the Christiana Shareholder pursuant to the Letter of Transmittal, provided as part of the Joint Proxy Statement (the "Letter of Transmittal"). Set forth below is a timeline of key events relating to the Offering, the Merger and the Acquisition. Timeline of Key Events Key Event Proposed Date o First Special Meeting of Shareholders of Weatherford and Christiana Amendment No. 2 to the Merger Agreement. August 17, 1998 o Amendment No. 2 to Merger Agreement October 14, 1998 o Special Meeting of Shareholders of Weatherford and Christiana to Vote on Merger. December __, 1998 o Christiana to make Additional Open Market Purchases, if necessary _________, 1998 (following Special Meetings) o Expiration Date for submission of Letter of Transmittal and/or Subscription Agreement (for non-Christiana Shareholders) to purchase Company Common Stock. _________, 1998 o Complete Acquisition with obligation to pay purchase price no later than thirty(30) days thereafter. _________, 1998 o Complete Merger with distribution of Cash Consideration to be made no later than thirty (30) days thereafter, except to the extent applied to purchase Company Common Stock pursuant to Letter of Transmittal. _________, 1998 o Distribution of Cash Consideration and/or application of Cash Consideration to purchase Company Common Stock, based on election made in Letter of Transmittal. _________, 1998 o Purchase of at least 2,734,250 shares of Company Common Stock by Lubar Family. _________, 1998 o Payment of Purchase Price for Acquisition. _________, 1998 o Issuance of Company Common Stock to Subscribers. _________, 1998 4.3. Validity. This Agreement has been duly and validly executed and delivered by C2 and TLC and is the legal, valid and binding obligation of each of C2 and TLC, enforceable in accordance with its terms. 5. Operating Agreement; Put and Participation Rights. 5.1 Operating Agreement. At the Closing, C2 and Christiana shall enter into the Operating Agreement. 5.2 Put.At any time after the fifth anniversary date of the Effective Date, Christiana shall have the option (but shall not be required) to sell to C2 or TLC, at Christiana's option, and C2 and TLC, as applicable, shall be required to purchase, all (but not less than all) of Christiana's Membership Units for a price equal to $7 million. To exercise this option, Christiana shall provide notice in writing to C2 or TLC, as applicable, of such election. The closing of any purchase pursuant to this Section 5.2 shall occur within 60 days of notice to C2 or TLC, as applicable. The price required to be paid by C2 or TLC, as applicable pursuant to this Section 5.2 shall be paid in cash. The rights contained in this Section 5.2 shall expire on the date one year after the fifth anniversary of the Effective Date. 5.3 Participation Rights.If there is a proposed merger, consolidation or share exchange involving C2 or TLC or if C2 shall propose to transfer or sell all its interest in TLC to an unrelated third party (a "Third Party") in one or more transactions, Christiana shall have the right to participate (a "Tag Along Right") in such sale with respect to the Membership Units held by it for the same equivalent consideration per equivalent unit in TLC and otherwise on the same terms as such member sells or transfers their interests in C2. If circumstances occur which give rise to the Tag Along Right, then C2 shall give written notice ("Tag Along Notice") to Christiana providing a summary of the terms of the proposed sale to the Third Party and advising Christiana of its Tag Along Right. Christiana may exercise its Tag Along Right by delivery of written notice to C2 within fifteen (15) days of its receipt of the Tag Along Right. If Christiana gives written notice indicating that it wishes to sell, it shall be obligated to sell its Membership Units upon the substantially same terms and conditions as the members of C2 are selling to the Third Party conditioned upon and contemporaneous with completion of the transaction of purchase and sale with the Third Party. 6. Indemnification. 6.1 Indemnification Matters. (a) Indemnification. Each of C2 and TLC, jointly and severally, hereby agree to indemnify, defend and hold Christiana, Weatherford and their respective officers, directors, employees, agents and assigns (collectively, the "Weatherford Indemnified Parties") harmless from and against any and all Liabilities or Environmental Liabilities (including, without limitation, reasonable fees and expenses of attorneys, accountants, consultants and experts) that the Weatherford Indemnified Parties incur, are subject to a claim for, or are subject to, that are based upon, arising out of, relating to or otherwise in respect of: action at a meeting held by such means. Such determination shall be made and announced in advance of such meeting. 6.13 Reliance by Third Parties. Any person dealing with the Company, other than a Member, may rely on the authority of the Board of Managers and any officer of the Company in taking any action that is in the name of the Company without inquiry into the provisions of this Operating Agreement or compliance therewith. Every instrument purporting to be the action of the Company and executed by the Board of Managers or any officer of the Company shall be conclusive evidence in favor of any person relying thereon or claiming thereunder that, at the time of delivery thereof, this Operating Agreement was in full force and effect and that the execution and delivery of that instrument is duly authorized by the Company. 6.14 Filing of Documents. The Board of Managers shall file or cause to be filed all certificates or documents as may be determined by the Board of Managers to be necessary or appropriate for the formation, continuation, qualification, and operation of a limited liability company in the State of Delaware and any other state in which the Company may elect to do business. To the extent that the Board of Managers determines the action to be necessary or appropriate, the Board of Managers shall do all things to maintain the Company as a limited liability company under the laws of the State of Delaware and any other state in which the Company may elect to do business. 6.15 Limitation on Liability; Indemnification. No Manager, Member or officer of the Company shall be liable, responsible, or accountable in damages or otherwise to the Members or the Company for any act or omission in connection with the business of the Company if the officer acted (i) in good faith and in a manner he or she reasonably believed to be within the scope of the authority granted to him or her by this Operating Agreement and (ii) in the best interests, or not opposed to the best interests, of the Company; provided that the Manager or officer shall not be relieved from liability for any claim, issue or matter as to which the officer shall have been finally adjudicated to have committed fraud or willful misconduct. Subject to this limitation in the case of such adjudication of liability, the Company shall indemnify the Managers, to the fullest extent permitted under the Act, against any losses, judgements, liabilities, and expenses (including, without limitation, reasonable attorney's fees) incurred by reason of any act or omission in connection with the business of the Company. 6.16 Delegation to Members or Representatives of Members. The Board of Managers may, from time to time, fill the offices of president, vice president, secretary and treasurer. The Board of Managers may appoint such other officers and assistant officers as they deem necessary. Unless the Board of Managers decide otherwise, if the title is one commonly used for officers of a business corporation, the assignment of such title shall constitute the delegation of the authority and duties that are normally associated with that office, as set forth below, subject to any specific delegation of authority and duties made pursuant to the first sentence of this Section 6.16. Any number of titles may be held by the same person. Any delegation pursuant to this Section 6.16 may be revoked at any time by the Board of Managers. The following diagram sets forth the organizational structure and stock ownership of the Company, TLC, Christiana and Weatherford following the Merger and the Acquisition. [BEFORE AND AFTER DIAGRAM] (i) Any breach of any covenant or agreement of C2 or TLC contained in this Agreement or in any other agreement contemplated hereby; (ii) The acts or omissions of Christiana or any Christiana Company on or before the Effective Date; (iii) The acts or omissions of TLC, any Christiana Company or any of its Affiliates (other than Christiana or Weatherford) or the conduct of any business by them on or after the Effective Date (it being understood that this indemnification shall not apply to acts or omissions by Christiana or Weatherford after the Effective Date); (iv) The Assumed Liabilities; (v) Any and all amounts for which Christiana or Weatherford may be liable on account of any claims, administrative charges, self-insured retentions, deductibles, retrospective premiums or fronting provisions in insurance policies, including as the result of any uninsured period, insolvent insurance carriers or exhausted policies, arising from claims by Christiana or any Christiana Company, or the employees of any of the foregoing, or claims by insurance carriers of Christiana or any Christiana Company for indemnity arising from or out of claims by or against Christiana or any Christiana Company for acts or omissions of Christiana or any Christiana Company, or related to any current or past business of Christiana or any Christiana Company or any product or service provided by Christiana or any Christiana Company in whole or part prior to the Effective Date; (vi) Any settlements or judgments in any litigation commenced by one or more insurance carriers against Christiana or Weatherford on account of claims by any Christiana Company or employees of any Christiana Company and, if filed prior to the Effective Date, by Christiana or any employee of Christiana; (vii) Any Taxes (other than Weatherford Related Taxes) as a result of the Logistic Sale and any Taxes as a result of the Merger subsequently being determined to be a taxable transaction for foreign, federal, state or local law purposes regardless of the theory or reason for the transactions being subject to Tax; (viii) The on-site or off-site handling, storage, treatment or disposal of any Waste Materials generated by Christiana or any Christiana Company on or prior to the Effective Date or any Christiana Company at any time; (ix) Any COBRA Liability with respect to any employees of Christiana or any Christiana Company prior to the Closing; Any person so delegated under this Section 6.16 shall not be considered a "manager" as defined in Section 18.101(10) of the Act. (i) President. The President shall be the principal executive officer of the Company and, subject to the direction of the Board of Managers, shall in general supervise and control the day-to-day operations of the Company. The President shall preside at all meetings of the Board of Managers. He or she shall have authority, subject to the terms of this Operating Agreement and such rules as may be prescribed by the Board of Managers, to appoint such agents and employees of the Company as he or she shall deem necessary, to prescribe their powers, duties and compensation, and to delegate authority to them. Such agents and employees shall hold office at the discretion of the President. He or she shall have authority to sign, execute, and acknowledge, on behalf of the Company, all deeds, mortgages, bonds, stock certificates, contracts, leases, reports, and all other documents or instruments necessary or proper to be executed in the course of the Company's regular business, or which shall be authorized by resolution of the Board of Managers or Members; and except as otherwise provided by the Board of Managers, he or she may authorize any Vice President or other officer or agent of the Corporation to sign, execute, and acknowledge such documents or instruments in his or her place and stead. In general, he or she shall perform all duties incident to the office of the President and such other duties as may be prescribed by the Board of Managers from time to time. (ii) The Vice President. In the absence of the President or in the event of the President's death, inability or refusal to act, or in the event for any reason it shall be impracticable for the President to act personally, the Vice President (or in the event there be more than one vice President, the Vice Presidents in the order designated by the Board of Managers, or in the absence of any designation, then in the order of their election or appointment) shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. Any Vice President shall perform such other duties and have such authority as from time to time may be delegated or assigned to him or her by the President or by the Board of Managers. The execution of any instrument of the Company by any Vice President shall be conclusive evidence, as to third parties, of his or her authority to act in the stead of the President. (iii) The Secretary. The Secretary shall (i) keep minutes of the meetings of the Members and the Board of Managers (and of committees thereof) in one or more books provided for that purpose (including records of actions taken by the Members and the Board of Managers); (ii) see that all notices are duly given in accordance with the provisions of this Operating Agreement or as required by the Act; (iii) be custodian of the corporate records; (iv) maintain a record of the Members of the Company, in a form that conforms to the requirements of the Act; and (v) in general perform all duties incidental to the office of Secretary and have such other duties and exercise such other authority as from time to time may be delegated or assigned by the President. The Offering Common Stock offered hereby.................5,202,664 shares Minimum Number of Shares of Common Stock to be Outstanding after the Offering......2,734,250 shares (1) Maximum Number of Shares of Common Stock to be Outstanding after the Offering......5,202,689 shares Subscription Price..........................$4.00 per share of Common Stock. The Subscription Price was determined by the Company's Board of Directors which considered the following (1) the desire to have a subscription price close to the Cash Consideration per share to be received in the Merger; (2) meeting the minimum initial bid price of $4.00 per share for the Common Stock to qualify for listing on the Nasdaq SmallCap Market; (3) the fairness of the price to be paid by the Company for its two-thirds interest in TLC; and (4) the potential usefulness of the excess funds to be generated from the Offering. No independent valuation of the Company was done. Subscription Agent..........................Firstar Trust Company, Milwaukee, Wisconsin. Rights......................................Each Right consists of the Basic Subscription Privilege and the Additional Subscription Privilege. Basic Subscription Privilege................The Basic Subscription Privilege grants each Christiana Shareholder a nontransferable right to purchase one share of Common Stock for every one share of Christiana Common Stock held immediately prior to the Effective Time. Additional Subscription Privilege...........If the entire Basic Subscription Privilege is not exercised in full, TLC management, Christiana Shareholders who exercise their Basic Subscription Privilege in full and the general public, in that order of allocation preference, will have an Additional Subscription Privilege to purchase any remaining shares of Common Stock (subject to proration as described below). - ------------------------ (1) Represents the Lubar Commitment. The minimum percentage of ownership of outstanding Common Stock following the Offering by the Lubar Family will be 53% and the maximum percentage of ownership by the Lubar Family following the Offering (assuming no other Christiana Shareholders exercise their Basic Subscription Privilege and that TLC management and the general public do not purchase shares of Common Stock in the Offering) is 100% (x) Any and all Environmental Conditions, known or unknown, existing on, at or underlying any of the Properties on or prior to the Effective Date; (xi) Any and all Liabilities incurred by Christiana or Weatherford pursuant to its obligations hereunder in seeking to obtain or obtaining any consent or approval to assign and transfer any interest in TLC; (xii) Any acts or omissions of Christiana or any Christiana Company relating to the ownership or operation of the business of Christiana or any Christiana Company or the Properties on or prior to the Effective Date; (xiii) Any Liability relating to any claim or demand by any stockholder of Christiana or Weatherford with respect to the Merger, the Logistic Sale or the transactions relating thereto; and (xiv) Any Liability relating to any Christiana or any Christiana Company employee benefit or welfare plans arising out of circumstances occurring on or prior to the Effective Date. (b) Allocation of Liability Payment Obligations. To the extent a Liability exists or a claim for indemnification is made by an Weatherford Indemnified Party hereunder, such Liability shall be paid and such claim shall be defended and paid as follows: (i) If the Liability or claim relates primarily to the historic assets, liability operations of business TLC (excluding [describe non TLC historic subs] (the "TLC Historic Business"), TLC shall, as between C2 and TLC, be primarily responsible for the payment of such Liability and the defense and payment of such claim. If TLC does not defend or pay such claim, C2 shall be responsible for the defense and payment of such claim. (ii) If the Liability or claim relates primarily to a matter other than the TLC Historic Business, C2 shall, as between C2 and TLC and subject to the provisions of clause (iii) below, be primarily responsible for the payment of such Liability and the defense and payment of such claim. If C2 does not defend or pay such claim, TLC shall be responsible for the defense and payment of such claim. (iii) If the Liability or claim relates primarily to a matter other than the TLC Historic Business, the costs of defense and payment of the Liability shall be paid by Weatherford to the extent and only to the extent of the Christiana Retained Cash (as defined in the Merger Agreement); provided that once such Christiana Retained Cash is paid pursuant to the Merger Agreement, Weatherford shall have no obligation to pay such amounts. Any such payments shall be (iv) The Treasurer. The Treasurer shall (i) have charge and custody of and be responsible for all funds and securities of the Company; (ii) maintain appropriate accounting records; (iii) receive and give receipt for monies due and payable to the Company from any source whatsoever, and deposit all such monies in the name of the Company in such banks, trust companies, or other depositories as shall be selected in accordance with the provisions of this Operating Agreement; and (iv) in general perform all of the duties incident to the office of Treasurer and have such other duties and exercise such other authority as from time to time may be delegated or assigned by the President. 6.17 Time Devoted to Business. The Members and the Managers shall not be required to devote their full time and efforts to the Company, but only so much of their time and efforts as is reasonably necessary to perform their duties and responsibilities to the Company. 6.18 Compensation of Members and Officers. The Board of Managers may authorize the Company to pay the officers (other than those affiliated with Lubar & Co., Incorporated) any reasonable fees or other compensation for their services. C2 shall be paid an annual management fee of $250,000. 7. ASSIGNMENT, TRANSFER AND REPURCHASE OF MEMBER'S UNITS AND DISASSOCIATION 7.1 Assignment and Transfer. (i) General Restrictions on Transfers. Except as otherwise provided herein, a Member may not Transfer any Unit without the prior written consent of the Board of Managers. Any Transfer, attempted Transfer, or purported Transfer in violation of this Operating Agreement's terms and conditions shall be null and void. Notwithstanding the foregoing, C2, Inc. may pledge and assign its interest to Christiana and Christiana may effect a Transfer of C2, Inc.'s Units pursuant to any action taken with respect to any security interest granted to it by C2, Inc. Christiana may also transfer its Units without consent of the Board of Managers if the transferee is an affiliate of Christiana or C2, Inc. and such party agrees in writing to be bound by the provisions of this Operating Agreement. At any time after the fifth anniversary of the date of this Operating Agreement, Christiana may transfer any or all of its Units in the Company to any person without the prior consent of the Board of Managers, provided, however, that in order to effect any such Transfer, Christiana must provide C2, Inc. with a copy of the terms of the proposed transfer (the "Transfer Notice"). C2, Inc. shall have a right of first refusal to purchase such Units for the same price and on the same terms set forth in the Transfer Notice. Such right shall be exercised by C2, Inc. sending an appropriate notice to Christiana within 60 days after receipt of the Transfer Notice. The closing shall then be held 30 days after C2, Inc. sends its notice to Christiana. subject to Weatherford being provided with reasonable documentation regarding the payment obligations. (iv) If TLC pays any amounts relating to an Assumed Liability or an indemnification claim hereunder, Christiana shall be entitled to receive a cash payment equal to one-third of any such amount paid when and if (i) TLC or all or substantially all of its assets are sold, (ii) there is a sale of Membership Units by C2 or (iii) there is a direct or indirect transfer or sale of the membership units of TLC held by C2 or of the membership units of C2. The obligation to pay such amounts shall be payable by C2. (v) To secure the obligations of C2 hereunder, C2 shall pledge to Christiana all of C2's interest in TLC, including all rights to distributions in respect thereof, pursuant to a pledge agreement in such form and having such terms as Christiana may reasonably request. (vi) Notwithstanding the foregoing, nothing contained in this Agreement shall be construed to be an assumption of any obligation or responsibility by Weatherford of any Assumed Liabilities and its obligations hereunder shall be personal to TLC and C2 to the extent and only to the extent Weatherford has agreed to fund the payment of indemnity claims by it with the Christiana Retained Cash as expressly provided herein. No third party shall be deemed to have any rights against Weatherford as result of this Agreement. (c) Absolute Indemnity. NONE OF THE WEATHERFORD INDEMNIFIED PARTIES WILL BE OBLIGATED TO INSTITUTE ANY LEGAL PROCEEDINGS IN CONNECTION WITH THE COLLECTION OR PURSUIT OF ANY INSURANCE IN ORDER TO EXERCISE AN INDEMNIFICATION REMEDY UNDER THIS SECTION VI. UNLESS OTHERWISE SPECIFICALLY EXPRESSED, THIS INDEMNITY OBLIGATION SHALL APPLY WITHOUT REGARD TO WHETHER THE LIABILITY OR ENVIRONMENTAL LIABILITY WAS CAUSED BY THE ORDINARY OR GROSS NEGLIGENCE OF ANY OF THE WEATHERFORD INDEMNIFIED PARTIES (WHETHER SUCH NEGLIGENCE BE SOLE, JOINT OR CONCURRENT OR ACTIVE OR PASSIVE), OR WHETHER THE LIABILITY OR ENVIRONMENTAL LIABILITY IS BASED ON STRICT LIABILITY, ABSOLUTE LIABILITY OR ARISES AS AN OBLIGATION OF CONTRIBUTION OR INDEMNITY. EACH OF C2 AND TLC ACKNOWLEDGES THAT IT IS AWARE OF VARIOUS THEORIES KNOWN AS THE "EXPRESS NEGLIGENCE" DOCTRINE AND OTHER SIMILAR DOCTRINES AND THEORIES THAT MAY LIMIT INDEMNIFICATION AND AGREES AND STIPULATES THAT THE PROVISIONS OF THIS AGREEMENT REFLECT THE EXPRESS INTENT OF THE PARTIES THAT THE INDEMNIFICATION TO BE PROVIDED BY TLC AND C2 APPLY NOTWITHSTANDING THE FACT THAT THE LIABILITY OR ENVIRONMENTAL LIABILITY (I) MAY NOT CURRENTLY BE KNOWN BY IT OR MANIFEST ITSELF IN ANY REGARD, (II) MAY ARISE UNDER A STATUTE OR THEORY THAT MAY NOT CURRENTLY EXIST OR BE KNOWN (ii) Involuntary Transfer. (a) Notice of Involuntary Transfer. In the event of an Involuntary Transfer of a Unit, the Transferor or the Involuntary Transferee shall immediately deliver a Notice of Involuntary Transfer to the Company. During the 90-day period beginning on the earlier of (i) the date of receipt by the Company of the Notice of Involuntary Transfer or (ii) the date that the Company provides a notice to the Involuntary Transferee and the Members that the Company is aware of the Involuntary Transfer, the Company shall have the option to purchase the Units that are subject to the Involuntary Transfer. The purchase price shall be an amount equal to the book value attributable to those Units, as determined by the Company's accountants, calculated as of the last day of the calendar quarter immediately preceding the date of the Involuntary Transfer. The purchase price shall be payable pursuant to the terms of payment set forth in the applicable provisions of Section 7.01(e) below. Notwithstanding the foregoing, in the case of a Member that is an entity, the option described above in this Section 7.01(b) shall not apply with respect to an Involuntary Transfer of Units resulting from a merger of such Member into another entity if the proportionate interest owned by each person who owns, directly or indirectly, an ownership interest in such other entity immediately after the merger is substantially the same as the proportionate interest owned, directly or indirectly, by such person in the Member immediately before the merger. (b) Acceptance of Offer. The Company shall exercise any such option by delivering a written notice to the Transferor (if the Transferor is still in existence) and the Involuntary Transferee within such 90-day period, which notice shall specify a closing date, occurring within 30 days after the end of such 90-day period, for the purchase by the Company. (c) Status of Involuntary Transferee. Regardless of whether the Company exercises such option or closes such purchase, the Involuntary Transferee shall not be considered to be a Member, for any period of time, as a result of the Involuntary Transfer (and the rights of the Involuntary Transferee shall be as described in Section 7.01(c)), unless all the Nontransferring Members have delivered (within such 90-day period) their written consent, which consent may be withheld in the sole and absolute discretion of the Nontransferring Members, to treating the Involuntary Transferee as a Member. (iii) Effect of Transfers. Until an Involuntary Transferee is considered a Member, if ever, pursuant to the applicable provisions of this Article VII, the Units transferred to an Involuntary Transferee shall be considered in all respects as Units held by the Transferor for purposes of this Operating Agreement except for those provisions relating to the economic rights associated with such Units, the nonmanagement provisions of which will apply to the Involuntary Transferee as though the Involuntary Transferee held the Units. Except as otherwise provided in this Operating Agreement, any actions that a Member takes or would be entitled to take with respect to Units, including, without limitation, votes, consents, offers, sales, purchases, options, or other deeds taken pursuant to this Operating Agreement, shall be taken by the Member for its Involuntary Transferees with respect to the Units held by those Involuntary Transferees. This Section 7.01(c) shall constitute an irrevocable and absolute proxy Subscription Procedure for Christiana Shareholders............ The Basic Subscription Privilege may be exercised by delivery of a properly completed Letter of Transmittal, even if it was completed and delivered in connection with the First Special Meeting. Christiana Shareholders wishing to exercise their Basic Subscription Privilege will automatically, upon completion and delivery of the Letter of Transmittal, have the exercise price paid directly by the Subscription Agent. If the Cash Consideration per share is less than $4.00 per share, the exercise of the Basic Subscription Privilege in full may require an additional cash payment. Christiana Shareholders wishing to exercise their Additional Subscription Privilege may do so pursuant to the Letter of Transmittal. Payment for shares purchased pursuant to the Additional Subscription Privilege must be made in the form of an additional cash payment by the subscriber. The Letter of Transmittal must be delivered to the Subscription Agent on or before the Expiration Date. Subscription Procedure for Others...Non-Christiana Shareholders may exercise their Additional Subscription Privilege by executing the Subscription Agreement provided herewith, providing full payment for all shares of Common Stock subscribed for pursuant to the Additional Subscription Privilege and delivering the Subscription Agreement to the Subscription Agent on or before the Expiration Date. Proration...........................If a proration of shares of Common Stock to persons exercising the Additional Subscription Privilege occurs, the Subscription Agent will promptly refund, without interest, the amount of any overpayment. Expiration Date.....................____________, 1998 at 5:00 p.m., Central Standard Time. Proceeds of the Offering............If fully subscribed, the Offering will result in proceeds to the Company, net of estimated Offering expenses, of $20,535,656. Further Information.................Any questions or requests for assistance concerning the method of subscribing for Common Stock or requests for additional copies of this Prospectus can be directed to William T. Donovan (414) 291-9000.. TO TLC, (III) MAY ARISE AS A RESULT OF A NEGLIGENT ACT OR OMISSION BY ANY OF THE WEATHERFORD INDEMNIFIED PARTIES (WHETHER SUCH CONDUCT BE SOLE, JOINT OR CONCURRENT OR ACTIVE OR PASSIVE) OR (IV) MAY CONSTITUTE A VIOLATION OF ANY APPLICABLE CIVIL OR CRIMINAL LAW OR REGULATION. 6.2 Notice of Circumstance. After receipt by an Weatherford Indemnified Party of notice, or an Weatherford Indemnified Party's actual discovery, of any action, proceeding, claim, demand or potential claim which could give rise to a right to indemnification pursuant to any provision of this Agreement (any of which is individually referred to a as a "Circumstance"), the Weatherford Indemnified Party shall give TLC and C2 (collectively the "TLC Parties") written notice describing the Circumstances in reasonable detail; provided, however, that no delay by an Weatherford Indemnified Party in notifying the TLC Parties shall relieve the TLC Parties from any Liability or Environmental Liability hereunder unless (and then solely to the extent) the TLC Parties' position is actually adversely prejudiced. In the event the TLC Parties notifies the Weatherford Indemnified Party within 15 days after such notice that the TLC Parties is assuming the defense thereof, (i) the TLC Parties will defend the Weatherford Indemnified Parties against the Circumstances with counsel of its choice, provided such counsel is reasonably satisfactory to Weatherford, (ii) the Weatherford Indemnified Parties may retain separate co-counsel at its or their sole cost or expense (except that the TLC Parties will be responsible for the fees and expenses for the separate co-counsel to the extent Weatherford concludes reasonably that the counsel the TLC Parties has selected has a conflict of interest), (iii) the Weatherford Indemnified Parties will not consent to the entry of any judgment or enter into any settlement with respect to the Circumstances without the written consent of the TLC Parties, and (iv) the TLC Parties will not consent to the entry of any judgment with respect to the Circumstances, or enter into any settlement which (x) requires any payments by or continuing obligations of an Weatherford Indemnified Party, (y) requires an Weatherford Indemnified Party to admit any facts or liability that could reasonably be expected to adversely affect an Weatherford Indemnified Party in any other matter or (z) does not include a provision whereby the plaintiff or claimant in the matter released the Weatherford Indemnified Parties from all Liability with respect thereto, without the written consent of Weatherford. In the event the TLC Parties does not notify Weatherford within 15 days after Weatherford has given notice of the Circumstance that the TLC Parties is assuming the defense thereof, the Weatherford Indemnified Parties may defend against, or enter into any settlement with respect to, the Circumstance in any manner the Weatherford Indemnified Parties reasonably may deem appropriate, at the TLC Parties' sole cost. The foregoing provisions shall be subject to the provisions of Section 6.1(b). 6.3 Insurance. the TLC Parties shall not be obligated to indemnify the Weatherford Indemnified Parties for amounts which shall have been covered and paid by insurance of the Weatherford Indemnified Parties, provided, however, insurance shall not include deductibles or self-insured retentions. 6.4 Scope of Indemnification. INDEMNIFICATION UNDER THIS SECTION VI SHALL BE IN ADDITION TO ANY REMEDIES CHRISTIANA, WEATHERFORD OR ANY WEATHERFORD INDEMNIFIED PARTY MAY HAVE AT and power of attorney granted by each Involuntary Transferee to its Transferor to (1) take such actions on behalf of the Involuntary Transferee without any further deed than the taking of the action by the Member, and (2) sign any document or instrument evidencing such action for or on behalf of the Involuntary Transferee relating to the Units held by the Involuntary Transferee. (iv) Time and Place of Closing. Except as otherwise agreed by the Company, the closing of any Involuntary Transfer (or purchase by the Company) pursuant to this Article VII shall occur at the Company's principal office on such day as the Company shall select pursuant to the provisions of this Article VII. The Company shall notify the Transferor and the Involuntary Transferee in writing of the exact date and time of closing at least 10 days before the closing date. (v) Transfer and Payment of Purchase Price. At the closing, the Transferor shall deliver the Units that are subject to the Involuntary Transfer (or purchase or redemption by the Company) free and clear of any liens, security interests, encumbrances, charges, or other restrictions (other than those created pursuant to this Operating Agreement), together with all such instruments or documents of conveyance as shall be reasonably required. If not otherwise provided pursuant to this Section 7.01 and the Notice of Involuntary Transfer, or otherwise agreed, the price for any Units to be purchased or redeemed by the Company shall be paid by certified or bank cashier's check. 7.2 Disassociation. A person ceases to be a Member of the Company upon the occurrence of, and at the time of, any event of disassociation defined under the Act. 7.3 Restraining Order. In the event that any Member shall at any time Transfer or attempt to Transfer its Units in violation of the provisions of this Operating Agreement and any rights hereby granted, then the other Members and the Company shall, in addition to all rights and remedies at law and in equity, be entitled to a decree or order restraining and enjoining such Transfer, and the offending Member shall not plead in defense thereto that there would be an adequate remedy at law; it being hereby expressly acknowledged and agreed that damages at law will be an inadequate remedy for a breach or threatened breach of the violation of the provisions concerning transfer set forth in this Operating Agreement. 8. DISSOLUTION AND WINDING UP 8.1 Dissolution. The Company shall be dissolved upon the happening of any of the following: (i) By Member Approval to dissolve the Company; (ii) The Company being adjudicated insolvent or bankrupt; or (iii) Entry of a decree of judicial dissolution.
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+PROSPECTUS SUMMARY The following summary does not purport to be complete and is qualified in its entirety by the detailed information and financial statements appearing elsewhere herein. Adirondack Financial Services Bancorp, Inc. The Holding Company, Adirondack Financial Services Bancorp, Inc. was recently formed by Gloversville Federal under the laws of Delaware for the purpose of becoming a savings and loan holding company which will own all of the outstanding capital stock that Gloversville Federal will issue in connection with the Conversion. Immediately following the Conversion, the only significant assets of the Holding Company will be the capital stock of Gloversville Federal, a note evidencing the Holding Company's loan to the ESOP and up to approximately 50% of the net proceeds from the Conversion. See "Use of Proceeds." Upon completion of the Conversion, the Holding Company's business initially will consist only of the business of Gloversville Federal. See "Adirondack Financial Services Bancorp, Inc." Gloversville Federal General. Gloversville Federal is a federally chartered mutual savings and loan association headquartered in Gloversville, New York. Gloversville Federal was originally chartered in 1923. Gloversville Federal currently serves the financial needs of communities in its market area through its main office located in Gloversville and its branch office located in the city of Saratoga Springs, New York. Its deposits are insured up to applicable limits by the Federal Deposit Insurance Corporation ("FDIC"). At September 30, 1997, Gloversville Federal had total assets of $61.0 million, deposits of $56.1 million and equity of $3.3 million. See "Business - Market Area" and " Competition." Gloversville Federal's business has historically involved attracting deposits from the general public and using such deposits, together with other funds, to originate primarily one- to four-family residential mortgages and, to a lesser extent, multi-family and commercial real estate, commercial business, home equity and other loans in its market area. The Association also invests in securities and other permissible investments. See "Business - Investment Activities - Securities." The Association has suffered significant losses in recent years on its residential lending program, in part due to loan underwriting and monitoring deficiencies. In order to address these issues, the Board of Directors has revised the Association's loan underwriting and monitoring procedures and hired new personnel to perform such functions. In addition, in fiscal 1995, the Association hired a new President and Chief Executive Officer experienced in residential mortgage lending, income producing property and business lending and determined to expand the Association's multi-family and commercial real estate and commercial business lending. See "Business - Lending Activities -Multi-family and Commercial Real Estate Lending" and "- Commercial Business Lending." However, loan losses continued in the residential loan portfolio into fiscal 1997 and there can be no assurance that any of these new programs can successfully address the Association's loan problems. Financial Data Employer Contributions. For the Plan Year ended December 31, 1997, Gloversville made no matching contributions. Gloversville made discretionary contributions to the Plan for the fiscal year ended December 31, 1997 of approximately $58,822. See generally "Employer Contributions" in the Summary Plan Description attached hereto. Gloversville may determine to reduce its matching contribution under the Plan in the future. Performance of Holding Company Stock. As of the date of this Prospectus Supplement, no shares of Holding Company Stock have been issued or are outstanding and there is no established market for the Holding Company Stock. Accordingly, there is no record of the historical performance of the Holding Company Stock. Performance of Investment Options. The following table provides performance data with respect to the Investment Options available under the Plan, based on information provided to the Company by Benefit Plans Administrators ("BPA"). The information set forth below with respect to the Investment Options has been reproduced from materials supplied by BPA; Gloversville and the Holding Company take no responsibility for the accuracy of such information. Additional information regarding the Investment Options may be available from BPA or Gloversville. Participants should review any available additional information regarding these investments before making an investment decision under the Plan. <TABLE> <CAPTION> Net Investment Performance -------------------------------------------------- For Twelve-Month Period Ended December 31, 1997 Annualized December 31, ----------------------------------- 1997 5 Years 3 Years 1 Year ---- ------- ------- ------ <S> <C> <C> <C> <C> SEI Stable Asset Fund 6.41% 6.23% 6.29% 6.41% Dodge & Cox Income Fund 10.00 8.18 11.07 10.00 Federated High Yield Trust 13.25 11.75 15.02 13.25 Warburg Pincus Global Fixed Income Fund 2.17 8.07 9.24 2.17 Federated Max Cap Fund 32.69 19.77 30.53 32.69 Managers Special Equity Fund 24.45 19.05 27.64 24.45 Warburg Pincus International Fund -4.40 12.06 5.26 -4.40 </TABLE> Each Participant should note that past performance is not necessarily an indicator of future results. VI EMPLOYER CONTRIBUTIONS A. Contribution Formula (1) Elective Deferrals: The Employer will contribute all Compensation which you elected to defer to the Plan, within the limits outlined in Section V(A). (2) Matching Contributions: The Employer shall make a discretionary Matching Contribution to each Participant based on their Elective Deferral in a percentage set by the Employer prior to the end of each Plan Year. The Employer shall not match your Elective Deferrals in excess of 5 % of your Compensation. Matching Contributions are fully vested when contributed. The Employer has the right to designate all or a portion of the Matching Contributions as "Qualified". To the extent Matching Contributions are so designated, they are nonforfeitable and may not be withdrawn from the Plan prior to separation from Service or attainment of Age 59 1/2. The time period which will be used for determining the amount of Matching Contributions owed shall be monthly. (3) Qualified Non-Elective Contributions: The Employer may also contribute an additional amount determined in its sole judgment. This additional contribution, if any, will be allocated to non-Highly Compensated Participants in proportion to each eligible Participant's Compensation. These contributions are nonforfeitable and subject to withdrawal restrictions. (4) Discretionary: The Employer may also contribute an additional amount determined in its sole judgment. Such additional contribution, if any, shall be allocated to Participants in proportion to each Participant's Compensation and is subject to the Plan's vesting schedule. B. Eligibility for Allocation Although the Employer will generally not make contributions to Participants who terminate Service with the Employer before the last day of the Plan Year, the following Employer Contributions will be made to Participants who terminate before the last day of the Plan Year as a result of: MATCHING OTHER [X] [X] (i) Retirement. [X] [X] (ii) Disability. [X] [X] (iii) Death. PARAGRAPH PAGE 10.3 Participation In This Plan And Another Regional Prototype Defined Contribution Plan, Welfare Benefit Fund, Or Individual Medical Account Maintained By The Employer 52 10.4 Disposition Of Excess Annual Additions Under Two Plans 53 10.5 Participation In This Plan And Another Defined Contribution Plan Which Is Not A Regional Prototype Plan 53 10.6 Participation In This Plan And A Defined Benefit Plan 54 10.7 Limitations On Allocations 54 10.8 Average Deferral Percentage (ADP) Test 54 10.9 Special Rules Relating To Application Of ADP Test 54 10.10 Recharacterization 55 10.11 Average Contribution Percentage (ACP) Test 56 10.12 Special Rules Relating To Application Of ACP Test 56 ARTICLE XI ADMINISTRATION 11.1 Plan Administrator 58 11.2 Trustee 58 11.3 Administrative Fees And Expenses 59 11.4 Division Of Duties And Indemnification 59 ARTICLE XII TRUST FUND ACCOUNT 12.1 The Fund 61 12.2 Control Of Plan Assets 61 12.3 Exclusive Benefit Rules 61 12.4 Assignment And Alienation Of Benefits 61 12.5 Determination Of Qualified Domestic Relations Order (QDRO) 61 ARTICLE XIII INVESTMENTS 13.1 Fiduciary Standards 63 13.2 Trustee Appointment 63 13.3 Investment Alternatives Of The Trustee 63 13.4 Participant Loans 64 13.5 Insurance Policies 66 13.6 Employer Investment Direction 67 13.7 Employee Investment Direction 68 1.19 Designated Beneficiary The individual who is designated as the beneficiary under the Plan in accordance with Code Section 401(a)(9) and the regulations thereunder. 1.20 Disability An illness or injury of a potentially permanent nature, expected to last for a continuous period of not less than 12 months, certified by a physician selected by or satisfactory to the Employer which prevents the Employee from engaging in any occupation for wage or profit for which the Employee is reasonably fitted by training, education or experience. 1.21 Distribution Calendar Year A calendar year for which a minimum distribution is required. 1.22 Early Retirement Age The age set by the Employer in the Adoption Agreement (but not less than 55), which is the earliest age at which a Participant may retire and receive his or her benefits under the Plan. 1.23 Earned Income Net earnings from self-employment in the trade or business with respect to which the Plan is established, determined without regard to items not included in gross income and the deductions allocable to such items, provided that personal services of the individual are a material income-producing factor. Earned income shall be reduced by contributions made by an Employer to a qualified plan to the extent deductible under Code Section 404. For tax years beginning after 1989, net earnings shall be determined taking into account the deduction for one-half of self-employment taxes allowed to the Employer under Code Section 164(f) to the extent deductible. 1.24 Effective Date The date on which the Employer's retirement plan or amendment to such plan becomes effective. For amendments reflecting statutory and regulatory changes post Tax Reform Act of 1986, the Effective Date will be the earlier of the date upon which such amendment is first administratively applied or the first day of the Plan Year following the date of adoption of such amendment. 1.25 Election Period The period which begins on the first day of the Plan Year in which the Participant attains age 35 and ends on the date of the Participant's death. If a Participant separates from Service prior to the first day of the Plan Year in which age 35 is attained, the Election Period shall begin on the date of separation, with respect to the account balance as of the date of separation. 1.26 Elective Deferral Employer contributions made to the Plan at the election of the Participant, in lieu of cash Compensation. Elective Deferrals shall also include contributions made pursuant to a Salary Savings Agreement or other deferral mechanism, such as a cash option contribution. With respect to any taxable year, a Participant's Elective Deferral is the sum of all Employer contributions made on behalf of such Participant pursuant to an election to defer under any qualified cash or deferred arrangement as described in Code Section 401(k), any simplified employee pension cash or deferred arrangement as described in Code Section 402(h)(1)(B), any eligible deferred compensation plan under Code Section 457, any plan as described under Code Section 501(c)(18), and any Employer contributions made on the behalf of a Participant for the purchase of an annuity contract under Code Section 403(b) pursuant to a Salary Savings Agreement. Elective Deferrals shall not include any deferrals properly distributed as Excess Annual Additions. [ ] (iii) Shall be defined as: ____________________________ ____________________________ (Only use if definition in Paragraph 1.48 of the Basic Plan Document #R1 is to be superseded.) (g) "Plan Year" [Paragraph 1.57] The 12-consecutive month period commencing on JANUARY 1 and ending on DECEMBER 31 . If applicable, the Plan Year will be a short Plan Year commencing on and ending on . Thereafter, the Plan Year shall end on the date last specified above. (h) "Qualified Early Retirement Age" For purposes of making distributions under the provisions of a Qualified Domestic Relations Order, the Plan's Qualified Early Retirement Age with regard to the Participant against whom the order is entered [X] shall [ ] shall not be the date the order is determined to be qualified. If "shall" is elected, this will only allow payout to the alternate payee(s). (i) "Qualified Joint and Survivor Annuity" The safe-harbor provisions of Paragraph 8.7 of the Basic Plan Document #R1 [ ] are [X] are not applicable. If not applicable, the survivor annuity will be 50 % (50%, 66 2/3%, 75% or 100%) of the annuity payable during the lives of the Participant and Spouse. If no answer is specified, 50% will be used. (j) "Taxable Wage Base" [Paragraph 1.79] [X] (i) Not Applicable - Plan is not integrated with Social Security. [ ] (ii) The maximum earnings considered wages for such Plan Year under Code Section 3121(a). [ ] (iii) % (not more than 100%) of the amount considered wages for such Plan Year under Code Section 3121(a). [ ] (iv) $_______ , provided that such amount is not in excess of the amount determined under Paragraph 3(j)(ii) above. Financial and operational highlights of the Association include the following: o Capital Strength. At September 30, 1997, the Association had total equity of $3.3 million and exceeded all of the applicable regulatory capital requirements with tangible, core and total risk-based capital ratios of 5.41%, 5.41% and 10.01%, respectively. Assuming on a pro forma basis that $5.0 million, the midpoint of the Estimated Valuation Range, of shares were sold in the Conversion and approximately 50% of the net proceeds were retained by the Holding Company, as of September 30, 1997, the Association's tangible capital would have been $6.5 million (10.0% of assets). See "Pro Forma Regulatory Capital Analysis." o Losses from Operations. The Association has recorded a net loss from operations in three out of its last five fiscal years, primarily due to significant additions to its allowance for loan losses as well as, in 1996, a significant charge to operations for delinquent property taxes on certain non-performing residential loans and a special FDIC assessment. The Association's income (loss) was ($583,000), ($1.0 million), $251,000, $272,000 and ($239,000) for the years ended September 30, 1997, 1996, 1995, 1994 and 1993, respectively. While the Board believes that it has addressed most of the problems which have caused these losses, the Association continues to have significant credit risk in its loan portfolio and its general and administrative expenses have increased as a result of new lending procedures and personnel. Accordingly, there can be no assurance that the Association's results of operations will reach favorable levels in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." o Income Producing Property and Business Lending Activities. In order to increase the yield and interest rate sensitivity of the Association's loan portfolio, the Association recently has increased its multi-family and commercial real estate and commercial business lending. While no such loans were delinquent at September 30, 1997, a number of underwriting, documentation and monitoring deficiencies have been noted. As a result, while no multi- family and commercial real estate or commercial business loans have been classified as non- performing, $1.1 million of such loans have been classified as "of concern" as of September 30, 1997. Based on the above and in view of the higher level of credit risk generally associated with such loans, there can be no assurance that such new lending programs will be successful. See "Risk Factors - Credit Risk Related to Income Producing Property and Business Lending Activities; Limited Experience in Non-Residential Lending." o Asset Quality. As a result of residential loan underwriting and monitoring deficiencies which the Board believes have now been addressed, as well as the relatively weak economy and weak real estate market in the Association's market area, the Association has experienced significant delinquencies and loan losses on its one- to four-family residential loans. In addition, since fiscal 1995, the Association has significantly increased its multi- family and commercial real estate and commercial business lending. At September 30, 1997, the Association's non-performing loans, all of which were one- to four- family residential loans, stood at $3.8 million or 7.4% of gross loans, while "other loans of concern" stood at $1.1 million. On the same date, the Association's loan loss reserves stood at $1.6 million or 3.1% of gross loans and 42.5% of non-performing loans and 33.0% of non-performing Administration of the Plan Trustees. The trustee is appointed by the Board of Directors of Gloversville to serve at its pleasure (the "Trustee"). The Trustee for all funds including the Employer Stock Fund is Community Bank, N.A. The Trustee receives and holds the contributions to the Plan in trust and distributes them to Participants and beneficiaries in accordance with the provisions of the Plan. The Trustee is responsible, following Participant direction, for effectuating the investment of the assets of the Trust in the Holding Company Stock and the other Investment Options. Reports to Plan Participants As soon as practicable after the end of each calendar quarter, the Plan Administrator will furnish to each Participant a statement showing (i) balances in the Participant's accounts as of the end of that period, (ii) the amount of contributions allocated to his or her accounts for that period, and (iii) the number of units in each of the funds. Amendment and Termination It is the intention of Gloversville to continue its participation in the Plan. Nevertheless, Gloversville may terminate the Plan at any time. If the Plan is terminated in whole or in part, then, regardless of other provisions in the Plan, each Participant affected by such termination shall become fully vested in all of his Accounts. Federal Tax Aspects of the Plan The Plan will be administered to comply in operation with the requirements of Section 401(a) of the Code and the requirements which are applicable to a qualified cash-or-deferred arrangement under Section 401(k) of the Code. Assuming that the Plan is administered in accordance with such Sections of the Code, participation in the Plan should have the following implications for federal income tax purposes: (a) Amounts contributed to Participants' Accounts, and the investment earnings on these Accounts, are not includable in Participants' federal taxable income until such contributions or earnings are actually distributed or withdrawn from the Plan. Special tax treatment may apply to the taxable portion of any distribution that includes Holding Company Stock or qualifies as a Lump Sum Distribution (as described below). (b) Income earned on assets by the Trust will not be taxable to the Trust. Lump Sum Distributions. A distribution from the Plan to a Participant or the beneficiary of a Participant will qualify as a Lump Sum Distribution if it is made: (i) within one taxable year to the Participant or beneficiary; (ii) on account of the Participant's death or separation from service, or after the Participant attains age 59-1/2; and (iii) consists of the balance to the credit of the Participant under this Plan and all other profit sharing plans, if any, maintained by Gloversville or the Holding Company. The portion of any Lump Sum Distribution that is required to be included in the Participant's or beneficiary's taxable income for federal income tax purposes (the "total taxable amount") consists of the entire amount of such Lump Sum Distribution made by the Participant to this Plan and the amount of after-tax contributions, if any, made by the Participant to any other profit sharing plans maintained by Gloversville which is included in such distribution. [ ] [ ] (iv) Other termination of employment provided that Participant has completed a Year of Service defined for Allocation Accrual Purposes. [X] [ ] (v) Other termination of employment even though the Participant has not completed a Year of Service. [ ] [ ] (vi) Termination of employment (for any reason) provided that the Participant had completed a of Service for Allocation Accrual Purposes. Matching Contributions will only be allocated to Participants who actually defer Compensation under the Plan. VII GOVERNMENT REGULATIONS The federal government sets certain limitations on the level of contributions which may be made to a Plan such as this. There is also a "percentage" limitation which means that the percentage of Compensation which you may contribute (both Elective Deferrals and, if applicable, Voluntary Contributions) depends on the average percentage of Compensation that the other Participants are contributing. Simply stated, all Participants are divided into two categories: Highly Compensated and Non-highly Compensated. The average contribution for each group is calculated. The average contribution that the Highly Compensated Participant group may make is based on the average contribution that the Non-highly Compensated make. If a Highly Compensated Participant is contributing more than he or she is allowed, the excess plus or minus any gain or loss will either be returned or if permitted, re-characterized as Voluntary Contributions. Keep in mind that if you are a 5% owner of the business or one of the ten highest paid Highly Compensated Employees, your Family Member's contribution percentage and Compensation will be combined with yours for purposes of determining your contributions under the Plan. VIII PARTICIPANT ACCOUNTS The Employer will set up a record keeping account in your name to show the value of your retirement benefit. The Employer will make the following additions to your account: (1) Your allocated share of the Employer's Contribution, (including your Elective Deferrals), (2) The amount of your Rollover Contributions and Transfer Contributions, if any, PARAGRAPH PAGE ARTICLE XIV TOP-HEAVY PROVISIONS 14.1 Applicability Of Rules 69 14.2 Minimum Contribution 69 14.3 Minimum Vesting 69 ARTICLE XV AMENDMENT AND TERMINATION 15.1 Amendment By Sponsor 71 15.2 Amendment By Employer 71 15.3 Termination 71 15.4 Qualification Of Employer's Plan 72 15.5 Mergers And Consolidations 72 15.6 Resignation And Removal 72 15.7 Qualification Of Prototype 72 ARTICLE XVI Governing Law 73 Section 401(a)(17) Limitation 74 1.27 Eligible Participant Any Employee who is eligible to make a Voluntary Contribution, or an Elective Deferral (if the Employer takes such contributions into account in the calculation of the Contribution Percentage), or to receive a Matching Contribution (including forfeitures) or a Qualified Matching Contribution. If a Voluntary Contribution or Elective Deferral is required as a condition of participation in the Plan, any Employee who would be a Participant in the Plan if such Employee made such a contribution shall be treated as an Eligible Participant even though no Voluntary Contributions or Elective Deferrals are made. 1.28 Employee Any person employed by the Employer (including Self-Employed Individuals and partners), all Employees of a member of an affiliated service group [as defined in Code Section 414(m)], Employees of a controlled group of corporations [as defined in Code Section 414(b)], all Employees of any incorporated or unincorporated trade or business which is under common control [as defined in Code Section 414(c)], Leased Employees [as defined in Code Section 414(n)] and any Employee required to be aggregated by Code Section 414(o). All such Employees shall be treated as employed by a single Employer. 1.29 Employer The Self-Employed Individual, partnership, corporation or other organization which adopts this Plan including any firm that succeeds the Employer and adopting this Plan. For purposes of Article X, Limitations shall mean the Employer that adopts this Plan, and all members of a controlled group of corporations [as defined in Code Section 414(b) as modified by Code Section 415(h)], all commonly controlled trades or businesses [as defined in Code Section 414(c) as modified by Code Section 415(h)] or affiliated service groups [as defined in Code Section 414(m)] of which the adopting Employer is a part, and other entities required to be aggregated with the Employer pursuant to Regulations under Code Section 414(o). 1.30 Entry Date The date on which an Employee commences participation in the Plan as determined by the Employer in the Adoption Agreement. Unless the Employer specifies otherwise in the Adoption Agreement, Entry into the Plan shall be on the first day of the Plan Year or the first day of the seventh month of the Plan Year coinciding with or following the date on which an Employee meets the eligibility requirements. 1.31 Excess Aggregate Contributions The excess, with respect to any Plan Year, of: (a) The aggregate Contribution Percentage Amounts taken into account in computing the numerator of the Contribution Percentage actually made on behalf of Highly Compensated Employees for such Plan Year, over (b) The maximum Contribution Percentage Amounts permitted by the ACP test (determined by reducing contributions made on behalf of Highly Compensated Employees in order of their Contribution Percentages beginning with the highest of such percentages). Such determination shall be made after first determining Excess Elective Deferrals pursuant to paragraph 1.34 and then determining Excess Contributions pursuant to paragraph 1.33. 1.32 Excess Amount The excess of the Participant's Annual Additions for the Limitation Year over the Maximum Permissible Amount. [x] (v) For the 1989 Plan Year, $10,000. For all subsequent Plan Years, 20% of the maximum earnings considered wages for such Plan Year under Code Section 3121(a). NOTE: Using less than the maximum at (ii) may result in a change in the allocation formula in Section 7. (k) "Valuation Date(s)" Allocations to Participant Accounts will be done in accordance with Article V of the Basic Plan Document #R1: (i) Daily (v) Quarterly (ii) Weekly (vi) Semi-Annually (iii) Monthly (vii) Annually (iv) Bi-Monthly Indicate Valuation Date(s) to be used by specifying option from list above: Type of Contribution(s) Valuation Date(s) ----------------------- ----------------- After-Tax Voluntary Contributions [Section 6] v Elective Deferrals [Section 7(b)] v Matching Contributions [Section 7(c)] v Qualified Non-Elective Contributions [Section 7(d)] vii Non-Elective Contributions [Section 7(e), (f), (g)] vii Minimum Top-Heavy Contributions [Section 7(i)] vii (l) "Year of Service" (i) For Eligibility Purposes: The 12-consecutive month period during which an Employee is credited with 1,000 (not more than 1,000) Hours of Service. (ii) For Allocation Accrual Purposes: The 12-consecutive month period during which an Employee is credited with the Hours of Service (not more than 1,000) for each type of contribution listed below. Type of Contribution Hours of Service -------------------- ---------------- (1) Matching [Section 7(c)] 1,000 (2) Qualified Non-Elective [Section 7(d)] 1,000 (3) Non-Elective [Section 7(e), (f), (g)] 1,000 loans and other loans of concern. At September 30, 1997, the Association's total non-performing assets stood at $4.1 million or 6.7% of assets. While the Association currently believes that its current allowance for loan losses is adequate, there can be no assurance that the Association will not continue to experience significant loan delinquencies and losses in the future. See "Business - Delinquencies and Non-Performing Assets." o Interest Rate Sensitivity. The Association's profitability, like that of most financial institutions, is dependent to a large extent upon its net interest income, which is the difference between its interest income and interest expense. In managing its asset/liability mix, Gloversville Federal generally, depending on the relationship between long and short- term interest rates, market conditions and consumer preference, places greater emphasis on maximizing its net interest margin than on matching the interest rate sensitivity of its assets and liabilities. At September 30, 1997, the net value of the Association's portfolio equity was projected to decline by 22.9% and 53.5% if there were instantaneous increases in interest rates of 200 and 400 basis points, respectively. See "Risk Factors - Interest Rate Risk Exposure" and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Market Risk Analysis." The Conversion The Offering is being made in connection with the conversion of Gloversville Federal from a federally chartered mutual savings and loan association to a federally chartered stock savings and loan association and the formation of Adirondack Financial Services Bancorp, Inc. as the holding company of Gloversville Federal. The Conversion is subject to certain conditions, including the prior approval of the Plan by the Association's members at a Special Meeting to be held on January 21, 1998. After the Conversion, the Association's current voting members (who include certain deposit account holders and borrowers) will have no voting rights in Gloversville Federal and will have no voting rights in the Holding Company unless they become Holding Company stockholders. Eligible Account Holders and Supplemental Eligible Account Holders, however, will have certain liquidation rights in the Association. See "The Conversion - Effects of Conversion to Stock Form on Depositors and Borrowers of the Association - Liquidation Rights." The Offering. The shares of Common Stock to be issued in the Conversion are being offered at a Purchase Price of $10.00 per share in the Subscription Offering pursuant to nontransferable Subscription Rights in the following order of priority: (i) Eligible Account Holders (i.e., depositors whose accounts in the Association totaled $50.00 or more on September 30, 1996); (ii) Tax-Qualified Employee Plans; provided, however, that the Tax Qualified Employee Plans shall have first priority Subscription Rights to the extent that the total number of shares of Common Stock sold in the Conversion exceeds the maximum of the Estimated Valuation Range; (iii) Supplemental Eligible Account Holders (i.e., depositors whose accounts in the Association totaled $50.00 or more on ___________, 1998); (iv) Other Members (i.e., depositors as of ___________ __, 1998 and certain borrowers of the Association as of ________ __, ____ and _______ __, 1998); and (v) employees, officers and directors of the Association. Subscription Rights received in any of the Averaging Rules. Except as described below with respect to distributions of Holding Company Stock, the portion of the total taxable amount of a Lump Sum Distribution that is attributable to participation after 1973 in this Plan or in any other profit-sharing plan maintained by Gloversville (the "ordinary income portion") will be taxable generally as ordinary income for federal income tax purposes. However, a Participant who has completed five years of participation in this Plan and each other profit-sharing plan making the Lump Sum Distribution prior to the taxable year in which the distribution is made, or a beneficiary who receives a Lump Sum Distribution on account of the Participant's death (regardless of the period of the Participant's participation in this Plan or any other profit-sharing plan maintained by the Employer), may elect to have the ordinary income portion of such Lump Sum Distribution taxed according to special averaging rules. The election of the special averaging rules must apply to all Lump Sum Distributions received by the Participant or beneficiary from this Plan and all other qualified plans during the taxable year. Furthermore, if a Lump Sum Distribution includes employer securities, the recipient is not currently taxable on the net unrealized appreciation of such securities at the time of the distribution, unless the recipient otherwise elects to pay the tax on the net unrealized appreciation at the time of the distribution. Rollover to Another Qualified Plan or to an IRA. A Participant may defer federal income taxation of all or any portion of the total taxable amount of a Lump Sum Distribution (including the proceeds from the sale of any Holding Company Stock included in the Lump Sum Distribution) to the extent that such amount, or a portion thereof, is contributed, within 60 days after the date of its receipt by the Participant, to another qualified plan or to an individual retirement account ("IRA"). The beneficiary of a Participant who is the Participant's surviving spouse also may defer federal income taxation of all or any portion of the total taxable amount of a Lump Sum Distribution to the extent that such amount, or a portion thereof, is contributed, within 60 days after the date of its receipt by the surviving spouse, to an IRA. If less than the total taxable amount of a Lump Sum Distribution is contributed to another qualified plan or to an IRA within the applicable 60-day period, the amount not so contributed must be included in the Participant's or beneficiary's taxable ordinary income for federal income tax purposes and will not be eligible for the special averaging rules or capital gain treatment. If all or any portion of the total taxable amount of a Lump Sum Distribution is contributed by a Participant or beneficiary to an IRA within the applicable 60-day period, any subsequent distribution from the IRA will not be eligible for the special averaging rules or capital gain treatment. Additional Tax on Early Distributions. For taxable years beginning after December 31, 1986, a Participant who receives a distribution from the Plan prior to attaining age 55 will be subject to an additional income tax equal to 10% of the amount of the distribution. The 10% additional income tax will not apply, however, to the extent the distribution is rolled over into an IRA or another qualified plan or the distribution is (i) made to a beneficiary (or to the estate of a Participant) on or after the death of the Participant, (ii) attributable to the Participant's being disabled within the meaning of Section 72(m)(7) of the Code, (iii) part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the Participant or the joint lives (or joint life expectancies) of the Participant and his beneficiary, (iv) made to the Participant after separation from service under the Plan after attainment of age 55, (v) made to pay medical expenses to the extent deductible for federal income tax purposes, (vi) pursuant to a qualified domestic relations order, or (vii) made to effect the distribution of excess contributions or excess deferrals. (3) Your share of forfeited accounts of former employees. (These are amounts left behind by employees who terminated before becoming 100% vested in their benefit); and (4) Your share of investment earnings and appreciation in the value of investments. The Employer will make the following subtractions from your account: (5) Any withdrawals or distributions made to you, (6) Your share of investment losses and depreciation in the value of investments; and (7) Your share of administrative fees and expenses paid out of the Plan, if applicable. The Employer will value the following types of contributions in your account as indicated: Valuation Type of Contribution(s) Date(s) - ----------------------- ------- Elective Deferrals [Section 7(b)] Quarterly Matching Contributions [Section 7(c)] Quarterly Qualified Non-Elective Contributions [Section 7(d)] Annually Non-Elective Contributions [Section 7(e), (f), (g)] Annually Minimum Top-Heavy Contributions [Section 7(i)] Annually IX VESTING A. Determining Vested Benefit Vesting refers to your earning or acquiring a nonforfeitable right to the full amount of your account(s). Any Qualified Non-elective Contribution, Qualified Matching Contribution, Employee Contribution (including Elective Deferrals), Rollover Contribution, or Transfer Contribution, plus or minus any earnings or losses, is always 100% vested and cannot be forfeited for any reason. Any Employer Contribution and the earnings or losses thereon, not fully vested when contributed, will vest in accordance with the following table: Year of Service Vesting --------------- ------- 1 0% 2 0% 3 20% 4 50% 5 100% 1.33 Excess Contribution With respect to any Plan Year, the excess of: (a) The aggregate amount of Employer contributions actually taken into account in computing the ADP of Highly Compensated Employees for such Plan Year, over (b) The maximum amount of such contributions permitted by the ADP test (determined by reducing contributions made on behalf of Highly Compensated Employees in order of the ADPs, beginning with the highest of such percentages). 1.34 Excess Elective Deferrals Those Elective Deferrals that are includible in a Participant's gross income under Code Section 402(g) to the extent such Participant's Elective Deferrals for a taxable year exceed the dollar limitation under such Code Section. Excess Elective Deferrals shall be treated as Annual Additions under the Plan, unless such amounts are distributed no later than the first April 15 following the close of the Participant's taxable year. 1.35 Family Member The Employee's Spouse, any lineal descendants and ascendants and the Spouse of such lineal descendants and ascendants. 1.36 First Distribution Calendar Year For distributions beginning before the Participant's death, the First Distribution Calendar Year is the calendar year immediately preceding the calendar year which contains the Participant's Required Beginning Date. For distributions beginning after the Participant's death, the First Distribution Calendar Year is the calendar year in which distributions are required to begin pursuant to paragraph 7.10. 1.37 Fund All contributions received by the Trustee under this Plan and Trust Account, investments thereof and earnings and appreciation thereon. 1.38 Hardship An immediate and heavy financial need of the Employee where such Employee lacks other available resources. 1.39 Highest Average Compensation The average compensation for the three consecutive Years of Service with the Employer that produces the highest average. A Year of Service with the Employer is the 12-consecutive month period defined in the Adoption Agreement. 1.40 Highly Compensated Employee Any Employee who performs service for the Employer during the determination year and who, during the immediate prior year: (a) received Compensation from the Employer in excess of $75,000 [as adjusted pursuant to Code Section 415(d)]; or (b) received Compensation from the Employer in excess of $50,000 [as adjusted pursuant to Code Section 415(d)] and was a member of the Top-Paid Group for such year; or (c) was an officer of the Employer and received Compensation during such year that is greater than 50 percent of the dollar limitation in effect under Code Section 415(b)(1)(A). Notwithstanding (a), (b) and (c), an Employee who was not Highly Compensated during the preceding Plan Year shall not be treated as a Highly Compensated Employee with respect to the current Plan Year unless such Employee is a member of the 100 Employees paid the greatest Compensation during the year for which such determination is being made. (iii)For Vesting Purposes: The 12-consecutive month period during which an Employee is credited with 1,000 (not more than 1,000) Hours of Service. 4. ELIGIBILITY REQUIREMENTS [Article II] (a) Service: (i) For Elective Deferrals, and Required Voluntary Contributions or Employer Contributions [unless specified otherwise at (ii) below]: [ ] (1) The Plan shall have no service requirement. [X] (2) The Plan shall cover only Employees having completed at least 6 months (not more than three (3)) Years of Service. If more than one (1) year is specified, for Plan Years beginning in 1989 and later, the answer will be deemed to be one (1). (ii) For contributions [not covered at (i) above] specify the Service requirements below: Type of Contribution Service Requirement (1) Elective Deferrals ___________________ (2) Employer Matching ___________________ (3) Qualified Non-Elective ___________________ (4) Discretionary Profit-Sharing ___________________ (5) Required Voluntary ___________________ Not more than three (3) years may be specified. If more than two (2) years is specified, for Plan Years beginning in 1989 and later, the requirement will be deemed to be two (2) years. NOTE:If the eligibility period selected is or includes a fractional year, an Employee will not be required to complete any specified number of Hours of Service to receive credit for such period. Participants will be eligible for Top-Heavy minimum contributions after the period in (i) above, assuming they satisfy the other requirements of this Section 4. (b) Age: [ ] (i) The Plan shall have no minimum age requirement. [X] (ii) The Plan shall cover only Employees having attained age 21 (not more than age 21). foregoing categories will be subordinated to the Subscription Rights received by those in a prior category. Subscription Rights will expire if not exercised by noon, Gloversville, New York time, on ____________ __, 1998, unless extended (the "Expiration Date"). Subject to the prior rights of holders of Subscription Rights and market conditions at or near the completion of the Subscription Offering, any shares of Common Stock not subscribed for in the Subscription Offering may be offered at the same price in a Public Offering and/or Direct Community Offering through Capital Resources on a best efforts basis to selected persons to whom this prospectus is delivered. To order Common Stock in connection with the Public Offering and/or Direct Community Offering, if any, an executed stock order form and account withdrawal authorization and certification must be received by Capital Resources prior to the termination of such offerings. The date by which orders must be received in the Public Offering and/or Direct Community Offering, if any, will be set by the Holding Company at the time of such offering provided that if the Offering is extended beyond __________ __, 1998, each subscriber will have the right to modify or rescind his or her subscription. The Holding Company and the Association reserve the absolute right to accept or reject any orders in the Public Offering and Direct Community Offering, if any, in whole or in part. If necessary, shares of Common Stock may also be offered in connection with the Public Offering for sale on a best-efforts basis by selected dealers managed by Capital Resources. See "The Conversion - Public Offering and Direct Community Offering." The Association and the Holding Company have engaged Capital Resources to consult with and advise the Holding Company and the Association with respect to the Offering, and Capital Resources has agreed to solicit subscriptions and purchase orders for shares of Common Stock in the Offering. Neither Capital Resources nor any selected broker-dealers will have any obligation to purchase shares of Common Stock in the Offering. Capital Resources will receive for its services a marketing fee of $90,000. To the extent selected broker-dealers are utilized in connection with the sale of shares in the Public Offering, the selected dealers will receive a fee of up to _____% and Capital Resources will receive a fee of _____% of the aggregate Purchase Price for all shares of Common Stock sold through such broker-dealers. Capital Resources will also receive reimbursement for certain expenses incurred in connection with the Offering. The Holding Company has agreed to indemnify Capital Resources against certain liabilities, including certain liabilities under the Securities Act of 1933, as amended ("Securities Act"). See "The Conversion Marketing Arrangements." The Association has established a Stock Information Center, which will be managed by Capital Resources, to coordinate the Offering, and answer questions about the Offering received by telephone. All subscribers will be instructed to mail payment to the Stock Information Center or deliver payment directly to the Association's office. Payment for shares of Common Stock may be made by cash (if delivered in person), check or money order or by authorization of withdrawal from deposit accounts maintained with the Association. Such funds will not be available for withdrawal and will not be released until the Conversion is completed or terminated. See "The Conversion - Method of Payment for Subscriptions." The foregoing is only a brief summary of certain federal income tax aspects of the Plan which are of general application under the Code and is not intended to be a complete or definitive description of the federal income tax consequences of participating in or receiving distributions from the Plan. Accordingly, each Participant may wish to consult a tax advisor concerning the Federal, state and local tax consequences of participating in and receiving distributions from the Plan. Participants subject to taxes imposed by state, local and other taxing authorities, including foreign governments, should also consult with their own attorneys or tax advisers regarding the tax consequences thereunder. Restrictions on Resale Any person receiving shares of Holding Company Stock under the Plan who is an "affiliate" of Gloversville or the Holding Company as the term "affiliate" is used in Rules 144 and 405 under the Securities Act of 1933 (e.g., directors, officers and substantial shareholders of the Holding Company and Gloversville) may re-offer or resell such shares only pursuant to a registration statement or, assuming the availability thereof, pursuant to Rule 144 or some other exemption of the registration requirements of the Securities Act of 1933. Any person who may be an "affiliate" of Gloversville or the Holding Company may wish to consult with counsel before transferring any Holding Company Stock owned by him or her. In addition, Participants are advised to consult with counsel as to the applicability of Section 16 of the Securities Exchange Act of 1934 which may restrict the sale of Holding Company Stock acquired under the Plan, or other sales of Holding Company Stock. LEGAL OPINIONS The validity of the issuance of the Holding Company Stock will be passed upon by Silver, Freedman & Taff, L.L.P., 1100 New York Avenue, N.W., Washington, D.C. 20005, which firm acted as special counsel for the Holding Company and Gloversville in connection with Gloversville's Conversion. FINANCIAL STATEMENTS The financial statements and schedules of the Plan have been prepared by management in accordance with the applicable provisions of ERISA and are included in this Prospectus Supplement. You are considered to have completed one Year of Service, for purposes of vesting, upon the completion of 1,000 Hours of Service as specified at Section III(N). Service prior to the Effective Date of the Plan is counted for purposes of vesting. Service prior to age 18 is counted for purposes of vesting. You automatically become fully vested, regardless of the vesting table, upon attainment of Normal Retirement Age, Early Retirement Age, upon retirement due to Disability, upon death, and upon termination of the Plan. B. Payment of Vested Benefit If you separate from Service before your Retirement, Death, or Disability, you may not request early payment of your vested benefit. If your Vested Account Balance at the time of termination or at the time of any prior distributions exceeds or exceeded $3,500, you may defer the payment of your benefit until April 1 of the calendar year following the calendar year during which you attain age 70 1/2. If you do not separate from Service you may not obtain a distribution of your vested Employer contributions. Distribution can only be made if you are 100% vested. The portion of your account balance to which you are not entitled is called a "forfeiture" and remains in the Plan for the benefit of other Participants. C. Loss of Benefits There are only two events which can cause loss of all or a portion of your account. One is termination of employment before you are 100% vested according to the vesting table described at IX(A), and the other is a decrease in the value of your account from investment losses or administrative expenses and other costs of maintaining the Plan. D. Reallocation of Forfeitures The Employer will forfeit and reallocate the nonvested portion of your account as of the Plan Year during which you incur your 1st consecutive one year Break in Service. If you have not received a distribution of your vested balance, your nonvested portion will be forfeited at the end of the Plan year during which you incur your fifth consecutive one-year Break in Service. E. Re-employment If you terminate service with your Employer and then are later re-employed, you will become a Participant as of the earlier of the next Valuation Date or the next Entry Date [See Section III(G)] upon returning to employment. If you are not a member of an eligible class and later become a member of an eligible class, you shall participate immediately if you have satisfied the minimum age and service requirements. Should you become ineligible to participate because you are no longer a member of an eligible class, you shall participate upon your return to an eligible class. All Years of Service will be counted when calculating your vested percentage in your new account balance. The following rules apply in connection with re-employed Participants. (d) Employees who are five percent (5%) Owners at any time during the immediate prior year or determination year. Highly Compensated Employee includes Highly Compensated active Employees and Highly Compensated former Employees. For purposes of determining those employees that are to be treated as Highly Compensated for a determination year, an Employer maintaining a fiscal year Plan may elect to make the look-back year calculation as defined in ss.1.414(q)-1T, Q&A 14(b) of the Treasury Regulations for a determination year on the basis of the calendar year ending with or within the applicable determination year. For purposes of this election, a determination year that is shorter than twelve (12) months, the look-back year calculation may be made based upon the calendar year ending with or within the twelve-month period ending with the end of the applicable determination year. Where such election is made, the employer shall make its determination year calculation pursuant to the provisions of Treasury Regulation ss.1.414(q)-1T, Q&A 14(b). 1.41 Hour Of Service (a) Each hour for which an Employee is paid, or entitled to payment, for the performance of duties for the Employer. These hours shall be credited to the Employee for the computation period in which the duties are performed; and (b) Each hour for which an Employee is paid, or entitled to payment, by the Employer on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence. No more than 501 Hours of Service shall be credited under this paragraph for any single continuous period (whether or not such period occurs in a single computation period). Hours under this paragraph shall be calculated and credited pursuant to Department of Labor Regulations Section 2530.200b-2 which are incorporated herein by this reference; and (c) Each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by the Employer. The same Hours of Service shall not be credited both under paragraph (a) or paragraph (b), as the case may be, and under this paragraph (c). These hours shall be credited to the Employee for the computation period or periods to which the award or agreement pertains rather than the computation period in which the award, agreement or payment is made. (d) Hours of Service shall be credited for employment with the Employer and with other members of an affiliated service group [as defined in Code Section 414(m)], a controlled group of corporations [as defined in Code Section 414(b)], or a group of trades or businesses under common control [as defined in Code Section 414(c)] of which the adopting Employer is a member, and any other entity required to be aggregated with the Employer pursuant to Code Section 414(o) and the regulations thereunder. Hours of Service shall also be credited for any individual considered an Employee for purposes of this Plan under Code Section 414(n) or Code Section 414(o) and the regulations thereunder. (c) Classification: The Plan shall cover all Employees who have met the age and service requirements with the following exceptions: [ ] (i) No exceptions. [X] (ii) The Plan shall exclude Employees included in a unit of Employees covered by a collective bargaining agreement between the Employer and Employee Representatives, if retirement benefits were the subject of good faith bargaining. For this purpose, the term "Employee Representative" does not include any organization more than half of whose members are Employees who are owners, officers, or executives of the Employer. [X] (iii) The Plan shall exclude Employees who are nonresident aliens and who receive no earned income from the Employer which constitutes income from sources within the United States. [X] (iv) The Plan shall exclude from participation any nondiscriminatory classification of Employees determined as follows: Independent Contractors (d) Employees on Effective Date: [X] (i) Not Applicable. All Employees will be required to satisfy both the Age and Service requirements specified above. [ ] (ii) Employees employed on the Plan's Effective Date do not have to satisfy the Service requirements specified above at [ ] (a)(i), [ ] (a)(ii), [ ] both. [ ] (iii) Employees employed on the Plan's Effective Date do not have to satisfy the age requirements specified above. 5. RETIREMENT AGES (a) Normal Retirement Age: If the Employer imposes a requirement that Employees retire upon reaching a specified age, the Normal Retirement Age selected below may not exceed the Employer imposed mandatory retirement age. [X] (i) Normal Retirement Age shall be 65 (not to exceed age 65). [ ] (ii) Normal Retirement Age shall be the later of attaining age (not to exceed age 65) or the (not to exceed the 5th) anniversary of the first day of the first Plan Year in which the Participant commenced participation in the Plan. Purchase Limitations. The Plan of Conversion places limitations on the number of shares which may be purchased in the Conversion by various categories of persons. With the exception of the Tax-Qualified Employee Plans, no Eligible Account Holder, Supplemental Eligible Account Holder, Other Member or director, officer or employee may purchase in their capacity as such in the Subscription Offering more than $150,000 of Common Stock; no person, together with associates of and persons acting in concert with such person, may purchase more than $150,000 of Common Stock in the Public Offering; and no person or group of persons acting in concert (other than the Tax-Qualified Employee Plans) may purchase more than $150,000 of Common Stock in the Conversion. The minimum purchase limitation is 25 shares of Common Stock. These purchase limits may be increased or decreased consistent with the Office of Thrift Supervision ("OTS") regulations at the sole discretion of the Holding Company and the Association. See "The Conversion - Offering of Holding Company Common Stock." Restrictions on Transfer of Subscription Rights. Prior to the completion of the Conversion, no person may transfer or enter into any agreement or understanding to transfer the legal or beneficial ownership of the subscription rights issued under the Plan or the shares of Common Stock to be issued upon their exercise. Persons found to be selling or otherwise transferring their right to purchase stock in the Subscription Offering or purchasing Common Stock on behalf of another person will be subject to forfeiture of such rights and possible federal penalties and sanctions. See "The Conversion - Restrictions on Transfer of Subscription Rights and Shares." Stock Pricing and Number of Shares of Common Stock to be Issued in the Conversion. The Purchase Price of the Common Stock is $10.00 per share and is the same for all purchasers. The aggregate pro forma market value of the Holding Company and Gloversville Federal, as converted, was estimated by RP Financial, which is experienced in appraising converting thrift institutions, to be the Estimated Valuation Range. The Board of Directors has reviewed the Estimated Valuation Range as stated in the appraisal and compared it with recent stock trading prices as well as other recent pro forma market value estimates. The Board of Directors has also reviewed the appraisal report, including the assumptions and methodology utilized therein, and determined that it was not unreasonable. Depending on market and financial conditions at the time of the completion of the Offering, the total number of shares of Common Stock to be issued in the Conversion may be increased or decreased significantly from the 575,000 shares offered hereby and the Purchase Price may be decreased. However, subscribers will be permitted to modify or rescind their subscriptions if the product of the total number of shares to be issued multiplied by the price per share is less than $4,250,000 or more than $6,612,500. The appraisal is not intended to be, and must not be interpreted as, a recommendation of any kind as to the advisability of voting to approve the Conversion or of purchasing shares of Common Stock. The appraisal considers Gloversville Federal and the Holding Company only as going concerns and should not be considered as any indication of the liquidation value of Gloversville Federal or the Holding Company. Moreover, the appraisal is necessarily based on many factors which change from time to time. There can be no assurance that persons who purchase shares in the Conversion will be able to sell such shares at prices at or above the Purchase Price. See "Pro Forma Data" and "The Conversion - Stock Pricing and Number (1) Terminated Partially Vested Participants. If you had a vested interest, received a distribution of that interest and your nonvested interest was forfeited away, you have the right to repay the amount you received. If you choose to repay, the nonvested portion of your Employer Account will be reinstated. Such repayment must be made within five (5) years after your date of re-employment, or if earlier, prior to your incurring five (5) consecutive 1-year Breaks in Service. If you do not repay the amount you received, the nonvested portion of your Employer Accounts will be permanently forfeited. Whether you repay or not, your prior Service will count toward vesting service for future Employer Contributions. For example, assume that you terminate your job with your current Employer. At the time of termination you had accrued a total benefit of $10,000 under the Retirement Plan. Although this amount had been allocated to your account, you were only 40% vested in that amount when you left. You decided to take a distribution of your vested account balance (40% of $10,000, or $4,000) when you quit. The nonvested balance of your account ($6,000) was forfeited. Three years later, you became re-employed by the same Employer. Since you were re-employed within 5 years, you have the right to repay the $4,000 distribution you received when you quit. You would have to repay the $4,000 within 5 years of being rehired. If you do so, the nonvested portion of your account ($6,000) will be restored to your account. After restoration, you will be vested in 40% of this account, but your vested percentage will increase based on your Years of Service after your re-employment. Your prior Service will always count towards vesting of Employer Contributions which you receive after re-employment, whether or not you decide to repay and restore your prior account. (2) Terminated Non-Vested Participants. If you were not vested in any portion of your Employer Contribution sub-account prior to your separation from service, and if you have a Break in Service, but then are re-employed before incurring five (5) consecutive 1-year Breaks in Service, you will be credited for vesting with all pre-break and post break service. Your prior account balance will automatically be restored and you will continue to vest in that account. If you are re-employed after incurring five (5) consecutive 1-year Breaks in Service, you will lose your prior account balance but your prior Service will still count towards vesting in your new account balance. X TOP-HEAVY RULES A "Top-Heavy" Plan is one in which more than 60% of the contributions or benefits are attributable to certain "key employees," such as owners, officers and stockholders. The Plan Administrator is responsible for determining each year if the Plan is "Top-Heavy." If the Plan becomes Top-Heavy special rules apply to the allocation of the Employer's Contribution. These special rules require that all eligible Participants will generally receive an allocation of the Employer's Contribution equal to the lesser of 3% of Compensation or a uniform percentage of Compensation for all Participants. For example, the minimum allocation requirement would be satisfied if all Participants received an allocation equal to 2% of their Compensation. All Participants are entitled to receive a minimum allocation upon completing at least one Hour of Service in the Top-Heavy Plan Year provided they are employed on the last day of the Plan Year. The Employer's minimum contribution can be satisfied by another Employer sponsored retirement plan, if so elected by the Employer. (e) Solely for purposes of determining whether a Break in Service, as defined in paragraph 1.10, for participation and vesting purposes has occurred in a computation period, an individual who is absent from work for maternity or paternity reasons shall receive credit for the Hours of Service which would otherwise have been credited to such individual but for such absence, or in any case in which such hours cannot be determined, 8 Hours of Service per day of such absence. For purposes of this paragraph, an absence from work for maternity or paternity reasons means an absence by reason of the pregnancy of the individual, by reason of a birth of a child of the individual, by reason of the placement of a child with the individual in connection with the adoption of such child by such individual, or for purposes of caring for such child for a period beginning immediately following such birth or placement. The Hours of Service credited under this paragraph shall be credited in the computation period in which the absence begins if the crediting is necessary to prevent a Break in Service in that period, or in all other cases, in the following computation period. No more than 501 hours will be credited under this paragraph. (f) Unless specified otherwise in the Adoption Agreement, Hours of Service shall be determined on the basis of the actual hours for which an Employee is paid or entitled to pay. 1.42 Key Employee Any Employee or former Employee (and the beneficiaries of such employee) who at any time during the determination period was an officer of the Employer if such individual's annual Compensation exceeds 50% of the dollar limitation under Code Section 415(b)(1)(A) (the defined benefit maximum annual benefit), an owner (or considered an owner under Code Section 318) of one of the ten largest interests in the employer if such individual's Compensation exceeds 100% of the dollar limitation under Code Section 415(c)(1)(A), a 5% owner of the Employer, or a 1% owner of the Employer who has an annual Compensation of more than $150,000. For purposes of determining who is a Key Employee, annual Compensation shall mean Compensation as defined for Article X, but including amounts deferred through a salary reduction agreement to a cash or deferred plan under Code Section 401(k), a Simplified Employee Pension Plan under Code Section 408(k), a cafeteria plan under Code Section 125 or a tax-deferred annuity under Code Section 403(b). The determination period is the Plan Year containing the Determination Date and the four preceding Plan Years. The determination of who is a Key Employee will be made in accordance with Code Section 416(i)(1) and the regulations thereunder. 1.43 Leased Employee Any person (other than an Employee of the recipient) who, pursuant to an agreement between the recipient and any other person ("leasing organization"), has performed services for the recipient [or for the recipient and related persons determined in accordance with Code Section 414(n)(6)] on a substantially full-time basis for a period of at least one year, and such services are of a type historically performed by Employees in the business field of the recipient Employer. (b) Early Retirement Age: [ ] (i) Not Applicable. [X] (ii)The Plan shall have an Early Retirement Age of 62 (not less than 55) and completion of N/A Years of Service. 6. EMPLOYEE CONTRIBUTIONS [Article IV] [X] (a) Participants shall be permitted to make Elective Deferrals in any amount from 1 % up to 15 % of their Compensation. If (a) is applicable, Participants shall be permitted to amend their Salary Savings Agreements to change the contribution percentage as provided below: [ ] (i) On the Anniversary Date of the Plan [ ] (ii) On the Anniversary Date of the Plan and on the first day of the seventh month of the Plan Year [X] (iii) On the Anniversary Date of the Plan and on the first day following any Valuation Date [ ] (iv) Upon thirty (30) days notice to the Employer [ ] (b) Participants shall be permitted to make after tax Voluntary Contributions. [ ] (c) Participants shall be required to make after tax Voluntary Contributions as follows (Thrift Savings Plan): [ ] (i) % of Compensation. [ ] (ii) A percentage determined by the Employee on his or her enrollment form. [ ] (d) If necessary to pass the Average Deferral Percentage Test, Participants [ ] may [ ] may not have Elective Deferrals re-characterized as Voluntary Contributions. NOTE:The Average Deferral Percentage Test will apply to contributions under (a) above. The Average Contribution Percentage Test will apply to contributions under (b) and (c) above, and may apply to (a). of Shares to be Issued" for a description of the manner in which such valuation was made and the limitations on its use. Purchases by Directors and Executive Officers The directors and executive officers of Gloversville Federal intend to purchase, for investment purposes and at the same price as the shares are sold to other investors in the Conversion, approximately $385,500 of Common Stock, or 9.1%, 7.7% or 6.7% of the shares to be sold in the Conversion at the minimum, midpoint and maximum of the Estimated Valuation Range, respectively. In addition, an amount of shares equal to an aggregate of 8% of the shares to be issued in the Conversion is anticipated to be purchased by the ESOP. See "The Conversion - Participation by the Board and Executive Officers." Potential Benefits of Conversion to Directors and Executive Officers Employee Stock Ownership Plan. The Board of Directors of the Association has adopted an ESOP, a tax-qualified employee benefit plan for officers and employees of the Holding Company and the Association. All employees of the Association are eligible to participate in the ESOP after they attain age 21 and complete one year of service. The Association's contribution to the ESOP is allocated among participants on the basis of their relative compensation. Each participant's account will be credited with cash and shares of Holding Company Common Stock based upon compensation earned during the year with respect to which the contribution is made. The ESOP intends to buy up to 8% of the Common Stock issued in the Conversion (approximately $340,000 to $460,000 of the Common Stock based on the issuance of the minimum and the maximum of the Estimated Valuation Range and the $10.00 per share Purchase Price). The ESOP will purchase the shares with funds borrowed from the Holding Company, and it is anticipated that the ESOP will repay the loans through periodic tax-deductible contributions from the Association over a ten-year period. These contributions will increase the compensation expense of the Association. See "Management Benefit Plans - Employee Stock Ownership Plan" for a description of this plan. Stock Option and Incentive Plan and Recognition and Retention Plan. The Board of Directors of the Holding Company intends to adopt a Stock Option and Incentive Plan (the "Stock Option Plan") and a Recognition and Retention Plan ("RRP") to become effective upon ratification by stockholders following the Conversion. Certain of the directors and executive officers of the Holding Company and the Association will receive awards under these plans. It is currently anticipated that an amount of shares equal to 10% and 4% of the shares sold in the Conversion will be reserved for issuance under the Stock Option Plan and RRP, respectively. Depending upon market conditions in the future, the Holding Company may purchase shares in the open market to fund these plans. See "Management - Benefit Plans" for a description of these plans. Under the proposed Stock Option Plan, it is presently intended that the directors and executive officers be granted options to purchase, in addition to the shares to be issued in the Conversion, an amount of shares equal to __% of the shares sold in the Conversion (or ______ and ______ shares, respectively, of Common Stock based on the minimum and maximum of the Estimated Valuation Range) at an exercise price equal to the market value per share of the Common XI RETIREMENT BENEFITS AND DISTRIBUTIONS A. Retirement Benefits The full value of your account balance is generally payable at Normal Retirement Age. If you work beyond your Normal Retirement Age, and have not separated from service, you may request commencement of benefit payments. In either event, you will continue to fully participate in the Plan. The latest commencement date for payment of your benefits is generally April 1 of the year following your attainment of age 70-1/2, even if you are still employed. B. Distributions During Employment Benefits are not normally payable prior to your separation from employment. There are possible exceptions to this rule as follows: First, you can always withdraw all or any part of your personal Employee Voluntary Contributions, Rollover Contributions, and the earnings thereon. Transfer Contributions may be withdrawn only if they originate from plans meeting certain safe-harbor provisions. Second, Hardship withdrawals are allowed. If permitted, you may file a written request for a Hardship withdrawal of Employer-related contributions (to the extent vested and if not prohibited by the Plan Administrator) and the investment earnings thereon, and Elective Deferrals and the earnings thereon as of the last day of the Plan Year ending before July 1, 1989. You must have your Spouse's written consent for a Hardship withdrawal unless the Plan is a safe-harbor Plan (i.e., lump sum is the normal form of distribution). Prior to receiving a Hardship distribution, you must take any other nontaxable distribution and borrow the maximum nontaxable loan amount allowed under this and other Plans of the Employer. Note, however, that if the effect of the loan would be to increase the amount of your financial need, you are not required to take the loan. For example, if you need funds to purchase a principal residence, and a Plan loan would disqualify you from obtaining other necessary financing, you do not have to take the loan. Hardship withdrawals may be authorized by the Employer for the following reasons: (1) To assist you in purchasing a personal residence which is your primary place of residence (not including mortgage payments); (2) To assist you in paying tuition expenses for you, your Spouse, or your dependents for the next twelve (12) months of post-secondary education; (3) To assist you in paying expenses incurred or necessary on behalf of you, your Spouse, or your dependents for hospitalization, doctor, or surgery expenses which are not covered by insurance; or (4) To prevent your eviction for or foreclosure on your principal residence. 1.44 Limitation Year The calendar year or such other 12-consecutive month period designated by the Employer in the Adoption Agreement for purposes of determining the maximum Annual Addition to a Participant's account. All qualified plans maintained by the Employer must use the same Limitation Year. If the Limitation Year is amended to a different 12-consecutive month period, the new Limitation Year must begin on a date within the Limitation Year in which the amendment is made. 1.45 Master Or Prototype Plan A plan, the form of which is the subject of a favorable opinion letter from the Internal Revenue Service. 1.46 Matching Contribution An Employer contribution made to this or any other defined contribution plan on behalf of a Participant on account of an Employee Voluntary Contribution made by such Participant, or on account of a Participant's Elective Deferral, under a Plan maintained by the Employer. 1.47 Maximum Permissible Amount The maximum Annual Addition that may be contributed or allocated to a Participant's account under the plan for any Limitation Year shall not exceed the lesser of: (a) the Defined Contribution Dollar Limitation, or (b) 25% of the Participant's Compensation for the Limitation Year. The Compensation limitation referred to in (b) shall not apply to any contribution for medical benefits [within the meaning of Code Section 401(h) or Code Section 419A(f)(2)] which is otherwise treated as an Annual Addition under Code Section 415(l)(1) or 419(d)(2). If a short Limitation Year is created because of an amendment changing the Limitation Year to a different 12-consecutive month period, the Maximum Permissible Amount will not exceed the Defined Contribution Dollar Limitation multiplied by the number of months in the short Limitation Year divided by 12. 1.48 Net Profit The current and accumulated operating earnings of the Employer before Federal and State income taxes, excluding nonrecurring or unusual items of income, and before contributions to this and any other qualified plan of the Employer. Alternatively, the Employer may fix another definition in the Adoption Agreement. 1.49 Normal Retirement Age The age, set by the Employer in the Adoption Agreement, at which a Participant may retire and receive his or her benefits under the Plan. 1.50 Owner-Employee A sole proprietor, or a partner owning more than 10% of either the capital or profits interest of the partnership. 1.51 Paired Plans Two or more Plans maintained by the Sponsor designed so that a single or any combination of Plans adopted by an Employer will meet the antidiscrimination rules, the contribution and benefit limitations, and the Top-Heavy provisions of the Code. 1.52 Participant Any Employee who has met the eligibility requirements and is participating in the Plan. 1.53 Participant's Benefit The account balance as of the last Valuation Date in the calendar year immediately preceding the Distribution Calendar Year (valuation calendar year) increased by the amount of any contributions or forfeitures allocated to the account balance as of the dates in the valuation calendar year after the valuation date and decreased by distributions made in the valuation calendar year after the Valuation Date. A special exception exists for the second distribution Calendar Year. For purposes of this paragraph, if any portion of the minimum distribution for the First Distribution Calendar Year is made in the second Distribution Calendar Year on or before the Required Beginning Date, the amount of the minimum distribution made in the second distribution calendar year shall be treated as if it had been made in the immediately preceding Distribution Calendar Year. 7. EMPLOYER CONTRIBUTIONS AND ALLOCATION THEREOF NOTE:The Employer shall make contributions to the Plan in accordance with the formula or formulas selected below. The Employer's contribution shall be subject to the limitations contained in Articles III and X. For this purpose, a contribution for a Plan Year shall be limited for the Limitation Year which ends with or within such Plan Year. Also, the integrated allocation formulas below are for Plan Years beginning in 1989 and later. The Employer's allocation for earlier years shall be as specified in its Plan prior to Amendment for the Tax Reform Act of 1986. (a) Profits Requirement: (i) Current or Accumulated Net Profits are required for: [ ] (A) Matching Contributions [ ] (B) Qualified Non-Elective Contributions [ ] (C) Discretionary Contributions (ii) No Net Profits are required for: [X] (A) Matching Contributions [X] (B) Qualified Non-Elective Contributions [X] (C) Discretionary Contributions NOTE:Elective Deferrals can always be contributed regardless of profits. [X] (b) Salary Savings Agreement: The Employer shall contribute and allocate to each Participant's account an amount equal to the amount withheld from the Compensation of such Participant pursuant to his or her Salary Savings Agreement. If applicable, the maximum percentage is specified in Section 6 above. An Employee who has terminated his or her election under the Salary Savings Agreement other than for Hardship reasons may not make another Elective Deferral: [ ] (i) until the first day of the next Plan Year. [X] (ii) until the first day of the [X] next valuation period. [ ] second valuation period following termination. [ ] third valuation period following termination. Stock on the date of grant. Such options will be awarded at no expense to the recipients and pose no financial risk to the recipients until exercised. It is presently anticipated that Lewis Kolar, President and Menzo Case, Executive Vice President will each receive an option to purchase an amount of shares equal to 2.0% of the shares sold in the Conversion (or 8,500 and 11,500 shares, assuming the minimum and maximum of the Estimated Valuation Range, respectively). See "Management - Benefit Plans - Stock Option and Incentive Plan." The award and exercise of options pursuant to the Stock Option Plan will not result in any expense to the Holding Company; however, when the options are exercised (or, depending on market conditions, potentially prior to exercise) , the per share earnings and book value of existing stockholders will likely be diluted. It is also intended that directors and executive officers be granted (without any requirement of payment by the grantee) an amount of shares of restricted stock awards equal to ___% of the shares sold in the Conversion (or _________ and ________ shares, respectively, based on the minimum and maximum of the Estimated Valuation Range) which will vest over five years commencing one year from stockholder ratification and which will have a total value of $________ and $__________ based on the Purchase Price of $10.00 per share at the minimum and maximum of the Estimated Valuation Range, respectively. It is presently anticipated that President Kolar will receive a restricted stock award equal to 1.0% of the shares sold in the Conversion (or 4,250 and 5,750 shares, assuming the minimum and maximum of the Estimated Valuation Range) and that Executive Vice President Case will receive a restricted stock award equal to .6% of the conversion shares. The restricted stock award to President Kolar and Executive Vice President Case would have an aggregate value ranging from $42,500 and $57,500, and $25,500 and $34,500, respectively, (at the minimum and maximum of the Estimated Valuation Range) based upon the original Purchase Price of $10.00 per share. See "Risk Factors - Takeover Defensive Provisions; Dilution of Per Share Value" and "Management Benefit Plans - Recognition and Retention Plan." Following stockholder ratification of the RRP, the RRP will be funded either with shares purchased in the open market or with authorized but unissued shares. Based upon the Purchase Price of $10.00 per share, the amount required to fund the RRP through open-market purchases would range from approximately $_______ (based upon the sale of shares at the minimum of the Estimated Valuation Range) to approximately $_______ (based upon the sale of shares at the maximum of the Estimated Valuation Range). In the event that the per share price of the Common Stock increases above the $10.00 per share Purchase Price following completion of the Offering, the amount necessary to fund the RRP would also increase. The expense related to the cost of the RRP will be recognized over the five-year vesting period of the awards made pursuant to such plan. The use of authorized but unissued shares to fund the RRP would dilute the holdings of stockholders who purchase Common Stock in the Conversion. See "Management - Benefit Plans - Recognition and Retention Plan." The Holding Company intends to submit the RRP and the Stock Option Plan to stockholders for ratification following completion of the Offering, but in no event prior to six months following the completion of the Conversion. These plans will only be effective if ratified by the stockholders. In the event the Stock Option Plan and the RRP are not ratified by stockholders, management may Any Hardship withdrawal is limited to the amount needed to meet the financial need. Hardship withdrawals must be approved by the Employer and will be administered in a nondiscriminatory manner. Such withdrawals will not affect your eligibility to continue to participate in Employer contributions to the Plan, but there will be a one year mandatory suspension of your right to make Elective Deferrals and Voluntary Contributions under the Plan. Any withdrawals you receive under these rules may not be recontributed to the Plan and may be subject to taxation, as well as an additional 10% penalty tax if the withdrawal is received before you reach Age 591/2. These withdrawals may also be subject to a mandatory 20% withholding for income tax purposes, depending on the law as then in effect. C. Beneficiary Every Participant or former Participant may designate a person or persons who are to receive benefits under the Plan in the event of his or her death. The designation must be made on a form provided by and returned to the Plan Administrator. You may change your designation at any time. If you are married, your beneficiary will automatically be your Spouse. If you and your Spouse wish to waive this automatic designation, you must complete a Beneficiary Designation form. The form must be signed by you and your Spouse in front of a Plan Representative or a Notary Public. D. Death Benefits In the event of your death, the full value of your account is payable to your beneficiary in a lump sum. E. Form of Payment When benefits become due, you or your representative should apply to the Employer requesting payment of your account and specifying the manner of payment. The normal or automatic form of payment is a Joint and Survivor Annuity. [See special annuity rules at (H) below]. If you do not wish to receive the normal form of payment when your payments are due to start, you may request to receive your benefit in any of the forms indicated: (1) Lump Sum (2) Installment Payments (3) Life Annuity (4) Life Annuity Term Certain with payments guaranteed for a 10-YEAR period. Selection of an optional form of payment may require the written consent of your Spouse. Payments may not be made over any period which exceeds the life expectancy of you and your beneficiary. A distribution of your benefits is required if benefits still remain in the Plan after you attain Age 70 1/2. At this time the life expectancy of both the Participant and the Spouse may be recalculated. This determination is made by the Participant. F. Rollover of Payment 1.54 Permissive Aggregation Group Used for Top-Heavy testing purposes, it is the Required Aggregation Group of plans plus any other plan or plans of the Employer which, when considered as a group with the Required Aggregation Group, would continue to satisfy the requirements of Code Sections 401(a)(4) and 410. 1.55 Plan The Employer's qualified retirement plan as embodied herein and in the Adoption Agreement. 1.56 Plan Administrator The Employer. 1.57 Plan Year The 12-consecutive month period designated by the Employer in the Adoption Agreement. 1.58 Present Value Used for Top-Heavy test and determination purposes, when determining the Present Value of accrued benefits, with respect to any Defined Benefit Plan maintained by the Employer, interest and mortality rates shall be determined in accordance with the provisions of the respective plan. If applicable, interest and mortality assumptions will be specified in the section of the Adoption Agreement entitled "Limitations on Allocations". 1.59 Projected Annual Benefit Used to test the maximum benefit which may be obtained from a combination of retirement plans, it is the annual retirement benefit (adjusted to an actuarial equivalent straight life annuity if such benefit is expressed in a form other than a straight life annuity or Qualified Joint and Survivor Annuity) to which the Participant would be entitled under the terms of a Defined Benefit Plan or plans, assuming: (a) the Participant will continue employment until Normal Retirement Age under the plan (or current age, if later), and (b) the Participant's Compensation for the current Limitation Year and all other relevant factors used to determine benefits under the plan will remain constant for all future Limitation Years. 1.60 Qualified Deferred Compensation Plan Any pension, profit-sharing, stock bonus, or other plan which meets the requirements of Code Section 401 and includes a trust exempt from tax under Code Section 501(a) or any annuity plan described in Code Section 403(a). An Eligible Retirement Plan is an individual retirement account (IRA) as described in Code Section 408(a), an individual retirement annuity (IRA) as described in Code Section 408(b), an annuity plan as described in Code Section 403(a), or a qualified trust as described in Code Section 401(a), which accepts Eligible Rollover Distributions. However in the case of an Eligible Rollover Distribution to a Surviving Spouse, an Eligible Retirement Plan is an individual retirement account or individual retirement annuity. [ ] (iii) for a period of month(s) (not to exceed twelve (12) months). [X] (c) Matching Employer Contribution [See Paragraphs (h) and (i)]: [ ] (i) Percentage Match: The Employer shall contribute and allocate to each eligible Participant's account an amount equal to ___% of the amount contributed and allocated in accordance with Paragraph 7(b) above and (if checked) ___% of [ ] the amount of Voluntary Contributions made in accordance with Paragraph 4.1 of the Basic Plan Document #R1. The Employer shall not match Participant Elective Deferrals as provided above in excess of ___$ or in excess of ___% of the Participant's Compensation or if applicable, Voluntary Contributions in excess of $ or in excess of ___% of the Participant's Compensation. In no event will the match on both Elective Deferrals and Voluntary Contributions exceed a combined amount of $____ or ___%. [X] (ii) Discretionary Match: The Employer shall contribute and allocate to each eligible Participant's account a percentage of the Participant's Elective Deferral contributed and allocated in accordance with Paragraph 7(b) above. The Employer shall set such percentage prior to the end of the Plan Year. The Employer shall not match Participant Elective Deferrals in excess of $N/A or in excess of 5 % of the Participant's Compensation. [ ] (iii) Tiered Match: The Employer shall contribute and allocate to each Participant's account an amount equal to % of the first % of the Participant's Compensation, to the extent deferred. ___% of the next ___% of the Participant's Compensation, to the extent deferred. ___% of the next ___% of the Participant's Compensation, to the extent deferred. NOTE:Percentages specified in (iii) above may not increase as the percentage of Participant's contribution increases. [ ] (iv) Flat Dollar Match: The Employer shall contribute and allocate to each Participant's account ___$ if the Participant defers at least 1% of Compensation. [ ] (v) Percentage of Compensation Match: The Employer shall contribute and allocate to each Participant's account ___% of Compensation if the Participant defers at least 1% of Compensation. consider the adoption of alternate incentive plans, although no such plans are currently contemplated. While the Association believes that the RRP and the Stock Option Plan will provide important incentives for the performance and retention of management, the Association has no reason to believe that the failure to obtain shareholder ratification of such plans would result in the departure of any members of senior management. Change in Control Severance Agreements. The Association intends to enter into change in control agreements with President Kolar and Executive Vice President Case. It is anticipated that such agreements will have initial terms of 24 and 12 months, respectively, and become effective upon completion of the Conversion. In the event that President Kolar or Executive Vice President Case is terminated following a "change in control" (as defined in the agreements), such officer will be entitled to a severance payment of 200% and 100%, respectively, of his current compensation. See "Management - Executive Compensation - Change in Control Severance Agreements" for the definition of "change in control" and a more detailed description of these agreements. Use of Proceeds The net proceeds from the sale of Common Stock in the Conversion (estimated at $3.7 million, $4.5 million, $5.2 million and $6.1 million based on sales at the minimum, midpoint, maximum and 15% above the maximum of the Estimated Valuation Range, respectively) will substantially increase the capital of Gloversville Federal. See "Pro Forma Data." The Holding Company will utilize approximately 50% of the net proceeds from the issuance of the Common Stock to purchase all of the common stock of Gloversville Federal to be issued upon Conversion and will retain approximately 50% of the net proceeds; provided that the amount retained by the Holding Company will be reduced to the extent required that, upon the completion of the transaction, the Association's ratio of capital to assets is at least 10%. The proceeds retained by the Holding Company will be invested initially in short-term investments. Such proceeds will subsequently be invested in one- to four-family residential and multi-family and commercial real estate and commercial business loans and investment securities and will be available for general corporate purposes, including the possible repurchase of shares of the Common Stock, as permitted by the OTS. The Holding Company currently has no specific plans to make any such repurchases of any of its Common Stock. In addition, the Holding Company intends to provide the funding for the ESOP loan. Based upon the initial Purchase Price of $10.00 per share, the dollar amount of the ESOP loan would range from $340,000 (based upon the sale of shares at the minimum of the Estimated Valuation Range) to $460,000 (based upon the sale of shares at the maximum of the Estimated Valuation Range). It is anticipated that the ESOP will repay the loan through periodic tax-deductible contributions from the Association over a ten-year period. The interest rate to be charged by the Holding Company on the ESOP loan will be based upon the Internal Revenue Service ("IRS") prescribed applicable federal rate at the time of origination. Finally, the Holding Company currently intends to use a portion of the proceeds to fund a Recognition and Retention Plan ("RRP"), subject to stockholder ratification. Compensation expense related to the RRP will be recognized as share awards vest. See "Pro Forma Data." Following stockholder ratification of the RRP, the RRP will be funded either with shares purchased in the open market or with authorized but unissued shares. Based upon the Purchase Price of $10.00 per share, the amount required to fund the RRP through open-market purchases would range from F. Rollover of Payment If your benefits qualify as eligible rollovers, you have the option of having them paid directly to you when they become due or of having them directly rolled over to another qualified plan or an IRA. If you do not choose to have the benefits directly rolled over, the Plan is required to automatically withhold 20% of your payment for tax purposes and distribute the remaining 80% to you. If you choose to have the payment made to you, you still have the option of rolling over the 80% payment yourself to a qualified plan or an IRA within sixty (60) days. You may also roll over the 20% that was withheld for tax by adding that amount from your own funds. Before you do this, however, check with a tax advisor to make sure the transaction still qualifies for rollover treatment. Certain benefit payments are not eligible for rollover and therefore will also not be subject to the 20% mandatory withholding. They are as follows: (1) annuities paid over life, (2) installments for a period of at least ten years; and (3) minimum required distributions at age 70 1/2. There are also several operational exceptions and a "de minimis" exception for payments of less than $200. Also, Employee Voluntary Contributions are not eligible for rollover. G. Time of Payment (1) In cases of termination for a reason other than death, disability or retirement, payments will start as soon as administratively feasible following the date in which a distribution is requested by you or is otherwise payable. (2) In cases of death, disability, or retirement, payments will start as soon as administratively feasible following the date in which a distribution is requested by you or is otherwise payable. H. Annuity Rules Retirement Benefits. If the benefit under the Plan is payable in the form of an annuity, the Plan is subject to the annuity rules. Under these rules, there are two automatic methods of payment for vested Participants, depending on your marital status. If you do not choose another form of payment (such as a lump sum or installments), the normal form to be paid is a straight life annuity if you are not married at the commencement of your benefit, or a qualified joint and survivor annuity if you are married. Under a straight life annuity, you will receive equal monthly payments for as long as you live. No further payments will be made after your death. Under a qualified joint and survivor annuity, you will receive a reduced benefit each month for your lifetime. After you die, 50% of that amount will be paid each month to your Spouse for his or her lifetime. The amount of your monthly benefit is reduced under a joint and survivor annuity because it is expected that payments will be made over two lifetimes instead of one. You may choose another form of payment by filling out the proper form and returning it to the Plan Administrator. In order to choose another form of payment or a beneficiary other than your Spouse, you must make a proper election, with your Spouse's written consent. Your Spouse's consent must be witnessed by a Notary Public. Written notice of these rules will be provided to you on a timely basis. 1.61 Qualified Domestic Relations Order A QDRO is a signed Domestic Relations Order issued by a State Court which creates, recognizes or assigns to an alternate payee(s) the right to receive all or part of a Participant's Plan benefit and which meets the requirements of Code Section 414(p). An alternate payee is a Spouse, former Spouse, child, or other dependent who is treated as a beneficiary under the Plan as a result of the QDRO. 1.62 Qualified Early Retirement Age Qualified Early Retirement Age is the latest of: (a) the earliest date, under the Plan, on which the Participant may elect to receive retirement benefits, or (b) the first day of the 120th month beginning before the Participant attains Normal Retirement Age, or (c) the date the Participant begins participation. 1.63 Qualified Joint And Survivor Annuity An immediate annuity for the life of the Participant with a survivor annuity for the life of the Participant's Spouse which is at least one-half of but not more than the amount of the annuity payable during the joint lives of the Participant and the Participant's Spouse. The exact amount of the Survivor Annuity is to be specified by the Employer in the Adoption Agreement. If not designated by the Employer, the Survivor Annuity will be one-half of the amount paid to the Participant during his or her lifetime. The Qualified Joint and Survivor Annuity will be the amount of benefit which can be provided by the Participant's Vested Account Balance. 1.64 Qualified Matching Contribution Matching Contributions which when made are subject to the distribution and nonforfeitability requirements under Code Section 401(k). 1.65 Qualified Non-Elective Contributions Contributions (other than Matching Contributions or Qualified Matching Contributions) made by the Employer and allocated to Participants' accounts that the Participants may not elect to receive in cash until distributed from the Plan; that are nonforfeitable when made; and that are distributable only in accordance with the distribution provisions that are applicable to Elective Deferrals and Qualified Matching Contributions. 1.66 Qualified Voluntary Contribution A tax-deductible voluntary Employee contribution. Qualified Voluntary Contributions are not permitted in this Plan. 1.67 Regional Prototype Plan A plan, the form of which is subject to a favorable notification letter from the Internal Revenue Service. 1.68 Required Aggregation Group Used for Top-Heavy testing purposes, it consists of: (a) each qualified plan of the Employer in which at least one Key Employee participates or participated at any time during the determination period (regardless of whether the plan has terminated), and (b) any other qualified plan of the Employer which enables a plan described in (a) to meet the requirements of Code Sections 401(a)(4) or 410. [ ] (vi) Proportionate Compensation Match: The Employer shall contribute and allocate to each Participant who defers at least 1% of Compensation, an amount determined by multiplying such Employer Matching Contribution by a fraction the numerator of which is the Participant's Compensation and the denominator of which is the Compensation of all Participants eligible to receive such an allocation. The Employer shall set such discretionary contribution prior to the end of the Plan Year. [X] (vii) Qualified Match: Employer Matching Contributions will be treated as Qualified Matching Contributions to the extent specified below: [ ] (A) All Matching Contributions [X] (B) None [ ] (C) ___% of the Employer's Matching Contribution [ ] (D) Up to ___% of each Participant's Compensation [ ] (E) The amount necessary to meet the [ ] Average Deferral Percentage (ADP) Test, [ ] Average Contribution Percentage (ACP) Test, [ ] Both the ADP and ACP tests Matching Contribution Computation Period: The time period upon which matching contributions will be based shall be: [ ] (A) weekly [ ] (E) quarterly [ ] (B) bi-weekly [ ] (F) semi-annually [ ] (C) semi-monthly [ ] (G) annually [X] (D) monthly Eligibility for Match: Employer Matching Contributions, whether or not Qualified, will only be made on Employee Contributions not withdrawn prior to the end of the [ ] valuation period [ ] Plan Year. [X] (d) Qualified Non-Elective Employer Contribution - [See Paragraphs (h) and (i)] These contributions are fully vested when contributed. The Employer shall have the right to make an additional discretionary contribution which shall be allocated to each eligible Employee in proportion to his or her Compensation as a percentage of the Compensation of all eligible Employees. This part of the Employer's contribution and the allocation thereof shall be unrelated to any Employee contributions made hereunder. The amount of Qualified Non-Elective Contributions taken into account for purposes of meeting the ADP or ACP test requirements is: approximately $170,000 (based upon the sale of shares at the minimum of the Estimated Valuation Range) to approximately $230,000 (based upon the sale of shares at the maximum of the Estimated Valuation Range). In the event that the per share price of the Common Stock increases above the $10.00 per share Purchase Price following completion of the Offering, the amount necessary to fund the RRP would also increase. The use of authorized but unissued shares to fund the RRP could dilute the holdings of stockholders who purchase Common Stock in the Conversion. See "Management - Benefit Plans - Recognition and Retention Plan." The net proceeds received by Gloversville Federal will become part of Gloversville Federal's general funds for use in its business and will be used to support the Association's existing operations, subject to applicable regulatory restrictions. Immediately upon the completion of the Conversion, it is anticipated that the Association will invest such proceeds into short-term assets. Subsequently, the Association intends to redirect the net proceeds to the origination of residential loans and, to a lesser extent, multi-family and commercial real estate, commercial business and home equity loans, subject to market conditions. In addition, such proceeds may also be utilized to repay borrowings. See "Use of Proceeds" for additional information on the utilization of the offering proceeds as well as OTS restrictions on repurchases of the Holding Company's stock. Dividends The declaration and payment of dividends are subject to, among other things, the Holding Company's financial condition and results of operations, Gloversville Federal's compliance with its regulatory capital requirements, including the fully phased-in capital requirements, tax considerations, industry standards, economic conditions, regulatory restrictions, general business practices and other factors. There can be no assurance as to whether or when the Holding Company will pay a dividend. See "Dividends." Market for Common Stock The Holding Company has never issued capital stock to the public and, consequently, there is no existing market for the Common Stock. Following the completion of the offering, it is anticipated that the Common Stock will be traded on the over-the-counter market with quotations available through the OTC Bulletin Board. Capital Resources has indicated its intention to make a market in the Common Stock. If the Common Stock cannot be quoted and traded on the OTC Bulletin Board it is expected that transactions in the Common Stock will be reported in the pink sheets published by the National Quotation Bureau, Inc. Making a market may include the solicitation of potential buyers and sellers in order to match buy and sell orders. However, Capital Resources will not be subject to any obligation with respect to such efforts. There can be no assurance that an active or liquid trading market will develop for the Common Stock, or if a market develops, that it will continue. A public market having the desirable characteristics of depth, liquidity and orderliness depends upon the presence in the marketplace of both willing buyers and sellers of the Common Stock at any given time, which is not within the control of the Holding Company or any market maker. Accordingly, there can be no assurance that Death Benefits. If you die while still employed by the Employer, or die after you retire or terminate employment but before benefit payments start, your surviving Spouse will be entitled to a life annuity based on the value of your account. These payments will continue for your Spouse's lifetime unless he or she chooses to accelerate such payments. Again, you and your Spouse can waive this coverage by obtaining the proper form from the Plan Administrator and completing it. XII INVESTMENTS A. Trust Fund The monies contributed to the Plan may be invested in any security or form of property considered prudent for a retirement plan. Such investments include, but are not limited to, common and preferred stocks, exchange traded put and call options, bonds, money market instruments, mutual funds, savings accounts, certificates of deposit, Treasury bills, or insurance contracts. An institutional Trustee may invest in its own deposits or those of affiliates which bear a reasonable interest rate, or in a group or collective trust maintained by such Trustee. B. Employee Investment Direction Employee investment direction is permitted. You may direct the investments among funds offered by the Trustee. The investment funds available to you and the procedures for making an election are shown in a separate election form which can be obtained from the Plan Administrator. You may change your investment selection and move monies from one fund to another by filing an election form with the Plan Administrator. C. Insurance Policies Insurance policies are not permitted as an investment of this Plan. D. Participant Loans Participant loans are not permitted under this Plan. XIII ADMINISTRATION The Plan will be administered by the following parties: A. Plan Administrator The Employer is the party who has established the Plan and who has overall control and authority over administration of the Plan. The Employer's duties as Plan Administrator include: 1.69 Required Beginning Date The date on which a Participant is required to take his or her first minimum distribution under the Plan. The rules are set forth at paragraph 7.5. 1.70 Rollover Contribution A contribution made by a Participant of an amount distributed to such Participant from another Qualified Deferred Compensation Plan in accordance with Code Sections 402(a)(5), (6), and (7). An Eligible Rollover Distribution is any distribution of all or any portion of the balance to the credit of the Participant except that an Eligible Rollover Distribution does not include: (a) any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the Participant or the joint lives (or joint life expectancies) of the Participant and the Participant's Designated Beneficiary, or for a specified period of ten years or more; (b) any distribution to the extent such distribution is required under Code Section 401(a)(9); and (c) the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to Employer securities). A Direct Rollover is a payment by the plan to the Eligible Retirement Plan specified by the Participant. 1.71 Salary Savings Agreement An agreement between the Employer and a participating Employee where the Employee authorizes the Employer to withhold a specified amount or percentage of his or her Compensation for deposit to the Plan on behalf of such Employee. 1.72 Self-Employed Individual An individual who has Earned Income for the taxable year from the trade or business for which the Plan is established including an individual who would have had Earned Income but for the fact that the trade or business had no Net Profit for the taxable year. 1.73 Service The period of current or prior employment with the Employer. If the Employer maintains a plan of a predecessor employer, Service for such predecessor shall be treated as Service for the Employer. 1.74 Shareholder Employee An Employee or Officer who owns [or is considered as owning within the meaning of Code Section 318(a)(1)], on any day during the taxable year of an electing small business corporation (S Corporation), more than 5% of such corporation's outstanding stock. 1.75 Simplified Employee Pension Plan An individual retirement account which meets the requirements of Code Section 408(k), and to which the Employer makes contributions pursuant to a written formula. These plans are considered for contribution limitation and Top-Heavy testing purposes. 1.76 Sponsor Benefit Plans Administrators, or any successor(s) or assign(s). [ ] (i) All such Qualified Non-Elective Contributions [X] (ii)The amount necessary to meet [ ] the ADP test [ ] the ACP test [X] both the ADP and ACP tests. Qualified Non-Elective Contributions will be made to: [ ] (iii) All Employees eligible to participate [X] (iv) Only non-Highly Compensated Employees eligible to participate [X] (e) Additional Employer Contribution Other Than Qualified Non-Elective Contributions - Non-Integrated [See Paragraphs (h) and (i)] The Employer shall have the right to make an additional discretionary contribution which shall be allocated to each eligible Employee in proportion to his or her Compensation as a percentage of the Compensation of all eligible Employees. This part of the Employer's contribution and the allocation thereof shall be unrelated to any Employee contributions made hereunder. [ ] (f) Additional Employer Contribution - Integrated Allocation Formula [See Paragraphs (h) and (i)] The Employer shall have the right to make an additional discretionary contribution. The Employer's contribution for the Plan Year plus any forfeitures shall be allocated to the accounts of eligible Participants as follows: (i) First, to the extent contributions and forfeitures are sufficient, all Participants will receive an allocation equal to 3% of their Compensation. (ii) Next, any remaining Employer Contributions and forfeitures will be allocated to Participants who have Compensation in excess of the Taxable Wage Base (excess Compensation). Each such Participant will receive an allocation in the ratio that his or her excess Compensation bears to the excess Compensation of all Participants. Participants may only receive an allocation of 3% of excess Compensation. (iii)Next, any remaining Employer contributions and forfeitures will be allocated to all Participants in the ratio that their Compensation plus excess Compensation bears to the total Compensation plus excess Compensation of all Participants. Participants may only receive an allocation of up to 2.7% of their Compensation plus excess Compensation, under this allocation method. If the Taxable Wage Base defined at Section 3(j) is less than or equal to the greater of $10,000 or 20% of the maximum, the 2.7% need not be reduced. If the amount specified is greater than the greater of $10,000 or 20% of the maximum Taxable Wage Base, but not more than 80%, 2.7% must be reduced to 1.3%. If the amount specified is greater than 80% but less than 100% of the maximum Taxable Wage Base, the 2.7% must be reduced to 2.4%. purchasers will be able to sell their shares at or above the Purchase Price. See "Market for Common Stock." Risk Factors See "Risk Factors" for information regarding certain factors which should be considered by prospective investors, including the Association's recent operating results, adverse market conditions in market area, credit risk related to income producing property and business lending activities and limited experience in non-residential lending, interest rate risk exposure, competition, takeover defensive provisions contained in the Holding Company's certificate of incorporation and bylaws and dilution of per share value, post-conversion overhead expenses, regulatory oversight, the risk of a delayed offering, the absence of an active market for the Common Stock, possible increase in estimated valuation range and number of shares issued and related earnings dilution and the possible consequences of amendment of the Plan of Conversion. (1) appointing the Plan's professional advisors needed to administer the Plan including, but not limited to, an accountant, attorney, actuary, or administrator, (2) directing the Trustee with respect to payments from the Fund, (3) communicating with Employees regarding their participation and benefits under the Plan, including the administration of all claims procedures and domestic relations orders, (4) filing any returns and reports with the Internal Revenue Service, Department of Labor, or any other governmental agency, (5) reviewing and approving any financial reports, investment reviews, or other reports prepared by any party appointed by the Employer, (6) establishing a funding policy and investment objectives consistent with the purposes of the Plan and the Employee Retirement Income Security Act of 1974; and (7) construing and resolving any question of Plan interpretation. The Plan Administrator's interpretation and application thereof is final. B. Trustee(s) The Trustee(s) shall be responsible for the administration of investments held in the Fund. These duties shall include: (1) receiving contributions under the terms of the Plan, (2) investing Plan assets, unless investment responsibility is delegated to another party, (3) making distributions from the Fund in accordance with written instructions received from the Plan Administrator, (4) keeping accounts and records of the financial transactions of the Fund; and (5) rendering an annual report of the Fund showing the financial transactions for the Plan Year. XIV AMENDMENT AND TERMINATION The Employer or the Sponsor may amend the Plan at any time, provided that no amendment will divert any part of the Plan's assets to any purpose other than for the exclusive benefit of you and the other Participants in the Plan or eliminate an optional form of distribution. The Employer may also terminate the Plan. In the event of a full or partial termination, all amounts credited to your account will be fully vested and will be paid to you as directed by the Employer. Depending on the facts (c) If the Employer's plan is a part of a Required Aggregation Group and part of a Permissive Aggregation Group of plans and the Top-Heavy Ratio for the Permissive Aggregation Group exceeds 60%. 1.82 Top-Heavy Ratio (a) If the Employer maintains one or more Defined Contribution plans (including any Simplified Employee Pension Plan) and the Employer has not maintained any Defined Benefit Plan which during the 5-year period ending on the Determination Date(s) has or has had accrued benefits, the Top-Heavy Ratio for this Plan alone, or for the Required or Permissive Aggregation Group as appropriate, is a fraction, (1) the numerator of which is the sum of the account balances of all Key Employees as of the Determination Date(s) [including any part of any account balance distributed in the 5-year period ending on the Determination Date(s)], and (2) the denominator of which is the sum of all account balances [including any part of any account balance distributed in the 5-year period ending on the Determination Date(s)], both computed in accordance with Code Section 416 and the regulations thereunder. Both the numerator and denominator of the Top-Heavy Ratio are increased to reflect any contribution not actually made as of the Determination Date, but which is required to be taken into account on that date under Code Section 416 and the regulations thereunder. (b) If the Employer maintains one or more Defined Contribution Plans (including any Simplified Employee Pension Plan) and the Employer maintains or has maintained one or more Defined Benefit Plans which during the 5-year period ending on the Determination Date(s) has or has had any accrued benefits, the Top-Heavy Ratio for any Required or Permissive Aggregation Group as appropriate is a fraction, (1) the numerator of which is the sum of account balances under the aggregated Defined Contribution Plan or Plans for all Key Employees, determined in accordance with (a) above, and the Present Value of accrued benefits under the aggregated Defined Benefit Plan or Plans for all Key Employees as of the Determination Date(s), and (2) the denominator of which is the sum of the account balances under the aggregated Defined Contribution Plan or Plans for all Participants, determined in accordance with (a) above, and the Present Value of accrued benefits under the Defined Benefit Plan or Plans for all Participants as of the Determination Date(s), all determined in accordance with Code Section 416 and the regulations thereunder. The accrued benefits under a Defined Benefit Plan in both the numerator and denominator of the Top-Heavy Ratio are increased for any distribution of an accrued benefit made in the 5-year period ending on the Determination Date. NOTE:If the Plan is not Top-Heavy, or if the Top-Heavy minimum contribution or benefit is provided under another plan [see Section 11 (c)(ii)] covering the same employees, subparagraphs (i) and (ii) above may be disregarded and 5.7%, 4.3%, or 5.4% may be substituted for 2.7%, 1.3% or 2.4% where it appears in (iii) above. (iv) Next, any remaining Employer contributions and forfeitures will be allocated to all Participants (whether or not they received an allocation under the preceding paragraphs) in the ratio that each Participant's Compensation bears to all Participants' Compensation. [ ] (g) Additional Employer Contribution - Alternative Integrated Allocation Formula [See Paragraph (h) and (i)] The Employer shall have the right to make an additional discretionary contribution. To the extent that such contributions are sufficient, they shall be allocated as follows: ___% of each eligible Participant's Compensation, plus ___% of Compensation in excess of the Taxable Wage Base defined at Section 3(j) hereof. The percentage on excess compensation may not exceed the lesser of (i) the amount first specified in this paragraph; or (ii) the greater of 5.7% or the percentage rate of tax under Code Section 3111(a) as in effect on the first day of the Plan Year attributable to the Old Age (OA) portion of the OASDI provisions of the Social Security Act. If the Employer specifies a Taxable Wage Base in Section 3(j) which is lower than the Taxable Wage Base for Social Security purposes (SSTWB) in effect as of the first day of the Plan Year, the percentage contributed with respect to excess Compensation must be adjusted. If the Plan's Taxable Wage Base is greater than the larger of $10,000 or 20% of the SSTWB but not more than 80% of the SSTWB, the excess percentage is 4.3%. If the Plan's Taxable Wage Base is greater than 80% of the SSTWB but less than 100% of the SSTWB, the excess percentage is 5.4%. NOTE:Only one Plan maintained by the Employer may be integrated with Social Security. (h) Allocation of Excess Amounts (Annual Additions) In the event that the allocation formula above results in an Excess Amount, such excess shall be: [ ] (i) placed in a suspense account accruing no gains or losses for the benefit of the Participant. [ ] (ii) reallocated as additional Employer contributions to all other Participants to the extent that they do not have any Excess Amount. SELECTED FINANCIAL INFORMATION Set forth below are selected financial and other data of the Association. The financial data is derived in part from, and should be read in conjunction with, the Financial Statements and Notes of the Association presented elsewhere in this Prospectus. <TABLE> <CAPTION> Selected Financial Information At September 30, ------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (In Thousands) <S> <C> <C> <C> <C> <C> Selected Financial Condition Data: - ---------------------------------- Total assets..................................... $61,022 $61,006 $63,073 $69,597 $61,894 Cash and cash equivalents........................ 1,922 1,198 3,181 6,509 18,184 Loans receivable, net............................ 49,526 49,636 48,239 45,645 40,896 Mortgage-backed securities available for sale.... 3,562 4,044 993 3,968 -- Other securities available for sale.............. 3,455 3,395 4,138 5,781 581 -------- -------- -------- -------- --------- Total securities available for sale........... 7,017 7,439 5,131 9,749 581 -------- -------- -------- -------- --------- Investment securities held to maturity........... -- -- 4,402 5,459 -- Deposits......................................... 56,117 55,716 57,866 64,703 57,346 Borrowings....................................... 1,300 300 -- -- -- Total equity..................................... 3,280 3,790 4,854 4,705 4,397 For the Years Ended September 30, -------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (In Thousands) Selected Operations Data: - ------------------------- Interest income.................................. 4,905 4,733 4,816 4,805 4,853 Interest expense................................. 2,447 2,416 2,527 2,148 2,586 -------- -------- -------- -------- -------- Net interest income.............................. 2,458 2,317 2,289 2,657 2,267 Provision for loan losses........................ 792 714 129 211 843 --------- --------- --------- --------- --------- Net interest income after provision for loan losses......................................... 1,666 1,603 2,160 2,446 1,424 -------- -------- ------- -------- -------- Net gain on sale of securities................... -- -- 204 -- -- Other non-interest income........................ 155 109 188 69 30 -------- --------- --------- ---------- ---------- Total non-interest income........................ 155 109 392 69 30 -------- --------- --------- ---------- ---------- Non-interest expense............................. 2,319 2,970 2,199 2,119 1,755 ------- ------- ------- ------- ------- (Loss) income before income tax expense (benefit) .................................... (498) (1,258) 353 396 (301) Income tax expense (benefit)..................... 85 (222) 102 124 (62) --------- --------- -------- -------- --------- Net (loss) income................................ $ (583) $(1,036) $ 251 $ 272 $ (239) ======== ======= ======== ======== ======== </TABLE> and circumstances, a partial termination may be found to occur where a significant number of Employees are terminated by the Employer or excluded from Plan participation. In case of a partial termination, only those affected will become 100% vested. XV LEGAL PROVISIONS A. Rights of Participants As a Plan Participant, you have certain rights and protections under the Employee Retirement Income Security Act of 1974 (ERISA). The law says that you are entitled to: (1) Examine, without charge, all documents relating to the operation of the Plan and any documents filed with the U.S. Department of Labor. These documents are available for review in the Employer's offices during regular business hours. (2) Obtain copies of all Plan documents and other Plan information upon written request to the Employer. The Employer may make a reasonable charge for producing the copies. (3) Receive from the Employer at least once each year a summary of the Plan's annual financial report. (4) Obtain, at least once a year, a statement of the total benefits accrued for you, and your nonforfeitable (vested) benefits, if any. The Plan provides that you will receive this statement automatically. If you are not vested, you may request a statement showing the date when your account will begin to become nonforfeitable. (5) File suit in a federal court, if any materials requested are not received within thirty (30) days of your request, unless the materials were not sent because of matters beyond the control of the Employer. If you are improperly denied access to information you are entitled to receive, the Employer may be required to pay up to $100 for each day's delay until the information is provided to you. B. Fiduciary Responsibility ERISA also imposes obligations upon the persons who are responsible for the operation of the Plan. These persons are referred to as "fiduciaries." Fiduciaries must act solely in your interest as a Plan Participant and they must exercise prudence in the performance of their duties. Fiduciaries who violate ERISA may be removed and required to reimburse any losses they have caused you or other Participants in the Plan. C. Employment Rights Participation in the Plan is not a guarantee of employment. However, the Employer may not fire you or discriminate against you to prevent you from becoming eligible for the Plan or from obtaining a benefit or exercising your rights under ERISA. (c) For purposes of (a) and (b) above, the value of account balances and the Present Value of accrued benefits will be determined as of the most recent Valuation Date that falls within or ends with the 12-month period ending on the Determination Date, except as provided in Code Section 416 and the regulations thereunder for the first and second plan years of a Defined Benefit Plan. The account balances and accrued benefits of a participant (1) who is not a Key Employee but who was a Key Employee in a prior year, or (2) who has not been credited with at least one hour of service with any Employer maintaining the Plan at any time during the 5-year period ending on the Determination Date will be disregarded. The calculation of the Top-Heavy Ratio, and the extent to which distributions, rollovers, and transfers are taken into account will be made in accordance with Code Section 416 and the Regulations thereunder. Qualified Voluntary Employee Contributions will not be taken into account for purposes of computing the Top-Heavy Ratio. When aggregating plans the value of account balances and accrued benefits will be calculated with reference to the Determination Dates that fall within the same calendar year. The accrued benefit of a Participant other than a Key Employee shall be determined under (1) the method, if any, that uniformly applies for accrual purposes under all Defined Benefit Plans maintained by the Employer, or (2) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional rule of Code Section 411(b)(1)(C). 1.83 Top-Paid Group The group consisting of the top 20% of Employees when ranked on the basis of Compensation paid during such year. For purposes of determining the number of Employees in the group (but not who is in it), the following Employees shall be excluded: (a) Employees who have not completed 6 months of Service. (b) Employees who normally work less than 17-1/2 hours per week. (c) Employees who normally do not work more than 6 months during any year. (d) Employees who have not attained age 21. (e) Employees included in a collective bargaining unit, covered by an agreement between employee representatives and the Employer, where retirement benefits were the subject of good faith bargaining and provided that 90% or more of the Employer's Employees are covered by the agreement. (f) Employees who are nonresident aliens and who receive no earned income which constitutes income from sources within the United States. (i) Minimum Employer Contribution Under Top-Heavy Plans: For any Plan Year during which the Plan is Top-Heavy, the sum of the contributions and forfeitures as allocated to eligible Employees under Paragraphs 7(d), 7(e), 7(f), 7(g) and 9 of this Adoption Agreement shall not be less than the amount required under Paragraph 14.2 of the Basic Plan Document #R1. Top-Heavy minimums will be allocated to: [X] (i) all eligible Participants. [x] (ii) only eligible non-Key Employees who are Participants. (j) Return of Excess Contributions and/or Excess Aggregate Contributions: In the event that one or more Highly Compensated Employees are subject to both the ADP and ACP tests and the sum of such tests exceeds the Aggregate Limit, the limit will be satisfied by reducing: [X] (i) the ADP of the affected Highly Compensated Employees [ ] (ii) the ACP of the affected Highly Compensated Employees [ ] (iii) a combination of the ADP and ACP of the affected Highly Compensated Employees 8. ALLOCATIONS TO TERMINATED EMPLOYEES [Paragraph 5.3] [ ] (a) The Employer will not allocate Employer related contributions to Employees who terminate during a Plan Year, unless required to satisfy the requirements of Code Section 401(a)(26) and 410(b). (These requirements are effective for 1989 and subsequent Plan Years.) [X] (b) The Employer will allocate Employer matching and other related contributions as indicated below to Employees who terminate during the Plan Year as a result of: MATCHING OTHER [X] [X] (i) Retirement. [X] [X] (ii) Disability. [X] [X] (iii) Death. [ ] [ ] (iv) Other termination of employment provided that the Participant has completed a Year of Service as defined for Allocation Accrual Purposes. Selected Financial Ratios and Other Data <TABLE> <CAPTION> September 30, ------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> Performance ratios: - ------------------- Return (Loss) on average assets.................... (0.94)% (1.69)% 0.38% 0.42% (0.37)% Return (Loss) on average equity.................... (16.30) (22.22) 5.30 5.97 (5.11) Interest rate spread information: - --------------------------------- Average during period.............................. 3.96 3.68 3.35 4.43 3.87 End of period...................................... 4.19 4.21 3.61 4.05 4.18 Net interest margin.............................. 4.11 3.91 3.55 4.42 3.82 Other Operating ratios: - ----------------------- Ratio of operating expenses to average total assets(1)......................................... 3.63 3.61 3.11 3.17 2.63 Efficiency ratio(2)................................ 85.94 91.10 86.67 75.85 74.46 Ratio of average interest-earning assets to average interest-bearing liabilities.............. 103.76 105.53 105.01 99.70 98.73 Asset Quality ratios: - --------------------- Non-performing assets to total assets at end of period................................... 6.73 3.74 4.38 5.53 4.22 Allowance for loan loss to non-performing loans at end of period................................... 42.53 56.53 30.20 24.34 41.63 Allowance for loan losses to gross loans receivable at end of period........................ 3.14 2.45 1.58 1.83 2.08 Capital ratios: - --------------- Equity to total assets at end of period............ 5.38 6.21 7.70 6.76 7.10 Average equity to average assets................... 5.78 7.62 7.11 6.99 7.17 Other data: - ----------- Number of full service offices....................... 2 2 2 2 2 </TABLE> (1) Operating expenses exclude OREO expenses of $73,000, $27,000, $127,000, $52,000 and $44,000 for years ended September 30, 1997, 1996, 1995, 1994 and 1993, respectively. In addition, operating expenses for the year ended September 30, 1996 exclude expenses incurred by the Association for delinquent property taxes on collateral secured by certain nonperforming one- to four-family residential loans paid on behalf of borrowers of $318,000 and the special one-time SAIF assessment of $415,000. (2) The efficiency ratio represents operating expenses (as defined in footnote 1 above) divided by the sum of net interest income and other operating income (excluding a gain on sale of building of $86,000 and net gains from security transactions of $204,000 for the year ended September 30, 1995). D. Benefit Insurance Your benefits under this Plan are not insured by the Pension Benefit Guaranty Corporation since the law does not require plan termination insurance for this type of Plan. E. Claims Procedure If you feel you are entitled to a benefit under the Plan, mail or deliver your written claim to the Plan Administrator. The Plan Administrator will notify you, your beneficiary, or authorized representative of the action taken within sixty (60) days of receipt of the claim. If you believe that you are being improperly denied a benefit in full or in part, the Employer must give you a written explanation of the reason for the denial. If the Employer denies your claim, you may, within sixty (60) days after receiving the denial, submit a written request asking the Employer to review your claim for benefits. Any such request should be accompanied by documents or records in support of your appeal. You, your beneficiary, or your authorized representative may review pertinent documents and submit issues and comments in writing. If you get no satisfaction from the Employer, you have the right to request assistance from the U.S. Department of Labor or you can file suit in a state or federal court. Service of legal process may be made upon the Plan Trustee or the Plan Administrator. If you are successful in your lawsuit, the Court may require the Employer to pay your legal costs, including your attorney's fees. If you lose, and the Court finds that your claim is frivolous, you may be required to pay the Employer's legal fees. F. Assignment Your rights and benefits under this Plan cannot be assigned, sold, transferred or pledged by you or reached by your creditors (subject to state law) or anyone else except under a Qualified Domestic Relations Order. A Qualified Domestic Relations Order (QDRO) is a court order issued under state domestic relations law relating to divorce, legal separation, custody, or support proceedings. The QDRO recognizes the right of someone other than you to receive your Plan benefits. You will be notified if a QDRO on your Plan benefits is received. Receipt of a Qualified Domestic Relations Order will allow for an earlier than normal distribution to the person(s) other than the Participant listed in the order. G. Questions If you have any questions about this statement of your rights under ERISA, please contact the Employer or the nearest Area Office of the U.S. Labor-Management Service Administration, Department of Labor. H. Conflicts with Plan This booklet is not the Plan Document, but only a Summary Plan Description of its principal provisions, and not every limitation or detail of the Plan is included. Every attempt has been made to provide concise and accurate information. However, if there is a discrepancy between this booklet and the official Plan Document, the Plan Document shall prevail. 1.84 Transfer Contribution A non-taxable transfer of a Participant's benefit directly from a Qualified Deferred Compensation Plan to this Plan. 1.85 Trustee Shall be the individual, individuals or institution appointed by the Employer to serve as Trustee of the Plan. In the event the Employer does not name an individual, individuals or institution to serve as Trustee of the Plan, the Employer will be deemed to be the Trustee. 1.86 Valuation Date The last day of the Plan Year or such other date as agreed to by the Employer and the Trustee on which Participant accounts are revalued in accordance with Article V hereof. For Top-Heavy purposes, the date selected by the Employer as of which the Top-Heavy Ratio is calculated. 1.87 Vested Account Balance The aggregate value of the Participant's vested account balances derived from Employer and Employee contributions (including Rollovers), whether vested before or upon death, including the proceeds of insurance contracts, if any, on the Participant's life. The provisions of Article VIII shall apply to a Participant who is vested in amounts attributable to Employer contributions, Employee contributions (or both) at the time of death or distribution. For purposes of paragraph 8.7, Vested Account Balance shall mean, in the case of a money purchase pension plan, the Participant's separate account balance attributable solely to Qualified Voluntary Contributions. For profit-sharing plans the above definition shall apply. 1.88 Voluntary Contribution An Employee contribution by or on behalf of a Participant that is included in the Participant's gross income in the year in which made and that is maintained under a separate account to which earnings and losses are allocated. For Plan Years beginning after the Plan Year in which this Plan is adopted (or restated) by the Employer, Voluntary Contributions are only permitted in Standardized Adoption Agreement 003 or Nonstandardized Adoption Agreement 006 whether or not the Employer utilizes the salary deferral provisions. Voluntary Contributions for Plan Years beginning after 1986, together with any Matching Contributions as defined in Code Section 401(m), will be limited so as to meet the nondiscrimination test of Code Section 401(m). 1.89 Welfare Benefit Fund Any fund that is part of a plan of the Employer, or has the effect of a plan, through which the Employer provides welfare benefits to Employees or their beneficiaries. For these purposes, Welfare Benefit means any benefit other than those with respect to which Code Section 83(h) (relating to transfers of property in connection with the performance of services), Code Section 404 (relating to deductions for contributions to an Employee's trust or annuity and Compensation under a deferred payment plan), Code Section 404A (relating to certain foreign deferred compensation plans) apply. A "Fund" is any social club, voluntary employee benefit association, supplemental unemployment benefit trust or qualified group legal service organization described in Code Section 501(c)(7), (9), (17) or (20); any trust, corporation, or other organization not exempt from income tax, or to the extent provided in regulations, any account held for an Employer by any person. 1.90 Year Of Service A 12-consecutive month period during which an Employee is credited with not less than 1,000 (or such lesser number as specified by the Employer in the Adoption Agreement) Hours of Service. [X] [ ] (v) Other termination of employment even though the Participant has not completed a Year of Service as defined for Allocation Accrual Purposes. [ ] [ ] (vi) Termination of employment (for any reason) provided that the Participant had completed a Year of Service for Allocation Accrual Purposes. 9. ALLOCATION OF FORFEITURES NOTE:Subsections (a), (b) and (c) below apply to forfeitures of amounts other than Excess Aggregate Contributions. (a) Allocation Alternatives: If forfeitures are allocated to Participants, such allocation shall be done in the same manner as the Employer's contribution. [ ] (i) Not Applicable. All contributions are always fully vested. [X] (ii) Forfeitures shall be allocated to Participants in the same manner as the Employer's contribution. If allocation to other Participants is selected, the allocation shall be as follows: (1) Amount attributable to Employer discretionary contributions and Top-Heavy minimums will be allocated to: [X]all eligible Participants under the Plan. [ ] only those Participants eligible for an allocation of Employer contributions in the current year. [ ] only those Participants eligible for an allocation of matching contributions in the current year. (2) Amounts attributable to Employer matching contributions will be allocated to: [X] all eligible Participants. [ ] only those Participants eligible for allocations of matching contributions in the current year. RECENT DEVELOPMENTS Summarized below is certain selected financial data for the Association at December 31, 1997 and 1996 and September 30, 1997 and for the three-month periods ended December 31, 1997 and 1996. Information at December 31, 1997 and 1996, and for each of the three month periods, is derived from unaudited financial statements. This financial data should be read in conjunction with the financial statements of the Association presented elsewhere in this Prospectus. In the opinion of management of the Association, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation have been included. The results of operations and other data for the three-month period ended December 31, 1997 are not necessarily indicative of the results of operations which may be expected for the fiscal year ending September 30, 1998 or any other period. Selected Financial Condition Information At December 31, At September 30, --------------- ---------------- 1997 1997 ---- ---- (In Thousands) Total assets...................................... $59,623 $61,022 Cash and cash equivalents......................... 1,435 1,922 Loans receivable, net............................. 48,880 49,526 Mortgage-backed securities available for sale..... 3,416 3,562 Other securities available for sale............... 3,454 3,455 ------- ------- Total securities available for sale............ 6,870 7,017 ------- ------- Deposits.......................................... 54,271 56,117 Borrowings........................................ 1,700 1,300 Total equity...................................... 3,321 3,280 Selected Operations Data For Three Months Ended ---------------------------- December 31, September 30, ------------ ------------- 1997 1997 ---- ---- (In Thousands) Interest and dividend income........................$ 1,184 $ 1,254 Interest expense.................................... 627 613 Net interest income................................. 557 641 Provision for loan losses........................... 15 198 Net interest income after provision for loan losses. 542 443 Total non-interest income........................... 54 44 Non-interest expense................................ 557 586 Income (loss) before income tax expense............. 39 (99) Income tax expense.................................. 16 14 Net income (loss)................................... 23 (113) ARTICLE II ELIGIBILITY REQUIREMENTS 2.1 Participation Employees who meet the eligibility requirements in the Adoption Agreement on the Effective Date of the Plan shall become Participants as of the Effective Date of the Plan. If so elected in the Adoption Agreement, all Employees employed on the Effective Date of the Plan may participate, even if they have not satisfied the Plan's specified eligibility requirements. Other Employees shall become Participants on the Entry Date coinciding with or immediately following the date on which they meet the eligibility requirements. Depending on the Plan's eligibility requirements, the entry date may actually be earlier than the date on which the Employee satisfies the eligibility requirements. The Employee must satisfy the eligibility requirements specified in the Adoption Agreement and be employed on the Entry Date to become a Participant in the Plan. In the event an Employee who is not a member of the eligible class of Employees becomes a member of the eligible class, such Employee shall participate immediately if such Employee has satisfied the minimum age and service requirements and would have previously become a Participant had he or she been in the eligible class. Employees may waive participation in the Plan. However, this is only permitted if the Employer's adoption is on Nonstandardized Adoption Agreement 004, 005 or 006, and the Plan will meet the minimum coverage requirements in Code Section 410(b) and the minimum participation requirements of Code Section 401(a)(26). [To the extent so provided by regulations, a partner (or other employee) waiving participation in the Plan may cause Code Section 401(k) and the regulations thereunder to apply.] A former Participant shall again become a Participant upon returning to the employ of the Employer at the next Entry Date or if earlier, the next Valuation Date. For this purpose, Participant's Compensation and Service shall be considered from date of rehire. 2.2 Change In Classification Of Employment In the event a Participant becomes ineligible to participate because he or she is no longer a member of an eligible class of Employees, such Employee shall participate upon his or her return to an eligible class of Employees. 2.3 Computation Period To determine Years of Service and Breaks in Service for purposes of eligibility, the 12-consecutive month period shall commence on the date on which an Employee first performs an Hour of Service for the Employer and each anniversary thereof, such that the succeeding 12-consecutive month period commences with the employee's first anniversary of employment and so on. If, however, the period so specified is one year or less, the succeeding 12-consecutive month period shall commence on the first day of the Plan Year prior to the anniversary of the date they first performed an Hour of Service regardless of whether the Employee is entitled to be credited with 1,000 (or such lesser number as specified by the Employer in the Adoption Agreement) Hours of Service during their first employment year. 2.4 Employment Rights Participation in the Plan shall not confer upon a Participant any employment rights, nor shall it interfere with the Employer's right to terminate the employment of any Employee at any time. 2.5 Service With Controlled Groups All Years of Service with other members of a controlled group of corporations [as defined in Code Section 414(b)], trades or businesses under common control [as defined in Code Section 414(c)], or members of an affiliated service group [as defined in Code Section 414(m)] shall be credited for purposes of determining an Employee's eligibility to participate. [X] (iii) Forfeitures shall be applied to reduce the Employer's contribution for such Plan Year. [ ] (iv) Forfeitures shall be applied to offset administrative expenses of the Plan. If forfeitures exceed these expenses (iii) above shall apply. (b) Date for Reallocation: NOTE:If no distribution has been made to a former Participant, subsection (i) below will apply to such Participant even if the Employer elects (ii), (iii) or (iv) below as its normal administrative policy. [ ] (i) Forfeitures shall be reallocated at the end of the Plan Year during which the former Participant incurs his or her fifth consecutive one year Break in Service. [ ] (ii) Forfeitures will be reallocated immediately (as of the next Valuation Date). [X] (iii) Forfeitures shall be reallocated at the end of the Plan Year during which the former Participant incurs his or her 1st (1st, 2nd, 3rd, or 4th) consecutive one year Break in Service. [ ] (iv) Forfeitures will be reallocated immediately (as of the Plan Year end). (c) Restoration of Forfeitures: If amounts are forfeited prior to five (5) consecutive one year Breaks in Service, the Funds for restoration of account balances will be obtained from the following resources in the order indicated (fill in the appropriate number). [1] (i) Current year's forfeitures [3] (ii) Additional Employer contribution [2] (iii) Income or gain to the Plan (d) Forfeitures of Excess Aggregate Contributions shall be: [X] (i) Applied to reduce Employer contributions [ ] (ii) Allocated, after all other forfeitures under the Plan, to the Matching Contribution account of each non-Highly Compensated Participant who made Elective Deferrals or Voluntary Contributions in the ratio which each such Participant's Compensation for the Plan Year bears to the total Compensation of all Participants for such Plan Year. Such forfeitures cannot be allocated to the account of any Highly Compensated Employee. Selected Financial Ratios (Annualized) and Other Data At or For the Years Ended December 31, ------------------ 1997 1996 ---- ---- Performance Ratios: Return on average assets................................. 0.15% (0.73)% Return on average equity................................. 2.78 (12.01) Interest rate spread information: Average during period.................................... 3.72% 4.13% End of Period............................................ 4.03 4.19 Other Operating Ratios: Net interest margin...................................... 3.82% 4.29% Ratio of operating expenses to average total assets(1)... 3.62 3.76 Efficiency Ratio......................................... 89.82 84.82 Ratio of average interest-earning assets to average interest-bearing liabilities 102.54 104.06 Asset Quality ratios: Non-performing assets to total assets at end of period 6.10% 3.51% Allowance for loan loss to non-performing loans at end of period 44.32 69.60 Allowance for loan losses to gross loans receivable at end of period 3.09 2.56 Capital ratios: Equity to total assets at end of period 5.57% 5.97% Average equity to average assets 5.46 6.09 Other data: Number of full service offices 2 2 (1) Operating expenses exclude OREO expenses of $8,000 and $5,000 for periods ended December 31, 1997 and 1996, respectively. (2) The efficiency ratio represents operating expenses (as defined above) divided by the sum of net interest income and other operating income. 2.6 Owner-Employees If this Plan provides contributions or benefits for one or more Owner-Employees who control both the business for which this Plan is established and one or more other trades or businesses, this Plan and the Plan established for other trades or businesses must, when looked at as a single Plan, satisfy Code Sections 401(a) and (d) for the Employees of this and all other trades or businesses. If the Plan provides contributions or benefits for one or more Owner-Employees who control one or more other trades or businesses, the Employees of the other trades or businesses must be included in a Plan which satisfies Code Sections 401(a) and (d) and which provides contributions and benefits not less favorable than provided for Owner-Employees under this Plan. If an individual is covered as an Owner-Employee under the plans of two or more trades or businesses which are not controlled, and the individual controls a trade or business, then the contributions or benefits of the Employees under the plan of the trades or businesses which are controlled must be as favorable as those provided for him or her under the most favorable plan of the trade or business which is not controlled. For purposes of the preceding sentences, an Owner-Employee, or two or more Owner-Employees, will be considered to control a trade or business if the Owner-Employee, or two or more Owner-Employees together: (a) own the entire interest in an unincorporated trade or business, or (b) in the case of a partnership, own more than 50% of either the capital interest or the profits interest in the partnership. For purposes of the preceding sentence, an Owner-Employee, or two or more Owner-Employees shall be treated as owning any interest in a partnership which is owned, directly or indirectly, by a partnership which such Owner-Employee, or such two or more Owner-Employees, are considered to control within the meaning of the preceding sentence. 2.7 Leased Employees Any Leased Employee shall be treated as an Employee of the recipient Employer; however, contributions or benefits provided by the leasing organization which are attributable to services performed for the recipient Employer shall be treated as provided by the recipient Employer. A Leased Employee shall not be considered an Employee of the recipient if such Employee is covered by a money purchase pension plan providing: (a) a non-integrated Employer contribution rate of at least 10% of Compensation, [as defined in Code Section 415(c)(3) but including amounts contributed by the Employer pursuant to a salary reduction agreement, which are excludable from the Employee's gross income under a cafeteria plan covered by Code Section 125, a cash or deferred profit-sharing plan under Code Section 401(k), a Simplified Employee Pension Plan under Code Section 408(k) and a tax-sheltered annuity under Code Section 403(b)], (b) immediate participation, and (c) full and immediate vesting. Forfeitures of Excess Aggregate Contributions will be so applied at the end of the Plan Year in which they occur. 10. CASH OPTION [ ] (a) The Employer may permit a Participant to elect to defer to the Plan, an amount not to exceed % of any Employer paid cash bonus made for such Participant for any year. A Participant must file an election to defer such contribution at least fifteen (15) days prior to the end of the Plan Year. If the Employee fails to make such an election, the entire Employer paid cash bonus to which the Participant would be entitled shall be paid as cash and not to the Plan. Amounts deferred under this Section shall be treated for all purposes as Elective Deferrals. Notwithstanding the above, the election to defer must be made before the bonus is made available to the Participant. [X] (b) Not Applicable. 11. LIMITATIONS ON ALLOCATIONS [Article X] [ ] This is the only Plan the Employer maintains or ever maintained; therefore, this Section is not applicable. [X] The Employer does maintain or has maintained another Plan (including a Welfare Benefit Fund or an individual medical account [as defined in Code Section 415(1)(2)], under which amounts are treated as Annual Additions) and has completed the proper sections below. Complete (a), (b) and (c) only if the Employer maintains or ever maintained another qualified Plan, including a Welfare Benefit Fund or an individual medical account (as defined in Code Section 415(1)(2)), in which any Participant in this Plan is (or was) a Participant or could possibly become a Participant. (a) If the Participant is covered under another qualified Defined Contribution Plan maintained by the Employer, other than a Regional Prototype Plan: [ ] (i) The provisions of Article X of the Basic Plan Document #R1 will apply, as if the other Plan were a Regional Prototype Plan. [ ] (ii) Attach provisions stating the method under which the Plans will limit total Annual Additions to the Maximum Permissible Amount, and will properly reduce any Excess Amounts, in a manner that precludes Employer discretion. (b) If a Participant is or ever has been a Participant in a Defined Benefit Plan maintained by the Employer: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT OPERATING RESULTS Financial Condition Total assets declined $1.4 million or 2.29% to $59.6 million at December 31, 1997 from $61.0 million at September 30, 1997. Gross loans declined from $51.3 million at September 30, 1997 by $707,000 or 1.38% to $50.6 million at December 31, 1997. The majority of the loan decline was in one-to-four family loans which were $36.9 million at September 30, 1997 and $594,000 or 1.61% less at December 31, 1997 with a balance of $36.3 million. The decline in gross loans outstanding from September 30, 1997 to December 31, 1997 was attributable to the highly competitive nature of the residential mortgage market where rates offered by competitors were lower than those offered by the Association. The Association pricing its mortgage loans more aggressively in December 1997. Cash and cash equivalents declined $487,000 or 25.36% from $1.9 million at September 30, 1997 to $1.4 million at December 31, 1997. Securities available for sale declined $147,000 or 2.10% from $7.0 million to $6.9 million from September 30, 1997 to December 31, 1997. Deposits declined during the three months ended December 31, 1997 by $1.8 million or 3.29%. The decline in deposits was primarily in time deposits which were $25.7 million at December 31, 1997 as compared to $28.0 million at September 30, 1997. The $2.3 million or 8.11% decline in time deposits outstanding was partially offset by an increase of $682,000 or 6.23% in money market accounts during the same time period. The outflow of deposits exceeded the Association's immediate sources of funding; therefore, borrowings increased $400,000 or 30.77% from $1.3 million at September 30, 1997 to $1.7 million at December 31, 1997. Time deposit outflows during the three month period were consistent with management's decision to not aggressively price new or maturing time deposits when alternative funding, such as FHLB borrowings and security repurchase agreements, were priced less expensively and effectively met the short term funding needs. The Association's allowance for loan losses declined $48,000 or 2.95% during the three month period ended December 31, 1997. The decline was the result of net charge-offs totaling $63,000 exceeding the $15,000 provision made during the quarter. Charge-offs taken during the period from September 30, 1997 to December 31, 1997 were primarily against residential properties either foreclosed upon or deemed uncollectible. At December 31, 1997, the allowance for loan losses was 3.09% of gross loans receivable (down from 3.14% at September 30, 1997) and 44.32% of non-performing loans (up from 42.53% at September 30, 1997). Non-performing loans decreased from $3.8 million at September 30, 1997 to $3.5 million at December 31, 1997. OREO declined from $313,000 at September 30, 1997 to $107,000 at December 31, 1997. Total equity increased by $41,000 during the three month period ended December 31, 1997 and was $3.3 million at both September 30, 1997 and December 31, 1997. The increase was attributable to net income of $23,000 recognized for the three month period ended This exclusion is only available if Leased Employees do not constitute more than twenty percent (20%) of the recipient's non-highly compensated work force. 2.8 Thrift Plans If the Employer makes an election in Adoption Agreements 003 or 006 to require Voluntary Contributions to participate in this Plan, the Employer shall notify each eligible Employee in writing of his or her eligibility for participation at least 30 days prior to the appropriate Entry Date. The Employee shall indicate his or her intention to join the Plan by authorizing the Employer to withhold a percentage of his or her Compensation as provided in the Plan. Such authorization shall be returned to the Employer at least 10 days prior to the Employee's Entry Date. The Employee may decline participation by so indicating on the enrollment form or by failure to return the enrollment form to the Employer prior to the Employee's Entry Date. If the Employee declines to participate, such Employee shall be given the opportunity to join the Plan on the next Entry Date. The taking of a Hardship Withdrawal under the provisions of paragraph 6.9 will impact the Participant's ability to make these contributions. Attach provisions which will satisfy the 1.0 limitation of Code Section 415(e). Such language must preclude Employer discretion. The Employer must also specify the interest and mortality assumptions used in determining Present Value in the Defined Benefit Plan. (c) The minimum contribution or benefit required under Code Section 416 relating to Top-Heavy Plans shall be satisfied by: [X] (i) This Plan. [ ] (ii)________________________________ ________________________________ (Name of other Qualified Plan of the Employer) [ ] (iii) Attach provisions stating the method under which the minimum contribution and benefit provisions of Code Section 416 will be satisfied. If a Defined Benefit Plan is or was maintained, an attachment must be provided showing interest and mortality assumptions used in the Top-Heavy Ratio. 12. VESTING [Article IX] Employees shall have a fully vested and nonforfeitable interest in any Employer contribution and the investment earnings thereon made in accordance with Paragraphs (select one or more options): [ ] 7(c) Matching Employer Contribution [ ] 7(e) Other than Qualified Non-Elective Contributions - Non-Integrated Formula [ ] 7(f) Integrated Allocation Formula [ ] 7(g) Alternative Integrated Allocation Formula [ ] 7(i) Minimum Employer Contribution - Top-Heavy Plans Contributions under Paragraph 7(b) 7(c)(vii) and 7(d) are always fully vested. If one or more of the foregoing options are not selected, such Employer contributions shall be subject to the vesting table selected by the Employer. Each Participant shall acquire a vested and nonforfeitable percentage in his or her account balance attributable to Employer contributions and the earning thereon under the procedures selected below except with respect to any Plan Year during which the Plan is Top-Heavy, in which case the Two-twenty vesting schedule [option (b)(iv)] shall automatically apply unless the Employer has already elected a faster vesting schedule. If the Plan is switched to option (b)(iv), because of its Top-Heavy status, that vesting schedule will remain in effect even if the Plan later becomes non-Top-Heavy until the Employer executes an amendment of this Adoption Agreement indicating otherwise. December 31,1997 and an $18,000 decline in the after-tax net unrealized loss on available for sale securities. Non-performing assets. Non-performing assets decreased $468,000 or 11.40% from $4.1 million at September 30, 1997 to $3.6 million at December 31, 1997. The decrease is attributable to non-performing loans decreasing $262,000 or 6.91% from $3.8 million at September 30, 1997 to $3.5 million at December 31, 1997 and by a decline in OREO of $206,000 during the same period. Non-performing loans at December 31, 1997 consisted of one-to-four family mortgages of $3.5 million, home equity loans of $34,000 and other consumer loans of $12,000. OREO at both December 31, 1997 and 1996 consisted entirely of one-to-four family residences. In addition to non-performing loans discussed above, at December 31, 1997, the Association had $1.1 million of other loans, all of which were multi-family and commercial real estate or commercial business loans, with respect to which known information about the possible credit problems of the borrowers or the cash flows of the security properties have caused management to have concerns as to the ability of the borrowers to comply with present loan repayment terms and which may result in the future inclusion of such loans in the non-performing asset categories. While none of these loans were more than 30 days delinquent as of December 31, 1997, weak or negative cash flows, failure to attain budgeted income projections or declines in collateral values have been the primary reasons which have caused the Association to monitor such loans more carefully. Comparison of Operating Results for the Three-Month Periods Ended December 31, 1997 and 1996 General. Net income for the three months ended December 31, 1997 was $23,000, compared to a net loss of $113,000 for the same period in 1996. The $136,000 increase was primarily attributable to a decline of $85,000 in net interest income, offset by a $183,000 decrease in the provision for loan losses, an increase of $10,000 in non-interest income and a decline of $30,000 in non-interest expense. Net interest income. Net interest income, or the difference between interest and dividend income and interest expense, declined $85,000 or 13.18 % from the three month period ended December 31, 1996 to the three month period ended December 31, 1997. The negative effect of a 26 basis point decrease in the average net interest-earning assets yield from 8.40% for the quarter ended December 31, 1996 to 8.14% for the quarter ended December 31, 1997 was further exasperated by a 16 basis point increase in the average interest-bearing liabilities cost from 4.27% for the quarter ended December 31, 1996 to 4.43% for the quarter ended December 31, 1997. Interest and dividend Income. Interest and dividend income totaled $1.2 million for the three months ended December 31, 1997, a decrease of $70,000 or 5.61% compared to interest and dividend income of $1.3 million for the three months ended December 31, 1996. This decrease reflects a decrease of $1.6 million in total average interest-earning assets and a 26 basis point decrease in the average yield on such assets to 8.14% for the three months ended December 31, 1997 from 8.40% for the same period in the prior year. Interest income on loans decreased $50,000 or 4.49% to $1.1 million for the three month period ended December 31, 1997 from $1.1 million for ARTICLE III EMPLOYER CONTRIBUTIONS 3.1 Amount The Employer intends to make periodic contributions to the Plan in accordance with the formula or formulas selected in the Adoption Agreement. However, the Employer's contribution for any Plan Year shall be subject to the limitations on allocations contained in Article X. A Participant may elect to waive an Employer contribution on his or her behalf for a given Plan Year. However, a Participant may only make this election if the Employer's adoption is on Nonstandardized Adoption Agreement 004, 005 or 006. [In the event a partner in a partnership makes this election, in accordance with Proposed Regulations Section 1.401(k)-1(a)(6), the Plan will be deemed to constitute a cash or deferred arrangement with respect to the partners. Thus, contributions made on behalf of any partners may be limited to $7,000 indexed as set forth in Code Section 402(g)]. Any waiver made pursuant to this paragraph will be made prior to the time such Participant accrues a benefit for that Plan Year. 3.2 Expenses And Fees The Employer shall also be authorized to reimburse the Fund for all expenses and fees incurred in the administration of the Plan or Trust Account and paid out of the assets of the Fund. Such expenses shall include, but shall not be limited to, fees for professional services, printing and postage. Brokerage Commissions may not be reimbursed. 3.3 Responsibility For Contributions Neither the Trustee nor the Sponsor shall be required to determine if the Employer has made a contribution or if the amount contributed is in accordance with the Adoption Agreement or the Code. The Employer shall have sole responsibility in this regard. The Trustee shall be accountable solely for contributions actually received by it. 3.4 Return Of Contributions Contributions made to the Fund by the Employer shall be irrevocable except as provided below: (a) Any contribution forwarded to the Trustee because of a mistake of fact, provided that the contribution is returned to the Employer within one year of the contribution. (b) In the event that the Commissioner of Internal Revenue determines that the Plan is not initially qualified under the Internal Revenue Code, any contribution made incident to that initial qualification by the Employer must be returned to the Employer within one year after the date the initial qualification is denied, but only if the application for the qualification is made by the time prescribed by law for filing the Employer's return for the taxable year in which the Plan is adopted, or such later date as the Secretary of the Treasury may prescribe. (c) Contributions forwarded to the Trustee are presumed to be deductible and are conditioned on their deductibility. Contributions which are determined to not be deductible will be returned to the Employer. (a) Computation Period: The computation period for purposes of determining Years of Service and Breaks in Service for purposes of computing a Participant's nonforfeitable right to his or her account balance derived from Employer contributions: [ ] (i) shall not be applicable since Participants are always fully vested, [ ] (ii) shall commence on the date on which an Employee first performs an Hour of Service for the Employer and each subsequent 12-consecutive month period shall commence on the anniversary thereof; or [X] (iii) shall commence on the first day of the Plan Year during which an Employee first performs an Hour of Service for the Employer and each subsequent 12-consecutive month period shall commence on the anniversary thereof. A Participant shall receive credit for a Year of Service if he or she completes at least 1,000 Hours of Service (or if lesser, the number of hours specified at 3(1)(iii) of this Adoption Agreement) at any time during the 12-consecutive month computation period. Consequently, a Year of Service may be earned prior to the end of the 12-consecutive month computation period and the Participant need not be employed at the end of the 12-consecutive month computation period to receive credit for a Year of Service. (b) Vesting Schedules: NOTE:The vesting schedules below only apply to a Participant who has at least one Hour of Service during or after the 1989 Plan Year. If applicable, Participants who separated from Service prior to the 1989 Plan Year will remain under the vesting schedule as in effect in the Plan prior to amendment for the Tax Reform Act of 1986. (i) Full and immediate vesting. Years of Service ---------------- 1 2 3 4 5 6 7 - - - - - - - (ii) __% 100% (iii) __% __% 100% (iv) __% 20% 40% 60% 80% 100% (v) __% __% 20% 40% 60% 80% 100% (vi) 10% 20% 30% 40% 60% 80% 100% (vii) 0% 0% 20% 50% 100% (viii) __% __% __% __% __% __% 100% the three months ended December 31, 1996, reflecting a $588,000 decline in the average balance of loans and a 29 basis point decline in average yield. The decline in the average balance of loans is primarily due to the decline in one-to-four family mortgages. The decrease in the average yield on loans is due to the continued amortization and prepayment of higher yielding one-to-four family mortgages with replacement by newly originated lower yielding one-to-four family mortgages, slightly offset by the continued growth in higher yielding multi-family and commercial real estate and commercial business loans. Interest income from securities decreased $14,000 or 11.34% from $122,000 for the three months ended December 31, 1996 to $108,000 for the three months ended December 31, 1997. The decline was attributable to the $558,000 or 7.39% decrease in the average balance of securities due to the continued amortization of the portfolio. Interest expense. Interest expense increased from $613,000 for the three month period ended December 31, 1996 by $14,000 or 2.31% to $627,000 for the three month period ended December 31, 1997. This increase reflects an increase of 16 basis points in the average rate paid on deposits and borrowings to 4.43% for the three months ended December 31, 1997 from 4.27% for the same period in the prior year offset by a decline of $660,000 in the average balance outstanding. The decrease in the average interest-bearing liabilities was the result of the combined average demand and N.O.W. accounts, savings and money market account balances outstanding increasing $679,000 or ____% from $27.9 million to $28.6 million and an increase of $960,000 in the average borrowings outstanding from $636,000 to $1.6 million offset by a decrease of $2.3 million or ____% in the average balance of time deposits from $28.8 million to $26.5 million. The increased interest expense reflects an increase in the rates paid on money market accounts, time deposits and borrowings. The average rate paid on money market accounts increased 13 basis points from 4.05% to 4.18% for the three months ended December 31, 1996 and December 31, 1997, respectively. The cost of time deposits also increased during the same time period by 32 basis points from 5.29% to 5.61%. Provision for loan losses. The provision for loans losses was $15,000 for the three months ended December 31, 1997 compared to $198,000 for the same period in 1996. Although the Association maintains its allowance for loan losses at a level it considers adequate to provide for losses, there can be no assurance that such losses will not exceed the estimated amounts or that additional substantial provisions for loan losses will not be required in future periods. The allowance for loan losses totaled $1.6 million (3.09% of gross loans and 44.32% of non-performing loans) at December 31, 1997 compared with $1.3 million (2.56% of gross loans and 69.60% of non-performing loans). Other income. Other income for the three months ended December 31, 1997 increased $10,000 or 21.83% from $44,000 during the same period in 1996 to $54,000. This increase was primarily attributable to a $8,000 increase in service charges and fees, reflecting newly implemented fees being collected from customers. Other expense. Other expenses decreased $30,000 or 5.13% to $557,000 for the three month period ended December 31, 1997 from $587,000 for the three month period ended December 31, 1996. Compensation and employee benefits increased $17,000 or 8.26% from $217,000 for the three month period ended December 31, 1996 to $234,000 for the same period in 1996. The increase ARTICLE IV EMPLOYEE CONTRIBUTIONS 4.1 Voluntary Contributions An Employee may make Voluntary Contributions to the Plan established hereunder if so authorized by the Employer in a uniform and nondiscriminatory manner. Such contributions are subject to the limitations on Annual Additions and are subject to antidiscrimination testing. Voluntary Contributions are permitted only in Adoption Agreements 003 and 006. 4.2 Qualified Voluntary Contributions A Participant may no longer make Qualified Voluntary Contributions to the Plan. Such amounts already contributed may remain in the Trust Fund Account until distributed to the Participant. 4.3 Rollover Contribution Unless provided otherwise in the Adoption Agreement, a Participant may make a Rollover Contribution to any Defined Contribution Plan established hereunder of all or any part of an amount distributed or distributable to him or her from a Qualified Deferred Compensation Plan provided: (a) the amount distributed to the Participant is deposited to the Plan no later than the sixtieth day after such distribution was received by the Participant, (b) the amount distributed is not one of a series of substantially equal periodic payments made for the life (or life expectancy) of the Participant or the joint lives (or joint life expectancies) of the Participant and the Participant's Designated Beneficiary, or for a specified period of ten years or more; (c) the amount distributed is not required under section 401(a)(9) of the Code; (d) if the amount distributed included property such property is rolled over, or if sold the proceeds of such property may be rolled over, (e) the amount distributed is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). In addition, if the Adoption Agreement allows Rollover Contributions, the Plan will also accept any Eligible Rollover Distribution (as defined at paragraph 1.70) directly to the Plan. Rollover Contributions, which relate to distributions prior to January 1, 1993, must be made in accordance with paragraphs (a) through (e) and additionally meet the requirements of paragraph (f): (f) The distribution from the Qualified Deferred Compensation Plan constituted the Participant's entire interest in such Plan and was distributed within one taxable year to the Participant: NOTE:The percentages selected for Schedule (viii) may not be less for any year than the percentages shown at Schedule (v). [X] All contributions other than those which are fully vested when contributed will vest under schedule vii above. [ ] Contributions other than those which are fully vested when contributed will vest as provided below: Vesting Option Selected Type of Employer Contribution ----------------------- ----------------------------- ____________ 7(c) Employer Match on Salary Savings ____________ 7(c) Employer Match on Employee Voluntary ____________ 7(e) Employer Discretionary ____________ 7(f) and 7(g) Employer Discretionary - Integrated (c) Service disregarded for Vesting: [X] (i) Not Applicable. All Service shall be considered. [ ] (ii) Service prior to the Effective Date of this Plan or a predecessor Plan shall be disregarded when computing a Participant's vested and nonforfeitable interest. [ ] (iii) Service prior to a Participant having attained age 18 shall be disregarded when computing a Participant's vested and nonforfeitable interest. 13. SERVICE WITH PREDECESSOR ORGANIZATION For purposes of satisfying the Service requirements for eligibility, Hours of Service shall include Service with the following predecessor organization(s): (These hours will also be used for vesting purposes). N/A ----------------------------------------------------------------- N/A ----------------------------------------------------------------- was primarily attributable to annual salary increases and increased pension and health insurance expenses. Federal deposit insurance premiums were $13,000 for the three months ended December 31, 1997 compared to $32,000 for the same period in 1996, reflecting a decrease of $19,000 or 58.48%. The decrease is attributable to the reduced premiums charged for insurance on deposits. Advertising expense decreased $7,000 or 23.50% from $29,000 for the three months ended December 31, 1996 to $22,000 for the three months ended December 31, 1997, as the amount of advertising used was reduced during the first quarter of fiscal 1998. All other operating expenses decreased $16,000 or 6.72% from $248,000 for the three months ended December 31, 1996 to $231,000 for the three months ended December 31, 1997. Income tax expense. Income tax expense was $16,000 for the three months ended December 31, 1997, or 40.40% of pre-tax income compared to $14,000 on a pre-tax loss of $99,000 for the three months ended December 31, 1996. A benefit was not recognized for the pre-tax loss incurred during the three months ended December 31, 1996 due to an evaluation of the realizability of the Association's deferred tax assets. The deferred tax asset valuation allowance was increased $43,000 during the three months ended December 31, 1996. (1) on account of separation from Service, a Plan termination, or in the case of a profit-sharing or stock bonus plan, a complete discontinuance of contributions under such plan within the meaning of Section 402(a)(6)(A) of the Code, or (2) in one or more distributions which constitute a qualified lump sum distribution within the meaning of Code Section 402(e)(4)(A), determined without reference to subparagraphs (B) and (H). Such Rollover Contribution may also be made through an Individual Retirement Account qualified under Code Section 408 where the IRA was used as a conduit from the Qualified Deferred Compensation Plan, the Rollover Contribution is made in accordance with the rules provided under paragraphs (a) through (e) and the Rollover Contribution does not include any regular IRA contributions, or earnings thereon, which the Participant may have made to the IRA. Rollover Contributions, which relate to distributions prior to January 1, 1993, may be made through an IRA in accordance with paragraphs (a) through (f) and additional requirements as provided in the previous sentence. The Trustee shall not be held responsible for determining the tax-free status of any Rollover Contribution made under this Plan. 4.4 Transfer Contribution Unless provided otherwise in the Adoption Agreement a Participant may, subject to the provisions of paragraph 4.5, also arrange for the direct transfer of his or her benefit from a Qualified Deferred Compensation Plan to this Plan. For accounting and record keeping purposes, Transfer Contributions shall be treated in the same manner as Rollover Contributions. In the event the Employer accepts a Transfer Contribution from a Plan in which the Employee was directing the investments of his or her account, the Employer may continue to permit the Employee to direct his or her investments in accordance with paragraph 13.7 with respect only to such Transfer Contribution. Notwithstanding the above, the Employer may refuse to accept such Transfer Contributions. 4.5 Employer Approval Of Transfer Contributions The Employer maintaining a Safe-Harbor Profit-Sharing Plan in accordance with the provisions of paragraph 8.7, acting in a nondiscriminatory manner, may in its sole discretion refuse to allow Transfer Contributions to its profit-sharing plan, if such contributions are directly or indirectly being transferred from a defined benefit plan, a money purchase pension plan (including a target benefit plan), a stock bonus plan, or another profit-sharing plan which would otherwise provide for a life annuity form of payment to the Participant. 4.6 Elective Deferrals A Participant may enter into a Elective Deferrals Agreement with the Employer authorizing the Employer to withhold a portion of such Participant's Compensation not to exceed $7,000 per calendar year as adjusted for inflation or, if lesser, the percentage of Compensation specified in the Adoption Agreement and to deposit such amount to the Plan. No Participant shall be permitted to have Elective Deferrals made under this Plan or any other qualified plan maintained by the Employer, during any taxable year, in excess of the dollar limitation contained in Code Section 402(g) in effect at the beginning of such taxable year. Thus, the $7,000 limit may be reduced if a Participant contributes pre-tax contributions to qualified plans of this or other Employers. Any such contribution shall be credited to the Employee's Elective Deferrals Account. Unless otherwise specified in the Adoption Agreement, a Participant may amend his or her Elective Deferrals Agreement to increase, decrease or terminate the percentage upon 30 days written notice to the Employer. If a Participant terminates his or her agreement, such Participant shall not be permitted to put a new Elective Deferrals Agreement into effect until the first pay period in the next Plan Year, unless otherwise stated in the Adoption Agreement. The Employer may also amend or terminate said agreement on written notice to the Participant. If a Participant has not authorized the Employer to withhold at the maximum rate and desires to increase the total withheld for a Plan Year, such Participant may authorize the Employer upon 30 days notice to withhold a supplemental amount up to 100% of his or her 14. ROLLOVER/TRANSFER CONTRIBUTIONS (a) Rollover Contributions, as described at Paragraph 4.3 of the Basic Plan Document #R1, [X] shall [ ] shall not be permitted. If permitted, Employees [X] may [ ] may not make Rollover Contributions prior to meeting the eligibility requirements for participation in the Plan. (b) Transfer Contributions, as described at Paragraph 4.4 of the Basic Plan Document #R1 [X] shall [ ] shall not be permitted. If permitted, Employees [X] may [ ] may not make Transfer Contributions prior to meeting the eligibility requirements for participation in the Plan. NOTE:Even if available, the Employer may refuse to accept such contributions if its Plan meets the safe-harbor rules of Paragraph 8.7 of the Basic Plan Document #R1. 15. HARDSHIP WITHDRAWALS Hardship withdrawals, as provided for in Paragraph 6.9 of the Basic Plan Document #R1 [X] are [ ] are not permitted. 16. PARTICIPANT LOANS Participant loans, as provided for in Paragraph 13.4 of the Basic Plan Document #R1, [ ] are [X] are not permitted. If permitted, repayments of principal and interest shall be repaid to [ ] the Participant's segregated account; or [ ] the general Fund. 17. INSURANCE POLICIES The insurance provisions of Paragraph 13.5 of the Basic Plan Document #R1, [ ] shall [X] shall not be applicable. 18. EMPLOYER INVESTMENT DIRECTION The Employer investment direction provisions, as set forth in Paragraph 13.6 of the Basic Plan Document #R1, [X] shall [ ] shall not be applicable. The following tables sets forth the Association's compliance with its regulatory capital requirements at December 31, 1997. See "Pro Forma Regulatory Capital Analysis" for information regarding the Association's pro forma capital compliance upon completion of the Conversion. Selected Financial Ratios (Annualized) and Other Data At December 31, 1997 ------------------------------- Amount Percent(1) ------ ---------- (Dollars in Thousands) Tangible Capital: Actual $3,325 5.58% Requirement 894 1.50 -------- ---- Excess $2,431 4.08% ====== ==== Core Capital: Actual(2) $3,325 5.58% Requirement 1,789 3.00% ------ ----- Excess $1,536 2.58% ====== ==== Risk-Based Capital: Actual(3) $3,764 11.05% Requirement 2,726 8.00 ------ ----- Excess $1,038 3.05% ====== ==== (1) Tangible and core capital levels are shown as a percentage of total adjusted assets; risk-based capital levels are shown as a percentage of risk-weighted assets. Unrealized gains and losses on debt securities available for sale are excluded from tangible, core and risk-based capital. (2) In April 1991, the OTS proposed a core capital requirement for savings associations comparable to the requirement for national banks that became effective on November 30, 1990. This proposed core capital ratio is 3% of total adjusted assets for thrifts that receive the highest supervisory rating for safety and soundness ("CAMEL" rating), with a 4% to 5% core capital requirement for all other thrifts. See "Regulation Regulatory Capital Requirements." (3) Includes $486,000 of the allowance for loan losses which qualifies as supplementary capital. See "Regulation - Regulatory Capital Requirements."
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors including, but not limited to, those discussed in "Risk Factors." THE COMPANY DSET is a leading provider of telecommunications network management solutions, including industry-standard application development tools, custom application development services and carrier-to-carrier network applications. Telecommunications carriers and equipment vendors utilize the Company's tools and development services to build applications which facilitate the remote management of network devices, the rapid implementation of new telecommunication services and the flow-through of information to higher level applications, such as billing, ordering and provisioning systems. The Company's tools are also used by the Company and by its customers to build carrier-to- carrier applications which are designed to facilitate the flow-through of information between carriers' networks and systems. These solutions are based on the Telecommunications Management Network ("TMN") standard, which defines the application programming interfaces ("APIs") and communication protocols required to ensure interoperability within and between carrier networks that incorporate devices deployed from multiple vendors. The Company's customers include AT&T, BellSouth, MCI, Advanced Fibre Communications, Ciena, Fujitsu, Hitachi, Lockheed Martin IMS, Lucent, Samsung, Tekelec and Tellabs. Telecommunications carriers face an increasingly competitive and complex market environment due to continued deregulation and privatization of the global telecommunications industry. Consequently, telecommunications carriers worldwide are investing aggressively in new technologies and equipment to enhance access to their networks and expand systems capacity or bandwidth in order to provision new and enhanced services. As a result, telecommunication equipment vendors are delivering a variety of new technologies and equipment to address the carriers' requirements, including SONET and SDH multiplexers, wavelength division multiplexers ("WDM"), ATM switches, next generation digital loop carrier systems, wireless local loop systems and digital subscriber line products. The proliferation of new technologies, equipment and services, and the pressure to deploy and provision them rapidly, has placed increased demands on the operations, administration and management of carrier networks. In addition, the Telecommunications Act of 1996 mandated access to carriers' networks and operational support systems ("OSSs") in order to enable the flow- through of information and services between competitive carriers in order to facilitate customer choice of carriers. As a result, carriers increasingly require TMN-compliant applications to facilitate the operation, administration and management of their networks and systems. The Company's highly functional and scalable TMN-based solutions (i) enable carriers to remotely manage large and complex telecommunication networks comprising thousands of network devices in a multi-vendor environment, (ii) facilitate the rapid deployment of new technologies and network equipment and the rapid provisioning of telecommunications services and (iii) expedite the development of carrier-to-carrier applications which enable carriers to quickly and cost-effectively enter new markets. DSET's objective is to become the leading provider of industry standard network management solutions for evolving telecommunications networks. Key elements of the Company's strategy include: (i) extending its technological leadership by continuing to invest its resources to enhance and expand its products and to ensure compatibility with emerging technologies such as CORBA and Java; (ii) expanding its application development services capabilities; (iii) delivering a suite of carrier-to-carrier applications; (iv) expanding its sales and distribution capabilities; and (v) pursuing strategic acquisitions of complementary businesses or technologies. The Company markets its products and services through a direct sales organization in North and South America and through distributors in Europe and Asia. As of December 31, 1997, the Company's direct sales force consisted of eight sales managers supported by nine consulting engineers based in its New Jersey, California and Texas offices. The Company also markets its products and services through non-exclusive distributors in China, Taiwan, South Korea and Japan, and an exclusive distributor in Europe. The Company was incorporated in New Jersey in 1989. The Company's executive offices are located at 1011 US Highway 22, Bridgewater, New Jersey 08807, and its telephone number is (908) 526-7500. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company.................. 2,500,000 shares Common Stock offered by the Selling Shareholders..... 1,000,000 shares Common Stock to be outstanding after the offering.... 9,303,092 shares(1) Use of proceeds...................................... General corporate purposes, working capital and possible acquisitions Proposed Nasdaq National Market Symbol............... DSET </TABLE> - -------------------- (1) Excludes 2,848,493 shares of Common Stock issuable upon the exercise of stock options outstanding as of December 31, 1997 at a weighted average exercise price of $2.23 per share, of which options to purchase 1,173,384 shares of Common Stock are exercisable. Also excludes 185,331 shares of Common Stock issuable upon the exercise of warrants outstanding as of December 31, 1997 at an exercise price of $2.18 per share, of which warrants to purchase 46,333 shares of Common Stock are exercisable. Includes 28,000 shares underlying outstanding options which will be exercised and sold upon consummation of this offering. See "Risk Factors-- Shares Eligible for Future Sale," "Management--Stock Option Plans" and "Description of Capital Stock--Warrants." SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ----------------------------------- 1993 1994 1995 1996 1997 ------ ------ ------ ------ ------- <S> <C> <C> <C> <C> <C> STATEMENT OF INCOME DATA: Revenues: License revenues.......................... $1,456 $2,838 $5,734 $7,005 $10,850 Service revenues.......................... 245 1,172 2,179 6,111 8,515 ------ ------ ------ ------ ------- Total revenues............................. 1,701 4,010 7,913 13,116 19,365 Gross profit............................... 1,620 3,692 7,403 10,834 14,686 Operating income........................... 383 871 2,653 2,870 3,520 Net income................................. 227 572 1,705 2,013 2,469 Net income per common share................ $ 0.04 $ 0.10 $ 0.28 $ 0.37 $ 0.45 Weighted average number of common shares outstanding............................... 5,330 5,760 6,003 3,309 3,567 Net income per common share assuming dilution.................................. $ 0.04 $ 0.10 $ 0.26 $ 0.27 $ 0.30 Weighted average number of common shares and common equivalent shares outstanding.. 5,333 5,807 6,490 7,393 8,346 Pro forma(1): Net income per common share............... $ 0.37 Weighted average number of common shares outstanding.............................. 6,610 Net income per common share assuming dilution................................. $ 0.30 Weighted average number of common shares and common equivalent shares outstanding.............................. 8,346 </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1997 ------------------------- PRO FORMA ACTUAL AS ADJUSTED(1)(2) ------ ----------------- <S> <C> <C> BALANCE SHEET DATA: Cash, cash equivalents and marketable securities..... $3,206 $38,493 Working capital...................................... 6,276 41,563 Total assets......................................... 13,315 48,603 Series A preferred stock............................. 11,604 -- Total shareholders' equity (deficit)................. (3,401) 43,490 </TABLE> - -------------------- (1) Gives effect to the automatic conversion of all issued and outstanding shares of Series A Preferred Stock (the "Series A Stock") into 3,043,625 shares of Common Stock. See "Description of Capital Stock." (2) Adjusted to reflect the sale of 2,500,000 shares of Common Stock offered by the Company hereby after deducting the estimated underwriting discounts and commissions and offering expenses payable by the Company. See "Use of Proceeds" and "Capitalization." Except as otherwise specified, all information in this Prospectus (i) assumes no exercise of the Underwriters' over-allotment option; (ii) has been adjusted to give effect to a three-for-one stock split of the Company's Common Stock effected on May 24, 1996 and a three-for-two stock split of the Company's Common Stock effected on December 31, 1997; (iii) assumes the conversion of all outstanding Series A Stock into an aggregate of 3,043,625 shares of Common Stock upon the consummation of this offering; and (iv) assumes the issuance of 2,500,000 shares of Common Stock offered by the Company hereby from the treasury and the simultaneous cancellation of all remaining shares of Common Stock held in treasury. See "Description of Capital Stock" and "Underwriting."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001052773_atlantic_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001052773_atlantic_prospectus_summary.txt
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+SUMMARY The following summary is qualified by the more detailed information, including information set forth in "Risk Factors" and the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Prospectus. This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ materially from those results discussed in these forward-looking statements and from the results historically experienced. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors." THE COMPANY Atlantic Data Services, Inc. ("ADS" or the "Company") provides information technology ("IT") strategy consulting and systems integration services to customers exclusively in the financial services industry, primarily banks. ADS offers rapid, cost-effective IT solutions to the business challenges faced by financial services companies through its in-depth financial services experience, technological expertise and project management skills. The Company's service offerings are organized around five practice areas: IT Strategy Consulting, Consolidations and Conversions, Year 2000 Resolution, Application Outsourcing, and Electronic Commerce and Home Banking. Since its founding in 1980, ADS has developed an in-depth knowledge of the banking and financial services industry and of its changing market and technology dynamics. The business challenges created by deregulation and consolidation coupled with the need to maintain existing systems and incorporate new technologies have forced banks to turn to third party IT providers for assistance in developing IT solutions to meet their changing needs. Because of the critical importance of their IT systems, banks seek to engage IT service providers who have in-depth knowledge of their systems and business processes and who can assume responsibility for project management and delivery. IT service providers working with banks must possess extensive experience in the financial services industry and be fluent in both traditional legacy systems and newer technologies. However, there is a shortage of professionals who have this combination of skills. While many banks are concluding that using outside specialists enables them to develop better IT solutions in less time and to reduce implementation risks, most IT consulting firms do not have the specialized knowledge of the financial services industry necessary to assist banks in rapidly and cost-effectively meeting their business challenges. ADS enables its customers to leverage their existing IT systems and personnel to compete more effectively, to rapidly assimilate changing technologies and to meet their evolving business needs in a timely and cost-effective manner. The Company works closely with its customers' management and IT personnel from diagnostic and strategic planning through project completion. The Company's IT professionals have extensive experience in the diverse technical environments, legacy hardware platforms, programming languages, and software used by banks, as well as newer technologies including client/server applications and the Internet. In addition, the Company has developed proprietary tools and methodologies designed to reduce the risks inherent in complex systems implementations. The Company works closely with its customers to determine the appropriate resources and staffing to assign to their projects and deploys its staff from throughout the United States to meet a customer's needs. The Company seeks to become the leading IT consulting and systems integration service provider to the financial services industry. Key elements of this strategy include developing long-term relationships with customers, particularly large banks that are expanding their operations and service offerings; leveraging the Company's vertical market expertise into additional financial services channels; developing new service offerings to meet customers' evolving needs; entering into relationships with leading software providers to the financial services industry to increase customer referrals and enhance industry recognition; and expanding the Company's expertise and market share in the financial services industry through selective acquisitions. The Company markets and sells its services directly through its professional sales staff and senior management. The Company's customers include ABN-AMRO Information Technology Services, Associated Banc-Corp., BankBoston, N.A., Canadian Imperial Bank of Commerce, Citizens Savings Bank & Citizens Trust Company, Fleet Services Corporation, National City Corporation, NationsBank Corporation (Barnett Bank) and SunTrust Services Corp. THE OFFERING Common Stock Offered by the Company........... 2,000,000 shares Common Stock Offered by the Selling Stockholders.................................. 500,000 shares Common Stock to be Outstanding after the offering(1)................................... 12,768,830 shares Use of Proceeds............................... For general corporate purposes, including working capital. See "Use of Proceeds." Proposed Nasdaq National Market Symbol........ ADSC SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> FISCAL YEAR ENDED MARCH 31, ----------------------------------------------- 1994 1995 1996 1997 1998 ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENTS OF INCOME DATA: Revenues................................................... $11,872 $14,624 $20,052 $23,843 $42,830 Gross profit............................................... 3,852 5,054 7,675 8,625 18,607 Income from operations..................................... 682 1,536 2,627 3,185 8,303 Discontinued operations, net of tax........................ 1,483 1,245 780 100 -- Net income................................................. 1,398 2,131 2,343 2,041 4,898 Earnings per share of Common Stock and Special Common Stock(2)................................................. $0.14 $0.21 $0.24 $0.20 $0.49 Pro forma earnings per common share(2)..................... $0.47 ======= Pro forma earnings per common share -- assuming dilution(2).............................................. $0.46 ======= Dividends declared per share of Common Stock and Special Common Stock............................................. -- -- $0.40 $0.15 $0.30 ======= ======= ======= ======= ======= </TABLE> <TABLE> <CAPTION> MARCH 31, 1998 ------------------------ ACTUAL AS ADJUSTED(3) ------- -------------- <S> <C> <C> CONSOLIDATED BALANCE SHEETS DATA: Cash and cash equivalents................................... $ 3,401 $28,691 Working capital............................................. 7,480 32,770 Total assets................................................ 14,485 39,775 Total stockholders' equity.................................. 8,683 33,973 </TABLE> - --------------- (1) Based on shares outstanding as of March 31, 1998. Excludes 649,510 shares of Class A Common Stock issuable upon the exercise of options outstanding as of such date at a weighted average exercise price of $6.41 per share, of which 503,760 stock options were then exercisable at a weighted exercise price of $4.05 per share. Also does not include 1,628,500 additional shares reserved for future grants or issuances as of the date of this Prospectus under the Company's stock option and stock purchase plans. See "Capitalization," "Management -- Equity Plans," "-- Director Compensation" and Notes 10-12 of Notes to Consolidated Financial Statements. (2) See Note 2 of Notes to Consolidated Financial Statements for information concerning the calculation of historical and pro forma earnings per common share. (3) Adjusted to reflect the sale of 2,000,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $14.00 per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001052895_us_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001052895_us_prospectus_summary.txt
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+SUMMARY The following summary is qualified in its entirety by reference to the detailed information appearing elsewhere in this Prospectus. OVERVIEW Using the net proceeds of this Offering (the "Offering"), the Company will purchase from automobile dealers, automobile sale divisions of national rental car companies, and finance companies (the "Sellers") retail installment finance contracts secured by used automobiles and light trucks (the "Contracts"). The Contracts will generally be purchased at discounts ranging from 0% to 25% below the total future net principal balance owed on such Contracts. The purchase discount will vary depending on the credit worthiness of the borrower, the age and mileage of the vehicle financed, and the availability and financial strength added by additional recourse or credit support agreements provided by the Seller. These credit support agreements, when obtained, will be in the form of repurchase agreements, limited guaranty agreements, cash hold-back arrangements, or contract replacement guarantees. The Company has contracted with U.S. Automobile Acceptance Corporation, an affiliate of the Company ("USAAC"), to provide ongoing servicing of the Contracts purchased, including accounting, administration and collections of payments due under the Contracts. In addition, USAAC will oversee enforcement and administration of recourse agreements, and oversee the repossession and sale of vehicles securing any Contract in default. The Company and USAAC may, in some instances, subcontract servicing, collection and repossession functions to third parties. The subcontractors that will provide subcontract services have substantial prior experience providing servicing, collection and repossession functions for their own account and/or on behalf of other automobile finance companies. Compensation to third parties for providing Contract services, if any, will be paid by USAAC out of its fees. See "Purchase and Collection of Contracts." All proceeds from the collection of the Contracts are deposited in a master collection bank account (the "Master Collections Account"). Collections on the Contracts are used to pay Interest on the Notes and "Allowed Expenses," which generally include Contract acquisition fees, Contract servicing and administration, trustee fees, bank charges, legal and accounting fees, taxes, repossession costs, repair and liquidation expenses, insurance premiums, vehicle warranty service contract charges, cost of enforcement of recourse agreements, salaries and other general and administrative expenses. The general and administrative expenses to be incurred by the Company are expenses that will be incurred in connection with the purchasing, collection and servicing of motor vehicle installment contracts (the "Contracts"). The Company will use cash proceeds available from Contract collections, less Allowed Expenses, to purchase additional Contracts, often at a discount. See "Security for the Notes - The Contract Proceeds, Master Cash Accounts" and "Allowed Expenses and Flow of Contract Proceeds." The Notes provide for monthly payments of Interest at an initial annual rate ranging from 7.75% to 11.0%. All unpaid principal and accrued Interest are payable at each respective class maturity date (the "Maturity Date"). Investors in this Offering will receive an IRS Form 1099 following the end of each calendar year. See "Description of the Notes - Payments of Principal and Interest." CLASSES OF NOTES; MATURITY Callable Asset-Backed Promissory Notes (the "Notes") issued to each Noteholder. Eight classes of Notes will be issued pursuant to the Indenture of Trust between the Company and Sterling Trust Company, as Trustee (see "Indenture of Trust"): Class A-1 Notes, due December 31, 2000, will bear interest at an initial rate of 7.75%; Class A-2 Notes, due December 31, 2001, will bear interest at an initial rate of 8.75%; Class A-3 Notes, due December 31, 2002, will bear interest at an initial rate of 9.5%; Class A-4 Notes, due December 31, 2003, will bear interest at an initial rate of 10%; Class A-5 Notes, due December 31, 2004, will bear interest at an initial rate of 10.4%; Class A-6 Notes, due December 31, 2005, will bear interest at an initial rate of 10.8%; Class A-7 Notes, due December 31, 2006, will bear interest at an initial rate of 11.0%; and Class A-8 Notes, due December 31, 2007, will bear interest at an initial rate of 11.0%. INDENTURE OF TRUST An Indenture of Trust will be entered into between the Company and the Trustee, for the benefit of Noteholders. The Trustee will accept title to the Security Agreement on behalf of Noteholders. The duties of the Trustee are to hold the Security Agreement, to perform certain obligations in the event of a default in the payment of the principal and Interest on the Notes, and to execute and deliver to the Company partial or full satisfaction of the Security Agreement upon partial or full repayment of the Notes. The form of Indenture of Trust is Exhibit B to the Prospectus. See "Indenture Provisions" for a summary of the Indenture of Trust agreement. THE TRUSTEE Sterling Trust Company will be the Trustee under the Indenture for the Notes. The Company is obligated to pay the fees and expenses of the Trustee relating to the Notes. To secure the Company's payment of such fees and expenses, the Trustee has a lien prior to the Notes on the Trust Estate. THE COMPANY U.S. Automobile Acceptance SNP-IV, Inc. (the "Company") is a newly organized Texas corporation. The Company has been formed for the purpose of purchasing, collecting and servicing motor vehicle retail installment contracts (the "Contracts"). It does not have, and does not expect to have in the future, any significant assets other than the Contracts and proceeds thereof that secure the Notes. The Notes are secured by the Contracts and the related motor vehicle collateral, and in many instances by additional recourse agreements from Sellers. The Company was incorporated under the laws of the State of Texas on January 2, 1998. The Company's principal executive offices are located at 1120 N.W. 63rd, Suite G-108, Oklahoma City, Oklahoma 73116 and its telephone number is (405) 843-3135. See "The Company." OFFERING AMOUNT Up to a maximum amount of $40,000,000 in principal amount of the Notes. Investor funds will be held in escrow until subscriptions for a minimum amount of $100,000 in principal amount of the Notes (the "Minimum Subscription Amount") has been received. See "Plan of Distribution" hereafter in this Summary for additional information concerning the escrow. INTEREST PAYMENTS TO NOTEHOLDERS The Interest rates payable on the Notes offered hereby will be established by the Company from time to time based on market conditions and the Company's financial requirements. The Company will constantly re-evaluate its Interest rates based on such analysis. Once determined, the rate of Interest payable on a Note will remain fixed for the term of the Note. The Company reserves the right to vary from time to time, in its discretion, the Interest rates it offers on the Notes based on numerous factors including, but not limited to, the desire to attract new investors, or receipts of Notes in excess of current or projected financial requirements. The initial Interest rates will range from 7.75% to 11.0% per annum on the outstanding principal balance of each Note. Interest is payable on the fifteenth (l5th) day of each month beginning with the first full calendar month following the issuance of such Note and upon maturity (the "Payment Dates"). The record date for each payment of Interest on the Notes is the close of business on the first day of the month of the Payment Date for that payment. See "Description of the Notes -Payments of Principal and Interest." EFFECTIVE YIELD Although the initial stated Interest rate on the Notes is 7.75% to 11.0% per annum, the effective Interest rate will be 7.747% to 10.996%, because each payment of Interest will be paid 15 days after the month over which it accrued. PRINCIPAL PAYMENTS TO NOTEHOLDERS No principal payments will be required to be made on the Notes until Maturity, except that in the event the Company has been unable to invest the net proceeds from the sale of the Notes in suitable Contracts for a period of one hundred eighty (180) days following the termination date of the Offering, the uninvested net proceeds at such date will be utilized for a mandatory partial redemption of the Notes within forty-five (45) days following such date. In addition, principal payments may be made in connection with an early redemption and orderly liquidation. See "Description of the Notes - Payments of Principal and Interest," "- Redemption," and " - Early Redemption and Orderly Liquidation." SECURITY FOR THE NOTES THE CONTRACTS. The Notes will be secured by specified motor vehicle retail installment sales contracts (the "Contracts") and the proceeds thereof. These Contracts will be secured by liens on used automobiles and light trucks (the "Financed Vehicles") and will be purchased by the Company from automobile dealerships, automobile sale divisions of national rental car companies, and finance companies (the "Sellers"), often at a discount, using (i) the net proceeds from the sale of Notes, and (ii) any remaining net collection proceeds from previously purchased Contracts after deduction for payments of Interest and Allowed Expenses. In addition, the Sellers will often provide some form of recourse agreements, which will provide additional collateral support for the Notes. The Company presently intends to utilize employees, independent commission agents and USAAC to assist in locating eligible Contracts. Commissions or Contract note purchase fees paid to independent agents will be negotiated, with a normal fee being approximately 1-3% of the outstanding principal balance of the Contracts acquired. The Company has no arrangements or agreements with any Sellers at this time with respect to the purchase of Contracts. See "Security for the Notes." THE CONTRACT PROCEEDS. The proceeds from the Contracts also will constitute security for the Notes under the Indenture. All proceeds from the Contracts will be deposited to a master collection account maintained by the Company (the "Master Collection Account"). The amounts in the Master Collection Account attributable to the Contracts will be directly transferred to an operating account maintained by the Company (the "Master Operating Account"). The Company will have the right to cause that portion of the funds contained in the Master Operating Account which is attributable to the Contracts to be withdrawn or applied for the following purposes: (1) to the Note Redemption Fund for the payment of any Interest due on the outstanding Notes on each Payment Date, (2) to any amounts due the Trustee for its fees and expenses; (3) to the payment of any other Allowed Expenses of the Company; and (4) to the purchase of additional eligible Contracts. The Trustee will be provided regular reports by which the use of such funds may be monitored. See "Security for the Notes - The Contract Proceeds, Master Cash Accounts." THE SERVICING AGREEMENT. The Company has granted a security interest to the Trustee in all of its rights under the Servicing Agreement. See "Security for the Notes - The Servicing Agreement." PURCHASE OF THE CONTRACTS The Company will purchase Contracts using (i) the net proceeds from the sale of Notes, and (ii) any remaining net collection proceeds from previously purchased Contracts, after deduction for payments of Interest and Allowed Expenses. In connection with such purchases, the Contracts will satisfy certain purchasing criteria. Obligors under the Contracts are anticipated to be non-prime credit individuals and will be somewhat less credit-worthy than prime credit purchasers of automobiles. See "Purchase and Collection of Contracts." REDEMPTION OF NOTES The Company may, at any time, elect to redeem the Notes in whole or in part. A partial redemption from time to time would reduce the average life of the Notes, and thereby reduce the overall return, but not the annual rate of return, to the Noteholders. In the event that prior to one hundred eighty (180) days following the termination date of the Offering the Company has been unable to invest the net proceeds from the sale of the Notes in suitable Contracts, the uninvested net proceeds at such date will be utilized for a mandatory partial redemption of the Notes within forty-five (45) days following such date. In addition, Notes may be redeemed in the event the Company is unable to purchase suitable Contracts throughout the term of the Notes. EARLY REDEMPTION AND ORDERLY LIQUIDATION If the Company, at its sole discretion, determines, during the term of the Notes, that there will be insufficient assets to fully repay the Notes at Maturity because of sustained operating losses, excessive credit losses or repossessions, or because the Company is unable to purchase suitable Contracts throughout the term of the Notes for the business of the Company to be profitable, the Company may proceed with an orderly liquidation and early redemption of the Notes. In such an event, the Company shall give notice to the Trustee of its intent to orderly liquidate the Company's assets, and all net collection proceeds from the Contracts following the deduction of Allowed Expenses will be required to be deposited in the Note Redemption Account for payment of the Notes. The Company will immediately begin to take action to cause the Contracts to be fully collected and/or sold for cash within a period of one year from the date of the orderly liquidation notice. The Paying Agent will continue to make monthly cash distributions to Noteholders until all assets of the Company have been distributed to the Noteholders. Such cash distributions will be distributed pro rata to each Noteholder based on the outstanding unpaid principal balance of each Note as of the date of the orderly liquidation notice. Any losses incurred will be similarly allocated pro rata to all outstanding Noteholders. SERVICING The Servicer will be U.S. Automobile Acceptance Corporation ("USAAC"), an affiliate of the Company, whose principal offices are located at 1120 N.W. 63rd, Suite G-108, Oklahoma City, Oklahoma 73116. USAAC is to provide services for the administration and collecting of the Contracts on behalf of the Company. USAAC has limited operating history, and its management has limited experience in the servicing and collection of consumer contracts, including those secured by automobiles. USAAC may subcontract with third parties to provide certain of these services. USAAC will be paid $21.50 per month per Contract for servicing and collecting the Contracts. TAX STATUS The Notes will be taxable obligations under the Internal Revenue Code of 1986, as amended, and Interest paid or accrued will be taxable to non-exempt holders of the Notes. See "Federal Income Tax Consequences." USE OF PROCEEDS The Company intends to use no less than 88% of the net proceeds from the sale of the Notes for the purchase of Contracts and no more than 12% of such proceeds to pay commissions, fees and expenses as stated in this Prospectus. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001054394_onyx_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001054394_onyx_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..191849f78f3df0a02874e23cb80761939f76bb42
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@@ -0,0 +1 @@
+SUMMARY The following summary is qualified in its entirety by reference to the detailed information appearing elsewhere in this Prospectus. Certain capitalized terms used in this Summary are defined elsewhere in this Prospectus. See the Index of Principal Definitions for the location herein of the definitions of certain capitalized terms. An investment in the Certificates involves various risks, and potential purchasers should carefully consider the matters discussed under "Risk Factors" herein in considering an investment in the Certificates. Issuer..................... Onyx Acceptance Grantor Trust 1998-1 (the "Trust"), to be formed by Onyx Acceptance Financial Corporation (the "Seller") pursuant to the Pooling and Servicing Agreement, to be dated as of March 1, 1998 (the "Agreement"), among the Seller, Onyx Acceptance Corporation (the "Servicer") and Bankers Trust Company (the "Trustee"). Securities Offered......... % Auto Loan Pass-Through Certificates, Series 1998-1 (the "Certificates") representing fractional undivided interests in the Trust. The Certificates will be offered for purchase in denominations of $1,000 and integral multiples thereof. See "The Certificates and the Agreement -- General." Initial Certificate Balance.................... The initial principal balance of the Certificates is equal to the aggregate principal balance of the Contracts as of the Cut-Off Date calculated in accordance with the Rule of 78's or Simple Interest Method, as applicable. The term "Cut-Off Date Scheduled Balance" means the principal balance of a Contract as of the Cut-Off Date. See "The Contracts." Seller..................... Onyx Acceptance Financial Corporation, a wholly-owned, limited purpose subsidiary of Onyx Acceptance Corporation ("Onyx"). The Seller's principal executive offices are located at 8001 Irvine Center Drive, 6th Floor, Irvine, California 92618 and its telephone number is (714) 790-5400. See "The Seller." All of the Contracts will have been purchased by the Seller from Onyx. Substantially all of the Contracts have been purchased by Onyx from new and used car Dealers unaffiliated with Onyx or the Seller, and a limited number of Contracts have been purchased or originated by subsidiaries of Onyx. See "The Onyx Portfolio of Motor Vehicle Contracts." Servicer................... Onyx. The Servicer's principal executive offices are located at 8001 Irvine Center Drive, 5th Floor, Irvine California 92618 and its telephone number is (714) 450-5509. See "The Servicer." Trustee.................... Bankers Trust Company. Trust Property............. The Trust's assets (the "Trust Property") will include: (i) a pool of fixed rate motor vehicle retail installment sales contracts (the "Contracts") of which approximately 33.78% of the Aggregate Scheduled Balance as of the Cut-Off Date are Rule of 78's Contracts and approximately 66.22% of the Aggregate Scheduled Balance as of the Cut-Off Date are Simple Interest Contracts, and all of which were purchased from the Seller and secured by new and used automobiles and light-duty trucks (the "Financed Vehicles"), (ii) certain documents relating to the Contracts, (iii) certain monies due under such Contracts on or after the Cut-Off Date, (iv) security interests in the Financed Vehicles and the rights to receive proceeds from claims on certain insurance policies covering the Financed Vehicles or the individual obligors under each related Contract and the right to certain proceeds under the Blanket Insurance Policy, (v) all amounts on deposit in the Collection Account, including all Eligible Investments credited thereto (but excluding any investment income from Eligible Investments, which will be paid to the Servicer), (vi) the benefits of a financial guarantee insurance policy (the "Financial Guarantee Insurance Policy") issued by MBIA Insurance Corporation (the "Insurer"), (vii) the right of the Seller to cause Onyx to repurchase certain Contracts under certain circumstances, and (viii) all proceeds of the foregoing. See "The Trust." Pass-Through Rate.......... % per annum, payable monthly at one-twelfth the annual rate and calculated on the basis of a 360-day year of twelve 30-day months. Distribution Date.......... The 15th day of each month (or, if such day is not a Business Day, the next succeeding Business Day) commencing April 15, 1998 (each a "Distribution Date"). A "Business Day" is a day other than a Saturday, Sunday or other day on which commercial banks located in California or New York are authorized or obligated to be closed. Final Distribution Date.... July 15, 2004. Interest Distribution...... On each Distribution Date, monthly interest (the "Interest Distribution") in an amount equal to the product of one-twelfth of the Pass-Through Rate and the Pool Balance as of the end of the Collection Period preceding the related Collection Period will be distributed on a pro rata basis to the Certificateholders of record as of the related Record Date; provided that the Interest Distribution with respect to the first Distribution Date will include an additional $ per $1,000 of initial principal balance of the Certificates. The "Pool Balance" as of any date is the Aggregate Scheduled Balance of the Contracts as of such date, excluding those Contracts which as of such date have become Liquidated Contracts or have been repurchased by the Seller or purchased by the Servicer. Interest will be paid from collections received on the Contracts on deposit in the Collection Account or previously collected and available for distribution. A "Collection Period" with respect to a Distribution Date will be the calendar month preceding the month in which such Distribution Date occurs; provided, that with respect to Liquidated Contracts (as defined below) the Collection Period will be the period from but excluding the sixth Business Day preceding the immediately preceding Distribution Date to and including the sixth Business Day preceding such Distribution Date. With respect to the first Distribution Date the "Collection Period" for Liquidated Contracts will be the period from and including the Cut-Off Date to and including the sixth Business Day preceding such first Distribution Date. See "The Certificates and the Agreement -- Distributions of Principal and Interest." Principal Distribution..... On each Distribution Date, the Principal Distribution for the related Collection Period will be passed through to the Certificateholders. The "Principal Distribution" on any Distribution Date is the Aggregate Scheduled Balance Decline (as defined below) for such Distribution Date. The Principal Distribution on the Final Distribution Date will include the Aggregate Scheduled Balance of all Contracts that are outstanding at the end of the Collection Period immediately prior to the Final Distribution Date. The "Aggregate Scheduled Balance Decline" for any Distribution Date is the amount by which the Aggregate Scheduled Balance of the Contracts as of the beginning of the related Collection Period exceeds the Aggregate Scheduled Balance of such Contracts as of the end of the related Collection Period. The "Aggregate Scheduled Balance" of the Contracts is the sum of the Scheduled Balance of each Contract. The "Scheduled Balance" of a Rule of 78's Contract at any date is equal to the Cut-Off Date Scheduled Balance of such Contract reduced by the portion of each scheduled payment of principal and interest due on such Contract (the "Monthly P&I") on or prior to the date of calculation that is allocated to principal under the Recomputed Actuarial Method. The Scheduled Balance of a Simple Interest Contract at any date is equal to the Cut-Off Date Scheduled Balance of such Contract reduced by the portion of Monthly P&I paid on or prior to the date of calculation that is allocated to principal under the Simple Interest Method. The Scheduled Balance of any Contract that is a Liquidated Contract or that has been purchased by the Servicer or repurchased by the Seller will equal zero. A "Liquidated Contract" is a Contract that (a) is the subject of a Full Prepayment, (b) is a Defaulted Contract and with respect to which Liquidation Proceeds constituting, in the Servicer's reasonable judgment, the final amounts recoverable have been received and deposited in the Collection Account, (c) is paid in full on or after its Maturity Date or (d) has been a Defaulted Contract for four or more Collection Periods and as to which Liquidation Proceeds have not been deposited in the Collection Account; provided, however, that in any event a Contract that is delinquent in the amount of five monthly installments of Monthly P&I at the end of a Collection Period is a Liquidated Contract. A "Defaulted Contract" with respect to any Collection Period is a Contract (a) which is, at the end of such Collection Period, delinquent in the amount of two monthly installments of Monthly P&I or (b) with respect to which the related Financed Vehicle has been repossessed or repossession efforts with respect to the related Financed Vehicle have been commenced. See "The Contracts" and "The Certificates and the Agreement -- Distributions of Principal and Interest." Servicing Fee.............. The Servicer will be responsible for managing, administering, servicing, and making collections on the Contracts. Compensation to the Servicer will consist of a monthly fee (the "Servicing Fee"), payable from the Trust to the Servicer on each Distribution Date, in an amount equal to the product of one-twelfth of 1.00% per annum (the "Servicing Fee Rate") multiplied by the Pool Balance as of the end of the Collection Period preceding the related Collection Period. As additional compensation, the Servicer will be entitled to any late fees and other administrative fees and expenses or similar charges collected with respect to the Contracts. The Servicer or its designee will also receive as servicing compensation investment earnings on Eligible Investments and the amount, if any, by which the outstanding principal balance of a Rule of 78's Contract that is subject to a Full Prepayment exceeds the Scheduled Balance of such Contract. See "The Certificates and the Agreement -- Servicing Fee." Financial Guarantee Insurance Policy........... On the Closing Date, the Insurer will issue the Financial Guarantee Insurance Policy to the Trustee pursuant to an Insurance and Reimbursement Agreement (the "Insurance Agreement"), dated as of March , 1998, by and among the Insurer, Onyx, the Seller and the Trustee. Pursuant to the Financial Guarantee Insurance Policy, the Insurer will unconditionally and irrevocably guarantee payment of the Interest Distribution and Principal Distribution on each Distribution Date to the Trustee for the benefit of the Certificateholders. If on the fifth Business Day prior to any Distribution Date (the "Servicer Report Date") the amount on deposit and available in the Collection Account, after giving effect to all amounts deposited or payable from the Payahead Account with respect to such Distribution Date, is less than the sum of the Servicing Fee, the Principal Distribution and Interest Distribution for such Distribution Date, the Trustee, by delivering a notice in accordance with the Financial Guarantee Insurance Policy, shall demand payment under the Financial Guarantee Insurance Policy in an amount equal to such deficiency. The Insurer shall pay or cause to be paid such amount to the Trustee for credit to the Collection Account and the Trustee shall withdraw from the Collection Account and shall pay such amount to the Certificateholders on the related Distribution Date. On the Final Distribution Date, to the extent the amount on deposit and available in the Collection Account is less than all remaining unpaid interest and principal on the Certificates, the Insurer shall pay or cause to be paid an amount equal to such shortfall. See "The Certificates and the Agreement -- The Financial Guarantee Insurance Policy." Contracts.................. The Aggregate Scheduled Balance of the Contracts as of the Cut-Off Date was $173,000,000. As of the Cut-Off Date the Contracts had a weighted average annual percentage rate of 14.92% and a weighted average remaining term of 56.4 months. Approximately 33.78% of the Aggregate Scheduled Balance of the Contracts as of the Cut-Off Date allocate interest and principal in accordance with the Rule of 78's (the "Rule of 78's Contracts"), and approximately 66.22% in accordance with the Simple Interest Method (the "Simple Interest Contracts"). Approximately 51.92% of the Aggregate Scheduled Balance of the Contracts as of the Cut-Off Date were originated in California, 9.41% in Florida, 8.36% in Washington, 8.14% in Arizona, 7.85% in Illinois, and 5.22% in Nevada. No more than 5.0% of the Contracts were originated in any other single state. Substantially all of the Contracts were originated by automobile dealerships ("Dealers") and assigned to Onyx, and a limited number of Contracts were purchased or originated by subsidiaries of Onyx. All the Contracts will have been purchased by the Seller from Onyx and by the Trust from the Seller. The Seller is required to repurchase certain of the Contracts under certain circumstances if certain representations and warranties made by the Seller are incorrect in a manner that materially and adversely affects the Certificateholders or the Insurer. All of the Contracts have been selected by Onyx from its portfolio of motor vehicle installment sales contracts based upon the criteria specified in the Agreement. All collections of Monthly P&I, all prepayments on the Contracts collected by the Servicer and all amounts paid under the Financial Guarantee Insurance Policy will be deposited in or credited to the Collection Account. Partial prepayments of Monthly P&I ("Payaheads") on Rule of 78's Contracts will be transferred on the Servicer Report Date to the Payahead Account, to be applied against future scheduled payments of Monthly P&I. Partial and full prepayments on Simple Interest Contracts will be passed through to Certifi cateholders on the Distribution Date immediately following the Collection Period in which such prepayments are received. All payments to the Certificateholders will be made from the Collection Account and certain funds remaining in the Collection Account following distributions to Certificateholders and others will be paid to the Insurer to be promptly distributed in accordance with the terms of the Insurance Agreement. See "The Contracts" and "The Certificates and the Agreement -- Payahead Account." Optional Termination....... The Servicer may purchase all of the Contracts on any Distribution Date as of which the Pool Balance (after giving effect to the Principal Distribution otherwise to be made on such Distribution Date) has declined to 10% or less of the Cut-Off Date Scheduled Balance for all of the Contracts (the "Original Pool Balance"), subject to certain provisions in the Agreement. See "The Certificates and the Agreement -- Repurchase of Contracts." Federal Income Tax Status..................... In the opinion of counsel to the Seller, the Trust will be treated for Federal income tax purposes as a grantor trust and not as an association taxable as a corporation. Certificateholders must report their respective allocable shares of income earned on Trust assets and, subject to certain limitations applicable to individuals, estates and trusts, may deduct their respective allocable shares of reasonable servicing and other fees. See "Certain Federal Income Tax Consequences." ERISA Considerations....... The Certificates may be purchased by employee benefit plans that are subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA") upon satisfaction of certain conditions described herein. See "ERISA Considerations." Rating..................... It is a condition of issuance of the Certificates that they be rated in the highest rating category by Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. ("Standard & Poor's"). Such ratings will be based primarily on the issuance of the Financial Guarantee Insurance Policy by the Insurer. See "Risk Factors -- Rating." Registration of the Certificates............... The Certificates will initially be represented by one or more certificates registered in the name of Cede & Co. ("Cede"), as the nominee of The Depository Trust Company ("DTC"). No person acquiring an interest in a Certificate through the facilities of DTC (a "Certificate Owner") will be entitled to receive a Definitive Certificate representing such person's interest in the Trust, except in the event that Definitive Certificates are issued in certain limited circumstances. See "The Certificates and the Agreement."
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION SET FORTH ELSEWHERE IN THIS PROSPECTUS OR THE REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS IS A PART. CERTAIN CAPITALIZED TERMS USED IN THIS SUMMARY ARE DEFINED ELSEWHERE IN THIS PROSPECTUS, INCLUDING IN THE GLOSSARY. Some of the statements made in this Prospectus and the accompanying letter to shareholders are forward-looking in nature, including but not limited to, CliniChem's and BioChem's research and development activities and plans, particularly with respect to anticipated CliniChem Programs and CliniChem Products, plans concerning the potential commercialization of the CliniChem Products, and other statements that are not historical facts. The occurrence of the events described and the achievement of the intended results are subject to the future occurrence of many events, some or all of which are not predictable or within CliniChem's control; therefore, actual results may differ materially from those anticipated in any forward-looking statements. Many risks and uncertainties are inherent in the biotechnology and pharmaceutical industry; others are more specific to CliniChem's business. These risks include the risks associated with product research and development, including clinical development, attempts to obtain regulatory clearance to market products and medical acceptance of products, changes in the health care marketplace, patent and intellectual property matters, regulatory and manufacturing issues, the ability to commercialize products effectively, and risks associated with competition from other companies. Many of the risks are described in "Risk Factors" beginning on page 19 and/or in documents filed by BioChem under the Exchange Act or applicable Canadian securities legislation. CliniChem will not update the information contained in this Prospectus except in the normal course of its public disclosure practices. Distributing Company....... BioChem Pharma Inc., a Canadian corporation, is a leading bio-pharmaceutical company engaged in the research, development and marketing of therapeutic products and the research, development, manufacturing and marketing of vaccine and diagnostic products for a wide range of infectious and other diseases. BioChem conducts its business through BioChem Therapeutic Inc., BioChem Vaccines Inc., BioChem ImmunoSystems Inc. and BioChem's foreign subsidiaries. BioChem's most significant therapeutic product is a novel nucleoside analog, marketed under the brand name 3TC, developed with Glaxo Wellcome plc and its subsidiaries (hereinafter collectively "Glaxo Wellcome") for the treatment of patients with HIV infection, including AIDS. The nucleoside analog is marketed under the brand names 3TC or Epivir. Lamivudine, a different dosage regimen of 3TC, is also being developed with Glaxo Wellcome as a treatment for chronic hepatitis B infection, including in the pre-and post-liver transplant setting to prevent graft re-infection by human hepatitis B virus. BioChem has also developed, and is manufacturing and marketing, a line of vaccines including whole virus and split virus influenza vaccines, a combined diphtheria tetanus vaccine and a vaccine to prevent tuberculosis. BioChem has also developed and is manufacturing an immuno-therapeutic product used in the treatment of certain superficial bladder cancers. BioChem's diagnostics operations engage in the research, development, manufacturing and marketing of a wide range of diagnostic products and automated laboratory analyzers for the detection of a variety of infectious diseases, and for use in immunology, endocrinology and hematology. References herein to "BioChem" include BioChem Pharma Inc. and its subsidiaries. Distributed Company........ CliniChem Development Inc., a Canadian corporation, is a company recently formed by BioChem to conduct research and development of potential human therapeutic and vaccine products primarily for treatment of cancer and HIV infection and the prevention of certain infectious diseases. CliniChem's therapeutic program includes a novel nucleoside analog to treat various forms of cancer, a novel nucleoside analog to treat HIV infection and small molecules to treat solid cancer tumors by inhibiting angiogenesis. CliniChem's vaccine program includes vaccines against Neisseria meningitidis, Streptococcus pneumoniae, Neisseria gonorrhoeae, Haemophilus influenzae, Streptococcus Group B and Chlamydia pneumoniae, all bacteria responsible for infectious diseases. Upon development and regulatory approval of any such products, CliniChem expects that the products will be marketed under distinct brand names. CliniChem has not yet conducted any business and has no employees. Its three officers are full-time employees of BioChem. CliniChem does not intend to perform any research and development itself, but rather will contract with BioChem to perform all such activities pursuant to the terms of the Research and Development Agreement. The Distribution........... Prior to the closing of the Distribution, BioChem will contribute $150 million in cash to CliniChem as a capital contribution. The shares of CliniChem currently held by BioChem will then be exchanged for the CliniChem Common Shares and CliniChem Class B Common Shares. On the date of closing of the Distribution, each Holder of BioChem Common Shares will receive one CliniChem Common Share for every 40 BioChem Common Shares held on the Record Date. A total of approximately 2,724,200 CliniChem Common Shares, being all of the CliniChem Common Shares then held by BioChem, are expected to be distributed. No Holder will be required to pay any cash or other consideration for the CliniChem Common Shares received in the Distribution (exclusive of applicable Canadian withholding taxes), nor will any action be required to be taken by any Holder in order to receive CliniChem Common Shares. The Distribution is expected to be taxable to the Holders. See "Income Tax Considerations." Neither BioChem nor CliniChem will receive any proceeds in connection with the Distribution. See "The Distribution." As of January 31, 1998, there were 97 holders of record of BioChem Common Shares who were United States residents, representing approximately 60% of the outstanding BioChem Common Shares. CliniChem Common Shares.... All of the Class A Common Shares of CliniChem will be subject to the Purchase Option whereby the holder of the majority of the outstanding Class B Shares can require holders of the CliniChem Common Shares to sell their CliniChem Common Shares to the holder of the majority of the outstanding Class B Shares at the Purchase Option Exercise Price. The decision to exercise the Purchase Option by the holder of the majority of the outstanding Class B Shares will depend on the circumstances prevailing at the time consideration is given to its exercise and will be based on a number of factors which are currently unknown, including the extent to which CliniChem is successful in pursuing the CliniChem Programs and whether or not the CliniChem Programs will fit such holder's business strategies at that time. The Class B Shares are freely transferable. Any subsequent holder of a majority of the outstanding Class B Shares may not possess the financial resources necessary to exercise the Purchase Option and may be unable or unwilling to register or qualify securities issued by it upon exercise of the Purchase Option in exchange for the CliniChem Common Shares. See "The Agreements and the Purchase Option--Purchase Option" and "Description of CliniChem's Share Capital." Record Date; Distribution Date....................... The Record Date for the Distribution will be the close of business on June 22, 1998. Distribution of the CliniChem Common Shares is expected to take place on or about June 26, 1998 (the "Distribution Date"), subject to certain conditions specified in the Distribution Agreement. Contribution by BioChem.... Prior to the Distribution, BioChem will contribute $150 million in cash to CliniChem as a capital contribution, thereby reducing the amount of BioChem's cash and temporary investments by that amount. As the holder of the majority of the outstanding Class B Shares following the Distribution, BioChem will have the option to acquire all (but not less than all) of the outstanding CliniChem Common Shares under specified conditions. See "Business of CliniChem--General." BioChem has also granted certain technology licenses and agreed to make specified payments on sales of certain products by BioChem should BioChem exercise the Product Option. See "The Agreements and the Purchase Option." The CliniChem Programs..... It is anticipated that CliniChem will initially conduct its therapeutic development program (the "Therapeutic Program") and its vaccine development program (the "Vaccine Program"), the technology for which will be licensed to CliniChem by BioChem pursuant to the Technology License Agreement, subject to certain third-party rights and the receipt of certain third-party consents and subject further to the terms and conditions of the Research and Development Agreement and the Product Option. See "The Agreements and the Purchase Option". In addition, BioChem has the right, with the consent of the Board of Directors of CliniChem, to expand the scope of the Therapeutic Program and the Vaccine Program and select additional development programs as substitutes for, or in addition to, the Therapeutic Program and the Vaccine Program (any such development programs, together with the Therapeutic Program and the Vaccine Program, being the "CliniChem Programs"). The CliniChem Programs, which are described more fully in the section entitled "The Business of CliniChem--The CliniChem Programs", are the development of: - BCH-4556, a novel nucleoside analog to treat cancer; - BCH-10652, a novel nucleoside analog to treat HIV infection; - small molecules to treat solid cancer tumors by inhibiting angiogenesis through the antagonism of the a(n)b(3) receptor; - a recombinant protein vaccine to protect against infection by Neisseria meningitidis; - a recombinant protein vaccine to protect against infection by Streptococcus pneumoniae; - a recombinant protein vaccine to protect against infection by Neisseria gonorrhoeae; - a recombinant protein vaccine to protect against infection by Haemophilus influenzae non typeable; - a recombinant protein vaccine to protect against infection by Streptococcus Group B; and - a recombinant protein vaccine to protect against infection by Chlamydia pneumoniae. The therapeutic and vaccine products developed according to the terms of the Research and Development Agreement and pursuant to the CliniChem Programs are herein referred to as the "CliniChem Products". Unless BioChem and CliniChem agree otherwise and subject to pre-existing third-party rights and receipt of certain third-party consents, all of the CliniChem Products will be licensed to CliniChem pursuant to the Technology License Agreement. Such license will be limited for each CliniChem Product to a particular Field of Use. See "The Agreements and the Purchase Option--Technology License Agreement." The Research and Development Agreement provides that CliniChem will fund Research and Development Costs from the date of the declaration of the Dividend. Based on CliniChem's current development schedule, CliniChem does not expect that most of the CliniChem Products will reach commercial marketability prior to expenditure of the Available Funds. See "The Agreements and the Purchase Option--Research and Development Agreement". Under the BioChem/CliniChem Agreements: (i) BioChem will grant CliniChem an exclusive, worldwide, royalty free license to all BioChem Technology used in the CliniChem Programs, except for technology licensed to BioChem under certain excluded agreements, in return for which CliniChem will pay BioChem the Technology Fee; (ii) CliniChem will contract with BioChem for BioChem to perform the research and development associated with the CliniChem Programs and CliniChem shall pay all associated Research and Development Costs; (iii) any intellectual property arising from BioChem's activities under the Research and Development Agreement will belong to BioChem but will be included in the license of BioChem Technology to CliniChem; (iv) BioChem will have an option to terminate the licenses granted to CliniChem on a product-by-product and country-by-country basis in return for ongoing royalty payments to CliniChem; (v) BioChem will have the right to buy out the ongoing royalty payment stream for a one time cash payment; and (vi) BioChem will provide certain administrative services for CliniChem in return for cash payments. At the time of the capital contribution, BioChem will record an investment in CliniChem of $150 million. Under Canadian Generally Accepted Accounting Principles ("GAAP"), BioChem will charge the carrying value of the distribution to retained earnings on the date of the declaration of the Distribution. Under U.S. GAAP, BioChem will charge the fair market value of the distribution to retained earnings and will expense the excess of the carrying value of its investment in CliniChem Common Shares over the fair market value of these shares. The fair market value of the CliniChem Common Shares will be determined by BioChem based on their closing price on relevant stock exchanges on the Distribution Date. This difference between the Canadian and U.S. GAAP treatment of the Distribution will be disclosed in a reconciling note to BioChem's financial statements. BioChem will recognize as revenue the payments from CliniChem under the Research and Development Agreement and Research and Development Costs incurred by BioChem to perform its obligations under the Research and Development Agreement will be expensed as research and development expenses under Canadian and U.S. GAAP. If BioChem exercises its Purchase Option, the purchase price will be allocated between capitalized intangibles (for the value of completed products) and in-process research and development (for the value of research and development programs). Under Canadian GAAP, the value attributed to in-process research and development will be amortized over the period to be benefitted. Under U.S. GAAP, it will be immediately written off as an expense. CliniChem is not expected to generate net income for the forseeable future and perhaps not at all. CliniChem Board of Directors.................. All the current directors of CliniChem are also officers, directors or employees of BioChem. Subsequent to the Distribution, two of the current directors will resign as directors of CliniChem and will be replaced by independent directors. As the holder of the majority of the outstanding Class B Shares, BioChem has the right to elect one director. See "Business of CliniChem--Executive Officers and Directors" and "Description of CliniChem's Share Capital." No Fractional Shares....... No fractional CliniChem Common Shares will be distributed. Fractional CliniChem Common Shares will be rounded up to a whole share by CliniChem's transfer agent and distribution agent for the Distribution, General Trust of Canada (the "Distribution Agent"). Reasons for the Distribution............... BioChem believes that the research and development work it has undertaken, directly and through collaborators, in the therapeutic and vaccine areas has yielded results which justify further research and development. However, a substantial amount of additional research and development effort is required to further develop the CliniChem Products to their potential commercialization. Such opportunities involve significantly different risk/reward profiles as compared to BioChem's established therapeutic, vaccine and diagnostic businesses. BioChem believes that the arrangements with CliniChem will significantly benefit BioChem shareholders by: - separating the risks associated with conducting the CliniChem Programs from those associated with BioChem's established therapeutic, vaccine and diagnostic businesses; - allowing individual shareholders of BioChem to increase or decrease their level of participation in the business of conducting the CliniChem Programs by varying their level of investment in CliniChem; - obtaining for BioChem the exclusive right to commercialize worldwide (subject to pre-existing third-party rights) any developed CliniChem Product, assuming BioChem's exercise of the Product Option with respect to such product or exercise of the Purchase Option, thereby making it possible for BioChem to capture a potentially greater return on the products developed with CliniChem than would otherwise be possible from products developed for commercialization in conjunction with other third parties; and - allowing BioChem's near-term financial results to continue to reflect principally its established therapeutic, vaccine and diagnostic businesses through CliniChem's payment to BioChem for the Research and Development Costs. The foregoing potential benefits to Holders of the arrangements with CliniChem may, however, be offset by certain costs and detriments, including but not limited to the following: BioChem's loss of control over research and development activities to be conducted by or on behalf of CliniChem, which instead will be overseen by CliniChem's Board of Directors; the administrative costs to BioChem relating to the establishment of CliniChem, including accounting and legal fees and costs; the potential cost of the exercise of any of BioChem's options and potential royalties to CliniChem; and the potential loss of income tax benefits to BioChem which may have been derived from deductions by BioChem rather than by CliniChem of research and development expenses attributable to the CliniChem Programs. Technology License Agreement................ Pursuant to the Technology License Agreement, BioChem has granted to CliniChem an exclusive perpetual license to use BioChem Technology solely to conduct the CliniChem Programs and related activities, and to manufacture and to commercialize the CliniChem Products worldwide. This license is subject to pre-existing third-party rights, receipt of certain third-party consents, the terms and conditions of the Research and Development Agreement and the Product Option. The license for each CliniChem Product shall be limited to a designated Field of Use. See "The Agreements and the Purchase Option--Technology License Agreement" and "--Third-Party Consents and Rights." In consideration for the license to use BioChem Technology to conduct the CliniChem Programs, CliniChem will pay a fee (the "Technology Fee") to BioChem. The Technology Fee will be payable monthly at a rate of $352,000 per month over a period of 48 months; provided that the Technology Fee will no longer be payable at such time as the number of CliniChem Products being researched or developed by or on behalf of CliniChem, plus the number of CliniChem Products having been acquired by BioChem pursuant to the exercise of the Product Option, is less than two. Pursuant to the terms of the Technology License Agreement, CliniChem's right to obtain manufacturing will be subject to a right of first offer and a right of first refusal on the part of BioChem to manufacture and, in the event BioChem does not exercise such right of first offer or right of first refusal, then BioChem has the right to approve any proposed manufacturer, which approval may be withheld only if any such manufacturer has insufficient or inadequate manufacturing capabil- ity (including lack of compliance with Good Manufacturing Practices ("GMP") regulations) or if any such manufacturer's activities are likely to have a material adverse effect on BioChem's overall competitive position in the pharmaceutical industry. In the event that BioChem exercises its right to reject a manufacturer, BioChem will be obligated to manufacture or obtain manufacturing for any such CliniChem Product for CliniChem at prevailing market rates, but not less than BioChem's cost of manufacture plus 15% of such cost. Pursuant to the Technology License Agreement, CliniChem shall not have the right to grant a sublicense with respect to the BioChem Technology to anyone other than BioChem until such time as the Product Option with respect to any CliniChem Product in one or more countries expires unexercised. From and after the expiration of such Product Option in any such country, CliniChem may sublicense BioChem Technology to one or more third parties solely to the extent necessary to complete the development of, or to make or have made and use such Clinichem Product, or to sell or have sold such CliniChem Product in such country. BioChem shall have the right to approve any proposed sublicensee or any manufacturer on behalf of a sublicensee but such approval may only be withheld if any such sublicensee or manufacturer has insufficient manufacturing capability (including lack of compliance with GMP regulations) or if any such sublicensee's or manufacturer's activities are likely to have a material adverse effect on BioChem's overall competitive position in the pharmaceutical industry. Research and Development Agreement................ CliniChem and BioChem have entered into the Research and Development Agreement pursuant to which BioChem will conduct the CliniChem Programs. Until the exercise or the expiration of the Purchase Option, CliniChem is required to utilize the Available Funds only in accordance with the Research and Development Agreement, the Technology License Agreement and the Services Agreement. CliniChem is expected to utilize substantially all of the Available Funds to make payments to BioChem for its Research and Development Costs. Research and Development Costs will be charged in a manner consistent with industry practices, and payments for all reasonable, fully-burdened costs plus 5% of such costs will be recognized by BioChem as contract research and development revenue. The Research and Development Agreement provides that CliniChem will fund Research and Development Costs from the date of the declaration of the Distribution. It is anticipated that CliniChem will spend the Available Funds under the Research and Development Agreement over a period of approximately four to five years. Based on CliniChem's current development schedule, CliniChem does not expect that most of the CliniChem Products will reach commercial marketability prior to expenditure of the Available Funds. Currently, other than the Available Funds, CliniChem has no other source for the funding that may be needed to complete the development and commercialization of the CliniChem Products. CliniChem's use of the Available Funds is subject to the terms of the BioChem/CliniChem Agreements. All technology developed or otherwise obtained pursuant to the Research and Development Agreement ("Developed Technology") will be owned by BioChem and licensed to CliniChem pursuant to the terms of the Technology License Agreement. The Research and Development Agreement will terminate upon the exercise or expiration of the Purchase Option, which will expire on the earlier of March 31, 2003 or 90 days after CliniChem provides BioChem with notification that there are less than $5.0 million of Available Funds (unless extended by BioChem but in no event beyond March 31, 2003). However, BioChem's obligation to make payments to CliniChem with respect to Acquired Products will continue if the Purchase Option expires unexercised. See "The Agreements and the Purchase Option--Research and Development Agreement." Product Option............. CliniChem has granted BioChem an option to acquire all rights to each CliniChem Product (the "Product Option"). Upon exercise of the Product Option, BioChem will make Product Payments to CliniChem with respect to each CliniChem Product as to which the Product Option is exercised (an "Acquired Product"). The Product Option for each CliniChem Product is exercisable on a country-by-country basis at any time until (i) with respect to the United States, 30 days after clearance by the United States Food and Drug Administration (the "FDA") to commercially market such CliniChem Product in the United States and (ii) with respect to any other country, 30 days after the clearance by the appropriate regulatory agency to commercially market the CliniChem Product in such country. The Product Option will expire, to the extent not previously exercised, 30 days after the expiration of the Purchase Option. If and to the extent the Product Option is exercised as to any Acquired Product, CliniChem's license to such Acquired Product in the country or countries as to which the Product Option is exercised shall terminate and BioChem shall be subject to the obligation to make Product Payments. Product Payments........... BioChem will make Product Payments to CliniChem with respect to each Acquired Product. Such payments will be a percentage of Net Sales and Licensing Revenues. Such payments will range from 1 to 6% of Net Sales and from 10 to 25% of Licensing Revenues and will be calculated as follows: (a) royalties of up to a maximum of 6% of Net Sales of the Acquired Product determined as follows: (i) 1% of such Net Sales, plus (ii) an additional 0.1% of such Net Sales for each full $1 million of Research and Development Costs of the Acquired Product paid by CliniChem at the time BioChem exercised the Product Option with respect to such Acquired Product; plus (b) licensing fees of up to a maximum of 25% of Licensing Revenues with respect to such Acquired Product determined as follows: (i) 10% of such Licensing Revenues, plus (ii) an additional 1% of such Licensing Revenues for each full $1 million of Research and Development Costs of the Acquired Product paid by CliniChem at the time BioChem exercised the Product Option with respect to such Acquired Product. Because the marketing expenses associated with newly introduced products during the first few years after launch are generally significantly higher than those for established products, the Product Option provides that the Product Payments described above will be capped at 3% of Net Sales plus 12.5% of Licensing Revenues, on a quarterly basis, for the first twelve calendar quarters during which the Acquired Product is commercially sold in the first Major Market Country. Subject to BioChem's Product Payment Buy-Out Option described below, Product Payments will be payable, with respect to all countries for which the Product Option has been exercised, until 10 years after the first commercial sale of the Acquired Product in the first Major Market Country in which such product is commercially sold. To the extent BioChem does not exercise the Product Option with respect to any CliniChem Product, CliniChem will retain the rights to research and develop (subject to the terms of the Technology License Agreement and the Research and Development Agreement) and commercialize such CliniChem Product. Until the exercise or the expiration of the Purchase Option, all Product Payments paid to CliniChem as described above will become part of the Available Funds and may be used to pay BioChem for its Research and Development Costs. Product Payment Buy-Out Options.................. BioChem has the option to buy out CliniChem's right to receive Product Payments for any Acquired Product on a country-by-country or global basis. A country-by-country buy-out option may be exercised for any Acquired Product in any country at any time after the end of the twelfth calendar quarter following the date on which the Acquired Product was first commercially sold in such country. The buy-out price for an Acquired Product will be 15 times the total amount of Product Payments for such Acquired Product made by or due from BioChem to CliniChem with respect to such Acquired Products in such country for the four calendar quarters immediately preceding the quarter in which the buy-out option is exercised. The global buy-out option may be exercised for any Acquired Product, for all countries for which BioChem has exercised the Product Option, at any time after the end of the twelfth calendar quarter following the date on which the Acquired Product was first commercially sold in either the United States or two other Major Market Countries. The buy-out price for a global buy-out shall be calculated as if any previous country-by-country buy-outs had not been made by adding payments which would have been made had the country specific buy-out not occurred to the Product Payments used to calculate the buy-out price, and subtracting from the buy-out price the amounts paid by BioChem to exercise the country-by-country buy-outs. The buy-out price in the case of a global buy-out will be (i) 20 times (a) the Product Payments made by or due from BioChem to CliniChem with respect to the Acquired Product, plus (b) such Product Payments as would have been made by or due from BioChem to CliniChem if BioChem had not exercised any country-specific buy-out option with respect to such Acquired Product, in each case for the four calendar quarters immediately preceding the quarter in which the global buy-out option is exercised, less (ii) any amount previously paid to exercise any country-specific buy-out option with respect to such Acquired Product. In either case, the buy-out price will be computed as if Product Payments were not limited to 3% of Net Sales or 12.5% of Licensing Revenues (as applicable) during early marketing as described above. Purchase Option............ BioChem, as the holder of the majority of the outstanding Class B Shares after the Distribution, has the right, provided for in CliniChem's Articles, to acquire all (but not less than all) of the outstanding CliniChem Common Shares (the "Purchase Option"). The Purchase Option will be exercisable by written notice given at any time from and after the Distribution Date and ending on the earlier of (i) March 31, 2003 or (ii) the 90(th) day after the date CliniChem provides BioChem (as the holder of the majority of the outstanding Class B Shares) with quarterly financial statements of CliniChem showing cash or cash equivalents of less than $5.0 million, although BioChem may, at its election, extend such period by providing additional funding, including through loans, for the continued conduct of any or all of the CliniChem Programs (but in no event beyond March 31, 2003). If the Purchase Option is exercised, the Purchase Option Exercise Price will be the greatest of: (a) (i) 25 times the aggregate of (a) all worldwide payments made by and all worldwide payments due to be made by BioChem to CliniChem with respect to all Acquired Products for the four calendar quarters immediately preceding the quarter in which the Purchase Option is exercised (the "Base Period") and (b) all payments that would have been made and all payments due to be made by BioChem to CliniChem during the Base Period if BioChem had not previously exercised its Product Payment Buy-Out Option with respect to any CliniChem Product; less (ii) any amounts previously paid to exercise any Product Payment Buy-Out Option for any CliniChem Product; (b) the fair market value of 420,000 BioChem Common Shares; (c) $175 million plus any additional funds contributed to CliniChem by BioChem, less the aggregate amount of all Technology Fee payments, Research and Development Costs and Services Agreement payments paid or incurred by CliniChem as of the date the Purchase Option is exercised; and (d) $50 million. In each case, the amount payable as the Purchase Option Exercise Price will be reduced (but not to less than $1.00) to the extent, if any, that CliniChem's liabilities at the time of exercise (other than liabilities under the Research and Development Agreement, the Services Agreement and the Technology License Agreement and any debt owed to BioChem) exceed CliniChem's cash and cash equivalents, and short-term and long-term investments (excluding the amount of Available Funds remaining at such time). BioChem may pay the Purchase Option Exercise Price in cash, in BioChem Common Shares or in any combination of cash and BioChem Common Shares. The per share Purchase Price of CliniChem Common Shares will be affected if CliniChem issues additional CliniChem Common Shares after the Distribution. Under the Articles and the by-laws of CliniChem (the "By-laws"), CliniChem is prohibited from taking or permitting any action inconsistent with, or which would in any way alter, BioChem's rights under the Purchase Option. In addition, until the expiration of the Purchase Option, CliniChem may not, without the consent of BioChem as the sole holder of the majority of the outstanding Class B Shares, amalgamate or liquidate, amend its Articles to alter the Purchase Option, CliniChem's authorized capitalization, or certain provisions of its Articles governing the right of the holders of the majority of the outstanding Class B Shares to elect one director. To the extent Rule 13e-3 ("Rule 13e-3") under the Exchange Act dealing with going private transactions by certain issuers or their affiliates is applicable at the time of any exercise of the Purchase Option, BioChem and CliniChem will comply with their respective obligations under Rule 13e-3, subject to any available exemptions from such obligations. Income Tax Considerations............. The Distribution will be a taxable dividend to Holders who are resident in Canada. The normal rules concerning the taxation of dividends paid by a taxable Canadian corporation to its shareholders will be applicable. A Holder who is not resident in Canada and receives CliniChem Common Shares as a dividend-in-kind will be subject to Canadian withholding tax. A portion of the CliniChem Common Shares otherwise deliverable to a non-resident Holder will be sold on behalf of the non-resident in order to pay any Canadian withholding tax for which such non-resident is otherwise liable. In the case of a U.S. Holder (as defined below), pursuant to the Canada-United States Income Tax Convention, the rate of withholding is generally 15%. In the case of U.S. Holders who hold their BioChem Common Shares through DTC, DTC will debit the broker-dealer's account for the amount of cash equal to 15% of the fair market value of the dividended shares and remit such amount to Revenue Canada. The broker-dealer will then debit the account of such Holder for a like amount. However, in the case of U.S. Holders who are registered holders (as opposed to beneficial owners who hold their shares through a depositary) ("Registered U.S. Holders"), BioChem needs to withhold 15% of the fair market value of the shares distributed to such Holders and remit the proceeds from the sale of such shares to Revenue Canada. Less than 1% of BioChem's Common Shares held by non-resident Holders are held by Registered U.S. Holders. Accordingly, BioChem (or its transfer agent) will be making such sales on behalf of Registered U.S. Holders from whom shares have been withheld. Such sales of CliniChem Common Shares will be effected following the Distribution pursuant to Regulation S under the Securities Act in one or more offshore transactions, including open-market transactions on a Canadian stock exchange, which are not subject to the registration requirements of the Securities Act and applicable state securities laws. BioChem expects that such shares will be sold in market transactions on either the Montreal Exchange or The Toronto Stock Exchange in an orderly fashion during the first few weeks following commencement in trading of the CliniChem Common Shares or in one or more private transactions. See "Income Tax Considerations--Canadian Federal Income tax Considerations" and "The Distribution". The Distribution of CliniChem Common Shares to a U.S. Holder will be treated as a dividend for United States Federal income tax purposes to the extent of BioChem's current and accumulated earnings and profits (as determined for United States tax purposes). Any excess of the value of the CliniChem Common Shares distributed over BioChem's current and accumulated earnings and profits will be treated first as a return of a U.S. Holder's tax basis in its BioChem Common Shares, and then (once such basis is reduced to zero) as a capital gain. For these purposes, a U.S. Holder will be considered to have received a distribution equal to the aggregate fair market value on the date of the Distribution of the CliniChem Common Shares actually received by such U.S. Holder plus those shares which are withheld to satisfy such U.S. Holder's Canadian withholding tax liability. BioChem believes that it does not have any accumulated earnings and profits, but cannot determine whether it has current earnings and profits until the close of its 1998 tax year. BioChem will notify the relevant depository agents of any amount which must be included in the income of the U.S. Holders as a dividend. A. U.S. Holder will not be entitled to claim a dividends-received deduction with respect to the CliniChem Common Shares received in the Distribution, or on dividends, if any, that CliniChem pays on CliniChem Common Shares. It is expected that CliniChem will initially be classified as a "passive foreign investment company" ("PFIC") for United States Federal income tax purposes. If CliniChem is so classified, a U.S. Holder of CliniChem Common Shares will be subject to a special United States tax regime with respect to certain distributions received from CliniChem as well as with respect to any gain from the disposition of CliniChem Common Shares, unless such U.S. Holder elects to include currently in gross income a pro rata share of the earnings of CliniChem each year (a "qualified election"). Failure to make such qualified election could be disadvantageous to certain United States investors. Therefore, prospective investors who are United States corporations, United States citizens or residents, or otherwise subject to the United States tax jurisdiction should consult their tax advisors to decide whether to make a qualified election with respect to their CliniChem Common Shares. See "Income Tax Considerations--United States Federal Income Tax Considerations." The status of CliniChem as a foreign corporation may pose special tax risks to United States investors. Certain material United States Federal income tax consequences of the Distribution and receipt of CliniChem Common Shares are discussed under "Income Tax Considerations--United States Federal Income Tax Considerations." A Registered U.S. Holder will be subject to Canadian withholding tax on the Distribution, and will have a portion of the CliniChem Common Shares otherwise deliverable to it withheld from the Distribution by the Distribution Agent, in order for some or all of such withheld shares to be sold and the proceeds used to satisfy Canadian withholding tax for which such U.S. Holder is liable. After sufficient shares are sold to satisfy such liability, any remaining withheld shares which have not been so sold will be distributed to such U.S. Holder. Such U.S. Holder will recognize a short-term capital gain or loss on the sale of such withheld shares equal to the difference between the sale price realized and the sum of the fair value of the shares on the Distribution Date plus any expenses incurred in relation to the sale. See "Income Tax Considerations" and "The Distribution." HOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE DISTRIBUTION AND THE OWNERSHIP AND DISPOSITION OF CLINICHEM COMMON SHARES GIVEN THEIR PARTICULAR STATUS AND CIRCUMSTANCES. Risk Factors............... Ownership of CliniChem Common Shares involves a high degree of investment risk which should be considered carefully in evaluating the ownership of CliniChem Common Shares including: (i) No prior operating history; no assurance of profitability; (ii) common management; (iii) lack of arm's-length negotiations; (iv) exercise of the Product Option will give BioChem sole control of a product; (v) the Purchase Option Exercise Price may not reflect the fair market value of the CliniChem Common Shares; (vi) no assurance of exercise of options; (vii) no assurance of successful development of the CliniChem Products; (viii) no assurance of sufficient funds; (ix) no assurance of successful manufacturing or marketing; (x) failure to obtain third-party consents may prevent the marketing of certain CliniChem Products; (xi) potential competition from BioChem; (xii) relationship between CliniChem and BioChem may limit CliniChem's activities and market value; (xiii) directors not initially elected by shareholders; (xiv) limitation on CliniChem's ability to license products to third parties; (xv) uncertainty regarding sufficient availability of BioChem research and development personnel and facilities; (xvi) limitation or termination of rights and obligations in bankruptcy; (xvii) dependence on BioChem; (xviii) possible dilution; reduction of per share Purchase Option Exercise Price; (xix) no assurance of trading value or markets for CliniChem Common Shares; (xx) highly competitive industry; rapid and significant technological change; (xxi) government regulation; (xxii) uncertainty regarding patents and proprietary technology; unpredictability of patent protection; (xxiii) uncertainty of pharmaceutical pricing and third-party reimbursement; (xxiv) product liability exposure and insurance; (xxv) development of new products; market acceptance of new products; (xxvi) risks associated with the commercialization of 3TC and lamivudine; (xxvii) reliance on Glaxo Wellcome and other collaborative relationships; (xxviii) uncertainties of financial results; (xxix) volatility of the price of the common share of BioChem; (xxx) shares eligible for future sale; (xxxi) absence of dividends; (xxxii) international operation; currency fluctuations; and (xxxiii) shareholder rights plan (anti-takeover protection). See "Risk Factors."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001054423_camelot_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001054423_camelot_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, information in this Prospectus assumes that the Underwriters' over-allotment options have not been exercised and reflects a -for-one stock split consummated prior to commencement of the Offerings. Pro forma financial information included herein gives effect to the adoption of fresh-start reporting and the acquisition by the Company of certain assets of The Wall Music, Inc. ("The Wall") as if each took place at the beginning of the period presented. The Company's fiscal year ends on the Saturday closest to February 28th. Fiscal years are identified according to the calendar year in which they begin (i.e., the fiscal year ended February 28, 1998 is referred to herein as "Fiscal 1997"). THE COMPANY Camelot Music Holdings, Inc. ("Camelot" or the "Company") is a leading mall-based retailer of prerecorded music and accessories and is one of the largest music retailers in the United States based on store count. As of July 31, 1998, the Company operated 493 stores in 37 states nationwide and in Puerto Rico under three brand names: Camelot Music, founded in 1956, and operating 304 stores with a significant store base concentration in the Midwest and Southeast regions of the United States; The Wall, operating 148 stores primarily in the Mid-Atlantic and Northeast regions of the United States; and Spec's Music, Inc. ("Spec's"), operating 41 stores in south Florida and Puerto Rico. The Company acquired certain assets of The Wall effective February 28, 1998 ("The Wall Acquisition"), and it acquired Spec's, a music retailer, on July 29, 1998 (the "Spec's Acquisition"). The Company believes that each chain benefits from name recognition and a loyal customer base in its primary markets of operation. For Fiscal 1997, the Company had pro forma net sales of $554.1 million ($396.2 million excluding The Wall) and earnings of $27.2 million ($15.9 million excluding (i) The Wall, (ii) special items and (iii) the reinstatement of vendor discounts). The Company believes that the Spec's Acquisition will enhance its competitive position in the Southeastern United States and give the Company a leading position in the south Florida market. See " -- Recent Developments." Camelot offers a broad range of prerecorded music, including compact discs ("CDs"), cassettes, pre-recorded video cassettes, digital versatile discs ("DVDs") and accessories such as blank audio and video cassettes as well as music and tape care products. The Company seeks to position itself as the mall-based music specialist for prerecorded music, and advertises under the motto "No One Knows Your Music Better." The Company's stores average 4,350 square feet in size and typically offer over 20,000 stock keeping units ("SKUs"), including both high-volume Billboard Top 100 titles ("hits") and a broad offering of older releases and diverse music categories ("catalog"). The Company believes its product offering enables it to attract a diverse customer base and reduce its dependence on any one music genre. In Fiscal 1997, the Company's average sales per square foot, including The Wall, was approximately $293 which the Company believes is among the highest for mall-based retailers of prerecorded music. The Company believes its broad product offering, supported by a high level of customer service from its knowledgeable sales force, combined with its competitive pricing strategy and attractive locations within regional malls, position it to benefit from the favorable trends occurring in the prerecorded music industry. The Company believes that the total market for prerecorded music and music videos in the United States amounted to $12.2 billion in 1997. The Company believes that revenues in the music and music video market in the United States have doubled over the last ten years and has grown at a compounded annual rate of 8.2% during that time. Industry growth rates do not reflect the Company's historical growth and are not necessarily indicative of its growth during future periods. The Company's revenues have grown at a 7.8% compounded annual rate over the last ten years, although its revenues grew over the past five years at a compounded annual rate of 2.3%. During the 1980s the music retail industry experienced rapid growth fueled by: (i) the introduction of new products such as the CD; (ii) a relatively large number of popular new releases which increased customer traffic and sales; and (iii) the rapid expansion of mall-based music retailers. These factors led, in the early 1990s, to the competitive intrusion of non-traditional music retailers such as consumer electronics stores and discount stores and to increased price competition. By mid-1994, these competitive factors, combined with the contraction of the replacement CD market and a comparative lack of successful new releases, led to deteriorating profitability in the music retail industry. Beginning in mid-1997, conditions in the music retail industry began to improve as a result of: (i) the significant reduction in competitive square footage resulting from the reduction in the total number of traditional music retail stores from approximately 5,000 in 1995 to approximately 4,200 in 1997, including a net reduction of 600 retail stores by the top five traditional music retailers, based on store count; (ii) an improvement in retail pricing as music vendors, beginning in 1996, strengthened minimum advertised pricing ("MAP") guidelines, which the Company believes decreased the intensity levels of price-based competition for prerecorded music; and (iii) a resurgence in popular new releases. The Company has historically been privately held. In 1993, the Company was acquired in a highly leveraged transaction by an investment group led by a private investment firm and members of the Company's current management (the "1993 Acquisition"). The 1993 Acquisition resulted in significant debt service obligations. This significant debt service and the industry conditions described above combined to impair Camelot's operating and financial condition and led the Company to file a voluntary petition for protection under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in August 1996 (the "Petition Date"). See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Camelot's joint plan of reorganization (the "Plan of Reorganization") was confirmed by the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") on December 12, 1997 and became effective on January 27, 1998 (the "Plan Effective Date"). Under the Plan of Reorganization, substantially all of the claims against the Company existing as of the Petition Date were exchanged for shares of Common Stock. Approximately $423.0 million of unsecured claims were exchanged for 10,167,824 shares of Common Stock valued at an amount equal to one share for each $47.95 of claim, and approximately $41.5 million of secured claims were exchanged for 2,211,111 shares of Common Stock valued at an amount equal to one share for each $18.75 of claim. All pre-petition ownership interests in the Company were canceled. Prior to and during its reorganization under the protection of the Bankruptcy Court, Camelot was able to substantially improve the competitive positioning of its business and significantly improve its financial position. These improvements included: (i) closing 96 underperforming stores; (ii) renegotiating unfavorable leases on certain of its remaining stores; (iii) returning certain overstock inventory to its vendors; and (iv) eliminating liabilities totaling approximately $485 million, including indebtedness of approximately $412 million. In addition, during the same period, Camelot invested $7.5 million to upgrade, develop and implement sophisticated merchandising, distribution, replenishment, and financial software packages, all of which were fully operational by the end of Fiscal 1997. The Company's new and upgraded information systems enable management to (i) allocate specific merchandise to a specific store, thereby improving sell-through rates and reducing returns to vendors; (ii) improve the efficiency of its replenishment system to reduce stock-outs and lower distribution center operating costs; (iii) better track profitability by SKU, store and region; and (iv) automate invoice matching to reduce corporate labor costs. The Company also developed and implemented a new marketing and data warehousing system, which became fully operational in April 1998, to better capture transaction specific data to facilitate the further development of the Company's customer loyalty programs and improve the effectiveness of its advertising programs by targeting specific customers with promotional material tailored to their buying patterns. Over the last two fiscal years, as the Company focused on improving the competitiveness of its business, revenues increased 1.0% as the Company closed 83 stores and opened no new stores. The Company believes the improved industry conditions, the modifications to its operations and financial condition, its infrastructure investments and its strong market position, provide Camelot with distinct competitive advantages and position it for accelerated growth and continued improvement in profitability. Key elements of the Company's growth strategy include: - Strengthen Competitive Position in Existing Markets. The Company intends to strengthen its store base and increase sales by relocating certain existing stores to larger stores and selectively opening new stores in existing markets. New stores will be opened to fill out existing markets and leverage the Company's distribution, advertising and field management costs. As of July 31, 1998, approximately 280 of the Company's 493 stores were less than 4,000 square feet in size compared to its current prototype store of 5,000-6,000 square feet. The Company intends to relocate many of these stores to larger facilities within the same regional mall. The Company believes these relocations will better facilitate its merchandising strategy, including the broader presentation of higher-margin catalog titles. At July 31, 1998, the Company had identified 100 such stores for relocation. In Fiscal 1998, the Company plans to relocate 20 stores and open four new stores in existing markets. Of these 24 projects, seven have been completed and lease commitments have been signed for three more. In Fiscal 1999, the Company expects to relocate 17 stores and open 20 new stores. - Improve Operating Margins. The Company has significantly improved its operating margin to 3.6% of net sales (2.5% excluding special items) in Fiscal 1997 from a loss of 3.5% of net sales (a loss of 1.9% excluding special items) in Fiscal 1996. The Company believes that significant opportunities exist to continue to improve its operating profit margin. The Company seeks to increase its gross profit margin primarily through: (i) improved pricing for the Company's products; (ii) enhanced trade terms; (iii) reduced product returns, through a more systematic allocation of products; and (iv) adjusting its merchandise mix to emphasize higher-margin catalog items as it relocates its stores to larger facilities. In addition, the Company expects to leverage its general and administrative and warehousing and distribution costs as it opens new stores or acquires stores in existing markets. The Company's warehouse and distribution center is currently operating at between 30% and 40% of capacity and the Company believes it could support approximately 500 additional stores without a significant increase in capital expenditures for its warehouse and distribution facilities. - Pursue Acquisitions. The Company believes its industry leading position, experienced management team and improved capitalization position Camelot to pursue selective acquisition opportunities in the music retail industry. Camelot targets mall-based retailers of prerecorded music in existing or contiguous market areas which possess attractive real estate locations. The Company's strategy is to improve such retailers' operating results by remerchandising the stores to conform to Camelot's prototype, implementing its information systems and integrating the acquired operations in order to benefit from economies of scale in distribution, advertising, and management costs. Effective February 28, 1998, the Company purchased certain assets of The Wall for $72.4 million, which significantly enhanced Camelot's market share in the Mid-Atlantic and Northeast regions of the United States. At May 31, 1998, the Company had improved product mix at all of The Wall's stores, targeted for closure 11 underperforming stores, implemented its information systems and reduced costs by eliminating The Wall's corporate infrastructure and phasing out its distribution facilities. See "Unaudited Pro Forma Condensed Consolidated Financial Data." On July 29, 1998, the Company acquired Spec's. See "-- Recent Developments." RECENT DEVELOPMENTS On July 29, 1998, the Company acquired Spec's under the terms of an Agreement and Plan of Merger dated June 3, 1998 (the "Spec's Merger Agreement"). Spec's is a Miami, Florida-based retailer of prerecorded music operating 41 stores in south Florida and Puerto Rico. As of July 29, 1998, Spec's operated 16 mall stores and 25 stores in shopping centers and free-standing locations. The Company believes the Spec's Acquisition will enhance its competitive position in the Southeastern United States and give the Company a leading position in the south Florida market. The cash purchase price for the Spec's Acquisition was $28 million (including related acquisition costs and the repayment of Spec's indebtedness) and was funded primarily with amounts available under the Company's Amended Credit Facility (as defined herein) as well as accumulated cash. See "Risk Factors -- Risks of Restrictions by Lenders" and "Description of Certain Indebtedness." See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Based on public filings by Spec's, during the twelve months ended January 31, 1998, Spec's had revenues of $66.2 million and an operating loss of $4.1 million (excluding restructuring charges, store closing expenses and impairment of long-lived assets). The Company expects to achieve cost savings through the reduction or elimination of Spec's corporate and distribution infrastructure and intends to close two underperforming stores. --------------- The Company was incorporated in Delaware on September 30, 1993. Its principal executive offices are located at 8000 Freedom Avenue, N.W., North Canton, Ohio 44720 and its telephone number is (330) 494-2282. THE OFFERINGS The offering of shares of the Company's Common Stock, par value $.01 per share, in the United States and Canada (the "U.S. Offering") and the offering of shares of the Common Stock outside the United States and Canada (the "International Offering") are collectively referred to herein as the "Offerings." <TABLE> <S> <C> Common Stock offered by the Selling Stockholders.............................. shares Common Stock to be outstanding after the Offerings(1).............................. 10,175,932 shares Use of Proceeds............................. The Company will not receive any proceeds from the sale of Common Stock offered by the Selling Stockholders. Proposed Nasdaq National Market System Symbol.................................... "CMLT" </TABLE> - --------------- (1) Does not include (i) 948,594 shares of Common Stock reserved for issuance under the Company's stock option plans of which options to purchase an aggregate of 734,000 shares of Common Stock will be outstanding upon completion of the Offerings and (ii) up to 1,730 shares of Common Stock reserved for issuance to certain former creditors of the Company pursuant to the Plan of Reorganization. See "Shares Eligible for Future Sale,"
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001054566_advanta_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001054566_advanta_prospectus_summary.txt
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+SUMMARY The following summary is qualified in its entirety by reference to the detailed information appearing elsewhere herein. Certain capitalized terms used herein are defined elsewhere in this Prospectus on the pages indicated in the "index of terms" on pages 55, 56, 57 and 58. Issuers....................... Advanta Leasing Receivables Corp. IV ("ALRC IV") and Advanta Leasing Receivables Corp. V ("ALRC V") will be joint and several obligors with respect to the Notes. Originator and Servicer....... Advanta Business Services Corp. ("ABS" or the "Originator," or, in its capacity as servicer, the "Servicer"). Trustee....................... The Chase Manhattan Bank (the "Trustee"). The Trustee's offices are located at 450 West 33rd Street, New York, New York 10001. Securities Offered............ $ aggregate principal amount of % Class A-1 Equipment Receivables Asset-Backed Notes, Series 1998-1, (the "Class A-1 Notes"), $ aggregate principal amount of % Class A-2 Equipment Receivables Asset-Backed Notes, Series 1998-1 (the "Class A-2 Notes"), $ aggregate principal amount of % Class A-3 Equipment Receivables Asset-Backed Notes, Series 1998-1 (the "Class A-3 Notes"); $ aggregate principal amount of % Class A-4 Equipment Receivables Asset-Backed Notes, Series 1998-1 (the "Class A-4 Notes" together with the Class A-1 Notes, Class A-2 Notes and the Class A-3 Notes, the "Class A Notes"); $ aggregate principal amount of % Class B Equipment Receivables Asset- Backed Notes, Series 1998-1 (the "Class B Notes") and $ aggregate principal amount of % Class C Equipment Receivables Asset-Backed Notes, Series 1998-1 (the "Class C Notes"; together with the Class A Notes and the Class B Notes, the "Offered Notes"). In addition to the Offered Notes, there will be issued $ aggregate principal amount of Class D Equipment Receivables Assets-Backed Notes, Series 1998-1 (the "Class D Notes", and together with the Offered Notes, the "Notes"). The Class D Notes are not being offered hereby. The combined initial principal amount of the Offered Notes will represent 96.00% of the Original Aggregate Contract Principal Balance. The initial principal balance of the Class D Notes will represent 4.00% of the Original Aggregate Contract Principal Balance. Material Risks................ Certain material risks may be present in an investment in the Offered Notes. See "Material Risks." Senior-Subordinate Nature of the Notes..................... The Notes are being issued in accordance with a "senior-subordinate" structure, such that the Class B Notes, Class C Notes and Class D Notes are subordinate in payment priority to the Class A Notes, the Class C Notes and Class D Notes are subordinate in priority to the Class A Notes and the Class B Notes, and the Class D Notes are subordinate in payment priority to the Class A Notes, the Class B Notes and the Class C Notes. Losses and delinquencies experienced by the Receivables will impact first, CROSS REFERENCE SHEET TO FORM S-1 <TABLE> <CAPTION> CAPTION OR LOCATION ITEM AND CAPTION IN FORM S-1 IN PROSPECTUS ---------------------------- ------------------- <S> <C> <C> 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus................... Forepart of Registration Statement; Outside Front Cover Page; Cross Reference Sheet 2. Inside Front and Outside Back Cover Page of Prospectus....................................... Inside Front Cover Page and Outside Back Cover Pages of the Prospectus; Terms of the Notes; Available Information; Table of Contents 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges........................ Summary of Prospectus; Material Risks; Certain Legal Matters Affecting the Receivables; Prepayments and Yield Considerations 4. Use of Proceeds.................................... Use of Proceeds 5. Determination of Offering Price.................... * 6. Dilution........................................... * 7. Selling Security Holders........................... * 8. Plan of Distribution............................... Underwriting 9. Description of Securities to be Registered......... Outside Front Cover Page; Summary of Prospectus; Material Description of the Notes; Federal Income Tax Considerations 10. Interests of Named Experts and Counsel............. Experts 11. Material Changes................................... * Information with Respect to the Registrants (a) Description of Business....................... The Issuers (b) Description of Property....................... * (c) Legal Proceedings............................. Legal Proceedings (d) Market Price of and Dividends on Registrants' Common Equity and Related Stockholder Stocks........................................ * (e) Financial Statements.......................... Index to Appendices (f) Selected Financial Data....................... * (g) Supplementary Financial Information........... * (h) Management's Discussion and Analysis of Financial Condition........................... Management's Discussion and Analysis of Financial Condition (i) Changes in and Disagreements with Accountants and Financial Disclosure..................... * (j) Directors and Executive Officers............. Directors and Executive Officers of the Issuers (k) Executive Compensation........................ * (l) Security Ownership of Certain Beneficial Owners and Management............................ The Issuers (m) Certain Relationships and Related Transactions................................... The Issuers 12. Incorporation of Certain Information by Reference........................................ Inside Front Cover Page; Incorporation of Certain Documents by Reference 13. Disclosure of Commission Position on Indemnification for Securities Act Liabilities... See page II-2 </TABLE> - --------------- * Not applicable or answer is negative. (cover page continued) promissory notes (collectively, the "Contracts") financing the purchase or lease of which will primarily consist of "small-ticket" equipment items for businesses, including, without limitation, computers, office machines (such as copy machines, facsimile machines and telephones), alarm systems and similar items, certain monies relating thereto received after the Cut-Off Date, certain interests in the underlying equipment, items, intangibles or property relating to the Contracts (the "Equipment," and together with the Contracts, and including certain other property appurtenant thereto, the "Receivables") and (y) a Reserve Account. Residual Receipts will be included in the Trust Estate subject to a maximum level described herein. Payments of principal and interest to the holders of the Class A Notes (the "Class A Noteholders") will have the benefit of limited credit support consisting of the subordination of the Class B Notes, the subordination of the Class C Notes, the subordination of the Class D Notes, the Residual Interest, funds on deposit in the Reserve Account, and amounts on deposit in certain other accounts, if any. The holders of the Class B Notes (the "Class B Noteholders") will have the benefit of limited credit support consisting of the subordination of the Class C Notes, the subordination of the Class D Notes, the Residual Interest, funds on deposit in the Reserve Account, and amounts on deposit in certain other accounts, if any. The holders of the Class C Notes (the "Class C Noteholders" together with the Class A Noteholders and the Class B Noteholders, the "Noteholders") will have the benefit of limited credit support in the form of the subordination of the Class D Notes, the Residual Interest, funds on deposit in the Reserve Account, and amounts on deposit in certain other accounts, if any. Capitalized terms used herein will have the meanings ascribed to such terms herein. The pages on which terms are defined are set forth on the Index of Terms contained herein. Principal and interest will be paid to the Noteholders monthly on the 15th day (or the next succeeding Business Day if such 15th day is not a Business Day) of each month (each, a "Payment Date"), commencing, with respect to interest, on May 15, 1998, and commencing, with respect to principal, on the Amortization Date (as defined herein). Pursuant to the terms of the Contribution Agreement the Originator will agree to use its best efforts to transfer to the Issuers additional qualifying Contracts and the related Equipment, and the Issuers will agree to add such Contracts and interests in the related Equipment to the Trust Estate, during the period (the "Interest-Only Period") from and including the Closing Date to and including the January 1999 Payment Date (the first Payment Date on which principal is scheduled to be paid, the February 1999 Payment Date, hereinafter the "Stated Amortization Date"), or, if a Required Amortization Event (as defined herein) occurs with respect to a Payment Date prior to the Stated Amortization Date, such earlier Payment Date (the earlier to occur of the Stated Amortization Date or such earlier date, the "Amortization Date"). The stated maturity date with respect to the Notes is the [October] 2006 Payment Date (the "Stated Maturity Date"). However, if all payments on the Contracts are made as scheduled, final payment with respect to the Notes would occur prior to the Stated Maturity Date. It is expected that the Notes will mature prior to the Stated Maturity Date. The Issuers will have the option, subject to certain conditions, to redeem all, but not less than all of the Notes of all Classes and thereby cause early repayment of the Notes on any Payment Date on which the Aggregate Contract Principal Balance is less than or equal to 10% of the Original Aggregate Contract Principal Balance (as defined herein). In addition, the Issuers will have the option, subject to certain conditions, to redeem the Class A-3 Notes on any Payment Date (a "Class A-3 Special Redemption"). The Issuers will give notice of any such redemption to the Trustee at least 30 days before the Payment Date fixed for such redemption. Upon deposit of funds necessary to effect such redemption, the Trustee shall pay the remaining unpaid principal amount on the Notes called for redemption and all accrued and unpaid interest thereon, and, in the event of a Class A-3 Special Redemption only, the Class A-3 Special Redemption Premium. See "Description of the Notes -- Redemption." the Class D Noteholders; second, the Class C Noteholders; third, the Class B Noteholders; and fourth, the Class A Noteholders. In addition to the subordination provisions of the Notes, the Reserve Account and the Residual Account will provide additional protection for the Offered Notes, as described herein, and the Residual Interest is subordinate to all classes of Notes. The Indenture provides that if the Outstanding Principal Balance of the Notes ever exceeds the Aggregate Contract Principal Balance (i.e., if the Notes are "undercollateralized"), the Outstanding Principal Balances of the Notes will be "written down" in inverse order of seniority such that parity is achieved. See "Description of the Notes" herein. Closing Date.................. On or about April , 1998 (the "Closing Date"). Cut-Off Date.................. The opening of business on April 1, 1998 (the "Cut-Off Date"). Denominations................. The Offered Notes will be issued in minimum denominations of $1,000 and integral multiples of $1,000 in excess thereof, except that one Note of each Class may be issued in another denomination. Interest Rates................ % per annum on the Class A-1 Notes (the "Class A-1 Interest Rate"), % per annum on the Class A-2 Notes (the "Class A-2 Interest Rate"), % per annum on the Class A-3 Notes (the "Class A-3 Interest Rate"), % per annum on the Class A-4 Notes (the "Class A-4 Interest Rate"), % per annum on the Class B Notes (the "Class B Interest Rate"), % per annum on the Class C Notes (the "Class C Interest Rate") calculated in each case on the basis of a year of 360 days comprised of twelve 30-day months. With respect to any particular Class, the "Interest Rate" refers to the applicable rate indicated in the immediately preceding sentence. The Class D Notes are a subordinated "principal-only" Class of Notes which do not bear interest. Initial Principal Balances.... $ for the Class A-1 Notes (the "Class A-1 Initial Principal Balance"), $ for the Class A-2 Notes (the "Class A-2 Initial Principal Balance"), $ for the Class A-3 Notes (the "Class A-3 Initial Principal Balance"), $ for the Class A-4 Notes, (the "Class A-4 Initial Principal Balance", together with the Class A-1 Initial Principal Balance, the Class A-2 Initial Principal Balance and the Class A-3 Initial Principal Balance, the "Class A Initial Principal Balance"), $ for the Class B Notes (the "Class B Initial Principal Balance"), $ for the Class C Notes (the "Class C Initial Principal Balance"), and $ for the Class D Principal Balance (the "Class D Initial Principal Balance"). See "Description of the Notes." The Indenture................. The Notes will be issued pursuant to, and will be in such form, bear interest and be payable on such terms as are prescribed in the Master Business Receivables Asset-Backed Financing Facility Agreement, dated as of May 1, 1997, by and among the Servicer, Advanta Leasing Receivables Corp. III as the Obligor's Agent and P R O S P E C T U S PRELIMINARY PROSPECTUS DATED APRIL , 1998; SUBJECT TO COMPLETION $360,000,000 ADVANTA BUSINESS SERVICES CORP. ORIGINATOR AND SERVICER ADVANTA LEASING RECEIVABLES CORP. IV ADVANTA LEASING RECEIVABLES CORP. V ISSUERS EQUIPMENT RECEIVABLES ASSET-BACKED NOTES, SERIES 1998-1 $ % CLASS A-1 NOTES $ % CLASS A-2 NOTES $ % CLASS A-3 NOTES $ % CLASS A-4 NOTES $ % CLASS B NOTES $ % CLASS C NOTES ------------------ The Advanta Equipment Receivables Asset-Backed Notes, Series 1998-1 will consist of the following classes (each, a "Class"): (i) the Class A-1 Notes (the "Class A-1 Notes"), the Class A-2 Notes (the "Class A-2 Notes"), the Class A-3 Notes (the "Class A-3 Notes") and the Class A-4 Notes (the "Class A-4 Notes", together with the Class A-1 Notes, Class A-2 Notes and the Class A-3 Notes, the "Class A Notes"), (ii) the Class B Notes (the "Class B Notes"), (iii) the Class C Notes (the "Class C Notes"); and (iv) the Class D Notes (the "Class D Notes" together with the Class A Notes, the Class B Notes, and the Class C Notes, the "Notes"). The Class B Notes, the Class C Notes and the Class D Notes are subordinate to the Class A Notes; the Class C Notes and the Class D Notes are subordinate to the Class B Notes and the Class D Notes are subordinate to the Class C Notes. The Class A Notes, the Class B Notes and the Class C Notes are sometimes referred to collectively as the "Offered Notes". The Class D Notes are not being offered hereby. The Notes will represent asset-backed debt obligations of Advanta Leasing Receivables Corp. IV ("ALRC IV") and Advanta Leasing Receivables Corp. V ("ALRC V"), as joint and several obligors (the "Issuers"). The Contracts were originated or acquired by Advanta Business Services Corp. ("ABS" or the "Originator"). The Issuers will establish a trust estate with respect to the Notes (the "Trust Estate") with The Chase Manhattan Bank, as trustee (the "Trustee"). The Trust Estate will consist primarily of (x) a combination of leases (including, but not limited to, finance leases, true leases and full payout leases), loans, contracts and ------------------ (cover continued on next page) AN INVESTMENT IN THE NOTES INVOLVES CERTAIN RISKS. SEE "MATERIAL RISKS" COMMENCING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE SECURITIES OFFERED HEREBY. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE NOTES WILL NOT REPRESENT AN INTEREST IN OR AN OBLIGATION OF ADVANTA BUSINESS SERVICES CORP., ADVANTA CORP. OR ANY OF THEIR AFFILIATES, OTHER THAN THE ISSUERS, NOR WILL THE NOTES BE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR BY ANY OTHER PERSON. ================================================================================ <TABLE> <CAPTION> INITIAL PUBLIC UNDERWRITING PROCEEDS TO OFFERING PRICE DISCOUNT(1) ISSUERS(2) - --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Per Class A-1 Equipment Receivables Asset-Backed Note - --------------------------------------------------------------------------------------------------------------------------- Per Class A-2 Equipment Receivables Asset-Backed Note - --------------------------------------------------------------------------------------------------------------------------- Per Class A-3 Equipment Receivables Asset-Backed Note - --------------------------------------------------------------------------------------------------------------------------- Per Class A-4 Equipment Receivables Asset-Backed Note - --------------------------------------------------------------------------------------------------------------------------- Per Class B Equipment Receivables Asset-Backed Note - --------------------------------------------------------------------------------------------------------------------------- Per Class C Equipment Receivables Asset-Backed Note - --------------------------------------------------------------------------------------------------------------------------- Total =========================================================================================================================== </TABLE> (1) The Originator has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. (2) Before deducting expenses estimated to be $ . ------------------ The Offered Notes are offered subject to receipt and acceptance by the Underwriters, to prior sale and to the Underwriters' right to reject any order in whole or in part and to withdraw, cancel, or modify any order without notice. It is expected that delivery of the Offered Notes will be made in book-entry form through the facilities of The Depository Trust Company, Cedel Bank, S.A. or the Euroclear System on or about April , 1998. ------------------ Underwriters of the Class A Notes SALOMON SMITH BARNEY Underwriter of the Class B and the Class C Notes SALOMON SMITH BARNEY THE DATE OF THIS PROSPECTUS IS APRIL , 1998. INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED WITHOUT THE DELIVERY OF A FINAL PROSPECTUS. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. The Offered Notes are being offered pursuant to this Prospectus. Sales of the Offered Notes may not be consummated unless the purchaser has received this Prospectus. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE OFFERED NOTES, INCLUDING PURCHASES OF OFFERED NOTES TO STABILIZE THE MARKET PRICE AND THE IMPOSITION OF BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES SEE "UNDERWRITING" HEREIN. AVAILABLE INFORMATION The Issuers have filed with the Securities and Exchange Commission (the "Commission") a Registration Statement (together with all amendments and exhibits thereto, the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the Offered Notes. For further information, reference is made to the Registration Statement which may be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549; Citicorp Center, 500 West Madison, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, Suite 1300, New York, New York 10048. Copies of the Registration Statement may be obtained from the Public Reference Branch of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission maintains a Web site at http://www.sec.gov pursuant to Item 502(a) under Regulation S-K as recently amended in SEC Release No. 33-7289 (May 9, 1996). The Issuers will file with the Commission such periodic reports with respect to the Notes as are required under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the rules and regulations of the Commission thereunder. REPORTS TO NOTEHOLDERS During such time as the Offered Notes remain in book-entry form, any quarterly and annual reports containing information concerning the Offered Notes and required to be filed with the Commission will be sent to Cede & Co. ("Cede"), as nominee of The Depository-Trust Company ("DTC"), the Euroclear System ("Euroclear") or Cedel Bank, S.A. ("CEDEL") as registered holders of the Offered Notes pursuant to the Indenture. Such reports will be made available by DTC, Euroclear or CEDEL and its participants to holders of interests in the Offered Notes in accordance with the rules, regulations and procedures creating and affecting DTC, Euroclear and CEDEL, respectively. See "Appendix A -- Book-Entry Registration." However, such reports will not be sent directly to each beneficial owner while the Offered Notes are in book-entry form. Upon the issuance of fully registered, certificated Offered Notes, such reports will be sent directly to each Offered Noteholder. Such reports will be prepared in accordance with generally accepted accounting principles. the Trustee, and a supplement thereto dated as of the Closing Date (the "Indenture"). Expected Maturity Dates....... The expected maturity dates with respect to the Class A-1 Notes, Class A-2 Notes, Class A-3 Notes, the Class A-4 Notes, Class B Notes and the Class C Notes are the Payment Dates in , , , , and respectively. Limited Obligations; Asset-Backed Debt............. The Notes will represent non-recourse asset-backed debt obligations solely of the Issuers and are secured solely by the Trust Estate. To the extent that the Issuers own other property, neither such other property nor any proceeds thereof will be available to fund payments on the Notes. The general credit of the Issuers has not been pledged to secure the Notes. Trust Assets.................. The assets pledged to the Trustee to secure the Notes will consist of, initially, (i) all Scheduled Payments due on or after the Cut-Off Date with respect to a pool consisting of a combination of leases (including, but not limited to, finance leases, true leases and full payout leases), loans, contracts and promissory notes (collectively, the "Initial Contracts"), financing the purchase or lease of "small-ticket" equipment items for businesses, including, without limitation, computers, office machines (such as copy machines, facsimile machines and telephones), alarm systems and similar items, together with such Initial Contracts and certain other property appurtenant thereto, (ii) certain interests in the Equipment (and certain proceeds (including net insurance proceeds thereof) relating to the Initial Contracts (the "Initial Property"), (iii) funds on deposit in the Reserve Account and certain other accounts held by the Trustee and (iv) the rights of the Originator under any applicable agreements (such as broker, vendor or purchase agreements) pursuant to which the Originator acquired the Contracts. Thereafter, during the Interest-Only Period of the Notes, additional Contracts may be pledged to the Trustee for the purpose of maintaining the Aggregate Contract Principal Balance as its initial level (such Contracts, the "Additional Contracts"). The Initial Contracts, together with any Additional Contracts are referred to as the "Contracts" and the Initial Equipment, together with any Additional Equipment is referred to as the "Equipment." The Contracts, together with certain interests in the related Equipment and other property appurtenant thereto, are collectively referred to as the "Receivables." On each Payment Date during the Interest-Only Period, to the extent necessary, (i) all amounts remaining on deposit in the Collection Account after making certain payments as described herein and (ii) all amounts on deposit in the Additional Property Funding Account, if any, will be disbursed by the Trustee to the Issuers, to the extent described in "Flow of Funds" herein, in consideration of the Issuers' pledge to the Trustee of Additional Property relating to Additional Contracts having an aggregate Contract Principal Balance on the related Cut-Off Date equal, as nearly as practicable, to such amounts. On each Payment Date commencing with the Amortization Date, principal is required to be paid to the Noteholders, as described herein. The Issuers' reversionary rights to the Trust Estate, to the extent that the proceeds thereof are not required to be applied to the payment of the Notes, is the "Residual Interest." As of any date of determination, the "Principal Balance" of the Residual Interest is equal to the excess of (x) the Aggregate Contract Principal Balance over (y) the Outstanding Principal Balances of all Classes of the Notes. The Issuers will acquire their rights in the Contracts and the Equipment either from the Originator directly, pursuant to the Master Contribution Agreement, dated as of May 1, 1997, together with various supplements thereto (together, the "Contribution Agreement") or pursuant to one or more Sale Agreements between an Issuer and one or more affiliates of the Originator (such Sale Agreements and the Contribution Agreement, together, the "Receivables Transfer Agreement"). The Originator, as an originator, will make certain representations and warranties with respect to, among other things, the Equipment and the Contracts, which representations and warranties will be assigned to the Trustee under the Indenture. See "The Trust Assets" herein. Statistical Information; Discount Rates......................... The statistical information presented in this Prospectus concerning the Initial Contracts reflects the pool of Initial Contracts as of the opening of business on March 1, 1998 (the "Statistic Calculation Date"), and has been calculated using an assumed discount rate of 7.00% per annum (the "Statistical Discount Rate"). The Aggregate Contract Principal Balance of the Initial Contracts as of the Statistic Calculation Date is $372,530,585.57 using the Statistical Discount Rate (the "Original Statistical Aggregate Contract Principal Balance"). The Aggregate Contract Principal Balance of the Initial Contracts as of the CutOff Date is $ using the Actual Discount Rate (the "Original Aggregate Contract Principal Balance"). The "Actual Discount Rate" is %, which is equal to the sum of (i) the weighted average (as of the Closing Date) of the Class A-4 Interest Rate (assuming that the Class A-4 Interest Rate applies to the entire Class A Initial Principal Balance), the Class B Interest Rate and the Class C Interest Rate and (ii) the Servicer Fee Percentage. The statistical distribution of the characteristics of the Initial Contracts as of the Cut-Off Date using the Actual Discount Rate may vary somewhat from the statistical distribution of the characteristics of the Initial Contracts as of the Statistic Calculation Date using the Statistical Discount Rate as presented in this Prospectus, due to the fact that certain Initial Contracts reflected in the statistical information presented herein may have had payments made in respect thereof or may be determined not to meet the eligibility requirements for the final pool and also due to the fact that, during the period from the Statistic Calculation Date to the Cut-Off Date, certain Contracts may have been added to the Initial Contracts. The variance in such characteristics with respect to the final pool will not be greater than 5% (plus or minus) compared to such characteristics that are described in this Prospectus, based upon the Original Statistical Aggregate Contract Principal Balance. The statistical characterization of the final pool will be filed with the Commission on the current report on Form 8-K. Unless otherwise noted, all statistical percentages in this Prospectus are measured by the Original Statistical Aggregate Contract Principal Balance. Payment Dates................. Payments on the Notes will be made on the 15th day of each month (or if such day is not a Business Day, the next succeeding Business Day), commencing on May 15, 1998 (each, a "Payment Date"), to holders of record on the last day of the immediately preceding calendar month (each a "Record Date"). See "Description of the Notes -- Payment Date." Interest Payments............. On each Payment Date, the interest due (the "Interest Payments") with respect to each Class of Notes will be the interest that has accrued on such Notes since the last Payment Date, or, in the case of the May 15, 1998 Payment Date, since the Closing Date, (each such period, an "Interest Accrual Period") at the applicable Interest Rate applied to the Outstanding Principal Balance of the Notes of each Class immediately prior to such Payment Date (such amount for the Class A Notes, the "Class A Note Interest," for the Class B Notes, the "Class B Note Interest", and for the Class C Notes, the "Class C Note Interest"). In addition, on each Payment Date, any Interest Payment shortfalls plus interest thereon for any prior Payment Date shall accrue and be due to the related Noteholders (such Interest Payment shortfalls on the Class A Notes, the "Class A Overdue Interest," the Class B Notes, the "Class B Overdue Interest" and the Class C Notes, "Class C Overdue Interest"). See "Description of the Notes -- General" and "-- Distributions on Notes." Interest-Only Period.......... During the Interest-Only Period, the Issuers may pledge Additional Contracts to the Trustee from time to time for the purpose of maintaining the Original Aggregate Contract Principal Balance such that no amortization of the Notes will occur. The Indenture provides that until the Amortization Date, amounts which would otherwise be paid as principal to the holders of the Notes will be released to the Issuers in consideration of the Issuers' pledge to the Trustee, for the benefit of the Noteholders, of Additional Contracts, with the result that the Noteholders will receive payments of interest only, and no payments of principal, on each Payment Date beginning with the May 1998 Payment Date through and including the January 1999 Payment Date (such period, the "Interest-Only Period"). See also "Prepayment and Yield Considerations" herein. Principal Payments............ Unless a Required Amortization Event occurs earlier, the Noteholders will receive no principal payments until the February 1999 Payment Date. For each Payment Date during the Amortization Period, the Notes of each Class will be entitled to receive payments of principal ("Principal Payments"), to the extent funds are available therefor, in the priorities set forth in the Indenture and described herein under "Description of the Notes -- Principal Payments." On each Payment Date during the Amortization Period, to the extent funds are available therefor, the principal will be paid to the Noteholders in the following priority: (a) to the Class A Noteholders (in "sequential-pay" fashion to the Class A-1 Notes, the Class A-2 Notes, the Class A-3 Notes and the Class A-4 Notes, in that order), until the Outstanding Principal Balance of the Class A Notes has been reduced to zero, the Class A Principal Payment, (b) to the Class B Noteholders, until the Outstanding Principal Balance of the Class B Notes has been reduced to zero, the Class B Principal Payment, (c) to the Class C Noteholders until the Outstanding Principal Balance of the Class C Notes has been reduced to zero, the Class C Principal Payment, and (d) following the funding to the Reserve Account to its required level, to the Class D Noteholders, until the Outstanding Principal Balance of the Class D Notes has been reduced to zero, the Class D Principal Payment. Flow of Funds................. The Indenture will require that the Trustee establish an account (the "Collection Account") and that the Servicer deposit to the Collection Account (or the Advance Payment Account, as described herein), all collections or receipts received by the Servicer on the Contracts no later than two Business Days, or such later date as permitted by the Rating Agencies, following the Servicer's determination that such amounts relate to the Contracts or the Equipment. On each Payment Date prior to the Amortization Date, the Trustee will be required to make payments from the Available Funds as more fully described in "Description of the Notes -- Flow of Funds." On the Payment Date which is also the Amortization Date and on each Payment Date thereafter (such period being the "Amortization Period"), the Trustee will be required to make the following payments from the Available Funds (including amounts transferred from the Reserve Account and/or the Residual Account on such Payment Date) then on deposit in the Collection Account, in the following order of priority: (i) from the Available Funds, to the Servicer, any unrecoverable Servicer Advances; (ii) from the Available Funds then remaining in the Collection Account, to the Servicer, if ABS is not then the Servicer, the Servicing Fee then due, together with certain miscellaneous amounts; (iii) from the Available Funds then remaining in the Collection Account, to the Class A Noteholders, the Class A Note Interest and Class A Overdue Interest for the related Interest Accrual Period, pari passu with respect to each Class of Class A Notes; (iv) from the Available Funds then remaining in the Collection Account, to the Class B Noteholders, the Class B Note Interest and the Class B Overdue Interest for the related Interest Accrual Period; (v) from the Available Funds then remaining in the Collection Account, to the Class C Noteholders, the Class C Note Interest and the Class C Overdue Interest for the related Interest Accrual Period; (vi) until the Class A Principal Amount has been reduced to zero, from the Available Funds then remaining in the Collection Account, the Class A Principal Payment and the Class A Overdue Principal; (vii) until the Class B Principal Balance has been reduced to zero, to the Class B Noteholders, from the Available Funds then remaining in the Collection Account, the Class B Principal Payment and the Class B Overdue Principal; (viii) until the Class C Principal Balance has been reduced to zero, to the Class C Noteholders, from the Available Funds then remaining in the Collection Account, the Class C Principal Payment and the Class C Overdue Principal; (ix) from Available Funds then remaining in the Collection Account, (x) from the Closing Date until the Reserve Account Funding Date, to the Reserve Account, an amount equal to the Servicing Fee otherwise payable to ABS and (y) after the Reserve Account Funding Date, to the Servicer, if ABS is then the Servicer, the Servicing Fee then due, together with certain miscellaneous amounts; (x) from the Available Funds then remaining in the Collection Account, to the Reserve Account, the amount needed to increase the amount on deposit in the Reserve Account to the Required Reserve Amount for such Payment Date; (xi) upon the occurrence and continuance of a Residual Event (as defined in the Indenture), to the Residual Account, the lesser of (A) the Available Funds then remaining on deposit in the Collection Account and (B) the aggregate amount of Residual Receipts originally included in Available Funds for such Payment Date; (xii) from the Available Funds then remaining in the Collection Account, to the Class D Noteholders, the Class D Principal Payment and the Class D Overdue Principal; (xiii) from the Available Funds then remaining in the Collection Account to ABS, the amount of any Servicing Fee previously due to it but deposited to the Reserve Account; and (xiv) to the Issuers, as the holder of the Residual Interest, any remaining Available Funds on deposit in the Collection Account. Residual Receipts will be included in "Available Funds" only through the Payment Date on which Residual Receipts on deposit in the Residual Account, or withdrawn from the Residual Account as a result of a shortfall and used (without duplication) to cover amounts owing the Offered Noteholders and the Servicer, equals $ (the "Residual Cap Amount"). Once the Residual Cap Amount has been reached, Residual Receipts will no longer be required to be remitted to the Trustee as "Available Funds," and will be released to the Issuers free and clear and the lien of the Indenture (whether or not a Residual Event is then in effect, or occurs thereafter). See "Description of Notes -- Flow of Funds." Defaulted Contracts........... A "Defaulted Contract" will mean any Contract (a)(i) that is a Delinquent Contract with respect to which a User is contractually delinquent for 121 days or more (without regard to any Servicer Advances or the application of any security deposit provided by the User (a "Security Deposit")) or (ii) as to which the Servicer has determined in accordance with its customary servicing practices that eventual payment of the remaining Scheduled Payments thereunder is unlikely or (iii) that has been rejected by or on behalf of the User in a bankruptcy proceeding and (b) as to which a Release Event has not occurred. With respect to any Contract, a "Release Event" is a payment in full of such Contract or a removal of such Contract from the Trust Estate by the Servicer or Originator pursuant to the terms of the Indenture. A Defaulted Contract has, by definition, a Contract Principal Balance of zero; given the cashflow mechanics of the Indenture, the effect of assigning such a zero balance is to require that the Noteholders receive on the next Payment Date an amount of principal equal to such Defaulted Contract's Contract Principal Balance, calculated immediately prior to such Contract becoming a Defaulted Contract. Application of Residual Receipts...................... On each Payment Date, Residual Receipts shall be deposited into the Collection Account and included as Available Funds until the aggregate, cumulative amount of Residual Receipts used (without duplication) since the Closing Date to cover amounts owing to the Offered Noteholders and to the Servicer, equals $ (the "Residual Cap Amount"), and will provide additional credit support to the Notes. Actual Residual Receipts may be more or less than the residual value of the Equipment, as recorded on the records of the Servicer (the "Booked Residual Value"). Under certain limited circumstances more fully described in the Indenture (a "Residual Event"), the Residual Receipts not distributed to Offered Noteholders, or paid to the Servicer with respect to the Servicing Fee, will be deposited in an Eligible Account that has been established and will be maintained by the Trustee (the "Residual Account"). As provided in the Indenture, funds on deposit in the Residual Account will be available to cover shortfalls in the amount available to pay the Servicing Fee owing the Servicer and to make interest and principal payments on the Offered Notes. If, on any Payment Date, such shortfall(s) exist and both the Residual Account and the Reserve Account have amounts on deposit therein, the Indenture provides that such shortfall shall first be funded from Residual Account moneys. Following the termination of a Residual Event, amounts on deposit in the Residual Account will be deposited into the Reserve Account to the extent that the amount on deposit in the Reserve Account is less than the Required Reserve Amount and the remainder of such amount will be released to the Issuers. Reserve Account............... The Offered Noteholders will have the benefit of funds on deposit in an account (the "Reserve Account") to the extent that, on any Payment Date, there is a shortfall in the amount available to pay amounts available to pay the Servicing Fee owing the Servicer or to make interest and principal payments on the Offered Notes. The Reserve Account will be funded by an initial deposit of 2.30% of the Initial Principal Balance of all Offered Notes (such amount the "Reserve Account Initial Deposit"). Thereafter, to the extent provided in the Indenture, additional deposits will be made to the Reserve Account on each Payment Date, to the extent that the amount on deposit in the Reserve Account (the "Available Reserve Amount") is less than the Required Reserve Amount. The "Required Reserve Amount" as of any Payment Date equals 3.25% of the then aggregate Outstanding Principal Balances of the Offered Notes (after taking into account all payments of principal on such Payment Date, but prior to any allocation of the Senior Allocated Loss Amount), subject to a floor amount (the "Reserve Account Floor") equal to the lesser of (a) 1.00% of the Initial Principal Balance of the Offered Notes and (b) the aggregate Outstanding Principal Balance of the Offered Notes. Amounts on deposit in the Reserve Account in excess of the Required Reserve Amount will be released to the Issuers in accordance with the provisions of the Indenture. "Clean-Up Call" Redemption.... The Issuers will have the option, subject to certain conditions, to redeem all, but not less than all, of the Notes of all Classes as of any Payment Date on which the Aggregate Contract Principal Balance as of the related Calculation Date is less than or equal to 10% of the Original Aggregate Contract Principal Balance. The Issuers will give notice of such redemption to the Trustee at least 30 days prior to the Payment Date for such redemption. Upon the deposit of funds necessary to effect such redemption, the Trustee shall pay the Outstanding Principal Balances of the Notes so called for redemption and all accrued and unpaid interest as of the Payment Date fixed for redemption. See "Description of the Notes -- Redemption." Class A-3 Special Redemption.................... The Class A-3 Notes may be redeemed (a "Class A-3 Special Redemption") on any Payment Date, at a price equal to the sum of (i) the then Class A-3 Principal Balance plus accrued and unpaid interest thereon, and (ii) the Class A-3 Special Redemption Premium. The Class A-3 Special Redemption Premium is payable only in the event that the Issuers exercise the Class A-3 Special Redemption and not in the event of a "clean-up call" redemption. Advances...................... Subject to the limitations described herein, on or prior to each Payment Date, the Servicer may, but is not required, to make advances (each, a "Servicer Advance") for delinquent Scheduled Payments. See "Description of the Notes -- Advances" herein. Federal Income Tax Consequences.................. It is intended that the Offered Notes will be characterized as indebtedness of the Issuers for federal income tax purposes, and in the opinion of Dewey Ballantine LLP, special tax counsel to the Issuers, the Offered Notes will be so characterized as indebtedness for federal income tax purposes. If characterized as indebtedness, interest on such Offered Notes will be taxable as ordinary income when received by a Noteholder on the cash method of accounting and when accrued by Noteholders on the accrual method of accounting. See "Material Federal Income Tax Consequences." ERISA Considerations.......... The Employee Retirement Income Security Act of 1974, as amended ("ERISA") places certain restrictions on those pension and other employee benefits plans to which it applies. Pursuant to regulations issued by the United States Department of Labor defining "plan assets," if the Offered Notes are considered to be indebtedness without substantial equity features under local law, the assets comprising the Trust Estate will not be considered assets of any ERISA plan holding the Offered Notes, thereby generally avoiding potential application of ERISA's prohibited transaction rules. However, in certain circumstances, the prohibited transaction rules may be applicable to the purchase of the Offered Notes even if the Offered Notes are not deemed to have substantial equity features. Certain exemptions from the prohibited transaction rules could be applicable, however, with respect to the acquisition and holding of the Offered Notes. Accordingly, the Offered Notes may be acquired by ERISA plans, subject to certain restrictions. Before purchasing any of the Offered Notes, fiduciaries of such plans should determine whether an investment in the Offered Notes is appropriate under ERISA. See "ERISA Considerations." Rating........................ It is a condition to the issuance of the Notes that the Class A Notes be rated at least "AAA," the Class B Notes be rated at least "A" and that the Class C Notes be rated at least "BBB" by Standard & Poor's Ratings Group ("S&P"); that the Class A Notes be rated at least "Aaa," the Class B Notes be rated at least "A2" and the Class C Notes be rated at least "Baa2" by Moody's Investors Service, Inc. ("Moody's") and the Class A Notes be rated at least "AAA," the Class B Notes be rated at least "A" and the Class C Notes be rated at least "BBB" by Fitch IBCA, Inc. ("Fitch"), respectively (each a "Rating Agency"). There is no assurance that any rating will not be lowered or withdrawn if, in the judgement of any Rating Agency, circumstances in the future so warrant. See "Ratings of the Offered Notes."
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the financial statements and the notes thereto appearing elsewhere in this Prospectus. The information contained in this Prospectus reflects a 5.059-for-1.000 split of the Company's outstanding Common Stock effected on June 4, 1998. Unless otherwise indicated, information in this Prospectus assumes no exercise of the Underwriters' option to purchase additional Common Stock to cover over-allotments, if any. The terms "Company" and "Hastings" refer to Hastings Entertainment, Inc. and its predecessors, unless the context otherwise requires. The Company's fiscal year ends on January 31 and is identified as the fiscal year for the immediately preceding calendar year. For example, the fiscal year ended January 31, 1998 is referred to as "fiscal 1997." This Prospectus contains certain forward-looking statements. Actual results and the timing of certain events could differ materially from those projected in the forward-looking statements due to a number of factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. THE COMPANY Hastings is a leading multimedia entertainment retailer that combines the sale of books, music, software, periodicals and videotapes with the rental of videotapes and video games in a superstore format. Founded in 1968, Hastings currently operates 120 superstores averaging 21,200 square feet in small to medium-sized markets located throughout the Midwestern and Western United States. Based on its 30-year operating history, the Company believes that these small to medium-sized markets with populations ranging from 25,000 to 150,000 present an opportunity to profitably operate and expand Hastings' unique entertainment superstore format. These markets are usually underserved by existing book, music, software or video stores with competition generally limited to locally owned specialty stores or single-concept entertainment retailers. In addition, Hastings proprietary purchasing and inventory management systems enable its superstores to typically offer the broadest range of entertainment products in these markets at prices that are competitive with or lower than the lowest prices charged by its competitors. The Company believes it has significant advantages over its competitors, including its unique multimedia retailing concept, extensive product selections, low-pricing strategy, targeted merchandising, efficient operations, superior customer service and substantial operating experience in small to medium-sized markets. A key element of the Company's business strategy is to continue its growth and increase its profitability through the continued expansion of its superstore operations. During the past five years, Hastings' revenues have increased at a 13% compound annual growth rate, growing from $218 million in fiscal 1993 to $358 million in fiscal 1997 as a result of new store openings and comparable store revenue increases. Over this period, the Company increased its superstore selling square footage by 86% from approximately 1,118,000 square feet in fiscal 1993 to approximately 2,081,000 square feet at the end of fiscal 1997, while comparable store revenue increases for fiscal 1995, 1996 and 1997 were 4%, 6% and 7%, respectively. Hastings intends to continue this growth in the future by opening approximately 60 superstores in the next three years and continuing its ongoing store expansion and remodeling programs. The Company also intends to augment its current Web site with Internet commerce capabilities during the second quarter of fiscal 1998. Hastings has assembled a strong management team with substantial experience in the retail industry led by John H. Marmaduke, who has served as the Company's President and Chief Executive Officer for the past 22 years. The Company believes that its success throughout its 30-year history has been due in large part to its ability to recognize and respond to prevailing trends in retailing. For example, in response to the growing popularity of the superstore format and its superior profitability, Hastings redirected its resources in the early 1990's to the expansion of its superstores while profitably divesting its mall-based stores in fiscal 1993 and fiscal 1994. Further, to address a slowdown in its rental video business in early 1997, the Company introduced a new rental video merchandising strategy that led to comparable store revenue increases for rental video of over 10% in the fourth quarter of fiscal 1997 compared to the same quarter in fiscal 1996. OPERATING STRATEGY The Company's goal is to enhance its position as a leading multimedia entertainment retailer by expanding existing stores, opening new stores in selected markets, and offering its products through the Internet. Each element of the Company's business strategy is designed to build consumer awareness of the Hastings concept and achieve high levels of customer loyalty and repeat business. The key elements of this strategy are the following: Superior Multimedia Concept. The Company's superstores present a wide variety of products tailored to local preferences in a dynamic and comfortable store atmosphere with exceptional customer service. Hastings superstores average approximately 21,200 square feet, with the Company's new stores ranging in size from 18,000 square feet to 35,000 square feet. The Company's superstores offer customers an extensive product assortment of approximately 44,000 book, 27,000 music, 1,500 software, 2,000 periodical and 6,000 videotape titles and 1,500 complementary and accessory items for sale and 15,000 videotape and video game selections for rent. The Company believes that its multimedia format reduces Hastings' reliance on and exposure to any particular entertainment segment or trend and enables the Company to promptly add exciting new entertainment categories to its product line. See "Business -- Business Strategy -- Superior Multimedia Concept." Small to Medium-Sized Market Superstore Focus. The Company targets small to medium-sized markets with populations of 25,000 to 150,000 in which the Company's extensive product selection, low pricing strategy, efficient operations and superior customer service enable it to become the market's entertainment destination store. The Company bases its merchandising strategy for its superstores on in-depth research of its customers and understanding of its individual markets. The Company utilizes flexible layouts that enable each superstore to arrange its products according to local interests and to customize the layout in response to new customer preferences and product lines, such as the Company's growing software department. See "Business -- Business Strategy -- Small to Medium-Sized Superstore Focus." Customer-Oriented Superstore Format. The Company designs its superstores to provide an easy-to-shop, open store atmosphere by offering major product categories in a "store-within-a-store" format. To encourage browsing and the perception of Hastings as a community gathering place, the Company has incorporated amenities in many superstores, such as chairs for reading, complimentary gourmet coffees, music auditioning stations, interactive information kiosks, telephones for free local calls, children's play areas and in-store promotional events. See "Business -- Business Strategy -- Customer-Oriented Superstore Format." Cost-Effective Operations. The Company is committed to controlling costs in every aspect of its operations while maintaining its customer-oriented philosophy. From 1993 to 1997, Hastings spent $12.8 million to develop and implement proprietary information, purchasing, distribution and inventory control systems that position the Company to continue to grow profitably. These systems enhance profitability by enabling the Company to respond actively to customers' changing desires and to rapid shifts in local and national market conditions. See "Business -- Business Strategy -- Cost-Effective Operations." Low Pricing. Hastings' pricing strategy at its superstores is to offer value to its customers by maintaining prices that are competitive with or lower than the lowest prices charged by other retailers in the market. The Company determines its prices on a market-by-market basis, depending on the level of competition and other market-specific considerations. See "Business -- Business Strategy -- Low Pricing." EXPANSION STRATEGY Expanded Selling Square Footage. The Company has identified as potential locations for future superstores over 500 underserved, small to medium-sized markets that meet its new-market criteria. It plans to open approximately 60 superstores over the next three years in certain of those markets for a total of approximately 170 superstores (net of closings) by the end of fiscal 2000. In addition to opening new superstores, the Company plans to continue expanding and remodeling its existing stores. Between new store openings and store expansions, the Company anticipates increasing its current selling square footage of approximately 2,081,000 by more than 50% by the end of fiscal 2000. See "Business -- Expansion Strategy -- Expanded Selling Square Footage." Electronic Commerce. With the anticipated initiation of the sale of products on its Web site in the second quarter of fiscal 1998, the Company believes that it will be the first fully integrated, multimedia entertainment retailer offering books, music, software, videotapes and video games through the Internet on a single Web site. See "Business -- Business Strategy -- Electronic Commerce." The Company's principal executive offices are located at 3601 Plains Boulevard, Suite #1, Amarillo, Texas 79102, and its telephone number at such location is (806) 351-2300. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company......................... 3,084,000 shares Common Stock offered by the Selling Shareholder............. 293,333 shares Common Stock outstanding after the Offering(1).............. 11,549,726 shares Use of Proceeds............................................. To fund the opening of new superstores and the expansion of existing superstores; to reduce outstanding indebtedness under the Company's unsecured $45.0 million revolving credit facility; and for general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol...................... HAST </TABLE> - --------------- (1) Does not include 2,370,278 shares reserved for issuance under the Company's various stock plans. As of January 31, 1998, options for 1,797,554 shares have been granted under these stock plans with a weighted average exercise price per share of $11.72. See "Management -- Stock Plans." SUMMARY FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) The summary financial and operating data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and notes thereto included elsewhere in this Prospectus. The income statement data set forth below for fiscal 1995, 1996 and 1997 and the balance sheet data at January 31, 1998 are derived from the audited financial statements included elsewhere in this Prospectus. The income statement data set forth below for fiscal 1993 and fiscal 1994 are derived from audited financial statements not included herein. See note (4) to the table below concerning the retroactive restatement of earnings per share data in compliance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). <TABLE> <CAPTION> FISCAL YEAR ----------------------------------------------------- 1993 1994 1995 1996 1997 -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> INCOME STATEMENT DATA(1): Merchandise revenue......................................... $171,049 $197,311 $232,463 $251,934 $283,026 Video rental revenue........................................ 46,674 57,603 66,449 72,357 74,739 -------- -------- -------- -------- -------- Total revenues.............................................. 217,723 254,914 298,912 324,291 357,765 Gross profit(2)............................................. 80,520 95,681 108,871 118,379 136,860 Selling, general and administrative expenses................ 65,769 80,480 88,443 103,883 119,637 Development expenses........................................ 514 2,811 2,791 2,421 -- -------- -------- -------- -------- -------- Operating income............................................ 14,237 12,390 17,637 12,075 17,223 Interest expense, net....................................... (310) (718) (2,588) (3,585) (4,228) Gain (loss) on sale of mall stores, net(1).................. 3,836 4,080 -- (2,500) 734 Other, net.................................................. 2,051(3) 148 221 126 139 -------- -------- -------- -------- -------- Income before income taxes.................................. 19,814 15,900 15,270 6,116 13,868 Income taxes................................................ 7,205 6,090 5,875 2,320 5,270 -------- -------- -------- -------- -------- Net income.................................................. $ 12,609 $ 9,810 $ 9,395 $ 3,796 $ 8,598 ======== ======== ======== ======== ======== Diluted earnings per share(4)............................... $ 1.46 $ 1.14 $ 1.09 $ .43 $ .98 Weighted average common shares outstanding -- diluted basis(4).................................................. 8,618 8,614 8,635 8,757 8,736 OTHER DATA: Depreciation and amortization(5)............................ $ 19,110 $ 20,860 $ 26,998 $ 28,535 $ 33,576 Capital expenditures........................................ $ 30,247 $ 40,013 $ 48,358 $ 40,510 $ 55,753 STORE DATA(1): Number of Stores: Open at beginning of period............................... 82 91 102 108 111 Opened during period...................................... 13 13 9 4 8 Closed during period...................................... (4) (2) (3) (1) (2) Open at end of period..................................... 91 102 108 111 117 Comparable store revenues increase(6)....................... 17% 10% 4% 6% 7% </TABLE> <TABLE> <CAPTION> JANUARY 31 ------------------------- 1998 1998 ACTUAL AS ADJUSTED(7) -------- -------------- <S> <C> <C> BALANCE SHEET DATA: Working capital............................................. $ 51,193 $ 69,293 Total assets................................................ 215,298 233,398 Total debt.................................................. 51,612 27,612 Total shareholders' equity.................................. 71,718 121,818 </TABLE> - --------------- (1) The Company sold 26 of its mall stores in fiscal 1993 and its remaining 16 mall stores in fiscal 1994. The operating results of these mall stores are included in the financial results of the Company until their sale. Store Data does not include these mall stores. In fiscal 1996, the Company established a reserve of $2.5 million ($1.6 million after-tax charge) to cover potential losses related to the leases covering the mall stores that were sold to Camelot Music, Inc., which filed for bankruptcy protection in August 1996. In fiscal 1997, the reserve was reduced to $1.5 million. See "Business -- Litigation." (2) On February 1, 1996, the Company began providing for an estimated residual value of $5 per video and began depreciation of rental videos in their first full month of service. In fiscal 1994 and 1995, a full month's depreciation was provided in the month the rental videos were received. These changes resulted in an increase in fiscal 1996 net earnings and earnings per common share of $829,000 and $0.10 on a diluted basis, respectively. (3) Includes $1,235,000 in life insurance proceeds received in fiscal 1993 from an insurance policy covering the life of Sam Marmaduke, founder of the Company. (4) The Company has restated all previous earnings per share data to comply with SFAS No. 128, which became effective on a retroactive basis with the issuance of the fiscal 1997 financial statements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Recent Accounting Pronouncements." (5) Includes total costs associated with the Company's videotape rental expense allocation. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- General -- Videotape Rental Expense Allocation." (6) Stores open a minimum of 60 weeks. (7) Adjusted to reflect the sale of the 3,084,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $15.00 per share, application of the estimated net proceeds therefrom as set forth in "Use of Proceeds" and the termination of the redemption obligation of the Company under the Stock Redemption Agreement between the Company and the estate of the Company's founder. See "Certain Transactions."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001054839_anthra_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001054839_anthra_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information appearing elsewhere in this Prospectus, including "Risk Factors" and the Consolidated Financial Statements and Notes thereto. Unless otherwise indicated, all information in this Prospectus assumes (i) no exercise of the Underwriter's over-allotment option, and (ii) that the Company is successful in obtaining from certain stockholders agreements to convert and the resultant conversion of an aggregate of 3,789,683 shares of the Company's Series A, B, C and D Convertible Preferred Stock (the "Preferred Stock"), see "Description of Securities -- Preferred Stock," into an aggregate of 3,789,683 shares of Common Stock, to be obtained prior to the closing of the Offering, to be effective upon the closing of the Offering and which is a non-waivable condition of the Offering pursuant to the Underwriting Agreement (the "Preferred Stock Conversion"). All references to the "Company" or "Anthra" herein include Anthra Pharmaceuticals, Inc. and its wholly owned United Kingdom subsidiary, Anthra Pharmaceuticals Ltd., unless the context otherwise requires. Unless otherwise indicated, all references to years refer to calendar years. THE COMPANY Anthra Pharmaceuticals, Inc. is a specialized pharmaceutical company engaged in managing clinical development and obtaining regulatory approval of New Drug Applications ("NDAs") and supplemental NDAs ("sNDAs") for a portfolio of its proprietary cancer drugs. The Company's current drug product is for the treatment of certain patients with carcinoma in-situ of the urinary bladder, a form of superficial bladder cancer, and who have had an inadequate response to treatment with Bacillus Calmette Guerin ("BCG") ("BCG-refractory CIS"). See "Business -- Products and Markets -- Valstar(TM) in Patients with BCG- refractory CIS." Its current drug candidates are for the treatment of patients with papillary bladder cancer, ovarian and prostatic cancer, and complications from metastatic cancer (hypercalcemia and lytic bone disease). The Company's strategy is to develop only late stage drug candidates, thereby improving the likelihood of successfully obtaining NDA/sNDA and equivalent foreign approvals. The Company directs its search for oncology drug candidates toward selected large pharmaceutical companies, because of the difficulty many of these companies have experienced in managing oncology projects, and at biotechnology and early stage discovery companies that lack clinical and regulatory proficiency. To maximize the return on its investment in each drug, Anthra seeks approvals for multiple disease indications for each product and directly manages both its United States and foreign clinical programs and regulatory submissions. At the present time, Anthra has entered into four marketing agreements with major multinational drug companies for which it has received certain initial payments and may, but will not necessarily, receive significant additional payments in the form of milestone fees and royalty and supply payments. In December 1997, Anthra filed an NDA for its first product, Valstar(TM) (valrubicin, AD 32) ("Valstar(TM)"), for treatment of patients with BCG-refractory CIS whose principal current alternative is cystectomy (the surgical removal of the urinary bladder). In January 1998, Anthra received priority review designation from the United States Food and Drug Administration (the "FDA") for the review of this NDA. On June 1, 1998, the Oncologic Drugs Advisory Committee ("ODAC") reviewed Valstar(TM), and declined to recommend approval to the FDA of Valstar(TM) without additional analyses. On September 1, 1998, ODAC re-evaluated Valstar(TM) and voted to recommend to the FDA approval of Valstar(TM) for treatment of patients with BCG-refractory CIS for whom cystectomy is not a medically acceptable treatment option (the "ODAC Recommended Indication"). On September 25, 1998, the FDA approved the Company's NDA for Valstar(TM) for the treatment of patients with BCG-refractory CIS for whom immediate cystectomy would be associated with unacceptable side effects, including the possibility of death (the "FDA Approved Indication"). Valstar(TM) is an anthracycline with multiple cytotoxic mechanisms that was discovered at the Dana-Farber Cancer Institute, Harvard University Medical School ("Dana-Farber"). Valstar(TM) has been shown to have significant activity against a variety of tumor cell lines and is not associated with significant contact toxicity, thereby making it an ideal choice for regional chemotherapy. The Company's pivotal clinical studies, have demonstrated a complete response rate of 18% (which rate was supported by the FDA) in a group of 90 patients with bladder cancer who had not responded satisfactorily to extensive pre-treatment with BCG, the accepted first line treatment for superficial bladder cancer. Prior to the FDA's approval of Valstar(TM) with respect to the FDA Approved Indication, there were no drugs approved in the United States for second-line treatment of bladder cancer following BCG therapy, and, surgical removal of the bladder was the only approved definitive form of therapy. Importantly, 35% of the patients in the Company's pivotal clinical studies retained their bladder up to 48 months following study entry. Anthra, consistent with its multiple disease indication strategy, is developing Valstar(TM) for three additional indications. One Phase III program is directed at patients with papillary superficial bladder cancer, for whom approximately 180,000 transurethral resection procedures are being performed annually in the United States. In another Phase III program involving patients with ovarian cancer, Valstar(TM) is being administered directly into the peritoneal cavity, where the cancer is confined. In addition, Anthra plans to commence a Phase I program to obtain approval for use of Valstar(TM) in treating prostate cancer. The Company has researched the historical incidence of each of these diseases based on publicly available information and reports prepared for the Company by MedProbe, Inc. ("MedProbe"), including a report summarizing the results of a survey of 1.5% (124) of office and hospital based urologists reported to be members of the American Medical Association ("AMA"). Although precise patient data is not published and can vary significantly from year to year, based on the foregoing research and certain assumptions made by the Company, including the estimated cost of treating each of the estimated number of patients with Valstar(TM), the Company estimates that the potential market for Valstar(TM) in the United States could approximate nearly $600 million per annum, see "Business -- Products and Markets -- Valstar(TM): Market," and that foreign markets will provide a significant additional opportunity for sales of Valstar(TM). No assurance can be given by the Company that this estimated market for Valstar(TM) will be achieved. A United States subsidiary of Medeva plc (collectively with Medeva plc, "Medeva") has committed up to $26.2 million (of which $11.1 million has been paid to date) and the payment of future royalties for the right to market and sell Valstar(TM) in the United States. Anthra currently has similar arrangements for Valstar(TM) with Nycomed Pharma AS ("Nycomed"), and Almirall Prodesfarma, S.A. ("Almirall"), with respect to marketing and sales rights in Europe. In total, Anthra has entered into agreements for Valstar(TM) providing potential equity investment, licensing and development fees and milestone payments of up to $42.9 million (of which $25.4 million has been paid to date), plus additional royalty and supply payments. In accordance with the Company's corporate development strategy, Anthra identified Bonefos(R), a product for the treatment of hypercalcemia and lytic bone disease associated with breast and lung cancer and owned by Schering AG, Germany, the Company's largest pharmaceutical shareholder. Bonefos(R) has been on the market in Europe and the rest of the world since 1985, with worldwide sales of approximately $150 million in 1997. In July 1998, Anthra entered into an Option Agreement (the "Bonefos Option Agreement") with Schering AG, Germany's affiliates, Berlex Laboratories, Inc. ("Berlex") and Leiras Oy, to acquire the exclusive United States development and marketing rights to Bonefos(R) for the hypercalcemia and lytic bone disease indications, for payments aggregating $3.75 million, including a nonrefundable $250,000 payment under a prior term sheet. In consideration of the Company's nonrefundable payment of $200,000 (also included in the $3.75 million), the Bonefos Option Agreement granted the Company the option to enter into a development and commercialization agreement with Berlex and Leiras Oy and a manufacturing agreement with Leiras Oy (collectively, the "Bonefos Agreements"). On September 30, 1998, the Company entered into the Bonefos Agreements by exercising its option under the Bonefos Option Agreement by making the $800,000 nonrefundable payment to Leiras Oy required under the Bonefos Option Agreement. The Bonefos Agreements provide that, upon FDA approval of an NDA for Bonefos(R), Berlex will have the option to acquire from the Company the exclusive right to market Bonefos(R) in the United States for the hypercalcemia and lytic bone disease indications for payments of up to $21 million, plus future royalties. The Company plans to commence Phase III trials in the United States for Bonefos(R) for the hypercalcemia indication in late 1998 and for the lytic bone disease indication in early 1999. The Company has researched the historical incidence of hypercalcemia and the types of lytic bone disease that Bonefos(R) treats based on publicly available information. Although precise patient data is not published and can vary significantly from year to year, based on the foregoing research and certain assumptions made by the Company, including the estimated costs of utilizing Bonefos(R) for the treatment of these maladies using each of the estimated number of patients, the Company estimates that the potential market for Bonefos(R) in the United States could approximate nearly $900 million per annum. See "Business -- Products and Markets -- Bonefos(R): Market." No assurance can be given by the Company that this estimated market for Bonefos(R) will be achieved. Anthra believes that its strategy and accomplishments have positioned it to become a recognized platform for the clinical substantiation and regulatory approval of cancer drugs capable of treating multiple disease indications. The Company is currently assessing and evaluating additional cancer-related late stage candidates for acquisition, although no definitive agreements have been executed. Management believes that focused, cost effective development increases the likelihood of successful clinical development and regulatory approval. Indicative of this strategy has been the Company's success in obtaining FDA approval of the NDA for Valstar(TM) for the FDA Approved Indication at a total cost of less than $20 million. According to Parexel's Pharmaceutical Statistical Sourcebook (1997) ("PPSS"), in the United States, the cost of developing an approved new drug has been estimated to be between $304 million and $608 million. The Company currently manages its clinical development program for the United States from Princeton, New Jersey, and its program for Europe from Princes Risborough, England through Anthra Pharmaceuticals Ltd., its wholly owned United Kingdom subsidiary ("Anthra UK"). The Company further anticipates that it may manage the manufacturing, supply, development and distribution of Valstar(TM) and Bonefos(R) from Switzerland through one or more wholly owned Swiss subsidiaries, which would hold substantially all of the Company's rights to Valstar(TM) and Bonefos(R). The Company was incorporated in Delaware on June 25, 1985. The Company's principal executive offices are located at 103 Carnegie Center, Suite 102, Princeton, New Jersey 08540 and its telephone number is (609) 514-1060. THE OFFERING Securities offered......... 2,000,000 Units, each Unit consisting of one share of Common Stock and one Warrant to purchase one share of Common Stock. Until the Separation Date (one year after the date of this Prospectus or on such earlier date as determined by the Underwriter), the Units will trade on The Nasdaq SmallCap Market and the Boston Stock Exchange and the Common Stock and the Warrants that make up the Units will not be separately transferable. On and after the Separation Date, the Units will no longer trade on The Nasdaq SmallCap Market or the Boston Stock Exchange and the Common Stock and the Warrants that make up the Units will trade on The Nasdaq SmallCap Market and the Boston Stock Exchange only as separate securities.(1) See "Description of Securities." Common Stock to be outstanding after the Offering................. 6,855,183 shares(2) Warrants to be outstanding after the Offering......... 2,000,000(3) Terms of Warrants.......... Each Warrant entitles the holder to purchase one share of Common Stock at a price of $6.00 per share. The Warrants are exercisable at any time beginning on the Separation Date unless previously redeemed, until the fifth anniversary of this Prospectus, subject to certain conditions. The Company may redeem the Warrants, in whole or in part, on or after the date 15 months from the date of this Prospectus upon at least thirty days' prior written notice to the registered holders thereof, at a price of $.10 per Warrant, provided that (i) the last sales price of the Common Stock as reported on The Nasdaq SmallCap Market has been at least $9.00 for at least 20 consecutive trading days ending within ten days of the date of the notice of redemption and (ii) there is a current registration statement covering the resale of the underlying shares of Common Stock. Use of proceeds............ Progress payments for the acquisition of Bonefos(R), for development of products, and for general corporate purposes, including potential additional product acquisitions and purchases of product inventory. See "Use of Proceeds." Proposed Nasdaq SmallCap Market symbols........... Units -- "ANTHU" (until the Separation Date) Common Stock -- "ANTH" (on and after the Separation Date) Warrants -- "ANTHW" (on and after the Separation Date) Proposed Boston Stock Exchange symbols........... Units -- "ANPU" (until the Separation Date) Common Stock -- "ANP" (on and after the Separation Date) Warrants -- "ANPW" (on and after the Separation Date) Risk Factors............... This Offering involves a high degree of risk. See "Risk Factors." - --------------- (1) Although the Company has applied for listing of the Units, the Common Stock and the Warrants on The Nasdaq SmallCap Market and the Boston Stock Exchange, the Company has not yet received approval to list such securities on The Nasdaq SmallCap Market or the Boston Stock Exchange. (2) Based on shares of Common Stock outstanding at September 30, 1998 and assuming the Company is successful in obtaining from all of the holders of Preferred Stock agreements to convert their shares and the resultant conversion of an aggregate of 3,789,683 shares of Preferred Stock into an aggregate of 3,789,683 shares of Common Stock prior to the closing of the Offering, to be effective upon the closing of the Offering, and which is a non-waivable condition of the Offering pursuant to the Underwriting Agreement. Does not include (a) 1,303,455 shares of Common Stock issuable upon exercise of stock options outstanding at September 30, 1998, with a weighted average exercise price of $2.61 per share (of which options to purchase 254,500 shares of Common Stock at an exercise price of $8.00 per share were, on October 15, 1998, exchanged for options to purchase 254,500 shares of Common Stock at an exercise price of $5.00 per share), of which options to purchase 630,457 shares of Common Stock were then exercisable (see "Capitalization" and "Management") (since September 30, 1998, options to purchase 130,000 shares of Common Stock have been granted at an exercise price of $5.00 per share, and options to purchase 3,000 shares of Common Stock have been cancelled, resulting in a net increase of 127,000 shares of Common Stock underlying outstanding options), (b) certain stock options to purchase Common Stock or Series D Convertible Preferred Stock which may be granted to Nycomed pursuant to the Nycomed Agreement (see "Business -- Products and Market -- Valstar(TM): Licensing Agreements"), (c) 2,000,000 shares of Common Stock issuable upon exercise of the Warrants, and (d) 400,000 shares of Common Stock issuable on the exercise of the Units underlying the Underwriter's Warrant and the Warrants underlying such Units. (3) Does not include 200,000 Warrants issuable upon the exercise of the Units underlying the Underwriter's Warrant. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> THREE MONTHS ENDED TWELVE MONTHS ENDED JUNE 30, SEPTEMBER 30, ------------------------------------------------------- ------------------------- 1994 1995 1996 1997 1998 1997 1998 ---- ---- ---- ---- ---- ---- ---- (UNAUDITED) (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenue................................ $ -- $ -- $ 2,171 $ 1,688 $ -- $ -- $ 8,581 Total operating expenses............... 2,489 2,712 4,172 7,292 11,106 1,481 3,125 Other income (expense)................. 37 94 111 139 359 65 36 ------- ------- ------- ------- -------- -------- -------- Net income (loss)...................... $(2,452) $(2,618) $(1,890) $(5,465) $(10,747) $ (1,416) $ 5,492 ======= ======= ======= ======= ======== ======== ======== Net income (loss) allocable to common stockholders......................... $(2,874) $(3,271) $(2,543) $(6,118) $(11,400) $ (1,579) $ 5,329 ======= ======= ======= ======= ======== ======== ======== Net income (loss) per share allocable to common stockholders(1): Basic.............................. $ (4.02) $ (4.24) $ (3.01) $ (5.79) $ (10.70) $ (1.48) $ 5.00 Diluted............................ (4.02) (4.24) (3.01) (5.79) (10.70) (1.48) $ 0.99 Shares used in computing net income (loss) per share allocable to common stockholders: Basic.............................. 716 771 844 1,057 1,066 1,066 1,066 Diluted............................ 716 771 844 1,057 1,066 1,066 5,547 </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1998 ------------------------------------------ (UNAUDITED) PRO FORMA AS ACTUAL PRO FORMA(2) ADJUSTED(2)(3) -------- ------------ -------------- <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents............................ $ 2,277 $ 2,277 $ 9,922 Working capital...................................... 1,391 1,391 9,865 Total assets......................................... 9,357 9,357 15,928 Mandatorily redeemable convertible preferred stock... 11,786 -- -- Convertible preferred stock.......................... 6 -- -- Deficit accumulated during the development stage..... (20,124) (20,124) (20,124) Total stockholders' equity (deficit)................. (12,459) (673) 6,727 </TABLE> - --------------- (1) See Note 2 of Notes to Consolidated Financial Statements. (2) The Company is in the process of obtaining agreements from all of the holders of Preferred Stock to convert all of their shares of Preferred Stock into the same number of shares of Common Stock, such agreements to be obtained prior to the closing of the Offering, to be effective upon the closing of the Offering, and which are a non-waivable condition of the Offering pursuant to the Underwriting Agreement. The amounts presented assume that the Company obtains the conversion agreements from each holder of Preferred Stock and the resultant conversion of all issued and outstanding shares of Preferred Stock into 3,789,683 shares of Common Stock effective upon the closing of the Offering. (3) As adjusted to give effect to the sale of the 2,000,000 Units by the Company offered hereby at an assumed initial public offering price of $5.00 per Unit, less underwriting discounts and commissions and estimated offering expenses, and the anticipated application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to, and should be read in conjunction with, the more detailed information herein and the Company's Consolidated Financial Statements, including the notes thereto, appearing elsewhere in this Prospectus. As used in this Prospectus, unless the context otherwise requires, (i) all financial data have been prepared using generally accepted accounting principles ("GAAP"), (ii) "Talegen" or "Selling Stockholder" means Talegen Holdings, Inc. and, where appropriate, its subsidiaries, (iii) "CFI" and the "Company" mean Crum & Forster Holdings, Inc. and, where appropriate, its insurance company subsidiaries (the "Insurance Companies") and its non-insurance company subsidiaries, and its predecessors and their subsidiaries, (iv) "Xerox" means Xerox Corporation and (v) the information contained in this Prospectus assumes an estimated initial public offering price of $ per share and that the U.S. Underwriters' over-allotment option is not exercised and gives effect to a for split of the Common Stock. Certain information contained in this summary and elsewhere in this Prospectus, including information with respect to the Company's plans and strategy, are forward-looking statements. For a discussion of important factors which could cause actual results to differ materially from the forward-looking statements contained herein, see "Risk Factors." See "Glossary of Selected Insurance Terms" for definitions of certain insurance terms used herein. Unless otherwise indicated, financial information and operating statistics applicable to the Company set forth in this Prospectus are based on United States GAAP and not statutory accounting practices ("SAP"). In conformity with industry practice, data derived from A.M. Best Company, Inc. ("A.M. Best") sources, generally used herein for industry comparisons, are based on statutory accounting practices. THE COMPANY OVERVIEW CFI is a national commercial lines property and casualty insurance group that operates on a regional basis and underwrites business produced by a limited number of preferred independent agents and brokers. The Company, which has operated for more than a century under the well-known Crum & Forster name, underwrites a broad array of commercial insurance products targeted to mid- sized businesses. These products principally include multiple peril, automobile, workers' compensation, umbrella and general liability coverages. With net premiums written of $956 million in 1996, the Company is among the 30 largest writers of commercial lines insurance in the United States based on 1996 statutory data published by A.M. Best. At September 30, 1997, CFI had total assets of $5.4 billion. The Company believes its key competitive advantage is its strong relationships with a group of preferred independent agents and brokers which it identifies as "Custom Agents." CFI considers the Custom Agents to be its primary customers because it believes these agents serve as risk managers for many of the insureds and exercise substantial influence over their choices of coverage and carrier. Custom Agents are selected based on their commercial lines focus, production of profitable business and professional reputation. In addition, each Custom Agent must have a business plan and strategy that is consistent with CFI's and must exhibit a commitment to maintaining a long-term, profitable business relationship with the Company. As of September 30, 1997, the Company had 586 Custom Agents which accounted for 90% of gross premiums written during the first nine months of 1997. CFI operates on a regional basis through 20 offices that provide local, market sensitive service and knowledge in support of its Custom Agents. Substantially all underwriting and claims functions are performed in the regional offices. The Company's management, reporting and control structures are organized to support regional decision making while emphasizing discipline and consistency in CFI's core underwriting and claims functions. Though CFI operates on a regional basis, it is also recognized as a national writer with the ability to offer countrywide account service capabilities. CFI is a wholly owned subsidiary of Talegen, which is a wholly owned subsidiary of Xerox Financial Services, Inc. ("XFSI"), which is, in turn, a wholly owned subsidiary of Xerox. In January 1993, Xerox announced its strategic decision to disengage from its insurance and other financial services businesses, which include Talegen and the Company, in order to focus on its core document processing business. The uncertainties regarding the Company's future ownership and operations created by the Xerox disengagement process have impacted CFI's ability to effectively execute its strategy, which relies heavily on mutual commitments to long-term, stable relationships with current and prospective Custom Agents. The Company believes that the Offering will remove many of these uncertainties. CFI has recently taken steps intended to enhance growth and profitability. Effective January 1, 1998, CFI strengthened its senior management team through the full-time involvement of Joseph W. Brown, Jr., previously Chairman and CEO of Talegen and, prior to that, President and CEO of Fireman's Fund Insurance Company. The Company anticipates that, following the Offering, Mr. Brown and other members of the senior management team will own equity interests in the Company. This ownership is intended to provide the senior management team with economic incentives aligned with the success of the Company. The management team is focused on improving profitability through a number of steps including (i) leveraging CFI's relationship with its Custom Agents to increase penetration, (ii) maintaining disciplined underwriting, (iii) continuing expense management measures to improve the Company's internal expense ratios, (iv) maintaining a strong balance sheet and strong ratings to attract high- quality business, and (v) repositioning the Company's investment portfolio to enhance investment income. STRATEGY CFI's objective is to enhance shareholder value by leveraging its Custom Agent relationships through its regional operating structure. The following paragraphs describe the major elements of the Company's strategy. Strong Custom Agent Relationships. The central focus of the Company is to capitalize on market opportunities by continuing to strengthen its relationships with its Custom Agents and by identifying and appointing additional Custom Agents. In order to enhance relationships with its Custom Agents, CFI seeks to provide a stable market, generalist products, strong local expertise and decision making, ready access to CFI's senior management and attractive agent compensation. In addition, CFI develops individual business plans on an annual basis with each of its Custom Agents. The number of Custom Agents was 494 at December 31, 1993 and 586 at September 30, 1997. The average gross premium written per Custom Agent increased by 33% from $1.2 million in 1993 to $1.6 million in 1996. CFI believes there is substantial opportunity to further increase the amount of business produced by its Custom Agents because it estimates that it currently has less than a 10% share of the total Custom Agents' commercial lines book of business. Consistent with its strategy to focus on Custom Agents, CFI reduced the number of non-Custom Agents from 468 at December 31, 1993 to 159 at September 30, 1997. To attract the highest quality business, CFI also provides eligible Custom Agents with the opportunity to share in the profitability of business they produce through ownership in 19 reinsurance companies ("Captives") formed by CFI and approximately 90% owned by the agents. CFI cedes a portion of certain premiums produced by the Custom Agent shareholders to these Captives. The Company established its initial Captive in 1985 and is one of the few commercial lines insurers to offer such a program to agents. At September 30, 1997, a total of 262 Custom Agents, or 62% of those eligible to own shares, were Captive shareholders. The statutory combined ratios for the portion of the business subject to the Captive program that was retained by CFI in each of the years from 1993 through 1996 was 103.0%, 106.0%, 107.3% and 105.9%, respectively. Direct premiums written by the Company which were subject to the Captive program more than doubled from $90 million in 1993 to $196 million in 1996, resulting in 1996 cessions to the Captives of $37 million. Evidencing CFI's stable, long-term relationships with its Custom Agents, over 75% of the Custom Agents have represented the Company for more than five years as of September 30, 1997. As of the same date, approximately 31% of the Custom Agents have represented CFI for more than 20 years. This latter group remains a strong part of CFI's Custom Agent force, having produced over one-third of the Company's gross premiums written through all Custom Agents for the nine months ended September 30, 1997. Decentralized Regional Approach. The Company operates through 20 regional offices, each focusing on building relationships with the Custom Agents within its region by providing the products and services that address their needs. Substantially all underwriting and claims functions are performed in the regional offices, subject to well-defined boundaries designed to assure quality underwriting and claims handling. The Company believes that operating on a decentralized, regional basis allows it to compete effectively with regional competitors while benefiting from its national scale by offering countrywide account service capabilities and its financial capacity relative to many regional carriers. CFI's regional operations allow it to obtain local knowledge of legal, regulatory, economic and cultural factors that influence the profit potential of insurance products and enable the Company to respond quickly to business developments and opportunities. Each of CFI's seven most senior officers is actively involved with the regions and works directly with Custom Agents to gain a better understanding of their needs. Focus on Generalist Commercial Lines Products for Middle Market Businesses. CFI applies a generalist approach to the commercial lines middle market by offering products which fulfill the majority of the insurance needs of mid-sized businesses. The Company believes that its generalist products and ability to meet most account needs of mid-size businesses have helped the Company strengthen its relationships with Custom Agents during a time when many competitors have specialized their product offerings. The Company also seeks to provide a stable market by consistently offering its generalist products, while actively working to tailor products to meet specific needs. CFI has used these approaches to differentiate itself from its competitors. Approximately 91% of the Company's gross premiums written for 1996 were derived from the following five lines of business: multiple peril (26%), automobile (25%), workers' compensation (18%), umbrella (14%) and general liability (8%). Gross premiums written per account averaged approximately $78,000 per year for the nine months ended September 30, 1997. Disciplined Underwriting. CFI's underwriting standards focus on profitability more than on premium growth or market share, which at times may limit premium growth when market conditions do not meet the Company's pricing and underwriting standards. Underwriting authority levels related to class, risk grade and policy limits are delegated to regional underwriters based on demonstrated individual expertise. The Company utilizes sophisticated monitoring systems to track pricing levels on both new and renewal business, thus facilitating pricing discipline within the regional offices. To manage its liability exposure relative to its capital, reserves and willingness to retain underwriting risk, CFI purchases both treaty and facultative reinsurance from a limited number of high-quality reinsurers. In addition, CFI applies various techniques to manage and limit its property catastrophe exposure, including modelling tools to evaluate potential catastrophe exposures and to allocate both underwriting capacity and reinsurance costs across the regions. In part due to its disciplined underwriting approach, the Company's statutory accident year pure loss ratios were better than the commercial lines insurance industry averages, as extracted from data published by A.M. Best, in each of the last four years for which industry data is available. CFI's average statutory accident year pure loss ratio from 1993 to 1996 was 59.8% while the commercial lines industry average accident year pure loss ratio as extracted from data published by A.M. Best over the same period was 63.4%. The Company's statutory accident year pure loss ratio for the nine months ended September 30, 1997 was 63.1%. Superior Claims Management. In addition to directly affecting the financial results of the Company, claims management is the most important after-sale service to Custom Agents and insureds. Policyholder satisfaction with the claims handling process is a determining factor in policy retention. The Company believes that its stable business focus on generalist products has allowed its claims professionals to develop a high degree of expertise in the insurance lines and for the types of accounts that the Company underwrites. CFI's claims management productivity and efficiency are illustrated by a 41.0% increase in claims managed per claims handling professional at September 30, 1997 as compared to December 31, 1994. The Company also experienced a 9.7% decrease in average legal fees per litigated liability claim on suits closed during the nine-month period ended September 30, 1997 as compared to those closed in 1996, while CFI's average indemnity fees paid per claim were reduced by 14.9% on these same claims. The Company's claims staff leverages its expertise to assist Custom Agents in problem solving and tailoring programs to address specific client needs. Substantially all claims are handled by the regional offices, although specialized units handle umbrella, environmental and construction defect claims. In addition, regardless of the line of business, claims identified as having major litigation potential are managed by a specialized team of claims professionals and monitored by senior management. Growth Opportunities. The Company has increased its gross premiums written through Custom Agents from approximately $599 million in 1993 to approximately $960 million in 1996. The Company intends to grow over time by increasing sales through its existing Custom Agents as a result of both increased penetration by CFI and growth in the agents' businesses. CFI believes there is substantial opportunity to increase its share of Custom Agents' premium volume because it estimates that its current share of the total commercial lines premium produced by its Custom Agents is under 10%. The average gross premiums written per Custom Agent increased by 33% from $1.2 million in 1993 to $1.6 million in 1996. Furthermore, CFI intends to grow over time by appointing additional Custom Agents, particularly in territories which are identified as having profit potential and which are currently underserved by the Company. This expansion will build on the experience gained through the Company's expansion in its Western Region, where premium volume increased by more than 48% during the three years ended December 31, 1996. The number of Custom Agents was 494 at December 31, 1993 and 586 at September 30, 1997. Aggressive Expense Management. CFI seeks to continue the substantial progress it has made since 1993 in reducing its cost structure while increasing the productivity of its employees. The Company has improved its operating expense ratio from December 1993 to September 1997 by 3.3 points, from 25.7% to 22.4%, respectively. Over the same period, gross premiums written per employee increased 50% from $426,000 to $640,000. CFI's cost cutting accomplishments are the result of: (i) reductions in staff and streamlined management functions and operations consistent with a decentralized, regional business emphasis; (ii) changes in processes and tools that contribute to productivity including sharing best practices among regional offices; and (iii) specific efforts to implement economic incentives designed to promote a performance-based culture. CFI intends to continue to reduce costs through these initiatives. In connection with its expense management activities, CFI reduced its workforce from 2,421 at December 31, 1993 to 1,705 at September 30, 1997, a decrease of approximately 30%. CFI has made significant investments in technology designed to enhance productivity in underwriting and claims administration and to improve the quality and responsiveness of front-line decision making. The Company has installed LAN-based workstations linking its employees and has developed and implemented new rate/quote/policy issuance and claim management and information systems. These enhanced communications and information capabilities, along with other technology improvements, have enabled CFI to replace certain existing systems with more flexible and less costly applications. Further, CFI believes that its improved technology will enable it to expand into new territories at modest incremental expense. Maintain Strong Balance Sheet and Strong Ratings. The Company believes that a strong balance sheet and strong ratings are crucial to attracting and retaining high-quality business. At September 30, 1997, CFI had total assets of $5.4 billion and shareholder's equity of $1.1 billion. The strength of CFI's balance sheet is supported by its current use of a limited number of high-quality reinsurers which, in 1996, totalled 36. The Company had a net premiums written to surplus ratio of 1.1x as of September 30, 1997. The Company maintains a proactive approach to its reserves, having strengthened its net reserves by $282 million over the last four years. The Company is continuing to review its loss and loss expense reserves. While the Company believes that its current reserves are adequate to meet its expected obligations, it has retained an independent actuarial consulting firm to do further analysis on its latent and non-latent loss and loss expense reserves. Based on both of the reviews at this stage, the Company may increase its reserves net of reinsurance by up to $250 million. CFI will make a determination upon completion of this study, which is expected by the end of the first quarter of 1998, on whether to make any reserve strengthening and, if so, on the amount of such strengthening. CFI is currently rated "A (Excellent)" by A.M. Best and has a claims paying rating of "A" by Standard & Poor's Ratings Services ("Standard & Poor's"). CFI's A.M. Best rating is the third highest of 15 categories, while its Standard & Poor's rating is the third highest of nine rating categories. Enhance Investment Income. As of September 30, 1997, approximately $1.9 billion, or 63% of total investments of $3.0 billion, was in short-term investments. The remainder of the portfolio was invested in fixed- income securities with average ratings equivalent to "Aa" by Moody's Investor Services Inc. ("Moody's") and a duration approximating 4.4 years. Following the completion of the Offering, the Company intends to reposition its investment portfolio over time with the objective of increasing both the yield and duration. The Company will seek to invest in high-quality, fixed-income securities with an average rating of approximately "Aa" and a duration more closely approximating the duration of its liabilities while maintaining sufficient liquidity to meet cash requirements. NEW MANAGEMENT ROLES Effective January 1, 1998, the Company strengthened its senior management team through the full time involvement of Joseph W. Brown, Jr., previously Chairman and Chief Executive Officer of Talegen and, prior to that, President and Chief Executive Officer of Fireman's Fund Insurance Company. Mr. Brown has been Chairman of the Company since 1992, but his focus was primarily on his Talegen responsibilities. In December, 1997, he resigned his Talegen positions to devote himself exclusively to his expanded responsibilities with the Company. Mr. Brown is highly qualified to direct the execution of CFI's business strategy with the goal of improving operating and financial performance and enhancing shareholder value. In his prior role as Chairman and Chief Executive Officer of Talegen, Mr. Brown was the principal architect of the Talegen Restructuring (as defined herein), one of the largest, most complex legal and financial restructurings implemented in the property and casualty insurance industry in recent years. Thereafter, Mr. Brown simultaneously oversaw both improved strategic focus at the seven stand-alone Talegen insurance groups and the sales of six of the units to date. Mr. Brown also brings to his new responsibilities the benefit of significant industry experience gained in over 17 years with Firemen's Fund Insurance Company during which he held various senior management positions culminating in his appointment as Chief Executive Officer. James A. Stark, President of CFI since 1993, will focus primarily on enhancing relationships with Custom Agents and managing day-to-day operations of CFI. Having begun his career with the Crum and Forster organization in 1964 in the underwriting area, Mr. Stark progressed rapidly through the field organization and managed two different regional offices before moving to the corporate office in 1978. In 1988, he was appointed President of a predecessor to CFI. During his years of experience with the Company, Mr. Stark has developed close working relationships with substantially all of the Custom Agents, as well as an indepth understanding of the underwriting, pricing, loss control, claims handling and other insurance aspects which contribute to the Company's success. Messrs. Brown and Stark have already begun to work with CFI's regional and home office management teams to structure plans designed to improve the strategy execution, financial results and competitive position of the Company. These plans include improving processes to select Custom Agents and to develop additional profitable business with them, leveraging the use of existing technology tools, and exporting best practices across the organization. The Company believes there are opportunities to achieve further gains in productivity, loss experience, investment results and overall returns to investors. BACKGROUND TO THE OFFERING In January 1993, Xerox announced its strategic decision to disengage from its insurance and other financial services businesses, which include Talegen and the Company, in order to focus on its core document processing business. Until 1993, CFI's two principal insurance subsidiaries, United States Fire Insurance Company ("U.S. Fire") and The North River Insurance Company ("North River"), were members of an underwriting pool with certain other insurance subsidiaries of Talegen. Under this pooling arrangement, all of the business written by the pool members was shared pursuant to a predetermined percentage. During 1993, a major restructuring of the Talegen insurance operations (the "Talegen Restructuring") was completed under the direction of Talegen's senior management and with the approval of the insurance regulators of each state in which the Talegen insurance subsidiaries were domiciled. As part of the Talegen Restructuring, the pooling arrangement was commuted and Talegen's insurance company subsidiaries were reorganized into seven independent operating groups, each focused on a different segment of the insurance market. CFI was the only operating group to retain the Crum & Forster name. The Talegen Restructuring included the realignment, effective January 1, 1993, of certain business segments among five of the seven operating groups, including the Company. The other two operating groups were composed of insurance companies that did not participate in the intercompany pool. This realignment included the transfer of a number of insurance policies (and the related assets and liabilities) from the original issuing companies to insurance companies dedicated to the respective types of business going forward. To effect these transfers, CFI and the other operating groups entered into assumption and indemnity reinsurance agreements providing for 100% quota share reinsurance of the subject insurance policies. These agreements were designed to permanently vest in the assuming company all of the liabilities which may arise under the subject insurance policies. They included an obligation on the part of the assuming company to attempt to novate certain of the subject insurance policies, completely replacing the ceding company as the insurer on such policies. In addition to the quota share reinsurance and novation obligations, these agreements delegate all claims handling and policy administration obligations related to such policies to the assuming companies and reassigned all third-party reinsurance associated with such policies from the ceding company to the assuming company, in each case, regardless of the success of the novation process. The Talegen Restructuring also included the realignment of underwriting and claims staff along with the transfer of insurance policies among Talegen entities to provide continuity with policyholders and agents in the handling of the assumed books of business. See "Certain Transactions--Talegen Restructuring." Talegen and XFSI have completed the sale of six of the seven insurance groups established through the Talegen Restructuring, two of which were completed in 1995, three in 1997 and one in January 1998. CFI is the sole remaining insurance operation under Talegen ownership. Through the Offering (assuming the U.S. Underwriters' over-allotment option is exercised), Talegen intends to divest all of its ownership interests in CFI. The uncertainties regarding the Company's future ownership and operations created by Xerox's disengagement process have impacted CFI's ability to effectively execute its strategy, which relies heavily on mutual commitments to long-term, stable relationships with current and prospective Custom Agents. The Company believes that the Offering will remove many of these uncertainties. Immediately following the completion of the Offering, assuming the U.S. Underwriters' over-allotment option is not exercised, Talegen will own shares of Common Stock, or approximately % of the Company's outstanding shares. Talegen intends to sell these shares in the future at such times and on such terms as it shall determine to be advantageous to Talegen, subject to its agreement with the Underwriters described herein. See "Ownership of Common Stock," "Certain Transactions" and "Shares Eligible for Future Sale." TRANSACTIONS CONTEMPORANEOUS WITH AND FOLLOWING THE OFFERING At the time of, or following, the consummation of the Offering, the Company will enter into the following transactions (the "Transactions"): . The Company will sell its 70% interest in a Xerox training facility in Virginia to Xerox Realty Corporation and terminate its lease with Xerox for $82 million in cash, which will result in a $62 million capital contribution. XFSI will assume any federal income tax liability associated with this sale. . XFSI will redeem $182 million of promissory notes held by the Company. . Talegen will make a $75 million capital contribution to CFI. Immediately following the Offering, the Company plans to use the proceeds from the capital contribution to purchase an aggregate excess of loss reinsurance cover. . The Company plans to issue $150 million of debt. Certain costs incurred in acquiring the debt, which will be capitalized in conjunction with the issuance of the debt, are assumed to be $2 million. . The Company plans to repay a $115 million promissory note to Talegen with a portion of the proceeds of the debt it incurs, and to use the remainder to meet holding company liquidity needs, including payment of dividends to stockholders. . The management fees paid to Talegen, which amounted to $21 million, $8 million, $8 million, $9 million, and $6 million for 1993, 1994, 1995, 1996 and the nine months ended September 30, 1997, respectively, will be discontinued. Management fees for 1993 were calculated using a different rate than that used for subsequent periods. . The fees paid for the management of the Company's investment portfolio will be reduced. Giving effect to this adjustment for prior periods would have resulted in a decrease to investment expenses of $4 million, $4 million, $5 million, $5 million and $4 million for 1993, 1994, 1995, 1996 and the nine months ended September 30, 1997, respectively. . The subsidy provided by Talegen relating to a portion of the lease payments for the Company's home office in Morristown, New Jersey, will be discontinued. As a result, the Company will record a liability of $27 million which represents unfavorable lease payments for the remaining term under the lease. . Talegen will assume responsibility for the Company's pension liabilities. As a result, the Company will write-off $8 million of prepaid pension assets. . Xerox will retain $105 million of deferred tax benefits that would otherwise be due to the Company, comprised primarily of $60 million of deferred tax sharing payments and $44 million associated with 1990 through 1994 uncollectible reinsurance deductions. For the period immediately following the Offering, the Company's pre-tax results of operations will be reduced by $174 million and total shareholder's equity will be reduced by $43 million resulting from certain of the Transactions. INVESTMENT PORTFOLIO RESTRUCTURING Since 1992, CFI's investment portfolio has been invested largely in short- term securities. The Company liquidated its investment portfolio in 1992 to assist in obtaining regulatory approval for the Talegen Restructuring. The Company completed limited reinvestment of the portfolio beginning in 1994 before again liquidating its investments in 1995 in connection with a proposed sale of Talegen. The Company then engaged in limited reinvestment activities in early 1996, increasing mid-term fixed-income holdings to approximately 35% of the total portfolio. In the fourth quarter of 1997, much of this reinvested portfolio was again liquidated to realize capital gains presented by lower interest rates in the fixed-income markets. As of September 30, 1997, approximately $1.9 billion, or 63% of total investments of $3.0 billion, was in short-term investments. The remainder of the portfolio was invested in fixed-income securities with average ratings of "Aa" and a duration approximating 4.4 years. During 1993 through 1996 and the nine months ended September 30, 1997, the average annualized after-tax yield on the Company's portfolio was 2.64%, 3.20%, 3.70%, 3.54% and 3.79%, respectively. Following the completion of the Offering, the Company intends to reposition its investment portfolio over time with the objective of increasing both the yield and duration. The Company will seek to invest in high-quality, fixed-income securities with an average rating of approximately "Aa" and a duration more closely approximating the duration of its liabilities while maintaining sufficient liquidity to meet cash requirements. THE OFFERING Common Stock offered hereby: U.S. Offering.............. shares International Offering..... shares Total..................... shares Common Stock to be outstanding after the Offering................... shares Use of Proceeds............. The Company will not receive any of the proceeds from the sale of shares of Common Stock by the Selling Stockholder. See "Use of Proceeds." Dividend Policy............. Subject to financial results and declaration by the Company's Board of Directors, the Company intends to pay regular quarterly cash dividends on its Common Stock. The Company currently intends to pay an initial quarterly cash dividend of $ per share. There can be no assurance, however, that dividends will be paid. The Company's ability to pay dividends is subject to certain restrictions. See "Dividend Policy."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001054930_intercept_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001054930_intercept_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and Consolidated Financial Statements and the related Notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, the information contained in this Prospectus assumes an initial public offering price per share of $8.50 and no exercise of the Underwriters' over-allotment option. All Common Stock share numbers in this Prospectus reflect a 2.1053-for- 1 stock split on February 28, 1998. The terms "InterCept" and "Company" as used in this Prospectus mean The InterCept Group, Inc. and its subsidiaries on a consolidated basis. Industry information presented in this Prospectus is based upon sources which the Company believes to be reliable but has not independently verified. THE COMPANY The InterCept Group, Inc. ("InterCept" or the "Company") designs, develops, markets and implements a suite of fully integrated electronic commerce products and services primarily for community financial institutions in the United States. The Company's products and services include electronic funds transfer ("EFT"), data communications management, client/server enterprise software and other processing solutions. InterCept currently serves over 580 financial institutions and is the largest third-party processor of financial institutions' automated teller machines ("ATMs") in the southeastern United States. The Company has established marketing relationships with 9 of the 17 bankers' banks, which provide the Company access to over 4,500 of the approximately 11,000 community financial institutions nationwide. For the years ended December 31, 1996 and 1997 and for the three months ended March 31, 1998, recurring revenues accounted for approximately 69.3%, 76.1% and 78.2%, respectively, of the Company's revenues. InterCept is a single source provider of a broad range of flexible electronic commerce solutions and supporting value-added products and services. The Company provides numerous EFT products and services, including ATM, point-of- sale ("POS") and scrip debit services, debit card processing, funds transfer and remote banking services. The Company licenses PC BancPAC(TM), a client/server enterprise software system that operates in a personal computing environment and (since October 1997) in a Windows NT(R) environment. Community financial institutions can implement PC BancPAC(TM) on both a service bureau and in-house basis, providing them with two alternatives for utilizing the Company's technologies and processing expertise to improve operating efficiency for their institutions. The Company also provides maintenance and technical support services, supplies banking related equipment and offers numerous ancillary products and services to its financial institution customers. As part of its integrated suite of electronic commerce products and services, the Company provides end-to-end data communications management solutions to its customers. The Company maintains nationwide data communications coverage and has one of the largest private frame relay networks in the southeastern United States (the "InterCept Frame Relay Network"). The InterCept Frame Relay Network is the principal conduit through which the Company processes EFT transactions and manages the data communications needs of its customers. The InterCept Frame Relay Network contains approximately 1,200 drops which are located in 14 states, 41 local access transport areas ("LATAs") and all five markets of the Regional Bell Operating Companies ("RBOCs"). The design of the InterCept Frame Relay Network provides for efficient switching capabilities, which results in rapid response time, as well as secure and reliable transmission and processing of electronic commerce transactions conducted across the network. The Company believes the InterCept Frame Relay Network enables it to provide its electronic commerce products and services efficiently and on a more cost-effective basis for its customers. InterCept's top 9 senior officers have an average of over 22 years of industry experience and have expertise in multiple areas of electronic commerce (including EFT and data communications management), enterprise software and transaction processing for financial institutions. The Company's current market focus is on community financial institutions, which the Company believes rely heavily on third-party providers for a majority of their EFT, data communications management, enterprise software and transaction processing solutions, including the products and services offered by the Company. As a result of rapid technological, financial and other changes that have occurred over the past several years, InterCept believes that the demand of community financial institutions and their customers for technologically advanced solutions has increased substantially and that such demand will continue to grow in the future. The Company believes that its integrated suite of electronic commerce solutions enables its community financial institution customers to compete with larger financial institutions by allowing them to offer similar products and services on a cost-competitive basis. The Company believes it is one of the largest providers of fully integrated electronic commerce products and services for community financial institutions in the southeastern United States, and its goal is to become one of the largest such providers in the United States. To attain this goal, the Company plans to grow significantly by implementing the following key strategies: (i) Cross-Market to Existing Customer Base and Maximize Recurring Revenues. InterCept plans to cross-market its EFT, data communications management, client/server enterprise software and numerous ancillary products and services to its existing customers, most of which already use the Company's EFT services. The Company seeks to develop and maintain long- term customer relationships by providing multiple electronic commerce products and services to community financial institutions pursuant to contracts with renewable terms. The Company intends to maximize its recurring revenues through these relationships by enhancing and increasing the use of its various products and services. The Company also plans to create and acquire additional sources of recurring revenues to meet the evolving needs of its customers. (ii) Increase Data Communications Management and Optimize the InterCept Frame Relay Network. InterCept intends to increase the use of its data communications management services by offering customized, cost-competitive telecommunications connectivity to its customers and by managing their data traffic in a reliable and secure manner across the InterCept Frame Relay Network. The Company intends to optimize the InterCept Frame Relay Network by selling additional communications services to its customers, thereby increasing network utilization with minimal additional cost to the Company. InterCept plans to improve the speed and efficiency of transaction processing across the network by selectively enhancing and upgrading its processing and switching equipment and telecommunications lines. In addition, the Company will attempt to expand the InterCept Frame Relay Network into new geographic areas as business warrants. The Company believes that the strategic development of the InterCept Frame Relay Network will continue to provide for more efficient network utilization, allow it to reduce transmission and other operating costs, and support its current and future products and services. (iii) Complete Strategic Acquisitions. InterCept intends to acquire other companies with complementary technologies or services that will enhance and expand the products and services offered to existing customers, increase its market share, expand its geographic presence or optimize the InterCept Frame Relay Network. Since the beginning of 1996, the Company has completed several acquisitions of providers of complementary products and services. On April 28, 1998, the Company entered into a $20.0 million revolving line of credit agreement with First Union National Bank (the "First Union Credit Facility"), the proceeds of which will be available to fund acquisitions upon completion of this Offering and the satisfaction of certain other conditions set forth in such agreement. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." (iv) Expand Sales Force and Strategic Marketing Relationships. The Company plans to expand its customer base and penetrate new geographic markets by hiring sales personnel with expertise in community financial institutions' operations and/or electronic commerce products and services similar to those offered by the Company. InterCept currently has established relationships with several banking related business organizations, including strategic marketing relationships with 9 of the 17 bankers' banks, which provide the Company access to over 4,500 of the approximately 11,000 community financial institutions nationwide. InterCept intends to use its expanded sales force to market its products and services directly to these institutions and to enhance its indirect marketing efforts by developing additional strategic marketing relationships with bankers' banks and various other business organizations. (v) Expand and Enhance its Products and Services. The Company has devoted and will continue to devote resources to developing and enhancing its suite of products and services. The Company plans to continue to combine its enhanced and expanded electronic commerce solutions with sophisticated technology to help its community financial institution customers remain competitive with other financial service providers. The Company continually strives to anticipate the most recent trends in the financial services industry and to develop and provide leading edge products and services. The Company is a Georgia corporation whose principal offices are located at 3150 Holcomb Bridge Road, Suite 200, Norcross, Georgia 30071, and its telephone number is (770) 248-9600. THE OFFERING <TABLE> <C> <S> Common Stock offered by the Company........ 2,250,000 shares Common Stock offered by the Selling Shareholder....................... 137,500 shares(1) Common Stock to be outstanding after the Offering........................ 9,000,114 shares(2) Use of proceeds by the Company............. To repay certain indebtedness and an amount owed to an officer; enhance marketing efforts; upgrade, enhance and expand the InterCept Frame Relay Network; redeem outstanding preferred stock; and for working capital and general corporate purposes, including acquisitions. See "Use of Proceeds." Proposed American Stock Exchange symbol.... ICT </TABLE> - -------- (1) See "Principal and Selling Shareholders." (2) Excludes 595,853 shares issuable upon exercise of outstanding options granted pursuant to the Company's stock option plans. See "Management-- Stock Option Plans." SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE DATA) <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31, ------------------------------- --------------------------------- AS ADJUSTED 1995(1) 1996(2)(3) 1997 1997 1998 1998(4) --------- ---------- --------- ---------- ---------- ----------- <S> <C> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA: Revenues................ $ 8,223 $ 14,511 $ 23,260 $ 5,116 $ 6,257 $ 6,257 Costs of services....... 4,607 7,859 10,223 2,274 2,634 2,634 Selling, general and administrative expenses............... 2,213 6,852 10,105 2,316 2,532 2,532 Depreciation and amortization........... 242 351 1,323 308 285 285 Loss on impairment of intangibles............ 0 0 728 0 0 0 Writeoff of purchased research and development costs...... 0 810 0 0 0 0 --------- --------- --------- ---------- ---------- ---------- Total operating expenses............... 7,062 15,873 22,379 4,898 5,451 5,451 --------- --------- --------- ---------- ---------- ---------- Operating income (loss)................. 1,161 (1,362) 881 218 806 806 Income (loss) before provision for income taxes and minority interest............... 1,098 (1,641) 232 55 646 814 Net income (loss) attributable to common shareholders........... $ 681 $ (1,427) $ (427) $ 29 $ 376 $ 476 ========= ========= ========= ========== ========== ========== Net income (loss) per common share(5)........ $ 0.12 $ (0.24) $ (0.06) $ 0.00 $ 0.06 $ 0.05 ========= ========= ========= ========== ========== ========== Weighted average common shares outstanding..... 5,867,400 5,851,347 6,750,114 6,750,114 6,750,114 9,000,114 </TABLE> <TABLE> <CAPTION> AS OF MARCH 31, 1998 ---------------------- ACTUAL AS ADJUSTED(6) ------ -------------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................ $ 940 $10,694 Working capital.......................................... 604 10,813 Total assets............................................. 9,885 19,639 Long-term debt........................................... 4,221 284 Shareholders' (deficit) equity........................... (408) 15,938 </TABLE> - -------- (1) On June 4, 1996, Intercept Systems, Inc. ("Systems") merged with the Company in a share exchange combination by which Systems became a wholly- owned subsidiary of the Company. The results of operations of Systems have been included for the periods shown. See Note 3 of Notes to Consolidated Financial Statements. (2) On June 4, 1996, the Company acquired Data Services Corp. ("Data Services") in a transaction accounted for as a purchase and the results of operations of Data Services have been included since the date of acquisition. On November 27, 1996, the Company acquired ProVesa, Inc. ("ProVesa") in a merger transaction accounted for as a purchase, and the results of operations of ProVesa have been included since the date of acquisition. On December 17, 1996, InterCept acquired FiNet, Inc. ("FiNet") in a merger transaction accounted for as a purchase, and the results of operations of FiNet have been included since the date of acquisition. On December 31, 1996, InterCept acquired Bank Services Corporation ("Bank Services") in a merger transaction accounted for as a purchase, and the results of operations of Bank Services have been included since the date of acquisition. See Note 3 of Notes to Consolidated Financial Statements. (3) On January 30, 1998, the Company acquired Technologies in a transaction accounted for as a pooling of interests, and the results of operations of Technologies have been included since its inception on January 1, 1996. (4) The statements of operations data have been adjusted to reflect (i) the sale of 2,250,000 shares of Common Stock offered by the Company, (ii) the elimination of interest expense related to the Company's credit facilities, (iii) the elimination of interest expense related to a deferred compensation agreement with an officer of the Company and (iv) the elimination of preferred stock dividends related to preferred stock to be repurchased with proceeds of the Offering. See "Use of Proceeds." (5) See Notes 2 and 10 of Notes to the Consolidated Financial Statements for a discussion of the historical computations of net income (loss) per common share. Pursuant to Staff Accounting Bulletin No. 98, the impact of any options are excluded as the issuances are not considered nominal. Accordingly, basic and fully diluted net income (loss) per common share are the same. (6) Adjusted to reflect the sale of 2,250,000 shares of Common Stock offered by the Company and the application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1998/CIK0001055105_c-w_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001055105_c-w_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..afed62449fc15fbfb861436f0512284c807c1672
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1998/CIK0001055105_c-w_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements (including the Notes thereto) appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus assumes no exercise of (a) the Underwriters' over-allotment option, (b) the Warrants, or (c) the Representative's Warrant. THE COMPANY The Company is an early-stage technology licensing company. Its primary purpose is to exploit globally a proprietary process that treats phosphogypsum, an environmentally hazardous waste by-product containing toxic components, that results from the production of phosphoric acid-based fertilizer, to render it both non-toxic and a useful product in other industries. This process (the "Phosphogypsum Treatment Process") converts the toxic phosphogypsum into an environmentally friendly material ("Processed Phosphogypsum") which can be used as basic construction material, road bed filler and filler for pigments and plastics. The Company is in the development stage and has a history of significant operating losses. See "Risk Factors." The Company also owns and intends to exploit a second process (the "CLM(TM) Production Process" and, together with the Phosphogypsum Treatment Process, the "Processes") which treats Processed Phosphogypsum to create a chemically reconstructed form of the material. This material may then be combined with various synthetic polymer resins and chemical hardeners to produce ceramic-like material ("CLM(TM)"). The Company is developing CLM(TM) compounds for use as floor coatings and chemical and anticorrosive coatings. CLM(TM) forms only after hardener is added, and therefore it is possible to store the chemically reconstructed form of processed phosphogypsum, potentially for shipping to satellite finishing plants, for up to three months. Phosphoric acid, a main ingredient in the production of fertilizers, is derived from both apatite and phosphorite ores, which are found in great abundance in many areas of the world, including Russia, China, South Africa, the Middle East, the Baltics and the United States. These areas accordingly produce a substantial portion of the world's fertilizer. When phosphoric acid is produced as the first step in the production of phosphoric acid-based fertilizer, a waste by-product called phosphogypsum is created which is considered toxic by virtue of the residual phosphoric, sulfuric and other acids which are left in the phosphogypsum. Fertilizer production creates phosphogypsum at the rate of five metric tons per metric ton of usable fertilizer. The largest 150 phosphoric fertilizer manufacturers worldwide produce approximately 35 million metric tons of phosphoric acid annually, which results in approximately 175 million metric tons of phosphogypsum. Phosphogypsum cannot be used without being treated to remove its toxic components. Some phosphate bearing ores, especially a majority of those ores found in the United States, contains an elevated level of radioactivity. At this time, regulations of the United States Environmental Protection Agency (the "EPA") prohibit the use and treatment of phosphogypsum as a result of dangers associated with the radioactive nature of phosphogypsum produced from ores mined in the United States. Of the 150 largest phosphoric fertilizer manufacturers by volume, 126 are located outside the United States, and approximately two-thirds of the world's production of such fertilizer takes place outside the United States. Based on discussions with a number of fertilizer producers in various countries, the Company believes that to date no other economical method of treating phosphogypsum on a large scale has been available. Fertilizer producers in most countries, including the United States, store phosphogypsum by creating artificial mountains in specially prepared landfills. These landfills not only detract from the landscape, but cause great environmental concern to the local authorities and population, and cost the fertilizer industry millions of dollars to prepare and maintain. In certain countries, phosphogypsum is stacked in mountains while in others phosphogypsum is dumped into the sea. The Phosphogypsum Treatment Process eliminates the cost of preparing and maintaining landfills and the cost of transporting the phosphogypsum for dumping into the sea, because this Process is designed to occur in a plant adjacent to or attached to existing fertilizer manufacturing plants. The Company's objective is to become a worldwide licensor of its technology, including the Processes and the design specifications for the construction and operation of phosphogypsum treatment plants and CLM(TM) production plants. The Company also will conduct research to refine the properties of, and to develop further applications for, CLM(TM). The Company`s strategy is to focus its initial efforts on marketing the Phosphogypsum Treatment Process as a low-cost and environmentally sound alternative to both the storage and dumping of phosphogypsum. The Company has commenced and will continue targeting geographical areas where apatite-based phosphogypsum (essentially non-radioactive) is most plentiful and its storage is a serious economic and environmental concern. The Company intends to customize the engineering design of phosphogypsum treatment plants for different capacities of phosphogypsum and to provide technical support to each licensee throughout the construction and operation of each plant. In consideration therefor, the Company will receive licensing fees payable in specified increments. The Company believes that the construction of a phosphogypsum treatment plant to operation will take approximately 20 to 28 months, depending on the size and location of the plant. See "Business -- Licensing Arrangements." Although the Company's business is highly influenced by government regulations of the countries in which the Company's licensees operate, because the Company is neither a manufacturer of fertilizer and accordingly is not a producer of phosphogypsum, nor will it be an operator of a phosphogypsum treatment plant or a CLM(TM) production plant, the Company does not believe it will be subject to environmental regulations or liability relating to the manufacture, storage or treatment of phosphogypsum outside the United States. In addition, the Company's licenses provide that the licensee has sole responsibility for compliance with applicable regulations, including environmental regulations. See "Business -- Government Regulation." Since its inception, the Company has focused its marketing efforts on the Mediterranean, Central and Eastern Europe, North Africa and the Middle East, developing engineering solutions for the application of the patents for building phosphogypsum treatment and CLM(TM) plants, and developing value-added end uses for the Processed Phosphogypsum. In October 1997, the Company entered into a licensing agreement with a company that intends to exploit the phosphogypsum treatment technology in Poland in cooperation with a local fertilizer plant, with an option to purchase a license for the CLM(TM) production technology also for use in Poland. The Company granted a further option to this licensee to construct plants for the Processes in Greece. In November 1997, the Company entered into an agreement to license the construction of both a phosphogypsum treatment plant and CLM(TM) production plant in Israel. These initial agreements provide for licensing fees aggregating $8 million, payable over a two-year period, of which $800,000 has already been received, in addition to royalties on Processed Phosphogypsum and CLM(TM) disposed of or sold by the licensees. See "Business -- Sales and Marketing," "Business -- Licensing Arrangements" and "Notes to Financial Statements." The Company was incorporated in Cyprus in April 1995. The Company maintains offices at 20 East 63rd Street, New York, New York 10021, and its telephone number is (212) 308-7420. It also maintains offices at 31 Akti Moutsopoulou, 185-34 Piraeus, Greece. THE OFFERING SECURITIES OFFERED BY THE COMPANY................. 2,000,000 Units, each Unit consisting of one Ordinary Share and one Warrant. Each Warrant is exercisable at any time commencing one year after and ending on the fifth anniversary of the date of this Prospectus to purchase one Ordinary Share for $6.00, subject to adjustment. Commencing two years from the date hereof, the Warrants are subject to redemption by the Company at a redemption price of $.05 per Warrant, in certain circumstances, upon 30 days' written notice. See "Description of Securities." SECURITIES REGISTERED CONCURRENTLY BY SELLING SECURITYHOLDERS......... 250,000 Selling Securityholder Warrants and 250,000 Ordinary Shares issuable upon the exercise of the Selling Securityholder Warrants. See "Concurrent Offering." ORDINARY SHARES OUTSTANDING (1) BEFORE THE OFFERING:.... 5,000,000 shares AFTER THE OFFERING:..... 7,000,000 shares USE OF PROCEEDS....... To repay $500,000 principal amount of 12% promissory notes (the "Bridge Notes") issued in the Bridge Financing, together with accrued interest; for marketing, research and development, working capital and general corporate purposes. See "Use of Proceeds" and "Capitalization -- Bridge Financing." PROPOSED NASDAQ SYMBOLS: ORDINARY SHARES......... CWTLF CLASS A WARRANTS........ CWTWF RISKS.................... An investment in the Units, Ordinary Shares and Warrants involves a high degree of risk, and prospective investors should rea carefully the section of this Propectus entitled "Risk Factors." - ----------- (1) Excludes (i) 2,000,000 Ordinary Shares issuable upon exercise of the Warrants included in the Units offered hereby, (ii) 600,000 shares issuable upon the exercise of the Underwriters' over-allotment option and underlying Warrants, (iii) 300,000 Ordinary Shares issuable upon exercise of the Representative's Warrant and underlying Warrants, (iv) 250,000 Ordinary Shares issuable upon exercise of the Selling Securityholder Warrants, and (v) 500,000 Ordinary Shares reserved for issuance upon the exercise of options issuable under the Company's 1998 Stock Option Plan (the "1998 Plan"), under which no options have been granted to date. See "Capitalization" and "Management -- 1998 Stock Option Plan."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1998/CIK0001055286_rock_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001055286_rock_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c17f808a0c5c2eebabb4e67d3095f706593b88d5
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1998/CIK0001055286_rock_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements and notes to financial statements appearing elsewhere in this Prospectus. Unless the context indicates otherwise, all references in this Prospectus to "Rock" or the "Company" refer to Rock Financial Corporation. Except as otherwise specified, all information in this Prospectus (i) assumes no exercise of the Underwriters' over-allotment option (see "Underwriting"), and (ii) gives effect to a 1,118.31805-for-one stock split effected January 8, 1997. THE COMPANY Rock is a specialty finance company marketing conventional and sub-prime debt consolidation and home financing loans, secured primarily by first or second mortgages on one- to four-family, owner-occupied residences. The Company originates loans through 26 stores and branches, one marketing center and one call center. "Stores" are Fresh Start(TM) division locations and "branches" are Conventional Mortgage Lending division locations. Founded in 1985 by its current Chief Executive Officer and Chairman of the Board, Daniel Gilbert, Rock originates 100% of its loans through its retail operations, marketing its loans directly to consumers. The Company uses proprietary marketing methods and technology to increase its market penetration. Rock seeks to provide "world class" service to its customers, thereby encouraging them to return for future loans and refer others to Rock for loans. "World Class" service is Rock's commitment to provide superior customer service, to be responsive to customer needs and to make applying for and closing each loan as quick, efficient and convenient for the customer as possible. The Company also focuses on recruiting, developing and motivating talented people, recruited from inside and outside the consumer finance industry, to implement its business strategies. Rock believes it is creating growing brand identities and a retail franchise that will sustain its loan origination efforts. As a retail originator of loans, Rock earns a portion of its revenues from origination points and processing fees charged to its customers. Rock does not currently securitize its loans. Rather, it sells its loans in large bulk and whole loan sales for cash premiums in the secondary market. During 1997, Rock had revenues of $52.1 million, pre-tax income of $11.4 million and pro forma net income of $7.3 million. During 1997, Rock closed $1.2 billion of loans (12,950 loans). As of March 31, 1998, Rock had 770 employees, including 335 loan officers. Rock currently operates through three major divisions. Rock originates loans to individuals with impaired credit characteristics, high levels of debt service to income, unfavorable past credit experience, limited credit history, limited employment history or unverifiable income ("Sub-Prime Home Equity Loans") through its Fresh Start(TM) division. Rock owns the registered trademark for the name "Fresh Start Financial Services(R)" and has applied for a registered service mark for the name "Fresh Start(TM)." Rock originates home equity second mortgage loans to individuals with good credit histories but little or no equity in their homes ("High Loan-to-Value Loans" or "High LTV Loans") through its Specialty Lending division. During 1997, Rock closed $335.3 million of Sub-Prime Home Equity Loans and High LTV Loans (together, "Sub-Prime Loans") (6,232 loans, representing 49% of the total loans closed). Rock also originates loans that generally conform to Federal National Mortgage Association ("FNMA") or Federal Home Loan Mortgage Corporation ("Freddie Mac") underwriting standards, or that generally meet such standards except for maximum loan size guidelines ("Conventional Loans"), through its Conventional Mortgage Lending division. During 1997, Rock closed $867.5 million of Conventional Loans (6,513 loans). Although only 28% of the total loan closings (by dollar volume) were Sub-Prime Loans in 1997, revenues from Sub-Prime Loans equaled 63% of total revenues due to the higher profit margins and interest rates associated with Sub-Prime Loans. In addition, Rock began to increase its government-insured lending operations in 1997, primarily making mortgage loans that meet the underwriting standards for Federal Housing Administration ("FHA") insurance. Rock's business in each division is supported by an infrastructure of sophisticated technology, highly-trained people and specialized marketing, including multimedia advertising and direct marketing operations. To identify potential customers, Rock uses internal and external databases of information regarding past and STORES AND BRANCHES: MICHIGAN Bingham Farms Canton Clinton Township Detroit Fenton Flint Grand Blanc Grand Rapids Hartland Lansing Rochester Saginaw Southgate Ypsilanti OHIO Brook Park Maple Heights Toledo ILLINOIS Broadview Hodgkins Lansing Skokie INDIANA Indianapolis MISSOURI Overland NEVADA Las Vegas TEXAS Bedford Dallas ACTIVE STATES: Florida Georgia Illinois Indiana Kentucky Michigan Missouri Nevada Ohio South Carolina Texas Fresh Start(TM) Loan Center, Hodgkins, Illinois MAP OF UNITED STATES SHOWING LOCATION OF STORES AND BRANCHES potential customers and their needs. Rock then develops proprietary customer profiles which it uses together with information from outside sources to tailor and direct its marketing efforts for each of its divisions. Rock believes that its focused marketing approach makes more efficient use of its marketing resources and leads to a higher marketing success rate than broad indiscriminate marketing aimed at a wide range of consumers. FRESH START(TM) DIVISION Created in 1994, the Fresh Start(TM) division focuses on customers whose borrowing needs are not served by traditional financial institutions due to impaired credit profiles or other factors. Sub-Prime Home Equity Loans are used typically to consolidate debt (such as credit card debt) and to finance home improvements, home purchases and other consumer needs. By originating loans to individuals with impaired credit profiles, Rock is able to charge higher interest rates on its Sub-Prime Home Equity Loans than for its Conventional Loans. The Fresh Start(TM) division originates Sub-Prime Home Equity Loans through its network of retail loan origination stores. The majority of the Fresh Start(TM) stores are located in retail strip malls or office buildings with substantial signage. Rock supports its Fresh Start(TM) store network with an array of marketing, including multimedia advertising campaigns and direct marketing to build local awareness of the Fresh Start(TM) brand name and to grow loan volume within each market. As of March 31, 1998, Rock had 19 Fresh Start(TM) stores, including five stores opened before 1997, nine stores opened during 1997, and five stores opened during January 1998. In addition, in November 1997, Rock opened a pilot marketing center located within a Super Kmart(TM). Rock's Fresh Start(TM) division is using the "Fresh Start(TM)" name, adopted in 1997, in its advertising outside of Michigan and plans to convert all eight of its current Michigan "Boulder Financial" stores to Fresh Start(TM) stores in 1998. Stores that were open before 1997 closed an average of $9.9 million of Sub-Prime Home Equity Loans per store during the first quarter of 1998. Rock believes that its new stores generally mature over a twelve- to eighteen-month time period. The Fresh Start(TM) division closed $269.3 million of Sub-Prime Home Equity Loans (4,196 loans) during 1997. Based on information provided in the National Mortgage News (March 16, 1998), an independent industry publication, Rock believes it was one of the 20 largest retail originators of Sub-Prime Loans in the United States in 1997. SPECIALTY LENDING DIVISION The Specialty Lending division, which commenced its current operations in March 1997, originates High LTV Loans secured primarily by second mortgages and with combined loan-to-value ratios (including the first mortgage balance) of up to 125% of the estimated value of the underlying property. Because High LTV Loans have little, if any, equity cushion (unlike Sub-Prime Home Equity Loans), Rock's underwriting relies principally on the creditworthiness of the customer for repayment. High LTV Loans are typically used to consolidate debt (such as credit card debt) and to finance home improvements, education, and other consumer needs. The Specialty Lending division markets High LTV Loans to consumers through its call center located in Bingham Farms, Michigan. During 1997, Rock closed $66.0 million of High LTV Loans (2,036 loans). As of March 31, 1998, Rock was soliciting High LTV Loans in eight states and was licensed to do business or exempt from licensing in eleven others. Rock uses extensive direct-mail marketing and significant multimedia advertising campaigns to generate inbound call volume into its call center. At various times, outbound telemarketing programs also are launched to targeted lists of consumers. The Specialty Lending division uses a specially trained sales force and relies heavily on technology and systems designed specifically for Rock. Although the current focus of the Specialty Lending division is High LTV Loans, the infrastructure of the division and the call center are designed with the ability to change focus to, or add, other types of loan products as appropriate. Rock Financial, Canton, Michigan (Conventional Mortgage Lending) Fresh Start(TM) Loan Center, Toledo, Ohio CONVENTIONAL MORTGAGE LENDING DIVISION Since its inception in 1985, Rock has originated Conventional Loans through its Conventional Mortgage Lending division. During 1997, Rock originated $867.5 million of Conventional Loans (6,513 loans). Based on a report by Lawyer's Title Insurance Company (June 1997), Rock believes that it is the largest non- depositary-affiliated retail lender of one- to four-family residential mortgage loans in southeast Michigan. The Conventional Mortgage Lending division originates loans through seven branches, all located in southeast Michigan. Conventional Loans generally conform to the underwriting guidelines of FNMA or Freddie Mac, or they generally conform except for maximum loan size, and they are generally made to finance the purchase of a home or to refinance a home mortgage. Over the past 13 years, Rock has used marketing and advertising to create and enhance brand name recognition for the Rock Financial name. In conjunction with its multimedia advertising, Rock coordinates extensive direct marketing campaigns. Rock has developed third-party relationships with real estate brokers, home builders, attorneys, accountants, and financial planners, which generate referral business. Rock is also an approved, unsupervised seller/servicer of FNMA and Freddie Mac Conventional Loans and a Department of Housing and Urban Development ("HUD")-approved lender. BUSINESS STRATEGY Rock's business strategy to sustain its growth in profitability while continuing to build its consumer lending operations includes: (i) enhancing consumer recognition of its "Fresh Start(TM)" and "Rock Financial" brand names in its current markets and establishing brand name recognition in new markets, (ii) increasing the number of Fresh Start(TM) stores and expanding its call center operations into additional states, (iii) expanding the cross-selling of existing products and expanding the products offered through existing distribution channels, (iv) exploring establishing additional distribution channels, (v) providing "world class" service, and thereby distinguishing itself from its competitors, (vi) continuing to invest heavily in technology and marketing, (vii) maintaining consistent underwriting standards, and thereby maintaining secondary market interest in Rock's loans, and (viii) seeking potential acquisition opportunities. Simultaneously with the closing of this Offering, Rock will cease to be taxed as an S corporation under Subchapter S (an "S corporation") of the Internal Revenue Code of 1986, as amended (the "Code"), and will become subject to federal and state income taxation as a C corporation. In connection with the termination of its S corporation status, Rock will pay previously-earned and undistributed taxable income (the "Shareholder Distribution Amount") out of the net proceeds of the Offering to Rock's shareholders existing immediately before the closing of this Offering (the "Existing Shareholders") and an accounting adjustment will be made. See "Termination of S Corporation Status." Rock was incorporated in the State of Michigan on June 21, 1985. Rock's principal executive offices are located at 30600 Telegraph Road, Fourth Floor, Bingham Farms, Michigan 48025. Its telephone number is (248) 540-8000. RECENT DEVELOPMENTS RECENT FINANCIAL RESULTS. The following table sets forth certain unaudited financial information concerning the first quarters of 1997 and 1998. <TABLE> <CAPTION> FOR THE QUARTER ENDED MARCH 31, ------------------------- 1997 1998 -------- -------- (DOLLARS IN THOUSANDS) <S> <C> <C> STATEMENT OF INCOME DATA: Revenues: Net interest margin after provision for loan losses........................................... $ 405 $ 1,247 Loan fees and gains and losses on sale of mortgages........................................ 7,173 17,663 Net gain on sale of marketable securities........... 685 0 Other income........................................ 50 10 -------- -------- 8,313 18,920 -------- -------- Expenses.............................................. 7,192 14,818 -------- -------- Net income.......................................... 1,121 4,102 Pro forma income tax expense(1)....................... 432 1,476 -------- -------- Pro forma net income................................ $ 689 $ 2,626 ======== ======== OPERATING DATA: Principal amount of loan closings: Fresh Start(TM)..................................... $ 48,212 $ 80,495 Specialty Lending................................... 1,118 23,203 Conventional Mortgage Lending....................... 184,147 370,156 Other............................................... 2,955 9,090 -------- -------- Total....................................... $236,432 $482,944 ======== ======== </TABLE> - ------------------------- (1) Pro forma income taxes reflect adjustments for federal and state income taxes as if Rock had been taxed as a C corporation rather than an S corporation. COMPARISON OF FIRST QUARTERS OF 1997 AND 1998. During the first quarter of 1998, Rock closed $482.9 million of loans (5,008 loans), an increase of $246.5 million, or 104.2%, from the $236.4 million of loans (2,090 loans) closed in the first quarter of 1997. Rock's total revenues for the first quarter increased to $18.9 million in 1998, an increase of $10.6 million, or 127.7%, from the first quarter of 1997 and an increase of $1.1 million, or 6.2%, from the fourth quarter of 1997. The increase in revenues is primarily due to (i) an increase of $186.0 million, or 101.0%, in the volume of Conventional Loans closed by Rock in the first quarter of 1998 compared to the first quarter of 1997, and (ii) an increase of $54.4 million, or 110.2%, in the volume of Sub-Prime Loans closed by Rock in the first quarter of 1998 compared to the first quarter of 1997. Total expenses increased from $7.2 million in the first quarter of 1997 to $14.8 million in the first quarter of 1998, an increase of $7.6 million, or 106.0%, primarily due to increased commissions, increased occupancy costs for new stores and increases in general and administrative expenses that fluctuate with increases in volumes of loans closed and numbers of employees. The 13 stores, one marketing center and two branches that have opened since July 1, 1997 (including four stores in the fourth quarter of 1997, five stores in January 1998 and two branches in the second quarter of 1998) contributed significantly less to Rock's revenues and net income and more to its expenses in the first quarter of 1998 than stores that had been in operation for at least twelve months. The stores opened in January 1998 and some of the stores opened late in 1997 operated at a net loss aggregating approximately $1.6 million in the first quarter of 1998. Rock believes that its new stores generally mature over a twelve- to eighteen-month time period. During the first quarter of 1998, Rock sold $23.9 million fewer loans than it closed, including $35.0 million fewer Conventional Loans than it closed and $11.1 million more Sub-Prime Loans than it closed. As a result of increased revenues, proportionally lower expenses and lower bonuses, pre-tax income increased 265.9%, from $1.1 million in the first quarter of 1997 to $4.1 million in the first quarter of 1998. Rock's pro forma net income increased from $0.7 million in the first quarter of 1997 to $2.6 million in the first quarter of 1998, an increase of $1.9 million, or 266.2%. See "Summary Financial Data."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001055458_aztec_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001055458_aztec_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND NOTES THERETO, THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF THE COMPANY AND THE NOTES THERETO, AND THE FINANCIAL STATEMENTS OF CERTAIN COMPANIES ACQUIRED BY THE COMPANY AND THE NOTES THERETO, APPEARING ELSEWHERE IN THE PROSPECTUS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. WHEN USED HEREIN, THE WORDS "ANTICIPATE," "BELIEVE," "ESTIMATE," "EXPECT," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS" AND "BUSINESS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED THE INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED. UNLESS OTHERWISE INDICATED, ALL REFERENCES TO "COMMON STOCK OUTSTANDING AFTER THE TECHNOLOGY DISTRIBUTION" ON A PRO FORMA BASIS SHALL MEAN 21,937,902 SHARES OF COMMON STOCK. AS USED IN THIS PROSPECTUS, UNLESS THE CONTEXT OTHERWISE REQUIRES, THE TERMS "AZTEC" AND THE "COMPANY" REFER TO AZTEC TECHNOLOGY PARTNERS, INC. AND INCLUDE ALL OF ITS SUBSIDIARIES AND THEIR RESPECTIVE PREDECESSORS AND SUBSIDIARIES. THE COMPANY Aztec is a single-source provider of a broad range of information technology ("IT") business solutions. Aztec currently consists of ten companies who have been in business for an average of over 15 years, with a history of superior client service. These companies offer complementary IT solutions, which allow Aztec to be a "one-stop" IT solutions provider in the Northeast region of the United States, while providing personalized services to its clients on a regional and local basis. Aztec's clients include middle market and Fortune 1000 companies in a wide range of industries (including communications, health care, financial services, government, manufacturing, pharmaceuticals, professional services, and technology). In 1997, Aztec, which employs over 1,000 people (approximately 65% of whom are technical professionals), provided services to over 2,000 customers. For the fiscal year ended April 26, 1997, Aztec had revenues of $136.3 million and net income of $6.7 million. Over the same period of time and taking into account all purchase acquisitions since May 1, 1996, pro forma revenues would have been $228.9 million and pro forma net income would have been $9.5 million. Aztec was initially formed in October 1996 with the acquisition of Bay State Computer Group ("Bay State") by U.S. Office Products Company ("U.S. Office Products"). Since that time, under the leadership of Aztec's current Chairman and Chief Executive Officer, James E. Claypoole, nine complementary regional IT solutions companies have been acquired. These companies are: (i) Aztec International ("Aztec International"); (ii) Compel Corporation ("Compel"); (iii) Digital Network Associates, Inc. ("Digital Network Associates"); (iv) Entra Computer Corp. ("Entra"); (v) Fortran Corp. ("Fortran"); (vi) Mahon Communications Corporation ("Mahon"); (vii) Office Equipment Service, Inc. ("Office Equipment Service"); (viii) Professional Computer Solutions, Inc. ("Professional Computer Solutions"); and (ix) Professional Network Services, Inc. ("Professional Network Services"). The Company intends to continue to pursue growth through targeted strategic acquisitions. Aztec's broad range of complementary IT business solutions includes: (i) consulting and engineering services; (ii) systems and network design and implementation services; (iii) software development and implementation services; (iv) IT support and operational services; and (v) telephony design and integration services. Aztec is currently providing this broad range of services in the Northeast region of the United States, and certain of these services in the other regions of the United States. Aztec intends to extend its comprehensive services offerings to the other regions of the United States. Aztec is dedicated to delivering IT services and support for all the major technology needs of its clients, which include a variety of operating systems (NT, Unix, VMS, Netware, SunOS, Digital Open VMS, and OS/2) on a variety of hardware platforms (Intel, Sun, HP, and Digital). In addition, Aztec supports its clients' hardware and software needs related to the World Wide Web and high-end telephony services. With the rapid evolution of technology, the market for IT solutions has grown significantly. Based on industry sources that Aztec believes are reliable, Aztec believes that the United States market for outsourced IT services is expected to grow from $13 billion in 1996 to approximately $24 billion in 2001. Although companies recognize the importance of IT services to their business, they are often unable to keep pace with the rate of technological change without outsourcing their IT needs. This trend towards outsourcing has been compounded by the scarcity of technical professionals in the United States, and has driven the growth of the outsourced IT solutions industry. Aztec's objective is to service its clients' strategic business needs by becoming their sole IT solutions provider. Aztec intends to grow through a combination of targeted strategic acquisitions and internal growth. Aztec's acquisition strategy is to extend its range of services to the regions outside of the Northeast by acquiring existing, profitable businesses, rather than start-up operations. Aztec's internal growth strategies include (i) capitalizing on existing cross-selling opportunities and (ii) expanding its IT solutions offerings. Aztec plans to encourage and manage cross-selling through a Company-developed proprietary software communication tool that will permit it to review and manage sales leads generated at any level of Aztec's operations, reinforced by compensation incentives. THE TECHNOLOGY DISTRIBUTION Prior to the completion of this Offering, shares of Aztec Common Stock are being distributed to the stockholders of record as of 5:00 p.m. EDT on June 9, 1998 of U.S. Office Products (the "Technology Distribution"). U.S. Office Products is spinning off Aztec as part of a comprehensive restructuring plan adopted by the U.S. Office Products Board of Directors, including modifications the Board of Directors has made since first adopting this plan (as so modified, the "Strategic Restructuring Plan"). As part of the Strategic Restructuring Plan, U.S. Office Products is spinning off the shares of Aztec and three other companies (the "Spin-Off Companies") that will conduct U.S. Office Products' current technology solutions, print management, educational supplies and corporate travel services businesses. (The spin-offs are collectively referred to as the "Distributions.") The effective time of the Distributions was 11:59 p.m. EDT on June 9, 1998 (the "Distribution Date"). See "The Spin-Offs From U.S. Office Products." THE OFFERING <TABLE> <S> <C> Common Stock Offered by Aztec................... 4,200,000 shares(1) Common Stock to be Outstanding after this Offering and the Technology Distribution...... 26,137,902 shares(1)(2) Use of Proceeds................................. To fund future acquisitions, to repay $4.3 million of indebtedness to BankBoston, N.A., and for general corporate purposes. See "Use of Proceeds." Nasdaq National Market Symbol................... "AZTC" </TABLE> - ------------------ (1) Excludes 630,000 shares of Common Stock subject to the Underwriters' over-allotment option. (2) Excludes shares of Common Stock reserved for issuance upon exercise of options. See "Management--Replacement of Outstanding U.S. Office Products Options" and "--1998 Stock Incentive Plan." SUMMARY FINANCIAL DATA (1) (In thousands, except per share data) <TABLE> <CAPTION> FISCAL YEAR ENDED NINE MONTHS ENDED APRIL 26, -------------------------- -------------------- FISCAL YEAR ENDED MARCH 31, PRO ------------------------------------------ FORMA JANUARY 25, JANUARY 24, 1993 1994 1995 1996 1997 1997 (2) 1997 1998 --------- --------- --------- --------- --------- --------- ------------ ------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF INCOME DATA: Revenues....................... $ 46,152 $ 58,979 $ 88,999 $ 114,055 $ 136,278 $ 228,912 $ 101,295 $ 142,512 Cost of revenues............... 34,121 43,630 65,858 84,113 102,129 169,150 76,049 107,895 --------- --------- --------- --------- --------- --------- ------------ ------------ Gross profit................... 12,031 15,349 23,141 29,942 34,149 59,762 25,246 34,617 Selling, general and administrative expenses...... 10,139 11,218 14,942 20,510 21,525 39,134 15,637 22,951 Goodwill amortization expense.. 1,651 414 Non-recurring acquisition costs........................ 2,274 2,274 1,906 --------- --------- --------- --------- --------- --------- ------------ ------------ Operating income............... 1,892 4,131 8,199 9,432 10,350 16,703 7,703 11,252 Interest expense............... 412 297 331 420 324 400 310 169 Interest income................ (75) (54) (118) (416) (168) (169) (167) Other (income) expense......... (77) (75) (111) (964) (53) (579) 234 (14) --------- --------- --------- --------- --------- --------- ------------ ------------ Income before provision for income taxes................. 1,632 3,963 8,097 10,392 10,247 16,882 7,328 11,264 Provision for income taxes (4).......................... 210 232 401 750 3,524 7,428 1,771 4,692 --------- --------- --------- --------- --------- --------- ------------ ------------ Net income..................... $ 1,422 $ 3,731 $ 7,696 $ 9,642 $ 6,723 $ 9,454 $ 5,557 $ 6,572 --------- --------- --------- --------- --------- --------- ------------ ------------ --------- --------- --------- --------- --------- --------- ------------ ------------ Per share amounts: Basic........................ $ 0.16 $ 0.42 $ 0.84 $ 0.71 $ 0.37 $ 0.43 $ 0.32 $ 0.29 --------- --------- --------- --------- --------- --------- ------------ ------------ --------- --------- --------- --------- --------- --------- ------------ ------------ Diluted...................... $ 0.16 $ 0.42 $ 0.84 $ 0.71 $ 0.36 $ 0.43 $ 0.32 $ 0.28 --------- --------- --------- --------- --------- --------- ------------ ------------ --------- --------- --------- --------- --------- --------- ------------ ------------ Weighted average shares outstanding: Basic........................ 8,852 8,852 9,112 13,509 18,005 21,938(5) 17,196 22,952 Diluted...................... 8,852 8,852 9,141 13,675 18,352 21,938(5) 17,565 23,437 <CAPTION> PRO PRO PRO FORMA FORMA FORMA AS ADJUSTED JANUARY 25, JANUARY 24, JANUARY 24, 1997 (2) 1998 (2) 1998(3) ------------ ------------ ------------ <S> <C> <C> <C> STATEMENT OF INCOME DATA: Revenues....................... $ 172,518 $ 191,074 $ 191,074 Cost of revenues............... 127,875 141,631 141,631 ------------ ------------ ------------ Gross profit................... 44,643 49,443 49,443 Selling, general and administrative expenses...... 28,876 31,235 31,235 Goodwill amortization expense.. 1,239 1,239 1,239 Non-recurring acquisition costs........................ 1,906 ------------ ------------ ------------ Operating income............... 12,622 16,969 16,969 Interest expense............... 300 300 41 Interest income................ Other (income) expense......... (232) (252) (252) ------------ ------------ ------------ Income before provision for income taxes................. 12,554 16,921 17,180 Provision for income taxes (4).......................... 5,524 7,445 7,559 ------------ ------------ ------------ Net income..................... $ 7,030 $ 9,476 $ 9,621 ------------ ------------ ------------ ------------ ------------ ------------ Per share amounts: Basic........................ $ 0.32 $ 0.43 $ 0.43 ------------ ------------ ------------ ------------ ------------ ------------ Diluted...................... $ 0.32 $ 0.43 $ 0.43 ------------ ------------ ------------ ------------ ------------ ------------ Weighted average shares outstanding: Basic........................ 21,938(5) 21,938(5) 22,305(6) Diluted...................... 21,938(5) 21,938(5) 22,305(6) </TABLE> <TABLE> <CAPTION> JANUARY 24, 1998 MARCH 31, --------- --------------------------------- APRIL 30, APRIL 26, 1993 1994 1995 1996 1997 ACTUAL --------- ----------- --------- ----------- ----------- --------- <S> <C> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Working capital............................................. $ 4,253 $ 5,623 $ 10,669 $ 8,664 $ 13,268 $ 31,848 Total assets................................................ 14,890 16,423 28,106 33,945 37,311 142,347 Long-term debt, less current portion........................ 461 461 1,524 799 167 386 Long-term payable to U.S. Office Products................... 4,786 9,957 Stockholder's equity........................................ 5,382 6,745 11,062 10,497 11,626 90,119 <CAPTION> PRO FORMA PRO FORMA (7) AS ADJUSTED (7) -------------- --------------- <S> <C> <C> BALANCE SHEET DATA: Working capital............................................. $ 23,869 $ 68,837 Total assets................................................ 134,368 179,336 Long-term debt, less current portion........................ 4,696 386 Long-term payable to U.S. Office Products................... Stockholder's equity........................................ 87,787 137,065 </TABLE> - ------------------ (1) The historical financial information of the businesses that were acquired in business combinations accounted for under the pooling-of-interests method (the "Pooled Companies") have been combined on a historical cost basis in accordance with generally accepted accounting principles ("GAAP") to present this financial data as if the Pooled Companies had always been members of the same operating group. The financial information of the businesses acquired in the business combinations accounted for under the purchase method (the "Purchased Companies") is included from the dates of their respective acquisitions. The pro forma financial data reflect acquisitions completed by Aztec through May 1, 1998. See Note 4 of the Company's Notes to Consolidated Financial Statements for a description of the number and accounting treatment of the acquisitions by the Company. (2) Gives effect to the Technology Distribution and the purchase acquisitions completed by Aztec since May 1, 1996 as if all such transactions had been consummated on May 1, 1996. The pro forma statement of income data are not necessarily indicative of the operating results that would have been achieved had these events actually then occurred and should not be construed as representative of future operating results. (3) Adjusted to give effect to the sale by the Company of 4,200,000 shares of Common Stock offered hereby (assuming an initial public offering price of $13.00 per share, which is equal to the midpoint of the range set forth in the preliminary prospectus dated May 18, 1998) after deducting underwriting discounts and estimated offering expenses payable to Aztec and the use of estimated net proceeds therefrom. Aztec expects that the initial public offering price in the Offering will be determined after the close of markets on the date of this Information Statement/Prospectus. There can be no assurance that the initial public offering price will be set at that time, that the price will be within the range set forth in the preliminary prospectus, or that the Offering will be completed. Information regarding the initial public offering price, and "as adjusted" pro forma financial statements based on that price, will be set forth in the final prospectus related to the Offering, which will be publicly available within two business days after the price is determined. See "Additional Information."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001055564_workflow_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001055564_workflow_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS OF WORKFLOW MANAGEMENT, INC. ("THE COMPANY" OR "WORKFLOW MANAGEMENT") AND NOTES THERETO, THE UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES THERETO, AND THE FINANCIAL STATEMENTS OF CERTAIN COMPANIES ACQUIRED BY THE COMPANY AND THE NOTES THERETO, APPEARING ELSEWHERE IN THE PROSPECTUS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. WHEN USED HEREIN, THE WORDS "ANTICIPATE," "BELIEVE," "ESTIMATE," "EXPECT," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES: (I) CONSUMMATION OF THE TRANSACTIONS DESCRIBED UNDER "THE SPIN-OFFS FROM U.S. OFFICE PRODUCTS;" (II) AN INITIAL PUBLIC OFFERING PRICE OF $13.00 PER SHARE OF COMMON STOCK (REPRESENTING THE MIDPOINT OF THE PRICE RANGE); (III) A DISTRIBUTION RATIO OF ONE SHARE OF COMMON STOCK FOR EVERY 7.5 SHARES OF U.S. OFFICE PRODUCTS COMPANY'S ("U.S. OFFICE PRODUCTS") COMMON STOCK (THE "DISTRIBUTION RATIO"); AND (IV) THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED. APPROXIMATELY 14,625,268 SHARES OF COMMON STOCK ARE BEING DISTRIBUTED TO STOCKHOLDERS OF U.S. OFFICE PRODUCTS. UNLESS THE CONTEXT REQUIRES OTHERWISE, ALL REFERENCES TO THE COMPANY (OR WORKFLOW MANAGEMENT) INCLUDE SFI OF DELAWARE, LLC ("SFI"), SFI OF PUERTO RICO INC., HANO DOCUMENT PRINTERS, INC. ("HANO"), UNITED ENVELOPE, LLC ("UE"), REX ENVELOPE CO., INC. ("REX"), HUXLEY ENVELOPE CORP. ("HUXLEY"), POCONO ENVELOPE CORP. ("POCONO"), ASTRID OFFSET CORP. ("ASTRID") (UE, REX, HUXLEY AND POCONO ARE COLLECTIVELY REFERRED TO HEREAFTER AS "UNITED") AND BUSINESSES OF 1186202 ONTARIO LIMITED ("1186202 ONTARIO"), OF WHICH 3303471 CANADA LIMITED ("3303471 CANADA") IS A DIRECT SUBSIDIARY AND DATA BUSINESS FORMS LIMITED ("DBF") IS AN INDIRECT SUBSIDIARY, WHOLLY-OWNED DIRECT OR INDIRECT SUBSIDIARIES OF THE COMPANY, AS WELL AS ALL PREDECESSORS THEREOF. THE COMPANY Workflow Management is an integrated graphic arts company providing documents, envelopes and commercial printing to more than 22,000 businesses in the United States and Canada. The Company also offers various print and facilities management services, which allow customers to realize cost savings by outsourcing non-core operations, as well as design services and workflow analysis. Drawing on its position in the industry and its experience in completing acquisitions, the Company seeks to become a leading consolidator in the highly-fragmented graphic arts industry. In the last ten years, the Company's senior management team successfully completed the acquisition of 16 companies for Standard Forms, Inc., the predecessor to SFI. Since the acquisition of SFI and Hano by the Print Management Division of U.S. Office Products in January 1997, that same senior management team has continued its acquisition strategy by successfully buying six additional companies. As a result, the enterprise has grown from SFI's revenues and operating income of $115.1 million and $6.7 million, respectively, for the year ended December 31, 1996, to the Company's revenues and operating income of $345.4 million and $17.1 million, respectively, for the twelve months ended January 24, 1998. The Company currently has over 2,000 employees and has 17 manufacturing facilities in seven states and five Canadian Provinces, 26 distribution centers, eight print-on-demand centers and 59 sales offices. Workflow Management intends to continue to pursue its aggressive acquisition strategy to extend its geographic scope and market penetration, and to increase sales to existing customers by cross-selling documents, envelopes and commercial printing. Workflow Management offers a full range of printed products which are either manufactured by the Company or procured from one of the Company's more than 3,500 vendors. The Company's product line includes: (i) documents, <PAGE> such as custom invoices, purchase orders, checks and labels; (ii) envelopes, including specialty envelopes for uses such as credit card solicitations, annual reports, direct mail and airline tickets; and (iii) commercial printing, such as product and corporate brochures, personalized direct mail literature, catalogs, directories and digital imaging. The Company's manufacturing base, combined with its extensive vendor network and distribution capability, gives the Company broad flexibility to meet customers' demands for printed products. For the nine months ended January 24, 1998, approximately 55.2% of its revenues were derived from products purchased by the Company for distribution, and 44.8% were derived from products manufactured by the Company. Many of the Company's customers are attempting to reduce their overhead and direct costs by focusing on core competencies and by outsourcing non-core operations to specialists. The Company provides customers with print management services that are designed to control the costs of procuring, storing and using graphic arts in their business operations. As an outsourcing specialist for print management services, Workflow Management enables its customers to reduce costs and improve control by soliciting competitive bids, establishing more efficient inventory levels and order quantities, and consolidating requisitions, production and deliveries. The Company also performs design and procurement services for its customers. In order to meet growing demand, Workflow Management plans to continue to expand its product lines and services, and to promote its print and facilities management services, which allow customers to outsource the management of print products. The Company believes its proprietary technology and systems are central to its ability to capitalize effectively on industry outsourcing trends and provide it with a significant competitive advantage. The Company has developed its GetSmart and Informa transaction and information systems to support these services and the Company's sales of print products. The GetSmart system provides transaction, reporting and control capabilities to the Company and its customers in the United States. The Informa system supports requisition, distribution and imaging services with a control database and a variety of customer interfaces for its customers in Canada, including the Imagenet Document Manager ("Imagenet") that provides access via the world wide web. In addition, using the GetSmart and the Informa systems, the Company has the flexibility to integrate future acquisitions and increase its customer base rapidly and seamlessly. In addition, with its technology platform, Workflow Management believes that it is able to position itself as a premier technology deployer, thus increasing the Company's attractiveness to potential acquisition targets. The Company is granting a license to U.S. Office Products for the Company's Imagenet technology effective on the Distribution Date (as hereafter defined). See "Certain Transactions." The document, envelope and commercial printing industries that comprise the graphic arts businesses are highly fragmented, and the Company believes they are ripe for consolidation. The Company believes that (i) the market for documents was approximately $12.7 billion in 1996, up from $11.1 billion in 1993; (ii) while the U.S. market for envelopes decreased from $3.0 billion in 1989 to $2.6 billion in 1992, the market has since increased to approximately $3.0 billion in 1996; and (iii) the general commercial segment of the U.S. printing industry shipped more than $88.0 billion of products in 1996, an increase of 8% over 1995. Furthermore, management believes there are approximately 200 envelope manufacturers in the U.S., and that the commercial printing industry is composed of approximately 25,000 printing plants, 70% of which have fewer than 10 employees. The Company intends to capitalize on consolidation opportunities primarily in three business lines of the North American graphic arts industry: United States printed products, United States envelopes and Canadian printed products. The Company will focus on acquisition opportunities that complement and complete its product line and service offerings. The Company believes that the greatest consolidation opportunities exist among distribution companies in the graphic arts industry. The Company plans to offer the customers of its newly acquired companies its GetSmart and Informa systems and its full offering of print and facilities management services. Workflow Management also plans to grow internally by developing new products, cross-selling the full complement of the Company's products and services to the customers of its subsidiaries (which previously had limited product offerings) and implementing its transaction and information systems throughout the Company. 2 <PAGE> Workflow Management was incorporated in the state of Delaware on February 13, 1998. The principal executive offices of the Company are located at 240 Royal Palm Way, Palm Beach, Florida 33480. Workflow Management's telephone number is (561) 659-6551. WORKFLOW DISTRIBUTION Prior to the completion of this Offering, 14,625,268 shares of Common Stock are being distributed to the stockholders of record as of 5:00 p.m. EDT on June 9, 1998 of U.S. Office Products (the "Workflow Distribution"). U.S. Office Products is spinning off Workflow Management as part of a comprehensive restructuring plan adopted by the U.S. Office Products Board of Directors, including modifications the Board of Directors has made since first adopting this plan (as so modified, the "Strategic Restructuring Plan") in which U.S. Office Products is spinning off the shares of the four companies (the "Spin-Off Companies") that conduct U.S. Office Products' current print management, technology solutions, educational supplies and corporate travel services businesses. (These spin-offs are collectively referred to as the "Distributions.") The effective time of the Distributions is will be 11:59 p.m. EDT on June 9, 1998 (the "Distribution Date"). See "The Spin-Offs From U.S. Office Products." THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Company....................................... 2,500,000 shares(1) Common Stock to be Outstanding after the Offering and the Workflow 17,125,268 shares(1)(2) Distribution............................................................ Use of Proceeds........................................................... For working capital and general corporate purposes, including future acquisitions Nasdaq National Market Symbol............................................. WORK </TABLE> - ------------------ (1) Excludes 375,000 shares of Common Stock subject to the Underwriters' over-allotment option. (2) Excludes shares of Common Stock reserved for issuance upon the exercise of stock options exercisable upon consummation of the Workflow Distribution. See "Management--Replacement of Outstanding U.S. Office Products Options" and "Management--1998 Stock Incentive Plan." 3 <PAGE> SUMMARY FINANCIAL DATA (1) (In thousands, except per share data) <TABLE> <CAPTION> FISCAL YEAR ENDED NINE MONTHS ENDED APRIL 26, ------------------------ FOUR MONTHS -------------------- YEAR ENDED DECEMBER 31, ENDED PRO ------------------------------------------ APRIL 30, FORMA JANUARY 25, JANUARY 24, 1992 1993 1994 1995(2) 1996 1997 1997(3) 1997 1998 --------- --------- --------- --------- ------------ --------- --------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF INCOME DATA: Revenues.................. $ 80,731 $ 121,463 $ 154,193 $ 309,426 $ 114,099 $ 327,381 $ 342,335 $ 239,751 $ 257,777 Cost of revenues.......... 57,054 88,255 114,885 234,959 82,998 236,340 244,475 172,869 190,482 --------- --------- --------- --------- ------------ --------- --------- ----------- ----------- Gross profit.............. 23,677 33,208 39,308 74,467 31,101 91,041 97,860 66,882 67,295 Selling, general and administrative expenses................ 20,800 27,683 32,020 62,012 22,485 70,949 75,568 51,735 53,083 Non-recurring acquisition costs................... 5,006 5,006 2,902 --------- --------- --------- --------- ------------ --------- --------- ----------- ----------- Operating income.......... 2,877 5,525 7,288 12,455 8,616 15,086 17,286 12,245 14,212 Interest expense.......... 904 1,328 2,048 5,370 1,676 4,561 3,647 3,910 1,665 Interest income........... (81) (116) (18) (25) (21) (9) Other (income) expense.... 366 511 186 62 (151) 632 408 610 (205) --------- --------- --------- --------- ------------ --------- --------- ----------- ----------- Income before provision for (benefit from) income taxes and extraordinary items..... 1,688 3,802 5,054 7,023 7,109 9,918 13,231 7,746 12,761 Provision for (benefit from) income taxes(5)... 153 260 379 (33) 1,351 3,690 5,425 2,249 5,212 --------- --------- --------- --------- ------------ --------- --------- ----------- ----------- Income before extraordinary items..... 1,535 3,542 4,675 7,056 5,758 6,228 $ 7,806 5,497 7,549 --------- --------- Extraordinary items(6).... 700 798 --------- --------- --------- --------- ------------ --------- ----------- ----------- Net income................ $ 1,535 $ 3,542 $ 4,675 $ 6,356 $ 5,758 $ 5,430 $ 5,497 $ 7,549 --------- --------- --------- --------- ------------ --------- ----------- ----------- --------- --------- --------- --------- ------------ --------- ----------- ----------- Per share amounts: Basic: Income from before extraordinary items............... $ 0.26 $ 0.60 $ 0.77 $ 0.90 $ 0.56 $ 0.52 $ 0.53(7) $ 0.48 $ 0.49 --------- --------- Extraordinary items... 0.09 0.07 --------- --------- --------- --------- ------------ --------- ----------- ----------- Net income............ $ 0.26 $ 0.60 $ 0.77 $ 0.81 $ 0.56 $ 0.45 $ 0.48 $ 0.49 --------- --------- --------- --------- ------------ --------- ----------- ----------- --------- --------- --------- --------- ------------ --------- ----------- ----------- Diluted................. Income from before extraordinary items............... $ 0.26 $ 0.60 $ 0.77 $ 0.88 $ 0.55 $ 0.51 $ 0.53(7) $ 0.47 $ 0.48 --------- --------- Extraordinary items... 0.09 0.07 --------- --------- --------- --------- ------------ --------- ----------- ----------- Net income............ $ 0.26 $ 0.60 $ 0.77 $ 0.79 $ 0.55 $ 0.44 $ 0.47 $ 0.48 --------- --------- --------- --------- ------------ --------- ----------- ----------- --------- --------- --------- --------- ------------ --------- ----------- ----------- Weighted average shares outstanding:............ Basic................... 5,901 5,901 6,075 7,875 10,333 12,003 14,625(8) 11,464 15,301 Diluted................. 5,901 5,901 6,094 8,003 10,547 12,235 14,625(8) 11,710 15,625 <CAPTION> PRO PRO PRO FORMA FORMA FORMA JANUARY 24, JANUARY 25, JANUARY 24, 1998, AS 1997(3) 1998(3) ADJUSTED(4) ----------- ----------- ----------- <S> <C> <C> <C> STATEMENT OF INCOME DATA: Revenues.................. $ 250,820 $ 263,960 $ 263,960 Cost of revenues.......... 178,983 193,104 193,104 ----------- ----------- ----------- Gross profit.............. 71,837 70,856 70,856 Selling, general and administrative expenses................ 55,472 55,095 55,095 Non-recurring acquisition costs................... 2,902 ----------- ----------- ----------- Operating income.......... 13,463 15,761 15,761 Interest expense.......... 2,735 2,735 1,011 Interest income........... Other (income) expense.... 445 (333) (333) ----------- ----------- ----------- Income before provision for (benefit from) income taxes and extraordinary items..... 10,283 13,359 15,083 Provision for (benefit from) income taxes(5)... 4,216 5,477 6,184 ----------- ----------- ----------- Income before extraordinary items..... $ 6,067 $ 7,882 $ 8,899 ----------- ----------- ----------- ----------- ----------- ----------- Extraordinary items(6).... Net income................ Per share amounts: Basic: Income from before extraordinary items............... $ 0.41(7) $ 0.54(7) $ 0.52(7) ----------- ----------- ----------- ----------- ----------- ----------- Extraordinary items... Net income............ Diluted................. Income from before extraordinary items............... $ 0.41(7) $ 0.54(7) $ 0.52(7) ----------- ----------- ----------- ----------- ----------- ----------- Extraordinary items... Net income............ Weighted average shares outstanding:............ Basic................... 14,625(8) 14,625(8) 17,125(9) Diluted................. 14,625(8) 14,625(8) 17,125(9) </TABLE> <TABLE> <CAPTION> JANUARY 24, 1998 --------- DECEMBER 31, ------------------------------------------ APRIL 30, APRIL 26, 1992 1993 1994 1995 1996 1997 ACTUAL --------- --------- --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Working capital............................. $ 6,005 $ 7,264 $ 8,583 $ 20,127 $ 23,378 $ 16,910 $ 25,370 Total assets................................ 26,543 48,374 51,357 120,630 117,949 125,108 127,105 Short-term debt payable to U.S. Office Products.................................. 23,622 17,658 Long-term debt, less current portion........ 4,632 9,632 7,355 28,812 28,108 6,034 5,498 Long-term debt payable to U.S. Office Products.................................. 561 1,905 Stockholders' equity........................ 7,459 11,675 12,889 24,719 29,120 47,780 55,979 <CAPTION> PRO FORMA PRO AS ADJUSTED FORMA(10) (4) ----------- ----------- <S> <C> <C> BALANCE SHEET DATA: Working capital............................. $ 43,958 $ 43,958 Total assets................................ 143,073 143,073 Short-term debt payable to U.S. Office Products.................................. Long-term debt, less current portion........ 40,638 11,913 Long-term debt payable to U.S. Office Products.................................. Stockholders' equity........................ 55,979 84,704 </TABLE> - ------------------ (1) The historical financial information of the businesses that were acquired in business combinations accounted for under the pooling-of-interests method (the "Pooled Companies") has been combined on a historical cost basis in accordance with generally accepted accounting principles ("GAAP") to present this financial data as if the Pooled Companies had always been members of the same operating group. The financial information of the businesses acquired in the business combinations accounted for under the purchase method (the "Purchased Companies") is included from the dates of their respective acquisitions. The pro forma financial information reflects completed acquisitions through May 1, 1998. See Note 4 of the Company's Notes to Consolidated Financial Statements for a description of the number and accounting treatment of the acquisitions by the Company. (2) The results for the year ended December 31, 1995 include the results of DBF, one of the Pooled Companies, from its date of incorporation on February 8, 1995. (3) Gives effect to the Workflow Distribution and the purchase acquisitions completed by the Company since May 1, 1996 as if all such transactions had been made on May 1, 1996. The pro forma statement of income data are not necessarily indicative of the operating results that would have been achieved had these events actually then occurred and should not be construed as representative of future operating results. (4) Adjusted to give effect to the sale by the Company of 2,500,000 shares of Common Stock offered hereby at the assumed initial public offering price and the anticipated application of the estimated net proceeds therefrom. See "Use of Proceeds." (5) Certain Pooled Companies were organized as subchapter S corporations prior to the closing of their acquisitions by the Company and, as a result, the federal tax on their income was the responsibility of their individual stockholders. Accordingly, the specific Pooled Companies provided no federal income tax expense prior to these acquisitions by the Company. (6) Extraordinary items represent the losses associated with the early terminations of credit facilities at one Pooled Company, net of the related income tax benefits. (7) Pro forma net income per share is pro forma income before extraordinary items per share. (8) For calculation of the pro forma weighted average shares outstanding for the fiscal year ended April 26, 1997 and for the nine months ended January 24, 1998 and January 25, 1997, see Note 2(k) of Notes to Pro Forma Combined Financial Statements included herein. (9) For calculation of pro forma as adjusted weighted average shares outstanding for the nine months ended January 24, 1998, see Note 2(m) of Notes to Pro Forma Combined Financial Statements included herein. (10) Gives effect to the Workflow Distribution and the purchase acquisition of Astrid as if such transactions had been made on January 24, 1998. The pro forma balance sheet data are not necessarily indicative of the financial position that would have been achieved had these events actually then occurred and should not be construed as representative of future financial position. 4 <PAGE>
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+SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed financial and other information contained elsewhere in this Prospectus. YORKSHIRE POWER GROUP LIMITED Yorkshire Group was incorporated as a private company with limited liability under the laws of England and Wales in July 1996 and is indirectly owned by American Electric Power Company, Inc. ("AEP") and New Century Energies, Inc. ("NCE" and, together with AEP, the "US Parents"). Each of the US Parents indirectly owns 50% of the outstanding shares of the Yorkshire Group. In 1997, Yorkshire Group was utilized in connection with the joint acquisition of Yorkshire by the US Parents for approximately (Pounds)1.5 billion (the "Acquisition"). Yorkshire Group holds all the outstanding shares of Yorkshire Holdings plc ("Yorkshire Holdings"), which is its primary asset. Yorkshire Holdings, in turn, beneficially owns all the outstanding shares of Yorkshire. See "Yorkshire Group and the US Parents". YORKSHIRE POWER FINANCE LIMITED Yorkshire Finance, a subsidiary of Yorkshire Group, was incorporated as a company with limited liability under the laws of the Cayman Islands in August 1997. Yorkshire Finance exists solely for the purpose of operating as a financing vehicle for Yorkshire Group and its affiliates. See "Yorkshire Group and the US Parents". YORKSHIRE ELECTRICITY GROUP PLC Yorkshire is one of twelve regional electricity companies ("RECs") in England and Wales licensed to distribute, supply and, to a limited extent, generate electricity. Yorkshire's two principal businesses are the "distribution business" and the "supply business". Yorkshire's distribution business consists of the distribution of electricity to approximately two million residential, commercial and industrial customers in its Franchise Area. Substantially all of the distribution business is a regulated monopoly. Yorkshire's supply business consists of the purchase and supply of electricity primarily to customers within the Franchise Area. Yorkshire generated total operating income of (Pounds)52 million ($85 million) in Fiscal Year 1997. During Fiscal Year 1997, however, Yorkshire recorded a (Pounds)78 million ($128 million) provision for uneconomic gas and electricity contracts and a (Pounds)50 million ($82 million) charge for information system development costs to prepare for the opening of the competitive electricity market in 1998 for Franchise Supply Customers (as defined below). Excluding these charges, total operating income would have been (Pounds)180 million ($295 million) in Fiscal Year 1997, including (Pounds)140 million ($230 million) (78% of total) associated with the core distribution business and (Pounds)29 million ($48 million) (16% of total) associated with the supply business. As discussed below under "Business--Business Restructuring", beginning in 1998, Yorkshire will operate the distribution and supply businesses as self-sufficient businesses. Yorkshire is authorized under its Public Electricity Supply License (the "PES License") to distribute and supply electricity in an area covering approximately 10,000 square km (3,860 square miles), which encompasses the counties of West Yorkshire, East Yorkshire and almost all of South Yorkshire, together with parts of North Yorkshire, Derbyshire, Nottinghamshire, Lincolnshire and Lancashire (the "Franchise Area"). The resident population of the Franchise Area served by Yorkshire is approximately 4.4 million. The regional economy is diverse, including traditional heavy industries such as iron, steel and coal mining, as well as growing service sector activities such as finance, retailing and leisure. Centrally located in the UK, the region is also well served by roads, railways, airports and ports which provide access to other European markets. Pursuant to its PES License, Yorkshire owns, manages and operates the electricity distribution network within the Franchise Area. The primary activity of the distribution business is the receipt of electricity from the national grid transmission system and its distribution to end users connected to Yorkshire's distribution network. Since the distribution business is substantially a regulated monopoly, virtually all electricity supplied (whether by Yorkshire's supply business or by any other suppliers) to consumers within the Franchise Area is transported through Yorkshire's distribution network. Yorkshire Group believes that economic, environmental and regulatory factors are likely to prevent competitors from entering the distribution business in the Franchise Area. See "Business--Distribution Business" and "--Business Restructuring". Yorkshire's supply business consists of selling electricity to end users and purchasing such electricity and arranging for its distribution to those end users. Within the Franchise Area, Yorkshire has an exclusive right to supply electricity to consumers who, within the most recent twelve-month period, have had an average peak demand ("Peak Demand") of not more than 100 kW in the three months of highest maximum demand during such period ("Franchise Supply Customers"). This exclusive right will continue until September 1998 when the supply market for these customers is currently scheduled to become competitive over a six-month phase-in period. The supply of electricity to Non-Franchise Supply Customers (as defined below) is currently open to competition and Yorkshire is able to competitively bid or negotiate to supply electricity to such customers. By purchasing electricity at competitive rates from most of the major power generators in the UK and providing high quality customer service, Yorkshire has been able to sustain its position as one of the largest national suppliers of electricity. "Non-Franchise Customers" are consumers, both inside and outside of Yorkshire's Franchise Area, who, within the most recent twelve month period, have had an average Peak Demand of more than 100 kW in the three months of highest maximum demand during such period. See "Business--Supply Business" and "--Business Restructuring". The operations of Yorkshire are regulated under its PES License, pursuant to which income generated by Yorkshire's distribution business and income derived from Franchise Supply Customers are subject to a price cap regulatory framework providing economic incentives to operate in a cost-effective manner, and, to a limited extent, to increase the volume of electricity distributed. See "The Electric Utility Industry in Great Britain". Yorkshire also conducts ancillary business activities apart from the distribution and supply businesses that are not subject to price regulation, such as owning an interest in an off-shore gas field, supplying gas in the competitive market and holding interests in power generation. See "Business-- Affiliate Businesses and Other Investments" and "--Business Restructuring". YORKSHIRE CAPITAL TRUST I The Trust is a statutory business trust created under the Delaware Business Trust Act (the "Delaware Act") pursuant to the filing of a certificate of trust with the Delaware Secretary of State on February 4, 1998. The Trust exists for the exclusive purposes of (i) issuing and selling the Trust Securities representing undivided beneficial interests in the assets of the Trust, (ii) investing the gross proceeds of the Trust Securities in the Junior Subordinated Debentures and (iii) engaging in only those other activities necessary, appropriate, convenient or incidental thereto. See "Yorkshire Capital Trust I". THE OFFERING As used herein, (i) the term "Indenture" means the Subordinated Indenture, as the same may be amended and supplemented from time to time, among Yorkshire Finance, Yorkshire Group, The Bank of New York, as Indenture Trustee, principal paying agent, registrar and transfer agent (the "Indenture Trustee"), and Banque Generale du Luxembourg, as paying agent and transfer agent, pursuant to which the Junior Subordinated Debentures and the Debentures Guarantee will be issued, and (ii) the term "Trust Agreement" means the Amended and Restated Trust Agreement, among AEP Resources, Inc., as depositor, the Control Party, as holder of the Control Certificate, The Bank of New York (Delaware), as Delaware Trustee, The Bank of New York, as Property Trustee, the administrative trustees named therein and the holders, from time to time, of undivided beneficial interests in the assets of the Trust. Each of the other capitalized terms used in this Prospectus and not otherwise defined has the meaning set forth in the Indenture or the Trust Agreement, as the case may be. Securities Offered ......... % Trust Securities (Liquidation Amount $25 Per Trust Security). Offering Price ............. $25 per Trust Security. Distribution Dates ......... March 31, June 30, September 30 and December 31 of each year, commencing , 1998. Record Date................. The record date for each Distribution Date (as defined under "Description of the Trust Securities--Distributions") will be the close of business on the 15th calendar day prior to such Distribution Date. Ratings..................... The Trust Securities are expected to be assigned ratings of BBB by Standard & Poor's Ratings Services ("S&P"), BBB by Duff & Phelps Credit Rating Company ("DCR") and "baa2" by Moody's Investors Service, Inc. ("Moody's"). These ratings will have been obtained with the understanding that S&P, DCR and Moody's will continue to monitor the credit rating of the registrants and will make future adjustments to the extent warranted. A rating reflects only the views of S&P, DCR or Moody's, as the case may be, and is not a recommendation to buy, sell or hold the Trust Securities. There is no assurance that any such rating will be retained for any given period of time or that it will not be revised downward or withdrawn entirely by S&P, DCR or Moody's, as the case may be, if, in their respective judgments, circumstances so warrant. Deferral of Interest So long as no Event of Default under the Payments.................... Indenture has occurred and is continuing, Yorkshire Finance has the right to defer Interest Payments on the Junior Subordinated Debentures, at any time or from time to time, for up to 20 consecutive quarters; provided, however, Yorkshire Finance cannot defer Interest Payments beyond the Stated Maturity of the Junior Subordinated Debentures. If Interest Payments on the Junior Subordinated Debentures are so deferred, Distributions on the Trust Securities will also be deferred. During an Extension Period, Yorkshire Group's obligations to make payments under the Trust Securities Guarantee and the Debentures Guarantee will be suspended. See "Description of the Junior Subordinated Debentures--Option to Defer Payment of Interest". Ranking of Junior Subordinated Debentures and Debentures Guarantee........ The Junior Subordinated Debentures and the Debentures Guarantee will be unsecured and subordinated obligations of Yorkshire Finance and Yorkshire Group, respectively, and will be junior in right of payment to all Senior Debt of Yorkshire Finance and Yorkshire Group, respectively, to the extent and in the manner set forth in the Indenture. At December 31, 1997, Senior Debt of Yorkshire Group aggregated approximately (Pounds)1,034 million ($1,699 million), a portion of which will be repaid with proceeds of this offering. Because Yorkshire Group is a holding company, Yorkshire Group's obligations under the Debentures Guarantee will be effectively subordinated to all existing and future indebtedness and liabilities of Yorkshire Group, including Yorkshire. At December 31, 1997, the direct and indirect subsidiaries of Yorkshire Group had total indebtedness (excluding indebtedness owed to Yorkshire Group) of approximately (Pounds)476 million ($782 million). See "Risk Factors--Factors Relating to the Trust Securities and the Junior Subordinated Debentures--Subordination of and Rights under the Debentures Guarantee", "Description of the Junior Subordinated Debentures--Subordination" and "Description of the Debentures Guarantee". Trust Securities Guarantee and Debentures Guarantee.... The payment of Distributions and payments on liquidation of the Trust or redemption of the Trust Securities are guaranteed by Yorkshire Group under the Trust Securities Guarantee, but only to the extent of sufficient funds held by the Trust and available therefor. The Trust Securities Guarantee will be an unsecured and subordinate obligation and junior in right of payment to all Senior Debt of Yorkshire Group and will rank pari passu with the most senior preferred stock of Yorkshire Group. At December 31, 1997, Yorkshire Group had no senior preferred stock outstanding with which the Trust Securities Guarantee would rank pari passu. See "Risk Factors--Factors Relating to the Trust Securities and the Junior Subordinated Debentures-- Subordination of and Limitation of Funds Available to Trust under the Trust Securities Guarantee". If Yorkshire Finance does not make payments of principal of or interest on the Junior Subordinated Debentures or Yorkshire Group does not make payments pursuant to the Debentures Guarantee, the Trust will not have sufficient funds to pay Distributions on the Trust Securities or amounts payable on redemption thereof or otherwise. In such event, the Trust Securities Guarantee will not apply to such Distributions of such amounts until the Trust has sufficient funds available therefor. The remedy of a holder of Trust Securities, accordingly, will be to enforce its rights under the Debentures Guarantee. Pursuant to the Debentures Guarantee, Yorkshire Group will irrevocably and unconditionally guarantee all payments on the Junior Subordinated Debentures when and as the same shall become due and payable, whether at Stated Maturity, upon redemption or otherwise. See "Description of the Debentures Guarantee". During an Extension Period, Yorkshire Group's obligations to make payments under the Trust Securities Guarantee and the Debentures Guarantee will be suspended. See "Description of the Junior Subordinated Debentures--Option to Defer Payment of Interest". The Trust Securities Guarantee, the Debentures Guarantee, the Indenture, the Junior Subordinated Debentures, the Trust Agreement and the Agreement as to Expenses and Liabilities, when taken together, will effectively provide a full and unconditional guarantee, on a subordinated basis, of the Trust's obligations under the Trust Securities. Redemption.................. The Trust Securities are subject to mandatory redemption, (i) in whole or in part, upon redemption of the Junior Subordinated Debentures in an amount equal to the aggregate principal amount of Junior Subordinated Debentures being redeemed and (ii) in whole, at the Stated Maturity of the Junior Subordinated Debentures, in each case at the Redemption Price. The Junior Subordinated Debentures are redeemable at the option of Yorkshire Finance (i) on or after , 2003, in whole at any time or in part from time to time, (ii) at any time, in whole (but not in part), upon the occurrence and continuation of a Special Event or (iii) at any time, in whole (but not in part), if Yorkshire Finance or Yorkshire Group has or will become obligated to pay Additional Amounts, as provided under "Description of the Junior Subordinated Debentures--Optional Tax Redemption", in each case at the Debenture Redemption Price. See "Description of the Trust Securities-- Redemptions--Mandatory Redemption", "--Optional Redemption of Junior Subordinated Debentures" and "--Special Event Redemption of Junior Subordinated Debentures". Distribution of Junior Subordinated Debentures..... The Control Party will have the right at any time to dissolve the Trust and, after satisfaction of liabilities to creditors of the Trust, if any, cause a Like Amount of Junior Subordinated Debentures to be distributed to the holders of the Trust Securities in liquidation of the Trust. See "Description of the Trust Securities-- Distribution of Junior Subordinated Debentures". Additional Amounts.......... Subject to certain exceptions as set forth under "Description of the Junior Subordinated Debentures--Additional Amounts", all payments in respect of the Junior Subordinated Debentures and the Debentures Guarantee and, therefore, the Trust Securities will be made free and clear of, and without withholding or deductions for or on account of, any Gross-Up Taxes (as defined under "Description of the Junior Subordinated Debentures--Additional Amounts"), unless such withholding or deduction is required by law. In the event of any such withholding or deduction, subject to certain exceptions, Yorkshire Finance or Yorkshire Group will pay such additional amounts (the "Additional Amounts") as will result in receipt by the holder of the Junior Subordinated Debentures and, therefore, the holders of the Trust Securities, of such amounts as would have been received by it had no such withholding or deduction been required. See "Description of the Junior Subordinated Debentures--Additional Amounts". Any reference in this Prospectus to any payments with respect to the Junior Subordinated Debentures or any payments pursuant to the Debentures Guarantee shall be deemed to include any such Additional Amounts payable in connection therewith. Listing..................... Application has been made to list the Trust Securities on the NYSE and to list the Junior Subordinated Debentures on the Luxembourg Stock Exchange. If the Junior Subordinated Debentures are distributed to the holders of the Trust Securities upon the liquidation of the Trust, Yorkshire Finance will use its best efforts to also list the Junior Subordinated Debentures on the NYSE, or such other stock exchanges or other organizations, if any, on which the Trust Securities are then listed. Use of Proceeds ............ The proceeds to the Trust from the sale of the Trust Securities will be invested by the Trust in the Junior Subordinated Debentures to be issued by Yorkshire Finance to the Trust. In turn, Yorkshire Finance intends to loan the net proceeds from such issuance to Yorkshire Group and certain of its affiliates with such loans to be evidenced by promissory notes issued by Yorkshire Group and such affiliates (collectively the "Intercompany Notes"). The proceeds therefrom will be used for the working capital of such affiliates and for the repayment of certain indebtedness of Yorkshire Group. See "Use of Proceeds" and "Capitalization". Governing Law .............. The Trust Agreement and the Trust Securities will be governed by, and construed in accordance with, the laws of the State of Delaware. The Trust Securities Guarantee, the Debentures Guarantee, the Indenture and the Junior Subordinated Debentures will be governed by, and construed in accordance with, the laws of the State of New York. The Trustees................ The Bank of New York will act as property trustee (the "Property Trustee") of the Trust. Four employees of the US Parents also will act as trustees (the "Administrative Trustees") of the Trust. The Bank of New York (Delaware) will be an additional trustee (the "Delaware Trustee") of the Trust. The Property Trustee, the Administrative Trustees and the Delaware Trustee are herein, collectively, referred to as the "Securities Trustees". The Bank of New York will also act as Indenture Trustee under the Indenture pursuant to which the Junior Subordinated Debentures and the Debentures Guarantee will be issued and will act as trustee under the Trust Securities Guarantee (the "Guarantee Trustee"). Control of the Trust........ A wholly-owned subsidiary of Yorkshire Group designated pursuant to the Trust Agreement (the "Control Party") will retain the voting control and appointment power with respect to the Trust by virtue of its possession of the Trust's control certificate (the "Control Certificate"). The Control Certificate shall not provide any economic interest in the Trust to the Control Party. See "Yorkshire Capital Trust I". Expenses of the Trust....... Pursuant to the Agreement as to Expenses and Liabilities, the US Affiliates will irrevocably and unconditionally guarantee to each person or entity to whom the Trust becomes indebted or liable the full payment of any indebtedness, expenses or liabilities of the Trust (other than obligations of the Trust to pay to the holders of the Trust Securities the amounts due such holders pursuant to the terms of the Trust Securities). SUMMARY FINANCIAL INFORMATION The following table sets forth summary consolidated financial data for Yorkshire Power Group Limited after March 31, 1997 ("Yorkshire Group" or the "Successor Company") and Yorkshire Electricity Group plc ("Yorkshire" or the "Predecessor Company") for each of the five Fiscal Years ended March 31, 1997 prepared in accordance with US GAAP. For a description of the financial statements and records from which the following financial data have been derived, see "Selected Consolidated Financial Data". This information should be read in conjunction with "Capitalization", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes thereto of the Successor Company and the Predecessor Company included elsewhere in this Prospectus. The summary unaudited pro forma consolidated income statement data for the Successor Company for Fiscal Year 1997 presented below reflect the Acquisition as if it had occurred as of April 1, 1996. Such data have been prepared by the Successor Company based upon assumptions deemed proper in accordance with the purchase method of accounting for business combinations and have been adjusted to reflect (i) interest expense of (Pounds)74 million incurred as a result of the financing of the Acquisition, (ii) amortization of (Pounds)24 million related to goodwill recorded in connection with the Acquisition, (iii) additional depreciation expense of (Pounds)6 million as a result of the revaluation of certain fixed assets in connection with the Acquisition and (iv) removal of the effect of recording the provision of (Pounds)78 million of certain uneconomic gas and electricity contracts, the loss of (Pounds)7 million on certain interest rate swap agreements and the write-down of (Pounds)6 million relating to non-operational property. Such data are shown for illustrative purposes only and are not necessarily indicative of the future results of operations of the Successor Company or of the results of operations of the Successor Company that would have actually occurred had the Acquisition occurred at the beginning of the period presented. Such data should be read in conjunction with the unaudited pro forma consolidated statement of income and notes thereto of the Successor Company included elsewhere in this Prospectus. PREDECESSOR COMPANY <TABLE> <CAPTION> FISCAL YEAR ENDED MARCH 31, -------------------------------------------- 1993 1994 1995 1996 1997 -------- -------- -------- -------- -------- (Pounds) (Pounds) (Pounds) (Pounds) (Pounds) -------- -------- -------- -------- -------- (AMOUNTS IN MILLIONS) <S> <C> <C> <C> <C> <C> CONSOLIDATED INCOME STATEMENT DA- TA: Operating revenues.............. 1,325 1,308 1,464 1,431 1,331 Operating income (1)............ 146 156 215 214 52 Other income (loss), net (2).... 15 (8) 16 313 20 Interest expense, net........... (7) (5) (12) (20) (33) Provision for income taxes (3).. (54) (50) (78) (114) (13) ----- ----- ----- ----- ----- Net income...................... 100 93 141 393 26 ===== ===== ===== ===== ===== <CAPTION> MARCH 31, -------------------------------------------- 1993 1994 1995 1996 1997 -------- -------- -------- -------- -------- (Pounds) (Pounds) (Pounds) (Pounds) (Pounds) -------- -------- -------- -------- -------- (AMOUNTS IN MILLIONS) <S> <C> <C> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Fixed assets.................... 613 701 747 769 796 Total assets.................... 1,214 1,241 1,367 1,408 1,375 Total shareholders' equity...... 561 612 517 399 359 Long-term debt.................. 104 126 305 424 419 Short-term debt and current por- tion of long-term debt......... 217 99 91 90 87 <CAPTION> FISCAL YEAR ENDED MARCH 31, -------------------------------------------- 1993 1994 1995 1996 1997 -------- -------- -------- -------- -------- (Pounds) (Pounds) (Pounds) (Pounds) (Pounds) -------- -------- -------- -------- -------- (AMOUNTS IN MILLIONS, EXCEPT RATIOS) <S> <C> <C> <C> <C> <C> OTHER CONSOLIDATED DATA: EBIT (4)........................ 161 148 231 527 72 EBITDA (4)...................... 193 182 272 569 122 Cash flow from operations....... 187 237 201 222 96 Cash used in investing activi- ties........................... (137) (201) (101) (8) (51) Cash provided by (used in) fi- nancing activities............. 129 (139) (67) (114) (76) Ratio of earnings to fixed charges (5).................... 6.6 6.8 10.5 12.0 1.8 </TABLE> SUCCESSOR COMPANY <TABLE> <CAPTION> PREDECESSOR SUCCESSOR SUCCESSOR NINE MONTHS NINE MONTHS PRO FORMA ENDED ENDED FISCAL YEAR DECEMBER 31, DECEMBER 31, 1997 1996 1997 -------------- ------------ --------------- (Pounds) $(6) (Pounds) (Pounds) $(6) -------- ----- ------------ -------- ------ (AMOUNTS IN MILLIONS) <S> <C> <C> <C> <C> <C> CONSOLIDATED INCOME STATEMENT DATA: Operating revenues............. 1,331 2,183 974 909 1,493 Operating income (1)........... 106 174 120 123 202 Other income, net (2).......... 20 33 17 2 3 Interest expense, net.......... (100) (164) (20) (78) (128) Provision for income taxes..... (17) (28) (40) (5) (8) ----- ----- --- ------ ------ Income before extraordinary item.......................... 9 15 77 42 69 Extraordinary item (7)......... -- -- -- (134) (220) ----- ----- --- ------ ------ Net income (loss).............. 9 15 77 (92) (151) ===== ===== === ====== ====== <CAPTION> SUCCESSOR SUCCESSOR APRIL 1, DECEMBER 31, 1997 1997 -------------- --------------- (Pounds) $(6) (Pounds) $(6) -------- ----- -------- ------ (AMOUNTS IN MILLIONS) <S> <C> <C> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Fixed assets................... 939 1,540 1,001 1,644 Total assets................... 2,591 4,249 2,522 4,143 Total shareholders' equity..... -- -- 330 542 Long-term debt................. 433 710 429 705 Accrued liability to purchase Yorkshire..................... 1,496 2,453 -- -- Short-term debt and current portion of long-term debt..... 87 143 1,081 1,776 <CAPTION> PREDECESSOR SUCCESSOR SUCCESSOR NINE MONTHS NINE MONTHS PRO FORMA ENDED ENDED FISCAL YEAR DECEMBER 31, DECEMBER 31, 1997 1996 1997 -------------- ------------ --------------- (Pounds) $(6) (Pounds) (Pounds) $(6) -------- ----- ------------ -------- ------ (AMOUNTS IN MILLIONS, EXCEPT RATIOS) <S> <C> <C> <C> <C> <C> OTHER CONSOLIDATED DATA: EBIT before extraordinary item (4)(7)........................ 126 207 137 125 205 EBITDA before extraordinary item (4)(7)................... 206 338 169 183 300 Cash flow from operations...... 149 63 103 Cash used in investing activities.................... (99) (1,575) (2,586) Cash provided by (used in) financing activities.......... (49) 1,409 2,314 Ratio of earnings to fixed charges (5)................... 1.2 4.6 1.5 </TABLE> PREDECESSOR COMPANY BUSINESS SEGMENTS <TABLE> <CAPTION> FISCAL YEAR ENDED MARCH 31, -------------------------------------------- 1993 1994 1995 1996 1997 (Pounds) (Pounds) (Pounds) (Pounds) (Pounds) -------- -------- -------- -------- -------- (AMOUNTS IN MILLIONS) <S> <C> <C> <C> <C> <C> OPERATING REVENUES: Distribution.................... 332 348 362 334 308 Supply.......................... 1,206 1,220 1,343 1,309 1,178 Other........................... 182 162 162 163 172 Intrabusiness eliminations (8).. (395) (422) (403) (375) (327) ----- ----- ----- ----- ----- 1,325 1,308 1,464 1,431 1,331 ===== ===== ===== ===== ===== OPERATING INCOME (LOSS): Distribution.................... 135 133 176 164 127 Supply (1)...................... 10 14 23 30 (132) Other........................... 1 9 16 20 10 Intrabusiness eliminations (1)(8)......................... -- -- -- -- 47 ----- ----- ----- ----- ----- 146 156 215 214 52 ===== ===== ===== ===== ===== <CAPTION> MARCH 31, -------------------------------------------- 1993 1994 1995 1996 1997 (Pounds) (Pounds) (Pounds) (Pounds) (Pounds) -------- -------- -------- -------- -------- (AMOUNTS IN MILLIONS) <S> <C> <C> <C> <C> <C> TOTAL ASSETS: Distribution.................... 476 513 556 589 643 Supply.......................... 177 161 198 212 178 Other and unallocated........... 561 567 613 607 554 ----- ----- ----- ----- ----- 1,214 1,241 1,367 1,408 1,375 ===== ===== ===== ===== ===== </TABLE> SUCCESSOR COMPANY BUSINESS SEGMENTS <TABLE> <CAPTION> PREDECESSOR SUCCESSOR SUCCESSOR NINE MONTHS NINE MONTHS PRO FORMA ENDED ENDED FISCAL YEAR DECEMBER 31, DECEMBER 31, 1997 1996 1997 -------------- ------------ -------------------- (Pounds) $(6) (Pounds) (Pounds) $(6) -------- ----- ------------ ---------- -------- (AMOUNTS IN MILLIONS) <S> <C> <C> <C> <C> <C> OPERATING REVENUES: Distribution............... 308 505 225 224 368 Supply..................... 1,178 1,932 868 799 1,312 Other...................... 172 282 136 141 232 Intrabusiness eliminations (8)....................... (327) (536) (255) (255) (419) ----- ----- ---- -------- -------- 1,331 2,183 974 909 1,493 ===== ===== ==== ======== ======== OPERATING INCOME (LOSS): Distribution............... 97 159 99 89 146 Supply (1)................. (7) (11) 1 14 23 Other...................... 16 26 20 20 33 ----- ----- ---- -------- -------- 106 174 120 123 202 ===== ===== ==== ======== ======== <CAPTION> SUCCESSOR SUCCESSOR APRIL 1, 1997 DECEMBER 31, 1997 -------------- -------------------- (Pounds) $(6) (Pounds) $(6) -------- ----- ---------- -------- (AMOUNTS IN MILLIONS) <S> <C> <C> <C> <C> <C> TOTAL ASSETS: Distribution............... 1,802 2,955 1,754 2,881 Supply..................... 187 307 180 296 Other and unallocated...... 602 987 588 966 ----- ----- -------- -------- 2,591 4,249 2,522 4,143 ===== ===== ======== ======== </TABLE> (1) Notable operating expenses include: Fiscal Year 1997--(i) a provision of (Pounds)78 million for uneconomic gas and electricity contracts (the effect of which is removed from the Successor Company's unaudited pro forma consolidated statement of income for Fiscal Year 1997), which resulted in a charge of (Pounds)125 million to the supply business offset by an intrabusiness elimination of (Pounds)47 million and (ii) a charge of (Pounds)50 million for information system development costs to prepare for the opening of the competitive electricity market in 1998 for Franchise Supply Customers, of which (Pounds)37 million was charged to the supply business and (Pounds)13 million was charged to the distribution business. Fiscal Years 1993, 1994 and 1995--reorganization costs of (Pounds)18 million, (Pounds)44 million and (Pounds)8 million, respectively. (2) Other income (loss) principally represents income from Yorkshire's investment in National Grid Group plc ("NGG") and, in Fiscal Year 1996, a gain resulting from the NGG Transaction (as defined herein) and earnings and losses from Yorkshire's investments in joint ventures and minority holdings. Notable items include: Fiscal Year 1997--gain on sale of Yorkshire's investment in Torch Telecom of (Pounds)15 million. Fiscal Year 1996--income from investment in NGG and gain in respect of the NGG Transaction as described under "Management's Discussion and Analysis of Financial Condition and Results of Operations--Introduction--NGG Transaction". Fiscal Year 1995--one-time termination payment received from Stockholm Stadhus AB of (Pounds)17 million. Fiscal Year 1994--loss on sale of Yorkshire's investment in Homepower Retail Limited of (Pounds)18 million. (3) Fiscal Year 1996 includes a tax charge of (Pounds)38 million relating to the NGG Transaction. (4) EBIT represents income before the sum of interest expense and income taxes. EBITDA represents income before the sum of interest expense, income taxes, depreciation and amortization. EBIT and EBITDA are provided for informational purposes only and such measures should not be construed as alternatives to operating income (as determined in accordance with US GAAP) as indicators of operating performance, or as alternatives to cash flows from operating activities (as determined in accordance with US GAAP) as measures of liquidity. EBIT and EBITDA are widely accepted financial indicators of a company's ability to incur and service debt. However, the measures of EBIT and EBITDA presented herein may not be comparable to similar measures presented by other companies. (5) The ratio of earnings to fixed charges is computed as the sum of pre-tax income (before extraordinary item), plus fixed charges divided by fixed charges. Fixed charges consist of interest expense and amortization of debt expense. (6) Solely for the convenience of the reader, pounds sterling amounts have been translated into US dollar amounts at the Noon Buying Rate on December 31, 1997 of $1.64 = (Pounds)1. See "Presentation of Certain Information and Exchange Rates".
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+SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed financial and other information contained elsewhere in this Prospectus. YORKSHIRE POWER GROUP LIMITED Yorkshire Group was incorporated as a private company with limited liability under the laws of England and Wales in July 1996 and is indirectly owned by American Electric Power Company, Inc. ("AEP") and New Century Energies, Inc. ("NCE" and, together with AEP, the "US Parents"). Each of the US Parents indirectly owns 50% of the outstanding shares of the Yorkshire Group. In 1997, Yorkshire Group was utilized in connection with the joint acquisition of Yorkshire by the US Parents for approximately (Pounds)1.5 billion (the "Acquisition"). Yorkshire Group holds all the outstanding shares of Yorkshire Holdings plc ("Yorkshire Holdings"), which is its primary asset. Yorkshire Holdings, in turn, beneficially owns all the outstanding shares of Yorkshire. See "Yorkshire Group and the US Parents". YORKSHIRE POWER FINANCE LIMITED Yorkshire Finance, a subsidiary of Yorkshire Group, was incorporated as a company with limited liability under the laws of the Cayman Islands in August 1997. Yorkshire Finance exists solely for the purpose of operating as a financing vehicle for Yorkshire Group and its affiliates. See "Yorkshire Group and the US Parents". YORKSHIRE ELECTRICITY GROUP PLC Yorkshire is one of twelve regional electricity companies ("RECs") in England and Wales licensed to distribute, supply and, to a limited extent, generate electricity. Yorkshire's two principal businesses are the "distribution business" and the "supply business". Yorkshire's distribution business consists of the distribution of electricity to approximately two million residential, commercial and industrial customers in its Franchise Area. Substantially all of the distribution business is a regulated monopoly. Yorkshire's supply business consists of the purchase and supply of electricity primarily to customers within the Franchise Area. Yorkshire generated total operating income of (Pounds)52 million ($85 million) in Fiscal Year 1997. During Fiscal Year 1997, however, Yorkshire recorded a (Pounds)78 million ($128 million) provision for uneconomic gas and electricity contracts and a (Pounds)50 million ($82 million) charge for information system development costs to prepare for the opening of the competitive electricity market in 1998 for Franchise Supply Customers (as defined below). Excluding these charges, total operating income would have been (Pounds)180 million ($295 million) in Fiscal Year 1997, including (Pounds)140 million ($230 million) (78% of total) associated with the core distribution business and (Pounds)29 million ($48 million) (16% of total) associated with the supply business. As discussed below under "Business--Business Restructuring", beginning in 1998, Yorkshire will operate the distribution and supply businesses as self-sufficient businesses. Yorkshire is authorized under its Public Electricity Supply License (the "PES License") to distribute and supply electricity in an area covering approximately 10,000 square km (3,860 square miles), which encompasses the counties of West Yorkshire, East Yorkshire and almost all of South Yorkshire, together with parts of North Yorkshire, Derbyshire, Nottinghamshire, Lincolnshire and Lancashire (the "Franchise Area"). The resident population of the Franchise Area served by Yorkshire is approximately 4.4 million. The regional economy is diverse, including traditional heavy industries such as iron, steel and coal mining, as well as growing service sector activities such as finance, retailing and leisure. Centrally located in the UK, the region is also well served by roads, railways, airports and ports which provide access to other European markets. Pursuant to its PES License, Yorkshire owns, manages and operates the electricity distribution network within the Franchise Area. The primary activity of the distribution business is the receipt of electricity from the national grid transmission system and its distribution to end users connected to Yorkshire's distribution network. Since the distribution business is substantially a regulated monopoly, virtually all electricity supplied (whether by Yorkshire's supply business or by any other suppliers) to consumers within the Franchise Area is transported through Yorkshire's distribution network. Yorkshire Group believes that economic, environmental and regulatory factors are likely to prevent competitors from entering the distribution business in the Franchise Area. See "Business--Distribution Business" and "--Business Restructuring". Yorkshire's supply business consists of selling electricity to end users and purchasing such electricity and arranging for its distribution to those end users. Within the Franchise Area, Yorkshire has an exclusive right to supply electricity to consumers who, within the most recent twelve-month period, have had an average peak demand ("Peak Demand") of not more than 100 kW in the three months of highest maximum demand during such period ("Franchise Supply Customers"). This exclusive right will continue until September 1998 when the supply market for these customers is currently scheduled to become competitive over a six-month phase-in period. The supply of electricity to Non-Franchise Supply Customers (as defined below) is currently open to competition and Yorkshire is able to competitively bid or negotiate to supply electricity to such customers. By purchasing electricity at competitive rates from most of the major power generators in the UK and providing high quality customer service, Yorkshire has been able to sustain its position as one of the largest national suppliers of electricity. "Non-Franchise Customers" are consumers, both inside and outside of Yorkshire's Franchise Area, who, within the most recent twelve month period, have had an average Peak Demand of more than 100 kW in the three months of highest maximum demand during such period. See "Business--Supply Business" and "--Business Restructuring". The operations of Yorkshire are regulated under its PES License, pursuant to which income generated by Yorkshire's distribution business and income derived from Franchise Supply Customers are subject to a price cap regulatory framework providing economic incentives to operate in a cost-effective manner, and, to a limited extent, to increase the volume of electricity distributed. See "The Electric Utility Industry in Great Britain". Yorkshire also conducts ancillary business activities apart from the distribution and supply businesses that are not subject to price regulation, such as owning an interest in an off-shore gas field, supplying gas in the competitive market and holding interests in power generation. See "Business-- Affiliate Businesses and Other Investments" and "--Business Restructuring". YORKSHIRE CAPITAL TRUST I The Trust is a statutory business trust created under the Delaware Business Trust Act (the "Delaware Act") pursuant to the filing of a certificate of trust with the Delaware Secretary of State on February 4, 1998. The Trust exists for the exclusive purposes of (i) issuing and selling the Trust Securities representing undivided beneficial interests in the assets of the Trust, (ii) investing the gross proceeds of the Trust Securities in the Junior Subordinated Debentures and (iii) engaging in only those other activities necessary, appropriate, convenient or incidental thereto. See "Yorkshire Capital Trust I". THE OFFERING As used herein, (i) the term "Indenture" means the Subordinated Indenture, as the same may be amended and supplemented from time to time, among Yorkshire Finance, Yorkshire Group, The Bank of New York, as Indenture Trustee, principal paying agent, registrar and transfer agent (the "Indenture Trustee"), and Banque Generale du Luxembourg, as paying agent and transfer agent, pursuant to which the Junior Subordinated Debentures and the Debentures Guarantee will be issued, and (ii) the term "Trust Agreement" means the Amended and Restated Trust Agreement, among AEP Resources, Inc., as depositor, the Control Party, as holder of the Control Certificate, The Bank of New York (Delaware), as Delaware Trustee, The Bank of New York, as Property Trustee, the administrative trustees named therein and the holders, from time to time, of undivided beneficial interests in the assets of the Trust. Each of the other capitalized terms used in this Prospectus and not otherwise defined has the meaning set forth in the Indenture or the Trust Agreement, as the case may be. Securities Offered ......... % Trust Securities (Liquidation Amount $25 Per Trust Security). Offering Price ............. $25 per Trust Security. Distribution Dates ......... March 31, June 30, September 30 and December 31 of each year, commencing , 1998. Record Date................. The record date for each Distribution Date (as defined under "Description of the Trust Securities--Distributions") will be the close of business on the 15th calendar day prior to such Distribution Date. Ratings..................... The Trust Securities are expected to be assigned ratings of BBB by Standard & Poor's Ratings Services ("S&P"), BBB by Duff & Phelps Credit Rating Company ("DCR") and "baa2" by Moody's Investors Service, Inc. ("Moody's"). These ratings will have been obtained with the understanding that S&P, DCR and Moody's will continue to monitor the credit rating of the registrants and will make future adjustments to the extent warranted. A rating reflects only the views of S&P, DCR or Moody's, as the case may be, and is not a recommendation to buy, sell or hold the Trust Securities. There is no assurance that any such rating will be retained for any given period of time or that it will not be revised downward or withdrawn entirely by S&P, DCR or Moody's, as the case may be, if, in their respective judgments, circumstances so warrant. Deferral of Interest So long as no Event of Default under the Payments.................... Indenture has occurred and is continuing, Yorkshire Finance has the right to defer Interest Payments on the Junior Subordinated Debentures, at any time or from time to time, for up to 20 consecutive quarters; provided, however, Yorkshire Finance cannot defer Interest Payments beyond the Stated Maturity of the Junior Subordinated Debentures. If Interest Payments on the Junior Subordinated Debentures are so deferred, Distributions on the Trust Securities will also be deferred. During an Extension Period, Yorkshire Group's obligations to make payments under the Trust Securities Guarantee and the Debentures Guarantee will be suspended. See "Description of the Junior Subordinated Debentures--Option to Defer Payment of Interest". Ranking of Junior Subordinated Debentures and Debentures Guarantee........ The Junior Subordinated Debentures and the Debentures Guarantee will be unsecured and subordinated obligations of Yorkshire Finance and Yorkshire Group, respectively, and will be junior in right of payment to all Senior Debt of Yorkshire Finance and Yorkshire Group, respectively, to the extent and in the manner set forth in the Indenture. At December 31, 1997, Senior Debt of Yorkshire Group aggregated approximately (Pounds)1,034 million ($1,699 million), a portion of which will be repaid with proceeds of this offering. Because Yorkshire Group is a holding company, Yorkshire Group's obligations under the Debentures Guarantee will be effectively subordinated to all existing and future indebtedness and liabilities of Yorkshire Group, including Yorkshire. At December 31, 1997, the direct and indirect subsidiaries of Yorkshire Group had total indebtedness (excluding indebtedness owed to Yorkshire Group) of approximately (Pounds)476 million ($782 million). See "Risk Factors--Factors Relating to the Trust Securities and the Junior Subordinated Debentures--Subordination of and Rights under the Debentures Guarantee", "Description of the Junior Subordinated Debentures--Subordination" and "Description of the Debentures Guarantee". Trust Securities Guarantee and Debentures Guarantee.... The payment of Distributions and payments on liquidation of the Trust or redemption of the Trust Securities are guaranteed by Yorkshire Group under the Trust Securities Guarantee, but only to the extent of sufficient funds held by the Trust and available therefor. The Trust Securities Guarantee will be an unsecured and subordinate obligation and junior in right of payment to all Senior Debt of Yorkshire Group and will rank pari passu with the most senior preferred stock of Yorkshire Group. At December 31, 1997, Yorkshire Group had no senior preferred stock outstanding with which the Trust Securities Guarantee would rank pari passu. See "Risk Factors--Factors Relating to the Trust Securities and the Junior Subordinated Debentures-- Subordination of and Limitation of Funds Available to Trust under the Trust Securities Guarantee". If Yorkshire Finance does not make payments of principal of or interest on the Junior Subordinated Debentures or Yorkshire Group does not make payments pursuant to the Debentures Guarantee, the Trust will not have sufficient funds to pay Distributions on the Trust Securities or amounts payable on redemption thereof or otherwise. In such event, the Trust Securities Guarantee will not apply to such Distributions of such amounts until the Trust has sufficient funds available therefor. The remedy of a holder of Trust Securities, accordingly, will be to enforce its rights under the Debentures Guarantee. Pursuant to the Debentures Guarantee, Yorkshire Group will irrevocably and unconditionally guarantee all payments on the Junior Subordinated Debentures when and as the same shall become due and payable, whether at Stated Maturity, upon redemption or otherwise. See "Description of the Debentures Guarantee". During an Extension Period, Yorkshire Group's obligations to make payments under the Trust Securities Guarantee and the Debentures Guarantee will be suspended. See "Description of the Junior Subordinated Debentures--Option to Defer Payment of Interest". The Trust Securities Guarantee, the Debentures Guarantee, the Indenture, the Junior Subordinated Debentures, the Trust Agreement and the Agreement as to Expenses and Liabilities, when taken together, will effectively provide a full and unconditional guarantee, on a subordinated basis, of the Trust's obligations under the Trust Securities. Redemption.................. The Trust Securities are subject to mandatory redemption, (i) in whole or in part, upon redemption of the Junior Subordinated Debentures in an amount equal to the aggregate principal amount of Junior Subordinated Debentures being redeemed and (ii) in whole, at the Stated Maturity of the Junior Subordinated Debentures, in each case at the Redemption Price. The Junior Subordinated Debentures are redeemable at the option of Yorkshire Finance (i) on or after , 2003, in whole at any time or in part from time to time, (ii) at any time, in whole (but not in part), upon the occurrence and continuation of a Special Event or (iii) at any time, in whole (but not in part), if Yorkshire Finance or Yorkshire Group has or will become obligated to pay Additional Amounts, as provided under "Description of the Junior Subordinated Debentures--Optional Tax Redemption", in each case at the Debenture Redemption Price. See "Description of the Trust Securities-- Redemptions--Mandatory Redemption", "--Optional Redemption of Junior Subordinated Debentures" and "--Special Event Redemption of Junior Subordinated Debentures". Distribution of Junior Subordinated Debentures..... The Control Party will have the right at any time to dissolve the Trust and, after satisfaction of liabilities to creditors of the Trust, if any, cause a Like Amount of Junior Subordinated Debentures to be distributed to the holders of the Trust Securities in liquidation of the Trust. See "Description of the Trust Securities-- Distribution of Junior Subordinated Debentures". Additional Amounts.......... Subject to certain exceptions as set forth under "Description of the Junior Subordinated Debentures--Additional Amounts", all payments in respect of the Junior Subordinated Debentures and the Debentures Guarantee and, therefore, the Trust Securities will be made free and clear of, and without withholding or deductions for or on account of, any Gross-Up Taxes (as defined under "Description of the Junior Subordinated Debentures--Additional Amounts"), unless such withholding or deduction is required by law. In the event of any such withholding or deduction, subject to certain exceptions, Yorkshire Finance or Yorkshire Group will pay such additional amounts (the "Additional Amounts") as will result in receipt by the holder of the Junior Subordinated Debentures and, therefore, the holders of the Trust Securities, of such amounts as would have been received by it had no such withholding or deduction been required. See "Description of the Junior Subordinated Debentures--Additional Amounts". Any reference in this Prospectus to any payments with respect to the Junior Subordinated Debentures or any payments pursuant to the Debentures Guarantee shall be deemed to include any such Additional Amounts payable in connection therewith. Listing..................... Application has been made to list the Trust Securities on the NYSE and to list the Junior Subordinated Debentures on the Luxembourg Stock Exchange. If the Junior Subordinated Debentures are distributed to the holders of the Trust Securities upon the liquidation of the Trust, Yorkshire Finance will use its best efforts to also list the Junior Subordinated Debentures on the NYSE, or such other stock exchanges or other organizations, if any, on which the Trust Securities are then listed. Use of Proceeds ............ The proceeds to the Trust from the sale of the Trust Securities will be invested by the Trust in the Junior Subordinated Debentures to be issued by Yorkshire Finance to the Trust. In turn, Yorkshire Finance intends to loan the net proceeds from such issuance to Yorkshire Group and certain of its affiliates with such loans to be evidenced by promissory notes issued by Yorkshire Group and such affiliates (collectively the "Intercompany Notes"). The proceeds therefrom will be used for the working capital of such affiliates and for the repayment of certain indebtedness of Yorkshire Group. See "Use of Proceeds" and "Capitalization". Governing Law .............. The Trust Agreement and the Trust Securities will be governed by, and construed in accordance with, the laws of the State of Delaware. The Trust Securities Guarantee, the Debentures Guarantee, the Indenture and the Junior Subordinated Debentures will be governed by, and construed in accordance with, the laws of the State of New York. The Trustees................ The Bank of New York will act as property trustee (the "Property Trustee") of the Trust. Four employees of the US Parents also will act as trustees (the "Administrative Trustees") of the Trust. The Bank of New York (Delaware) will be an additional trustee (the "Delaware Trustee") of the Trust. The Property Trustee, the Administrative Trustees and the Delaware Trustee are herein, collectively, referred to as the "Securities Trustees". The Bank of New York will also act as Indenture Trustee under the Indenture pursuant to which the Junior Subordinated Debentures and the Debentures Guarantee will be issued and will act as trustee under the Trust Securities Guarantee (the "Guarantee Trustee"). Control of the Trust........ A wholly-owned subsidiary of Yorkshire Group designated pursuant to the Trust Agreement (the "Control Party") will retain the voting control and appointment power with respect to the Trust by virtue of its possession of the Trust's control certificate (the "Control Certificate"). The Control Certificate shall not provide any economic interest in the Trust to the Control Party. See "Yorkshire Capital Trust I". Expenses of the Trust....... Pursuant to the Agreement as to Expenses and Liabilities, the US Affiliates will irrevocably and unconditionally guarantee to each person or entity to whom the Trust becomes indebted or liable the full payment of any indebtedness, expenses or liabilities of the Trust (other than obligations of the Trust to pay to the holders of the Trust Securities the amounts due such holders pursuant to the terms of the Trust Securities). SUMMARY FINANCIAL INFORMATION The following table sets forth summary consolidated financial data for Yorkshire Power Group Limited after March 31, 1997 ("Yorkshire Group" or the "Successor Company") and Yorkshire Electricity Group plc ("Yorkshire" or the "Predecessor Company") for each of the five Fiscal Years ended March 31, 1997 prepared in accordance with US GAAP. For a description of the financial statements and records from which the following financial data have been derived, see "Selected Consolidated Financial Data". This information should be read in conjunction with "Capitalization", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes thereto of the Successor Company and the Predecessor Company included elsewhere in this Prospectus. The summary unaudited pro forma consolidated income statement data for the Successor Company for Fiscal Year 1997 presented below reflect the Acquisition as if it had occurred as of April 1, 1996. Such data have been prepared by the Successor Company based upon assumptions deemed proper in accordance with the purchase method of accounting for business combinations and have been adjusted to reflect (i) interest expense of (Pounds)74 million incurred as a result of the financing of the Acquisition, (ii) amortization of (Pounds)24 million related to goodwill recorded in connection with the Acquisition, (iii) additional depreciation expense of (Pounds)6 million as a result of the revaluation of certain fixed assets in connection with the Acquisition and (iv) removal of the effect of recording the provision of (Pounds)78 million of certain uneconomic gas and electricity contracts, the loss of (Pounds)7 million on certain interest rate swap agreements and the write-down of (Pounds)6 million relating to non-operational property. Such data are shown for illustrative purposes only and are not necessarily indicative of the future results of operations of the Successor Company or of the results of operations of the Successor Company that would have actually occurred had the Acquisition occurred at the beginning of the period presented. Such data should be read in conjunction with the unaudited pro forma consolidated statement of income and notes thereto of the Successor Company included elsewhere in this Prospectus. PREDECESSOR COMPANY <TABLE> <CAPTION> FISCAL YEAR ENDED MARCH 31, -------------------------------------------- 1993 1994 1995 1996 1997 -------- -------- -------- -------- -------- (Pounds) (Pounds) (Pounds) (Pounds) (Pounds) -------- -------- -------- -------- -------- (AMOUNTS IN MILLIONS) <S> <C> <C> <C> <C> <C> CONSOLIDATED INCOME STATEMENT DA- TA: Operating revenues.............. 1,325 1,308 1,464 1,431 1,331 Operating income (1)............ 146 156 215 214 52 Other income (loss), net (2).... 15 (8) 16 313 20 Interest expense, net........... (7) (5) (12) (20) (33) Provision for income taxes (3).. (54) (50) (78) (114) (13) ----- ----- ----- ----- ----- Net income...................... 100 93 141 393 26 ===== ===== ===== ===== ===== <CAPTION> MARCH 31, -------------------------------------------- 1993 1994 1995 1996 1997 -------- -------- -------- -------- -------- (Pounds) (Pounds) (Pounds) (Pounds) (Pounds) -------- -------- -------- -------- -------- (AMOUNTS IN MILLIONS) <S> <C> <C> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Fixed assets.................... 613 701 747 769 796 Total assets.................... 1,214 1,241 1,367 1,408 1,375 Total shareholders' equity...... 561 612 517 399 359 Long-term debt.................. 104 126 305 424 419 Short-term debt and current por- tion of long-term debt......... 217 99 91 90 87 <CAPTION> FISCAL YEAR ENDED MARCH 31, -------------------------------------------- 1993 1994 1995 1996 1997 -------- -------- -------- -------- -------- (Pounds) (Pounds) (Pounds) (Pounds) (Pounds) -------- -------- -------- -------- -------- (AMOUNTS IN MILLIONS, EXCEPT RATIOS) <S> <C> <C> <C> <C> <C> OTHER CONSOLIDATED DATA: EBIT (4)........................ 161 148 231 527 72 EBITDA (4)...................... 193 182 272 569 122 Cash flow from operations....... 187 237 201 222 96 Cash used in investing activi- ties........................... (137) (201) (101) (8) (51) Cash provided by (used in) fi- nancing activities............. 129 (139) (67) (114) (76) Ratio of earnings to fixed charges (5).................... 6.6 6.8 10.5 12.0 1.8 </TABLE> SUCCESSOR COMPANY <TABLE> <CAPTION> PREDECESSOR SUCCESSOR SUCCESSOR NINE MONTHS NINE MONTHS PRO FORMA ENDED ENDED FISCAL YEAR DECEMBER 31, DECEMBER 31, 1997 1996 1997 -------------- ------------ --------------- (Pounds) $(6) (Pounds) (Pounds) $(6) -------- ----- ------------ -------- ------ (AMOUNTS IN MILLIONS) <S> <C> <C> <C> <C> <C> CONSOLIDATED INCOME STATEMENT DATA: Operating revenues............. 1,331 2,183 974 909 1,493 Operating income (1)........... 106 174 120 123 202 Other income, net (2).......... 20 33 17 2 3 Interest expense, net.......... (100) (164) (20) (78) (128) Provision for income taxes..... (17) (28) (40) (5) (8) ----- ----- --- ------ ------ Income before extraordinary item.......................... 9 15 77 42 69 Extraordinary item (7)......... -- -- -- (134) (220) ----- ----- --- ------ ------ Net income (loss).............. 9 15 77 (92) (151) ===== ===== === ====== ====== <CAPTION> SUCCESSOR SUCCESSOR APRIL 1, DECEMBER 31, 1997 1997 -------------- --------------- (Pounds) $(6) (Pounds) $(6) -------- ----- -------- ------ (AMOUNTS IN MILLIONS) <S> <C> <C> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Fixed assets................... 939 1,540 1,001 1,644 Total assets................... 2,591 4,249 2,522 4,143 Total shareholders' equity..... -- -- 330 542 Long-term debt................. 433 710 429 705 Accrued liability to purchase Yorkshire..................... 1,496 2,453 -- -- Short-term debt and current portion of long-term debt..... 87 143 1,081 1,776 <CAPTION> PREDECESSOR SUCCESSOR SUCCESSOR NINE MONTHS NINE MONTHS PRO FORMA ENDED ENDED FISCAL YEAR DECEMBER 31, DECEMBER 31, 1997 1996 1997 -------------- ------------ --------------- (Pounds) $(6) (Pounds) (Pounds) $(6) -------- ----- ------------ -------- ------ (AMOUNTS IN MILLIONS, EXCEPT RATIOS) <S> <C> <C> <C> <C> <C> OTHER CONSOLIDATED DATA: EBIT before extraordinary item (4)(7)........................ 126 207 137 125 205 EBITDA before extraordinary item (4)(7)................... 206 338 169 183 300 Cash flow from operations...... 149 63 103 Cash used in investing activities.................... (99) (1,575) (2,586) Cash provided by (used in) financing activities.......... (49) 1,409 2,314 Ratio of earnings to fixed charges (5)................... 1.2 4.6 1.5 </TABLE> PREDECESSOR COMPANY BUSINESS SEGMENTS <TABLE> <CAPTION> FISCAL YEAR ENDED MARCH 31, -------------------------------------------- 1993 1994 1995 1996 1997 (Pounds) (Pounds) (Pounds) (Pounds) (Pounds) -------- -------- -------- -------- -------- (AMOUNTS IN MILLIONS) <S> <C> <C> <C> <C> <C> OPERATING REVENUES: Distribution.................... 332 348 362 334 308 Supply.......................... 1,206 1,220 1,343 1,309 1,178 Other........................... 182 162 162 163 172 Intrabusiness eliminations (8).. (395) (422) (403) (375) (327) ----- ----- ----- ----- ----- 1,325 1,308 1,464 1,431 1,331 ===== ===== ===== ===== ===== OPERATING INCOME (LOSS): Distribution.................... 135 133 176 164 127 Supply (1)...................... 10 14 23 30 (132) Other........................... 1 9 16 20 10 Intrabusiness eliminations (1)(8)......................... -- -- -- -- 47 ----- ----- ----- ----- ----- 146 156 215 214 52 ===== ===== ===== ===== ===== <CAPTION> MARCH 31, -------------------------------------------- 1993 1994 1995 1996 1997 (Pounds) (Pounds) (Pounds) (Pounds) (Pounds) -------- -------- -------- -------- -------- (AMOUNTS IN MILLIONS) <S> <C> <C> <C> <C> <C> TOTAL ASSETS: Distribution.................... 476 513 556 589 643 Supply.......................... 177 161 198 212 178 Other and unallocated........... 561 567 613 607 554 ----- ----- ----- ----- ----- 1,214 1,241 1,367 1,408 1,375 ===== ===== ===== ===== ===== </TABLE> SUCCESSOR COMPANY BUSINESS SEGMENTS <TABLE> <CAPTION> PREDECESSOR SUCCESSOR SUCCESSOR NINE MONTHS NINE MONTHS PRO FORMA ENDED ENDED FISCAL YEAR DECEMBER 31, DECEMBER 31, 1997 1996 1997 -------------- ------------ -------------------- (Pounds) $(6) (Pounds) (Pounds) $(6) -------- ----- ------------ ---------- -------- (AMOUNTS IN MILLIONS) <S> <C> <C> <C> <C> <C> OPERATING REVENUES: Distribution............... 308 505 225 224 368 Supply..................... 1,178 1,932 868 799 1,312 Other...................... 172 282 136 141 232 Intrabusiness eliminations (8)....................... (327) (536) (255) (255) (419) ----- ----- ---- -------- -------- 1,331 2,183 974 909 1,493 ===== ===== ==== ======== ======== OPERATING INCOME (LOSS): Distribution............... 97 159 99 89 146 Supply (1)................. (7) (11) 1 14 23 Other...................... 16 26 20 20 33 ----- ----- ---- -------- -------- 106 174 120 123 202 ===== ===== ==== ======== ======== <CAPTION> SUCCESSOR SUCCESSOR APRIL 1, 1997 DECEMBER 31, 1997 -------------- -------------------- (Pounds) $(6) (Pounds) $(6) -------- ----- ---------- -------- (AMOUNTS IN MILLIONS) <S> <C> <C> <C> <C> <C> TOTAL ASSETS: Distribution............... 1,802 2,955 1,754 2,881 Supply..................... 187 307 180 296 Other and unallocated...... 602 987 588 966 ----- ----- -------- -------- 2,591 4,249 2,522 4,143 ===== ===== ======== ======== </TABLE> (1) Notable operating expenses include: Fiscal Year 1997--(i) a provision of (Pounds)78 million for uneconomic gas and electricity contracts (the effect of which is removed from the Successor Company's unaudited pro forma consolidated statement of income for Fiscal Year 1997), which resulted in a charge of (Pounds)125 million to the supply business offset by an intrabusiness elimination of (Pounds)47 million and (ii) a charge of (Pounds)50 million for information system development costs to prepare for the opening of the competitive electricity market in 1998 for Franchise Supply Customers, of which (Pounds)37 million was charged to the supply business and (Pounds)13 million was charged to the distribution business. Fiscal Years 1993, 1994 and 1995--reorganization costs of (Pounds)18 million, (Pounds)44 million and (Pounds)8 million, respectively. (2) Other income (loss) principally represents income from Yorkshire's investment in National Grid Group plc ("NGG") and, in Fiscal Year 1996, a gain resulting from the NGG Transaction (as defined herein) and earnings and losses from Yorkshire's investments in joint ventures and minority holdings. Notable items include: Fiscal Year 1997--gain on sale of Yorkshire's investment in Torch Telecom of (Pounds)15 million. Fiscal Year 1996--income from investment in NGG and gain in respect of the NGG Transaction as described under "Management's Discussion and Analysis of Financial Condition and Results of Operations--Introduction--NGG Transaction". Fiscal Year 1995--one-time termination payment received from Stockholm Stadhus AB of (Pounds)17 million. Fiscal Year 1994--loss on sale of Yorkshire's investment in Homepower Retail Limited of (Pounds)18 million. (3) Fiscal Year 1996 includes a tax charge of (Pounds)38 million relating to the NGG Transaction. (4) EBIT represents income before the sum of interest expense and income taxes. EBITDA represents income before the sum of interest expense, income taxes, depreciation and amortization. EBIT and EBITDA are provided for informational purposes only and such measures should not be construed as alternatives to operating income (as determined in accordance with US GAAP) as indicators of operating performance, or as alternatives to cash flows from operating activities (as determined in accordance with US GAAP) as measures of liquidity. EBIT and EBITDA are widely accepted financial indicators of a company's ability to incur and service debt. However, the measures of EBIT and EBITDA presented herein may not be comparable to similar measures presented by other companies. (5) The ratio of earnings to fixed charges is computed as the sum of pre-tax income (before extraordinary item), plus fixed charges divided by fixed charges. Fixed charges consist of interest expense and amortization of debt expense. (6) Solely for the convenience of the reader, pounds sterling amounts have been translated into US dollar amounts at the Noon Buying Rate on December 31, 1997 of $1.64 = (Pounds)1. See "Presentation of Certain Information and Exchange Rates".
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. Except as otherwise indicated, information in this Prospectus assumes (i) no exercise of the Underwriters' over-allotment option and (ii) the conversion of all outstanding shares of the Company's Series A Convertible Redeemable Preferred Stock (the "Series A Preferred Stock") and of all outstanding shares of the Company's Series B Convertible Redeemable Preferred Stock (the "Series B Preferred Stock") into an aggregate of 1,875,000 shares of Common Stock and a warrant to purchase 175,000 shares of Common Stock, all of which will occur automatically upon consummation of the Offering. IN THIS PROSPECTUS, UNLESS OTHERWISE INDICATED, THE INFORMATION FOR THE COMPANY AS OF ANY DATE OR FOR ANY PERIOD ON OR AFTER DECEMBER 31, 1997 GIVES PRO FORMA EFFECT TO EACH OF THE BRICOLEUR ACQUISITION, THE JMG-PACIFIC ACQUISITION AND THE MET ACQUISITION (AS SUCH TERMS ARE DEFINED HEREIN) AND THE RELATED FINANCINGS AS IF EACH SUCH TRANSACTION HAD BEEN COMPLETED AS OF SUCH DATE OR THE BEGINNING OF SUCH PERIOD. THE COMPANY Asset Alliance is an investment management holding company organized on February 1, 1996 to acquire preferred interests in privately owned investment management firms specializing in alternative investment strategies ("Alternative Managers"). The Company considers Alternative Managers to be those who use hedging or other risk modifying strategies to seek higher risk adjusted rates of return in various market environments. The Company generally purchases a 50% equity interest in a given firm and is granted a preferred right to a comparable percentage of the firm's gross revenues (the "Preferred Revenue Share"). Asset Alliance's strategic focus is to acquire interests in established mid-sized Alternative Managers with assets under management ranging from $50 million to $500 million. Upon completion of the MET Acquisition (which is conditioned upon the completion of the Offering), Asset Alliance will have acquired preferred interests in six Alternative Managers with aggregate assets under management of approximately $1.3 billion as of March 31, 1998. The Company's goal is to build a large and diversified family of Alternative Managers each possessing a high level of expertise in its chosen investment discipline. The alternative investment management business is one of the fastest growing segments of the domestic investment management industry. The Company believes that the domestic alternative investment management business consists of approximately 3,000 Alternative Managers with aggregate assets under management in excess of $350 billion representing a compound annual growth rate in excess of 38% since 1990. Moreover, the Company believes that global assets committed to Alternative Managers also have increased significantly as foreign investors have become aware of alternative investment strategies. Alternative Managers generally manage investment funds or separate accounts for institutional investors, high net worth investors and other investment funds. Alternative Managers generally charge higher asset-based fees on their assets under management than traditional investment managers and also are entitled to annual incentive performance fees or profit allocations on incremental positive performance. As a result, Alternative Managers with positive performance historically have generated substantially more revenues per dollar of assets under management at any given performance level than have traditional investment managers. This higher level and dual source of revenues is a distinguishing and attractive characteristic of the alternative investment management business. The Asset Alliance acquisition structure enables the Company to participate in this favorable revenue stream. Asset Alliance has developed an innovative and flexible acquisition structure which it believes aligns its strategic and financial goals with those of the principals (the "Principals") of the Alternative Managers in which it acquires an interest who are generally the key employees and owners of a substantial majority of the equity of an Alternative Manager. As used in this Prospectus, the term "Alternative Managers" refers to investment managers of the type in which the Company is interested in acquiring interests, and the term "Affiliated Firms" refers to those Alternative Managers in which the Company has acquired or contracted to acquire an interest. Acquisitions ordinarily are structured to allocate all net income of an Affiliated Firm, after payment of the Preferred Revenue Share to Asset Alliance, to the Principals, thereby permitting them to participate in the future growth of the Affiliated Firm in which they retain a significant ownership position and creating incentives for them to increase revenues and assets under management. As Affiliated Firms increase revenues, the Company's income from its Preferred Revenue Shares also will increase. Principals participate in and are encouraged to further the growth of the Company through ownership of Common Stock or Common Stock equivalents received as part of the consideration for the Preferred Revenue Share. Principals also may be eligible to receive incentive options to purchase Common Stock if the Affiliated Firm achieves specified revenue goals. Asset Alliance has actively encouraged and now generally requires the Principals to provide for orderly succession in the management and ownership of the Affiliated Firm in order to realize the value of their retained ownership positions. Asset Alliance itself does not provide Principals with a buy-out of their remaining ownership interest in the Affiliated Firm. Day-to-day management of the Affiliated Firms is delegated to the Principals. Asset Alliance, however, retains rights of consent on major matters. In addition, Asset Alliance has the right to appoint 50% or more of the members of the management board of certain of the Affiliated Firms, and has the right to appoint up to all of such members in the other Affiliated Firms, although the exercise of the right to appoint up to all such members could, except in limited circumstances, result in substantial payments to the affected Principals. The Principals of each Affiliated Firm retain full investment discretion with respect to their firm's assets under management. Asset Alliance provides expertise with respect to marketing and distribution services, strategic planning and administration, as well as back-office support and systems. The Company seeks to provide new product development services for the Affiliated Firms, including the integration of existing investment products and the distribution of new products that incorporate the investment strategies of several Affiliated Firms. The Company also actively introduces the Affiliated Firms to new sources of capital and new markets for their investment products which can result in access to long-term investment capital. Asset Alliance's marketing and operational support enables the Principals to focus to a greater extent on their primary expertise -- portfolio management. See "Business -- Growth Strategy -- Product Development and Marketing/Operational Support." The Affiliated Firms have grown rapidly in terms of revenues and assets under management since their respective inception dates. On a combined basis for the Affiliated Firms, total management and incentive performance fees have grown from $2.9 million for the year ended December 31, 1994 to $46.9 million for the year ended December 31, 1997, representing a compound annual growth rate of approximately 153%, while total assets under management have grown from $363 million as of December 31, 1994 to $1.3 billion as of March 31, 1998, representing a compound annual growth rate of 48%. On a pro forma basis for the year ended December 31, 1997 and for the three months ended March 31, 1998, the Company had gross revenues of $25.6 million and $7.4 million, respectively, amortization of intangibles of $9.9 million and $2.5 million, respectively, operating expenses of $8.7 million and $1.9 million, respectively, net (loss) income of ($207,000) and $752,000, respectively, EBITDA* of $17.5 million and $5.7 million, respectively, and EBITDA as adjusted** of $10.9 million and $3.5 million, respectively. On a historical basis for the year ended December 31, 1997 and for the three months ended March 31, 1998, the Company had gross revenues of $7.9 million and $2.8 million, respectively, amortization of intangibles of $201,000 and $315,000, respectively, operating expenses of $7.2 million and $1.8 million, respectively, net income of $564,000 and $410,000, - --------------- * EBITDA represents earnings before interest, income taxes, depreciation, amortization and extraordinary items. The Company believes EBITDA may be useful to investors as an indicator of the Company's ability to service debt, to make additional acquisitions and to meet working capital requirements. EBITDA, as calculated by the Company, may not be consistent with computations of EBITDA by other companies. EBITDA is not a measure of financial performance under generally accepted accounting principles and should not be considered an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. ** EBITDA as adjusted represents earnings after interest expense and income taxes but before depreciation and amortization, extraordinary items and amortization of original issue discount on the Company's subordinated convertible debentures. The Company believes that this measure may be useful to investors as another indicator of funds available to the Company, which may be used, among other things, to make additional acquisitions and repay debt obligations. EBITDA as adjusted, as calculated by the Company, may not be consistent with computations of EBITDA as adjusted by other companies. EBITDA as adjusted is not a measure of financial performance under generally accepted accounting principles and should not be considered an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. respectively, EBITDA of $1.3 million and $1.2 million, respectively, and EBITDA as adjusted of $852,000 and $745,000, respectively. The alternative asset management business as a whole remains highly fragmented and generally is characterized by entrepreneurial organizations which are often heavily or entirely dependent on the investment management, operational and marketing skills of a small group of individuals. Asset Alliance believes that principals of Alternative Managers will increasingly seek out an organization such as Asset Alliance which can provide them with substantial benefits, including the realization of a portion of the value of their firms, the framework for succession planning and the diversification of risk while allowing for continued day-to-day operational control of their firms with increased marketing and administrative support. Accordingly, Asset Alliance believes that significant opportunities exist for future growth of the Company through the acquisition of preferred interests in additional Alternative Managers. See "Business -- Industry Focus" and "Business -- Growth Strategy." Asset Alliance believes it is well positioned to take advantage of the opportunities in the alternative asset management market because of (i) management's experience in the alternative asset management business, (ii) the development of a strong list of potential acquisition targets, (iii) its experience in acquiring Alternative Managers, (iv) its innovative acquisition structure and its marketing and operational support capabilities, (v) its strategic relationship with Arthur J. Gallagher & Co. ("AJG Co."), the fifth largest insurance broker in the world and a long time participant in the alternative investment management industry, from which Asset Alliance has obtained not only significant financial backing, but also, under employment agreements with Asset Alliance, the services of two of Asset Alliance's executive officers and directors, who also are employees of AJG Co., and (vi) the quality of the Affiliated Firms in which the Company has already acquired a preferred interest and of their Principals. The Company believes that the Offering increases the Company's ability to acquire Alternative Managers by providing additional capital for such acquisitions and by establishing a trading market for the Common Stock, which will enhance the attractiveness of the Common Stock and Common Stock equivalents as part of the consideration for such acquisitions. ------------------------ The Company was incorporated in the State of Delaware in 1996. Its principal executive offices are located at 800 Third Avenue, New York, New York 10022, and its telephone number is (212) 207-8786. ------------------------ RECENT AND PENDING ACQUISITIONS The Company's principal means of implementing its growth strategy is through the acquisition of preferred interests in Alternative Managers. During 1996 and 1997, the Company acquired two existing Alternative Managers and established one new Alternative Manager in partnership with an experienced investment manager (an "Experienced Manager Launch"). In 1998, the Company acquired two Alternative Managers, and has entered into definitive agreements to acquire one additional Alternative Manager. In February 1998, the Company acquired a preferred interest in Bricoleur Capital Management LLC (the "Bricoleur Acquisition"). In March 1998, the Company entered into definitive agreements to acquire preferred interests in each of JMG Capital Management LLC and Pacific Assets Management LLC (collectively, the "JMG-Pacific Acquisition") and Metropolitan Capital Managers LLC, Metropolitan Capital Managers II LLC and Metropolitan Capital Advisors LLC (collectively, the "MET Acquisition"). The Company closed the JMG-Pacific Acquisition in April 1998 and currently anticipates that the MET Acquisition will close within 30 days after the Offering. Such acquisitions have been, or will be, accounted for under the equity method. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Recent and Pending Acquisitions." THE AFFILIATED FIRMS <TABLE> <CAPTION> ASSETS UNDER MANAGEMENT AS OF DATE FORMED(2)/ EQUITY OWNERSHIP MARCH 31, 1998 AFFILIATED FIRM INVESTMENT STYLE(1) DATE ACQUIRED PERCENTAGE (IN MILLIONS) - --------------- ------------------- ---------------- ---------------- ---------------- <S> <C> <C> <C> <C> Milestone Global Advisors L.P....... Hedged May 1993/ 99% $ 139 ("Milestone") New York, NY Mortgage-Backed July 1996 Securities Trading Trust Advisors LLC ("Trust Advisors")........................ Market Neutral July 1989/ 50% 242 Westport, CT Long/Short Equity; October 1996 Stable Value Silverado Capital Management LLC.... Convertible and March 1997/ 50% 20 ("Silverado") Saddle Brook, NJ Merger Arbitrage March 1997 Bricoleur Capital Management LLC.... Long/Short October 1993/ 50% 304 ("Bricoleur") San Diego, CA Equity February 1998 JMG Capital Management LLC.......... Diversified March 1992(3)/ 50% 282 and Pacific Assets Management Market Neutral April 1998 LLC (collectively, "JMG-Pacific") Arbitrage Los Angeles and San Francisco, CA Metropolitan Capital Managers LLC,.............................. Event Driven, July 1992/ 50% 306 Metropolitan Capital Managers II LLC Opportunistic Pending and Metropolitan Capital Advisors LLC (collectively, "MET") New York, NY ------ TOTAL.................................................................................... $1,293 ====== </TABLE> - --------------- (1) The general terms "arbitrage," "hedging" and "market neutral," as used herein, have the following meanings: (i) arbitrage means purchasing securities while selling short other related securities to attempt to exploit a perceived pricing inefficiency; (ii) hedging means establishing investment positions the performance of which will tend to offset that of other investment positions in an effort to reduce the effect of broad market movements or other factors affecting securities prices; and (iii) market neutral means a strategy which focuses on obtaining returns with low or no correlation to the market. (2) Date Affiliated Firm or predecessor firm formed. (3) JMG Capital Management LLC's predecessor firm was formed in March 1992 and Pacific Assets Management LLC's predecessor firm was formed in April 1996. THE OFFERING <TABLE> <S> <C> Common Stock offered hereby(1)..................... 7,700,000 shares Common Stock to be outstanding after the Offering(1)(2)................................... 24,341,808 shares Use of proceeds.................................... To repay indebtedness outstanding under the Credit Agreement (as defined herein) (approximately $30.0 million), to finance the cash portion of the MET Acquisition (approximately $18.4 million), to repay the Citco Loan (as defined herein) ($5.0 million) and the balance (approximately $31.0 million) for working capital needs and other general corporate purposes, including future acquisitions. See "Use of Proceeds." Nasdaq National Market symbol...................... AACO </TABLE> - --------------- (1) Assumes that the Underwriters' option to purchase up to an additional 1,155,000 shares to cover over-allotments is not exercised. (2) The 24,341,808 shares of Common Stock to be outstanding after the Offering excludes 784,594 shares of Common Stock reserved for issuance upon the exercise of outstanding options pursuant to the Asset Alliance 1996 Stock Option Plan, as amended (the "1996 Plan"), and all of the non-plan stock option agreements. See "Management -- Compensation, Benefit and Retirement Plans." Such outstanding shares include (i) an aggregate of 6,444,308 shares of Common Stock issuable upon the conversion of (A) $39.6 million aggregate principal amount of the Company's outstanding subordinated convertible debentures and (B) approximately $17.85 million aggregate principal amount of subordinated convertible debentures to be issued in the MET Acquisition and (ii) an aggregate of 957,500 shares of Common Stock issuable upon the exercise of 957,500 warrants (including 175,000 warrants issuable upon the conversion of the Series A Preferred Stock upon consummation of the Offering). SUMMARY RISK FACTORS Before making an investment decision, prospective investors should carefully consider all of the information set forth in this Prospectus and, in particular, should evaluate the risk factors set forth in "Risk Factors." These risks include, among others: - The Company's continued growth is dependent on the successful implementation of a strategy which primarily focuses on the acquisition of preferred interests in Alternative Managers. There can be no assurance that the Company will be able to locate or acquire suitable Alternative Managers in the future. The inability on an ongoing basis to acquire additional Alternative Managers on acceptable terms would limit the Company's growth and could adversely affect the Company and the market price of the Common Stock. - The Company's revenues consist almost entirely of the Preferred Revenue Shares received from the Affiliated Firms. Because a high percentage of the Affiliated Firms' revenues are dependent on the realization of incentive performance fees, unfavorable performance on balance by the Affiliated Firms would adversely affect the Preferred Revenue Shares and, therefore, the Company's revenues. The impact of unfavorable performance on the Company's revenues may be magnified by the existence of minimum performance benchmarks and loss recovery provisions that would reduce or postpone an Affiliated Firm's ability to collect performance fees. Although investment performance of the Affiliated Firms and the investment funds managed by them generally has been favorable in the past, there can be no assurance that such performance will be favorable in the future. - The Company's growth also depends on increasing the assets managed by the Affiliated Firms. There can be no assurance that the Company or the Affiliated Firms will succeed in attracting new assets or retaining those assets presently under management. Unfavorable investment performance by the Affiliated Firms would likely impair the growth or retention of assets under management. Unfavorable investment performance by the Affiliated Firms or relative underperformance of the Company's Common Stock also could result in Alternative Managers becoming less receptive to an investment by the Company. - The performance of the Company and the Affiliated Firms may be adversely affected by changes in economic and market conditions, including fluctuations in securities prices. The use of leverage (which magnifies losses to the extent the leverage costs more than the return on the assets supported by the leverage) and other investment techniques by the Affiliated Firms may increase the volatility of the Affiliated Firms' performance and the possibility of poor performance. There can be no assurance that economic and market conditions will be stable or that future performance by the Company and the Affiliated Firms will be favorable. - The Company and the Affiliated Firms rely on key management personnel, including the Principals, whose continued service cannot be assured. The loss of senior management at the Company or the Affiliated Firms could adversely affect the Company's business. - The Principals generally manage the day-to-day business of the Affiliated Firms autonomously, and the Company's management philosophy and financial arrangements with the Principals limit its ability to influence the management practices and policies of an Affiliated Firm even if the Affiliated Firm is experiencing operational difficulties. - The business of the Affiliated Firms is highly regulated, and the failure of an Affiliated Firm to comply with such regulations could result in fines, other sanctions and losses in assets under management and revenues. In addition, unforeseen regulatory changes affecting Alternative Managers could adversely affect the Company's business. - The business of the Affiliated Firms is highly competitive and the business of the Company is becoming competitive. Many potential competitors of the Company have greater resources than the Company, which may affect the Company's ability to compete for, or increase the cost of, future acquisitions of Alternative Managers. Many competitors and potential competitors of the Affiliated Firms have greater resources than the Affiliated Firms, which may affect the ability of the Affiliated Firms to compete for client assets. Each of the foregoing could adversely affect the Company's business. - The Company may be exposed to liabilities incurred by the Affiliated Firms and there can be no assurance that existing insurance coverage will be sufficient to offset such liabilities. - The Affiliated Firms' revenues from incentive compensation may vary substantially from one period to another and result in more volatile revenues to the Company than is characteristic of other asset management firms and holding companies. Therefore, the Company's quarterly results of operations may fluctuate significantly from quarter to quarter, which may adversely affect the market price of the Common Stock. - Future debt and equity financings could adversely affect the Company and its stockholders. - The Company could be adversely affected by write-offs of its current and future investments in the Affiliated Firms. - The Company could be adversely affected by limitations on the payment by Affiliated Firms of the Preferred Revenue Shares. - The ability to effect a change of control of the Company, even if such a change would be beneficial to the stockholders, could be limited by certain provisions of the Company's charter and by-laws and Delaware law, which could adversely affect the market price of the Common Stock. - Certain stockholders may have the ability to exert significant influence over the Board of Directors of the Company and to influence the outcome of corporate transactions requiring stockholder approval. - Purchasers of Common Stock in the Offering will experience immediate and substantial dilution in the pro forma net tangible book value per share of Common Stock purchased in the Offering. - The Company does not plan to declare or pay dividends, and the terms of its existing credit agreement (the "Credit Agreement") with Bank of America National Trust and Savings Association (the "Lending Bank") and the terms of its new credit facility (the "New Credit Facility") with the Lending Bank could limit the Company's ability to pay dividends and other distributions to its stockholders. - The lack of a prior public market, variations in equity market conditions, and the sale of shares eligible for future sale could adversely affect the market price of the Common Stock. BENEFITS TO RELATED PARTIES AJG Financial Services, Inc. ("AJG"), which will be the beneficial owner of approximately 19.4% of the outstanding Common Stock after giving effect to the Offering (including the number of shares of Common Stock having a total purchase price of $3 million, which the Company expects to be purchased by AJG in the Offering), will realize material benefits from the Offering because the guarantee of $20.0 million of the Company's indebtedness under the Credit Agreement by AJG Co., the parent company of AJG, will terminate upon repayment of such amount to the Lending Bank under the Credit Agreement. The Citco Group Limited (the "Citco Group"), which will be the beneficial owner of 2.6% of the outstanding Common Stock after giving effect to the Offering, also will realize material benefits from the Offering because the Company intends to use a portion of the net proceeds of the Offering to repay $5.0 million of indebtedness which was borrowed by the Company from Citco Banking Corporation N.V., an affiliate of the Citco Group, to finance a part of the cash portion of the purchase price for the JMG-Pacific Acquisition (the "Citco Loan"). See "Certain Relationships and Related Party Transactions." SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA The following table sets forth certain historical and pro forma financial data for the Company. The historical financial data as of December 31, 1996 and 1997, and for the period from February 1, 1996 (date of inception) to December 31, 1996 and the year ended December 31, 1997, have been derived from the audited consolidated financial statements of the Company included elsewhere herein, which statements have been audited by Ernst & Young LLP, independent auditors, as indicated in their report included elsewhere herein. The historical financial data as of March 31, 1998 and for the three months ended March 31, 1997 and 1998 are derived from the unaudited consolidated financial statements of the Company included elsewhere herein and include all adjustments (consisting only of normal recurring adjustments) which the Company considers necessary for a fair presentation of the financial position as of, and the results for, such interim periods. The results of operations for the three months ended March 31, 1998 are not necessarily indicative of the results for any future interim period or for the year ending December 31, 1998. The unaudited pro forma consolidated financial information is not necessarily indicative of the results that might have occurred had such transactions actually taken place at the beginning of the period specified and is not intended to be a projection of future results. This summary historical and pro forma financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," with the Company's historical consolidated financial statements and the notes thereto and the historical financial statements and related notes thereto of each of Bricoleur, JMG-Pacific and MET, with the Company's Unaudited Pro Forma Financial Consolidated Information and the notes thereto, and with the other financial information included elsewhere in this Prospectus. <TABLE> <CAPTION> HISTORICAL --------------------------------------------------- THREE MONTHS PERIOD FROM YEAR ENDED ENDED FEBRUARY 1, DECEMBER 31, 1997 MARCH 31, 1998 1996 THREE MONTHS ---------------------- ---------------------- (DATE OF ENDED INCEPTION) YEAR ENDED MARCH 31, PRO FORMA PRO FORMA TO DECEMBER 31, DECEMBER 31, ------------------ PRO AS PRO AS 1996 1997 1997 1998 FORMA(1) ADJUSTED(2) FORMA(1) ADJUSTED(2) --------------- ------------ ------- -------- -------- ----------- -------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA AND AS OTHERWISE INDICATED) <S> <C> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues: Management and incentive fees (including equity interests from preferred revenue share)................. $ 914 $7,923 $ 1,086 $ 2,843 $ 25,555 $ 25,555 $ 7,427 $ 7,427 Amortization expense associated with portion of equity interest..... (22) (201) (38) (315) (9,902) (9,902) (2,480) (2,480) Other.................... 86 339 55 56 339 339 56 56 ------ ------ ------- -------- -------- -------- -------- -------- Net revenues.............. 978 8,061 1,103 2,584 15,992 15,992 5,003 5,003 ------ ------ ------- -------- -------- -------- -------- -------- Expenses: Sub-advisory fee......... 529 4,864 654 951 4,864 4,864 951 951 Compensation and related expenses............... 297 1,412 195 645 2,715 2,715 702 702 Other operating expenses............... 228 900 128 205 1,090 1,090 251 251 ------ ------ ------- -------- -------- -------- -------- -------- Total expenses........... 1,054 7,176 977 1,801 8,669 8,669 1,904 1,904 ------ ------ ------- -------- -------- -------- -------- -------- Operating (loss) income... (76) 885 126 783 7,323 7,323 3,099 3,099 Interest income(expense), net...................... 55 36 18 (23) (6,619) (2,788) (1,591) (633) ------ ------ ------- -------- -------- -------- -------- -------- Income (loss) before income taxes............. (21) 921 144 760 704 4,535 1,508 2,466 Provision for income taxes.................... 38 357 55 350 911 2,443 756 1,139 ------ ------ ------- -------- -------- -------- -------- -------- Net (loss) income......... (59) 564 89 410 (207) 2,092 752 1,327 Preferred stock dividend requirement.............. 60 125 31 156 625 -- 156 -- ------ ------ ------- -------- -------- -------- -------- -------- Net (loss) income available to common stockholders............. $ (119) $ 439 $ 58 $ 254 $ (832) $ 2,092 $ 596 $ 1,327 ====== ====== ======= ======== ======== ======== ======== ======== Net (loss) income per share available to common stockholders: Basic.................... $(0.03) $ 0.10 $ 0.01 $ 0.05 $ (0.11) $ 0.12 $ 0.08 $ 0.08 ====== ====== ======= ======== ======== ======== ======== ======== Diluted.................. $(0.03) $ 0.09 $ 0.01 $ 0.04 $ (0.11) $ 0.12 $ 0.07 $ 0.07 ====== ====== ======= ======== ======== ======== ======== ======== Shares used to compute net (loss) income per share: Basic.................... 3,837 4,471 4,467 5,477 7,351 16,926 7,365 16,940 ====== ====== ======= ======== ======== ======== ======== ======== Diluted.................. 3,837 4,631 4,467 6,824 7,351 17,110 15,049 23,749 ====== ====== ======= ======== ======== ======== ======== ======== OTHER FINANCIAL DATA: Assets under management (at period end, in millions)................ $ 293 $ 391 $ 330 $ 705 $ 1,177 $ 1,177 $ 1,293 $ 1,293 EBITDA(3)................. 51 1,285 216 1,241 17,452 17,452 5,727 5,727 EBITDA as adjusted(4)..... -- 852 148 745 10,894 13,193 3,528 4,103 Net cash (used in) provided by operating activities(5)............ (2,734) (1,732) (358) (237) 8,310 10,609 2,546 3,121 Net cash used in investing activities(5)............ (877) (1,124) (717) (15,938) (65,636) (65,636) (64,400) (64,400) Net cash provided by (used in) financing activities(5)............ 6,834 11,802 (31) 10,460 64,647 96,347 53,805 85,036 (see footnotes on following page) </TABLE> <TABLE> <CAPTION> HISTORICAL PRO FORMA ------------------------------- PRO FORMA AS ADJUSTED DECEMBER 31, ---------- ------------ ----------------- MARCH 31, MARCH 31, MARCH 31, 1996 1997 1998 1998(6) 1998(7) ------ ------- ---------- ---------- ------------ <S> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Current assets.............................................. $6,518 $20,629 $ 13,477 $ 8,510 $ 39,585 Investments in preferred equity interests................... 1,921 3,956 47,690 137,630 137,630 Total assets................................................ 8,696 24,822 61,691 146,759 177,739 Current liabilities......................................... 720 4,227 2,313 2,313 2,225 Long-term debt.............................................. 750 2,690 19,631 104,616 51,259 Total liabilities........................................... 1,493 7,021 22,036 107,021 53,576 Total stockholders' equity.................................. 7,203 17,801 39,655 39,738 124,163 </TABLE> - --------------- (1) Gives effect to (i) the Bricoleur Acquisition, the JMG-Pacific Acquisition and the MET Acquisition as if such acquisitions had occurred as of the beginning of the respective periods, (ii) amortization and depreciation of contracts and other acquired assets, (iii) increased interest costs from borrowings to finance the Bricoleur Acquisition, the JMG-Pacific Acquisition and the MET Acquisition, (iv) certain other increased costs to the Company related to new employment arrangements and increased rent expense and (v) the related tax effects of the above adjustments. See "Management's Discussion and Analysis of Financial Condition and Results of Operations"
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001056364_newtech_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001056364_newtech_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO (THE "CONSOLIDATED FINANCIAL STATEMENTS"), APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, INFORMATION SET FORTH IN THIS PROSPECTUS (I) ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION AND (II) REFLECTS THE MERGER ON APRIL 3, 1998 OF ELECTRONIC INDUSTRIES OF AMERICA, INC. WITH AND INTO THE COMPANY, WITH THE COMPANY AS THE SURVIVING CORPORATION, AND A SIMULTANEOUS 10,000-FOR-ONE STOCK SPLIT. AS USED HEREIN, THE "COMPANY" MEANS NEWTECH ELECTRONICS INDUSTRIES, INC., ITS SUBSIDIARIES AND THEIR RESPECTIVE PREDECESSORS UNLESS THE CONTEXT OTHERWISE REQUIRES. THE COMPANY Newtech Electronics Industries, Inc., established in 1990, designs, sources, manufactures, and markets high-quality, value-priced brand-name consumer electronic products. The Company offers a broad line of audio, video and telecommunications products and selected home appliances, including televisions, video cassette players and recorders ("VCRs"), home audio systems, compact disc ("CD") players, cassette players, telephones and portable microwave ovens. The Company's strategy has been to build a portfolio of licensed and owned brand names, including White-Westinghouse, Admiral, Philco, Craig and Newtech. By having a portfolio of brand names, the Company is able to offer retailers proprietary and flexible merchandising programs. The Company currently sells its products to 15 retailers which operate over 14,000 retail outlets in the United States and Canada, including mass merchandisers such as Kmart Corporation ("Kmart") and Wal-Mart Stores, Inc. ("Wal-Mart"), and other retailers, including Family Dollar Stores, Inc. ("Family Dollar Stores"), Ames Department Stores, Inc. ("Ames"), Rite-Aid Corporation ("Rite-Aid") and Zellers Inc. ("Zellers"). In addition, the Company sells its products to customers in Mexico, the Caribbean and Central and South America. In January 1997, the Company entered into a long-term strategic alliance with Kmart, pursuant to which the Company appointed Kmart as the exclusive "discount department store" to market and sell a range of audio, video and telecommunications products in the United States under the White-Westinghouse brand name (the "White-Westinghouse Trademark"). The agreement provides for minimum purchases by Kmart of a total of $1.1 billion of White-Westinghouse brand consumer electronic products in specified yearly increments over a seven-and-a-half-year period. The Company believes that this strategic alliance provides a platform for significant growth. See "Business--Strategic Alliances." In large part due to this alliance, from 1996 to 1997, net sales increased 434% to $208.4 million from $39.1 million. The Company currently sells products to all other U.S. customers through open purchase orders. The Company plans to grow its business by expanding its customer base, acquiring and licensing additional brand names, expanding the territories and product lines available under its existing licenses, and increasing penetration of existing distribution channels. THE CONSUMER ELECTRONICS INDUSTRY The consumer electronics industry is large and diverse, encompassing a wide variety of technologies and products, including televisions, VCRs, audio systems, CD players, cassette players and telephones. The Consumer Electronics Manufacturers Association ("CEMA") estimates that total factory sales to the U.S. market in 1997 included approximately $8.4 billion of televisions (including TV/VCR combinations), $2.7 billion of VCRs, $1.7 billion of audio systems, $4.3 billion of CD players (including portable and home CD players), $0.3 billion of cassette players and $5.9 billion of telephones and telephone answering devices. Industry participants have traditionally offered such merchandise using three principal branding strategies and corresponding price points: (i) premium brands, such as Sony and Panasonic; (ii) mass-market brands, such as General Electric ("GE") and Magnavox; and (iii) value-priced brands, such as White-Westinghouse and GPX. BUSINESS STRATEGY The Company plans to establish itself as the leading supplier of high quality, value-priced consumer electronic products and selected household appliances. The Company believes that its portfolio of well-recognized brand names, superior design capabilities, flexible and low-cost sourcing and manufacturing and responsive after-sales service provide it with competitive advantages in achieving this goal. OPERATING STRATEGY. The Company's operating strategy is based on the following key elements: /bullet/ OFFER A PORTFOLIO OF WELL-RECOGNIZED BRAND NAMES. The Company believes that its strategy of offering a portfolio of well-recognized brand names enables retailers to differentiate themselves in the marketplace through proprietary and flexible merchandising programs. For example, the Company's recent strategic alliance with Kmart designates Kmart as the exclusive "discount department store" to market and sell a range of audio, video and telecommunications products in the United States under the White-Westinghouse Trademark. /bullet/ OFFER HIGH-QUALITY PRODUCTS OF SUPERIOR DESIGN. The Company has assembled an in-house design and engineering team with significant industry experience and expertise. The Company believes that the superior design and style of its products distinguish them from those of its competitors in the value-priced category and help drive consumer purchasing decisions. In addition, the Company highlights the design and style features of its products with detailed descriptions and illustrations on packaging, which the Company believes further distinguishes its products from those of its competitors. /bullet/ MAINTAIN LOW-COST, FLEXIBLE SOURCING AND MANUFACTURING CAPABILITIES. The Company's products are manufactured both at the Company's facility in the People's Republic of China (the "PRC") and at various third-party facilities throughout the world. The Company believes that its manufacturing facility allows flexibility in sourcing products and a better understanding of manufacturing cost and time parameters, which provide the Company with leverage in negotiating with outside manufacturers. /bullet/ PROVIDE RESPONSIVE AFTER-SALES SERVICE. The Company believes that after-sales service is an important competitive factor in the consumer electronics industry and that its model of responsive after-sales service is superior to others in the value-priced segment. This model is based on a toll-free interactive phone system that directs callers to independent local service centers staffed by in-house and outsourced personnel who provide basic troubleshooting and advanced technical support, thus enabling the Company to provide responsive service at a reasonable cost to the Company. GROWTH STRATEGY. The Company plans to continue to grow its business using a strategy comprised of the following principal elements: /bullet/ EXPAND ITS CUSTOMER BASE. The Company believes that it has significant opportunities to increase the number of outlets at which its products are sold. For example, in the second half of 1997, the Company began selling products to Ames, Bradlees, Inc. ("Bradlees"), Musicland Stores Corp. ("Musicland") and Heilig Meyers Co. ("Heilig Meyers"). Also, in the fourth quarter of 1997, the Company received its first purchase order from Zellers, a division of Hudson Bay Company, one of the largest retailers in Canada. The Company plans to pursue additional proprietary strategic alliances similar to its arrangement with Kmart, as well as other merchandising programs. /bullet/ ACQUIRE AND LICENSE ADDITIONAL BRAND NAMES. The Company plans to continue to acquire and license additional brand names in order to maximize its ability to provide retailers with proprietary and flexible merchandising programs. Towards this end, in September 1997, the Company obtained a license to sell portable microwave ovens in the United States and Canada under the Philco brand name, the Company's first product offering outside of the consumer electronics industry. In addition, in December 1997, the Company acquired the Craig trademark, a well-recognized brand name in the consumer electronics industry, under which the Company sells a broad range of its audio, video and telecommunications products, as well as portable microwave ovens. Although the acquisition of additional brand names may require the expenditure of funds, the Company believes that entering into new or modified license and distribution agreements will not involve significant costs. /bullet/ EXPAND THE SCOPE OF EXISTING BRANDS. The Company plans to continue to negotiate for the expansion of the territories and product lines under its existing brand-name licenses. In September 1997, the Company secured the right to add portable microwave ovens to the consumer electronic products it sells under the White-Westinghouse Trademark in the United States and Canada. In addition, in December 1997, the Company expanded its marketing territory for the Admiral brand name to include Mexico. /bullet/ INCREASE PENETRATION OF EXISTING DISTRIBUTION CHANNELS. The Company plans to leverage its customer relationships and success in broadening product lines and acquiring and licensing additional brand names to increase product sales to existing customers. The Company believes that this strategy is responsive to the desire of major retailers to source products through fewer vendors. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company ....................... shares Common Stock offered by the Selling Shareholders .......... shares Common Stock to be outstanding after the Offering ......... shares(1) Use of proceeds by the Company ............................ The Company intends to apply the net proceeds of the Offering to repayment of certain indebtedness, possible future acquisitions and general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol .................... NTCH </TABLE> - ---------------- (1) Does not include: (i) shares of Common Stock reserved for issuance upon exercise of the Underwriters' over-allotment option, (ii) an aggregate of 649,000 shares of Common Stock reserved for issuance upon exercise of outstanding options under the Company's 1997 Stock Option Plan and (iii) an aggregate of 351,000 shares of Common Stock reserved for issuance upon exercise of options available for grant under the 1997 Stock Option Plan. SUMMARY CONSOLIDATED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, -------------------------------------------- 1995 1996 1997 -------------- -------------- -------------- <S> <C> <C> <C> STATEMENT OF OPERATIONS: Net sales .............................................. $ 13,353 $ 39,060 $ 208,417 Cost of products sold .................................. 11,993 35,172 186,433 ------------ ------------ ------------ Gross profit ........................................... 1,360 3,888 21,984 Selling expenses(1) .................................... 846 1,285 10,533 General and administrative expenses .................... 1,155 1,842 4,598 Write-off of advances to affiliate ..................... -- 980 -- ------------ ------------ ------------ Total expenses ......................................... 2,001 4,107 15,131 ------------ ------------ ------------ Income (loss) from operations .......................... (641) (219) 6,853 Other (income) expense: Interest expense ...................................... 307 201 1,763 Interest and other income ............................. (197) (587) (581) ------------ ------------ ------------ Total other (income) expense ........................... 110 (386) 1,182 ------------ ------------ ------------ Income (loss) before income taxes ...................... (751) 167 5,671 Income tax (benefit) expense ........................... -- (135) (351) ------------ ------------ ------------ Net income (loss) ...................................... $ (751) $ 302 $ 6,022 ============ ============ ============ Net income (loss) per common share Basic and diluted ..................................... $ (0.08) $ 0.03 $ 0.60 Weighted average number of common shares outstanding Basic ................................................. 10,000,000 10,000,000 10,000,000 Diluted(2) ............................................ 10,000,000 10,000,000 10,093,024 <CAPTION> SIX MONTHS ENDED JUNE 30, ----------------------------- 1997 1998 -------------- -------------- <S> <C> <C> STATEMENT OF OPERATIONS: Net sales .............................................. $ 36,286 $ 81,714 Cost of products sold .................................. 31,704 74,968 ------------ ------------ Gross profit ........................................... 4,582 6,746 Selling expenses(1) .................................... 1,338 3,451 General and administrative expenses .................... 1,568 3,734 Write-off of advances to affiliate ..................... -- -- ------------ ------------ Total expenses ......................................... 2,906 7,185 ------------ ------------ Income (loss) from operations .......................... 1,676 (439) Other (income) expense: Interest expense ...................................... 137 1,614 Interest and other income ............................. (250) (233) ------------ ------------ Total other (income) expense ........................... (113) 1,381 ------------ ------------ Income (loss) before income taxes ...................... 1,789 (1,820) Income tax (benefit) expense ........................... 239 (765) ------------ ------------ Net income (loss) ...................................... $ 1,550 $ (1,055) ============ ============ Net income (loss) per common share Basic and diluted ..................................... $ 0.15 $ (0.11) Weighted average number of common shares outstanding Basic ................................................. 10,000,000 10,000,000 Diluted(2) ............................................ 10,000,000 10,000,000 </TABLE> AS OF JUNE 30, 1998 ------------------------- PRO FORMA AS ACTUAL ADJUSTED(3)(4) --------- --------------- BALANCE SHEET DATA: Cash and cash equivalents .......... $ 826 $ Current assets ..................... 68,932 Total assets ....................... 75,793 Total debt ......................... 41,752 Total shareholders' equity ......... 14,230 - ---------------- (1) Selling expenses in 1995, 1996, 1997 and for the six months ended June 30, 1997 and 1998 included freight costs of $49,000, $20,000, $4.5 million, $16,000 and $273,000, respectively. Approximately $4.3 million of such freight costs in 1997 were due primarily to the Company's decision to airfreight products to customers during the 1997 holiday season. The additional airfreight costs resulted mainly from delays in bringing the Company's PRC manufacturing facility to required production levels. (2) Includes the impact of 649,000 shares of Common Stock issuable upon the exercise of outstanding stock options granted under the Company's 1997 Stock Option Plan. See Note 10 to the Company's Consolidated Financial Statements included elsewhere in this Prospectus. (3) Adjusted to reflect the sale of shares of Common Stock offered by the Company at an assumed public offering price of $ per share and the application of the estimated net proceeds therefrom as set forth in "Use of Proceeds." (4) Gives pro forma effect to (i) the repayment to the Company of an approximately $290,000 loan to Joel Newman, the Company's Chairman, Chief Executive Officer and President and 45.0% shareholder, (ii) the repayment to the Company of an approximately $402,000 loan to a corporation wholly owned by Mr. Newman, and (iii) the payment of certain share subscription receivables, consisting of promissory notes in the aggregate principal amount of $5.0 million issued to the Company by Windmere Holdings Corporation, a 50.0% shareholder of the Company, as consideration for the purchase of Common Stock. See "Capitalization," "Management" and "Certain Transactions." Mr. Newman has agreed to repay in full the loan with a portion of the net proceeds to him from the sale of Common Stock in the Offering. With respect to the promissory notes issued to the Company by Windmere Holdings Corporation, one such promissory note, in the principal amount of $3.0 million, has been repaid in full as of June 30, 1998, and Windmere Holdings Corporation has agreed to repay in full the other promissory note, in the principal amount of $2.0 million, with a portion of the net proceeds to such Selling Shareholder from the sale of Common Stock in the Offering. See "Use of Proceeds" and "Principal and Selling Shareholders."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001056385_hiway_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001056385_hiway_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..3c99ef228287b94322fa96cef2abf680bae03c06
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus (i) reflects the 1-for-2 reverse split of the Company's Common Stock and the Company's reincorporation into Delaware, both of which will occur prior to the completion of this offering, and (ii) assumes that the Underwriters' over-allotment option will not be exercised. See "Description of Capital Stock" and "Underwriting." THE COMPANY Hiway is a leading global provider of Web hosting and related enhanced Internet services to small and medium sized businesses. With over 91,000 Web hosting accounts worldwide, the Company believes that it is currently the largest provider of business Web hosting services, as measured by number of Web hosting accounts. The Company focuses on delivering high-quality, reliable and flexible services that are backed by 24x7 customer support and can be scaled to host millions of Web sites. Hiway's services enable its customers to deploy, expand and update Web sites more rapidly and cost-effectively than internally developed solutions. The Company offers its solutions directly, through third- party dealers that resell and support the Company's Web hosting services ("VARs") and through large companies that offer the Company's Web hosting services to their established customer bases under their own brand names ("OEMs"). Hiway's OEMs include two of the five regional Bell operating companies ("RBOCs"), which two in the aggregate provide telecommunications services to approximately 30% of the U.S. business market. Use of the Internet has grown rapidly in recent years and represents a substantial opportunity for enterprises to interact in innovative ways with geographically distributed offices, employees, customers, suppliers and partners. Enterprises are increasingly recognizing the need to take advantage of the Internet by establishing Web sites that provide information about them and their products and services. As a result, high-performance and reliable Web site hosting services have become increasingly critical for many mainstream enterprises, and many enterprises are seeking to outsource these functions in order to ensure reliability, high performance, scalability, sophisticated monitoring and expert management. International Data Corporation ("IDC") estimates that Web hosting revenues generated by small and medium sized businesses in the U.S. will grow from $217 million in 1997 to over $3.4 billion in 2000, a 150% compound annual growth rate. Only 7% of all small businesses had a Web site at the end of 1997, according to IDC. However, IDC expects small and medium sized businesses to generate most of the growth in the Web hosting market, and to account for 95% of the total estimated Web hosting market in the United States by 2000. Many of these businesses find an outsourced Web hosting solution effective because they lack the technology expertise, IT resources, capital or ability to bear the time-to- market risks required to install, maintain and monitor their own Web servers and Internet connectivity. Currently, a number of these businesses utilize a Web site to provide basic information about their products and services. However, competition for Web traffic continues to drive businesses to create Web sites with greater functionality. Companies are also augmenting their Web sites with related enhanced Internet services such as secure electronic commerce, unified messaging and email. IDC estimates the market for enhanced Internet services in the United States, including Web hosting, will grow from approximately $352 million in 1997 to over $7 billion in 2000. The Company's services are designed to provide small to medium sized businesses with the high performance, scalability, flexibility and expertise they need to deploy a Web presence or expand its functionality cost effectively. The Company's services utilize a redundant, high-speed, secure, proprietary network architecture and a fault tolerant hosting platform, monitored on a 24x7 basis through two Network Operations Centers ("NOCs"). This enables Hiway to offer its customers a 99.9% uptime service level warranty. In addition, the Company has developed various proprietary operating system level tools to facilitate a high customer to server ratio, allowing Hiway to host over 2,000 Web sites on a single server. Hiway also utilizes various proprietary technologies to improve the back-end processing and customer interface components of its solutions, allowing customers to order, change and manage their Web hosting accounts easily and flexibly, regardless of their level of technical expertise. To meet its customers' needs, the Company offers Web hosting services on a range of operating systems and computing platforms: Silicon Graphics, Intel and Sun Microsystems. The Company expects to offer Windows NT-based Web hosting services commencing in the fourth quarter of 1998. The Company seeks to maximize market share by utilizing three distribution channels--direct sales, VARs and OEM partnerships. In addition to driving direct sales through the use of traditional media and online marketing campaigns, the Company has developed a global VAR network consisting of over 1,800 value-added resellers that resell the Company's services to customers located in more than 100 countries. The Company has also recently commenced the distribution of its services through OEM partners, which include two of the five RBOCs. The Company believes that these relationships present a significant opportunity to penetrate the large, established customer bases of these OEMs. Hiway intends to continue to increase its market share as a leading provider of Web hosting services to small to medium sized businesses. The Company also intends to seek additional opportunities by offering a range of enhanced Internet services. In order to achieve this objective, the Company plans to (i) increase its marketing efforts in order to extend its established brand recognition; (ii) continue to deliver high quality services at affordable prices; (iii) pursue multiple direct and indirect distribution channels; (iv) expand its presence internationally; and (v) leverage its innovative and proprietary technology. THE MERGER The Company was formed in May 1998 through the merger (the "Merger") of Best Internet Communications, Inc., a California corporation ("Best"), which was incorporated in September 1994, and Hiway Technologies, Inc., a Florida corporation ("Hiway Florida"), which was incorporated in April 1995. Prior to the Merger, Hiway Florida was a leading provider of shared server Web hosting domestically and, through its established network of VARs, internationally. Hiway Florida had also begun to expand its distribution channels by entering into relationships with RBOCs and other OEMs. Best was a leading provider of shared server Web hosting bundled with dial-up Internet access in the California market prior to the Merger, and also offered stand-alone high-speed Internet connectivity and co-location Web hosting services. In 1997 and the first quarter of 1998, Hiway Florida had revenues of $10.4 million and $4.3 million, respectively, and Best had revenues of $15.8 million and $4.5 million, respectively. At March 31, 1998, Hiway Florida had approximately 49,000 Web hosting accounts and Best had approximately 29,000 Web hosting accounts. The Company intends to reincorporate in Delaware in August 1998 and to change its name to Hiway Technologies, Inc. in connection with the reincorporation. Unless the context otherwise requires, the terms the "Company" and "Hiway" refer to Hiway Technologies, Inc., a Delaware corporation, its California and Florida predecessor corporations and its wholly-owned subsidiary, RapidSite, Inc., which was incorporated in Florida in January 1997. The address of the Company's principal executive offices is 5050 Blue Lake Drive, Suite 100, Boca Raton, Florida 33431, and its telephone number is (561) 989-8574. Hiway Technologies(R) and Best Internet Communications(R) (stylized) are registered trademarks of the Company. Hiway(TM), HWAY(TM), A Home For Your Page(TM) and RapidSite(TM) are trademarks of the Company. This Prospectus also includes trade names and trademarks of other companies. THE OFFERING <TABLE> <C> <S> Common Stock offered by the Company............. 3,500,000 shares Common Stock offered by the Selling 500,000 shares Stockholders.................................... Common Stock to be outstanding after this 21,378,911 shares(1) offering........................................ Use of proceeds by the Company.................. Working capital and other general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol.......... HWAY </TABLE> SUMMARY CONSOLIDATED FINANCIAL AND OTHER OPERATING DATA (in thousands, except per share and other operating data) <TABLE> <CAPTION> SIX MONTHS YEAR ENDED DECEMBER ENDED 31, JUNE 30, ----------------------- --------------- 1995 1996 1997 1997 1998 ------ ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues............................... $2,011 $12,217 $26,185 $11,535 $18,510 Income (loss) from operations.......... (539) 783 4,871 2,556 2,665 Historical net income (loss)........... $ (551) $ 664 $ 4,435 $ 2,353 $ 2,000 Historical diluted net income (loss) per share(3).......................... $(0.07) $ 0.05 $ 0.25 $ 0.14 $ 0.11 Pro forma net income (loss) (2)........ $ (551) $ 632 $ 2,871 $ 1,531 $ 1,256 Pro forma diluted net income (loss) per share (3)............................. $(0.07) $ 0.04 $ 0.17 $ 0.09 $ 0.07 Shares used in computing diluted net income (loss) per share (3)........... 8,436 14,063 17,439 17,170 18,150 OTHER OPERATING DATA: Web hosting accounts at end of period.. N/A 35,000 68,000 52,000 91,000 </TABLE> <TABLE> <CAPTION> JUNE 30, 1998 ----------------------- ACTUAL AS ADJUSTED (4) ------- --------------- <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents.............................. $ 5,088 $49,558 Working capital........................................ 2,257 46,727 Total assets........................................... 24,863 69,333 Long-term debt and capital lease obligations, less current portion....................................... 5,189 5,189 Total stockholders' equity............................. 11,532 56,002 </TABLE> - -------- (1) Based on shares outstanding as of June 30, 1998. Does not include (i) 722,413 shares of Common Stock issuable upon the exercise of stock options outstanding as of that date under the Company's Stock Option Plan (the "1995 Plan"), the Company's Amended and Restated 1996 Stock Option Plan (the "1996 Plan") or the Hiway Florida Stock Option Plan (the "Hiway Florida Plan"), with a weighted average per share exercise price of $5.90, (ii) 1,718,175 shares of Common Stock available as of that date for future grant under the Company's 1998 Equity Incentive Plan (the "1998 Plan"), (iii) 800,000 shares of Common Stock available for future grant or issuance immediately after this offering under the Company's 1998 Directors Stock Option Plan (the "Directors Plan") and 1998 Employee Stock Purchase Plan (the "Purchase Plan") or (iv) 1,557,558 shares of Common Stock issuable upon the exercise of warrants outstanding as of June 30, 1998, with a weighted average per share exercise price of $5.38. See "Capitalization,"
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001056562_united_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001056562_united_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary highlights some information from this prospectus. It may not contain all of the information important to you. To understand this offering fully, you should read the entire prospectus carefully, including the risk factors and the financial statements. Please note that throughout this prospectus we use the terms "Founding Companies" which means the seven companies that we acquired at the time of our initial public offering in May 1998, and "Selected Acquired Companies" which means the nine companies that we have acquired since May 1998 whose separate audited financial statements are required to be included in this prospectus. Additionally, references in this prospectus to "we","our" or "us" refer to United Road Services, Inc., not to any selling stockholders. THE COMPANY United Road Services, Inc. was formed in July 1997 to become a leading national provider of motor vehicle and equipment towing, recovery and transport services. We believe that we are now one of the largest providers of these services in the United States. Of our pro forma combined net revenue in the first six months of 1998, approximately 60.9% was derived from companies that we have acquired which primarily provide transport services, and approximately 39.1% was derived from companies that we have acquired which primarily provide towing and recovery services. We offer a broad range of towing, recovery, transport and related services, including: . towing, impounding and storing motor vehicles; . conducting lien sales and auctions of abandoned vehicles; . recovering heavy-duty commercial vehicles; and . transporting new and used vehicles and heavy construction equipment. We derive revenue from towing, recovery and transport services based on distance, time or fixed charges and from related impounding and storage fees. If impounded vehicles are not claimed by their owners within certain time periods, we are entitled to be paid from the proceeds of lien sales or auctions. Our customers include: . commercial entities, such as automobile leasing companies and insurance companies, . automobile auction companies, . automobile dealers, . repair shops and fleet operators, . municipalities, . law enforcement agencies such as police, sheriff and highway patrol departments, and . individual motorists. AVAILABLE INFORMATION We file annual, quarterly and special reports, proxy statements and other information with the SEC. You may read and copy reports, statements, or other information at the SEC's public reference rooms in Washington, D.C., New York, New York or Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. Our SEC filings are also available to the public from commercial document retrieval services and at the web site maintained by the SEC at "http://www.sec.gov." You can also review copies of our SEC filings at the offices of the Nasdaq Stock Market, Inc., 1735 K Street, N.W., Washington, D.C. 20006. We have filed with the SEC a registration statement on Form S-1 to register shares of our Common Stock. This prospectus is part of that registration statement and, as permitted by the SEC'S rules, does not contain all the information set forth in the registration statement. For further information with respect to us and the Common Stock, you may refer to the registration statement and to the exhibits and schedules filed as part of the registration statement. You can review and copy the registration statement and its exhibits and schedules at the public reference facilities maintained by the SEC as described above. The registration statement, including its exhibits and schedules, is also available on the SEC's web site. This prospectus may contain summaries of contracts or other documents. Because they are summaries, they will not contain all of the information that may be important to you. If you would like complete information about a contract or other document, you should read the copy filed as an exhibit to the registration statement. ---------------- This prospectus contains certain forward-looking statements which involve substantial risks and uncertainties. These forward-looking statements can generally be identified because the context of the statement includes words such as "may," "will," "expect," "anticipate," "intend," "estimate," "continue," "believe" or other similar words. Similarly, statements that describe our future plans, objectives and goals are also forward-looking statements. Our actual results, performance or achievements could differ materially from those expressed or implied in these forward-looking statements as a result of certain factors, including those set forth in "Risk Factors" and elsewhere in this prospectus. STRATEGY We believe there are significant opportunities for a national provider of towing, recovery and transport services with high quality service, to increase revenue and profitability by expanding its scope of services and customer base, achieving operating efficiencies and expanding through acquisitions. We also believe that the fragmented nature of the towing, recovery and transport markets presents an attractive opportunity for consolidation. Our management team includes executives with experience in implementing acquisition programs and effectively integrating acquired businesses as well as local managers who have significant contacts and experience in towing, recovery and transport services. We believe that this combination and the fragmented industry provides us with the capability and opportunity to implement an effective consolidation strategy. In order to increase our revenue and profitability, we have developed the following operating and acquisition strategies: Operating Strategy: . Provide High Quality Service . Expand Scope of Services and Customer Base . Achieve Operating Efficiencies . Maintain Local Expertise Acquisition Strategy: . Enter New Geographic Markets . Expand Within Existing Geographic Markets RECENT DEVELOPMENTS Since May 1998 when we completed our initial public offering and the Founding Company acquisitions, we have acquired 27 additional motor vehicle and equipment towing, recovery and transport service business (including Keystone Towing, Inc. ("Keystone")) for an aggregate of approximately $64.0 million in cash, 1,708,907 shares of Common Stock and the assumption of approximately $18.7 million of indebtedness. You can contact us at the following address and telephone number: United Road Services, Inc., 8 Automation Lane, Albany, New York 12205, 518-446-0140. SUMMARY PRO FORMA COMBINED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) The following unaudited pro forma combined statement of operations data present our historical financial data adjusted to give effect to (i) our purchases of the Founding Companies and the Selected Acquired Companies as if they occurred on January 1, 1997, and (ii) certain pro forma adjustments to the historical statement of operations data described below. The unaudited pro forma combined balance sheet data present our historical financial data adjusted to give effect to those purchases of Selected Acquired Companies which occurred after June 30, 1998, as if they occurred on June 30, 1998. The unaudited pro forma data are not necessarily indicative of the results we would have obtained had these events actually occurred on such dates or of our future results. You should refer to other sections of this prospectus for more information, including, "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and our Unaudited Pro Forma Combined Financial Statements and historical financial statements for the Founding Companies and the Selected Acquired Companies. <TABLE> <CAPTION> YEAR ENDED SIX MONTHS ENDED DECEMBER 31, 1997 JUNE 30, 1998 ----------------- ---------------- <S> <C> <C> STATEMENT OF OPERATIONS DATA: Net revenue............ $ 104,567 $ 61,521 Cost of revenue........ 76,186 43,606 --------- --------- Gross profit........... 28,381 17,915 Selling, general and administrative expenses(1)........... 14,510 9,572 Goodwill amortization(2)....... 2,721 1,494 --------- --------- Income from operations. 11,150 6,849 Interest expense and other, net............ 1,168 618 --------- --------- Income before income taxes................. 9,982 6,231 Income tax expense(3).. 4,827 2,936 --------- --------- Net income............. $ 5,155 $ 3,295 ========= ========= Diluted net income per share................. $ 0.58 $ 0.37 ========= ========= Shares used in computing diluted net income per share(4)... 8,941,179 8,941,179 ========= ========= <CAPTION> AT JUNE 30, 1998 ---------------------------------- ACTUAL PRO FORMA COMBINED <S> <C> BALANCE SHEET DATA: Working capital (deficit)............. $ 38,637 $ (3,933)(5) Total assets........... 133,736 161,928 Long-term obligations, excluding current installments.......... 1,156 3,253 Stockholders' equity... 121,883 133,688 </TABLE> (1) Includes agreed upon reductions in salaries, bonuses and benefits to the former owners of the Founding Companies and the Selected Acquired Companies of $5.6 million for the year ended December 31, 1997 and $2.7 million for the six-months ended June 30, 1998. (2) Consists of amortization, over a 40-year estimated life, of goodwill to be recorded as a result of the acquisitions of the Founding Companies and the Selected Acquired Companies. (3) Assumes a corporate income tax rate of 38% and the non-deductibility of goodwill. (4) Shares used in computing diluted net income per share include (i) 2,604,000 shares issued to members of our management in connection with our formation, (ii) 218,736 shares issued to investors pursuant to subscription agreements, (iii) 3,408,671 shares issued to owners of the Founding Companies and the Selected Acquired Companies in connection with the acquisitions; (iv) 2,594,863 of the shares issued in our initial public offering, representing that portion of the total 7,590,000 shares issued in our initial public offering necessary to pay the cash portion of the purchase price for the acquisitions of the Founding Companies and expenses related to the initial public offering and the acquisitions of the Founding Companies; and (v) 114,909 shares reflecting the incremental effect of options. (5) Includes $36.8 million paid to owners of the Selected Acquired Companies, representing the cash portion of the purchase price for the acquisitions of the Selected Acquired Companies.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001056677_bearcom_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001056677_bearcom_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..7e5bc5ee8af8f7c801f1af4779d87b9f2536c35d
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and notes thereto contained elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus assumes the Underwriters' over-allotment option is not exercised and gives retroactive effect to a 643-for-1 stock split effected in June 1998. All references to fiscal years, unless otherwise noted, refer to the Company's fiscal year which ends on April 30 of each year. The Company was incorporated in Texas in 1983. In December 1995, a subsidiary of the Company merged (the "Merger") with Bear Communications, Inc. ("Bear Communications"). Unless the context otherwise requires, all references to "BearCom" shall include the operations of the Company's direct and indirect wholly owned subsidiaries, Bear Communications, BearCom Operating, L.P. and their subsidiaries. On March 31, 1998, a wholly owned subsidiary of the Company, Condor Holdings, Inc. ("Condor Holdings"), acquired substantially all of the assets of Condor Communications, Inc. ("Condor Communications"). The foregoing transaction is referred to herein as the "Condor Acquisition." Unless the context otherwise requires, all references to "Condor" shall include Condor Communications (prior to the Condor Acquisition), Condor Holdings (following the Condor Acquisition), Condor's fifty percent interest in Condor Telecommunicationes, C.A., a corporation incorporated under the laws of Venezuela, which operates Condor's Caracas, Venezuela distribution sales office, and the entities that operate Condor's Prague, Czech Republic distribution sales office. As of the date hereof, the Company is awaiting regulatory approval in the Czech Republic with respect to the acquisition of those entities. Based on the advice of foreign counsel, the Company believes regulatory approval will be obtained. All references herein to "BearCom Group" or the "Company" shall include the combined operations of BearCom Group, Inc. and its subsidiaries, including BearCom and Condor. THE COMPANY The Company believes that it is the largest independent distributor of two-way radios in the world with leading positions in the field sales, catalog sales, export sales and rental segments of the market. The Company sells, services and rents a broad line of two-way radios manufactured by industry leaders including Motorola, Maxon, Icom and Tekk, which are used to communicate within a limited geographic area without incurring airtime or subscriber charges. In the United States, the Company's diverse customer base consists primarily of businesses and organizations across a wide variety of industries, whereas internationally the Company's customers generally are dealers which, in turn, sell to similar end users. In addition to its two-way radio product line, the Company sells complementary wireless communication and related products and services, including Orbacom console systems, Motorola messaging systems, Nextel handsets and services and PageMart pagers and services. See "Business -- Purchasing." Through BearCom, the Company markets its products and services through 32 field offices in the United States and two in Australia and through its catalog operations throughout the United States. In addition, through Condor, the Company exports its products and services through its distribution offices in Miami, Florida, Caracas, Venezuela and Prague, Czech Republic. The Company believes that it is the only significant distributor of two-way radios leveraging the strengths of these multiple channels of distribution. Through its field offices, BearCom provides technical assistance for customers requiring on-site evaluation of their communications needs. For customers not requiring this consultative approach (usually when system needs are relatively uncomplicated or purchases are add-on or replacement units to an existing system), the catalog marketing channel provides an efficient and convenient method of purchasing products. During fiscal 1998, BearCom mailed more than 5.7 million catalogs and marketing pieces and processed in excess of 182,000 customer orders. Most orders are processed and shipped on the same day they are received. The Company uses sophisticated information systems and proprietary software to monitor and refine its customer database, catalog mailings and inventory levels. In addition, the Company has a fleet of over 15,000 two-way radios for rent, which are used in connection with sporting events, conventions, disaster recovery projects, motion picture productions and other events. The Company believes that it is the largest renter of two-way radios in the United States. While the Company is not aware of any definitive industry data, the Company believes that the market for the sale, rental and service of two-way radios and related products is in excess of $5 billion per year in the United States and an additional $5 billion per year outside the United States. The independent distribution of two-way radios is a highly fragmented industry, with thousands of local and regional independent dealers. The manufacturing of two-way radios, however, is dominated by a small number of companies, each of which has developed a network of authorized dealers to augment their internal direct sales forces. These authorized dealer networks typically comprise several local dealerships within a given metropolitan area each generating less than $5 million in sales. Over the past ten years, manufacturers have strategically reduced the size of their direct sales forces, increasingly relying on independent authorized dealers. The Company believes that an increasing percentage of two-way radio products will continue to be sold through independent dealers as manufacturers continue to outsource distribution and other non-core functions. At the same time, the Company believes manufacturers are limiting their authorized dealer relationships to fewer, but larger organizations. The Company believes that these industry fundamentals and outsourcing trends will lead to a consolidation of independent dealers and that as the largest independent dealer worldwide it is well positioned to continue to acquire local authorized dealers and expand its international presence and market share. From fiscal 1993 through fiscal 1997, the Company's revenues grew, primarily as a result of internal growth and the opening of nine new sales offices, from $37.9 million to $69.6 million, representing a compound annual growth rate of approximately 16%. Since August 1996, the Company has accelerated its growth through the acquisition of the operations of 14 independent dealers, a majority of the assets of Motorola's Radio Products Group rentals business and substantially all of the assets of Condor. As a result, revenues for fiscal 1998 were $96.5 million, a 39% increase from revenues generated during fiscal 1997. On a pro forma basis, giving effect to the Condor Acquisition and the Other Acquisitions (as defined below under "Unaudited Pro Forma Condensed Consolidated Statement of Income"), the Company's revenues were $149.1 million for fiscal 1998. The Company intends to make additional acquisitions to establish a presence in new geographic areas and to enhance its presence in existing markets. In pursuing such acquisitions, the Company typically seeks to gain access to the acquired dealer's skills, experience and customer relationships, while consolidating its fulfillment operations into existing facilities. The Company's objective is to expand its position as the largest independent distributor of two-way radios and related products in the world and be the leading independent distributor in each market in which it serves. The Company's strategy is to further develop its network of field offices by opening and acquiring local operations, expand and enhance its catalog and export operations, leverage its complementary distribution channels by expanding its product and service offerings, and support such operations with rapid order fulfillment and superior customer service and technical support. The Company seeks to capitalize on its experience and reputation derived from more than 15 years of selling and marketing two-way radio products in executing its strategy and addressing its market opportunity. RECENT DEVELOPMENTS On March 31, 1998, the Company completed the Condor Acquisition. Condor reported revenues of $50.7 million during its fiscal year ended December 31, 1997. The Condor Acquisition was accounted for using the purchase method of accounting. Based in Miami, Florida, Condor is a leading exporter of two-way radio communication equipment and communication systems primarily to Latin America, Eastern Europe, Africa and the Middle East. In addition to its Miami office, Condor maintains distribution sales offices in Caracas, Venezuela and Prague, Czech Republic. Condor exports primarily Motorola two-way radio products. Virtually all of Condor's sales are denominated in U.S. dollars. The Condor Acquisition provides the Company an operational platform from which it can expand its international operations. The Company's strategy is to expand its international operations by establishing additional sales offices and offering additional products and services. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Condor," "Unaudited Pro Forma Condensed Consolidated Statement of Income" and the historical combined financial statements of Condor included elsewhere herein. THE OFFERING <TABLE> <S> <C> <C> Common Stock Offered: By the Company..................................... 3,333,000 shares By the Selling Shareholders........................ 426,000 shares ---------- Total...................................... 3,759,000 shares </TABLE> Common Stock to be Outstanding after the Offering........................ 10,002,515 shares(1) Use of Proceeds..................... To repay certain indebtedness and for general corporate purposes, including possible future acquisitions Proposed NYSE Trading Symbol........ BCG - ------------------------------ (1) Excludes 406,000 shares of Common Stock issuable upon the exercise of outstanding options, an additional 694,000 shares of Common Stock reserved for future issuance under the Company's 1998 Stock Option Plan, and 500,000 shares of Common Stock reserved for future issuance under the Company's 1998 Employee Stock Purchase Plan. See "Management -- Stock Option Plan" and "Management -- Stock Purchase Plan."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001056885_condominiu_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001056885_condominiu_prospectus_summary.txt
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+SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial data included elsewhere in this Prospectus, including the Consolidated Financial Statements and the Notes thereto. Unless otherwise indicated, all timeshare industry data contained herein is derived from information prepared by the American Resort Development Association ("ARDA"). This Prospectus contains certain statements of a forward-looking nature relating to future events or the future financial performance of the Company. In evaluating such statements, prospective investors should specifically consider the various factors identified in this Prospectus, including the matters set forth under the caption "Risk Factors", which could cause actual results to differ materially from those indicated in such forward-looking statements. Unless the context otherwise indicates, the "Company" or "Silverleaf" means Silverleaf Resorts, Inc. and its subsidiaries. "Pro forma" financial information appearing herein is prepared on the assumption that the Company's June 1997 initial public offering of 3.6 million shares of Common Stock (the "IPO"), the Equity Offering and the Note Offering occurred at the beginning of 1997 for statement of operations data and that the Equity Offering and the Note Offering occurred on December 31, 1997 for balance sheet data. "EBITDA" means earnings before interest, taxes, depreciation and amortization. THE COMPANY Silverleaf is a leading developer, marketer, and operator of "drive-to" timeshare resorts. The Company currently owns and operates eight "drive-to" resorts in Texas, Missouri, Illinois, and Massachusetts (the "Drive-to Resorts") and two "destination" resorts in Missouri (the "Destination Resorts", and together with the Drive-to Resorts, the "Existing Resorts"). The Company has recently acquired sites in Las Vegas, Nevada and Galveston, Texas to be developed as new Destination Resorts (the "New Resorts"). The number of annual one-week vacations ("Vacation Intervals") sold by the Company increased at an annual compounded growth rate of 29.2% from 1992 to 1997. At December 31, 1997, the Company had an inventory of 10,930 Vacation Intervals, was constructing 120 new units (6,192 new Vacation Intervals), and had plans to construct 2,670 additional units (137,728 new Vacation Intervals) at the Existing Resorts. The Company plans to construct 557 new units (28,964 Vacation Intervals) at the New Resorts. Due to standardized architectural designs and procedures, new units can typically be constructed at the Existing Resorts within 150 days, weather permitting. Silverleaf generally starts construction of new units after sales of Vacation Intervals for those units have occurred. The Company markets Vacation Intervals to value-conscious customers and has advanced proprietary computer systems to track and identify potential timeshare owners. Through exclusive marketing arrangements with race tracks, amusement parks, and other event sponsors, the Company identifies a substantial number of prospects in its target markets. As a result of these and other activities, more than 1,500 potential customers currently tour the resorts each week. During 1997, approximately 12.7% of the Company's visitors purchased Vacation Intervals from the Company. Management anticipates the pool of potential customers will remain strong due to expansion into new geographic regions and growth in major Texas metropolitan areas, population turnover in such metropolitan areas, and further penetration of the target markets. The Drive-to Resorts are designed to appeal to value-conscious vacationers seeking comfortable and affordable accommodations in locations convenient to their residences. These resorts are located proximate to major metropolitan areas (currently Dallas-Ft. Worth, Houston, San Antonio/Austin, St. Louis, Chicago, Boston and the greater New York City area), facilitating more frequent "short stay" getaways, which the Company believes is a growing vacation trend. The Destination Resorts, which are located in the popular country and western music entertainment resort area of Branson, Missouri, offer Silverleaf customers the opportunity to upgrade into higher quality resorts as their lifestyles and travel budgets permit. Both the Drive-to Resorts and the Destination Resorts are in rustic areas which provide a quiet, relaxing vacation environment and offer an economical alternative to commercial vacation lodging. Consistent with Silverleaf's strategy of targeting value-conscious customers, the average price of a Vacation Interval for a two-bedroom unit at the Existing Resorts was $7,834 for 1997 and $6,922 for 1996, as compared to the industry average price of $10,790 for 1996. The Company offers benefits to owners of Silverleaf Vacation Intervals ("Silverleaf Owners") which are uncommon in the timeshare industry. These benefits include (i) use of vacant lodging facilities at no extra cost through Silverleaf's "Endless Escape" program; (ii) year-round access to non-lodging amenities such as fishing, boating, horseback riding, tennis or golf on a "country-club" basis for little or no additional charge; and (iii) the right to exchange a Vacation Interval for a different time period or different Existing Resort through Silverleaf's internal exchange program. These benefits are subject to availability and other limitations. Most Silverleaf Owners may also enroll in the world's largest Vacation Interval exchange network operated by Resort Condominiums International ("RCI"). The Company's 1997 pro forma revenues and EBITDA were $84.9 million and $24.8 million, respectively. The Company's Common Stock is listed on the New York Stock Exchange ("NYSE") under the symbol "SVR", and based on a closing price of $26.75 per share on February 27, 1998, the Company had a market capitalization of approximately $300.0 million. TIMESHARE INDUSTRY The timeshare industry has experienced substantial growth since 1980. Annual worldwide timeshare sales have increased from approximately $490 million in 1980 to approximately $5 billion in 1995. The U.S. market has also grown considerably -- from $1.3 billion of timeshare sales in 1992 to $2.2 billion of timeshare sales in 1996. The growth in the U.S. timeshare industry is due to (i) higher quality accommodations and services; (ii) involvement of well-recognized hotel companies in the upscale segment of the industry such as Marriott Ownership Resorts ("Marriott"), The Walt Disney Company ("Disney"), and Hilton Hotels Corporation ("Hilton"); (iii) improved availability of financing for purchasers of Vacation Intervals; (iv) increased flexibility of timeshare use; (v) increased governmental regulation; and (vi) improved overall image of the industry. Since timeshare units typically include two bedrooms and kitchen facilities, Vacation Interval ownership is often more economical for a family than an extended vacation at a commercial lodging establishment. OPERATIONS Silverleaf's operations include (i) developing and acquiring timeshare resorts; (ii) marketing and selling Vacation Intervals to prospective first-time owners; (iii) marketing and selling upgraded Vacation Intervals to existing Silverleaf Owners; (iv) providing financing for the purchase of Vacation Intervals; and (v) operating timeshare resorts. The Company has substantial in-house capabilities which enable it to coordinate all aspects of development and expansion of the Existing Resorts and the development of the New Resorts, including site selection, design, and construction pursuant to standardized plans and specifications. The Company also performs substantially all marketing and sales functions internally and has made a significant investment in operating technology, including sophisticated telemarketing and computer systems and proprietary software applications. The Company identifies potential purchasers through internally developed marketing techniques, and sells Vacation Intervals through on-site sales offices located at certain Drive-to Resorts. This practice allows the Company to avoid the more expensive marketing costs of subsidized airfare and lodging which are typically associated with the timeshare industry. The Company believes its marketing program and operating and computer systems enable it to market and sell Vacation Intervals at a lower cost than its competitors in the timeshare industry. The costs of maintaining and operating the Existing Resorts are paid from Silverleaf Owners' monthly ownership dues. As part of the Vacation Interval sales process, the Company offers customer financing of up to 90% of the purchase price to be paid over a seven year period. At December 31, 1997, the Company had a portfolio of approximately 21,320 Vacation Interval customer notes receivable totalling approximately $104.4 million with an average yield of 14.5% per annum. The Company has typically financed its operations by pledging eligible customer notes to lending institutions who make loans secured by such notes. The Company has three revolving credit facilities providing for loans up to an aggregate of $115.0 million to finance customer notes receivable. See "Description of Certain Indebtedness". COMPETITIVE ADVANTAGES Silverleaf believes the following characteristics afford it certain competitive advantages: LOWER MARKETING, SALES, AND ADMINISTRATIVE COSTS. With resorts and on-site sales offices within a two-hour drive of its targeted customers, Silverleaf can invite potential customers to tour the Drive-to Resorts without offering subsidized airline tickets and lodging, a significant marketing expense typically incurred by competitors in the industry. Silverleaf has also reduced marketing, operating, and administrative costs through centralization and automation of many functions. While marketing and sales costs as a percentage of revenue will increase for newly acquired resorts, the Company believes that these costs will, over time, return to historical levels. CONVENIENT DRIVE-TO LOCATIONS. Silverleaf's Drive-to Resorts are located within a two-hour drive of a majority of the target customers' residences, which accommodates the growing demand for shorter, more frequent, close to home vacations. This proximity facilitates use of Silverleaf's Endless Escape program, which allows Silverleaf Owners to use vacant units for no additional charge, subject to availability and certain limitations. Silverleaf believes it is the only timeshare operator in the industry which offers its customers these benefits. Silverleaf Owners can also conveniently enjoy non-lodging resort amenities year-round on a "country-club" basis. SUBSTANTIAL INTERNAL GROWTH CAPACITY. At December 31, 1997, Silverleaf had an inventory of 10,930 Vacation Intervals, and a master plan to construct new units which will result in up to 143,920 additional Vacation Intervals at the Existing Resorts and 28,964 Vacation Intervals at the New Resorts. Silverleaf's master plan for construction of new units is contingent upon future sales at the Existing Resorts and New Resorts and the availability of financing, grant of government permits, and future land-planning and site-layout considerations. See "Risk Factors -- Development, Construction and Property Acquisition Activities". IN-HOUSE OPERATIONS. Silverleaf has in-house marketing, sales, financing, development, and property management capabilities. While Silverleaf utilizes outside contractors to supplement internal resources, when appropriate, the breadth of Silverleaf's internal capabilities allows greater control over all phases of its operations and helps maintain operating standards and reduce overall costs. LOWER CONSTRUCTION AND OPERATING COSTS. Silverleaf has developed and generally employs standard architectural designs and operating procedures which it believes significantly reduce construction and operating expenses. Standardization and integration also allow Silverleaf to rapidly develop new inventory in response to demand. Weather permitting, new units at Existing Resorts can normally be constructed on an "as needed" basis within 150 days. CENTRALIZED PROPERTY MANAGEMENT. Silverleaf operates all of the Existing Resorts on a centralized and collective basis, with operating and maintenance costs paid from Silverleaf Owners' monthly dues. Silverleaf believes that consolidation of resort operations benefits Silverleaf Owners by providing them with a uniform level of service, accommodations and amenities on a standardized, cost-effective basis. Such standardization also facilitates Silverleaf's internal exchange program, the Endless Escape program, and external Vacation Interval exchange programs. EXPERIENCED MANAGEMENT. The Company's senior management has extensive experience in the acquisition, development, and operation of timeshare resorts. Robert E. Mead, Chairman of the Board and Chief Executive Officer, has more than 18 years of experience in the timeshare industry and since 1995 has served as a director of ARDA, the primary trade association for the timeshare industry. Pro forma for the Equity Offering (assuming no exercise of the Underwriters' over-allotment option granted by Mr. Mead), Mr. Mead will own 53.5% of the Common Stock of the Company. The Company's senior officers have an average of ten years of experience in the timeshare industry. GROWTH STRATEGY Silverleaf intends to grow through the following strategies: INCREASING DEVELOPMENT AND SALES OF VACATION INTERVALS. Silverleaf intends to capitalize on its significant expansion capacity at the Existing Resorts and the New Resorts by increasing marketing, sales and development activities. At December 31, 1997, Silverleaf owned approximately 930 acres of land that were available for further development of timeshare units and amenities under Silverleaf's master plan. The master plan forecasts development of 3,347 additional units, which would result in 172,884 additional Vacation Intervals. During 1997, Silverleaf enhanced its marketing efforts, including increased telemarketing capacity arising from investments in computer and automated dialing technology, increased its sales force, enhanced its lead generation methods, completed the construction of new sales offices and other amenities, and commenced the development of newer lodging facilities. Furthermore, Silverleaf continues to emphasize its Endless Escape program designed to accommodate shorter, "getaway" vacations and has broadened its product offerings to include biennial (alternate year) intervals and short-term leasing packages ("Samplers") which are designed to accommodate more cost- conscious customers. INCREASING SALES OF UPGRADED INTERVALS. Silverleaf believes it can continue to improve operating margins by increasing sales of upgraded Vacation Intervals to existing Silverleaf Owners since these sales have significantly lower sales and marketing costs. Upgrades by a Silverleaf Owner include the purchase of (i) an interval in a newly designed and constructed standard unit; (ii) an interval in a larger or higher quality unit; (iii) an interval during a more desirable time period; (iv) an interval at a different Drive-to Resort; or (v) an interval at a Destination Resort. Silverleaf has designed specific marketing and sales programs to sell upgraded Vacation Intervals to Silverleaf Owners. Silverleaf continues to construct higher quality, larger units for sale as upgraded intervals, as well as developing new sites such as Las Vegas and Galveston as new upgrade locations. For example, at Ozark Mountain Resort in Branson, Missouri, luxury "President's View" units are offered for sale at prices ranging from $8,000 to $17,500 per Vacation Interval. Intervals exchanged for upgraded intervals are added back to inventory at historical cost for resale at the current offering price. Sales of upgrades increased to $16.9 million in 1997, from $7.9 million in 1996 (upgrade sales represented 24.6% of Silverleaf's Vacation Interval sales in 1997 as compared to 17.1% for 1996). Silverleaf incurs additional sales commissions upon the resale of Vacation Intervals reconveyed to Silverleaf by purchasers of upgraded intervals, and such sales absorb their proportionate share of marketing costs to the extent they displace the sale of another interval, although they do not directly result in incremental marketing costs. DEVELOPMENT OF ADDITIONAL RESORTS AND ACQUISITIONS. In 1997, Silverleaf purchased four sites for development as Drive-to and Destination Resorts and acquired an existing timeshare resort which it markets as a Drive-to Resort. Additionally, in 1998, Silverleaf entered into agreements to acquire property with a golf course near Atlanta, undeveloped land near Kansas City, and the right to manage eight timeshare resorts in seven states. Silverleaf continues to seek new properties for Drive-to Resorts in scenic wooded areas on lakes or waterways that are near major metropolitan areas that have favorable demographic characteristics. For Destination Resorts, Silverleaf seeks popular destination resort areas that are easily accessible to Silverleaf Owners. Silverleaf is currently exploring a number of other property acquisition opportunities, and intends to continue acquiring and/or developing additional resorts. RECENT DEVELOPMENTS Since the IPO, Silverleaf has taken actions which it believes will enhance its growth and competitive position within the U.S. timeshare industry. These actions are summarized below and discussed in greater detail elsewhere in this Prospectus. - DEVELOPMENT OF TIMBER CREEK PROPERTY. In August 1997, Silverleaf purchased the Timber Creek Resort for $1.2 million for development as a Drive-to Resort. Timber Creek is located approximately 50 miles south of St. Louis, Missouri. Silverleaf intends to develop approximately 600 units (31,200 Vacation Intervals) at the Timber Creek Resort and has begun construction of 24 units to be completed in May 1998. Sales of Vacation Intervals at Timber Creek began in October 1997. - DEVELOPMENT OF FOX RIVER PROPERTY. In August 1997, Silverleaf purchased the Fox River Resort for $1.7 million for development as a Drive-to Resort. Fox River is located approximately 70 miles southwest of Chicago. Silverleaf intends to develop approximately 492 (25,584 Vacation Intervals) units on this property, and has begun construction on 36 units to be completed in May 1998. Sales of Vacation Intervals at Fox River began in November 1997. - ACQUISITION OF OAK N' SPRUCE RESORT. In December 1997, Silverleaf acquired the Oak N' Spruce Resort, an existing 55 room hotel and 132 unit timeshare resort, in the Berkshire Mountains of western Massachusetts for $5.1 million. This new Drive-to Resort serves Boston and the greater New York City market and Silverleaf plans to develop approximately 420 new units (21,840 Vacation Intervals) at this resort. At December 31, 1997, there were 1,629 unsold Vacation Intervals at the resort. Silverleaf's sales of Vacation Intervals at Oak N' Spruce began in January 1998. - PURCHASE OF LAS VEGAS SITE. In November 1997, Silverleaf acquired a two acre parcel near the "strip" in Las Vegas, Nevada, for $2.7 million. Silverleaf intends to develop this property as a new Destination Resort which will contain approximately 157 units (8,164 Vacation Intervals). - PURCHASE OF GULF COAST SITE. In December 1997 and February 1998, Silverleaf acquired two adjoining tracts of land in Galveston, Texas, for approximately $1.7 million, to be developed as a new beach-front Gulf Coast Destination Resort. Silverleaf intends to develop approximately 400 units (20,800 Vacation Intervals) at this resort. - INCREASED SALES OF VACATION INTERVALS AT EXISTING RESORTS. In addition to the acquisitions described above, Silverleaf has also worked since the IPO to improve internal sales growth at the Existing Resorts. During 1997, Silverleaf sold 6,592 Vacation Intervals (excluding upgrades), compared to 5,634 and 4,464 during 1996 and 1995, respectively. Total revenues increased to $85.1 million in 1997 from $57.9 million and $44.1 million in 1996 and 1995, respectively. - ENHANCED CREDIT FACILITIES. Silverleaf has improved its borrowing capacity by increasing its revolving credit facilities from $80.0 million to $115.0 million and by acquiring a construction line of credit in the amount of $10.0 million. Additionally, Silverleaf has been able to negotiate lower interest rates and extensions of maturity of certain loan facilities. - INVESTMENTS IN OPERATING AND TELEMARKETING SYSTEMS. Silverleaf has invested approximately $2.1 million in a new automated dialer, telephone system, and a new central marketing facility to improve Silverleaf's operating and telemarketing systems. - ADDITIONS TO MANAGEMENT TEAM. Silverleaf formed a new acquisition subsidiary, Silverleaf Resort Acquisitions, Inc., and hired Thomas G. Franks as President of the new subsidiary. Mr. Franks is a former President of ARDA, the primary trade association for the timeshare industry, and has more than 15 years of experience in the timeshare industry. Silverleaf has also added marketing and operational personnel to its management team. - PROPOSED ACQUISITION OF MANAGEMENT RIGHTS. In January 1998, Silverleaf entered into an agreement with Crown Resort Co., LLC ("Crown") to acquire management rights to eight timeshare resorts in Alabama, Mississippi, North Carolina, Pennsylvania, South Carolina, Tennessee, and Texas for $3.8 million. At December 31, 1997 these eight resorts had approximately 21,500 timeshare owners. As part of this agreement, Silverleaf will also receive approximately 1,800 unsold Vacation Intervals and certain equipment at these eight resorts. This proposed acquisition is subject to completion of customary due diligence investigations and there is no assurance that it will be consummated. - PROPOSED PURCHASE OF ATLANTA AND KANSAS CITY SITES. In February 1998, Silverleaf entered into two agreements, one to acquire a 220 acre property, including a 160 acre golf course, 72 miles north of Atlanta, Georgia for $3.5 million, and another to acquire 260 acres of undeveloped land near Kansas City, Missouri for $1.6 million. If acquired, each property will be developed as a Drive-to Resort. Each contract may be cancelled by Silverleaf if it is not satisfied with each property after conducting its due diligence investigation. Accordingly, there is no assurance that either of these contracts will be closed. RESORTS SUMMARY The following tables set forth certain information regarding each of the Existing Resorts and New Resorts at December 31, 1997, unless otherwise indicated. EXISTING RESORTS <TABLE> <CAPTION> VACATION VACATION INTERVALS INTERVALS UNITS AT RESORTS AT RESORTS SOLD(A) ------------------------ ------------------------ --------- PRIMARY INVENTORY INVENTORY DATE IN MARKET AT PLANNED AT PLANNED SALES THROUGH 1997 RESORT/LOCATION SERVED 12/31/97 EXPANSION(B) 12/31/97 EXPANSION COMMENCED 12/31/97 ONLY --------------- --------------- --------- ------------ --------- ------------ --------- --------- ----- <S> <C> <C> <C> <C> <C> <C> <C> <C> DRIVE-TO RESORTS Holly Lake Dallas- 130 108 1,129 5,400(d) 1982 5,371 539 Hawkins, TX Ft. Worth, TX The Villages Dallas- 240 352 2,440 18,304(e) 1980 10,040 1,679 Flint, TX Ft. Worth, TX Lake O' The Woods Dallas- 64 16 412 800(d) 1987 2,788 332 Flint, TX Ft. Worth, TX Piney Shores Houston, TX 132 268 2,516 13,936(e) 1988 4,348 1,359 Conroe, TX Hill Country Austin-San 153(g) 254 1,886 12,700(d) 1984 5,764 1,391 Canyon Lake, TX Antonio, TX Timber Creek St. Louis, -- 600(h) -- 31,200(e)(h) 1997 32 32 DeSoto, MO MO Fox River Chicago, IL -- 492(h) -- 25,584(e)(h) 1997 49 49 Sheridan, IL Oak N' Spruce Boston, MA 132 420 1,629 21,840(e) 1998 -- -- South Lee, MA New York, NY(i) DESTINATION RESORTS Ozark Mountain Branson, 124 78 783 4,056(e) 1982 5,665 994 Kimberling City, MO MO Holiday Hills Branson, 24 202 135 10,100(d) 1984 1,065 217 Branson, MO MO --- ----- ------ ------- ------ ----- Total 999 2,790 10,930 143,920 35,122 6,592 === ===== ====== ======= ====== ===== <CAPTION> AVERAGE SALES PRICE AMENITIES/ RESORT/LOCATION IN 1997 ACTIVITIES(C) --------------- ------- ------------- <S> <C> <C> DRIVE-TO RESORTS Holly Lake $7,062 B,F,G,H, Hawkins, TX M,S,T The Villages 7,640 B,F,H, Flint, TX M,S,T Lake O' The Woods 6,743 F,M,S,T(f) Flint, TX Piney Shores 8,518 B,F,H, Conroe, TX M,S,T Hill Country 8,552 M,S,T(f) Canyon Lake, TX Timber Creek 5,599 B,F,G,M,S,T DeSoto, MO Fox River 5,465 G,M,S,T Sheridan, IL Oak N' Spruce -- F,G,S,T South Lee, MA DESTINATION RESORTS Ozark Mountain 7,282 B,F,H, Kimberling City, MO M,S,T Holiday Hills 8,046 G,M,S,T(f) Branson, MO ------ Total $7,854 ====== </TABLE> NEW RESORTS <TABLE> <CAPTION> PRIMARY MARKET DATE PLANNED PLANNED EXISTING AND PLANNED RESORT/LOCATION SERVED ACQUIRED UNITS(H) INTERVALS(H) AMENITIES/ACTIVITIES --------------- ------------- -------- -------- ------------ -------------------- <S> <C> <C> <C> <C> <C> Galveston, TX......................... Houston, TX 1997(j) 400(k) 20,800(e)(k) B,F,S,T Las Vegas, NV......................... Las Vegas, NV 1997 157(l) 8,164(e)(l) S ----- ------ Total......................... 557 28,964 ===== ====== </TABLE> (See notes commencing on following page) - --------------- (a) These totals do not reflect sales of upgraded Vacation Intervals to Silverleaf Owners. For the year ended December 31, 1997, upgrade sales at the Existing Resorts were as follows: <TABLE> <CAPTION> AVERAGE SALES PRICE FOR THE YEAR ENDED 12/31/97 UPGRADED VACATION -- NET OF RESORT INTERVALS SOLD EXCHANGED INTERVAL ------ ----------------- ---------------------- <S> <C> <C> Holly Lake..................................... 187 $3,809 The Villages................................... 642 4,871 Lake O' The Woods.............................. 79 3,630 Piney Shores................................... 671 3,850 Hill Country................................... 648 3,928 Timber Creek................................... 2 945 Fox River...................................... 1 2,780 Ozark Mountain................................. 1,468 4,645 Holiday Hills.................................. 210 3,938 ----- ------ 3,908 $4,326 ===== ====== </TABLE> (b) Represents units included in the Company's master plan. This plan is subject to change based upon various factors, including consumer demand, the availability of financing, grant of governmental permits, and future land-planning and site layout considerations. The following chart reflects the status of certain planned units at December 31, 1997: <TABLE> <CAPTION> LAND- LAND- LAND- USE USE USE PROCESS PROCESS PROCESS CURRENTLY IN SHELL NOT STARTED PENDING COMPLETE CONSTRUCTION COMPLETE TOTAL ----------- -------- -------- ------------ -------- ----- <S> <C> <C> <C> <C> <C> <C> Holly Lake................ 54 -- 50 -- 4 108 The Villages.............. 110 152 78 12 -- 352 Lake O' The Woods......... -- -- 16 -- -- 16 Piney Shores.............. 108 120 16 24 -- 268 Hill Country.............. 153 47 54 -- -- 254 Timber Creek.............. 576 -- -- 24 -- 600 Fox River................. 456 -- -- 36 -- 492 Oak 'N Spruce............. 420 -- -- -- -- 420 Ozark Mountain............ 36 -- 30 -- 12 78 Holiday Hills............. 70 -- 94 24 14 202 ----- --- --- --- -- ----- 1,983 319 338 120 30 2,790 ===== === === === == ===== </TABLE> "Land-Use Process Pending" means that the Company has commenced the process which the Company believes is required under current law in order to obtain the necessary land-use authorizations from the applicable local governmental authority with jurisdiction, including submitting for approval any architectural drawings, preliminary plats or other attendant items as may be required. "Land-Use Process Complete" means either that (i) the Company believes that it has obtained all necessary land-use authorizations under current law from the applicable local governmental authority with jurisdiction, including the approval and filing of any required preliminary or final plat and the issuance of building permit(s), in each case to the extent applicable, or (ii) upon payment of any required filing or other fees, the Company believes that it will under current law obtain such necessary authorizations without further process. See "Risk Factors -- Development, Construction and Property Acquisition Activities". The 30 "Shell Complete" units are currently devoted to such uses as a general store, registration office, sales office, activity center, construction office, or pro shop. The Company anticipates that these units will continue to be used for such purposes during 1998. (c) Principal amenities available to Silverleaf Owners at each resort are indicated by the following symbols: B -- boating; F -- fishing; G -- golf course; H -- horseback riding; M -- miniature golf; S -- swimming pool; and T -- tennis. (d) These figures are based on 50 one-week intervals per unit. In some instances, the Company may be able to market 52 one-week intervals per unit. (e) These figures are based on 52 one-week intervals per unit. (f) Boating is available near the resort. (g) Includes three units which have not been finished-out for accommodations and which are currently used for other purposes. (h) Engineering, architectural and construction estimates have not been completed by the Company, and there can be no assurance that the Company will develop these properties at the unit numbers currently projected. (i) The Company has commenced the timeshare permit process in New York, but has not yet received a permit. (The Company has a timeshare permit in Massachusetts.) (j) One portion of this tract was acquired in February 1998. (k) The Company has not commenced the timeshare permit process. The Company has commenced the land use permit process. See "Risk Factors -- Development, Construction and Property Acquisition Activities", "Business -- Description of New Resorts -- Gulf Coast Resort". (l) The Company has commenced the timeshare permit application process, but has not yet received a permit. The Company has not commenced the land use permit process. See "Risk Factors -- Regulation of Marketing and Sales of Vacation Intervals and Related Laws". CORPORATE BACKGROUND The Company was incorporated in Texas in 1989 and has been owned by and operated primarily under the direction of Robert E. Mead. Through the Company, Mr. Mead consolidated in one entity all of the timeshare assets and operations he previously owned through various partnerships and corporations affiliated with Mr. Mead. In May 1989, a partnership, of which the Company was the general partner, acquired seven of the Existing Resorts from a now dissolved corporation which was also owned and controlled by Mr. Mead. In December 1995 (i) through a merger of the partnership into the Company, such Existing Resorts were transferred to the Company, (ii) the Company acquired additional assets of the now dissolved corporation subject to certain indebtedness owing by such corporation to Mr. Mead and his affiliates; and (iii) the Company acquired Condominium Builders, Inc. ("CBI") and certain assets from Mr. Mead (all of the acquisition and merger transactions in (i), (ii) and (iii) are collectively referred to herein as the "Consolidation Transactions"). See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Certain Relationships and Related Transactions". The affiliated corporations and partnership whose assets were acquired by the Company through the Consolidation Transactions are sometimes collectively referred to herein as the "Affiliated Companies" or individually as an "Affiliated Company". The Company's principal executive offices are located at 1221 Riverbend Drive, Suite 120, Dallas, Texas 75247. The Company's telephone number is (214) 631-1166. THE EQUITY OFFERING The Company is also offering 2,000,000 shares of Common Stock and Mr. Mead is offering an additional 500,000 shares of Common Stock. The Equity Offering is being made by separate prospectus. Giving effect to the Equity Offering, the Company will have 13,311,517 shares of Common Stock outstanding. Silverleaf has not historically paid dividends on its Common Stock and does not expect to pay any dividends in the foreseeable future. SOURCES AND USES OF PROCEEDS The net proceeds from the Note Offering are estimated to be $72.1 million. The net proceeds from the Equity Offering are estimated to be $49.3 million. The following table sets forth the estimated sources and uses of funds at December 31, 1997: <TABLE> <CAPTION> AMOUNT ------------ (DOLLARS IN MILLIONS) <S> <C> Sources of Funds: Senior Subordinated Notes due 2008......................... $ 75.0 Common Stock(a)................. 53.5 ------ Total sources..................... $128.5 ====== </TABLE> <TABLE> <CAPTION> AMOUNT ------------ (DOLLARS IN MILLIONS) <S> <C> Uses of Funds: Pay existing debt(b)(c)(d)...... $ 48.9 Develop units, amenities, and infrastructure at Existing Resorts(e)................... 32.0 Develop units, amenities, and infrastructure at New Resorts(e)................... 6.0 Acquisitions, working capital and general corporate purposes(b)(e)............... 34.5 Fees, expenses, and other costs........................ 7.1 ------ Total uses........................ $128.5 ====== </TABLE> - --------------- (a) The Company is offering 2,000,000 primary shares of Common Stock in the Equity Offering. The assumed offering price of $26.75 was the closing price of Silverleaf's Common Stock on February 27, 1998. The Company will not receive any of the proceeds from the sale of the shares of Common Stock offered by Silverleaf's Chief Executive Officer, Robert E. Mead. (b) Indebtedness is projected to increase from $48.9 million at December 31, 1997, to approximately $68.6 million at the closing of the Equity Offering and the Note Offering, substantially all of which will be paid from the proceeds of the Equity Offering and the Note Offering. As a result, cash available at closing for acquisitions, working capital, and general corporate purposes will be reduced to approximately $14.8 million. Additionally, after repayment of existing indebtedness, there will be $125.0 million of borrowing capacity available under the Company's credit facilities. See "Description of Certain Indebtedness". (c) This includes $5.6 million owing to Credit Suisse First Boston Mortgage Capital, L.L.C., an affiliate of Credit Suisse First Boston Corporation, the lead managing underwriter for the Equity Offering and the Note Offering. This indebtedness is projected to increase to $13.0 million by the closing of the Equity Offering and the Note Offering. See "Underwriting". (d) At December 31, 1997, indebtedness to be repaid from the net proceeds of the Equity Offering and Note Offering bears interest at variable rates currently ranging from 4.2% to 14.0% per annum and matures between January 1998 and October 2005. See "Description of Certain Indebtedness". Indebtedness is projected to increase from $48.9 million to approximately $68.6 million at the closing of the Equity Offering and the Note Offering. Approximately $58.0 million of this indebtedness will have been incurred within one year prior to the date of this Prospectus. Of this indebtedness, $2.9 million was incurred to purchase the Fox River and Timber Creek resorts in St. Louis and Chicago, respectively, $2.7 million was incurred to purchase the New Resort in Las Vegas, $1.7 million was incurred to purchase the New Resort in Galveston, $5.1 million was incurred to purchase the Oak 'N Spruce Resort in the Berkshires, $2.9 million was incurred for capital leases of equipment, and the balance was used for working capital and general corporate purposes. (e) The Company currently anticipates investing these proceeds during 1998. Pending the final application of these proceeds, the Company will invest these proceeds in commercial paper, bankers' acceptances, other short-term investment-grade securities, or money-market accounts, and may utilize the proceeds for working capital purposes. THE NOTE OFFERING Securities Offered......... $75.0 million aggregate principal amount of % Senior Subordinated Notes due 2008. Maturity Date.............. , 2008. Interest Payment Dates..... and , commencing , 1998. Optional Redemption........ The Notes will be redeemable, in whole or in part, at the option of the Company on or after , 2003, at the redemption prices (expressed as a percentage of principal amount) set forth herein, plus accrued and unpaid interest, if any, to the date of redemption. In addition, prior to , 2001, the Company may redeem up to 33 1/3% of the aggregate principal amount of the Notes with the net cash proceeds of one or more public offerings of its Common Stock, at a redemption price equal to % of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date); provided, however, that at least 66 2/3% of the aggregate principal amount of the Notes originally issued remains outstanding after any such redemption. See "Description of Notes -- Optional Redemption". Change of Control.......... Upon a Change of Control (as defined), each holder of Notes will have the right to require the Company to repurchase all or a portion of such holder's Notes at a purchase price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon, if any, to the date of repurchase. See "Description of Notes -- Repurchase at the Option of Holders -- Change of Control" and "Risk Factors -- Payment Upon a Change of Control and Certain Asset Sales". Ranking.................... The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company. The Notes will rank pari passu with any future senior subordinated indebtedness of the Company and will rank senior to all subordinated indebtedness of the Company. At December 31, 1997, as adjusted to give effect to the consummation of the Equity Offering, the Note Offering and the application of the estimated net proceeds thereof, the Company would have had no Senior Debt (exclusive of unused commitments under the credit facilities). The Notes, subject to the Subsidiary Guarantees, will be structurally subordinated to all existing and future liabilities of the Guarantors. At December 31, 1997, as adjusted to give effect to the consummation of the Equity Offering and the Note Offering, such subsidiaries would have had no material liabilities (other than intercompany obligations). Subsidiary Guarantees...... The payment of the principal, interest, and premium (if any) on the Notes is fully and unconditionally guaranteed, jointly and severally, on a senior subordinated basis by all existing and future domestic Restricted Subsidiaries (as defined) of the Company. Each Subsidiary Guarantee will be subordinated to all existing and future Senior Debt of the respective Guarantor. See "Description of Notes -- Subsidiary Guarantees". The Company will be able to designate other current or future subsidiaries as Unrestricted Subsidiaries (as defined) under certain circumstances. Unrestricted Subsidiaries will not be required to issue a Subsidiary Guarantee with respect to the Notes and will not be subject to many of the restrictive covenants set forth in the Indenture pursuant to which the Notes will be issued (the "Indenture"). Covenants.................. The Indenture will contain certain covenants that, among other things, limit the ability of the Company and certain of its subsidiaries to incur additional Indebtedness and issue preferred stock, make certain investments, pay dividends or make other distributions, repurchase Equity Interests (as defined) or subordinated indebtedness, enter into certain transactions with affiliates, sell assets of the Company or certain of its subsidiaries, issue or sell Equity Interests of the Company's subsidiaries or enter into certain mergers and consolidations. In addition, under certain circumstances, the Company will be required to offer to purchase the Notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the date of purchase, with the proceeds of certain Assets Sales (as defined). See "Description of Notes -- Repurchase at the Option of Holders -- Asset Sales" and "-- Certain Covenants". Conditions................. The closing of the Note Offering will be conditioned upon, among other things, the closing of the Equity Offering. SUMMARY CONSOLIDATED HISTORICAL FINANCIAL, OPERATING AND PRO FORMA INFORMATION The summary consolidated historical financial and operating information set forth below has been derived from the consolidated financial statements of the Company which have been restated giving effect to the Consolidation Transactions utilizing the historical cost basis of the combined entities since these entities were under common ownership and control. The consolidated financial statements of the Company for 1995, 1996 and 1997 included herein were audited by Deloitte & Touche LLP. The data presented as of and for the year ended December 31, 1994 has been derived from the Company's audited consolidated financial statements which have not been included herein. Data presented as of and for the year ended December 31, 1993 has been derived from the Company's unaudited consolidated financial statements which in the opinion of management of the Company reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial position at such dates and results of operation for such periods. The summary pro forma financial information set forth below has been derived from the Unaudited Pro Forma Condensed Consolidated Financial Information and related Notes included elsewhere in this Prospectus. The pro forma statement of income data for the years ended December 31, 1997 gives effect, at the beginning of the period, to the IPO, the Equity Offering, the Note Offering, and the application of the proceeds thereof, and to the other adjustments set forth in the Unaudited Pro Forma Condensed Consolidated Financial Information and related Notes (collectively the "Pro Forma Adjustments"). The pro forma balance sheet data at December 31, 1997 gives effect to the Equity Offering, the Note Offering, and the application of the proceeds thereof to pay indebtedness and offering expenses, on the basis of and subject to the assumptions stated in the Notes thereto. The pro forma financial information does not purport to present the actual financial position or results of operations of the Company had the IPO, the Equity Offering, the Note Offering and events associated therewith occurred on the dates specified, nor are they necessarily indicative of the Company's future results of operations or financial position. During 1997 the Company began classifying the components of the previously reported provision for uncollectible notes into three categories based on the nature of the item -- credit losses, customer returns, and customer releases. The Company has reclassified these amounts within the previously reported financial information to conform to the classification for the year ended December 31, 1997. This reclassification has no balance sheet effect and has no effect on previously reported net income. See Note 2 of Notes to Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview". The Summary Consolidated Historical Financial, Operating and Pro Forma Information should be read in conjunction with the Consolidated Financial Statements and Notes thereto, "Unaudited Pro Forma Condensed Consolidated Financial Information" and Notes thereto, "Selected Consolidated Historical Financial and Operating Information" and Notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations". <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ----------------------------------------------- 1993 1994 1995 1996 1997 ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS, EXCEPT AVERAGE PRICE OF VACATION INTERVALS) <S> <C> <C> <C> <C> <C> STATEMENT OF INCOME DATA: Revenues: Vacation Interval sales................................. $18,627 $24,551 $34,091 $45,907 $68,682 Other income............................................ 7,188 7,348 9,981 12,018 16,376 ------- ------- ------- ------- ------- Total revenues..................................... 25,815 31,899 44,072 57,925 85,058 Costs and Operating Expenses: Cost of Vacation Interval sales......................... 2,094 2,648 3,280 2,805 6,600 Sales and marketing..................................... 10,219 12,929 17,850 21,839 30,559 Provision for uncollectible notes....................... 1,877 4,205 6,632 8,733 10,524 Operating, general and administrative................... 6,501 5,853 8,780 10,116 12,230 Depreciation and amortization........................... 477 590 863 1,264 1,497 Interest expense........................................ 1,426 1,642 3,609 4,759 4,664 ------- ------- ------- ------- ------- Total costs and operating expenses................. 22,594 27,867 41,014 49,516 66,074 ------- ------- ------- ------- ------- Income from continuing operations before income taxes..... $ 3,221 $ 4,032 $ 3,058 $ 8,409 $18,984 ======= ======= ======= ======= ======= OTHER FINANCIAL DATA: EBITDA(a)................................................. $ 5,124 $ 6,264 $ 7,530 $14,432 $25,145 Capital expenditures...................................... $ 2,986 $ 1,701 $ 4,497 $ 4,162 $ 8,692 Ratio of earnings to fixed charges(b)..................... 3.2x 3.4x 1.6x 2.5x 4.3x SUPPLEMENTAL PRO FORMA DATA: EBITDA(c)........................................................................................ $24,785 Total interest expense(d)........................................................................ $ 7,509 Ratio of EBITDA to total interest expense(c)(d)(e)............................................... 3.3x Ratio of net debt to EBITDA(e)(f)................................................................ NM Ratio of debt to EBITDA(e)....................................................................... 3.0x Ratio of earnings to fixed charges............................................................... 3.1x OTHER OPERATING DATA: Number of Existing Resorts at period end.................. 7 7 7 7 10 Number of Vacation Intervals sold (excluding upgrades)(g)............................................ 2,386 3,423 4,464 5,634 6,592 Number of upgraded Vacation Intervals sold................ 1,378 1,290 1,921 1,914 3,908 Number of Vacation Intervals in inventory................. 5,615 5,943 6,580 6,746 10,930 Average price of Vacation Intervals sold (excluding upgrades)(g)(h)......................................... $ 5,599 $ 5,821 $ 5,965 $ 6,751 $ 7,854 Average price of upgraded Vacation Intervals sold (net of exchanged interval)..................................... $ 3,822 $ 3,585 $ 3,885 $ 4,113 $ 4,326 </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1997 -------------------------- HISTORICAL PRO FORMA(e) ---------- ------------ <S> <C> <C> BALANCE SHEET DATA: Cash and equivalents...................................... $ 4,970 $ 77,499 Notes receivable, net..................................... 92,036 92,036 Total assets.............................................. 156,401 231,830 Senior Subordinated Notes, notes payable and capital lease obligations............................................. 48,871 75,000 Total liabilities......................................... 72,636 98,765 Shareholders' equity...................................... 83,765 133,065 </TABLE> - --------------- (a) EBITDA represents income from continuing operations before interest expense, income taxes and depreciation and amortization. EBITDA is presented because it is a widely accepted indicator of a company's financial performance. However, EBITDA should not be construed as an alternative to net income as a measure of the Company's operating results or to cash flows from operating activities (determined in accordance with generally accepted accounting principles) as a measure of liquidity. Since revenues from Vacation Interval sales include promissory notes received by the Company, EBITDA does not reflect cash flow available to the Company. Additionally, due to varying methods of reporting EBITDA within the timeshare industry, the computation of EBITDA for the Company may not be comparable to other companies in the timeshare industry which compute EBITDA in a different manner. The Company's management interprets trends in EBITDA to be an indicator of the Company's financial performance, in addition to net income and cash flows from operating activities (determined in accordance with generally accepted accounting principles). (b) For purposes of determining the ratio of earnings to fixed charges, earnings is defined as income from continuing operations before provision for income taxes, plus interest on indebtedness, imputed interest on the portion of rent expense (one-third) deemed to represent interest expense, and amortization of previously capitalized interest. Fixed charges consist of interest on indebtedness whether expensed or capitalized, imputed interest on the portion of rent expense (one-third) deemed to represent interest expense, amortization of debt expense, and discount or premium relating to any indebtedness whether expensed or capitalized. (c) Pro forma EBITDA is adjusted for the Pro Forma Adjustments. Pro Forma EBITDA is lower than historical EBITDA in 1997 due to two adjustments relating to the IPO in June 1997. The difference is due to (i) lower interest income associated with amounts due from affiliates that was repaid indirectly from the IPO proceeds and (ii) expenses associated with being a public company. See "Unaudited Pro Forma Condensed Consolidated Financial Information". (d) Pro forma total interest expense is defined as pro forma interest expense plus pro forma capitalized interest, as adjusted for the Pro Forma Adjustments. No interest income has been assumed on proceeds of the IPO, the Equity Offering and Note Offering. Assuming interest income of 5.5% (current market rate) on such proceeds, the ratio of pro forma EBITDA to pro forma net interest expense for 1997 would have been 7.0x. The ratio of pro forma EBITDA to pro forma net interest expense differs from the Consolidated Coverage Ratio (as defined herein) as set forth in the Indenture. See "Description of Notes".
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+SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial data included elsewhere in this Prospectus, including the Consolidated Financial Statements and the Notes thereto. Unless otherwise indicated, all timeshare industry data contained herein is derived from information prepared by the American Resort Development Association ("ARDA"). This Prospectus contains certain statements of a forward-looking nature relating to future events or the future financial performance of the Company. In evaluating such statements, prospective investors should specifically consider the various factors identified in this Prospectus, including the matters set forth under the caption "Risk Factors", which could cause actual results to differ materially from those indicated in such forward-looking statements. Unless the context otherwise indicates, the "Company" or "Silverleaf" means Silverleaf Resorts, Inc. and its subsidiaries. "Pro forma" financial information appearing herein is prepared on the assumption that the Company's June 1997 initial public offering of 3.6 million shares of Common Stock (the "IPO"), the Equity Offering and the Note Offering occurred at the beginning of 1997 for statement of operations data and that the Equity Offering and the Note Offering occurred on December 31, 1997 for balance sheet data. "EBITDA" means earnings before interest, taxes, depreciation and amortization. THE COMPANY Silverleaf is a leading developer, marketer, and operator of "drive-to" timeshare resorts. The Company currently owns and operates eight "drive-to" resorts in Texas, Missouri, Illinois, and Massachusetts (the "Drive-to Resorts") and two "destination" resorts in Missouri (the "Destination Resorts", and together with the Drive-to Resorts, the "Existing Resorts"). The Company has recently acquired sites in Las Vegas, Nevada and Galveston, Texas to be developed as new Destination Resorts (the "New Resorts"). The number of annual one-week vacations ("Vacation Intervals") sold by the Company increased at an annual compounded growth rate of 29.2% from 1992 to 1997. At December 31, 1997, the Company had an inventory of 10,930 Vacation Intervals, was constructing 120 new units (6,192 new Vacation Intervals), and had plans to construct 2,670 additional units (137,728 new Vacation Intervals) at the Existing Resorts. The Company plans to construct 557 new units (28,964 Vacation Intervals) at the New Resorts. Due to standardized architectural designs and procedures, new units can typically be constructed at the Existing Resorts within 150 days, weather permitting. Silverleaf generally starts construction of new units after sales of Vacation Intervals for those units have occurred. The Company markets Vacation Intervals to value-conscious customers and has advanced proprietary computer systems to track and identify potential timeshare owners. Through exclusive marketing arrangements with race tracks, amusement parks, and other event sponsors, the Company identifies a substantial number of prospects in its target markets. As a result of these and other activities, more than 1,500 potential customers currently tour the resorts each week. During 1997, approximately 12.7% of the Company's visitors purchased Vacation Intervals from the Company. Management anticipates the pool of potential customers will remain strong due to expansion into new geographic regions and growth in major Texas metropolitan areas, population turnover in such metropolitan areas, and further penetration of the target markets. The Drive-to Resorts are designed to appeal to value-conscious vacationers seeking comfortable and affordable accommodations in locations convenient to their residences. These resorts are located proximate to major metropolitan areas (currently Dallas-Ft. Worth, Houston, San Antonio/Austin, St. Louis, Chicago, Boston and the greater New York City area), facilitating more frequent "short stay" getaways, which the Company believes is a growing vacation trend. The Destination Resorts, which are located in the popular country and western music entertainment resort area of Branson, Missouri, offer Silverleaf customers the opportunity to upgrade into higher quality resorts as their lifestyles and travel budgets permit. Both the Drive-to Resorts and the Destination Resorts are in rustic areas which provide a quiet, relaxing vacation environment and offer an economical alternative to commercial vacation lodging. Consistent with Silverleaf's strategy of targeting value-conscious customers, the average price of a Vacation Interval for a two-bedroom unit at the Existing Resorts was $7,834 for 1997 and $6,922 for 1996, as compared to the industry average price of $10,790 for 1996. The Company offers benefits to owners of Silverleaf Vacation Intervals ("Silverleaf Owners") which are uncommon in the timeshare industry. These benefits include (i) use of vacant lodging facilities at no extra cost through Silverleaf's "Endless Escape" program; (ii) year-round access to non-lodging amenities such as fishing, boating, horseback riding, tennis or golf on a "country-club" basis for little or no additional charge; and (iii) the right to exchange a Vacation Interval for a different time period or different Existing Resort through Silverleaf's internal exchange program. These benefits are subject to availability and other limitations. Most Silverleaf Owners may also enroll in the world's largest Vacation Interval exchange network operated by Resort Condominiums International ("RCI"). The Company's 1997 pro forma revenues and EBITDA were $84.9 million and $24.8 million, respectively. The Company's Common Stock is listed on the New York Stock Exchange ("NYSE") under the symbol "SVR", and based on a closing price of $26.75 per share on February 27, 1998, the Company had a market capitalization of approximately $300.0 million. TIMESHARE INDUSTRY The timeshare industry has experienced substantial growth since 1980. Annual worldwide timeshare sales have increased from approximately $490 million in 1980 to approximately $5 billion in 1995. The U.S. market has also grown considerably -- from $1.3 billion of timeshare sales in 1992 to $2.2 billion of timeshare sales in 1996. The growth in the U.S. timeshare industry is due to (i) higher quality accommodations and services; (ii) involvement of well-recognized hotel companies in the upscale segment of the industry such as Marriott Ownership Resorts ("Marriott"), The Walt Disney Company ("Disney"), and Hilton Hotels Corporation ("Hilton"); (iii) improved availability of financing for purchasers of Vacation Intervals; (iv) increased flexibility of timeshare use; (v) increased governmental regulation; and (vi) improved overall image of the industry. Since timeshare units typically include two bedrooms and kitchen facilities, Vacation Interval ownership is often more economical for a family than an extended vacation at a commercial lodging establishment. OPERATIONS Silverleaf's operations include (i) developing and acquiring timeshare resorts; (ii) marketing and selling Vacation Intervals to prospective first-time owners; (iii) marketing and selling upgraded Vacation Intervals to existing Silverleaf Owners; (iv) providing financing for the purchase of Vacation Intervals; and (v) operating timeshare resorts. The Company has substantial in-house capabilities which enable it to coordinate all aspects of development and expansion of the Existing Resorts and the development of the New Resorts, including site selection, design, and construction pursuant to standardized plans and specifications. The Company also performs substantially all marketing and sales functions internally and has made a significant investment in operating technology, including sophisticated telemarketing and computer systems and proprietary software applications. The Company identifies potential purchasers through internally developed marketing techniques, and sells Vacation Intervals through on-site sales offices located at certain Drive-to Resorts. This practice allows the Company to avoid the more expensive marketing costs of subsidized airfare and lodging which are typically associated with the timeshare industry. The Company believes its marketing program and operating and computer systems enable it to market and sell Vacation Intervals at a lower cost than its competitors in the timeshare industry. The costs of maintaining and operating the Existing Resorts are paid from Silverleaf Owners' monthly ownership dues. As part of the Vacation Interval sales process, the Company offers customer financing of up to 90% of the purchase price to be paid over a seven year period. At December 31, 1997, the Company had a portfolio of approximately 21,320 Vacation Interval customer notes receivable totalling approximately $104.4 million with an average yield of 14.5% per annum. The Company has typically financed its operations by pledging eligible customer notes to lending institutions who make loans secured by such notes. The Company has three revolving credit facilities providing for loans up to an aggregate of $115.0 million to finance customer notes receivable. See "Description of Certain Indebtedness". COMPETITIVE ADVANTAGES Silverleaf believes the following characteristics afford it certain competitive advantages: LOWER MARKETING, SALES, AND ADMINISTRATIVE COSTS. With resorts and on-site sales offices within a two-hour drive of its targeted customers, Silverleaf can invite potential customers to tour the Drive-to Resorts without offering subsidized airline tickets and lodging, a significant marketing expense typically incurred by competitors in the industry. Silverleaf has also reduced marketing, operating, and administrative costs through centralization and automation of many functions. While marketing and sales costs as a percentage of revenue will increase for newly acquired resorts, the Company believes that these costs will, over time, return to historical levels. CONVENIENT DRIVE-TO LOCATIONS. Silverleaf's Drive-to Resorts are located within a two-hour drive of a majority of the target customers' residences, which accommodates the growing demand for shorter, more frequent, close to home vacations. This proximity facilitates use of Silverleaf's Endless Escape program, which allows Silverleaf Owners to use vacant units for no additional charge, subject to availability and certain limitations. Silverleaf believes it is the only timeshare operator in the industry which offers its customers these benefits. Silverleaf Owners can also conveniently enjoy non-lodging resort amenities year-round on a "country-club" basis. SUBSTANTIAL INTERNAL GROWTH CAPACITY. At December 31, 1997, Silverleaf had an inventory of 10,930 Vacation Intervals, and a master plan to construct new units which will result in up to 143,920 additional Vacation Intervals at the Existing Resorts and 28,964 Vacation Intervals at the New Resorts. Silverleaf's master plan for construction of new units is contingent upon future sales at the Existing Resorts and New Resorts and the availability of financing, grant of government permits, and future land-planning and site-layout considerations. See "Risk Factors -- Development, Construction and Property Acquisition Activities". IN-HOUSE OPERATIONS. Silverleaf has in-house marketing, sales, financing, development, and property management capabilities. While Silverleaf utilizes outside contractors to supplement internal resources, when appropriate, the breadth of Silverleaf's internal capabilities allows greater control over all phases of its operations and helps maintain operating standards and reduce overall costs. LOWER CONSTRUCTION AND OPERATING COSTS. Silverleaf has developed and generally employs standard architectural designs and operating procedures which it believes significantly reduce construction and operating expenses. Standardization and integration also allow Silverleaf to rapidly develop new inventory in response to demand. Weather permitting, new units at Existing Resorts can normally be constructed on an "as needed" basis within 150 days. CENTRALIZED PROPERTY MANAGEMENT. Silverleaf operates all of the Existing Resorts on a centralized and collective basis, with operating and maintenance costs paid from Silverleaf Owners' monthly dues. Silverleaf believes that consolidation of resort operations benefits Silverleaf Owners by providing them with a uniform level of service, accommodations and amenities on a standardized, cost-effective basis. Such standardization also facilitates Silverleaf's internal exchange program, the Endless Escape program, and external Vacation Interval exchange programs. EXPERIENCED MANAGEMENT. The Company's senior management has extensive experience in the acquisition, development, and operation of timeshare resorts. Robert E. Mead, Chairman of the Board and Chief Executive Officer, has more than 18 years of experience in the timeshare industry and since 1995 has served as a director of ARDA, the primary trade association for the timeshare industry. Pro forma for the Equity Offering (assuming no exercise of the Underwriters' over-allotment option granted by Mr. Mead), Mr. Mead will own 53.5% of the Common Stock of the Company. The Company's senior officers have an average of ten years of experience in the timeshare industry. GROWTH STRATEGY Silverleaf intends to grow through the following strategies: INCREASING DEVELOPMENT AND SALES OF VACATION INTERVALS. Silverleaf intends to capitalize on its significant expansion capacity at the Existing Resorts and the New Resorts by increasing marketing, sales and development activities. At December 31, 1997, Silverleaf owned approximately 930 acres of land that were available for further development of timeshare units and amenities under Silverleaf's master plan. The master plan forecasts development of 3,347 additional units, which would result in 172,884 additional Vacation Intervals. During 1997, Silverleaf enhanced its marketing efforts, including increased telemarketing capacity arising from investments in computer and automated dialing technology, increased its sales force, enhanced its lead generation methods, completed the construction of new sales offices and other amenities, and commenced the development of newer lodging facilities. Furthermore, Silverleaf continues to emphasize its Endless Escape program designed to accommodate shorter, "getaway" vacations and has broadened its product offerings to include biennial (alternate year) intervals and short-term leasing packages ("Samplers") which are designed to accommodate more cost- conscious customers. INCREASING SALES OF UPGRADED INTERVALS. Silverleaf believes it can continue to improve operating margins by increasing sales of upgraded Vacation Intervals to existing Silverleaf Owners since these sales have significantly lower sales and marketing costs. Upgrades by a Silverleaf Owner include the purchase of (i) an interval in a newly designed and constructed standard unit; (ii) an interval in a larger or higher quality unit; (iii) an interval during a more desirable time period; (iv) an interval at a different Drive-to Resort; or (v) an interval at a Destination Resort. Silverleaf has designed specific marketing and sales programs to sell upgraded Vacation Intervals to Silverleaf Owners. Silverleaf continues to construct higher quality, larger units for sale as upgraded intervals, as well as developing new sites such as Las Vegas and Galveston as new upgrade locations. For example, at Ozark Mountain Resort in Branson, Missouri, luxury "President's View" units are offered for sale at prices ranging from $8,000 to $17,500 per Vacation Interval. Intervals exchanged for upgraded intervals are added back to inventory at historical cost for resale at the current offering price. Sales of upgrades increased to $16.9 million in 1997, from $7.9 million in 1996 (upgrade sales represented 24.6% of Silverleaf's Vacation Interval sales in 1997 as compared to 17.1% for 1996). Silverleaf incurs additional sales commissions upon the resale of Vacation Intervals reconveyed to Silverleaf by purchasers of upgraded intervals, and such sales absorb their proportionate share of marketing costs to the extent they displace the sale of another interval, although they do not directly result in incremental marketing costs. DEVELOPMENT OF ADDITIONAL RESORTS AND ACQUISITIONS. In 1997, Silverleaf purchased four sites for development as Drive-to and Destination Resorts and acquired an existing timeshare resort which it markets as a Drive-to Resort. Additionally, in 1998, Silverleaf entered into agreements to acquire property with a golf course near Atlanta, undeveloped land near Kansas City, and the right to manage eight timeshare resorts in seven states. Silverleaf continues to seek new properties for Drive-to Resorts in scenic wooded areas on lakes or waterways that are near major metropolitan areas that have favorable demographic characteristics. For Destination Resorts, Silverleaf seeks popular destination resort areas that are easily accessible to Silverleaf Owners. Silverleaf is currently exploring a number of other property acquisition opportunities, and intends to continue acquiring and/or developing additional resorts. RECENT DEVELOPMENTS Since the IPO, Silverleaf has taken actions which it believes will enhance its growth and competitive position within the U.S. timeshare industry. These actions are summarized below and discussed in greater detail elsewhere in this Prospectus. - DEVELOPMENT OF TIMBER CREEK PROPERTY. In August 1997, Silverleaf purchased the Timber Creek Resort for $1.2 million for development as a Drive-to Resort. Timber Creek is located approximately 50 miles south of St. Louis, Missouri. Silverleaf intends to develop approximately 600 units (31,200 Vacation Intervals) at the Timber Creek Resort and has begun construction of 24 units to be completed in May 1998. Sales of Vacation Intervals at Timber Creek began in October 1997. - DEVELOPMENT OF FOX RIVER PROPERTY. In August 1997, Silverleaf purchased the Fox River Resort for $1.7 million for development as a Drive-to Resort. Fox River is located approximately 70 miles southwest of Chicago. Silverleaf intends to develop approximately 492 (25,584 Vacation Intervals) units on this property, and has begun construction on 36 units to be completed in May 1998. Sales of Vacation Intervals at Fox River began in November 1997. - ACQUISITION OF OAK N' SPRUCE RESORT. In December 1997, Silverleaf acquired the Oak N' Spruce Resort, an existing 55 room hotel and 132 unit timeshare resort, in the Berkshire Mountains of western Massachusetts for $5.1 million. This new Drive-to Resort serves Boston and the greater New York City market and Silverleaf plans to develop approximately 420 new units (21,840 Vacation Intervals) at this resort. At December 31, 1997, there were 1,629 unsold Vacation Intervals at the resort. Silverleaf's sales of Vacation Intervals at Oak N' Spruce began in January 1998. - PURCHASE OF LAS VEGAS SITE. In November 1997, Silverleaf acquired a two acre parcel near the "strip" in Las Vegas, Nevada, for $2.7 million. Silverleaf intends to develop this property as a new Destination Resort which will contain approximately 157 units (8,164 Vacation Intervals). - PURCHASE OF GULF COAST SITE. In December 1997 and February 1998, Silverleaf acquired two adjoining tracts of land in Galveston, Texas, for approximately $1.7 million, to be developed as a new beach-front Gulf Coast Destination Resort. Silverleaf intends to develop approximately 400 units (20,800 Vacation Intervals) at this resort. - INCREASED SALES OF VACATION INTERVALS AT EXISTING RESORTS. In addition to the acquisitions described above, Silverleaf has also worked since the IPO to improve internal sales growth at the Existing Resorts. During 1997, Silverleaf sold 6,592 Vacation Intervals (excluding upgrades), compared to 5,634 and 4,464 during 1996 and 1995, respectively. Total revenues increased to $85.1 million in 1997 from $57.9 million and $44.1 million in 1996 and 1995, respectively. - ENHANCED CREDIT FACILITIES. Silverleaf has improved its borrowing capacity by increasing its revolving credit facilities from $80.0 million to $115.0 million and by acquiring a construction line of credit in the amount of $10.0 million. Additionally, Silverleaf has been able to negotiate lower interest rates and extensions of maturity of certain loan facilities. - INVESTMENTS IN OPERATING AND TELEMARKETING SYSTEMS. Silverleaf has invested approximately $2.1 million in a new automated dialer, telephone system, and a new central marketing facility to improve Silverleaf's operating and telemarketing systems. - ADDITIONS TO MANAGEMENT TEAM. Silverleaf formed a new acquisition subsidiary, Silverleaf Resort Acquisitions, Inc., and hired Thomas G. Franks as President of the new subsidiary. Mr. Franks is a former President of ARDA, the primary trade association for the timeshare industry, and has more than 15 years of experience in the timeshare industry. Silverleaf has also added marketing and operational personnel to its management team. - PROPOSED ACQUISITION OF MANAGEMENT RIGHTS. In January 1998, Silverleaf entered into an agreement with Crown Resort Co., LLC ("Crown") to acquire management rights to eight timeshare resorts in Alabama, Mississippi, North Carolina, Pennsylvania, South Carolina, Tennessee, and Texas for $3.8 million. At December 31, 1997 these eight resorts had approximately 21,500 timeshare owners. As part of this agreement, Silverleaf will also receive approximately 1,800 unsold Vacation Intervals and certain equipment at these eight resorts. This proposed acquisition is subject to completion of customary due diligence investigations and there is no assurance that it will be consummated. - PROPOSED PURCHASE OF ATLANTA AND KANSAS CITY SITES. In February 1998, Silverleaf entered into two agreements, one to acquire a 220 acre property, including a 160 acre golf course, 72 miles north of Atlanta, Georgia for $3.5 million, and another to acquire 260 acres of undeveloped land near Kansas City, Missouri for $1.6 million. If acquired, each property will be developed as a Drive-to Resort. Each contract may be cancelled by Silverleaf if it is not satisfied with each property after conducting its due diligence investigation. Accordingly, there is no assurance that either of these contracts will be closed. RESORTS SUMMARY The following tables set forth certain information regarding each of the Existing Resorts and New Resorts at December 31, 1997, unless otherwise indicated. EXISTING RESORTS <TABLE> <CAPTION> VACATION VACATION INTERVALS INTERVALS UNITS AT RESORTS AT RESORTS SOLD(A) ------------------------ ------------------------ --------- PRIMARY INVENTORY INVENTORY DATE IN MARKET AT PLANNED AT PLANNED SALES THROUGH 1997 RESORT/LOCATION SERVED 12/31/97 EXPANSION(B) 12/31/97 EXPANSION COMMENCED 12/31/97 ONLY --------------- --------------- --------- ------------ --------- ------------ --------- --------- ----- <S> <C> <C> <C> <C> <C> <C> <C> <C> DRIVE-TO RESORTS Holly Lake Dallas- 130 108 1,129 5,400(d) 1982 5,371 539 Hawkins, TX Ft. Worth, TX The Villages Dallas- 240 352 2,440 18,304(e) 1980 10,040 1,679 Flint, TX Ft. Worth, TX Lake O' The Woods Dallas- 64 16 412 800(d) 1987 2,788 332 Flint, TX Ft. Worth, TX Piney Shores Houston, TX 132 268 2,516 13,936(e) 1988 4,348 1,359 Conroe, TX Hill Country Austin-San 153(g) 254 1,886 12,700(d) 1984 5,764 1,391 Canyon Lake, TX Antonio, TX Timber Creek St. Louis, -- 600(h) -- 31,200(e)(h) 1997 32 32 DeSoto, MO MO Fox River Chicago, IL -- 492(h) -- 25,584(e)(h) 1997 49 49 Sheridan, IL Oak N' Spruce Boston, MA 132 420 1,629 21,840(e) 1998 -- -- South Lee, MA New York, NY(i) DESTINATION RESORTS Ozark Mountain Branson, 124 78 783 4,056(e) 1982 5,665 994 Kimberling City, MO MO Holiday Hills Branson, 24 202 135 10,100(d) 1984 1,065 217 Branson, MO MO --- ----- ------ ------- ------ ----- Total 999 2,790 10,930 143,920 35,122 6,592 === ===== ====== ======= ====== ===== <CAPTION> AVERAGE SALES PRICE AMENITIES/ RESORT/LOCATION IN 1997 ACTIVITIES(C) --------------- ------- ------------- <S> <C> <C> DRIVE-TO RESORTS Holly Lake $7,062 B,F,G,H, Hawkins, TX M,S,T The Villages 7,640 B,F,H, Flint, TX M,S,T Lake O' The Woods 6,743 F,M,S,T(f) Flint, TX Piney Shores 8,518 B,F,H, Conroe, TX M,S,T Hill Country 8,552 M,S,T(f) Canyon Lake, TX Timber Creek 5,599 B,F,G,M,S,T DeSoto, MO Fox River 5,465 G,M,S,T Sheridan, IL Oak N' Spruce -- F,G,S,T South Lee, MA DESTINATION RESORTS Ozark Mountain 7,282 B,F,H, Kimberling City, MO M,S,T Holiday Hills 8,046 G,M,S,T(f) Branson, MO ------ Total $7,854 ====== </TABLE> NEW RESORTS <TABLE> <CAPTION> PRIMARY MARKET DATE PLANNED PLANNED EXISTING AND PLANNED RESORT/LOCATION SERVED ACQUIRED UNITS(H) INTERVALS(H) AMENITIES/ACTIVITIES --------------- ------------- -------- -------- ------------ -------------------- <S> <C> <C> <C> <C> <C> Galveston, TX......................... Houston, TX 1997(j) 400(k) 20,800(e)(k) B,F,S,T Las Vegas, NV......................... Las Vegas, NV 1997 157(l) 8,164(e)(l) S ----- ------ Total......................... 557 28,964 ===== ====== </TABLE> (See notes commencing on following page) - --------------- (a) These totals do not reflect sales of upgraded Vacation Intervals to Silverleaf Owners. For the year ended December 31, 1997, upgrade sales at the Existing Resorts were as follows: <TABLE> <CAPTION> AVERAGE SALES PRICE FOR THE YEAR ENDED 12/31/97 UPGRADED VACATION -- NET OF RESORT INTERVALS SOLD EXCHANGED INTERVAL ------ ----------------- ---------------------- <S> <C> <C> Holly Lake..................................... 187 $3,809 The Villages................................... 642 4,871 Lake O' The Woods.............................. 79 3,630 Piney Shores................................... 671 3,850 Hill Country................................... 648 3,928 Timber Creek................................... 2 945 Fox River...................................... 1 2,780 Ozark Mountain................................. 1,468 4,645 Holiday Hills.................................. 210 3,938 ----- ------ 3,908 $4,326 ===== ====== </TABLE> (b) Represents units included in the Company's master plan. This plan is subject to change based upon various factors, including consumer demand, the availability of financing, grant of governmental permits, and future land-planning and site layout considerations. The following chart reflects the status of certain planned units at December 31, 1997: <TABLE> <CAPTION> LAND- LAND- LAND- USE USE USE PROCESS PROCESS PROCESS CURRENTLY IN SHELL NOT STARTED PENDING COMPLETE CONSTRUCTION COMPLETE TOTAL ----------- -------- -------- ------------ -------- ----- <S> <C> <C> <C> <C> <C> <C> Holly Lake................ 54 -- 50 -- 4 108 The Villages.............. 110 152 78 12 -- 352 Lake O' The Woods......... -- -- 16 -- -- 16 Piney Shores.............. 108 120 16 24 -- 268 Hill Country.............. 153 47 54 -- -- 254 Timber Creek.............. 576 -- -- 24 -- 600 Fox River................. 456 -- -- 36 -- 492 Oak 'N Spruce............. 420 -- -- -- -- 420 Ozark Mountain............ 36 -- 30 -- 12 78 Holiday Hills............. 70 -- 94 24 14 202 ----- --- --- --- -- ----- 1,983 319 338 120 30 2,790 ===== === === === == ===== </TABLE> "Land-Use Process Pending" means that the Company has commenced the process which the Company believes is required under current law in order to obtain the necessary land-use authorizations from the applicable local governmental authority with jurisdiction, including submitting for approval any architectural drawings, preliminary plats or other attendant items as may be required. "Land-Use Process Complete" means either that (i) the Company believes that it has obtained all necessary land-use authorizations under current law from the applicable local governmental authority with jurisdiction, including the approval and filing of any required preliminary or final plat and the issuance of building permit(s), in each case to the extent applicable, or (ii) upon payment of any required filing or other fees, the Company believes that it will under current law obtain such necessary authorizations without further process. See "Risk Factors -- Development, Construction and Property Acquisition Activities". The 30 "Shell Complete" units are currently devoted to such uses as a general store, registration office, sales office, activity center, construction office, or pro shop. The Company anticipates that these units will continue to be used for such purposes during 1998. (c) Principal amenities available to Silverleaf Owners at each resort are indicated by the following symbols: B -- boating; F -- fishing; G -- golf course; H -- horseback riding; M -- miniature golf; S -- swimming pool; and T -- tennis. (d) These figures are based on 50 one-week intervals per unit. In some instances, the Company may be able to market 52 one-week intervals per unit. (e) These figures are based on 52 one-week intervals per unit. (f) Boating is available near the resort. (g) Includes three units which have not been finished-out for accommodations and which are currently used for other purposes. (h) Engineering, architectural and construction estimates have not been completed by the Company, and there can be no assurance that the Company will develop these properties at the unit numbers currently projected. (i) The Company has commenced the timeshare permit process in New York, but has not yet received a permit. (The Company has a timeshare permit in Massachusetts.) (j) One portion of this tract was acquired in February 1998. (k) The Company has not commenced the timeshare permit process. The Company has commenced the land use permit process. See "Risk Factors -- Development, Construction and Property Acquisition Activities", "Business -- Description of New Resorts -- Gulf Coast Resort". (l) The Company has commenced the timeshare permit application process, but has not yet received a permit. The Company has not commenced the land use permit process. See "Risk Factors -- Regulation of Marketing and Sales of Vacation Intervals and Related Laws". CORPORATE BACKGROUND The Company was incorporated in Texas in 1989 and has been owned by and operated primarily under the direction of Robert E. Mead. Through the Company, Mr. Mead consolidated in one entity all of the timeshare assets and operations he previously owned through various partnerships and corporations affiliated with Mr. Mead. In May 1989, a partnership, of which the Company was the general partner, acquired seven of the Existing Resorts from a now dissolved corporation which was also owned and controlled by Mr. Mead. In December 1995 (i) through a merger of the partnership into the Company, such Existing Resorts were transferred to the Company, (ii) the Company acquired additional assets of the now dissolved corporation subject to certain indebtedness owing by such corporation to Mr. Mead and his affiliates; and (iii) the Company acquired Condominium Builders, Inc. ("CBI") and certain assets from Mr. Mead (all of the acquisition and merger transactions in (i), (ii) and (iii) are collectively referred to herein as the "Consolidation Transactions"). See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Certain Relationships and Related Transactions". The affiliated corporations and partnership whose assets were acquired by the Company through the Consolidation Transactions are sometimes collectively referred to herein as the "Affiliated Companies" or individually as an "Affiliated Company". The Company's principal executive offices are located at 1221 Riverbend Drive, Suite 120, Dallas, Texas 75247. The Company's telephone number is (214) 631-1166. THE EQUITY OFFERING The Company is also offering 2,000,000 shares of Common Stock and Mr. Mead is offering an additional 500,000 shares of Common Stock. The Equity Offering is being made by separate prospectus. Giving effect to the Equity Offering, the Company will have 13,311,517 shares of Common Stock outstanding. Silverleaf has not historically paid dividends on its Common Stock and does not expect to pay any dividends in the foreseeable future. SOURCES AND USES OF PROCEEDS The net proceeds from the Note Offering are estimated to be $72.1 million. The net proceeds from the Equity Offering are estimated to be $49.3 million. The following table sets forth the estimated sources and uses of funds at December 31, 1997: <TABLE> <CAPTION> AMOUNT ------------ (DOLLARS IN MILLIONS) <S> <C> Sources of Funds: Senior Subordinated Notes due 2008......................... $ 75.0 Common Stock(a)................. 53.5 ------ Total sources..................... $128.5 ====== </TABLE> <TABLE> <CAPTION> AMOUNT ------------ (DOLLARS IN MILLIONS) <S> <C> Uses of Funds: Pay existing debt(b)(c)(d)...... $ 48.9 Develop units, amenities, and infrastructure at Existing Resorts(e)................... 32.0 Develop units, amenities, and infrastructure at New Resorts(e)................... 6.0 Acquisitions, working capital and general corporate purposes(b)(e)............... 34.5 Fees, expenses, and other costs........................ 7.1 ------ Total uses........................ $128.5 ====== </TABLE> - --------------- (a) The Company is offering 2,000,000 primary shares of Common Stock in the Equity Offering. The assumed offering price of $26.75 was the closing price of Silverleaf's Common Stock on February 27, 1998. The Company will not receive any of the proceeds from the sale of the shares of Common Stock offered by Silverleaf's Chief Executive Officer, Robert E. Mead. (b) Indebtedness is projected to increase from $48.9 million at December 31, 1997, to approximately $68.6 million at the closing of the Equity Offering and the Note Offering, substantially all of which will be paid from the proceeds of the Equity Offering and the Note Offering. As a result, cash available at closing for acquisitions, working capital, and general corporate purposes will be reduced to approximately $14.8 million. Additionally, after repayment of existing indebtedness, there will be $125.0 million of borrowing capacity available under the Company's credit facilities. See "Description of Certain Indebtedness". (c) This includes $5.6 million owing to Credit Suisse First Boston Mortgage Capital, L.L.C., an affiliate of Credit Suisse First Boston Corporation, the lead managing underwriter for the Equity Offering and the Note Offering. This indebtedness is projected to increase to $13.0 million by the closing of the Equity Offering and the Note Offering. See "Underwriting". (d) At December 31, 1997, indebtedness to be repaid from the net proceeds of the Equity Offering and Note Offering bears interest at variable rates currently ranging from 4.2% to 14.0% per annum and matures between January 1998 and October 2005. See "Description of Certain Indebtedness". Indebtedness is projected to increase from $48.9 million to approximately $68.6 million at the closing of the Equity Offering and the Note Offering. Approximately $58.0 million of this indebtedness will have been incurred within one year prior to the date of this Prospectus. Of this indebtedness, $2.9 million was incurred to purchase the Fox River and Timber Creek resorts in St. Louis and Chicago, respectively, $2.7 million was incurred to purchase the New Resort in Las Vegas, $1.7 million was incurred to purchase the New Resort in Galveston, $5.1 million was incurred to purchase the Oak 'N Spruce Resort in the Berkshires, $2.9 million was incurred for capital leases of equipment, and the balance was used for working capital and general corporate purposes. (e) The Company currently anticipates investing these proceeds during 1998. Pending the final application of these proceeds, the Company will invest these proceeds in commercial paper, bankers' acceptances, other short-term investment-grade securities, or money-market accounts, and may utilize the proceeds for working capital purposes. THE NOTE OFFERING Securities Offered......... $75.0 million aggregate principal amount of % Senior Subordinated Notes due 2008. Maturity Date.............. , 2008. Interest Payment Dates..... and , commencing , 1998. Optional Redemption........ The Notes will be redeemable, in whole or in part, at the option of the Company on or after , 2003, at the redemption prices (expressed as a percentage of principal amount) set forth herein, plus accrued and unpaid interest, if any, to the date of redemption. In addition, prior to , 2001, the Company may redeem up to 33 1/3% of the aggregate principal amount of the Notes with the net cash proceeds of one or more public offerings of its Common Stock, at a redemption price equal to % of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date); provided, however, that at least 66 2/3% of the aggregate principal amount of the Notes originally issued remains outstanding after any such redemption. See "Description of Notes -- Optional Redemption". Change of Control.......... Upon a Change of Control (as defined), each holder of Notes will have the right to require the Company to repurchase all or a portion of such holder's Notes at a purchase price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon, if any, to the date of repurchase. See "Description of Notes -- Repurchase at the Option of Holders -- Change of Control" and "Risk Factors -- Payment Upon a Change of Control and Certain Asset Sales". Ranking.................... The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company. The Notes will rank pari passu with any future senior subordinated indebtedness of the Company and will rank senior to all subordinated indebtedness of the Company. At December 31, 1997, as adjusted to give effect to the consummation of the Equity Offering, the Note Offering and the application of the estimated net proceeds thereof, the Company would have had no Senior Debt (exclusive of unused commitments under the credit facilities). The Notes, subject to the Subsidiary Guarantees, will be structurally subordinated to all existing and future liabilities of the Guarantors. At December 31, 1997, as adjusted to give effect to the consummation of the Equity Offering and the Note Offering, such subsidiaries would have had no material liabilities (other than intercompany obligations). Subsidiary Guarantees...... The payment of the principal, interest, and premium (if any) on the Notes is fully and unconditionally guaranteed, jointly and severally, on a senior subordinated basis by all existing and future domestic Restricted Subsidiaries (as defined) of the Company. Each Subsidiary Guarantee will be subordinated to all existing and future Senior Debt of the respective Guarantor. See "Description of Notes -- Subsidiary Guarantees". The Company will be able to designate other current or future subsidiaries as Unrestricted Subsidiaries (as defined) under certain circumstances. Unrestricted Subsidiaries will not be required to issue a Subsidiary Guarantee with respect to the Notes and will not be subject to many of the restrictive covenants set forth in the Indenture pursuant to which the Notes will be issued (the "Indenture"). Covenants.................. The Indenture will contain certain covenants that, among other things, limit the ability of the Company and certain of its subsidiaries to incur additional Indebtedness and issue preferred stock, make certain investments, pay dividends or make other distributions, repurchase Equity Interests (as defined) or subordinated indebtedness, enter into certain transactions with affiliates, sell assets of the Company or certain of its subsidiaries, issue or sell Equity Interests of the Company's subsidiaries or enter into certain mergers and consolidations. In addition, under certain circumstances, the Company will be required to offer to purchase the Notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the date of purchase, with the proceeds of certain Assets Sales (as defined). See "Description of Notes -- Repurchase at the Option of Holders -- Asset Sales" and "-- Certain Covenants". Conditions................. The closing of the Note Offering will be conditioned upon, among other things, the closing of the Equity Offering. SUMMARY CONSOLIDATED HISTORICAL FINANCIAL, OPERATING AND PRO FORMA INFORMATION The summary consolidated historical financial and operating information set forth below has been derived from the consolidated financial statements of the Company which have been restated giving effect to the Consolidation Transactions utilizing the historical cost basis of the combined entities since these entities were under common ownership and control. The consolidated financial statements of the Company for 1995, 1996 and 1997 included herein were audited by Deloitte & Touche LLP. The data presented as of and for the year ended December 31, 1994 has been derived from the Company's audited consolidated financial statements which have not been included herein. Data presented as of and for the year ended December 31, 1993 has been derived from the Company's unaudited consolidated financial statements which in the opinion of management of the Company reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial position at such dates and results of operation for such periods. The summary pro forma financial information set forth below has been derived from the Unaudited Pro Forma Condensed Consolidated Financial Information and related Notes included elsewhere in this Prospectus. The pro forma statement of income data for the years ended December 31, 1997 gives effect, at the beginning of the period, to the IPO, the Equity Offering, the Note Offering, and the application of the proceeds thereof, and to the other adjustments set forth in the Unaudited Pro Forma Condensed Consolidated Financial Information and related Notes (collectively the "Pro Forma Adjustments"). The pro forma balance sheet data at December 31, 1997 gives effect to the Equity Offering, the Note Offering, and the application of the proceeds thereof to pay indebtedness and offering expenses, on the basis of and subject to the assumptions stated in the Notes thereto. The pro forma financial information does not purport to present the actual financial position or results of operations of the Company had the IPO, the Equity Offering, the Note Offering and events associated therewith occurred on the dates specified, nor are they necessarily indicative of the Company's future results of operations or financial position. During 1997 the Company began classifying the components of the previously reported provision for uncollectible notes into three categories based on the nature of the item -- credit losses, customer returns, and customer releases. The Company has reclassified these amounts within the previously reported financial information to conform to the classification for the year ended December 31, 1997. This reclassification has no balance sheet effect and has no effect on previously reported net income. See Note 2 of Notes to Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview". The Summary Consolidated Historical Financial, Operating and Pro Forma Information should be read in conjunction with the Consolidated Financial Statements and Notes thereto, "Unaudited Pro Forma Condensed Consolidated Financial Information" and Notes thereto, "Selected Consolidated Historical Financial and Operating Information" and Notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations". <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ----------------------------------------------- 1993 1994 1995 1996 1997 ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS, EXCEPT AVERAGE PRICE OF VACATION INTERVALS) <S> <C> <C> <C> <C> <C> STATEMENT OF INCOME DATA: Revenues: Vacation Interval sales................................. $18,627 $24,551 $34,091 $45,907 $68,682 Other income............................................ 7,188 7,348 9,981 12,018 16,376 ------- ------- ------- ------- ------- Total revenues..................................... 25,815 31,899 44,072 57,925 85,058 Costs and Operating Expenses: Cost of Vacation Interval sales......................... 2,094 2,648 3,280 2,805 6,600 Sales and marketing..................................... 10,219 12,929 17,850 21,839 30,559 Provision for uncollectible notes....................... 1,877 4,205 6,632 8,733 10,524 Operating, general and administrative................... 6,501 5,853 8,780 10,116 12,230 Depreciation and amortization........................... 477 590 863 1,264 1,497 Interest expense........................................ 1,426 1,642 3,609 4,759 4,664 ------- ------- ------- ------- ------- Total costs and operating expenses................. 22,594 27,867 41,014 49,516 66,074 ------- ------- ------- ------- ------- Income from continuing operations before income taxes..... $ 3,221 $ 4,032 $ 3,058 $ 8,409 $18,984 ======= ======= ======= ======= ======= OTHER FINANCIAL DATA: EBITDA(a)................................................. $ 5,124 $ 6,264 $ 7,530 $14,432 $25,145 Capital expenditures...................................... $ 2,986 $ 1,701 $ 4,497 $ 4,162 $ 8,692 Ratio of earnings to fixed charges(b)..................... 3.2x 3.4x 1.6x 2.5x 4.3x SUPPLEMENTAL PRO FORMA DATA: EBITDA(c)........................................................................................ $24,785 Total interest expense(d)........................................................................ $ 7,509 Ratio of EBITDA to total interest expense(c)(d)(e)............................................... 3.3x Ratio of net debt to EBITDA(e)(f)................................................................ NM Ratio of debt to EBITDA(e)....................................................................... 3.0x Ratio of earnings to fixed charges............................................................... 3.1x OTHER OPERATING DATA: Number of Existing Resorts at period end.................. 7 7 7 7 10 Number of Vacation Intervals sold (excluding upgrades)(g)............................................ 2,386 3,423 4,464 5,634 6,592 Number of upgraded Vacation Intervals sold................ 1,378 1,290 1,921 1,914 3,908 Number of Vacation Intervals in inventory................. 5,615 5,943 6,580 6,746 10,930 Average price of Vacation Intervals sold (excluding upgrades)(g)(h)......................................... $ 5,599 $ 5,821 $ 5,965 $ 6,751 $ 7,854 Average price of upgraded Vacation Intervals sold (net of exchanged interval)..................................... $ 3,822 $ 3,585 $ 3,885 $ 4,113 $ 4,326 </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1997 -------------------------- HISTORICAL PRO FORMA(e) ---------- ------------ <S> <C> <C> BALANCE SHEET DATA: Cash and equivalents...................................... $ 4,970 $ 77,499 Notes receivable, net..................................... 92,036 92,036 Total assets.............................................. 156,401 231,830 Senior Subordinated Notes, notes payable and capital lease obligations............................................. 48,871 75,000 Total liabilities......................................... 72,636 98,765 Shareholders' equity...................................... 83,765 133,065 </TABLE> - --------------- (a) EBITDA represents income from continuing operations before interest expense, income taxes and depreciation and amortization. EBITDA is presented because it is a widely accepted indicator of a company's financial performance. However, EBITDA should not be construed as an alternative to net income as a measure of the Company's operating results or to cash flows from operating activities (determined in accordance with generally accepted accounting principles) as a measure of liquidity. Since revenues from Vacation Interval sales include promissory notes received by the Company, EBITDA does not reflect cash flow available to the Company. Additionally, due to varying methods of reporting EBITDA within the timeshare industry, the computation of EBITDA for the Company may not be comparable to other companies in the timeshare industry which compute EBITDA in a different manner. The Company's management interprets trends in EBITDA to be an indicator of the Company's financial performance, in addition to net income and cash flows from operating activities (determined in accordance with generally accepted accounting principles). (b) For purposes of determining the ratio of earnings to fixed charges, earnings is defined as income from continuing operations before provision for income taxes, plus interest on indebtedness, imputed interest on the portion of rent expense (one-third) deemed to represent interest expense, and amortization of previously capitalized interest. Fixed charges consist of interest on indebtedness whether expensed or capitalized, imputed interest on the portion of rent expense (one-third) deemed to represent interest expense, amortization of debt expense, and discount or premium relating to any indebtedness whether expensed or capitalized. (c) Pro forma EBITDA is adjusted for the Pro Forma Adjustments. Pro Forma EBITDA is lower than historical EBITDA in 1997 due to two adjustments relating to the IPO in June 1997. The difference is due to (i) lower interest income associated with amounts due from affiliates that was repaid indirectly from the IPO proceeds and (ii) expenses associated with being a public company. See "Unaudited Pro Forma Condensed Consolidated Financial Information". (d) Pro forma total interest expense is defined as pro forma interest expense plus pro forma capitalized interest, as adjusted for the Pro Forma Adjustments. No interest income has been assumed on proceeds of the IPO, the Equity Offering and Note Offering. Assuming interest income of 5.5% (current market rate) on such proceeds, the ratio of pro forma EBITDA to pro forma net interest expense for 1997 would have been 7.0x. The ratio of pro forma EBITDA to pro forma net interest expense differs from the Consolidated Coverage Ratio (as defined herein) as set forth in the Indenture. See "Description of Notes".
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+SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial data included elsewhere in this Prospectus, including the Consolidated Financial Statements and the Notes thereto. Unless otherwise indicated, all timeshare industry data contained herein is derived from information prepared by the American Resort Development Association ("ARDA"). This Prospectus contains certain statements of a forward-looking nature relating to future events or the future financial performance of the Company. In evaluating such statements, prospective investors should specifically consider the various factors identified in this Prospectus, including the matters set forth under the caption "Risk Factors", which could cause actual results to differ materially from those indicated in such forward-looking statements. Unless the context otherwise indicates, the "Company" or "Silverleaf" means Silverleaf Resorts, Inc. and its subsidiaries. "Pro forma" financial information appearing herein is prepared on the assumption that the Company's June 1997 initial public offering of 3.6 million shares of Common Stock (the "IPO"), the Equity Offering and the Note Offering occurred at the beginning of 1997 for statement of operations data and that the Equity Offering and the Note Offering occurred on December 31, 1997 for balance sheet data. "EBITDA" means earnings before interest, taxes, depreciation and amortization. THE COMPANY Silverleaf is a leading developer, marketer, and operator of "drive-to" timeshare resorts. The Company currently owns and operates eight "drive-to" resorts in Texas, Missouri, Illinois, and Massachusetts (the "Drive-to Resorts") and two "destination" resorts in Missouri (the "Destination Resorts", and together with the Drive-to Resorts, the "Existing Resorts"). The Company has recently acquired sites in Las Vegas, Nevada and Galveston, Texas to be developed as new Destination Resorts (the "New Resorts"). The number of annual one-week vacations ("Vacation Intervals") sold by the Company increased at an annual compounded growth rate of 29.2% from 1992 to 1997. At December 31, 1997, the Company had an inventory of 10,930 Vacation Intervals, was constructing 120 new units (6,192 new Vacation Intervals), and had plans to construct 2,670 additional units (137,728 new Vacation Intervals) at the Existing Resorts. The Company plans to construct 557 new units (28,964 Vacation Intervals) at the New Resorts. Due to standardized architectural designs and procedures, new units can typically be constructed at the Existing Resorts within 150 days, weather permitting. Silverleaf generally starts construction of new units after sales of Vacation Intervals for those units have occurred. The Company markets Vacation Intervals to value-conscious customers and has advanced proprietary computer systems to track and identify potential timeshare owners. Through exclusive marketing arrangements with race tracks, amusement parks, and other event sponsors, the Company identifies a substantial number of prospects in its target markets. As a result of these and other activities, more than 1,500 potential customers currently tour the resorts each week. During 1997, approximately 12.7% of the Company's visitors purchased Vacation Intervals from the Company. Management anticipates the pool of potential customers will remain strong due to expansion into new geographic regions and growth in major Texas metropolitan areas, population turnover in such metropolitan areas, and further penetration of the target markets. The Drive-to Resorts are designed to appeal to value-conscious vacationers seeking comfortable and affordable accommodations in locations convenient to their residences. These resorts are located proximate to major metropolitan areas (currently Dallas-Ft. Worth, Houston, San Antonio/Austin, St. Louis, Chicago, Boston and the greater New York City area), facilitating more frequent "short stay" getaways, which the Company believes is a growing vacation trend. The Destination Resorts, which are located in the popular country and western music entertainment resort area of Branson, Missouri, offer Silverleaf customers the opportunity to upgrade into higher quality resorts as their lifestyles and travel budgets permit. Both the Drive-to Resorts and the Destination Resorts are in rustic areas which provide a quiet, relaxing vacation environment and offer an economical alternative to commercial vacation lodging. Consistent with Silverleaf's strategy of targeting value-conscious customers, the average price of a Vacation Interval for a two-bedroom unit at the Existing Resorts was $7,834 for 1997 and $6,922 for 1996, as compared to the industry average price of $10,790 for 1996. The Company offers benefits to owners of Silverleaf Vacation Intervals ("Silverleaf Owners") which are uncommon in the timeshare industry. These benefits include (i) use of vacant lodging facilities at no extra cost through Silverleaf's "Endless Escape" program; (ii) year-round access to non-lodging amenities such as fishing, boating, horseback riding, tennis or golf on a "country-club" basis for little or no additional charge; and (iii) the right to exchange a Vacation Interval for a different time period or different Existing Resort through Silverleaf's internal exchange program. These benefits are subject to availability and other limitations. Most Silverleaf Owners may also enroll in the world's largest Vacation Interval exchange network operated by Resort Condominiums International ("RCI"). The Company's 1997 pro forma revenues and EBITDA were $84.9 million and $24.8 million, respectively. The Company's Common Stock is listed on the New York Stock Exchange ("NYSE") under the symbol "SVR", and based on a closing price of $26.75 per share on February 27, 1998, the Company had a market capitalization of approximately $300.0 million. TIMESHARE INDUSTRY The timeshare industry has experienced substantial growth since 1980. Annual worldwide timeshare sales have increased from approximately $490 million in 1980 to approximately $5 billion in 1995. The U.S. market has also grown considerably -- from $1.3 billion of timeshare sales in 1992 to $2.2 billion of timeshare sales in 1996. The growth in the U.S. timeshare industry is due to (i) higher quality accommodations and services; (ii) involvement of well-recognized hotel companies in the upscale segment of the industry such as Marriott Ownership Resorts ("Marriott"), The Walt Disney Company ("Disney"), and Hilton Hotels Corporation ("Hilton"); (iii) improved availability of financing for purchasers of Vacation Intervals; (iv) increased flexibility of timeshare use; (v) increased governmental regulation; and (vi) improved overall image of the industry. Since timeshare units typically include two bedrooms and kitchen facilities, Vacation Interval ownership is often more economical for a family than an extended vacation at a commercial lodging establishment. OPERATIONS Silverleaf's operations include (i) developing and acquiring timeshare resorts; (ii) marketing and selling Vacation Intervals to prospective first-time owners; (iii) marketing and selling upgraded Vacation Intervals to existing Silverleaf Owners; (iv) providing financing for the purchase of Vacation Intervals; and (v) operating timeshare resorts. The Company has substantial in-house capabilities which enable it to coordinate all aspects of development and expansion of the Existing Resorts and the development of the New Resorts, including site selection, design, and construction pursuant to standardized plans and specifications. The Company also performs substantially all marketing and sales functions internally and has made a significant investment in operating technology, including sophisticated telemarketing and computer systems and proprietary software applications. The Company identifies potential purchasers through internally developed marketing techniques, and sells Vacation Intervals through on-site sales offices located at certain Drive-to Resorts. This practice allows the Company to avoid the more expensive marketing costs of subsidized airfare and lodging which are typically associated with the timeshare industry. The Company believes its marketing program and operating and computer systems enable it to market and sell Vacation Intervals at a lower cost than its competitors in the timeshare industry. The costs of maintaining and operating the Existing Resorts are paid from Silverleaf Owners' monthly ownership dues. As part of the Vacation Interval sales process, the Company offers customer financing of up to 90% of the purchase price to be paid over a seven year period. At December 31, 1997, the Company had a portfolio of approximately 21,320 Vacation Interval customer notes receivable totalling approximately $104.4 million with an average yield of 14.5% per annum. The Company has typically financed its operations by pledging eligible customer notes to lending institutions who make loans secured by such notes. The Company has three revolving credit facilities providing for loans up to an aggregate of $115.0 million to finance customer notes receivable. See "Description of Certain Indebtedness". COMPETITIVE ADVANTAGES Silverleaf believes the following characteristics afford it certain competitive advantages: LOWER MARKETING, SALES, AND ADMINISTRATIVE COSTS. With resorts and on-site sales offices within a two-hour drive of its targeted customers, Silverleaf can invite potential customers to tour the Drive-to Resorts without offering subsidized airline tickets and lodging, a significant marketing expense typically incurred by competitors in the industry. Silverleaf has also reduced marketing, operating, and administrative costs through centralization and automation of many functions. While marketing and sales costs as a percentage of revenue will increase for newly acquired resorts, the Company believes that these costs will, over time, return to historical levels. CONVENIENT DRIVE-TO LOCATIONS. Silverleaf's Drive-to Resorts are located within a two-hour drive of a majority of the target customers' residences, which accommodates the growing demand for shorter, more frequent, close to home vacations. This proximity facilitates use of Silverleaf's Endless Escape program, which allows Silverleaf Owners to use vacant units for no additional charge, subject to availability and certain limitations. Silverleaf believes it is the only timeshare operator in the industry which offers its customers these benefits. Silverleaf Owners can also conveniently enjoy non-lodging resort amenities year-round on a "country-club" basis. SUBSTANTIAL INTERNAL GROWTH CAPACITY. At December 31, 1997, Silverleaf had an inventory of 10,930 Vacation Intervals, and a master plan to construct new units which will result in up to 143,920 additional Vacation Intervals at the Existing Resorts and 28,964 Vacation Intervals at the New Resorts. Silverleaf's master plan for construction of new units is contingent upon future sales at the Existing Resorts and New Resorts and the availability of financing, grant of government permits, and future land-planning and site-layout considerations. See "Risk Factors -- Development, Construction and Property Acquisition Activities". IN-HOUSE OPERATIONS. Silverleaf has in-house marketing, sales, financing, development, and property management capabilities. While Silverleaf utilizes outside contractors to supplement internal resources, when appropriate, the breadth of Silverleaf's internal capabilities allows greater control over all phases of its operations and helps maintain operating standards and reduce overall costs. LOWER CONSTRUCTION AND OPERATING COSTS. Silverleaf has developed and generally employs standard architectural designs and operating procedures which it believes significantly reduce construction and operating expenses. Standardization and integration also allow Silverleaf to rapidly develop new inventory in response to demand. Weather permitting, new units at Existing Resorts can normally be constructed on an "as needed" basis within 150 days. CENTRALIZED PROPERTY MANAGEMENT. Silverleaf operates all of the Existing Resorts on a centralized and collective basis, with operating and maintenance costs paid from Silverleaf Owners' monthly dues. Silverleaf believes that consolidation of resort operations benefits Silverleaf Owners by providing them with a uniform level of service, accommodations and amenities on a standardized, cost-effective basis. Such standardization also facilitates Silverleaf's internal exchange program, the Endless Escape program, and external Vacation Interval exchange programs. EXPERIENCED MANAGEMENT. The Company's senior management has extensive experience in the acquisition, development, and operation of timeshare resorts. Robert E. Mead, Chairman of the Board and Chief Executive Officer, has more than 18 years of experience in the timeshare industry and since 1995 has served as a director of ARDA, the primary trade association for the timeshare industry. Pro forma for the Equity Offering (assuming no exercise of the Underwriters' over-allotment option granted by Mr. Mead), Mr. Mead will own 53.5% of the Common Stock of the Company. The Company's senior officers have an average of ten years of experience in the timeshare industry. GROWTH STRATEGY Silverleaf intends to grow through the following strategies: INCREASING DEVELOPMENT AND SALES OF VACATION INTERVALS. Silverleaf intends to capitalize on its significant expansion capacity at the Existing Resorts and the New Resorts by increasing marketing, sales and development activities. At December 31, 1997, Silverleaf owned approximately 930 acres of land that were available for further development of timeshare units and amenities under Silverleaf's master plan. The master plan forecasts development of 3,347 additional units, which would result in 172,884 additional Vacation Intervals. During 1997, Silverleaf enhanced its marketing efforts, including increased telemarketing capacity arising from investments in computer and automated dialing technology, increased its sales force, enhanced its lead generation methods, completed the construction of new sales offices and other amenities, and commenced the development of newer lodging facilities. Furthermore, Silverleaf continues to emphasize its Endless Escape program designed to accommodate shorter, "getaway" vacations and has broadened its product offerings to include biennial (alternate year) intervals and short-term leasing packages ("Samplers") which are designed to accommodate more cost- conscious customers. INCREASING SALES OF UPGRADED INTERVALS. Silverleaf believes it can continue to improve operating margins by increasing sales of upgraded Vacation Intervals to existing Silverleaf Owners since these sales have significantly lower sales and marketing costs. Upgrades by a Silverleaf Owner include the purchase of (i) an interval in a newly designed and constructed standard unit; (ii) an interval in a larger or higher quality unit; (iii) an interval during a more desirable time period; (iv) an interval at a different Drive-to Resort; or (v) an interval at a Destination Resort. Silverleaf has designed specific marketing and sales programs to sell upgraded Vacation Intervals to Silverleaf Owners. Silverleaf continues to construct higher quality, larger units for sale as upgraded intervals, as well as developing new sites such as Las Vegas and Galveston as new upgrade locations. For example, at Ozark Mountain Resort in Branson, Missouri, luxury "President's View" units are offered for sale at prices ranging from $8,000 to $17,500 per Vacation Interval. Intervals exchanged for upgraded intervals are added back to inventory at historical cost for resale at the current offering price. Sales of upgrades increased to $16.9 million in 1997, from $7.9 million in 1996 (upgrade sales represented 24.6% of Silverleaf's Vacation Interval sales in 1997 as compared to 17.1% for 1996). Silverleaf incurs additional sales commissions upon the resale of Vacation Intervals reconveyed to Silverleaf by purchasers of upgraded intervals, and such sales absorb their proportionate share of marketing costs to the extent they displace the sale of another interval, although they do not directly result in incremental marketing costs. DEVELOPMENT OF ADDITIONAL RESORTS AND ACQUISITIONS. In 1997, Silverleaf purchased four sites for development as Drive-to and Destination Resorts and acquired an existing timeshare resort which it markets as a Drive-to Resort. Additionally, in 1998, Silverleaf entered into agreements to acquire property with a golf course near Atlanta, undeveloped land near Kansas City, and the right to manage eight timeshare resorts in seven states. Silverleaf continues to seek new properties for Drive-to Resorts in scenic wooded areas on lakes or waterways that are near major metropolitan areas that have favorable demographic characteristics. For Destination Resorts, Silverleaf seeks popular destination resort areas that are easily accessible to Silverleaf Owners. Silverleaf is currently exploring a number of other property acquisition opportunities, and intends to continue acquiring and/or developing additional resorts. RECENT DEVELOPMENTS Since the IPO, Silverleaf has taken actions which it believes will enhance its growth and competitive position within the U.S. timeshare industry. These actions are summarized below and discussed in greater detail elsewhere in this Prospectus. - DEVELOPMENT OF TIMBER CREEK PROPERTY. In August 1997, Silverleaf purchased the Timber Creek Resort for $1.2 million for development as a Drive-to Resort. Timber Creek is located approximately 50 miles south of St. Louis, Missouri. Silverleaf intends to develop approximately 600 units (31,200 Vacation Intervals) at the Timber Creek Resort and has begun construction of 24 units to be completed in May 1998. Sales of Vacation Intervals at Timber Creek began in October 1997. - DEVELOPMENT OF FOX RIVER PROPERTY. In August 1997, Silverleaf purchased the Fox River Resort for $1.7 million for development as a Drive-to Resort. Fox River is located approximately 70 miles southwest of Chicago. Silverleaf intends to develop approximately 492 (25,584 Vacation Intervals) units on this property, and has begun construction on 36 units to be completed in May 1998. Sales of Vacation Intervals at Fox River began in November 1997. - ACQUISITION OF OAK N' SPRUCE RESORT. In December 1997, Silverleaf acquired the Oak N' Spruce Resort, an existing 55 room hotel and 132 unit timeshare resort, in the Berkshire Mountains of western Massachusetts for $5.1 million. This new Drive-to Resort serves Boston and the greater New York City market and Silverleaf plans to develop approximately 420 new units (21,840 Vacation Intervals) at this resort. At December 31, 1997, there were 1,629 unsold Vacation Intervals at the resort. Silverleaf's sales of Vacation Intervals at Oak N' Spruce began in January 1998. - PURCHASE OF LAS VEGAS SITE. In November 1997, Silverleaf acquired a two acre parcel near the "strip" in Las Vegas, Nevada, for $2.7 million. Silverleaf intends to develop this property as a new Destination Resort which will contain approximately 157 units (8,164 Vacation Intervals). - PURCHASE OF GULF COAST SITE. In December 1997 and February 1998, Silverleaf acquired two adjoining tracts of land in Galveston, Texas, for approximately $1.7 million, to be developed as a new beach-front Gulf Coast Destination Resort. Silverleaf intends to develop approximately 400 units (20,800 Vacation Intervals) at this resort. - INCREASED SALES OF VACATION INTERVALS AT EXISTING RESORTS. In addition to the acquisitions described above, Silverleaf has also worked since the IPO to improve internal sales growth at the Existing Resorts. During 1997, Silverleaf sold 6,592 Vacation Intervals (excluding upgrades), compared to 5,634 and 4,464 during 1996 and 1995, respectively. Total revenues increased to $85.1 million in 1997 from $57.9 million and $44.1 million in 1996 and 1995, respectively. - ENHANCED CREDIT FACILITIES. Silverleaf has improved its borrowing capacity by increasing its revolving credit facilities from $80.0 million to $115.0 million and by acquiring a construction line of credit in the amount of $10.0 million. Additionally, Silverleaf has been able to negotiate lower interest rates and extensions of maturity of certain loan facilities. - INVESTMENTS IN OPERATING AND TELEMARKETING SYSTEMS. Silverleaf has invested approximately $2.1 million in a new automated dialer, telephone system, and a new central marketing facility to improve Silverleaf's operating and telemarketing systems. - ADDITIONS TO MANAGEMENT TEAM. Silverleaf formed a new acquisition subsidiary, Silverleaf Resort Acquisitions, Inc., and hired Thomas G. Franks as President of the new subsidiary. Mr. Franks is a former President of ARDA, the primary trade association for the timeshare industry, and has more than 15 years of experience in the timeshare industry. Silverleaf has also added marketing and operational personnel to its management team. - PROPOSED ACQUISITION OF MANAGEMENT RIGHTS. In January 1998, Silverleaf entered into an agreement with Crown Resort Co., LLC ("Crown") to acquire management rights to eight timeshare resorts in Alabama, Mississippi, North Carolina, Pennsylvania, South Carolina, Tennessee, and Texas for $3.8 million. At December 31, 1997 these eight resorts had approximately 21,500 timeshare owners. As part of this agreement, Silverleaf will also receive approximately 1,800 unsold Vacation Intervals and certain equipment at these eight resorts. This proposed acquisition is subject to completion of customary due diligence investigations and there is no assurance that it will be consummated. - PROPOSED PURCHASE OF ATLANTA AND KANSAS CITY SITES. In February 1998, Silverleaf entered into two agreements, one to acquire a 220 acre property, including a 160 acre golf course, 72 miles north of Atlanta, Georgia for $3.5 million, and another to acquire 260 acres of undeveloped land near Kansas City, Missouri for $1.6 million. If acquired, each property will be developed as a Drive-to Resort. Each contract may be cancelled by Silverleaf if it is not satisfied with each property after conducting its due diligence investigation. Accordingly, there is no assurance that either of these contracts will be closed. RESORTS SUMMARY The following tables set forth certain information regarding each of the Existing Resorts and New Resorts at December 31, 1997, unless otherwise indicated. EXISTING RESORTS <TABLE> <CAPTION> VACATION VACATION INTERVALS INTERVALS UNITS AT RESORTS AT RESORTS SOLD(A) ------------------------ ------------------------ --------- PRIMARY INVENTORY INVENTORY DATE IN MARKET AT PLANNED AT PLANNED SALES THROUGH 1997 RESORT/LOCATION SERVED 12/31/97 EXPANSION(B) 12/31/97 EXPANSION COMMENCED 12/31/97 ONLY --------------- --------------- --------- ------------ --------- ------------ --------- --------- ----- <S> <C> <C> <C> <C> <C> <C> <C> <C> DRIVE-TO RESORTS Holly Lake Dallas- 130 108 1,129 5,400(d) 1982 5,371 539 Hawkins, TX Ft. Worth, TX The Villages Dallas- 240 352 2,440 18,304(e) 1980 10,040 1,679 Flint, TX Ft. Worth, TX Lake O' The Woods Dallas- 64 16 412 800(d) 1987 2,788 332 Flint, TX Ft. Worth, TX Piney Shores Houston, TX 132 268 2,516 13,936(e) 1988 4,348 1,359 Conroe, TX Hill Country Austin-San 153(g) 254 1,886 12,700(d) 1984 5,764 1,391 Canyon Lake, TX Antonio, TX Timber Creek St. Louis, -- 600(h) -- 31,200(e)(h) 1997 32 32 DeSoto, MO MO Fox River Chicago, IL -- 492(h) -- 25,584(e)(h) 1997 49 49 Sheridan, IL Oak N' Spruce Boston, MA 132 420 1,629 21,840(e) 1998 -- -- South Lee, MA New York, NY(i) DESTINATION RESORTS Ozark Mountain Branson, 124 78 783 4,056(e) 1982 5,665 994 Kimberling City, MO MO Holiday Hills Branson, 24 202 135 10,100(d) 1984 1,065 217 Branson, MO MO --- ----- ------ ------- ------ ----- Total 999 2,790 10,930 143,920 35,122 6,592 === ===== ====== ======= ====== ===== <CAPTION> AVERAGE SALES PRICE AMENITIES/ RESORT/LOCATION IN 1997 ACTIVITIES(C) --------------- ------- ------------- <S> <C> <C> DRIVE-TO RESORTS Holly Lake $7,062 B,F,G,H, Hawkins, TX M,S,T The Villages 7,640 B,F,H, Flint, TX M,S,T Lake O' The Woods 6,743 F,M,S,T(f) Flint, TX Piney Shores 8,518 B,F,H, Conroe, TX M,S,T Hill Country 8,552 M,S,T(f) Canyon Lake, TX Timber Creek 5,599 B,F,G,M,S,T DeSoto, MO Fox River 5,465 G,M,S,T Sheridan, IL Oak N' Spruce -- F,G,S,T South Lee, MA DESTINATION RESORTS Ozark Mountain 7,282 B,F,H, Kimberling City, MO M,S,T Holiday Hills 8,046 G,M,S,T(f) Branson, MO ------ Total $7,854 ====== </TABLE> NEW RESORTS <TABLE> <CAPTION> PRIMARY MARKET DATE PLANNED PLANNED EXISTING AND PLANNED RESORT/LOCATION SERVED ACQUIRED UNITS(H) INTERVALS(H) AMENITIES/ACTIVITIES --------------- ------------- -------- -------- ------------ -------------------- <S> <C> <C> <C> <C> <C> Galveston, TX......................... Houston, TX 1997(j) 400(k) 20,800(e)(k) B,F,S,T Las Vegas, NV......................... Las Vegas, NV 1997 157(l) 8,164(e)(l) S ----- ------ Total......................... 557 28,964 ===== ====== </TABLE> (See notes commencing on following page) - --------------- (a) These totals do not reflect sales of upgraded Vacation Intervals to Silverleaf Owners. For the year ended December 31, 1997, upgrade sales at the Existing Resorts were as follows: <TABLE> <CAPTION> AVERAGE SALES PRICE FOR THE YEAR ENDED 12/31/97 UPGRADED VACATION -- NET OF RESORT INTERVALS SOLD EXCHANGED INTERVAL ------ ----------------- ---------------------- <S> <C> <C> Holly Lake..................................... 187 $3,809 The Villages................................... 642 4,871 Lake O' The Woods.............................. 79 3,630 Piney Shores................................... 671 3,850 Hill Country................................... 648 3,928 Timber Creek................................... 2 945 Fox River...................................... 1 2,780 Ozark Mountain................................. 1,468 4,645 Holiday Hills.................................. 210 3,938 ----- ------ 3,908 $4,326 ===== ====== </TABLE> (b) Represents units included in the Company's master plan. This plan is subject to change based upon various factors, including consumer demand, the availability of financing, grant of governmental permits, and future land-planning and site layout considerations. The following chart reflects the status of certain planned units at December 31, 1997: <TABLE> <CAPTION> LAND- LAND- LAND- USE USE USE PROCESS PROCESS PROCESS CURRENTLY IN SHELL NOT STARTED PENDING COMPLETE CONSTRUCTION COMPLETE TOTAL ----------- -------- -------- ------------ -------- ----- <S> <C> <C> <C> <C> <C> <C> Holly Lake................ 54 -- 50 -- 4 108 The Villages.............. 110 152 78 12 -- 352 Lake O' The Woods......... -- -- 16 -- -- 16 Piney Shores.............. 108 120 16 24 -- 268 Hill Country.............. 153 47 54 -- -- 254 Timber Creek.............. 576 -- -- 24 -- 600 Fox River................. 456 -- -- 36 -- 492 Oak 'N Spruce............. 420 -- -- -- -- 420 Ozark Mountain............ 36 -- 30 -- 12 78 Holiday Hills............. 70 -- 94 24 14 202 ----- --- --- --- -- ----- 1,983 319 338 120 30 2,790 ===== === === === == ===== </TABLE> "Land-Use Process Pending" means that the Company has commenced the process which the Company believes is required under current law in order to obtain the necessary land-use authorizations from the applicable local governmental authority with jurisdiction, including submitting for approval any architectural drawings, preliminary plats or other attendant items as may be required. "Land-Use Process Complete" means either that (i) the Company believes that it has obtained all necessary land-use authorizations under current law from the applicable local governmental authority with jurisdiction, including the approval and filing of any required preliminary or final plat and the issuance of building permit(s), in each case to the extent applicable, or (ii) upon payment of any required filing or other fees, the Company believes that it will under current law obtain such necessary authorizations without further process. See "Risk Factors -- Development, Construction and Property Acquisition Activities". The 30 "Shell Complete" units are currently devoted to such uses as a general store, registration office, sales office, activity center, construction office, or pro shop. The Company anticipates that these units will continue to be used for such purposes during 1998. (c) Principal amenities available to Silverleaf Owners at each resort are indicated by the following symbols: B -- boating; F -- fishing; G -- golf course; H -- horseback riding; M -- miniature golf; S -- swimming pool; and T -- tennis. (d) These figures are based on 50 one-week intervals per unit. In some instances, the Company may be able to market 52 one-week intervals per unit. (e) These figures are based on 52 one-week intervals per unit. (f) Boating is available near the resort. (g) Includes three units which have not been finished-out for accommodations and which are currently used for other purposes. (h) Engineering, architectural and construction estimates have not been completed by the Company, and there can be no assurance that the Company will develop these properties at the unit numbers currently projected. (i) The Company has commenced the timeshare permit process in New York, but has not yet received a permit. (The Company has a timeshare permit in Massachusetts.) (j) One portion of this tract was acquired in February 1998. (k) The Company has not commenced the timeshare permit process. The Company has commenced the land use permit process. See "Risk Factors -- Development, Construction and Property Acquisition Activities", "Business -- Description of New Resorts -- Gulf Coast Resort". (l) The Company has commenced the timeshare permit application process, but has not yet received a permit. The Company has not commenced the land use permit process. See "Risk Factors -- Regulation of Marketing and Sales of Vacation Intervals and Related Laws". CORPORATE BACKGROUND The Company was incorporated in Texas in 1989 and has been owned by and operated primarily under the direction of Robert E. Mead. Through the Company, Mr. Mead consolidated in one entity all of the timeshare assets and operations he previously owned through various partnerships and corporations affiliated with Mr. Mead. In May 1989, a partnership, of which the Company was the general partner, acquired seven of the Existing Resorts from a now dissolved corporation which was also owned and controlled by Mr. Mead. In December 1995 (i) through a merger of the partnership into the Company, such Existing Resorts were transferred to the Company, (ii) the Company acquired additional assets of the now dissolved corporation subject to certain indebtedness owing by such corporation to Mr. Mead and his affiliates; and (iii) the Company acquired Condominium Builders, Inc. ("CBI") and certain assets from Mr. Mead (all of the acquisition and merger transactions in (i), (ii) and (iii) are collectively referred to herein as the "Consolidation Transactions"). See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Certain Relationships and Related Transactions". The affiliated corporations and partnership whose assets were acquired by the Company through the Consolidation Transactions are sometimes collectively referred to herein as the "Affiliated Companies" or individually as an "Affiliated Company". The Company's principal executive offices are located at 1221 Riverbend Drive, Suite 120, Dallas, Texas 75247. The Company's telephone number is (214) 631-1166. THE EQUITY OFFERING The Company is also offering 2,000,000 shares of Common Stock and Mr. Mead is offering an additional 500,000 shares of Common Stock. The Equity Offering is being made by separate prospectus. Giving effect to the Equity Offering, the Company will have 13,311,517 shares of Common Stock outstanding. Silverleaf has not historically paid dividends on its Common Stock and does not expect to pay any dividends in the foreseeable future. SOURCES AND USES OF PROCEEDS The net proceeds from the Note Offering are estimated to be $72.1 million. The net proceeds from the Equity Offering are estimated to be $49.3 million. The following table sets forth the estimated sources and uses of funds at December 31, 1997: <TABLE> <CAPTION> AMOUNT ------------ (DOLLARS IN MILLIONS) <S> <C> Sources of Funds: Senior Subordinated Notes due 2008......................... $ 75.0 Common Stock(a)................. 53.5 ------ Total sources..................... $128.5 ====== </TABLE> <TABLE> <CAPTION> AMOUNT ------------ (DOLLARS IN MILLIONS) <S> <C> Uses of Funds: Pay existing debt(b)(c)(d)...... $ 48.9 Develop units, amenities, and infrastructure at Existing Resorts(e)................... 32.0 Develop units, amenities, and infrastructure at New Resorts(e)................... 6.0 Acquisitions, working capital and general corporate purposes(b)(e)............... 34.5 Fees, expenses, and other costs........................ 7.1 ------ Total uses........................ $128.5 ====== </TABLE> - --------------- (a) The Company is offering 2,000,000 primary shares of Common Stock in the Equity Offering. The assumed offering price of $26.75 was the closing price of Silverleaf's Common Stock on February 27, 1998. The Company will not receive any of the proceeds from the sale of the shares of Common Stock offered by Silverleaf's Chief Executive Officer, Robert E. Mead. (b) Indebtedness is projected to increase from $48.9 million at December 31, 1997, to approximately $68.6 million at the closing of the Equity Offering and the Note Offering, substantially all of which will be paid from the proceeds of the Equity Offering and the Note Offering. As a result, cash available at closing for acquisitions, working capital, and general corporate purposes will be reduced to approximately $14.8 million. Additionally, after repayment of existing indebtedness, there will be $125.0 million of borrowing capacity available under the Company's credit facilities. See "Description of Certain Indebtedness". (c) This includes $5.6 million owing to Credit Suisse First Boston Mortgage Capital, L.L.C., an affiliate of Credit Suisse First Boston Corporation, the lead managing underwriter for the Equity Offering and the Note Offering. This indebtedness is projected to increase to $13.0 million by the closing of the Equity Offering and the Note Offering. See "Underwriting". (d) At December 31, 1997, indebtedness to be repaid from the net proceeds of the Equity Offering and Note Offering bears interest at variable rates currently ranging from 4.2% to 14.0% per annum and matures between January 1998 and October 2005. See "Description of Certain Indebtedness". Indebtedness is projected to increase from $48.9 million to approximately $68.6 million at the closing of the Equity Offering and the Note Offering. Approximately $58.0 million of this indebtedness will have been incurred within one year prior to the date of this Prospectus. Of this indebtedness, $2.9 million was incurred to purchase the Fox River and Timber Creek resorts in St. Louis and Chicago, respectively, $2.7 million was incurred to purchase the New Resort in Las Vegas, $1.7 million was incurred to purchase the New Resort in Galveston, $5.1 million was incurred to purchase the Oak 'N Spruce Resort in the Berkshires, $2.9 million was incurred for capital leases of equipment, and the balance was used for working capital and general corporate purposes. (e) The Company currently anticipates investing these proceeds during 1998. Pending the final application of these proceeds, the Company will invest these proceeds in commercial paper, bankers' acceptances, other short-term investment-grade securities, or money-market accounts, and may utilize the proceeds for working capital purposes. THE NOTE OFFERING Securities Offered......... $75.0 million aggregate principal amount of % Senior Subordinated Notes due 2008. Maturity Date.............. , 2008. Interest Payment Dates..... and , commencing , 1998. Optional Redemption........ The Notes will be redeemable, in whole or in part, at the option of the Company on or after , 2003, at the redemption prices (expressed as a percentage of principal amount) set forth herein, plus accrued and unpaid interest, if any, to the date of redemption. In addition, prior to , 2001, the Company may redeem up to 33 1/3% of the aggregate principal amount of the Notes with the net cash proceeds of one or more public offerings of its Common Stock, at a redemption price equal to % of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date); provided, however, that at least 66 2/3% of the aggregate principal amount of the Notes originally issued remains outstanding after any such redemption. See "Description of Notes -- Optional Redemption". Change of Control.......... Upon a Change of Control (as defined), each holder of Notes will have the right to require the Company to repurchase all or a portion of such holder's Notes at a purchase price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon, if any, to the date of repurchase. See "Description of Notes -- Repurchase at the Option of Holders -- Change of Control" and "Risk Factors -- Payment Upon a Change of Control and Certain Asset Sales". Ranking.................... The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company. The Notes will rank pari passu with any future senior subordinated indebtedness of the Company and will rank senior to all subordinated indebtedness of the Company. At December 31, 1997, as adjusted to give effect to the consummation of the Equity Offering, the Note Offering and the application of the estimated net proceeds thereof, the Company would have had no Senior Debt (exclusive of unused commitments under the credit facilities). The Notes, subject to the Subsidiary Guarantees, will be structurally subordinated to all existing and future liabilities of the Guarantors. At December 31, 1997, as adjusted to give effect to the consummation of the Equity Offering and the Note Offering, such subsidiaries would have had no material liabilities (other than intercompany obligations). Subsidiary Guarantees...... The payment of the principal, interest, and premium (if any) on the Notes is fully and unconditionally guaranteed, jointly and severally, on a senior subordinated basis by all existing and future domestic Restricted Subsidiaries (as defined) of the Company. Each Subsidiary Guarantee will be subordinated to all existing and future Senior Debt of the respective Guarantor. See "Description of Notes -- Subsidiary Guarantees". The Company will be able to designate other current or future subsidiaries as Unrestricted Subsidiaries (as defined) under certain circumstances. Unrestricted Subsidiaries will not be required to issue a Subsidiary Guarantee with respect to the Notes and will not be subject to many of the restrictive covenants set forth in the Indenture pursuant to which the Notes will be issued (the "Indenture"). Covenants.................. The Indenture will contain certain covenants that, among other things, limit the ability of the Company and certain of its subsidiaries to incur additional Indebtedness and issue preferred stock, make certain investments, pay dividends or make other distributions, repurchase Equity Interests (as defined) or subordinated indebtedness, enter into certain transactions with affiliates, sell assets of the Company or certain of its subsidiaries, issue or sell Equity Interests of the Company's subsidiaries or enter into certain mergers and consolidations. In addition, under certain circumstances, the Company will be required to offer to purchase the Notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the date of purchase, with the proceeds of certain Assets Sales (as defined). See "Description of Notes -- Repurchase at the Option of Holders -- Asset Sales" and "-- Certain Covenants". Conditions................. The closing of the Note Offering will be conditioned upon, among other things, the closing of the Equity Offering. SUMMARY CONSOLIDATED HISTORICAL FINANCIAL, OPERATING AND PRO FORMA INFORMATION The summary consolidated historical financial and operating information set forth below has been derived from the consolidated financial statements of the Company which have been restated giving effect to the Consolidation Transactions utilizing the historical cost basis of the combined entities since these entities were under common ownership and control. The consolidated financial statements of the Company for 1995, 1996 and 1997 included herein were audited by Deloitte & Touche LLP. The data presented as of and for the year ended December 31, 1994 has been derived from the Company's audited consolidated financial statements which have not been included herein. Data presented as of and for the year ended December 31, 1993 has been derived from the Company's unaudited consolidated financial statements which in the opinion of management of the Company reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial position at such dates and results of operation for such periods. The summary pro forma financial information set forth below has been derived from the Unaudited Pro Forma Condensed Consolidated Financial Information and related Notes included elsewhere in this Prospectus. The pro forma statement of income data for the years ended December 31, 1997 gives effect, at the beginning of the period, to the IPO, the Equity Offering, the Note Offering, and the application of the proceeds thereof, and to the other adjustments set forth in the Unaudited Pro Forma Condensed Consolidated Financial Information and related Notes (collectively the "Pro Forma Adjustments"). The pro forma balance sheet data at December 31, 1997 gives effect to the Equity Offering, the Note Offering, and the application of the proceeds thereof to pay indebtedness and offering expenses, on the basis of and subject to the assumptions stated in the Notes thereto. The pro forma financial information does not purport to present the actual financial position or results of operations of the Company had the IPO, the Equity Offering, the Note Offering and events associated therewith occurred on the dates specified, nor are they necessarily indicative of the Company's future results of operations or financial position. During 1997 the Company began classifying the components of the previously reported provision for uncollectible notes into three categories based on the nature of the item -- credit losses, customer returns, and customer releases. The Company has reclassified these amounts within the previously reported financial information to conform to the classification for the year ended December 31, 1997. This reclassification has no balance sheet effect and has no effect on previously reported net income. See Note 2 of Notes to Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview". The Summary Consolidated Historical Financial, Operating and Pro Forma Information should be read in conjunction with the Consolidated Financial Statements and Notes thereto, "Unaudited Pro Forma Condensed Consolidated Financial Information" and Notes thereto, "Selected Consolidated Historical Financial and Operating Information" and Notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations". <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ----------------------------------------------- 1993 1994 1995 1996 1997 ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS, EXCEPT AVERAGE PRICE OF VACATION INTERVALS) <S> <C> <C> <C> <C> <C> STATEMENT OF INCOME DATA: Revenues: Vacation Interval sales................................. $18,627 $24,551 $34,091 $45,907 $68,682 Other income............................................ 7,188 7,348 9,981 12,018 16,376 ------- ------- ------- ------- ------- Total revenues..................................... 25,815 31,899 44,072 57,925 85,058 Costs and Operating Expenses: Cost of Vacation Interval sales......................... 2,094 2,648 3,280 2,805 6,600 Sales and marketing..................................... 10,219 12,929 17,850 21,839 30,559 Provision for uncollectible notes....................... 1,877 4,205 6,632 8,733 10,524 Operating, general and administrative................... 6,501 5,853 8,780 10,116 12,230 Depreciation and amortization........................... 477 590 863 1,264 1,497 Interest expense........................................ 1,426 1,642 3,609 4,759 4,664 ------- ------- ------- ------- ------- Total costs and operating expenses................. 22,594 27,867 41,014 49,516 66,074 ------- ------- ------- ------- ------- Income from continuing operations before income taxes..... $ 3,221 $ 4,032 $ 3,058 $ 8,409 $18,984 ======= ======= ======= ======= ======= OTHER FINANCIAL DATA: EBITDA(a)................................................. $ 5,124 $ 6,264 $ 7,530 $14,432 $25,145 Capital expenditures...................................... $ 2,986 $ 1,701 $ 4,497 $ 4,162 $ 8,692 Ratio of earnings to fixed charges(b)..................... 3.2x 3.4x 1.6x 2.5x 4.3x SUPPLEMENTAL PRO FORMA DATA: EBITDA(c)........................................................................................ $24,785 Total interest expense(d)........................................................................ $ 7,509 Ratio of EBITDA to total interest expense(c)(d)(e)............................................... 3.3x Ratio of net debt to EBITDA(e)(f)................................................................ NM Ratio of debt to EBITDA(e)....................................................................... 3.0x Ratio of earnings to fixed charges............................................................... 3.1x OTHER OPERATING DATA: Number of Existing Resorts at period end.................. 7 7 7 7 10 Number of Vacation Intervals sold (excluding upgrades)(g)............................................ 2,386 3,423 4,464 5,634 6,592 Number of upgraded Vacation Intervals sold................ 1,378 1,290 1,921 1,914 3,908 Number of Vacation Intervals in inventory................. 5,615 5,943 6,580 6,746 10,930 Average price of Vacation Intervals sold (excluding upgrades)(g)(h)......................................... $ 5,599 $ 5,821 $ 5,965 $ 6,751 $ 7,854 Average price of upgraded Vacation Intervals sold (net of exchanged interval)..................................... $ 3,822 $ 3,585 $ 3,885 $ 4,113 $ 4,326 </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1997 -------------------------- HISTORICAL PRO FORMA(e) ---------- ------------ <S> <C> <C> BALANCE SHEET DATA: Cash and equivalents...................................... $ 4,970 $ 77,499 Notes receivable, net..................................... 92,036 92,036 Total assets.............................................. 156,401 231,830 Senior Subordinated Notes, notes payable and capital lease obligations............................................. 48,871 75,000 Total liabilities......................................... 72,636 98,765 Shareholders' equity...................................... 83,765 133,065 </TABLE> - --------------- (a) EBITDA represents income from continuing operations before interest expense, income taxes and depreciation and amortization. EBITDA is presented because it is a widely accepted indicator of a company's financial performance. However, EBITDA should not be construed as an alternative to net income as a measure of the Company's operating results or to cash flows from operating activities (determined in accordance with generally accepted accounting principles) as a measure of liquidity. Since revenues from Vacation Interval sales include promissory notes received by the Company, EBITDA does not reflect cash flow available to the Company. Additionally, due to varying methods of reporting EBITDA within the timeshare industry, the computation of EBITDA for the Company may not be comparable to other companies in the timeshare industry which compute EBITDA in a different manner. The Company's management interprets trends in EBITDA to be an indicator of the Company's financial performance, in addition to net income and cash flows from operating activities (determined in accordance with generally accepted accounting principles). (b) For purposes of determining the ratio of earnings to fixed charges, earnings is defined as income from continuing operations before provision for income taxes, plus interest on indebtedness, imputed interest on the portion of rent expense (one-third) deemed to represent interest expense, and amortization of previously capitalized interest. Fixed charges consist of interest on indebtedness whether expensed or capitalized, imputed interest on the portion of rent expense (one-third) deemed to represent interest expense, amortization of debt expense, and discount or premium relating to any indebtedness whether expensed or capitalized. (c) Pro forma EBITDA is adjusted for the Pro Forma Adjustments. Pro Forma EBITDA is lower than historical EBITDA in 1997 due to two adjustments relating to the IPO in June 1997. The difference is due to (i) lower interest income associated with amounts due from affiliates that was repaid indirectly from the IPO proceeds and (ii) expenses associated with being a public company. See "Unaudited Pro Forma Condensed Consolidated Financial Information". (d) Pro forma total interest expense is defined as pro forma interest expense plus pro forma capitalized interest, as adjusted for the Pro Forma Adjustments. No interest income has been assumed on proceeds of the IPO, the Equity Offering and Note Offering. Assuming interest income of 5.5% (current market rate) on such proceeds, the ratio of pro forma EBITDA to pro forma net interest expense for 1997 would have been 7.0x. The ratio of pro forma EBITDA to pro forma net interest expense differs from the Consolidated Coverage Ratio (as defined herein) as set forth in the Indenture. See "Description of Notes".
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+SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial data included elsewhere in this Prospectus, including the Consolidated Financial Statements and the Notes thereto. Unless otherwise indicated, all timeshare industry data contained herein is derived from information prepared by the American Resort Development Association ("ARDA"). This Prospectus contains certain statements of a forward-looking nature relating to future events or the future financial performance of the Company. In evaluating such statements, prospective investors should specifically consider the various factors identified in this Prospectus, including the matters set forth under the caption "Risk Factors", which could cause actual results to differ materially from those indicated in such forward-looking statements. Unless the context otherwise indicates, the "Company" or "Silverleaf" means Silverleaf Resorts, Inc. and its subsidiaries. "Pro forma" financial information appearing herein is prepared on the assumption that the Company's June 1997 initial public offering of 3.6 million shares of Common Stock (the "IPO"), the Equity Offering and the Note Offering occurred at the beginning of 1997 for statement of operations data and that the Equity Offering and the Note Offering occurred on December 31, 1997 for balance sheet data. "EBITDA" means earnings before interest, taxes, depreciation and amortization. THE COMPANY Silverleaf is a leading developer, marketer, and operator of "drive-to" timeshare resorts. The Company currently owns and operates eight "drive-to" resorts in Texas, Missouri, Illinois, and Massachusetts (the "Drive-to Resorts") and two "destination" resorts in Missouri (the "Destination Resorts", and together with the Drive-to Resorts, the "Existing Resorts"). The Company has recently acquired sites in Las Vegas, Nevada and Galveston, Texas to be developed as new Destination Resorts (the "New Resorts"). The number of annual one-week vacations ("Vacation Intervals") sold by the Company increased at an annual compounded growth rate of 29.2% from 1992 to 1997. At December 31, 1997, the Company had an inventory of 10,930 Vacation Intervals, was constructing 120 new units (6,192 new Vacation Intervals), and had plans to construct 2,670 additional units (137,728 new Vacation Intervals) at the Existing Resorts. The Company plans to construct 557 new units (28,964 Vacation Intervals) at the New Resorts. Due to standardized architectural designs and procedures, new units can typically be constructed at the Existing Resorts within 150 days, weather permitting. Silverleaf generally starts construction of new units after sales of Vacation Intervals for those units have occurred. The Company markets Vacation Intervals to value-conscious customers and has advanced proprietary computer systems to track and identify potential timeshare owners. Through exclusive marketing arrangements with race tracks, amusement parks, and other event sponsors, the Company identifies a substantial number of prospects in its target markets. As a result of these and other activities, more than 1,500 potential customers currently tour the resorts each week. During 1997, approximately 12.7% of the Company's visitors purchased Vacation Intervals from the Company. Management anticipates the pool of potential customers will remain strong due to expansion into new geographic regions and growth in major Texas metropolitan areas, population turnover in such metropolitan areas, and further penetration of the target markets. The Drive-to Resorts are designed to appeal to value-conscious vacationers seeking comfortable and affordable accommodations in locations convenient to their residences. These resorts are located proximate to major metropolitan areas (currently Dallas-Ft. Worth, Houston, San Antonio/Austin, St. Louis, Chicago, Boston and the greater New York City area), facilitating more frequent "short stay" getaways, which the Company believes is a growing vacation trend. The Destination Resorts, which are located in the popular country and western music entertainment resort area of Branson, Missouri, offer Silverleaf customers the opportunity to upgrade into higher quality resorts as their lifestyles and travel budgets permit. Both the Drive-to Resorts and the Destination Resorts are in rustic areas which provide a quiet, relaxing vacation environment and offer an economical alternative to commercial vacation lodging. Consistent with Silverleaf's strategy of targeting value-conscious customers, the average price of a Vacation Interval for a two-bedroom unit at the Existing Resorts was $7,834 for 1997 and $6,922 for 1996, as compared to the industry average price of $10,790 for 1996. The Company offers benefits to owners of Silverleaf Vacation Intervals ("Silverleaf Owners") which are uncommon in the timeshare industry. These benefits include (i) use of vacant lodging facilities at no extra cost through Silverleaf's "Endless Escape" program; (ii) year-round access to non-lodging amenities such as fishing, boating, horseback riding, tennis or golf on a "country-club" basis for little or no additional charge; and (iii) the right to exchange a Vacation Interval for a different time period or different Existing Resort through Silverleaf's internal exchange program. These benefits are subject to availability and other limitations. Most Silverleaf Owners may also enroll in the world's largest Vacation Interval exchange network operated by Resort Condominiums International ("RCI"). The Company's 1997 pro forma revenues and EBITDA were $84.9 million and $24.8 million, respectively. The Company's Common Stock is listed on the New York Stock Exchange ("NYSE") under the symbol "SVR", and based on a closing price of $26.75 per share on February 27, 1998, the Company had a market capitalization of approximately $300.0 million. TIMESHARE INDUSTRY The timeshare industry has experienced substantial growth since 1980. Annual worldwide timeshare sales have increased from approximately $490 million in 1980 to approximately $5 billion in 1995. The U.S. market has also grown considerably -- from $1.3 billion of timeshare sales in 1992 to $2.2 billion of timeshare sales in 1996. The growth in the U.S. timeshare industry is due to (i) higher quality accommodations and services; (ii) involvement of well-recognized hotel companies in the upscale segment of the industry such as Marriott Ownership Resorts ("Marriott"), The Walt Disney Company ("Disney"), and Hilton Hotels Corporation ("Hilton"); (iii) improved availability of financing for purchasers of Vacation Intervals; (iv) increased flexibility of timeshare use; (v) increased governmental regulation; and (vi) improved overall image of the industry. Since timeshare units typically include two bedrooms and kitchen facilities, Vacation Interval ownership is often more economical for a family than an extended vacation at a commercial lodging establishment. OPERATIONS Silverleaf's operations include (i) developing and acquiring timeshare resorts; (ii) marketing and selling Vacation Intervals to prospective first-time owners; (iii) marketing and selling upgraded Vacation Intervals to existing Silverleaf Owners; (iv) providing financing for the purchase of Vacation Intervals; and (v) operating timeshare resorts. The Company has substantial in-house capabilities which enable it to coordinate all aspects of development and expansion of the Existing Resorts and the development of the New Resorts, including site selection, design, and construction pursuant to standardized plans and specifications. The Company also performs substantially all marketing and sales functions internally and has made a significant investment in operating technology, including sophisticated telemarketing and computer systems and proprietary software applications. The Company identifies potential purchasers through internally developed marketing techniques, and sells Vacation Intervals through on-site sales offices located at certain Drive-to Resorts. This practice allows the Company to avoid the more expensive marketing costs of subsidized airfare and lodging which are typically associated with the timeshare industry. The Company believes its marketing program and operating and computer systems enable it to market and sell Vacation Intervals at a lower cost than its competitors in the timeshare industry. The costs of maintaining and operating the Existing Resorts are paid from Silverleaf Owners' monthly ownership dues. As part of the Vacation Interval sales process, the Company offers customer financing of up to 90% of the purchase price to be paid over a seven year period. At December 31, 1997, the Company had a portfolio of approximately 21,320 Vacation Interval customer notes receivable totalling approximately $104.4 million with an average yield of 14.5% per annum. The Company has typically financed its operations by pledging eligible customer notes to lending institutions who make loans secured by such notes. The Company has three revolving credit facilities providing for loans up to an aggregate of $115.0 million to finance customer notes receivable. See "Description of Certain Indebtedness". COMPETITIVE ADVANTAGES Silverleaf believes the following characteristics afford it certain competitive advantages: LOWER MARKETING, SALES, AND ADMINISTRATIVE COSTS. With resorts and on-site sales offices within a two-hour drive of its targeted customers, Silverleaf can invite potential customers to tour the Drive-to Resorts without offering subsidized airline tickets and lodging, a significant marketing expense typically incurred by competitors in the industry. Silverleaf has also reduced marketing, operating, and administrative costs through centralization and automation of many functions. While marketing and sales costs as a percentage of revenue will increase for newly acquired resorts, the Company believes that these costs will, over time, return to historical levels. CONVENIENT DRIVE-TO LOCATIONS. Silverleaf's Drive-to Resorts are located within a two-hour drive of a majority of the target customers' residences, which accommodates the growing demand for shorter, more frequent, close to home vacations. This proximity facilitates use of Silverleaf's Endless Escape program, which allows Silverleaf Owners to use vacant units for no additional charge, subject to availability and certain limitations. Silverleaf believes it is the only timeshare operator in the industry which offers its customers these benefits. Silverleaf Owners can also conveniently enjoy non-lodging resort amenities year-round on a "country-club" basis. SUBSTANTIAL INTERNAL GROWTH CAPACITY. At December 31, 1997, Silverleaf had an inventory of 10,930 Vacation Intervals, and a master plan to construct new units which will result in up to 143,920 additional Vacation Intervals at the Existing Resorts and 28,964 Vacation Intervals at the New Resorts. Silverleaf's master plan for construction of new units is contingent upon future sales at the Existing Resorts and New Resorts and the availability of financing, grant of government permits, and future land-planning and site-layout considerations. See "Risk Factors -- Development, Construction and Property Acquisition Activities". IN-HOUSE OPERATIONS. Silverleaf has in-house marketing, sales, financing, development, and property management capabilities. While Silverleaf utilizes outside contractors to supplement internal resources, when appropriate, the breadth of Silverleaf's internal capabilities allows greater control over all phases of its operations and helps maintain operating standards and reduce overall costs. LOWER CONSTRUCTION AND OPERATING COSTS. Silverleaf has developed and generally employs standard architectural designs and operating procedures which it believes significantly reduce construction and operating expenses. Standardization and integration also allow Silverleaf to rapidly develop new inventory in response to demand. Weather permitting, new units at Existing Resorts can normally be constructed on an "as needed" basis within 150 days. CENTRALIZED PROPERTY MANAGEMENT. Silverleaf operates all of the Existing Resorts on a centralized and collective basis, with operating and maintenance costs paid from Silverleaf Owners' monthly dues. Silverleaf believes that consolidation of resort operations benefits Silverleaf Owners by providing them with a uniform level of service, accommodations and amenities on a standardized, cost-effective basis. Such standardization also facilitates Silverleaf's internal exchange program, the Endless Escape program, and external Vacation Interval exchange programs. EXPERIENCED MANAGEMENT. The Company's senior management has extensive experience in the acquisition, development, and operation of timeshare resorts. Robert E. Mead, Chairman of the Board and Chief Executive Officer, has more than 18 years of experience in the timeshare industry and since 1995 has served as a director of ARDA, the primary trade association for the timeshare industry. Pro forma for the Equity Offering (assuming no exercise of the Underwriters' over-allotment option granted by Mr. Mead), Mr. Mead will own 53.5% of the Common Stock of the Company. The Company's senior officers have an average of ten years of experience in the timeshare industry. GROWTH STRATEGY Silverleaf intends to grow through the following strategies: INCREASING DEVELOPMENT AND SALES OF VACATION INTERVALS. Silverleaf intends to capitalize on its significant expansion capacity at the Existing Resorts and the New Resorts by increasing marketing, sales and development activities. At December 31, 1997, Silverleaf owned approximately 930 acres of land that were available for further development of timeshare units and amenities under Silverleaf's master plan. The master plan forecasts development of 3,347 additional units, which would result in 172,884 additional Vacation Intervals. During 1997, Silverleaf enhanced its marketing efforts, including increased telemarketing capacity arising from investments in computer and automated dialing technology, increased its sales force, enhanced its lead generation methods, completed the construction of new sales offices and other amenities, and commenced the development of newer lodging facilities. Furthermore, Silverleaf continues to emphasize its Endless Escape program designed to accommodate shorter, "getaway" vacations and has broadened its product offerings to include biennial (alternate year) intervals and short-term leasing packages ("Samplers") which are designed to accommodate more cost- conscious customers. INCREASING SALES OF UPGRADED INTERVALS. Silverleaf believes it can continue to improve operating margins by increasing sales of upgraded Vacation Intervals to existing Silverleaf Owners since these sales have significantly lower sales and marketing costs. Upgrades by a Silverleaf Owner include the purchase of (i) an interval in a newly designed and constructed standard unit; (ii) an interval in a larger or higher quality unit; (iii) an interval during a more desirable time period; (iv) an interval at a different Drive-to Resort; or (v) an interval at a Destination Resort. Silverleaf has designed specific marketing and sales programs to sell upgraded Vacation Intervals to Silverleaf Owners. Silverleaf continues to construct higher quality, larger units for sale as upgraded intervals, as well as developing new sites such as Las Vegas and Galveston as new upgrade locations. For example, at Ozark Mountain Resort in Branson, Missouri, luxury "President's View" units are offered for sale at prices ranging from $8,000 to $17,500 per Vacation Interval. Intervals exchanged for upgraded intervals are added back to inventory at historical cost for resale at the current offering price. Sales of upgrades increased to $16.9 million in 1997, from $7.9 million in 1996 (upgrade sales represented 24.6% of Silverleaf's Vacation Interval sales in 1997 as compared to 17.1% for 1996). Silverleaf incurs additional sales commissions upon the resale of Vacation Intervals reconveyed to Silverleaf by purchasers of upgraded intervals, and such sales absorb their proportionate share of marketing costs to the extent they displace the sale of another interval, although they do not directly result in incremental marketing costs. DEVELOPMENT OF ADDITIONAL RESORTS AND ACQUISITIONS. In 1997, Silverleaf purchased four sites for development as Drive-to and Destination Resorts and acquired an existing timeshare resort which it markets as a Drive-to Resort. Additionally, in 1998, Silverleaf entered into agreements to acquire property with a golf course near Atlanta, undeveloped land near Kansas City, and the right to manage eight timeshare resorts in seven states. Silverleaf continues to seek new properties for Drive-to Resorts in scenic wooded areas on lakes or waterways that are near major metropolitan areas that have favorable demographic characteristics. For Destination Resorts, Silverleaf seeks popular destination resort areas that are easily accessible to Silverleaf Owners. Silverleaf is currently exploring a number of other property acquisition opportunities, and intends to continue acquiring and/or developing additional resorts. RECENT DEVELOPMENTS Since the IPO, Silverleaf has taken actions which it believes will enhance its growth and competitive position within the U.S. timeshare industry. These actions are summarized below and discussed in greater detail elsewhere in this Prospectus. - DEVELOPMENT OF TIMBER CREEK PROPERTY. In August 1997, Silverleaf purchased the Timber Creek Resort for $1.2 million for development as a Drive-to Resort. Timber Creek is located approximately 50 miles south of St. Louis, Missouri. Silverleaf intends to develop approximately 600 units (31,200 Vacation Intervals) at the Timber Creek Resort and has begun construction of 24 units to be completed in May 1998. Sales of Vacation Intervals at Timber Creek began in October 1997. - DEVELOPMENT OF FOX RIVER PROPERTY. In August 1997, Silverleaf purchased the Fox River Resort for $1.7 million for development as a Drive-to Resort. Fox River is located approximately 70 miles southwest of Chicago. Silverleaf intends to develop approximately 492 (25,584 Vacation Intervals) units on this property, and has begun construction on 36 units to be completed in May 1998. Sales of Vacation Intervals at Fox River began in November 1997. - ACQUISITION OF OAK N' SPRUCE RESORT. In December 1997, Silverleaf acquired the Oak N' Spruce Resort, an existing 55 room hotel and 132 unit timeshare resort, in the Berkshire Mountains of western Massachusetts for $5.1 million. This new Drive-to Resort serves Boston and the greater New York City market and Silverleaf plans to develop approximately 420 new units (21,840 Vacation Intervals) at this resort. At December 31, 1997, there were 1,629 unsold Vacation Intervals at the resort. Silverleaf's sales of Vacation Intervals at Oak N' Spruce began in January 1998. - PURCHASE OF LAS VEGAS SITE. In November 1997, Silverleaf acquired a two acre parcel near the "strip" in Las Vegas, Nevada, for $2.7 million. Silverleaf intends to develop this property as a new Destination Resort which will contain approximately 157 units (8,164 Vacation Intervals). - PURCHASE OF GULF COAST SITE. In December 1997 and February 1998, Silverleaf acquired two adjoining tracts of land in Galveston, Texas, for approximately $1.7 million, to be developed as a new beach-front Gulf Coast Destination Resort. Silverleaf intends to develop approximately 400 units (20,800 Vacation Intervals) at this resort. - INCREASED SALES OF VACATION INTERVALS AT EXISTING RESORTS. In addition to the acquisitions described above, Silverleaf has also worked since the IPO to improve internal sales growth at the Existing Resorts. During 1997, Silverleaf sold 6,592 Vacation Intervals (excluding upgrades), compared to 5,634 and 4,464 during 1996 and 1995, respectively. Total revenues increased to $85.1 million in 1997 from $57.9 million and $44.1 million in 1996 and 1995, respectively. - ENHANCED CREDIT FACILITIES. Silverleaf has improved its borrowing capacity by increasing its revolving credit facilities from $80.0 million to $115.0 million and by acquiring a construction line of credit in the amount of $10.0 million. Additionally, Silverleaf has been able to negotiate lower interest rates and extensions of maturity of certain loan facilities. - INVESTMENTS IN OPERATING AND TELEMARKETING SYSTEMS. Silverleaf has invested approximately $2.1 million in a new automated dialer, telephone system, and a new central marketing facility to improve Silverleaf's operating and telemarketing systems. - ADDITIONS TO MANAGEMENT TEAM. Silverleaf formed a new acquisition subsidiary, Silverleaf Resort Acquisitions, Inc., and hired Thomas G. Franks as President of the new subsidiary. Mr. Franks is a former President of ARDA, the primary trade association for the timeshare industry, and has more than 15 years of experience in the timeshare industry. Silverleaf has also added marketing and operational personnel to its management team. - PROPOSED ACQUISITION OF MANAGEMENT RIGHTS. In January 1998, Silverleaf entered into an agreement with Crown Resort Co., LLC ("Crown") to acquire management rights to eight timeshare resorts in Alabama, Mississippi, North Carolina, Pennsylvania, South Carolina, Tennessee, and Texas for $3.8 million. At December 31, 1997 these eight resorts had approximately 21,500 timeshare owners. As part of this agreement, Silverleaf will also receive approximately 1,800 unsold Vacation Intervals and certain equipment at these eight resorts. This proposed acquisition is subject to completion of customary due diligence investigations and there is no assurance that it will be consummated. - PROPOSED PURCHASE OF ATLANTA AND KANSAS CITY SITES. In February 1998, Silverleaf entered into two agreements, one to acquire a 220 acre property, including a 160 acre golf course, 72 miles north of Atlanta, Georgia for $3.5 million, and another to acquire 260 acres of undeveloped land near Kansas City, Missouri for $1.6 million. If acquired, each property will be developed as a Drive-to Resort. Each contract may be cancelled by Silverleaf if it is not satisfied with each property after conducting its due diligence investigation. Accordingly, there is no assurance that either of these contracts will be closed. RESORTS SUMMARY The following tables set forth certain information regarding each of the Existing Resorts and New Resorts at December 31, 1997, unless otherwise indicated. EXISTING RESORTS <TABLE> <CAPTION> VACATION VACATION INTERVALS INTERVALS UNITS AT RESORTS AT RESORTS SOLD(A) ------------------------ ------------------------ --------- PRIMARY INVENTORY INVENTORY DATE IN MARKET AT PLANNED AT PLANNED SALES THROUGH 1997 RESORT/LOCATION SERVED 12/31/97 EXPANSION(B) 12/31/97 EXPANSION COMMENCED 12/31/97 ONLY --------------- --------------- --------- ------------ --------- ------------ --------- --------- ----- <S> <C> <C> <C> <C> <C> <C> <C> <C> DRIVE-TO RESORTS Holly Lake Dallas- 130 108 1,129 5,400(d) 1982 5,371 539 Hawkins, TX Ft. Worth, TX The Villages Dallas- 240 352 2,440 18,304(e) 1980 10,040 1,679 Flint, TX Ft. Worth, TX Lake O' The Woods Dallas- 64 16 412 800(d) 1987 2,788 332 Flint, TX Ft. Worth, TX Piney Shores Houston, TX 132 268 2,516 13,936(e) 1988 4,348 1,359 Conroe, TX Hill Country Austin-San 153(g) 254 1,886 12,700(d) 1984 5,764 1,391 Canyon Lake, TX Antonio, TX Timber Creek St. Louis, -- 600(h) -- 31,200(e)(h) 1997 32 32 DeSoto, MO MO Fox River Chicago, IL -- 492(h) -- 25,584(e)(h) 1997 49 49 Sheridan, IL Oak N' Spruce Boston, MA 132 420 1,629 21,840(e) 1998 -- -- South Lee, MA New York, NY(i) DESTINATION RESORTS Ozark Mountain Branson, 124 78 783 4,056(e) 1982 5,665 994 Kimberling City, MO MO Holiday Hills Branson, 24 202 135 10,100(d) 1984 1,065 217 Branson, MO MO --- ----- ------ ------- ------ ----- Total 999 2,790 10,930 143,920 35,122 6,592 === ===== ====== ======= ====== ===== <CAPTION> AVERAGE SALES PRICE AMENITIES/ RESORT/LOCATION IN 1997 ACTIVITIES(C) --------------- ------- ------------- <S> <C> <C> DRIVE-TO RESORTS Holly Lake $7,062 B,F,G,H, Hawkins, TX M,S,T The Villages 7,640 B,F,H, Flint, TX M,S,T Lake O' The Woods 6,743 F,M,S,T(f) Flint, TX Piney Shores 8,518 B,F,H, Conroe, TX M,S,T Hill Country 8,552 M,S,T(f) Canyon Lake, TX Timber Creek 5,599 B,F,G,M,S,T DeSoto, MO Fox River 5,465 G,M,S,T Sheridan, IL Oak N' Spruce -- F,G,S,T South Lee, MA DESTINATION RESORTS Ozark Mountain 7,282 B,F,H, Kimberling City, MO M,S,T Holiday Hills 8,046 G,M,S,T(f) Branson, MO ------ Total $7,854 ====== </TABLE> NEW RESORTS <TABLE> <CAPTION> PRIMARY MARKET DATE PLANNED PLANNED EXISTING AND PLANNED RESORT/LOCATION SERVED ACQUIRED UNITS(H) INTERVALS(H) AMENITIES/ACTIVITIES --------------- ------------- -------- -------- ------------ -------------------- <S> <C> <C> <C> <C> <C> Galveston, TX......................... Houston, TX 1997(j) 400(k) 20,800(e)(k) B,F,S,T Las Vegas, NV......................... Las Vegas, NV 1997 157(l) 8,164(e)(l) S ----- ------ Total......................... 557 28,964 ===== ====== </TABLE> (See notes commencing on following page) - --------------- (a) These totals do not reflect sales of upgraded Vacation Intervals to Silverleaf Owners. For the year ended December 31, 1997, upgrade sales at the Existing Resorts were as follows: <TABLE> <CAPTION> AVERAGE SALES PRICE FOR THE YEAR ENDED 12/31/97 UPGRADED VACATION -- NET OF RESORT INTERVALS SOLD EXCHANGED INTERVAL ------ ----------------- ---------------------- <S> <C> <C> Holly Lake..................................... 187 $3,809 The Villages................................... 642 4,871 Lake O' The Woods.............................. 79 3,630 Piney Shores................................... 671 3,850 Hill Country................................... 648 3,928 Timber Creek................................... 2 945 Fox River...................................... 1 2,780 Ozark Mountain................................. 1,468 4,645 Holiday Hills.................................. 210 3,938 ----- ------ 3,908 $4,326 ===== ====== </TABLE> (b) Represents units included in the Company's master plan. This plan is subject to change based upon various factors, including consumer demand, the availability of financing, grant of governmental permits, and future land-planning and site layout considerations. The following chart reflects the status of certain planned units at December 31, 1997: <TABLE> <CAPTION> LAND- LAND- LAND- USE USE USE PROCESS PROCESS PROCESS CURRENTLY IN SHELL NOT STARTED PENDING COMPLETE CONSTRUCTION COMPLETE TOTAL ----------- -------- -------- ------------ -------- ----- <S> <C> <C> <C> <C> <C> <C> Holly Lake................ 54 -- 50 -- 4 108 The Villages.............. 110 152 78 12 -- 352 Lake O' The Woods......... -- -- 16 -- -- 16 Piney Shores.............. 108 120 16 24 -- 268 Hill Country.............. 153 47 54 -- -- 254 Timber Creek.............. 576 -- -- 24 -- 600 Fox River................. 456 -- -- 36 -- 492 Oak 'N Spruce............. 420 -- -- -- -- 420 Ozark Mountain............ 36 -- 30 -- 12 78 Holiday Hills............. 70 -- 94 24 14 202 ----- --- --- --- -- ----- 1,983 319 338 120 30 2,790 ===== === === === == ===== </TABLE> "Land-Use Process Pending" means that the Company has commenced the process which the Company believes is required under current law in order to obtain the necessary land-use authorizations from the applicable local governmental authority with jurisdiction, including submitting for approval any architectural drawings, preliminary plats or other attendant items as may be required. "Land-Use Process Complete" means either that (i) the Company believes that it has obtained all necessary land-use authorizations under current law from the applicable local governmental authority with jurisdiction, including the approval and filing of any required preliminary or final plat and the issuance of building permit(s), in each case to the extent applicable, or (ii) upon payment of any required filing or other fees, the Company believes that it will under current law obtain such necessary authorizations without further process. See "Risk Factors -- Development, Construction and Property Acquisition Activities". The 30 "Shell Complete" units are currently devoted to such uses as a general store, registration office, sales office, activity center, construction office, or pro shop. The Company anticipates that these units will continue to be used for such purposes during 1998. (c) Principal amenities available to Silverleaf Owners at each resort are indicated by the following symbols: B -- boating; F -- fishing; G -- golf course; H -- horseback riding; M -- miniature golf; S -- swimming pool; and T -- tennis. (d) These figures are based on 50 one-week intervals per unit. In some instances, the Company may be able to market 52 one-week intervals per unit. (e) These figures are based on 52 one-week intervals per unit. (f) Boating is available near the resort. (g) Includes three units which have not been finished-out for accommodations and which are currently used for other purposes. (h) Engineering, architectural and construction estimates have not been completed by the Company, and there can be no assurance that the Company will develop these properties at the unit numbers currently projected. (i) The Company has commenced the timeshare permit process in New York, but has not yet received a permit. (The Company has a timeshare permit in Massachusetts.) (j) One portion of this tract was acquired in February 1998. (k) The Company has not commenced the timeshare permit process. The Company has commenced the land use permit process. See "Risk Factors -- Development, Construction and Property Acquisition Activities", "Business -- Description of New Resorts -- Gulf Coast Resort". (l) The Company has commenced the timeshare permit application process, but has not yet received a permit. The Company has not commenced the land use permit process. See "Risk Factors -- Regulation of Marketing and Sales of Vacation Intervals and Related Laws". CORPORATE BACKGROUND The Company was incorporated in Texas in 1989 and has been owned by and operated primarily under the direction of Robert E. Mead. Through the Company, Mr. Mead consolidated in one entity all of the timeshare assets and operations he previously owned through various partnerships and corporations affiliated with Mr. Mead. In May 1989, a partnership, of which the Company was the general partner, acquired seven of the Existing Resorts from a now dissolved corporation which was also owned and controlled by Mr. Mead. In December 1995 (i) through a merger of the partnership into the Company, such Existing Resorts were transferred to the Company, (ii) the Company acquired additional assets of the now dissolved corporation subject to certain indebtedness owing by such corporation to Mr. Mead and his affiliates; and (iii) the Company acquired Condominium Builders, Inc. ("CBI") and certain assets from Mr. Mead (all of the acquisition and merger transactions in (i), (ii) and (iii) are collectively referred to herein as the "Consolidation Transactions"). See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Certain Relationships and Related Transactions". The affiliated corporations and partnership whose assets were acquired by the Company through the Consolidation Transactions are sometimes collectively referred to herein as the "Affiliated Companies" or individually as an "Affiliated Company". The Company's principal executive offices are located at 1221 Riverbend Drive, Suite 120, Dallas, Texas 75247. The Company's telephone number is (214) 631-1166. THE EQUITY OFFERING The Company is also offering 2,000,000 shares of Common Stock and Mr. Mead is offering an additional 500,000 shares of Common Stock. The Equity Offering is being made by separate prospectus. Giving effect to the Equity Offering, the Company will have 13,311,517 shares of Common Stock outstanding. Silverleaf has not historically paid dividends on its Common Stock and does not expect to pay any dividends in the foreseeable future. SOURCES AND USES OF PROCEEDS The net proceeds from the Note Offering are estimated to be $72.1 million. The net proceeds from the Equity Offering are estimated to be $49.3 million. The following table sets forth the estimated sources and uses of funds at December 31, 1997: <TABLE> <CAPTION> AMOUNT ------------ (DOLLARS IN MILLIONS) <S> <C> Sources of Funds: Senior Subordinated Notes due 2008......................... $ 75.0 Common Stock(a)................. 53.5 ------ Total sources..................... $128.5 ====== </TABLE> <TABLE> <CAPTION> AMOUNT ------------ (DOLLARS IN MILLIONS) <S> <C> Uses of Funds: Pay existing debt(b)(c)(d)...... $ 48.9 Develop units, amenities, and infrastructure at Existing Resorts(e)................... 32.0 Develop units, amenities, and infrastructure at New Resorts(e)................... 6.0 Acquisitions, working capital and general corporate purposes(b)(e)............... 34.5 Fees, expenses, and other costs........................ 7.1 ------ Total uses........................ $128.5 ====== </TABLE> - --------------- (a) The Company is offering 2,000,000 primary shares of Common Stock in the Equity Offering. The assumed offering price of $26.75 was the closing price of Silverleaf's Common Stock on February 27, 1998. The Company will not receive any of the proceeds from the sale of the shares of Common Stock offered by Silverleaf's Chief Executive Officer, Robert E. Mead. (b) Indebtedness is projected to increase from $48.9 million at December 31, 1997, to approximately $68.6 million at the closing of the Equity Offering and the Note Offering, substantially all of which will be paid from the proceeds of the Equity Offering and the Note Offering. As a result, cash available at closing for acquisitions, working capital, and general corporate purposes will be reduced to approximately $14.8 million. Additionally, after repayment of existing indebtedness, there will be $125.0 million of borrowing capacity available under the Company's credit facilities. See "Description of Certain Indebtedness". (c) This includes $5.6 million owing to Credit Suisse First Boston Mortgage Capital, L.L.C., an affiliate of Credit Suisse First Boston Corporation, the lead managing underwriter for the Equity Offering and the Note Offering. This indebtedness is projected to increase to $13.0 million by the closing of the Equity Offering and the Note Offering. See "Underwriting". (d) At December 31, 1997, indebtedness to be repaid from the net proceeds of the Equity Offering and Note Offering bears interest at variable rates currently ranging from 4.2% to 14.0% per annum and matures between January 1998 and October 2005. See "Description of Certain Indebtedness". Indebtedness is projected to increase from $48.9 million to approximately $68.6 million at the closing of the Equity Offering and the Note Offering. Approximately $58.0 million of this indebtedness will have been incurred within one year prior to the date of this Prospectus. Of this indebtedness, $2.9 million was incurred to purchase the Fox River and Timber Creek resorts in St. Louis and Chicago, respectively, $2.7 million was incurred to purchase the New Resort in Las Vegas, $1.7 million was incurred to purchase the New Resort in Galveston, $5.1 million was incurred to purchase the Oak 'N Spruce Resort in the Berkshires, $2.9 million was incurred for capital leases of equipment, and the balance was used for working capital and general corporate purposes. (e) The Company currently anticipates investing these proceeds during 1998. Pending the final application of these proceeds, the Company will invest these proceeds in commercial paper, bankers' acceptances, other short-term investment-grade securities, or money-market accounts, and may utilize the proceeds for working capital purposes. THE NOTE OFFERING Securities Offered......... $75.0 million aggregate principal amount of % Senior Subordinated Notes due 2008. Maturity Date.............. , 2008. Interest Payment Dates..... and , commencing , 1998. Optional Redemption........ The Notes will be redeemable, in whole or in part, at the option of the Company on or after , 2003, at the redemption prices (expressed as a percentage of principal amount) set forth herein, plus accrued and unpaid interest, if any, to the date of redemption. In addition, prior to , 2001, the Company may redeem up to 33 1/3% of the aggregate principal amount of the Notes with the net cash proceeds of one or more public offerings of its Common Stock, at a redemption price equal to % of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date); provided, however, that at least 66 2/3% of the aggregate principal amount of the Notes originally issued remains outstanding after any such redemption. See "Description of Notes -- Optional Redemption". Change of Control.......... Upon a Change of Control (as defined), each holder of Notes will have the right to require the Company to repurchase all or a portion of such holder's Notes at a purchase price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon, if any, to the date of repurchase. See "Description of Notes -- Repurchase at the Option of Holders -- Change of Control" and "Risk Factors -- Payment Upon a Change of Control and Certain Asset Sales". Ranking.................... The Notes will be general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future Senior Debt of the Company. The Notes will rank pari passu with any future senior subordinated indebtedness of the Company and will rank senior to all subordinated indebtedness of the Company. At December 31, 1997, as adjusted to give effect to the consummation of the Equity Offering, the Note Offering and the application of the estimated net proceeds thereof, the Company would have had no Senior Debt (exclusive of unused commitments under the credit facilities). The Notes, subject to the Subsidiary Guarantees, will be structurally subordinated to all existing and future liabilities of the Guarantors. At December 31, 1997, as adjusted to give effect to the consummation of the Equity Offering and the Note Offering, such subsidiaries would have had no material liabilities (other than intercompany obligations). Subsidiary Guarantees...... The payment of the principal, interest, and premium (if any) on the Notes is fully and unconditionally guaranteed, jointly and severally, on a senior subordinated basis by all existing and future domestic Restricted Subsidiaries (as defined) of the Company. Each Subsidiary Guarantee will be subordinated to all existing and future Senior Debt of the respective Guarantor. See "Description of Notes -- Subsidiary Guarantees". The Company will be able to designate other current or future subsidiaries as Unrestricted Subsidiaries (as defined) under certain circumstances. Unrestricted Subsidiaries will not be required to issue a Subsidiary Guarantee with respect to the Notes and will not be subject to many of the restrictive covenants set forth in the Indenture pursuant to which the Notes will be issued (the "Indenture"). Covenants.................. The Indenture will contain certain covenants that, among other things, limit the ability of the Company and certain of its subsidiaries to incur additional Indebtedness and issue preferred stock, make certain investments, pay dividends or make other distributions, repurchase Equity Interests (as defined) or subordinated indebtedness, enter into certain transactions with affiliates, sell assets of the Company or certain of its subsidiaries, issue or sell Equity Interests of the Company's subsidiaries or enter into certain mergers and consolidations. In addition, under certain circumstances, the Company will be required to offer to purchase the Notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the date of purchase, with the proceeds of certain Assets Sales (as defined). See "Description of Notes -- Repurchase at the Option of Holders -- Asset Sales" and "-- Certain Covenants". Conditions................. The closing of the Note Offering will be conditioned upon, among other things, the closing of the Equity Offering. SUMMARY CONSOLIDATED HISTORICAL FINANCIAL, OPERATING AND PRO FORMA INFORMATION The summary consolidated historical financial and operating information set forth below has been derived from the consolidated financial statements of the Company which have been restated giving effect to the Consolidation Transactions utilizing the historical cost basis of the combined entities since these entities were under common ownership and control. The consolidated financial statements of the Company for 1995, 1996 and 1997 included herein were audited by Deloitte & Touche LLP. The data presented as of and for the year ended December 31, 1994 has been derived from the Company's audited consolidated financial statements which have not been included herein. Data presented as of and for the year ended December 31, 1993 has been derived from the Company's unaudited consolidated financial statements which in the opinion of management of the Company reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial position at such dates and results of operation for such periods. The summary pro forma financial information set forth below has been derived from the Unaudited Pro Forma Condensed Consolidated Financial Information and related Notes included elsewhere in this Prospectus. The pro forma statement of income data for the years ended December 31, 1997 gives effect, at the beginning of the period, to the IPO, the Equity Offering, the Note Offering, and the application of the proceeds thereof, and to the other adjustments set forth in the Unaudited Pro Forma Condensed Consolidated Financial Information and related Notes (collectively the "Pro Forma Adjustments"). The pro forma balance sheet data at December 31, 1997 gives effect to the Equity Offering, the Note Offering, and the application of the proceeds thereof to pay indebtedness and offering expenses, on the basis of and subject to the assumptions stated in the Notes thereto. The pro forma financial information does not purport to present the actual financial position or results of operations of the Company had the IPO, the Equity Offering, the Note Offering and events associated therewith occurred on the dates specified, nor are they necessarily indicative of the Company's future results of operations or financial position. During 1997 the Company began classifying the components of the previously reported provision for uncollectible notes into three categories based on the nature of the item -- credit losses, customer returns, and customer releases. The Company has reclassified these amounts within the previously reported financial information to conform to the classification for the year ended December 31, 1997. This reclassification has no balance sheet effect and has no effect on previously reported net income. See Note 2 of Notes to Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview". The Summary Consolidated Historical Financial, Operating and Pro Forma Information should be read in conjunction with the Consolidated Financial Statements and Notes thereto, "Unaudited Pro Forma Condensed Consolidated Financial Information" and Notes thereto, "Selected Consolidated Historical Financial and Operating Information" and Notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations". <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ----------------------------------------------- 1993 1994 1995 1996 1997 ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS, EXCEPT AVERAGE PRICE OF VACATION INTERVALS) <S> <C> <C> <C> <C> <C> STATEMENT OF INCOME DATA: Revenues: Vacation Interval sales................................. $18,627 $24,551 $34,091 $45,907 $68,682 Other income............................................ 7,188 7,348 9,981 12,018 16,376 ------- ------- ------- ------- ------- Total revenues..................................... 25,815 31,899 44,072 57,925 85,058 Costs and Operating Expenses: Cost of Vacation Interval sales......................... 2,094 2,648 3,280 2,805 6,600 Sales and marketing..................................... 10,219 12,929 17,850 21,839 30,559 Provision for uncollectible notes....................... 1,877 4,205 6,632 8,733 10,524 Operating, general and administrative................... 6,501 5,853 8,780 10,116 12,230 Depreciation and amortization........................... 477 590 863 1,264 1,497 Interest expense........................................ 1,426 1,642 3,609 4,759 4,664 ------- ------- ------- ------- ------- Total costs and operating expenses................. 22,594 27,867 41,014 49,516 66,074 ------- ------- ------- ------- ------- Income from continuing operations before income taxes..... $ 3,221 $ 4,032 $ 3,058 $ 8,409 $18,984 ======= ======= ======= ======= ======= OTHER FINANCIAL DATA: EBITDA(a)................................................. $ 5,124 $ 6,264 $ 7,530 $14,432 $25,145 Capital expenditures...................................... $ 2,986 $ 1,701 $ 4,497 $ 4,162 $ 8,692 Ratio of earnings to fixed charges(b)..................... 3.2x 3.4x 1.6x 2.5x 4.3x SUPPLEMENTAL PRO FORMA DATA: EBITDA(c)........................................................................................ $24,785 Total interest expense(d)........................................................................ $ 7,509 Ratio of EBITDA to total interest expense(c)(d)(e)............................................... 3.3x Ratio of net debt to EBITDA(e)(f)................................................................ NM Ratio of debt to EBITDA(e)....................................................................... 3.0x Ratio of earnings to fixed charges............................................................... 3.1x OTHER OPERATING DATA: Number of Existing Resorts at period end.................. 7 7 7 7 10 Number of Vacation Intervals sold (excluding upgrades)(g)............................................ 2,386 3,423 4,464 5,634 6,592 Number of upgraded Vacation Intervals sold................ 1,378 1,290 1,921 1,914 3,908 Number of Vacation Intervals in inventory................. 5,615 5,943 6,580 6,746 10,930 Average price of Vacation Intervals sold (excluding upgrades)(g)(h)......................................... $ 5,599 $ 5,821 $ 5,965 $ 6,751 $ 7,854 Average price of upgraded Vacation Intervals sold (net of exchanged interval)..................................... $ 3,822 $ 3,585 $ 3,885 $ 4,113 $ 4,326 </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1997 -------------------------- HISTORICAL PRO FORMA(e) ---------- ------------ <S> <C> <C> BALANCE SHEET DATA: Cash and equivalents...................................... $ 4,970 $ 77,499 Notes receivable, net..................................... 92,036 92,036 Total assets.............................................. 156,401 231,830 Senior Subordinated Notes, notes payable and capital lease obligations............................................. 48,871 75,000 Total liabilities......................................... 72,636 98,765 Shareholders' equity...................................... 83,765 133,065 </TABLE> - --------------- (a) EBITDA represents income from continuing operations before interest expense, income taxes and depreciation and amortization. EBITDA is presented because it is a widely accepted indicator of a company's financial performance. However, EBITDA should not be construed as an alternative to net income as a measure of the Company's operating results or to cash flows from operating activities (determined in accordance with generally accepted accounting principles) as a measure of liquidity. Since revenues from Vacation Interval sales include promissory notes received by the Company, EBITDA does not reflect cash flow available to the Company. Additionally, due to varying methods of reporting EBITDA within the timeshare industry, the computation of EBITDA for the Company may not be comparable to other companies in the timeshare industry which compute EBITDA in a different manner. The Company's management interprets trends in EBITDA to be an indicator of the Company's financial performance, in addition to net income and cash flows from operating activities (determined in accordance with generally accepted accounting principles). (b) For purposes of determining the ratio of earnings to fixed charges, earnings is defined as income from continuing operations before provision for income taxes, plus interest on indebtedness, imputed interest on the portion of rent expense (one-third) deemed to represent interest expense, and amortization of previously capitalized interest. Fixed charges consist of interest on indebtedness whether expensed or capitalized, imputed interest on the portion of rent expense (one-third) deemed to represent interest expense, amortization of debt expense, and discount or premium relating to any indebtedness whether expensed or capitalized. (c) Pro forma EBITDA is adjusted for the Pro Forma Adjustments. Pro Forma EBITDA is lower than historical EBITDA in 1997 due to two adjustments relating to the IPO in June 1997. The difference is due to (i) lower interest income associated with amounts due from affiliates that was repaid indirectly from the IPO proceeds and (ii) expenses associated with being a public company. See "Unaudited Pro Forma Condensed Consolidated Financial Information". (d) Pro forma total interest expense is defined as pro forma interest expense plus pro forma capitalized interest, as adjusted for the Pro Forma Adjustments. No interest income has been assumed on proceeds of the IPO, the Equity Offering and Note Offering. Assuming interest income of 5.5% (current market rate) on such proceeds, the ratio of pro forma EBITDA to pro forma net interest expense for 1997 would have been 7.0x. The ratio of pro forma EBITDA to pro forma net interest expense differs from the Consolidated Coverage Ratio (as defined herein) as set forth in the Indenture. See "Description of Notes".
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+SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements and related notes thereto included elsewhere in this Prospectus. Prospective investors are urged to read this Prospectus in its entirety. See "Glossary" for definitions of certain terms used in this Prospectus. IRIDIUM Iridium Operating LLC ("Iridium") is developing and commercializing a global mobile wireless communications system that will enable subscribers to send and receive telephone calls virtually anywhere in the world -- all with one phone, one phone number and one customer bill. The IRIDIUM communications system (the "IRIDIUM System") will combine the convenience of terrestrial wireless systems with the global reach of Iridium's satellite system. The IRIDIUM System encompasses four components: the "space segment," which will include the low earth orbit satellite constellation and the related control facilities; the ground stations or "gateways," which will link the satellites to terrestrial communications systems; the Iridium subscriber equipment, which will provide mobile access to the satellite system and terrestrial wireless systems; and the terrestrial wireless interprotocol roaming infrastructure, which will facilitate roaming among the Iridium satellite system and multiple terrestrial wireless systems that use different wireless protocols. The first launch of Iridium satellites occurred on May 5, 1997. Iridium expects to commence commercial operations in September 1998. The satellite constellation is being designed, assembled and delivered in orbit by Motorola, Inc. ("Motorola"), a leading international provider of wireless communications systems, phones and pagers, semiconductors and other electronic equipment. Motorola also is the principal investor in Iridium, having provided investments, guarantees and conditional agreements to provide guarantees totaling over $1.1 billion, including its conditional commitment to guarantee up to an additional $350 million of borrowings under the Guaranteed Bank Facility described below. Other strategic investors include leading wireless communications service providers from around the world, as well as experienced satellite manufacturers and experienced launch providers. Iridium is a wholly owned subsidiary of Iridium LLC, a Delaware limited liability company ("Iridium LLC" or "Parent"). On December 18, 1997, substantially all of the assets and liabilities of Parent were transferred to Iridium pursuant to the Asset Drop-Down Transaction. See "Ownership Structure and Strategic Investors -- Asset Drop-Down Transaction." Iridium Capital Corporation ("Capital"), a Delaware corporation, is a wholly owned subsidiary of Iridium. The Notes will be the joint and several obligations of Iridium and Capital (the "Issuers"), although Capital will not receive any of the net proceeds from the issuance of the Notes. Capital has no assets and does not conduct any operations. The Notes will be guaranteed by Iridium Roaming LLC ("Roaming"), Iridium IP LLC ("IP") and Iridium Facilities Corporation ("Facilities" and, together with Roaming and IP, the "Initial Guarantors" and, together with the Issuers, the "Iridium Parties"). Each of Roaming and IP is a Delaware limited liability company, Facilities is a Delaware corporation and each of Roaming, Facilities and IP is a wholly owned subsidiary of Iridium. The principal executive office for each of the Iridium Parties is located at 1575 Eye Street, N.W., Washington, DC 20005, telephone (202) 408-3800. IRIDIUM SERVICES AND MARKET Global mobile satellite service ("MSS") systems such as the IRIDIUM System are designed to address two broad trends in the communications market: (i) the worldwide growth in the demand for portable wireless communications -- according to industry sources, the worldwide wireless communications market had approximately 200 million subscribers at year-end 1997 and is estimated to grow to over 400 million subscribers by year-end 2000; and (ii) the growing demand for communications services to and from areas where landline or terrestrial wireless service is not available or accessible. The IRIDIUM System architecture and Iridium voice, data, facsimile and INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED APRIL 29, 1998 PROSPECTUS IRIDIUM LOGO IRIDIUM OPERATING LLC IRIDIUM CAPITAL CORPORATION $350,000,000 % SENIOR NOTES DUE 2005, SERIES D FULLY AND UNCONDITIONALLY GUARANTEED, AS DESCRIBED HEREIN, BY IRIDIUM ROAMING LLC IRIDIUM IP LLC IRIDIUM FACILITIES CORPORATION Iridium Operating LLC ("Iridium") and Iridium Capital Corporation ("Capital" and, together with Iridium, the "Issuers") are offering (the "Offering") % Senior Notes due 2005, Series D (the "Notes"). Interest on the Notes will accrue from , 1998 at the rate of % per annum. Interest on the Notes is payable in cash semi-annually on January 15 and July 15 of each year, commencing on July 15, 1998. The Notes will be redeemable at the option of either Issuer, in whole or in part, at any time on or after July 15, 2002 at the redemption prices set forth herein, together with, as applicable, accrued and unpaid interest, if any, to the redemption date. At any time on or prior to July 15, 2000, either Issuer may redeem in the aggregate up to 33 1/3% of the original aggregate principal amount of the Notes, with the cash proceeds to Iridium of one or more Equity Offerings (as defined), at a redemption price equal to % of the principal amount of any Notes being redeemed plus accrued and unpaid interest to the date of redemption; provided that at least 66 2/3% of the original aggregate principal amount of the Notes must remain outstanding after each such redemption. See "Description of Notes -- Optional Redemption." (continued on next page) ---------------------------------------------------------------------------- SEE "RISK FACTORS" ON PAGE 17 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NOTES. ---------------------------------------------------------------------------- THE NOTES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ---------------------------------------------------------------------------- <TABLE> <CAPTION> - -------------------------------------------------------------------------------------------------------------------------- PRICE TO UNDERWRITING PROCEEDS TO PUBLIC(1) DISCOUNTS(2) IRIDIUM(1)(3) - -------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> PER SERIES D SENIOR NOTE % % % TOTAL $ $ $ - -------------------------------------------------------------------------------------------------------------------------- </TABLE> (1) Plus accrued and unpaid interest on the Notes, if any, from the date of issuance. (2) The Issuers and the Initial Guarantors (as defined) have agreed to jointly and severally indemnify the Underwriters (as defined) against certain liabilities, including liabilities under the Securities Act. See "Underwriting." (3) Before deducting estimated expenses of $850,000 payable by Iridium. ---------------------------------------------------------------------------- The Notes are being offered by Chase Securities Inc., Barclays Capital Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriters"), subject to prior sale, when, as and if issued by the Issuers and delivered to and accepted by the Underwriters. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of the Notes will be made in New York, New York in book-entry form through the facilities of The Depository Trust Company on or about , 1998. CHASE SECURITIES INC. BARCLAYS CAPITAL MERRILL LYNCH & CO. , 1998 paging services are primarily designed to serve customers who place the greatest value on global mobile communications services. Iridium believes there is a significant market comprised of individuals and businesses who need global communications capability and are willing to pay for the convenience of a hand-held wireless phone or belt-worn pager. The availability of terrestrial wireless communications service is often constrained by the limited geographic coverage of terrestrial systems, the incompatibility of differing wireless protocols or the absence of roaming agreements among wireless operators. The combination of Iridium World Cellular Services, Iridium World Satellite Services and Iridium World Page Services will extend wireless access globally and allow customers of Iridium to be reached by phone or pager, and to place phone calls from or to virtually anywhere in the world with one phone and one phone number. Iridium World Cellular Services is expected to enable customers to roam on an international basis among terrestrial wireless networks, including those using different protocols, that have roaming agreements with Iridium. Iridium World Satellite Services will extend voice services to the regions of the world not served by terrestrial systems. Iridium intends to offer global paging (Iridium World Page Services) both in combination with its voice services and as a stand-alone service. Iridium believes that the signaling capabilities of the IRIDIUM System will enable Iridium to track the location of a voice customer effectively and with minimal customer cooperation, thereby allowing Iridium to direct pages and calls as customers travel globally. Iridium also expects to offer, commencing in 1999, a broad range of in-flight passenger communications services with participating airlines, including global incoming and outgoing voice, data and facsimile services. In addition, Iridium expects to market Iridium World Services to governmental, industrial and rural users of wireless communications systems. Iridium believes it will be the only wireless communications system in operation prior to 2000 that will be able to offer this array of global communications services. See "Risk Factors -- Consequences of Satellite Service Limitations on Customer Acceptance" and "-- Consequences of Iridium Phone and Pager Characteristics on Customer Acceptance." To estimate potential demand for its services, Iridium has engaged in extensive market analysis, including primary market research which involved screening over 200,000 persons and interviewing more than 23,300 individuals from 43 countries and 3,000 corporations with remote operations. Based on this market analysis, Iridium has identified five target markets for Iridium World Services: traveling professionals; corporate/industrial; government; rural; and aeronautical. Iridium expects the traveling professional and corporate/industrial markets will provide most of the demand for Iridium World Services. Iridium believes that individuals in these markets are more likely to need and have the ability to afford hand-held, global mobile communications capability than, for example, individuals who live in remote areas outside existing distribution channels for wireless communications services. Iridium estimates that the addressable traveling professional market, which it defines as all employed adults living in urban areas who own a wireless phone and travel at least four times per year beyond the coverage of their current wireless phone, will include approximately 42 million individuals by 2002. The global corporate/industrial addressable market, which consists of companies with more than 1,000 employees in industries with operations that are likely to need mobile satellite services, is estimated by Iridium to include over 8,800 companies by 2002. Iridium believes that its market analysis was properly designed, appropriate in scope and implemented in a systematic basis and, accordingly, provides a reasonable basis for Iridium's marketing and strategic planning. Iridium believes that its unique service package is well tailored to meet the demands of, and will give Iridium an advantage over competing MSS systems in, these target markets. Based upon its market analysis, Iridium estimates that it will have customer counts in the year 2002 in the range of 2.2 million to 2.5 million for Iridium World Satellite Services (satellite voice and paging) and Iridium World Services (the combination of Iridium World Satellite Services and Iridium World Cellular Services), 1.0 million to 1.3 million for stand-alone Iridium World Cellular Services and 350,000 to 500,000 for stand-alone Iridium World Page Services. (continued from previous page) Upon the occurrence of a Change of Control (as defined), each holder of Notes may require the Issuers to repurchase all or a portion of such holder's Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, to the purchase date. See "Description of Notes -- Change of Control." The Notes will be senior obligations of the Issuers ranking pari passu in right of payment to the Initial Senior Notes (as defined) and all other existing and future senior Indebtedness (as defined) of the Issuers, other than Indebtedness that is expressly subordinated to the Notes. However, subject to certain limitations set forth in the Indenture (as defined), Iridium and its Subsidiaries (as defined) may incur other senior Indebtedness, including Indebtedness that is secured by the assets of Iridium and its Subsidiaries. The Notes will be effectively subordinated to any secured Indebtedness of the Issuers to the extent of the value of the assets securing such Indebtedness. The Notes will be fully and unconditionally guaranteed, on an unsecured senior basis, by Iridium Roaming LLC ("Roaming"), Iridium IP LLC ("IP") and Iridium Facilities Corporation ("Facilities" and, together with Roaming and IP, the "Initial Guarantors" and, together with the Issuers, the "Iridium Parties"). Each of Roaming and IP is a Delaware limited liability company, Facilities is a Delaware corporation and each of Roaming, Facilities and IP is a wholly owned subsidiary of Iridium. In addition, the Notes will be fully and unconditionally guaranteed (the "Subsidiary Guarantees") on an unsecured, senior basis by all future Guarantor Subsidiaries (as defined). As of March 31, 1998, after giving pro forma effect to the issuance of $350 million in aggregate principal amount of Notes and the application of $175 million of the net proceeds from the Notes to a permanent reduction of the Guaranteed Bank Facility (as defined), the Iridium Parties would have had outstanding (i) approximately $350 million of senior secured Indebtedness, (ii) approximately $1,210 million of unsecured senior Indebtedness (other than the Notes) that ranks pari passu with the Notes (including $1,100 million in aggregate principal amount of Initial Senior Notes and borrowings of $110 million under the Guaranteed Bank Facility), and (iii) approximately $285 million of Indebtedness that is subordinated to the Notes. Such outstanding amounts of Indebtedness do not reflect the anticipated temporary reduction in the Guaranteed Bank Facility. See "Use of Proceeds," "Risk Factors -- Significant Additional Funding Needs," "-- Ranking of the Notes" and "Description of Notes." ---------------------------------------------------------------------------- CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES, INCLUDING OVERALLOTMENT, STABILIZING TRANSACTIONS AND SYNDICATE SHORT COVERING TRANSACTIONS AT LEVELS WHICH MIGHT NOT OTHERWISE PREVAIL IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES SEE "UNDERWRITING." ---------------------------------------------------------------------------- FORWARD LOOKING INFORMATION Iridium is a development stage enterprise with no operating history. Accordingly, all statements in this Prospectus that are not clearly historical in nature are forward looking. Examples of such forward looking statements include the statements concerning Iridium's operations, prospects, markets, technical capabilities, funding needs, financing sources, pricing, launch schedule, commercial operations schedule, estimates of the size of addressable markets for mobile satellite services, estimates of customer counts, estimates of retail usage fees for Iridium World Satellite Services, the last year in which Iridium will have negative cash flow and a net increase in year-end borrowings, and future regulatory approvals, as well as information concerning expected characteristics of competing systems and expected actions of third parties such as equipment suppliers, gateway operators, service providers and roaming partners. These forward looking statements are inherently predictive and speculative and no assurance can be given that any of such statements will prove to be correct. Actual results and developments may be materially different from those expressed or implied by such statements. See "Risk Factors" for a discussion of various factors which, among others, could result in any of such forward looking statements proving to be inaccurate. Iridium currently has no customers and its estimates of target markets and customer counts are based upon a number of assumptions, one or more of which is likely to be incorrect. The assumptions underlying Iridium's market analysis relate to the expected performance characteristics of the IRIDIUM System, the expected competition in the markets for personal satellite communications services and terrestrial cross protocol wireless services and the accuracy of the respondents' responses to Iridium's market research questions. Such assumptions include, without limitation, (i) that the IRIDIUM System will provide continuous service to virtually anywhere in the world with service characteristics at least as favorable as those described in this Prospectus from September 23, 1998 forward, (ii) that Iridium will face competition from satellite systems, terrestrial wireless systems and other communications systems that is no greater than Iridium's expectations regarding competition as described in this Prospectus and (iii) that Iridium's market research was properly designed and implemented to determine actual market interest and that the respondents provided truthful responses. There can be no assurance that actual target markets and actual customer counts will not be materially different from Iridium's estimates or that Iridium will not revise such estimates substantially from time to time. For a more detailed description of Iridium's target markets see "Business -- The Iridium Market," and for further discussion of the forward looking nature of Iridium's estimates, and various of the factors which could cause actual addressable markets and actual customer counts to differ materially from these estimates, see "Risk Factors -- Risk of Error in Forward Looking Statements." THE IRIDIUM SYSTEM The satellite constellation of the IRIDIUM System, which will consist of 66 operational satellites arranged in six polar orbital planes, is being assembled and delivered in orbit by Motorola pursuant to a fixed price contract, subject to certain adjustments. Motorola also will operate and maintain the satellite constellation for five years (extendible to seven years at Iridium's option) under a fixed price contract, subject to certain adjustments. Iridium believes the IRIDIUM System will have greater signal strength than other proposed MSS systems, thereby allowing it to better serve hand-held phones and providing a higher degree of in-building penetration for paging services. The IRIDIUM System utilizes adaptations of proven technologies, including GSM cellular call processing technology, intersatellite links, FDMA/TDMA radio transmission technology, a 2,400 bps vocoder and business support software. The Iridium satellites will feature cross-link antennas allowing telephone calls and signaling information to be passed globally from satellite to satellite. These intersatellite links, which enable the satellites to function as switches in the sky, will allow the IRIDIUM System to (i) select the optimal space-to-ground path of each call, thereby enhancing system reliability and capacity while reducing the costs associated with the use of terrestrial phone systems, (ii) communicate with subscribers in all regions of the world (including mid-ocean and remote areas) regardless of their proximity to a gateway, (iii) provide full global coverage with a relatively small number of gateways, thereby lowering total ground segment build-out and operating costs and (iv) provide enhanced ability to track the location of a voice customer, allowing Iridium to direct calls and pages as customers travel globally. In addition, the communications, station keeping and control systems of the Iridium satellites can be upgraded, maintained and reconfigured in orbit through the remote loading of software. Iridium believes that its primary technological challenge in implementing the IRIDIUM System is the integration of these proven technologies into a single system. Iridium expects to provide virtually global service initially through up to 12 gateways, although it will be able to provide such global service with fewer than nine gateways. Each of these gateways will be owned, operated and financed by one or more investors in Iridium or their affiliates. See "Risk Factors -- Potential for Delay and Cost Overruns -- Construction and Operation of Gateways." Iridium subscriber equipment will support voice, data and paging services. Iridium expects that portable, hand-held Iridium phones and pagers will be manufactured by at least two experienced suppliers, Motorola and Kyocera Corporation ("Kyocera"), both of which have hand-held Iridium phones under development. The phones are expected to be available in satellite-only and "multi-mode" models. The multi-mode phone being developed by Motorola uses changeable terrestrial radio cassettes ("TRCs") which can be inserted into the phone. TRCs are being developed for GSM 900 MHz and CDMA/AMPS/NAMPS 800 MHz so that with a single multi-mode phone and the appropriate TRC, a subscriber will be able to access the IRIDIUM System and those terrestrial wireless systems. Kyocera's multi-mode phone is expected to be configured as a satellite phone casing into which terrestrial wireless phones using different protocols can be inserted. The Iridium belt-worn pager will have the capability to receive alphanumeric messages virtually anywhere in the world. In an effort to ensure that sufficient quantities of phones and pagers are available for distribution in advance of the commencement of commercial operations, Iridium intends to enter into standby commitments with Motorola (the "Motorola Standby Purchase Commitment") and Kyocera (the "Kyocera Standby Purchase Commitment" and together with the Motorola Standby Purchase Commitment, the "Standby Equipment Purchase Commitments") to purchase an aggregate of up to approximately $400 million of subscriber equipment. These Commitments would be triggered on or after January 1, 1999, but only to the extent such subscriber equipment is not purchased by and shipped to gateway operators or service providers prior to January 1, 1999. In the event Iridium is required to make significant purchases pursuant to these Commitments, it expects to use (i) up to approximately $175 million in additional borrowings guaranteed by Motorola (in respect of purchases from Motorola) and (ii) up to approximately $122.5 million in additional borrowings guaranteed by Kyocera (in respect of purchases by Kyocera). See "Certain Relationships and Related Transactions of Iridium" and "Risk Factors -- Significant Additional Funding Needs." Iridium World Cellular Services will support roaming among the two principal types of terrestrial wireless protocols -- IS-41 (AMPS, NAMPS and CDMA) and GSM 900. Roaming between these protocols requires cross protocol translation which will be accomplished for Iridium World Cellular Services through the Iridium Interoperability Unit ("IIU"), being developed under the direction of Motorola. The IIU will permit system management information, including customer authentication and location, to be relayed between systems that use different technologies. PRICING STRATEGY, DISTRIBUTION AND MARKETING Iridium intends to implement a pricing strategy for its voice services similar to the prevailing pricing structure for terrestrial wireless calls. Prices for terrestrial wireless calls generally reflect two components -- a charge based on the landline "dial-up" rate for a comparable call (primarily the long distance charges) and a mobility premium for the convenience of wireless service (including any roaming charges). Pricing for both Iridium World Satellite Services and Iridium World Cellular Services is expected to be based on this structure. For international Iridium World Satellite Services calls, which Iridium expects will constitute the majority of calls over the Iridium satellite system, the "dial-up" rate component will be designed to approximate the rates for comparable landline point-to-point international long distance calls. Iridium has analyzed and will continue to analyze published international direct dial rates around the world as well as published international calling card rates of many of the largest international telecommunications carriers in establishing the "dial-up" rate component. Iridium intends to set the global mobility premium with reference to the premium charged by other wireless services, including cross-protocol international terrestrial wireless roaming services and competing MSS systems. Iridium will set the wholesale prices for its services to allow for a suggested retail price that will approximate the "dial-up" plus mobility premium price. Iridium's wholesale price will be designed to compensate Iridium, as the network provider, and the originating and terminating gateways, as well as to cover the PSTN tail charges. The home gateway will mark up the wholesale price and the service provider will establish the final retail price. Iridium expects that for international wireless calls, Iridium's suggested retail prices will be competitive with other global MSS systems. In addition, from a regulatory approval perspective, in markets where the monopoly telecommunica- tions provider and the licensing authority are the same entity, a pricing strategy that takes into account the "dial-up" alternatives allows Iridium to respond to concerns that Iridium will capture the local monopoly provider's long-distance revenues by undercutting terrestrial "dial-up" rates. For Iridium World Cellular Services pricing, the "dial-up" rate component is primarily the long distance charge, if any, which will be passed through to the customer. The mobility premium will be set to compensate the parties involved, primarily the serving network for its airtime charges, the visited gateway for customer authentication and Iridium for protocol translation services. The retail price will include the markup of the home gateway and service provider. Iridium believes that its Iridium World Cellular Services suggested retail prices will be comparable to prices charged by other cross-protocol roaming services. In addition to airtime charges, Iridium subscribers will pay a monthly subscription fee in the same manner that terrestrial wireless customers pay monthly charges. Iridium will permit service providers that are wireless network operators to offer Iridium World Satellite Services as additional features to their existing wireless services, permitting their customers to remain customers of the wireless network and to roam onto the IRIDIUM System. These customers will pay a feature charge to Iridium for the roaming privilege that will be significantly below the Iridium monthly subscription fee, but they will pay an additional roaming premium for calls made over the IRIDIUM System. Initially, Iridium World Page Services subscribers will pay a fixed monthly subscription fee for unlimited paging. Iridium expects to implement per page pricing after commencement of commercial operations, with the cost per page based, in part, on the size of the geographic area covered by the page. The monthly paging subscription fees will be reduced for persons who are also subscribers to Iridium World Cellular Services and Iridium World Services. Iridium's distribution strategy reflects its role as a wholesaler of Iridium World Services and is primarily designed to leverage off established retail distribution channels by using existing distributors of wireless services as Iridium service providers and marketing Iridium World Services to their customers. Iridium will implement the distribution of Iridium World Services through its gateway operators, all of which have agreed to become or to engage Iridium service providers within their exclusive gateway territories. Iridium service providers will generally have primary responsibility for marketing Iridium World Services within their territories in accordance with marketing policies and programs established by Iridium. They will also be responsible for customer service, billing and collection. Iridium anticipates its gateway operators will generally seek to utilize more than one method of distribution in their markets. Iridium expects that its service providers also will include affinity partners (e.g., airlines, hotels and car rental companies). Iridium's marketing strategy is to position Iridium as the premier brand in global wireless communications services. Iridium believes that its principal target markets -- traveling professional and corporate/industrial -- can be accessed through established marketing channels, which will permit more effective marketing compared to MSS systems targeting individuals in remote areas where marketing opportunities and distribution channels are limited. Iridium is coordinating with its gateway partners to determine the optimum allocation of marketing expenditures based on the market analysis that Iridium has conducted. Iridium plans to engage in direct marketing to certain markets, such as the utility, oil and gas, mining and maritime industries. Based on a review of its marketing plan, Iridium intends to increase its global advertising budget, in order to promote its brand identity, by approximately $80 million, a substantial portion of which is expected to be utilized prior to commencement of commercial operations (the "Global Advertising Program Increase"). See "Risk Factors -- Significant Additional Funding Needs." Iridium believes that a coordinated and comprehensive global marketing strategy, supported by its market research, will promote a consistent message and permit Iridium to establish a global brand identity. STRATEGIC INVESTOR GROUP AND IRIDIUM WORLD COMMUNICATIONS LTD. Iridium LLC is the parent and sole member of Iridium. Each of the strategic investors in the IRIDIUM System is a member of Parent. See "Ownership Structure and Strategic Investors." The Iridium investor team includes enterprises from around the world with skills and experience in developing, manufacturing, licensing and distributing satellite and telecommunications products and services. IWCL, the publicly held member of Parent, and the Iridium strategic investors have collectively invested, or committed to invest, approximately $3.1 billion in Iridium (directly or indirectly through Parent), including equity, debt, guarantees (other than in respect of subscriber equipment purchases) and the Reserve Capital Call (as defined). These investments represent approximately 69% of Iridium's projected total funding needs through September 23, 1998, the date on which Iridium expects to commence commercial operations, and approximately 56% of Iridium's projected total funding needs through December 31, 1999, the last year in which Iridium projects negative cash flow and a net increase in year-end borrowings. By partnering with strategic investors, Iridium benefits from the development, manufacturing and launch expertise of leading worldwide satellite development and launch organizations and from the wireless telecommunications distribution and regulatory expertise of leading telecommunications companies. The Iridium investor team includes leading telecommunications companies in North America (Motorola, Sprint and BCE Mobile Communications Inc.), Europe (Telecom Italia and o.tel.o communications GmbH & Co.) and Asia (DDI in Japan, UCOM in Thailand, P.T. Bakrie Communications Corporation in Indonesia and SK Telecom in South Korea). Iridium expects that these investors will use their wireless communications sales and services organizations to market Iridium World Services and equipment in their territories, which include their existing base of approximately 33 million wireless subscribers. In addition, because of the prominence of many of these investors, Iridium believes that their efforts to obtain necessary regulatory approvals have been, and will continue to be, of great importance. The investor team also includes organizations with significant satellite communications development, manufacturing and launch expertise including Raytheon, Lockheed Martin, Telespazio, Khrunichev and China Aerospace. Iridium expects subscriber equipment for use with the IRIDIUM System will be manufactured and sold by Motorola and Kyocera, two of the world's leading manufacturers of wireless phones. IWCL was formed to act as a publicly held member of Parent and to have no other business. On June 13, 1997, IWCL consummated an initial public offering (the "IWCL IPO"), whereby IWCL issued 12,000,000 shares of its Class A Common Stock and applied the net proceeds of approximately $225 million to purchase 12,000,000 Class 1 Membership Interests in Parent ("Class 1 Interests"). In connection with the IWCL IPO, IWCL was admitted as a member of Parent. IWCL owns approximately 8.5% of the outstanding Class 1 Interests. See "Ownership Structure and Strategic Investors" and "Certain Matters Regarding Relationship Among IWCL, Parent and Iridium." PROGRESS TO DATE Iridium, Motorola and the various gateway owners have made substantial progress in the development and implementation of the IRIDIUM System and related activities and expect to commence global commercial service on schedule in September 1998. As of April 15, 1998, Motorola had launched 65 Iridium satellites in 13 separate launches. Motorola has informed Iridium that, as of April 23, 1998, four of those 65 satellites are not functioning and will not become part of the constellation, but that Iridium will not bear the financial impact of the loss of the four satellites and that such loss will not affect the scheduled completion date for commercial service in September 1998. Motorola currently plans to launch seven satellites before the end of May 1998 in two launches in order to complete the initial deployment of the satellite constellation. Motorola also has contracted with launch service providers to perform launches to replace non-functioning satellites. In early July of 1997, the IRIDIUM System logged its first test paging message to a prototype pager from orbiting satellites. In addition, the north-south and east-west satellite cross-links have been tested using data packets and limited voice testing has occurred. See "Risk Factors -- Potential for Delay and Cost Overruns -- Deployment of Satellites," "-- Limited Life of Satellites; Cost of Maintaining the Space Segment; Risk of Satellite Failure or Damage" and "-- Satellite Launch Risks -- Number of Launches; Compressed Launch Schedule." Motorola has completed construction of most of the terrestrial facilities necessary to command the in-space movements of the IRIDIUM System's satellites, including the Satellite and Network Operations Center (the "SNOC") and the associated tracking, telemetry and command ("TT&C") facilities. Iridium expects to provide virtually global service initially through up to 12 gateways. The construction of the 12 gateway facilities is substantially complete and the telecommunications equipment has been installed at 11 locations. However, two gateways are significantly behind schedule in their preparations for the commencement of commercial operations. See "Risk Factors -- Potential for Delay and Cost Overruns -- Construction and Operation of Gateways." Motorola has produced a functional prototype of the Iridium phone, and Motorola has produced a functional prototype of the Iridium belt-worn pager. Iridium has also made substantial progress in the development of its Iridium business support systems, which will be used for the provision of its billing and customer support functions. Iridium expects to begin internal voice trials in May 1998 and customer trials in August 1998. See "Risk Factors" for a description of certain of the risks that could impair the ability of Iridium to commence commercial operations on schedule in September 1998. Iridium has made significant progress to date in securing the worldwide regulatory approvals necessary to build and operate the IRIDIUM System. At the 1992 World Administrative Radio Communication Conference ("WARC-92"), the International Telecommunications Union (the "ITU") allocated 16.5 MHz of spectrum in the 1610-1626.5 MHz band to MSS systems. The U.S. Federal Communications Commission (the "FCC") conditionally assigned the IRIDIUM System exclusive use of 5.15 MHz of the 16.5 MHz for use in the United States. The space segment of the IRIDIUM System has been licensed in the United States. Iridium believes that coordination through the ITU has been completed successfully between the IRIDIUM System and all existing or planned systems that have been identified under the ITU's coordination process. No other action is required from any other country to license the space segment. Seven licenses and two experimental licenses to build and operate gateways have been received. Each country in which Iridium intends to operate must authorize use of Iridium subscriber equipment, including allocation of subscriber link frequencies. The FCC has issued a conditional license covering Iridium World Satellite Services in the United States and as of March 15, 1998, 57 additional administrations had granted all or a substantial portion of the authorizations necessary to operate the IRIDIUM System in their territories. Iridium's gateway owners are dedicating substantial effort to obtaining licensing for Iridium World Services in the countries in their service territories with particular focus on obtaining licenses by the commencement of commercial operations in those countries which are expected to account for most of the demand for and usage of Iridium World Services. See "Risk Factors -- Risks Associated with Licensing and Spectrum Allocation -- Significant Regulatory Approvals Required for Operation of the IRIDIUM System," "-- Significant Remaining Regulatory Approvals" and "Regulation of Iridium" for a discussion of the conditions to these licenses and the additional regulatory approvals outside the United States that remain to be obtained. BUSINESS STRATEGY Iridium's strategy is to launch and operate the premier global mobile wireless network. The key components of this strategy are set forth below: Provide a unique service package to traveling professionals enabling them to be reached and make calls virtually anywhere in the world. Iridium World Satellite Services will complement terrestrial wireless services and provide the traveling professional with communications capability in areas where terrestrial wireless service is unavailable, inconvenient, of poor quality or unreliable. Iridium intends to offer Iridium World Cellular Services and Iridium World Page Services as complements to Iridium World Satellite Services and as stand-alone services. Iridium believes that it will be the only wireless communications system in operation prior to 2000 that will be able to offer virtually global mobile voice and paging services, including: - Global coverage. An Iridium World Services subscriber will generally have worldwide wireless coverage wherever Iridium World Services are authorized, including mid-ocean and remote areas. The availability of the Iridium World Satellite Services will not be limited by the customer's proximity to a gateway. Iridium believes this feature will make Iridium World Satellite Services particularly well suited for aeronautical and shipping communications and for service in land areas where LEO MSS systems using "bent pipe" technology are not expected to have the more extensive gateway infrastructure needed by such systems to provide global coverage. - Convenient roaming onto terrestrial wireless networks. Iridium will offer subscribers a combination of Iridium World Satellite Services and Iridium World Cellular Services. With the addition of Iridium World Cellular Services, customers will be able to overcome (i) the incompatibility of differing wireless protocols and (ii) the service limitations of satellite-only voice services in buildings and urban canyons. Iridium expects to be able to deliver all of its voice services with one phone, one phone number and one customer bill. - Global paging with belt-worn pagers. The Iridium belt-worn pager will have the capability of receiving alphanumeric messages of up to 200 characters and numeric messages of up to 20 digits virtually anywhere in the world. With Iridium World Page Services, users of Iridium World Satellite Services or Iridium World Cellular Services will generally be able to update their location on the IRIDIUM System by briefly turning on their phone, thereby allowing the IRIDIUM System to send a targeted page. Iridium believes that it will be the first company, and the only company prior to 2000, which will offer global paging to a belt-worn pager. - Greater signal strength. The IRIDIUM System is designed to provide greater signal strength than proposed competing MSS systems. Iridium believes this greater signal strength will allow it to better serve hand-held phones, and provide a higher degree of in-building signal penetration for pagers, than competing MSS systems. Be the first to market with a global wireless communications system. Iridium plans to capitalize on the substantial design, development, fabrication and testing efforts and financial investment to date of its strategic investors to bring Iridium World Services to market at the earliest practicable date, which is currently expected to be September 23, 1998. Iridium believes that it will be the only wireless communications system in operation prior to 2000 that will be able to offer global mobile voice and paging services in each country in which Iridium World Services are authorized. Adapt proven technologies through an industrial team led by Motorola. The IRIDIUM System adapts proven technology, including GSM cellular call processing technology, intersatellite links, FDMA/TDMA radio transmission technology, a 2,400 bps vocoder and business support software. Iridium believes that the primary technological challenge is the integration of these proven technologies into a single system. Motorola, the principal investor in Iridium, is a leading international provider of wireless communications systems, cellular phones, pagers, semiconductors and other electronic equipment. The industrial team assembled by Motorola to build and deliver in orbit the IRIDIUM System consists of major companies experienced in aerospace and telecommunications, including Telespazio, Lockheed Martin, Raytheon, Boeing, Khrunichev and China Aerospace. Capitalize on the strengths of its strategic investors. A number of the Iridium strategic investors provide telecommunications services in various parts of the world and have significant operating, regulatory and marketing experience in their service territories. Iridium expects that its investors with existing wireless communications sales and service organizations will use these organizations to market and distribute Iridium World Services and equipment to potential subscribers. Because of the prominence of many of these investors, Iridium believes that their efforts to obtain the necessary regulatory approvals have been, and will continue to be, of great importance. Utilize existing wireless distribution channels. Iridium's strategy is to target primarily traveling professionals, who are generally wireless phone users. Iridium's strategy is to provide customers with an enhancement to their existing terrestrial wireless service through existing marketing and distribution channels rather than to focus on individuals who have no or limited landline or wireless communications experience and live in areas where no marketing and distribution channels currently exist. SOURCES AND USES OF FUNDS BY IRIDIUM The following table and the accompanying notes describe the currently estimated sources and uses of funds by Iridium from inception of its predecessors through September 23, 1998 (the date on which Iridium expects to commence commercial operations) giving pro forma effect to the Offering and the use of $175 million of the net proceeds therefrom to permanently reduce the Guaranteed Bank Facility (and, therefore, the corresponding Motorola Guarantee). Prospective investors are urged to read the notes accompanying the table and should note that significant additional funds will be needed to service Iridium's cash needs prior to its expected generation of positive cash flow from operations. The projection of total sources and total uses of funds is forward looking and could vary, perhaps substantially, from actual results, due to events outside Iridium's control, including unexpected costs and unforeseen delays. See "Risk Factors -- Risk of Error in Forward Looking Statements." PRE-OPERATIONAL PERIOD(1) (DOLLARS IN MILLIONS) <TABLE> <CAPTION> SOURCES OF FUNDS ---------------- <S> <C> Secured Bank Facility(2)........... $ 629 The Notes(3)....................... 342 The Units, Series B Notes and Series C Notes(4)................ 1,038 Guaranteed Bank Facility(5)........ 270 14 1/2% Senior Subordinated Notes due 2006......................... 238 Series A Class 2 Interests of Parent(6)........................ 31 Class 1 Interests of Parent(7)..... 1,952 ------ Total Pre-operational Sources..................... $4,500 ====== Additional pre-operational amounts available under Secured Bank Facility......................... $ 121 </TABLE> <TABLE> <CAPTION> USES OF FUNDS ------------- <S> <C> Space System Contract(8)........... $3,450 Terrestrial Network Development Contract(9)...................... 151 Business support systems and other expenditures(10)(13)............. 177 Net interest and financing costs(11)(13).................... 259 Net expenses and working capital(12)(13).................. 463 ------ Total Pre-operational net uses(13).................... $4,500 ====== </TABLE> - --------------- (1) Assumes that the IRIDIUM System will commence commercial operations on September 23, 1998. Iridium anticipates total cash needs of $5.5 billion (net of assumed revenues following commencement of commercial operations) through year-end 1999, the last year in which Iridium projects negative cash flow and a net increase in year-end borrowings. Many factors, including Iridium's ability to generate significant revenues and purchases under its Standby Equipment Purchase Commitments, could affect this estimate. See "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Iridium currently expects to satisfy its additional funding requirements through the incurrence of debt. Iridium expects to seek additional secured bank financing in order to meet its expected funding requirements following the commencement of commercial operations. Such additional bank financing may require credit support from the Iridium strategic investors, vendors or others for which Iridium will be required to pay compensation. There can be no assurance that such additional bank financing will be obtained by Iridium on terms and conditions that are acceptable to it, and if such additional bank financing is unavailable, there can be no assurance that Iridium will be able to obtain alternative financing on terms and conditions acceptable to it. The availability of any financing is subject to, among other things, market conditions at the time of any proposed financing. See "Risk Factors -- Significant Additional Funding Needs," and "Management's Discussion and Analysis of Financial Condition and Results of Operations." (2) As of March 31, 1998 Iridium had drawn $350 million under a Credit Agreement with Chase Securities Inc., The Chase Manhattan Bank, Barclays Bank PLC and a syndicate of lenders with respect to a senior bank facility in a principal amount of $1 billion (the "Secured Bank Facility"), of which $250 million is not available prior to the defined commercial activation date. The Secured Bank Facility is secured by substantially all of Iridium's assets. The Secured Bank Facility is further secured by the Reserve Capital Call (as defined) and all of the membership interests in Iridium. See "Description of Other Indebtedness -- Secured Bank Facility." The availability of additional amounts under the Secured Bank Facility is subject to significant conditions, including technical conditions relating to the IRIDIUM System, conditions relating to regulatory approvals and conditions relating to other financing sources. In connection with the Offering, Iridium has requested that the lenders under the Secured Bank Facility agree to amendments to the Secured Bank Facility (the "Requested SBF Amendments") that would increase the approved budget under the Secured Bank Facility for the development, construction and commercialization of the IRIDIUM System by $175 million (and would make corresponding adjustments in various covenants restricting the amount Iridium is permitted to spend on project costs) and would increase the amount of Indebtedness Iridium is permitted to incur during the term of the Secured Bank Facility. The Offering is not contingent on Iridium receiving the Requested SBF Amendments and there can be no assurance that the lenders under the Secured Bank Facility will agree to the Requested SBF Amendments. Borrowings under the Secured Bank Facility mature on September 30, 1998, subject to Iridium's right to extend such maturity up to June 30, 1999 if it can demonstrate by July 1, 1998 that it has sufficient available or committed funding for the budgeted project costs through such extended maturity. See "Use of Proceeds" and "Description of Other Indebtedness." (3) Reflects the net proceeds of the Offering to Iridium, after deducting the expenses of the Offering and the discounts to the Underwriters. See "Use of Proceeds." (4) Reflects the net proceeds received directly or indirectly by Parent from the offering of (i) 300,000 Units, each consisting of $1,000 principal amount of Series A Notes and one Warrant, representing the right to purchase 5.2 shares of Class A Common Stock of IWCL, (ii) $500 million aggregate principal amount of Series B Notes, and (iii) $300 million aggregate principal amount of Series C Notes. See "Description of Other Indebtedness." (5) As of March 31, 1998, Iridium had $285 million outstanding under a $450 million unsecured borrowing facility with a syndicate of banks (the "Guaranteed Bank Facility"). Borrowings under the Guaranteed Bank Facility are guaranteed by Motorola (the "Motorola Guarantee"). A portion of the proceeds from the issuance of the Initial Senior Notes was used to permanently reduce the Guaranteed Bank Facility from $750 million to $450 million. Iridium intends to use approximately $175 million of the net proceeds from the Offering to permanently reduce the Guaranteed Bank Facility from $450 million to $275 million. See "Use of Proceeds." The Guaranteed Bank Facility matures on June 30, 1999. Parent, Iridium and Motorola are parties to a Memorandum of Understanding, and, in connection with the Offering, Parent, Iridium and Motorola intend to enter into an Amended and Restated Memorandum of Understanding (as amended and restated the "Motorola MOU"). Pursuant to the Motorola MOU, Motorola is expected to agree to extend the Motorola Guarantee until after the Stated Maturity (as defined) of the Initial Senior Notes (which is the same date as the Stated Maturity of the Notes) if the Guaranteed Bank Facility is so extended. There can be no assurance, however, that the bank lenders would agree to extend the term of the Guaranteed Bank Facility if requested by Iridium. Pursuant to the Motorola MOU, Motorola is expected to agree that Motorola will (i) guarantee up to $350 million of additional Indebtedness (including principal and interest) of Iridium under the Guaranteed Bank Facility or another credit agreement with identical terms (the "Motorola Additional Guarantee"), provided that such increase (or separate credit agreement) is put in place prior to February 28, 1999, and (ii) guarantee up to $175 million of additional Indebtedness (including principal and interest) under the Guaranteed Bank Facility or a credit agreement having the identical terms (other than maturity) as the Guaranteed Bank Facility to be used by Iridium only for payments to Motorola in respect of the Motorola Standby Purchase Commitment and other amounts overdue to Motorola (the "Motorola Equipment Guarantee"). For a description of the Motorola MOU, the Motorola Additional Guarantee and the Motorola Equipment Guarantee see "Certain Relationships and Related Transactions of Iridium -- Motorola Related Matters." There can be no assurance that the bank lenders would agree to increase the amount of their commitments under the Guaranteed Bank Facility in respect of the Motorola Additional Guarantee or the Motorola Equipment Guarantee. See "Description of Other Indebtedness." Pursuant to the existing covenants under the Secured Bank Facility, and assuming that $270 million is outstanding under the Guaranteed Bank Facility, Iridium would have the ability to borrow no more than $175 million of the additional $350 million in borrowings under the Motorola Additional Guarantee. Pursuant to the Requested SBF Amendments, however, the relevant debt limit would be raised to permit the entire amount of any such additional $350 million of borrowings. See "Risk Factors -- Significant Additional Funding Needs" and "-- Risk of Highly Leveraged Capital Structure." (6) The Series A Class 2 Interests of Parent pay a 14 1/2% dividend which, at the option of Parent, may be paid in-kind until 2001 and paid in cash thereafter. The Series A Class 2 Interests are convertible at any time into Class 1 Interests. If all dividends permitted to be paid in-kind are paid in-kind, at the time when the Series A Class 2 Interests convert to a cash dividend, there will be 62,668 Series A Class 2 Interests outstanding convertible into 1,159,985 Class 1 Interests, subject to anti-dilution adjustments. The Series A Class 2 Interests are not obligations of Iridium. (7) Includes approximately $224 million net proceeds to Parent from the issuance of Class 1 Interests in connection with the IWCL IPO consummated on June 13, 1997. Includes approximately $41 million (exclusive of interest) due from South Pacific Iridium Holdings Limited ("SPI"), an affiliate of P.T. Bakrie Communications Corporation, an Indonesian corporation, pursuant to a definitive purchase agreement under which SPI purchased 7,500,000 Class 1 Interests at $13.33 per Class 1 Interest on May 30, 1997. SPI paid $40 million on May 30, 1997. Payment of the second installment occurred on August 26, 1997 in the amount of $10 million (including interest), and a partial prepayment of the third installment in the amount of $9 million (including interest) occurred on September 9, 1997. The outstanding amount of $41 million (plus interest) becomes due on May 15, 1998. See "Risk Factors -- Risks Associated with International Operations and Developing Markets" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." (8) As of March 31, 1998, $3.1 billion of this amount had been incurred. See "Risk Factors -- Potential for Delay and Cost Overruns," "-- Risks Associated with Principal Supply Contracts" and "-- Satellite Launch Risks -- Impact of Excusable Delays." (9) As of March 31, 1998, $148 million of this amount had been incurred. The total cost of the Terrestrial Network Development Contract is estimated to be approximately $284 million, with approximately $133 million of such total due at or after September 23, 1998, the expected date of the commencement of commercial operations. See "Risk Factors -- Risks Associated with Principal Supply Contracts." (10) As of March 31, 1998, $105 million of this amount had been incurred. See "Risk Factors -- Potential for Delay and Cost Overruns -- Development and Implementation of Software." (11) Based on assumed interest payment obligations, interest rates and borrowing levels and Iridium's estimates of associated costs. Actual interest and financing costs will depend upon applicable interest rates and the amount and timing of actual borrowings. (12) Comprised of operating expenses of $683 million and net of interest income of $18 million and working capital of $202 million. (13) Amounts in these categories include increased financing expenses of approximately $6 million, comprised of higher interest expenses resulting from the refinancing of a portion of the Guaranteed Bank Facility with net proceeds of the Offering and a change in the form of Iridium's payments to Motorola in respect of the Motorola Guarantee from the issuance of warrants to purchase Class 1 Interests to the payment in cash and a substantially reduced amount of warrants (the "High Yield Compensation"), and increased working capital and expenses of approximately $86 million. Such increased working capital expenses include a portion of the expenditures associated with (i) the Global Advertising Program Increase; (ii) the provision of software by Iridium in connection with the construction and operation of the China gateway; (iii) the cost of an IRIDIUM System software upgrade for capacity enhancement; and (iv) contingency funding to cover other expenses prior to September 23, 1998. Iridium will not effect a substantial portion of the Global Advertising Program Increase if it does not receive the Requested SBF Amendments. See "Use of Proceeds," "Description of Other Indebtedness," "Certain Relationships and Related Transactions of Iridium -- Motorola MOU and Agreement Regarding Guarantee" and "-- Agreements Regarding the China Gateway," and "Risk Factors -- Significant Additional Funding Needs." THE OFFERING Issuers.................... Iridium Operating LLC, a Delaware limited liability company, and Iridium Capital Corporation, a Delaware corporation. Notes Offered.............. $350 million aggregate principal amount of % Senior Notes due 2005, Series D, of Iridium and Capital, as joint and several obligors. Maturity Date.............. July 15, 2005. Interest Payment Dates..... Interest on the Notes will accrue from , 1998 at an annual rate of %. Interest on each Note will be payable semi-annually in arrears on January 15 and July 15 of each year, commencing July 15, 1998. Security................... None. Optional Redemption........ Except as described below, the Issuers may not redeem the Notes prior to July 15, 2002. On or after such date, either Issuer may redeem the Notes, in whole or in part, at any time at the redemption prices set forth herein, together with accrued and unpaid interest to the date of redemption. At any time and from time to time on or prior to July 15, 2000, either Issuer may, subject to certain requirements, redeem in the aggregate up to 33 1/3% of the original aggregate principal amount of the Notes with the cash proceeds to Iridium of one or more Equity Offerings (as defined) at a redemption price equal to % of the principal amount of the Notes being redeemed, plus accrued and unpaid interest thereon to the date of redemption; provided that at least 66 2/3% of the original aggregate principal amount of the Notes must remain outstanding immediately after each such redemption. See "Description of Notes -- Optional Redemption." Change of Control.......... Upon the occurrence of a Change of Control (as defined), each holder of Notes will have the option to require the Issuers to repurchase all or a portion of such holder's Notes at 101% of the principal amount of the Notes, plus accrued and unpaid interest to the purchase date. However, certain highly leveraged transactions may not be deemed to be a Change of Control, including, without limitation, transactions with affiliates which comply with the other covenants included in the Indenture. See "Description of Notes -- Change of Control." Additionally, there can be no assurance that the Issuers will have the financial resources necessary to repurchase the Notes upon a Change of Control. See "Risk Factors -- Change of Control" and "Description of Notes -- Change of Control." Subsidiary Guaranties...... The Notes will be fully guaranteed on an unsecured, senior basis by all present or future Guarantor Subsidiaries. Iridium currently has no subsidiaries other than Capital, Roaming, Facilities and IP. Roaming, Facilities and IP are Guarantor Subsidiaries. Neither Capital nor any of the Guarantor Subsidiaries has any outstanding Indebtedness other than as co-issuers or guarantors of outstanding Indebtedness of Iridium. See "Description of Notes -- Subsid- iary Guarantees" and "-- Certain Covenants -- Future Guarantor Subsidiaries." Ranking.................... The Notes will be senior obligations of the Issuers. The Notes will rank pari passu in right of payment with the Initial Senior Notes and all other existing and future senior Indebtedness of the Issuers, other than any Subordinated Obligations (as defined). The Notes will be effectively subordinated to any secured Indebtedness of the Issuers to the extent of the value of the assets securing such Indebtedness. The Subsidiary Guarantees will be unsecured, senior obligations of the Guarantor Subsidiaries. Neither Capital nor any of the Initial Guarantors has any outstanding Indebtedness other than as co-issuers or guarantors of outstanding Indebtedness of Iridium. As of March 31, 1998, after giving pro forma effect to the issuance of $350 million in aggregate principal amount of Notes and the application of $175 million of the net proceeds from the Notes to a permanent reduction of the Guaranteed Bank Facility, the Iridium Parties would have had outstanding (i) approximately $350 million of senior secured Indebtedness and (ii) approximately $1,210 million of unsecured senior Indebtedness (other than the Notes) that ranks pari passu with the Notes (including the Initial Senior Notes and borrowings of $110 million under the Guaranteed Bank Facility). In addition, as of March 31, 1998, Iridium had approximately $285 million of Indebtedness that is subordinated to the Notes. Such outstanding amounts of Indebtedness do not reflect the anticipated temporary reduction in the Guaranteed Bank Facility. See "Use of Proceeds," "Description of Other Indebtedness" and "Risk Factors -- Significant Additional Funding Needs." Use of Proceeds............ The net proceeds from the Offering to be received by Iridium are estimated to be approximately $342 million. Iridium will use $175 million of the net proceeds from the Offering to permanently reduce the commitment of the bank lenders under the Guaranteed Bank Facility from $450 million to $275 million (and, therefore, correspondingly reduce the Motorola Guarantee) and will use the remainder of the net proceeds primarily to make milestone payments in connection with the construction and deployment of the IRIDIUM System and to a lesser extent for other general corporate purposes. Pending such use, Iridium intends to temporarily reduce the amount outstanding under the revolving Guaranteed Bank Facility and to invest the remainder in short-term investment grade debt securities. See "Summary -- Sources and Uses of Funds by Iridium" and "Use of Proceeds." Restrictive Covenants...... The Indenture governing the Notes will limit (i) the incurrence of additional Indebtedness by Iridium and the Restricted Subsidiaries (as defined); (ii) the payment of dividends on, and redemption of, Capital Stock (as defined) of Iridium and the Restricted Subsidiaries and the redemption of certain Subordinated Obligations (as defined) of Iridium and the Restricted Subsidiaries; (iii) certain other restricted payments, including certain investments; (iv) sales of assets and Restricted Subsidiary stock; (v) certain transactions with affiliates; (vi) the sale or issuance of capital stock of Restricted Subsidiaries; (vii) the creation of liens; (viii) the lines of business in which Iridium and the Restricted Subsidiaries may operate; and (ix) consolidations, mergers and transfers of all or substantially all of the Issuers' assets. The Indenture will also prohibit certain restrictions on distributions from Restricted Subsidiaries. However, all of these limitations and prohibitions are subject to a number of important qualifications and exemptions. See "Description of Notes -- Certain Covenants" and "-- Merger and Consolidation."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001057187_caliber_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001057187_caliber_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to, and should be read in conjunction with, the more detailed information and the Financial Statements and related Notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, all information contained in this Prospectus assumes (i) the Preferred Stock Conversions, the exercise by Sylvan Learning Systems, Inc. ("Sylvan") of the Hill Option and the Recapitalization have been effected, (ii) Sylvan's payment of the balance due on the Sylvan Subscription, (iii) the 1.2274-for-1 split of the outstanding capital stock and (iv) no exercise of the Warrant held by MCI Communications Corporation ("MCI") or the Underwriters' over-allotment option. See "--Initial Capitalization and Recapitalization of the Company" and "Underwriting." The Company is establishing a state-of-the-art, graduate level learning and professional training distribution network throughout the United States designed to meet the needs of prominent universities, major corporations and working adults. Caliber intends to distribute courses developed by prominent universities and to distribute professional development and training programs to Fortune 1000 corporations. Caliber has entered into a five-year contract with The Johns Hopkins University ("Johns Hopkins") and a five-year contract with The Wharton School of the University of Pennsylvania ("Wharton") to begin programs for working adults in 1998. In addition, the Company has signed joint development agreements with the University of California at Berkeley Extension School, the Massachusetts Institute of Technology ("MIT") and Georgetown University. The Company has entered into contracts with Compaq Corporation ("Compaq"), Macmillan Computer Publishing ("Macmillan") and MCI Systemhouse Corp. ("MCI Systemhouse") to begin programs in 1998. As of April 1, 1998, the Company had 34 Caliber Campuses open in 34 markets and expects to have 41 Caliber Campuses open in 40 markets by September 1998. Sylvan and MCI organized Caliber in November 1996, bringing together the educational services expertise of Sylvan and the technology and telecommunications expertise of MCI. Caliber's goal is to become the standard for distributed learning and professional training by maintaining high quality course content, advanced technology, a professional learning environment and a national presence. Initially, the Company intends to focus on educational and training programs in the fields of health care, management development, information technology/engineering and education. These fields are characterized by (i) large, dispersed and changing professional populations; (ii) rapid changes in subject matter; and (iii) required continuing education or professional development. Caliber is establishing alliances with prominent universities and major corporations to provide solutions for their lifelong learning and professional training needs. Caliber believes that it will be able to use these alliances to facilitate collaboration between universities and corporations for the development of customized professional development, training and corporate communications programs. Caliber will distribute these programs to dispersed corporate constituencies through the Caliber network. Caliber will also provide other services to increase Campus utilization, including video conferencing services and hourly classroom rental. Expenditures in the post-secondary education market were approximately $220 billion in 1996-97, compared to approximately $135 billion in 1989-90. In 1996- 97, approximately 45% of the students enrolled in post-secondary education were adults age 25 and older. Corporations budgeted approximately $60 billion in 1997 to provide training for their employees, compared to $46 billion in 1990. The Company believes that an increasing need for technical skills in the workforce is the primary reason for growth in the training market. Increasing numbers of working adults have concluded that graduate level education is necessary for career advancement. Many would prefer to obtain this education from prominent universities because the prestige of these universities increases the value of the credentials earned. However, most universities use a teaching method and provide course content targeted toward traditional, full-time students that do not meet the practical needs of either working adults or the corporations that are funding their employees' education. To date, the alternatives for working adults have been conventional distance learning and local two-year and four-year colleges. Conventional distance learning addresses the problems of time and location for working adults but fails to provide the benefits of traditional classroom learning or the value of the credential from a prominent university. Corporations have been spending increasing amounts on communicating with and training their employees, dealers, and customers. Transporting corporate trainers to remote offices or employees, dealers and customers to central training facilities is costly and often difficult to coordinate. The corporate trainer is typically an intermediary between the expert and the employees, which may lower the quality of the training. Caliber combines the best elements of the traditional classroom with the convenience of distance learning. Caliber Campuses feature professional classrooms, educational facilitators, state-of-the-art satellite transmission, video conferencing, wide-area network computing and Internet technologies. These features give working adults access to live expert instruction, real-time two-way interactivity with the instructor and the ability to collaborate with the other course participants. In addition, Caliber integrates personal computing and the Internet to enhance student-teacher interactivity and to extend the learning experience beyond the classroom. The Caliber network addresses the practical constraints of working adults by providing local access across the nation to prominent university content and professional development and training programs. The Caliber network enables prominent universities to extend the market for their educational products without sacrificing high- quality instruction. Caliber accomplishes this by distributing live, interactive instruction developed by the university through satellite broadcast, video conferencing and Internet technologies to Caliber Campuses, which enables one instructor to teach students across the country. The Caliber network enables corporations to have an expert address a corporation's workforce, customers or dealers in geographically diverse locations at the same time. The efficiency of the Caliber network allows corporations to rapidly disseminate time sensitive subject matter. In addition, Caliber plans to use its relationships with prominent universities to manage collaborations between corporations and universities to develop high quality, effective professional development programs with content specifically tailored to the corporations' needs. The Company was incorporated in Maryland in March 1996. The Company's executive offices are located at 3600 Clipper Mill Road, Suite 300, Baltimore, Maryland 21211, and its telephone number is 410-843-1000. THE OFFERING <TABLE> <C> <S> Common Stock offered by the Company................ 4,200,000 shares Common Stock offered by the Selling Stockholder.... 1,200,000 shares Common Stock to be outstanding after the offering.. 11,718,642 shares(1) Use of Proceeds.................................... To finance leasehold improvements and equip Caliber Campuses, to repay outstanding indebtedness and management fees, to pay accrued Preferred Stock dividends and to provide working capital to support the Company's planned growth. Nasdaq National Market Symbol...................... CLBR </TABLE> - -------- (1) After giving effect to the automatic conversion of all of the 2,442,513 currently outstanding shares of the 8% Series A Redeemable Convertible Preferred Stock (all of which are held by MCI) and the 1,227,393 currently outstanding shares of the Series B Redeemable Junior Convertible Preferred Stock (all of which are held by Sylvan) into an aggregate of 3,669,906 shares of Common Stock at the closing of this offering. Excludes (i) 5,167,328 shares of Common Stock issuable upon future conversion of the 5,167,328 shares of Non-Voting Convertible Preferred Stock (all of which will be held by Sylvan) to be outstanding upon closing of this offering, (ii) 1,193,573 shares of Common Stock issuable to MCI upon exercise of a warrant (the "MCI Warrant") at an aggregate exercise price of $3.78 million, and (iii) 1,156,349 shares of Common Stock issuable upon exercise of management stock options outstanding as of the date of this Prospectus, at a weighted average exercise price of $1.46 per share. See "Capitalization," "Management--Employee Benefit Plans" and "Certain Relationships and Related Transactions." INITIAL CAPITALIZATION AND RECAPITALIZATION OF THE COMPANY Upon completion of this offering, 11,718,642 shares of Common Stock and 5,167,328 shares of 6% Non-Voting Convertible Preferred Stock will be outstanding. Prior to completion of this offering, the authorized capital of the Company included two classes of Common Stock, equivalent in all respects except that each share of Class A Common Stock was entitled to one vote and each share of Class B Common Stock was entitled to ten votes. The authorized capital also included two classes of preferred stock, the 8% Series A Convertible Preferred Stock and Series B Junior Convertible Preferred Stock, each of which will automatically convert into Class A Common Stock, on a share for share basis, simultaneously with completion of this offering, subject to payment of accrued dividends on the Series A Preferred Stock. The Company was capitalized pursuant to a Stock Purchase Agreement, dated October 23, 1996, under which MCI purchased 2,442,513 shares of 8% Series A Convertible Preferred Stock for $10.0 million in cash; Sylvan purchased 1,227,393 shares of Series B Junior Preferred Stock for $1.3 million in cash; each of R. Christopher Hoehn-Saric and Douglas L. Becker, Sylvan's co-Chief Executive Officers, purchased 1,718,351 shares of Class A Common Stock for $350,000 each in cash; and John P. Hill, an independent investor, purchased 5,167,328 shares of Class B Common Stock for $1.0 million in cash. Messrs. Hoehn-Saric and Becker subsequently transferred their shares to Sterling Caliber Investment, L.L.C. ("Sterling Caliber"), which is owned by Messrs. Hoehn-Saric and Becker, two other investors and trusts for the benefit of their respective families. In connection with the Company's capitalization: (i) Mr. Hill granted Sylvan the option to purchase his shares of Class B Common Stock for the lesser of $5.0 million or the fair market value of the shares on the date of purchase (the "Hill Option"); (ii) the Company issued MCI a warrant to purchase the number of shares of Class A Common Stock that would equal 7% of the capital stock of the Company to be outstanding after the exercise of the warrant at an aggregate exercise price of $3.78 million (the "MCI Warrant"); (iii) Sylvan agreed to provide a line of credit to, or guarantee debt for, the Company of up to $3.0 million (the "Sylvan Loan"); (iv) Sylvan agreed to contribute an additional $8.0 million of capital to Caliber (the "Sylvan Subscription") to the extent needed by Caliber for working capital; and (v) MCI agreed to provide up to $20.0 million in equipment lease financing to the Company, on a "last look" basis (the "MCI Lease and Guarantee Commitment"). Sylvan, MCI and Messrs. Becker, Hill and Hoehn-Saric (collectively, the "Stockholders") also entered into a Stockholders' Agreement in November 1996 which restricted the transferability of their shares of Caliber stock, required the Stockholders to elect the other Stockholders or their representatives to the Company's Board of Directors and prohibited the Company from taking certain actions without the approval of MCI's Board representative. The Stockholders' Agreement will terminate upon completion of this offering. Under a Registration Rights Agreement executed in November 1996, the Company granted Sylvan, MCI and Messrs. Hoehn-Saric and Becker the right to have their shares of Class A Common Stock registered under the Securities Act of 1933, as amended (the "Securities Act"), at various times during the four years following completion of this offering. Messrs. Hoehn-Saric and Becker have transferred their rights under the Registration Rights Agreement to Sterling Caliber. Immediately prior to completion of this offering, (i) the Company's Charter will be amended so that there will be authorized a single class of Common Stock, for which all shares of Class A Common Stock will be exchanged on a share for share basis, and a series of 6% Non-Voting Convertible Preferred Stock, for which all shares of Class B Common Stock will be exchanged on a share for share basis (the "Recapitalization"); (ii) MCI's 2,442,513 shares of 8% Series A Convertible Preferred Stock and Sylvan's 1,227,393 shares of Series B Junior Convertible Preferred Stock will be converted into an aggregate of 3,669,906 shares of Common Stock (the "Preferred Stock Conversion"); (iii) Sylvan will exercise the Hill Option and purchase Mr. Hill's stock, which will have been converted to 5,167,328 shares of 6% Non-Voting Convertible Preferred Stock, for $5.0 million in cash; and (iv) Sylvan will contribute the balance due on the Sylvan Subscription. MCI will not exercise the MCI Warrant in connection with this offering, but the MCI Warrant will become exercisable for 1,193,573 shares of Common Stock and no longer will be subject to adjustment (except for stock splits and similar changes in the capitalization of the Company). See "Capitalization," "Certain Relationships and Related Transactions" and "Description of Capital Stock." SUMMARY FINANCIAL DATA <TABLE> <CAPTION> PERIOD FROM NOVEMBER 22, 1996 (INCEPTION) TO YEAR ENDED DECEMBER 31, DECEMBER 31, 1996 1997 -------------- ------------ <S> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue......................................... $ -- $ 1,199,293 Expenses: Campus operating expenses..................... -- 7,133,744 Management fees to Sylvan..................... 480,000 2,400,500 Other selling, general and administrative expenses..................................... 1,155,171 5,380,972 ----------- ------------ Total expenses................................ 1,635,171 14,915,216 Other income (expense): Interest income............................... -- 536,100 Interest expense.............................. -- (391,312) ----------- ------------ Net loss........................................ $(1,635,171) $(13,571,135) =========== ============ Net loss per common share attributable to common stockholders................................... $ (0.21) $ (1.62) =========== ============ </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1997 ---------------------------------------- PRO FORMA ACTUAL PRO FORMA(1) AS ADJUSTED(2) ----------- ------------ -------------- <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents............ $ 3,850,440 $8,219,798 $40,115,514 Working capital...................... (1,290,891) 4,073,440 39,270,967 Total assets......................... 14,510,389 18,879,747 62,775,463 Total debt........................... 7,033,076 7,033,076 4,033,076 Redeemable preferred stock........... 11,300,000 -- -- Stockholders' equity (deficit)....... (11,500,356) 5,164,002 55,242,002 </TABLE> - -------- (1) Pro forma to reflect the (i) Preferred Stock Conversion, (ii) Recapitalization and (iii) Sylvan's payment of the $5.4 million balance due on the Sylvan Subscription. See Note 15 of Notes to Financial Statements. (2) Pro forma as adjusted for the sale of the 4,200,000 shares of Common Stock offered by the Company hereby (at an assumed initial public offering price of $13.00 per share), after deduction of underwriting discounts and commissions and offering expenses, and application of the net proceeds therefrom, as described in "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001057507_resortques_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001057507_resortques_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the financial statements and related notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, all share, per share and financial information in this Prospectus has been adjusted to give effect to (i) the Combinations (as defined herein) and (ii) a 8,834.76-for-one stock split effected on March 9, 1998. Except as indicated otherwise, all references to Common Stock include Restricted Common Stock. See "Description of Capital Stock." THE COMPANY ResortQuest International, Inc. was established to create a leading provider of vacation condominium and home rentals in premier destination resorts throughout the United States. Through the consolidation of leading vacation rental and property management companies, the development of a national brand and marketing initiative and best practices management systems, the Company intends to offer vacationers a branded network of high quality, fully furnished, privately-owned condominium and home rentals while offering property owners superior management services designed to enhance their rental income. Currently, most vacationers seeking to rent a condominium or home at a popular destination resort must use a local vacation rental and property management firm to inquire about availability and make reservations. Vacationers typically make rental choices with limited information and, as a result, face great uncertainty concerning the quality of their rental. To address this need, the Company intends to provide vacationers with consistent quality and service, increased information and easy access to a broad array of high quality condominium and home rentals in premier destination resorts. On May 26, 1998, the Company consummated its initial public offering and the combinations (the "Combinations") of 12 leading vacation rental and property management companies and one leading vacation rental and property management software company (each a "Founding Company" and, collectively, the "Founding Companies.") The Founding Companies together manage approximately 8,900 condominiums and homes in eight states and in Canada. These condominiums and homes are located in beach and island resorts such as the Hawaiian Islands; Bethany Beach, DE; Nantucket, MA; the Outer Banks, NC; Sanibel and Captiva Islands, FL; and St. Simons Island, GA; and mountain resorts such as Aspen, Breckenridge and Telluride, CO; Park City, UT, and Whistler, British Columbia. The Company also manages 11 hotels, with an aggregate of approximately 1,650 hotel rooms located primarily in the Hawaiian Islands. The Company provides a wide range of services to both vacationers and property owners. Because of the variety of the Company's resort locations throughout the United States and Canada and the diversity of rental prices throughout its rental pool, the Company is able to target a broad range of vacationers, including families, couples and individuals. For vacationers, the Company offers the convenience and accommodations of a condominium or home, while providing many of the amenities and services of a hotel. Vacation condominium and home rentals generally offer greater space and convenience than resort hotel rooms, including separate living, sleeping and eating quarters. As a result, vacationers generally have more privacy and greater flexibility in a vacation condominium or home. The Company typically offers such services as convenient check-in and check-out, frequent housekeeping and cleaning and emergency maintenance assistance. In addition, in most of its markets, the Company provides specialized concierge-type services such as arranging golf tee times, purchasing ski lift tickets and making restaurant reservations. For property owners, the Company offers a comprehensive set of services, including marketing and rental services, maintenance and security. The Company's primary source of revenue is property rental fees, which are charged to the property owners as a percentage of the vacationers' total rental price. Fee percentages for vacation condominiums and homes range from approximately 3% to over 40% of rental rates for the various Founding Companies depending on the type of services provided to the property owner and the type of rental unit managed. On a pro forma basis for the year ended December 31, 1997, the Company generated total revenues of approximately $56.8 million, which includes $31.0 million of revenues from property rental fees, and net income of $6.9 million. In addition, in many markets, the Company provides traditional real estate brokerage services for property owners seeking to sell their condominiums and homes. The Company believes that a national brand and superior management services, which are designed to enhance rental income for property owners, will provide it with a competitive advantage in attracting additional high quality condominiums and homes in its markets. The vacation rental and property management industry is highly fragmented and inefficient, with an estimated 3,000 vacation rental and property management companies in the United States. Presently, most vacation rental condominiums and homes are managed by and booked through local vacation rental and property management firms, whose principal means of attracting property owners and vacationers is by referral, word of mouth, limited local advertising and direct mailings. The Company believes this presents a significant market penetration opportunity for a well-capitalized company offering a large, national network of high quality vacation condominiums and homes. The Company's objective is to enhance its position as a leading provider of premier destination resort condominium and home rentals by: o NATIONAL BRAND. Developing a national brand based on offering vacationers an extensive network of high quality condominiums and homes in premier destination resorts throughout the United States; o SUPERIOR CUSTOMER SERVICE. Offering vacationers superior customer service with the convenience and accommodations of a condominium or home as well as many of the amenities and services of a hotel; o INCREASED RENTAL INCOME. Enhancing value for condominium and home owners with strategies designed to increase occupancy and rental rates resulting in increased rental income; o MANAGEMENT'S EXPERIENCE. Relying on the industry experience of its senior management including David Sullivan, Chairman and Chief Executive Officer, who was the Chief Operating Officer of Promus Hotel Corporation, as well as David Levine, President and Chief Operating Officer, Jeffery M. Jarvis, Senior Vice President and Chief Financial Officer, and Michael Murphy, Senior Vice President of Development of the Company, each of whom have extensive experience in the hotel and resort industries; and o LOCAL EXPERTISE. Maintaining the local relationships and expertise of the management teams of the Founding Companies, each of which has extensive experience in their respective resort areas. Management teams at the Founding Companies bring valuable industry relationships and provide local market knowledge in each market in which the Company operates. The Founding Companies have an average of over 20 years of experience in the industry. Additionally, officers and directors of the Company, the former owners of the Founding Companies, the founders of the Company and their respective affiliates own approximately 60% of the Common Stock of the Company as of May 26, 1998. The Company believes it can achieve significant growth internally and through an active acquisition program. The primary elements of the Company's internal growth strategy include: o NATIONAL MARKETING STRATEGY. Implementing a national marketing strategy emphasizing: (i) cross-selling to existing customers; (ii) bringing in new customers; and (iii) increasing the use of marketing channels such as the world wide web, travel agents and national print media, which are difficult for local vacation rental and property management companies to use in a cost-effective manner; o CAPITALIZE ON TECHNOLOGY. Capitalizing on technology by utilizing the technological expertise of First Resort, a Founding Company, to create a comprehensive web site that includes all of the Company's condominium, home and hotel rentals through which vacationers can ultimately view photographs and detailed floor plans of the Company's rental properties and make reservations and payments; o GROWTH WITHIN EXISTING MARKETS. Expanding its market share of condominium, home and hotel room rentals in existing markets; and o PROFIT MARGIN EXPANSION. Pursuing opportunities for profit margin expansion via cost synergies and additional revenue sources including the implementation of best practices achieved by tapping the industry experience of the management teams in each of the Founding Companies. The Company also intends to build a national market presence through strategic acquisitions. The vacation rental and property management industry is highly fragmented, which the Company believes provides significant opportunities for consolidation. While the Company will seek to acquire the leading companies in each new market, the Company also plans to pursue tuck-in acquisitions through which it can expand its selection of condominiums and homes available for rent in its existing markets. The Company believes that the opportunity to join with it will be attractive to many vacation rental and property management companies. The Company expects to offer acquisition candidates: (i) affiliation with a national brand; (ii) the ability to cross-sell to customers of other vacation rental and property management companies; (iii) the ability to increase liquidity as a result of the Company's financial strength as a public company; and (iv) the ability to increase profitability as a result of the Company's centralization of certain administrative functions and other economies of scale. The Company intends to finance future acquisitions through internally generated cash flow, borrowings under its three year, $30 million credit facility with NationsBank N.A. (the "Credit Facility") and through the issuance of Common Stock to the owners of businesses to be acquired. First Resort is a leading provider of software services to vacation rental and property management companies. Over 650 clients utilize First Resort's software to automate and computerize their reservations, rental management and owner accounting activities. Many acquisition candidates utilize First Resort's software, which the Company believes will enhance its ability to integrate such companies upon acquisition. The Company's executive offices are located at 1355-B Lynnfield Road, Suite 245, Memphis, TN 38119, and its telephone number is (901) 818-5445. SECURITIES COVERED BY THE PROSPECTUS The shares of Common Stock covered by this Prospectus are available for use in future acquisitions of businesses, properties or securities of entities or persons engaged in the vacation rental and property management business and other related businesses. The consideration offered by the Company in such acquisitions, in addition to the Common Stock offered by the Prospectus, may include cash, debt or other Company securities, or assumption by the Company of liabilities of the business being acquired, or a combination thereof. It is contemplated that the terms of each acquisition will be determined by negotiations between the Company and the management or owners of the assets to be acquired or the owners of the securities (including newly issued securities) to be acquired, with the Company taking into account the quality of the management, the past and potential earning power and growth of the assets or securities to be acquired, and other relevant factors. It is anticipated that the Common Stock issued in any such acquisition will be valued at a price reasonably related to the market value of the Common Stock either at the time the terms of the acquisition are tentatively agreed upon or at or about the time or times of delivery of the shares. This Prospectus, as appropriately amended or supplemented, also may be used from time to time principally by the Selling Stockholders who have received shares of Common Stock in connection with the acquisition by the Company of securities or assets held by such persons, or their transferees, and who wish to offer and sell such shares of Common Stock in transactions in which they and any broker-dealer through whom such shares are sold may be deemed to be underwriters within the meaning of the Securities Act, as more fully described herein. The Company will receive none of the proceeds from any such sale. Any commissions paid or concessions allowed to any broker-dealer, and, if any broker-dealer purchases such shares as principal, any profits received on the resale of such shares, may be deemed to be underwriting discounts and commissions under the Securities Act. SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) On May 26, 1998, RQI consummated its initial public offering and the acquisitions of the Founding Companies. For financial statement presentation purposes, Hotel Corporation of the Pacific, Inc., known primarily by its trade name, Aston Hotels & Resorts ("Aston Hotels & Resorts"), one of the Founding Companies, was designated as the "accounting acquiror." The following summary unaudited pro forma combined financial data present certain data for the Company as adjusted for: (i) the effects of the Combinations on a historical basis; (ii) the effects of certain pro forma adjustments to the historical financial statements; and (iii) the consummation of the initial public offering and the application of the net proceeds therefrom. See the Unaudited Pro Forma Combined Financial Statements and the notes thereto included elsewhere in this Prospectus. <TABLE> <CAPTION> PRO FORMA COMBINED ------------------------------------------------------- THREE MONTHS ENDED YEAR ENDED ---------------------------------- DECEMBER 31, 1997 MARCH 31, 1997 MARCH 31, 1998 ------------------ ---------------- --------------- <S> <C> <C> <C> STATEMENT OF OPERATIONS DATA (1): Revenues: Property rental fees ........................... $ 30,990 $ 12,542 $ 13,754 Service fees ................................... 12,713 3,263 4,087 Other .......................................... 13,116 3,015 3,480 ----------- ----------- ----------- 56,819 18,820 21,321 Operating expenses (2) .......................... 27,680 7,327 7,949 General and administrative expenses (2) ......... 12,383 2,619 3,607 Depreciation and amortization (3) ............... 3,921 993 993 ----------- ----------- ----------- Income from operations .......................... 12,835 7,881 8,772 Interest and other income, net .................. 276 43 222 ----------- ----------- ----------- Income before income taxes ...................... 13,111 7,924 8,994 Provision for income taxes ...................... 6,203 3,428 3,735 ----------- ----------- ----------- Net income ...................................... $ 6,908 $ 4,496 $ 5,259 =========== =========== =========== Net income per share ............................ $ 0.43 $ 0.28 $ 0.33 =========== =========== =========== Shares used in computing pro forma net in- come per share (4) ............................. 15,924,286 15,924,286 15,924,286 </TABLE> <TABLE> <CAPTION> MARCH 31, 1998 ------------------------------ PRO FORMA AS COMBINED (5) ADJUSTED (6) -------------- ------------- <S> <C> <C> BALANCE SHEET DATA: Working capital surplus (deficit) (7) ......... $ (52,464) $ 7,939 Total assets (8) .............................. 137,066 141,765 Long-term debt ................................ 4,468 473 Stockholders' equity .......................... 44,349 108,747 </TABLE> - ----------- (1) The pro forma combined statement of operations data assume that the Combinations and the intial public offering were consummated on January 1, 1997 and are not necessarily indicative of the results the Company would have obtained had these events actually then occurred or of the Company's future results. During the period presented above, the Founding Companies were not under common control or management and, therefore, the data presented may not be comparable to or indicative of post-combination results to be achieved by the Company. The pro forma combined statements of operations data are based on preliminary estimates, available information and certain assumptions that management deems appropriate and should be read in conjunction with the other financial statements and notes thereto included elsewhere in this Prospectus. The Company expects to realize certain savings as a result of the consolidation of insurance, employee benefits and other general and administrative expenses. The Company cannot quantify these savings accurately at this time. Consequently, the Company is unable to determine at this time whether these savings will be material or not. Any such savings may be offset by the costs of being a publicly traded company and the incremental costs related to the Company's new management team. However, these costs, like the savings that they offset, cannot be quantified accurately at this time. Neither these anticipated savings nor these anticipated costs have been included in the pro forma combined financial information of the Company. (2) The unaudited pro forma combined statement of operations data include pro forma reductions in salary, bonuses and benefits to the owners and certain key employees of the Founding Companies to which they have agreed prospectively (the "Compensation Differential") and excludes the effects of the exclusion of certain non-operating assets and the assumption or retirement of certain liabilities that were retained by certain stockholders of the Founding Companies. For the year ended December 31, 1997 and the three months ended March 31, 1997 and 1998, the Compensation Differential was approximately $2.3 million, $299,000 and $690,000, respectively. (3) Reflects amortization of the goodwill (which is not deductible for tax purposes) recorded as a result of the Combinations over a 40-year period, except for the goodwill related to First Resort, which will be amortized over a 15-year period, and computed on the basis described in the notes to the Unaudited Pro Forma Combined Financial Statements. (4) Includes (i) 6,119,656 shares issued to owners of the Founding Companies; (ii) 3,134,630 shares issued to the management and founders of RQI; and (iii) 6,670,000 shares representing the number of shares sold in the initial public offering necessary to pay the cash portion of the consideration for the Combinations, to repay debt assumed in the Combinations, to pay the underwriting discount and other expenses of the initial public offering and to provide additional working capital. Excludes options to purchase 1,697,000 shares granted concurrently with the initial public offering at an exercise price equal to the initial public offering price. See "Certain Transactions." (5) The pro forma combined balance sheet data assume that the Combinations were consummated on March 31, 1998. The unaudited pro forma combined balance sheet data are based upon preliminary estimates, available information and certain assumptions that management deems appropriate and should be read in conjunction with the other financial statements and notes thereto included elsewhere in this Prospectus. (6) Adjusted for the sale of 6,670,000 shares of Common Stock sold in the initial public offering (less estimated underwriting discount and offering expenses) and the application of the net proceeds therefrom. (7) Includes the cash portion of the consideration paid to the Founding Companies and the amount of debt repaid from net proceeds of the initial public offering of $60.0 million and approximately $232,000 representing certain working capital adjustments from certain stockholders of the Founding Companies in connection with the Combinations. (8) Reflects (i) the creation of approximately $94.1 million of goodwill and (ii) a reduction of net assets of approximately $5.1 million, including certain non-operating assets and the assumption or retirement of certain liabilities that were excluded from the Combinations and retained by certain stockholders of the Founding Companies. SUMMARY INDIVIDUAL FOUNDING COMPANY FINANCIAL DATA (IN THOUSANDS) The following table presents summary data for each of the Founding Companies (see "The Company" for the complete names of each Founding Company) on a historical basis for the periods indicated. Income from operations for the Founding Companies for each of the years in the three year period ended December 31, 1997 and for the three months ended March 31, 1997 and 1998 does not include pro forma adjustments, including the Compensation Differential. See Compensation Differential Table below. <TABLE> <CAPTION> THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, --------------------------------------- ----------------------- 1995 1996 1997 1997 1998 ------------- ---------- ---------- --------- ----------- <S> <C> <C> <C> <C> <C> BEACH AND ISLAND RESORTS Aston Hotels & Resorts (Hawaii) Revenues ...................................... $19,048 $19,460 $19,554 $5,581 $ 5,693 Income from operations ........................ 3,064 3,485 5,171 2,055 1,882 Maui Condominium and Home (Hawaii) Revenues ...................................... $ 910 $ 1,222 $ 1,422 $ 462 $ 554 Income from operations ........................ 29 45 77 196 259 Brindley & Brindley (Outer Banks, NC) Revenues ...................................... $2,443 $ 2,950 $ 4,021 $ 269 $ 257 Income (loss) from operations ................. (123) 131 511 (271) (544) Coastal Resorts (Bethany Beach, DE) Revenues ...................................... $1,902 $ 2,097 $ 3,615 $ 424 $ 577 Income (loss) from operations ................. 450 603 1,183 (16) (16) The Maury People (Nantucket, MA) Revenues ...................................... $ 926 $ 988 $ 1,183 $ 370 $ 338 Income from operations ........................ 362 135 290 213 77 Priscilla Murphy Realty (Sanibel and Captiva Is- lands, FL) Revenues ...................................... $4,316 $ 4,721 $ 4,740 $1,959 $ 2,275 Income from operations ........................ 740 1,282 1,690 1,191 1,322 Trupp-Hodnett Enterprises (St. Simons Island, GA) Revenues ...................................... $3,202 $ 3,431 $ 4,061 $ 767 $ 1,254 Income from operations ........................ 45 126 199 25 85 MOUNTAIN RESORTS Collection of Fine Properties (Breckenridge, CO) Revenues ...................................... $3,500 $ 4,141 $ 4,303 $2,714 $ 2,689 Income (loss) from operations ................. (44) 416 580 1,455 1,535 Houston and O'Leary (Aspen, CO) Revenues ...................................... $ 837 $ 829 $ 1,596 $ 484 $ 421 Income (loss) from operations ................. 40 (24) 780 306 94 Resort Property Management (Park City, UT)(1) Revenues ...................................... $1,355 $ 1,630 $ 2,295 $1,606 $ 1,468 Income (loss) from operations ................. (3) 20 108 760 807 Telluride Resort Accommodations (Telluride, CO) Revenues ...................................... $4,404 $ 4,858 $ 4,313 $2,135 $ 2,342 Income from operations ........................ 365 369 246 911 915 Whistler Chalets (Whistler, British Columbia) Revenues ...................................... $1,948 $ 2,247 $ 2,060 $1,191 $ 1,135 Income (loss) from operations ................. 66 (223) 99 567 501 SOFTWARE SALES AND SERVICES First Resort (Aspen, CO) Revenues ...................................... $2,207 $ 2,462 $ 2,864 $ 578 $ 828 Income from operations ........................ 377 467 743 108 254 </TABLE> COMPENSATION DIFFERENTIAL <TABLE> <CAPTION> THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ----------------------------------- ---------------- 1995 1996 1997 1997 1998 --------- ---------- ---------- ------ ------- <S> <C> <C> <C> <C> <C> Aston Hotels & Resorts .................. $ 380 $ 282 $ 282 $ 73 $ 70 Maui Condominium and Home ............... 240 245 284 71 26 Brindley & Brindley ..................... 39 37 69 -- -- Coastal Resorts ......................... -- -- -- -- -- The Maury People ........................ 30 129 142 19 -- Priscilla Murphy Realty ................. 250 320 31 8 29 Trupp-Hodnett Enterprises ............... 954 865 1,143 74 463 Collection of Fine Properties ........... 64 74 94 30 21 Houston and O'Leary ..................... 160 178 58 15 29 Resort Property Management(1) ........... 46 149 186 -- -- Telluride Resort Accommodations ......... 30 -- -- -- -- Whistler Chalets ........................ 33 34 35 9 52 First Resort ............................ 76 (53) (42) -- -- ------ ------ ------ ---- ---- $2,302 $2,260 $2,282 $299 $690 ====== ====== ====== ==== ==== </TABLE> - ----------- (1) Fiscal years presented are for the periods ending September 30, 1995, 1996 and 1997 and the three months ended March 31, 1997 and 1998.
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, INCLUDED ELSEWHERE AND INCORPORATED BY REFERENCE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT (I) THE FORMATION TRANSACTIONS ARE CONSUMMATED, (II) THE INITIAL PUBLIC OFFERING PRICE IS $15 PER SHARE (THE MID-POINT OF THE ANTICIPATED RANGE OF THE INITIAL PUBLIC OFFERING PRICES SET FORTH ON THE COVER PAGE OF THIS PROSPECTUS), AND (III) THE UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED. UNLESS THE CONTEXT OTHERWISE REQUIRES, AS USED HEREIN THE TERM "COMPANY" INCLUDES (A) CAPITAL LEASE FUNDING, INC., A MARYLAND CORPORATION ("CLF, INC."), AND ANY SUBSIDIARIES WHICH IT MAY HAVE, FROM TIME TO TIME, AND (B) CAPITAL LEASE FUNDING, L.P., A DELAWARE LIMITED PARTNERSHIP ("CLF"), THE PREDECESSOR ENTITY TO CLF, INC. SEE "GLOSSARY" BEGINNING ON PAGE 101 FOR THE DEFINITIONS OF CERTAIN TERMS USED IN THIS PROSPECTUS. THE COMPANY GENERAL The Company was formed on March 6, 1998, to continue the growth of CLF as a specialty lender. Since 1995, CLF has been primarily engaged in the business of originating, underwriting, pooling and financing mortgage loans secured by first liens on commercial properties which are long-term net leased to tenants ("Credit Tenants") whose unsecured credit rating is equal to or greater than BB- or its equivalent (such leases, "Credit Tenant Leases," and loans to owners of real property subject to Credit Tenant Leases, "Credit Tenant Loans"). The Company's financing strategy is to accumulate Credit Tenant Loans and periodically to pool and finance them with the intention of matching the duration of its assets with the duration of its long-term liabilities. Based upon management's knowledge and experience, the Company believes that its national network of loan origination correspondent brokers (see "--Loan Origination Capability and Correspondent Network"), underwriting and loan processing systems, securitization experience and loan product innovations have established the Company's name in the Credit Tenant Loan market place and that continued innovation will permit the Company to expand into other related investment activities. Since 1995, the Company has closed over 120 Credit Tenant Loans with an aggregate original principal amount exceeding $480 million. The Company expects to continue to fund all of its loans through warehouse and other lines of credit which, upon closing of this Offering, the Company expects will aggregate approximately $930 million (subject to reduction to $730 million at September 1, 1998), and will be provided by NationsBank, N.A. ("NationsBank"), and Prudential Securities Credit Corporation ("Prudential Credit"). In 1997, CLF completed the first ever CTL Pool Financing involving a variety of Credit Tenants and multiple enhanced net leased properties. This transaction was accomplished through a private placement of approximately $130 million of various classes of securities backed by a pool of 30 Credit Tenant Loans with 13 Credit Tenants. The Company's revenues are principally derived from the spread between interest revenues from its loans and the cost it incurs on its borrowings. The Company's business strategy is to grow its revenues both through increasing loan origination volumes and increasing the net interest spread on its loans and other investments. This increased spread may occur from the origination of higher margin products and/or from decreasing the Company's cost of funding. The Company's strategy is to pool and finance its Credit Tenant Loans in order to lower its costs of funds, which it expects to accomplish primarily through issuing collateralized obligations backed by pools of Credit Tenants Loans. The Company, however, from time to time on an opportunistic basis, may sell equity interests in such pools or sell whole loans. The Company has sustained negative net income from operating and investing activities in each year since its inception in 1995. The negative net income was principally the result of factors such as the Company's historic cost of borrowing and degree of leverage, expenses incurred in establishing a national origination network, and investments in product development, marketing and loan processing systems, a <TABLE> <CAPTION> PAGE --------- <S> <C> Business Strategy...................................................................................... 49 Existing Loans and Pipeline for Future Originations.................................................... 51 Management............................................................................................. 52 Loan Origination Capability and Correspondent Network.................................................. 53 Credit Facilities...................................................................................... 54 Loan Process........................................................................................... 55 Hedging Strategy....................................................................................... 55 Securitization......................................................................................... 55 Company Policies....................................................................................... 58 Industry Overview...................................................................................... 61 Employees.............................................................................................. 61 Competition............................................................................................ 61 Certain Key Relationships.............................................................................. 62 Facilities............................................................................................. 62 Legal Proceedings...................................................................................... 62 FORMATION TRANSACTIONS..................................................................................... 63 YIELD CONSIDERATIONS RELATED TO THE COMPANY'S INVESTMENTS.................................................. 66 Credit Tenant Loans Held in Inventory.................................................................. 66 Other Mortgage Loans................................................................................... 67 Commercial Mortgage-Backed Securities.................................................................. 68 DESCRIPTION OF EXISTING REAL ESTATE INTERESTS.............................................................. 69 Credit Tenant and Other Mortgage Loans................................................................. 69 Initial Investments; Existing Loans, Commitments and Properties........................................ 70 TARGETED INVESTMENTS....................................................................................... 74 Net Leased Real Estate................................................................................. 74 Commercial Mortgage-Backed Securities.................................................................. 75 Other Investments...................................................................................... 75 Investment in Other Entities........................................................................... 76 Foreign Investments.................................................................................... 76 DIRECTORS AND EXECUTIVE OFFICERS........................................................................... 77 Indemnification of Officers and Directors.............................................................. 80 Committees of the Board................................................................................ 80 Compensation of Directors.............................................................................. 80 Employment Agreements.................................................................................. 80 Executive Compensation................................................................................. 81 Stock Options.......................................................................................... 81 Management Shareholders' Agreement..................................................................... 81 Expenses............................................................................................... 82 Limitation of Liability and Indemnification............................................................ 82 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................................. 84 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................................. 85 FEDERAL INCOME TAX CONSEQUENCES............................................................................ 86 Distributions.......................................................................................... 86 Dividends to Corporate Shareholders.................................................................... 86 Taxation of Stockholders on the Disposition or Redemption of the Common Stock.......................... 87 Capital Gains and Losses............................................................................... 87 Information Reporting Requirements and Backup Withholding.............................................. 87 Taxation of Non-U.S. Stockholders...................................................................... 88 Taxation of the Company................................................................................ 89 State and Local Taxes.................................................................................. 90 ERISA CONSIDERATIONS....................................................................................... 91 DESCRIPTION OF CAPITAL STOCK............................................................................... 91 General................................................................................................ 91 Registration Rights Agreement.......................................................................... 92 CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S CHARTER AND BYLAWS................................. 92 Number of Directors; Classification of the Board of Directors.......................................... 93 </TABLE> lack of historic loan origination volume, and the completion of only a single CTL Pool Financing which was of limited size and diversity, during the past three years. The Company's negative net income for the period from September 29, 1995 through December 31, 1995, and for the years ended December 31, 1996 and 1997 was approximately ($1.7 million), ($3.7 million) and ($3.4 million), respectively. On a pro forma basis (after giving effect to the adjustments referred to below under "--Summary Selected Historical and Pro Forma Financial Information"), the Company's net income for the year ended December 31, 1997 would have been approximately $1.0 million. The Company's Net Cash Used in Operating Activities for the period from September 29, 1995 through December 31, 1995, and for the years ended December 31, 1996 and 1997 was approximately ($4.4 million), ($13.6 million) and ($2.7 million), respectively. There is no assurance that the Company will be profitable in the future, and it should be noted that the Company's experience in CTL Pool Financing transactions is limited to the one CTL Pool Financing accomplished in January 1997, and the Company's future business plans call for it to expand into related lines of business in which it has no or limited experience. For certain of these new businesses, the Company will require financing, the availability of which will be dependent upon numerous factors, including, possibly, the Company's ability to attain positive cash flow or net income and certain minimum net worth requirements. CTL Pool Financings involve the formation and utilization of a special single-purpose entity into which is placed a pool of multiple borrower Credit Tenant Loans involving multiple Credit Tenants. The Credit Tenant Loans in CTL financing pools are either "bond" leases or enhanced to "bond" lease status so that these loans are rated on the quality of the Credit Tenant rather than on the value of the underlying real property. The ratings received for any pool will be dependent, in part, on the size of the pool and the diversity of the Credit Tenant Loans. A CTL Pool Financing as structured in the past by CLF, differs from other mortgage pool financings because of the reliance of a Credit Tenant Loan on the credit rating of the underlying Credit Tenant and the expected cash flow therefrom. This reliance upon the expected cash flow from the applicable Credit Tenant, rather than the underlying value of the real property, allows the Company to underwrite higher loan to value loans with prepayment protection provisions that increase the proceeds available to the borrower. As of May 15, 1998, CLF held 93 Credit Tenant Loans with an aggregate original principal balance exceeding $350 million (the "Existing Loans"). In addition, as of May 15, 1998, CLF has issued 88 commitments to fund further Credit Tenant Loans with an aggregate committed principal balance of approximately $402 million (the "Committed Loans"). Furthermore, as of May 15, 1998, the Company has purchased or committed to purchase real property net leased to tenants with an aggregate purchase price of approximately $12 million (the "Purchase Commitments"). In connection with the Formation Transactions, the Company will acquire all of the existing business of CLF, including the Existing Loans, the Committed Loans and the Purchase Commitments, as well as its pipeline of outstanding loan applications and term sheets (which, as of May 15, 1998, totaled approximately $623 million), and the business which may be generated therefrom. See "--Existing Loans and Pipeline for Future Originations." The Company intends to engage in a transaction to pool and finance all or a portion of the Existing Loans and certain of the Committed Loans following completion of the Offering and expects to pool and finance the remaining Committed Loans in future transactions. The Company's objective is to maximize stockholder value by creating an on-going and increasing cash flow stream through originating, pooling and financing Credit Tenant Loans and by investing in related real estate assets. Upon completion of the Offering, the Company intends to continue to expand its Credit Tenant Loan business and to expand into related lines of business. These related lines of business include Mezzanine Construction Lending, the purchase of real estate net leased to Credit Tenants (generally in conjunction with a Credit Tenant Loan), investment in the Subordinate Interests in securitized pools of the Company's Credit Tenant Loans, and selective investments in Subordinate Interests in other CMBS (particularly those which include, as a component thereof, Credit Tenant Loans). The Company expects to begin offering Mezzanine Construction Loans and retaining or purchasing Subordinate Interests following the Offering, but has not originated, retained or purchased any of such <TABLE> <CAPTION> PAGE --------- <S> <C> Removal; Filling Vacancies............................................................................. 93 Business Combinations.................................................................................. 93 Control Share Acquisition Statute...................................................................... 94 Shareholder Rights Plan................................................................................ 95 Amendment to the Charter............................................................................... 95 Dissolution of the Company............................................................................. 95 Advance Notice of Director Nominations and New Business................................................ 95 Meetings of Shareholders............................................................................... 95 Anti-Takeover Effect of Certain Provisions of Maryland Law and of the Charter and Bylaws........................................................................................... 95 Transfer Agent and Registrar........................................................................... 95 Reports to Shareholders................................................................................ 96 Amendment to the Bylaws................................................................................ 96 SHARES ELIGIBLE FOR FUTURE SALE............................................................................ 97 UNDERWRITING............................................................................................... 98 LEGAL MATTERS.............................................................................................. 99 EXPERTS.................................................................................................... 100 ADDITIONAL INFORMATION..................................................................................... 100 GLOSSARY................................................................................................... 101 FINANCIAL STATEMENTS AND INFORMATION....................................................................... F-1 </TABLE> assets to date. As of June 25, 1998, the Company has acquired three parcels of real property net leased to Credit Tenants for an aggregate purchase price of approximately $10.1 million. The Company's principal executive offices are located at 85 John Street, 12th Floor, New York, New York 10038, telephone number (212) 587-7676. The Company is a Maryland corporation. CREDIT TENANT LOAN BUSINESS The financing of Credit Tenant Loans through securitizations of pools of diversified credits in the capital markets is a new financing technique and was pioneered by the Company. Credit Tenant Loans are mortgage loans made by the Company to owners of commercial properties net leased to Credit Tenants under Credit Tenant Leases. Each Credit Tenant Loan is secured by a first mortgage on a commercial real property subject to a long-term net lease to a Credit Tenant, and by a collateral assignment of the Credit Tenant Lease and all rents due under the lease. As more fully described below, under a Credit Tenant Loan, the principal credit underlying the transaction is not that of the borrower nor is it the liquidation value of the applicable real estate, rather the principal credit is the credit of the applicable tenant. The Company primarily focuses on making loans on properties net leased to Credit Tenants. This focus differentiates the Company from conventional real estate lenders. The typical Credit Tenant Loan made by the Company (other than the Company's Extended-Term Loans) is fully amortized by scheduled rent payments under the Credit Tenant Lease (or payments under insurance policies and other mechanisms designed to protect against defaults in certain events where sufficient rent might not otherwise be payable or to replace other required payments under the applicable loan). Furthermore, under the Company's Credit Tenant Loans, prepayments are available only after a period of time (generally eight years) and then only with a yield maintenance premium or a suitable defeasance mechanism. As a result, the Credit Tenant Loans originated by the Company are analyzed principally on the basis of the credit of the applicable Credit Tenant and whether the stream of rental payments under the applicable Credit Tenant Lease and such insurance policies and other mechanisms (rather than liquidation value of the property) will be sufficient to pay all amounts due under the loan. Consequently, the Company's Credit Tenant Loans tend to have debt service coverage ratios lower than conventional mortgage loans (approaching a ratio of scheduled rent payments to debt service under the loan of 1.0) and higher loan-to-value ratios (95-100%). The credit underwriting analysis for conventional real estate lending relies heavily on the liquidation value of collateral securing the loan and therefore loan proceeds are generally limited to amounts significantly lower than the appraised value of the applicable real property. Even where the mortgaged property is net leased to a Credit Tenant, the underwriting of such loans has nevertheless typically been done largely on the basis of an assessment of the liquidation value of the mortgaged property (taking into account the anticipated cash flows from the lease as appropriate) so long as (i) the lease payments are insufficient to pay interest on and fully amortize the loan (if, for example, a portion of the loan balance remains outstanding at the end of the lease term) or (ii) the tenant has significant rights to terminate the lease or abate rent. Consequently, the original principal balance of such loans is limited by a requirement to maintain a property liquidation value significantly in excess of the loan balance. Historically, Credit Tenant Loans of the type made by the Company were only available when the applicable Credit Tenant Lease was a "bond" lease. In a "bond" lease the Credit Tenant is responsible for every monetary obligation associated with managing, owning, developing and operating the leased premises including, but not limited to the costs associated with utilities, taxes, insurance, maintenance, repairs and losses due to casualty and condemnation. As a result, the Credit Tenant's ability to terminate a lease or abate rent on a "bond" lease (other than as a result of bankruptcy) is non-existent or available under extremely limited circumstances. Consequently, loans secured by a "bond" lease are analyzed as if they were a direct obligation of the applicable tenant and, in a pool financing, can be expected to receive credit ratings equivalent to the unsecured debt rating of the applicable Credit Tenants. A net lease (often referred to as a double- or triple-net lease) generally is a lease on a long-term basis (ten years or more) to tenants who are responsible for paying all or many of the costs of owning, operating, and maintaining the leased property during the term of the lease, in addition to the payment of a monthly net rent to the landlord for the use and occupancy of the premises. Under many net leases, in contrast to a "bond" lease, a tenant has the right to terminate the applicable lease or abate rent in certain circumstances, such as the occurrence of significant casualty loss or condemnation, or failure by the landlord to maintain or repair the property, provide adequate parking, maintain common areas or comply with affirmative covenants of the lease, or if the landlord engages in or promotes a competing property within a specified radius of the property or otherwise violates negative covenants in the lease. Properties subject to net leases which do not qualify as "bond" leases have been traditionally financed as conventional real estate loans. The use of the Company's specialized Lease Enhancement mechanisms substantially mitigates the risk of a potential interruption in the rental stream so that such Credit Tenant Leases can be evaluated as if they were "bond" leases. Upon securitization, a properly structured Credit Tenant Loan and Credit Tenant Lease with the appropriate Lease Enhancements can be expected to receive a rating from one or more of the Rating Agencies equivalent to the unsecured debt rating of the applicable Credit Tenant. The expected receipt of such a rating increases the amount which may be borrowed against the collateral of the Credit Tenant Loan and Lease (as compared to a conventional real estate loan), enabling the Company to compete successfully for loan originations, while preserving the profits expected to be available to the Company in the pooling and financing of Credit Tenant Loans. The Company's Lease Enhancement mechanisms consist primarily of an integrated set of specialized insurance policies, servicer advancing mechanisms, loan documents, and various borrower and expense reserve accounts. The specialized insurance policies are non-cancellable during the term of the Credit Tenant Loan and have been designed to protect the holder of the mortgage from (i) under all of the Company's Credit Tenant Loans, rent abatement or lease termination under the associated Credit Tenant Lease as a result of a casualty or condemnation event, (ii) under the Company's Extended-Term Loans, failure of the borrower to pay the balance of the mortgage outstanding, if any, at the expiration of the initial term of the Credit Tenant Lease, or (iii) under the Company's CPI Loans, increases in rent. The servicer advancing mechanisms and reserve funds (combined with specialized borrower recourse provisions where appropriate) have been established to support the landlord's maintenance and other obligations under a Credit Lease in order to mitigate the risk of rent abatement or lease termination by the Credit Tenant due to the failure of a landlord to perform his obligations. The Company pioneered the development of many of these Lease Enhancement mechanisms. In addition, the Company continues to design creative and new financing programs which enable the Company to offer borrowers a wide array of Credit Tenant Loan programs to best meet their needs. Based upon management's knowledge and experience in the industry, the Company believes that by offering these financing programs in addition to increasing the number of currently available programs, it will continue to be a leader in the Credit Tenant Loan business and increase its market penetration. The Company expects that proceeds from the Offering will enable the Company to continue to develop and aggressively to promote these programs. CONSTRUCTION/PERMANENT LOANS. The Company has developed a "Construction/Permanent" program under which a developer/borrower may obtain both a construction loan from a commercial bank and a permanent loan from the Company with one set of documents in one integrated closing process. The loans made by the Company under the "Construction/Permanent" program are referred to as "Construction/ Permanent Loans." The Construction/Permanent program has been marketed with NationsBank under the name "1TC" for "One Time Close." This program enables a borrower (provided that a pre-construction Credit Tenant Lease is in place) to enter into a commitment and final documentation for permanent financing at an early stage without additional transaction costs, and also allows the borrower to "lock in" an interest rate for the permanent loan at the time the construction loan is made. The 1TC program (introduced in August 1997) enables the Company to build and manage its loan pipeline by arranging for permanent financing earlier in the borrowing cycle. As of May 15, 1998, the Company had committed to fund approximately $168 million in the aggregate of Construction/Permanent Loans, including approximately $64 million for which NationsBank has commenced advances under the construction loan portion under the 1TC portion. In addition, in March 1998, the first 1TC loan completed the construction phase and the permanent loan was funded by the Company. The Company is developing similar programs with KeyBank, N.A. and other selected banks that make construction loans on net leased properties. EXTENDED-TERM LOANS. Although Credit Tenant Loans depend on Credit Tenant Lease payments and generally are fully amortized over the initial term of the Credit Tenant Lease, the Company's "Extended-Term Loan" program (introduced in May 1997) allows a borrower to extend the amortization period of the Credit Tenant Loan beyond the initial term of the associated Credit Tenant Lease. As a result of extending the amortization period, loan proceeds can be increased or periodic debt service can be reduced (making more cash flow available to the borrower), enhancing certain tax benefits that may be made available to borrowers. As of May 15, 1998, the Company had funded approximately $54 million in additional aggregate principal amount of Extended-Term Loans and has committed to fund approximately $98 million in aggregate principal of Extended-Term Loans. This program has been marketed under the name the "Extended Amortization Program." CONSUMER PRICE INDEXED LOANS. The Company is a discounted cash flow lender and its Credit Tenant Loans typically depend upon repayment from the fixed rental stream under the Credit Tenant Lease. The Company's consumer price index ("CPI") program (loans made thereunder, "CPI Loans") (introduced in March 1998) makes available additional loan proceeds based upon a portion of expected Credit Tenant Lease rental increases as a result of contractual CPI adjustments (typically up to two percent per annum) as if they were fixed and determinable at the time of execution of the Credit Tenant Lease. As of May 15, 1998, the Company has committed to fund one CPI Loan with an estimated principal balance of approximately $22 million. RELATED BUSINESSES As part of the Company's growth plans, the Company intends to expand into lines of business which are related to, but do not consist solely of, Credit Tenant Loans. These additional activities are an outgrowth of the Credit Tenant Loan business, and their development uses many of the same product innovations and personnel skills that have permitted the Company to develop and grow its Credit Tenant Loan business. The related lines of business to which the Company has devoted management attention and development efforts to date are: MEZZANINE CONSTRUCTION LOANS. Under the Company's "Mezzanine Construction" Loan program, the Company will lend to a developer (provided that an executed Credit Tenant Lease is in place) up to the difference between a developer's project costs and the proceeds (generally 75% to 90% of the project costs) of the available construction loan. The Company will only make Mezzanine Construction Loans to developers who will qualify for a permanent Credit Tenant Loan with the Company (based on the level of rent payments under the Credit Tenant Lease). Such loan will be in an amount significantly in excess of the amounts required to pay the senior construction loan and Mezzanine Construction Loan and return the borrower's invested capital, consequently reducing the risk that the developer will default on the Construction Loan. The Company expects these transactions to generate yields superior to conventional bank construction loan yields. Furthermore, one of the design features of this product is to enable the Company to develop relationships with borrowers earlier in the construction and borrowing cycle. The Company has a dedicated credit facility with one of its lenders for making Mezzanine Construction Loans. These loans will be secured by second mortgages and/or pledges of ownership interests in the borrower. In addition, based upon an analysis of the creditworthiness of the borrower, these loans will be full recourse to a creditworthy borrower or personally guaranteed by the principals of the borrower during the construction period. EQUITY INVESTMENTS IN NET LEASED PROPERTIES. In connection with its Credit Tenant Loan business, the Company frequently is presented with opportunities to purchase net leased properties from developers, and other owners or tenants of net leased properties. From time to time, the Company intends to purchase net leased properties, make its usual Credit Tenant Loan upon such properties (to be pooled and financed later) and retain ownership of the properties. Because net leased properties are generally required to be maintained by tenants, the Company does not expect to incur significant management costs with respect to such properties. COMMERCIAL MORTGAGE-BACKED SECURITIES. In its Credit Tenant Loan business, the Company will issue collateralized obligations backed by pools of Credit Tenant Loans. The Company anticipates that it will retain the Subordinate Interests of such pools depending upon the then current market condition and its business needs. Based upon management's knowledge and experience in the industry, the Company believes that it is in a unique position to analyze whether the Subordinate Interests of its CTL pools provide an attractive investment on an adjusted risk/return basis because the Company originates and underwrites each Credit Tenant Loan and is familiar with the applicable Lease Enhancements. Having developed the specialized skills to analyze the risks associated with investing in the Subordinate Interests in its own CTL pools, management believes, based upon its knowledge and experience in the industry, that the Company is well-positioned to analyze and invest in interests in CMBS issued by unrelated third parties (particularly those which include, as a component thereof, Credit Tenant Loans). The Company intends to invest primarily in (i) Subordinate Interests in CMBS pools originated by the Company and others, including Investment Grade, Non-Investment Grade and, in the case of those originated by the Company, unrated interests, and (ii) interest-only classes in some of such CMBS pools. Subordinate Interests and interest-only classes generally afford a higher yield and entail greater risk than more senior investment grade securities. OTHER INVESTMENTS. The Company intends to engage in other related businesses from time to time, which management believes are complementary to its Credit Tenant Loan business. These investments may include making equity investments in, and/or Credit Tenant Loans on, real properties net leased to Credit Tenants in selected international markets. The Company may also invest in interests in REITs, registered investment companies, partnerships and other investment funds and real estate operating companies involved in the ownership of real estate interests or the rendering of real estate-related services. BUSINESS STRATEGY The Company's principal business objective is to continue to focus on and expand its lending business while at the same time selectively expanding into related, value-added lines of business in a manner that generates attractive investment returns on a risk adjusted basis. The Company has a specialized and experienced staff (a number of whom have been previously employed by the real estate departments of major financial institutions and law firms) which is focused principally on structuring, underwriting and making Credit Tenant Loans which meet Rating Agency criteria for such loans and on making the transactional and credit judgments required to make Credit Tenant Loans. The Company has continuously engineered its loan underwriting and closing process with the intention of eliminating redundant procedures and speedily approving loans to prospective borrowers. The Company believes, based upon management's knowledge and experience in the industry, that its current process is one of the most streamlined and comprehensive in the Credit Tenant Loan industry. Management believes that the real estate industry has been undergoing a significant restructuring which has, to some degree, been led by the increased prominence of publicly held real estate companies (such as REITs) and the increasing importance of capital markets in real estate financing. The Company believes that this industry restructuring offers the Company significant opportunities to expand its existing business, offer new products and expand into related businesses. The Company plans to build on its streamlined underwriting and processing organization, national correspondent origination network, expertise in Credit Tenant Leases and Credit Tenant Loans, product innovations and increased capital as a result of the Offering to achieve its growth and profit objectives, through the following: - EXPANDING EXISTING BUSINESS. The Company intends to continue to build on its growing market presence and increasing borrower base to expand origination volume in existing business lines. - INTRODUCING VALUE-ADDED, INNOVATIVE PRODUCTS. Over the past twelve months the Company has introduced a number of value-added products that it expects will enhance its returns. These products include Construction/Permanent Loans, Extended-Term Loans, CPI Loans and Mezzanine Construction Loans. The Company continuously works to develop new financing products and investment opportunities and expects to commit to invest in such products or investments from time to time. The Company believes that its strategy of continuing product innovation will permit it to differentiate itself and anticipate opportunities to provide greater services and to remain efficient and competitive in its areas of focus and expertise. As part of its product development strategy, the Company designs these products to develop relationships with borrowers and Credit Tenants earlier in the construction and borrowing cycle as a means of expanding and better controlling loan origination. - EXPANDING THE COMPANY'S MARKET REACH. In the past, the Company's strategy has been to finance properties net leased to Investment Grade tenants. Based upon management's experience in the industry, the Company believes that it can utilize its existing credit tenant financing programs to make, pool and finance Credit Tenant Loans on favorable terms on properties net leased to BB Grade tenants. Management believes that the market for financing properties net leased to tenants with BB Grade ratings represents a large and attractive business opportunity. In addition, the Company plans to continue to build on its relationships with Credit Tenants to develop innovative financing alternatives directly with Credit Tenants. - ACQUIRING SELECTED PROPERTY LEASED TO A CREDIT TENANT. From time to time, the Company is presented with the opportunity to purchase real property net leased to a Credit Tenant. The Company intends to purchase selected properties and generally will simultaneously finance such properties with Credit Tenant Loans. The Company would then seek to pool and finance the Credit Tenant Loans, while retaining the ownership of the properties. Although the Company presently outsources servicing, the Company may explore acting as a primary servicer, subservicer or special servicer. In addition, the Company believes that many of the technologies that have supported the growth of the capital markets in U.S. commercial real estate are readily exportable to offshore markets. As these offshore markets continue to develop, the Company believes that U.S. firms will play an important role (primarily in the early stages of development of such markets). Based upon its knowledge and experience in the industry, management believes that the Company will be well positioned to expand into selected international markets as a result of its position as a market innovator and its expertise in Credit Tenant Loans. For example, the Company has established a relationship with a leading United Kingdom real estate law firm and real estate services companies who could act as advisors and have the ability to direct the Company to sources of origination. The Company may explore such opportunities as they arise. Based upon management's knowledge and experience in the industry, the Company believes that its standardized procedures and integrated systems enable the Company and its employees efficiently to manage a large and increasing volume of transactions while maintaining underwriting quality and high levels of service to borrowers. In addition, by coordinating the Company's automated loan tracking and document production systems with those of its outside legal counsel, the Company has been able to improve efficiency and reduce the legal costs associated with closing loans. As its loan volume grows, the Company expects to continue to improve cost efficiency by modestly expanding its internal loan closing support staff and relying less on outside service providers. The Company also plans to continue to refine and upgrade its systems and loan processing infrastructure to reduce costs and improve efficiency and to support its growth strategy by selectively adding employees and expanding its marketing and sales effort. In 1997, the Company completed the first securitization of a pool of Credit Tenant Loans with a variety of Credit Tenants and multiple properties backed by enhanced leases with the sale of approximately $130 million of mortgage-backed pass-through certificates. This securitization was rated by Duff & Phelps Credit Rating Co. ("DCR") and Fitch IBCA, Inc. ("Fitch"). The effectiveness of the Company's underwriting practices is reflected in the fact that of approximately $345 million of Company-underwritten Credit Tenant Loans reviewed to date (including those included in the Company's securitization and certain Credit Tenant Loans since made by the Company) by DCR, Fitch or S&P, none were rejected as not meeting Rating Agency requirements for Credit Tenant Loans. Furthermore, at May 15, 1998, of the 93 outstanding loans owned by the Company, none were delinquent more than 30 days or are otherwise nonperforming. Exposure to changes in underlying interest rates can have a great effect on the value and profitability of the Company's Credit Tenant Loans, prior to pooling and financing. The Company has accordingly employed a hedging strategy designed to mitigate the effect that movements in market rates have on its Credit Tenant Loans prior to pooling and financing. See "The Company--Hedging Strategy." EXISTING LOANS AND PIPELINE FOR FUTURE ORIGINATIONS In the Formation Transactions, the Company will acquire CLF's portfolio of Existing Loans having an aggregate outstanding principal balance at May 15, 1998, of approximately $342 million. In addition, the Company will assume commitments made by CLF to fund approximately $402 million of Credit Tenant Loans (subject to completion of the Company's underwriting process). These commitments generally are expected to fund within the next twelve months. Based on management's review of the publicly available ratings for its Credit Tenants and Internal Classifications of the limited number of tenants which do not have publicly available credit ratings, management believes that the Credit Tenants underlying approximately 92% in aggregate principal amount of the Existing Loans are rated Investment Grade (with the remaining 8% being rated BB Grade) and the Credit Tenants underlying approximately 98% of the expected aggregate principal amount of the Committed Loans are rated Investment Grade. The Company expects to pool and finance all or part of these loans in 1998. The Company's current loan pool is larger and more diversified than the pool for the Company's previous securitization. Consequently, the post-Offering CTL Pool Financing (based upon a preliminary review by the Rating Agencies of a large portion of this loan pool) is expected by management to result in a significantly higher percentage of the loan pool being rated AAA than were obtained in the first CTL Pool Financing. In each case, the amount of the loans and commitments listed above are as of May 15, 1998, and are expected to increase between such date and the closing of the Offering. In addition, as of June 25, 1998, the Company will assume from CLF three parcels of real property net leased to Credit Tenants for an aggregate purchase price of approximately $10.1 million. The Company's pipeline includes potential loans in various stages of development. The Company receives requests for Credit Tenant Lease financing on a daily basis. At any given time, the Company may have hundreds of potential transactions in different stages in the Company's loan qualification, pricing and due diligence process. Once a lease has been reviewed by the Company and is determined to be financeable under the Company's Credit Tenant Loan program, the Company will, at a borrower's request, issue a term sheet (a "Term Sheet") which briefly outlines the pricing and terms under which the Company proposes to finance the property (such potential loan, after delivery of the Term Sheet, being at the "Term Sheet Stage"). Upon acceptance of the Term Sheet by a borrower, the Company issues a form of application which sets forth the detailed terms of the transaction (the potential loan then being at the "Application Stage"). Once a borrower signs an application and delivers it to the Company with a deposit and the application is accepted, subject to the underwriting process by the Company's loan committee, the Company considers such loans to be Committed Loans, and the formal due diligence process begins. The Company generally closes a Committed Loan in four to eight weeks. At any time from the date of acceptance of the application until closing, the borrower may lock in the interest rate on the loan by payment of an additional fee. While an application may be declined by the Company upon completion of the Company's underwriting process, or the prospective borrower may forfeit its deposit and withdraw the application prior to closing, management believes, based on the Company's historical operating experience, that the substantial majority of these Committed Loans result in closed loans. Furthermore, it has been the Company's experience, that once the Company has committed to make a Credit Tenant Loan and has locked in an interest rate (receiving a rate-lock fee), closing of that loan is relatively assured ("Rate-Locked Loans"). Management believes, based on the Company's operating experience, that a significant portion of loans in the Application Stage and a lesser percentage of loans in the Term Sheet Stage, respectively, will move into the category of Committed Loans. Since the Company receives requests for loan financing daily, the Company's loan pipeline frequently changes as new transactions are added and others are removed. Since commencing operations in 1995, the volume of closed and Rate-Locked Loans increased from $22.7 million in calendar year 1995 to $145.7 million in calendar year 1996 to $351.1 million in calendar year 1997. In the first quarter (historically the slowest quarter of the year) of 1998, the Company generated closed and Rate-Locked Loans totaling approximately $115 million, as compared with $49 million during the same period in 1997. Management believes that loan originations will continue to grow throughout 1998 as a result of the following factors: - As of May 15, 1998, the Company's total pipeline of 265 loans either under various stages of negotiation or under due diligence totaled approximately $1.3 billion, the largest such loan having a principal amount of $36 million. Of this pipeline, the Company had 88 Committed Loans (potential loans as to which the Company had accepted signed loan applications and commenced due diligence) with respect to approximately $402 million in Credit Tenant Loans. In addition, at such date the Company had potential loans in the Application Stage and Term Sheet Stage in the amount of $239 million, and $383 million, respectively. - Based upon its experience and responses from customers, the Company believes that its Extended-Term Loans and the Construction/Permanent Loan programs, which were introduced between May and July of 1997, are gaining greater market awareness and acceptance, resulting in increased year- over-year loan origination. Furthermore, the Company expects to increase its volume of these loans through the year. As of May 15, 1998, the Company had funded approximately $54 million in Extended-Term Loans and had committed to make an additional $98 million of Extended-Term Loans. Furthermore, as of May 15, 1998, the Company had committed to fund approximately $168 million in aggregate principal amount of Construction/Permanent Loans. - New financing and property acquisition programs introduced in the first quarter of 1998 are expected to generate additional loans throughout 1998. These programs include expanding the Company's loan programs to include BB Grade tenants (which management believes, based upon its industry experience, is a large potential market for its programs), Mezzanine Construction Loans and Consumer Price Index financing. In addition, the Company anticipates acquiring properties net leased to Credit Tenants on which it expects to place its Credit Tenant Loans. Management believes, based on the foregoing factors, the volume of Credit Tenant Loans closed since January 1, 1998 and management's current expectation of additional loans it expects to originate and close through the remainder of 1998 (based on a review of the daily flow of leases received by the Company, outstanding Term Sheets and applications, discussions with correspondents about market conditions and future potential transactions, expected completion of construction projects in which the Company is providing a permanent loan takeout, and other factors), that, if current market conditions continue and if historical percentages of potential loans in the Term Sheet Stage, Application Stage, Committed Loans and Rate-Locked converting to closed loans continue, the Company's loan originations will continue to grow during calendar year 1998. There can be no assurance, however, that the Company's growth will continue. LOAN ORIGINATION CAPABILITY AND CORRESPONDENT NETWORK The principal source of origination for the Company's business is its national network of independent correspondent mortgage brokers. The Company has established relationships with over 500 individual mortgage brokers at over 60 correspondent mortgage brokerage companies. These correspondents operate offices in more than 100 locations throughout the United States and maintain close working relationships with the borrowers they represent. The Company has entered into a written or oral arrangement with each of its correspondent brokers, who are generally compensated by the applicable borrower. In general, pursuant to the Company's arrangements with its correspondents, the Company has agreed to originate loans primarily through those brokers which have entered into a correspondent relationship with the Company. The Company agrees to provide these correspondent brokers with training and information regarding the Company's products. These correspondent brokers are not required to originate loans exclusively through the Company, although the Company closely tracks the volume of loans generated by each of its correspondents and does replace correspondent brokers with whom it is not satisfied. Credit Tenant Lease financing demands of mortgage brokers specialized knowledge and skills not generally required for traditional real estate financing activities. The Company dedicates significant resources to training correspondent mortgage brokers in all aspects of Credit Tenant Lease financing and routinely presents on-site training seminars throughout the United States. Training seminars are supplemented with bimonthly newsletters, brochures and other written material intended to keep correspondents up to date on the latest underwriting requirements for Credit Tenant Loans and Credit Tenant Leases, Lease Enhancements, and changes in tenant credit ratings, as well as providing up-to-date information on the Company's latest innovative financing programs. A comprehensive marketing, advertising and public relations program supports correspondent loan origination efforts. The objective of the program has been to establish and build the Company's name recognition and credibility as a specialty lender and to promote the Company's specialized Credit Tenant financing programs. The Company believes, based upon its experience and responses from customers, that it has been successful in achieving its objectives of market awareness and prominence in the Credit Tenant Loan market. In addition to the Company's training and marketing support to correspondents, the Company's executives and staff periodically assist correspondents in originating loans by meeting with potential borrowers to explain various aspects of the Credit Tenant Loan program, and by assisting in structuring transactions to best meet the borrower's requirements. Based upon responses from correspondent brokers as well as the Company's experience, the Company believes that its ongoing marketing efforts combined with comprehensive training programs are key factors not only in attracting and retaining productive correspondent mortgage brokers but also in improving their productivity. Furthermore, the Company believes that it has streamlined its loan approval processes and centralized loan underwriting as well as many transactional and structuring matters to make the origination of Credit Tenant Loans with the Company efficient for its correspondents. As a result, the Company believes its correspondents can focus on identifying possible additional borrowers for Credit Tenant Loans and facilitating the loan closing process, rather than focusing solely on underwriting each loan. In addition to its ability to originate loans for its principal business lines, the Company believes that its correspondent broker network can be utilized without significant further training to find opportunities that will be eligible for the related business lines described above. CREDIT FACILITIES The Company has Warehouse Credit Facilities provided by NationsBank (the "NationsBank Warehouse") and Prudential Credit (the "Prudential Warehouse"). CLF entered into the NationsBank Warehouse in the initial amount of $350 million in July 1996. In April 1998, the facility was temporarily increased to $550 million for a limited period ending on September 1, 1998, and the Company may not choose to seek a continuation of this increase. The NationsBank Warehouse is scheduled to expire on April 1, 2000. The NationsBank Warehouse is used primarily to fund and hold the Company's Credit Tenant Loans prior to pooling and financing. The Company pledges its Credit Tenant Loans as collateral under the NationsBank Warehouse. The Company entered into the Prudential Warehouse in the initial amount of $250 million on July , 1998 which amount is expected to increase to $350 million upon closing of the Offering, based upon the application of the net proceeds of the Offering and the consequent achievement of certain minimum net worth requirements. The Prudential Warehouse will expire one year from the date of closing of the Offering. As with the NationsBank Warehouse, the Company intends to utilize the Prudential Warehouse for purposes of funding and holding the Company's Credit Tenant Loans prior to pooling and financing. In addition, on July , 1998 the Company entered into a Mezzanine Construction Loan financing facility (the "Mezzanine Construction Facility") with Prudential Credit which the Company expects to be in the amount of $30 million at the closing of the Offering and the application of the net proceeds thereof. The Mezzanine Construction Facility will be used by the Company to fund its Mezzanine Construction Loans. The availability of financing to the Company under the Warehouse Credit Facilities will be subject to compliance by the Company with the terms and conditions established for each such facility. FORMATION TRANSACTIONS The assets, liabilities and equity of CLF will be contributed to CLF, Inc. on the date of issuance of the shares offered hereby. The assets of the Company will include the Existing Loans and Committed Loans (which, as of May 15, 1998, were in the aggregate amount of approximately $342 million and $402 million, respectively), subject to the existing indebtedness, as well as all of the operating assets of CLF. A series of integrated transactions (the "Formation Transactions") will be entered into initially to establish the structure of CLF, Inc. and its business. The Formation Transactions include the following transactions, which will have occurred or will occur prior to or upon closing of the Offering: A. The limited partners of CLF will transfer their limited partnership interests to CLF, Inc. in exchange for Common Stock of CLF, Inc. and cash. More specifically, Hyperion Partners II L.P., South Ferry #2, L.P., CLF Investors LLC, and the Class C limited partners will transfer their limited partnership interests in CLF for shares of Common Stock of CLF, Inc. Hyperion Partners II L.P. and South Ferry #2, L.P. will transfer their preferred limited partnership interests in CLF to CLF, Inc. for an amount projected to be approximately $21.4 million. B. CLF Holdings, Inc., one of the two general partners of CLF, will transfer its general partnership interest in CLF for Common Stock of CLF, Inc. CLFC HPII Inc. (the other general partner of CLF), will transfer its general partnership interest in CLF to CLF, Inc. in exchange for Common Stock of CLF, Inc. and cash of approximately $500,000. C. Upon the completion of these transfers, CLF, Inc. will own all of the interests in CLF and CLF will automatically liquidate in accordance with applicable law. The number of shares of the Company and the cash that each equity ownership class of CLF will receive in conjunction with this transaction, in accordance with the Partnership agreement, is as follows: <TABLE> <CAPTION> NUMBER OF SHARES CASH ---------- ------------- <S> <C> <C> General partners: CLF Holdings, Inc. ............................................. 275,308 -- CLFC HP II, Inc. ............................................... 39,225 $ 215,862 Limited partners: Preferred....................................................... -- 21,370,295 Class A......................................................... 1,922,007 290,000 Class B......................................................... 1,250,094 -- Class C......................................................... 1,053,366 -- ---------- ------------- 4,540,000 $ 21,876,157 ---------- ------------- ---------- ------------- </TABLE> The Company will record the recapitalization of the predecessor historical balance sheet as of March 31, 1998, including the assets, assumption of liabilities and deficits at their historical amounts. As a result of the Formation Transactions, upon completion of the Offering, CLF, Inc. will succeed to all of the assets and liabilities of CLF. See "Formation Transactions." The Company expects that it will originate all of its future loans through a newly-formed subsidiary limited partnership (a Delaware limited partnership which, upon conclusion of the Formation Transactions will be renamed "Capital Lease Funding, L.P.") of which the Company directly owns 100% of the limited partnership interests and, indirectly through a wholly owned subsidiary, 100% of the general partnership interests. In addition, the Company expects that it will purchase real estate through individual Delaware business trusts of which it will be the sole beneficiary. As a result of the Formation Transactions, including the Offering, the existing investors in CLF, as a group (including substantially all of the Company's employees), and purchasers in the Offering, as a group, will own 38% and 62%, respectively, of the then outstanding Common Stock of CLF, Inc. INVESTMENT COMPANY ACT COMPLIANCE The Company will regularly monitor its portfolio of assets and the income from such assets, including income from its hedging strategies, to maintain its exclusion from regulation under the Investment Company Act. SUMMARY SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION The summary selected historical financial information set forth below as of and for the years ended December 31, 1997 and 1996, and for the period September 29 (commencement of operations) through December 31, 1995, have been derived from the consolidated financial statements of Capital Lease Funding, L.P. included elsewhere herein, which have been audited by Ernst & Young LLP, independent auditors, and should be read in conjunction with those consolidated financial statements (including the notes thereto) and with "Management's Discussion and Analysis of Financial Condition and Results of Operations," all appearing elsewhere in this Prospectus. The results shown below reflect significant investments in the future growth of its business, including the development of its lending and securitization programs, from which the Company expects to reap an ongoing benefit. For example, the Company's operating losses to date reflect the substantial investments the Company has made to enable the Company to achieve its growth plans, including investments in personnel, product development, securitization related documents and the development and training of a national correspondent network. As a result of these investments, management believes, based upon its knowledge and experience in the industry, that its staff is largely sufficient in terms of size, expertise and training to achieve the Company's projected growth, and that its innovative programs provide it with competitive advantages. The Company made a strategic decision to securitize a small developmental pool of Credit Tenant Loans in January 1997. This initial pool's smaller size and characteristics, as well as associated non-recurring expenses of approximately $0.7 million, resulted in an economically inefficient transaction. However, this initial securitization resulted in a number of benefits for the Company. The Company has received preliminary subordination levels from the Rating Agencies in connection with a proposed second CTL Pool Financing during the fourth quarter of 1997 and again in June 1998. These preliminary subordination levels were significantly more favorable than those obtained in the first securitization, reflecting the increased size and diversity of the proposed pool. Based upon preliminary subordination levels received verbally from one or more of the Rating Agencies for pools presented for review in October of 1997 and June of 1998, management believes that pools of Credit Tenant Loans greater than $200 million and involving more than 10 Credit Tenants can be efficiently and profitably securitized. Management estimates, after consulting with its bankers and investment advisors, that the value of the Company's loans exceeded their carrying value by $10 million at December 31, 1997, and by $13 million at May 15, 1998, after giving effect to the value of associated hedge positions. The summary selected unaudited pro forma balance sheet as of March 31, 1998 set forth below is presented as if the transactions contemplated by this Prospectus, including the Offering and the application of the proceeds therefrom, had occurred on March 31, 1998. The summary selected unaudited pro forma statements of operations data for the three months ended March 31, 1998 and the year ended December 31, 1997 are presented as if the transactions contemplated by this Prospectus, including the Offering and the application of the estimated net proceeds therefrom, had occurred on January 1, 1997. See "Use of Proceeds." The pro forma financial information set forth below is not necessarily indicative of what the actual results of operations or financial position of the Company would have been, nor do they purport to represent the Company's results of operations or financial position for future periods. The pro forma financial information should be read in conjunction with the Company's pro forma financial statements and related notes and historical financial statements and related notes included elsewhere in this Prospectus. See "Selected Historical and Pro Forma Financial Information" and "Financial Statements and Information." <TABLE> <CAPTION> SEPTEMBER 29 (COMMENCEMENT OF OPERATIONS) THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, TO --------------------------------------- --------------------------------------- DECEMBER 31, HISTORICAL HISTORICAL CLF, L.P. -------------- PRO FORMA ------------------------- PRO FORMA ------------------------- ----------- 1998 1997 COMPANY 1997 1996 HISTORICAL 1998 ----------- ----------- ----------- ----------- ----------- CLF, L.P. ----------- 1997 -------------- (UNAUDITED) (UNAUDITED) ----------- 1995 (UNAUDITED) (UNAUDITED) -------------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: REVENUE: Interest income from mortgage loans....... $5,279,888 $5,279,888 $ 1,498,770 $9,859,768 $ 9,859,768 $ 5,060,676 $ 224,313 Loss on sales of mortgage loans....... -- -- (160,782) (160,782) (160,782) (923,611) -- Other revenue from mortgage loans....... 20,787 20,787 8,081 43,326 43,326 16,520 -- ----------- ----------- ----------- ----------- ----------- ----------- -------------- Total Revenues......... 5,300,675 5,300,675 1,346,069 9,742,312 9,742,312 4,153,585 224,313 ----------- ----------- ----------- ----------- ----------- ----------- -------------- LOAN EXPENSES: Interest on repurchase agreements........... 3,288,281 4,899,369 1,146,617 3,662,631 8,829,548 4,048,601 221,400 Loss on loan in default.............. -- -- -- -- -- -- 717,359 Servicer fees.......... 40,721 40,721 13,341 76,328 76,328 50,320 -- ----------- ----------- ----------- ----------- ----------- ----------- -------------- Total Loan Expenses.... 3,329,002 4,940,090 1,159,958 3,738,959 8,905,876 4,098,921 938,759 ----------- ----------- ----------- ----------- ----------- ----------- -------------- OPERATING EXPENSES....... 1,192,907 1,105,407 752,811 4,459,040 4,109,040 3,805,230 1,087,320 ----------- ----------- ----------- ----------- ----------- ----------- -------------- OPERATING INCOME (LOSS).. 778,766 (744,822) (566,700) 1,544,313 (3,272,604) (3,750,566) (1,801,766) OTHER INCOME (EXPENSE)... 38,956 (885,359) 61,581 169,889 (122,938) 86,900 136,789 ----------- ----------- ----------- ----------- ----------- ----------- -------------- INCOME (LOSS) BEFORE PROVISION FOR FEDERAL AND STATE INCOME TAX......... 817,722 (1,630,181) (505,119) 1,714,202 (3,395,542) (3,663,666) (1,664,977) PROVISION FOR FEDERAL AND STATE INCOME TAX....... (327,100) -- -- (685,700) -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- -------------- NET INCOME (LOSS)........ $ 490,622 $(1,630,181) $ (505,119) $1,028,502 $(3,395,542) $(3,663,666) $ (1,664,977) ----------- ----------- ----------- ----------- ----------- ----------- -------------- ----------- ----------- ----------- ----------- ----------- ----------- -------------- PRO FORMA NET INCOME PER SHARE.................... $ 0.04 $ -- $ -- $ 0.09 $ -- $ -- $ -- ----------- ----------- ----------- ----------- ----------- ----------- -------------- ----------- ----------- ----------- ----------- ----------- ----------- -------------- OTHER DATA: Cash flows from operating activities........... $ -- $(4,060,275) $ 4,684,622 $ -- $(2,704,304) $(13,630,639) $ (4,411,903) Cash flows from investing activities........... $ -- $ (1,198) $ (12,968) $ -- $ (60,612) $ (77,581) $ -- Cash flows from financing activities........... $ -- $6,232,704 $ (487,559) $ -- $ 5,032,880 $ 7,546,214 $ 12,714,139 Number of loans funded............... -- 23 12 -- 60 26 6 Original principal amount of loans funded............... $ -- $62,475,112 $50,963,285 $ -- $224,866,628 $137,940,791 $ 22,735,140 </TABLE> <TABLE> <CAPTION> AS OF MARCH 31, 1998 AS OF DECEMBER 31, -------------------------- --------------------------------- PRO FORMA HISTORICAL HISTORICAL CLF, L.P. ------------ ------------ --------------------------------- <S> <C> <C> <C> <C> (UNAUDITED) (UNAUDITED) 1997 1996 ------------ ------------------- BALANCE SHEET DATA: Cash and cash equivalents........................................ $ 11,964,425 $ 6,579,425 $ 4,408,194 $ 2,140,230 Mortgage loans held for sale..................................... 323,509,279 323,509,279 263,473,373 157,719,912 Total assets..................................................... 342,423,635 337,423,635 274,378,058 168,349,353 Notes payable.................................................... -- 18,507,023 12,274,318 487,559 Total liabilities................................................ 263,274,799 337,491,642 272,815,884 154,671,846 Total partners' capital (deficit)/ stockholders' equity.......... 79,148,836 (68,007) 1,562,174 13,677,507 </TABLE> THE OFFERING <TABLE> <S> <C> Common Stock Offered Hereby................................. 7,340,000 shares (1) Common Stock to be Outstanding After the Offering........... 11,880,000 shares (1)(2) Use of Proceeds............................................. To repay a portion of the outstanding balance under the NationsBank Warehouse, retire preferred interest issued by CLF, repay notes payable to one of its limited partners, and for general working capital purposes. See "Use of Proceeds." Proposed Nasdaq National Market Symbol...................... CLFI </TABLE> - ------------------------ (1) Assumes that the Underwriters' over-allotment option to purchase up to an additional 1,101,000 shares will not be exercised. See "Underwriting." (2) Includes 4,540,000 shares of Common Stock issued to the general and limited partners of CLF, in connection with the Formation Transactions (assuming an initial public offering price of $15.00). Excludes 1,425,600 shares of Common Stock reserved for issuance under the Company's 1998 Stock Option Plans. As of the closing of the Offering, the Company expects to grant options to acquire 712,800 shares of Common Stock pursuant to such plan on terms to be determined. See "Directors and Executive Officers--Stock Options."
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and consolidated financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Each prospective investor is urged to read this Prospectus in its entirety. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information included in this Prospectus contains statements that are forward-looking, such as statements relating to plans for future activities. Such forward-looking information involves important known and unknown risks, uncertainties and other factors that could significantly affect actual results, performance or achievements of the Company in the future and, accordingly, such actual results, performance or achievements may materially differ from those expressed or implied in any forward-looking statements made by or on behalf of the Company. These risks, uncertainties and factors include, but are not limited to, those relating to the Company's growth strategy, customer concentration, outstanding indebtedness, dependence on weather conditions, seasonality, expansion and other activities of competitors, changes in federal or state environmental laws and the administration of such laws, protection of trademarks and other proprietary rights and the general condition of the economy and its effect on the securities markets. The words "believe", "expect", "anticipate", "intend" and "plan" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date the statement was made. See "Risk Factors." The Company The Company is a leading manufacturer and marketer of a broad range of consumer lawn and garden products. The Company's products include weed preventive landscape fabrics, fertilizer spikes, decorative landscape edging, shade cloth and root feeders, which are sold under recognized brand names such as WeedBlock(R), Jobe's(R), Emerald Edge(R), Shade Fabric(TM) and Ross(R). In February 1998, the Company acquired the assets of Weed Wizard, Inc., a manufacturer and distributor of weed trimmer replacement heads, and will continue marketing the product under the "Weed Wizard" trademark. In addition, in March 1998, the Company acquired substantially all of the assets of Landmaster Products, Inc., a manufacturer and distributor of polyspun landscape fabrics. The Company believes that it has significant market share and brand-name recognition in several of its primary product categories. The Company markets its products through most large national home improvement and mass merchant retailers ("Retail Accounts"), including Home Depot, Lowe's, Kmart, Builder's Square, Wal-Mart and Home Base. The Company has experienced significant growth in recent years. Net sales, EBITDA (as defined herein) and net income grew at compound annual rates of 63%, 77% and 42%, respectively, during the period from the fiscal year ended June 30, 1995 through the fiscal year ended June 30, 1997. The Company achieved record results from operations for the fiscal year ended June 30, 1997, with net sales, EBITDA and net income increasing to $52.0 million, $12.6 million and $3.2 million, respectively, from $27.0 million, $4.6 million and $2.5 million for the fiscal year ended June 30, 1996. The Company believes that its success has been primarily attributable to the expansion of its product lines through the acquisition of complementary lawn and garden businesses, the quality of its products, its focus on providing Retail Accounts with a single source of lawn and garden products, the efficiency and reliability of its inventory tracking and order fulfillment systems and its distinctive advertising and in-store displays. Lawn and Garden Industry Historically, the lawn and garden industry was comprised of relatively small regional manufacturers and distributors whose products were sold to consumers primarily through local nurseries and garden centers. As the industry has grown, national home improvement and mass merchant retailers have replaced many of these local garden centers as the primary retail source for lawn and garden products. In an effort to improve operating margins and reduce the number of vendors needed to source high volume lawn and garden products, the preference among home improvement and mass merchant retailers has shifted to single source suppliers such as the Company that offer broad product lines of consumer brand-name merchandise and provide the product support necessary to stimulate consumer demand and ensure timely and cost effective order fulfillment. Smaller regional suppliers generally lack the capital and other resources necessary to offer the variety and number of product lines, the product support and the inventory stocking and tracking capabilities required by home improvement and mass merchant retailers. Regional manufacturers, distributors and marketers are now largely fragmented and the Company believes that many of them are attractive acquisition candidates for larger suppliers and distributors in the lawn and garden industry. The Company has historically been successful in locating, acquiring and integrating certain of these manufacturers and distributors into its business and intends to continue its acquisition program as a principal component of its growth strategy. According to the 1996-1997 National Gardening Survey, 1996 retail sales of lawn and garden products were approximately $22 billion and 64% of the approximately 101 million households in the United States participated in some form of gardening activity during 1996. In addition, sales growth in the lawn and garden industry is being driven in part by the aging of the "baby boomer" consumer segment. According to the National Gardening Survey, persons 50 years of age and older spent an average of $400 per household on lawn and garden activities in 1996. Business Strategy The Company's business objective is to be a leading single source supplier of lawn and garden products to Retail Accounts and its strategy includes: (i) marketing low-cost, high-margin products that stimulate impulse buying by consumers; (ii) supplying Retail Accounts with a broad range of brand-name products within each of its product categories; (iii) utilizing distinctive packaging and point-of-purchase product displays, new product introductions and other merchandising techniques to stimulate consumer demand; (iv) generating brand-name recognition of its products through national marketing and advertising programs; and (v) promoting Retail Account satisfaction by providing them with timely and cost efficient order fulfillment services. Growth Strategy The Company attributes its historical growth and success to its ability to capitalize on the consolidation of the lawn and garden industry by locating, acquiring and effectively integrating acquisition targets and its ability to act as an efficient single source supplier of a broad range of quality products. The Company intends to continue this growth strategy, which consists of the following principal components: o Pursue Additional Strategic Acquisitions. The Company plans to continue its primary strategy of acquiring complementary lawn and garden companies and product lines. The Company has consummated seven (7) such acquisitions since 1992 and recently entered into a non-binding letter of intent to acquire another lawn and garden product business. By consolidating companies with complementary product lines, the Company believes it can capitalize on its existing channels of distribution and gain market share by increasing sales to its Retail Accounts. o Increase Brand Awareness. The Company intends to enhance existing consumer brand awareness by expanding its advertising and marketing efforts with an emphasis on its Jobe's fertilizer spikes, a nationally-recognized brand name. The Company believes that the modernization of its Jobe's packaging, together with a national television advertising campaign targeted at the "baby boomer" consumer segment, will allow it to further capitalize on its brand name recognition. o Utilize Existing Infrastructure. The Company's management and administrative infrastructure has been designed to accommodate the integration of additional products when suitable lawn and garden companies and product lines are acquired. The Company believes that its ability to efficiently integrate new businesses and product lines into its existing infrastructure will result in significant savings in the areas of management, distribution, marketing and customer service. The Company also believes that its infrastructure, including its on-line inventory tracking and order fulfillment capabilities, allows it to be an effective and efficient source of lawn and garden products for Retail Accounts. o Focus on High-Volume Retailers. National high-volume retailers such as the Company's Retail Accounts are gaining an increasing share of the lawn and garden retail market. By focusing on the emergence of high-volume retailers and their needs, including providing broad product lines, order fulfillment capabilities and marketing and merchandising programs, the Company believes that it will increase its market share and enhance its position as a leading single source supplier of lawn and garden products. Recent and Proposed Acquisitions Since August 1992, the Company has consummated the following seven (7) acquisitions of lawn and garden companies or product lines for a total of over $75 million in consideration: o Golden West Chemical Distributors, Inc. A manufacturer of humic acid-based products designed to improve crop yield, which was acquired in August 1992 for aggregate consideration of approximately $2.2 million. o Easy Gardener, Inc. A manufacturer of multiple fabric landscaping products including WeedBlock, which was acquired in September 1994 for aggregate consideration of approximately $23.5 million. o Emerald Products LLC. A manufacturer of decorative landscape edging, which was acquired in August 1995 for aggregate consideration of $935,000. o Weatherly Consumer Products Group, Inc. A manufacturer of fertilizer spikes and other lawn and garden products, which was acquired in August 1996 for aggregate consideration of approximately $25.9 million. o Plasti-Chain Product Line of Plastic Molded Concepts, Inc. A line of plastic chain links and decorative edgings, which was acquired in May 1997 for approximately $4.3 million. o Weed Wizard, Inc. A manufacturer and distributor of weed trimmer replacement heads which was acquired in February 1998 for approximately $16.0 million, of which approximately $5.0 million was based on the value of certain net current assets acquired. o Landmaster Products, Inc. A manufacturer and distributor of polyspun landscape fabrics for use by consumers and professional landscapers, substantially all of whose assets were acquired in March 1998 for approximately $3.0 million, of which approximately $750,000 was based on the value of certain net current assets acquired. In addition, the Company has entered into a non-binding letter of intent to purchase a manufacturer and distributor of lawn and garden products for approximately $4.8 million (the "Proposed Acquisition"). The Company was organized under the laws of the State of California in August 1990 under the name Natural Earth Technologies, Inc. In January 1992, the Company reincorporated under the laws of the State of Delaware and, in July 1995, changed its name to U.S. Home & Garden Inc. The Company's lawn and garden operations are conducted through its subsidiary Easy Gardener, Inc. ("Easy Gardener") and Easy Gardener's subsidiaries, Weatherly Consumer Products Group, Inc. ("Weatherly") and Weed Wizard Acquisition Corp. ("Weed Wizard"), and the Company's agricultural operations are conducted through its subsidiary Golden West Agri-Products, Inc. ("Golden West"). Except when used with respect to the Trust Preferred Securities or where the context otherwise requires, references in this Prospectus to the "Company" mean U.S. Home & Garden Inc., its subsidiaries Easy Gardener and Golden West and the subsidiaries of Easy Gardener (all such subsidiaries to be referred to herein as the "Subsidiaries"). The Company's executive offices are located at 655 Montgomery Street, San Francisco, California 94111, and its telephone number is (415) 616-8111. U.S. Home & Garden Trust I The Trust is a statutory business trust created under Delaware law pursuant to (i) the trust agreement of the Trust among the Company, as depositor, the Delaware Trustee and an Administrative Trustee, and (ii) the filing of a Certificate of Trust with the Delaware Secretary of State on March 16, 1998. The Trust's business and affairs are conducted by the Property Trustee, the Delaware Trustee and three individual Administrative Trustees who are officers of the Company. The Trust exists for the exclusive purposes of (i) issuing and selling the Trust Securities, (ii) using the proceeds from the sale of the Trust Securities to acquire the Junior Subordinated Debentures issued by the Company and (iii) engaging in only those other activities necessary, advisable or incidental thereto. The Junior Subordinated Debentures will be the sole assets of the Trust and payments by the Company under the Junior Subordinated Debentures and the Expense Agreement will be the sole revenues of the Trust. All of the Common Securities will be owned by the Company. The Common Securities will rank pari passu, and payments will be made thereon pro rata, with the Trust Preferred Securities, except that upon the occurrence and during the continuance of an event of default under the Trust Agreement resulting from an event of default under the Indenture, the rights of the Company as holder of the Common Securities to payment in respect of Distributions and payments upon liquidation, redemption or otherwise will be subordinated to the rights of the holders of the Trust Preferred Securities. See "Description of the Trust Preferred Securities--Subordination of Common Securities of the Trust Held by the Company." The Company will acquire Common Securities in an aggregate liquidation amount equal to 3% of the total capital of the Trust. The Trust has a term of 31 years, but may dissolve earlier as provided in the Trust Agreement. The Trust's principal offices are located at 655 Montgomery Street, San Francisco, California 94111 and its telephone number is (415) 616-8111. SUMMARY FINANCIAL DATA AND OTHER INFORMATION (in thousands, except percentages, ratios and per share data) The summary financial data set forth below has been derived from the Company's consolidated financial statements. Such information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements of the Company, including the notes thereto, appearing elsewhere in this Prospectus. <TABLE> <CAPTION> Six Months Ended Year Ended June 30, December 31, ------------------------------------------------------------------ --------------------------- 1993 1994 1995 1996 1997 1996 1997 ------------ ----------- ----------- ---------- ------------ ------------- ----------- <S> <C> <C> <C> <C> <C> <C> <C> Statement of Income Data: Net sales ............................ $2,910 $ 3,063 $ 19,692 $ 27,031 $ 52,046 $ 12,939 $ 15,538 Gross profit ......................... 1,402 1,608 10,541 14,361 28,397 7,114 8,159 Selling, general and administrative expenses(1) ........................ 1,826 6,786 7,152 10,612 17,745 7,312 8,552 ------ -------- ---------- -------- ---------- -------- -------- Income (loss) from operations ........ (424) (5,178) 3,389 3,749 10,652 (198) (393) Interest expense, net ................ (45) (41) (1,776) (1,940) (3,262) (1,332) (1,493) Income (loss) before extraordinary expense ............................ (469) (5,219) 1,575 2,524 4,190 (1,055) (1,086) ------ -------- ---------- -------- ---------- -------- -------- Extraordinary gain (expense), net..... 389 (1,007) (1,007) ------ ---------- -------- Net income (loss) .................... $ (80) $ (5,219) $ 1,575 $ 2,524 $ 3,183 $ (2,062) $ (1,086) ====== ======== ========== ======== ========== ======== ======== Dilutive income (loss) per share: Income (loss) per share before extraordinary expense(2) ........... $(0.22) $ (1.31) $ 0.16 $ 0.19 $ 0.26 $ (0.08) $ (0.07) Net income (loss) per share(2) ....... $(0.04) $ (1.31) $ 0.16 $ 0.19 $ 0.20 $ (0.15) $ (0.07) ====== ======== ========== ======== ========== ======== ======== Weighted average number of com- mon and common equivalent shares outstanding(2) .............. 2,178 3,980 10,125 13,361 16,068 13,437 15,552 ====== ======== ========== ======== ========== ======== ======== Other Data(3): EBITDA(4) ............................ $ 4,026 $ 4,583 $ 12,642 $ 760 $ 870 Interest expense, net ................ 1,776 1,940 3,262 1,332 1,493 Depreciation and amortization ........ 637 834 1,990 958 1,263 Capital expenditures ................. 151 261 528 230 486 Net cash provided by (used in) operating activities ............... 438 618 10,545 (1,540) 682 Net cash (used in) investing activities ......................... (15,576) (2,103) (29,594) (24,667) (1,414) Net cash provided by financing activities ......................... 16,021 1,195 20,452 25,783 11,383 Growth Rates(3): Net sales growth ..................... 37.3% 92.5% 20.1% EBITDA growth(4) ..................... 13.8 175.9 14.5 Income from Operations growth ........ 10.6 184.1 (98.5) Margins(3): EBITDA margin(4)(5) .................. 20.4% 17.0% 24.3% 5.9% 5.6% Operating income (loss) margin(6) 17.2 13.9 20.5 (1.5) (2.5) Net income (loss) margin ............. 8.0 9.3 6.1 (15.9) (7.0) Ratios: EBITDA to interest expense, net(4) ............................. 2.3x 2.4x 3.9x 0.6x 0.6x Earnings to fixed charges(7) ......... 468(9) 5,219(9) 1.9x 1.9x 3.1x 1,530(9) 1,886(9) Pro forma ratio of earnings to fixed charges(7)(8) ................ 3.6x 1,488(9) </TABLE> <TABLE> <CAPTION> At December 31, 1997 ---------------------------- At June 30, 1997 Actual As Adjusted(10) ------------------ ---------- ---------------- <S> <C> <C> <C> Balance Sheet Data: Working capital ...................................... $ 2,292 $15,753 $ 30,829 Intangible assets, net ............................... 44,364 43,474 57,947 Total assets ......................................... 68,475 77,636 107,985 Short-term debt ...................................... 8,990 6,086 0 Long-term debt ....................................... 17,570 16,430 0 Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely junior subordinated debentures(11) ........................ 55,000 Stockholders' equity ................................. 31,926 46,616 45,335 </TABLE> - ------------- (1) Includes goodwill amortization expense of $91,000, $105,000, $475,000, $585,000, $1.3 million, $590,000 and $730,000 for the fiscal years ended June 30, 1993, 1994, 1995, 1996 and 1997 and the six months ended December 31, 1996 and 1997, respectively. (2) Net income (loss) per share calculations for all periods presented reflects the retroactive adoption of the provisions of Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128). See "Management's Discussion and Analysis of Financial Condition and Results of Operations," Summary of Accounting Policies of Consolidated Financial Statements and Note 14 of Notes to Consolidated Financial Statements. (3) Certain Other Data, Growth Rates and Margins for the fiscal years ended June 30, 1993, 1994 and 1995 have been omitted due to the lack of relevant comparison after the Company's acquisition of Easy Gardener, Inc. in September 1994. (4) EBITDA represents earnings before interest expense, income taxes, depreciation and amortization and non-recurring charges. EBITDA is not intended to represent cash flow from operations as defined by generally accepted accounting principles and should not be considered as an alternative to cash flow or as a measure of liquidity or as an alternative to net earnings as indicative of operating performance. The Company's reported EBITDA may not be comparable to similarly titled measures of other companies that do not have non-recurring charges. EBITDA, EBITDA growth, EBITDA margin and EBITDA to interest expense, net are included herein because management believes they are useful for measuring the Company's ability to service its debt. (5) EBITDA margin represents EBITDA divided by net sales. (6) Operating income (loss) margin represents income (loss) from operations divided by net sales. (7) For purposes of calculating the ratio and pro forma ratio of earnings to fixed charges, earnings consist of income before income taxes, plus fixed charges. Fixed charges consist of the interest expense on all indebtedness, including amortization of deferred financing costs, and the estimated representative interest factor of rental expense. (8) The average outstanding debt balances for the year ended June 30, 1997 and the six-month period ended December 31, 1997 were approximately $28,877,000 and $24,188,000, respectively, and gross interest expense was approximately $3,338,000 and $1,597,000, respectively. The pro forma ratios assume the replacement of this indebtedness with a corresponding amount of Junior Subordinated Debentures on July 1, 1996. If, on a consolidated basis, the entire $55,000,000 principal amount of Junior Subordinated Debentures had been outstanding throughout the periods, total interest expense would have been approximately $5,225,000 and $2,612,500, respectively. (9) Earnings are inadequate to cover fixed charges. Amounts shown reflect the coverage deficiency for this ratio to equal one. (10) As adjusted to give effect to (i) the acquisitions by the Company of the assets of Weed Wizard, Inc. and Landmaster Products, Inc. in February and March 1998 using $10.0 million under the Credit Facility to pay a portion of the acquisition costs, and (ii) the issuance by the Trust of the 2,200,000 Trust Preferred Securities offered hereby and the receipt by the Company of the proceeds, net of estimated underwriting compensation and other estimated offering expenses, from the corresponding sale of the Junior Subordinated Debentures to the Trust, and the application of the net proceeds therefrom as described under "Use of Proceeds." Estimated underwriting compensation and other estimated offering expenses have been reflected as a deferred financing cost to be amortized over the life of the Junior Subordinated Debentures. Existing deferred financing costs related to debt to be repaid from the proceeds of this offering have been reflected as a charge to earnings. (11) The assets of the Trust consist solely of an aggregate principal amount of $56,700,000 Junior Subordinated Debentures. THE OFFERING <TABLE> <S> <C> Trust Preferred Securities issuer .......... U.S. Home & Garden Trust I ("the Trust") Securities offered ......... 2,200,000 Trust Preferred Securities having a Liquidation Amount of $25 per Trust Preferred Security. The Trust Preferred Securities represent preferred undivided beneficial interests in the Trust's assets, which will consist solely of the Junior Subordinated Debentures and payments thereunder. Distributions .............. The Distributions payable on each Trust Preferred Security will be fixed at a rate per annum of % of the Liquidation Amount of $25 per Trust Preferred Security, will be cumu- lative, will accrue from the date of issuance of the Trust Preferred Securities, and will be payable monthly in arrears on the day of each calendar month of each year, com- mencing on , 1998 (subject to possible deferral as described below). The amount of each Distribution due with respect to the Trust Preferred Securities will include amounts accrued through the date the Distribution payment is due. See "Description of the Trust Preferred Securities." Extension periods .......... So long as no Debenture Event of Default (as defined herein) has occurred and is continuing, the Company will have the right, at any time, to defer payments of interest on the Junior Subordinated Debentures by extending the inter- est payment period thereon for a period not exceeding 60 consecutive months with respect to each deferral period (each an "Extension Period"), provided that no Extension Period may extend beyond the Stated Maturity of the Jun- ior Subordinated Debentures. If interest payments are so deferred, Distributions on the Trust Preferred Securities will also be deferred and the Company will not be permit- ted, subject to certain exceptions described herein, to declare or pay any cash distributions with respect to the Company's capital stock or debt securities that rank pari passu with or junior to the Junior Subordinated Deben- tures. During an Extension Period, Distributions will con- tinue to accumulate at the rate of __% compounded monthly. Because interest would continue to accrue and compound on the Junior Subordinated Debentures, to the extent permitted by applicable law, holders of the Trust Preferred Securities will be required to accrue income for United States federal income tax purposes. See "Descrip- tion of Junior Subordinated Debentures--Option to Defer Interest Payment Period" and "Certain Federal Income Tax Consequences--Interest Income and Original Issue Discount." </TABLE> <TABLE> <S> <C> Maturity .......................... The Junior Subordinated Debentures will mature on , 2028 which date may be shortened (such date, as it may be shortened, the "Stated Maturity") to a date not earlier than , 2003. The Company might exercise its right to shorten the maturity of the Junior Sub- ordinated Debentures under the circumstances where a Tax Event, Investment Company Event or other undesirable event could be avoided simply by shortening the maturity of the Junior Subordinated Debentures. See "Description of Junior Subordinated Debentures--General." Redemption ........................ The Trust Securities are subject to mandatory redemption upon repayment of the Junior Subordinated Debentures at their Stated Maturity or their earlier redemption at a redemption price equal to the aggregate Liquidation Amount of the Trust Securities plus accumulated and unpaid Distributions thereon to the date of redemption. The Junior Subordinated Debentures are redeemable prior to maturity at the option of the Company (i) on or after , 2003 in whole at any time or in part from time to time, or (ii) at any time, in whole (but not in part), within 90 days following the occurrence of a Tax Event or an Investment Company Event, in each case at a redemp- tion price equal to 100% of the principal amount of the Junior Subordinated Debentures so redeemed, together with any accrued but unpaid interest to the date fixed for redemption. See "Description of the Trust Preferred Securities--Redemption" and "Description of Junior Sub- ordinated Debentures--Redemption." Distribution of Junior Subordinated Debentures ......... The Company has the right at any time to dissolve the Trust, and, after satisfaction of creditors of the Trust as required by applicable law, to cause the Junior Subordinated Debentures to be distributed to holders of Trust Preferred Securities in liquidation of the Trust. See "Description of the Trust Preferred Securities-- Distribution of Junior Subordinated Debentures." Guarantee ......................... Taken together, the Company's obligations under the vari- ous documents described herein, including the Guarantee Agreement, provide a full and unconditional guarantee (the "Guarantee") of payments by the Trust of Distributions and other amounts due on the Trust Preferred Securities. Under the Guarantee Agreement, the Company guarantees the payment of Distributions by the Trust and payments on liq- uidation or redemption of the Trust Preferred Securities (subordinate to the right to payment of Senior Debt and Subordinated Debt of the Company) to the extent of funds </TABLE> <TABLE> <S> <C> held by the Trust. If the Trust has insufficient funds to pay Distributions on the Trust Preferred Securities (i.e., if the Company has failed to make required payments under the Junior Subordinated Debentures), a holder of the Trust Pre- ferred Securities would have the right to institute a legal proceeding directly against the Company to enforce pay- ment of such Distributions to such holder. See "Description of Junior Subordinated Debentures--Enforcement of Cer- tain Rights by Holders of Trust Preferred Securities," and "--Debenture Events of Default" and "Description of Guarantee." Ranking ............... The Trust Preferred Securities will rank pari passu, and payments thereon will be made pro rata, with the Common Securities of the Trust held by the Company, except as described under "Description of the Trust Preferred Securities--Subordination of Common Securities of the Trust Held by the Company." The obligations of the Com- pany under the Guarantee, the Junior Subordinated Deben- tures and other documents described herein are unsecured and rank subordinate and junior in right of payment to all current and future Senior Debt and Subordinated Debt of the Company, the amount of which is unlimited. The Com- pany will apply a portion of the net proceeds of this offer- ing to pay off the outstanding balance under the Credit Facility, which was approximately $38.7 million as of April 1, 1998. The Credit Facility will then be terminated. Because the Company is a holding company, all obliga- tions of the Company relating to the securities described herein will be effectively subordinated to all existing and future liabilities of the Company's Subsidiaries. The Com- pany may cause additional trust preferred securities to be issued by trusts similar to the Trust in the future, and there is no limit on the amount of such securities that may be issued. In that event, the Company's obligations under the junior subordinated debentures to be issued to such other trusts and the Company's guarantees of the payments by such trusts will rank pari passu with the Company's obli- gations under the Junior Subordinated Debentures and the Guarantee, respectively. Voting rights ......... The holders of the Trust Preferred Securities will have no voting rights except in limited circumstances. Except as provided below, the affirmative consent of the holders of at least a majority of the outstanding Trust Preferred Securi- ties will be required by the Trust for amendments to the Trust Agreement that would affect adversely the rights or privileges of the holders of the Trust Preferred Securities. The Property Trustee, the Administrative Trustees and the Company may amend the Trust Agreement without the </TABLE> <TABLE> <S> <C> consent of holders of the Trust Preferred Securities to ensure that the Trust will be classified for United States federal income tax purposes as a grantor trust or to ensure that the Trust will not be required to register as an "invest- ment company" under the Investment Company Act, even if such action adversely affects the interests of such hold- ers. See "Description of the Trust Preferred Securities-- Voting Rights; Amendment of the Trust Agreement." ERISA considerations ......... Prospective purchasers should carefully consider the information set forth under the caption "ERISA Considerations." American Stock Exchange symbol ..................... UHG.Pr.A Use of proceeds .............. The proceeds to the Trust from the sale of the Trust Pre- ferred Securities offered hereby will be invested by the Trust in the Junior Subordinated Debentures of the Com- pany. The Company will use approximately $38.7 million of the net proceeds of the offering to pay off in full the indebtedness outstanding under the Credit Facility. An additional $735,000 will be used to pay a prepayment pen- alty resulting from the foregoing repayment. The balance of the proceeds will be applied to working capital, which may include, without limitation, funding additional invest- ments in, or extensions of credit to, the Company's operat- ing subsidiaries for the expansion of operations. In addi- tion, a portion of the proceeds allocated to working capital may be used for possible future acquisitions. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001057709_carreker_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001057709_carreker_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. THE INFORMATION CONTAINED IN THIS PROSPECTUS REFLECTS THE RECENT COMPLETION OF THE REINCORPORATION OF THE COMPANY AS A DELAWARE CORPORATION (THE "REINCORPORATION") AND CERTAIN OTHER MATTERS (SEE "CERTAIN TRANSACTIONS"), AND ASSUMES NO EXERCISE OF THE OVER-ALLOTMENT OPTION GRANTED TO THE UNDERWRITERS. THE COMPANY Carreker-Antinori is a leading provider of integrated consulting and software solutions that enable banks to increase their revenues, reduce their costs and enhance their delivery of customer services. The Company's offerings include yield management, payment systems, payment electronification and enabling technologies solutions. Carreker-Antinori's solutions assist banks in re-engineering their operational systems and implementing new software applications to increase earning assets, develop new revenue sources, improve operating efficiencies and reduce check fraud losses. The Company believes that its 20 years of experience in the banking industry, combined with its advanced technological expertise, positions it to effectively address and anticipate the challenges and opportunities faced by banks in today's increasingly competitive environment. The Company's customers include approximately two-thirds of the largest 100 bank holding companies in the United States, including Fleet Financial Group, Inc., NationsBank Corporation, Norwest Corporation and SunTrust Banks, Inc. The banking industry is one of the nation's largest industries, with aggregate annual revenues of nearly $250 billion. In recent years, the industry has undergone significant change, and today's banking environment is characterized by intense competition, continuing consolidation, changing regulations and rapid technological innovation. In addition to increased competition within the banking industry, banks are encountering significant competition from insurance companies, brokerage houses and other financial institutions, all of which are expanding to provide services that were once within the exclusive domain of banks. While banks historically have focused on reducing their operating expenses to remain competitive, they are today increasingly focusing on developing new sources of revenue growth, automating operations to increase efficiencies and outsourcing commodity-like banking functions to sustain market value growth. To this end, banks are expending significant resources, both internally and through outsourcing arrangements. Information technology expenditures by the industry in 1997 on paper-based payment systems and financial and risk management systems alone are estimated to have been approximately $1.0 billion and $2.3 billion, respectively, of which approximately 59% and 51% were paid to third parties. The Company's offerings include yield management, payment systems, payment electronification and enabling technologies solutions. The Company's yield management solutions are designed to quickly increase a bank's revenues through improved operational workflows, pricing structures and liquidity and cash management. The Company's payment systems and payment electronification solutions are designed to reduce check-processing costs through procedural and technological improvements and reduced check fraud and other risks of loss. Carreker-Antinori's enabling technologies convert leading-edge technologies and ideas into practical banking solutions. The Company's solutions are differentiated by virtue of Carreker-Antinori's industry-specific consulting expertise, advanced technology and broad array of integrated, value-added solutions. The Company's objective is to be the leading provider of yield management, payment systems, payment electronification and enabling technologies solutions that enhance the competitiveness of banks. Carreker-Antinori plans to accomplish this objective by: (i) advancing its position as a leading industry innovator; (ii) pursuing strategic alliances and acquisitions; (iii) leveraging its market position to expand its customer base; and (iv) building long-term customer relationships. The Company believes that it derives a significant competitive advantage by providing leadership to the banking industry through its association with two high-profile interbank organizations: the Electronic Check Clearing House Organization ("ECCHO"), which is focused on developing the rules and standards for transitioning the check payment system from paper to electronic formats, and Payment Solutions Network, Inc. ("PSN"), which provides database and information-based products and services critical to the realization of the benefits associated with the electronification of the check payment system. The Company's role in these interbank organizations enables it to be an infrastructure development partner to the banking industry, enhancing the Company's ability to provide value-added benefits to banks today and uniquely positioning it to take advantage of the electronification of payment systems in the future. In addition, the Company has recently partnered with UPS Worldwide Logistics, National Processing Company, Fiserv, Inc. and Brink's Incorporated to form INFITEQ, LLC ("INFITEQ"), a single-source provider of specialized outsourcing services to the banking industry for transaction processing, information management, electronic commerce and image technology. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company...................... 3,650,000 shares Common Stock offered by the Selling Stockholders......... 1,450,000 shares Common Stock to be outstanding after the Offering (1).... 16,427,433 shares Use of Proceeds.......................................... The Company intends to use the net proceeds for working capital and other general corporate purposes, as well as possible strategic alliances and acquisitions. See "Use of Proceeds." Proposed Nasdaq National Market symbol................... CANI </TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA (In thousands, except per share data) <TABLE> <CAPTION> YEAR ENDED JANUARY 31, ----------------------------------------------------- 1994 1995 1996 1997 1998 --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Total revenues..................................................... $ 9,606 $ 13,084 $ 18,549 $ 29,072 $ 40,501 Income (loss) from operations...................................... (1,284) 593 2,723 2,884 5,009 Net income (loss) (2).............................................. (922) 697 1,862 1,376 3,055 Basic earnings (loss) per share (3)................................ (.08) .06 .16 .13 .27 Diluted earnings per share (3)..................................... -- .06 .15 .12 .23 Shares used in computing basic earnings per share (3).............. 11,547 11,548 11,543 10,914 11,477 Shares used in computing diluted earnings per share (3)............ -- 11,878 12,092 11,878 13,244 </TABLE> <TABLE> <CAPTION> JANUARY 31, 1998 -------------------------- ACTUAL AS ADJUSTED (4) --------- --------------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents.................................................................. $ 1,975 $ 38,215 Working capital............................................................................ 7,434 43,674 Total assets............................................................................... 20,319 56,559 Long-term debt, net of current portion..................................................... -- -- Total stockholders' equity................................................................. 8,624 46,864 </TABLE> - ------------------------------ (1) Assumes the issuance of 77,000 shares of Common Stock concurrently with the offering upon the exercise by a Selling Stockholder of options under the Company's Long Term Incentive Plan (the "Long Term Incentive Plan") to purchase shares of Common Stock, as well as the issuance of 1,152,174 shares upon the exercise of options outstanding under the Long Term Incentive Plan that terminate if unexercised contemporaneously with the offering. BancAmerica Robertson Stephens has established a loan program to facilitate the exercise of such options. See "Principal and Selling Stockholders" and "Underwriting." Excludes: (i) 4,186,126 shares of Common Stock reserved for issuance under the Long Term Incentive Plan of which options to purchase 2,927,926 shares are outstanding at a weighted average exercise price of $5.35 per share; (ii) 100,000 shares of Common Stock reserved for issuance under the Company's Director Stock Option Plan (the "Director Plan"), none of which are outstanding; and (iii) 221,052 options issued to the Company's non-employee directors at a weighted average exercise price of $0.58 per share. See "Management--Long Term Incentive Plan" and "--Director Stock Option Plan." (2) Prior to the Company's acquisition of Antinori Software, Inc., a Georgia corporation ("ASI"), on January 31, 1997, ASI had elected to be treated as an S corporation for federal and state income tax purposes. The provision for income tax included as a component of net income for the fiscal years prior to fiscal 1997 reflects a pro forma tax provision which includes estimated federal and state income taxes (by applying statutory income tax rates) that would have been incurred if ASI had been subject to taxation as a C corporation. (3) See Notes 2 and 10 of Notes to Consolidated Financial Statements for information concerning the calculation of basic and diluted net earnings per share. (4) Adjusted to give effect to the sale of 3,650,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $11.00 per share (the mid-point of the range set forth on the cover of this Prospectus), after deducting the estimated underwriting discounts and estimated offering expenses payable by the Company. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001057949_landcare_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001057949_landcare_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..60851c1d35852606a55a53850c7979642c1bb2b3
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY IN CONNECTION WITH ITS INITIAL PUBLIC OFFERING ON JUNE 9, 1998 (THE "IPO"), LANDCare USA, INC. ACQUIRED, IN SEPARATE MERGER TRANSACTIONS (THE "MERGERS") IN EXCHANGE FOR CASH AND SHARES OF ITS COMMON STOCK, SEVEN COMPANIES (EACH A "FOUNDING COMPANY" AND, COLLECTIVELY, THE "FOUNDING COMPANIES") ENGAGED IN COMPREHENSIVE LANDSCAPE AND TREE SERVICES. UNLESS OTHERWISE INDICATED, ALL REFERENCES TO THE "COMPANY" HEREIN INCLUDE THE FOUNDING COMPANIES, AND REFERENCES HEREIN TO "LANDCare" MEAN LANDCare USA, INC. PRIOR TO THE CONSUMMATION OF THE MERGERS. THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE PRO FORMA COMBINED AND INDIVIDUAL HISTORICAL FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL REFERENCES TO COMMON STOCK INCLUDE BOTH COMMON STOCK, $0.01 PAR VALUE, AND RESTRICTED VOTING COMMON STOCK, $0.01 PAR VALUE (THE "RESTRICTED COMMON STOCK"), OF THE COMPANY.(1) THE COMPANY LandCARE was founded in 1997 to be a national provider of comprehensive landscape and tree services to the commercial and institutional markets. On June 9, 1998, LandCARE acquired in separate, concurrent transactions seven companies engaged in comprehensive landscape and tree services. These Founding Companies are: Arteka Corporation, located in Eden Prairie, Minnesota; Desert Care Landscaping, Inc., located in Phoenix, Arizona; D.R. Church Landscape Co., Inc., located in Lombard, Illinois; Four Seasons Landscape and Maintenance, Inc., located in Foster City, California; Ground Control Landscaping, Inc., located in Orlando, Florida; Southern Tree & Landscape Co., Inc., located in Charlotte, North Carolina; and Trees, Inc., located in Houston, Texas. The Company offers a full range of landscape maintenance, landscape installation and tree services capabilities, including trimming trees and other plant growth away from power lines, generally known as "line clearing." The Company serves a diverse set of customers, including regional and national property owners and managers, real estate developers, corporations, utilities, universities and governmental entities. Properties served by the Company include office buildings, multi- family residential complexes, shopping centers, corporate and university campuses, parks, hotels, resorts and governmental facilities. Approximately 75% of the Company's pro forma combined revenues in 1997 were attributable to maintenance services, which include line clearing for utility customers, and 25% were attributable to installation services. The seven Founding Companies have been in business an average of 25 years and had pro forma combined revenues of $116.2 million in 1997 and $26.6 million in the first three months of 1998. Historical combined revenues increased at a compound annual growth rate of approximately 10% from 1995 through 1997. In addition to emphasizing internal growth, the Company has an aggressive acquisition program. According to data published by LAWN AND LANDSCAPE magazine, the commercial and institutional segment of the landscape and tree services industry generated approximately $20 billion in revenues in 1996. The Company estimates that approximately $15 billion of this amount represented landscape maintenance and installation and $5 billion represented tree services. Most of the more than 10,000 participants in this industry are small, owner-operated companies operating in a limited geographic area. During recent years, this industry has experienced significant growth due to the consolidation of the commercial real estate market, the trend towards outsourcing of landscape and tree services and a growing recognition of the economic and aesthetic benefits of landscaping. In recent years, ownership of commercial real estate throughout the United States has become increasingly consolidated. Commercial property owners and managers, as well as governmental entities and - ------------ (1) Notre Capital Ventures II L.L.C. ("Notre") holds 1,296,408 shares of Restricted Common Stock, which are entitled to elect one member of the Company's Board of Directors and to one-tenth (0.1) of one vote for each share held on all other matters on which they are entitled to vote. Restricted Common Stock is convertible into one share of Common Stock under certain circumstances. See "Description of Capital Stock -- Common Stock and Restricted Stock." institutions such as universities and hospitals, are increasingly outsourcing their landscape and tree services needs. As a result, regional and national property owners and management companies are seeking providers with the capacity to service all of their properties in a particular region. The Company believes, therefore, that a landscape and tree services provider with a multi-regional or national presence and greater scale will have a significant advantage over its competitors. Moreover, the Company believes that its combination of landscape and tree services capabilities will prove attractive to property owners and managers as they seek to reduce the number of vendors with which they do business. The Company performs services for properties owned or managed by a number of leading property owners and managers, including Trammell Crow, Marriott and CB Commercial. Trees, Inc., one of the Founding Companies, has line clearing contracts with large utilities, including PacifiCorp, Houston Lighting & Power and Texas Utilities. The Company's landscape maintenance services consist primarily of general upkeep and minor upgrades of a customer's property, including grass cutting, weeding, pruning, leaf removal, trimming and edging, mulching, grass reseeding, fertilization and replacement of plants providing seasonal color. Landscape installation consists of installing ornamental and shade trees, plants, shrubbery and grasses, as well as installing walkways, exterior lighting, fountains and drainage and irrigation systems. The Company's tree services consist primarily of line clearing for utilities, as well as commercial and residential tree maintenance services. The Company plans to offer periodic tree maintenance to many of its commercial customers as part of an overall landscape maintenance agreement, thereby reducing the number of required vendors and reducing its customers' need for emergency tree services. OPERATING STRATEGY. The Company believes that there are significant opportunities to increase the profitability of the Founding Companies and any subsequently acquired businesses. The key elements of the Company's operating strategy are: FOCUS ON COMMERCIAL AND INSTITUTIONAL MARKETS. The Company believes that the commercial and institutional markets are attractive because of (i) the potential for preferred relationships with regional and national property owners and managers, real estate developers, corporations, general contractors and landscape architects, (ii) the diverse types of properties served, such as office buildings, multi-family residential complexes, shopping centers, corporate and university campuses, parks, hotels, resorts and governmental facilities, (iii) the opportunity to generate recurring revenue through maintenance contracts, and (iv) the recognition by building owners and managers of the importance of landscaping in enhancing the value and marketability of their properties. OPERATE ON DECENTRALIZED BASIS. The Company manages the Founding Companies and intends to manage the subsequently acquired companies on a decentralized basis with local management retaining responsibility for the day-to-day operations, profitability and internal growth of the business. Although the Company intends to maintain strong central operating and financial control over businesses it acquires, without which inconsistent operating and financial practices could result, its decentralized operating structure will allow it to capitalize on the considerable local and regional market knowledge and customer relationships possessed by local management. ACHIEVE OPERATING EFFICIENCIES. The Company expects there will be significant opportunities to achieve operating efficiencies and cost savings through purchasing economies and the adoption of "best practices" operating programs. The Company intends to use its increased purchasing power to gain volume discounts in areas such as materials, equipment, spare parts and vehicle purchases and workers' compensation and other insurance coverage. The Company expects that its operating efficiency also can be enhanced by implementing, on a Company-wide basis, selected business practices used by one or more of the Founding Companies which have proven successful (also known as "best practices"), in areas such as management information systems, recruiting and training programs, safety and risk management programs, sales training and materials and human resource management, and can also be enhanced by expanding branch networks to increase route density and improve labor utilization. ATTRACT AND RETAIN QUALITY LABOR AND SUPERVISORY PERSONNEL. Most companies in the landscape and tree services industry experience high labor turnover and difficulty in attracting sufficient numbers of supervisory personnel. The Company expects to better attract and retain supervisory and management level employees, the lack of which could adversely limit the Company's growth and scope of operations, because it offers (i) an enhanced career path from working for a multi-branch, public company, including the opportunity to gain increased responsibility at a branch office, (ii) the opportunity to realize a more stable income and (iii) improved health insurance, retirement, profit sharing and other benefits, which the Company expects to be able to offer at little or no additional cost to the Company due to its ability to negotiate with benefit providers on a higher-volume basis. INTERNAL GROWTH. A principal component of the Company's strategy is to continue its internal growth. The key elements of the Company's internal growth strategy are: BUILD MARKET DENSITY. The Company intends to develop its branch network in each of the markets it serves to enable it to serve more commercial and institutional properties efficiently, to improve labor and equipment utilization and to attract employees who live near newly-established branches. ESTABLISH REGIONAL AND NATIONAL MARKET COVERAGE. The Company intends to provide comprehensive landscaping and tree services on a multi-regional and ultimately a national basis. This will enable the Company to capitalize on existing and future relationships with major regional and national property owners and managers. The Company believes it can establish preferred provider relationships with these regional and national property owners and managers to service all or a significant number of their properties. BECOME SINGLE SOURCE PROVIDER. The Company intends to provide its customers with both landscape and tree services in order to become the single source for all of its customers' installation and maintenance requirements. The Company believes that becoming a single source provider will allow it to take advantage of the trend toward vendor consolidation in the commercial real estate market and the developing trend toward outsourcing by institutions and state and local governments. DEVELOP ENHANCED SALES AND MARKETING PROGRAM. The Company intends to establish a national account sales and marketing program, which will emphasize the Company's full service capabilities. This program will target large regional and national property owners as well as large corporations. The Company also intends to establish a sales and marketing program targeted toward institutions and governmental entities beginning to outsource their landscape and tree services requirements. The Company expects that its sales force, which currently includes twenty full-time sales and/or marketing personnel, will expand as the Company increases in size. Although the Company believes that this strategy will prove successful, no assurance can be given of continued internal growth among the Founding Companies and subsequently acquired businesses. See "Risk Factors -- Risks Related to Operating and Internal Growth Strategy." ACQUISITION PROGRAM. In addition to emphasizing internal growth, the Company has an aggressive acquisition program. Although the Company expects to face competition for acquisition candidates, it believes that it will be viewed as an attractive acquiror by other landscape and tree services companies due to its: (i) strategy for creating a national company, (ii) increased financial strength and visibility as a public company, (iii) increased opportunities to cross-market to regional and national property owners and managers, (iv) decentralized operations, which leverage the strengths of local management and (v) ability to achieve operating efficiencies. The Company's acquisition program focuses both on entering new markets through significant acquisitions, as well as expanding within existing markets through acquisitions of smaller companies. Although there are various risks related to the Company's acquisition strategy and no acquisitions, other than the Founding Companies, have been made as of the date of this Prospectus, the Company believes that its strategy will enable it to compete successfully for landscape and tree services companies and increase its geographic coverage, customer base and range of services offered. See "Risk Factors -- Risks Related to the Company's Acquisition Strategy."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001058194_specialty_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001058194_specialty_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..fadbdb5ecaa01c2b1d521fac3394d3be802ffc74
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. For purposes of this Prospectus, the "Company" refers to Specialty Products & Insulation Co. and its consolidated subsidiary, unless the context otherwise requires. Unless otherwise indicated, the information contained in this Prospectus (i) gives effect to the spin-off of the Company from its parent, Irex Corporation ("Irex"), through the pro rata distribution of 100% of the capital stock of the Company to the shareholders of Irex (the "Separation"), (ii) gives effect to the recapitalization of each share of the Company's previously issued common stock into 291.3547 shares of Common Stock and (iii) assumes no exercise of the Underwriters' over-allotment option in connection with the Offering. THE COMPANY Specialty Products & Insulation Co. is a leading national distributor and fabricator of mechanical insulation, architectural/acoustical products and specialty products to commercial and industrial markets. The Company also offers customized fabrication, export and other value-added services related to its core product lines. The Company operates through a national network of 52 distribution centers, including seven fabrication facilities, at strategically chosen locations in 21 states. Through this network, the Company offers approximately 25,000 stock keeping units ("SKUs") to more than 9,000 customers, including specialty contractors, facility owners, general contractors, original equipment manufacturers ("OEMs"), exporters and supply houses. The Company's principal product categories include piping and equipment insulation as well as acoustical ceilings and specialty wall panels for use in new construction, maintenance, renovation and repair.These categories include the products of more than 150 manufacturers including Armstrong World Industries, Owens Corning, Johns Manville, Dow Chemical and Pittsburgh Corning. Since commencing operations in the early 1980s, the Company has experienced significant growth as a result of its ability to capitalize on industry changes including, principally, the increased reliance on distributors by manufacturers and customers. Net sales of the Company increased from $118.4 million in 1995 to $158.5 million in 1997, and operating income grew from $4.1 million in 1995 to $7.0 million in 1997. In the first three months of 1998, net sales and operating income totalled $42.7 million and $1.4 million, respectively, as compared to $36.3 million and $1.1 million, respectively, in the first three months of 1997. Significant changes in the Company's markets have resulted in the emergence of an independent distribution channel. Independent distribution has reduced duplicate functions performed by both manufacturers and customers, allowing them to devote greater resources to their core competencies. Manufacturers have been able to reduce logistical costs, lower marketing expenses and better manage inventories by outsourcing the distribution function to independent distributors. Customers have also been able to lower operating costs, reduce their number of supply sources and gain high-quality, value-added services through the utilization of independent distributors. This evolution has produced markets which are highly fragmented and populated by many smaller local and regional distributors. However, the Company believes the industry is undergoing a significant trend toward consolidation as both manufacturers and customers seek to enhance efficiencies and reduce costs while maintaining high levels of product and service quality. The Company believes that large, national distributors with significant purchasing power, integrated information systems and relatively low infrastructure costs can offer greater value to customers and will be well positioned to exceed market growth rates in this industry. Two key components of the Company's growth strategy have been acquisitions and openings of distribution and service centers ("distribution centers"). Historically, the Company grew as it solidified its presence in regional markets. More recently, the Company has implemented a growth strategy that is being executed on a national scale. Through targeted acquisitions and distribution center openings, the Company pursues opportunities to expand its presence in new geographic areas with strong growth characteristics. This strategy enables the Company to further penetrate existing markets, broaden its product and service capabilities and take advantage of current industry dynamics. For the five-year period ended December 31, 1997, the Company acquired 11 distribution operations, including three from affiliates, which together contributed approximately $13.2 million, or 8.3%, of the Company's 1997 net sales. During the same period, the Company opened 10 distribution centers, which together contributed approximately $12.3 million, or 7.8%, of the Company's 1997 net sales. Since January 1, 1998, the Company has completed one acquisition and opened three distribution centers. The Company is focused on its traditional strengths as a broadly based national distributor and fabricator of mechanical insulation, architectural/acoustical products, specialty products and value-added services. The Company is committed to capitalizing on the expertise, knowledge and experience it has developed in these core markets to increase market share and profitability. In addition, the Company's operating strategy includes the following key elements: . Superior Customer Service. With distribution centers and sales forces in each area that it serves, the Company provides its customers with rapid delivery and localized service. The Company believes that providing a high level of customer service leads to long-term relationships with its customers. . National Network of Distribution Centers. The Company believes its national distribution network enables the Company to attract customers that have multiple locations, participate with key vendors in the development of national marketing and sales strategies, achieve geographic diversification and facilitate best-practice benchmarking as well as innovation and knowledge-sharing within the Company. . Strong Supplier Relationships. The Company believes its national presence, financial strength and partnering philosophy have enabled the Company to become the preferred distributor for many of its suppliers. The Company works with its suppliers to develop common expansion programs as well as customer-oriented product solutions. . Low Cost of Operations. The Company believes that its volume of purchases and desirability as a vendor enable it to obtain purchase terms that are as favorable as those available to other large competitors. The Company is also able to realize advantages from the economies of large-scale operation in the areas of administrative processing, information systems, financing terms, technical expertise, inventory and working capital management. . Innovative and Committed Employees. Management believes the Company's corporate culture and values allow it to attract, develop and retain innovative and committed employees. The Company's senior management has an average of approximately 10 years' experience with the Company, and many of its sales and service staff have been working in the same markets for 10 years or more. The Company believes that its operating strategy provides a foundation for growth in each of the markets in which it participates. See "Business--Growth Strategy." The Company's growth strategy includes the following key elements: . Increase Sales of Existing and Accessory Products. Management believes the Company's strengths and operating strategies will lead to increased sales to its existing customer base. The Company believes acquisitions, the opening of new distribution centers and other strategic initiatives will generate additional sales of existing products to new customers. . Open New Distribution Centers. The Company expects to continue to open new distribution centers as a result of new market opportunities, customer service requirements, supplier initiatives and strategic opportunities. As the Company continues to broaden its national distribution network, the Company believes that it will be able to capitalize on operating efficiencies and the benefits of large-scale operation. . Continue Acquisitions. The Company is committed to continuing its strategy to acquire distribution businesses with strong market positions, supplier support or attractive customer bases. Acquisitions allow the Company to accelerate revenue growth, expand its geographical presence, add product lines and technical expertise and achieve greater operating efficiencies. . Emphasize National Accounts. Management believes that the Company's national distribution network gives the Company a competitive advantage in securing national and multi-regional customers seeking to reduce vendors, outsource non-core operations, integrate supply and gain value-added services such as procurement and material management. . Add Product Lines. The Company intends to leverage its core product and technical expertise to add product lines which are complementary to those currently offered. The Company believes that its existing national distribution infrastructure enables it to add new product lines without incurring significant additional cost. The Company's executive offices are located at 1097 Commercial Avenue, East Petersburg, Pennsylvania 17520, and its telephone number is (717) 569-3900. RECENT ACQUISITION On March 1, 1998, the Company acquired certain assets relating to mechanical insulation distribution and fabrication operations of Extol of Texas, Inc. in Houston and Corpus Christi, Texas ("Extol") for approximately $5.6 million in cash. The acquisition was financed by borrowings from Irex. For the year ended December 31, 1997, Extol generated sales of approximately $13.2 million. See "Acquisition and Expansion Background." The Company has entered into a letter of intent to purchase certain assets of a mechanical insulation fabricator with fiscal year 1997 net sales of approximately $4.0 million. SEPARATION FROM PARENT Since commencing operations in 1982, the Company has been a wholly owned subsidiary of Irex. Through its operating subsidiaries other than the Company, Irex is primarily engaged in the business of specialty contracting throughout the United States and Canada. In January 1998 Irex announced plans to effect the Separation through a pro rata distribution of 100% of the capital stock of the Company to the shareholders of Irex. The Separation will occur immediately prior to consummation of the Offering, and the Offering is conditioned upon the consummation of the Separation. Immediately following the Separation and the Offering, all of the capital stock of the Company will be owned by the shareholders of Irex who receive shares of Common Stock in the Separation and by new shareholders who purchase Common Stock in the Offering. See "Separation from Irex." The decision to effect the Separation is based on a number of factors. The Separation will provide both corporations with greater managerial, operational and financial flexibility to focus on and respond to changing market conditions in their respective business environments. The Company also believes that its ability to pursue and finance acquisitions and other business opportunities will be enhanced if the Company operates independently. Furthermore, financial advisors have advised Irex and the Company that equity capital necessary to meet the business needs of Irex and the Company can be most effectively raised through an initial public offering of the stock of the Company following its Separation from Irex, rather than through a stock offering by either Irex or the Company while Irex continues to hold a substantial equity interest in the Company. In addition, management believes the Separation will assist the Company in serving certain customers. Through the specialty contracting businesses operated by its other subsidiaries, Irex competes with customers whose business is solicited by the Company, and the Company believes these customers will be more likely to purchase products from the Company after it is independent from Irex. The Separation will also enable the Company to provide its management and employees with incentive compensation in the form of direct and indirect equity ownership in the Company. In connection with the Separation, the Company will enter into several agreements with Irex and its subsidiaries setting forth the terms and conditions of the Separation and governing certain interim and longer-term relationships between the companies. See "Separation from Irex--Agreements with Irex." THE OFFERING Common Stock offered by the Company........................ 2,000,000 shares Common Stock to be outstanding after the Offering............. 4,913,547 shares(1) Use of Proceeds................. For the repayment of certain indebtedness, including indebtedness incurred to pay a dividend to Irex in connection with the Separation, and working capital and general corporate purposes. See "Use of Proceeds." Nasdaq National Market Symbol... The Common Stock has been approved for quotation on the Nasdaq National Market under - -------- the symbol "SPIE." (1) Does not include up to 491,355 shares of Common Stock that may be subject to a stock option plan which the Company expects to adopt prior to the consummation of the Offering. See "Management--Stock Options" and "Description of Capital Stock."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001058371_yuasa-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001058371_yuasa-inc_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety and should be read in conjunction with the more detailed information and Consolidated Financial Statements, including the Notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated or the context otherwise requires, all references herein to "Common Stock" include the Class A Common Stock and the Class B Common Stock of the Company. All information in this Prospectus (i) gives effect to the formation of the Company to own all of the shares of the outstanding common stock of Yuasa-Exide, Inc. ("YEI"), (ii) gives effect to the exchange of shares of common stock in YEI held by Yuasa Japan and Exide for shares of Class B Common Stock of the Company on a 1400-for-1 basis on March 26, 1998, (iii) assumes an initial public offering price of $15.00 per share of Class A Common Stock--the midpoint of the range of estimated offering prices, and (iv) assumes that the Underwriters' over-allotment option will not be exercised. All references in this Prospectus to the "Company" refer to Yuasa, Inc., a Pennsylvania corporation and, unless the context indicates otherwise, its consolidated subsidiaries, including YEI which, effective March 9, 1998, began to do business as "Yuasa, Inc." All references herein to the "Offering" mean the offering of shares of Class A Common Stock of the Company by the Company and the Selling Stockholder pursuant to this Prospectus. All references in this Prospectus to fiscal years are to the Company's fiscal years ended on March 31. THE COMPANY The Company believes that it is the leading manufacturer and supplier of industrial batteries and small engine starting batteries in the Americas. The Company markets a full line of stationary and other batteries, as well as motive power batteries and related products and services. Stationary batteries are used primarily to supply standby operating power for (i) telecommunications applications, such as wireless and wireline systems, (ii) uninterruptible power system ("UPS") applications for electronic, security and computer systems, and (iii) switchgear and electrical control systems used in electric utilities and energy pipelines. Stationary and other batteries include small engine starting batteries used to start motorcycles, all-terrain vehicles, snowmobiles and personal watercraft. Motive power batteries are used primarily to power industrial forklift trucks and other materials handling equipment. Related products include chargers, electronic power equipment and a wide variety of battery accessories. The Company sells its products and services through a network of distributors, independent representatives and an internal sales force, and also maintains service centers throughout the United States. The Company believes that it is well-positioned to benefit from expected continued growth in the markets for its products, especially the market for its stationary and motive power industrial batteries. According to industry sources, U.S. sales of large (greater than 25 amperes/hour) industrial stationary and motive power batteries were approximately $670 million in fiscal 1997 and were projected to be approximately $760 million for fiscal 1998. Stationary batteries represent approximately 49% of the total U.S. industrial battery market in fiscal 1998. The stationary battery market has grown at a compounded annual growth rate of approximately 13.7% per year over the past five years, fueled principally by growth in the U.S. telecommunications industry. The stationary battery market is expected to grow at a similar rate over the next several years. Motive power batteries represent approximately 51% of the total U.S. industrial battery market in fiscal 1998. The motive power battery market has grown at a compounded annual growth rate of approximately 9.6% per year over the past five years, fueled principally by increased demand for batteries in the industrial forklift truck market. The motive power battery market is expected to grow at a lower rate for the next several years. For fiscal 1994 through fiscal 1998 the Company's net sales grew from $296.4 million to $396.3 million, while net earnings decreased from $6.3 million in fiscal 1994 to $0.6 million in fiscal 1995. The reduction in fiscal 1995 net earnings was due primarily to a sudden increase in the cost of raw materials and to manufacturing inefficiencies of the Company. Beginning in fiscal 1996, the Company initiated a strategic program primarily designed to improve manufacturing efficiencies and reduce product costs. This program included, among other items, redesigning certain of the Company's products to reduce material costs and automating and reengineering manufacturing operations. The Company's gross profit margin increased from 17.6% to 22.2% between fiscal 1995 and fiscal 1998 and net earnings increased from $0.6 million in fiscal 1995 to $8.3 million in fiscal 1998 due, in significant part, to the success of this program. The Company has historically relied on indebtedness to meet certain of its liquidity requirements and can be expected to do so in the future in light of the growth contemplated by its business strategy. OPERATING STRENGTHS The Company has been able to achieve profitable growth by capitalizing on the following operating strengths: Strong Market Positions. The Company believes it holds the leading market position in both the motive power and small engine starting battery markets and is among the three largest suppliers of stationary batteries in the Americas. The Company believes that its strong market positions result, in large part, from its extensive direct sales force and national network of independent distributors, representatives and service centers. Established Brand Names. The Company believes that its brand names are among the most highly recognized in the markets it serves. The Company sells its stationary and related products principally under the "Yuasa" and "Exide" brand names, motive power products principally under the "Exide" and "General" brand names, and small engine starting batteries under the "Yuasa" brand name, as well as under certain private labels. The Company benefits from having the right to use the "Yuasa" and "Exide" brand names, which the Company believes hold a reputation in the industry for high quality. Reputation for Quality, Service and Innovation. The Company believes that its reputation for product quality, reliability and service enhances its competitiveness. The Company also competes on the basis of its ability to partner with its customers to engineer innovative power solutions. Manufacturing Efficiency. Since it began its strategic initiative to improve manufacturing efficiency in fiscal 1996, the Company has spent over $45.0 million, among other things, to reengineer and automate its manufacturing operations and to increase plant capacities. As a result, the Company believes its manufacturing operations are among the most modern and efficient in the industry and will provide sufficient capacity to meet expected demand for the Company's products over the next three years without substantial additional investment. Broad Range of Products. The Company believes that it offers the broadest product capability in the industry, including batteries addressing a wide range of power requirements (from 1 ampere/hour to 4,000 amperes/hour) and applications. This broad range of products allows the Company to customize its products to meet varying customer requirements. Relationship with Yuasa Japan. The Company benefits from its relationship with Yuasa Japan through its ability to use the "Yuasa" brand name, and from technical assistance and access to battery technology developed by Yuasa Japan. Additionally, the Company sells batteries to Yuasa Japan and its affiliates for resale in the Pacific Rim, and purchases batteries from Yuasa Japan and its affiliates for resale in the Americas. Yuasa Japan is one of the leading manufacturers of lead acid batteries in the world. BUSINESS STRATEGY The Company's primary objectives are to increase its net earnings and return on shareholders' equity and to capitalize on its operating strengths to grow faster than the markets it serves by implementing the following strategies: Stationary Products: Focus on Telecommunications and Other High Growth Markets. The Company believes that the telecommunications markets in the United States and the rest of the Americas offer high growth potential for sales of its stationary products. The Company intends to take advantage of its leading position in the stationary battery market, as well as its other operating strengths, to increase its share of these growing and profitable markets. The Company recently strengthened its stationary business by adding new members to its management team with broad experience in both the industrial battery and telecommunications markets and extensive business relationships with existing and potential purchasers of the Company's stationary products. The Company intends to focus this team's efforts on increasing the Company's sales of stationary products to the telecommunications markets and other markets which may be identified as offering rapid growth potential. The Company also intends to focus its engineering and manufacturing resources on products which have applications in the telecommunications markets and other markets which may be identified as offering rapid growth potential. The Company intends to continue its strategy of developing customized engineering and other product solutions for original equipment manufacturers ("OEMs") and end users of its products through strategic partnerships with them and by taking advantage of technical assistance available from Yuasa Japan. Further, the Company intends to use its increased manufacturing capacity and new systems and programs to significantly improve delivery to its customers with shorter lead times. Motive Power and Small Engine Starting Products: Maintain Leadership Positions. The Company intends to maintain its leadership position in the motive power market by (i) continuing to provide a dual brand approach, including a premium, higher performance product, marketed under the "Exide" brand, and a lower priced product marketed under the "General" brand, (ii) leveraging its nationwide sales and service network, and (iii) improving delivery to its customers through shorter lead times. The Company intends to maintain its leadership position in the small engine starting battery market by developing new products for emerging applications, such as cordless electric mowers and trimmers, and by developing programs to maintain and enhance brand image and customer loyalty. Continued Cost Reduction Initiatives. The Company intends to continue its cost reduction programs initiated in fiscal 1996 by continuing to reengineer and automate its manufacturing processes and facilities and by redesigning its products and business processes to further increase efficiency. Continued Expansion Into New Geographic Markets. The Company believes that Latin America presents significant growth potential for industrial battery sales, particularly in the telecommunications markets. The Company established a sales and distribution business in Mexico in fiscal 1994 and entered into a joint venture in Argentina in fiscal 1997 to market and sell industrial batteries. The Company intends to expand into other Latin American countries through acquisitions, joint ventures and start-up ventures. On August 5, 1998 the Company entered into an agreement to acquire 80% of the stock of a battery manufacturer in Brazil, SA. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." ---------------- The Company maintains its executive offices at 2366 Bernville Road, Reading, Pennsylvania 19605-9457. Its mailing address is P.O. Box 14145, Reading, Pennsylvania 19612-4145, and its telephone number is (610) 208-1991. THE OFFERING <TABLE> <S> <C> Class A Common Stock offered by: The Company 3,300,000 shares/(1)/ The Selling Stockholder 1,092,000 shares/(2)/ Common Stock to be outstanding after the Offering: Class A Common Stock 4,392,000 shares/(1)//(3)//(4)/ Class B Common Stock 7,000,000 shares/(4)/ Total Common Stock 11,392,000 shares/(1)//(3)/ Voting Rights: The Class A Common Stock and Class B Common Stock vote as a single class on all matters, except as otherwise required by law. Each share of Class A Common Stock entitles its holder to one vote and each share of Class B Common Stock entitles its holder to two votes. All of the outstanding shares of Class B Common Stock are presently owned by Yuasa Japan (86.5%) and Exide (13.5%). Immediately after completion of the Offering, Yuasa Japan will own all of the 7,000,000 issued and outstanding shares of Class B Common Stock, representing approximately 61% of all of the outstanding Common Stock and 76% of the combined voting power of the outstanding shares of Common Stock (approximately 73% of the combined voting power if the Underwriters' over-allotment option is exercised in full). See "Description of Capital Stock." Use of Proceeds: The net proceeds received by the Company will be used to repay a portion of the Company's indebtedness. See "Use of Proceeds." New York Stock Exchange The Company has applied for listing of the Class A Listing: Common Stock on the New York Stock Exchange under the symbol "YUA". Risk Factors: An investment in the Class A Common Stock offered hereby is subject to a number of risks. Prospective investors should consider carefully all information set forth herein before making an investment in the Class A Common Stock. In particular, prospective investors should consider the factors set forth herein under "Risk Factors." </TABLE> - -------- (1) Up to an aggregate of 658,800 additional shares of Class A Common Stock may be sold by the Company pursuant to the Underwriters' over-allotment option. See "Underwriting." (2) Consists of 1,092,000 shares of Class B Common Stock which will automatically convert to Class A Common Stock in connection with the Offering. (3) Excludes an aggregate of 602,540 shares of Class A Common Stock reserved for issuance upon exercise of outstanding options and for future issuances under the Company's Omnibus Stock Plan (the "Omnibus Stock Plan"). See "Management--Management Incentive Plans--Omnibus Stock Plan" and "--Grant of Options." (4) Each share of Class B Common Stock is convertible at any time into one share of Class A Common Stock at the election of the holder and converts automatically into one share of Class A Common Stock upon a transfer by the holder to any person other than an affiliate of such holder, except under certain limited circumstances. See "Description of Capital Stock--Class A Common Stock and Class B Common Stock." SUMMARY CONSOLIDATED FINANCIAL INFORMATION The following tables present summary historical consolidated financial information and certain pro forma data of the Company, for the periods or as of the dates indicated. The historical consolidated financial information for each of the five years in the period ended March 31, 1998 has been derived from the Company's historical financial statements, which have been audited. The historical consolidated income statement information for the three-month period ended June 28, 1998 and the three-month period ended June 29, 1997 and the consolidated balance sheet information as of June 28, 1998 have been derived from unaudited consolidated financial statements prepared on the same basis as the audited consolidated financial statements, and, in the opinion of management, include all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of financial position and results of operations as of the dates and for the periods indicated. Results of operations for the interim periods are not necessarily indicative of the results of operations that could be expected for the full fiscal year or any future period. The pro forma information is provided for information purposes only and does not purport to be indicative of the results which would actually have been attained had the events reflected therein occurred on the dates indicated, or which may be expected to occur in the future. The Summary Consolidated Financial Information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements and the Notes thereto included elsewhere in this Prospectus. <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED MARCH 31, ----------------------- ---------------------------------------------------- JUNE 29, JUNE 28, 1994 1995 1996 1997 1998 1997 1998 --------- --------- --------- --------- -------- ----------- ----------- (Unaudited) (Unaudited) (in thousands, except per share data) <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED INCOME STATEMENT DATA: Net sales............... $ 296,416 $ 328,678 $ 357,517 $ 357,526 $396,317 $94,677 $98,864 Gross profit............ $ 61,670 $ 57,698 $ 61,722 $ 72,147 $ 87,879 $20,157 $22,767 Operating expenses...... $ 39,406 $ 42,744 $ 43,952 $ 48,991 $ 56,398 $13,664 $14,514 Operating earnings...... $ 18,724 $ 11,600 $ 14,255 $ 19,527 $ 27,851 $ 5,583 $ 7,345 Earnings before taxes... $ 11,179 $ 1,277 $ 2,793 $ 9,347 $ 14,138 $ 2,874 $ 4,631 Net earnings............ $ 6,306 $ 616 $ 1,279 $ 5,111 $ 8,308 $ 1,662 $ 2,743 Net earnings per share of Common Stock (basic and diluted)........... $ 0.78 $ 0.08 $ 0.16 $ 0.63 $ 1.03 $ 0.21 $ 0.34 Dividends per share of Common Stock........... $ 0.20 $ 0.28 $ 0.05 $ 0.15 $ 0.49 $ 0.21 $ 0.00 Weighted average shares of Common Stock outstanding/(2)/....... 8,092 8,092 8,092 8,092 8,092 8,092 8,092 PRO FORMA DATA: Pro forma net earnings per share/(1)//(3)/.... $ 0.88 $ .28 Pro forma weighted average shares of Common Stock outstanding/(2)//(3)/.. 11,392 11,392 OTHER DATA: Capital expenditures.... $ 16,199 $ 19,983 $ 17,078 $ 11,203 $ 18,951 $ 1,676 $ 5,945 Depreciation and amorti- zation................. $ 11,493 $ 12,386 $ 15,000 $ 14,022 $ 14,882 $ 3,714 $ 3,806 Gross profit margin..... 20.8% 17.6% 17.3% 20.2% 22.2% 21.3% 23.0% Operating earnings mar- gin.................... 6.3% 3.5% 4.0% 5.5% 7.0% 5.9% 7.4% </TABLE> <TABLE> <CAPTION> JUNE 28, 1998 ------------------------- ACTUAL AS ADJUSTED/(4)/ -------- ---------------- (in thousands)(unaudited) <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Total assets......................................... $228,712 $228,712 Total debt........................................... $121,296 $ 76,296 Total shareholders' equity........................... $ 42,711 $ 87,711 </TABLE> - -------- (1) Adjusted to reflect an annual reduction of $2.9 million in interest expense, and the related income tax effect of $1.2 million, on a pro forma basis as if the net proceeds from the Offering (assuming the Underwriters' over-allotment option is not exercised) had been utilized to repay a portion of the Company's outstanding indebtedness at the beginning of each period presented. Interest expense assumes a weighted average interest rate of 6.55% for fiscal 1998 and for the first quarter of fiscal 1999, which approximates the actual interest rate on $45.0 million of indebtedness to be repaid with the estimated net proceeds from the Offering. Assumes an initial public offering price of $15.00 per share of Class A Common Stock-- the midpoint on the estimated range of the public offering price. (2) Amounts exclude an aggregate of 602,540 shares of Class A Common Stock (equal to 5% of the estimated total shares outstanding after the Offering) reserved for issuance upon exercise of outstanding options and for future issuances under the Company's Omnibus Stock Plan. See "Management-- Management Incentive Plans--Omnibus Stock Plan" and "--Grant of Options."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001058441_rainbow_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001058441_rainbow_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..3be3da188033ce56a69e375ff003a0aec87f61a5
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to, and should be read in conjunction with, the more detailed information and the Company's Consolidated Financial Statements, including the related notes thereto, appearing elsewhere in this Prospectus. Unless otherwise noted, the information contained in this Prospectus assumes that the Underwriters' over-allotment option has not been exercised. All industry data set forth in this Prospectus is based on published industry sources, as prepared by The Association of Progressive Rental Organizations ("APRO"). The APRO 1997 Rental-Purchase Industry Survey is based on numbers reported to APRO through December 31, 1996 by its members, and represents the latest period for which such data are available. THE COMPANY The Company operates 66 rental-purchase stores in eight states: Connecticut, Massachusetts, Michigan, New York, Ohio, Pennsylvania, Rhode Island and Tennessee. The Company was founded in 1986 by four individuals, including the three current shareholders-officers of the Company, who average over 18 years of experience in the rental-purchase industry. The Company offers quality, name brand, durable merchandise, including home electronics, furniture, appliances and computers. Generally, rental-purchase merchandise is rented to individuals under flexible agreements that allow customers to own the merchandise after making a specified number of rental payments (ranging from 12 to 24 months). Customers have the option to return the merchandise at any time without further obligation and also have the option to purchase the merchandise at any time during the rental term. The Company believes that its rental-purchase program is an attractive alternative to a credit or installment sale for persons who have difficulty obtaining credit or have a temporary, short-term need for goods. Based on APRO estimates, the Company believes its stores are among the industry's leaders in average monthly rental rate ("AMRR") on its agreements, number of rental-purchase agreements per store and collection performance. In addition, the Company believes its level of customer referrals and repeat business are among the highest in the industry. APRO estimated that gross revenue in the rental-purchase industry was approximately $4.1 billion, and that there were over 2.9 million customers in 1996. The rental-purchase industry is highly fragmented. APRO estimated that there were approximately 7,500 rental-purchase stores at the end of 1996, with the majority of companies owning fewer than 20 stores. The rental-purchase industry is experiencing increasing consolidation due to a combination of increased competition from larger regional and national chains and decreased availability of traditional financing to smaller rental-purchase companies. The Company believes that its significant store base and regional presence make it well positioned in the current industry environment. The Company's operating strategy is to deliver a high degree of customer satisfaction by providing an appealing store environment; quality, name brand, durable merchandise; personal customer service; experienced, well-trained associates; decentralized management; and sophisticated management information systems. The Company believes its high levels of customer satisfaction allow the Company to maintain a high AMRR on its agreements, a large number of rental-purchase agreements per store and a significant level of customer referrals and repeat business. By delivering high volume and superior operating performance in each store, the Company is able to achieve increased profitability by spreading fixed costs over higher revenues. In 1997, the Company's average revenue in those stores opened three full years or more ("core stores") was approximately $1.0 million. The Company attempts to differentiate itself from its competitors and increase customer loyalty by not requiring common industry fees, such as application, delivery, damage-waiver and insurance fees. As a result, its customers are able to spend more of their payments on the merchandise. The Company's growth strategy is to accelerate its new store opening program, increase comparable store revenue and profitability and pursue opportunistic acquisitions. Beginning with six stores in 1986, the Company opened 56 additional stores through April 30, 1998. The Company has increased revenues from $0.6 million in 1986 to $55.3 million in 1997. The Company believes the rental-purchase market is significantly under-penetrated and provides substantial new store expansion potential, particularly within the Midwest, Mid-Atlantic and New England markets. Because most of its public competitors have grown primarily through acquisitions, management believes that the state of the industry presents an opportunity for the Company to capitalize on its demonstrated ability to open new stores. The Company has developed a consistent, replicable model for opening new stores and management believes its strategy of opening new stores provides controllable and predictable growth in revenue and operating income. The Company expects to increase comparable store revenue and profitability by increasing both the number of rental-purchase agreements per store and the monthly rental rates of such agreements. In addition, the Company strives to enhance profitability at its existing stores by empowering store associates, leveraging fixed costs and marketing innovative, high margin product offerings, such as computers. The Company intends to examine both fill-in acquisitions (acquisitions in markets already served by the Company) and new market acquisitions (acquisitions in markets not then served by the Company) on an opportunistic basis. The Company's principal executive offices are located at 3711 Starr Centre Drive, Canfield, Ohio 44406, and its telephone number is (330)533-5363. THE OFFERING <TABLE> <S> <C> Common Stock Offered....................................... 2,250,000 Shares Common Stock to be outstanding after the Offering(1)....... 5,925,735 Shares Use of Proceeds............................................ To repay outstanding indebtedness and for general corporate purposes. Proposed Nasdaq National Market Symbol..................... RBOW </TABLE> - --------------- (1) Excludes 400,000 shares of Common Stock reserved for issuance under the Company's Stock Option Plan, including 305,000 shares issuable pursuant to options outstanding at an exercise price equal to the initial public offering price per share. See "Management -- Stock Option Plan."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1998/CIK0001058590_balance_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001058590_balance_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e605259a789ab6cb7643169ceb587a5e8735ab17
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Financial Statements and Notes thereto appearing elsewhere in this Prospectus. The Common Stock offered hereby involves a high degree of risk. See "Risk Factors." THE COMPANY Balance Bar Company develops and markets branded food and beverage products in convenient, good-tasting, balanced nutritional formulations that appeal to a broad consumer base. The Company has targeted its products, the Balance bar and the 40-30-30 Balance powdered drink mix, at the healthy snack and meal replacement market and believes that by marketing its products as "nutritious snacks that taste great" it is highlighting their benefits over typical snacks and meal replacements. In addition, the Company has targeted other markets consisting of consumers with specific dietary or nutritional requirements, including the fitness, weight management and diabetic markets. In order to make its products available wherever people shop, the Company sells its products through multiple distribution channels, including natural foods, mass merchandise, club, grocery, convenience, health and fitness, and drug stores. Balance Bar Company has experienced significant growth as sales have grown from $1.3 million in 1995 to $39.6 million in 1997. Consumers have become increasingly health conscious over the last decade, as reflected in the surge of activities aimed at maintaining and improving health, including exercising, dieting and quitting smoking. Despite this concern for health and nutrition, today's consumers find themselves with less time for three nutritious meals a day and are seeking healthy snacks and meal substitutes that can be consumed at any time or place. In response to these trends, many new food and beverage products have been introduced to satisfy consumer demand for nutritious snacks and meal replacements and have achieved increasingly broad distribution. The Company believes that the consumer trends towards health and nutrition will continue to drive the broad distribution of convenient, healthy snacks and meal replacements. The Company has differentiated its brand from other snack products and meal replacements by focusing on the combination of nutrition, good taste and convenience. The Company's current product lines are based on balanced proportions of 40% carbohydrates, 30% protein and 30% dietary fat, a formulation designed to sustain energy and satisfy hunger. The Company currently sells ten flavors of Balance bars in two sizes and five flavors of powdered drinks in canisters or single serving envelopes. Although the Company's current products are based upon the 40-30-30 concept, a Company survey indicates that the popularity of its products extends to a much broader consumer base. The Balance bar has significantly penetrated the natural foods channel with approximately 69% of the Company's 1997 sales in this channel. According to SPINS data from Spence Information Services, the Balance bar was the number one selling brand of nutrition bar in the natural foods channel, achieving a 31.0% share in 1997 and a 34.6% share in the January/February 1998 reporting period. In 1997 and the first quarter of 1998, the Company expanded its strategic focus to the wider mass market, including mass merchandise, club, grocery, convenience, health and fitness and drug stores. The Company had the top two selling nutrition bar flavors per point of distribution in grocery stores for the November/December 1997 reporting period and the top selling nutrition bar flavor per point of distribution in grocery stores for the January/February 1998 reporting period. In addition the leading Balance bar flavor outsold the nearest competitor flavor per point of distribution in grocery stores by 56.6% in December 1997 and by 40.0% in February 1998. According to ACNielsen Scan Track: SPINS Natural Track, the Balance bar market share in the energy bars category of grocery store natural products increased from 2% in the November/December 1996 reporting period to 16% in the November/December 1997 reporting period and to 17% in the January/February 1998 reporting period. The Company believes that expanding distribution within the mass market represents a significant growth opportunity. The Company's goal is to become a recognized leader in providing nutritious, good tasting and convenient snack and meal replacement products for a wide variety of consumer needs. In order to achieve its goal, the Company's strategy is to: (i) continue positioning Balance products as good tasting, nutritious snacks and meal replacements; (ii) expand the Company's consumer base and brand awareness through increased advertising and promotional activities; (iii) expand existing and new channels of distribution; (iv) focus on in-store promotion and marketing; (v) continue to promote the nutritional qualities of Balance products; (vi) introduce new products and product line extensions; and (vii) acquire complimentary companies or product lines. The Company's principal executive office is located at 1015 Mark Avenue, Carpinteria, California 93013. Its telephone number is (805) 566-0234. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company................. 1,003,372 shares Common Stock offered by the Selling Stockholders.... 1,396,628 shares Common Stock to be outstanding after the offering... 10,687,174 shares (1) Use of proceeds..................................... To retire short and long-term debt and for working capital and other general corporate purposes (which could include the acquisition of companies or product lines). Proposed Nasdaq National Market symbol.............. BBAR </TABLE> SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> YEAR ENDED SEVEN MONTHS YEAR ENDED THREE MONTHS MAY 31, ENDED DECEMBER 31, ENDED MARCH 31, --------------- DECEMBER 31, ----------------------- --------------- 1993 1994 1994 1995 1996 1997 1997 1998 ------- ------ ------------ ------ ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Sales.................. $ 481 $ 692 $ 576 $1,262 $10,544 $39,634 $ 6,136 $17,457 Income (loss) before income taxes.......... (1,262) (312) 7 (84) 1,840 2,876 775 2,176 Net income (loss)...... (1,263) (313) 6 (85) 1,615 1,660 447 1,284 Earnings (loss) per diluted share (2)..... (0.22) (0.04) -- (0.01) 0.17 0.15 0.04 0.11 Weighted average number of shares outstanding (2)................... 5,828 7,670 7,713 7,800 9,343 11,043 11,434 11,683 </TABLE> <TABLE> <CAPTION> MARCH 31, 1998 ---------------------- ACTUAL AS ADJUSTED(3) ------- -------------- <S> <C> <C> BALANCE SHEET DATA: Cash................................................... $ 89 $ 6,712 Working capital........................................ 4,122 14,331 Total assets........................................... 14,694 20,880 Long-term debt, net of current portion................. 202 10 Total shareholders' equity............................. 5,561 15,525 </TABLE> - -------- (1) Based on the number of shares outstanding at March 31, 1998. Excludes (i) 1,800,000 shares of Common Stock reserved for issuance under the Company's 1998 Performance Award Plan (the "1998 Plan"), of which no shares were subject to outstanding options as of March 31, 1998, and (ii) 2,615,502 shares of Common Stock issuable upon the exercise of options outstanding at March 31, 1998 at a weighted average exercise price of $0.74 per share. See "Capitalization," "Management--Stock Options and Stock Plans" and Note 8 of Notes to Financial Statements. (2) See Note 3 of Notes to Financial Statements for an explanation of the determination of shares used in computing earnings (loss) per diluted share. (3) Adjusted to reflect the sale of 1,003,372 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $11.00 per share, the receipt of the estimated net proceeds therefrom, and the retirement of $3.7 million of outstanding debt. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001058991_new-south_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001058991_new-south_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..c2144422c7f7728d0359421b362e7cd405fe4209
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1998/CIK0001058991_new-south_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus does not give effect to the exercise of the Underwriters' over-allotment option. Prospective investors should carefully consider the information set forth under the heading "Risk Factors." Throughout this Prospectus, unless the context clearly requires otherwise, references to "the Company" should be deemed references to the combined activities of New South Bancshares, Inc., a non-operating holding company, and its principal operating subsidiary, New South Federal Savings Bank. THE COMPANY New South Bancshares, Inc. (the "Company") is a closely held unitary thrift holding company headquartered in Birmingham, Alabama. Through its financial institution subsidiary, New South Federal Savings Bank ("New South"), a federally chartered savings association organized in 1985, the Company operates two full-service retail branch offices in Birmingham, Alabama, and 46 loan production offices located in 13 states throughout the southeastern and western United States. New South is the largest thrift and the sixth largest depository institution, based on asset size, headquartered in the State of Alabama. See "The Company" and "Business." The Company's operations principally involve residential mortgage lending, installment (automobile) lending, residential construction and land lending and deposit gathering activities. The Company's residential mortgage lending efforts involve the origination and purchase of residential mortgage loans through its loan origination offices and wholesale sources, the sale of such loans (usually on a pooled and securitized basis) in the secondary market, and the servicing of residential mortgage loans for investors as well as the Company's own loan portfolio. The installment (automobile) lending program involves indirect lending through 600 automobile dealers in six southern states. The Company's residential construction and land lending efforts involve making loans to builders for the construction of single family properties and, on a more limited basis, loans for the acquisition and development of improved residential lots. In addition, the Company actively funds and purchases commercial real estate loans originated by Collateral Mortgage Ltd. ("Collateral"), an affiliate, which may be sold to investors or held in New South's portfolio. See "Business." The Company funds its lending activities primarily with customer deposits gathered through a broad range of banking services including certificates of deposit, individual retirement and other time and demand deposit accounts and money market accounts. The Company takes a wholesale approach to generating deposits, paying high interest rates while keeping deposit gathering overhead costs low. The Company maintains two retail branch offices, both located in Birmingham, Alabama, and attracts the majority of its deposits through telemarketing activities and third parties, primarily brokers. See "Business." At March 31, 1998, the Company's loan portfolio consisted of the following: (i) $314.9 million in residential mortgage loans, of which $137.4 million the Company classifies as conforming residential mortgage loans, and $177.5 million the Company classifies as nonconforming residential mortgage loans; (ii) $107.1 million in installment (automobile) loans; (iii) $107.8 million in residential construction and land loans; (iv) $119.9 million in commercial real estate loans (the majority of which are originated by Collateral but funded and closed by New South); and (v) $3.3 million in commercial loans. Also as of such date, the Company serviced approximately $1.8 billion of residential mortgage loans, installment (automobile) loans and commercial real estate loans, which had an approximate weighted average yield of 8.55%. Of such amount, $1.2 billion represented loans serviced for others and $652.9 million represented loans the Company held in its own portfolio. See "Business." The following information summarizes certain selected consolidated financial information of New South as of and for its fiscal years ended September 30, 1993 and 1994 and of the Company (which was established in 1994 with a fiscal year ended December 31) as of and for its fiscal years ended December 31, 1994 on a pro forma basis, December 31, 1995, 1996 and 1997 and for the three months ended March 31, 1997 and 1998. The summary below should be read in conjunction with "Management's Discussion and Analysis of Financial Conditions and Results of Operations" and the Company's Consolidated Financial Statements and Notes included herein. <TABLE> <CAPTION> NEW SOUTH FEDERAL SAVINGS BANK NEW SOUTH BANCSHARES, INC. -------------------- -------------------------------------------------------------------- PRO FORMA AS OF AND FOR THE AS OF AND FOR THE AS OF AND FOR THE AS OF AND FOR THE YEAR ENDED YEAR ENDED YEAR ENDED THREE MONTHS ENDED SEPTEMBER 30, DECEMBER 31, DECEMBER 31, MARCH 31, -------------------- ----------------- ---------------------------- -------------------- 1993 1994 1994(1) 1995 1996 1997 1997 1998(2) --------- --------- ----------------- -------- -------- -------- -------- ---------- (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE) <S> <C> <C> <C> <C> <C> <C> <C> <C> Total assets............ $ 616,949 $ 575,767 $590,384 $746,518 $824,968 $994,053 $869,508 $ 983,576 Loans serviced for others................. 643,429 723,699 731,110 716,664 709,773 999,613 769,597 1,163,042 Loans originated........ 152,419 219,858 221,011 264,192 408,845 852,588 100,849 383,270 Net income.............. 5,804 3,793 4,628 3,366 2,562 4,716 1,570 1,264 Net income per share.... 5.80 3.79 3.32 2.42 1.84 3.42 1.14 0.92 Total stockholders' equity................. 37,350 38,263 38,883 45,780 47,941 52,314 49,155 53,028 Return on average equity................. 17.01% 9.51% 12.73% 7.75% 5.22% 9.17% 12.55% 9.42% Return on average assets................. 0.99 0.59 0.79 0.47 0.31 0.51 0.74 0.50 </TABLE> - -------- (1) Pro forma amounts assume the formation of New South Bancshares, Inc. as of January 1, 1994. (2) In July of 1997, Collateral transferred to New South 39 residential mortgage loan production offices, associated employees, and related assets and liabilities. See "Management Discussion and Analysis." The principal executive offices of the Company are located at 1900 Crestwood Boulevard, Birmingham, Alabama 35210. Its telephone number at such address is (205) 951-4000. NEW SOUTH CAPITAL TRUST I The Trust is a statutory business trust formed under Delaware law pursuant to (i) a trust agreement, dated as of April 2, 1998, executed by the Company, as depositor, and Bankers Trust (Delaware), as a trustee (the "Delaware Trustee"), and (ii) a certificate of trust filed with the Delaware Secretary of State on April 2, 1998. The initial trust agreement will be amended and restated in its entirety (as so amended and restated, the "Trust Agreement") substantially in the form filed as an exhibit to the Registration Statement of which this Prospectus forms a part. This Trust Agreement will, among other things, appoint a "Property Trustee" which shall hold legal title to the Subordinated Debentures in trust for the benefit of the holders of the Trust Securities and several "Administrative Trustees" who shall have the power, duty and authority to cause the Trust to issue and sell the Trust Securities and to execute any documents or certificates necessary to effectuate such issuance and sale. The Delaware Trustee shall be a Trustee for the sole and limited purpose of fulfilling the statutory requirements of Section 3807 of the Delaware Business Trust Act and shall have no authority to take any action except as required under the Delaware Business Trust Act. The Delaware Trustee, Property Trustee and Administrative Trustees are collectively referred to herein as the "Issuer Trustees." The Trust Agreement will be qualified as an indenture under the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The Trust exists for the exclusive purposes of (i) issuing the Preferred Securities offered hereby representing preferred undivided beneficial interests in the assets of the Trust, (ii) issuing the Common Securities representing common undivided beneficial interests in the assets of the Trust to the Company, (iii) investing the gross proceeds of the sale of the Trust Securities in the Subordinated Debentures, and (iv) engaging in only those other activities necessary, advisable, or incidental thereto. The Subordinated Debentures will be the only assets of the Trust and payments on the Subordinated Debentures will be the only revenue of the Trust. The Subordinated Debentures will be issued by the Company pursuant to the Junior Subordinated Indenture between the Company and Bankers Trust Company, as debenture trustee (as amended and supplemented from time to time, the "Indenture"). Upon issuance of the Preferred Securities, the purchasers thereof will own all of the Preferred Securities. The Company will acquire all of the Common Securities which will represent an aggregate liquidation amount equal to at least 3% of the total capital of the Trust. The Common Securities will rank pari passu, and payments will be made thereon pro rata, with the Preferred Securities, except that upon the occurrence and during the continuance of an Event of Default (as defined herein) under the Trust Agreement resulting from a Debenture Event of Default (as defined herein), the rights of the Company as holder of the Common Securities to payment in respect of Distributions and payments upon liquidation, redemption or otherwise will be subordinated to the rights of the holders of the Preferred Securities. See "Description of the Preferred Securities--Subordination of Common Securities." The Trust has a term of 31 years, but may terminate earlier as provided in the Trust Agreement. The principal executive offices of the Trust are located at 1900 Crestwood Boulevard, Birmingham, Alabama 35210. Its telephone number at such address is (205) 951-4000. It is anticipated that the Trust will be conditionally exempted from the reporting requirements of the Exchange Act. THE OFFERING Securities Offered.......... 3,000,000 Preferred Securities having a Liquidation Amount of $10.00 per Preferred Security. The Preferred Securities represent preferred undivided beneficial interests in the assets of the Trust, which will consist solely of the Subordinated Debentures and payments thereunder. The Company and the Trust have granted the Underwriters an option, exercisable within 30 days after the date of this Prospectus, to purchase up to an additional 450,000 Preferred Securities at the initial offering price, solely to cover over-allotments, if any. Payment of Distributions.... The Distributions payable on each Preferred Security will be fixed at a rate per annum of % of the Liquidation Amount of $10.00 per Preferred Security, will be cumulative, will accumulate from , 1998, the Issue Date of the Preferred Securities, and will be payable quarterly in arrears, on March 31, June 30, September 30 and December 31 of each year, commencing September 30, 1998. See "Description of the Preferred Securities --Distributions." Extension Periods........... The Company has the right, at any time, so long as no Debenture Event of Default has occurred and is continuing, to defer payments of interest on the Subordinated Debentures by extending the interest payment period on the Subordinated Debentures, at any time and from time to time, for up to 20 consecutive quarters (each, an "Extension Period"), provided, that no Extension Period may extend beyond the Stated Maturity of the Subordinated Debentures. See "Description of the Subordinated Debentures--Option to Extend Interest Payment Date." During an Extension Period, interest on the Subordinated Debentures will continue to accrue (and the amount of Distributions to which holders of the Preferred Securities are entitled will accumulate) at the rate of % per annum, compounded quarterly, to the extent permitted by applicable law, from the relevant payment date for such interest, and holders of Preferred Securities will be required to continue to accrue income for United States federal income tax purposes, even though the Trust is not making cash Distributions on such Preferred Securities. There could be multiple Extension Periods of varying lengths throughout the term of the Subordinated Debentures. As a consequence of the extension by the Company of the interest payment period, quarterly Distributions on the Preferred Securities will be deferred (though such Distributions will continue to accumulate and compound quarterly, since interest will continue to accrue and compound on the Subordinated Debentures) during any such Extension Period. During an Extension Period the Company will be prohibited, subject to certain exceptions described herein, from declaring or paying any cash distributions with respect to its capital stock or debt securities that rank pari passu with or junior to the Subordinated Debentures. Upon the termination of any Extension Period and the payment of all amounts then due, the Company may commence a new Extension Period, subject to the foregoing requirements. See "Description of the Preferred Securities-- Distributions" and "Description of the Subordinated Debentures--Option to Extend Interest Payment Date." During an Extension Period, holders of Preferred Securities will be required to continue to include income in the form of Original Issue Discount ("OID") in their gross income for federal income tax purposes in advance of the receipt of the cash payments attributable to such deferred interest. See "Description of the Subordinated Debentures-- Option to Extend Interest Payment Date" and "Certain Federal Income Tax Consequences-- Interest Income and Original Issue Discount." Ranking..................... The Preferred Securities will rank pari passu, and payments thereon will be made pro rata, with the Common Securities except as described under "Description of the Preferred Securities-- Subordination of Common Securities." The Subordinated Debentures will be unsecured and subordinate and junior in right of payment to all Senior Debt to the extent and in the manner set forth in the Indenture. See "Description of the Subordinated Debentures." The Guarantee will constitute an unsecured obligation of the Company and will rank subordinate and junior in right of payment to all Senior Debt to the extent and in the manner set forth in the Guarantee Agreement and, in the event of bankruptcy or insolvency proceedings involving the Company, will rank subordinate and junior in right of payment to all liabilities of the Company, but senior to any obligations in respect of any class of capital stock of the Company. See "Risk Factors--Risk Factors Relating to the Preferred Securities-- Ranking of Subordinate Obligations Under the Guarantee and Subordinated Debentures" and "Description of the Guarantee." In addition, because the Company is a holding company, the Subordinated Debentures and the Guarantee will be effectively subordinated to all existing and future liabilities of the Company's subsidiaries, including New South's deposit liabilities. See "Description of the Subordinated Debentures--Subordination." Optional Redemption......... The Preferred Securities are subject to redemption, in whole or in part, upon repayment of the Subordinated Debentures at , 2028, the Stated Maturity, or their earlier redemption. The Subordinated Debentures are redeemable prior to the Stated Maturity at the option of the Company (i) on or after , 2003, in whole at any time or in part from time to time, or (ii) at any time, in whole (but not in part), upon the occurrence of a Special Event. See "Description of the Preferred Securities--Redemption," "Description of the Subordinated Debentures-- Optional Prepayment after , 2003," and "-- Special Event Prepayment." No Ratings.................. The Preferred Securities are not expected to be rated by any rating agency, nor is any other security issued by the Company so rated. Termination and Distribution................ The Company will have the right at any time to terminate the Trust and cause the Subordinated Debentures to be distributed to the holders of the Preferred Securities in liquidation of the Trust. This right is optional and wholly within the discretion of the Company. Circumstances under which the Company may determine to exercise such right could include the occurrence of adverse tax consequences to the Company or the Trust that are not within the definition of a Tax Event (as defined herein) because they do not result from an amendment or change described in such definition, and changes in the accounting requirements applicable to the Preferred Securities as described under "Accounting Treatment." See "Description of the Preferred Securities--Liquidation of Trust and Distribution of Subordinated Debentures." Guarantee................... The Company has, through the Guarantee, the Indenture, the Subordinated Debentures and the Trust Agreement, fully and unconditionally guaranteed all the Trust's obligations with respect to the Preferred Securities, subject to certain subordination provisions discussed below. The payment of distributions on the Preferred Securities is guaranteed by the Company under the Guarantee, but only to the extent the Trust has funds legally and immediately available to make such distributions. If the Company does not make principal or interest payments on the Subordinated Debentures, the Trust will not have sufficient funds to make distributions on the Preferred Securities. In such event, a holder of Preferred Securities may institute a legal proceeding directly against the Company pursuant to the terms of the Guarantee to enforce payment of amounts equal to such Distributions to such holder. See "Description of the Subordinated Debentures--Enforcement of Certain Rights by Holders of Preferred Securities." Voting Rights............... The holders of the Preferred Securities will have no voting rights except in limited circumstances. See "Description of the Preferred Securities-- Voting Rights; Amendment of the Trust Agreement." ERISA Considerations........ Prospective purchasers should consider the restrictions on purchase set forth under "ERISA Considerations." Certain Tax Consequences.... Should the Company exercise its right to defer payments of interest on the Subordinated Debentures, each holder of Preferred Securities will be required to continue to accrue income (as OID) in respect of the deferred stated interest allocable to its Preferred Securities for United States federal income tax purposes, which will be allocated but not distributed to holders of Preferred Securities. As a result, during an Extension Period, each holder of Preferred Securities will recognize income for United States federal income tax purposes in advance of the receipt of cash and will not receive the cash related to such income from the Trust if the holder disposes of the Preferred Securities prior to the record date for the payment of Distributions thereafter. See "Certain Federal Income Tax Consequences--Interest Income and Original Issue Discount" and "--Sales of Preferred Securities." Absence of Market for the Preferred Securities........ The Preferred Securities will be a new issue of securities for which there currently is no market. Although the Company intends to apply to have the Preferred Securities approved for quotation on the American Stock Exchange, there can be no assurance that such application will be approved, that an active trading market in the Preferred Securities will develop or, if one does develop, that it will be maintained. Accordingly, there can be no assurance as to the development or liquidity of any market for the Preferred Securities. American Stock Exchange..... The Company intends to apply to have the Preferred Securities approved for quotation on the American Stock Exchange, Inc. For additional information regarding the Preferred Securities, see "The Trust,"
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001059019_cleveland_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001059019_cleveland_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2650b9950218f69f19cca9df6114a1366340db32
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus assumes (i) no exercise of the Underwriters' over-allotment option and (ii) completion of the transactions described under the heading "Formation Transactions." Unless the context otherwise requires, prior to completion of the Formation Transactions, references to the "Company" throughout this Prospectus, including the financial information contained herein, refer to the operations of Cleveland Indians Baseball Company Limited Partnership (the "Partnership") and Ballpark Management Company ("Ballpark Management"). After completion of the Formation Transactions, references to the "Company" refer to the operations of Cleveland Indians Baseball Company, Inc. and the Partnership. The American League, and its member clubs, and the National League, and its member clubs, are collectively referred to in this Prospectus as "MLB" or "Major League Baseball." None of the Office of the Commissioner of Baseball, the National League or any of its member clubs, or the American League or any of its member clubs, or any of their respective owners, officers, directors, employees or representatives make any representation or warranty, express or implied, as to the accuracy or completeness of the information contained in, or assume any liability for any inaccuracies in or omissions from, this Prospectus. THE COMPANY The Company has been organized to serve as the sole general partner of the Partnership, which owns the 1997 American League Champion Cleveland Indians (the "Indians" or the "Club") and manages Jacobs Field, the Indians' home ballpark. Baseball has a long tradition in the City of Cleveland. The first professional baseball game in Cleveland was played on June 2, 1869, when the Cleveland Forest Citys played the Cincinnati Red Stockings. In 1901, the Club became one of the charter members of the American League of Professional Baseball Clubs (the "American League"). During the ensuing 20 years, the Indians enjoyed great success, including a victory against the Brooklyn Dodgers in the 1920 World Series. During the 1940s and 1950s, the Indians were one of baseball's consistently strong teams. The Indians won the American League pennant twice (1948 and 1954), captured the World Series from the Boston Braves in 1948, and finished second in the American League six times (1951-1953, 1955, 1956 and 1959). Unfortunately, the next 25 years of the Indians' history were marked by financial instability, inattention to the Club's minor league system, criticized player personnel decisions, poor on-field performance and some of the worst attendance figures in Major League Baseball. In 1986, Richard E. Jacobs and his brother David acquired control of the Indians and began to execute a long-term strategy that has returned winning baseball to Cleveland and has made the Cleveland Indians one of the premier franchises in Major League Baseball. The Company's strategy is to maintain the Indians' competitive position and to increase the long-term value of the franchise. The elements of this strategy include dedication to a strong player development system, effective player personnel management, attention to quality and customer service and an integrated approach to marketing and licensing arrangements. In the past three seasons, the Indians have won three American League Central Division Championships and two American League Championships. Under Mr. Jacobs' direction, the Indians were also instrumental in the planning and development of the downtown sports complex that includes Jacobs Field. The Company believes that the Club's recent on-field and financial successes are largely attributable to the collaboration of a management team that includes experienced and talented baseball and business executives. This team is led by John Hart, Executive Vice President and General Manager, and Dennis Lehman, Executive Vice President, Business, and includes a coaching staff led by Mike Hargrove, Manager. Mr. Hart was named Major League Baseball Executive of the Year in 1994 and 1995 by The Sporting News, a leading sports publication, and Mr. Hargrove was named Manager of the Year by The Sporting News in 1995. Player development is a critical element of management's efforts to build and maintain a strong franchise. The Company has established a strong minor league organization through a consistent, system-wide approach to evaluating and developing young players. The team's minor league organization was ranked the best in Major League Baseball in a 1996 poll by The Sporting News. Among its other player development efforts, the Company sponsors baseball programs in The Dominican Republic and Venezuela in which coaches affiliated with the Club work to develop the skills of promising young players in those countries. The Club's successful minor league organization has provided the Indians with a pool of talented young players to supplement its major league roster and to permit it to make opportune trades. Effective player personnel management is the most visible element of the Company's baseball strategy. The goal of the Company's player personnel management efforts is to maintain a competitive team while limiting the unpredictability in player salaries resulting from salary arbitration and free agency. Management's confidence in its ability to identify promising young players has permitted the Club to selectively enter into multi-year contracts with players early in their careers. The Company also attempts to sign a nucleus of experienced players to multi-year contracts. Finally, the Club has been successful in trading for, or signing as free agents, talented players who can fill roles on the roster made vacant by trades, retirements, injuries and losses to the free agent market. By building value for team sponsors and fans, the Company's business executives leverage the Club's on-field product to enhance revenues. The Company's control over various facets of its business, including advertising signage and concessions at Jacobs Field, permits it to capitalize on the Indians' popularity with sponsors and fans. Sponsors are offered a number of advertising vehicles to maximize their exposure at Jacobs Field and their association with the Club. Fans at Jacobs Field are offered a customer-focused experience in an attractive, comfortable environment featuring a variety of amenities, concessions and merchandise options and a courteous, well-trained staff. The successful execution of the Indians' long-term strategy has resulted in strong revenues in recent years. The Club has sold out all tickets available for public sale for each of the 1996, 1997 and 1998 regular seasons prior to Opening Day. The Indians hold the Major League Baseball record for consecutive regular season sell-outs, which stands at 237 through May 26, 1998. These strong attendance figures provide the Club with a predictable ticket sale and premium seating revenue base for the regular season and permit the Company to realize high levels of merchandise and concession sales at Jacobs Field. The fan interest evidenced by these attendance figures has also permitted the Club to enhance revenues from other sources, such as local broadcast and cable television, radio and advertising. However, the Company's management believes that much of the Club's local revenue potential has been realized and that future increases in the Club's revenues, operating income and net income, if any, are likely to be substantially less than those realized over the past five years. See "Risk Factors -- Limited Potential for Further Revenue and Earnings Growth." Although the Company's revenues depend heavily on the Indians' on-field performance, the predictability of the Club's ticket and premium seating sales in recent years has allowed it to create a competitive, profitable team within the framework of a Major League Baseball system that is confronted with escalating player salaries and limited means for clubs to increase revenue. Richard E. Jacobs is Chairman of the Board, President and Chief Executive Officer of the Company. Upon completion of the Offering, the Company will own at least a 51% general partnership interest in the Partnership, and Mr. Jacobs, as the sole trustee of two family trusts (the "Jacobs family trusts"), will beneficially own a 49% limited partnership interest in the Partnership, through the trusts' ownership of Cleveland Baseball Corporation ("CBC"), the pre-Offering general partner of the Partnership. In addition, Mr. Jacobs, through the Jacobs family trusts, will beneficially own 2,281,667 Class B Common Shares and 133,200 Class A Common Shares following the Offering which represents 99.88% of the total voting control of the Company. As a result, Mr. Jacobs will be able to control all decisions regarding the Company requiring a shareholder vote (other than certain charter amendments), including the election of the entire Board of Directors. Following the Offering, each of the 6,043,334 limited partnership Units in the Partnership held by CBC will be exchangeable for Class A Common Shares on a one-for-one basis, subject to the right of the Company to pay cash upon receiving notice of a proposed exchange. See "Formation Transactions" and "The Partnership--Limited Partner Rights." The Company is an Ohio corporation incorporated on March 17, 1998. The Company's principal executive offices are located at 2401 Ontario Street, Cleveland, Ohio 44115, and its telephone number is (216) 420-4200. THE OFFERING <TABLE> <S> <C> Class A Common Shares offered.............................. 4,000,000 shares Class A Common Shares to be outstanding after the Offering(1).............................................. 4,139,376 shares Class B Common Shares to be outstanding after the Offering................................................. 2,283,957 shares Aggregate Class A and Class B Common Shares to be outstanding after the Offering(1)........................ 6,423,333 shares Nasdaq National Market symbol.............................. CLEV Use of proceeds............................................ To acquire the general partnership interest in the Partnership. See "Formation Transactions." </TABLE> - --------------- (1) Excludes 6,043,334 Class A Common Shares reserved for issuance upon exchange of limited partnership Units in the Partnership. See "The Partnership -- Limited Partner Rights." Also excludes 700,000 Class A Common Shares reserved for issuance under the Company's Stock Option Plan. See "Management -- Stock Option Plan." SUMMARY FINANCIAL DATA The following table sets forth certain historical and pro forma data for the Partnership and Ballpark Management on a combined basis and should be read in conjunction with the Combined Financial Statements of the Partnership and Ballpark Management and the Notes thereto included elsewhere in this Prospectus. For financial reporting purposes, the Company generally recognizes revenues and expenses on a game-by-game basis. Because the Major League Baseball regular season begins in late March or early April, the Company's first fiscal quarter, which ends on March 31, generally includes limited revenues and reflects a loss attributable to fixed costs of operations incurred during the quarter. The revenue recognized in the first quarter ended March 31 consists primarily of spring training and exhibition game revenues, merchandise sales and concession and catering revenue. Generally, any post-season revenue will be recognized in the fourth quarter. <TABLE> <CAPTION> YEAR ENDED -------------------------------------------------------------- THREE MONTHS ENDED DECEMBER 31, MARCH 31, ----------------------------------------- ------------------------------ 1997 PRO OCTOBER 31,(1)(2) ------------------- ACTUAL FORMA ------------------ PRO -------------------- ------- 1993 1994(3) 1995(3) 1996 ACTUAL FORMA(4) 1997 1998 1998(4) ------- -------- -------- -------- -------- -------- -------- -------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> INCOME STATEMENT DATA REVENUES: Net ticket sales.............. $19,410 $23,182 $32,267 $ 45,658 $ 49,279 $49,279 $ 1,402 $ 1,093 $ 1,093 Local radio and television.... 6,316 5,568 9,667 13,631 17,014 17,014 -- 38 38 Concession and catering....... 2,367 6,969 11,872 14,726 14,095 14,095 110 20 20 Private suite and club seat rental...................... -- 3,768 5,635 7,035 8,704 8,704 -- -- -- Advertising and promotion..... 1,597 3,998 5,742 6,891 8,754 8,754 -- -- -- Merchandise................... 2,548 8,513 15,024 14,683 17,449 17,449 1,043 1,432 1,432 Major Leagues Central Fund.... 17,585 3,943 6,633 12,369 15,505 15,505 -- -- -- Other......................... 3,602 3,579 2,979 3,002 3,365 3,365 648 675 675 Post-season................... -- -- 9,888 1,933 13,051 13,051 -- -- -- Benefit (provision) for revenue sharing............. 658 (239) (2,056) (5,731) (7,186) (7,186) (204) (223) (223) ------- ------- ------- -------- -------- -------- ------- -------- ------- Total revenues.......... 54,083 59,281 97,651 114,197 140,030 140,030 2,999 3,035 3,035 ------- ------- ------- -------- -------- -------- ------- -------- ------- OPERATING EXPENSES: Major league team............. 21,898 26,389 38,904 53,420 66,125 66,125 1,512 2,430 2,430 Player development............ 7,931 7,198 8,298 8,735 11,146 11,146 2,436 2,484 2,484 Ballpark operations........... 5,148 6,259 9,071 10,389 10,965 10,965 1,844 1,973 1,973 Cost of merchandise sold...... 1,422 5,001 9,224 11,692 12,982 12,982 1,435 1,582 1,582 Administrative and general.... 5,983 8,702 9,769 9,275 10,292 11,342 2,271 2,473 2,736 Major Leagues Central Fund.... 3,747 3,559 1,498 4,146 4,938 4,938 260 303 303 Advertising and promotion..... 3,205 3,929 3,805 2,960 3,854 3,854 1,284 927 927 Post-season................... -- -- 5,457 1,309 6,252 6,252 -- -- -- Amortization of signing bonuses and player contracts................... 1,833 2,005 3,242 3,212 3,630 3,630 104 225 225 Depreciation and amortization................ 1,338 1,275 1,361 1,326 1,629 1,629 385 397 397 ------- ------- ------- -------- -------- -------- ------- -------- ------- Total operating expenses.............. 52,505 64,317 90,629 106,464 131,813 132,863 11,531 12,794 13,057 ------- ------- ------- -------- -------- -------- ------- -------- ------- OPERATING INCOME (LOSS)......... 1,578 (5,036) 7,022 7,733 8,217 7,167 (8,532) (9,759) (10,022) OTHER INCOME (EXPENSE): Interest income............... 1,260 1,375 1,658 3,855 4,672 2,649 1,231 1,948 1,353 Interest expense.............. (2,027) (1,310) (2,005) (2,045) (2,301) (2,301) (429) (661) (661) Gain (loss) on player transactions................ 47 85 71 616 2,696 2,696 -- (1,604) (1,604) League expansion proceeds..... 3,000 -- -- -- 9,286 9,286 -- -- -- Minority interest............. -- -- -- -- -- (9,554) -- -- 5,358 ------- ------- ------- -------- -------- -------- ------- -------- ------- Income (loss) before provision for income taxes.............. 3,858 (4,886) 6,746 10,159 22,570 9,943 (7,730) (10,076) (5,576) Provision (benefit) for income taxes......................... -- -- -- -- -- 3,060 -- -- (1,729) ------- ------- ------- -------- -------- -------- ------- -------- ------- Net income (loss)............... $ 3,858 $(4,886) $ 6,746 $ 10,159 $ 22,570 $ 6,883 $(7,730) $(10,076) $(3,847) ======= ======= ======= ======== ======== ======== ======= ======== ======= Pro forma net income (loss) per share......................... $ 1.07 $ (0.60) ======== ======= </TABLE> <TABLE> <CAPTION> MARCH 31, ------------------- OCTOBER 31,(1)(2) DECEMBER 31, PRO ------------------ ------------------------------ ACTUAL FORMA 1993 1994(3) 1995(3) 1996 1997 1998 1998(4) ------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> BALANCE SHEET DATA (AT PERIOD END): Total current assets.............................. $28,316 $21,719 $60,952 $ 60,228 $ 85,195 91,412 91,412 Total current liabilities......................... 32,465 35,792 68,346 62,124 74,891 100,655 100,655 Total assets...................................... 47,441 43,032 79,991 87,272 118,152 125,037 129,737 Long-term obligations............................. 26,538 25,671 26,182 33,458 45,811 50,708 50,708 Total shareholders' equity (deficit).............. (11,562) (18,431) (14,537) (8,310) (2,550) (26,326) (21,626) </TABLE> - --------------- (1) Includes (a) the assets, liabilities and results of operations of the Partnership as of October 31, 1993 and 1994 and for the years then ended and (b) the assets, liabilities and results of operations of Ballpark Management as of December 31, 1993 and 1994 and for the years then ended. The results of operations of the Partnership for the two-month period ended December 31, 1994, which are not reflected in the above combined financial data, were as follows (in thousands): <TABLE> <S> <C> Revenues.................................. $ 578 Expenses.................................. 2,783 ------- Operating loss............................ (2,205) Interest expense.......................... 271 ------- Net loss.................................. $(2,476) ======= </TABLE> (2) The Club did not commence play at Jacobs Field until the 1994 regular season. As a result, the operations of Ballpark Management for the year ended December 31, 1993 were insignificant. (3) A players' strike during 1994 and 1995 resulted in the cancellation of 27 home games and 18 away games of the 1994 regular season, the entire 1994 post-season and nine home games and nine away games of the 1995 regular season. The Major League Baseball regular season consists of 162 games, of which 81 are scheduled to be played at home and 81 are scheduled to be played on the road. (4) Pro forma income statement data give effect to a March 1998 distribution by the Partnership and the repayment of related party indebtedness (the "Distribution"), the transactions described under the caption "Formation Transactions" and the sale of 4,000,000 Class A Common Shares by the Company pursuant to the Offering and the application of the estimated net proceeds therefrom at an assumed initial public offering price of $15.00 per share, as if such transactions had occurred on January 1, 1997. Pro forma balance sheet data give effect to such transactions (other than the Distribution) as if they had occurred on March 31, 1998. See "Formation Transactions," "Use of Proceeds" and "Pro Forma Financial Data."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001059033_healthdriv_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001059033_healthdriv_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL DATA APPEARING ELSEWHERE IN THIS PROSPECTUS. POTENTIAL PURCHASERS OF THE COMMON STOCK SHOULD READ CAREFULLY THIS PROSPECTUS IN ITS ENTIRETY AND SHOULD CONSIDER CAREFULLY THE FACTORS IDENTIFIED UNDER "RISK FACTORS." EXCEPT AS OTHERWISE INDICATED, THE INFORMATION CONTAINED HEREIN ASSUMES THE CONVERSION OF 571,428 SHARES OF THE COMPANY'S CLASS A CONVERTIBLE PREFERRED STOCK ("CLASS A PREFERRED STOCK") AND 181,818 SHARES OF THE COMPANY'S CLASS B CONVERTIBLE PREFERRED STOCK ("CLASS B PREFERRED STOCK") HELD BY DCC INTERNATIONAL HOLDINGS B.V. ("DCC HOLDINGS") INTO 753,246 SHARES OF COMMON STOCK UPON THE CLOSING OF THE OFFERING. THE COMPANY HealthDrive Corporation (the "Company") is the sole sponsor of, and provider of administrative services to, four professional corporations and one Michigan taxable not-for-profit corporation (collectively, the "Medical and Dental Practices" and each a "Practice"). The Company and its founders established the Medical and Dental Practices to focus on the provision of on-site geriatric health care services primarily to residents of nursing homes. The Company does not own the capital stock of any of the professional corporations or the Michigan taxable not-for-profit corporation. Each of the Medical and Dental Practices is affiliated with the Company through an exclusive long-term Operating Agreement (collectively, the "Operating Agreements") pursuant to which the Company receives a fee in exchange for the services it provides, and an Option Agreement pursuant to which the Company is entitled to cause the sole stockholder of the Practice to sell all of the outstanding capital stock of the Practice to a designee of the Company at any time for a nominal price. The Company and the Medical and Dental Practices are completely interdependent and function as a single integrated economic unit, with the Company being entirely dependent on the success of the Medical and Dental Practices for its revenues and the Medical and Dental Practices being entirely dependent on the Company for capital and all services other than the provision of medical, dental and ancillary health care services. The Company does not itself provide health care services. In addition to providing services to nursing home residents, the Medical and Dental Practices also provide services to a growing number of residents of assisted living facilities ("ALFs") and independent living senior housing facilities ("ILFs" and, collectively with nursing homes and ALFs, "LTCFs") that are affiliated with nursing homes under service agreements with one or more of the Practices. Physicians, dentists and ancillary health care service providers employed by the Medical and Dental Practices ("Providers") travel to LTCFs where they provide a growing range of geriatric medical and dental services. Services currently provided by the Medical and Dental Practices include dentistry, optometry, podiatry, audiology, and primary care. As of May 15, 1998, the Medical and Dental Practices employed 95 Providers who were rendering services at 884 LTCFs located in 11 states, and the Company employed an additional 106 people. The Company, headquartered in Newton, Massachusetts, operates four regional offices located in Massachusetts, Connecticut, Pennsylvania and Wisconsin. The Company has positioned itself to capitalize on important trends shaping geriatric care in the United States including: (i) changing demographics; (ii) evolving care protocols and disease management techniques; and (iii) changing reimbursement methodologies driven by federal legislation. In 1996, there were approximately 15,300 nursing homes serving approximately 1.7 million residents nationwide. In addition, it was estimated that in 1996 there were approximately 14,500 ALFs and ILFs nationwide. According to the U.S. Census Bureau, the portion of the U.S. population aged 75 to 85 is expected to increase by 27.0%, from approximately 10.0 million in 1990 to approximately 12.7 million by the year 2010, and the number of persons aged 85 and older is expected to increase by 90.0%, from approximately 3.0 million in 1990 to approximately 5.7 million by the year 2010. According to the United States General Accounting Office, the number of Americans aged 65 years and older who need assistance with activities of daily living is expected to double from approximately 7.0 million in 1997 to approximately 14.0 million by 2020. Nursing home residents require frequent medical care and often suffer from decreased mobility which makes it difficult for them to visit off-site physicians. The Company considers itself to be an innovator in promoting, sponsoring and administering the delivery by the Medical and Dental Practices of a broad spectrum of on-site geriatric medical and dental services to residents of LTCFs. In order to do so effectively, the Company has developed proprietary systems, procedures and expertise that aid it in the complex task of providing a range of geriatric medical and dental services to a large number and variety of LTCF residents. The Company believes such systems, procedures and expertise give it and the Medical and Dental Practices a significant competitive advantage over other health care services providers. The Company was founded in 1989 by Steven S. Charlap, M.D. and Alec H. Jaret, D.M.D. to respond to the growing demand for convenient on-site dental care services at nursing homes. Dr. Charlap and Dr. Jaret also founded three of the Medical and Dental Practices with funds borrowed from the Company, Steven S. Charlap, M.D., P.C. (the "Audiology and Primary Care Practice"), Alec H. Jaret, D.M.D., P.C. (the "Dental Practice"), and HealthDrive Michigan Corporation, which provides dental, optometry and podiatry services to residents of LTCFs in Michigan. The Company has also established an optometry practice (Jeffrey Morer, O.D., P.C., the "Optometry Practice"), and a podiatry practice (Mary C. Manesis, D.P.M., P.C., the "Podiatry Practice"), as it identified opportunities in such areas among residents of LTCFs serviced by its other Practices. In each case, the Company designated the individual Provider who would incorporate the professional corporation, and loaned money to the Practice to cover formation and initial operating costs. Each of the Medical and Dental Practices (other than HealthDrive Michigan Corporation) is a Massachusetts professional corporation of which the named physician or dentist is the sole stockholder. HealthDrive Michigan Corporation is a Michigan not-for-profit taxable corporation of which Dr. Charlap is the sole stockholder. Nursing homes are required by the Omnibus Budget Reconciliation Act ("OBRA") of 1987 to ensure that medical and dental services are made available to their residents. In addition, while not required to do so, certain ALFs and ILFs in the Company's markets have begun to make on-site medical and dental services available to their residents. Historically, it has not been cost-effective for LTCFs to use their own resources to satisfy their residents' medical and dental service needs, and they have looked to single-specialty solo health care service providers ("Solo Providers") to meet such needs. Providing the range of geriatric medical and dental services required by LTCF residents through Solo Providers imposes a number of increasingly complex burdens on LTCFs which include: (i) identifying and contracting with multiple, competent Solo Providers to provide on-site services; (ii) allocating LTCF staff to coordinate the services of such Solo Providers; (iii) monitoring the appropriateness of services provided and related billings; (iv) complying with related federal and state health care regulations; and (v) when necessary, transporting residents off-site to receive such services. The Balanced Budget Act of 1997 requires the Health Care Finance Administration ("HCFA") by July 1, 1998 to begin converting from a cost-plus reimbursement methodology to the Prospective Payment System ("PPS") for nursing homes, pursuant to which the federal government will pay a per diem rate to nursing homes for post-hospitalization services provided to their Medicare covered residents. The Company believes that as a result of the change to PPS, nursing homes will need to increase their focus on the efficiency and quality of all of their operations to maximize their profitability. PPS does not cover physician-related services such as those provided by the Medical and Dental Practices. However, the Company believes an increased focus on efficiency and quality will make the use of integrated providers of multiple medical and dental services, such as the Medical and Dental Practices, more attractive than the use of multiple Solo Providers. The Company and the Medical and Dental Practices offer an efficient alternative to Solo Providers because the Medical and Dental Practices, with the assistance of the Company, are able to provide coordinated, comprehensive, cost-effective on-site geriatric medical and dental services. The rendering of such services requires: (i) multi-specialty clinical expertise; (ii) a staff of highly qualified health care service providers; (iii) the purchase and maintenance of specialized equipment; (iv) the development of sophisticated management information systems; and (v) reimbursement and regulatory knowledge. The Company and the Medical and Dental Practices have extensive experience in providing such services. In addition, the Company has developed proprietary procedures, systems and software necessary to overcome the logistical complexities involved in coordinating on-site care. Specifically, the Company has developed CustomCare, a proprietary software program that enhances the Company's customer service capabilities by effectively integrating all facets of the Company's services, including scheduling, billing, tracking dentures and eyeglasses, coordinating transportation, compiling Provider productivity and patient utilization data, monitoring payor pre-approvals, and generating customized reports. Pursuant to the Operating Agreements, the Company provides certain services relating to the administration of health care provided by the Medical and Dental Practices, licenses the use of the service mark "HealthDrive" and, from time to time, extends credit to the Medical and Dental Practices. The services provided by the Company pursuant to the Operating Agreements include ordering and purchasing of supplies, performance of bookkeeping and accounting functions, and billing and collections. In exchange for these services, the license of the service mark to the Practice and the extension of credit, each Practice pays the Company a monthly fee (the "Compensation Amount") equal to all revenue generated by such Practice minus the expenses incurred by such Practice (primarily compensation and benefits, bad debt expense, insurance costs and the interest expense on loans from the Company to such Practice), adjusted to give effect to certain tax-related items. Under the terms of the Operating Agreements the Compensation Amount may not exceed the fair market value of the services provided by the Company thereunder. Revenue is generated by the Medical and Dental Practices pursuant to service agreements each of them enters into with LTCFs to provide their respective services (the "Service Agreements") to residents of such LTCFs. Each of the Medical and Dental Practices, other than HealthDrive Michigan Corporation, practices one of the four major specialties. LTCFs enter into a separate Service Agreement with each of the Medical and Dental Practices from which they wish to obtain services for their residents, and generally a LTCF may choose to contract with any number and any combination of the Medical and Dental Practices. Under the respective Service Agreements, an LTCF is responsible for notifying its residents that the Practice's services are available to them, as medically necessary, and the Practice is responsible for providing its services to those residents who need and request them. The Company then bills the patient or his or her insurance company on behalf of the Medical and Dental Practices for the services rendered, typically Medicare, Medicaid or a commercial insurer, and in most instances does not receive payments from the LTCFs. In connection with the formation of the Medical and Dental Practices, and from time to time thereafter, the Company has advanced money pursuant to the Operating Agreements to the Medical and Dental Practices for working capital purposes. The amount of these advances, to the extent not repaid during the month in which they are made, are added on a monthly basis to intercompany balances (the "Intercompany Balances") maintained by the Company with each Medical and Dental Practice, the majority of which have been generated by the calculation of the Compensation Amounts. The Medical and Dental Practices are required to pay down the principal balance and accrued interest on the Intercompany Balances from time to time to the extent possible, and the Company is entitled to demand repayment of the entire amounts due on thirty days notice. The Intercompany Balances bear interest at rates determined by the Company not to exceed a designated prime rate plus five percent and payments are generally made on the Intercompany Balances no less frequently than on a monthly basis. The primary strategic objective of the Company and the Medical and Dental Practices is for the Medical and Dental Practices to become, acting in cooperation with the Company, dominant providers of on-site, integrated and cost-effective geriatric medical and dental services to residents of LTCFs. The Company and the Medical and Dental Practices have identified three opportunities for growth: (i) obtaining Service Agreements for the Medical and Dental Practices with additional LTCFs in existing and contiguous markets; (ii) increasing the number of Service Agreements with LTCFs under existing contracts with the Medical and Dental Practices; and (iii) increasing the number of patients served by the Medical and Dental Practices within LTCFs under existing contracts. The Company has determined four means of capitalizing on such opportunities to achieve growth within both existing geographic markets and new geographic markets. These include: (i) increasing its sales and marketing initiatives; (ii) expanding its existing customer relationships; (iii) leveraging its operational infrastructure and its existing and planned management information systems; and (iv) the consummation of acquisitions of other LTCF-focused medical, dental or ancillary health care services practices or related companies. These acquisitions are likely to take the form of (i) the purchase outright by the Company of another company engaged in the business of the promotion, administration and coordination of the provision of health care services to residents of LTCFs; (ii) the purchase by the Company of the assets of a physician practice followed by the assignment of any purchased service contracts to one or more of the Practices, or (iii) the payment by the Company of a purchase price for the entrance by an unaffiliated physician practice (and its shareholders) into Operating Agreements and Option Agreements in substantially the form of the existing Operating Agreements and Option Agreements among the Company, the Practices and the stockholders of the Practices. Because the Company is entirely dependent on the activities of the Medical and Dental Practices for its revenue, to the extent that any of these initiatives may be successful in increasing the profitability of the Medical and Dental Practices, the Company's profitability may be similarly affected. The Company believes that most of the costs associated with these initiatives, such as increased sales and marketing expenditures and recruitment and salary costs for new employees of the Company, will be borne by the Company and not the Medical and Dental Practices. In addition to the material expenses that will be required to increase the Company's marketing efforts, the Company expects that enhancing its management information systems to provide additional services and consummating potential acquisitions will require substantial expenditures by the Company. The Company was incorporated in Delaware in May 1989. Its corporate headquarters are located at 25 Needham Street, Newton, Massachusetts 02161 and its telephone number is (617) 964-6681. THE OFFERING <TABLE> <S> <C> Common Stock being offered by the Company..... 1,600,000 shares Common Stock outstanding prior to the Offering (1)......................................... 2,763,246 shares Common Stock to be outstanding after the Offering (2)(3)............................. 4,363,246 shares Use of Proceeds............................... To expand sales and marketing initiatives, enhance management information systems, finance acquisitions by the Company, repay the amount outstanding under an existing credit facility, and for working capital to be used in connection with the expansion of the Company's business. See "Use of Proceeds." Proposed Nasdaq SmallCap Market symbol........ HDMD </TABLE> - ------------------------ (1) Adjusted to give effect to the automatic conversion upon the closing of the Offering of all outstanding shares of the Company's Class A Preferred Stock and Class B Preferred Stock into an aggregate of 753,246 shares of Common Stock. (2) Does not include: (i) 436,400 shares of Common Stock reserved for issuance upon the exercise of outstanding options granted pursuant to the Company's Second Amended and Restated 1992 Stock Option Plan (the "Stock Option Plan"), and up to 302,475 additional shares reserved for issuance upon the exercise of options that may be granted in the future under the Stock Option Plan; and (ii) 160,000 shares of Common Stock reserved for issuance upon the exercise of the Representative's Warrants. See "Use of Proceeds" and "Underwriting." (3) Assumes that the Underwriters' option to purchase up to 240,000 shares of Common Stock from the Selling Stockholders, solely to cover over-allotments, if any, made in connection with the sale of the Common Stock offered hereby, is not exercised. See "Selling Stockholders."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001059128_aladdin_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001059128_aladdin_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..edd59bce392c5a33c9686794c854079e264686d7
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION (INCLUDING FINANCIAL INFORMATION) APPEARING ELSEWHERE IN THIS PROSPECTUS. THE ISSUER The Issuer is an indirect subsidiary of AHL and was incorporated for the sole purpose of issuing the Warrants and Warrant Shares. The sole material asset of the Issuer is 25% of the Holdings Common Membership Interests (as defined herein). Holdings is a holding company, the material assets of which are 100% of the outstanding Common Membership Interests and 100% of the outstanding Series A preferred interests of the Company (the "Series A Preferred Interests"). The Warrants entitle the holders thereof to purchase an aggregate of 2,215,000 shares of Common Stock of the Issuer, representing a 40% economic interest in the Issuer, at an exercise price of $0.001 per Warrant Share, subject to adjustment, and representing an indirect interest of 10% of the outstanding Holdings Common Membership Interests on a fully-diluted basis as of the Issue Date, after giving effect to such issuance. The Warrants are exercisable at any time on or after the Separation Date and, unless exercised, will expire on March 1, 2010. THE COMPANY The Company plans to develop, construct and operate a new hotel and casino, the Aladdin, as the centerpiece of an approximately 35 acre world-class resort, casino and entertainment complex (the "Complex") located on the site of the original Aladdin hotel and casino in Las Vegas, Nevada, a premier location at the center of Las Vegas Boulevard (the "Strip"). The Aladdin has been designed to include a luxury themed hotel of approximately 2,600 rooms (the "Hotel"), an approximately 116,000 square foot casino (the "Casino"), an approximately 1,400-seat production showroom and seven restaurants. The Casino's main gaming area will contain approximately 2,800 slot machines, 87 table games, keno and a race and sports book facility. Included on a separate level of the Casino will be a 15,000 square foot luxurious gaming section (the "Salle Privee") which is expected to contain an additional 20 to 30 high limit table games and approximately 100 high limit slot machines. The Salle Privee will cater to wealthy clientele and be operated and marketed in conjunction with London Clubs, a prestigious, multi-national casino operator which caters to international premium players. The Complex, which has been designed to promote Casino traffic and to provide customers with a wide variety of entertainment alternatives, will comprise (i) the Aladdin; (ii) a themed entertainment shopping mall with approximately 522,000 square feet of retail space (the "Desert Passage"); (iii) a second hotel and casino, with a music and entertainment theme, expected to be known as "Sound Republic Hotel and Casino" (the "Music Project"); (iv) a newly renovated 7,000-seat Theater of the Performing Arts (the "Theater"); and (v) an approximately 4,800-space car parking facility (the "Carpark" and, together with the Desert Passage, the "Mall Project"). The Mall Project and the Music Project will be separately owned by affiliates of the Company. The Company's business and marketing strategies are expected to capitalize on the Complex's premier location, its superior designed, mixed-use, themed development, and strong strategic partnering with highly successful public companies. The grand opening date for the Aladdin and the Mall Project is currently anticipated to occur during the first four months of the year 2000, with the opening of the Music Project expected to occur within six months after the opening of the Aladdin. The Company's management team is led by Chief Executive Officer Richard J. Goeglein, the former President and Chief Executive Officer of Harrah's Hotels and Casinos and President and Chief Operating Officer of Holiday Corp., who during his term at Harrah's oversaw the expansion of the Harrah's brand, including the development of Harrah's Hotel and Casino in Atlantic City. Assisting Mr. Goeglein as Senior Vice President of the Company and President/Chief Operating Officer of the Aladdin Hotel and Casino is James H. McKennon, who as President and Chief Operating Officer of Caesars Tahoe was instrumental in its financial turnaround and as President of Caesars World International Marketing Corp. was responsible for the global marketing of the Caesars brand. HOLDINGS; (III) "ISSUER" REFER TO ALADDIN GAMING ENTERPRISES, INC., A NEVADA CORPORATION, THE SOLE ASSET OF WHICH IS A 25% MEMBERSHIP INTEREST IN HOLDINGS; (IV) "NOTE ISSUERS" REFER TO HOLDINGS AND CAPITAL, COLLECTIVELY; (V) "ALADDIN PARTIES" REFER TO HOLDINGS, THE ISSUER AND CAPITAL, COLLECTIVELY; (VI) THE "COMPANY" REFER TO ALADDIN GAMING, LLC, A NEVADA LIMITED-LIABILITY COMPANY WHICH PLANS TO DEVELOP, CONSTRUCT AND OPERATE THE ALADDIN; (VII) "HOLDINGS GROUP" REFER TO EACH OF HOLDINGS AND ITS SUBSIDIARIES; (VIII) "LONDON CLUBS" REFER TO LONDON CLUBS INTERNATIONAL, PLC, A UNITED KINGDOM PUBLIC LIMITED COMPANY AND (IX) "LCNI" REFER TO LONDON CLUBS NEVADA INC., AN INDIRECT WHOLLY OWNED SUBSIDIARY OF LONDON CLUBS. ALADDIN HOLDINGS, LLC ("AHL"), WHICH IS 95% OWNED BY THE TRUST UNDER ARTICLE SIXTH U/W/O SIGMUND SOMMER (THE "TRUST"), DIRECTLY OWNS 98.7% OF THE MEMBERSHIP INTERESTS OF SOMMER ENTERPRISES, LLC ("SOMMER ENTERPRISES"), A NEVADA LIMITED-LIABILITY COMPANY, AND INDIRECTLY OWNS APPROXIMATELY 71% OF THE MEMBERSHIP INTERESTS OF HOLDINGS PRIOR TO THE EXERCISE OF THE WARRANTS. It is expected that approximately $75 million will be spent on theming in the Aladdin and the Desert Passage, of which approximately $35 million will be spent by the Company on the Aladdin. This theming will create an environment in the Aladdin that will be based upon the Legends of the 1001 Arabian Nights, including the intriguing tales of Aladdin, Ali Baba and the 40 Thieves, Sinbad and other legendary stories woven around ancient wealth and wonders. The Aladdin's exterior will be designed to include a highly articulated streetscape, a themed Casino exterior shaped like a Bedouin tent, fountains, walkways, sculptures and an outdoor restaurant. The sophisticated interior of the Aladdin will utilize rich colors, textures and design, enhancing the fantasy of a mystical romantic time and place. A significant feature of the Desert Passage will be the themed area to be known as the "Lost City." The "Lost City" is expected to contain a re-creation of an ancient mystical mountain city and will house a variety of specialty shops and restaurants underneath a 10-story high ceiling. The Company believes that the Aladdin, with its unique theme, together with the Desert Passage, will ensure its place as a "must-see" destination in one of the world's largest entertainment cities. The Company believes that upon completion, the Aladdin, the Mall Project and the Music Project together will constitute one of the largest and best-planned integrated, mixed-use entertainment resorts in the world. Aladdin Bazaar Holdings, LLC ("Bazaar Holdings"), a subsidiary of the Trust, and TH Bazaar Centers Inc. ("THB"), a subsidiary of TrizecHahn Centers Inc. ("TrizecHahn"), have entered into a joint venture agreement and formed Aladdin Bazaar, LLC ("Bazaar") to develop, construct, own and operate the Mall Project. TrizecHahn is the principal retail subsidiary of TrizecHahn Corporation, one of the largest publicly-traded real estate companies in North America. The Desert Passage is expected to include an array of high-fashion specialty stores, exotic boutiques, themed restaurants, cafes and other entertainment offerings. The Desert Passage will be directly connected to the Casino to maximize Casino traffic. Aladdin Music Holdings, LLC ("AMH"), a wholly owned subsidiary of the Company, and a subsidiary of Planet Hollywood International, Inc. ("Planet Hollywood") have entered into a memorandum of understanding (the "Music Project Memorandum of Understanding") and formed Aladdin Music, LLC ("Aladdin Music"), which will own and develop the Music Project. The Music Project Memorandum of Understanding is subject to the finalization of financing commitments. Planet Hollywood is a creator and worldwide developer of themed restaurants and consumer brands, most notably "Planet Hollywood" and the "Official All Star Cafe." Planet Hollywood has announced that it intends to position a brand of music-themed entertainment venues as its third major brand. The Music Project, which will be managed by the Company, is expected to include an approximately 1,000 room hotel, a 50,000 square foot casino, four restaurants, including a music-themed restaurant which will feature its own 1,000-person nightclub, a health spa and an outdoor swimming pool. As part of the development of the Complex, the Company expects to indirectly contribute to Aladdin Music $21.3 million in cash and land having an appraised fair market value of $15.0 million in exchange for a preferred membership interest in Aladdin Music and to lease to Aladdin Music the existing 7,000-seat Theater for a nominal amount. It is anticipated that Aladdin Music will carry out an approximately $8 million renovation of the Theater, improving its decor, light and sound systems and other facilities. A further distinguishing feature of the Music Project is the anticipated active involvement of famous artists and celebrities, some of whom are expected to be stockholders of Planet Hollywood (or its affiliates), participate in the marketing of Planet Hollywood's music-themed brand and perform at the Theater or make other personal appearances at the Music Project. The Music Project, with its music and entertainment theme, will complement the Aladdin and it is expected that together the two hotels will offer an excitement and variety of entertainment alternatives that will further distinguish the Complex from other venues on the Strip. The development of the Aladdin commenced during the first quarter of 1998. The original Aladdin hotel and casino closed for business on November 25, 1997 and the original facility was demolished on April 27, 1998. The development of the Mall Project is expected to commence during the second quarter of 1998, followed thereafter by the expected commencement of the development of the Music Project in the second half of 1998. There can be no assurance, however, that either of the Mall Project or the Music Project will, in fact, be completed. If the Mall Project is not completed, the Company will need to expend additional amounts (expected to be approximately $23 million) with respect to the completion of shared structural space and the cost of surface parking. See "Risk Factors--Completion of the Mall Project and the Music Project." STRENGTHS The Company believes that several important advantages will contribute significantly to the success of the Aladdin: PREMIER LOCATION. The Aladdin's 800 feet of Strip frontage is located on the section of the Strip between Flamingo Road at the north and Tropicana Boulevard at the south. Based upon independent research and assuming completion of the Bellagio, Paris and Venetian development projects, the average vehicular traffic that will pass the Complex each day is expected to be up to approximately 54,000. Another major feature of the Complex will be its easy access from Las Vegas' McCarran International Airport ("McCarran Airport"), only 2.5 miles away. According to the Las Vegas Convention and Visitors Authority (the "LVCVA"), the number of visitors to Las Vegas has increased at a steady and significant rate for the last 15 years, growing from approximately 10 million in 1980 to approximately 19 million in 1990 to over 30 million in 1997, with approximately 47% of these visitors in 1997 arriving by air through McCarran Airport. McCarran Airport, the tenth busiest airport in the United States, is currently in the process of expanding its capacity through the addition of 26 new gates, and it is expected that following completion thereof, the number and percentage of visitors arriving in Las Vegas by air will further increase, making easy access from McCarran Airport to Las Vegas' resorts even more crucial. MASTER-PLANNED, MIXED-USE DEVELOPMENT. The Aladdin has been carefully and strategically designed to promote Casino traffic. Each element of the Complex has been sited and planned in a manner that maximizes pedestrian and vehicular traffic so as to facilitate access to and from the Complex, as well as circulation between the different parts of the Complex, with the Casino being the nexus for the vast majority of pedestrian traffic. Significant portions of the Desert Passage and all of the Theater's entrances and exits will be accessed through, or be adjacent to, the Casino. The Casino will be located in front of the Hotel, and unlike many of the newer projects on the Strip, will provide easy access for pedestrians without requiring long walks into the Complex. Pedestrian visitors to the Aladdin entering from the Aladdin's 800 feet of Strip frontage will be able to enter the Hotel directly through the Casino or through the Desert Passage entrances. Through the use of a circular internal roadway, guests arriving by limousine, car service, taxi or private vehicle will be able to enter the Complex directly and easily from the Strip and Harmon Avenue. Furthermore, by the use of bridges and access ways, pedestrians will not be required to cross roadways while moving between different attractions on the Complex, thus facilitating ease of movement between the various parts of the Complex and the Strip. UNIQUE ENTERTAINMENT FACILITIES. The Aladdin is expected to benefit from the Casino traffic generated from the broad variety of entertainment facilities located throughout the Complex. The Aladdin will be adjacent to the existing Theater, which is expected to continue to be used to hold major concerts and theatrical performances and is one of the few venues of its size and type in Nevada. The Theater's approximately $8 million renovation is expected to transform it into a first-class venue and provide an additional source of visitor traffic to the Complex. The Aladdin will include a 1,400-seat showroom featuring a 1001 Arabian Nights-themed production show on its mezzanine level, with elegant, exotic costuming, music, lighting and choreography. In addition, the Desert Passage will be designed to engage the customer in a themed shopping, entertainment and dining experience. Of the approximately 522,000 square feet of retail space within the Desert Passage, it is anticipated that approximately 25% will be devoted to high pedestrian traffic generating food, beverage and entertainment experiences. Furthermore, the Music Project is expected to contain a 1,000-person nightclub featuring regular live performances. PRESTIGIOUS STRATEGIC PARTNERS. The Company and the Complex will benefit from important relationships with several prominent public companies, as follows: - - LONDON CLUBS INVESTMENT. London Clubs, a prestigious multi-national casino operator, indirectly owns 25% of the outstanding common membership interests of Holdings ("Holdings Common Membership Interests"). London Clubs had an equity market capitalization of over $461 million on May 29, 1998. London Clubs has extensive experience in the international marketing of casinos to premium players and maintains a strong presence in the United Kingdom (where it controls the largest share of the London casino market), Europe, Asia and the Middle East. In addition to its 25% ownership of the outstanding Holdings Common Membership Interests, London Clubs, through LCNI, will direct the operations of, and act as marketing consultant to, the Salle Privee. The Company believes that the Salle Privee will be the first of its kind in the United States managed by a European operator and based on the European concept of full service gaming areas for premium players. The Salle Privee's primary business and marketing focus will be to access London Clubs' worldwide base of upscale casino clientele. - - JOINT VENTURE WITH PLANET HOLLYWOOD. Through a subsidiary, Planet Hollywood has agreed to be a 50% partner (on a fully diluted basis) in the Music Project. Planet Hollywood is a creator and worldwide developer of consumer brands, most notably "Planet Hollywood" and the "Official All Star Cafe," that capitalize on the universal appeal of the high energy environment of movies, sports and other entertainment-based themes. The Company believes that the exposure generated by the Music Project will enhance the Aladdin by providing immediate excitement and press coverage for the Complex. On July 21, 1998, Planet Hollywood announced that it has retained financial advisors in connection with a review of Planet Hollywood's financial and strategic alternatives and is continuing with an operational plan to address current financial and operational performance issues. There can be no assurance that the Music Project will proceed with Planet Hollywood. See "Risk Factors--Completion of the Mall Project and the Music Project." - - STRATEGIC RELATIONSHIP WITH TRIZECHAHN. The Mall Project will be owned, developed and operated by Bazaar, a joint venture between Bazaar Holdings and THB, a subsidiary of TrizecHahn. TrizecHahn is a wholly-owned subsidiary of TrizecHahn Corporation, one of the largest publicly traded real estate companies in North America. TrizecHahn was the developer of Horton Plaza in San Diego, Bridgewater Commons in New Jersey, Valley Fair in San Jose and Park Meadows in Denver. Investors should note that TrizecHahn has announced that it is considering selling its operating portfolio of regional shopping centers and on April 6, 1998 announced the sale of 20 regional shopping centers for over $2.5 billion. See "Risk Factors--Completion of the Mall Project and the Music Project." While TrizecHahn's announcement is limited to the sale of its current operating portfolio of regional shopping centers, there can be no assurance that TrizecHahn will not similarly decide to sell its interest in the Desert Passage. Accordingly, investors cannot be assured that TrizecHahn will own and operate the Desert Passage once it becomes operational, and as a result, pedestrian traffic to the Aladdin may decrease. STRATEGY The Company's business and marketing strategies are expected to capitalize on the Complex's premier location, its superior designed, mixed-use themed development and strong strategic partnering with highly successful public companies. CREATE A "MUST-SEE" DESTINATION. The Company believes that the Aladdin, with its unique design, together with the Desert Passage and the Music Project will ensure its place as a "must-see" destination in one of the fastest growing entertainment cities in the world. The Aladdin theme will be supported by a sophisticated interior design enhancing the fantasy of a mystical and romantic time and place. The Aladdin's main Casino traffic will be driven not only by Hotel guests, but also by the customers directly attracted from the Strip. Visitor traffic to the Aladdin will also be enhanced by the Desert Passage and the adjoining Music Project. TARGETED MARKET POSITIONING. The Company intends to focus on three different market segments to attract customers to the Aladdin: - - UPSCALE CLIENTELE. The Hotel will be designed to appeal to an upscale clientele, providing the amenities and level of service such high-end guests expect. Each of the Hotel's approximately 2,600 guest rooms will have an area of not less than 450 square feet--exceeding that of the average Las Vegas hotel room of approximately 360 to 400 square feet--and 24% of the Hotel's guest rooms will have an area exceeding 620 square feet. The Hotel's room inventory for the upscale market is expected to include 624 "king parlors" and suites, ranging from 585 to 1,162 square feet. The Hotel will provide extensive recreational facilities and amenities for its guests, including a 20,000 square foot health spa with steam, sauna and massage services and an outdoor swimming-pool complex surrounded by gardens and fountains. The Company intends to promote the Aladdin's many features to the upscale market through a variety of media, including high-end print publications, travel agents and events sponsorships. A targeted-relationship marketing program is expected to ensure clientele retention and repeat visitation. - - INTERNATIONAL PREMIUM PLAYER CLIENTELE. The focus of the Salle Privee's business will be the wealthy clientele that form the core of London Clubs' business in London and elsewhere. The Hotel will include 30 suites primarily for use by Salle Privee clientele, including 25 "Salle Privee suites" (ranging from 815 to 930 square feet) and five "mega-suites" (ranging from 2,125 to 3,500 square feet). The Company will maintain the Salle Privee's premium player atmosphere through more sophisticated dining options, higher table limits and more formal levels of service and dress. - - UPPER-MIDDLE MARKET CLIENTELE. The Hotel's variety of guest rooms, six of its seven restaurants and the 1,400-seat production showroom, combined with the heavily themed Casino, Theater and Desert Passage, are expected to appeal broadly to the upper-middle market guest. Additionally, cooperative advertising and promotion through various media, such as television, radio and print, will be used to promote the Complex to the upper-middle market. Furthermore, the Music Project is expected to attract younger, affluent customers to the Complex through, among other things, its music and entertainment-based theme. LEVERAGE FROM STRATEGIC RELATIONSHIPS. The Company and its affiliates have chosen as strategic partners an experienced team of retail, casino and themed entertainment developers and operators. The Company intends to utilize the unique expertise of its partners from the preliminary development stages of the Complex through its promotion and operation. - - DEVELOPMENT EXPERTISE. In establishing a strategic relationship with TrizecHahn, the Company has obtained the knowledge, skills and capital of a partner who has expertise in the coordination, construction and completion in a timely manner of large, high quality projects. - - MANAGEMENT AND OPERATING ABILITIES. The Complex is expected to benefit from the experience of TrizecHahn, London Clubs and Planet Hollywood in its operations. Through its management and ownership of shopping centers, TrizecHahn has demonstrated its ability to successfully design, configure and attract high quality tenants to its retail shopping projects. London Clubs has extensive experience in the international marketing and operation of casinos, in particular to premium players. In addition, Planet Hollywood has successfully grown its concepts to 87 company-owned and franchised Planet Hollywood and Official All Star Cafe units (as of December 31, 1997) since commencing business in 1991. - - CAPITALIZING ON BRAND NAMES. With access to some of the most well-known names in their respective markets, the Company expects to capitalize on the worldwide brand recognition of Planet Hollywood, London Clubs and TrizecHahn, creating unique opportunities for the Complex. - - ACCESSING NEW CLIENT BASE. London Clubs and Planet Hollywood are expected to provide the Complex with access to market segments which the Company believes have not been extensively penetrated by other hotel/casinos in Las Vegas. London Clubs provides the Aladdin with a substantial network of international premium players and superb promotional opportunities. Furthermore, it is expected that Planet Hollywood will introduce a younger, affluent clientele to the Complex through, among other things, celebrity involvement in the Music Project. CAREFULLY MANAGE CONSTRUCTION COSTS AND RISKS. The Company anticipates the total cost of developing, financing, constructing and opening the Aladdin to be approximately $790 million (excluding the Company's $21.3 million planned indirect cash contribution and $15.0 million appraised fair market value land contribution to Aladdin Music as part of the development funds for the Music Project). As part of the Company's strategy of carefully managing construction costs and risks, the Company has hired Tishman Construction Corporation of Nevada ("Tishman"), to be the construction manager. Tishman is a subsidiary of Tishman Realty & Construction Co. Inc., a privately held company with extensive experience in building quality hotels and casinos. As construction manager, Tishman will advise with respect to scheduling, administration and reporting in connection with the construction activities of the Design/ Builder (as defined herein). In addition, the following arrangements have been made to ensure the full and timely completion of the Aladdin. - - BANK COMPLETION GUARANTY AND NOTEHOLDER COMPLETION GUARANTY. London Clubs, the Trust and Bazaar Holdings have entered into a completion guaranty (the "Bank Completion Guaranty") for the benefit of the lenders under the Bank Credit Facility (the "Bank Lenders"), under which they have agreed to guarantee, among other things, the completion of the Aladdin. The Bank Completion Guaranty, is not subject to any maximum dollar limitations. London Clubs, the Trust and Bazaar Holdings have also entered into a limited completion guaranty for the benefit of the holders of the Notes (the "Noteholder Completion Guaranty"), under which they have guaranteed completion of the Aladdin, subject to certain important exceptions, limitations and qualifications. None of Holdings, the Issuer nor the holders of Warrants or Warrant Shares is a party to the Bank Completion Guaranty or the Noteholder Completion Guaranty. No financial information regarding the Trust is available for the purpose of evaluating the Trust's creditworthiness and, accordingly, purchasers of Warrants or Warrant Shares should not rely upon the Trust's performance under the Bank Completion Guaranty of Noteholder Completion Guaranty when making their investment decision. See "Risk Factors--Lack of Available Information on the Trust's Ability to Perform Its Obligations Under Certain Agreements," "--Limitations Under Bank Completion Guaranty and Noteholder Completion Guaranty," "Description of Noteholder Completion Guaranty and Disbursement Agreement--Noteholder Completion Guaranty" and "Description of Certain Indebtedness and Other Obligations--Completion Guaranty." - - DESIGN/BUILD CONTRACT. Fluor Daniel, Inc. (the "Design/Builder") is the design/builder for the Aladdin. The Design/Builder has entered into a guaranteed maximum price design/build contract (subject to increases based on scope changes) with the Company to design and construct the Aladdin (the "Design/Build Contract"). The Design/Build Contract provides the Design/Builder with incentives for completing the Aladdin ahead of schedule and within budget and for payment of liquidated damages to the Company for certain delays. The Design/Build Contract is guaranteed by Fluor Corporation ("Fluor"), the parent of the Design/Builder, pursuant to the Fluor Guaranty (as defined herein). See "Certain Material Agreements--Design/Build Contract." - - MALL FINANCING AND MALL GUARANTY. Bazaar has entered into a building loan agreement with Fleet National Bank ("Fleet," and together with any other lenders in a financing syndicate to be formed, the "Mall Lenders"), and Fleet as administrative agent for a credit facility to fund the construction of the Mall Project (the "Mall Financing"). Furthermore, TrizecHahn, TrizecHahn Office Properties, Inc. ("THOP"), an affiliate of TrizecHahn, the Trust, Bazaar Holdings and AHL have agreed to guarantee completion of the Mall Project and Bazaar's indebtedness to the Mall Lenders until certain earnings and loan to value targets have been met (collectively, the "Mall Guaranty"). Investors should note that TrizecHahn has announced that it is considering selling its operating portfolio of regional shopping centers and on April 6, 1998, announced the sale of 20 regional shopping centers for over $2.5 billion. While TrizecHahn's announcement is limited to the sale of its current operating portfolio of regional shopping centers, there can be no assurance that TrizecHahn will not similarly decide to sell its interest in the Desert Passage. Accordingly, investors cannot be assured that TrizecHahn will own and operate the Desert Passage once it becomes operational, and as a result, pedestrian traffic to the Aladdin may decrease. See "Risk Factors--Completion of the Mall Project and the Music Project." MANAGEMENT AND DEVELOPMENT TEAM The Complex is being developed by a team with broad expertise in each of the elements of the Complex and which, collectively, have a proven track record in constructing, completing and operating significant hotel casino projects. MANAGEMENT TEAM. The management team of the Company, which will develop and operate the Aladdin and the Music Project, comprises a unique combination of executives with an average of more than 20 years' experience in the management of hotels, casinos, restaurants and large real estate projects. The team includes: - - Jack Sommer, Chairman of the Company, who has been a full-time resident of Las Vegas since 1988 and has more than 25 years of experience as a developer of real estate including luxury projects such as North Shore Towers, in Queens County, New York, The Sovereign at 425 East 58th Street in Manhattan and 280 Park Avenue, an 820,000 square foot office building in Manhattan formerly owned and currently partially occupied by the Bankers Trust Company. - - Richard J. Goeglein, Chief Executive Officer, President and a director of the Company who has spent over 28 years in the hotel/casino and food service industries. Mr. Goeglein has served as President and Chief Executive Officer of Harrah's Hotels and Casinos and as President and Chief Operating Officer of Holiday Corp. (the parent company of Holiday Inns, Harrah's, Hampton Inns and Embassy Suites). Mr. Goeglein oversaw the acquisition of Harrah's and the development of some of Harrah's most successful projects, including Harrah's Hotel and Casino in Atlantic City, and its expansion into Southern Nevada. - - James H. McKennon, Senior Vice President of the Company and President/Chief Operating Officer of the Aladdin Hotel and Casino, whose career spans over 21 years in the hotel and casino industry in a variety of executive positions, including as President and Chief Operating Officer of Caesars World International Marketing Corp. Mr. McKennon was also President and Chief Operating Officer of Caesars Tahoe for 4 years and was instrumental in its financial turnaround. - - Cornelius T. Klerk, Senior Vice President/Chief Financial Officer of the Company, has over 19 years experience in the hotel and casino industry both at the corporate and property level, including as Vice President/Finance of the Hilton Hotels Gaming Division from 1993 to 1997. Mr. Klerk also served in a variety of senior financial management positions during the development and operation of Harrah's Hotel and Casino in Atlantic City and Harrah's Trump Plaza (now Trump Plaza) in Atlantic City. DEVELOPMENT TEAM. The Company and its affiliates have been involved in the design of the Complex for over 24 months and have assembled a development team with proven experience in the development of high quality resort projects. The team includes: - - Tishman, the construction manager for the Aladdin. Tishman or its affiliates have developed or built over 30,000 hotel rooms nationwide, including the Golden Nugget and the Trump Castle Hotel and Casino in Atlantic City, the 400-room expansion of Harrah's Hotel and Casino in Atlantic City, the 2,300 room Walt Disney World Dolphin and Swan Hotel and Convention Complex and the 1,200 room Sheraton Chicago Hotel. - - The Design/Builder, a subsidiary of Fluor. The Design/Builder is recognized internationally as an industry leader in providing architectural, engineering and construction services, including resort projects such as the Guest Inn Timika in Indonesia, the Pan Pacific Hotel in Malaysia and the Hyatt Regency Greenville Hotel. - - ADP/FD of Nevada, Inc. ("ADP"), the Complex architect and an indirect subsidiary of Fluor. ADP is wholly owned by ADP Marshall, Inc. ("ADP Marshall"), which is well-known for its architecture work and mixed-use projects. Its architecture client list includes Princess Hotels, Inc. (Scottsdale and Acapulco) and Carefree Resorts (The Boulders, The Peaks, Carmel Valley Ranch). - - THB, a wholly-owned subsidiary of TrizecHahn and the joint venture partner of ABH in the Mall Project. Prior to its recently announced sale of 20 regional shopping centers, TrizecHahn owned and managed 27 regional shopping centers in major markets throughout the United States, comprising over 25 million square feet. - - Brennan Beer Gorman Monk/Interiors ("BBGM"), the interior designer for the Aladdin. BBGM specializes in hospitality design and has experience in casinos, restaurants, retail, spa/fitness centers and specialty theme projects, including the recently renovated and expanded Caesars Atlantic City hotel, Mohegan Sun Casino and TropWorld. BBGM's hotel projects have included the St. Regis, the Plaza and the Sheraton Hotel & Towers in New York City. [CHART] USE OF PROCEEDS No proceeds will be received by the Issuer from the registration or sale of the Warrants or the Warrant Shares pursuant to the Registration Statement. The gross proceeds from the sale of the Units were $115.0 million. The net proceeds (net of discounts for Initial Purchasers (as defined herein) and estimated Offering expenses) together with the proceeds from the other Funding Transactions are being used to develop, construct, equip and open the Aladdin and to fund the Company's cash contribution to Aladdin Music with respect to the Music Project. Upon or prior to consummation of the Offering, (i) the proceeds from the sale of the Units were allocated between the Notes and the Warrants, (ii) Sommer Enterprises (a) contributed a portion of the Contributed Land (as defined herein) and $7.0 million consisting of the benefit of certain predevelopment costs incurred by AHL to the Issuer in exchange for Class A Common Stock in the Issuer and (b) contributed a portion of the Contributed Land to Holdings in exchange for Holdings Common Membership Interests, (iii) the Issuer contributed the portion of the Contributed Land, the benefit of the predevelopment costs received from Sommer Enterprises and the net proceeds allocable from the sale of the Warrants to Holdings in exchange for Holdings Common Membership Interests, (iv) Holdings contributed the Contributed Land appraised at $150.0 million, approximately $42 million in cash from the London Clubs Contribution (as defined herein) and the $7.0 million consisting of the benefit of certain predevelopment costs incurred by AHL to the Company in exchange for Common Membership Interests of the Company, and (v) Holdings contributed $115.0 million in cash, consisting of the net proceeds of the sale of the Units and approximately $8 million from the London Clubs Contribution, to the Company in exchange for Series A Preferred Interests of the Company ((iv) and (v) collectively, the "Equity and Series A Preferred Interest Financing"). The London Clubs Contribution, together with a portion of the net proceeds of the Offering, were expended on the Issue Date (as defined herein) to repay certain existing indebtedness assumed by the Company in connection with the Sommer Equity Financing (as defined herein) and to pay certain accrued expenses and certain fees and expenses incurred in connection with the Funding Transactions. The remaining net proceeds from the Offering (approximately $35 million) were deposited in a segregated escrow account ("the Note Construction Disbursement Account") which was pledged as collateral for the benefit of the holders of the Notes, pending disbursement of such funds pursuant to the Disbursement Agreement (as defined herein). The liquidation preference of the Series A Preferred Interests held by Holdings will at all times equal the Accreted Value (as defined herein) of the Notes. Prior to or contemporaneously with the Offering, the following other arrangements (together with the Offering, the "Funding Transactions") for the financing by the Company of the Aladdin were consummated: (i) the Sommer Equity Financing and the indirect equity contribution to Holdings by London Clubs of $50.0 million in cash (the "London Clubs Contribution") in exchange for Holdings Common Membership Interests; (ii) the closing of the $410.0 million Bank Credit Facility between the Company and the funding of the Term B Loan (as defined herein) and the Term C Loan (as defined herein) thereunder into the Cash Collateral Account (as defined herein) and (iii) execution and delivery of a commitment letter by the Company for one or more leases or loans in the aggregate amount of $80.0 million, covering the Specified Equipment and the Gaming Equipment (each as defined herein), to be used in the Aladdin (the "FF&E Financing"). See "Controlling Stockholders--Equity and Series A Preferred Interest Financing," "Description of Certain Indebtedness and Other Obligations--Bank Credit Facility" and "--FF&E Financing." SOURCES AND USES OF FUNDS The estimated sources and uses of funds raised for the development, construction, equipping and opening of the Aladdin are as follows (in millions): <TABLE> <CAPTION> SOURCES USES - --------------------------------------------------------- --------------------------------------------------------- <S> <C> <C> <C> Bank Credit Facility(1)....................... $ 410.0 Hotel and Casino(7)........................... $ 295.6 FF&E Financing(2)............................. 80.0 Off-Site Improvements(8)...................... 6.8 Senior Discount Notes due 2010(3)............. 115.0 Reimbursable Site Work Expenses(6)............ 14.2 Land Contribution(4).......................... 150.0 Furniture, Fixtures and Equipment and Cash Contribution(5).......................... 57.0 Gaming Equipment(9)........................... 107.5 Anticipated Site Work Land(10)...................................... 135.0 Reimbursement(6)............................ 14.2 Retire Existing Debt(11)...................... 74.5 Capitalized Interest, Net(12)................. 44.0 Pre-Opening Costs and Expenses................ 16.9 Reimbursement of Pre-development Costs(13).... 3.9 Working Capital(14)........................... 15.0 Construction and FF&E Contingency(15)......... 31.8 Land Investment in Music Project(16).......... 15.0 Cash Equity Investment in Music Project(17)... 21.3 Financing Fees and Expenses(18)............... 44.7 --------- --------- Total Sources................................. $ 826.2 Total Uses.................................... $ 826.2 --------- --------- --------- --------- </TABLE> - ------------------------ (1) The Company entered into the Bank Credit Facility with the Bank Lenders. The Bank Credit Facility, which closed concurrently with the closing of the Offering, consists of: (a) a term loan of $136.0 million ("Term A Loan") which matures seven years after the initial borrowing date; (b) a term loan of $114.0 million ("Term B Loan") which matures eight and one-half years after the initial borrowing date; and (c) a term loan of $160.0 million ("Term C Loan", and collectively with the Term A Loan and the Term B Loan, the "Loans") which matures ten years after the initial borrowing date. The Term B Loan and Term C Loan were funded into the Cash Collateral Account on the Issue Date, and in June, 1998, the Company began to use a portion of such funds in the construction of the Aladdin. The use of the remaining proceeds of the Term B Loan and Term C Loan in the construction of the Aladdin is subject to satisfaction of the conditions in the Disbursement Agreement. It is anticipated that the Company will begin to draw down the Term A Loan, subject to satisfaction of the conditions in the Disbursement Agreement, in December 1999 (being approximately 21 months after the Issue Date). See "Risk Factors--Conditions to Draw Down of Funds Under Funding Transactions." All of the Loans will convert from construction loans into amortizing loans on the Conversion Date (as defined herein), with substantial amounts due during the final six quarters of the Term B Loan and the Term C Loan. The Company has the option to pay interest at either LIBOR or the alternate base rate ("ABR") published by The Bank of Nova Scotia ("Scotiabank"), in each case plus certain margins. See "Description of Certain Indebtedness and Other Obligations--Bank Credit Facility." (2) The Company has entered into an agreement with the FF&E Lender (as defined herein) for provision of the FF&E Financing. The FF&E Financing consists of $60.0 million of operating leases and $20.0 million in loans and will be used by the Company to obtain the Gaming Equipment and Specified Equipment. See "Description of Certain Indebtedness and Other Obligations--FF&E Financing." (3) Represents the gross proceeds of the Offering, which, net of expenses of approximately $8 million, were contributed, together with approximately $8 million in cash received pursuant to the London Clubs Contribution, by Holdings to the Company in exchange for Series A Preferred Interests. (4) The land on which the Aladdin, the Music Project and the Plant (as defined herein) will be built, including adjacent land of approximately 0.8 acres, comprises a total of approximately 22.75 acres (the "Contributed Land") and was contributed to the Company by Holdings in exchange for Common Membership Interests. The Contributed Land has an appraised fair market value of $150.0 million (book value of $33.6 million as of December 31, 1997). Approximately 18 acres of the Contributed Land, having an appraised fair market value of $135.0 million, have been retained by the Company and approximately 4.75 acres of the Contributed Land, having an appraised fair market value of $15.0 million, will be contributed to Aladdin Music for the Music Project. (5) Represents (i) a $50.0 million cash contribution by London Clubs in exchange for 25% of the Holdings Common Membership Interests and (ii) a $7.0 million deemed equity contribution by the Issuer in exchange for Holdings Common Membership Interests, consisting of certain pre-development costs incurred by AHL in 1996, 1997 and 1998. (6) Pursuant to the Site Work Agreement, the Company has agreed to complete the construction of, among other things, certain shared structural space (the "Mall Shared Space"), construction of which will commence prior to the initial funding of the Mall Financing. Bazaar has agreed to reimburse the Company for up to $14.2 million (including interest) of the costs associated with such construction upon the completion of the Mall Shared Space. See "Certain Material Agreements--Construction, Operation and Reciprocal Easement Agreement and Related Agreements." (7) Represents (i) the guaranteed maximum price of construction of the Aladdin pursuant to the Design/ Build Contract of $267.0 million, less the contingency allowance of $6.8 million and expected reimbursement from Bazaar of $13.6 million (net of approximately $0.6 million of interest) as set forth in note (6) above; (ii) approximately $35 million for theming the Aladdin; (iii) $11.7 million for professional fees and disbursements; and (iv) $2.3 million for permits and taxes. See "Risk Factors-- Completion of the Mall Project and the Music Project." The Design/Build Contract contains financial incentives for the Design/Builder to complete the Aladdin within the construction budget and in a timely manner, as well as liquidated damages payable to the Company for certain unexcused delays. See "Risk Factors--Risks of New Construction," "--Risks Under Design/Build Contract and Fluor Guaranty" and "Certain Material Agreements--Design/Build Contract." (8) Represents the cost of off-site improvements, including overhead pedestrian walkways and widening of certain streets, for those parts of the Project Site (as defined herein) on which the Aladdin will be built. (9) Includes $26.5 million of gaming equipment and $81.0 million of furniture, fixtures and other equipment (including the Specified Equipment consisting of new furniture and equipment other than gaming equipment). (10) Represents the appraised fair market value of the land on which the Aladdin and the Plant will be built, together with adjacent land of approximately 0.8 acres. (11) Represents the retirement on the Issue Date of $68.7 million of existing indebtedness on the Contributed Land (with an interest rate of LIBOR plus 650 bps) and $5.8 million of existing debt owed by the Trust to GW Vegas LLC ("GW Vegas"), assumed by the Company as part of Holdings' equity contribution to the Company. (12) Represents capitalized gross interest under the Bank Credit Facility of $57.4 million and capitalized gross interest of $2.4 million from leasing expenses in connection with the FF&E Financing, from the date of the Offering until the estimated completion of the Aladdin in the first four months of the year 2000, net of interest income anticipated to be earned upon the investment in cash equivalents of the funds (assumed to be at 5% per annum) from the proceeds of the Offering and the proceeds of the Term B Loan and Term C Loan. (13) Represents $3.0 million of certain predevelopment costs incurred by AHL and reimbursed on the Issue Date and up to $0.9 million of certain predevelopment costs expected to be incurred and reimbursed over the expected construction period. (14) Represents cash on hand, inventories, deposits and other cash balances required for the opening of the Aladdin. (15) Comprises (i) the $6.8 million contingency included in the guaranteed maximum price set forth in the Design/Build Contract and (ii) the $25.0 million general project contingency (collectively, the "Contingency"). (16) Represents the appraised fair market value of the approximately 4.75 acres of land on which the Music Project will be built, which land will be contributed by the Company to AMH in exchange for common membership interests in AMH. (17) Represents cash to be contributed by the Company to AMH in exchange for common membership interests in AMH. (18) Represents fees in connection with the organization of the Company and the financing of the Aladdin, including approximately $8 million in expenses incurred in connection with the Offering. THE WARRANTS AND WARRANT SHARES The Warrants were originally issued by the Issuer in the Offering, pursuant to which 221,500 Units were issued and sold. Each Unit consists of $1,000 principal amount of Notes and 10 Warrants. The Notes and the Warrants will be separately transferable, in accordance with the Indenture (as defined herein), upon the filing of the Registration Statement at the option of the holders thereof. The Registration Statement applies solely to the Warrants and the Warrant Shares. The registration of the Warrants and the Warrant Shares is intended to satisfy certain obligations of the Issuer under a registration rights agreement with respect to the Warrants (the "Warrant Registration Rights Agreement") among the Issuer and Merrill Lynch, Pierce, Fenner and Smith Incorporated, Credit Suisse First Boston Corporation, CIBC Oppenheimer Corp. and Scotia Capital Markets (USA) Inc. (the "Initial Purchasers"), dated the Issue Date. There will be no proceeds to the Issuer from the registration or subsequent sale of the Warrants or Warrant Shares. <TABLE> <S> <C> Issuer....................... Aladdin Gaming Enterprises, Inc. Number of Warrants........... The Warrants entitle the holders thereof to acquire an aggregate of 2,215,000 shares of Common Stock of the Issuer (40% of the economic interest in the Issuer) representing an indirect interest in 10% of the outstanding Holdings Common Membership Interests on a fully-diluted basis after giving effect to such issuance. Exercisability; Expiration... The Warrants are exercisable at any time on or after the Separation Date (as defined herein) and prior to March 1, 2010. Exercise Price............... Each Warrant entitles the holder thereof to purchase one share of Common Stock of the Issuer at an exercise price of $0.001 per share, subject to adjustment. Anti-Dilution Provisions..... The Warrants have customary anti-dilution provisions. Such anti-dilution provisions are also reflected in the documents pertaining to the Holdings Common Membership Interests. Warrant Shares............... The Warrants entitle the holders thereof to acquire non-voting Common Stock of the Issuer. Shares of Common Stock of the Issuer or any successor entity and any other securities or property issuable or deliverable upon exercise of the Warrants are collectively referred to herein as the "Warrant Shares." The Issuer is a corporation, the sole material asset of which is 25% of the outstanding Holdings Common Membership Interests. The Warrants represent an effective 10% interest in the outstanding Holdings Common Membership Interests, on a fully-diluted basis after giving effect to such issuance, and the Trust (through Sommer Enterprises) owns interests which represent an effective 58.5% interest in the outstanding Holdings Common Membership Interests on a fully-diluted basis, (44.5% held by a direct ownership and 14.0% held by an indirect equity ownership through the Issuer). Equity Participation The Issuer, the Warrant Agent for and on behalf of the Agreement.................. holders of the Warrants and Warrant Shares, the Trust, London Clubs and Holdings have entered into the Equity Participation Agreement (as defined herein) which provides (among other things) (a) for the grant of certain "tag-along" rights to the holders of Warrant Shares in respect of sales by Sommer Enterprises or LCNI, directly or indirectly, of Holdings Common Membership Interests; (b) for rights of holders of the Warrant Shares to participate in an initial public offering on the same terms and conditions as LCNI and Sommer Enterprises and (c) that the Warrant holders will have the right to convert their Warrant Shares into Common Membership Interests in the Company in the event that the Issuer takes certain actions, including certain mergers </TABLE> <TABLE> <S> <C> or consolidations, disposition of all or substantially all of the Issuer's assets, transfers of the Issuer's Holdings Common Membership Interests, certain recapitalizations of the Issuer, voluntary dissolution or liquidation of the Issuer, repurchases of the Issuer's stock which is not pro-rata among the stockholders, and certain issuances of the Issuer's stock. See "Certain Material Agreements--Equity Participation Agreement."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001059169_new-south_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001059169_new-south_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus does not give effect to the exercise of the Underwriters' over-allotment option. Prospective investors should carefully consider the information set forth under the heading "Risk Factors." Throughout this Prospectus, unless the context clearly requires otherwise, references to "the Company" should be deemed references to the combined activities of New South Bancshares, Inc., a non-operating holding company, and its principal operating subsidiary, New South Federal Savings Bank. THE COMPANY New South Bancshares, Inc. (the "Company") is a closely held unitary thrift holding company headquartered in Birmingham, Alabama. Through its financial institution subsidiary, New South Federal Savings Bank ("New South"), a federally chartered savings association organized in 1985, the Company operates two full-service retail branch offices in Birmingham, Alabama, and 46 loan production offices located in 13 states throughout the southeastern and western United States. New South is the largest thrift and the sixth largest depository institution, based on asset size, headquartered in the State of Alabama. See "The Company" and "Business." The Company's operations principally involve residential mortgage lending, installment (automobile) lending, residential construction and land lending and deposit gathering activities. The Company's residential mortgage lending efforts involve the origination and purchase of residential mortgage loans through its loan origination offices and wholesale sources, the sale of such loans (usually on a pooled and securitized basis) in the secondary market, and the servicing of residential mortgage loans for investors as well as the Company's own loan portfolio. The installment (automobile) lending program involves indirect lending through 600 automobile dealers in six southern states. The Company's residential construction and land lending efforts involve making loans to builders for the construction of single family properties and, on a more limited basis, loans for the acquisition and development of improved residential lots. In addition, the Company actively funds and purchases commercial real estate loans originated by Collateral Mortgage Ltd. ("Collateral"), an affiliate, which may be sold to investors or held in New South's portfolio. See "Business." The Company funds its lending activities primarily with customer deposits gathered through a broad range of banking services including certificates of deposit, individual retirement and other time and demand deposit accounts and money market accounts. The Company takes a wholesale approach to generating deposits, paying high interest rates while keeping deposit gathering overhead costs low. The Company maintains two retail branch offices, both located in Birmingham, Alabama, and attracts the majority of its deposits through telemarketing activities and third parties, primarily brokers. See "Business." At March 31, 1998, the Company's loan portfolio consisted of the following: (i) $314.9 million in residential mortgage loans, of which $137.4 million the Company classifies as conforming residential mortgage loans, and $177.5 million the Company classifies as nonconforming residential mortgage loans; (ii) $107.1 million in installment (automobile) loans; (iii) $107.8 million in residential construction and land loans; (iv) $119.9 million in commercial real estate loans (the majority of which are originated by Collateral but funded and closed by New South); and (v) $3.3 million in commercial loans. Also as of such date, the Company serviced approximately $1.8 billion of residential mortgage loans, installment (automobile) loans and commercial real estate loans, which had an approximate weighted average yield of 8.55%. Of such amount, $1.2 billion represented loans serviced for others and $652.9 million represented loans the Company held in its own portfolio. See "Business." The following information summarizes certain selected consolidated financial information of New South as of and for its fiscal years ended September 30, 1993 and 1994 and of the Company (which was established in 1994 with a fiscal year ended December 31) as of and for its fiscal years ended December 31, 1995, 1996 and 1997 and for the three months ended March 31, 1997 and 1998. The data for the Company, on a consolidated basis as of and for its fiscal year ended December 31, 1994, did not differ significantly from the corresponding data for New South as of and for its fiscal year ended September 30, 1994. The summary below should be read in conjunction with "Management's Discussion and Analysis of Financial Conditions and Results of Operations" and the Company's Consolidated Financial Statements and Notes included herein. <TABLE> <CAPTION> NEW SOUTH FEDERAL SAVINGS BANK NEW SOUTH BANCSHARES, INC. -------------------- -------------------------------------------------- AS OF AND FOR THE AS OF AND FOR THE AS OF AND FOR THE YEAR ENDED YEAR ENDED THREE MONTHS ENDED SEPTEMBER 30, DECEMBER 31, MARCH 31, -------------------- ---------------------------- -------------------- 1993 1994 1995 1996 1997 1997 1998(1) --------- --------- -------- -------- -------- -------- ---------- (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE) <S> <C> <C> <C> <C> <C> <C> <C> Total assets............ $ 616,949 $ 575,767 $746,518 $824,968 $994,053 $869,508 $ 983,576 Loans serviced for others................. 643,429 723,699 716,664 709,773 999,613 769,597 1,163,042 Loans originated........ 152,419 219,858 264,192 408,845 852,588 100,849 383,270 Net income.............. 5,804 3,793 3,366 2,562 4,716 1,570 1,264 Net income per share.... 5.80 3.79 2.42 1.84 3.42 1.14 0.92 Total stockholders' equity................. 37,350 38,263 45,780 47,941 52,314 49,155 53,028 Return on average equity................. 17.01% 9.51% 7.75% 5.22% 9.17% 12.55% 9.42% Return on average assets................. 0.99 0.59 0.47 0.31 0.51 0.74 0.50 </TABLE> - -------- (1) In July of 1997, Collateral transferred to New South 39 residential mortgage loan production offices, associated employees, and related assets and liabilities. See "Management Discussion and Analysis." The principal executive offices of the Company are located at 1900 Crestwood Boulevard, Birmingham, Alabama 35210. Its telephone number at such address is (205) 951-4000. NEW SOUTH CAPITAL TRUST I The Trust is a statutory business trust formed under Delaware law pursuant to (i) a trust agreement, dated as of April 2, 1998, executed by the Company, as depositor, and Bankers Trust (Delaware), as a trustee (the "Delaware Trustee"), and (ii) a certificate of trust filed with the Delaware Secretary of State on April 2, 1998. The initial trust agreement will be amended and restated in its entirety (as so amended and restated, the "Trust Agreement") substantially in the form filed as an exhibit to the Registration Statement of which this Prospectus forms a part. This Trust Agreement will, among other things, appoint a "Property Trustee" which shall hold legal title to the Subordinated Debentures in trust for the benefit of the holders of the Trust Securities and several "Administrative Trustees" who shall have the power, duty and authority to cause the Trust to issue and sell the Trust Securities and to execute any documents or certificates necessary to effectuate such issuance and sale. The Delaware Trustee shall be a Trustee for the sole and limited purpose of fulfilling the statutory requirements of Section 3807 of the Delaware Business Trust Act and shall have no authority to take any action except as required under the Delaware Business Trust Act. The Delaware Trustee, Property Trustee and Administrative Trustees are collectively referred to herein as the "Issuer Trustees." The Trust Agreement will be qualified as an indenture under the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The Trust exists for the exclusive purposes of (i) issuing the Preferred Securities offered hereby representing preferred undivided beneficial interests in the assets of the Trust, (ii) issuing the Common Securities representing common undivided beneficial interests in the assets of the Trust to the Company, (iii) investing the gross proceeds of the sale of the Trust Securities in the Subordinated Debentures, and (iv) engaging in only those other activities necessary, advisable, or incidental thereto. The Subordinated Debentures will be the only assets of the Trust and payments on the Subordinated Debentures will be the only revenue of the Trust. The Subordinated Debentures will be issued by the Company pursuant to the Junior Subordinated Indenture between the Company and Bankers Trust Company, as debenture trustee (as amended and supplemented from time to time, the "Indenture"). Upon issuance of the Preferred Securities, the purchasers thereof will own all of the Preferred Securities. The Company will acquire all of the Common Securities which will represent an aggregate liquidation amount equal to at least 3% of the total capital of the Trust. The Common Securities will rank pari passu, and payments will be made thereon pro rata, with the Preferred Securities, except that upon the occurrence and during the continuance of an Event of Default (as defined herein) under the Trust Agreement resulting from a Debenture Event of Default (as defined herein), the rights of the Company as holder of the Common Securities to payment in respect of Distributions and payments upon liquidation, redemption or otherwise will be subordinated to the rights of the holders of the Preferred Securities. See "Description of the Preferred Securities--Subordination of Common Securities." The Trust has a term of 31 years, but may terminate earlier as provided in the Trust Agreement. The principal executive offices of the Trust are located at 1900 Crestwood Boulevard, Birmingham, Alabama 35210. Its telephone number at such address is (205) 951-4000. It is anticipated that the Trust will be conditionally exempted from the reporting requirements of the Exchange Act. THE OFFERING Securities Offered.......... 3,000,000 Preferred Securities having a Liquidation Amount of $10.00 per Preferred Security. The Preferred Securities represent preferred undivided beneficial interests in the assets of the Trust, which will consist solely of the Subordinated Debentures and payments thereunder. The Company and the Trust have granted the Underwriters an option, exercisable within 30 days after the date of this Prospectus, to purchase up to an additional 450,000 Preferred Securities at the initial offering price, solely to cover over-allotments, if any. Payment of Distributions.... The Distributions payable on each Preferred Security will be fixed at a rate per annum of % of the Liquidation Amount of $10.00 per Preferred Security, will be cumulative, will accumulate from , 1998, the Issue Date of the Preferred Securities, and will be payable quarterly in arrears, on March 31, June 30, September 30 and December 31 of each year, commencing September 30, 1998. See "Description of the Preferred Securities --Distributions." Extension Periods........... The Company has the right, at any time, so long as no Debenture Event of Default has occurred and is continuing, to defer payments of interest on the Subordinated Debentures by extending the interest payment period on the Subordinated Debentures, at any time and from time to time, for up to 20 consecutive quarters (each, an "Extension Period"), provided, that no Extension Period may extend beyond the Stated Maturity of the Subordinated Debentures. See "Description of the Subordinated Debentures--Option to Extend Interest Payment Date." During an Extension Period, interest on the Subordinated Debentures will continue to accrue (and the amount of Distributions to which holders of the Preferred Securities are entitled will accumulate) at the rate of % per annum, compounded quarterly, to the extent permitted by applicable law, from the relevant payment date for such interest, and holders of Preferred Securities will be required to continue to accrue income for United States federal income tax purposes, even though the Trust is not making cash Distributions on such Preferred Securities. There could be multiple Extension Periods of varying lengths throughout the term of the Subordinated Debentures. As a consequence of the extension by the Company of the interest payment period, quarterly Distributions on the Preferred Securities will be deferred (though such Distributions will continue to accumulate and compound quarterly, since interest will continue to accrue and compound on the Subordinated Debentures) during any such Extension Period. During an Extension Period the Company will be prohibited, subject to certain exceptions described herein, from declaring or paying any cash distributions with respect to its capital stock or debt securities that rank pari passu with or junior to the Subordinated Debentures. Upon the termination of any Extension Period and the payment of all amounts then due, the Company may commence a new Extension Period, subject to the foregoing requirements. See "Description of the Preferred Securities-- Distributions" and "Description of the Subordinated Debentures--Option to Extend Interest Payment Date." During an Extension Period, holders of Preferred Securities will be required to continue to include income in the form of Original Issue Discount ("OID") in their gross income for federal income tax purposes in advance of the receipt of the cash payments attributable to such deferred interest. See "Description of the Subordinated Debentures-- Option to Extend Interest Payment Date" and "Certain Federal Income Tax Consequences-- Interest Income and Original Issue Discount." Ranking..................... The Preferred Securities will rank pari passu, and payments thereon will be made pro rata, with the Common Securities except as described under "Description of the Preferred Securities-- Subordination of Common Securities." The Subordinated Debentures will be unsecured and subordinate and junior in right of payment to all Senior Debt to the extent and in the manner set forth in the Indenture. See "Description of the Subordinated Debentures." The Guarantee will constitute an unsecured obligation of the Company and will rank subordinate and junior in right of payment to all Senior Debt to the extent and in the manner set forth in the Guarantee Agreement and, in the event of bankruptcy or insolvency proceedings involving the Company, will rank subordinate and junior in right of payment to all liabilities of the Company, but senior to any obligations in respect of any class of capital stock of the Company. See "Risk Factors--Risk Factors Relating to the Preferred Securities-- Ranking of Subordinate Obligations Under the Guarantee and Subordinated Debentures" and "Description of the Guarantee." In addition, because the Company is a holding company, the Subordinated Debentures and the Guarantee will be effectively subordinated to all existing and future liabilities of the Company's subsidiaries, including New South's deposit liabilities. See "Description of the Subordinated Debentures--Subordination." Optional Redemption......... The Preferred Securities are subject to redemption, in whole or in part, upon repayment of the Subordinated Debentures at , 2028, the Stated Maturity, or their earlier redemption. The Subordinated Debentures are redeemable prior to the Stated Maturity at the option of the Company (i) on or after , 2003, in whole at any time or in part from time to time, or (ii) at any time, in whole (but not in part), upon the occurrence of a Special Event. See "Description of the Preferred Securities--Redemption," "Description of the Subordinated Debentures-- Optional Prepayment after , 2003," and "-- Special Event Prepayment." No Ratings.................. The Preferred Securities are not expected to be rated by any rating agency, nor is any other security issued by the Company so rated. Termination and Distribution................ The Company will have the right at any time to terminate the Trust and cause the Subordinated Debentures to be distributed to the holders of the Preferred Securities in liquidation of the Trust. This right is optional and wholly within the discretion of the Company. Circumstances under which the Company may determine to exercise such right could include the occurrence of adverse tax consequences to the Company or the Trust that are not within the definition of a Tax Event (as defined herein) because they do not result from an amendment or change described in such definition, and changes in the accounting requirements applicable to the Preferred Securities as described under "Accounting Treatment." See "Description of the Preferred Securities--Liquidation of Trust and Distribution of Subordinated Debentures." Guarantee................... The Company has, through the Guarantee, the Indenture, the Subordinated Debentures and the Trust Agreement, fully and unconditionally guaranteed all the Trust's obligations with respect to the Preferred Securities, subject to certain subordination provisions discussed below. The payment of distributions on the Preferred Securities is guaranteed by the Company under the Guarantee, but only to the extent the Trust has funds legally and immediately available to make such distributions. If the Company does not make principal or interest payments on the Subordinated Debentures, the Trust will not have sufficient funds to make distributions on the Preferred Securities. In such event, a holder of Preferred Securities may institute a legal proceeding directly against the Company pursuant to the terms of the Guarantee to enforce payment of amounts equal to such Distributions to such holder. See "Description of the Subordinated Debentures--Enforcement of Certain Rights by Holders of Preferred Securities." Voting Rights............... The holders of the Preferred Securities will have no voting rights except in limited circumstances. See "Description of the Preferred Securities-- Voting Rights; Amendment of the Trust Agreement." ERISA Considerations........ Prospective purchasers should consider the restrictions on purchase set forth under "ERISA Considerations." Certain Tax Consequences.... Should the Company exercise its right to defer payments of interest on the Subordinated Debentures, each holder of Preferred Securities will be required to continue to accrue income (as OID) in respect of the deferred stated interest allocable to its Preferred Securities for United States federal income tax purposes, which will be allocated but not distributed to holders of Preferred Securities. As a result, during an Extension Period, each holder of Preferred Securities will recognize income for United States federal income tax purposes in advance of the receipt of cash and will not receive the cash related to such income from the Trust if the holder disposes of the Preferred Securities prior to the record date for the payment of Distributions thereafter. See "Certain Federal Income Tax Consequences--Interest Income and Original Issue Discount" and "--Sales of Preferred Securities." Absence of Market for the Preferred Securities........ The Preferred Securities will be a new issue of securities for which there currently is no market. Although the Company intends to apply to have the Preferred Securities approved for quotation on the American Stock Exchange, there can be no assurance that such application will be approved, that an active trading market in the Preferred Securities will develop or, if one does develop, that it will be maintained. Accordingly, there can be no assurance as to the development or liquidity of any market for the Preferred Securities. American Stock Exchange..... The Company intends to apply to have the Preferred Securities approved for quotation on the American Stock Exchange, Inc. For additional information regarding the Preferred Securities, see "The Trust,"
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001059382_teltrust_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001059382_teltrust_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and the Consolidated Financial Statements and notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, references in this Prospectus to "Teltrust" or the "Company" refer collectively to Teltrust, Inc. and its subsidiaries, and all information presented in this Prospectus assumes no exercise of the Underwriters' over- allotment option. See the "Glossary" beginning on page 66 for definition of certain technical terms used in this Prospectus. THE COMPANY Teltrust is a leading independent outsource provider of a broad range of enhanced call processing and calling card services to the domestic telecommunications industry. The Company believes that it offers the most comprehensive suite of services of any independent outsource provider in its industry. This diversified suite of services includes call completion, national directory assistance and third-party verification services in addition to calling card services. Teltrust serves its customers through state-of-the-art technology and switch-based call processing platforms and, as of March 31, 1998, more than 1,000 employees. The Company's customers include regional Bell operating company ("RBOC") affiliates (such as BellSouth Long Distance and BellSouth Public Communications), pay telephone and hospitality aggregators (such as Peoples Telephone Company and Global Net), interexchange carriers ("IXCs") (such as US Long Distance, WorldCom, LCI International and Qwest Communications), and other large telecommunications resellers or users (such as TON Services, an affiliate of Flying J ("Flying J"), and Eastern Communications Network). The Company has also recently established customer relationships with affiliates of Ameritech Corporation (Ameritech Communications and Ameritech Services) and emerging telecommunications companies including competitive local exchange carriers ("CLECs") (such as Nextlink and Cox Com, a subsidiary of Cox Communications ("Cox Communications")), wireless providers (such as Centennial Cellular and Omnipoint Communications) and international carriers (such as RSL Com U.S.A. and Justice Technology). Many of the Company's customers purchase a number of the Company's services under multi-year contracts and utilize Teltrust to provide complex outsourcing solutions. During the quarter ended March 31, 1998, Teltrust processed over 21 million call processing transactions and decremented more than 17.6 million domestic minutes for its prepaid calling card customers. A brief description of Teltrust's enhanced call processing and calling card service offerings is as follows: CALL PROCESSING SERVICES CALL COMPLETION SERVICES. Teltrust provides call completion services to RBOCs, IXCs, other local exchange carriers ("LECs"), CLECs, wireless providers, pay telephone providers, hospitality service providers and international carriers. Call completion services include calling card calling, collect calling and third-party billed calling. A majority of calls handled are branded in the names of Teltrust's customers. The Company also offers STATUS(TM), a proprietary refund and repair service to pay telephone providers. NATIONAL DIRECTORY ASSISTANCE SERVICES. Teltrust provides national directory assistance services to RBOCs, IXCs, LECs, wireless providers and other telecommunications resellers. As part of its national directory assistance services, the Company offers enhanced features such as direct call connection, reverse searches and standard industrial classification code searches. THIRD-PARTY VERIFICATION SERVICES. Teltrust provides third-party verification services to RBOCs, IXCs, LECs, CLECs, international carriers and telecommunications resellers. These services allow Teltrust customers to verify consumer orders for changes in local and long distance telephone service and public utility service in compliance with regulations promulgated by the Federal Communications Commission ("FCC") and many state public utility commissions ("PUCs"). These regulations were implemented to combat "slamming" (the practice of changing a consumer's telecommunications or other utility provider without such consumer's authorization). CALLING CARD SERVICES The Company provides calling card programs and platform services to RBOCs, IXCs, LECs, CLECs, wireless providers, major retail operations and other firms to allow such customers to sell prepaid and postpaid calling card products to the general public. Teltrust's customers utilize the Company's advanced point- of-sale activation technology and can offer users of calling cards serviced by Teltrust access to numerous enhanced services, including voice mail, paging, faxing and conference calling. INDUSTRY During the 1990s, changes in the regulatory environment and the emergence of new technologies have created a growing and fiercely competitive environment in the telecommunications industry. According to FCC reports, the telecommunications market in the United States, including local, long distance, wireless and prepaid calling, generated revenues of more than $220 billion in 1996. As new participants enter the market, telecommunications companies, including RBOCs, IXCs, LECs, CLECs and wireless providers, are evaluating their existing services and seeking opportunities that will allow them to compete more effectively, reduce operating costs, and increase usage, market penetration and customer retention. Many of these companies are seeking access to call completion services, national directory assistance services and calling card platforms which are considered essential by end-users. Partnering with an outsource provider, such as Teltrust, allows telecommunications companies to bring to market new value-added products and services in a more expeditious and cost-effective manner than by building the necessary infrastructure to provide such services internally and enables telecommunications companies to focus on their core competencies and strategies. GROWTH STRATEGY Teltrust believes it is well-positioned to capitalize on the changes in the telecommunications industry by utilizing its competitive advantages as an experienced independent outsource provider of a broad range of enhanced call processing and calling card services. Teltrust's distinct operational advantage is its focus on providing enhanced call processing and calling card services on a wholesale basis to its customers. This emphasis has allowed the Company to avoid competing in the core businesses of its customers and enables Teltrust to concentrate on offering and expanding a diversified suite of enhanced call processing and calling card services. Other advantages include the Company's use of a proven operating infrastructure and technology that can be customized to respond to customer needs, a commitment to excellence in customer service and a demonstrated ability to meet the performance expectations of sophisticated customers with demanding and changing standards. Teltrust's goal is to be the premier provider of outsourced enhanced call processing and calling card services. The key elements of the Company's focused growth strategy are (i) cross-selling its current service offerings to existing customers, (ii) pursuing customers in new and existing markets, (iii) developing new services, (iv) leveraging its operating structure to enable the Company to expand its business and meet the needs and requirements of current and future customers, (v) maintaining its dedication to high levels of customer satisfaction and (vi) considering strategic acquisitions. QUEST ACQUISITION On December 31, 1997, the Company completed the acquisition of Quest Group International, Inc. and its affiliated companies ("Quest"), a pioneer in the United States prepaid calling industry. This acquisition enabled the Company to combine its existing calling card operations with Quest's proprietary technology, innovative management and marketing team. Teltrust believes this acquisition will enable it to offer its customers a broader range of services and position it for additional growth in its calling card services business. Teltrust was incorporated under the laws of Delaware in 1998, and its predecessor was incorporated under the laws of Utah in 1986. The Company's principal executive offices are located at 6322 South 3000 East, Salt Lake City, Utah 84121, and its telephone number is (801) 535-2000. "Teltrust", "Quest" and the Company's logo are trademarks of the Company and are used throughout this document as such. All other trademarks and trade names referred to in this Prospectus are the property of their respective owners. THE OFFERING <TABLE> <C> <S> Common Stock Offered By the Company..................................... 2,500,000 shares By the Selling Stockholders........................ 700,000 shares Total.......................................... 3,200,000 shares ------- Common Stock to be Outstanding after the Offering(1).. 12,787,023 shares Use of Proceeds....................................... To repay existing indebtedness; to finance capital expenditures, to fund working capital, other general corporate purposes, new business opportunities and possible strategic acquisitions. See "Use of Proceeds." Nasdaq National Market Symbol......................... TTST </TABLE> - -------------------- (1) Excludes: (i) an aggregate of 972,300 shares of Common Stock issuable upon the exercise of outstanding stock options under the Company's 1993 Employee Stock Option Plan (the "1993 Option Plan") at a weighted average exercise price of $5.62 per share at May 31, 1998 and (ii) 981,600 additional shares of Common Stock available for future issuance under the 1993 Option Plan and the Company's 1998 Stock Option and Grant Plan (the "1998 Option Plan"), of which approximately 362,500 will be issuable pursuant to the exercise of options to be granted to employees of the Company immediately prior to the commencement of the Offering exercisable at the per share price to the public set forth on the cover page of this Prospectus. See "Management--Stock Option Plans." Unless otherwise indicated, all information presented in this Prospectus assumes the conversion of all outstanding shares of the Company's Series A Convertible Preferred Stock, par value $.01 per share ("Series A Preferred Stock"), into shares of Common Stock immediately prior to the closing of the Offering and gives effect to the acquisition of Quest on December 31, 1997 in a transaction accounted for as a pooling-of-interests. Teltrust was incorporated under the laws of the State of Delaware in 1998. Following its formation, Teltrust, Inc. entered into a merger transaction with Teltrust Holdings, Inc., a Utah corporation formed in 1986 and Teltrust, Inc.'s predecessor ("Holdings"), and a wholly owned subsidiary of Teltrust, Inc. As a result of this merger, Holdings became a wholly owned subsidiary of Teltrust, Inc. and all of the stockholders of Holdings became stockholders of Teltrust. Prior to this Offering, Teltrust held no assets other than its capital stock in Holdings.
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION CONCERNING THE COMPANY AND THE CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO OF GSV APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE REQUIRES, THE TERM "COMPANY" OR "GSV" WHEN USED IN THIS PROSPECTUS REFERS TO GOLDEN STATE VINTNERS, INC., A DELAWARE CORPORATION, AND ITS CONSOLIDATED SUBSIDIARIES AND PREDECESSORS. EXCEPT AS SET FORTH IN THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO OR AS OTHERWISE SPECIFIED HEREIN, ALL INFORMATION IN THIS PROSPECTUS ASSUMES (I) THE CHANGE OF THE NAME OF GSV FROM "GOLDEN STATE ACQUISITION CORP." TO "GOLDEN STATE VINTNERS, INC.", (II) THE CREATION BY GSV OF A NEW CLASS A COMMON STOCK AND A NEW CLASS B COMMON STOCK, (III) THE CONVERSION OF ALL OF GSV'S OUTSTANDING SHARES OF OLD CLASS B COMMON STOCK ON A ONE-FOR-ONE BASIS INTO SHARES OF THE COMPANY'S NEWLY-CREATED CLASS A COMMON STOCK, (IV) THE CONVERSION OF ALL OF GSV'S OUTSTANDING SHARES OF OLD CLASS E COMMON STOCK AND OLD CLASS K COMMON STOCK ON A ONE-FOR-ONE BASIS INTO SHARES OF THE COMPANY'S NEWLY-CREATED CLASS B COMMON STOCK, (V) A 2.9-FOR-1 STOCK SPLIT FOR EACH OF GSV'S OUTSTANDING SHARES OF NEWLY-CREATED CLASS A COMMON STOCK AND NEWLY-CREATED CLASS B COMMON STOCK, (VI) THE CONVERSION OF ALL OF GSV'S OUTSTANDING SHARES OF JUNIOR EXCHANGEABLE PREFERRED STOCK (THE "JUNIOR PREFERRED STOCK") INTO 130,343 SHARES OF THE COMPANY'S NEWLY-CREATED CLASS B COMMON STOCK (COLLECTIVELY, WITH THE EVENTS DESCRIBED IN (II) THROUGH (V), THE "RECAPITALIZATION"), (VII) THE CONVERSION OF 1,526,084 SHARES OF THE COMPANY'S NEWLY-CREATED CLASS A COMMON STOCK ON A ONE-FOR-ONE BASIS INTO SHARES OF THE COMPANY'S NEWLY-CREATED CLASS B COMMON STOCK IMMEDIATELY PRIOR TO THE SALE OF SUCH SHARES BY CERTAIN SELLING STOCKHOLDERS IN THIS OFFERING, (VIII) THE COMPANY'S FISCAL YEAR PERIODS RUNNING FROM JULY 1 TO JUNE 30 OF EACH YEAR REFERENCED AND (IX) NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. AS USED IN THIS PROSPECTUS, THE TERM "PREMIUM WINE" REFERS TO WINE THAT RETAILS FOR $3.00 OR MORE PER 750 MILLILITER (ML) BOTTLE OR THE EQUIVALENT PRICE FOR DIFFERENT SIZED BOTTLES, IN ACCORDANCE WITH INDUSTRY CUSTOM. THE COMPANY GSV is one of the largest suppliers of premium bulk wines, wine processing and storage services, wine grapes and case goods in the United States. Management believes that the Company is a contract supplier of choice for many of the leading branded wineries in California because of its reputation for quality and service, extensive vineyard holdings, strategically located facilities and ability to tailor a full range of products and services to meet the particular needs of its customers. The Company believes that its strong customer relationships, low-cost operations and ability to successfully integrate vineyard and facility acquisitions have enabled GSV to capitalize on recent wine industry trends, including the growth of the premium wine market and the trend by many of the leading branded wineries to outsource wine production. Over the last five years, GSV has increased its revenues at a compounded annual rate of 19% from $47.0 million in fiscal 1993 to $95.8 million in fiscal 1997. The Company provides a broad range of high quality winemaking and processing services, barrel fermentation and bottling and storage services to many of the largest branded wineries in California and to a number of international wineries. The Company supplies premium bulk wine pursuant to long-term supply agreements with Sutter Home Winery ("Sutter Home"), Canandaigua Wine Company ("Canandaigua"), Sebastiani Vineyards ("Sebastiani"), IDV North America ("Heublein"), Vincor International, Inc. ("Vincor"), and other wineries. The Company also delivers contract wine processing, barrel fermentation and storage services under contracts with, among others, The Wine Group, Robert Mondavi Winery ("Mondavi") and Beringer Wine Estates ("Beringer"). The Company also sells wine grapes, primarily to EJ Gallo Winery ("Gallo"). GSV produces private label case goods for a number of clients, such as Archer Daniels Midland Co. ("ADM"), JC Boisset USA ("Boisset") and Trader Joe's. The Company is the largest exporter of bulk wine from California, according to Gomberg, Fredrikson & Associates ("Fredrikson"), a wine industry consulting firm, and, in fiscal 1997, the Company derived approximately 12% of its revenues from the sale of bulk wine and case goods outside of the United States. The Company also supplies brandy (a distilled derivative of wine) to Heublein pursuant to a long-term agreement and is the second largest brandy producer in the United States. The combination of GSV's extensive vineyard holdings and five strategically located facilities has enabled the Company to become what management believes is one of California's low-cost producers of premium bulk wine. The Company's 9,600 acres of vineyard properties in California's San Joaquin Valley allow the Company to source high quality wine grapes at a competitive cost. The Company's wine processing facilities are generally modern, efficient and automated, and allow for large scale, low-cost production of premium bulk wine and case goods and the delivery of a full line of winemaking, processing and storage services. Over the last four years, the Company has greatly expanded its presence in the California wine industry by acquiring vineyards and wine and brandy processing facilities and quickly integrating these assets into GSV's winemaking operations. Management believes that the growth in the Company's sales is attributable in part to the growth of the premium wine market. Over the past 10 years, there has been a shift in consumer preferences in the United States from generic or "jug" wines to high quality, branded premium varietal wines sold primarily in 750ml bottles. Since 1987, sales of premium California table wines have increased at a 15% compounded annual rate, from approximately $932 million in 1987 to approximately $3.8 billion in 1997, according to Fredrikson. In 1997, premium table wines accounted for 78% of the $4.8 billion California table wine market (expressed in winery sales revenues), compared to 52% of the $1.8 billion California table wine market in 1987. The Company believes that this major shift in consumer preferences has occurred due to (1) the maturing "baby-boomer" generation entering its prime wine consumption period; (2) a growing consumer interest in premium wines in general; (3) a growing interest in and sophistication about food that lends itself to expanded consumption of premium wines; and (4) the improving quality and reputation of California premium wines. Management believes that the Company's recent financial performance has also benefited from the increasing trend by a number of California's leading branded wineries to outsource various steps in the winemaking process. With the growth in demand for premium wines, these wineries have focused on the marketing of their brands and have invested significant financial resources in building brand awareness and loyalty through marketing and distribution. Additionally, the growing demand for premium wine has strained the winemaking capacity of a number of leading branded wineries. These wineries have demonstrated a strategic preference towards focusing their resources on brand building as opposed to facility expansion. Management believes that these and other factors in the wine industry have resulted in an increasing need for California's large, branded wineries to outsource the production of premium wine. As a quality-oriented, low-cost provider of contract winemaking and processing services, management believes that the Company is well positioned to continue to capitalize on these wine industry trends. BUSINESS STRENGTHS GSV's key business strengths include: LOW-COST PROVIDER. To position the Company advantageously among its bulk wine processing competitors, GSV seeks to be the low-cost provider of bulk wine and contract winemaking and processing services. The economies of scale of the Company's large, efficient vineyards and facilities and GSV's expertise in managing its winemaking facilities translate into low production costs, which allow the Company to price its winemaking products and services at prices that may be lower than the marginal production costs of these products and services to its customers. FOCUS ON QUALITY. The Company has a consistent record of producing high quality wine products. For example, three of the top 13 "Best-Value" Chardonnays (under $10 per 750ml bottle), as ranked in 1997 by WINE SPECTATOR magazine, were made exclusively from the Company's wine. The Company applies rigorous attention to quality in all aspects of its grape growing, winemaking and storage processes. FULL RANGE OF PRODUCTS AND SERVICES. The Company offers customers an array of wine products in most of the California appellations and provides a full complement of wine-related services, from grape growing to the shipment of case goods. Consequently, the Company's customers can use GSV's products and services in any step of the winemaking process, while focusing the use of their resources to leverage their particular strengths. LARGE, COST EFFECTIVE VINEYARDS. The Company is one of the largest vineyard owners in California in terms of total acreage. GSV's 9,600 acres of vineyard properties are large and highly productive, which results in lower grape production costs. For example, in 1997 the average cost of grape production at the Company's vineyards was well below the 1997 market price for such grapes. The Company's ownership of extensive vineyards also allows GSV to control the varieties of grapes it grows, enabling the Company to tailor its product offerings to the changing needs of its branded winery customers. STRATEGICALLY LOCATED FACILITIES. The location of the Company's five wineries in or adjacent to most of California's primary wine growing regions allows the Company to offer its customers winemaking, processing and storage services at several conveniently located facilities. In addition, the size of the Company's facilities enables GSV to aggregate the winemaking needs of several customers, producing wine at a lower marginal cost than each customer could at their own facilities and reliably delivering large quantities of quality wine. STRONG CUSTOMER RELATIONSHIPS. The Company has developed relationships with many of the largest branded wineries in California as well as with a number of international branded wineries. The Company has used long-term contracts to create and maintain business relationships with such customers as Gallo, Heublein, Sutter Home, Canandaigua, Sebastiani, The Wine Group, Mondavi, Beringer, and Vincor. As competition among the major wineries in California intensifies, management believes that a number of these wineries will continue to outsource the production of a major portion of their premium wines. GROWTH STRATEGY GSV's strategic objective is to strengthen its position as a leading supplier of premium bulk wine, wine processing and storage services and case goods to the leading branded wineries in California and to a number of international winemakers. In addition to building on its business strengths, the Company's strategy for achieving this goal has the following key elements: UPGRADE AND EXPAND WINEMAKING OPERATIONS. The Company recently authorized capital expenditures of up to $20 million, primarily to upgrade, maintain and expand its existing winemaking facilities in Fresno and Monterey over the next two years. In addition, the Company will continue to evaluate opportunities to make strategic greenfield investments in selected wine regions of California. PURSUE STRATEGIC ACQUISITIONS. The Company's recent acquisitions have enabled it to expand the range of premium winemaking and processing services that it offers to its branded winery customers. Additionally, the Company has often been able to quickly generate revenues from acquired assets that have been integrated into GSV operations. While the Company has found it increasingly difficult to identify attractive acquisition opportunities, GSV will continue to examine acquisition opportunities that make sense financially and can be integrated efficiently with the Company's existing operations. EXPAND INTERNATIONALLY. The Company will seek to strengthen its position as the leading bulk wine exporter from California and will continue to market its winemaking and processing services to leading international wineries. The Company also plans to further leverage its relationships with leading international winemakers to internationally source bulk wine for the Company's customers in North America. Finally, the Company believes there are significant growth opportunities in a variety of international winemaking regions, including Australia, South America and Southern Europe, and that the premium bulk wine processor and contract service provider models that the Company has successfully implemented in California can be applied internationally. SUMMARY CONSOLIDATED FINANCIAL INFORMATION (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) The Company (referred to as "New GSV" below) was incorporated for the purpose of acquiring all of the outstanding capital stock of Golden State Vintners, currently one of the Company's consolidated subsidiaries (referred to as "Old GSV" below), on April 27, 1995. The Company constitutes the successor company to Old GSV and is reflected in the statement of operations data beginning on April 27, 1995 and the balance sheet data beginning on June 30, 1995. The statement of operations data and the balance sheet data through April 26, 1995 are the results of Old GSV. The information contained in the tables below should be read in conjunction with and is qualified in its entirety by "Selected Consolidated Financial Data", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited and unaudited Consolidated Financial Statements of Old GSV and the Company and the Notes thereto, each of which is included elsewhere in this Prospectus. <TABLE> <CAPTION> NEW GSV OLD GSV ------------------------------------------- --------------------------------- NINE MONTHS YEAR ENDED JUNE 30, JULY 1, APRIL 27, YEAR ENDED JUNE 30, ENDED 1994 TO 1995 TO MARCH 31, -------------------- APRIL 26, JUNE 30, -------------------- --------- 1993 1994 1995 1995 1996 1997 1997 --------- --------- ----------- ---------- --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues....................................... $ 47,048 $ 44,063 $ 42,851 $ 4,037 $ 71,755 $ 95,785 $ 88,678 Cost of sales (1).............................. 38,713 34,241 34,772 3,949 58,468 71,662 66,846 Gross profit................................... 8,335 9,822 8,079 88 13,287 24,123 21,832 Selling, general, and administrative expenses (2).......................................... 1,676 2,768 3,364 951 5,042 7,408 5,315 Income (loss) from operations.................. 6,659 7,054 4,715 (863) 8,245 16,715 16,517 Interest expense............................... 2,813 3,189 2,797 920 5,344 5,880 4,480 Income (loss) before income taxes.............. 3,846 3,828 1,874 (1,784) 2,507 10,158 11,360 Net income (loss).............................. 6,618 3,503 1,874 (1,784) 1,924 6,170 6,896 Redeemable preferred stock dividends........... -- -- -- -- (1,290) (1,314) (679) Redemption of Junior Preferred Stock........... -- -- -- -- -- (405) (405) --------- --------- ----------- ---------- --------- --------- --------- Income (loss) available to common stockholders................................. $ 6,618 $ 3,503 $ 1,874 $ (1,784) $ 634 $ 4,451 $ 5,812 --------- --------- ----------- ---------- --------- --------- --------- Earnings (loss) per common share (3): Basic........................................ $ (.26) $ .09 $ .65 $ .85 ---------- --------- --------- --------- ---------- --------- --------- --------- Diluted...................................... $ (.26) $ .09 $ .65 $ .83 ---------- --------- --------- --------- ---------- --------- --------- --------- OTHER FINANCIAL DATA: Depreciation and amortization.................. $ 1,946 $ 2,279 $ 1,926 $ 755 $ 3,319 $ 4,207 $ 3,525 Capital expenditures........................... 1,007 3,639 3,222 8,967 3,536 4,778 2,676 OTHER DATA: Tons of grapes crushed (4)..................... 128,022 110,285 119,103 156,722 163,521 163,521 Vineyard property (in acres)................... 7,850 7,850 9,600 9,600 9,600 9,600 <CAPTION> 1998 --------- <S> <C> STATEMENT OF OPERATIONS DATA: Revenues....................................... $ 101,675 Cost of sales (1).............................. 75,625 Gross profit................................... 26,050 Selling, general, and administrative expenses (2).......................................... 13,066 Income (loss) from operations.................. 12,984 Interest expense............................... 5,203 Income (loss) before income taxes.............. 7,616 Net income (loss).............................. 4,738 Redeemable preferred stock dividends........... (636) Redemption of Junior Preferred Stock........... -- --------- Income (loss) available to common stockholders................................. $ 4,102 --------- Earnings (loss) per common share (3): Basic........................................ $ .60 --------- --------- Diluted...................................... $ .57 --------- --------- OTHER FINANCIAL DATA: Depreciation and amortization.................. $ 3,768 Capital expenditures........................... 5,524 OTHER DATA: Tons of grapes crushed (4)..................... 197,841 Vineyard property (in acres)................... 9,600 </TABLE> <TABLE> <CAPTION> OLD GSV NEW GSV -------------------- --------------------------------------------------------- JUNE 30, JUNE 30, MARCH 31, 1998 -------------------- ------------------------------- ------------------------ 1993 1994 1995 1996 1997 ACTUAL PRO FORMA(5) --------- --------- --------- --------- --------- --------- ------------- <S> <C> <C> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Working capital...................... $ 5,755 $ 10,011 $ 8,735 $ 9,335 $ 9,386 $ 8,245 $ 8,245 Total assets......................... 45,741 53,537 80,941 90,435 102,111 124,640 124,640 Total long-term debt................. 27,119 30,900 44,322 42,973 49,781 48,023 48,023 Redeemable preferred stock........... -- -- 9,978 10,034 8,813 8,915 8,192 Stockholders' equity................. 10,286 13,789 10,037 10,670 12,574 16,676 17,399 <CAPTION> AS ADJUSTED(6) --------------- <S> <C> BALANCE SHEET DATA: Working capital...................... $ 13,836 Total assets......................... 124,640 Total long-term debt................. 30,223 Redeemable preferred stock........... -- Stockholders' equity................. 48,982 </TABLE> - -------------------- (1) In accordance with purchase accounting rules applied to the Company's acquisition of Old GSV, inventory was increased to estimated fair value. The inventory step-up increased cost of sales for the period April 27, 1995 to June 30, 1995 and the year ended June 30, 1996 by $471 and $1,563, respectively. (2) Management incentives relating to stock appreciation rights and bonuses increased selling, general and administrative expenses by $33, $930, $2,141, $1,567 and $8,800 for the period April 27, 1995 to June 30, 1995, the years ended June 30, 1996 and 1997 and the nine months ended March 31, 1997 and 1998, respectively. (3) See Note 2 of the Notes to Consolidated Financial Statements for an explanation of the basic and diluted earnings per share computations. (4) It is industry custom to convert one ton of wine grapes to 170 gallons of wine, and to convert gallons of wine into cases of twelve 750ml bottles at the rate of 2.3775 gallons per case. All grapes crushed in the twelve month period ended June 30, 1995 are shown under New GSV. (5) Stockholders' equity increased, and redeemable preferred stock decreased, by the $723 carrying value of 178,105 shares of Junior Preferred Stock to be converted into 130,343 shares of Class B Common Stock pursuant to the certificate of designations governing the Junior Preferred Stock, assuming that such conversion occurred on March 31, 1998. (6) Assumes that the issuance and sale of the 2,150,000 shares of Class B Common Stock offered by the Company hereby at an assumed initial public offering price of $17.50 per share and the application of the estimated net proceeds therefrom, including a $1,800 decrease to stockholders' equity resulting from the redemption of the 12% Senior Redeemable Exchangeable Preferred Stock (the "Senior Preferred Stock"), occurred on March 31, 1998. THE OFFERING <TABLE> <S> <C> Class B Common Stock Offered: The Company..................... 2,150,000 shares The Selling Stockholders........ 2,150,000 shares Total......................... 4,300,000 shares Common Stock to Be Outstanding After the Offering (1): Class A Common Stock............ 4,342,528 shares Class B Common Stock............ 5,136,733 shares Voting Rights: Class A Common Stock............ Ten votes per share Class B Common Stock............ One vote per share Use of Proceeds................... Repayment of certain outstanding indebtedness, repurchase of senior preferred stock, working capital and other general corporate purposes. Certain Selling Stockholders intend to use a portion of the net proceeds they receive from the sale of shares of Class B Common Stock to redeem outstanding participating securities issued to the U.S. Small Business Administration. See "Use of Proceeds".
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001059662_farm_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001059662_farm_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated or where the context otherwise requires, the information contained in this Prospectus gives effect to the recapitalization described in "Description of Capital Stock-- Recapitalization" and assumes no exercise of the Underwriters' over-allotment option. The Farm Journal Corporation ("FJC") is a holding company conducting business through its wholly-owned subsidiaries, including Farm Journal, Inc. ("FJI"), which was acquired in April 1997 (the "Management Purchase"). See "Management Purchase." The term "Farm Journal" or the "Company" shall refer to FJC and its consolidated subsidiaries subsequent to the Management Purchase and FJI and its consolidated subsidiaries prior to the Management Purchase. Market data used throughout this Prospectus was obtained from surveys conducted by the Company and from industry publications. These industry publications generally indicate that the information contained therein has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. The Company has not independently verified such market data. These publications were not commissioned by, or prepared at the request of, the Company or any of its affiliates. Similarly, surveys conducted by the Company, while believed to be reliable, have not been verified by an independent source. THE COMPANY Farm Journal is one of the country's oldest and largest providers of agricultural information, principally through print and electronic publishing, data management and related information services. The Company's publishing operations include its 121 year old flagship publication, Farm Journal, one of the largest circulation agriculture magazines in the United States; Pro Farmer, the largest circulation newsletter devoted to the agricultural commodity markets; several specialty agribusiness magazines, including Top Producer and the Today livestock publications; the Links business, a satellite-delivered agricultural commodity news and analysis service; and several agriculture- oriented Internet sites. The Company's data management and information services businesses, conducted through the Company's Farm Journal Information Resources division ("FJIR"), provide proprietary data and analysis about commercial farming and ranching operations to leading agricultural industry suppliers, such as equipment manufacturers, seed producers and crop protection suppliers. The Company believes that the Farm Journal brand is among the most trusted, respected and authoritative names in American agriculture and that the Company's database, created through over 30 years of direct communication with American farmers and ranchers, is unique in its depth and accuracy. In April 1997, management and an investor group purchased FJI from Tribune Company. Since the Management Purchase, the Company has begun implementing a strategy to build on the Farm Journal brand and the Company's unique database and sophisticated data analysis capabilities to become the worldwide market leader for serving the large and growing need for quality information by farmers and ranchers and the businesses that serve them. MARKET OPPORTUNITY The United States Department of Agriculture ("USDA") estimates that in 1997 approximately $213 billion of agricultural products were sold in the United States alone. The size and increasing sophistication and complexity of the global agricultural business has created a substantial and growing need for quality information and analysis among farmers and ranchers. Management believes that the market for such information and analysis is significant and underserved given the overall size of the market for agricultural products. Management also believes that there is a related large and growing need for quality information and information services among businesses that supply farmers and ranchers. The increasing complexity of the industry, as well as its capital intensive nature, has, among other things, resulted in the consolidation of farms and purchasing power. To reach the largest purchasers, agricultural product suppliers increasingly are using targeted relationship marketing techniques which require more detailed information about the most successful farmers and ranchers. Farm Journal believes it is effectively positioned to satisfy the large and growing domestic and worldwide demand for such information with the Company's database, data services expertise and longstanding relationships with farmers and ranchers. GROWTH STRATEGY Farm Journal's objective is to aggressively grow revenues and improve profitability while becoming the leading worldwide provider of agricultural information and information services to farmers, ranchers, agricultural suppliers and related constituencies. The elements of the Company's strategy are set forth below: Increase Revenues from Existing Business. Management believes that there is substantial opportunity to increase revenues from existing business and has commenced a variety of revenue-enhancing initiatives. These initiatives have included combining data management and market research operations, increasing subscription rates and converting controlled-circulation publications to partially-paid status, restructuring the Company's sales force and sales compensation, emphasizing classified advertising sales and expanding certain product lines, including its Links businesses and anticipated television programming products. Develop Related Revenue Opportunities. Farm Journal believes there are numerous opportunities to develop additional revenues by leveraging the Company's strong brand identity, data management capabilities and customer and reader relationships. These opportunities include organization of conferences and seminars; direct sales of books, videos and other merchandise; event marketing; custom publishing for agricultural suppliers, trade groups and other agricultural related constituencies; development of farm management services; and the launch of new publications, including newsletters, directories, other agricultural related business-to-business magazines and certain rural-oriented titles. Pursue Strategic Acquisitions. Farm Journal intends to pursue strategic acquisitions of agricultural related media and information businesses. The Company will initially focus on acquisitions that will immediately expand the Company's product and media offerings as well as create benefits from cross- selling of advertisers, cross-promotion of readership and expansion of the Farm Journal database. The Company intends to pursue acquisitions of companies that operate in different media, such as television, radio and the Internet; that provide coverage of those segments of the agricultural industry not well- penetrated by Farm Journal, such as fruits, vegetables and nuts; that address agricultural related businesses, such as food processing, governmental regulation and shipping; and that target interests of rural readers, such as hunting, gardening and crafts. Create Co-Branding and Affinity Programs. Management believes that, through the extension of the Farm Journal brand, there are substantial opportunities to serve its target audience (as well as other rural residents) through co- branding and other joint ventures that offer value alternatives to products and services that have traditionally been unavailable, not competitively priced or not ideally structured for farmers, ranchers or other residents of rural communities. Farm Journal has formed and is pursuing several strategic alliances with selected financial services and consumer products companies to co-brand and offer tailored or value-priced products and services to its rural constituency. Expand Internationally. The United States agricultural industry is the most productive and technically sophisticated in the world, exporting its technology and an estimated $57 billion of product in 1997. Given the Company's position as a leading provider of agricultural information in the United States agricultural industry and given a trend toward the globalization of agricultural technology and trade, management believes that there is a substantial long-term opportunity to expand its business activities overseas. The Company's growth strategy is subject to certain risks, including risks relating to unproven growth opportunities, to uncertainties regarding acquisitions and the successful operation of acquired businesses, to the financing of acquisitions and to international expansion. See "Risk Factors." RECENT DEVELOPMENTS Since the Management Purchase, the Company has taken the following actions to implement its growth strategy: PFA Acquisition. In April 1998, the Company acquired Professional Farmers of America, Inc. and a related company (the "PFA Acquisition"). The businesses acquired in the PFA Acquisition ("PFA") included the leading agricultural commodity markets newsletter, Pro Farmer, and a satellite-delivered commodity news and analysis service marketed under the Globalink and FutureLink brand names. AgDay Acquisition Agreement. On July 7, 1998, the Company entered into an agreement to acquire AgDay, a 30-minute television news program targeted to farmers, ranchers and those interested in rural lifestyles, and related television programming assets. AgDay is a nationally-syndicated television program which is fed via satellite to over 140 local television stations. The Company's acquisition of AgDay (the "AgDay Acquisition") is scheduled to close on August 31, 1998, subject to certain closing conditions. Livestock Publication Revenue Increases. Management has achieved significant advertising sales increases in the Today livestock magazines following several advertising sales initiatives, including a restructuring of the magazines' sales force and the naming of a livestock publisher. During the first quarter of 1998, revenues from these magazines were up more than 12% over the comparable period in 1997. New Information Services Product. In November 1997, the Company was awarded a contract for a new data management product that FJIR designed for a consortium of members of the American Crop Protection Association. This project ("RAPID") will result in a comprehensive farmer directory that will provide the foundation of a system to capture point-of-sale information for manufacturers. The Company also has realized incremental sales through leads initiated from RAPID. The Company anticipates that technologies utilized for RAPID can be applied to additional directory development projects. Co-Branding Agreements. In March 1998, the Company entered into an agreement with The Member Companies of American International Group, Inc. to jointly market private passenger automobile insurance to the Company's subscriber base. Most recently, Farm Journal entered into an agreement with CIGNA Property and Casualty to explore the sale of a variety of insurance products through a cooperative marketing effort. Services that could be incorporated in such marketing effort include data management, product advertising and the organization of farmer seminars. Policy Conferences. In November 1997, Farm Journal organized a trade policy conference in Washington, D.C. Speakers at the conference included Unites States government cabinet members, members of the United States Congress and several chief executives of major agricultural companies. The Company held a second conference on clean water and food quality legislation in March 1998. These conferences were sponsored and profitable. Top Producer Seminar Series. In the first quarter of 1998, the Company held its first two Top Producer Executive Farmer Seminars targeted at farmers and ranchers who generate high annual revenues. Each seminar featured high-profile Top Producer columnists and large-scale farmers previously featured in the magazine. Seminar revenue was generated through admission fees and sponsorships. Each seminar attracted approximately 100 attendees whose average annual sales of over $1.0 million placed them in the top 1% of commercial farmers and ranchers. The Company intends to offer this seminar series at additional locations as well as to expand its seminar offerings. International Developments. In January 1998, Farm Journal retained JFA International Marketing Services, an international agribusiness consulting firm, to launch a sponsored international magazine targeted to agricultural decision-makers worldwide. The Company is currently arranging sufficient advertising sponsorship to cover the magazine's development costs and initial publication is planned for the fourth quarter of 1998. In November 1997, the Company entered into an editorial agreement with a Japanese publication to reprint Dairy Today editorial in Dairy Japan. In July 1998, the Company's Rockwood Research unit and German-based Kleffman Market Research entered into an agreement to jointly develop and market additional research programs designed to be of global market interest. MANAGEMENT The Company believes that one of its most important assets is its experienced and aggressive, growth-oriented management team. Stanford Erickson, Chairman and Chief Executive Officer, has over 30 years of publishing and advertising experience. Prior to joining Farm Journal in 1997, Mr. Erickson was President and Chief Operating Officer of the Journal of Commerce magazine group where he acquired or launched six business-to-business trade publications. Roger Randall, President and Chief Operating Officer, has over 22 years of experience in the agrimedia business and 13 years of experience at Farm Journal. Sonja Hillgren, editor of Farm Journal, has over 20 years experience in agricultural journalism and is a past President of the National Press Club. Each of the other senior managers of Farm Journal has on average over 20 years of experience in such areas as publishing, marketing and finance. The Farm Journal Corporation is a Delaware corporation, its executive offices are located at 1500 Market Street, Centre Square West, Philadelphia, Pennsylvania 19102 and its telephone number is (215) 557-8900. The Farm Journal Internet site can be found at www.farmjournal.com. The content of the Farm Journal Internet site is not intended to be, and shall not be deemed to be, part of this Prospectus. THE OFFERING Common Stock offered........ shares of Class A Common Stock Common Stock to be outstanding after the shares of Class A Common Stock (1)(2) Offering................... shares of Class B Common Stock total shares of Common Stock Use of proceeds............. To repay indebtedness and to fund the Company's business expansion plans, including acquisitions, and for working capital and other general corporate purposes. Voting rights............... Holders of Class A Common Stock, voting as a class, are entitled to elect that minimum number of directors constituting 25% of the members of the Company's Board of Directors. Other than such right to elect directors, unless all of the shares of Class B Common Stock are converted into shares of Class A Common Stock or otherwise cease to be issued and outstanding and except as required by the laws of the State of Delaware, holders of Class A Common Stock have no voting rights. See "Description of Capital Stock." Proposed Nasdaq National Market symbol.............. FJCO - -------- (1) Excludes shares of Class A Common Stock issuable upon exercise of outstanding options granted pursuant to the Company's Stock Option Plan. See "Management", "Principal Stockholders" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--AgDay Acquisition Agreement." (2) Includes shares of Class A Common Stock issuable upon conversion of the preferred stock issued in connection with the PFA Acquisition (the "PFA Preferred Stock") and shares of Class A Common Stock issuable upon conversion of the preferred stock issued in connection with the AgDay Acquisition (the "AgDay Preferred Stock"). See "Management's Discussion and Analysis of Financial Condition and Results of Operations--PFA Acquisition." SUMMARY COMBINED FINANCIAL DATA HISTORICAL DATA: The following table presents summary combined historical financial and other data derived (a) from the audited consolidated financial statements of: (i) Farm Journal, Inc., a predecessor corporation (the "Prior Predecessor"), for the year ended December 31, 1993 and the period from January 1, 1994 to June 24, 1994, (ii) Farm Journal, Inc., a subsidiary of Tribune Company and a predecessor corporation (the "Predecessor"), for the period from June 25, 1994 to December 31, 1994, the two years in the period ended December 29, 1996 and the period from December 30, 1996 to March 31, 1997 and (iii) the Company for the period from April 1, 1997 to December 31, 1997; and (b) from the unaudited consolidated financial statements of the Company for the three months ended June 30, 1997 and the six months ended June 30, 1998. The summary combined historical financial data for the year ended December 31, 1994 represent the combined financial data of the Prior Predecessor for the period from January 1, 1994 to June 24, 1994 and the Predecessor for the period from June 25, 1994 to December 31, 1994. The summary combined historical data for the year ended December 31, 1997 represents the combined financial data of the Predecessor for the period from December 30, 1996 to March 31, 1997 and the Company for the period from April 1, 1997 to December 31, 1997. The summary combined historical financial data for the six months ended June 30, 1997 represents the combined financial data of the Predecessor for the period from December 30, 1996 to March 31, 1997 and the Company for the period from April 1, 1997 to June 30, 1997. The changes in ownership that occurred in 1994 and 1997 were accounted for using the purchase method of accounting; accordingly, certain of the historical financial data of the Predecessor and Prior Predecessor are not comparable to that of the Company. PRO FORMA DATA: The following table also presents (a) certain unaudited pro forma combined financial and other data giving effect to the Management Purchase, the PFA Acquisition and certain related operational changes, and (b) certain unaudited pro forma as adjusted data giving effect to such pro forma adjustments and the following adjustments (the "Offering Adjustments"): (i) the completion of the Offering and application of the estimated net proceeds as described under "Use of Proceeds," and (ii) the conversion of the PFA Preferred Stock and the AgDay Preferred Stock described under "Capitalization." The unaudited pro forma financial data may not be indicative of the results that actually would have occurred if these transactions had been effected on the dates indicated or the results that may be obtained in the future. This data is qualified in its entirety by, and should be read in conjunction with, "Unaudited Pro Forma Combined Financial Data," "Selected Historical Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company and Predecessor Consolidated Financial Statements and Notes thereto included elsewhere in this Prospectus. SUMMARY COMBINED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> COMBINED PRIOR COMBINED COMBINED PREDECESSOR PREDECESSOR PREDECESSOR PRIOR AND AND THE AND THE THE PREDECESSOR PREDECESSOR PREDECESSOR COMPANY PRO COMPANY COMPANY ----------- ----------- ----------------- ----------- FORMA ----------- ------- YEAR YEAR PRO FORMA ENDED YEAR ENDED ENDED SIX MONTHS DECEMBER DECEMBER DECEMBER SIX MONTHS ENDED ENDED YEAR ENDED DECEMBER 31, 29, 31, 31, JUNE 30, JUNE 30, ------------------------------- -------- ----------- -------- ------------------- ---------- 1993 1994 1995 1996 1997 1997(1) 1997 1998 1998(2) ----------- ----------- ------- -------- ----------- -------- ----------- ------- ---------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues: Publishing............ $23,812 $22,191 $20,639 $20,526 $19,440 $28,544 $11,680 $14,617 $17,028 Information services.. 2,703 4,871 5,617 6,049 5,230 5,230 2,512 4,235 4,235 Other................. 367 489 319 199 338 338 81 146 146 ------- ------- ------- ------- ------- ------- ------- ------- ------- Total revenues....... 26,882 27,551 26,575 26,774 25,008 34,112 14,273 18,998 21,409 Operating expenses: Cost of publishing (3).................. 15,145 15,104 15,394 14,228 11,805 13,972 6,901 8,084 8,624 Cost of information services (4)......... 1,887 2,108 2,273 2,543 2,135 2,135 1,103 1,317 1,317 Selling, general and administrative....... 7,330 8,280 8,970 9,250 8,612 12.618 4,034 6,407 7,688 Depreciation and amortization......... 586 803 1,056 1,060 1,098 4,790 554 1,474 2,506 ------- ------- ------- ------- ------- ------- ------- ------- ------- Operating income (loss)................ 1,934 1,256 (1,118) (307) 1,358 597 1,681 1,716 1,274 Interest income....... 63 76 195 20 228 254 47 97 97 Interest expense...... (32) (54) (853) (1,777) (299) (704) (874) ------- ------- ------- ------- ------- ------- ------- ------- ------- Income (loss) before income taxes......... 1,965 1,332 (923) (341) 733 (926) 1,429 1,109 497 Income tax provision (benefit)............ 498 623 (166) 67 528 (114) 634 638 335 ------- ------- ------- ------- ------- ------- ------- ------- ------- Net income (loss)...... $ 1,467 $ 709 $ (757) $ (408) $ 205 $ (812) $ 795 $ 471 $ 162 ======= ======= ======= ======= ======= ======= ======= ======= ======= Basic net income (loss) $ $ $ per common share...... ======= ======= ======= Diluted net income (loss) per common $ $ $ share................. ======= ======= ======= Weighted average number of common shares outstanding (5)....... ======= ======= ======= PRO FORMA AS ADJUSTED DATA: Interest expense (6)... $ (835) $ (403) Income tax provision... 83 433 Net income (loss) (6).. (517) 310 Basic net income (loss) $ $ per common share (6).. ======= ======= Diluted net income (loss) per common $ $ share (6)............. ======= ======= Weighted average number of common shares outstanding(7)........ ======= ======= OTHER DATA: EBITDA (8)............ $ 2,520 $ 2,059 $ (62) $ 753 $ 2,456 $ 5,387 $ 2,235 $ 3,190 $ 3,555 Capital expenditures.. 251 232 2,411 554 357 386 237 578 696 Cash flow information: Operating cash flows.. 148 232 321 1,150 1,408 2,019 3,190 1,887 1,925 Investing cash flows.. (251) (232) (2,411) (554) (16,012) (25,771) (15,892) (11,769) (11,887) Financing cash flows.. (215) 79 1,819 (1,474) 19,169 26,002 19,088 7,962 8,434 </TABLE> <TABLE> <CAPTION> JUNE 30, 1998 --------------------- ACTUAL AS ADJUSTED(9) ------ -------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Working capital................................... $ 573 $ 5,661 Total assets...................................... 37,886 43,196 Total long-term debt, including current portion... 19,605 8,555 Preferred stock................................... 1,000 -- Total shareholders' equity........................ 9,305 26,443 </TABLE> NOTES TO SUMMARY COMBINED FINANCIAL DATA (1) Presented to give pro forma effect to the Management Purchase, the PFA Acquisition, the related financings and certain related operational changes as if such transactions had been consummated on December 30, 1996. The unaudited pro forma data give effect to the following adjustments (the "Pro Forma Adjustments") as of the beginning of each period presented: (i) an increase in interest expense attributable to financings related to the Management Purchase and PFA Acquisition; (ii) the elimination of excess management fees, compensation expense and rent expense that will no longer be incurred after the PFA Acquisition and (iii) an adjustment to the pro forma provision (benefit) for income taxes to reflect the tax effect of the adjustments described in clauses (i) and (ii). (2) Presented to give pro forma effect to the PFA Acquisition, the related financings and certain related operational changes as if they had occurred on December 30, 1996. The unaudited pro forma data also give effect to the Pro Forma Adjustments as of the beginning of each period presented. (3) Cost of publishing includes paper, printing, postage, editorial and circulation. (4) Cost of information services includes account service, programming and demographic updates. (5) Based on the weighted average number of shares of Common Stock outstanding for the periods presented after giving effect to the Recapitalization. See "Description of Capital Stock--Recapitalization."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001059706_transporta_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001059706_transporta_prospectus_summary.txt
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+PROSPECTUS SUMMARY SIMULTANEOUS WITH, AND AS A CONDITION TO, THE CONSUMMATION OF THE OFFERING MADE BY THIS PROSPECTUS (THE "OFFERING"), TRANSPORTATION COMPONENTS, INC. WILL ACQUIRE, IN SEPARATE MERGER TRANSACTIONS (THE "MERGERS") IN EXCHANGE FOR CASH AND SHARES OF ITS COMMON STOCK, NINE COMPANIES (EACH A "FOUNDING COMPANY" AND, COLLECTIVELY, THE "FOUNDING COMPANIES") ENGAGED IN THE DISTRIBUTION OF REPLACEMENT PARTS AND SUPPLIES FOR COMMERCIAL TRUCKS, TRAILERS AND OTHER TYPES OF SPECIALIZED HEAVY DUTY VEHICLES AND EQUIPMENT. UNLESS OTHERWISE INDICATED, ALL REFERENCES TO "TRANSCOM USA" OR THE "COMPANY" HEREIN INCLUDE THE FOUNDING COMPANIES FOLLOWING THE CONSUMMATION OF THE MERGERS, AND REFERENCES HEREIN TO "TRANSPORTATION COMPONENTS" MEAN TRANSPORTATION COMPONENTS, INC. PRIOR TO THE CONSUMMATION OF THE MERGERS. THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE PRO FORMA COMBINED AND INDIVIDUAL HISTORICAL FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, (I) ALL SHARE, PER SHARE AND FINANCIAL INFORMATION SET FORTH HEREIN (A) HAVE BEEN ADJUSTED TO GIVE EFFECT TO THE MERGERS; (B) ASSUME AN INITIAL PUBLIC OFFERING PRICE OF $11.00 PER SHARE AND (C) ASSUME NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION; AND (II) ALL REFERENCES TO COMMON STOCK INCLUDE BOTH COMMON STOCK, $0.01 PAR VALUE, AND RESTRICTED VOTING COMMON STOCK, $0.01 PAR VALUE (THE "RESTRICTED COMMON STOCK"), OF THE COMPANY. THE COMPANY TransCom USA was founded in October 1997 to become a leading national, value-added independent distributor of replacement parts and supplies for Class III through Class VIII commercial trucks, trailers and other types of specialized heavy duty vehicles and equipment. Class III through Class VIII trucks range in size from one-ton commercial vehicles to tractor-trailers and represent a $22 billion annual market for parts and repairs. Specialized heavy duty vehicles and equipment include bulldozers, fork lifts, agricultural vehicles, airport vehicles, government-operated vehicles and marine applications and represent a significant additional market for parts and repairs. The Company believes that this industry, generally referred to as the "heavy duty parts and repair industry," includes approximately 14,100 participants in the United States, consisting of 11,500 independent distributors and repair shops and 2,600 original equipment manufacturer ("OEM") authorized dealerships. The Company intends to pursue aggressively the consolidation of this highly-fragmented industry by combining a geographically dispersed group of independent distributors offering a broad selection of products and complementary services to a wide range of customers. Upon consummation of this Offering, Transportation Components will acquire the nine Founding Companies, which have been in business an average of 40 years and had 1997 pro forma revenues of $208 million. The Company purchases heavy duty parts from component manufacturers, inventories these parts in over 60 facilities across the United States and Mexico and distributes them to over 18,000 customers. The Company also exports heavy duty parts to customers located in countries in South and Central America, Southeast Asia and the Pacific Rim. The Company maintains a large volume and wide selection of inventory, thereby increasing customers' accessibility to parts and assisting the Company in meeting its goal of serving its customers on a same-day basis. To complement its parts distribution business, the Company also provides customers with value-added services, such as parts installation and repair, fleet maintenance management, training, machine shop services and remanufacturing. The Company seeks to enable its customers to reduce expenses by reducing material and labor costs, decreasing capital required for parts inventory and minimizing lost productivity and costs attributable to vehicle and equipment breakdowns. The Company's comprehensive product line includes a broad selection of parts for braking systems and suspension and steering systems, as well as axles, wheels and rims, trailer parts, drive train components, hydraulic components and engine parts. The parts are installed in vehicles such as tractor-trailers, construction vehicles, waste disposal trucks, buses and light duty trucks. The Company also provides parts for specialized heavy duty vehicles and equipment that support the oil field services, construction, mining, timber and agriculture industries as well as the United States military and ground support for commercial airlines. The Company's customers include regional and national private fleets operated by businesses such as Dowell Schlumberger Corporation, Browning-Ferris Industries, Inc. and Waste Management, Inc. and common carrier and rental fleets, including United Parcel Service of America, Inc., Roadway Package System, Inc. and U-Haul International, Inc. The Company also distributes parts to independent repair shops, resellers, municipal and other government entities, specialty OEMs and other end-users. The Company has a diverse customer base of more than 18,000 customers, with no single customer accounting for more than two percent of the Company's pro forma revenues in 1997. Based on the experience of management of the Founding Companies, the number of independent distributors and repair shops in the industry and the acquisition activity within the industry, the Company believes that the independent heavy duty parts and repair industry is highly fragmented and in the early stages of consolidation. The Company believes that most of the approximately 11,500 independent distributors and repair shops in this industry are small, owner-operated businesses with limited access to the capital required to develop and maintain a large volume and wide selection of inventory, expand product offerings, implement advanced management information systems and service regional and national accounts. As the first public company formed to pursue aggressively the consolidation of this industry, the Company believes that it will have significant acquisition opportunities. Additionally, the Company believes that the consolidation of the industry will provide it with volume purchasing discounts, distribution and operating efficiencies, national sales and marketing opportunities and cross-selling opportunities. Key elements of the Company's strategy are: EXPANDING THROUGH ACQUISITIONS. The Company intends to pursue aggressively this consolidation through its acquisition program by entering new geographic markets, expanding within existing geographic markets and acquiring complementary businesses. The Company believes there are significant opportunities to expand through acquisitions into geographic markets where the Company does not currently have a strong presence by acquiring companies that are leaders in their regional markets. The Company also plans to improve its market share in existing markets by pursuing smaller "tuck-in" acquisitions, whereby the Company purchases a smaller business and operates it as part of the Company's existing operations in that market, and by pursuing acquisitions that expand its range of products and services. OPERATING ON A DECENTRALIZED BASIS. The Company intends to manage the Founding Companies and subsequently acquired companies on a decentralized basis, with local management retaining responsibility for day-to-day operations, profitability and growth of the business and the flexibility to capitalize on the considerable local and regional market knowledge, goodwill, name recognition and customer relationships. ACCELERATING INTERNAL SALES GROWTH. A key component of the Company's strategy is to accelerate internal sales growth at each Founding Company and at each subsequently acquired company by establishing national market coverage and cross selling and expanding products and services. Based on the national fleet service provided by one of the Founding Companies, the Company believes that demand exists from larger fleets to utilize the services of independent distributors capable of providing comprehensive services on a regional or national basis. The Company intends to market itself to these regional and national accounts as a single-source, preferred provider for replacement parts and installation and repair services. The Company also believes it will be able to cross-sell the products and services it offers to its customers by leveraging the specialized and diverse product, service and marketing expertise of individual Founding Companies. IMPROVING OPERATING MARGINS. The Company intends to improve the operating margins of the Founding Companies and subsequently acquired businesses by increasing operating efficiencies and centralizing appropriate administrative functions. The Company believes the consolidation of commonly-owned locations within a geographical area will provide additional cost savings through distribution efficiencies. In addition, the Company expects measurable cost savings in such areas as parts purchasing, vehicle leasing and maintenance, information systems and contractual relationships with key suppliers. Moreover, the Company intends to identify those "best practices" among the Founding Companies that can be successfully implemented throughout its operations. The Company also believes there are significant opportunities to improve operating margins by consolidating administrative functions such as inventory financing, marketing, insurance, employee benefits, accounting and risk management. As consideration for future acquisitions, the Company intends to use combinations of its Common Stock, cash and notes. The Company has received a commitment for a credit facility of $75.0 million for working capital and acquisitions, which is expected to be available upon consummation of this Offering. Within 90 days following the completion of this Offering, the Company intends to register up to 10,000,000 additional shares of Common Stock under the Securities Act for its use in connection with future acquisitions.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001059763_adams_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001059763_adams_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY INFORMATION IS QUALIFIED IN ITS ENTIRETY BY AND SHOULD BE READ IN CONJUNCTION WITH THE MORE DETAILED INFORMATION AND THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL SHARE AMOUNTS, PER SHARE AMOUNTS AND OTHER INFORMATION IN THIS PROSPECTUS HAVE BEEN ADJUSTED TO GIVE RETROACTIVE EFFECT TO A 2-FOR-1 STOCK SPLIT OF THE COMMON STOCK AND ASSUME NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. REFERENCES IN THIS PROSPECTUS TO THE "COMPANY" OR "ADAMS" ARE, UNLESS THE CONTEXT OTHERWISE REQUIRES, TO ADAMS GOLF, INC., A DELAWARE CORPORATION, AND ITS SUBSIDIARIES. THE COMPANY Adams designs, manufactures and markets premium quality, technologically innovative golf clubs. The Company's design objective is to produce golf clubs that deliver meaningful performance benefits and inspire player confidence. The Company believes that its most successful product line to date, the Tight Lies fairway woods, meets this objective by providing golfers with the ability to hit the ball from virtually any lie while maximizing distance. The patented Tight Lies fairway woods feature an upright trapezoidal head, a shallow face and a lower center of gravity as compared to conventional fairway woods. The complete Tight Lies line of products includes the original, Strong 3, Strong 5, Strong 7 and Strong 9 fairway woods. According to the Golf Market Research Institute, the Tight Lies fairway woods were the top-selling single fairway woods in the U.S. on a unit volume basis during the three months ended March 31, 1998. During this period, the Company achieved a 27% market share of the single fairway woods category. Adams has developed a marketing model that integrates direct response and traditional image-based advertising to generate brand awareness and drive retail sales. The Company's advertising includes a 30-minute informative television commercial ("infomercial") and print advertising in publications such as GOLF DIGEST, USA TODAY and THE WALL STREET JOURNAL. For the three months ended March 31, 1998, approximately 79% of the Company's sales occurred at the retail level. To preserve the integrity of its image and reputation, the Company currently limits its distribution to retailers that market premium quality golf equipment and provide a high level of customer service and technical expertise. The Company currently sells its products to on- and off-course golf shops and selected sporting goods retailers. The Company believes its selective retail distribution helps its retailers to maintain profitable margins and maximize sales of Adams' products. Another important element of the Company's success to date has been its sales and customer service infrastructure. Rather than relying on independent sales representatives, as do many other golf equipment companies, Adams maintains an inside sales department that currently consists of 25 employees who are in regular telephone contact with the Company's over 7,000 retailers. These sales representatives are supported by 13 field-based Regional Account Coordinators who maintain personal contact with the Company's retailers nationwide. The Company believes that using and carefully managing its own sales force enables it to significantly reduce selling expenses. Adams also has a separate 30-seat customer call center that provides customer service to retailers and consumers. The majority of the Company's sales and customer service personnel are experienced golfers. The Company believes interaction with its knowledgeable representatives promotes customer satisfaction and helps to strengthen the Adams brand. In 1997, wholesale sales of golf equipment in the U.S. reached an estimated $2.4 billion. Wholesale sales of golf clubs increased at an estimated compound annual growth rate of approximately 13% over the 5-year period from 1992 to 1997. The Company believes that a number of trends are likely to further increase the demand for Adams' products. These trends include: (i) significant growth in the number of golf courses; (ii) increasing interest in golf from women, junior and minority golfers; (iii) the large numbers of golfers entering their 40s and 50s, the age when most golfers begin to play more often and increase their spending on the sport; (iv) the correspondingly large population of "Echo Boomers," who are beginning to enter their 20s, the age when golfers generally take up the sport; and (v) the rapid evolution of golf club designs and materials. The Company recently established a relationship with internationally recognized, professional golfer Nicholas A. Faldo, who currently uses the Tight Lies fairway woods. Mr. Faldo was inducted into the World Golf Hall of Fame in May 1998 and has won more major championships in the 1990s than any other golfer. Pursuant to the terms of the agreement, Mr. Faldo has agreed to, among other things, (i) exclusively endorse the Company's golf clubs and undertake certain other promotional activities on behalf of the Company and (ii) assist in the design and field testing of a new line of golf clubs. In exchange for his services, Mr. Faldo was granted 900,000 shares of Common Stock and is entitled to receive certain minimum royalties. Absent an early termination event, the agreement with Mr. Faldo continues throughout his lifetime. The Company believes that Mr. Faldo's comprehensive knowledge of the game of golf and reputation for technical excellence complement the Company's capabilities and strong brand identity. See "Certain Transactions." The Company intends to develop proprietary new technologies and product designs that provide golfers with meaningful performance benefits. Capitalizing on the technical knowledge and expertise gained through the Tight Lies fairway woods, the Company is currently testing prototypes of a potential new driver. This new product is expected to combine the distance of a driver with the playability of a fairway wood. The Company currently expects the new driver to be introduced after the end of fiscal year 1998. The Company is working with Mr. Faldo to design and test this new driver as well as other potential new products. The Company's goal is to establish itself as a leading developer of technologically innovative, performance-oriented golf clubs. To achieve this goal the Company intends to (i) build its share of the premium fairway woods market; (ii) leverage the success, performance and reputation of the Tight Lies fairway woods; (iii) expand international sales; and (iv) develop new technologies and product designs. The address of the Company's principal executive office is 300 Delaware Avenue, Suite 548, Wilmington, Delaware 19801. The Company's telephone number at this address is (302) 427-5892. Adams' principal manufacturing and management headquarters are located at 2801 East Plano Parkway, Plano, Texas 75074 and its telephone number at this location is (972) 673-9000. The Company's World Wide Web site is located at www.adamsgolf.com. The contents of the Company's Web site shall not be deemed to be part of this Prospectus. THE OFFERING <TABLE> <S> <C> Common Stock offered by: The Company.......................................... 3,750,000 shares The Selling Stockholders............................. 2,000,000 shares Total Common Stock Offered......................... 5,750,000 shares Common Stock to be outstanding after the Offering(1)... 22,849,282 shares Use of net proceeds to the Company..................... Working capital and general corporate purposes Nasdaq National Market Symbol.......................... ADGO </TABLE> - ------------------------ (1) Excludes 423,666 shares of Common Stock issuable upon the exercise of outstanding stock options at May 31, 1998. SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) The following table sets forth summary consolidated financial data of the Company and should be read in conjunction with the Consolidated Financial Statements and related Notes thereto included elsewhere in this Prospectus. <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------------- -------------------- 1995 1996 1997 1997 1998 --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENTS OF OPERATIONS DATA(1): Net sales................................................. $ 1,125 $ 3,522 $ 36,690 $ 1,475 $ 24,511 Gross profit.............................................. 369 1,932 26,699 888 18,649 Operating expenses (excluding stock compensation and bonus award).................................................. 613 1,709 15,826 823 9,777 Stock compensation and bonus award(2)..................... -- 214 14,842 -- -- --------- --------- --------- --------- --------- Operating income (loss)................................... (244) 9 (3,969) 65 8,872 Net income (loss)......................................... $ (243) $ 13 $ (4,654) $ 45 $ 5,642 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Income (loss) per common share(3): Basic................................................... $ (0.05) $ -- $ (0.37) $ -- $ 0.32 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Diluted................................................. $ (0.05) $ -- $ (0.37) $ -- $ 0.31 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Weighted average common shares(3): Basic................................................... 4,423 11,238 12,519 11,873 17,662 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Diluted................................................. 4,423 11,238 12,519 11,873 18,340 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- </TABLE> <TABLE> <CAPTION> AT MARCH 31, 1998 ------------------------- <S> <C> <C> ACTUAL AS ADJUSTED(4) --------- -------------- CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents............................................................ $ 602 $ 51,915 Working capital...................................................................... 12,299 63,612 Total assets......................................................................... 25,793 77,106 Total debt (including current maturities)............................................ 1,135 1,135 Stockholders' equity................................................................. 14,667 65,980 </TABLE> - ------------------------ (1) This table excludes summary financial information for the fiscal years ended December 31, 1993 and 1994 because operations in those years were not comparable in size or scope to current operations. (2) Consists primarily of a stock award to the Company's founder, Chief Executive Officer and President. See "Certain Transactions" and Note 9 of Notes to Consolidated Financial Statements. (3) See Note 1 of Notes to Consolidated Financial Statements for information concerning the calculation of income (loss) per common share and weighted average common shares outstanding. (4) Gives effect to the sale of 3,750,000 shares of Common Stock offered by the Company hereby and the application of the estimated net proceeds therefrom (based on an assumed initial public offering price of $15 per share). See "Use of Proceeds" and "Capitalization."
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+PROSPECTUS SUMMARY Sunbelt Automotive Group, Inc. was formed in December 1997 to acquire automobile dealerships and related operations and has conducted limited operations to date. Sunbelt's current operations are limited to activities involved in identifying potential target companies, negotiating the related acquisition agreements, preparing for the proposed Merger and Acquisitions and operating the companies acquired to date. Although certain members of Sunbelt's management have significant automotive retailing industry experience, Sunbelt has not managed the combined businesses discussed herein, and the proposed Merger and certain of the Acquisitions will not occur until the consummation date of this offering (the "Offering"). Accordingly, any references herein to "Sunbelt" or the "Company" and the activities and characteristics of the combined entities should be read as pro forma descriptions of those activities and characteristics following the consummation of the proposed Merger and all of the Acquisition transactions. The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information, including risk factors and financial statements (including the notes thereto) appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus assumes that (i) the Underwriters' over-allotment option has not been exercised, and (ii) the Merger (as such term is defined herein; see "The Merger") and the Acquisitions (as such term is defined herein; see "The Acquisitions") have occurred. References in this Prospectus to "common stock" are to the common stock of the Company, unless otherwise indicated or unless the context otherwise requires. References in this Prospectus to "Sunbelt" or the "Company" (i) are to Sunbelt Automotive Group, Inc. and, unless the context indicates otherwise, its consolidated subsidiaries and their respective predecessors, (ii) give effect to the Merger, and (iii) assume that the Company has consummated all of the Acquisitions. See "The Merger" and "The Acquisitions." The Acquisitions will be consummated on or before the closing of the Offering, and the Merger will be consummated contemporaneously with the closing of the Offering. Investors should carefully consider the information set forth in "Risk Factors." THE COMPANY Upon the consummation of the Merger and all of the Acquisitions, Sunbelt expects to be one of the leading retailers of new and used vehicles in the southeastern United States. The Company will operate a total of 31 dealership franchises in Georgia, North Carolina and Tennessee, as well as four collision repair centers in metropolitan Atlanta, Georgia. Sunbelt will sell 20 domestic and foreign brands of automobiles, which consist of Buick, Cadillac, Chevrolet, Chrysler, Dodge, Ford, GMC, Honda, Hummer, Isuzu, Jeep, Kia, Mazda, Mercury, Mitsubishi, Nissan, Oldsmobile, Plymouth, Pontiac and Toyota. In 1997, based on pro forma retail new vehicle unit sales, the Company believes it would have ranked 13th on the Automotive News' listing of the 1997 top 100 dealer groups in the United States. The Company intends to further diversify its product and service offerings by adding more brands of vehicles, and by offering related finance and insurance, replacement parts, collision repair, and other products and services that are complementary to its core automotive retailing operations. The Company's strategy is: (i) to become the leading operator of automotive dealerships in small and medium-sized markets in the southeastern United States through acquisitions of additional dealerships in these markets, and (ii) to expand its collision centers and other complementary business operations. The Company's executive management team has extensive experience in the automotive retailing industry and the operation of automotive dealerships in the southeastern United States. On average, the Company's executive officers have over 15 years of direct industry experience. Between 1992 and 1997, the dealerships that the Company owns or expects to acquire upon consummation of the Offering won many awards from various manufacturers measuring quality and customer satisfaction. These awards include: the Five Star Award from Chrysler, which is given to the top 25% of Chrysler dealers in the nation; the NACE (North American Customer Excellence) Award, Ford Motor Company's highest overall award for customer service; the Top 100 Club, which is awarded to Ford's top 100 retailers or 2% of Ford dealers in the nation based on retail volume and consumer satisfaction; the Cadillac Master Dealer award, a status achieved by 1% of Cadillac dealers nationwide; the Oldsmobile Elite Award, which is given by Oldsmobile Motor Division to [DESCRIPTION OF GRAPHICS -- INSIDE FRONT COVER: PICTURE OF GLOBE AND FOLLOWING TEXT: THE WORLD OF AUTOMOTIVE RETAILING IS CHANGING . . . The industry is growing . . . up 40% over the last 5 years, to more than $1.0 trillion in total revenues in 1997. Sunbelt Automotive Group, Inc. believes that the opportunity exists for industry leaders to create operating efficiencies, and to improve customer service.] ------------------------ [DESCRIPTION OF GRAPHICS -- INSIDE FRONT COVER: COMPANY'S LOGO AND FOLLOWING TEXT: A WHOLE NEW WORLD OF AUTOMOTIVE RETAILING COMPANY PROFILE: Upon completion of this Offering, Sunbelt believes it will be one of the 13 largest dealership groups with $688 million in revenues Southeast automotive retailing consolidator will initially operate in four states Management team with automotive retailing and public company experience Acquisition strategy focused on medium- and smaller-sized Southeast markets Diversified revenue base: new cars (61%), used cars (26%) and other ancillary products (13%)] ------------------------ [DESCRIPTION OF GRAPHICS -- INSIDE FRONT COVER: COMPANY'S LOGO; MAP OF SOUTHEASTERN UNITED STATES SHOWING COMPANY'S LOCATIONS AND FOLLOWING TEXT: Sunbelt Automotive Group, Inc. is located in the Southeast region of the United States. Sunbelt will operate 31 automotive dealerships, 4 Collision Centers USA locations and 5 South Financial Corporation locations in 6 southeastern markets.] The Company intends to furnish its shareholders with annual reports containing financial statements audited by its independent public accountants and will make available copies of its quarterly reports for the first three quarters of each fiscal year. This Prospectus includes statistical data regarding the automotive retailing industry. Unless otherwise indicated herein, such data is taken or derived from information published by the Industry Analysis Division of the National Automobile Dealers Association ("NADA") in its NADA Data 1997 publication and/or the Automotive News Market Data Book 1998. ------------------------ [DESCRIPTION OF GRAPHICS -- INSIDE BACK COVER: EMBLEMS OF VARIOUS DEALERSHIP BRANDS OF COMPANY AND FOLLOWING TEXT: THE SUNBELT AUTOMOTIVE GROUP BRAND PORTFOLIO Sunbelt Automotive Group, Inc. will offer a well-diversified product and brand portfolio with a strong mix of domestic and foreign vehicles.] This Prospectus includes trademarks and service marks of Sunbelt, companies other than Sunbelt, and the automobile manufacturers, which trademarks are the property of their respective holders. No automobile manufacturer has been involved, directly or indirectly, in the preparation of this Prospectus or in the Offering being made hereby. No automobile manufacturer has made any statements or representations in connection with this Offering or provided any information or materials that were used in connection with this Offering, and no automobile manufacturer has any responsibility for the accuracy or completeness of this Prospectus. ------------------------ the top 10% of Oldsmobile dealers in the nation; and the President's Circle Award for performance, which is given by Nissan Motor Corporation to the top 10% of Nissan dealers in the nation. The automotive dealerships and related businesses that will comprise the Company upon the consummation of the Merger and the Acquisitions would have had pro forma combined total revenues of $688 million for the year ended June 30, 1997 and $510 million for the nine months ended March 31, 1998. See "Pro Forma Combined and Condensed Financial Data." RISKS ASSOCIATED WITH MANUFACTURERS' APPROVALS As of the date of this Prospectus, the Company has not received the approval of any manufacturer with respect to the Merger or the Acquisitions except for final approval from AM General Corporation ("Hummer"), contingent approval from Ford and verbal approval from Chrysler, GM and Nissan, and the Company does not expect to obtain such approvals until after the closing date of this Offering. The Company has also received notices from Isuzu, Mazda, Mitsubishi and Toyota rejecting its initial requests to transfer those dealerships pursuant to the Merger and the Acquisitions, although each of these manufacturers has continued to negotiate such transfers with the Company. In the event that the Company is unable to obtain approvals for the Merger or any of the Acquisition transactions, the Company may be forced to divest itself of one or more dealerships or may be forced to accept conditions imposed by the manufacturer(s) that may have a material adverse effect on the Company's strategic plan. The failure to obtain such approvals may have a material adverse effect on the Company's business, financial condition and results of operations. The failure to obtain such approvals will not have an effect on the purchase price payable by the Company in the Merger or any of the Acquisitions. The following tables set forth certain pro forma combined total sales revenues and cost of goods sold information relating to the new vehicles sold by dealerships that the Company owns or expects to acquire upon consummation of the Offering categorized by manufacturer (dollars in thousands): <TABLE> <CAPTION> YEAR ENDED JUNE 30, ------------------------------------------------------------------ 1995 1996 1997 -------------------- -------------------- -------------------- SALES % OF SALES SALES % OF SALES SALES % OF SALES -------- ---------- -------- ---------- -------- ---------- <S> <C> <C> <C> <C> <C> <C> Ford(1).................... $147,965 41.3% $176,156 43.5% $201,508 47.9% General Motors(2).......... 114,696 32.1 111,798 27.7 98,506 23.5 Nissan..................... 41,453 11.6 44,304 11.0 44,261 10.5 Toyota..................... 17,066 4.8 22,196 5.5 17,473 4.2 Mitsubishi................. 2,369 0.7 5,989 1.5 11,013 2.6 Mazda...................... 2,073 0.6 5,288 1.3 10,469 2.5 Isuzu...................... 15,119 4.2 12,479 3.1 9,434 2.2 Chrysler/Dodge/Plymouth.... 9,574 2.7 7,920 2.0 8,717 2.1 Kia........................ -- -- 4,570 1.1 7,040 1.7 Honda...................... -- -- 6,007 1.5 6,105 1.5 Jeep/Eagle................. 2,736 0.8 3,045 0.8 3,353 0.8 Hummer..................... 1,998 0.6 2,954 0.7 2,140 0.5 Other(3)................... 2,172 0.6 1,171 0.3 -- -- -------- ------- -------- ------- -------- ------- $357,221 100.0% $403,877 100.0% $420,019 100.0% ======== ======= ======== ======= ======== ======= <CAPTION> NINE MONTHS ENDED MARCH 31, ------------------------------------------- 1997 1998 -------------------- -------------------- SALES % OF SALES SALES % OF SALES -------- ---------- -------- ---------- <S> <C> <C> <C> <C> Ford(1).................... $141,761 46.3% $159,741 50.5% General Motors(2).......... 77,535 25.3 77,834 24.7 Nissan..................... 30,897 10.1 21,043 6.7 Toyota..................... 16,655 5.4 12,384 3.9 Mitsubishi................. 7,802 2.5 8,386 2.7 Mazda...................... 5,816 1.9 7,628 2.4 Isuzu...................... 7,134 2.3 7,362 2.3 Chrysler/Dodge/Plymouth.... 5,456 1.8 6,246 2.0 Kia........................ 4,406 1.4 5,045 1.6 Honda...................... 5,037 1.6 4,728 1.5 Jeep/Eagle................. 2,098 0.7 2,402 0.8 Hummer..................... 2,140 0.7 2,898 0.9 Other(3)................... -- -- -- -- -------- ------- -------- ------- $306,737 100.0% $315,697 100.0% ======== ======= ======== ======= </TABLE> <TABLE> <CAPTION> YEAR ENDED JUNE 30, ------------------------------------------------------------------ 1995 1996 1997 -------------------- -------------------- -------------------- COSTS % OF COSTS COSTS % OF COSTS COSTS % OF COSTS -------- ---------- -------- ---------- -------- ---------- <S> <C> <C> <C> <C> <C> <C> Ford(1).................... $141,779 42.0% $167,986 43.7% $191,529 48.1% General Motors(2).......... 106,683 31.5 104,452 27.2 94,322 23.6 Nissan..................... 39,065 11.5 43,608 11.4 40,647 10.2 Toyota..................... 16,402 4.8 20,868 5.4 16,840 4.2 Mitsubishi................. 2,298 0.7 5,849 1.5 10,506 2.6 Mazda...................... 1,958 0.6 4,935 1.3 9,930 2.5 Isuzu...................... 14,433 4.3 12,033 3.1 9,029 2.3 Chrysler/Dodge/Plymouth.... 9,253 2.7 7,619 2.0 8,399 2.1 Kia........................ -- -- 4,395 1.1 6,752 1.7 Honda...................... -- -- 5,700 1.5 5,740 1.4 Jeep/Eagle................. 2,696 0.8 2,930 0.8 3,249 0.8 Hummer..................... 1,817 0.5 2,617 0.7 2,060 0.5 Other(3)................... 2,074 0.6 1,005 0.3 -- -- -------- ------- -------- ------- -------- ------- $338,458 100.0% $383,997 100.0% $399,003 100.0% ======== ======= ======== ======= ======== ======= <CAPTION> NINE MONTHS ENDED MARCH 31, ------------------------------------------- 1997 1998 -------------------- -------------------- COSTS % OF COSTS COSTS % OF COSTS -------- ---------- -------- ---------- <S> <C> <C> <C> <C> Ford(1).................... $133,906 46.0% $150,640 50.2% General Motors(2).......... 72,924 25.0 75,208 25.1 Nissan..................... 30,370 10.4 20,214 6.7 Toyota..................... 15,638 5.4 11,654 3.9 Mitsubishi................. 7,637 2.6 7,938 2.6 Mazda...................... 5,455 1.9 7,108 2.4 Isuzu...................... 6,858 2.4 7,042 2.3 Chrysler/Dodge/Plymouth.... 5,286 1.8 5,994 2.0 Kia........................ 4,306 1.5 4,792 1.6 Honda...................... 4,738 1.6 4,448 1.5 Jeep/Eagle................. 1,986 0.7 2,307 0.8 Hummer..................... 2,010 0.7 2,772 0.9 Other(3)................... -- -- -- -- -------- ------- -------- ------- $291,114 100.0% $300,117 100.0% ======== ======= ======== ======= </TABLE> - --------------- (1) Ford includes both the Ford division and the Mercury division. (2) General Motors includes the divisions of Buick, Cadillac, Chevrolet, GMC, Oldsmobile and Pontiac. (3) Consists only of Subaru franchise divested by Boomershine Automotive Group, Inc. during the fiscal year ended June 30, 1996. THE AUTOMOTIVE RETAILING INDUSTRY The automotive retailing industry, with aggregate revenues of approximately $491.1 billion in 1996 for franchised dealers alone, is the largest retail market in the United States. Aggregate revenues for the southeastern United States, which will be the Company's primary area of operations and is comprised of the states of Alabama, Florida, Georgia, North Carolina, South Carolina and Tennessee, amounted to approximately $89.8 billion through franchised dealers in 1996 and accounted for approximately 18% of total franchised dealer revenues in the United States. Since 1990, the industry has experienced growth in total revenues, total gross profits and income before taxes. From 1990 to 1996, for franchised dealers alone, total revenues increased 53.5% from $320.0 billion in 1990 to $491.1 billion in 1996, total gross profits increased 33.3% from $46.9 billion in 1990 to $62.5 billion in 1996, and income before taxes increased 131.3% from $3.2 billion in 1990 to $7.4 billion in 1996. The industry has been experiencing a consolidation trend which has seen the number of franchised dealerships in the United States decline from approximately 36,000 in 1960 to 22,750 in 1996. Despite this consolidation, fragmentation is still a defining characteristic of the industry, with the largest 100 franchised dealership groups generating less than 10% of 1996 total franchised dealer revenue and controlling less than 5% of all franchised automotive dealerships. However, as a result of the increasing capital requirements necessary to operate an automotive dealership, the management succession planning concerns of many current dealers, and other economic and industry factors, the Company expects a further consolidation of the automotive retailing industry. BUSINESS STRATEGY Sunbelt intends to establish itself as the leading operator of automotive dealerships in small and medium-sized markets in the southeastern United States through acquisitions of additional dealerships in these markets. The Company believes that its diverse portfolio of brands and dealerships in several of these markets and its experienced management team will give it a competitive advantage in achieving this goal. OPERATING STRATEGY The Company intends to pursue an operating strategy based on the following key elements: - Offer a Diverse Range of Automotive Products and Services. The Company will offer a diverse range of automotive products and services, including a wide selection of new and used vehicles, vehicle financing and insurance programs, replacement parts, maintenance and repair programs. The Company believes that its brand and product diversity will enable the Company to satisfy a variety of customers, reduce dependence on any one manufacturer and reduce exposure to supply problems and product cycles. The Company believes that its variety of complementary products and services will allow the Company to generate incremental revenue that will result in higher profitability and less cyclicality for the Company than if it were solely dependent on automobile sales. - Institute Divisional Organization by Manufacturer. The Company intends to institute a corporate organizational form which the Company believes will differentiate it from most other automotive retailing companies. The Company intends to organize its dealerships and dealership groups by manufacturer, so that all dealerships which carry a particular manufacturer's brands would be grouped together in a single division. Each division, in turn, would be headed by a member of corporate management who has extensive working experience with the applicable manufacturer. The Company initially intends to implement this organizational structure only for its Ford and Mercury dealerships. Once the Company owns an appropriate number of dealerships affiliated with another single manufacturer and the Company has achieved an appropriate sales volume with respect to such manufacturer's vehicles, the Company intends to implement this organizational structure for those dealerships. The Company believes that such a corporate structure does not require any manufacturer's approval and will not impact any other dealership requirements imposed by manufacturers. However, the Company does not know if any manufacturers, other than Ford, agree with this interpretation, and therefore, the Company intends to seek the approval of all applicable manufacturers prior to implementing such a structure with respect to each such manufacturer's dealerships. As of the date of this Prospectus, the Company has neither sought, nor received, the approval of any manufacturer, other than Ford, for its implementation of such a structure. Ford has approved the Company's organizational structure for its Ford and Mercury dealerships as part of its contingent approval of the Company's acquisitions of the Ford and Mercury dealerships. See "Business -- Dealership Operations" and "Business -- Business Strategy." The Company believes that organizing its dealerships by manufacturer and having each division headed by a senior manager who is experienced with that particular manufacturer -- and has established and maintained long-standing business relationships with the regional and corporate managers of that manufacturer -- will yield numerous benefits to the Company. For example, the Company believes that its relationships with each manufacturer will be enhanced; management training within each division will be more efficient and consistent; and managers within each division will benefit from a shared experience base. The Company believes that these benefits will provide a competitive advantage to the Company. - Decentralize Marketing Strategies; Achieve High Levels of Customer Satisfaction; Utilize Incentive-Based Compensation Programs. The Company believes that many customers purchase automotive vehicles based on an established long-term business relationship with a particular dealership. Therefore the Company intends to empower its experienced local management -- who have a better in-depth knowledge of local customer needs and preferences -- to establish marketing, advertising and other policies that foster these long-term relationships and provide superior customer service. The Company's strategy emphasizes the retention of local management, which the Company believes will help make it an attractive acquiror of other dealerships. The Company also intends to create incentives for entrepreneurial management teams at the dealer level through the use of stock options and other programs in order to align local management's interests with those of the Company's shareholders. In order to keep local management focused on customer satisfaction, the Company also intends to include certain customer satisfaction index ("CSI") results as a component of its incentive compensation program. The Company believes that this is important because some manufacturers offer specific performance incentives, on a per vehicle basis, if certain CSI levels (which vary by manufacturer) are achieved by a dealer. - Centralize Administrative Functions. The Company believes that the consolidation of certain dealership functions and requirements will result in significant cost savings. The Company intends to restructure its floorplan financing, which the Company anticipates will result in an overall reduced interest rate on such financing. Specifically, the Company estimates that this rate will be approximately 50 to 75 basis points below the Company's current average annual floorplan rates, and expects that this lower rate will result in annual cost savings of $750,000 to $1 million. In addition to the floorplan financing, the Company is also negotiating a revolving credit facility. Furthermore, the Company expects that significant cost savings will be achieved through the consolidation of administrative functions such as risk management, employee benefits and employee training. GROWTH STRATEGY The Company plans to grow its business using a strategy comprised of the following principal elements: - Acquire Dealerships. The Company's goal is to become the leading operator of automotive dealerships in small and medium-sized markets in the southeastern United States through acquisitions of additional dealerships in these markets. The Company plans to pursue acquisitions in markets where it does not currently own dealerships, as well as in areas which are contiguous to its existing dealership markets. The Company intends to focus on acquiring both dealer groups with multiple franchises in a given market area and dealers with a single franchise which possess significant market shares. Generally, the Company will seek to retain the acquired dealerships' operational and financial management, and thereby benefit from their market knowledge, name recognition and local reputation. - Expand Complementary Products and Services. The Company expects to generate additional revenue and achieve higher profitability through the sale of products and services which complement its dealership operations. Examples of such opportunities include the following: Collision Repair Centers. The Company owns four collision repair facilities operated under the name Collision Centers USA, which serve the Jonesboro, Duluth, Stockbridge and Marietta, Georgia markets. The Company expects to expand this business by increasing volumes at these four centers, developing new centers and acquiring existing centers. The Company's collision repair business provides higher margins than its core retailing operations and is generally not significantly affected by economic cycles or consumer spending habits. Finance and Insurance. The Company expects to offer its customers a wide range of financing and leasing alternatives for the purchase of vehicles, as well as credit life, accident and health and disability insurance and extended service contracts. The Company has recently entered into an agreement with a leading insurance carrier to share in certain revenues generated by the sale of extended warranty contracts. In addition, in January 1998, the Company acquired South Financial Corporation ("South Financial"), which has been primarily engaged in the sub-prime automotive lending business for the past eight years. The Company expects its dealer network to provide additional loan business opportunities to South Financial. THE ACQUISITIONS AND THE MERGER THE ACQUISITIONS Since November 1997, the Company and/or Boomershine Automotive Group, Inc. ("Boomershine Automotive") (the accounting acquiror), which will be merged into Sunbelt in the Merger, have consummated or signed definitive agreements to acquire six dealership groups, three collision repair centers and one sub-prime automotive lending business for aggregate consideration of approximately $67 million. The number of shares of the Company's unregistered common stock that it expects to issue in each of the acquisitions will be determined by dividing the aggregate stock consideration to be issued in each acquisition, which is fixed under the terms of the respective agreements, by the offering price of the common stock of the Company indicated on the cover page of this prospectus. Specifically, the acquisitions consist of the following: - The acquisition by Boomershine Automotive of Southlake Collision Center, Inc., Southlake Collision Henry County, Inc. and Southlake Collision Cobb Parkway, Inc., each of which is involved in the automotive collision repair business. This acquisition was consummated on December 18, 1997 for consideration of approximately $1.7 million, which included cash plus a promissory note in the amount of $761,000; - The acquisition by Boomershine Automotive of South Financial Corporation, which is involved in the sub-prime automotive finance business. This acquisition was consummated on January 6, 1998 for consideration of approximately $4.6 million; - The acquisition of Hones, Inc. d/b/a Bill Holt Ford Mercury, which is involved in the automotive retailing business. This acquisition was consummated on June 15, 1998 for consideration of approximately $750,000; - The acquisition of Grindstaff, Inc., which is involved in the automotive retailing business. This acquisition was consummated on July 31, 1998 for consideration of $8.5 million (based on a purchase price of $9.1 million less closing adjustments of approximately $600,000) in the form of a short-term promissory note, plus or minus post-closing adjustments described below; - The acquisition of Jay Automotive Group, Inc., which is involved in the automotive retailing business. The Company anticipates consummating this acquisition upon the consummation of this Offering for consideration of $12.0 million in cash and the Company's 90-day promissory note in the amount of $4.0 million. The purchase price for the Jay Automotive Group, Inc. acquisition includes payment for the acquisition of the Saturn and Suzuki dealerships; however, the Company expects to sell the assets of those dealerships subsequent to the consummation of this Offering; - The acquisition of Wade Ford, Inc. and Wade Ford Buford, Inc. (the "Wade Ford Dealerships"), both of which are involved in the automotive retailing business. The Company anticipates consummating these acquisitions upon the consummation of this Offering for consideration of approximately $12.0 million in cash and approximately $3.5 million in the form of the Company's unregistered common stock, plus or minus consideration to be determined by closing and post-closing adjustments described below; - The acquisition of Day's Chevrolet, which is involved in the automotive retailing business. The Company anticipates consummating this acquisition upon the consummation of this Offering for consideration of approximately $5.6 million in cash and approximately $5.2 million in the form of the Company's unregistered common stock, plus or minus additional consideration to be determined by post-closing adjustments described below; and - The acquisition of Robertson Oldsmobile-Cadillac, Inc., which is involved in the automotive retailing business. Based on the March 31, 1998 FIFO net worth of Robertson Oldsmobile-Cadillac, Inc., the consideration payable in this acquisition would be approximately $7.7 million in cash and approxi- mately $360,000 in the form of the Company's unregistered common stock. This consideration is subject to the closing and post-closing adjustments described below. Each acquisition is hereinafter individually referred to as an "Acquisition" and collectively referred to as the "Acquisitions." See "The Acquisitions." CLOSING AND POST-CLOSING ADJUSTMENTS Wade Ford, Inc. and Wade Ford Buford, Inc. The purchase price for the Wade Ford Dealerships is defined as $14.5 million, plus or minus the following adjustments. If the Wade Ford Dealerships earn a profit during the period from January 1, 1998 to the closing date, then Sunbelt shall pay to the selling shareholders the entire amount of such profit less any distributions made by the Wade Ford, Dealerships to the selling shareholders during such period. If the Wade Ford, Dealerships incur a loss during the period from January 1, 1998 to the closing date, the purchase price will be reduced by such amount. If the aggregate cash accounts of the Wade Ford Dealerships amount to less than $800,000, the purchase price will be reduced dollar for dollar by the deficiency. Additionally, if the Wade Ford Dealerships' floor plan liability exceeds their floor plan assets by more than 3%, the purchase price will be reduced by such amount. Day's Chevrolet, Inc. The purchase price for the Day's Chevrolet, Inc. Acquisition is defined as $10.5 million, plus or minus the following adjustments. If Day's Chevrolet, Inc. made distributions in excess of $1.0 million of the previously taxed income, paid-in capital and common stock of Day's Chevrolet, Inc. as of December 31, 1997 (the "pre-1998 distributions"), then the purchase price shall be reduced by such excess on a dollar for dollar basis. The purchase price will be further adjusted to the extent that the closing date net worth is greater or less than zero. Additionally, if Day's Chevrolet, Inc.'s floor plan liability exceeds their floor plan assets by more than 3%, the purchase price shall be reduced by such amount. Robertson Oldsmobile-Cadillac, Inc. The purchase price for the Robertson Oldsmobile-Cadillac, Inc. Acquisition is defined as $4.7 million plus the FIFO net worth of Robertson Oldsmobile-Cadillac, Inc. on the closing date, as described in the purchase agreement. Grindstaff, Inc. The purchase price for the Grindstaff, Inc. Acquisition was calculated to be $8.5 million and is subject to the following additional adjustments. If the net income of Grindstaff, Inc. for the period from January 1, 1998 to June 30, 1998 is less than $927,944, then the selling shareholders shall pay the entire amount of such deficiency to the Company. If the net income of Grindstaff, Inc. for that period is greater than $927,944, then the Company shall pay the entire amount of such excess to the selling shareholders. PRICE PROTECTION PROVISIONS In addition to the consideration described above, the Company may be required to pay consideration not to exceed approximately $9.8 million in the aggregate (in the form of cash and/or the Company's common stock) to certain shareholders of the dealerships being acquired in the Day's Chevrolet and Wade Ford Acquisitions pursuant to certain stock price protection provisions and/or agreements entered into in connection with those transactions. Specifically, if the price of the common stock subject to price protection is more on the date of the Offering than the price of such common stock (i) on the first anniversary of the Offering in the case of the Wade Ford Acquisition or (ii) on the second anniversary of the Offering in the case of the Day's Chevrolet Acquisition, then the Company is required to compensate the applicable target shareholders for such price decrease, either in cash or by issuing additional shares of the Company's common stock, at the Company's option. As the Company is unable under applicable federal securities laws to issue registered common stock to the shareholders of Day's Chevrolet Inc. in connection with the price protection provisions, any such price decrease must be paid by the Company in cash. See "Risk Factors -- Price Protection Provisions" and "Description of Capital Stock -- Registration Rights and Stock Price Protection." THE MERGER In addition to the Acquisitions, the Company has signed a definitive agreement to acquire by merger Boomershine Automotive Group, Inc. simultaneously with the consummation of this Offering in exchange for 3,800,160 shares of common stock of Sunbelt, based on an exchange ratio of 52.78 shares of the Company's unregistered common stock in exchange for each share of common stock of Boomershine Automotive Group, Inc., which is based on an assumed initial public offering price of $10 per share, the midpoint of the estimated initial public offering price range, and assumes a discount of 10%, which reflects the stock's trading restrictions. See "The Merger." There will be no post-closing adjustments to the consideration payable by the Company in connection with the Merger. CONSIDERATION RECEIVED BY CERTAIN PERSONS The shareholders of Boomershine Automotive will receive the following amounts of the Company's common stock upon consummation of the Merger: Walter M. Boomershine, Jr. -- 570,024 shares (excludes 2,000 shares of common stock that Mr. Boomershine currently owns); Walter M. Boomershine, III -- 696,696 shares; Renee B. Jochum -- 633,360 shares; Jacquelyn B. Thompson -- 633,360 shares; Patrice B. Mitchell -- 633,360 shares; Lindsey B. Robertson -- 633,360 shares. Walter M. Boomershine, Jr. will serve as Chairman and Senior Vice President of the Company, while Walter M. Boomershine, III, Lindsey B. Robertson and Patrice B. Mitchell will serve as employees of the Company. In addition, Charles K. Yancey and Ricky L. Brown, who are currently executive officers of Boomershine Automotive, will serve as executive officers of the Company. Additionally, certain persons receiving consideration in connection with the Acquisitions will continue as employees of the Company upon consummation of the Offering. In connection with the Wade Ford Acquisition, Alan K. Arnold and Gary R. Billings will receive consideration in an aggregate amount of 385,000 shares of common stock and approximately $12.0 million in cash (plus or minus closing and/or post-closing adjustments), which consideration will be allocated between Mr. Arnold and Mr. Billings at closing of the Wade Ford Acquisition. Mr. Arnold will serve as a director of the Company and Vice President of the Company's Ford Division and Mr. Billings will serve as Executive Manager of Wade Ford Buford, Inc. upon consummation of the Offering. In connection with the Collision Centers USA Acquisition, James L. Peters received $1.7 million in the form of cash and promissory notes as well as an option to purchase 5,000 shares of the common stock at an exercise price of $8.00 per share. Mr. Peters currently serves as Vice President of Collision Centers USA, which will be owned by the Company upon consummation of the Offering. In connection with the Robertson Acquisition, E. Moss Robertson, Jr. will receive approximately $7.7 million in cash and 40,000 shares of common stock (plus or minus closing and/or post-closing adjustments). Mr. Robertson will serve as Executive Manager of Robertson Oldsmobile-Cadillac, Inc. upon consummation of the Offering. In connection with the Jay Automotive Group Acquisition, James G. Stelzenmuller, III will receive $16.0 million in the form of cash and a promissory note. Mr. Stelzenmuller will serve as Executive Manager of Jay Automotive upon consummation of the Offering. In connection with the Day's Chevrolet Acquisition, Calvin Diemer will receive $2.8 million in cash and $2.6 million in common stock (plus or minus closing and post-closing adjustments). Mr. Diemer will serve as Executive Manager of Day's Chevrolet, Inc. upon consummation of the Offering. In connection with the Grindstaff Acquisition, Wes Hambrick will receive approximately $850,000 in cash (plus or minus post-closing adjustments). Mr. Hambrick will serve as Executive Manager of Grindstaff, Inc. upon consummation of the Offering. STOCK OPTIONS TO BE GRANTED TO EXECUTIVE OFFICERS AND DIRECTORS UPON COMPLETION OF THIS OFFERING Upon the completion of this Offering, the Company intends to reserve the following shares underlying options to be granted to its executive officers and directors: 25,000 shares underlying options to Walter M. Boomershine, Jr. (executive officer and Chairman of the Board of Directors); 50,000 shares underlying options to Robert W. Gundeck (executive officer and director); 100,000 shares underlying options to Charles K. Yancey (executive officer and director); 100,000 shares underlying options to Stephen C. Whicker (executive officer and director); 25,000 shares underlying options to Ricky L. Brown (executive officer); and 5,000 shares underlying options to each of George D. Busbee, Lee M. Sessions, Jr. and Jack R. Altherr (directors). PRINCIPAL OFFICE The Company's principal executive office is located at 5901 Peachtree-Dunwoody Road, Suite 250-B, Atlanta, Georgia 30328, and its telephone number at that location is (678) 443-8100. THE OFFERING Common stock offered hereby............. 5,500,000 shares Common stock to be outstanding after the Offering................................ 10,557,862 shares(1)(2) Use of proceeds......................... The net proceeds of the Offering will be used to fund the Acquisitions, including repaying certain indebtedness incurred by the Company in connection therewith, and for working capital and general corporate purposes. See "The Acquisitions" and "Use of Proceeds." Proposed Nasdaq National Market Symbol.................................. SBLT - --------------- (1) Excludes 2,250,000 shares of common stock reserved for future issuance to Company employees under the Company's Incentive Stock Plan (as defined herein) (including up to 1,597,000 shares of common stock issuable upon exercise of options granted on or before the consummation of the Offering pursuant to the Incentive Stock Plan, with the following shares reserved in connection with grants to executive officers and directors: 25,000 shares underlying options granted to Walter M. Boomershine, Jr. (executive officer); an aggregate of 350,000 shares underlying options granted to Robert W. Gundeck (executive officer); an aggregate of 540,000 shares underlying options granted to Charles K. Yancey (executive officer); an aggregate of 540,000 shares underlying options granted to Stephen C. Whicker (executive officer); an aggregate of 120,000 shares underlying options granted to Ricky L. Brown (executive officer); and 5,000 shares underlying options granted to each of George D. Busbee, Lee M. Sessions, Jr. and Jack R. Altherr (each, a director)). See "Management -- Incentive Stock Plan." Also excludes 50,000 shares of common stock reserved for issuance upon exercise of warrants granted to a consulting firm for services rendered in connection with this Offering. See "Description of Capital Stock -- Warrants." (2) Includes 249,202 shares of common stock issued to executive officers of the Company. See "Description of Capital Stock -- Common Stock."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001060233_internatio_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001060233_internatio_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified by the more detailed information and Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. International Integration Incorporated ("i-Cube" or the "Company") provides application migration and custom software development services on a fixed-price, fixed-time basis to Fortune 1000 companies and other large enterprises. The Company believes that through these services, its customers can cost-effectively and rapidly improve their competitiveness and narrow the gap between the demands of their business strategies and the capabilities of their information technology ("IT") environments. The Company offers a full range of services, known as iMPACT, including information systems consulting, application migration, custom software development and customer support. The Company utilizes its proprietary development methodologies and technologies, known as i-Structure, to implement large-scale, complex application migration and custom development projects based on a multi-tier client/server architecture. i-Structure's proprietary technologies include transformation tools used to separate legacy applications into their smallest logical components, methodologies to populate an Application Repository that contains the components of and critical information about an application, and runtime tools used to access and integrate application components. i-Structure provides the Company with a repeatable and consistent development framework, applicable to both its application migration and custom development projects, that increases the speed and reduces the risk and cost of the development of strategic, core business applications. The applications custom developed or migrated using i-Structure are not dependent on any single hardware provider or operating system, are adaptable to future technologies and business changes, and are easily maintainable. In addition, i-Structure enables the Company to migrate legacy software applications into multi-tier client/server applications, allowing customers to preserve the core functionality and other benefits of their legacy applications while eliminating the constraints of legacy system architectures. The Company believes that i-Structure enhances the productivity of its IT professionals and the Company's continued investment in i-Structure is a key component of its growth strategy. The Company believes that the expertise gained from completing large-scale, strategic application migration and custom development projects since its founding in 1992 provides a significant competitive advantage. Recent engagements include projects for Cooper Cameron Corporation, Daimler-Benz AG, Hewlett-Packard Company, IBM, McDonnell Douglas Corporation (now part of The Boeing Company), Rockwell Automation/Reliance Electric, and Wisconsin Power and Light Company. THE OFFERING <TABLE> <S> <C> Common Stock offered........................................ 2,500,000 shares Common Stock to be outstanding after this offering.......... 15,967,233 shares(1) Use of proceeds............................................. For general corporate purposes, including working capital, capital expenditures and potential acquisitions. See "Use of Proceeds." Proposed Nasdaq National Market symbol...................... ICUB </TABLE> - --------------- (1) Based on shares of Common Stock outstanding as of March 31, 1998. Excludes (i) 5,539,782 shares of Common Stock issuable upon exercise of stock options outstanding as of March 31, 1998, of which options to purchase 1,657,628 shares were then exercisable, and (ii) 4,064,578 shares of Common Stock reserved for future issuance under the Company's stock plans. See "Description of Capital Stock," "Management -- Benefit Plans" and Note 7 of Notes to Consolidated Financial Statements. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------------------------- --------------- 1993 1994 1995 1996 1997 1997 1998 ----- ------ ------ ------- ------- ------ ------ (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF INCOME DATA: Net revenues................................................ $ 833 $2,893 $9,197 $14,479 $26,859 $5,598 $8,828 Operating income............................................ 197 792 3,408 2,580 6,694 1,471 2,119 Net income.................................................. 124 485 2,076 1,615 4,325 929 1,372 Earnings per share(1): Basic..................................................... $ .01 $ .04 $ .17 $ .13 $ .34 $ .07 $ .10 Diluted................................................... $ .01 $ .04 $ .15 $ .12 $ .29 $ .07 $ .09 Weighted average shares outstanding(1): Basic..................................................... 9,353 12,114 12,323 12,425 12,627 12,519 13,244 Diluted................................................... 9,353 12,114 13,465 13,682 15,163 14,256 16,031 </TABLE> <TABLE> <CAPTION> AS OF MARCH 31, 1998 ------------------------ ACTUAL AS ADJUSTED(2) ------- -------------- (UNAUDITED) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................... $ 9,833 $36,783 Working capital............................................. 9,174 36,124 Total assets................................................ 19,518 46,468 Long-term obligations, net of current maturities............ 623 623 Total stockholders' equity.................................. 11,043 37,993 </TABLE> - --------------- (1) For an explanation of the determination of the number of shares used in computing earnings per share, see Note 6 of Notes to Consolidated Financial Statements. (2) Adjusted to give effect to the sale of the 2,500,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $12.00 per share (the midpoint of the range set forth on the cover of this Prospectus), after deducting the estimated underwriting discounts and commissions and offering expenses payable by the Company and the application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001060279_phoenix_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001060279_phoenix_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION HEREIN ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION AND GIVES EFFECT TO A RECAPITALIZATION OF THE COMPANY (THE "RECAPITALIZATION") COMPLETED APRIL , 1998, BY WHICH (I) THE COMPANY'S TOTAL AUTHORIZED SHARES WERE INCREASED AND (II) EACH OF THE COMPANY'S PREVIOUSLY OUTSTANDING CLASS A AND CLASS B SHARES WAS CONVERTED INTO 483 SHARES OF A NEW, SINGLE CLASS OF COMMON STOCK. SEE "CAPITALIZATION" AND "DESCRIPTION OF CAPITAL STOCK". UNLESS THE CONTEXT INDICATES OTHERWISE, ALL REFERENCES IN THIS PROSPECTUS TO THE "COMPANY" INCLUDE PHOENIX COLOR CORP. AND ITS CONSOLIDATED SUBSIDIARIES. THE COMPANY The Company is a leader in the manufacture and supply of book components to publishers and book manufacturers. Book components include paperback covers, book jackets, pre-printed case covers (which are glued to hardboard and used for hardcover books), endpapers, illustrations and inserts. The Company is the largest independent book component printer in North America, and is a fully integrated provider of digital prepress, computer-to-plate, single-pass multi-color printing and a complete range of finishing services. In 1997, the Company completed over 55,000 separate printing jobs and serviced over 200 customers, including Simon & Schuster, HarperCollins Publishers, Pearson Putnam Publishing, Bantam Doubleday Dell Publishing Group, Inc., Random House, Inc., The McGraw-Hill Companies, Inc., Time Warner, Inc. and R.R. Donnelley & Sons Company. The manufacture of books requires both the printing of text and the production of book components. Due to publishers' demand for high quality, intricate book covers to enhance book sales, and the need for specialized equipment, materials and finishes to produce such covers, many leading publishers rely on specialty printers such as the Company to produce book components, and use other commercial printers to produce text and assemble books. During 1998, the Company intends to add complete book manufacturing capabilities for certain categories of books in order to provide its publishing customers with the opportunity to purchase complete books from a single source. From 1993 through 1997, the Company's net sales increased from $40.9 million to $104.8 million, reflecting a compound annual growth rate of approximately 26.5%. During such period, the Company's EBITDA increased from $7.0 million to $22.1 million, reflecting a compound annual growth rate of approximately 33.3% and an improvement in the EBITDA margin from 17.1% in 1993 to 21.1% in 1997. (See Footnotes 7 and 8 to Summary Consolidated Financial Information.) The Company's financial results include the effect of the acquisition in February 1996 of New England Book Holding Corporation and its wholly-owned subsidiary, New England Book Components, Inc. (collectively, "NEBC"). See "Business-Growth Strategy-STRATEGIC ACQUISITIONS." Management attributes the Company's growth and profitability to its record of providing superior customer service and product quality, expanding and enhancing its product offerings and adding state-of-the-art manufacturing capacity. Management emphasizes service and responsiveness to customer needs, and the Company believes it consistently offers its customers the most modern and complete line of printing and finishing facilities and provides the shortest work-order turnaround time in U.S. book component manufacturing. The Company has invested extensively in technologically-advanced prepress and pressroom equipment and has developed a sophisticated management information system, which digitally links all of its facilities, permitting real-time measurement of operational results and optimization of workflow among facilities. The Company's ability to respond quickly is also due to the strategic location of its four modern, computerized production plants near major book manufacturers, and the use of its own tractor-trailers to reduce delivery times. The Company's production efficiency is further enhanced by its long-term, single- source relationships with suppliers of paper, ink and other production materials, which provide a reliable supply of raw materials and advantageous pricing. See "Business." The key elements of the Company's growth strategy are: (i) enhanced sales and marketing, (ii) expansion into complementary areas of book manufacturing, (iii) continuing capital investment to increase production capabilities, (iv) geographic expansion and (v) strategic acquisitions. See "Business-Growth Strategy." The Company was founded in 1979 by 15 individuals, each with extensive experience in the production of book components. The Company's principal offices are at 540 Western Maryland Parkway, Hagerstown, Maryland 21740, and its telephone number is (301) 733-0018. The Company has two production facilities in Hagerstown and additional plants in Long Island City, New York and in Taunton, Massachusetts. The Company maintains local sales offices at each of its plants and in various other cities in the United States. See "Business-Facilities and Equipment." THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company..................... 4,000,000 shares(1) Common Stock to be outstanding after the Offering....... 13,125,802 shares(1) Use of Proceeds......................................... To fund capital expenditures for building and equipping two new complete book manufacturing plants and a new book component plant, to purchase additional prepress equipment, to repay a portion of long-term and short-term debt, to increase working capital and for general corporate purposes. See "Use of Proceeds." Proposed NASDAQ National Market Symbol.................. PHNX </TABLE> - ------------------------ (1) Excludes 600,000 shares issuable upon exercise of the Underwriters' over-allotment option. SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, ------------------------------------------------------ 1993 1994 1995 1996 1997 --------- --------- --------- --------- ---------- <S> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA:(1) Net sales................................................. $ 40,860 $ 50,971 $ 60,907 $ 95,262 $ 104,794 Gross profit............................................ 8,469 13,503 15,778 24,146 31,072 Selling and marketing expenses............................ 1,280 1,827 3,036 6,089 5,881 General and administrative expenses....................... 3,733 4,803 4,505 9,010 10,980 Impairment loss (2)....................................... -- -- -- 1,268 -- --------- --------- --------- --------- ---------- Income from operations.................................. 3,456 6,873 8,237 7,779 14,211 Net income (3) (4)........................................ 1,261 3,200 3,710 1,796 5,767 --------- --------- --------- --------- ---------- --------- --------- --------- --------- ---------- Pro forma basic and diluted earnings per share (5)........ $ 0.15 $ 0.34 $ 0.41 $ 0.20 $ 0.63 --------- --------- --------- --------- ---------- --------- --------- --------- --------- ---------- Pro forma weighted average number of shares outstanding (5)..................................................... 8,681 9,426 9,033 9,126 9,126 OTHER FINANCIAL DATA: Depreciation and amortization expense (4)................. $ 3,527 $ 3,265 $ 3,119 $ 8,479 $ 7,856 Capital expenditures (6).................................. 6,981 6,083 17,841 11,052 15,131 EBITDA (7)................................................ 6,983 10,138 11,355 17,527 22,067 EBITDA margin (8)......................................... 17.1% 19.9% 18.6% 18.4% 21.1% </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1997 -------------------------- ACTUAL AS ADJUSTED(9) ---------- -------------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents............................................................. $ 1,045 $ 25,145 Working capital (deficit) surplus..................................................... (19,192) 14,908 Total assets.......................................................................... 86,709 110,809 Total debt............................................................................ 46,726 34,226 Total stockholders' equity............................................................ 17,870 54,470 </TABLE> - ------------------------ (1) The Company's operating expenses include the following amounts as discretionary management incentive compensation for the years ended December 31: 1993, $257,000; 1994, $2,120,000; 1995, $2,298,000; 1996, none; and 1997, $2,050,000. (2) Reflects the write-down of real estate assets held for sale to their estimated net realizable value. (3) Net income in 1996 includes a non-recurring pretax gain of $916,000 on the sale of printing press equipment obtained in the NEBC acquisition. (4) In 1997, the Company revised the amortization period for goodwill resulting from the 1996 acquisition of NEBC from eight years to 20 years. The effect of this change was to increase 1997 net income and basic net income per share by $1,383,000 and $.15 per share, respectively. See Note 2 to the Consolidated Financial Statements. (5) The pro forma basic and diluted earnings per share and pro forma weighted average number of shares of Common Stock outstanding is unaudited and assumes that the Recapitalization had been given effect as of January 1 in each year presented. See "Description of Capital Stock" and Note 1 to the Consolidated Financial Statements. (6) Includes property and equipment financed through notes and capital leases. See Consolidated Statements of Cash Flows in the Consolidated Financial Statements. (7) EBITDA represents the operating income of the Company plus depreciation and amortization. EBITDA is not a measure of financial performance under generally accepted accounting principles ("GAAP") and may not be comparable to other similarly titled measures by other companies. EBITDA does not represent income or cash flows from operations as defined by GAAP and does not necessarily indicate that cash flows will be sufficient to fund cash needs. As a result, EBITDA should not be considered an alternative to net income as an indicator of operating performance or to cash flows as a measure of liquidity. EBITDA is included in this Prospectus because it is a basis on which the Company assesses its financial performance, and certain covenants in the Company's borrowing arrangements have been tied to similar measurements. EBITDA for the year ended December 31, 1996 excludes an impairment loss of $1,268,000. See Note 2 to Consolidated Financial Statements. (8) EBITDA margin represents EBITDA divided by Net sales. (9) Adjusted to give effect to the sale of 4,000,000 shares of the Company's Common Stock by the Company at an assumed public offering price of $10.00 per share after deducting the underwriting discount, estimated offering expenses and the application of a portion of the net proceeds to repay certain of the Company's outstanding indebtedness as described in "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001060355_wfs_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001060355_wfs_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..fca9de29b65e7767b035af4c2ecd60ceb1e798ac
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+SUMMARY OF PROSPECTUS The following summary is qualified in its entirety by reference to the detailed information appearing elsewhere in this Prospectus. See the Index of Principal Definitions for the location herein of certain capitalized terms. Trust...................... WFS Financial 1998-B Owner Trust (the "Trust"). Seller..................... WFS Financial Auto Loans, Inc. (the "Seller"), a wholly owned, limited-purpose operating subsidiary of WFS Financial Inc. The principal executive offices of the Seller are located at 23 Pasteur Road, Irvine, California 92618 and its telephone number is (714) 727-1000. Prior to May 29, 1996, the Seller was known as Western Financial Auto Loans, Inc. See "The Seller." WFS........................ WFS Financial Inc ("WFS" or, in its capacity as Master Servicer, the "Master Servicer"), a majority owned, operating subsidiary of Western Financial Bank (the "Bank"), a federally chartered savings association. The principal offices of WFS are located at 23 Pasteur Road, Irvine, California 92618 and its telephone number is (714) 727-1000. See "WFS." WII........................ WFS Investments, Inc. ("WII"), a California corporation and a wholly owned operating subsidiary of WFS. The principal office of WII is 23 Pasteur Road, Irvine, California 92618 and its telephone number is (714) 727-1000. See "WII." Securities Offered......... The securities offered are as follows: A. General................. The WFS Financial 1998-B Owner Trust Auto Receivable Backed Notes (the "Notes") will represent obligations of the Trust secured by the assets of the Trust (other than the Certificate Distribution Account and the Certificate Policy). The WFS Financial 1998-B Owner Trust Auto Receivable Backed Certificates (the "Certificates" and, together with the Notes, the "Securities") will represent fractional undivided interests in the Trust. The Trust will issue four Classes of Notes pursuant to an indenture to be dated as of 1, 1998 (the "Indenture"), between the Trust and Bankers Trust Company, as trustee (the "Indenture Trustee"), as follows: (i) $ aggregate principal amount of % Auto Receivable Backed Notes, Class A-1 (the "Class A-1 Notes"), (ii) $ aggregate principal amount of % Auto Receivable Backed Notes, Class A-2 (the "Class A-2 Notes"), (iii) $ aggregate principal amount of % Auto Receivable Backed Notes, Class A-3 (the "Class A-3 Notes") and (iv) $ aggregate principal amount of % Auto Receivable Backed Notes, Class A-4 (the "Class A-4 Notes"). Payments of principal and interest on the Notes will be made in accordance with the priorities set forth under "Certain Information Regarding the Securities -- Distributions on the Securities." The Trust will issue $ aggregate principal amount of % Auto Receivable Backed Certificates pursuant to an amended and restated trust agreement (the "Trust Agreement") to be dated as of the date of initial issuance of the Securities (the "Closing Date"), among the Seller, Financial Security Assurance Inc. ("Financial Security"), WII and Chase Manhattan Bank Delaware, as trustee (the "Owner Trustee" and, together with the Indenture Trustee, the "Trustees"). Payments in respect of the Certificates will be subordinated to payments on the Notes to the extent described herein. Each Class of Notes and the Certificates will be issued in minimum denominations of $1,000 and integral multiples of $1,000 in excess thereof. Definitive Securities will be issued only under the limited circumstances described herein. See "Certain Information Regarding the Securities -- Book-Entry Registration" and "-- Definitive Securities." B. Property of the Trust... Each Note will represent an obligation of, and each Certificate will represent a fractional undivided interest in, the Trust. The property of the Trust will primarily include (i) a pool of retail installment sales contracts and installment loans (the "Contracts") secured by the new and used automobiles and light-duty trucks financed thereby (the "Financed Vehicles"); (ii) certain monies due under the Contracts on and after 1, 1998 (the "Cut-Off Date"); (iii) security interests in the Financed Vehicles; (iv) a financial guaranty insurance policy (the "Note Policy") to be issued by Financial Security for the exclusive benefit of Noteholders, which will unconditionally and irrevocably guarantee payment of the Scheduled Payments on each Distribution Date; (v) a financial guaranty insurance policy (the "Certificate Policy" and, together with the Note Policy, the "Policies") to be issued by Financial Security for the exclusive benefit of Certificateholders, which will unconditionally and irrevocably guarantee payment of the Guaranteed Distributions on each Distribution Date; (vi) amounts on deposit in the Collection Account, the Note Distribution Account, the Certificate Distribution Account, the Spread Account and the Holding Account, including all Eligible Investments therein and all income from the investment of funds therein and all proceeds therefrom; (vii) proceeds from claims under certain insurance policies in respect of individual Financed Vehicles or obligors under the Contracts (the "Obligors"); and (viii) certain rights under the sale and servicing agreement to be dated as of 1, 1998 (the "Sale and Servicing Agreement"), among the Trust, the Seller and the Master Servicer. Pursuant to the Indenture, the property of the Trust (other than the Certificate Distribution Account and the Certificate Policy) will be held by the Master Servicer for the benefit of the Indenture Trustee and Financial Security on behalf of the holders of the Notes. C. Distribution Dates...... Distributions of interest and principal on the Securities will be made on 20, 20, 20 and 20 of each year (or, if any such day is not a Business Day, on the next succeeding Business Day) (each, a "Distribution Date"), commencing 20, 1998. Payments on the Securities on each Distribution Date will be paid to the holders of record of the related Securities on the Business Day immediately preceding such Distribution Date or, in the event that Definitive Securities are issued, as of the 15th day of the month immediately preceding the month in which such Distribution Date occurs (each, a "Record Date"). A "Business Day" will be any day other than a Saturday, a Sunday or a day on which banking institutions in New York, New York, Wilmington, Delaware, or Los Angeles, California are authorized or obligated by law, executive order or government decree to be closed. To the extent not previously paid prior to such dates, the outstanding principal amount of (i) the Class A-1 Notes will be payable on 20, 1999 (the "Class A-1 Final Distribution Date"), (ii) the Class A-2 Notes will be payable on 20, 200 (the "Class A-2 Final Distribution Date"), (iii) the Class A-3 Notes will be payable on 20, 200 (the "Class A-3 Final Distribution Date") and (iv) the Class A-4 Notes will be payable on 20, 200 (the "Class A-4 Final Distribution Date" and, together with the Class A-1 Final Distribution Date, the Class A-2 Final Distribution Date and the Class A-3 Final Distribution Date, the "Note Final Distribution Dates"). To the extent not previously paid in full prior to such date, the unpaid principal balance of the Certificates will be payable on 20, 200 (the "Certificate Final Distribution Date" and, together with the Note Final Distribution Dates, the "Final Distribution Dates"). Terms of the Notes......... The principal terms of the Notes will be as described below: A. Interest Rates.......... Interest will be borne on (i) the Class A-1 Notes at the rate of % per annum (the "Class A-1 Rate"), (ii) the Class A-2 Notes at the rate of % per annum (the "Class A-2 Rate"), (iii) the Class A-3 Notes at the rate of % per annum (the "Class A-3 Rate") and (iv) the Class A-4 Notes at the rate of % per annum (the "Class A-4 Rate" and, together with the Class A-1 Rate, the Class A-2 Rate and the Class A-3 Rate, the "Interest Rates"). B. Interest................ Interest on the outstanding principal amount of each Class of Notes will accrue at the related Interest Rate from and including the most recent Distribution Date on which interest has been paid (or from and including the Cut-Off Date with respect to the first Distribution Date) to but excluding the current Distribution Date (each, an "Interest Period"). Interest on the Class A-1 and the Class A-2 Notes will be calculated on the basis of the actual number of days elapsed in an Interest Period and a 360-day year. Interest on the Class A-3 and Class A-4 Notes will be calculated on the basis of a 360-day year consisting of twelve 30-day months. Interest on the Notes for any Distribution Date due but not paid on such Distribution Date will be due on the next Distribution Date, together with, to the extent permitted by applicable law, interest on such shortfall at the related Interest Rate. See "The Notes -- Payments of Interest" and "Certain Information Regarding the Securities -- Distributions on the Securities." C. Principal............... Principal of the Notes will be payable on each Distribution Date in an amount generally equal to the Note Principal Distributable Amount for such Distribution Date, calculated as described under "Certain Information Regarding the Securities -- Distributions on the Securities -- Deposits to the Distribution Accounts; Priority of Payments." On each Distribution Date, the Note Principal Distributable Amount will be applied in the following priority: first to reduce the principal amount of the Class A-1 Notes; second, after the principal amount of the Class A-1 Notes has been reduced to zero, to reduce the principal amount of the Class A-2 Notes; third, after the principal amount of the Class A-2 Notes has been reduced to zero, to reduce the principal amount of the Class A-3 Notes; and fourth, after the principal amount of the Class A-3 Notes has been reduced to zero, to reduce the principal amount of the Class A-4 Notes. Notwithstanding the foregoing, if the principal amount of a Class of Notes has not been paid in full prior to its Note Final Distribution Date, the Note Principal Distributable Amount for such Note Final Distribution Date will include an amount sufficient to reduce the unpaid principal amount of such Class of Notes to zero on such Note Final Distribution Date. See "The Notes -- Payments of Principal" and "Certain Information Regarding the Securities -- Distributions on the Securities -- Deposits to the Distribution Accounts; Priority of Payments." D. Optional Redemption..... In the event of an Optional Purchase, each Class of outstanding Notes will be redeemed in whole, but not in part, at a redemption price equal to the unpaid principal amount of such Class of Notes plus accrued interest thereon at the related Interest Rate. See "The Notes -- Optional Redemption." E. Mandatory Redemption.... Under certain conditions, the Notes may be accelerated upon the occurrence of an Event of Default under the Indenture. So long as no Insurer Default shall have occurred and be continuing, under certain circumstances Financial Security will have the right (in addition to its obligation to make Scheduled Payments on the Notes in accordance with the terms of the Note Policy), but not the obligation, to elect to accelerate the principal of the Notes and to cause the Master Servicer or the Trustee to sell or otherwise liquidate the property of the Trust and to deliver the proceeds to the Indenture Trustee for distribution in accordance with the terms of the Indenture. See "The Notes -- Events of Default." Terms of the Certificates............... The principal terms of the Certificates will be as described below: A. Interest................ On each Distribution Date, the Owner Trustee or any paying agent as the Owner Trustee may designate from time to time (the "Paying Agent") will distribute pro rata to Certificateholders of record as of the related Record Date accrued interest at the rate of % per annum (the "Pass-Through Rate") on the Certificate Balance, as defined below, as of the immediately preceding Distribution Date (after giving effect to distributions of principal to be made on such immediately preceding Distribution Date) or, in the case of the first Distribution Date, on the Original Certificate Balance. Interest in respect of a Distribution Date will accrue from and including the Cut-Off Date (in the case of the first Distribution Date), or from and including the most recent Distribution Date on which interest has been paid, to but excluding the current Distribution Date. Interest on the Certificates for any Distribution Date due but not paid on such Distribution Date will be due on the next Distribution Date, together with, to the extent permitted by applicable law, interest on such shortfall at the Pass-Through Rate. See "The Certificates -- Distributions of Interest" and "Certain Information Regarding the Securities -- Distributions on the Securities." The "Certificate Balance" will equal $ (the "Original Certificate Balance") on the Closing Date and on any date thereafter will equal the Original Certificate Balance reduced by all distributions of principal previously made in respect of the Certificates. Distributions on the Certificates will be subordinated to payments of interest and principal on the Notes as described under "The Certificates" and "Certain Information Regarding the Securities -- Distributions on the Securities." B. Principal............... No principal will be paid on the Certificates until the Distribution Date on which the principal amount of the Class A-1, Class A-2, Class A-3 and Class A-4 Notes has been reduced to zero. On such Distribution Date and each Distribution Date thereafter, principal of the Certificates will be payable in an amount equal to the Certificate Principal Distributable Amount for such Distribution Date, calculated as described under "Certain Information Regarding the Securities -- Distributions on the Securities -- Deposits to the Distribution Accounts; Priority of Payments." If not paid in full prior to the Certificate Final Distribution Date, the remaining Certificate Balance, if any, will be payable on that date. See "The Certificates -- Distributions of Principal." C. Optional Prepayment..... In the event of an Optional Purchase, the Certificates will be repaid in whole, but not in part, at a repayment price equal to the Certificate Balance plus accrued interest thereon at the Pass-Through Rate. See "The Certificates -- Optional Prepayment." Security for the Securities................. The principal security for the Securities will be as described below: A. The Contracts........... The Contracts will consist of retail installment sales contracts and installment loans, secured by liens on the Financed Vehicles, purchased from WFS by the Seller and from the Seller by the Trust, including the right to receive the payments thereunder on and after the Cut-Off Date. The Seller will be required to repurchase Contracts under certain circumstances if certain representations and warranties made by the Seller are incorrect in a manner that materially and adversely affects the Securityholders, the Indenture Trustee, the Owner Trustee or Financial Security. The Contracts were purchased from new and used car dealers or originated directly from consumers by WFS. The Contracts were originated in California and other states by new and used car dealers not affiliated with WFS, except for a limited number of Contracts originated directly from consumers by WFS. The Contracts will be selected by WFS from its portfolio of retail installment sales contracts and installment loans based upon the criteria to be specified in the Sale and Servicing Agreement. As of the Cut-Off Date, the Aggregate Scheduled Balance will be $ (the "Cut-Off Date Aggregate Scheduled Balance") and the Contracts will have an expected weighted average annual percentage rate of approximately % and an expected weighted average remaining maturity of approximately months. See "The Contracts Pool." Approximately % of the aggregate principal amount of the Contracts will be Rule of 78's Contracts and approximately % will be Simple Interest Contracts, based upon the anticipated Scheduled Balances of the Contracts as of the Cut-Off Date. All net collections received by the Master Servicer on or in respect of the Contracts, any Advances made by the Master Servicer and all amounts paid under the Policies will be deposited in or credited to the Collection Account or, in certain limited instances, the Holding Account. On each Distribution Date, the Indenture Trustee will distribute the amounts on deposit in the Collection Account with respect to such Distribution Date to the Note Distribution Account and, to the extent applicable, the Certificate Distribution Account. All payments to Noteholders will be made from the Note Distribution Account and to Certificateholders from the Certificate Distribution Account. See "Certain Information Regarding the Securities -- The Accounts and Eligible Investments" and "-- Distributions on the Securities." B. The Spread Account...... The Securityholders will be afforded certain limited protection, to the extent described herein, against losses in respect of the Contracts by the establishment of a segregated trust account in the name of the Indenture Trustee for the benefit of the Securityholders (the "Spread Account"). The Spread Account will be part of the Trust. The Spread Account will be created with an initial deposit by the Seller of $ (the "Spread Account Initial Deposit"). The funds in the Spread Account will thereafter be supplemented on each Distribution Date by the deposit of any Excess Amounts (as defined below), until the cash on deposit in the Spread Account is at least equal to the Specified Spread Account Balance. "Excess Amounts" in respect of a Distribution Date will be calculated as described under "Certain Information Regarding the Securities -- Distributions on the Securities -- Deposits to the Distribution Accounts; Priority of Payments" and will equal the funds on deposit in the Collection Account in respect of such Distribution Date, after giving effect to all distributions required to be made on such Distribution Date. The Specified Spread Account Balance will be calculated as described under "Certain Information Regarding the Securities -- Payment Priorities of the Notes and the Certificates; The Spread Account -- Calculation of Specified Spread Account Balance." On each Distribution Date, funds will be withdrawn from the Spread Account for distribution to Securityholders to cover any shortfalls in interest and principal required to be paid on the Securities (before giving effect to any claim under the Policies). If on the last day of any month (each, a "Calculation Day") or on any Distribution Date the amount on deposit in the Spread Account is greater than the Specified Spread Account Balance, any excess cash on deposit therein will be released therefrom and upon such distribution Securityholders will have no further rights in, or claims to, such amounts. See "Certain Information Regarding the Securities -- Withdrawals from the Spread Account." C. The Policies............ On the Closing Date, Financial Security will issue the Note Policy to the Indenture Trustee and the Certificate Policy to the Owner Trustee pursuant to the insurance, indemnity and pledge agreement to be dated as of 1, 1998 (the "Insurance Agreement"), among Financial Security, the Trust, the Seller, Bankers Trust Company as Collateral Agent for Financial Security, WII and WFS. Pursuant to the Note Policy, Financial Security will unconditionally and irrevocably guarantee to the Noteholders payment of the Scheduled Payments for each Distribution Date. Pursuant to the Certificate Policy, Financial Security will unconditionally and irrevocably guarantee to the Certificateholders payment of the Guaranteed Distributions for each Distribution Date. See "The Policies" and "Financial Security Assurance Inc." Optional Purchase.......... The Seller may, but will not be obligated to, purchase all of the Contracts in the Trust, and thereby cause early retirement of all outstanding Securities, on any Distribution Date as of which the Aggregate Scheduled Balance is 5% or less of the Cut-Off Date Aggregate Scheduled Balance (an "Optional Purchase"). See "Certain Information Regarding the Securities -- Termination." The Master Servicer........ WFS, as Master Servicer, will be obligated pursuant to the Sale and Servicing Agreement, subject to the limitations set forth therein, to service the Contracts and to repurchase certain of the Contracts under certain circumstances if certain representations and warranties made by WFS are incorrect or if WFS, as Master Servicer, breaches certain of its servicing obligations under the Sale and Servicing Agreement, in either case in a manner that materially and adversely affects such Contracts. See "The Master Servicer." Ratings.................... It is a condition of issuance that the Class A-1 Notes be rated A-1+ by Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P") and P-1 by Moody's Investors Service, Inc. ("Moody's" and, together with S&P, the "Rating Agencies"), and the Class A-2, Class A-3 and Class A-4 Notes and the Certificates each be rated AAA by S&P and Aaa by Moody's. See "Ratings of the Securities." Tax Status................. In the opinion of special tax counsel to the Seller, for both federal and California income tax purposes, the Notes will be characterized as debt, and the Trust will not be characterized as an association (or a publicly traded partnership) taxable as a corporation. Each Noteholder, by the acceptance of a Note, will agree to treat the Notes as indebtedness, and each Certificateholder, by the acceptance of a Certificate, will agree to treat the Trust as a partnership in which the Certificateholders are partners for federal income tax purposes. See "Certain Federal Income Tax Consequences" and "Certain California Income Tax Consequences." ERISA Considerations....... Subject to the considerations discussed under "ERISA Considerations," the Notes will be eligible for purchase by employee benefit plans that are subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Since the Certificates will be subordinated to the Notes to the extent described herein, employee benefit plans subject to ERISA will not be eligible to purchase the Certificates. Any benefit plan fiduciary considering purchase of the Securities should, among other things, consult with its counsel in determining whether all required conditions have been satisfied. See "ERISA Considerations." Legal Investment........... The Class A-1 Notes have been structured to be eligible securities for purchase by money market funds under Rule 2a-7 under the Investment Company Act of 1940, as amended. A money market fund should consult its legal advisors regarding the eligibility of the Class A-1 Notes under Rule 2a-7, the fund's investment policies and objectives and an investment in the Class A-1 Notes.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001060770_superior_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001060770_superior_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary is qualified in its entirety by the more detailed information and financial statements, including the accompanying Notes, appearing elsewhere in this Prospectus. Prospective investors should carefully consider the information set forth under the heading "Risk Factors." A glossary of terms applicable to the Indenture and the Senior Notes is set forth under "Description of Senior Notes--Certain Definitions." THE COMPANY Superior Financial Corp. (the "Company") is a savings and loan holding company organized under the laws of Delaware and headquartered in Fort Smith, Arkansas. The Company was organized in 1997 as SFC Acquisition Corp. for the purpose of acquiring Superior Federal Bank, F.S.B. (the "Bank"), a federally chartered savings bank. The Company's acquisition of the issued and outstanding capital stock of the Bank (the "Bank Capital Stock") from NationsBank, N.A. ("NationsBank") occurred on April 1, 1998 (the "Acquisition"). On April 1, 1998, the Company and Keefe, Bruyette & Woods, Inc. as Placement Agent, completed the Private Placement of $97.5 million of Common Stock and $60.0 million of Senior Notes. The proceeds of the Private Placement were used primarily to fund the Acquisition. In connection with the Private Placement, the Company entered into the Registration Rights Agreement with the initial purchasers of the Superior Securities and the Placement Agent, pursuant to which, among other things, the Company agreed to file within 120 days a shelf registration statement with the Securities and Exchange Commission (the "Commission") providing for the offer and sale of the Superior Securities. The Registration Statement of which this Prospectus forms a part has been filed in satisfaction of such requirements. See "The Private Placement" and "Registration Rights." The Acquisition was financed through the Private Placement of $97.5 million of Common Stock and $60.0 million of Senior Notes and the $20.0 million Loan. The large debt component of the Acquisition financing has created a high degree of leverage at the level of the Company (as opposed to the Bank). At September 30, 1998, the Company's leverage ratio was 3.8%. Furthermore, as a consequence of the purchase method of accounting used in the Acquisition, there is a significant non-cash amortization charge for goodwill which was created. This charge reduces the Company's reported GAAP earnings by approximately $808,000 per quarter. In addition, the Senior Notes and the Loan have created a debt service expense of approximately $1.93 million per quarter. The accounting treatment applied to the Acquisition created a material difference between the book value of the Common Stock ($10.25) and its tangible book value ($3.83). The Company recorded at the holding company level $80.0 million in debt incurred to finance the Acquisition. In addition, $64.0 million allocated to goodwill has been recorded, under push-down accounting principles, at the Bank level. Moreover, under principles of regulatory accounting, 50% of goodwill is recorded as capital at the Bank level, but no goodwill may be recorded as capital at the holding company level. Since it is a holding company, the Company has no business operations of its own and conducts business entirely through its subsidiaries. The Company's principal subsidiary is the Bank. The Bank owns a subsidiary, SFS Corporation, and a second-tier subsidiary, Southwest Protective Life Insurance Company, which sells consumer loan credit life insurance to consumer loan borrowers of the Bank. The Bank was organized in 1934. The Bank is headquartered in Fort Smith, Arkansas and operates through 50 branches in Arkansas and Oklahoma, with concentration in the Little Rock and Fort Smith markets. At September 30, 1998, the Company had consolidated assets of $1.2 billion, and shareholders' equity of $103.3 million. At September 30, 1998, the Bank had deposits of $920.6 million and gross loans of $703 million. The Company, through the Bank, provides a wide range of retail and small business banking services including non-interest bearing and interest bearing checking, savings and money market accounts, certificates of deposit, and individual retirement accounts. In addition, the Company offers a full array of real estate, consumer, small business, and commercial real estate loan products. Other financial services include automated teller machines ("ATMs"), credit related life and disability insurance, safety deposit boxes, and telephone banking. The Company has been particularly effective in establishing primary banking relationships by virtue of its Totally Free Checking strategy. It is the Company's goal to maximize long-term shareholder value through year-to-year growth in loans, deposits, and non-interest revenue in a manner consistent with safe, sound and prudent banking practices. To achieve this goal, the Company's business strategy is to: (a) embark on a series of short term and intermediate term initiatives designed to enhance suboptimal business practices of the Bank thereby increasing revenue and enhancing operating efficiency; (b) expand the loan portfolio and transaction deposit accounts through market share growth and selective de novo branching, specifically targeting the account relocation expected to take place as a result of merger-related customer dislocation in the Company's market area; (c) expand the Bank's product offerings to encompass a wider range of products and services which will be offered by a locally owned and operated financial company with motivated employees; (d) enhance delivery systems options by offering expanded ATM, telephone, and personal computer based banking services; and (e) maintain financial safety and soundness. Certain of these short-term initiatives have already been put into effect. In August and September 1998, the Bank completed the sale of nine branch facilities located in Oklahoma and Arkansas. The Bank has entered into an agreement to sell one additional facility in Oklahoma. The sale of this facility should be completed in the first quarter of 1999. These branches were determined to be unprofitable, or not in geographic or demographic locations deemed to fit the strategic direction of the Bank. Additionally, several significant outsourcing contracts have been renegotiated at more favorable terms. The Bank is also analyzing the merits of selling certain underutilized fixed assets and reallocating this capital into higher earning assets. The Company's growth strategy focuses on targeting customers displaced and disenchanted as a result of industry consolidation in Superior's immediate and contiguous markets. The ongoing consolidation in the financial services industry is providing significant opportunity for local, community-oriented financial institutions to capitalize on the resulting merger dislocation of many customers. The Company is positioned to exploit this opportunity as a newly independent organization. Furthermore, its reputation in its market for strong service and its "totally free checking" product should help it to cultivate these customers. The Company plans to capture these customers where it currently has a presence and through geographic expansion via de novo branching and acquisitions. The Bank has begun building four branches in Little Rock (2), Conway and Ft. Smith. These locations will introduce a branch design that emphasizes speed of service and convenience. The Bank opened a loan production office in Tulsa, Oklahoma in October, 1998. The Company, as a registered savings and loan holding company, is subject to examination and regulation by the Office of Thrift Supervision (the "OTS"). The Bank, as a federally chartered savings bank, is subject to comprehensive regulation and examination by the OTS, as its chartering authority and primary regulator, and by the FDIC, which administers the Savings Association Insurance Fund (the "SAIF"), which insures the Bank's deposits to the maximum extent permitted by law. The Bank is a member of the Federal Home Loan Bank (the "FHLB") of Dallas, which is one of the 12 regional banks which comprise the FHLB System. The Company is further subject to regulations of the Board of Governors of the Federal Reserve Board (the "Federal Reserve Board") governing reserves required to be maintained against deposits and certain other matters. The Company's executive offices are located at 5000 Rogers Avenue, Fort Smith, Arkansas 72917-7012, and its main telephone number is (501) 484-4305. THE OFFERING The Private Placement........... The Superior Securities issued to investors in the Private Placement were sold by the Company on April 1, 1998. An aggregate of 10,079,703 million shares of Common Stock and an aggregate of $60.0 million of the Senior Notes were sold. In connection therewith, the Company executed and delivered for the benefit of the holders of the Superior Securities the Registration Rights Agreement, providing for, among other things, the filing of the Registration Statement of which this Prospectus forms a part. See "The Private Placement" and "Registration Rights." Securities Offered.............. 10,079,703 shares of Common Stock and $60.0 million aggregate principal amount of Senior Notes. The Senior Notes................ See "Description of the Senior Notes." Maturity Date................... April 1, 2003 Interest Payment Dates.......... Semi-annually on April 15 and October 15, which commenced on October 15, 1998. Ranking......................... The Senior Notes are general unsecured obligations of the Company and will rank senior to such other Indebtedness (as defined in the Indenture dated April 1, 1998 by and between the Company and The Bank of New York, as Trustee (the "Indenture")) as the Company may incur. Because the Company is the sole shareholder of the Bank, the rights of creditors of the Bank to payments from the Bank are, in effect, senior to the rights of the Company as a shareholder of the Bank, and in effect, senior to the rights of holders of Senior Notes, who will have no direct claim against the Bank for payment. Interest Reserve Account........ The Indenture pursuant to which the Senior Notes are issued required the Company to establish at the time of issuance of the Senior Notes the Interest Reserve Account, which is a segregated account containing a sufficient amount of cash and other Permitted Investments to pay the aggregate interest payments scheduled to be made with respect to the Senior Notes for the next two succeeding Interest Payment Dates. Sinking Fund.................... None Mandatory or Optional Upon the occurrence of a Change of Control Redemption...................... the Senior Notes not tendered in accordance with the provisions set forth under "Change of Control" shall be redeemable at the option of the Company, in whole or in part, at any time or from time to time, upon not less than 45 nor more than 60 days' prior notice mailed by first-class mail to each holder's registered address, at a redemption price equal to the sum of (i) the principal amount of the Senior Notes being redeemed plus accrued interest thereon to the redemption date and (ii) the Make-Whole Amount (as defined in the Indenture), if any, with respect to such Senior Notes (the "Redemption Price"). If notice has been given as provided in the Indenture and funds for the redemption of any Senior Notes called for redemption shall have been made available on the redemption date referred to in such notice, such Senior Notes will cease to bear interest on the date fixed for such redemption specified in such notice and the only right of the holders of the Senior Notes will be to receive payment of the Redemption Price. Change of Control............... Upon a Change of Control (as defined in the Indenture), holders of Senior Notes will have the option to require the Company to repurchase all outstanding Senior Notes at 101% of their principal amount, plus accrued interest to the date of repurchase. There can be no assurance that the Company will have the funds available to repurchase the Senior Notes in the event of a Change of Control. Certain Additional Covenants.... The Indenture pursuant to which the Senior Notes have been issued contains certain additional covenants that prohibit, among other things: (i) the incurrence of Indebtedness by the Company, except for certain Junior Indebtedness and Indebtedness incurred under a Loan Agreement dated April 1, 1998 by and between the Company and Colonial Bank and on such terms as were in effect on the Issue Date and other Permitted Indebtedness as defined in the Indenture; (ii) the making of certain Restricted Payments by the Company and its subsidiaries; (iii) the incurrence of certain liens on the Company's assets; (iv) the sale or other transfer of capital stock of the Bank; and (v) the Company's ability to enter into any arrangement that would impose certain restrictions on the ability of subsidiaries of the Company to make dividend and other payments of the Company. The Indenture also restricts the Company's and the Bank's ability to merge, consolidate or sell all or substantially all of the assets of the Company or the Bank. Acceleration.................... The maturity of the Senior Notes may be accelerated upon an Event of Default, as defined in the Indenture. Such Events of Default include, among other things, continued default in payment of interest upon any Senior Note for a period of 15 days, continued breach of certain covenants or warranties of the Indenture for a period of 30 days after notice of such default from the holders of at least 25% of the outstanding principal balance of the Senior Notes, bankruptcy of the Company or the Bank, default by the Company or a Subsidiary on any Indebtedness in excess of 5% of the Company's Consolidated Net Worth, which default has not been cured within 30 days, the entry of a final judgment in excess of 5% of the Company's Consolidated Net Worth which remains unsatisfied for a period of 60 days or the continuing failure of either of the Banks to comply with their Regulatory Capital Requirements. The Common Stock................ See "Description of Capital Stock." Dividends....................... The payment of dividends on the Common Stock will be at the discretion of the Board of Directors of the Company. The Company does not presently have a plan for paying dividends and does not expect to pay any dividends on the Common Stock before April 1, 1999. The Company's ability to pay dividends will depend principally on the ability of the Bank to pay dividends to the Company. For a discussion of certain restrictions on the ability of the Bank to pay dividends, see "Regulation," "Description of Senior Notes" and "Description of Capital Stock." OTS regulations currently permit a "Tier I" association such as the Bank to make capital distributions without OTS approval during a calendar year up to the higher of (i) 100% of its net income to the date of such distribution during the calendar year plus the amount that would reduce by one-half its surplus capital ratio, as defined, at the beginning of the calendar year; or (ii) 75% of its net income over the most recent four- quarter period. See "Regulation--Regulation of Federal Savings Institutions--Capital Distribution Requirements." Market for Superior Securities.. Since consummation of the Private Placement, transactions in the Superior Securities have been limited, and there is no established market for the Superior Securities at this time. Although the Company intends to apply to have the Common Stock and the Senior Notes listed on a national and/or regional securities exchange or inter-dealer quotation service upon satisfaction of the applicable minimum listing requirements, no assurance can be made when, if at all, the Company will satisfy such listing requirements or if any such application will ultimately be approved. Accordingly, there can be no assurance that an active public trading market for either the Common Stock or the Senior Notes will develop or be sustained. See "Dividends and Market for Superior Securities." Use of Proceeds................. The Selling Holders will receive all of the proceeds from Superior Securities sold pursuant to this Prospectus. See "Use of Proceeds" for a discussion of the use of the net proceeds from the Private Placement.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001061202_classic_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001061202_classic_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..b03a5b6bdbd53e35a9b100ec4debe98e29a53184
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Except as otherwise indicated herein, all information in this Prospectus (i) gives effect to the conversion of all outstanding shares of Class A Convertible Preferred Stock (the "Convertible Preferred Stock") into shares of Common Stock (the "Conversion"), which will occur concurrently with the closing of this offering, and (ii) assumes no exercise of the Underwriters' over-allotment option. Because the number of shares to be issued in the Conversion will depend upon the closing date and the pricing of this offering, all calculations included in this Prospectus based upon the Conversion, including those indicating the number of shares of Common Stock to be outstanding after this offering, have been made assuming the closing date of this offering is July 31, 1998 and assuming an initial public offering price of $14.00 per share. See "Description of Capital Stock" and "Underwriting." As used in this Prospectus, unless the context otherwise requires, references to "Global Vacation Group" or the "Company" are to the Company and its subsidiaries. Prospective purchasers should read the Prospectus in its entirety. THE COMPANY The Company believes it is one of the largest U.S. providers of value-added vacation products and services targeted to higher-income travelers. The Company assembles air, hotel, rental car and other travel components in bulk and provides complete vacations to travelers through retail travel distributors, such as travel agents, and other distribution channels, including the Internet and affinity groups. The Company provides flexible independent travel programs for individuals as well as escorted tours and group packages. On a pro forma as adjusted basis for the year ended December 31, 1997 and for the three months ended March 31, 1998, the Company had net revenues of $115.2 million and $22.4 million, respectively, derived from a total dollar value of travel products and services sold of $507.0 million and $101.1 million, respectively. For the same periods, the Company had pro forma as adjusted net income (loss) of $4.3 million and ($1.5 million), respectively. More than 90% of the Company's 1997 pro forma net revenues were derived from sales through retail travel agents and other travel intermediaries. The Company intends to achieve the leading market position in selected high-volume, high-margin travel destinations and will focus initially on the following markets: (i) Hawaii; (ii) in-bound vacations to the United States for international travelers; (iii) Florida, the Caribbean and Mexico; (iv) other U.S. destinations such as California and New York; and (v) out-bound travel by U.S. travelers to Europe. Based on numbers of travelers reported by independent industry sources, the Company had approximately a 13% market share of westbound packaged vacation travel to Hawaii in 1997 and approximately an 8% market share of packaged trips to the United States by international travelers in 1996. The Company focuses its marketing efforts on travelers who typically spend more than $750 per person for a vacation. The Company also provides certain services to travel suppliers, including outsourced vacation packaging and affinity group marketing and awards program fulfillment. The Company intends to market its products and services under two specific proprietary brands: one for up-scale, customized vacations and another for popular-priced vacation packages. The Company believes providing expertise and competitive pricing in multiple destinations through two separate brands will distinguish its products and services and will provide the Company with a significant competitive advantage. In addition to serving multiple destinations, the Company also has achieved a diverse domestic and international customer base. The Company believes it will be able to use its international scope to create cross-selling opportunities and expand its relationships with suppliers of quality travel products and services (primarily airlines, hotel companies and rental car companies). In addition, the Company believes the shift to on-line systems such as the Internet will enable it to realize savings in operating expenses. The Company further believes its value-added approach and expertise will allow it to compete effectively with other travel providers on the Internet by (i) generally providing better prices and INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED JULY 29, 1998 LOGO PROSPECTUS 3,000,000 SHARES GLOBAL VACATION GROUP, INC. COMMON STOCK ------------------ All of the 3,000,000 shares of common stock, $0.01 par value per share (the "Common Stock"), offered hereby are being offered by Global Vacation Group, Inc. (the "Company"). Prior to this offering, there has not been a public market for the Common Stock of the Company. It is currently estimated that the initial public offering price will be between $13.00 and $15.00 per share. See "Underwriting" for information relating to the factors to be considered in determining the initial public offering price. The Common Stock has been approved for listing on the New York Stock Exchange under the symbol "GVG." SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN RISK FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. ------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- <TABLE> <CAPTION> <S> <C> <C> <C> <CAPTION> UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS(1) COMPANY(2) - ---------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Per Share $ $ $ - ---------------------------------------------------------------------------------------------------------- Total(3) $ $ $ - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- </TABLE> (1) For information regarding indemnification of the several Underwriters, see "Underwriting." (2) Before deducting expenses payable by the Company estimated at $2,500,000. (3) Certain of the Company's shareholders (the "Selling Shareholders") have granted the Underwriters a 30-day option to purchase up to 450,000 additional shares of Common Stock solely to cover over-allotments, if any. See "Underwriting." If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Selling Shareholders will be $ , $ and $ , respectively. ------------------ The shares of Common Stock are being offered by the several Underwriters named herein, subject to prior sale, when, as and if accepted by them and subject to certain conditions. It is expected that certificates for the shares of Common Stock offered hereby will be available for delivery on or about , 1998, at the office of Smith Barney Inc., 333 West 34th Street, New York, New York 10001. ------------------ SALOMON SMITH BARNEY NATIONSBANC MONTGOMERY SECURITIES LLC BANCAMERICA ROBERTSON STEPHENS ING BARING FURMAN SELZ , 1998 inventory availability than can be obtained by an individual travel agency or traveler, (ii) enhancing and simplifying access to travel information across multiple destinations and (iii) assembling vacation travel components into convenient packages for ease of planning and booking. The Company's executive management team, Roger H. Ballou, J. Raymond Lewis Jr. and Walter S. Berman, has over 60 years of combined management experience in the travel industry with leading companies such as American Express Travel Related Services Company, Inc. ("American Express Travel"), Alamo Rent-A-Car, Inc. ("Alamo"), Certified Vacations, Inc. ("Certified Vacations") and Holiday Inn Worldwide ("Holiday Inn"). Their experience includes management responsibility for the acquisition and integration of businesses with a combined purchase price of over $500 million. The Company intends to grow through acquisitions by capitalizing upon the significant consolidation opportunities available in the fragmented packaged vacation industry. The Company will seek to make acquisitions that complement its established strengths and are likely to enhance its presence in specific travel destinations or allow the Company to establish a leading presence in a new market. The Company believes it will be regarded as an attractive acquiror by the owners of existing travel businesses. OPERATING STRATEGY In providing value-added vacation products and services targeted to higher-income travelers, the Company pursues an operating strategy that includes the following elements: Creating Value-added Vacation Products and Services. The Company focuses on creating vacation packages that provide added value to higher-income travelers. The Company believes that, because of its size and expertise in certain destination markets, it can (i) generally provide better prices and inventory availability than can be obtained by an individual travel agency or traveler, (ii) enhance and simplify access to travel information across multiple destinations and (iii) assemble vacation travel components into convenient packages for ease of planning and booking. Establishing National Brand Name Recognition. The Company believes it can leverage its presence in leading origination and destination markets to develop nationally recognized proprietary brand names in the packaged vacation industry. The Company believes offering expertise and competitive pricing through common brands across multiple destinations will provide greater confidence to travelers in making their vacation choices and engender consumer loyalty and a pattern of repeat purchases. Leveraging Strength in Selected Travel Destinations. The Company believes it has a leading position in the packaged vacation markets for westbound travel to Hawaii and for in-bound travel to the United States and intends to achieve the leading position in these and other high-volume, high-margin vacation destinations. The Company believes having scale and expertise in selected destinations gives it access to pricing and inventory that provides the Company with a significant competitive advantage. Pursuing Revenue Enhancing Opportunities. Following the Acquisitions (as defined below), the Company's revenue enhancing strategies include (i) improving yield management by obtaining greater access to high-margin products and services, (ii) expanding ancillary products and services, such as city tours and travel insurance, (iii) securing favorable pricing and inventory availability through strategic purchasing relationships and (iv) improving cash management, particularly management of traveler deposits and advance payments. Improving Operating Efficiencies. The Company seeks to reduce its operating expenses by (i) capitalizing on enhanced purchasing efficiencies, (ii) implementing a more effective utilization program of its physical and other assets, (iii) implementing best practices in its management and business systems, (iv) enhancing marketing relationships with travel suppliers and other related parties and (v) outsourcing certain functions where appropriate. [GRAPHICS -- GATEFOLD SHOWING PRODUCT OFFERINGS] CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING." Implementing Integrated Information Systems. The Company will seek to integrate its information systems in order to improve its ability to offer travelers value-added vacation products and services and to leverage maintenance and development costs across a broader customer base. In addition, integrated systems will facilitate the use of common operating platforms, reduce the cost and time requirements of developing external interfaces and accelerate the integration of subsequent acquisitions. GROWTH STRATEGY To complement its operating strategy, the Company has developed a multi-faceted growth strategy that includes the following elements: Generating Internal Growth. The Company intends to grow internally by (i) implementing an integrated national marketing program, (ii) increasing its presence in underpenetrated origination markets and (iii) implementing loyalty programs that stimulate repeat purchases. Identifying and Consummating Strategic Acquisitions. The Company believes the packaged vacation industry is fragmented and there are significant opportunities to make selective acquisitions of packaged vacation providers. The Company generally will seek to acquire companies that (i) have desirable destination concentrations, (ii) have demonstrated growth and profitability, (iii) have an emphasis on customer service, (iv) have an experienced management team and (v) are likely to add some other strategic value to the Company. Enhancing Strategic Relationships with Travel Suppliers and Travel Agents. By enhancing strategic supplier relationships, the Company will strengthen its ability to provide vacation products and services and to offer prices and inventory that generally would not be available to travelers on their own or through travel agents. In addition, by broadening its products and services to include additional destinations, the Company believes it will achieve enhanced loyalty among the travel agent community. Enhancing Distribution Channels. The Company seeks to capitalize on the opportunities presented by the direct selling of vacation products and services to travelers (disintermediation) and the emergence of alternative distribution channels (e.g., the Internet and affinity groups) while still supporting and leveraging its strong relationships with existing retail travel agents. Private Label Branding. In recent years, certain travel and other companies have sought to leverage their brand names by outsourcing the development and operation of packaged vacation programs under such brand names. The Company believes there are significant opportunities to expand its private label business. Affinity Group Marketing. The Company will seek access to affinity groups such as frequent flier programs and bank card reward or loyalty programs for the direct marketing of its products and services as well as the opportunity to provide its vacation products and services as rewards in these programs. The Company has certain proprietary software and extensive operating experience which it believes provide a significant opportunity to capitalize on this growing market. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company.......... 3,000,000 shares Common Stock to be outstanding after the offering(1) ............................... 14,739,838 shares Use of proceeds(2)........................... Repayment of debt NYSE Symbol.................................. GVG </TABLE> - --------------- (1) Excludes (i) 84,716 shares of Common Stock issuable upon exercise of options outstanding under the Company's 1998 Stock Option Plan (the "Stock Option Plan") as of July 7, 1998, (ii) shares of Common Stock equal to 7.5% of the number of shares of Common Stock to be outstanding upon completion of this offering plus a number of shares of Common Stock equal to $2,475,000 divided by the price per share in this offering, all of which shares will be issuable upon exercise of options to be granted under the Stock Option Plan upon completion of this offering (an aggregate of 1,282,269 shares, assuming the offering is closed on July 31, 1998 at a price of $14.00 per share), and (iii) additional shares of Common Stock reserved for issuance under the Stock Option Plan (including up to 195,000 shares to be subject to options the Company intends to grant concurrently with the closing of this offering), up to a total number of shares eligible for issuance under the Stock Option Plan at any time equal to 12% of the then outstanding shares of Common Stock. See "Management -- Stock Option Plan." (2) The Company will use all of the net proceeds from this offering to repay debt that was incurred to finance, in part, the Recapitalization (as defined below) and the Acquisitions. This debt may not be re-borrowed. Accordingly, the net proceeds of this offering will not result in any direct availability of funds for operations or capital expenditures. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001061322_global_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001061322_global_prospectus_summary.txt
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+SUMMARY The following summary should be read in conjunction with, and is qualified in its entirety by, the more detailed information and financial information appearing elsewhere in this Prospectus. For a discussion of certain factors to be considered in connection with an investment in the Shares, see "Risk Factors." Unless the context otherwise requires, the term "Company" means GCL and all of its direct and indirect subsidiaries. A glossary of relevant terms used in the telecommunications business is included at the end of this Prospectus. THE COMPANY Global Crossing is the world's first independent provider of global Internet and long distance telecommunications facilities and services utilizing a network of undersea digital fiber optic cable systems and associated terrestrial backhaul capacity. As such, the Company believes it is the first to offer "one-stop shopping" for its customers to multiple destinations worldwide. The Company operates as a "carriers' carrier", providing tiered pricing and segmented products to licensed providers of international Internet and telecommunications services. Capacity on the Company's network is offered to all customers on an open, equal access basis. The first four cable systems under development by the Company, together with associated terrestrial backhaul capacity, will form a state-of-the-art interconnected worldwide high capacity undersea fiber optic network (the "Global Crossing Network"): Atlantic Crossing ("AC-1"), a system connecting the United States and Europe; Pacific Crossing ("PC-1"), a system connecting the United States and Asia; Mid-Atlantic Crossing ("MAC"), a system connecting the eastern United States and the Caribbean; and Pan American Crossing ("PAC"), a system connecting the western United States, Central America and the Caribbean. The undersea component of the Global Crossing Network initially totals 51,300 km. The Company is in the process of developing several new cable systems and evaluating other business development opportunities which will complement the Global Crossing Network. Global Crossing's business is designed to meet the varying needs of the global carrier market. The Company offers customers the ability to purchase capacity on demand, thereby (i) eliminating their need to commit the substantial capital which would otherwise be required to build undersea cable capacity and (ii) decreasing the risks associated with forecasting their future capacity requirements. Compared with traditional undersea cable systems, the Company offers more comprehensive, flexible and low-cost purchasing alternatives designed to meet current market requirements of international carriers, including direct international city-to-city connectivity, the ability to purchase capacity annually and discounts based upon aggregate volume purchased on the Global Crossing Network. The Global Crossing Network is being engineered and constructed to allow multiple upgrades to its initial circuit capacity at a fraction of the original network cost. The Company is focusing on expanding the products and services it offers to customers in order to increase revenues and profits. The Company anticipates that its future revenues, beyond the sale of the initial capacity of its first four cable systems, will derive from several sources, including system upgrades, additional undersea cable projects, the development or purchase of additional terrestrial fiber capacity and the introduction of new services. In addition to the undersea segments of the Global Crossing Network, the Company has made and expects to continue to make acquisitions of terrestrial fiber capacity which complement its core undersea cable business and which address customer demands for global city-to-city connectivity. Global Crossing intends to pursue such connectivity in approximately 50 of the largest metropolitan communications markets worldwide. Once completed, the undersea segments of the Global Crossing Network, in combination with the Company's investments in terrestrial fiber capacity, will form an integrated worldwide network with multiple access points offering low-cost wholesale capacity. SERVICE OF PROCESS AND ENFORCEMENT OF LIABILITIES The Issuer is organized pursuant to the laws of Bermuda. In addition, certain of the directors and officers of the Issuer reside outside the United States and a substantial portion of the assets of the Issuer are located outside the United States. As a result, it may be difficult for investors to effect service of process within the United States upon such persons or to realize against them in courts of the United States upon judgments of courts of the United States predicated upon civil liabilities under the United States federal securities laws. The Company has been advised by its legal counsel in Bermuda, Appleby, Spurling & Kempe, that there is doubt as to the enforcement in Bermuda, in original actions or in actions for enforcement of judgments of United States courts, of liabilities predicated upon U.S. federal securities laws, although Bermuda courts will enforce foreign judgments for liquidated amounts in civil matters subject to certain conditions and exceptions. ---------------- In this Prospectus, references to "dollars" and "$" are to United States dollars, and the terms "United States" and "U.S." mean the United States of America, its states, its territories, its possessions and all areas subject to its jurisdiction. INFORMATION REGARDING FORWARD-LOOKING STATEMENTS This Prospectus contains forward-looking statements that include, among others, statements concerning the Company's plans to effect the design, construction, and operations of, and sales of capacity on, its planned telecommunications systems, expectations as to funding its future capital requirements and other statements of expectations, beliefs, future plans and strategies, anticipated developments and other matters that are not historical facts. Management cautions the reader that these forward-looking statements are subject to risks and uncertainties that could cause actual events or results to differ materially from those expressed or implied by the statements. The most important factors that could prevent the Company from achieving its goals include, but are not limited to, failure by the Company to: (i) complete its systems within currently estimated time frames and budgets, (ii) sell capacity on its systems, (iii) make a successful transition from a system development to an operating company and (iv) effectively compete in the context of a rapidly evolving market characterized by intense price competition and unpredictable levels of demand for telecommunication capacity. See "Risk Factors."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001061325_cogen_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001061325_cogen_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following information should be read in conjunction with, and is qualified in its entirety by reference to, the more detailed information and the combined financial statements appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus assumes that the Underwriters' over-allotment option is not exercised. This Prospectus assumes, unless otherwise indicated, the consummation of the Formation Transactions (as defined in "Certain Transactions--Formation Transactions") in describing the Company and in presenting other information in this Prospectus. In order to make distinctions where necessary, references in this Prospectus to identified entities shall have the following meanings: . ""Cogen'' and the "Company" shall mean Cogen Technologies, Inc. and, unless the context otherwise requires, its subsidiaries on a consolidated basis as if the Formation Transactions had been consummated and the Company were the successor to the interests which it will acquire pursuant to the Formation Transactions. . ""subsidiaries'' or the "Company's subsidiaries" shall mean the entities in which Cogen will acquire equity interests pursuant to the Formation Transactions. . ""ventures'' shall mean the ventures or entities in which the subsidiaries have equity interests and which in turn directly own the Company's independent power plants. . The "Company's plants" and the "Company's independent power plants" shall mean the independent power plants in which the Company has an interest and that form the core of the Company's business; the same may be referred to singularly, as a "plant". . Cogen Technologies Group (the "Group") refers collectively to (i) McNair Energy Services Corporation ("MESC") and its wholly owned subsidiary, Cogen Technologies NJ, Inc. ("NJ Inc."), (ii) Cogen Technologies Camden, Inc. ("Camden Inc."), (iii) Cogen Technologies Linden, Ltd. ("Linden Ltd."), (iv) CT Global Insurance, Ltd. ("CT Global"), (v) the limited partnership interests in Cogen Technologies Camden GP Limited Partnership ("Camden GPLP") held by the Minority Interests (as defined in "The Company-- Formation") and (vi) Cogen Technologies Selkirk, LP ("Selkirk L.P."). . NJ Inc. is the managing partner of Cogen Technologies NJ Venture ("NJ Venture") which owns and operates the Bayonne Plant. Camden Inc. is the general partner of Camden GPLP, which is the general partner of Camden Cogen LP ("Camden Cogen") which owns and operates the Camden Plant. Linden Ltd. is the general partner of Cogen Technologies Linden Venture, LP ("Linden Venture"), which owns and operates the Linden Plant. . NJ Venture, Camden Cogen and Linden Venture are referred to as the Cogen Technologies New Jersey Operating Partnerships or the "NJ Partnerships". . Selkirk LP holds limited partnership interests in Selkirk Cogen Partners, L.P. ("Selkirk Venture"), which owns and operates the Selkirk Plant. CT Global insures certain interests of the Group and the NJ Partnerships. Certain information contained in this summary and elsewhere in this Prospectus, including information with respect to the Company's plans and strategy for its business, are forward-looking statements. Accordingly, prospective investors should carefully consider the factors set forth herein under the caption "Risk Factors" for a discussion of important factors that could cause actual results to differ materially from the forward-looking statements contained in this Prospectus, and investors are encouraged to exercise caution in considering such forward-looking statements. Certain terms, including particularly technical terms relating to the power generation business, are defined under the caption "Glossary" appearing elsewhere in this Prospectus. PROSPECTUS SUMMARY The following information should be read in conjunction with, and is qualified in its entirety by reference to, the more detailed information and the combined financial statements appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus assumes that the Underwriters' over-allotment option in the Common Stock Offering is not exercised. This Prospectus assumes, unless otherwise indicated, the consummation of the Formation Transactions (as defined in "Certain Transactions--Formation Transactions") in describing the Company and in presenting other information in this Prospectus. In order to make distinctions where necessary, references in this Prospectus to identified entities shall have the following meanings: . ""Cogen'' and the "Company" shall mean Cogen Technologies, Inc. and, unless the context otherwise requires, its subsidiaries on a consolidated basis as if the Formation Transactions had been consummated and the Company were the successor to the interests which it will acquire pursuant to the Formation Transactions. . ""subsidiaries'' or the "Company's subsidiaries" shall mean the entities in which Cogen will acquire equity interests pursuant to the Formation Transactions. . ""ventures'' shall mean the ventures or entities in which the subsidiaries have equity interests and which in turn directly own the Company's independent power plants. . The "Company's plants", and the "Company's independent power plants" shall mean independent power plants in which the Company has an interest and that form the core of the Company's business; the same may be referred to singularly, as a "plant". . Cogen Technologies Group (the "Group") refers collectively to (i) McNair Energy Services Corporation ("MESC") and its wholly owned subsidiary, Cogen Technologies NJ, Inc. ("NJ Inc."), (ii) Cogen Technologies Camden, Inc. ("Camden Inc."), (iii) Cogen Technologies Linden, Ltd. ("Linden Ltd."), (iv) CT Global Insurance, Ltd. ("CT Global"), (v) the limited partnership interests in Cogen Technologies Camden GP Limited Partnership ("Camden GPLP") held by the Minority Interests (as defined in "The Company-- Formation") and (vi) Cogen Technologies Selkirk, LP ("Selkirk LP"). . NJ Inc. is the managing partner of Cogen Technologies NJ Venture ("NJ Venture") which owns and operates the Bayonne Plant. Camden Inc. is the general partner of Camden GPLP, which is the general partner of Camden Cogen LP ("Camden Cogen") which owns and operates the Camden Plant. Linden Ltd. is the general partner of Cogen Technologies Linden Venture, LP ("Linden Venture"), which owns and operates the Linden Plant. . NJ Venture, Camden Cogen and Linden Venture are referred to as the Cogen Technologies New Jersey Operating Partnerships or the "NJ Partnerships". . Selkirk LP holds limited partnership interests in Selkirk Cogen Partners, L.P. ("Selkirk Venture"), which owns and operates the Selkirk Plant. CT Global insures certain interests of the Group and the NJ Partnerships. Certain information contained in this summary and elsewhere in this Prospectus, including information with respect to the Company's plans and strategy for its business, are forward-looking statements. Accordingly, prospective investors should carefully consider the factors set forth herein under the caption "Risk Factors" for a discussion of important factors that could cause actual results to differ materially from the forward-looking statements contained in this Prospectus, and investors are encouraged to exercise caution in considering such forward-looking statements. Certain terms, including particularly technical terms relating to the power generation business, are defined under the caption "Glossary" appearing elsewhere in this Prospectus. THE COMPANY The Company is engaged in the development, ownership, operation, acquisition and financing of power generation facilities and the sale of electricity and steam in the United States. The Company currently has interests in four power plants having an aggregate nameplate capacity of 1,382 megawatts. In 1997, these plants produced an aggregate 8,662,000 megawatt hours of electricity and 7,665 million pounds of steam. The Company's principal assets consist of its substantial economic interests in a 715 megawatt capacity Linden, New Jersey, cogeneration plant (the "Linden Plant"), which sells its electric output to The Consolidated Edison Company of New York, Inc. ("Con Ed") under a contract having an initial term expiring in 2017, a 176 megawatt capacity Bayonne, New Jersey, cogeneration plant (the "Bayonne Plant"), which sells its electric output to Jersey Central Power & Light Company ("JCP&L") and Public Service Electric and Gas Company of New Jersey ("PSE&G"), under contracts having initial terms expiring in 2008 and a 146 megawatt capacity Camden, New Jersey, cogeneration plant (the "Camden Plant"), which sells its electric output to PSE&G under a contract having an initial term expiring in 2013. The Company has operating and maintenance responsibility for the three principal plants and has contracted for the day- to-day operation and maintenance of the plants with General Electric Company ("GE"). In addition, the Company has an equity investment in a 345 megawatt capacity Bethlehem, New York cogeneration plant (the "Selkirk Plant"), which is not economically material to the Company. INDUSTRY The Company is a participant in the highly competitive power generation industry, which is among the largest industries in the United States, with an estimated end-user market of over $200.0 billion of electricity sales and annual net generation of approximately 3.5 million gigawatt hours. New regulatory initiatives have been or currently are being adopted or considered at the federal level and in approximately 45 states to increase competition in the domestic power generation industry. In April 1996, the Federal Energy Regulatory Commission ("FERC") adopted Order No. 888, opening wholesale power sales to competition and providing for open and fair electric transmission services by public utilities. At the state level, industry restructuring is well advanced in various states including California, Massachusetts, New York, New Jersey and Pennsylvania. This restructuring includes deregulation of electric utilities and the introduction of customer choice. The regulatory initiatives are expected to lead to the transformation of the existing market, which is largely characterized by electric utility monopolies, having old, inefficient, high-cost generating facilities, selling to a captive customer base, to a more competitive market where end users may purchase electricity from a variety of suppliers, including non-utility generators, power marketers, public utilities and others. The Company believes that these market trends will present substantial opportunities for industry participants that are efficient and low-cost power producers and are able to offer competitive rates to customers. The Company believes that an additional opportunity is presented by the significant deregulation and consolidation now affecting the power industry, which has resulted in substantial divestitures of generation assets by traditional power utilities and by certain independent power producers currently owning relatively few plants. For example, as a result of regulatory initiatives, approximately 14,000 megawatts of New York generating capacity has been announced for sale by utilities. Similar regulatory initiatives in New Jersey and Pennsylvania are expected to cause utilities in those states to pursue similar divestiture plans. At the same time, a number of industrial companies have also announced plans to sell self-generation facilities and to re-deploy the capital in their core businesses. These trends, which the Company believes are likely to continue, should provide significant acquisition opportunities for the Company. The Company also believes that attractive opportunities for development of new generation assets will arise in the next few years, principally due to a projected increase in baseload demand in the Northeast and Mid-Atlantic regions and the retirement of a significant number of existing power generation facilities which are 30 or more years old. THE COMPANY The Company is engaged in the development, ownership, operation, acquisition and financing of power generation facilities and the sale of electricity and steam in the United States. The Company currently has interests in four power plants having an aggregate nameplate capacity of 1,382 megawatts. In 1997, these plants produced an aggregate 8,662,000 megawatt hours of electricity and 7,665 million pounds of steam. The Company's principal assets consist of its substantial economic interests in a 715 megawatt capacity Linden, New Jersey, cogeneration plant (the "Linden Plant"), which sells its electric output to The Consolidated Edison Company of New York, Inc. ("Con Ed") under a contract having an initial term expiring in 2017, a 176 megawatt capacity Bayonne, New Jersey, cogeneration plant (the "Bayonne Plant"), which sells its electric output to Jersey Central Power & Light Company ("JCP&L") and Public Service Electric and Gas Company of New Jersey ("PSE&G"), under contracts having initial terms expiring in 2008 and a 146 megawatt capacity Camden, New Jersey, cogeneration plant (the "Camden Plant"), which sells its electric output to PSE&G under a contract having an initial term expiring in 2013. The Company has operating and maintenance responsibility for the three principal plants and has contracted for the day- to-day operation and maintenance of the plants with General Electric Company ("GE"). In addition, the Company has an equity investment in a 345 megawatt capacity Bethlehem, New York cogeneration plant (the "Selkirk Plant"), which is not economically material to the Company. INDUSTRY The Company is a participant in the highly competitive power generation industry, which is among the largest industries in the United States, with an estimated end-user market of over $200 billion of electricity sales and 3,400 gigawatt hours of production. New regulatory initiatives have been or currently are being adopted or considered at the federal level and in approximately 45 states to increase competition in the domestic power generation industry. In April 1996, the Federal Energy Regulatory Commission ("FERC") adopted Order No. 888, opening wholesale power sales to competition and providing for open and fair electric transmission services by public utilities. At the state level, industry restructuring is well advanced in various states including California, Massachusetts, New York, New Jersey and Pennsylvania. This restructuring includes deregulation of electric utilities and the introduction of customer choice. The regulatory initiatives are expected to lead to the transformation of the existing market, which is largely characterized by electric utility monopolies, having old, inefficient, high-cost generating facilities, selling to a captive customer base, to a more competitive market where end users may purchase electricity from a variety of suppliers, including non-utility generators, power marketers, public utilities and others. The Company believes that these market trends will present substantial opportunities for industry participants that are efficient and low-cost power producers and are able to offer competitive rates to customers. The Company believes that an additional opportunity is presented by the significant deregulation and consolidation now affecting the power industry, which has resulted in substantial divestitures of generation assets by traditional power utilities and by certain independent power producers currently owning relatively few plants. For example, as a result of regulatory initiatives, approximately 14,000 megawatts of New York generating capacity have been sold or offered for sale by utilities. Similar regulatory initiatives in New Jersey and Pennsylvania are expected to cause utilities in those states to pursue similar divestiture plans. At the same time, a number of industrial companies have also announced plans to sell self-generation facilities and to re-deploy the capital in their core businesses. These trends, which the Company believes are likely to continue, should provide significant acquisition opportunities for the Company. The Company also believes that attractive opportunities for development of new generation assets will arise in the next few years, principally due to a projected increase in baseload demand in the Northeast and Mid-Atlantic regions and the retirement of a significant number of existing power generation facilities which are 30 or more years old. STRATEGY The Company's strategy is to maximize cash flow associated with its existing power plants and to grow through expansion of the Company's existing operations and through the acquisition and development of existing or new power generation and related facilities. Specific aspects of this strategy are set-forth below: . Maximize the Value of Existing Assets. The Company's high quality plant and equipment and long duration power sales agreements have provided it with stable long-term cash flow. In order to maintain the quality of these assets, and to further increase margins, the Company's core strategy includes continuous capital investment in current facilities to assure ongoing efficiency consistent with high rates of return on capital. In keeping with these objectives, the Company has systematically pursued technological upgrades and retrofits to existing plants which increase output or operating efficiency. As an example, the capacity of each of the nine gas turbines at the Linden, Camden and Bayonne Plants has been increased by approximately 2.5 megawatts per gas turbine. At the Camden Plant, an inlet chiller system recently was installed which increases the generation capacity of the plant by 32,000 megawatt hours per year. In addition to these improvements, the Company currently is considering a number of technology investments, some of which, if implemented, the Company expects will (i) reduce fuel costs at the Bayonne Plant, (ii) reduce water usage and associated expenses at the Camden Plant, (iii) generate additional steam sales and electrical output through modest expansion and the addition of equipment at the Camden Plant, (iv) reduce water costs at the Linden Plant and (v) increase electrical output through the use of chilled water equipment improvements at the Linden Plant. The Company will continue to seek to add value to its existing projects and its customers through mutually negotiated contractual and operating changes such as those changes successfully negotiated to Linden Venture's power purchase agreement with Con Ed in September 1990 and December 1993. The Company will continue to monitor, revise and replace its fuel supply arrangements to obtain a balance between immediate savings in gas and transportation costs and the need to maintain regular and secure relationships with various gas producers and transporters of gas. . Expand Existing Plants. The Company believes that all three of the plants in which it has a substantial economic interest are capable of being expanded not only through additions to existing plants but also through the development and construction of new power plant facilities at the existing sites. In this regard, the Company has permit applications pending and presently is engaged in advanced strategic design work with respect to the addition of a new 250 megawatt unit at the Linden Plant with a view to utilizing such plant's direct interconnect with Con Ed in New York City. With respect to the Bayonne Plant, the Company is considering the installation of a new power facility at that location. . Pursue Domestic Electricity Generation Acquisitions and Other Opportunities. The Company believes that it will have ample opportunities to grow its operations through acquisitions, development of new assets and through other means, whether on its own or through partnerships with companies that have complementary skills. This strategy is based on the Company's view that baseload demand for power will increase over the next few years, and that retirement of a significant number of existing plants will further spur the need for additional capacity. In addition, a number of utilities in the Northeastern United States have announced plans to divest power generating assets, including Con Ed, General Public Utilities, New York State Electric and Gas, and Niagara Mohawk Power Company. This development, together with expected further consolidation in the independent power industry, may offer the Company a number of opportunities to grow its business by making strategically significant acquisitions, with an initial focus in the Northeast. Longer term, the Company intends to continue to consider opportunities for new developments of power generation facilities in the Northeast and elsewhere in the United States. The Company has no plans for expansion into the international arena. STRATEGY The Company's strategy is to maximize cash flow associated with its existing power plants and to grow through expansion of the Company's existing operations and through the acquisition and development of existing or new power generation and related facilities. Specific aspects of this strategy are set-forth below: . Maximize the Value of Existing Assets. The Company's high quality plant and equipment and long duration power sales agreements have provided it with stable long-term cash flow. In order to maintain the quality of these assets, and to further increase margins, the Company's core strategy includes continuous capital investment in current facilities to assure ongoing efficiency consistent with high rates of return on capital. In keeping with these objectives, the Company has systematically pursued technological upgrades and retrofits to existing plants which increase output or operating efficiency. As an example, the capacity of each of the nine gas turbines at the Linden, Camden and Bayonne Plants has been increased by approximately 2.5 megawatts per gas turbine. At the Camden Plant, an inlet chiller system recently was installed which increases the generation capacity of the plant by 32,000 megawatt hours per year. In addition to these improvements, the Company currently is considering a number of technology investments, some of which, if implemented, the Company expects will (i) reduce fuel costs at the Bayonne Plant, (ii) reduce water usage and associated expenses at the Camden Plant, (iii) generate additional steam sales and electrical output through modest expansion and the addition of equipment at the Camden Plant, (iv) reduce water costs at the Linden Plant and (v) increase electrical output through the use of chilled water equipment improvements at the Linden Plant. The Company will continue to seek to add value to its existing projects and its customers through mutually negotiated contractual and operating changes such as those changes successfully negotiated to Linden Venture's power purchase agreement with Con Ed in September 1990 and December 1993. The Company will continue to monitor, revise and replace its fuel supply arrangements to obtain a balance between immediate savings in gas and transportation costs and the need to maintain regular and secure relationships with various gas producers and transporters of gas. . Expand Existing Plants. The Company believes that all three of the plants in which it has a substantial economic interest are capable of being expanded not only through additions to existing plants but also through the development and construction of new power plant facilities at the existing sites. In this regard, the Company has permit applications pending and presently is engaged in advanced strategic design work with respect to the addition of a new 250 megawatt unit at the Linden Plant with a view to utilizing such plant's direct interconnect with Con Ed in New York City. With respect to the Bayonne Plant, the Company is considering the installation of a new power facility at that location. . Pursue Domestic Electricity Generation Acquisitions and Other Opportunities. The Company believes that it will have ample opportunities to grow its operations through acquisitions, development of new assets and through other means, whether on its own or through partnerships with companies that have complementary skills. This strategy is based on the Company's view that baseload demand for power will increase over the next few years, and that retirement of a significant number of existing plants will further spur the need for additional capacity. In addition, a number of utilities in the Northeastern United States have announced plans to divest power generating assets, including Con Ed, General Public Utilities, New York State Electric and Gas, and Niagara Mohawk Power Company. This development, together with expected further consolidation in the independent power industry, may offer the Company a number of opportunities to grow its business by making strategically significant acquisitions, with an initial focus in the Northeast. Longer term, the Company intends to continue to consider opportunities for new developments of power generation facilities in the Northeast and elsewhere in the United States. The Company has no plans for expansion into the international arena. The Company believes that the following competitive strengths will aid in the successful implementation of its strategy: . Efficient and Reliable Power Projects. The Company's three principal plants have well-established and consistent records of service to their customers. The average availability for all of these plants has exceeded 92% since placed in operation. This record of service is principally the result of the highly reliable combined-cycle technology, which generally is significantly more efficient than that of a majority of the existing utility generating facilities in the region, together with the operations and maintenance practices of the Company. . Favorable Contracts and Stable Cash Flow. The utility power purchase contracts relating to the Company's three principal plants have long-term remaining lives, with expirations ranging from 2008 to 2017. For example, the Linden Plant has nameplate electric capacity of 715 megawatts and represents approximately 70% of the Company's power generating assets. Linden Venture has a power purchase agreement which expires in the year 2017. In addition, all of the Company's existing power purchase agreements are with large utilities which presently have investment grade senior debt ratings. The Company's principal power plants historically have provided a consistent and substantial cash flow to equity holders due to the fixed payment components of the power purchase contracts which have provided favorable margins over the ventures' fixed operating and financing costs. Moreover, the variable energy payment components of such agreements, which provide the second major component of pricing under such agreements, have historically been well correlated to fuel costs at the Bayonne and Camden Plants and have reflected a partial pass-through mechanism for fuel expenses at the Linden Plant. . Environmental Considerations. The Company's existing plants principally burn natural gas, which is a clean burning fuel, and they employ advanced environmental technology which makes them among the cleanest in the industry. The existing plants also are operated in compliance with applicable state and federal environmental regulations. . Regional Expertise in Northeast Power Markets. As a result of the location of its existing assets and its active involvement in industry restructuring, the Company has developed significant expertise in Northeastern power markets. This expertise could provide the Company with a competitive advantage in pursuing additional opportunities within the region. . Experienced Management. The Company's senior management team, led by the founder of the Company's predecessor companies, Robert C. McNair, has an aggregate of over 117 years of experience in the energy industry. The Company currently operates plant and equipment that is widely viewed to be among the safest and most environmentally advanced in the industry. The Company's philosophy is to maintain a small, well-qualified management team with expertise in all aspects of the independent power business, to actively participate in a broad range of regulatory affairs governing the industry and to retain additional experts in connection with the construction, maintenance and operation of its plants. . Strong Financial Position. The Company believes that its high quality assets, its federal income tax position and its long duration power supply contracts provide it with the financial strength to access the capital markets to obtain the capital needed to fund execution of its strategic plan. The Company believes that the following competitive strengths will aid in the successful implementation of its strategy: . Efficient and Reliable Power Projects. The Company's three principal plants have well-established and consistent records of service to their customers. The average availability for all of these plants has exceeded 92% since placed in operation. This record of service is principally the result of the highly reliable combined-cycle technology, which generally is significantly more efficient than that of a majority of the existing utility generating facilities in the region, together with the operations and maintenance practices of the Company. . Favorable Contracts and Stable Cash Flow. The utility power purchase contracts relating to the Company's three principal plants have long-term remaining lives, with expirations ranging from 2008 to 2017. For example, the Linden Plant has nameplate electric capacity of 715 megawatts and represents approximately 70% of the Company's power generating assets. Linden Venture has a power purchase agreement which expires in the year 2017. In addition, all of the Company's existing power purchase agreements are with large utilities which presently have investment grade senior debt ratings. The Company's principal power plants historically have provided a consistent and substantial cash flow to equity holders due to the fixed payment components of the power purchase contracts which have provided favorable margins over the ventures' fixed operating and financing costs. Moreover, the variable energy payment components of such agreements, which provide the second major component of pricing under such agreements, have historically been well correlated to fuel costs at the Bayonne and Camden Plants and have reflected a partial pass-through mechanism for fuel expenses at the Linden Plant. . Environmental Considerations. The Company's existing plants principally burn natural gas, which is a clean burning fuel, and they employ advanced environmental technology which makes them among the cleanest in the industry. The existing plants also are operated in compliance with applicable state and federal environmental regulations. . Regional Expertise in Northeast Power Markets. As a result of the location of its existing assets and its active involvement in industry restructuring, the Company has developed significant expertise in Northeastern power markets. This expertise could provide the Company with a competitive advantage in pursuing additional opportunities within the region. . Experienced Management. The Company's senior management team, led by the founder of the Company's predecessor companies, Robert C. McNair, has an aggregate of over 117 years of experience in the energy industry. The Company currently operates plant and equipment that is widely viewed to be among the safest and most environmentally advanced in the industry. The Company's philosophy is to maintain a small, well-qualified management team with expertise in all aspects of the independent power business, to actively participate in a broad range of regulatory affairs governing the industry and to retain additional experts in connection with the construction, maintenance and operation of its plants. . Disciplined Management Approach. The Company's management team has a demonstrated track record in developing innovative financial structures for its investments and has well-established criteria which govern its approach to both development of new plants and acquisitions. . Strong Financial Position. The Company believes that its high quality assets, its federal income tax position and its long duration power supply contracts provide it with the financial strength to access the capital markets to obtain the capital needed to fund execution of its strategic plan. FORMATION Cogen was incorporated in May 1998 at the instance of Robert C. McNair to acquire operating control of three entities operating independent power plants in New Jersey, together with an indirect equity interest in a fourth plant operating in New York. Prior to the consummation of the Formation Transactions, the Cogen ownership interests in the plants were 82% beneficially owned by Mr. McNair and members of his family, and by entities controlled by his family (the "McNair Interests"). The remaining 18% of such interests was beneficially held by other persons or entities (the "Minority Interests") with no relation to the McNair Interests. Upon consummation of the Formation Transactions, Cogen will own the interests in the subsidiaries held by the McNair Interests and the Minority Interests. See "Certain Transactions--Formation Transactions". The following chart sets forth, in a simplified manner, the organizational structure of the Company with respect to its interests in the ventures owning the plants immediately following the consummation of the Formation Transactions, eliminating certain intermediate entities that may be formed to hold various interests. [POST FORMATION TRANSACTIONS STRUCTURE CHART APPEARS HERE] - -------- (1) See "Existing Venture and Plant Descriptions" for information as to the partnership distributions relating to each of the ventures. (2) Will be owned by the McNair Interests after the consummation of the Formation Transactions. DIVIDEND POLICY Cogen plans to pay dividends on the Common Stock of approximately $ per share per quarter. During the initial years of the Company's operations, dividends with respect to the Common Stock are expected to exceed the share of the current and accumulated earnings and profits of the Company allocable to the holders of the Common Stock (as determined for United States federal income tax purposes). In such a case, such excess generally would be treated as a tax- free return of capital up to a holder's basis in such holder's shares of Common Stock and as capital gain thereafter. See "Dividend Policy". The Company's principal executive office is located at 711 Louisiana, 33rd Floor, Houston, Texas 77002, and its telephone number is 713/336-7700. FORMATION Cogen was incorporated in May 1998 at the instance of Robert C. McNair to acquire operating control of three entities operating independent power plants in New Jersey, together with an indirect equity interest in a fourth plant operating in New York. Prior to the consummation of the Formation Transactions, the Cogen ownership interests in the plants were 82% beneficially owned by Mr. McNair and members of his family, and by entities controlled by his family (the "McNair Interests"). The remaining 18% of such interests was beneficially held by other persons or entities (the "Minority Interests") with no relation to the McNair Interests. Upon consummation of the Formation Transactions, Cogen will own the interests in the subsidiaries held by the McNair Interests and the Minority Interests. See "Certain Transactions--Formation Transactions". The following chart sets forth, in a simplified manner, the organizational structure of the Company with respect to its interests in the ventures owning the plants immediately following the consummation of the Formation Transactions, eliminating certain intermediate entities that may be formed to hold various interests. [POST FORMATION TRANSACTION STRUCTURE CHART APPEARS HERE] - -------- (1) See "Existing Venture and Plant Descriptions" for information as to the partnership distributions relating to each of the ventures. (2) Will be owned by the McNair Interests after the consummation of the Formation Transactions. DIVIDEND POLICY Cogen plans to pay dividends on the Common Stock of approximately $ per share per quarter. During the initial years of the Company's operations, dividends with respect to the Common Stock are expected to exceed the share of the current and accumulated earnings and profits of the Company allocable to the holders of the Common Stock (as determined for United States federal income tax purposes). In such a case, such excess generally would be treated as a tax- free return of capital up to a holder's basis in such holder's shares of Common Stock and as capital gain thereafter. See "Dividend Policy".
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+PROSPECTUS SUMMARY Simultaneously with and as a condition to the closing of this Offering, Enfinity Corporation will acquire, in separate transactions (the 'Mergers') in exchange for cash and shares of its Common Stock, all of the common stock of and ownership interests in eight energy and indoor environmental systems and services companies (each, a 'Founding Company' and, collectively, the 'Founding Companies'). Unless otherwise indicated, all references to the 'Company' herein include the Founding Companies, and references to 'Enfinity' mean Enfinity Corporation prior to the consummation of the Mergers. For more information about the Mergers, see 'Certain Transactions.' The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements and related notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, all share, per share and financial information in this Prospectus: (i) has been adjusted to give effect to the Mergers; (ii) assumes no exercise of the Underwriters' over-allotment option; (iii) gives effect to a 36,804.93-for-1 stock split effected in the form of a stock dividend on July 9, 1998; and (iv) assumes an initial public offering price per share of $13.50. See 'Description of Capital Stock.' THE COMPANY Enfinity was formed by the Founding Companies to become the premier provider of energy and indoor environmental systems and services to commercial, industrial and institutional clients. The Company provides a broad range of services throughout the life cycle of a client's energy and indoor environmental systems, including: (i) maintenance, repair and replacement; (ii) design, engineering and installation; and (iii) on-site and off-site management of building systems, including control and monitoring systems. Seven of the eight Founding Companies have worked together in industry peer groups for over 10 years. All of the Founding Companies are 'best-of-class' service providers with specialized and complementary expertise and have been recognized by industry organizations for their high quality service and innovative client solutions. Six of the eight Founding Companies have been named 'Commercial Contractor of the Year,' an award presented annually by Contracting Business magazine to the most progressive and professional organization in the commercial heating, ventilation and air-conditioning ('HVAC') business. The Company has established strategic partnerships with several energy providers and financial institutions as a means to provide innovative and cost effective energy and indoor environmental solutions to its clients. The Founding Companies had combined revenues of $364.8 million for fiscal year 1997, representing a compound annual growth rate of 21.9% from fiscal year 1995. The commercial, industrial and institutional HVAC and related services industry is large, growing and highly fragmented. In 1996, over 10,000 companies provided over $35 billion in commercial, industrial and institutional HVAC services. Factors fueling the growth of the industry include: (i) an increasing focus on air quality and internal environmental control in a growing number of sealed commercial buildings; (ii) the aging of the installed base of energy and indoor environmental systems, which has increased the demand for maintenance, repair and replacement services; (iii) the increasing automation, sophistication and complexity of energy and indoor environmental systems; (iv) government restrictions on the use of refrigerants commonly used in older energy and indoor environmental systems; (v) a desire by companies to outsource their energy and indoor environmental services as they focus on their core competencies; and (vi) an increasing focus by companies on managing costs and achieving energy savings by replacing less efficient systems. An important factor affecting the energy and environmental services industry is the deregulation of the U.S. gas and electric utility industries. As these industries become further deregulated, the Company anticipates that utilities and other energy providers will continue to establish strategic partnerships with providers of energy and indoor environmental systems and services in order to attract utility customers in an increasingly competitive market. These partnerships offer customers a broad range of services and utilities on a variable cost per unit basis without the need for customers to make significant capital expenditures on energy and indoor environmental systems. The Company believes that these strategic partnerships will decrease energy costs and improve marketing and customer service, resulting in increased demand for energy and indoor environmental systems and services. The Company's goal is to create the leading national provider of energy and indoor environmental systems and services for commercial, industrial and institutional clients. In order to achieve this goal, the Company's business strategy is focused on the following key principles: (i) creating a single source provider of energy and indoor environmental systems and services; (ii) leveraging Founding Company engineering and technical expertise; (iii) focusing on high quality client service; (iv) attracting, training and retaining highly qualified technicians and engineers; and (v) operating with a decentralized management strategy. INTERNAL GROWTH STRATEGY. While the Company intends to acquire additional energy and indoor environmental systems and services companies, strong internal growth remains the foundation of the Company's growth strategy. The Company believes it will be able to increase its revenues from existing clients by taking advantage of cross-selling opportunities among the Founding Companies and other acquired companies. Through interaction at industry peer group meetings and their reputations as 'best-of-class' service providers, certain of the Founding Companies have already begun to leverage their client relationships by recommending each other for significant business opportunities. The Company also believes that it can produce strong internal growth by expanding market coverage to provide energy and indoor environmental systems and services on a regional and national basis and achieving operating efficiencies through best practices and economies of scale. STRATEGIC PARTNERSHIPS. The Company will seek to form additional strategic relationships with energy providers and financial institutions to satisfy the full range of a client's energy and indoor environmental systems needs. For example, the Company and its strategic partners may: (i) provide a client with gas, electrical power, cooled air or water, heat or lighting; (ii) design, install and maintain the client's energy and indoor environmental systems; (iii) operate central energy plants; (iv) provide financing for the design, engineering and installation of new energy and environmental systems; and (v) monitor the indoor air quality of the client's facility. The Company anticipates that these partnerships will result in lower energy costs and greater client satisfaction as a client's full range of energy and indoor environmental systems and services needs are provided and paid for through a single source. By creating an attractive alternative to the traditional means of satisfying a client's needs, the Company believes that strategic partnerships will provide the Company with an advantage over many of its competitors, additional business opportunities and increased revenues. GROWTH THROUGH ACQUISITIONS. The Company intends to capitalize on the highly fragmented nature of the energy and indoor environmental systems and services industry by implementing a strategic acquisition program following this Offering. The Company will seek to acquire companies that are 'best-of-class' local or regional providers of energy and indoor environmental systems and services. In order to identify 'best-of-class' providers, the Company will look for, among other things, companies that: (i) have annual revenues of at least $8 million and a strong history of internal growth; (ii) have core competencies that complement or add to the Company's services; (iii) have a reputation for high levels of client service; and (iv) are constantly seeking new ways to improve their business. The Company believes that 'best-of-class' companies demonstrate the foregoing characteristics and each is generally a premier provider of energy and indoor environmental systems and services in the market it serves. Together with the Founding Companies, such acquisition targets will expand the Company's geographic presence and serve as platforms for further growth and consolidation and will have the client base, technical skills and infrastructure necessary to be a core business into which other companies can be consolidated. The Company also will attempt to leverage the existing infrastructure by pursuing 'tuck-in' acquisitions of smaller companies whose operations can be integrated into a platform company. In addition, the Company will selectively seek to acquire other well-established businesses that provide services complementary to those provided by the Company in order to expand its market penetration and range of services offered. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company............................ 8,000,000 shares Common Stock to be outstanding after this Offering............. 17,345,452 shares(1) Use of proceeds................................................ To pay the cash portion of the purchase price for the Founding Companies, to repay certain indebtedness of the Founding Companies, to pay certain other amounts provided for under the agreements relating to the Mergers and for working capital and other general corporate purposes, including future acquisitions.(2) Proposed New York Stock Exchange symbol........................ BTU </TABLE> - ------------ (1) Includes 8,243,971 shares of Common Stock to be issued in connection with the Mergers at a value per share of $10.80 due to restrictions on transferability, but excludes 2,341,635 shares of Common Stock reserved for issuance pursuant to the Company's 1998 Long-Term Incentive Plan, of which options to purchase 1,760,883 shares will be granted by the Company concurrently with the consummation of the Mergers and this Offering. See 'Management -- 1998 Long-Term Incentive Plan,' 'Certain Transactions -- Organization of the Company' and 'Shares Eligible for Future Sale.' (2) Includes approximately $79.6 million (subject to adjustment) to be used to pay the cash portion of the purchase price for the Founding Companies; approximately $6.3 million to be used to pay indebtedness, accrued expenses and other liabilities assumed in connection with the Mergers; and approximately $8.0 million to be used to pay S Corporation distributions, to redeem preferred stock of one of the Founding Companies and to pay certain amounts representing excess working capital as provided in the agreements relating to the Mergers ('Excess Working Capital'). See 'Use of Proceeds.'
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001061586_abi_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001061586_abi_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and consolidated financial statements and notes thereto appearing elsewhere in this Prospectus. Prospective investors should read this Prospectus in its entirety. This Prospectus contains certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, such as statements relating to the financial condition and prospects, loan loss reserve adequacy, Year 2000 readiness, simulation of changes in interest rates, results of operations, plans for future business development activities, capital spending and financing sources, capital structure, the effects of regulation and competition, and the business of the Company. Where used in this Prospectus, the words "anticipate", "believe", "estimate", "expect", "intend", and similar words and expressions, as they relate to the Issuer Trust, the Company, or the management of the Company, identify forward-looking statements. Such forward-looking statements reflect the current views of the Issuer Trust and the Company and are based on information currently available to the management of the Company and upon current expectations, estimates, and projections about the Issuer Trust, the Company and its industry, management's beliefs with respect thereto, and certain assumptions made by management. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors which could cause actual results to differ materially from those expressed or implied by such forward-looking statements as a result of various factors. Potential risks and uncertainties include, but are not limited to: (i) competitive pressure in the banking and financial services industries increasing significantly; (ii) changes in the interest rate environment which reduce margins; (iii) changes in political conditions or changes occurring in the legislative or regulatory environment; (iv) general economic conditions, either nationally or regionally, becoming less favorable than expected resulting in, among other things, a deterioration in credit quality; (v) changes occurring in business conditions and inflation; (vi) acquisitions and integration of acquired businesses or assets; (vii) changes in technology; (viii) changes in monetary and tax policies, (ix) changes occurring in the securities markets; and (x) other risks and uncertainties detailed from time to time in the filings of the Company with the Commission. THE COMPANY AND THE BANK AMERICAN BANCSHARES, INC. The Company is a Florida corporation and a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the "BHCA"), headquartered in Bradenton, Florida. The Company's primary subsidiary and principal asset is American Bank (the "Bank"). Through its ownership of the Bank, the Company is engaged in a general commercial banking and related business. In addition to the Bank, the Company also owns a finance company subsidiary which only recently has commenced operations. Unless the context otherwise requires, references to the Company herein include the Company and the Bank on a consolidated basis. The principal executive offices of the Company is located at 4502 Cortez Road West, Bradenton, Florida 34210, and its telephone number is (941) 795-3050. AMERICAN BANK The Bank, which commenced operations in May 1989 as a Florida state-chartered banking corporation, was formed by local business persons who identified the need for a consumer-oriented independent community bank in Manatee County, Florida to serve its growing population and expanding business base. It was their belief that the large banking institutions located in this area were inflexible, slow in their decision-making processes, and not meeting the banking needs of individuals and small-to-medium sized businesses. They recognized the opportunity to build a profitable banking business through the establishment of a local banking institution operated by local business persons and by experienced banking personnel who are familiar with the community and are dedicated to providing fast, efficient, and personalized service to the market area. Consistent with this objective, the Bank sought after and attracted experienced bank personnel, most of whom reside in the area, know the Bank's customers, and are able to provide them with personalized service. Further, the Board of Directors of both the Company and the Bank have been comprised of local business persons who actively promote the Bank in the community. As a result of the implementation of this strategy, the Bank experienced rapid growth which was financed through a series of equity offerings primarily supported by local investors who, in turn, provided additional capital to the Bank, broadened the community's awareness of the Bank, and attracted new business. In 1994, the Bank added a mortgage banking division to originate, close, and service fixed and adjustable rate construction-to-permanent residential real estate mortgage loans which are generally sold in the secondary mortgage market. In late 1995, the Bank implemented a growth strategy to expand its operations geographically, to expand its product and services and to penetrate additional segments of the financial services market. In order to finance this growth strategy, the Company was formed for the purpose of owning the Bank and conducting a public offering of the Company's common stock, which offering was completed in early 1996. Since its initial public offering, the Company has implemented its growth strategy by: - Adding 4 new branch locations which has expanded the Bank's operations within Manatee County and into Hillsborough County. - Palma Sola branch (Manatee) was opened in March 1996 - Whitfield branch (Manatee) was opened in September 1996 - Palmetto branch (Manatee) was opened in June 1997 - Ruskin branch (Hillsborough) was opened in April 1998 - Acquiring DesChamps & Gregory, Inc. ("DesChamps") in January 1997, a Bradenton-based mortgage brokerage company which originates retail residential mortgage loans. - Entering into an arrangement with Advest, Inc. in March 1997 to make trust services available to the Bank's customers. - Acquiring Murdock Florida Bank, a Florida state banking corporation ("Murdock") in March 1998, which has been converted into a branch of the Bank and has expanded the Bank's operations into Charlotte County. - Forming and, in March 1998, commencing the operations of Freedom Finance Company, a Florida corporation and wholly-owned subsidiary of the Company ("Finance Company") to provide consumer finance products and services. - Making available to its customers computer-based home banking services commencing in September 1997. The Company also has constructed a new administrative office facility to centralize its operations by combining in one location the Company's administrative personnel, its consumer lending operations, the mortgage banking and residential lending operations, and its credit card and human resources departments. The Company has achieved its growth while maintaining its credit quality standards, as is reflected by its low ratios of delinquencies and losses to total loan portfolio and to assets. As a result of the successful implementation of its strategies, the Company has established a special niche in its market area which fills the needs of a significant segment of that market. The consumer-oriented community banking focus of the Bank provides customers with locally-based decision makers who are familiar with their customers, their business environment, and competitive demands, who are able to quickly evaluate and respond to loan applications, and who have the ability to craft personalized banking solutions to the customer's needs without extensive bureaucratic delays. Due to the growth of the Bank, it is able to extend larger credits than other community-based financial institutions. From its eight retail banking branches located in Manatee, Charlotte, and Hillsborough counties in Florida, the Bank offers a broad range of corporate and personal banking services to individuals and small to mid-sized businesses. The Bank places a special emphasis on the importance of individualized attention to its customers by offering loan and deposit products tailored to meet the needs of its customers. In addition, the Bank offers customized accounts receivable financing and billing services, and credit card merchant services. The Bank's deposits are insured up to the applicable limits by the Federal Deposit Insurance Corporation (the "FDIC") and the Bank is a member of the Federal Home Loan Bank of Atlanta ("FHLB"). The principal executive office of the Bank is 4702 Cortez Road West, Bradenton, 34210, and its telephone number is (941) 795-3050. GROWTH AND EXPANSION At December 31, 1995, the quarter-end prior to the Company's initial public offering, and at March 31, 1998, the Company had total assets of approximately $219.0 and $379.2 million, respectively, or a 73% increase, net portfolio loans of approximately $138.1 and $230.5 million, respectively, or a 67% increase, total deposits of approximately $186.7 and $316.6 million, respectively, or a 70% increase, and shareholders' equity of approximately $14.6 and $26.4 million, respectively, or an 81% increase. The Company intends to continue its geographic and product expansion while maintaining its community banking focus and preserving its market niche. The Company also will seek opportunities to further expand its operations into other segments of the financial services markets that it believes will be beneficial to its growth strategy. The Company intends to expand its presence along the west coast of Florida through internal growth, branching, and strategic acquisitions. Management believes that there are branching and acquisition opportunities available for further expansion of its geographic market both in the areas existing between its current branches and in other areas along the west coast of Florida. Of course, branching activities and acquisitions involve certain upfront start-up and acquisition related expenses which are not recovered until several months after the opening of the branch or consummation of the acquisition. Accordingly, the Company's short-term profitability and efficiency ratios have been adversely affected by its growth strategy. As these branches recover such upfront costs, profitability measurements should improve and, as a result of the Bank's increasing asset base, each additional branch established by the Bank should have less impact on the short-term profitability of the Company as a whole. ABI CAPITAL TRUST The Issuer Trust is a statutory business trust created under Delaware law on May 21, 1998. The Issuer Trust will be governed by a trust agreement ("Trust Agreement"), as amended and supplemented from time to time, among the Company, as Depositor, Bankers Trust (Delaware), as Delaware trustee ("Delaware Trustee"), and Bankers Trust Company, as property trustee ("Property Trustee") (the Delaware Trustee and Property Trustee together, the "Trustees"). The Issuer Trust exists for the exclusive purpose of (i) issuing and selling the Trust Securities, (ii) using the proceeds from the sale of the Trust Securities to acquire the Junior Subordinated Debentures issued by the Company, and (iii) engaging in only those other activities necessary, convenient, or incidental thereto (such as registering the transfer of the Trust Securities). Accordingly, the Junior Subordinated Debentures will be the sole assets of the Issuer Trust, and payments under the Junior Subordinated Debentures will be the sole source of revenue of the Issuer Trust. The Issuer Trust has a term of 31 years unless earlier terminated as provided in the Trust Agreement. The principal executive offices of the Issuer Trust is 4502 Cortez Road West, Bradenton, Florida 34210, and its telephone number is (941) 795-3050. THE OFFERING Securities Offered......... $15,000,000 aggregate Liquidation Amount of Preferred Securities representing preferred undivided beneficial interests in the Issuer Trust's assets, which will consist solely of the Junior Subordinated Debentures. The Issuer Trust has granted the Underwriter an option, exercisable within 30 days after the date of this Prospectus, to purchase up to an additional $2,250,000 aggregate Liquidation Amount of Preferred Securities at the offering price, solely to cover over-allotments, if any. Offering Price............. $10 per Preferred Security (Liquidation Amount $10), plus accumulated Distributions, if any, from June 26, 1998. Distributions.............. The Distributions payable on each Preferred Security will be fixed at a rate per annum of % of the stated Liquidation Amount per Preferred Security. Such distributions will be cumulative, will accrue from June 26, 1998 (the date of issuance of the Preferred Securities), and will be payable quarterly in arrears on March 31, June 30, September 30, and December 31 of each year, commencing September 30, 1998. See "Description of Preferred Securities -- Distributions". Preferred Securities Rank....................... The Preferred Securities will rank pari passu, and payments thereon, will be made pro rata, with the Common Securities except as described under "Description of Preferred Securities -- Subordination of Common Securities". Junior Subordinated Debentures............... The Issuer Trust will invest the proceeds from the issuance of the Preferred Securities and Common Securities in an equivalent amount of % Junior Subordinated Debentures of the Company. The Junior Subordinated Debentures will mature on June 30, 2028, subject to the Maturity Adjustment. The Junior Subordinated Debentures will rank subordinate and junior in right of payment to all Senior Indebtedness of the Company. In addition, the Company's obligations under the Junior Subordinated Debentures will be structurally subordinated to all existing and future liabilities and obligations of the Company's subsidiaries. Guarantee.................. Under the terms of the Guarantee, the Company has guaranteed the payment of Distributions and payments on liquidation or redemption of the Preferred Securities, but only in each case to the extent of funds held by the Issuer Trust, as described herein. The Company and the Issuer Trust believe that the obligations of the Company under the Guarantee, the Trust Agreement, the Junior Subordinated Debentures, and the Junior Subordinated Indenture, when taken together, fully, irrevocably, and unconditionally guarantee all of the Issuer Trust's obligations relating to the Preferred Securities. The obligations of the Company under the Guarantee and the Preferred Securities are subordinate and junior in right of payment to all Senior Indebtedness. See "Description of Guarantee". Right to Defer Interest.... The Company has the right, at any time, so long as no Debenture Event of Default has occurred and is continuing, to defer payments of interest on Junior Subordinated Debentures for a period not exceeding 20 consecutive quarters; provided, that no Extension Period may extend beyond the Stated Maturity of the Junior Subordinated Debentures. As a consequence of the Company's extension of the interest payment period, quarterly Distributions on the Preferred Securities will be deferred (though such Distributions would continue to accrue with interest thereon compounded quarterly, since interest will continue to accrue and compound on the Junior Subordinated Debentures during any such Extension Period). During an Extension Period, the Company will be prohibited, subject to certain exceptions described herein, from declaring or paying any cash distributions with respect to its capital stock or debt securities that rank pari passu with or junior to the Junior Subordinated Debentures. Upon the termination of any Extension Period and the payment of all amounts then due, the Company may commence a new Extension Period, subject to the foregoing requirements. See "Description of Junior Subordinated Debentures -- Option to Extend Interest Payment Period". In the event that an Extension Period should occur, Preferred Security holders will continue to include interest income (and de minimis original issue discount, if any) for United States federal income tax purposes in advance of receipt of the cash distributions with respect to such deferred interest payments. See "Certain Federal Income Tax Consequences -- Interest Income and Original Issue Discount". The Company has no current intention of exercising its right to defer payments of interest by extending the interest payment period of the Junior Subordinated Debentures. Redemption................. The Preferred Securities are subject to mandatory redemption (i) in whole, but not in part, at the Stated Maturity upon repayment of the Junior Subordinated Debentures, (ii) in whole, but not in part, contemporaneously with the optional redemption at any time by the Company of the Junior Subordinated Debentures upon the occurrence and continuation of a Tax Event, Investment Company Event, or Capital Treatment Event, and (iii) in whole or in part at any time on or after June 30, 2003, contemporaneously with the optional redemption by the Company of the Junior Subordinated Debentures in whole or in part, in each case at the applicable Redemption Price. See "Description of Preferred Securities -- Redemption". Liquidation of the Issuer Trust............. The Company, as holder of the Common Securities, has the right at any time to dissolve the Issuer Trust and cause the Junior Subordinated Debentures to be distributed to holders of Preferred Securities in liquidation of the Issuer Trust, subject to the Company having received prior approval of the FRB to do so if then required under applicable capital guidelines or policies of the FRB. See "Description of Preferred Securities -- Liquidation Distribution Upon Dissolution". Voting Rights.............. Generally, except in limited circumstances, the holders of the Preferred Securities will not have any voting rights. See "Description of Preferred Securities -- Voting Rights; Amendment of Trust Agreement" and "Risk Factors -- Risk Factors Relating to the Offering -- Limited Voting Rights". Use of Proceeds............ All of the net proceeds to the Issuer Trust from the sale of the Preferred Securities offered hereby will be used by the Issuer Trust to purchase the Junior Subordinated Debentures issued by the Company. The net proceeds received by the Company from the sale of the Junior Subordinated Debentures will be used for general corporate purposes which may include, among other things, contributions to the Bank to support its growth, branch acquisitions, acquisitions of other financial institutions by either the Company or the Bank, acquisitions of other financial service companies, and for working capital. In addition, a portion of the proceeds may be contributed through investments in or advances to the Bank or other subsidiaries of the Company to support mutual growth opportunities. It also is anticipated that a portion of the proceeds will be used to retire all or a part of the Company's outstanding indebtedness under a line of credit used to finance the construction of its administrative offices. As of May 31, 1998, approximately $2.55 million has been borrowed under this credit facility. The Trust Securities will qualify as Tier 1 or core capital of the Company, subject to the 25% Capital Limitation (as defined herein), under the risk-based capital guidelines of the FRB. The portion of the Trust Securities that exceeds the 25% Capital Limitation will qualify as Tier 2 or supplemental capital of the Company. See "Use of Proceeds".
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001061646_bindview_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001061646_bindview_prospectus_summary.txt
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+SUMMARY Because this is only a summary, it does not contain all the information that may be important to you. You should read the entire Prospectus, especially "Risk Factors" and the Consolidated Financial Statements and Notes, before deciding to invest in shares of our common stock. THE COMPANY Our Business............BindView develops, markets and supports a suite of systems management software products which manage the security and integrity of complex, distributed client/server networks operating on Microsoft Windows NT and Novell NetWare environments. Our primary product line, BindView EMS, provides software solutions for systems administration, security management, enterprise inventory of local area network ("LAN") assets and Year 2000 assessment of PC hardware and software. Network administrators, security auditors and other information technology ("IT") personnel use BindView EMS to proactively identify, diagnose and, in many cases, fix a wide range of systems management problems. BindView EMS allows organizations to reduce the total cost of ownership of enterprise computing. Our Market..............The use of distributed, client/server networks has grown tremendously in the last ten years with the increase in PC-based LANs being one of the fastest growing aspects of the client/server market. These LANs depend largely on servers running network operating systems provided by Microsoft and Novell. As these LANs have grown larger and more complex, the problems associated with maintaining their security and integrity have increased and become more difficult for IT departments to manage. As a result, network security and integrity are increasingly at risk, and the total cost of ownership for client/ server computing has often climbed far beyond management's expectations. The market for systems management software to address these issues is growing rapidly. IDC projects this market for the Windows and NetWare platforms to grow to over $4.6 billion by the year 2000, with security management software for Windows NT Server and NetWare accounting for $640 million of the total. Our Products............Our comprehensive suite of systems management software products enables IT organizations to manage the increasingly complex issues associated with managing the security and integrity of the LAN environment in a cost- effective manner. We built BindView EMS to be native to each of the Windows NT and Novell NetWare platforms that it supports. We also designed it to manage workgroup LANs as well as enterprise-wide networks of tens of thousands of users. Our product offerings utilize a unique query-based approach to systems management that allows users to perform diagnostic and reporting tasks in a matter of minutes that previously took hours or even days to complete. Finally, our products are both easy to install and use, with a typical enterprise-wide deployment taking just days or weeks to install depending on the product. Our Customers...........We have sold our software products to over 4,000 corporations, governmental agencies and other organizations worldwide, including more than 70% of the Fortune 100 companies. We market and sell our products primarily through a direct telesales organization of 95 people located in Houston, Texas, Frankfurt, Germany and Paris, France, and, to a lesser extent, through value added resellers, distributors and systems integrators. THE OFFERING Common Stock Offered by the Company..... 300,000 shares Common Stock Offered by the Selling Shareholders............................ 2,700,000 shares Common Stock to be Outstanding after the Offering................................ 20,360,370 shares (1) Use of Proceeds......................... For covering expenses related to this offering and general corporate purposes. Nasdaq National Market Symbol........... BVEW SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, --------------------------------------------- ----------------- 1993 1994 1995 1996 1997 1997 1998 ------ ------ ------ ------- -------- ------- ------- (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenues.......................... $3,031 $5,171 $7,333 $11,002 $ 20,838 $12,653 $23,953 Operating income (loss)(2)........ 396 509 783 1,982 (11,296) 2,664 3,249 Net income (loss)................. 389 488 754 1,990 (8,028) 2,715 2,729 Pro forma net income (loss)(3)(4).................... 253 317 490 1,293 (7,263) 1,764 --(7) Diluted pro forma net income (loss) per share(3)(5)(6)....... $ 0.03 $ 0.04 $ 0.06 $ 0.12 $ (0.88) $ 0.12 $ 0.14 Shares used in computing diluted pro forma net income (loss) per share(5)(6)..................... 8,228 8,228 8,228 11,046 8,232 14,295 19,543 </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1998 ------------------------ ACTUAL AS ADJUSTED(8) ------- -------------- (UNAUDITED) <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Working capital............................................. $49,122 $53,716 Total assets................................................ 60,520 65,114 Total shareholders' equity.................................. 52,937 58,439 </TABLE> - --------------- (1) This information is based on the number of shares outstanding as of September 30, 1998 and the intended exercise of 95,200 option shares by Selling Shareholders. It excludes 4,653,834 shares subject to outstanding options as of September 30, 1998 at a weighted average exercise price of $3.12 per share. It also excludes 1,379,838 shares reserved for issuance under the Company's stock option plans. See "Management--Stock Option Plans" and Note 7 of the Notes to Consolidated Financial Statements. (2) Operating income excluding stock compensation expense of $436 and $15,262 in 1996 and 1997, respectively, recognized in connection with the Company's terminated Phantom Stock Plan and a terminated provision of an employment agreement would have been $2,418 and $3,966 in 1996 and 1997, respectively. We believe these data may be useful to investors. However, we have not prepared these data in accordance with generally accepted accounting principles and you should not utilize these data as a substitute for operating income. (3) Pro forma net income excluding stock compensation expense of $436 and $15,262 in 1996 and 1997, respectively, recognized in connection with the Company's terminated Phantom Stock Plan and a terminated provision of an employment agreement would have been $1,577 and $2,655 in 1996 and 1997, respectively. We believe these data may be useful to investors. However, we have not prepared these data in accordance with generally accepted accounting principles and you should not utilize these data as a substitute for pro forma net income. (4) This represents our net income, adjusted for a pro forma charge in lieu of income taxes as if we were a C Corporation for all periods. (5) See Note 10 of the Notes to Consolidated Financial Statements for an explanation of the method used to determine the number of shares used in computing pro forma net income per share. (6) The amounts for the nine months ended September 30, 1998 represent actual diluted net income per share rather than pro forma diluted net income per share and the number of shares used to determine such amount. (7) This item is not applicable as we were a C Corporation for the entire period. (8) Adjusted to reflect our application of the net proceeds from our sale of 300,000 shares of Common Stock at the assumed offering price of $17.88 per share. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001061777_albecca_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001061777_albecca_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and consolidated financial statements and the related notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, the information contained in this Prospectus assumes an initial public offering price of $ per share and no exercise of the U.S. Underwriters' over-allotment option. Unless specified to the contrary or the context clearly implies otherwise, all references herein to "Albecca" or the "Company" shall be deemed to include Albecca Inc. and its subsidiaries on a consolidated basis, as well as the Company's predecessors. All share numbers in this Prospectus reflect a 1.7-for-one stock split effected on April 27, 1998. All information herein concerning the Company's operations gives effect to a reorganization that occurred on June 26, 1998, in which Larson-Juhl International L.L.C., a Georgia limited liability company and an affiliate of the Company, became a wholly-owned subsidiary of the Company. All references herein to industry financial and statistical information are based on trade articles, industry reports and other sources that the Company believes to be reliable but has not independently verified. The Company uses a 52-53 week fiscal year that ends on the last Sunday in August. All references to a specific year in connection with the Company's financial results refer to that specific fiscal year. THE COMPANY Albecca, which primarily does business under the Larson-Juhl name, is a worldwide leader in the custom framing industry. Albecca designs, manufactures and distributes a complete line of high quality, branded custom framing products, including wood and metal moulding, matboard, foam board, glass, equipment and other framing supplies. The Company's principal brands include the "Larson-Juhl Classic Collection" and the "Craig Ponzio Signature Collection." For over 100 years, the Company has been designing, manufacturing and distributing custom framing products that enhance the aesthetic qualities of prints, paintings, drawings and other art and memorabilia. By combining traditional craftsmanship with modern manufacturing technology, Albecca creates frames characterized by distinctive design and superior quality. Albecca has attained its worldwide leadership position by offering a complete selection of branded products and outstanding service to its retail custom framing customers and, more recently, by increasing awareness of its products through consumer advertising. Albecca has maintained a consistent operating strategy that combines innovative design of premium branded products, global distribution capabilities, superior customer service, efficient, low cost manufacturing and distribution and a complete line of quality products. This strategy has made the Larson-Juhl brand one of the most globally recognized names in the custom framing industry. The Company believes that consumers are placing an increased emphasis on the home, its decor and the expression of individual style, which will contribute to the growth of the custom framing market. To capitalize on this trend, Albecca's growth strategy is focused on continuing to introduce premium branded product collections, increasing sales penetration to retail custom framers, improving profitability of its operations, increasing product and brand awareness through consumer advertising and pursuing acquisitions of manufacturers and distributors of custom framing products. Albecca's consistent operating strategy and focus on profitable growth are intended to allow the Company to grow operating income faster than net sales. Net sales increased from $137.8 million in 1993 to $354.1 million in 1997. Over the same period, operating income increased from $13.4 million to $35.6 million. During the first nine months of 1998, net sales and operating income were $292.9 million and $27.0 million, respectively. Albecca conducts its operations through 75 locations in 20 countries. North American operations (United States and Canada) contributed 52% and 76% of the Company's 1997 net sales and operating income, respectively. International operations (primarily Europe) contributed 48% and 24% of 1997 net sales and operating income, respectively. Albecca is a market leader in North America with an estimated 16% market share and estimates that it holds a leading market position in the other 18 countries it serves. In North America, Albecca operates four moulding and frame manufacturing plants and 28 light manufacturing/ distribution centers. Internationally, the Company operates 16 moulding and frame manufacturing plants and 33 light manufacturing/distribution centers located in 18 different countries. The Company has completed 12 acquisitions in North America since 1988 and 25 international acquisitions beginning in 1994. In North America, Albecca's primary customers are retail custom framers. In Europe, the Company primarily serves retail custom framers as well as home decorating centers. Craig Ponzio, the Company's Chairman, President, Chief Executive Officer and principal shareholder, joined Larson Picture Frame, Inc. in 1973 and purchased that company in 1981, when it had net sales of approximately $3 million. In 1988 Larson Picture Frame, Inc. acquired Juhl-Pacific Corporation, creating Larson-Juhl. Following the 1981 acquisition, the Company's management team initiated a program to expand Albecca's product lines, develop an organizational infrastructure, acquire and consolidate manufacturers and distributors of custom framing products and instill a culture based on the Company's six core values. These core values are: - Customer always comes first - Fair and honest in all dealings - Respect for the individual - Excellence in products and service - Rewards tie to performance - Leadership by example Building a talented management team with extensive experience in key areas such as design, sourcing, sales, marketing, information systems, finance, manufacturing, distribution and logistics has been central to the Company's objective to be the worldwide leader in the custom framing industry. The Company's seven senior managers have over 75 years of experience in the custom framing industry. The experience of the Company's management team has been a key factor in the growth and profitability of the Company. INDUSTRY OVERVIEW The Company estimates that the wholesale custom framing industry had 1997 sales to retailers of approximately $1.2 billion in North America. The Company also estimates that 1997 sales to retailers in the rest of the world approximated $1.2 billion. There are an estimated 20,000 custom framing retail store fronts in North America, of which independent, non-franchised stores represent approximately 85% and national chains, regional chains and franchised operations comprise the balance. In North America, the Company competes with over 300 manufacturers and distributors of custom framing products. Albecca is one of the largest manufacturers and distributors in North America and the only manufacturer operating a broad-based North American distribution network. The custom framing industry in Europe is similar to that in North America, although home decorating center chains, primarily in France and Germany, also sell custom framing products. OPERATING STRATEGY Albecca has maintained a consistent operating strategy which has allowed the Company to grow operating income faster than net sales in each fiscal year from 1989 through 1997. The principal elements of Albecca's operating strategy are: Leadership in Design and Premium Branded Products. Albecca provides consistent leadership in design and premium branded products to the custom framing industry. With operations in 20 countries, Albecca provides products on a local, regional and national basis that appeal to the style and design tastes of a broad range of consumers. Albecca's design team creates new collections with the objective of providing retail custom framers and consumers with better designed, higher quality products. The design team uses a proprietary database that analyzes consumer preferences and cost information to assist in developing high quality, marketable collections. The Company markets its wood mouldings under the "Larson-Juhl Classic Collection" and the "Craig Ponzio Signature Collection" brand names. The "Craig Ponzio Signature Collection" contains the Company's finest lines of wood moulding, allowing the Company to market differentiated products to multiple segments of the custom framing industry. Global Leadership in Sales and Customer Service. Through an organization designed to respond immediately to the needs of retail custom framers, Albecca is a global leader in sales and customer service. The Company employs the largest direct sales force serving the custom framing industry, with 224 sales representatives worldwide, 110 of whom serve North American retail custom framers. The Company's sales force visits retail custom framers regularly to introduce new moulding collections, assist with in-store displays and provide information on more effective merchandising, design and selling techniques. With 61 light manufacturing/distribution centers worldwide, Albecca can provide next day shipping of virtually all customer orders. The Company's proprietary information systems track inventory on a real-time basis to maximize availability and optimize distribution of products. Albecca's effective inventory management, global distribution capabilities and superior customer service have allowed the Company to become a recognized service leader in the custom framing industry. Efficient, Low Cost Manufacturing and Distribution. The Company focuses on continually reducing the costs and improving the efficiency of its manufacturing and distribution operations while consistently providing the industry's highest quality products and services. The Company achieves these efficiencies by leveraging the use of its information systems, process technology, manufacturing automation, buying power and select third-party manufacturers in order to identify and take advantage of cost saving opportunities. As a measure of its success, the Company's operating income margin, which was 10.1% in 1997, increased in each fiscal year from 1989 through 1997. Complete Line of Quality Products. Albecca designs, manufactures and distributes a complete line of quality branded products to the custom framing industry and believes it offers the widest variety of custom framing products in the world. The Company's products include wood and metal moulding, matboard, foam board, glass, equipment and other framing supplies. The Company offers over 8,000 branded products in North America and over 17,000 additional branded products in the rest of world. The Company believes a key competitive advantage is its ability to offer this full line of quality branded products, which enables it to be a complete source supplier to retail custom framers. GROWTH STRATEGY The Company believes that the ongoing implementation of its operating strategy combined with its growth strategy has positioned the Company to pursue continued growth in sales and earnings. The principal elements of Albecca's growth strategy are: Introduce Premium, Branded Product Collections. To address changing consumer style and design preferences, Albecca continually develops new lines of branded custom mouldings, such as the recent introduction of the "Craig Ponzio Signature Collection." Since 1994, the Company has designed and introduced 27 new moulding lines in North America, which represented over 30% of Albecca's 1997 North American moulding sales. During the first nine months of 1998, the Company designed and introduced nine new moulding lines in North America. Albecca believes its ability to design and manufacture premium, branded framing products that meet consumers' changing tastes enables the Company to grow its net sales faster than those of other manufacturers and distributors of custom framing products. Increase Sales Penetration to Retail Custom Framers. Albecca has sold framing products to approximately 90% of the estimated 20,000 retail custom framers in North America. However, the Company believes that approximately 75% of these customers purchase less than 20% of their products from Albecca. Although Albecca is a market leader in North America, the Company believes there is substantial opportunity to increase its sales penetration to these retail custom framers and that similar opportunities exist in certain international markets it serves. One method the Company uses in the U.S. to increase sales to its current customers is its Partnership Program, through which participating retail custom framers receive a number of incentives, including pricing discounts for volume purchases, in-store signage and displays, and direct mail and customized consumer advertising materials, in return for their commitment to Albecca products. In the first nine months of 1998, net sales to Partnership Program participants represented approximately 23% of U.S. net sales. Net sales to Partnership Program participants in the first nine months of 1998 increased 13.4% over net sales to the same participants in the comparable period of 1997. Improve Profitability of Operations. The Company's U.S. operations generated an operating income margin of 15% in 1997 from a sales base of $165.5 million. Outside of the U.S., the Company generated an operating income margin of 6% in 1997 from a sales base of $188.5 million. To continue to improve these margins, the Company is (i) increasing the number of branded, proprietary products it offers; (ii) developing a centralized distribution system in Europe; (iii) leveraging the Company's buying power to reduce costs; (iv) expanding the Partnership Program; and (v) leveraging the capabilities of its proprietary information systems and process technologies. By taking these steps, which have been successfully applied in its U.S. operations, the Company believes that it will be able to continue to increase its operating income margins, particularly in its operations outside of the U.S. Increase Product and Brand Awareness through Consumer Advertising. Albecca believes there are substantial benefits for the Company and the industry to exposing consumers to the warmth and individuality that custom frames can add to a home. The Company began a consumer advertising program in September 1996 to build and strengthen awareness of custom framing generally, and the Company's brands in particular, among retail custom framers, individual consumers and decorators. This program uses magazine advertising as well as direct mail materials and in-store promotional displays. The Company's advertisements have had an estimated 150 million consumer exposures since September 1996 and can be seen in publications such as Architectural Digest, Elle Decor, Gourmet, House and Garden, House Beautiful, Metropolitan Home and Traditional Home. Pursue Acquisitions. A key growth opportunity and core competency of the Company is the acquisition of manufacturers and distributors of custom framing products. Albecca's ability to identify and capitalize on cost savings and other synergies, and to successfully integrate acquisitions, has been a key factor in growing the Company's operating income faster than net sales in each fiscal year from 1989 through 1997. Since 1988, Albecca has acquired 37 businesses. Albecca has a disciplined approach to acquisitions, evaluating certain operating and financial criteria for each candidate, including product design and quality, geographic markets and customer segments served, management team strength and return on invested capital. Albecca has been able to leverage its industry leadership position, marketing and manufacturing expertise, and emphasis on its core values to become a leading consolidator of manufacturers and distributors of custom framing products. There are currently over 300 manufacturers and distributors of custom framing products in North America and an additional 500 outside North America, with the smallest having estimated annual sales under $1 million and the largest having sales over $150 million. Albecca believes the fragmented nature of the industry presents opportunities to make further prudent acquisitions. The Company expects to enter into an agreement for a new credit facility, which is intended to provide greater flexibility for the Company to pursue future acquisitions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Albecca Inc. is a Georgia corporation whose principal executive offices are located at 3900 Steve Reynolds Boulevard, Norcross, Georgia 30093, and its telephone number is (770) 279-5200. THE OFFERING Class A Common Stock to be offered: U.S. Offering............ shares International Offering... shares Total............ shares Common Stock to be outstanding after the Offering(1)(2): Class A Common Stock..... shares Class B Common Stock..... shares Total............ shares Voting Rights.............. Each share of Class A Common Stock is entitled to one vote, while each share of Class B Common Stock is entitled to 10 votes. Holders of Class A Common Stock and Class B Common Stock generally vote together as a single class. All of the shares of Class B Common Stock are owned by the Company's Chairman, President and Chief Executive Officer. See "Risk Factors -- Voting Rights of Class A and Class B Common Stock; Control by Principal Shareholder," "Principal Shareholders" and "Description of Capital Stock." Use of Proceeds............ To repay indebtedness under the Company's credit facilities (approximately $ million) and to repay notes payable to the Company's existing shareholders issued in connection with the termination of the Company's S corporation status (approximately $60.0 million). See "S Corporation Termination," "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Proposed New York Stock Exchange symbol.......... BEK - --------------- (1) Excludes 2,600,000 shares of Class A Common Stock reserved for issuance pursuant to the Company's stock option plan. See "Management -- 1998 Stock Option Plan." (2) Assumes no exercise of the U.S. Underwriters' over-allotment option. SUMMARY CONSOLIDATED FINANCIAL DATA The following summary consolidated financial data is qualified by reference to, and should be read in conjunction with, the consolidated financial statements and the related notes thereto and other financial information included elsewhere in this Prospectus, as well as "Management's Discussion and Analysis of Financial Condition and Results of Operations." The summary consolidated financial data of the Company for the fiscal years ended August 27, 1995, August 25, 1996 and August 31, 1997 and the six months ended March 1, 1998 are derived from the Company's audited consolidated financial statements. The summary consolidated financial data for the six months ended February 23, 1997 and the nine months ended May 25, 1997 and May 31, 1998 have been derived from the Company's unaudited consolidated financial statements which, in the opinion of management, contain all adjustments (consisting of only normal and recurring adjustments) necessary to present fairly the Company's financial position and results of operations at such dates and for such periods. Historical results are not necessarily indicative of the results to be expected in the future and results for interim periods are not necessarily indicative of results for the entire year. <TABLE> <CAPTION> YEAR ENDED(1) SIX MONTHS ENDED NINE MONTHS ENDED ------------------------------------ ------------------------ ------------------- AUGUST 27, AUGUST 25, AUGUST 31, FEBRUARY 23, MARCH 1, MAY 25, MAY 31, 1995 1996 1997 1997 1998 1997 1998 ---------- ---------- ---------- ------------ --------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales.................... $225,359 $300,788 $354,058 $186,016 $199,814 $266,695 $292,869 Cost of sales................ 128,341 173,964 200,750 108,401 113,468 152,614 165,817 -------- -------- -------- -------- -------- -------- -------- Gross profit............... 97,018 126,824 153,308 77,615 86,346 114,081 127,052 Operating expenses........... 74,547 96,595 117,707 58,304 67,992 86,905 100,011 -------- -------- -------- -------- -------- -------- -------- Operating income........... $ 22,471 $ 30,229 $ 35,601 $ 19,311 $ 18,354 $ 27,176 $ 27,041 ======== ======== ======== ======== ======== ======== ======== Pro forma net income(2)...... $ 10,612 $ 13,262 $ 14,864 $ 8,424 $ 7,554 $ 11,587 $ 10,973 ======== ======== ======== ======== ======== ======== ======== Pro forma basic earnings per common share............... Pro forma basic weighted average common shares outstanding................ OTHER DATA: Net cash provided by operating activities....... $ 19,043 $ 30,640 $ 22,150 $ 13,364 $ 11,979 $ 22,496 $ 14,566 Net cash (used in) investing activities................. (31,084) (38,099) (22,514) (16,300) (23,726) (15,814) (35,239) Net cash provided by (used in) financing activities... 14,068 8,282 1,504 3,516 12,390 (2,611) 22,414 EBITDA(3).................... 28,174 35,531 42,486 22,661 22,004 32,187 32,764 </TABLE> <TABLE> <CAPTION> MAY 31, 1998 ------------------------- ACTUAL AS ADJUSTED(4) -------- -------------- (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Working capital........................................... $ 45,463 Total assets.............................................. 257,406 Long-term debt including current maturities............... 146,141 Shareholders' equity...................................... 31,169 </TABLE> - --------------- (1) The Company ends its fiscal year on the last Sunday in August. The Company's fiscal year ended August 31, 1997 was a 53-week year. (2) On or prior to the date of this Prospectus, Albecca will terminate its status as an S corporation. Pro forma net income represents net income had the Company been a C corporation for the periods presented. See "S Corporation Termination." (3) EBITDA is defined as income before interest, taxes, depreciation and amortization and minority interest. EBITDA is presented because the Company believes it to be a useful indicator of a company's ability to meet debt service and capital expenditure requirements. It is not, however, intended as an alternative measure of operating results or cash flow from operations (as determined in accordance with generally accepted accounting principles). EBITDA is not necessarily comparable to similarly titled measures for other companies and does not necessarily represent amounts of funds available for management's discretionary use. (4) Adjusted to give effect to the Offering and the application of the net proceeds therefrom of approximately $ million (assuming an initial public offering price of $ per share). Also adjusted to give effect to the estimated final distribution of approximately $60.0 million to the Company's existing shareholders on or prior to the date of this Prospectus. See "S Corporation Termination" and "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001061857_railworks_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001061857_railworks_prospectus_summary.txt
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+PROSPECTUS SUMMARY Simultaneously with the closing of the offering made by this Prospectus (the "Offering"), RailWorks Corporation will acquire, in separate transactions (the "Combination"), 22 companies (collectively, the "Founding Companies") that will become wholly-owned subsidiaries of RailWorks Corporation. See "Formation of the Company." Unless otherwise indicated or the context otherwise requires, (i) all references to the "Company" and "RailWorks" include RailWorks Corporation and the Founding Companies after giving effect to the Combination, (ii) "rail systems" means transit systems, regional and shortline railroads, Class I railroads and commercial and industrial companies with on-site rail infrastructure and (iii) "Common Stock" means the common stock, par value $0.01 per share, of RailWorks Corporation. The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, all share, per share and financial information set forth herein (i) gives effect to the Combination and (ii) assumes no exercise of the Underwriters' over-allotment option. Unless otherwise indicated, "pro forma combined" information gives effect to the Combination and certain pro forma adjustments to the historical financial statements based on an assumed initial public offering price of $12.50 per share as described in the Unaudited Pro Forma As Adjusted Financial Statements, and "pro forma as adjusted" information gives further effect to the sale of the shares of Common Stock offered hereby at an assumed initial public offering price of $12.50 per share and the application of the net proceeds therefrom as set forth herein under "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001062101_e3-corp_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001062101_e3-corp_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..5774fc9f2849f818f214a63c140388655f83dc9a
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus. This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. THE COMPANY E3 is a leading provider of inventory management software solutions designed to help businesses make purchasing decisions that optimize inventory levels and increase profitability. The Company's solutions are designed primarily for businesses in the wholesale and retail segments of the supply chain. The Company complements its software products with a range of services that leverage its comprehensive buying process expertise. To date, substantially all of the Company's revenue has been generated through its direct sales force based in the United States and abroad. E3 has provided solutions to a broad range of distributors, wholesalers and retail chains in the general retail; pharmaceutical; general manufacturing; electrical, industrial and automotive supply; food and food service; wine and spirits; and office supply industries, among others. Founded in 1980, E3 has installed its systems at more than 600 customers in 16 countries. Customers include Ace Hardware, Best Buy, CVS Pharmacy, Eckerd Drugs, Rubbermaid, Staples, The Sports Authority and Victoria's Secret. In the United States, E3's customers include seven of the largest ten drug wholesalers, five of the largest ten drug retailers, 22 of the largest 50 food service distributors, and eight of the largest 17 hardware wholesalers. Today's increasingly competitive business environment has forced manufacturers, distributors and retailers to change their business practices. There has been a fundamental shift in market power from manufacturers to retailers and consumers. This shift in market power has had a profound effect on the supply chain, which consists of the flow of goods from suppliers to manufacturers, then to wholesalers and warehouses, next to distributors and retailers, and ultimately, to the consumer. The competitive nature of today's end markets requires retailers and wholesalers to effectively manage their supply chains in order to provide their customers with the right products, at the right price, and at the precise time and place they are needed. As a result of these recent trends, a significant need has developed for optimized inventory management solutions that: (i) not only track inventory levels but also measure and improve inventory profitability; (ii) provide sophisticated decision-support tools combined with simulation capabilities that analyze numerous purchasing factors, such as demand patterns, purchasing costs, the receipt and management of inventory, vendor pricing and discounts, and forecasted demand; (iii) respond to changing business factors by automatically recommending the optimal purchasing decisions; and (iv) enable companies to manage millions of stock-keeping units ("SKUs") over broad geographic regions with many stores and distributed users. Finally, the solutions should be easy to implement, use and maintain. The Company's solutions address the complex requirements of inventory management by factoring in forward-buying and alternate-buying opportunities while minimizing the required inventory levels needed to meet pre-established customer service objectives. The Company's solutions are based on a comprehensive suite of software modules, including demand forecasting, lead time forecasting, order policy analysis, service level analysis, replenishment analysis, investment analysis and order validity analysis. The Company offers consulting and educational services that help customers maximize profitability through the use of the Company's proprietary inventory management software and techniques. The Company's software solutions provide comprehensive and advanced inventory management capabilities that enable organizations to reduce inventories, increase profitability and meet customer service objectives. The Company's product offerings target four distinct markets: (i) E3TRIM targets warehouse inventory management; (ii) E3SLIM targets store inventory management; (iii) E3CRISP targets vendor managed inventories; and (iv) ProfitTrack focuses on shared services inventory management. The Company intends to maintain its leadership position in the inventory management market by continuing to provide comprehensive and advanced applications that allow customers to optimize inventory management. Key elements of the Company's strategy include maintaining and enhancing its technology leadership, expanding product offerings and targeting new market opportunities, maintaining high quality customer relationships through consulting and education, broadening distribution channels and strategic relationships and increasing penetration of international markets. The Company was founded in 1980 and incorporated in Georgia in 1986 as Technology Investment Leasing & Loan, Inc. In 1998, the Company changed its name to E3 Corporation. When used in this Prospectus, unless the context requires otherwise, the term "Company" refers to E3 Corporation and its consolidated subsidiaries. The Company's principal executive offices are located at 1800 Parkway Place, Suite 600, Marietta, Georgia 30067 and its telephone number is (770) 424-0100. THE OFFERING Common Stock offered by the Company.... shares Common Stock offered by the Selling Shareholders........................... shares Common Stock to be outstanding after the Offering........................... shares(1) Use of Proceeds........................ For working capital and other general corporate purposes including possible acquisitions. Proposed Nasdaq National Market Symbol........................ EIII - --------------- (1) Excludes (i) 3,000,000 shares of Common Stock reserved for issuance upon the exercise of options granted under the E3 Corporation Stock Incentive Plan (the "Stock Incentive Plan"), of which options to purchase 898,919 shares were outstanding as of the date of this Prospectus, at a weighted average exercise price of $10.00 per share; and (ii) 148,354 shares of Common Stock issuable upon the exercise of non-plan options outstanding as of the date of this Prospectus, at a weighted average exercise price of $9.10 per share. See "Management -- Stock Option and Other Compensation Plans." SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, -------------------------------------------------- ----------------- 1993 1994 1995 1996 1997 1997 1998 ------- ------- -------- -------- -------- ------- ------- <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF INCOME DATA: Software license fees................ $ 4,827 $ 7,545 $ 11,199 $ 12,589 $ 14,519 $ 7,718 $10,034 Services and maintenance fees........ 2,340 3,576 5,044 7,200 10,342 4,790 6,654 ------- ------- -------- -------- -------- ------- ------- Total revenue...................... 7,167 11,121 16,243 19,789 24,861 12,508 16,688 Income from operations............... 1,115 2,173 2,917 3,738 3,673 3,788 4,015 Net income........................... 857 1,249 2,058 2,261 2,258 2,275 2,377 Net income per share -- basic and diluted............................ $ 0.05 $ 0.08 $ 0.13 $ 0.14 $ 0.14 $ 0.15 $ 0.15 ======= ======= Shares used in computing net income per share -- basic and diluted(1)......................... 15,850 15,555 15,555 15,645 15,649 15,649 15,649 ======= ======= Cash dividends declared per common share.............................. $ -- $ 0.02 $ 0.04 $ 0.02 $ 0.02 $ 0.01 $ -- ======= ======= </TABLE> <TABLE> <CAPTION> DECEMBER 31, 1997 JUNE 30, 1998 ----------------- --------------------- AS ACTUAL ADJUSTED(2) ------- ----------- <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................. $ 7,318 $ 7,532 $ Working capital........................................... 5,573 7,327 Total assets.............................................. 15,824 17,190 Long-term debt, net of current portion.................... -- -- Shareholders' equity...................................... 6,838 9,255 </TABLE> - --------------- (1) See Note 1 of Notes to Consolidated Financial Statements. (2) As adjusted to give effect to the sale by the Company of the shares of Common Stock offered hereby at an assumed initial public offering price of $ per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by the Company, and the application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001062184_marketing_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001062184_marketing_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..47de96540064a05df1ad7c6d39dcc8b6c69a4708
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+PROSPECTUS SUMMARY Unless the context otherwise requires, all references to the "Company" herein mean Merkert American Corporation, a Delaware corporation, together with Merkert Enterprises, Inc., a Massachusetts corporation ("Merkert"), and Rogers- American Company, Inc., a North Carolina corporation ("Rogers"), after consummation of the Combination (as defined herein). References to the Company's business prior to the Combination mean the business of each of Merkert and Rogers, including each of their respective subsidiaries. Prior to May 29, 1998, the Company operated under the name Monroe, Inc. See "The Combination." The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements and related notes appearing elsewhere in this Prospectus. Unless otherwise indicated, all share, per share and financial information in this Prospectus (a) has been adjusted to give effect to the Combination, (b) gives effect to a stock dividend of 729.9074 shares of Common Stock and 186.50 shares of Restricted Common Stock (as defined herein) in respect of each share of Common Stock outstanding as of December 15, 1998, (c) assumes an initial public offering price of $15.00 per share, (d) assumes no exercise of the Underwriters' over-allotment option and (e) does not include shares issuable upon exercise of outstanding options or reserved for issuance pursuant to the Company's stock option and incentive plan. See "The Combination," "Management-- 1998 Stock Option and Incentive Plan," and "Underwriting." THE COMPANY The Company was organized in March 1998 to create a leading food brokerage firm providing outsourced sales, merchandising and marketing services to manufacturers, suppliers and producers of food products and consumer goods ("Manufacturers"). The Company acts as an independent sales and marketing representative, selling grocery and consumer products on behalf of Manufacturers and coordinating the execution of Manufacturers' marketing programs with retailers and wholesalers ("Retailers"). The Company's principal source of revenues is commissions that it receives from Manufacturers. The Company's other activities include managing private label programs on behalf of selected Retailers. The Company has long-standing relationships with many of its Manufacturers, including Agrilink Foods/Birds Eye (41 years), H.J. Heinz (24 years), Minute Maid (44 years), Ocean Spray (29 years) and Pillsbury (19 years). Key Retailer relationships include C&S Wholesale Grocers, Inc., Food Lion Supermarkets, Hannaford Brothers, Kroger, Publix Supermarkets, Royal Ahold (including Stop & Shop, Bi-Lo and Giant Food), Safeway, Wakefern (Shop Rite) and Winn-Dixie. The Company represents more than 750 Manufacturers and more than 70,000 food and non-food stock-keeping units ("SKUs"), and does business with key Retailers in 22 states. Since 1994, Rogers and Merkert have acquired and integrated 21 companies, successfully adding coverage of new geographic markets and expanding representation of Manufacturers' product offerings within existing markets. The Company's strategic acquisition plan includes the selection, acquisition and management of businesses in brokerage market segments, including the retail food brokerage, food service brokerage and private label brokerage market segments. The Company will be the first publicly held food broker in the United States. The Company is the only food broker with comprehensive geographic coverage of the eastern United States and the capability to provide service to that region's largest Retailers. The eastern United States is the most highly concentrated retail store region in the United States and represents approximately 43% of national food store sales. The Company has 30 offices servicing Retailers in 22 states. In 1997, the Company had pro forma combined revenue of approximately $230.4 million and pro forma combined net income of approximately $0.1 million. Simultaneously with the consummation of the Offering, the Company will purchase in separate transactions (collectively, the "Combination") all of the issued and outstanding capital stock of Merkert and Rogers. To date, the Company has conducted operations only in connection with the Offering and the Combination. See "Certain Transactions--Organization of the Company" and "The Combination." INDUSTRY OVERVIEW The Company estimates, based on information published by industry sources, that the food brokerage industry in the United States had annual commission revenues of approximately $6 billion in 1997. A portion of such revenues were earned in connection with retail merchandising activities. According to industry sources, the retail merchandising industry in the United States had annual revenues of approximately $11.7 billion (exclusive of retail merchandising revenues in the food brokerage industry) in 1997. Food brokers serve Manufacturers, Retailers and food service providers. Retail food brokers represent approximately 3,200 Manufacturers that sell to approximately 128,000 grocery stores, including chain and independent supermarkets, convenience stores, wholesale clubs and other stores ("Grocery Stores") and more than 700 wholesalers nationwide. The industry includes three types of food brokers, as follows: Retail Food Brokers. Manufacturers of branded food and non-food products use retail food brokers as a cost effective alternative to a direct sales force and rely on retail food brokers to provide local market penetration, integrated brand and category-management and access to local merchandising data. When a broker provides full services to a Manufacturer in connection with the sale of its products to Retailers, the commission earned is generally 3% of the Manufacturer's net sales to such Retailers. Retail food brokers typically perform two types of services on behalf of Manufacturers: headquarters functions and retail store functions. Headquarters functions include services provided to both Manufacturers and Retailers at the headquarters level. Retail food brokers conduct business development activities, including sales calls and new product introductions to Retailers, on behalf of Manufacturers. Retail food brokers also assist Manufacturers in developing, reviewing and executing annual marketing plans. Other headquarters services include order management, supervision of shelf space management, coordination of Manufacturers' promotional spending, and facilitating the resolution of billing issues between Manufacturers and Retailers. In connection with the implementation of category management at the Retailers' headquarters level, retail food brokers assist Retailers by gathering and analyzing demographic, consumer, and store sales information utilized in the management of product categories as strategic business units. Retail store functions generally include execution of sales plans for Manufacturers' products at the store level by assisting in merchandising, shelf and display management, new store set-ups, implementation of promotional plans, and placement of point-of-sale coupons, signs and other information. Retail food brokers also assist Retailers with coupon and advertising programs, quality assurance and technical training (primarily in relation to prepared foods). In addition, retail food brokers assist Retailers and Manufacturers in the collection, analysis and application of retail sales data. The retail food brokerage industry has been growing as food brokers represent an increasing percentage of the volume of all commodities (the "ACV") sold through Grocery Stores. In 1997, the percentage of ACV sold through Grocery Stores was approximately 55% compared to 45% in 1985. According to Progressive Grocer, Grocery Store revenues, of which an increasing portion is represented by food brokers, are generally not materially adversely affected by economic downturns and have grown from approximately $292 billion in 1985 to $436 billion in 1997. The Company believes that the retail food brokerage industry is highly fragmented and is experiencing significant consolidation. In the past 10 years, the number of food brokerage firms has decreased from 2,500 to 1,000, while the number of sales representatives employed by such firms increased from 35,000 to 42,000. There are five multi-regional food brokerage firms, including the Company, each with an approximately 3% market share. In total, there are approximately 12 large regional food brokerage firms in the United States. A number of the companies in the food brokerage industry, including Merkert and Rogers, have participated in the trend towards consolidation by acquiring other food brokerage businesses, generally financing these transactions with debt and/or by deferring the payment of a portion of the purchase price. The Company believes that the consolidation of food brokers is primarily the result of a desire by Manufacturers and Retailers to manage their businesses more efficiently and effectively by reducing the number of brokers they interact with in a given region. Additionally, management believes that consolidation within the food brokerage industry is being driven, in part, by the consolidation of Retailers and Manufacturers and the increasing demand for the application of more sophisticated information technology on the part of food brokers. Private Label Food Brokers. Private label food brokers work with Manufacturers to develop and manage private label programs on behalf of Retailers. A food broker's responsibilities in connection with a private label program may include procurement and inventory management and in-store delivery of private label products. The private label segment has been a substantial growth segment for Retailers in recent years. Food Service Brokers. Food service providers include operators of restaurants, school and hospital cafeterias and other similar establishments. The food service business also includes prepared meals sold at convenience stores. Food brokers sell Manufacturers' products to food service providers through a number of means, including headquarters sales calls and the representation of Manufacturers' products at trade shows. The food service segment of the industry has experienced significant growth in recent years as an increasing percentage of consumer spending for food in the United States has shifted to meals away from home. BUSINESS STRATEGY The Company's objective is to become one of the leading national providers of outsourced sales, merchandising and marketing services to Manufacturers, Retailers and food service providers throughout the United States. The Company's business strategy comprises the following key elements: Expand Current and Develop New Manufacturer Relationships. The Company seeks to increase its representation of existing Manufacturers' product lines by representing Manufacturers' products in new geographic markets and non- supermarket trade channels, including mass merchandisers, food service providers, membership warehouses, drug stores and convenience stores. The Company also seeks to increase the range of products it represents on behalf of the Manufacturers it currently serves and enter into new relationships with Manufacturers. Provide Effective Marketing Support and Valuable Category Management Technology. The Company's marketing expertise and information technology system allow it to utilize local demographic information and information about retail store level conditions to understand consumer purchasing preferences in local markets. As a result, the Company is able to develop and implement targeted consumer sales promotions for its Manufacturers' products. The Company also deploys category analysts who use local sales data to assist Retailers with shelf schematics, category layouts and total store space management. Growth Through Strategic Acquisitions. The Company intends to pursue strategic acquisitions in the food brokerage industry. Since 1994, Merkert and Rogers have acquired and integrated 21 companies, successfully adding coverage of new geographic markets and expanding representation of Manufacturers' product offerings in existing markets. The Company's plans include the selection, acquisition and management of businesses in the retail, food service and private label segments of the brokerage market. The Company believes that its acquisition strategy will enable it to strengthen its market presence, increase economies of scale and improve operating efficiencies. Increase Private Label Brokerage. The Company has a division that specializes in the development, procurement and inventory management of private label frozen products, including fruits, vegetables and other products on behalf of certain Retailers. The Company's private label division currently works in conjunction with Retailers such as A&P, Price Chopper, Publix and Royal Ahold (including Stop & Shop, Bi-Lo and Giant Food). The increasing geographic coverage of the Company will provide it with the opportunity to offer private label services to more Retailers and retail locations. COMPANY HISTORY To date, the Company has conducted operations only in connection with the Combination and the Offering and will purchase all of the issued and outstanding capital stock of Merkert and Rogers in the Combination. Merkert Enterprises, Inc., one of the entities to be acquired in the Combination, has operated as a food broker in the northeastern and mid-Atlantic regions of the United States since 1950. In 1997, Merkert Enterprises, Inc. had total revenues of approximately $147.4 million and net losses of $3.4 million. For the first nine months of 1998, Merkert Enterprises, Inc. had total revenues of $100.5 million and net losses of $6.3 million. The principal source (71%) of the 1997 total revenues at Merkert Enterprises, Inc. was commissions it received from Manufacturers. Merkert Enterprises, Inc. also manages private label programs on behalf of selected Retailers. Merkert Enterprises, Inc. has grown its revenues both through internally generated growth and through acquisitions, having acquired and integrated six smaller food brokers since 1994. Merkert Enterprises, Inc. financed such acquisitions, in part, with debt and/or by deferring the payment of a portion of the purchase price. A portion of the $72 million net available borrowings under the Company's Credit Facility (as defined herein) will be used to repay certain of such acquisition-related obligations of Merkert Enterprises, Inc. Primarily as a result of such obligations, as well as a substantial tax liability, Merkert Enterprises, Inc. has experienced losses and a working capital deficit in recent years. The stockholders of Merkert Enterprises, Inc. have agreed to pay such tax liability from cash otherwise payable to them in connection with the Combination. After giving effect to the Offering and the expected application of the net proceeds therefrom and the use of the proceeds of the $50 million Term Loan (as defined herein) and a portion of the $25 million Revolving Credit (as defined herein) under the Credit Facility, the Company will have a working capital deficit of approximately $(3.7) million. See "Risk Factors--Merkert Enterprises, Inc.- History of Losses," "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations-- Merkert," "--Liquidity and Capital Resources--Merkert" and "--Combined Liquidity and Capital Resources Following the Combination." Rogers has operated as a food broker in the southeastern region of the United States since 1934. In 1997, Rogers had total revenues of approximately $83.0 million and net income of $0.7 million. For the first nine months of 1998, Rogers had total revenues of $62.6 million and net income of $0.4 million. All of Rogers' 1997 revenues were derived from commissions it received from Manufacturers. Rogers has grown its revenues both through internally generated growth and through acquisitions, having acquired and integrated 15 smaller food brokers since 1994. Rogers financed such acquisitions, in part, with debt and/or by deferring the payment of a portion of the purchase price. A portion of the net available borrowings under the Credit Facility will be used to repay certain of such acquisition-related obligations of Rogers. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Combined Liquidity and Capital Resources Following the Combination." The Company is a Delaware corporation with its executive offices located at 490 Turnpike Street, Canton, Massachusetts 02021. The Company's telephone number is (781) 828-4800. THE OFFERING <TABLE> <C> <S> Common Stock offered by the Company..... 4,400,000 shares. Common Stock to be outstanding after the Offering(1)(2)......................... 7,218,000 shares. Use of proceeds......................... The net proceeds to be received by the Company in the Offering together with amounts available under the Company's $75 million Credit Facility (which is comprised of a $50 million Term Loan and a $25 million Revolving Credit)(as defined herein) will be used to finance the cash portion of the consideration to be paid in the Combination, to repay certain indebtedness of Merkert and Rogers, to fund buyouts of certain obligations of Merkert and Rogers to make payments to sellers of previously acquired businesses, to repay a note payable to Monroe & Company II, LLC which is attributable to certain of the Company's expenses, to fund buyouts of employment arrangements of departing executives of Merkert as well as buyouts of certain consulting arrangements, and to pay expenses incurred by the Company and each of Merkert and Rogers and their respective stockholders in connection with the Combination. See "Use of Proceeds." Nasdaq National Market symbol........... MERK. </TABLE> - -------- (1) Includes 1,166,667 shares of Common Stock to be issued to the stockholders of Merkert in connection with the Combination. Excludes (i) 245,000 shares of Common Stock issuable upon exercise of outstanding stock options granted pursuant to the Company's Amended and Restated 1998 Stock Option and Incentive Plan (the "1998 Stock Plan"), (ii) options to purchase 65,000 shares of Common Stock to be granted to the Company's independent directors upon consummation of the Offering, (iii) options to purchase 347,000 shares of Common Stock to be granted to employees of the Company upon consummation of the Offering and (iv) 281,340 shares of Common Stock available for future grants under the 1998 Stock Plan. See "Management--1998 Stock Option and Incentive Plan." At the request of the Company, the Underwriters have reserved for sale, at the initial public offering price, up to 5% of the shares offered hereby to be sold to certain directors, officers, and employees of the Company and certain distributors, dealers, business associates and related persons. See "Underwriting." (2) Includes 1,657,319 shares of Common Stock held by Monroe & Company II, LLC, Gerald R. Leonard and certain trusts for the benefit of members of Mr. Leonard's family, 335,700 of which are shares of Restricted Common Stock. Each share of Restricted Common Stock is entitled to 1/10th of one vote on all matters submitted to the stockholders of the Company. Each share of Restricted Common Stock is convertible into one share of Common Stock under certain circumstances. See "Description of Capital Stock--Authorized and Outstanding Capital Stock."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001062232_mariner_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001062232_mariner_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. AS USED HEREIN, (I) THE "JUNIOR SUBORDINATED INDENTURE" MEANS THE JUNIOR SUBORDINATED INDENTURE, AS AMENDED AND SUPPLEMENTED FROM TIME TO TIME, BETWEEN THE COMPANY AND WILMINGTON TRUST COMPANY, AS TRUSTEE (THE "DEBENTURE TRUSTEE"), PURSUANT TO WHICH THE JUNIOR SUBORDINATED DEBENTURES WILL BE ISSUED, (II) THE "TRUST AGREEMENT" MEANS THE AMENDED AND RESTATED TRUST AGREEMENT RELATING TO THE ISSUER TRUST, AS AMENDED AND SUPPLEMENTED FROM TIME TO TIME, AMONG THE COMPANY, AS DEPOSITOR, AND WILMINGTON TRUST COMPANY, AS PROPERTY TRUSTEE (THE "PROPERTY TRUSTEE") AND AS DELAWARE TRUSTEE (THE "DELAWARE TRUSTEE") (COLLECTIVELY, THE "ISSUER TRUSTEES") AND (III) THE "GUARANTEE" MEANS THE GUARANTEE AGREEMENT RELATING TO THE PREFERRED SECURITIES, AS AMENDED AND SUPPLEMENTED FROM TIME TO TIME, BETWEEN THE COMPANY AND WILMINGTON TRUST COMPANY, AS GUARANTEE TRUSTEE (THE "GUARANTEE TRUSTEE"). FIRST MARINER BANCORP First Mariner Bancorp, a bank holding company formed in Maryland in 1994, conducts its business through its wholly owned subsidiary, First Mariner Bank (the "Bank"). As of May 1, 1998, the Bank, which is headquartered in Baltimore City, serves the central region of the State of Maryland through 18 full service branches and 33 Automated Teller Machines ("ATMs"). At March 31, 1998, the Company had total assets of $263,809,000. The Bank provides residential mortgage lending services through its wholly owned subsidiary, First Mariner Mortgage Corporation (the "Mortgage Subsidiary"). As an independent Maryland-based community bank, the Bank is engaged in the general commercial banking business with particular emphasis on the needs of individuals and small to mid-sized businesses. The Bank emphasizes personal attention and professional service to its customers while delivering a range of traditional and contemporary financial products and performing many of the essential banking services offered by its larger competitors. The Bank offers its customers access to local bank officers who are empowered to act with flexibility to meet customers' needs in order to foster and develop long-term loan and deposit relationships. The Company believes that individuals and businesses in its market area are dissatisfied with the large out-of-state banking institutions which have acquired local banks. Management believes that the Bank has a window of opportunity to establish business ties with customers who have been displaced by the consolidations and who are anxious to forge banking relationships with locally owned and managed institutions. These consolidations also benefit the Bank by making available experienced and entrepreneurial managers displaced by such consolidation and acquisition opportunities from the remaining small independent banks in the Company's market area. The Company intends to continue to capture market share and expand in Central Maryland. See "Business." MARINER CAPITAL TRUST The Issuer Trust is a statutory business trust created under Delaware law on May 14, 1998. The Issuer Trust will be governed by a Trust Agreement among the Company, as Depositor, and Wilmington Trust Company, as Delaware Trustee and as Property Trustee. The Issuer Trust exists for the exclusive purposes of (i) issuing and selling the Trust Securities, (ii) using the proceeds from the sale of the Trust Securities to acquire the Junior Subordinated Debentures and (iii) engaging in only those other activities necessary, convenient or incidental thereto (such as registering the transfer of the Trust Securities). Accordingly, the Junior Subordinated Debentures will be the sole assets of the Issuer Trust, and payments under the Junior Subordinated Debentures will be the sole source of revenue of the Issuer Trust. (COVER CONTINUED FROM PREVIOUS PAGE) The Company, as holder of the outstanding Common Securities, will have the right at any time to dissolve the Issuer Trust and, after satisfaction of liabilities to creditors of the Issuer Trust as provided by applicable law, to cause the Junior Subordinated Debentures to be distributed to the holders of the Preferred Securities in liquidation of the Issuer Trust. The ability of the Company to dissolve the Issuer Trust may be subject to prior regulatory approval of the Federal Reserve, if then required under applicable Federal Reserve capital guidelines or policies. See "Description of Preferred Securities-- Liquidation Distribution Upon Dissolution." In the event of the dissolution of the Issuer Trust, after satisfaction of liabilities to creditors of the Issuer Trust as provided by applicable law, the holders of the Preferred Securities will be entitled to receive a Liquidation Amount of $10 per Preferred Security plus accumulated and unpaid Distributions thereon to the date of payment, subject to certain exceptions, which may be in the form of a distribution of such amount in Junior Subordinated Debentures. See "Description of Preferred Securities--Liquidation Distribution Upon Dissolution." The Junior Subordinated Debentures will be unsecured and subordinated to all Senior Indebtedness of the Company. See "Description of Junior Subordinated Debentures--Subordination." Prospective purchasers must carefully consider the restrictions on purchase set forth in "Certain ERISA Considerations." THE JUNIOR SUBORDINATED DEBENTURES ARE DIRECT AND UNSECURED OBLIGATIONS OF THE COMPANY, DO NOT EVIDENCE DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER INSURER OR GOVERNMENT AGENCY. THE OFFERING <TABLE> <S> <C> SECURITIES OFFERED.................. $20,000,000 aggregate Liquidation Amount of % Preferred Securities (Liquidation Amount $10 per Preferred Security). OFFERING PRICE...................... $10 per Preferred Security (Liquidation Amount $10), plus accumulated Distributions, if any, from , 1998. DISTRIBUTIONS....................... The Distributions payable on each Preferred Security will be fixed at a rate per annum of % of the Liquidation Amount of $10 per Preferred Security, will be cumulative, will accrue from the date of issuance of the Preferred Securities and will be payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year, commencing , 1998. See "Description of Preferred Securities-- Distributions." JUNIOR SUBORDINATED DEBENTURES...... The Issuer Trust will invest the proceeds from the issuance of the Preferred Securities and Common Securities in an equivalent amount of % Junior Subordinated Debentures of the Company. The Junior Subordinated Debentures will mature on , 2028 subject to the Maturity Adjustment. The Junior Subordinated Debentures will rank subordinate and junior in right of payment to all Senior Indebtedness of the Company. In addition, the Company's obligations under the Junior Subordinated Debentures will be structurally subordinated to all existing and future liabilities and obligations of its subsidiaries. GUARANTEE........................... Under the terms of the Guarantee, the Company has guaranteed the payment of Distributions and payments on liquidation or redemption of the Preferred Securities, but only in each case to the extent of funds held by the Issuer Trust described herein. The Company and the Issuer Trust believe that the obligations of the Company under the Guarantee, the Trust Agreement, the Junior Subordinated Debentures and the Junior Subordinated Indenture, taken together, fully, irrevocably and unconditionally guarantee all of the Issuer Trust's obligations relating to the Preferred Securities. The obligations of the Company under the Guarantee and the Junior Guarantee Subordinated Debentures are subordinate and junior in right of payment to all Senior Indebtedness. See "Description of Guarantee." </TABLE> AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith, files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information can be inspected and copied at the public reference facilities of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the Commission located at 7 World Trade Center, 13th Floor, Suite 1300, New York, New York 10048 and Suite 1400, Citicorp Center, 14th Floor, 500 West Madison Street, Chicago, Illinois 60661. Copies of such material can also be obtained at prescribed rates by writing to the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Such material may also be accessed electronically by means of the Commission's web site on the Internet at http://www.sec.gov. The Company and the Issuer Trust have filed with the Commission a Registration Statement on Form S-1 (together with all amendments thereto, the "Registration Statement"), of which this Prospectus is a part, under the Securities Act of 1933, as amended, with respect to the Preferred Securities, the Junior Subordinated Debentures and the Guarantee. This Prospectus does not contain all the information set forth in the Registration Statement and exhibits thereto, to which reference is hereby made. No separate financial statements of the Issuer Trust have been included or incorporated by reference herein. The Company and the Issuer Trust do not consider that such financial statements would be material to potential purchasers of the Preferred Securities because the Issuer Trust is a newly formed special purpose entity, has no operating history or independent operations and is not engaged in and does not propose to engage in any activities other than holding as trust assets the Junior Subordinated Debentures and issuing the Trust Securities. See "Mariner Capital Trust," "Description of Preferred Securities," "Description of Junior Subordinated Debentures" and "Description of Guarantee." In addition, the Company does not expect that the Issuer Trust will be filing reports under the Exchange Act with the Commission. CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE PREFERRED SECURITIES OFFERED HEREBY, INCLUDING OVER-ALLOTTING THE PREFERRED SECURITIES AND BIDDING FOR AND PURCHASING THE PREFERRED SECURITIES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." <TABLE> <S> <C> RIGHT TO DEFER INTEREST............. The Company has the right, at any time, to defer payments of interest on the Junior Subordinated Debentures for a period not exceeding 20 consecutive quarters; provided that no Extension Period may extend beyond the Stated Maturity of the Junior Subordinated Debentures. As a consequence of the Company's extension of the interest payment period, quarterly Distributions on the Preferred Securities will be deferred (though such Distribution would continue to accrue with interest thereon compounded quarterly, since interest will continue to accrue and compound on the Junior Subordinated Debentures during any such Extension Period). During an Extension Period, the Company will be prohibited, subject to certain exceptions described herein, from declaring or paying any cash distributions with respect to its capital stock or debt securities that rank pari passu with or junior to the Junior Subordinated Debentures. Upon the termination of any Extension Period and the payment of all amounts then due, the Company may commence a new Extension Period, subject to the foregoing requirements. See "Description of Junior Subordinated Debentures--Option to Extend Interest Payment Period." Should an Extension Period occur, Preferred Security holders will continue to accrue interest income (and DE MINIMIS original issue discount, if any) for United States federal income tax purposes. See "Certain Federal Income Tax Consequences--U.S. Holders--Interest Income and Original Issue Discount." LIQUIDATION OF THE ISSUER TRUST..... The Company, as holder of the Common Securities, has the right at any time to dissolve the Issuer Trust and cause the Junior Subordinated Debentures to be distributed to holders of Preferred Securities in liquidation of the Issuer Trust, subject to the Company having received prior approval of the Federal Reserve to do so if then required under applicable capital guidelines or policies of the Federal Reserve. See "Description of Preferred Securities--Liquidation Distribution Upon Dissolution." VOTING RIGHTS....................... Generally, the holders of the Preferred Securities will not have any voting rights. See "Description of Preferred Securities--Voting Rights; Amendment of Trust Agreement." </TABLE> <TABLE> <S> <C> RANKING............................. The Preferred Securities will rank pari passu, and payments thereon will be made pro rata, with the Common Securities except as described under "Description of Preferred Securities--Subordination of Common Securities." The Junior Subordinated Debentures will be unsecured and subordinate and junior in right of payment to the extent and in the manner set forth in the Junior Subordinated Indenture to all Senior Indebtedness (as defined herein). See "Description of Junior Subordinated Debentures." The Guarantee will constitute an unsecured obligation of the Company and will rank subordinate and junior in right of payment to the extent and in the manner set forth in the Guarantee to all Senior Indebtedness. See "Description of Guarantee." In addition, because the Company is a holding company, the Junior Subordinated Debentures and the Guarantee effectively will be subordinated to all existing and future liabilities of the Company's subsidiaries, including the deposit liabilities of the Bank. See "Description of Junior Subordinated Debentures--Subordination." REDEMPTION.......................... The Preferred Securities will be subject to mandatory redemption (i) in whole, but not in part, at the Stated Maturity upon repayment of the Junior Subordinated Debentures, (ii) in whole, but not in part, contemporaneously with the optional redemption at any time by the Company of the Junior Subordinated Debentures upon the occurrence and continuation of a Tax Event, Investment Company Event or Capital Treatment Event and (iii) in whole or in part, at any time on or after , 2003, contemporaneously with the optional redemption by the Company of the Junior Subordinated Debentures in whole or in part, in each case at the applicable Redemption Price. See "Description of Preferred Securities--Redemption." NO RATING........................... The Preferred Securities are not expected to be rated by any rating service, nor is any other security issued by the Company so rated. ERISA CONSIDERATIONS................ Prospective purchasers should carefully consider the restrictions on purchase set forth under "Certain ERISA Considerations." </TABLE> <TABLE> <S> <C> USE OF PROCEEDS..................... All proceeds to the Issuer Trust from the sale of the Trust Securities will be invested by the Issuer Trust in the Junior Subordinated Debentures. All of the net proceeds received by the Company from the sale of the Junior Subordinated Debentures will be used to finance growth, which may include the acquisition of branches or other financial institutions, and for general corporate purposes which may include investments in or extensions of credit to its direct or indirect subsidiaries to support internal growth. See "Use of Proceeds" and "Capitalization." The Preferred Securities may qualify in whole or in part as Tier 1 or core capital of the Company, subject to the 25% Capital Limitation (as defined under "Use of Proceeds"), under the risk-based capital guidelines of the Federal Reserve. The portion of the Preferred Securities that exceeds the 25% Capital Limitation will qualify as Tier 2 or supplementary capital of the Company. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001062391_copelco_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001062391_copelco_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary is qualified in its entirety by reference to the detailed information appearing elsewhere in this Prospectus. A listing of pages on which some of such terms are defined can be found in the "Index of Terms" herein. Issuer........................ Copelco Capital Funding Trust 1998-A (the "Issuer"), a Delaware business trust. The Issuer has been formed pursuant to a trust agreement, dated as of July 31, 1998 (the "Trust Agreement"), by and among Copelco Capital Funding LLC 98-1, a Delaware limited liability company, as sponsor ("Copelco Funding LLC" or the "Sponsor") and Wilmington Trust Company, a Delaware banking corporation (in its capacity as owner trustee of the Issuer, the "Owner Trustee"). The Issuer will have no significant assets other than the Trust Fund (as described below). The Issuer's offices are located at Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-0001. Securities Offered............ $194,515,898 aggregate principal amount of ____% Class A-1 Lease-Backed Notes, Series 1998-A, (the "Class A-1 Notes"), $90,432,830 aggregate principal amount of _____% Class A-2 Lease-Backed Notes, Series 1998-A (the "Class A-2 Notes"), $150,152,623 aggregate principal amount of ___% Class A-3 Lease-Backed Notes, Series 1998-A (the "Class A-3 Notes"), and $162,096,582 aggregate principal amount of ___% Class A-4 Lease-Backed Notes, Series 1998-A (the "Class A-4 Notes", together with the Class A-1 Notes, Class A-2 Notes and Class A-3 Notes, the "Class A Notes"), $17,062,798 aggregate principal amount of ___% Class B Leased-Backed Notes, Series 1998-A (the "Class B Notes"), $13,650,238 aggregate principal amount of ___% Class C Leased-Backed Notes, Series 1998-A (the "Class C Notes") and $20,475,358 aggregate principal amount of ___% Class D Lease-Backed Notes, Series 1998-A (the "Class D Notes", together with the Class A Notes, the Class B Notes and the Class C Notes, the "Offered Notes"). The Class A-1 Notes will be an "eligible security" within the meaning of Rule 2a-7 promulgated under the Investment Company Act of 1940, as amended. In addition, the Issuer will issue, through a private placement, (i) $20,475,358 aggregate principal amount of ___% Class E Notes (the "Class E Notes", together with the Offered Notes, the "Notes") (ii) one or more classes of Residual Notes and (iii) one or more classes of Certificates (all of which Certificates will be initially held by the Sponsor, Copelco Capital and Copelco Capital XI). The combined aggregate principal amount of the Class A Notes, the Class B Notes, the Class C Notes, the Class D Notes and the Class E Notes will comprise the initial principal amount (the "Initial Principal Amount") of the Notes. The aggregate principal amounts of the Class A Notes, the Class B Notes, the Class C Notes, the Class D Notes and the Class E Notes set forth herein are based upon the Discounted Present Value of the Leases (as defined herein) as of the close of business on June 30, 1998 (the "Cut-Off Date") calculated at the Statistical Discount Rate (defined herein). The Initial Principal Amount of the Notes will be calculated using the actual Discount Rate. Issuance Date................. On or about August 11, 1998. Denominations................. The Offered Notes will be issued in minimum denominations of $1,000 and integral multiples of $1,000 in excess thereof, except that one Class A Note, Class B Note, Class C Notes and Class D Note may be issued in another denomination. Interest Rate................. ___% per annum on the Class A-1 Notes (the "Class A-1 Interest Rate") calculated on the basis of a year of 360 days and the actual number of days in such Interest Accrual Period, ___% per annum on the Class A-2 Notes (the "Class A-2 Interest Rate"), ___% per annum on the Class A-3 Notes (the "Class A-3 Interest Rate"), ___% per annum on the Class A-4 Notes (the "Class A-4 Interest Rate"), ___% per annum on the Class B Notes (the "Class B Interest Rate") , ___% per annum on the Class C Notes (the "Class C Interest Rate"), ___% per annum on the Class D Notes (the "Class D Interest Rate") and ___% per annum on the Class E Notes (the "Class E Interest Rate"), calculated on the basis of a year of 360 days comprised of twelve 30-day months. With respect to any particular Class, the "Interest Rate" refers to the applicable rate indicated in the immediately preceding sentence. Initial Principal Amount...... $194,515,898 for the Class A-1 Notes (the "Class A-1 Initial Principal Amount"), $90,432,830 for the Class A-2 Notes (the "Class A-2 Initial Principal Amount"), $150,152,623 for the Class A-3 Notes (the "Class A-3 Initial Principal Amount"), $162,096,582 for the Class A-4 Notes (the "Class A-4 Initial Principal Amount", together with the Class A-1 Initial Principal Amount, Class A-2 Initial Principal Amount, and the Class A-3 Initial Principal Amount, the "Class A Initial Principal Amount"), $17,062,798 for the Class B Notes (the "Class B Initial Principal Amount"), $13,650,238 for the Class C Notes (the "Class C Initial Principal Amount"), $20,475,358 for the Class D Notes (the "Class D Initial Principal Amount") and $20,475,358 for the Class E Notes (the "Class E Initial Principal Amount"). See "Description of the Notes." Discounted Present Value of the Leases................ The Discounted Present Value of the Leases (the "Discounted Present Value of the Leases"), at any given time, shall equal the future remaining scheduled payments (not including delinquent amounts, Excess Copy Charges, Maintenance Charges and Fee Per Scan Charges (defined below)) from the Leases (including Non-Performing Leases), discounted at a rate equal to ___% (the "Discount Rate"), which rate is equal to the sum of (a) the weighted average Interest Rate of the Class A-1 Notes, the Class A-2 Notes, the Class A-3 Notes, the Class A-4 Notes, the Class B Notes, the Class C Notes, the Class D Notes and the Class E Notes each weighted by (i) the Class A-1 Initial Principal Amount, the Class A-2 Initial Principal Amount, the Class A-3 Initial Principal Amount, the Class A-4 Initial Principal Amount, the Class B Initial Principal Amount, the Class C Initial Principal Amount, the Class D Initial Principal Amount or the Class E Initial Principal Amount, as applicable, and (ii) the expected weighted average life (under a zero prepayment, and no loss scenario) of each Class of Notes, as applicable and (b) the Servicing Fee Rate of 0.75% per annum. The "Discounted Present Value of the Performing Leases" equals the Discounted Present Value of the Leases, reduced by all future remaining scheduled payments on the Non-Performing Leases (not including delinquent amounts, Excess Copy Charges, Maintenance Charges or Fee Per Scan Charges), discounted at the Discount Rate. See "Description of the Notes--General." Each of the Indenture and the Sales and Servicing Agreement will provide that any calculation of future remaining scheduled payments made on a Determination Date or with respect to a Payment Date will be calculated after giving effect to any payments received prior to such date of calculation to the extent such payments relate to scheduled payments due and payable by the Lessees with respect to the related Due Period (defined herein) and all prior Due Periods. "Statistical Discounted Present Value of the Leases" means an amount equal to the future remaining scheduled payments (not including delinquent amounts, Excess Copy Charges, Maintenance Charges and Fee Per Scan Charges) from the Leases as of the Cut-Off Date, discounted at a rate equal to 6.75% (the "Statistical Discount Rate"). The Statistical Discounted Present Value of the Leases as of the Cut-Off Date is $682,296,520.78 and will not vary materially from the Discounted Present Value of the Leases as of the Cut-Off Date. See "The Series Pool--The Equipment." The aggregate Discounted Present Value of the Leases as of the Cut-Off Date, calculated at the Discount Rate is $_____________. "Non-Performing Leases" are (a) Leases that have become more than 123 days delinquent or (b) Leases that have been accelerated by the Servicer or Leases that the Servicer has determined to be uncollectible in accordance with its customary practices. See "The Series Pool--The Leases." The Seller will represent in the Sales and Servicing Agreement that at the time of transfer of any Lease to the Issuer, such Lease was not a Non-Performing Lease. Expected Maturity; Stated Maturity.................. The expected maturity dates with respect to the Class A-1 Notes, Class A-2 Notes, Class A-3 Notes, Class A-4 Notes are the Payment Dates on July 1999, February 2000, February 2001 and January 2003, respectively. The expected maturity date with respect to the Class B Notes, Class C Notes and Class D Notes are the Payment Dates on February 2003, March 2003 and April 2003, respectively. The stated maturity date with respect to the Class A-1 Notes is the Payment Date in August 1999 (the "Class A-1 Stated Maturity Date"), the stated maturity date with respect to the Class A-2 Notes is the Payment Date in August 2000 (the "Class A-2 Stated Maturity Date"), the stated maturity date with respect to the Class A-3 Notes is the Payment Date in August 2001 (the "Class A-3 Stated Maturity Date"), the stated maturity date with respect to Class the A-4 Notes is the Payment Date in July 2003 (the "Class A-4 Stated Maturity Date"), the stated maturity date with respect to the Class B Notes is the Payment Date in February 2004 (the "Class B Stated Maturity Date"), the stated maturity date with respect to the Class C Notes is the Payment Date in March 2004 (the "Class C Stated Maturity Date") and the stated maturity date with respect to the Class D Notes is the Payment Date in April 2004 (the "Class D Stated Maturity Date", together with the Class A-1 Stated Maturity Date, the Class A-2 Stated Maturity Date, the Class A-3 Stated Maturity Date, the Class A-4 Stated Maturity Date, the Class B Stated Maturity Date and the Class C Stated Maturity Date, the "Stated Maturity Dates"). However, if all payments on the Leases are made as scheduled, final payment with respect to the Notes would occur prior to stated maturity. The Notes..................... The Notes will represent obligations solely of the Issuer and are secured by the Trust Fund. Seller and Servicer........... Copelco Capital, Inc., a Delaware corporation ("Copelco Capital", in its capacity as seller, the "Seller", and in its capacity as servicer, the "Servicer"). Copelco Capital will enter into a sales and servicing agreement (the "Sales and Servicing Agreement") with the Issuer and the Sponsor to service the Leases included in the Series Pool (as defined herein) and make Servicer Advances (as defined herein). Pursuant to the Sale and Servicing Agreement, Copelco Capital will sell to the Sponsor all of its right, title and interest in the Leases. In addition, Copelco Capital will concurrently transfer to the Sponsor all of its right, title and interest in the related Equipment (which is either an ownership interest or security interest) which shall constitute a contribution of capital. Contemporaneously with the sale, transfer and conveyance by Copelco Capital to the Sponsor of the Leases and related Equipment, the Sponsor will transfer its right, interest and title of the Leases and related Equipment to the Issuer pursuant to the Sale and Servicing Agreement and the Issuer will thereby pledge the Leases and related Equipment to the Indenture Trustee pursuant to the Indenture. Trust Fund.................... The "Trust Fund" will consist of a pool (the "Series Pool") of healthcare, manufacturing and business equipment lease contracts (the "Lease Contracts"), including payments due thereunder (the "Lease Receivables" together with the Lease Contracts, the "Leases") and interest in the related leased equipment (the "Equipment") transferred by the Sponsor to the Issuer. In addition, the Trust Fund will include the funds on deposit in the Reserve Account. Indenture Trustee............. Manufacturers and Traders Trust Company (the "Indenture Trustee"). The Indenture Trustee's offices are located at One M&T Plaza, 7th Floor, Buffalo, New York 14203. Determination Date............ The fifth day prior to each Payment Date (or the preceding business day, if such day is not a business day). On such date (each, a "Determination Date"), the Servicer will determine the amount of payments received on the Leases in respect of the immediately preceding calendar month (each such period, a "Due Period") which will be available for distribution on the Payment Date. See "Description of the Notes--Distributions on Notes." Payment Date.................. Payments on the Notes will be made on the fifteenth day of each month (or if such day is not a business day, the next succeeding business day), commencing on August 17, 1998 (each, a "Payment Date"), to holders of record on the last day of the immediately preceding calendar month (each, a "Record Date"). See "Description of the Notes--Distributions on Notes." Interest Payments............. On each Payment Date, the interest due (the "Interest Payments") with respect to the Class A-1 Notes, the Class A-2 Notes, the Class A-3 Notes, the Class A-4 Notes, the Class B Notes, the Class C Notes, the Class D Notes and the Class E Notes since the last Payment Date will be the interest that has accrued on such Notes since the last Payment Date (or in the case of the first Payment Date, with respect to the Class A-1 Notes, since the Issuance Date, and with respect to all other Notes, since July 15, 1998) (the "Interest Accrual Period") at the applicable Interest Rate applied to the then unpaid principal amounts (the "Outstanding Principal Amounts") of the Class A-1 Notes, the Class A-2 Notes, the Class A-3 Notes, the Class A-4 Notes, the Class B Notes, the Class C Notes, the Class D Notes, and the Class E Notes, respectively, after giving effect to payments of principal to the Class A-1 Noteholders, the Class A-2 Noteholders, the Class A-3 Noteholders, the Class A-4 Noteholders, the Class B Noteholders, the Class C Noteholders, the Class D Noteholders and the Class E Noteholders, respectively, on the preceding Payment Date. See "Description of the Notes--General" and "Distributions on Notes." Principal Payments............ For each Payment Date, each of the Class A Noteholders, the Class B Noteholders, the Class C Noteholders, the Class D Noteholders and the Class E Noteholders will be entitled to receive payments of principal ("Principal Payments"), to the extent funds are available therefor, in the priorities set forth in the Indenture and described herein below and under "Application of Payments" and "Description of the Notes--Distributions on Notes." On each Payment Date, to the extent funds are available therefor, the Principal Payment will be paid to the Noteholders in the following priority: (a) (i) to the Class A-1 Noteholders only, until the Outstanding Principal Amount on the Class A-1 Notes has been reduced to zero, the Class A Principal Payment, then (ii) to the Class A-2 Noteholders only, until the Outstanding Principal Amount on the Class A-2 Notes has been reduced to zero, the Class A Principal Payment, then (iii) to the Class A-3 Noteholders only, until the Outstanding Principal Amount on the Class A-3 Notes has been reduced to zero, the Class A Principal Payment, and (iv) to the Class A-4 Noteholders, until the Outstanding Principal Amount on the Class A-4 Notes has been reduced to zero, the Class A Principal Payment, (b) to the Class B Noteholders, the Class B Principal Payment, (c) to the Class C Noteholders, the Class C Principal Payment, (d) to the Class D Noteholders, the Class D Principal Payment, (e) to the Class E Noteholders, the Class E Principal Payment and (f) to the extent that the Class B Floor exceeds the Class B Target Investor Principal Amount, the Class C Floor exceeds the Class C Target Investor Principal Amount, the Class D Floor exceeds the Class D Target Investor Principal Amount and/or the Class E Floor exceeds the Class E Target Investor Principal Amount, Additional Principal (defined below) shall be distributed, sequentially, as an additional principal payment on the Class A-1 Notes, Class A-2 Notes, Class A-3 Notes, Class A-4 Notes, the Class B Notes, the Class C Notes, the Class D Notes and the Class E Notes as applicable, until the Outstanding Principal Amount of each Class has been reduced to zero. The "Class A Principal Payment" shall equal (a) while the Class A-1 Notes are outstanding, (i) on all Payment Dates prior to the August 1999 Payment Date, the lesser of (1) the amount necessary to reduce the Outstanding Principal Amount on the Class A-1 Notes to zero and (2) the difference between (A) the Discounted Present Value of the Performing Leases as of the previous Determination Date and (B) the Discounted Present Value of the Performing Leases as of the related Determination Date, and (ii) on and after the August 1999 Payment Date, the entire Outstanding Principal Amount on the Class A-1 Notes and (b) after the Class A-1 Notes have been paid in full, the amount necessary to reduce the aggregate Outstanding Principal Amount on the Class A Notes to the Class A Target Investor Principal Amount (as defined below). The "Class B Principal Payment" shall equal (a) while the Class A-1 Notes are outstanding, zero and (b) after the Outstanding Principal Amount on the Class A-1 Notes has been reduced to zero, the amount necessary to reduce the Outstanding Principal Amount of the Class B Notes to the greater of the Class B Target Investor Principal Amount and the Class B Floor. The "Class C Principal Payment" shall equal (a) while the Class A-1 Notes are outstanding, zero and (b) after the Outstanding Principal Amount on the Class A-1 Notes has been reduced to zero, the amount necessary to reduce the Outstanding Principal Amount of the Class C Notes to the greater of the Class C Target Investor Principal Amount and the Class C Floor. The "Class D Principal Payment" shall equal (a) while the Class A-1 Notes are outstanding, zero and (b) after the Outstanding Principal Amount on the Class A-1 Notes has been reduced to zero, the amount necessary to reduce the Outstanding Principal Amount of the Class D Notes to the greater of the Class D Target Investor Principal Amount and the Class D Floor. The "Class E Principal Payment" shall equal (a) while the Class A-1 Notes are outstanding, zero and (b) after the Outstanding Principal Amount on the Class A-1 Notes has been reduced to zero, the amount necessary to reduce the Outstanding Principal Amount of the Class E Notes to the greater of the Class E Target Investor Principal Amount and the Class E Floor. The "Class A Target Investor Principal Amount" with respect to each Payment Date is an amount equal to the product of (a) the Class A Percentage and (b) the Discounted Present Value of the Performing Leases as of the related Determination Date. The "Class B Target Investor Principal Amount" with respect to each Payment Date is an amount equal to the product of (a) the Class B Percentage and (b) the Discounted Present Value of the Performing Leases as of the related Determination Date. The "Class C Target Investor Principal Amount" with respect to each Payment Date is an amount equal to the product of (a) the Class C Percentage and (b) the Discounted Present Value of the Performing Leases as of the related Determination Date. The "Class D Target Investor Principal Amount" with respect to each Payment Date is an amount equal to the product of (a) the Class D Percentage and (b) the Discounted Present Value of the Performing Leases as of the related Determination Date. The "Class E Target Investor Principal Amount" (the Class A Target Investor Principal Amount, the Class B Target Investor Principal Amount, the Class C Target Investor Principal Amount, the Class D Target Investor Principal Amount and the Class E Target Investor Principal Amount, collectively, the "Class Target Investor Principal Amounts") with respect to each Payment Date is an amount equal to the product of (a) the Class E Percentage and (b) the Discounted Present Value of the Performing Leases as of the related Determination Date. The "Class A Percentage" will be equal approximately to 82.5175%. The "Class B Percentage" will be equal approximately to 3.4965%. The "Class C Percentage" will be equal approximately to 2.7972%. The "Class D Percentage" will be equal approximately to 4.1958%. The "Class E Percentage" will be equal approximately to 4.1958%. The "Class B Floor" with respect to each Payment Date means (a) 2.7% of the initial Discounted Present Value of the Leases as of the Cut-Off Date, plus (b) the Cumulative Loss Amount with respect to such Payment Date, minus (c) the sum of the Outstanding Principal Amount of the Class C Notes, the Outstanding Principal Amount of the Class D Notes, the Outstanding Principal Amount of the Class E Notes, and the Overcollateralization Balance as of the immediately preceding Payment Date after giving effect to all principal payments made on that day, minus (d) the amount on deposit in the Reserve Account after giving effect to withdrawals to be made on such Payment Date. The "Class C Floor" with respect to each Payment Date means (a) 2.2% of the initial Discounted Present Value of the Leases as of the Cut-Off Date, plus (b) the Cumulative Loss Amount with respect to such Payment Date, minus (c) the sum of the Outstanding Principal Amount of the Class D Notes, the Outstanding Principal Amount of the Class E Notes, and the Overcollateralization Balance as of the immediately preceding Payment Date after giving effect to all principal payments made on that day, minus (d) the amount on deposit in the Reserve Account after giving effect to withdrawals to be made on such Payment Date; provided, however, that if the Outstanding Principal Amount of the Class B Notes is less than or equal to the Class B Floor on such Payment Date, the Class C Floor will equal the Outstanding Principal Amount of the Class C Notes utilized in the calculation of the Class B Floor for such Payment Date. The "Class D Floor" with respect to each Payment Date means (a) 1.8% of the initial Discounted Present Value of the Leases as of the Cut-Off Date, plus (b) the Cumulative Loss Amount with respect to such Payment Date, minus (c) the sum of the Outstanding Principal Amount of the Class E Notes, and the Overcollateral- ization Balance as of the immediately preceding Payment Date after giving effect to all principal payments made on that day, minus (d) the amount on deposit in the Reserve Account after giving effect to withdrawals to be made on such Payment Date; provided, however, that if the Outstanding Principal Amount of the Class C Notes is less than or equal to the Class C Floor on such Payment Date, the Class D Floor will equal the Outstanding Principal Amount of the Class D Notes utilized in the calculation of the Class C Floor for such Payment Date. The "Class E Floor" (the Class B Floor, the Class C Floor, the Class D Floor and the Class E Floor, collectively, the "Class Floors") with respect to each Payment Date means (a) 1.2% of the initial Discounted Present Value of the Leases as of the Cut-Off Date, plus (b) the Cumulative Loss Amount with respect to such Payment Date, minus (c) the Overcollateralization Balance as of the immediately preceding Payment Date after giving effect to all principal payments made on that day, minus (d) the amount on deposit in the Reserve Account after giving effect to withdrawals to be made on such Payment Date; provided, however, that if the Outstanding Principal Amount of the Class D Notes is less than or equal to the Class D Floor on such Payment Date, the Class E Floor will equal the Outstanding Principal Amount of the Class E Notes utilized in the calculation of the Class D Floor for such Payment Date. "Additional Principal" with respect to each Payment Date equals (a) zero if each of the Class Target Investor Principal Amounts for Classes B, C, D and E exceed their respective Class Floors on such Payment Date and (b) in each other case the excess, if any, of (i)(A) the Outstanding Principal Balance of the Notes plus the Overcollateralization Balance as of the immediately preceding Payment Date after giving effect to payments on such Payment Date, minus (B) the Discounted Present Value of the Performing Leases as of the related Determination Date, over (ii) the sum of the Class A Principal Payment, the Class B Principal Payment, the Class C Principal Payment, the Class D Principal Payment and the Class E Principal Payment to be paid on such Payment Date. The "Overcollateralization Balance" with respect to each Payment Date is an amount equal to the excess, if any, of (a) the Discounted Present Value of Performing Leases as of the related Determination Date over (b) the sum of the Outstanding Principal Amount of the Notes as of such Payment Date after giving effect to all principal payments made on that day. The "Cumulative Loss Amount" with respect to each Payment Date is an amount equal to the excess, if any, of (a) the total of (i) the Outstanding Principal Amount of the Notes as of the immediately preceding Payment Date after giving effect to all principal payments made on that day, plus (ii) the Overcollateralization Balance as of the immediately preceding Payment Date, minus (iii) the lesser of (A) the Discounted Present Value of the Performing Leases as of the Determination Date relating to the immediately preceding Payment Date minus the Discounted Present Value of the Performing Leases as of the related Determination Date and (B) Available Funds remaining after the payment of amounts owing the Servicer and in respect of interest on the Notes on such Payment Date, over (b) the Discounted Present Value of the Performing Leases as of the related Determination Date. The Series Pool............... The Series Pool will consist of the Leases as of the Cut-Off Date, plus any Substitute Leases (as defined herein) and any Additional Leases (as defined herein) excluding any Leases which have been replaced by one or more Additional Leases or Substitute Leases and, the interest of the Issuer in the related Equipment. See "The Series Pool" and "Certain Legal Matters Affecting a Lessee's Rights and Obligations." Copelco Capital will represent and warrant that, as of the Cut-Off Date, all Leases were current or less than 63 days delinquent and that, as of the initial Determination Date, the Lessees have made at least one lease payment. Equipment..................... The Equipment is comprised primarily of office products such as copiers and facsimile machines, computer systems for healthcare professionals, medical diagnostic and examination equipment for radiology, nuclear medicine, ultrasound and laboratory analysis, industrial and business equipment such as machine tools, graphic arts equipment, electronics testing equipment, and computers for businesses. As of the Cut-Off Date, the Series Pool had approximately 64 equipment categories. Lessees....................... Primarily hospitals, non-hospital medical facilities, physicians, businesses and individual business owners (each, a "Lessee," and collectively, the "Lessees"). As of the Cut-Off Date, the Series Pool included 48,869 separate Leases. As of the Cut-Off Date, Leases relating to Lessees in any one state did not account for more than 17.7% of the Statistical Discounted Present Value of the Leases. See "The Series Pool--The Leases." Certain Lease Terms........... The Leases are triple-net leases, requiring the Lessee to pay all taxes, maintenance and insurance associated with the Equipment. The Leases are non-cancelable by the Lessees. All payments under the Leases are absolute, unconditional obligations of the Lessees without right of offset for any reason Each Lessee entered into its Lease for specified Equipment designated in schedules incorporated into the Lease. The schedules, among other things, establish the payments and the term of the Lease with respect to such Equipment. The Leases have remaining terms to maturity, calculated as of the Cut-Off Date, of between approximately 2 and 82 months and a weighted average remaining term to maturity of 43.2 months. See "The Series Pool--The Leases." The Leases had original terms to maturity of between approximately 9 and 88 months and a weighted average original term to maturity of 51.0 months. Additions, Substitutions and Adjustments............... Although the Leases will be non-cancelable by the Lessees, Copelco Capital has, from time to time, permitted early termination by Lessees ("Early Lease Termination") or other modifications of the lease terms in certain circumstances more fully specified in the Sales and Servicing Agreement, including, without limitation, in connection with a full or partial buy-out or equipment upgrade. In the event of an Early Lease Termination which has been prepaid in full or in part, the Issuer will have the option to reinvest the proceeds of such Early Termination Lease in one or more Leases having similar characteristics to such terminated Lease (each, an "Additional Lease"). In addition, Copelco Capital will have the option to substitute one or more leases having similar characteristics (each, a "Substitute Lease") for (a) Non-Performing Leases, (b) Leases subject to repurchase as a result of a breach of representation and warranty (each a "Warranty Lease") and (c) Leases following a modification or adjustment to the terms of such Lease (each, an "Adjusted Lease"). The aggregate Discounted Present Value of the Non-Performing Leases for which Copelco Capital may substitute Substitute Leases is limited to an amount not in excess of 10% of the aggregate Discounted Present Value of the Leases as of the Cut-Off Date. The aggregate Discounted Present Value of Adjusted Leases and Warranty Leases for which Copelco Capital may substitute Substitute Leases is limited to an amount not in excess of 10% of the aggregate Discounted Present Value of the Leases as of the Cut-Off Date. The terms of a Lease may be modified or adjusted for administrative reasons or at the request of the lessee, vendor or lessor due to a variety of circumstances, including changes to the delivery date of equipment, the cost of equipment, the components of leased equipment or to correct information when a Lease is entered into Copelco Capital's servicing system. Such modifications may result in adjustments to the lease commencement date, the monthly payment date, the amount of the monthly payment or the equipment subject to a Lease. Additional Leases and Substitute Leases will be originated using the same credit criteria as the initial Leases. To the extent material, information with respect to such Additional or Substitute Leases will be included in periodic reports filed with the Commission as are required under the Exchange Act. In no event will the aggregate scheduled payments of the Leases, after the inclusion of the Substitute Leases and Additional Leases be materially less than the aggregate scheduled payments of the Leases prior to such substitution or reinvestment. Additionally, either the final payment on such Substitute Lease or Additional Lease will be on or prior to May 2005. In the event that an Early Lease Termination is allowed by Copelco Capital and an Additional Lease is not provided, the amount prepaid will be equal to at least the Discounted Present Value of the terminated Lease, plus any delinquent payments. See "The Series Pool--The Leases." Payments on Leases............ All payments on Leases will be made by the Lessees to the address specified by the Servicer. The Servicer will deposit the proceeds of such payments to the Collection Account (as defined herein) within two Business Days of the receipt thereof. See "Description of the Notes--Collection Account." Advances by Servicer.......... Prior to any Payment Date, the Servicer may, but will not be required to, advance (each, a "Servicer Advance") to the Indenture Trustee, an amount sufficient to cover delinquencies on Leases in the Trust Fund with respect to the prior Due Period. The Servicer will be reimbursed for Servicer Advances not recovered from late payments from Available Funds on the Payment Date following the date on which the Servicer determined such Lease to be a Non-Performing Lease. See "Description of the Notes--Advances by Servicer." Servicing Fee................. A Servicing Fee (the "Servicing Fee"), will be paid monthly to the Servicer on each Payment Date with respect to the Notes from amounts in the Collection Account and will be calculated by multiplying one-twelfth of 0.75% times the Discounted Present Value of the Performing Leases, as of the prior Payment Date. The Servicing Fee will be paid to the Servicer for servicing the Series Pool and to pay certain administrative expenses in connection with the Notes, including Indenture Trustee fees, Owner Trustee fees and expenses. See "Copelco Capital's Underwriting and Servicing Practices." Use of Proceeds............... The net proceeds from the sale of the Offered Notes will be distributed to the holders of Certificates and primarily used to purchase the Leases from Copelco Capital. In addition, the net proceeds from the private placement of the Class E Notes and the Residual Notes will be used for the same purpose. Copelco Capital will use such amounts to repay bank indebtedness and for general corporate purposes. The Indenture................. The Notes and the Residual Notes are to be issued pursuant to, and are to be in such form, bear interest and be payable on such terms as are prescribed in an indenture (the "Indenture") to be executed between the Issuer and the Indenture Trustee. Available Funds............... On each Payment Date, the Indenture Trustee will use such funds to make required payments of principal and interest to Noteholders. Funds received on or prior to the related Determination Date ("Available Funds") will be available for distribution by the Indenture Trustee on a Payment Date and will include: a) Lease Payments due during the prior Due Period (net of any Excess Copy Charges, Maintenance Charges and Fee Per Scan Charges); b) recoveries from Non-Performing Leases to the extent Copelco Capital has not substituted Substitute Leases for such Non-Performing Leases (except to the extent required to reimburse unreimbursed Servicer Advances); c) late charges received on delinquent Lease payments not advanced by the Servicer; d) proceeds from repurchases by Copelco Capital of Leases as a result of breaches of representations and warranties to the extent Copelco Capital has not substituted Substitute Leases for such Leases other than Residual Warranty Payments (as defined herein). e) proceeds from investment of funds in the Collection Account and the Reserve Account, if any; f) Casualty Payments other than Residual Casualty Payments (as defined herein); g) Servicer Advances; h) Termination Payments other than Residual Prepayments (as defined herein) to the extent the Issuer does not reinvest such Termination Payments in Additional Leases; i) to the extent there occurs an Available Funds Shortfall, funds, if any, on deposit in the Reserve Account. Available Funds will not include Residual Realizations. "Residual Realizations" means (a) cash flows realized from the sale or release of the Equipment following the expiration dates of the Leases, other than Equipment subject to Non-Performing Leases, (b) Residual Warranty Payments, (c) Residual Casualty Payments and (d) Residual Prepayments. "Residual Casualty Payments" means, at any date with respect to a Lease, the excess of (a) the Casualty Payment related to the Lease over (b) the Discounted Present Value of the remaining Lease Payments related to the Lease as of the immediately following Payment Date (plus any amounts previously due and unpaid). "Residual Prepayments" means, at any date with respect to a Terminated Lease, the excess of (a) the payment related to the Terminated Lease over (b) the Discounted Present Value of the remaining Lease Payments of the Terminated Lease as of the immediately following Payment Date (plus any amounts previously due and unpaid). "Residual Warranty Payments" means, at any date with respect to a Warranty Lease, the excess of (a) the repurchase price related to the Warranty Lease over (b) the Discounted Present Value of the remaining Lease Payments related to the Warranty Lease as of the immediately following Payment Date (plus any amounts previously due and unpaid). Application of Payments....... Monthly distributions will be made by the Indenture Trustee from Available Funds in the following priority: a) to pay the Servicing Fee; b) to reimburse unreimbursed Servicer Advances in respect of a prior Payment Date; c) to make Interest Payments owing on the Class A Notes concurrently to the Class A-1 Noteholders, Class A-2 Noteholders, Class A-3 Noteholders and Class A-4 Noteholders; d) to make Interest Payments owing on the Class B Notes; e) to make Interest Payments owing on the Class C Notes; f) to make Interest Payments owing on the Class D Notes; g) to make Interest Payments owing on the Class E Notes h) to make the Class A Principal Payment (i) to the Class A-1 Noteholders only, until the Outstanding Principal Amount on the Class A-1 Notes is reduced to zero, then (ii) to the Class A-2 Noteholders only, until the Outstanding Principal Amount on the Class A-2 Notes is reduced to zero, then (iii) to the Class A-3 Noteholders only, until the Outstanding Principal Amount on the Class A-3 Notes is reduced to zero and finally, (iv) to the Class A-4 Noteholders until the Outstanding Principal Amount on the Class A-4 Notes is reduced to zero; i) to make the Class B Principal Payment; j) to make the Class C Principal Payment; k) to make the Class D Principal Payment; l) to make the Class E Principal Payment; m) to pay the Additional Principal, if any, to the Class A Noteholders then receiving the Class A Principal Payment as provided in clause (h) above until the Outstanding Principal Amount on all of the Class A Notes has been reduced to zero, then to the Class B Noteholders until the Outstanding Principal Amount on the Class B Notes has been reduced to zero, then to the Class C Noteholders until the Outstanding Principal Amount on the Class C Notes has been reduced to zero, then to the Class D Noteholders until the Outstanding Principal Amount on the Class D Notes has been reduced to zero, thereafter to the Class E Noteholders until the Outstanding Principal Amount on the Class E Notes has been reduced to zero; n) to the Reserve Account, an amount equal to the excess of the Required Reserve Amount over the Available Reserve Amount; and o) to the Issuer, the balance, if any. See "Description of the Notes--Distribution on Notes." Redemption.................... The Issuer will have the option, subject to certain conditions, to redeem all, but not less than all, of the Notes and thereby cause early repayment of the Notes as of any Payment Date on which the Discounted Present Value of the Performing Leases is less than or equal to 5% of the Discounted Present Value of the Leases as of the Cut-Off Date (after giving effect to the payment of principal on such Payment Date). The Issuer will give notice of such redemption to each Noteholder and the Indenture Trustee at least 30 days before the Payment Date fixed for such prepayment. Upon deposit of funds necessary to effect such redemption, the Indenture Trustee shall pay the remaining unpaid principal amount on the Notes and all accrued and unpaid interest as of the Payment Date fixed for redemption. See "Description of the Notes--Redemption." Subordination................. The Class A Notes will be paid sequentially in accordance with the provisions of the Indenture and as described in clause (h) under "Application of Payments." The Class A Notes will be senior in right of payment to the Class B Notes, the Class B Notes will be senior in right to the Class C Notes, the Class C Notes will be senior in right to the Class D Notes and the Class D Notes will be senior in right to the Class E Notes to the extent described herein. See "Description of the Notes--Distributions on Notes." Except following an Event of Default, the Residual Notes are not subordinated to the Notes and have senior rights with respect to Residual Realizations. The Notes will have no rights with respect to Residual Realizations. Reserve Account............... The Noteholders will have the benefit of funds on deposit in an account (the "Reserve Account") to the extent that there is a shortfall in the amount available to pay amounts owing the Servicer and to make interest and principal payments on the Notes, on any Payment Date. The Reserve Account will be funded by an initial deposit of 1.00% of the Discounted Present Value of the Leases as of the Cut-Off Date. Thereafter, to the extent provided in the Indenture, additional deposits will be made to the Reserve Account to the extent that the amount on deposit in the Reserve Account (the "Available Reserve Amount") is less than the Required Reserve Amount. The "Required Reserve Amount" equals the lesser of (a) 1.00% of the Discounted Present Value of the Leases as of the Cut-Off Date and (b) the Outstanding Principal Amount of the Notes. Amounts on deposit in the Reserve Account in excess of the Required Reserve Amount will be disbursed to the Issuer in accordance with the provisions of the Indenture. Residual Realizations......... On any Distribution Date, Residual Realizations shall be directed by the Indenture Trustee to the Residual Noteholders in accordance with the Indenture. The Noteholders will not have any right to any Residual Realization under any circumstance and neither the Residual Notes nor the Residual Realizations will provide credit enhancement for the Class A Noteholders, the Class B Noteholders, the Class C Noteholders, the Class D Noteholders or the Class E Noteholders. Federal Income Tax Considerations............ It is intended that the Class A Notes, the Class B Notes, the Class C Notes and the Class D Notes will be characterized as indebtedness of the Issuer for federal income tax purposes. If characterized as indebtedness, interest on such Offered Notes will be taxable as ordinary income when received by an Offered Noteholder on the cash method of accounting and when accrued by Offered Noteholders on the accrual method of accounting. See "Material Federal Income Tax Considerations." ERISA Considerations.......... The Employee Retirement Income Security Act of 1974, as amended ("ERISA") places certain restrictions on those pension and other employee benefits plans to which it applies. Pursuant to regulations issued by the United States Department of Labor defining "plan assets," if the Offered Notes are considered to be indebtedness without substantial equity features under local law, the assets of the Issuer will not be considered assets of any ERISA plan holding the Notes, thereby generally avoiding potential application of ERISA's prohibited transaction rules. However, in certain circumstances, the prohibited transaction rules may be applicable to the purchase of the Offered Notes even if the Offered Notes are not deemed to have substantial equity features. Certain exemptions from the prohibited transaction rules could be applicable, however, with respect to the acquisition and holding of the Offered Notes. Accordingly, the Offered Notes may be acquired by ERISA plans, subject to certain restrictions. Before purchasing any of the Offered Notes, fiduciaries of such plans should determine whether an investment in the Offered Notes is appropriate under ERISA. See "ERISA Considerations." Rating........................ It is a condition to the issuance of the Offered Notes that the Class A-1 Notes be rated at least "A-1+", "D-1+" and "F1+/AAA" , that the Class A-2, A-3 and A-4 Notes be rated at least "AAA", "AAA" and "AAA", that the Class B Notes be rated at least "AA", "AA+" and "AA", that the Class C Notes be rated at least "A", "A+" and "A+" and that the Class D Notes be rated at least "BBB", "BBB+" and "BBB+" by Standard & Poor's Ratings Group ("S&P"), Duff & Phelps Credit Ratings Co. ("DCR") and Fitch IBCA, Inc. ("Fitch"), respectively (each a "Rating Agency"). The ratings assess the likelihood of timely payment of interest and the ultimate payment of principal to the Offered Noteholders by the Stated Maturity date. There is no assurance that any rating ill not be lowered or withdrawn if, in the judgement of any Rating Agency, circumstances in the future so warrant. See "Rating of the Notes."
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE REQUIRES, THE INFORMATION CONTAINED IN THIS PROSPECTUS: (I) GIVES EFFECT TO A FOR ONE STOCK SPLIT OF THE COMMON STOCK, $.01 PAR VALUE PER SHARE (THE "COMMON STOCK"), OF THE COMPANY TO BE EFFECTED SIMULTANEOUSLY WITH THE CONSUMMATION OF THE OFFERING (SEE "DESCRIPTION OF CAPITAL STOCK"); (II) GIVES EFFECT TO THE CONVERSION OF EACH OUTSTANDING SHARE OF THE ROTHFELD PREFERRED STOCK AND THE VESTAR PREFERRED STOCK (EACH AS DEFINED HEREIN) INTO APPROXIMATELY SHARES OF COMMON STOCK (THE "PREFERRED STOCK CONVERSION"); (III) ASSUMES AN INITIAL PUBLIC OFFERING PRICE OF $ PER SHARE OF COMMON STOCK; AND (IV) ASSUMES THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED. UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL REFERENCES IN THIS PROSPECTUS TO THE "COMPANY" MEAN SUN APPAREL, INC. AND ITS SUBSIDIARIES. THE COMPANY Sun Apparel, Inc. is a leading designer, manufacturer and distributor of jeanswear, sportswear, and related apparel for men, women and children under licensed brands, private label brands and Company owned brands, the most prominent of which is the POLO JEANS COMPANY RALPH LAUREN ("Polo Jeans") licensed brand. The Company markets and distributes its products nationally through a broad array of distribution channels, including department stores, specialty stores and mass merchandisers. Through its brand marketing and development expertise, diversified product offerings, manufacturing capabilities and comprehensive distribution network, the Company reaches a broad range of consumers and distinguishes itself from its competitors. In late 1995, the Company entered into exclusive long-term license and design agreements with Polo Ralph Lauren Corporation ("Polo Ralph Lauren") for the design, manufacture and distribution of men's and women's jeanswear, sportswear and related apparel (the "Polo Jeans Products") under the Polo Jeans trademark in the United States and its territories. The Polo Jeans collection targets youthful, brand conscious consumers, capitalizing on the distinctive name recognition and lifestyle image created by Polo Ralph Lauren. The Polo Jeans Products maintain the high quality standards and prestige of Polo Ralph Lauren at price points that are competitive with other denim based designer collections and lower than most apparel collections bearing the "Polo" name. The Company markets its Polo Jeans line in leading department stores, specialty stores and Polo Ralph Lauren retail stores. Launched at retail for Fall 1996, the Polo Jeans collection is currently distributed to more than 3,000 department and specialty store doors and generated $198.0 million in net sales in 1997, the first full fiscal year of distribution of Polo Jeans Products. Since its inception in 1979, the Company has focused primarily on the design, manufacture and distribution of jeanswear and casual bottoms for all size ranges, at various price points under private label brands, contract manufacturing programs, licensed brands and Company owned brands (the "Sun Division Products"). The Company manufactures Sun Division Products for leading retailers and manufacturers such as Wal-Mart Stores, Inc. ("Wal-Mart"), The Limited Inc. ("The Limited"), J.C. Penney Company, Inc. ("J.C. Penney"), Federated Department Stores Inc. ("Federated") and Sara Lee Corp. ("Sara Lee"). While manufacturing high quality jeanswear and casual bottoms in diverse styles, fits and finishes, the Company distinguishes itself from other denim based apparel manufacturers by providing value-added services in design, merchandising, production and inventory management. The Sun Division Products are currently distributed nationwide to more than 18,000 store doors. In fiscal 1997, Sun Division Products generated $161.7 million in net sales. Primarily as a result of the launch of the Polo Jeans line in fiscal 1996, the Company has experienced rapid growth, with net sales increasing from $205.7 million in fiscal 1995 to $359.7 million in fiscal 1997. During the same period, operating income increased from $16.0 million to $36.0 million, and the operating margin increased from 7.8% to 10.0%. In the first three months of fiscal 1998, net sales and operating income increased from $80.5 million and $7.9 million to $94.0 million and $11.8 million, respectively, while the operating margin increased from 9.8% to 12.6%, compared to the corresponding period of fiscal 1997. The Company believes that its success is due to a number of fundamental strengths, including: proven success in brand marketing and development, full service design and merchandising expertise, modern and vertically integrated jeanswear manufacturing and distribution facilities, international sourcing capabilities and customer inventory management. The Company believes that these strengths position the Company to execute its growth strategy. GROWTH STRATEGY The Company's core competencies position it to grow its existing businesses and attract additional opportunities in brand licensing and ownership and private label manufacturing. CAPITALIZE ON THE STRENGTH OF THE POLO JEANS COMPANY RALPH LAUREN BRAND. The Company believes that there are multiple opportunities to further grow the Polo Jeans business, which was launched at retail for Fall 1996. - EXPAND IN-STORE SHOPS. The Company expects to increase the retail presence of Polo Jeans Products through the expansion of existing in-store shops and the installation of additional in-store shops. In-store shops are areas within department stores dedicated to Polo Jeans Products utilizing signature Polo Jeans fixtures. The in-store shops, which range from 300 to 2,500 square feet, are designed to effectively display and merchandise Polo Jeans Products. The Company believes that, in addition to increasing sales, in-store shops enhance the consumer's shopping experience, promote the Polo Jeans lifestyle image and build loyalty among consumers. As of March 31, 1998, there were 682 Polo Jeans in-store shops covering more than 243,000 square feet of fixtured retail selling space. The Company currently expects to have over 1,200 in-store shops covering more than 500,000 square feet of fixtured retail selling space in department stores by the end of 1998. - INCREASE DOOR PENETRATION. Within the Company's existing customer base, management believes it has significant opportunity in both its men's and women's Polo Jeans lines to increase penetration in its existing department store doors and expand to additional doors. The Company anticipates that by the end of 1998 the Polo Jeans collection will be distributed to more than 3,200 department and specialty store doors. - INCREASE SALES TO POLO RALPH LAUREN RETAIL STORES. The Company anticipates that retail stores owned and operated by Polo Ralph Lauren will provide significant opportunities to grow the Polo Jeans business. Polo Ralph Lauren currently owns and operates more than 70 Polo Ralph Lauren Factory Outlets, all of which carry certain Polo Jeans Products, and two Polo Jeans Company Factory Outlets. In late 1997, Polo Ralph Lauren opened its first full-price Polo Jeans Company retail store dedicated to the Company's Polo Jeans Products. Polo Ralph Lauren has announced plans to open two additional such stores as well as four additional Polo Jeans Company Factory Outlets by the end of 1998 and expects to open five full-price Polo Jeans Company retail stores and ten Polo Jeans Company Factory Outlets during 1999. The Company believes that the continued roll-out of outlet and retail stores by Polo Ralph Lauren will augment Polo Jeans Products sales and enhance consumer recognition of the Polo Jeans brand. - SELECTIVELY EXPAND ACCOUNT BASE. Based on the strong demand for Polo Jeans Products, the Company believes that additional growth can be achieved by selectively expanding the Polo Jeans business account base in both department stores and specialty stores. - BROADEN PRODUCT OFFERINGS. The Company will continue to expand product offerings within its Polo Jeans collection to attract youthful, brand conscious consumers and enhance its image as a lifestyle brand. In addition to expanding its denim product offerings, the Company intends to broaden offerings of Polo Jeans Products in casual bottoms, knitwear, sweaters and outerwear. EXPAND SUN DIVISION BUSINESS. The Company believes that the Sun Division business is well positioned for controlled growth through increasing customer penetration, expanding distribution and broadening product offerings. - INCREASE EXISTING CUSTOMER PENETRATION. The Company manufactures its Sun Division Products for a broad array of established retailers, including department stores, specialty stores and mass merchandisers. The Company manufactures these products under well recognized brands, such as FADED GLORY (Wal-Mart), EXPRESS (The Limited), THE ARIZONA JEANS COMPANY (J.C. Penney), and BADGE (Federated). By virtue of the Company's ability to produce basic and fashion jeanswear and casual bottoms for all size ranges, the Company believes that there are significant opportunities for further penetration within the Company's existing customer base by expanding to new departments and offering additional merchandise within existing departments. - SELECTIVELY EXPAND ACCOUNT BASE. The Company's longstanding reputation as a manufacturer and distributor of high quality jeanswear, together with the success of the Polo Jeans business, position the Company to expand its Sun Division Products account base. In 1997, the Company began a new contract manufacturing program with the JUST MY SIZE division of Sara Lee and recently began new private label programs for Dayton Hudson Corporation ("Dayton Hudson"), Sears Roebuck and Co. ("Sears"), The Talbots, Inc. ("Talbots") and The Wet Seal, Inc. ("Wet Seal"). In addition, as the Polo Jeans line has been launched internationally by Polo Ralph Lauren, the Company has become the primary jeanswear contractor for many Polo Jeans Company Ralph Lauren international licensees. The Company will continue to explore opportunities to develop additional accounts for its Sun Division Products business with department stores, specialty stores, mass merchandisers and manufacturers. - BROADEN PRODUCT OFFERINGS. The Company will continue to expand Sun Division Products offerings to attract new customers. In addition to expanding its jeanswear offerings, the Company intends to broaden its offerings of casual bottoms. PURSUE ADDITIONAL OPPORTUNITIES IN LICENSING AND BRAND OWNERSHIP. Building on its success in brand marketing and development, together with its jeanswear manufacturing and distribution expertise, the Company believes it is well-positioned to pursue additional opportunities in licensing and brand ownership. For example, the Company is presently the exclusive worldwide licensee for TODD OLDHAM JEANS, a collection of jeanswear and sportswear targeted toward the sophisticated, fashion forward consumer and distributed to better department stores and specialty stores. In the Fall 1998 season, the Company is scheduled to introduce at Nordstrom, Inc. ("Nordstrom"), Wet Seal and other select department and specialty stores a more moderately priced Todd Oldham jeanswear and sportswear line under the TO(2) brand name for the junior market. The Company intends to continue to evaluate and pursue new opportunities in licensing and brand ownership. INCREASE PRODUCTION CAPACITY AND FURTHER REDUCE MANUFACTURING COSTS. The Company owns and operates five modern jeanswear sewing and finishing facilities in Mexico and intends to expand these facilities in the near future. In addition, the Company plans to shift cutting and portions of its other operations from the United States to Mexico to further reduce manufacturing costs. The Company owned facilities, combined with an established network of contractors, provide production flexibility, while maintaining the Company's position as a low cost and high quality supplier of jeanswear and casual bottoms. THE RECAPITALIZATION On September 26, 1997, the Company consummated a series of transactions to effect a recapitalization of the Company and transfer a controlling interest in the Company from the Former Partner (as defined herein) to Eric A. Rothfeld, President, Chief Executive Officer and Chairman of the Board of Directors of the Company. As a result of the Recapitalization (as defined herein), (i) certain companies formerly under the common control of Mr. Rothfeld and the Former Partner became direct or indirect wholly-owned subsidiaries of the Company (the "Reorganization"); (ii) following the Reorganization, Mr. Rothfeld and the Rothfeld Family Trust (as defined herein) increased their equity interest in the Company to 60%; and (iii) Vestar/Sun Holding Company, L.L.C. ("Vestar"), an affiliate of Vestar Capital Partners III, L.P., acquired a 40% equity interest in the Company. In connection with the Recapitalization, the Company and such affiliated companies terminated their S corporation status under Subchapter S of the Internal Revenue Code of 1986, as amended (the "Code"), and, as a result, are now fully subject to federal and state income taxes at the corporate level. The Reorganization, together with the other transactions referred to above, are hereinafter referred to as the "Recapitalization". See "Company History, the Recapitalization and Prior S Corporation Status". The Company is a Texas corporation with its principal executive office located at 11201 Armour Drive, El Paso, Texas 79935, and its telephone number is (915) 595-2800. THE OFFERING <TABLE> <S> <C> Shares of Common Stock Offered by the Company..................... shares. Common Stock to be outstanding after this Offering............. shares of Common Stock(1) Use of proceeds................... The Company intends to use the estimated net proceeds of approximately $ from this Offering to repay certain indebtedness, including $45 million to repay the Vestar Note (as defined herein). See "Use of Proceeds". Proposed Nasdaq National Market symbol.......................... </TABLE> - ------------------------ (1) Excludes shares of Common Stock reserved for issuance under the Sun Apparel, Inc. 1998 Stock Incentive Plan (the "1998 Stock Incentive Plan"), including shares of Common Stock subject to outstanding options granted at the initial public offering price of the Common Stock. See "Management--1998 Stock Incentive Plan".
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001062478_actuate_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001062478_actuate_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and the Financial Statements and Notes thereto, appearing elsewhere in this Prospectus. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward- looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors" and elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus (i) assumes no exercise of the Underwriters' over-allotment option and (ii) reflects, except in the Financial Statements, the conversion of all outstanding shares of Preferred Stock into Common Stock upon completion of this offering. THE COMPANY Actuate Software Corporation is a leading provider of enterprise reporting solutions that enable organizations to systematically extract, publish and disseminate information across distributed computing environments. The Company develops and markets software products that are designed to allow companies to rapidly design, generate and distribute reports throughout the enterprise, thereby increasing access to and the value of corporate data. Actuate's products have been adopted in a wide variety of industries, including financial services, telecommunications, technology, health care and others. Actuate's customers include companies such as Chase Manhattan, Concert Communications, Manpower, Merck and Toyota Motor Sales, USA. The Company has also established strategic relationships with a number of enterprise application vendors, including PeopleSoft, Siebel and Vantive, all of which embed the Company's products as part of or as their entire standard reporting solution. Each of such customers and enterprise application vendors have purchased more than $100,000 in license and services fees from the Company since January 1996. To succeed in today's increasingly competitive market, businesses must accelerate the rate at which they identify and respond to changing business conditions. An organization's success is, to a large extent, dependent upon its ability to rapidly collect, organize and distribute information to make effective business decisions. Reports are the primary means in virtually all organizations by which critical business information is distributed and used by employees, customers and suppliers. Other products such as On-line Analytical Processing ("OLAP") and query tools generally serve as supplements to core reporting systems and are only utilized by a small number of users for very distinct and specialized data analysis. Historically, most reports have been paper-based, designed using legacy computer languages such as COBOL and delivered to users through physical means such as handcarts, inter-office mail and the postal service. Over the past decade, there has been a dramatic migration of critical corporate information from mainframe computer systems to distributed computing environments. This transition has been driven largely by the widespread emergence and adoption of enterprise software applications, data warehouses, corporate intranets and the Internet. Due to this fundamental shift in the way corporations store and manage data, IT departments are now faced with the challenge of providing users with secure access to business information residing in a broad range of distributed systems. The Company believes traditional reporting methods have not kept pace with the technological advancements in application software and relational databases. As a result, it has been extremely difficult for businesses to report information from these systems efficiently, uniformly and securely across a single platform to users within and outside of the organization. Due to the shortcomings of traditional reporting methods, the Company believes organizations will increasingly adopt enterprise reporting solutions which allow for the dissemination of information across distributed computing environments. IDC estimates the market for such enterprise reporting solutions will grow to over $900 million by the year 2002. The Actuate Reporting System is a scalable, dynamic reporting platform which is designed to allow organizations to replace traditional paper-based and on- line reports with Live Report Documents. Live Report Documents feature rich interactive capabilities, including hyperlinks, context-sensitive help, a dynamic table of contents, and a report query feature. Architected specifically to leverage the functionality of the Internet, the Actuate Reporting System is designed to make reports accessible to an organization's employees, customers and suppliers via corporate intranets and the Internet. Actuate's ReportCast technology can be integrated with Internet or intranet web sites, making it easier for organizations to notify users when corporate information is available. The Actuate Reporting System also facilitates off-line analysis of reports. The Actuate Reporting System's server-centric architecture provides the building blocks for an enterprise reporting environment of any size. Actuate's open environment allows developers to create reports from virtually any data source and in virtually any format required by end-users. The Actuate Report Encyclopedia acts as a repository for reports and report components. Actuate's Virtual Report Distribution technology reduces network traffic by minimizing the movement of large reports and data sets. The Actuate Developer Workbench is designed to give developers a complete visual environment for designing, compiling, viewing and debugging sophisticated report designs. The Company began shipping its Actuate Reporting System in January 1996, and the Company's most recent version of the Actuate Reporting System, Version 3.1, began shipping in May 1998. The Company's strategy is to be the leading provider of enterprise reporting solutions. Key elements of Actuate's strategy include (i) expanding its market leadership position by establishing strategic relationships with the leading enterprise application vendors, consulting firms and systems integrators, (ii) extending its technology leadership through internal research and development and integration of acquired technologies, (iii) broadening its domestic and international distribution channels, and (iv) increasing its international presence through expanded distribution and product localization. The address of the Company's principal executive offices is 999 Baker Way, Suite 270, San Mateo, California 94404 and its telephone number is (650) 425- 2300. Unless otherwise indicated, all references in this Prospectus to the "Company" or "Actuate" refer to Actuate Software Corporation, a Delaware corporation, and its California predecessor. Actuate, the Company's logo, and Report Encyclopedia are registered trademarks of the Company, ReportCast, Live Report Document, Live Report Extension and Virtual Report Distribution are trademarks of the Company. All other trademarks, service marks or trade names referred to in this Prospectus are the property of their respective owners. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company........ 2,890,000 shares Common Stock offered by Selling Stockholders.............................. 110,000 shares Common Stock to be outstanding after the offering.................................. 13,443,000 shares(1) Use of Proceeds............................ For general corporate purposes, including working capital and capital expenditures. See "Use of Proceeds". Proposed Nasdaq National Market Symbol..... "ACTU" </TABLE> SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> SIX MONTHS YEARS ENDED ENDED DECEMBER 31, JUNE 30, ------------------------- ---------------- 1995 1996 1997 1997 1998 ------- ------- ------- ------- ------- STATEMENTS OF OPERATIONS DATA: (UNAUDITED) <S> <C> <C> <C> <C> <C> Revenues: License fees..................... $ -- $ 343 $ 7,542 $ 2,829 $ 7,009 Services......................... 22 308 1,976 616 1,754 ------- ------- ------- ------- ------- Total revenues................. 22 651 9,518 3,445 8,763 ------- ------- ------- ------- ------- Costs of revenues: License fees..................... -- 171 647 207 531 Services......................... 53 305 1,263 381 1,529 ------- ------- ------- ------- ------- Total cost of revenues......... 53 476 1,910 588 2,060 ------- ------- ------- ------- ------- Gross profit (loss)............... (31) 175 7,608 2,857 6,703 Operating expenses: Sales and marketing.............. 847 2,965 7,366 2,914 5,467 Research and development......... 1,883 2,731 6,213 2,504 3,574 General and administrative....... 240 603 1,317 413 1,200 ------- ------- ------- ------- ------- Total operating expenses....... 2,970 6,299 14,896 5,831 10,241 ------- ------- ------- ------- ------- Loss from operations.............. (3,001) (6,124) (7,288) (2,974) (3,538) Equity in losses of affiliate..... -- (25) (36) -- -- Interest and other income, net.... 166 90 82 30 36 ------- ------- ------- ------- ------- Net loss.......................... $(2,835) $(6,059) $(7,242) $(2,944) $(3,502) ======= ======= ======= ======= ======= Pro forma basic and diluted net loss per share(1)................ $ (0.78) $ (0.36) ======= ======= Shares used in computing pro forma basic and diluted net loss per share(1)......................... 9,290 9,848 ======= ======= </TABLE> <TABLE> <CAPTION> JUNE 30, 1998 ---------------------- ACTUAL AS ADJUSTED(2) ------ -------------- (UNAUDITED) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents.............................. $1,003 $29,843 Working capital (deficit).............................. (6,798) 22,042 Total assets........................................... 6,568 35,408 Long-term obligations.................................. 65 65 Stockholders' equity (deficit)......................... (5,457) 23,383 </TABLE> - -------- (1) Based on the number of shares outstanding as of June 30, 1998. Excludes (i) 1,046,300 shares of Common Stock issuable upon the exercise of outstanding stock options under the Company's 1994 Stock Option Plan as of June 30, 1998 at a weighted average exercise price of approximately $3.41 per share, (ii) 1,300,000 shares of Common Stock reserved for issuance under the Company's 1998 Equity Incentive Plan, (iii) 250,000 shares of Common Stock reserved for issuance under the Company's 1998 Employee Stock Purchase Plan and (iv) 200,000 shares of Common Stock reserved for issuance under the Company's 1998 Non-Employee Directors Option Plan. See "Management--Stock Plans" and Notes 8 and 10 of Notes to Financial Statements. (2) Adjusted to reflect the sale of shares of Common Stock by the Company at an assumed initial public offering price of $11.00 per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization".
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001062530_digital_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001062530_digital_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..c99515cc3c7a3d6866872a70cc8de51ddb7057b3
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+PROSPECTUS SUMMARY YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS. THE OUTCOME OF THE EVENTS DESCRIBED IN THESE FORWARD-LOOKING STATEMENTS IS SUBJECT TO RISKS AND ACTUAL RESULTS COULD DIFFER MATERIALLY. THE SECTIONS ENTITLED "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS" AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS CONTAIN A DISCUSSION OF SOME OF THE FACTORS THAT COULD CONTRIBUTE TO THOSE DIFFERENCES. DIGITAL RIVER We are a leading provider of comprehensive electronic commerce outsourcing solutions to software publishers and online retailers. We have developed a technology platform that allows us to provide a suite of electronic commerce services to our software publisher and online retailer clients, including electronic software delivery ("ESD"). We also provide data mining and merchandising services to assist clients in increasing Internet traffic and sales through their Web stores. We have no branded Web store that would compete with our clients. Instead, we provide an outsourcing solution that allows clients to promote their own brands while leveraging our investment in infrastructure and technology. As of September 30, 1998, we had contracts with 1,309 software publisher clients and 762 online retailer clients, including: - Corel Corporation; - Cyberian Outpost, Inc.; - Lotus Development Corporation; - Micro Warehouse, Inc.; - Network Associates, Inc.; and - Symantec Corporation. As of the same date, we maintained a database of more than 131,000 software products from our various software publisher clients, including more than 24,000 software titles and more than 107,000 digital images, such as photography, clip art and type fonts. Through September 30, 1998, we had completed more than 288,000 transactions for more than 213,000 unique end-users. Our proprietary commerce network server ("CNS") technology provides the platform for our solutions. The CNS incorporates custom software applications that enable ESD, Web store authoring, fraud prevention, export control, merchandising programs and online registration. The CNS also features our database of more than 131,000 software products. Using our CNS platform, we create Web stores for our clients that replicate the look and feel of each client's Web site. End-users enter the client Web site and are then seamlessly transferred to our system. End-users can then browse for products and make purchases online. Once purchases are made, we deliver the purchased software products directly to the end-user, primarily through ESD. We also provide transaction processing services, and collect and maintain critical information about end-users. Our clients can use this information to facilitate add-on or upgrade sales and for other direct marketing purposes. We actively manage direct marketing campaigns for our clients, and deliver purchase information and Web store traffic statistics to our clients on a regular basis. We believe that the market for online software sales will continue to grow rapidly. International Data Corporation estimates that the worldwide market for ESD will increase from approximately $200 million in 1997 to approximately $5.9 billion by 2001, a 133% compound annual growth rate. The Internet is well-suited for most software distribution because software products can be purchased and delivered quickly, conveniently and cost-effectively to an end-user's home or office computer through ESD. However, software applications exceeding 10 megabytes can be impractical to download at slower modem speeds. We believe that as Internet bandwidth increases, ESD will become increasingly attractive even for large software titles. Accordingly, we believe that ESD will represent an increasing share of online software sales and will become increasingly critical to online retailers' success. Unlike established physical distribution channels for shrink-wrapped software, until recently there has been no established, comprehensive electronic distribution source for online retailers. We believe that the distribution of software products through ESD is complex and requires up-front and ongoing investments in secure, reliable and scaleable systems. Accordingly, we believe that a substantial market opportunity exists for a comprehensive, cost-effective, outsourced electronic commerce solution that provides software publishers and online retailers with access to a critical mass of software products and a robust distribution and transaction network. We provide a number of advantages to software publishers, online retailers and end-users. We allow software publishers to: - avoid the cost and complexity of operating an electronic commerce infrastructure; - offer a full library of their software products; - avoid shipping and packaging costs; - offer software products through their own Web store or our network of online retailer clients; and - benefit from valuable end-user information and data mining capabilities to facilitate targeted marketing, upgrade notification and sophisticated merchandising. We allow online retailers to: - access most of our 131,000 software products; - avoid having to negotiate agreements with individual software publishers; and - avoid inventory costs and risks. End-users who purchase software products through our network can benefit from our: - value-added services, including credit card security and upgrade notifications; and - archiving service, which guarantees replacement of software products if they are lost or damaged. Digital River was incorporated in Minnesota in February 1994 and reincorporated into Delaware in December 1997. References in the prospectus to "Digital River," "we," "our," "us" and the "Company" refer to Digital River, Inc., a Delaware corporation and its subsidiaries. Our executive offices are located at 9625 West 76th Street, Suite 150, Eden Prairie, Minnesota 55344. Our telephone number is (612) 253-1234. Information contained on our Web site does not constitute part of this Prospectus. THE OFFERING <TABLE> <S> <C> Shares offered by Digital River.............. 1,750,000 shares Shares offered by the Selling Stockholders... 1,250,000 shares Shares to be outstanding after the 18,708,093 shares (1) offering..................................... Use of proceeds.............................. For general corporate purposes, including product development, expansion of sales and marketing activities, and working capital. Nasdaq National Market symbol................ DRIV </TABLE> SUMMARY CONSOLIDATED FINANCIAL INFORMATION <TABLE> <CAPTION> NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------- -------------------- 1995 1996 1997 1997 1998 --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Sales....................................................... $ -- $ 111 $ 2,472 $ 1,144 $ 11,504 Gross profit................................................ -- 16 420 204 1,894 Loss from operations........................................ (165) (697) (3,538) (2,143) (9,711) Net loss.................................................... (143) (689) (3,485) (2,098) (9,292) Basic and diluted net loss per share (2).................... $ (0.03) $ (0.13) $ (0.46) $ (0.30) $ (0.74) Shares used in per share computation (2).................... 5,333 5,333 7,514 7,098 12,484 </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1998 -------------------------- ACTUAL AS ADJUSTED(3) ---------- -------------- (IN THOUSANDS) <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents........................................................... $ 19,411 $ 68,698 Short-term investments.............................................................. 8,840 8,840 Working capital..................................................................... 26,107 75,394 Total assets........................................................................ 32,961 82,248 Accumulated deficit................................................................. (13,617) (13,617) Total stockholders' equity.......................................................... 29,345 78,632 </TABLE> - -------------------------- (1) Based on shares outstanding as of September 30, 1998. Excludes (i) 2,179,378 shares of Common Stock issuable upon exercise of options outstanding as of September 30, 1998 at a weighted average exercise price of $4.40 per share and includes options for 132,380 shares of Common Stock to be exercised in connection with this offering, (ii) 711,342 shares of Common Stock issuable upon exercise of warrants outstanding as of September 30, 1998 at a weighted average exercise price of $2.52 per share and includes warrants for 91,666 shares of Common Stock to be exercised in connection with this offering, and (iii) 613,791 shares reserved for future grants under the Company's stock option plan. See "Management--Employee Benefit Plans" and Notes 3 and 4 of Notes to Consolidated Financial Statements. (2) See Note 1 of Notes to Consolidated Financial Statements for an explanation of the determination of the number of shares used in computing per share data. (3) As adjusted reflects the estimated net proceeds from the sale of the 1,750,000 shares of Common Stock offered by Digital River in this offering, after deducting the estimated underwriting discount and estimated offering expenses. See "Use of Proceeds." EXCEPT AS OTHERWISE SPECIFIED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVERALLOTMENT OPTION. SEE "UNDERWRITING."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001062701_airwaves_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001062701_airwaves_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..362a56865f9f3e153ce8b559e71105e4c769c124
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+SUMMARY The following summary should be read in conjunction with the more detailed information, financial statements and notes thereto appearing elsewhere in this Prospectus. For additional information relating to certain defined terms used herein, as well as the sources for the market and other industry data contained herein, see "Certain Definitions and Market and Industry Data." THE COMPANY The Company is a leading television station group operator in the United States that operates eleven television stations and provides consulting services to two additional television stations. Twelve of these stations are network affiliates and nine are in top forty DMAs, including: Indianapolis, Indiana; New Haven-Hartford, Connecticut; Buffalo, New York; Norfolk-Portsmouth, Virginia; Grand Rapids-Kalamazoo-Battle Creek, Michigan and Dallas-Fort Worth, Texas. These stations have an aggregate United States household reach of approximately 6.9%, ranking the Company among the top independent, "pure-play" television station group operators in the United States. The Company's Core Stations generated an aggregate pro forma BCF margin of approximately 46% for the fiscal year ended December 31, 1997, principally as a result of their strong network affiliations, leading local news programming and tight cost controls. In addition, the Company's management pioneered the "multi-channel strategy," which involves the combination of an owned and operated television station with an LMA station and/or a 24-hour cable weather channel (a "Local Weather Station") in the same market. The multi-channel strategy has enhanced the Company's revenue market shares and increased its BCF by leveraging its fixed costs over a larger revenue base. The Company's station portfolio is well diversified in terms of its network affiliations, geographic coverage, net revenues and cash flow. The Company owns and operates three CBS affiliates, two NBC affiliates and two ABC affiliates which accounted for 35%, 28% and 28%, respectively, of the Company's pro forma BCF for the fiscal year ended December 31, 1997. The Company's LMA stations and Local Weather Stations accounted for substantially all of the remaining 9% of its BCF on the same basis. The Company's Core Stations broadcast in seven different markets, with no market representing more than 25% of the Company's pro forma net revenues or BCF for the fiscal year ended December 31, 1997. The Company's pro forma net revenues, BCF and EBITDA were $196.1 million, $79.5 million and $72.7 million, respectively, for the fiscal year ended December 31, 1997. Hicks, Muse, Tate & Furst Incorporated ("Hicks Muse"), a leading private equity firm with significant investments and experience in the media and communications industry, has acquired LIN Television to serve as a platform for acquiring and operating additional television stations that can benefit from management's ability to improve operating performance and increase BCF margins at acquired stations. In connection with the Acquisition, Hicks Muse and NBC formed a television station joint venture (the "Joint Venture"). The Joint Venture consists of KXAS-TV, LIN Television's Dallas-Fort Worth NBC affiliate, and KNSD-TV, NBC's San Diego station. A wholly owned subsidiary of NBC is the general partner of the Joint Venture (the "NBC General Partner") and NBC operates the stations owned by the Joint Venture pursuant to a management agreement. The NBC General Partner holds an approximate 80% equity interest and the Company holds an approximate 20% equity interest in the Joint Venture. General Electric Capital Corporation ("GECC") provided debt financing to the Joint Venture in the form of the GECC Note (as defined), the proceeds of which were distributed to the Company to finance a portion of the cost of the Acquisition. The GECC Note is not an obligation of Holdings, the Company or any of their respective subsidiaries and is recourse only to the Joint Venture, the Company's equity interest therein and to one of Holding's two corporate parents (the "GECC Note Guarantor") pursuant to a guarantee. The Company expects that the interest payments on the GECC Note will be serviced solely by the cash flow of the Joint Venture. See "The Transactions and Other Matters -- The Joint Venture." Later this year, the Company expects to acquire (the "Grand Rapids Acquisition") from AT&T Corporation ("AT&T") the assets of WOOD-TV and the LMA rights related to WOTV-TV (collectively, LIN TELEVISION CORPORATION LIN HOLDINGS CORP. CROSS REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING THE LOCATION IN THE PROSPECTUS OF THE INFORMATION REQUIRED BY PART I OF FORM S-1 <TABLE> <CAPTION> FORM S-1 ITEM NUMBER AND HEADING LOCATION IN PROSPECTUS -------------------------------- ---------------------- <S> <C> <C> 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus... Cover Page of Registration Statement; Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus............................ Inside Front and Outside Back Cover Pages of Prospectus 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges............. Certain Definitions and Market and Industry Data; Summary; Risk Factors; Selected Consolidated Financial and Operating Data; Unaudited Pro Forma Financial Information; Business 4. Use of Proceeds............................ Use of Proceeds 5. Determination of Offering Price............ Not Applicable 6. Dilution................................... Not Applicable 7. Selling Security Holders................... Not Applicable 8. Plan of Distribution....................... Front Cover Page of Prospectus; The Exchange Offers; Plan of Distribution 9. Description of Securities to be Registered............................... Description of New Senior Subordinated Notes; Description of New Senior Discount Notes 10. Interests of Named Experts and Counsel..... Not Applicable 11. Information with Respect to the Registrant............................... Cover Page of Registration Statement; Certain Definitions and Market and Industry Data; Summary; Risk Factors; The Transactions and Other Matters; Selected Consolidated Financial and Operating Data; Unaudited Pro Forma Consolidated Financial Information; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Securities Ownership of Certain Beneficial Owners; Certain Other Transactions; Description of the Senior Credit Facilities; Legal Matters 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities.............................. Not Applicable </TABLE> AVAILABLE INFORMATION The Issuers and the Guarantors have filed with the Securities and Exchange Commission (the "Commission") a Registration Statement (which term shall encompass any amendments thereto) on Form S-1 under the Securities Act with respect to the securities offered hereby. This Prospectus does not contain all information set forth in the Registration Statement and the exhibits thereto, to which reference is hereby made. Although the Issuers and the Guarantors believe that statements made in this Prospectus as to the contents of any contract, agreement, or other document describe all material elements of such documents, such statements are not necessarily complete. With respect to each such contract, agreement, or other document filed as an exhibit to the Registration Statement, reference is hereby made to such exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. As a result of the filing of the Registration Statement with the Commission, the Issuers and the Guarantors each will become subject to the informational reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In accordance therewith, the Company and Holdings will be required to file reports and other information with the Commission. Such reports and other information can be inspected and copied at the principal office of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and the following Regional Offices of the Commission: Chicago Regional Office, Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60611 and New York Regional office, 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of such material may also be obtained at prescribed rates from the Public Reference Section of the Commission at its principal office at Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549. The Commission also maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission at http://www.sec.gov. In reliance upon certain Staff Accounting Bulletins of the Commission, interpretations of the staff of the Commission and no-action relief granted by the Staff of the Commission to unrelated third parties, the Subsidiary Guarantors do not intend to file periodic reports with the Commission under the Exchange Act separately from the Issuers. The Issuers will furnish holders of the securities offered hereby with annual reports containing, among other information, audited financial statements certified by an independent public accounting firm and quarterly reports containing unaudited financial information for the first three quarters of each fiscal year. The Issuers will also furnish such other reports as it may determine or as may be required by law or by the indentures governing the New Notes. FORWARD LOOKING STATEMENTS THIS PROSPECTUS CONTAINS CERTAIN FORWARD LOOKING STATEMENTS WITH RESPECT TO THE FINANCIAL CONDITIONS, RESULTS OF OPERATIONS AND BUSINESSES OF THE ISSUERS, INCLUDING STATEMENTS UNDER THE CAPTIONS "SUMMARY," "UNAUDITED PRO FORMA FINANCIAL INFORMATION," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS." ALL OF THESE FORWARD LOOKING STATEMENTS ARE BASED ON ESTIMATES AND ASSUMPTIONS MADE BY MANAGEMENT OF THE ISSUERS WHICH, ALTHOUGH BELIEVED TO BE REASONABLE, ARE INHERENTLY UNCERTAIN. THEREFORE, UNDUE RELIANCE SHOULD NOT BE PLACED UPON SUCH ESTIMATES AND STATEMENTS. NO ASSURANCE CAN BE GIVEN THAT ANY OF SUCH ESTIMATES OR STATEMENTS WILL BE REALIZED AND IT IS LIKELY THAT ACTUAL RESULTS WILL DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE: (1) INCREASED COMPETITION, INCLUDING FROM NEWER FORMS OF ENTERTAINMENT AND ENTERTAINMENT MEDIA OR CHANGES IN THE POPULARITY OR AVAILABILITY OF PROGRAMMING; (2) INCREASED COSTS, INCLUDING INCREASED CAPITAL EXPENDITURES AS A RESULT OF NECESSARY TECHNOLOGICAL ENHANCEMENTS (E.G., EXPENDITURES RELATED TO THE TRANSITION TO DIGITAL the "Grand Rapids Stations"), both of which stations are located in the Grand Rapids-Kalamazoo-Battle Creek market. The Company currently provides services to the Grand Rapids Stations pursuant to a consulting agreement with AT&T. See "The Transactions and Other Matters -- The Grand Rapids Acquisition" and "Business -- The Company -- History." The following table provides information regarding the stations and other programming outlets operated by the Company and the stations owned by the Joint Venture: <TABLE> <CAPTION> COMMERCIAL STATION STATION DMAS, STATIONS AND OTHER DMA STATIONS IN RANK IN AUDIENCE PROGRAMMING OUTLETS STATUS(A) AFFILIATION(B) RANK(C) DMA(D) DMA(E) Share(e) ------------------------ --------- -------------- ------- ----------- ------- -------- <S> <C> <C> <C> <C> <C> <C> COMPANY STATIONS AND OTHER PROGRAMMING OUTLETS: INDIANAPOLIS, IN WISH-TV.......................................... O&O CBS 25 8 1 18% WIIH-LP (Satellite)(f)........................... O&O CBS Local Weather Station............................ O&O Cable NEW HAVEN-HARTFORD, CT WTNH-TV.......................................... O&O ABC 27 8 2 14% WBNE-TV.......................................... LMA WB 5(tie) 2% GRAND RAPIDS-KALAMAZOO-BATTLE CREEK, MI(g) WOOD-TV.......................................... CS NBC 37 8 1(tie) 18% WOTV-TV.......................................... CS ABC 4 5% NORFOLK-PORTSMOUTH, VA WAVY-TV.......................................... O&O NBC 39 7 1(tie) 16% WVBT-TV.......................................... LMA WB/Fox(h) 5 2% Local Weather Station............................ O&O Cable BUFFALO, NY WIVB-TV.......................................... O&O CBS 40 7 2 17% AUSTIN, TX KXAN-TV.......................................... O&O NBC 60 7 3 14% KNVA-TV.......................................... LMA WB 6 3% KXAM-TV (Satellite)(i)........................... O&O NBC Low Power Network................................ O&O UPN DECATUR-CHAMPAIGN, IL WAND-TV.......................................... O&O ABC 81 8 3 14% Local Weather Station............................ O&O Cable FORT WAYNE, IN WANE-TV.......................................... O&O CBS 102 6 2 19% Local Weather Station............................ O&O Cable DALLAS-FORT WORTH, TX KXTX-TV.......................................... LMA IND 8 13 9 3% JOINT VENTURE STATIONS: DALLAS-FORT WORTH, TX KXAS-TV.......................................... JV NBC 8 13 3 12% SAN DIEGO, CA KNSD-TV.......................................... JV NBC 26 7 1 13% </TABLE> - --------------- (a) "O&O" refers to a station owned and operated by the Company. "LMA" refers to a station operated by the Company pursuant to a local marketing agreement and with respect to which the Company has a purchase option exercisable under certain circumstances. "JV" refers to a station owned by the Joint Venture and operated by NBC. "CS" refers to a station which the Company currently provides services to pursuant to a consulting agreement. The Company's Core Stations, all of which are CBS, NBC and ABC affiliates, are WISH-TV, WANE-TV, WAND-TV, WAVY-TV, KXAN-TV, WTNH-TV and WIVB-TV. (b) "IND" refers to an independent station with no network affiliation. (c) Rankings are based on the relative size of the station's "market" among the 211 generally recognized television markets in the United States. Source: Nielsen Station Index DMA Market Ratings -- November 1997, A.C. Nielsen Company. (d) The number of stations in a market excludes local weather stations, low power networks and satellite broadcasting facilities. (e) Source: Nielsen Station Index DMA Market Ratings -- November 1997, A.C. Nielsen Company, Sunday-Saturday 6:00 a.m.-2:00 a.m. (f) Station WIIH-LP, Indianapolis, Indiana, is operated as a satellite station of WISH-TV in order to increase WISH-TV's coverage. PROSPECTUS <TABLE> <S> <C> OFFER FOR ALL OUTSTANDING OFFER FOR ALL OUTSTANDING 8 3/8% SENIOR SUBORDINATED NOTES DUE 10% SENIOR DISCOUNT NOTES DUE 2008 2008 IN EXCHANGE FOR IN EXCHANGE FOR 10% SENIOR DISCOUNT NOTES DUE 2008 8 3/8% SENIOR SUBORDINATED NOTES DUE OF 2008 LIN HOLDINGS CORP. OF LIN TELEVISION CORPORATION </TABLE> Pursuant to the terms and subject to the conditions set forth in this Prospectus and the accompanying letters of transmittal, (i) LIN Television Corporation, a Delaware corporation (the "Company"), and the Guarantors (as defined) hereby offer (the "Senior Subordinated Notes Exchange Offer") to exchange $1,000 principal amount of registered 8 3/8% Senior Subordinated Notes Due 2008 (the "New Senior Subordinated Notes") issued by the Company, for each $1,000 principal amount of unregistered 8 3/8% Senior Subordinated Notes Due 2008 (the "Old Senior Subordinated Notes," and together with the New Senior Subordinated Notes, the "Senior Subordinated Notes") issued by LIN Acquisition Company, the predecessor in interest of the Company ("LIN Acquisition"), of which an aggregate principal amount of $300,000,000 is outstanding and (ii) LIN Holdings Corp., a Delaware corporation ("Holdings") hereby offers (the "Senior Discount Notes Exchange Offer," and together with the Senior Subordinated Notes Exchange Offer, the "Exchange Offers") to exchange $1,000 principal amount at maturity of registered 10% Senior Discount Notes Due 2008 (the "New Senior Discount Notes") issued by Holdings, for each $1,000 principal amount at maturity of unregistered 10% Senior Discount Notes Due 2008 (the "Old Senior Discount Notes," and together with the New Senior Discount Notes, the "Senior Discount Notes") issued by Holdings, of which an aggregate principal amount at maturity of $325,000,000 is outstanding. The Old Senior Subordinated Notes and the Old Senior Discount Notes are sometimes collectively referred to herein as the "Old Notes" and the New Senior Subordinated Notes and the New Senior Discount Notes are sometimes collectively referred to herein as the "New Notes." The Old Notes and the New Notes are sometimes collectively referred to herein as the "Notes." The Company and Holdings are sometimes collectively referred to herein as the "Issuers." The form and terms of the New Notes are identical to the form and terms of the Old Notes except that (i) interest on the New Senior Subordinated Notes shall accrue from the date of issuance of the Old Senior Subordinated Notes, (ii) the Accreted Value (as defined) of the New Senior Discount Notes will be calculated from the date of issuance of the Old Senior Discount Notes, and (iii) the New Notes are being registered under the Securities Act of 1933, as amended (the "Securities Act"), and will not bear any legends restricting their transfer. The New Senior Subordinated Notes will evidence the same debt as the Old Senior Subordinated Notes and will be issued pursuant to, and entitled to the benefits of, the indenture governing the Old Senior Subordinated Notes. The New Senior Discount Notes will evidence the same debt as the Old Senior Discount Notes and will be issued pursuant to, and entitled to the benefits of, the indenture governing the Old Senior Discount Notes. The Exchange Offers are being made in order to satisfy certain contractual obligations of the Company and Holdings. See "The Exchange Offers," "Description of the New Senior Subordinated Notes" and "Description of the New Senior Discount Notes." The net proceeds from the sale of the Old Notes were used to effect the acquisition by Holdings of the Company and its subsidiaries (the "Acquisition"). Such acquisition was effected pursuant to the merger of LIN Acquisition with and into the Company, with the Company surviving as a wholly owned subsidiary of Holdings. See "The Transactions and Other Matters." --------------------- SEE "RISK FACTORS" BEGINNING ON PAGE 22 FOR A DISCUSSION OF CERTAIN INFORMATION THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NEW NOTES. --------------------- The Company and Holdings will accept for exchange any and all Old Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on , 1998, unless extended (as so extended, the "Expiration Date"). Tenders of Old Notes may be withdrawn at any time prior to the Expiration Date. The Exchange Offers are subject to certain customary conditions. See "The Exchange Offers." In order for a holder of Old Notes to participate in an Exchange Offer, such holder must represent to the Company or Holdings, as appropriate, that, among other things, (i) the New Notes acquired pursuant to such Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Notes, whether or not such person is the holder of the Old Notes, (ii) neither the holder nor any such other person is engaging or intends to engage in a distribution of such New Notes, (iii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Notes within the meaning of the Securities Act, (iv) neither the holder nor any such other person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of the Company, Holdings or any Guarantor, and (v) if such holder or other person is a broker-dealer, that it will receive New Notes for its own account in exchange for Old Notes that were acquired as a result of marketmaking activities or other trading activities. See "The Exchange Offers--Purpose and Effect." Each broker-dealer that receives New Notes for its own account pursuant to either of the Exchange Offers must acknowledge that it will deliver a prospectus in connection with any resale of those New Notes. The letter of transmittal accompanying this Prospectus states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for Old Notes where such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company and Holdings have agreed that, for a period of 90 days after the Expiration Date, they will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." No public market has existed for the Old Notes. The Company and Holdings currently do not intend to list the New Notes on any securities exchange or to seek approval for quotation through any automated quotation system, and no active public market for the New Notes is currently anticipated. The Company and Holdings will pay all expenses incident to the Exchange Offers. The Exchange Offers are not conditioned upon any minimum principal amount of Old Senior Subordinated Notes or Old Senior Discount Notes being tendered for exchange pursuant to the Exchange Offers. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DATE OF THIS PROSPECTUS IS , 1998. BROADCASTING) OR ACQUISITIONS OR INCREASED PROGRAMMING COSTS; (3) INABILITY TO CONSUMMATE ACQUISITIONS ON ATTRACTIVE TERMS; (4) LOSS OR RETIREMENT OF KEY MEMBERS OF MANAGEMENT; (5) INCREASES IN THE ISSUERS' COST OF BORROWINGS OR INABILITY OR UNAVAILABILITY OF ADDITIONAL DEBT OR EQUITY CAPITAL; (6) ADVERSE STATE OR FEDERAL LEGISLATION OR REGULATION OR ADVERSE DETERMINATIONS BY REGULATORS; AND (7) CHANGES IN ADVERTISING TRENDS AND/OR BUDGETS AND IN GENERAL ECONOMIC CONDITIONS IN THE MARKETS IN WHICH THE ISSUERS MAY, FROM TIME TO TIME, COMPETE. MANY OF SUCH FACTORS WILL BE BEYOND THE CONTROL OF THE ISSUERS AND THEIR MANAGEMENT. FORWARD-LOOKING STATEMENTS CONTAINED HEREIN SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULT OF ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS WHICH MAY BE MADE TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. FOR FURTHER INFORMATION OR OTHER FACTORS WHICH COULD AFFECT THE FINANCIAL RESULTS OF THE ISSUERS AND SUCH FORWARD LOOKING STATEMENTS, SEE "RISK FACTORS." (g) The Company currently provides services to WOOD-TV and WOTV-TV pursuant to a consulting agreement with AT&T. The Company has agreed to acquire the assets of WOOD-TV and the LMA rights related to WOTV-TV from AT&T for a purchase price of approximately $125.5 million. The acquisition is expected to close later this year. See "The Transactions and Other Matters -- The Grand Rapids Acquisition" and "Business -- The Company -- History." (h) WVBT-TV will become a Fox affiliate on August 31, 1998. (i) Station KXAM-TV, Llano, Texas, is operated as a satellite station of KXAN-TV in order to increase KXAN-TV's coverage. BUSINESS STRATEGY The Company's business strategy is to maximize its BCF through both revenue growth and the implementation of effective cost controls. To achieve these goals, the Company seeks, among other things, to: Maximize Revenue Shares. From 1993 to 1997, the Company increased its broadcast television advertising revenue market share from 22.8% to 25.9% (assuming the acquisitions of WIVB-TV and WTNH-TV occurred on January 1, 1993) by targeting audiences with favorable demographic profiles, creating auxiliary revenue streams and cultivating strong network affiliations. On the same basis, the Company's gross advertising revenues have grown at a compound annual rate of 10.3%, whereas gross advertising revenues in the Company's markets have grown at a compound annual rate of 6.8%. The Company attempts to maximize each station's revenue share through a quarterly "entitlement review process." This process involves the benchmarking of each station's advertising revenues against an index which weights various demographic attributes according to their relative advertising revenue value. As a result of the entitlement review process, the Company's revenue shares typically outperform its audience shares. The Company's revenue shares also benefit from long term affiliations with its three core networks -- CBS, NBC and ABC -- which provide the Company's television stations affiliated with such networks with competitive programming, including coverage of political events and high profile sporting events such as the Olympic Games, Super Bowl and NCAA Men's Basketball Tournament. The Company also has stations affiliated with Fox, WB and UPN, which further enhances its ability to grow its revenue shares through access to their competitive programming. Emphasize Leading Local News. The Company's Core Stations are ranked number one or two in late news in all but the Company's smallest market. Management believes that a successful news operation is critical to the success of a television station because news audiences generally have the best demographic profiles from an advertising sales perspective. In addition, news programming: (i) enables the Company to purchase less syndicated programming and thereby maintain tight control over programming costs; (ii) serves as a strong lead-in to other programming; and (iii) fosters a high profile in the local community, which is critical to maximizing local advertising sales. The Company believes that its local news programming significantly improves its stations' BCF margins. Accordingly, the Company has increased the hours of news produced per week from 81 in 1989 to 187 in 1997 on a pro forma basis. Partly as a result of its emphasis on quality local news programming, management has increased the BCF margin at the five network-affiliated stations that it has operated throughout the period from January 1, 1991 to December 31, 1997 (WISH-TV, WANE-TV, WAND-TV, WAVY-TV and KXAN-TV) from 37% to 47%. Execute a Multi-Channel Strategy. The Company's management pioneered the "multi-channel strategy," which involves the combination of an owned and operated television station with an LMA station and/or a Local Weather Station in the same market. Management has pursued this strategy in all but one of the Company's markets. Execution of the multi-channel strategy has been a factor in the Company's ability to generate incremental cash flow. The advantages of the multi-channel strategy are: (i) the ability to capitalize on management's expertise; (ii) additional advertising inventory in each market; (iii) greater programming flexibility; (iv) enhanced ability to leverage fixed operating costs over a larger revenue base; (v) improved negotiating positions with respect to suppliers of syndicated programming, advertisers and the networks; (vi) increased share of actual viewers; (vii) the opportunity to affiliate with the emerging networks; and (viii) enhanced opportunities for cross promotion. CERTAIN DEFINITIONS AND MARKET AND INDUSTRY DATA As used in this Prospectus, unless the context otherwise requires, (i) "Holdings" refers to LIN Holdings Corp., (ii) "LIN Acquisition" refers to LIN Acquisition Company, (iii) "LIN Television" or the "Predecessor" refers to LIN Television Corporation and its subsidiaries prior to the Acquisition, (iv) the "Company" refers to LIN Television after giving effect to the Acquisition (as defined), the Financings (as defined) and the Joint Venture (as defined) (collectively, the "Transactions"), except where the context requires otherwise, (v) "on a pro forma basis" or "pro forma" means after giving effect to the Transactions, except as indicated otherwise and (vi) "Core Stations" refers to the CBS, NBC and ABC-affiliated stations owned and operated by the Company (WISH-TV, WANE-TV, WAND-TV, WAVY-TV, KXAN-TV, WTNH-TV and WIVB-TV). See "The Transactions and Other Matters." The terms "broadcast cash flow" ("BCF") and "EBITDA" are referred to in various places in this Prospectus. BCF is defined as operating income (loss) plus corporate expenses plus depreciation and amortization of intangible assets and amortization of program rights plus other non-cash expenses (consisting of tower write-offs and non-cash pension expenses), minus cash program payments. EBITDA is defined as BCF minus corporate expenses. BCF and EBITDA are not measures of performance calculated in accordance with generally accepted accounting principles ("GAAP"). However, management believes that BCF is useful to a prospective investor because it is a measure widely used in the broadcast industry to evaluate a television broadcast company's operating performance and that EBITDA is useful to a prospective investor because it is widely used in the broadcast industry to evaluate a television broadcast company's ability to service debt. BCF and EBITDA should not be considered in isolation of or as a substitute for net income (loss), cash flows from operating activities and other income and cash flow statement data prepared in accordance with GAAP or as a measure of liquidity or profitability. BCF and EBITDA as determined above may not be comparable to the BCF and EBITDA measures reported by other companies. In addition, these measures do not represent funds available for discretionary use. Designated market area ("DMA") rankings are from the Nielsen Station Index dated November 1997 as estimated by the A.C. Nielsen Company ("Nielsen"). There are 211 generally-recognized television "markets" or DMAs in the United States, which are ranked in size according to various factors based upon actual or potential audience. Unless otherwise indicated herein, (i) market revenue, market revenue share, projected advertising revenue growth and station revenue share data have been obtained from Investing in Television 1994, 1995, 1996 and 1997, BIA Publications, Inc. ("BIA"); (ii) television household data has been obtained from the Nielsen Station Index for November of the appropriate year; (iii) audience share and audience rankings, except where specifically stated to the contrary, have been derived from Nielsen estimates (for May and November of the appropriate year) of the percentage of persons in the DMA tuned into the relevant station from sign-on to sign-off (Sunday to Saturday, 6:00 a.m. to 2:00 a.m.); (iv) general market economic data has been obtained from BIA and the chambers of commerce in each station's market; (v) the term "station" or "commercial station" means a television broadcast station and does not include public television stations, cable stations or networks (e.g., CNN, TBS or ESPN), or stations that do not meet the minimum Nielsen reporting standards (i.e., weekly cumulative audience share of at least 2.5% for Sunday to Saturday, 7:00 a.m. to 1:00 a.m.); and (vi) the term "independent" describes a commercial television station that is not affiliated with the ABC, CBS, NBC, Fox, WB or UPN television networks. Control Costs. In addition to concentrating on maximizing advertising revenues in its local markets, management focuses on controlling costs to maximize BCF. In many markets, the Company operates with fewer personnel than its competitors. In addition, management typically buys syndicated programming on a Company-wide basis and performs detailed profitability analyses for all programming purchases. As a result, management believes that the Company's margins are among the highest in the industry for stations in markets of comparable size. Pursue Selective Acquisitions. The Company intends to pursue selective acquisitions of television stations with the goal of improving their operating performance by applying management's business strategy. Targeted stations generally will share many of the following characteristics: (i) attractive acquisition terms; (ii) opportunities for increased advertising revenue; (iii) opportunities to implement effective cost controls; (iv) opportunities for increased audience share through improved newscasts and programming; and (v) market locations that are projected to have attractive growth in advertising revenues. The Company intends to primarily target network-affiliated stations located in the fifty largest DMAs, which stations typically have established audiences for their news, sports and entertainment programming. Invest in Digital Technology. Management believes that the Company is well positioned for the transition to digital broadcasting and anticipates that the Company will be one of the first television broadcasters in the United States to transmit a digital signal. The Company has already invested $13 million to fully prepare its towers and transmitter buildings for the transition, and estimates that an additional $40 million will be required over the next five to seven years for other necessary capital expenditures such as the purchase of antennae, transmitters, studio equipment and news gathering equipment. In accordance with FCC regulations, all station affiliates of ABC, CBS, NBC and Fox in the top ten DMAs will be required to transmit a digital signal by May 1, 1999. Affiliates of those networks in DMAs ranked eleven through thirty will be required to transmit a digital signal by November 1, 1999. All remaining commercial broadcasters will be required to transmit a digital signal by May 1, 2002. MANAGEMENT AND OWNERSHIP The Company's management team, led by Gary Chapman, the Company's President and Chief Executive Officer, is recognized as an industry leader. As an indication of management's expertise and ability, the five network-affiliated stations operated by management throughout the period from January 1, 1991 to December 31, 1997 (WISH-TV, WANE-TV, WAND-TV, WAVY-TV and KXAN-TV) achieved an aggregate annual compound growth rate in net revenues and BCF of 8.9% (from $57.8 million to $96.2 million) and 13.3% (from $21.4 million to $45.2 million), respectively. Management also increased the Company's BCF margin at these stations from 37% to 47% during such period. In connection with the Acquisition, management and key employees reinvested a portion of their equity interest in LIN Television in the indirect parent corporation of Holdings. In addition, management and key employees will be granted options to acquire additional shares representing an approximate 5% equity interest in such parent corporation. Hicks Muse is a leading private investment firm with offices in Dallas, New York, St. Louis and Mexico City that specializes in leveraged acquisitions, recapitalizations and other principal investing activities. Hicks Muse and its predecessor firm have completed or have pending over 100 transactions having a combined transaction value of more than $24 billion. Although Hicks Muse invests in a wide variety of industries, it has significant investments and experience in the media and communications industry, including interests in Chancellor Media, Capstar Broadcasting, STC Broadcasting, Katz Media, OmniAmerica Tower and Grupo MVS. Hicks Muse plans to utilize an investment model for the Company similar to that used for Chancellor Media and Capstar Broadcasting. Chancellor Media was formed in 1993 with the purchase of two radio stations. Today, Chancellor Media is the second largest radio operator in the United States in terms of revenue (behind only CBS). Similarly, Capstar Broadcasting was formed in 1996 for the purpose of acquiring radio stations in small to medium size markets. Capstar Broadcasting is now the largest radio operator in the United States in terms of number of stations. See "Risk Factors -- Potential Conflicts of Interest" and "Certain Other Transactions." THE TRANSACTIONS AND OTHER MATTERS THE TRANSACTIONS The Acquisition. Holdings, LIN Acquisition and LIN Television entered into an Agreement and Plan of Merger on August 12, 1997 (as amended, the "Merger Agreement"). Pursuant to, and upon the terms and conditions of, the Merger Agreement, Holdings acquired LIN Television (the "Acquisition") on March 3, 1998 by merging LIN Acquisition, its wholly-owned subsidiary, with and into LIN Television (the "Merger"), with LIN Television surviving the Merger and becoming a direct, wholly owned subsidiary of Holdings. The total purchase price for the common equity of LIN Television was approximately $1.7 billion. In addition, the Company refinanced $260.2 million of LIN Television indebtedness and incurred acquisition costs of approximately $32.2 million. The Financings. The Acquisition was funded by (i) $6.9 million of excess cash on the Company's balance sheet; (ii) $50.0 million aggregate principal amount of senior secured Tranche A term loans ("Tranche A Term Loans"); (iii) $120.0 million aggregate principal amount of senior secured Tranche B term loans ("Tranche B Term Loans"); (iv) $299.3 million gross proceeds from the issuance by LIN Television of $300.0 million aggregate principal amount of Old Senior Subordinated Notes; (v) $199.6 million gross proceeds from the issuance by Holdings of $325.0 million aggregate principal amount at maturity of Old Senior Discount Notes, which proceeds were contributed by Holdings to the common equity of the Company; (vi) $558.1 million of common equity provided by affiliates of Hicks Muse, management and other co-investors to the equity of the corporate parents of Holdings, which in turn, through Holdings, contributed such amount to the common equity of the Company; and (vii) $815.5 million of proceeds of the GECC Note (collectively, the "Financings"). The Joint Venture. In connection with the Acquisition, Hicks Muse and NBC formed the Joint Venture. The Joint Venture consists of KXAS-TV, formerly LIN Television's Dallas-Fort Worth NBC affiliate, and KNSD-TV, formerly NBC's San Diego station. A wholly owned subsidiary of NBC is the general partner of the Joint Venture and NBC operates the stations owned by the Joint Venture. The NBC General Partner holds an approximate 80% equity interest and the Company holds an approximate 20% equity interest in the Joint Venture. GECC provided debt financing for the Joint Venture in the form of an $815.5 million 25-year non-amortizing senior secured note bearing an initial interest rate of 8.0% per annum (the "GECC Note"). The Company expects that the interest payments on the GECC Note will be serviced solely by the cash flow of the Joint Venture. All Distributable Cash (as defined) of the Joint Venture will be distributed to the Company and the NBC General Partner based on their respective equity interests in the Joint Venture. On a pro forma basis for the fiscal year ended December 31, 1997, the Company's portion of the Joint Venture's Distributable Cash would have been $2.2 million (without giving effect to a reserve of $15.0 million which must be established, subject to waiver by the Company, prior to any distribution of Distributable Cash). See "Risk Factors -- Control of Holdings and the Company." The GECC Note was issued by LIN Television of Texas, L.P., the Company's indirect wholly owned partnership ("LIN Texas"), which distributed the proceeds to the Company to finance a portion of the cost of the Acquisition. The obligations to GECC under the GECC Note were assumed by the Joint Venture and LIN Texas was simultaneously released from all obligations under the GECC Note. The GECC Note is not an obligation of Holdings, the Company or any of their respective subsidiaries and is recourse only to the Joint Venture, the Company's equity interest therein and to the GECC Note Guarantor. See "Risk Factors -- Defaults under the GECC Note" and "The Transactions and Other Matters -- The Joint Venture." In connection with the formation of the Joint Venture, the Company received an extension of its NBC network affiliation agreements to 2010 and the option (exercisable through December 31, 1999) to purchase WVTM-TV, the NBC affiliate in Birmingham, Alabama. Sources and Uses. The following table sets forth the sources and uses of funds in connection with the Acquisition (dollars in millions): <TABLE> <S> <C> SOURCES Excess cash........................ $ 6.9 Term Loans(a)...................... 170.0 Old Senior Subordinated Notes(b)... 299.3 Holdings contributions(c).......... 757.7 GECC Note(d)....................... 815.5 -------- Total Sources................. $2,049.4 ======== USES Purchase of LIN Television equity(e)........................ $1,706.4 Refinance LIN Television debt...... 260.2 Transaction fees and expenses(f)... 82.8 -------- Total Uses.................... $2,049.4 ======== </TABLE> - --------------- (a) The Term Loans funded in connection with the Acquisition consisted of $50.0 million aggregate principal amount of Tranche A Term Loans and $120.0 million aggregate principal amount of Tranche B Term Loans. As of December 31, 1997, the interest rates payable on outstanding Tranche A Term Loans and Tranche B Term Loans would have been approximately 7.50% and 8.00%, respectively. See "Description of the Senior Credit Facilities." (b) Represents gross proceeds to the Company from the issuance of $300.0 million aggregate principal amount of Old Senior Subordinated Notes. (c) Affiliates of Hicks Muse, management and other co-investors contributed $558.1 million to the equity of the corporate parents of Holdings, which in turn, through Holdings, contributed such amount to the common equity of the Company. In addition, Holdings issued $325.0 million aggregate principal amount at maturity of Old Senior Discount Notes and contributed the $199.6 million gross proceeds thereof to the common equity of the Company. (d) LIN Texas distributed the proceeds from the issuance of the GECC Note to the Company, which used such proceeds to finance a portion of the cost of the Acquisition. The GECC Note is not an obligation of Holdings, the Company or any of their respective subsidiaries and is recourse only to the Joint Venture, the Company's equity interest therein and to the GECC Note Guarantor. The Company expects that the interest payments on the GECC Note will be serviced solely by the cash flow of the Joint Venture. See "Risk Factors -- Control of Holdings and the Company" and "-- Defaults under the GECC Note" and "The Transactions and Other Matters -- The Joint Venture.". (e) The purchase price reflects the total price to acquire the equity of LIN Television (including KXAS-TV, which was contributed to the Joint Venture). (f) Includes discounts and commissions on the Old Notes in connection with the Offerings. Organizational Structure The following chart depicts (i) the summary organizational chart of Holdings and the Company and (ii) the sources of financing for the Transactions: LIN GRAPH THE GRAND RAPIDS ACQUISITION The Company expects to consummate the Grand Rapids Acquisition later this year. The Company currently provides services to the Grand Rapids Stations pursuant to a consulting agreement with AT&T. The total purchase price for the Grand Rapids Acquisition will be approximately $125.5 million (plus accretion thereon of 8% from March 1, 1998), which is expected to be funded by $125.0 million of additional Tranche A Term Loans. For the fiscal year ended December 31, 1997, the Grand Rapids Stations generated net revenues and BCF of $28.4 million and $11.3 million, respectively. The historical and pro forma financial information contained herein does not give effect to the Grand Rapids Acquisition. See "The Transactions and Other Matters -- The Grand Rapids Acquisition" and "Business -- The Company -- History." RECENT DEVELOPMENTS Chancellor Media Corporation, a Delaware corporation ("Chancellor") and Ranger Equity Holdings Corporation, a Delaware corporation ("Ranger"), the indirect parent company of Holdings and the Company, entered into an Agreement and Plan of Merger, dated July 7, 1998 (the "Chancellor Merger Agreement"). Pursuant to, and subject to the prior satisfaction or waiver of certain customary conditions (including, without limitation, the approval of Chancellor's and the Company's respective shareholders, the receipt of necessary FCC approvals, and the termination or expiration of the applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended) set forth in, the Chancellor Merger Agreement, Ranger will be merged with and into Chancellor (the "Chancellor Merger"), with Chancellor continuing as the surviving corporation following the Chancellor Merger. As a result of the Chancellor Merger, (i) each share of common stock, $0.01 par value ("Ranger Common Stock"), of Ranger will be converted into the right to receive 0.0300 of a share of common stock, $0.01 par value ("Chancellor Common Stock"), of Chancellor, other than shares of Ranger Common Stock for which appraisal rights have been exercised pursuant to Section 262 of the General Corporation Law of the State of Delaware. In addition, Chancellor, as the surviving corporation, will assume certain outstanding options to purchase shares of Ranger Common Stock held by certain directors, officers, employees and consultants of Ranger and its subsidiaries. Following the Chancellor Merger, Holdings and the Company will become indirect, wholly owned subsidiaries of Chancellor. A Chancellor shareholder has filed a shareholders derivative lawsuit in a chancery court in the State of Delaware, purportedly on behalf of Chancellor, naming Chancellor, Chancellor's directors and the Company as defendants. The lawsuit seeks, among other things, money damages and an injunction prohibiting the consummation of the Chancellor Merger. The Company believes that the lawsuit is without substantial merit and intends to vigorously defend the action. THE EXCHANGE OFFERS THE SENIOR SUBORDINATED NOTES EXCHANGE OFFER: The Senior Subordinated Notes Exchange Offer applies to $300,000,000 aggregate principal amount of the Old Senior Subordinated Notes. The form and terms of the New Senior Subordinated Notes will be the same as the form and terms of the Old Senior Subordinated Notes except that (i) interest on the New Senior Subordinated Notes will accrue from the date of issuance of the Old Senior Subordinated Notes, and (ii) the New Senior Subordinated Notes are being registered under the Securities Act and, therefore, will not bear legends restricting their transfer. The New Senior Subordinated Notes will evidence the same debt as the Old Senior Subordinated Notes and will be entitled to the benefits of the Senior Subordinated Notes Indenture (as defined) pursuant to which the Old Senior Subordinated Notes were issued. The Old Senior Subordinated Notes and the New Senior Subordinated Notes are sometimes referred to collectively herein as the "Senior Subordinated Notes." See "Description of the New Senior Subordinated Notes." The Senior Subordinated Notes Exchange Offer....... $1,000 principal amount of New Senior Subordinated Notes in exchange for each $1,000 principal amount of Old Senior Subordinated Notes. As of the date hereof, Old Senior Subordinated Notes representing $300,000,000 aggregate principal amount are outstanding. The terms of the New Senior Subordinated Notes and the Old Senior Subordinated Notes are substantially identical. Based on an interpretation by the Commission's staff set forth in no-action letters issued to third parties unrelated to the Company, Holdings and the Guarantors, the Company and the Guarantors believe that New Senior Subordinated Notes issued pursuant to the Senior Subordinated Notes Exchange Offer in exchange for Old Senior Subordinated Notes may be offered for resale, resold and otherwise transferred by any person receiving the New Senior Subordinated Notes, whether or not that person is the registered holder (other than any such holder or such other person that is an "affiliate" of the Company or any Guarantors within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that (i) the New Senior Subordinated Notes are acquired in the ordinary course of business of that holder or such other person, (ii) neither the holder nor such other person is engaging in or intends to engage in a distribution of the New Senior Subordinated Notes, and (iii) neither the holder nor such other person has an arrangement or understanding with any person to participate in the distribution of the New Senior Subordinated Notes. See "The Exchange Offers -- Purpose and Effect." Each broker-dealer that receives New Senior Subordinated Notes for its own account in exchange for Old Senior Subordinated Notes, where those Old Senior Subordinated Notes were acquired by the broker-dealer as a result of its market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Subordinated Notes. See "Plan of Distribution." Senior Subordinated Notes Registration Rights Agreement................ The Old Senior Subordinated Notes were sold by the Company on March 3, 1998, in a private placement in reliance on Section 4(2) of the Securities Act and immediately resold by the initial purchasers thereof (the "Initial Purchasers") in reliance on Rule 144A under the Securities Act (the "Original Senior Subordinated Notes Offering"). In connection with the original Senior Subordinated Notes Offering, the Company and Holdings entered into a Registration Rights Agreement with the Initial Purchasers (the "Senior Subordinated Notes Registration Rights Agreement") providing for, among other things, the Senior Subordinated Notes Exchange Offer. See "The Exchange Offers -- Purpose and Effect." Expiration Date............ The Senior Subordinated Notes Exchange Offer will expire at 5:00 p.m., New York City time, on , 1998, or such later date and time to which it is extended by the Company. Withdrawal................. The tender of Old Senior Subordinated Notes pursuant to the Senior Subordinated Notes Exchange Offer may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Any Old Senior Subordinated Notes not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Senior Subordinated Notes Exchange Offer. Interest on the New Senior Subordinated Notes and Old Senior Subordinated Notes.................... Interest on each New Senior Subordinated Note will accrue from the date of issuance of the Old Senior Subordinated Note for which such Old Senior Subordinated Note is exchanged or from the date of the last periodic payment of interest on such Old Note, whichever is later. Conditions to the Senior Subordinated Notes Exchange Offer........... The Senior Subordinated Notes Exchange Offer is subject to certain customary conditions, certain of which may be waived by the Company. See "The Exchange Offers -- Certain Conditions to the Exchange Offers." Procedures for Tendering Old Senior Subordinated Notes.................... Each holder of Old Senior Subordinated Notes wishing to accept the Senior Subordinated Notes Exchange Offer must complete, sign and date the accompanying letter of transmittal relating to the Senior Subordinated Notes Exchange Offer (the "Senior Subordinated Notes Letter of Transmittal"), or a copy thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver the Senior Subordinated Notes Letter of Transmittal, or the copy, together with the Old Senior Subordinated Notes and any other required documentation, to the Senior Subordinated Notes Exchange Agent (as defined) at the address set forth in the Senior Subordinated Notes Letter of Transmittal. Persons holding Old Senior Subordinated Notes through the Depository Trust Company ("DTC") and wishing to accept the Senior Subordinated Notes Exchange Offer must do so pursuant to the DTC's Automated Tender Offer Program, by which each tendering Participant will agree to be bound by the Senior Subordinated Notes Letter of Transmittal. By executing or agreeing to be bound by the Senior Subordinated Notes Letter of Transmittal, each holder will represent to the Company that, among other things, (i) the New Senior Subordinated Notes acquired pursuant to the Senior Subordinated Notes Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Senior Subordinated Notes, whether or not such person is the holder of the Old Senior Subordinated Notes, (ii) neither the holder nor any such other person is engaging in or intends to engage in a distribution of such New Senior Subordinated Notes, (iii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Senior Subordinated Notes within the meaning of the Securities Act, (iv) neither the holder nor any such person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of the Company or any Guarantor, and (v) if such holder or other person is a broker-dealer, that it will receive New Senior Subordinated Notes for its own account in exchange for Old Senior Subordinated Notes that were acquired as a result of market-making activities or other trading activities and that it will be required to acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Subordinated Notes. See "The Exchange Offers -- Procedures for Tendering." Shelf Registration Requirement.............. Pursuant to the Senior Subordinated Notes Registration Rights Agreement, the Company is required to file a "shelf" registration statement for a continuous offering pursuant to Rule 415 under the Securities Act in respect of the Old Senior Subordinated Notes if (i) because of any change in law or applicable interpretations of the staff of the Commission, the Company is not permitted to effect the Senior Subordinated Notes Exchange Offer, (ii) the Senior Subordinated Notes Exchange Offer is not consummated within 225 days of the Original Senior Subordinated Notes Offering, (iii) any holder of Private Exchange Securities (as defined) requests within 60 days after the Senior Subordinated Notes Exchange Offer, (iv) any applicable law or interpretations do not permit any holder of Old Senior Subordinated Notes to participate in the Senior Subordinated Notes Exchange Offer, (v) any holder of Old Senior Subordinated Notes participates in the Senior Subordinated Notes Exchange Offer and does not receive freely transferrable New Senior Subordinated Notes in change for Old Senior Subordinated Notes or (vi) the Company so elects. Acceptance of Old Senior Subordinated Notes and Delivery of New Senior Subordinated Notes....... The Company will accept for exchange any and all Old Senior Subordinated Notes which are properly tendered (and not withdrawn) in the Senior Subordinated Notes Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Senior Subordinated Notes issued pursuant to the Senior Subordinated Notes Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offers -- Terms of the Exchange Offers." Senior Subordinated Notes Exchange Agent........... United States Trust Company of New York is serving as Exchange Agent (the "Senior Subordinated Notes Exchange Agent") in connection with the Senior Subordinated Notes Exchange Offer. Federal Income Tax Considerations........... The exchange pursuant to the Senior Subordinated Notes Exchange Offer should not be a taxable event for federal income tax purposes. See "Certain United States Federal Income Tax Considerations." Effect of Not Tendering.... Old Senior Subordinated Notes that are not tendered or that are tendered but not accepted will, following the completion of the Senior Subordinated Notes Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. THE SENIOR DISCOUNT NOTES EXCHANGE OFFER: The Senior Discount Notes Exchange Offer applies to $325,000,000 aggregate principal amount at maturity of the Old Senior Discount Notes. The form and terms of the New Senior Discount Notes will be the same as the form and terms of the Old Senior Discount Notes except that (i) the Accreted Value (as defined) of the New Senior Discount Notes will be calculated from the date of issuance of the Old Senior Discount Notes and (ii) the New Senior Discount Notes are being registered under the Securities Act and, therefore, will not bear legends restricting their transfer. The New Senior Discount Notes will evidence the same debt as the Old Senior Discount Notes and will be entitled to the benefits of the Senior Discount Notes Indenture (as defined) pursuant to which the Old Senior Discount Notes were issued. The Old Senior Discount Notes and the New Senior Discount Notes are sometimes referred to collectively herein as the "Senior Discount Notes." See "Description of the New Senior Discount Notes." The Senior Discount Notes Exchange Offer........... $1,000 principal amount at maturity of New Senior Discount Notes in exchange for each $1,000 principal amount at maturity of Old Senior Discount Notes. As of the date hereof, Old Senior Discount Notes representing $325,000,000 aggregate principal amount at maturity are outstanding. The terms of the New Senior Discount Notes and the Old Senior Discount Notes are substantially identical. Based on an interpretation by the Commission's staff set forth in no-action letters issued to third parties unrelated to Holdings, Holdings believes that New Senior Discount Notes issued pursuant to the Senior Discount Notes Exchange Offer in exchange for Old Senior Discount Notes may be offered for resale, resold and otherwise transferred by any person receiving the New Senior Discount Notes, whether or not that person is the holder (other than any such holder or such other person that is an "affiliate" of Holdings within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that (i) the New Senior Discount Notes are required in the ordinary course of business of that holder or such other person, (ii) neither the holder nor such other person is engaging in or intends to engage in a distribution of the New Senior Discount Notes, and (iii) neither the holder nor such other person has an arrangement or understanding with any person to participate in the distribution of the New Senior Discount Notes. See "The Exchange Offers -- Purpose and Effect." Each broker-dealer that receives New Senior Discount Notes for its own account in exchange for Old Senior Discount Notes where the Old Senior Discount Notes were acquired by the broker-dealer as a result of its market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Discount Notes. See "Plan of Distribution." Senior Discount Notes Registration Rights Agreement................ The Old Senior Discount Notes were sold by Holdings on March 3, 1998, in a private placement in reliance on Section 4(2) of the Securities Act and immediately resold by the Initial Purchasers in reliance on Rule 144A under the Securities Act (the "Original Senior Discount Notes Offering," and together with the Original Senior Subordinated Notes Offering, the "Original Offerings.") In connection with the Original Senior Discount Notes Offering, the Company and Holdings entered into a Registration Rights Agreement with the Initial Purchasers (the "Senior Discount Notes Registration Rights Agreement") providing for, among other things, the Senior Discount Notes Exchange Offer. See "The Exchange Offers -- Purpose and Effect." Expiration Date............ The Senior Discount Notes Exchange Offer will expire at 5:00 p.m., New York City time, on , 1998, or such later date and time to which it is extended by Holdings. Withdrawal................. The tender of Old Senior Discount Notes pursuant to the Senior Discount Notes Exchange Offer may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Any Old Senior Discount Notes not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Senior Discount Notes Exchange Offer. Accreted Value of the New Senior Discount Notes and Old Senior Discount Notes.................... The Accreted Value of each New Senior Discount Note will be calculated from the date of issuance of the Old Senior Discount Note for which such New Senior Discount Note is exchanged. Conditions to the Senior Discount Notes Exchange Offer.................... The Senior Discount Notes Exchange Offer is subject to certain customary conditions, certain of which may be waived by the Company. See "The Exchange Offers -- Certain Conditions to the Exchange Offers." Procedures for Tendering Senior Discount Notes...... Each holder of Old Senior Discount Notes wishing to accept the Senior Discount Notes Exchange Offer must complete, sign and date the accompanying letter of transmittal relating to the Senior Discount Notes Exchange Offer (the "Senior Discount Notes Letter of Transmittal"; the Senior Discount Notes Letter of Transmittal and the Senior Subordinated Notes Letter of Transmittal are sometimes referred to herein individually as a "Letter of Transmittal" and collectively as the "Letters of Transmittal"), or a copy thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver the Senior Discount Notes Letter of Transmittal, or the copy, together with the Old Senior Discount Notes and any other required documentation, to the Senior Discount Notes Exchange Offer (as defined) at the address set forth in the Senior Discount Notes Letter of Transmittal. Persons holding Old Discount Notes through the DTC and wishing to accept the Senior Discount Notes Exchange Offer must do so pursuant to the DTC's Automated Tender Offer Program, by which each tendering Participant will agree to be bound by the Senior Discount Notes Letter of Transmittal. By executing or agreeing to be bound by the Senior Discount Notes Letter of Transmittal, each holder will represent to Holdings that, among other things, (i) the New Senior Discount Notes acquired pursuant to the Senior Discount Notes Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Senior Discount Notes, whether or not such person is the holder of the Old Senior Discount Notes, (ii) neither the holder nor any such other person is engaging in or intends to engage in a distribution of such New Senior Discount Notes, (iii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Senior Discount Notes, (iv) neither the holder nor any such other person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of Holdings, and (v) if such holder or other person is a broker-dealer, that it will receive New Senior Discount Notes for its own account in exchange for Old Senior Discount Notes that were acquired as a result of market-making activities or other trading activities and that it will be required to acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Discount Notes. Shelf Registration Requirement.............. Pursuant to the Senior Discount Notes Registration Rights Agreement, Holdings is required to file a "shelf" registration statement for a continuous offering pursuant to Rule 415 under the Securities Act in respect of the Old Senior Discount Notes if (i) because of any change in law or applicable interpretations of the staff of the Commission, Holdings is not permitted to effect the Senior Discount Notes Exchange Offer, (ii) the Senior Discount Notes Exchange Offer is not consummated within 225 days of the Original Senior Discount Notes Offering, (iii) any holder of Private Exchange Securities (as defined) requests within 60 days after the Senior Discount Notes Exchange Offer, (iv) any applicable law or interpretations do not permit any holder of Old Senior Discount Notes to participate in the Senior Discount Notes Exchange Offer, (v) any holder of Old Senior Discount Notes participates in the Senior Discount Notes Exchange Offer and does not receive freely transferrable New Senior Discount Notes in exchange for Old Senior Discount Notes or (vi) Holdings so elects. Acceptance of Old Senior Discount Notes and Delivery of New Senior Discount Notes.................... Holdings will accept for exchange any and all Old Senior Discount Notes which are properly tendered (and not withdrawn) in the Senior Discount Notes Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Senior Discount Notes issued pursuant to the Senior Discount Notes Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offers -- Terms of the Exchange Offer." Senior Discount Notes Exchange Agent........... United States Trust Company of New York is serving as Exchange Agent (the "Senior Discount Notes Exchange Agent"; the Senior Subordinated Notes Exchange Agent and the Senior Discount Notes Exchange Agent are sometimes referred to herein individually as an "Exchange Agent" and collectively as the "Exchange Agents") in connection with the Senior Discount Notes Exchange Offer. Federal Income Tax Considerations........... The exchange pursuant to the Senior Discount Notes Exchange Offer should not be a taxable event for federal income tax purposes. See "Certain United States Federal Income Tax Considerations." Effect of Not Tendering.... Old Senior Discount Notes that are not tendered or that are tendered but not accepted will, following the completion of the Senior Discount Notes Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. TERMS OF THE NEW NOTES NEW SENIOR SUBORDINATED NOTES Issuer..................... LIN Television Corporation (as successor-in-interest to LIN Acquisition Company). Securities Offered......... $300,000,000 aggregate principal amount of 8 3/8% Senior Subordinated Notes due 2008. Maturity................... March 1, 2008. Interest Payment Dates..... March 1 and September 1 of each year, commencing September 1, 1998. Sinking Fund............... None. Optional Redemption........ Except as described below, the Company may not redeem the New Senior Subordinated Notes prior to March 1, 2003. On or after such date, the Company may redeem the Senior Subordinated Notes, in whole or in part, at the redemption prices set forth herein, together with accrued and unpaid interest, if any, to the date of redemption. In addition, at any time and from time to time on or prior to March 1, 2001, the Company may redeem up to 35% of the aggregate principal amount of the Senior Subordinated Notes with the net cash proceeds of one or more private or public offerings by the Company, at a redemption price equal to 108.375% of the principal amount to be redeemed, together with accrued and unpaid interest, if any, to the date of redemption, provided that at least 65% of the originally issued aggregate principal amount of the Senior Subordinated Notes remains outstanding after each such redemption. See "Description of the New Senior Subordinated Notes -- Optional Redemption." Change of Control.......... Upon the occurrence of a Change of Control, (i) the Company will have the option, at any time on or prior to March 1, 2003, to redeem the New Senior Subordinated Notes, in whole but not in part, at a redemption price equal to 100% of the principal amount thereof, plus accrued and unpaid interest plus the Applicable Premium (as defined) and (ii) if the New Senior Subordinated Notes are not redeemed or if such Change of Control occurs after March 1, 2003, the Company will be required to make an offer to repurchase the New Senior Subordinated Notes at a price equal to 101% of the principal amount thereof, together with accrued and unpaid interest, if any, to the date of purchase. See "Description of the New Senior Subordinated Notes -- Change of Control" and "-- Amendment." Guarantees................. The New Senior Subordinated Notes will be guaranteed (the "Subsidiary Guarantees"), jointly and severally on an unsecured senior subordinated basis, by the Company's direct and indirect, existing and future, Restricted Subsidiaries (the "Guarantors"). The Guarantors also will guarantee all obligations of the Company under the Senior Credit Facilities (as defined). The Company's obligations under the Senior Credit Facilities also will be secured by substantially all of the assets of the Company and the Guarantors. The obligations of each Guarantor under its Subsidiary Guarantee will be subordinated in right of payment to the prior payment in full of all Guarantor Senior Indebtedness (as defined) of such Guarantor to substantially the same extent as the Senior Subordinated Notes are subordinated to all existing and future Senior Indebtedness of the Company. See "Description of the New Senior Subordinated Notes -- Subsidiary Guarantees of the New Senior Subordinated Notes." Ranking.................... The New Senior Subordinated Notes will be unsecured and will be subordinated in right of payment to all existing and future Senior Indebtedness (as defined) of the Company and will rank pari passu in right of payment with all Senior Subordinated Indebtedness (as defined) of the Company. As of March 31, 1998, the aggregate principal amount of the Company's outstanding Senior Indebtedness was $170.0 million (consisting of outstanding Term Loans) and the Company had no Senior Subordinated Indebtedness outstanding other than the Senior Subordinated Notes and had no Subsidiary Indebtedness outstanding. As of such date, liabilities of the Company's Subsidiaries reflected on its consolidated balance sheet, including indebtedness and other liabilities such as trade payables and accrued expenses, aggregated $17.8 million. See "Description of the New Senior Subordinated Notes -- Ranking and Subordination." Restrictive Covenants...... The Senior Subordinated Notes Indenture limits, among other things, (i) the incurrence of additional indebtedness and issuance of capital stock, (ii) layering of indebtedness, (iii) the payment of dividends on, and redemption of, capital stock of the Company, (iv) liens, (v) mergers, consolidations, and sales of all or substantially all of the Company's assets, (vi) asset sales, (vii) asset swaps, (viii) dividend and other payment restrictions affecting Restricted Subsidiaries and (ix) transactions with affiliates of the Company. However, all of these limitations and prohibitions are subject to a number of important qualifications and exceptions. See "Description of the New Senior Subordinated Notes -- Certain Covenants." Use of Proceeds............ There will be no cash proceeds to the Company from the exchange of New Senior Subordinated Notes for Old Senior Subordinated Notes pursuant to the Senior Subordinated Notes Exchange Offer. The net proceeds from the Original Senior Subordinated Notes Offering were used, together with the proceeds of the other Financings, to consummate the Acquisition. NEW SENIOR DISCOUNT NOTES Issuer..................... LIN Holdings Corp. Securities Offered......... $325,000,000 aggregate principal amount at maturity of 10% Senior Discount Notes due 2008. The Senior Discount Notes will be issued at a discount to their aggregate principal amount at maturity. Maturity................... March 1, 2008. Interest Payment Dates..... Cash interest will not accrue or be payable on the New Senior Discount Notes prior to March 1, 2003. Thereafter, cash interest on the New Senior Discount Notes will accrue at a rate of 10% per annum and will be payable semi-annually in arrears on March 1 and September 1 of each year, commencing on September 1, 2003. Original Issue Discount.... For federal income tax purposes, the New Senior Discount Notes will be treated as having been issued with "original issue discount" equal to the difference between the issue price of the Old Senior Discount Notes and the sum of all cash payments (whether denominated as principal or interest) to be made thereon. Each holder of a New Senior Discount Note must include as gross income for federal income tax purposes a portion of such original issue discount for each day during each taxable year in which a New Senior Discount Note is held even though no cash interest payments will be received prior to March 1, 2003. See "Certain United States Federal Income Tax Considerations -- Taxation of Original Issue Discount." Sinking Fund............... None. Mandatory Principal Redemption............... Except as described below, Holdings may not redeem the New Senior Discount Notes prior to March 1, 2003. On March 1, 2003, Holdings will be required to redeem Senior Discount Notes with an aggregate principal amount at maturity equal to (i) $125.0 million multiplied by (ii) the quotient obtained by dividing (x) the aggregate principal amount at maturity of Senior Discount Notes then outstanding (other than Senior Discount Notes then held by Holdings or its Subsidiaries or the entities with respect to which Holdings is a direct or indirect Subsidiary) by (y) $325.0 million, (the "Mandatory Principal Redemption Amount") at a redemption price equal to 100% of the principal amount at maturity of the Senior Discount Notes so redeemed. See "Description of the New Senior Discount Notes -- Mandatory Principal Redemption." Optional Redemption........ The New Senior Discount Notes will be redeemable at the option of Holdings, in whole or in part, at any time on or after March 1, 2003. On or after such date, Holdings may redeem the New Senior Discount Notes, in whole or in part, at the redemption prices set forth herein, together with accrued and unpaid interest, if any, to the date of redemption. In addition, at any time and from time to time on or prior to March 1, 2001, Holdings may, subject to certain requirements, redeem up to 35% of the aggregate principal amount at maturity of the Senior Discount Notes with the net cash proceeds from one or more private or public equity offerings at a price equal to 110% of the Accreted Value (as defined) at the date of redemption, provided that at least 65% of the originally issued aggregate principal amount at maturity of the Senior Discount Notes remains outstanding after each such redemption. See "Description of the New Senior Discount Notes -- Optional Redemption." Change of Control.......... Upon a Change of Control, (i) Holdings will have the option, at any time on or prior to March 1, 2003, to redeem the New Senior Discount Notes, in whole but not in part, at a redemption price equal to 100% of the Accreted Value thereof plus the Applicable Premium and (ii) if the New Senior Discount Notes are not so redeemed or if such Change of Control occurs after March 1, 2003, Holdings will be required to make an offer to repurchase the New Senior Discount Notes at a price equal to (a) 101% of the Accreted Value thereof if redeemed on or before March 1, 2003, and (b) 101% of the principal amount at maturity, plus accrued and unpaid interest, if any, thereon, if redeemed after March 1, 2003. See "Description of the New Senior Discount Notes -- Change of Control." Guarantees................. None. Ranking.................... The New Senior Discount Notes will be senior unsecured obligations of Holdings and will rank pari passu in right of payment with all Senior Indebtedness of Holdings, including Holdings' guarantee of the Senior Credit Facilities. Holdings is a holding company with no operations of its own and whose primary asset is the capital stock of the Company (all of which will be pledged to secure the Senior Credit Facilities). As a result of the holding company structure, the New Senior Discount Notes will effectively rank junior in right of payment to all creditors of the Company and its subsidiaries, including the lenders under the Senior Credit Facilities, holders of the Senior Subordinated Notes and trade creditors. As of March 31, 1998, the New Senior Discount Notes were effectively subordinated to $523.8 of aggregate liabilities (including indebtedness and other liabilities such as trade payables and accrued expenses that would have been reflected on the consolidated balance sheet) of the Company and its subsidiaries. See "Description of the New Senior Discount Notes." Restrictive Covenants...... The Senior Discount Notes Indenture limits, among other things, (i) the incurrence of additional indebtedness and issuance of capital stock, (ii) the payment of dividends on, and redemption of, capital stock of Holdings, (iii) mergers, consolidations and sales of all or substantially all of Holdings' assets, (iv) asset sales, (v) asset swaps, (vi) dividend and other payment restrictions affecting Restricted Subsidiaries and (vii) transactions with affiliates. However, all of these limitations and prohibitions are subject to a number of important qualifications and exceptions. See "Description of the New Senior Discount Notes -- Certain Covenants."
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+SUMMARY The following summary should be read in conjunction with the more detailed information, financial statements and notes thereto appearing elsewhere in this Prospectus. For additional information relating to certain defined terms used herein, as well as the sources for the market and other industry data contained herein, see "Certain Definitions and Market and Industry Data." THE COMPANY The Company is a leading television station group operator in the United States that operates eleven television stations and provides consulting services to two additional television stations. Twelve of these stations are network affiliates and nine are in top forty DMAs, including: Indianapolis, Indiana; New Haven-Hartford, Connecticut; Buffalo, New York; Norfolk-Portsmouth, Virginia; Grand Rapids-Kalamazoo-Battle Creek, Michigan and Dallas-Fort Worth, Texas. These stations have an aggregate United States household reach of approximately 6.9%, ranking the Company among the top independent, "pure-play" television station group operators in the United States. The Company's Core Stations generated an aggregate pro forma BCF margin of approximately 46% for the fiscal year ended December 31, 1997, principally as a result of their strong network affiliations, leading local news programming and tight cost controls. In addition, the Company's management pioneered the "multi-channel strategy," which involves the combination of an owned and operated television station with an LMA station and/or a 24-hour cable weather channel (a "Local Weather Station") in the same market. The multi-channel strategy has enhanced the Company's revenue market shares and increased its BCF by leveraging its fixed costs over a larger revenue base. The Company's station portfolio is well diversified in terms of its network affiliations, geographic coverage, net revenues and cash flow. The Company owns and operates three CBS affiliates, two NBC affiliates and two ABC affiliates which accounted for 35%, 28% and 28%, respectively, of the Company's pro forma BCF for the fiscal year ended December 31, 1997. The Company's LMA stations and Local Weather Stations accounted for substantially all of the remaining 9% of its BCF on the same basis. The Company's Core Stations broadcast in seven different markets, with no market representing more than 25% of the Company's pro forma net revenues or BCF for the fiscal year ended December 31, 1997. The Company's pro forma net revenues, BCF and EBITDA were $196.1 million, $79.5 million and $72.7 million, respectively, for the fiscal year ended December 31, 1997. Hicks, Muse, Tate & Furst Incorporated ("Hicks Muse"), a leading private equity firm with significant investments and experience in the media and communications industry, has acquired LIN Television to serve as a platform for acquiring and operating additional television stations that can benefit from management's ability to improve operating performance and increase BCF margins at acquired stations. In connection with the Acquisition, Hicks Muse and NBC formed a television station joint venture (the "Joint Venture"). The Joint Venture consists of KXAS-TV, LIN Television's Dallas-Fort Worth NBC affiliate, and KNSD-TV, NBC's San Diego station. A wholly owned subsidiary of NBC is the general partner of the Joint Venture (the "NBC General Partner") and NBC operates the stations owned by the Joint Venture pursuant to a management agreement. The NBC General Partner holds an approximate 80% equity interest and the Company holds an approximate 20% equity interest in the Joint Venture. General Electric Capital Corporation ("GECC") provided debt financing to the Joint Venture in the form of the GECC Note (as defined), the proceeds of which were distributed to the Company to finance a portion of the cost of the Acquisition. The GECC Note is not an obligation of Holdings, the Company or any of their respective subsidiaries and is recourse only to the Joint Venture, the Company's equity interest therein and to one of Holding's two corporate parents (the "GECC Note Guarantor") pursuant to a guarantee. The Company expects that the interest payments on the GECC Note will be serviced solely by the cash flow of the Joint Venture. See "The Transactions and Other Matters -- The Joint Venture." Later this year, the Company expects to acquire (the "Grand Rapids Acquisition") from AT&T Corporation ("AT&T") the assets of WOOD-TV and the LMA rights related to WOTV-TV (collectively, LIN TELEVISION CORPORATION LIN HOLDINGS CORP. CROSS REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING THE LOCATION IN THE PROSPECTUS OF THE INFORMATION REQUIRED BY PART I OF FORM S-1 <TABLE> <CAPTION> FORM S-1 ITEM NUMBER AND HEADING LOCATION IN PROSPECTUS -------------------------------- ---------------------- <S> <C> <C> 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus... Cover Page of Registration Statement; Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus............................ Inside Front and Outside Back Cover Pages of Prospectus 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges............. Certain Definitions and Market and Industry Data; Summary; Risk Factors; Selected Consolidated Financial and Operating Data; Unaudited Pro Forma Financial Information; Business 4. Use of Proceeds............................ Use of Proceeds 5. Determination of Offering Price............ Not Applicable 6. Dilution................................... Not Applicable 7. Selling Security Holders................... Not Applicable 8. Plan of Distribution....................... Front Cover Page of Prospectus; The Exchange Offers; Plan of Distribution 9. Description of Securities to be Registered............................... Description of New Senior Subordinated Notes; Description of New Senior Discount Notes 10. Interests of Named Experts and Counsel..... Not Applicable 11. Information with Respect to the Registrant............................... Cover Page of Registration Statement; Certain Definitions and Market and Industry Data; Summary; Risk Factors; The Transactions and Other Matters; Selected Consolidated Financial and Operating Data; Unaudited Pro Forma Consolidated Financial Information; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Securities Ownership of Certain Beneficial Owners; Certain Other Transactions; Description of the Senior Credit Facilities; Legal Matters 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities.............................. Not Applicable </TABLE> AVAILABLE INFORMATION The Issuers and the Guarantors have filed with the Securities and Exchange Commission (the "Commission") a Registration Statement (which term shall encompass any amendments thereto) on Form S-1 under the Securities Act with respect to the securities offered hereby. This Prospectus does not contain all information set forth in the Registration Statement and the exhibits thereto, to which reference is hereby made. Although the Issuers and the Guarantors believe that statements made in this Prospectus as to the contents of any contract, agreement, or other document describe all material elements of such documents, such statements are not necessarily complete. With respect to each such contract, agreement, or other document filed as an exhibit to the Registration Statement, reference is hereby made to such exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. As a result of the filing of the Registration Statement with the Commission, the Issuers and the Guarantors each will become subject to the informational reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In accordance therewith, the Company and Holdings will be required to file reports and other information with the Commission. Such reports and other information can be inspected and copied at the principal office of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and the following Regional Offices of the Commission: Chicago Regional Office, Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60611 and New York Regional office, 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of such material may also be obtained at prescribed rates from the Public Reference Section of the Commission at its principal office at Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549. The Commission also maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission at http://www.sec.gov. In reliance upon certain Staff Accounting Bulletins of the Commission, interpretations of the staff of the Commission and no-action relief granted by the Staff of the Commission to unrelated third parties, the Subsidiary Guarantors do not intend to file periodic reports with the Commission under the Exchange Act separately from the Issuers. The Issuers will furnish holders of the securities offered hereby with annual reports containing, among other information, audited financial statements certified by an independent public accounting firm and quarterly reports containing unaudited financial information for the first three quarters of each fiscal year. The Issuers will also furnish such other reports as it may determine or as may be required by law or by the indentures governing the New Notes. FORWARD LOOKING STATEMENTS THIS PROSPECTUS CONTAINS CERTAIN FORWARD LOOKING STATEMENTS WITH RESPECT TO THE FINANCIAL CONDITIONS, RESULTS OF OPERATIONS AND BUSINESSES OF THE ISSUERS, INCLUDING STATEMENTS UNDER THE CAPTIONS "SUMMARY," "UNAUDITED PRO FORMA FINANCIAL INFORMATION," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS." ALL OF THESE FORWARD LOOKING STATEMENTS ARE BASED ON ESTIMATES AND ASSUMPTIONS MADE BY MANAGEMENT OF THE ISSUERS WHICH, ALTHOUGH BELIEVED TO BE REASONABLE, ARE INHERENTLY UNCERTAIN. THEREFORE, UNDUE RELIANCE SHOULD NOT BE PLACED UPON SUCH ESTIMATES AND STATEMENTS. NO ASSURANCE CAN BE GIVEN THAT ANY OF SUCH ESTIMATES OR STATEMENTS WILL BE REALIZED AND IT IS LIKELY THAT ACTUAL RESULTS WILL DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE: (1) INCREASED COMPETITION, INCLUDING FROM NEWER FORMS OF ENTERTAINMENT AND ENTERTAINMENT MEDIA OR CHANGES IN THE POPULARITY OR AVAILABILITY OF PROGRAMMING; (2) INCREASED COSTS, INCLUDING INCREASED CAPITAL EXPENDITURES AS A RESULT OF NECESSARY TECHNOLOGICAL ENHANCEMENTS (E.G., EXPENDITURES RELATED TO THE TRANSITION TO DIGITAL the "Grand Rapids Stations"), both of which stations are located in the Grand Rapids-Kalamazoo-Battle Creek market. The Company currently provides services to the Grand Rapids Stations pursuant to a consulting agreement with AT&T. See "The Transactions and Other Matters -- The Grand Rapids Acquisition" and "Business -- The Company -- History." The following table provides information regarding the stations and other programming outlets operated by the Company and the stations owned by the Joint Venture: <TABLE> <CAPTION> COMMERCIAL STATION STATION DMAS, STATIONS AND OTHER DMA STATIONS IN RANK IN AUDIENCE PROGRAMMING OUTLETS STATUS(A) AFFILIATION(B) RANK(C) DMA(D) DMA(E) Share(e) ------------------------ --------- -------------- ------- ----------- ------- -------- <S> <C> <C> <C> <C> <C> <C> COMPANY STATIONS AND OTHER PROGRAMMING OUTLETS: INDIANAPOLIS, IN WISH-TV.......................................... O&O CBS 25 8 1 18% WIIH-LP (Satellite)(f)........................... O&O CBS Local Weather Station............................ O&O Cable NEW HAVEN-HARTFORD, CT WTNH-TV.......................................... O&O ABC 27 8 2 14% WBNE-TV.......................................... LMA WB 5(tie) 2% GRAND RAPIDS-KALAMAZOO-BATTLE CREEK, MI(g) WOOD-TV.......................................... CS NBC 37 8 1(tie) 18% WOTV-TV.......................................... CS ABC 4 5% NORFOLK-PORTSMOUTH, VA WAVY-TV.......................................... O&O NBC 39 7 1(tie) 16% WVBT-TV.......................................... LMA WB/Fox(h) 5 2% Local Weather Station............................ O&O Cable BUFFALO, NY WIVB-TV.......................................... O&O CBS 40 7 2 17% AUSTIN, TX KXAN-TV.......................................... O&O NBC 60 7 3 14% KNVA-TV.......................................... LMA WB 6 3% KXAM-TV (Satellite)(i)........................... O&O NBC Low Power Network................................ O&O UPN DECATUR-CHAMPAIGN, IL WAND-TV.......................................... O&O ABC 81 8 3 14% Local Weather Station............................ O&O Cable FORT WAYNE, IN WANE-TV.......................................... O&O CBS 102 6 2 19% Local Weather Station............................ O&O Cable DALLAS-FORT WORTH, TX KXTX-TV.......................................... LMA IND 8 13 9 3% JOINT VENTURE STATIONS: DALLAS-FORT WORTH, TX KXAS-TV.......................................... JV NBC 8 13 3 12% SAN DIEGO, CA KNSD-TV.......................................... JV NBC 26 7 1 13% </TABLE> - --------------- (a) "O&O" refers to a station owned and operated by the Company. "LMA" refers to a station operated by the Company pursuant to a local marketing agreement and with respect to which the Company has a purchase option exercisable under certain circumstances. "JV" refers to a station owned by the Joint Venture and operated by NBC. "CS" refers to a station which the Company currently provides services to pursuant to a consulting agreement. The Company's Core Stations, all of which are CBS, NBC and ABC affiliates, are WISH-TV, WANE-TV, WAND-TV, WAVY-TV, KXAN-TV, WTNH-TV and WIVB-TV. (b) "IND" refers to an independent station with no network affiliation. (c) Rankings are based on the relative size of the station's "market" among the 211 generally recognized television markets in the United States. Source: Nielsen Station Index DMA Market Ratings -- November 1997, A.C. Nielsen Company. (d) The number of stations in a market excludes local weather stations, low power networks and satellite broadcasting facilities. (e) Source: Nielsen Station Index DMA Market Ratings -- November 1997, A.C. Nielsen Company, Sunday-Saturday 6:00 a.m.-2:00 a.m. (f) Station WIIH-LP, Indianapolis, Indiana, is operated as a satellite station of WISH-TV in order to increase WISH-TV's coverage. PROSPECTUS <TABLE> <S> <C> OFFER FOR ALL OUTSTANDING OFFER FOR ALL OUTSTANDING 8 3/8% SENIOR SUBORDINATED NOTES DUE 10% SENIOR DISCOUNT NOTES DUE 2008 2008 IN EXCHANGE FOR IN EXCHANGE FOR 10% SENIOR DISCOUNT NOTES DUE 2008 8 3/8% SENIOR SUBORDINATED NOTES DUE OF 2008 LIN HOLDINGS CORP. OF LIN TELEVISION CORPORATION </TABLE> Pursuant to the terms and subject to the conditions set forth in this Prospectus and the accompanying letters of transmittal, (i) LIN Television Corporation, a Delaware corporation (the "Company"), and the Guarantors (as defined) hereby offer (the "Senior Subordinated Notes Exchange Offer") to exchange $1,000 principal amount of registered 8 3/8% Senior Subordinated Notes Due 2008 (the "New Senior Subordinated Notes") issued by the Company, for each $1,000 principal amount of unregistered 8 3/8% Senior Subordinated Notes Due 2008 (the "Old Senior Subordinated Notes," and together with the New Senior Subordinated Notes, the "Senior Subordinated Notes") issued by LIN Acquisition Company, the predecessor in interest of the Company ("LIN Acquisition"), of which an aggregate principal amount of $300,000,000 is outstanding and (ii) LIN Holdings Corp., a Delaware corporation ("Holdings") hereby offers (the "Senior Discount Notes Exchange Offer," and together with the Senior Subordinated Notes Exchange Offer, the "Exchange Offers") to exchange $1,000 principal amount at maturity of registered 10% Senior Discount Notes Due 2008 (the "New Senior Discount Notes") issued by Holdings, for each $1,000 principal amount at maturity of unregistered 10% Senior Discount Notes Due 2008 (the "Old Senior Discount Notes," and together with the New Senior Discount Notes, the "Senior Discount Notes") issued by Holdings, of which an aggregate principal amount at maturity of $325,000,000 is outstanding. The Old Senior Subordinated Notes and the Old Senior Discount Notes are sometimes collectively referred to herein as the "Old Notes" and the New Senior Subordinated Notes and the New Senior Discount Notes are sometimes collectively referred to herein as the "New Notes." The Old Notes and the New Notes are sometimes collectively referred to herein as the "Notes." The Company and Holdings are sometimes collectively referred to herein as the "Issuers." The form and terms of the New Notes are identical to the form and terms of the Old Notes except that (i) interest on the New Senior Subordinated Notes shall accrue from the date of issuance of the Old Senior Subordinated Notes, (ii) the Accreted Value (as defined) of the New Senior Discount Notes will be calculated from the date of issuance of the Old Senior Discount Notes, and (iii) the New Notes are being registered under the Securities Act of 1933, as amended (the "Securities Act"), and will not bear any legends restricting their transfer. The New Senior Subordinated Notes will evidence the same debt as the Old Senior Subordinated Notes and will be issued pursuant to, and entitled to the benefits of, the indenture governing the Old Senior Subordinated Notes. The New Senior Discount Notes will evidence the same debt as the Old Senior Discount Notes and will be issued pursuant to, and entitled to the benefits of, the indenture governing the Old Senior Discount Notes. The Exchange Offers are being made in order to satisfy certain contractual obligations of the Company and Holdings. See "The Exchange Offers," "Description of the New Senior Subordinated Notes" and "Description of the New Senior Discount Notes." The net proceeds from the sale of the Old Notes were used to effect the acquisition by Holdings of the Company and its subsidiaries (the "Acquisition"). Such acquisition was effected pursuant to the merger of LIN Acquisition with and into the Company, with the Company surviving as a wholly owned subsidiary of Holdings. See "The Transactions and Other Matters." --------------------- SEE "RISK FACTORS" BEGINNING ON PAGE 22 FOR A DISCUSSION OF CERTAIN INFORMATION THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NEW NOTES. --------------------- The Company and Holdings will accept for exchange any and all Old Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on , 1998, unless extended (as so extended, the "Expiration Date"). Tenders of Old Notes may be withdrawn at any time prior to the Expiration Date. The Exchange Offers are subject to certain customary conditions. See "The Exchange Offers." In order for a holder of Old Notes to participate in an Exchange Offer, such holder must represent to the Company or Holdings, as appropriate, that, among other things, (i) the New Notes acquired pursuant to such Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Notes, whether or not such person is the holder of the Old Notes, (ii) neither the holder nor any such other person is engaging or intends to engage in a distribution of such New Notes, (iii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Notes within the meaning of the Securities Act, (iv) neither the holder nor any such other person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of the Company, Holdings or any Guarantor, and (v) if such holder or other person is a broker-dealer, that it will receive New Notes for its own account in exchange for Old Notes that were acquired as a result of marketmaking activities or other trading activities. See "The Exchange Offers--Purpose and Effect." Each broker-dealer that receives New Notes for its own account pursuant to either of the Exchange Offers must acknowledge that it will deliver a prospectus in connection with any resale of those New Notes. The letter of transmittal accompanying this Prospectus states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for Old Notes where such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company and Holdings have agreed that, for a period of 90 days after the Expiration Date, they will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." No public market has existed for the Old Notes. The Company and Holdings currently do not intend to list the New Notes on any securities exchange or to seek approval for quotation through any automated quotation system, and no active public market for the New Notes is currently anticipated. The Company and Holdings will pay all expenses incident to the Exchange Offers. The Exchange Offers are not conditioned upon any minimum principal amount of Old Senior Subordinated Notes or Old Senior Discount Notes being tendered for exchange pursuant to the Exchange Offers. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DATE OF THIS PROSPECTUS IS , 1998. BROADCASTING) OR ACQUISITIONS OR INCREASED PROGRAMMING COSTS; (3) INABILITY TO CONSUMMATE ACQUISITIONS ON ATTRACTIVE TERMS; (4) LOSS OR RETIREMENT OF KEY MEMBERS OF MANAGEMENT; (5) INCREASES IN THE ISSUERS' COST OF BORROWINGS OR INABILITY OR UNAVAILABILITY OF ADDITIONAL DEBT OR EQUITY CAPITAL; (6) ADVERSE STATE OR FEDERAL LEGISLATION OR REGULATION OR ADVERSE DETERMINATIONS BY REGULATORS; AND (7) CHANGES IN ADVERTISING TRENDS AND/OR BUDGETS AND IN GENERAL ECONOMIC CONDITIONS IN THE MARKETS IN WHICH THE ISSUERS MAY, FROM TIME TO TIME, COMPETE. MANY OF SUCH FACTORS WILL BE BEYOND THE CONTROL OF THE ISSUERS AND THEIR MANAGEMENT. FORWARD-LOOKING STATEMENTS CONTAINED HEREIN SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULT OF ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS WHICH MAY BE MADE TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. FOR FURTHER INFORMATION OR OTHER FACTORS WHICH COULD AFFECT THE FINANCIAL RESULTS OF THE ISSUERS AND SUCH FORWARD LOOKING STATEMENTS, SEE "RISK FACTORS." (g) The Company currently provides services to WOOD-TV and WOTV-TV pursuant to a consulting agreement with AT&T. The Company has agreed to acquire the assets of WOOD-TV and the LMA rights related to WOTV-TV from AT&T for a purchase price of approximately $125.5 million. The acquisition is expected to close later this year. See "The Transactions and Other Matters -- The Grand Rapids Acquisition" and "Business -- The Company -- History." (h) WVBT-TV will become a Fox affiliate on August 31, 1998. (i) Station KXAM-TV, Llano, Texas, is operated as a satellite station of KXAN-TV in order to increase KXAN-TV's coverage. BUSINESS STRATEGY The Company's business strategy is to maximize its BCF through both revenue growth and the implementation of effective cost controls. To achieve these goals, the Company seeks, among other things, to: Maximize Revenue Shares. From 1993 to 1997, the Company increased its broadcast television advertising revenue market share from 22.8% to 25.9% (assuming the acquisitions of WIVB-TV and WTNH-TV occurred on January 1, 1993) by targeting audiences with favorable demographic profiles, creating auxiliary revenue streams and cultivating strong network affiliations. On the same basis, the Company's gross advertising revenues have grown at a compound annual rate of 10.3%, whereas gross advertising revenues in the Company's markets have grown at a compound annual rate of 6.8%. The Company attempts to maximize each station's revenue share through a quarterly "entitlement review process." This process involves the benchmarking of each station's advertising revenues against an index which weights various demographic attributes according to their relative advertising revenue value. As a result of the entitlement review process, the Company's revenue shares typically outperform its audience shares. The Company's revenue shares also benefit from long term affiliations with its three core networks -- CBS, NBC and ABC -- which provide the Company's television stations affiliated with such networks with competitive programming, including coverage of political events and high profile sporting events such as the Olympic Games, Super Bowl and NCAA Men's Basketball Tournament. The Company also has stations affiliated with Fox, WB and UPN, which further enhances its ability to grow its revenue shares through access to their competitive programming. Emphasize Leading Local News. The Company's Core Stations are ranked number one or two in late news in all but the Company's smallest market. Management believes that a successful news operation is critical to the success of a television station because news audiences generally have the best demographic profiles from an advertising sales perspective. In addition, news programming: (i) enables the Company to purchase less syndicated programming and thereby maintain tight control over programming costs; (ii) serves as a strong lead-in to other programming; and (iii) fosters a high profile in the local community, which is critical to maximizing local advertising sales. The Company believes that its local news programming significantly improves its stations' BCF margins. Accordingly, the Company has increased the hours of news produced per week from 81 in 1989 to 187 in 1997 on a pro forma basis. Partly as a result of its emphasis on quality local news programming, management has increased the BCF margin at the five network-affiliated stations that it has operated throughout the period from January 1, 1991 to December 31, 1997 (WISH-TV, WANE-TV, WAND-TV, WAVY-TV and KXAN-TV) from 37% to 47%. Execute a Multi-Channel Strategy. The Company's management pioneered the "multi-channel strategy," which involves the combination of an owned and operated television station with an LMA station and/or a Local Weather Station in the same market. Management has pursued this strategy in all but one of the Company's markets. Execution of the multi-channel strategy has been a factor in the Company's ability to generate incremental cash flow. The advantages of the multi-channel strategy are: (i) the ability to capitalize on management's expertise; (ii) additional advertising inventory in each market; (iii) greater programming flexibility; (iv) enhanced ability to leverage fixed operating costs over a larger revenue base; (v) improved negotiating positions with respect to suppliers of syndicated programming, advertisers and the networks; (vi) increased share of actual viewers; (vii) the opportunity to affiliate with the emerging networks; and (viii) enhanced opportunities for cross promotion. CERTAIN DEFINITIONS AND MARKET AND INDUSTRY DATA As used in this Prospectus, unless the context otherwise requires, (i) "Holdings" refers to LIN Holdings Corp., (ii) "LIN Acquisition" refers to LIN Acquisition Company, (iii) "LIN Television" or the "Predecessor" refers to LIN Television Corporation and its subsidiaries prior to the Acquisition, (iv) the "Company" refers to LIN Television after giving effect to the Acquisition (as defined), the Financings (as defined) and the Joint Venture (as defined) (collectively, the "Transactions"), except where the context requires otherwise, (v) "on a pro forma basis" or "pro forma" means after giving effect to the Transactions, except as indicated otherwise and (vi) "Core Stations" refers to the CBS, NBC and ABC-affiliated stations owned and operated by the Company (WISH-TV, WANE-TV, WAND-TV, WAVY-TV, KXAN-TV, WTNH-TV and WIVB-TV). See "The Transactions and Other Matters." The terms "broadcast cash flow" ("BCF") and "EBITDA" are referred to in various places in this Prospectus. BCF is defined as operating income (loss) plus corporate expenses plus depreciation and amortization of intangible assets and amortization of program rights plus other non-cash expenses (consisting of tower write-offs and non-cash pension expenses), minus cash program payments. EBITDA is defined as BCF minus corporate expenses. BCF and EBITDA are not measures of performance calculated in accordance with generally accepted accounting principles ("GAAP"). However, management believes that BCF is useful to a prospective investor because it is a measure widely used in the broadcast industry to evaluate a television broadcast company's operating performance and that EBITDA is useful to a prospective investor because it is widely used in the broadcast industry to evaluate a television broadcast company's ability to service debt. BCF and EBITDA should not be considered in isolation of or as a substitute for net income (loss), cash flows from operating activities and other income and cash flow statement data prepared in accordance with GAAP or as a measure of liquidity or profitability. BCF and EBITDA as determined above may not be comparable to the BCF and EBITDA measures reported by other companies. In addition, these measures do not represent funds available for discretionary use. Designated market area ("DMA") rankings are from the Nielsen Station Index dated November 1997 as estimated by the A.C. Nielsen Company ("Nielsen"). There are 211 generally-recognized television "markets" or DMAs in the United States, which are ranked in size according to various factors based upon actual or potential audience. Unless otherwise indicated herein, (i) market revenue, market revenue share, projected advertising revenue growth and station revenue share data have been obtained from Investing in Television 1994, 1995, 1996 and 1997, BIA Publications, Inc. ("BIA"); (ii) television household data has been obtained from the Nielsen Station Index for November of the appropriate year; (iii) audience share and audience rankings, except where specifically stated to the contrary, have been derived from Nielsen estimates (for May and November of the appropriate year) of the percentage of persons in the DMA tuned into the relevant station from sign-on to sign-off (Sunday to Saturday, 6:00 a.m. to 2:00 a.m.); (iv) general market economic data has been obtained from BIA and the chambers of commerce in each station's market; (v) the term "station" or "commercial station" means a television broadcast station and does not include public television stations, cable stations or networks (e.g., CNN, TBS or ESPN), or stations that do not meet the minimum Nielsen reporting standards (i.e., weekly cumulative audience share of at least 2.5% for Sunday to Saturday, 7:00 a.m. to 1:00 a.m.); and (vi) the term "independent" describes a commercial television station that is not affiliated with the ABC, CBS, NBC, Fox, WB or UPN television networks. Control Costs. In addition to concentrating on maximizing advertising revenues in its local markets, management focuses on controlling costs to maximize BCF. In many markets, the Company operates with fewer personnel than its competitors. In addition, management typically buys syndicated programming on a Company-wide basis and performs detailed profitability analyses for all programming purchases. As a result, management believes that the Company's margins are among the highest in the industry for stations in markets of comparable size. Pursue Selective Acquisitions. The Company intends to pursue selective acquisitions of television stations with the goal of improving their operating performance by applying management's business strategy. Targeted stations generally will share many of the following characteristics: (i) attractive acquisition terms; (ii) opportunities for increased advertising revenue; (iii) opportunities to implement effective cost controls; (iv) opportunities for increased audience share through improved newscasts and programming; and (v) market locations that are projected to have attractive growth in advertising revenues. The Company intends to primarily target network-affiliated stations located in the fifty largest DMAs, which stations typically have established audiences for their news, sports and entertainment programming. Invest in Digital Technology. Management believes that the Company is well positioned for the transition to digital broadcasting and anticipates that the Company will be one of the first television broadcasters in the United States to transmit a digital signal. The Company has already invested $13 million to fully prepare its towers and transmitter buildings for the transition, and estimates that an additional $40 million will be required over the next five to seven years for other necessary capital expenditures such as the purchase of antennae, transmitters, studio equipment and news gathering equipment. In accordance with FCC regulations, all station affiliates of ABC, CBS, NBC and Fox in the top ten DMAs will be required to transmit a digital signal by May 1, 1999. Affiliates of those networks in DMAs ranked eleven through thirty will be required to transmit a digital signal by November 1, 1999. All remaining commercial broadcasters will be required to transmit a digital signal by May 1, 2002. MANAGEMENT AND OWNERSHIP The Company's management team, led by Gary Chapman, the Company's President and Chief Executive Officer, is recognized as an industry leader. As an indication of management's expertise and ability, the five network-affiliated stations operated by management throughout the period from January 1, 1991 to December 31, 1997 (WISH-TV, WANE-TV, WAND-TV, WAVY-TV and KXAN-TV) achieved an aggregate annual compound growth rate in net revenues and BCF of 8.9% (from $57.8 million to $96.2 million) and 13.3% (from $21.4 million to $45.2 million), respectively. Management also increased the Company's BCF margin at these stations from 37% to 47% during such period. In connection with the Acquisition, management and key employees reinvested a portion of their equity interest in LIN Television in the indirect parent corporation of Holdings. In addition, management and key employees will be granted options to acquire additional shares representing an approximate 5% equity interest in such parent corporation. Hicks Muse is a leading private investment firm with offices in Dallas, New York, St. Louis and Mexico City that specializes in leveraged acquisitions, recapitalizations and other principal investing activities. Hicks Muse and its predecessor firm have completed or have pending over 100 transactions having a combined transaction value of more than $24 billion. Although Hicks Muse invests in a wide variety of industries, it has significant investments and experience in the media and communications industry, including interests in Chancellor Media, Capstar Broadcasting, STC Broadcasting, Katz Media, OmniAmerica Tower and Grupo MVS. Hicks Muse plans to utilize an investment model for the Company similar to that used for Chancellor Media and Capstar Broadcasting. Chancellor Media was formed in 1993 with the purchase of two radio stations. Today, Chancellor Media is the second largest radio operator in the United States in terms of revenue (behind only CBS). Similarly, Capstar Broadcasting was formed in 1996 for the purpose of acquiring radio stations in small to medium size markets. Capstar Broadcasting is now the largest radio operator in the United States in terms of number of stations. See "Risk Factors -- Potential Conflicts of Interest" and "Certain Other Transactions." THE TRANSACTIONS AND OTHER MATTERS THE TRANSACTIONS The Acquisition. Holdings, LIN Acquisition and LIN Television entered into an Agreement and Plan of Merger on August 12, 1997 (as amended, the "Merger Agreement"). Pursuant to, and upon the terms and conditions of, the Merger Agreement, Holdings acquired LIN Television (the "Acquisition") on March 3, 1998 by merging LIN Acquisition, its wholly-owned subsidiary, with and into LIN Television (the "Merger"), with LIN Television surviving the Merger and becoming a direct, wholly owned subsidiary of Holdings. The total purchase price for the common equity of LIN Television was approximately $1.7 billion. In addition, the Company refinanced $260.2 million of LIN Television indebtedness and incurred acquisition costs of approximately $32.2 million. The Financings. The Acquisition was funded by (i) $6.9 million of excess cash on the Company's balance sheet; (ii) $50.0 million aggregate principal amount of senior secured Tranche A term loans ("Tranche A Term Loans"); (iii) $120.0 million aggregate principal amount of senior secured Tranche B term loans ("Tranche B Term Loans"); (iv) $299.3 million gross proceeds from the issuance by LIN Television of $300.0 million aggregate principal amount of Old Senior Subordinated Notes; (v) $199.6 million gross proceeds from the issuance by Holdings of $325.0 million aggregate principal amount at maturity of Old Senior Discount Notes, which proceeds were contributed by Holdings to the common equity of the Company; (vi) $558.1 million of common equity provided by affiliates of Hicks Muse, management and other co-investors to the equity of the corporate parents of Holdings, which in turn, through Holdings, contributed such amount to the common equity of the Company; and (vii) $815.5 million of proceeds of the GECC Note (collectively, the "Financings"). The Joint Venture. In connection with the Acquisition, Hicks Muse and NBC formed the Joint Venture. The Joint Venture consists of KXAS-TV, formerly LIN Television's Dallas-Fort Worth NBC affiliate, and KNSD-TV, formerly NBC's San Diego station. A wholly owned subsidiary of NBC is the general partner of the Joint Venture and NBC operates the stations owned by the Joint Venture. The NBC General Partner holds an approximate 80% equity interest and the Company holds an approximate 20% equity interest in the Joint Venture. GECC provided debt financing for the Joint Venture in the form of an $815.5 million 25-year non-amortizing senior secured note bearing an initial interest rate of 8.0% per annum (the "GECC Note"). The Company expects that the interest payments on the GECC Note will be serviced solely by the cash flow of the Joint Venture. All Distributable Cash (as defined) of the Joint Venture will be distributed to the Company and the NBC General Partner based on their respective equity interests in the Joint Venture. On a pro forma basis for the fiscal year ended December 31, 1997, the Company's portion of the Joint Venture's Distributable Cash would have been $2.2 million (without giving effect to a reserve of $15.0 million which must be established, subject to waiver by the Company, prior to any distribution of Distributable Cash). See "Risk Factors -- Control of Holdings and the Company." The GECC Note was issued by LIN Television of Texas, L.P., the Company's indirect wholly owned partnership ("LIN Texas"), which distributed the proceeds to the Company to finance a portion of the cost of the Acquisition. The obligations to GECC under the GECC Note were assumed by the Joint Venture and LIN Texas was simultaneously released from all obligations under the GECC Note. The GECC Note is not an obligation of Holdings, the Company or any of their respective subsidiaries and is recourse only to the Joint Venture, the Company's equity interest therein and to the GECC Note Guarantor. See "Risk Factors -- Defaults under the GECC Note" and "The Transactions and Other Matters -- The Joint Venture." In connection with the formation of the Joint Venture, the Company received an extension of its NBC network affiliation agreements to 2010 and the option (exercisable through December 31, 1999) to purchase WVTM-TV, the NBC affiliate in Birmingham, Alabama. Sources and Uses. The following table sets forth the sources and uses of funds in connection with the Acquisition (dollars in millions): <TABLE> <S> <C> SOURCES Excess cash........................ $ 6.9 Term Loans(a)...................... 170.0 Old Senior Subordinated Notes(b)... 299.3 Holdings contributions(c).......... 757.7 GECC Note(d)....................... 815.5 -------- Total Sources................. $2,049.4 ======== USES Purchase of LIN Television equity(e)........................ $1,706.4 Refinance LIN Television debt...... 260.2 Transaction fees and expenses(f)... 82.8 -------- Total Uses.................... $2,049.4 ======== </TABLE> - --------------- (a) The Term Loans funded in connection with the Acquisition consisted of $50.0 million aggregate principal amount of Tranche A Term Loans and $120.0 million aggregate principal amount of Tranche B Term Loans. As of December 31, 1997, the interest rates payable on outstanding Tranche A Term Loans and Tranche B Term Loans would have been approximately 7.50% and 8.00%, respectively. See "Description of the Senior Credit Facilities." (b) Represents gross proceeds to the Company from the issuance of $300.0 million aggregate principal amount of Old Senior Subordinated Notes. (c) Affiliates of Hicks Muse, management and other co-investors contributed $558.1 million to the equity of the corporate parents of Holdings, which in turn, through Holdings, contributed such amount to the common equity of the Company. In addition, Holdings issued $325.0 million aggregate principal amount at maturity of Old Senior Discount Notes and contributed the $199.6 million gross proceeds thereof to the common equity of the Company. (d) LIN Texas distributed the proceeds from the issuance of the GECC Note to the Company, which used such proceeds to finance a portion of the cost of the Acquisition. The GECC Note is not an obligation of Holdings, the Company or any of their respective subsidiaries and is recourse only to the Joint Venture, the Company's equity interest therein and to the GECC Note Guarantor. The Company expects that the interest payments on the GECC Note will be serviced solely by the cash flow of the Joint Venture. See "Risk Factors -- Control of Holdings and the Company" and "-- Defaults under the GECC Note" and "The Transactions and Other Matters -- The Joint Venture.". (e) The purchase price reflects the total price to acquire the equity of LIN Television (including KXAS-TV, which was contributed to the Joint Venture). (f) Includes discounts and commissions on the Old Notes in connection with the Offerings. Organizational Structure The following chart depicts (i) the summary organizational chart of Holdings and the Company and (ii) the sources of financing for the Transactions: LIN GRAPH THE GRAND RAPIDS ACQUISITION The Company expects to consummate the Grand Rapids Acquisition later this year. The Company currently provides services to the Grand Rapids Stations pursuant to a consulting agreement with AT&T. The total purchase price for the Grand Rapids Acquisition will be approximately $125.5 million (plus accretion thereon of 8% from March 1, 1998), which is expected to be funded by $125.0 million of additional Tranche A Term Loans. For the fiscal year ended December 31, 1997, the Grand Rapids Stations generated net revenues and BCF of $28.4 million and $11.3 million, respectively. The historical and pro forma financial information contained herein does not give effect to the Grand Rapids Acquisition. See "The Transactions and Other Matters -- The Grand Rapids Acquisition" and "Business -- The Company -- History." RECENT DEVELOPMENTS Chancellor Media Corporation, a Delaware corporation ("Chancellor") and Ranger Equity Holdings Corporation, a Delaware corporation ("Ranger"), the indirect parent company of Holdings and the Company, entered into an Agreement and Plan of Merger, dated July 7, 1998 (the "Chancellor Merger Agreement"). Pursuant to, and subject to the prior satisfaction or waiver of certain customary conditions (including, without limitation, the approval of Chancellor's and the Company's respective shareholders, the receipt of necessary FCC approvals, and the termination or expiration of the applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended) set forth in, the Chancellor Merger Agreement, Ranger will be merged with and into Chancellor (the "Chancellor Merger"), with Chancellor continuing as the surviving corporation following the Chancellor Merger. As a result of the Chancellor Merger, (i) each share of common stock, $0.01 par value ("Ranger Common Stock"), of Ranger will be converted into the right to receive 0.0300 of a share of common stock, $0.01 par value ("Chancellor Common Stock"), of Chancellor, other than shares of Ranger Common Stock for which appraisal rights have been exercised pursuant to Section 262 of the General Corporation Law of the State of Delaware. In addition, Chancellor, as the surviving corporation, will assume certain outstanding options to purchase shares of Ranger Common Stock held by certain directors, officers, employees and consultants of Ranger and its subsidiaries. Following the Chancellor Merger, Holdings and the Company will become indirect, wholly owned subsidiaries of Chancellor. A Chancellor shareholder has filed a shareholders derivative lawsuit in a chancery court in the State of Delaware, purportedly on behalf of Chancellor, naming Chancellor, Chancellor's directors and the Company as defendants. The lawsuit seeks, among other things, money damages and an injunction prohibiting the consummation of the Chancellor Merger. The Company believes that the lawsuit is without substantial merit and intends to vigorously defend the action. THE EXCHANGE OFFERS THE SENIOR SUBORDINATED NOTES EXCHANGE OFFER: The Senior Subordinated Notes Exchange Offer applies to $300,000,000 aggregate principal amount of the Old Senior Subordinated Notes. The form and terms of the New Senior Subordinated Notes will be the same as the form and terms of the Old Senior Subordinated Notes except that (i) interest on the New Senior Subordinated Notes will accrue from the date of issuance of the Old Senior Subordinated Notes, and (ii) the New Senior Subordinated Notes are being registered under the Securities Act and, therefore, will not bear legends restricting their transfer. The New Senior Subordinated Notes will evidence the same debt as the Old Senior Subordinated Notes and will be entitled to the benefits of the Senior Subordinated Notes Indenture (as defined) pursuant to which the Old Senior Subordinated Notes were issued. The Old Senior Subordinated Notes and the New Senior Subordinated Notes are sometimes referred to collectively herein as the "Senior Subordinated Notes." See "Description of the New Senior Subordinated Notes." The Senior Subordinated Notes Exchange Offer....... $1,000 principal amount of New Senior Subordinated Notes in exchange for each $1,000 principal amount of Old Senior Subordinated Notes. As of the date hereof, Old Senior Subordinated Notes representing $300,000,000 aggregate principal amount are outstanding. The terms of the New Senior Subordinated Notes and the Old Senior Subordinated Notes are substantially identical. Based on an interpretation by the Commission's staff set forth in no-action letters issued to third parties unrelated to the Company, Holdings and the Guarantors, the Company and the Guarantors believe that New Senior Subordinated Notes issued pursuant to the Senior Subordinated Notes Exchange Offer in exchange for Old Senior Subordinated Notes may be offered for resale, resold and otherwise transferred by any person receiving the New Senior Subordinated Notes, whether or not that person is the registered holder (other than any such holder or such other person that is an "affiliate" of the Company or any Guarantors within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that (i) the New Senior Subordinated Notes are acquired in the ordinary course of business of that holder or such other person, (ii) neither the holder nor such other person is engaging in or intends to engage in a distribution of the New Senior Subordinated Notes, and (iii) neither the holder nor such other person has an arrangement or understanding with any person to participate in the distribution of the New Senior Subordinated Notes. See "The Exchange Offers -- Purpose and Effect." Each broker-dealer that receives New Senior Subordinated Notes for its own account in exchange for Old Senior Subordinated Notes, where those Old Senior Subordinated Notes were acquired by the broker-dealer as a result of its market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Subordinated Notes. See "Plan of Distribution." Senior Subordinated Notes Registration Rights Agreement................ The Old Senior Subordinated Notes were sold by the Company on March 3, 1998, in a private placement in reliance on Section 4(2) of the Securities Act and immediately resold by the initial purchasers thereof (the "Initial Purchasers") in reliance on Rule 144A under the Securities Act (the "Original Senior Subordinated Notes Offering"). In connection with the original Senior Subordinated Notes Offering, the Company and Holdings entered into a Registration Rights Agreement with the Initial Purchasers (the "Senior Subordinated Notes Registration Rights Agreement") providing for, among other things, the Senior Subordinated Notes Exchange Offer. See "The Exchange Offers -- Purpose and Effect." Expiration Date............ The Senior Subordinated Notes Exchange Offer will expire at 5:00 p.m., New York City time, on , 1998, or such later date and time to which it is extended by the Company. Withdrawal................. The tender of Old Senior Subordinated Notes pursuant to the Senior Subordinated Notes Exchange Offer may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Any Old Senior Subordinated Notes not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Senior Subordinated Notes Exchange Offer. Interest on the New Senior Subordinated Notes and Old Senior Subordinated Notes.................... Interest on each New Senior Subordinated Note will accrue from the date of issuance of the Old Senior Subordinated Note for which such Old Senior Subordinated Note is exchanged or from the date of the last periodic payment of interest on such Old Note, whichever is later. Conditions to the Senior Subordinated Notes Exchange Offer........... The Senior Subordinated Notes Exchange Offer is subject to certain customary conditions, certain of which may be waived by the Company. See "The Exchange Offers -- Certain Conditions to the Exchange Offers." Procedures for Tendering Old Senior Subordinated Notes.................... Each holder of Old Senior Subordinated Notes wishing to accept the Senior Subordinated Notes Exchange Offer must complete, sign and date the accompanying letter of transmittal relating to the Senior Subordinated Notes Exchange Offer (the "Senior Subordinated Notes Letter of Transmittal"), or a copy thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver the Senior Subordinated Notes Letter of Transmittal, or the copy, together with the Old Senior Subordinated Notes and any other required documentation, to the Senior Subordinated Notes Exchange Agent (as defined) at the address set forth in the Senior Subordinated Notes Letter of Transmittal. Persons holding Old Senior Subordinated Notes through the Depository Trust Company ("DTC") and wishing to accept the Senior Subordinated Notes Exchange Offer must do so pursuant to the DTC's Automated Tender Offer Program, by which each tendering Participant will agree to be bound by the Senior Subordinated Notes Letter of Transmittal. By executing or agreeing to be bound by the Senior Subordinated Notes Letter of Transmittal, each holder will represent to the Company that, among other things, (i) the New Senior Subordinated Notes acquired pursuant to the Senior Subordinated Notes Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Senior Subordinated Notes, whether or not such person is the holder of the Old Senior Subordinated Notes, (ii) neither the holder nor any such other person is engaging in or intends to engage in a distribution of such New Senior Subordinated Notes, (iii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Senior Subordinated Notes within the meaning of the Securities Act, (iv) neither the holder nor any such person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of the Company or any Guarantor, and (v) if such holder or other person is a broker-dealer, that it will receive New Senior Subordinated Notes for its own account in exchange for Old Senior Subordinated Notes that were acquired as a result of market-making activities or other trading activities and that it will be required to acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Subordinated Notes. See "The Exchange Offers -- Procedures for Tendering." Shelf Registration Requirement.............. Pursuant to the Senior Subordinated Notes Registration Rights Agreement, the Company is required to file a "shelf" registration statement for a continuous offering pursuant to Rule 415 under the Securities Act in respect of the Old Senior Subordinated Notes if (i) because of any change in law or applicable interpretations of the staff of the Commission, the Company is not permitted to effect the Senior Subordinated Notes Exchange Offer, (ii) the Senior Subordinated Notes Exchange Offer is not consummated within 225 days of the Original Senior Subordinated Notes Offering, (iii) any holder of Private Exchange Securities (as defined) requests within 60 days after the Senior Subordinated Notes Exchange Offer, (iv) any applicable law or interpretations do not permit any holder of Old Senior Subordinated Notes to participate in the Senior Subordinated Notes Exchange Offer, (v) any holder of Old Senior Subordinated Notes participates in the Senior Subordinated Notes Exchange Offer and does not receive freely transferrable New Senior Subordinated Notes in change for Old Senior Subordinated Notes or (vi) the Company so elects. Acceptance of Old Senior Subordinated Notes and Delivery of New Senior Subordinated Notes....... The Company will accept for exchange any and all Old Senior Subordinated Notes which are properly tendered (and not withdrawn) in the Senior Subordinated Notes Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Senior Subordinated Notes issued pursuant to the Senior Subordinated Notes Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offers -- Terms of the Exchange Offers." Senior Subordinated Notes Exchange Agent........... United States Trust Company of New York is serving as Exchange Agent (the "Senior Subordinated Notes Exchange Agent") in connection with the Senior Subordinated Notes Exchange Offer. Federal Income Tax Considerations........... The exchange pursuant to the Senior Subordinated Notes Exchange Offer should not be a taxable event for federal income tax purposes. See "Certain United States Federal Income Tax Considerations." Effect of Not Tendering.... Old Senior Subordinated Notes that are not tendered or that are tendered but not accepted will, following the completion of the Senior Subordinated Notes Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. THE SENIOR DISCOUNT NOTES EXCHANGE OFFER: The Senior Discount Notes Exchange Offer applies to $325,000,000 aggregate principal amount at maturity of the Old Senior Discount Notes. The form and terms of the New Senior Discount Notes will be the same as the form and terms of the Old Senior Discount Notes except that (i) the Accreted Value (as defined) of the New Senior Discount Notes will be calculated from the date of issuance of the Old Senior Discount Notes and (ii) the New Senior Discount Notes are being registered under the Securities Act and, therefore, will not bear legends restricting their transfer. The New Senior Discount Notes will evidence the same debt as the Old Senior Discount Notes and will be entitled to the benefits of the Senior Discount Notes Indenture (as defined) pursuant to which the Old Senior Discount Notes were issued. The Old Senior Discount Notes and the New Senior Discount Notes are sometimes referred to collectively herein as the "Senior Discount Notes." See "Description of the New Senior Discount Notes." The Senior Discount Notes Exchange Offer........... $1,000 principal amount at maturity of New Senior Discount Notes in exchange for each $1,000 principal amount at maturity of Old Senior Discount Notes. As of the date hereof, Old Senior Discount Notes representing $325,000,000 aggregate principal amount at maturity are outstanding. The terms of the New Senior Discount Notes and the Old Senior Discount Notes are substantially identical. Based on an interpretation by the Commission's staff set forth in no-action letters issued to third parties unrelated to Holdings, Holdings believes that New Senior Discount Notes issued pursuant to the Senior Discount Notes Exchange Offer in exchange for Old Senior Discount Notes may be offered for resale, resold and otherwise transferred by any person receiving the New Senior Discount Notes, whether or not that person is the holder (other than any such holder or such other person that is an "affiliate" of Holdings within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that (i) the New Senior Discount Notes are required in the ordinary course of business of that holder or such other person, (ii) neither the holder nor such other person is engaging in or intends to engage in a distribution of the New Senior Discount Notes, and (iii) neither the holder nor such other person has an arrangement or understanding with any person to participate in the distribution of the New Senior Discount Notes. See "The Exchange Offers -- Purpose and Effect." Each broker-dealer that receives New Senior Discount Notes for its own account in exchange for Old Senior Discount Notes where the Old Senior Discount Notes were acquired by the broker-dealer as a result of its market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Discount Notes. See "Plan of Distribution." Senior Discount Notes Registration Rights Agreement................ The Old Senior Discount Notes were sold by Holdings on March 3, 1998, in a private placement in reliance on Section 4(2) of the Securities Act and immediately resold by the Initial Purchasers in reliance on Rule 144A under the Securities Act (the "Original Senior Discount Notes Offering," and together with the Original Senior Subordinated Notes Offering, the "Original Offerings.") In connection with the Original Senior Discount Notes Offering, the Company and Holdings entered into a Registration Rights Agreement with the Initial Purchasers (the "Senior Discount Notes Registration Rights Agreement") providing for, among other things, the Senior Discount Notes Exchange Offer. See "The Exchange Offers -- Purpose and Effect." Expiration Date............ The Senior Discount Notes Exchange Offer will expire at 5:00 p.m., New York City time, on , 1998, or such later date and time to which it is extended by Holdings. Withdrawal................. The tender of Old Senior Discount Notes pursuant to the Senior Discount Notes Exchange Offer may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Any Old Senior Discount Notes not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Senior Discount Notes Exchange Offer. Accreted Value of the New Senior Discount Notes and Old Senior Discount Notes.................... The Accreted Value of each New Senior Discount Note will be calculated from the date of issuance of the Old Senior Discount Note for which such New Senior Discount Note is exchanged. Conditions to the Senior Discount Notes Exchange Offer.................... The Senior Discount Notes Exchange Offer is subject to certain customary conditions, certain of which may be waived by the Company. See "The Exchange Offers -- Certain Conditions to the Exchange Offers." Procedures for Tendering Senior Discount Notes...... Each holder of Old Senior Discount Notes wishing to accept the Senior Discount Notes Exchange Offer must complete, sign and date the accompanying letter of transmittal relating to the Senior Discount Notes Exchange Offer (the "Senior Discount Notes Letter of Transmittal"; the Senior Discount Notes Letter of Transmittal and the Senior Subordinated Notes Letter of Transmittal are sometimes referred to herein individually as a "Letter of Transmittal" and collectively as the "Letters of Transmittal"), or a copy thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver the Senior Discount Notes Letter of Transmittal, or the copy, together with the Old Senior Discount Notes and any other required documentation, to the Senior Discount Notes Exchange Offer (as defined) at the address set forth in the Senior Discount Notes Letter of Transmittal. Persons holding Old Discount Notes through the DTC and wishing to accept the Senior Discount Notes Exchange Offer must do so pursuant to the DTC's Automated Tender Offer Program, by which each tendering Participant will agree to be bound by the Senior Discount Notes Letter of Transmittal. By executing or agreeing to be bound by the Senior Discount Notes Letter of Transmittal, each holder will represent to Holdings that, among other things, (i) the New Senior Discount Notes acquired pursuant to the Senior Discount Notes Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Senior Discount Notes, whether or not such person is the holder of the Old Senior Discount Notes, (ii) neither the holder nor any such other person is engaging in or intends to engage in a distribution of such New Senior Discount Notes, (iii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Senior Discount Notes, (iv) neither the holder nor any such other person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of Holdings, and (v) if such holder or other person is a broker-dealer, that it will receive New Senior Discount Notes for its own account in exchange for Old Senior Discount Notes that were acquired as a result of market-making activities or other trading activities and that it will be required to acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Discount Notes. Shelf Registration Requirement.............. Pursuant to the Senior Discount Notes Registration Rights Agreement, Holdings is required to file a "shelf" registration statement for a continuous offering pursuant to Rule 415 under the Securities Act in respect of the Old Senior Discount Notes if (i) because of any change in law or applicable interpretations of the staff of the Commission, Holdings is not permitted to effect the Senior Discount Notes Exchange Offer, (ii) the Senior Discount Notes Exchange Offer is not consummated within 225 days of the Original Senior Discount Notes Offering, (iii) any holder of Private Exchange Securities (as defined) requests within 60 days after the Senior Discount Notes Exchange Offer, (iv) any applicable law or interpretations do not permit any holder of Old Senior Discount Notes to participate in the Senior Discount Notes Exchange Offer, (v) any holder of Old Senior Discount Notes participates in the Senior Discount Notes Exchange Offer and does not receive freely transferrable New Senior Discount Notes in exchange for Old Senior Discount Notes or (vi) Holdings so elects. Acceptance of Old Senior Discount Notes and Delivery of New Senior Discount Notes.................... Holdings will accept for exchange any and all Old Senior Discount Notes which are properly tendered (and not withdrawn) in the Senior Discount Notes Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Senior Discount Notes issued pursuant to the Senior Discount Notes Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offers -- Terms of the Exchange Offer." Senior Discount Notes Exchange Agent........... United States Trust Company of New York is serving as Exchange Agent (the "Senior Discount Notes Exchange Agent"; the Senior Subordinated Notes Exchange Agent and the Senior Discount Notes Exchange Agent are sometimes referred to herein individually as an "Exchange Agent" and collectively as the "Exchange Agents") in connection with the Senior Discount Notes Exchange Offer. Federal Income Tax Considerations........... The exchange pursuant to the Senior Discount Notes Exchange Offer should not be a taxable event for federal income tax purposes. See "Certain United States Federal Income Tax Considerations." Effect of Not Tendering.... Old Senior Discount Notes that are not tendered or that are tendered but not accepted will, following the completion of the Senior Discount Notes Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. TERMS OF THE NEW NOTES NEW SENIOR SUBORDINATED NOTES Issuer..................... LIN Television Corporation (as successor-in-interest to LIN Acquisition Company). Securities Offered......... $300,000,000 aggregate principal amount of 8 3/8% Senior Subordinated Notes due 2008. Maturity................... March 1, 2008. Interest Payment Dates..... March 1 and September 1 of each year, commencing September 1, 1998. Sinking Fund............... None. Optional Redemption........ Except as described below, the Company may not redeem the New Senior Subordinated Notes prior to March 1, 2003. On or after such date, the Company may redeem the Senior Subordinated Notes, in whole or in part, at the redemption prices set forth herein, together with accrued and unpaid interest, if any, to the date of redemption. In addition, at any time and from time to time on or prior to March 1, 2001, the Company may redeem up to 35% of the aggregate principal amount of the Senior Subordinated Notes with the net cash proceeds of one or more private or public offerings by the Company, at a redemption price equal to 108.375% of the principal amount to be redeemed, together with accrued and unpaid interest, if any, to the date of redemption, provided that at least 65% of the originally issued aggregate principal amount of the Senior Subordinated Notes remains outstanding after each such redemption. See "Description of the New Senior Subordinated Notes -- Optional Redemption." Change of Control.......... Upon the occurrence of a Change of Control, (i) the Company will have the option, at any time on or prior to March 1, 2003, to redeem the New Senior Subordinated Notes, in whole but not in part, at a redemption price equal to 100% of the principal amount thereof, plus accrued and unpaid interest plus the Applicable Premium (as defined) and (ii) if the New Senior Subordinated Notes are not redeemed or if such Change of Control occurs after March 1, 2003, the Company will be required to make an offer to repurchase the New Senior Subordinated Notes at a price equal to 101% of the principal amount thereof, together with accrued and unpaid interest, if any, to the date of purchase. See "Description of the New Senior Subordinated Notes -- Change of Control" and "-- Amendment." Guarantees................. The New Senior Subordinated Notes will be guaranteed (the "Subsidiary Guarantees"), jointly and severally on an unsecured senior subordinated basis, by the Company's direct and indirect, existing and future, Restricted Subsidiaries (the "Guarantors"). The Guarantors also will guarantee all obligations of the Company under the Senior Credit Facilities (as defined). The Company's obligations under the Senior Credit Facilities also will be secured by substantially all of the assets of the Company and the Guarantors. The obligations of each Guarantor under its Subsidiary Guarantee will be subordinated in right of payment to the prior payment in full of all Guarantor Senior Indebtedness (as defined) of such Guarantor to substantially the same extent as the Senior Subordinated Notes are subordinated to all existing and future Senior Indebtedness of the Company. See "Description of the New Senior Subordinated Notes -- Subsidiary Guarantees of the New Senior Subordinated Notes." Ranking.................... The New Senior Subordinated Notes will be unsecured and will be subordinated in right of payment to all existing and future Senior Indebtedness (as defined) of the Company and will rank pari passu in right of payment with all Senior Subordinated Indebtedness (as defined) of the Company. As of March 31, 1998, the aggregate principal amount of the Company's outstanding Senior Indebtedness was $170.0 million (consisting of outstanding Term Loans) and the Company had no Senior Subordinated Indebtedness outstanding other than the Senior Subordinated Notes and had no Subsidiary Indebtedness outstanding. As of such date, liabilities of the Company's Subsidiaries reflected on its consolidated balance sheet, including indebtedness and other liabilities such as trade payables and accrued expenses, aggregated $17.8 million. See "Description of the New Senior Subordinated Notes -- Ranking and Subordination." Restrictive Covenants...... The Senior Subordinated Notes Indenture limits, among other things, (i) the incurrence of additional indebtedness and issuance of capital stock, (ii) layering of indebtedness, (iii) the payment of dividends on, and redemption of, capital stock of the Company, (iv) liens, (v) mergers, consolidations, and sales of all or substantially all of the Company's assets, (vi) asset sales, (vii) asset swaps, (viii) dividend and other payment restrictions affecting Restricted Subsidiaries and (ix) transactions with affiliates of the Company. However, all of these limitations and prohibitions are subject to a number of important qualifications and exceptions. See "Description of the New Senior Subordinated Notes -- Certain Covenants." Use of Proceeds............ There will be no cash proceeds to the Company from the exchange of New Senior Subordinated Notes for Old Senior Subordinated Notes pursuant to the Senior Subordinated Notes Exchange Offer. The net proceeds from the Original Senior Subordinated Notes Offering were used, together with the proceeds of the other Financings, to consummate the Acquisition. NEW SENIOR DISCOUNT NOTES Issuer..................... LIN Holdings Corp. Securities Offered......... $325,000,000 aggregate principal amount at maturity of 10% Senior Discount Notes due 2008. The Senior Discount Notes will be issued at a discount to their aggregate principal amount at maturity. Maturity................... March 1, 2008. Interest Payment Dates..... Cash interest will not accrue or be payable on the New Senior Discount Notes prior to March 1, 2003. Thereafter, cash interest on the New Senior Discount Notes will accrue at a rate of 10% per annum and will be payable semi-annually in arrears on March 1 and September 1 of each year, commencing on September 1, 2003. Original Issue Discount.... For federal income tax purposes, the New Senior Discount Notes will be treated as having been issued with "original issue discount" equal to the difference between the issue price of the Old Senior Discount Notes and the sum of all cash payments (whether denominated as principal or interest) to be made thereon. Each holder of a New Senior Discount Note must include as gross income for federal income tax purposes a portion of such original issue discount for each day during each taxable year in which a New Senior Discount Note is held even though no cash interest payments will be received prior to March 1, 2003. See "Certain United States Federal Income Tax Considerations -- Taxation of Original Issue Discount." Sinking Fund............... None. Mandatory Principal Redemption............... Except as described below, Holdings may not redeem the New Senior Discount Notes prior to March 1, 2003. On March 1, 2003, Holdings will be required to redeem Senior Discount Notes with an aggregate principal amount at maturity equal to (i) $125.0 million multiplied by (ii) the quotient obtained by dividing (x) the aggregate principal amount at maturity of Senior Discount Notes then outstanding (other than Senior Discount Notes then held by Holdings or its Subsidiaries or the entities with respect to which Holdings is a direct or indirect Subsidiary) by (y) $325.0 million, (the "Mandatory Principal Redemption Amount") at a redemption price equal to 100% of the principal amount at maturity of the Senior Discount Notes so redeemed. See "Description of the New Senior Discount Notes -- Mandatory Principal Redemption." Optional Redemption........ The New Senior Discount Notes will be redeemable at the option of Holdings, in whole or in part, at any time on or after March 1, 2003. On or after such date, Holdings may redeem the New Senior Discount Notes, in whole or in part, at the redemption prices set forth herein, together with accrued and unpaid interest, if any, to the date of redemption. In addition, at any time and from time to time on or prior to March 1, 2001, Holdings may, subject to certain requirements, redeem up to 35% of the aggregate principal amount at maturity of the Senior Discount Notes with the net cash proceeds from one or more private or public equity offerings at a price equal to 110% of the Accreted Value (as defined) at the date of redemption, provided that at least 65% of the originally issued aggregate principal amount at maturity of the Senior Discount Notes remains outstanding after each such redemption. See "Description of the New Senior Discount Notes -- Optional Redemption." Change of Control.......... Upon a Change of Control, (i) Holdings will have the option, at any time on or prior to March 1, 2003, to redeem the New Senior Discount Notes, in whole but not in part, at a redemption price equal to 100% of the Accreted Value thereof plus the Applicable Premium and (ii) if the New Senior Discount Notes are not so redeemed or if such Change of Control occurs after March 1, 2003, Holdings will be required to make an offer to repurchase the New Senior Discount Notes at a price equal to (a) 101% of the Accreted Value thereof if redeemed on or before March 1, 2003, and (b) 101% of the principal amount at maturity, plus accrued and unpaid interest, if any, thereon, if redeemed after March 1, 2003. See "Description of the New Senior Discount Notes -- Change of Control." Guarantees................. None. Ranking.................... The New Senior Discount Notes will be senior unsecured obligations of Holdings and will rank pari passu in right of payment with all Senior Indebtedness of Holdings, including Holdings' guarantee of the Senior Credit Facilities. Holdings is a holding company with no operations of its own and whose primary asset is the capital stock of the Company (all of which will be pledged to secure the Senior Credit Facilities). As a result of the holding company structure, the New Senior Discount Notes will effectively rank junior in right of payment to all creditors of the Company and its subsidiaries, including the lenders under the Senior Credit Facilities, holders of the Senior Subordinated Notes and trade creditors. As of March 31, 1998, the New Senior Discount Notes were effectively subordinated to $523.8 of aggregate liabilities (including indebtedness and other liabilities such as trade payables and accrued expenses that would have been reflected on the consolidated balance sheet) of the Company and its subsidiaries. See "Description of the New Senior Discount Notes." Restrictive Covenants...... The Senior Discount Notes Indenture limits, among other things, (i) the incurrence of additional indebtedness and issuance of capital stock, (ii) the payment of dividends on, and redemption of, capital stock of Holdings, (iii) mergers, consolidations and sales of all or substantially all of Holdings' assets, (iv) asset sales, (v) asset swaps, (vi) dividend and other payment restrictions affecting Restricted Subsidiaries and (vii) transactions with affiliates. However, all of these limitations and prohibitions are subject to a number of important qualifications and exceptions. See "Description of the New Senior Discount Notes -- Certain Covenants."
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+SUMMARY The following summary should be read in conjunction with the more detailed information, financial statements and notes thereto appearing elsewhere in this Prospectus. For additional information relating to certain defined terms used herein, as well as the sources for the market and other industry data contained herein, see "Certain Definitions and Market and Industry Data." THE COMPANY The Company is a leading television station group operator in the United States that operates eleven television stations and provides consulting services to two additional television stations. Twelve of these stations are network affiliates and nine are in top forty DMAs, including: Indianapolis, Indiana; New Haven-Hartford, Connecticut; Buffalo, New York; Norfolk-Portsmouth, Virginia; Grand Rapids-Kalamazoo-Battle Creek, Michigan and Dallas-Fort Worth, Texas. These stations have an aggregate United States household reach of approximately 6.9%, ranking the Company among the top independent, "pure-play" television station group operators in the United States. The Company's Core Stations generated an aggregate pro forma BCF margin of approximately 46% for the fiscal year ended December 31, 1997, principally as a result of their strong network affiliations, leading local news programming and tight cost controls. In addition, the Company's management pioneered the "multi-channel strategy," which involves the combination of an owned and operated television station with an LMA station and/or a 24-hour cable weather channel (a "Local Weather Station") in the same market. The multi-channel strategy has enhanced the Company's revenue market shares and increased its BCF by leveraging its fixed costs over a larger revenue base. The Company's station portfolio is well diversified in terms of its network affiliations, geographic coverage, net revenues and cash flow. The Company owns and operates three CBS affiliates, two NBC affiliates and two ABC affiliates which accounted for 35%, 28% and 28%, respectively, of the Company's pro forma BCF for the fiscal year ended December 31, 1997. The Company's LMA stations and Local Weather Stations accounted for substantially all of the remaining 9% of its BCF on the same basis. The Company's Core Stations broadcast in seven different markets, with no market representing more than 25% of the Company's pro forma net revenues or BCF for the fiscal year ended December 31, 1997. The Company's pro forma net revenues, BCF and EBITDA were $196.1 million, $79.5 million and $72.7 million, respectively, for the fiscal year ended December 31, 1997. Hicks, Muse, Tate & Furst Incorporated ("Hicks Muse"), a leading private equity firm with significant investments and experience in the media and communications industry, has acquired LIN Television to serve as a platform for acquiring and operating additional television stations that can benefit from management's ability to improve operating performance and increase BCF margins at acquired stations. In connection with the Acquisition, Hicks Muse and NBC formed a television station joint venture (the "Joint Venture"). The Joint Venture consists of KXAS-TV, LIN Television's Dallas-Fort Worth NBC affiliate, and KNSD-TV, NBC's San Diego station. A wholly owned subsidiary of NBC is the general partner of the Joint Venture (the "NBC General Partner") and NBC operates the stations owned by the Joint Venture pursuant to a management agreement. The NBC General Partner holds an approximate 80% equity interest and the Company holds an approximate 20% equity interest in the Joint Venture. General Electric Capital Corporation ("GECC") provided debt financing to the Joint Venture in the form of the GECC Note (as defined), the proceeds of which were distributed to the Company to finance a portion of the cost of the Acquisition. The GECC Note is not an obligation of Holdings, the Company or any of their respective subsidiaries and is recourse only to the Joint Venture, the Company's equity interest therein and to one of Holding's two corporate parents (the "GECC Note Guarantor") pursuant to a guarantee. The Company expects that the interest payments on the GECC Note will be serviced solely by the cash flow of the Joint Venture. See "The Transactions and Other Matters -- The Joint Venture." Later this year, the Company expects to acquire (the "Grand Rapids Acquisition") from AT&T Corporation ("AT&T") the assets of WOOD-TV and the LMA rights related to WOTV-TV (collectively, LIN TELEVISION CORPORATION LIN HOLDINGS CORP. CROSS REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING THE LOCATION IN THE PROSPECTUS OF THE INFORMATION REQUIRED BY PART I OF FORM S-1 <TABLE> <CAPTION> FORM S-1 ITEM NUMBER AND HEADING LOCATION IN PROSPECTUS -------------------------------- ---------------------- <S> <C> <C> 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus... Cover Page of Registration Statement; Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus............................ Inside Front and Outside Back Cover Pages of Prospectus 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges............. Certain Definitions and Market and Industry Data; Summary; Risk Factors; Selected Consolidated Financial and Operating Data; Unaudited Pro Forma Financial Information; Business 4. Use of Proceeds............................ Use of Proceeds 5. Determination of Offering Price............ Not Applicable 6. Dilution................................... Not Applicable 7. Selling Security Holders................... Not Applicable 8. Plan of Distribution....................... Front Cover Page of Prospectus; The Exchange Offers; Plan of Distribution 9. Description of Securities to be Registered............................... Description of New Senior Subordinated Notes; Description of New Senior Discount Notes 10. Interests of Named Experts and Counsel..... Not Applicable 11. Information with Respect to the Registrant............................... Cover Page of Registration Statement; Certain Definitions and Market and Industry Data; Summary; Risk Factors; The Transactions and Other Matters; Selected Consolidated Financial and Operating Data; Unaudited Pro Forma Consolidated Financial Information; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Securities Ownership of Certain Beneficial Owners; Certain Other Transactions; Description of the Senior Credit Facilities; Legal Matters 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities.............................. Not Applicable </TABLE> AVAILABLE INFORMATION The Issuers and the Guarantors have filed with the Securities and Exchange Commission (the "Commission") a Registration Statement (which term shall encompass any amendments thereto) on Form S-1 under the Securities Act with respect to the securities offered hereby. This Prospectus does not contain all information set forth in the Registration Statement and the exhibits thereto, to which reference is hereby made. Although the Issuers and the Guarantors believe that statements made in this Prospectus as to the contents of any contract, agreement, or other document describe all material elements of such documents, such statements are not necessarily complete. With respect to each such contract, agreement, or other document filed as an exhibit to the Registration Statement, reference is hereby made to such exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. As a result of the filing of the Registration Statement with the Commission, the Issuers and the Guarantors each will become subject to the informational reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In accordance therewith, the Company and Holdings will be required to file reports and other information with the Commission. Such reports and other information can be inspected and copied at the principal office of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and the following Regional Offices of the Commission: Chicago Regional Office, Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60611 and New York Regional office, 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of such material may also be obtained at prescribed rates from the Public Reference Section of the Commission at its principal office at Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549. The Commission also maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission at http://www.sec.gov. In reliance upon certain Staff Accounting Bulletins of the Commission, interpretations of the staff of the Commission and no-action relief granted by the Staff of the Commission to unrelated third parties, the Subsidiary Guarantors do not intend to file periodic reports with the Commission under the Exchange Act separately from the Issuers. The Issuers will furnish holders of the securities offered hereby with annual reports containing, among other information, audited financial statements certified by an independent public accounting firm and quarterly reports containing unaudited financial information for the first three quarters of each fiscal year. The Issuers will also furnish such other reports as it may determine or as may be required by law or by the indentures governing the New Notes. FORWARD LOOKING STATEMENTS THIS PROSPECTUS CONTAINS CERTAIN FORWARD LOOKING STATEMENTS WITH RESPECT TO THE FINANCIAL CONDITIONS, RESULTS OF OPERATIONS AND BUSINESSES OF THE ISSUERS, INCLUDING STATEMENTS UNDER THE CAPTIONS "SUMMARY," "UNAUDITED PRO FORMA FINANCIAL INFORMATION," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS." ALL OF THESE FORWARD LOOKING STATEMENTS ARE BASED ON ESTIMATES AND ASSUMPTIONS MADE BY MANAGEMENT OF THE ISSUERS WHICH, ALTHOUGH BELIEVED TO BE REASONABLE, ARE INHERENTLY UNCERTAIN. THEREFORE, UNDUE RELIANCE SHOULD NOT BE PLACED UPON SUCH ESTIMATES AND STATEMENTS. NO ASSURANCE CAN BE GIVEN THAT ANY OF SUCH ESTIMATES OR STATEMENTS WILL BE REALIZED AND IT IS LIKELY THAT ACTUAL RESULTS WILL DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE: (1) INCREASED COMPETITION, INCLUDING FROM NEWER FORMS OF ENTERTAINMENT AND ENTERTAINMENT MEDIA OR CHANGES IN THE POPULARITY OR AVAILABILITY OF PROGRAMMING; (2) INCREASED COSTS, INCLUDING INCREASED CAPITAL EXPENDITURES AS A RESULT OF NECESSARY TECHNOLOGICAL ENHANCEMENTS (E.G., EXPENDITURES RELATED TO THE TRANSITION TO DIGITAL the "Grand Rapids Stations"), both of which stations are located in the Grand Rapids-Kalamazoo-Battle Creek market. The Company currently provides services to the Grand Rapids Stations pursuant to a consulting agreement with AT&T. See "The Transactions and Other Matters -- The Grand Rapids Acquisition" and "Business -- The Company -- History." The following table provides information regarding the stations and other programming outlets operated by the Company and the stations owned by the Joint Venture: <TABLE> <CAPTION> COMMERCIAL STATION STATION DMAS, STATIONS AND OTHER DMA STATIONS IN RANK IN AUDIENCE PROGRAMMING OUTLETS STATUS(A) AFFILIATION(B) RANK(C) DMA(D) DMA(E) Share(e) ------------------------ --------- -------------- ------- ----------- ------- -------- <S> <C> <C> <C> <C> <C> <C> COMPANY STATIONS AND OTHER PROGRAMMING OUTLETS: INDIANAPOLIS, IN WISH-TV.......................................... O&O CBS 25 8 1 18% WIIH-LP (Satellite)(f)........................... O&O CBS Local Weather Station............................ O&O Cable NEW HAVEN-HARTFORD, CT WTNH-TV.......................................... O&O ABC 27 8 2 14% WBNE-TV.......................................... LMA WB 5(tie) 2% GRAND RAPIDS-KALAMAZOO-BATTLE CREEK, MI(g) WOOD-TV.......................................... CS NBC 37 8 1(tie) 18% WOTV-TV.......................................... CS ABC 4 5% NORFOLK-PORTSMOUTH, VA WAVY-TV.......................................... O&O NBC 39 7 1(tie) 16% WVBT-TV.......................................... LMA WB/Fox(h) 5 2% Local Weather Station............................ O&O Cable BUFFALO, NY WIVB-TV.......................................... O&O CBS 40 7 2 17% AUSTIN, TX KXAN-TV.......................................... O&O NBC 60 7 3 14% KNVA-TV.......................................... LMA WB 6 3% KXAM-TV (Satellite)(i)........................... O&O NBC Low Power Network................................ O&O UPN DECATUR-CHAMPAIGN, IL WAND-TV.......................................... O&O ABC 81 8 3 14% Local Weather Station............................ O&O Cable FORT WAYNE, IN WANE-TV.......................................... O&O CBS 102 6 2 19% Local Weather Station............................ O&O Cable DALLAS-FORT WORTH, TX KXTX-TV.......................................... LMA IND 8 13 9 3% JOINT VENTURE STATIONS: DALLAS-FORT WORTH, TX KXAS-TV.......................................... JV NBC 8 13 3 12% SAN DIEGO, CA KNSD-TV.......................................... JV NBC 26 7 1 13% </TABLE> - --------------- (a) "O&O" refers to a station owned and operated by the Company. "LMA" refers to a station operated by the Company pursuant to a local marketing agreement and with respect to which the Company has a purchase option exercisable under certain circumstances. "JV" refers to a station owned by the Joint Venture and operated by NBC. "CS" refers to a station which the Company currently provides services to pursuant to a consulting agreement. The Company's Core Stations, all of which are CBS, NBC and ABC affiliates, are WISH-TV, WANE-TV, WAND-TV, WAVY-TV, KXAN-TV, WTNH-TV and WIVB-TV. (b) "IND" refers to an independent station with no network affiliation. (c) Rankings are based on the relative size of the station's "market" among the 211 generally recognized television markets in the United States. Source: Nielsen Station Index DMA Market Ratings -- November 1997, A.C. Nielsen Company. (d) The number of stations in a market excludes local weather stations, low power networks and satellite broadcasting facilities. (e) Source: Nielsen Station Index DMA Market Ratings -- November 1997, A.C. Nielsen Company, Sunday-Saturday 6:00 a.m.-2:00 a.m. (f) Station WIIH-LP, Indianapolis, Indiana, is operated as a satellite station of WISH-TV in order to increase WISH-TV's coverage. PROSPECTUS <TABLE> <S> <C> OFFER FOR ALL OUTSTANDING OFFER FOR ALL OUTSTANDING 8 3/8% SENIOR SUBORDINATED NOTES DUE 10% SENIOR DISCOUNT NOTES DUE 2008 2008 IN EXCHANGE FOR IN EXCHANGE FOR 10% SENIOR DISCOUNT NOTES DUE 2008 8 3/8% SENIOR SUBORDINATED NOTES DUE OF 2008 LIN HOLDINGS CORP. OF LIN TELEVISION CORPORATION </TABLE> Pursuant to the terms and subject to the conditions set forth in this Prospectus and the accompanying letters of transmittal, (i) LIN Television Corporation, a Delaware corporation (the "Company"), and the Guarantors (as defined) hereby offer (the "Senior Subordinated Notes Exchange Offer") to exchange $1,000 principal amount of registered 8 3/8% Senior Subordinated Notes Due 2008 (the "New Senior Subordinated Notes") issued by the Company, for each $1,000 principal amount of unregistered 8 3/8% Senior Subordinated Notes Due 2008 (the "Old Senior Subordinated Notes," and together with the New Senior Subordinated Notes, the "Senior Subordinated Notes") issued by LIN Acquisition Company, the predecessor in interest of the Company ("LIN Acquisition"), of which an aggregate principal amount of $300,000,000 is outstanding and (ii) LIN Holdings Corp., a Delaware corporation ("Holdings") hereby offers (the "Senior Discount Notes Exchange Offer," and together with the Senior Subordinated Notes Exchange Offer, the "Exchange Offers") to exchange $1,000 principal amount at maturity of registered 10% Senior Discount Notes Due 2008 (the "New Senior Discount Notes") issued by Holdings, for each $1,000 principal amount at maturity of unregistered 10% Senior Discount Notes Due 2008 (the "Old Senior Discount Notes," and together with the New Senior Discount Notes, the "Senior Discount Notes") issued by Holdings, of which an aggregate principal amount at maturity of $325,000,000 is outstanding. The Old Senior Subordinated Notes and the Old Senior Discount Notes are sometimes collectively referred to herein as the "Old Notes" and the New Senior Subordinated Notes and the New Senior Discount Notes are sometimes collectively referred to herein as the "New Notes." The Old Notes and the New Notes are sometimes collectively referred to herein as the "Notes." The Company and Holdings are sometimes collectively referred to herein as the "Issuers." The form and terms of the New Notes are identical to the form and terms of the Old Notes except that (i) interest on the New Senior Subordinated Notes shall accrue from the date of issuance of the Old Senior Subordinated Notes, (ii) the Accreted Value (as defined) of the New Senior Discount Notes will be calculated from the date of issuance of the Old Senior Discount Notes, and (iii) the New Notes are being registered under the Securities Act of 1933, as amended (the "Securities Act"), and will not bear any legends restricting their transfer. The New Senior Subordinated Notes will evidence the same debt as the Old Senior Subordinated Notes and will be issued pursuant to, and entitled to the benefits of, the indenture governing the Old Senior Subordinated Notes. The New Senior Discount Notes will evidence the same debt as the Old Senior Discount Notes and will be issued pursuant to, and entitled to the benefits of, the indenture governing the Old Senior Discount Notes. The Exchange Offers are being made in order to satisfy certain contractual obligations of the Company and Holdings. See "The Exchange Offers," "Description of the New Senior Subordinated Notes" and "Description of the New Senior Discount Notes." The net proceeds from the sale of the Old Notes were used to effect the acquisition by Holdings of the Company and its subsidiaries (the "Acquisition"). Such acquisition was effected pursuant to the merger of LIN Acquisition with and into the Company, with the Company surviving as a wholly owned subsidiary of Holdings. See "The Transactions and Other Matters." --------------------- SEE "RISK FACTORS" BEGINNING ON PAGE 22 FOR A DISCUSSION OF CERTAIN INFORMATION THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NEW NOTES. --------------------- The Company and Holdings will accept for exchange any and all Old Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on , 1998, unless extended (as so extended, the "Expiration Date"). Tenders of Old Notes may be withdrawn at any time prior to the Expiration Date. The Exchange Offers are subject to certain customary conditions. See "The Exchange Offers." In order for a holder of Old Notes to participate in an Exchange Offer, such holder must represent to the Company or Holdings, as appropriate, that, among other things, (i) the New Notes acquired pursuant to such Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Notes, whether or not such person is the holder of the Old Notes, (ii) neither the holder nor any such other person is engaging or intends to engage in a distribution of such New Notes, (iii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Notes within the meaning of the Securities Act, (iv) neither the holder nor any such other person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of the Company, Holdings or any Guarantor, and (v) if such holder or other person is a broker-dealer, that it will receive New Notes for its own account in exchange for Old Notes that were acquired as a result of marketmaking activities or other trading activities. See "The Exchange Offers--Purpose and Effect." Each broker-dealer that receives New Notes for its own account pursuant to either of the Exchange Offers must acknowledge that it will deliver a prospectus in connection with any resale of those New Notes. The letter of transmittal accompanying this Prospectus states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for Old Notes where such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company and Holdings have agreed that, for a period of 90 days after the Expiration Date, they will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." No public market has existed for the Old Notes. The Company and Holdings currently do not intend to list the New Notes on any securities exchange or to seek approval for quotation through any automated quotation system, and no active public market for the New Notes is currently anticipated. The Company and Holdings will pay all expenses incident to the Exchange Offers. The Exchange Offers are not conditioned upon any minimum principal amount of Old Senior Subordinated Notes or Old Senior Discount Notes being tendered for exchange pursuant to the Exchange Offers. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DATE OF THIS PROSPECTUS IS , 1998. BROADCASTING) OR ACQUISITIONS OR INCREASED PROGRAMMING COSTS; (3) INABILITY TO CONSUMMATE ACQUISITIONS ON ATTRACTIVE TERMS; (4) LOSS OR RETIREMENT OF KEY MEMBERS OF MANAGEMENT; (5) INCREASES IN THE ISSUERS' COST OF BORROWINGS OR INABILITY OR UNAVAILABILITY OF ADDITIONAL DEBT OR EQUITY CAPITAL; (6) ADVERSE STATE OR FEDERAL LEGISLATION OR REGULATION OR ADVERSE DETERMINATIONS BY REGULATORS; AND (7) CHANGES IN ADVERTISING TRENDS AND/OR BUDGETS AND IN GENERAL ECONOMIC CONDITIONS IN THE MARKETS IN WHICH THE ISSUERS MAY, FROM TIME TO TIME, COMPETE. MANY OF SUCH FACTORS WILL BE BEYOND THE CONTROL OF THE ISSUERS AND THEIR MANAGEMENT. FORWARD-LOOKING STATEMENTS CONTAINED HEREIN SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULT OF ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS WHICH MAY BE MADE TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. FOR FURTHER INFORMATION OR OTHER FACTORS WHICH COULD AFFECT THE FINANCIAL RESULTS OF THE ISSUERS AND SUCH FORWARD LOOKING STATEMENTS, SEE "RISK FACTORS." (g) The Company currently provides services to WOOD-TV and WOTV-TV pursuant to a consulting agreement with AT&T. The Company has agreed to acquire the assets of WOOD-TV and the LMA rights related to WOTV-TV from AT&T for a purchase price of approximately $125.5 million. The acquisition is expected to close later this year. See "The Transactions and Other Matters -- The Grand Rapids Acquisition" and "Business -- The Company -- History." (h) WVBT-TV will become a Fox affiliate on August 31, 1998. (i) Station KXAM-TV, Llano, Texas, is operated as a satellite station of KXAN-TV in order to increase KXAN-TV's coverage. BUSINESS STRATEGY The Company's business strategy is to maximize its BCF through both revenue growth and the implementation of effective cost controls. To achieve these goals, the Company seeks, among other things, to: Maximize Revenue Shares. From 1993 to 1997, the Company increased its broadcast television advertising revenue market share from 22.8% to 25.9% (assuming the acquisitions of WIVB-TV and WTNH-TV occurred on January 1, 1993) by targeting audiences with favorable demographic profiles, creating auxiliary revenue streams and cultivating strong network affiliations. On the same basis, the Company's gross advertising revenues have grown at a compound annual rate of 10.3%, whereas gross advertising revenues in the Company's markets have grown at a compound annual rate of 6.8%. The Company attempts to maximize each station's revenue share through a quarterly "entitlement review process." This process involves the benchmarking of each station's advertising revenues against an index which weights various demographic attributes according to their relative advertising revenue value. As a result of the entitlement review process, the Company's revenue shares typically outperform its audience shares. The Company's revenue shares also benefit from long term affiliations with its three core networks -- CBS, NBC and ABC -- which provide the Company's television stations affiliated with such networks with competitive programming, including coverage of political events and high profile sporting events such as the Olympic Games, Super Bowl and NCAA Men's Basketball Tournament. The Company also has stations affiliated with Fox, WB and UPN, which further enhances its ability to grow its revenue shares through access to their competitive programming. Emphasize Leading Local News. The Company's Core Stations are ranked number one or two in late news in all but the Company's smallest market. Management believes that a successful news operation is critical to the success of a television station because news audiences generally have the best demographic profiles from an advertising sales perspective. In addition, news programming: (i) enables the Company to purchase less syndicated programming and thereby maintain tight control over programming costs; (ii) serves as a strong lead-in to other programming; and (iii) fosters a high profile in the local community, which is critical to maximizing local advertising sales. The Company believes that its local news programming significantly improves its stations' BCF margins. Accordingly, the Company has increased the hours of news produced per week from 81 in 1989 to 187 in 1997 on a pro forma basis. Partly as a result of its emphasis on quality local news programming, management has increased the BCF margin at the five network-affiliated stations that it has operated throughout the period from January 1, 1991 to December 31, 1997 (WISH-TV, WANE-TV, WAND-TV, WAVY-TV and KXAN-TV) from 37% to 47%. Execute a Multi-Channel Strategy. The Company's management pioneered the "multi-channel strategy," which involves the combination of an owned and operated television station with an LMA station and/or a Local Weather Station in the same market. Management has pursued this strategy in all but one of the Company's markets. Execution of the multi-channel strategy has been a factor in the Company's ability to generate incremental cash flow. The advantages of the multi-channel strategy are: (i) the ability to capitalize on management's expertise; (ii) additional advertising inventory in each market; (iii) greater programming flexibility; (iv) enhanced ability to leverage fixed operating costs over a larger revenue base; (v) improved negotiating positions with respect to suppliers of syndicated programming, advertisers and the networks; (vi) increased share of actual viewers; (vii) the opportunity to affiliate with the emerging networks; and (viii) enhanced opportunities for cross promotion. CERTAIN DEFINITIONS AND MARKET AND INDUSTRY DATA As used in this Prospectus, unless the context otherwise requires, (i) "Holdings" refers to LIN Holdings Corp., (ii) "LIN Acquisition" refers to LIN Acquisition Company, (iii) "LIN Television" or the "Predecessor" refers to LIN Television Corporation and its subsidiaries prior to the Acquisition, (iv) the "Company" refers to LIN Television after giving effect to the Acquisition (as defined), the Financings (as defined) and the Joint Venture (as defined) (collectively, the "Transactions"), except where the context requires otherwise, (v) "on a pro forma basis" or "pro forma" means after giving effect to the Transactions, except as indicated otherwise and (vi) "Core Stations" refers to the CBS, NBC and ABC-affiliated stations owned and operated by the Company (WISH-TV, WANE-TV, WAND-TV, WAVY-TV, KXAN-TV, WTNH-TV and WIVB-TV). See "The Transactions and Other Matters." The terms "broadcast cash flow" ("BCF") and "EBITDA" are referred to in various places in this Prospectus. BCF is defined as operating income (loss) plus corporate expenses plus depreciation and amortization of intangible assets and amortization of program rights plus other non-cash expenses (consisting of tower write-offs and non-cash pension expenses), minus cash program payments. EBITDA is defined as BCF minus corporate expenses. BCF and EBITDA are not measures of performance calculated in accordance with generally accepted accounting principles ("GAAP"). However, management believes that BCF is useful to a prospective investor because it is a measure widely used in the broadcast industry to evaluate a television broadcast company's operating performance and that EBITDA is useful to a prospective investor because it is widely used in the broadcast industry to evaluate a television broadcast company's ability to service debt. BCF and EBITDA should not be considered in isolation of or as a substitute for net income (loss), cash flows from operating activities and other income and cash flow statement data prepared in accordance with GAAP or as a measure of liquidity or profitability. BCF and EBITDA as determined above may not be comparable to the BCF and EBITDA measures reported by other companies. In addition, these measures do not represent funds available for discretionary use. Designated market area ("DMA") rankings are from the Nielsen Station Index dated November 1997 as estimated by the A.C. Nielsen Company ("Nielsen"). There are 211 generally-recognized television "markets" or DMAs in the United States, which are ranked in size according to various factors based upon actual or potential audience. Unless otherwise indicated herein, (i) market revenue, market revenue share, projected advertising revenue growth and station revenue share data have been obtained from Investing in Television 1994, 1995, 1996 and 1997, BIA Publications, Inc. ("BIA"); (ii) television household data has been obtained from the Nielsen Station Index for November of the appropriate year; (iii) audience share and audience rankings, except where specifically stated to the contrary, have been derived from Nielsen estimates (for May and November of the appropriate year) of the percentage of persons in the DMA tuned into the relevant station from sign-on to sign-off (Sunday to Saturday, 6:00 a.m. to 2:00 a.m.); (iv) general market economic data has been obtained from BIA and the chambers of commerce in each station's market; (v) the term "station" or "commercial station" means a television broadcast station and does not include public television stations, cable stations or networks (e.g., CNN, TBS or ESPN), or stations that do not meet the minimum Nielsen reporting standards (i.e., weekly cumulative audience share of at least 2.5% for Sunday to Saturday, 7:00 a.m. to 1:00 a.m.); and (vi) the term "independent" describes a commercial television station that is not affiliated with the ABC, CBS, NBC, Fox, WB or UPN television networks. Control Costs. In addition to concentrating on maximizing advertising revenues in its local markets, management focuses on controlling costs to maximize BCF. In many markets, the Company operates with fewer personnel than its competitors. In addition, management typically buys syndicated programming on a Company-wide basis and performs detailed profitability analyses for all programming purchases. As a result, management believes that the Company's margins are among the highest in the industry for stations in markets of comparable size. Pursue Selective Acquisitions. The Company intends to pursue selective acquisitions of television stations with the goal of improving their operating performance by applying management's business strategy. Targeted stations generally will share many of the following characteristics: (i) attractive acquisition terms; (ii) opportunities for increased advertising revenue; (iii) opportunities to implement effective cost controls; (iv) opportunities for increased audience share through improved newscasts and programming; and (v) market locations that are projected to have attractive growth in advertising revenues. The Company intends to primarily target network-affiliated stations located in the fifty largest DMAs, which stations typically have established audiences for their news, sports and entertainment programming. Invest in Digital Technology. Management believes that the Company is well positioned for the transition to digital broadcasting and anticipates that the Company will be one of the first television broadcasters in the United States to transmit a digital signal. The Company has already invested $13 million to fully prepare its towers and transmitter buildings for the transition, and estimates that an additional $40 million will be required over the next five to seven years for other necessary capital expenditures such as the purchase of antennae, transmitters, studio equipment and news gathering equipment. In accordance with FCC regulations, all station affiliates of ABC, CBS, NBC and Fox in the top ten DMAs will be required to transmit a digital signal by May 1, 1999. Affiliates of those networks in DMAs ranked eleven through thirty will be required to transmit a digital signal by November 1, 1999. All remaining commercial broadcasters will be required to transmit a digital signal by May 1, 2002. MANAGEMENT AND OWNERSHIP The Company's management team, led by Gary Chapman, the Company's President and Chief Executive Officer, is recognized as an industry leader. As an indication of management's expertise and ability, the five network-affiliated stations operated by management throughout the period from January 1, 1991 to December 31, 1997 (WISH-TV, WANE-TV, WAND-TV, WAVY-TV and KXAN-TV) achieved an aggregate annual compound growth rate in net revenues and BCF of 8.9% (from $57.8 million to $96.2 million) and 13.3% (from $21.4 million to $45.2 million), respectively. Management also increased the Company's BCF margin at these stations from 37% to 47% during such period. In connection with the Acquisition, management and key employees reinvested a portion of their equity interest in LIN Television in the indirect parent corporation of Holdings. In addition, management and key employees will be granted options to acquire additional shares representing an approximate 5% equity interest in such parent corporation. Hicks Muse is a leading private investment firm with offices in Dallas, New York, St. Louis and Mexico City that specializes in leveraged acquisitions, recapitalizations and other principal investing activities. Hicks Muse and its predecessor firm have completed or have pending over 100 transactions having a combined transaction value of more than $24 billion. Although Hicks Muse invests in a wide variety of industries, it has significant investments and experience in the media and communications industry, including interests in Chancellor Media, Capstar Broadcasting, STC Broadcasting, Katz Media, OmniAmerica Tower and Grupo MVS. Hicks Muse plans to utilize an investment model for the Company similar to that used for Chancellor Media and Capstar Broadcasting. Chancellor Media was formed in 1993 with the purchase of two radio stations. Today, Chancellor Media is the second largest radio operator in the United States in terms of revenue (behind only CBS). Similarly, Capstar Broadcasting was formed in 1996 for the purpose of acquiring radio stations in small to medium size markets. Capstar Broadcasting is now the largest radio operator in the United States in terms of number of stations. See "Risk Factors -- Potential Conflicts of Interest" and "Certain Other Transactions." THE TRANSACTIONS AND OTHER MATTERS THE TRANSACTIONS The Acquisition. Holdings, LIN Acquisition and LIN Television entered into an Agreement and Plan of Merger on August 12, 1997 (as amended, the "Merger Agreement"). Pursuant to, and upon the terms and conditions of, the Merger Agreement, Holdings acquired LIN Television (the "Acquisition") on March 3, 1998 by merging LIN Acquisition, its wholly-owned subsidiary, with and into LIN Television (the "Merger"), with LIN Television surviving the Merger and becoming a direct, wholly owned subsidiary of Holdings. The total purchase price for the common equity of LIN Television was approximately $1.7 billion. In addition, the Company refinanced $260.2 million of LIN Television indebtedness and incurred acquisition costs of approximately $32.2 million. The Financings. The Acquisition was funded by (i) $6.9 million of excess cash on the Company's balance sheet; (ii) $50.0 million aggregate principal amount of senior secured Tranche A term loans ("Tranche A Term Loans"); (iii) $120.0 million aggregate principal amount of senior secured Tranche B term loans ("Tranche B Term Loans"); (iv) $299.3 million gross proceeds from the issuance by LIN Television of $300.0 million aggregate principal amount of Old Senior Subordinated Notes; (v) $199.6 million gross proceeds from the issuance by Holdings of $325.0 million aggregate principal amount at maturity of Old Senior Discount Notes, which proceeds were contributed by Holdings to the common equity of the Company; (vi) $558.1 million of common equity provided by affiliates of Hicks Muse, management and other co-investors to the equity of the corporate parents of Holdings, which in turn, through Holdings, contributed such amount to the common equity of the Company; and (vii) $815.5 million of proceeds of the GECC Note (collectively, the "Financings"). The Joint Venture. In connection with the Acquisition, Hicks Muse and NBC formed the Joint Venture. The Joint Venture consists of KXAS-TV, formerly LIN Television's Dallas-Fort Worth NBC affiliate, and KNSD-TV, formerly NBC's San Diego station. A wholly owned subsidiary of NBC is the general partner of the Joint Venture and NBC operates the stations owned by the Joint Venture. The NBC General Partner holds an approximate 80% equity interest and the Company holds an approximate 20% equity interest in the Joint Venture. GECC provided debt financing for the Joint Venture in the form of an $815.5 million 25-year non-amortizing senior secured note bearing an initial interest rate of 8.0% per annum (the "GECC Note"). The Company expects that the interest payments on the GECC Note will be serviced solely by the cash flow of the Joint Venture. All Distributable Cash (as defined) of the Joint Venture will be distributed to the Company and the NBC General Partner based on their respective equity interests in the Joint Venture. On a pro forma basis for the fiscal year ended December 31, 1997, the Company's portion of the Joint Venture's Distributable Cash would have been $2.2 million (without giving effect to a reserve of $15.0 million which must be established, subject to waiver by the Company, prior to any distribution of Distributable Cash). See "Risk Factors -- Control of Holdings and the Company." The GECC Note was issued by LIN Television of Texas, L.P., the Company's indirect wholly owned partnership ("LIN Texas"), which distributed the proceeds to the Company to finance a portion of the cost of the Acquisition. The obligations to GECC under the GECC Note were assumed by the Joint Venture and LIN Texas was simultaneously released from all obligations under the GECC Note. The GECC Note is not an obligation of Holdings, the Company or any of their respective subsidiaries and is recourse only to the Joint Venture, the Company's equity interest therein and to the GECC Note Guarantor. See "Risk Factors -- Defaults under the GECC Note" and "The Transactions and Other Matters -- The Joint Venture." In connection with the formation of the Joint Venture, the Company received an extension of its NBC network affiliation agreements to 2010 and the option (exercisable through December 31, 1999) to purchase WVTM-TV, the NBC affiliate in Birmingham, Alabama. Sources and Uses. The following table sets forth the sources and uses of funds in connection with the Acquisition (dollars in millions): <TABLE> <S> <C> SOURCES Excess cash........................ $ 6.9 Term Loans(a)...................... 170.0 Old Senior Subordinated Notes(b)... 299.3 Holdings contributions(c).......... 757.7 GECC Note(d)....................... 815.5 -------- Total Sources................. $2,049.4 ======== USES Purchase of LIN Television equity(e)........................ $1,706.4 Refinance LIN Television debt...... 260.2 Transaction fees and expenses(f)... 82.8 -------- Total Uses.................... $2,049.4 ======== </TABLE> - --------------- (a) The Term Loans funded in connection with the Acquisition consisted of $50.0 million aggregate principal amount of Tranche A Term Loans and $120.0 million aggregate principal amount of Tranche B Term Loans. As of December 31, 1997, the interest rates payable on outstanding Tranche A Term Loans and Tranche B Term Loans would have been approximately 7.50% and 8.00%, respectively. See "Description of the Senior Credit Facilities." (b) Represents gross proceeds to the Company from the issuance of $300.0 million aggregate principal amount of Old Senior Subordinated Notes. (c) Affiliates of Hicks Muse, management and other co-investors contributed $558.1 million to the equity of the corporate parents of Holdings, which in turn, through Holdings, contributed such amount to the common equity of the Company. In addition, Holdings issued $325.0 million aggregate principal amount at maturity of Old Senior Discount Notes and contributed the $199.6 million gross proceeds thereof to the common equity of the Company. (d) LIN Texas distributed the proceeds from the issuance of the GECC Note to the Company, which used such proceeds to finance a portion of the cost of the Acquisition. The GECC Note is not an obligation of Holdings, the Company or any of their respective subsidiaries and is recourse only to the Joint Venture, the Company's equity interest therein and to the GECC Note Guarantor. The Company expects that the interest payments on the GECC Note will be serviced solely by the cash flow of the Joint Venture. See "Risk Factors -- Control of Holdings and the Company" and "-- Defaults under the GECC Note" and "The Transactions and Other Matters -- The Joint Venture.". (e) The purchase price reflects the total price to acquire the equity of LIN Television (including KXAS-TV, which was contributed to the Joint Venture). (f) Includes discounts and commissions on the Old Notes in connection with the Offerings. Organizational Structure The following chart depicts (i) the summary organizational chart of Holdings and the Company and (ii) the sources of financing for the Transactions: LIN GRAPH THE GRAND RAPIDS ACQUISITION The Company expects to consummate the Grand Rapids Acquisition later this year. The Company currently provides services to the Grand Rapids Stations pursuant to a consulting agreement with AT&T. The total purchase price for the Grand Rapids Acquisition will be approximately $125.5 million (plus accretion thereon of 8% from March 1, 1998), which is expected to be funded by $125.0 million of additional Tranche A Term Loans. For the fiscal year ended December 31, 1997, the Grand Rapids Stations generated net revenues and BCF of $28.4 million and $11.3 million, respectively. The historical and pro forma financial information contained herein does not give effect to the Grand Rapids Acquisition. See "The Transactions and Other Matters -- The Grand Rapids Acquisition" and "Business -- The Company -- History." RECENT DEVELOPMENTS Chancellor Media Corporation, a Delaware corporation ("Chancellor") and Ranger Equity Holdings Corporation, a Delaware corporation ("Ranger"), the indirect parent company of Holdings and the Company, entered into an Agreement and Plan of Merger, dated July 7, 1998 (the "Chancellor Merger Agreement"). Pursuant to, and subject to the prior satisfaction or waiver of certain customary conditions (including, without limitation, the approval of Chancellor's and the Company's respective shareholders, the receipt of necessary FCC approvals, and the termination or expiration of the applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended) set forth in, the Chancellor Merger Agreement, Ranger will be merged with and into Chancellor (the "Chancellor Merger"), with Chancellor continuing as the surviving corporation following the Chancellor Merger. As a result of the Chancellor Merger, (i) each share of common stock, $0.01 par value ("Ranger Common Stock"), of Ranger will be converted into the right to receive 0.0300 of a share of common stock, $0.01 par value ("Chancellor Common Stock"), of Chancellor, other than shares of Ranger Common Stock for which appraisal rights have been exercised pursuant to Section 262 of the General Corporation Law of the State of Delaware. In addition, Chancellor, as the surviving corporation, will assume certain outstanding options to purchase shares of Ranger Common Stock held by certain directors, officers, employees and consultants of Ranger and its subsidiaries. Following the Chancellor Merger, Holdings and the Company will become indirect, wholly owned subsidiaries of Chancellor. A Chancellor shareholder has filed a shareholders derivative lawsuit in a chancery court in the State of Delaware, purportedly on behalf of Chancellor, naming Chancellor, Chancellor's directors and the Company as defendants. The lawsuit seeks, among other things, money damages and an injunction prohibiting the consummation of the Chancellor Merger. The Company believes that the lawsuit is without substantial merit and intends to vigorously defend the action. THE EXCHANGE OFFERS THE SENIOR SUBORDINATED NOTES EXCHANGE OFFER: The Senior Subordinated Notes Exchange Offer applies to $300,000,000 aggregate principal amount of the Old Senior Subordinated Notes. The form and terms of the New Senior Subordinated Notes will be the same as the form and terms of the Old Senior Subordinated Notes except that (i) interest on the New Senior Subordinated Notes will accrue from the date of issuance of the Old Senior Subordinated Notes, and (ii) the New Senior Subordinated Notes are being registered under the Securities Act and, therefore, will not bear legends restricting their transfer. The New Senior Subordinated Notes will evidence the same debt as the Old Senior Subordinated Notes and will be entitled to the benefits of the Senior Subordinated Notes Indenture (as defined) pursuant to which the Old Senior Subordinated Notes were issued. The Old Senior Subordinated Notes and the New Senior Subordinated Notes are sometimes referred to collectively herein as the "Senior Subordinated Notes." See "Description of the New Senior Subordinated Notes." The Senior Subordinated Notes Exchange Offer....... $1,000 principal amount of New Senior Subordinated Notes in exchange for each $1,000 principal amount of Old Senior Subordinated Notes. As of the date hereof, Old Senior Subordinated Notes representing $300,000,000 aggregate principal amount are outstanding. The terms of the New Senior Subordinated Notes and the Old Senior Subordinated Notes are substantially identical. Based on an interpretation by the Commission's staff set forth in no-action letters issued to third parties unrelated to the Company, Holdings and the Guarantors, the Company and the Guarantors believe that New Senior Subordinated Notes issued pursuant to the Senior Subordinated Notes Exchange Offer in exchange for Old Senior Subordinated Notes may be offered for resale, resold and otherwise transferred by any person receiving the New Senior Subordinated Notes, whether or not that person is the registered holder (other than any such holder or such other person that is an "affiliate" of the Company or any Guarantors within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that (i) the New Senior Subordinated Notes are acquired in the ordinary course of business of that holder or such other person, (ii) neither the holder nor such other person is engaging in or intends to engage in a distribution of the New Senior Subordinated Notes, and (iii) neither the holder nor such other person has an arrangement or understanding with any person to participate in the distribution of the New Senior Subordinated Notes. See "The Exchange Offers -- Purpose and Effect." Each broker-dealer that receives New Senior Subordinated Notes for its own account in exchange for Old Senior Subordinated Notes, where those Old Senior Subordinated Notes were acquired by the broker-dealer as a result of its market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Subordinated Notes. See "Plan of Distribution." Senior Subordinated Notes Registration Rights Agreement................ The Old Senior Subordinated Notes were sold by the Company on March 3, 1998, in a private placement in reliance on Section 4(2) of the Securities Act and immediately resold by the initial purchasers thereof (the "Initial Purchasers") in reliance on Rule 144A under the Securities Act (the "Original Senior Subordinated Notes Offering"). In connection with the original Senior Subordinated Notes Offering, the Company and Holdings entered into a Registration Rights Agreement with the Initial Purchasers (the "Senior Subordinated Notes Registration Rights Agreement") providing for, among other things, the Senior Subordinated Notes Exchange Offer. See "The Exchange Offers -- Purpose and Effect." Expiration Date............ The Senior Subordinated Notes Exchange Offer will expire at 5:00 p.m., New York City time, on , 1998, or such later date and time to which it is extended by the Company. Withdrawal................. The tender of Old Senior Subordinated Notes pursuant to the Senior Subordinated Notes Exchange Offer may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Any Old Senior Subordinated Notes not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Senior Subordinated Notes Exchange Offer. Interest on the New Senior Subordinated Notes and Old Senior Subordinated Notes.................... Interest on each New Senior Subordinated Note will accrue from the date of issuance of the Old Senior Subordinated Note for which such Old Senior Subordinated Note is exchanged or from the date of the last periodic payment of interest on such Old Note, whichever is later. Conditions to the Senior Subordinated Notes Exchange Offer........... The Senior Subordinated Notes Exchange Offer is subject to certain customary conditions, certain of which may be waived by the Company. See "The Exchange Offers -- Certain Conditions to the Exchange Offers." Procedures for Tendering Old Senior Subordinated Notes.................... Each holder of Old Senior Subordinated Notes wishing to accept the Senior Subordinated Notes Exchange Offer must complete, sign and date the accompanying letter of transmittal relating to the Senior Subordinated Notes Exchange Offer (the "Senior Subordinated Notes Letter of Transmittal"), or a copy thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver the Senior Subordinated Notes Letter of Transmittal, or the copy, together with the Old Senior Subordinated Notes and any other required documentation, to the Senior Subordinated Notes Exchange Agent (as defined) at the address set forth in the Senior Subordinated Notes Letter of Transmittal. Persons holding Old Senior Subordinated Notes through the Depository Trust Company ("DTC") and wishing to accept the Senior Subordinated Notes Exchange Offer must do so pursuant to the DTC's Automated Tender Offer Program, by which each tendering Participant will agree to be bound by the Senior Subordinated Notes Letter of Transmittal. By executing or agreeing to be bound by the Senior Subordinated Notes Letter of Transmittal, each holder will represent to the Company that, among other things, (i) the New Senior Subordinated Notes acquired pursuant to the Senior Subordinated Notes Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Senior Subordinated Notes, whether or not such person is the holder of the Old Senior Subordinated Notes, (ii) neither the holder nor any such other person is engaging in or intends to engage in a distribution of such New Senior Subordinated Notes, (iii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Senior Subordinated Notes within the meaning of the Securities Act, (iv) neither the holder nor any such person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of the Company or any Guarantor, and (v) if such holder or other person is a broker-dealer, that it will receive New Senior Subordinated Notes for its own account in exchange for Old Senior Subordinated Notes that were acquired as a result of market-making activities or other trading activities and that it will be required to acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Subordinated Notes. See "The Exchange Offers -- Procedures for Tendering." Shelf Registration Requirement.............. Pursuant to the Senior Subordinated Notes Registration Rights Agreement, the Company is required to file a "shelf" registration statement for a continuous offering pursuant to Rule 415 under the Securities Act in respect of the Old Senior Subordinated Notes if (i) because of any change in law or applicable interpretations of the staff of the Commission, the Company is not permitted to effect the Senior Subordinated Notes Exchange Offer, (ii) the Senior Subordinated Notes Exchange Offer is not consummated within 225 days of the Original Senior Subordinated Notes Offering, (iii) any holder of Private Exchange Securities (as defined) requests within 60 days after the Senior Subordinated Notes Exchange Offer, (iv) any applicable law or interpretations do not permit any holder of Old Senior Subordinated Notes to participate in the Senior Subordinated Notes Exchange Offer, (v) any holder of Old Senior Subordinated Notes participates in the Senior Subordinated Notes Exchange Offer and does not receive freely transferrable New Senior Subordinated Notes in change for Old Senior Subordinated Notes or (vi) the Company so elects. Acceptance of Old Senior Subordinated Notes and Delivery of New Senior Subordinated Notes....... The Company will accept for exchange any and all Old Senior Subordinated Notes which are properly tendered (and not withdrawn) in the Senior Subordinated Notes Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Senior Subordinated Notes issued pursuant to the Senior Subordinated Notes Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offers -- Terms of the Exchange Offers." Senior Subordinated Notes Exchange Agent........... United States Trust Company of New York is serving as Exchange Agent (the "Senior Subordinated Notes Exchange Agent") in connection with the Senior Subordinated Notes Exchange Offer. Federal Income Tax Considerations........... The exchange pursuant to the Senior Subordinated Notes Exchange Offer should not be a taxable event for federal income tax purposes. See "Certain United States Federal Income Tax Considerations." Effect of Not Tendering.... Old Senior Subordinated Notes that are not tendered or that are tendered but not accepted will, following the completion of the Senior Subordinated Notes Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. THE SENIOR DISCOUNT NOTES EXCHANGE OFFER: The Senior Discount Notes Exchange Offer applies to $325,000,000 aggregate principal amount at maturity of the Old Senior Discount Notes. The form and terms of the New Senior Discount Notes will be the same as the form and terms of the Old Senior Discount Notes except that (i) the Accreted Value (as defined) of the New Senior Discount Notes will be calculated from the date of issuance of the Old Senior Discount Notes and (ii) the New Senior Discount Notes are being registered under the Securities Act and, therefore, will not bear legends restricting their transfer. The New Senior Discount Notes will evidence the same debt as the Old Senior Discount Notes and will be entitled to the benefits of the Senior Discount Notes Indenture (as defined) pursuant to which the Old Senior Discount Notes were issued. The Old Senior Discount Notes and the New Senior Discount Notes are sometimes referred to collectively herein as the "Senior Discount Notes." See "Description of the New Senior Discount Notes." The Senior Discount Notes Exchange Offer........... $1,000 principal amount at maturity of New Senior Discount Notes in exchange for each $1,000 principal amount at maturity of Old Senior Discount Notes. As of the date hereof, Old Senior Discount Notes representing $325,000,000 aggregate principal amount at maturity are outstanding. The terms of the New Senior Discount Notes and the Old Senior Discount Notes are substantially identical. Based on an interpretation by the Commission's staff set forth in no-action letters issued to third parties unrelated to Holdings, Holdings believes that New Senior Discount Notes issued pursuant to the Senior Discount Notes Exchange Offer in exchange for Old Senior Discount Notes may be offered for resale, resold and otherwise transferred by any person receiving the New Senior Discount Notes, whether or not that person is the holder (other than any such holder or such other person that is an "affiliate" of Holdings within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that (i) the New Senior Discount Notes are required in the ordinary course of business of that holder or such other person, (ii) neither the holder nor such other person is engaging in or intends to engage in a distribution of the New Senior Discount Notes, and (iii) neither the holder nor such other person has an arrangement or understanding with any person to participate in the distribution of the New Senior Discount Notes. See "The Exchange Offers -- Purpose and Effect." Each broker-dealer that receives New Senior Discount Notes for its own account in exchange for Old Senior Discount Notes where the Old Senior Discount Notes were acquired by the broker-dealer as a result of its market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Discount Notes. See "Plan of Distribution." Senior Discount Notes Registration Rights Agreement................ The Old Senior Discount Notes were sold by Holdings on March 3, 1998, in a private placement in reliance on Section 4(2) of the Securities Act and immediately resold by the Initial Purchasers in reliance on Rule 144A under the Securities Act (the "Original Senior Discount Notes Offering," and together with the Original Senior Subordinated Notes Offering, the "Original Offerings.") In connection with the Original Senior Discount Notes Offering, the Company and Holdings entered into a Registration Rights Agreement with the Initial Purchasers (the "Senior Discount Notes Registration Rights Agreement") providing for, among other things, the Senior Discount Notes Exchange Offer. See "The Exchange Offers -- Purpose and Effect." Expiration Date............ The Senior Discount Notes Exchange Offer will expire at 5:00 p.m., New York City time, on , 1998, or such later date and time to which it is extended by Holdings. Withdrawal................. The tender of Old Senior Discount Notes pursuant to the Senior Discount Notes Exchange Offer may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Any Old Senior Discount Notes not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Senior Discount Notes Exchange Offer. Accreted Value of the New Senior Discount Notes and Old Senior Discount Notes.................... The Accreted Value of each New Senior Discount Note will be calculated from the date of issuance of the Old Senior Discount Note for which such New Senior Discount Note is exchanged. Conditions to the Senior Discount Notes Exchange Offer.................... The Senior Discount Notes Exchange Offer is subject to certain customary conditions, certain of which may be waived by the Company. See "The Exchange Offers -- Certain Conditions to the Exchange Offers." Procedures for Tendering Senior Discount Notes...... Each holder of Old Senior Discount Notes wishing to accept the Senior Discount Notes Exchange Offer must complete, sign and date the accompanying letter of transmittal relating to the Senior Discount Notes Exchange Offer (the "Senior Discount Notes Letter of Transmittal"; the Senior Discount Notes Letter of Transmittal and the Senior Subordinated Notes Letter of Transmittal are sometimes referred to herein individually as a "Letter of Transmittal" and collectively as the "Letters of Transmittal"), or a copy thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver the Senior Discount Notes Letter of Transmittal, or the copy, together with the Old Senior Discount Notes and any other required documentation, to the Senior Discount Notes Exchange Offer (as defined) at the address set forth in the Senior Discount Notes Letter of Transmittal. Persons holding Old Discount Notes through the DTC and wishing to accept the Senior Discount Notes Exchange Offer must do so pursuant to the DTC's Automated Tender Offer Program, by which each tendering Participant will agree to be bound by the Senior Discount Notes Letter of Transmittal. By executing or agreeing to be bound by the Senior Discount Notes Letter of Transmittal, each holder will represent to Holdings that, among other things, (i) the New Senior Discount Notes acquired pursuant to the Senior Discount Notes Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Senior Discount Notes, whether or not such person is the holder of the Old Senior Discount Notes, (ii) neither the holder nor any such other person is engaging in or intends to engage in a distribution of such New Senior Discount Notes, (iii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Senior Discount Notes, (iv) neither the holder nor any such other person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of Holdings, and (v) if such holder or other person is a broker-dealer, that it will receive New Senior Discount Notes for its own account in exchange for Old Senior Discount Notes that were acquired as a result of market-making activities or other trading activities and that it will be required to acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Discount Notes. Shelf Registration Requirement.............. Pursuant to the Senior Discount Notes Registration Rights Agreement, Holdings is required to file a "shelf" registration statement for a continuous offering pursuant to Rule 415 under the Securities Act in respect of the Old Senior Discount Notes if (i) because of any change in law or applicable interpretations of the staff of the Commission, Holdings is not permitted to effect the Senior Discount Notes Exchange Offer, (ii) the Senior Discount Notes Exchange Offer is not consummated within 225 days of the Original Senior Discount Notes Offering, (iii) any holder of Private Exchange Securities (as defined) requests within 60 days after the Senior Discount Notes Exchange Offer, (iv) any applicable law or interpretations do not permit any holder of Old Senior Discount Notes to participate in the Senior Discount Notes Exchange Offer, (v) any holder of Old Senior Discount Notes participates in the Senior Discount Notes Exchange Offer and does not receive freely transferrable New Senior Discount Notes in exchange for Old Senior Discount Notes or (vi) Holdings so elects. Acceptance of Old Senior Discount Notes and Delivery of New Senior Discount Notes.................... Holdings will accept for exchange any and all Old Senior Discount Notes which are properly tendered (and not withdrawn) in the Senior Discount Notes Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Senior Discount Notes issued pursuant to the Senior Discount Notes Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offers -- Terms of the Exchange Offer." Senior Discount Notes Exchange Agent........... United States Trust Company of New York is serving as Exchange Agent (the "Senior Discount Notes Exchange Agent"; the Senior Subordinated Notes Exchange Agent and the Senior Discount Notes Exchange Agent are sometimes referred to herein individually as an "Exchange Agent" and collectively as the "Exchange Agents") in connection with the Senior Discount Notes Exchange Offer. Federal Income Tax Considerations........... The exchange pursuant to the Senior Discount Notes Exchange Offer should not be a taxable event for federal income tax purposes. See "Certain United States Federal Income Tax Considerations." Effect of Not Tendering.... Old Senior Discount Notes that are not tendered or that are tendered but not accepted will, following the completion of the Senior Discount Notes Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. TERMS OF THE NEW NOTES NEW SENIOR SUBORDINATED NOTES Issuer..................... LIN Television Corporation (as successor-in-interest to LIN Acquisition Company). Securities Offered......... $300,000,000 aggregate principal amount of 8 3/8% Senior Subordinated Notes due 2008. Maturity................... March 1, 2008. Interest Payment Dates..... March 1 and September 1 of each year, commencing September 1, 1998. Sinking Fund............... None. Optional Redemption........ Except as described below, the Company may not redeem the New Senior Subordinated Notes prior to March 1, 2003. On or after such date, the Company may redeem the Senior Subordinated Notes, in whole or in part, at the redemption prices set forth herein, together with accrued and unpaid interest, if any, to the date of redemption. In addition, at any time and from time to time on or prior to March 1, 2001, the Company may redeem up to 35% of the aggregate principal amount of the Senior Subordinated Notes with the net cash proceeds of one or more private or public offerings by the Company, at a redemption price equal to 108.375% of the principal amount to be redeemed, together with accrued and unpaid interest, if any, to the date of redemption, provided that at least 65% of the originally issued aggregate principal amount of the Senior Subordinated Notes remains outstanding after each such redemption. See "Description of the New Senior Subordinated Notes -- Optional Redemption." Change of Control.......... Upon the occurrence of a Change of Control, (i) the Company will have the option, at any time on or prior to March 1, 2003, to redeem the New Senior Subordinated Notes, in whole but not in part, at a redemption price equal to 100% of the principal amount thereof, plus accrued and unpaid interest plus the Applicable Premium (as defined) and (ii) if the New Senior Subordinated Notes are not redeemed or if such Change of Control occurs after March 1, 2003, the Company will be required to make an offer to repurchase the New Senior Subordinated Notes at a price equal to 101% of the principal amount thereof, together with accrued and unpaid interest, if any, to the date of purchase. See "Description of the New Senior Subordinated Notes -- Change of Control" and "-- Amendment." Guarantees................. The New Senior Subordinated Notes will be guaranteed (the "Subsidiary Guarantees"), jointly and severally on an unsecured senior subordinated basis, by the Company's direct and indirect, existing and future, Restricted Subsidiaries (the "Guarantors"). The Guarantors also will guarantee all obligations of the Company under the Senior Credit Facilities (as defined). The Company's obligations under the Senior Credit Facilities also will be secured by substantially all of the assets of the Company and the Guarantors. The obligations of each Guarantor under its Subsidiary Guarantee will be subordinated in right of payment to the prior payment in full of all Guarantor Senior Indebtedness (as defined) of such Guarantor to substantially the same extent as the Senior Subordinated Notes are subordinated to all existing and future Senior Indebtedness of the Company. See "Description of the New Senior Subordinated Notes -- Subsidiary Guarantees of the New Senior Subordinated Notes." Ranking.................... The New Senior Subordinated Notes will be unsecured and will be subordinated in right of payment to all existing and future Senior Indebtedness (as defined) of the Company and will rank pari passu in right of payment with all Senior Subordinated Indebtedness (as defined) of the Company. As of March 31, 1998, the aggregate principal amount of the Company's outstanding Senior Indebtedness was $170.0 million (consisting of outstanding Term Loans) and the Company had no Senior Subordinated Indebtedness outstanding other than the Senior Subordinated Notes and had no Subsidiary Indebtedness outstanding. As of such date, liabilities of the Company's Subsidiaries reflected on its consolidated balance sheet, including indebtedness and other liabilities such as trade payables and accrued expenses, aggregated $17.8 million. See "Description of the New Senior Subordinated Notes -- Ranking and Subordination." Restrictive Covenants...... The Senior Subordinated Notes Indenture limits, among other things, (i) the incurrence of additional indebtedness and issuance of capital stock, (ii) layering of indebtedness, (iii) the payment of dividends on, and redemption of, capital stock of the Company, (iv) liens, (v) mergers, consolidations, and sales of all or substantially all of the Company's assets, (vi) asset sales, (vii) asset swaps, (viii) dividend and other payment restrictions affecting Restricted Subsidiaries and (ix) transactions with affiliates of the Company. However, all of these limitations and prohibitions are subject to a number of important qualifications and exceptions. See "Description of the New Senior Subordinated Notes -- Certain Covenants." Use of Proceeds............ There will be no cash proceeds to the Company from the exchange of New Senior Subordinated Notes for Old Senior Subordinated Notes pursuant to the Senior Subordinated Notes Exchange Offer. The net proceeds from the Original Senior Subordinated Notes Offering were used, together with the proceeds of the other Financings, to consummate the Acquisition. NEW SENIOR DISCOUNT NOTES Issuer..................... LIN Holdings Corp. Securities Offered......... $325,000,000 aggregate principal amount at maturity of 10% Senior Discount Notes due 2008. The Senior Discount Notes will be issued at a discount to their aggregate principal amount at maturity. Maturity................... March 1, 2008. Interest Payment Dates..... Cash interest will not accrue or be payable on the New Senior Discount Notes prior to March 1, 2003. Thereafter, cash interest on the New Senior Discount Notes will accrue at a rate of 10% per annum and will be payable semi-annually in arrears on March 1 and September 1 of each year, commencing on September 1, 2003. Original Issue Discount.... For federal income tax purposes, the New Senior Discount Notes will be treated as having been issued with "original issue discount" equal to the difference between the issue price of the Old Senior Discount Notes and the sum of all cash payments (whether denominated as principal or interest) to be made thereon. Each holder of a New Senior Discount Note must include as gross income for federal income tax purposes a portion of such original issue discount for each day during each taxable year in which a New Senior Discount Note is held even though no cash interest payments will be received prior to March 1, 2003. See "Certain United States Federal Income Tax Considerations -- Taxation of Original Issue Discount." Sinking Fund............... None. Mandatory Principal Redemption............... Except as described below, Holdings may not redeem the New Senior Discount Notes prior to March 1, 2003. On March 1, 2003, Holdings will be required to redeem Senior Discount Notes with an aggregate principal amount at maturity equal to (i) $125.0 million multiplied by (ii) the quotient obtained by dividing (x) the aggregate principal amount at maturity of Senior Discount Notes then outstanding (other than Senior Discount Notes then held by Holdings or its Subsidiaries or the entities with respect to which Holdings is a direct or indirect Subsidiary) by (y) $325.0 million, (the "Mandatory Principal Redemption Amount") at a redemption price equal to 100% of the principal amount at maturity of the Senior Discount Notes so redeemed. See "Description of the New Senior Discount Notes -- Mandatory Principal Redemption." Optional Redemption........ The New Senior Discount Notes will be redeemable at the option of Holdings, in whole or in part, at any time on or after March 1, 2003. On or after such date, Holdings may redeem the New Senior Discount Notes, in whole or in part, at the redemption prices set forth herein, together with accrued and unpaid interest, if any, to the date of redemption. In addition, at any time and from time to time on or prior to March 1, 2001, Holdings may, subject to certain requirements, redeem up to 35% of the aggregate principal amount at maturity of the Senior Discount Notes with the net cash proceeds from one or more private or public equity offerings at a price equal to 110% of the Accreted Value (as defined) at the date of redemption, provided that at least 65% of the originally issued aggregate principal amount at maturity of the Senior Discount Notes remains outstanding after each such redemption. See "Description of the New Senior Discount Notes -- Optional Redemption." Change of Control.......... Upon a Change of Control, (i) Holdings will have the option, at any time on or prior to March 1, 2003, to redeem the New Senior Discount Notes, in whole but not in part, at a redemption price equal to 100% of the Accreted Value thereof plus the Applicable Premium and (ii) if the New Senior Discount Notes are not so redeemed or if such Change of Control occurs after March 1, 2003, Holdings will be required to make an offer to repurchase the New Senior Discount Notes at a price equal to (a) 101% of the Accreted Value thereof if redeemed on or before March 1, 2003, and (b) 101% of the principal amount at maturity, plus accrued and unpaid interest, if any, thereon, if redeemed after March 1, 2003. See "Description of the New Senior Discount Notes -- Change of Control." Guarantees................. None. Ranking.................... The New Senior Discount Notes will be senior unsecured obligations of Holdings and will rank pari passu in right of payment with all Senior Indebtedness of Holdings, including Holdings' guarantee of the Senior Credit Facilities. Holdings is a holding company with no operations of its own and whose primary asset is the capital stock of the Company (all of which will be pledged to secure the Senior Credit Facilities). As a result of the holding company structure, the New Senior Discount Notes will effectively rank junior in right of payment to all creditors of the Company and its subsidiaries, including the lenders under the Senior Credit Facilities, holders of the Senior Subordinated Notes and trade creditors. As of March 31, 1998, the New Senior Discount Notes were effectively subordinated to $523.8 of aggregate liabilities (including indebtedness and other liabilities such as trade payables and accrued expenses that would have been reflected on the consolidated balance sheet) of the Company and its subsidiaries. See "Description of the New Senior Discount Notes." Restrictive Covenants...... The Senior Discount Notes Indenture limits, among other things, (i) the incurrence of additional indebtedness and issuance of capital stock, (ii) the payment of dividends on, and redemption of, capital stock of Holdings, (iii) mergers, consolidations and sales of all or substantially all of Holdings' assets, (iv) asset sales, (v) asset swaps, (vi) dividend and other payment restrictions affecting Restricted Subsidiaries and (vii) transactions with affiliates. However, all of these limitations and prohibitions are subject to a number of important qualifications and exceptions. See "Description of the New Senior Discount Notes -- Certain Covenants."
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+SUMMARY The following summary should be read in conjunction with the more detailed information, financial statements and notes thereto appearing elsewhere in this Prospectus. For additional information relating to certain defined terms used herein, as well as the sources for the market and other industry data contained herein, see "Certain Definitions and Market and Industry Data." THE COMPANY The Company is a leading television station group operator in the United States that operates eleven television stations and provides consulting services to two additional television stations. Twelve of these stations are network affiliates and nine are in top forty DMAs, including: Indianapolis, Indiana; New Haven-Hartford, Connecticut; Buffalo, New York; Norfolk-Portsmouth, Virginia; Grand Rapids-Kalamazoo-Battle Creek, Michigan and Dallas-Fort Worth, Texas. These stations have an aggregate United States household reach of approximately 6.9%, ranking the Company among the top independent, "pure-play" television station group operators in the United States. The Company's Core Stations generated an aggregate pro forma BCF margin of approximately 46% for the fiscal year ended December 31, 1997, principally as a result of their strong network affiliations, leading local news programming and tight cost controls. In addition, the Company's management pioneered the "multi-channel strategy," which involves the combination of an owned and operated television station with an LMA station and/or a 24-hour cable weather channel (a "Local Weather Station") in the same market. The multi-channel strategy has enhanced the Company's revenue market shares and increased its BCF by leveraging its fixed costs over a larger revenue base. The Company's station portfolio is well diversified in terms of its network affiliations, geographic coverage, net revenues and cash flow. The Company owns and operates three CBS affiliates, two NBC affiliates and two ABC affiliates which accounted for 35%, 28% and 28%, respectively, of the Company's pro forma BCF for the fiscal year ended December 31, 1997. The Company's LMA stations and Local Weather Stations accounted for substantially all of the remaining 9% of its BCF on the same basis. The Company's Core Stations broadcast in seven different markets, with no market representing more than 25% of the Company's pro forma net revenues or BCF for the fiscal year ended December 31, 1997. The Company's pro forma net revenues, BCF and EBITDA were $196.1 million, $79.5 million and $72.7 million, respectively, for the fiscal year ended December 31, 1997. Hicks, Muse, Tate & Furst Incorporated ("Hicks Muse"), a leading private equity firm with significant investments and experience in the media and communications industry, has acquired LIN Television to serve as a platform for acquiring and operating additional television stations that can benefit from management's ability to improve operating performance and increase BCF margins at acquired stations. In connection with the Acquisition, Hicks Muse and NBC formed a television station joint venture (the "Joint Venture"). The Joint Venture consists of KXAS-TV, LIN Television's Dallas-Fort Worth NBC affiliate, and KNSD-TV, NBC's San Diego station. A wholly owned subsidiary of NBC is the general partner of the Joint Venture (the "NBC General Partner") and NBC operates the stations owned by the Joint Venture pursuant to a management agreement. The NBC General Partner holds an approximate 80% equity interest and the Company holds an approximate 20% equity interest in the Joint Venture. General Electric Capital Corporation ("GECC") provided debt financing to the Joint Venture in the form of the GECC Note (as defined), the proceeds of which were distributed to the Company to finance a portion of the cost of the Acquisition. The GECC Note is not an obligation of Holdings, the Company or any of their respective subsidiaries and is recourse only to the Joint Venture, the Company's equity interest therein and to one of Holding's two corporate parents (the "GECC Note Guarantor") pursuant to a guarantee. The Company expects that the interest payments on the GECC Note will be serviced solely by the cash flow of the Joint Venture. See "The Transactions and Other Matters -- The Joint Venture." Later this year, the Company expects to acquire (the "Grand Rapids Acquisition") from AT&T Corporation ("AT&T") the assets of WOOD-TV and the LMA rights related to WOTV-TV (collectively, LIN TELEVISION CORPORATION LIN HOLDINGS CORP. CROSS REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING THE LOCATION IN THE PROSPECTUS OF THE INFORMATION REQUIRED BY PART I OF FORM S-1 <TABLE> <CAPTION> FORM S-1 ITEM NUMBER AND HEADING LOCATION IN PROSPECTUS -------------------------------- ---------------------- <S> <C> <C> 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus... Cover Page of Registration Statement; Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus............................ Inside Front and Outside Back Cover Pages of Prospectus 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges............. Certain Definitions and Market and Industry Data; Summary; Risk Factors; Selected Consolidated Financial and Operating Data; Unaudited Pro Forma Financial Information; Business 4. Use of Proceeds............................ Use of Proceeds 5. Determination of Offering Price............ Not Applicable 6. Dilution................................... Not Applicable 7. Selling Security Holders................... Not Applicable 8. Plan of Distribution....................... Front Cover Page of Prospectus; The Exchange Offers; Plan of Distribution 9. Description of Securities to be Registered............................... Description of New Senior Subordinated Notes; Description of New Senior Discount Notes 10. Interests of Named Experts and Counsel..... Not Applicable 11. Information with Respect to the Registrant............................... Cover Page of Registration Statement; Certain Definitions and Market and Industry Data; Summary; Risk Factors; The Transactions and Other Matters; Selected Consolidated Financial and Operating Data; Unaudited Pro Forma Consolidated Financial Information; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Securities Ownership of Certain Beneficial Owners; Certain Other Transactions; Description of the Senior Credit Facilities; Legal Matters 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities.............................. Not Applicable </TABLE> AVAILABLE INFORMATION The Issuers and the Guarantors have filed with the Securities and Exchange Commission (the "Commission") a Registration Statement (which term shall encompass any amendments thereto) on Form S-1 under the Securities Act with respect to the securities offered hereby. This Prospectus does not contain all information set forth in the Registration Statement and the exhibits thereto, to which reference is hereby made. Although the Issuers and the Guarantors believe that statements made in this Prospectus as to the contents of any contract, agreement, or other document describe all material elements of such documents, such statements are not necessarily complete. With respect to each such contract, agreement, or other document filed as an exhibit to the Registration Statement, reference is hereby made to such exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. As a result of the filing of the Registration Statement with the Commission, the Issuers and the Guarantors each will become subject to the informational reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In accordance therewith, the Company and Holdings will be required to file reports and other information with the Commission. Such reports and other information can be inspected and copied at the principal office of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and the following Regional Offices of the Commission: Chicago Regional Office, Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60611 and New York Regional office, 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of such material may also be obtained at prescribed rates from the Public Reference Section of the Commission at its principal office at Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549. The Commission also maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission at http://www.sec.gov. In reliance upon certain Staff Accounting Bulletins of the Commission, interpretations of the staff of the Commission and no-action relief granted by the Staff of the Commission to unrelated third parties, the Subsidiary Guarantors do not intend to file periodic reports with the Commission under the Exchange Act separately from the Issuers. The Issuers will furnish holders of the securities offered hereby with annual reports containing, among other information, audited financial statements certified by an independent public accounting firm and quarterly reports containing unaudited financial information for the first three quarters of each fiscal year. The Issuers will also furnish such other reports as it may determine or as may be required by law or by the indentures governing the New Notes. FORWARD LOOKING STATEMENTS THIS PROSPECTUS CONTAINS CERTAIN FORWARD LOOKING STATEMENTS WITH RESPECT TO THE FINANCIAL CONDITIONS, RESULTS OF OPERATIONS AND BUSINESSES OF THE ISSUERS, INCLUDING STATEMENTS UNDER THE CAPTIONS "SUMMARY," "UNAUDITED PRO FORMA FINANCIAL INFORMATION," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS." ALL OF THESE FORWARD LOOKING STATEMENTS ARE BASED ON ESTIMATES AND ASSUMPTIONS MADE BY MANAGEMENT OF THE ISSUERS WHICH, ALTHOUGH BELIEVED TO BE REASONABLE, ARE INHERENTLY UNCERTAIN. THEREFORE, UNDUE RELIANCE SHOULD NOT BE PLACED UPON SUCH ESTIMATES AND STATEMENTS. NO ASSURANCE CAN BE GIVEN THAT ANY OF SUCH ESTIMATES OR STATEMENTS WILL BE REALIZED AND IT IS LIKELY THAT ACTUAL RESULTS WILL DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE: (1) INCREASED COMPETITION, INCLUDING FROM NEWER FORMS OF ENTERTAINMENT AND ENTERTAINMENT MEDIA OR CHANGES IN THE POPULARITY OR AVAILABILITY OF PROGRAMMING; (2) INCREASED COSTS, INCLUDING INCREASED CAPITAL EXPENDITURES AS A RESULT OF NECESSARY TECHNOLOGICAL ENHANCEMENTS (E.G., EXPENDITURES RELATED TO THE TRANSITION TO DIGITAL the "Grand Rapids Stations"), both of which stations are located in the Grand Rapids-Kalamazoo-Battle Creek market. The Company currently provides services to the Grand Rapids Stations pursuant to a consulting agreement with AT&T. See "The Transactions and Other Matters -- The Grand Rapids Acquisition" and "Business -- The Company -- History." The following table provides information regarding the stations and other programming outlets operated by the Company and the stations owned by the Joint Venture: <TABLE> <CAPTION> COMMERCIAL STATION STATION DMAS, STATIONS AND OTHER DMA STATIONS IN RANK IN AUDIENCE PROGRAMMING OUTLETS STATUS(A) AFFILIATION(B) RANK(C) DMA(D) DMA(E) Share(e) ------------------------ --------- -------------- ------- ----------- ------- -------- <S> <C> <C> <C> <C> <C> <C> COMPANY STATIONS AND OTHER PROGRAMMING OUTLETS: INDIANAPOLIS, IN WISH-TV.......................................... O&O CBS 25 8 1 18% WIIH-LP (Satellite)(f)........................... O&O CBS Local Weather Station............................ O&O Cable NEW HAVEN-HARTFORD, CT WTNH-TV.......................................... O&O ABC 27 8 2 14% WBNE-TV.......................................... LMA WB 5(tie) 2% GRAND RAPIDS-KALAMAZOO-BATTLE CREEK, MI(g) WOOD-TV.......................................... CS NBC 37 8 1(tie) 18% WOTV-TV.......................................... CS ABC 4 5% NORFOLK-PORTSMOUTH, VA WAVY-TV.......................................... O&O NBC 39 7 1(tie) 16% WVBT-TV.......................................... LMA WB/Fox(h) 5 2% Local Weather Station............................ O&O Cable BUFFALO, NY WIVB-TV.......................................... O&O CBS 40 7 2 17% AUSTIN, TX KXAN-TV.......................................... O&O NBC 60 7 3 14% KNVA-TV.......................................... LMA WB 6 3% KXAM-TV (Satellite)(i)........................... O&O NBC Low Power Network................................ O&O UPN DECATUR-CHAMPAIGN, IL WAND-TV.......................................... O&O ABC 81 8 3 14% Local Weather Station............................ O&O Cable FORT WAYNE, IN WANE-TV.......................................... O&O CBS 102 6 2 19% Local Weather Station............................ O&O Cable DALLAS-FORT WORTH, TX KXTX-TV.......................................... LMA IND 8 13 9 3% JOINT VENTURE STATIONS: DALLAS-FORT WORTH, TX KXAS-TV.......................................... JV NBC 8 13 3 12% SAN DIEGO, CA KNSD-TV.......................................... JV NBC 26 7 1 13% </TABLE> - --------------- (a) "O&O" refers to a station owned and operated by the Company. "LMA" refers to a station operated by the Company pursuant to a local marketing agreement and with respect to which the Company has a purchase option exercisable under certain circumstances. "JV" refers to a station owned by the Joint Venture and operated by NBC. "CS" refers to a station which the Company currently provides services to pursuant to a consulting agreement. The Company's Core Stations, all of which are CBS, NBC and ABC affiliates, are WISH-TV, WANE-TV, WAND-TV, WAVY-TV, KXAN-TV, WTNH-TV and WIVB-TV. (b) "IND" refers to an independent station with no network affiliation. (c) Rankings are based on the relative size of the station's "market" among the 211 generally recognized television markets in the United States. Source: Nielsen Station Index DMA Market Ratings -- November 1997, A.C. Nielsen Company. (d) The number of stations in a market excludes local weather stations, low power networks and satellite broadcasting facilities. (e) Source: Nielsen Station Index DMA Market Ratings -- November 1997, A.C. Nielsen Company, Sunday-Saturday 6:00 a.m.-2:00 a.m. (f) Station WIIH-LP, Indianapolis, Indiana, is operated as a satellite station of WISH-TV in order to increase WISH-TV's coverage. PROSPECTUS <TABLE> <S> <C> OFFER FOR ALL OUTSTANDING OFFER FOR ALL OUTSTANDING 8 3/8% SENIOR SUBORDINATED NOTES DUE 10% SENIOR DISCOUNT NOTES DUE 2008 2008 IN EXCHANGE FOR IN EXCHANGE FOR 10% SENIOR DISCOUNT NOTES DUE 2008 8 3/8% SENIOR SUBORDINATED NOTES DUE OF 2008 LIN HOLDINGS CORP. OF LIN TELEVISION CORPORATION </TABLE> Pursuant to the terms and subject to the conditions set forth in this Prospectus and the accompanying letters of transmittal, (i) LIN Television Corporation, a Delaware corporation (the "Company"), and the Guarantors (as defined) hereby offer (the "Senior Subordinated Notes Exchange Offer") to exchange $1,000 principal amount of registered 8 3/8% Senior Subordinated Notes Due 2008 (the "New Senior Subordinated Notes") issued by the Company, for each $1,000 principal amount of unregistered 8 3/8% Senior Subordinated Notes Due 2008 (the "Old Senior Subordinated Notes," and together with the New Senior Subordinated Notes, the "Senior Subordinated Notes") issued by LIN Acquisition Company, the predecessor in interest of the Company ("LIN Acquisition"), of which an aggregate principal amount of $300,000,000 is outstanding and (ii) LIN Holdings Corp., a Delaware corporation ("Holdings") hereby offers (the "Senior Discount Notes Exchange Offer," and together with the Senior Subordinated Notes Exchange Offer, the "Exchange Offers") to exchange $1,000 principal amount at maturity of registered 10% Senior Discount Notes Due 2008 (the "New Senior Discount Notes") issued by Holdings, for each $1,000 principal amount at maturity of unregistered 10% Senior Discount Notes Due 2008 (the "Old Senior Discount Notes," and together with the New Senior Discount Notes, the "Senior Discount Notes") issued by Holdings, of which an aggregate principal amount at maturity of $325,000,000 is outstanding. The Old Senior Subordinated Notes and the Old Senior Discount Notes are sometimes collectively referred to herein as the "Old Notes" and the New Senior Subordinated Notes and the New Senior Discount Notes are sometimes collectively referred to herein as the "New Notes." The Old Notes and the New Notes are sometimes collectively referred to herein as the "Notes." The Company and Holdings are sometimes collectively referred to herein as the "Issuers." The form and terms of the New Notes are identical to the form and terms of the Old Notes except that (i) interest on the New Senior Subordinated Notes shall accrue from the date of issuance of the Old Senior Subordinated Notes, (ii) the Accreted Value (as defined) of the New Senior Discount Notes will be calculated from the date of issuance of the Old Senior Discount Notes, and (iii) the New Notes are being registered under the Securities Act of 1933, as amended (the "Securities Act"), and will not bear any legends restricting their transfer. The New Senior Subordinated Notes will evidence the same debt as the Old Senior Subordinated Notes and will be issued pursuant to, and entitled to the benefits of, the indenture governing the Old Senior Subordinated Notes. The New Senior Discount Notes will evidence the same debt as the Old Senior Discount Notes and will be issued pursuant to, and entitled to the benefits of, the indenture governing the Old Senior Discount Notes. The Exchange Offers are being made in order to satisfy certain contractual obligations of the Company and Holdings. See "The Exchange Offers," "Description of the New Senior Subordinated Notes" and "Description of the New Senior Discount Notes." The net proceeds from the sale of the Old Notes were used to effect the acquisition by Holdings of the Company and its subsidiaries (the "Acquisition"). Such acquisition was effected pursuant to the merger of LIN Acquisition with and into the Company, with the Company surviving as a wholly owned subsidiary of Holdings. See "The Transactions and Other Matters." --------------------- SEE "RISK FACTORS" BEGINNING ON PAGE 22 FOR A DISCUSSION OF CERTAIN INFORMATION THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NEW NOTES. --------------------- The Company and Holdings will accept for exchange any and all Old Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on , 1998, unless extended (as so extended, the "Expiration Date"). Tenders of Old Notes may be withdrawn at any time prior to the Expiration Date. The Exchange Offers are subject to certain customary conditions. See "The Exchange Offers." In order for a holder of Old Notes to participate in an Exchange Offer, such holder must represent to the Company or Holdings, as appropriate, that, among other things, (i) the New Notes acquired pursuant to such Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Notes, whether or not such person is the holder of the Old Notes, (ii) neither the holder nor any such other person is engaging or intends to engage in a distribution of such New Notes, (iii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Notes within the meaning of the Securities Act, (iv) neither the holder nor any such other person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of the Company, Holdings or any Guarantor, and (v) if such holder or other person is a broker-dealer, that it will receive New Notes for its own account in exchange for Old Notes that were acquired as a result of marketmaking activities or other trading activities. See "The Exchange Offers--Purpose and Effect." Each broker-dealer that receives New Notes for its own account pursuant to either of the Exchange Offers must acknowledge that it will deliver a prospectus in connection with any resale of those New Notes. The letter of transmittal accompanying this Prospectus states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for Old Notes where such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company and Holdings have agreed that, for a period of 90 days after the Expiration Date, they will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." No public market has existed for the Old Notes. The Company and Holdings currently do not intend to list the New Notes on any securities exchange or to seek approval for quotation through any automated quotation system, and no active public market for the New Notes is currently anticipated. The Company and Holdings will pay all expenses incident to the Exchange Offers. The Exchange Offers are not conditioned upon any minimum principal amount of Old Senior Subordinated Notes or Old Senior Discount Notes being tendered for exchange pursuant to the Exchange Offers. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DATE OF THIS PROSPECTUS IS , 1998. BROADCASTING) OR ACQUISITIONS OR INCREASED PROGRAMMING COSTS; (3) INABILITY TO CONSUMMATE ACQUISITIONS ON ATTRACTIVE TERMS; (4) LOSS OR RETIREMENT OF KEY MEMBERS OF MANAGEMENT; (5) INCREASES IN THE ISSUERS' COST OF BORROWINGS OR INABILITY OR UNAVAILABILITY OF ADDITIONAL DEBT OR EQUITY CAPITAL; (6) ADVERSE STATE OR FEDERAL LEGISLATION OR REGULATION OR ADVERSE DETERMINATIONS BY REGULATORS; AND (7) CHANGES IN ADVERTISING TRENDS AND/OR BUDGETS AND IN GENERAL ECONOMIC CONDITIONS IN THE MARKETS IN WHICH THE ISSUERS MAY, FROM TIME TO TIME, COMPETE. MANY OF SUCH FACTORS WILL BE BEYOND THE CONTROL OF THE ISSUERS AND THEIR MANAGEMENT. FORWARD-LOOKING STATEMENTS CONTAINED HEREIN SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULT OF ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS WHICH MAY BE MADE TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. FOR FURTHER INFORMATION OR OTHER FACTORS WHICH COULD AFFECT THE FINANCIAL RESULTS OF THE ISSUERS AND SUCH FORWARD LOOKING STATEMENTS, SEE "RISK FACTORS." (g) The Company currently provides services to WOOD-TV and WOTV-TV pursuant to a consulting agreement with AT&T. The Company has agreed to acquire the assets of WOOD-TV and the LMA rights related to WOTV-TV from AT&T for a purchase price of approximately $125.5 million. The acquisition is expected to close later this year. See "The Transactions and Other Matters -- The Grand Rapids Acquisition" and "Business -- The Company -- History." (h) WVBT-TV will become a Fox affiliate on August 31, 1998. (i) Station KXAM-TV, Llano, Texas, is operated as a satellite station of KXAN-TV in order to increase KXAN-TV's coverage. BUSINESS STRATEGY The Company's business strategy is to maximize its BCF through both revenue growth and the implementation of effective cost controls. To achieve these goals, the Company seeks, among other things, to: Maximize Revenue Shares. From 1993 to 1997, the Company increased its broadcast television advertising revenue market share from 22.8% to 25.9% (assuming the acquisitions of WIVB-TV and WTNH-TV occurred on January 1, 1993) by targeting audiences with favorable demographic profiles, creating auxiliary revenue streams and cultivating strong network affiliations. On the same basis, the Company's gross advertising revenues have grown at a compound annual rate of 10.3%, whereas gross advertising revenues in the Company's markets have grown at a compound annual rate of 6.8%. The Company attempts to maximize each station's revenue share through a quarterly "entitlement review process." This process involves the benchmarking of each station's advertising revenues against an index which weights various demographic attributes according to their relative advertising revenue value. As a result of the entitlement review process, the Company's revenue shares typically outperform its audience shares. The Company's revenue shares also benefit from long term affiliations with its three core networks -- CBS, NBC and ABC -- which provide the Company's television stations affiliated with such networks with competitive programming, including coverage of political events and high profile sporting events such as the Olympic Games, Super Bowl and NCAA Men's Basketball Tournament. The Company also has stations affiliated with Fox, WB and UPN, which further enhances its ability to grow its revenue shares through access to their competitive programming. Emphasize Leading Local News. The Company's Core Stations are ranked number one or two in late news in all but the Company's smallest market. Management believes that a successful news operation is critical to the success of a television station because news audiences generally have the best demographic profiles from an advertising sales perspective. In addition, news programming: (i) enables the Company to purchase less syndicated programming and thereby maintain tight control over programming costs; (ii) serves as a strong lead-in to other programming; and (iii) fosters a high profile in the local community, which is critical to maximizing local advertising sales. The Company believes that its local news programming significantly improves its stations' BCF margins. Accordingly, the Company has increased the hours of news produced per week from 81 in 1989 to 187 in 1997 on a pro forma basis. Partly as a result of its emphasis on quality local news programming, management has increased the BCF margin at the five network-affiliated stations that it has operated throughout the period from January 1, 1991 to December 31, 1997 (WISH-TV, WANE-TV, WAND-TV, WAVY-TV and KXAN-TV) from 37% to 47%. Execute a Multi-Channel Strategy. The Company's management pioneered the "multi-channel strategy," which involves the combination of an owned and operated television station with an LMA station and/or a Local Weather Station in the same market. Management has pursued this strategy in all but one of the Company's markets. Execution of the multi-channel strategy has been a factor in the Company's ability to generate incremental cash flow. The advantages of the multi-channel strategy are: (i) the ability to capitalize on management's expertise; (ii) additional advertising inventory in each market; (iii) greater programming flexibility; (iv) enhanced ability to leverage fixed operating costs over a larger revenue base; (v) improved negotiating positions with respect to suppliers of syndicated programming, advertisers and the networks; (vi) increased share of actual viewers; (vii) the opportunity to affiliate with the emerging networks; and (viii) enhanced opportunities for cross promotion. CERTAIN DEFINITIONS AND MARKET AND INDUSTRY DATA As used in this Prospectus, unless the context otherwise requires, (i) "Holdings" refers to LIN Holdings Corp., (ii) "LIN Acquisition" refers to LIN Acquisition Company, (iii) "LIN Television" or the "Predecessor" refers to LIN Television Corporation and its subsidiaries prior to the Acquisition, (iv) the "Company" refers to LIN Television after giving effect to the Acquisition (as defined), the Financings (as defined) and the Joint Venture (as defined) (collectively, the "Transactions"), except where the context requires otherwise, (v) "on a pro forma basis" or "pro forma" means after giving effect to the Transactions, except as indicated otherwise and (vi) "Core Stations" refers to the CBS, NBC and ABC-affiliated stations owned and operated by the Company (WISH-TV, WANE-TV, WAND-TV, WAVY-TV, KXAN-TV, WTNH-TV and WIVB-TV). See "The Transactions and Other Matters." The terms "broadcast cash flow" ("BCF") and "EBITDA" are referred to in various places in this Prospectus. BCF is defined as operating income (loss) plus corporate expenses plus depreciation and amortization of intangible assets and amortization of program rights plus other non-cash expenses (consisting of tower write-offs and non-cash pension expenses), minus cash program payments. EBITDA is defined as BCF minus corporate expenses. BCF and EBITDA are not measures of performance calculated in accordance with generally accepted accounting principles ("GAAP"). However, management believes that BCF is useful to a prospective investor because it is a measure widely used in the broadcast industry to evaluate a television broadcast company's operating performance and that EBITDA is useful to a prospective investor because it is widely used in the broadcast industry to evaluate a television broadcast company's ability to service debt. BCF and EBITDA should not be considered in isolation of or as a substitute for net income (loss), cash flows from operating activities and other income and cash flow statement data prepared in accordance with GAAP or as a measure of liquidity or profitability. BCF and EBITDA as determined above may not be comparable to the BCF and EBITDA measures reported by other companies. In addition, these measures do not represent funds available for discretionary use. Designated market area ("DMA") rankings are from the Nielsen Station Index dated November 1997 as estimated by the A.C. Nielsen Company ("Nielsen"). There are 211 generally-recognized television "markets" or DMAs in the United States, which are ranked in size according to various factors based upon actual or potential audience. Unless otherwise indicated herein, (i) market revenue, market revenue share, projected advertising revenue growth and station revenue share data have been obtained from Investing in Television 1994, 1995, 1996 and 1997, BIA Publications, Inc. ("BIA"); (ii) television household data has been obtained from the Nielsen Station Index for November of the appropriate year; (iii) audience share and audience rankings, except where specifically stated to the contrary, have been derived from Nielsen estimates (for May and November of the appropriate year) of the percentage of persons in the DMA tuned into the relevant station from sign-on to sign-off (Sunday to Saturday, 6:00 a.m. to 2:00 a.m.); (iv) general market economic data has been obtained from BIA and the chambers of commerce in each station's market; (v) the term "station" or "commercial station" means a television broadcast station and does not include public television stations, cable stations or networks (e.g., CNN, TBS or ESPN), or stations that do not meet the minimum Nielsen reporting standards (i.e., weekly cumulative audience share of at least 2.5% for Sunday to Saturday, 7:00 a.m. to 1:00 a.m.); and (vi) the term "independent" describes a commercial television station that is not affiliated with the ABC, CBS, NBC, Fox, WB or UPN television networks. Control Costs. In addition to concentrating on maximizing advertising revenues in its local markets, management focuses on controlling costs to maximize BCF. In many markets, the Company operates with fewer personnel than its competitors. In addition, management typically buys syndicated programming on a Company-wide basis and performs detailed profitability analyses for all programming purchases. As a result, management believes that the Company's margins are among the highest in the industry for stations in markets of comparable size. Pursue Selective Acquisitions. The Company intends to pursue selective acquisitions of television stations with the goal of improving their operating performance by applying management's business strategy. Targeted stations generally will share many of the following characteristics: (i) attractive acquisition terms; (ii) opportunities for increased advertising revenue; (iii) opportunities to implement effective cost controls; (iv) opportunities for increased audience share through improved newscasts and programming; and (v) market locations that are projected to have attractive growth in advertising revenues. The Company intends to primarily target network-affiliated stations located in the fifty largest DMAs, which stations typically have established audiences for their news, sports and entertainment programming. Invest in Digital Technology. Management believes that the Company is well positioned for the transition to digital broadcasting and anticipates that the Company will be one of the first television broadcasters in the United States to transmit a digital signal. The Company has already invested $13 million to fully prepare its towers and transmitter buildings for the transition, and estimates that an additional $40 million will be required over the next five to seven years for other necessary capital expenditures such as the purchase of antennae, transmitters, studio equipment and news gathering equipment. In accordance with FCC regulations, all station affiliates of ABC, CBS, NBC and Fox in the top ten DMAs will be required to transmit a digital signal by May 1, 1999. Affiliates of those networks in DMAs ranked eleven through thirty will be required to transmit a digital signal by November 1, 1999. All remaining commercial broadcasters will be required to transmit a digital signal by May 1, 2002. MANAGEMENT AND OWNERSHIP The Company's management team, led by Gary Chapman, the Company's President and Chief Executive Officer, is recognized as an industry leader. As an indication of management's expertise and ability, the five network-affiliated stations operated by management throughout the period from January 1, 1991 to December 31, 1997 (WISH-TV, WANE-TV, WAND-TV, WAVY-TV and KXAN-TV) achieved an aggregate annual compound growth rate in net revenues and BCF of 8.9% (from $57.8 million to $96.2 million) and 13.3% (from $21.4 million to $45.2 million), respectively. Management also increased the Company's BCF margin at these stations from 37% to 47% during such period. In connection with the Acquisition, management and key employees reinvested a portion of their equity interest in LIN Television in the indirect parent corporation of Holdings. In addition, management and key employees will be granted options to acquire additional shares representing an approximate 5% equity interest in such parent corporation. Hicks Muse is a leading private investment firm with offices in Dallas, New York, St. Louis and Mexico City that specializes in leveraged acquisitions, recapitalizations and other principal investing activities. Hicks Muse and its predecessor firm have completed or have pending over 100 transactions having a combined transaction value of more than $24 billion. Although Hicks Muse invests in a wide variety of industries, it has significant investments and experience in the media and communications industry, including interests in Chancellor Media, Capstar Broadcasting, STC Broadcasting, Katz Media, OmniAmerica Tower and Grupo MVS. Hicks Muse plans to utilize an investment model for the Company similar to that used for Chancellor Media and Capstar Broadcasting. Chancellor Media was formed in 1993 with the purchase of two radio stations. Today, Chancellor Media is the second largest radio operator in the United States in terms of revenue (behind only CBS). Similarly, Capstar Broadcasting was formed in 1996 for the purpose of acquiring radio stations in small to medium size markets. Capstar Broadcasting is now the largest radio operator in the United States in terms of number of stations. See "Risk Factors -- Potential Conflicts of Interest" and "Certain Other Transactions." THE TRANSACTIONS AND OTHER MATTERS THE TRANSACTIONS The Acquisition. Holdings, LIN Acquisition and LIN Television entered into an Agreement and Plan of Merger on August 12, 1997 (as amended, the "Merger Agreement"). Pursuant to, and upon the terms and conditions of, the Merger Agreement, Holdings acquired LIN Television (the "Acquisition") on March 3, 1998 by merging LIN Acquisition, its wholly-owned subsidiary, with and into LIN Television (the "Merger"), with LIN Television surviving the Merger and becoming a direct, wholly owned subsidiary of Holdings. The total purchase price for the common equity of LIN Television was approximately $1.7 billion. In addition, the Company refinanced $260.2 million of LIN Television indebtedness and incurred acquisition costs of approximately $32.2 million. The Financings. The Acquisition was funded by (i) $6.9 million of excess cash on the Company's balance sheet; (ii) $50.0 million aggregate principal amount of senior secured Tranche A term loans ("Tranche A Term Loans"); (iii) $120.0 million aggregate principal amount of senior secured Tranche B term loans ("Tranche B Term Loans"); (iv) $299.3 million gross proceeds from the issuance by LIN Television of $300.0 million aggregate principal amount of Old Senior Subordinated Notes; (v) $199.6 million gross proceeds from the issuance by Holdings of $325.0 million aggregate principal amount at maturity of Old Senior Discount Notes, which proceeds were contributed by Holdings to the common equity of the Company; (vi) $558.1 million of common equity provided by affiliates of Hicks Muse, management and other co-investors to the equity of the corporate parents of Holdings, which in turn, through Holdings, contributed such amount to the common equity of the Company; and (vii) $815.5 million of proceeds of the GECC Note (collectively, the "Financings"). The Joint Venture. In connection with the Acquisition, Hicks Muse and NBC formed the Joint Venture. The Joint Venture consists of KXAS-TV, formerly LIN Television's Dallas-Fort Worth NBC affiliate, and KNSD-TV, formerly NBC's San Diego station. A wholly owned subsidiary of NBC is the general partner of the Joint Venture and NBC operates the stations owned by the Joint Venture. The NBC General Partner holds an approximate 80% equity interest and the Company holds an approximate 20% equity interest in the Joint Venture. GECC provided debt financing for the Joint Venture in the form of an $815.5 million 25-year non-amortizing senior secured note bearing an initial interest rate of 8.0% per annum (the "GECC Note"). The Company expects that the interest payments on the GECC Note will be serviced solely by the cash flow of the Joint Venture. All Distributable Cash (as defined) of the Joint Venture will be distributed to the Company and the NBC General Partner based on their respective equity interests in the Joint Venture. On a pro forma basis for the fiscal year ended December 31, 1997, the Company's portion of the Joint Venture's Distributable Cash would have been $2.2 million (without giving effect to a reserve of $15.0 million which must be established, subject to waiver by the Company, prior to any distribution of Distributable Cash). See "Risk Factors -- Control of Holdings and the Company." The GECC Note was issued by LIN Television of Texas, L.P., the Company's indirect wholly owned partnership ("LIN Texas"), which distributed the proceeds to the Company to finance a portion of the cost of the Acquisition. The obligations to GECC under the GECC Note were assumed by the Joint Venture and LIN Texas was simultaneously released from all obligations under the GECC Note. The GECC Note is not an obligation of Holdings, the Company or any of their respective subsidiaries and is recourse only to the Joint Venture, the Company's equity interest therein and to the GECC Note Guarantor. See "Risk Factors -- Defaults under the GECC Note" and "The Transactions and Other Matters -- The Joint Venture." In connection with the formation of the Joint Venture, the Company received an extension of its NBC network affiliation agreements to 2010 and the option (exercisable through December 31, 1999) to purchase WVTM-TV, the NBC affiliate in Birmingham, Alabama. Sources and Uses. The following table sets forth the sources and uses of funds in connection with the Acquisition (dollars in millions): <TABLE> <S> <C> SOURCES Excess cash........................ $ 6.9 Term Loans(a)...................... 170.0 Old Senior Subordinated Notes(b)... 299.3 Holdings contributions(c).......... 757.7 GECC Note(d)....................... 815.5 -------- Total Sources................. $2,049.4 ======== USES Purchase of LIN Television equity(e)........................ $1,706.4 Refinance LIN Television debt...... 260.2 Transaction fees and expenses(f)... 82.8 -------- Total Uses.................... $2,049.4 ======== </TABLE> - --------------- (a) The Term Loans funded in connection with the Acquisition consisted of $50.0 million aggregate principal amount of Tranche A Term Loans and $120.0 million aggregate principal amount of Tranche B Term Loans. As of December 31, 1997, the interest rates payable on outstanding Tranche A Term Loans and Tranche B Term Loans would have been approximately 7.50% and 8.00%, respectively. See "Description of the Senior Credit Facilities." (b) Represents gross proceeds to the Company from the issuance of $300.0 million aggregate principal amount of Old Senior Subordinated Notes. (c) Affiliates of Hicks Muse, management and other co-investors contributed $558.1 million to the equity of the corporate parents of Holdings, which in turn, through Holdings, contributed such amount to the common equity of the Company. In addition, Holdings issued $325.0 million aggregate principal amount at maturity of Old Senior Discount Notes and contributed the $199.6 million gross proceeds thereof to the common equity of the Company. (d) LIN Texas distributed the proceeds from the issuance of the GECC Note to the Company, which used such proceeds to finance a portion of the cost of the Acquisition. The GECC Note is not an obligation of Holdings, the Company or any of their respective subsidiaries and is recourse only to the Joint Venture, the Company's equity interest therein and to the GECC Note Guarantor. The Company expects that the interest payments on the GECC Note will be serviced solely by the cash flow of the Joint Venture. See "Risk Factors -- Control of Holdings and the Company" and "-- Defaults under the GECC Note" and "The Transactions and Other Matters -- The Joint Venture.". (e) The purchase price reflects the total price to acquire the equity of LIN Television (including KXAS-TV, which was contributed to the Joint Venture). (f) Includes discounts and commissions on the Old Notes in connection with the Offerings. Organizational Structure The following chart depicts (i) the summary organizational chart of Holdings and the Company and (ii) the sources of financing for the Transactions: LIN GRAPH THE GRAND RAPIDS ACQUISITION The Company expects to consummate the Grand Rapids Acquisition later this year. The Company currently provides services to the Grand Rapids Stations pursuant to a consulting agreement with AT&T. The total purchase price for the Grand Rapids Acquisition will be approximately $125.5 million (plus accretion thereon of 8% from March 1, 1998), which is expected to be funded by $125.0 million of additional Tranche A Term Loans. For the fiscal year ended December 31, 1997, the Grand Rapids Stations generated net revenues and BCF of $28.4 million and $11.3 million, respectively. The historical and pro forma financial information contained herein does not give effect to the Grand Rapids Acquisition. See "The Transactions and Other Matters -- The Grand Rapids Acquisition" and "Business -- The Company -- History." RECENT DEVELOPMENTS Chancellor Media Corporation, a Delaware corporation ("Chancellor") and Ranger Equity Holdings Corporation, a Delaware corporation ("Ranger"), the indirect parent company of Holdings and the Company, entered into an Agreement and Plan of Merger, dated July 7, 1998 (the "Chancellor Merger Agreement"). Pursuant to, and subject to the prior satisfaction or waiver of certain customary conditions (including, without limitation, the approval of Chancellor's and the Company's respective shareholders, the receipt of necessary FCC approvals, and the termination or expiration of the applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended) set forth in, the Chancellor Merger Agreement, Ranger will be merged with and into Chancellor (the "Chancellor Merger"), with Chancellor continuing as the surviving corporation following the Chancellor Merger. As a result of the Chancellor Merger, (i) each share of common stock, $0.01 par value ("Ranger Common Stock"), of Ranger will be converted into the right to receive 0.0300 of a share of common stock, $0.01 par value ("Chancellor Common Stock"), of Chancellor, other than shares of Ranger Common Stock for which appraisal rights have been exercised pursuant to Section 262 of the General Corporation Law of the State of Delaware. In addition, Chancellor, as the surviving corporation, will assume certain outstanding options to purchase shares of Ranger Common Stock held by certain directors, officers, employees and consultants of Ranger and its subsidiaries. Following the Chancellor Merger, Holdings and the Company will become indirect, wholly owned subsidiaries of Chancellor. A Chancellor shareholder has filed a shareholders derivative lawsuit in a chancery court in the State of Delaware, purportedly on behalf of Chancellor, naming Chancellor, Chancellor's directors and the Company as defendants. The lawsuit seeks, among other things, money damages and an injunction prohibiting the consummation of the Chancellor Merger. The Company believes that the lawsuit is without substantial merit and intends to vigorously defend the action. THE EXCHANGE OFFERS THE SENIOR SUBORDINATED NOTES EXCHANGE OFFER: The Senior Subordinated Notes Exchange Offer applies to $300,000,000 aggregate principal amount of the Old Senior Subordinated Notes. The form and terms of the New Senior Subordinated Notes will be the same as the form and terms of the Old Senior Subordinated Notes except that (i) interest on the New Senior Subordinated Notes will accrue from the date of issuance of the Old Senior Subordinated Notes, and (ii) the New Senior Subordinated Notes are being registered under the Securities Act and, therefore, will not bear legends restricting their transfer. The New Senior Subordinated Notes will evidence the same debt as the Old Senior Subordinated Notes and will be entitled to the benefits of the Senior Subordinated Notes Indenture (as defined) pursuant to which the Old Senior Subordinated Notes were issued. The Old Senior Subordinated Notes and the New Senior Subordinated Notes are sometimes referred to collectively herein as the "Senior Subordinated Notes." See "Description of the New Senior Subordinated Notes." The Senior Subordinated Notes Exchange Offer....... $1,000 principal amount of New Senior Subordinated Notes in exchange for each $1,000 principal amount of Old Senior Subordinated Notes. As of the date hereof, Old Senior Subordinated Notes representing $300,000,000 aggregate principal amount are outstanding. The terms of the New Senior Subordinated Notes and the Old Senior Subordinated Notes are substantially identical. Based on an interpretation by the Commission's staff set forth in no-action letters issued to third parties unrelated to the Company, Holdings and the Guarantors, the Company and the Guarantors believe that New Senior Subordinated Notes issued pursuant to the Senior Subordinated Notes Exchange Offer in exchange for Old Senior Subordinated Notes may be offered for resale, resold and otherwise transferred by any person receiving the New Senior Subordinated Notes, whether or not that person is the registered holder (other than any such holder or such other person that is an "affiliate" of the Company or any Guarantors within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that (i) the New Senior Subordinated Notes are acquired in the ordinary course of business of that holder or such other person, (ii) neither the holder nor such other person is engaging in or intends to engage in a distribution of the New Senior Subordinated Notes, and (iii) neither the holder nor such other person has an arrangement or understanding with any person to participate in the distribution of the New Senior Subordinated Notes. See "The Exchange Offers -- Purpose and Effect." Each broker-dealer that receives New Senior Subordinated Notes for its own account in exchange for Old Senior Subordinated Notes, where those Old Senior Subordinated Notes were acquired by the broker-dealer as a result of its market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Subordinated Notes. See "Plan of Distribution." Senior Subordinated Notes Registration Rights Agreement................ The Old Senior Subordinated Notes were sold by the Company on March 3, 1998, in a private placement in reliance on Section 4(2) of the Securities Act and immediately resold by the initial purchasers thereof (the "Initial Purchasers") in reliance on Rule 144A under the Securities Act (the "Original Senior Subordinated Notes Offering"). In connection with the original Senior Subordinated Notes Offering, the Company and Holdings entered into a Registration Rights Agreement with the Initial Purchasers (the "Senior Subordinated Notes Registration Rights Agreement") providing for, among other things, the Senior Subordinated Notes Exchange Offer. See "The Exchange Offers -- Purpose and Effect." Expiration Date............ The Senior Subordinated Notes Exchange Offer will expire at 5:00 p.m., New York City time, on , 1998, or such later date and time to which it is extended by the Company. Withdrawal................. The tender of Old Senior Subordinated Notes pursuant to the Senior Subordinated Notes Exchange Offer may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Any Old Senior Subordinated Notes not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Senior Subordinated Notes Exchange Offer. Interest on the New Senior Subordinated Notes and Old Senior Subordinated Notes.................... Interest on each New Senior Subordinated Note will accrue from the date of issuance of the Old Senior Subordinated Note for which such Old Senior Subordinated Note is exchanged or from the date of the last periodic payment of interest on such Old Note, whichever is later. Conditions to the Senior Subordinated Notes Exchange Offer........... The Senior Subordinated Notes Exchange Offer is subject to certain customary conditions, certain of which may be waived by the Company. See "The Exchange Offers -- Certain Conditions to the Exchange Offers." Procedures for Tendering Old Senior Subordinated Notes.................... Each holder of Old Senior Subordinated Notes wishing to accept the Senior Subordinated Notes Exchange Offer must complete, sign and date the accompanying letter of transmittal relating to the Senior Subordinated Notes Exchange Offer (the "Senior Subordinated Notes Letter of Transmittal"), or a copy thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver the Senior Subordinated Notes Letter of Transmittal, or the copy, together with the Old Senior Subordinated Notes and any other required documentation, to the Senior Subordinated Notes Exchange Agent (as defined) at the address set forth in the Senior Subordinated Notes Letter of Transmittal. Persons holding Old Senior Subordinated Notes through the Depository Trust Company ("DTC") and wishing to accept the Senior Subordinated Notes Exchange Offer must do so pursuant to the DTC's Automated Tender Offer Program, by which each tendering Participant will agree to be bound by the Senior Subordinated Notes Letter of Transmittal. By executing or agreeing to be bound by the Senior Subordinated Notes Letter of Transmittal, each holder will represent to the Company that, among other things, (i) the New Senior Subordinated Notes acquired pursuant to the Senior Subordinated Notes Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Senior Subordinated Notes, whether or not such person is the holder of the Old Senior Subordinated Notes, (ii) neither the holder nor any such other person is engaging in or intends to engage in a distribution of such New Senior Subordinated Notes, (iii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Senior Subordinated Notes within the meaning of the Securities Act, (iv) neither the holder nor any such person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of the Company or any Guarantor, and (v) if such holder or other person is a broker-dealer, that it will receive New Senior Subordinated Notes for its own account in exchange for Old Senior Subordinated Notes that were acquired as a result of market-making activities or other trading activities and that it will be required to acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Subordinated Notes. See "The Exchange Offers -- Procedures for Tendering." Shelf Registration Requirement.............. Pursuant to the Senior Subordinated Notes Registration Rights Agreement, the Company is required to file a "shelf" registration statement for a continuous offering pursuant to Rule 415 under the Securities Act in respect of the Old Senior Subordinated Notes if (i) because of any change in law or applicable interpretations of the staff of the Commission, the Company is not permitted to effect the Senior Subordinated Notes Exchange Offer, (ii) the Senior Subordinated Notes Exchange Offer is not consummated within 225 days of the Original Senior Subordinated Notes Offering, (iii) any holder of Private Exchange Securities (as defined) requests within 60 days after the Senior Subordinated Notes Exchange Offer, (iv) any applicable law or interpretations do not permit any holder of Old Senior Subordinated Notes to participate in the Senior Subordinated Notes Exchange Offer, (v) any holder of Old Senior Subordinated Notes participates in the Senior Subordinated Notes Exchange Offer and does not receive freely transferrable New Senior Subordinated Notes in change for Old Senior Subordinated Notes or (vi) the Company so elects. Acceptance of Old Senior Subordinated Notes and Delivery of New Senior Subordinated Notes....... The Company will accept for exchange any and all Old Senior Subordinated Notes which are properly tendered (and not withdrawn) in the Senior Subordinated Notes Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Senior Subordinated Notes issued pursuant to the Senior Subordinated Notes Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offers -- Terms of the Exchange Offers." Senior Subordinated Notes Exchange Agent........... United States Trust Company of New York is serving as Exchange Agent (the "Senior Subordinated Notes Exchange Agent") in connection with the Senior Subordinated Notes Exchange Offer. Federal Income Tax Considerations........... The exchange pursuant to the Senior Subordinated Notes Exchange Offer should not be a taxable event for federal income tax purposes. See "Certain United States Federal Income Tax Considerations." Effect of Not Tendering.... Old Senior Subordinated Notes that are not tendered or that are tendered but not accepted will, following the completion of the Senior Subordinated Notes Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. THE SENIOR DISCOUNT NOTES EXCHANGE OFFER: The Senior Discount Notes Exchange Offer applies to $325,000,000 aggregate principal amount at maturity of the Old Senior Discount Notes. The form and terms of the New Senior Discount Notes will be the same as the form and terms of the Old Senior Discount Notes except that (i) the Accreted Value (as defined) of the New Senior Discount Notes will be calculated from the date of issuance of the Old Senior Discount Notes and (ii) the New Senior Discount Notes are being registered under the Securities Act and, therefore, will not bear legends restricting their transfer. The New Senior Discount Notes will evidence the same debt as the Old Senior Discount Notes and will be entitled to the benefits of the Senior Discount Notes Indenture (as defined) pursuant to which the Old Senior Discount Notes were issued. The Old Senior Discount Notes and the New Senior Discount Notes are sometimes referred to collectively herein as the "Senior Discount Notes." See "Description of the New Senior Discount Notes." The Senior Discount Notes Exchange Offer........... $1,000 principal amount at maturity of New Senior Discount Notes in exchange for each $1,000 principal amount at maturity of Old Senior Discount Notes. As of the date hereof, Old Senior Discount Notes representing $325,000,000 aggregate principal amount at maturity are outstanding. The terms of the New Senior Discount Notes and the Old Senior Discount Notes are substantially identical. Based on an interpretation by the Commission's staff set forth in no-action letters issued to third parties unrelated to Holdings, Holdings believes that New Senior Discount Notes issued pursuant to the Senior Discount Notes Exchange Offer in exchange for Old Senior Discount Notes may be offered for resale, resold and otherwise transferred by any person receiving the New Senior Discount Notes, whether or not that person is the holder (other than any such holder or such other person that is an "affiliate" of Holdings within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that (i) the New Senior Discount Notes are required in the ordinary course of business of that holder or such other person, (ii) neither the holder nor such other person is engaging in or intends to engage in a distribution of the New Senior Discount Notes, and (iii) neither the holder nor such other person has an arrangement or understanding with any person to participate in the distribution of the New Senior Discount Notes. See "The Exchange Offers -- Purpose and Effect." Each broker-dealer that receives New Senior Discount Notes for its own account in exchange for Old Senior Discount Notes where the Old Senior Discount Notes were acquired by the broker-dealer as a result of its market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Discount Notes. See "Plan of Distribution." Senior Discount Notes Registration Rights Agreement................ The Old Senior Discount Notes were sold by Holdings on March 3, 1998, in a private placement in reliance on Section 4(2) of the Securities Act and immediately resold by the Initial Purchasers in reliance on Rule 144A under the Securities Act (the "Original Senior Discount Notes Offering," and together with the Original Senior Subordinated Notes Offering, the "Original Offerings.") In connection with the Original Senior Discount Notes Offering, the Company and Holdings entered into a Registration Rights Agreement with the Initial Purchasers (the "Senior Discount Notes Registration Rights Agreement") providing for, among other things, the Senior Discount Notes Exchange Offer. See "The Exchange Offers -- Purpose and Effect." Expiration Date............ The Senior Discount Notes Exchange Offer will expire at 5:00 p.m., New York City time, on , 1998, or such later date and time to which it is extended by Holdings. Withdrawal................. The tender of Old Senior Discount Notes pursuant to the Senior Discount Notes Exchange Offer may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Any Old Senior Discount Notes not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Senior Discount Notes Exchange Offer. Accreted Value of the New Senior Discount Notes and Old Senior Discount Notes.................... The Accreted Value of each New Senior Discount Note will be calculated from the date of issuance of the Old Senior Discount Note for which such New Senior Discount Note is exchanged. Conditions to the Senior Discount Notes Exchange Offer.................... The Senior Discount Notes Exchange Offer is subject to certain customary conditions, certain of which may be waived by the Company. See "The Exchange Offers -- Certain Conditions to the Exchange Offers." Procedures for Tendering Senior Discount Notes...... Each holder of Old Senior Discount Notes wishing to accept the Senior Discount Notes Exchange Offer must complete, sign and date the accompanying letter of transmittal relating to the Senior Discount Notes Exchange Offer (the "Senior Discount Notes Letter of Transmittal"; the Senior Discount Notes Letter of Transmittal and the Senior Subordinated Notes Letter of Transmittal are sometimes referred to herein individually as a "Letter of Transmittal" and collectively as the "Letters of Transmittal"), or a copy thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver the Senior Discount Notes Letter of Transmittal, or the copy, together with the Old Senior Discount Notes and any other required documentation, to the Senior Discount Notes Exchange Offer (as defined) at the address set forth in the Senior Discount Notes Letter of Transmittal. Persons holding Old Discount Notes through the DTC and wishing to accept the Senior Discount Notes Exchange Offer must do so pursuant to the DTC's Automated Tender Offer Program, by which each tendering Participant will agree to be bound by the Senior Discount Notes Letter of Transmittal. By executing or agreeing to be bound by the Senior Discount Notes Letter of Transmittal, each holder will represent to Holdings that, among other things, (i) the New Senior Discount Notes acquired pursuant to the Senior Discount Notes Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Senior Discount Notes, whether or not such person is the holder of the Old Senior Discount Notes, (ii) neither the holder nor any such other person is engaging in or intends to engage in a distribution of such New Senior Discount Notes, (iii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Senior Discount Notes, (iv) neither the holder nor any such other person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of Holdings, and (v) if such holder or other person is a broker-dealer, that it will receive New Senior Discount Notes for its own account in exchange for Old Senior Discount Notes that were acquired as a result of market-making activities or other trading activities and that it will be required to acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Discount Notes. Shelf Registration Requirement.............. Pursuant to the Senior Discount Notes Registration Rights Agreement, Holdings is required to file a "shelf" registration statement for a continuous offering pursuant to Rule 415 under the Securities Act in respect of the Old Senior Discount Notes if (i) because of any change in law or applicable interpretations of the staff of the Commission, Holdings is not permitted to effect the Senior Discount Notes Exchange Offer, (ii) the Senior Discount Notes Exchange Offer is not consummated within 225 days of the Original Senior Discount Notes Offering, (iii) any holder of Private Exchange Securities (as defined) requests within 60 days after the Senior Discount Notes Exchange Offer, (iv) any applicable law or interpretations do not permit any holder of Old Senior Discount Notes to participate in the Senior Discount Notes Exchange Offer, (v) any holder of Old Senior Discount Notes participates in the Senior Discount Notes Exchange Offer and does not receive freely transferrable New Senior Discount Notes in exchange for Old Senior Discount Notes or (vi) Holdings so elects. Acceptance of Old Senior Discount Notes and Delivery of New Senior Discount Notes.................... Holdings will accept for exchange any and all Old Senior Discount Notes which are properly tendered (and not withdrawn) in the Senior Discount Notes Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Senior Discount Notes issued pursuant to the Senior Discount Notes Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offers -- Terms of the Exchange Offer." Senior Discount Notes Exchange Agent........... United States Trust Company of New York is serving as Exchange Agent (the "Senior Discount Notes Exchange Agent"; the Senior Subordinated Notes Exchange Agent and the Senior Discount Notes Exchange Agent are sometimes referred to herein individually as an "Exchange Agent" and collectively as the "Exchange Agents") in connection with the Senior Discount Notes Exchange Offer. Federal Income Tax Considerations........... The exchange pursuant to the Senior Discount Notes Exchange Offer should not be a taxable event for federal income tax purposes. See "Certain United States Federal Income Tax Considerations." Effect of Not Tendering.... Old Senior Discount Notes that are not tendered or that are tendered but not accepted will, following the completion of the Senior Discount Notes Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. TERMS OF THE NEW NOTES NEW SENIOR SUBORDINATED NOTES Issuer..................... LIN Television Corporation (as successor-in-interest to LIN Acquisition Company). Securities Offered......... $300,000,000 aggregate principal amount of 8 3/8% Senior Subordinated Notes due 2008. Maturity................... March 1, 2008. Interest Payment Dates..... March 1 and September 1 of each year, commencing September 1, 1998. Sinking Fund............... None. Optional Redemption........ Except as described below, the Company may not redeem the New Senior Subordinated Notes prior to March 1, 2003. On or after such date, the Company may redeem the Senior Subordinated Notes, in whole or in part, at the redemption prices set forth herein, together with accrued and unpaid interest, if any, to the date of redemption. In addition, at any time and from time to time on or prior to March 1, 2001, the Company may redeem up to 35% of the aggregate principal amount of the Senior Subordinated Notes with the net cash proceeds of one or more private or public offerings by the Company, at a redemption price equal to 108.375% of the principal amount to be redeemed, together with accrued and unpaid interest, if any, to the date of redemption, provided that at least 65% of the originally issued aggregate principal amount of the Senior Subordinated Notes remains outstanding after each such redemption. See "Description of the New Senior Subordinated Notes -- Optional Redemption." Change of Control.......... Upon the occurrence of a Change of Control, (i) the Company will have the option, at any time on or prior to March 1, 2003, to redeem the New Senior Subordinated Notes, in whole but not in part, at a redemption price equal to 100% of the principal amount thereof, plus accrued and unpaid interest plus the Applicable Premium (as defined) and (ii) if the New Senior Subordinated Notes are not redeemed or if such Change of Control occurs after March 1, 2003, the Company will be required to make an offer to repurchase the New Senior Subordinated Notes at a price equal to 101% of the principal amount thereof, together with accrued and unpaid interest, if any, to the date of purchase. See "Description of the New Senior Subordinated Notes -- Change of Control" and "-- Amendment." Guarantees................. The New Senior Subordinated Notes will be guaranteed (the "Subsidiary Guarantees"), jointly and severally on an unsecured senior subordinated basis, by the Company's direct and indirect, existing and future, Restricted Subsidiaries (the "Guarantors"). The Guarantors also will guarantee all obligations of the Company under the Senior Credit Facilities (as defined). The Company's obligations under the Senior Credit Facilities also will be secured by substantially all of the assets of the Company and the Guarantors. The obligations of each Guarantor under its Subsidiary Guarantee will be subordinated in right of payment to the prior payment in full of all Guarantor Senior Indebtedness (as defined) of such Guarantor to substantially the same extent as the Senior Subordinated Notes are subordinated to all existing and future Senior Indebtedness of the Company. See "Description of the New Senior Subordinated Notes -- Subsidiary Guarantees of the New Senior Subordinated Notes." Ranking.................... The New Senior Subordinated Notes will be unsecured and will be subordinated in right of payment to all existing and future Senior Indebtedness (as defined) of the Company and will rank pari passu in right of payment with all Senior Subordinated Indebtedness (as defined) of the Company. As of March 31, 1998, the aggregate principal amount of the Company's outstanding Senior Indebtedness was $170.0 million (consisting of outstanding Term Loans) and the Company had no Senior Subordinated Indebtedness outstanding other than the Senior Subordinated Notes and had no Subsidiary Indebtedness outstanding. As of such date, liabilities of the Company's Subsidiaries reflected on its consolidated balance sheet, including indebtedness and other liabilities such as trade payables and accrued expenses, aggregated $17.8 million. See "Description of the New Senior Subordinated Notes -- Ranking and Subordination." Restrictive Covenants...... The Senior Subordinated Notes Indenture limits, among other things, (i) the incurrence of additional indebtedness and issuance of capital stock, (ii) layering of indebtedness, (iii) the payment of dividends on, and redemption of, capital stock of the Company, (iv) liens, (v) mergers, consolidations, and sales of all or substantially all of the Company's assets, (vi) asset sales, (vii) asset swaps, (viii) dividend and other payment restrictions affecting Restricted Subsidiaries and (ix) transactions with affiliates of the Company. However, all of these limitations and prohibitions are subject to a number of important qualifications and exceptions. See "Description of the New Senior Subordinated Notes -- Certain Covenants." Use of Proceeds............ There will be no cash proceeds to the Company from the exchange of New Senior Subordinated Notes for Old Senior Subordinated Notes pursuant to the Senior Subordinated Notes Exchange Offer. The net proceeds from the Original Senior Subordinated Notes Offering were used, together with the proceeds of the other Financings, to consummate the Acquisition. NEW SENIOR DISCOUNT NOTES Issuer..................... LIN Holdings Corp. Securities Offered......... $325,000,000 aggregate principal amount at maturity of 10% Senior Discount Notes due 2008. The Senior Discount Notes will be issued at a discount to their aggregate principal amount at maturity. Maturity................... March 1, 2008. Interest Payment Dates..... Cash interest will not accrue or be payable on the New Senior Discount Notes prior to March 1, 2003. Thereafter, cash interest on the New Senior Discount Notes will accrue at a rate of 10% per annum and will be payable semi-annually in arrears on March 1 and September 1 of each year, commencing on September 1, 2003. Original Issue Discount.... For federal income tax purposes, the New Senior Discount Notes will be treated as having been issued with "original issue discount" equal to the difference between the issue price of the Old Senior Discount Notes and the sum of all cash payments (whether denominated as principal or interest) to be made thereon. Each holder of a New Senior Discount Note must include as gross income for federal income tax purposes a portion of such original issue discount for each day during each taxable year in which a New Senior Discount Note is held even though no cash interest payments will be received prior to March 1, 2003. See "Certain United States Federal Income Tax Considerations -- Taxation of Original Issue Discount." Sinking Fund............... None. Mandatory Principal Redemption............... Except as described below, Holdings may not redeem the New Senior Discount Notes prior to March 1, 2003. On March 1, 2003, Holdings will be required to redeem Senior Discount Notes with an aggregate principal amount at maturity equal to (i) $125.0 million multiplied by (ii) the quotient obtained by dividing (x) the aggregate principal amount at maturity of Senior Discount Notes then outstanding (other than Senior Discount Notes then held by Holdings or its Subsidiaries or the entities with respect to which Holdings is a direct or indirect Subsidiary) by (y) $325.0 million, (the "Mandatory Principal Redemption Amount") at a redemption price equal to 100% of the principal amount at maturity of the Senior Discount Notes so redeemed. See "Description of the New Senior Discount Notes -- Mandatory Principal Redemption." Optional Redemption........ The New Senior Discount Notes will be redeemable at the option of Holdings, in whole or in part, at any time on or after March 1, 2003. On or after such date, Holdings may redeem the New Senior Discount Notes, in whole or in part, at the redemption prices set forth herein, together with accrued and unpaid interest, if any, to the date of redemption. In addition, at any time and from time to time on or prior to March 1, 2001, Holdings may, subject to certain requirements, redeem up to 35% of the aggregate principal amount at maturity of the Senior Discount Notes with the net cash proceeds from one or more private or public equity offerings at a price equal to 110% of the Accreted Value (as defined) at the date of redemption, provided that at least 65% of the originally issued aggregate principal amount at maturity of the Senior Discount Notes remains outstanding after each such redemption. See "Description of the New Senior Discount Notes -- Optional Redemption." Change of Control.......... Upon a Change of Control, (i) Holdings will have the option, at any time on or prior to March 1, 2003, to redeem the New Senior Discount Notes, in whole but not in part, at a redemption price equal to 100% of the Accreted Value thereof plus the Applicable Premium and (ii) if the New Senior Discount Notes are not so redeemed or if such Change of Control occurs after March 1, 2003, Holdings will be required to make an offer to repurchase the New Senior Discount Notes at a price equal to (a) 101% of the Accreted Value thereof if redeemed on or before March 1, 2003, and (b) 101% of the principal amount at maturity, plus accrued and unpaid interest, if any, thereon, if redeemed after March 1, 2003. See "Description of the New Senior Discount Notes -- Change of Control." Guarantees................. None. Ranking.................... The New Senior Discount Notes will be senior unsecured obligations of Holdings and will rank pari passu in right of payment with all Senior Indebtedness of Holdings, including Holdings' guarantee of the Senior Credit Facilities. Holdings is a holding company with no operations of its own and whose primary asset is the capital stock of the Company (all of which will be pledged to secure the Senior Credit Facilities). As a result of the holding company structure, the New Senior Discount Notes will effectively rank junior in right of payment to all creditors of the Company and its subsidiaries, including the lenders under the Senior Credit Facilities, holders of the Senior Subordinated Notes and trade creditors. As of March 31, 1998, the New Senior Discount Notes were effectively subordinated to $523.8 of aggregate liabilities (including indebtedness and other liabilities such as trade payables and accrued expenses that would have been reflected on the consolidated balance sheet) of the Company and its subsidiaries. See "Description of the New Senior Discount Notes." Restrictive Covenants...... The Senior Discount Notes Indenture limits, among other things, (i) the incurrence of additional indebtedness and issuance of capital stock, (ii) the payment of dividends on, and redemption of, capital stock of Holdings, (iii) mergers, consolidations and sales of all or substantially all of Holdings' assets, (iv) asset sales, (v) asset swaps, (vi) dividend and other payment restrictions affecting Restricted Subsidiaries and (vii) transactions with affiliates. However, all of these limitations and prohibitions are subject to a number of important qualifications and exceptions. See "Description of the New Senior Discount Notes -- Certain Covenants."
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+SUMMARY The following summary should be read in conjunction with the more detailed information, financial statements and notes thereto appearing elsewhere in this Prospectus. For additional information relating to certain defined terms used herein, as well as the sources for the market and other industry data contained herein, see "Certain Definitions and Market and Industry Data." THE COMPANY The Company is a leading television station group operator in the United States that operates eleven television stations and provides consulting services to two additional television stations. Twelve of these stations are network affiliates and nine are in top forty DMAs, including: Indianapolis, Indiana; New Haven-Hartford, Connecticut; Buffalo, New York; Norfolk-Portsmouth, Virginia; Grand Rapids-Kalamazoo-Battle Creek, Michigan and Dallas-Fort Worth, Texas. These stations have an aggregate United States household reach of approximately 6.9%, ranking the Company among the top independent, "pure-play" television station group operators in the United States. The Company's Core Stations generated an aggregate pro forma BCF margin of approximately 46% for the fiscal year ended December 31, 1997, principally as a result of their strong network affiliations, leading local news programming and tight cost controls. In addition, the Company's management pioneered the "multi-channel strategy," which involves the combination of an owned and operated television station with an LMA station and/or a 24-hour cable weather channel (a "Local Weather Station") in the same market. The multi-channel strategy has enhanced the Company's revenue market shares and increased its BCF by leveraging its fixed costs over a larger revenue base. The Company's station portfolio is well diversified in terms of its network affiliations, geographic coverage, net revenues and cash flow. The Company owns and operates three CBS affiliates, two NBC affiliates and two ABC affiliates which accounted for 35%, 28% and 28%, respectively, of the Company's pro forma BCF for the fiscal year ended December 31, 1997. The Company's LMA stations and Local Weather Stations accounted for substantially all of the remaining 9% of its BCF on the same basis. The Company's Core Stations broadcast in seven different markets, with no market representing more than 25% of the Company's pro forma net revenues or BCF for the fiscal year ended December 31, 1997. The Company's pro forma net revenues, BCF and EBITDA were $196.1 million, $79.5 million and $72.7 million, respectively, for the fiscal year ended December 31, 1997. Hicks, Muse, Tate & Furst Incorporated ("Hicks Muse"), a leading private equity firm with significant investments and experience in the media and communications industry, has acquired LIN Television to serve as a platform for acquiring and operating additional television stations that can benefit from management's ability to improve operating performance and increase BCF margins at acquired stations. In connection with the Acquisition, Hicks Muse and NBC formed a television station joint venture (the "Joint Venture"). The Joint Venture consists of KXAS-TV, LIN Television's Dallas-Fort Worth NBC affiliate, and KNSD-TV, NBC's San Diego station. A wholly owned subsidiary of NBC is the general partner of the Joint Venture (the "NBC General Partner") and NBC operates the stations owned by the Joint Venture pursuant to a management agreement. The NBC General Partner holds an approximate 80% equity interest and the Company holds an approximate 20% equity interest in the Joint Venture. General Electric Capital Corporation ("GECC") provided debt financing to the Joint Venture in the form of the GECC Note (as defined), the proceeds of which were distributed to the Company to finance a portion of the cost of the Acquisition. The GECC Note is not an obligation of Holdings, the Company or any of their respective subsidiaries and is recourse only to the Joint Venture, the Company's equity interest therein and to one of Holding's two corporate parents (the "GECC Note Guarantor") pursuant to a guarantee. The Company expects that the interest payments on the GECC Note will be serviced solely by the cash flow of the Joint Venture. See "The Transactions and Other Matters -- The Joint Venture." Later this year, the Company expects to acquire (the "Grand Rapids Acquisition") from AT&T Corporation ("AT&T") the assets of WOOD-TV and the LMA rights related to WOTV-TV (collectively, LIN TELEVISION CORPORATION LIN HOLDINGS CORP. CROSS REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING THE LOCATION IN THE PROSPECTUS OF THE INFORMATION REQUIRED BY PART I OF FORM S-1 <TABLE> <CAPTION> FORM S-1 ITEM NUMBER AND HEADING LOCATION IN PROSPECTUS -------------------------------- ---------------------- <S> <C> <C> 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus... Cover Page of Registration Statement; Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus............................ Inside Front and Outside Back Cover Pages of Prospectus 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges............. Certain Definitions and Market and Industry Data; Summary; Risk Factors; Selected Consolidated Financial and Operating Data; Unaudited Pro Forma Financial Information; Business 4. Use of Proceeds............................ Use of Proceeds 5. Determination of Offering Price............ Not Applicable 6. Dilution................................... Not Applicable 7. Selling Security Holders................... Not Applicable 8. Plan of Distribution....................... Front Cover Page of Prospectus; The Exchange Offers; Plan of Distribution 9. Description of Securities to be Registered............................... Description of New Senior Subordinated Notes; Description of New Senior Discount Notes 10. Interests of Named Experts and Counsel..... Not Applicable 11. Information with Respect to the Registrant............................... Cover Page of Registration Statement; Certain Definitions and Market and Industry Data; Summary; Risk Factors; The Transactions and Other Matters; Selected Consolidated Financial and Operating Data; Unaudited Pro Forma Consolidated Financial Information; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Securities Ownership of Certain Beneficial Owners; Certain Other Transactions; Description of the Senior Credit Facilities; Legal Matters 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities.............................. Not Applicable </TABLE> AVAILABLE INFORMATION The Issuers and the Guarantors have filed with the Securities and Exchange Commission (the "Commission") a Registration Statement (which term shall encompass any amendments thereto) on Form S-1 under the Securities Act with respect to the securities offered hereby. This Prospectus does not contain all information set forth in the Registration Statement and the exhibits thereto, to which reference is hereby made. Although the Issuers and the Guarantors believe that statements made in this Prospectus as to the contents of any contract, agreement, or other document describe all material elements of such documents, such statements are not necessarily complete. With respect to each such contract, agreement, or other document filed as an exhibit to the Registration Statement, reference is hereby made to such exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. As a result of the filing of the Registration Statement with the Commission, the Issuers and the Guarantors each will become subject to the informational reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In accordance therewith, the Company and Holdings will be required to file reports and other information with the Commission. Such reports and other information can be inspected and copied at the principal office of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and the following Regional Offices of the Commission: Chicago Regional Office, Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60611 and New York Regional office, 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of such material may also be obtained at prescribed rates from the Public Reference Section of the Commission at its principal office at Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549. The Commission also maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission at http://www.sec.gov. In reliance upon certain Staff Accounting Bulletins of the Commission, interpretations of the staff of the Commission and no-action relief granted by the Staff of the Commission to unrelated third parties, the Subsidiary Guarantors do not intend to file periodic reports with the Commission under the Exchange Act separately from the Issuers. The Issuers will furnish holders of the securities offered hereby with annual reports containing, among other information, audited financial statements certified by an independent public accounting firm and quarterly reports containing unaudited financial information for the first three quarters of each fiscal year. The Issuers will also furnish such other reports as it may determine or as may be required by law or by the indentures governing the New Notes. FORWARD LOOKING STATEMENTS THIS PROSPECTUS CONTAINS CERTAIN FORWARD LOOKING STATEMENTS WITH RESPECT TO THE FINANCIAL CONDITIONS, RESULTS OF OPERATIONS AND BUSINESSES OF THE ISSUERS, INCLUDING STATEMENTS UNDER THE CAPTIONS "SUMMARY," "UNAUDITED PRO FORMA FINANCIAL INFORMATION," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS." ALL OF THESE FORWARD LOOKING STATEMENTS ARE BASED ON ESTIMATES AND ASSUMPTIONS MADE BY MANAGEMENT OF THE ISSUERS WHICH, ALTHOUGH BELIEVED TO BE REASONABLE, ARE INHERENTLY UNCERTAIN. THEREFORE, UNDUE RELIANCE SHOULD NOT BE PLACED UPON SUCH ESTIMATES AND STATEMENTS. NO ASSURANCE CAN BE GIVEN THAT ANY OF SUCH ESTIMATES OR STATEMENTS WILL BE REALIZED AND IT IS LIKELY THAT ACTUAL RESULTS WILL DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE: (1) INCREASED COMPETITION, INCLUDING FROM NEWER FORMS OF ENTERTAINMENT AND ENTERTAINMENT MEDIA OR CHANGES IN THE POPULARITY OR AVAILABILITY OF PROGRAMMING; (2) INCREASED COSTS, INCLUDING INCREASED CAPITAL EXPENDITURES AS A RESULT OF NECESSARY TECHNOLOGICAL ENHANCEMENTS (E.G., EXPENDITURES RELATED TO THE TRANSITION TO DIGITAL the "Grand Rapids Stations"), both of which stations are located in the Grand Rapids-Kalamazoo-Battle Creek market. The Company currently provides services to the Grand Rapids Stations pursuant to a consulting agreement with AT&T. See "The Transactions and Other Matters -- The Grand Rapids Acquisition" and "Business -- The Company -- History." The following table provides information regarding the stations and other programming outlets operated by the Company and the stations owned by the Joint Venture: <TABLE> <CAPTION> COMMERCIAL STATION STATION DMAS, STATIONS AND OTHER DMA STATIONS IN RANK IN AUDIENCE PROGRAMMING OUTLETS STATUS(A) AFFILIATION(B) RANK(C) DMA(D) DMA(E) Share(e) ------------------------ --------- -------------- ------- ----------- ------- -------- <S> <C> <C> <C> <C> <C> <C> COMPANY STATIONS AND OTHER PROGRAMMING OUTLETS: INDIANAPOLIS, IN WISH-TV.......................................... O&O CBS 25 8 1 18% WIIH-LP (Satellite)(f)........................... O&O CBS Local Weather Station............................ O&O Cable NEW HAVEN-HARTFORD, CT WTNH-TV.......................................... O&O ABC 27 8 2 14% WBNE-TV.......................................... LMA WB 5(tie) 2% GRAND RAPIDS-KALAMAZOO-BATTLE CREEK, MI(g) WOOD-TV.......................................... CS NBC 37 8 1(tie) 18% WOTV-TV.......................................... CS ABC 4 5% NORFOLK-PORTSMOUTH, VA WAVY-TV.......................................... O&O NBC 39 7 1(tie) 16% WVBT-TV.......................................... LMA WB/Fox(h) 5 2% Local Weather Station............................ O&O Cable BUFFALO, NY WIVB-TV.......................................... O&O CBS 40 7 2 17% AUSTIN, TX KXAN-TV.......................................... O&O NBC 60 7 3 14% KNVA-TV.......................................... LMA WB 6 3% KXAM-TV (Satellite)(i)........................... O&O NBC Low Power Network................................ O&O UPN DECATUR-CHAMPAIGN, IL WAND-TV.......................................... O&O ABC 81 8 3 14% Local Weather Station............................ O&O Cable FORT WAYNE, IN WANE-TV.......................................... O&O CBS 102 6 2 19% Local Weather Station............................ O&O Cable DALLAS-FORT WORTH, TX KXTX-TV.......................................... LMA IND 8 13 9 3% JOINT VENTURE STATIONS: DALLAS-FORT WORTH, TX KXAS-TV.......................................... JV NBC 8 13 3 12% SAN DIEGO, CA KNSD-TV.......................................... JV NBC 26 7 1 13% </TABLE> - --------------- (a) "O&O" refers to a station owned and operated by the Company. "LMA" refers to a station operated by the Company pursuant to a local marketing agreement and with respect to which the Company has a purchase option exercisable under certain circumstances. "JV" refers to a station owned by the Joint Venture and operated by NBC. "CS" refers to a station which the Company currently provides services to pursuant to a consulting agreement. The Company's Core Stations, all of which are CBS, NBC and ABC affiliates, are WISH-TV, WANE-TV, WAND-TV, WAVY-TV, KXAN-TV, WTNH-TV and WIVB-TV. (b) "IND" refers to an independent station with no network affiliation. (c) Rankings are based on the relative size of the station's "market" among the 211 generally recognized television markets in the United States. Source: Nielsen Station Index DMA Market Ratings -- November 1997, A.C. Nielsen Company. (d) The number of stations in a market excludes local weather stations, low power networks and satellite broadcasting facilities. (e) Source: Nielsen Station Index DMA Market Ratings -- November 1997, A.C. Nielsen Company, Sunday-Saturday 6:00 a.m.-2:00 a.m. (f) Station WIIH-LP, Indianapolis, Indiana, is operated as a satellite station of WISH-TV in order to increase WISH-TV's coverage. PROSPECTUS <TABLE> <S> <C> OFFER FOR ALL OUTSTANDING OFFER FOR ALL OUTSTANDING 8 3/8% SENIOR SUBORDINATED NOTES DUE 10% SENIOR DISCOUNT NOTES DUE 2008 2008 IN EXCHANGE FOR IN EXCHANGE FOR 10% SENIOR DISCOUNT NOTES DUE 2008 8 3/8% SENIOR SUBORDINATED NOTES DUE OF 2008 LIN HOLDINGS CORP. OF LIN TELEVISION CORPORATION </TABLE> Pursuant to the terms and subject to the conditions set forth in this Prospectus and the accompanying letters of transmittal, (i) LIN Television Corporation, a Delaware corporation (the "Company"), and the Guarantors (as defined) hereby offer (the "Senior Subordinated Notes Exchange Offer") to exchange $1,000 principal amount of registered 8 3/8% Senior Subordinated Notes Due 2008 (the "New Senior Subordinated Notes") issued by the Company, for each $1,000 principal amount of unregistered 8 3/8% Senior Subordinated Notes Due 2008 (the "Old Senior Subordinated Notes," and together with the New Senior Subordinated Notes, the "Senior Subordinated Notes") issued by LIN Acquisition Company, the predecessor in interest of the Company ("LIN Acquisition"), of which an aggregate principal amount of $300,000,000 is outstanding and (ii) LIN Holdings Corp., a Delaware corporation ("Holdings") hereby offers (the "Senior Discount Notes Exchange Offer," and together with the Senior Subordinated Notes Exchange Offer, the "Exchange Offers") to exchange $1,000 principal amount at maturity of registered 10% Senior Discount Notes Due 2008 (the "New Senior Discount Notes") issued by Holdings, for each $1,000 principal amount at maturity of unregistered 10% Senior Discount Notes Due 2008 (the "Old Senior Discount Notes," and together with the New Senior Discount Notes, the "Senior Discount Notes") issued by Holdings, of which an aggregate principal amount at maturity of $325,000,000 is outstanding. The Old Senior Subordinated Notes and the Old Senior Discount Notes are sometimes collectively referred to herein as the "Old Notes" and the New Senior Subordinated Notes and the New Senior Discount Notes are sometimes collectively referred to herein as the "New Notes." The Old Notes and the New Notes are sometimes collectively referred to herein as the "Notes." The Company and Holdings are sometimes collectively referred to herein as the "Issuers." The form and terms of the New Notes are identical to the form and terms of the Old Notes except that (i) interest on the New Senior Subordinated Notes shall accrue from the date of issuance of the Old Senior Subordinated Notes, (ii) the Accreted Value (as defined) of the New Senior Discount Notes will be calculated from the date of issuance of the Old Senior Discount Notes, and (iii) the New Notes are being registered under the Securities Act of 1933, as amended (the "Securities Act"), and will not bear any legends restricting their transfer. The New Senior Subordinated Notes will evidence the same debt as the Old Senior Subordinated Notes and will be issued pursuant to, and entitled to the benefits of, the indenture governing the Old Senior Subordinated Notes. The New Senior Discount Notes will evidence the same debt as the Old Senior Discount Notes and will be issued pursuant to, and entitled to the benefits of, the indenture governing the Old Senior Discount Notes. The Exchange Offers are being made in order to satisfy certain contractual obligations of the Company and Holdings. See "The Exchange Offers," "Description of the New Senior Subordinated Notes" and "Description of the New Senior Discount Notes." The net proceeds from the sale of the Old Notes were used to effect the acquisition by Holdings of the Company and its subsidiaries (the "Acquisition"). Such acquisition was effected pursuant to the merger of LIN Acquisition with and into the Company, with the Company surviving as a wholly owned subsidiary of Holdings. See "The Transactions and Other Matters." --------------------- SEE "RISK FACTORS" BEGINNING ON PAGE 22 FOR A DISCUSSION OF CERTAIN INFORMATION THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NEW NOTES. --------------------- The Company and Holdings will accept for exchange any and all Old Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on , 1998, unless extended (as so extended, the "Expiration Date"). Tenders of Old Notes may be withdrawn at any time prior to the Expiration Date. The Exchange Offers are subject to certain customary conditions. See "The Exchange Offers." In order for a holder of Old Notes to participate in an Exchange Offer, such holder must represent to the Company or Holdings, as appropriate, that, among other things, (i) the New Notes acquired pursuant to such Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Notes, whether or not such person is the holder of the Old Notes, (ii) neither the holder nor any such other person is engaging or intends to engage in a distribution of such New Notes, (iii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Notes within the meaning of the Securities Act, (iv) neither the holder nor any such other person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of the Company, Holdings or any Guarantor, and (v) if such holder or other person is a broker-dealer, that it will receive New Notes for its own account in exchange for Old Notes that were acquired as a result of marketmaking activities or other trading activities. See "The Exchange Offers--Purpose and Effect." Each broker-dealer that receives New Notes for its own account pursuant to either of the Exchange Offers must acknowledge that it will deliver a prospectus in connection with any resale of those New Notes. The letter of transmittal accompanying this Prospectus states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for Old Notes where such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company and Holdings have agreed that, for a period of 90 days after the Expiration Date, they will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." No public market has existed for the Old Notes. The Company and Holdings currently do not intend to list the New Notes on any securities exchange or to seek approval for quotation through any automated quotation system, and no active public market for the New Notes is currently anticipated. The Company and Holdings will pay all expenses incident to the Exchange Offers. The Exchange Offers are not conditioned upon any minimum principal amount of Old Senior Subordinated Notes or Old Senior Discount Notes being tendered for exchange pursuant to the Exchange Offers. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DATE OF THIS PROSPECTUS IS , 1998. BROADCASTING) OR ACQUISITIONS OR INCREASED PROGRAMMING COSTS; (3) INABILITY TO CONSUMMATE ACQUISITIONS ON ATTRACTIVE TERMS; (4) LOSS OR RETIREMENT OF KEY MEMBERS OF MANAGEMENT; (5) INCREASES IN THE ISSUERS' COST OF BORROWINGS OR INABILITY OR UNAVAILABILITY OF ADDITIONAL DEBT OR EQUITY CAPITAL; (6) ADVERSE STATE OR FEDERAL LEGISLATION OR REGULATION OR ADVERSE DETERMINATIONS BY REGULATORS; AND (7) CHANGES IN ADVERTISING TRENDS AND/OR BUDGETS AND IN GENERAL ECONOMIC CONDITIONS IN THE MARKETS IN WHICH THE ISSUERS MAY, FROM TIME TO TIME, COMPETE. MANY OF SUCH FACTORS WILL BE BEYOND THE CONTROL OF THE ISSUERS AND THEIR MANAGEMENT. FORWARD-LOOKING STATEMENTS CONTAINED HEREIN SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULT OF ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS WHICH MAY BE MADE TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. FOR FURTHER INFORMATION OR OTHER FACTORS WHICH COULD AFFECT THE FINANCIAL RESULTS OF THE ISSUERS AND SUCH FORWARD LOOKING STATEMENTS, SEE "RISK FACTORS." (g) The Company currently provides services to WOOD-TV and WOTV-TV pursuant to a consulting agreement with AT&T. The Company has agreed to acquire the assets of WOOD-TV and the LMA rights related to WOTV-TV from AT&T for a purchase price of approximately $125.5 million. The acquisition is expected to close later this year. See "The Transactions and Other Matters -- The Grand Rapids Acquisition" and "Business -- The Company -- History." (h) WVBT-TV will become a Fox affiliate on August 31, 1998. (i) Station KXAM-TV, Llano, Texas, is operated as a satellite station of KXAN-TV in order to increase KXAN-TV's coverage. BUSINESS STRATEGY The Company's business strategy is to maximize its BCF through both revenue growth and the implementation of effective cost controls. To achieve these goals, the Company seeks, among other things, to: Maximize Revenue Shares. From 1993 to 1997, the Company increased its broadcast television advertising revenue market share from 22.8% to 25.9% (assuming the acquisitions of WIVB-TV and WTNH-TV occurred on January 1, 1993) by targeting audiences with favorable demographic profiles, creating auxiliary revenue streams and cultivating strong network affiliations. On the same basis, the Company's gross advertising revenues have grown at a compound annual rate of 10.3%, whereas gross advertising revenues in the Company's markets have grown at a compound annual rate of 6.8%. The Company attempts to maximize each station's revenue share through a quarterly "entitlement review process." This process involves the benchmarking of each station's advertising revenues against an index which weights various demographic attributes according to their relative advertising revenue value. As a result of the entitlement review process, the Company's revenue shares typically outperform its audience shares. The Company's revenue shares also benefit from long term affiliations with its three core networks -- CBS, NBC and ABC -- which provide the Company's television stations affiliated with such networks with competitive programming, including coverage of political events and high profile sporting events such as the Olympic Games, Super Bowl and NCAA Men's Basketball Tournament. The Company also has stations affiliated with Fox, WB and UPN, which further enhances its ability to grow its revenue shares through access to their competitive programming. Emphasize Leading Local News. The Company's Core Stations are ranked number one or two in late news in all but the Company's smallest market. Management believes that a successful news operation is critical to the success of a television station because news audiences generally have the best demographic profiles from an advertising sales perspective. In addition, news programming: (i) enables the Company to purchase less syndicated programming and thereby maintain tight control over programming costs; (ii) serves as a strong lead-in to other programming; and (iii) fosters a high profile in the local community, which is critical to maximizing local advertising sales. The Company believes that its local news programming significantly improves its stations' BCF margins. Accordingly, the Company has increased the hours of news produced per week from 81 in 1989 to 187 in 1997 on a pro forma basis. Partly as a result of its emphasis on quality local news programming, management has increased the BCF margin at the five network-affiliated stations that it has operated throughout the period from January 1, 1991 to December 31, 1997 (WISH-TV, WANE-TV, WAND-TV, WAVY-TV and KXAN-TV) from 37% to 47%. Execute a Multi-Channel Strategy. The Company's management pioneered the "multi-channel strategy," which involves the combination of an owned and operated television station with an LMA station and/or a Local Weather Station in the same market. Management has pursued this strategy in all but one of the Company's markets. Execution of the multi-channel strategy has been a factor in the Company's ability to generate incremental cash flow. The advantages of the multi-channel strategy are: (i) the ability to capitalize on management's expertise; (ii) additional advertising inventory in each market; (iii) greater programming flexibility; (iv) enhanced ability to leverage fixed operating costs over a larger revenue base; (v) improved negotiating positions with respect to suppliers of syndicated programming, advertisers and the networks; (vi) increased share of actual viewers; (vii) the opportunity to affiliate with the emerging networks; and (viii) enhanced opportunities for cross promotion. CERTAIN DEFINITIONS AND MARKET AND INDUSTRY DATA As used in this Prospectus, unless the context otherwise requires, (i) "Holdings" refers to LIN Holdings Corp., (ii) "LIN Acquisition" refers to LIN Acquisition Company, (iii) "LIN Television" or the "Predecessor" refers to LIN Television Corporation and its subsidiaries prior to the Acquisition, (iv) the "Company" refers to LIN Television after giving effect to the Acquisition (as defined), the Financings (as defined) and the Joint Venture (as defined) (collectively, the "Transactions"), except where the context requires otherwise, (v) "on a pro forma basis" or "pro forma" means after giving effect to the Transactions, except as indicated otherwise and (vi) "Core Stations" refers to the CBS, NBC and ABC-affiliated stations owned and operated by the Company (WISH-TV, WANE-TV, WAND-TV, WAVY-TV, KXAN-TV, WTNH-TV and WIVB-TV). See "The Transactions and Other Matters." The terms "broadcast cash flow" ("BCF") and "EBITDA" are referred to in various places in this Prospectus. BCF is defined as operating income (loss) plus corporate expenses plus depreciation and amortization of intangible assets and amortization of program rights plus other non-cash expenses (consisting of tower write-offs and non-cash pension expenses), minus cash program payments. EBITDA is defined as BCF minus corporate expenses. BCF and EBITDA are not measures of performance calculated in accordance with generally accepted accounting principles ("GAAP"). However, management believes that BCF is useful to a prospective investor because it is a measure widely used in the broadcast industry to evaluate a television broadcast company's operating performance and that EBITDA is useful to a prospective investor because it is widely used in the broadcast industry to evaluate a television broadcast company's ability to service debt. BCF and EBITDA should not be considered in isolation of or as a substitute for net income (loss), cash flows from operating activities and other income and cash flow statement data prepared in accordance with GAAP or as a measure of liquidity or profitability. BCF and EBITDA as determined above may not be comparable to the BCF and EBITDA measures reported by other companies. In addition, these measures do not represent funds available for discretionary use. Designated market area ("DMA") rankings are from the Nielsen Station Index dated November 1997 as estimated by the A.C. Nielsen Company ("Nielsen"). There are 211 generally-recognized television "markets" or DMAs in the United States, which are ranked in size according to various factors based upon actual or potential audience. Unless otherwise indicated herein, (i) market revenue, market revenue share, projected advertising revenue growth and station revenue share data have been obtained from Investing in Television 1994, 1995, 1996 and 1997, BIA Publications, Inc. ("BIA"); (ii) television household data has been obtained from the Nielsen Station Index for November of the appropriate year; (iii) audience share and audience rankings, except where specifically stated to the contrary, have been derived from Nielsen estimates (for May and November of the appropriate year) of the percentage of persons in the DMA tuned into the relevant station from sign-on to sign-off (Sunday to Saturday, 6:00 a.m. to 2:00 a.m.); (iv) general market economic data has been obtained from BIA and the chambers of commerce in each station's market; (v) the term "station" or "commercial station" means a television broadcast station and does not include public television stations, cable stations or networks (e.g., CNN, TBS or ESPN), or stations that do not meet the minimum Nielsen reporting standards (i.e., weekly cumulative audience share of at least 2.5% for Sunday to Saturday, 7:00 a.m. to 1:00 a.m.); and (vi) the term "independent" describes a commercial television station that is not affiliated with the ABC, CBS, NBC, Fox, WB or UPN television networks. Control Costs. In addition to concentrating on maximizing advertising revenues in its local markets, management focuses on controlling costs to maximize BCF. In many markets, the Company operates with fewer personnel than its competitors. In addition, management typically buys syndicated programming on a Company-wide basis and performs detailed profitability analyses for all programming purchases. As a result, management believes that the Company's margins are among the highest in the industry for stations in markets of comparable size. Pursue Selective Acquisitions. The Company intends to pursue selective acquisitions of television stations with the goal of improving their operating performance by applying management's business strategy. Targeted stations generally will share many of the following characteristics: (i) attractive acquisition terms; (ii) opportunities for increased advertising revenue; (iii) opportunities to implement effective cost controls; (iv) opportunities for increased audience share through improved newscasts and programming; and (v) market locations that are projected to have attractive growth in advertising revenues. The Company intends to primarily target network-affiliated stations located in the fifty largest DMAs, which stations typically have established audiences for their news, sports and entertainment programming. Invest in Digital Technology. Management believes that the Company is well positioned for the transition to digital broadcasting and anticipates that the Company will be one of the first television broadcasters in the United States to transmit a digital signal. The Company has already invested $13 million to fully prepare its towers and transmitter buildings for the transition, and estimates that an additional $40 million will be required over the next five to seven years for other necessary capital expenditures such as the purchase of antennae, transmitters, studio equipment and news gathering equipment. In accordance with FCC regulations, all station affiliates of ABC, CBS, NBC and Fox in the top ten DMAs will be required to transmit a digital signal by May 1, 1999. Affiliates of those networks in DMAs ranked eleven through thirty will be required to transmit a digital signal by November 1, 1999. All remaining commercial broadcasters will be required to transmit a digital signal by May 1, 2002. MANAGEMENT AND OWNERSHIP The Company's management team, led by Gary Chapman, the Company's President and Chief Executive Officer, is recognized as an industry leader. As an indication of management's expertise and ability, the five network-affiliated stations operated by management throughout the period from January 1, 1991 to December 31, 1997 (WISH-TV, WANE-TV, WAND-TV, WAVY-TV and KXAN-TV) achieved an aggregate annual compound growth rate in net revenues and BCF of 8.9% (from $57.8 million to $96.2 million) and 13.3% (from $21.4 million to $45.2 million), respectively. Management also increased the Company's BCF margin at these stations from 37% to 47% during such period. In connection with the Acquisition, management and key employees reinvested a portion of their equity interest in LIN Television in the indirect parent corporation of Holdings. In addition, management and key employees will be granted options to acquire additional shares representing an approximate 5% equity interest in such parent corporation. Hicks Muse is a leading private investment firm with offices in Dallas, New York, St. Louis and Mexico City that specializes in leveraged acquisitions, recapitalizations and other principal investing activities. Hicks Muse and its predecessor firm have completed or have pending over 100 transactions having a combined transaction value of more than $24 billion. Although Hicks Muse invests in a wide variety of industries, it has significant investments and experience in the media and communications industry, including interests in Chancellor Media, Capstar Broadcasting, STC Broadcasting, Katz Media, OmniAmerica Tower and Grupo MVS. Hicks Muse plans to utilize an investment model for the Company similar to that used for Chancellor Media and Capstar Broadcasting. Chancellor Media was formed in 1993 with the purchase of two radio stations. Today, Chancellor Media is the second largest radio operator in the United States in terms of revenue (behind only CBS). Similarly, Capstar Broadcasting was formed in 1996 for the purpose of acquiring radio stations in small to medium size markets. Capstar Broadcasting is now the largest radio operator in the United States in terms of number of stations. See "Risk Factors -- Potential Conflicts of Interest" and "Certain Other Transactions." THE TRANSACTIONS AND OTHER MATTERS THE TRANSACTIONS The Acquisition. Holdings, LIN Acquisition and LIN Television entered into an Agreement and Plan of Merger on August 12, 1997 (as amended, the "Merger Agreement"). Pursuant to, and upon the terms and conditions of, the Merger Agreement, Holdings acquired LIN Television (the "Acquisition") on March 3, 1998 by merging LIN Acquisition, its wholly-owned subsidiary, with and into LIN Television (the "Merger"), with LIN Television surviving the Merger and becoming a direct, wholly owned subsidiary of Holdings. The total purchase price for the common equity of LIN Television was approximately $1.7 billion. In addition, the Company refinanced $260.2 million of LIN Television indebtedness and incurred acquisition costs of approximately $32.2 million. The Financings. The Acquisition was funded by (i) $6.9 million of excess cash on the Company's balance sheet; (ii) $50.0 million aggregate principal amount of senior secured Tranche A term loans ("Tranche A Term Loans"); (iii) $120.0 million aggregate principal amount of senior secured Tranche B term loans ("Tranche B Term Loans"); (iv) $299.3 million gross proceeds from the issuance by LIN Television of $300.0 million aggregate principal amount of Old Senior Subordinated Notes; (v) $199.6 million gross proceeds from the issuance by Holdings of $325.0 million aggregate principal amount at maturity of Old Senior Discount Notes, which proceeds were contributed by Holdings to the common equity of the Company; (vi) $558.1 million of common equity provided by affiliates of Hicks Muse, management and other co-investors to the equity of the corporate parents of Holdings, which in turn, through Holdings, contributed such amount to the common equity of the Company; and (vii) $815.5 million of proceeds of the GECC Note (collectively, the "Financings"). The Joint Venture. In connection with the Acquisition, Hicks Muse and NBC formed the Joint Venture. The Joint Venture consists of KXAS-TV, formerly LIN Television's Dallas-Fort Worth NBC affiliate, and KNSD-TV, formerly NBC's San Diego station. A wholly owned subsidiary of NBC is the general partner of the Joint Venture and NBC operates the stations owned by the Joint Venture. The NBC General Partner holds an approximate 80% equity interest and the Company holds an approximate 20% equity interest in the Joint Venture. GECC provided debt financing for the Joint Venture in the form of an $815.5 million 25-year non-amortizing senior secured note bearing an initial interest rate of 8.0% per annum (the "GECC Note"). The Company expects that the interest payments on the GECC Note will be serviced solely by the cash flow of the Joint Venture. All Distributable Cash (as defined) of the Joint Venture will be distributed to the Company and the NBC General Partner based on their respective equity interests in the Joint Venture. On a pro forma basis for the fiscal year ended December 31, 1997, the Company's portion of the Joint Venture's Distributable Cash would have been $2.2 million (without giving effect to a reserve of $15.0 million which must be established, subject to waiver by the Company, prior to any distribution of Distributable Cash). See "Risk Factors -- Control of Holdings and the Company." The GECC Note was issued by LIN Television of Texas, L.P., the Company's indirect wholly owned partnership ("LIN Texas"), which distributed the proceeds to the Company to finance a portion of the cost of the Acquisition. The obligations to GECC under the GECC Note were assumed by the Joint Venture and LIN Texas was simultaneously released from all obligations under the GECC Note. The GECC Note is not an obligation of Holdings, the Company or any of their respective subsidiaries and is recourse only to the Joint Venture, the Company's equity interest therein and to the GECC Note Guarantor. See "Risk Factors -- Defaults under the GECC Note" and "The Transactions and Other Matters -- The Joint Venture." In connection with the formation of the Joint Venture, the Company received an extension of its NBC network affiliation agreements to 2010 and the option (exercisable through December 31, 1999) to purchase WVTM-TV, the NBC affiliate in Birmingham, Alabama. Sources and Uses. The following table sets forth the sources and uses of funds in connection with the Acquisition (dollars in millions): <TABLE> <S> <C> SOURCES Excess cash........................ $ 6.9 Term Loans(a)...................... 170.0 Old Senior Subordinated Notes(b)... 299.3 Holdings contributions(c).......... 757.7 GECC Note(d)....................... 815.5 -------- Total Sources................. $2,049.4 ======== USES Purchase of LIN Television equity(e)........................ $1,706.4 Refinance LIN Television debt...... 260.2 Transaction fees and expenses(f)... 82.8 -------- Total Uses.................... $2,049.4 ======== </TABLE> - --------------- (a) The Term Loans funded in connection with the Acquisition consisted of $50.0 million aggregate principal amount of Tranche A Term Loans and $120.0 million aggregate principal amount of Tranche B Term Loans. As of December 31, 1997, the interest rates payable on outstanding Tranche A Term Loans and Tranche B Term Loans would have been approximately 7.50% and 8.00%, respectively. See "Description of the Senior Credit Facilities." (b) Represents gross proceeds to the Company from the issuance of $300.0 million aggregate principal amount of Old Senior Subordinated Notes. (c) Affiliates of Hicks Muse, management and other co-investors contributed $558.1 million to the equity of the corporate parents of Holdings, which in turn, through Holdings, contributed such amount to the common equity of the Company. In addition, Holdings issued $325.0 million aggregate principal amount at maturity of Old Senior Discount Notes and contributed the $199.6 million gross proceeds thereof to the common equity of the Company. (d) LIN Texas distributed the proceeds from the issuance of the GECC Note to the Company, which used such proceeds to finance a portion of the cost of the Acquisition. The GECC Note is not an obligation of Holdings, the Company or any of their respective subsidiaries and is recourse only to the Joint Venture, the Company's equity interest therein and to the GECC Note Guarantor. The Company expects that the interest payments on the GECC Note will be serviced solely by the cash flow of the Joint Venture. See "Risk Factors -- Control of Holdings and the Company" and "-- Defaults under the GECC Note" and "The Transactions and Other Matters -- The Joint Venture.". (e) The purchase price reflects the total price to acquire the equity of LIN Television (including KXAS-TV, which was contributed to the Joint Venture). (f) Includes discounts and commissions on the Old Notes in connection with the Offerings. Organizational Structure The following chart depicts (i) the summary organizational chart of Holdings and the Company and (ii) the sources of financing for the Transactions: LIN GRAPH THE GRAND RAPIDS ACQUISITION The Company expects to consummate the Grand Rapids Acquisition later this year. The Company currently provides services to the Grand Rapids Stations pursuant to a consulting agreement with AT&T. The total purchase price for the Grand Rapids Acquisition will be approximately $125.5 million (plus accretion thereon of 8% from March 1, 1998), which is expected to be funded by $125.0 million of additional Tranche A Term Loans. For the fiscal year ended December 31, 1997, the Grand Rapids Stations generated net revenues and BCF of $28.4 million and $11.3 million, respectively. The historical and pro forma financial information contained herein does not give effect to the Grand Rapids Acquisition. See "The Transactions and Other Matters -- The Grand Rapids Acquisition" and "Business -- The Company -- History." RECENT DEVELOPMENTS Chancellor Media Corporation, a Delaware corporation ("Chancellor") and Ranger Equity Holdings Corporation, a Delaware corporation ("Ranger"), the indirect parent company of Holdings and the Company, entered into an Agreement and Plan of Merger, dated July 7, 1998 (the "Chancellor Merger Agreement"). Pursuant to, and subject to the prior satisfaction or waiver of certain customary conditions (including, without limitation, the approval of Chancellor's and the Company's respective shareholders, the receipt of necessary FCC approvals, and the termination or expiration of the applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended) set forth in, the Chancellor Merger Agreement, Ranger will be merged with and into Chancellor (the "Chancellor Merger"), with Chancellor continuing as the surviving corporation following the Chancellor Merger. As a result of the Chancellor Merger, (i) each share of common stock, $0.01 par value ("Ranger Common Stock"), of Ranger will be converted into the right to receive 0.0300 of a share of common stock, $0.01 par value ("Chancellor Common Stock"), of Chancellor, other than shares of Ranger Common Stock for which appraisal rights have been exercised pursuant to Section 262 of the General Corporation Law of the State of Delaware. In addition, Chancellor, as the surviving corporation, will assume certain outstanding options to purchase shares of Ranger Common Stock held by certain directors, officers, employees and consultants of Ranger and its subsidiaries. Following the Chancellor Merger, Holdings and the Company will become indirect, wholly owned subsidiaries of Chancellor. A Chancellor shareholder has filed a shareholders derivative lawsuit in a chancery court in the State of Delaware, purportedly on behalf of Chancellor, naming Chancellor, Chancellor's directors and the Company as defendants. The lawsuit seeks, among other things, money damages and an injunction prohibiting the consummation of the Chancellor Merger. The Company believes that the lawsuit is without substantial merit and intends to vigorously defend the action. THE EXCHANGE OFFERS THE SENIOR SUBORDINATED NOTES EXCHANGE OFFER: The Senior Subordinated Notes Exchange Offer applies to $300,000,000 aggregate principal amount of the Old Senior Subordinated Notes. The form and terms of the New Senior Subordinated Notes will be the same as the form and terms of the Old Senior Subordinated Notes except that (i) interest on the New Senior Subordinated Notes will accrue from the date of issuance of the Old Senior Subordinated Notes, and (ii) the New Senior Subordinated Notes are being registered under the Securities Act and, therefore, will not bear legends restricting their transfer. The New Senior Subordinated Notes will evidence the same debt as the Old Senior Subordinated Notes and will be entitled to the benefits of the Senior Subordinated Notes Indenture (as defined) pursuant to which the Old Senior Subordinated Notes were issued. The Old Senior Subordinated Notes and the New Senior Subordinated Notes are sometimes referred to collectively herein as the "Senior Subordinated Notes." See "Description of the New Senior Subordinated Notes." The Senior Subordinated Notes Exchange Offer....... $1,000 principal amount of New Senior Subordinated Notes in exchange for each $1,000 principal amount of Old Senior Subordinated Notes. As of the date hereof, Old Senior Subordinated Notes representing $300,000,000 aggregate principal amount are outstanding. The terms of the New Senior Subordinated Notes and the Old Senior Subordinated Notes are substantially identical. Based on an interpretation by the Commission's staff set forth in no-action letters issued to third parties unrelated to the Company, Holdings and the Guarantors, the Company and the Guarantors believe that New Senior Subordinated Notes issued pursuant to the Senior Subordinated Notes Exchange Offer in exchange for Old Senior Subordinated Notes may be offered for resale, resold and otherwise transferred by any person receiving the New Senior Subordinated Notes, whether or not that person is the registered holder (other than any such holder or such other person that is an "affiliate" of the Company or any Guarantors within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that (i) the New Senior Subordinated Notes are acquired in the ordinary course of business of that holder or such other person, (ii) neither the holder nor such other person is engaging in or intends to engage in a distribution of the New Senior Subordinated Notes, and (iii) neither the holder nor such other person has an arrangement or understanding with any person to participate in the distribution of the New Senior Subordinated Notes. See "The Exchange Offers -- Purpose and Effect." Each broker-dealer that receives New Senior Subordinated Notes for its own account in exchange for Old Senior Subordinated Notes, where those Old Senior Subordinated Notes were acquired by the broker-dealer as a result of its market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Subordinated Notes. See "Plan of Distribution." Senior Subordinated Notes Registration Rights Agreement................ The Old Senior Subordinated Notes were sold by the Company on March 3, 1998, in a private placement in reliance on Section 4(2) of the Securities Act and immediately resold by the initial purchasers thereof (the "Initial Purchasers") in reliance on Rule 144A under the Securities Act (the "Original Senior Subordinated Notes Offering"). In connection with the original Senior Subordinated Notes Offering, the Company and Holdings entered into a Registration Rights Agreement with the Initial Purchasers (the "Senior Subordinated Notes Registration Rights Agreement") providing for, among other things, the Senior Subordinated Notes Exchange Offer. See "The Exchange Offers -- Purpose and Effect." Expiration Date............ The Senior Subordinated Notes Exchange Offer will expire at 5:00 p.m., New York City time, on , 1998, or such later date and time to which it is extended by the Company. Withdrawal................. The tender of Old Senior Subordinated Notes pursuant to the Senior Subordinated Notes Exchange Offer may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Any Old Senior Subordinated Notes not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Senior Subordinated Notes Exchange Offer. Interest on the New Senior Subordinated Notes and Old Senior Subordinated Notes.................... Interest on each New Senior Subordinated Note will accrue from the date of issuance of the Old Senior Subordinated Note for which such Old Senior Subordinated Note is exchanged or from the date of the last periodic payment of interest on such Old Note, whichever is later. Conditions to the Senior Subordinated Notes Exchange Offer........... The Senior Subordinated Notes Exchange Offer is subject to certain customary conditions, certain of which may be waived by the Company. See "The Exchange Offers -- Certain Conditions to the Exchange Offers." Procedures for Tendering Old Senior Subordinated Notes.................... Each holder of Old Senior Subordinated Notes wishing to accept the Senior Subordinated Notes Exchange Offer must complete, sign and date the accompanying letter of transmittal relating to the Senior Subordinated Notes Exchange Offer (the "Senior Subordinated Notes Letter of Transmittal"), or a copy thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver the Senior Subordinated Notes Letter of Transmittal, or the copy, together with the Old Senior Subordinated Notes and any other required documentation, to the Senior Subordinated Notes Exchange Agent (as defined) at the address set forth in the Senior Subordinated Notes Letter of Transmittal. Persons holding Old Senior Subordinated Notes through the Depository Trust Company ("DTC") and wishing to accept the Senior Subordinated Notes Exchange Offer must do so pursuant to the DTC's Automated Tender Offer Program, by which each tendering Participant will agree to be bound by the Senior Subordinated Notes Letter of Transmittal. By executing or agreeing to be bound by the Senior Subordinated Notes Letter of Transmittal, each holder will represent to the Company that, among other things, (i) the New Senior Subordinated Notes acquired pursuant to the Senior Subordinated Notes Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Senior Subordinated Notes, whether or not such person is the holder of the Old Senior Subordinated Notes, (ii) neither the holder nor any such other person is engaging in or intends to engage in a distribution of such New Senior Subordinated Notes, (iii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Senior Subordinated Notes within the meaning of the Securities Act, (iv) neither the holder nor any such person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of the Company or any Guarantor, and (v) if such holder or other person is a broker-dealer, that it will receive New Senior Subordinated Notes for its own account in exchange for Old Senior Subordinated Notes that were acquired as a result of market-making activities or other trading activities and that it will be required to acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Subordinated Notes. See "The Exchange Offers -- Procedures for Tendering." Shelf Registration Requirement.............. Pursuant to the Senior Subordinated Notes Registration Rights Agreement, the Company is required to file a "shelf" registration statement for a continuous offering pursuant to Rule 415 under the Securities Act in respect of the Old Senior Subordinated Notes if (i) because of any change in law or applicable interpretations of the staff of the Commission, the Company is not permitted to effect the Senior Subordinated Notes Exchange Offer, (ii) the Senior Subordinated Notes Exchange Offer is not consummated within 225 days of the Original Senior Subordinated Notes Offering, (iii) any holder of Private Exchange Securities (as defined) requests within 60 days after the Senior Subordinated Notes Exchange Offer, (iv) any applicable law or interpretations do not permit any holder of Old Senior Subordinated Notes to participate in the Senior Subordinated Notes Exchange Offer, (v) any holder of Old Senior Subordinated Notes participates in the Senior Subordinated Notes Exchange Offer and does not receive freely transferrable New Senior Subordinated Notes in change for Old Senior Subordinated Notes or (vi) the Company so elects. Acceptance of Old Senior Subordinated Notes and Delivery of New Senior Subordinated Notes....... The Company will accept for exchange any and all Old Senior Subordinated Notes which are properly tendered (and not withdrawn) in the Senior Subordinated Notes Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Senior Subordinated Notes issued pursuant to the Senior Subordinated Notes Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offers -- Terms of the Exchange Offers." Senior Subordinated Notes Exchange Agent........... United States Trust Company of New York is serving as Exchange Agent (the "Senior Subordinated Notes Exchange Agent") in connection with the Senior Subordinated Notes Exchange Offer. Federal Income Tax Considerations........... The exchange pursuant to the Senior Subordinated Notes Exchange Offer should not be a taxable event for federal income tax purposes. See "Certain United States Federal Income Tax Considerations." Effect of Not Tendering.... Old Senior Subordinated Notes that are not tendered or that are tendered but not accepted will, following the completion of the Senior Subordinated Notes Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. THE SENIOR DISCOUNT NOTES EXCHANGE OFFER: The Senior Discount Notes Exchange Offer applies to $325,000,000 aggregate principal amount at maturity of the Old Senior Discount Notes. The form and terms of the New Senior Discount Notes will be the same as the form and terms of the Old Senior Discount Notes except that (i) the Accreted Value (as defined) of the New Senior Discount Notes will be calculated from the date of issuance of the Old Senior Discount Notes and (ii) the New Senior Discount Notes are being registered under the Securities Act and, therefore, will not bear legends restricting their transfer. The New Senior Discount Notes will evidence the same debt as the Old Senior Discount Notes and will be entitled to the benefits of the Senior Discount Notes Indenture (as defined) pursuant to which the Old Senior Discount Notes were issued. The Old Senior Discount Notes and the New Senior Discount Notes are sometimes referred to collectively herein as the "Senior Discount Notes." See "Description of the New Senior Discount Notes." The Senior Discount Notes Exchange Offer........... $1,000 principal amount at maturity of New Senior Discount Notes in exchange for each $1,000 principal amount at maturity of Old Senior Discount Notes. As of the date hereof, Old Senior Discount Notes representing $325,000,000 aggregate principal amount at maturity are outstanding. The terms of the New Senior Discount Notes and the Old Senior Discount Notes are substantially identical. Based on an interpretation by the Commission's staff set forth in no-action letters issued to third parties unrelated to Holdings, Holdings believes that New Senior Discount Notes issued pursuant to the Senior Discount Notes Exchange Offer in exchange for Old Senior Discount Notes may be offered for resale, resold and otherwise transferred by any person receiving the New Senior Discount Notes, whether or not that person is the holder (other than any such holder or such other person that is an "affiliate" of Holdings within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that (i) the New Senior Discount Notes are required in the ordinary course of business of that holder or such other person, (ii) neither the holder nor such other person is engaging in or intends to engage in a distribution of the New Senior Discount Notes, and (iii) neither the holder nor such other person has an arrangement or understanding with any person to participate in the distribution of the New Senior Discount Notes. See "The Exchange Offers -- Purpose and Effect." Each broker-dealer that receives New Senior Discount Notes for its own account in exchange for Old Senior Discount Notes where the Old Senior Discount Notes were acquired by the broker-dealer as a result of its market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Discount Notes. See "Plan of Distribution." Senior Discount Notes Registration Rights Agreement................ The Old Senior Discount Notes were sold by Holdings on March 3, 1998, in a private placement in reliance on Section 4(2) of the Securities Act and immediately resold by the Initial Purchasers in reliance on Rule 144A under the Securities Act (the "Original Senior Discount Notes Offering," and together with the Original Senior Subordinated Notes Offering, the "Original Offerings.") In connection with the Original Senior Discount Notes Offering, the Company and Holdings entered into a Registration Rights Agreement with the Initial Purchasers (the "Senior Discount Notes Registration Rights Agreement") providing for, among other things, the Senior Discount Notes Exchange Offer. See "The Exchange Offers -- Purpose and Effect." Expiration Date............ The Senior Discount Notes Exchange Offer will expire at 5:00 p.m., New York City time, on , 1998, or such later date and time to which it is extended by Holdings. Withdrawal................. The tender of Old Senior Discount Notes pursuant to the Senior Discount Notes Exchange Offer may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Any Old Senior Discount Notes not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Senior Discount Notes Exchange Offer. Accreted Value of the New Senior Discount Notes and Old Senior Discount Notes.................... The Accreted Value of each New Senior Discount Note will be calculated from the date of issuance of the Old Senior Discount Note for which such New Senior Discount Note is exchanged. Conditions to the Senior Discount Notes Exchange Offer.................... The Senior Discount Notes Exchange Offer is subject to certain customary conditions, certain of which may be waived by the Company. See "The Exchange Offers -- Certain Conditions to the Exchange Offers." Procedures for Tendering Senior Discount Notes...... Each holder of Old Senior Discount Notes wishing to accept the Senior Discount Notes Exchange Offer must complete, sign and date the accompanying letter of transmittal relating to the Senior Discount Notes Exchange Offer (the "Senior Discount Notes Letter of Transmittal"; the Senior Discount Notes Letter of Transmittal and the Senior Subordinated Notes Letter of Transmittal are sometimes referred to herein individually as a "Letter of Transmittal" and collectively as the "Letters of Transmittal"), or a copy thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver the Senior Discount Notes Letter of Transmittal, or the copy, together with the Old Senior Discount Notes and any other required documentation, to the Senior Discount Notes Exchange Offer (as defined) at the address set forth in the Senior Discount Notes Letter of Transmittal. Persons holding Old Discount Notes through the DTC and wishing to accept the Senior Discount Notes Exchange Offer must do so pursuant to the DTC's Automated Tender Offer Program, by which each tendering Participant will agree to be bound by the Senior Discount Notes Letter of Transmittal. By executing or agreeing to be bound by the Senior Discount Notes Letter of Transmittal, each holder will represent to Holdings that, among other things, (i) the New Senior Discount Notes acquired pursuant to the Senior Discount Notes Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Senior Discount Notes, whether or not such person is the holder of the Old Senior Discount Notes, (ii) neither the holder nor any such other person is engaging in or intends to engage in a distribution of such New Senior Discount Notes, (iii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Senior Discount Notes, (iv) neither the holder nor any such other person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of Holdings, and (v) if such holder or other person is a broker-dealer, that it will receive New Senior Discount Notes for its own account in exchange for Old Senior Discount Notes that were acquired as a result of market-making activities or other trading activities and that it will be required to acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Discount Notes. Shelf Registration Requirement.............. Pursuant to the Senior Discount Notes Registration Rights Agreement, Holdings is required to file a "shelf" registration statement for a continuous offering pursuant to Rule 415 under the Securities Act in respect of the Old Senior Discount Notes if (i) because of any change in law or applicable interpretations of the staff of the Commission, Holdings is not permitted to effect the Senior Discount Notes Exchange Offer, (ii) the Senior Discount Notes Exchange Offer is not consummated within 225 days of the Original Senior Discount Notes Offering, (iii) any holder of Private Exchange Securities (as defined) requests within 60 days after the Senior Discount Notes Exchange Offer, (iv) any applicable law or interpretations do not permit any holder of Old Senior Discount Notes to participate in the Senior Discount Notes Exchange Offer, (v) any holder of Old Senior Discount Notes participates in the Senior Discount Notes Exchange Offer and does not receive freely transferrable New Senior Discount Notes in exchange for Old Senior Discount Notes or (vi) Holdings so elects. Acceptance of Old Senior Discount Notes and Delivery of New Senior Discount Notes.................... Holdings will accept for exchange any and all Old Senior Discount Notes which are properly tendered (and not withdrawn) in the Senior Discount Notes Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Senior Discount Notes issued pursuant to the Senior Discount Notes Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offers -- Terms of the Exchange Offer." Senior Discount Notes Exchange Agent........... United States Trust Company of New York is serving as Exchange Agent (the "Senior Discount Notes Exchange Agent"; the Senior Subordinated Notes Exchange Agent and the Senior Discount Notes Exchange Agent are sometimes referred to herein individually as an "Exchange Agent" and collectively as the "Exchange Agents") in connection with the Senior Discount Notes Exchange Offer. Federal Income Tax Considerations........... The exchange pursuant to the Senior Discount Notes Exchange Offer should not be a taxable event for federal income tax purposes. See "Certain United States Federal Income Tax Considerations." Effect of Not Tendering.... Old Senior Discount Notes that are not tendered or that are tendered but not accepted will, following the completion of the Senior Discount Notes Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. TERMS OF THE NEW NOTES NEW SENIOR SUBORDINATED NOTES Issuer..................... LIN Television Corporation (as successor-in-interest to LIN Acquisition Company). Securities Offered......... $300,000,000 aggregate principal amount of 8 3/8% Senior Subordinated Notes due 2008. Maturity................... March 1, 2008. Interest Payment Dates..... March 1 and September 1 of each year, commencing September 1, 1998. Sinking Fund............... None. Optional Redemption........ Except as described below, the Company may not redeem the New Senior Subordinated Notes prior to March 1, 2003. On or after such date, the Company may redeem the Senior Subordinated Notes, in whole or in part, at the redemption prices set forth herein, together with accrued and unpaid interest, if any, to the date of redemption. In addition, at any time and from time to time on or prior to March 1, 2001, the Company may redeem up to 35% of the aggregate principal amount of the Senior Subordinated Notes with the net cash proceeds of one or more private or public offerings by the Company, at a redemption price equal to 108.375% of the principal amount to be redeemed, together with accrued and unpaid interest, if any, to the date of redemption, provided that at least 65% of the originally issued aggregate principal amount of the Senior Subordinated Notes remains outstanding after each such redemption. See "Description of the New Senior Subordinated Notes -- Optional Redemption." Change of Control.......... Upon the occurrence of a Change of Control, (i) the Company will have the option, at any time on or prior to March 1, 2003, to redeem the New Senior Subordinated Notes, in whole but not in part, at a redemption price equal to 100% of the principal amount thereof, plus accrued and unpaid interest plus the Applicable Premium (as defined) and (ii) if the New Senior Subordinated Notes are not redeemed or if such Change of Control occurs after March 1, 2003, the Company will be required to make an offer to repurchase the New Senior Subordinated Notes at a price equal to 101% of the principal amount thereof, together with accrued and unpaid interest, if any, to the date of purchase. See "Description of the New Senior Subordinated Notes -- Change of Control" and "-- Amendment." Guarantees................. The New Senior Subordinated Notes will be guaranteed (the "Subsidiary Guarantees"), jointly and severally on an unsecured senior subordinated basis, by the Company's direct and indirect, existing and future, Restricted Subsidiaries (the "Guarantors"). The Guarantors also will guarantee all obligations of the Company under the Senior Credit Facilities (as defined). The Company's obligations under the Senior Credit Facilities also will be secured by substantially all of the assets of the Company and the Guarantors. The obligations of each Guarantor under its Subsidiary Guarantee will be subordinated in right of payment to the prior payment in full of all Guarantor Senior Indebtedness (as defined) of such Guarantor to substantially the same extent as the Senior Subordinated Notes are subordinated to all existing and future Senior Indebtedness of the Company. See "Description of the New Senior Subordinated Notes -- Subsidiary Guarantees of the New Senior Subordinated Notes." Ranking.................... The New Senior Subordinated Notes will be unsecured and will be subordinated in right of payment to all existing and future Senior Indebtedness (as defined) of the Company and will rank pari passu in right of payment with all Senior Subordinated Indebtedness (as defined) of the Company. As of March 31, 1998, the aggregate principal amount of the Company's outstanding Senior Indebtedness was $170.0 million (consisting of outstanding Term Loans) and the Company had no Senior Subordinated Indebtedness outstanding other than the Senior Subordinated Notes and had no Subsidiary Indebtedness outstanding. As of such date, liabilities of the Company's Subsidiaries reflected on its consolidated balance sheet, including indebtedness and other liabilities such as trade payables and accrued expenses, aggregated $17.8 million. See "Description of the New Senior Subordinated Notes -- Ranking and Subordination." Restrictive Covenants...... The Senior Subordinated Notes Indenture limits, among other things, (i) the incurrence of additional indebtedness and issuance of capital stock, (ii) layering of indebtedness, (iii) the payment of dividends on, and redemption of, capital stock of the Company, (iv) liens, (v) mergers, consolidations, and sales of all or substantially all of the Company's assets, (vi) asset sales, (vii) asset swaps, (viii) dividend and other payment restrictions affecting Restricted Subsidiaries and (ix) transactions with affiliates of the Company. However, all of these limitations and prohibitions are subject to a number of important qualifications and exceptions. See "Description of the New Senior Subordinated Notes -- Certain Covenants." Use of Proceeds............ There will be no cash proceeds to the Company from the exchange of New Senior Subordinated Notes for Old Senior Subordinated Notes pursuant to the Senior Subordinated Notes Exchange Offer. The net proceeds from the Original Senior Subordinated Notes Offering were used, together with the proceeds of the other Financings, to consummate the Acquisition. NEW SENIOR DISCOUNT NOTES Issuer..................... LIN Holdings Corp. Securities Offered......... $325,000,000 aggregate principal amount at maturity of 10% Senior Discount Notes due 2008. The Senior Discount Notes will be issued at a discount to their aggregate principal amount at maturity. Maturity................... March 1, 2008. Interest Payment Dates..... Cash interest will not accrue or be payable on the New Senior Discount Notes prior to March 1, 2003. Thereafter, cash interest on the New Senior Discount Notes will accrue at a rate of 10% per annum and will be payable semi-annually in arrears on March 1 and September 1 of each year, commencing on September 1, 2003. Original Issue Discount.... For federal income tax purposes, the New Senior Discount Notes will be treated as having been issued with "original issue discount" equal to the difference between the issue price of the Old Senior Discount Notes and the sum of all cash payments (whether denominated as principal or interest) to be made thereon. Each holder of a New Senior Discount Note must include as gross income for federal income tax purposes a portion of such original issue discount for each day during each taxable year in which a New Senior Discount Note is held even though no cash interest payments will be received prior to March 1, 2003. See "Certain United States Federal Income Tax Considerations -- Taxation of Original Issue Discount." Sinking Fund............... None. Mandatory Principal Redemption............... Except as described below, Holdings may not redeem the New Senior Discount Notes prior to March 1, 2003. On March 1, 2003, Holdings will be required to redeem Senior Discount Notes with an aggregate principal amount at maturity equal to (i) $125.0 million multiplied by (ii) the quotient obtained by dividing (x) the aggregate principal amount at maturity of Senior Discount Notes then outstanding (other than Senior Discount Notes then held by Holdings or its Subsidiaries or the entities with respect to which Holdings is a direct or indirect Subsidiary) by (y) $325.0 million, (the "Mandatory Principal Redemption Amount") at a redemption price equal to 100% of the principal amount at maturity of the Senior Discount Notes so redeemed. See "Description of the New Senior Discount Notes -- Mandatory Principal Redemption." Optional Redemption........ The New Senior Discount Notes will be redeemable at the option of Holdings, in whole or in part, at any time on or after March 1, 2003. On or after such date, Holdings may redeem the New Senior Discount Notes, in whole or in part, at the redemption prices set forth herein, together with accrued and unpaid interest, if any, to the date of redemption. In addition, at any time and from time to time on or prior to March 1, 2001, Holdings may, subject to certain requirements, redeem up to 35% of the aggregate principal amount at maturity of the Senior Discount Notes with the net cash proceeds from one or more private or public equity offerings at a price equal to 110% of the Accreted Value (as defined) at the date of redemption, provided that at least 65% of the originally issued aggregate principal amount at maturity of the Senior Discount Notes remains outstanding after each such redemption. See "Description of the New Senior Discount Notes -- Optional Redemption." Change of Control.......... Upon a Change of Control, (i) Holdings will have the option, at any time on or prior to March 1, 2003, to redeem the New Senior Discount Notes, in whole but not in part, at a redemption price equal to 100% of the Accreted Value thereof plus the Applicable Premium and (ii) if the New Senior Discount Notes are not so redeemed or if such Change of Control occurs after March 1, 2003, Holdings will be required to make an offer to repurchase the New Senior Discount Notes at a price equal to (a) 101% of the Accreted Value thereof if redeemed on or before March 1, 2003, and (b) 101% of the principal amount at maturity, plus accrued and unpaid interest, if any, thereon, if redeemed after March 1, 2003. See "Description of the New Senior Discount Notes -- Change of Control." Guarantees................. None. Ranking.................... The New Senior Discount Notes will be senior unsecured obligations of Holdings and will rank pari passu in right of payment with all Senior Indebtedness of Holdings, including Holdings' guarantee of the Senior Credit Facilities. Holdings is a holding company with no operations of its own and whose primary asset is the capital stock of the Company (all of which will be pledged to secure the Senior Credit Facilities). As a result of the holding company structure, the New Senior Discount Notes will effectively rank junior in right of payment to all creditors of the Company and its subsidiaries, including the lenders under the Senior Credit Facilities, holders of the Senior Subordinated Notes and trade creditors. As of March 31, 1998, the New Senior Discount Notes were effectively subordinated to $523.8 of aggregate liabilities (including indebtedness and other liabilities such as trade payables and accrued expenses that would have been reflected on the consolidated balance sheet) of the Company and its subsidiaries. See "Description of the New Senior Discount Notes." Restrictive Covenants...... The Senior Discount Notes Indenture limits, among other things, (i) the incurrence of additional indebtedness and issuance of capital stock, (ii) the payment of dividends on, and redemption of, capital stock of Holdings, (iii) mergers, consolidations and sales of all or substantially all of Holdings' assets, (iv) asset sales, (v) asset swaps, (vi) dividend and other payment restrictions affecting Restricted Subsidiaries and (vii) transactions with affiliates. However, all of these limitations and prohibitions are subject to a number of important qualifications and exceptions. See "Description of the New Senior Discount Notes -- Certain Covenants."
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+SUMMARY The following summary should be read in conjunction with the more detailed information, financial statements and notes thereto appearing elsewhere in this Prospectus. For additional information relating to certain defined terms used herein, as well as the sources for the market and other industry data contained herein, see "Certain Definitions and Market and Industry Data." THE COMPANY The Company is a leading television station group operator in the United States that operates eleven television stations and provides consulting services to two additional television stations. Twelve of these stations are network affiliates and nine are in top forty DMAs, including: Indianapolis, Indiana; New Haven-Hartford, Connecticut; Buffalo, New York; Norfolk-Portsmouth, Virginia; Grand Rapids-Kalamazoo-Battle Creek, Michigan and Dallas-Fort Worth, Texas. These stations have an aggregate United States household reach of approximately 6.9%, ranking the Company among the top independent, "pure-play" television station group operators in the United States. The Company's Core Stations generated an aggregate pro forma BCF margin of approximately 46% for the fiscal year ended December 31, 1997, principally as a result of their strong network affiliations, leading local news programming and tight cost controls. In addition, the Company's management pioneered the "multi-channel strategy," which involves the combination of an owned and operated television station with an LMA station and/or a 24-hour cable weather channel (a "Local Weather Station") in the same market. The multi-channel strategy has enhanced the Company's revenue market shares and increased its BCF by leveraging its fixed costs over a larger revenue base. The Company's station portfolio is well diversified in terms of its network affiliations, geographic coverage, net revenues and cash flow. The Company owns and operates three CBS affiliates, two NBC affiliates and two ABC affiliates which accounted for 35%, 28% and 28%, respectively, of the Company's pro forma BCF for the fiscal year ended December 31, 1997. The Company's LMA stations and Local Weather Stations accounted for substantially all of the remaining 9% of its BCF on the same basis. The Company's Core Stations broadcast in seven different markets, with no market representing more than 25% of the Company's pro forma net revenues or BCF for the fiscal year ended December 31, 1997. The Company's pro forma net revenues, BCF and EBITDA were $196.1 million, $79.5 million and $72.7 million, respectively, for the fiscal year ended December 31, 1997. Hicks, Muse, Tate & Furst Incorporated ("Hicks Muse"), a leading private equity firm with significant investments and experience in the media and communications industry, has acquired LIN Television to serve as a platform for acquiring and operating additional television stations that can benefit from management's ability to improve operating performance and increase BCF margins at acquired stations. In connection with the Acquisition, Hicks Muse and NBC formed a television station joint venture (the "Joint Venture"). The Joint Venture consists of KXAS-TV, LIN Television's Dallas-Fort Worth NBC affiliate, and KNSD-TV, NBC's San Diego station. A wholly owned subsidiary of NBC is the general partner of the Joint Venture (the "NBC General Partner") and NBC operates the stations owned by the Joint Venture pursuant to a management agreement. The NBC General Partner holds an approximate 80% equity interest and the Company holds an approximate 20% equity interest in the Joint Venture. General Electric Capital Corporation ("GECC") provided debt financing to the Joint Venture in the form of the GECC Note (as defined), the proceeds of which were distributed to the Company to finance a portion of the cost of the Acquisition. The GECC Note is not an obligation of Holdings, the Company or any of their respective subsidiaries and is recourse only to the Joint Venture, the Company's equity interest therein and to one of Holding's two corporate parents (the "GECC Note Guarantor") pursuant to a guarantee. The Company expects that the interest payments on the GECC Note will be serviced solely by the cash flow of the Joint Venture. See "The Transactions and Other Matters -- The Joint Venture." Later this year, the Company expects to acquire (the "Grand Rapids Acquisition") from AT&T Corporation ("AT&T") the assets of WOOD-TV and the LMA rights related to WOTV-TV (collectively, LIN TELEVISION CORPORATION LIN HOLDINGS CORP. CROSS REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING THE LOCATION IN THE PROSPECTUS OF THE INFORMATION REQUIRED BY PART I OF FORM S-1 <TABLE> <CAPTION> FORM S-1 ITEM NUMBER AND HEADING LOCATION IN PROSPECTUS -------------------------------- ---------------------- <S> <C> <C> 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus... Cover Page of Registration Statement; Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus............................ Inside Front and Outside Back Cover Pages of Prospectus 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges............. Certain Definitions and Market and Industry Data; Summary; Risk Factors; Selected Consolidated Financial and Operating Data; Unaudited Pro Forma Financial Information; Business 4. Use of Proceeds............................ Use of Proceeds 5. Determination of Offering Price............ Not Applicable 6. Dilution................................... Not Applicable 7. Selling Security Holders................... Not Applicable 8. Plan of Distribution....................... Front Cover Page of Prospectus; The Exchange Offers; Plan of Distribution 9. Description of Securities to be Registered............................... Description of New Senior Subordinated Notes; Description of New Senior Discount Notes 10. Interests of Named Experts and Counsel..... Not Applicable 11. Information with Respect to the Registrant............................... Cover Page of Registration Statement; Certain Definitions and Market and Industry Data; Summary; Risk Factors; The Transactions and Other Matters; Selected Consolidated Financial and Operating Data; Unaudited Pro Forma Consolidated Financial Information; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Securities Ownership of Certain Beneficial Owners; Certain Other Transactions; Description of the Senior Credit Facilities; Legal Matters 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities.............................. Not Applicable </TABLE> AVAILABLE INFORMATION The Issuers and the Guarantors have filed with the Securities and Exchange Commission (the "Commission") a Registration Statement (which term shall encompass any amendments thereto) on Form S-1 under the Securities Act with respect to the securities offered hereby. This Prospectus does not contain all information set forth in the Registration Statement and the exhibits thereto, to which reference is hereby made. Although the Issuers and the Guarantors believe that statements made in this Prospectus as to the contents of any contract, agreement, or other document describe all material elements of such documents, such statements are not necessarily complete. With respect to each such contract, agreement, or other document filed as an exhibit to the Registration Statement, reference is hereby made to such exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. As a result of the filing of the Registration Statement with the Commission, the Issuers and the Guarantors each will become subject to the informational reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In accordance therewith, the Company and Holdings will be required to file reports and other information with the Commission. Such reports and other information can be inspected and copied at the principal office of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and the following Regional Offices of the Commission: Chicago Regional Office, Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60611 and New York Regional office, 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of such material may also be obtained at prescribed rates from the Public Reference Section of the Commission at its principal office at Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549. The Commission also maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission at http://www.sec.gov. In reliance upon certain Staff Accounting Bulletins of the Commission, interpretations of the staff of the Commission and no-action relief granted by the Staff of the Commission to unrelated third parties, the Subsidiary Guarantors do not intend to file periodic reports with the Commission under the Exchange Act separately from the Issuers. The Issuers will furnish holders of the securities offered hereby with annual reports containing, among other information, audited financial statements certified by an independent public accounting firm and quarterly reports containing unaudited financial information for the first three quarters of each fiscal year. The Issuers will also furnish such other reports as it may determine or as may be required by law or by the indentures governing the New Notes. FORWARD LOOKING STATEMENTS THIS PROSPECTUS CONTAINS CERTAIN FORWARD LOOKING STATEMENTS WITH RESPECT TO THE FINANCIAL CONDITIONS, RESULTS OF OPERATIONS AND BUSINESSES OF THE ISSUERS, INCLUDING STATEMENTS UNDER THE CAPTIONS "SUMMARY," "UNAUDITED PRO FORMA FINANCIAL INFORMATION," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS." ALL OF THESE FORWARD LOOKING STATEMENTS ARE BASED ON ESTIMATES AND ASSUMPTIONS MADE BY MANAGEMENT OF THE ISSUERS WHICH, ALTHOUGH BELIEVED TO BE REASONABLE, ARE INHERENTLY UNCERTAIN. THEREFORE, UNDUE RELIANCE SHOULD NOT BE PLACED UPON SUCH ESTIMATES AND STATEMENTS. NO ASSURANCE CAN BE GIVEN THAT ANY OF SUCH ESTIMATES OR STATEMENTS WILL BE REALIZED AND IT IS LIKELY THAT ACTUAL RESULTS WILL DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE: (1) INCREASED COMPETITION, INCLUDING FROM NEWER FORMS OF ENTERTAINMENT AND ENTERTAINMENT MEDIA OR CHANGES IN THE POPULARITY OR AVAILABILITY OF PROGRAMMING; (2) INCREASED COSTS, INCLUDING INCREASED CAPITAL EXPENDITURES AS A RESULT OF NECESSARY TECHNOLOGICAL ENHANCEMENTS (E.G., EXPENDITURES RELATED TO THE TRANSITION TO DIGITAL the "Grand Rapids Stations"), both of which stations are located in the Grand Rapids-Kalamazoo-Battle Creek market. The Company currently provides services to the Grand Rapids Stations pursuant to a consulting agreement with AT&T. See "The Transactions and Other Matters -- The Grand Rapids Acquisition" and "Business -- The Company -- History." The following table provides information regarding the stations and other programming outlets operated by the Company and the stations owned by the Joint Venture: <TABLE> <CAPTION> COMMERCIAL STATION STATION DMAS, STATIONS AND OTHER DMA STATIONS IN RANK IN AUDIENCE PROGRAMMING OUTLETS STATUS(A) AFFILIATION(B) RANK(C) DMA(D) DMA(E) Share(e) ------------------------ --------- -------------- ------- ----------- ------- -------- <S> <C> <C> <C> <C> <C> <C> COMPANY STATIONS AND OTHER PROGRAMMING OUTLETS: INDIANAPOLIS, IN WISH-TV.......................................... O&O CBS 25 8 1 18% WIIH-LP (Satellite)(f)........................... O&O CBS Local Weather Station............................ O&O Cable NEW HAVEN-HARTFORD, CT WTNH-TV.......................................... O&O ABC 27 8 2 14% WBNE-TV.......................................... LMA WB 5(tie) 2% GRAND RAPIDS-KALAMAZOO-BATTLE CREEK, MI(g) WOOD-TV.......................................... CS NBC 37 8 1(tie) 18% WOTV-TV.......................................... CS ABC 4 5% NORFOLK-PORTSMOUTH, VA WAVY-TV.......................................... O&O NBC 39 7 1(tie) 16% WVBT-TV.......................................... LMA WB/Fox(h) 5 2% Local Weather Station............................ O&O Cable BUFFALO, NY WIVB-TV.......................................... O&O CBS 40 7 2 17% AUSTIN, TX KXAN-TV.......................................... O&O NBC 60 7 3 14% KNVA-TV.......................................... LMA WB 6 3% KXAM-TV (Satellite)(i)........................... O&O NBC Low Power Network................................ O&O UPN DECATUR-CHAMPAIGN, IL WAND-TV.......................................... O&O ABC 81 8 3 14% Local Weather Station............................ O&O Cable FORT WAYNE, IN WANE-TV.......................................... O&O CBS 102 6 2 19% Local Weather Station............................ O&O Cable DALLAS-FORT WORTH, TX KXTX-TV.......................................... LMA IND 8 13 9 3% JOINT VENTURE STATIONS: DALLAS-FORT WORTH, TX KXAS-TV.......................................... JV NBC 8 13 3 12% SAN DIEGO, CA KNSD-TV.......................................... JV NBC 26 7 1 13% </TABLE> - --------------- (a) "O&O" refers to a station owned and operated by the Company. "LMA" refers to a station operated by the Company pursuant to a local marketing agreement and with respect to which the Company has a purchase option exercisable under certain circumstances. "JV" refers to a station owned by the Joint Venture and operated by NBC. "CS" refers to a station which the Company currently provides services to pursuant to a consulting agreement. The Company's Core Stations, all of which are CBS, NBC and ABC affiliates, are WISH-TV, WANE-TV, WAND-TV, WAVY-TV, KXAN-TV, WTNH-TV and WIVB-TV. (b) "IND" refers to an independent station with no network affiliation. (c) Rankings are based on the relative size of the station's "market" among the 211 generally recognized television markets in the United States. Source: Nielsen Station Index DMA Market Ratings -- November 1997, A.C. Nielsen Company. (d) The number of stations in a market excludes local weather stations, low power networks and satellite broadcasting facilities. (e) Source: Nielsen Station Index DMA Market Ratings -- November 1997, A.C. Nielsen Company, Sunday-Saturday 6:00 a.m.-2:00 a.m. (f) Station WIIH-LP, Indianapolis, Indiana, is operated as a satellite station of WISH-TV in order to increase WISH-TV's coverage. PROSPECTUS <TABLE> <S> <C> OFFER FOR ALL OUTSTANDING OFFER FOR ALL OUTSTANDING 8 3/8% SENIOR SUBORDINATED NOTES DUE 10% SENIOR DISCOUNT NOTES DUE 2008 2008 IN EXCHANGE FOR IN EXCHANGE FOR 10% SENIOR DISCOUNT NOTES DUE 2008 8 3/8% SENIOR SUBORDINATED NOTES DUE OF 2008 LIN HOLDINGS CORP. OF LIN TELEVISION CORPORATION </TABLE> Pursuant to the terms and subject to the conditions set forth in this Prospectus and the accompanying letters of transmittal, (i) LIN Television Corporation, a Delaware corporation (the "Company"), and the Guarantors (as defined) hereby offer (the "Senior Subordinated Notes Exchange Offer") to exchange $1,000 principal amount of registered 8 3/8% Senior Subordinated Notes Due 2008 (the "New Senior Subordinated Notes") issued by the Company, for each $1,000 principal amount of unregistered 8 3/8% Senior Subordinated Notes Due 2008 (the "Old Senior Subordinated Notes," and together with the New Senior Subordinated Notes, the "Senior Subordinated Notes") issued by LIN Acquisition Company, the predecessor in interest of the Company ("LIN Acquisition"), of which an aggregate principal amount of $300,000,000 is outstanding and (ii) LIN Holdings Corp., a Delaware corporation ("Holdings") hereby offers (the "Senior Discount Notes Exchange Offer," and together with the Senior Subordinated Notes Exchange Offer, the "Exchange Offers") to exchange $1,000 principal amount at maturity of registered 10% Senior Discount Notes Due 2008 (the "New Senior Discount Notes") issued by Holdings, for each $1,000 principal amount at maturity of unregistered 10% Senior Discount Notes Due 2008 (the "Old Senior Discount Notes," and together with the New Senior Discount Notes, the "Senior Discount Notes") issued by Holdings, of which an aggregate principal amount at maturity of $325,000,000 is outstanding. The Old Senior Subordinated Notes and the Old Senior Discount Notes are sometimes collectively referred to herein as the "Old Notes" and the New Senior Subordinated Notes and the New Senior Discount Notes are sometimes collectively referred to herein as the "New Notes." The Old Notes and the New Notes are sometimes collectively referred to herein as the "Notes." The Company and Holdings are sometimes collectively referred to herein as the "Issuers." The form and terms of the New Notes are identical to the form and terms of the Old Notes except that (i) interest on the New Senior Subordinated Notes shall accrue from the date of issuance of the Old Senior Subordinated Notes, (ii) the Accreted Value (as defined) of the New Senior Discount Notes will be calculated from the date of issuance of the Old Senior Discount Notes, and (iii) the New Notes are being registered under the Securities Act of 1933, as amended (the "Securities Act"), and will not bear any legends restricting their transfer. The New Senior Subordinated Notes will evidence the same debt as the Old Senior Subordinated Notes and will be issued pursuant to, and entitled to the benefits of, the indenture governing the Old Senior Subordinated Notes. The New Senior Discount Notes will evidence the same debt as the Old Senior Discount Notes and will be issued pursuant to, and entitled to the benefits of, the indenture governing the Old Senior Discount Notes. The Exchange Offers are being made in order to satisfy certain contractual obligations of the Company and Holdings. See "The Exchange Offers," "Description of the New Senior Subordinated Notes" and "Description of the New Senior Discount Notes." The net proceeds from the sale of the Old Notes were used to effect the acquisition by Holdings of the Company and its subsidiaries (the "Acquisition"). Such acquisition was effected pursuant to the merger of LIN Acquisition with and into the Company, with the Company surviving as a wholly owned subsidiary of Holdings. See "The Transactions and Other Matters." --------------------- SEE "RISK FACTORS" BEGINNING ON PAGE 22 FOR A DISCUSSION OF CERTAIN INFORMATION THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NEW NOTES. --------------------- The Company and Holdings will accept for exchange any and all Old Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on , 1998, unless extended (as so extended, the "Expiration Date"). Tenders of Old Notes may be withdrawn at any time prior to the Expiration Date. The Exchange Offers are subject to certain customary conditions. See "The Exchange Offers." In order for a holder of Old Notes to participate in an Exchange Offer, such holder must represent to the Company or Holdings, as appropriate, that, among other things, (i) the New Notes acquired pursuant to such Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Notes, whether or not such person is the holder of the Old Notes, (ii) neither the holder nor any such other person is engaging or intends to engage in a distribution of such New Notes, (iii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Notes within the meaning of the Securities Act, (iv) neither the holder nor any such other person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of the Company, Holdings or any Guarantor, and (v) if such holder or other person is a broker-dealer, that it will receive New Notes for its own account in exchange for Old Notes that were acquired as a result of marketmaking activities or other trading activities. See "The Exchange Offers--Purpose and Effect." Each broker-dealer that receives New Notes for its own account pursuant to either of the Exchange Offers must acknowledge that it will deliver a prospectus in connection with any resale of those New Notes. The letter of transmittal accompanying this Prospectus states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for Old Notes where such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company and Holdings have agreed that, for a period of 90 days after the Expiration Date, they will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." No public market has existed for the Old Notes. The Company and Holdings currently do not intend to list the New Notes on any securities exchange or to seek approval for quotation through any automated quotation system, and no active public market for the New Notes is currently anticipated. The Company and Holdings will pay all expenses incident to the Exchange Offers. The Exchange Offers are not conditioned upon any minimum principal amount of Old Senior Subordinated Notes or Old Senior Discount Notes being tendered for exchange pursuant to the Exchange Offers. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DATE OF THIS PROSPECTUS IS , 1998. BROADCASTING) OR ACQUISITIONS OR INCREASED PROGRAMMING COSTS; (3) INABILITY TO CONSUMMATE ACQUISITIONS ON ATTRACTIVE TERMS; (4) LOSS OR RETIREMENT OF KEY MEMBERS OF MANAGEMENT; (5) INCREASES IN THE ISSUERS' COST OF BORROWINGS OR INABILITY OR UNAVAILABILITY OF ADDITIONAL DEBT OR EQUITY CAPITAL; (6) ADVERSE STATE OR FEDERAL LEGISLATION OR REGULATION OR ADVERSE DETERMINATIONS BY REGULATORS; AND (7) CHANGES IN ADVERTISING TRENDS AND/OR BUDGETS AND IN GENERAL ECONOMIC CONDITIONS IN THE MARKETS IN WHICH THE ISSUERS MAY, FROM TIME TO TIME, COMPETE. MANY OF SUCH FACTORS WILL BE BEYOND THE CONTROL OF THE ISSUERS AND THEIR MANAGEMENT. FORWARD-LOOKING STATEMENTS CONTAINED HEREIN SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULT OF ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS WHICH MAY BE MADE TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. FOR FURTHER INFORMATION OR OTHER FACTORS WHICH COULD AFFECT THE FINANCIAL RESULTS OF THE ISSUERS AND SUCH FORWARD LOOKING STATEMENTS, SEE "RISK FACTORS." (g) The Company currently provides services to WOOD-TV and WOTV-TV pursuant to a consulting agreement with AT&T. The Company has agreed to acquire the assets of WOOD-TV and the LMA rights related to WOTV-TV from AT&T for a purchase price of approximately $125.5 million. The acquisition is expected to close later this year. See "The Transactions and Other Matters -- The Grand Rapids Acquisition" and "Business -- The Company -- History." (h) WVBT-TV will become a Fox affiliate on August 31, 1998. (i) Station KXAM-TV, Llano, Texas, is operated as a satellite station of KXAN-TV in order to increase KXAN-TV's coverage. BUSINESS STRATEGY The Company's business strategy is to maximize its BCF through both revenue growth and the implementation of effective cost controls. To achieve these goals, the Company seeks, among other things, to: Maximize Revenue Shares. From 1993 to 1997, the Company increased its broadcast television advertising revenue market share from 22.8% to 25.9% (assuming the acquisitions of WIVB-TV and WTNH-TV occurred on January 1, 1993) by targeting audiences with favorable demographic profiles, creating auxiliary revenue streams and cultivating strong network affiliations. On the same basis, the Company's gross advertising revenues have grown at a compound annual rate of 10.3%, whereas gross advertising revenues in the Company's markets have grown at a compound annual rate of 6.8%. The Company attempts to maximize each station's revenue share through a quarterly "entitlement review process." This process involves the benchmarking of each station's advertising revenues against an index which weights various demographic attributes according to their relative advertising revenue value. As a result of the entitlement review process, the Company's revenue shares typically outperform its audience shares. The Company's revenue shares also benefit from long term affiliations with its three core networks -- CBS, NBC and ABC -- which provide the Company's television stations affiliated with such networks with competitive programming, including coverage of political events and high profile sporting events such as the Olympic Games, Super Bowl and NCAA Men's Basketball Tournament. The Company also has stations affiliated with Fox, WB and UPN, which further enhances its ability to grow its revenue shares through access to their competitive programming. Emphasize Leading Local News. The Company's Core Stations are ranked number one or two in late news in all but the Company's smallest market. Management believes that a successful news operation is critical to the success of a television station because news audiences generally have the best demographic profiles from an advertising sales perspective. In addition, news programming: (i) enables the Company to purchase less syndicated programming and thereby maintain tight control over programming costs; (ii) serves as a strong lead-in to other programming; and (iii) fosters a high profile in the local community, which is critical to maximizing local advertising sales. The Company believes that its local news programming significantly improves its stations' BCF margins. Accordingly, the Company has increased the hours of news produced per week from 81 in 1989 to 187 in 1997 on a pro forma basis. Partly as a result of its emphasis on quality local news programming, management has increased the BCF margin at the five network-affiliated stations that it has operated throughout the period from January 1, 1991 to December 31, 1997 (WISH-TV, WANE-TV, WAND-TV, WAVY-TV and KXAN-TV) from 37% to 47%. Execute a Multi-Channel Strategy. The Company's management pioneered the "multi-channel strategy," which involves the combination of an owned and operated television station with an LMA station and/or a Local Weather Station in the same market. Management has pursued this strategy in all but one of the Company's markets. Execution of the multi-channel strategy has been a factor in the Company's ability to generate incremental cash flow. The advantages of the multi-channel strategy are: (i) the ability to capitalize on management's expertise; (ii) additional advertising inventory in each market; (iii) greater programming flexibility; (iv) enhanced ability to leverage fixed operating costs over a larger revenue base; (v) improved negotiating positions with respect to suppliers of syndicated programming, advertisers and the networks; (vi) increased share of actual viewers; (vii) the opportunity to affiliate with the emerging networks; and (viii) enhanced opportunities for cross promotion. CERTAIN DEFINITIONS AND MARKET AND INDUSTRY DATA As used in this Prospectus, unless the context otherwise requires, (i) "Holdings" refers to LIN Holdings Corp., (ii) "LIN Acquisition" refers to LIN Acquisition Company, (iii) "LIN Television" or the "Predecessor" refers to LIN Television Corporation and its subsidiaries prior to the Acquisition, (iv) the "Company" refers to LIN Television after giving effect to the Acquisition (as defined), the Financings (as defined) and the Joint Venture (as defined) (collectively, the "Transactions"), except where the context requires otherwise, (v) "on a pro forma basis" or "pro forma" means after giving effect to the Transactions, except as indicated otherwise and (vi) "Core Stations" refers to the CBS, NBC and ABC-affiliated stations owned and operated by the Company (WISH-TV, WANE-TV, WAND-TV, WAVY-TV, KXAN-TV, WTNH-TV and WIVB-TV). See "The Transactions and Other Matters." The terms "broadcast cash flow" ("BCF") and "EBITDA" are referred to in various places in this Prospectus. BCF is defined as operating income (loss) plus corporate expenses plus depreciation and amortization of intangible assets and amortization of program rights plus other non-cash expenses (consisting of tower write-offs and non-cash pension expenses), minus cash program payments. EBITDA is defined as BCF minus corporate expenses. BCF and EBITDA are not measures of performance calculated in accordance with generally accepted accounting principles ("GAAP"). However, management believes that BCF is useful to a prospective investor because it is a measure widely used in the broadcast industry to evaluate a television broadcast company's operating performance and that EBITDA is useful to a prospective investor because it is widely used in the broadcast industry to evaluate a television broadcast company's ability to service debt. BCF and EBITDA should not be considered in isolation of or as a substitute for net income (loss), cash flows from operating activities and other income and cash flow statement data prepared in accordance with GAAP or as a measure of liquidity or profitability. BCF and EBITDA as determined above may not be comparable to the BCF and EBITDA measures reported by other companies. In addition, these measures do not represent funds available for discretionary use. Designated market area ("DMA") rankings are from the Nielsen Station Index dated November 1997 as estimated by the A.C. Nielsen Company ("Nielsen"). There are 211 generally-recognized television "markets" or DMAs in the United States, which are ranked in size according to various factors based upon actual or potential audience. Unless otherwise indicated herein, (i) market revenue, market revenue share, projected advertising revenue growth and station revenue share data have been obtained from Investing in Television 1994, 1995, 1996 and 1997, BIA Publications, Inc. ("BIA"); (ii) television household data has been obtained from the Nielsen Station Index for November of the appropriate year; (iii) audience share and audience rankings, except where specifically stated to the contrary, have been derived from Nielsen estimates (for May and November of the appropriate year) of the percentage of persons in the DMA tuned into the relevant station from sign-on to sign-off (Sunday to Saturday, 6:00 a.m. to 2:00 a.m.); (iv) general market economic data has been obtained from BIA and the chambers of commerce in each station's market; (v) the term "station" or "commercial station" means a television broadcast station and does not include public television stations, cable stations or networks (e.g., CNN, TBS or ESPN), or stations that do not meet the minimum Nielsen reporting standards (i.e., weekly cumulative audience share of at least 2.5% for Sunday to Saturday, 7:00 a.m. to 1:00 a.m.); and (vi) the term "independent" describes a commercial television station that is not affiliated with the ABC, CBS, NBC, Fox, WB or UPN television networks. Control Costs. In addition to concentrating on maximizing advertising revenues in its local markets, management focuses on controlling costs to maximize BCF. In many markets, the Company operates with fewer personnel than its competitors. In addition, management typically buys syndicated programming on a Company-wide basis and performs detailed profitability analyses for all programming purchases. As a result, management believes that the Company's margins are among the highest in the industry for stations in markets of comparable size. Pursue Selective Acquisitions. The Company intends to pursue selective acquisitions of television stations with the goal of improving their operating performance by applying management's business strategy. Targeted stations generally will share many of the following characteristics: (i) attractive acquisition terms; (ii) opportunities for increased advertising revenue; (iii) opportunities to implement effective cost controls; (iv) opportunities for increased audience share through improved newscasts and programming; and (v) market locations that are projected to have attractive growth in advertising revenues. The Company intends to primarily target network-affiliated stations located in the fifty largest DMAs, which stations typically have established audiences for their news, sports and entertainment programming. Invest in Digital Technology. Management believes that the Company is well positioned for the transition to digital broadcasting and anticipates that the Company will be one of the first television broadcasters in the United States to transmit a digital signal. The Company has already invested $13 million to fully prepare its towers and transmitter buildings for the transition, and estimates that an additional $40 million will be required over the next five to seven years for other necessary capital expenditures such as the purchase of antennae, transmitters, studio equipment and news gathering equipment. In accordance with FCC regulations, all station affiliates of ABC, CBS, NBC and Fox in the top ten DMAs will be required to transmit a digital signal by May 1, 1999. Affiliates of those networks in DMAs ranked eleven through thirty will be required to transmit a digital signal by November 1, 1999. All remaining commercial broadcasters will be required to transmit a digital signal by May 1, 2002. MANAGEMENT AND OWNERSHIP The Company's management team, led by Gary Chapman, the Company's President and Chief Executive Officer, is recognized as an industry leader. As an indication of management's expertise and ability, the five network-affiliated stations operated by management throughout the period from January 1, 1991 to December 31, 1997 (WISH-TV, WANE-TV, WAND-TV, WAVY-TV and KXAN-TV) achieved an aggregate annual compound growth rate in net revenues and BCF of 8.9% (from $57.8 million to $96.2 million) and 13.3% (from $21.4 million to $45.2 million), respectively. Management also increased the Company's BCF margin at these stations from 37% to 47% during such period. In connection with the Acquisition, management and key employees reinvested a portion of their equity interest in LIN Television in the indirect parent corporation of Holdings. In addition, management and key employees will be granted options to acquire additional shares representing an approximate 5% equity interest in such parent corporation. Hicks Muse is a leading private investment firm with offices in Dallas, New York, St. Louis and Mexico City that specializes in leveraged acquisitions, recapitalizations and other principal investing activities. Hicks Muse and its predecessor firm have completed or have pending over 100 transactions having a combined transaction value of more than $24 billion. Although Hicks Muse invests in a wide variety of industries, it has significant investments and experience in the media and communications industry, including interests in Chancellor Media, Capstar Broadcasting, STC Broadcasting, Katz Media, OmniAmerica Tower and Grupo MVS. Hicks Muse plans to utilize an investment model for the Company similar to that used for Chancellor Media and Capstar Broadcasting. Chancellor Media was formed in 1993 with the purchase of two radio stations. Today, Chancellor Media is the second largest radio operator in the United States in terms of revenue (behind only CBS). Similarly, Capstar Broadcasting was formed in 1996 for the purpose of acquiring radio stations in small to medium size markets. Capstar Broadcasting is now the largest radio operator in the United States in terms of number of stations. See "Risk Factors -- Potential Conflicts of Interest" and "Certain Other Transactions." THE TRANSACTIONS AND OTHER MATTERS THE TRANSACTIONS The Acquisition. Holdings, LIN Acquisition and LIN Television entered into an Agreement and Plan of Merger on August 12, 1997 (as amended, the "Merger Agreement"). Pursuant to, and upon the terms and conditions of, the Merger Agreement, Holdings acquired LIN Television (the "Acquisition") on March 3, 1998 by merging LIN Acquisition, its wholly-owned subsidiary, with and into LIN Television (the "Merger"), with LIN Television surviving the Merger and becoming a direct, wholly owned subsidiary of Holdings. The total purchase price for the common equity of LIN Television was approximately $1.7 billion. In addition, the Company refinanced $260.2 million of LIN Television indebtedness and incurred acquisition costs of approximately $32.2 million. The Financings. The Acquisition was funded by (i) $6.9 million of excess cash on the Company's balance sheet; (ii) $50.0 million aggregate principal amount of senior secured Tranche A term loans ("Tranche A Term Loans"); (iii) $120.0 million aggregate principal amount of senior secured Tranche B term loans ("Tranche B Term Loans"); (iv) $299.3 million gross proceeds from the issuance by LIN Television of $300.0 million aggregate principal amount of Old Senior Subordinated Notes; (v) $199.6 million gross proceeds from the issuance by Holdings of $325.0 million aggregate principal amount at maturity of Old Senior Discount Notes, which proceeds were contributed by Holdings to the common equity of the Company; (vi) $558.1 million of common equity provided by affiliates of Hicks Muse, management and other co-investors to the equity of the corporate parents of Holdings, which in turn, through Holdings, contributed such amount to the common equity of the Company; and (vii) $815.5 million of proceeds of the GECC Note (collectively, the "Financings"). The Joint Venture. In connection with the Acquisition, Hicks Muse and NBC formed the Joint Venture. The Joint Venture consists of KXAS-TV, formerly LIN Television's Dallas-Fort Worth NBC affiliate, and KNSD-TV, formerly NBC's San Diego station. A wholly owned subsidiary of NBC is the general partner of the Joint Venture and NBC operates the stations owned by the Joint Venture. The NBC General Partner holds an approximate 80% equity interest and the Company holds an approximate 20% equity interest in the Joint Venture. GECC provided debt financing for the Joint Venture in the form of an $815.5 million 25-year non-amortizing senior secured note bearing an initial interest rate of 8.0% per annum (the "GECC Note"). The Company expects that the interest payments on the GECC Note will be serviced solely by the cash flow of the Joint Venture. All Distributable Cash (as defined) of the Joint Venture will be distributed to the Company and the NBC General Partner based on their respective equity interests in the Joint Venture. On a pro forma basis for the fiscal year ended December 31, 1997, the Company's portion of the Joint Venture's Distributable Cash would have been $2.2 million (without giving effect to a reserve of $15.0 million which must be established, subject to waiver by the Company, prior to any distribution of Distributable Cash). See "Risk Factors -- Control of Holdings and the Company." The GECC Note was issued by LIN Television of Texas, L.P., the Company's indirect wholly owned partnership ("LIN Texas"), which distributed the proceeds to the Company to finance a portion of the cost of the Acquisition. The obligations to GECC under the GECC Note were assumed by the Joint Venture and LIN Texas was simultaneously released from all obligations under the GECC Note. The GECC Note is not an obligation of Holdings, the Company or any of their respective subsidiaries and is recourse only to the Joint Venture, the Company's equity interest therein and to the GECC Note Guarantor. See "Risk Factors -- Defaults under the GECC Note" and "The Transactions and Other Matters -- The Joint Venture." In connection with the formation of the Joint Venture, the Company received an extension of its NBC network affiliation agreements to 2010 and the option (exercisable through December 31, 1999) to purchase WVTM-TV, the NBC affiliate in Birmingham, Alabama. Sources and Uses. The following table sets forth the sources and uses of funds in connection with the Acquisition (dollars in millions): <TABLE> <S> <C> SOURCES Excess cash........................ $ 6.9 Term Loans(a)...................... 170.0 Old Senior Subordinated Notes(b)... 299.3 Holdings contributions(c).......... 757.7 GECC Note(d)....................... 815.5 -------- Total Sources................. $2,049.4 ======== USES Purchase of LIN Television equity(e)........................ $1,706.4 Refinance LIN Television debt...... 260.2 Transaction fees and expenses(f)... 82.8 -------- Total Uses.................... $2,049.4 ======== </TABLE> - --------------- (a) The Term Loans funded in connection with the Acquisition consisted of $50.0 million aggregate principal amount of Tranche A Term Loans and $120.0 million aggregate principal amount of Tranche B Term Loans. As of December 31, 1997, the interest rates payable on outstanding Tranche A Term Loans and Tranche B Term Loans would have been approximately 7.50% and 8.00%, respectively. See "Description of the Senior Credit Facilities." (b) Represents gross proceeds to the Company from the issuance of $300.0 million aggregate principal amount of Old Senior Subordinated Notes. (c) Affiliates of Hicks Muse, management and other co-investors contributed $558.1 million to the equity of the corporate parents of Holdings, which in turn, through Holdings, contributed such amount to the common equity of the Company. In addition, Holdings issued $325.0 million aggregate principal amount at maturity of Old Senior Discount Notes and contributed the $199.6 million gross proceeds thereof to the common equity of the Company. (d) LIN Texas distributed the proceeds from the issuance of the GECC Note to the Company, which used such proceeds to finance a portion of the cost of the Acquisition. The GECC Note is not an obligation of Holdings, the Company or any of their respective subsidiaries and is recourse only to the Joint Venture, the Company's equity interest therein and to the GECC Note Guarantor. The Company expects that the interest payments on the GECC Note will be serviced solely by the cash flow of the Joint Venture. See "Risk Factors -- Control of Holdings and the Company" and "-- Defaults under the GECC Note" and "The Transactions and Other Matters -- The Joint Venture.". (e) The purchase price reflects the total price to acquire the equity of LIN Television (including KXAS-TV, which was contributed to the Joint Venture). (f) Includes discounts and commissions on the Old Notes in connection with the Offerings. Organizational Structure The following chart depicts (i) the summary organizational chart of Holdings and the Company and (ii) the sources of financing for the Transactions: LIN GRAPH THE GRAND RAPIDS ACQUISITION The Company expects to consummate the Grand Rapids Acquisition later this year. The Company currently provides services to the Grand Rapids Stations pursuant to a consulting agreement with AT&T. The total purchase price for the Grand Rapids Acquisition will be approximately $125.5 million (plus accretion thereon of 8% from March 1, 1998), which is expected to be funded by $125.0 million of additional Tranche A Term Loans. For the fiscal year ended December 31, 1997, the Grand Rapids Stations generated net revenues and BCF of $28.4 million and $11.3 million, respectively. The historical and pro forma financial information contained herein does not give effect to the Grand Rapids Acquisition. See "The Transactions and Other Matters -- The Grand Rapids Acquisition" and "Business -- The Company -- History." RECENT DEVELOPMENTS Chancellor Media Corporation, a Delaware corporation ("Chancellor") and Ranger Equity Holdings Corporation, a Delaware corporation ("Ranger"), the indirect parent company of Holdings and the Company, entered into an Agreement and Plan of Merger, dated July 7, 1998 (the "Chancellor Merger Agreement"). Pursuant to, and subject to the prior satisfaction or waiver of certain customary conditions (including, without limitation, the approval of Chancellor's and the Company's respective shareholders, the receipt of necessary FCC approvals, and the termination or expiration of the applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended) set forth in, the Chancellor Merger Agreement, Ranger will be merged with and into Chancellor (the "Chancellor Merger"), with Chancellor continuing as the surviving corporation following the Chancellor Merger. As a result of the Chancellor Merger, (i) each share of common stock, $0.01 par value ("Ranger Common Stock"), of Ranger will be converted into the right to receive 0.0300 of a share of common stock, $0.01 par value ("Chancellor Common Stock"), of Chancellor, other than shares of Ranger Common Stock for which appraisal rights have been exercised pursuant to Section 262 of the General Corporation Law of the State of Delaware. In addition, Chancellor, as the surviving corporation, will assume certain outstanding options to purchase shares of Ranger Common Stock held by certain directors, officers, employees and consultants of Ranger and its subsidiaries. Following the Chancellor Merger, Holdings and the Company will become indirect, wholly owned subsidiaries of Chancellor. A Chancellor shareholder has filed a shareholders derivative lawsuit in a chancery court in the State of Delaware, purportedly on behalf of Chancellor, naming Chancellor, Chancellor's directors and the Company as defendants. The lawsuit seeks, among other things, money damages and an injunction prohibiting the consummation of the Chancellor Merger. The Company believes that the lawsuit is without substantial merit and intends to vigorously defend the action. THE EXCHANGE OFFERS THE SENIOR SUBORDINATED NOTES EXCHANGE OFFER: The Senior Subordinated Notes Exchange Offer applies to $300,000,000 aggregate principal amount of the Old Senior Subordinated Notes. The form and terms of the New Senior Subordinated Notes will be the same as the form and terms of the Old Senior Subordinated Notes except that (i) interest on the New Senior Subordinated Notes will accrue from the date of issuance of the Old Senior Subordinated Notes, and (ii) the New Senior Subordinated Notes are being registered under the Securities Act and, therefore, will not bear legends restricting their transfer. The New Senior Subordinated Notes will evidence the same debt as the Old Senior Subordinated Notes and will be entitled to the benefits of the Senior Subordinated Notes Indenture (as defined) pursuant to which the Old Senior Subordinated Notes were issued. The Old Senior Subordinated Notes and the New Senior Subordinated Notes are sometimes referred to collectively herein as the "Senior Subordinated Notes." See "Description of the New Senior Subordinated Notes." The Senior Subordinated Notes Exchange Offer....... $1,000 principal amount of New Senior Subordinated Notes in exchange for each $1,000 principal amount of Old Senior Subordinated Notes. As of the date hereof, Old Senior Subordinated Notes representing $300,000,000 aggregate principal amount are outstanding. The terms of the New Senior Subordinated Notes and the Old Senior Subordinated Notes are substantially identical. Based on an interpretation by the Commission's staff set forth in no-action letters issued to third parties unrelated to the Company, Holdings and the Guarantors, the Company and the Guarantors believe that New Senior Subordinated Notes issued pursuant to the Senior Subordinated Notes Exchange Offer in exchange for Old Senior Subordinated Notes may be offered for resale, resold and otherwise transferred by any person receiving the New Senior Subordinated Notes, whether or not that person is the registered holder (other than any such holder or such other person that is an "affiliate" of the Company or any Guarantors within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that (i) the New Senior Subordinated Notes are acquired in the ordinary course of business of that holder or such other person, (ii) neither the holder nor such other person is engaging in or intends to engage in a distribution of the New Senior Subordinated Notes, and (iii) neither the holder nor such other person has an arrangement or understanding with any person to participate in the distribution of the New Senior Subordinated Notes. See "The Exchange Offers -- Purpose and Effect." Each broker-dealer that receives New Senior Subordinated Notes for its own account in exchange for Old Senior Subordinated Notes, where those Old Senior Subordinated Notes were acquired by the broker-dealer as a result of its market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Subordinated Notes. See "Plan of Distribution." Senior Subordinated Notes Registration Rights Agreement................ The Old Senior Subordinated Notes were sold by the Company on March 3, 1998, in a private placement in reliance on Section 4(2) of the Securities Act and immediately resold by the initial purchasers thereof (the "Initial Purchasers") in reliance on Rule 144A under the Securities Act (the "Original Senior Subordinated Notes Offering"). In connection with the original Senior Subordinated Notes Offering, the Company and Holdings entered into a Registration Rights Agreement with the Initial Purchasers (the "Senior Subordinated Notes Registration Rights Agreement") providing for, among other things, the Senior Subordinated Notes Exchange Offer. See "The Exchange Offers -- Purpose and Effect." Expiration Date............ The Senior Subordinated Notes Exchange Offer will expire at 5:00 p.m., New York City time, on , 1998, or such later date and time to which it is extended by the Company. Withdrawal................. The tender of Old Senior Subordinated Notes pursuant to the Senior Subordinated Notes Exchange Offer may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Any Old Senior Subordinated Notes not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Senior Subordinated Notes Exchange Offer. Interest on the New Senior Subordinated Notes and Old Senior Subordinated Notes.................... Interest on each New Senior Subordinated Note will accrue from the date of issuance of the Old Senior Subordinated Note for which such Old Senior Subordinated Note is exchanged or from the date of the last periodic payment of interest on such Old Note, whichever is later. Conditions to the Senior Subordinated Notes Exchange Offer........... The Senior Subordinated Notes Exchange Offer is subject to certain customary conditions, certain of which may be waived by the Company. See "The Exchange Offers -- Certain Conditions to the Exchange Offers." Procedures for Tendering Old Senior Subordinated Notes.................... Each holder of Old Senior Subordinated Notes wishing to accept the Senior Subordinated Notes Exchange Offer must complete, sign and date the accompanying letter of transmittal relating to the Senior Subordinated Notes Exchange Offer (the "Senior Subordinated Notes Letter of Transmittal"), or a copy thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver the Senior Subordinated Notes Letter of Transmittal, or the copy, together with the Old Senior Subordinated Notes and any other required documentation, to the Senior Subordinated Notes Exchange Agent (as defined) at the address set forth in the Senior Subordinated Notes Letter of Transmittal. Persons holding Old Senior Subordinated Notes through the Depository Trust Company ("DTC") and wishing to accept the Senior Subordinated Notes Exchange Offer must do so pursuant to the DTC's Automated Tender Offer Program, by which each tendering Participant will agree to be bound by the Senior Subordinated Notes Letter of Transmittal. By executing or agreeing to be bound by the Senior Subordinated Notes Letter of Transmittal, each holder will represent to the Company that, among other things, (i) the New Senior Subordinated Notes acquired pursuant to the Senior Subordinated Notes Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Senior Subordinated Notes, whether or not such person is the holder of the Old Senior Subordinated Notes, (ii) neither the holder nor any such other person is engaging in or intends to engage in a distribution of such New Senior Subordinated Notes, (iii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Senior Subordinated Notes within the meaning of the Securities Act, (iv) neither the holder nor any such person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of the Company or any Guarantor, and (v) if such holder or other person is a broker-dealer, that it will receive New Senior Subordinated Notes for its own account in exchange for Old Senior Subordinated Notes that were acquired as a result of market-making activities or other trading activities and that it will be required to acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Subordinated Notes. See "The Exchange Offers -- Procedures for Tendering." Shelf Registration Requirement.............. Pursuant to the Senior Subordinated Notes Registration Rights Agreement, the Company is required to file a "shelf" registration statement for a continuous offering pursuant to Rule 415 under the Securities Act in respect of the Old Senior Subordinated Notes if (i) because of any change in law or applicable interpretations of the staff of the Commission, the Company is not permitted to effect the Senior Subordinated Notes Exchange Offer, (ii) the Senior Subordinated Notes Exchange Offer is not consummated within 225 days of the Original Senior Subordinated Notes Offering, (iii) any holder of Private Exchange Securities (as defined) requests within 60 days after the Senior Subordinated Notes Exchange Offer, (iv) any applicable law or interpretations do not permit any holder of Old Senior Subordinated Notes to participate in the Senior Subordinated Notes Exchange Offer, (v) any holder of Old Senior Subordinated Notes participates in the Senior Subordinated Notes Exchange Offer and does not receive freely transferrable New Senior Subordinated Notes in change for Old Senior Subordinated Notes or (vi) the Company so elects. Acceptance of Old Senior Subordinated Notes and Delivery of New Senior Subordinated Notes....... The Company will accept for exchange any and all Old Senior Subordinated Notes which are properly tendered (and not withdrawn) in the Senior Subordinated Notes Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Senior Subordinated Notes issued pursuant to the Senior Subordinated Notes Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offers -- Terms of the Exchange Offers." Senior Subordinated Notes Exchange Agent........... United States Trust Company of New York is serving as Exchange Agent (the "Senior Subordinated Notes Exchange Agent") in connection with the Senior Subordinated Notes Exchange Offer. Federal Income Tax Considerations........... The exchange pursuant to the Senior Subordinated Notes Exchange Offer should not be a taxable event for federal income tax purposes. See "Certain United States Federal Income Tax Considerations." Effect of Not Tendering.... Old Senior Subordinated Notes that are not tendered or that are tendered but not accepted will, following the completion of the Senior Subordinated Notes Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. THE SENIOR DISCOUNT NOTES EXCHANGE OFFER: The Senior Discount Notes Exchange Offer applies to $325,000,000 aggregate principal amount at maturity of the Old Senior Discount Notes. The form and terms of the New Senior Discount Notes will be the same as the form and terms of the Old Senior Discount Notes except that (i) the Accreted Value (as defined) of the New Senior Discount Notes will be calculated from the date of issuance of the Old Senior Discount Notes and (ii) the New Senior Discount Notes are being registered under the Securities Act and, therefore, will not bear legends restricting their transfer. The New Senior Discount Notes will evidence the same debt as the Old Senior Discount Notes and will be entitled to the benefits of the Senior Discount Notes Indenture (as defined) pursuant to which the Old Senior Discount Notes were issued. The Old Senior Discount Notes and the New Senior Discount Notes are sometimes referred to collectively herein as the "Senior Discount Notes." See "Description of the New Senior Discount Notes." The Senior Discount Notes Exchange Offer........... $1,000 principal amount at maturity of New Senior Discount Notes in exchange for each $1,000 principal amount at maturity of Old Senior Discount Notes. As of the date hereof, Old Senior Discount Notes representing $325,000,000 aggregate principal amount at maturity are outstanding. The terms of the New Senior Discount Notes and the Old Senior Discount Notes are substantially identical. Based on an interpretation by the Commission's staff set forth in no-action letters issued to third parties unrelated to Holdings, Holdings believes that New Senior Discount Notes issued pursuant to the Senior Discount Notes Exchange Offer in exchange for Old Senior Discount Notes may be offered for resale, resold and otherwise transferred by any person receiving the New Senior Discount Notes, whether or not that person is the holder (other than any such holder or such other person that is an "affiliate" of Holdings within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that (i) the New Senior Discount Notes are required in the ordinary course of business of that holder or such other person, (ii) neither the holder nor such other person is engaging in or intends to engage in a distribution of the New Senior Discount Notes, and (iii) neither the holder nor such other person has an arrangement or understanding with any person to participate in the distribution of the New Senior Discount Notes. See "The Exchange Offers -- Purpose and Effect." Each broker-dealer that receives New Senior Discount Notes for its own account in exchange for Old Senior Discount Notes where the Old Senior Discount Notes were acquired by the broker-dealer as a result of its market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Discount Notes. See "Plan of Distribution." Senior Discount Notes Registration Rights Agreement................ The Old Senior Discount Notes were sold by Holdings on March 3, 1998, in a private placement in reliance on Section 4(2) of the Securities Act and immediately resold by the Initial Purchasers in reliance on Rule 144A under the Securities Act (the "Original Senior Discount Notes Offering," and together with the Original Senior Subordinated Notes Offering, the "Original Offerings.") In connection with the Original Senior Discount Notes Offering, the Company and Holdings entered into a Registration Rights Agreement with the Initial Purchasers (the "Senior Discount Notes Registration Rights Agreement") providing for, among other things, the Senior Discount Notes Exchange Offer. See "The Exchange Offers -- Purpose and Effect." Expiration Date............ The Senior Discount Notes Exchange Offer will expire at 5:00 p.m., New York City time, on , 1998, or such later date and time to which it is extended by Holdings. Withdrawal................. The tender of Old Senior Discount Notes pursuant to the Senior Discount Notes Exchange Offer may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Any Old Senior Discount Notes not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Senior Discount Notes Exchange Offer. Accreted Value of the New Senior Discount Notes and Old Senior Discount Notes.................... The Accreted Value of each New Senior Discount Note will be calculated from the date of issuance of the Old Senior Discount Note for which such New Senior Discount Note is exchanged. Conditions to the Senior Discount Notes Exchange Offer.................... The Senior Discount Notes Exchange Offer is subject to certain customary conditions, certain of which may be waived by the Company. See "The Exchange Offers -- Certain Conditions to the Exchange Offers." Procedures for Tendering Senior Discount Notes...... Each holder of Old Senior Discount Notes wishing to accept the Senior Discount Notes Exchange Offer must complete, sign and date the accompanying letter of transmittal relating to the Senior Discount Notes Exchange Offer (the "Senior Discount Notes Letter of Transmittal"; the Senior Discount Notes Letter of Transmittal and the Senior Subordinated Notes Letter of Transmittal are sometimes referred to herein individually as a "Letter of Transmittal" and collectively as the "Letters of Transmittal"), or a copy thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver the Senior Discount Notes Letter of Transmittal, or the copy, together with the Old Senior Discount Notes and any other required documentation, to the Senior Discount Notes Exchange Offer (as defined) at the address set forth in the Senior Discount Notes Letter of Transmittal. Persons holding Old Discount Notes through the DTC and wishing to accept the Senior Discount Notes Exchange Offer must do so pursuant to the DTC's Automated Tender Offer Program, by which each tendering Participant will agree to be bound by the Senior Discount Notes Letter of Transmittal. By executing or agreeing to be bound by the Senior Discount Notes Letter of Transmittal, each holder will represent to Holdings that, among other things, (i) the New Senior Discount Notes acquired pursuant to the Senior Discount Notes Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Senior Discount Notes, whether or not such person is the holder of the Old Senior Discount Notes, (ii) neither the holder nor any such other person is engaging in or intends to engage in a distribution of such New Senior Discount Notes, (iii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Senior Discount Notes, (iv) neither the holder nor any such other person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of Holdings, and (v) if such holder or other person is a broker-dealer, that it will receive New Senior Discount Notes for its own account in exchange for Old Senior Discount Notes that were acquired as a result of market-making activities or other trading activities and that it will be required to acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Discount Notes. Shelf Registration Requirement.............. Pursuant to the Senior Discount Notes Registration Rights Agreement, Holdings is required to file a "shelf" registration statement for a continuous offering pursuant to Rule 415 under the Securities Act in respect of the Old Senior Discount Notes if (i) because of any change in law or applicable interpretations of the staff of the Commission, Holdings is not permitted to effect the Senior Discount Notes Exchange Offer, (ii) the Senior Discount Notes Exchange Offer is not consummated within 225 days of the Original Senior Discount Notes Offering, (iii) any holder of Private Exchange Securities (as defined) requests within 60 days after the Senior Discount Notes Exchange Offer, (iv) any applicable law or interpretations do not permit any holder of Old Senior Discount Notes to participate in the Senior Discount Notes Exchange Offer, (v) any holder of Old Senior Discount Notes participates in the Senior Discount Notes Exchange Offer and does not receive freely transferrable New Senior Discount Notes in exchange for Old Senior Discount Notes or (vi) Holdings so elects. Acceptance of Old Senior Discount Notes and Delivery of New Senior Discount Notes.................... Holdings will accept for exchange any and all Old Senior Discount Notes which are properly tendered (and not withdrawn) in the Senior Discount Notes Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Senior Discount Notes issued pursuant to the Senior Discount Notes Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offers -- Terms of the Exchange Offer." Senior Discount Notes Exchange Agent........... United States Trust Company of New York is serving as Exchange Agent (the "Senior Discount Notes Exchange Agent"; the Senior Subordinated Notes Exchange Agent and the Senior Discount Notes Exchange Agent are sometimes referred to herein individually as an "Exchange Agent" and collectively as the "Exchange Agents") in connection with the Senior Discount Notes Exchange Offer. Federal Income Tax Considerations........... The exchange pursuant to the Senior Discount Notes Exchange Offer should not be a taxable event for federal income tax purposes. See "Certain United States Federal Income Tax Considerations." Effect of Not Tendering.... Old Senior Discount Notes that are not tendered or that are tendered but not accepted will, following the completion of the Senior Discount Notes Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. TERMS OF THE NEW NOTES NEW SENIOR SUBORDINATED NOTES Issuer..................... LIN Television Corporation (as successor-in-interest to LIN Acquisition Company). Securities Offered......... $300,000,000 aggregate principal amount of 8 3/8% Senior Subordinated Notes due 2008. Maturity................... March 1, 2008. Interest Payment Dates..... March 1 and September 1 of each year, commencing September 1, 1998. Sinking Fund............... None. Optional Redemption........ Except as described below, the Company may not redeem the New Senior Subordinated Notes prior to March 1, 2003. On or after such date, the Company may redeem the Senior Subordinated Notes, in whole or in part, at the redemption prices set forth herein, together with accrued and unpaid interest, if any, to the date of redemption. In addition, at any time and from time to time on or prior to March 1, 2001, the Company may redeem up to 35% of the aggregate principal amount of the Senior Subordinated Notes with the net cash proceeds of one or more private or public offerings by the Company, at a redemption price equal to 108.375% of the principal amount to be redeemed, together with accrued and unpaid interest, if any, to the date of redemption, provided that at least 65% of the originally issued aggregate principal amount of the Senior Subordinated Notes remains outstanding after each such redemption. See "Description of the New Senior Subordinated Notes -- Optional Redemption." Change of Control.......... Upon the occurrence of a Change of Control, (i) the Company will have the option, at any time on or prior to March 1, 2003, to redeem the New Senior Subordinated Notes, in whole but not in part, at a redemption price equal to 100% of the principal amount thereof, plus accrued and unpaid interest plus the Applicable Premium (as defined) and (ii) if the New Senior Subordinated Notes are not redeemed or if such Change of Control occurs after March 1, 2003, the Company will be required to make an offer to repurchase the New Senior Subordinated Notes at a price equal to 101% of the principal amount thereof, together with accrued and unpaid interest, if any, to the date of purchase. See "Description of the New Senior Subordinated Notes -- Change of Control" and "-- Amendment." Guarantees................. The New Senior Subordinated Notes will be guaranteed (the "Subsidiary Guarantees"), jointly and severally on an unsecured senior subordinated basis, by the Company's direct and indirect, existing and future, Restricted Subsidiaries (the "Guarantors"). The Guarantors also will guarantee all obligations of the Company under the Senior Credit Facilities (as defined). The Company's obligations under the Senior Credit Facilities also will be secured by substantially all of the assets of the Company and the Guarantors. The obligations of each Guarantor under its Subsidiary Guarantee will be subordinated in right of payment to the prior payment in full of all Guarantor Senior Indebtedness (as defined) of such Guarantor to substantially the same extent as the Senior Subordinated Notes are subordinated to all existing and future Senior Indebtedness of the Company. See "Description of the New Senior Subordinated Notes -- Subsidiary Guarantees of the New Senior Subordinated Notes." Ranking.................... The New Senior Subordinated Notes will be unsecured and will be subordinated in right of payment to all existing and future Senior Indebtedness (as defined) of the Company and will rank pari passu in right of payment with all Senior Subordinated Indebtedness (as defined) of the Company. As of March 31, 1998, the aggregate principal amount of the Company's outstanding Senior Indebtedness was $170.0 million (consisting of outstanding Term Loans) and the Company had no Senior Subordinated Indebtedness outstanding other than the Senior Subordinated Notes and had no Subsidiary Indebtedness outstanding. As of such date, liabilities of the Company's Subsidiaries reflected on its consolidated balance sheet, including indebtedness and other liabilities such as trade payables and accrued expenses, aggregated $17.8 million. See "Description of the New Senior Subordinated Notes -- Ranking and Subordination." Restrictive Covenants...... The Senior Subordinated Notes Indenture limits, among other things, (i) the incurrence of additional indebtedness and issuance of capital stock, (ii) layering of indebtedness, (iii) the payment of dividends on, and redemption of, capital stock of the Company, (iv) liens, (v) mergers, consolidations, and sales of all or substantially all of the Company's assets, (vi) asset sales, (vii) asset swaps, (viii) dividend and other payment restrictions affecting Restricted Subsidiaries and (ix) transactions with affiliates of the Company. However, all of these limitations and prohibitions are subject to a number of important qualifications and exceptions. See "Description of the New Senior Subordinated Notes -- Certain Covenants." Use of Proceeds............ There will be no cash proceeds to the Company from the exchange of New Senior Subordinated Notes for Old Senior Subordinated Notes pursuant to the Senior Subordinated Notes Exchange Offer. The net proceeds from the Original Senior Subordinated Notes Offering were used, together with the proceeds of the other Financings, to consummate the Acquisition. NEW SENIOR DISCOUNT NOTES Issuer..................... LIN Holdings Corp. Securities Offered......... $325,000,000 aggregate principal amount at maturity of 10% Senior Discount Notes due 2008. The Senior Discount Notes will be issued at a discount to their aggregate principal amount at maturity. Maturity................... March 1, 2008. Interest Payment Dates..... Cash interest will not accrue or be payable on the New Senior Discount Notes prior to March 1, 2003. Thereafter, cash interest on the New Senior Discount Notes will accrue at a rate of 10% per annum and will be payable semi-annually in arrears on March 1 and September 1 of each year, commencing on September 1, 2003. Original Issue Discount.... For federal income tax purposes, the New Senior Discount Notes will be treated as having been issued with "original issue discount" equal to the difference between the issue price of the Old Senior Discount Notes and the sum of all cash payments (whether denominated as principal or interest) to be made thereon. Each holder of a New Senior Discount Note must include as gross income for federal income tax purposes a portion of such original issue discount for each day during each taxable year in which a New Senior Discount Note is held even though no cash interest payments will be received prior to March 1, 2003. See "Certain United States Federal Income Tax Considerations -- Taxation of Original Issue Discount." Sinking Fund............... None. Mandatory Principal Redemption............... Except as described below, Holdings may not redeem the New Senior Discount Notes prior to March 1, 2003. On March 1, 2003, Holdings will be required to redeem Senior Discount Notes with an aggregate principal amount at maturity equal to (i) $125.0 million multiplied by (ii) the quotient obtained by dividing (x) the aggregate principal amount at maturity of Senior Discount Notes then outstanding (other than Senior Discount Notes then held by Holdings or its Subsidiaries or the entities with respect to which Holdings is a direct or indirect Subsidiary) by (y) $325.0 million, (the "Mandatory Principal Redemption Amount") at a redemption price equal to 100% of the principal amount at maturity of the Senior Discount Notes so redeemed. See "Description of the New Senior Discount Notes -- Mandatory Principal Redemption." Optional Redemption........ The New Senior Discount Notes will be redeemable at the option of Holdings, in whole or in part, at any time on or after March 1, 2003. On or after such date, Holdings may redeem the New Senior Discount Notes, in whole or in part, at the redemption prices set forth herein, together with accrued and unpaid interest, if any, to the date of redemption. In addition, at any time and from time to time on or prior to March 1, 2001, Holdings may, subject to certain requirements, redeem up to 35% of the aggregate principal amount at maturity of the Senior Discount Notes with the net cash proceeds from one or more private or public equity offerings at a price equal to 110% of the Accreted Value (as defined) at the date of redemption, provided that at least 65% of the originally issued aggregate principal amount at maturity of the Senior Discount Notes remains outstanding after each such redemption. See "Description of the New Senior Discount Notes -- Optional Redemption." Change of Control.......... Upon a Change of Control, (i) Holdings will have the option, at any time on or prior to March 1, 2003, to redeem the New Senior Discount Notes, in whole but not in part, at a redemption price equal to 100% of the Accreted Value thereof plus the Applicable Premium and (ii) if the New Senior Discount Notes are not so redeemed or if such Change of Control occurs after March 1, 2003, Holdings will be required to make an offer to repurchase the New Senior Discount Notes at a price equal to (a) 101% of the Accreted Value thereof if redeemed on or before March 1, 2003, and (b) 101% of the principal amount at maturity, plus accrued and unpaid interest, if any, thereon, if redeemed after March 1, 2003. See "Description of the New Senior Discount Notes -- Change of Control." Guarantees................. None. Ranking.................... The New Senior Discount Notes will be senior unsecured obligations of Holdings and will rank pari passu in right of payment with all Senior Indebtedness of Holdings, including Holdings' guarantee of the Senior Credit Facilities. Holdings is a holding company with no operations of its own and whose primary asset is the capital stock of the Company (all of which will be pledged to secure the Senior Credit Facilities). As a result of the holding company structure, the New Senior Discount Notes will effectively rank junior in right of payment to all creditors of the Company and its subsidiaries, including the lenders under the Senior Credit Facilities, holders of the Senior Subordinated Notes and trade creditors. As of March 31, 1998, the New Senior Discount Notes were effectively subordinated to $523.8 of aggregate liabilities (including indebtedness and other liabilities such as trade payables and accrued expenses that would have been reflected on the consolidated balance sheet) of the Company and its subsidiaries. See "Description of the New Senior Discount Notes." Restrictive Covenants...... The Senior Discount Notes Indenture limits, among other things, (i) the incurrence of additional indebtedness and issuance of capital stock, (ii) the payment of dividends on, and redemption of, capital stock of Holdings, (iii) mergers, consolidations and sales of all or substantially all of Holdings' assets, (iv) asset sales, (v) asset swaps, (vi) dividend and other payment restrictions affecting Restricted Subsidiaries and (vii) transactions with affiliates. However, all of these limitations and prohibitions are subject to a number of important qualifications and exceptions. See "Description of the New Senior Discount Notes -- Certain Covenants."
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+SUMMARY The following summary should be read in conjunction with the more detailed information, financial statements and notes thereto appearing elsewhere in this Prospectus. For additional information relating to certain defined terms used herein, as well as the sources for the market and other industry data contained herein, see "Certain Definitions and Market and Industry Data." THE COMPANY The Company is a leading television station group operator in the United States that operates eleven television stations and provides consulting services to two additional television stations. Twelve of these stations are network affiliates and nine are in top forty DMAs, including: Indianapolis, Indiana; New Haven-Hartford, Connecticut; Buffalo, New York; Norfolk-Portsmouth, Virginia; Grand Rapids-Kalamazoo-Battle Creek, Michigan and Dallas-Fort Worth, Texas. These stations have an aggregate United States household reach of approximately 6.9%, ranking the Company among the top independent, "pure-play" television station group operators in the United States. The Company's Core Stations generated an aggregate pro forma BCF margin of approximately 46% for the fiscal year ended December 31, 1997, principally as a result of their strong network affiliations, leading local news programming and tight cost controls. In addition, the Company's management pioneered the "multi-channel strategy," which involves the combination of an owned and operated television station with an LMA station and/or a 24-hour cable weather channel (a "Local Weather Station") in the same market. The multi-channel strategy has enhanced the Company's revenue market shares and increased its BCF by leveraging its fixed costs over a larger revenue base. The Company's station portfolio is well diversified in terms of its network affiliations, geographic coverage, net revenues and cash flow. The Company owns and operates three CBS affiliates, two NBC affiliates and two ABC affiliates which accounted for 35%, 28% and 28%, respectively, of the Company's pro forma BCF for the fiscal year ended December 31, 1997. The Company's LMA stations and Local Weather Stations accounted for substantially all of the remaining 9% of its BCF on the same basis. The Company's Core Stations broadcast in seven different markets, with no market representing more than 25% of the Company's pro forma net revenues or BCF for the fiscal year ended December 31, 1997. The Company's pro forma net revenues, BCF and EBITDA were $196.1 million, $79.5 million and $72.7 million, respectively, for the fiscal year ended December 31, 1997. Hicks, Muse, Tate & Furst Incorporated ("Hicks Muse"), a leading private equity firm with significant investments and experience in the media and communications industry, has acquired LIN Television to serve as a platform for acquiring and operating additional television stations that can benefit from management's ability to improve operating performance and increase BCF margins at acquired stations. In connection with the Acquisition, Hicks Muse and NBC formed a television station joint venture (the "Joint Venture"). The Joint Venture consists of KXAS-TV, LIN Television's Dallas-Fort Worth NBC affiliate, and KNSD-TV, NBC's San Diego station. A wholly owned subsidiary of NBC is the general partner of the Joint Venture (the "NBC General Partner") and NBC operates the stations owned by the Joint Venture pursuant to a management agreement. The NBC General Partner holds an approximate 80% equity interest and the Company holds an approximate 20% equity interest in the Joint Venture. General Electric Capital Corporation ("GECC") provided debt financing to the Joint Venture in the form of the GECC Note (as defined), the proceeds of which were distributed to the Company to finance a portion of the cost of the Acquisition. The GECC Note is not an obligation of Holdings, the Company or any of their respective subsidiaries and is recourse only to the Joint Venture, the Company's equity interest therein and to one of Holding's two corporate parents (the "GECC Note Guarantor") pursuant to a guarantee. The Company expects that the interest payments on the GECC Note will be serviced solely by the cash flow of the Joint Venture. See "The Transactions and Other Matters -- The Joint Venture." Later this year, the Company expects to acquire (the "Grand Rapids Acquisition") from AT&T Corporation ("AT&T") the assets of WOOD-TV and the LMA rights related to WOTV-TV (collectively, LIN TELEVISION CORPORATION LIN HOLDINGS CORP. CROSS REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING THE LOCATION IN THE PROSPECTUS OF THE INFORMATION REQUIRED BY PART I OF FORM S-1 <TABLE> <CAPTION> FORM S-1 ITEM NUMBER AND HEADING LOCATION IN PROSPECTUS -------------------------------- ---------------------- <S> <C> <C> 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus... Cover Page of Registration Statement; Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus............................ Inside Front and Outside Back Cover Pages of Prospectus 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges............. Certain Definitions and Market and Industry Data; Summary; Risk Factors; Selected Consolidated Financial and Operating Data; Unaudited Pro Forma Financial Information; Business 4. Use of Proceeds............................ Use of Proceeds 5. Determination of Offering Price............ Not Applicable 6. Dilution................................... Not Applicable 7. Selling Security Holders................... Not Applicable 8. Plan of Distribution....................... Front Cover Page of Prospectus; The Exchange Offers; Plan of Distribution 9. Description of Securities to be Registered............................... Description of New Senior Subordinated Notes; Description of New Senior Discount Notes 10. Interests of Named Experts and Counsel..... Not Applicable 11. Information with Respect to the Registrant............................... Cover Page of Registration Statement; Certain Definitions and Market and Industry Data; Summary; Risk Factors; The Transactions and Other Matters; Selected Consolidated Financial and Operating Data; Unaudited Pro Forma Consolidated Financial Information; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Securities Ownership of Certain Beneficial Owners; Certain Other Transactions; Description of the Senior Credit Facilities; Legal Matters 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities.............................. Not Applicable </TABLE> AVAILABLE INFORMATION The Issuers and the Guarantors have filed with the Securities and Exchange Commission (the "Commission") a Registration Statement (which term shall encompass any amendments thereto) on Form S-1 under the Securities Act with respect to the securities offered hereby. This Prospectus does not contain all information set forth in the Registration Statement and the exhibits thereto, to which reference is hereby made. Although the Issuers and the Guarantors believe that statements made in this Prospectus as to the contents of any contract, agreement, or other document describe all material elements of such documents, such statements are not necessarily complete. With respect to each such contract, agreement, or other document filed as an exhibit to the Registration Statement, reference is hereby made to such exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. As a result of the filing of the Registration Statement with the Commission, the Issuers and the Guarantors each will become subject to the informational reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In accordance therewith, the Company and Holdings will be required to file reports and other information with the Commission. Such reports and other information can be inspected and copied at the principal office of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and the following Regional Offices of the Commission: Chicago Regional Office, Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60611 and New York Regional office, 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of such material may also be obtained at prescribed rates from the Public Reference Section of the Commission at its principal office at Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549. The Commission also maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission at http://www.sec.gov. In reliance upon certain Staff Accounting Bulletins of the Commission, interpretations of the staff of the Commission and no-action relief granted by the Staff of the Commission to unrelated third parties, the Subsidiary Guarantors do not intend to file periodic reports with the Commission under the Exchange Act separately from the Issuers. The Issuers will furnish holders of the securities offered hereby with annual reports containing, among other information, audited financial statements certified by an independent public accounting firm and quarterly reports containing unaudited financial information for the first three quarters of each fiscal year. The Issuers will also furnish such other reports as it may determine or as may be required by law or by the indentures governing the New Notes. FORWARD LOOKING STATEMENTS THIS PROSPECTUS CONTAINS CERTAIN FORWARD LOOKING STATEMENTS WITH RESPECT TO THE FINANCIAL CONDITIONS, RESULTS OF OPERATIONS AND BUSINESSES OF THE ISSUERS, INCLUDING STATEMENTS UNDER THE CAPTIONS "SUMMARY," "UNAUDITED PRO FORMA FINANCIAL INFORMATION," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS." ALL OF THESE FORWARD LOOKING STATEMENTS ARE BASED ON ESTIMATES AND ASSUMPTIONS MADE BY MANAGEMENT OF THE ISSUERS WHICH, ALTHOUGH BELIEVED TO BE REASONABLE, ARE INHERENTLY UNCERTAIN. THEREFORE, UNDUE RELIANCE SHOULD NOT BE PLACED UPON SUCH ESTIMATES AND STATEMENTS. NO ASSURANCE CAN BE GIVEN THAT ANY OF SUCH ESTIMATES OR STATEMENTS WILL BE REALIZED AND IT IS LIKELY THAT ACTUAL RESULTS WILL DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE: (1) INCREASED COMPETITION, INCLUDING FROM NEWER FORMS OF ENTERTAINMENT AND ENTERTAINMENT MEDIA OR CHANGES IN THE POPULARITY OR AVAILABILITY OF PROGRAMMING; (2) INCREASED COSTS, INCLUDING INCREASED CAPITAL EXPENDITURES AS A RESULT OF NECESSARY TECHNOLOGICAL ENHANCEMENTS (E.G., EXPENDITURES RELATED TO THE TRANSITION TO DIGITAL the "Grand Rapids Stations"), both of which stations are located in the Grand Rapids-Kalamazoo-Battle Creek market. The Company currently provides services to the Grand Rapids Stations pursuant to a consulting agreement with AT&T. See "The Transactions and Other Matters -- The Grand Rapids Acquisition" and "Business -- The Company -- History." The following table provides information regarding the stations and other programming outlets operated by the Company and the stations owned by the Joint Venture: <TABLE> <CAPTION> COMMERCIAL STATION STATION DMAS, STATIONS AND OTHER DMA STATIONS IN RANK IN AUDIENCE PROGRAMMING OUTLETS STATUS(A) AFFILIATION(B) RANK(C) DMA(D) DMA(E) Share(e) ------------------------ --------- -------------- ------- ----------- ------- -------- <S> <C> <C> <C> <C> <C> <C> COMPANY STATIONS AND OTHER PROGRAMMING OUTLETS: INDIANAPOLIS, IN WISH-TV.......................................... O&O CBS 25 8 1 18% WIIH-LP (Satellite)(f)........................... O&O CBS Local Weather Station............................ O&O Cable NEW HAVEN-HARTFORD, CT WTNH-TV.......................................... O&O ABC 27 8 2 14% WBNE-TV.......................................... LMA WB 5(tie) 2% GRAND RAPIDS-KALAMAZOO-BATTLE CREEK, MI(g) WOOD-TV.......................................... CS NBC 37 8 1(tie) 18% WOTV-TV.......................................... CS ABC 4 5% NORFOLK-PORTSMOUTH, VA WAVY-TV.......................................... O&O NBC 39 7 1(tie) 16% WVBT-TV.......................................... LMA WB/Fox(h) 5 2% Local Weather Station............................ O&O Cable BUFFALO, NY WIVB-TV.......................................... O&O CBS 40 7 2 17% AUSTIN, TX KXAN-TV.......................................... O&O NBC 60 7 3 14% KNVA-TV.......................................... LMA WB 6 3% KXAM-TV (Satellite)(i)........................... O&O NBC Low Power Network................................ O&O UPN DECATUR-CHAMPAIGN, IL WAND-TV.......................................... O&O ABC 81 8 3 14% Local Weather Station............................ O&O Cable FORT WAYNE, IN WANE-TV.......................................... O&O CBS 102 6 2 19% Local Weather Station............................ O&O Cable DALLAS-FORT WORTH, TX KXTX-TV.......................................... LMA IND 8 13 9 3% JOINT VENTURE STATIONS: DALLAS-FORT WORTH, TX KXAS-TV.......................................... JV NBC 8 13 3 12% SAN DIEGO, CA KNSD-TV.......................................... JV NBC 26 7 1 13% </TABLE> - --------------- (a) "O&O" refers to a station owned and operated by the Company. "LMA" refers to a station operated by the Company pursuant to a local marketing agreement and with respect to which the Company has a purchase option exercisable under certain circumstances. "JV" refers to a station owned by the Joint Venture and operated by NBC. "CS" refers to a station which the Company currently provides services to pursuant to a consulting agreement. The Company's Core Stations, all of which are CBS, NBC and ABC affiliates, are WISH-TV, WANE-TV, WAND-TV, WAVY-TV, KXAN-TV, WTNH-TV and WIVB-TV. (b) "IND" refers to an independent station with no network affiliation. (c) Rankings are based on the relative size of the station's "market" among the 211 generally recognized television markets in the United States. Source: Nielsen Station Index DMA Market Ratings -- November 1997, A.C. Nielsen Company. (d) The number of stations in a market excludes local weather stations, low power networks and satellite broadcasting facilities. (e) Source: Nielsen Station Index DMA Market Ratings -- November 1997, A.C. Nielsen Company, Sunday-Saturday 6:00 a.m.-2:00 a.m. (f) Station WIIH-LP, Indianapolis, Indiana, is operated as a satellite station of WISH-TV in order to increase WISH-TV's coverage. PROSPECTUS <TABLE> <S> <C> OFFER FOR ALL OUTSTANDING OFFER FOR ALL OUTSTANDING 8 3/8% SENIOR SUBORDINATED NOTES DUE 10% SENIOR DISCOUNT NOTES DUE 2008 2008 IN EXCHANGE FOR IN EXCHANGE FOR 10% SENIOR DISCOUNT NOTES DUE 2008 8 3/8% SENIOR SUBORDINATED NOTES DUE OF 2008 LIN HOLDINGS CORP. OF LIN TELEVISION CORPORATION </TABLE> Pursuant to the terms and subject to the conditions set forth in this Prospectus and the accompanying letters of transmittal, (i) LIN Television Corporation, a Delaware corporation (the "Company"), and the Guarantors (as defined) hereby offer (the "Senior Subordinated Notes Exchange Offer") to exchange $1,000 principal amount of registered 8 3/8% Senior Subordinated Notes Due 2008 (the "New Senior Subordinated Notes") issued by the Company, for each $1,000 principal amount of unregistered 8 3/8% Senior Subordinated Notes Due 2008 (the "Old Senior Subordinated Notes," and together with the New Senior Subordinated Notes, the "Senior Subordinated Notes") issued by LIN Acquisition Company, the predecessor in interest of the Company ("LIN Acquisition"), of which an aggregate principal amount of $300,000,000 is outstanding and (ii) LIN Holdings Corp., a Delaware corporation ("Holdings") hereby offers (the "Senior Discount Notes Exchange Offer," and together with the Senior Subordinated Notes Exchange Offer, the "Exchange Offers") to exchange $1,000 principal amount at maturity of registered 10% Senior Discount Notes Due 2008 (the "New Senior Discount Notes") issued by Holdings, for each $1,000 principal amount at maturity of unregistered 10% Senior Discount Notes Due 2008 (the "Old Senior Discount Notes," and together with the New Senior Discount Notes, the "Senior Discount Notes") issued by Holdings, of which an aggregate principal amount at maturity of $325,000,000 is outstanding. The Old Senior Subordinated Notes and the Old Senior Discount Notes are sometimes collectively referred to herein as the "Old Notes" and the New Senior Subordinated Notes and the New Senior Discount Notes are sometimes collectively referred to herein as the "New Notes." The Old Notes and the New Notes are sometimes collectively referred to herein as the "Notes." The Company and Holdings are sometimes collectively referred to herein as the "Issuers." The form and terms of the New Notes are identical to the form and terms of the Old Notes except that (i) interest on the New Senior Subordinated Notes shall accrue from the date of issuance of the Old Senior Subordinated Notes, (ii) the Accreted Value (as defined) of the New Senior Discount Notes will be calculated from the date of issuance of the Old Senior Discount Notes, and (iii) the New Notes are being registered under the Securities Act of 1933, as amended (the "Securities Act"), and will not bear any legends restricting their transfer. The New Senior Subordinated Notes will evidence the same debt as the Old Senior Subordinated Notes and will be issued pursuant to, and entitled to the benefits of, the indenture governing the Old Senior Subordinated Notes. The New Senior Discount Notes will evidence the same debt as the Old Senior Discount Notes and will be issued pursuant to, and entitled to the benefits of, the indenture governing the Old Senior Discount Notes. The Exchange Offers are being made in order to satisfy certain contractual obligations of the Company and Holdings. See "The Exchange Offers," "Description of the New Senior Subordinated Notes" and "Description of the New Senior Discount Notes." The net proceeds from the sale of the Old Notes were used to effect the acquisition by Holdings of the Company and its subsidiaries (the "Acquisition"). Such acquisition was effected pursuant to the merger of LIN Acquisition with and into the Company, with the Company surviving as a wholly owned subsidiary of Holdings. See "The Transactions and Other Matters." --------------------- SEE "RISK FACTORS" BEGINNING ON PAGE 22 FOR A DISCUSSION OF CERTAIN INFORMATION THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NEW NOTES. --------------------- The Company and Holdings will accept for exchange any and all Old Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on , 1998, unless extended (as so extended, the "Expiration Date"). Tenders of Old Notes may be withdrawn at any time prior to the Expiration Date. The Exchange Offers are subject to certain customary conditions. See "The Exchange Offers." In order for a holder of Old Notes to participate in an Exchange Offer, such holder must represent to the Company or Holdings, as appropriate, that, among other things, (i) the New Notes acquired pursuant to such Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Notes, whether or not such person is the holder of the Old Notes, (ii) neither the holder nor any such other person is engaging or intends to engage in a distribution of such New Notes, (iii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Notes within the meaning of the Securities Act, (iv) neither the holder nor any such other person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of the Company, Holdings or any Guarantor, and (v) if such holder or other person is a broker-dealer, that it will receive New Notes for its own account in exchange for Old Notes that were acquired as a result of marketmaking activities or other trading activities. See "The Exchange Offers--Purpose and Effect." Each broker-dealer that receives New Notes for its own account pursuant to either of the Exchange Offers must acknowledge that it will deliver a prospectus in connection with any resale of those New Notes. The letter of transmittal accompanying this Prospectus states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for Old Notes where such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company and Holdings have agreed that, for a period of 90 days after the Expiration Date, they will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." No public market has existed for the Old Notes. The Company and Holdings currently do not intend to list the New Notes on any securities exchange or to seek approval for quotation through any automated quotation system, and no active public market for the New Notes is currently anticipated. The Company and Holdings will pay all expenses incident to the Exchange Offers. The Exchange Offers are not conditioned upon any minimum principal amount of Old Senior Subordinated Notes or Old Senior Discount Notes being tendered for exchange pursuant to the Exchange Offers. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DATE OF THIS PROSPECTUS IS , 1998. BROADCASTING) OR ACQUISITIONS OR INCREASED PROGRAMMING COSTS; (3) INABILITY TO CONSUMMATE ACQUISITIONS ON ATTRACTIVE TERMS; (4) LOSS OR RETIREMENT OF KEY MEMBERS OF MANAGEMENT; (5) INCREASES IN THE ISSUERS' COST OF BORROWINGS OR INABILITY OR UNAVAILABILITY OF ADDITIONAL DEBT OR EQUITY CAPITAL; (6) ADVERSE STATE OR FEDERAL LEGISLATION OR REGULATION OR ADVERSE DETERMINATIONS BY REGULATORS; AND (7) CHANGES IN ADVERTISING TRENDS AND/OR BUDGETS AND IN GENERAL ECONOMIC CONDITIONS IN THE MARKETS IN WHICH THE ISSUERS MAY, FROM TIME TO TIME, COMPETE. MANY OF SUCH FACTORS WILL BE BEYOND THE CONTROL OF THE ISSUERS AND THEIR MANAGEMENT. FORWARD-LOOKING STATEMENTS CONTAINED HEREIN SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULT OF ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS WHICH MAY BE MADE TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. FOR FURTHER INFORMATION OR OTHER FACTORS WHICH COULD AFFECT THE FINANCIAL RESULTS OF THE ISSUERS AND SUCH FORWARD LOOKING STATEMENTS, SEE "RISK FACTORS." (g) The Company currently provides services to WOOD-TV and WOTV-TV pursuant to a consulting agreement with AT&T. The Company has agreed to acquire the assets of WOOD-TV and the LMA rights related to WOTV-TV from AT&T for a purchase price of approximately $125.5 million. The acquisition is expected to close later this year. See "The Transactions and Other Matters -- The Grand Rapids Acquisition" and "Business -- The Company -- History." (h) WVBT-TV will become a Fox affiliate on August 31, 1998. (i) Station KXAM-TV, Llano, Texas, is operated as a satellite station of KXAN-TV in order to increase KXAN-TV's coverage. BUSINESS STRATEGY The Company's business strategy is to maximize its BCF through both revenue growth and the implementation of effective cost controls. To achieve these goals, the Company seeks, among other things, to: Maximize Revenue Shares. From 1993 to 1997, the Company increased its broadcast television advertising revenue market share from 22.8% to 25.9% (assuming the acquisitions of WIVB-TV and WTNH-TV occurred on January 1, 1993) by targeting audiences with favorable demographic profiles, creating auxiliary revenue streams and cultivating strong network affiliations. On the same basis, the Company's gross advertising revenues have grown at a compound annual rate of 10.3%, whereas gross advertising revenues in the Company's markets have grown at a compound annual rate of 6.8%. The Company attempts to maximize each station's revenue share through a quarterly "entitlement review process." This process involves the benchmarking of each station's advertising revenues against an index which weights various demographic attributes according to their relative advertising revenue value. As a result of the entitlement review process, the Company's revenue shares typically outperform its audience shares. The Company's revenue shares also benefit from long term affiliations with its three core networks -- CBS, NBC and ABC -- which provide the Company's television stations affiliated with such networks with competitive programming, including coverage of political events and high profile sporting events such as the Olympic Games, Super Bowl and NCAA Men's Basketball Tournament. The Company also has stations affiliated with Fox, WB and UPN, which further enhances its ability to grow its revenue shares through access to their competitive programming. Emphasize Leading Local News. The Company's Core Stations are ranked number one or two in late news in all but the Company's smallest market. Management believes that a successful news operation is critical to the success of a television station because news audiences generally have the best demographic profiles from an advertising sales perspective. In addition, news programming: (i) enables the Company to purchase less syndicated programming and thereby maintain tight control over programming costs; (ii) serves as a strong lead-in to other programming; and (iii) fosters a high profile in the local community, which is critical to maximizing local advertising sales. The Company believes that its local news programming significantly improves its stations' BCF margins. Accordingly, the Company has increased the hours of news produced per week from 81 in 1989 to 187 in 1997 on a pro forma basis. Partly as a result of its emphasis on quality local news programming, management has increased the BCF margin at the five network-affiliated stations that it has operated throughout the period from January 1, 1991 to December 31, 1997 (WISH-TV, WANE-TV, WAND-TV, WAVY-TV and KXAN-TV) from 37% to 47%. Execute a Multi-Channel Strategy. The Company's management pioneered the "multi-channel strategy," which involves the combination of an owned and operated television station with an LMA station and/or a Local Weather Station in the same market. Management has pursued this strategy in all but one of the Company's markets. Execution of the multi-channel strategy has been a factor in the Company's ability to generate incremental cash flow. The advantages of the multi-channel strategy are: (i) the ability to capitalize on management's expertise; (ii) additional advertising inventory in each market; (iii) greater programming flexibility; (iv) enhanced ability to leverage fixed operating costs over a larger revenue base; (v) improved negotiating positions with respect to suppliers of syndicated programming, advertisers and the networks; (vi) increased share of actual viewers; (vii) the opportunity to affiliate with the emerging networks; and (viii) enhanced opportunities for cross promotion. CERTAIN DEFINITIONS AND MARKET AND INDUSTRY DATA As used in this Prospectus, unless the context otherwise requires, (i) "Holdings" refers to LIN Holdings Corp., (ii) "LIN Acquisition" refers to LIN Acquisition Company, (iii) "LIN Television" or the "Predecessor" refers to LIN Television Corporation and its subsidiaries prior to the Acquisition, (iv) the "Company" refers to LIN Television after giving effect to the Acquisition (as defined), the Financings (as defined) and the Joint Venture (as defined) (collectively, the "Transactions"), except where the context requires otherwise, (v) "on a pro forma basis" or "pro forma" means after giving effect to the Transactions, except as indicated otherwise and (vi) "Core Stations" refers to the CBS, NBC and ABC-affiliated stations owned and operated by the Company (WISH-TV, WANE-TV, WAND-TV, WAVY-TV, KXAN-TV, WTNH-TV and WIVB-TV). See "The Transactions and Other Matters." The terms "broadcast cash flow" ("BCF") and "EBITDA" are referred to in various places in this Prospectus. BCF is defined as operating income (loss) plus corporate expenses plus depreciation and amortization of intangible assets and amortization of program rights plus other non-cash expenses (consisting of tower write-offs and non-cash pension expenses), minus cash program payments. EBITDA is defined as BCF minus corporate expenses. BCF and EBITDA are not measures of performance calculated in accordance with generally accepted accounting principles ("GAAP"). However, management believes that BCF is useful to a prospective investor because it is a measure widely used in the broadcast industry to evaluate a television broadcast company's operating performance and that EBITDA is useful to a prospective investor because it is widely used in the broadcast industry to evaluate a television broadcast company's ability to service debt. BCF and EBITDA should not be considered in isolation of or as a substitute for net income (loss), cash flows from operating activities and other income and cash flow statement data prepared in accordance with GAAP or as a measure of liquidity or profitability. BCF and EBITDA as determined above may not be comparable to the BCF and EBITDA measures reported by other companies. In addition, these measures do not represent funds available for discretionary use. Designated market area ("DMA") rankings are from the Nielsen Station Index dated November 1997 as estimated by the A.C. Nielsen Company ("Nielsen"). There are 211 generally-recognized television "markets" or DMAs in the United States, which are ranked in size according to various factors based upon actual or potential audience. Unless otherwise indicated herein, (i) market revenue, market revenue share, projected advertising revenue growth and station revenue share data have been obtained from Investing in Television 1994, 1995, 1996 and 1997, BIA Publications, Inc. ("BIA"); (ii) television household data has been obtained from the Nielsen Station Index for November of the appropriate year; (iii) audience share and audience rankings, except where specifically stated to the contrary, have been derived from Nielsen estimates (for May and November of the appropriate year) of the percentage of persons in the DMA tuned into the relevant station from sign-on to sign-off (Sunday to Saturday, 6:00 a.m. to 2:00 a.m.); (iv) general market economic data has been obtained from BIA and the chambers of commerce in each station's market; (v) the term "station" or "commercial station" means a television broadcast station and does not include public television stations, cable stations or networks (e.g., CNN, TBS or ESPN), or stations that do not meet the minimum Nielsen reporting standards (i.e., weekly cumulative audience share of at least 2.5% for Sunday to Saturday, 7:00 a.m. to 1:00 a.m.); and (vi) the term "independent" describes a commercial television station that is not affiliated with the ABC, CBS, NBC, Fox, WB or UPN television networks. Control Costs. In addition to concentrating on maximizing advertising revenues in its local markets, management focuses on controlling costs to maximize BCF. In many markets, the Company operates with fewer personnel than its competitors. In addition, management typically buys syndicated programming on a Company-wide basis and performs detailed profitability analyses for all programming purchases. As a result, management believes that the Company's margins are among the highest in the industry for stations in markets of comparable size. Pursue Selective Acquisitions. The Company intends to pursue selective acquisitions of television stations with the goal of improving their operating performance by applying management's business strategy. Targeted stations generally will share many of the following characteristics: (i) attractive acquisition terms; (ii) opportunities for increased advertising revenue; (iii) opportunities to implement effective cost controls; (iv) opportunities for increased audience share through improved newscasts and programming; and (v) market locations that are projected to have attractive growth in advertising revenues. The Company intends to primarily target network-affiliated stations located in the fifty largest DMAs, which stations typically have established audiences for their news, sports and entertainment programming. Invest in Digital Technology. Management believes that the Company is well positioned for the transition to digital broadcasting and anticipates that the Company will be one of the first television broadcasters in the United States to transmit a digital signal. The Company has already invested $13 million to fully prepare its towers and transmitter buildings for the transition, and estimates that an additional $40 million will be required over the next five to seven years for other necessary capital expenditures such as the purchase of antennae, transmitters, studio equipment and news gathering equipment. In accordance with FCC regulations, all station affiliates of ABC, CBS, NBC and Fox in the top ten DMAs will be required to transmit a digital signal by May 1, 1999. Affiliates of those networks in DMAs ranked eleven through thirty will be required to transmit a digital signal by November 1, 1999. All remaining commercial broadcasters will be required to transmit a digital signal by May 1, 2002. MANAGEMENT AND OWNERSHIP The Company's management team, led by Gary Chapman, the Company's President and Chief Executive Officer, is recognized as an industry leader. As an indication of management's expertise and ability, the five network-affiliated stations operated by management throughout the period from January 1, 1991 to December 31, 1997 (WISH-TV, WANE-TV, WAND-TV, WAVY-TV and KXAN-TV) achieved an aggregate annual compound growth rate in net revenues and BCF of 8.9% (from $57.8 million to $96.2 million) and 13.3% (from $21.4 million to $45.2 million), respectively. Management also increased the Company's BCF margin at these stations from 37% to 47% during such period. In connection with the Acquisition, management and key employees reinvested a portion of their equity interest in LIN Television in the indirect parent corporation of Holdings. In addition, management and key employees will be granted options to acquire additional shares representing an approximate 5% equity interest in such parent corporation. Hicks Muse is a leading private investment firm with offices in Dallas, New York, St. Louis and Mexico City that specializes in leveraged acquisitions, recapitalizations and other principal investing activities. Hicks Muse and its predecessor firm have completed or have pending over 100 transactions having a combined transaction value of more than $24 billion. Although Hicks Muse invests in a wide variety of industries, it has significant investments and experience in the media and communications industry, including interests in Chancellor Media, Capstar Broadcasting, STC Broadcasting, Katz Media, OmniAmerica Tower and Grupo MVS. Hicks Muse plans to utilize an investment model for the Company similar to that used for Chancellor Media and Capstar Broadcasting. Chancellor Media was formed in 1993 with the purchase of two radio stations. Today, Chancellor Media is the second largest radio operator in the United States in terms of revenue (behind only CBS). Similarly, Capstar Broadcasting was formed in 1996 for the purpose of acquiring radio stations in small to medium size markets. Capstar Broadcasting is now the largest radio operator in the United States in terms of number of stations. See "Risk Factors -- Potential Conflicts of Interest" and "Certain Other Transactions." THE TRANSACTIONS AND OTHER MATTERS THE TRANSACTIONS The Acquisition. Holdings, LIN Acquisition and LIN Television entered into an Agreement and Plan of Merger on August 12, 1997 (as amended, the "Merger Agreement"). Pursuant to, and upon the terms and conditions of, the Merger Agreement, Holdings acquired LIN Television (the "Acquisition") on March 3, 1998 by merging LIN Acquisition, its wholly-owned subsidiary, with and into LIN Television (the "Merger"), with LIN Television surviving the Merger and becoming a direct, wholly owned subsidiary of Holdings. The total purchase price for the common equity of LIN Television was approximately $1.7 billion. In addition, the Company refinanced $260.2 million of LIN Television indebtedness and incurred acquisition costs of approximately $32.2 million. The Financings. The Acquisition was funded by (i) $6.9 million of excess cash on the Company's balance sheet; (ii) $50.0 million aggregate principal amount of senior secured Tranche A term loans ("Tranche A Term Loans"); (iii) $120.0 million aggregate principal amount of senior secured Tranche B term loans ("Tranche B Term Loans"); (iv) $299.3 million gross proceeds from the issuance by LIN Television of $300.0 million aggregate principal amount of Old Senior Subordinated Notes; (v) $199.6 million gross proceeds from the issuance by Holdings of $325.0 million aggregate principal amount at maturity of Old Senior Discount Notes, which proceeds were contributed by Holdings to the common equity of the Company; (vi) $558.1 million of common equity provided by affiliates of Hicks Muse, management and other co-investors to the equity of the corporate parents of Holdings, which in turn, through Holdings, contributed such amount to the common equity of the Company; and (vii) $815.5 million of proceeds of the GECC Note (collectively, the "Financings"). The Joint Venture. In connection with the Acquisition, Hicks Muse and NBC formed the Joint Venture. The Joint Venture consists of KXAS-TV, formerly LIN Television's Dallas-Fort Worth NBC affiliate, and KNSD-TV, formerly NBC's San Diego station. A wholly owned subsidiary of NBC is the general partner of the Joint Venture and NBC operates the stations owned by the Joint Venture. The NBC General Partner holds an approximate 80% equity interest and the Company holds an approximate 20% equity interest in the Joint Venture. GECC provided debt financing for the Joint Venture in the form of an $815.5 million 25-year non-amortizing senior secured note bearing an initial interest rate of 8.0% per annum (the "GECC Note"). The Company expects that the interest payments on the GECC Note will be serviced solely by the cash flow of the Joint Venture. All Distributable Cash (as defined) of the Joint Venture will be distributed to the Company and the NBC General Partner based on their respective equity interests in the Joint Venture. On a pro forma basis for the fiscal year ended December 31, 1997, the Company's portion of the Joint Venture's Distributable Cash would have been $2.2 million (without giving effect to a reserve of $15.0 million which must be established, subject to waiver by the Company, prior to any distribution of Distributable Cash). See "Risk Factors -- Control of Holdings and the Company." The GECC Note was issued by LIN Television of Texas, L.P., the Company's indirect wholly owned partnership ("LIN Texas"), which distributed the proceeds to the Company to finance a portion of the cost of the Acquisition. The obligations to GECC under the GECC Note were assumed by the Joint Venture and LIN Texas was simultaneously released from all obligations under the GECC Note. The GECC Note is not an obligation of Holdings, the Company or any of their respective subsidiaries and is recourse only to the Joint Venture, the Company's equity interest therein and to the GECC Note Guarantor. See "Risk Factors -- Defaults under the GECC Note" and "The Transactions and Other Matters -- The Joint Venture." In connection with the formation of the Joint Venture, the Company received an extension of its NBC network affiliation agreements to 2010 and the option (exercisable through December 31, 1999) to purchase WVTM-TV, the NBC affiliate in Birmingham, Alabama. Sources and Uses. The following table sets forth the sources and uses of funds in connection with the Acquisition (dollars in millions): <TABLE> <S> <C> SOURCES Excess cash........................ $ 6.9 Term Loans(a)...................... 170.0 Old Senior Subordinated Notes(b)... 299.3 Holdings contributions(c).......... 757.7 GECC Note(d)....................... 815.5 -------- Total Sources................. $2,049.4 ======== USES Purchase of LIN Television equity(e)........................ $1,706.4 Refinance LIN Television debt...... 260.2 Transaction fees and expenses(f)... 82.8 -------- Total Uses.................... $2,049.4 ======== </TABLE> - --------------- (a) The Term Loans funded in connection with the Acquisition consisted of $50.0 million aggregate principal amount of Tranche A Term Loans and $120.0 million aggregate principal amount of Tranche B Term Loans. As of December 31, 1997, the interest rates payable on outstanding Tranche A Term Loans and Tranche B Term Loans would have been approximately 7.50% and 8.00%, respectively. See "Description of the Senior Credit Facilities." (b) Represents gross proceeds to the Company from the issuance of $300.0 million aggregate principal amount of Old Senior Subordinated Notes. (c) Affiliates of Hicks Muse, management and other co-investors contributed $558.1 million to the equity of the corporate parents of Holdings, which in turn, through Holdings, contributed such amount to the common equity of the Company. In addition, Holdings issued $325.0 million aggregate principal amount at maturity of Old Senior Discount Notes and contributed the $199.6 million gross proceeds thereof to the common equity of the Company. (d) LIN Texas distributed the proceeds from the issuance of the GECC Note to the Company, which used such proceeds to finance a portion of the cost of the Acquisition. The GECC Note is not an obligation of Holdings, the Company or any of their respective subsidiaries and is recourse only to the Joint Venture, the Company's equity interest therein and to the GECC Note Guarantor. The Company expects that the interest payments on the GECC Note will be serviced solely by the cash flow of the Joint Venture. See "Risk Factors -- Control of Holdings and the Company" and "-- Defaults under the GECC Note" and "The Transactions and Other Matters -- The Joint Venture.". (e) The purchase price reflects the total price to acquire the equity of LIN Television (including KXAS-TV, which was contributed to the Joint Venture). (f) Includes discounts and commissions on the Old Notes in connection with the Offerings. Organizational Structure The following chart depicts (i) the summary organizational chart of Holdings and the Company and (ii) the sources of financing for the Transactions: LIN GRAPH THE GRAND RAPIDS ACQUISITION The Company expects to consummate the Grand Rapids Acquisition later this year. The Company currently provides services to the Grand Rapids Stations pursuant to a consulting agreement with AT&T. The total purchase price for the Grand Rapids Acquisition will be approximately $125.5 million (plus accretion thereon of 8% from March 1, 1998), which is expected to be funded by $125.0 million of additional Tranche A Term Loans. For the fiscal year ended December 31, 1997, the Grand Rapids Stations generated net revenues and BCF of $28.4 million and $11.3 million, respectively. The historical and pro forma financial information contained herein does not give effect to the Grand Rapids Acquisition. See "The Transactions and Other Matters -- The Grand Rapids Acquisition" and "Business -- The Company -- History." RECENT DEVELOPMENTS Chancellor Media Corporation, a Delaware corporation ("Chancellor") and Ranger Equity Holdings Corporation, a Delaware corporation ("Ranger"), the indirect parent company of Holdings and the Company, entered into an Agreement and Plan of Merger, dated July 7, 1998 (the "Chancellor Merger Agreement"). Pursuant to, and subject to the prior satisfaction or waiver of certain customary conditions (including, without limitation, the approval of Chancellor's and the Company's respective shareholders, the receipt of necessary FCC approvals, and the termination or expiration of the applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended) set forth in, the Chancellor Merger Agreement, Ranger will be merged with and into Chancellor (the "Chancellor Merger"), with Chancellor continuing as the surviving corporation following the Chancellor Merger. As a result of the Chancellor Merger, (i) each share of common stock, $0.01 par value ("Ranger Common Stock"), of Ranger will be converted into the right to receive 0.0300 of a share of common stock, $0.01 par value ("Chancellor Common Stock"), of Chancellor, other than shares of Ranger Common Stock for which appraisal rights have been exercised pursuant to Section 262 of the General Corporation Law of the State of Delaware. In addition, Chancellor, as the surviving corporation, will assume certain outstanding options to purchase shares of Ranger Common Stock held by certain directors, officers, employees and consultants of Ranger and its subsidiaries. Following the Chancellor Merger, Holdings and the Company will become indirect, wholly owned subsidiaries of Chancellor. A Chancellor shareholder has filed a shareholders derivative lawsuit in a chancery court in the State of Delaware, purportedly on behalf of Chancellor, naming Chancellor, Chancellor's directors and the Company as defendants. The lawsuit seeks, among other things, money damages and an injunction prohibiting the consummation of the Chancellor Merger. The Company believes that the lawsuit is without substantial merit and intends to vigorously defend the action. THE EXCHANGE OFFERS THE SENIOR SUBORDINATED NOTES EXCHANGE OFFER: The Senior Subordinated Notes Exchange Offer applies to $300,000,000 aggregate principal amount of the Old Senior Subordinated Notes. The form and terms of the New Senior Subordinated Notes will be the same as the form and terms of the Old Senior Subordinated Notes except that (i) interest on the New Senior Subordinated Notes will accrue from the date of issuance of the Old Senior Subordinated Notes, and (ii) the New Senior Subordinated Notes are being registered under the Securities Act and, therefore, will not bear legends restricting their transfer. The New Senior Subordinated Notes will evidence the same debt as the Old Senior Subordinated Notes and will be entitled to the benefits of the Senior Subordinated Notes Indenture (as defined) pursuant to which the Old Senior Subordinated Notes were issued. The Old Senior Subordinated Notes and the New Senior Subordinated Notes are sometimes referred to collectively herein as the "Senior Subordinated Notes." See "Description of the New Senior Subordinated Notes." The Senior Subordinated Notes Exchange Offer....... $1,000 principal amount of New Senior Subordinated Notes in exchange for each $1,000 principal amount of Old Senior Subordinated Notes. As of the date hereof, Old Senior Subordinated Notes representing $300,000,000 aggregate principal amount are outstanding. The terms of the New Senior Subordinated Notes and the Old Senior Subordinated Notes are substantially identical. Based on an interpretation by the Commission's staff set forth in no-action letters issued to third parties unrelated to the Company, Holdings and the Guarantors, the Company and the Guarantors believe that New Senior Subordinated Notes issued pursuant to the Senior Subordinated Notes Exchange Offer in exchange for Old Senior Subordinated Notes may be offered for resale, resold and otherwise transferred by any person receiving the New Senior Subordinated Notes, whether or not that person is the registered holder (other than any such holder or such other person that is an "affiliate" of the Company or any Guarantors within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that (i) the New Senior Subordinated Notes are acquired in the ordinary course of business of that holder or such other person, (ii) neither the holder nor such other person is engaging in or intends to engage in a distribution of the New Senior Subordinated Notes, and (iii) neither the holder nor such other person has an arrangement or understanding with any person to participate in the distribution of the New Senior Subordinated Notes. See "The Exchange Offers -- Purpose and Effect." Each broker-dealer that receives New Senior Subordinated Notes for its own account in exchange for Old Senior Subordinated Notes, where those Old Senior Subordinated Notes were acquired by the broker-dealer as a result of its market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Subordinated Notes. See "Plan of Distribution." Senior Subordinated Notes Registration Rights Agreement................ The Old Senior Subordinated Notes were sold by the Company on March 3, 1998, in a private placement in reliance on Section 4(2) of the Securities Act and immediately resold by the initial purchasers thereof (the "Initial Purchasers") in reliance on Rule 144A under the Securities Act (the "Original Senior Subordinated Notes Offering"). In connection with the original Senior Subordinated Notes Offering, the Company and Holdings entered into a Registration Rights Agreement with the Initial Purchasers (the "Senior Subordinated Notes Registration Rights Agreement") providing for, among other things, the Senior Subordinated Notes Exchange Offer. See "The Exchange Offers -- Purpose and Effect." Expiration Date............ The Senior Subordinated Notes Exchange Offer will expire at 5:00 p.m., New York City time, on , 1998, or such later date and time to which it is extended by the Company. Withdrawal................. The tender of Old Senior Subordinated Notes pursuant to the Senior Subordinated Notes Exchange Offer may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Any Old Senior Subordinated Notes not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Senior Subordinated Notes Exchange Offer. Interest on the New Senior Subordinated Notes and Old Senior Subordinated Notes.................... Interest on each New Senior Subordinated Note will accrue from the date of issuance of the Old Senior Subordinated Note for which such Old Senior Subordinated Note is exchanged or from the date of the last periodic payment of interest on such Old Note, whichever is later. Conditions to the Senior Subordinated Notes Exchange Offer........... The Senior Subordinated Notes Exchange Offer is subject to certain customary conditions, certain of which may be waived by the Company. See "The Exchange Offers -- Certain Conditions to the Exchange Offers." Procedures for Tendering Old Senior Subordinated Notes.................... Each holder of Old Senior Subordinated Notes wishing to accept the Senior Subordinated Notes Exchange Offer must complete, sign and date the accompanying letter of transmittal relating to the Senior Subordinated Notes Exchange Offer (the "Senior Subordinated Notes Letter of Transmittal"), or a copy thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver the Senior Subordinated Notes Letter of Transmittal, or the copy, together with the Old Senior Subordinated Notes and any other required documentation, to the Senior Subordinated Notes Exchange Agent (as defined) at the address set forth in the Senior Subordinated Notes Letter of Transmittal. Persons holding Old Senior Subordinated Notes through the Depository Trust Company ("DTC") and wishing to accept the Senior Subordinated Notes Exchange Offer must do so pursuant to the DTC's Automated Tender Offer Program, by which each tendering Participant will agree to be bound by the Senior Subordinated Notes Letter of Transmittal. By executing or agreeing to be bound by the Senior Subordinated Notes Letter of Transmittal, each holder will represent to the Company that, among other things, (i) the New Senior Subordinated Notes acquired pursuant to the Senior Subordinated Notes Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Senior Subordinated Notes, whether or not such person is the holder of the Old Senior Subordinated Notes, (ii) neither the holder nor any such other person is engaging in or intends to engage in a distribution of such New Senior Subordinated Notes, (iii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Senior Subordinated Notes within the meaning of the Securities Act, (iv) neither the holder nor any such person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of the Company or any Guarantor, and (v) if such holder or other person is a broker-dealer, that it will receive New Senior Subordinated Notes for its own account in exchange for Old Senior Subordinated Notes that were acquired as a result of market-making activities or other trading activities and that it will be required to acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Subordinated Notes. See "The Exchange Offers -- Procedures for Tendering." Shelf Registration Requirement.............. Pursuant to the Senior Subordinated Notes Registration Rights Agreement, the Company is required to file a "shelf" registration statement for a continuous offering pursuant to Rule 415 under the Securities Act in respect of the Old Senior Subordinated Notes if (i) because of any change in law or applicable interpretations of the staff of the Commission, the Company is not permitted to effect the Senior Subordinated Notes Exchange Offer, (ii) the Senior Subordinated Notes Exchange Offer is not consummated within 225 days of the Original Senior Subordinated Notes Offering, (iii) any holder of Private Exchange Securities (as defined) requests within 60 days after the Senior Subordinated Notes Exchange Offer, (iv) any applicable law or interpretations do not permit any holder of Old Senior Subordinated Notes to participate in the Senior Subordinated Notes Exchange Offer, (v) any holder of Old Senior Subordinated Notes participates in the Senior Subordinated Notes Exchange Offer and does not receive freely transferrable New Senior Subordinated Notes in change for Old Senior Subordinated Notes or (vi) the Company so elects. Acceptance of Old Senior Subordinated Notes and Delivery of New Senior Subordinated Notes....... The Company will accept for exchange any and all Old Senior Subordinated Notes which are properly tendered (and not withdrawn) in the Senior Subordinated Notes Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Senior Subordinated Notes issued pursuant to the Senior Subordinated Notes Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offers -- Terms of the Exchange Offers." Senior Subordinated Notes Exchange Agent........... United States Trust Company of New York is serving as Exchange Agent (the "Senior Subordinated Notes Exchange Agent") in connection with the Senior Subordinated Notes Exchange Offer. Federal Income Tax Considerations........... The exchange pursuant to the Senior Subordinated Notes Exchange Offer should not be a taxable event for federal income tax purposes. See "Certain United States Federal Income Tax Considerations." Effect of Not Tendering.... Old Senior Subordinated Notes that are not tendered or that are tendered but not accepted will, following the completion of the Senior Subordinated Notes Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. THE SENIOR DISCOUNT NOTES EXCHANGE OFFER: The Senior Discount Notes Exchange Offer applies to $325,000,000 aggregate principal amount at maturity of the Old Senior Discount Notes. The form and terms of the New Senior Discount Notes will be the same as the form and terms of the Old Senior Discount Notes except that (i) the Accreted Value (as defined) of the New Senior Discount Notes will be calculated from the date of issuance of the Old Senior Discount Notes and (ii) the New Senior Discount Notes are being registered under the Securities Act and, therefore, will not bear legends restricting their transfer. The New Senior Discount Notes will evidence the same debt as the Old Senior Discount Notes and will be entitled to the benefits of the Senior Discount Notes Indenture (as defined) pursuant to which the Old Senior Discount Notes were issued. The Old Senior Discount Notes and the New Senior Discount Notes are sometimes referred to collectively herein as the "Senior Discount Notes." See "Description of the New Senior Discount Notes." The Senior Discount Notes Exchange Offer........... $1,000 principal amount at maturity of New Senior Discount Notes in exchange for each $1,000 principal amount at maturity of Old Senior Discount Notes. As of the date hereof, Old Senior Discount Notes representing $325,000,000 aggregate principal amount at maturity are outstanding. The terms of the New Senior Discount Notes and the Old Senior Discount Notes are substantially identical. Based on an interpretation by the Commission's staff set forth in no-action letters issued to third parties unrelated to Holdings, Holdings believes that New Senior Discount Notes issued pursuant to the Senior Discount Notes Exchange Offer in exchange for Old Senior Discount Notes may be offered for resale, resold and otherwise transferred by any person receiving the New Senior Discount Notes, whether or not that person is the holder (other than any such holder or such other person that is an "affiliate" of Holdings within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that (i) the New Senior Discount Notes are required in the ordinary course of business of that holder or such other person, (ii) neither the holder nor such other person is engaging in or intends to engage in a distribution of the New Senior Discount Notes, and (iii) neither the holder nor such other person has an arrangement or understanding with any person to participate in the distribution of the New Senior Discount Notes. See "The Exchange Offers -- Purpose and Effect." Each broker-dealer that receives New Senior Discount Notes for its own account in exchange for Old Senior Discount Notes where the Old Senior Discount Notes were acquired by the broker-dealer as a result of its market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Discount Notes. See "Plan of Distribution." Senior Discount Notes Registration Rights Agreement................ The Old Senior Discount Notes were sold by Holdings on March 3, 1998, in a private placement in reliance on Section 4(2) of the Securities Act and immediately resold by the Initial Purchasers in reliance on Rule 144A under the Securities Act (the "Original Senior Discount Notes Offering," and together with the Original Senior Subordinated Notes Offering, the "Original Offerings.") In connection with the Original Senior Discount Notes Offering, the Company and Holdings entered into a Registration Rights Agreement with the Initial Purchasers (the "Senior Discount Notes Registration Rights Agreement") providing for, among other things, the Senior Discount Notes Exchange Offer. See "The Exchange Offers -- Purpose and Effect." Expiration Date............ The Senior Discount Notes Exchange Offer will expire at 5:00 p.m., New York City time, on , 1998, or such later date and time to which it is extended by Holdings. Withdrawal................. The tender of Old Senior Discount Notes pursuant to the Senior Discount Notes Exchange Offer may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Any Old Senior Discount Notes not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Senior Discount Notes Exchange Offer. Accreted Value of the New Senior Discount Notes and Old Senior Discount Notes.................... The Accreted Value of each New Senior Discount Note will be calculated from the date of issuance of the Old Senior Discount Note for which such New Senior Discount Note is exchanged. Conditions to the Senior Discount Notes Exchange Offer.................... The Senior Discount Notes Exchange Offer is subject to certain customary conditions, certain of which may be waived by the Company. See "The Exchange Offers -- Certain Conditions to the Exchange Offers." Procedures for Tendering Senior Discount Notes...... Each holder of Old Senior Discount Notes wishing to accept the Senior Discount Notes Exchange Offer must complete, sign and date the accompanying letter of transmittal relating to the Senior Discount Notes Exchange Offer (the "Senior Discount Notes Letter of Transmittal"; the Senior Discount Notes Letter of Transmittal and the Senior Subordinated Notes Letter of Transmittal are sometimes referred to herein individually as a "Letter of Transmittal" and collectively as the "Letters of Transmittal"), or a copy thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver the Senior Discount Notes Letter of Transmittal, or the copy, together with the Old Senior Discount Notes and any other required documentation, to the Senior Discount Notes Exchange Offer (as defined) at the address set forth in the Senior Discount Notes Letter of Transmittal. Persons holding Old Discount Notes through the DTC and wishing to accept the Senior Discount Notes Exchange Offer must do so pursuant to the DTC's Automated Tender Offer Program, by which each tendering Participant will agree to be bound by the Senior Discount Notes Letter of Transmittal. By executing or agreeing to be bound by the Senior Discount Notes Letter of Transmittal, each holder will represent to Holdings that, among other things, (i) the New Senior Discount Notes acquired pursuant to the Senior Discount Notes Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Senior Discount Notes, whether or not such person is the holder of the Old Senior Discount Notes, (ii) neither the holder nor any such other person is engaging in or intends to engage in a distribution of such New Senior Discount Notes, (iii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Senior Discount Notes, (iv) neither the holder nor any such other person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of Holdings, and (v) if such holder or other person is a broker-dealer, that it will receive New Senior Discount Notes for its own account in exchange for Old Senior Discount Notes that were acquired as a result of market-making activities or other trading activities and that it will be required to acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Discount Notes. Shelf Registration Requirement.............. Pursuant to the Senior Discount Notes Registration Rights Agreement, Holdings is required to file a "shelf" registration statement for a continuous offering pursuant to Rule 415 under the Securities Act in respect of the Old Senior Discount Notes if (i) because of any change in law or applicable interpretations of the staff of the Commission, Holdings is not permitted to effect the Senior Discount Notes Exchange Offer, (ii) the Senior Discount Notes Exchange Offer is not consummated within 225 days of the Original Senior Discount Notes Offering, (iii) any holder of Private Exchange Securities (as defined) requests within 60 days after the Senior Discount Notes Exchange Offer, (iv) any applicable law or interpretations do not permit any holder of Old Senior Discount Notes to participate in the Senior Discount Notes Exchange Offer, (v) any holder of Old Senior Discount Notes participates in the Senior Discount Notes Exchange Offer and does not receive freely transferrable New Senior Discount Notes in exchange for Old Senior Discount Notes or (vi) Holdings so elects. Acceptance of Old Senior Discount Notes and Delivery of New Senior Discount Notes.................... Holdings will accept for exchange any and all Old Senior Discount Notes which are properly tendered (and not withdrawn) in the Senior Discount Notes Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Senior Discount Notes issued pursuant to the Senior Discount Notes Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offers -- Terms of the Exchange Offer." Senior Discount Notes Exchange Agent........... United States Trust Company of New York is serving as Exchange Agent (the "Senior Discount Notes Exchange Agent"; the Senior Subordinated Notes Exchange Agent and the Senior Discount Notes Exchange Agent are sometimes referred to herein individually as an "Exchange Agent" and collectively as the "Exchange Agents") in connection with the Senior Discount Notes Exchange Offer. Federal Income Tax Considerations........... The exchange pursuant to the Senior Discount Notes Exchange Offer should not be a taxable event for federal income tax purposes. See "Certain United States Federal Income Tax Considerations." Effect of Not Tendering.... Old Senior Discount Notes that are not tendered or that are tendered but not accepted will, following the completion of the Senior Discount Notes Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. TERMS OF THE NEW NOTES NEW SENIOR SUBORDINATED NOTES Issuer..................... LIN Television Corporation (as successor-in-interest to LIN Acquisition Company). Securities Offered......... $300,000,000 aggregate principal amount of 8 3/8% Senior Subordinated Notes due 2008. Maturity................... March 1, 2008. Interest Payment Dates..... March 1 and September 1 of each year, commencing September 1, 1998. Sinking Fund............... None. Optional Redemption........ Except as described below, the Company may not redeem the New Senior Subordinated Notes prior to March 1, 2003. On or after such date, the Company may redeem the Senior Subordinated Notes, in whole or in part, at the redemption prices set forth herein, together with accrued and unpaid interest, if any, to the date of redemption. In addition, at any time and from time to time on or prior to March 1, 2001, the Company may redeem up to 35% of the aggregate principal amount of the Senior Subordinated Notes with the net cash proceeds of one or more private or public offerings by the Company, at a redemption price equal to 108.375% of the principal amount to be redeemed, together with accrued and unpaid interest, if any, to the date of redemption, provided that at least 65% of the originally issued aggregate principal amount of the Senior Subordinated Notes remains outstanding after each such redemption. See "Description of the New Senior Subordinated Notes -- Optional Redemption." Change of Control.......... Upon the occurrence of a Change of Control, (i) the Company will have the option, at any time on or prior to March 1, 2003, to redeem the New Senior Subordinated Notes, in whole but not in part, at a redemption price equal to 100% of the principal amount thereof, plus accrued and unpaid interest plus the Applicable Premium (as defined) and (ii) if the New Senior Subordinated Notes are not redeemed or if such Change of Control occurs after March 1, 2003, the Company will be required to make an offer to repurchase the New Senior Subordinated Notes at a price equal to 101% of the principal amount thereof, together with accrued and unpaid interest, if any, to the date of purchase. See "Description of the New Senior Subordinated Notes -- Change of Control" and "-- Amendment." Guarantees................. The New Senior Subordinated Notes will be guaranteed (the "Subsidiary Guarantees"), jointly and severally on an unsecured senior subordinated basis, by the Company's direct and indirect, existing and future, Restricted Subsidiaries (the "Guarantors"). The Guarantors also will guarantee all obligations of the Company under the Senior Credit Facilities (as defined). The Company's obligations under the Senior Credit Facilities also will be secured by substantially all of the assets of the Company and the Guarantors. The obligations of each Guarantor under its Subsidiary Guarantee will be subordinated in right of payment to the prior payment in full of all Guarantor Senior Indebtedness (as defined) of such Guarantor to substantially the same extent as the Senior Subordinated Notes are subordinated to all existing and future Senior Indebtedness of the Company. See "Description of the New Senior Subordinated Notes -- Subsidiary Guarantees of the New Senior Subordinated Notes." Ranking.................... The New Senior Subordinated Notes will be unsecured and will be subordinated in right of payment to all existing and future Senior Indebtedness (as defined) of the Company and will rank pari passu in right of payment with all Senior Subordinated Indebtedness (as defined) of the Company. As of March 31, 1998, the aggregate principal amount of the Company's outstanding Senior Indebtedness was $170.0 million (consisting of outstanding Term Loans) and the Company had no Senior Subordinated Indebtedness outstanding other than the Senior Subordinated Notes and had no Subsidiary Indebtedness outstanding. As of such date, liabilities of the Company's Subsidiaries reflected on its consolidated balance sheet, including indebtedness and other liabilities such as trade payables and accrued expenses, aggregated $17.8 million. See "Description of the New Senior Subordinated Notes -- Ranking and Subordination." Restrictive Covenants...... The Senior Subordinated Notes Indenture limits, among other things, (i) the incurrence of additional indebtedness and issuance of capital stock, (ii) layering of indebtedness, (iii) the payment of dividends on, and redemption of, capital stock of the Company, (iv) liens, (v) mergers, consolidations, and sales of all or substantially all of the Company's assets, (vi) asset sales, (vii) asset swaps, (viii) dividend and other payment restrictions affecting Restricted Subsidiaries and (ix) transactions with affiliates of the Company. However, all of these limitations and prohibitions are subject to a number of important qualifications and exceptions. See "Description of the New Senior Subordinated Notes -- Certain Covenants." Use of Proceeds............ There will be no cash proceeds to the Company from the exchange of New Senior Subordinated Notes for Old Senior Subordinated Notes pursuant to the Senior Subordinated Notes Exchange Offer. The net proceeds from the Original Senior Subordinated Notes Offering were used, together with the proceeds of the other Financings, to consummate the Acquisition. NEW SENIOR DISCOUNT NOTES Issuer..................... LIN Holdings Corp. Securities Offered......... $325,000,000 aggregate principal amount at maturity of 10% Senior Discount Notes due 2008. The Senior Discount Notes will be issued at a discount to their aggregate principal amount at maturity. Maturity................... March 1, 2008. Interest Payment Dates..... Cash interest will not accrue or be payable on the New Senior Discount Notes prior to March 1, 2003. Thereafter, cash interest on the New Senior Discount Notes will accrue at a rate of 10% per annum and will be payable semi-annually in arrears on March 1 and September 1 of each year, commencing on September 1, 2003. Original Issue Discount.... For federal income tax purposes, the New Senior Discount Notes will be treated as having been issued with "original issue discount" equal to the difference between the issue price of the Old Senior Discount Notes and the sum of all cash payments (whether denominated as principal or interest) to be made thereon. Each holder of a New Senior Discount Note must include as gross income for federal income tax purposes a portion of such original issue discount for each day during each taxable year in which a New Senior Discount Note is held even though no cash interest payments will be received prior to March 1, 2003. See "Certain United States Federal Income Tax Considerations -- Taxation of Original Issue Discount." Sinking Fund............... None. Mandatory Principal Redemption............... Except as described below, Holdings may not redeem the New Senior Discount Notes prior to March 1, 2003. On March 1, 2003, Holdings will be required to redeem Senior Discount Notes with an aggregate principal amount at maturity equal to (i) $125.0 million multiplied by (ii) the quotient obtained by dividing (x) the aggregate principal amount at maturity of Senior Discount Notes then outstanding (other than Senior Discount Notes then held by Holdings or its Subsidiaries or the entities with respect to which Holdings is a direct or indirect Subsidiary) by (y) $325.0 million, (the "Mandatory Principal Redemption Amount") at a redemption price equal to 100% of the principal amount at maturity of the Senior Discount Notes so redeemed. See "Description of the New Senior Discount Notes -- Mandatory Principal Redemption." Optional Redemption........ The New Senior Discount Notes will be redeemable at the option of Holdings, in whole or in part, at any time on or after March 1, 2003. On or after such date, Holdings may redeem the New Senior Discount Notes, in whole or in part, at the redemption prices set forth herein, together with accrued and unpaid interest, if any, to the date of redemption. In addition, at any time and from time to time on or prior to March 1, 2001, Holdings may, subject to certain requirements, redeem up to 35% of the aggregate principal amount at maturity of the Senior Discount Notes with the net cash proceeds from one or more private or public equity offerings at a price equal to 110% of the Accreted Value (as defined) at the date of redemption, provided that at least 65% of the originally issued aggregate principal amount at maturity of the Senior Discount Notes remains outstanding after each such redemption. See "Description of the New Senior Discount Notes -- Optional Redemption." Change of Control.......... Upon a Change of Control, (i) Holdings will have the option, at any time on or prior to March 1, 2003, to redeem the New Senior Discount Notes, in whole but not in part, at a redemption price equal to 100% of the Accreted Value thereof plus the Applicable Premium and (ii) if the New Senior Discount Notes are not so redeemed or if such Change of Control occurs after March 1, 2003, Holdings will be required to make an offer to repurchase the New Senior Discount Notes at a price equal to (a) 101% of the Accreted Value thereof if redeemed on or before March 1, 2003, and (b) 101% of the principal amount at maturity, plus accrued and unpaid interest, if any, thereon, if redeemed after March 1, 2003. See "Description of the New Senior Discount Notes -- Change of Control." Guarantees................. None. Ranking.................... The New Senior Discount Notes will be senior unsecured obligations of Holdings and will rank pari passu in right of payment with all Senior Indebtedness of Holdings, including Holdings' guarantee of the Senior Credit Facilities. Holdings is a holding company with no operations of its own and whose primary asset is the capital stock of the Company (all of which will be pledged to secure the Senior Credit Facilities). As a result of the holding company structure, the New Senior Discount Notes will effectively rank junior in right of payment to all creditors of the Company and its subsidiaries, including the lenders under the Senior Credit Facilities, holders of the Senior Subordinated Notes and trade creditors. As of March 31, 1998, the New Senior Discount Notes were effectively subordinated to $523.8 of aggregate liabilities (including indebtedness and other liabilities such as trade payables and accrued expenses that would have been reflected on the consolidated balance sheet) of the Company and its subsidiaries. See "Description of the New Senior Discount Notes." Restrictive Covenants...... The Senior Discount Notes Indenture limits, among other things, (i) the incurrence of additional indebtedness and issuance of capital stock, (ii) the payment of dividends on, and redemption of, capital stock of Holdings, (iii) mergers, consolidations and sales of all or substantially all of Holdings' assets, (iv) asset sales, (v) asset swaps, (vi) dividend and other payment restrictions affecting Restricted Subsidiaries and (vii) transactions with affiliates. However, all of these limitations and prohibitions are subject to a number of important qualifications and exceptions. See "Description of the New Senior Discount Notes -- Certain Covenants."
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+SUMMARY The following summary should be read in conjunction with the more detailed information, financial statements and notes thereto appearing elsewhere in this Prospectus. For additional information relating to certain defined terms used herein, as well as the sources for the market and other industry data contained herein, see "Certain Definitions and Market and Industry Data." THE COMPANY The Company is a leading television station group operator in the United States that operates eleven television stations and provides consulting services to two additional television stations. Twelve of these stations are network affiliates and nine are in top forty DMAs, including: Indianapolis, Indiana; New Haven-Hartford, Connecticut; Buffalo, New York; Norfolk-Portsmouth, Virginia; Grand Rapids-Kalamazoo-Battle Creek, Michigan and Dallas-Fort Worth, Texas. These stations have an aggregate United States household reach of approximately 6.9%, ranking the Company among the top independent, "pure-play" television station group operators in the United States. The Company's Core Stations generated an aggregate pro forma BCF margin of approximately 46% for the fiscal year ended December 31, 1997, principally as a result of their strong network affiliations, leading local news programming and tight cost controls. In addition, the Company's management pioneered the "multi-channel strategy," which involves the combination of an owned and operated television station with an LMA station and/or a 24-hour cable weather channel (a "Local Weather Station") in the same market. The multi-channel strategy has enhanced the Company's revenue market shares and increased its BCF by leveraging its fixed costs over a larger revenue base. The Company's station portfolio is well diversified in terms of its network affiliations, geographic coverage, net revenues and cash flow. The Company owns and operates three CBS affiliates, two NBC affiliates and two ABC affiliates which accounted for 35%, 28% and 28%, respectively, of the Company's pro forma BCF for the fiscal year ended December 31, 1997. The Company's LMA stations and Local Weather Stations accounted for substantially all of the remaining 9% of its BCF on the same basis. The Company's Core Stations broadcast in seven different markets, with no market representing more than 25% of the Company's pro forma net revenues or BCF for the fiscal year ended December 31, 1997. The Company's pro forma net revenues, BCF and EBITDA were $196.1 million, $79.5 million and $72.7 million, respectively, for the fiscal year ended December 31, 1997. Hicks, Muse, Tate & Furst Incorporated ("Hicks Muse"), a leading private equity firm with significant investments and experience in the media and communications industry, has acquired LIN Television to serve as a platform for acquiring and operating additional television stations that can benefit from management's ability to improve operating performance and increase BCF margins at acquired stations. In connection with the Acquisition, Hicks Muse and NBC formed a television station joint venture (the "Joint Venture"). The Joint Venture consists of KXAS-TV, LIN Television's Dallas-Fort Worth NBC affiliate, and KNSD-TV, NBC's San Diego station. A wholly owned subsidiary of NBC is the general partner of the Joint Venture (the "NBC General Partner") and NBC operates the stations owned by the Joint Venture pursuant to a management agreement. The NBC General Partner holds an approximate 80% equity interest and the Company holds an approximate 20% equity interest in the Joint Venture. General Electric Capital Corporation ("GECC") provided debt financing to the Joint Venture in the form of the GECC Note (as defined), the proceeds of which were distributed to the Company to finance a portion of the cost of the Acquisition. The GECC Note is not an obligation of Holdings, the Company or any of their respective subsidiaries and is recourse only to the Joint Venture, the Company's equity interest therein and to one of Holding's two corporate parents (the "GECC Note Guarantor") pursuant to a guarantee. The Company expects that the interest payments on the GECC Note will be serviced solely by the cash flow of the Joint Venture. See "The Transactions and Other Matters -- The Joint Venture." Later this year, the Company expects to acquire (the "Grand Rapids Acquisition") from AT&T Corporation ("AT&T") the assets of WOOD-TV and the LMA rights related to WOTV-TV (collectively, LIN TELEVISION CORPORATION LIN HOLDINGS CORP. CROSS REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING THE LOCATION IN THE PROSPECTUS OF THE INFORMATION REQUIRED BY PART I OF FORM S-1 <TABLE> <CAPTION> FORM S-1 ITEM NUMBER AND HEADING LOCATION IN PROSPECTUS -------------------------------- ---------------------- <S> <C> <C> 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus... Cover Page of Registration Statement; Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus............................ Inside Front and Outside Back Cover Pages of Prospectus 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges............. Certain Definitions and Market and Industry Data; Summary; Risk Factors; Selected Consolidated Financial and Operating Data; Unaudited Pro Forma Financial Information; Business 4. Use of Proceeds............................ Use of Proceeds 5. Determination of Offering Price............ Not Applicable 6. Dilution................................... Not Applicable 7. Selling Security Holders................... Not Applicable 8. Plan of Distribution....................... Front Cover Page of Prospectus; The Exchange Offers; Plan of Distribution 9. Description of Securities to be Registered............................... Description of New Senior Subordinated Notes; Description of New Senior Discount Notes 10. Interests of Named Experts and Counsel..... Not Applicable 11. Information with Respect to the Registrant............................... Cover Page of Registration Statement; Certain Definitions and Market and Industry Data; Summary; Risk Factors; The Transactions and Other Matters; Selected Consolidated Financial and Operating Data; Unaudited Pro Forma Consolidated Financial Information; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Securities Ownership of Certain Beneficial Owners; Certain Other Transactions; Description of the Senior Credit Facilities; Legal Matters 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities.............................. Not Applicable </TABLE> AVAILABLE INFORMATION The Issuers and the Guarantors have filed with the Securities and Exchange Commission (the "Commission") a Registration Statement (which term shall encompass any amendments thereto) on Form S-1 under the Securities Act with respect to the securities offered hereby. This Prospectus does not contain all information set forth in the Registration Statement and the exhibits thereto, to which reference is hereby made. Although the Issuers and the Guarantors believe that statements made in this Prospectus as to the contents of any contract, agreement, or other document describe all material elements of such documents, such statements are not necessarily complete. With respect to each such contract, agreement, or other document filed as an exhibit to the Registration Statement, reference is hereby made to such exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. As a result of the filing of the Registration Statement with the Commission, the Issuers and the Guarantors each will become subject to the informational reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In accordance therewith, the Company and Holdings will be required to file reports and other information with the Commission. Such reports and other information can be inspected and copied at the principal office of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and the following Regional Offices of the Commission: Chicago Regional Office, Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60611 and New York Regional office, 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of such material may also be obtained at prescribed rates from the Public Reference Section of the Commission at its principal office at Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549. The Commission also maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission at http://www.sec.gov. In reliance upon certain Staff Accounting Bulletins of the Commission, interpretations of the staff of the Commission and no-action relief granted by the Staff of the Commission to unrelated third parties, the Subsidiary Guarantors do not intend to file periodic reports with the Commission under the Exchange Act separately from the Issuers. The Issuers will furnish holders of the securities offered hereby with annual reports containing, among other information, audited financial statements certified by an independent public accounting firm and quarterly reports containing unaudited financial information for the first three quarters of each fiscal year. The Issuers will also furnish such other reports as it may determine or as may be required by law or by the indentures governing the New Notes. FORWARD LOOKING STATEMENTS THIS PROSPECTUS CONTAINS CERTAIN FORWARD LOOKING STATEMENTS WITH RESPECT TO THE FINANCIAL CONDITIONS, RESULTS OF OPERATIONS AND BUSINESSES OF THE ISSUERS, INCLUDING STATEMENTS UNDER THE CAPTIONS "SUMMARY," "UNAUDITED PRO FORMA FINANCIAL INFORMATION," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS." ALL OF THESE FORWARD LOOKING STATEMENTS ARE BASED ON ESTIMATES AND ASSUMPTIONS MADE BY MANAGEMENT OF THE ISSUERS WHICH, ALTHOUGH BELIEVED TO BE REASONABLE, ARE INHERENTLY UNCERTAIN. THEREFORE, UNDUE RELIANCE SHOULD NOT BE PLACED UPON SUCH ESTIMATES AND STATEMENTS. NO ASSURANCE CAN BE GIVEN THAT ANY OF SUCH ESTIMATES OR STATEMENTS WILL BE REALIZED AND IT IS LIKELY THAT ACTUAL RESULTS WILL DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE: (1) INCREASED COMPETITION, INCLUDING FROM NEWER FORMS OF ENTERTAINMENT AND ENTERTAINMENT MEDIA OR CHANGES IN THE POPULARITY OR AVAILABILITY OF PROGRAMMING; (2) INCREASED COSTS, INCLUDING INCREASED CAPITAL EXPENDITURES AS A RESULT OF NECESSARY TECHNOLOGICAL ENHANCEMENTS (E.G., EXPENDITURES RELATED TO THE TRANSITION TO DIGITAL the "Grand Rapids Stations"), both of which stations are located in the Grand Rapids-Kalamazoo-Battle Creek market. The Company currently provides services to the Grand Rapids Stations pursuant to a consulting agreement with AT&T. See "The Transactions and Other Matters -- The Grand Rapids Acquisition" and "Business -- The Company -- History." The following table provides information regarding the stations and other programming outlets operated by the Company and the stations owned by the Joint Venture: <TABLE> <CAPTION> COMMERCIAL STATION STATION DMAS, STATIONS AND OTHER DMA STATIONS IN RANK IN AUDIENCE PROGRAMMING OUTLETS STATUS(A) AFFILIATION(B) RANK(C) DMA(D) DMA(E) Share(e) ------------------------ --------- -------------- ------- ----------- ------- -------- <S> <C> <C> <C> <C> <C> <C> COMPANY STATIONS AND OTHER PROGRAMMING OUTLETS: INDIANAPOLIS, IN WISH-TV.......................................... O&O CBS 25 8 1 18% WIIH-LP (Satellite)(f)........................... O&O CBS Local Weather Station............................ O&O Cable NEW HAVEN-HARTFORD, CT WTNH-TV.......................................... O&O ABC 27 8 2 14% WBNE-TV.......................................... LMA WB 5(tie) 2% GRAND RAPIDS-KALAMAZOO-BATTLE CREEK, MI(g) WOOD-TV.......................................... CS NBC 37 8 1(tie) 18% WOTV-TV.......................................... CS ABC 4 5% NORFOLK-PORTSMOUTH, VA WAVY-TV.......................................... O&O NBC 39 7 1(tie) 16% WVBT-TV.......................................... LMA WB/Fox(h) 5 2% Local Weather Station............................ O&O Cable BUFFALO, NY WIVB-TV.......................................... O&O CBS 40 7 2 17% AUSTIN, TX KXAN-TV.......................................... O&O NBC 60 7 3 14% KNVA-TV.......................................... LMA WB 6 3% KXAM-TV (Satellite)(i)........................... O&O NBC Low Power Network................................ O&O UPN DECATUR-CHAMPAIGN, IL WAND-TV.......................................... O&O ABC 81 8 3 14% Local Weather Station............................ O&O Cable FORT WAYNE, IN WANE-TV.......................................... O&O CBS 102 6 2 19% Local Weather Station............................ O&O Cable DALLAS-FORT WORTH, TX KXTX-TV.......................................... LMA IND 8 13 9 3% JOINT VENTURE STATIONS: DALLAS-FORT WORTH, TX KXAS-TV.......................................... JV NBC 8 13 3 12% SAN DIEGO, CA KNSD-TV.......................................... JV NBC 26 7 1 13% </TABLE> - --------------- (a) "O&O" refers to a station owned and operated by the Company. "LMA" refers to a station operated by the Company pursuant to a local marketing agreement and with respect to which the Company has a purchase option exercisable under certain circumstances. "JV" refers to a station owned by the Joint Venture and operated by NBC. "CS" refers to a station which the Company currently provides services to pursuant to a consulting agreement. The Company's Core Stations, all of which are CBS, NBC and ABC affiliates, are WISH-TV, WANE-TV, WAND-TV, WAVY-TV, KXAN-TV, WTNH-TV and WIVB-TV. (b) "IND" refers to an independent station with no network affiliation. (c) Rankings are based on the relative size of the station's "market" among the 211 generally recognized television markets in the United States. Source: Nielsen Station Index DMA Market Ratings -- November 1997, A.C. Nielsen Company. (d) The number of stations in a market excludes local weather stations, low power networks and satellite broadcasting facilities. (e) Source: Nielsen Station Index DMA Market Ratings -- November 1997, A.C. Nielsen Company, Sunday-Saturday 6:00 a.m.-2:00 a.m. (f) Station WIIH-LP, Indianapolis, Indiana, is operated as a satellite station of WISH-TV in order to increase WISH-TV's coverage. PROSPECTUS <TABLE> <S> <C> OFFER FOR ALL OUTSTANDING OFFER FOR ALL OUTSTANDING 8 3/8% SENIOR SUBORDINATED NOTES DUE 10% SENIOR DISCOUNT NOTES DUE 2008 2008 IN EXCHANGE FOR IN EXCHANGE FOR 10% SENIOR DISCOUNT NOTES DUE 2008 8 3/8% SENIOR SUBORDINATED NOTES DUE OF 2008 LIN HOLDINGS CORP. OF LIN TELEVISION CORPORATION </TABLE> Pursuant to the terms and subject to the conditions set forth in this Prospectus and the accompanying letters of transmittal, (i) LIN Television Corporation, a Delaware corporation (the "Company"), and the Guarantors (as defined) hereby offer (the "Senior Subordinated Notes Exchange Offer") to exchange $1,000 principal amount of registered 8 3/8% Senior Subordinated Notes Due 2008 (the "New Senior Subordinated Notes") issued by the Company, for each $1,000 principal amount of unregistered 8 3/8% Senior Subordinated Notes Due 2008 (the "Old Senior Subordinated Notes," and together with the New Senior Subordinated Notes, the "Senior Subordinated Notes") issued by LIN Acquisition Company, the predecessor in interest of the Company ("LIN Acquisition"), of which an aggregate principal amount of $300,000,000 is outstanding and (ii) LIN Holdings Corp., a Delaware corporation ("Holdings") hereby offers (the "Senior Discount Notes Exchange Offer," and together with the Senior Subordinated Notes Exchange Offer, the "Exchange Offers") to exchange $1,000 principal amount at maturity of registered 10% Senior Discount Notes Due 2008 (the "New Senior Discount Notes") issued by Holdings, for each $1,000 principal amount at maturity of unregistered 10% Senior Discount Notes Due 2008 (the "Old Senior Discount Notes," and together with the New Senior Discount Notes, the "Senior Discount Notes") issued by Holdings, of which an aggregate principal amount at maturity of $325,000,000 is outstanding. The Old Senior Subordinated Notes and the Old Senior Discount Notes are sometimes collectively referred to herein as the "Old Notes" and the New Senior Subordinated Notes and the New Senior Discount Notes are sometimes collectively referred to herein as the "New Notes." The Old Notes and the New Notes are sometimes collectively referred to herein as the "Notes." The Company and Holdings are sometimes collectively referred to herein as the "Issuers." The form and terms of the New Notes are identical to the form and terms of the Old Notes except that (i) interest on the New Senior Subordinated Notes shall accrue from the date of issuance of the Old Senior Subordinated Notes, (ii) the Accreted Value (as defined) of the New Senior Discount Notes will be calculated from the date of issuance of the Old Senior Discount Notes, and (iii) the New Notes are being registered under the Securities Act of 1933, as amended (the "Securities Act"), and will not bear any legends restricting their transfer. The New Senior Subordinated Notes will evidence the same debt as the Old Senior Subordinated Notes and will be issued pursuant to, and entitled to the benefits of, the indenture governing the Old Senior Subordinated Notes. The New Senior Discount Notes will evidence the same debt as the Old Senior Discount Notes and will be issued pursuant to, and entitled to the benefits of, the indenture governing the Old Senior Discount Notes. The Exchange Offers are being made in order to satisfy certain contractual obligations of the Company and Holdings. See "The Exchange Offers," "Description of the New Senior Subordinated Notes" and "Description of the New Senior Discount Notes." The net proceeds from the sale of the Old Notes were used to effect the acquisition by Holdings of the Company and its subsidiaries (the "Acquisition"). Such acquisition was effected pursuant to the merger of LIN Acquisition with and into the Company, with the Company surviving as a wholly owned subsidiary of Holdings. See "The Transactions and Other Matters." --------------------- SEE "RISK FACTORS" BEGINNING ON PAGE 22 FOR A DISCUSSION OF CERTAIN INFORMATION THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NEW NOTES. --------------------- The Company and Holdings will accept for exchange any and all Old Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on , 1998, unless extended (as so extended, the "Expiration Date"). Tenders of Old Notes may be withdrawn at any time prior to the Expiration Date. The Exchange Offers are subject to certain customary conditions. See "The Exchange Offers." In order for a holder of Old Notes to participate in an Exchange Offer, such holder must represent to the Company or Holdings, as appropriate, that, among other things, (i) the New Notes acquired pursuant to such Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Notes, whether or not such person is the holder of the Old Notes, (ii) neither the holder nor any such other person is engaging or intends to engage in a distribution of such New Notes, (iii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Notes within the meaning of the Securities Act, (iv) neither the holder nor any such other person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of the Company, Holdings or any Guarantor, and (v) if such holder or other person is a broker-dealer, that it will receive New Notes for its own account in exchange for Old Notes that were acquired as a result of marketmaking activities or other trading activities. See "The Exchange Offers--Purpose and Effect." Each broker-dealer that receives New Notes for its own account pursuant to either of the Exchange Offers must acknowledge that it will deliver a prospectus in connection with any resale of those New Notes. The letter of transmittal accompanying this Prospectus states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for Old Notes where such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company and Holdings have agreed that, for a period of 90 days after the Expiration Date, they will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." No public market has existed for the Old Notes. The Company and Holdings currently do not intend to list the New Notes on any securities exchange or to seek approval for quotation through any automated quotation system, and no active public market for the New Notes is currently anticipated. The Company and Holdings will pay all expenses incident to the Exchange Offers. The Exchange Offers are not conditioned upon any minimum principal amount of Old Senior Subordinated Notes or Old Senior Discount Notes being tendered for exchange pursuant to the Exchange Offers. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DATE OF THIS PROSPECTUS IS , 1998. BROADCASTING) OR ACQUISITIONS OR INCREASED PROGRAMMING COSTS; (3) INABILITY TO CONSUMMATE ACQUISITIONS ON ATTRACTIVE TERMS; (4) LOSS OR RETIREMENT OF KEY MEMBERS OF MANAGEMENT; (5) INCREASES IN THE ISSUERS' COST OF BORROWINGS OR INABILITY OR UNAVAILABILITY OF ADDITIONAL DEBT OR EQUITY CAPITAL; (6) ADVERSE STATE OR FEDERAL LEGISLATION OR REGULATION OR ADVERSE DETERMINATIONS BY REGULATORS; AND (7) CHANGES IN ADVERTISING TRENDS AND/OR BUDGETS AND IN GENERAL ECONOMIC CONDITIONS IN THE MARKETS IN WHICH THE ISSUERS MAY, FROM TIME TO TIME, COMPETE. MANY OF SUCH FACTORS WILL BE BEYOND THE CONTROL OF THE ISSUERS AND THEIR MANAGEMENT. FORWARD-LOOKING STATEMENTS CONTAINED HEREIN SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULT OF ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS WHICH MAY BE MADE TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. FOR FURTHER INFORMATION OR OTHER FACTORS WHICH COULD AFFECT THE FINANCIAL RESULTS OF THE ISSUERS AND SUCH FORWARD LOOKING STATEMENTS, SEE "RISK FACTORS." (g) The Company currently provides services to WOOD-TV and WOTV-TV pursuant to a consulting agreement with AT&T. The Company has agreed to acquire the assets of WOOD-TV and the LMA rights related to WOTV-TV from AT&T for a purchase price of approximately $125.5 million. The acquisition is expected to close later this year. See "The Transactions and Other Matters -- The Grand Rapids Acquisition" and "Business -- The Company -- History." (h) WVBT-TV will become a Fox affiliate on August 31, 1998. (i) Station KXAM-TV, Llano, Texas, is operated as a satellite station of KXAN-TV in order to increase KXAN-TV's coverage. BUSINESS STRATEGY The Company's business strategy is to maximize its BCF through both revenue growth and the implementation of effective cost controls. To achieve these goals, the Company seeks, among other things, to: Maximize Revenue Shares. From 1993 to 1997, the Company increased its broadcast television advertising revenue market share from 22.8% to 25.9% (assuming the acquisitions of WIVB-TV and WTNH-TV occurred on January 1, 1993) by targeting audiences with favorable demographic profiles, creating auxiliary revenue streams and cultivating strong network affiliations. On the same basis, the Company's gross advertising revenues have grown at a compound annual rate of 10.3%, whereas gross advertising revenues in the Company's markets have grown at a compound annual rate of 6.8%. The Company attempts to maximize each station's revenue share through a quarterly "entitlement review process." This process involves the benchmarking of each station's advertising revenues against an index which weights various demographic attributes according to their relative advertising revenue value. As a result of the entitlement review process, the Company's revenue shares typically outperform its audience shares. The Company's revenue shares also benefit from long term affiliations with its three core networks -- CBS, NBC and ABC -- which provide the Company's television stations affiliated with such networks with competitive programming, including coverage of political events and high profile sporting events such as the Olympic Games, Super Bowl and NCAA Men's Basketball Tournament. The Company also has stations affiliated with Fox, WB and UPN, which further enhances its ability to grow its revenue shares through access to their competitive programming. Emphasize Leading Local News. The Company's Core Stations are ranked number one or two in late news in all but the Company's smallest market. Management believes that a successful news operation is critical to the success of a television station because news audiences generally have the best demographic profiles from an advertising sales perspective. In addition, news programming: (i) enables the Company to purchase less syndicated programming and thereby maintain tight control over programming costs; (ii) serves as a strong lead-in to other programming; and (iii) fosters a high profile in the local community, which is critical to maximizing local advertising sales. The Company believes that its local news programming significantly improves its stations' BCF margins. Accordingly, the Company has increased the hours of news produced per week from 81 in 1989 to 187 in 1997 on a pro forma basis. Partly as a result of its emphasis on quality local news programming, management has increased the BCF margin at the five network-affiliated stations that it has operated throughout the period from January 1, 1991 to December 31, 1997 (WISH-TV, WANE-TV, WAND-TV, WAVY-TV and KXAN-TV) from 37% to 47%. Execute a Multi-Channel Strategy. The Company's management pioneered the "multi-channel strategy," which involves the combination of an owned and operated television station with an LMA station and/or a Local Weather Station in the same market. Management has pursued this strategy in all but one of the Company's markets. Execution of the multi-channel strategy has been a factor in the Company's ability to generate incremental cash flow. The advantages of the multi-channel strategy are: (i) the ability to capitalize on management's expertise; (ii) additional advertising inventory in each market; (iii) greater programming flexibility; (iv) enhanced ability to leverage fixed operating costs over a larger revenue base; (v) improved negotiating positions with respect to suppliers of syndicated programming, advertisers and the networks; (vi) increased share of actual viewers; (vii) the opportunity to affiliate with the emerging networks; and (viii) enhanced opportunities for cross promotion. CERTAIN DEFINITIONS AND MARKET AND INDUSTRY DATA As used in this Prospectus, unless the context otherwise requires, (i) "Holdings" refers to LIN Holdings Corp., (ii) "LIN Acquisition" refers to LIN Acquisition Company, (iii) "LIN Television" or the "Predecessor" refers to LIN Television Corporation and its subsidiaries prior to the Acquisition, (iv) the "Company" refers to LIN Television after giving effect to the Acquisition (as defined), the Financings (as defined) and the Joint Venture (as defined) (collectively, the "Transactions"), except where the context requires otherwise, (v) "on a pro forma basis" or "pro forma" means after giving effect to the Transactions, except as indicated otherwise and (vi) "Core Stations" refers to the CBS, NBC and ABC-affiliated stations owned and operated by the Company (WISH-TV, WANE-TV, WAND-TV, WAVY-TV, KXAN-TV, WTNH-TV and WIVB-TV). See "The Transactions and Other Matters." The terms "broadcast cash flow" ("BCF") and "EBITDA" are referred to in various places in this Prospectus. BCF is defined as operating income (loss) plus corporate expenses plus depreciation and amortization of intangible assets and amortization of program rights plus other non-cash expenses (consisting of tower write-offs and non-cash pension expenses), minus cash program payments. EBITDA is defined as BCF minus corporate expenses. BCF and EBITDA are not measures of performance calculated in accordance with generally accepted accounting principles ("GAAP"). However, management believes that BCF is useful to a prospective investor because it is a measure widely used in the broadcast industry to evaluate a television broadcast company's operating performance and that EBITDA is useful to a prospective investor because it is widely used in the broadcast industry to evaluate a television broadcast company's ability to service debt. BCF and EBITDA should not be considered in isolation of or as a substitute for net income (loss), cash flows from operating activities and other income and cash flow statement data prepared in accordance with GAAP or as a measure of liquidity or profitability. BCF and EBITDA as determined above may not be comparable to the BCF and EBITDA measures reported by other companies. In addition, these measures do not represent funds available for discretionary use. Designated market area ("DMA") rankings are from the Nielsen Station Index dated November 1997 as estimated by the A.C. Nielsen Company ("Nielsen"). There are 211 generally-recognized television "markets" or DMAs in the United States, which are ranked in size according to various factors based upon actual or potential audience. Unless otherwise indicated herein, (i) market revenue, market revenue share, projected advertising revenue growth and station revenue share data have been obtained from Investing in Television 1994, 1995, 1996 and 1997, BIA Publications, Inc. ("BIA"); (ii) television household data has been obtained from the Nielsen Station Index for November of the appropriate year; (iii) audience share and audience rankings, except where specifically stated to the contrary, have been derived from Nielsen estimates (for May and November of the appropriate year) of the percentage of persons in the DMA tuned into the relevant station from sign-on to sign-off (Sunday to Saturday, 6:00 a.m. to 2:00 a.m.); (iv) general market economic data has been obtained from BIA and the chambers of commerce in each station's market; (v) the term "station" or "commercial station" means a television broadcast station and does not include public television stations, cable stations or networks (e.g., CNN, TBS or ESPN), or stations that do not meet the minimum Nielsen reporting standards (i.e., weekly cumulative audience share of at least 2.5% for Sunday to Saturday, 7:00 a.m. to 1:00 a.m.); and (vi) the term "independent" describes a commercial television station that is not affiliated with the ABC, CBS, NBC, Fox, WB or UPN television networks. Control Costs. In addition to concentrating on maximizing advertising revenues in its local markets, management focuses on controlling costs to maximize BCF. In many markets, the Company operates with fewer personnel than its competitors. In addition, management typically buys syndicated programming on a Company-wide basis and performs detailed profitability analyses for all programming purchases. As a result, management believes that the Company's margins are among the highest in the industry for stations in markets of comparable size. Pursue Selective Acquisitions. The Company intends to pursue selective acquisitions of television stations with the goal of improving their operating performance by applying management's business strategy. Targeted stations generally will share many of the following characteristics: (i) attractive acquisition terms; (ii) opportunities for increased advertising revenue; (iii) opportunities to implement effective cost controls; (iv) opportunities for increased audience share through improved newscasts and programming; and (v) market locations that are projected to have attractive growth in advertising revenues. The Company intends to primarily target network-affiliated stations located in the fifty largest DMAs, which stations typically have established audiences for their news, sports and entertainment programming. Invest in Digital Technology. Management believes that the Company is well positioned for the transition to digital broadcasting and anticipates that the Company will be one of the first television broadcasters in the United States to transmit a digital signal. The Company has already invested $13 million to fully prepare its towers and transmitter buildings for the transition, and estimates that an additional $40 million will be required over the next five to seven years for other necessary capital expenditures such as the purchase of antennae, transmitters, studio equipment and news gathering equipment. In accordance with FCC regulations, all station affiliates of ABC, CBS, NBC and Fox in the top ten DMAs will be required to transmit a digital signal by May 1, 1999. Affiliates of those networks in DMAs ranked eleven through thirty will be required to transmit a digital signal by November 1, 1999. All remaining commercial broadcasters will be required to transmit a digital signal by May 1, 2002. MANAGEMENT AND OWNERSHIP The Company's management team, led by Gary Chapman, the Company's President and Chief Executive Officer, is recognized as an industry leader. As an indication of management's expertise and ability, the five network-affiliated stations operated by management throughout the period from January 1, 1991 to December 31, 1997 (WISH-TV, WANE-TV, WAND-TV, WAVY-TV and KXAN-TV) achieved an aggregate annual compound growth rate in net revenues and BCF of 8.9% (from $57.8 million to $96.2 million) and 13.3% (from $21.4 million to $45.2 million), respectively. Management also increased the Company's BCF margin at these stations from 37% to 47% during such period. In connection with the Acquisition, management and key employees reinvested a portion of their equity interest in LIN Television in the indirect parent corporation of Holdings. In addition, management and key employees will be granted options to acquire additional shares representing an approximate 5% equity interest in such parent corporation. Hicks Muse is a leading private investment firm with offices in Dallas, New York, St. Louis and Mexico City that specializes in leveraged acquisitions, recapitalizations and other principal investing activities. Hicks Muse and its predecessor firm have completed or have pending over 100 transactions having a combined transaction value of more than $24 billion. Although Hicks Muse invests in a wide variety of industries, it has significant investments and experience in the media and communications industry, including interests in Chancellor Media, Capstar Broadcasting, STC Broadcasting, Katz Media, OmniAmerica Tower and Grupo MVS. Hicks Muse plans to utilize an investment model for the Company similar to that used for Chancellor Media and Capstar Broadcasting. Chancellor Media was formed in 1993 with the purchase of two radio stations. Today, Chancellor Media is the second largest radio operator in the United States in terms of revenue (behind only CBS). Similarly, Capstar Broadcasting was formed in 1996 for the purpose of acquiring radio stations in small to medium size markets. Capstar Broadcasting is now the largest radio operator in the United States in terms of number of stations. See "Risk Factors -- Potential Conflicts of Interest" and "Certain Other Transactions." THE TRANSACTIONS AND OTHER MATTERS THE TRANSACTIONS The Acquisition. Holdings, LIN Acquisition and LIN Television entered into an Agreement and Plan of Merger on August 12, 1997 (as amended, the "Merger Agreement"). Pursuant to, and upon the terms and conditions of, the Merger Agreement, Holdings acquired LIN Television (the "Acquisition") on March 3, 1998 by merging LIN Acquisition, its wholly-owned subsidiary, with and into LIN Television (the "Merger"), with LIN Television surviving the Merger and becoming a direct, wholly owned subsidiary of Holdings. The total purchase price for the common equity of LIN Television was approximately $1.7 billion. In addition, the Company refinanced $260.2 million of LIN Television indebtedness and incurred acquisition costs of approximately $32.2 million. The Financings. The Acquisition was funded by (i) $6.9 million of excess cash on the Company's balance sheet; (ii) $50.0 million aggregate principal amount of senior secured Tranche A term loans ("Tranche A Term Loans"); (iii) $120.0 million aggregate principal amount of senior secured Tranche B term loans ("Tranche B Term Loans"); (iv) $299.3 million gross proceeds from the issuance by LIN Television of $300.0 million aggregate principal amount of Old Senior Subordinated Notes; (v) $199.6 million gross proceeds from the issuance by Holdings of $325.0 million aggregate principal amount at maturity of Old Senior Discount Notes, which proceeds were contributed by Holdings to the common equity of the Company; (vi) $558.1 million of common equity provided by affiliates of Hicks Muse, management and other co-investors to the equity of the corporate parents of Holdings, which in turn, through Holdings, contributed such amount to the common equity of the Company; and (vii) $815.5 million of proceeds of the GECC Note (collectively, the "Financings"). The Joint Venture. In connection with the Acquisition, Hicks Muse and NBC formed the Joint Venture. The Joint Venture consists of KXAS-TV, formerly LIN Television's Dallas-Fort Worth NBC affiliate, and KNSD-TV, formerly NBC's San Diego station. A wholly owned subsidiary of NBC is the general partner of the Joint Venture and NBC operates the stations owned by the Joint Venture. The NBC General Partner holds an approximate 80% equity interest and the Company holds an approximate 20% equity interest in the Joint Venture. GECC provided debt financing for the Joint Venture in the form of an $815.5 million 25-year non-amortizing senior secured note bearing an initial interest rate of 8.0% per annum (the "GECC Note"). The Company expects that the interest payments on the GECC Note will be serviced solely by the cash flow of the Joint Venture. All Distributable Cash (as defined) of the Joint Venture will be distributed to the Company and the NBC General Partner based on their respective equity interests in the Joint Venture. On a pro forma basis for the fiscal year ended December 31, 1997, the Company's portion of the Joint Venture's Distributable Cash would have been $2.2 million (without giving effect to a reserve of $15.0 million which must be established, subject to waiver by the Company, prior to any distribution of Distributable Cash). See "Risk Factors -- Control of Holdings and the Company." The GECC Note was issued by LIN Television of Texas, L.P., the Company's indirect wholly owned partnership ("LIN Texas"), which distributed the proceeds to the Company to finance a portion of the cost of the Acquisition. The obligations to GECC under the GECC Note were assumed by the Joint Venture and LIN Texas was simultaneously released from all obligations under the GECC Note. The GECC Note is not an obligation of Holdings, the Company or any of their respective subsidiaries and is recourse only to the Joint Venture, the Company's equity interest therein and to the GECC Note Guarantor. See "Risk Factors -- Defaults under the GECC Note" and "The Transactions and Other Matters -- The Joint Venture." In connection with the formation of the Joint Venture, the Company received an extension of its NBC network affiliation agreements to 2010 and the option (exercisable through December 31, 1999) to purchase WVTM-TV, the NBC affiliate in Birmingham, Alabama. Sources and Uses. The following table sets forth the sources and uses of funds in connection with the Acquisition (dollars in millions): <TABLE> <S> <C> SOURCES Excess cash........................ $ 6.9 Term Loans(a)...................... 170.0 Old Senior Subordinated Notes(b)... 299.3 Holdings contributions(c).......... 757.7 GECC Note(d)....................... 815.5 -------- Total Sources................. $2,049.4 ======== USES Purchase of LIN Television equity(e)........................ $1,706.4 Refinance LIN Television debt...... 260.2 Transaction fees and expenses(f)... 82.8 -------- Total Uses.................... $2,049.4 ======== </TABLE> - --------------- (a) The Term Loans funded in connection with the Acquisition consisted of $50.0 million aggregate principal amount of Tranche A Term Loans and $120.0 million aggregate principal amount of Tranche B Term Loans. As of December 31, 1997, the interest rates payable on outstanding Tranche A Term Loans and Tranche B Term Loans would have been approximately 7.50% and 8.00%, respectively. See "Description of the Senior Credit Facilities." (b) Represents gross proceeds to the Company from the issuance of $300.0 million aggregate principal amount of Old Senior Subordinated Notes. (c) Affiliates of Hicks Muse, management and other co-investors contributed $558.1 million to the equity of the corporate parents of Holdings, which in turn, through Holdings, contributed such amount to the common equity of the Company. In addition, Holdings issued $325.0 million aggregate principal amount at maturity of Old Senior Discount Notes and contributed the $199.6 million gross proceeds thereof to the common equity of the Company. (d) LIN Texas distributed the proceeds from the issuance of the GECC Note to the Company, which used such proceeds to finance a portion of the cost of the Acquisition. The GECC Note is not an obligation of Holdings, the Company or any of their respective subsidiaries and is recourse only to the Joint Venture, the Company's equity interest therein and to the GECC Note Guarantor. The Company expects that the interest payments on the GECC Note will be serviced solely by the cash flow of the Joint Venture. See "Risk Factors -- Control of Holdings and the Company" and "-- Defaults under the GECC Note" and "The Transactions and Other Matters -- The Joint Venture.". (e) The purchase price reflects the total price to acquire the equity of LIN Television (including KXAS-TV, which was contributed to the Joint Venture). (f) Includes discounts and commissions on the Old Notes in connection with the Offerings. Organizational Structure The following chart depicts (i) the summary organizational chart of Holdings and the Company and (ii) the sources of financing for the Transactions: LIN GRAPH THE GRAND RAPIDS ACQUISITION The Company expects to consummate the Grand Rapids Acquisition later this year. The Company currently provides services to the Grand Rapids Stations pursuant to a consulting agreement with AT&T. The total purchase price for the Grand Rapids Acquisition will be approximately $125.5 million (plus accretion thereon of 8% from March 1, 1998), which is expected to be funded by $125.0 million of additional Tranche A Term Loans. For the fiscal year ended December 31, 1997, the Grand Rapids Stations generated net revenues and BCF of $28.4 million and $11.3 million, respectively. The historical and pro forma financial information contained herein does not give effect to the Grand Rapids Acquisition. See "The Transactions and Other Matters -- The Grand Rapids Acquisition" and "Business -- The Company -- History." RECENT DEVELOPMENTS Chancellor Media Corporation, a Delaware corporation ("Chancellor") and Ranger Equity Holdings Corporation, a Delaware corporation ("Ranger"), the indirect parent company of Holdings and the Company, entered into an Agreement and Plan of Merger, dated July 7, 1998 (the "Chancellor Merger Agreement"). Pursuant to, and subject to the prior satisfaction or waiver of certain customary conditions (including, without limitation, the approval of Chancellor's and the Company's respective shareholders, the receipt of necessary FCC approvals, and the termination or expiration of the applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended) set forth in, the Chancellor Merger Agreement, Ranger will be merged with and into Chancellor (the "Chancellor Merger"), with Chancellor continuing as the surviving corporation following the Chancellor Merger. As a result of the Chancellor Merger, (i) each share of common stock, $0.01 par value ("Ranger Common Stock"), of Ranger will be converted into the right to receive 0.0300 of a share of common stock, $0.01 par value ("Chancellor Common Stock"), of Chancellor, other than shares of Ranger Common Stock for which appraisal rights have been exercised pursuant to Section 262 of the General Corporation Law of the State of Delaware. In addition, Chancellor, as the surviving corporation, will assume certain outstanding options to purchase shares of Ranger Common Stock held by certain directors, officers, employees and consultants of Ranger and its subsidiaries. Following the Chancellor Merger, Holdings and the Company will become indirect, wholly owned subsidiaries of Chancellor. A Chancellor shareholder has filed a shareholders derivative lawsuit in a chancery court in the State of Delaware, purportedly on behalf of Chancellor, naming Chancellor, Chancellor's directors and the Company as defendants. The lawsuit seeks, among other things, money damages and an injunction prohibiting the consummation of the Chancellor Merger. The Company believes that the lawsuit is without substantial merit and intends to vigorously defend the action. THE EXCHANGE OFFERS THE SENIOR SUBORDINATED NOTES EXCHANGE OFFER: The Senior Subordinated Notes Exchange Offer applies to $300,000,000 aggregate principal amount of the Old Senior Subordinated Notes. The form and terms of the New Senior Subordinated Notes will be the same as the form and terms of the Old Senior Subordinated Notes except that (i) interest on the New Senior Subordinated Notes will accrue from the date of issuance of the Old Senior Subordinated Notes, and (ii) the New Senior Subordinated Notes are being registered under the Securities Act and, therefore, will not bear legends restricting their transfer. The New Senior Subordinated Notes will evidence the same debt as the Old Senior Subordinated Notes and will be entitled to the benefits of the Senior Subordinated Notes Indenture (as defined) pursuant to which the Old Senior Subordinated Notes were issued. The Old Senior Subordinated Notes and the New Senior Subordinated Notes are sometimes referred to collectively herein as the "Senior Subordinated Notes." See "Description of the New Senior Subordinated Notes." The Senior Subordinated Notes Exchange Offer....... $1,000 principal amount of New Senior Subordinated Notes in exchange for each $1,000 principal amount of Old Senior Subordinated Notes. As of the date hereof, Old Senior Subordinated Notes representing $300,000,000 aggregate principal amount are outstanding. The terms of the New Senior Subordinated Notes and the Old Senior Subordinated Notes are substantially identical. Based on an interpretation by the Commission's staff set forth in no-action letters issued to third parties unrelated to the Company, Holdings and the Guarantors, the Company and the Guarantors believe that New Senior Subordinated Notes issued pursuant to the Senior Subordinated Notes Exchange Offer in exchange for Old Senior Subordinated Notes may be offered for resale, resold and otherwise transferred by any person receiving the New Senior Subordinated Notes, whether or not that person is the registered holder (other than any such holder or such other person that is an "affiliate" of the Company or any Guarantors within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that (i) the New Senior Subordinated Notes are acquired in the ordinary course of business of that holder or such other person, (ii) neither the holder nor such other person is engaging in or intends to engage in a distribution of the New Senior Subordinated Notes, and (iii) neither the holder nor such other person has an arrangement or understanding with any person to participate in the distribution of the New Senior Subordinated Notes. See "The Exchange Offers -- Purpose and Effect." Each broker-dealer that receives New Senior Subordinated Notes for its own account in exchange for Old Senior Subordinated Notes, where those Old Senior Subordinated Notes were acquired by the broker-dealer as a result of its market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Subordinated Notes. See "Plan of Distribution." Senior Subordinated Notes Registration Rights Agreement................ The Old Senior Subordinated Notes were sold by the Company on March 3, 1998, in a private placement in reliance on Section 4(2) of the Securities Act and immediately resold by the initial purchasers thereof (the "Initial Purchasers") in reliance on Rule 144A under the Securities Act (the "Original Senior Subordinated Notes Offering"). In connection with the original Senior Subordinated Notes Offering, the Company and Holdings entered into a Registration Rights Agreement with the Initial Purchasers (the "Senior Subordinated Notes Registration Rights Agreement") providing for, among other things, the Senior Subordinated Notes Exchange Offer. See "The Exchange Offers -- Purpose and Effect." Expiration Date............ The Senior Subordinated Notes Exchange Offer will expire at 5:00 p.m., New York City time, on , 1998, or such later date and time to which it is extended by the Company. Withdrawal................. The tender of Old Senior Subordinated Notes pursuant to the Senior Subordinated Notes Exchange Offer may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Any Old Senior Subordinated Notes not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Senior Subordinated Notes Exchange Offer. Interest on the New Senior Subordinated Notes and Old Senior Subordinated Notes.................... Interest on each New Senior Subordinated Note will accrue from the date of issuance of the Old Senior Subordinated Note for which such Old Senior Subordinated Note is exchanged or from the date of the last periodic payment of interest on such Old Note, whichever is later. Conditions to the Senior Subordinated Notes Exchange Offer........... The Senior Subordinated Notes Exchange Offer is subject to certain customary conditions, certain of which may be waived by the Company. See "The Exchange Offers -- Certain Conditions to the Exchange Offers." Procedures for Tendering Old Senior Subordinated Notes.................... Each holder of Old Senior Subordinated Notes wishing to accept the Senior Subordinated Notes Exchange Offer must complete, sign and date the accompanying letter of transmittal relating to the Senior Subordinated Notes Exchange Offer (the "Senior Subordinated Notes Letter of Transmittal"), or a copy thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver the Senior Subordinated Notes Letter of Transmittal, or the copy, together with the Old Senior Subordinated Notes and any other required documentation, to the Senior Subordinated Notes Exchange Agent (as defined) at the address set forth in the Senior Subordinated Notes Letter of Transmittal. Persons holding Old Senior Subordinated Notes through the Depository Trust Company ("DTC") and wishing to accept the Senior Subordinated Notes Exchange Offer must do so pursuant to the DTC's Automated Tender Offer Program, by which each tendering Participant will agree to be bound by the Senior Subordinated Notes Letter of Transmittal. By executing or agreeing to be bound by the Senior Subordinated Notes Letter of Transmittal, each holder will represent to the Company that, among other things, (i) the New Senior Subordinated Notes acquired pursuant to the Senior Subordinated Notes Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Senior Subordinated Notes, whether or not such person is the holder of the Old Senior Subordinated Notes, (ii) neither the holder nor any such other person is engaging in or intends to engage in a distribution of such New Senior Subordinated Notes, (iii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Senior Subordinated Notes within the meaning of the Securities Act, (iv) neither the holder nor any such person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of the Company or any Guarantor, and (v) if such holder or other person is a broker-dealer, that it will receive New Senior Subordinated Notes for its own account in exchange for Old Senior Subordinated Notes that were acquired as a result of market-making activities or other trading activities and that it will be required to acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Subordinated Notes. See "The Exchange Offers -- Procedures for Tendering." Shelf Registration Requirement.............. Pursuant to the Senior Subordinated Notes Registration Rights Agreement, the Company is required to file a "shelf" registration statement for a continuous offering pursuant to Rule 415 under the Securities Act in respect of the Old Senior Subordinated Notes if (i) because of any change in law or applicable interpretations of the staff of the Commission, the Company is not permitted to effect the Senior Subordinated Notes Exchange Offer, (ii) the Senior Subordinated Notes Exchange Offer is not consummated within 225 days of the Original Senior Subordinated Notes Offering, (iii) any holder of Private Exchange Securities (as defined) requests within 60 days after the Senior Subordinated Notes Exchange Offer, (iv) any applicable law or interpretations do not permit any holder of Old Senior Subordinated Notes to participate in the Senior Subordinated Notes Exchange Offer, (v) any holder of Old Senior Subordinated Notes participates in the Senior Subordinated Notes Exchange Offer and does not receive freely transferrable New Senior Subordinated Notes in change for Old Senior Subordinated Notes or (vi) the Company so elects. Acceptance of Old Senior Subordinated Notes and Delivery of New Senior Subordinated Notes....... The Company will accept for exchange any and all Old Senior Subordinated Notes which are properly tendered (and not withdrawn) in the Senior Subordinated Notes Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Senior Subordinated Notes issued pursuant to the Senior Subordinated Notes Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offers -- Terms of the Exchange Offers." Senior Subordinated Notes Exchange Agent........... United States Trust Company of New York is serving as Exchange Agent (the "Senior Subordinated Notes Exchange Agent") in connection with the Senior Subordinated Notes Exchange Offer. Federal Income Tax Considerations........... The exchange pursuant to the Senior Subordinated Notes Exchange Offer should not be a taxable event for federal income tax purposes. See "Certain United States Federal Income Tax Considerations." Effect of Not Tendering.... Old Senior Subordinated Notes that are not tendered or that are tendered but not accepted will, following the completion of the Senior Subordinated Notes Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. THE SENIOR DISCOUNT NOTES EXCHANGE OFFER: The Senior Discount Notes Exchange Offer applies to $325,000,000 aggregate principal amount at maturity of the Old Senior Discount Notes. The form and terms of the New Senior Discount Notes will be the same as the form and terms of the Old Senior Discount Notes except that (i) the Accreted Value (as defined) of the New Senior Discount Notes will be calculated from the date of issuance of the Old Senior Discount Notes and (ii) the New Senior Discount Notes are being registered under the Securities Act and, therefore, will not bear legends restricting their transfer. The New Senior Discount Notes will evidence the same debt as the Old Senior Discount Notes and will be entitled to the benefits of the Senior Discount Notes Indenture (as defined) pursuant to which the Old Senior Discount Notes were issued. The Old Senior Discount Notes and the New Senior Discount Notes are sometimes referred to collectively herein as the "Senior Discount Notes." See "Description of the New Senior Discount Notes." The Senior Discount Notes Exchange Offer........... $1,000 principal amount at maturity of New Senior Discount Notes in exchange for each $1,000 principal amount at maturity of Old Senior Discount Notes. As of the date hereof, Old Senior Discount Notes representing $325,000,000 aggregate principal amount at maturity are outstanding. The terms of the New Senior Discount Notes and the Old Senior Discount Notes are substantially identical. Based on an interpretation by the Commission's staff set forth in no-action letters issued to third parties unrelated to Holdings, Holdings believes that New Senior Discount Notes issued pursuant to the Senior Discount Notes Exchange Offer in exchange for Old Senior Discount Notes may be offered for resale, resold and otherwise transferred by any person receiving the New Senior Discount Notes, whether or not that person is the holder (other than any such holder or such other person that is an "affiliate" of Holdings within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that (i) the New Senior Discount Notes are required in the ordinary course of business of that holder or such other person, (ii) neither the holder nor such other person is engaging in or intends to engage in a distribution of the New Senior Discount Notes, and (iii) neither the holder nor such other person has an arrangement or understanding with any person to participate in the distribution of the New Senior Discount Notes. See "The Exchange Offers -- Purpose and Effect." Each broker-dealer that receives New Senior Discount Notes for its own account in exchange for Old Senior Discount Notes where the Old Senior Discount Notes were acquired by the broker-dealer as a result of its market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Discount Notes. See "Plan of Distribution." Senior Discount Notes Registration Rights Agreement................ The Old Senior Discount Notes were sold by Holdings on March 3, 1998, in a private placement in reliance on Section 4(2) of the Securities Act and immediately resold by the Initial Purchasers in reliance on Rule 144A under the Securities Act (the "Original Senior Discount Notes Offering," and together with the Original Senior Subordinated Notes Offering, the "Original Offerings.") In connection with the Original Senior Discount Notes Offering, the Company and Holdings entered into a Registration Rights Agreement with the Initial Purchasers (the "Senior Discount Notes Registration Rights Agreement") providing for, among other things, the Senior Discount Notes Exchange Offer. See "The Exchange Offers -- Purpose and Effect." Expiration Date............ The Senior Discount Notes Exchange Offer will expire at 5:00 p.m., New York City time, on , 1998, or such later date and time to which it is extended by Holdings. Withdrawal................. The tender of Old Senior Discount Notes pursuant to the Senior Discount Notes Exchange Offer may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Any Old Senior Discount Notes not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Senior Discount Notes Exchange Offer. Accreted Value of the New Senior Discount Notes and Old Senior Discount Notes.................... The Accreted Value of each New Senior Discount Note will be calculated from the date of issuance of the Old Senior Discount Note for which such New Senior Discount Note is exchanged. Conditions to the Senior Discount Notes Exchange Offer.................... The Senior Discount Notes Exchange Offer is subject to certain customary conditions, certain of which may be waived by the Company. See "The Exchange Offers -- Certain Conditions to the Exchange Offers." Procedures for Tendering Senior Discount Notes...... Each holder of Old Senior Discount Notes wishing to accept the Senior Discount Notes Exchange Offer must complete, sign and date the accompanying letter of transmittal relating to the Senior Discount Notes Exchange Offer (the "Senior Discount Notes Letter of Transmittal"; the Senior Discount Notes Letter of Transmittal and the Senior Subordinated Notes Letter of Transmittal are sometimes referred to herein individually as a "Letter of Transmittal" and collectively as the "Letters of Transmittal"), or a copy thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver the Senior Discount Notes Letter of Transmittal, or the copy, together with the Old Senior Discount Notes and any other required documentation, to the Senior Discount Notes Exchange Offer (as defined) at the address set forth in the Senior Discount Notes Letter of Transmittal. Persons holding Old Discount Notes through the DTC and wishing to accept the Senior Discount Notes Exchange Offer must do so pursuant to the DTC's Automated Tender Offer Program, by which each tendering Participant will agree to be bound by the Senior Discount Notes Letter of Transmittal. By executing or agreeing to be bound by the Senior Discount Notes Letter of Transmittal, each holder will represent to Holdings that, among other things, (i) the New Senior Discount Notes acquired pursuant to the Senior Discount Notes Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Senior Discount Notes, whether or not such person is the holder of the Old Senior Discount Notes, (ii) neither the holder nor any such other person is engaging in or intends to engage in a distribution of such New Senior Discount Notes, (iii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Senior Discount Notes, (iv) neither the holder nor any such other person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of Holdings, and (v) if such holder or other person is a broker-dealer, that it will receive New Senior Discount Notes for its own account in exchange for Old Senior Discount Notes that were acquired as a result of market-making activities or other trading activities and that it will be required to acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Discount Notes. Shelf Registration Requirement.............. Pursuant to the Senior Discount Notes Registration Rights Agreement, Holdings is required to file a "shelf" registration statement for a continuous offering pursuant to Rule 415 under the Securities Act in respect of the Old Senior Discount Notes if (i) because of any change in law or applicable interpretations of the staff of the Commission, Holdings is not permitted to effect the Senior Discount Notes Exchange Offer, (ii) the Senior Discount Notes Exchange Offer is not consummated within 225 days of the Original Senior Discount Notes Offering, (iii) any holder of Private Exchange Securities (as defined) requests within 60 days after the Senior Discount Notes Exchange Offer, (iv) any applicable law or interpretations do not permit any holder of Old Senior Discount Notes to participate in the Senior Discount Notes Exchange Offer, (v) any holder of Old Senior Discount Notes participates in the Senior Discount Notes Exchange Offer and does not receive freely transferrable New Senior Discount Notes in exchange for Old Senior Discount Notes or (vi) Holdings so elects. Acceptance of Old Senior Discount Notes and Delivery of New Senior Discount Notes.................... Holdings will accept for exchange any and all Old Senior Discount Notes which are properly tendered (and not withdrawn) in the Senior Discount Notes Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Senior Discount Notes issued pursuant to the Senior Discount Notes Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offers -- Terms of the Exchange Offer." Senior Discount Notes Exchange Agent........... United States Trust Company of New York is serving as Exchange Agent (the "Senior Discount Notes Exchange Agent"; the Senior Subordinated Notes Exchange Agent and the Senior Discount Notes Exchange Agent are sometimes referred to herein individually as an "Exchange Agent" and collectively as the "Exchange Agents") in connection with the Senior Discount Notes Exchange Offer. Federal Income Tax Considerations........... The exchange pursuant to the Senior Discount Notes Exchange Offer should not be a taxable event for federal income tax purposes. See "Certain United States Federal Income Tax Considerations." Effect of Not Tendering.... Old Senior Discount Notes that are not tendered or that are tendered but not accepted will, following the completion of the Senior Discount Notes Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. TERMS OF THE NEW NOTES NEW SENIOR SUBORDINATED NOTES Issuer..................... LIN Television Corporation (as successor-in-interest to LIN Acquisition Company). Securities Offered......... $300,000,000 aggregate principal amount of 8 3/8% Senior Subordinated Notes due 2008. Maturity................... March 1, 2008. Interest Payment Dates..... March 1 and September 1 of each year, commencing September 1, 1998. Sinking Fund............... None. Optional Redemption........ Except as described below, the Company may not redeem the New Senior Subordinated Notes prior to March 1, 2003. On or after such date, the Company may redeem the Senior Subordinated Notes, in whole or in part, at the redemption prices set forth herein, together with accrued and unpaid interest, if any, to the date of redemption. In addition, at any time and from time to time on or prior to March 1, 2001, the Company may redeem up to 35% of the aggregate principal amount of the Senior Subordinated Notes with the net cash proceeds of one or more private or public offerings by the Company, at a redemption price equal to 108.375% of the principal amount to be redeemed, together with accrued and unpaid interest, if any, to the date of redemption, provided that at least 65% of the originally issued aggregate principal amount of the Senior Subordinated Notes remains outstanding after each such redemption. See "Description of the New Senior Subordinated Notes -- Optional Redemption." Change of Control.......... Upon the occurrence of a Change of Control, (i) the Company will have the option, at any time on or prior to March 1, 2003, to redeem the New Senior Subordinated Notes, in whole but not in part, at a redemption price equal to 100% of the principal amount thereof, plus accrued and unpaid interest plus the Applicable Premium (as defined) and (ii) if the New Senior Subordinated Notes are not redeemed or if such Change of Control occurs after March 1, 2003, the Company will be required to make an offer to repurchase the New Senior Subordinated Notes at a price equal to 101% of the principal amount thereof, together with accrued and unpaid interest, if any, to the date of purchase. See "Description of the New Senior Subordinated Notes -- Change of Control" and "-- Amendment." Guarantees................. The New Senior Subordinated Notes will be guaranteed (the "Subsidiary Guarantees"), jointly and severally on an unsecured senior subordinated basis, by the Company's direct and indirect, existing and future, Restricted Subsidiaries (the "Guarantors"). The Guarantors also will guarantee all obligations of the Company under the Senior Credit Facilities (as defined). The Company's obligations under the Senior Credit Facilities also will be secured by substantially all of the assets of the Company and the Guarantors. The obligations of each Guarantor under its Subsidiary Guarantee will be subordinated in right of payment to the prior payment in full of all Guarantor Senior Indebtedness (as defined) of such Guarantor to substantially the same extent as the Senior Subordinated Notes are subordinated to all existing and future Senior Indebtedness of the Company. See "Description of the New Senior Subordinated Notes -- Subsidiary Guarantees of the New Senior Subordinated Notes." Ranking.................... The New Senior Subordinated Notes will be unsecured and will be subordinated in right of payment to all existing and future Senior Indebtedness (as defined) of the Company and will rank pari passu in right of payment with all Senior Subordinated Indebtedness (as defined) of the Company. As of March 31, 1998, the aggregate principal amount of the Company's outstanding Senior Indebtedness was $170.0 million (consisting of outstanding Term Loans) and the Company had no Senior Subordinated Indebtedness outstanding other than the Senior Subordinated Notes and had no Subsidiary Indebtedness outstanding. As of such date, liabilities of the Company's Subsidiaries reflected on its consolidated balance sheet, including indebtedness and other liabilities such as trade payables and accrued expenses, aggregated $17.8 million. See "Description of the New Senior Subordinated Notes -- Ranking and Subordination." Restrictive Covenants...... The Senior Subordinated Notes Indenture limits, among other things, (i) the incurrence of additional indebtedness and issuance of capital stock, (ii) layering of indebtedness, (iii) the payment of dividends on, and redemption of, capital stock of the Company, (iv) liens, (v) mergers, consolidations, and sales of all or substantially all of the Company's assets, (vi) asset sales, (vii) asset swaps, (viii) dividend and other payment restrictions affecting Restricted Subsidiaries and (ix) transactions with affiliates of the Company. However, all of these limitations and prohibitions are subject to a number of important qualifications and exceptions. See "Description of the New Senior Subordinated Notes -- Certain Covenants." Use of Proceeds............ There will be no cash proceeds to the Company from the exchange of New Senior Subordinated Notes for Old Senior Subordinated Notes pursuant to the Senior Subordinated Notes Exchange Offer. The net proceeds from the Original Senior Subordinated Notes Offering were used, together with the proceeds of the other Financings, to consummate the Acquisition. NEW SENIOR DISCOUNT NOTES Issuer..................... LIN Holdings Corp. Securities Offered......... $325,000,000 aggregate principal amount at maturity of 10% Senior Discount Notes due 2008. The Senior Discount Notes will be issued at a discount to their aggregate principal amount at maturity. Maturity................... March 1, 2008. Interest Payment Dates..... Cash interest will not accrue or be payable on the New Senior Discount Notes prior to March 1, 2003. Thereafter, cash interest on the New Senior Discount Notes will accrue at a rate of 10% per annum and will be payable semi-annually in arrears on March 1 and September 1 of each year, commencing on September 1, 2003. Original Issue Discount.... For federal income tax purposes, the New Senior Discount Notes will be treated as having been issued with "original issue discount" equal to the difference between the issue price of the Old Senior Discount Notes and the sum of all cash payments (whether denominated as principal or interest) to be made thereon. Each holder of a New Senior Discount Note must include as gross income for federal income tax purposes a portion of such original issue discount for each day during each taxable year in which a New Senior Discount Note is held even though no cash interest payments will be received prior to March 1, 2003. See "Certain United States Federal Income Tax Considerations -- Taxation of Original Issue Discount." Sinking Fund............... None. Mandatory Principal Redemption............... Except as described below, Holdings may not redeem the New Senior Discount Notes prior to March 1, 2003. On March 1, 2003, Holdings will be required to redeem Senior Discount Notes with an aggregate principal amount at maturity equal to (i) $125.0 million multiplied by (ii) the quotient obtained by dividing (x) the aggregate principal amount at maturity of Senior Discount Notes then outstanding (other than Senior Discount Notes then held by Holdings or its Subsidiaries or the entities with respect to which Holdings is a direct or indirect Subsidiary) by (y) $325.0 million, (the "Mandatory Principal Redemption Amount") at a redemption price equal to 100% of the principal amount at maturity of the Senior Discount Notes so redeemed. See "Description of the New Senior Discount Notes -- Mandatory Principal Redemption." Optional Redemption........ The New Senior Discount Notes will be redeemable at the option of Holdings, in whole or in part, at any time on or after March 1, 2003. On or after such date, Holdings may redeem the New Senior Discount Notes, in whole or in part, at the redemption prices set forth herein, together with accrued and unpaid interest, if any, to the date of redemption. In addition, at any time and from time to time on or prior to March 1, 2001, Holdings may, subject to certain requirements, redeem up to 35% of the aggregate principal amount at maturity of the Senior Discount Notes with the net cash proceeds from one or more private or public equity offerings at a price equal to 110% of the Accreted Value (as defined) at the date of redemption, provided that at least 65% of the originally issued aggregate principal amount at maturity of the Senior Discount Notes remains outstanding after each such redemption. See "Description of the New Senior Discount Notes -- Optional Redemption." Change of Control.......... Upon a Change of Control, (i) Holdings will have the option, at any time on or prior to March 1, 2003, to redeem the New Senior Discount Notes, in whole but not in part, at a redemption price equal to 100% of the Accreted Value thereof plus the Applicable Premium and (ii) if the New Senior Discount Notes are not so redeemed or if such Change of Control occurs after March 1, 2003, Holdings will be required to make an offer to repurchase the New Senior Discount Notes at a price equal to (a) 101% of the Accreted Value thereof if redeemed on or before March 1, 2003, and (b) 101% of the principal amount at maturity, plus accrued and unpaid interest, if any, thereon, if redeemed after March 1, 2003. See "Description of the New Senior Discount Notes -- Change of Control." Guarantees................. None. Ranking.................... The New Senior Discount Notes will be senior unsecured obligations of Holdings and will rank pari passu in right of payment with all Senior Indebtedness of Holdings, including Holdings' guarantee of the Senior Credit Facilities. Holdings is a holding company with no operations of its own and whose primary asset is the capital stock of the Company (all of which will be pledged to secure the Senior Credit Facilities). As a result of the holding company structure, the New Senior Discount Notes will effectively rank junior in right of payment to all creditors of the Company and its subsidiaries, including the lenders under the Senior Credit Facilities, holders of the Senior Subordinated Notes and trade creditors. As of March 31, 1998, the New Senior Discount Notes were effectively subordinated to $523.8 of aggregate liabilities (including indebtedness and other liabilities such as trade payables and accrued expenses that would have been reflected on the consolidated balance sheet) of the Company and its subsidiaries. See "Description of the New Senior Discount Notes." Restrictive Covenants...... The Senior Discount Notes Indenture limits, among other things, (i) the incurrence of additional indebtedness and issuance of capital stock, (ii) the payment of dividends on, and redemption of, capital stock of Holdings, (iii) mergers, consolidations and sales of all or substantially all of Holdings' assets, (iv) asset sales, (v) asset swaps, (vi) dividend and other payment restrictions affecting Restricted Subsidiaries and (vii) transactions with affiliates. However, all of these limitations and prohibitions are subject to a number of important qualifications and exceptions. See "Description of the New Senior Discount Notes -- Certain Covenants."
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+SUMMARY The following summary should be read in conjunction with the more detailed information, financial statements and notes thereto appearing elsewhere in this Prospectus. For additional information relating to certain defined terms used herein, as well as the sources for the market and other industry data contained herein, see "Certain Definitions and Market and Industry Data." THE COMPANY The Company is a leading television station group operator in the United States that operates eleven television stations and provides consulting services to two additional television stations. Twelve of these stations are network affiliates and nine are in top forty DMAs, including: Indianapolis, Indiana; New Haven-Hartford, Connecticut; Buffalo, New York; Norfolk-Portsmouth, Virginia; Grand Rapids-Kalamazoo-Battle Creek, Michigan and Dallas-Fort Worth, Texas. These stations have an aggregate United States household reach of approximately 6.9%, ranking the Company among the top independent, "pure-play" television station group operators in the United States. The Company's Core Stations generated an aggregate pro forma BCF margin of approximately 46% for the fiscal year ended December 31, 1997, principally as a result of their strong network affiliations, leading local news programming and tight cost controls. In addition, the Company's management pioneered the "multi-channel strategy," which involves the combination of an owned and operated television station with an LMA station and/or a 24-hour cable weather channel (a "Local Weather Station") in the same market. The multi-channel strategy has enhanced the Company's revenue market shares and increased its BCF by leveraging its fixed costs over a larger revenue base. The Company's station portfolio is well diversified in terms of its network affiliations, geographic coverage, net revenues and cash flow. The Company owns and operates three CBS affiliates, two NBC affiliates and two ABC affiliates which accounted for 35%, 28% and 28%, respectively, of the Company's pro forma BCF for the fiscal year ended December 31, 1997. The Company's LMA stations and Local Weather Stations accounted for substantially all of the remaining 9% of its BCF on the same basis. The Company's Core Stations broadcast in seven different markets, with no market representing more than 25% of the Company's pro forma net revenues or BCF for the fiscal year ended December 31, 1997. The Company's pro forma net revenues, BCF and EBITDA were $196.1 million, $79.5 million and $72.7 million, respectively, for the fiscal year ended December 31, 1997. Hicks, Muse, Tate & Furst Incorporated ("Hicks Muse"), a leading private equity firm with significant investments and experience in the media and communications industry, has acquired LIN Television to serve as a platform for acquiring and operating additional television stations that can benefit from management's ability to improve operating performance and increase BCF margins at acquired stations. In connection with the Acquisition, Hicks Muse and NBC formed a television station joint venture (the "Joint Venture"). The Joint Venture consists of KXAS-TV, LIN Television's Dallas-Fort Worth NBC affiliate, and KNSD-TV, NBC's San Diego station. A wholly owned subsidiary of NBC is the general partner of the Joint Venture (the "NBC General Partner") and NBC operates the stations owned by the Joint Venture pursuant to a management agreement. The NBC General Partner holds an approximate 80% equity interest and the Company holds an approximate 20% equity interest in the Joint Venture. General Electric Capital Corporation ("GECC") provided debt financing to the Joint Venture in the form of the GECC Note (as defined), the proceeds of which were distributed to the Company to finance a portion of the cost of the Acquisition. The GECC Note is not an obligation of Holdings, the Company or any of their respective subsidiaries and is recourse only to the Joint Venture, the Company's equity interest therein and to one of Holding's two corporate parents (the "GECC Note Guarantor") pursuant to a guarantee. The Company expects that the interest payments on the GECC Note will be serviced solely by the cash flow of the Joint Venture. See "The Transactions and Other Matters -- The Joint Venture." Later this year, the Company expects to acquire (the "Grand Rapids Acquisition") from AT&T Corporation ("AT&T") the assets of WOOD-TV and the LMA rights related to WOTV-TV (collectively, LIN TELEVISION CORPORATION LIN HOLDINGS CORP. CROSS REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING THE LOCATION IN THE PROSPECTUS OF THE INFORMATION REQUIRED BY PART I OF FORM S-1 <TABLE> <CAPTION> FORM S-1 ITEM NUMBER AND HEADING LOCATION IN PROSPECTUS -------------------------------- ---------------------- <S> <C> <C> 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus... Cover Page of Registration Statement; Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus............................ Inside Front and Outside Back Cover Pages of Prospectus 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges............. Certain Definitions and Market and Industry Data; Summary; Risk Factors; Selected Consolidated Financial and Operating Data; Unaudited Pro Forma Financial Information; Business 4. Use of Proceeds............................ Use of Proceeds 5. Determination of Offering Price............ Not Applicable 6. Dilution................................... Not Applicable 7. Selling Security Holders................... Not Applicable 8. Plan of Distribution....................... Front Cover Page of Prospectus; The Exchange Offers; Plan of Distribution 9. Description of Securities to be Registered............................... Description of New Senior Subordinated Notes; Description of New Senior Discount Notes 10. Interests of Named Experts and Counsel..... Not Applicable 11. Information with Respect to the Registrant............................... Cover Page of Registration Statement; Certain Definitions and Market and Industry Data; Summary; Risk Factors; The Transactions and Other Matters; Selected Consolidated Financial and Operating Data; Unaudited Pro Forma Consolidated Financial Information; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Securities Ownership of Certain Beneficial Owners; Certain Other Transactions; Description of the Senior Credit Facilities; Legal Matters 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities.............................. Not Applicable </TABLE> AVAILABLE INFORMATION The Issuers and the Guarantors have filed with the Securities and Exchange Commission (the "Commission") a Registration Statement (which term shall encompass any amendments thereto) on Form S-1 under the Securities Act with respect to the securities offered hereby. This Prospectus does not contain all information set forth in the Registration Statement and the exhibits thereto, to which reference is hereby made. Although the Issuers and the Guarantors believe that statements made in this Prospectus as to the contents of any contract, agreement, or other document describe all material elements of such documents, such statements are not necessarily complete. With respect to each such contract, agreement, or other document filed as an exhibit to the Registration Statement, reference is hereby made to such exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. As a result of the filing of the Registration Statement with the Commission, the Issuers and the Guarantors each will become subject to the informational reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In accordance therewith, the Company and Holdings will be required to file reports and other information with the Commission. Such reports and other information can be inspected and copied at the principal office of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and the following Regional Offices of the Commission: Chicago Regional Office, Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60611 and New York Regional office, 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of such material may also be obtained at prescribed rates from the Public Reference Section of the Commission at its principal office at Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549. The Commission also maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission at http://www.sec.gov. In reliance upon certain Staff Accounting Bulletins of the Commission, interpretations of the staff of the Commission and no-action relief granted by the Staff of the Commission to unrelated third parties, the Subsidiary Guarantors do not intend to file periodic reports with the Commission under the Exchange Act separately from the Issuers. The Issuers will furnish holders of the securities offered hereby with annual reports containing, among other information, audited financial statements certified by an independent public accounting firm and quarterly reports containing unaudited financial information for the first three quarters of each fiscal year. The Issuers will also furnish such other reports as it may determine or as may be required by law or by the indentures governing the New Notes. FORWARD LOOKING STATEMENTS THIS PROSPECTUS CONTAINS CERTAIN FORWARD LOOKING STATEMENTS WITH RESPECT TO THE FINANCIAL CONDITIONS, RESULTS OF OPERATIONS AND BUSINESSES OF THE ISSUERS, INCLUDING STATEMENTS UNDER THE CAPTIONS "SUMMARY," "UNAUDITED PRO FORMA FINANCIAL INFORMATION," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS." ALL OF THESE FORWARD LOOKING STATEMENTS ARE BASED ON ESTIMATES AND ASSUMPTIONS MADE BY MANAGEMENT OF THE ISSUERS WHICH, ALTHOUGH BELIEVED TO BE REASONABLE, ARE INHERENTLY UNCERTAIN. THEREFORE, UNDUE RELIANCE SHOULD NOT BE PLACED UPON SUCH ESTIMATES AND STATEMENTS. NO ASSURANCE CAN BE GIVEN THAT ANY OF SUCH ESTIMATES OR STATEMENTS WILL BE REALIZED AND IT IS LIKELY THAT ACTUAL RESULTS WILL DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE: (1) INCREASED COMPETITION, INCLUDING FROM NEWER FORMS OF ENTERTAINMENT AND ENTERTAINMENT MEDIA OR CHANGES IN THE POPULARITY OR AVAILABILITY OF PROGRAMMING; (2) INCREASED COSTS, INCLUDING INCREASED CAPITAL EXPENDITURES AS A RESULT OF NECESSARY TECHNOLOGICAL ENHANCEMENTS (E.G., EXPENDITURES RELATED TO THE TRANSITION TO DIGITAL the "Grand Rapids Stations"), both of which stations are located in the Grand Rapids-Kalamazoo-Battle Creek market. The Company currently provides services to the Grand Rapids Stations pursuant to a consulting agreement with AT&T. See "The Transactions and Other Matters -- The Grand Rapids Acquisition" and "Business -- The Company -- History." The following table provides information regarding the stations and other programming outlets operated by the Company and the stations owned by the Joint Venture: <TABLE> <CAPTION> COMMERCIAL STATION STATION DMAS, STATIONS AND OTHER DMA STATIONS IN RANK IN AUDIENCE PROGRAMMING OUTLETS STATUS(A) AFFILIATION(B) RANK(C) DMA(D) DMA(E) Share(e) ------------------------ --------- -------------- ------- ----------- ------- -------- <S> <C> <C> <C> <C> <C> <C> COMPANY STATIONS AND OTHER PROGRAMMING OUTLETS: INDIANAPOLIS, IN WISH-TV.......................................... O&O CBS 25 8 1 18% WIIH-LP (Satellite)(f)........................... O&O CBS Local Weather Station............................ O&O Cable NEW HAVEN-HARTFORD, CT WTNH-TV.......................................... O&O ABC 27 8 2 14% WBNE-TV.......................................... LMA WB 5(tie) 2% GRAND RAPIDS-KALAMAZOO-BATTLE CREEK, MI(g) WOOD-TV.......................................... CS NBC 37 8 1(tie) 18% WOTV-TV.......................................... CS ABC 4 5% NORFOLK-PORTSMOUTH, VA WAVY-TV.......................................... O&O NBC 39 7 1(tie) 16% WVBT-TV.......................................... LMA WB/Fox(h) 5 2% Local Weather Station............................ O&O Cable BUFFALO, NY WIVB-TV.......................................... O&O CBS 40 7 2 17% AUSTIN, TX KXAN-TV.......................................... O&O NBC 60 7 3 14% KNVA-TV.......................................... LMA WB 6 3% KXAM-TV (Satellite)(i)........................... O&O NBC Low Power Network................................ O&O UPN DECATUR-CHAMPAIGN, IL WAND-TV.......................................... O&O ABC 81 8 3 14% Local Weather Station............................ O&O Cable FORT WAYNE, IN WANE-TV.......................................... O&O CBS 102 6 2 19% Local Weather Station............................ O&O Cable DALLAS-FORT WORTH, TX KXTX-TV.......................................... LMA IND 8 13 9 3% JOINT VENTURE STATIONS: DALLAS-FORT WORTH, TX KXAS-TV.......................................... JV NBC 8 13 3 12% SAN DIEGO, CA KNSD-TV.......................................... JV NBC 26 7 1 13% </TABLE> - --------------- (a) "O&O" refers to a station owned and operated by the Company. "LMA" refers to a station operated by the Company pursuant to a local marketing agreement and with respect to which the Company has a purchase option exercisable under certain circumstances. "JV" refers to a station owned by the Joint Venture and operated by NBC. "CS" refers to a station which the Company currently provides services to pursuant to a consulting agreement. The Company's Core Stations, all of which are CBS, NBC and ABC affiliates, are WISH-TV, WANE-TV, WAND-TV, WAVY-TV, KXAN-TV, WTNH-TV and WIVB-TV. (b) "IND" refers to an independent station with no network affiliation. (c) Rankings are based on the relative size of the station's "market" among the 211 generally recognized television markets in the United States. Source: Nielsen Station Index DMA Market Ratings -- November 1997, A.C. Nielsen Company. (d) The number of stations in a market excludes local weather stations, low power networks and satellite broadcasting facilities. (e) Source: Nielsen Station Index DMA Market Ratings -- November 1997, A.C. Nielsen Company, Sunday-Saturday 6:00 a.m.-2:00 a.m. (f) Station WIIH-LP, Indianapolis, Indiana, is operated as a satellite station of WISH-TV in order to increase WISH-TV's coverage. PROSPECTUS <TABLE> <S> <C> OFFER FOR ALL OUTSTANDING OFFER FOR ALL OUTSTANDING 8 3/8% SENIOR SUBORDINATED NOTES DUE 10% SENIOR DISCOUNT NOTES DUE 2008 2008 IN EXCHANGE FOR IN EXCHANGE FOR 10% SENIOR DISCOUNT NOTES DUE 2008 8 3/8% SENIOR SUBORDINATED NOTES DUE OF 2008 LIN HOLDINGS CORP. OF LIN TELEVISION CORPORATION </TABLE> Pursuant to the terms and subject to the conditions set forth in this Prospectus and the accompanying letters of transmittal, (i) LIN Television Corporation, a Delaware corporation (the "Company"), and the Guarantors (as defined) hereby offer (the "Senior Subordinated Notes Exchange Offer") to exchange $1,000 principal amount of registered 8 3/8% Senior Subordinated Notes Due 2008 (the "New Senior Subordinated Notes") issued by the Company, for each $1,000 principal amount of unregistered 8 3/8% Senior Subordinated Notes Due 2008 (the "Old Senior Subordinated Notes," and together with the New Senior Subordinated Notes, the "Senior Subordinated Notes") issued by LIN Acquisition Company, the predecessor in interest of the Company ("LIN Acquisition"), of which an aggregate principal amount of $300,000,000 is outstanding and (ii) LIN Holdings Corp., a Delaware corporation ("Holdings") hereby offers (the "Senior Discount Notes Exchange Offer," and together with the Senior Subordinated Notes Exchange Offer, the "Exchange Offers") to exchange $1,000 principal amount at maturity of registered 10% Senior Discount Notes Due 2008 (the "New Senior Discount Notes") issued by Holdings, for each $1,000 principal amount at maturity of unregistered 10% Senior Discount Notes Due 2008 (the "Old Senior Discount Notes," and together with the New Senior Discount Notes, the "Senior Discount Notes") issued by Holdings, of which an aggregate principal amount at maturity of $325,000,000 is outstanding. The Old Senior Subordinated Notes and the Old Senior Discount Notes are sometimes collectively referred to herein as the "Old Notes" and the New Senior Subordinated Notes and the New Senior Discount Notes are sometimes collectively referred to herein as the "New Notes." The Old Notes and the New Notes are sometimes collectively referred to herein as the "Notes." The Company and Holdings are sometimes collectively referred to herein as the "Issuers." The form and terms of the New Notes are identical to the form and terms of the Old Notes except that (i) interest on the New Senior Subordinated Notes shall accrue from the date of issuance of the Old Senior Subordinated Notes, (ii) the Accreted Value (as defined) of the New Senior Discount Notes will be calculated from the date of issuance of the Old Senior Discount Notes, and (iii) the New Notes are being registered under the Securities Act of 1933, as amended (the "Securities Act"), and will not bear any legends restricting their transfer. The New Senior Subordinated Notes will evidence the same debt as the Old Senior Subordinated Notes and will be issued pursuant to, and entitled to the benefits of, the indenture governing the Old Senior Subordinated Notes. The New Senior Discount Notes will evidence the same debt as the Old Senior Discount Notes and will be issued pursuant to, and entitled to the benefits of, the indenture governing the Old Senior Discount Notes. The Exchange Offers are being made in order to satisfy certain contractual obligations of the Company and Holdings. See "The Exchange Offers," "Description of the New Senior Subordinated Notes" and "Description of the New Senior Discount Notes." The net proceeds from the sale of the Old Notes were used to effect the acquisition by Holdings of the Company and its subsidiaries (the "Acquisition"). Such acquisition was effected pursuant to the merger of LIN Acquisition with and into the Company, with the Company surviving as a wholly owned subsidiary of Holdings. See "The Transactions and Other Matters." --------------------- SEE "RISK FACTORS" BEGINNING ON PAGE 22 FOR A DISCUSSION OF CERTAIN INFORMATION THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NEW NOTES. --------------------- The Company and Holdings will accept for exchange any and all Old Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on , 1998, unless extended (as so extended, the "Expiration Date"). Tenders of Old Notes may be withdrawn at any time prior to the Expiration Date. The Exchange Offers are subject to certain customary conditions. See "The Exchange Offers." In order for a holder of Old Notes to participate in an Exchange Offer, such holder must represent to the Company or Holdings, as appropriate, that, among other things, (i) the New Notes acquired pursuant to such Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Notes, whether or not such person is the holder of the Old Notes, (ii) neither the holder nor any such other person is engaging or intends to engage in a distribution of such New Notes, (iii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Notes within the meaning of the Securities Act, (iv) neither the holder nor any such other person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of the Company, Holdings or any Guarantor, and (v) if such holder or other person is a broker-dealer, that it will receive New Notes for its own account in exchange for Old Notes that were acquired as a result of marketmaking activities or other trading activities. See "The Exchange Offers--Purpose and Effect." Each broker-dealer that receives New Notes for its own account pursuant to either of the Exchange Offers must acknowledge that it will deliver a prospectus in connection with any resale of those New Notes. The letter of transmittal accompanying this Prospectus states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for Old Notes where such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company and Holdings have agreed that, for a period of 90 days after the Expiration Date, they will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." No public market has existed for the Old Notes. The Company and Holdings currently do not intend to list the New Notes on any securities exchange or to seek approval for quotation through any automated quotation system, and no active public market for the New Notes is currently anticipated. The Company and Holdings will pay all expenses incident to the Exchange Offers. The Exchange Offers are not conditioned upon any minimum principal amount of Old Senior Subordinated Notes or Old Senior Discount Notes being tendered for exchange pursuant to the Exchange Offers. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DATE OF THIS PROSPECTUS IS , 1998. BROADCASTING) OR ACQUISITIONS OR INCREASED PROGRAMMING COSTS; (3) INABILITY TO CONSUMMATE ACQUISITIONS ON ATTRACTIVE TERMS; (4) LOSS OR RETIREMENT OF KEY MEMBERS OF MANAGEMENT; (5) INCREASES IN THE ISSUERS' COST OF BORROWINGS OR INABILITY OR UNAVAILABILITY OF ADDITIONAL DEBT OR EQUITY CAPITAL; (6) ADVERSE STATE OR FEDERAL LEGISLATION OR REGULATION OR ADVERSE DETERMINATIONS BY REGULATORS; AND (7) CHANGES IN ADVERTISING TRENDS AND/OR BUDGETS AND IN GENERAL ECONOMIC CONDITIONS IN THE MARKETS IN WHICH THE ISSUERS MAY, FROM TIME TO TIME, COMPETE. MANY OF SUCH FACTORS WILL BE BEYOND THE CONTROL OF THE ISSUERS AND THEIR MANAGEMENT. FORWARD-LOOKING STATEMENTS CONTAINED HEREIN SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULT OF ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS WHICH MAY BE MADE TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. FOR FURTHER INFORMATION OR OTHER FACTORS WHICH COULD AFFECT THE FINANCIAL RESULTS OF THE ISSUERS AND SUCH FORWARD LOOKING STATEMENTS, SEE "RISK FACTORS." (g) The Company currently provides services to WOOD-TV and WOTV-TV pursuant to a consulting agreement with AT&T. The Company has agreed to acquire the assets of WOOD-TV and the LMA rights related to WOTV-TV from AT&T for a purchase price of approximately $125.5 million. The acquisition is expected to close later this year. See "The Transactions and Other Matters -- The Grand Rapids Acquisition" and "Business -- The Company -- History." (h) WVBT-TV will become a Fox affiliate on August 31, 1998. (i) Station KXAM-TV, Llano, Texas, is operated as a satellite station of KXAN-TV in order to increase KXAN-TV's coverage. BUSINESS STRATEGY The Company's business strategy is to maximize its BCF through both revenue growth and the implementation of effective cost controls. To achieve these goals, the Company seeks, among other things, to: Maximize Revenue Shares. From 1993 to 1997, the Company increased its broadcast television advertising revenue market share from 22.8% to 25.9% (assuming the acquisitions of WIVB-TV and WTNH-TV occurred on January 1, 1993) by targeting audiences with favorable demographic profiles, creating auxiliary revenue streams and cultivating strong network affiliations. On the same basis, the Company's gross advertising revenues have grown at a compound annual rate of 10.3%, whereas gross advertising revenues in the Company's markets have grown at a compound annual rate of 6.8%. The Company attempts to maximize each station's revenue share through a quarterly "entitlement review process." This process involves the benchmarking of each station's advertising revenues against an index which weights various demographic attributes according to their relative advertising revenue value. As a result of the entitlement review process, the Company's revenue shares typically outperform its audience shares. The Company's revenue shares also benefit from long term affiliations with its three core networks -- CBS, NBC and ABC -- which provide the Company's television stations affiliated with such networks with competitive programming, including coverage of political events and high profile sporting events such as the Olympic Games, Super Bowl and NCAA Men's Basketball Tournament. The Company also has stations affiliated with Fox, WB and UPN, which further enhances its ability to grow its revenue shares through access to their competitive programming. Emphasize Leading Local News. The Company's Core Stations are ranked number one or two in late news in all but the Company's smallest market. Management believes that a successful news operation is critical to the success of a television station because news audiences generally have the best demographic profiles from an advertising sales perspective. In addition, news programming: (i) enables the Company to purchase less syndicated programming and thereby maintain tight control over programming costs; (ii) serves as a strong lead-in to other programming; and (iii) fosters a high profile in the local community, which is critical to maximizing local advertising sales. The Company believes that its local news programming significantly improves its stations' BCF margins. Accordingly, the Company has increased the hours of news produced per week from 81 in 1989 to 187 in 1997 on a pro forma basis. Partly as a result of its emphasis on quality local news programming, management has increased the BCF margin at the five network-affiliated stations that it has operated throughout the period from January 1, 1991 to December 31, 1997 (WISH-TV, WANE-TV, WAND-TV, WAVY-TV and KXAN-TV) from 37% to 47%. Execute a Multi-Channel Strategy. The Company's management pioneered the "multi-channel strategy," which involves the combination of an owned and operated television station with an LMA station and/or a Local Weather Station in the same market. Management has pursued this strategy in all but one of the Company's markets. Execution of the multi-channel strategy has been a factor in the Company's ability to generate incremental cash flow. The advantages of the multi-channel strategy are: (i) the ability to capitalize on management's expertise; (ii) additional advertising inventory in each market; (iii) greater programming flexibility; (iv) enhanced ability to leverage fixed operating costs over a larger revenue base; (v) improved negotiating positions with respect to suppliers of syndicated programming, advertisers and the networks; (vi) increased share of actual viewers; (vii) the opportunity to affiliate with the emerging networks; and (viii) enhanced opportunities for cross promotion. CERTAIN DEFINITIONS AND MARKET AND INDUSTRY DATA As used in this Prospectus, unless the context otherwise requires, (i) "Holdings" refers to LIN Holdings Corp., (ii) "LIN Acquisition" refers to LIN Acquisition Company, (iii) "LIN Television" or the "Predecessor" refers to LIN Television Corporation and its subsidiaries prior to the Acquisition, (iv) the "Company" refers to LIN Television after giving effect to the Acquisition (as defined), the Financings (as defined) and the Joint Venture (as defined) (collectively, the "Transactions"), except where the context requires otherwise, (v) "on a pro forma basis" or "pro forma" means after giving effect to the Transactions, except as indicated otherwise and (vi) "Core Stations" refers to the CBS, NBC and ABC-affiliated stations owned and operated by the Company (WISH-TV, WANE-TV, WAND-TV, WAVY-TV, KXAN-TV, WTNH-TV and WIVB-TV). See "The Transactions and Other Matters." The terms "broadcast cash flow" ("BCF") and "EBITDA" are referred to in various places in this Prospectus. BCF is defined as operating income (loss) plus corporate expenses plus depreciation and amortization of intangible assets and amortization of program rights plus other non-cash expenses (consisting of tower write-offs and non-cash pension expenses), minus cash program payments. EBITDA is defined as BCF minus corporate expenses. BCF and EBITDA are not measures of performance calculated in accordance with generally accepted accounting principles ("GAAP"). However, management believes that BCF is useful to a prospective investor because it is a measure widely used in the broadcast industry to evaluate a television broadcast company's operating performance and that EBITDA is useful to a prospective investor because it is widely used in the broadcast industry to evaluate a television broadcast company's ability to service debt. BCF and EBITDA should not be considered in isolation of or as a substitute for net income (loss), cash flows from operating activities and other income and cash flow statement data prepared in accordance with GAAP or as a measure of liquidity or profitability. BCF and EBITDA as determined above may not be comparable to the BCF and EBITDA measures reported by other companies. In addition, these measures do not represent funds available for discretionary use. Designated market area ("DMA") rankings are from the Nielsen Station Index dated November 1997 as estimated by the A.C. Nielsen Company ("Nielsen"). There are 211 generally-recognized television "markets" or DMAs in the United States, which are ranked in size according to various factors based upon actual or potential audience. Unless otherwise indicated herein, (i) market revenue, market revenue share, projected advertising revenue growth and station revenue share data have been obtained from Investing in Television 1994, 1995, 1996 and 1997, BIA Publications, Inc. ("BIA"); (ii) television household data has been obtained from the Nielsen Station Index for November of the appropriate year; (iii) audience share and audience rankings, except where specifically stated to the contrary, have been derived from Nielsen estimates (for May and November of the appropriate year) of the percentage of persons in the DMA tuned into the relevant station from sign-on to sign-off (Sunday to Saturday, 6:00 a.m. to 2:00 a.m.); (iv) general market economic data has been obtained from BIA and the chambers of commerce in each station's market; (v) the term "station" or "commercial station" means a television broadcast station and does not include public television stations, cable stations or networks (e.g., CNN, TBS or ESPN), or stations that do not meet the minimum Nielsen reporting standards (i.e., weekly cumulative audience share of at least 2.5% for Sunday to Saturday, 7:00 a.m. to 1:00 a.m.); and (vi) the term "independent" describes a commercial television station that is not affiliated with the ABC, CBS, NBC, Fox, WB or UPN television networks. Control Costs. In addition to concentrating on maximizing advertising revenues in its local markets, management focuses on controlling costs to maximize BCF. In many markets, the Company operates with fewer personnel than its competitors. In addition, management typically buys syndicated programming on a Company-wide basis and performs detailed profitability analyses for all programming purchases. As a result, management believes that the Company's margins are among the highest in the industry for stations in markets of comparable size. Pursue Selective Acquisitions. The Company intends to pursue selective acquisitions of television stations with the goal of improving their operating performance by applying management's business strategy. Targeted stations generally will share many of the following characteristics: (i) attractive acquisition terms; (ii) opportunities for increased advertising revenue; (iii) opportunities to implement effective cost controls; (iv) opportunities for increased audience share through improved newscasts and programming; and (v) market locations that are projected to have attractive growth in advertising revenues. The Company intends to primarily target network-affiliated stations located in the fifty largest DMAs, which stations typically have established audiences for their news, sports and entertainment programming. Invest in Digital Technology. Management believes that the Company is well positioned for the transition to digital broadcasting and anticipates that the Company will be one of the first television broadcasters in the United States to transmit a digital signal. The Company has already invested $13 million to fully prepare its towers and transmitter buildings for the transition, and estimates that an additional $40 million will be required over the next five to seven years for other necessary capital expenditures such as the purchase of antennae, transmitters, studio equipment and news gathering equipment. In accordance with FCC regulations, all station affiliates of ABC, CBS, NBC and Fox in the top ten DMAs will be required to transmit a digital signal by May 1, 1999. Affiliates of those networks in DMAs ranked eleven through thirty will be required to transmit a digital signal by November 1, 1999. All remaining commercial broadcasters will be required to transmit a digital signal by May 1, 2002. MANAGEMENT AND OWNERSHIP The Company's management team, led by Gary Chapman, the Company's President and Chief Executive Officer, is recognized as an industry leader. As an indication of management's expertise and ability, the five network-affiliated stations operated by management throughout the period from January 1, 1991 to December 31, 1997 (WISH-TV, WANE-TV, WAND-TV, WAVY-TV and KXAN-TV) achieved an aggregate annual compound growth rate in net revenues and BCF of 8.9% (from $57.8 million to $96.2 million) and 13.3% (from $21.4 million to $45.2 million), respectively. Management also increased the Company's BCF margin at these stations from 37% to 47% during such period. In connection with the Acquisition, management and key employees reinvested a portion of their equity interest in LIN Television in the indirect parent corporation of Holdings. In addition, management and key employees will be granted options to acquire additional shares representing an approximate 5% equity interest in such parent corporation. Hicks Muse is a leading private investment firm with offices in Dallas, New York, St. Louis and Mexico City that specializes in leveraged acquisitions, recapitalizations and other principal investing activities. Hicks Muse and its predecessor firm have completed or have pending over 100 transactions having a combined transaction value of more than $24 billion. Although Hicks Muse invests in a wide variety of industries, it has significant investments and experience in the media and communications industry, including interests in Chancellor Media, Capstar Broadcasting, STC Broadcasting, Katz Media, OmniAmerica Tower and Grupo MVS. Hicks Muse plans to utilize an investment model for the Company similar to that used for Chancellor Media and Capstar Broadcasting. Chancellor Media was formed in 1993 with the purchase of two radio stations. Today, Chancellor Media is the second largest radio operator in the United States in terms of revenue (behind only CBS). Similarly, Capstar Broadcasting was formed in 1996 for the purpose of acquiring radio stations in small to medium size markets. Capstar Broadcasting is now the largest radio operator in the United States in terms of number of stations. See "Risk Factors -- Potential Conflicts of Interest" and "Certain Other Transactions." THE TRANSACTIONS AND OTHER MATTERS THE TRANSACTIONS The Acquisition. Holdings, LIN Acquisition and LIN Television entered into an Agreement and Plan of Merger on August 12, 1997 (as amended, the "Merger Agreement"). Pursuant to, and upon the terms and conditions of, the Merger Agreement, Holdings acquired LIN Television (the "Acquisition") on March 3, 1998 by merging LIN Acquisition, its wholly-owned subsidiary, with and into LIN Television (the "Merger"), with LIN Television surviving the Merger and becoming a direct, wholly owned subsidiary of Holdings. The total purchase price for the common equity of LIN Television was approximately $1.7 billion. In addition, the Company refinanced $260.2 million of LIN Television indebtedness and incurred acquisition costs of approximately $32.2 million. The Financings. The Acquisition was funded by (i) $6.9 million of excess cash on the Company's balance sheet; (ii) $50.0 million aggregate principal amount of senior secured Tranche A term loans ("Tranche A Term Loans"); (iii) $120.0 million aggregate principal amount of senior secured Tranche B term loans ("Tranche B Term Loans"); (iv) $299.3 million gross proceeds from the issuance by LIN Television of $300.0 million aggregate principal amount of Old Senior Subordinated Notes; (v) $199.6 million gross proceeds from the issuance by Holdings of $325.0 million aggregate principal amount at maturity of Old Senior Discount Notes, which proceeds were contributed by Holdings to the common equity of the Company; (vi) $558.1 million of common equity provided by affiliates of Hicks Muse, management and other co-investors to the equity of the corporate parents of Holdings, which in turn, through Holdings, contributed such amount to the common equity of the Company; and (vii) $815.5 million of proceeds of the GECC Note (collectively, the "Financings"). The Joint Venture. In connection with the Acquisition, Hicks Muse and NBC formed the Joint Venture. The Joint Venture consists of KXAS-TV, formerly LIN Television's Dallas-Fort Worth NBC affiliate, and KNSD-TV, formerly NBC's San Diego station. A wholly owned subsidiary of NBC is the general partner of the Joint Venture and NBC operates the stations owned by the Joint Venture. The NBC General Partner holds an approximate 80% equity interest and the Company holds an approximate 20% equity interest in the Joint Venture. GECC provided debt financing for the Joint Venture in the form of an $815.5 million 25-year non-amortizing senior secured note bearing an initial interest rate of 8.0% per annum (the "GECC Note"). The Company expects that the interest payments on the GECC Note will be serviced solely by the cash flow of the Joint Venture. All Distributable Cash (as defined) of the Joint Venture will be distributed to the Company and the NBC General Partner based on their respective equity interests in the Joint Venture. On a pro forma basis for the fiscal year ended December 31, 1997, the Company's portion of the Joint Venture's Distributable Cash would have been $2.2 million (without giving effect to a reserve of $15.0 million which must be established, subject to waiver by the Company, prior to any distribution of Distributable Cash). See "Risk Factors -- Control of Holdings and the Company." The GECC Note was issued by LIN Television of Texas, L.P., the Company's indirect wholly owned partnership ("LIN Texas"), which distributed the proceeds to the Company to finance a portion of the cost of the Acquisition. The obligations to GECC under the GECC Note were assumed by the Joint Venture and LIN Texas was simultaneously released from all obligations under the GECC Note. The GECC Note is not an obligation of Holdings, the Company or any of their respective subsidiaries and is recourse only to the Joint Venture, the Company's equity interest therein and to the GECC Note Guarantor. See "Risk Factors -- Defaults under the GECC Note" and "The Transactions and Other Matters -- The Joint Venture." In connection with the formation of the Joint Venture, the Company received an extension of its NBC network affiliation agreements to 2010 and the option (exercisable through December 31, 1999) to purchase WVTM-TV, the NBC affiliate in Birmingham, Alabama. Sources and Uses. The following table sets forth the sources and uses of funds in connection with the Acquisition (dollars in millions): <TABLE> <S> <C> SOURCES Excess cash........................ $ 6.9 Term Loans(a)...................... 170.0 Old Senior Subordinated Notes(b)... 299.3 Holdings contributions(c).......... 757.7 GECC Note(d)....................... 815.5 -------- Total Sources................. $2,049.4 ======== USES Purchase of LIN Television equity(e)........................ $1,706.4 Refinance LIN Television debt...... 260.2 Transaction fees and expenses(f)... 82.8 -------- Total Uses.................... $2,049.4 ======== </TABLE> - --------------- (a) The Term Loans funded in connection with the Acquisition consisted of $50.0 million aggregate principal amount of Tranche A Term Loans and $120.0 million aggregate principal amount of Tranche B Term Loans. As of December 31, 1997, the interest rates payable on outstanding Tranche A Term Loans and Tranche B Term Loans would have been approximately 7.50% and 8.00%, respectively. See "Description of the Senior Credit Facilities." (b) Represents gross proceeds to the Company from the issuance of $300.0 million aggregate principal amount of Old Senior Subordinated Notes. (c) Affiliates of Hicks Muse, management and other co-investors contributed $558.1 million to the equity of the corporate parents of Holdings, which in turn, through Holdings, contributed such amount to the common equity of the Company. In addition, Holdings issued $325.0 million aggregate principal amount at maturity of Old Senior Discount Notes and contributed the $199.6 million gross proceeds thereof to the common equity of the Company. (d) LIN Texas distributed the proceeds from the issuance of the GECC Note to the Company, which used such proceeds to finance a portion of the cost of the Acquisition. The GECC Note is not an obligation of Holdings, the Company or any of their respective subsidiaries and is recourse only to the Joint Venture, the Company's equity interest therein and to the GECC Note Guarantor. The Company expects that the interest payments on the GECC Note will be serviced solely by the cash flow of the Joint Venture. See "Risk Factors -- Control of Holdings and the Company" and "-- Defaults under the GECC Note" and "The Transactions and Other Matters -- The Joint Venture.". (e) The purchase price reflects the total price to acquire the equity of LIN Television (including KXAS-TV, which was contributed to the Joint Venture). (f) Includes discounts and commissions on the Old Notes in connection with the Offerings. Organizational Structure The following chart depicts (i) the summary organizational chart of Holdings and the Company and (ii) the sources of financing for the Transactions: LIN GRAPH THE GRAND RAPIDS ACQUISITION The Company expects to consummate the Grand Rapids Acquisition later this year. The Company currently provides services to the Grand Rapids Stations pursuant to a consulting agreement with AT&T. The total purchase price for the Grand Rapids Acquisition will be approximately $125.5 million (plus accretion thereon of 8% from March 1, 1998), which is expected to be funded by $125.0 million of additional Tranche A Term Loans. For the fiscal year ended December 31, 1997, the Grand Rapids Stations generated net revenues and BCF of $28.4 million and $11.3 million, respectively. The historical and pro forma financial information contained herein does not give effect to the Grand Rapids Acquisition. See "The Transactions and Other Matters -- The Grand Rapids Acquisition" and "Business -- The Company -- History." RECENT DEVELOPMENTS Chancellor Media Corporation, a Delaware corporation ("Chancellor") and Ranger Equity Holdings Corporation, a Delaware corporation ("Ranger"), the indirect parent company of Holdings and the Company, entered into an Agreement and Plan of Merger, dated July 7, 1998 (the "Chancellor Merger Agreement"). Pursuant to, and subject to the prior satisfaction or waiver of certain customary conditions (including, without limitation, the approval of Chancellor's and the Company's respective shareholders, the receipt of necessary FCC approvals, and the termination or expiration of the applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended) set forth in, the Chancellor Merger Agreement, Ranger will be merged with and into Chancellor (the "Chancellor Merger"), with Chancellor continuing as the surviving corporation following the Chancellor Merger. As a result of the Chancellor Merger, (i) each share of common stock, $0.01 par value ("Ranger Common Stock"), of Ranger will be converted into the right to receive 0.0300 of a share of common stock, $0.01 par value ("Chancellor Common Stock"), of Chancellor, other than shares of Ranger Common Stock for which appraisal rights have been exercised pursuant to Section 262 of the General Corporation Law of the State of Delaware. In addition, Chancellor, as the surviving corporation, will assume certain outstanding options to purchase shares of Ranger Common Stock held by certain directors, officers, employees and consultants of Ranger and its subsidiaries. Following the Chancellor Merger, Holdings and the Company will become indirect, wholly owned subsidiaries of Chancellor. A Chancellor shareholder has filed a shareholders derivative lawsuit in a chancery court in the State of Delaware, purportedly on behalf of Chancellor, naming Chancellor, Chancellor's directors and the Company as defendants. The lawsuit seeks, among other things, money damages and an injunction prohibiting the consummation of the Chancellor Merger. The Company believes that the lawsuit is without substantial merit and intends to vigorously defend the action. THE EXCHANGE OFFERS THE SENIOR SUBORDINATED NOTES EXCHANGE OFFER: The Senior Subordinated Notes Exchange Offer applies to $300,000,000 aggregate principal amount of the Old Senior Subordinated Notes. The form and terms of the New Senior Subordinated Notes will be the same as the form and terms of the Old Senior Subordinated Notes except that (i) interest on the New Senior Subordinated Notes will accrue from the date of issuance of the Old Senior Subordinated Notes, and (ii) the New Senior Subordinated Notes are being registered under the Securities Act and, therefore, will not bear legends restricting their transfer. The New Senior Subordinated Notes will evidence the same debt as the Old Senior Subordinated Notes and will be entitled to the benefits of the Senior Subordinated Notes Indenture (as defined) pursuant to which the Old Senior Subordinated Notes were issued. The Old Senior Subordinated Notes and the New Senior Subordinated Notes are sometimes referred to collectively herein as the "Senior Subordinated Notes." See "Description of the New Senior Subordinated Notes." The Senior Subordinated Notes Exchange Offer....... $1,000 principal amount of New Senior Subordinated Notes in exchange for each $1,000 principal amount of Old Senior Subordinated Notes. As of the date hereof, Old Senior Subordinated Notes representing $300,000,000 aggregate principal amount are outstanding. The terms of the New Senior Subordinated Notes and the Old Senior Subordinated Notes are substantially identical. Based on an interpretation by the Commission's staff set forth in no-action letters issued to third parties unrelated to the Company, Holdings and the Guarantors, the Company and the Guarantors believe that New Senior Subordinated Notes issued pursuant to the Senior Subordinated Notes Exchange Offer in exchange for Old Senior Subordinated Notes may be offered for resale, resold and otherwise transferred by any person receiving the New Senior Subordinated Notes, whether or not that person is the registered holder (other than any such holder or such other person that is an "affiliate" of the Company or any Guarantors within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that (i) the New Senior Subordinated Notes are acquired in the ordinary course of business of that holder or such other person, (ii) neither the holder nor such other person is engaging in or intends to engage in a distribution of the New Senior Subordinated Notes, and (iii) neither the holder nor such other person has an arrangement or understanding with any person to participate in the distribution of the New Senior Subordinated Notes. See "The Exchange Offers -- Purpose and Effect." Each broker-dealer that receives New Senior Subordinated Notes for its own account in exchange for Old Senior Subordinated Notes, where those Old Senior Subordinated Notes were acquired by the broker-dealer as a result of its market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Subordinated Notes. See "Plan of Distribution." Senior Subordinated Notes Registration Rights Agreement................ The Old Senior Subordinated Notes were sold by the Company on March 3, 1998, in a private placement in reliance on Section 4(2) of the Securities Act and immediately resold by the initial purchasers thereof (the "Initial Purchasers") in reliance on Rule 144A under the Securities Act (the "Original Senior Subordinated Notes Offering"). In connection with the original Senior Subordinated Notes Offering, the Company and Holdings entered into a Registration Rights Agreement with the Initial Purchasers (the "Senior Subordinated Notes Registration Rights Agreement") providing for, among other things, the Senior Subordinated Notes Exchange Offer. See "The Exchange Offers -- Purpose and Effect." Expiration Date............ The Senior Subordinated Notes Exchange Offer will expire at 5:00 p.m., New York City time, on , 1998, or such later date and time to which it is extended by the Company. Withdrawal................. The tender of Old Senior Subordinated Notes pursuant to the Senior Subordinated Notes Exchange Offer may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Any Old Senior Subordinated Notes not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Senior Subordinated Notes Exchange Offer. Interest on the New Senior Subordinated Notes and Old Senior Subordinated Notes.................... Interest on each New Senior Subordinated Note will accrue from the date of issuance of the Old Senior Subordinated Note for which such Old Senior Subordinated Note is exchanged or from the date of the last periodic payment of interest on such Old Note, whichever is later. Conditions to the Senior Subordinated Notes Exchange Offer........... The Senior Subordinated Notes Exchange Offer is subject to certain customary conditions, certain of which may be waived by the Company. See "The Exchange Offers -- Certain Conditions to the Exchange Offers." Procedures for Tendering Old Senior Subordinated Notes.................... Each holder of Old Senior Subordinated Notes wishing to accept the Senior Subordinated Notes Exchange Offer must complete, sign and date the accompanying letter of transmittal relating to the Senior Subordinated Notes Exchange Offer (the "Senior Subordinated Notes Letter of Transmittal"), or a copy thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver the Senior Subordinated Notes Letter of Transmittal, or the copy, together with the Old Senior Subordinated Notes and any other required documentation, to the Senior Subordinated Notes Exchange Agent (as defined) at the address set forth in the Senior Subordinated Notes Letter of Transmittal. Persons holding Old Senior Subordinated Notes through the Depository Trust Company ("DTC") and wishing to accept the Senior Subordinated Notes Exchange Offer must do so pursuant to the DTC's Automated Tender Offer Program, by which each tendering Participant will agree to be bound by the Senior Subordinated Notes Letter of Transmittal. By executing or agreeing to be bound by the Senior Subordinated Notes Letter of Transmittal, each holder will represent to the Company that, among other things, (i) the New Senior Subordinated Notes acquired pursuant to the Senior Subordinated Notes Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Senior Subordinated Notes, whether or not such person is the holder of the Old Senior Subordinated Notes, (ii) neither the holder nor any such other person is engaging in or intends to engage in a distribution of such New Senior Subordinated Notes, (iii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Senior Subordinated Notes within the meaning of the Securities Act, (iv) neither the holder nor any such person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of the Company or any Guarantor, and (v) if such holder or other person is a broker-dealer, that it will receive New Senior Subordinated Notes for its own account in exchange for Old Senior Subordinated Notes that were acquired as a result of market-making activities or other trading activities and that it will be required to acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Subordinated Notes. See "The Exchange Offers -- Procedures for Tendering." Shelf Registration Requirement.............. Pursuant to the Senior Subordinated Notes Registration Rights Agreement, the Company is required to file a "shelf" registration statement for a continuous offering pursuant to Rule 415 under the Securities Act in respect of the Old Senior Subordinated Notes if (i) because of any change in law or applicable interpretations of the staff of the Commission, the Company is not permitted to effect the Senior Subordinated Notes Exchange Offer, (ii) the Senior Subordinated Notes Exchange Offer is not consummated within 225 days of the Original Senior Subordinated Notes Offering, (iii) any holder of Private Exchange Securities (as defined) requests within 60 days after the Senior Subordinated Notes Exchange Offer, (iv) any applicable law or interpretations do not permit any holder of Old Senior Subordinated Notes to participate in the Senior Subordinated Notes Exchange Offer, (v) any holder of Old Senior Subordinated Notes participates in the Senior Subordinated Notes Exchange Offer and does not receive freely transferrable New Senior Subordinated Notes in change for Old Senior Subordinated Notes or (vi) the Company so elects. Acceptance of Old Senior Subordinated Notes and Delivery of New Senior Subordinated Notes....... The Company will accept for exchange any and all Old Senior Subordinated Notes which are properly tendered (and not withdrawn) in the Senior Subordinated Notes Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Senior Subordinated Notes issued pursuant to the Senior Subordinated Notes Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offers -- Terms of the Exchange Offers." Senior Subordinated Notes Exchange Agent........... United States Trust Company of New York is serving as Exchange Agent (the "Senior Subordinated Notes Exchange Agent") in connection with the Senior Subordinated Notes Exchange Offer. Federal Income Tax Considerations........... The exchange pursuant to the Senior Subordinated Notes Exchange Offer should not be a taxable event for federal income tax purposes. See "Certain United States Federal Income Tax Considerations." Effect of Not Tendering.... Old Senior Subordinated Notes that are not tendered or that are tendered but not accepted will, following the completion of the Senior Subordinated Notes Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. THE SENIOR DISCOUNT NOTES EXCHANGE OFFER: The Senior Discount Notes Exchange Offer applies to $325,000,000 aggregate principal amount at maturity of the Old Senior Discount Notes. The form and terms of the New Senior Discount Notes will be the same as the form and terms of the Old Senior Discount Notes except that (i) the Accreted Value (as defined) of the New Senior Discount Notes will be calculated from the date of issuance of the Old Senior Discount Notes and (ii) the New Senior Discount Notes are being registered under the Securities Act and, therefore, will not bear legends restricting their transfer. The New Senior Discount Notes will evidence the same debt as the Old Senior Discount Notes and will be entitled to the benefits of the Senior Discount Notes Indenture (as defined) pursuant to which the Old Senior Discount Notes were issued. The Old Senior Discount Notes and the New Senior Discount Notes are sometimes referred to collectively herein as the "Senior Discount Notes." See "Description of the New Senior Discount Notes." The Senior Discount Notes Exchange Offer........... $1,000 principal amount at maturity of New Senior Discount Notes in exchange for each $1,000 principal amount at maturity of Old Senior Discount Notes. As of the date hereof, Old Senior Discount Notes representing $325,000,000 aggregate principal amount at maturity are outstanding. The terms of the New Senior Discount Notes and the Old Senior Discount Notes are substantially identical. Based on an interpretation by the Commission's staff set forth in no-action letters issued to third parties unrelated to Holdings, Holdings believes that New Senior Discount Notes issued pursuant to the Senior Discount Notes Exchange Offer in exchange for Old Senior Discount Notes may be offered for resale, resold and otherwise transferred by any person receiving the New Senior Discount Notes, whether or not that person is the holder (other than any such holder or such other person that is an "affiliate" of Holdings within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that (i) the New Senior Discount Notes are required in the ordinary course of business of that holder or such other person, (ii) neither the holder nor such other person is engaging in or intends to engage in a distribution of the New Senior Discount Notes, and (iii) neither the holder nor such other person has an arrangement or understanding with any person to participate in the distribution of the New Senior Discount Notes. See "The Exchange Offers -- Purpose and Effect." Each broker-dealer that receives New Senior Discount Notes for its own account in exchange for Old Senior Discount Notes where the Old Senior Discount Notes were acquired by the broker-dealer as a result of its market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Discount Notes. See "Plan of Distribution." Senior Discount Notes Registration Rights Agreement................ The Old Senior Discount Notes were sold by Holdings on March 3, 1998, in a private placement in reliance on Section 4(2) of the Securities Act and immediately resold by the Initial Purchasers in reliance on Rule 144A under the Securities Act (the "Original Senior Discount Notes Offering," and together with the Original Senior Subordinated Notes Offering, the "Original Offerings.") In connection with the Original Senior Discount Notes Offering, the Company and Holdings entered into a Registration Rights Agreement with the Initial Purchasers (the "Senior Discount Notes Registration Rights Agreement") providing for, among other things, the Senior Discount Notes Exchange Offer. See "The Exchange Offers -- Purpose and Effect." Expiration Date............ The Senior Discount Notes Exchange Offer will expire at 5:00 p.m., New York City time, on , 1998, or such later date and time to which it is extended by Holdings. Withdrawal................. The tender of Old Senior Discount Notes pursuant to the Senior Discount Notes Exchange Offer may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Any Old Senior Discount Notes not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Senior Discount Notes Exchange Offer. Accreted Value of the New Senior Discount Notes and Old Senior Discount Notes.................... The Accreted Value of each New Senior Discount Note will be calculated from the date of issuance of the Old Senior Discount Note for which such New Senior Discount Note is exchanged. Conditions to the Senior Discount Notes Exchange Offer.................... The Senior Discount Notes Exchange Offer is subject to certain customary conditions, certain of which may be waived by the Company. See "The Exchange Offers -- Certain Conditions to the Exchange Offers." Procedures for Tendering Senior Discount Notes...... Each holder of Old Senior Discount Notes wishing to accept the Senior Discount Notes Exchange Offer must complete, sign and date the accompanying letter of transmittal relating to the Senior Discount Notes Exchange Offer (the "Senior Discount Notes Letter of Transmittal"; the Senior Discount Notes Letter of Transmittal and the Senior Subordinated Notes Letter of Transmittal are sometimes referred to herein individually as a "Letter of Transmittal" and collectively as the "Letters of Transmittal"), or a copy thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver the Senior Discount Notes Letter of Transmittal, or the copy, together with the Old Senior Discount Notes and any other required documentation, to the Senior Discount Notes Exchange Offer (as defined) at the address set forth in the Senior Discount Notes Letter of Transmittal. Persons holding Old Discount Notes through the DTC and wishing to accept the Senior Discount Notes Exchange Offer must do so pursuant to the DTC's Automated Tender Offer Program, by which each tendering Participant will agree to be bound by the Senior Discount Notes Letter of Transmittal. By executing or agreeing to be bound by the Senior Discount Notes Letter of Transmittal, each holder will represent to Holdings that, among other things, (i) the New Senior Discount Notes acquired pursuant to the Senior Discount Notes Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Senior Discount Notes, whether or not such person is the holder of the Old Senior Discount Notes, (ii) neither the holder nor any such other person is engaging in or intends to engage in a distribution of such New Senior Discount Notes, (iii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Senior Discount Notes, (iv) neither the holder nor any such other person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of Holdings, and (v) if such holder or other person is a broker-dealer, that it will receive New Senior Discount Notes for its own account in exchange for Old Senior Discount Notes that were acquired as a result of market-making activities or other trading activities and that it will be required to acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Discount Notes. Shelf Registration Requirement.............. Pursuant to the Senior Discount Notes Registration Rights Agreement, Holdings is required to file a "shelf" registration statement for a continuous offering pursuant to Rule 415 under the Securities Act in respect of the Old Senior Discount Notes if (i) because of any change in law or applicable interpretations of the staff of the Commission, Holdings is not permitted to effect the Senior Discount Notes Exchange Offer, (ii) the Senior Discount Notes Exchange Offer is not consummated within 225 days of the Original Senior Discount Notes Offering, (iii) any holder of Private Exchange Securities (as defined) requests within 60 days after the Senior Discount Notes Exchange Offer, (iv) any applicable law or interpretations do not permit any holder of Old Senior Discount Notes to participate in the Senior Discount Notes Exchange Offer, (v) any holder of Old Senior Discount Notes participates in the Senior Discount Notes Exchange Offer and does not receive freely transferrable New Senior Discount Notes in exchange for Old Senior Discount Notes or (vi) Holdings so elects. Acceptance of Old Senior Discount Notes and Delivery of New Senior Discount Notes.................... Holdings will accept for exchange any and all Old Senior Discount Notes which are properly tendered (and not withdrawn) in the Senior Discount Notes Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Senior Discount Notes issued pursuant to the Senior Discount Notes Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offers -- Terms of the Exchange Offer." Senior Discount Notes Exchange Agent........... United States Trust Company of New York is serving as Exchange Agent (the "Senior Discount Notes Exchange Agent"; the Senior Subordinated Notes Exchange Agent and the Senior Discount Notes Exchange Agent are sometimes referred to herein individually as an "Exchange Agent" and collectively as the "Exchange Agents") in connection with the Senior Discount Notes Exchange Offer. Federal Income Tax Considerations........... The exchange pursuant to the Senior Discount Notes Exchange Offer should not be a taxable event for federal income tax purposes. See "Certain United States Federal Income Tax Considerations." Effect of Not Tendering.... Old Senior Discount Notes that are not tendered or that are tendered but not accepted will, following the completion of the Senior Discount Notes Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. TERMS OF THE NEW NOTES NEW SENIOR SUBORDINATED NOTES Issuer..................... LIN Television Corporation (as successor-in-interest to LIN Acquisition Company). Securities Offered......... $300,000,000 aggregate principal amount of 8 3/8% Senior Subordinated Notes due 2008. Maturity................... March 1, 2008. Interest Payment Dates..... March 1 and September 1 of each year, commencing September 1, 1998. Sinking Fund............... None. Optional Redemption........ Except as described below, the Company may not redeem the New Senior Subordinated Notes prior to March 1, 2003. On or after such date, the Company may redeem the Senior Subordinated Notes, in whole or in part, at the redemption prices set forth herein, together with accrued and unpaid interest, if any, to the date of redemption. In addition, at any time and from time to time on or prior to March 1, 2001, the Company may redeem up to 35% of the aggregate principal amount of the Senior Subordinated Notes with the net cash proceeds of one or more private or public offerings by the Company, at a redemption price equal to 108.375% of the principal amount to be redeemed, together with accrued and unpaid interest, if any, to the date of redemption, provided that at least 65% of the originally issued aggregate principal amount of the Senior Subordinated Notes remains outstanding after each such redemption. See "Description of the New Senior Subordinated Notes -- Optional Redemption." Change of Control.......... Upon the occurrence of a Change of Control, (i) the Company will have the option, at any time on or prior to March 1, 2003, to redeem the New Senior Subordinated Notes, in whole but not in part, at a redemption price equal to 100% of the principal amount thereof, plus accrued and unpaid interest plus the Applicable Premium (as defined) and (ii) if the New Senior Subordinated Notes are not redeemed or if such Change of Control occurs after March 1, 2003, the Company will be required to make an offer to repurchase the New Senior Subordinated Notes at a price equal to 101% of the principal amount thereof, together with accrued and unpaid interest, if any, to the date of purchase. See "Description of the New Senior Subordinated Notes -- Change of Control" and "-- Amendment." Guarantees................. The New Senior Subordinated Notes will be guaranteed (the "Subsidiary Guarantees"), jointly and severally on an unsecured senior subordinated basis, by the Company's direct and indirect, existing and future, Restricted Subsidiaries (the "Guarantors"). The Guarantors also will guarantee all obligations of the Company under the Senior Credit Facilities (as defined). The Company's obligations under the Senior Credit Facilities also will be secured by substantially all of the assets of the Company and the Guarantors. The obligations of each Guarantor under its Subsidiary Guarantee will be subordinated in right of payment to the prior payment in full of all Guarantor Senior Indebtedness (as defined) of such Guarantor to substantially the same extent as the Senior Subordinated Notes are subordinated to all existing and future Senior Indebtedness of the Company. See "Description of the New Senior Subordinated Notes -- Subsidiary Guarantees of the New Senior Subordinated Notes." Ranking.................... The New Senior Subordinated Notes will be unsecured and will be subordinated in right of payment to all existing and future Senior Indebtedness (as defined) of the Company and will rank pari passu in right of payment with all Senior Subordinated Indebtedness (as defined) of the Company. As of March 31, 1998, the aggregate principal amount of the Company's outstanding Senior Indebtedness was $170.0 million (consisting of outstanding Term Loans) and the Company had no Senior Subordinated Indebtedness outstanding other than the Senior Subordinated Notes and had no Subsidiary Indebtedness outstanding. As of such date, liabilities of the Company's Subsidiaries reflected on its consolidated balance sheet, including indebtedness and other liabilities such as trade payables and accrued expenses, aggregated $17.8 million. See "Description of the New Senior Subordinated Notes -- Ranking and Subordination." Restrictive Covenants...... The Senior Subordinated Notes Indenture limits, among other things, (i) the incurrence of additional indebtedness and issuance of capital stock, (ii) layering of indebtedness, (iii) the payment of dividends on, and redemption of, capital stock of the Company, (iv) liens, (v) mergers, consolidations, and sales of all or substantially all of the Company's assets, (vi) asset sales, (vii) asset swaps, (viii) dividend and other payment restrictions affecting Restricted Subsidiaries and (ix) transactions with affiliates of the Company. However, all of these limitations and prohibitions are subject to a number of important qualifications and exceptions. See "Description of the New Senior Subordinated Notes -- Certain Covenants." Use of Proceeds............ There will be no cash proceeds to the Company from the exchange of New Senior Subordinated Notes for Old Senior Subordinated Notes pursuant to the Senior Subordinated Notes Exchange Offer. The net proceeds from the Original Senior Subordinated Notes Offering were used, together with the proceeds of the other Financings, to consummate the Acquisition. NEW SENIOR DISCOUNT NOTES Issuer..................... LIN Holdings Corp. Securities Offered......... $325,000,000 aggregate principal amount at maturity of 10% Senior Discount Notes due 2008. The Senior Discount Notes will be issued at a discount to their aggregate principal amount at maturity. Maturity................... March 1, 2008. Interest Payment Dates..... Cash interest will not accrue or be payable on the New Senior Discount Notes prior to March 1, 2003. Thereafter, cash interest on the New Senior Discount Notes will accrue at a rate of 10% per annum and will be payable semi-annually in arrears on March 1 and September 1 of each year, commencing on September 1, 2003. Original Issue Discount.... For federal income tax purposes, the New Senior Discount Notes will be treated as having been issued with "original issue discount" equal to the difference between the issue price of the Old Senior Discount Notes and the sum of all cash payments (whether denominated as principal or interest) to be made thereon. Each holder of a New Senior Discount Note must include as gross income for federal income tax purposes a portion of such original issue discount for each day during each taxable year in which a New Senior Discount Note is held even though no cash interest payments will be received prior to March 1, 2003. See "Certain United States Federal Income Tax Considerations -- Taxation of Original Issue Discount." Sinking Fund............... None. Mandatory Principal Redemption............... Except as described below, Holdings may not redeem the New Senior Discount Notes prior to March 1, 2003. On March 1, 2003, Holdings will be required to redeem Senior Discount Notes with an aggregate principal amount at maturity equal to (i) $125.0 million multiplied by (ii) the quotient obtained by dividing (x) the aggregate principal amount at maturity of Senior Discount Notes then outstanding (other than Senior Discount Notes then held by Holdings or its Subsidiaries or the entities with respect to which Holdings is a direct or indirect Subsidiary) by (y) $325.0 million, (the "Mandatory Principal Redemption Amount") at a redemption price equal to 100% of the principal amount at maturity of the Senior Discount Notes so redeemed. See "Description of the New Senior Discount Notes -- Mandatory Principal Redemption." Optional Redemption........ The New Senior Discount Notes will be redeemable at the option of Holdings, in whole or in part, at any time on or after March 1, 2003. On or after such date, Holdings may redeem the New Senior Discount Notes, in whole or in part, at the redemption prices set forth herein, together with accrued and unpaid interest, if any, to the date of redemption. In addition, at any time and from time to time on or prior to March 1, 2001, Holdings may, subject to certain requirements, redeem up to 35% of the aggregate principal amount at maturity of the Senior Discount Notes with the net cash proceeds from one or more private or public equity offerings at a price equal to 110% of the Accreted Value (as defined) at the date of redemption, provided that at least 65% of the originally issued aggregate principal amount at maturity of the Senior Discount Notes remains outstanding after each such redemption. See "Description of the New Senior Discount Notes -- Optional Redemption." Change of Control.......... Upon a Change of Control, (i) Holdings will have the option, at any time on or prior to March 1, 2003, to redeem the New Senior Discount Notes, in whole but not in part, at a redemption price equal to 100% of the Accreted Value thereof plus the Applicable Premium and (ii) if the New Senior Discount Notes are not so redeemed or if such Change of Control occurs after March 1, 2003, Holdings will be required to make an offer to repurchase the New Senior Discount Notes at a price equal to (a) 101% of the Accreted Value thereof if redeemed on or before March 1, 2003, and (b) 101% of the principal amount at maturity, plus accrued and unpaid interest, if any, thereon, if redeemed after March 1, 2003. See "Description of the New Senior Discount Notes -- Change of Control." Guarantees................. None. Ranking.................... The New Senior Discount Notes will be senior unsecured obligations of Holdings and will rank pari passu in right of payment with all Senior Indebtedness of Holdings, including Holdings' guarantee of the Senior Credit Facilities. Holdings is a holding company with no operations of its own and whose primary asset is the capital stock of the Company (all of which will be pledged to secure the Senior Credit Facilities). As a result of the holding company structure, the New Senior Discount Notes will effectively rank junior in right of payment to all creditors of the Company and its subsidiaries, including the lenders under the Senior Credit Facilities, holders of the Senior Subordinated Notes and trade creditors. As of March 31, 1998, the New Senior Discount Notes were effectively subordinated to $523.8 of aggregate liabilities (including indebtedness and other liabilities such as trade payables and accrued expenses that would have been reflected on the consolidated balance sheet) of the Company and its subsidiaries. See "Description of the New Senior Discount Notes." Restrictive Covenants...... The Senior Discount Notes Indenture limits, among other things, (i) the incurrence of additional indebtedness and issuance of capital stock, (ii) the payment of dividends on, and redemption of, capital stock of Holdings, (iii) mergers, consolidations and sales of all or substantially all of Holdings' assets, (iv) asset sales, (v) asset swaps, (vi) dividend and other payment restrictions affecting Restricted Subsidiaries and (vii) transactions with affiliates. However, all of these limitations and prohibitions are subject to a number of important qualifications and exceptions. See "Description of the New Senior Discount Notes -- Certain Covenants."
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+SUMMARY The following summary should be read in conjunction with the more detailed information, financial statements and notes thereto appearing elsewhere in this Prospectus. For additional information relating to certain defined terms used herein, as well as the sources for the market and other industry data contained herein, see "Certain Definitions and Market and Industry Data." THE COMPANY The Company is a leading television station group operator in the United States that operates eleven television stations and provides consulting services to two additional television stations. Twelve of these stations are network affiliates and nine are in top forty DMAs, including: Indianapolis, Indiana; New Haven-Hartford, Connecticut; Buffalo, New York; Norfolk-Portsmouth, Virginia; Grand Rapids-Kalamazoo-Battle Creek, Michigan and Dallas-Fort Worth, Texas. These stations have an aggregate United States household reach of approximately 6.9%, ranking the Company among the top independent, "pure-play" television station group operators in the United States. The Company's Core Stations generated an aggregate pro forma BCF margin of approximately 46% for the fiscal year ended December 31, 1997, principally as a result of their strong network affiliations, leading local news programming and tight cost controls. In addition, the Company's management pioneered the "multi-channel strategy," which involves the combination of an owned and operated television station with an LMA station and/or a 24-hour cable weather channel (a "Local Weather Station") in the same market. The multi-channel strategy has enhanced the Company's revenue market shares and increased its BCF by leveraging its fixed costs over a larger revenue base. The Company's station portfolio is well diversified in terms of its network affiliations, geographic coverage, net revenues and cash flow. The Company owns and operates three CBS affiliates, two NBC affiliates and two ABC affiliates which accounted for 35%, 28% and 28%, respectively, of the Company's pro forma BCF for the fiscal year ended December 31, 1997. The Company's LMA stations and Local Weather Stations accounted for substantially all of the remaining 9% of its BCF on the same basis. The Company's Core Stations broadcast in seven different markets, with no market representing more than 25% of the Company's pro forma net revenues or BCF for the fiscal year ended December 31, 1997. The Company's pro forma net revenues, BCF and EBITDA were $196.1 million, $79.5 million and $72.7 million, respectively, for the fiscal year ended December 31, 1997. Hicks, Muse, Tate & Furst Incorporated ("Hicks Muse"), a leading private equity firm with significant investments and experience in the media and communications industry, has acquired LIN Television to serve as a platform for acquiring and operating additional television stations that can benefit from management's ability to improve operating performance and increase BCF margins at acquired stations. In connection with the Acquisition, Hicks Muse and NBC formed a television station joint venture (the "Joint Venture"). The Joint Venture consists of KXAS-TV, LIN Television's Dallas-Fort Worth NBC affiliate, and KNSD-TV, NBC's San Diego station. A wholly owned subsidiary of NBC is the general partner of the Joint Venture (the "NBC General Partner") and NBC operates the stations owned by the Joint Venture pursuant to a management agreement. The NBC General Partner holds an approximate 80% equity interest and the Company holds an approximate 20% equity interest in the Joint Venture. General Electric Capital Corporation ("GECC") provided debt financing to the Joint Venture in the form of the GECC Note (as defined), the proceeds of which were distributed to the Company to finance a portion of the cost of the Acquisition. The GECC Note is not an obligation of Holdings, the Company or any of their respective subsidiaries and is recourse only to the Joint Venture, the Company's equity interest therein and to one of Holding's two corporate parents (the "GECC Note Guarantor") pursuant to a guarantee. The Company expects that the interest payments on the GECC Note will be serviced solely by the cash flow of the Joint Venture. See "The Transactions and Other Matters -- The Joint Venture." Later this year, the Company expects to acquire (the "Grand Rapids Acquisition") from AT&T Corporation ("AT&T") the assets of WOOD-TV and the LMA rights related to WOTV-TV (collectively, LIN TELEVISION CORPORATION LIN HOLDINGS CORP. CROSS REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING THE LOCATION IN THE PROSPECTUS OF THE INFORMATION REQUIRED BY PART I OF FORM S-1 <TABLE> <CAPTION> FORM S-1 ITEM NUMBER AND HEADING LOCATION IN PROSPECTUS -------------------------------- ---------------------- <S> <C> <C> 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus... Cover Page of Registration Statement; Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus............................ Inside Front and Outside Back Cover Pages of Prospectus 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges............. Certain Definitions and Market and Industry Data; Summary; Risk Factors; Selected Consolidated Financial and Operating Data; Unaudited Pro Forma Financial Information; Business 4. Use of Proceeds............................ Use of Proceeds 5. Determination of Offering Price............ Not Applicable 6. Dilution................................... Not Applicable 7. Selling Security Holders................... Not Applicable 8. Plan of Distribution....................... Front Cover Page of Prospectus; The Exchange Offers; Plan of Distribution 9. Description of Securities to be Registered............................... Description of New Senior Subordinated Notes; Description of New Senior Discount Notes 10. Interests of Named Experts and Counsel..... Not Applicable 11. Information with Respect to the Registrant............................... Cover Page of Registration Statement; Certain Definitions and Market and Industry Data; Summary; Risk Factors; The Transactions and Other Matters; Selected Consolidated Financial and Operating Data; Unaudited Pro Forma Consolidated Financial Information; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Securities Ownership of Certain Beneficial Owners; Certain Other Transactions; Description of the Senior Credit Facilities; Legal Matters 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities.............................. Not Applicable </TABLE> AVAILABLE INFORMATION The Issuers and the Guarantors have filed with the Securities and Exchange Commission (the "Commission") a Registration Statement (which term shall encompass any amendments thereto) on Form S-1 under the Securities Act with respect to the securities offered hereby. This Prospectus does not contain all information set forth in the Registration Statement and the exhibits thereto, to which reference is hereby made. Although the Issuers and the Guarantors believe that statements made in this Prospectus as to the contents of any contract, agreement, or other document describe all material elements of such documents, such statements are not necessarily complete. With respect to each such contract, agreement, or other document filed as an exhibit to the Registration Statement, reference is hereby made to such exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. As a result of the filing of the Registration Statement with the Commission, the Issuers and the Guarantors each will become subject to the informational reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In accordance therewith, the Company and Holdings will be required to file reports and other information with the Commission. Such reports and other information can be inspected and copied at the principal office of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and the following Regional Offices of the Commission: Chicago Regional Office, Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60611 and New York Regional office, 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of such material may also be obtained at prescribed rates from the Public Reference Section of the Commission at its principal office at Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549. The Commission also maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission at http://www.sec.gov. In reliance upon certain Staff Accounting Bulletins of the Commission, interpretations of the staff of the Commission and no-action relief granted by the Staff of the Commission to unrelated third parties, the Subsidiary Guarantors do not intend to file periodic reports with the Commission under the Exchange Act separately from the Issuers. The Issuers will furnish holders of the securities offered hereby with annual reports containing, among other information, audited financial statements certified by an independent public accounting firm and quarterly reports containing unaudited financial information for the first three quarters of each fiscal year. The Issuers will also furnish such other reports as it may determine or as may be required by law or by the indentures governing the New Notes. FORWARD LOOKING STATEMENTS THIS PROSPECTUS CONTAINS CERTAIN FORWARD LOOKING STATEMENTS WITH RESPECT TO THE FINANCIAL CONDITIONS, RESULTS OF OPERATIONS AND BUSINESSES OF THE ISSUERS, INCLUDING STATEMENTS UNDER THE CAPTIONS "SUMMARY," "UNAUDITED PRO FORMA FINANCIAL INFORMATION," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS." ALL OF THESE FORWARD LOOKING STATEMENTS ARE BASED ON ESTIMATES AND ASSUMPTIONS MADE BY MANAGEMENT OF THE ISSUERS WHICH, ALTHOUGH BELIEVED TO BE REASONABLE, ARE INHERENTLY UNCERTAIN. THEREFORE, UNDUE RELIANCE SHOULD NOT BE PLACED UPON SUCH ESTIMATES AND STATEMENTS. NO ASSURANCE CAN BE GIVEN THAT ANY OF SUCH ESTIMATES OR STATEMENTS WILL BE REALIZED AND IT IS LIKELY THAT ACTUAL RESULTS WILL DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE: (1) INCREASED COMPETITION, INCLUDING FROM NEWER FORMS OF ENTERTAINMENT AND ENTERTAINMENT MEDIA OR CHANGES IN THE POPULARITY OR AVAILABILITY OF PROGRAMMING; (2) INCREASED COSTS, INCLUDING INCREASED CAPITAL EXPENDITURES AS A RESULT OF NECESSARY TECHNOLOGICAL ENHANCEMENTS (E.G., EXPENDITURES RELATED TO THE TRANSITION TO DIGITAL the "Grand Rapids Stations"), both of which stations are located in the Grand Rapids-Kalamazoo-Battle Creek market. The Company currently provides services to the Grand Rapids Stations pursuant to a consulting agreement with AT&T. See "The Transactions and Other Matters -- The Grand Rapids Acquisition" and "Business -- The Company -- History." The following table provides information regarding the stations and other programming outlets operated by the Company and the stations owned by the Joint Venture: <TABLE> <CAPTION> COMMERCIAL STATION STATION DMAS, STATIONS AND OTHER DMA STATIONS IN RANK IN AUDIENCE PROGRAMMING OUTLETS STATUS(A) AFFILIATION(B) RANK(C) DMA(D) DMA(E) Share(e) ------------------------ --------- -------------- ------- ----------- ------- -------- <S> <C> <C> <C> <C> <C> <C> COMPANY STATIONS AND OTHER PROGRAMMING OUTLETS: INDIANAPOLIS, IN WISH-TV.......................................... O&O CBS 25 8 1 18% WIIH-LP (Satellite)(f)........................... O&O CBS Local Weather Station............................ O&O Cable NEW HAVEN-HARTFORD, CT WTNH-TV.......................................... O&O ABC 27 8 2 14% WBNE-TV.......................................... LMA WB 5(tie) 2% GRAND RAPIDS-KALAMAZOO-BATTLE CREEK, MI(g) WOOD-TV.......................................... CS NBC 37 8 1(tie) 18% WOTV-TV.......................................... CS ABC 4 5% NORFOLK-PORTSMOUTH, VA WAVY-TV.......................................... O&O NBC 39 7 1(tie) 16% WVBT-TV.......................................... LMA WB/Fox(h) 5 2% Local Weather Station............................ O&O Cable BUFFALO, NY WIVB-TV.......................................... O&O CBS 40 7 2 17% AUSTIN, TX KXAN-TV.......................................... O&O NBC 60 7 3 14% KNVA-TV.......................................... LMA WB 6 3% KXAM-TV (Satellite)(i)........................... O&O NBC Low Power Network................................ O&O UPN DECATUR-CHAMPAIGN, IL WAND-TV.......................................... O&O ABC 81 8 3 14% Local Weather Station............................ O&O Cable FORT WAYNE, IN WANE-TV.......................................... O&O CBS 102 6 2 19% Local Weather Station............................ O&O Cable DALLAS-FORT WORTH, TX KXTX-TV.......................................... LMA IND 8 13 9 3% JOINT VENTURE STATIONS: DALLAS-FORT WORTH, TX KXAS-TV.......................................... JV NBC 8 13 3 12% SAN DIEGO, CA KNSD-TV.......................................... JV NBC 26 7 1 13% </TABLE> - --------------- (a) "O&O" refers to a station owned and operated by the Company. "LMA" refers to a station operated by the Company pursuant to a local marketing agreement and with respect to which the Company has a purchase option exercisable under certain circumstances. "JV" refers to a station owned by the Joint Venture and operated by NBC. "CS" refers to a station which the Company currently provides services to pursuant to a consulting agreement. The Company's Core Stations, all of which are CBS, NBC and ABC affiliates, are WISH-TV, WANE-TV, WAND-TV, WAVY-TV, KXAN-TV, WTNH-TV and WIVB-TV. (b) "IND" refers to an independent station with no network affiliation. (c) Rankings are based on the relative size of the station's "market" among the 211 generally recognized television markets in the United States. Source: Nielsen Station Index DMA Market Ratings -- November 1997, A.C. Nielsen Company. (d) The number of stations in a market excludes local weather stations, low power networks and satellite broadcasting facilities. (e) Source: Nielsen Station Index DMA Market Ratings -- November 1997, A.C. Nielsen Company, Sunday-Saturday 6:00 a.m.-2:00 a.m. (f) Station WIIH-LP, Indianapolis, Indiana, is operated as a satellite station of WISH-TV in order to increase WISH-TV's coverage. PROSPECTUS <TABLE> <S> <C> OFFER FOR ALL OUTSTANDING OFFER FOR ALL OUTSTANDING 8 3/8% SENIOR SUBORDINATED NOTES DUE 10% SENIOR DISCOUNT NOTES DUE 2008 2008 IN EXCHANGE FOR IN EXCHANGE FOR 10% SENIOR DISCOUNT NOTES DUE 2008 8 3/8% SENIOR SUBORDINATED NOTES DUE OF 2008 LIN HOLDINGS CORP. OF LIN TELEVISION CORPORATION </TABLE> Pursuant to the terms and subject to the conditions set forth in this Prospectus and the accompanying letters of transmittal, (i) LIN Television Corporation, a Delaware corporation (the "Company"), and the Guarantors (as defined) hereby offer (the "Senior Subordinated Notes Exchange Offer") to exchange $1,000 principal amount of registered 8 3/8% Senior Subordinated Notes Due 2008 (the "New Senior Subordinated Notes") issued by the Company, for each $1,000 principal amount of unregistered 8 3/8% Senior Subordinated Notes Due 2008 (the "Old Senior Subordinated Notes," and together with the New Senior Subordinated Notes, the "Senior Subordinated Notes") issued by LIN Acquisition Company, the predecessor in interest of the Company ("LIN Acquisition"), of which an aggregate principal amount of $300,000,000 is outstanding and (ii) LIN Holdings Corp., a Delaware corporation ("Holdings") hereby offers (the "Senior Discount Notes Exchange Offer," and together with the Senior Subordinated Notes Exchange Offer, the "Exchange Offers") to exchange $1,000 principal amount at maturity of registered 10% Senior Discount Notes Due 2008 (the "New Senior Discount Notes") issued by Holdings, for each $1,000 principal amount at maturity of unregistered 10% Senior Discount Notes Due 2008 (the "Old Senior Discount Notes," and together with the New Senior Discount Notes, the "Senior Discount Notes") issued by Holdings, of which an aggregate principal amount at maturity of $325,000,000 is outstanding. The Old Senior Subordinated Notes and the Old Senior Discount Notes are sometimes collectively referred to herein as the "Old Notes" and the New Senior Subordinated Notes and the New Senior Discount Notes are sometimes collectively referred to herein as the "New Notes." The Old Notes and the New Notes are sometimes collectively referred to herein as the "Notes." The Company and Holdings are sometimes collectively referred to herein as the "Issuers." The form and terms of the New Notes are identical to the form and terms of the Old Notes except that (i) interest on the New Senior Subordinated Notes shall accrue from the date of issuance of the Old Senior Subordinated Notes, (ii) the Accreted Value (as defined) of the New Senior Discount Notes will be calculated from the date of issuance of the Old Senior Discount Notes, and (iii) the New Notes are being registered under the Securities Act of 1933, as amended (the "Securities Act"), and will not bear any legends restricting their transfer. The New Senior Subordinated Notes will evidence the same debt as the Old Senior Subordinated Notes and will be issued pursuant to, and entitled to the benefits of, the indenture governing the Old Senior Subordinated Notes. The New Senior Discount Notes will evidence the same debt as the Old Senior Discount Notes and will be issued pursuant to, and entitled to the benefits of, the indenture governing the Old Senior Discount Notes. The Exchange Offers are being made in order to satisfy certain contractual obligations of the Company and Holdings. See "The Exchange Offers," "Description of the New Senior Subordinated Notes" and "Description of the New Senior Discount Notes." The net proceeds from the sale of the Old Notes were used to effect the acquisition by Holdings of the Company and its subsidiaries (the "Acquisition"). Such acquisition was effected pursuant to the merger of LIN Acquisition with and into the Company, with the Company surviving as a wholly owned subsidiary of Holdings. See "The Transactions and Other Matters." --------------------- SEE "RISK FACTORS" BEGINNING ON PAGE 22 FOR A DISCUSSION OF CERTAIN INFORMATION THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NEW NOTES. --------------------- The Company and Holdings will accept for exchange any and all Old Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on , 1998, unless extended (as so extended, the "Expiration Date"). Tenders of Old Notes may be withdrawn at any time prior to the Expiration Date. The Exchange Offers are subject to certain customary conditions. See "The Exchange Offers." In order for a holder of Old Notes to participate in an Exchange Offer, such holder must represent to the Company or Holdings, as appropriate, that, among other things, (i) the New Notes acquired pursuant to such Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Notes, whether or not such person is the holder of the Old Notes, (ii) neither the holder nor any such other person is engaging or intends to engage in a distribution of such New Notes, (iii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Notes within the meaning of the Securities Act, (iv) neither the holder nor any such other person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of the Company, Holdings or any Guarantor, and (v) if such holder or other person is a broker-dealer, that it will receive New Notes for its own account in exchange for Old Notes that were acquired as a result of marketmaking activities or other trading activities. See "The Exchange Offers--Purpose and Effect." Each broker-dealer that receives New Notes for its own account pursuant to either of the Exchange Offers must acknowledge that it will deliver a prospectus in connection with any resale of those New Notes. The letter of transmittal accompanying this Prospectus states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for Old Notes where such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company and Holdings have agreed that, for a period of 90 days after the Expiration Date, they will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." No public market has existed for the Old Notes. The Company and Holdings currently do not intend to list the New Notes on any securities exchange or to seek approval for quotation through any automated quotation system, and no active public market for the New Notes is currently anticipated. The Company and Holdings will pay all expenses incident to the Exchange Offers. The Exchange Offers are not conditioned upon any minimum principal amount of Old Senior Subordinated Notes or Old Senior Discount Notes being tendered for exchange pursuant to the Exchange Offers. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DATE OF THIS PROSPECTUS IS , 1998. BROADCASTING) OR ACQUISITIONS OR INCREASED PROGRAMMING COSTS; (3) INABILITY TO CONSUMMATE ACQUISITIONS ON ATTRACTIVE TERMS; (4) LOSS OR RETIREMENT OF KEY MEMBERS OF MANAGEMENT; (5) INCREASES IN THE ISSUERS' COST OF BORROWINGS OR INABILITY OR UNAVAILABILITY OF ADDITIONAL DEBT OR EQUITY CAPITAL; (6) ADVERSE STATE OR FEDERAL LEGISLATION OR REGULATION OR ADVERSE DETERMINATIONS BY REGULATORS; AND (7) CHANGES IN ADVERTISING TRENDS AND/OR BUDGETS AND IN GENERAL ECONOMIC CONDITIONS IN THE MARKETS IN WHICH THE ISSUERS MAY, FROM TIME TO TIME, COMPETE. MANY OF SUCH FACTORS WILL BE BEYOND THE CONTROL OF THE ISSUERS AND THEIR MANAGEMENT. FORWARD-LOOKING STATEMENTS CONTAINED HEREIN SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULT OF ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS WHICH MAY BE MADE TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. FOR FURTHER INFORMATION OR OTHER FACTORS WHICH COULD AFFECT THE FINANCIAL RESULTS OF THE ISSUERS AND SUCH FORWARD LOOKING STATEMENTS, SEE "RISK FACTORS." (g) The Company currently provides services to WOOD-TV and WOTV-TV pursuant to a consulting agreement with AT&T. The Company has agreed to acquire the assets of WOOD-TV and the LMA rights related to WOTV-TV from AT&T for a purchase price of approximately $125.5 million. The acquisition is expected to close later this year. See "The Transactions and Other Matters -- The Grand Rapids Acquisition" and "Business -- The Company -- History." (h) WVBT-TV will become a Fox affiliate on August 31, 1998. (i) Station KXAM-TV, Llano, Texas, is operated as a satellite station of KXAN-TV in order to increase KXAN-TV's coverage. BUSINESS STRATEGY The Company's business strategy is to maximize its BCF through both revenue growth and the implementation of effective cost controls. To achieve these goals, the Company seeks, among other things, to: Maximize Revenue Shares. From 1993 to 1997, the Company increased its broadcast television advertising revenue market share from 22.8% to 25.9% (assuming the acquisitions of WIVB-TV and WTNH-TV occurred on January 1, 1993) by targeting audiences with favorable demographic profiles, creating auxiliary revenue streams and cultivating strong network affiliations. On the same basis, the Company's gross advertising revenues have grown at a compound annual rate of 10.3%, whereas gross advertising revenues in the Company's markets have grown at a compound annual rate of 6.8%. The Company attempts to maximize each station's revenue share through a quarterly "entitlement review process." This process involves the benchmarking of each station's advertising revenues against an index which weights various demographic attributes according to their relative advertising revenue value. As a result of the entitlement review process, the Company's revenue shares typically outperform its audience shares. The Company's revenue shares also benefit from long term affiliations with its three core networks -- CBS, NBC and ABC -- which provide the Company's television stations affiliated with such networks with competitive programming, including coverage of political events and high profile sporting events such as the Olympic Games, Super Bowl and NCAA Men's Basketball Tournament. The Company also has stations affiliated with Fox, WB and UPN, which further enhances its ability to grow its revenue shares through access to their competitive programming. Emphasize Leading Local News. The Company's Core Stations are ranked number one or two in late news in all but the Company's smallest market. Management believes that a successful news operation is critical to the success of a television station because news audiences generally have the best demographic profiles from an advertising sales perspective. In addition, news programming: (i) enables the Company to purchase less syndicated programming and thereby maintain tight control over programming costs; (ii) serves as a strong lead-in to other programming; and (iii) fosters a high profile in the local community, which is critical to maximizing local advertising sales. The Company believes that its local news programming significantly improves its stations' BCF margins. Accordingly, the Company has increased the hours of news produced per week from 81 in 1989 to 187 in 1997 on a pro forma basis. Partly as a result of its emphasis on quality local news programming, management has increased the BCF margin at the five network-affiliated stations that it has operated throughout the period from January 1, 1991 to December 31, 1997 (WISH-TV, WANE-TV, WAND-TV, WAVY-TV and KXAN-TV) from 37% to 47%. Execute a Multi-Channel Strategy. The Company's management pioneered the "multi-channel strategy," which involves the combination of an owned and operated television station with an LMA station and/or a Local Weather Station in the same market. Management has pursued this strategy in all but one of the Company's markets. Execution of the multi-channel strategy has been a factor in the Company's ability to generate incremental cash flow. The advantages of the multi-channel strategy are: (i) the ability to capitalize on management's expertise; (ii) additional advertising inventory in each market; (iii) greater programming flexibility; (iv) enhanced ability to leverage fixed operating costs over a larger revenue base; (v) improved negotiating positions with respect to suppliers of syndicated programming, advertisers and the networks; (vi) increased share of actual viewers; (vii) the opportunity to affiliate with the emerging networks; and (viii) enhanced opportunities for cross promotion. CERTAIN DEFINITIONS AND MARKET AND INDUSTRY DATA As used in this Prospectus, unless the context otherwise requires, (i) "Holdings" refers to LIN Holdings Corp., (ii) "LIN Acquisition" refers to LIN Acquisition Company, (iii) "LIN Television" or the "Predecessor" refers to LIN Television Corporation and its subsidiaries prior to the Acquisition, (iv) the "Company" refers to LIN Television after giving effect to the Acquisition (as defined), the Financings (as defined) and the Joint Venture (as defined) (collectively, the "Transactions"), except where the context requires otherwise, (v) "on a pro forma basis" or "pro forma" means after giving effect to the Transactions, except as indicated otherwise and (vi) "Core Stations" refers to the CBS, NBC and ABC-affiliated stations owned and operated by the Company (WISH-TV, WANE-TV, WAND-TV, WAVY-TV, KXAN-TV, WTNH-TV and WIVB-TV). See "The Transactions and Other Matters." The terms "broadcast cash flow" ("BCF") and "EBITDA" are referred to in various places in this Prospectus. BCF is defined as operating income (loss) plus corporate expenses plus depreciation and amortization of intangible assets and amortization of program rights plus other non-cash expenses (consisting of tower write-offs and non-cash pension expenses), minus cash program payments. EBITDA is defined as BCF minus corporate expenses. BCF and EBITDA are not measures of performance calculated in accordance with generally accepted accounting principles ("GAAP"). However, management believes that BCF is useful to a prospective investor because it is a measure widely used in the broadcast industry to evaluate a television broadcast company's operating performance and that EBITDA is useful to a prospective investor because it is widely used in the broadcast industry to evaluate a television broadcast company's ability to service debt. BCF and EBITDA should not be considered in isolation of or as a substitute for net income (loss), cash flows from operating activities and other income and cash flow statement data prepared in accordance with GAAP or as a measure of liquidity or profitability. BCF and EBITDA as determined above may not be comparable to the BCF and EBITDA measures reported by other companies. In addition, these measures do not represent funds available for discretionary use. Designated market area ("DMA") rankings are from the Nielsen Station Index dated November 1997 as estimated by the A.C. Nielsen Company ("Nielsen"). There are 211 generally-recognized television "markets" or DMAs in the United States, which are ranked in size according to various factors based upon actual or potential audience. Unless otherwise indicated herein, (i) market revenue, market revenue share, projected advertising revenue growth and station revenue share data have been obtained from Investing in Television 1994, 1995, 1996 and 1997, BIA Publications, Inc. ("BIA"); (ii) television household data has been obtained from the Nielsen Station Index for November of the appropriate year; (iii) audience share and audience rankings, except where specifically stated to the contrary, have been derived from Nielsen estimates (for May and November of the appropriate year) of the percentage of persons in the DMA tuned into the relevant station from sign-on to sign-off (Sunday to Saturday, 6:00 a.m. to 2:00 a.m.); (iv) general market economic data has been obtained from BIA and the chambers of commerce in each station's market; (v) the term "station" or "commercial station" means a television broadcast station and does not include public television stations, cable stations or networks (e.g., CNN, TBS or ESPN), or stations that do not meet the minimum Nielsen reporting standards (i.e., weekly cumulative audience share of at least 2.5% for Sunday to Saturday, 7:00 a.m. to 1:00 a.m.); and (vi) the term "independent" describes a commercial television station that is not affiliated with the ABC, CBS, NBC, Fox, WB or UPN television networks. Control Costs. In addition to concentrating on maximizing advertising revenues in its local markets, management focuses on controlling costs to maximize BCF. In many markets, the Company operates with fewer personnel than its competitors. In addition, management typically buys syndicated programming on a Company-wide basis and performs detailed profitability analyses for all programming purchases. As a result, management believes that the Company's margins are among the highest in the industry for stations in markets of comparable size. Pursue Selective Acquisitions. The Company intends to pursue selective acquisitions of television stations with the goal of improving their operating performance by applying management's business strategy. Targeted stations generally will share many of the following characteristics: (i) attractive acquisition terms; (ii) opportunities for increased advertising revenue; (iii) opportunities to implement effective cost controls; (iv) opportunities for increased audience share through improved newscasts and programming; and (v) market locations that are projected to have attractive growth in advertising revenues. The Company intends to primarily target network-affiliated stations located in the fifty largest DMAs, which stations typically have established audiences for their news, sports and entertainment programming. Invest in Digital Technology. Management believes that the Company is well positioned for the transition to digital broadcasting and anticipates that the Company will be one of the first television broadcasters in the United States to transmit a digital signal. The Company has already invested $13 million to fully prepare its towers and transmitter buildings for the transition, and estimates that an additional $40 million will be required over the next five to seven years for other necessary capital expenditures such as the purchase of antennae, transmitters, studio equipment and news gathering equipment. In accordance with FCC regulations, all station affiliates of ABC, CBS, NBC and Fox in the top ten DMAs will be required to transmit a digital signal by May 1, 1999. Affiliates of those networks in DMAs ranked eleven through thirty will be required to transmit a digital signal by November 1, 1999. All remaining commercial broadcasters will be required to transmit a digital signal by May 1, 2002. MANAGEMENT AND OWNERSHIP The Company's management team, led by Gary Chapman, the Company's President and Chief Executive Officer, is recognized as an industry leader. As an indication of management's expertise and ability, the five network-affiliated stations operated by management throughout the period from January 1, 1991 to December 31, 1997 (WISH-TV, WANE-TV, WAND-TV, WAVY-TV and KXAN-TV) achieved an aggregate annual compound growth rate in net revenues and BCF of 8.9% (from $57.8 million to $96.2 million) and 13.3% (from $21.4 million to $45.2 million), respectively. Management also increased the Company's BCF margin at these stations from 37% to 47% during such period. In connection with the Acquisition, management and key employees reinvested a portion of their equity interest in LIN Television in the indirect parent corporation of Holdings. In addition, management and key employees will be granted options to acquire additional shares representing an approximate 5% equity interest in such parent corporation. Hicks Muse is a leading private investment firm with offices in Dallas, New York, St. Louis and Mexico City that specializes in leveraged acquisitions, recapitalizations and other principal investing activities. Hicks Muse and its predecessor firm have completed or have pending over 100 transactions having a combined transaction value of more than $24 billion. Although Hicks Muse invests in a wide variety of industries, it has significant investments and experience in the media and communications industry, including interests in Chancellor Media, Capstar Broadcasting, STC Broadcasting, Katz Media, OmniAmerica Tower and Grupo MVS. Hicks Muse plans to utilize an investment model for the Company similar to that used for Chancellor Media and Capstar Broadcasting. Chancellor Media was formed in 1993 with the purchase of two radio stations. Today, Chancellor Media is the second largest radio operator in the United States in terms of revenue (behind only CBS). Similarly, Capstar Broadcasting was formed in 1996 for the purpose of acquiring radio stations in small to medium size markets. Capstar Broadcasting is now the largest radio operator in the United States in terms of number of stations. See "Risk Factors -- Potential Conflicts of Interest" and "Certain Other Transactions." THE TRANSACTIONS AND OTHER MATTERS THE TRANSACTIONS The Acquisition. Holdings, LIN Acquisition and LIN Television entered into an Agreement and Plan of Merger on August 12, 1997 (as amended, the "Merger Agreement"). Pursuant to, and upon the terms and conditions of, the Merger Agreement, Holdings acquired LIN Television (the "Acquisition") on March 3, 1998 by merging LIN Acquisition, its wholly-owned subsidiary, with and into LIN Television (the "Merger"), with LIN Television surviving the Merger and becoming a direct, wholly owned subsidiary of Holdings. The total purchase price for the common equity of LIN Television was approximately $1.7 billion. In addition, the Company refinanced $260.2 million of LIN Television indebtedness and incurred acquisition costs of approximately $32.2 million. The Financings. The Acquisition was funded by (i) $6.9 million of excess cash on the Company's balance sheet; (ii) $50.0 million aggregate principal amount of senior secured Tranche A term loans ("Tranche A Term Loans"); (iii) $120.0 million aggregate principal amount of senior secured Tranche B term loans ("Tranche B Term Loans"); (iv) $299.3 million gross proceeds from the issuance by LIN Television of $300.0 million aggregate principal amount of Old Senior Subordinated Notes; (v) $199.6 million gross proceeds from the issuance by Holdings of $325.0 million aggregate principal amount at maturity of Old Senior Discount Notes, which proceeds were contributed by Holdings to the common equity of the Company; (vi) $558.1 million of common equity provided by affiliates of Hicks Muse, management and other co-investors to the equity of the corporate parents of Holdings, which in turn, through Holdings, contributed such amount to the common equity of the Company; and (vii) $815.5 million of proceeds of the GECC Note (collectively, the "Financings"). The Joint Venture. In connection with the Acquisition, Hicks Muse and NBC formed the Joint Venture. The Joint Venture consists of KXAS-TV, formerly LIN Television's Dallas-Fort Worth NBC affiliate, and KNSD-TV, formerly NBC's San Diego station. A wholly owned subsidiary of NBC is the general partner of the Joint Venture and NBC operates the stations owned by the Joint Venture. The NBC General Partner holds an approximate 80% equity interest and the Company holds an approximate 20% equity interest in the Joint Venture. GECC provided debt financing for the Joint Venture in the form of an $815.5 million 25-year non-amortizing senior secured note bearing an initial interest rate of 8.0% per annum (the "GECC Note"). The Company expects that the interest payments on the GECC Note will be serviced solely by the cash flow of the Joint Venture. All Distributable Cash (as defined) of the Joint Venture will be distributed to the Company and the NBC General Partner based on their respective equity interests in the Joint Venture. On a pro forma basis for the fiscal year ended December 31, 1997, the Company's portion of the Joint Venture's Distributable Cash would have been $2.2 million (without giving effect to a reserve of $15.0 million which must be established, subject to waiver by the Company, prior to any distribution of Distributable Cash). See "Risk Factors -- Control of Holdings and the Company." The GECC Note was issued by LIN Television of Texas, L.P., the Company's indirect wholly owned partnership ("LIN Texas"), which distributed the proceeds to the Company to finance a portion of the cost of the Acquisition. The obligations to GECC under the GECC Note were assumed by the Joint Venture and LIN Texas was simultaneously released from all obligations under the GECC Note. The GECC Note is not an obligation of Holdings, the Company or any of their respective subsidiaries and is recourse only to the Joint Venture, the Company's equity interest therein and to the GECC Note Guarantor. See "Risk Factors -- Defaults under the GECC Note" and "The Transactions and Other Matters -- The Joint Venture." In connection with the formation of the Joint Venture, the Company received an extension of its NBC network affiliation agreements to 2010 and the option (exercisable through December 31, 1999) to purchase WVTM-TV, the NBC affiliate in Birmingham, Alabama. Sources and Uses. The following table sets forth the sources and uses of funds in connection with the Acquisition (dollars in millions): <TABLE> <S> <C> SOURCES Excess cash........................ $ 6.9 Term Loans(a)...................... 170.0 Old Senior Subordinated Notes(b)... 299.3 Holdings contributions(c).......... 757.7 GECC Note(d)....................... 815.5 -------- Total Sources................. $2,049.4 ======== USES Purchase of LIN Television equity(e)........................ $1,706.4 Refinance LIN Television debt...... 260.2 Transaction fees and expenses(f)... 82.8 -------- Total Uses.................... $2,049.4 ======== </TABLE> - --------------- (a) The Term Loans funded in connection with the Acquisition consisted of $50.0 million aggregate principal amount of Tranche A Term Loans and $120.0 million aggregate principal amount of Tranche B Term Loans. As of December 31, 1997, the interest rates payable on outstanding Tranche A Term Loans and Tranche B Term Loans would have been approximately 7.50% and 8.00%, respectively. See "Description of the Senior Credit Facilities." (b) Represents gross proceeds to the Company from the issuance of $300.0 million aggregate principal amount of Old Senior Subordinated Notes. (c) Affiliates of Hicks Muse, management and other co-investors contributed $558.1 million to the equity of the corporate parents of Holdings, which in turn, through Holdings, contributed such amount to the common equity of the Company. In addition, Holdings issued $325.0 million aggregate principal amount at maturity of Old Senior Discount Notes and contributed the $199.6 million gross proceeds thereof to the common equity of the Company. (d) LIN Texas distributed the proceeds from the issuance of the GECC Note to the Company, which used such proceeds to finance a portion of the cost of the Acquisition. The GECC Note is not an obligation of Holdings, the Company or any of their respective subsidiaries and is recourse only to the Joint Venture, the Company's equity interest therein and to the GECC Note Guarantor. The Company expects that the interest payments on the GECC Note will be serviced solely by the cash flow of the Joint Venture. See "Risk Factors -- Control of Holdings and the Company" and "-- Defaults under the GECC Note" and "The Transactions and Other Matters -- The Joint Venture.". (e) The purchase price reflects the total price to acquire the equity of LIN Television (including KXAS-TV, which was contributed to the Joint Venture). (f) Includes discounts and commissions on the Old Notes in connection with the Offerings. Organizational Structure The following chart depicts (i) the summary organizational chart of Holdings and the Company and (ii) the sources of financing for the Transactions: LIN GRAPH THE GRAND RAPIDS ACQUISITION The Company expects to consummate the Grand Rapids Acquisition later this year. The Company currently provides services to the Grand Rapids Stations pursuant to a consulting agreement with AT&T. The total purchase price for the Grand Rapids Acquisition will be approximately $125.5 million (plus accretion thereon of 8% from March 1, 1998), which is expected to be funded by $125.0 million of additional Tranche A Term Loans. For the fiscal year ended December 31, 1997, the Grand Rapids Stations generated net revenues and BCF of $28.4 million and $11.3 million, respectively. The historical and pro forma financial information contained herein does not give effect to the Grand Rapids Acquisition. See "The Transactions and Other Matters -- The Grand Rapids Acquisition" and "Business -- The Company -- History." RECENT DEVELOPMENTS Chancellor Media Corporation, a Delaware corporation ("Chancellor") and Ranger Equity Holdings Corporation, a Delaware corporation ("Ranger"), the indirect parent company of Holdings and the Company, entered into an Agreement and Plan of Merger, dated July 7, 1998 (the "Chancellor Merger Agreement"). Pursuant to, and subject to the prior satisfaction or waiver of certain customary conditions (including, without limitation, the approval of Chancellor's and the Company's respective shareholders, the receipt of necessary FCC approvals, and the termination or expiration of the applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended) set forth in, the Chancellor Merger Agreement, Ranger will be merged with and into Chancellor (the "Chancellor Merger"), with Chancellor continuing as the surviving corporation following the Chancellor Merger. As a result of the Chancellor Merger, (i) each share of common stock, $0.01 par value ("Ranger Common Stock"), of Ranger will be converted into the right to receive 0.0300 of a share of common stock, $0.01 par value ("Chancellor Common Stock"), of Chancellor, other than shares of Ranger Common Stock for which appraisal rights have been exercised pursuant to Section 262 of the General Corporation Law of the State of Delaware. In addition, Chancellor, as the surviving corporation, will assume certain outstanding options to purchase shares of Ranger Common Stock held by certain directors, officers, employees and consultants of Ranger and its subsidiaries. Following the Chancellor Merger, Holdings and the Company will become indirect, wholly owned subsidiaries of Chancellor. A Chancellor shareholder has filed a shareholders derivative lawsuit in a chancery court in the State of Delaware, purportedly on behalf of Chancellor, naming Chancellor, Chancellor's directors and the Company as defendants. The lawsuit seeks, among other things, money damages and an injunction prohibiting the consummation of the Chancellor Merger. The Company believes that the lawsuit is without substantial merit and intends to vigorously defend the action. THE EXCHANGE OFFERS THE SENIOR SUBORDINATED NOTES EXCHANGE OFFER: The Senior Subordinated Notes Exchange Offer applies to $300,000,000 aggregate principal amount of the Old Senior Subordinated Notes. The form and terms of the New Senior Subordinated Notes will be the same as the form and terms of the Old Senior Subordinated Notes except that (i) interest on the New Senior Subordinated Notes will accrue from the date of issuance of the Old Senior Subordinated Notes, and (ii) the New Senior Subordinated Notes are being registered under the Securities Act and, therefore, will not bear legends restricting their transfer. The New Senior Subordinated Notes will evidence the same debt as the Old Senior Subordinated Notes and will be entitled to the benefits of the Senior Subordinated Notes Indenture (as defined) pursuant to which the Old Senior Subordinated Notes were issued. The Old Senior Subordinated Notes and the New Senior Subordinated Notes are sometimes referred to collectively herein as the "Senior Subordinated Notes." See "Description of the New Senior Subordinated Notes." The Senior Subordinated Notes Exchange Offer....... $1,000 principal amount of New Senior Subordinated Notes in exchange for each $1,000 principal amount of Old Senior Subordinated Notes. As of the date hereof, Old Senior Subordinated Notes representing $300,000,000 aggregate principal amount are outstanding. The terms of the New Senior Subordinated Notes and the Old Senior Subordinated Notes are substantially identical. Based on an interpretation by the Commission's staff set forth in no-action letters issued to third parties unrelated to the Company, Holdings and the Guarantors, the Company and the Guarantors believe that New Senior Subordinated Notes issued pursuant to the Senior Subordinated Notes Exchange Offer in exchange for Old Senior Subordinated Notes may be offered for resale, resold and otherwise transferred by any person receiving the New Senior Subordinated Notes, whether or not that person is the registered holder (other than any such holder or such other person that is an "affiliate" of the Company or any Guarantors within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that (i) the New Senior Subordinated Notes are acquired in the ordinary course of business of that holder or such other person, (ii) neither the holder nor such other person is engaging in or intends to engage in a distribution of the New Senior Subordinated Notes, and (iii) neither the holder nor such other person has an arrangement or understanding with any person to participate in the distribution of the New Senior Subordinated Notes. See "The Exchange Offers -- Purpose and Effect." Each broker-dealer that receives New Senior Subordinated Notes for its own account in exchange for Old Senior Subordinated Notes, where those Old Senior Subordinated Notes were acquired by the broker-dealer as a result of its market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Subordinated Notes. See "Plan of Distribution." Senior Subordinated Notes Registration Rights Agreement................ The Old Senior Subordinated Notes were sold by the Company on March 3, 1998, in a private placement in reliance on Section 4(2) of the Securities Act and immediately resold by the initial purchasers thereof (the "Initial Purchasers") in reliance on Rule 144A under the Securities Act (the "Original Senior Subordinated Notes Offering"). In connection with the original Senior Subordinated Notes Offering, the Company and Holdings entered into a Registration Rights Agreement with the Initial Purchasers (the "Senior Subordinated Notes Registration Rights Agreement") providing for, among other things, the Senior Subordinated Notes Exchange Offer. See "The Exchange Offers -- Purpose and Effect." Expiration Date............ The Senior Subordinated Notes Exchange Offer will expire at 5:00 p.m., New York City time, on , 1998, or such later date and time to which it is extended by the Company. Withdrawal................. The tender of Old Senior Subordinated Notes pursuant to the Senior Subordinated Notes Exchange Offer may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Any Old Senior Subordinated Notes not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Senior Subordinated Notes Exchange Offer. Interest on the New Senior Subordinated Notes and Old Senior Subordinated Notes.................... Interest on each New Senior Subordinated Note will accrue from the date of issuance of the Old Senior Subordinated Note for which such Old Senior Subordinated Note is exchanged or from the date of the last periodic payment of interest on such Old Note, whichever is later. Conditions to the Senior Subordinated Notes Exchange Offer........... The Senior Subordinated Notes Exchange Offer is subject to certain customary conditions, certain of which may be waived by the Company. See "The Exchange Offers -- Certain Conditions to the Exchange Offers." Procedures for Tendering Old Senior Subordinated Notes.................... Each holder of Old Senior Subordinated Notes wishing to accept the Senior Subordinated Notes Exchange Offer must complete, sign and date the accompanying letter of transmittal relating to the Senior Subordinated Notes Exchange Offer (the "Senior Subordinated Notes Letter of Transmittal"), or a copy thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver the Senior Subordinated Notes Letter of Transmittal, or the copy, together with the Old Senior Subordinated Notes and any other required documentation, to the Senior Subordinated Notes Exchange Agent (as defined) at the address set forth in the Senior Subordinated Notes Letter of Transmittal. Persons holding Old Senior Subordinated Notes through the Depository Trust Company ("DTC") and wishing to accept the Senior Subordinated Notes Exchange Offer must do so pursuant to the DTC's Automated Tender Offer Program, by which each tendering Participant will agree to be bound by the Senior Subordinated Notes Letter of Transmittal. By executing or agreeing to be bound by the Senior Subordinated Notes Letter of Transmittal, each holder will represent to the Company that, among other things, (i) the New Senior Subordinated Notes acquired pursuant to the Senior Subordinated Notes Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Senior Subordinated Notes, whether or not such person is the holder of the Old Senior Subordinated Notes, (ii) neither the holder nor any such other person is engaging in or intends to engage in a distribution of such New Senior Subordinated Notes, (iii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Senior Subordinated Notes within the meaning of the Securities Act, (iv) neither the holder nor any such person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of the Company or any Guarantor, and (v) if such holder or other person is a broker-dealer, that it will receive New Senior Subordinated Notes for its own account in exchange for Old Senior Subordinated Notes that were acquired as a result of market-making activities or other trading activities and that it will be required to acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Subordinated Notes. See "The Exchange Offers -- Procedures for Tendering." Shelf Registration Requirement.............. Pursuant to the Senior Subordinated Notes Registration Rights Agreement, the Company is required to file a "shelf" registration statement for a continuous offering pursuant to Rule 415 under the Securities Act in respect of the Old Senior Subordinated Notes if (i) because of any change in law or applicable interpretations of the staff of the Commission, the Company is not permitted to effect the Senior Subordinated Notes Exchange Offer, (ii) the Senior Subordinated Notes Exchange Offer is not consummated within 225 days of the Original Senior Subordinated Notes Offering, (iii) any holder of Private Exchange Securities (as defined) requests within 60 days after the Senior Subordinated Notes Exchange Offer, (iv) any applicable law or interpretations do not permit any holder of Old Senior Subordinated Notes to participate in the Senior Subordinated Notes Exchange Offer, (v) any holder of Old Senior Subordinated Notes participates in the Senior Subordinated Notes Exchange Offer and does not receive freely transferrable New Senior Subordinated Notes in change for Old Senior Subordinated Notes or (vi) the Company so elects. Acceptance of Old Senior Subordinated Notes and Delivery of New Senior Subordinated Notes....... The Company will accept for exchange any and all Old Senior Subordinated Notes which are properly tendered (and not withdrawn) in the Senior Subordinated Notes Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Senior Subordinated Notes issued pursuant to the Senior Subordinated Notes Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offers -- Terms of the Exchange Offers." Senior Subordinated Notes Exchange Agent........... United States Trust Company of New York is serving as Exchange Agent (the "Senior Subordinated Notes Exchange Agent") in connection with the Senior Subordinated Notes Exchange Offer. Federal Income Tax Considerations........... The exchange pursuant to the Senior Subordinated Notes Exchange Offer should not be a taxable event for federal income tax purposes. See "Certain United States Federal Income Tax Considerations." Effect of Not Tendering.... Old Senior Subordinated Notes that are not tendered or that are tendered but not accepted will, following the completion of the Senior Subordinated Notes Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. THE SENIOR DISCOUNT NOTES EXCHANGE OFFER: The Senior Discount Notes Exchange Offer applies to $325,000,000 aggregate principal amount at maturity of the Old Senior Discount Notes. The form and terms of the New Senior Discount Notes will be the same as the form and terms of the Old Senior Discount Notes except that (i) the Accreted Value (as defined) of the New Senior Discount Notes will be calculated from the date of issuance of the Old Senior Discount Notes and (ii) the New Senior Discount Notes are being registered under the Securities Act and, therefore, will not bear legends restricting their transfer. The New Senior Discount Notes will evidence the same debt as the Old Senior Discount Notes and will be entitled to the benefits of the Senior Discount Notes Indenture (as defined) pursuant to which the Old Senior Discount Notes were issued. The Old Senior Discount Notes and the New Senior Discount Notes are sometimes referred to collectively herein as the "Senior Discount Notes." See "Description of the New Senior Discount Notes." The Senior Discount Notes Exchange Offer........... $1,000 principal amount at maturity of New Senior Discount Notes in exchange for each $1,000 principal amount at maturity of Old Senior Discount Notes. As of the date hereof, Old Senior Discount Notes representing $325,000,000 aggregate principal amount at maturity are outstanding. The terms of the New Senior Discount Notes and the Old Senior Discount Notes are substantially identical. Based on an interpretation by the Commission's staff set forth in no-action letters issued to third parties unrelated to Holdings, Holdings believes that New Senior Discount Notes issued pursuant to the Senior Discount Notes Exchange Offer in exchange for Old Senior Discount Notes may be offered for resale, resold and otherwise transferred by any person receiving the New Senior Discount Notes, whether or not that person is the holder (other than any such holder or such other person that is an "affiliate" of Holdings within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that (i) the New Senior Discount Notes are required in the ordinary course of business of that holder or such other person, (ii) neither the holder nor such other person is engaging in or intends to engage in a distribution of the New Senior Discount Notes, and (iii) neither the holder nor such other person has an arrangement or understanding with any person to participate in the distribution of the New Senior Discount Notes. See "The Exchange Offers -- Purpose and Effect." Each broker-dealer that receives New Senior Discount Notes for its own account in exchange for Old Senior Discount Notes where the Old Senior Discount Notes were acquired by the broker-dealer as a result of its market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Discount Notes. See "Plan of Distribution." Senior Discount Notes Registration Rights Agreement................ The Old Senior Discount Notes were sold by Holdings on March 3, 1998, in a private placement in reliance on Section 4(2) of the Securities Act and immediately resold by the Initial Purchasers in reliance on Rule 144A under the Securities Act (the "Original Senior Discount Notes Offering," and together with the Original Senior Subordinated Notes Offering, the "Original Offerings.") In connection with the Original Senior Discount Notes Offering, the Company and Holdings entered into a Registration Rights Agreement with the Initial Purchasers (the "Senior Discount Notes Registration Rights Agreement") providing for, among other things, the Senior Discount Notes Exchange Offer. See "The Exchange Offers -- Purpose and Effect." Expiration Date............ The Senior Discount Notes Exchange Offer will expire at 5:00 p.m., New York City time, on , 1998, or such later date and time to which it is extended by Holdings. Withdrawal................. The tender of Old Senior Discount Notes pursuant to the Senior Discount Notes Exchange Offer may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Any Old Senior Discount Notes not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Senior Discount Notes Exchange Offer. Accreted Value of the New Senior Discount Notes and Old Senior Discount Notes.................... The Accreted Value of each New Senior Discount Note will be calculated from the date of issuance of the Old Senior Discount Note for which such New Senior Discount Note is exchanged. Conditions to the Senior Discount Notes Exchange Offer.................... The Senior Discount Notes Exchange Offer is subject to certain customary conditions, certain of which may be waived by the Company. See "The Exchange Offers -- Certain Conditions to the Exchange Offers." Procedures for Tendering Senior Discount Notes...... Each holder of Old Senior Discount Notes wishing to accept the Senior Discount Notes Exchange Offer must complete, sign and date the accompanying letter of transmittal relating to the Senior Discount Notes Exchange Offer (the "Senior Discount Notes Letter of Transmittal"; the Senior Discount Notes Letter of Transmittal and the Senior Subordinated Notes Letter of Transmittal are sometimes referred to herein individually as a "Letter of Transmittal" and collectively as the "Letters of Transmittal"), or a copy thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver the Senior Discount Notes Letter of Transmittal, or the copy, together with the Old Senior Discount Notes and any other required documentation, to the Senior Discount Notes Exchange Offer (as defined) at the address set forth in the Senior Discount Notes Letter of Transmittal. Persons holding Old Discount Notes through the DTC and wishing to accept the Senior Discount Notes Exchange Offer must do so pursuant to the DTC's Automated Tender Offer Program, by which each tendering Participant will agree to be bound by the Senior Discount Notes Letter of Transmittal. By executing or agreeing to be bound by the Senior Discount Notes Letter of Transmittal, each holder will represent to Holdings that, among other things, (i) the New Senior Discount Notes acquired pursuant to the Senior Discount Notes Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Senior Discount Notes, whether or not such person is the holder of the Old Senior Discount Notes, (ii) neither the holder nor any such other person is engaging in or intends to engage in a distribution of such New Senior Discount Notes, (iii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Senior Discount Notes, (iv) neither the holder nor any such other person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of Holdings, and (v) if such holder or other person is a broker-dealer, that it will receive New Senior Discount Notes for its own account in exchange for Old Senior Discount Notes that were acquired as a result of market-making activities or other trading activities and that it will be required to acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Discount Notes. Shelf Registration Requirement.............. Pursuant to the Senior Discount Notes Registration Rights Agreement, Holdings is required to file a "shelf" registration statement for a continuous offering pursuant to Rule 415 under the Securities Act in respect of the Old Senior Discount Notes if (i) because of any change in law or applicable interpretations of the staff of the Commission, Holdings is not permitted to effect the Senior Discount Notes Exchange Offer, (ii) the Senior Discount Notes Exchange Offer is not consummated within 225 days of the Original Senior Discount Notes Offering, (iii) any holder of Private Exchange Securities (as defined) requests within 60 days after the Senior Discount Notes Exchange Offer, (iv) any applicable law or interpretations do not permit any holder of Old Senior Discount Notes to participate in the Senior Discount Notes Exchange Offer, (v) any holder of Old Senior Discount Notes participates in the Senior Discount Notes Exchange Offer and does not receive freely transferrable New Senior Discount Notes in exchange for Old Senior Discount Notes or (vi) Holdings so elects. Acceptance of Old Senior Discount Notes and Delivery of New Senior Discount Notes.................... Holdings will accept for exchange any and all Old Senior Discount Notes which are properly tendered (and not withdrawn) in the Senior Discount Notes Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Senior Discount Notes issued pursuant to the Senior Discount Notes Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offers -- Terms of the Exchange Offer." Senior Discount Notes Exchange Agent........... United States Trust Company of New York is serving as Exchange Agent (the "Senior Discount Notes Exchange Agent"; the Senior Subordinated Notes Exchange Agent and the Senior Discount Notes Exchange Agent are sometimes referred to herein individually as an "Exchange Agent" and collectively as the "Exchange Agents") in connection with the Senior Discount Notes Exchange Offer. Federal Income Tax Considerations........... The exchange pursuant to the Senior Discount Notes Exchange Offer should not be a taxable event for federal income tax purposes. See "Certain United States Federal Income Tax Considerations." Effect of Not Tendering.... Old Senior Discount Notes that are not tendered or that are tendered but not accepted will, following the completion of the Senior Discount Notes Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. TERMS OF THE NEW NOTES NEW SENIOR SUBORDINATED NOTES Issuer..................... LIN Television Corporation (as successor-in-interest to LIN Acquisition Company). Securities Offered......... $300,000,000 aggregate principal amount of 8 3/8% Senior Subordinated Notes due 2008. Maturity................... March 1, 2008. Interest Payment Dates..... March 1 and September 1 of each year, commencing September 1, 1998. Sinking Fund............... None. Optional Redemption........ Except as described below, the Company may not redeem the New Senior Subordinated Notes prior to March 1, 2003. On or after such date, the Company may redeem the Senior Subordinated Notes, in whole or in part, at the redemption prices set forth herein, together with accrued and unpaid interest, if any, to the date of redemption. In addition, at any time and from time to time on or prior to March 1, 2001, the Company may redeem up to 35% of the aggregate principal amount of the Senior Subordinated Notes with the net cash proceeds of one or more private or public offerings by the Company, at a redemption price equal to 108.375% of the principal amount to be redeemed, together with accrued and unpaid interest, if any, to the date of redemption, provided that at least 65% of the originally issued aggregate principal amount of the Senior Subordinated Notes remains outstanding after each such redemption. See "Description of the New Senior Subordinated Notes -- Optional Redemption." Change of Control.......... Upon the occurrence of a Change of Control, (i) the Company will have the option, at any time on or prior to March 1, 2003, to redeem the New Senior Subordinated Notes, in whole but not in part, at a redemption price equal to 100% of the principal amount thereof, plus accrued and unpaid interest plus the Applicable Premium (as defined) and (ii) if the New Senior Subordinated Notes are not redeemed or if such Change of Control occurs after March 1, 2003, the Company will be required to make an offer to repurchase the New Senior Subordinated Notes at a price equal to 101% of the principal amount thereof, together with accrued and unpaid interest, if any, to the date of purchase. See "Description of the New Senior Subordinated Notes -- Change of Control" and "-- Amendment." Guarantees................. The New Senior Subordinated Notes will be guaranteed (the "Subsidiary Guarantees"), jointly and severally on an unsecured senior subordinated basis, by the Company's direct and indirect, existing and future, Restricted Subsidiaries (the "Guarantors"). The Guarantors also will guarantee all obligations of the Company under the Senior Credit Facilities (as defined). The Company's obligations under the Senior Credit Facilities also will be secured by substantially all of the assets of the Company and the Guarantors. The obligations of each Guarantor under its Subsidiary Guarantee will be subordinated in right of payment to the prior payment in full of all Guarantor Senior Indebtedness (as defined) of such Guarantor to substantially the same extent as the Senior Subordinated Notes are subordinated to all existing and future Senior Indebtedness of the Company. See "Description of the New Senior Subordinated Notes -- Subsidiary Guarantees of the New Senior Subordinated Notes." Ranking.................... The New Senior Subordinated Notes will be unsecured and will be subordinated in right of payment to all existing and future Senior Indebtedness (as defined) of the Company and will rank pari passu in right of payment with all Senior Subordinated Indebtedness (as defined) of the Company. As of March 31, 1998, the aggregate principal amount of the Company's outstanding Senior Indebtedness was $170.0 million (consisting of outstanding Term Loans) and the Company had no Senior Subordinated Indebtedness outstanding other than the Senior Subordinated Notes and had no Subsidiary Indebtedness outstanding. As of such date, liabilities of the Company's Subsidiaries reflected on its consolidated balance sheet, including indebtedness and other liabilities such as trade payables and accrued expenses, aggregated $17.8 million. See "Description of the New Senior Subordinated Notes -- Ranking and Subordination." Restrictive Covenants...... The Senior Subordinated Notes Indenture limits, among other things, (i) the incurrence of additional indebtedness and issuance of capital stock, (ii) layering of indebtedness, (iii) the payment of dividends on, and redemption of, capital stock of the Company, (iv) liens, (v) mergers, consolidations, and sales of all or substantially all of the Company's assets, (vi) asset sales, (vii) asset swaps, (viii) dividend and other payment restrictions affecting Restricted Subsidiaries and (ix) transactions with affiliates of the Company. However, all of these limitations and prohibitions are subject to a number of important qualifications and exceptions. See "Description of the New Senior Subordinated Notes -- Certain Covenants." Use of Proceeds............ There will be no cash proceeds to the Company from the exchange of New Senior Subordinated Notes for Old Senior Subordinated Notes pursuant to the Senior Subordinated Notes Exchange Offer. The net proceeds from the Original Senior Subordinated Notes Offering were used, together with the proceeds of the other Financings, to consummate the Acquisition. NEW SENIOR DISCOUNT NOTES Issuer..................... LIN Holdings Corp. Securities Offered......... $325,000,000 aggregate principal amount at maturity of 10% Senior Discount Notes due 2008. The Senior Discount Notes will be issued at a discount to their aggregate principal amount at maturity. Maturity................... March 1, 2008. Interest Payment Dates..... Cash interest will not accrue or be payable on the New Senior Discount Notes prior to March 1, 2003. Thereafter, cash interest on the New Senior Discount Notes will accrue at a rate of 10% per annum and will be payable semi-annually in arrears on March 1 and September 1 of each year, commencing on September 1, 2003. Original Issue Discount.... For federal income tax purposes, the New Senior Discount Notes will be treated as having been issued with "original issue discount" equal to the difference between the issue price of the Old Senior Discount Notes and the sum of all cash payments (whether denominated as principal or interest) to be made thereon. Each holder of a New Senior Discount Note must include as gross income for federal income tax purposes a portion of such original issue discount for each day during each taxable year in which a New Senior Discount Note is held even though no cash interest payments will be received prior to March 1, 2003. See "Certain United States Federal Income Tax Considerations -- Taxation of Original Issue Discount." Sinking Fund............... None. Mandatory Principal Redemption............... Except as described below, Holdings may not redeem the New Senior Discount Notes prior to March 1, 2003. On March 1, 2003, Holdings will be required to redeem Senior Discount Notes with an aggregate principal amount at maturity equal to (i) $125.0 million multiplied by (ii) the quotient obtained by dividing (x) the aggregate principal amount at maturity of Senior Discount Notes then outstanding (other than Senior Discount Notes then held by Holdings or its Subsidiaries or the entities with respect to which Holdings is a direct or indirect Subsidiary) by (y) $325.0 million, (the "Mandatory Principal Redemption Amount") at a redemption price equal to 100% of the principal amount at maturity of the Senior Discount Notes so redeemed. See "Description of the New Senior Discount Notes -- Mandatory Principal Redemption." Optional Redemption........ The New Senior Discount Notes will be redeemable at the option of Holdings, in whole or in part, at any time on or after March 1, 2003. On or after such date, Holdings may redeem the New Senior Discount Notes, in whole or in part, at the redemption prices set forth herein, together with accrued and unpaid interest, if any, to the date of redemption. In addition, at any time and from time to time on or prior to March 1, 2001, Holdings may, subject to certain requirements, redeem up to 35% of the aggregate principal amount at maturity of the Senior Discount Notes with the net cash proceeds from one or more private or public equity offerings at a price equal to 110% of the Accreted Value (as defined) at the date of redemption, provided that at least 65% of the originally issued aggregate principal amount at maturity of the Senior Discount Notes remains outstanding after each such redemption. See "Description of the New Senior Discount Notes -- Optional Redemption." Change of Control.......... Upon a Change of Control, (i) Holdings will have the option, at any time on or prior to March 1, 2003, to redeem the New Senior Discount Notes, in whole but not in part, at a redemption price equal to 100% of the Accreted Value thereof plus the Applicable Premium and (ii) if the New Senior Discount Notes are not so redeemed or if such Change of Control occurs after March 1, 2003, Holdings will be required to make an offer to repurchase the New Senior Discount Notes at a price equal to (a) 101% of the Accreted Value thereof if redeemed on or before March 1, 2003, and (b) 101% of the principal amount at maturity, plus accrued and unpaid interest, if any, thereon, if redeemed after March 1, 2003. See "Description of the New Senior Discount Notes -- Change of Control." Guarantees................. None. Ranking.................... The New Senior Discount Notes will be senior unsecured obligations of Holdings and will rank pari passu in right of payment with all Senior Indebtedness of Holdings, including Holdings' guarantee of the Senior Credit Facilities. Holdings is a holding company with no operations of its own and whose primary asset is the capital stock of the Company (all of which will be pledged to secure the Senior Credit Facilities). As a result of the holding company structure, the New Senior Discount Notes will effectively rank junior in right of payment to all creditors of the Company and its subsidiaries, including the lenders under the Senior Credit Facilities, holders of the Senior Subordinated Notes and trade creditors. As of March 31, 1998, the New Senior Discount Notes were effectively subordinated to $523.8 of aggregate liabilities (including indebtedness and other liabilities such as trade payables and accrued expenses that would have been reflected on the consolidated balance sheet) of the Company and its subsidiaries. See "Description of the New Senior Discount Notes." Restrictive Covenants...... The Senior Discount Notes Indenture limits, among other things, (i) the incurrence of additional indebtedness and issuance of capital stock, (ii) the payment of dividends on, and redemption of, capital stock of Holdings, (iii) mergers, consolidations and sales of all or substantially all of Holdings' assets, (iv) asset sales, (v) asset swaps, (vi) dividend and other payment restrictions affecting Restricted Subsidiaries and (vii) transactions with affiliates. However, all of these limitations and prohibitions are subject to a number of important qualifications and exceptions. See "Description of the New Senior Discount Notes -- Certain Covenants."
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and Financial Statements and the Notes thereto appearing elsewhere in this Prospectus. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in "Risk Factors" and elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus: (i) reflects, upon the closing of the offering, the automatic conversion of all outstanding shares of the Company's preferred stock into shares of Common Stock (the "Preferred Stock Conversion"); (ii) reflects the Company's reincorporation in Delaware and a concurrent two-for-one stock split of the Company's capital stock effected in July 1998 (including associated changes to the Company's Certificate of Incorporation and Bylaws) and (iii) assumes no exercise of the Underwriters' over-allotment option. THE COMPANY GeoCities offers the world's largest and one of the fastest growing communities of personal Web sites on the Internet. GeoCities pioneered the first large-scale, Web-based community for Internet users to express themselves, share ideas, interests and expertise, and publish content accessible to other users with common interests. The mainstay of the Company's community are its "Homesteaders," Internet users who create their own personal Web sites or "Homesteads" in themed "neighborhoods" on the GeoCities Web site. These neighborhoods provide a context for Web users to publish content, to share experiences and ideas with other users and to access a centralized and easy-to-navigate destination for user-published content. With thousands of new Homesteaders joining each day, the GeoCities community has grown from approximately 10,000 Homesteads in October 1995 to over 2.1 million in July 1998. Homesteaders have created an estimated 17 million pages of personalized content, attracting over 14.8 million unique visitors to, and generating over 925 million page views on, the GeoCities Web site, according to Relevant Knowledge in June 1998 and Nielsen I/Pro in May 1998 in a report prepared for the Company, respectively. GeoCities was the third most trafficked Web site on the Internet among home users in June 1998, according to Media Metrix, and, based on this information, the Company believes it was the most popular community of personal Web sites on the Internet during the first two quarters of 1998. This combination of GeoCities' distinctive community context, topical organization and high volume of traffic provides advertisers and businesses with an attractive platform for targeted Web advertising and Web commerce. As the Internet continues to grow, Web users, advertisers and businesses are increasingly seeking online communities. Users are seeking from the Web the same opportunity for expression, interaction, sharing and recognition that they seek in the everyday world. To date, a typical Internet user's experience surfing the Web has been essentially one-way--searching and viewing Web sites containing professionally created content on topics of general interest, such as current events, sports, finance, politics and weather. In general, the Web does not provide a context to publish, promote, search, view and react to personal content. While Internet search and navigational sites have improved a user's ability to seek out aggregated Web content, these sites are not primarily focused on providing a robust platform for publishing or aggregating the rapidly increasing volume of personalized content created by users with similar interests, or enabling such users to interact with one another. Similarly, users browsing the Web are increasingly seeking ways of accessing unique, personalized content, and interacting and communicating with other individuals with similar interests. Often the most relevant content for a user is that generated by other users who share a common interest. Online communities offer a centralized means of accessing diverse, user-created content in an easy-to-navigate context and the ability to interact directly with the author of such personalized content. For advertisers and businesses, online communities hold the potential of reaching highly targeted audiences within a more personalized context, thus providing the opportunity to increase advertising efficiency and improve the likelihood of a sale. GeoCities offers Web users the ability to join and become actively involved in the world's largest Web community of personal Web sites. GeoCities provides Web users with free disk space and publishing tools to quickly and easily create their own sites in one of over 40 topically organized neighborhoods, such as CapitolHill for politics, Colosseum for sports, Hollywood for movies and television and WallStreet for finance. Homesteaders are encouraged to become active participants in the GeoCities community by updating their sites and communicating with others through free e-mail, chat and bulletin-board services provided by the Company. The Company offers Homesteaders seeking greater involvement the opportunity to join the ranks of over one thousand active Community Leaders and Community Liaisons--volunteers who welcome Homesteaders and provide them with assistance, suggest improvements to GeoCities and monitor the GeoCities community for compliance with community guidelines. In addition, the Company seeks to make the GeoCities community a primary destination point for Internet users seeking personalized, user-created content. Through the Company's enhanced user interface, GeoCities provides a central site for Internet users to quickly access and view millions of pages of topically organized content created by fellow users. This distinct community context and high volume of traffic attracts advertisers, vendors and third- party content providers from whom the Company derives revenue from advertising and online commerce. For the six months ended June 30, 1998, the Company had 161 advertising customers, including Acura, IBM, Microsoft and VISA, and four premier commerce partners, including Amazon.com, CDnow, First USA and Surplus Direct/Egghead. The Company's equity investors include Chase Capital Partners, CMG@Ventures, Intel Corporation, SOFTBANK Holdings Inc. and Yahoo! Inc. The Company's objective is to be the world's leading member-created online community for Web users. The Company's strategy includes: (i) expanding its Homesteader base and strengthening Homesteader affinity through the introduction of new classes of membership, more advanced and easier-to-use publishing tools and affinity-building programs; (ii) building the GeoCities brand; (iii) enhancing the GeoCities site functionality and performance through continued investments in technology and site infrastructure; (iv) expanding globally, through initiatives similar to its current GeoCities Japan Corporation joint venture with SOFTBANK Corporation of Japan and (v) establishing additional strategic relationships, such as its current distribution relationship with Yahoo! Inc. The Company believes that this strategy will result in a highly scalable business platform from which it can generate revenues from multiple sources, including advertising, commerce and premium membership services. The Company does not generate revenues from general Internet access or subscription fees. The Company was incorporated under the laws of California in December 1994 and reincorporated in Delaware in July 1998. Unless the context otherwise requires, references in this Prospectus to the "Company" or "GeoCities" refer to GeoCities, a Delaware corporation and its predecessor California corporation. The Company's principal executive offices are located at 1918 Main Street, Suite 300, Santa Monica, California 90405. Its telephone number at that location is (310) 664-6500. GeoCities is a registered service mark of the Company. GeoPlus, GeoPoints, GeoRewards, GeoShops and GeoTickets are service marks of the Company. This Prospectus contains other product names, trade names, service marks and trademarks of the Company and of other organizations, all of which are the property of their respective owners. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company... 4,750,000 shares Common Stock to be outstanding after the offering......................... 30,661,000 shares(1) Use of proceeds....................... For investments in the GeoCities community site, including enhancements to the Company's server and networking infrastructure and the functionality of its Web site, and general corporate purposes, including working capital, expansion of its sales and marketing capabilities and brand-name promotions. See "Use of Proceeds". Nasdaq National Market symbol......... "GCTY" </TABLE> SUMMARY FINANCIAL DATA The following table sets forth certain summary financial data for the Company. This information should be read in conjunction with the Financial Statements and Notes thereto appearing elsewhere in this Prospectus. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, --------------------------- --------------------------- 1995 1996 1997 1997 1998 -------- ------- -------- ------------ -------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net revenues............ $ 46 $ 314 $ 4,582 $ 1,632 $ 5,542 Gross profit (loss)..... (57) (474) (52) 211 1,605 Loss from operations.... (479) (2,965) (9,019) (3,629) (7,739) Net loss................ $ (482) $(3,006) $ (8,903) $(3,561) $(7,253) ======== ======= ======== ======= ======= Basic and diluted net loss per share (2)..... $ (3.40) $ (2.27) Shares outstanding used in basic and diluted net loss per-share calculation (2)........ 2,620 3,194 Pro forma basic and diluted net loss per share (3).............. $ (0.36) $ (0.29) Shares outstanding used in pro forma basic and diluted net loss per share calculation (3).. 24,850 25,425 <CAPTION> JUNE 30, 1998 ------------------------------------- ACTUAL PRO FORMA(3) AS ADJUSTED(4) -------- ------------ -------------- BALANCE SHEET DATA: (IN THOUSANDS) <S> <C> <C> <C> Cash and cash equivalents and short- term investments....... $ 20,388 $20,388 $85,451 Working capital......... 17,706 17,706 82,769 Total assets............ 28,260 28,260 93,323 Debt and capital lease obligations, less current portion........ 780 780 780 Mandatory redeemable convertible preferred stock.................. 37,200 -- -- Total stockholders' equity (deficiency).... (15,868) 21,332 86,395 </TABLE> - -------- (1) Based on the number of shares of Common Stock outstanding as of June 30, 1998. Excludes (i) 6,531,000 shares of Common Stock issuable upon the exercise of outstanding stock options, including stock options outstanding under the Company's 1998 Stock Incentive Plan (the "1998 Stock Incentive Plan"), at a weighted average exercise price of $1.97 per share; (ii) 2,671,000 shares of Common Stock reserved for future issuance under the 1998 Stock Incentive Plan (which includes an increase of 2,300,000 shares in the reserve under the 1998 Stock Incentive Plan approved in July); (iii) 427,000 shares issuable upon the exercise of stock options granted under the predecessor plan to the 1998 Stock Incentive Plan in July 1998, at a weighted average exercise price of $10.88 per share; (iv) 300,000 shares of Common Stock reserved for future issuance under the Company's Employee Stock Purchase Plan (the "Purchase Plan"); (v) 20,304 shares of Common Stock issuable upon the exercise of an outstanding warrant at an exercise price of $4.695 per share and (vi) up to 40,000 shares of Common Stock to be issued pursuant to a technology purchase agreement, assuming an initial public offering price of $15.00 per share. Includes 15,840 shares of Common Stock to be issued to the Community Leaders and Liaisons under the 1998 Stock Incentive Plan. See "Capitalization", "Management--Employee Benefit Plans", "Description of Capital Stock" and Notes 2, 6, 8, 10 and 12 of Notes to Financial Statements. (2) See Notes 2 and 10 of Notes to Financial Statements for the determination of shares used in computing basic and diluted loss per share. (3) Pro forma gives effect to the Preferred Stock Conversion. (4) As adjusted to reflect the sale of 4,750,000 shares of Common Stock offered hereby at an assumed initial public offering price of $15.00 per share after deducting the estimated underwriting discount and estimated offering expenses payable by the Company. See "Use of Proceeds" and "Capitalization".
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001062967_hospitalit_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001062967_hospitalit_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION, INCLUDING THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS (I) GIVES EFFECT TO THE REORGANIZATION, (II) REFLECTS THE CONVERSION OF THE SUBORDINATED PROMISSORY NOTE (THE "SUBORDINATED PROMISSORY NOTE") HELD BY HOSPITALITY PARTNERS, LLC AND (III) ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. SEE "RISK FACTORS" AND "REORGANIZATION." THE COMPANY Hospitality Marketing Concepts Inc. ("HMC" or the "Company") is a provider of membership programs for prestigious hotels and other businesses in international and domestic markets. The Company's revenues are primarily derived from annual membership fees paid by individuals, a portion of which fees (after deducting costs related to marketing the programs) is paid to the applicable participating hotels. The Company's hotel membership programs are designed to provide participating hotels with improved consumer loyalty, increased patronage, an additional channel for acquiring new customers and a more predictable recurring revenue stream from a growing base of individual members. The Company's marketing services address the increasing need of hotels and other businesses to increase profitability, leverage the marketing expertise and infrastructure of outside vendors and cost-effectively offer new and differentiated products and services to customers. As of June 30, 1998, the Company has established hotel membership programs and on-going marketing relationships with over 300 hotels in over 150 cities worldwide, including New York, Rome, London, Madrid, Hong Kong, Shanghai, Warsaw and Caracas. The Company selects prestigious, full-service hotels, which are generally four or five-star or "best in town," and creates hotel membership programs which offer individual members a variety of benefits, including premium service, complimentary nights, substantial discounts off published room rates and complimentary food and beverage privileges when dining with a guest at hotel restaurants. Such benefits are provided directly by participating hotels, subject to availability, and the Company has no obligation to guarantee any level of member usage of rooms or services. Members pay the hotels directly for their use of hotel facilities at the discounted rates offered by the hotels to program members. Approximately 175 of the Company's top participating hotels have agreed to honor reciprocal membership benefits to all members of local HMC membership programs through the Company's CLUBHOTEL-TM- program, a unique international network including four and five-star participating hotels, such as the Shangri-La Manila, Pan Pacific Kuala Lumpur, Victoria Intercontinental (Warsaw) and Husa Palace Barcelona. As the global market for goods and services becomes increasingly competitive, businesses have substantially increased the use of direct marketing methods to strengthen relationships with existing customers, attract new customers and generate predictable recurring revenue streams from existing and new products and services. According to a study commissioned by the Direct Marketing Association, sales revenue in the United States attributable to direct marketing was estimated to be $1.2 trillion in 1997 and is estimated to reach $1.8 trillion in 2002. Membership programs are one of the fastest growing segments of the direct marketing industry. In the hospitality industry, hotels are increasingly utilizing membership programs to attract customers to fill their unoccupied rooms, utilize food and beverage services and use conference and banquet facilities. To generate increased profitability, hotels market their facilities to traditional customers consisting of business and vacation travelers. To attract such customers, hotels often rely on conventional marketing methods such as corporate and mass advertising, hotel and other travel reward programs, sponsorship of travel organizations and word-of-mouth. These methods have had limited success, however, at significantly increasing consumer loyalty and retention, because they attempt to influence the initial purchasing decision of the travelling customer and provide minimal incentives to use the hotels' facilities on a repeated basis. Likewise, hotels and other businesses often lack the necessary marketing expertise and resources to address the needs and demands of multi-ethnic, international purchasing audiences whose languages and customs differ from those prevailing in the region in which they are located. The Company's membership programs address the needs of three constituencies: participating hotels, individual members and businesses in travel-related industries whose complementary products and services are offered through the Company's membership programs. To address these needs, HMC designs membership programs which offer a unique combination of products and services targeting specific purchasing audiences. The Company's membership programs are designed to provide hotels with increased patronage and consumer loyalty from both a local membership base and the Company's domestic and international membership base and a more predictable recurring revenue stream. Individual members of the Company's hotel membership programs have access to enhanced services and benefits that significantly exceed the cost of membership. The Company also provides hotels and other participating businesses with local access to domestic and international markets and to a receptive purchasing audience of a growing base of individual members through an established distribution channel of locally-staffed telemarketing offices and a network of on-going marketing relationships with over 300 hotels worldwide. Additionally, the Company recently began offering complementary products to its members such as an international calling card (Call Connect-TM-) and a co-branded VISA card (with Standard Chartered Bank in Malaysia). To achieve its objective of becoming a leading provider of membership programs and marketing services to businesses and customers worldwide, the Company intends to expand its membership programs within the hotel industry, advance the HMC-SM- and CLUBHOTEL-TM- brands, consolidate its marketing infrastructure and expand its distribution channels, offer complementary products and services and expand its proprietary membership database. The Company intends to capitalize on its accumulated marketing expertise, knowledge of the hotel industry and global marketing infrastructure to increase its active membership base, expand its presence in the hotel industry and design, market and manage other membership programs. THE OFFERING <TABLE> <S> <C> Shares Offered by the Company..... 3,000,000 shares (1) Shares Outstanding Immediately After the Offering.............. 15,000,000 shares (1)(2) Use of Proceeds................... The net proceeds of the offering will be used for distributions to certain stockholders, payment of outstanding bank indebtedness and working capital and other general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol.......................... HMCC </TABLE> SUMMARY CONSOLIDATED FINANCIAL DATA (In thousands, except share and per share data) <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ----------------------------------------------------- -------------------- 1993 1994 1995 1996 1997 1997 1998 --------- --------- --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> <C> CONSOLIDATED INCOME STATEMENT DATA: Revenues........................... $ 24,458 $ 23,893 $ 21,199 $ 27,297 $ 31,906 $ 15,828 $ 15,884 Gross margin....................... 7,845 7,833 7,411 9,826 11,248 5,462 5,584 General and administrative costs... 6,580 6,813 6,316 6,396 7,304 3,425 4,478 Operating income................... 1,265 1,020 1,095 3,430 3,944 2,037 1,106 Net income......................... $ 1,142 $ 1,343 $ 995 $ 3,271 $ 3,655 $ 1,915 $ 811 Net income per share--basic and diluted.......................... $ 0.14 $ 0.17 $ 0.12 $ 0.39 $ 0.43 $ 0.23 $ 0.10 Weighted average common shares: Basic............................ 7,980,000 8,050,000 8,400,000 8,400,000 8,400,000 8,400,000 8,400,000 Diluted.......................... 7,980,000 8,050,000 8,400,000 8,400,000 8,427,000 8,400,000 8,562,000 Pro forma data (3): Pro forma net income............. $ 1,604 $ 256 Pro forma net income per share: Basic.......................... $ 0.17 $ 0.02 Diluted........................ $ 0.13 $ 0.02 Weighted average common shares: Basic.......................... 9,651,000 12,651,000 Diluted........................ 12,678,000 12,813,000 </TABLE> <TABLE> <CAPTION> JUNE 30, 1998 ------------------------------------------- PRO FORMA ACTUAL PRO FORMA(3)(4) AS ADJUSTED(5) --------- --------------- --------------- <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents.............................................. $ 908 $ 908 $ 19,298 Working capital (deficit).............................................. (5,710) (4,662) 15,038 Total assets........................................................... 17,253 18,130 36,520 Long-term debt......................................................... 4,763 1,763 1,763 Distribution payable to stockholders................................... 7,000 Stockholders' equity (deficit)......................................... (8,248) (11,200) 15,500 </TABLE> - ------------------------------ (1) Excludes 1,500,000 shares of the Company's Common Stock, par value $0.001 per share ("Common Stock"), reserved for issuance under the Company's 1998 Stock Option Plan (the "1998 Stock Option Plan"), of which options for an aggregate of 817,140 shares of Common Stock were issued and outstanding as of June 30, 1998, and an option to purchase 180,000 shares of Common Stock. See "Management--Option Plan," "Certain Transactions" and Notes 6 and 10 of Notes to Consolidated Financial Statements. (2) Includes 3,600,000 shares of the Company's Common Stock to be issued upon conversion of the Subordinated Promissory Note. See Note 9 of Notes to Consolidated Financial Statements. (3) See Note 9 of Notes to Consolidated Financial Statements for a discussion of pro forma income statement and balance sheet data. (4) Reflects the estimated distribution of approximately $7.0 million to the Principals and the assumed conversion of the Subordinated Promissory Note. Also adjusted to reflect the recording of a net deferred tax asset of $877,000 as if the Company's change from a limited liability company to a C corporation had occurred June 30, 1998. See Note 9 of Notes to Consolidated Financial Statements. (5) Adjusted to reflect the sale of 3,000,000 shares of the Company's Common Stock in this offering and the application of the estimated proceeds therefrom. CAPITALIZED TERMS USED IN THIS SUMMARY HAVE THE MEANINGS ASCRIBED TO SUCH TERMS ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE INDICATES, ALL REFERENCES IN THIS PROSPECTUS TO THE "COMPANY" OR "HMC" ARE TO HOSPITALITY MARKETING CONCEPTS INC. AND ITS SUBSIDIARIES. PRIOR TO THE REORGANIZATION, SUCH SUBSIDIARIES WERE UNDER COMMON OWNERSHIP AND MANAGEMENT AND WERE IN THE SAME BUSINESS. AS A RESULT, THE FINANCIAL STATEMENTS PRESENTED HEREIN HAVE BEEN PREPARED ON A CONSOLIDATED BASIS. The Company does not own any hotel properties. The properties shown on the inside cover page participate in HMC membership programs and are owned by unaffiliated third parties. HMC-SM-, CLUBHOTEL-TM- and Call Connect-TM- are trademarks or service marks of the Company. Certain of the Company's marks have been registered in foreign jurisdictions. This Prospectus includes other trademarks and service marks of the Company and other entities. The Company was incorporated in Delaware in May 1998 to consolidate the operations of several entities in the same business and under common ownership and management. See "Reorganization." The Company's principal executive offices are located at 15751 Rockfield Boulevard, Suite 200, Irvine, California 92618, and its telephone number is (949) 454-1800.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001063163_strategix_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001063163_strategix_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements appearing elsewhere in this Prospectus. Prospective investors should read the Prospectus in its entirety. As used in this Prospectus, "Company" means Strategix Solutions, Inc. and, unless the context otherwise requires, its subsidiaries. The Company's sole shareholder before the Offering is Career Horizons, Inc., a subsidiary of AccuStaff Incorporated, a Florida corporation that is listed on the New York Stock Exchange ("NYSE"). As described under the heading "The Reorganization and the Proposed Spin-off," AccuStaff Incorporated has announced that it intends, upon shareholder approval, to change its name to "Modis Professional Services, Inc." during 1998. Unless otherwise indicated, the information in this Prospectus assumes: (i) an initial public offering price of $ per share of Common Stock (representing the mid-point of the estimated price range); (ii) all financial data and ratios presented herein have been prepared using generally accepted accounting principles ("GAAP"); (iii) the consummation of transactions other than the Spin-off described herein under the heading "The Reorganization and Proposed Spin-off"; and (iv) no exercise of the Underwriters' over-allotment option. As used herein, references to the "Company" include the historical operating results and activities of, and assets and liabilities assigned to, the businesses and operations which comprise the Company as of the date hereof after giving effect to the transactions other than the Spin-off described herein under the heading "The Reorganization and Proposed Spin-off." The historical financial information of the Company included in the Prospectus reflects the results of operations, financial position, stockholder's equity and cash flows of the businesses to be transferred to the Company from AccuStaff in the reorganization described under the heading, "The Reorganization and Proposed Spin-off", as if the Company were a separate entity for all periods presented. THE COMPANY OVERVIEW Strategix Solutions, Inc. (the "Company") is, on the basis of revenues, a leading national provider of business services that primarily include diversified staffing and outsourcing services to businesses and government agencies. The Company was formed in May 1998 in connection with the Reorganization (as defined below) and represents the commercial businesses of AccuStaff Incorporated ("AccuStaff"). The Company will operate in two divisions, Specialized Solutions and Traditional Staffing Services. The Company provides its services through a network of 341 Company owned offices and 36 franchised offices, with centralized support including marketing and back office support. In the year ended December 31, 1997, the Company generated revenues of $1.3 billion and supplied approximately 250,000 employees to clients in 36 states and the District of Columbia. On a pro forma basis, after eliminating results of operations that have been sold or that are in the process of being terminated, 1997 revenues were approximately $1.0 billion. The Company has experienced rapid pro forma revenue growth from $312 million in 1992 through both acquisitions and internal growth. The Specialized Solutions division provides sophisticated customized solutions to customers including high-end office support and office automation resources, desktop publishing, outsourcing, mid-level information technology ("IT") staffing, web-site design and development, and end-user IT training. This division also provides staffing of scientific skills for biotechnology and pharmaceutical customers and skilled "light technical" staffing for electronics and other component manufacturers. In addition, through this division, the Company provides technical support for end-users including telecommunication companies. The Company provides this specialized expertise under various brand names. The division's Office Specialists, Excel, Richard Michael Group and Placers brands provide high-end office support and office automation resources. The e-Staff brand provides services such as desktop publishing. The Strategix and HR Management brands offer turn-key outsourcing services. The Mindsharp Learning Centers brand offers a wide range of end-user IT training. The Specialized Solutions division, which had revenues of $341 million in 1997, representing 34% of the Company's revenues on a pro forma basis, operates through 124 offices in 20 states and the District of Columbia. The Traditional Staffing Services division primarily provides clerical, secretarial and, to a lesser extent, light industrial staffing, primarily under the AccuStaff brand name. The office services unit, which accounts for approximately 78% of the division's staffing revenue, supplies a wide variety of secretarial, clerical, word processing, and office automation employees to perform skilled tasks, as well as reception, copying, filing, and other miscellaneous office services. This division also provides customer care and telemarketing services for businesses. The light industrial unit, which accounts for approximately 22% of the division's staffing revenue, supplies employees for light industrial positions such as unskilled assembly and packaging, light-duty warehouse work, inventory and other light-duty, labor intensive tasks. This division also provides on-site management programs for numerous clients where the Company's staffing employees constitute a significant portion of a client's workforce. The Traditional Staffing Services division, which had revenues of $655.7 million in 1997 representing 66% of the Company's revenues on a pro forma basis, operates through 253 offices (including franchised offices) in 32 states and the District of Columbia. OPERATING STRATEGY The Company's goal is to be the leading provider of quality business solutions such as strategic staffing and outsourcing. The Company intends to achieve its goal through a focused operating strategy. The key elements of this operating strategy include: (i) enhancing its position as a provider of both specialized and traditional staffing services through a broad range of customized, value-added services; (ii) pursuing a targeted marketing strategy that focuses on high growth customers and high skill segments; (iii) recruiting, training and retaining qualified employees; (iv) capitalizing on its strong reputation and brand names; (v) operating decentralized, entrepreneurial branches with centralized support; and (vi) leveraging its existing infrastructure and technology to further achieve economies of scale, to enhance its ability to strengthen client relationships and to support growth in operations through existing back-office operations. GROWTH STRATEGY The Company pursues a focused growth strategy designed to achieve both increased revenue and earnings. The key elements of this growth strategy are as follows: INTERNAL GROWTH The Company's internal growth strategy includes: (i) positioning in market locations, customer segments and skill segments that value high levels of service; (ii) increasing penetration of existing markets and expanding into contiguous markets; (iii) changing the mix of business; (iv) growing the Company's specialized businesses, including its outsourcing, mid-level IT services and training services; and (v) cross-selling services on an intra- company basis as well as on an inter-company basis with AccuStaff. ACQUISITIONS The Company's acquisition strategy is to acquire complementary staffing and outsourcing operations that are focused on high value, high skill business segments that the Company believes are growing faster than the traditional staffing segments. The Company believes that there is an opportunity, as a part of the consolidation in the global business services industry, to focus on acquisitions of companies that offer specialized staffing and high-end office support. After completing more than 30 acquisitions for AccuStaff (including for Career Horizons, Inc. and Office Specialists, Inc.), including several acquisitions in the information technology industry, the Company's management has a proven track record of identifying acquisition candidates that complement existing businesses, integrating them within existing operations and utilizing them to enhance the Company's growth performance. The Company intends to fund the costs of acquisitions through cash flow from operations, its $300 million credit facility (the "Credit Facility") ($150 million of which will be available at the Offering Closing Date (defined below) and seller financing. For a description of limitations on the Company's ability to use its stock for acquisitions, see "Risk Factors--Limited Ability to Issue Common Stock Prior to Spin-off." INDUSTRY OVERVIEW The global business services and staffing industry has experienced significant growth in recent years in response to the changing work environment worldwide. The Company believes the focus of the industry has been gradually changing from employers' traditional use of staffing services to manage employee costs and meet fluctuating staffing requirements to the reduction of administrative overhead by outsourcing a wide variety of operations that are not part of their core business competencies. The use of specialized and traditional flexible staffing services has allowed employers to improve productivity, manage costs and avoid the negative effects of layoffs. Furthermore, the ability to hire business solutions specialists on a contractual basis or outsource specialized functions and administrative responsibilities has permitted companies to focus on their core business while cutting costs and attaining higher quality support services. This has been partly in response to rapidly changing regulations worldwide regarding employee benefits, insurance and retirement plans, as well as the high cost of hiring, training and terminating regular employees. In addition, the Company believes that the industry's growth is also driven by the changing demographics of the workforce and evolving attitudes toward work patterns, both domestically and internationally. These trends have accelerated with the pace of technological change and global competitive pressures. The U.S. remains the largest and most important business solutions, outsourcing and staffing services market. According to Staffing Industry Report, U.S. staffing industry revenue grew from approximately $29.3 billion in 1992 to approximately $66.3 billion in 1997, which represents a compound annual growth rate of 17.7%. The National Association of Temporary and Staffing Services has estimated that more than 90% of all U.S. businesses utilize temporary services. However, temporary help represented only 2.01% of total employment. The staffing market in the U.S. and most other developed economies is highly fragmented and includes a large number of medium sized and small businesses, many of which operate in a single geographic market. This fragmentation combined with increased competitive pressures has produced a trend of industry consolidation, resulting in the Company's belief that many smaller and medium sized companies are becoming increasingly responsive to acquisition proposals by larger firms, such as the Company. THE REORGANIZATION The Company currently is an indirect wholly-owned subsidiary of AccuStaff and was formed in May 1998. In connection with a reorganization (the "Reorganization"), AccuStaff will cause its wholly-owned subsidiary, Career Horizons, Inc. that owns all of the common stock of the Company ("Career Horizons") to contribute to the Company the common stock or other ownership interests of companies Career Horizons owns engaged in AccuStaff's commercial division. In exchange, Career Horizons will continue to hold all of the stock of the Company and receive $150 million, which amount will be obtained by the Company borrowing under the Credit Facility. Career Horizons will distribute the $150 million and the stock of the Company to AccuStaff. AccuStaff will then contribute the common stock or other ownership interests of companies it owns engaged in AccuStaff's commercial division and certain of AccuStaff's assets that comprise part of AccuStaff's commercial division to the Company. The assets being contributed by AccuStaff include AccuStaff's receivables, contracts and fixed assets related to its commercial business. In exchange, AccuStaff will continue to hold all of the stock of the Company and will receive the net proceeds of the Common Stock sold by the Company in the Offering. The cash proceeds paid to AccuStaff will be deemed a distribution pursuant to the Reorganization and Spin-Off Agreement. For accounting purposes, all amounts considered due to parent on the Company's balance sheet ($98.9 million as of March 31, 1998) will be deemed forgiven at the time of the Reorganization. THE SPIN-OFF AccuStaff has announced that it intends to distribute the Common Stock of the Company held by AccuStaff to AccuStaff's stockholders in 1999 by means of a tax-free distribution (the "Spin-off"). The Spin-off will be subject to (i) the receipt of a favorable ruling from the Internal Revenue Service as to the tax- free nature of the transaction, (ii) the receipt of all material government approvals and third-party consents necessary to consummate the Spin-off, (iii) no order, injunction or decree issued by any court or agency of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Spin-off shall be in effect, and (iv) no other events or developments shall have occurred subsequent to the Offering Closing Date that, in the sole judgment of the AccuStaff Board of Directors (the "AccuStaff Board"), would result in the Spin-off having a material adverse effect on AccuStaff or on the stockholders of AccuStaff. Under the terms of the Reorganization and Spin-off Agreement, until the Spin-off is completed, the Company may not issue additional shares of its capital stock without the prior consent of AccuStaff if such issuance would reduce AccuStaff's ownership percentage below the percentage required for the Spin-off to be tax-free. See "Certain Relationships and Related Transactions." ---------------- The Company's executive offices are located at One Independent Drive, Jacksonville, Florida 32202, and its telephone number is (904) 360-2000. The Company maintains operations centers at its executive offices and also in Woodbury, New York and Peabody, Massachusetts (respectively, the "Woodbury Operations Center" and the "Peabody Operations Center"). THE OFFERING <TABLE> <S> <C> Common Stock offered hereby.. shares Common Stock outstanding after the Offering (1)...... shares Proposed New York Stock Exchange symbol............. "STG" Use of Proceeds.............. The net proceeds to the Company from the Offering are estimated to be approximately $ million after deducting underwriting discounts and commissions and estimated offering expenses. Pursuant to the Reorganization, such net proceeds will be paid to AccuStaff. See "The Reorganization and Proposed Spin-off" and "Use of Proceeds." </TABLE> - -------- (1) Excludes shares of Common Stock that are reserved for issuance under the Company's Omnibus Incentive Plan ( shares of which are subject to options as of the Offering Closing Date) and an undetermined number of shares which will be exercisable under employee stock options following the Spin-off by Company employees who held AccuStaff stock options and who have elected to convert such options into stapled options of AccuStaff common stock and Common Stock of the Company). See "Management--Executive Compensation--Long Term Incentive Plan" and "Certain Relationships and Related Transactions--Employee Benefits Agreement."
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+SUMMARY This summary highlights selected information from this document and may not contain all the information that is important to you. To understand the stock offering fully, you should read carefully this entire document, including the financial statements and the notes to the financial statements of the Bank. INNES STREET FINANCIAL CORPORATION Innes Street Financial Corporation was incorporated on July 6, 1998 as a North Carolina corporation to be the holding company for the Bank. The Company is not an operating company and has not engaged in any significant business to date. The holding company structure will provide greater flexibility in terms of operations, expansion and diversification. The Company's office is located at 401 West Innes Street, Post Office Box 1929, Salisbury, North Carolina 28145- 1929. See page 22. CITIZENS BANK, FSB The Bank, which has been in operation since 1907, converted from a North Carolina-chartered mutual savings bank to a federally-chartered mutual savings bank effective September 2, 1998. The Bank offers a variety of financial services to meet the needs of the communities it serves from its three full service offices located in Salisbury, Statesville and Rockwell, North Carolina. The Bank is a member of the FHLB system and its deposits are federally insured by the FDIC under the SAIF to the maximum amount permitted by law. The Bank emphasizes residential mortgage lending, primarily originating one-to-four- family mortgage loans in its primary market area, consisting of communities within a 10-mile radius of its offices and includes portions of Rowan and Iredell Counties, North Carolina. The Bank also makes home equity loans, nonresidential loans, multi-family residential loans, construction and development loans, commercial loans and consumer loans. The Bank sells a portion of its loan production into the secondary market to reduce its interest rate risk exposure. At June 30, 1998, the Bank had total assets of $192.7 million, deposits of $159.8 million, and equity of $15.6 million. See pages 45 to 66. THE STOCK OFFERING The Company is offering between 1,445,000 and 1,955,000 shares of Common Stock at $10.00 per share. Subject to approval by the OTS, the number of shares to be sold may be increased to 2,248,250 shares without future notice if market or financial conditions change prior to completion of the Conversion. STOCK PURCHASES The Company is first offering its shares of Common Stock in a Subscription Offering. Depositors as of certain eligibility dates will receive subscription rights. The shares of Common Stock will be offered on a priority basis as follows: Eligible Account Holders, the Bank's ESOP, Supplemental Eligible Account Holders, Other Members and directors, officers and employees of the Bank who do not qualify in the above-listed categories. Any remaining shares may be offered in a Community Offering or in a Syndicated Community Offering. See pages 96 to 99. SUBSCRIPTION RIGHTS You may not sell or assign your subscription rights. Any transfer of subscription rights is prohibited by law. All persons exercising their subscription rights will be required to certify that they are purchasing shares solely for their own account and that they have no agreement or understanding regarding the sale or transfer of shares. The Bank intends to pursue any and all legal and equitable remedies in the event the Bank becomes aware of the transfer of subscription rights. The Bank will reject orders that are determined to involve the transfer of such rights. See page 106. THE OFFERING RANGE AND DETERMINATION OF THE PRICE PER SHARE The Offering range is based on an independent appraisal of the pro forma market value of the Common Stock by Ferguson & Company ("Ferguson"), an appraisal firm experienced in the appraisal of savings institutions. The pro forma market value of the shares is the Bank's market value after giving effect to the sale of shares in this Offering. Ferguson has estimated that in its opinion as of October 16, 1998, such value ranged between $14,450,000 and $19,550,000 (with a midpoint of $17,000,000) (the "Estimated Valuation Range"). The appraisal was based in part upon the Bank's financial condition and operations and the effect of the additional capital raised by the sale of Common Stock in this Offering. The $10.00 price per share was determined by the Bank's Board of Directors. The appraisal will be updated prior to the consummation of the Conversion. If the updated pro forma market value of the Common Stock is either below $14,450,000 or above $22,482,500, the Company will notify you and you will have the opportunity to modify or cancel your order. See pages 99 to 101. TERMINATION OF THE OFFERING The Subscription Offering will terminate at 12:00 noon, Eastern Time, on December 8, 1998. The Community Offering, if any, may terminate at any time without notice but no later than January 25, 1999, without approval by the OTS. The Subscription Offering and the Community Offering may not be extended beyond December 10, 2000. See pages 96 to 99. BENEFITS TO MANAGEMENT FROM THE OFFERING Employment Agreement. As a part of the Conversion, the Bank will enter into an employment agreement with Ronald E. Bostian, President and Chief Executive Officer of the Bank. The agreement will provide for an initial annual base salary of $147,528 and for an initial term of employment of three years. The employment agreement provides that in the event of a change in control of the Bank or the Company, the acquiror will be bound by the terms of the employment agreement for a period of three years beginning on the date of the change in control and during such time the nature of Mr. Bostian's compensation, duties or benefits cannot be diminished except as set forth in the agreement. See page 79. Severance Plan. Also, in connection with the Conversion, the Bank will adopt a Severance Plan for the benefit of all of its employees. The Severance Plan provides for severance pay for the Bank's employees in the event of an employee's termination under certain circumstances following a change in control of the Bank or the Company. Any officer of the Bank who at the time of a change in control is a party to an employment agreement is not covered by the Severance Plan. See page 80. ESOP. The Bank's full-time employees will participate in an ESOP, which is a form of retirement plan that will purchase up to 8% of the Common Stock issued in the Conversion. The Company intends to use up to 8% of the proceeds of the Offerings to make a loan to the ESOP to enable the ESOP to purchase up to 8% of the shares of Common Stock to be issued in the Conversion, estimated to be between 115,600 and 156,400 shares assuming the issuance of between 1,445,000 and 1,955,000 shares. The amount loaned to the ESOP to enable such purchases is estimated to range from $1,156,000 (if 1,445,000 shares are issued) to $1,564,000 (if 1,955,000 shares are issued). Shares purchased by the ESOP and pledged as security for the loan will be held in a suspense account for allocation among participants as the loan is repaid. Contributions to the ESOP and shares released from the suspense account in an amount proportional to the repayment of the ESOP loan will be allocated among ESOP participants on the basis of relative compensation in the year of allocation. Employees participating in the ESOP will be entitled to instruct the ESOP trustees as to the voting of all shares allocated to their respective accounts and held in the ESOP. The unallocated shares held in the suspense account, and all allocated shares for which voting instructions are not received will be voted by the trustees in their discretion, subject to the provisions of the ERISA. See page 80. MRP. Following the Conversion, subject to approval by the Company's stockholders, the Bank intends to implement a management recognition plan (the "MRP"). At any time following approval of the MRP by the Company's stockholders, the Company and the Bank expect to contribute sufficient funds to the MRP Trust to enable the MRP Trust to purchase a number of shares equal to 4% of the number of shares issued in the Conversion. Such shares would be provided by the issuance of authorized but unissued shares of Common Stock or shares purchased by the MRP Trust in the open market. If shares are acquired in the open market, the funds for such purchase may be provided from the proceeds of the Offerings. To the extent that the MRP acquires authorized but unissued shares of Common Stock after the Conversion, the interests of existing shareholders will be diluted by up to approximately 4%. Under the MRP, directors and executive officers of the Bank will be entitled to receive awards of restricted stock at no cost to them, except for any federal and state taxes due on such award. Assuming the issuance of 1,955,000 shares in the Conversion and receipt of stockholder approval, 78,200 shares would be issued pursuant to the MRP and the estimated aggregate value of such MRP shares would be $782,000 based on the $10.00 Purchase Price. The MRP provides that each recipient will be entitled to all voting and other stockholder rights with respect to shares which have been awarded under the MRP. The Boards of Directors of the Bank and the Company have decided to adopt the MRP no sooner than 12 months after the Conversion at which time such plan will be presented to the stockholders of the Company for their approval. See pages 81 to 82. Option Plan. Subject to approval by the Company's stockholders, the Company anticipates implementing a stock option plan (the "Option Plan"), which will benefit the Bank's directors and certain employees. The Company will reserve for the Option Plan a number of shares equal to 10% of the number of shares issued in the Conversion. However, some or all of the shares issued upon the exercise of options granted under the Option Plan may be purchased in the open market at the time of exercise. The exercise price of the options granted under the Option Plan will be equal to the market price of the Common Stock on the date of the grant. Assuming the issuance of 1,955,000 shares in the Conversion and receipt of shareholder approval, 195,500 shares would be reserved for issuance under the Option Plan. Of those shares, the Company anticipates that 58% (113,390 shares) would be issued to directors and executive officers and 42% (82,110 shares) would be issued to other employees of the Company and the Bank. The Option Plan will provide that the Company's Board of Directors will have the discretionary authority to authorize cash payments to the holders of unexercised options, both vested and unvested, equal to the amount of dividends which would have been paid on shares subject to options if the options had been exercised. No such payment may be made in connection with dividends or other distributions which result in a reduction in the option exercise price. If an optionee receives such a cash payment with respect to any unvested option, and if such option is later forfeited, the optionee must repay any cash payment made with respect to the forfeited option. The Boards of Directors of the Bank and the Company have decided to adopt the Option Plan no sooner than 12 months after the Conversion at which time such plan will be presented to the stockholders of the Company for their approval. See pages 82 to 85. The following table summarizes the benefits executive officers, directors and other employees of the Company and the Bank may receive in connection with the Conversion. The table assumes (i) the issuance of 1,955,000 shares (the maximum of the Estimated Valuation Range) in the Conversion; (ii) that the ESOP purchases 156,400 shares (8% of the shares offered at the maximum of the Estimated Valuation Range) at $10.00 per share; (iii) that the MRP is approved by the stockholders of the Company no sooner than 12 months following the Conversion, the MRP Trust purchases 78,200 shares (4% of the number of shares offered at the maximum of the Estimated Valuation Range), and the market value of the MRP shares on the date of award is $10.00 per share; and (iv) that the Option Plan is approved by the stockholders of the Company no sooner than 12 months following the Conversion and that 195,500 options are awarded under the Option Plan, which is 10% of the number of shares offered at the maximum of the Estimated Valuation Range. <TABLE> <CAPTION> ESTIMATED ESTIMATED ESTIMATED NUMBER NUMBER OF SHARES NUMBER OF OF MRP PURCHASED BY THE SHARES PERCENTAGE SHARES PERCENTAGE OF DOLLAR VALUE OF ESOP AND SUBJECT OF OPTIONS TO BE TOTAL MRP MRP SHARES ON ALLOCATED TO RECIPIENT TITLE TO OPTION ISSUED GRANTED/1/ SHARES ISSUED DATE OF GRANT/2/ PARTICIPANTS <S> <C> <C> <C> <C> <C> <C> <C> Malcolm B. Blankenship, Jr. Director 5,865 3.0% 7,820 10.0% $ 78,200 0 James W. Duke Director 5,865 3.0% 7,820 10.0% 78,200 0 Harold C. Earnhardt Vice 5,865 3.0% 7,820 10.0% 78,200 0 Chairman K.V. Epting, Jr. Director 5,865 3.0% 7,820 10.0% 78,200 0 Gordon P. Hurley Director 5,865 3.0% 3,910 5.0% 39,100 0 Bobby A. Lomax Director 5,865 3.0% 7,820 10.0% 78,200 0 Ronald E. Bostian Chairman, 39,100 20.0% 15,640 20.0% 156,400 -- President, and Chief Executive Officer Jeffrey C. Chisholm Senior Vice 19,550 10.0% 9,775 12.5% 97,775 -- President and Chief Lending Officer Dianne E. Hawkins Vice 19,550 10.0% 9,775 12.5% 97,775 -- President, Treasurer, and Controller Other Employees 82,110 42.0% 0 0.0% 0 ------- ----- ------ ----- -------- ---------- Total 195,500 100.0% 78,200 100.0% $782,000 156,400/2/ ======= ===== ====== ===== ======== ========== <CAPTION> ESTIMATED OF SHARES HELD BY THE ESOP AND ALLOCATED TO RECIPIENT TITLE PARTICIPANTS <S> <C> <C> Malcolm B. Blankenship, Jr. Director 0 James W. Duke Director 0 Harold C. Earnhardt Vice 0 Chairman K.V. Epting, Jr. Director 0 Gordon P. Hurley Director 0 Bobby A. Lomax Director 0 Ronald E. Bostian Chairman, -- President, and Chief Executive Officer Jeffrey C. Chisholm Senior Vic -- President and Chief Lending Officer Dianne E. Hawkins Vice -- President, Treasurer, and Controller Other Employees ------------- Total $1,564,000/2/ ============= </TABLE> _______________________________ (1) The recipients of MRP shares will be entitled to all voting and other stockholder rights with respect to shares which have been awarded under the MRP. (2) The MRP shares will be awarded at no cost to the recipients, except for any federal or state taxes due on such awards. (3) The number and the value of shares allocated to the ESOP accounts of each of the executive officers and other employees cannot be determined at this time. Contributions to the ESOP and shares released from the suspense account in an amount proportional to the repayment of the ESOP loan will be allocated among ESOP participants on the basis of relative compensation in the year of allocation. OFFICERS' AND DIRECTORS' COMMON STOCK PURCHASES AND BENEFICIAL OWNERSHIP The directors and executive officers of the Company and of the Bank and their associates currently anticipate subscribing for Common Stock in the aggregate amount of $3,270,000, or 327,000 shares. As a result, such persons anticipate subscribing for 22.63% to 16.73% of the shares of Common Stock issued in the Conversion based upon the 1,445,000 shares (minimum of the Estimated Valuation Range) and 1,955,000 shares (maximum of the Estimated Valuation Range), respectively. In addition, purchases by the ESOP, allocations under the MRP, and the exercise of stock options issued under the Option Plan, will increase the number of shares beneficially owned by directors, officers and employees. Assuming (i) implementation of the MRP and the Option Plan, (ii) the open market purchase of shares on behalf of the MRP, (iii) the purchase by the ESOP of 8% of the Common Stock sold in the Offerings, and (iv) the exercise of stock options equal to 10% of the number of shares of Common Stock issued in the Conversion, directors, officers and employees of the Company and the Bank would have voting control, on a fully diluted basis of 44.63% and 38.73% of the Common Stock, based on the issuance of the 1,445,000 shares (minimum of the Estimated Valuation Range) and 1,955,000 shares (maximum of the Estimated Valuation Range), respectively. See pages 19 to 20 and 33 to 34. USE OF THE PROCEEDS FROM THE SALE OF COMMON STOCK The Company will use the proceeds from the Offerings as follows: . 50% of the net proceeds will be used to purchase all the capital stock of the Bank. . 8% of the gross proceeds will be loaned to the ESOP to fund its purchase of Common Stock. . The balance will be retained as a possible source of funds for the payment of dividends to shareholders, the repurchase of stock, and for other general corporate purposes. The Company will initially invest these proceeds primarily in interest-earning deposits, U.S. government, federal agency and other marketable securities and mortgage-backed securities. The Company and the Bank have no present intention to file consolidated tax returns which will preserve for the Company the ability to use a portion of the proceeds to make a return of capital in the future. However, the Company has not made any decision to pay such a return of capital. In accordance with OTS policy, the Company and the Bank will take no actions in furtherance of the payment of a return of capital, including filing a private letter ruling request with the IRS regarding the tax free nature of a possible one time cash distribution to the Company's stockholders, for a period of one year following the Conversion. In addition to general corporate purposes, net proceeds received by the Bank will be available for continued expansion of the retail banking franchise through new branch openings or deposit or branch acquisitions, continued growth in the loan portfolio and investments consisting primarily of U.S. government and federal agency obligations, interest-earning deposits and other marketable securities. See pages 22 to 23. DIVIDENDS After the Conversion, the Board of Directors of the Company will have the authority to declare dividends on the Common Stock, subject to statutory and regulatory requirements. The Company currently anticipates paying quarterly cash dividends on the Common Stock of $0.05 per share (or an annual rate of $0.20 per share, which is equal to 2% of the Purchase Price for the Common Stock in the Conversion). In addition, the Board of Directors may determine from time to time to pay special, nonrecurring cash dividends. No assurances can be given that any dividends will in fact be paid on the Common Stock. See page 24. MARKET FOR THE COMMON STOCK The Company has never issued its Common Stock to the public. Consequently, there is no established market for the Common Stock. An active and liquid public trading market for the securities of any issuer, including the Common Stock of the Company, depends upon the presence in the marketplace of both willing buyers and willing sellers of the securities at any given time. The Company expects the Common Stock to be quoted on the Nasdaq Small-Cap Market, under the symbol "ISFC" subject to certain conditions which it believes will be met, including a minimum market capitalization and minimum number of market makers and stockholders of record. If the Common Stock does not qualify for quotation on the Nasdaq Small-Cap Market, the Company expects it to be quoted on the OTC Electronic Bulletin Board. Trident Securities is expected to make a market in the Common Stock following consummation of the Conversion and will assist the Company in seeking to encourage at least two additional market makers to establish and maintain a market in the Common Stock. Making a market involves maintaining bid and ask quotations and being able, as principal, to effect transactions in reasonable quantities at those quoted prices, subject to various securities laws and other regulatory requirements. Due to the amount of Common Stock to be issued in the Conversion, the Company cannot assure investors that the conditions for quotation on the Nasdaq Small-Cap Market or the OTC Electronic Bulletin Board will be satisfied or that an active and liquid trading market for the Common Stock will develop or be maintained. See "RISK FACTORS."
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by and should be read in conjunction with the more detailed information and the financial statements and notes thereto appearing elsewhere in this Prospectus. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Except as otherwise indicated, the information contained herein (i) assumes no exercise of the Underwriters' over-allotment option and (ii) gives effect to a 3-for-2 stock split effected in the form of a stock dividend on June 1, 1998. THE COMPANY Childcare Network, Inc. (the "Company") provides affordable, high quality developmental education and child care to families through private schools located predominantly in smaller and mid-sized cities ranging in population from 60,000 to 400,000 in the southeastern United States. The Company's schools provide age-appropriate training and care to infants, toddlers and children aged six weeks to 12 years through a combination of contemporary curricula, computer programs, field trips and parent/student activities designed to promote both the student's academic and social development. The Company's schools are principally free-standing sites in suburban communities and generally operate five days a week throughout the year. A majority of the schools are operated under the "Childcare Network" name although 14 recently acquired schools operate under the "Young World" name. As of June 26, 1998, the Company's 67 schools had an aggregate licensed capacity of approximately 8,400 and served over 7,000 children in seven states. The Company was formed in 1988 and, at the end of 1992, was operating five schools that served approximately 500 students. By the end of 1997, the Company had grown to 63 schools, increasing its full- and part-time enrollment to over 7,000 students. As a result, revenues increased from $1.1 million in 1992 to $16.3 million in 1997, and income before income taxes increased from approximately $86,000 in 1992 to approximately $2.2 million in 1997. According to Child Care Information Exchange(R), an industry publication, the Company is the 14th largest for-profit provider of child care services in the United States measured in terms of licensed capacity. The Company's goal is to be the leading provider of affordable, high quality developmental education and child care services in each of the markets in which it operates. The Company believes that child care providers compete based on accessibility, price and quality and breadth of services. The Company focuses on directly serving a large number of families rather than a smaller number of corporate clients. The key elements of the Company's business strategy, which the Company believes positions it for continued growth, are: - High Quality Services at Competitive Prices. The Company's schools are focused on providing affordable and convenient services through programs which emphasize the child's development rather than mere supervision. The Company attempts to price its services competitively relative to other providers in each of the markets it serves. Central to the Company's services are innovative and age-appropriate curricula. In order to promote parents' understanding and appreciation of the Company's child development programs, teachers and staff seek to actively partner with parents through meetings, newsletters and written progress reports. In addition, for the convenience of working parents, the Company provides transportation to and from area elementary schools. - Focus on Families. The Company believes it realizes benefits in pricing, brand awareness, operating autonomy and flexibility to attract customers from many sources by directly serving a large number of families rather than focusing on a smaller number of corporate clients. The Company's schools are principally free-standing sites in suburban communities located in proximity to residences, elementary schools and major transportation arteries. As such, the Company's schools are well positioned to conveniently provide services to parents and children in these areas. - Enhanced Utilization and Efficient Staff-to-Child Ratios. The Company configures its schools to maximize licensed capacity while preserving an attractive and inviting environment for students. The Company believes that offering affordable, high quality developmental education and child care at convenient locations leads to increased enrollment, thus enabling the Company to enhance its capacity utilization. In addition, the Company monitors staff-to-child ratios to ensure that schools are efficiently staffed in accordance with regulatory guidelines, and that changes in staff requirements due to shifts in enrollment levels are addressed in a timely manner. By clustering schools and maintaining a balance of full-time and part-time personnel, the Company is able to manage staff deployment between schools more efficiently, thereby minimizing overall payroll expenses. - Decentralized School Operations. Each of the Company's schools is managed by a director who is responsible for its operation and profitability. Administrative functions performed by a director include marketing, tuition and accounts receivable collection, regulatory compliance, recruiting, purchasing, parent relations and corporate reporting. Each director prepares profit and loss information for weekly review by management and is incentivized through quarterly and annual bonuses to maximize school-level profitability while maintaining the Company's standards of quality. In addition, a team of four district managers provides training and guidance to directors and makes regular visits to the schools to monitor and, as necessary, assist with operations. The Company believes that the decentralization of school operations, together with support from district managers and senior management, leads to a sense of entrepreneurship in each director and a spirit of teamwork throughout the Company. In addition, decentralization enables each school to respond to the cultural, economic and regulatory differences which exist in its respective market. - Participation in Government Assistance Programs. The Company derives several benefits from its active participation in federal and state programs which provide funding for child care assistance. While most of these programs provide funding designed only to cover the cost of the Company's services, certain of these programs provide reimbursement to the Company of an allocable portion of its overhead or permit the Company to increase the utilization of its facilities. Further, the Company believes that participation in such programs enhances recognition of the Company. - Expansion Through Acquisitions. The Company seeks to acquire child care centers that present it with opportunities to increase utilization and improve profitability through implementation of enhanced operating and financial controls. Acquiring existing child care centers allows the Company access to an established customer base and an experienced staff with acceptance in the local community. In addition, by avoiding the cost and time associated with constructing new facilities, the Company is able to expand more rapidly and realize a return on its investment more quickly. The Company believes that the market for child care services is growing rapidly and that demand for high quality child care will continue to increase as a result of the following factors: a growing number of young children; an increasing percentage of mothers in the workforce; a shift toward the more structured and education-based environment of center-based child care; and the effects of federal and state policy initiatives which would make child care accessible to a larger number of families. In addition, the child care industry is highly fragmented. Within the United States, for-profit chains, including national and regional chains and operators of four or more centers, represent only 7.0% of total market share. Substantially all of the industry's licensed centers are owned or operated individually or by small providers, many of which lack the financial, technological and managerial resources to operate their centers profitably in an increasingly regulated and competitive environment. As a result, the Company believes that the number of providers seeking to exit the industry is likely to grow, leading to an increase in the number of potential centers available to the Company for acquisition. The Company anticipates that future growth will come from acquiring individual centers in its existing markets and acquiring groups of centers in both existing and new markets. The Company generally seeks either to acquire child care centers in areas close to the Company's existing schools and district managers or to acquire a provider which has a sufficient number of centers to justify the employment of an additional district manager. The Company targets facilities in cities with populations of 60,000 to 400,000 in the southeastern United States. Within this target market, the Company believes that there are numerous centers which could provide attractive locations for its schools, thus enabling the Company to continue to acquire facilities on terms which compare favorably to the costs and risks of establishing new facilities. The Company's principal executive offices are located at 3025 University Avenue, Suite B-2, Columbus, Georgia 31907, and its telephone number is (706) 562-8600. THE OFFERING <TABLE> <S> <C> Common Stock offered by: The Company.................................... 1,600,000 shares The Selling Shareholders....................... 1,250,000 shares Voting rights: Common Stock offered hereby.................... 1 vote per share(1) Outstanding Common Stock....................... 10 votes per share Common Stock to be outstanding after the 6,535,000 shares(2) Offering....................................... Use of proceeds.................................. Repayment of indebtedness and other general corporate purposes, including working capital and possible acquisitions. See "Use of Proceeds." Proposed Nasdaq National Market symbol........... CCNI </TABLE> - --------------- (1) Holders of the Common Stock who purchase shares in the Offering will be entitled to one vote per share until such shares have been held by the same beneficial owner for a continuous period of greater than 48 months, at which time each share so held will be entitled to ten votes per share. See "Description of Capital Stock." (2) Excludes 750,000 shares of Common Stock reserved for issuance under the Company's stock option plan. As of July 31, 1998, there were outstanding options to purchase 424,500 shares of Common Stock at an exercise price per share equal to the initial public offering price. See "Management -- 1998 Stock Option Plan." SUMMARY FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT PER SHARE AND SCHOOL DATA) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, JANUARY 1, 1997 JANUARY 1, 1998 ---------------------------------------------------------- THROUGH THROUGH PRO FORMA JUNE 27, JUNE 26, 1993 1994 1995 1996 1997 1997(2) 1997(3) 1998(3) ------ ------ ------ ------- ------- ----------- --------------- --------------- (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF INCOME DATA(1): Revenues................... $4,825 $6,505 $9,209 $12,183 $16,331 $21,052 $7,128 $13,574 Operating expenses......... 4,158 5,417 7,758 10,281 13,991 19,053 5,766 11,399 ------ ------ ------ ------- ------- ------- ------ ------- Income from operations..... 667 1,088 1,451 1,902 2,340 1,999 1,362 2,175 Interest expense, net...... (211) (262) (311) (277) (190) (344) (86) (213) ------ ------ ------ ------- ------- ------- ------ ------- Income before income taxes.................... 456 826 1,140 1,625 2,150 1,655 1,276 1,962 Pro forma provision for income taxes(4).......... 173 314 433 618 817 629 485 746 ------ ------ ------ ------- ------- ------- ------ ------- Pro forma net income....... $ 283 $ 512 $ 707 $ 1,007 $ 1,333 $ 1,026 $ 791 1,216 ====== ====== ====== ======= ======= ======= ====== ======= Basic shares outstanding... 4,905 4,905 4,905 4,905 4,932 4,932 4,931 4,935 Diluted shares outstanding.............. 4,905 4,905 4,905 4,905 4,932 4,932 4,931 4,955 Pro forma net income per basic share(5)........... $ 0.06 $ 0.10 $ 0.14 $ 0.21 $ 0.27 $ 0.21 $ 0.16 $ 0.25 Pro forma net income per diluted share(5)......... $ 0.06 $ 0.10 $ 0.14 $ 0.21 $ 0.27 $ 0.21 $ 0.16 $ 0.25 </TABLE> <TABLE> <CAPTION> AT JUNE 26, 1998 --------------------- AS ACTUAL ADJUSTED(6) ------- ----------- (UNAUDITED) <S> <C> <C> BALANCE SHEET DATA: Working capital........................................... $ 1,915 $15,230 Total assets.............................................. 12,801 26,116 Total debt, including current portion..................... 6,517 -- Shareholders' equity...................................... 4,904 24,636 </TABLE> <TABLE> <CAPTION> AT DECEMBER 31, -------------------------------------------- AT JUNE 26, 1993 1994 1995 1996 1997(1) 1998(3) ------ ------ ------ ------- ------- -------------- <S> <C> <C> <C> <C> <C> <C> SCHOOL DATA(1): Number of schools................................ 25 25 32 34 63 67 Licensed capacity................................ 2,731 2,731 3,431 3,631 7,923 8,431 </TABLE> - --------------- (1) In September 1997, the Company acquired 29 schools in two transactions, which were accounted for under the purchase method of accounting. Results of operations of these schools have been included in the Company's operations since the respective dates of purchase. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Pro Forma Financial Information" and the financial statements and notes thereto appearing elsewhere in this Prospectus for information concerning other acquisitions and additional information related to these acquisitions. (2) The pro forma statement of income data for the year ended December 31, 1997 reflects the acquisition of the operations of Young World, Inc. as if it occurred at January 1, 1997 and has been accounted for under the purchase method of accounting. (3) Effective January 1, 1998, the Company changed its fiscal year end from December 31 to the last Friday in December. As a result, the Company will report its quarterly results in 13 week periods beginning in 1998. Quarterly results for 1997 have been presented on a comparable basis. (4) The Company has historically elected to be taxed as an S corporation and accordingly, income taxes have been paid by its shareholders. The Company's S corporation status will terminate upon consummation of the Offering, and the Company will be taxed as a C corporation in future periods. The pro forma provision for income taxes has been calculated at a 38% rate, which is the Company's expected effective income tax rate. (5) The calculation of a supplemental pro forma earnings per share reflecting (i) the impact of the additional shares to be outstanding after consummation of the Offering and (ii) the repayment of indebtedness with a portion of the Offering proceeds is not presented as the impact is not material. (6) As adjusted to give effect to (i) the sale by the Company of 1,600,000 shares of Common Stock offered hereby at an assumed initial public offering price of $14.00 per share and the application of the estimated net proceeds therefrom, (ii) the payment of approximately $200,000 in dividends to shareholders prior to consummation of the Offering and (iii) the provision for deferred tax liabilities of $100,000 for temporary differences related to the tax and book bases of assets at the date of termination of S corporation status. See "Use of Proceeds."
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+PROSPECTUS SUMMARY THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS AND IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND NOTES RELATED THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. PROSPECTIVE INVESTORS ARE URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY BEFORE INVESTING IN THE SECURITIES. UNLESS OTHERWISE STATED IN THIS PROSPECTUS OR UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES HEREIN TO THE "COMPANY" OR TO "NSM" ARE TO NAKORNTHAI STRIP MILL PUBLIC COMPANY LIMITED AND ITS SUBSIDIARIES. THE COMPANY'S FISCAL YEAR ENDS DECEMBER 31, AND THUS, FOR EXAMPLE, "FISCAL YEAR 1997" REFERS TO THE FISCAL YEAR ENDED DECEMBER 31, 1997. CERTAIN FINANCIAL, OPERATING AND STATISTICAL INFORMATION IS PRESENTED HEREIN IN ROUNDED AMOUNTS. AS A RESULT, CERTAIN AMOUNTS MAY NOT SUM DUE TO SUCH ROUNDING. OVERVIEW NSM is the owner, developer and operator of one of the most advanced and lowest cost thin-slab/flat-rolled steel mini-mills in the world. NSM's mini-mill is located in Chonburi, Thailand, and when completed will combine a technologically advanced mini-mill steel production facility with a contiguous direct reduced iron facility and finishing facilities. The mini-mill is managed and operated by NSM Management Company, LLC ("Management Co.") and an experienced team of international steel executives employed by NSM. Management Co. receives technical and advisory services from Steel Dynamics, Inc. ("SDI"), a leading mini-mill operator in the United States, under a long-term management advisory and technical assistance agreement (the "SDI Agreement"). In connection with the execution of a license agreement (the "SDI License Agreement"), which includes the grant by SDI and NSM of reciprocal license rights to certain technical and operational know-how, SDI received 74,468,090 Ordinary Shares. NSM also issued warrants (the "SDI Warrants") to SDI to purchase 11,421,480 Ordinary Shares, which contain exercise provisions that protect SDI from dilution of its equity interest in the event holders of certain Warrants exercisable for Ordinary Shares issued on the Issue Date is conjunction with the Senior Subordinated Notes exercise such Warrants. In addition to SDI, one or more affiliates of Enron Corp. (individually and collectively, "Enron"), a U.S.-based company with energy and project finance expertise throughout the world, and one or more affiliates of McDonald & Company Securities, Inc. (individually and collectively, "McDonald", and together with Enron and SDI, the "Management Investors"), acquired (the "Management Equity Investment") newly issued Ordinary Shares on the Issue Date. Enron and McDonald, among others, also purchased an aggregate of 45 million Ordinary Shares in a privately negotiated transaction in the secondary market for the Company's shares. Enron additionally acquired a significant portion of the 64,417,180 Ordinary Shares privately placed by the Company concurrently with the Debenture Offering (the "Private Placement Shares" and, together with the Management Equity Investment, the "Equity Investments"). Giving effect to the Transactions and the other purchases described above, the Management Investors in the aggregate hold a 20.56% interest in the Company's issued and outstanding Ordinary Shares. Construction and start-up of the Hot Mill (as defined), the core of the mini-mill, has been completed. The hot mill rolled its first coil of steel during operational testing in October 1997 and melted, cast and hot-rolled its first coil of steel in December 1997. The Company began commercial operations in the first quarter of 1998. The Company's goal is to be the world's most efficient and lowest cost producer of high-quality flat-rolled steel products, including hot-rolled, cold-rolled and galvanized steel, as well as other specialty steel products. The recent devaluation of the Baht has reduced certain of the Company's current capital expenditure obligations and may lower certain of its operating costs. Upon completion, NSM's mini-mill will consist of three facilities: (i) a compact strip production ("CSP") thin-slab hot mill (the "Hot Mill") for steel melting, refining, casting and hot-rolling, (ii) a facility (the "DRI Facility") for the production of direct reduced iron ("DRI"), which includes a co-generation electric power plant (the "Co-Gen Facility") in the process of being developed with Enron, and (iii) downstream processing facilities for the production of high-quality pickled and oiled, cold-rolled, galvanized, and other value-added steel products (the "Finishing Facilities"). The Hot Mill, DRI Facility and PRESENTATION OF FINANCIAL INFORMATION The Company maintains its financial books and records in Thai Baht ("Baht") and presents its financial statements in conformity with generally accepted accounting principles in Thailand ("Thai GAAP"). This Prospectus contains translations of certain Baht amounts into U.S. Dollars ("U.S.$") at specified rates solely for the convenience of the reader. These translations should not be construed as representations that the Baht amounts actually represent such U.S.$ amounts or could be converted into U.S.$ at the rate indicated or any other rate. Unless otherwise indicated, such U.S.$ amounts have been translated from Baht at an exchange rate 43.10 Baht to U.S.$1.00, which was the noon buying rate in New York City for cable transfers of Baht as certified for customs purposes published by the Federal Reserve Bank of New York (the "Noon Buying Rate") at June 5, 1998. As of March 12, the Issue Date, the Noon Buying Rate for Baht was 43.05 Baht to U.S.$1.00. On May 15, 1998, the Noon Buying Rate for Baht was 39.15 Baht to U.S.$1.00. The following table sets forth, for the periods and dates indicated, information concerning the rates of exchange of Baht into U.S.$ based on the Noon Buying Rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York. <TABLE> <CAPTION> AVG. RATE PERIOD END HIGH LOW ----------- ----------- --------- --------- <S> <C> <C> <C> <C> 1993(1)............................................................... 25.33 25.58 25.61 25.11 1994(1)............................................................... 25.16 25.11 25.60 24.89 1995(1)............................................................... 24.92 25.20 25.70 24.47 1996(1)............................................................... 25.36 25.65 25.80 25.17 1997 Month Ended:(2) January........................................................... 25.73 25.91 25.97 25.60 February.......................................................... 25.96 25.90 26.10 25.89 March............................................................. 25.96 25.97 26.03 25.89 April............................................................. 26.06 26.13 26.13 25.96 May............................................................... 25.75 24.75 26.11 24.75 June.............................................................. 24.53 25.15 25.40 22.75 July (3).......................................................... 30.27 32.30 32.30 24.52 August............................................................ 32.40 34.50 34.50 31.00 September......................................................... 35.26 35.85 36.55 33.55 October........................................................... 37.54 40.50 40.50 35.80 November.......................................................... 39.09 41.00 41.00 37.40 December.......................................................... 44.31 46.80 47.40 41.20 1998 Month Ended:(2) January........................................................... 52.98 53.10 56.10 48.30 February.......................................................... 45.99 43.00 51.00 43.00 March............................................................. 41.35 39.60 45.00 38.00 April............................................................. 39.65 38.70 41.20 38.55 May............................................................... 39.20 40.44 40.44 38.55 </TABLE> SOURCE: FEDERAL RESERVE BANK OF NEW YORK - ------------------------ (1) The average of the exchange rates on the last day of each month during the year. (2) The average of the exchange rates on each day of the month. (3) Prior to July 1997, the Baht/U.S.$ exchange rate was pegged via a trade-weighted basket of goods and services at approximately 25 Baht/U.S.$1.00. See "Risk Factors--Exchange Rate Risks." ------------------------ Finishing Facilities are referred to collectively as the "Mill." The Company believes that the Mill's design utilizes a unique combination of the best commercially proven technologies currently in use in some of the most efficient and highest quality steel manufacturing facilities in the world. The Hot Mill has a designed annual production capacity of 1.5 million tonnes. The Hot Mill utilizes advanced technology steel melting and refining, CSP casting and hot-rolling processes and equipment. The Finishing Facilities, which are expected to be operational in the first quarter of 1999, will incorporate a multi-purpose high-capacity production line and several lower capacity production units with a combined rated annual production capacity of 1.5 million tonnes. The DRI Facility, which is expected to be operational during the second quarter of 1999, will have an annual rated production capacity of 500,000 tonnes and will provide the Company with a low-cost substitute for approximately 30% of the scrap in its melt mix. The Company believes that this equipment will allow it to produce thinner gauge, higher value steel in hot-rolled form with consistently better tolerances, uniformity and surface qualities relative to certain other flat-rolled steel producers. NSM believes that the resulting increased product breadth and cost advantages produced by combining the DRI Facility, Hot Mill and Finishing Facilities together in a continuous process will allow it to become a world class flat-rolled steel producer based on cost, quality and timeliness of delivery. The world's flat-rolled steel market is dominated by integrated steel producers using conventional blast furnaces and eight- to ten-inch slab production methods. The Company believes that thin-slab/flat-rolled steel mini-mills can compete favorably against integrated steel producers in terms of cost, quality and timeliness of delivery, while producing superior financial results. Thailand has historically been one of the largest importers of flat-rolled steel in the world, ranking third in 1996 in terms of net steel imported. Virtually all of the steel products imported into Thailand are produced by high-cost integrated steel producers with lengthy delivery schedules. The demand for flat-rolled products in Thailand results, in part, from the development over the past 20 years of several industries including the manufacturing of pipe and tube, containers, furniture, appliances and automotive parts and vehicles. NSM is the only flat-rolled steel producer in Thailand. Accordingly, the Company believes that it is well positioned to capture a significant share of the demand for flat-rolled steel in Thailand by producing a broad range of high-quality products. In order to ensure consistent and efficient mill utilization and to mitigate NSM's exposure to the economic difficulties currently being experienced in Thailand, the Company has entered into eight-year off-take agreements with Preussag Handel GmbH ("Preussag") and Klockner Steel Trading ("Klockner") (collectively, the "Off-Take Agreements"). Preussag and Klockner are two international steel trading and processing companies which sell high-quality, high-grade steel products throughout the world. Under the Off-Take Agreements, Preussag and Klockner will be obligated to purchase, in aggregate, 100% of the Company's production in 1998 through 2002, and 25% of the Company's production in the years 2001 through 2005. NSM may, at is option, reduce the percentage of its production sold under the Off-Take Agreements to as little as 67% in 1998, 50% in 1999 and 25% in 2000, if the Company believes it could maximize sales revenues through sales to other customers. Under the Indentures, sales by NSM to customers other than Preussag and Klockner, to the extent that the aggregate of such sales results in receivables outstanding in excess of U.S.$10 million, must be supported by letters of credit if the customer does not have an investment grade credit rating. All sales to Preussag and Klockner and substantially all other export sales will be U.S.$ denominated. In addition to the Off-Take Agreements, the Company has entered into a commercial assistance agreement with the former chief commercial officer of U.S. Steel to facilitate the Company's introduction to flat-rolled steel customers. Based on international customer inquiries received by the Company to date, the Company believes that it could increase the percentage of its annual production sold under off-take agreements in 2001 through 2005 should economic conditions in the Asia-Pacific region warrant. The METRIC EQUIVALENTS For the convenience of the reader, the following table sets out the relationship between metric measures and imperial equivalents: <TABLE> <S> <C> <C> <C> <C> 1 Tonne = 2,204.6224 Pounds 1 Tonne = 1.1023 Tons (short) 1 Hectare = 2.4711 Acres 1 Kilometer = 0.6214 Miles 1 Meter = 3.2808 Feet </TABLE> ------------------------ Company also believes, that as a low-cost producer of high-quality steel products, it will have the option to sell its products in either domestic or world markets, including the United States. NSM has entered into various arrangements to ensure its access to and availability of electric power, natural gas, oxygen, coal and iron ore. NSM has entered into arrangements under which the Provincial Electricity Authority of Thailand ("PEA") and the Petroleum Authority of Thailand ("PTT") will provide NSM with electric power and natural gas. PEA and PTT are government entities charged with providing electricity and natural gas, respectively, to Thailand's industrial base. NSM will benefit from two new power substations adjacent to the Mill constructed by Electric Generating Authority of Thailand ("EGAT") and from two sets of new power lines which run to the Mill site, all recently constructed by PEA. NSM also has access to a long-term supply of oxygen and other industrial gases from Bangkok Industrial Gas, which has recently constructed an oxygen plant adjacent to the Mill. Coal and iron ore, two important raw materials needed to produce DRI, are being supplied under long-term contracts by SSM Coal BV ("SSM"), the owner of a Vietnamese coal mine, and MMTC Limited ("MMTC"), an iron ore trading company based in India. When complete, the Company estimates that its total investment in the Mill for property, plant, land, buildings, machinery and equipment will be approximately U.S.$764 million. The Company's investment in the land, buildings, machinery and equipment of the Mill as of December 31, 1997 was approximately U.S.$588 million, including approximately U.S.$514 million in connection with the construction of the Hot Mill, approximately U.S.$32 million in connection with the DRI Facility and approximately U.S.$42 million in connection with the Finishing Facilities. During 1998, while the DRI Facility and Finishing Facilities are expected to be under construction, interest on the Notes will be paid from amounts on deposit in the Notes DSR Account. As of December 31, 1997, after giving pro forma effect to the Transactions, the Company would have had total shareholders' equity of U.S.$158 million and total indebtedness of U.S.$771 million, of which U.S.$336 million would have been secured equally and ratably with the Guaranties. See "Risk Factors--Risk Related to Projected Information; Forward Looking Information." PROJECT ADVANTAGES NSM believes that it enjoys a number of advantages over other flat-rolled steel producers and that these advantages will facilitate the implementation of its business strategy. Through the use of advanced technology throughout the Mill, the Company believes that its projected cost structure will place it among the lowest cost producers of flat-rolled steel products in the world. Complementing the Company's projected low cost structure is its designed capability to produce a full range of flat-rolled products, including high value-added products that previously could only be produced by higher cost integrated steel producers. The Company believes that this ability to produce high value-added products coupled with its projected low cost structure, will enable it to compete effectively in selling its products, to the domestic and world steel markets. Further complementing the Company's projected cost structure and product capabilities will be its right to obtain certain technical and operational advice and consultation services from SDI, as well as access to the strategic expertise of Enron and McDonald. BUSINESS STRATEGY NSM's business strategy is to use its advanced Hot Mill, DRI Facility and Finishing Facilities technologies to produce superior quality flat-rolled steel in a variety of high value-added forms. The principal elements of the Company's strategy include: - ACHIEVE CONVERSION COSTS AMONG THE LOWEST IN THE STEEL INDUSTRY. The Company believes that the design of the Mill represents substantial efficiency improvements over earlier mini-mills using CSP technology. These improvements are expected to substantially reduce the cost and production time of the steel-making process, limit electric arc furnace ("EAF") power-off and downtime, reduce GLOSSARY <TABLE> <S> <C> ASEAN......................... The Association of Southeast Asian Nations Bank Credit Facility.......... The Credit Facilities Agreement, dated September 27, 1995, among the Company and The Industrial Finance Corporation of Thailand, Thai Farmers Bank Public Company Limited, Siam City Bank Public Company Limited, The Government Savings Bank, First Bangkok City Bank Public Company Limited, Nakornthon Bank Public Company Limited, SCF Finance and Securities Public Company Limited, Siam City Credit Finance and Security Public Company Limited, IFCT Finance and Securities Public Company Limited and First City Investment Finance and Securities Public Company Limited, as such agreement may be amended, supplemented or otherwise modified in writing from time to time BNP........................... Banque Nationale de Paris BOI........................... Board of Investment of Thailand BOOT.......................... Build own operate transfer Co-Gen Facility............... A co-generation electric power plant to be developed in conjunction with Enron, subject to the execution of definitive agreements Combination Line.............. A combination/multipurpose continuous pickling, cold-rolling, cleaning, annealing hot-dip galvanizing, skin pass/tension leveling and oiling line. The Combination Line is part of the Finishing Facilities Consteel Process.............. The Consteel continuous charging process CSP........................... Compact strip production Debenture Offering............ The private placement of the Debentures completed on the Issue Date. Debentures.................... 12 3/4% Subordinated Mortgage Debentures due 2009 issued by NSM Cayman and NSM Del and guaranteed by the Company. DRI........................... Direct reduced iron DRI Facility.................. NSM's facility for the production of DRI, which includes the Co-Gen Facility EAF........................... Electric arc furnace EBITDA........................ Earnings before interest expense, income taxes, depreciation and amortization EGAT.......................... Electric Generating Authority of Thailand Enron......................... One or more affiliates of Enron Corp. Equity Investments............ The acquisition from NSM of 158,639,864 newly issued shares (representing 22.1% of NSM's issued and outstanding shares after giving effect to the Equity Investments) in aggregate by the Management Investors and the purchasers of the Private Placement Shares pursuant to the Management Equity Investment and the issuance of the Private Placement Shares respectively. Finishing Facilities.......... NSM's processing facilities for the production of high-quality pickled and oiled, cold-rolled, galvanized, and other value-added steel products Hatch......................... Hatch Associates Ltd. Heats......................... Successive melting cycles Hot Mill...................... NSM's CSP thin-slab hot mill Hylsa......................... Hylsa S.A. Hylsa Agreement............... The technical assistance and training agreement entered into between NSM and Hylsa Klockner...................... Klockner Steel Trading LIBOR......................... London Inter-Bank Offered Rate Management Co................. NSM Management Company, LLC </TABLE> consumption of consumable inputs and ultimately produce higher quality steel. By designing and utilizing equipment that is efficient, consumes fewer raw materials and improves the consistency and reliability of the steel making process, the Company believes that its per tonne manufacturing costs will be among the lowest in the steel industry. - EMPHASIZE VALUE-ADDED PRODUCTS. NSM believes that it will be able to produce thinner gauge steel in hot-rolled form with consistently better uniformity, tolerances and surface quality relative to certain other flat-rolled steel producers. The Company also believes that its high-quality, thinner gauge hot-rolled products will compete favorably with certain more expensive cold-rolled (further processed) products, enabling it to achieve higher margins. The Company believes that thinner gauge, hot-rolled products, and other value-added products, may be less susceptible to the price fluctuations commonly found in the spot market for commodity grade steel. The design of the Finishing Facilities' process lines is expected to result in higher quality products, significant cost savings and yield improvements relative to the processing systems used by certain other flat-rolled steel producers. In addition, the Company expects to devote a substantial portion of its hot-rolled capacity to the production of higher margin pickled and oiled, cold-rolled, galvanized, and other value added steel products. The Company believes that the resulting increased product breadth and cost advantages will allow it to compete favorably on a cost and quality basis with any steel producer in the world. - SECURE A SOLID BASELOAD OF U.S.$ SALES. In order to ensure consistent and efficient Mill utilization and to balance U.S.$ revenues with U.S.$ debt service and expense requirements, the Company has entered into the Off-Take Agreements. Under the Off-Take Agreements, Preussag and Klockner will be obligated to purchase, in aggregate, 100% of the Company's production in 1998 through 2002, and 25% of the Company's production in the years 2001 through 2005. NSM may, at is option, reduce the percentage of its production sold under the Off-Take Agreements to as little as 67% in 1998, 50% in 1999 and 25% in 2000, if the Company believes it could maximize sales revenues through sales to other customers. Under the Indentures, sales by NSM to customers other than Preussag and Klockner, to the extent that the aggregate of such sales results in receivables outstanding in excess of U.S.$10 million, must be supported by letters of credit if the customer does not have an investment grade credit rating. All sales to Preussag and Klockner and substantially all other export sales will be U.S.$ denominated. Based on international customer inquiries, the Company believes that it could substantially increase the percentage of its annual production sold under off-take agreements in 2001 through 2005 should economic conditions in the Asia-Pacific region warrant. The Company believes that as a low-cost producer of high-quality steel products, it will have the option to sell all of its products in either domestic or world markets, including the United States. - MAXIMIZE MINI-MILL ADVANTAGES. The Company has adopted a combination of technologies and management techniques which management believes will provide it with the flexibility to deliver custom ordered, just-in-time, high-quality products to customers with minimal lead times. NSM has adopted management and personnel policies designed to take advantage of the opportunities inherent in the technological revolution in the flat-rolled steel industry. The Company expects its energy consumption, man-hours per tonne produced and the environmental impact of the operations to be among the lowest in the industry. The Company intends to use its advanced technologies to develop profitable niche market products. - UTILIZE LEADING MINI-MILL OPERATIONAL AND MANAGEMENT TECHNIQUES. The Company has entered into agreements with a number of leading steel mini-mill developers and operators in order to make available to Management Co. or the Company certain technical know how and business practices. Under the terms of the SDI Agreement, SDI, a company whose executives and managers pioneered the development of thin-slab/flat-rolled technology and directed the construction and operation of the world's first thin-slab/flat-rolled minimill, will provide management advisory and periodic on- <TABLE> <S> <C> Management Equity Investment.. The acquisition of newly-issued and outstanding Ordinary Shares by the Management Investors Management Investors.......... SDI, Enron and McDonald McDonald...................... One or more affiliates of McDonald & Company Securities, Inc. Mill.......................... NSM's combined DRI facility, Hot Mill and Finishing Facilities NSM........................... Nakornthai Strip Mill Public Company Limited NSM Cayman.................... NSM Steel Company, Ltd., a wholly owned subsidiary of NSM NSM (Del)..................... NSM Steel (Delaware), Inc., a wholly owned subsidiary of NSM Cayman NTS........................... N.T.S. Steel Group Public Company Limited Notes......................... Collectively, the 12% Senior Notes due 2006 and the 12 1/4% Senior Subordinated Mortgage Notes due 2008, each issued by NSM Cayman and NSM (Del) and each guaranteed by the Company. Nucor......................... Nucor Corporation Off-Take Agreements........... Eight year off-take agreements entered into by NSM and Klockner and NSM and Preussag under which NSM may at its option sell and Preussag and Klockner, in the aggregate, will be obligated to purchase up to 100% of NSM's production in 1998, 1999 and 2000, and 25% of the Company's production in the years 2001 through 2005 PEA........................... Provincial Electricity Authority of Thailand Preussag...................... Preussag Handel GmbH Private Placement Shares...... 64,417,180 Ordinary Shares being privately placed by the Company concurrently with the Debenture Offering PTT........................... Petroleum Authority of Thailand Push-Pull Line................ A push-pull pickling/trimming/oiling line that is part of the Finishing Facilities Recoil Line................... A recoil/temper rolling/slitting line that is part of the Finishing Facilities SDI........................... Steel Dynamics, Inc. SDI Agreement................. The management advisory and technical assistance agreement which will be entered into by SDI and Management Co. SDI License Agreement......... A 10-year reciprocal license and technology sharing agreement between SDI and NSM SDI Warrants.................. The Warrants issued to SDI to purchase up to 11,421,480 Ordinary Shares, which will contain exercise provisions that will protect SDI from dilution of its equity interest in the event holders of Warrants exercise such Warrants Securities.................... Collectively, the Notes and the Debentures SEN........................... Submerged entry nozzle SET........................... Stock Exchange of Thailand SIBOR......................... Singapore Inter-Bank Offered Rate Thai Parties.................. NTS and Mr. Sawasdi Horrungruang Thailand...................... The Kingdom of Thailand Transactions.................. The Offerings, the Debenture Offering and the Equity Investments, and the application of the proceeds therefrom VOD........................... Vacuum/oxygen/degasser Working Capital Facility...... The agreement to be entered into between NSM and BNP for the funding of working capital through the monetizing of NSM's accounts receivable </TABLE> site technical support to Management Co. Hylsa S.A. ("Hylsa"), under a technical assistance and training agreement (the "Hylsa Agreement"), has provided training to over 140 NSM employees at its Monterey, Mexico plant, and will continue to provide training and on-site technical support. Hylsa is recognized in the world steel making community for producing high-quality, thin-gauge products utilizing CSP technology. From early 1996 through mid-1997, the Company received certain technical assistance and employee training for over 170 NSM employees from Nucor Corporation ("Nucor"), currently an operator of eight mini-mills in the United States. - SECURE RAW MATERIAL SOURCES. The primary raw materials and utilities used to produce DRI and flat-rolled steel products are coal, iron ore, electricity and scrap. To secure access to adequate low-cost supplies of these inputs, NSM has entered into long-term arrangements for the supply of coal, iron ore and electricity with SSM Coal BV, MMTC Limited, and PEA, respectively. For scrap, NSM will have access to both the domestic and global scrap markets. Management believes that due to the recent Baht devaluation and the logistical and regulatory obstacles to exporting scrap from Thailand, NSM's near term domestic scrap costs will be U.S.$20-30 per tonne lower than world market prices. - EXPLOIT STRATEGIC LOCATION. The Company is the only flat-rolled steel producer in Thailand, historically one of the world's largest importers of finished and semi-finished flat-rolled steel. In 1996, Thailand ranked third in the world in terms of imported steel. The Company believes that demand in Thailand for steel products will return to historical levels following improvements in domestic economic conditions. The Company believes that strong domestic demand combined with import tariffs on certain steel products would allow the Company to achieve higher profit margins on the sale of its products in Thailand relative to sales outside of Thailand. - UTILIZE THE EXPERTISE OF SDI, ENRON AND MCDONALD. NSM and Management Co. have contracted to acquire certain strategic and financial expertise that will enhance NSM's ability to compete both financially and operationally in the world steel market. By becoming equity owners of NSM and through their representation on the Company's board of directors, the Company expects that SDI's, Enron's and McDonald's representatives on the board of directors will provide the Company with certain know how, expertise and knowledge. - PURSUE EXPANSION OPPORTUNITIES. In order to lower production costs through economies of scale, the Company intends to pursue expansion of the Mill if market conditions warrant such an expansion. To facilitate expansion of DRI production capacity, NSM designed the DRI Facility to accommodate a tripling of capacity. In addition to mitigating NSM's reliance on the global scrap market, an expanded DRI Facility would produce a significant amount of additional electric power at economically attractive rates for use in the Hot Mill. NSM also designed the Hot Mill and Finishing Facilities to facilitate expansion. In aggregate, the cost of increasing the capacity of the DRI Facility by 1.0 million tonnes per year, the Hot Mill by 1.2 million tonnes per year and the Finishing Facilities by 100,000 tonnes per year is estimated by the Company to approximate U.S.$250 million. THE WARRANTS OFFERING WARRANTS: <TABLE> <S> <C> Issuer.................. Nakornthai Strip Mill Public Company Limited Warrants Offered........ 128,834,356 Warrants which, when exercised, initially will entitle the holders thereof to acquire an aggregate of 128,834,356 Ordinary Shares of the Company. Exercise Price.......... 10 Baht per Ordinary Share Expiration.............. The Warrants are exercisable beginning on March 12, 1999 and at any time thereafter on or prior to February 1, 2008. Registration Rights..... Holders of the Warrants and shares of the Company underlying the Warrants have certain rights to require the Company to file and have declared effective a registration statement with respect thereto. See "Description of the Warrants--Registration Rights." Voting Rights........... Warrant holders will have no voting rights Use of Proceeds......... Net proceeds (approximately 1,288,343,560 Baht), if any, which might be received by the Company from the exercise of all of the Warrants will be used for general corporate purposes. The Company will not receive any proceeds from the sale of the Ordinary Shares underlying the Warrants offered hereby. See "USE OF PROCEEDS."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001063744_informatio_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001063744_informatio_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND HISTORICAL AND PRO FORMA FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES HEREIN TO THE "COMPANY" OR "IH" INCLUDE INFORMATION HOLDINGS INC. AND ITS SUBSIDIARIES, INCLUDING THE LLC (AS DEFINED HEREIN), AND REFERENCES HEREIN TO "COMMON STOCK" REFER TO THE COMPANY'S COMMON STOCK, PAR VALUE $.01 PER SHARE. UNLESS OTHERWISE INDICATED, ALL INFORMATION PRESENTED IN THIS PROSPECTUS ASSUMES THAT (I) THE EXCHANGE (AS DEFINED HEREIN) AND CERTAIN CONTEMPORANEOUS TRANSACTIONS HAVE BEEN CONSUMMATED AND (II) THE UNDERWRITERS' OVER-ALLOTMENT OPTION HAS NOT BEEN EXERCISED. THE COMPANY OVERVIEW The Company is an information publishing business focused on providing essential information to professional and academic end-users in attractive niche markets. The Company was formed to capitalize on management's experience in acquiring information publishing businesses and then increasing profitability through a combination of organic revenue growth and improved operating efficiencies. To date, the Company has acquired information publishing businesses in the following niche markets: scientific, technical and medical ("STM") and professional through CRC Press; and intellectual property through MicroPatent. For the year ended December 31, 1997, the Company had revenues, net loss and EBITDA of $34.9 million, ($4.9) million and $1.4 million, respectively. These figures reflect the Adjustments (as defined on page 10), which reduced revenues by $4.0 million and net income and EBITDA by $8.0 million. CRC Press, acquired in January 1997 from The Times Mirror Company, is a mid-sized STM and professional publisher with leading positions in several attractive niche markets. CRC Press, with a 95-year history, has highly regarded brand names and publishes some of the most recognizable STM titles in their respective fields, including THE HANDBOOK OF CHEMISTRY AND PHYSICS (currently in its 79th edition) and STANDARD MATHEMATICAL TABLES AND FORMULAE. In the first half of 1997, two fold-in acquisitions were completed and combined with CRC Press: St. Lucie Press, a publisher of professional titles; and Auerbach, a provider of technology-oriented print and electronic subscription-based products, which was acquired from The Thomson Corporation ("Thomson"). For the three months ended March 31, 1998, CRC Press contributed approximately 83% of the Company's revenues. MicroPatent, acquired in July 1997, is a leading source of intellectual property information products and services. Its high-quality patent and trademark databases are used extensively by legal and research professionals and corporations. The Internet, MicroPatent's fastest-growing distribution channel, accounted for 34% of its total revenues in the first quarter of 1998, as compared to 14% in the first quarter of 1997. The Company believes that its profitable PATENTWEB-TM- service is among the most comprehensive intellectual property information services on the Internet. For the three months ended March 31, 1998, MicroPatent contributed approximately 17% of the Company's revenues. MANAGEMENT The Company was formed in December 1996 by Mason P. Slaine and Warburg, Pincus Ventures, L.P. ("Warburg Pincus"). Mr. Slaine, the Company's President and Chief Executive Officer, has more than 15 years of experience in the information publishing industry in both corporate and entrepreneurial environments. From 1994 to 1996, he served as President of Thomson Financial Services ("Thomson Financial"), a unit of Thomson which is a leading provider of financial information, research, analysis and software products worldwide. Vincent A. Chippari, the Company's Executive Vice President and Chief Financial Officer, has extensive experience in information publishing, business management, consulting and finance, including seven years in various senior level operating and financial capacities with Thomson. Messrs. Slaine and Chippari are complemented by strong operating management. Dennis Buda, President of CRC Press, and Steven Wolfson, President of MicroPatent, each have more than 20 years of experience in the information publishing industry. See "Management--Executive Officers and Directors." Upon consummation of the Offering, the executive officers of the Company will own an aggregate of approximately 14.9% of the outstanding Common Stock, assuming an initial public offering price of $13.00 per share. See "Security Ownership of Certain Beneficial Owners and Management." GROWTH AND OPERATING STRATEGY The principal elements of the Company's growth strategy are to (i) acquire businesses in attractive niche markets, (ii) organically grow revenues and profit, (iii) improve operating efficiencies and (iv) attract and retain superior management. ACQUIRE BUSINESSES IN ATTRACTIVE NICHE MARKETS. The Company actively seeks to identify and acquire information publishing businesses with attractive market, product and customer characteristics. The Company targets professional and academic end-users who have a critical need to keep abreast of current developments in their particular fields. While the Company continually develops and introduces new products, the majority of the Company's revenues are generated from recurring sources, such as subscriptions and sales of previously released publications ("backlist"). The Company believes that markets in which information is critical to success, such as the STM market served by the Company, have supported consistent price increases over the past decade. Examples of additional niche markets that the Company may target include business information, healthcare information, regulatory information and technology-related information. Upon the expiration of Mr. Slaine's non-compete agreement with Thomson at the end of 1999, the Company may also pursue opportunities in financial information publishing. See "Management--Slaine Non-competition Agreement." ORGANICALLY GROW REVENUES AND PROFIT. The Company seeks to acquire information publishing businesses with significant short- and long-term growth prospects. The Company's strategy is to acquire valuable content and leverage such content across new distribution platforms and through expansion of product lines. For example, the Company has launched new electronic versions of successful print products, increased sales of core products based on new distribution agreements, began Internet delivery of products and launched new products targeting segments of its existing customer base. IMPROVE OPERATING EFFICIENCIES. The Company seeks to improve operating efficiencies by combining administrative functions, eliminating redundant facilities, negotiating more favorable contract terms with suppliers, implementing systems improvements and upgrading management. In addition, the Company seeks to leverage its infrastructure by acquiring companies or product lines which can be supported by its existing operations. To date, CRC Press has acquired two such companies, St. Lucie Press and Auerbach, as well as a line of engineering titles from Krause Communications and the McGee line of business titles. ATTRACT AND RETAIN SUPERIOR MANAGEMENT. The Company seeks to employ professional management with substantial information publishing expertise, both in entrepreneurial and corporate settings. The Company's philosophy is to provide its operating units with significant decision-making authority, so that key operating policies are made close to the Company's customers and operations. This enables the Company to attract superior entrepreneurial talent who can grow the business by capitalizing on market opportunities. BACKGROUND Information Ventures LLC, a Delaware limited liability company (the "LLC"), was formed in December 1996 by Mason P. Slaine and Warburg Pincus (together, the "Initial Stockholders"). In order to effect the Offering through a corporation rather than a limited liability company, immediately prior to the consummation of the Offering, the members of the LLC will contribute all of their direct or indirect equity interests therein to the Company, a newly formed Delaware corporation, in exchange for an aggregate of 12,200,000 shares of Common Stock (the "Exchange"). Following the Exchange, the Company will own, directly or indirectly, all of the equity interests in the LLC and its subsidiaries. Contemporaneously with the Exchange, the Company will make certain incentive payments to Dennis Buda. See "Management-- Employment Agreements." Warburg Pincus and its affiliates comprise a specialized financial services organization that manages approximately $7.0 billion of investments in its private equity investing activities. Upon consummation of the Offering, the Initial Stockholders will own an aggregate of 73.9% of the outstanding Common Stock. As a result, the Initial Stockholders will have the abilitiy to control the Company, including the election of directors, and direct its affairs and business. See "Risk Factors--Control by Principal Stockholders; Anti-takeover Provisions." The Company's principal executive office is located at 23 Old Kings Highway South, Darien, Connecticut 06820, and its telephone number is (203) 662-4203. RECENT DEVELOPMENTS For the quarter ended June 30, 1998, the Company currently estimates that revenues were approximately $10 million. This estimate is preliminary and may change when the Company completes its review of second quarter results. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Seasonality." THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Company (1).................... 4,250,000 shares Common Stock to be Outstanding After the Offering (1)(2)...... 16,469,231 shares Use of Proceeds.................. The net proceeds to be received by the Company from the Offering, estimated to be approximately $50.0 million, will be used for general corporate purposes, including acquisitions. See "Use of Proceeds." NYSE Symbol...................... "IHI" </TABLE> - ------------------------ (1) Does not include up to 637,500 shares subject to an over-allotment option granted by the Company to the Underwriters. (2) Does not include an aggregate of 487,812 shares of Common Stock (assuming an initial public offering price of $13.00 per share) issuable at a price per share equal to the initial public offering price upon the exercise of stock options to be granted upon consummation of the Offering. See "Management-- 1998 Stock Option Plan" and "Shares Eligible for Future Sale."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001063760_net_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001063760_net_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..58017616fcff328acbed9ee5535fd992b58c464b
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus (i) assumes that the underwriters' over-allotment option has not been exercised, (ii) assumes the exercise of warrants issued by the Company to purchase shares of Common Stock, (iii) assumes the conversion of convertible debentures issued by the Company into shares of Common Stock and (iv) reflects a 10-for-1 stock split effected September 2, 1997 and a subsequent -for-1 stock split to be effected before the consummation of the Offering. Prospective investors should carefully consider the information set forth under the heading "Risk Factors." THE COMPANY NetGrocer is the only nationwide, Internet supermarket offering customers dry grocery and related consumer products shipped directly to homes and offices. Through a virtual supermarket on the World Wide Web at www. netgrocer.com, the Company offers competitively priced products, online convenience and comprehensive product information, all to help shoppers reduce grocery bills, save time and shop more effectively. The NetGrocer Internet supermarket never closes. Twenty-four hours a day, seven days a week, NetGrocer customers can shop at their convenience, browsing from aisle to aisle and making selections from full-color product images. Orders are then carefully packaged and shipped from the Company's central distribution center primarily via FedEx. One of the Company's unique advantages is its ability to sell a variety of higher margin consumer products, such as housewares, toys and baby-related items with its dry grocery product offerings at no additional shipping charge to the customer and at minimal additional shipping cost to the Company. The Company recently entered into marketing relationships with various Internet sites and services which the Company believes will provide it with a further competitive advantage over its current and potential competitors with respect to customer acquisition efforts. One such relationship is the Company's exclusive marketing alliance with the America Online service, to which 47% of all U.S. interactive households subscribe. In addition, the Company has exclusive agreements with AOL.COM, Yahoo! Inc. and Excite, Inc., which have an unduplicated combined reach of approximately 75% of U.S. Web users and are each among the top six most visited Web sites. As part of its relationship with the Company, America Online, Inc. ("AOL") also has agreed, subject to certain conditions, to make a strategic investment in the Company in a private placement occurring contemporaneously with the consummation of this offering. According to Progressive Grocer's 1998 Annual Report of the Grocery Industry (the "Progressive Grocer Report"), the retail grocery industry is the largest retail category in the U.S., representing 18%, or $436 billion, of the $2.4 trillion spent on retail goods in 1997. The "dry grocery" segment, comprised of items such as snack food, beverages, soups, pet food, personal care and health and beauty products, and household products, represented more than $217 billion of the retail grocery market. Jupiter Communications estimates that consumers spent approximately $85 million in 1997 on groceries purchased online and that these purchases will increase to $6.6 billion by 2002. The Company is leveraging the dramatic growth and inherent economic advantages of the Internet as a commerce medium to create a model that significantly reduces the high overhead and fixed costs associated with traditional grocery retailers, satisfies consumers' increasing demand for convenience and service, and provides an attractive medium for consumer product manufacturers to effectively and efficiently market their products to specific demographic groups. Through its virtual supermarket and centralized distribution strategy, NetGrocer has effectively re-engineered the traditional supply chain and substantially reduced the real estate, inventory and personnel costs typically associated with a "brick and mortar" retail store. NetGrocer is redefining and improving the traditional grocery shopping experience for the consumer as well by providing added convenience, time savings, easily accessible and comprehensive product information and high quality customer service. Furthermore, NetGrocer's re-engineered supply chain benefits consumer product manufacturers through improved distribution, marketing and promotion of grocery and related consumer products. NetGrocer's systems enable it to (i) collect a wide variety of information about the Company's customers to provide research and marketing services to consumer product manufacturers, (ii) permit the marketing of products by consumer product manufacturers to desired demographic groups or customers on a one-to-one basis and (iii) reduce the costs to consumer product manufacturers of market research and sampling, and new product introductions. The Company recently entered into a marketing agreement with Unilever Foods, the second largest consumer product manufacturer in the world, to provide such services. NetGrocer's objective is to be the leading online retailer of dry grocery products and its customers' most frequently visited store for the purchase of dry grocery and related consumer products. The Company plans to achieve this objective by (i) creating customer loyalty through delivering a superior shopping experience, (ii) building a national brand identity, (iii) leveraging its superior economic model, (iv) maintaining a superior technology platform, (v) capitalizing on aggregation opportunities to enhance its margins and (vi) leveraging its customer database information to generate marketing revenues. NetGrocer has grown rapidly since it commenced sales operations in July 1997. Monthly visits to the NetGrocer site have grown from approximately 84,000 in December 1997 to approximately 580,000 in June 1998. Despite the Company's limited operating history and rapid acquisition of new customers, however, the Company already experiences significant customer loyalty, with repeat customers generally shopping 1.5 to 2 times per month and accounting for over 60% of revenues during the first six months of 1998. NetGrocer was incorporated in Delaware on October 27, 1995. The Company maintains its principal executive offices at 333 Seventh Avenue, New York, New York 10001. Its telephone number is (212) 244-0031. ----------------- THE OFFERING <TABLE> <S> <C> Common Stock Offered by the Company ................ shares Common Stock to be Outstanding After the Offering(1) shares Use of Proceeds .................................... To fund strategic marketing relationships and other capital expenditures and for general corporate purposes, including working capital. See "Use of Proceeds." Proposed Nasdaq StockMarket Symbol ................. "NTGR" </TABLE> - ---------- (1) Excludes: (i) shares of Common Stock issuable upon exercise of outstanding options at a weighted average exercise price of per share; and (ii) shares of Common Stock reserved for issuance upon exercise of options that may be granted in the future under the Company's 1996 Stock Option Plan (the "Stock Option Plan"). Includes shares of Common Stock reserved for issuance pursuant to the exercise of two warrants issued by the Company to AOL (assuming an initial public offering price of $ per share) and shares of Common Stock issuable upon the conversion of two convertible debentures issued by the Company to Cendant Corporation (including its predecessors, HFS Incorporated and CUC International Inc., "Cendant"). See "Management--Employment Agreements" and "--Stock Option Plans," "Certain Transactions," "Description of Capital Stock" and Notes 6 and 7 of Notes to Financial Statements. SUMMARY FINANCIAL DATA <TABLE> <CAPTION> QUARTERS ENDED YEAR ENDED ----------------------------------------------------------------- DEC. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, 1997 1997 1997 1997 1998 STATEMENT OF OPERATIONS DATA: --------------- ------------- ------------- --------------- --------------- (AUDITED) (UNAUDITED) <S> <C> <C> <C> <C> <C> Net sales ............................. $ 281,160 $ -- $ 83,511 $ 197,649 $ 406,639 Gross deficit ......................... (283,370) -- (103,324) (180,046) (285,726) Loss from operations .................. (3,552,759) (431,935) (567,494) (2,110,337) (2,967,398) Net loss .............................. (3,584,570) (431,935) (568,064) (2,140,889) (3,043,102) Basic loss per share .................. Diluted loss per share ................ Weighted average number of shares outstanding (basic) ........... Weighted average number of shares outstanding (diluted) ......... </TABLE> <TABLE> <CAPTION> MARCH 31, 1998 --------------------------------- ACTUAL AS ADJUSTED(1) BALANCE SHEET DATA: --------------- --------------- (UNAUDITED) <S> <C> <C> Working capital (deficit) ......... $ 7,120,988 $ Total assets ...................... 9,350,153 Convertible debentures ............ 12,000,000 Stockholders' deficit ............. (3,929,647) </TABLE> - ---------- (1) Adjusted to give effect to the sale by the Company of the shares of Common Stock offered hereby at an assumed initial public offering price of $ per share and after deducting the estimated underwriting discount and offering expenses. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001063854_prestige_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001063854_prestige_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..e7e5f842202e4a7cb49808f7dfdd5cf88ace8f72
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+PROSPECTUS SUMMARY This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. The following summary is qualified in its entirety by the more detailed information and the financial statements and notes thereto, appearing elsewhere in this Prospectus. The Company intends to acquire (the "Acquisition Transactions"), prior to the consummation of this Offering, all of the outstanding capital stock of each of Les Cosmetiques P.C. Inc., a Canadian corporation, Prestige Cosmetics Pty Ltd., an Australian corporation, and Prestige Cosmetics s.r.l., an Italian corporation, each of which is currently engaged principally in distributing the Company's products in foreign markets. Except as otherwise noted, all information in this Prospectus (i) assumes no exercise of the Underwriters' over-allotment option, the Representative's Warrants or outstanding options, (ii) gives effect to the consummation of the Acquisition Transactions, and (iii) gives effect to a 12,594.14-for-1 stock split effected in September 1998. The fiscal years ended September 30, 1995, 1996 and 1997 are referred to herein as "Fiscal 1995," "Fiscal 1996" and "Fiscal 1997," respectively. References in this Prospectus to the historical results of operations of the Company mean the Company's results of operations without giving effect to the Acquisition Transactions. References in this Prospectus to the pro forma results of operations of the Company mean the Company's results of operations giving effect to the Acquisition Transactions. The Company was incorporated in the State of Florida on February 21, 1980 under the name Sinequanone Mfg. of America, Inc., changed its name to Lancetti Cosmetics Corporation in September 1982, and has been doing business as Prestige Cosmetics since 1985. In September 1998, the Company changed its name to Prestige Cosmetics Corporation. Except as otherwise noted, all references to the Company include the foreign companies to be acquired pursuant to the Acquisition Transactions, Les Cosmetiques P.C. Inc., Prestige Cosmetics Pty Ltd. and Prestige Cosmetics s.r.l. See "Prospectus Summary -- Acquisition Transactions" and Pro Forma Financial Statements. THE COMPANY The Company manufactures, markets and distributes, domestically and internationally, a full line of cosmetic products under its proprietary "Prestige"(R) and "Prestige Studio Make-Up"(TM) brand names, and manufactures private label products for cosmetic and other specialty retailers. The Company believes that it is one of the fastest growing niche cosmetic companies. The Company's marketing strategy emphasizes distinctive, high-fashion, premium color cosmetic products that are sold at prices that compare favorably to those of competitive products. The Company distributes its "Prestige" products through a variety of national and regional "self-select" distribution channels. This type of distribution channel, in which customers select their own purchases without the assistance of an in-store demonstrator, includes independent and chain drug stores, mass volume retailers, and supermarkets. In the United States, the Company markets and sells its products nationwide, in many large retail chains including Eckerd Drugs, Thrifty-Payless, Rite-Aid and Wal-Mart stores, as well as on a promotional basis in Walgreens and CVS. The Company has increased its distribution in retail outlets from approximately 7,000 outlets in Fiscal 1995, to 8,300 outlets in Fiscal 1996, to 10,000 outlets in Fiscal 1997 and to 11,000 outlets in the nine months ended June 30, 1998. In addition, the Company has recently commenced distribution into over 500 SAV-ON stores. Further, the Company has been realizing significant growth in sales of its products within existing outlets, including an increase of approximately 33% in sales of the Company's products within the same Wal-Mart stores during the 12-month period ended January 1998. The Company has successfully completed tests of its basic "Prestige" line in 30 K-Mart stores and its "Prestige Studio Make-Up" line in 53 Sears stores, and has recently expanded into 100 K-Mart stores and 385 Sears stores. Since completion of testing, the linear footage of the Company's product space has increased 150% in K-Mart stores and 300% in Sears stores. The Company has recently launched a new, upscale merchandising program with Sears. Pursuant to this new merchandising program, the Company's "Prestige Studio Make-Up"(TM) line will be prominently featured in free-standing center aisle displays in 385 of the approximately 550 existing Sears stores. The opening order from Sears for this program was $ million. The Company has operations based in three foreign countries and its products are currently sold in 28 countries, as compared to five countries in 1995. Internationally, the Company sells its products in leading mass, drug and/or department store chains, including Shoppers Drug Mart and London Drugs in Canada, Kaufhof and Karstadt in Germany, Les Galeries Lafayette in France and Myer and David Jones in Australia. The Company tailors its marketing strategy to meet the consumer trends in each country in which it sells its products. The major overseas markets in which the Company currently sells its products include Canada, Italy, Germany, Spain, Norway, Sweden, Greece, Australia, Hong Kong, Taiwan, France and Austria. In addition, the Company sells its products in such emerging markets as Kuwait, Lithuania, Brazil, Korea, Singapore and Argentina. In June 1997, the Company commenced distribution in Japan and anticipates additional significant sales in the Far East, including China, where the Company has recently begun sales of its products in a major retail chain. The Company believes that its foreign distribution network will enable it to expand in existing and new international markets and intends to use a portion of the net proceeds of this Offering for international expansion. In the United States, the Company believes that it generates retail sales of $2,500 to $9,000 per linear foot per year on products with suggested retail price points principally of $2.95 to $4.95, with most of the Company's volume in the $3,000 to $4,000 range per linear foot. According to Information Resources, Inc., for the 52-week period ended December 7, 1997, sales of the Company's lip products within domestic drug stores increased approximately 73% on a dollar basis and 54% on a unit basis and sales of the Company's eye makeup products within domestic drug stores increased approximately 21% on a dollar basis and 12% on a unit basis. The drug store industry has been experiencing a consolidation trend. In addition, there has been significant growth among mass volume retailers. These large retail chains typically seek vendors with the capability to offer a broad line of innovative products and to respond quickly to changing trends. The Company has positioned itself to capitalize on the consolidation trend in the drug store industry through its ability to (i) manufacture a broad selection of innovative high quality, competitively priced cosmetic products, (ii) respond quickly to changes in consumer trends by utilizing its management information systems which serve to differentiate it from many of its direct niche competitors and enable it to satisfy the requirements of the large retail chains, (iii) maintain lower levels of inventory than a number of its competitors who are dependent on third party manufacturers, and (iv) support a just-in-time delivery system. The Company currently manufactures most of its products in a 50,000 square foot modern facility in Deerfield Beach, Florida, at which the Company manufactures and/or processes, tests, packages and labels cosmetic products including lipstick, cosmetic pencils, lip gloss, powder, eyeshadow, blush, concealers, mascara, foundation and nail lacquer. The Company also owns and operates distribution facilities in Montreal, Canada, Melbourne, Australia and Bologna, Italy. The Company intends to commence manufacturing cosmetics at its Italian facility for the European and Middle Eastern markets thereby greatly reducing its cost of goods as well as shipping and distribution costs and allowing the Company to rapidly respond to local customer demands. The Company's strategy is to (i) strengthen and enhance the Prestige brand through marketing and advertising, (ii) further penetrate the self-select distribution channel, (iii) continue to expand in existing and new international markets, (iv) continue to extend its line of cosmetic products and expand into alternative markets, (v) continue to improve operating efficiencies, customer service and product quality by upgrading management information systems and manufacturing capabilities, and (vi) evaluate possible acquisitions of or investments in businesses and products that are complementary to those of the Company. The Company's principal executive offices are located at 1441 West Newport Center Drive, Deerfield Beach, Florida 33442, and its telephone number is (954) 480-9202. THE OFFERING Common Stock offered hereby......... 2,300,000 shares Common Stock to be outstanding after the Offering........................ 10,300,000 shares(1) Use of proceeds..................... For the repayment of indebtedness, including loans from shareholders, upgrade of the Company's in-store displays, expansion of advertising, marketing and sales efforts, acquisition of equipment, international expansion, possible acquisitions, working capital and other general corporate purposes. See "Use of Proceeds." Risk factors........................ The shares of Common Stock offered hereby are speculative in nature and involve a high degree of risk and immediate substantial dilution and should not be purchased by investors who cannot afford the loss of their entire investment. See "Risk Factors" and "Dilution." Proposed Nasdaq National Market System symbol....................... "PRES" - --------------- (1) Does not include (i) 437,500 shares of Common Stock reserved for issuance upon exercise of stock options, at an exercise price equal to the initial public offering price, granted under the Company's 1998 Stock Option Plan (the "Plan"), (ii) 312,500 shares of Common Stock reserved for issuance upon exercise of stock options which may be granted under the Plan and (iii) 230,000 shares of Common Stock reserved for issuance pursuant to the Representative's Warrants. See "Management -- 1998 Stock Option Plan" and "Underwriting." ACQUISITION TRANSACTIONS The Company intends to acquire all of the outstanding capital stock of each of Les Cosmetiques P.C. Inc., a Canadian corporation ("Prestige Canada"), Prestige Cosmetics Pty Ltd., an Australian corporation ("Prestige Australia"), and Prestige Cosmetics s.r.l., an Italian corporation ("Prestige Italy" and, together with Prestige Canada and Prestige Australia, the "Foreign Subsidiaries"), prior to the consummation of this Offering. Each of the Foreign Subsidiaries is currently engaged principally in distributing the Company's products in foreign markets. The Company anticipates that it will acquire all of the outstanding capital stock of Prestige Canada, Prestige Australia and Prestige Italy in exchange for the issuance of 123,000, 380,000 and 1,199,923 shares of Common Stock, respectively. See "Certain Transactions." SUMMARY FINANCIAL DATA The historical summary financial data set forth below reflect the results of operations of the Company without giving effect to the Acquisition Transactions. The pro forma summary financial data set forth below give effect to the Acquisition Transactions as if they had occurred as of June 30, 1998 or at the beginning of the periods presented. The pro forma summary statement of operations data for the year ended September 30, 1997 include the Company's results of operations for the year ended September 30, 1997, Prestige Canada's results of operations for the year ended December 31, 1997, Prestige Australia's results of operations for the year ended December 31, 1997 and Prestige Italy's results of operations for the year ended December 31, 1997. The pro forma summary statement of operations data for the nine months ended June 30, 1998 include the results of operations of the Company and each of the Foreign Subsidiaries for the same period. <TABLE> <CAPTION> YEAR ENDED NINE MONTHS ENDED SEPTEMBER 30, JUNE 30, ------------------------------------------ ------------------------------- PRO FORMA PRO FORMA 1995 1996 1997 1997 1997 1998 1998 ------- ------- ------- --------- ------- ------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales.................. $10,469 $13,771 $20,252 $26,922 $15,517 $12,409 $18,297 Cost of goods sold......... 5,440 7,042 9,022 11,259 6,912 5,191 7,336 ------- ------- ------- ------- ------- ------- ------- Gross profit............... 5,029 6,729 11,230 15,663 8,605 7,218 10,961 Total operating expenses... 5,237 6,452 9,377 12,004 7,109 5,919 9,262 ------- ------- ------- ------- ------- ------- ------- Operating income (loss).... (208) 277 1,853 3,659 1,496 1,299 1,699 Other (expense)............ (108) (133) (217) (371) (141) (246) (348) Provision (benefit) for income taxes............. (120) 60 793 1,411 694 455 612 ------- ------- ------- ------- ------- ------- ------- Net income (loss).......... $ (196) $ 84 $ 843 $ 1,877 $ 661 $ 598 $ 739 ======= ======= ======= ======= ======= ======= ======= Basic and diluted earnings per share................ $ (.03) $ .01 $ .13 $ .23 $ .10 $ .09 $ .09 Weighted average shares outstanding.............. 6,297 6,297 6,297 8,000 6,297 6,297 8,000 </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, JUNE 30, 1998 -------------------------- ---------------------------------------- PRO FORMA AS 1995 1996 1997 ACTUAL PRO FORMA ADJUSTED(1) ------ ------ ------ ------ -------------- ------------ (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents.......... $ 4 $ -- $ -- $ -- $ 429 $10,908 Working capital (deficit).......... (10) (900) (298) 154 742 14,021 Total assets....................... 3,562 6,585 8,759 9,387 21,886(2) 32,365(2) Total liabilities.................. 3,100 6,039 7,370 7,400 10,886 8,086 Total shareholders' equity......... 462 546 1,389 1,987 11,000 24,279 </TABLE> - --------------- (1) Gives effect to the sale of the 2,300,000 shares of Common Stock offered hereby at an assumed initial public offering price of $6.50 and the application of the estimated net proceeds therefrom. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001063885_netcare_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001063885_netcare_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the Consolidated Financial Statements and the related Notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus (i) has been adjusted to give effect to the Recapitalization (as defined below); and (ii) assumes no exercise of the Underwriters' over-allotment option. Prospective investors should consider carefully, among other things, the information set forth under "Risk Factors." Unless the context otherwise requires, references in this Prospectus to "NetCare" or the "Company" shall mean NetCare Health Systems, Inc. and its predecessors, together with its direct and indirect subsidiaries. THE COMPANY OVERVIEW NetCare was initially funded in March 1996 to acquire and operate acute care community hospitals in non-urban markets. Since then, NetCare has acquired and currently operates ten general acute care hospitals in growing, non-urban communities in Georgia, Mississippi, Texas and California. These facilities, together with their medical staffs, provide a wide range of inpatient and outpatient acute care services and a variety of specialty services, including skilled nursing services, rehabilitation services and psychiatric services. The Company also operates four nursing homes associated with its hospitals. The Company had total revenue of $130.3 million for the year ended December 31, 1997 from the seven hospitals and related businesses then operated by the Company, approximately 92% of which was derived from hospital and hospital-related activities. On a pro forma basis, after giving effect to the acquisition of the three hospitals acquired in 1998 as if such acquisitions occurred on January 1, 1997, the Company had total revenue of $162.8 million for the year ended December 31, 1997. The Company's objective is to be a leading provider of high quality health care services in growing non-urban markets. The Company believes that these markets are attractive because there are generally only one or two hospitals in each non-urban community, resulting in less direct competition for hospital-based services. The smaller populations and relative dominance of the acute care hospitals in these markets generally also limit the entry of alternative non-hospital providers, such as outpatient surgery centers or rehabilitation or diagnostic imaging centers, as well as managed care plans. In addition, the Company believes that non-urban communities are generally characterized by a high level of patient and physician loyalty that fosters cooperative relationships among the local hospital, physician and patients. As a result, the local hospital is viewed as a key part of the local community. All of NetCare's facilities are located in growing, non-urban markets. Nine of NetCare's ten hospitals are the only hospitals in their respective communities and the tenth hospital is one of only two hospitals in its community. The hospitals have general service area populations ranging from 15,000 to more than 110,000 and the average annual population growth rate of these communities since 1990 is 2.3%, more than twice the national average annual population growth rate of 1.1% for the same period, according to data supplied by Health InfoTechnics, LLC. The Company's senior management has significant experience acquiring and operating community hospitals. As part of the management of Healthtrust, Inc.-- The Hospital Company, NetCare's senior management implemented a growth plan which included the acquisition of more than 20 community hospitals and the operation of over 100 hospitals between 1987 and 1995. BUSINESS STRATEGY The key elements of the Company's business strategy include: - Increasing Revenue at Existing Facilities. The Company increases revenue at existing facilities by providing a broader range of services in a more attractive care setting, and by supporting and recruiting physicians. The Company's hospitals are expanding the breadth of services offered to include more complex services such as cardiology, orthopedics, and oncology, and investing in technology and the physical plant at the facilities. The Company also provides the resources and capital needed to support <PAGE> 6 the physicians currently in the communities it serves and works with local hospital boards, management teams and medical staffs to determine the number and type of additional physicians needed. The Company aggressively recruits additional primary care physicians and specialists to its communities to meet those needs. By taking these actions, the Company believes each of its hospitals can increase its share of the health care dollars spent by local residents and limit patient migration to larger urban facilities. Total revenue for hospitals operated by NetCare for a full year in 1997 increased 10.3% from 1996 to 1997. - Growing through Acquisitions. NetCare intends to grow through the acquisition of additional hospitals in its target communities. NetCare intends to acquire at least one or two hospitals each year that fit the Company's acquisition criteria. The Company pursues acquisition candidates that: (i) have a minimum general service area population of 10,000 with a stable or growing population base; (ii) are the sole or a primary provider of acute care services in the community; and (iii) have financial performance that the Company believes will benefit from management's operating skills. According to Company estimates, there are currently more than 900 acute care hospitals that have two or fewer hospital competitors within a twenty mile radius of their local community campus. As these hospitals experience limited management and financial resources, payment reductions, increasingly complex regulations and larger urban competitors, the Company believes that their owners may turn to companies, such as NetCare, that have the management expertise and financial resources necessary to preserve the local availability of health care in their community. - Reducing Costs. In order to improve efficiencies and increase operating margins following the acquisition of a hospital, the Company implements cost reduction programs which include: (i) redesigning the manner in which clinical and administrative work is performed; (ii) adjusting staffing levels according to patient volumes; (iii) capitalizing on purchasing efficiencies and terminating or renegotiating certain vendor contracts; and (iv) installing a standardized management information system resulting in more efficient billing and collection procedures. In addition, each of the Company's hospitals and their local management teams is supported by the Company's reimbursement, regulatory and compliance expertise and by NetCare's senior management team which has an average of 15 years of experience in the health care industry. The operating margins for the hospitals operated by NetCare for a full year in 1997 improved from 13.1% in 1996 to 15.5% in 1997. - Focusing on the Community. Since the Company believes that the provision of health care is essentially a local business, the Company emphasizes local hospital initiatives, responsibility and accountability. Decentralized hospital management teams work closely with local physicians, community leaders and residents to identify and then meet the health care needs of the community. The Company also generally affiliates with tertiary care hospitals or systems in nearby urban markets for services which cannot effectively be provided locally and sponsors local preferred provider options and contracting opportunities to employers in partnership with other local providers and managed care plans. The Company believes that its community focus will limit patient migration to larger urban facilities and thereby increase the Company's market share and revenue. BACKGROUND NetCare was formed in November 1995 and was initially funded in March 1996 by Charterhouse Equity Partners II, L.P. ("Charterhouse Equity Partners"), certain former executives of Healthtrust, Inc. -- The Hospital Company and certain other investors. In August 1996, NetCare acquired Southern Health Corporation ("Southern Health"), an owner and operator of four non-urban community hospitals and three associated nursing homes in Georgia ranging from approximately 45 miles to 100 miles north of Atlanta, Georgia and one hospital and associated nursing home in northeastern Mississippi, approximately 35 miles southeast of Tupelo, Mississippi. In November 1996, NetCare acquired Denton Community Hospital, located in Denton, Texas, approximately 35 miles northwest of Dallas. In January 1997, NetCare acquired Stone County Hospital, located in Wiggins, Mississippi, approximately 30 miles north of Gulfport, Mississippi. In April 1998, NetCare acquired Central Texas Hospital, located in Cameron, Texas, approximately 70 miles northeast of Austin, Texas, through the assumption of a lease and in May 1998, NetCare acquired Holly 2 <PAGE> 7 Springs Memorial Hospital, located in Holly Springs, Mississippi, approximately 30 miles southeast of Memphis, Tennessee. In June 1998, the Company acquired San Clemente Hospital and Medical Center, located in San Clemente, California, approximately 65 miles south of Los Angeles, California. The Company's principal executive offices are located at 424 Church Street, Suite 2100, Nashville, Tennessee 37219, and its telephone number is (615) 742-8500. THE RECAPITALIZATION Prior to the Offerings (as defined below), all of the outstanding Common Stock of the Company has been owned by NetCare Health Systems LLC ("NetCare LLC"). The members of NetCare LLC are Charterhouse Equity Partners, Chef Nominees Limited ("Chef" and, together with Charterhouse Equity Partners, "CEP II") and NetCare Management LLC ("Management LLC"). The members of Management LLC are senior management and employees of the Company and certain other investors. Immediately prior to the consummation of the Offerings (i) Management LLC will be liquidated and members of Management LLC will receive member interests in NetCare LLC in accordance with the terms of the limited liability company agreement of Management LLC; (ii) an amendment to the Company's Certificate of Incorporation providing for, among other things, an increase in the authorized number of shares of Common Stock and the authorization of the preferred stock, par value $ per share of the Company (the "Preferred Stock") will become effective; (iii) the Company will effect a [ ]-for-one stock split with respect to the then outstanding Common Stock; and (iv) NetCare LLC will be liquidated and the Common Stock of the Company then held by NetCare LLC will be distributed to the former members of NetCare LLC in accordance with the terms of the limited liability company agreement of NetCare LLC (collectively, the "Recapitalization"). THE OFFERINGS The offering of shares of the Company's Common Stock, par value $.01 per share (the "Common Stock"), in the United States and Canada (the "U.S. Offering") and the offering of shares of the Common Stock outside the United States and Canada (the "International Offering") are collectively referred to herein as the "Offerings." Common Stock offered by the Company..... shares Common Stock to be outstanding after the Offerings............................... shares (1) Use of Proceeds......................... The net proceeds to be received by the Company from the Offerings will be used to repay certain indebtedness and for general corporate purposes. See "Use of Proceeds." Proposed New York Stock Exchange Symbol.................................. "NHS" - --------------- (1) Excludes shares of Common Stock issuable upon the exercise of options to be issued upon consummation of the Offerings pursuant to the Company's 1998 Long-Term Equity Incentive Plan and Directors' Stock Option Plan at an exercise price equal to the initial public offering price. See "Management."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001063918_cny_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001063918_cny_prospectus_summary.txt
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+SUMMARY The following questions and answers summarize some of the important information in this Prospectus. Please read the questions and answers carefully, and also read the rest of the Prospectus before deciding whether to purchase Common Stock. WHAT IS CNY FINANCIAL CORPORATION? CNY Financial Corporation is a new corporation formed under Delaware law. After the Conversion, the Company will be a bank holding company and will own all the stock of the Bank. The stock of the Company, which is the Common Stock that is being offered by this Prospectus, will then be owned by the public, the ESOP, the 401(k) Plan, Directors, officers and employees of the Company and the Bank and the Foundation. See "CNY Financial Corporation." WHAT IS CORTLAND SAVINGS BANK? The Bank is a mutual savings bank, which means that it has no stockholders. It has three banking offices, all in Cortland County in central New York State. On March 31, 1998, the Bank had total assets of $232.4 million, loans of $154.2 million, deposits of $198.2 million and net worth of $31.4 million. For the three months ended March 31, 1998, the Bank had net income of $493,000 compared to net income of $411,000 for the three months ended March 31, 1997. The Bank was chartered in 1866. It obtains deposits, mainly from local depositors, and invests those deposits, and other available funds, principally in loans, a majority of which are secured by property located in Cortland County, New York. It also buys securities, such as Treasury bills issued by the United States and securities which are backed by groups of mortgages. The Bank's income primarily comes from the difference between the rate of interest it pays on its deposits and the rate of interest earned on its loans and other investments. In addition to the cost of its deposits, the Bank also has expenses for salaries and employee benefits, maintaining its banking offices and equipment, computer data processing, insurance and other expenses. WHAT IS THE CONVERSION? The Conversion is a change in the Bank's form of organization so the Bank can issue its stock to the Company, and the Company can sell its stock to certain of its depositors, the ESOP and, if available, to other members of the public. After the Conversion, the stockholders of the Company will indirectly own the Bank. See "The Conversion--General." WHY IS THE BANK CONVERTING? The Bank is converting because, among other reasons, the Conversion will: - Allow the Bank's customers to obtain an ownership interest in the Bank, fostering customer loyalty and encouraging them to promote the Bank to others in the community. - Increase the Bank's capital, which will support the Bank's expansion plans. - Provide the Company with the capital and ownership structure to engage in acquisitions and mergers through the use of cash or stock as payment for the institution being acquired. - Allow acquired institutions to continue to operate on a semi-autonomous basis as subsidiaries of the Company if necessary or appropriate in order to realize the benefits of an acquisition. - Permit the Bank and the Company to offer stock incentives to directors, officers and employees in order to attract and retain high quality personnel. - Allow the Bank to create the Cortland Savings Foundation, a charitable foundation, to further foster a close and mutually beneficial relationship between the Bank and the communities it serves. See "The Conversion--Reasons for the Conversion." WHAT IS THE BANK'S AND THE COMPANY'S POST-CONVERSION STRATEGY? After the Conversion, the Bank and the Company intend to implement a business strategy to seek increased strength, growth and profitability. The foundations of that strategy include the following: - STRENGTHEN THE BANK'S POSITION AS A DOMINANT COMMUNITY-ORIENTED FINANCIAL INSTITUTION. The Bank currently has the largest deposit market share in Cortland County with 42.1% of FDIC-insured deposits. Of the Bank's $198 million in deposits at March 31, 1998, approximately 81.5% were held by persons and companies located in Cortland County. As industry consolidation continues in the Northeast, the Bank believes it can build its depositor base and fortify its position within the surrounding communities by continuing to provide new and existing customers with a higher level of service and convenience than its competitors. - PURSUE EXPANSION OPPORTUNITIES IN CENTRAL NEW YORK. Management believes that its operating strategy can be extended profitably into adjoining counties with customers who share the same needs and interests as the Bank's existing home community. To achieve this goal, management intends to seek out opportunities for further expansion through acquisitions, branch purchases or the opening of new offices. As evidence of this, the Bank has recently opened a loan production office in Ithaca, the county seat of adjoining Tompkins County. - MAINTAIN PRE-EMINENCE IN RESIDENTIAL MORTGAGE LENDING. The Bank is, and has been for many years, the largest residential mortgage lender in Cortland County, with a market share that substantially exceeds any other local bank in terms of dollar volume or number of loans. The Bank has hired a new senior loan officer and upgraded its loan department staffing. As the Bank expands into other central New York communities, it intends to offer an even broader range of residential loan products. In furtherance of this goal, the Bank plans to implement a secondary mortgage market operation. - DIVERSIFICATION AND GROWTH OF LOAN PORTFOLIO. Although residential mortgage loans are expected to remain the primary component of the Bank's loan portfolio, other types of loans have provided the Bank with opportunities for asset growth in the past. To complement its residential mortgage lending operations, the Bank currently offers commercial mortgage loans, commercial loans, and a variety of consumer loans. Automobile loans are an important growth category, increasing by $2.7 million, or 42%, over fifteen months from $6.4 million at December 31, 1996 to $9.1 million at March 31, 1998. The Bank plans to maintain its position as the leading residential mortgage lender in Cortland County while building upon its position as an independent community bank to increase its market share of higher yielding commercial and consumer loans. - IMPROVE EFFICIENCY. Recent changes in the Bank's staffing and infrastructure have enabled it to serve more customers with increased deposit and loan volumes, thus allowing its current operating expenses to be spread over a larger asset base. In addition, the Bank anticipates that in the future it will be required to incorporate technological developments into its product delivery system. Future growth and expansion will allow the Bank to spread the cost of these technological innovations over a larger asset base. The ability of the Bank and the Company to implement successfully the post-Conversion strategy is subject to many uncertainties, and may be hindered by both internal and external factors. Some of the factors which could affect the ability of the Bank and the Company to implement the post-Conversion strategy, and which could also have a material adverse effect on their financial condition or results of operations, include: - INTEREST RATE RISKS. Fluctuating market interest rates could reduce net interest income as the cost of funds increases more rapidly, or declines more slowly, than the yield on assets. - DIFFICULTIES IN INVESTING AND LEVERAGING THE NEW CAPITAL. The proceeds from the sale of the Common Stock will initially be invested in lower-yielding securities investments. Furthermore, leveraging the new capital will take time, resulting in a decline in return on equity. It will be difficult, if not impossible, for the Company and the Bank immediately to invest the net proceeds in loans, which are now the Bank's highest yielding asset category. - GEOGRAPHIC AND ECONOMIC CONCERNS. The Bank's loans, and its business operations, are concentrated in a community which has not benefited from the economic boom experienced by much of the rest of the country during the past few years. Therefore, the ability of the Company and the Bank to increase deposits and find suitable new loans may be limited. The Bank could also experience higher than peer group default rates on existing loans. WHAT ARE SOME OF THE RISKS I SHOULD CONSIDER WHEN I DECIDE WHETHER TO PURCHASE COMMON STOCK? There is a section in this Prospectus titled "Risk Factors" beginning on page 15 which describes some of the risks that you should consider before deciding whether to purchase Common Stock. Please read that section carefully. Remember that the Common Stock is not a deposit account. It is not insured by the FDIC or any other government agency and may not pay dividends. The market value of the Common Stock may go up or down after the Conversion, and you could lose your investment. The appraisal by RP Financial, LC. is no assurance that the Common Stock will be worth the estimated amount and you should not treat the appraisal as a recommendation that you purchase any Common Stock. HOW MUCH COMMON STOCK WILL BE SOLD? Based on the independent appraisal of RP Financial, LC., the pro forma market value of the Common Stock of the Company after completion of the Conversion, and thus the dollar amount of Common Stock expected to be sold, will be from $52,062,500 to $70,437,500, not including the Common Stock contributed to the Foundation as described below. This is known as the "Valuation Range." The Company is offering from 5,206,250 to 7,043,750 shares of Common Stock, at $10 per share. The actual amount of Common Stock sold will depend on a number of things, including the number of orders received and the appraiser's updated estimate of the market value of the Common Stock. The Company may increase the amount of Common Stock sold by an additional 15%, to $81,003,120 (or 8,100,312 shares), based upon the number of orders received, the updated appraisal, economic conditions when the Conversion is being completed and other factors. See "The Conversion--Stock Pricing and Number of Shares to be Issued." WHO CAN BUY COMMON STOCK OF THE COMPANY IN THE CONVERSION? Persons who had deposits of at least $100 on December 31, 1996 will have the first priority to buy Common Stock. The second priority goes to the ESOP and the third priority goes to persons who had deposits of at least $100 on June 30, 1998. Depositors who have the right to purchase Common Stock may not sell or transfer that right to anyone else. See "The Conversion--Subscription Offering." If all of the Common Stock is not purchased by persons with subscription rights, then other people may be offered the opportunity to purchase Common Stock. MAY I TRANSFER MY SUBSCRIPTION RIGHTS OR USE THEM TO BUY COMMON STOCK FOR SOMEONE ELSE? No. If you exercise your subscriptions rights, you may do so only for yourself, and not for anyone else. It is illegal to transfer your subscription rights or the benefits of your subscription rights to anyone else. If you transfer or attempt to transfer your subscription rights, the Bank will have the right to cancel those rights. You may also be subject to other penalties, possibly including criminal penalties. IF I HAVE SUBSCRIPTION RIGHTS, HOW DO I ORDER COMMON STOCK AND HOW DO I PAY FOR IT? To order Common Stock, you must submit an original order form to the Bank no later than 12:00 noon, New York time, on September 16, 1998 with payment in full. Copies of order forms will not be accepted. You may pay for Common Stock by check, money order or, if delivered directly to the Bank, cash. You may also pay for your Common Stock by including, in your order form, an authorization to withdraw the purchase price from an account you have at the Bank. If you pay by check, cash or money order, your payment will earn interest at 2.75% until the Conversion is completed or your money is refunded. If you pay by authorizing a withdrawal from a deposit at the Bank, your deposit will continue to earn interest at the regular rate for your deposit until it is used to purchase Common Stock when the Conversion is completed. However, you may not use that part of your deposit for any other purpose from the time you submit your order form until the Conversion is completed. If the Conversion is not completed by October 31, 1998, you will have an opportunity to reduce or cancel your subscription and receive a refund of amounts paid, with interest, and release any applicable hold on your deposit account. See "The Conversion--Purchasing Common Stock." WHAT IS THE MAXIMUM AND MINIMUM AMOUNT OF COMMON STOCK THAT CAN BE PURCHASED? No person, related persons or persons acting together may order or purchase more than $150,000 of Common Stock. If more than one person is named as a depositor on any account or accounts, such as a joint account, all named depositors on those accounts will be considered to be acting together for the purpose of the limit so that they may not purchase, in total including their individual orders and orders by the group, more than $150,000 of Common Stock. The minimum purchase is 25 shares. See "The Conversion--Purchase Limitations." WHAT HAPPENS IF THERE IS NOT ENOUGH COMMON STOCK TO FILL ALL ORDERS? If there is not enough Common Stock to fill all orders, shares will be allocated based on the priorities described above. See "The Conversion--Subscription Offering." WHAT IS THE ROLE OF THE FINANCIAL ADVISORS? The Bank and the Company have engaged CIBC Oppenheimer Corp. and Trident Securities, Inc. as financial and marketing advisors, and they have agreed to use their reasonable best efforts to assist the Company in soliciting subscriptions and purchase orders for Common Stock. CIBC Oppenheimer Corp. and Trident Securities, Inc. are not required to take or purchase any Common Stock. They have not prepared any report or opinion constituting a recommendation or advice to the Bank or the Company, nor have they prepared an opinion as to the fairness of the purchase price or the terms of the offering. CIBC Oppenheimer Corp. and Trident Securities, Inc. have not verified the accuracy or completeness of the information contained in this Prospectus. See "The Conversion--Marketing Arrangements." HOW CAN I GET ANSWERS TO ADDITIONAL QUESTIONS ABOUT THE CONVERSION? For answers to questions about purchasing stock and other matters related to the Conversion, call or come to the Stock Information Center at One North Main Street, Cortland, New York 13045, telephone number (607) 758-3850. HOW WILL THE PROCEEDS FROM THE CONVERSION BE USED? The Company will use half of the net proceeds from the sale of the Common Stock, after paying expenses, to buy all the common stock to be issued by the Bank. The Company will use a part of the remaining net proceeds to make a loan to the ESOP so the ESOP can buy 8% of the Common Stock issued in the Conversion, including Common Stock issued to the Foundation. The net proceeds will be available to support future expansion of the Bank's business and assist the Bank and the Company in implementing their post-Conversion business plans as outlined above. The Company may also use the proceeds to repurchase its Common Stock in the future. Initially, the Company and the Bank both expect that they will use the net proceeds to make short-term and medium-term investments, primarily in securities. At current market rates, such investments are expected to have yields of from 5% to 6% per year, which is less than the 8.00% average yield on the Bank's interest-earning assets for the three months ended March 31, 1998. See "Use of Proceeds" for a discussion of restrictions on repurchases of Common Stock and other information regarding use of the proceeds. WILL THE COMPANY PAY DIVIDENDS TO STOCKHOLDERS? The Board of Directors of the Company will decide whether, when and how much to pay in dividends with respect to the Common Stock. No assurance is given to investors that dividends will be paid or, if they are paid, when they will start and how much they will be. The Board of Directors does not expect that it will pay dividends on the Company's Common Stock immediately after the Conversion. See "Dividend Policy." WHAT BENEFITS WILL THE BANK'S DIRECTORS, OFFICERS AND EMPLOYEES GET FROM THE CONVERSION? The Company will form the ESOP as part of the Conversion and the ESOP is expected to purchase up to 8% of the Common Stock issued in the Conversion, including the Common Stock contributed to the Foundation. The ESOP will purchase the Common Stock using a loan from the Company. All officers and other employees of the Bank and the Company will be eligible to be participants in the ESOP after satisfying certain age and length of service requirements, but directors of the Company and the Bank who are not employees will not be eligible to participate. As the ESOP gradually repays its loan, the Common Stock owned by the ESOP will be gradually divided among accounts for officers and other employees. The division of shares is generally based upon salary. See "Management of the Bank--Benefits--Employee Stock Ownership Plan." In addition, the Company expects to adopt the Stock Option Plan and the Personnel Recognition and Retention Program, or PRRP, after the Conversion is completed. The Company intends to implement the Stock Option Plan and the PRRP within one year after the Conversion. Therefore, the Conversion Regulations require that they must first be approved by the Company's stockholders no earlier than six months after the Conversion. The Company expects that the Stock Option Plan will permit the award, in the aggregate, of options for up to 10% of the Common Stock issued in the Conversion and the PRRP will permit the award, in the aggregate, of shares of Common Stock equal to 4% of the Common Stock issued in the Conversion, in both cases including Common Stock contributed to the Foundation. Directors, officers and other employees will be eligible to participate in these plans. Directors who are not employees, as a group, may not receive awards of more than 30% of the shares covered by each plan. No individual director who is not an employee may receive an award of more than 5% of the shares covered by each plan. No officer or employee may receive an award of more than 25% of the Common Stock covered by either plan. See "Management of the Bank--Benefits--Stock Option Plan" and "--Personnel Recognition and Retention Program." Furthermore, in the future, the Company may consider the adoption of other stock benefit plans, such as employee discount stock purchase plans and stock-based directors' fee plans, which could result in additional stock benefits for, and an increase in voting control by, employees, officers and directors of the Bank and the Company. The Bank has entered into employment contracts with four executive officers: Mr. Stisser, the Bank's President, Mr. Stapleton, the Bank's Executive Vice President and Chief Operating Officer, Mr. Covert, the Bank's Executive Vice President and Chief Financial Officer, and Mr. Meeker, the Bank's Senior Vice President and Senior Loan Officer, in connection with the Conversion. Mr. Stisser's contract and Mr. Stapleton's contract have three-year terms, while Mr. Covert's contract and Mr. Meeker's contract have two-year terms. If Mr. Stisser's employment ends under certain circumstances, he will be paid benefits so that he is in the same position as if he had continued to be employed until the end of the contract. The contract will provide for other benefits such as an initial salary of $175,000 per year and a guaranty that the salary will not decline. Mr. Stisser did not previously have an employment contract with the Bank. The employment contracts for the other three executive officers provide for salary continuation or severance payments if employment ends under certain circumstances. All contracts provide for severance payments if employment is terminated in connection with a change in control of the Bank or the Company, subject to certain conditions. The Company estimates that if the employment of all four executive officers is terminated under circumstances in which the full severance payments would be made under the contracts, the aggregate amount payable would be $1.4 million. In addition, the Bank has amended its 401(k) Plan to allow employees to invest their accounts in a fund consisting of Common Stock of the Company by using subscription rights that they may have as depositors of the Bank. In the Conversion, each employee who has priority subscription rights because of his or her deposits with the Bank may exercise those subscription rights using money in his or her 401(k) Plan account, including matching contributions from the Bank. The Bank has also adopted an Employee Severance Plan which provides for severance payments to an employee of the Bank if his or her employment is terminated under certain circumstances in connection with or after a change in control. See "Management of the Bank--Employment Contracts" and "--Benefits" and "Restrictions on Acquisitions of the Company and the Bank-Anti-takeover Effects of Management Compensation Arrangements." WHY IS THE BANK FORMING A CHARITABLE FOUNDATION AND WHAT EFFECT WILL IT HAVE? The Bank has a strong commitment to the well-being of its local community. A charitable foundation will be created in connection with the Conversion to further that commitment. The Foundation is expected to provide grants for community development, low cost housing, civic programs, education programs and other charitable purposes in the communities served by the Bank and the Company. The Company will contribute Common Stock to the Foundation equal to 2% of the shares sold in the Conversion and may also contribute up to $100,000 to the Foundation to cover initial start-up expenses and initial grants. The Foundation is being established at this time because the Company has the ability to fund the Foundation with its Common Stock. The Foundation is not expected to be established if the Conversion does not occur. The Bank and the Company believe that the Foundation will enhance the bond between the Bank and its community. A majority of the Foundation's directors will be officers or directors of the Bank or the Company. The Foundation must vote all Common Stock owned by it in the same ratio as all other shares of the Company's Common Stock are voted, unless that would cause the Foundation to lose its tax-exempt status and the Superintendent and the FDIC agree to a change in the voting procedure. The Company's contribution to the Foundation will dilute the ownership interests of other stockholders by approximately 1.96%. When the Foundation is established, the Company's net income will be reduced by the fair market value of the contribution, net of the related tax benefit. See "The Conversion-- Establishment of the Foundation." RP Financial, LC. has estimated that the establishment of the Foundation has reduced the estimated pro forma market value of the Company's Common Stock upon completion of the Conversion by approximately 2.8%. See "See Comparison of Valuation and Pro Forma Information With and Without Foundation."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001063980_clark-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001063980_clark-inc_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following is a summary of certain information contained herein and is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements, including the notes thereto, contained elsewhere in this Prospectus. Clark/Bardes Holdings, Inc., a Delaware corporation ("CBH"), and Clark/Bardes, Inc., a Delaware corporation and a wholly owned subsidiary of CBH ("Clark/ Bardes"), were formed in June 1998 in contemplation of the Offering and to effect the Merger (as defined below). As a result of the Merger, Clark/Bardes became the successor corporation to Clark/Bardes, Inc., a Texas corporation (the "Predecessor Company"). Unless the context otherwise requires, all references in this Prospectus to the "Company" mean CBH together with its wholly owned subsidiary Clark/Bardes and the predecessor of Clark/Bardes, and all dates, periods or events prior to the Merger refer to the Predecessor Company. Unless otherwise indicated, this Prospectus and all pro forma financial and statistical information set forth herein assumes the consummation of the Reorganization (as defined below) and no exercise of the Underwriters' over-allotment option. For the convenience of the reader, certain terms have been defined in the Glossary contained elsewhere in this Prospectus, and any defined terms used herein and not otherwise defined shall have the meanings given in the Glossary. THE COMPANY GENERAL Since the inception of the Predecessor Company in 1967, Clark/Bardes, the wholly owned operating subsidiary of CBH, has designed, marketed and administered insurance-financed employee benefit programs to large corporations and community, regional and money center banks. The Company's clients use these sophisticated programs primarily to offset the costs of employee benefit liabilities and to supplement and secure benefits for key executives. The Company's revenue is earned primarily from (i) commissions paid to Clark/Bardes by the insurance companies that underwrite the policies underlying the Company's programs and (ii) fees paid by clients in connection with initial program design and the ongoing administrative services provided by the Company. Such commissions and fees are usually long-term and recurring and are typically paid annually and extend over a period of ten years or more after a sale. The Company has experienced rapid growth since December 31, 1995. Effective September 1, 1997, the Predecessor Company acquired substantially all the assets and the business of Bank Compensation Strategies, Inc. ("BCS"), a Minnesota based company that designed, marketed and administered insurance-financed employee benefit programs and related compensation, salary and benefit plans for community and regional banks. Through sales generated by a group of specialized independent producers and the integration of the assets acquired from BCS, the Company had a customer base of over 1,100 clients as of June 30, 1998. Additionally, the inforce insurance coverage underlying the Company's programs has increased from approximately $26.2 billion as of December 31, 1995 to approximately $46.7 billion as of December 31, 1997 ($43.9 billion excluding BCS), representing a compound annual growth rate of 33.9% (29.4% excluding BCS). Income from operations has grown from $2.2 million for the year ended December 31, 1995 to $5.2 million ($4.3 million excluding BCS) for the year ended December 31, 1997, representing a compound annual growth rate of 53.5% (39.5% excluding BCS). Management believes additional growth opportunities exist and that Clark/Bardes' industry reputation, comprehensive in-house expertise, sophisticated administrative systems, quality producers and strong relationships with insurance companies provide the Company with distinct competitive advantages. The Company intends to increase its market share by combining these strengths with its core competencies of (i) designing proprietary programs customized to meet clients' needs, (ii) providing outstanding client service, and (iii) responding quickly to develop new products and services brought about by regulatory and legislative changes. In addition, management believes that Clark/Bardes can be a leader in the consolidation of the highly fragmented insurance-financed employee benefit industry by offering liquidity, proprietary benefit and program designs, and administrative support to the owners of smaller firms. Finally, management intends to leverage the Company's core competencies by entering into related markets such as compensation consulting and outsourcing of benefit plan administration services. Additional costs for acquisition activity, which include INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. PROSPECTUS SUBJECT TO COMPLETION, DATED AUGUST 19, 1998 4,000,000 SHARES CLARK BARDES LOGO COMMON STOCK ------------------------------ All of the 4,000,000 shares of common stock, par value $0.01 per share (the "Common Stock"), offered hereby (the "Offering") will be sold by Clark/Bardes Holdings, Inc. ("CBH"). Prior to the Offering, there has been no public market for CBH's Common Stock. It is currently anticipated that the initial public offering price will be between $9.00 and $10.00 per share (the "Range"). For a discussion of the factors to be considered in determining the initial public offering price, see "Underwriting." At CBH's request, the Underwriters have reserved up to 600,000 shares of Common Stock for sale to the directors, officers, employees and designees of CBH and its wholly owned subsidiary and have agreed to permit them to buy such shares at the initial price to public. The number of shares of Common Stock available for sale by CBH to the general public will be reduced to the extent such persons purchase such reserved shares. Any reserved shares not so purchased will be offered by the Underwriters to the general public at the initial price to public. Each of General American Life Insurance Company and Phoenix Home Life Mutual Insurance Company has expressed an interest in purchasing up to $5.0 million of the shares of Common Stock in the Offering, at the initial price to public. See "Business -- Programs and Products." The Common Stock has been approved for quotation on the Nasdaq National Market under the symbol "CLKB." SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR CERTAIN CONSIDERATIONS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ UNDERWRITING PRICE TO PUBLIC DISCOUNT(1) PROCEEDS TO CBH(2) - ------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> Per Share........................... $ $ $ - ------------------------------------------------------------------------------------------------------------ Total(3)............................ $ $ $ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ </TABLE> (1) CBH has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses payable by CBH estimated at $1,500,000. (3) W.T. Wamberg, CBH's chairman (the "Selling Stockholder"), has granted the Underwriters a 30-day option to purchase up to 600,000 additional shares of Common Stock on the same terms and conditions as set forth above, solely to cover over-allotments, if any. If the option is exercised in full, the total Price to Public will be $ and the total Underwriting Discount will be $ . CBH will not receive any of the proceeds from the sale of shares by Mr. Wamberg. See "Principal and Selling Stockholders" and "Underwriting." ------------------------------ The shares of Common Stock are offered subject to prior sale, when, as and if delivered to, and accepted by, the Underwriters and subject to certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify the Offering and to reject orders in whole or in part. It is expected that delivery of the shares of Common Stock will be made on or about , 1998, at the offices of Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New York 10167. BEAR, STEARNS & CO. INC. PIPER JAFFRAY INC. CONNING & COMPANY THE DATE OF THIS PROSPECTUS IS , 1998. both financial expenditures and a reallocation of human resources, will require substantial cash, and will be financed through cash from operations as well as future debt and equity offerings by the Company. The Company has developed the high quality administrative capabilities necessary to service the executive benefit and insurance programs marketed by the Company. At June 30, 1998, the Company administered approximately 187,000 benefit and insurance records for over 1,100 clients. At such date, the insurance policies underlying the Company's employee benefit programs represented a total of $48.5 billion of inforce insurance coverage. Management believes that its strong relationship with insurance companies is due to the Company's history of placing high quality, high persistency policies. As of July 24, 1998, the Company was represented by 36 producers in 32 independently operated sales offices located in 28 cities throughout the United States. These producers and the Company's management are expected to own an aggregate of at least 47.7% of the outstanding Common Stock after giving effect to the Offering. See "Principal and Selling Stockholders." INDUSTRY Beginning in the early 1980s, corporations and banks began using life insurance to offset the costs of employee benefit liabilities with greater frequency than in the past. Since that time, several large insurers, including CIGNA, General American, Great-West, Life Investors and Nationwide, have committed significant resources to develop business-owned life insurance products for use in the insurance-financed employee benefit industry. The use of insurance to offset the costs of employee benefit liabilities historically has been affected by legislative change, both positive and negative. In the past, legislation has reduced the usefulness of traditional pension plans for highly-paid executives which, in turn, has increased the attractiveness of insurance-financed non-qualified benefit plans. On the other hand, legislation has limited interest deductibility on policy loans and restricted the use of business-owned life insurance to employees, officers, directors and 20-percent owners. The insurance-financed employee benefit industry will continue to be affected significantly by legislative change. Consequently, the Company believes that the ability to respond quickly to legislative initiatives is a competitive advantage which can be used to increase market share. The insurance-financed employee benefit industry is highly fragmented. Management believes that many once dominant producers and producer groups have not kept pace with the numerous changes affecting the industry, and are currently faced with a decreasing market share and the inability to provide adequate administrative support to existing clients. The Company believes that those producers and producer groups who have not made the necessary and substantial investment in administrative systems and personnel will continue to experience difficulties in satisfying their clients' growing needs and demands and in meeting complex regulatory requirements. Finally, the Company also believes that the ever-changing legislative and economic environments require product development systems and personnel that are more sophisticated and cost intensive than most producers and producer groups are able to justify economically. Given the highly fragmented nature of the industry, management expects significant consolidation to occur in the future. STRATEGY The Company's goal is to enhance its role as a provider of innovative benefit and insurance solutions to corporations and banks throughout the United States. To accomplish this goal, the Company intends to focus on the following: - Leverage Market Reputation. The Company plans to leverage its reputation as an industry leader to expand current operations and to enter into related businesses. - Design Innovative Programs. The Company intends to use its expertise in program development to create and market innovative, customized programs in order to facilitate the Company's penetration of new markets and to satisfy the financial needs of its clients in a changing regulatory and economic environment. CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING TRANSACTIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." - Diversify Business. The Company plans to identify and enter into related businesses in which its core competencies can be profitably employed. Examples of related businesses include compensation consulting, outsourcing of benefit plan administrative services and marketing to the non-profit sector. - Enhance Administrative Capabilities. The Company intends to continue distinguishing itself from its competitors by enhancing its administrative capabilities, providing high quality administrative services and improving operating margins. - Pursue Consolidating Acquisitions. The Company intends to take advantage of the expected consolidation in the insurance-financed employee benefit market and implement the Company's design, distribution and service model on a wide-scale basis so as to increase market share, acquire producer and management talent, enter into new markets and improve operating margins through integration efficiencies. Subsequent to the completion of the Offering, the Company intends to consider the adoption of a combination of plans to encourage ownership of Common Stock among its employees, producers and directors so as to further align their interests with those of CBH's stockholders. Examples of such plans include a commission reinvestment plan for producers, providing the opportunity for employees to purchase Common Stock through the Company's 401(k) plan and compensating the non-employee members of the Board of Directors with Common Stock. The principal executive office of the Company is located at 2121 San Jacinto Street, Suite 2200, Dallas, Texas 75201-7906, and its telephone number is (214) 871-8717. THE OFFERING Common Stock offered by CBH......... 4,000,000 Shares Common Stock to be outstanding after the Offering........................ 8,059,677 Shares Use of Proceeds..................... For the payment of certain indebtedness of the Company, extinguishment of warrants, consummation of a pending acquisition, purchase of renewal revenues from Mr. Wamberg and The Wamberg Organization and general corporate purposes, including working capital. See "Use of Proceeds," "The Reorganization," "Pending Acquisition" and "Certain Relationships and Related Transactions." Nasdaq National Market Symbol....... CLKB FORWARD-LOOKING STATEMENTS All statements other than statements of historical fact included in this Prospectus, including without limitation statements under "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," regarding the Company's financial position, business strategy and plans and objectives of management of the Company for future operations, are forward-looking statements. When used in this Prospectus, words such as "anticipate," "believe," "estimate," "expect," "intend" and similar expressions, as they relate to the Company or its management, identify forward-looking statements. Such forward-looking statements are based on the beliefs of the Company's management as well as assumptions made by and information currently available to the Company's management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors, such as those disclosed under "Risk Factors," including but not limited to difficulties associated with changes in tax legislation, dependence on key producers, the Company's dependence on persistency of existing business, credit risk related to renewal revenue, acquisition risks, competitive factors and pricing pressures, dependence on certain insurance companies, changes in legal and regulatory requirements and general economic conditions. Such statements reflect the current views of the Company's management with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to the operations, results of operations, growth strategy and liquidity of the Company. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by this paragraph. SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION The following table sets forth summary historical financial information and summary pro forma financial information of the Predecessor Company for the periods ended and as of the dates indicated. The summary historical financial information of the Predecessor Company set forth below as of and for each of the years ended December 31, 1993, 1994, 1995, 1996 and 1997 was derived from the audited financial statements of the Predecessor Company. The summary historical financial information of the Predecessor Company set forth below as of and for the six month periods ended June 30, 1997 and 1998 was derived from the Predecessor Company's unaudited financial statements which, in the opinion of management, reflect all normal recurring adjustments necessary for the fair presentation of such financial statements. The results of operations for the six month period ended June 30, 1998 are not necessarily indicative of the Predecessor Company's results of operations to be expected for the full year. The summary unaudited pro forma financial information of the Predecessor Company set forth below for the year ended December 31, 1997 and the six month period ended June 30, 1997 gives effect to the Reorganization and the acquisition by the Predecessor Company of the business and substantially all the assets of BCS as if such transactions had occurred as of the beginning of the periods presented. The summary unaudited pro forma financial information of the Predecessor Company set forth below for the six month period ended June 30, 1998 gives effect to the Reorganization as if such transactions had occurred as of the beginning of the period presented. The unaudited pro forma income tax expense, net income and earnings per share information of the Predecessor Company set forth below for the year ended December 31, 1997 and the six month period ended June 30, 1998 gives effect to the incurrence of income taxes as if the Predecessor Company had been taxed as a C corporation as of the beginning of the periods presented. The summary unaudited pro forma financial information of the Predecessor Company set forth below does not purport to represent what the Predecessor Company's results of operations would have been if the BCS acquisition had actually occurred as of such dates or what such results will be for any future periods. The following historical and pro forma information of the Predecessor Company should be read in conjunction with information included elsewhere herein, including the financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations." <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------------------- 1993 1994(1) 1995 1996 1997(2) 1997 ACTUAL ACTUAL ACTUAL ACTUAL ACTUAL PRO FORMA ---------- ---------- ----------- ----------- ----------- ------------ <S> <C> <C> <C> <C> <C> <C> STATEMENT OF INCOME INFORMATION: Total revenue..................... --(3) --(3) $26,972,732 $33,243,155 $49,455,419 $ 62,264,393 Commission and fee expense........ --(3) --(3) 16,890,862 21,049,704 32,439,092 41,171,626 ---------- ---------- ----------- ----------- ----------- ------------ Net revenue..................... $7,913,173 $7,343,507 10,081,870 12,193,451 17,016,327 21,092,767 General and administrative expense......................... 6,919,933 7,236,896 7,868,997 8,554,420 11,506,335 14,024,448 Amortization of intangibles....... -- -- -- -- 294,630 883,890 Non-recurring operating expenses........................ -- -- -- -- -- 942,157(5) ---------- ---------- ----------- ----------- ----------- ------------ Income (loss) from operations... 993,240 106,611 2,212,873 3,639,031 5,215,362 5,242,272 Interest and dividend income...... 142,777 171,454 200,577 121,814 188,597 216,600 Interest expense.................. (49,367) (29,396) (6,903) -- (1,111,995) (1,636,620) Miscellaneous income (expense).... (1,169) (100,498) (86,292) (25,416) 1,925 1,925 ---------- ---------- ----------- ----------- ----------- ------------ Total other income (expense).... 92,241 41,560 107,382 96,398 (921,473) (1,418,095) ---------- ---------- ----------- ----------- ----------- ------------ Income (loss) before taxes........ 1,085,481 148,171 2,320,255 3,735,429 4,293,889 3,824,177 Income taxes (benefit)(7)......... 70,517 9,842 102,459 181,444 60,000 1,514,000(8) ---------- ---------- ----------- ----------- ----------- ------------ Net income (loss)............ $1,014,964 $ 138,329 $ 2,217,796 $ 3,553,985 $ 4,233,889 $ 2,310,177 ========== ========== =========== =========== =========== ============ Pro forma income tax expense(8)... -- -- -- -- $ 1,700,000 -- =========== Pro forma net income (loss)(8).... -- -- -- -- $ 2,593,889 -- =========== PER SHARE INFORMATION: Basic earnings (loss) per share... $ .17 $ .02 $ .39 $ .75 $ 1.03 $ .46(9) Diluted earnings (loss) per share........................... .17 .02 .39 .75 .99 .46(9) Dividends per share............... -- .02 .29 .36 1.32 .52 Pro forma basic earnings (loss) per share(8).................... -- -- -- -- .63 -- Pro forma diluted earnings (loss) per share(8).................... -- -- -- -- .61 -- <CAPTION> SIX MONTHS ENDED JUNE 30, -------------------------------------------------------- 1997 1997 1998 1998 ACTUAL PRO FORMA ACTUAL PRO FORMA ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> STATEMENT OF INCOME INFORMATION: Total revenue..................... $11,283,184 $20,633,005 $28,984,959 $28,984,959 Commission and fee expense........ 7,273,519 13,908,713 18,203,681 18,203,681 ----------- ----------- ----------- ----------- Net revenue..................... 4,009,665 6,724,292 10,781,278 10,781,278 General and administrative expense......................... 4,615,101 6,614,571 8,399,696(4) 8,399,696 Amortization of intangibles....... -- 441,945 441,945 441,945 Non-recurring operating expenses........................ -- -- 5,300,000(6) 5,300,000(6) ----------- ----------- ----------- ----------- Income (loss) from operations... (605,436) (332,224) (3,360,363) (3,360,363) Interest and dividend income...... 68,117 108,917 167,624 167,624 Interest expense.................. -- (638,250) (1,803,750) (1,302,104) Miscellaneous income (expense).... 146 146 (141) (141) ----------- ----------- ----------- ----------- Total other income (expense).... 68,263 (529,187) (1,636,267) (1,134,621) ----------- ----------- ----------- ----------- Income (loss) before taxes........ (537,173) (861,411) (4,996,630) (4,494,984) Income taxes (benefit)(7)......... -- (340,000)(8) 14,000 319,000(8) ----------- ----------- ----------- ----------- Net income (loss)............ $ (537,173) $ (521,411) $(5,010,630) $(4,813,984) =========== =========== =========== =========== Pro forma income tax expense(8)... -- -- $ 120,000 -- =========== Pro forma net income (loss)(8).... -- -- $(5,116,630) -- =========== PER SHARE INFORMATION: Basic earnings (loss) per share... $ (.12) $ (.10)(9) $ (1.56) $ (1.16)(9) Diluted earnings (loss) per share........................... (.12) (.10)(9) (1.56) $ (1.16)(9) Dividends per share............... -- -- -- -- Pro forma basic earnings (loss) per share(8).................... -- -- (1.59) -- Pro forma diluted earnings (loss) per share(8).................... -- -- (1.59) -- </TABLE> <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, --------------------------------------------------------------------- 1993 1994(1) 1995 1996 1997 ACTUAL ACTUAL ACTUAL ACTUAL ACTUAL ---------- ---------- ----------- ----------- ----------- <S> <C> <C> <C> <C> <C> BALANCE SHEET INFORMATION: Cash and cash equivalents......... $2,242,595 $3,022,964 $ 3,968,307 $ 4,881,584 $ 3,782,941 Total assets...................... 10,294,798 7,152,186 9,886,651 8,525,454 36,901,890 Current portion of long-term debt............................ -- -- -- -- 4,325,000 Long-term debt, excluding current portion......................... -- -- -- -- 32,838,143 Total liabilities................. 4,222,603 1,991,611 4,099,197 4,714,055 42,581,510 Warrants obligation............... -- -- -- -- -- Stockholders' equity (deficit).... 6,072,195 5,160,575 5,787,454 3,811,399 (5,679,620)(10) <CAPTION> SIX MONTHS ENDED JUNE 30, --------------------------- 1997 1998 ACTUAL ACTUAL ----------- ------------ <S> <C> <C> BALANCE SHEET INFORMATION: Cash and cash equivalents......... $ 2,002,037 $ 6,305,094 Total assets...................... 4,806,135 35,559,778 Current portion of long-term debt............................ -- 4,325,000 Long-term debt, excluding current portion......................... -- 31,388,143 Total liabilities................. 1,409,316 40,646,653 Warrants obligation............... -- 5,300,000(6) Stockholders' equity (deficit).... 3,396,819 (10,386,875)(10) </TABLE> - --------------- (1) The results of operations in 1994 reflect estimated lost renewal commissions and fees of approximately $1 million due to the cessation of operations and subsequent rehabilitation of Confederation Life Insurance Company. (2) Includes the results of operations attributable to the assets acquired from BCS for the period beginning September 1, 1997 (the effective date of the BCS acquisition) and ended December 31, 1997, and reflects the consummation of such acquisition. (3) For the period presented, the Predecessor Company reported net revenue only. Therefore, total revenue and commission and fee expense amounts are not available. (4) During the six months ended June 30, 1998, the Company recognized $525,000 of compensation expense related to the restructuring of the stock grant to Melvin G. Todd, the President and Chief Executive Officer of each of CBH and Clark/Bardes, and $200,000 of compensation expense for consulting services related to the start-up health care business. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Entry into New Business."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001064452_minority_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001064452_minority_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED OR THE CONTEXT OTHERWISE REQUIRES, (I) THE INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTIONS ARE NOT EXERCISED AND THE REORGANIZATION (AS DEFINED IN "--REORGANIZATION AND CORPORATE STRUCTURE") HAS BEEN CONSUMMATED; (II) REFERENCES TO THE "COMPANY" INCLUDE THE COMPANY AND ITS SUBSIDIARIES; AND (III) ALL PRO FORMA INFORMATION CONTAINED IN THIS PROSPECTUS GIVES EFFECT TO THE REORGANIZATION, BORROWINGS UNDER THE CREDIT FACILITY AND THE APPLICATION OF PROCEEDS THEREFROM, ACQUISITIONS COMPLETED AS OF THE DATE HEREOF (THE "COMPLETED ACQUISITIONS"), THE PENDING ACQUISITIONS, AND THE OFFERINGS AND THE APPLICATIONS OF PROCEEDS THEREFROM (COLLECTIVELY, THE "TRANSACTIONS"). THE COMPANY Cumulus Media Inc. ("Cumulus" or the "Company") is a radio broadcasting company focused on the acquisition, operation and development of radio stations in mid-size and smaller radio markets in the U.S. The Company currently owns and operates 67 stations in 15 markets and provides sales and marketing services under LMA agreements (pending FCC approval of acquisition) to 44 stations in 16 markets. Upon consummation of the Pending Acquisitions, the Company will be one of the five largest radio broadcasting companies based on number of stations, and among the fifteen largest based on net revenues, in the U.S. and will own and operate 176 radio stations (124 FM and 52 AM) clustered in 34 U.S. markets. The Company has assembled market-leading clusters with stations comprising the first or second ranked radio group, in terms of revenue share and/or audience share, in all of its U.S. markets. On a pro forma basis, after giving effect to the Transactions, the Company would have generated net revenues of approximately $111.8 million and $27.0 million and Broadcast Cash Flow (as defined under "Certain Definitions and Market and Industry Data") of approximately $23.9 million and $3.1 million for the year ended December 31, 1997 and for the three months ended March 31, 1998, respectively. Cumulus operates and develops clusters of stations in demographically attractive and fast growing mid-size and smaller markets. Relative to the 100 largest markets in the U.S., the Company believes that the mid-size and smaller markets (MSA 100-267) represent attractive operating environments and generally are characterized by: (i) a greater reliance on radio advertising as evidenced by the greater percentage of total media revenues captured by radio than the national average; (ii) rising advertising revenues as the larger national and regional retailers expand into these markets; (iii) small independent operators, many of whom lack the capital to produce high quality locally-originated programming and/or to employ more sophisticated research, marketing, management and sales techniques; and (iv) lower overall susceptibility to economic downturns. The Company believes that the attractive operating characteristics of mid-size and smaller markets coupled with the relaxation of FCC ownership limits create significant opportunities to form clusters within markets and regions that will enable the Company to achieve revenue growth and cost efficiencies. As a result, management believes that the Company can grow revenues at rates equal to or better than larger market growth rates and generate Broadcast Cash Flow margins that are comparable to the higher margins that previously were generally achievable only in the top 100 markets. The Company believes that mid-size and smaller radio markets provide an excellent opportunity to acquire attractive properties at favorable purchase prices due to the size and fragmented nature of ownership in these markets and to the historically greater attention given to the larger markets by radio station acquirors. According to BIA, there are approximately 1,600 FM and 1,000 AM stations in the 168 U.S. radio markets ranked MSA 100-267. These 2,600 stations are owned by approximately 1,100 different operators. In addition, there are nearly 4,700 stations in unranked markets owned by approximately 2,700 operators. The Company's principal strategy is to establish its position as a leader in its markets and regions and to expand into additional mid-size and smaller markets and regions where it believes a leadership position can be achieved by assembling clusters. Cumulus seeks to enhance the quality of radio for listeners and the utility of the radio medium for advertisers in order to maximize the advertising revenues and Broadcast Cash Flow of its radio stations. To that end, Cumulus utilizes extensive research to properly position the formats of stations in a given market and also significantly increases the amount of locally-originated programming. Upon consummation of the Pending Acquisitions, the Company's portfolio of stations will be diversified in terms of format, target audience, geographic location and stage of development. Because of the size and diversity of its portfolio and its individual radio station groups or "clusters", the Company believes it is not reliant upon the performance of any single station or any specific format. MANAGEMENT TEAM Members of the Company's senior management team have an aggregate of over 75 years of experience in the media and radio broadcasting industry. To date, management has successfully negotiated 61 separate acquisition transactions on behalf of the Company. The Company's Executive Chairman and Treasurer, Richard W. Weening, has over 20 years of operating experience in media and information companies including significant experience in corporate finance and mergers and acquisitions. Lewis W. Dickey, Jr., Executive Vice Chairman, has over 15 years of experience in the radio and television broadcasting industry and is a successful owner-operator of radio stations in larger and mid-size markets. Mr. Dickey is also a nationally regarded business strategy and marketing consultant to the radio and television broadcasting industry. William M. Bungeroth, the Company's President, has over 20 years of experience in the radio broadcasting industry and has developed an expertise in enhancing revenue at stations under his management. Mr. Bungeroth manages the broadcasting business along with the General Managers of each market, the Director of Programming and the regional Directors of Sales. The Company's Vice President and Chief Financial Officer, Richard J. Bonick, Jr., has 20 years of experience in the radio broadcasting industry. Mr. Bonick manages the financial reporting and control systems as well as the operational aspects of the Company's broadcasting business. STATION PORTFOLIO The Company has four regions in the U.S. as its primary focus: the Midwest, Southeast, Southwest and Northeast. The following chart sets forth certain information as of June 16, 1998 with respect to the Company's stations in these regions, before and after giving effect to the Pending Acquisitions: <TABLE> <CAPTION> PENDING ACQUISITIONS (1) NUMBER OF STATIONS --------------------------------------------------- NUMBER OF NUMBER OF NUMBER OF TOTAL PRO CURRENTLY STATIONS STATIONS TO STATIONS TO BE FORMA OWNED CURRENTLY BE PLACED ACQUIRED STATIONS MARKET ----------- UNDER UNDER WITHOUT ------------- MARKET(2) RANK FM AM LMA(3) LMA LMA FM - ----------------------- --------- ----- ----- --------------- --------------- ----------------- ------------- <S> <C> <C> <C> <C> <C> <C> <C> MIDWEST REGION Ann Arbor, MI.......... 146 2 2 -- -- -- 2 Appleton-Oshkosh/ Green Bay, WI.............. 138/182 3 2 2 -- -- 5 Dubuque, IA............ 217 1 -- -- -- 4 4 Marion Carbondale, IL.. 209 -- -- 6 -- -- 4 Bismarck, ND........... 259 -- -- -- -- 4 3 Kalamazoo, MI.......... 172 -- -- -- -- 3 2 Faribault-Owatonna- Waseca, MN........... -- -- -- -- -- 8 4 Mankato, MN............ -- -- -- -- -- 3 2 Mason City, IA......... -- -- -- -- -- 7 5 Monroe, MI............. -- -- -- 1 -- -- 1 New Ulm-Springfield- Marshall, MN......... -- -- -- -- -- 3 2 Rochester, MN.......... -- -- -- -- -- 4 2 Toledo, OH............. 76 4 2 -- -- -- 4 SOUTHEAST REGION Albany, GA............. 205 -- -- 6 -- -- 4 Augusta, GA(6)......... 109 4 2 2 -- 1 6(2) Chattanooga, TN........ 102 -- -- 1 3 -- 3 Columbus, GA........... 166 3 2 -- -- -- 3 Florence, SC........... 198 2 2 5 1 -- 7 <CAPTION> ADULTS 12+ REVENUE MARKET(2) AM SHARE (%) RANK(4) - ----------------------- ------------- ------------- ------------- <S> <C> <C> <C> MIDWEST REGION Ann Arbor, MI.......... 2 8.7 1 Appleton-Oshkosh/ Green Bay, WI.............. 2 20.2(5) 2 Dubuque, IA............ 1 34.8 1 Marion Carbondale, IL.. 2 32.4 2 Bismarck, ND........... 1 37.7 1 Kalamazoo, MI.......... 1 22.3 1 Faribault-Owatonna- Waseca, MN........... 4 -- 1 Mankato, MN............ 1 -- 1 Mason City, IA......... 2 -- 1 Monroe, MI............. 0 -- 1 New Ulm-Springfield- Marshall, MN......... 1 -- 1 Rochester, MN.......... 2 -- 2 Toledo, OH............. 2 31.2 2 SOUTHEAST REGION Albany, GA............. 2 23.2 2 Augusta, GA(6)......... 3 29.3 1 Chattanooga, TN........ 1 22.3 1 Columbus, GA........... 2 32.5 1 Florence, SC........... 3 42.2 1 </TABLE> <TABLE> <CAPTION> PENDING ACQUISITIONS (1) NUMBER OF STATIONS --------------------------------------------------- NUMBER OF NUMBER OF NUMBER OF TOTAL PRO CURRENTLY STATIONS STATIONS TO STATIONS TO BE FORMA OWNED CURRENTLY BE PLACED ACQUIRED STATIONS MARKET ----------- UNDER UNDER WITHOUT ------------- MARKET(2) RANK FM AM LMA(3) LMA LMA FM - ----------------------- --------- ----- ----- --------------- --------------- ----------------- ------------- <S> <C> <C> <C> <C> <C> <C> <C> Montgomery, AL......... 143 -- -- 4 -- -- 2 Myrtle Beach, SC....... 175 3 1 2 -- -- 5 Salisbury-Ocean City, MD................... 153 4 2 2 -- -- 6 Savannah, GA........... 154 -- -- 5 -- 2 5 Tallahassee, FL........ 165 3 1 1 -- -- 4 Wilmington, NC......... 178 4 1 -- -- -- 4 SOUTHWEST REGION Abilene, TX............ 224 3 -- 1 -- -- 4 Amarillo, TX........... 188 4 2 -- -- -- 4 Beaumont-Port Arthur, TX................... 128 3 2 -- -- -- 3 Grand Junction, CO..... 247 -- -- -- -- 6 4 Lake Charles, LA....... 203 -- -- -- -- 4 3 Odessa-Midland, TX..... 174 -- -- 5 -- -- 4 Topeka, KS............. 180 -- -- -- -- 4 2 Wichita Falls, TX...... 236 3 -- 1 -- -- 4 NORTHEAST REGION Augusta-Waterville, ME................... 245 -- -- -- -- 6 5 Bangor, ME............. 263 -- -- -- -- 2 2 --- --- --- --- --- --- TOTAL 34 U.S. MARKETS.............. 46 21 44 4 61 124 <CAPTION> ADULTS 12+ REVENUE MARKET(2) AM SHARE (%) RANK(4) - ----------------------- ------------- ------------- ------------- <S> <C> <C> <C> Montgomery, AL......... 2 34.4 1 Myrtle Beach, SC....... 1 20.3 1 Salisbury-Ocean City, MD................... 2 31.2 1 Savannah, GA........... 2 36.0 2 Tallahassee, FL........ 1 32.8 1 Wilmington, NC......... 1 17.3 2 SOUTHWEST REGION Abilene, TX............ 0 26.7 2 Amarillo, TX........... 2 30.6 2 Beaumont-Port Arthur, TX................... 2 29.4 2 Grand Junction, CO..... 2 42.7 1 Lake Charles, LA....... 1 49.7 1 Odessa-Midland, TX..... 1 39.7 1 Topeka, KS............. 2 24.1 2 Wichita Falls, TX...... 0 28.6 2 NORTHEAST REGION Augusta-Waterville, ME................... 1 25.6 1 Bangor, ME............. 0 30.4 1 -- TOTAL 34 U.S. MARKETS.............. 52 </TABLE> - ------------------------ (1) The Company expects to consummate most of the Pending Acquisitions during the third and fourth quarters of 1998, although there can be no assurance that the transactions will be consummated within that time frame. In two of the markets in which there are Pending Acquisitions (Dubuque, IA and Grand Junction, CO), petitions or informal objections have been filed against the Company's FCC assignment applications. In addition, FCC staff inquiries and U.S. Department of Justice ("DOJ") reviews has raised questions concerning whether the Company will be permitted to acquire its full complement of proposed stations in two markets, based on local market concentration concerns. There can be no assurance that applications for other Pending Acquisitions will not be subjected to similar challenges, FCC staff inquiries or DOJ investigations. The FCC staff has also requested additional information regarding attributable media interests of one of the Company's non-attributable investors to determine compliance with the FCC's cross-interest policy in one market. All such petitions, objections and FCC staff inquiries must be resolved before FCC approval can be obtained and the acquisitions consummated. (2) The listed markets correspond to station clusters of the Company, but may vary from the "markets" defined for purposes of the FCC's multiple-ownership rules, which are defined by reference to the signal coverages of the stations involved. Thus, in some instances (E.G., Augusta, GA, Florence, SC, and Salisbury-Ocean City, MD), the number of stations following the Pending Acquisitions as listed in the above table exceeds the number of radio stations specified in the FCC's rules that one person or entity may own, operate or control within a single market, but is still consistent with these rules. (3) Includes radio stations to which the Company currently provides programming and on which the Company sells advertising pursuant to an LMA. (4) Market revenue rankings for Faribault-Owatonna-Waseca, MN, Mankato, MN, Mason City, IA, Rochester, MN and New Ulm-Springfield-Marshall, MN are based on Company estimates. (5) Indicates Adults 12+ share of Appleton-Oshkosh market. (6) The FCC staff recently dismissed the assignment application for one of the six FM stations in Augusta, GA based on the unacceptability of the Company's supplemental engineering analysis in demonstrating compliance with the FCC's multiple-ownership rules. The Company will not be permitted to acquire more than five FM and three AM stations in this market unless it succeeds in obtaining FCC approval to modify the facilities of one or more of its currently owned stations or successfully appeals the FCC staff dismissal of its assignment application for the sixth FM station. The Company also owns and operates five radio stations and one leased frequency in various locations throughout the English-speaking Eastern Caribbean, including among other places, Trinidad, St. Kitts and St. Lucia. ACQUISITION STRATEGY Cumulus has focused its acquisition strategy on acquiring radio broadcasting stations in demographically attractive and fast growing mid-size to smaller markets that it believes offer substantial growth opportunities for the Company. In executing this strategy, the Company adheres to certain key acquisition criteria. Primary among these criteria are targeting markets with: (i) growing economies that are not dependent upon any single industry or employer; (ii) a regional fit with the Company's overall portfolio concentration in the Midwest, Southeast, Southwest and Northeast regions of the U.S.; (iii) close proximity to larger markets that may lead to increased economic expansion into the Company's markets; (iv) previously unconsolidated markets with fragmented individual ownership of stations; (v) the opportunity to assemble a cluster of stations diversified in format to provide a range of target demographic options for advertisers; and (vi) the opportunity to increase sales performance through greater coverage of potential advertisers with more sales people per station. In targeting specific stations, the Company seeks stations with a position of leadership in their market in terms of ratings and format, with the opportunity to significantly increase revenues and Broadcast Cash Flow (as defined under "Certain Definitions and Market and Industry Data"). Additionally, Cumulus seeks high quality technical and operating facilities, capable local management and an FCC license which enables coverage of the entire market. The Company believes that its acquisition strategy will have a number of benefits, including: (i) growth and diversification of revenue and Broadcast Cash Flow across a greater number of stations and markets; (ii) improved Broadcast Cash Flow margins through the consolidation of facilities and the elimination of redundant expenses; (iii) enhanced utilization of certain corporate overhead functions, including its senior management team; (iv) improved leverage in various key vendor negotiations; (v) greater ability to recruit top industry management talent; and (vi) increased overall scale, which should facilitate the Company's future capital raising activities. INTEGRATION OF ACQUIRED BUSINESSES The Company has developed, through its 61 Completed and Pending Acquisitions, an efficient process for the integration of newly acquired properties into the Cumulus portfolio and respective geographic cluster, as well as into the overall Cumulus culture and operating philosophy. The Company's station integration plan consists of six key elements: (i) employ sophisticated market research to refine station formats, enrich the listener experience and increase audience and revenue share relative to other stations in the market; (ii) expand the size and the effectiveness of the sales organization through active recruitment and in-depth training to enhance demand for the station's spot inventory to increase both revenue and margin; (iii) add the station to the Cumulus in-market local area network and install the Company's proprietary system for real-time monitoring by management of station sales and inventory performance; (iv) install Cumulus's centralized networked accounting system for financial reporting, budget control, payables management and cash management; (v) establish revenue and expense budgets consistent with the programming and sales strategy and make necessary cost adjustments; and (vi) implement necessary improvements in transmission facilities, audio processing and studio facilities. From time to time, in compliance with applicable law, the Company will enter into an LMA or consulting arrangement with a target property prior to FCC final approval and the consummation of the acquisition in order to gain a "head start" on the integration process. OPERATING STRATEGY The Company's operating strategy has the following principal components: ASSEMBLE AND MANAGE MARKET CLUSTERS WITH REGIONAL CONCENTRATIONS. The Company has assembled the first or second ranked cluster of stations based on revenue share and/or audience share in all of its U.S. markets in four regional concentrations, the Midwest, Southeast, Southwest and Northeast. The Company believes that by offering a diversity of radio formats within a given market, Cumulus provides customized and efficient marketing solutions to meet advertisers' needs. By assembling market clusters with a regional concentration, the Company believes that it will be able to increase revenues by offering regional coverage of key demographic groups that were previously unavailable to national and regional advertisers. The Company also believes that its cluster approach will allow it to operate its stations with more highly skilled local management teams equipped with greater resources and to eliminate redundant operating and overhead expenses. MAXIMIZE EACH STATION'S POTENTIAL THROUGH POSITIONING AND BRANDING. The Company utilizes extensive market research to refine the programming of each of its stations and to position each as a separate brand within a particular cluster. The objective of this strategy is to optimize each station's potential in terms of audience ratings and revenue share while providing the widest possible range of choice to listeners and advertisers. Such stations can better capitalize on the operating leverage inherent in the radio industry because the costs of operating a radio station are generally fixed and, therefore, increased revenues generally result in disproportionately larger increases in Broadcast Cash Flow (as defined under "Certain Definitions and Market and Industry Data"). FOCUS ON PROGRAMMING. A principal Company operating strategy is to enhance each station's programming appeal, including both the quality and quantity of local programming as a means of enriching the listener experience. The Company believes that adopting this commitment to high quality, locally originated programming will provide its stations with a competitive advantage and increase each station's audience share. Moreover, the Company believes that the efficiencies and scale afforded by the operation of multiple stations in the same market and region working together with information technology make it possible to substantially improve programming and the quality of the listener experience without a comparable increase in cost. EXPAND DEDICATED SALES FORCE AND OPTIMIZE INVENTORY MANAGEMENT. Underpinning the Company's strategy for optimizing the potential of each station within a cluster is the practice of dedicating a sales force for each of its stations. The Company believes that many of the acquired stations have dramatically underperformed in sales, due primarily to undersized sales staffs responsible for selling air time on multiple stations, thus diluting their ability to cover all of the potential advertisers with strong advocates for each station. The Company believes its practice of utilizing a dedicated sales force for each station will attract a larger number of advertisers thereby increasing the demand for each station's commercial spot inventory. Accordingly, the Company has significantly expanded the number of salespeople for each of its stations. Salespeople are typically compensated exclusively on a commission basis. Also, in each of its market clusters, the Company utilizes Internet-based sales reporting systems to monitor its sales activity and to formulate and implement rate structure and inventory management on a continual basis. INCREASE RADIO REVENUE SHARE. The Company believes that its strategy of larger and dedicated station sales staffs, brand development, regional concentration, and market clusters will help increase advertising volume and revenues from existing customers and increase the number and scope of new advertisers. This strategy enables the Company to compete more effectively with other local and regional media such as newspapers and cable and broadcast television stations, because it can now offer a competitively priced alternative to reach the target audience that advertisers desire. The Company's sales management team has substantial experience in the areas of generating new sources of revenues including promotional events, retailer co-op advertising and other sources including business-to-business advertising. IMPLEMENT STRICT COST CONTROLS. The Company's management imposes strict financial reporting requirements and expense budget limitations on each of its stations. In addition, management maintains a centralized accounting system which allows it to monitor the performance and operations of each of its stations. Management believes such centralization allows the Company to achieve expense savings in certain areas, including purchasing and administrative expenses. Management believes that the Company will also achieve expense savings through the elimination of certain duplicate costs within its markets and market clusters. IMPLEMENT INTERNET-BASED MANAGEMENT INFORMATION SYSTEMS. The Company is implementing a proprietary application using Internet software standards to support daily sales and inventory performance reporting by station, by market and by cluster. The Company has completed implementation of the daily sales reporting application and anticipates full implementation of the inventory performance application by the end of 1998. Upon full implementation, this application will allow the Company to compare each station's actual performance (including revenue and inventory management) to budget on a regular basis and deploy resources on a timely basis to those stations not achieving budgetary goals. RECRUIT AND RETAIN SKILLED MANAGERS. The Company believes that operating a top-ranked cluster of stations in a market will enable the Company to recruit and retain high caliber radio management personnel who might otherwise be attracted to larger markets. The Company believes that regional management and coordination will enable it to maximize the benefits of operating a growing number of stations in geographically diverse locations, while maintaining controls over local operations. Local management is also central to the Company's strategy and is primarily responsible for building and developing a sales team capable of converting the stations' audience rankings into revenues. The Company's general managers and sales managers are motivated through incentive compensation based primarily upon their station's cash flow performance and secondarily on their ability to convert their station's audience share into market revenue share. REORGANIZATION AND CORPORATE STRUCTURE In March 1998, the Company amended its articles of incorporation to change its name from Cumulus Holdings, Inc. to Cumulus Media Inc. Until immediately prior to the closing of the Offerings, all of the outstanding common stock of the Company will have been held by Cumulus Media, LLC, a Wisconsin limited liability company ("Media LLC"), whose members include State of Wisconsin Investment Board, NationsBanc Capital Corp. ("NationsBanc"), Heller Equity Capital Corporation, The Northwestern Mutual Life Insurance Company ("NML") and certain members of the Company's management or affiliates of management. See "Principal and Selling Stockholders." Immediately prior to the closing of the Offerings, (i) all of the shares of the NML Preferred Stock will be exchanged for shares of Series A Preferred Stock as described below; and (ii) Media LLC will be liquidated and the shares of Class A Common Stock, Class B Common Stock and Class C Common Stock held by Media LLC will be distributed by Media LLC to its members in liquidation (the "Reorganization"). All shares of the Company's 12% Class A Cumulative Preferred Stock (the "NML Preferred Stock") which were held by NML immediately prior to the Offerings plus all accrued and unpaid dividends thereon as of the exchange date will be exchanged for shares of Series A Preferred Stock having an equivalent aggregate liquidation value pursuant to the Preferred Stock Offering. As of June 1, 1998, the liquidation value of the NML Preferred Stock was approximately $34.2 million. Subject to certain conditions, the Series A Preferred Stock will be exchangeable on any dividend payment date, at the Company's option, for the % Subordinated Exchange Debentures due 2009 (the "Exchange Debentures"). See "Description of Capital Stock." Upon the consummation of the Reorganization, the capital stock of the Company will consist of the Class A Common Stock, the Class B Common Stock, the Class C Common Stock and the Series A Preferred Stock. The Company's U.S. radio operations are conducted primarily through Cumulus Broadcasting, Inc., a Nevada corporation ("Broadcasting") and a wholly-owned subsidiary of the Company, which owns the radio stations acquired pursuant to asset purchase agreements. The Company also owns the stock of radio groups or stations acquired pursuant to stock purchase agreements. Cumulus Licensing Corp., a Nevada corporation ("Licensing") and a wholly-owned subsidiary of Broadcasting, holds virtually all the FCC licenses for the Company's stations. Certain other FCC licenses are held by wholly-owned subsidiaries of the Company and the Company intends in the near future to transfer those licenses to Licensing or to newly created subsidiaries that hold only FCC licenses. Caribbean Communications Company Ltd., a corporation organized under the laws of Montserrat ("CCC") and a wholly-owned subsidiary of the Company, owns radio stations throughout the English-speaking Eastern Caribbean, including among other places, Trinidad, St. Kitts and St. Lucia. CCC is currently constructing an FM station in Barbados and Tortola, BVI. The Company will be the issuer of the Class A Common Stock, the Series A Preferred Stock and the Notes, and is the borrower under the Credit Facility. Broadcasting and Licensing are guarantors of the Company's obligations under the Credit Facility. See "Description of the Credit Facility and Notes." PENDING ACQUISITIONS The Company has entered into definitive purchase agreements to acquire 109 stations in 28 markets for an aggregate purchase price of approximately $245.1 million in transactions which have not yet been consummated (the "Pending Acquisitions"). The Company expects to consummate most of the Pending Acquisitions during the third and fourth quarters of 1998, although there can be no assurance that the transactions will be consummated within that time frame. In two of the markets in which there are Pending Acquisitions (Dubuque, IA and Grand Junction, CO), petitions or informal objections have been filed against the Company's FCC assignment applications. In several other markets, FCC staff questions and/or requests for additional information relating to local market concentration or the FCC's cross-interest policy have been raised with respect to pending assignment applications. All such petitions, objections and FCC staff inquiries must be resolved before FCC approval can be obtained and the acquisitions consummated. There can be no assurances that other Pending Acquisitions will not be subjected to similar challenges, or that the Pending Acquisitions will be consummated. The Company believes that the proceeds of the Offerings will be sufficient to finance the consummation of the Pending Acquisitions. The Company from time to time enters into non-binding arrangements with potential sellers to conduct a diligence review of their radio stations and propose the terms of a possible purchase agreement. At the present time, discussions with potential sellers are at an early stage and no diligence reviews have been commenced. FINANCING PLAN The Company intends to use the proceeds of the Offerings to finance the Pending Acquisitions and to repay certain indebtedness. The following table presents the sources and uses of funds, pro forma for the Offerings, the acquisitions consummated after March 31, 1998 (the "Subsequent Acquisitions") and the Pending Acquisitions as if such transactions had occurred as of March 31, 1998: <TABLE> <CAPTION> (DOLLARS IN THOUSANDS) --------------------- <S> <C> SOURCES OF FUNDS: Common Stock offered to public....................................... $ 100,000 Debt Offering........................................................ 150,000 Preferred Stock offered to public(1)................................. 91,488 Cash on hand......................................................... 21,916 Escrow funds(2)...................................................... 12,522 -------- Total............................................................ $ 375,926 -------- -------- USES OF FUNDS: Purchase price of the Subsequent Acquisitions and the Pending Acquisitions....................................................... $ 279,532 Repayment of Credit Facility(3)...................................... 79,696 Fees and expenses.................................................... 16,698 -------- Total............................................................ $ 375,926 -------- -------- </TABLE> - ------------------------------ (1) Excludes exchange of NML Preferred Stock concurrent with the Preferred Stock Offering. The Company will not receive any proceeds from the exchange of the NML Preferred Stock for the Series A Preferred Stock. (2) Represents funds deposited into escrow by the Company in connection with the Subsequent and Pending Acquisitions. (3) Affiliates of Lehman Brothers Inc. act as arranger and lender under the Credit Facility. The Company is an Illinois corporation with its principal executive offices located at 111 East Kilbourn Ave., Suite 2700, Milwaukee, Wisconsin 53202, telephone number (414) 615-2800. THE STOCK OFFERINGS <TABLE> <S> <C> Class A Common Stock Offered by the Company....... 6,250,000 shares Class A Common Stock Offered by the Selling Stockholder...................... 1,170,000 shares ---------------- Total......................................... 7,420,000 shares Class A Common Stock Offered to Public: U.S. Offering................................... 5,936,000 shares International Offering.......................... 1,484,000 shares ---------------- Total......................................... 7,420,000 shares Common Stock Outstanding after the Stock Offerings(1): Class A Common Stock(2)......................... 7,613,450 shares Class B Common Stock............................ 8,711,367 shares Class C Common Stock............................ 2,433,808 shares ---------------- Total......................................... 18,758,625 shares Voting Rights..................................... Except with respect to voting and conversion, the rights of holders of Class A Common Stock, Class B Common Stock and Class C Common Stock are identical. Except upon the occurrence of certain events, holders of the Class B Common Stock are not entitled to vote, whereas holders of the Class A Common Stock are entitled to one vote per share and subject to certain exceptions holders of the Class C Common Stock are entitled to ten votes per share. Under certain conditions and subject to prior governmental approval, each share of Class B Common Stock is convertible into one share of Class A Common Stock or one share of Class C Common Stock at the option of the holder, and each share of Class C Common Stock is convertible into one share of Class A Common Stock at the option of the holder. See "Description of Capital Stock." Use of Proceeds................................... Approximately $245.1 million of the net proceeds of the Offerings will be used to finance the Pending Acquisitions. The balance of the net proceeds of the Offerings will be used to repay the principal amount of indebtedness currently outstanding under the Credit Facility for which affiliates of Lehman Brothers Inc. act as arranger and lender. See "Use of Proceeds" and "Description of Credit Facility and Notes." Proposed Nasdaq National Market Symbol.......................................... CMLS Concurrent Offerings.............................. Concurrently with the Stock Offerings, the Company is offering 125,000 shares of its % Series A Cumulative Exchangeable Redeemable Preferred Stock due 2009 (with a liquidation preference of $1,000 per share) and $150 million aggregate principal amount of its % Senior Subordinated Notes due 2008. Each Offering is conditioned upon consummation of each of the other Offerings. See "Risk Factors -- Significant Capital Requirements" and "Use of Proceeds." </TABLE> - -------------------------- (1) As of March 31, 1998, the Company had 1,000 shares of common stock outstanding. Pursuant to the Reorganization, Media LLC will exchange all 1,000 shares of outstanding common stock of the Company for 193,450 shares of Class A Common Stock, 9,881,367 shares of Class B Common Stock and 2,433,808 shares of Class C Common Stock. Media LLC will be liquidated and such shares will be distributed to its members in liquidation. Of the 9,881,367 shares of Class B Common Stock distributed to Media LLC's members, 1,170,000 of such shares will be converted into shares of Class A Common Stock and are being offered hereby by the Selling Stockholder. (2) If the Underwriters' over-allotment options were exercised in full, 8,550,950 shares of Class A Common Stock would be outstanding after the Stock Offerings. See "Underwriting" and "Description of Capital Stock."
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED OR THE CONTEXT OTHERWISE REQUIRES, (I) THE INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTIONS ARE NOT EXERCISED AND THE REORGANIZATION (AS DEFINED IN "--REORGANIZATION AND CORPORATE STRUCTURE") HAS BEEN CONSUMMATED; (II) REFERENCES TO THE "COMPANY" INCLUDE THE COMPANY AND ITS SUBSIDIARIES; AND (III) ALL PRO FORMA INFORMATION CONTAINED IN THIS PROSPECTUS GIVES EFFECT TO THE REORGANIZATION, BORROWINGS UNDER THE CREDIT FACILITY AND THE APPLICATION OF PROCEEDS THEREFROM, ACQUISITIONS COMPLETED AS OF THE DATE HEREOF (THE "COMPLETED ACQUISITIONS"), THE PENDING ACQUISITIONS, AND THE OFFERINGS AND THE APPLICATIONS OF PROCEEDS THEREFROM (COLLECTIVELY, THE "TRANSACTIONS"). THE COMPANY Cumulus Media Inc. ("Cumulus" or the "Company") is a radio broadcasting company focused on the acquisition, operation and development of radio stations in mid-size and smaller radio markets in the U.S. The Company currently owns and operates 67 stations in 15 markets and provides sales and marketing services under LMA agreements (pending FCC approval of acquisition) to 44 stations in 16 markets. Upon consummation of the Pending Acquisitions, the Company will be one of the five largest radio broadcasting companies based on number of stations, and among the fifteen largest based on net revenues, in the U.S. and will own and operate 176 radio stations (124 FM and 52 AM) clustered in 34 U.S. markets. The Company has assembled market-leading clusters with stations comprising the first or second ranked radio group, in terms of revenue share and/or audience share, in all of its U.S. markets. On a pro forma basis, after giving effect to the Transactions, the Company would have generated net revenues of approximately $111.8 million and $27.0 million and Broadcast Cash Flow (as defined under "Certain Definitions and Market and Industry Data") of approximately $23.9 million and $3.1 million for the year ended December 31, 1997 and for the three months ended March 31, 1998, respectively. Cumulus operates and develops clusters of stations in demographically attractive and fast growing mid-size and smaller markets. Relative to the 100 largest markets in the U.S., the Company believes that the mid-size and smaller markets (MSA 100-267) represent attractive operating environments and generally are characterized by: (i) a greater reliance on radio advertising as evidenced by the greater percentage of total media revenues captured by radio than the national average; (ii) rising advertising revenues as the larger national and regional retailers expand into these markets; (iii) small independent operators, many of whom lack the capital to produce high quality locally-originated programming and/or to employ more sophisticated research, marketing, management and sales techniques; and (iv) lower overall susceptibility to economic downturns. The Company believes that the attractive operating characteristics of mid-size and smaller markets coupled with the relaxation of FCC ownership limits create significant opportunities to form clusters within markets and regions that will enable the Company to achieve revenue growth and cost efficiencies. As a result, management believes that the Company can grow revenues at rates equal to or better than larger market growth rates and generate Broadcast Cash Flow margins that are comparable to the higher margins that previously were generally achievable only in the top 100 markets. The Company believes that mid-size and smaller radio markets provide an excellent opportunity to acquire attractive properties at favorable purchase prices due to the size and fragmented nature of ownership in these markets and to the historically greater attention given to the larger markets by radio station acquirors. According to BIA, there are approximately 1,600 FM and 1,000 AM stations in the 168 U.S. radio markets ranked MSA 100-267. These 2,600 stations are owned by approximately 1,100 different operators. In addition, there are nearly 4,700 stations in unranked markets owned by approximately 2,700 operators. The Company's principal strategy is to establish its position as a leader in its markets and regions and to expand into additional mid-size and smaller markets and regions where it believes a leadership position can be achieved by assembling clusters. Cumulus seeks to enhance the quality of radio for listeners and the utility of the radio medium for advertisers in order to maximize the advertising revenues and Broadcast Cash Flow of its radio stations. To that end, Cumulus utilizes extensive research to properly position the formats of stations in a given market and also significantly increases the amount of locally-originated programming. Upon consummation of the Pending Acquisitions, the Company's portfolio of stations will be diversified in terms of format, target audience, geographic location and stage of development. Because of the size and diversity of its portfolio and its individual radio station groups or "clusters", the Company believes it is not reliant upon the performance of any single station or any specific format. MANAGEMENT TEAM Members of the Company's senior management team have an aggregate of over 75 years of experience in the media and radio broadcasting industry. To date, management has successfully negotiated 61 separate acquisition transactions on behalf of the Company. The Company's Executive Chairman and Treasurer, Richard W. Weening, has over 20 years of operating experience in media and information companies including significant experience in corporate finance and mergers and acquisitions. Lewis W. Dickey, Jr., Executive Vice Chairman, has over 15 years of experience in the radio and television broadcasting industry and is a successful owner-operator of radio stations in larger and mid-size markets. Mr. Dickey is also a nationally regarded business strategy and marketing consultant to the radio and television broadcasting industry. William M. Bungeroth, the Company's President, has over 20 years of experience in the radio broadcasting industry and has developed an expertise in enhancing revenue at stations under his management. Mr. Bungeroth manages the broadcasting business along with the General Managers of each market, the Director of Programming and the regional Directors of Sales. The Company's Vice President and Chief Financial Officer, Richard J. Bonick, Jr., has 20 years of experience in the radio broadcasting industry. Mr. Bonick manages the financial reporting and control systems as well as the operational aspects of the Company's broadcasting business. STATION PORTFOLIO The Company has four regions in the U.S. as its primary focus: the Midwest, Southeast, Southwest and Northeast. The following chart sets forth certain information as of June 16, 1998 with respect to the Company's stations in these regions, before and after giving effect to the Pending Acquisitions: <TABLE> <CAPTION> PENDING ACQUISITIONS (1) NUMBER OF STATIONS --------------------------------------------------- NUMBER OF NUMBER OF NUMBER OF TOTAL PRO CURRENTLY STATIONS STATIONS TO STATIONS TO BE FORMA OWNED CURRENTLY BE PLACED ACQUIRED STATIONS MARKET ----------- UNDER UNDER WITHOUT ------------- MARKET(2) RANK FM AM LMA(3) LMA LMA FM - ----------------------- --------- ----- ----- --------------- --------------- ----------------- ------------- <S> <C> <C> <C> <C> <C> <C> <C> MIDWEST REGION Ann Arbor, MI.......... 146 2 2 -- -- -- 2 Appleton-Oshkosh/ Green Bay, WI.............. 138/182 3 2 2 -- -- 5 Dubuque, IA............ 217 1 -- -- -- 4 4 Marion Carbondale, IL.. 209 -- -- 6 -- -- 4 Bismarck, ND........... 259 -- -- -- -- 4 3 Kalamazoo, MI.......... 172 -- -- -- -- 3 2 Faribault-Owatonna- Waseca, MN........... -- -- -- -- -- 8 4 Mankato, MN............ -- -- -- -- -- 3 2 Mason City, IA......... -- -- -- -- -- 7 5 Monroe, MI............. -- -- -- 1 -- -- 1 New Ulm-Springfield- Marshall, MN......... -- -- -- -- -- 3 2 Rochester, MN.......... -- -- -- -- -- 4 2 Toledo, OH............. 76 4 2 -- -- -- 4 SOUTHEAST REGION Albany, GA............. 205 -- -- 6 -- -- 4 Augusta, GA(6)......... 109 4 2 2 -- 1 6(2) Chattanooga, TN........ 102 -- -- 1 3 -- 3 Columbus, GA........... 166 3 2 -- -- -- 3 Florence, SC........... 198 2 2 5 1 -- 7 <CAPTION> ADULTS 12+ REVENUE MARKET(2) AM SHARE (%) RANK(4) - ----------------------- ------------- ------------- ------------- <S> <C> <C> <C> MIDWEST REGION Ann Arbor, MI.......... 2 8.7 1 Appleton-Oshkosh/ Green Bay, WI.............. 2 20.2(5) 2 Dubuque, IA............ 1 34.8 1 Marion Carbondale, IL.. 2 32.4 2 Bismarck, ND........... 1 37.7 1 Kalamazoo, MI.......... 1 22.3 1 Faribault-Owatonna- Waseca, MN........... 4 -- 1 Mankato, MN............ 1 -- 1 Mason City, IA......... 2 -- 1 Monroe, MI............. 0 -- 1 New Ulm-Springfield- Marshall, MN......... 1 -- 1 Rochester, MN.......... 2 -- 2 Toledo, OH............. 2 31.2 2 SOUTHEAST REGION Albany, GA............. 2 23.2 2 Augusta, GA(6)......... 3 29.3 1 Chattanooga, TN........ 1 22.3 1 Columbus, GA........... 2 32.5 1 Florence, SC........... 3 42.2 1 </TABLE> <TABLE> <CAPTION> PENDING ACQUISITIONS (1) NUMBER OF STATIONS --------------------------------------------------- NUMBER OF NUMBER OF NUMBER OF TOTAL PRO CURRENTLY STATIONS STATIONS TO STATIONS TO BE FORMA OWNED CURRENTLY BE PLACED ACQUIRED STATIONS MARKET ----------- UNDER UNDER WITHOUT ------------- MARKET(2) RANK FM AM LMA(3) LMA LMA FM - ----------------------- --------- ----- ----- --------------- --------------- ----------------- ------------- <S> <C> <C> <C> <C> <C> <C> <C> Montgomery, AL......... 143 -- -- 4 -- -- 2 Myrtle Beach, SC....... 175 3 1 2 -- -- 5 Salisbury-Ocean City, MD................... 153 4 2 2 -- -- 6 Savannah, GA........... 154 -- -- 5 -- 2 5 Tallahassee, FL........ 165 3 1 1 -- -- 4 Wilmington, NC......... 178 4 1 -- -- -- 4 SOUTHWEST REGION Abilene, TX............ 224 3 -- 1 -- -- 4 Amarillo, TX........... 188 4 2 -- -- -- 4 Beaumont-Port Arthur, TX................... 128 3 2 -- -- -- 3 Grand Junction, CO..... 247 -- -- -- -- 6 4 Lake Charles, LA....... 203 -- -- -- -- 4 3 Odessa-Midland, TX..... 174 -- -- 5 -- -- 4 Topeka, KS............. 180 -- -- -- -- 4 2 Wichita Falls, TX...... 236 3 -- 1 -- -- 4 NORTHEAST REGION Augusta-Waterville, ME................... 245 -- -- -- -- 6 5 Bangor, ME............. 263 -- -- -- -- 2 2 --- --- --- --- --- --- TOTAL 34 U.S. MARKETS.............. 46 21 44 4 61 124 <CAPTION> ADULTS 12+ REVENUE MARKET(2) AM SHARE (%) RANK(4) - ----------------------- ------------- ------------- ------------- <S> <C> <C> <C> Montgomery, AL......... 2 34.4 1 Myrtle Beach, SC....... 1 20.3 1 Salisbury-Ocean City, MD................... 2 31.2 1 Savannah, GA........... 2 36.0 2 Tallahassee, FL........ 1 32.8 1 Wilmington, NC......... 1 17.3 2 SOUTHWEST REGION Abilene, TX............ 0 26.7 2 Amarillo, TX........... 2 30.6 2 Beaumont-Port Arthur, TX................... 2 29.4 2 Grand Junction, CO..... 2 42.7 1 Lake Charles, LA....... 1 49.7 1 Odessa-Midland, TX..... 1 39.7 1 Topeka, KS............. 2 24.1 2 Wichita Falls, TX...... 0 28.6 2 NORTHEAST REGION Augusta-Waterville, ME................... 1 25.6 1 Bangor, ME............. 0 30.4 1 -- TOTAL 34 U.S. MARKETS.............. 52 </TABLE> - ------------------------ (1) The Company expects to consummate most of the Pending Acquisitions during the third and fourth quarters of 1998, although there can be no assurance that the transactions will be consummated within that time frame. In two of the markets in which there are Pending Acquisitions (Dubuque, IA and Grand Junction, CO), petitions or informal objections have been filed against the Company's FCC assignment applications. In addition, FCC staff inquiries and U.S. Department of Justice ("DOJ") reviews has raised questions concerning whether the Company will be permitted to acquire its full complement of proposed stations in two markets, based on local market concentration concerns. There can be no assurance that applications for other Pending Acquisitions will not be subjected to similar challenges, FCC staff inquiries or DOJ investigations. The FCC staff has also requested additional information regarding attributable media interests of one of the Company's non-attributable investors to determine compliance with the FCC's cross-interest policy in one market. All such petitions, objections and FCC staff inquiries must be resolved before FCC approval can be obtained and the acquisitions consummated. (2) The listed markets correspond to station clusters of the Company, but may vary from the "markets" defined for purposes of the FCC's multiple-ownership rules, which are defined by reference to the signal coverages of the stations involved. Thus, in some instances (E.G., Augusta, GA, Florence, SC, and Salisbury-Ocean City, MD), the number of stations following the Pending Acquisitions as listed in the above table exceeds the number of radio stations specified in the FCC's rules that one person or entity may own, operate or control within a single market, but is still consistent with these rules. (3) Includes radio stations to which the Company currently provides programming and on which the Company sells advertising pursuant to an LMA. (4) Market revenue rankings for Faribault-Owatonna-Waseca, MN, Mankato, MN, Mason City, IA, Rochester, MN and New Ulm-Springfield-Marshall, MN are based on Company estimates. (5) Indicates Adults 12+ share of Appleton-Oshkosh market. (6) The FCC staff recently dismissed the assignment application for one of the six FM stations in Augusta, GA based on the unacceptability of the Company's supplemental engineering analysis in demonstrating compliance with the FCC's multiple-ownership rules. The Company will not be permitted to acquire more than five FM and three AM stations in this market unless it succeeds in obtaining FCC approval to modify the facilities of one or more of its currently owned stations or successfully appeals the FCC staff dismissal of its assignment application for the sixth FM station. The Company also owns and operates five radio stations and one leased frequency in various locations throughout the English-speaking Eastern Caribbean, including among other places, Trinidad, St. Kitts and St. Lucia. ACQUISITION STRATEGY Cumulus has focused its acquisition strategy on acquiring radio broadcasting stations in demographically attractive and fast growing mid-size to smaller markets that it believes offer substantial growth opportunities for the Company. In executing this strategy, the Company adheres to certain key acquisition criteria. Primary among these criteria are targeting markets with: (i) growing economies that are not dependent upon any single industry or employer; (ii) a regional fit with the Company's overall portfolio concentration in the Midwest, Southeast, Southwest and Northeast regions of the U.S.; (iii) close proximity to larger markets that may lead to increased economic expansion into the Company's markets; (iv) previously unconsolidated markets with fragmented individual ownership of stations; (v) the opportunity to assemble a cluster of stations diversified in format to provide a range of target demographic options for advertisers; and (vi) the opportunity to increase sales performance through greater coverage of potential advertisers with more sales people per station. In targeting specific stations, the Company seeks stations with a position of leadership in their market in terms of ratings and format, with the opportunity to significantly increase revenues and Broadcast Cash Flow (as defined under "Certain Definitions and Market and Industry Data"). Additionally, Cumulus seeks high quality technical and operating facilities, capable local management and an FCC license which enables coverage of the entire market. The Company believes that its acquisition strategy will have a number of benefits, including: (i) growth and diversification of revenue and Broadcast Cash Flow across a greater number of stations and markets; (ii) improved Broadcast Cash Flow margins through the consolidation of facilities and the elimination of redundant expenses; (iii) enhanced utilization of certain corporate overhead functions, including its senior management team; (iv) improved leverage in various key vendor negotiations; (v) greater ability to recruit top industry management talent; and (vi) increased overall scale, which should facilitate the Company's future capital raising activities. INTEGRATION OF ACQUIRED BUSINESSES The Company has developed, through its 61 Completed and Pending Acquisitions, an efficient process for the integration of newly acquired properties into the Cumulus portfolio and respective geographic cluster, as well as into the overall Cumulus culture and operating philosophy. The Company's station integration plan consists of six key elements: (i) employ sophisticated market research to refine station formats, enrich the listener experience and increase audience and revenue share relative to other stations in the market; (ii) expand the size and the effectiveness of the sales organization through active recruitment and in-depth training to enhance demand for the station's spot inventory to increase both revenue and margin; (iii) add the station to the Cumulus in-market local area network and install the Company's proprietary system for real-time monitoring by management of station sales and inventory performance; (iv) install Cumulus's centralized networked accounting system for financial reporting, budget control, payables management and cash management; (v) establish revenue and expense budgets consistent with the programming and sales strategy and make necessary cost adjustments; and (vi) implement necessary improvements in transmission facilities, audio processing and studio facilities. From time to time, in compliance with applicable law, the Company will enter into an LMA or consulting arrangement with a target property prior to FCC final approval and the consummation of the acquisition in order to gain a "head start" on the integration process. OPERATING STRATEGY The Company's operating strategy has the following principal components: ASSEMBLE AND MANAGE MARKET CLUSTERS WITH REGIONAL CONCENTRATIONS. The Company has assembled the first or second ranked cluster of stations based on revenue share and/or audience share in all of its U.S. markets in four regional concentrations, the Midwest, Southeast, Southwest and Northeast. The Company believes that by offering a diversity of radio formats within a given market, Cumulus provides customized and efficient marketing solutions to meet advertisers' needs. By assembling market clusters with a regional concentration, the Company believes that it will be able to increase revenues by offering regional coverage of key demographic groups that were previously unavailable to national and regional advertisers. The Company also believes that its cluster approach will allow it to operate its stations with more highly skilled local management teams equipped with greater resources and to eliminate redundant operating and overhead expenses. MAXIMIZE EACH STATION'S POTENTIAL THROUGH POSITIONING AND BRANDING. The Company utilizes extensive market research to refine the programming of each of its stations and to position each as a separate brand within a particular cluster. The objective of this strategy is to optimize each station's potential in terms of audience ratings and revenue share while providing the widest possible range of choice to listeners and advertisers. Such stations can better capitalize on the operating leverage inherent in the radio industry because the costs of operating a radio station are generally fixed and, therefore, increased revenues generally result in disproportionately larger increases in Broadcast Cash Flow (as defined under "Certain Definitions and Market and Industry Data"). FOCUS ON PROGRAMMING. A principal Company operating strategy is to enhance each station's programming appeal, including both the quality and quantity of local programming as a means of enriching the listener experience. The Company believes that adopting this commitment to high quality, locally originated programming will provide its stations with a competitive advantage and increase each station's audience share. Moreover, the Company believes that the efficiencies and scale afforded by the operation of multiple stations in the same market and region working together with information technology make it possible to substantially improve programming and the quality of the listener experience without a comparable increase in cost. EXPAND DEDICATED SALES FORCE AND OPTIMIZE INVENTORY MANAGEMENT. Underpinning the Company's strategy for optimizing the potential of each station within a cluster is the practice of dedicating a sales force for each of its stations. The Company believes that many of the acquired stations have dramatically underperformed in sales, due primarily to undersized sales staffs responsible for selling air time on multiple stations, thus diluting their ability to cover all of the potential advertisers with strong advocates for each station. The Company believes its practice of utilizing a dedicated sales force for each station will attract a larger number of advertisers thereby increasing the demand for each station's commercial spot inventory. Accordingly, the Company has significantly expanded the number of salespeople for each of its stations. Salespeople are typically compensated exclusively on a commission basis. Also, in each of its market clusters, the Company utilizes Internet-based sales reporting systems to monitor its sales activity and to formulate and implement rate structure and inventory management on a continual basis. INCREASE RADIO REVENUE SHARE. The Company believes that its strategy of larger and dedicated station sales staffs, brand development, regional concentration, and market clusters will help increase advertising volume and revenues from existing customers and increase the number and scope of new advertisers. This strategy enables the Company to compete more effectively with other local and regional media such as newspapers and cable and broadcast television stations, because it can now offer a competitively priced alternative to reach the target audience that advertisers desire. The Company's sales management team has substantial experience in the areas of generating new sources of revenues including promotional events, retailer co-op advertising and other sources including business-to-business advertising. IMPLEMENT STRICT COST CONTROLS. The Company's management imposes strict financial reporting requirements and expense budget limitations on each of its stations. In addition, management maintains a centralized accounting system which allows it to monitor the performance and operations of each of its stations. Management believes such centralization allows the Company to achieve expense savings in certain areas, including purchasing and administrative expenses. Management believes that the Company will also achieve expense savings through the elimination of certain duplicate costs within its markets and market clusters. IMPLEMENT INTERNET-BASED MANAGEMENT INFORMATION SYSTEMS. The Company is implementing a proprietary application using Internet software standards to support daily sales and inventory performance reporting by station, by market and by cluster. The Company has completed implementation of the daily sales reporting application and anticipates full implementation of the inventory performance application by the end of 1998. Upon full implementation, this application will allow the Company to compare each station's actual performance (including revenue and inventory management) to budget on a regular basis and deploy resources on a timely basis to those stations not achieving budgetary goals. RECRUIT AND RETAIN SKILLED MANAGERS. The Company believes that operating a top-ranked cluster of stations in a market will enable the Company to recruit and retain high caliber radio management personnel who might otherwise be attracted to larger markets. The Company believes that regional management and coordination will enable it to maximize the benefits of operating a growing number of stations in geographically diverse locations, while maintaining controls over local operations. Local management is also central to the Company's strategy and is primarily responsible for building and developing a sales team capable of converting the stations' audience rankings into revenues. The Company's general managers and sales managers are motivated through incentive compensation based primarily upon their station's cash flow performance and secondarily on their ability to convert their station's audience share into market revenue share. REORGANIZATION AND CORPORATE STRUCTURE In March 1998, the Company amended its articles of incorporation to change its name from Cumulus Holdings, Inc. to Cumulus Media Inc. Until immediately prior to the closing of the Offerings, all of the outstanding common stock of the Company will have been held by Cumulus Media, LLC, a Wisconsin limited liability company ("Media LLC"), whose members include State of Wisconsin Investment Board, NationsBanc Capital Corp. ("NationsBanc"), Heller Equity Capital Corporation, The Northwestern Mutual Life Insurance Company ("NML") and certain members of the Company's management or affiliates of management. See "Principal and Selling Stockholders." Immediately prior to the closing of the Offerings, (i) all of the shares of the NML Preferred Stock will be exchanged for shares of Series A Preferred Stock as described below; and (ii) Media LLC will be liquidated and the shares of Class A Common Stock, Class B Common Stock and Class C Common Stock held by Media LLC will be distributed by Media LLC to its members in liquidation (the "Reorganization"). All shares of the Company's 12% Class A Cumulative Preferred Stock (the "NML Preferred Stock") which were held by NML immediately prior to the Offerings plus all accrued and unpaid dividends thereon as of the exchange date will be exchanged for shares of Series A Preferred Stock having an equivalent aggregate liquidation value pursuant to the Preferred Stock Offering. As of June 1, 1998, the liquidation value of the NML Preferred Stock was approximately $34.2 million. Subject to certain conditions, the Series A Preferred Stock will be exchangeable on any dividend payment date, at the Company's option, for the % Subordinated Exchange Debentures due 2009 (the "Exchange Debentures"). See "Description of Capital Stock." Upon the consummation of the Reorganization, the capital stock of the Company will consist of the Class A Common Stock, the Class B Common Stock, the Class C Common Stock and the Series A Preferred Stock. The Company's U.S. radio operations are conducted primarily through Cumulus Broadcasting, Inc., a Nevada corporation ("Broadcasting") and a wholly-owned subsidiary of the Company, which owns the radio stations acquired pursuant to asset purchase agreements. The Company also owns the stock of radio groups or stations acquired pursuant to stock purchase agreements. Cumulus Licensing Corp., a Nevada corporation ("Licensing") and a wholly-owned subsidiary of Broadcasting, holds virtually all the FCC licenses for the Company's stations. Certain other FCC licenses are held by wholly-owned subsidiaries of the Company and the Company intends in the near future to transfer those licenses to Licensing or to newly created subsidiaries that hold only FCC licenses. Caribbean Communications Company Ltd., a corporation organized under the laws of Montserrat ("CCC") and a wholly-owned subsidiary of the Company, owns radio stations throughout the English-speaking Eastern Caribbean, including among other places, Trinidad, St. Kitts and St. Lucia. CCC is currently constructing an FM station in Barbados and Tortola, BVI. The Company will be the issuer of the Class A Common Stock, the Series A Preferred Stock and the Notes, and is the borrower under the Credit Facility. Broadcasting and Licensing are guarantors of the Company's obligations under the Credit Facility. See "Description of the Credit Facility and Notes." PENDING ACQUISITIONS The Company has entered into definitive purchase agreements to acquire 109 stations in 28 markets for an aggregate purchase price of approximately $245.1 million in transactions which have not yet been consummated (the "Pending Acquisitions"). The Company expects to consummate most of the Pending Acquisitions during the third and fourth quarters of 1998, although there can be no assurance that the transactions will be consummated within that time frame. In two of the markets in which there are Pending Acquisitions (Dubuque, IA and Grand Junction, CO), petitions or informal objections have been filed against the Company's FCC assignment applications. In several other markets, FCC staff questions and/or requests for additional information relating to local market concentration or the FCC's cross-interest policy have been raised with respect to pending assignment applications. All such petitions, objections and FCC staff inquiries must be resolved before FCC approval can be obtained and the acquisitions consummated. There can be no assurances that other Pending Acquisitions will not be subjected to similar challenges, or that the Pending Acquisitions will be consummated. The Company believes that the proceeds of the Offerings will be sufficient to finance the consummation of the Pending Acquisitions. The Company from time to time enters into non-binding arrangements with potential sellers to conduct a diligence review of their radio stations and propose the terms of a possible purchase agreement. At the present time, discussions with potential sellers are at an early stage and no diligence reviews have been commenced. FINANCING PLAN The Company intends to use the proceeds of the Offerings to finance the Pending Acquisitions and to repay certain indebtedness. The following table presents the sources and uses of funds, pro forma for the Offerings, the acquisitions consummated after March 31, 1998 (the "Subsequent Acquisitions") and the Pending Acquisitions as if such transactions had occurred as of March 31, 1998: <TABLE> <CAPTION> (DOLLARS IN THOUSANDS) --------------------- <S> <C> SOURCES OF FUNDS: Common Stock offered to public....................................... $ 100,000 Debt Offering........................................................ 150,000 Preferred Stock offered to public(1)................................. 91,488 Cash on hand......................................................... 21,916 Escrow funds(2)...................................................... 12,522 -------- Total............................................................ $ 375,926 -------- -------- USES OF FUNDS: Purchase price of the Subsequent Acquisitions and the Pending Acquisitions....................................................... $ 279,532 Repayment of Credit Facility(3)...................................... 79,696 Fees and expenses.................................................... 16,698 -------- Total............................................................ $ 375,926 -------- -------- </TABLE> - ------------------------------ (1) Excludes exchange of NML Preferred Stock concurrent with the Preferred Stock Offering. The Company will not receive any proceeds from the exchange of the NML Preferred Stock for the Series A Preferred Stock. (2) Represents funds deposited into escrow by the Company in connection with the Subsequent and Pending Acquisitions. (3) Affiliates of Lehman Brothers Inc. act as arranger and lender under the Credit Facility. The Company is an Illinois corporation with its principal executive offices located at 111 East Kilbourn Ave., Suite 2700, Milwaukee, Wisconsin 53202, telephone number (414) 615-2800. THE STOCK OFFERINGS <TABLE> <S> <C> Class A Common Stock Offered by the Company....... 6,250,000 shares Class A Common Stock Offered by the Selling Stockholder...................... 1,170,000 shares ---------------- Total......................................... 7,420,000 shares Class A Common Stock Offered to Public: U.S. Offering................................... 5,936,000 shares International Offering.......................... 1,484,000 shares ---------------- Total......................................... 7,420,000 shares Common Stock Outstanding after the Stock Offerings(1): Class A Common Stock(2)......................... 7,613,450 shares Class B Common Stock............................ 8,711,367 shares Class C Common Stock............................ 2,433,808 shares ---------------- Total......................................... 18,758,625 shares Voting Rights..................................... Except with respect to voting and conversion, the rights of holders of Class A Common Stock, Class B Common Stock and Class C Common Stock are identical. Except upon the occurrence of certain events, holders of the Class B Common Stock are not entitled to vote, whereas holders of the Class A Common Stock are entitled to one vote per share and subject to certain exceptions holders of the Class C Common Stock are entitled to ten votes per share. Under certain conditions and subject to prior governmental approval, each share of Class B Common Stock is convertible into one share of Class A Common Stock or one share of Class C Common Stock at the option of the holder, and each share of Class C Common Stock is convertible into one share of Class A Common Stock at the option of the holder. See "Description of Capital Stock." Use of Proceeds................................... Approximately $245.1 million of the net proceeds of the Offerings will be used to finance the Pending Acquisitions. The balance of the net proceeds of the Offerings will be used to repay the principal amount of indebtedness currently outstanding under the Credit Facility for which affiliates of Lehman Brothers Inc. act as arranger and lender. See "Use of Proceeds" and "Description of Credit Facility and Notes." Proposed Nasdaq National Market Symbol.......................................... CMLS Concurrent Offerings.............................. Concurrently with the Stock Offerings, the Company is offering 125,000 shares of its % Series A Cumulative Exchangeable Redeemable Preferred Stock due 2009 (with a liquidation preference of $1,000 per share) and $150 million aggregate principal amount of its % Senior Subordinated Notes due 2008. Each Offering is conditioned upon consummation of each of the other Offerings. See "Risk Factors -- Significant Capital Requirements" and "Use of Proceeds." </TABLE> - -------------------------- (1) As of March 31, 1998, the Company had 1,000 shares of common stock outstanding. Pursuant to the Reorganization, Media LLC will exchange all 1,000 shares of outstanding common stock of the Company for 193,450 shares of Class A Common Stock, 9,881,367 shares of Class B Common Stock and 2,433,808 shares of Class C Common Stock. Media LLC will be liquidated and such shares will be distributed to its members in liquidation. Of the 9,881,367 shares of Class B Common Stock distributed to Media LLC's members, 1,170,000 of such shares will be converted into shares of Class A Common Stock and are being offered hereby by the Selling Stockholder. (2) If the Underwriters' over-allotment options were exercised in full, 8,550,950 shares of Class A Common Stock would be outstanding after the Stock Offerings. See "Underwriting" and "Description of Capital Stock."
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED OR THE CONTEXT OTHERWISE REQUIRES, (I) THE INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTIONS ARE NOT EXERCISED AND THE REORGANIZATION (AS DEFINED IN "--REORGANIZATION AND CORPORATE STRUCTURE") HAS BEEN CONSUMMATED; (II) REFERENCES TO THE "COMPANY" INCLUDE THE COMPANY AND ITS SUBSIDIARIES; AND (III) ALL PRO FORMA INFORMATION CONTAINED IN THIS PROSPECTUS GIVES EFFECT TO THE REORGANIZATION, BORROWINGS UNDER THE CREDIT FACILITY AND THE APPLICATION OF PROCEEDS THEREFROM, ACQUISITIONS COMPLETED AS OF THE DATE HEREOF (THE "COMPLETED ACQUISITIONS"), THE PENDING ACQUISITIONS, AND THE OFFERINGS AND THE APPLICATIONS OF PROCEEDS THEREFROM (COLLECTIVELY, THE "TRANSACTIONS"). THE COMPANY Cumulus Media Inc. ("Cumulus" or the "Company") is a radio broadcasting company focused on the acquisition, operation and development of radio stations in mid-size and smaller radio markets in the U.S. The Company currently owns and operates 67 stations in 15 markets and provides sales and marketing services under LMA agreements (pending FCC approval of acquisition) to 44 stations in 16 markets. Upon consummation of the Pending Acquisitions, the Company will be one of the five largest radio broadcasting companies based on number of stations, and among the fifteen largest based on net revenues, in the U.S. and will own and operate 176 radio stations (124 FM and 52 AM) clustered in 34 U.S. markets. The Company has assembled market-leading clusters with stations comprising the first or second ranked radio group, in terms of revenue share and/or audience share, in all of its U.S. markets. On a pro forma basis, after giving effect to the Transactions, the Company would have generated net revenues of approximately $111.8 million and $27.0 million and Broadcast Cash Flow (as defined under "Certain Definitions and Market and Industry Data") of approximately $23.9 million and $3.1 million for the year ended December 31, 1997 and for the three months ended March 31, 1998, respectively. Cumulus operates and develops clusters of stations in demographically attractive and fast growing mid-size and smaller markets. Relative to the 100 largest markets in the U.S., the Company believes that the mid-size and smaller markets (MSA 100-267) represent attractive operating environments and generally are characterized by: (i) a greater reliance on radio advertising as evidenced by the greater percentage of total media revenues captured by radio than the national average; (ii) rising advertising revenues as the larger national and regional retailers expand into these markets; (iii) small independent operators, many of whom lack the capital to produce high quality locally-originated programming and/or to employ more sophisticated research, marketing, management and sales techniques; and (iv) lower overall susceptibility to economic downturns. The Company believes that the attractive operating characteristics of mid-size and smaller markets coupled with the relaxation of FCC ownership limits create significant opportunities to form clusters within markets and regions that will enable the Company to achieve revenue growth and cost efficiencies. As a result, management believes that the Company can grow revenues at rates equal to or better than larger market growth rates and generate Broadcast Cash Flow margins that are comparable to the higher margins that previously were generally achievable only in the top 100 markets. The Company believes that mid-size and smaller radio markets provide an excellent opportunity to acquire attractive properties at favorable purchase prices due to the size and fragmented nature of ownership in these markets and to the historically greater attention given to the larger markets by radio station acquirors. According to BIA, there are approximately 1,600 FM and 1,000 AM stations in the 168 U.S. radio markets ranked MSA 100-267. These 2,600 stations are owned by approximately 1,100 different operators. In addition, there are nearly 4,700 stations in unranked markets owned by approximately 2,700 operators. The Company's principal strategy is to establish its position as a leader in its markets and regions and to expand into additional mid-size and smaller markets and regions where it believes a leadership position can be achieved by assembling clusters. Cumulus seeks to enhance the quality of radio for listeners and the utility of the radio medium for advertisers in order to maximize the advertising revenues and Broadcast Cash Flow of its radio stations. To that end, Cumulus utilizes extensive research to properly position the formats of stations in a given market and also significantly increases the amount of locally-originated programming. Upon consummation of the Pending Acquisitions, the Company's portfolio of stations will be diversified in terms of format, target audience, geographic location and stage of development. Because of the size and diversity of its portfolio and its individual radio station groups or "clusters", the Company believes it is not reliant upon the performance of any single station or any specific format. MANAGEMENT TEAM Members of the Company's senior management team have an aggregate of over 75 years of experience in the media and radio broadcasting industry. To date, management has successfully negotiated 61 separate acquisition transactions on behalf of the Company. The Company's Executive Chairman and Treasurer, Richard W. Weening, has over 20 years of operating experience in media and information companies including significant experience in corporate finance and mergers and acquisitions. Lewis W. Dickey, Jr., Executive Vice Chairman, has over 15 years of experience in the radio and television broadcasting industry and is a successful owner-operator of radio stations in larger and mid-size markets. Mr. Dickey is also a nationally regarded business strategy and marketing consultant to the radio and television broadcasting industry. William M. Bungeroth, the Company's President, has over 20 years of experience in the radio broadcasting industry and has developed an expertise in enhancing revenue at stations under his management. Mr. Bungeroth manages the broadcasting business along with the General Managers of each market, the Director of Programming and the regional Directors of Sales. The Company's Vice President and Chief Financial Officer, Richard J. Bonick, Jr., has 20 years of experience in the radio broadcasting industry. Mr. Bonick manages the financial reporting and control systems as well as the operational aspects of the Company's broadcasting business. STATION PORTFOLIO The Company has four regions in the U.S. as its primary focus: the Midwest, Southeast, Southwest and Northeast. The following chart sets forth certain information as of June 16, 1998 with respect to the Company's stations in these regions, before and after giving effect to the Pending Acquisitions: <TABLE> <CAPTION> PENDING ACQUISITIONS (1) NUMBER OF STATIONS --------------------------------------------------- NUMBER OF NUMBER OF NUMBER OF TOTAL PRO CURRENTLY STATIONS STATIONS TO STATIONS TO BE FORMA OWNED CURRENTLY BE PLACED ACQUIRED STATIONS MARKET ----------- UNDER UNDER WITHOUT ------------- MARKET(2) RANK FM AM LMA(3) LMA LMA FM - ----------------------- --------- ----- ----- --------------- --------------- ----------------- ------------- <S> <C> <C> <C> <C> <C> <C> <C> MIDWEST REGION Ann Arbor, MI.......... 146 2 2 -- -- -- 2 Appleton-Oshkosh/ Green Bay, WI.............. 138/182 3 2 2 -- -- 5 Dubuque, IA............ 217 1 -- -- -- 4 4 Marion Carbondale, IL.. 209 -- -- 6 -- -- 4 Bismarck, ND........... 259 -- -- -- -- 4 3 Kalamazoo, MI.......... 172 -- -- -- -- 3 2 Faribault-Owatonna- Waseca, MN........... -- -- -- -- -- 8 4 Mankato, MN............ -- -- -- -- -- 3 2 Mason City, IA......... -- -- -- -- -- 7 5 Monroe, MI............. -- -- -- 1 -- -- 1 New Ulm-Springfield- Marshall, MN......... -- -- -- -- -- 3 2 Rochester, MN.......... -- -- -- -- -- 4 2 Toledo, OH............. 76 4 2 -- -- -- 4 SOUTHEAST REGION Albany, GA............. 205 -- -- 6 -- -- 4 Augusta, GA(6)......... 109 4 2 2 -- 1 6(2) Chattanooga, TN........ 102 -- -- 1 3 -- 3 Columbus, GA........... 166 3 2 -- -- -- 3 Florence, SC........... 198 2 2 5 1 -- 7 <CAPTION> ADULTS 12+ REVENUE MARKET(2) AM SHARE (%) RANK(4) - ----------------------- ------------- ------------- ------------- <S> <C> <C> <C> MIDWEST REGION Ann Arbor, MI.......... 2 8.7 1 Appleton-Oshkosh/ Green Bay, WI.............. 2 20.2(5) 2 Dubuque, IA............ 1 34.8 1 Marion Carbondale, IL.. 2 32.4 2 Bismarck, ND........... 1 37.7 1 Kalamazoo, MI.......... 1 22.3 1 Faribault-Owatonna- Waseca, MN........... 4 -- 1 Mankato, MN............ 1 -- 1 Mason City, IA......... 2 -- 1 Monroe, MI............. 0 -- 1 New Ulm-Springfield- Marshall, MN......... 1 -- 1 Rochester, MN.......... 2 -- 2 Toledo, OH............. 2 31.2 2 SOUTHEAST REGION Albany, GA............. 2 23.2 2 Augusta, GA(6)......... 3 29.3 1 Chattanooga, TN........ 1 22.3 1 Columbus, GA........... 2 32.5 1 Florence, SC........... 3 42.2 1 </TABLE> <TABLE> <CAPTION> PENDING ACQUISITIONS (1) NUMBER OF STATIONS --------------------------------------------------- NUMBER OF NUMBER OF NUMBER OF TOTAL PRO CURRENTLY STATIONS STATIONS TO STATIONS TO BE FORMA OWNED CURRENTLY BE PLACED ACQUIRED STATIONS MARKET ----------- UNDER UNDER WITHOUT ------------- MARKET(2) RANK FM AM LMA(3) LMA LMA FM - ----------------------- --------- ----- ----- --------------- --------------- ----------------- ------------- <S> <C> <C> <C> <C> <C> <C> <C> Montgomery, AL......... 143 -- -- 4 -- -- 2 Myrtle Beach, SC....... 175 3 1 2 -- -- 5 Salisbury-Ocean City, MD................... 153 4 2 2 -- -- 6 Savannah, GA........... 154 -- -- 5 -- 2 5 Tallahassee, FL........ 165 3 1 1 -- -- 4 Wilmington, NC......... 178 4 1 -- -- -- 4 SOUTHWEST REGION Abilene, TX............ 224 3 -- 1 -- -- 4 Amarillo, TX........... 188 4 2 -- -- -- 4 Beaumont-Port Arthur, TX................... 128 3 2 -- -- -- 3 Grand Junction, CO..... 247 -- -- -- -- 6 4 Lake Charles, LA....... 203 -- -- -- -- 4 3 Odessa-Midland, TX..... 174 -- -- 5 -- -- 4 Topeka, KS............. 180 -- -- -- -- 4 2 Wichita Falls, TX...... 236 3 -- 1 -- -- 4 NORTHEAST REGION Augusta-Waterville, ME................... 245 -- -- -- -- 6 5 Bangor, ME............. 263 -- -- -- -- 2 2 --- --- --- --- --- --- TOTAL 34 U.S. MARKETS.............. 46 21 44 4 61 124 <CAPTION> ADULTS 12+ REVENUE MARKET(2) AM SHARE (%) RANK(4) - ----------------------- ------------- ------------- ------------- <S> <C> <C> <C> Montgomery, AL......... 2 34.4 1 Myrtle Beach, SC....... 1 20.3 1 Salisbury-Ocean City, MD................... 2 31.2 1 Savannah, GA........... 2 36.0 2 Tallahassee, FL........ 1 32.8 1 Wilmington, NC......... 1 17.3 2 SOUTHWEST REGION Abilene, TX............ 0 26.7 2 Amarillo, TX........... 2 30.6 2 Beaumont-Port Arthur, TX................... 2 29.4 2 Grand Junction, CO..... 2 42.7 1 Lake Charles, LA....... 1 49.7 1 Odessa-Midland, TX..... 1 39.7 1 Topeka, KS............. 2 24.1 2 Wichita Falls, TX...... 0 28.6 2 NORTHEAST REGION Augusta-Waterville, ME................... 1 25.6 1 Bangor, ME............. 0 30.4 1 -- TOTAL 34 U.S. MARKETS.............. 52 </TABLE> - ------------------------ (1) The Company expects to consummate most of the Pending Acquisitions during the third and fourth quarters of 1998, although there can be no assurance that the transactions will be consummated within that time frame. In two of the markets in which there are Pending Acquisitions (Dubuque, IA and Grand Junction, CO), petitions or informal objections have been filed against the Company's FCC assignment applications. In addition, FCC staff inquiries and U.S. Department of Justice ("DOJ") reviews has raised questions concerning whether the Company will be permitted to acquire its full complement of proposed stations in two markets, based on local market concentration concerns. There can be no assurance that applications for other Pending Acquisitions will not be subjected to similar challenges, FCC staff inquiries or DOJ investigations. The FCC staff has also requested additional information regarding attributable media interests of one of the Company's non-attributable investors to determine compliance with the FCC's cross-interest policy in one market. All such petitions, objections and FCC staff inquiries must be resolved before FCC approval can be obtained and the acquisitions consummated. (2) The listed markets correspond to station clusters of the Company, but may vary from the "markets" defined for purposes of the FCC's multiple-ownership rules, which are defined by reference to the signal coverages of the stations involved. Thus, in some instances (E.G., Augusta, GA, Florence, SC, and Salisbury-Ocean City, MD), the number of stations following the Pending Acquisitions as listed in the above table exceeds the number of radio stations specified in the FCC's rules that one person or entity may own, operate or control within a single market, but is still consistent with these rules. (3) Includes radio stations to which the Company currently provides programming and on which the Company sells advertising pursuant to an LMA. (4) Market revenue rankings for Faribault-Owatonna-Waseca, MN, Mankato, MN, Mason City, IA, Rochester, MN and New Ulm-Springfield-Marshall, MN are based on Company estimates. (5) Indicates Adults 12+ share of Appleton-Oshkosh market. (6) The FCC staff recently dismissed the assignment application for one of the six FM stations in Augusta, GA based on the unacceptability of the Company's supplemental engineering analysis in demonstrating compliance with the FCC's multiple-ownership rules. The Company will not be permitted to acquire more than five FM and three AM stations in this market unless it succeeds in obtaining FCC approval to modify the facilities of one or more of its currently owned stations or successfully appeals the FCC staff dismissal of its assignment application for the sixth FM station. The Company also owns and operates five radio stations and one leased frequency in various locations throughout the English-speaking Eastern Caribbean, including among other places, Trinidad, St. Kitts and St. Lucia. ACQUISITION STRATEGY Cumulus has focused its acquisition strategy on acquiring radio broadcasting stations in demographically attractive and fast growing mid-size to smaller markets that it believes offer substantial growth opportunities for the Company. In executing this strategy, the Company adheres to certain key acquisition criteria. Primary among these criteria are targeting markets with: (i) growing economies that are not dependent upon any single industry or employer; (ii) a regional fit with the Company's overall portfolio concentration in the Midwest, Southeast, Southwest and Northeast regions of the U.S.; (iii) close proximity to larger markets that may lead to increased economic expansion into the Company's markets; (iv) previously unconsolidated markets with fragmented individual ownership of stations; (v) the opportunity to assemble a cluster of stations diversified in format to provide a range of target demographic options for advertisers; and (vi) the opportunity to increase sales performance through greater coverage of potential advertisers with more sales people per station. In targeting specific stations, the Company seeks stations with a position of leadership in their market in terms of ratings and format, with the opportunity to significantly increase revenues and Broadcast Cash Flow (as defined under "Certain Definitions and Market and Industry Data"). Additionally, Cumulus seeks high quality technical and operating facilities, capable local management and an FCC license which enables coverage of the entire market. The Company believes that its acquisition strategy will have a number of benefits, including: (i) growth and diversification of revenue and Broadcast Cash Flow across a greater number of stations and markets; (ii) improved Broadcast Cash Flow margins through the consolidation of facilities and the elimination of redundant expenses; (iii) enhanced utilization of certain corporate overhead functions, including its senior management team; (iv) improved leverage in various key vendor negotiations; (v) greater ability to recruit top industry management talent; and (vi) increased overall scale, which should facilitate the Company's future capital raising activities. INTEGRATION OF ACQUIRED BUSINESSES The Company has developed, through its 61 Completed and Pending Acquisitions, an efficient process for the integration of newly acquired properties into the Cumulus portfolio and respective geographic cluster, as well as into the overall Cumulus culture and operating philosophy. The Company's station integration plan consists of six key elements: (i) employ sophisticated market research to refine station formats, enrich the listener experience and increase audience and revenue share relative to other stations in the market; (ii) expand the size and the effectiveness of the sales organization through active recruitment and in-depth training to enhance demand for the station's spot inventory to increase both revenue and margin; (iii) add the station to the Cumulus in-market local area network and install the Company's proprietary system for real-time monitoring by management of station sales and inventory performance; (iv) install Cumulus's centralized networked accounting system for financial reporting, budget control, payables management and cash management; (v) establish revenue and expense budgets consistent with the programming and sales strategy and make necessary cost adjustments; and (vi) implement necessary improvements in transmission facilities, audio processing and studio facilities. From time to time, in compliance with applicable law, the Company will enter into an LMA or consulting arrangement with a target property prior to FCC final approval and the consummation of the acquisition in order to gain a "head start" on the integration process. OPERATING STRATEGY The Company's operating strategy has the following principal components: ASSEMBLE AND MANAGE MARKET CLUSTERS WITH REGIONAL CONCENTRATIONS. The Company has assembled the first or second ranked cluster of stations based on revenue share and/or audience share in all of its U.S. markets in four regional concentrations, the Midwest, Southeast, Southwest and Northeast. The Company believes that by offering a diversity of radio formats within a given market, Cumulus provides customized and efficient marketing solutions to meet advertisers' needs. By assembling market clusters with a regional concentration, the Company believes that it will be able to increase revenues by offering regional coverage of key demographic groups that were previously unavailable to national and regional advertisers. The Company also believes that its cluster approach will allow it to operate its stations with more highly skilled local management teams equipped with greater resources and to eliminate redundant operating and overhead expenses. MAXIMIZE EACH STATION'S POTENTIAL THROUGH POSITIONING AND BRANDING. The Company utilizes extensive market research to refine the programming of each of its stations and to position each as a separate brand within a particular cluster. The objective of this strategy is to optimize each station's potential in terms of audience ratings and revenue share while providing the widest possible range of choice to listeners and advertisers. Such stations can better capitalize on the operating leverage inherent in the radio industry because the costs of operating a radio station are generally fixed and, therefore, increased revenues generally result in disproportionately larger increases in Broadcast Cash Flow (as defined under "Certain Definitions and Market and Industry Data"). FOCUS ON PROGRAMMING. A principal Company operating strategy is to enhance each station's programming appeal, including both the quality and quantity of local programming as a means of enriching the listener experience. The Company believes that adopting this commitment to high quality, locally originated programming will provide its stations with a competitive advantage and increase each station's audience share. Moreover, the Company believes that the efficiencies and scale afforded by the operation of multiple stations in the same market and region working together with information technology make it possible to substantially improve programming and the quality of the listener experience without a comparable increase in cost. EXPAND DEDICATED SALES FORCE AND OPTIMIZE INVENTORY MANAGEMENT. Underpinning the Company's strategy for optimizing the potential of each station within a cluster is the practice of dedicating a sales force for each of its stations. The Company believes that many of the acquired stations have dramatically underperformed in sales, due primarily to undersized sales staffs responsible for selling air time on multiple stations, thus diluting their ability to cover all of the potential advertisers with strong advocates for each station. The Company believes its practice of utilizing a dedicated sales force for each station will attract a larger number of advertisers thereby increasing the demand for each station's commercial spot inventory. Accordingly, the Company has significantly expanded the number of salespeople for each of its stations. Salespeople are typically compensated exclusively on a commission basis. Also, in each of its market clusters, the Company utilizes Internet-based sales reporting systems to monitor its sales activity and to formulate and implement rate structure and inventory management on a continual basis. INCREASE RADIO REVENUE SHARE. The Company believes that its strategy of larger and dedicated station sales staffs, brand development, regional concentration, and market clusters will help increase advertising volume and revenues from existing customers and increase the number and scope of new advertisers. This strategy enables the Company to compete more effectively with other local and regional media such as newspapers and cable and broadcast television stations, because it can now offer a competitively priced alternative to reach the target audience that advertisers desire. The Company's sales management team has substantial experience in the areas of generating new sources of revenues including promotional events, retailer co-op advertising and other sources including business-to-business advertising. IMPLEMENT STRICT COST CONTROLS. The Company's management imposes strict financial reporting requirements and expense budget limitations on each of its stations. In addition, management maintains a centralized accounting system which allows it to monitor the performance and operations of each of its stations. Management believes such centralization allows the Company to achieve expense savings in certain areas, including purchasing and administrative expenses. Management believes that the Company will also achieve expense savings through the elimination of certain duplicate costs within its markets and market clusters. IMPLEMENT INTERNET-BASED MANAGEMENT INFORMATION SYSTEMS. The Company is implementing a proprietary application using Internet software standards to support daily sales and inventory performance reporting by station, by market and by cluster. The Company has completed implementation of the daily sales reporting application and anticipates full implementation of the inventory performance application by the end of 1998. Upon full implementation, this application will allow the Company to compare each station's actual performance (including revenue and inventory management) to budget on a regular basis and deploy resources on a timely basis to those stations not achieving budgetary goals. RECRUIT AND RETAIN SKILLED MANAGERS. The Company believes that operating a top-ranked cluster of stations in a market will enable the Company to recruit and retain high caliber radio management personnel who might otherwise be attracted to larger markets. The Company believes that regional management and coordination will enable it to maximize the benefits of operating a growing number of stations in geographically diverse locations, while maintaining controls over local operations. Local management is also central to the Company's strategy and is primarily responsible for building and developing a sales team capable of converting the stations' audience rankings into revenues. The Company's general managers and sales managers are motivated through incentive compensation based primarily upon their station's cash flow performance and secondarily on their ability to convert their station's audience share into market revenue share. REORGANIZATION AND CORPORATE STRUCTURE In March 1998, the Company amended its articles of incorporation to change its name from Cumulus Holdings, Inc. to Cumulus Media Inc. Until immediately prior to the closing of the Offerings, all of the outstanding common stock of the Company will have been held by Cumulus Media, LLC, a Wisconsin limited liability company ("Media LLC"), whose members include State of Wisconsin Investment Board, NationsBanc Capital Corp. ("NationsBanc"), Heller Equity Capital Corporation, The Northwestern Mutual Life Insurance Company ("NML") and certain members of the Company's management or affiliates of management. See "Principal and Selling Stockholders." Immediately prior to the closing of the Offerings, (i) all of the shares of the NML Preferred Stock will be exchanged for shares of Series A Preferred Stock as described below; and (ii) Media LLC will be liquidated and the shares of Class A Common Stock, Class B Common Stock and Class C Common Stock held by Media LLC will be distributed by Media LLC to its members in liquidation (the "Reorganization"). All shares of the Company's 12% Class A Cumulative Preferred Stock (the "NML Preferred Stock") which were held by NML immediately prior to the Offerings plus all accrued and unpaid dividends thereon as of the exchange date will be exchanged for shares of Series A Preferred Stock having an equivalent aggregate liquidation value pursuant to the Preferred Stock Offering. As of June 1, 1998, the liquidation value of the NML Preferred Stock was approximately $34.2 million. Subject to certain conditions, the Series A Preferred Stock will be exchangeable on any dividend payment date, at the Company's option, for the % Subordinated Exchange Debentures due 2009 (the "Exchange Debentures"). See "Description of Capital Stock." Upon the consummation of the Reorganization, the capital stock of the Company will consist of the Class A Common Stock, the Class B Common Stock, the Class C Common Stock and the Series A Preferred Stock. The Company's U.S. radio operations are conducted primarily through Cumulus Broadcasting, Inc., a Nevada corporation ("Broadcasting") and a wholly-owned subsidiary of the Company, which owns the radio stations acquired pursuant to asset purchase agreements. The Company also owns the stock of radio groups or stations acquired pursuant to stock purchase agreements. Cumulus Licensing Corp., a Nevada corporation ("Licensing") and a wholly-owned subsidiary of Broadcasting, holds virtually all the FCC licenses for the Company's stations. Certain other FCC licenses are held by wholly-owned subsidiaries of the Company and the Company intends in the near future to transfer those licenses to Licensing or to newly created subsidiaries that hold only FCC licenses. Caribbean Communications Company Ltd., a corporation organized under the laws of Montserrat ("CCC") and a wholly-owned subsidiary of the Company, owns radio stations throughout the English-speaking Eastern Caribbean, including among other places, Trinidad, St. Kitts and St. Lucia. CCC is currently constructing an FM station in Barbados and Tortola, BVI. The Company will be the issuer of the Class A Common Stock, the Series A Preferred Stock and the Notes, and is the borrower under the Credit Facility. Broadcasting and Licensing are guarantors of the Company's obligations under the Credit Facility. See "Description of the Credit Facility and Notes." PENDING ACQUISITIONS The Company has entered into definitive purchase agreements to acquire 109 stations in 28 markets for an aggregate purchase price of approximately $245.1 million in transactions which have not yet been consummated (the "Pending Acquisitions"). The Company expects to consummate most of the Pending Acquisitions during the third and fourth quarters of 1998, although there can be no assurance that the transactions will be consummated within that time frame. In two of the markets in which there are Pending Acquisitions (Dubuque, IA and Grand Junction, CO), petitions or informal objections have been filed against the Company's FCC assignment applications. In several other markets, FCC staff questions and/or requests for additional information relating to local market concentration or the FCC's cross-interest policy have been raised with respect to pending assignment applications. All such petitions, objections and FCC staff inquiries must be resolved before FCC approval can be obtained and the acquisitions consummated. There can be no assurances that other Pending Acquisitions will not be subjected to similar challenges, or that the Pending Acquisitions will be consummated. The Company believes that the proceeds of the Offerings will be sufficient to finance the consummation of the Pending Acquisitions. The Company from time to time enters into non-binding arrangements with potential sellers to conduct a diligence review of their radio stations and propose the terms of a possible purchase agreement. At the present time, discussions with potential sellers are at an early stage and no diligence reviews have been commenced. FINANCING PLAN The Company intends to use the proceeds of the Offerings to finance the Pending Acquisitions and to repay certain indebtedness. The following table presents the sources and uses of funds, pro forma for the Offerings, the acquisitions consummated after March 31, 1998 (the "Subsequent Acquisitions") and the Pending Acquisitions as if such transactions had occurred as of March 31, 1998: <TABLE> <CAPTION> (DOLLARS IN THOUSANDS) --------------------- <S> <C> SOURCES OF FUNDS: Common Stock offered to public....................................... $ 100,000 Debt Offering........................................................ 150,000 Preferred Stock offered to public(1)................................. 91,488 Cash on hand......................................................... 21,916 Escrow funds(2)...................................................... 12,522 -------- Total............................................................ $ 375,926 -------- -------- USES OF FUNDS: Purchase price of the Subsequent Acquisitions and the Pending Acquisitions....................................................... $ 279,532 Repayment of Credit Facility(3)...................................... 79,696 Fees and expenses.................................................... 16,698 -------- Total............................................................ $ 375,926 -------- -------- </TABLE> - ------------------------------ (1) Excludes exchange of NML Preferred Stock concurrent with the Preferred Stock Offering. The Company will not receive any proceeds from the exchange of the NML Preferred Stock for the Series A Preferred Stock. (2) Represents funds deposited into escrow by the Company in connection with the Subsequent and Pending Acquisitions. (3) Affiliates of Lehman Brothers Inc. act as arranger and lender under the Credit Facility. The Company is an Illinois corporation with its principal executive offices located at 111 East Kilbourn Ave., Suite 2700, Milwaukee, Wisconsin 53202, telephone number (414) 615-2800. THE STOCK OFFERINGS <TABLE> <S> <C> Class A Common Stock Offered by the Company....... 6,250,000 shares Class A Common Stock Offered by the Selling Stockholder...................... 1,170,000 shares ---------------- Total......................................... 7,420,000 shares Class A Common Stock Offered to Public: U.S. Offering................................... 5,936,000 shares International Offering.......................... 1,484,000 shares ---------------- Total......................................... 7,420,000 shares Common Stock Outstanding after the Stock Offerings(1): Class A Common Stock(2)......................... 7,613,450 shares Class B Common Stock............................ 8,711,367 shares Class C Common Stock............................ 2,433,808 shares ---------------- Total......................................... 18,758,625 shares Voting Rights..................................... Except with respect to voting and conversion, the rights of holders of Class A Common Stock, Class B Common Stock and Class C Common Stock are identical. Except upon the occurrence of certain events, holders of the Class B Common Stock are not entitled to vote, whereas holders of the Class A Common Stock are entitled to one vote per share and subject to certain exceptions holders of the Class C Common Stock are entitled to ten votes per share. Under certain conditions and subject to prior governmental approval, each share of Class B Common Stock is convertible into one share of Class A Common Stock or one share of Class C Common Stock at the option of the holder, and each share of Class C Common Stock is convertible into one share of Class A Common Stock at the option of the holder. See "Description of Capital Stock." Use of Proceeds................................... Approximately $245.1 million of the net proceeds of the Offerings will be used to finance the Pending Acquisitions. The balance of the net proceeds of the Offerings will be used to repay the principal amount of indebtedness currently outstanding under the Credit Facility for which affiliates of Lehman Brothers Inc. act as arranger and lender. See "Use of Proceeds" and "Description of Credit Facility and Notes." Proposed Nasdaq National Market Symbol.......................................... CMLS Concurrent Offerings.............................. Concurrently with the Stock Offerings, the Company is offering 125,000 shares of its % Series A Cumulative Exchangeable Redeemable Preferred Stock due 2009 (with a liquidation preference of $1,000 per share) and $150 million aggregate principal amount of its % Senior Subordinated Notes due 2008. Each Offering is conditioned upon consummation of each of the other Offerings. See "Risk Factors -- Significant Capital Requirements" and "Use of Proceeds." </TABLE> - -------------------------- (1) As of March 31, 1998, the Company had 1,000 shares of common stock outstanding. Pursuant to the Reorganization, Media LLC will exchange all 1,000 shares of outstanding common stock of the Company for 193,450 shares of Class A Common Stock, 9,881,367 shares of Class B Common Stock and 2,433,808 shares of Class C Common Stock. Media LLC will be liquidated and such shares will be distributed to its members in liquidation. Of the 9,881,367 shares of Class B Common Stock distributed to Media LLC's members, 1,170,000 of such shares will be converted into shares of Class A Common Stock and are being offered hereby by the Selling Stockholder. (2) If the Underwriters' over-allotment options were exercised in full, 8,550,950 shares of Class A Common Stock would be outstanding after the Stock Offerings. See "Underwriting" and "Description of Capital Stock."
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED OR THE CONTEXT OTHERWISE REQUIRES, (I) THE INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTIONS ARE NOT EXERCISED AND THE REORGANIZATION (AS DEFINED IN "--REORGANIZATION AND CORPORATE STRUCTURE") HAS BEEN CONSUMMATED; (II) REFERENCES TO THE "COMPANY" INCLUDE THE COMPANY AND ITS SUBSIDIARIES; AND (III) ALL PRO FORMA INFORMATION CONTAINED IN THIS PROSPECTUS GIVES EFFECT TO THE REORGANIZATION, BORROWINGS UNDER THE CREDIT FACILITY AND THE APPLICATION OF PROCEEDS THEREFROM, ACQUISITIONS COMPLETED AS OF THE DATE HEREOF (THE "COMPLETED ACQUISITIONS"), THE PENDING ACQUISITIONS, AND THE OFFERINGS AND THE APPLICATIONS OF PROCEEDS THEREFROM (COLLECTIVELY, THE "TRANSACTIONS"). THE COMPANY Cumulus Media Inc. ("Cumulus" or the "Company") is a radio broadcasting company focused on the acquisition, operation and development of radio stations in mid-size and smaller radio markets in the U.S. The Company currently owns and operates 67 stations in 15 markets and provides sales and marketing services under LMA agreements (pending FCC approval of acquisition) to 44 stations in 16 markets. Upon consummation of the Pending Acquisitions, the Company will be one of the five largest radio broadcasting companies based on number of stations, and among the fifteen largest based on net revenues, in the U.S. and will own and operate 176 radio stations (124 FM and 52 AM) clustered in 34 U.S. markets. The Company has assembled market-leading clusters with stations comprising the first or second ranked radio group, in terms of revenue share and/or audience share, in all of its U.S. markets. On a pro forma basis, after giving effect to the Transactions, the Company would have generated net revenues of approximately $111.8 million and $27.0 million and Broadcast Cash Flow (as defined under "Certain Definitions and Market and Industry Data") of approximately $23.9 million and $3.1 million for the year ended December 31, 1997 and for the three months ended March 31, 1998, respectively. Cumulus operates and develops clusters of stations in demographically attractive and fast growing mid-size and smaller markets. Relative to the 100 largest markets in the U.S., the Company believes that the mid-size and smaller markets (MSA 100-267) represent attractive operating environments and generally are characterized by: (i) a greater reliance on radio advertising as evidenced by the greater percentage of total media revenues captured by radio than the national average; (ii) rising advertising revenues as the larger national and regional retailers expand into these markets; (iii) small independent operators, many of whom lack the capital to produce high quality locally-originated programming and/or to employ more sophisticated research, marketing, management and sales techniques; and (iv) lower overall susceptibility to economic downturns. The Company believes that the attractive operating characteristics of mid-size and smaller markets coupled with the relaxation of FCC ownership limits create significant opportunities to form clusters within markets and regions that will enable the Company to achieve revenue growth and cost efficiencies. As a result, management believes that the Company can grow revenues at rates equal to or better than larger market growth rates and generate Broadcast Cash Flow margins that are comparable to the higher margins that previously were generally achievable only in the top 100 markets. The Company believes that mid-size and smaller radio markets provide an excellent opportunity to acquire attractive properties at favorable purchase prices due to the size and fragmented nature of ownership in these markets and to the historically greater attention given to the larger markets by radio station acquirors. According to BIA, there are approximately 1,600 FM and 1,000 AM stations in the 168 U.S. radio markets ranked MSA 100-267. These 2,600 stations are owned by approximately 1,100 different operators. In addition, there are nearly 4,700 stations in unranked markets owned by approximately 2,700 operators. The Company's principal strategy is to establish its position as a leader in its markets and regions and to expand into additional mid-size and smaller markets and regions where it believes a leadership position can be achieved by assembling clusters. Cumulus seeks to enhance the quality of radio for listeners and the utility of the radio medium for advertisers in order to maximize the advertising revenues and Broadcast Cash Flow of its radio stations. To that end, Cumulus utilizes extensive research to properly position the formats of stations in a given market and also significantly increases the amount of locally-originated programming. Upon consummation of the Pending Acquisitions, the Company's portfolio of stations will be diversified in terms of format, target audience, geographic location and stage of development. Because of the size and diversity of its portfolio and its individual radio station groups or "clusters", the Company believes it is not reliant upon the performance of any single station or any specific format. MANAGEMENT TEAM Members of the Company's senior management team have an aggregate of over 75 years of experience in the media and radio broadcasting industry. To date, management has successfully negotiated 61 separate acquisition transactions on behalf of the Company. The Company's Executive Chairman and Treasurer, Richard W. Weening, has over 20 years of operating experience in media and information companies including significant experience in corporate finance and mergers and acquisitions. Lewis W. Dickey, Jr., Executive Vice Chairman, has over 15 years of experience in the radio and television broadcasting industry and is a successful owner-operator of radio stations in larger and mid-size markets. Mr. Dickey is also a nationally regarded business strategy and marketing consultant to the radio and television broadcasting industry. William M. Bungeroth, the Company's President, has over 20 years of experience in the radio broadcasting industry and has developed an expertise in enhancing revenue at stations under his management. Mr. Bungeroth manages the broadcasting business along with the General Managers of each market, the Director of Programming and the regional Directors of Sales. The Company's Vice President and Chief Financial Officer, Richard J. Bonick, Jr., has 20 years of experience in the radio broadcasting industry. Mr. Bonick manages the financial reporting and control systems as well as the operational aspects of the Company's broadcasting business. STATION PORTFOLIO The Company has four regions in the U.S. as its primary focus: the Midwest, Southeast, Southwest and Northeast. The following chart sets forth certain information as of June 16, 1998 with respect to the Company's stations in these regions, before and after giving effect to the Pending Acquisitions: <TABLE> <CAPTION> PENDING ACQUISITIONS (1) NUMBER OF STATIONS --------------------------------------------------- NUMBER OF NUMBER OF NUMBER OF TOTAL PRO CURRENTLY STATIONS STATIONS TO STATIONS TO BE FORMA OWNED CURRENTLY BE PLACED ACQUIRED STATIONS MARKET ----------- UNDER UNDER WITHOUT ------------- MARKET(2) RANK FM AM LMA(3) LMA LMA FM - ----------------------- --------- ----- ----- --------------- --------------- ----------------- ------------- <S> <C> <C> <C> <C> <C> <C> <C> MIDWEST REGION Ann Arbor, MI.......... 146 2 2 -- -- -- 2 Appleton-Oshkosh/ Green Bay, WI.............. 138/182 3 2 2 -- -- 5 Dubuque, IA............ 217 1 -- -- -- 4 4 Marion Carbondale, IL.. 209 -- -- 6 -- -- 4 Bismarck, ND........... 259 -- -- -- -- 4 3 Kalamazoo, MI.......... 172 -- -- -- -- 3 2 Faribault-Owatonna- Waseca, MN........... -- -- -- -- -- 8 4 Mankato, MN............ -- -- -- -- -- 3 2 Mason City, IA......... -- -- -- -- -- 7 5 Monroe, MI............. -- -- -- 1 -- -- 1 New Ulm-Springfield- Marshall, MN......... -- -- -- -- -- 3 2 Rochester, MN.......... -- -- -- -- -- 4 2 Toledo, OH............. 76 4 2 -- -- -- 4 SOUTHEAST REGION Albany, GA............. 205 -- -- 6 -- -- 4 Augusta, GA(6)......... 109 4 2 2 -- 1 6(2) Chattanooga, TN........ 102 -- -- 1 3 -- 3 Columbus, GA........... 166 3 2 -- -- -- 3 Florence, SC........... 198 2 2 5 1 -- 7 <CAPTION> ADULTS 12+ REVENUE MARKET(2) AM SHARE (%) RANK(4) - ----------------------- ------------- ------------- ------------- <S> <C> <C> <C> MIDWEST REGION Ann Arbor, MI.......... 2 8.7 1 Appleton-Oshkosh/ Green Bay, WI.............. 2 20.2(5) 2 Dubuque, IA............ 1 34.8 1 Marion Carbondale, IL.. 2 32.4 2 Bismarck, ND........... 1 37.7 1 Kalamazoo, MI.......... 1 22.3 1 Faribault-Owatonna- Waseca, MN........... 4 -- 1 Mankato, MN............ 1 -- 1 Mason City, IA......... 2 -- 1 Monroe, MI............. 0 -- 1 New Ulm-Springfield- Marshall, MN......... 1 -- 1 Rochester, MN.......... 2 -- 2 Toledo, OH............. 2 31.2 2 SOUTHEAST REGION Albany, GA............. 2 23.2 2 Augusta, GA(6)......... 3 29.3 1 Chattanooga, TN........ 1 22.3 1 Columbus, GA........... 2 32.5 1 Florence, SC........... 3 42.2 1 </TABLE> <TABLE> <CAPTION> PENDING ACQUISITIONS (1) NUMBER OF STATIONS --------------------------------------------------- NUMBER OF NUMBER OF NUMBER OF TOTAL PRO CURRENTLY STATIONS STATIONS TO STATIONS TO BE FORMA OWNED CURRENTLY BE PLACED ACQUIRED STATIONS MARKET ----------- UNDER UNDER WITHOUT ------------- MARKET(2) RANK FM AM LMA(3) LMA LMA FM - ----------------------- --------- ----- ----- --------------- --------------- ----------------- ------------- <S> <C> <C> <C> <C> <C> <C> <C> Montgomery, AL......... 143 -- -- 4 -- -- 2 Myrtle Beach, SC....... 175 3 1 2 -- -- 5 Salisbury-Ocean City, MD................... 153 4 2 2 -- -- 6 Savannah, GA........... 154 -- -- 5 -- 2 5 Tallahassee, FL........ 165 3 1 1 -- -- 4 Wilmington, NC......... 178 4 1 -- -- -- 4 SOUTHWEST REGION Abilene, TX............ 224 3 -- 1 -- -- 4 Amarillo, TX........... 188 4 2 -- -- -- 4 Beaumont-Port Arthur, TX................... 128 3 2 -- -- -- 3 Grand Junction, CO..... 247 -- -- -- -- 6 4 Lake Charles, LA....... 203 -- -- -- -- 4 3 Odessa-Midland, TX..... 174 -- -- 5 -- -- 4 Topeka, KS............. 180 -- -- -- -- 4 2 Wichita Falls, TX...... 236 3 -- 1 -- -- 4 NORTHEAST REGION Augusta-Waterville, ME................... 245 -- -- -- -- 6 5 Bangor, ME............. 263 -- -- -- -- 2 2 --- --- --- --- --- --- TOTAL 34 U.S. MARKETS.............. 46 21 44 4 61 124 <CAPTION> ADULTS 12+ REVENUE MARKET(2) AM SHARE (%) RANK(4) - ----------------------- ------------- ------------- ------------- <S> <C> <C> <C> Montgomery, AL......... 2 34.4 1 Myrtle Beach, SC....... 1 20.3 1 Salisbury-Ocean City, MD................... 2 31.2 1 Savannah, GA........... 2 36.0 2 Tallahassee, FL........ 1 32.8 1 Wilmington, NC......... 1 17.3 2 SOUTHWEST REGION Abilene, TX............ 0 26.7 2 Amarillo, TX........... 2 30.6 2 Beaumont-Port Arthur, TX................... 2 29.4 2 Grand Junction, CO..... 2 42.7 1 Lake Charles, LA....... 1 49.7 1 Odessa-Midland, TX..... 1 39.7 1 Topeka, KS............. 2 24.1 2 Wichita Falls, TX...... 0 28.6 2 NORTHEAST REGION Augusta-Waterville, ME................... 1 25.6 1 Bangor, ME............. 0 30.4 1 -- TOTAL 34 U.S. MARKETS.............. 52 </TABLE> - ------------------------ (1) The Company expects to consummate most of the Pending Acquisitions during the third and fourth quarters of 1998, although there can be no assurance that the transactions will be consummated within that time frame. In two of the markets in which there are Pending Acquisitions (Dubuque, IA and Grand Junction, CO), petitions or informal objections have been filed against the Company's FCC assignment applications. In addition, FCC staff inquiries and U.S. Department of Justice ("DOJ") reviews has raised questions concerning whether the Company will be permitted to acquire its full complement of proposed stations in two markets, based on local market concentration concerns. There can be no assurance that applications for other Pending Acquisitions will not be subjected to similar challenges, FCC staff inquiries or DOJ investigations. The FCC staff has also requested additional information regarding attributable media interests of one of the Company's non-attributable investors to determine compliance with the FCC's cross-interest policy in one market. All such petitions, objections and FCC staff inquiries must be resolved before FCC approval can be obtained and the acquisitions consummated. (2) The listed markets correspond to station clusters of the Company, but may vary from the "markets" defined for purposes of the FCC's multiple-ownership rules, which are defined by reference to the signal coverages of the stations involved. Thus, in some instances (E.G., Augusta, GA, Florence, SC, and Salisbury-Ocean City, MD), the number of stations following the Pending Acquisitions as listed in the above table exceeds the number of radio stations specified in the FCC's rules that one person or entity may own, operate or control within a single market, but is still consistent with these rules. (3) Includes radio stations to which the Company currently provides programming and on which the Company sells advertising pursuant to an LMA. (4) Market revenue rankings for Faribault-Owatonna-Waseca, MN, Mankato, MN, Mason City, IA, Rochester, MN and New Ulm-Springfield-Marshall, MN are based on Company estimates. (5) Indicates Adults 12+ share of Appleton-Oshkosh market. (6) The FCC staff recently dismissed the assignment application for one of the six FM stations in Augusta, GA based on the unacceptability of the Company's supplemental engineering analysis in demonstrating compliance with the FCC's multiple-ownership rules. The Company will not be permitted to acquire more than five FM and three AM stations in this market unless it succeeds in obtaining FCC approval to modify the facilities of one or more of its currently owned stations or successfully appeals the FCC staff dismissal of its assignment application for the sixth FM station. The Company also owns and operates five radio stations and one leased frequency in various locations throughout the English-speaking Eastern Caribbean, including among other places, Trinidad, St. Kitts and St. Lucia. ACQUISITION STRATEGY Cumulus has focused its acquisition strategy on acquiring radio broadcasting stations in demographically attractive and fast growing mid-size to smaller markets that it believes offer substantial growth opportunities for the Company. In executing this strategy, the Company adheres to certain key acquisition criteria. Primary among these criteria are targeting markets with: (i) growing economies that are not dependent upon any single industry or employer; (ii) a regional fit with the Company's overall portfolio concentration in the Midwest, Southeast, Southwest and Northeast regions of the U.S.; (iii) close proximity to larger markets that may lead to increased economic expansion into the Company's markets; (iv) previously unconsolidated markets with fragmented individual ownership of stations; (v) the opportunity to assemble a cluster of stations diversified in format to provide a range of target demographic options for advertisers; and (vi) the opportunity to increase sales performance through greater coverage of potential advertisers with more sales people per station. In targeting specific stations, the Company seeks stations with a position of leadership in their market in terms of ratings and format, with the opportunity to significantly increase revenues and Broadcast Cash Flow (as defined under "Certain Definitions and Market and Industry Data"). Additionally, Cumulus seeks high quality technical and operating facilities, capable local management and an FCC license which enables coverage of the entire market. The Company believes that its acquisition strategy will have a number of benefits, including: (i) growth and diversification of revenue and Broadcast Cash Flow across a greater number of stations and markets; (ii) improved Broadcast Cash Flow margins through the consolidation of facilities and the elimination of redundant expenses; (iii) enhanced utilization of certain corporate overhead functions, including its senior management team; (iv) improved leverage in various key vendor negotiations; (v) greater ability to recruit top industry management talent; and (vi) increased overall scale, which should facilitate the Company's future capital raising activities. INTEGRATION OF ACQUIRED BUSINESSES The Company has developed, through its 61 Completed and Pending Acquisitions, an efficient process for the integration of newly acquired properties into the Cumulus portfolio and respective geographic cluster, as well as into the overall Cumulus culture and operating philosophy. The Company's station integration plan consists of six key elements: (i) employ sophisticated market research to refine station formats, enrich the listener experience and increase audience and revenue share relative to other stations in the market; (ii) expand the size and the effectiveness of the sales organization through active recruitment and in-depth training to enhance demand for the station's spot inventory to increase both revenue and margin; (iii) add the station to the Cumulus in-market local area network and install the Company's proprietary system for real-time monitoring by management of station sales and inventory performance; (iv) install Cumulus's centralized networked accounting system for financial reporting, budget control, payables management and cash management; (v) establish revenue and expense budgets consistent with the programming and sales strategy and make necessary cost adjustments; and (vi) implement necessary improvements in transmission facilities, audio processing and studio facilities. From time to time, in compliance with applicable law, the Company will enter into an LMA or consulting arrangement with a target property prior to FCC final approval and the consummation of the acquisition in order to gain a "head start" on the integration process. OPERATING STRATEGY The Company's operating strategy has the following principal components: ASSEMBLE AND MANAGE MARKET CLUSTERS WITH REGIONAL CONCENTRATIONS. The Company has assembled the first or second ranked cluster of stations based on revenue share and/or audience share in all of its U.S. markets in four regional concentrations, the Midwest, Southeast, Southwest and Northeast. The Company believes that by offering a diversity of radio formats within a given market, Cumulus provides customized and efficient marketing solutions to meet advertisers' needs. By assembling market clusters with a regional concentration, the Company believes that it will be able to increase revenues by offering regional coverage of key demographic groups that were previously unavailable to national and regional advertisers. The Company also believes that its cluster approach will allow it to operate its stations with more highly skilled local management teams equipped with greater resources and to eliminate redundant operating and overhead expenses. MAXIMIZE EACH STATION'S POTENTIAL THROUGH POSITIONING AND BRANDING. The Company utilizes extensive market research to refine the programming of each of its stations and to position each as a separate brand within a particular cluster. The objective of this strategy is to optimize each station's potential in terms of audience ratings and revenue share while providing the widest possible range of choice to listeners and advertisers. Such stations can better capitalize on the operating leverage inherent in the radio industry because the costs of operating a radio station are generally fixed and, therefore, increased revenues generally result in disproportionately larger increases in Broadcast Cash Flow (as defined under "Certain Definitions and Market and Industry Data"). FOCUS ON PROGRAMMING. A principal Company operating strategy is to enhance each station's programming appeal, including both the quality and quantity of local programming as a means of enriching the listener experience. The Company believes that adopting this commitment to high quality, locally originated programming will provide its stations with a competitive advantage and increase each station's audience share. Moreover, the Company believes that the efficiencies and scale afforded by the operation of multiple stations in the same market and region working together with information technology make it possible to substantially improve programming and the quality of the listener experience without a comparable increase in cost. EXPAND DEDICATED SALES FORCE AND OPTIMIZE INVENTORY MANAGEMENT. Underpinning the Company's strategy for optimizing the potential of each station within a cluster is the practice of dedicating a sales force for each of its stations. The Company believes that many of the acquired stations have dramatically underperformed in sales, due primarily to undersized sales staffs responsible for selling air time on multiple stations, thus diluting their ability to cover all of the potential advertisers with strong advocates for each station. The Company believes its practice of utilizing a dedicated sales force for each station will attract a larger number of advertisers thereby increasing the demand for each station's commercial spot inventory. Accordingly, the Company has significantly expanded the number of salespeople for each of its stations. Salespeople are typically compensated exclusively on a commission basis. Also, in each of its market clusters, the Company utilizes Internet-based sales reporting systems to monitor its sales activity and to formulate and implement rate structure and inventory management on a continual basis. INCREASE RADIO REVENUE SHARE. The Company believes that its strategy of larger and dedicated station sales staffs, brand development, regional concentration, and market clusters will help increase advertising volume and revenues from existing customers and increase the number and scope of new advertisers. This strategy enables the Company to compete more effectively with other local and regional media such as newspapers and cable and broadcast television stations, because it can now offer a competitively priced alternative to reach the target audience that advertisers desire. The Company's sales management team has substantial experience in the areas of generating new sources of revenues including promotional events, retailer co-op advertising and other sources including business-to-business advertising. IMPLEMENT STRICT COST CONTROLS. The Company's management imposes strict financial reporting requirements and expense budget limitations on each of its stations. In addition, management maintains a centralized accounting system which allows it to monitor the performance and operations of each of its stations. Management believes such centralization allows the Company to achieve expense savings in certain areas, including purchasing and administrative expenses. Management believes that the Company will also achieve expense savings through the elimination of certain duplicate costs within its markets and market clusters. IMPLEMENT INTERNET-BASED MANAGEMENT INFORMATION SYSTEMS. The Company is implementing a proprietary application using Internet software standards to support daily sales and inventory performance reporting by station, by market and by cluster. The Company has completed implementation of the daily sales reporting application and anticipates full implementation of the inventory performance application by the end of 1998. Upon full implementation, this application will allow the Company to compare each station's actual performance (including revenue and inventory management) to budget on a regular basis and deploy resources on a timely basis to those stations not achieving budgetary goals. RECRUIT AND RETAIN SKILLED MANAGERS. The Company believes that operating a top-ranked cluster of stations in a market will enable the Company to recruit and retain high caliber radio management personnel who might otherwise be attracted to larger markets. The Company believes that regional management and coordination will enable it to maximize the benefits of operating a growing number of stations in geographically diverse locations, while maintaining controls over local operations. Local management is also central to the Company's strategy and is primarily responsible for building and developing a sales team capable of converting the stations' audience rankings into revenues. The Company's general managers and sales managers are motivated through incentive compensation based primarily upon their station's cash flow performance and secondarily on their ability to convert their station's audience share into market revenue share. REORGANIZATION AND CORPORATE STRUCTURE In March 1998, the Company amended its articles of incorporation to change its name from Cumulus Holdings, Inc. to Cumulus Media Inc. Until immediately prior to the closing of the Offerings, all of the outstanding common stock of the Company will have been held by Cumulus Media, LLC, a Wisconsin limited liability company ("Media LLC"), whose members include State of Wisconsin Investment Board, NationsBanc Capital Corp. ("NationsBanc"), Heller Equity Capital Corporation, The Northwestern Mutual Life Insurance Company ("NML") and certain members of the Company's management or affiliates of management. See "Principal and Selling Stockholders." Immediately prior to the closing of the Offerings, (i) all of the shares of the NML Preferred Stock will be exchanged for shares of Series A Preferred Stock as described below; and (ii) Media LLC will be liquidated and the shares of Class A Common Stock, Class B Common Stock and Class C Common Stock held by Media LLC will be distributed by Media LLC to its members in liquidation (the "Reorganization"). All shares of the Company's 12% Class A Cumulative Preferred Stock (the "NML Preferred Stock") which were held by NML immediately prior to the Offerings plus all accrued and unpaid dividends thereon as of the exchange date will be exchanged for shares of Series A Preferred Stock having an equivalent aggregate liquidation value pursuant to the Preferred Stock Offering. As of June 1, 1998, the liquidation value of the NML Preferred Stock was approximately $34.2 million. Subject to certain conditions, the Series A Preferred Stock will be exchangeable on any dividend payment date, at the Company's option, for the % Subordinated Exchange Debentures due 2009 (the "Exchange Debentures"). See "Description of Capital Stock." Upon the consummation of the Reorganization, the capital stock of the Company will consist of the Class A Common Stock, the Class B Common Stock, the Class C Common Stock and the Series A Preferred Stock. The Company's U.S. radio operations are conducted primarily through Cumulus Broadcasting, Inc., a Nevada corporation ("Broadcasting") and a wholly-owned subsidiary of the Company, which owns the radio stations acquired pursuant to asset purchase agreements. The Company also owns the stock of radio groups or stations acquired pursuant to stock purchase agreements. Cumulus Licensing Corp., a Nevada corporation ("Licensing") and a wholly-owned subsidiary of Broadcasting, holds virtually all the FCC licenses for the Company's stations. Certain other FCC licenses are held by wholly-owned subsidiaries of the Company and the Company intends in the near future to transfer those licenses to Licensing or to newly created subsidiaries that hold only FCC licenses. Caribbean Communications Company Ltd., a corporation organized under the laws of Montserrat ("CCC") and a wholly-owned subsidiary of the Company, owns radio stations throughout the English-speaking Eastern Caribbean, including among other places, Trinidad, St. Kitts and St. Lucia. CCC is currently constructing an FM station in Barbados and Tortola, BVI. The Company will be the issuer of the Class A Common Stock, the Series A Preferred Stock and the Notes, and is the borrower under the Credit Facility. Broadcasting and Licensing are guarantors of the Company's obligations under the Credit Facility. See "Description of the Credit Facility and Notes." PENDING ACQUISITIONS The Company has entered into definitive purchase agreements to acquire 109 stations in 28 markets for an aggregate purchase price of approximately $245.1 million in transactions which have not yet been consummated (the "Pending Acquisitions"). The Company expects to consummate most of the Pending Acquisitions during the third and fourth quarters of 1998, although there can be no assurance that the transactions will be consummated within that time frame. In two of the markets in which there are Pending Acquisitions (Dubuque, IA and Grand Junction, CO), petitions or informal objections have been filed against the Company's FCC assignment applications. In several other markets, FCC staff questions and/or requests for additional information relating to local market concentration or the FCC's cross-interest policy have been raised with respect to pending assignment applications. All such petitions, objections and FCC staff inquiries must be resolved before FCC approval can be obtained and the acquisitions consummated. There can be no assurances that other Pending Acquisitions will not be subjected to similar challenges, or that the Pending Acquisitions will be consummated. The Company believes that the proceeds of the Offerings will be sufficient to finance the consummation of the Pending Acquisitions. The Company from time to time enters into non-binding arrangements with potential sellers to conduct a diligence review of their radio stations and propose the terms of a possible purchase agreement. At the present time, discussions with potential sellers are at an early stage and no diligence reviews have been commenced. FINANCING PLAN The Company intends to use the proceeds of the Offerings to finance the Pending Acquisitions and to repay certain indebtedness. The following table presents the sources and uses of funds, pro forma for the Offerings, the acquisitions consummated after March 31, 1998 (the "Subsequent Acquisitions") and the Pending Acquisitions as if such transactions had occurred as of March 31, 1998: <TABLE> <CAPTION> (DOLLARS IN THOUSANDS) --------------------- <S> <C> SOURCES OF FUNDS: Common Stock offered to public....................................... $ 100,000 Debt Offering........................................................ 150,000 Preferred Stock offered to public(1)................................. 91,488 Cash on hand......................................................... 21,916 Escrow funds(2)...................................................... 12,522 -------- Total............................................................ $ 375,926 -------- -------- USES OF FUNDS: Purchase price of the Subsequent Acquisitions and the Pending Acquisitions....................................................... $ 279,532 Repayment of Credit Facility(3)...................................... 79,696 Fees and expenses.................................................... 16,698 -------- Total............................................................ $ 375,926 -------- -------- </TABLE> - ------------------------------ (1) Excludes exchange of NML Preferred Stock concurrent with the Preferred Stock Offering. The Company will not receive any proceeds from the exchange of the NML Preferred Stock for the Series A Preferred Stock. (2) Represents funds deposited into escrow by the Company in connection with the Subsequent and Pending Acquisitions. (3) Affiliates of Lehman Brothers Inc. act as arranger and lender under the Credit Facility. The Company is an Illinois corporation with its principal executive offices located at 111 East Kilbourn Ave., Suite 2700, Milwaukee, Wisconsin 53202, telephone number (414) 615-2800. THE STOCK OFFERINGS <TABLE> <S> <C> Class A Common Stock Offered by the Company....... 6,250,000 shares Class A Common Stock Offered by the Selling Stockholder...................... 1,170,000 shares ---------------- Total......................................... 7,420,000 shares Class A Common Stock Offered to Public: U.S. Offering................................... 5,936,000 shares International Offering.......................... 1,484,000 shares ---------------- Total......................................... 7,420,000 shares Common Stock Outstanding after the Stock Offerings(1): Class A Common Stock(2)......................... 7,613,450 shares Class B Common Stock............................ 8,711,367 shares Class C Common Stock............................ 2,433,808 shares ---------------- Total......................................... 18,758,625 shares Voting Rights..................................... Except with respect to voting and conversion, the rights of holders of Class A Common Stock, Class B Common Stock and Class C Common Stock are identical. Except upon the occurrence of certain events, holders of the Class B Common Stock are not entitled to vote, whereas holders of the Class A Common Stock are entitled to one vote per share and subject to certain exceptions holders of the Class C Common Stock are entitled to ten votes per share. Under certain conditions and subject to prior governmental approval, each share of Class B Common Stock is convertible into one share of Class A Common Stock or one share of Class C Common Stock at the option of the holder, and each share of Class C Common Stock is convertible into one share of Class A Common Stock at the option of the holder. See "Description of Capital Stock." Use of Proceeds................................... Approximately $245.1 million of the net proceeds of the Offerings will be used to finance the Pending Acquisitions. The balance of the net proceeds of the Offerings will be used to repay the principal amount of indebtedness currently outstanding under the Credit Facility for which affiliates of Lehman Brothers Inc. act as arranger and lender. See "Use of Proceeds" and "Description of Credit Facility and Notes." Proposed Nasdaq National Market Symbol.......................................... CMLS Concurrent Offerings.............................. Concurrently with the Stock Offerings, the Company is offering 125,000 shares of its % Series A Cumulative Exchangeable Redeemable Preferred Stock due 2009 (with a liquidation preference of $1,000 per share) and $150 million aggregate principal amount of its % Senior Subordinated Notes due 2008. Each Offering is conditioned upon consummation of each of the other Offerings. See "Risk Factors -- Significant Capital Requirements" and "Use of Proceeds." </TABLE> - -------------------------- (1) As of March 31, 1998, the Company had 1,000 shares of common stock outstanding. Pursuant to the Reorganization, Media LLC will exchange all 1,000 shares of outstanding common stock of the Company for 193,450 shares of Class A Common Stock, 9,881,367 shares of Class B Common Stock and 2,433,808 shares of Class C Common Stock. Media LLC will be liquidated and such shares will be distributed to its members in liquidation. Of the 9,881,367 shares of Class B Common Stock distributed to Media LLC's members, 1,170,000 of such shares will be converted into shares of Class A Common Stock and are being offered hereby by the Selling Stockholder. (2) If the Underwriters' over-allotment options were exercised in full, 8,550,950 shares of Class A Common Stock would be outstanding after the Stock Offerings. See "Underwriting" and "Description of Capital Stock."
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. TUMBLEWEED, LLC, WHICH CURRENTLY OWNS AND CONDUCTS THE TUMBLEWEED BUSINESS, WILL BE MERGED INTO TUMBLEWEED, INC. (THE "REORGANIZATION") AS DESCRIBED UNDER THE CAPTION "HISTORY AND PENDING REORGANIZATION," EFFECTIVE AT THE TIME THAT SUBSCRIPTION PROCEEDS FOR AT LEAST 700,000 SHARES HAVE BEEN RECEIVED IN ESCROW AND AN INITIAL CLOSING ON THE ESCROWED PROCEEDS OCCURS. UNLESS THE CONTEXT INDICATES OTHERWISE, ALL REFERENCES TO THE COMPANY AT TIMES BEFORE THE TIME THE REORGANIZATION TAKES EFFECT INCLUDE TUMBLEWEED, LLC , AND ALL INFORMATION IN THIS PROSPECTUS ASSUMES CONSUMMATION OF THE REORGANIZATION; THE CONVERSION OF THE OWNERSHIP INTERESTS OF THE MEMBERS OF TUMBLEWEED, LLC INTO A TOTAL 5,145,000 SHARES OF COMMON STOCK AND PAYMENT OF AN ADDITIONAL $747,500 AS OF THE EFFECTIVE TIME OF THE REORGANIZATION BY THE CLASS B MEMBERS OF TUMBLEWEED, LLC TO EXERCISE THEIR RIGHT UNDER THE TUMBLEWEED, LLC OPERATING AGREEMENT TO MAKE ADDITIONAL CAPITAL CONTRIBUTIONS, WHICH ENTITLES THE CLASS B MEMBERS TO RECEIVE 297,235 OF THE 5,145,000 SHARES OF THE COMMON STOCK TO BE ISSUED IN THE REORGANIZATION, PRIOR TO THE SALE OF COMMON STOCK IN THIS OFFERING. THE COMPANY Tumbleweed, Inc. (the "Company") owns, franchises or licenses 38 Tumbleweed-Registered Trademark- Southwest Mesquite Grill & Bar ("Tumbleweed") restaurants. The Company owns and operates 23 Tumbleweed restaurants in Kentucky, Indiana and Ohio. The Company also franchises 13 Tumbleweed restaurants in Indiana, Illinois, Tennessee and Wisconsin and licenses two restaurants outside the United States. The Company and its franchisees currently expect to open an additional 4 Company-owned, 3 franchised, and 2 licensed restaurants by the end of 1998. The 38 Tumbleweed restaurants are all open seven days a week for lunch and dinner and generally offer a full service bar. Same store sales of the Company increased 6.4% in 1996 versus 1995, 5.2% in 1997 versus 1996 and 0.4% in the first six months of 1998 versus the same period in 1997. See "Business." Tumbleweed restaurants feature sophisticated Tex-Mex and mesquite grilled food served in a casual dining atmosphere evoking the American Southwest. The Tumbleweed menu offers both distinctively seasoned, spicier versions of popular Tex-Mex dishes, as well as an assortment of grilled steaks, ribs, pork chops, chicken and seafood selections. The Tumbleweed concept is designed to appeal to a broad range of customers by offering a wide selection of distinctive items at a broad range of price points while, in management's view, providing a consistent level of food quality and friendly and efficient service comparable or superior to that of other casual dining restaurants. Use of a centralized commissary system enhances Tumbleweed's ability to maintain consistently high food quality, minimizes restaurant kitchen space and equipment, reduces the need for skilled cooking personnel, and simplifies restaurant operations. For 1997 and the first six months of 1998, the average check at a full-service Tumbleweed restaurant, including beverages, was approximately $9.10. See "Business--Concept and Strategy." The Company's strategy for growth during the next several years will focus on the further development of new and existing markets by both the Company and franchisees. Since acquiring the Tumbleweed concept in 1995, the Company has added 16 new Company-owned and 8 new franchised and licensed restaurants, while developing the infrastructure necessary to support a more aggressive growth strategy. This approach has given management an opportunity to validate the Tumbleweed concept, refine operating systems, design and develop prototype restaurant buildings of different sizes and build a team of experienced corporate managers needed to support future internal and franchise growth. See "Business--Expansion Strategy." The Company targets mid-sized metropolitan markets for development, initially concentrating in the Midwest, Mid-Atlantic and Southeast regions, where income levels and other factors indicate a significant base of potential customers exists. In selecting potential restaurant sites within target markets, management analyzes such factors as local market demographics, site visibility, competition in the vicinity, and accessibility and proximity of major retail centers, hotels, universities, and sports and entertainment facilities. Whenever possible, management considers the feasibility of opening multiple restaurants in a target market to achieve greater operating and advertising efficiencies. See "Business--Expansion Strategy." When developing a new Tumbleweed restaurant, the Company generally uses one of three prototype designs, which accommodate approximately 130, 225, and 265 guests, and target annual sales of $1,250,000, $2,000,000 and $2,500,000, respectively. The following table sets forth by restaurant size certain sales and other information for the 15 Company-owned Tumbleweed restaurants opened for all of 1997: <TABLE> <CAPTION> Number Average Sales Size Seating of Stores per Store ---- ------- --------- ------------- <S> <C> <C> <C> Mini 128-194 4 $1,317,000 Midi 210-244 3 $1,850,000 Maxi 252-384 8 $2,062,000 </TABLE> The use of multiple prototypes, in management's view, permits the Company to more closely match the investment in a restaurant site with the site's targeted revenue, thereby allowing for more efficient utilization of financial resources by the Company and its franchisees. See "Business--Properties." Tumbleweed, Inc. was incorporated by the Company on December 17, 1997 and capitalized in June 1998. Tumbleweed, LLC will merge into Tumbleweed, Inc.(the "Reorganization"), subject to the sale of at least 700,000 shares of Common Stock in this offering. The Reorganization will take effect as of the time the Company has accepted subscriptions for at least 700,000 shares of Common Stock offered hereby and elects to consummate the sale of those shares at an initial closing. Offering proceeds of approximately $6,080,000 will be available for use by the Company if the minimum number of shares are sold in the offering. Such proceeds will be used to repay bank indebtedness which is an obligation of the Class A Members of Tumbleweed, LLC. When the Reorganization takes effect, the interests of the current Class A, Class B, Class C and Common Members of Tumbleweed, LLC will be converted into a total of 5,145,000 shares of Common Stock. The interests of the Class B Members, which were issued in connection with the initial organization of Tumbleweed, LLC in September 1994, are convertible into 297,235 shares of Common Stock to be issued in the Reorganization only if the Class B Members make additional capital contributions totaling $747,500 no later than the time the Reorganization takes effect. The Class B Members have deposited the capital contributions into escrow, subject to the effectiveness of the Reorganization. In connection with the Reorganization, Tumbleweed, LLC expects to distribute approximately $440,000 to its members, which amount equals the estimated income taxes payable on Tumbleweed, LLC's earnings, plus interest owed by Class A members on bank indebtedness recorded as redeemable members' equity for which the Class A members are liable, through the date the Reorganization takes effect. The Company also expects to establish a deferred tax liability of approximately $444,000 in connection with the Company's conversion from a limited liability company to a C corporation in the Reorganization. See "History and Pending Reorganization," "Capitalization" and "Certain Transactions." The Company's executive offices are located at 1900 Mellwood Avenue, Louisville, Kentucky 40206, and its telephone number is (502) 893-0323. THE OFFERING <TABLE> <S> <C> Securities Offered Common Stock of Tumbleweed, Inc. Offering Price $10.00 per share Number of Shares Offered Maximum of 1,200,000 shares Minimum of 700,000 shares (1) Common Stock to be Outstanding after the Offering 6,345,000 shares if 1,200,000 shares are sold in this offering 5,845,000 shares if 700,000 shares are sold in this offering(2) Use of Proceeds If the minimum number of shares are sold in this offering, the offering proceeds of approximately $6,080,000, together with $747,500 in capital contributions from the Class B members and additional advances from the Company's line of credit and working capital, will be used to repay approximately $7 million of bank indebtedness which is an obligation of the Class A Members of Tumbleweed, LLC as of the date of this Prospectus, and is accounted for as redeemable members' equity. The redeemable members' equity was contributed to fund a portion of the initial capitalization of the Company and was used to purchase the Tumbleweed business and assets in January 1995. If the maximum number of shares are sold in this offering, the offering proceeds of approximately $11,000,000, together with $747,500 in capital contributions from the Class B members, will be used first to repay approximately $7 million of bank indebtedness. Approximately $4,668,000 in net proceeds will then be used to repay the outstanding balance of the Company's line of credit, which totaled approximately $3,182,000 at June 30, 1998. The remaining net proceeds, cash from operations and other borrowings, are expected to be used to finance the development of additional restaurants, to fund working capital needs, and for general corporate purposes. The Company may also use offering proceeds to expand its commissary operations to support additional growth and to buy out certain restaurant leases, if cost-effective. See "Use of Proceeds" and "Certain Transactions -- Leases With Affiliates." <S> <C> The Offering Period The offering will terminate on the earlier of the date that all of the 1,200,000 shares offered hereby are sold or 5:00 p.m. Eastern Time, on December 31, 1998, unless terminated sooner (the "Termination Date"). The Termination Date may be extended at the discretion of the Company for up to an additional 90 days to no later than March 31, 1999. The offering will be terminated, and no Shares will be issued and no subscription proceeds will be released from escrow to the Company, unless on or before the Termination Date the Company has received and accepted subscriptions for an aggregate of at least 700,000 Shares ($7,000,000) and good funds therefor have been deposited in escrow. If the Company receives and accepts subscriptions for fewer than 700,000 shares on or before the Termination Date, or the offering is terminated for any other reason other than the sale of at least 700,000 shares, all subscription proceeds will be promptly returned to subscribers, with interest and without deduction. </TABLE> - -------------- (1) The offering is contingent upon the receipt and acceptance of subscriptions for a minimum of 700,000 shares ($7,000,000) before the Termination Date. See "Risk Factors" and "Plan of Distribution." (2) Assumes 5,145,000 shares will be received by current members of Tumbleweed, LLC in the Reorganization. See "History and Pending Reorganization." Excludes approximately 400,000 shares of Common Stock issuable to employees and nonemployee directors upon the exercise of stock options to be granted under the Company's stock incentive plan concurrently with the closing of the offering. See "Management -- Stock Incentive Plan" and " -- Director Compensation." SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> YEARS ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, ---------------------------------------- --------------------- 1995 1996 1997 1997 1998 ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA(1): Total revenues $19,547 $25,732 $29,826 $14,234 $19,685 Income from operations 949 705 2,143 967 1,313 Net income as reported 683 501 1,714 750 933 PRO FORMA DATA Net income as reported $ 1,714 $ 750 $ 933 Pro forma income tax expense(2) (617) (270) (336) Pro forma net income $ 1,097 $ 480 $ 597 Pro forma net income per share - basic and diluted $ 0.21 $ 0.09 $ 0.12 Weighted average shares outstanding (3) 5,145 5,145 5,145 </TABLE> <TABLE> <CAPTION> JUNE 30, 1998 PRO FORMA PRO FORMA PRO AS ADJUSTED AS ADJUSTED ACTUAL FORMA(4) (MINIMUM)(5) (MAXIMUM)(6) ------ -------- ------------ ------------ <S> <C> <C> <C> <C> BALANCE SHEET DATA: Total assets.......................... $29,374 $29,374 $29,374 $34,042 Long-term debt and capital lease obligations, including current maturities......................... 11,356 11,356 11,608 11,356 Total liabilities..................... 13,649 14,093 14,345 14,093 Redeemable members' equity............ 24,669 7,080 -- -- Members' equity....................... 7 -- -- -- Retained earnings (deficit)........... (8,951) -- -- -- Pro forma stockholders' equity........ -- 8,201 15,029 19,949 </TABLE> - -------------------- (1) Historical data of the Company prior to the Reorganization. (2) Prior to the Reorganization, the Company operated as a limited liability company and was not subject to corporate income taxes. Pro forma adjustment has been made to net income to give effect to federal and state income taxes as though the Company had been subject to corporate income taxes for the periods presented with an effective tax rate of 36%. (3) Shares outstanding gives effect to the Reorganization as if it had occurred as of January 1, 1997. See "History and Pending Reorganization." (4) Reflects the establishment of a deferred tax liability of $444,000 assuming the termination of Tumbleweed, LLC's limited liability company status on June 30, 1998, and the conversion of members' interests into 5,145,000 shares of Common Stock. See "History and Pending Reorganization." (5) Adjusted to reflect the capital contribution of $747,500 by certain Class B Members as of the effective time of the Reorganization, the net proceeds of the sale by the Company of 700,000 shares of Common Stock at an assumed initial public offering price of $10.00 per share, and the use of the net proceeds plus borrowing of $252,000 to repay indebtedness recorded as redeemable members' equity as of the date of this Prospectus. See "Use of Proceeds" and "History and Pending Reorganization." (6) Adjusted to reflect the capital contribution of $747,500 by certain Class B Members as of the effective time of the Reorganization, the net proceeds of the sale by the Company of 1,200,000 shares of Common Stock at an assumed initial public offering price of $10.00 per share, and the use of the net proceeds to repay indebtedness recorded as redeemable members' equity as of the date of this Prospectus and for other corporate purposes. See "Use of Proceeds" and "History and Pending Reorganization."
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+SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Investors are urged to read this Prospectus in its entirety. As used in this Prospectus, the term "Holdings" means Thermadyne Holdings Corporation, including its predecessors and subsidiaries; the term "Issuers" means Thermadyne Mfg. LLC, a wholly owned subsidiary of Holdings ("Thermadyne LLC"), and Thermadyne Capital Corp. ("Thermadyne Capital"), a wholly owned subsidiary of Thermadyne LLC; and the terms "Company" and "Thermadyne" mean Thermadyne LLC and its predecessors and subsidiaries. THE COMPANY OVERVIEW Thermadyne is a leading global manufacturer of cutting and welding products and accessories. The Company manufactures a broad range of gas (oxy-fuel) and electric arc cutting and welding products that are ultimately sold to end-user customers principally engaged in the aerospace, automotive, construction, metal fabrication, mining, mill and foundry, petroleum and shipbuilding industries. Thermadyne sells its products through a long-established domestic network of approximately 1,100 independent distributors who market Thermadyne products to over 10,000 end-user customers. For the twelve months ended March 31, 1998, the Company's net sales and Adjusted EBITDA (as defined herein), on a pro forma basis, were $548.2 million and $115.5 million, respectively. The Company's core products enjoy leading brand recognition, a reputation for quality and strong market positions. In 1994, following the Company's Restructuring (as defined herein), current management initiated a series of transactions to focus the Company's business exclusively on the cutting and welding industry. As part of this strategy, the Company divested three non-core businesses and acquired six cutting and welding businesses, which collectively generated approximately $169 million in annual revenues at the respective times of acquisition. As a result of this repositioning strategy, along with ongoing new product introductions, an extensive distribution network and market leading brands, the Company has achieved a compound annual growth in net sales and EBITDA of 20.3% and 12.5%, respectively, from 1993 to 1997. According to the United States Department of Commerce, domestic welding industry revenues totaled over $3.6 billion in 1997. The domestic industry has grown at an annual rate of 5.9% since 1989 and is expected to grow 4.2% in 1998. Global welding industry revenues are estimated to total over $10.0 billion, and management believes that growth in the international market has been faster than the domestic market, driven, in large part, by infrastructure spending in developing markets. International markets, including Australia and Italy, represented approximately 42% of the Company's net sales in 1997, up from approximately 20% of net sales in 1994. Although the industry has begun to experience global consolidation, it continues to be very fragmented. COMPETITIVE STRENGTHS Thermadyne possesses a number of competitive strengths that have allowed it to develop and maintain a strong position within the cutting and welding industry, including the following: Market Leading Brands. Management believes that the strength and longevity of the numerous Thermadyne brand names create a significant competitive advantage and position Thermadyne as one of the leaders in the cutting and welding industry. Each of the Company's major divisions maintains industry-leading brand names with significant market shares. Management believes that VICTOR(R), founded in 1913, is the leading brand name in domestic gas-operated cutting and welding torches and equipment; TWECO(R), founded in 1936, is the leading domestic manufacturer of metal inert gas ("MIG") and manual welding torches; ARCAIR(R) is the leading domestic brand name of tungsten inert gas ("TIG") torch and accessory products; THERMAL DYNAMICS(R), founded in 1957, is a leading domestic manufacturer of manual plasma cutting products; and CIGWELD(R), founded in 1922, is the leading brand name in the Australia/New Zealand cutting and welding (Continued from cover page) Each broker-dealer that receives New Senior Subordinated Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Subordinated Notes. The letter of transmittal accompanying this Prospectus (the "Letter of Transmittal") states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Senior Subordinated Notes received in exchange for Old Senior Subordinated Notes where such Old Senior Subordinated Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Issuers have agreed, for a period of 90 days after the Expiration Date, to make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." No public market existed for the Old Senior Subordinated Notes before the Exchange Offer. The Issuers currently do not intend to list the New Senior Subordinated Notes on any securities exchange or to seek approval for quotation through any automated quotation system, and no active public market for the New Senior Subordinated Notes is currently anticipated. The Issuers will pay all the expenses incident to the Exchange Offer. The Exchange Offer is not conditioned upon any minimum principal amount of Old Senior Subordinated Notes being tendered for exchange pursuant to the Exchange Offer. products market. Each of the manufacturing operations associated with these brands is ISO-9000 series certified. Diverse and Stable Customer Base. The Company's customer base includes cutting and welding product distributors as well as end-user customers principally engaged in the aerospace, automotive, construction, metal fabrication, mining, mill and foundry, petroleum and ship building industries. No one customer accounted for more than 9% of the Company's 1997 net sales. Further, the Company's top 20 customers have been associated with the Company for an average of over 10 years. Established, Effective Distribution Channels. The Company believes that its strong, established and long-standing relationships with over 1,100 independent cutting and welding products distributors in the United States provide a significant competitive advantage and support the Company's strong market position. Thermadyne's domestic distributor relationships are maintained by 11 area business managers who oversee the Company's relationships with large distributors and by separate product-specific sales forces for each of Thermadyne's business units. Management believes that this unique structure, which combines relationship managers with technically trained product specialists, will enable the Company to more effectively maintain and utilize its distributor networks. Management also believes that this established distribution network enables the Company to achieve market penetration when introducing newly developed or acquired products. Proven and Committed Senior Management Team. Thermadyne's management team has strategically repositioned the Company over the past four years to focus exclusively in its core cutting and welding markets. This repositioning was accomplished through divestitures of three non-core assets and acquisitions of six strategic businesses or product lines. In addition, management has initiated the development and introduction of significant new products and product lines. As a result of management's efforts, the Company achieved a 20.3% growth rate in net sales from 1993 to 1997. In connection with the Merger each member of the senior management team signed an employment contract with the Company. Additionally, the Company adopted an incentive plan to tie each member of senior management's compensation to the Company's financial performance. See "Executive Compensation." BUSINESS STRATEGY Thermadyne has developed a business strategy designed to enhance its strong market positions and continue to improve its growth and profitability. The primary elements of the Company's business strategy are as follows: Continue New Product Development and Enhancement. The foundation for Thermadyne's strong market positions and leading brand names is the development and introduction of new products and enhancements of existing products. The Company believes it is at the forefront of cutting and welding technology with a proven track-record of continual new product introductions and existing product enhancements that have resulted in 262 issued or pending United States and foreign patents. New products and product enhancements are designed to add value for customers, including enhanced safety features, improved productivity and ergonomics and an improved welding environment. Examples of recent new product introductions include robotic welding systems and accessories, high-purity instrumentation, automated plasma cutting and safety products as well as underwater cutting electrodes. During 1997, the Company introduced over 135 new products or product enhancements, and the Company expects to continue this effort in the future. Expand Strategic Acquisitions. The Company has completed six acquisitions since 1993, which collectively generated approximately $169 million in annual revenues at the respective times of acquisition, including over $135 million of revenues for Australia and Italy. The Company believes that numerous acquisition candidates exist globally, and the Company intends to continue to seek new acquisition opportunities in its cutting and welding business. Thermadyne intends to continue its focused acquisition strategy that includes the following principal elements: (i) entering and expanding in geographic areas where the Company does not currently have a significant presence through acquisitions of local cutting and welding businesses and (ii) expanding in geographic areas where the Company currently maintains a strong presence through the acquisition of complementary product lines. Leverage Existing Distribution Network. The Company intends to leverage its existing distribution network through the acquisition or introduction of new products and product enhancements. Management believes that when the Company acquires a local presence in a new geographic area, it can utilize the acquired distribution network to sell existing Thermadyne brands into that local market. In addition, the Company believes that significant opportunities exist to purchase complementary product lines and expand its business by selling the new product lines through Thermadyne's extensive distribution network. For example, through recent acquisitions the Company has expanded its offering of filler metals, conventional arc welding power supplies, safety equipment and engine-driven welding power sources and began marketing such products through its established distribution network. The Company intends to continue this strategy of penetrating new welding product markets by leveraging its extensive distribution network in conjunction with its new product development and focused acquisition strategies. Broaden International Presence. Thermadyne has maintained an international presence for over 30 years and continues to broaden its presence throughout the world. International sales accounted for approximately 42% of net sales in 1997 as compared to approximately 20% in 1994. The Company has established a dedicated international market presence and maintains the leading position in Australia/New Zealand and significant and growing positions in Europe, Asia and Latin America. Management intends to continue the expansion of its strong domestic brand names into the international market and to continue to penetrate the growing Asian and Latin American cutting and welding markets. Continue Cost Reduction Efforts. Thermadyne strives to continually improve manufacturing efficiencies and reduce unit costs. In December 1997, the Company implemented a cost reduction program that includes the following principal elements: (i) vendor rationalization and consolidation; (ii) manufacturing process and productivity improvements and product design changes; (iii) personnel rationalization and expense reductions; (iv) advertising and trade show expense reductions; (v) aircraft, charter and other travel expense reductions; and (vi) elimination of the annual sales meeting. These cost reduction initiatives are expected to generate approximately $10 million in savings on an annualized basis. In addition, the Company has initiated the implementation of a new global information system that is designed to allow the Company to further integrate administrative functions and improve information flow across business unit lines. Continue Dedicated Customer Service. The Company believes that effective and proactive customer service has enabled the Company to build and maintain its leading market positions and strong distributor relationships. Management plans to continue this strategy of enhancing distributor and end-user relationships through continuous customer service improvements. Each of Thermadyne's divisions maintains a dedicated, well trained, technically oriented and product-specific sales and customer service team. Management believes that the dedicated product teams provide Thermadyne with a significant competitive advantage. In addition, to further improve customer service, the Company has implemented a national accounts team of 11 area business managers to support the dedicated product sales and service teams and further support sales to the Company's key distributors. THE MERGER AND MERGER FINANCING On May 22, 1998, Holdings consummated the merger of Mercury Acquisition Corporation ("Mercury"), a corporation organized by DLJ Merchant Banking Partners II, L.P. ("DLJMB") and affiliated funds and entities (the "DLJMB Funds") with and into Holdings, with Holdings continuing as the surviving corporation (the "Merger"). In order to fund the payment of the cash portion of the Merger Consideration (as defined herein), the Option Cash Proceeds (as defined herein) and the ESPP Cash Proceeds (as defined herein), to refinance and/or retire outstanding indebtedness of the Company, and to pay expenses incurred in connection with the Merger, the Issuers issued the Senior Subordinated Notes and the Company entered into a syndicated senior secured loan facility providing for term loan borrowings in the aggregate principal amount of approximately $330 million and revolving loan borrowings of $100 million (the "New Credit Facility"). In connection with the Merger, the Company borrowed all term loans available under the New Credit Facility plus approximately $25 million of revolving loans. The remaining revolving loans will be available to fund the working capital requirements of the Company. The proceeds of such financings were distributed to Holdings in the form of a dividend. See "Description of New Credit Facility," "The Merger and Merger Financing" and "Certain Relationships and Related Transactions." Mercury issued approximately $94.6 million aggregate gross proceeds of its 12 1/2% Senior Discount Debentures due 2008 (the "Debentures"). In connection with the Merger, Holdings succeeded to the obligations of Mercury with respect to the Debentures. The DLJMB Funds also purchased 2,608,696 shares of common stock of Mercury ("Mercury Common Stock"), 2,000,000 shares of senior exchangeable preferred stock of Mercury ("Mercury Preferred Stock") and warrants to purchase 353,428 shares of Mercury Common Stock at an exercise price of $0.01 per share (the "DLJMB Warrants") for approximately $140 million (the "DLJMB Equity Investment"). As a result of the Merger, the proceeds of such purchases became an asset of Holdings, each share of Mercury Common Stock became a share of common stock of Holdings ("Holdings Common Stock"), each share of Mercury Preferred Stock became a share of senior exchangeable preferred stock of Holdings ("Holdings Preferred Stock") and each DLJMB Warrant to acquire Mercury Common Stock became exercisable for an equal number of shares of Holdings Common Stock. In addition, in connection with the Merger, certain members of senior management purchased 143,192 shares of Holdings Common Stock for approximately $4.9 million (the "Management Share Purchase"), of which approximately $3.6 million was provided through non-recourse loans from Holdings (the "Management Loans"). The equity and debt financings referred to above are collectively referred to herein as the "Merger Financing." THE EXCHANGE OFFER The Exchange Offer......... $1,000 principal amount at maturity of New Senior Subordinated Notes in exchange for each $1,000 principal amount at maturity of Old Senior Subordinated Notes. The Old Senior Subordinated Notes were sold on May 22, 1998, in a private placement to Donaldson, Lufkin & Jenrette Securities Corporation ("DLJSC" or the "Initial Purchaser"), which immediately resold to the Old Senior Subordinated Notes pursuant to Rule 144A promulgated under the Securities Act (the "Original Offering"). As of the date hereof, Old Senior Subordinated Notes representing $207 million aggregate principal amount at maturity are outstanding. The terms of the New Senior Subordinated Notes and the Old Senior Subordinated Notes are substantially identical in all material respects, except that the New Senior Subordinated Notes will be freely transferable by the holders thereof except as otherwise provided herein. See "Description of New Senior Subordinated Notes." Based on an interpretation by the Commission's staff set forth in no-action letters issued to third parties unrelated to the Issuers and the Guarantors, the Issuers and the Guarantors believe that New Senior Subordinated Notes issued pursuant to the Exchange Offer in exchange for Old Senior Subordinated Notes may be offered for resale, sold and otherwise transferred by any person receiving the New Notes, whether or not that person is the registered holder (other than any such holder or such other person that is an "affiliate" of the Issuers or any Guarantor within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that (i) the New Senior Subordinated Notes are acquired in the ordinary course of business of that holder or such other person, (ii) neither the holder nor such other person is engaging in or intends to engage in a distribution of the New Senior Subordinated Notes and (iii) neither the holder nor such other person has an arrangement or understanding with any person to participate in the distribution of the New Senior Subordinated Notes. See "The Exchange Offer -- Purpose and Effect." Each broker-dealer that receives New Senior Subordinated Notes for its own account in exchange for Old Senior Subordinated Notes, where those Old Senior Subordinated Notes were acquired by the broker-dealer as a result of its market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of these New Senior Subordinated Notes. See "Plan of Distribution." Registration Rights Agreement................ In connection with the Original Offering, the Issuers and the Guarantors entered into a Registration Rights Agreement with the Initial Purchaser (the "Registration Rights Agreement") requiring the Issuers to make the Exchange Offer. See "The Exchange Offer -- Purpose and Effect." Expiration Date............ The Exchange Offer will expire at 5:00 p.m., New York City time, September 3, 1998, or such later date and time to which it is extended (the "Expiration Date"). Withdrawal................. The tender of the Old Senior Subordinated Notes pursuant to the Exchange Offer may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Any Old Senior Subordinated Notes not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Exchange Offer. Interest on the New Senior Subordinated Notes.................... Interest on each New Senior Subordinated Note will accrue from the date of issuance of the Old Senior Subordinated Note for which the New Senior Subordinated Note is exchanged or from the date of the last periodic payment of interest on such Old Senior Subordinated Note, whichever is later. No additional interest will be paid on Old Senior Subordinated Notes tendered and accepted for exchange. Conditions to the Exchange Offer.................... The Exchange Offer is subject to certain customary conditions, certain of which may be waived by the Issuers. See "The Exchange Offer -- Conditions to the Exchange Offer." Procedures for Tendering Old Senior Subordinated Notes.................... Each holder of Old Senior Subordinated Notes wishing to accept the Exchange Offer must complete, sign and date the Letter of Transmittal, or a copy thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver the Letter of Transmittal, or the copy, together with the Old Senior Subordinated Notes and any other required documentation, to the Exchange Agent (as defined herein) at the address set forth herein. Persons holding the Old Senior Subordinated Notes through the Depository Trust Company ("DTC") and wishing to accept the Exchange Offer must do so pursuant to the DTC's Automated Tender Offer Program, by which each tendering participant will agree to be bound by the Letter of Transmittal. By executing or agreeing to be bound by the Letter of Transmittal, each holder will represent to the Issuers that, among other things, (i) the New Senior Subordinated Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Senior Subordinated Notes, whether or not such person is the registered holder of the Old Senior Subordinated Notes, (ii) neither the holder nor any such other person is engaging in or intends to engage in a distribution of such New Senior Subordinated Notes, (iii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Senior Subordinated Notes, and (iv) neither the holder nor any such other person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of the Issuers or any Guarantor. Pursuant to the Registration Rights Agreement, the Issuers are required to file a "shelf" registration statement for a continuous offering pursuant to Rule 415 under the Securities Act in respect of the Old Notes if (a) they are prohibited from consummating the Exchange Offer because the Exchange Offer is not permitted by applicable law or Commission policy or (b) any holder of Transfer Restricted Securities (as defined) notifies the Issuers in writing prior to the 20th business day following consummation of the Exchange Offer that (i) based on an opinion of counsel, it is prohibited by law or Commission policy from participating in the Exchange Offer or (ii) it is a broker-dealer and owns Senior Subordinated Notes acquired directly from the Issuers. Acceptance of Old Notes and Delivery of New Notes.... The Issuers and the Guarantors will accept for exchange any and all Old Senior Subordinated Notes which are properly tendered (and not withdrawn) in the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Senior Subordinated Notes issued pursuant to the Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offer -- Terms of the Exchange Offer." Exchange Agent............. State Street Bank and Trust Company is serving as Exchange Agent (the "Exchange Agent") in connection with the Exchange Offer. Federal Income Tax Considerations........... The exchange pursuant to the Exchange Offer should not be a taxable event for federal income tax purposes. See "Certain United States Federal Income Tax Considerations." Effect of Not Tendering.... Old Senior Subordinated Notes that are not tendered or that are improperly tendered and not accepted will, following the completion of the Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. The Issuers and the Guarantors will have no further obligation to provide for the registration under the Securities Act of such Old Senior Subordinated Notes. THE NEW SENIOR SUBORDINATED NOTES Securities Offered......... $207.0 million aggregate principal amount at maturity of 9 7/8% Senior Subordinated Notes due 2008. Issuers.................... The New Senior Subordinated Notes will be joint and several obligations of the Company and Thermadyne Capital. Thermadyne Capital is a Delaware corporation and wholly-owned subsidiary of the Company formed in connection with the Original Offering. Thermadyne Capital has no assets, no liabilities (other than the Senior Subordinated Notes), no substantial operations, and will be prohibited from engaging in any business activities. Maturity Date.............. June 1, 2008. Interest Payment Dates..... June 1 and December 1, commencing December 1, 1998. Optional Redemption........ The New Senior Subordinated Notes will be subject to redemption at any time on or after June 1, 2003 at the option of the Issuers, in whole or in part, in cash at the redemption prices set forth herein, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the applicable redemption date. Notwithstanding the foregoing, on or prior to June 1, 2001, the Issuers may redeem up to 35% of the aggregate principal amount of Senior Subordinated Notes ever issued under the Indenture in cash at a redemption price of 109.875% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the redemption date, with the net cash proceeds of one or more Public Equity Offerings; provided that at least 65% of the aggregate principal amount of Senior Subordinated Notes ever issued under the Indenture remains outstanding immediately after the occurrence of any such redemption. In addition, at any time prior to June 1, 2003, the Issuers may, at their option upon the occurrence of a Change of Control, redeem the New Senior Subordinated Notes, in whole but not in part, in cash at a redemption price equal to (i) the present value of the sum of all the remaining interest (excluding accrued and unpaid interest, if any), premium and principal payments that would become due on the New Senior Subordinated Notes as if the New Senior Subordinated Notes were to remain outstanding and be redeemed on June 1, 2003, computed using a discount rate equal to the Treasury Rate plus 50 basis points, plus (ii) accrued and unpaid interest and Liquidated Damages, if any, to the date of redemption. See "Description of New Senior Subordinated Notes -- Optional Redemption." Change of Control.......... Upon the occurrence of a Change of Control, each Holder of New Senior Subordinated Notes will have the right to require the Issuers to repurchase all or any part of such Holder's New Senior Subordinated Notes at an offer price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the date of repurchase. No assurance can be given that the Issuers will have sufficient resources to satisfy their repurchase obligation with respect to the New Senior Subordinated Notes following a Change of Control. See "Risk Factors -- Possible Inability to Repurchase New Senior Subordinated Notes upon Change of Control" and "Description of New Senior Subordinated Notes -- Repurchase at the Option of Holders -- Change of Control." Ranking.................... The New Senior Subordinated Notes will be general unsecured obligations of the Issuers and will be subordinated in right of payment to all existing and future Senior Indebtedness of the Issuers, including indebtedness pursuant to the New Credit Facility. The New Senior Subordinated Notes will rank pari passu with any future senior subordinated indebtedness of the Issuers and will rank senior to all Subordinated Indebtedness of the Issuers. The New Senior Subordinated Notes will be effectively subordinated to all liabilities of the Issuers' subsidiaries that are not Guarantors. On a pro forma basis after giving effect to the Merger, including the Merger Financing and the application of proceeds thereof, as of March 31, 1998, the Company and the Guarantors would have had outstanding approximately $379.5 million of Senior Indebtedness and the Company's non-Guarantor subsidiaries would have had approximately $87.0 million of outstanding liabilities, including trade payables. Note Guarantees............ The New Senior Subordinated Notes will be unconditionally guaranteed on a senior subordinated basis by the Guarantors. The Note Guarantees will be general unsecured obligations of the Guarantors, will be subordinated in right of payment to all existing and future Senior Indebtedness of the Guarantors, including indebtedness under the New Credit Facility, and will rank senior in right of payment to any future subordinated indebtedness of the Guarantors. See "Description of New Senior Subordinated Notes -- Note Guarantees." Certain Covenants.......... The Indenture pursuant to which the New Senior Subordinated Notes will be issued (the "Indenture") contains certain covenants that, among other things, limit the ability of the Issuers and their Restricted Subsidiaries (as defined herein) to: incur indebtedness and issue preferred stock, repurchase Capital Stock (as defined herein) and Indebtedness subordinated to the New Senior Subordinated Notes, engage in transactions with affiliates, engage in sale and leaseback transactions, incur or suffer to exist certain liens, pay dividends or other distributions, make investments, sell assets and engage in certain mergers and consolidations. Use of Proceeds............ There will be no cash proceeds to the Issuers from the exchange pursuant to the Exchange Offer. The net proceeds from the Original Offering, together with the initial borrowings under the New Credit Facility, the DLJMB Equity Investment and the issuance of the Debentures, were used to fund payment of the cash portion of the Merger Consideration, the Option Cash Proceeds and the ESPP Cash Proceeds, to refinance outstanding indebtedness of the Company and to pay the expenses incurred in connection with the Merger. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001064547_c-g_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001064547_c-g_prospectus_summary.txt
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+SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Investors are urged to read this Prospectus in its entirety. As used in this Prospectus, the term "Holdings" means Thermadyne Holdings Corporation, including its predecessors and subsidiaries; the term "Issuers" means Thermadyne Mfg. LLC, a wholly owned subsidiary of Holdings ("Thermadyne LLC"), and Thermadyne Capital Corp. ("Thermadyne Capital"), a wholly owned subsidiary of Thermadyne LLC; and the terms "Company" and "Thermadyne" mean Thermadyne LLC and its predecessors and subsidiaries. THE COMPANY OVERVIEW Thermadyne is a leading global manufacturer of cutting and welding products and accessories. The Company manufactures a broad range of gas (oxy-fuel) and electric arc cutting and welding products that are ultimately sold to end-user customers principally engaged in the aerospace, automotive, construction, metal fabrication, mining, mill and foundry, petroleum and shipbuilding industries. Thermadyne sells its products through a long-established domestic network of approximately 1,100 independent distributors who market Thermadyne products to over 10,000 end-user customers. For the twelve months ended March 31, 1998, the Company's net sales and Adjusted EBITDA (as defined herein), on a pro forma basis, were $548.2 million and $115.5 million, respectively. The Company's core products enjoy leading brand recognition, a reputation for quality and strong market positions. In 1994, following the Company's Restructuring (as defined herein), current management initiated a series of transactions to focus the Company's business exclusively on the cutting and welding industry. As part of this strategy, the Company divested three non-core businesses and acquired six cutting and welding businesses, which collectively generated approximately $169 million in annual revenues at the respective times of acquisition. As a result of this repositioning strategy, along with ongoing new product introductions, an extensive distribution network and market leading brands, the Company has achieved a compound annual growth in net sales and EBITDA of 20.3% and 12.5%, respectively, from 1993 to 1997. According to the United States Department of Commerce, domestic welding industry revenues totaled over $3.6 billion in 1997. The domestic industry has grown at an annual rate of 5.9% since 1989 and is expected to grow 4.2% in 1998. Global welding industry revenues are estimated to total over $10.0 billion, and management believes that growth in the international market has been faster than the domestic market, driven, in large part, by infrastructure spending in developing markets. International markets, including Australia and Italy, represented approximately 42% of the Company's net sales in 1997, up from approximately 20% of net sales in 1994. Although the industry has begun to experience global consolidation, it continues to be very fragmented. COMPETITIVE STRENGTHS Thermadyne possesses a number of competitive strengths that have allowed it to develop and maintain a strong position within the cutting and welding industry, including the following: Market Leading Brands. Management believes that the strength and longevity of the numerous Thermadyne brand names create a significant competitive advantage and position Thermadyne as one of the leaders in the cutting and welding industry. Each of the Company's major divisions maintains industry-leading brand names with significant market shares. Management believes that VICTOR(R), founded in 1913, is the leading brand name in domestic gas-operated cutting and welding torches and equipment; TWECO(R), founded in 1936, is the leading domestic manufacturer of metal inert gas ("MIG") and manual welding torches; ARCAIR(R) is the leading domestic brand name of tungsten inert gas ("TIG") torch and accessory products; THERMAL DYNAMICS(R), founded in 1957, is a leading domestic manufacturer of manual plasma cutting products; and CIGWELD(R), founded in 1922, is the leading brand name in the Australia/New Zealand cutting and welding (Continued from cover page) Each broker-dealer that receives New Senior Subordinated Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Subordinated Notes. The letter of transmittal accompanying this Prospectus (the "Letter of Transmittal") states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Senior Subordinated Notes received in exchange for Old Senior Subordinated Notes where such Old Senior Subordinated Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Issuers have agreed, for a period of 90 days after the Expiration Date, to make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." No public market existed for the Old Senior Subordinated Notes before the Exchange Offer. The Issuers currently do not intend to list the New Senior Subordinated Notes on any securities exchange or to seek approval for quotation through any automated quotation system, and no active public market for the New Senior Subordinated Notes is currently anticipated. The Issuers will pay all the expenses incident to the Exchange Offer. The Exchange Offer is not conditioned upon any minimum principal amount of Old Senior Subordinated Notes being tendered for exchange pursuant to the Exchange Offer. products market. Each of the manufacturing operations associated with these brands is ISO-9000 series certified. Diverse and Stable Customer Base. The Company's customer base includes cutting and welding product distributors as well as end-user customers principally engaged in the aerospace, automotive, construction, metal fabrication, mining, mill and foundry, petroleum and ship building industries. No one customer accounted for more than 9% of the Company's 1997 net sales. Further, the Company's top 20 customers have been associated with the Company for an average of over 10 years. Established, Effective Distribution Channels. The Company believes that its strong, established and long-standing relationships with over 1,100 independent cutting and welding products distributors in the United States provide a significant competitive advantage and support the Company's strong market position. Thermadyne's domestic distributor relationships are maintained by 11 area business managers who oversee the Company's relationships with large distributors and by separate product-specific sales forces for each of Thermadyne's business units. Management believes that this unique structure, which combines relationship managers with technically trained product specialists, will enable the Company to more effectively maintain and utilize its distributor networks. Management also believes that this established distribution network enables the Company to achieve market penetration when introducing newly developed or acquired products. Proven and Committed Senior Management Team. Thermadyne's management team has strategically repositioned the Company over the past four years to focus exclusively in its core cutting and welding markets. This repositioning was accomplished through divestitures of three non-core assets and acquisitions of six strategic businesses or product lines. In addition, management has initiated the development and introduction of significant new products and product lines. As a result of management's efforts, the Company achieved a 20.3% growth rate in net sales from 1993 to 1997. In connection with the Merger each member of the senior management team signed an employment contract with the Company. Additionally, the Company adopted an incentive plan to tie each member of senior management's compensation to the Company's financial performance. See "Executive Compensation." BUSINESS STRATEGY Thermadyne has developed a business strategy designed to enhance its strong market positions and continue to improve its growth and profitability. The primary elements of the Company's business strategy are as follows: Continue New Product Development and Enhancement. The foundation for Thermadyne's strong market positions and leading brand names is the development and introduction of new products and enhancements of existing products. The Company believes it is at the forefront of cutting and welding technology with a proven track-record of continual new product introductions and existing product enhancements that have resulted in 262 issued or pending United States and foreign patents. New products and product enhancements are designed to add value for customers, including enhanced safety features, improved productivity and ergonomics and an improved welding environment. Examples of recent new product introductions include robotic welding systems and accessories, high-purity instrumentation, automated plasma cutting and safety products as well as underwater cutting electrodes. During 1997, the Company introduced over 135 new products or product enhancements, and the Company expects to continue this effort in the future. Expand Strategic Acquisitions. The Company has completed six acquisitions since 1993, which collectively generated approximately $169 million in annual revenues at the respective times of acquisition, including over $135 million of revenues for Australia and Italy. The Company believes that numerous acquisition candidates exist globally, and the Company intends to continue to seek new acquisition opportunities in its cutting and welding business. Thermadyne intends to continue its focused acquisition strategy that includes the following principal elements: (i) entering and expanding in geographic areas where the Company does not currently have a significant presence through acquisitions of local cutting and welding businesses and (ii) expanding in geographic areas where the Company currently maintains a strong presence through the acquisition of complementary product lines. Leverage Existing Distribution Network. The Company intends to leverage its existing distribution network through the acquisition or introduction of new products and product enhancements. Management believes that when the Company acquires a local presence in a new geographic area, it can utilize the acquired distribution network to sell existing Thermadyne brands into that local market. In addition, the Company believes that significant opportunities exist to purchase complementary product lines and expand its business by selling the new product lines through Thermadyne's extensive distribution network. For example, through recent acquisitions the Company has expanded its offering of filler metals, conventional arc welding power supplies, safety equipment and engine-driven welding power sources and began marketing such products through its established distribution network. The Company intends to continue this strategy of penetrating new welding product markets by leveraging its extensive distribution network in conjunction with its new product development and focused acquisition strategies. Broaden International Presence. Thermadyne has maintained an international presence for over 30 years and continues to broaden its presence throughout the world. International sales accounted for approximately 42% of net sales in 1997 as compared to approximately 20% in 1994. The Company has established a dedicated international market presence and maintains the leading position in Australia/New Zealand and significant and growing positions in Europe, Asia and Latin America. Management intends to continue the expansion of its strong domestic brand names into the international market and to continue to penetrate the growing Asian and Latin American cutting and welding markets. Continue Cost Reduction Efforts. Thermadyne strives to continually improve manufacturing efficiencies and reduce unit costs. In December 1997, the Company implemented a cost reduction program that includes the following principal elements: (i) vendor rationalization and consolidation; (ii) manufacturing process and productivity improvements and product design changes; (iii) personnel rationalization and expense reductions; (iv) advertising and trade show expense reductions; (v) aircraft, charter and other travel expense reductions; and (vi) elimination of the annual sales meeting. These cost reduction initiatives are expected to generate approximately $10 million in savings on an annualized basis. In addition, the Company has initiated the implementation of a new global information system that is designed to allow the Company to further integrate administrative functions and improve information flow across business unit lines. Continue Dedicated Customer Service. The Company believes that effective and proactive customer service has enabled the Company to build and maintain its leading market positions and strong distributor relationships. Management plans to continue this strategy of enhancing distributor and end-user relationships through continuous customer service improvements. Each of Thermadyne's divisions maintains a dedicated, well trained, technically oriented and product-specific sales and customer service team. Management believes that the dedicated product teams provide Thermadyne with a significant competitive advantage. In addition, to further improve customer service, the Company has implemented a national accounts team of 11 area business managers to support the dedicated product sales and service teams and further support sales to the Company's key distributors. THE MERGER AND MERGER FINANCING On May 22, 1998, Holdings consummated the merger of Mercury Acquisition Corporation ("Mercury"), a corporation organized by DLJ Merchant Banking Partners II, L.P. ("DLJMB") and affiliated funds and entities (the "DLJMB Funds") with and into Holdings, with Holdings continuing as the surviving corporation (the "Merger"). In order to fund the payment of the cash portion of the Merger Consideration (as defined herein), the Option Cash Proceeds (as defined herein) and the ESPP Cash Proceeds (as defined herein), to refinance and/or retire outstanding indebtedness of the Company, and to pay expenses incurred in connection with the Merger, the Issuers issued the Senior Subordinated Notes and the Company entered into a syndicated senior secured loan facility providing for term loan borrowings in the aggregate principal amount of approximately $330 million and revolving loan borrowings of $100 million (the "New Credit Facility"). In connection with the Merger, the Company borrowed all term loans available under the New Credit Facility plus approximately $25 million of revolving loans. The remaining revolving loans will be available to fund the working capital requirements of the Company. The proceeds of such financings were distributed to Holdings in the form of a dividend. See "Description of New Credit Facility," "The Merger and Merger Financing" and "Certain Relationships and Related Transactions." Mercury issued approximately $94.6 million aggregate gross proceeds of its 12 1/2% Senior Discount Debentures due 2008 (the "Debentures"). In connection with the Merger, Holdings succeeded to the obligations of Mercury with respect to the Debentures. The DLJMB Funds also purchased 2,608,696 shares of common stock of Mercury ("Mercury Common Stock"), 2,000,000 shares of senior exchangeable preferred stock of Mercury ("Mercury Preferred Stock") and warrants to purchase 353,428 shares of Mercury Common Stock at an exercise price of $0.01 per share (the "DLJMB Warrants") for approximately $140 million (the "DLJMB Equity Investment"). As a result of the Merger, the proceeds of such purchases became an asset of Holdings, each share of Mercury Common Stock became a share of common stock of Holdings ("Holdings Common Stock"), each share of Mercury Preferred Stock became a share of senior exchangeable preferred stock of Holdings ("Holdings Preferred Stock") and each DLJMB Warrant to acquire Mercury Common Stock became exercisable for an equal number of shares of Holdings Common Stock. In addition, in connection with the Merger, certain members of senior management purchased 143,192 shares of Holdings Common Stock for approximately $4.9 million (the "Management Share Purchase"), of which approximately $3.6 million was provided through non-recourse loans from Holdings (the "Management Loans"). The equity and debt financings referred to above are collectively referred to herein as the "Merger Financing." THE EXCHANGE OFFER The Exchange Offer......... $1,000 principal amount at maturity of New Senior Subordinated Notes in exchange for each $1,000 principal amount at maturity of Old Senior Subordinated Notes. The Old Senior Subordinated Notes were sold on May 22, 1998, in a private placement to Donaldson, Lufkin & Jenrette Securities Corporation ("DLJSC" or the "Initial Purchaser"), which immediately resold to the Old Senior Subordinated Notes pursuant to Rule 144A promulgated under the Securities Act (the "Original Offering"). As of the date hereof, Old Senior Subordinated Notes representing $207 million aggregate principal amount at maturity are outstanding. The terms of the New Senior Subordinated Notes and the Old Senior Subordinated Notes are substantially identical in all material respects, except that the New Senior Subordinated Notes will be freely transferable by the holders thereof except as otherwise provided herein. See "Description of New Senior Subordinated Notes." Based on an interpretation by the Commission's staff set forth in no-action letters issued to third parties unrelated to the Issuers and the Guarantors, the Issuers and the Guarantors believe that New Senior Subordinated Notes issued pursuant to the Exchange Offer in exchange for Old Senior Subordinated Notes may be offered for resale, sold and otherwise transferred by any person receiving the New Notes, whether or not that person is the registered holder (other than any such holder or such other person that is an "affiliate" of the Issuers or any Guarantor within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that (i) the New Senior Subordinated Notes are acquired in the ordinary course of business of that holder or such other person, (ii) neither the holder nor such other person is engaging in or intends to engage in a distribution of the New Senior Subordinated Notes and (iii) neither the holder nor such other person has an arrangement or understanding with any person to participate in the distribution of the New Senior Subordinated Notes. See "The Exchange Offer -- Purpose and Effect." Each broker-dealer that receives New Senior Subordinated Notes for its own account in exchange for Old Senior Subordinated Notes, where those Old Senior Subordinated Notes were acquired by the broker-dealer as a result of its market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of these New Senior Subordinated Notes. See "Plan of Distribution." Registration Rights Agreement................ In connection with the Original Offering, the Issuers and the Guarantors entered into a Registration Rights Agreement with the Initial Purchaser (the "Registration Rights Agreement") requiring the Issuers to make the Exchange Offer. See "The Exchange Offer -- Purpose and Effect." Expiration Date............ The Exchange Offer will expire at 5:00 p.m., New York City time, September 3, 1998, or such later date and time to which it is extended (the "Expiration Date"). Withdrawal................. The tender of the Old Senior Subordinated Notes pursuant to the Exchange Offer may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Any Old Senior Subordinated Notes not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Exchange Offer. Interest on the New Senior Subordinated Notes.................... Interest on each New Senior Subordinated Note will accrue from the date of issuance of the Old Senior Subordinated Note for which the New Senior Subordinated Note is exchanged or from the date of the last periodic payment of interest on such Old Senior Subordinated Note, whichever is later. No additional interest will be paid on Old Senior Subordinated Notes tendered and accepted for exchange. Conditions to the Exchange Offer.................... The Exchange Offer is subject to certain customary conditions, certain of which may be waived by the Issuers. See "The Exchange Offer -- Conditions to the Exchange Offer." Procedures for Tendering Old Senior Subordinated Notes.................... Each holder of Old Senior Subordinated Notes wishing to accept the Exchange Offer must complete, sign and date the Letter of Transmittal, or a copy thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver the Letter of Transmittal, or the copy, together with the Old Senior Subordinated Notes and any other required documentation, to the Exchange Agent (as defined herein) at the address set forth herein. Persons holding the Old Senior Subordinated Notes through the Depository Trust Company ("DTC") and wishing to accept the Exchange Offer must do so pursuant to the DTC's Automated Tender Offer Program, by which each tendering participant will agree to be bound by the Letter of Transmittal. By executing or agreeing to be bound by the Letter of Transmittal, each holder will represent to the Issuers that, among other things, (i) the New Senior Subordinated Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Senior Subordinated Notes, whether or not such person is the registered holder of the Old Senior Subordinated Notes, (ii) neither the holder nor any such other person is engaging in or intends to engage in a distribution of such New Senior Subordinated Notes, (iii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Senior Subordinated Notes, and (iv) neither the holder nor any such other person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of the Issuers or any Guarantor. Pursuant to the Registration Rights Agreement, the Issuers are required to file a "shelf" registration statement for a continuous offering pursuant to Rule 415 under the Securities Act in respect of the Old Notes if (a) they are prohibited from consummating the Exchange Offer because the Exchange Offer is not permitted by applicable law or Commission policy or (b) any holder of Transfer Restricted Securities (as defined) notifies the Issuers in writing prior to the 20th business day following consummation of the Exchange Offer that (i) based on an opinion of counsel, it is prohibited by law or Commission policy from participating in the Exchange Offer or (ii) it is a broker-dealer and owns Senior Subordinated Notes acquired directly from the Issuers. Acceptance of Old Notes and Delivery of New Notes.... The Issuers and the Guarantors will accept for exchange any and all Old Senior Subordinated Notes which are properly tendered (and not withdrawn) in the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Senior Subordinated Notes issued pursuant to the Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offer -- Terms of the Exchange Offer." Exchange Agent............. State Street Bank and Trust Company is serving as Exchange Agent (the "Exchange Agent") in connection with the Exchange Offer. Federal Income Tax Considerations........... The exchange pursuant to the Exchange Offer should not be a taxable event for federal income tax purposes. See "Certain United States Federal Income Tax Considerations." Effect of Not Tendering.... Old Senior Subordinated Notes that are not tendered or that are improperly tendered and not accepted will, following the completion of the Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. The Issuers and the Guarantors will have no further obligation to provide for the registration under the Securities Act of such Old Senior Subordinated Notes. THE NEW SENIOR SUBORDINATED NOTES Securities Offered......... $207.0 million aggregate principal amount at maturity of 9 7/8% Senior Subordinated Notes due 2008. Issuers.................... The New Senior Subordinated Notes will be joint and several obligations of the Company and Thermadyne Capital. Thermadyne Capital is a Delaware corporation and wholly-owned subsidiary of the Company formed in connection with the Original Offering. Thermadyne Capital has no assets, no liabilities (other than the Senior Subordinated Notes), no substantial operations, and will be prohibited from engaging in any business activities. Maturity Date.............. June 1, 2008. Interest Payment Dates..... June 1 and December 1, commencing December 1, 1998. Optional Redemption........ The New Senior Subordinated Notes will be subject to redemption at any time on or after June 1, 2003 at the option of the Issuers, in whole or in part, in cash at the redemption prices set forth herein, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the applicable redemption date. Notwithstanding the foregoing, on or prior to June 1, 2001, the Issuers may redeem up to 35% of the aggregate principal amount of Senior Subordinated Notes ever issued under the Indenture in cash at a redemption price of 109.875% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the redemption date, with the net cash proceeds of one or more Public Equity Offerings; provided that at least 65% of the aggregate principal amount of Senior Subordinated Notes ever issued under the Indenture remains outstanding immediately after the occurrence of any such redemption. In addition, at any time prior to June 1, 2003, the Issuers may, at their option upon the occurrence of a Change of Control, redeem the New Senior Subordinated Notes, in whole but not in part, in cash at a redemption price equal to (i) the present value of the sum of all the remaining interest (excluding accrued and unpaid interest, if any), premium and principal payments that would become due on the New Senior Subordinated Notes as if the New Senior Subordinated Notes were to remain outstanding and be redeemed on June 1, 2003, computed using a discount rate equal to the Treasury Rate plus 50 basis points, plus (ii) accrued and unpaid interest and Liquidated Damages, if any, to the date of redemption. See "Description of New Senior Subordinated Notes -- Optional Redemption." Change of Control.......... Upon the occurrence of a Change of Control, each Holder of New Senior Subordinated Notes will have the right to require the Issuers to repurchase all or any part of such Holder's New Senior Subordinated Notes at an offer price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the date of repurchase. No assurance can be given that the Issuers will have sufficient resources to satisfy their repurchase obligation with respect to the New Senior Subordinated Notes following a Change of Control. See "Risk Factors -- Possible Inability to Repurchase New Senior Subordinated Notes upon Change of Control" and "Description of New Senior Subordinated Notes -- Repurchase at the Option of Holders -- Change of Control." Ranking.................... The New Senior Subordinated Notes will be general unsecured obligations of the Issuers and will be subordinated in right of payment to all existing and future Senior Indebtedness of the Issuers, including indebtedness pursuant to the New Credit Facility. The New Senior Subordinated Notes will rank pari passu with any future senior subordinated indebtedness of the Issuers and will rank senior to all Subordinated Indebtedness of the Issuers. The New Senior Subordinated Notes will be effectively subordinated to all liabilities of the Issuers' subsidiaries that are not Guarantors. On a pro forma basis after giving effect to the Merger, including the Merger Financing and the application of proceeds thereof, as of March 31, 1998, the Company and the Guarantors would have had outstanding approximately $379.5 million of Senior Indebtedness and the Company's non-Guarantor subsidiaries would have had approximately $87.0 million of outstanding liabilities, including trade payables. Note Guarantees............ The New Senior Subordinated Notes will be unconditionally guaranteed on a senior subordinated basis by the Guarantors. The Note Guarantees will be general unsecured obligations of the Guarantors, will be subordinated in right of payment to all existing and future Senior Indebtedness of the Guarantors, including indebtedness under the New Credit Facility, and will rank senior in right of payment to any future subordinated indebtedness of the Guarantors. See "Description of New Senior Subordinated Notes -- Note Guarantees." Certain Covenants.......... The Indenture pursuant to which the New Senior Subordinated Notes will be issued (the "Indenture") contains certain covenants that, among other things, limit the ability of the Issuers and their Restricted Subsidiaries (as defined herein) to: incur indebtedness and issue preferred stock, repurchase Capital Stock (as defined herein) and Indebtedness subordinated to the New Senior Subordinated Notes, engage in transactions with affiliates, engage in sale and leaseback transactions, incur or suffer to exist certain liens, pay dividends or other distributions, make investments, sell assets and engage in certain mergers and consolidations. Use of Proceeds............ There will be no cash proceeds to the Issuers from the exchange pursuant to the Exchange Offer. The net proceeds from the Original Offering, together with the initial borrowings under the New Credit Facility, the DLJMB Equity Investment and the issuance of the Debentures, were used to fund payment of the cash portion of the Merger Consideration, the Option Cash Proceeds and the ESPP Cash Proceeds, to refinance outstanding indebtedness of the Company and to pay the expenses incurred in connection with the Merger. See "Use of Proceeds."
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+SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Investors are urged to read this Prospectus in its entirety. As used in this Prospectus, the term "Holdings" means Thermadyne Holdings Corporation, including its predecessors and subsidiaries; the term "Issuers" means Thermadyne Mfg. LLC, a wholly owned subsidiary of Holdings ("Thermadyne LLC"), and Thermadyne Capital Corp. ("Thermadyne Capital"), a wholly owned subsidiary of Thermadyne LLC; and the terms "Company" and "Thermadyne" mean Thermadyne LLC and its predecessors and subsidiaries. THE COMPANY OVERVIEW Thermadyne is a leading global manufacturer of cutting and welding products and accessories. The Company manufactures a broad range of gas (oxy-fuel) and electric arc cutting and welding products that are ultimately sold to end-user customers principally engaged in the aerospace, automotive, construction, metal fabrication, mining, mill and foundry, petroleum and shipbuilding industries. Thermadyne sells its products through a long-established domestic network of approximately 1,100 independent distributors who market Thermadyne products to over 10,000 end-user customers. For the twelve months ended March 31, 1998, the Company's net sales and Adjusted EBITDA (as defined herein), on a pro forma basis, were $548.2 million and $115.5 million, respectively. The Company's core products enjoy leading brand recognition, a reputation for quality and strong market positions. In 1994, following the Company's Restructuring (as defined herein), current management initiated a series of transactions to focus the Company's business exclusively on the cutting and welding industry. As part of this strategy, the Company divested three non-core businesses and acquired six cutting and welding businesses, which collectively generated approximately $169 million in annual revenues at the respective times of acquisition. As a result of this repositioning strategy, along with ongoing new product introductions, an extensive distribution network and market leading brands, the Company has achieved a compound annual growth in net sales and EBITDA of 20.3% and 12.5%, respectively, from 1993 to 1997. According to the United States Department of Commerce, domestic welding industry revenues totaled over $3.6 billion in 1997. The domestic industry has grown at an annual rate of 5.9% since 1989 and is expected to grow 4.2% in 1998. Global welding industry revenues are estimated to total over $10.0 billion, and management believes that growth in the international market has been faster than the domestic market, driven, in large part, by infrastructure spending in developing markets. International markets, including Australia and Italy, represented approximately 42% of the Company's net sales in 1997, up from approximately 20% of net sales in 1994. Although the industry has begun to experience global consolidation, it continues to be very fragmented. COMPETITIVE STRENGTHS Thermadyne possesses a number of competitive strengths that have allowed it to develop and maintain a strong position within the cutting and welding industry, including the following: Market Leading Brands. Management believes that the strength and longevity of the numerous Thermadyne brand names create a significant competitive advantage and position Thermadyne as one of the leaders in the cutting and welding industry. Each of the Company's major divisions maintains industry-leading brand names with significant market shares. Management believes that VICTOR(R), founded in 1913, is the leading brand name in domestic gas-operated cutting and welding torches and equipment; TWECO(R), founded in 1936, is the leading domestic manufacturer of metal inert gas ("MIG") and manual welding torches; ARCAIR(R) is the leading domestic brand name of tungsten inert gas ("TIG") torch and accessory products; THERMAL DYNAMICS(R), founded in 1957, is a leading domestic manufacturer of manual plasma cutting products; and CIGWELD(R), founded in 1922, is the leading brand name in the Australia/New Zealand cutting and welding (Continued from cover page) Each broker-dealer that receives New Senior Subordinated Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Subordinated Notes. The letter of transmittal accompanying this Prospectus (the "Letter of Transmittal") states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Senior Subordinated Notes received in exchange for Old Senior Subordinated Notes where such Old Senior Subordinated Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Issuers have agreed, for a period of 90 days after the Expiration Date, to make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." No public market existed for the Old Senior Subordinated Notes before the Exchange Offer. The Issuers currently do not intend to list the New Senior Subordinated Notes on any securities exchange or to seek approval for quotation through any automated quotation system, and no active public market for the New Senior Subordinated Notes is currently anticipated. The Issuers will pay all the expenses incident to the Exchange Offer. The Exchange Offer is not conditioned upon any minimum principal amount of Old Senior Subordinated Notes being tendered for exchange pursuant to the Exchange Offer. products market. Each of the manufacturing operations associated with these brands is ISO-9000 series certified. Diverse and Stable Customer Base. The Company's customer base includes cutting and welding product distributors as well as end-user customers principally engaged in the aerospace, automotive, construction, metal fabrication, mining, mill and foundry, petroleum and ship building industries. No one customer accounted for more than 9% of the Company's 1997 net sales. Further, the Company's top 20 customers have been associated with the Company for an average of over 10 years. Established, Effective Distribution Channels. The Company believes that its strong, established and long-standing relationships with over 1,100 independent cutting and welding products distributors in the United States provide a significant competitive advantage and support the Company's strong market position. Thermadyne's domestic distributor relationships are maintained by 11 area business managers who oversee the Company's relationships with large distributors and by separate product-specific sales forces for each of Thermadyne's business units. Management believes that this unique structure, which combines relationship managers with technically trained product specialists, will enable the Company to more effectively maintain and utilize its distributor networks. Management also believes that this established distribution network enables the Company to achieve market penetration when introducing newly developed or acquired products. Proven and Committed Senior Management Team. Thermadyne's management team has strategically repositioned the Company over the past four years to focus exclusively in its core cutting and welding markets. This repositioning was accomplished through divestitures of three non-core assets and acquisitions of six strategic businesses or product lines. In addition, management has initiated the development and introduction of significant new products and product lines. As a result of management's efforts, the Company achieved a 20.3% growth rate in net sales from 1993 to 1997. In connection with the Merger each member of the senior management team signed an employment contract with the Company. Additionally, the Company adopted an incentive plan to tie each member of senior management's compensation to the Company's financial performance. See "Executive Compensation." BUSINESS STRATEGY Thermadyne has developed a business strategy designed to enhance its strong market positions and continue to improve its growth and profitability. The primary elements of the Company's business strategy are as follows: Continue New Product Development and Enhancement. The foundation for Thermadyne's strong market positions and leading brand names is the development and introduction of new products and enhancements of existing products. The Company believes it is at the forefront of cutting and welding technology with a proven track-record of continual new product introductions and existing product enhancements that have resulted in 262 issued or pending United States and foreign patents. New products and product enhancements are designed to add value for customers, including enhanced safety features, improved productivity and ergonomics and an improved welding environment. Examples of recent new product introductions include robotic welding systems and accessories, high-purity instrumentation, automated plasma cutting and safety products as well as underwater cutting electrodes. During 1997, the Company introduced over 135 new products or product enhancements, and the Company expects to continue this effort in the future. Expand Strategic Acquisitions. The Company has completed six acquisitions since 1993, which collectively generated approximately $169 million in annual revenues at the respective times of acquisition, including over $135 million of revenues for Australia and Italy. The Company believes that numerous acquisition candidates exist globally, and the Company intends to continue to seek new acquisition opportunities in its cutting and welding business. Thermadyne intends to continue its focused acquisition strategy that includes the following principal elements: (i) entering and expanding in geographic areas where the Company does not currently have a significant presence through acquisitions of local cutting and welding businesses and (ii) expanding in geographic areas where the Company currently maintains a strong presence through the acquisition of complementary product lines. Leverage Existing Distribution Network. The Company intends to leverage its existing distribution network through the acquisition or introduction of new products and product enhancements. Management believes that when the Company acquires a local presence in a new geographic area, it can utilize the acquired distribution network to sell existing Thermadyne brands into that local market. In addition, the Company believes that significant opportunities exist to purchase complementary product lines and expand its business by selling the new product lines through Thermadyne's extensive distribution network. For example, through recent acquisitions the Company has expanded its offering of filler metals, conventional arc welding power supplies, safety equipment and engine-driven welding power sources and began marketing such products through its established distribution network. The Company intends to continue this strategy of penetrating new welding product markets by leveraging its extensive distribution network in conjunction with its new product development and focused acquisition strategies. Broaden International Presence. Thermadyne has maintained an international presence for over 30 years and continues to broaden its presence throughout the world. International sales accounted for approximately 42% of net sales in 1997 as compared to approximately 20% in 1994. The Company has established a dedicated international market presence and maintains the leading position in Australia/New Zealand and significant and growing positions in Europe, Asia and Latin America. Management intends to continue the expansion of its strong domestic brand names into the international market and to continue to penetrate the growing Asian and Latin American cutting and welding markets. Continue Cost Reduction Efforts. Thermadyne strives to continually improve manufacturing efficiencies and reduce unit costs. In December 1997, the Company implemented a cost reduction program that includes the following principal elements: (i) vendor rationalization and consolidation; (ii) manufacturing process and productivity improvements and product design changes; (iii) personnel rationalization and expense reductions; (iv) advertising and trade show expense reductions; (v) aircraft, charter and other travel expense reductions; and (vi) elimination of the annual sales meeting. These cost reduction initiatives are expected to generate approximately $10 million in savings on an annualized basis. In addition, the Company has initiated the implementation of a new global information system that is designed to allow the Company to further integrate administrative functions and improve information flow across business unit lines. Continue Dedicated Customer Service. The Company believes that effective and proactive customer service has enabled the Company to build and maintain its leading market positions and strong distributor relationships. Management plans to continue this strategy of enhancing distributor and end-user relationships through continuous customer service improvements. Each of Thermadyne's divisions maintains a dedicated, well trained, technically oriented and product-specific sales and customer service team. Management believes that the dedicated product teams provide Thermadyne with a significant competitive advantage. In addition, to further improve customer service, the Company has implemented a national accounts team of 11 area business managers to support the dedicated product sales and service teams and further support sales to the Company's key distributors. THE MERGER AND MERGER FINANCING On May 22, 1998, Holdings consummated the merger of Mercury Acquisition Corporation ("Mercury"), a corporation organized by DLJ Merchant Banking Partners II, L.P. ("DLJMB") and affiliated funds and entities (the "DLJMB Funds") with and into Holdings, with Holdings continuing as the surviving corporation (the "Merger"). In order to fund the payment of the cash portion of the Merger Consideration (as defined herein), the Option Cash Proceeds (as defined herein) and the ESPP Cash Proceeds (as defined herein), to refinance and/or retire outstanding indebtedness of the Company, and to pay expenses incurred in connection with the Merger, the Issuers issued the Senior Subordinated Notes and the Company entered into a syndicated senior secured loan facility providing for term loan borrowings in the aggregate principal amount of approximately $330 million and revolving loan borrowings of $100 million (the "New Credit Facility"). In connection with the Merger, the Company borrowed all term loans available under the New Credit Facility plus approximately $25 million of revolving loans. The remaining revolving loans will be available to fund the working capital requirements of the Company. The proceeds of such financings were distributed to Holdings in the form of a dividend. See "Description of New Credit Facility," "The Merger and Merger Financing" and "Certain Relationships and Related Transactions." Mercury issued approximately $94.6 million aggregate gross proceeds of its 12 1/2% Senior Discount Debentures due 2008 (the "Debentures"). In connection with the Merger, Holdings succeeded to the obligations of Mercury with respect to the Debentures. The DLJMB Funds also purchased 2,608,696 shares of common stock of Mercury ("Mercury Common Stock"), 2,000,000 shares of senior exchangeable preferred stock of Mercury ("Mercury Preferred Stock") and warrants to purchase 353,428 shares of Mercury Common Stock at an exercise price of $0.01 per share (the "DLJMB Warrants") for approximately $140 million (the "DLJMB Equity Investment"). As a result of the Merger, the proceeds of such purchases became an asset of Holdings, each share of Mercury Common Stock became a share of common stock of Holdings ("Holdings Common Stock"), each share of Mercury Preferred Stock became a share of senior exchangeable preferred stock of Holdings ("Holdings Preferred Stock") and each DLJMB Warrant to acquire Mercury Common Stock became exercisable for an equal number of shares of Holdings Common Stock. In addition, in connection with the Merger, certain members of senior management purchased 143,192 shares of Holdings Common Stock for approximately $4.9 million (the "Management Share Purchase"), of which approximately $3.6 million was provided through non-recourse loans from Holdings (the "Management Loans"). The equity and debt financings referred to above are collectively referred to herein as the "Merger Financing." THE EXCHANGE OFFER The Exchange Offer......... $1,000 principal amount at maturity of New Senior Subordinated Notes in exchange for each $1,000 principal amount at maturity of Old Senior Subordinated Notes. The Old Senior Subordinated Notes were sold on May 22, 1998, in a private placement to Donaldson, Lufkin & Jenrette Securities Corporation ("DLJSC" or the "Initial Purchaser"), which immediately resold to the Old Senior Subordinated Notes pursuant to Rule 144A promulgated under the Securities Act (the "Original Offering"). As of the date hereof, Old Senior Subordinated Notes representing $207 million aggregate principal amount at maturity are outstanding. The terms of the New Senior Subordinated Notes and the Old Senior Subordinated Notes are substantially identical in all material respects, except that the New Senior Subordinated Notes will be freely transferable by the holders thereof except as otherwise provided herein. See "Description of New Senior Subordinated Notes." Based on an interpretation by the Commission's staff set forth in no-action letters issued to third parties unrelated to the Issuers and the Guarantors, the Issuers and the Guarantors believe that New Senior Subordinated Notes issued pursuant to the Exchange Offer in exchange for Old Senior Subordinated Notes may be offered for resale, sold and otherwise transferred by any person receiving the New Notes, whether or not that person is the registered holder (other than any such holder or such other person that is an "affiliate" of the Issuers or any Guarantor within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that (i) the New Senior Subordinated Notes are acquired in the ordinary course of business of that holder or such other person, (ii) neither the holder nor such other person is engaging in or intends to engage in a distribution of the New Senior Subordinated Notes and (iii) neither the holder nor such other person has an arrangement or understanding with any person to participate in the distribution of the New Senior Subordinated Notes. See "The Exchange Offer -- Purpose and Effect." Each broker-dealer that receives New Senior Subordinated Notes for its own account in exchange for Old Senior Subordinated Notes, where those Old Senior Subordinated Notes were acquired by the broker-dealer as a result of its market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of these New Senior Subordinated Notes. See "Plan of Distribution." Registration Rights Agreement................ In connection with the Original Offering, the Issuers and the Guarantors entered into a Registration Rights Agreement with the Initial Purchaser (the "Registration Rights Agreement") requiring the Issuers to make the Exchange Offer. See "The Exchange Offer -- Purpose and Effect." Expiration Date............ The Exchange Offer will expire at 5:00 p.m., New York City time, September 3, 1998, or such later date and time to which it is extended (the "Expiration Date"). Withdrawal................. The tender of the Old Senior Subordinated Notes pursuant to the Exchange Offer may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Any Old Senior Subordinated Notes not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Exchange Offer. Interest on the New Senior Subordinated Notes.................... Interest on each New Senior Subordinated Note will accrue from the date of issuance of the Old Senior Subordinated Note for which the New Senior Subordinated Note is exchanged or from the date of the last periodic payment of interest on such Old Senior Subordinated Note, whichever is later. No additional interest will be paid on Old Senior Subordinated Notes tendered and accepted for exchange. Conditions to the Exchange Offer.................... The Exchange Offer is subject to certain customary conditions, certain of which may be waived by the Issuers. See "The Exchange Offer -- Conditions to the Exchange Offer." Procedures for Tendering Old Senior Subordinated Notes.................... Each holder of Old Senior Subordinated Notes wishing to accept the Exchange Offer must complete, sign and date the Letter of Transmittal, or a copy thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver the Letter of Transmittal, or the copy, together with the Old Senior Subordinated Notes and any other required documentation, to the Exchange Agent (as defined herein) at the address set forth herein. Persons holding the Old Senior Subordinated Notes through the Depository Trust Company ("DTC") and wishing to accept the Exchange Offer must do so pursuant to the DTC's Automated Tender Offer Program, by which each tendering participant will agree to be bound by the Letter of Transmittal. By executing or agreeing to be bound by the Letter of Transmittal, each holder will represent to the Issuers that, among other things, (i) the New Senior Subordinated Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Senior Subordinated Notes, whether or not such person is the registered holder of the Old Senior Subordinated Notes, (ii) neither the holder nor any such other person is engaging in or intends to engage in a distribution of such New Senior Subordinated Notes, (iii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Senior Subordinated Notes, and (iv) neither the holder nor any such other person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of the Issuers or any Guarantor. Pursuant to the Registration Rights Agreement, the Issuers are required to file a "shelf" registration statement for a continuous offering pursuant to Rule 415 under the Securities Act in respect of the Old Notes if (a) they are prohibited from consummating the Exchange Offer because the Exchange Offer is not permitted by applicable law or Commission policy or (b) any holder of Transfer Restricted Securities (as defined) notifies the Issuers in writing prior to the 20th business day following consummation of the Exchange Offer that (i) based on an opinion of counsel, it is prohibited by law or Commission policy from participating in the Exchange Offer or (ii) it is a broker-dealer and owns Senior Subordinated Notes acquired directly from the Issuers. Acceptance of Old Notes and Delivery of New Notes.... The Issuers and the Guarantors will accept for exchange any and all Old Senior Subordinated Notes which are properly tendered (and not withdrawn) in the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Senior Subordinated Notes issued pursuant to the Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offer -- Terms of the Exchange Offer." Exchange Agent............. State Street Bank and Trust Company is serving as Exchange Agent (the "Exchange Agent") in connection with the Exchange Offer. Federal Income Tax Considerations........... The exchange pursuant to the Exchange Offer should not be a taxable event for federal income tax purposes. See "Certain United States Federal Income Tax Considerations." Effect of Not Tendering.... Old Senior Subordinated Notes that are not tendered or that are improperly tendered and not accepted will, following the completion of the Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. The Issuers and the Guarantors will have no further obligation to provide for the registration under the Securities Act of such Old Senior Subordinated Notes. THE NEW SENIOR SUBORDINATED NOTES Securities Offered......... $207.0 million aggregate principal amount at maturity of 9 7/8% Senior Subordinated Notes due 2008. Issuers.................... The New Senior Subordinated Notes will be joint and several obligations of the Company and Thermadyne Capital. Thermadyne Capital is a Delaware corporation and wholly-owned subsidiary of the Company formed in connection with the Original Offering. Thermadyne Capital has no assets, no liabilities (other than the Senior Subordinated Notes), no substantial operations, and will be prohibited from engaging in any business activities. Maturity Date.............. June 1, 2008. Interest Payment Dates..... June 1 and December 1, commencing December 1, 1998. Optional Redemption........ The New Senior Subordinated Notes will be subject to redemption at any time on or after June 1, 2003 at the option of the Issuers, in whole or in part, in cash at the redemption prices set forth herein, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the applicable redemption date. Notwithstanding the foregoing, on or prior to June 1, 2001, the Issuers may redeem up to 35% of the aggregate principal amount of Senior Subordinated Notes ever issued under the Indenture in cash at a redemption price of 109.875% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the redemption date, with the net cash proceeds of one or more Public Equity Offerings; provided that at least 65% of the aggregate principal amount of Senior Subordinated Notes ever issued under the Indenture remains outstanding immediately after the occurrence of any such redemption. In addition, at any time prior to June 1, 2003, the Issuers may, at their option upon the occurrence of a Change of Control, redeem the New Senior Subordinated Notes, in whole but not in part, in cash at a redemption price equal to (i) the present value of the sum of all the remaining interest (excluding accrued and unpaid interest, if any), premium and principal payments that would become due on the New Senior Subordinated Notes as if the New Senior Subordinated Notes were to remain outstanding and be redeemed on June 1, 2003, computed using a discount rate equal to the Treasury Rate plus 50 basis points, plus (ii) accrued and unpaid interest and Liquidated Damages, if any, to the date of redemption. See "Description of New Senior Subordinated Notes -- Optional Redemption." Change of Control.......... Upon the occurrence of a Change of Control, each Holder of New Senior Subordinated Notes will have the right to require the Issuers to repurchase all or any part of such Holder's New Senior Subordinated Notes at an offer price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the date of repurchase. No assurance can be given that the Issuers will have sufficient resources to satisfy their repurchase obligation with respect to the New Senior Subordinated Notes following a Change of Control. See "Risk Factors -- Possible Inability to Repurchase New Senior Subordinated Notes upon Change of Control" and "Description of New Senior Subordinated Notes -- Repurchase at the Option of Holders -- Change of Control." Ranking.................... The New Senior Subordinated Notes will be general unsecured obligations of the Issuers and will be subordinated in right of payment to all existing and future Senior Indebtedness of the Issuers, including indebtedness pursuant to the New Credit Facility. The New Senior Subordinated Notes will rank pari passu with any future senior subordinated indebtedness of the Issuers and will rank senior to all Subordinated Indebtedness of the Issuers. The New Senior Subordinated Notes will be effectively subordinated to all liabilities of the Issuers' subsidiaries that are not Guarantors. On a pro forma basis after giving effect to the Merger, including the Merger Financing and the application of proceeds thereof, as of March 31, 1998, the Company and the Guarantors would have had outstanding approximately $379.5 million of Senior Indebtedness and the Company's non-Guarantor subsidiaries would have had approximately $87.0 million of outstanding liabilities, including trade payables. Note Guarantees............ The New Senior Subordinated Notes will be unconditionally guaranteed on a senior subordinated basis by the Guarantors. The Note Guarantees will be general unsecured obligations of the Guarantors, will be subordinated in right of payment to all existing and future Senior Indebtedness of the Guarantors, including indebtedness under the New Credit Facility, and will rank senior in right of payment to any future subordinated indebtedness of the Guarantors. See "Description of New Senior Subordinated Notes -- Note Guarantees." Certain Covenants.......... The Indenture pursuant to which the New Senior Subordinated Notes will be issued (the "Indenture") contains certain covenants that, among other things, limit the ability of the Issuers and their Restricted Subsidiaries (as defined herein) to: incur indebtedness and issue preferred stock, repurchase Capital Stock (as defined herein) and Indebtedness subordinated to the New Senior Subordinated Notes, engage in transactions with affiliates, engage in sale and leaseback transactions, incur or suffer to exist certain liens, pay dividends or other distributions, make investments, sell assets and engage in certain mergers and consolidations. Use of Proceeds............ There will be no cash proceeds to the Issuers from the exchange pursuant to the Exchange Offer. The net proceeds from the Original Offering, together with the initial borrowings under the New Credit Facility, the DLJMB Equity Investment and the issuance of the Debentures, were used to fund payment of the cash portion of the Merger Consideration, the Option Cash Proceeds and the ESPP Cash Proceeds, to refinance outstanding indebtedness of the Company and to pay the expenses incurred in connection with the Merger. See "Use of Proceeds."
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+SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Investors are urged to read this Prospectus in its entirety. As used in this Prospectus, the term "Holdings" means Thermadyne Holdings Corporation, including its predecessors and subsidiaries; the term "Issuers" means Thermadyne Mfg. LLC, a wholly owned subsidiary of Holdings ("Thermadyne LLC"), and Thermadyne Capital Corp. ("Thermadyne Capital"), a wholly owned subsidiary of Thermadyne LLC; and the terms "Company" and "Thermadyne" mean Thermadyne LLC and its predecessors and subsidiaries. THE COMPANY OVERVIEW Thermadyne is a leading global manufacturer of cutting and welding products and accessories. The Company manufactures a broad range of gas (oxy-fuel) and electric arc cutting and welding products that are ultimately sold to end-user customers principally engaged in the aerospace, automotive, construction, metal fabrication, mining, mill and foundry, petroleum and shipbuilding industries. Thermadyne sells its products through a long-established domestic network of approximately 1,100 independent distributors who market Thermadyne products to over 10,000 end-user customers. For the twelve months ended March 31, 1998, the Company's net sales and Adjusted EBITDA (as defined herein), on a pro forma basis, were $548.2 million and $115.5 million, respectively. The Company's core products enjoy leading brand recognition, a reputation for quality and strong market positions. In 1994, following the Company's Restructuring (as defined herein), current management initiated a series of transactions to focus the Company's business exclusively on the cutting and welding industry. As part of this strategy, the Company divested three non-core businesses and acquired six cutting and welding businesses, which collectively generated approximately $169 million in annual revenues at the respective times of acquisition. As a result of this repositioning strategy, along with ongoing new product introductions, an extensive distribution network and market leading brands, the Company has achieved a compound annual growth in net sales and EBITDA of 20.3% and 12.5%, respectively, from 1993 to 1997. According to the United States Department of Commerce, domestic welding industry revenues totaled over $3.6 billion in 1997. The domestic industry has grown at an annual rate of 5.9% since 1989 and is expected to grow 4.2% in 1998. Global welding industry revenues are estimated to total over $10.0 billion, and management believes that growth in the international market has been faster than the domestic market, driven, in large part, by infrastructure spending in developing markets. International markets, including Australia and Italy, represented approximately 42% of the Company's net sales in 1997, up from approximately 20% of net sales in 1994. Although the industry has begun to experience global consolidation, it continues to be very fragmented. COMPETITIVE STRENGTHS Thermadyne possesses a number of competitive strengths that have allowed it to develop and maintain a strong position within the cutting and welding industry, including the following: Market Leading Brands. Management believes that the strength and longevity of the numerous Thermadyne brand names create a significant competitive advantage and position Thermadyne as one of the leaders in the cutting and welding industry. Each of the Company's major divisions maintains industry-leading brand names with significant market shares. Management believes that VICTOR(R), founded in 1913, is the leading brand name in domestic gas-operated cutting and welding torches and equipment; TWECO(R), founded in 1936, is the leading domestic manufacturer of metal inert gas ("MIG") and manual welding torches; ARCAIR(R) is the leading domestic brand name of tungsten inert gas ("TIG") torch and accessory products; THERMAL DYNAMICS(R), founded in 1957, is a leading domestic manufacturer of manual plasma cutting products; and CIGWELD(R), founded in 1922, is the leading brand name in the Australia/New Zealand cutting and welding (Continued from cover page) Each broker-dealer that receives New Senior Subordinated Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Subordinated Notes. The letter of transmittal accompanying this Prospectus (the "Letter of Transmittal") states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Senior Subordinated Notes received in exchange for Old Senior Subordinated Notes where such Old Senior Subordinated Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Issuers have agreed, for a period of 90 days after the Expiration Date, to make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." No public market existed for the Old Senior Subordinated Notes before the Exchange Offer. The Issuers currently do not intend to list the New Senior Subordinated Notes on any securities exchange or to seek approval for quotation through any automated quotation system, and no active public market for the New Senior Subordinated Notes is currently anticipated. The Issuers will pay all the expenses incident to the Exchange Offer. The Exchange Offer is not conditioned upon any minimum principal amount of Old Senior Subordinated Notes being tendered for exchange pursuant to the Exchange Offer. products market. Each of the manufacturing operations associated with these brands is ISO-9000 series certified. Diverse and Stable Customer Base. The Company's customer base includes cutting and welding product distributors as well as end-user customers principally engaged in the aerospace, automotive, construction, metal fabrication, mining, mill and foundry, petroleum and ship building industries. No one customer accounted for more than 9% of the Company's 1997 net sales. Further, the Company's top 20 customers have been associated with the Company for an average of over 10 years. Established, Effective Distribution Channels. The Company believes that its strong, established and long-standing relationships with over 1,100 independent cutting and welding products distributors in the United States provide a significant competitive advantage and support the Company's strong market position. Thermadyne's domestic distributor relationships are maintained by 11 area business managers who oversee the Company's relationships with large distributors and by separate product-specific sales forces for each of Thermadyne's business units. Management believes that this unique structure, which combines relationship managers with technically trained product specialists, will enable the Company to more effectively maintain and utilize its distributor networks. Management also believes that this established distribution network enables the Company to achieve market penetration when introducing newly developed or acquired products. Proven and Committed Senior Management Team. Thermadyne's management team has strategically repositioned the Company over the past four years to focus exclusively in its core cutting and welding markets. This repositioning was accomplished through divestitures of three non-core assets and acquisitions of six strategic businesses or product lines. In addition, management has initiated the development and introduction of significant new products and product lines. As a result of management's efforts, the Company achieved a 20.3% growth rate in net sales from 1993 to 1997. In connection with the Merger each member of the senior management team signed an employment contract with the Company. Additionally, the Company adopted an incentive plan to tie each member of senior management's compensation to the Company's financial performance. See "Executive Compensation." BUSINESS STRATEGY Thermadyne has developed a business strategy designed to enhance its strong market positions and continue to improve its growth and profitability. The primary elements of the Company's business strategy are as follows: Continue New Product Development and Enhancement. The foundation for Thermadyne's strong market positions and leading brand names is the development and introduction of new products and enhancements of existing products. The Company believes it is at the forefront of cutting and welding technology with a proven track-record of continual new product introductions and existing product enhancements that have resulted in 262 issued or pending United States and foreign patents. New products and product enhancements are designed to add value for customers, including enhanced safety features, improved productivity and ergonomics and an improved welding environment. Examples of recent new product introductions include robotic welding systems and accessories, high-purity instrumentation, automated plasma cutting and safety products as well as underwater cutting electrodes. During 1997, the Company introduced over 135 new products or product enhancements, and the Company expects to continue this effort in the future. Expand Strategic Acquisitions. The Company has completed six acquisitions since 1993, which collectively generated approximately $169 million in annual revenues at the respective times of acquisition, including over $135 million of revenues for Australia and Italy. The Company believes that numerous acquisition candidates exist globally, and the Company intends to continue to seek new acquisition opportunities in its cutting and welding business. Thermadyne intends to continue its focused acquisition strategy that includes the following principal elements: (i) entering and expanding in geographic areas where the Company does not currently have a significant presence through acquisitions of local cutting and welding businesses and (ii) expanding in geographic areas where the Company currently maintains a strong presence through the acquisition of complementary product lines. Leverage Existing Distribution Network. The Company intends to leverage its existing distribution network through the acquisition or introduction of new products and product enhancements. Management believes that when the Company acquires a local presence in a new geographic area, it can utilize the acquired distribution network to sell existing Thermadyne brands into that local market. In addition, the Company believes that significant opportunities exist to purchase complementary product lines and expand its business by selling the new product lines through Thermadyne's extensive distribution network. For example, through recent acquisitions the Company has expanded its offering of filler metals, conventional arc welding power supplies, safety equipment and engine-driven welding power sources and began marketing such products through its established distribution network. The Company intends to continue this strategy of penetrating new welding product markets by leveraging its extensive distribution network in conjunction with its new product development and focused acquisition strategies. Broaden International Presence. Thermadyne has maintained an international presence for over 30 years and continues to broaden its presence throughout the world. International sales accounted for approximately 42% of net sales in 1997 as compared to approximately 20% in 1994. The Company has established a dedicated international market presence and maintains the leading position in Australia/New Zealand and significant and growing positions in Europe, Asia and Latin America. Management intends to continue the expansion of its strong domestic brand names into the international market and to continue to penetrate the growing Asian and Latin American cutting and welding markets. Continue Cost Reduction Efforts. Thermadyne strives to continually improve manufacturing efficiencies and reduce unit costs. In December 1997, the Company implemented a cost reduction program that includes the following principal elements: (i) vendor rationalization and consolidation; (ii) manufacturing process and productivity improvements and product design changes; (iii) personnel rationalization and expense reductions; (iv) advertising and trade show expense reductions; (v) aircraft, charter and other travel expense reductions; and (vi) elimination of the annual sales meeting. These cost reduction initiatives are expected to generate approximately $10 million in savings on an annualized basis. In addition, the Company has initiated the implementation of a new global information system that is designed to allow the Company to further integrate administrative functions and improve information flow across business unit lines. Continue Dedicated Customer Service. The Company believes that effective and proactive customer service has enabled the Company to build and maintain its leading market positions and strong distributor relationships. Management plans to continue this strategy of enhancing distributor and end-user relationships through continuous customer service improvements. Each of Thermadyne's divisions maintains a dedicated, well trained, technically oriented and product-specific sales and customer service team. Management believes that the dedicated product teams provide Thermadyne with a significant competitive advantage. In addition, to further improve customer service, the Company has implemented a national accounts team of 11 area business managers to support the dedicated product sales and service teams and further support sales to the Company's key distributors. THE MERGER AND MERGER FINANCING On May 22, 1998, Holdings consummated the merger of Mercury Acquisition Corporation ("Mercury"), a corporation organized by DLJ Merchant Banking Partners II, L.P. ("DLJMB") and affiliated funds and entities (the "DLJMB Funds") with and into Holdings, with Holdings continuing as the surviving corporation (the "Merger"). In order to fund the payment of the cash portion of the Merger Consideration (as defined herein), the Option Cash Proceeds (as defined herein) and the ESPP Cash Proceeds (as defined herein), to refinance and/or retire outstanding indebtedness of the Company, and to pay expenses incurred in connection with the Merger, the Issuers issued the Senior Subordinated Notes and the Company entered into a syndicated senior secured loan facility providing for term loan borrowings in the aggregate principal amount of approximately $330 million and revolving loan borrowings of $100 million (the "New Credit Facility"). In connection with the Merger, the Company borrowed all term loans available under the New Credit Facility plus approximately $25 million of revolving loans. The remaining revolving loans will be available to fund the working capital requirements of the Company. The proceeds of such financings were distributed to Holdings in the form of a dividend. See "Description of New Credit Facility," "The Merger and Merger Financing" and "Certain Relationships and Related Transactions." Mercury issued approximately $94.6 million aggregate gross proceeds of its 12 1/2% Senior Discount Debentures due 2008 (the "Debentures"). In connection with the Merger, Holdings succeeded to the obligations of Mercury with respect to the Debentures. The DLJMB Funds also purchased 2,608,696 shares of common stock of Mercury ("Mercury Common Stock"), 2,000,000 shares of senior exchangeable preferred stock of Mercury ("Mercury Preferred Stock") and warrants to purchase 353,428 shares of Mercury Common Stock at an exercise price of $0.01 per share (the "DLJMB Warrants") for approximately $140 million (the "DLJMB Equity Investment"). As a result of the Merger, the proceeds of such purchases became an asset of Holdings, each share of Mercury Common Stock became a share of common stock of Holdings ("Holdings Common Stock"), each share of Mercury Preferred Stock became a share of senior exchangeable preferred stock of Holdings ("Holdings Preferred Stock") and each DLJMB Warrant to acquire Mercury Common Stock became exercisable for an equal number of shares of Holdings Common Stock. In addition, in connection with the Merger, certain members of senior management purchased 143,192 shares of Holdings Common Stock for approximately $4.9 million (the "Management Share Purchase"), of which approximately $3.6 million was provided through non-recourse loans from Holdings (the "Management Loans"). The equity and debt financings referred to above are collectively referred to herein as the "Merger Financing." THE EXCHANGE OFFER The Exchange Offer......... $1,000 principal amount at maturity of New Senior Subordinated Notes in exchange for each $1,000 principal amount at maturity of Old Senior Subordinated Notes. The Old Senior Subordinated Notes were sold on May 22, 1998, in a private placement to Donaldson, Lufkin & Jenrette Securities Corporation ("DLJSC" or the "Initial Purchaser"), which immediately resold to the Old Senior Subordinated Notes pursuant to Rule 144A promulgated under the Securities Act (the "Original Offering"). As of the date hereof, Old Senior Subordinated Notes representing $207 million aggregate principal amount at maturity are outstanding. The terms of the New Senior Subordinated Notes and the Old Senior Subordinated Notes are substantially identical in all material respects, except that the New Senior Subordinated Notes will be freely transferable by the holders thereof except as otherwise provided herein. See "Description of New Senior Subordinated Notes." Based on an interpretation by the Commission's staff set forth in no-action letters issued to third parties unrelated to the Issuers and the Guarantors, the Issuers and the Guarantors believe that New Senior Subordinated Notes issued pursuant to the Exchange Offer in exchange for Old Senior Subordinated Notes may be offered for resale, sold and otherwise transferred by any person receiving the New Notes, whether or not that person is the registered holder (other than any such holder or such other person that is an "affiliate" of the Issuers or any Guarantor within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that (i) the New Senior Subordinated Notes are acquired in the ordinary course of business of that holder or such other person, (ii) neither the holder nor such other person is engaging in or intends to engage in a distribution of the New Senior Subordinated Notes and (iii) neither the holder nor such other person has an arrangement or understanding with any person to participate in the distribution of the New Senior Subordinated Notes. See "The Exchange Offer -- Purpose and Effect." Each broker-dealer that receives New Senior Subordinated Notes for its own account in exchange for Old Senior Subordinated Notes, where those Old Senior Subordinated Notes were acquired by the broker-dealer as a result of its market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of these New Senior Subordinated Notes. See "Plan of Distribution." Registration Rights Agreement................ In connection with the Original Offering, the Issuers and the Guarantors entered into a Registration Rights Agreement with the Initial Purchaser (the "Registration Rights Agreement") requiring the Issuers to make the Exchange Offer. See "The Exchange Offer -- Purpose and Effect." Expiration Date............ The Exchange Offer will expire at 5:00 p.m., New York City time, September 3, 1998, or such later date and time to which it is extended (the "Expiration Date"). Withdrawal................. The tender of the Old Senior Subordinated Notes pursuant to the Exchange Offer may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Any Old Senior Subordinated Notes not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Exchange Offer. Interest on the New Senior Subordinated Notes.................... Interest on each New Senior Subordinated Note will accrue from the date of issuance of the Old Senior Subordinated Note for which the New Senior Subordinated Note is exchanged or from the date of the last periodic payment of interest on such Old Senior Subordinated Note, whichever is later. No additional interest will be paid on Old Senior Subordinated Notes tendered and accepted for exchange. Conditions to the Exchange Offer.................... The Exchange Offer is subject to certain customary conditions, certain of which may be waived by the Issuers. See "The Exchange Offer -- Conditions to the Exchange Offer." Procedures for Tendering Old Senior Subordinated Notes.................... Each holder of Old Senior Subordinated Notes wishing to accept the Exchange Offer must complete, sign and date the Letter of Transmittal, or a copy thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver the Letter of Transmittal, or the copy, together with the Old Senior Subordinated Notes and any other required documentation, to the Exchange Agent (as defined herein) at the address set forth herein. Persons holding the Old Senior Subordinated Notes through the Depository Trust Company ("DTC") and wishing to accept the Exchange Offer must do so pursuant to the DTC's Automated Tender Offer Program, by which each tendering participant will agree to be bound by the Letter of Transmittal. By executing or agreeing to be bound by the Letter of Transmittal, each holder will represent to the Issuers that, among other things, (i) the New Senior Subordinated Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Senior Subordinated Notes, whether or not such person is the registered holder of the Old Senior Subordinated Notes, (ii) neither the holder nor any such other person is engaging in or intends to engage in a distribution of such New Senior Subordinated Notes, (iii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Senior Subordinated Notes, and (iv) neither the holder nor any such other person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of the Issuers or any Guarantor. Pursuant to the Registration Rights Agreement, the Issuers are required to file a "shelf" registration statement for a continuous offering pursuant to Rule 415 under the Securities Act in respect of the Old Notes if (a) they are prohibited from consummating the Exchange Offer because the Exchange Offer is not permitted by applicable law or Commission policy or (b) any holder of Transfer Restricted Securities (as defined) notifies the Issuers in writing prior to the 20th business day following consummation of the Exchange Offer that (i) based on an opinion of counsel, it is prohibited by law or Commission policy from participating in the Exchange Offer or (ii) it is a broker-dealer and owns Senior Subordinated Notes acquired directly from the Issuers. Acceptance of Old Notes and Delivery of New Notes.... The Issuers and the Guarantors will accept for exchange any and all Old Senior Subordinated Notes which are properly tendered (and not withdrawn) in the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Senior Subordinated Notes issued pursuant to the Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offer -- Terms of the Exchange Offer." Exchange Agent............. State Street Bank and Trust Company is serving as Exchange Agent (the "Exchange Agent") in connection with the Exchange Offer. Federal Income Tax Considerations........... The exchange pursuant to the Exchange Offer should not be a taxable event for federal income tax purposes. See "Certain United States Federal Income Tax Considerations." Effect of Not Tendering.... Old Senior Subordinated Notes that are not tendered or that are improperly tendered and not accepted will, following the completion of the Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. The Issuers and the Guarantors will have no further obligation to provide for the registration under the Securities Act of such Old Senior Subordinated Notes. THE NEW SENIOR SUBORDINATED NOTES Securities Offered......... $207.0 million aggregate principal amount at maturity of 9 7/8% Senior Subordinated Notes due 2008. Issuers.................... The New Senior Subordinated Notes will be joint and several obligations of the Company and Thermadyne Capital. Thermadyne Capital is a Delaware corporation and wholly-owned subsidiary of the Company formed in connection with the Original Offering. Thermadyne Capital has no assets, no liabilities (other than the Senior Subordinated Notes), no substantial operations, and will be prohibited from engaging in any business activities. Maturity Date.............. June 1, 2008. Interest Payment Dates..... June 1 and December 1, commencing December 1, 1998. Optional Redemption........ The New Senior Subordinated Notes will be subject to redemption at any time on or after June 1, 2003 at the option of the Issuers, in whole or in part, in cash at the redemption prices set forth herein, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the applicable redemption date. Notwithstanding the foregoing, on or prior to June 1, 2001, the Issuers may redeem up to 35% of the aggregate principal amount of Senior Subordinated Notes ever issued under the Indenture in cash at a redemption price of 109.875% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the redemption date, with the net cash proceeds of one or more Public Equity Offerings; provided that at least 65% of the aggregate principal amount of Senior Subordinated Notes ever issued under the Indenture remains outstanding immediately after the occurrence of any such redemption. In addition, at any time prior to June 1, 2003, the Issuers may, at their option upon the occurrence of a Change of Control, redeem the New Senior Subordinated Notes, in whole but not in part, in cash at a redemption price equal to (i) the present value of the sum of all the remaining interest (excluding accrued and unpaid interest, if any), premium and principal payments that would become due on the New Senior Subordinated Notes as if the New Senior Subordinated Notes were to remain outstanding and be redeemed on June 1, 2003, computed using a discount rate equal to the Treasury Rate plus 50 basis points, plus (ii) accrued and unpaid interest and Liquidated Damages, if any, to the date of redemption. See "Description of New Senior Subordinated Notes -- Optional Redemption." Change of Control.......... Upon the occurrence of a Change of Control, each Holder of New Senior Subordinated Notes will have the right to require the Issuers to repurchase all or any part of such Holder's New Senior Subordinated Notes at an offer price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the date of repurchase. No assurance can be given that the Issuers will have sufficient resources to satisfy their repurchase obligation with respect to the New Senior Subordinated Notes following a Change of Control. See "Risk Factors -- Possible Inability to Repurchase New Senior Subordinated Notes upon Change of Control" and "Description of New Senior Subordinated Notes -- Repurchase at the Option of Holders -- Change of Control." Ranking.................... The New Senior Subordinated Notes will be general unsecured obligations of the Issuers and will be subordinated in right of payment to all existing and future Senior Indebtedness of the Issuers, including indebtedness pursuant to the New Credit Facility. The New Senior Subordinated Notes will rank pari passu with any future senior subordinated indebtedness of the Issuers and will rank senior to all Subordinated Indebtedness of the Issuers. The New Senior Subordinated Notes will be effectively subordinated to all liabilities of the Issuers' subsidiaries that are not Guarantors. On a pro forma basis after giving effect to the Merger, including the Merger Financing and the application of proceeds thereof, as of March 31, 1998, the Company and the Guarantors would have had outstanding approximately $379.5 million of Senior Indebtedness and the Company's non-Guarantor subsidiaries would have had approximately $87.0 million of outstanding liabilities, including trade payables. Note Guarantees............ The New Senior Subordinated Notes will be unconditionally guaranteed on a senior subordinated basis by the Guarantors. The Note Guarantees will be general unsecured obligations of the Guarantors, will be subordinated in right of payment to all existing and future Senior Indebtedness of the Guarantors, including indebtedness under the New Credit Facility, and will rank senior in right of payment to any future subordinated indebtedness of the Guarantors. See "Description of New Senior Subordinated Notes -- Note Guarantees." Certain Covenants.......... The Indenture pursuant to which the New Senior Subordinated Notes will be issued (the "Indenture") contains certain covenants that, among other things, limit the ability of the Issuers and their Restricted Subsidiaries (as defined herein) to: incur indebtedness and issue preferred stock, repurchase Capital Stock (as defined herein) and Indebtedness subordinated to the New Senior Subordinated Notes, engage in transactions with affiliates, engage in sale and leaseback transactions, incur or suffer to exist certain liens, pay dividends or other distributions, make investments, sell assets and engage in certain mergers and consolidations. Use of Proceeds............ There will be no cash proceeds to the Issuers from the exchange pursuant to the Exchange Offer. The net proceeds from the Original Offering, together with the initial borrowings under the New Credit Facility, the DLJMB Equity Investment and the issuance of the Debentures, were used to fund payment of the cash portion of the Merger Consideration, the Option Cash Proceeds and the ESPP Cash Proceeds, to refinance outstanding indebtedness of the Company and to pay the expenses incurred in connection with the Merger. See "Use of Proceeds."
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+SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Investors are urged to read this Prospectus in its entirety. As used in this Prospectus, the term "Holdings" means Thermadyne Holdings Corporation, including its predecessors and subsidiaries; the term "Issuers" means Thermadyne Mfg. LLC, a wholly owned subsidiary of Holdings ("Thermadyne LLC"), and Thermadyne Capital Corp. ("Thermadyne Capital"), a wholly owned subsidiary of Thermadyne LLC; and the terms "Company" and "Thermadyne" mean Thermadyne LLC and its predecessors and subsidiaries. THE COMPANY OVERVIEW Thermadyne is a leading global manufacturer of cutting and welding products and accessories. The Company manufactures a broad range of gas (oxy-fuel) and electric arc cutting and welding products that are ultimately sold to end-user customers principally engaged in the aerospace, automotive, construction, metal fabrication, mining, mill and foundry, petroleum and shipbuilding industries. Thermadyne sells its products through a long-established domestic network of approximately 1,100 independent distributors who market Thermadyne products to over 10,000 end-user customers. For the twelve months ended March 31, 1998, the Company's net sales and Adjusted EBITDA (as defined herein), on a pro forma basis, were $548.2 million and $115.5 million, respectively. The Company's core products enjoy leading brand recognition, a reputation for quality and strong market positions. In 1994, following the Company's Restructuring (as defined herein), current management initiated a series of transactions to focus the Company's business exclusively on the cutting and welding industry. As part of this strategy, the Company divested three non-core businesses and acquired six cutting and welding businesses, which collectively generated approximately $169 million in annual revenues at the respective times of acquisition. As a result of this repositioning strategy, along with ongoing new product introductions, an extensive distribution network and market leading brands, the Company has achieved a compound annual growth in net sales and EBITDA of 20.3% and 12.5%, respectively, from 1993 to 1997. According to the United States Department of Commerce, domestic welding industry revenues totaled over $3.6 billion in 1997. The domestic industry has grown at an annual rate of 5.9% since 1989 and is expected to grow 4.2% in 1998. Global welding industry revenues are estimated to total over $10.0 billion, and management believes that growth in the international market has been faster than the domestic market, driven, in large part, by infrastructure spending in developing markets. International markets, including Australia and Italy, represented approximately 42% of the Company's net sales in 1997, up from approximately 20% of net sales in 1994. Although the industry has begun to experience global consolidation, it continues to be very fragmented. COMPETITIVE STRENGTHS Thermadyne possesses a number of competitive strengths that have allowed it to develop and maintain a strong position within the cutting and welding industry, including the following: Market Leading Brands. Management believes that the strength and longevity of the numerous Thermadyne brand names create a significant competitive advantage and position Thermadyne as one of the leaders in the cutting and welding industry. Each of the Company's major divisions maintains industry-leading brand names with significant market shares. Management believes that VICTOR(R), founded in 1913, is the leading brand name in domestic gas-operated cutting and welding torches and equipment; TWECO(R), founded in 1936, is the leading domestic manufacturer of metal inert gas ("MIG") and manual welding torches; ARCAIR(R) is the leading domestic brand name of tungsten inert gas ("TIG") torch and accessory products; THERMAL DYNAMICS(R), founded in 1957, is a leading domestic manufacturer of manual plasma cutting products; and CIGWELD(R), founded in 1922, is the leading brand name in the Australia/New Zealand cutting and welding (Continued from cover page) Each broker-dealer that receives New Senior Subordinated Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Subordinated Notes. The letter of transmittal accompanying this Prospectus (the "Letter of Transmittal") states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Senior Subordinated Notes received in exchange for Old Senior Subordinated Notes where such Old Senior Subordinated Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Issuers have agreed, for a period of 90 days after the Expiration Date, to make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." No public market existed for the Old Senior Subordinated Notes before the Exchange Offer. The Issuers currently do not intend to list the New Senior Subordinated Notes on any securities exchange or to seek approval for quotation through any automated quotation system, and no active public market for the New Senior Subordinated Notes is currently anticipated. The Issuers will pay all the expenses incident to the Exchange Offer. The Exchange Offer is not conditioned upon any minimum principal amount of Old Senior Subordinated Notes being tendered for exchange pursuant to the Exchange Offer. products market. Each of the manufacturing operations associated with these brands is ISO-9000 series certified. Diverse and Stable Customer Base. The Company's customer base includes cutting and welding product distributors as well as end-user customers principally engaged in the aerospace, automotive, construction, metal fabrication, mining, mill and foundry, petroleum and ship building industries. No one customer accounted for more than 9% of the Company's 1997 net sales. Further, the Company's top 20 customers have been associated with the Company for an average of over 10 years. Established, Effective Distribution Channels. The Company believes that its strong, established and long-standing relationships with over 1,100 independent cutting and welding products distributors in the United States provide a significant competitive advantage and support the Company's strong market position. Thermadyne's domestic distributor relationships are maintained by 11 area business managers who oversee the Company's relationships with large distributors and by separate product-specific sales forces for each of Thermadyne's business units. Management believes that this unique structure, which combines relationship managers with technically trained product specialists, will enable the Company to more effectively maintain and utilize its distributor networks. Management also believes that this established distribution network enables the Company to achieve market penetration when introducing newly developed or acquired products. Proven and Committed Senior Management Team. Thermadyne's management team has strategically repositioned the Company over the past four years to focus exclusively in its core cutting and welding markets. This repositioning was accomplished through divestitures of three non-core assets and acquisitions of six strategic businesses or product lines. In addition, management has initiated the development and introduction of significant new products and product lines. As a result of management's efforts, the Company achieved a 20.3% growth rate in net sales from 1993 to 1997. In connection with the Merger each member of the senior management team signed an employment contract with the Company. Additionally, the Company adopted an incentive plan to tie each member of senior management's compensation to the Company's financial performance. See "Executive Compensation." BUSINESS STRATEGY Thermadyne has developed a business strategy designed to enhance its strong market positions and continue to improve its growth and profitability. The primary elements of the Company's business strategy are as follows: Continue New Product Development and Enhancement. The foundation for Thermadyne's strong market positions and leading brand names is the development and introduction of new products and enhancements of existing products. The Company believes it is at the forefront of cutting and welding technology with a proven track-record of continual new product introductions and existing product enhancements that have resulted in 262 issued or pending United States and foreign patents. New products and product enhancements are designed to add value for customers, including enhanced safety features, improved productivity and ergonomics and an improved welding environment. Examples of recent new product introductions include robotic welding systems and accessories, high-purity instrumentation, automated plasma cutting and safety products as well as underwater cutting electrodes. During 1997, the Company introduced over 135 new products or product enhancements, and the Company expects to continue this effort in the future. Expand Strategic Acquisitions. The Company has completed six acquisitions since 1993, which collectively generated approximately $169 million in annual revenues at the respective times of acquisition, including over $135 million of revenues for Australia and Italy. The Company believes that numerous acquisition candidates exist globally, and the Company intends to continue to seek new acquisition opportunities in its cutting and welding business. Thermadyne intends to continue its focused acquisition strategy that includes the following principal elements: (i) entering and expanding in geographic areas where the Company does not currently have a significant presence through acquisitions of local cutting and welding businesses and (ii) expanding in geographic areas where the Company currently maintains a strong presence through the acquisition of complementary product lines. Leverage Existing Distribution Network. The Company intends to leverage its existing distribution network through the acquisition or introduction of new products and product enhancements. Management believes that when the Company acquires a local presence in a new geographic area, it can utilize the acquired distribution network to sell existing Thermadyne brands into that local market. In addition, the Company believes that significant opportunities exist to purchase complementary product lines and expand its business by selling the new product lines through Thermadyne's extensive distribution network. For example, through recent acquisitions the Company has expanded its offering of filler metals, conventional arc welding power supplies, safety equipment and engine-driven welding power sources and began marketing such products through its established distribution network. The Company intends to continue this strategy of penetrating new welding product markets by leveraging its extensive distribution network in conjunction with its new product development and focused acquisition strategies. Broaden International Presence. Thermadyne has maintained an international presence for over 30 years and continues to broaden its presence throughout the world. International sales accounted for approximately 42% of net sales in 1997 as compared to approximately 20% in 1994. The Company has established a dedicated international market presence and maintains the leading position in Australia/New Zealand and significant and growing positions in Europe, Asia and Latin America. Management intends to continue the expansion of its strong domestic brand names into the international market and to continue to penetrate the growing Asian and Latin American cutting and welding markets. Continue Cost Reduction Efforts. Thermadyne strives to continually improve manufacturing efficiencies and reduce unit costs. In December 1997, the Company implemented a cost reduction program that includes the following principal elements: (i) vendor rationalization and consolidation; (ii) manufacturing process and productivity improvements and product design changes; (iii) personnel rationalization and expense reductions; (iv) advertising and trade show expense reductions; (v) aircraft, charter and other travel expense reductions; and (vi) elimination of the annual sales meeting. These cost reduction initiatives are expected to generate approximately $10 million in savings on an annualized basis. In addition, the Company has initiated the implementation of a new global information system that is designed to allow the Company to further integrate administrative functions and improve information flow across business unit lines. Continue Dedicated Customer Service. The Company believes that effective and proactive customer service has enabled the Company to build and maintain its leading market positions and strong distributor relationships. Management plans to continue this strategy of enhancing distributor and end-user relationships through continuous customer service improvements. Each of Thermadyne's divisions maintains a dedicated, well trained, technically oriented and product-specific sales and customer service team. Management believes that the dedicated product teams provide Thermadyne with a significant competitive advantage. In addition, to further improve customer service, the Company has implemented a national accounts team of 11 area business managers to support the dedicated product sales and service teams and further support sales to the Company's key distributors. THE MERGER AND MERGER FINANCING On May 22, 1998, Holdings consummated the merger of Mercury Acquisition Corporation ("Mercury"), a corporation organized by DLJ Merchant Banking Partners II, L.P. ("DLJMB") and affiliated funds and entities (the "DLJMB Funds") with and into Holdings, with Holdings continuing as the surviving corporation (the "Merger"). In order to fund the payment of the cash portion of the Merger Consideration (as defined herein), the Option Cash Proceeds (as defined herein) and the ESPP Cash Proceeds (as defined herein), to refinance and/or retire outstanding indebtedness of the Company, and to pay expenses incurred in connection with the Merger, the Issuers issued the Senior Subordinated Notes and the Company entered into a syndicated senior secured loan facility providing for term loan borrowings in the aggregate principal amount of approximately $330 million and revolving loan borrowings of $100 million (the "New Credit Facility"). In connection with the Merger, the Company borrowed all term loans available under the New Credit Facility plus approximately $25 million of revolving loans. The remaining revolving loans will be available to fund the working capital requirements of the Company. The proceeds of such financings were distributed to Holdings in the form of a dividend. See "Description of New Credit Facility," "The Merger and Merger Financing" and "Certain Relationships and Related Transactions." Mercury issued approximately $94.6 million aggregate gross proceeds of its 12 1/2% Senior Discount Debentures due 2008 (the "Debentures"). In connection with the Merger, Holdings succeeded to the obligations of Mercury with respect to the Debentures. The DLJMB Funds also purchased 2,608,696 shares of common stock of Mercury ("Mercury Common Stock"), 2,000,000 shares of senior exchangeable preferred stock of Mercury ("Mercury Preferred Stock") and warrants to purchase 353,428 shares of Mercury Common Stock at an exercise price of $0.01 per share (the "DLJMB Warrants") for approximately $140 million (the "DLJMB Equity Investment"). As a result of the Merger, the proceeds of such purchases became an asset of Holdings, each share of Mercury Common Stock became a share of common stock of Holdings ("Holdings Common Stock"), each share of Mercury Preferred Stock became a share of senior exchangeable preferred stock of Holdings ("Holdings Preferred Stock") and each DLJMB Warrant to acquire Mercury Common Stock became exercisable for an equal number of shares of Holdings Common Stock. In addition, in connection with the Merger, certain members of senior management purchased 143,192 shares of Holdings Common Stock for approximately $4.9 million (the "Management Share Purchase"), of which approximately $3.6 million was provided through non-recourse loans from Holdings (the "Management Loans"). The equity and debt financings referred to above are collectively referred to herein as the "Merger Financing." THE EXCHANGE OFFER The Exchange Offer......... $1,000 principal amount at maturity of New Senior Subordinated Notes in exchange for each $1,000 principal amount at maturity of Old Senior Subordinated Notes. The Old Senior Subordinated Notes were sold on May 22, 1998, in a private placement to Donaldson, Lufkin & Jenrette Securities Corporation ("DLJSC" or the "Initial Purchaser"), which immediately resold to the Old Senior Subordinated Notes pursuant to Rule 144A promulgated under the Securities Act (the "Original Offering"). As of the date hereof, Old Senior Subordinated Notes representing $207 million aggregate principal amount at maturity are outstanding. The terms of the New Senior Subordinated Notes and the Old Senior Subordinated Notes are substantially identical in all material respects, except that the New Senior Subordinated Notes will be freely transferable by the holders thereof except as otherwise provided herein. See "Description of New Senior Subordinated Notes." Based on an interpretation by the Commission's staff set forth in no-action letters issued to third parties unrelated to the Issuers and the Guarantors, the Issuers and the Guarantors believe that New Senior Subordinated Notes issued pursuant to the Exchange Offer in exchange for Old Senior Subordinated Notes may be offered for resale, sold and otherwise transferred by any person receiving the New Notes, whether or not that person is the registered holder (other than any such holder or such other person that is an "affiliate" of the Issuers or any Guarantor within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that (i) the New Senior Subordinated Notes are acquired in the ordinary course of business of that holder or such other person, (ii) neither the holder nor such other person is engaging in or intends to engage in a distribution of the New Senior Subordinated Notes and (iii) neither the holder nor such other person has an arrangement or understanding with any person to participate in the distribution of the New Senior Subordinated Notes. See "The Exchange Offer -- Purpose and Effect." Each broker-dealer that receives New Senior Subordinated Notes for its own account in exchange for Old Senior Subordinated Notes, where those Old Senior Subordinated Notes were acquired by the broker-dealer as a result of its market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of these New Senior Subordinated Notes. See "Plan of Distribution." Registration Rights Agreement................ In connection with the Original Offering, the Issuers and the Guarantors entered into a Registration Rights Agreement with the Initial Purchaser (the "Registration Rights Agreement") requiring the Issuers to make the Exchange Offer. See "The Exchange Offer -- Purpose and Effect." Expiration Date............ The Exchange Offer will expire at 5:00 p.m., New York City time, September 3, 1998, or such later date and time to which it is extended (the "Expiration Date"). Withdrawal................. The tender of the Old Senior Subordinated Notes pursuant to the Exchange Offer may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Any Old Senior Subordinated Notes not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Exchange Offer. Interest on the New Senior Subordinated Notes.................... Interest on each New Senior Subordinated Note will accrue from the date of issuance of the Old Senior Subordinated Note for which the New Senior Subordinated Note is exchanged or from the date of the last periodic payment of interest on such Old Senior Subordinated Note, whichever is later. No additional interest will be paid on Old Senior Subordinated Notes tendered and accepted for exchange. Conditions to the Exchange Offer.................... The Exchange Offer is subject to certain customary conditions, certain of which may be waived by the Issuers. See "The Exchange Offer -- Conditions to the Exchange Offer." Procedures for Tendering Old Senior Subordinated Notes.................... Each holder of Old Senior Subordinated Notes wishing to accept the Exchange Offer must complete, sign and date the Letter of Transmittal, or a copy thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver the Letter of Transmittal, or the copy, together with the Old Senior Subordinated Notes and any other required documentation, to the Exchange Agent (as defined herein) at the address set forth herein. Persons holding the Old Senior Subordinated Notes through the Depository Trust Company ("DTC") and wishing to accept the Exchange Offer must do so pursuant to the DTC's Automated Tender Offer Program, by which each tendering participant will agree to be bound by the Letter of Transmittal. By executing or agreeing to be bound by the Letter of Transmittal, each holder will represent to the Issuers that, among other things, (i) the New Senior Subordinated Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Senior Subordinated Notes, whether or not such person is the registered holder of the Old Senior Subordinated Notes, (ii) neither the holder nor any such other person is engaging in or intends to engage in a distribution of such New Senior Subordinated Notes, (iii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Senior Subordinated Notes, and (iv) neither the holder nor any such other person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of the Issuers or any Guarantor. Pursuant to the Registration Rights Agreement, the Issuers are required to file a "shelf" registration statement for a continuous offering pursuant to Rule 415 under the Securities Act in respect of the Old Notes if (a) they are prohibited from consummating the Exchange Offer because the Exchange Offer is not permitted by applicable law or Commission policy or (b) any holder of Transfer Restricted Securities (as defined) notifies the Issuers in writing prior to the 20th business day following consummation of the Exchange Offer that (i) based on an opinion of counsel, it is prohibited by law or Commission policy from participating in the Exchange Offer or (ii) it is a broker-dealer and owns Senior Subordinated Notes acquired directly from the Issuers. Acceptance of Old Notes and Delivery of New Notes.... The Issuers and the Guarantors will accept for exchange any and all Old Senior Subordinated Notes which are properly tendered (and not withdrawn) in the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Senior Subordinated Notes issued pursuant to the Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offer -- Terms of the Exchange Offer." Exchange Agent............. State Street Bank and Trust Company is serving as Exchange Agent (the "Exchange Agent") in connection with the Exchange Offer. Federal Income Tax Considerations........... The exchange pursuant to the Exchange Offer should not be a taxable event for federal income tax purposes. See "Certain United States Federal Income Tax Considerations." Effect of Not Tendering.... Old Senior Subordinated Notes that are not tendered or that are improperly tendered and not accepted will, following the completion of the Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. The Issuers and the Guarantors will have no further obligation to provide for the registration under the Securities Act of such Old Senior Subordinated Notes. THE NEW SENIOR SUBORDINATED NOTES Securities Offered......... $207.0 million aggregate principal amount at maturity of 9 7/8% Senior Subordinated Notes due 2008. Issuers.................... The New Senior Subordinated Notes will be joint and several obligations of the Company and Thermadyne Capital. Thermadyne Capital is a Delaware corporation and wholly-owned subsidiary of the Company formed in connection with the Original Offering. Thermadyne Capital has no assets, no liabilities (other than the Senior Subordinated Notes), no substantial operations, and will be prohibited from engaging in any business activities. Maturity Date.............. June 1, 2008. Interest Payment Dates..... June 1 and December 1, commencing December 1, 1998. Optional Redemption........ The New Senior Subordinated Notes will be subject to redemption at any time on or after June 1, 2003 at the option of the Issuers, in whole or in part, in cash at the redemption prices set forth herein, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the applicable redemption date. Notwithstanding the foregoing, on or prior to June 1, 2001, the Issuers may redeem up to 35% of the aggregate principal amount of Senior Subordinated Notes ever issued under the Indenture in cash at a redemption price of 109.875% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the redemption date, with the net cash proceeds of one or more Public Equity Offerings; provided that at least 65% of the aggregate principal amount of Senior Subordinated Notes ever issued under the Indenture remains outstanding immediately after the occurrence of any such redemption. In addition, at any time prior to June 1, 2003, the Issuers may, at their option upon the occurrence of a Change of Control, redeem the New Senior Subordinated Notes, in whole but not in part, in cash at a redemption price equal to (i) the present value of the sum of all the remaining interest (excluding accrued and unpaid interest, if any), premium and principal payments that would become due on the New Senior Subordinated Notes as if the New Senior Subordinated Notes were to remain outstanding and be redeemed on June 1, 2003, computed using a discount rate equal to the Treasury Rate plus 50 basis points, plus (ii) accrued and unpaid interest and Liquidated Damages, if any, to the date of redemption. See "Description of New Senior Subordinated Notes -- Optional Redemption." Change of Control.......... Upon the occurrence of a Change of Control, each Holder of New Senior Subordinated Notes will have the right to require the Issuers to repurchase all or any part of such Holder's New Senior Subordinated Notes at an offer price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the date of repurchase. No assurance can be given that the Issuers will have sufficient resources to satisfy their repurchase obligation with respect to the New Senior Subordinated Notes following a Change of Control. See "Risk Factors -- Possible Inability to Repurchase New Senior Subordinated Notes upon Change of Control" and "Description of New Senior Subordinated Notes -- Repurchase at the Option of Holders -- Change of Control." Ranking.................... The New Senior Subordinated Notes will be general unsecured obligations of the Issuers and will be subordinated in right of payment to all existing and future Senior Indebtedness of the Issuers, including indebtedness pursuant to the New Credit Facility. The New Senior Subordinated Notes will rank pari passu with any future senior subordinated indebtedness of the Issuers and will rank senior to all Subordinated Indebtedness of the Issuers. The New Senior Subordinated Notes will be effectively subordinated to all liabilities of the Issuers' subsidiaries that are not Guarantors. On a pro forma basis after giving effect to the Merger, including the Merger Financing and the application of proceeds thereof, as of March 31, 1998, the Company and the Guarantors would have had outstanding approximately $379.5 million of Senior Indebtedness and the Company's non-Guarantor subsidiaries would have had approximately $87.0 million of outstanding liabilities, including trade payables. Note Guarantees............ The New Senior Subordinated Notes will be unconditionally guaranteed on a senior subordinated basis by the Guarantors. The Note Guarantees will be general unsecured obligations of the Guarantors, will be subordinated in right of payment to all existing and future Senior Indebtedness of the Guarantors, including indebtedness under the New Credit Facility, and will rank senior in right of payment to any future subordinated indebtedness of the Guarantors. See "Description of New Senior Subordinated Notes -- Note Guarantees." Certain Covenants.......... The Indenture pursuant to which the New Senior Subordinated Notes will be issued (the "Indenture") contains certain covenants that, among other things, limit the ability of the Issuers and their Restricted Subsidiaries (as defined herein) to: incur indebtedness and issue preferred stock, repurchase Capital Stock (as defined herein) and Indebtedness subordinated to the New Senior Subordinated Notes, engage in transactions with affiliates, engage in sale and leaseback transactions, incur or suffer to exist certain liens, pay dividends or other distributions, make investments, sell assets and engage in certain mergers and consolidations. Use of Proceeds............ There will be no cash proceeds to the Issuers from the exchange pursuant to the Exchange Offer. The net proceeds from the Original Offering, together with the initial borrowings under the New Credit Facility, the DLJMB Equity Investment and the issuance of the Debentures, were used to fund payment of the cash portion of the Merger Consideration, the Option Cash Proceeds and the ESPP Cash Proceeds, to refinance outstanding indebtedness of the Company and to pay the expenses incurred in connection with the Merger. See "Use of Proceeds."
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+SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Investors are urged to read this Prospectus in its entirety. As used in this Prospectus, the term "Holdings" means Thermadyne Holdings Corporation, including its predecessors and subsidiaries; the term "Issuers" means Thermadyne Mfg. LLC, a wholly owned subsidiary of Holdings ("Thermadyne LLC"), and Thermadyne Capital Corp. ("Thermadyne Capital"), a wholly owned subsidiary of Thermadyne LLC; and the terms "Company" and "Thermadyne" mean Thermadyne LLC and its predecessors and subsidiaries. THE COMPANY OVERVIEW Thermadyne is a leading global manufacturer of cutting and welding products and accessories. The Company manufactures a broad range of gas (oxy-fuel) and electric arc cutting and welding products that are ultimately sold to end-user customers principally engaged in the aerospace, automotive, construction, metal fabrication, mining, mill and foundry, petroleum and shipbuilding industries. Thermadyne sells its products through a long-established domestic network of approximately 1,100 independent distributors who market Thermadyne products to over 10,000 end-user customers. For the twelve months ended March 31, 1998, the Company's net sales and Adjusted EBITDA (as defined herein), on a pro forma basis, were $548.2 million and $115.5 million, respectively. The Company's core products enjoy leading brand recognition, a reputation for quality and strong market positions. In 1994, following the Company's Restructuring (as defined herein), current management initiated a series of transactions to focus the Company's business exclusively on the cutting and welding industry. As part of this strategy, the Company divested three non-core businesses and acquired six cutting and welding businesses, which collectively generated approximately $169 million in annual revenues at the respective times of acquisition. As a result of this repositioning strategy, along with ongoing new product introductions, an extensive distribution network and market leading brands, the Company has achieved a compound annual growth in net sales and EBITDA of 20.3% and 12.5%, respectively, from 1993 to 1997. According to the United States Department of Commerce, domestic welding industry revenues totaled over $3.6 billion in 1997. The domestic industry has grown at an annual rate of 5.9% since 1989 and is expected to grow 4.2% in 1998. Global welding industry revenues are estimated to total over $10.0 billion, and management believes that growth in the international market has been faster than the domestic market, driven, in large part, by infrastructure spending in developing markets. International markets, including Australia and Italy, represented approximately 42% of the Company's net sales in 1997, up from approximately 20% of net sales in 1994. Although the industry has begun to experience global consolidation, it continues to be very fragmented. COMPETITIVE STRENGTHS Thermadyne possesses a number of competitive strengths that have allowed it to develop and maintain a strong position within the cutting and welding industry, including the following: Market Leading Brands. Management believes that the strength and longevity of the numerous Thermadyne brand names create a significant competitive advantage and position Thermadyne as one of the leaders in the cutting and welding industry. Each of the Company's major divisions maintains industry-leading brand names with significant market shares. Management believes that VICTOR(R), founded in 1913, is the leading brand name in domestic gas-operated cutting and welding torches and equipment; TWECO(R), founded in 1936, is the leading domestic manufacturer of metal inert gas ("MIG") and manual welding torches; ARCAIR(R) is the leading domestic brand name of tungsten inert gas ("TIG") torch and accessory products; THERMAL DYNAMICS(R), founded in 1957, is a leading domestic manufacturer of manual plasma cutting products; and CIGWELD(R), founded in 1922, is the leading brand name in the Australia/New Zealand cutting and welding (Continued from cover page) Each broker-dealer that receives New Senior Subordinated Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Subordinated Notes. The letter of transmittal accompanying this Prospectus (the "Letter of Transmittal") states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Senior Subordinated Notes received in exchange for Old Senior Subordinated Notes where such Old Senior Subordinated Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Issuers have agreed, for a period of 90 days after the Expiration Date, to make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." No public market existed for the Old Senior Subordinated Notes before the Exchange Offer. The Issuers currently do not intend to list the New Senior Subordinated Notes on any securities exchange or to seek approval for quotation through any automated quotation system, and no active public market for the New Senior Subordinated Notes is currently anticipated. The Issuers will pay all the expenses incident to the Exchange Offer. The Exchange Offer is not conditioned upon any minimum principal amount of Old Senior Subordinated Notes being tendered for exchange pursuant to the Exchange Offer. products market. Each of the manufacturing operations associated with these brands is ISO-9000 series certified. Diverse and Stable Customer Base. The Company's customer base includes cutting and welding product distributors as well as end-user customers principally engaged in the aerospace, automotive, construction, metal fabrication, mining, mill and foundry, petroleum and ship building industries. No one customer accounted for more than 9% of the Company's 1997 net sales. Further, the Company's top 20 customers have been associated with the Company for an average of over 10 years. Established, Effective Distribution Channels. The Company believes that its strong, established and long-standing relationships with over 1,100 independent cutting and welding products distributors in the United States provide a significant competitive advantage and support the Company's strong market position. Thermadyne's domestic distributor relationships are maintained by 11 area business managers who oversee the Company's relationships with large distributors and by separate product-specific sales forces for each of Thermadyne's business units. Management believes that this unique structure, which combines relationship managers with technically trained product specialists, will enable the Company to more effectively maintain and utilize its distributor networks. Management also believes that this established distribution network enables the Company to achieve market penetration when introducing newly developed or acquired products. Proven and Committed Senior Management Team. Thermadyne's management team has strategically repositioned the Company over the past four years to focus exclusively in its core cutting and welding markets. This repositioning was accomplished through divestitures of three non-core assets and acquisitions of six strategic businesses or product lines. In addition, management has initiated the development and introduction of significant new products and product lines. As a result of management's efforts, the Company achieved a 20.3% growth rate in net sales from 1993 to 1997. In connection with the Merger each member of the senior management team signed an employment contract with the Company. Additionally, the Company adopted an incentive plan to tie each member of senior management's compensation to the Company's financial performance. See "Executive Compensation." BUSINESS STRATEGY Thermadyne has developed a business strategy designed to enhance its strong market positions and continue to improve its growth and profitability. The primary elements of the Company's business strategy are as follows: Continue New Product Development and Enhancement. The foundation for Thermadyne's strong market positions and leading brand names is the development and introduction of new products and enhancements of existing products. The Company believes it is at the forefront of cutting and welding technology with a proven track-record of continual new product introductions and existing product enhancements that have resulted in 262 issued or pending United States and foreign patents. New products and product enhancements are designed to add value for customers, including enhanced safety features, improved productivity and ergonomics and an improved welding environment. Examples of recent new product introductions include robotic welding systems and accessories, high-purity instrumentation, automated plasma cutting and safety products as well as underwater cutting electrodes. During 1997, the Company introduced over 135 new products or product enhancements, and the Company expects to continue this effort in the future. Expand Strategic Acquisitions. The Company has completed six acquisitions since 1993, which collectively generated approximately $169 million in annual revenues at the respective times of acquisition, including over $135 million of revenues for Australia and Italy. The Company believes that numerous acquisition candidates exist globally, and the Company intends to continue to seek new acquisition opportunities in its cutting and welding business. Thermadyne intends to continue its focused acquisition strategy that includes the following principal elements: (i) entering and expanding in geographic areas where the Company does not currently have a significant presence through acquisitions of local cutting and welding businesses and (ii) expanding in geographic areas where the Company currently maintains a strong presence through the acquisition of complementary product lines. Leverage Existing Distribution Network. The Company intends to leverage its existing distribution network through the acquisition or introduction of new products and product enhancements. Management believes that when the Company acquires a local presence in a new geographic area, it can utilize the acquired distribution network to sell existing Thermadyne brands into that local market. In addition, the Company believes that significant opportunities exist to purchase complementary product lines and expand its business by selling the new product lines through Thermadyne's extensive distribution network. For example, through recent acquisitions the Company has expanded its offering of filler metals, conventional arc welding power supplies, safety equipment and engine-driven welding power sources and began marketing such products through its established distribution network. The Company intends to continue this strategy of penetrating new welding product markets by leveraging its extensive distribution network in conjunction with its new product development and focused acquisition strategies. Broaden International Presence. Thermadyne has maintained an international presence for over 30 years and continues to broaden its presence throughout the world. International sales accounted for approximately 42% of net sales in 1997 as compared to approximately 20% in 1994. The Company has established a dedicated international market presence and maintains the leading position in Australia/New Zealand and significant and growing positions in Europe, Asia and Latin America. Management intends to continue the expansion of its strong domestic brand names into the international market and to continue to penetrate the growing Asian and Latin American cutting and welding markets. Continue Cost Reduction Efforts. Thermadyne strives to continually improve manufacturing efficiencies and reduce unit costs. In December 1997, the Company implemented a cost reduction program that includes the following principal elements: (i) vendor rationalization and consolidation; (ii) manufacturing process and productivity improvements and product design changes; (iii) personnel rationalization and expense reductions; (iv) advertising and trade show expense reductions; (v) aircraft, charter and other travel expense reductions; and (vi) elimination of the annual sales meeting. These cost reduction initiatives are expected to generate approximately $10 million in savings on an annualized basis. In addition, the Company has initiated the implementation of a new global information system that is designed to allow the Company to further integrate administrative functions and improve information flow across business unit lines. Continue Dedicated Customer Service. The Company believes that effective and proactive customer service has enabled the Company to build and maintain its leading market positions and strong distributor relationships. Management plans to continue this strategy of enhancing distributor and end-user relationships through continuous customer service improvements. Each of Thermadyne's divisions maintains a dedicated, well trained, technically oriented and product-specific sales and customer service team. Management believes that the dedicated product teams provide Thermadyne with a significant competitive advantage. In addition, to further improve customer service, the Company has implemented a national accounts team of 11 area business managers to support the dedicated product sales and service teams and further support sales to the Company's key distributors. THE MERGER AND MERGER FINANCING On May 22, 1998, Holdings consummated the merger of Mercury Acquisition Corporation ("Mercury"), a corporation organized by DLJ Merchant Banking Partners II, L.P. ("DLJMB") and affiliated funds and entities (the "DLJMB Funds") with and into Holdings, with Holdings continuing as the surviving corporation (the "Merger"). In order to fund the payment of the cash portion of the Merger Consideration (as defined herein), the Option Cash Proceeds (as defined herein) and the ESPP Cash Proceeds (as defined herein), to refinance and/or retire outstanding indebtedness of the Company, and to pay expenses incurred in connection with the Merger, the Issuers issued the Senior Subordinated Notes and the Company entered into a syndicated senior secured loan facility providing for term loan borrowings in the aggregate principal amount of approximately $330 million and revolving loan borrowings of $100 million (the "New Credit Facility"). In connection with the Merger, the Company borrowed all term loans available under the New Credit Facility plus approximately $25 million of revolving loans. The remaining revolving loans will be available to fund the working capital requirements of the Company. The proceeds of such financings were distributed to Holdings in the form of a dividend. See "Description of New Credit Facility," "The Merger and Merger Financing" and "Certain Relationships and Related Transactions." Mercury issued approximately $94.6 million aggregate gross proceeds of its 12 1/2% Senior Discount Debentures due 2008 (the "Debentures"). In connection with the Merger, Holdings succeeded to the obligations of Mercury with respect to the Debentures. The DLJMB Funds also purchased 2,608,696 shares of common stock of Mercury ("Mercury Common Stock"), 2,000,000 shares of senior exchangeable preferred stock of Mercury ("Mercury Preferred Stock") and warrants to purchase 353,428 shares of Mercury Common Stock at an exercise price of $0.01 per share (the "DLJMB Warrants") for approximately $140 million (the "DLJMB Equity Investment"). As a result of the Merger, the proceeds of such purchases became an asset of Holdings, each share of Mercury Common Stock became a share of common stock of Holdings ("Holdings Common Stock"), each share of Mercury Preferred Stock became a share of senior exchangeable preferred stock of Holdings ("Holdings Preferred Stock") and each DLJMB Warrant to acquire Mercury Common Stock became exercisable for an equal number of shares of Holdings Common Stock. In addition, in connection with the Merger, certain members of senior management purchased 143,192 shares of Holdings Common Stock for approximately $4.9 million (the "Management Share Purchase"), of which approximately $3.6 million was provided through non-recourse loans from Holdings (the "Management Loans"). The equity and debt financings referred to above are collectively referred to herein as the "Merger Financing." THE EXCHANGE OFFER The Exchange Offer......... $1,000 principal amount at maturity of New Senior Subordinated Notes in exchange for each $1,000 principal amount at maturity of Old Senior Subordinated Notes. The Old Senior Subordinated Notes were sold on May 22, 1998, in a private placement to Donaldson, Lufkin & Jenrette Securities Corporation ("DLJSC" or the "Initial Purchaser"), which immediately resold to the Old Senior Subordinated Notes pursuant to Rule 144A promulgated under the Securities Act (the "Original Offering"). As of the date hereof, Old Senior Subordinated Notes representing $207 million aggregate principal amount at maturity are outstanding. The terms of the New Senior Subordinated Notes and the Old Senior Subordinated Notes are substantially identical in all material respects, except that the New Senior Subordinated Notes will be freely transferable by the holders thereof except as otherwise provided herein. See "Description of New Senior Subordinated Notes." Based on an interpretation by the Commission's staff set forth in no-action letters issued to third parties unrelated to the Issuers and the Guarantors, the Issuers and the Guarantors believe that New Senior Subordinated Notes issued pursuant to the Exchange Offer in exchange for Old Senior Subordinated Notes may be offered for resale, sold and otherwise transferred by any person receiving the New Notes, whether or not that person is the registered holder (other than any such holder or such other person that is an "affiliate" of the Issuers or any Guarantor within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that (i) the New Senior Subordinated Notes are acquired in the ordinary course of business of that holder or such other person, (ii) neither the holder nor such other person is engaging in or intends to engage in a distribution of the New Senior Subordinated Notes and (iii) neither the holder nor such other person has an arrangement or understanding with any person to participate in the distribution of the New Senior Subordinated Notes. See "The Exchange Offer -- Purpose and Effect." Each broker-dealer that receives New Senior Subordinated Notes for its own account in exchange for Old Senior Subordinated Notes, where those Old Senior Subordinated Notes were acquired by the broker-dealer as a result of its market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of these New Senior Subordinated Notes. See "Plan of Distribution." Registration Rights Agreement................ In connection with the Original Offering, the Issuers and the Guarantors entered into a Registration Rights Agreement with the Initial Purchaser (the "Registration Rights Agreement") requiring the Issuers to make the Exchange Offer. See "The Exchange Offer -- Purpose and Effect." Expiration Date............ The Exchange Offer will expire at 5:00 p.m., New York City time, September 3, 1998, or such later date and time to which it is extended (the "Expiration Date"). Withdrawal................. The tender of the Old Senior Subordinated Notes pursuant to the Exchange Offer may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Any Old Senior Subordinated Notes not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Exchange Offer. Interest on the New Senior Subordinated Notes.................... Interest on each New Senior Subordinated Note will accrue from the date of issuance of the Old Senior Subordinated Note for which the New Senior Subordinated Note is exchanged or from the date of the last periodic payment of interest on such Old Senior Subordinated Note, whichever is later. No additional interest will be paid on Old Senior Subordinated Notes tendered and accepted for exchange. Conditions to the Exchange Offer.................... The Exchange Offer is subject to certain customary conditions, certain of which may be waived by the Issuers. See "The Exchange Offer -- Conditions to the Exchange Offer." Procedures for Tendering Old Senior Subordinated Notes.................... Each holder of Old Senior Subordinated Notes wishing to accept the Exchange Offer must complete, sign and date the Letter of Transmittal, or a copy thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver the Letter of Transmittal, or the copy, together with the Old Senior Subordinated Notes and any other required documentation, to the Exchange Agent (as defined herein) at the address set forth herein. Persons holding the Old Senior Subordinated Notes through the Depository Trust Company ("DTC") and wishing to accept the Exchange Offer must do so pursuant to the DTC's Automated Tender Offer Program, by which each tendering participant will agree to be bound by the Letter of Transmittal. By executing or agreeing to be bound by the Letter of Transmittal, each holder will represent to the Issuers that, among other things, (i) the New Senior Subordinated Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Senior Subordinated Notes, whether or not such person is the registered holder of the Old Senior Subordinated Notes, (ii) neither the holder nor any such other person is engaging in or intends to engage in a distribution of such New Senior Subordinated Notes, (iii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Senior Subordinated Notes, and (iv) neither the holder nor any such other person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of the Issuers or any Guarantor. Pursuant to the Registration Rights Agreement, the Issuers are required to file a "shelf" registration statement for a continuous offering pursuant to Rule 415 under the Securities Act in respect of the Old Notes if (a) they are prohibited from consummating the Exchange Offer because the Exchange Offer is not permitted by applicable law or Commission policy or (b) any holder of Transfer Restricted Securities (as defined) notifies the Issuers in writing prior to the 20th business day following consummation of the Exchange Offer that (i) based on an opinion of counsel, it is prohibited by law or Commission policy from participating in the Exchange Offer or (ii) it is a broker-dealer and owns Senior Subordinated Notes acquired directly from the Issuers. Acceptance of Old Notes and Delivery of New Notes.... The Issuers and the Guarantors will accept for exchange any and all Old Senior Subordinated Notes which are properly tendered (and not withdrawn) in the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Senior Subordinated Notes issued pursuant to the Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offer -- Terms of the Exchange Offer." Exchange Agent............. State Street Bank and Trust Company is serving as Exchange Agent (the "Exchange Agent") in connection with the Exchange Offer. Federal Income Tax Considerations........... The exchange pursuant to the Exchange Offer should not be a taxable event for federal income tax purposes. See "Certain United States Federal Income Tax Considerations." Effect of Not Tendering.... Old Senior Subordinated Notes that are not tendered or that are improperly tendered and not accepted will, following the completion of the Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. The Issuers and the Guarantors will have no further obligation to provide for the registration under the Securities Act of such Old Senior Subordinated Notes. THE NEW SENIOR SUBORDINATED NOTES Securities Offered......... $207.0 million aggregate principal amount at maturity of 9 7/8% Senior Subordinated Notes due 2008. Issuers.................... The New Senior Subordinated Notes will be joint and several obligations of the Company and Thermadyne Capital. Thermadyne Capital is a Delaware corporation and wholly-owned subsidiary of the Company formed in connection with the Original Offering. Thermadyne Capital has no assets, no liabilities (other than the Senior Subordinated Notes), no substantial operations, and will be prohibited from engaging in any business activities. Maturity Date.............. June 1, 2008. Interest Payment Dates..... June 1 and December 1, commencing December 1, 1998. Optional Redemption........ The New Senior Subordinated Notes will be subject to redemption at any time on or after June 1, 2003 at the option of the Issuers, in whole or in part, in cash at the redemption prices set forth herein, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the applicable redemption date. Notwithstanding the foregoing, on or prior to June 1, 2001, the Issuers may redeem up to 35% of the aggregate principal amount of Senior Subordinated Notes ever issued under the Indenture in cash at a redemption price of 109.875% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the redemption date, with the net cash proceeds of one or more Public Equity Offerings; provided that at least 65% of the aggregate principal amount of Senior Subordinated Notes ever issued under the Indenture remains outstanding immediately after the occurrence of any such redemption. In addition, at any time prior to June 1, 2003, the Issuers may, at their option upon the occurrence of a Change of Control, redeem the New Senior Subordinated Notes, in whole but not in part, in cash at a redemption price equal to (i) the present value of the sum of all the remaining interest (excluding accrued and unpaid interest, if any), premium and principal payments that would become due on the New Senior Subordinated Notes as if the New Senior Subordinated Notes were to remain outstanding and be redeemed on June 1, 2003, computed using a discount rate equal to the Treasury Rate plus 50 basis points, plus (ii) accrued and unpaid interest and Liquidated Damages, if any, to the date of redemption. See "Description of New Senior Subordinated Notes -- Optional Redemption." Change of Control.......... Upon the occurrence of a Change of Control, each Holder of New Senior Subordinated Notes will have the right to require the Issuers to repurchase all or any part of such Holder's New Senior Subordinated Notes at an offer price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the date of repurchase. No assurance can be given that the Issuers will have sufficient resources to satisfy their repurchase obligation with respect to the New Senior Subordinated Notes following a Change of Control. See "Risk Factors -- Possible Inability to Repurchase New Senior Subordinated Notes upon Change of Control" and "Description of New Senior Subordinated Notes -- Repurchase at the Option of Holders -- Change of Control." Ranking.................... The New Senior Subordinated Notes will be general unsecured obligations of the Issuers and will be subordinated in right of payment to all existing and future Senior Indebtedness of the Issuers, including indebtedness pursuant to the New Credit Facility. The New Senior Subordinated Notes will rank pari passu with any future senior subordinated indebtedness of the Issuers and will rank senior to all Subordinated Indebtedness of the Issuers. The New Senior Subordinated Notes will be effectively subordinated to all liabilities of the Issuers' subsidiaries that are not Guarantors. On a pro forma basis after giving effect to the Merger, including the Merger Financing and the application of proceeds thereof, as of March 31, 1998, the Company and the Guarantors would have had outstanding approximately $379.5 million of Senior Indebtedness and the Company's non-Guarantor subsidiaries would have had approximately $87.0 million of outstanding liabilities, including trade payables. Note Guarantees............ The New Senior Subordinated Notes will be unconditionally guaranteed on a senior subordinated basis by the Guarantors. The Note Guarantees will be general unsecured obligations of the Guarantors, will be subordinated in right of payment to all existing and future Senior Indebtedness of the Guarantors, including indebtedness under the New Credit Facility, and will rank senior in right of payment to any future subordinated indebtedness of the Guarantors. See "Description of New Senior Subordinated Notes -- Note Guarantees." Certain Covenants.......... The Indenture pursuant to which the New Senior Subordinated Notes will be issued (the "Indenture") contains certain covenants that, among other things, limit the ability of the Issuers and their Restricted Subsidiaries (as defined herein) to: incur indebtedness and issue preferred stock, repurchase Capital Stock (as defined herein) and Indebtedness subordinated to the New Senior Subordinated Notes, engage in transactions with affiliates, engage in sale and leaseback transactions, incur or suffer to exist certain liens, pay dividends or other distributions, make investments, sell assets and engage in certain mergers and consolidations. Use of Proceeds............ There will be no cash proceeds to the Issuers from the exchange pursuant to the Exchange Offer. The net proceeds from the Original Offering, together with the initial borrowings under the New Credit Facility, the DLJMB Equity Investment and the issuance of the Debentures, were used to fund payment of the cash portion of the Merger Consideration, the Option Cash Proceeds and the ESPP Cash Proceeds, to refinance outstanding indebtedness of the Company and to pay the expenses incurred in connection with the Merger. See "Use of Proceeds."
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+SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Investors are urged to read this Prospectus in its entirety. As used in this Prospectus, the term "Holdings" means Thermadyne Holdings Corporation, including its predecessors and subsidiaries; the term "Issuers" means Thermadyne Mfg. LLC, a wholly owned subsidiary of Holdings ("Thermadyne LLC"), and Thermadyne Capital Corp. ("Thermadyne Capital"), a wholly owned subsidiary of Thermadyne LLC; and the terms "Company" and "Thermadyne" mean Thermadyne LLC and its predecessors and subsidiaries. THE COMPANY OVERVIEW Thermadyne is a leading global manufacturer of cutting and welding products and accessories. The Company manufactures a broad range of gas (oxy-fuel) and electric arc cutting and welding products that are ultimately sold to end-user customers principally engaged in the aerospace, automotive, construction, metal fabrication, mining, mill and foundry, petroleum and shipbuilding industries. Thermadyne sells its products through a long-established domestic network of approximately 1,100 independent distributors who market Thermadyne products to over 10,000 end-user customers. For the twelve months ended March 31, 1998, the Company's net sales and Adjusted EBITDA (as defined herein), on a pro forma basis, were $548.2 million and $115.5 million, respectively. The Company's core products enjoy leading brand recognition, a reputation for quality and strong market positions. In 1994, following the Company's Restructuring (as defined herein), current management initiated a series of transactions to focus the Company's business exclusively on the cutting and welding industry. As part of this strategy, the Company divested three non-core businesses and acquired six cutting and welding businesses, which collectively generated approximately $169 million in annual revenues at the respective times of acquisition. As a result of this repositioning strategy, along with ongoing new product introductions, an extensive distribution network and market leading brands, the Company has achieved a compound annual growth in net sales and EBITDA of 20.3% and 12.5%, respectively, from 1993 to 1997. According to the United States Department of Commerce, domestic welding industry revenues totaled over $3.6 billion in 1997. The domestic industry has grown at an annual rate of 5.9% since 1989 and is expected to grow 4.2% in 1998. Global welding industry revenues are estimated to total over $10.0 billion, and management believes that growth in the international market has been faster than the domestic market, driven, in large part, by infrastructure spending in developing markets. International markets, including Australia and Italy, represented approximately 42% of the Company's net sales in 1997, up from approximately 20% of net sales in 1994. Although the industry has begun to experience global consolidation, it continues to be very fragmented. COMPETITIVE STRENGTHS Thermadyne possesses a number of competitive strengths that have allowed it to develop and maintain a strong position within the cutting and welding industry, including the following: Market Leading Brands. Management believes that the strength and longevity of the numerous Thermadyne brand names create a significant competitive advantage and position Thermadyne as one of the leaders in the cutting and welding industry. Each of the Company's major divisions maintains industry-leading brand names with significant market shares. Management believes that VICTOR(R), founded in 1913, is the leading brand name in domestic gas-operated cutting and welding torches and equipment; TWECO(R), founded in 1936, is the leading domestic manufacturer of metal inert gas ("MIG") and manual welding torches; ARCAIR(R) is the leading domestic brand name of tungsten inert gas ("TIG") torch and accessory products; THERMAL DYNAMICS(R), founded in 1957, is a leading domestic manufacturer of manual plasma cutting products; and CIGWELD(R), founded in 1922, is the leading brand name in the Australia/New Zealand cutting and welding (Continued from cover page) Each broker-dealer that receives New Senior Subordinated Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Subordinated Notes. The letter of transmittal accompanying this Prospectus (the "Letter of Transmittal") states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Senior Subordinated Notes received in exchange for Old Senior Subordinated Notes where such Old Senior Subordinated Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Issuers have agreed, for a period of 90 days after the Expiration Date, to make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." No public market existed for the Old Senior Subordinated Notes before the Exchange Offer. The Issuers currently do not intend to list the New Senior Subordinated Notes on any securities exchange or to seek approval for quotation through any automated quotation system, and no active public market for the New Senior Subordinated Notes is currently anticipated. The Issuers will pay all the expenses incident to the Exchange Offer. The Exchange Offer is not conditioned upon any minimum principal amount of Old Senior Subordinated Notes being tendered for exchange pursuant to the Exchange Offer. products market. Each of the manufacturing operations associated with these brands is ISO-9000 series certified. Diverse and Stable Customer Base. The Company's customer base includes cutting and welding product distributors as well as end-user customers principally engaged in the aerospace, automotive, construction, metal fabrication, mining, mill and foundry, petroleum and ship building industries. No one customer accounted for more than 9% of the Company's 1997 net sales. Further, the Company's top 20 customers have been associated with the Company for an average of over 10 years. Established, Effective Distribution Channels. The Company believes that its strong, established and long-standing relationships with over 1,100 independent cutting and welding products distributors in the United States provide a significant competitive advantage and support the Company's strong market position. Thermadyne's domestic distributor relationships are maintained by 11 area business managers who oversee the Company's relationships with large distributors and by separate product-specific sales forces for each of Thermadyne's business units. Management believes that this unique structure, which combines relationship managers with technically trained product specialists, will enable the Company to more effectively maintain and utilize its distributor networks. Management also believes that this established distribution network enables the Company to achieve market penetration when introducing newly developed or acquired products. Proven and Committed Senior Management Team. Thermadyne's management team has strategically repositioned the Company over the past four years to focus exclusively in its core cutting and welding markets. This repositioning was accomplished through divestitures of three non-core assets and acquisitions of six strategic businesses or product lines. In addition, management has initiated the development and introduction of significant new products and product lines. As a result of management's efforts, the Company achieved a 20.3% growth rate in net sales from 1993 to 1997. In connection with the Merger each member of the senior management team signed an employment contract with the Company. Additionally, the Company adopted an incentive plan to tie each member of senior management's compensation to the Company's financial performance. See "Executive Compensation." BUSINESS STRATEGY Thermadyne has developed a business strategy designed to enhance its strong market positions and continue to improve its growth and profitability. The primary elements of the Company's business strategy are as follows: Continue New Product Development and Enhancement. The foundation for Thermadyne's strong market positions and leading brand names is the development and introduction of new products and enhancements of existing products. The Company believes it is at the forefront of cutting and welding technology with a proven track-record of continual new product introductions and existing product enhancements that have resulted in 262 issued or pending United States and foreign patents. New products and product enhancements are designed to add value for customers, including enhanced safety features, improved productivity and ergonomics and an improved welding environment. Examples of recent new product introductions include robotic welding systems and accessories, high-purity instrumentation, automated plasma cutting and safety products as well as underwater cutting electrodes. During 1997, the Company introduced over 135 new products or product enhancements, and the Company expects to continue this effort in the future. Expand Strategic Acquisitions. The Company has completed six acquisitions since 1993, which collectively generated approximately $169 million in annual revenues at the respective times of acquisition, including over $135 million of revenues for Australia and Italy. The Company believes that numerous acquisition candidates exist globally, and the Company intends to continue to seek new acquisition opportunities in its cutting and welding business. Thermadyne intends to continue its focused acquisition strategy that includes the following principal elements: (i) entering and expanding in geographic areas where the Company does not currently have a significant presence through acquisitions of local cutting and welding businesses and (ii) expanding in geographic areas where the Company currently maintains a strong presence through the acquisition of complementary product lines. Leverage Existing Distribution Network. The Company intends to leverage its existing distribution network through the acquisition or introduction of new products and product enhancements. Management believes that when the Company acquires a local presence in a new geographic area, it can utilize the acquired distribution network to sell existing Thermadyne brands into that local market. In addition, the Company believes that significant opportunities exist to purchase complementary product lines and expand its business by selling the new product lines through Thermadyne's extensive distribution network. For example, through recent acquisitions the Company has expanded its offering of filler metals, conventional arc welding power supplies, safety equipment and engine-driven welding power sources and began marketing such products through its established distribution network. The Company intends to continue this strategy of penetrating new welding product markets by leveraging its extensive distribution network in conjunction with its new product development and focused acquisition strategies. Broaden International Presence. Thermadyne has maintained an international presence for over 30 years and continues to broaden its presence throughout the world. International sales accounted for approximately 42% of net sales in 1997 as compared to approximately 20% in 1994. The Company has established a dedicated international market presence and maintains the leading position in Australia/New Zealand and significant and growing positions in Europe, Asia and Latin America. Management intends to continue the expansion of its strong domestic brand names into the international market and to continue to penetrate the growing Asian and Latin American cutting and welding markets. Continue Cost Reduction Efforts. Thermadyne strives to continually improve manufacturing efficiencies and reduce unit costs. In December 1997, the Company implemented a cost reduction program that includes the following principal elements: (i) vendor rationalization and consolidation; (ii) manufacturing process and productivity improvements and product design changes; (iii) personnel rationalization and expense reductions; (iv) advertising and trade show expense reductions; (v) aircraft, charter and other travel expense reductions; and (vi) elimination of the annual sales meeting. These cost reduction initiatives are expected to generate approximately $10 million in savings on an annualized basis. In addition, the Company has initiated the implementation of a new global information system that is designed to allow the Company to further integrate administrative functions and improve information flow across business unit lines. Continue Dedicated Customer Service. The Company believes that effective and proactive customer service has enabled the Company to build and maintain its leading market positions and strong distributor relationships. Management plans to continue this strategy of enhancing distributor and end-user relationships through continuous customer service improvements. Each of Thermadyne's divisions maintains a dedicated, well trained, technically oriented and product-specific sales and customer service team. Management believes that the dedicated product teams provide Thermadyne with a significant competitive advantage. In addition, to further improve customer service, the Company has implemented a national accounts team of 11 area business managers to support the dedicated product sales and service teams and further support sales to the Company's key distributors. THE MERGER AND MERGER FINANCING On May 22, 1998, Holdings consummated the merger of Mercury Acquisition Corporation ("Mercury"), a corporation organized by DLJ Merchant Banking Partners II, L.P. ("DLJMB") and affiliated funds and entities (the "DLJMB Funds") with and into Holdings, with Holdings continuing as the surviving corporation (the "Merger"). In order to fund the payment of the cash portion of the Merger Consideration (as defined herein), the Option Cash Proceeds (as defined herein) and the ESPP Cash Proceeds (as defined herein), to refinance and/or retire outstanding indebtedness of the Company, and to pay expenses incurred in connection with the Merger, the Issuers issued the Senior Subordinated Notes and the Company entered into a syndicated senior secured loan facility providing for term loan borrowings in the aggregate principal amount of approximately $330 million and revolving loan borrowings of $100 million (the "New Credit Facility"). In connection with the Merger, the Company borrowed all term loans available under the New Credit Facility plus approximately $25 million of revolving loans. The remaining revolving loans will be available to fund the working capital requirements of the Company. The proceeds of such financings were distributed to Holdings in the form of a dividend. See "Description of New Credit Facility," "The Merger and Merger Financing" and "Certain Relationships and Related Transactions." Mercury issued approximately $94.6 million aggregate gross proceeds of its 12 1/2% Senior Discount Debentures due 2008 (the "Debentures"). In connection with the Merger, Holdings succeeded to the obligations of Mercury with respect to the Debentures. The DLJMB Funds also purchased 2,608,696 shares of common stock of Mercury ("Mercury Common Stock"), 2,000,000 shares of senior exchangeable preferred stock of Mercury ("Mercury Preferred Stock") and warrants to purchase 353,428 shares of Mercury Common Stock at an exercise price of $0.01 per share (the "DLJMB Warrants") for approximately $140 million (the "DLJMB Equity Investment"). As a result of the Merger, the proceeds of such purchases became an asset of Holdings, each share of Mercury Common Stock became a share of common stock of Holdings ("Holdings Common Stock"), each share of Mercury Preferred Stock became a share of senior exchangeable preferred stock of Holdings ("Holdings Preferred Stock") and each DLJMB Warrant to acquire Mercury Common Stock became exercisable for an equal number of shares of Holdings Common Stock. In addition, in connection with the Merger, certain members of senior management purchased 143,192 shares of Holdings Common Stock for approximately $4.9 million (the "Management Share Purchase"), of which approximately $3.6 million was provided through non-recourse loans from Holdings (the "Management Loans"). The equity and debt financings referred to above are collectively referred to herein as the "Merger Financing." THE EXCHANGE OFFER The Exchange Offer......... $1,000 principal amount at maturity of New Senior Subordinated Notes in exchange for each $1,000 principal amount at maturity of Old Senior Subordinated Notes. The Old Senior Subordinated Notes were sold on May 22, 1998, in a private placement to Donaldson, Lufkin & Jenrette Securities Corporation ("DLJSC" or the "Initial Purchaser"), which immediately resold to the Old Senior Subordinated Notes pursuant to Rule 144A promulgated under the Securities Act (the "Original Offering"). As of the date hereof, Old Senior Subordinated Notes representing $207 million aggregate principal amount at maturity are outstanding. The terms of the New Senior Subordinated Notes and the Old Senior Subordinated Notes are substantially identical in all material respects, except that the New Senior Subordinated Notes will be freely transferable by the holders thereof except as otherwise provided herein. See "Description of New Senior Subordinated Notes." Based on an interpretation by the Commission's staff set forth in no-action letters issued to third parties unrelated to the Issuers and the Guarantors, the Issuers and the Guarantors believe that New Senior Subordinated Notes issued pursuant to the Exchange Offer in exchange for Old Senior Subordinated Notes may be offered for resale, sold and otherwise transferred by any person receiving the New Notes, whether or not that person is the registered holder (other than any such holder or such other person that is an "affiliate" of the Issuers or any Guarantor within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that (i) the New Senior Subordinated Notes are acquired in the ordinary course of business of that holder or such other person, (ii) neither the holder nor such other person is engaging in or intends to engage in a distribution of the New Senior Subordinated Notes and (iii) neither the holder nor such other person has an arrangement or understanding with any person to participate in the distribution of the New Senior Subordinated Notes. See "The Exchange Offer -- Purpose and Effect." Each broker-dealer that receives New Senior Subordinated Notes for its own account in exchange for Old Senior Subordinated Notes, where those Old Senior Subordinated Notes were acquired by the broker-dealer as a result of its market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of these New Senior Subordinated Notes. See "Plan of Distribution." Registration Rights Agreement................ In connection with the Original Offering, the Issuers and the Guarantors entered into a Registration Rights Agreement with the Initial Purchaser (the "Registration Rights Agreement") requiring the Issuers to make the Exchange Offer. See "The Exchange Offer -- Purpose and Effect." Expiration Date............ The Exchange Offer will expire at 5:00 p.m., New York City time, September 3, 1998, or such later date and time to which it is extended (the "Expiration Date"). Withdrawal................. The tender of the Old Senior Subordinated Notes pursuant to the Exchange Offer may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Any Old Senior Subordinated Notes not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Exchange Offer. Interest on the New Senior Subordinated Notes.................... Interest on each New Senior Subordinated Note will accrue from the date of issuance of the Old Senior Subordinated Note for which the New Senior Subordinated Note is exchanged or from the date of the last periodic payment of interest on such Old Senior Subordinated Note, whichever is later. No additional interest will be paid on Old Senior Subordinated Notes tendered and accepted for exchange. Conditions to the Exchange Offer.................... The Exchange Offer is subject to certain customary conditions, certain of which may be waived by the Issuers. See "The Exchange Offer -- Conditions to the Exchange Offer." Procedures for Tendering Old Senior Subordinated Notes.................... Each holder of Old Senior Subordinated Notes wishing to accept the Exchange Offer must complete, sign and date the Letter of Transmittal, or a copy thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver the Letter of Transmittal, or the copy, together with the Old Senior Subordinated Notes and any other required documentation, to the Exchange Agent (as defined herein) at the address set forth herein. Persons holding the Old Senior Subordinated Notes through the Depository Trust Company ("DTC") and wishing to accept the Exchange Offer must do so pursuant to the DTC's Automated Tender Offer Program, by which each tendering participant will agree to be bound by the Letter of Transmittal. By executing or agreeing to be bound by the Letter of Transmittal, each holder will represent to the Issuers that, among other things, (i) the New Senior Subordinated Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Senior Subordinated Notes, whether or not such person is the registered holder of the Old Senior Subordinated Notes, (ii) neither the holder nor any such other person is engaging in or intends to engage in a distribution of such New Senior Subordinated Notes, (iii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Senior Subordinated Notes, and (iv) neither the holder nor any such other person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of the Issuers or any Guarantor. Pursuant to the Registration Rights Agreement, the Issuers are required to file a "shelf" registration statement for a continuous offering pursuant to Rule 415 under the Securities Act in respect of the Old Notes if (a) they are prohibited from consummating the Exchange Offer because the Exchange Offer is not permitted by applicable law or Commission policy or (b) any holder of Transfer Restricted Securities (as defined) notifies the Issuers in writing prior to the 20th business day following consummation of the Exchange Offer that (i) based on an opinion of counsel, it is prohibited by law or Commission policy from participating in the Exchange Offer or (ii) it is a broker-dealer and owns Senior Subordinated Notes acquired directly from the Issuers. Acceptance of Old Notes and Delivery of New Notes.... The Issuers and the Guarantors will accept for exchange any and all Old Senior Subordinated Notes which are properly tendered (and not withdrawn) in the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Senior Subordinated Notes issued pursuant to the Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offer -- Terms of the Exchange Offer." Exchange Agent............. State Street Bank and Trust Company is serving as Exchange Agent (the "Exchange Agent") in connection with the Exchange Offer. Federal Income Tax Considerations........... The exchange pursuant to the Exchange Offer should not be a taxable event for federal income tax purposes. See "Certain United States Federal Income Tax Considerations." Effect of Not Tendering.... Old Senior Subordinated Notes that are not tendered or that are improperly tendered and not accepted will, following the completion of the Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. The Issuers and the Guarantors will have no further obligation to provide for the registration under the Securities Act of such Old Senior Subordinated Notes. THE NEW SENIOR SUBORDINATED NOTES Securities Offered......... $207.0 million aggregate principal amount at maturity of 9 7/8% Senior Subordinated Notes due 2008. Issuers.................... The New Senior Subordinated Notes will be joint and several obligations of the Company and Thermadyne Capital. Thermadyne Capital is a Delaware corporation and wholly-owned subsidiary of the Company formed in connection with the Original Offering. Thermadyne Capital has no assets, no liabilities (other than the Senior Subordinated Notes), no substantial operations, and will be prohibited from engaging in any business activities. Maturity Date.............. June 1, 2008. Interest Payment Dates..... June 1 and December 1, commencing December 1, 1998. Optional Redemption........ The New Senior Subordinated Notes will be subject to redemption at any time on or after June 1, 2003 at the option of the Issuers, in whole or in part, in cash at the redemption prices set forth herein, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the applicable redemption date. Notwithstanding the foregoing, on or prior to June 1, 2001, the Issuers may redeem up to 35% of the aggregate principal amount of Senior Subordinated Notes ever issued under the Indenture in cash at a redemption price of 109.875% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the redemption date, with the net cash proceeds of one or more Public Equity Offerings; provided that at least 65% of the aggregate principal amount of Senior Subordinated Notes ever issued under the Indenture remains outstanding immediately after the occurrence of any such redemption. In addition, at any time prior to June 1, 2003, the Issuers may, at their option upon the occurrence of a Change of Control, redeem the New Senior Subordinated Notes, in whole but not in part, in cash at a redemption price equal to (i) the present value of the sum of all the remaining interest (excluding accrued and unpaid interest, if any), premium and principal payments that would become due on the New Senior Subordinated Notes as if the New Senior Subordinated Notes were to remain outstanding and be redeemed on June 1, 2003, computed using a discount rate equal to the Treasury Rate plus 50 basis points, plus (ii) accrued and unpaid interest and Liquidated Damages, if any, to the date of redemption. See "Description of New Senior Subordinated Notes -- Optional Redemption." Change of Control.......... Upon the occurrence of a Change of Control, each Holder of New Senior Subordinated Notes will have the right to require the Issuers to repurchase all or any part of such Holder's New Senior Subordinated Notes at an offer price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the date of repurchase. No assurance can be given that the Issuers will have sufficient resources to satisfy their repurchase obligation with respect to the New Senior Subordinated Notes following a Change of Control. See "Risk Factors -- Possible Inability to Repurchase New Senior Subordinated Notes upon Change of Control" and "Description of New Senior Subordinated Notes -- Repurchase at the Option of Holders -- Change of Control." Ranking.................... The New Senior Subordinated Notes will be general unsecured obligations of the Issuers and will be subordinated in right of payment to all existing and future Senior Indebtedness of the Issuers, including indebtedness pursuant to the New Credit Facility. The New Senior Subordinated Notes will rank pari passu with any future senior subordinated indebtedness of the Issuers and will rank senior to all Subordinated Indebtedness of the Issuers. The New Senior Subordinated Notes will be effectively subordinated to all liabilities of the Issuers' subsidiaries that are not Guarantors. On a pro forma basis after giving effect to the Merger, including the Merger Financing and the application of proceeds thereof, as of March 31, 1998, the Company and the Guarantors would have had outstanding approximately $379.5 million of Senior Indebtedness and the Company's non-Guarantor subsidiaries would have had approximately $87.0 million of outstanding liabilities, including trade payables. Note Guarantees............ The New Senior Subordinated Notes will be unconditionally guaranteed on a senior subordinated basis by the Guarantors. The Note Guarantees will be general unsecured obligations of the Guarantors, will be subordinated in right of payment to all existing and future Senior Indebtedness of the Guarantors, including indebtedness under the New Credit Facility, and will rank senior in right of payment to any future subordinated indebtedness of the Guarantors. See "Description of New Senior Subordinated Notes -- Note Guarantees." Certain Covenants.......... The Indenture pursuant to which the New Senior Subordinated Notes will be issued (the "Indenture") contains certain covenants that, among other things, limit the ability of the Issuers and their Restricted Subsidiaries (as defined herein) to: incur indebtedness and issue preferred stock, repurchase Capital Stock (as defined herein) and Indebtedness subordinated to the New Senior Subordinated Notes, engage in transactions with affiliates, engage in sale and leaseback transactions, incur or suffer to exist certain liens, pay dividends or other distributions, make investments, sell assets and engage in certain mergers and consolidations. Use of Proceeds............ There will be no cash proceeds to the Issuers from the exchange pursuant to the Exchange Offer. The net proceeds from the Original Offering, together with the initial borrowings under the New Credit Facility, the DLJMB Equity Investment and the issuance of the Debentures, were used to fund payment of the cash portion of the Merger Consideration, the Option Cash Proceeds and the ESPP Cash Proceeds, to refinance outstanding indebtedness of the Company and to pay the expenses incurred in connection with the Merger. See "Use of Proceeds."
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+SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Investors are urged to read this Prospectus in its entirety. As used in this Prospectus, the term "Holdings" means Thermadyne Holdings Corporation, including its predecessors and subsidiaries; the term "Issuers" means Thermadyne Mfg. LLC, a wholly owned subsidiary of Holdings ("Thermadyne LLC"), and Thermadyne Capital Corp. ("Thermadyne Capital"), a wholly owned subsidiary of Thermadyne LLC; and the terms "Company" and "Thermadyne" mean Thermadyne LLC and its predecessors and subsidiaries. THE COMPANY OVERVIEW Thermadyne is a leading global manufacturer of cutting and welding products and accessories. The Company manufactures a broad range of gas (oxy-fuel) and electric arc cutting and welding products that are ultimately sold to end-user customers principally engaged in the aerospace, automotive, construction, metal fabrication, mining, mill and foundry, petroleum and shipbuilding industries. Thermadyne sells its products through a long-established domestic network of approximately 1,100 independent distributors who market Thermadyne products to over 10,000 end-user customers. For the twelve months ended March 31, 1998, the Company's net sales and Adjusted EBITDA (as defined herein), on a pro forma basis, were $548.2 million and $115.5 million, respectively. The Company's core products enjoy leading brand recognition, a reputation for quality and strong market positions. In 1994, following the Company's Restructuring (as defined herein), current management initiated a series of transactions to focus the Company's business exclusively on the cutting and welding industry. As part of this strategy, the Company divested three non-core businesses and acquired six cutting and welding businesses, which collectively generated approximately $169 million in annual revenues at the respective times of acquisition. As a result of this repositioning strategy, along with ongoing new product introductions, an extensive distribution network and market leading brands, the Company has achieved a compound annual growth in net sales and EBITDA of 20.3% and 12.5%, respectively, from 1993 to 1997. According to the United States Department of Commerce, domestic welding industry revenues totaled over $3.6 billion in 1997. The domestic industry has grown at an annual rate of 5.9% since 1989 and is expected to grow 4.2% in 1998. Global welding industry revenues are estimated to total over $10.0 billion, and management believes that growth in the international market has been faster than the domestic market, driven, in large part, by infrastructure spending in developing markets. International markets, including Australia and Italy, represented approximately 42% of the Company's net sales in 1997, up from approximately 20% of net sales in 1994. Although the industry has begun to experience global consolidation, it continues to be very fragmented. COMPETITIVE STRENGTHS Thermadyne possesses a number of competitive strengths that have allowed it to develop and maintain a strong position within the cutting and welding industry, including the following: Market Leading Brands. Management believes that the strength and longevity of the numerous Thermadyne brand names create a significant competitive advantage and position Thermadyne as one of the leaders in the cutting and welding industry. Each of the Company's major divisions maintains industry-leading brand names with significant market shares. Management believes that VICTOR(R), founded in 1913, is the leading brand name in domestic gas-operated cutting and welding torches and equipment; TWECO(R), founded in 1936, is the leading domestic manufacturer of metal inert gas ("MIG") and manual welding torches; ARCAIR(R) is the leading domestic brand name of tungsten inert gas ("TIG") torch and accessory products; THERMAL DYNAMICS(R), founded in 1957, is a leading domestic manufacturer of manual plasma cutting products; and CIGWELD(R), founded in 1922, is the leading brand name in the Australia/New Zealand cutting and welding (Continued from cover page) Each broker-dealer that receives New Senior Subordinated Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Subordinated Notes. The letter of transmittal accompanying this Prospectus (the "Letter of Transmittal") states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Senior Subordinated Notes received in exchange for Old Senior Subordinated Notes where such Old Senior Subordinated Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Issuers have agreed, for a period of 90 days after the Expiration Date, to make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." No public market existed for the Old Senior Subordinated Notes before the Exchange Offer. The Issuers currently do not intend to list the New Senior Subordinated Notes on any securities exchange or to seek approval for quotation through any automated quotation system, and no active public market for the New Senior Subordinated Notes is currently anticipated. The Issuers will pay all the expenses incident to the Exchange Offer. The Exchange Offer is not conditioned upon any minimum principal amount of Old Senior Subordinated Notes being tendered for exchange pursuant to the Exchange Offer. products market. Each of the manufacturing operations associated with these brands is ISO-9000 series certified. Diverse and Stable Customer Base. The Company's customer base includes cutting and welding product distributors as well as end-user customers principally engaged in the aerospace, automotive, construction, metal fabrication, mining, mill and foundry, petroleum and ship building industries. No one customer accounted for more than 9% of the Company's 1997 net sales. Further, the Company's top 20 customers have been associated with the Company for an average of over 10 years. Established, Effective Distribution Channels. The Company believes that its strong, established and long-standing relationships with over 1,100 independent cutting and welding products distributors in the United States provide a significant competitive advantage and support the Company's strong market position. Thermadyne's domestic distributor relationships are maintained by 11 area business managers who oversee the Company's relationships with large distributors and by separate product-specific sales forces for each of Thermadyne's business units. Management believes that this unique structure, which combines relationship managers with technically trained product specialists, will enable the Company to more effectively maintain and utilize its distributor networks. Management also believes that this established distribution network enables the Company to achieve market penetration when introducing newly developed or acquired products. Proven and Committed Senior Management Team. Thermadyne's management team has strategically repositioned the Company over the past four years to focus exclusively in its core cutting and welding markets. This repositioning was accomplished through divestitures of three non-core assets and acquisitions of six strategic businesses or product lines. In addition, management has initiated the development and introduction of significant new products and product lines. As a result of management's efforts, the Company achieved a 20.3% growth rate in net sales from 1993 to 1997. In connection with the Merger each member of the senior management team signed an employment contract with the Company. Additionally, the Company adopted an incentive plan to tie each member of senior management's compensation to the Company's financial performance. See "Executive Compensation." BUSINESS STRATEGY Thermadyne has developed a business strategy designed to enhance its strong market positions and continue to improve its growth and profitability. The primary elements of the Company's business strategy are as follows: Continue New Product Development and Enhancement. The foundation for Thermadyne's strong market positions and leading brand names is the development and introduction of new products and enhancements of existing products. The Company believes it is at the forefront of cutting and welding technology with a proven track-record of continual new product introductions and existing product enhancements that have resulted in 262 issued or pending United States and foreign patents. New products and product enhancements are designed to add value for customers, including enhanced safety features, improved productivity and ergonomics and an improved welding environment. Examples of recent new product introductions include robotic welding systems and accessories, high-purity instrumentation, automated plasma cutting and safety products as well as underwater cutting electrodes. During 1997, the Company introduced over 135 new products or product enhancements, and the Company expects to continue this effort in the future. Expand Strategic Acquisitions. The Company has completed six acquisitions since 1993, which collectively generated approximately $169 million in annual revenues at the respective times of acquisition, including over $135 million of revenues for Australia and Italy. The Company believes that numerous acquisition candidates exist globally, and the Company intends to continue to seek new acquisition opportunities in its cutting and welding business. Thermadyne intends to continue its focused acquisition strategy that includes the following principal elements: (i) entering and expanding in geographic areas where the Company does not currently have a significant presence through acquisitions of local cutting and welding businesses and (ii) expanding in geographic areas where the Company currently maintains a strong presence through the acquisition of complementary product lines. Leverage Existing Distribution Network. The Company intends to leverage its existing distribution network through the acquisition or introduction of new products and product enhancements. Management believes that when the Company acquires a local presence in a new geographic area, it can utilize the acquired distribution network to sell existing Thermadyne brands into that local market. In addition, the Company believes that significant opportunities exist to purchase complementary product lines and expand its business by selling the new product lines through Thermadyne's extensive distribution network. For example, through recent acquisitions the Company has expanded its offering of filler metals, conventional arc welding power supplies, safety equipment and engine-driven welding power sources and began marketing such products through its established distribution network. The Company intends to continue this strategy of penetrating new welding product markets by leveraging its extensive distribution network in conjunction with its new product development and focused acquisition strategies. Broaden International Presence. Thermadyne has maintained an international presence for over 30 years and continues to broaden its presence throughout the world. International sales accounted for approximately 42% of net sales in 1997 as compared to approximately 20% in 1994. The Company has established a dedicated international market presence and maintains the leading position in Australia/New Zealand and significant and growing positions in Europe, Asia and Latin America. Management intends to continue the expansion of its strong domestic brand names into the international market and to continue to penetrate the growing Asian and Latin American cutting and welding markets. Continue Cost Reduction Efforts. Thermadyne strives to continually improve manufacturing efficiencies and reduce unit costs. In December 1997, the Company implemented a cost reduction program that includes the following principal elements: (i) vendor rationalization and consolidation; (ii) manufacturing process and productivity improvements and product design changes; (iii) personnel rationalization and expense reductions; (iv) advertising and trade show expense reductions; (v) aircraft, charter and other travel expense reductions; and (vi) elimination of the annual sales meeting. These cost reduction initiatives are expected to generate approximately $10 million in savings on an annualized basis. In addition, the Company has initiated the implementation of a new global information system that is designed to allow the Company to further integrate administrative functions and improve information flow across business unit lines. Continue Dedicated Customer Service. The Company believes that effective and proactive customer service has enabled the Company to build and maintain its leading market positions and strong distributor relationships. Management plans to continue this strategy of enhancing distributor and end-user relationships through continuous customer service improvements. Each of Thermadyne's divisions maintains a dedicated, well trained, technically oriented and product-specific sales and customer service team. Management believes that the dedicated product teams provide Thermadyne with a significant competitive advantage. In addition, to further improve customer service, the Company has implemented a national accounts team of 11 area business managers to support the dedicated product sales and service teams and further support sales to the Company's key distributors. THE MERGER AND MERGER FINANCING On May 22, 1998, Holdings consummated the merger of Mercury Acquisition Corporation ("Mercury"), a corporation organized by DLJ Merchant Banking Partners II, L.P. ("DLJMB") and affiliated funds and entities (the "DLJMB Funds") with and into Holdings, with Holdings continuing as the surviving corporation (the "Merger"). In order to fund the payment of the cash portion of the Merger Consideration (as defined herein), the Option Cash Proceeds (as defined herein) and the ESPP Cash Proceeds (as defined herein), to refinance and/or retire outstanding indebtedness of the Company, and to pay expenses incurred in connection with the Merger, the Issuers issued the Senior Subordinated Notes and the Company entered into a syndicated senior secured loan facility providing for term loan borrowings in the aggregate principal amount of approximately $330 million and revolving loan borrowings of $100 million (the "New Credit Facility"). In connection with the Merger, the Company borrowed all term loans available under the New Credit Facility plus approximately $25 million of revolving loans. The remaining revolving loans will be available to fund the working capital requirements of the Company. The proceeds of such financings were distributed to Holdings in the form of a dividend. See "Description of New Credit Facility," "The Merger and Merger Financing" and "Certain Relationships and Related Transactions." Mercury issued approximately $94.6 million aggregate gross proceeds of its 12 1/2% Senior Discount Debentures due 2008 (the "Debentures"). In connection with the Merger, Holdings succeeded to the obligations of Mercury with respect to the Debentures. The DLJMB Funds also purchased 2,608,696 shares of common stock of Mercury ("Mercury Common Stock"), 2,000,000 shares of senior exchangeable preferred stock of Mercury ("Mercury Preferred Stock") and warrants to purchase 353,428 shares of Mercury Common Stock at an exercise price of $0.01 per share (the "DLJMB Warrants") for approximately $140 million (the "DLJMB Equity Investment"). As a result of the Merger, the proceeds of such purchases became an asset of Holdings, each share of Mercury Common Stock became a share of common stock of Holdings ("Holdings Common Stock"), each share of Mercury Preferred Stock became a share of senior exchangeable preferred stock of Holdings ("Holdings Preferred Stock") and each DLJMB Warrant to acquire Mercury Common Stock became exercisable for an equal number of shares of Holdings Common Stock. In addition, in connection with the Merger, certain members of senior management purchased 143,192 shares of Holdings Common Stock for approximately $4.9 million (the "Management Share Purchase"), of which approximately $3.6 million was provided through non-recourse loans from Holdings (the "Management Loans"). The equity and debt financings referred to above are collectively referred to herein as the "Merger Financing." THE EXCHANGE OFFER The Exchange Offer......... $1,000 principal amount at maturity of New Senior Subordinated Notes in exchange for each $1,000 principal amount at maturity of Old Senior Subordinated Notes. The Old Senior Subordinated Notes were sold on May 22, 1998, in a private placement to Donaldson, Lufkin & Jenrette Securities Corporation ("DLJSC" or the "Initial Purchaser"), which immediately resold to the Old Senior Subordinated Notes pursuant to Rule 144A promulgated under the Securities Act (the "Original Offering"). As of the date hereof, Old Senior Subordinated Notes representing $207 million aggregate principal amount at maturity are outstanding. The terms of the New Senior Subordinated Notes and the Old Senior Subordinated Notes are substantially identical in all material respects, except that the New Senior Subordinated Notes will be freely transferable by the holders thereof except as otherwise provided herein. See "Description of New Senior Subordinated Notes." Based on an interpretation by the Commission's staff set forth in no-action letters issued to third parties unrelated to the Issuers and the Guarantors, the Issuers and the Guarantors believe that New Senior Subordinated Notes issued pursuant to the Exchange Offer in exchange for Old Senior Subordinated Notes may be offered for resale, sold and otherwise transferred by any person receiving the New Notes, whether or not that person is the registered holder (other than any such holder or such other person that is an "affiliate" of the Issuers or any Guarantor within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that (i) the New Senior Subordinated Notes are acquired in the ordinary course of business of that holder or such other person, (ii) neither the holder nor such other person is engaging in or intends to engage in a distribution of the New Senior Subordinated Notes and (iii) neither the holder nor such other person has an arrangement or understanding with any person to participate in the distribution of the New Senior Subordinated Notes. See "The Exchange Offer -- Purpose and Effect." Each broker-dealer that receives New Senior Subordinated Notes for its own account in exchange for Old Senior Subordinated Notes, where those Old Senior Subordinated Notes were acquired by the broker-dealer as a result of its market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of these New Senior Subordinated Notes. See "Plan of Distribution." Registration Rights Agreement................ In connection with the Original Offering, the Issuers and the Guarantors entered into a Registration Rights Agreement with the Initial Purchaser (the "Registration Rights Agreement") requiring the Issuers to make the Exchange Offer. See "The Exchange Offer -- Purpose and Effect." Expiration Date............ The Exchange Offer will expire at 5:00 p.m., New York City time, September 3, 1998, or such later date and time to which it is extended (the "Expiration Date"). Withdrawal................. The tender of the Old Senior Subordinated Notes pursuant to the Exchange Offer may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Any Old Senior Subordinated Notes not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Exchange Offer. Interest on the New Senior Subordinated Notes.................... Interest on each New Senior Subordinated Note will accrue from the date of issuance of the Old Senior Subordinated Note for which the New Senior Subordinated Note is exchanged or from the date of the last periodic payment of interest on such Old Senior Subordinated Note, whichever is later. No additional interest will be paid on Old Senior Subordinated Notes tendered and accepted for exchange. Conditions to the Exchange Offer.................... The Exchange Offer is subject to certain customary conditions, certain of which may be waived by the Issuers. See "The Exchange Offer -- Conditions to the Exchange Offer." Procedures for Tendering Old Senior Subordinated Notes.................... Each holder of Old Senior Subordinated Notes wishing to accept the Exchange Offer must complete, sign and date the Letter of Transmittal, or a copy thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver the Letter of Transmittal, or the copy, together with the Old Senior Subordinated Notes and any other required documentation, to the Exchange Agent (as defined herein) at the address set forth herein. Persons holding the Old Senior Subordinated Notes through the Depository Trust Company ("DTC") and wishing to accept the Exchange Offer must do so pursuant to the DTC's Automated Tender Offer Program, by which each tendering participant will agree to be bound by the Letter of Transmittal. By executing or agreeing to be bound by the Letter of Transmittal, each holder will represent to the Issuers that, among other things, (i) the New Senior Subordinated Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Senior Subordinated Notes, whether or not such person is the registered holder of the Old Senior Subordinated Notes, (ii) neither the holder nor any such other person is engaging in or intends to engage in a distribution of such New Senior Subordinated Notes, (iii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Senior Subordinated Notes, and (iv) neither the holder nor any such other person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of the Issuers or any Guarantor. Pursuant to the Registration Rights Agreement, the Issuers are required to file a "shelf" registration statement for a continuous offering pursuant to Rule 415 under the Securities Act in respect of the Old Notes if (a) they are prohibited from consummating the Exchange Offer because the Exchange Offer is not permitted by applicable law or Commission policy or (b) any holder of Transfer Restricted Securities (as defined) notifies the Issuers in writing prior to the 20th business day following consummation of the Exchange Offer that (i) based on an opinion of counsel, it is prohibited by law or Commission policy from participating in the Exchange Offer or (ii) it is a broker-dealer and owns Senior Subordinated Notes acquired directly from the Issuers. Acceptance of Old Notes and Delivery of New Notes.... The Issuers and the Guarantors will accept for exchange any and all Old Senior Subordinated Notes which are properly tendered (and not withdrawn) in the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Senior Subordinated Notes issued pursuant to the Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offer -- Terms of the Exchange Offer." Exchange Agent............. State Street Bank and Trust Company is serving as Exchange Agent (the "Exchange Agent") in connection with the Exchange Offer. Federal Income Tax Considerations........... The exchange pursuant to the Exchange Offer should not be a taxable event for federal income tax purposes. See "Certain United States Federal Income Tax Considerations." Effect of Not Tendering.... Old Senior Subordinated Notes that are not tendered or that are improperly tendered and not accepted will, following the completion of the Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. The Issuers and the Guarantors will have no further obligation to provide for the registration under the Securities Act of such Old Senior Subordinated Notes. THE NEW SENIOR SUBORDINATED NOTES Securities Offered......... $207.0 million aggregate principal amount at maturity of 9 7/8% Senior Subordinated Notes due 2008. Issuers.................... The New Senior Subordinated Notes will be joint and several obligations of the Company and Thermadyne Capital. Thermadyne Capital is a Delaware corporation and wholly-owned subsidiary of the Company formed in connection with the Original Offering. Thermadyne Capital has no assets, no liabilities (other than the Senior Subordinated Notes), no substantial operations, and will be prohibited from engaging in any business activities. Maturity Date.............. June 1, 2008. Interest Payment Dates..... June 1 and December 1, commencing December 1, 1998. Optional Redemption........ The New Senior Subordinated Notes will be subject to redemption at any time on or after June 1, 2003 at the option of the Issuers, in whole or in part, in cash at the redemption prices set forth herein, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the applicable redemption date. Notwithstanding the foregoing, on or prior to June 1, 2001, the Issuers may redeem up to 35% of the aggregate principal amount of Senior Subordinated Notes ever issued under the Indenture in cash at a redemption price of 109.875% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the redemption date, with the net cash proceeds of one or more Public Equity Offerings; provided that at least 65% of the aggregate principal amount of Senior Subordinated Notes ever issued under the Indenture remains outstanding immediately after the occurrence of any such redemption. In addition, at any time prior to June 1, 2003, the Issuers may, at their option upon the occurrence of a Change of Control, redeem the New Senior Subordinated Notes, in whole but not in part, in cash at a redemption price equal to (i) the present value of the sum of all the remaining interest (excluding accrued and unpaid interest, if any), premium and principal payments that would become due on the New Senior Subordinated Notes as if the New Senior Subordinated Notes were to remain outstanding and be redeemed on June 1, 2003, computed using a discount rate equal to the Treasury Rate plus 50 basis points, plus (ii) accrued and unpaid interest and Liquidated Damages, if any, to the date of redemption. See "Description of New Senior Subordinated Notes -- Optional Redemption." Change of Control.......... Upon the occurrence of a Change of Control, each Holder of New Senior Subordinated Notes will have the right to require the Issuers to repurchase all or any part of such Holder's New Senior Subordinated Notes at an offer price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the date of repurchase. No assurance can be given that the Issuers will have sufficient resources to satisfy their repurchase obligation with respect to the New Senior Subordinated Notes following a Change of Control. See "Risk Factors -- Possible Inability to Repurchase New Senior Subordinated Notes upon Change of Control" and "Description of New Senior Subordinated Notes -- Repurchase at the Option of Holders -- Change of Control." Ranking.................... The New Senior Subordinated Notes will be general unsecured obligations of the Issuers and will be subordinated in right of payment to all existing and future Senior Indebtedness of the Issuers, including indebtedness pursuant to the New Credit Facility. The New Senior Subordinated Notes will rank pari passu with any future senior subordinated indebtedness of the Issuers and will rank senior to all Subordinated Indebtedness of the Issuers. The New Senior Subordinated Notes will be effectively subordinated to all liabilities of the Issuers' subsidiaries that are not Guarantors. On a pro forma basis after giving effect to the Merger, including the Merger Financing and the application of proceeds thereof, as of March 31, 1998, the Company and the Guarantors would have had outstanding approximately $379.5 million of Senior Indebtedness and the Company's non-Guarantor subsidiaries would have had approximately $87.0 million of outstanding liabilities, including trade payables. Note Guarantees............ The New Senior Subordinated Notes will be unconditionally guaranteed on a senior subordinated basis by the Guarantors. The Note Guarantees will be general unsecured obligations of the Guarantors, will be subordinated in right of payment to all existing and future Senior Indebtedness of the Guarantors, including indebtedness under the New Credit Facility, and will rank senior in right of payment to any future subordinated indebtedness of the Guarantors. See "Description of New Senior Subordinated Notes -- Note Guarantees." Certain Covenants.......... The Indenture pursuant to which the New Senior Subordinated Notes will be issued (the "Indenture") contains certain covenants that, among other things, limit the ability of the Issuers and their Restricted Subsidiaries (as defined herein) to: incur indebtedness and issue preferred stock, repurchase Capital Stock (as defined herein) and Indebtedness subordinated to the New Senior Subordinated Notes, engage in transactions with affiliates, engage in sale and leaseback transactions, incur or suffer to exist certain liens, pay dividends or other distributions, make investments, sell assets and engage in certain mergers and consolidations. Use of Proceeds............ There will be no cash proceeds to the Issuers from the exchange pursuant to the Exchange Offer. The net proceeds from the Original Offering, together with the initial borrowings under the New Credit Facility, the DLJMB Equity Investment and the issuance of the Debentures, were used to fund payment of the cash portion of the Merger Consideration, the Option Cash Proceeds and the ESPP Cash Proceeds, to refinance outstanding indebtedness of the Company and to pay the expenses incurred in connection with the Merger. See "Use of Proceeds."
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+SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Investors are urged to read this Prospectus in its entirety. As used in this Prospectus, the term "Holdings" means Thermadyne Holdings Corporation, including its predecessors and subsidiaries; the term "Issuers" means Thermadyne Mfg. LLC, a wholly owned subsidiary of Holdings ("Thermadyne LLC"), and Thermadyne Capital Corp. ("Thermadyne Capital"), a wholly owned subsidiary of Thermadyne LLC; and the terms "Company" and "Thermadyne" mean Thermadyne LLC and its predecessors and subsidiaries. THE COMPANY OVERVIEW Thermadyne is a leading global manufacturer of cutting and welding products and accessories. The Company manufactures a broad range of gas (oxy-fuel) and electric arc cutting and welding products that are ultimately sold to end-user customers principally engaged in the aerospace, automotive, construction, metal fabrication, mining, mill and foundry, petroleum and shipbuilding industries. Thermadyne sells its products through a long-established domestic network of approximately 1,100 independent distributors who market Thermadyne products to over 10,000 end-user customers. For the twelve months ended March 31, 1998, the Company's net sales and Adjusted EBITDA (as defined herein), on a pro forma basis, were $548.2 million and $115.5 million, respectively. The Company's core products enjoy leading brand recognition, a reputation for quality and strong market positions. In 1994, following the Company's Restructuring (as defined herein), current management initiated a series of transactions to focus the Company's business exclusively on the cutting and welding industry. As part of this strategy, the Company divested three non-core businesses and acquired six cutting and welding businesses, which collectively generated approximately $169 million in annual revenues at the respective times of acquisition. As a result of this repositioning strategy, along with ongoing new product introductions, an extensive distribution network and market leading brands, the Company has achieved a compound annual growth in net sales and EBITDA of 20.3% and 12.5%, respectively, from 1993 to 1997. According to the United States Department of Commerce, domestic welding industry revenues totaled over $3.6 billion in 1997. The domestic industry has grown at an annual rate of 5.9% since 1989 and is expected to grow 4.2% in 1998. Global welding industry revenues are estimated to total over $10.0 billion, and management believes that growth in the international market has been faster than the domestic market, driven, in large part, by infrastructure spending in developing markets. International markets, including Australia and Italy, represented approximately 42% of the Company's net sales in 1997, up from approximately 20% of net sales in 1994. Although the industry has begun to experience global consolidation, it continues to be very fragmented. COMPETITIVE STRENGTHS Thermadyne possesses a number of competitive strengths that have allowed it to develop and maintain a strong position within the cutting and welding industry, including the following: Market Leading Brands. Management believes that the strength and longevity of the numerous Thermadyne brand names create a significant competitive advantage and position Thermadyne as one of the leaders in the cutting and welding industry. Each of the Company's major divisions maintains industry-leading brand names with significant market shares. Management believes that VICTOR(R), founded in 1913, is the leading brand name in domestic gas-operated cutting and welding torches and equipment; TWECO(R), founded in 1936, is the leading domestic manufacturer of metal inert gas ("MIG") and manual welding torches; ARCAIR(R) is the leading domestic brand name of tungsten inert gas ("TIG") torch and accessory products; THERMAL DYNAMICS(R), founded in 1957, is a leading domestic manufacturer of manual plasma cutting products; and CIGWELD(R), founded in 1922, is the leading brand name in the Australia/New Zealand cutting and welding (Continued from cover page) Each broker-dealer that receives New Senior Subordinated Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Subordinated Notes. The letter of transmittal accompanying this Prospectus (the "Letter of Transmittal") states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Senior Subordinated Notes received in exchange for Old Senior Subordinated Notes where such Old Senior Subordinated Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Issuers have agreed, for a period of 90 days after the Expiration Date, to make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." No public market existed for the Old Senior Subordinated Notes before the Exchange Offer. The Issuers currently do not intend to list the New Senior Subordinated Notes on any securities exchange or to seek approval for quotation through any automated quotation system, and no active public market for the New Senior Subordinated Notes is currently anticipated. The Issuers will pay all the expenses incident to the Exchange Offer. The Exchange Offer is not conditioned upon any minimum principal amount of Old Senior Subordinated Notes being tendered for exchange pursuant to the Exchange Offer. products market. Each of the manufacturing operations associated with these brands is ISO-9000 series certified. Diverse and Stable Customer Base. The Company's customer base includes cutting and welding product distributors as well as end-user customers principally engaged in the aerospace, automotive, construction, metal fabrication, mining, mill and foundry, petroleum and ship building industries. No one customer accounted for more than 9% of the Company's 1997 net sales. Further, the Company's top 20 customers have been associated with the Company for an average of over 10 years. Established, Effective Distribution Channels. The Company believes that its strong, established and long-standing relationships with over 1,100 independent cutting and welding products distributors in the United States provide a significant competitive advantage and support the Company's strong market position. Thermadyne's domestic distributor relationships are maintained by 11 area business managers who oversee the Company's relationships with large distributors and by separate product-specific sales forces for each of Thermadyne's business units. Management believes that this unique structure, which combines relationship managers with technically trained product specialists, will enable the Company to more effectively maintain and utilize its distributor networks. Management also believes that this established distribution network enables the Company to achieve market penetration when introducing newly developed or acquired products. Proven and Committed Senior Management Team. Thermadyne's management team has strategically repositioned the Company over the past four years to focus exclusively in its core cutting and welding markets. This repositioning was accomplished through divestitures of three non-core assets and acquisitions of six strategic businesses or product lines. In addition, management has initiated the development and introduction of significant new products and product lines. As a result of management's efforts, the Company achieved a 20.3% growth rate in net sales from 1993 to 1997. In connection with the Merger each member of the senior management team signed an employment contract with the Company. Additionally, the Company adopted an incentive plan to tie each member of senior management's compensation to the Company's financial performance. See "Executive Compensation." BUSINESS STRATEGY Thermadyne has developed a business strategy designed to enhance its strong market positions and continue to improve its growth and profitability. The primary elements of the Company's business strategy are as follows: Continue New Product Development and Enhancement. The foundation for Thermadyne's strong market positions and leading brand names is the development and introduction of new products and enhancements of existing products. The Company believes it is at the forefront of cutting and welding technology with a proven track-record of continual new product introductions and existing product enhancements that have resulted in 262 issued or pending United States and foreign patents. New products and product enhancements are designed to add value for customers, including enhanced safety features, improved productivity and ergonomics and an improved welding environment. Examples of recent new product introductions include robotic welding systems and accessories, high-purity instrumentation, automated plasma cutting and safety products as well as underwater cutting electrodes. During 1997, the Company introduced over 135 new products or product enhancements, and the Company expects to continue this effort in the future. Expand Strategic Acquisitions. The Company has completed six acquisitions since 1993, which collectively generated approximately $169 million in annual revenues at the respective times of acquisition, including over $135 million of revenues for Australia and Italy. The Company believes that numerous acquisition candidates exist globally, and the Company intends to continue to seek new acquisition opportunities in its cutting and welding business. Thermadyne intends to continue its focused acquisition strategy that includes the following principal elements: (i) entering and expanding in geographic areas where the Company does not currently have a significant presence through acquisitions of local cutting and welding businesses and (ii) expanding in geographic areas where the Company currently maintains a strong presence through the acquisition of complementary product lines. Leverage Existing Distribution Network. The Company intends to leverage its existing distribution network through the acquisition or introduction of new products and product enhancements. Management believes that when the Company acquires a local presence in a new geographic area, it can utilize the acquired distribution network to sell existing Thermadyne brands into that local market. In addition, the Company believes that significant opportunities exist to purchase complementary product lines and expand its business by selling the new product lines through Thermadyne's extensive distribution network. For example, through recent acquisitions the Company has expanded its offering of filler metals, conventional arc welding power supplies, safety equipment and engine-driven welding power sources and began marketing such products through its established distribution network. The Company intends to continue this strategy of penetrating new welding product markets by leveraging its extensive distribution network in conjunction with its new product development and focused acquisition strategies. Broaden International Presence. Thermadyne has maintained an international presence for over 30 years and continues to broaden its presence throughout the world. International sales accounted for approximately 42% of net sales in 1997 as compared to approximately 20% in 1994. The Company has established a dedicated international market presence and maintains the leading position in Australia/New Zealand and significant and growing positions in Europe, Asia and Latin America. Management intends to continue the expansion of its strong domestic brand names into the international market and to continue to penetrate the growing Asian and Latin American cutting and welding markets. Continue Cost Reduction Efforts. Thermadyne strives to continually improve manufacturing efficiencies and reduce unit costs. In December 1997, the Company implemented a cost reduction program that includes the following principal elements: (i) vendor rationalization and consolidation; (ii) manufacturing process and productivity improvements and product design changes; (iii) personnel rationalization and expense reductions; (iv) advertising and trade show expense reductions; (v) aircraft, charter and other travel expense reductions; and (vi) elimination of the annual sales meeting. These cost reduction initiatives are expected to generate approximately $10 million in savings on an annualized basis. In addition, the Company has initiated the implementation of a new global information system that is designed to allow the Company to further integrate administrative functions and improve information flow across business unit lines. Continue Dedicated Customer Service. The Company believes that effective and proactive customer service has enabled the Company to build and maintain its leading market positions and strong distributor relationships. Management plans to continue this strategy of enhancing distributor and end-user relationships through continuous customer service improvements. Each of Thermadyne's divisions maintains a dedicated, well trained, technically oriented and product-specific sales and customer service team. Management believes that the dedicated product teams provide Thermadyne with a significant competitive advantage. In addition, to further improve customer service, the Company has implemented a national accounts team of 11 area business managers to support the dedicated product sales and service teams and further support sales to the Company's key distributors. THE MERGER AND MERGER FINANCING On May 22, 1998, Holdings consummated the merger of Mercury Acquisition Corporation ("Mercury"), a corporation organized by DLJ Merchant Banking Partners II, L.P. ("DLJMB") and affiliated funds and entities (the "DLJMB Funds") with and into Holdings, with Holdings continuing as the surviving corporation (the "Merger"). In order to fund the payment of the cash portion of the Merger Consideration (as defined herein), the Option Cash Proceeds (as defined herein) and the ESPP Cash Proceeds (as defined herein), to refinance and/or retire outstanding indebtedness of the Company, and to pay expenses incurred in connection with the Merger, the Issuers issued the Senior Subordinated Notes and the Company entered into a syndicated senior secured loan facility providing for term loan borrowings in the aggregate principal amount of approximately $330 million and revolving loan borrowings of $100 million (the "New Credit Facility"). In connection with the Merger, the Company borrowed all term loans available under the New Credit Facility plus approximately $25 million of revolving loans. The remaining revolving loans will be available to fund the working capital requirements of the Company. The proceeds of such financings were distributed to Holdings in the form of a dividend. See "Description of New Credit Facility," "The Merger and Merger Financing" and "Certain Relationships and Related Transactions." Mercury issued approximately $94.6 million aggregate gross proceeds of its 12 1/2% Senior Discount Debentures due 2008 (the "Debentures"). In connection with the Merger, Holdings succeeded to the obligations of Mercury with respect to the Debentures. The DLJMB Funds also purchased 2,608,696 shares of common stock of Mercury ("Mercury Common Stock"), 2,000,000 shares of senior exchangeable preferred stock of Mercury ("Mercury Preferred Stock") and warrants to purchase 353,428 shares of Mercury Common Stock at an exercise price of $0.01 per share (the "DLJMB Warrants") for approximately $140 million (the "DLJMB Equity Investment"). As a result of the Merger, the proceeds of such purchases became an asset of Holdings, each share of Mercury Common Stock became a share of common stock of Holdings ("Holdings Common Stock"), each share of Mercury Preferred Stock became a share of senior exchangeable preferred stock of Holdings ("Holdings Preferred Stock") and each DLJMB Warrant to acquire Mercury Common Stock became exercisable for an equal number of shares of Holdings Common Stock. In addition, in connection with the Merger, certain members of senior management purchased 143,192 shares of Holdings Common Stock for approximately $4.9 million (the "Management Share Purchase"), of which approximately $3.6 million was provided through non-recourse loans from Holdings (the "Management Loans"). The equity and debt financings referred to above are collectively referred to herein as the "Merger Financing." THE EXCHANGE OFFER The Exchange Offer......... $1,000 principal amount at maturity of New Senior Subordinated Notes in exchange for each $1,000 principal amount at maturity of Old Senior Subordinated Notes. The Old Senior Subordinated Notes were sold on May 22, 1998, in a private placement to Donaldson, Lufkin & Jenrette Securities Corporation ("DLJSC" or the "Initial Purchaser"), which immediately resold to the Old Senior Subordinated Notes pursuant to Rule 144A promulgated under the Securities Act (the "Original Offering"). As of the date hereof, Old Senior Subordinated Notes representing $207 million aggregate principal amount at maturity are outstanding. The terms of the New Senior Subordinated Notes and the Old Senior Subordinated Notes are substantially identical in all material respects, except that the New Senior Subordinated Notes will be freely transferable by the holders thereof except as otherwise provided herein. See "Description of New Senior Subordinated Notes." Based on an interpretation by the Commission's staff set forth in no-action letters issued to third parties unrelated to the Issuers and the Guarantors, the Issuers and the Guarantors believe that New Senior Subordinated Notes issued pursuant to the Exchange Offer in exchange for Old Senior Subordinated Notes may be offered for resale, sold and otherwise transferred by any person receiving the New Notes, whether or not that person is the registered holder (other than any such holder or such other person that is an "affiliate" of the Issuers or any Guarantor within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that (i) the New Senior Subordinated Notes are acquired in the ordinary course of business of that holder or such other person, (ii) neither the holder nor such other person is engaging in or intends to engage in a distribution of the New Senior Subordinated Notes and (iii) neither the holder nor such other person has an arrangement or understanding with any person to participate in the distribution of the New Senior Subordinated Notes. See "The Exchange Offer -- Purpose and Effect." Each broker-dealer that receives New Senior Subordinated Notes for its own account in exchange for Old Senior Subordinated Notes, where those Old Senior Subordinated Notes were acquired by the broker-dealer as a result of its market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of these New Senior Subordinated Notes. See "Plan of Distribution." Registration Rights Agreement................ In connection with the Original Offering, the Issuers and the Guarantors entered into a Registration Rights Agreement with the Initial Purchaser (the "Registration Rights Agreement") requiring the Issuers to make the Exchange Offer. See "The Exchange Offer -- Purpose and Effect." Expiration Date............ The Exchange Offer will expire at 5:00 p.m., New York City time, September 3, 1998, or such later date and time to which it is extended (the "Expiration Date"). Withdrawal................. The tender of the Old Senior Subordinated Notes pursuant to the Exchange Offer may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Any Old Senior Subordinated Notes not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Exchange Offer. Interest on the New Senior Subordinated Notes.................... Interest on each New Senior Subordinated Note will accrue from the date of issuance of the Old Senior Subordinated Note for which the New Senior Subordinated Note is exchanged or from the date of the last periodic payment of interest on such Old Senior Subordinated Note, whichever is later. No additional interest will be paid on Old Senior Subordinated Notes tendered and accepted for exchange. Conditions to the Exchange Offer.................... The Exchange Offer is subject to certain customary conditions, certain of which may be waived by the Issuers. See "The Exchange Offer -- Conditions to the Exchange Offer." Procedures for Tendering Old Senior Subordinated Notes.................... Each holder of Old Senior Subordinated Notes wishing to accept the Exchange Offer must complete, sign and date the Letter of Transmittal, or a copy thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver the Letter of Transmittal, or the copy, together with the Old Senior Subordinated Notes and any other required documentation, to the Exchange Agent (as defined herein) at the address set forth herein. Persons holding the Old Senior Subordinated Notes through the Depository Trust Company ("DTC") and wishing to accept the Exchange Offer must do so pursuant to the DTC's Automated Tender Offer Program, by which each tendering participant will agree to be bound by the Letter of Transmittal. By executing or agreeing to be bound by the Letter of Transmittal, each holder will represent to the Issuers that, among other things, (i) the New Senior Subordinated Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Senior Subordinated Notes, whether or not such person is the registered holder of the Old Senior Subordinated Notes, (ii) neither the holder nor any such other person is engaging in or intends to engage in a distribution of such New Senior Subordinated Notes, (iii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Senior Subordinated Notes, and (iv) neither the holder nor any such other person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of the Issuers or any Guarantor. Pursuant to the Registration Rights Agreement, the Issuers are required to file a "shelf" registration statement for a continuous offering pursuant to Rule 415 under the Securities Act in respect of the Old Notes if (a) they are prohibited from consummating the Exchange Offer because the Exchange Offer is not permitted by applicable law or Commission policy or (b) any holder of Transfer Restricted Securities (as defined) notifies the Issuers in writing prior to the 20th business day following consummation of the Exchange Offer that (i) based on an opinion of counsel, it is prohibited by law or Commission policy from participating in the Exchange Offer or (ii) it is a broker-dealer and owns Senior Subordinated Notes acquired directly from the Issuers. Acceptance of Old Notes and Delivery of New Notes.... The Issuers and the Guarantors will accept for exchange any and all Old Senior Subordinated Notes which are properly tendered (and not withdrawn) in the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Senior Subordinated Notes issued pursuant to the Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offer -- Terms of the Exchange Offer." Exchange Agent............. State Street Bank and Trust Company is serving as Exchange Agent (the "Exchange Agent") in connection with the Exchange Offer. Federal Income Tax Considerations........... The exchange pursuant to the Exchange Offer should not be a taxable event for federal income tax purposes. See "Certain United States Federal Income Tax Considerations." Effect of Not Tendering.... Old Senior Subordinated Notes that are not tendered or that are improperly tendered and not accepted will, following the completion of the Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. The Issuers and the Guarantors will have no further obligation to provide for the registration under the Securities Act of such Old Senior Subordinated Notes. THE NEW SENIOR SUBORDINATED NOTES Securities Offered......... $207.0 million aggregate principal amount at maturity of 9 7/8% Senior Subordinated Notes due 2008. Issuers.................... The New Senior Subordinated Notes will be joint and several obligations of the Company and Thermadyne Capital. Thermadyne Capital is a Delaware corporation and wholly-owned subsidiary of the Company formed in connection with the Original Offering. Thermadyne Capital has no assets, no liabilities (other than the Senior Subordinated Notes), no substantial operations, and will be prohibited from engaging in any business activities. Maturity Date.............. June 1, 2008. Interest Payment Dates..... June 1 and December 1, commencing December 1, 1998. Optional Redemption........ The New Senior Subordinated Notes will be subject to redemption at any time on or after June 1, 2003 at the option of the Issuers, in whole or in part, in cash at the redemption prices set forth herein, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the applicable redemption date. Notwithstanding the foregoing, on or prior to June 1, 2001, the Issuers may redeem up to 35% of the aggregate principal amount of Senior Subordinated Notes ever issued under the Indenture in cash at a redemption price of 109.875% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the redemption date, with the net cash proceeds of one or more Public Equity Offerings; provided that at least 65% of the aggregate principal amount of Senior Subordinated Notes ever issued under the Indenture remains outstanding immediately after the occurrence of any such redemption. In addition, at any time prior to June 1, 2003, the Issuers may, at their option upon the occurrence of a Change of Control, redeem the New Senior Subordinated Notes, in whole but not in part, in cash at a redemption price equal to (i) the present value of the sum of all the remaining interest (excluding accrued and unpaid interest, if any), premium and principal payments that would become due on the New Senior Subordinated Notes as if the New Senior Subordinated Notes were to remain outstanding and be redeemed on June 1, 2003, computed using a discount rate equal to the Treasury Rate plus 50 basis points, plus (ii) accrued and unpaid interest and Liquidated Damages, if any, to the date of redemption. See "Description of New Senior Subordinated Notes -- Optional Redemption." Change of Control.......... Upon the occurrence of a Change of Control, each Holder of New Senior Subordinated Notes will have the right to require the Issuers to repurchase all or any part of such Holder's New Senior Subordinated Notes at an offer price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the date of repurchase. No assurance can be given that the Issuers will have sufficient resources to satisfy their repurchase obligation with respect to the New Senior Subordinated Notes following a Change of Control. See "Risk Factors -- Possible Inability to Repurchase New Senior Subordinated Notes upon Change of Control" and "Description of New Senior Subordinated Notes -- Repurchase at the Option of Holders -- Change of Control." Ranking.................... The New Senior Subordinated Notes will be general unsecured obligations of the Issuers and will be subordinated in right of payment to all existing and future Senior Indebtedness of the Issuers, including indebtedness pursuant to the New Credit Facility. The New Senior Subordinated Notes will rank pari passu with any future senior subordinated indebtedness of the Issuers and will rank senior to all Subordinated Indebtedness of the Issuers. The New Senior Subordinated Notes will be effectively subordinated to all liabilities of the Issuers' subsidiaries that are not Guarantors. On a pro forma basis after giving effect to the Merger, including the Merger Financing and the application of proceeds thereof, as of March 31, 1998, the Company and the Guarantors would have had outstanding approximately $379.5 million of Senior Indebtedness and the Company's non-Guarantor subsidiaries would have had approximately $87.0 million of outstanding liabilities, including trade payables. Note Guarantees............ The New Senior Subordinated Notes will be unconditionally guaranteed on a senior subordinated basis by the Guarantors. The Note Guarantees will be general unsecured obligations of the Guarantors, will be subordinated in right of payment to all existing and future Senior Indebtedness of the Guarantors, including indebtedness under the New Credit Facility, and will rank senior in right of payment to any future subordinated indebtedness of the Guarantors. See "Description of New Senior Subordinated Notes -- Note Guarantees." Certain Covenants.......... The Indenture pursuant to which the New Senior Subordinated Notes will be issued (the "Indenture") contains certain covenants that, among other things, limit the ability of the Issuers and their Restricted Subsidiaries (as defined herein) to: incur indebtedness and issue preferred stock, repurchase Capital Stock (as defined herein) and Indebtedness subordinated to the New Senior Subordinated Notes, engage in transactions with affiliates, engage in sale and leaseback transactions, incur or suffer to exist certain liens, pay dividends or other distributions, make investments, sell assets and engage in certain mergers and consolidations. Use of Proceeds............ There will be no cash proceeds to the Issuers from the exchange pursuant to the Exchange Offer. The net proceeds from the Original Offering, together with the initial borrowings under the New Credit Facility, the DLJMB Equity Investment and the issuance of the Debentures, were used to fund payment of the cash portion of the Merger Consideration, the Option Cash Proceeds and the ESPP Cash Proceeds, to refinance outstanding indebtedness of the Company and to pay the expenses incurred in connection with the Merger. See "Use of Proceeds."
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+SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Investors are urged to read this Prospectus in its entirety. As used in this Prospectus, the term "Holdings" means Thermadyne Holdings Corporation, including its predecessors and subsidiaries; the term "Issuers" means Thermadyne Mfg. LLC, a wholly owned subsidiary of Holdings ("Thermadyne LLC"), and Thermadyne Capital Corp. ("Thermadyne Capital"), a wholly owned subsidiary of Thermadyne LLC; and the terms "Company" and "Thermadyne" mean Thermadyne LLC and its predecessors and subsidiaries. THE COMPANY OVERVIEW Thermadyne is a leading global manufacturer of cutting and welding products and accessories. The Company manufactures a broad range of gas (oxy-fuel) and electric arc cutting and welding products that are ultimately sold to end-user customers principally engaged in the aerospace, automotive, construction, metal fabrication, mining, mill and foundry, petroleum and shipbuilding industries. Thermadyne sells its products through a long-established domestic network of approximately 1,100 independent distributors who market Thermadyne products to over 10,000 end-user customers. For the twelve months ended March 31, 1998, the Company's net sales and Adjusted EBITDA (as defined herein), on a pro forma basis, were $548.2 million and $115.5 million, respectively. The Company's core products enjoy leading brand recognition, a reputation for quality and strong market positions. In 1994, following the Company's Restructuring (as defined herein), current management initiated a series of transactions to focus the Company's business exclusively on the cutting and welding industry. As part of this strategy, the Company divested three non-core businesses and acquired six cutting and welding businesses, which collectively generated approximately $169 million in annual revenues at the respective times of acquisition. As a result of this repositioning strategy, along with ongoing new product introductions, an extensive distribution network and market leading brands, the Company has achieved a compound annual growth in net sales and EBITDA of 20.3% and 12.5%, respectively, from 1993 to 1997. According to the United States Department of Commerce, domestic welding industry revenues totaled over $3.6 billion in 1997. The domestic industry has grown at an annual rate of 5.9% since 1989 and is expected to grow 4.2% in 1998. Global welding industry revenues are estimated to total over $10.0 billion, and management believes that growth in the international market has been faster than the domestic market, driven, in large part, by infrastructure spending in developing markets. International markets, including Australia and Italy, represented approximately 42% of the Company's net sales in 1997, up from approximately 20% of net sales in 1994. Although the industry has begun to experience global consolidation, it continues to be very fragmented. COMPETITIVE STRENGTHS Thermadyne possesses a number of competitive strengths that have allowed it to develop and maintain a strong position within the cutting and welding industry, including the following: Market Leading Brands. Management believes that the strength and longevity of the numerous Thermadyne brand names create a significant competitive advantage and position Thermadyne as one of the leaders in the cutting and welding industry. Each of the Company's major divisions maintains industry-leading brand names with significant market shares. Management believes that VICTOR(R), founded in 1913, is the leading brand name in domestic gas-operated cutting and welding torches and equipment; TWECO(R), founded in 1936, is the leading domestic manufacturer of metal inert gas ("MIG") and manual welding torches; ARCAIR(R) is the leading domestic brand name of tungsten inert gas ("TIG") torch and accessory products; THERMAL DYNAMICS(R), founded in 1957, is a leading domestic manufacturer of manual plasma cutting products; and CIGWELD(R), founded in 1922, is the leading brand name in the Australia/New Zealand cutting and welding (Continued from cover page) Each broker-dealer that receives New Senior Subordinated Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Subordinated Notes. The letter of transmittal accompanying this Prospectus (the "Letter of Transmittal") states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Senior Subordinated Notes received in exchange for Old Senior Subordinated Notes where such Old Senior Subordinated Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Issuers have agreed, for a period of 90 days after the Expiration Date, to make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." No public market existed for the Old Senior Subordinated Notes before the Exchange Offer. The Issuers currently do not intend to list the New Senior Subordinated Notes on any securities exchange or to seek approval for quotation through any automated quotation system, and no active public market for the New Senior Subordinated Notes is currently anticipated. The Issuers will pay all the expenses incident to the Exchange Offer. The Exchange Offer is not conditioned upon any minimum principal amount of Old Senior Subordinated Notes being tendered for exchange pursuant to the Exchange Offer. products market. Each of the manufacturing operations associated with these brands is ISO-9000 series certified. Diverse and Stable Customer Base. The Company's customer base includes cutting and welding product distributors as well as end-user customers principally engaged in the aerospace, automotive, construction, metal fabrication, mining, mill and foundry, petroleum and ship building industries. No one customer accounted for more than 9% of the Company's 1997 net sales. Further, the Company's top 20 customers have been associated with the Company for an average of over 10 years. Established, Effective Distribution Channels. The Company believes that its strong, established and long-standing relationships with over 1,100 independent cutting and welding products distributors in the United States provide a significant competitive advantage and support the Company's strong market position. Thermadyne's domestic distributor relationships are maintained by 11 area business managers who oversee the Company's relationships with large distributors and by separate product-specific sales forces for each of Thermadyne's business units. Management believes that this unique structure, which combines relationship managers with technically trained product specialists, will enable the Company to more effectively maintain and utilize its distributor networks. Management also believes that this established distribution network enables the Company to achieve market penetration when introducing newly developed or acquired products. Proven and Committed Senior Management Team. Thermadyne's management team has strategically repositioned the Company over the past four years to focus exclusively in its core cutting and welding markets. This repositioning was accomplished through divestitures of three non-core assets and acquisitions of six strategic businesses or product lines. In addition, management has initiated the development and introduction of significant new products and product lines. As a result of management's efforts, the Company achieved a 20.3% growth rate in net sales from 1993 to 1997. In connection with the Merger each member of the senior management team signed an employment contract with the Company. Additionally, the Company adopted an incentive plan to tie each member of senior management's compensation to the Company's financial performance. See "Executive Compensation." BUSINESS STRATEGY Thermadyne has developed a business strategy designed to enhance its strong market positions and continue to improve its growth and profitability. The primary elements of the Company's business strategy are as follows: Continue New Product Development and Enhancement. The foundation for Thermadyne's strong market positions and leading brand names is the development and introduction of new products and enhancements of existing products. The Company believes it is at the forefront of cutting and welding technology with a proven track-record of continual new product introductions and existing product enhancements that have resulted in 262 issued or pending United States and foreign patents. New products and product enhancements are designed to add value for customers, including enhanced safety features, improved productivity and ergonomics and an improved welding environment. Examples of recent new product introductions include robotic welding systems and accessories, high-purity instrumentation, automated plasma cutting and safety products as well as underwater cutting electrodes. During 1997, the Company introduced over 135 new products or product enhancements, and the Company expects to continue this effort in the future. Expand Strategic Acquisitions. The Company has completed six acquisitions since 1993, which collectively generated approximately $169 million in annual revenues at the respective times of acquisition, including over $135 million of revenues for Australia and Italy. The Company believes that numerous acquisition candidates exist globally, and the Company intends to continue to seek new acquisition opportunities in its cutting and welding business. Thermadyne intends to continue its focused acquisition strategy that includes the following principal elements: (i) entering and expanding in geographic areas where the Company does not currently have a significant presence through acquisitions of local cutting and welding businesses and (ii) expanding in geographic areas where the Company currently maintains a strong presence through the acquisition of complementary product lines. Leverage Existing Distribution Network. The Company intends to leverage its existing distribution network through the acquisition or introduction of new products and product enhancements. Management believes that when the Company acquires a local presence in a new geographic area, it can utilize the acquired distribution network to sell existing Thermadyne brands into that local market. In addition, the Company believes that significant opportunities exist to purchase complementary product lines and expand its business by selling the new product lines through Thermadyne's extensive distribution network. For example, through recent acquisitions the Company has expanded its offering of filler metals, conventional arc welding power supplies, safety equipment and engine-driven welding power sources and began marketing such products through its established distribution network. The Company intends to continue this strategy of penetrating new welding product markets by leveraging its extensive distribution network in conjunction with its new product development and focused acquisition strategies. Broaden International Presence. Thermadyne has maintained an international presence for over 30 years and continues to broaden its presence throughout the world. International sales accounted for approximately 42% of net sales in 1997 as compared to approximately 20% in 1994. The Company has established a dedicated international market presence and maintains the leading position in Australia/New Zealand and significant and growing positions in Europe, Asia and Latin America. Management intends to continue the expansion of its strong domestic brand names into the international market and to continue to penetrate the growing Asian and Latin American cutting and welding markets. Continue Cost Reduction Efforts. Thermadyne strives to continually improve manufacturing efficiencies and reduce unit costs. In December 1997, the Company implemented a cost reduction program that includes the following principal elements: (i) vendor rationalization and consolidation; (ii) manufacturing process and productivity improvements and product design changes; (iii) personnel rationalization and expense reductions; (iv) advertising and trade show expense reductions; (v) aircraft, charter and other travel expense reductions; and (vi) elimination of the annual sales meeting. These cost reduction initiatives are expected to generate approximately $10 million in savings on an annualized basis. In addition, the Company has initiated the implementation of a new global information system that is designed to allow the Company to further integrate administrative functions and improve information flow across business unit lines. Continue Dedicated Customer Service. The Company believes that effective and proactive customer service has enabled the Company to build and maintain its leading market positions and strong distributor relationships. Management plans to continue this strategy of enhancing distributor and end-user relationships through continuous customer service improvements. Each of Thermadyne's divisions maintains a dedicated, well trained, technically oriented and product-specific sales and customer service team. Management believes that the dedicated product teams provide Thermadyne with a significant competitive advantage. In addition, to further improve customer service, the Company has implemented a national accounts team of 11 area business managers to support the dedicated product sales and service teams and further support sales to the Company's key distributors. THE MERGER AND MERGER FINANCING On May 22, 1998, Holdings consummated the merger of Mercury Acquisition Corporation ("Mercury"), a corporation organized by DLJ Merchant Banking Partners II, L.P. ("DLJMB") and affiliated funds and entities (the "DLJMB Funds") with and into Holdings, with Holdings continuing as the surviving corporation (the "Merger"). In order to fund the payment of the cash portion of the Merger Consideration (as defined herein), the Option Cash Proceeds (as defined herein) and the ESPP Cash Proceeds (as defined herein), to refinance and/or retire outstanding indebtedness of the Company, and to pay expenses incurred in connection with the Merger, the Issuers issued the Senior Subordinated Notes and the Company entered into a syndicated senior secured loan facility providing for term loan borrowings in the aggregate principal amount of approximately $330 million and revolving loan borrowings of $100 million (the "New Credit Facility"). In connection with the Merger, the Company borrowed all term loans available under the New Credit Facility plus approximately $25 million of revolving loans. The remaining revolving loans will be available to fund the working capital requirements of the Company. The proceeds of such financings were distributed to Holdings in the form of a dividend. See "Description of New Credit Facility," "The Merger and Merger Financing" and "Certain Relationships and Related Transactions." Mercury issued approximately $94.6 million aggregate gross proceeds of its 12 1/2% Senior Discount Debentures due 2008 (the "Debentures"). In connection with the Merger, Holdings succeeded to the obligations of Mercury with respect to the Debentures. The DLJMB Funds also purchased 2,608,696 shares of common stock of Mercury ("Mercury Common Stock"), 2,000,000 shares of senior exchangeable preferred stock of Mercury ("Mercury Preferred Stock") and warrants to purchase 353,428 shares of Mercury Common Stock at an exercise price of $0.01 per share (the "DLJMB Warrants") for approximately $140 million (the "DLJMB Equity Investment"). As a result of the Merger, the proceeds of such purchases became an asset of Holdings, each share of Mercury Common Stock became a share of common stock of Holdings ("Holdings Common Stock"), each share of Mercury Preferred Stock became a share of senior exchangeable preferred stock of Holdings ("Holdings Preferred Stock") and each DLJMB Warrant to acquire Mercury Common Stock became exercisable for an equal number of shares of Holdings Common Stock. In addition, in connection with the Merger, certain members of senior management purchased 143,192 shares of Holdings Common Stock for approximately $4.9 million (the "Management Share Purchase"), of which approximately $3.6 million was provided through non-recourse loans from Holdings (the "Management Loans"). The equity and debt financings referred to above are collectively referred to herein as the "Merger Financing." THE EXCHANGE OFFER The Exchange Offer......... $1,000 principal amount at maturity of New Senior Subordinated Notes in exchange for each $1,000 principal amount at maturity of Old Senior Subordinated Notes. The Old Senior Subordinated Notes were sold on May 22, 1998, in a private placement to Donaldson, Lufkin & Jenrette Securities Corporation ("DLJSC" or the "Initial Purchaser"), which immediately resold to the Old Senior Subordinated Notes pursuant to Rule 144A promulgated under the Securities Act (the "Original Offering"). As of the date hereof, Old Senior Subordinated Notes representing $207 million aggregate principal amount at maturity are outstanding. The terms of the New Senior Subordinated Notes and the Old Senior Subordinated Notes are substantially identical in all material respects, except that the New Senior Subordinated Notes will be freely transferable by the holders thereof except as otherwise provided herein. See "Description of New Senior Subordinated Notes." Based on an interpretation by the Commission's staff set forth in no-action letters issued to third parties unrelated to the Issuers and the Guarantors, the Issuers and the Guarantors believe that New Senior Subordinated Notes issued pursuant to the Exchange Offer in exchange for Old Senior Subordinated Notes may be offered for resale, sold and otherwise transferred by any person receiving the New Notes, whether or not that person is the registered holder (other than any such holder or such other person that is an "affiliate" of the Issuers or any Guarantor within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that (i) the New Senior Subordinated Notes are acquired in the ordinary course of business of that holder or such other person, (ii) neither the holder nor such other person is engaging in or intends to engage in a distribution of the New Senior Subordinated Notes and (iii) neither the holder nor such other person has an arrangement or understanding with any person to participate in the distribution of the New Senior Subordinated Notes. See "The Exchange Offer -- Purpose and Effect." Each broker-dealer that receives New Senior Subordinated Notes for its own account in exchange for Old Senior Subordinated Notes, where those Old Senior Subordinated Notes were acquired by the broker-dealer as a result of its market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of these New Senior Subordinated Notes. See "Plan of Distribution." Registration Rights Agreement................ In connection with the Original Offering, the Issuers and the Guarantors entered into a Registration Rights Agreement with the Initial Purchaser (the "Registration Rights Agreement") requiring the Issuers to make the Exchange Offer. See "The Exchange Offer -- Purpose and Effect." Expiration Date............ The Exchange Offer will expire at 5:00 p.m., New York City time, September 3, 1998, or such later date and time to which it is extended (the "Expiration Date"). Withdrawal................. The tender of the Old Senior Subordinated Notes pursuant to the Exchange Offer may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Any Old Senior Subordinated Notes not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Exchange Offer. Interest on the New Senior Subordinated Notes.................... Interest on each New Senior Subordinated Note will accrue from the date of issuance of the Old Senior Subordinated Note for which the New Senior Subordinated Note is exchanged or from the date of the last periodic payment of interest on such Old Senior Subordinated Note, whichever is later. No additional interest will be paid on Old Senior Subordinated Notes tendered and accepted for exchange. Conditions to the Exchange Offer.................... The Exchange Offer is subject to certain customary conditions, certain of which may be waived by the Issuers. See "The Exchange Offer -- Conditions to the Exchange Offer." Procedures for Tendering Old Senior Subordinated Notes.................... Each holder of Old Senior Subordinated Notes wishing to accept the Exchange Offer must complete, sign and date the Letter of Transmittal, or a copy thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver the Letter of Transmittal, or the copy, together with the Old Senior Subordinated Notes and any other required documentation, to the Exchange Agent (as defined herein) at the address set forth herein. Persons holding the Old Senior Subordinated Notes through the Depository Trust Company ("DTC") and wishing to accept the Exchange Offer must do so pursuant to the DTC's Automated Tender Offer Program, by which each tendering participant will agree to be bound by the Letter of Transmittal. By executing or agreeing to be bound by the Letter of Transmittal, each holder will represent to the Issuers that, among other things, (i) the New Senior Subordinated Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Senior Subordinated Notes, whether or not such person is the registered holder of the Old Senior Subordinated Notes, (ii) neither the holder nor any such other person is engaging in or intends to engage in a distribution of such New Senior Subordinated Notes, (iii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Senior Subordinated Notes, and (iv) neither the holder nor any such other person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of the Issuers or any Guarantor. Pursuant to the Registration Rights Agreement, the Issuers are required to file a "shelf" registration statement for a continuous offering pursuant to Rule 415 under the Securities Act in respect of the Old Notes if (a) they are prohibited from consummating the Exchange Offer because the Exchange Offer is not permitted by applicable law or Commission policy or (b) any holder of Transfer Restricted Securities (as defined) notifies the Issuers in writing prior to the 20th business day following consummation of the Exchange Offer that (i) based on an opinion of counsel, it is prohibited by law or Commission policy from participating in the Exchange Offer or (ii) it is a broker-dealer and owns Senior Subordinated Notes acquired directly from the Issuers. Acceptance of Old Notes and Delivery of New Notes.... The Issuers and the Guarantors will accept for exchange any and all Old Senior Subordinated Notes which are properly tendered (and not withdrawn) in the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Senior Subordinated Notes issued pursuant to the Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offer -- Terms of the Exchange Offer." Exchange Agent............. State Street Bank and Trust Company is serving as Exchange Agent (the "Exchange Agent") in connection with the Exchange Offer. Federal Income Tax Considerations........... The exchange pursuant to the Exchange Offer should not be a taxable event for federal income tax purposes. See "Certain United States Federal Income Tax Considerations." Effect of Not Tendering.... Old Senior Subordinated Notes that are not tendered or that are improperly tendered and not accepted will, following the completion of the Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. The Issuers and the Guarantors will have no further obligation to provide for the registration under the Securities Act of such Old Senior Subordinated Notes. THE NEW SENIOR SUBORDINATED NOTES Securities Offered......... $207.0 million aggregate principal amount at maturity of 9 7/8% Senior Subordinated Notes due 2008. Issuers.................... The New Senior Subordinated Notes will be joint and several obligations of the Company and Thermadyne Capital. Thermadyne Capital is a Delaware corporation and wholly-owned subsidiary of the Company formed in connection with the Original Offering. Thermadyne Capital has no assets, no liabilities (other than the Senior Subordinated Notes), no substantial operations, and will be prohibited from engaging in any business activities. Maturity Date.............. June 1, 2008. Interest Payment Dates..... June 1 and December 1, commencing December 1, 1998. Optional Redemption........ The New Senior Subordinated Notes will be subject to redemption at any time on or after June 1, 2003 at the option of the Issuers, in whole or in part, in cash at the redemption prices set forth herein, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the applicable redemption date. Notwithstanding the foregoing, on or prior to June 1, 2001, the Issuers may redeem up to 35% of the aggregate principal amount of Senior Subordinated Notes ever issued under the Indenture in cash at a redemption price of 109.875% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the redemption date, with the net cash proceeds of one or more Public Equity Offerings; provided that at least 65% of the aggregate principal amount of Senior Subordinated Notes ever issued under the Indenture remains outstanding immediately after the occurrence of any such redemption. In addition, at any time prior to June 1, 2003, the Issuers may, at their option upon the occurrence of a Change of Control, redeem the New Senior Subordinated Notes, in whole but not in part, in cash at a redemption price equal to (i) the present value of the sum of all the remaining interest (excluding accrued and unpaid interest, if any), premium and principal payments that would become due on the New Senior Subordinated Notes as if the New Senior Subordinated Notes were to remain outstanding and be redeemed on June 1, 2003, computed using a discount rate equal to the Treasury Rate plus 50 basis points, plus (ii) accrued and unpaid interest and Liquidated Damages, if any, to the date of redemption. See "Description of New Senior Subordinated Notes -- Optional Redemption." Change of Control.......... Upon the occurrence of a Change of Control, each Holder of New Senior Subordinated Notes will have the right to require the Issuers to repurchase all or any part of such Holder's New Senior Subordinated Notes at an offer price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the date of repurchase. No assurance can be given that the Issuers will have sufficient resources to satisfy their repurchase obligation with respect to the New Senior Subordinated Notes following a Change of Control. See "Risk Factors -- Possible Inability to Repurchase New Senior Subordinated Notes upon Change of Control" and "Description of New Senior Subordinated Notes -- Repurchase at the Option of Holders -- Change of Control." Ranking.................... The New Senior Subordinated Notes will be general unsecured obligations of the Issuers and will be subordinated in right of payment to all existing and future Senior Indebtedness of the Issuers, including indebtedness pursuant to the New Credit Facility. The New Senior Subordinated Notes will rank pari passu with any future senior subordinated indebtedness of the Issuers and will rank senior to all Subordinated Indebtedness of the Issuers. The New Senior Subordinated Notes will be effectively subordinated to all liabilities of the Issuers' subsidiaries that are not Guarantors. On a pro forma basis after giving effect to the Merger, including the Merger Financing and the application of proceeds thereof, as of March 31, 1998, the Company and the Guarantors would have had outstanding approximately $379.5 million of Senior Indebtedness and the Company's non-Guarantor subsidiaries would have had approximately $87.0 million of outstanding liabilities, including trade payables. Note Guarantees............ The New Senior Subordinated Notes will be unconditionally guaranteed on a senior subordinated basis by the Guarantors. The Note Guarantees will be general unsecured obligations of the Guarantors, will be subordinated in right of payment to all existing and future Senior Indebtedness of the Guarantors, including indebtedness under the New Credit Facility, and will rank senior in right of payment to any future subordinated indebtedness of the Guarantors. See "Description of New Senior Subordinated Notes -- Note Guarantees." Certain Covenants.......... The Indenture pursuant to which the New Senior Subordinated Notes will be issued (the "Indenture") contains certain covenants that, among other things, limit the ability of the Issuers and their Restricted Subsidiaries (as defined herein) to: incur indebtedness and issue preferred stock, repurchase Capital Stock (as defined herein) and Indebtedness subordinated to the New Senior Subordinated Notes, engage in transactions with affiliates, engage in sale and leaseback transactions, incur or suffer to exist certain liens, pay dividends or other distributions, make investments, sell assets and engage in certain mergers and consolidations. Use of Proceeds............ There will be no cash proceeds to the Issuers from the exchange pursuant to the Exchange Offer. The net proceeds from the Original Offering, together with the initial borrowings under the New Credit Facility, the DLJMB Equity Investment and the issuance of the Debentures, were used to fund payment of the cash portion of the Merger Consideration, the Option Cash Proceeds and the ESPP Cash Proceeds, to refinance outstanding indebtedness of the Company and to pay the expenses incurred in connection with the Merger. See "Use of Proceeds."
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+SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Investors are urged to read this Prospectus in its entirety. As used in this Prospectus, the term "Holdings" means Thermadyne Holdings Corporation, including its predecessors and subsidiaries; the term "Issuers" means Thermadyne Mfg. LLC, a wholly owned subsidiary of Holdings ("Thermadyne LLC"), and Thermadyne Capital Corp. ("Thermadyne Capital"), a wholly owned subsidiary of Thermadyne LLC; and the terms "Company" and "Thermadyne" mean Thermadyne LLC and its predecessors and subsidiaries. THE COMPANY OVERVIEW Thermadyne is a leading global manufacturer of cutting and welding products and accessories. The Company manufactures a broad range of gas (oxy-fuel) and electric arc cutting and welding products that are ultimately sold to end-user customers principally engaged in the aerospace, automotive, construction, metal fabrication, mining, mill and foundry, petroleum and shipbuilding industries. Thermadyne sells its products through a long-established domestic network of approximately 1,100 independent distributors who market Thermadyne products to over 10,000 end-user customers. For the twelve months ended March 31, 1998, the Company's net sales and Adjusted EBITDA (as defined herein), on a pro forma basis, were $548.2 million and $115.5 million, respectively. The Company's core products enjoy leading brand recognition, a reputation for quality and strong market positions. In 1994, following the Company's Restructuring (as defined herein), current management initiated a series of transactions to focus the Company's business exclusively on the cutting and welding industry. As part of this strategy, the Company divested three non-core businesses and acquired six cutting and welding businesses, which collectively generated approximately $169 million in annual revenues at the respective times of acquisition. As a result of this repositioning strategy, along with ongoing new product introductions, an extensive distribution network and market leading brands, the Company has achieved a compound annual growth in net sales and EBITDA of 20.3% and 12.5%, respectively, from 1993 to 1997. According to the United States Department of Commerce, domestic welding industry revenues totaled over $3.6 billion in 1997. The domestic industry has grown at an annual rate of 5.9% since 1989 and is expected to grow 4.2% in 1998. Global welding industry revenues are estimated to total over $10.0 billion, and management believes that growth in the international market has been faster than the domestic market, driven, in large part, by infrastructure spending in developing markets. International markets, including Australia and Italy, represented approximately 42% of the Company's net sales in 1997, up from approximately 20% of net sales in 1994. Although the industry has begun to experience global consolidation, it continues to be very fragmented. COMPETITIVE STRENGTHS Thermadyne possesses a number of competitive strengths that have allowed it to develop and maintain a strong position within the cutting and welding industry, including the following: Market Leading Brands. Management believes that the strength and longevity of the numerous Thermadyne brand names create a significant competitive advantage and position Thermadyne as one of the leaders in the cutting and welding industry. Each of the Company's major divisions maintains industry-leading brand names with significant market shares. Management believes that VICTOR(R), founded in 1913, is the leading brand name in domestic gas-operated cutting and welding torches and equipment; TWECO(R), founded in 1936, is the leading domestic manufacturer of metal inert gas ("MIG") and manual welding torches; ARCAIR(R) is the leading domestic brand name of tungsten inert gas ("TIG") torch and accessory products; THERMAL DYNAMICS(R), founded in 1957, is a leading domestic manufacturer of manual plasma cutting products; and CIGWELD(R), founded in 1922, is the leading brand name in the Australia/New Zealand cutting and welding (Continued from cover page) Each broker-dealer that receives New Senior Subordinated Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Senior Subordinated Notes. The letter of transmittal accompanying this Prospectus (the "Letter of Transmittal") states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Senior Subordinated Notes received in exchange for Old Senior Subordinated Notes where such Old Senior Subordinated Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Issuers have agreed, for a period of 90 days after the Expiration Date, to make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." No public market existed for the Old Senior Subordinated Notes before the Exchange Offer. The Issuers currently do not intend to list the New Senior Subordinated Notes on any securities exchange or to seek approval for quotation through any automated quotation system, and no active public market for the New Senior Subordinated Notes is currently anticipated. The Issuers will pay all the expenses incident to the Exchange Offer. The Exchange Offer is not conditioned upon any minimum principal amount of Old Senior Subordinated Notes being tendered for exchange pursuant to the Exchange Offer. products market. Each of the manufacturing operations associated with these brands is ISO-9000 series certified. Diverse and Stable Customer Base. The Company's customer base includes cutting and welding product distributors as well as end-user customers principally engaged in the aerospace, automotive, construction, metal fabrication, mining, mill and foundry, petroleum and ship building industries. No one customer accounted for more than 9% of the Company's 1997 net sales. Further, the Company's top 20 customers have been associated with the Company for an average of over 10 years. Established, Effective Distribution Channels. The Company believes that its strong, established and long-standing relationships with over 1,100 independent cutting and welding products distributors in the United States provide a significant competitive advantage and support the Company's strong market position. Thermadyne's domestic distributor relationships are maintained by 11 area business managers who oversee the Company's relationships with large distributors and by separate product-specific sales forces for each of Thermadyne's business units. Management believes that this unique structure, which combines relationship managers with technically trained product specialists, will enable the Company to more effectively maintain and utilize its distributor networks. Management also believes that this established distribution network enables the Company to achieve market penetration when introducing newly developed or acquired products. Proven and Committed Senior Management Team. Thermadyne's management team has strategically repositioned the Company over the past four years to focus exclusively in its core cutting and welding markets. This repositioning was accomplished through divestitures of three non-core assets and acquisitions of six strategic businesses or product lines. In addition, management has initiated the development and introduction of significant new products and product lines. As a result of management's efforts, the Company achieved a 20.3% growth rate in net sales from 1993 to 1997. In connection with the Merger each member of the senior management team signed an employment contract with the Company. Additionally, the Company adopted an incentive plan to tie each member of senior management's compensation to the Company's financial performance. See "Executive Compensation." BUSINESS STRATEGY Thermadyne has developed a business strategy designed to enhance its strong market positions and continue to improve its growth and profitability. The primary elements of the Company's business strategy are as follows: Continue New Product Development and Enhancement. The foundation for Thermadyne's strong market positions and leading brand names is the development and introduction of new products and enhancements of existing products. The Company believes it is at the forefront of cutting and welding technology with a proven track-record of continual new product introductions and existing product enhancements that have resulted in 262 issued or pending United States and foreign patents. New products and product enhancements are designed to add value for customers, including enhanced safety features, improved productivity and ergonomics and an improved welding environment. Examples of recent new product introductions include robotic welding systems and accessories, high-purity instrumentation, automated plasma cutting and safety products as well as underwater cutting electrodes. During 1997, the Company introduced over 135 new products or product enhancements, and the Company expects to continue this effort in the future. Expand Strategic Acquisitions. The Company has completed six acquisitions since 1993, which collectively generated approximately $169 million in annual revenues at the respective times of acquisition, including over $135 million of revenues for Australia and Italy. The Company believes that numerous acquisition candidates exist globally, and the Company intends to continue to seek new acquisition opportunities in its cutting and welding business. Thermadyne intends to continue its focused acquisition strategy that includes the following principal elements: (i) entering and expanding in geographic areas where the Company does not currently have a significant presence through acquisitions of local cutting and welding businesses and (ii) expanding in geographic areas where the Company currently maintains a strong presence through the acquisition of complementary product lines. Leverage Existing Distribution Network. The Company intends to leverage its existing distribution network through the acquisition or introduction of new products and product enhancements. Management believes that when the Company acquires a local presence in a new geographic area, it can utilize the acquired distribution network to sell existing Thermadyne brands into that local market. In addition, the Company believes that significant opportunities exist to purchase complementary product lines and expand its business by selling the new product lines through Thermadyne's extensive distribution network. For example, through recent acquisitions the Company has expanded its offering of filler metals, conventional arc welding power supplies, safety equipment and engine-driven welding power sources and began marketing such products through its established distribution network. The Company intends to continue this strategy of penetrating new welding product markets by leveraging its extensive distribution network in conjunction with its new product development and focused acquisition strategies. Broaden International Presence. Thermadyne has maintained an international presence for over 30 years and continues to broaden its presence throughout the world. International sales accounted for approximately 42% of net sales in 1997 as compared to approximately 20% in 1994. The Company has established a dedicated international market presence and maintains the leading position in Australia/New Zealand and significant and growing positions in Europe, Asia and Latin America. Management intends to continue the expansion of its strong domestic brand names into the international market and to continue to penetrate the growing Asian and Latin American cutting and welding markets. Continue Cost Reduction Efforts. Thermadyne strives to continually improve manufacturing efficiencies and reduce unit costs. In December 1997, the Company implemented a cost reduction program that includes the following principal elements: (i) vendor rationalization and consolidation; (ii) manufacturing process and productivity improvements and product design changes; (iii) personnel rationalization and expense reductions; (iv) advertising and trade show expense reductions; (v) aircraft, charter and other travel expense reductions; and (vi) elimination of the annual sales meeting. These cost reduction initiatives are expected to generate approximately $10 million in savings on an annualized basis. In addition, the Company has initiated the implementation of a new global information system that is designed to allow the Company to further integrate administrative functions and improve information flow across business unit lines. Continue Dedicated Customer Service. The Company believes that effective and proactive customer service has enabled the Company to build and maintain its leading market positions and strong distributor relationships. Management plans to continue this strategy of enhancing distributor and end-user relationships through continuous customer service improvements. Each of Thermadyne's divisions maintains a dedicated, well trained, technically oriented and product-specific sales and customer service team. Management believes that the dedicated product teams provide Thermadyne with a significant competitive advantage. In addition, to further improve customer service, the Company has implemented a national accounts team of 11 area business managers to support the dedicated product sales and service teams and further support sales to the Company's key distributors. THE MERGER AND MERGER FINANCING On May 22, 1998, Holdings consummated the merger of Mercury Acquisition Corporation ("Mercury"), a corporation organized by DLJ Merchant Banking Partners II, L.P. ("DLJMB") and affiliated funds and entities (the "DLJMB Funds") with and into Holdings, with Holdings continuing as the surviving corporation (the "Merger"). In order to fund the payment of the cash portion of the Merger Consideration (as defined herein), the Option Cash Proceeds (as defined herein) and the ESPP Cash Proceeds (as defined herein), to refinance and/or retire outstanding indebtedness of the Company, and to pay expenses incurred in connection with the Merger, the Issuers issued the Senior Subordinated Notes and the Company entered into a syndicated senior secured loan facility providing for term loan borrowings in the aggregate principal amount of approximately $330 million and revolving loan borrowings of $100 million (the "New Credit Facility"). In connection with the Merger, the Company borrowed all term loans available under the New Credit Facility plus approximately $25 million of revolving loans. The remaining revolving loans will be available to fund the working capital requirements of the Company. The proceeds of such financings were distributed to Holdings in the form of a dividend. See "Description of New Credit Facility," "The Merger and Merger Financing" and "Certain Relationships and Related Transactions." Mercury issued approximately $94.6 million aggregate gross proceeds of its 12 1/2% Senior Discount Debentures due 2008 (the "Debentures"). In connection with the Merger, Holdings succeeded to the obligations of Mercury with respect to the Debentures. The DLJMB Funds also purchased 2,608,696 shares of common stock of Mercury ("Mercury Common Stock"), 2,000,000 shares of senior exchangeable preferred stock of Mercury ("Mercury Preferred Stock") and warrants to purchase 353,428 shares of Mercury Common Stock at an exercise price of $0.01 per share (the "DLJMB Warrants") for approximately $140 million (the "DLJMB Equity Investment"). As a result of the Merger, the proceeds of such purchases became an asset of Holdings, each share of Mercury Common Stock became a share of common stock of Holdings ("Holdings Common Stock"), each share of Mercury Preferred Stock became a share of senior exchangeable preferred stock of Holdings ("Holdings Preferred Stock") and each DLJMB Warrant to acquire Mercury Common Stock became exercisable for an equal number of shares of Holdings Common Stock. In addition, in connection with the Merger, certain members of senior management purchased 143,192 shares of Holdings Common Stock for approximately $4.9 million (the "Management Share Purchase"), of which approximately $3.6 million was provided through non-recourse loans from Holdings (the "Management Loans"). The equity and debt financings referred to above are collectively referred to herein as the "Merger Financing." THE EXCHANGE OFFER The Exchange Offer......... $1,000 principal amount at maturity of New Senior Subordinated Notes in exchange for each $1,000 principal amount at maturity of Old Senior Subordinated Notes. The Old Senior Subordinated Notes were sold on May 22, 1998, in a private placement to Donaldson, Lufkin & Jenrette Securities Corporation ("DLJSC" or the "Initial Purchaser"), which immediately resold to the Old Senior Subordinated Notes pursuant to Rule 144A promulgated under the Securities Act (the "Original Offering"). As of the date hereof, Old Senior Subordinated Notes representing $207 million aggregate principal amount at maturity are outstanding. The terms of the New Senior Subordinated Notes and the Old Senior Subordinated Notes are substantially identical in all material respects, except that the New Senior Subordinated Notes will be freely transferable by the holders thereof except as otherwise provided herein. See "Description of New Senior Subordinated Notes." Based on an interpretation by the Commission's staff set forth in no-action letters issued to third parties unrelated to the Issuers and the Guarantors, the Issuers and the Guarantors believe that New Senior Subordinated Notes issued pursuant to the Exchange Offer in exchange for Old Senior Subordinated Notes may be offered for resale, sold and otherwise transferred by any person receiving the New Notes, whether or not that person is the registered holder (other than any such holder or such other person that is an "affiliate" of the Issuers or any Guarantor within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that (i) the New Senior Subordinated Notes are acquired in the ordinary course of business of that holder or such other person, (ii) neither the holder nor such other person is engaging in or intends to engage in a distribution of the New Senior Subordinated Notes and (iii) neither the holder nor such other person has an arrangement or understanding with any person to participate in the distribution of the New Senior Subordinated Notes. See "The Exchange Offer -- Purpose and Effect." Each broker-dealer that receives New Senior Subordinated Notes for its own account in exchange for Old Senior Subordinated Notes, where those Old Senior Subordinated Notes were acquired by the broker-dealer as a result of its market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of these New Senior Subordinated Notes. See "Plan of Distribution." Registration Rights Agreement................ In connection with the Original Offering, the Issuers and the Guarantors entered into a Registration Rights Agreement with the Initial Purchaser (the "Registration Rights Agreement") requiring the Issuers to make the Exchange Offer. See "The Exchange Offer -- Purpose and Effect." Expiration Date............ The Exchange Offer will expire at 5:00 p.m., New York City time, September 3, 1998, or such later date and time to which it is extended (the "Expiration Date"). Withdrawal................. The tender of the Old Senior Subordinated Notes pursuant to the Exchange Offer may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Any Old Senior Subordinated Notes not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Exchange Offer. Interest on the New Senior Subordinated Notes.................... Interest on each New Senior Subordinated Note will accrue from the date of issuance of the Old Senior Subordinated Note for which the New Senior Subordinated Note is exchanged or from the date of the last periodic payment of interest on such Old Senior Subordinated Note, whichever is later. No additional interest will be paid on Old Senior Subordinated Notes tendered and accepted for exchange. Conditions to the Exchange Offer.................... The Exchange Offer is subject to certain customary conditions, certain of which may be waived by the Issuers. See "The Exchange Offer -- Conditions to the Exchange Offer." Procedures for Tendering Old Senior Subordinated Notes.................... Each holder of Old Senior Subordinated Notes wishing to accept the Exchange Offer must complete, sign and date the Letter of Transmittal, or a copy thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver the Letter of Transmittal, or the copy, together with the Old Senior Subordinated Notes and any other required documentation, to the Exchange Agent (as defined herein) at the address set forth herein. Persons holding the Old Senior Subordinated Notes through the Depository Trust Company ("DTC") and wishing to accept the Exchange Offer must do so pursuant to the DTC's Automated Tender Offer Program, by which each tendering participant will agree to be bound by the Letter of Transmittal. By executing or agreeing to be bound by the Letter of Transmittal, each holder will represent to the Issuers that, among other things, (i) the New Senior Subordinated Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Senior Subordinated Notes, whether or not such person is the registered holder of the Old Senior Subordinated Notes, (ii) neither the holder nor any such other person is engaging in or intends to engage in a distribution of such New Senior Subordinated Notes, (iii) neither the holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Senior Subordinated Notes, and (iv) neither the holder nor any such other person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of the Issuers or any Guarantor. Pursuant to the Registration Rights Agreement, the Issuers are required to file a "shelf" registration statement for a continuous offering pursuant to Rule 415 under the Securities Act in respect of the Old Notes if (a) they are prohibited from consummating the Exchange Offer because the Exchange Offer is not permitted by applicable law or Commission policy or (b) any holder of Transfer Restricted Securities (as defined) notifies the Issuers in writing prior to the 20th business day following consummation of the Exchange Offer that (i) based on an opinion of counsel, it is prohibited by law or Commission policy from participating in the Exchange Offer or (ii) it is a broker-dealer and owns Senior Subordinated Notes acquired directly from the Issuers. Acceptance of Old Notes and Delivery of New Notes.... The Issuers and the Guarantors will accept for exchange any and all Old Senior Subordinated Notes which are properly tendered (and not withdrawn) in the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Senior Subordinated Notes issued pursuant to the Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offer -- Terms of the Exchange Offer." Exchange Agent............. State Street Bank and Trust Company is serving as Exchange Agent (the "Exchange Agent") in connection with the Exchange Offer. Federal Income Tax Considerations........... The exchange pursuant to the Exchange Offer should not be a taxable event for federal income tax purposes. See "Certain United States Federal Income Tax Considerations." Effect of Not Tendering.... Old Senior Subordinated Notes that are not tendered or that are improperly tendered and not accepted will, following the completion of the Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. The Issuers and the Guarantors will have no further obligation to provide for the registration under the Securities Act of such Old Senior Subordinated Notes. THE NEW SENIOR SUBORDINATED NOTES Securities Offered......... $207.0 million aggregate principal amount at maturity of 9 7/8% Senior Subordinated Notes due 2008. Issuers.................... The New Senior Subordinated Notes will be joint and several obligations of the Company and Thermadyne Capital. Thermadyne Capital is a Delaware corporation and wholly-owned subsidiary of the Company formed in connection with the Original Offering. Thermadyne Capital has no assets, no liabilities (other than the Senior Subordinated Notes), no substantial operations, and will be prohibited from engaging in any business activities. Maturity Date.............. June 1, 2008. Interest Payment Dates..... June 1 and December 1, commencing December 1, 1998. Optional Redemption........ The New Senior Subordinated Notes will be subject to redemption at any time on or after June 1, 2003 at the option of the Issuers, in whole or in part, in cash at the redemption prices set forth herein, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the applicable redemption date. Notwithstanding the foregoing, on or prior to June 1, 2001, the Issuers may redeem up to 35% of the aggregate principal amount of Senior Subordinated Notes ever issued under the Indenture in cash at a redemption price of 109.875% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the redemption date, with the net cash proceeds of one or more Public Equity Offerings; provided that at least 65% of the aggregate principal amount of Senior Subordinated Notes ever issued under the Indenture remains outstanding immediately after the occurrence of any such redemption. In addition, at any time prior to June 1, 2003, the Issuers may, at their option upon the occurrence of a Change of Control, redeem the New Senior Subordinated Notes, in whole but not in part, in cash at a redemption price equal to (i) the present value of the sum of all the remaining interest (excluding accrued and unpaid interest, if any), premium and principal payments that would become due on the New Senior Subordinated Notes as if the New Senior Subordinated Notes were to remain outstanding and be redeemed on June 1, 2003, computed using a discount rate equal to the Treasury Rate plus 50 basis points, plus (ii) accrued and unpaid interest and Liquidated Damages, if any, to the date of redemption. See "Description of New Senior Subordinated Notes -- Optional Redemption." Change of Control.......... Upon the occurrence of a Change of Control, each Holder of New Senior Subordinated Notes will have the right to require the Issuers to repurchase all or any part of such Holder's New Senior Subordinated Notes at an offer price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the date of repurchase. No assurance can be given that the Issuers will have sufficient resources to satisfy their repurchase obligation with respect to the New Senior Subordinated Notes following a Change of Control. See "Risk Factors -- Possible Inability to Repurchase New Senior Subordinated Notes upon Change of Control" and "Description of New Senior Subordinated Notes -- Repurchase at the Option of Holders -- Change of Control." Ranking.................... The New Senior Subordinated Notes will be general unsecured obligations of the Issuers and will be subordinated in right of payment to all existing and future Senior Indebtedness of the Issuers, including indebtedness pursuant to the New Credit Facility. The New Senior Subordinated Notes will rank pari passu with any future senior subordinated indebtedness of the Issuers and will rank senior to all Subordinated Indebtedness of the Issuers. The New Senior Subordinated Notes will be effectively subordinated to all liabilities of the Issuers' subsidiaries that are not Guarantors. On a pro forma basis after giving effect to the Merger, including the Merger Financing and the application of proceeds thereof, as of March 31, 1998, the Company and the Guarantors would have had outstanding approximately $379.5 million of Senior Indebtedness and the Company's non-Guarantor subsidiaries would have had approximately $87.0 million of outstanding liabilities, including trade payables. Note Guarantees............ The New Senior Subordinated Notes will be unconditionally guaranteed on a senior subordinated basis by the Guarantors. The Note Guarantees will be general unsecured obligations of the Guarantors, will be subordinated in right of payment to all existing and future Senior Indebtedness of the Guarantors, including indebtedness under the New Credit Facility, and will rank senior in right of payment to any future subordinated indebtedness of the Guarantors. See "Description of New Senior Subordinated Notes -- Note Guarantees." Certain Covenants.......... The Indenture pursuant to which the New Senior Subordinated Notes will be issued (the "Indenture") contains certain covenants that, among other things, limit the ability of the Issuers and their Restricted Subsidiaries (as defined herein) to: incur indebtedness and issue preferred stock, repurchase Capital Stock (as defined herein) and Indebtedness subordinated to the New Senior Subordinated Notes, engage in transactions with affiliates, engage in sale and leaseback transactions, incur or suffer to exist certain liens, pay dividends or other distributions, make investments, sell assets and engage in certain mergers and consolidations. Use of Proceeds............ There will be no cash proceeds to the Issuers from the exchange pursuant to the Exchange Offer. The net proceeds from the Original Offering, together with the initial borrowings under the New Credit Facility, the DLJMB Equity Investment and the issuance of the Debentures, were used to fund payment of the cash portion of the Merger Consideration, the Option Cash Proceeds and the ESPP Cash Proceeds, to refinance outstanding indebtedness of the Company and to pay the expenses incurred in connection with the Merger. See "Use of Proceeds."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001064637_time_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001064637_time_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the Company's financial statements, including the notes thereto, appearing elsewhere in this Prospectus. As used herein, the term 'Company' refers to Time Warner Telecom LLC, its consolidated and unconsolidated subsidiaries, including TWT, and all operations of the Company that were historically conducted by the Members (as defined herein). The term 'Members' refers to Time Warner Inc. and certain of its subsidiaries (collectively, 'TW'), MediaOne Group, Inc. and certain of its subsidiaries (collectively, 'MediaOne'), and Advance/Newhouse Partnership ('Newhouse'). TW and MediaOne, through certain subsidiaries, are partners in Time Warner Entertainment Company, L.P. ('TWE'). TWE and Newhouse are partners in Time Warner Entertainment-Advance/Newhouse Partnership ('TWE-A/N'). The term 'TW Cable' refers collectively to the cable systems owned by subsidiaries and divisions of TWE, TWE-A/N and TW. The Company was recently formed in connection with a reorganization (the 'Reorganization') of the assets and liabilities of its business, which were previously owned by subsidiaries and divisions of TWE, TWE-A/N and TW (together, the 'Parent Companies'). The Reorganization was consummated on July 14, 1998. In connection with the Reorganization, TW, MediaOne and Newhouse received 61.95%, 18.88%, and 19.17% respectively, of the limited liability company interests in the Company. See 'The Reorganization' and 'Principal Members.' Unless otherwise indicated, the information set forth in this Prospectus gives effect to the transactions described herein under 'The Reorganization.' See 'Glossary' for definitions of certain other terms used in this Prospectus. THE COMPANY The Company is a leading facilities-based competitive local exchange carrier ('CLEC') in selected metropolitan areas across the United States, offering a wide range of business telephony services, primarily to medium- and large-sized business customers and other carriers. The Company's customers are principally telecommunications-intensive business end-users, long distance carriers ('IXCs'), Internet service providers ('ISPs'), wireless communications companies and governmental entities. Such customers are offered a wide range of integrated telecommunications services, including dedicated transmission, local switched, data and video transmission services and certain Internet services. The Company has deployed switches in 16 of its 19 service areas as of March 31, 1998, and management expects that a growing portion of the Company's revenues will be derived from providing switched services. In addition, the Company benefits from its strategic relationship with TW Cable both through network facilities access and cost-sharing. As a result, the Company's networks have been constructed primarily through licensing the use of fiber capacity from TW Cable. As of March 31, 1998, the Company operated networks in 19 metropolitan areas that spanned 6,239 route miles, contained 244,894 fiber glass miles and offered service to 2,711 buildings. Consolidated revenues for the Company, which have historically been primarily derived from private line services, grew by 117.2% for the three months ended March 31, 1998 as compared to the same period in 1997. The business of the Company was commenced in 1993 by TW Cable, originally to provide certain telephony services together with cable television. In January 1997, the Company put in place a new management team that is implementing a business strategy focused on exclusively serving business customers, rapidly providing switched services in all the Company's service areas and expanding the range of business telephony services offered by the Company. The Company believes that the Telecommunications Act of 1996 (the '1996 Act') and certain state regulatory initiatives provide increased opportunities in the telecommunications marketplace by opening all local service areas to competition and requiring incumbent local exchange carriers ('ILECs') to provide increased direct interconnection. According to the Federal Communications Commission (the 'FCC'), in 1996 the total revenues for the telecommunications industry amounted to approximately $222 billion, of which approximately $122 billion was local service and approximately $100 billion was long distance. BUSINESS STRATEGY The Company's primary objective is to be a leading CLEC in its existing and future service areas, offering medium- and large-sized businesses superior telecommunications services through advanced networks. The key elements of the Company's business strategy include the following: Leverage Existing Fiber Optic Networks. The Company has designed and built its networks to serve geographic locations where management believes there are large numbers of potential customers. As of March 31, 1998, the Company operated networks that spanned 6,239 route miles and contained 244,894 fiber miles. The Company's highly concentrated networks have yet to be fully exploited and provide the capacity to serve a substantially larger base of customers. Management believes that the Company's extensive fiber network capacity allows it to: (i) increase orders substantially from new and existing customers without incurring significant additional capital expenditures and operating expenses; (ii) emphasize its facilities-based services rather than resales of network capacity of other providers; and (iii) exert greater control over its services than the Company's competitors that are dependent upon off-net facilities, thereby providing better customer service. Expand Switched Services. The Company provided a broad range of switched services in 16 of its service areas as of March 31, 1998, and plans to provide switched services in all of its current service areas by the end of 1999. For the three months ended March 31, 1998, consolidated revenues from switched service grew by 187.0% as compared to the same period in 1997. Because the demand for switched services is greater than for dedicated transport services, and the Company has been rapidly installing switches in its markets, Management expects the Company to derive a growing portion of its revenues from switched services. Target Medium- and Large-Sized Business Customers. The Company operates networks in metropolitan areas that have high concentrations of medium- and large-sized businesses. Such businesses tend to be telecommunications-intensive and are more likely to seek the greater reliability provided by an advanced network such as the Company's. Thus, management believes that significant economies of scale may be achieved by focusing and intensifying its sales and marketing efforts on such businesses as they are potentially high volume users of the Company's services. To drive revenue growth in these markets, the Company is aggressively expanding its direct sales force to focus on such business customers. Interconnect Service Areas within Clusters. The 19 service areas in which the Company currently operates are grouped in six geographic clusters across the United States. The Company plans to interconnect each service area within a cluster with broadband, fiber optic facilities of its own or licensed from TW Cable and/or third parties. Interconnecting the service areas within a cluster will enable the Company to increase its revenue potential by addressing customers' regional long distance voice, data and video requirements. In 1998, management plans to begin interconnecting service areas within the Company's Midwest, Southwest and Southeast clusters. Utilize Strategic Relationships with TW Cable. The Company has benefited from and continues to leverage its relationships with TW Cable, the second largest multiple system cable operator in the U.S., by licensing and sharing the cost of digital fiber optic facilities. This licensing arrangement allows the Company to benefit from TW Cable's access to rights-of-way, easements, poles, ducts and conduits. By leveraging its existing relationship with TW Cable, the Company believes that it can increase revenues, benefit from existing regulatory approvals and licenses, derive economies of scale in network costs and extend its existing networks in a rapid, efficient and cost-effective manner. Furthermore, management believes that the strong awareness and positive recognition of the 'Time Warner' brand name significantly contributes to its marketing programs and sales efforts by distinguishing it from its competitors. Expand Product Offerings. The Company intends to increase revenues and cash flows by developing and tailoring diversified bundles of telephony services for its customers. The services currently offered by the Company include a wide range of dedicated transmission, local switched, data and video transmission services and certain Internet services. The Company intends to offer additional services including long distance service and other high speed data transport services. The Company generally develops its customer base by first offering basic telecommunications services to its new customers. As the needs of such customers change and develop, the Company selectively bundles and offers more sophisticated, higher margin products and services to them. Enter into New Geographic Areas. The Company's strategy is to target metropolitan areas possessing demographic, economic and telecommunications demand profiles that it believes provide it with the potential to generate an attractive economic return. Currently, the Company operates networks in a total of 19 metropolitan areas. Management plans to have networks in operation or under construction in several additional service areas by the end of 1999, most of which will be in service areas where TW Cable has already made substantial infrastructure investments. By licensing capacity from TW Cable's existing fiber optic networks, the Company can develop new networks quickly and cost-effectively, thereby giving it a competitive advantage over other CLECs. See 'Certain Relationships and Related Transactions -- Certain Operating Agreements.' Continue Disciplined Expenditure Program. The Company increases operational efficiencies by pursuing a disciplined approach to capital expenditures. This capital expenditure program requires that prior to making any expenditure on a project, the project must be expected to meet stringent financial criteria such as minimum recurring revenue, cash flow margins and rate of return. In addition, to control capital expenditures and share the risks of developing costly new networks, management is considering establishing strategic alliances with other telecommunications providers in the form of joint ventures and possible co-branding marketing programs. FINANCING PLAN The Company expects that the net proceeds of the Offering, together with internally generated funds, will provide sufficient funds for the Company to expand its business as currently planned, pay interest on the Notes and fund its currently expected losses through the end of 1999. Thereafter, the Company expects to require additional financing. See 'Use of Proceeds.' THE REORGANIZATION The Company was recently formed in connection with the Reorganization of the assets and liabilities of its business, which were previously owned by subsidiaries and divisions of the Parent Companies. In connection with the Reorganization, the Members received all the outstanding limited liability company interests in the Company. The interests in the Company are divided into Class A limited liability company interests (the 'Class A Interests') and Class B limited liability company interests (the 'Class B Interests' and, together with the Class A Interests, the 'Interests'). The holders of the Class A Interests have virtually no voting or approval rights, except with respect to an amendment of the LLC Agreement (as defined) which is adverse to the interests of the holders of such class, and the holders of the Class B Interests have the voting rights set forth in the LLC Agreement. The Company has not issued any Class A Interests and the Members hold 100.0% of the Class B Interests. See 'The Reorganization' and 'Principal Members.' TWT has no operations or assets and was formed solely for the purpose of serving as co-obligor of the Notes. The Company and TWT will be jointly and severally liable, fully and unconditionally, with respect to the Notes. Accordingly, a claimant in respect of the Notes will be entitled to proceed against the Company in respect of the Notes without first proceeding against TWT. The Amended and Restated Limited Liability Company Agreement of the Company (the 'LLC Agreement') provides that if the Members unanimously agree to do so, the Company will be reconstituted (either by merger, exchange, contribution of assets or a similar type of transaction) as a Delaware corporation (the 'Reconstitution') so that an initial public offering of the Class A Common Stock of such corporation (an 'Initial Public Offering') may be effected. Upon the Reconstitution, the Company will have authorized two classes of common stock, Class A Common Stock ('Class A Common Stock'), which will carry one vote per share, and Class B Common Stock ('Class B Common Stock', and together with Class A Common Stock, 'Common Stock') which will carry ten votes per share. Pursuant to the Reconstitution, holders of Class B Interests will receive shares of Class B Common Stock and holders of Class A Interests, if any, will receive shares of Class A Common Stock. As used herein, the term 'Existing Stockholders' means the Members who become holders of Common Stock following the Reconstitution. In connection with the Reconstitution, the Existing Stockholders will enter into a Stockholders' Agreement (the 'Stockholders Agreement') which will provide for the election of directors designated by the Existing Stockholders, and will govern transfers of Common Stock by the Existing Stockholders. See 'Certain Relationships and Related Transactions -- LLC Agreement' and ' -- Stockholders Agreement.' There can be no assurances that the Members will unanimously agree to the Reconstitution or that an Initial Public Offering will be effected. The Company was organized as a limited liability company in the State of Delaware in 1998 and TWT was incorporated in the State of Delaware in 1998. The Company's and TWT's principal executive offices are located at 5700 S. Quebec Street, Greenwood Village, CO 80111, and their telephone number is (303) 566-1000. THE OFFERING <TABLE> <S> <C> Securities Offered..................... $400.0 million aggregate principal amount of % Senior Notes due 2008 (the 'Offering'). Maturity............................... July 15, 2008 Yield and Interest..................... Interest on the Notes is payable semiannually in cash on January 15 and July 15 of each year, commencing on January 15, 1999. Optional Redemption.................... The Notes are redeemable prior to maturity, in whole or in part, at the option of the Obligors at any time on or after July 15, 2003, initially at % of their principal amount, plus accrued interest, declining to 100% of their principal amount, plus accrued interest, on or after July 15, 2006. In addition, at any time prior to July 15, 2001, up to 35% of the aggregate principal amount of the Notes may be redeemed by the Obligors from the net proceeds of one or more sales of the common stock or equivalent interests of the Company or any successor thereto at % of their principal amount plus accrued interest to the date of redemption; provided, however, that after any such redemption at least 65% of the aggregate principal amount of the Notes originally issued remains outstanding. See 'Description of the Notes.' Change of Control...................... Upon a Change of Control (as defined), the Obligors will be required to make an offer to purchase the Notes at a purchase price equal to 101% of the principal amount thereof, plus accrued interest. There can be no assurance that the Obligors will have sufficient funds available at the time of any Change of Control to make any required debt repayment (including repurchases of the Notes). See 'Description of the Notes -- Repurchase of Notes upon a Change of Control.' Ranking................................ The Notes will be general, unsecured senior obligations of the Obligors, ranking pari passu in right of payment with all existing and future unsecured unsubordinated obligations, and senior in right of payment to all existing and future subordinated indebtedness of the Obligors. The Notes will also be subordinated to all existing and future secured indebtedness of the Obligors to the extent of such security. At March 31, 1998, on a pro forma basis after giving effect to the Offering, the Obligors would have had outstanding approximately $517.5 million of indebtedness, approximately $117.5 million of which would have been expressly subordinated in right of payment to the Notes. At March 31, 1998, on the same pro forma basis, the Obligors would not have had any indebtedness ranking senior to the Notes. In addition, the Company is a holding company and the Notes will be effectively subordinated to all existing and future liabilities (including trade payables) of the Company's subsidiaries other than TWT. At March 31, 1998, on the same pro forma basis, the subsidiaries of the Company other than TWT would have had $57.3 million of liabilities, none of which is indebtedness. Neither the Company's subsidiaries nor any other entity has guaranteed the Notes. The Obligors will be jointly and severally liable, fully and unconditionally, with respect to the Notes. See 'Description of the Notes -- Ranking.' Certain Covenants...................... The Indenture (as defined) will contain certain covenants, including, but not limited to, covenants with respect to the following matters: (i) limitation on indebtedness; (ii) limitation on restricted payments; (iii) limitation on dividend and other payment restrictions affecting </TABLE> <TABLE> <S> <C> restricted subsidiaries; (iv) limitation on the issuance and sale of capital stock of restricted subsidiaries; (v) limitation on issuances of guarantees by restricted subsidiaries; (vi) limitation on transactions with shareholders and affiliates; (vii) limitation on liens; (viii) limitation on sale-leaseback transactions; and (ix) limitation on asset sales. See 'Description of the Notes -- Certain Covenants' and 'Description of Certain Indebtedness.' Use of Proceeds........................ The net proceeds to the Obligors from the Offering will be used to expand and develop existing and new networks and for general corporate and working capital purposes, which may include payment of interest on the Notes and acquisitions of and joint ventures with other telecommunications service providers. See 'Use of Proceeds.'
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001065269_applied_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001065269_applied_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, contained elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus gives effect, immediately prior to the consummation of the Offering, to the Reorganization as described in "Reorganization and S Corporation Distribution." References herein to the "Company" or "Applied Systems" shall be deemed, unless the context otherwise indicates, to include (i) with respect to periods following the consummation of the Offering, Applied Systems, Inc., a Delaware corporation, and its subsidiaries, and (ii) with respect to periods preceding the consummation of the Offering, ASI, Asktom and TAM UK, each as defined in "Reorganization and S Corporation Distribution." Unless otherwise indicated, the information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. See "Underwriting." Certain technical terms are used throughout this Prospectus and are defined in a glossary of terms below. See "Glossary of Terms." THE COMPANY Applied Systems is a leading designer, developer and marketer of automation software for independent insurance agencies. The Company's principal product, The Agency Manager(R) ("TAM"), significantly improves the productivity and efficiency of independent property and casualty ("P&C") insurance agencies by combining client management, policy pricing, electronic data interchange ("EDI"), policy and claims servicing, and accounting and back office administration into an easy to use, completely integrated, single-entry software solution. Since the Company's founding in 1980, the Company's products have been designed to operate on a personal computer platform, and currently support implementations ranging from single users to large local area and wide area networks. A significant advantage of TAM over competing products is that it enables agencies to electronically transmit and receive industry standard information to and from multiple insurance carriers through EDI. Estimates prepared by ACORD, an independent insurance industry association, indicate that the Company leads the P&C insurance industry in EDI capabilities, with TAM enabling over 40% of all industry standard electronic communication links between agencies and carriers. The Company expects general release of its newest TAM product, TAM-Vision Series, in the fourth quarter of 1998. TAM-Vision Series is a Windows NT, 32-bit, client/server product that is designed to support the next generation of industry object-based EDI standards. The Company currently serves over 7,500 agencies, representing over 70,000 concurrent licensed users. Fifteen percent of the approximately 44,000 independent P&C insurance agencies in the U.S. are currently customers of Applied Systems. The Company has begun to leverage its insurance industry expertise through the introduction of software solutions for P&C insurance carriers. The Company's Diamond System is a fully integrated Microsoft Windows-based insurance carrier automation system that offers real-time processing of policies and claims, automates billing and facilitates the production of regulatory and statistical reports. The Diamond System provides established EDI connections with the Company's insurance agency customers, which the Company believes comprise the largest base of independent agencies on a single EDI-enabled system, as well as with other insurance agencies operating on industry standard systems. The Company has sold the Diamond System to 13 insurance carriers to date, and recently began an active marketing program for the product. There are approximately 2,400 insurance carriers in the P&C industry in the U.S., most of which have multiple lines of business in a number of states, representing an attractive market opportunity for the Diamond System. Applied Systems also provides its customers with support and maintenance services, implementation and consulting services, and third-party equipment and software. In 1997, approximately 35% of the Company's revenue was attributable to support and maintenance agreements. These agreements entitle customers to unlimited support as well as product enhancements and new versions of the Company's products. Product enhancements and new versions are introduced regularly to offer additional functionality and respond to changes in state insurance regulations and other insurance industry and technological developments. As evidence of their high level of satisfaction with the Company's products and services, approximately 96% of TAM customers since 1996 have annually renewed their support and maintenance agreements. A.M. Best Company estimates that approximately $276 billion in total premiums were written in the P&C insurance industry in the U.S. in 1997. The Company estimates that agencies and carriers collectively spend a total of approximately 3-4% of such premiums on information technology, including automation software and data processing. The Company expects this spending to increase as competitive pressures on premiums for carriers and on commissions for agencies continue to necessitate productivity and efficiency improvements. Management believes insurance agencies are automating to become more efficient across all areas of their business, allowing them to dedicate more time to providing customer service, soliciting and developing new clients and retaining and leveraging existing accounts. Insurance carriers are also focusing on automation, with many upgrading their systems to more current technologies, often developed and serviced by third-party vendors, in order to realize efficiencies and to reduce the size of their in-house technical and data processing staffs. In addition to efforts to improve automation internally, P&C insurance carriers are actively promoting automation for the independent agencies who sell their products. Some insurance carriers provide incentives to agencies that elect to automate, such as offering financing for or subsidizing the purchase of an automation system or paying higher commissions to automated agencies. Automation and EDI allow insurance agencies to efficiently access policy and pricing data electronically from insurance carriers. Both insurance agencies and carriers are focusing on EDI because it allows for a higher level of cost-efficient communication with fewer redundant steps and reduced exposure to errors and omissions. Applied Systems, Inc. was incorporated in Delaware in June 1998 and is the holding company for a business founded in 1980. The Company's principal place of business is located at 200 Applied Parkway, University Park, IL 60466, and its telephone number is (708) 534-5575. The Company's Internet site is http://www.appliedsystems.com. THE OFFERING Shares Offered by the Company................. shares Shares Offered by the Selling Stockholders.... shares Common Stock Outstanding Immediately After the Offering...................................... shares(1) Use of Proceeds............................... General corporate purposes, including working capital, product development and possible acquisitions. See "Use of Proceeds." Proposed Nasdaq National Market Symbol........ APPS - ------------------------- (1) Excludes (i) 1,500,000 shares of Common Stock reserved for issuance under the Company's Stock Option Plan, including shares of Common Stock reserved for issuance pursuant to stock options being granted to certain employees in connection with the Offering at the initial public offering price, and (ii) 350,000 shares of Common Stock reserved for issuance pursuant to the Company's Employee Stock Purchase Plan. See "Management -- Stock Plans." SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, ----------------------------------------------- ------------------ 1993 1994 1995 1996 1997 1997 1998 ------- ------- ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenue........................... $48,696 $61,041 $63,234 $64,956 $76,068 $34,898 $45,334 Gross profit...................... 25,009 27,514 29,464 29,828 36,688 16,199 22,425 Harbor Software litigation and related items(1)............. -- 54 137 6,237 (3,508) 251 -- Operating income (loss)........... 1,762 1,964 2,878 (2,919) 8,713 1,249 4,111 Net income (loss)(2).............. 1,336 1,577 2,492 (3,288) 8,487 1,088 4,057 PRO FORMA STATEMENT OF OPERATIONS DATA(3): Operating income.................. $(1,775) $ 9,783 $ 1,784 $ 4,321 Income tax provision (benefit).... (707) 3,841 693 1,739 Net income........................ (1,106) 6,008 1,083 2,720 Net income per share.............. $ $ $ $ Weighted average shares outstanding(4)................. </TABLE> <TABLE> <CAPTION> JUNE 30, 1998 ------------------------ PRO FORMA ACTUAL AS ADJUSTED(5) ------- -------------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................. $ 6,977 Working capital (deficit)................................. (11,478) Total assets.............................................. 32,762 Total debt................................................ 249 Stockholders' equity...................................... 176 </TABLE> - ------------------------- (1) Represents a charge (credit) related to litigation between the Company and Harbor Software, Inc. ("Harbor"). See Note 12 of Notes to Combined Financial Statements. See "Risk Factors -- Proprietary Rights; Risk of Infringement." (2) Net income (loss) excludes (i) accretion related to the redemption feature on certain common shares of ASI and (ii) the provision for federal and certain state income taxes due to ASI's status as an S corporation. ASI's S corporation status will terminate at the end of the day preceding the Reorganization. See "Reorganization and S Corporation Distribution." (3) Pro forma to give effect to: (i) the elimination of employee compensation for Robert R. Eustace and Elsa M. Eustace, who upon consummation of the Offering will no longer be employed by the Company or receive compensation from the Company; (ii) the elimination of accretion resulting from the elimination of the redemption feature on certain shares of ASI common stock; and (iii) income tax expense that would have been recorded based on effective tax rates had ASI been taxed as a C corporation during these periods. The duties performed by Robert R. Eustace have been transitioned to James P. Kellner, who is receiving additional compensation effective January 1998 to reflect these added responsibilities. Mr. Kellner has been President of ASI since 1991. During 1997 Mr. Kellner was promoted to CEO and during 1998 he was promoted to Chairman. The duties performed by Elsa M. Eustace have been transitioned to Timothy J. McIntyre, who has been employed by ASI since May of 1998. A portion of Mr. McIntyre's compensation is attributable to these added responsibilities. The following is a tabular reconciliation of the historical and pro forma amounts: <TABLE> <CAPTION> YEARS ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, ------------------ ----------------- 1996 1997 1997 1998 ------- ------- ------ ------- <S> <C> <C> <C> <C> Net income (loss) available to common stockholders, as reported........................................ $(3,288) $ 8,409 $1,088 $ 4,025 Elimination of Robert R. and Elsa M. Eustace's salary(i).......................................... 1,244 1,170 585 215 Additional compensation for James P. Kellner and Timothy J. McIntyre(i)............................. (100) (100) (50) (5) Elimination of accretion(ii)......................... -- 77 -- 32 Tax benefit (expense)(iii)........................... 1,038 (3,548) (540) (1,547) ------- ------- ------ ------- Pro forma net income (loss).......................... $(1,106) $ 6,008 $1,083 $ 2,720 ======= ======= ====== ======= </TABLE> (4) The number of shares estimated to be outstanding after the Reorganization, but prior to consummation of the Offering. (5) Pro forma as adjusted to give effect to (i) payment of an aggregate amount of $11.0 million to ASI's current stockholders, representing the estimated undistributed previously taxed S corporation earnings through the date of the Offering, approximately $6.0 million of which is cash and approximately $5.0 million of which is represented by the S Corporation Notes (as defined herein), (ii) the recording of a deferred tax asset that will be recognized as a result of the termination of ASI's S corporation status, which amount would have been approximately $2.6 million as of June 30, 1998, and (iii) the sale of shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $ , and the application of the estimated net proceeds therefrom as described in "Use of Proceeds." See "Reorganization and S Corporation Distribution."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001065471_triarco_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001065471_triarco_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information contained in this Prospectus, including "Risk Factors" and the Financial Statements and Notes thereto. Except as otherwise noted, all references to the "Company" include its predecessors and all information in this Prospectus (i) assumes no exercise of the Underwriters' over-allotment option and (ii) gives effect to a 4,469-for-1 split of the shares of Common Stock to be effected prior to consummation of this offering. See "--Corporate Consolidation," "Description of Capital Stock" and "Underwriting." Compound annual growth rate, or "CAGR," represents the constant annual rate of growth over a period required to achieve specified values at the beginning and end of such period. Caution should be used to avoid confusion of CAGRs with actual annual growth rates on a year to year basis. THE COMPANY The Company is a leading vertically integrated supplier of high-quality, high-purity natural product ingredients in "ready-to-run" form to nutritional supplement manufacturers. The Company cultivates, procures, cleans, processes, grinds, granulates, blends and formulates premium natural products that meet the increasing demands of its customers for value-added ingredients. The Company works closely with these customers in developing products that meet the customers' desired label claims with consistent and measurable compounds. Moreover, the Company's ingredients are "ready-to-run," which enables its customers to introduce these ingredients immediately into the manufacturing process without additional preparation. The Company develops various ready-to- run forms that accommodate customers' existing tablet, capsule, powder or liquid packaging capabilities. In addition, the Company provides to its customers value-added technical and research and development ("R&D") support. In 1997, the Company manufactured over 700 products in three categories, botanicals (herbs), teas and specialty products, which accounted for 55.6%, 27.7% and 16.7% of net sales, respectively. The Company's customers include a diverse range of nutritional supplement manufacturers which process the Company's natural product ingredients into consumer salable form which are then marketed through various distribution channels. These distribution channels include (i) multi-level marketers such as Herbalife International Inc. ("Herbalife") and Amway Corporation ("Amway"), (ii) specialty health products retailers such as General Nutrition Companies, Inc. ("GNC"), Whole Foods Market Inc. ("Whole Foods") and Wild Oats Markets Inc. ("Wild Oats") and (iii) mass market retailers such as major drug stores, supermarkets and discount stores. Under the dedication and leadership of the Rohde family, who share more than 40 years experience in the nutritional supplements industry, the Company has developed long-standing relationships with industry leaders including GNC, Global Health Sciences, Inc. ("Global Health") (a major manufacturer for Herbalife), Pharmavite Corporation ("Pharmavite") and Rexall Sundown, Inc. ("Rexall Sundown"). GNC's manufacturing subsidiary and Global Health represented approximately 36.6% and 35.9%, respectively, of the Company's net sales in 1997, and in common with peers in its industry, the Company does not have long-term contracts with these or other customers. Each distribution channel targets consumers with specific purchasing characteristics with respect to product formulation, quality and price. By maintaining the flexibility to effectively assist its customers in meeting these diverse consumer requirements, the Company believes it maximizes its ability to continually increase the breadth and depth of its customer base. Quality assurance and quality control are a fundamental aspect of the Company's business strategy. These disciplines are designed to address both the quality of the Company's botanical manufacturing process and the identity and purity of the Company's ingredients. The Company continues to invest in agricultural, scientific and manufacturing assets and personnel and is committed to elevating the standards for acceptable purity, consistency and quality of natural product ingredients, thus establishing a competitive advantage over other ingredient suppliers. In conjunction with this effort, the Company launched its agricultural division (the "Agricultural Division") in late 1996 by leasing a 500 acre certified organic farm, principally for the purpose of conducting agricultural R&D. In addition, the Company is currently constructing a state-of-the-art herbal processing facility (the "Herbal Processing Facility") that will expand its botanical processing capacity and capabilities. The Company believes that it is well positioned to capitalize on the continued growth in the nutritional supplements industry. According to the Packaged Facts Report (as defined herein), the retail market for vitamins, minerals and other supplements (excluding sports nutrition and diet products) has grown at a CAGR of 15% from $3.7 billion in 1992 to $6.5 billion in 1996. A large portion of this growth is attributable to an increase in sales of other supplements (primarily herbal products), which grew from $570 million in 1992 to $2.3 billion in 1996. According to the Packaged Facts Report, CAGRs from 1992 through 1996 for vitamins, minerals and other supplements were 8.0%, 5.2% and 41.7%, respectively. In addition, the Packaged Facts Report forecasts a 13.6% CAGR in the market for vitamins, minerals and other supplements (excluding sports nutrition and diet products), including a 25% CAGR in the market for other supplements, through 2001. See "Business--Industry Growth" for detailed information regarding annual growth rates underlying CAGRs. Since its inception in 1978, the Company has experienced rapid growth in net sales and operating income. From 1993 to 1997, net sales and operating income have grown at CAGRs of 34.6% and 84.5%, respectively. Net sales were $42.0 million and $22.9 million and operating income was $8.3 million and $4.8 million in 1997 and the six months ended June 30, 1998, respectively. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company......................3,300,000.shares Common Stock to be outstanding after this offering.......12,693,838 shares(1) Use of proceeds..........................................For repayment of outstanding indebtedness, expansion of the Company's Agricultural Division and Herbal Processing Facility, expansion of R&D and management information system ("MIS") functions, launching a branding initiative with respect to certain of the Company's products, and working capital and general corporate purposes, including potential acquisitions. See "Use of Proceeds." Proposed Nasdaq National Market symbol...................TRCO </TABLE> - -------- (1) Excludes shares to be issuable upon exercise of stock options expected to be granted on or after the consummation of this offering at an exercise price equal to the closing price of the Common Stock on the Nasdaq National Market on the date of grant (or 110% thereof in the case of greater than 10% stockholders). See "Capitalization" and "Management--Employee Benefit Plans--1998 Omnibus Stock Incentive Plan." -------------------- The Company was incorporated under the laws of Delaware in June 1998, and its principal executive offices are located at 400 Hamburg Turnpike, Wayne, New Jersey 07470, telephone number: (973) 942-5100. SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, --------------------------------------- --------------- 1993 1994 1995 1996 1997 1997 1998 ------- ------- ------- ------- ------- ------- ------- (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> <C> STATEMENTS OF OPERATIONS DATA(1): Net sales............... $12,783 $28,169 $23,646 $32,012 $41,995 $18,706 $22,881 Gross profit............ 5,651 14,529 9,398 14,018 17,400 7,638 9,575 Operating income........ 718 9,429 3,693 6,506 8,327 3,336 4,724 Net income.............. 294 7,423 3,655 6,250 8,125 3,261 4,754 PRO FORMA DATA (UNAU- DITED): Historical income before income taxes........... 8,460 4,917 Pro forma adjustments other than income taxes(2)............... 1 88 ------- ------- Pro forma income before income taxes........... 8,461 5,005 Pro forma provision for income taxes(3)........ 3,394 1,970 ------- ------- Pro forma net income.... $ 5,067 $ 3,035 ======= ======= Pro forma earnings per share(4)............... $ $ ======= ======= Pro forma weighted average shares outstanding(4)......... </TABLE> <TABLE> <CAPTION> JUNE 30, 1998 ----------------------------------- PRO FORMA ACTUAL PRO FORMA(5) AS ADJUSTED(6) ------- ------------ -------------- (UNAUDITED) <S> <C> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents.................. $ 763 $ 763 $ Working capital............................ 339 609 Total assets............................... 23,421 23,795 Total debt, including current portion...... 9,515 13,465 -- Stockholders' equity....................... 4,765 5,139 </TABLE> - -------- (1) To the extent set forth in the Financial Statements, each of the Predecessor Companies (as defined herein) was treated as an S corporation and therefore was not subject to federal income taxes and was subject to a reduced corporate rate for state income taxes. As a result, income was passed through to the respective shareholders for tax purposes. See Note 11 to the Financial Statements and Note 3 below. (2) Pro forma adjustments other than income taxes represents a reduction in interest expense assuming the application of proceeds from the sale of sufficient shares of Common Stock to repay all of the Company's outstanding debt. See Note 4 below. (3) Pro forma provision for income taxes is calculated as if the Company had been subject to federal and additional state income taxes since January 1 of each period and represents an increase in income taxes of approximately $3,059 and $1,807 in 1997 and for the six months ended June 30, 1998, respectively. See "--Corporate Consolidation" and "Use of Proceeds." (4) Pro forma earnings per share is based on (i) pro forma net income as indicated and (ii) 9,394 shares of Common Stock outstanding prior to this offering, increased by the sale of sufficient shares of Common Stock, assumed to be shares based on an assumed initial public offering price of $ per share, to repay the Company's outstanding debt, assumed to be $13,465, composed of $10,965 under the Term Notes (as defined herein) and $2,500 under the revolving credit facility. (5) Pro forma to reflect (i) the distribution of $10,965 to the shareholders of the Predecessor Companies, funded by the Term Notes and (ii) a net deferred tax asset of approximately $374 which the Company will record concurrently with becoming a C corporation. See "--Corporate Consolidation." (6) Pro forma as adjusted to reflect the sale of 3,300 shares of Common Stock offered hereby at an assumed initial public offering price of $ per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001066275_chemical_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001066275_chemical_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY Concurrently with and as a condition to the consummation of the offering made hereby (the "Offering"), Chemical Logistics Corporation plans to acquire, in separate transactions (collectively, the "Acquisitions"), for consideration including cash and shares of its Common Stock (the "Acquisitions Consideration"), the following nine entities engaged in the chemical distribution business: G. S. Robins & Company ("Robins"), Industrial Chemicals, Inc. ("Industrial"), Southwest Solvents & Chemicals and certain of its affiliated entities ("Southwest Solvents"), Chemical Solvents, Inc. and one affiliated entity ("Chemical Solvents"), Tilley Chemical Company, Inc. and one affiliated entity ("Tilley"), Cron Chemical Corporation and certain of its affiliated entities ("Cron"), Brown Chemical Company, Inc. and one affiliated entity ("Brown"), Tarr, Inc. and certain of its affiliated entities ("Tarr") and American Chemicals Co., Inc. ("American") (the foregoing companies referred to herein as the "Founding Companies"). Unless otherwise indicated, references herein to "CLC" mean Chemical Logistics Corporation, and references to the "Company" mean CLC and the Founding Companies collectively. The following summary is qualified in its entirety by reference to, and should be read in conjunction with, the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, the information and share and per share data in this Prospectus (i) have been adjusted for (a) the Acquisitions, (b) the effects of certain pro forma adjustments to the historical financial statements, (c) the consummation of the Offering and (d) a 16.59366-for-1 stock split of the Common Stock effected in July 1998, and (ii) assume that the Underwriters' over-allotment option is not exercised. THE COMPANY CLC was founded in July 1997 to create a premier national chemical distribution company with a wide range of value-added services, broad line of product offerings and extensive geographic coverage, and to participate in the consolidation of the chemical distribution industry. The Company operates an extensive sales and distribution network focused primarily in the United States, with 41 facilities serving 47 states, and distributes a broad line of chemicals to over 10,000 customers in a number of industries including paint and coatings, water treatment, pharmaceuticals, oil and gas, chemical processing, textiles, food and beverage, fragrances, cosmetics, soaps and detergents, semiconductor, mining and metal treatment, pulp and paper, ink, rubber and plastics. The customers range in size from small manufacturing facilities to national and multinational corporations such as McCormick & Company, Incorporated, The Procter & Gamble Company and Archer-Daniels-Midland Company. In addition to providing basic customer services such as the warehousing, transporting, blending, packaging and labeling of chemicals, the Company also provides value- added services requiring specialized facilities and expertise such as quality assurance and laboratory analysis, contract drumming, specialized packaging and bagging, bar coding, integrated supply (including inventory management, remote tank monitoring and just-in-time delivery) and export containerization. Concurrently with the closing of the Offering, CLC will acquire the nine Founding Companies with pro forma combined 1997 revenues of $366 million, making the Company one of the largest chemical distribution companies in North America. The Founding Companies have been in existence for 49 years on average, and the continuing senior executive officers of the Founding Companies have an average of 25 years experience in the industry. One of these executives currently serves as president of the industry's trade association, the National Association of Chemical Distributors ("NACD"), and principals of four of the Founding Companies currently serve on the 13-member Board of Directors of the NACD. Additionally, one principal has served as president of the Chemical Education Foundation and three principals currently serve as trustees of this foundation. Based on industry data, the Company believes that sales by chemical distribution companies in the United States were approximately $18 billion in 1997. The chemical distribution industry is becoming an increasingly important component of the U.S. chemical supply chain as chemical manufacturers and end users demand greater product and service capability from chemical distribution companies and aggressively reduce their overall number of distributor relationships in order to control costs. At the same time, and in common INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION , 1998 3,200,000 SHARES (Logo) CHEMICAL LOGISTICS CORPORATION COMMON STOCK ------------------ All of the 3,200,000 shares of Common Stock, par value $.01 per share (the "Common Stock"), offered hereby are being offered by Chemical Logistics Corporation (the "Company"). The Company was founded in July 1997 to acquire nine companies engaged in the chemical distribution business (the "Founding Companies") and has conducted no operations to date. Prior to this offering, there has been no public market for the Common Stock. It is currently estimated that the initial public offering price will be between $ and $ per share. For information relating to factors to be considered in determining the initial public offering price, see "Underwriting." The Company intends to make application to list the Common Stock on The New York Stock Exchange under the symbol "CLO." Of the net proceeds to the Company from the sale of the Common Stock offered hereby, approximately $31.1 million will be paid to the stockholders of the Founding Companies in connection with the acquisition of the Founding Companies. See "Use of Proceeds." --------------------- THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7 HEREOF. --------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. <TABLE> <CAPTION> - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- UNDERWRITING PROCEEDS PRICE TO DISCOUNTS AND TO PUBLIC COMMISSIONS COMPANY(1) - ---------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Per Share.............................. $ $ $ - ---------------------------------------------------------------------------------------------------------------- Total(2)............................... $ $ $ - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- </TABLE> (1) Before deducting expenses of the offering payable by the Company estimated at $5,400,000. (2) The Company has granted to the Underwriters a 30-day option to purchase up to an additional 480,000 shares of Common Stock solely to cover over-allotments, if any. To the extent the option is exercised, the Underwriters will offer the additional shares at the Price to Public shown above. If the option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." --------------------- The shares of Common Stock are offered by the several Underwriters, subject to prior sale, when, as and if delivered to and accepted by them and subject to their right to reject any order in whole or in part. It is expected that delivery of such shares of Common Stock will be made at the offices of BT Alex. Brown Incorporated, Baltimore, Maryland, on or about , 1998. BT ALEX. BROWN DONALDSON, LUFKIN & JENRETTE SANDERS MORRIS MUNDY The date of this Prospectus is , 1998. with certain other U.S. distribution industries, chemical distribution companies are facing increasing costs for technology, infrastructure and regulatory compliance. In this evolving, competitive environment, the Company believes that its size, wide range of value-added services, broad line of product offerings and extensive geographic coverage will allow it to be an industry leader. The chemical distribution industry is highly fragmented. The Company believes, based on industry data, that there are more than 1,000 chemical distribution businesses in the United States consisting of a small number of regional or national companies and a much larger number of relatively small, owner-operated businesses that have limited access to capital and that offer a limited range of services. At this time, many of these companies are not in direct competition with the Company due to differences in services and products offered. The Company believes that the fragmented nature of the industry presents substantial consolidation and growth opportunities for relatively large companies with a disciplined acquisition program, a decentralized operating strategy and access to financial resources. STRATEGY The Company plans to achieve its goal of becoming a premier, broad line national chemical distribution company by accelerating internal growth, by implementing its operating strategy and by expanding through acquisitions. The key elements of the Company's strategy are as follows: Internal Growth Strategy. The Company intends to pursue internal growth by promoting national account sales, cross selling its expanded product lines and services and implementing best practices across the Founding Companies. The Company believes that significant demand exists from large multi-location companies to utilize the services of a limited number of chemical distribution companies capable of providing comprehensive chemical product sourcing and services on a regional or national basis. The Company intends to leverage its sales and distribution network across the United States to obtain additional business from existing customers that operate on a regional and national basis, as well as new business from multi-location companies that previously could not be serviced by the Founding Companies individually. Also, the Company believes it will be able to expand sales to existing customers and to obtain new customers by offering a broader line of products than has been offered by the Founding Companies individually, complemented by a broader array of specialized services. In addition, the Company intends to implement a company-wide marketing program and to foster a culture of cooperation and teamwork that emphasizes the dissemination of best practices among its local management teams. Operating Strategy. The key elements of the Company's operating strategy are to centralize certain corporate functions in order to obtain operating efficiencies and to maintain a decentralized operating management in order to continue to provide superior customer service; to provide value-added services and become more integrated into the customers' internal use and handling of chemical products; and to implement a company-wide management information system. At the corporate level, the Company will consolidate functions such as risk management and insurance, finance and accounting and employee benefits to eliminate duplicative administrative and other costs that otherwise would be incurred at each of its operating locations. At the operating subsidiary level, the Company will adopt a regional approach to the U.S. chemical distribution market by creating four U.S. geographic regions that in most cases will be managed by selected Founding Company principals. The Company will employ a decentralized management structure that focuses management of each operating subsidiary on day-to-day operating matters, maintaining existing and building new customer and supplier relationships, as well as assisting in the identification of potential acquisition candidates. Also, the Company will continue to develop and provide value-added services designed to meet each customer's needs, thereby expanding product sales. Following the Offering, the Company expects to use the Chempax(TM) management information system, which is currently used by a majority of the Founding Companies, as the Company's primary management information system. The Company's objective over time is to implement a centralized, real time management information system linking all stocking locations, chemical terminal locations, warehouses and sales offices with Company management. [GRAPHICS] --------------------- CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THIS OFFERING AND MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." Acquisition Strategy. The Company believes that the U.S. chemical distribution industry presents significant consolidation opportunities, with over 350 companies it views currently as potential acquisition candidates. The Company intends to pursue an aggressive but disciplined acquisition program to acquire chemical distribution companies in order to increase sales to industries and markets currently served by the Company; to enter new industries and markets; to develop new relationships with domestic and international chemical suppliers; and to expand its range of products and services. The Company believes that the senior management of the Founding Companies will be instrumental in identifying and completing future acquisitions, as several of the principals of the Founding Companies have held leadership roles in various industry organizations and have developed extensive relationships with NACD members. The Company believes that the prominence and operating strength of the Founding Companies and the experience of its senior management will provide the Company with significant competitive advantages as it pursues its strategy. THE OFFERING Common Stock offered hereby..................... 3,200,000 shares Common Stock to be outstanding after the Offering(1).............. 12,194,531 shares Use of proceeds............ To pay the cash portion of the purchase price for the Founding Companies, to pay certain indebtedness of the Founding Companies, to pay expenses incurred in connection with the organization of CLC and the Offering and for general corporate purposes. See "Use of Proceeds." Proposed NYSE trading symbol..................... CLO - --------------- (1) Includes (i) 6,543,329 shares to be issued to the owners of the Founding Companies, (ii) 3,200,000 shares to be sold in the Offering, (iii) 656,697 shares issued to the management and directors of CLC, (iv) 1,570,441 shares issued to the principals of Bellmeade Capital Partners, L.L.C. ("BCP") and (v) 224,064 shares issued to or held by consultants to and employees of BCP. Excludes options to purchase approximately 1,070,000 shares which are expected to be granted upon consummation of the Offering. See "Management,"
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001066622_griffith_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001066622_griffith_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..e7b4402e2ca504ec272544d5016d635922fd8c07
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this Prospectus. Unless otherwise indicated, the information contained in this Prospectus assumes that the Underwriters' over-allotment option will not be exercised and, except in the Consolidated Financial Statements and notes thereto, gives effect to the recapitalization of the Company described under "Description of Capital Stock -- Recapitalization." As used in this Prospectus in conjunction with any given year, the term "Fiscal" refers to the fiscal year of the Company which ended on September 30. For example, Fiscal 1997 ended on September 30, 1997. THE COMPANY Griffith Micro Science is a major multinational provider of sterilization management services with extensive operations in both North America and Europe. The Company offers comprehensive sterilization processing and related laboratory testing, consulting and logistics management services to manufacturers of single use medical devices and, to a much lesser extent, pharmaceuticals, cosmetics and food products. The Company pioneered the development and use of ethylene oxide as a sterilant beginning in the 1930s. It currently operates a network of eleven ethylene oxide sterilization facilities in North America (eight in the United States, two in Canada and one in Mexico) and a network of seven ethylene oxide sterilization facilities in Europe. The Company began offering gamma sterilization services in 1997 through the acquisition of a gamma sterilization facility in Belgium. The Company has also formed a joint venture to design, construct and operate a gamma sterilization facility in Mexico. Over the past five years, the Company has opened three new sterilization facilities, acquired five others, replaced one and closed one. Of the Company's Fiscal 1997 net revenues of $60.2 million, approximately 61% was derived from its operations in North America and 39% from its operations in Europe. In Fiscal 1997, the Company provided sterilization management services to approximately 530 customers in North America and approximately 980 customers in Europe. The Company's customers range in size from large multinational corporations to small local enterprises. The Company's largest customers include many of the world's major medical products manufacturers, such as: Abbott Laboratories; Allegiance Healthcare Corporation; Baxter International, Inc.; Becton, Dickinson and Co.; The Kendall Company (a subsidiary of Tyco International, Ltd.); Mallinckrodt Inc.; Medtronic, Inc.; Merck & Co., Inc.; Pfizer, Inc.; and Schering-Plough Corporation. The Company's five largest customers accounted for approximately 38% of its net revenues in Fiscal 1997, including one customer, Allegiance Healthcare Corporation, which accounted for approximately 20% of net revenues. A substantial portion of single use prepackaged medical devices and kits are required by government regulation in the United States and many other countries to be "sterile" or to have minimal levels of microbial contamination when sold. In addition, other products, such as pharmaceuticals, cosmetics, spices and herbs, frozen and dried foods, and animal feed, undergo sterilization processing to improve their safety, reduce microbial contamination and extend shelf-life. Manufacturers sterilize their products after assembly and packaging using either or both of their own in-house sterilization facilities ("captive processors") or the services of commercial sterilization processing companies such as Griffith Micro Science ("contract processors"). The two most widely used methods of commercial sterilization utilize either ethylene oxide in gaseous form ("ethylene oxide sterilization") or gamma radiation from a radioactive Cobalt 60 isotope ("gamma sterilization"). Other methods include E-beam sterilization ("E-beam"), accomplished using a high-energy electron beam, and steam sterilization, which to date have only been employed to a limited extent for contract sterilization. Eighteen of the Company's 19 sterilization facilities currently utilize ethylene oxide sterilization; the other utilizes gamma sterilization. Although the Company is not aware of any published industry statistics and precise numbers are difficult to determine, the Company estimates that in 1997 the market for sterilization services in North America and those European countries in which the Company has sterilization facilities was approximately $500 million, consisting of approximately $300 million in aggregate net revenues generated by contract processors (approximately $200 million in North America and $100 million in Europe) and $200 million in equivalent net revenue value for products sterilized by captive processors (approximately $140 million in North America and $60 million in Europe). Of this total market, the Company estimates that slightly more than 50% was attributable to ethylene oxide sterilization, approximately 40% to 45% to gamma sterilization and the balance to E-beam and other forms of sterilization. The principal sources for the foregoing market estimates were publicly available information of certain other contract and captive processors, information received from customers and the knowledge of and experience within the industry of the Company's management in North America and Europe. Beginning in Fiscal 1995 under new senior management, the Company initiated a comprehensive program to: (i) increase its sterilization processing capacity; (ii) strengthen the quality and training of its personnel; (iii) improve the process capability as well as the efficiency of its operations on a system-wide basis; (iv) expand its customer base; (v) provide greater focus to and expand the laboratory services it offers; and (vi) broaden its service offering to include gamma sterilization, sterilization consulting and logistics management. These efforts, together with a continuing trend by manufacturers of single use medical devices to use contract processors for their sterilization requirements, have resulted in compound annual growth rates for the Company of 14.1% and 65.6% in net revenues and pro forma operating profit, respectively, during the three-year period ended September 30, 1997. The Company's primary strategic objective is to expand and strengthen its position as the largest multi-national provider of a full range of sterilization management services. The Company believes the extensive experience, know-how, expertise and data it has gathered over the more than 60 years since it pioneered the use of ethylene oxide as a sterilant has created a significant and unique core competency, which it refers to as its "scientific platform." The Company's business strategy is to continue to take advantage of its scientific platform, enhancing its position as a full service provider of comprehensive sterilization management services and allowing it to further pursue "Value Managed Relationships" with its customers. The key components of this strategy include: (i) expanding its core medical device sterilization business; (ii) optimizing the sterilization process through continuous improvement programs with customers; (iii) broadening its laboratory and related service offerings; and (iv) expanding its processing of non-medical products. All of the outstanding capital stock of the Company is currently owned by Griffith Laboratories International, Inc. which in turn is wholly owned by Griffith Laboratories, Inc. Upon completion of the Offering, the Parent Company will continue to own all of the outstanding shares of Class B Common Stock and will hold 67.6% of the total number and have 95.4% of the combined voting power of all outstanding shares of Common Stock. As a result, the Parent Company will be able to control the election of directors and the vote on other matters submitted to the Company's stockholders, including the approval of extraordinary corporate transactions. In addition, two of the Company's directors, including Dean L. Griffith, its Chairman of the Board, are directors and senior officers of the Parent Company, which was organized in 1919. Mr. Griffith, members of his family and trusts established for their benefit collectively beneficially own a substantial majority of the voting stock of the Parent Company. There is no public market for the stock of the Parent Company. The Company was organized in 1987 under the laws of Delaware. Its corporate headquarters is located at 2001 Spring Road, Suite 500, Oak Brook, Illinois 60523-1887 and its telephone number is (630) 571-1280.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001066662_family_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001066662_family_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..e7fffafbab5897e2958c8c6d724e2916f6b23fe3
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, REFERENCES HEREIN TO FISCAL YEARS OF THE COMPANY ARE TO THE COMPANY'S 52- OR 53-WEEK FISCAL YEAR, WHICH ENDS ON THE LAST SUNDAY IN JANUARY OF EACH YEAR AND IS IDENTIFIED AS THE FISCAL YEAR FOR THE IMMEDIATELY PRECEDING CALENDAR YEAR. FOR EXAMPLE, THE FISCAL YEAR ENDED JANUARY 25, 1998, IS REFERRED TO AS "FISCAL 1997." REFERENCES TO FISCAL YEARS OF JOSHUA'S CHRISTIAN STORES ("JOSHUA'S") ARE TO JOSHUA'S TWELVE MONTHS ENDED MARCH 31 AND ARE IDENTIFIED AS THE FISCAL YEAR FOR THE IMMEDIATELY PRECEDING CALENDAR YEAR. FOR EXAMPLE, THE TWELVE MONTHS ENDED MARCH 31, 1998, IS REFERRED TO AS "FISCAL 1997." EXCEPT AS OTHERWISE SPECIFIED, ALL INFORMATION IN THIS PROSPECTUS: (I) REFLECTS A -FOR-1 STOCK SPLIT OF THE COMMON STOCK TO BE EFFECTED PRIOR TO THE CLOSING OF THE OFFERING; (II) REFLECTS THE FILING OF THE RESTATED ARTICLES OF INCORPORATION AND RESTATED BYLAWS OF THE COMPANY CONCURRENTLY WITH THE CLOSING OF THE OFFERING; (III) REFLECTS THE AUTOMATIC CONVERSION OF ALL OF THE COMPANY'S CURRENTLY OUTSTANDING COMMON STOCK INTO SHARES OF NEWLY CREATED CLASS B COMMON STOCK UPON THE FILING OF THE RESTATED ARTICLES OF INCORPORATION; (IV) ASSUMES THE EXERCISE OF ALL OUTSTANDING WARRANTS TO PURCHASE COMMON STOCK; AND (V) ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. EXCEPT AS OTHERWISE INDICATED IN THIS PROSPECTUS OR THE FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS PROSPECTUS, ALL REFERENCES TO "FAMILY" AND THE "COMPANY" REFER TO FAMILY CHRISTIAN STORES, INC., FORMERLY FAMILY BOOKSTORES COMPANY, INC. THE COMPANY Family Christian Stores, Inc. ("Family" or the "Company") is the largest retailer in the United States dedicated solely to Christian-related products. The Company, as the category-dominant retailer of Christian books and Bibles, gifts and cards, music, children's merchandise and church supplies, seeks to fulfill the growing demand for products that address Christian and family values. The Company's net sales increased from $126.1 million in fiscal 1995 to $168.1 million in fiscal 1997, representing a compound annual growth rate of 15.4%. Operating income increased from a loss of $2.5 million to income of $5.5 million over the same period. The growth has been driven by comparable store sales, acquisitions and new store openings. As of July 31, 1998, the Company operated 276 stores in 36 states, having grown from 148 stores in 28 states, which the Company acquired from the Family Bookstores Division of The Zondervan Corporation ("Zondervan") on October 31, 1994. Family is the primary consolidator in the Christian retail industry, which is highly fragmented and characterized by numerous small independent operators. On June 1, 1998, the Company completed the acquisition of Joshua's Christian Stores, a leading retailer of Christian-related products with 56 stores. The Joshua's acquisition expands Family's presence in both existing and new markets and provides an opportunity to capture greater operating efficiencies across its expanded store base. On a pro forma basis, after giving effect to the acquisition of Joshua's, the Company had net sales of $197.8 million in fiscal 1997. The Company believes that numerous opportunities exist to continue making acquisitions and opening new stores and plans to continue its strategy of clustering stores in both existing and new markets. The Company differentiates itself from other retailers of Christian-related products by offering products to consumers of all ages and denominations in the environment of a focused specialty retailer with value pricing. The Company's mission is to offer an extensive selection of high-quality, Christian-related products of exceptional value in a warm, family atmosphere. In addition, Family seeks to reinforce Christian and family values as well as impact the lives of its customers by offering meaningful and inspirational products. The Company's core customers are individuals who characterize themselves as active Christians, as well as others who are searching for meaning in their lives. The Company believes that its ability to deliver an extensive product assortment to a broad range of consumers provides it with a competitive advantage in the Christian retail industry. The Company's principal objective is to enhance its position as the leading provider of Christian-related products in the United States. Family's business strategy includes maintaining category dominance, serving a diverse Christian customer base, providing the highest value to its customers, promoting recognition of its brand name and implementing its guiding principles throughout its business. The Company's growth strategy includes increasing sales and profitability in its existing stores, expanding its store base through focused acquisitions and new store openings as well as utilizing additional distribution channels. RECENT DEVELOPMENTS JOSHUA'S ACQUISITION. On June 1, 1998, Family acquired Joshua's, a division of The Development Association, Inc., a subsidiary of Tandycrafts, Inc. Joshua's was a leading Christian retail chain headquartered in Fort Worth, Texas that operated 56 stores in 10 states, including a major presence in Texas, Georgia, Colorado and Southern California. For its twelve months ended March 31, 1998 (fiscal 1997), Joshua's had net sales of $32.0 million. The acquisition expands Family's presence in existing and new markets and creates a stronger platform for future growth. Management has completed several important steps to integrate Joshua's operations, including the introduction of the Company's (i) point-of-sale, automatic product replenishment and information systems, (ii) enhanced product assortment and (iii) targeted marketing and preferred customer programs. Substantially all of the acquired stores have been renamed Family Christian Stores and exterior signage has been changed, except for six stores which will remain Joshua's Christian Stores and be operated as bargin-format stores. All store managers of former Joshua's stores who are currently employed by Family have completed the Company's formal management training. The Company believes that the successful integration of Joshua's will enhance its existing store base and result in future operating efficiencies and increased brand awareness. See "Pro Forma Combined Condensed Financial Statements (unaudited)" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." OTHER ACQUISITIONS AND OPENINGS. Since January 25, 1998, in addition to the Joshua's acquisition, the Company has acquired 21 stores and opened two new stores through July 31, 1998. The Company is operating these stores under the Family Christian Stores name, has completed a limited amount of remodeling and has integrated these stores into its point-of-sale, automatic product replenishment and information systems. The Company was incorporated in Michigan in 1994. The Company's executive office is located at 5300 Patterson Avenue, S.E., Grand Rapids, Michigan 49530, and its telephone number is (616) 554-8700. THE OFFERING <TABLE> <CAPTION> Class A Common Stock offered <S> <C> by the Company............................. shares by the Selling Shareholders................ shares Common Stock to be outstanding after the Offering(1) Class A Common Stock....................... shares Class B Common Stock....................... shares Use of proceeds.............................. To finance store acquisitions and new store openings and to repay outstanding bank indebtedness. See "Use of Proceeds." Proposed Nasdaq National Market symbol....... FMLY </TABLE> - ------------------------------ (1) Excludes: (i) shares of Common Stock issuable upon exercise of options outstanding under the Company's stock option plans as of , 1998, with a weighted average exercise price of $ per share; (ii) shares of Common Stock issuable upon exercise of options to be granted under the Company's stock option plans upon the closing of the Offering, with an exercise price per share equal to the initial public offering price; and (iii) shares reserved for issuance pursuant to the Company's stock option plans. See "Capitalization,"
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001067289_check_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001067289_check_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..8fffeb7cf830f03b228123649515605e83c1bb18
--- /dev/null
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless the context indicates otherwise, all references to the "Company" or "Check Into Cash" include Check Into Cash, Inc. and its subsidiaries. All information contained herein reflects the 1,000-for-1 stock split effected on May 12, 1997 and a 7.49-for-1 stock split that will be effected contemporaneously with the Offering and, except as otherwise noted, assumes no exercise of the Underwriters' over-allotment option. THE COMPANY Check Into Cash, Inc. (the "Company") is a specialty financial services company that advances cash to its customers by cashing their personal checks and agreeing to hold the checks until they are redeemed by the customers or until a short holding period, typically less than 17 days, has expired. The Company targets customers who are currently employed and have an active checking account. To initiate a relationship with the Company, each customer is required to provide proof of income, proof of an active personal checking account, proof of residence and proper identification. The Company limits the amount of cash that it advances to customers to $300 per transaction and prohibits customers from having more than one outstanding transaction with the Company. The Company generally does not cash checks with a face amount exceeding 50.0% of the net "take-home" amount of the customer's next paycheck. In exchange for its service, the Company receives a fee ranging from approximately 11.5% to 18.0% of the face amount of the check. The Company believes that its customers have access to alternative sources of cash to satisfy their short-term financial needs but prefer the Company's simple, convenient, confidential service that enables customers to quickly obtain small amounts of short term cash, with payment due generally as of the date of the customers' next paycheck. In addition, management believes that the Company's customers prefer (i) to have the ability to redeem their checks rather than having them deposited and (ii) to pay the one-time flat fee charged by the Company as opposed to the ongoing finance charges associated with other alternatives. Moreover, because the Company does not require its customers to provide collateral or to satisfy traditional credit criteria, the Company believes that it eliminates the consumers' fear of credit denial. Management further believes that a primary reason for the growth in its business is the high cost of insufficient funds charges ("NSF") assessed by both banks and merchants and the high finance costs charged by financial service providers for small amounts of short-term cash. The Company's growth strategy is to open stores rapidly in middle income neighborhoods in high traffic shopping centers with a significant anchor tenant such as a supermarket or major discount retail store. The Company is also testing store locations in certain supermarkets, convenience stores and retail stores. Management targets particular geographic areas for development and seeks to develop all of the major, and many of the secondary, markets in that area in a "clustered" fashion that maximizes the effectiveness and efficiency of store opening processes, recruiting and training functions, and advertising and promotional efforts. The Company uses intensive employee training in customer service and targeted local advertising in order to build brand loyalty and customer awareness and to increase transaction volume. The Company commenced operations in June 1993 with one store and has expanded rapidly to a total of 266 stores at June 30, 1998. Revenues have increased substantially from $78,000 in 1993 to $21.4 million in 1997 and $21.2 million for the six months ended June 30, 1998. The Company's average store revenues from stores open for at least 12 months at the beginning of each of the following periods was $213,000 (two stores) in 1995, $255,000 (nine stores) in 1996, $233,000 (52 stores) in 1997 and $132,000 (63 stores) for the six months ended June 30, 1998. During the six months ended June 30, 1998, the Company completed 652,000 transactions attributable to 120,000 customers. As of June 30, 1998, the Company had approximately 67,000 held checks with an aggregate outstanding balance of $15.4 million. The Company incurred bad debt expense of $1,826 for 1993 (2.3% of revenues), $50,976 for 1994 (5.2% of revenues), $113,931 for 1995 (3.1% of revenues), $438,551 for 1996 (4.3% of revenues), $1.2 million for 1997 (5.6% of revenues) and $1.1 million (5.3% of revenues) for the six months ended June 30, 1998. Charge-offs, net, for such periods were $2,000 for 1993, $ 39,000 for 1994, $72,000 for 1995, $357,000 for 1996, $1.1 million for 1997 and $1.1 million for the six months ended June 30, 1998. The Company was incorporated in Delaware on December 23, 1996. The mailing address of its principal executive office is 224 North Ocoee Street, P.O. Box 550, Cleveland, Tennessee 37364-0550, and its telephone number is (423) 479- 2400. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company.. shares Common Stock offered by the Selling shares(1) Stockholder......................... Common Stock to be outstanding after shares(2) the Offering........................ Use of proceeds by the Company....... Repay certain indebtedness, pay S corporation dividends and for working capital and general corporate purposes, including the opening of new stores. See "Use of Proceeds." Proposed Nasdaq National Market sym- CHEK bol................................. </TABLE> - -------- (1) See "Principal and Selling Stockholders." (2) Excludes shares that will be subject to outstanding warrants following completion of the Offering and 561,750 shares of Common Stock reserved for issuance under the Company's Amended and Restated 1997 Long-Term Incentive Plan, of which options to purchase 364,344 shares of Common Stock had been granted at June 30, 1998 at a weighted average exercise price of $6.95 per share. See "Management--Incentive Plan," "Shares Eligible for Future Sale" and Note 7 to the Company's Consolidated Financial Statements. SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ---------------------------------------------------------- ----------------------- 1993 1994 1995 1996 1997 1997 1998 --------- --------- ---------- ----------- ----------- ---------- ----------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues................ $ 77,743 $ 980,048 $3,715,056 $10,252,085 $21,446,588 $8,007,852 $21,241,222 --------- --------- ---------- ----------- ----------- ---------- ----------- Store expenses: Salaries and bene- fits.................. 15,851 202,585 783,615 2,374,450 5,031,970 2,068,250 4,715,050 Occupancy.............. 7,363 70,416 401,322 1,017,438 2,470,382 980,536 2,505,996 Bad debt expense....... 1,826 50,976 113,931 438,551 1,196,469 213,839 1,135,456 Other store expenses... 21,513 161,582 838,674 1,468,739 4,398,982 1,834,609 3,869,307 --------- --------- ---------- ----------- ----------- ---------- ----------- Total store ex- penses.............. 46,553 485,559 2,137,542 5,299,178 13,097,803 5,097,234 12,225,809 --------- --------- ---------- ----------- ----------- ---------- ----------- General and administra- tive expenses: Legal and professional expenses.............. -- 15,466 49,222 266,073 3,192,732 (1) 454,633 561,102 Other general and administrative expenses.............. -- 201,269 612,075 2,306,986 5,406,352 1,948,178 4,630,223 --------- --------- ---------- ----------- ----------- ---------- ----------- Total general and administrative expenses............. -- 216,735 661,297 2,573,059 8,599,084 2,402,811 5,191,325 --------- --------- ---------- ----------- ----------- ---------- ----------- Interest expense, net... -- 15,590 36,649 124,217 621,452 194,568 620,443 --------- --------- ---------- ----------- ----------- ---------- ----------- Income (loss) before in- come taxes............. 31,190 262,164 879,568 2,255,631 (871,751) 313,239 3,203,645 Provision for (benefit from) income taxes..... 1,958 46,080 346,540 515,109 (594,236) 200,636 1,082,515(2) --------- --------- ---------- ----------- ----------- ---------- ----------- Net income (loss)....... $ 29,232 $ 216,084 $ 533,028 $ 1,740,522 $ (277,515) $ 112,603 $ 2,121,130 ========= ========= ========== =========== =========== ========== =========== Historical net income (loss) per share: Basic.................. $ -- $ 0.02 $ 0.06 $ 0.19 $ (0.03) $ 0.01 $ 0.23 ========= ========= ========== =========== =========== ========== =========== Diluted................ $ -- $ 0.02 $ 0.06 $ 0.19 $ (0.03) $ 0.01 $ 0.22 ========= ========= ========== =========== =========== ========== =========== Weighted average common shares outstanding-- basic.................. 8,988,000 8,988,000 8,988,000 8,988,000 9,123,929 8,988,000 9,257,640 ========= ========= ========== =========== =========== ========== =========== Weighted average common shares outstanding-- diluted................ 8,988,000 8,988,000 8,988,000 9,060,084 9,123,929 9,475,247 9,778,397 ========= ========= ========== =========== =========== ========== =========== PRO FORMA DATA(3): Historical income (loss) before income taxes.... $ (871,751) $ 3,203,645 Pro forma provision for (benefit from) income taxes.................. (331,265) 1,217,385 ----------- ----------- Pro forma net income (loss)................. $ (540,486) $ 1,986,260 =========== =========== Pro forma earnings per share: Basic.................. $ $ =========== =========== Diluted................ $ $ =========== =========== Weighted average common shares outstanding-- basic.................. =========== =========== Weighted average common shares outstanding-- diluted................ =========== =========== OPERATING DATA: Stores open at beginning of period.............. -- 2 9 52 69 69 176 Stores opened during pe- riod................... 2 7 43 20 107 53 91 Stores closed during pe- riod................... -- -- -- (3) -- -- (1) --------- --------- ---------- ----------- ----------- ---------- ----------- Stores open at end of period................. 2 9 52 69 176 122 266 ========= ========= ========== =========== =========== ========== =========== Held checks at end of period, net............ $ 49,610 $ 455,719 $1,922,738 $ 3,466,898 $ 9,847,430 $5,000,455 $15,119,598 ========= ========= ========== =========== =========== ========== =========== Number of held checks at end of period.......... 374 1,683 9,728 19,012 45,871 26,255 67,195 ========= ========= ========== =========== =========== ========== =========== Bad debt expense as a percentage of revenues............... 2.3% 5.2% 3.1% 4.3% 5.6% 2.7% 5.3% ========= ========= ========== =========== =========== ========== =========== </TABLE> <TABLE> <CAPTION> DECEMBER 31, JUNE 30, 1998 -------------------------------------------------- ----------------------- 1993 1994 1995 1996 1997 ACTUAL ADJUSTED(4) ------- -------- --------- ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Working capital......... $25,911 $194,047 $ 459,387 $ 3,212,497 $ 9,124,337 $14,834,241 Property and equipment, net.................... 2,861 58,872 287,036 645,859 2,184,527 3,032,223 Total assets............ 70,585 595,062 2,590,388 6,114,331 15,925,011 23,169,506 Long-term debt, less current maturities..... -- -- -- 562,939 8,650,069 13,591,392 Total stockholders' equity................. 29,232 255,601 788,629 3,112,284 2,433,121 3,893,460 </TABLE> - -------- (1) Includes nonrecurring charges of $2.2 million for the settlement of a class action lawsuit filed against the Company in Tennessee and related legal expenses of approximately $500,000. See "Business--Legal Proceedings." (2) On January 1, 1998, in connection with the S corporation election of Creditcorp of Tennessee, Inc., a wholly-owned subsidiary of the Company, the Company eliminated approximately $709,000 of previously recognized net deferred federal tax benefits. (3) Gives effect to the following in connection with the Company's termination of its S corporation status as if such termination occurred on January 1, 1997: (i) the estimated number of shares of Common Stock that would be required to be sold (at an assumed initial public offering price of $ per share) to fund the $3.9 million S corporation distribution and (ii) the recognition of federal and state income taxes as if the Company had been a C corporation based on the effective tax rates that would have been in effect during the periods reported. See "Prior S Corporation Status."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001067489_lamar_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001067489_lamar_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..649f988b74f97c15da762d066cf3e570b1eecc85
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1998/CIK0001067489_lamar_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is not intended to be complete and is qualified in its entirety by the more detailed information and the consolidated financial statements and the related notes appearing elsewhere in this Prospectus. Share information included in this Prospectus (other than the consolidated financial statements beginning on page F-1) has been restated to reflect a twenty-for-one stock split effected in May of 1998, and a three-for-one split of the common stock effected in August of 1998. Unless otherwise indicated, all information in this Prospectus assumes that the Underwriters' over-allotment option is not exercised. In addition, unless otherwise indicated, all references to "the Company" in this Prospectus refer to Lamar Capital Corporation and its consolidated subsidiaries, including the Bank. THE COMPANY Lamar Capital Corporation (the "Company") is a one-bank holding company headquartered in Purvis, Mississippi, with total consolidated assets of $315.7 million, total deposits of $277.6 million and stockholders' equity of $18.7 million at September 30, 1998. The Company, through its subsidiaries, offers a broad line of banking and financial products and services with the personalized focus of a community banking organization. The Company ranks 13th in size out of 59 bank holding companies headquartered in Mississippi, based on total deposits as of June 30, 1997. As of June 30, 1997, the Bank had a 74.26% deposit market share in Lamar County, its primary market area. Most of the Company's growth has occurred in the last decade as management responded to opportunities presented by the growth of the Lamar County and Hattiesburg, Mississippi market areas. Total assets, which were $25 million in 1980, exceeded $100 million by June of 1991, grew to $200 million by September of 1996, and passed the $300 million mark in May of 1998. The Company derives a substantial amount of its revenue and income from the operation of its wholly-owned subsidiary, Lamar Bank, a Mississippi state bank founded in 1904 and domiciled in Purvis, Mississippi (the "Bank"). In 1997, the Bank contributed 90.2% of the total net income of the Company. The Bank has seven full-service banking locations and seven automated teller machines ("ATMs"), all located in the southeastern part of Mississippi: the main office and a branch office in Purvis, two branches in Hattiesburg, one in Sumrall, one in Petal and one in Prentiss. In June of 1998, the Bank acquired property which will be used to open a new branch in Hattiesburg, Mississippi on Hardy Street, a major thoroughfare, near the main campus of the University of Southern Mississippi. This branch is expected to open in the second half of 1999. In 1992, the Company expanded its product lines by organizing a finance company, Southern Financial Services, Inc. ("SFSI"), as a subsidiary of the Bank. In 1997, SFSI contributed 8.5% of the net income of the Company. SFSI provides consumer loans to customers who may not be eligible to obtain financing from the Bank. Expansion into this area of consumer loans opened up a new market of customers for the Company and allowed the Company to offer an additional service to its customers, thereby adding a new and profitable segment to its market base. SFSI has locations in Purvis, Monticello, Hattiesburg, Petal, Prentiss, Gulfport, and Poplarville, Mississippi. As of September 30, 1998, SFSI had total loans of $5.5 million. To expand the Company's ability to provide mortgage loans to a broader customer base, in November of 1996, the Company organized The Mortgage Shop, Inc. ("MSI") as a subsidiary corporation. In 1997, MSI contributed 1.3% of the net income of the Company. MSI, located in Hattiesburg, Mississippi, began operations in January of 1997 and is engaged in the origination of B and C grade mortgage loans which are sold in the secondary market. Since beginning operations, MSI has originated $4.6 million in mortgage loans through September 30, 1998. In 1996, the Bank further expanded the types of services offered by entering into an arrangement with a licensed broker-dealer firm to provide stock and other securities trading services for customers of the Bank and other investors. With this arrangement, the Company is furthering its strategy of offering a broad range of banking and financial services with the personalized focus of a community banking organization. The Company is community oriented and focuses on financial products consisting primarily of consumer, commercial and real estate loans and deposit services to individuals and small and medium-sized businesses. The Company, through its subsidiaries, offers a broad line of financial products and services while successfully retaining the local appeal and level of service of a community bank. The Company believes that its community style of banking is important to its success. This style allows for flexible, responsive decision making at each banking center in the Company's network and focuses on long- standing customer relationships and personalized service. Management believes that its community oriented approach and commitment to customer service afford the Company a distinct competitive advantage in its markets. Management of the Company believes that consolidation in the banking industry in Mississippi has disrupted customer relationships as the larger regional financial institutions increasingly focus on large corporate clients, and standardized loan and deposit products. Generally, these products and services are offered through less personalized delivery systems. Consolidation has also dislocated experienced and talented personnel as duplicate functions are eliminated. As a result, consolidation provides the Company with the opportunity to attract and maintain targeted customers and personnel. Hattiesburg is the educational, retail and medical center for more than a quarter of a million people throughout the southeast portion of Mississippi. The Hattiesburg area has received widespread attention as an increasing number of retirees are moving to the area. Hattiesburg's retirement program was featured in the November 22, 1996 issue of the "Kiplinger Washington Letter" and in the June 18, 1997 broadcast of the NBC Nightly News. The May 24, 1997 edition of The New York Times featured Hattiesburg as a place to retire touting the high quality of life, cultural opportunities, and state-of-the-art medical facilities. Hattiesburg was one of five cities listed as "Best Cities for Retirement" as well as one of five cities listed as "Best Small Metro Areas" in the 1997 Places Rated Almanac by David Savegeau and Richard Boyer and was named one of the "20 Top Retirement Towns in North America" by MoneyExtra, a publication of Money Magazine. With two locations in Hattiesburg, the Bank ranked fifth in the city based on deposits as of June 30, 1997. The Bank is focusing on expanding its current 6.0% market share in Hattiesburg, where it competes with eight commercial banks, including several regional banks, and other financial institutions. At September 30, 1998, approximately 26% of the Bank's loans and 26% of the Bank's deposits were attributable to its Hattiesburg branches. The Company's overall business strategy is to: (i) continue to service individuals and small and medium-sized businesses by providing personal, responsive, quality service through its community banking network; (ii) continue to coordinate its loan and deposit growth by gaining customers from banks that have recently merged with larger multi-state banks or that are in the process of doing so and thereby enrich its earning asset mix; and (iii) continue to expand its business, particularly in the Hattiesburg area, through internal growth and the opening of new branch offices and by selective acquisitions in product lines or markets considered strategically attractive by management. In implementing its strategy, management emphasizes the following: . RELATIONSHIP BANKING. The Company's business strategy emphasizes personal relationships and customer loyalty. The Company strives to know its customers' families, businesses and financial needs. The Company believes a key to establishing and maintaining long-term relationships with its banking customers is to offer competitively priced products tailored to meet customers' needs with personalized service and professional delivery. The Company meets community needs by making its facilities available for community events and by sponsoring a variety of civic activities. . CUSTOMER SERVICE AND CONVENIENCE. Through extended lobby and drive-up hours, seven ATMs and experienced personnel, customers of the Bank can obtain full banking services at any banking center. The Company strives to develop customer loyalty by promoting a "hands-on" approach and offering quick decision-making in its delivery of banking products and services to existing and potential customers. Executive officers spend time each month in banking centers assessing the needs of both customers and the personnel serving those customers. To further enhance customer service and convenience, the Bank plans to offer Internet banking in 1999. . DEDICATED BANKING PERSONNEL. The Company instills within its work force a sales-oriented culture to promote customer service and market penetration. The Company seeks to enhance employee performance through training and Company-wide annual evaluations. To further promote customer service and enhance performance, the Company provides performance-based compensation, rewarding employees who achieve or exceed corporate objectives. . REAL ESTATE LENDING. The Bank originates real estate loans which consist of residential first and second mortgage loans, residential construction loans and home equity lines of credit and term loans secured by first and second mortgages on the residences of borrowers for home improvements, education and other personal expenditures. The Bank makes real estate and mortgage loans with a variety of terms, including fixed and floating rates. Generally, the Bank retains real estate loans with maturities under ten years and sells mortgage loans with longer maturities. MSI originates B and C grade mortgage loans which are sold in the secondary market. The Bank originated and retained $45.6 million of real estate loans during 1997 and $49.1 million of real estate loans during the nine months ended September 30, 1998. The Bank originated and sold $10.6 million of mortgage loans during 1997 and $8.9 million of mortgage loans during the nine months ended September 30, 1998. MSI originated and sold $2.4 million of mortgage loans during 1997 and $2.2 million of mortgage loans during the nine months ended September 30, 1998. . CONSUMER LOANS. The Bank and SFSI offer consumer installment loans to business owners and other individuals for personal, family and household purposes. The Bank originated $47.1 million in consumer loans in 1997 and $47.2 million for the nine months ended September 30, 1998. SFSI originated $10.0 million in consumer loans in 1997 and $6.8 million for the nine months ended September 30, 1998. . COMMERCIAL LOANS. The Bank's commercial loan portfolio is dispersed among various business lines such as commercial construction, trucking, timber, utilities, auto and recreational vehicles, farm supplies, and heavy equipment. Such loans are primarily for the financing of accounts receivable, property, plant and equipment and inventory. The Bank also offers Small Business Administration guaranteed loans ("SBA loans"). The Bank originated $46.5 million in commercial loans in 1997 and $70.5 million for the nine months ended September 30, 1998. The Company is a Mississippi corporation with its principal executive offices located at 401 Shelby Speights Drive, Purvis, Mississippi 39475, and its telephone number is (601) 794-6047. THE OFFERING <TABLE> <C> <S> Common Stock offered by the Company........ 1,363,636 shares Common Stock outstanding prior to the Offering.................................. 2,767,071 shares Common Stock to be outstanding after the Offering.................................. 4,130,707 shares(1) Proposed Nasdaq National Market symbol..... LCCO Use of Proceeds............................ The proceeds of the Offering are expected to be used to establish two de novo branches in Hattiesburg, Mississippi, for the repayment of a Company loan, and other general corporate purposes including selective acquisitions and the contribution of additional capital to the Bank to support asset growth. See "Use of Proceeds." </TABLE> - -------- (1) Excludes 200,000 shares of Common Stock reserved for issuance of options to employees under the Company's Stock Incentive Plan, and 204,545 shares issuable upon exercise of the Underwriters' over-allotment option. RISK FACTORS A number of factors should be considered by potential investors before purchasing shares of the Common Stock in the Offering. See "Risk Factors," beginning on page 7.
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, all information presented in this Prospectus assumes no exercise of the Underwriters' over-allotment option. This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from the results anticipated in these forward-looking statements as a result of certain of the factors set forth under "Risk Factors" and elsewhere in this Prospectus. Unless the context indicates or otherwise requires, references in this Prospectus to "swimming pools" or "pools" shall mean residential, in-ground swimming pools, and references to "swimming pool industry" or "industry" shall mean the swimming pool design, installation and renovation industry. THE COMPANY The Company is the largest installer of concrete swimming pools in the United States. Through its network of 39 sales offices serving 15 states, the Company believes it has achieved the leading market share in 15 of the 24 major metropolitan areas it serves. As the successor to the respective businesses of Sylvan Pools (founded in Pennsylvania in 1946) and Anthony Pools (founded in California in 1947), the Company has a referral base of over 300,000 customers and a depth of experience and expertise that is unmatched in the industry. These factors, together with the Company's national reputation for quality, volume purchasing ability and innovative sales techniques have enabled the Company to establish a significant presence in each of its current geographic markets while positioning itself for continued expansion into new markets through internal growth and selective acquisitions. The majority of the Company's pools range in price from $14,500 to $36,500. Historically, the Company's sales have been seasonally strongest in the second and third quarters and weakest in the first quarter. The Company built approximately 4,100 pools in 1997 and 2,300 pools during the first half of 1998. On a pro forma basis, after giving effect to the January 1998 Tango Acquisition (defined below) for 1997 and the August 1998 Andrews Acquisition (defined below) for 1997 and for the first half of 1998, the number of pools installed by the Company during such periods would have been approximately 6,200 and 2,900, respectively. According to the National Spa & Pool Institute, the total number of swimming pools installed annually in the United States has grown from 121,000 in 1994 to 160,000 in 1997, a 9.8% compound annual growth rate. In each of these years, the percentage of swimming pools installed using formative structures made of concrete, vinyl liners and pre-molded fiberglass has remained relatively constant and in 1997 represented 68.8%, 28.7% and 2.5%, respectively, of total swimming pools installed. While other sectors of the swimming pool business (such as manufacturing, distribution and retailing of pool products and equipment) have undergone significant consolidation in recent years, the industry has remained highly fragmented. The Company estimates that in 1997, the top ten concrete swimming pool installation companies installed approximately 18,600 such pools, accounting for 16.9% of all concrete swimming pool installations and 11.6% of all swimming pool installations in the United States that year. The Company believes that on a nationwide basis, it has the leading share of both the concrete swimming pool market and the total swimming pool market, with an estimated 5.6% share of the concrete pool market and an estimated 3.9% share of the total pool market. COMPETITIVE STRENGTHS The Company attributes its strong competitive position in the swimming pool installation industry to, among other things: Size, National Presence and Leading Market Share. The Company believes its size, national presence and leading market share enable it, among other things, to (i) benefit from operating efficiencies and maximize productivity, (ii) attract, develop and retain the highest quality employees and independent contractors and invest in state-of-the-art equipment, (iii) temper the effects of cyclical and economic downturns and unseasonable The Company intends to furnish its shareholders with annual reports containing financial statements audited by the Company's independent accountants and quarterly reports for the first three quarters of each year containing unaudited interim financial information. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON SHARES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. weather through a diversified geographic presence, (iv) implement national marketing strategies and support a centralized management team and (v) attract desirable acquisition candidates. Industry Expertise. The Company believes its craftsmen are among the most skilled and experienced in the industry. As a result of, among other things, its longevity in the business, significant volume of work and willingness to provide financing for equipment purchases by subcontractors, the Company has forged significant relationships with the craftsmen who perform its pool installation and renovation work. These relationships, which in some cases include several generations from the same family, have enabled the Company to negotiate favorable arrangements with such craftsmen and, together with national recruiting and apprenticeship training, have enabled the Company to maintain a stable supply of skilled labor. In addition to its experienced labor base, the Company has a senior management team that has, on average, 14 years of experience in the swimming pool industry. Reputation and Name Recognition. As a result of the Company's size, history and strong commitment to customer satisfaction, the Company believes "Anthony & Sylvan" has become one of the most recognized names in the industry and a symbol of quality among consumers. The Company's name recognition and reputation should permit the Company to establish relationships with national home builders and other referral sources that wish to be associated with the Company's brand. Innovative Sales and Marketing Approach. The Company's experienced sales designers and substantial investments in training and technology provide it with significant advantages over competitors that have less qualified sales personnel and/or utilize less sophisticated sales methods. All sales designers complete an intensive one-month training program upon joining the Company and receive periodic skills training throughout their careers. The introduction of the laptop computer as a selling tool in recent years has significantly enhanced the quality and professionalism of the Company's in-home sales presentations. This technology enables sales designers to utilize pre-programmed informational displays and pricing worksheets to educate customers and make sales visits more interactive, informative and successful. GROWTH STRATEGY The Company believes that its competitive strengths provide a platform for profitable expansion. The Company's growth strategy includes the following components: Open New Sales Offices. The Company intends to open new sales offices in existing markets where it believes it can enhance its current market share and in new markets where its competitive strengths will permit it to achieve a leading market share position. The Company has currently identified over 30 markets that meet its development or expansion criteria and intends to assess these areas further to pinpoint the most attractive locations for new sales offices and the best strategy for opening such offices. The Company believes the most significant expansion opportunities may be found in certain sunbelt regions and on the eastern seaboard in areas where the Company has little or no current presence. Since January 1, 1997, the Company has opened eight new sales offices. Pursue Acquisitions. The Company believes that it is well positioned to make acquisitions of high quality pool installation companies in the fragmented pool installation industry. As with its internal growth strategy, the Company intends to pursue acquisition candidates in the markets it has targeted for expansion. In keeping with this approach, in January 1998, the Company, which was already the leading pool installer in Las Vegas, acquired substantially all of the assets of Tango Pools, Inc., a leading pool installation company in Las Vegas (the "Tango Acquisition"). In addition, in August 1998, the Company acquired substantially all of the assets of Pools by Andrews, Inc., one of the largest pool installation companies in Florida (the "Andrews Acquisition"). See "-- Recent Developments." Develop Relationships with National and Regional Home Builders. As the largest of the national pool installers, the Company is well positioned to develop relationships with both national and regional home builders. The Company currently has relationships with homebuilders in certain markets that enable it to serve as their exclusive pool installation company. In new housing developments, the cost of the pool is typically included in the homeowner's first mortgage, and as such, the Company is paid at closing, after the pool has been completely installed. The Company believes that its ability to forego progress payments on a pool installation and accept a one-time payment at the time of the loan closing provides it with a competitive advantage over smaller companies seeking to provide similar services to large homebuilders. The Company believes that significant opportunities exist to develop and expand upon relationships with national and regional homebuilders in the future. Expand Pool Renovation Business. There are currently over three million swimming pools in the United States. The Company's experience indicates that pool owners seek renovation services when their pools need repair or when they want to upgrade certain features of the pool such as equipment, tile, lighting or plaster. Renovations are typically done in the early spring or late fall which, to some extent, reduces the seasonal nature of the business. Since 1993, the Company has been marketing its renovation services to its past installation customers in selected markets. This strategy has contributed to an increase in revenues from renovations from $0.8 million in 1993 to $7.9 million in 1997. The Company maintains a separate sales and marketing staff of 20 people responsible for its renovation business and intends to expand its marketing efforts to include an even wider base of pool owners in new and existing markets. The Company is an Ohio corporation with its principal executive offices located at 220 Park Drive, Chardon, Ohio 44024, and its telephone number is (440) 285-SWIM, or (440) 285-7946. The Company's internet homepage is located at www.anthony-sylvan.com. RELATIONSHIP WITH ESSEF The Company is an indirect, wholly owned subsidiary of Essef. Upon completion of this Offering, Essef will beneficially own Common Shares, representing % of the Common Shares then outstanding ( % if the Underwriters' over-allotment option is exercised in full). Unless and until the Double Spin-Off is completed, Essef will retain control of the Company. Such control will include the ability to determine any corporate action requiring approval of holders of the Common Shares (including the election of the entire Board of Directors of the Company) without the approval of the other shareholders of the Company. Currently, all three of the Company's current directors are executive officers and/or directors of Essef. In connection with this Offering, the Company intends to execute and deliver a revolving credit promissory note to, and enter into a series of agreements with, Essef that will govern certain aspects of their relationship subsequent to this Offering. It is anticipated that the Company will utilize the proceeds of the Offering to reduce the intercompany debt the Company owes Essef in connection with, among other things, the May 1997 acquisition of the assets and business of Anthony and Sylvan Pools, Inc. ("Original Anthony and Sylvan"). As of June 30, 1998, the Company's obligations to Essef totaled approximately $26.7 million. See "Risk Factors -- Relationship with Essef; Absence of History as a Stand-Alone Company," "Relationship between the Company and Essef" and "Principal Shareholder." RECENT DEVELOPMENTS On August 26, 1998, the Company completed the Andrews Acquisition. Pools by Andrews, Inc., with annual sales of approximately $27.0 million for the year ended December 31, 1997, is one of the largest installers of concrete swimming pools in Florida and installed approximately 1,500 pools in 1997. The Company believes that the Andrews Acquisition will facilitate its entry into six new Florida markets (Fort Myers, Fort Lauderdale, Jacksonville, Miami, Palm Beach and Tampa), and augment its presence in the Orlando market. In addition, Edward Andrews, the founder and President of Pools by Andrews, Inc. has joined the Company as a Vice President with primary responsibility for the Company's Florida operations. THE OFFERING <TABLE> <S> <C> Common Shares offered...................................... shares Common Shares to be outstanding after the Offering......... shares(1) Use of proceeds............................................ To repay certain existing indebtedness. See "Use of Proceeds." Proposed Nasdaq National Market Symbol..................... SWIM </TABLE> - --------------- (1) Excludes 1,000,000 Common Shares reserved for issuance under the Company's 1998 Long-Term Incentive Plan and additional Common Shares which may be issued to Stuart D. Neidus, the Company's Chairman, Chief Executive Officer and Chief Financial Officer, and Thomas B. Waldin, a Director of the Company, in substitution for certain of their respective Essef stock options. See "Management -- Stock Options" and "Management -- 1998 Long-Term Incentive Plan." If the Underwriters' over-allotment option is exercised in full, then the Company will have Common Shares outstanding upon consummation of the Offering. See "Shares Eligible for Future Sale."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001068003_brigham_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001068003_brigham_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary should be read in conjunction with, and is qualified in its entirety by, the detailed information and the Financial Statements and notes thereto included elsewhere in this Prospectus. All references in this Prospectus to "Brigham" or the "Company" include Brigham Exploration Company, its subsidiaries and its predecessors and their subsidiaries. Certain terms relating to the oil and gas industry are defined in "Glossary of Certain Oil and Gas Terms." THE COMPANY Brigham is an independent exploration and production company that applies 3-D seismic imaging and other advanced technologies to systematically explore and develop onshore domestic natural gas and oil provinces. The Company focuses its 3-D seismic activity in provinces where it believes 3-D technology may be effectively applied and which Brigham believes offer relatively large potential reserve volumes per well and per field, high potential production rates and multiple producing objectives. The Company's exploration activities are concentrated primarily in three core provinces: the Anadarko Basin of western Oklahoma and the Texas Panhandle; the onshore Gulf Coast of Texas and Louisiana; and West Texas. Brigham is accelerating its 3-D seismic and drilling activities in the Anadarko Basin and the Gulf Coast and is selectively focusing its activities in those geologic trends of West Texas where it has achieved its best results historically. The Company pioneered the acquisition of large scale onshore 3-D seismic surveys for exploration, obtaining extensive 3-D seismic data and experience in capturing undiscovered natural gas and oil reserves. Through December 31, 1997, Brigham had acquired 4,005 square miles (2.6 million acres) of 3-D seismic and identified 1,170 potential drilling locations, of which the Company had drilled 370. The Company generates most of its exploratory projects and, therefore, has the ability to retain a sizeable working interest to the extent that it decides not to place interests with industry participants. From inception in 1990 through December 31, 1997, Brigham had drilled 324 exploratory and 46 development wells on its 3-D seismic generated prospects with an aggregate 63% success rate and an average working interest of 24%. Utilizing the capital it raised in its May 1997 initial public offering, the Company increased the average working interest it retained in its wells during the second half of 1997, retaining a 45% average working interest in the 36 wells that it drilled. As of December 31, 1997, the Company had added approximately 93 Bcfe of net proved reserves (excluding revisions) to its reserve base, approximately 72 net Bcfe of which were discovered by Brigham through its systematic 3-D seismic exploration drilling activities. The Company's estimated net proved reserves as of December 31, 1997 were 72.3 Bcfe having an aggregate Present Value of Future Net Revenues of $69.2 million, compared to estimated net proved reserves as of December 31, 1996 of 21.9 Bcfe having an aggregate Present Value of Future Net Revenues of $44.5 million. The Company's net proved reserve volumes at December 31, 1997 were 74% natural gas and 65% categorized as proved developed reserves. BUSINESS STRATEGY Brigham's business strategy is to achieve superior growth in shareholder value through the application of its systematic exploration approach, which emphasizes the integrated use of 3-D seismic imaging and other advanced technologies to reduce drilling risks and finding costs. Since its inception in 1990, the Company has consistently achieved rapid growth in its acquisition of 3-D seismic data, identification of potential drilling locations, discovery of proved reserves and production volumes. Brigham completed its initial public offering of common stock in May 1997, raising approximately $24 million to fund the Company's accelerated 3-D seismic acquisition and exploration drilling activities. Key elements of the Company's growth strategy at its initial public offering and continuing today include: (i) accelerating the rate at which it acquires 3-D seismic and identifies potential drilling locations; (ii) increasing the working interests it retains in exploration projects to capture a greater share of the reserves that the Company discovers; (iii) identifying higher potential, higher impact prospects; and (iv) accelerating the rate at which its 3-D seismic defined locations are drilled. During the second half of 1997, the Company employed the capital raised in its initial public offering to attain significant growth in each of its core strategic objectives: Accelerated 3-D Seismic Acquisition. During 1997, Brigham acquired approximately 1,250 square miles of 3-D seismic, which increased the Company's aggregate 3-D seismic inventory 45% to approximately 4,000 square miles as of December 31, 1997. The overall level of 3-D seismic acquisition in 1997 represents the most active year in the Company's history, and 85% of this increased 3-D seismic was acquired in its higher potential Anadarko Basin and Gulf Coast provinces. Increased Working Interest. In an effort to retain a greater portion of the value generated by its 3-D seismic exploration efforts, Brigham increased the average working interests it retained in its 1997 3-D seismic projects to 68% as compared with its average project working interest of 24% in 1990 through 1996. As a result of the higher working interests and the accelerated acquisition of 3-D seismic, the Company acquired 845 net square miles of 3-D seismic in 1997 as compared with 780 cumulative net square miles acquired from 1990 through 1996. Higher Potential, Higher Impact Prospects. By focusing an increasing portion of its exploration activities in the more prolific Anadarko Basin, Brigham increased its average proved reserves discovered per net well drilled (including dry holes) to 1.2 Bcfe in 1997 from 0.7 Bcfe in 1996 and 0.4 Bcfe in 1992 through 1995. In the Anadarko Basin alone, Brigham's average proved reserves discovered per net well drilled was 3.4 Bcfe in 1997 compared with 1.8 Bcfe in 1996 and 2 Bcfe in 1994 through 1995. Contributing to these increases, the Company's Anadarko Basin drilling in 1997 produced the two largest field discoveries in Brigham's history, which resulted in the discovery of approximately 52 Bcfe of gross proved reserves and provided the Company with several development drilling opportunities. Accelerated Drilling. Through its strategy of retaining higher working interests in its 3-D seismic projects and subsequent drilling, Brigham participated in the drilling of 28 net wells in 1997, a 75% increase from the approximate 16 net wells drilled by the Company in 1996. The Company achieved a 63% success rate on the 73 wells in its 1997 drilling program, consistent with Brigham's historical average success rate. A key factor contributing to its increased level of drilling activity was the Company's addition of personnel in engineering, land and administrative functions during 1997. These staff additions provided Brigham with the additional infrastructure required to increase its operating capabilities, enabling the Company to operate 37% of its gross wells and 64% of its net wells drilled in 1997. As a result of the combined effects of the Company's multi-pronged growth strategy, Brigham generated net proved reserve additions of approximately 38 Bcfe through drilling in 1997, which represents approximately 175% of the Company's year-end 1996 net proved reserves of approximately 22 Bcfe. In addition to its drilling efforts in 1997, the Company acquired 21.5 Bcfe of net proved reserves at an implied cost of $0.63 per proved Mcfe in its November 1997 purchase of certain properties in and adjacent to its West Bradley project area in its Anadarko Basin province. Brigham believes this acquisition will enable it to further build its inventory of potential drilling locations over the historically prolific Carter Knox anticline in the Anadarko Basin through a 3-D seismic shoot planned for 1998. Primarily through its exploration efforts, the Company increased its net production volumes 52% to 3.1 Bcfe in 1997 from 2.1 Bcfe in 1996. As further evidence of the Company's acceleration efforts subsequent to its May 1997 initial public offering, Brigham increased its average net daily production volumes from 6.6 MMcfe in the second quarter 1997 to 21.2 MMcfe in the second quarter 1998 representing a compounded growth rate of 34% per quarter. Based on the results that the Company has achieved from its growth strategy since its initial public offering, Brigham intends with the proceeds from the Offering to increase its exploration activities in 1998 to take advantage of opportunities currently available to further accelerate the Company's growth. The Company's current 1998 capital budget contemplates (i) an increase in budgeted drilling expenditures in the Anadarko Basin and the Gulf Coast provinces, (ii) a reduction in planned drilling activity in West Texas in part due to recent declines in oil prices, (iii) an increase in planned 3-D seismic acquisition activities in an effort to capture additional exploration prospects for future drilling activities and (iv) potential sales of a portion of the Company's interests in certain seismic projects. The Company intends to continue to retain higher working interests in its 3-D seismic projects in the Anadarko Basin and the onshore Gulf Coast. By increasing its working interests retained in the majority of its current and planned seismic projects, Brigham expects to further accelerate its growth not only by retaining a greater portion of the reserves it discovers, but also by increasing its ability to control the timing of the drilling of its exploration projects and therefore helping to accelerate its drilling pace. The Company's current 1998 budget consists of 90 gross (45 net) wells, compared with the 73 gross (28 net) wells drilled by the Company in 1997. This increase in anticipated 1998 drilling is the result of an increase in planned drilling of higher working interest wells in the Anadarko Basin and the Gulf Coast offset by a reduction in planned drilling activity in West Texas. COMPETITIVE ADVANTAGES Brigham believes that its knowledge base, personnel and technology provide it with the following competitive advantages to capture undiscovered natural gas and oil reserves. 3-D Seismic Knowledge Base. From 1990 through 1997, the Company acquired 4,005 square miles of 3-D seismic and drilled 370 wells in over 20 geologic trends in seven basins and seven states. With the resulting knowledge of the application of 3-D seismic to different geologic trends, the Company has refined its exploration techniques and identified exploration areas where it believes 3-D seismic can reduce risks and enhance returns on its investments. Technological Expertise. Brigham's 19 explorationists collectively have approximately 300 years of experience, including approximately 85 years of experience using computer aided exploration ("CAEX") workstations, and have expertise in many geologic trends. Project Generation and Control. Brigham is not dependent on third parties for its project flow, having generated approximately 90% of its 3-D seismic exploration projects. With the resulting project control, the Company is able to manage the predrilling exploration phases and can determine the level of working interest it retains and the extent to which it manages drilling and post-drilling operations. Numerous Potential Drilling Locations. As of December 31, 1997, the Company had identified 1,170 3-D defined potential drilling locations in historically productive geologic trends, of which 370 had been drilled. The Company currently anticipates drilling 90 of these locations (45 net) in 1998 at an aggregate net cost of approximately $40 million. Pioneering Innovations. In 1990 the Company pioneered the assemblage of large scale onshore 3-D seismic projects and the use of pre-seismic lease options for the systematic exploration of proven natural gas and oil provinces. Subsequent innovations include the Company's 3-D seismic acquisition and processing alliances and creative industry trade structures to financially leverage its drilling program. PRIMARY EXPLORATION PROVINCES Brigham's exploration activities are concentrated primarily in three core provinces: the Anadarko Basin of western Oklahoma and the Texas Panhandle; the onshore Gulf Coast of Texas and Louisiana; and West Texas. Brigham is accelerating 3-D seismic activity in the Anadarko Basin and the Gulf Coast and will selectively continue such activity in those geologic trends of the West Texas region where it has achieved its best results historically. Brigham is focusing its 3-D seismic exploration efforts in provinces where it believes 3-D seismic technology may be effectively applied and which the Company believes offer relatively large potential reserve volumes per well and per field, high potential production rates and multiple producing objectives. Although the Company is acquiring 3-D seismic within the provinces listed below and has identified approximately 800 potential drilling locations yet to be drilled in those provinces, there can be no assurance that any of the seismic will be acquired or will generate additional drilling locations or that any potential drilling locations will be drilled at all or within the expected time frame. The final determination with respect to the drilling of any well, including those currently budgeted, will depend on a number of factors, including (i) the results of exploration efforts and the review and analysis of the seismic, (ii) the availability of sufficient capital resources by the Company and other participants for drilling prospects, (iii) economic and industry conditions at the time of drilling, including prevailing and anticipated prices for natural gas and oil and the availability of drilling rigs and crews, (iv) the financial resources and results of the Company and (v) the availability of leases on reasonable terms and permitting for the potential drilling location. There can be no assurance that the budgeted wells will, if drilled, encounter reservoirs of commercial quantities of natural gas or oil. <TABLE> <CAPTION> CURRENT 1998 CAPITAL BUDGET(1) -------------------------------------------- 3-D SEISMIC 3-D SEISMIC UNDRILLED CAPITAL DATA ACQUIRED/ DATA GROSS POTENTIAL EXPENDITURES ($MM) INTERPRETED AS OF BUDGETED TO WELLS DRILLING WELLS ----------------------------- 12/31/97 BE ACQUIRED IN DRILLED LOCATIONS BUDGETED NET (GROSS SQ. 1998 (GROSS THROUGH AS OF ------------ SEISMIC NET PROVINCE MILES) SQ. MILES) 12/31/97 12/31/97 GROSS NET & LAND DRILLING TOTAL(2) - -------- ----------------- -------------- -------- --------- ----- ---- ------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Anadarko Basin.......... 1,515/1,195 660 55 364 55 28.8 $12.5 $26.5 $39.0 Gulf Coast.............. 566/325 600 11 110 20 9.5 (0.5) 10.5 10.0 West Texas.............. 1,649/1,600 40 287 302 14 6.5 1.5 2.8 4.3 Others(3)............... 275/275 -- 17 24 1 0.2 -- 0.2 0.2 ----------- ----- --- --- --- ---- ----- ----- ----- Total........... 4,005/3,395 1,300 370 800 90 45.0 $13.5 $40.0 $53.5 =========== ===== === === === ==== ===== ===== ===== </TABLE> - --------------- (1) Prepared as of August 10, 1998. (2) Net 3-D seismic and land acquisition costs and drilling expenditures. (3) Colorado, Kansas and Montana. Anadarko Basin. The Anadarko Basin is a prolific natural gas province that the Company believes has been relatively under explored, particularly with regard to deep, high potential objectives. The Anadarko Basin contains numerous historically elusive stratigraphic targets, such as the Red Fork, Morrow and Springer channel sands, and structural targets, such as the Hunton and Arbuckle carbonates, which are well-suited to 3-D seismic imaging. In some cases, these objectives have produced in excess of 30 Bcf of natural gas from a single well at rates up to 30 MMcf of natural gas per day. The Company has assembled an extensive digital data base in this province, including geologic studies, basin wide geologic tops, production data, well data, geographic data and over 8,400 miles of 2-D seismic. Working with its team of in-house geologists and supplemented by consulting geologists, the Company's explorationists integrate this data with their extensive expertise and knowledge base to generate 3-D projects in the Anadarko Basin. As of December 31, 1997, the Company had acquired or was acquiring 1,515 square miles (969,600 acres) in 30 projects in the Anadarko Basin. The Company anticipates acquiring 660 square miles (422,400 acres) of additional 3-D seismic in this province in 1998. As of December 31, 1997, Brigham had completed 44 wells in 55 attempts (80% success rate) in the Anadarko Basin and had found cumulative proved reserves of 44 net Bcfe. In 1997, the Company completed 19 wells in 23 attempts in the Anadarko Basin with an average working interest of 39%, adding 31 net Bcfe of proved reserves. In addition, the Company acquired 21.5 net Bcfe of proved reserves in this region in November 1997. As of December 31, 1997, the Company had 364 3-D seismic delineated potential drilling locations in the Anadarko Basin, of which the Company intends to drill 55 gross (29 net) wells in 1998. Gulf Coast. The onshore Gulf Coast region of Texas and Louisiana is a high potential, multi-pay province that lends itself to 3-D seismic exploration due to its substantial structural and stratigraphic complexity. The Company has assembled a digital data base including geographical, production, geophysical and geological information that the Company evaluates on its CAEX workstations. Working with consulting regional geologists, the Company's explorationists integrate this data with their extensive expertise and knowledge base to generate 3-D seismic projects in the Gulf Coast. Brigham's commitment to this province is evidenced by the Company's staff additions, the opening of its Houston office and the addition of ten new 3-D seismic projects in 1996 and 1997. The Company anticipates that its increased project assemblage and 3-D seismic acquisition activity in the Gulf Coast will generate accelerated drilling in this province in 1998 and 1999. The Company is currently assembling projects in the Expanded Wilcox and Expanded Vicksburg trends in South Texas, the Miocene trend in South Texas and South Louisiana, and the Lower and Middle Frio trends of South Texas. As of December 31, 1997, the Company had acquired or was acquiring 566 square miles (362,400 acres) of 3-D seismic in seven projects in the onshore Gulf Coast province. The Company anticipates acquiring 600 square miles (384,000 acres) of additional 3-D seismic in this province in 1998. As of December 31, 1997, Brigham had completed 8 wells in 11 attempts (73% success rate) in the Gulf Coast and had found cumulative proved reserves of 3 net Bcfe. In 1997, the Company completed seven wells in 10 attempts with an average working interest of 9% adding 3 net Bcfe of proved reserves. As of December 31, 1997, the Company had 110 3-D seismic delineated potential drilling locations in the Gulf Coast province, of which the Company intends to drill 20 gross (10 net) wells in 1998. West Texas. The Company's 3-D seismic drilling activity in the West Texas region has been focused in the Horseshoe Atoll, the Midland Basin and the Eastern Shelf of the Permian Basin and the Hardeman Basin. Recently the Company initiated an exploration program in the Delaware Basin and it is selectively focusing its West Texas activity in portions of geologic trends that the Company believes offer greater potential for lower finding costs and higher returns, including the Fusselman formation of the Midland Basin and the Ellenberger and Devonian formations of the Delaware Basin. As of December 31, 1997, the Company had acquired or was acquiring 1,649 square miles (1,055,360 acres) in 74 projects in the West Texas region. The Company anticipates acquiring 40 square miles (25,600 acres) of additional 3-D seismic in this region in 1998. As of December 31, 1997, Brigham had completed 180 wells in 287 attempts (63% success rate) in the West Texas region and had found cumulative proved reserves of 24 net Bcfe. In 1997, the Company completed 19 wells in 34 attempts with an average working interest of 45%, adding 4 net Bcfe of proved reserves. As of December 31, 1997, the Company had 302 3-D seismic delineated potential drilling locations in the West Texas region, of which the Company intends to drill 14 gross (6 net) wells in 1998. THE OFFERING ISSUER..................... Brigham Exploration Company USE OF PROCEEDS............ The net proceeds of the Offering will be used to fund the Company's accelerated exploration and development activities, and in the interim for repayment of a portion of outstanding indebtedness. See "Use of Proceeds." The Notes Securities Offered......... $40 million aggregate principal amount of Senior Subordinated Secured Notes due 2003. Maturity Date.............. , 2003. Interest Payment Dates..... November 15, February 15, May 15 and August 15 of each year, commencing November 15, 1998. Interest Rate.............. Interest rates payable on the Notes shall vary depending upon whether a accrued interest is paid in cash or in kind ("PIK Interest"). Interest shall be paid in cash at interest rates of %, % and % per annum during years one through three, year four and year five, respectively, of the term of the Notes; provided, however, that if the payment of interest accrued on the Notes in cash would cause a "Borrowing Base Deficiency" under the Company's revolving credit facility or would cause the Company to be in violation of any covenant or other restriction set forth in any Senior Loan Document or any agreement entered into by the Company or subsidiary of the Company in connection with the Notes, the Company may pay PIK Interest at interest rates of %, % and % per annum during years one through three, year four and year five, respectively, of the term of the Notes. Ranking.................... The Notes will rank subordinate in right of payment to the Senior Indebtedness and senior to all other financings (other than any allowed capital leases and purchase money financings). The Subsidiary Guaranty Agreements will be similarly subordinated. As of June 30, 1998, on a pro forma basis, after giving effect to the application of the net proceeds from the Offering, the Company would have had $20.5 million Senior Indebtedness outstanding, and there would be no senior subordinated debt outstanding other than the Notes. In addition, the Notes may be structurally subordinated to all existing and future liabilities of the Company's subsidiaries. See "Capitalization," "Description of the Notes -- Ranking and Subordination," "Description of Other Indebtedness" and "Subordination Agreement." Subsidiary Guaranty Agreements................. The Notes will be fully and unconditionally guaranteed, jointly and severally, by each of the Subsidiary Guarantors. The Subsidiary Guaranty Agreements will be secured by substantially all of the assets of the Subsidiary Guarantors. Financial statements for the Subsidiary Guarantors are not presented because management has determined that they would not be material to investors. Optional Prepayment........ The Notes may be prepaid at any time, in whole or in part, without premium or penalty, provided that all partial prepayments must be pro rata to the various holders of the Notes. Change of Control.......... A Change of Control would constitute an Event of Default (as defined). If any Event of Default occurs, the holders of the Notes may direct the Trustee (as defined) to declare the principal of and the accrued and unpaid interest on such Notes to be due and payable immediately. However, such repayment would be subject to certain subordination provisions in the Indenture (as defined). Certain Covenants.......... The Notes will be issued pursuant to an indenture (the "Indenture") containing certain covenants that, among other things, limit the ability of the Company and its Subsidiaries (as defined) to incur additional indebtedness, pay dividends, make distributions, enter into certain sale and leaseback transactions, enter into certain transactions with affiliates, dispose of certain assets, incur liens, and engage in mergers and consolidations. See "Description of the Notes -- Certain Covenants." Absence of a Public Market for the Notes.............. The Notes are new securities and may only be traded in compliance with applicable securities laws. There can be no assurance as to the development or liquidity of any market for the Notes. The Company does not intend to apply for a listing of the Notes on any securities exchange or on any automated dealer quotation system. The Warrants Securities Offered......... Warrants which, when exercised, will entitle the holders thereof to acquire an aggregate of 1,000,000 shares of Common Stock (the "Warrant Shares"). Expiration Date............ , 2005. Exercise................... Each Warrant will entitle the holder to acquire at any time prior to , 2005, one share of Common Stock at a price equal to $ per share, subject to adjustment from time to time upon the occurrence of certain changes in Common Stock, certain Common Stock distributions, certain issuances of options or convertible securities, certain dividends and distributions and certain other increases in the number of shares of Common Stock. Rights as Shareholders..... Holders of Warrants will not, by virtue of being such holders, have any rights as stockholders of the Company. Registration Rights........ Pursuant to the New Registration Rights Agreement (as defined), holders of the Shares, the Warrants, the Warrant Shares and any other securities issued upon the exercise of the Warrants (collectively, the "Registrable Securities") will have demand registration rights for two registrations, provided that a request, which must be made by holders of Registrable Securities collectively owning at least 25% of the Registrable Securities (or holding at least a majority of the Registrable Securities for a shelf registration statement if the Company is eligible to use Form S-3), will be "counted" towards the two registrations only when (i) all the Registrable Securities requested to be included in the registration statement have been included, (ii) the corresponding registration statement has become effective and (iii) the public offering has been consummated and the Registrable Securities have been sold on the terms and conditions provided therein, provided that in the event of a shelf registration statement (if the Company is then eligible to file on Form S-3) the Company shall keep such registration statement effective for two years. The Company will agree in the New Registration Rights Agreement to use its best efforts to cause the registration statement to become and remain effective for the period of the distribution in order for it to be "counted" as described above. Subject to other provisions contained in the New Registration Rights Agreement, the holders of the Registrable Securities will have "piggyback" registration rights. Exercise of the right to convert the Warrants to Warrant Shares shall, at the election of the holder of the Warrants, be contingent upon the registration of the Warrant Shares in accordance with the New Registration Rights Agreement and should such registration not be completed such holder shall have the right to rescind its election to convert the Warrants. See "Registration Rights Relating to the Shares and the Warrants." Transfer Restrictions...... The Warrant Shares have not been registered under the Securities Act and may not be offered or sold, except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. The Common Stock Common Stock Offered by the Company.................. shares Common Stock to be Outstanding after the Offering................. shares(1) The Nasdaq Stock Market(SM) Symbol................... "BEXP" Registration Rights........ The holders of the Shares shall have registration rights with respect to the Shares set forth above in the summary of Registration Rights relating to the Warrants. - --------------- (1) Does not include (a) 935,987 shares of Common Stock issuable, subject to vesting, upon exercise of outstanding stock options with an average exercise price of $7.61 per share or (b) 1,000,000 shares of Common Stock issuable upon exercise of the Warrants with an exercise price of $ per share. See "Management -- Executive Director Compensation," "-- Executive Compensation," "Capitalization" and "Description of Warrants." RISK FACTORS Any investment in the Notes, Warrants or Shares involves a high degree of risk. For a discussion of certain risks that a potential investor should carefully evaluate prior to making an investment in the Notes, Warrants or Shares, see "Risk Factors." SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The following table sets forth selected financial data of the Company. The data for the three years ended December 31, 1997 has been derived from the consolidated financial statements appearing elsewhere in this Prospectus. The data for the two years ended December 31, 1994 has been derived from consolidated financial statements not appearing in this Prospectus. The consolidated financial data at June 30, 1998 and for the six months ended June 30, 1998 and June 30, 1997 have been derived from the condensed consolidated financial statements of the Company which, in the opinion of management, include all adjustments, consisting only of normal adjustments, necessary for a fair presentation of the results for the periods. The results for the six months ended June 30, 1998 are not necessarily indicative of the results to be expected for the full year. The information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and notes thereto included elsewhere in this Prospectus. <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, -------------------------------------------------- ------------------- 1993 1994 1995 1996 1997 1997 1998 ------- ------- ------- -------- -------- ------- -------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues: Natural gas and oil sales................. $ 937 $ 2,565 $ 3,578 $ 6,141 $ 9,184 $ 3,854 $ 7,130 Workstation revenue....................... 467 815 635 627 637 324 247 ------- ------- ------- -------- -------- ------- -------- Total revenues........................ 1,404 3,380 4,213 6,768 9,821 4,178 7,377 Costs and expenses: Lease operating........................... 111 491 761 726 1,151 470 978 Production taxes.......................... 47 126 165 362 549 219 450 General and administrative................ 1,433 1,785 1,897 2,199 3,570 1,455 2,293 Depletion of natural gas and oil properties.............................. 4,371(1) 1,104 1,626 2,323 2,732 1,395 2,784 Depreciation and amortization............. 406 561 533 487 582 287 365 ------- ------- ------- -------- -------- ------- -------- Total costs and expenses.............. 6,368 4,067 4,982 6,097 8,584 3,826 6,870 ------- ------- ------- -------- -------- ------- -------- Operating income (loss)..................... (4,964) (687) (769) 671 1,237 352 507 Other income (expense): Interest income........................... 6 56 128 52 145 81 77 Interest expense.......................... (105) (668) (936) (1,173) (1,190) (546) (2,432) ------- ------- ------- -------- -------- ------- -------- Total other income (expense).......... (99) (612) (808) (1,121) (1,045) (465) (2,355) ------- ------- ------- -------- -------- ------- -------- Net income (loss) before income taxes....... (5,063) (1,299) (1,577) (450) 192 (113) (1,848) Income tax (expense) benefit, net........... -- -- -- -- (1,228)(2) (4,813)(2) 621 ------- ------- ------- -------- -------- ------- -------- Net loss.............................. $(5,063) $(1,299) $(1,577) $ (450) $ (1,036) $(4,926) $ (1,227) ======= ======= ======= ======== ======== ======= ======== Net loss per share -- basic/diluted......... $ (0.57) $ (0.15) $ (0.18) $ (0.05) $ (0.09) $ (0.50) $ (0.10) Weighted average shares outstanding -- basic/diluted............................. 8,929 8,929 8,929 8,929 11,081 9,890 12,254 STATEMENT OF CASH FLOWS DATA: Net cash provided by (used in) operating activities................................ $ (730) $ 626 $ 1,383 $ 3,710 $ 9,806 $ (195) $ (1,692) Net cash used in investing activities....... (6,983) (5,463) (8,005) (11,796) (57,300) (12,105) (30,884) Net cash provided by financing activities... 7,839 4,634 7,724 7,731 47,748 15,842 33,981 OTHER FINANCIAL DATA: Capital expenditures........................ $ 6,632 $ 5,445 $ 7,935 $ 13,612 $ 57,170 $11,796 $ 30,044 EBITDA(3)................................... (187) 978 1,390 3,481 4,551 2,034 3,656 Operating cash flow(4)...................... (286) 366 582 2,360 3,506 1,569 1,567 Ratio of earnings to fixed charges(6)....... -- -- -- -- 1.1x -- -- PRO FORMA FINANCIAL DATA(7): Ratio of earnings to fixed charges(6)....... -- -- Interest expense(7)......................... 2,325 3,252 </TABLE> <TABLE> <CAPTION> AS OF JUNE 30, 1998 ------------------------- ACTUAL AS ADJUSTED(5) -------- -------------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................. $ 3,106 $ 3,106 Natural gas and oil properties, at cost, net.............. 114,454 114,454 Total assets.............................................. 129,699 131,579 Notes payable............................................. 68,000 20,450 Stockholders' equity...................................... 42,334 56,264 </TABLE> - --------------- (1) Includes a capitalized ceiling impairment charge of $3.3 million in 1993. (2) In conjunction with the Exchange, the Company recorded a deferred income tax liability of $5 million to recognize the temporary differences between the financial statement and tax bases of the assets and liabilities of the Partnership at February 27, 1997, the date of the Exchange. During the fourth quarter of 1997, the Company elected to record a step-up in basis of its assets for tax purposes as a result of the Exchange. Related to this election, the Company recorded a $3.8 million deferred income tax benefit, resulting in a net $1.2 million ($.10 per share) non-cash deferred income tax charge for the year ended December 31, 1997. See Note 2 of Notes to the December 31, 1997 Consolidated Financial Statements. See "The Company." (3) EBITDA represents net income (loss) plus income taxes, net interest expense and depreciation, depletion and amortization expense. EBITDA should not be considered in isolation or as a substitute for net income, cash flows from operating activities or any other measure of financial performance prepared in accordance with generally accepted accounting principles or as a measure of a company's profitability or liquidity. (4) Operating cash flow represents net income (loss) plus depreciation, depletion and amortization ("DD&A") expenses, deferred income taxes and other non-cash items. Operating cash flow should not be considered in isolation or as a substitute for net income, cash flows from operating activities or any other measure of financial performance prepared in accordance with generally accepted accounting principles or as a measure of a company's profitability or liquidity. (5) As adjusted to give effect to the Offering and the application of the estimated $47.6 million net proceeds therefrom to the Company, assuming issuance of 1,052,632 Shares at a price of $9.50 per share. See "Use of Proceeds" and "Capitalization."
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+PROSPECTUS SUMMARY The following summary should be read in conjunction with, and is qualified in its entirety by, the detailed information and the Financial Statements and notes thereto included elsewhere in this Prospectus. All references in this Prospectus to "Brigham" or the "Company" include Brigham Exploration Company, its subsidiaries and its predecessors and their subsidiaries. Certain terms relating to the oil and gas industry are defined in "Glossary of Certain Oil and Gas Terms." THE COMPANY Brigham is an independent exploration and production company that applies 3-D seismic imaging and other advanced technologies to systematically explore and develop onshore domestic natural gas and oil provinces. The Company focuses its 3-D seismic activity in provinces where it believes 3-D technology may be effectively applied and which Brigham believes offer relatively large potential reserve volumes per well and per field, high potential production rates and multiple producing objectives. The Company's exploration activities are concentrated primarily in three core provinces: the Anadarko Basin of western Oklahoma and the Texas Panhandle; the onshore Gulf Coast of Texas and Louisiana; and West Texas. Brigham is accelerating its 3-D seismic and drilling activities in the Anadarko Basin and the Gulf Coast and is selectively focusing its activities in those geologic trends of West Texas where it has achieved its best results historically. The Company pioneered the acquisition of large scale onshore 3-D seismic surveys for exploration, obtaining extensive 3-D seismic data and experience in capturing undiscovered natural gas and oil reserves. Through December 31, 1997, Brigham had acquired 4,005 square miles (2.6 million acres) of 3-D seismic and identified 1,170 potential drilling locations, of which the Company had drilled 370. The Company generates most of its exploratory projects and, therefore, has the ability to retain a sizeable working interest to the extent that it decides not to place interests with industry participants. From inception in 1990 through December 31, 1997, Brigham had drilled 324 exploratory and 46 development wells on its 3-D seismic generated prospects with an aggregate 63% success rate and an average working interest of 24%. Utilizing the capital it raised in its May 1997 initial public offering, the Company increased the average working interest it retained in its wells during the second half of 1997, retaining a 45% average working interest in the 36 wells that it drilled. As of December 31, 1997, the Company had added approximately 93 Bcfe of net proved reserves (excluding revisions) to its reserve base, approximately 72 net Bcfe of which were discovered by Brigham through its systematic 3-D seismic exploration drilling activities. The Company's estimated net proved reserves as of December 31, 1997 were 72.3 Bcfe having an aggregate Present Value of Future Net Revenues of $69.2 million, compared to estimated net proved reserves as of December 31, 1996 of 21.9 Bcfe having an aggregate Present Value of Future Net Revenues of $44.5 million. The Company's net proved reserve volumes at December 31, 1997 were 74% natural gas and 65% categorized as proved developed reserves. BUSINESS STRATEGY Brigham's business strategy is to achieve superior growth in shareholder value through the application of its systematic exploration approach, which emphasizes the integrated use of 3-D seismic imaging and other advanced technologies to reduce drilling risks and finding costs. Since its inception in 1990, the Company has consistently achieved rapid growth in its acquisition of 3-D seismic data, identification of potential drilling locations, discovery of proved reserves and production volumes. Brigham completed its initial public offering of common stock in May 1997, raising approximately $24 million to fund the Company's accelerated 3-D seismic acquisition and exploration drilling activities. Key elements of the Company's growth strategy at its initial public offering and continuing today include: (i) accelerating the rate at which it acquires 3-D seismic and identifies potential drilling locations; (ii) increasing the working interests it retains in exploration projects to capture a greater share of the reserves that the Company discovers; (iii) identifying higher potential, higher impact prospects; and (iv) accelerating the rate at which its 3-D seismic defined locations are drilled. During the second half of 1997, the Company employed the capital raised in its initial public offering to attain significant growth in each of its core strategic objectives: Accelerated 3-D Seismic Acquisition. During 1997, Brigham acquired approximately 1,250 square miles of 3-D seismic, which increased the Company's aggregate 3-D seismic inventory 45% to approximately 4,000 square miles as of December 31, 1997. The overall level of 3-D seismic acquisition in 1997 represents the most active year in the Company's history, and 85% of this increased 3-D seismic was acquired in its higher potential Anadarko Basin and Gulf Coast provinces. Increased Working Interest. In an effort to retain a greater portion of the value generated by its 3-D seismic exploration efforts, Brigham increased the average working interests it retained in its 1997 3-D seismic projects to 68% as compared with its average project working interest of 24% in 1990 through 1996. As a result of the higher working interests and the accelerated acquisition of 3-D seismic, the Company acquired 845 net square miles of 3-D seismic in 1997 as compared with 780 cumulative net square miles acquired from 1990 through 1996. Higher Potential, Higher Impact Prospects. By focusing an increasing portion of its exploration activities in the more prolific Anadarko Basin, Brigham increased its average proved reserves discovered per net well drilled (including dry holes) to 1.2 Bcfe in 1997 from 0.7 Bcfe in 1996 and 0.4 Bcfe in 1992 through 1995. In the Anadarko Basin alone, Brigham's average proved reserves discovered per net well drilled was 3.4 Bcfe in 1997 compared with 1.8 Bcfe in 1996 and 2 Bcfe in 1994 through 1995. Contributing to these increases, the Company's Anadarko Basin drilling in 1997 produced the two largest field discoveries in Brigham's history, which resulted in the discovery of approximately 52 Bcfe of gross proved reserves and provided the Company with several development drilling opportunities. Accelerated Drilling. Through its strategy of retaining higher working interests in its 3-D seismic projects and subsequent drilling, Brigham participated in the drilling of 28 net wells in 1997, a 75% increase from the approximate 16 net wells drilled by the Company in 1996. The Company achieved a 63% success rate on the 73 wells in its 1997 drilling program, consistent with Brigham's historical average success rate. A key factor contributing to its increased level of drilling activity was the Company's addition of personnel in engineering, land and administrative functions during 1997. These staff additions provided Brigham with the additional infrastructure required to increase its operating capabilities, enabling the Company to operate 37% of its gross wells and 64% of its net wells drilled in 1997. As a result of the combined effects of the Company's multi-pronged growth strategy, Brigham generated net proved reserve additions of approximately 38 Bcfe through drilling in 1997, which represents approximately 175% of the Company's year-end 1996 net proved reserves of approximately 22 Bcfe. In addition to its drilling efforts in 1997, the Company acquired 21.5 Bcfe of net proved reserves at an implied cost of $0.63 per proved Mcfe in its November 1997 purchase of certain properties in and adjacent to its West Bradley project area in its Anadarko Basin province. Brigham believes this acquisition will enable it to further build its inventory of potential drilling locations over the historically prolific Carter Knox anticline in the Anadarko Basin through a 3-D seismic shoot planned for 1998. Primarily through its exploration efforts, the Company increased its net production volumes 52% to 3.1 Bcfe in 1997 from 2.1 Bcfe in 1996. As further evidence of the Company's acceleration efforts subsequent to its May 1997 initial public offering, Brigham increased its average net daily production volumes from 6.6 MMcfe in the second quarter 1997 to 21.2 MMcfe in the second quarter 1998 representing a compounded growth rate of 34% per quarter. Based on the results that the Company has achieved from its growth strategy since its initial public offering, Brigham intends with the proceeds from the Offering to increase its exploration activities in 1998 to take advantage of opportunities currently available to further accelerate the Company's growth. The Company's current 1998 capital budget contemplates (i) an increase in budgeted drilling expenditures in the Anadarko Basin and the Gulf Coast provinces, (ii) a reduction in planned drilling activity in West Texas in part due to recent declines in oil prices, (iii) an increase in planned 3-D seismic acquisition activities in an effort to capture additional exploration prospects for future drilling activities and (iv) potential sales of a portion of the Company's interests in certain seismic projects. The Company intends to continue to retain higher working interests in its 3-D seismic projects in the Anadarko Basin and the onshore Gulf Coast. By increasing its working interests retained in the majority of its current and planned seismic projects, Brigham expects to further accelerate its growth not only by retaining a greater portion of the reserves it discovers, but also by increasing its ability to control the timing of the drilling of its exploration projects and therefore helping to accelerate its drilling pace. The Company's current 1998 budget consists of 90 gross (45 net) wells, compared with the 73 gross (28 net) wells drilled by the Company in 1997. This increase in anticipated 1998 drilling is the result of an increase in planned drilling of higher working interest wells in the Anadarko Basin and the Gulf Coast offset by a reduction in planned drilling activity in West Texas. COMPETITIVE ADVANTAGES Brigham believes that its knowledge base, personnel and technology provide it with the following competitive advantages to capture undiscovered natural gas and oil reserves. 3-D Seismic Knowledge Base. From 1990 through 1997, the Company acquired 4,005 square miles of 3-D seismic and drilled 370 wells in over 20 geologic trends in seven basins and seven states. With the resulting knowledge of the application of 3-D seismic to different geologic trends, the Company has refined its exploration techniques and identified exploration areas where it believes 3-D seismic can reduce risks and enhance returns on its investments. Technological Expertise. Brigham's 19 explorationists collectively have approximately 300 years of experience, including approximately 85 years of experience using computer aided exploration ("CAEX") workstations, and have expertise in many geologic trends. Project Generation and Control. Brigham is not dependent on third parties for its project flow, having generated approximately 90% of its 3-D seismic exploration projects. With the resulting project control, the Company is able to manage the predrilling exploration phases and can determine the level of working interest it retains and the extent to which it manages drilling and post-drilling operations. Numerous Potential Drilling Locations. As of December 31, 1997, the Company had identified 1,170 3-D defined potential drilling locations in historically productive geologic trends, of which 370 had been drilled. The Company currently anticipates drilling 90 of these locations (45 net) in 1998 at an aggregate net cost of approximately $40 million. Pioneering Innovations. In 1990 the Company pioneered the assemblage of large scale onshore 3-D seismic projects and the use of pre-seismic lease options for the systematic exploration of proven natural gas and oil provinces. Subsequent innovations include the Company's 3-D seismic acquisition and processing alliances and creative industry trade structures to financially leverage its drilling program. PRIMARY EXPLORATION PROVINCES Brigham's exploration activities are concentrated primarily in three core provinces: the Anadarko Basin of western Oklahoma and the Texas Panhandle; the onshore Gulf Coast of Texas and Louisiana; and West Texas. Brigham is accelerating 3-D seismic activity in the Anadarko Basin and the Gulf Coast and will selectively continue such activity in those geologic trends of the West Texas region where it has achieved its best results historically. Brigham is focusing its 3-D seismic exploration efforts in provinces where it believes 3-D seismic technology may be effectively applied and which the Company believes offer relatively large potential reserve volumes per well and per field, high potential production rates and multiple producing objectives. Although the Company is acquiring 3-D seismic within the provinces listed below and has identified approximately 800 potential drilling locations yet to be drilled in those provinces, there can be no assurance that any of the seismic will be acquired or will generate additional drilling locations or that any potential drilling locations will be drilled at all or within the expected time frame. The final determination with respect to the drilling of any well, including those currently budgeted, will depend on a number of factors, including (i) the results of exploration efforts and the review and analysis of the seismic, (ii) the availability of sufficient capital resources by the Company and other participants for drilling prospects, (iii) economic and industry conditions at the time of drilling, including prevailing and anticipated prices for natural gas and oil and the availability of drilling rigs and crews, (iv) the financial resources and results of the Company and (v) the availability of leases on reasonable terms and permitting for the potential drilling location. There can be no assurance that the budgeted wells will, if drilled, encounter reservoirs of commercial quantities of natural gas or oil. <TABLE> <CAPTION> CURRENT 1998 CAPITAL BUDGET(1) -------------------------------------------- 3-D SEISMIC 3-D SEISMIC UNDRILLED CAPITAL DATA ACQUIRED/ DATA GROSS POTENTIAL EXPENDITURES ($MM) INTERPRETED AS OF BUDGETED TO WELLS DRILLING WELLS ----------------------------- 12/31/97 BE ACQUIRED IN DRILLED LOCATIONS BUDGETED NET (GROSS SQ. 1998 (GROSS THROUGH AS OF ------------ SEISMIC NET PROVINCE MILES) SQ. MILES) 12/31/97 12/31/97 GROSS NET & LAND DRILLING TOTAL(2) - -------- ----------------- -------------- -------- --------- ----- ---- ------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Anadarko Basin.......... 1,515/1,195 660 55 364 55 28.8 $12.5 $26.5 $39.0 Gulf Coast.............. 566/325 600 11 110 20 9.5 (0.5) 10.5 10.0 West Texas.............. 1,649/1,600 40 287 302 14 6.5 1.5 2.8 4.3 Others(3)............... 275/275 -- 17 24 1 0.2 -- 0.2 0.2 ----------- ----- --- --- --- ---- ----- ----- ----- Total........... 4,005/3,395 1,300 370 800 90 45.0 $13.5 $40.0 $53.5 =========== ===== === === === ==== ===== ===== ===== </TABLE> - --------------- (1) Prepared as of August 10, 1998. (2) Net 3-D seismic and land acquisition costs and drilling expenditures. (3) Colorado, Kansas and Montana. Anadarko Basin. The Anadarko Basin is a prolific natural gas province that the Company believes has been relatively under explored, particularly with regard to deep, high potential objectives. The Anadarko Basin contains numerous historically elusive stratigraphic targets, such as the Red Fork, Morrow and Springer channel sands, and structural targets, such as the Hunton and Arbuckle carbonates, which are well-suited to 3-D seismic imaging. In some cases, these objectives have produced in excess of 30 Bcf of natural gas from a single well at rates up to 30 MMcf of natural gas per day. The Company has assembled an extensive digital data base in this province, including geologic studies, basin wide geologic tops, production data, well data, geographic data and over 8,400 miles of 2-D seismic. Working with its team of in-house geologists and supplemented by consulting geologists, the Company's explorationists integrate this data with their extensive expertise and knowledge base to generate 3-D projects in the Anadarko Basin. As of December 31, 1997, the Company had acquired or was acquiring 1,515 square miles (969,600 acres) in 30 projects in the Anadarko Basin. The Company anticipates acquiring 660 square miles (422,400 acres) of additional 3-D seismic in this province in 1998. As of December 31, 1997, Brigham had completed 44 wells in 55 attempts (80% success rate) in the Anadarko Basin and had found cumulative proved reserves of 44 net Bcfe. In 1997, the Company completed 19 wells in 23 attempts in the Anadarko Basin with an average working interest of 39%, adding 31 net Bcfe of proved reserves. In addition, the Company acquired 21.5 net Bcfe of proved reserves in this region in November 1997. As of December 31, 1997, the Company had 364 3-D seismic delineated potential drilling locations in the Anadarko Basin, of which the Company intends to drill 55 gross (29 net) wells in 1998. Gulf Coast. The onshore Gulf Coast region of Texas and Louisiana is a high potential, multi-pay province that lends itself to 3-D seismic exploration due to its substantial structural and stratigraphic complexity. The Company has assembled a digital data base including geographical, production, geophysical and geological information that the Company evaluates on its CAEX workstations. Working with consulting regional geologists, the Company's explorationists integrate this data with their extensive expertise and knowledge base to generate 3-D seismic projects in the Gulf Coast. Brigham's commitment to this province is evidenced by the Company's staff additions, the opening of its Houston office and the addition of ten new 3-D seismic projects in 1996 and 1997. The Company anticipates that its increased project assemblage and 3-D seismic acquisition activity in the Gulf Coast will generate accelerated drilling in this province in 1998 and 1999. The Company is currently assembling projects in the Expanded Wilcox and Expanded Vicksburg trends in South Texas, the Miocene trend in South Texas and South Louisiana, and the Lower and Middle Frio trends of South Texas. As of December 31, 1997, the Company had acquired or was acquiring 566 square miles (362,400 acres) of 3-D seismic in seven projects in the onshore Gulf Coast province. The Company anticipates acquiring 600 square miles (384,000 acres) of additional 3-D seismic in this province in 1998. As of December 31, 1997, Brigham had completed 8 wells in 11 attempts (73% success rate) in the Gulf Coast and had found cumulative proved reserves of 3 net Bcfe. In 1997, the Company completed seven wells in 10 attempts with an average working interest of 9% adding 3 net Bcfe of proved reserves. As of December 31, 1997, the Company had 110 3-D seismic delineated potential drilling locations in the Gulf Coast province, of which the Company intends to drill 20 gross (10 net) wells in 1998. West Texas. The Company's 3-D seismic drilling activity in the West Texas region has been focused in the Horseshoe Atoll, the Midland Basin and the Eastern Shelf of the Permian Basin and the Hardeman Basin. Recently the Company initiated an exploration program in the Delaware Basin and it is selectively focusing its West Texas activity in portions of geologic trends that the Company believes offer greater potential for lower finding costs and higher returns, including the Fusselman formation of the Midland Basin and the Ellenberger and Devonian formations of the Delaware Basin. As of December 31, 1997, the Company had acquired or was acquiring 1,649 square miles (1,055,360 acres) in 74 projects in the West Texas region. The Company anticipates acquiring 40 square miles (25,600 acres) of additional 3-D seismic in this region in 1998. As of December 31, 1997, Brigham had completed 180 wells in 287 attempts (63% success rate) in the West Texas region and had found cumulative proved reserves of 24 net Bcfe. In 1997, the Company completed 19 wells in 34 attempts with an average working interest of 45%, adding 4 net Bcfe of proved reserves. As of December 31, 1997, the Company had 302 3-D seismic delineated potential drilling locations in the West Texas region, of which the Company intends to drill 14 gross (6 net) wells in 1998. THE OFFERING ISSUER..................... Brigham Exploration Company USE OF PROCEEDS............ The net proceeds of the Offering will be used to fund the Company's accelerated exploration and development activities, and in the interim for repayment of a portion of outstanding indebtedness. See "Use of Proceeds." The Notes Securities Offered......... $40 million aggregate principal amount of Senior Subordinated Secured Notes due 2003. Maturity Date.............. , 2003. Interest Payment Dates..... November 15, February 15, May 15 and August 15 of each year, commencing November 15, 1998. Interest Rate.............. Interest rates payable on the Notes shall vary depending upon whether a accrued interest is paid in cash or in kind ("PIK Interest"). Interest shall be paid in cash at interest rates of %, % and % per annum during years one through three, year four and year five, respectively, of the term of the Notes; provided, however, that if the payment of interest accrued on the Notes in cash would cause a "Borrowing Base Deficiency" under the Company's revolving credit facility or would cause the Company to be in violation of any covenant or other restriction set forth in any Senior Loan Document or any agreement entered into by the Company or subsidiary of the Company in connection with the Notes, the Company may pay PIK Interest at interest rates of %, % and % per annum during years one through three, year four and year five, respectively, of the term of the Notes. Ranking.................... The Notes will rank subordinate in right of payment to the Senior Indebtedness and senior to all other financings (other than any allowed capital leases and purchase money financings). The Subsidiary Guaranty Agreements will be similarly subordinated. As of June 30, 1998, on a pro forma basis, after giving effect to the application of the net proceeds from the Offering, the Company would have had $20.5 million Senior Indebtedness outstanding, and there would be no senior subordinated debt outstanding other than the Notes. In addition, the Notes may be structurally subordinated to all existing and future liabilities of the Company's subsidiaries. See "Capitalization," "Description of the Notes -- Ranking and Subordination," "Description of Other Indebtedness" and "Subordination Agreement." Subsidiary Guaranty Agreements................. The Notes will be fully and unconditionally guaranteed, jointly and severally, by each of the Subsidiary Guarantors. The Subsidiary Guaranty Agreements will be secured by substantially all of the assets of the Subsidiary Guarantors. Financial statements for the Subsidiary Guarantors are not presented because management has determined that they would not be material to investors. Optional Prepayment........ The Notes may be prepaid at any time, in whole or in part, without premium or penalty, provided that all partial prepayments must be pro rata to the various holders of the Notes. Change of Control.......... A Change of Control would constitute an Event of Default (as defined). If any Event of Default occurs, the holders of the Notes may direct the Trustee (as defined) to declare the principal of and the accrued and unpaid interest on such Notes to be due and payable immediately. However, such repayment would be subject to certain subordination provisions in the Indenture (as defined). Certain Covenants.......... The Notes will be issued pursuant to an indenture (the "Indenture") containing certain covenants that, among other things, limit the ability of the Company and its Subsidiaries (as defined) to incur additional indebtedness, pay dividends, make distributions, enter into certain sale and leaseback transactions, enter into certain transactions with affiliates, dispose of certain assets, incur liens, and engage in mergers and consolidations. See "Description of the Notes -- Certain Covenants." Absence of a Public Market for the Notes.............. The Notes are new securities and may only be traded in compliance with applicable securities laws. There can be no assurance as to the development or liquidity of any market for the Notes. The Company does not intend to apply for a listing of the Notes on any securities exchange or on any automated dealer quotation system. The Warrants Securities Offered......... Warrants which, when exercised, will entitle the holders thereof to acquire an aggregate of 1,000,000 shares of Common Stock (the "Warrant Shares"). Expiration Date............ , 2005. Exercise................... Each Warrant will entitle the holder to acquire at any time prior to , 2005, one share of Common Stock at a price equal to $ per share, subject to adjustment from time to time upon the occurrence of certain changes in Common Stock, certain Common Stock distributions, certain issuances of options or convertible securities, certain dividends and distributions and certain other increases in the number of shares of Common Stock. Rights as Shareholders..... Holders of Warrants will not, by virtue of being such holders, have any rights as stockholders of the Company. Registration Rights........ Pursuant to the New Registration Rights Agreement (as defined), holders of the Shares, the Warrants, the Warrant Shares and any other securities issued upon the exercise of the Warrants (collectively, the "Registrable Securities") will have demand registration rights for two registrations, provided that a request, which must be made by holders of Registrable Securities collectively owning at least 25% of the Registrable Securities (or holding at least a majority of the Registrable Securities for a shelf registration statement if the Company is eligible to use Form S-3), will be "counted" towards the two registrations only when (i) all the Registrable Securities requested to be included in the registration statement have been included, (ii) the corresponding registration statement has become effective and (iii) the public offering has been consummated and the Registrable Securities have been sold on the terms and conditions provided therein, provided that in the event of a shelf registration statement (if the Company is then eligible to file on Form S-3) the Company shall keep such registration statement effective for two years. The Company will agree in the New Registration Rights Agreement to use its best efforts to cause the registration statement to become and remain effective for the period of the distribution in order for it to be "counted" as described above. Subject to other provisions contained in the New Registration Rights Agreement, the holders of the Registrable Securities will have "piggyback" registration rights. Exercise of the right to convert the Warrants to Warrant Shares shall, at the election of the holder of the Warrants, be contingent upon the registration of the Warrant Shares in accordance with the New Registration Rights Agreement and should such registration not be completed such holder shall have the right to rescind its election to convert the Warrants. See "Registration Rights Relating to the Shares and the Warrants." Transfer Restrictions...... The Warrant Shares have not been registered under the Securities Act and may not be offered or sold, except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. The Common Stock Common Stock Offered by the Company.................. shares Common Stock to be Outstanding after the Offering................. shares(1) The Nasdaq Stock Market(SM) Symbol................... "BEXP" Registration Rights........ The holders of the Shares shall have registration rights with respect to the Shares set forth above in the summary of Registration Rights relating to the Warrants. - --------------- (1) Does not include (a) 935,987 shares of Common Stock issuable, subject to vesting, upon exercise of outstanding stock options with an average exercise price of $7.61 per share or (b) 1,000,000 shares of Common Stock issuable upon exercise of the Warrants with an exercise price of $ per share. See "Management -- Executive Director Compensation," "-- Executive Compensation," "Capitalization" and "Description of Warrants." RISK FACTORS Any investment in the Notes, Warrants or Shares involves a high degree of risk. For a discussion of certain risks that a potential investor should carefully evaluate prior to making an investment in the Notes, Warrants or Shares, see "Risk Factors." SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The following table sets forth selected financial data of the Company. The data for the three years ended December 31, 1997 has been derived from the consolidated financial statements appearing elsewhere in this Prospectus. The data for the two years ended December 31, 1994 has been derived from consolidated financial statements not appearing in this Prospectus. The consolidated financial data at June 30, 1998 and for the six months ended June 30, 1998 and June 30, 1997 have been derived from the condensed consolidated financial statements of the Company which, in the opinion of management, include all adjustments, consisting only of normal adjustments, necessary for a fair presentation of the results for the periods. The results for the six months ended June 30, 1998 are not necessarily indicative of the results to be expected for the full year. The information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and notes thereto included elsewhere in this Prospectus. <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, -------------------------------------------------- ------------------- 1993 1994 1995 1996 1997 1997 1998 ------- ------- ------- -------- -------- ------- -------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues: Natural gas and oil sales................. $ 937 $ 2,565 $ 3,578 $ 6,141 $ 9,184 $ 3,854 $ 7,130 Workstation revenue....................... 467 815 635 627 637 324 247 ------- ------- ------- -------- -------- ------- -------- Total revenues........................ 1,404 3,380 4,213 6,768 9,821 4,178 7,377 Costs and expenses: Lease operating........................... 111 491 761 726 1,151 470 978 Production taxes.......................... 47 126 165 362 549 219 450 General and administrative................ 1,433 1,785 1,897 2,199 3,570 1,455 2,293 Depletion of natural gas and oil properties.............................. 4,371(1) 1,104 1,626 2,323 2,732 1,395 2,784 Depreciation and amortization............. 406 561 533 487 582 287 365 ------- ------- ------- -------- -------- ------- -------- Total costs and expenses.............. 6,368 4,067 4,982 6,097 8,584 3,826 6,870 ------- ------- ------- -------- -------- ------- -------- Operating income (loss)..................... (4,964) (687) (769) 671 1,237 352 507 Other income (expense): Interest income........................... 6 56 128 52 145 81 77 Interest expense.......................... (105) (668) (936) (1,173) (1,190) (546) (2,432) ------- ------- ------- -------- -------- ------- -------- Total other income (expense).......... (99) (612) (808) (1,121) (1,045) (465) (2,355) ------- ------- ------- -------- -------- ------- -------- Net income (loss) before income taxes....... (5,063) (1,299) (1,577) (450) 192 (113) (1,848) Income tax (expense) benefit, net........... -- -- -- -- (1,228)(2) (4,813)(2) 621 ------- ------- ------- -------- -------- ------- -------- Net loss.............................. $(5,063) $(1,299) $(1,577) $ (450) $ (1,036) $(4,926) $ (1,227) ======= ======= ======= ======== ======== ======= ======== Net loss per share -- basic/diluted......... $ (0.57) $ (0.15) $ (0.18) $ (0.05) $ (0.09) $ (0.50) $ (0.10) Weighted average shares outstanding -- basic/diluted............................. 8,929 8,929 8,929 8,929 11,081 9,890 12,254 STATEMENT OF CASH FLOWS DATA: Net cash provided by (used in) operating activities................................ $ (730) $ 626 $ 1,383 $ 3,710 $ 9,806 $ (195) $ (1,692) Net cash used in investing activities....... (6,983) (5,463) (8,005) (11,796) (57,300) (12,105) (30,884) Net cash provided by financing activities... 7,839 4,634 7,724 7,731 47,748 15,842 33,981 OTHER FINANCIAL DATA: Capital expenditures........................ $ 6,632 $ 5,445 $ 7,935 $ 13,612 $ 57,170 $11,796 $ 30,044 EBITDA(3)................................... (187) 978 1,390 3,481 4,551 2,034 3,656 Operating cash flow(4)...................... (286) 366 582 2,360 3,506 1,569 1,567 Ratio of earnings to fixed charges(6)....... -- -- -- -- 1.1x -- -- PRO FORMA FINANCIAL DATA(7): Ratio of earnings to fixed charges(6)....... -- -- Interest expense(7)......................... 2,325 3,252 </TABLE> <TABLE> <CAPTION> AS OF JUNE 30, 1998 ------------------------- ACTUAL AS ADJUSTED(5) -------- -------------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................. $ 3,106 $ 3,106 Natural gas and oil properties, at cost, net.............. 114,454 114,454 Total assets.............................................. 129,699 131,579 Notes payable............................................. 68,000 20,450 Stockholders' equity...................................... 42,334 56,264 </TABLE> - --------------- (1) Includes a capitalized ceiling impairment charge of $3.3 million in 1993. (2) In conjunction with the Exchange, the Company recorded a deferred income tax liability of $5 million to recognize the temporary differences between the financial statement and tax bases of the assets and liabilities of the Partnership at February 27, 1997, the date of the Exchange. During the fourth quarter of 1997, the Company elected to record a step-up in basis of its assets for tax purposes as a result of the Exchange. Related to this election, the Company recorded a $3.8 million deferred income tax benefit, resulting in a net $1.2 million ($.10 per share) non-cash deferred income tax charge for the year ended December 31, 1997. See Note 2 of Notes to the December 31, 1997 Consolidated Financial Statements. See "The Company." (3) EBITDA represents net income (loss) plus income taxes, net interest expense and depreciation, depletion and amortization expense. EBITDA should not be considered in isolation or as a substitute for net income, cash flows from operating activities or any other measure of financial performance prepared in accordance with generally accepted accounting principles or as a measure of a company's profitability or liquidity. (4) Operating cash flow represents net income (loss) plus depreciation, depletion and amortization ("DD&A") expenses, deferred income taxes and other non-cash items. Operating cash flow should not be considered in isolation or as a substitute for net income, cash flows from operating activities or any other measure of financial performance prepared in accordance with generally accepted accounting principles or as a measure of a company's profitability or liquidity. (5) As adjusted to give effect to the Offering and the application of the estimated $47.6 million net proceeds therefrom to the Company, assuming issuance of 1,052,632 Shares at a price of $9.50 per share. See "Use of Proceeds" and "Capitalization."
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+PROSPECTUS SUMMARY The following summary should be read in conjunction with, and is qualified in its entirety by, the detailed information and the Financial Statements and notes thereto included elsewhere in this Prospectus. All references in this Prospectus to "Brigham" or the "Company" include Brigham Exploration Company, its subsidiaries and its predecessors and their subsidiaries. Certain terms relating to the oil and gas industry are defined in "Glossary of Certain Oil and Gas Terms." THE COMPANY Brigham is an independent exploration and production company that applies 3-D seismic imaging and other advanced technologies to systematically explore and develop onshore domestic natural gas and oil provinces. The Company focuses its 3-D seismic activity in provinces where it believes 3-D technology may be effectively applied and which Brigham believes offer relatively large potential reserve volumes per well and per field, high potential production rates and multiple producing objectives. The Company's exploration activities are concentrated primarily in three core provinces: the Anadarko Basin of western Oklahoma and the Texas Panhandle; the onshore Gulf Coast of Texas and Louisiana; and West Texas. Brigham is accelerating its 3-D seismic and drilling activities in the Anadarko Basin and the Gulf Coast and is selectively focusing its activities in those geologic trends of West Texas where it has achieved its best results historically. The Company pioneered the acquisition of large scale onshore 3-D seismic surveys for exploration, obtaining extensive 3-D seismic data and experience in capturing undiscovered natural gas and oil reserves. Through December 31, 1997, Brigham had acquired 4,005 square miles (2.6 million acres) of 3-D seismic and identified 1,170 potential drilling locations, of which the Company had drilled 370. The Company generates most of its exploratory projects and, therefore, has the ability to retain a sizeable working interest to the extent that it decides not to place interests with industry participants. From inception in 1990 through December 31, 1997, Brigham had drilled 324 exploratory and 46 development wells on its 3-D seismic generated prospects with an aggregate 63% success rate and an average working interest of 24%. Utilizing the capital it raised in its May 1997 initial public offering, the Company increased the average working interest it retained in its wells during the second half of 1997, retaining a 45% average working interest in the 36 wells that it drilled. As of December 31, 1997, the Company had added approximately 93 Bcfe of net proved reserves (excluding revisions) to its reserve base, approximately 72 net Bcfe of which were discovered by Brigham through its systematic 3-D seismic exploration drilling activities. The Company's estimated net proved reserves as of December 31, 1997 were 72.3 Bcfe having an aggregate Present Value of Future Net Revenues of $69.2 million, compared to estimated net proved reserves as of December 31, 1996 of 21.9 Bcfe having an aggregate Present Value of Future Net Revenues of $44.5 million. The Company's net proved reserve volumes at December 31, 1997 were 74% natural gas and 65% categorized as proved developed reserves. BUSINESS STRATEGY Brigham's business strategy is to achieve superior growth in shareholder value through the application of its systematic exploration approach, which emphasizes the integrated use of 3-D seismic imaging and other advanced technologies to reduce drilling risks and finding costs. Since its inception in 1990, the Company has consistently achieved rapid growth in its acquisition of 3-D seismic data, identification of potential drilling locations, discovery of proved reserves and production volumes. Brigham completed its initial public offering of common stock in May 1997, raising approximately $24 million to fund the Company's accelerated 3-D seismic acquisition and exploration drilling activities. Key elements of the Company's growth strategy at its initial public offering and continuing today include: (i) accelerating the rate at which it acquires 3-D seismic and identifies potential drilling locations; (ii) increasing the working interests it retains in exploration projects to capture a greater share of the reserves that the Company discovers; (iii) identifying higher potential, higher impact prospects; and (iv) accelerating the rate at which its 3-D seismic defined locations are drilled. During the second half of 1997, the Company employed the capital raised in its initial public offering to attain significant growth in each of its core strategic objectives: Accelerated 3-D Seismic Acquisition. During 1997, Brigham acquired approximately 1,250 square miles of 3-D seismic, which increased the Company's aggregate 3-D seismic inventory 45% to approximately 4,000 square miles as of December 31, 1997. The overall level of 3-D seismic acquisition in 1997 represents the most active year in the Company's history, and 85% of this increased 3-D seismic was acquired in its higher potential Anadarko Basin and Gulf Coast provinces. Increased Working Interest. In an effort to retain a greater portion of the value generated by its 3-D seismic exploration efforts, Brigham increased the average working interests it retained in its 1997 3-D seismic projects to 68% as compared with its average project working interest of 24% in 1990 through 1996. As a result of the higher working interests and the accelerated acquisition of 3-D seismic, the Company acquired 845 net square miles of 3-D seismic in 1997 as compared with 780 cumulative net square miles acquired from 1990 through 1996. Higher Potential, Higher Impact Prospects. By focusing an increasing portion of its exploration activities in the more prolific Anadarko Basin, Brigham increased its average proved reserves discovered per net well drilled (including dry holes) to 1.2 Bcfe in 1997 from 0.7 Bcfe in 1996 and 0.4 Bcfe in 1992 through 1995. In the Anadarko Basin alone, Brigham's average proved reserves discovered per net well drilled was 3.4 Bcfe in 1997 compared with 1.8 Bcfe in 1996 and 2 Bcfe in 1994 through 1995. Contributing to these increases, the Company's Anadarko Basin drilling in 1997 produced the two largest field discoveries in Brigham's history, which resulted in the discovery of approximately 52 Bcfe of gross proved reserves and provided the Company with several development drilling opportunities. Accelerated Drilling. Through its strategy of retaining higher working interests in its 3-D seismic projects and subsequent drilling, Brigham participated in the drilling of 28 net wells in 1997, a 75% increase from the approximate 16 net wells drilled by the Company in 1996. The Company achieved a 63% success rate on the 73 wells in its 1997 drilling program, consistent with Brigham's historical average success rate. A key factor contributing to its increased level of drilling activity was the Company's addition of personnel in engineering, land and administrative functions during 1997. These staff additions provided Brigham with the additional infrastructure required to increase its operating capabilities, enabling the Company to operate 37% of its gross wells and 64% of its net wells drilled in 1997. As a result of the combined effects of the Company's multi-pronged growth strategy, Brigham generated net proved reserve additions of approximately 38 Bcfe through drilling in 1997, which represents approximately 175% of the Company's year-end 1996 net proved reserves of approximately 22 Bcfe. In addition to its drilling efforts in 1997, the Company acquired 21.5 Bcfe of net proved reserves at an implied cost of $0.63 per proved Mcfe in its November 1997 purchase of certain properties in and adjacent to its West Bradley project area in its Anadarko Basin province. Brigham believes this acquisition will enable it to further build its inventory of potential drilling locations over the historically prolific Carter Knox anticline in the Anadarko Basin through a 3-D seismic shoot planned for 1998. Primarily through its exploration efforts, the Company increased its net production volumes 52% to 3.1 Bcfe in 1997 from 2.1 Bcfe in 1996. As further evidence of the Company's acceleration efforts subsequent to its May 1997 initial public offering, Brigham increased its average net daily production volumes from 6.6 MMcfe in the second quarter 1997 to 21.2 MMcfe in the second quarter 1998 representing a compounded growth rate of 34% per quarter. Based on the results that the Company has achieved from its growth strategy since its initial public offering, Brigham intends with the proceeds from the Offering to increase its exploration activities in 1998 to take advantage of opportunities currently available to further accelerate the Company's growth. The Company's current 1998 capital budget contemplates (i) an increase in budgeted drilling expenditures in the Anadarko Basin and the Gulf Coast provinces, (ii) a reduction in planned drilling activity in West Texas in part due to recent declines in oil prices, (iii) an increase in planned 3-D seismic acquisition activities in an effort to capture additional exploration prospects for future drilling activities and (iv) potential sales of a portion of the Company's interests in certain seismic projects. The Company intends to continue to retain higher working interests in its 3-D seismic projects in the Anadarko Basin and the onshore Gulf Coast. By increasing its working interests retained in the majority of its current and planned seismic projects, Brigham expects to further accelerate its growth not only by retaining a greater portion of the reserves it discovers, but also by increasing its ability to control the timing of the drilling of its exploration projects and therefore helping to accelerate its drilling pace. The Company's current 1998 budget consists of 90 gross (45 net) wells, compared with the 73 gross (28 net) wells drilled by the Company in 1997. This increase in anticipated 1998 drilling is the result of an increase in planned drilling of higher working interest wells in the Anadarko Basin and the Gulf Coast offset by a reduction in planned drilling activity in West Texas. COMPETITIVE ADVANTAGES Brigham believes that its knowledge base, personnel and technology provide it with the following competitive advantages to capture undiscovered natural gas and oil reserves. 3-D Seismic Knowledge Base. From 1990 through 1997, the Company acquired 4,005 square miles of 3-D seismic and drilled 370 wells in over 20 geologic trends in seven basins and seven states. With the resulting knowledge of the application of 3-D seismic to different geologic trends, the Company has refined its exploration techniques and identified exploration areas where it believes 3-D seismic can reduce risks and enhance returns on its investments. Technological Expertise. Brigham's 19 explorationists collectively have approximately 300 years of experience, including approximately 85 years of experience using computer aided exploration ("CAEX") workstations, and have expertise in many geologic trends. Project Generation and Control. Brigham is not dependent on third parties for its project flow, having generated approximately 90% of its 3-D seismic exploration projects. With the resulting project control, the Company is able to manage the predrilling exploration phases and can determine the level of working interest it retains and the extent to which it manages drilling and post-drilling operations. Numerous Potential Drilling Locations. As of December 31, 1997, the Company had identified 1,170 3-D defined potential drilling locations in historically productive geologic trends, of which 370 had been drilled. The Company currently anticipates drilling 90 of these locations (45 net) in 1998 at an aggregate net cost of approximately $40 million. Pioneering Innovations. In 1990 the Company pioneered the assemblage of large scale onshore 3-D seismic projects and the use of pre-seismic lease options for the systematic exploration of proven natural gas and oil provinces. Subsequent innovations include the Company's 3-D seismic acquisition and processing alliances and creative industry trade structures to financially leverage its drilling program. PRIMARY EXPLORATION PROVINCES Brigham's exploration activities are concentrated primarily in three core provinces: the Anadarko Basin of western Oklahoma and the Texas Panhandle; the onshore Gulf Coast of Texas and Louisiana; and West Texas. Brigham is accelerating 3-D seismic activity in the Anadarko Basin and the Gulf Coast and will selectively continue such activity in those geologic trends of the West Texas region where it has achieved its best results historically. Brigham is focusing its 3-D seismic exploration efforts in provinces where it believes 3-D seismic technology may be effectively applied and which the Company believes offer relatively large potential reserve volumes per well and per field, high potential production rates and multiple producing objectives. Although the Company is acquiring 3-D seismic within the provinces listed below and has identified approximately 800 potential drilling locations yet to be drilled in those provinces, there can be no assurance that any of the seismic will be acquired or will generate additional drilling locations or that any potential drilling locations will be drilled at all or within the expected time frame. The final determination with respect to the drilling of any well, including those currently budgeted, will depend on a number of factors, including (i) the results of exploration efforts and the review and analysis of the seismic, (ii) the availability of sufficient capital resources by the Company and other participants for drilling prospects, (iii) economic and industry conditions at the time of drilling, including prevailing and anticipated prices for natural gas and oil and the availability of drilling rigs and crews, (iv) the financial resources and results of the Company and (v) the availability of leases on reasonable terms and permitting for the potential drilling location. There can be no assurance that the budgeted wells will, if drilled, encounter reservoirs of commercial quantities of natural gas or oil. <TABLE> <CAPTION> CURRENT 1998 CAPITAL BUDGET(1) -------------------------------------------- 3-D SEISMIC 3-D SEISMIC UNDRILLED CAPITAL DATA ACQUIRED/ DATA GROSS POTENTIAL EXPENDITURES ($MM) INTERPRETED AS OF BUDGETED TO WELLS DRILLING WELLS ----------------------------- 12/31/97 BE ACQUIRED IN DRILLED LOCATIONS BUDGETED NET (GROSS SQ. 1998 (GROSS THROUGH AS OF ------------ SEISMIC NET PROVINCE MILES) SQ. MILES) 12/31/97 12/31/97 GROSS NET & LAND DRILLING TOTAL(2) - -------- ----------------- -------------- -------- --------- ----- ---- ------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Anadarko Basin.......... 1,515/1,195 660 55 364 55 28.8 $12.5 $26.5 $39.0 Gulf Coast.............. 566/325 600 11 110 20 9.5 (0.5) 10.5 10.0 West Texas.............. 1,649/1,600 40 287 302 14 6.5 1.5 2.8 4.3 Others(3)............... 275/275 -- 17 24 1 0.2 -- 0.2 0.2 ----------- ----- --- --- --- ---- ----- ----- ----- Total........... 4,005/3,395 1,300 370 800 90 45.0 $13.5 $40.0 $53.5 =========== ===== === === === ==== ===== ===== ===== </TABLE> - --------------- (1) Prepared as of August 10, 1998. (2) Net 3-D seismic and land acquisition costs and drilling expenditures. (3) Colorado, Kansas and Montana. Anadarko Basin. The Anadarko Basin is a prolific natural gas province that the Company believes has been relatively under explored, particularly with regard to deep, high potential objectives. The Anadarko Basin contains numerous historically elusive stratigraphic targets, such as the Red Fork, Morrow and Springer channel sands, and structural targets, such as the Hunton and Arbuckle carbonates, which are well-suited to 3-D seismic imaging. In some cases, these objectives have produced in excess of 30 Bcf of natural gas from a single well at rates up to 30 MMcf of natural gas per day. The Company has assembled an extensive digital data base in this province, including geologic studies, basin wide geologic tops, production data, well data, geographic data and over 8,400 miles of 2-D seismic. Working with its team of in-house geologists and supplemented by consulting geologists, the Company's explorationists integrate this data with their extensive expertise and knowledge base to generate 3-D projects in the Anadarko Basin. As of December 31, 1997, the Company had acquired or was acquiring 1,515 square miles (969,600 acres) in 30 projects in the Anadarko Basin. The Company anticipates acquiring 660 square miles (422,400 acres) of additional 3-D seismic in this province in 1998. As of December 31, 1997, Brigham had completed 44 wells in 55 attempts (80% success rate) in the Anadarko Basin and had found cumulative proved reserves of 44 net Bcfe. In 1997, the Company completed 19 wells in 23 attempts in the Anadarko Basin with an average working interest of 39%, adding 31 net Bcfe of proved reserves. In addition, the Company acquired 21.5 net Bcfe of proved reserves in this region in November 1997. As of December 31, 1997, the Company had 364 3-D seismic delineated potential drilling locations in the Anadarko Basin, of which the Company intends to drill 55 gross (29 net) wells in 1998. Gulf Coast. The onshore Gulf Coast region of Texas and Louisiana is a high potential, multi-pay province that lends itself to 3-D seismic exploration due to its substantial structural and stratigraphic complexity. The Company has assembled a digital data base including geographical, production, geophysical and geological information that the Company evaluates on its CAEX workstations. Working with consulting regional geologists, the Company's explorationists integrate this data with their extensive expertise and knowledge base to generate 3-D seismic projects in the Gulf Coast. Brigham's commitment to this province is evidenced by the Company's staff additions, the opening of its Houston office and the addition of ten new 3-D seismic projects in 1996 and 1997. The Company anticipates that its increased project assemblage and 3-D seismic acquisition activity in the Gulf Coast will generate accelerated drilling in this province in 1998 and 1999. The Company is currently assembling projects in the Expanded Wilcox and Expanded Vicksburg trends in South Texas, the Miocene trend in South Texas and South Louisiana, and the Lower and Middle Frio trends of South Texas. As of December 31, 1997, the Company had acquired or was acquiring 566 square miles (362,400 acres) of 3-D seismic in seven projects in the onshore Gulf Coast province. The Company anticipates acquiring 600 square miles (384,000 acres) of additional 3-D seismic in this province in 1998. As of December 31, 1997, Brigham had completed 8 wells in 11 attempts (73% success rate) in the Gulf Coast and had found cumulative proved reserves of 3 net Bcfe. In 1997, the Company completed seven wells in 10 attempts with an average working interest of 9% adding 3 net Bcfe of proved reserves. As of December 31, 1997, the Company had 110 3-D seismic delineated potential drilling locations in the Gulf Coast province, of which the Company intends to drill 20 gross (10 net) wells in 1998. West Texas. The Company's 3-D seismic drilling activity in the West Texas region has been focused in the Horseshoe Atoll, the Midland Basin and the Eastern Shelf of the Permian Basin and the Hardeman Basin. Recently the Company initiated an exploration program in the Delaware Basin and it is selectively focusing its West Texas activity in portions of geologic trends that the Company believes offer greater potential for lower finding costs and higher returns, including the Fusselman formation of the Midland Basin and the Ellenberger and Devonian formations of the Delaware Basin. As of December 31, 1997, the Company had acquired or was acquiring 1,649 square miles (1,055,360 acres) in 74 projects in the West Texas region. The Company anticipates acquiring 40 square miles (25,600 acres) of additional 3-D seismic in this region in 1998. As of December 31, 1997, Brigham had completed 180 wells in 287 attempts (63% success rate) in the West Texas region and had found cumulative proved reserves of 24 net Bcfe. In 1997, the Company completed 19 wells in 34 attempts with an average working interest of 45%, adding 4 net Bcfe of proved reserves. As of December 31, 1997, the Company had 302 3-D seismic delineated potential drilling locations in the West Texas region, of which the Company intends to drill 14 gross (6 net) wells in 1998. THE OFFERING ISSUER..................... Brigham Exploration Company USE OF PROCEEDS............ The net proceeds of the Offering will be used to fund the Company's accelerated exploration and development activities, and in the interim for repayment of a portion of outstanding indebtedness. See "Use of Proceeds." The Notes Securities Offered......... $40 million aggregate principal amount of Senior Subordinated Secured Notes due 2003. Maturity Date.............. , 2003. Interest Payment Dates..... November 15, February 15, May 15 and August 15 of each year, commencing November 15, 1998. Interest Rate.............. Interest rates payable on the Notes shall vary depending upon whether a accrued interest is paid in cash or in kind ("PIK Interest"). Interest shall be paid in cash at interest rates of %, % and % per annum during years one through three, year four and year five, respectively, of the term of the Notes; provided, however, that if the payment of interest accrued on the Notes in cash would cause a "Borrowing Base Deficiency" under the Company's revolving credit facility or would cause the Company to be in violation of any covenant or other restriction set forth in any Senior Loan Document or any agreement entered into by the Company or subsidiary of the Company in connection with the Notes, the Company may pay PIK Interest at interest rates of %, % and % per annum during years one through three, year four and year five, respectively, of the term of the Notes. Ranking.................... The Notes will rank subordinate in right of payment to the Senior Indebtedness and senior to all other financings (other than any allowed capital leases and purchase money financings). The Subsidiary Guaranty Agreements will be similarly subordinated. As of June 30, 1998, on a pro forma basis, after giving effect to the application of the net proceeds from the Offering, the Company would have had $20.5 million Senior Indebtedness outstanding, and there would be no senior subordinated debt outstanding other than the Notes. In addition, the Notes may be structurally subordinated to all existing and future liabilities of the Company's subsidiaries. See "Capitalization," "Description of the Notes -- Ranking and Subordination," "Description of Other Indebtedness" and "Subordination Agreement." Subsidiary Guaranty Agreements................. The Notes will be fully and unconditionally guaranteed, jointly and severally, by each of the Subsidiary Guarantors. The Subsidiary Guaranty Agreements will be secured by substantially all of the assets of the Subsidiary Guarantors. Financial statements for the Subsidiary Guarantors are not presented because management has determined that they would not be material to investors. Optional Prepayment........ The Notes may be prepaid at any time, in whole or in part, without premium or penalty, provided that all partial prepayments must be pro rata to the various holders of the Notes. Change of Control.......... A Change of Control would constitute an Event of Default (as defined). If any Event of Default occurs, the holders of the Notes may direct the Trustee (as defined) to declare the principal of and the accrued and unpaid interest on such Notes to be due and payable immediately. However, such repayment would be subject to certain subordination provisions in the Indenture (as defined). Certain Covenants.......... The Notes will be issued pursuant to an indenture (the "Indenture") containing certain covenants that, among other things, limit the ability of the Company and its Subsidiaries (as defined) to incur additional indebtedness, pay dividends, make distributions, enter into certain sale and leaseback transactions, enter into certain transactions with affiliates, dispose of certain assets, incur liens, and engage in mergers and consolidations. See "Description of the Notes -- Certain Covenants." Absence of a Public Market for the Notes.............. The Notes are new securities and may only be traded in compliance with applicable securities laws. There can be no assurance as to the development or liquidity of any market for the Notes. The Company does not intend to apply for a listing of the Notes on any securities exchange or on any automated dealer quotation system. The Warrants Securities Offered......... Warrants which, when exercised, will entitle the holders thereof to acquire an aggregate of 1,000,000 shares of Common Stock (the "Warrant Shares"). Expiration Date............ , 2005. Exercise................... Each Warrant will entitle the holder to acquire at any time prior to , 2005, one share of Common Stock at a price equal to $ per share, subject to adjustment from time to time upon the occurrence of certain changes in Common Stock, certain Common Stock distributions, certain issuances of options or convertible securities, certain dividends and distributions and certain other increases in the number of shares of Common Stock. Rights as Shareholders..... Holders of Warrants will not, by virtue of being such holders, have any rights as stockholders of the Company. Registration Rights........ Pursuant to the New Registration Rights Agreement (as defined), holders of the Shares, the Warrants, the Warrant Shares and any other securities issued upon the exercise of the Warrants (collectively, the "Registrable Securities") will have demand registration rights for two registrations, provided that a request, which must be made by holders of Registrable Securities collectively owning at least 25% of the Registrable Securities (or holding at least a majority of the Registrable Securities for a shelf registration statement if the Company is eligible to use Form S-3), will be "counted" towards the two registrations only when (i) all the Registrable Securities requested to be included in the registration statement have been included, (ii) the corresponding registration statement has become effective and (iii) the public offering has been consummated and the Registrable Securities have been sold on the terms and conditions provided therein, provided that in the event of a shelf registration statement (if the Company is then eligible to file on Form S-3) the Company shall keep such registration statement effective for two years. The Company will agree in the New Registration Rights Agreement to use its best efforts to cause the registration statement to become and remain effective for the period of the distribution in order for it to be "counted" as described above. Subject to other provisions contained in the New Registration Rights Agreement, the holders of the Registrable Securities will have "piggyback" registration rights. Exercise of the right to convert the Warrants to Warrant Shares shall, at the election of the holder of the Warrants, be contingent upon the registration of the Warrant Shares in accordance with the New Registration Rights Agreement and should such registration not be completed such holder shall have the right to rescind its election to convert the Warrants. See "Registration Rights Relating to the Shares and the Warrants." Transfer Restrictions...... The Warrant Shares have not been registered under the Securities Act and may not be offered or sold, except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. The Common Stock Common Stock Offered by the Company.................. shares Common Stock to be Outstanding after the Offering................. shares(1) The Nasdaq Stock Market(SM) Symbol................... "BEXP" Registration Rights........ The holders of the Shares shall have registration rights with respect to the Shares set forth above in the summary of Registration Rights relating to the Warrants. - --------------- (1) Does not include (a) 935,987 shares of Common Stock issuable, subject to vesting, upon exercise of outstanding stock options with an average exercise price of $7.61 per share or (b) 1,000,000 shares of Common Stock issuable upon exercise of the Warrants with an exercise price of $ per share. See "Management -- Executive Director Compensation," "-- Executive Compensation," "Capitalization" and "Description of Warrants." RISK FACTORS Any investment in the Notes, Warrants or Shares involves a high degree of risk. For a discussion of certain risks that a potential investor should carefully evaluate prior to making an investment in the Notes, Warrants or Shares, see "Risk Factors." SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The following table sets forth selected financial data of the Company. The data for the three years ended December 31, 1997 has been derived from the consolidated financial statements appearing elsewhere in this Prospectus. The data for the two years ended December 31, 1994 has been derived from consolidated financial statements not appearing in this Prospectus. The consolidated financial data at June 30, 1998 and for the six months ended June 30, 1998 and June 30, 1997 have been derived from the condensed consolidated financial statements of the Company which, in the opinion of management, include all adjustments, consisting only of normal adjustments, necessary for a fair presentation of the results for the periods. The results for the six months ended June 30, 1998 are not necessarily indicative of the results to be expected for the full year. The information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and notes thereto included elsewhere in this Prospectus. <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, -------------------------------------------------- ------------------- 1993 1994 1995 1996 1997 1997 1998 ------- ------- ------- -------- -------- ------- -------- <S> <C> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Revenues: Natural gas and oil sales................. $ 937 $ 2,565 $ 3,578 $ 6,141 $ 9,184 $ 3,854 $ 7,130 Workstation revenue....................... 467 815 635 627 637 324 247 ------- ------- ------- -------- -------- ------- -------- Total revenues........................ 1,404 3,380 4,213 6,768 9,821 4,178 7,377 Costs and expenses: Lease operating........................... 111 491 761 726 1,151 470 978 Production taxes.......................... 47 126 165 362 549 219 450 General and administrative................ 1,433 1,785 1,897 2,199 3,570 1,455 2,293 Depletion of natural gas and oil properties.............................. 4,371(1) 1,104 1,626 2,323 2,732 1,395 2,784 Depreciation and amortization............. 406 561 533 487 582 287 365 ------- ------- ------- -------- -------- ------- -------- Total costs and expenses.............. 6,368 4,067 4,982 6,097 8,584 3,826 6,870 ------- ------- ------- -------- -------- ------- -------- Operating income (loss)..................... (4,964) (687) (769) 671 1,237 352 507 Other income (expense): Interest income........................... 6 56 128 52 145 81 77 Interest expense.......................... (105) (668) (936) (1,173) (1,190) (546) (2,432) ------- ------- ------- -------- -------- ------- -------- Total other income (expense).......... (99) (612) (808) (1,121) (1,045) (465) (2,355) ------- ------- ------- -------- -------- ------- -------- Net income (loss) before income taxes....... (5,063) (1,299) (1,577) (450) 192 (113) (1,848) Income tax (expense) benefit, net........... -- -- -- -- (1,228)(2) (4,813)(2) 621 ------- ------- ------- -------- -------- ------- -------- Net loss.............................. $(5,063) $(1,299) $(1,577) $ (450) $ (1,036) $(4,926) $ (1,227) ======= ======= ======= ======== ======== ======= ======== Net loss per share -- basic/diluted......... $ (0.57) $ (0.15) $ (0.18) $ (0.05) $ (0.09) $ (0.50) $ (0.10) Weighted average shares outstanding -- basic/diluted............................. 8,929 8,929 8,929 8,929 11,081 9,890 12,254 STATEMENT OF CASH FLOWS DATA: Net cash provided by (used in) operating activities................................ $ (730) $ 626 $ 1,383 $ 3,710 $ 9,806 $ (195) $ (1,692) Net cash used in investing activities....... (6,983) (5,463) (8,005) (11,796) (57,300) (12,105) (30,884) Net cash provided by financing activities... 7,839 4,634 7,724 7,731 47,748 15,842 33,981 OTHER FINANCIAL DATA: Capital expenditures........................ $ 6,632 $ 5,445 $ 7,935 $ 13,612 $ 57,170 $11,796 $ 30,044 EBITDA(3)................................... (187) 978 1,390 3,481 4,551 2,034 3,656 Operating cash flow(4)...................... (286) 366 582 2,360 3,506 1,569 1,567 Ratio of earnings to fixed charges(6)....... -- -- -- -- 1.1x -- -- PRO FORMA FINANCIAL DATA(7): Ratio of earnings to fixed charges(6)....... -- -- Interest expense(7)......................... 2,325 3,252 </TABLE> <TABLE> <CAPTION> AS OF JUNE 30, 1998 ------------------------- ACTUAL AS ADJUSTED(5) -------- -------------- <S> <C> <C> BALANCE SHEET DATA: Cash and cash equivalents................................. $ 3,106 $ 3,106 Natural gas and oil properties, at cost, net.............. 114,454 114,454 Total assets.............................................. 129,699 131,579 Notes payable............................................. 68,000 20,450 Stockholders' equity...................................... 42,334 56,264 </TABLE> - --------------- (1) Includes a capitalized ceiling impairment charge of $3.3 million in 1993. (2) In conjunction with the Exchange, the Company recorded a deferred income tax liability of $5 million to recognize the temporary differences between the financial statement and tax bases of the assets and liabilities of the Partnership at February 27, 1997, the date of the Exchange. During the fourth quarter of 1997, the Company elected to record a step-up in basis of its assets for tax purposes as a result of the Exchange. Related to this election, the Company recorded a $3.8 million deferred income tax benefit, resulting in a net $1.2 million ($.10 per share) non-cash deferred income tax charge for the year ended December 31, 1997. See Note 2 of Notes to the December 31, 1997 Consolidated Financial Statements. See "The Company." (3) EBITDA represents net income (loss) plus income taxes, net interest expense and depreciation, depletion and amortization expense. EBITDA should not be considered in isolation or as a substitute for net income, cash flows from operating activities or any other measure of financial performance prepared in accordance with generally accepted accounting principles or as a measure of a company's profitability or liquidity. (4) Operating cash flow represents net income (loss) plus depreciation, depletion and amortization ("DD&A") expenses, deferred income taxes and other non-cash items. Operating cash flow should not be considered in isolation or as a substitute for net income, cash flows from operating activities or any other measure of financial performance prepared in accordance with generally accepted accounting principles or as a measure of a company's profitability or liquidity. (5) As adjusted to give effect to the Offering and the application of the estimated $47.6 million net proceeds therefrom to the Company, assuming issuance of 1,052,632 Shares at a price of $9.50 per share. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001068032_praegitzer_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001068032_praegitzer_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. EACH PROSPECTIVE INVESTOR IS URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY. EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. THE COMPANY The Company is a leader in providing electronics original equipment manufacturers ("OEMs") and contract manufacturers with a full range of printed circuit board ("PCB") and interconnect solutions, including schematic capture and design, quick-turnaround, prototyping and pre-production, and large volume production. The Company provides its solutions to four key electronics industry segments (with corresponding percentages of Company revenue for the fiscal year ended June 30, 1998): (i) data and telecommunications (31%), (ii) computers and peripherals (36%), (iii) industrial and instrumentation (25%) and (iv) business and consumer (8%). The Company's growth has been driven by sales to industry leaders whose products require increasingly complex and technologically advanced electronic interconnects. The Company's principal customers include Compaq, Hewlett Packard, Intel, Dell, EMC, IEC Electronics, SCI, Solectron, Motorola, Xylan and Xerox. The Company has obtained ISO 9002 certifications for five of its manufacturing facilities and has received awards from a number of its customers in recognition of its superior performance in meeting their PCB needs. In fiscal 1998 the Company served more than 650 customers worldwide. The 1997 worldwide PCB market was estimated at $29.7 billion by the Institute for Interconnecting Packaging Electronic Circuits ("IPC"), of which the U.S. market was $7.8 billion and was forecast to grow 6.5% annually through 2001. As electronics OEMs respond to competitive pressures, they place ever- greater emphasis on faster product time-to-market and greater PCB complexity in tight space tolerances, and face increasing pressure to shorten the design-to-manufacture cycles. Additionally, as OEMs increasingly focus on core competencies, non-core activities are contracted to independent specialty vendors. As a result of these market forces, outsourcing of PCBs and electronic interconnects has grown from 66% of total OEM requirements in 1991 to 93% in 1997. Addressing these trends, Praegitzer in 1997 implemented its One-Stop Shopping-TM- strategy to provide its customers with advanced technology and integrated manufacturing capabilities for the entire cycle of PCB creation. In the last three years, the Company has acquired production facilities in Redmond, Washington; Fremont, California; and Huntsville, Alabama, and a 51% interest in a production facility in Melaka, Malaysia. During this same period, Praegitzer acquired or opened 11 design centers in the U.S. and one in Israel. The Company has experienced 46.5% compound revenue growth during fiscal years 1995 through 1998, compared with a compound revenue growth rate for the U.S. PCB industry of 8.5%. Excluding revenue generated by acquired facilities, the Company's compound revenue growth rate during the same period would have been 21.7%. During this period the Company produced increasingly complex PCBs with higher density and layer counts. The Company's goal is to be the leading provider of electronic interconnect one-stop design and manufacturing services, while continuing to increase its technological and services advantages. The address of the Company's principal executive offices is 1270 SE Monmouth Cut Off Road, Dallas, Oregon 97338, and the Company's telephone number is (503) 623-1000. FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information included in this Prospectus contains statements that are forward-looking, such as statements relating to plans for future activities. This forward-looking information is subject to significant known and unknown risks, uncertainties and other factors that could significantly affect actual results, performance or achievements of the Company in the future and, accordingly, the actual results, performance or achievements may materially differ from those expressed or implied in any forward-looking statements made by the Company. These risks, uncertainties and factors include, but are not limited to, those relating to business conditions and growth in the electronics industry and general economies, both domestic and international, lower than expected customer orders, competitive factors (including increased competition, new product offerings by competitors and price pressures), the availability of parts and supplies at reasonable prices, technological difficulties and resource constraints encountered in developing new products, and outstanding indebtedness. For a more specific and detailed discussion of some of these risks, uncertainties and factors, see "Risk Factors." The words "believe," "expect," "anticipate," "intend" and "plan" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001068679_mounger_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001068679_mounger_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus, including information under "Risk Factors". THE COMPANY The Company is a leading designer, marketer and distributor of quality men's and women's rainwear and outerwear in the United States. The Company designs, markets and distributes its products under the Company-owned LONDON FOG(Reg. TM) and PACIFIC TRAIL(Reg. TM) and related brand names, as well as under the DOCKERS(Reg. TM), LEVI'S(Reg. TM) and SPERRY(Reg. TM) labels pursuant to licenses from the owners thereof, and sells its products through most major channels of distribution in its markets. The Company believes it has a dominant share of the men's rainwear market in department stores and a significant share of the men's outerwear and women's rainwear and outerwear markets in department stores. The Company also distributes its products to specialty retailers (including sport specialty retailers), national and regional chain stores, and discount and off-price retailers. In addition, the Company generates a significant portion of its sales from distributing its products through Company-operated retail stores. As of May 30, 1998, the Company operated 134 factory outlet stores, eight superstores and three Weather Stores(TM). In Fiscal 1998, the Company had net sales of approximately $336 million. The Company's products marketed under the LONDON FOG(Reg. TM) and the related FOG(Reg. TM) and TOWNE(Reg. TM) brands and under the SPERRY(Reg. TM) brand (licensed to the Company by the owner thereof) are referred to as the "London Fog Products" and the products marketed under the PACIFIC TRAIL(Reg. TM), INSIDE EDGE(Reg. TM) and BLACK DOT(Reg. TM) brands, and under the DOCKERS(Reg. TM) and LEVI'S(Reg. TM) brands (licensed to the Company by the owner thereof) are referred to as "Pacific Trail Products". BUSINESS STRENGTHS Management believes that the Company has several competitive advantages which are important to its business, including the following: IMAGE AND CONSUMER RECOGNITION. The LONDON FOG(Reg. TM) brand name was introduced in 1954 and has become one of the most well known apparel brand names in the United States, with a strong reputation for quality and value. The LONDON FOG(Reg. TM) brand name ranked 6th in the 1997 Fairchild 100 Consumer Survey of the most recognizable apparel and accessory brands. In the same survey, the LONDON FOG(Reg. TM) brand name ranked 1st among the outerwear brands. The Company has capitalized on the strength of the LONDON FOG(Reg. TM) brand name by expanding from its initial roots in formal men's rainwear to a broad range of rainwear, outerwear and related products each providing consumers with the quality, functionality and value they expect from the LONDON FOG(Reg. TM) brand. In addition, the PACIFIC TRAIL(Reg. TM) brand has developed a strong and growing niche as a competitively priced brand which targets value-conscious consumers who seek authentic, quality outerwear for recreational activities and casual wearing occasions. Management believes that the Company will be able to continue to capitalize on the strength of its brands by expanding into additional product categories, such as sportswear, and utilizing a sub-branding strategy to enable product and distribution channel extensions while preserving the identity of the LONDON FOG(Reg. TM) and PACIFIC TRAIL(Reg. TM) brand names. BROAD AND DIVERSIFIED DISTRIBUTION CHANNELS. The Company sells its products through a varied array of distribution channels. The Company believes that its ability to distribute its products through varied wholesale distribution channels (including department stores, specialty retailers, sport specialty retailers, national and regional chain stores, and discount and off-price retailers) and through its own retail stores (factory outlet stores and new retail concept stores) places the Company at a competitive advantage by reducing the Company's dependency on any one distribution channel. RETAILING AS A COMPETITIVE ADVANTAGE. For Fiscal 1998, approximately 42% of the Company's net sales were generated through its retail stores, predominantly through its factory outlet stores. The Company's factory outlet stores are located in many of the primary outlet malls throughout the United States and the Company expects to open 20-25 additional factory outlet stores this year. The Company believes that operating its own retail stores provides the Company with the following advantages: (i) mitigating the Company's inventory risk by providing a controlled channel for selling excess inventory; (ii) increasing the breadth and control of the distribution of its products; (iii) preventing the Company from being solely dependent on third party retailers; and (iv) enabling the testing of new products, new product categories and new merchandise concepts. The Company also believes that its experience in operating its own retail stores provides the Company with a better understanding of the needs of its wholesale customers and the ultimate consumers of the Company's products. To further capitalize on these advantages, the Company is seeking to expand the distribution of its products by testing new Company-operated retail concepts through its superstores, Weather Stores(TM) and other potential retail store concepts. VARIETY OF PRODUCTS AND TARGET CONSUMERS. Through its well-known LONDON FOG(Reg. TM), PACIFIC TRAIL(Reg. TM) and related brands, as well as under the DOCKERS(Reg. TM), LEVI'S(Reg. TM), AND SPERRY(Reg. TM) labels pursuant to licenses from the owners thereof, the Company provides consumers with a broad selection of quality products, including a full assortment of outerwear for the entire family, for different end uses and different lifestyles at a broad range of price points. The Company provides products for use in all weather conditions and for use in dress, casual, outdoor and active end-uses. The Company believes this segmentation of its product offerings, targeting specific products to meet specific consumer lifestyle and end use requirements, increases its ability to satisfy the product needs of a broad consumer base. The Company is continuing to increase the variety of products it offers through the development of its own focused men's and women's sportswear collections to be marketed solely through the Company's retail stores. In addition, the Company continues to pursue additional opportunities to develop and market products under other well known brand names through license arrangements, as evidenced by the Company's license to market outerwear under the FOSSIL(Reg. TM) and related labels beginning in the fall 1999 season. STABLE PRODUCT LINES. The Company believes that the stability and continuity of the Company's core product lines relative to the fashion industry generally, with a significant portion of annual revenues being generated by similar styles carried over from the previous year, makes the Company less sensitive to fashion risk. WORLDWIDE PRODUCT SOURCING. The Company's merchandise is produced worldwide by independent manufacturers selected, monitored and coordinated by local Company employees to assure conformity to strict quality, cost and delivery standards. The Company believes the use of independent manufacturers, together with the Company's dedicated sourcing personnel, increases its production flexibility and capacity and allows it to maintain control over all aspects of the sourcing process, while at the same time substantially reducing capital expenditures and avoiding the costs of managing a large production work force. INTEGRATED OPERATING STRUCTURE. The integration of the Company's design, product procurement, production planning, marketing and merchandising functions enables the Company to effectively distribute products to its wholesale and retail customers in a timely manner and to control inventory. BUSINESS STRATEGY The Company's mission is to be the international leader in the design, marketing and distribution of quality rainwear, outerwear and other related products that protect consumers in all weather conditions. To achieve this objective, the Company focuses on maximizing the market penetration of its brands by executing a life style/end-use segmentation approach to the design, merchandising and marketing of the Company's broad range of products. The Company aims to develop a clearer understanding of the target customer for each of the Company's brands and product lines, and to segment its products by types of target customers, which are differentiated by gender, age group and lifestyle and end-use requirements. In implementing this strategy, the Company has adopted an approach that divides its product offerings and brands into "dress," "casual," "outdoor," and "active" categories, through which the Company offers a broad range of products to satisfy different customer preferences and end-use requirements, all of which provide a consistently high standard of quality and value at price points consistent with the positioning of each brand. In addition to increasing the penetration of its existing brands and product lines, the Company's business plan includes seeking to add new brands (both through licensing of well-known, third party brands and development of new brands) and new product offerings to increase the breadth of coverage of the Company's products in terms of price, distribution channels and target consumers. Such new brands and product offerings must adhere to the Company's stringent standards of product quality, value and design while being positioned appropriately in the marketplace within the Company's overall life style/end-use segmentation approach. The Company may, in the future, under appropriate circumstances, enter into complementary acquisition opportunities consistent with the foregoing strategy in order to expand its stable of brand names and augment its product lines. The Company's business plans are designed to build upon the steps the Company has taken to grow its outerwear businesses, continuing the Company's transformation from a significant rainwear designer, marketer and distributor to a market force in all aspects of rainwear, outerwear and related products. This continued transformation is extremely important to the Company's future growth since the market for traditional rainwear is significantly smaller than the markets for either outerwear or other apparel products, such as sportswear, and the market demand for traditional rainwear continues to be adversely affected by the growth of casual attire in the workplace. Of Fiscal 1998 total net sales of $335.6 million, outerwear comprised 68%, rainwear comprised 27% and sportswear, accessories and other (primarily consisting of sales of goods purchased from licensees and other companies for sale in the Company's retail stores, such as hats, umbrellas, gloves, scarves and luggage) comprised 5%. This compares with Fiscal 1994 total net sales of $356.6 million, of which outerwear comprised 40%, rainwear comprised 42%, and sportswear, accessories and other (primarily consisting of a wholesale sportswear line consisting primarily of men's sweaters and knit shirts, which was discontinued at the end of Fiscal 1994, and men's and women's sportswear lines marketed solely through the Company's retail stores, which were discontinued during Fiscal 1996) comprised 18%. The Company's strategy of augmenting its range of brands, product offerings and target consumers was advanced significantly by the acquisition of Pacific Trail in April 1994. Pacific Trail, headquartered in Seattle since 1945 and inspired by the rugged outdoor lifestyle of the Pacific Northwest, is a leading designer, marketer and distributor of authentic, moderate-priced casual, outdoor and active outerwear for men, women and children. Wholesale sales of Pacific Trail Products in Fiscal 1998 were $85.8 million. After having discontinued its sportswear product lines in Fiscal 1996 as part of the Company's strategy to recover from the significant deterioration of its financial condition and operating results during Fiscal 1995 by streamlining the Company's operations and refocusing its operational and financial resources on its core rainwear and outerwear product categories, the Company has decided to reenter the business of marketing sportswear. Management plans to market focused lines of men's and women's sportswear through its retail stores, and expects that sportswear will be a growing product category for the Company. Management believes that the new sportswear lines will help broaden the appeal of the Company's stores to both existing and new customers, increase store sales, reduce the seasonality of the Company's sales and provide a product base to support potential additional Company-operated retail store concepts. A central part of the Company's growth plan is to increase its sales through Company-operated retail stores. The Company is already the dominant provider of men's rainwear and a significant provider of women's rainwear and men's and women's outerwear to department stores. However, department stores are becoming an increasingly competitive environment as a result of the increased emphasis on private label products at lower prices and lifestyle "collection" brands at higher prices. In addition, the consolidation of department store groups over the past several years has significantly reduced the number of potential customers for the Company's products. Also, delivery problems in fall 1994 and spring 1995 had an adverse effect on the Company's relations with some of its department store customers, which contributed to a significant decrease in wholesale sales of London Fog Products. Therefore, Company-operated retail stores are an increasingly important distribution channel to the Company. In Fiscal 1998, net sales at the Company's retail stores totaled $139.9 million (41.7% of total net sales), as compared to $96.5 million (35.2% of total net sales) in Fiscal 1996. Retail sales include sales at the Company's factory outlet stores, superstores and Weather Stores(TM). At May 30, 1998, the Company operated 134 factory outlet stores. A typical factory outlet store is approximately 4,700 square feet and is located in a manufacturers' outlet mall. Factory outlet stores appeal to the value-oriented consumer and sell excess inventory, out-of-season merchandise and seconds, as well as current season, first-quality products. As of May 30, 1998, the Company operated eight test superstores. The Company's superstores, the first of which was opened in May 1997 in North Canton, Ohio, were opened to test an alternative, larger format retail distribution channel for the Company's product offerings to supplement its traditional wholesale and factory outlet store retail distribution channels. A typical superstore is located in a suburban shopping mall or strip mall and offers a superior selection of current season, first quality product for the entire family at highly competitive prices. Based on initial sales results for these test retail superstores, management has determined that most of the existing superstores, many of which are larger than 25,000 square feet, are too large to generate acceptable profitability within an acceptable period of time. The Company is currently targeting 10,000 to 12,000 square feet as the optimal size to test for its larger format superstores. In connection with adopting a plan to restructure its superstores, during the quarter ended May 30, 1998, the Company recorded a restructuring charge of $3.5 million related to the planned closing or downsizing of five of the Company's eight superstores open as of May 30, 1998. The Company expects to open one additional large format superstore during the remainder of the current Fiscal year (other than potential relocations of existing superstores in connection with their downsizing pursuant to the Company's superstore restructuring plan), an approximately 11,000 square foot store expected to open in late fall 1998 in Columbus, Ohio. The Company will continue to evaluate the optimal size and the best locations for its future superstores. The Company's principal executive offices are located at 1332 Londontown Boulevard, Eldersburg, Maryland 21784. The telephone number of the Company is (410) 795-5900.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001070259_lincoln_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001070259_lincoln_prospectus_summary.txt
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+SUMMARY This summary highlights selected information from this document and may not contain all the information that is important to you. To understand the stock offering fully, you should read carefully this entire document, including the consolidated financial statements and the notes to the consolidated financial statements of Lincoln Federal Savings Bank. References in this document to "we", "us", "our" and "Lincoln Federal" refer to Lincoln Federal Savings Bank. In certain instances where appropriate, "us" or "our" refer collectively to Lincoln Bancorp and Lincoln Federal Savings Bank. References in this document to "the Holding Company" refer to Lincoln Bancorp. The Companies Lincoln Bancorp 1121 East Main Street Plainfield, Indiana 46168 (317) 839-6539 Lincoln Bancorp is not currently an operating company and has not engaged in any significant business to date. It was formed in September, 1998, as an Indiana corporation to be the holding company for Lincoln Federal Savings Bank. The holding company structure will provide greater flexibility in terms of operations, expansion and diversification. See page 22. Lincoln Federal Savings Bank 1121 East Main Street Plainfield, Indiana 46168 (317) 839-6539 We are a community- and customer-oriented federal mutual savings bank. We provide financial services to individuals, families and small business. Historically, we have attracted deposits from the general public and have emphasized residential mortgage lending, primarily one- to four-family mortgage loans. We also offer commercial real estate loans, real estate construction loans, land loans, multi-family residential loans, home equity loans and other types of consumer loans, and commercial loans. On June 30, 1998, we had total assets of $304.5 million, deposits of $211.2 million, and equity capital of $42.8 million. See page 22. The Stock Offering Lincoln Bancorp is offering for sale between 4,305,000 and 5,895,000 shares of its Common Stock at $10 per share. This offering may be increased to 6,809,250 shares without further notice to you if market or financial conditions change prior to the completion of this stock offering or if additional shares of stock are needed to fill the order of our employee stock ownership plan. Stock Purchases Lincoln Bancorp will offer shares of its Common Stock to our depositors who held deposit accounts as of certain dates and to our borrowers with outstanding loans as of certain dates. The shares will be offered first in a Subscription Offering and any remaining shares may be offered in a Community Offering to members of the general public with preference given to residents of Hendricks, Montgomery and Clinton Counties. See pages 45 to 51. We have engaged Charles Webb & Company to assist in the marketing of the Common Stock. Prohibition on Transfer of Subscription Rights You may not sell or assign your subscription rights. Any transfer of subscription rights is prohibited by law. If you exercise your subscription rights, you will be required to certify that you are purchasing shares solely for your own account and that you have no agreement or understanding regarding the sale or transfer of shares. We intend to pursue any and all legal and equitable remedies in the event we become aware of the transfer of subscription rights and will not honor orders known by us to involve the transfer of such rights. In addition, persons who violate the purchase limitations may be subject to sanctions and penalties imposed by the Office of Thrift Supervision. The Offering Range and Determination of the Price Per Share The offering range is based on an independent appraisal of the pro forma market value of the Common Stock by Keller & Company, Inc., an appraisal firm experienced in appraisals of savings associations. Keller & Company, Inc. has estimated that, in its opinion, as of August 14, 1998, and as updated as of October 23, 1998, the aggregate pro forma market value of the Common Stock ranged between $43,050,000 and $58,950,000 (with a mid-point of $51,000,000). This appraisal assumes that the Holding Company issues 200,000 shares of Common Stock to Lincoln Federal Charitable Foundation, Inc. The appraisal was based in part upon our financial condition and operations and the effect of the additional capital raised by the sale of Common Stock in this offering. The $10.00 price per share was determined by our board of directors and is the price most commonly used in stock offerings involving conversions of mutual savings associations. If the pro forma market value of the Common Stock changes to either below $43,050,000 or above $68,092,500, we will notify you and provide you with the opportunity to modify or cancel your order. See pages 52 to 53. Termination of the Offering The Subscription Offering will terminate at 12:00 noon, Plainfield time, on December 14, 1998. The Community Offering, if any, may terminate at any time without notice but no later than January 28, 1999, without approval by the OTS. Benefits to Management from the Offering Our full-time employees will participate in our employee stock ownership plan, which is a form of retirement plan that will purchase shares of Lincoln Bancorp's Common Stock. We also intend to implement a management recognition and retention plan and a stock option plan following completion of the Conversion, which will benefit our officers and directors. If we award shares under the recognition and retention plan and the stock option plan out of our authorized but unissued shares of Common Stock, your ownership and voting interests would be diluted by 3.9% or 9.1%, respectively, assuming the sale of 5.1 million shares and the contribution of 200,000 shares to the Foundation. Net income per share and book value per share will also decrease if shares are awarded from authorized but unissued shares. However, the management recognition and retention plan and stock option plan may not be adopted until at least six months after the Conversion and are subject to shareholder approval and compliance with OTS regulations. See page 99 to 101. The following chart indicates the amount of Common Stock we expect will be held by the recognition and retention plan, the employee stock ownership plan and the stock option plan following the Conversion. The chart assumes that 4% of the number of shares sold in the Conversion (including the 200,000 shares issued to Lincoln Federal Charitable Foundation, Inc.) will be awarded under the recognition and retention plan, 8% will be issued to the employee stock ownership plan and 10% will be issued pursuant to the stock option plan. Number of Shares (1) Value of Shares (2) Recognition and Retention Plan 212,000 $2,120,000 Employee Stock Ownership Plan 424,000 $4,240,000 (3) Stock Option Plan 530,000 N/A (4) 1 Assumes the sale of 5,100,000 shares of Common Stock, the midpoint of the Estimated Valuation Range, and the issuance of 200,000 shares to Lincoln Federal Charitable Foundation, Inc. 2 Assumes a value of $10 per share of Common Stock. Actual amounts will depend upon the future market value of the Common Stock, which cannot be determined at this time. 3 The Trustee of the ESOP will be required to vote nondirected shares and the shares held in the suspense account to reflect the instructions it has received fom participants in the ESOP regarding allocated shares. 4 The value of awards issued under the Stock Option Plan will depend upon the exercise price of the stock options and the market value of the Common Stock when the options are exercised, neither of which can be determined at this time. We also have entered into a three-year employment contract with T. Tim Unger, our President and Chief Executive Officer, in connection with the Conversion which provides for an annual salary of $135,000, subject to increases by our board of directors. The employment contract also provides for severance pay in an amount up to three times his annual salary in the event his employment is terminated without cause following a change in control of the Holding Company. See page 97. We also intend to issue 200,000 shares of stock to Lincoln Federal Charitable Foundation, Inc. We expect, however, that as a condition to its approval of the establishment of the Foundation, the OTS will require that all shares of Common Stock held by the Foundation be voted in the same ratio as all other shares of Common Stock on all proposals considered by the shareholders of the Holding Company. See pages 23 to 25. Lincoln Federal Charitable Foundation, Inc. Our Plan of Conversion provides for the establishment of Lincoln Federal Charitable Foundation, Inc. to provide grants or donations for charitable activities in our market area. We have historically made donations to charitable organizations in our primary market area. During the 12-month period ended December 31, 1997, we made charitable donations of $31,900, and during the nine-month period ended September 30, 1998 we made charitable donations of $16,400. Lincoln Federal Charitable Foundation, Inc. is incorporated under Indiana law as a nonprofit corporation without members and operates under the guidance of its Board of Directors. Upon the completion of the Conversion, the Board will initially consist of three members of the Board of Directors of Lincoln Bancorp. Lincoln Bancorp intends to issue 200,000 shares, or $2 million, of Common Stock to Lincoln Federal Charitable Foundation, Inc. immediately following the Conversion. This issuance of additional shares of Common Stock to Lincoln Federal Charitable Foundation, Inc. will dilute the ownership and voting interests of any shares you may purchase by 3.8%, assuming the sale of 5,100,000 shares of Common Stock. See pages 23 to 25. Use of the Proceeds Raised from the Sale of Common Stock Lincoln Bancorp intends to use a portion of the proceeds from the stock offering to make a loan to our employee stock ownership plan to fund its purchase of 8% of the Common Stock sold in the Conversion and issued to the Foundation. Lincoln Bancorp will use 50% of the proceeds that remain after it pays expenses incurred in connection with the Conversion to purchase all of the capital stock to be issued by Lincoln Federal Savings Bank. Lincoln Bancorp will retain the balance of the proceeds as a possible source of funds for the payment of dividends, if any, to shareholders, to repurchase shares of Common Stock in the future, to acquire one or more other financial institutions or assets of other financial institutions, or for other general corporate purposes. The Holding Company has no present plans, agreements or understandings to acquire another financial institution or the assets of another financial institution or to repurchase shares of Common Stock. Lincoln Federal intends to use the proceeds it receives in the Conversion to support its lending activities, to repay advances from the Federal Home Loan Bank of Indianapolis and to purchase mortgage-backed securities and, possibly, loan participations from other financial institutions. On a short-term basis, both the Holding Company and Lincoln Federal may invest the net proceeds that they retain in short- or intermediate-term investments. See pages 25 to 26. Dividends The Holding Company currently has not adopted a policy regarding the payment of dividends, if any, on the Common Stock. Following consummation of the Conversion, the Board of Directors of the Holding Company intends to implement a policy of paying quarterly cash dividends on the Common Stock. Declarations of dividends by the Holding Company's Board of Directors will depend upon a number of factors, including the amount of the net proceeds retained by the Holding Company in the Conversion, investment opportunities available to the Holding Company or to Lincoln Federal, capital requirements, the Holding Company's and Lincoln Federal's financial condition and results of operations, tax considerations, statutory and regulatory limitations, and general economic conditions. There can be no assurances that dividends will in fact be paid on the Common Stock or that, if paid, such dividends will not be reduced or eliminated in future periods. See pages 26 to 27. Market for the Common Stock Lincoln Bancorp has received conditional approval to have its Common Stock listed for quotation on the Nasdaq National Market System under the symbol "LNCB." Even though we expect that the shares of Common Stock will be quoted on the Nasdaq National Market System, there can be no guarantee that an active and liquid trading market for the shares will develop and be maintained. The Common Stock may not be appropriate as a short-term investment. If you purchase shares, you may not be able to sell them when you want to at a price that is equal to or more than the price you paid. See page 27. Important Risks in Owning the Holding Company's Common Stock Before you decide to purchase stock in the offering, you should read the Risk Factors section on pages 16 to 21 of this document. <PAGE>
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001070361_artificial_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001070361_artificial_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the Financial Statements, including the Notes thereto, appearing elsewhere in this Prospectus. Except as otherwise noted herein, all information in this Prospectus (i) reflects the adoption of the Amended and Restated Certificate of Incorporation of the Company (the "Certificate of Incorporation"), to be effected upon consummation of the Offering, removing the Company's existing class of Non-Voting Common Stock, increasing the authorized Common Stock to 30,000,000 shares and creating and authorizing 5,000,000 shares of undesignated Preferred Stock, (ii) reflects the amendment of the Company's Bylaws effective upon consummation of the Offering, (iii) reflects a 1-for-2.44 reverse stock split of the Common Stock of the Company effected on September 22, 1998, and (iv) assumes no exercise of the Underwriters' over-allotment option. THE COMPANY Artificial Life, Inc. ("Artificial Life" or the "Company") develops, markets and supports "intelligent" software robots ("bots"). The Company's bots, known as "SmartBots," are software programs that the Company is developing to automate and simplify time-consuming and complex business-related Internet functions such as Web navigation, direct marketing, user profiling, information gathering, messaging, knowledge management, sales response and call center automation. The Company is also developing applications in data mining, Web-page analysis, statistical analysis and direct marketing to support the functionality of the SmartBot products. While each Artificial Life SmartBot will function independently and will be programmed for a particular application, customers will be able to combine the SmartBots to create what the Company believes will be the industry's first integrated commercial, robot-based electronic commerce ("e-commerce") solution. In addition, the Company provides software consulting services to corporations and other entities seeking software solutions, particularly in the field of "intelligent" software programs. The rapidly increasing number of Web users and ubiquitous access to the Internet, both in the United States and internationally, have resulted in the emergence of the Internet as a new mass medium through which persons and entities gather information, communicate, market and sell products and services, interact and seek entertainment. However, the Company believes that the Internet's success has also made it increasingly difficult for Internet users to search for and locate information relevant to their interests and for companies engaged in selling goods and services over the Internet to effectively market and support their products and services. Artificial Life is developing its family of SmartBot products to help address these needs. The Company's SmartBot products are being designed to communicate in natural language and to respond "intelligently" to a user's command or inquiry, and in some cases, to act autonomously. All of the Company's SmartBot products are based on the Company's ALife-SmartEngine technology. The ALife-SmartEngine is the core component that gives the Company's products the ability to converse with its users in natural language, either by text or speech, and also to process and respond to natural language commands or questions. The Company believes that its products will allow people to interact with computers in a more natural way -- similar to a conversation with a human being. The Company believes that "intelligent" software products represent an emerging standard in the way individuals and businesses will retrieve, present and manipulate information on the Internet. The advent of graphical user interfaces and window-based operating systems created a new personal computing standard and led to significantly increased computer use because they made computers easier to use. Users no longer had to engage in the time consuming task of learning and accurately executing textual operating commands. Instead, a generation of computer users operated their computers by pointing and clicking with a "mouse." The Company believes that the introduction and adoption of "intelligent" software programs like its SmartBots will make the Internet easier to use through natural language communication and by freeing users from much of the time needed to manually search for data on the Internet and then to manipulate such data for the user's desired purpose. The Company released its first SmartBot product, the non-commercial version of the ALife-WebGuide, in September 1998. The Company released its first commercial product, the "Professional" version of the ALife-WebGuide, in November 1998 and expects to release the "Enterprise" version of the ALife-WebGuide for commercial sale in the first quarter of 1999. The Company is presently developing the initial versions of seven SmartBot products listed below: - ALIFE-WEBGUIDE: This SmartBot is designed to reside on a Web site and help users navigate the site by accepting and processing questions, such as search queries, from users in natural language, and responding to users in natural language. The bot engages the user in a "conversation" through questions and answers and, upon learning of the user's interests, is designed to display Web pages that match the content of the "conversation" or to suggest links to other locations on the Web site. - ALIFE-SALESREP: The ALife-SalesRep is being designed for e-commerce retailers to use for one-to-one marketing on the Internet. Retailers will input user profile information and product information into this SmartBot's Knowledge Bases to deliver customer-specific, targeted sales information via the Internet. - ALIFE-MESSENGER: The ALife-Messenger is being designed to act as a natural language-based automated e-mail reply and answering service. By customizing the ALife-Messenger, a company can automate replies to incoming e-mail queries and customer requests, thereby reducing the need for human intermediaries. - ALIFE-PORTFOLIO-MANAGER: This SmartBot is being developed to monitor, in real-time, an individual's investment portfolio using criteria established by the individual and, when such criteria have been met, or failed to have been met, to autonomously in real-time contact the individual by telephone, pager, e-mail or some other mode of communication and let the individual know that trading action might be warranted. - ALIFE-CALL-CENTER-AGENT: The ALife-Call-Center-Agent is being designed for call centers and help desks to be integrated with existing call center server software to provide an automated first response to incoming voice telephone calls or e-mail requests and to handle call center requirements with virtually no aid from human operators. - ALIFE-KNOWLEDGE-MANAGER: This SmartBot is being designed to extract information contained in a company's Intranet documents, organize it and make it more easily accessible for retrieval in order to enable companies to more efficiently and intelligently manage the large amount of data and documents that companies are making available on their Intranets. - ALIFE-PERSONAL-TUTOR: The ALife-Personal-Tutor is a tutoring program being designed to extract profile information from natural language conversation between the bot and the student user and to automatically adapt the difficulty and content of the lessons to the skill level of the student based on this information. The Company plans to offer a fully-functional "Personal" version of most of its products to non-commercial users either free or at a low price. The Company believes that this approach, which has been used successfully by other Internet companies, will result in more rapid acceptance and sales of the Company's products to commercial users. The commercial versions of the SmartBot products will include a "Professional" version for professional and small corporate users and/or a transaction and client/server based "Enterprise" version for networked corporate users. For the commercial versions of its SmartBot products, the Company intends to charge a one-time licensing fee and, with respect to the "Enterprise" version, intends to also charge a transactional fee based upon the number of users which interact with its bots. The Company is developing its SmartBot products on widely available standard hardware and software platforms such as Windows NT/95/98 and INSIDE GATEFOLD [Color work: Artificial Life SmartBots[TM] name appears vertically on the left edge of the gatefold.] [On the left side of the page, the following goals and/or applications of the SmartBots[TM] are stated: Improve Web Navigation, Personalize the Web with SmartBots[TM], Direct Marketing and Enable E-Commerce. Integrated with the goals is a graphic of an avatar's face with personalized features, a wire grid hand pressing a doorbell and a computer where a wire grid hand is protruding from the screen holding a credit card.] [To the center right of the gatefold is a circular diagram depicting that the Company's planned products (which have not yet been released for commercial sale) are based on a central core technology, the Alife Smart Engine[TM]. The center of the circular diagram delineates a wire grid face emerging into a full face.] [Beginning with the left side of the circular diagram, caption reads "Alife SmartEngine[TM] is the core component that gives SmartBots[TM] the ability to converse with users in natural language. The SmartEngine[TM] stores information in "knowledge bases" that can be exchanged to provide bots with different sets of expertise." Moving in a clockwise direction, each of the Company's planned products is depicted by an illustrated representation and a caption. The graphics of the first planned product Alife-SalesRep[TM] depicts an avatar discussing the features of an automobile. The graphics of the second planned product Alife-Personal-Tutor[TM] depicts an avatar teaching the German language. The graphics of the third planned product Alife-Call-Center-Agent[TM] portrays an avatar receptionist.] [On the right side of the circular diagram is a graphic of the WebGuide[TM] 1.0 Professional product representative] [Continuing in a clockwise direction, the graphics of the fourth planned product Alife-Portfolio-Manager[TM] depicts an avatar on the telephone with a ticker tape background. The graphics of the fifth planned product Alife-Knowledge-Manager[TM] portrays an avatar in an electronic library. The graphics of the sixth planned product Alife-Messenger[TM] illustrates a telephone, a pager, a palm-pilot and an avatar.] [Each page of the inside gatefold has the following disclosure: TO DATE, THE COMPANY HAS RELEASED ONLY ONE OF ITS PRODUCTS FOR COMMERCIAL SALE. THE COMPANY EXPECTS TO RELEASE THE REMAINDER OF ITS PRODUCTS FOR COMMERCIAL SALE IN 1999 AND 2000. THERE CAN BE NO ASSURANCE THAT THE COMPANY WILL SUCCEED IN COMMERCIALIZING ITS PLANNED PRODUCTS.] Internet browsers such as the Netscape Navigator/Communicator and Microsoft Internet Explorer. The Company released the Professional version of the ALife-WebGuide in November 1998 and intends to release the Enterprise version in the first quarter of 1999 and a number of its other SmartBot products in 1999. See "Business -- Products."
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001070518_infinity_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001070518_infinity_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus, including information under "Risk Factors." Throughout this Prospectus, except where the context otherwise requires: (i) the term "CBS" refers collectively to CBS Corporation and its direct and indirect subsidiaries (other than the Company), and their respective predecessors; and (ii) the term "Company" refers collectively to Infinity Broadcasting Corporation and its direct and indirect subsidiaries and their respective predecessors. Except where the context otherwise requires, all information in this Prospectus: (i) gives effect to the amendment of the Company's Certificate of Incorporation to change its authorized capital stock to Class A Common Stock, Class B Common Stock and preferred stock, par value $.01 per share (the "Preferred Stock"); (ii) gives effect to the conversion of each outstanding share of the Company's current common stock, par value $1.00 per share, into approximately 642,201.8349 shares of its newly created Class B Common Stock (see "Description of Capital Stock"); (iii) assumes the Underwriters' over-allotment options, as described in "Underwriting," are not exercised; and (iv) assumes an initial public offering price of $20.50 per share of Class A Common Stock, which represents the mid-point of the range set forth on the cover of this Prospectus. THE COMPANY The Company is one of the largest radio broadcasting and outdoor advertising companies in the United States. The Company's 161 radio stations, which serve 34 markets, collectively accounted for approximately 11% of total 1997 U.S. radio advertising expenditures. The Company's stations collectively ranked first or second, in terms of 1997 pro forma radio revenues, in 28 out of the 34 markets in which the Company operates stations. Approximately 70%, 87% and 99% of the Company's pro forma 1997 net radio revenues were generated in the 10, 25 and 50 largest U.S. radio markets, respectively. The Company's outdoor advertising business is conducted through its wholly owned subsidiary, TDI Worldwide, Inc. ("TDI"). TDI is one of the largest outdoor advertising companies in the United States, and operates predominantly in major metropolitan markets, 14 of which are also served by the Company's radio stations. TDI also operates internationally with offices in the United Kingdom, the Republic of Ireland and Northern Ireland. The Company operates and seeks to opportunistically acquire radio and outdoor, or "out-of-home," media properties in the largest markets in the United States. The Company characterizes its business as out-of-home because the majority of radio listening, and virtually all viewing of outdoor advertising, takes place in automobiles, transit systems, on the street and other locations outside the consumer's home. The Company believes that out-of-home media are an attractive alternative to other advertising media, particularly as "in-home" media, including broadcast television, cable and the Internet, increasingly compete for advertising revenue in the home. The Company's radio stations serve diverse target demographics through a broad range of programming formats such as rock, oldies, news/talk, adult contemporary, sports/talk and country, and the Company has established leading franchises in news, sports and personality programming. The Company believes that this diversity provides advertisers with "one-stop-shopping" by enabling advertisers to select stations to reach a targeted demographic group or to select groups of stations and outdoor advertising properties to reach broad groups of consumers within and across markets. The Company believes that this diversity also reduces its dependence on any single station, local economy, format or advertiser. CBS beneficially owns all of the Company's outstanding common stock. After giving effect to the Offerings, CBS will beneficially own approximately 83.8% of the equity, which will represent approximately 96.3% of the combined voting power, of the Company. CBS also owns, among other assets, 14 television stations covering approximately 31% of U.S. television households, several cable television networks and the CBS television network, as well as equity interests in certain Internet Web site providers. The Company was formed to own and operate the out-of-home media business of CBS Corporation, which prior to December 1, 1997, was known as Westinghouse Electric Corporation ("Westinghouse"). In EXPLANATORY NOTE This Registration Statement contains two forms of prospectus: one to be used in connection with an underwritten offering in the United States and Canada (the "U.S. Prospectus") and one to be used in a concurrent underwritten offering outside the United States and Canada (the "International Prospectus"). The U.S. Prospectus and the International Prospectus are identical except for the front and back cover pages and the section entitled "Underwriting." The form of U.S. Prospectus is included herein and is followed by the alternate pages to be used in the International Prospectus. The alternate pages for the International Prospectus included herein are each labeled "Alternate Page for International Prospectus." Final forms of each prospectus will be filed with the Securities and Exchange Commission under Rule 424(b) under the Securities Act. FORWARD-LOOKING STATEMENTS; CERTAIN DEFINED TERMS Certain statements made in this Prospectus under the captions "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and "Relationships Between the Company and CBS" and elsewhere in this Prospectus are forward-looking statements that are not historical facts but rather reflect the Company's current expectations concerning future results and events. The words "believes," "expects," "intends," "plans," "anticipates," "likely," "will" and similar expressions identify such forward-looking statements. These forward-looking statements are subject to risks, uncertainties and other factors, some of which are beyond the Company's control, that could cause actual results to differ materially from those forecast or anticipated in such forward-looking statements. Such risks, uncertainties and factors include, but are not limited to: business conditions and growth in the radio broadcasting and outdoor advertising industry and the general economy; competitive factors; changes in interest rates; the failure or inability to renew one or more of the Company's broadcast licenses; and the factors described in "Risk Factors." Readers are cautioned not to place undue reliance on these forward-looking statements which reflect management's view only as of the date of this Prospectus. The Company undertakes no obligation to update such statements or publicly release the result of any revisions to these forward-looking statements which it may make to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. ------------------------ As used herein, "Class A Common Stock" means the Class A Common Stock, $.01 par value per share, of the Company; "Class B Common Stock" means the Class B Common Stock, $.01 par value per share, of the Company; "Common Stock" means the Class A Common Stock and the Class B Common Stock; "Offerings" means the U.S. Offering and the International Offering; "FCC" means the Federal Communications Commission; "LMAs" means local marketing agreements which would be considered time brokerage agreements ("TBAs") for FCC purposes; "NYSE" means the New York Stock Exchange, Inc.; "Commission" means the Securities and Exchange Commission; "Exchange Act" means the Securities Exchange Act of 1934, as amended; and "Securities Act" means the Securities Act of 1933, as amended. November 1995, Westinghouse acquired CBS Inc. In December 1996, Westinghouse acquired the former Infinity Broadcasting Corporation ("Old Infinity"), which also owned TDI and had a minority equity interest in and managed Westwood One, Inc. ("Westwood One"). On June 4, 1998, CBS acquired the radio broadcasting operations of American Radio Systems Corporation ("American Radio"). Both Old Infinity and American Radio were publicly traded companies prior to their acquisition by Westinghouse and CBS, respectively. Prior to the Offerings, CBS transferred substantially all its radio, outdoor advertising and related assets to the Company. Infinity Broadcasting Corporation is a corporation organized under the laws of Delaware. Its principal executive offices are located at 40 West 57th Street, New York, New York 10019, and its telephone number is (212) 314-9200. BUSINESS STRATEGY AND COMPETITIVE STRENGTHS Growth Potential for Out-of-Home Media. The Company believes that the radio business has significant growth potential. Radio currently represents approximately 7% of all advertising spending in the United States. The Company believes that this market share may not yet fully reflect the operational benefits which it expects will result from the consolidation that has taken place in the radio business since the enactment of the Telecommunications Act of 1996 (the "Telecom Act"). The Telecom Act eliminated the national ownership ceiling previously applicable to radio broadcasters and relaxed restrictions previously applicable to ownership of radio stations within single markets, providing an opportunity for increased consolidation within the radio industry. The Company believes that this consolidation has made radio more competitive with newspapers, television and other media which can deliver large audiences across a wide range of demographics. The Company believes that the outdoor advertising business has also become more competitive due to similar industry consolidation. In addition, should the number and variety of in-home media continue to increase (whether as a result of the introduction of new technologies or otherwise), the Company believes that the smaller number of media competing in the out-of-home market will provide it with a greater competitive advantage than it has to date. Focus on Large Market Assets. Approximately 94% of the Company's radio stations are located in the 50 largest radio markets in the United States. As of September 30, 1998, the Company owned 9 of the 16 highest billing radio stations (measured by 1997 net revenues) in the United States. The Company believes that this focus on large markets makes it more appealing to advertisers, enables it to attract more highly skilled management, employees and on-air talent, and also enables it to more efficiently manage its business and generate higher levels of cash flow than would be the case if it managed a larger number of smaller stations. Strategic Acquisitions. While the Company does not believe that it needs to make acquisitions to grow its business, it intends to pursue acquisition opportunities that would enable it to continue to compete more effectively for advertising revenues and to increase its growth rate of cash flow. As an experienced operator of out-of-home media properties, the Company believes that it will have opportunities to acquire additional properties and to improve their operating performance. In general, the Company intends to pursue acquisitions of radio stations primarily in the 50 largest radio markets in the United States. This strategy may include acquiring radio stations in markets where the Company currently owns stations, as well as in markets in which the Company does not currently operate. The Company will also seek to acquire additional outdoor properties both in the United States and internationally. Diversification of Revenues. The Company seeks to maintain substantial diversity among its stations in many respects. The geographically wide-ranging stations serve diverse target demographics through a broad range of programming formats such as rock, oldies, news/talk, adult contemporary, sports/talk and country. This diversity reduces the Company's dependence on any particular station, local economy, format, on-air personality or advertiser. Similarly, the Company places an emphasis on increasing local and regional INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED DECEMBER 7, 1998 PROSPECTUS 135,000,000 SHARES [INFINITY LOGO] INFINITY BROADCASTING CORPORATION CLASS A COMMON STOCK ------------------------ All of the shares of Class A Common Stock, par value $.01 per share, offered hereby are being sold by Infinity Broadcasting Corporation (the "Company"). Of the 135,000,000 shares of Class A Common Stock offered hereby, 114,750,000 shares are being offered for sale initially in the United States and Canada (the "U.S. Offering") by the U.S. Underwriters and 20,250,000 shares are being offered for sale initially in a concurrent offering outside the United States and Canada (the "International Offering" and, together with the U.S. Offering, the "Offerings") by the International Managers (collectively with the U.S. Underwriters, the "Underwriters"). The initial public offering price and the underwriting discount per share will be identical for both Offerings. See "Underwriting." Prior to the Offerings, there has been no public market for the Class A Common Stock. It is currently estimated that the initial public offering price of the Class A Common Stock offered hereby will be between $19 and $22 per share. For a discussion of the factors considered in determining the initial public offering price of the Class A Common Stock, see "Underwriting." The Class A Common Stock has been approved for listing on the New York Stock Exchange under the symbol "INF," subject to official notice of issuance. (continued on page i) SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN MATERIAL RISK FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE CLASS A COMMON STOCK OFFERED HEREBY. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT(1) COMPANY(2) - ----------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Per Share................................... $ $ $ - ----------------------------------------------------------------------------------------------------------------------- Total(3).................................... $ $ $ - ----------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- </TABLE> (1) The Company has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). See "Underwriting." (2) Before deducting expenses payable by the Company estimated at $ . (3) The Company has granted the U.S. Underwriters and the International Managers options to purchase up to an additional 17,212,500 and 3,037,500 shares of Class A Common Stock, respectively, in each case exercisable within 30 days after the date hereof, solely to cover over-allotments, if any. If such options are exercised in full, the total Price to Public, Underwriting Discount and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ------------------------ The shares of Class A Common Stock are offered by the several Underwriters, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of certain legal matters by counsel for the Underwriters and certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of the shares of Class A Common Stock will be made in New York, New York on or about , 1998. ------------------------ MERRILL LYNCH & CO. BT ALEX. BROWN GOLDMAN, SACHS & CO. ALLEN & COMPANY INCORPORATED CREDIT SUISSE FIRST BOSTON DONALDSON, LUFKIN & JENRETTE LEHMAN BROTHERS MORGAN STANLEY DEAN WITTER NATIONSBANC MONTGOMERY SECURITIES LLC SALOMON SMITH BARNEY BEAR, STEARNS & CO. INC. DEUTSCHE BANK SECURITIES ING BARING FURMAN SELZ LLC LAZARD FRERES & CO. LLC PAINEWEBBER INCORPORATED SANFORD C. BERNSTEIN & CO., INC. SCHRODER & CO. INC. SG COWEN ABN AMRO ROTHSCHILD BANCBOSTON ROBERTSON STEPHENS CHASE SECURITIES INC. A DIVISION OF ABN AMRO INCORPORATED J.P. MORGAN & CO. WASSERSTEIN PERELLA SECURITIES, INC. ------------------------ The date of this Prospectus is , 1998. advertising revenues to avoid dependence on national advertising. During the year ended December 31, 1997, the Company generated approximately 72% of its net radio revenues from local and regional advertising. Proven Management Team. The Company's four executive officers have more than 70 years combined experience in the radio and outdoor advertising business, and Mel Karmazin, the Company's Chairman, President and Chief Executive Officer, and Farid Suleman, the Company's Executive Vice President, Chief Financial Officer, Treasurer and Secretary, have worked together at the Company's predecessors since 1986. The Company believes that this proven management team is a significant competitive asset for the Company. Cost Controls. The Company strives to maximize its stations' cash flow by instituting strict financial reporting requirements and cost controls, directing promotional activities, developing programming to improve the stations' appeal to a targeted audience group and enhancing advertising sales efforts. While the Company's local management is responsible for the day-to-day operations of each station, corporate management is responsible for long-range planning, establishing policies and procedures, maximizing cost savings where centralized activity is appropriate, allocating resources and maintaining overall control of the stations. Programming. The overall mix of each station's programming is designed to fit the station's specific format and serve its local community. The Company's general programming strategy includes acquiring significant on-air talent, sports franchises and news for its radio stations. The Company believes that this strategy, in addition to developing loyal audiences for its radio stations, creates the opportunity for the Company to obtain additional revenues from syndicating such programming franchises to other radio stations. Similarly, the Company's relationship with CBS gives it access to certain CBS programming. RELATIONSHIPS WITH CBS CBS beneficially owns all of the Company's outstanding common stock. After the Offerings, CBS will beneficially own approximately 83.8% of the equity, which will represent approximately 96.3% of the combined voting power, of the Company. As a result of such ownership, CBS will be able to control the vote on substantially all matters submitted to a vote of the Company's stockholders, including the election of directors and the approval of extraordinary corporate transactions. The Company believes that it derives substantial benefits from its relationships with CBS. CBS owns, among other assets, 14 television stations covering approximately 31% of U.S. television households, several cable television networks (including The Nashville Network and Country Music Television) and the CBS television network, as well as equity interests in certain Internet Web site providers. Through its affiliation with CBS, the Company is able to offer its customers "one-stop shopping" in a broader array of media and markets than that available to the Company's competitors. Because the Company's Chief Executive Officer will also be the Chief Executive Officer of CBS, the Company believes it is well positioned to identify and benefit from the synergies between the Company's businesses and those of CBS. After the Offerings, the relationship between CBS and the Company will be governed by an Intercompany Agreement and a Tax Sharing Agreement. The Intercompany Agreement will require CBS to make available to the Company the services of Mr. Karmazin, the Company's Chairman, President and Chief Executive Officer, and Mr. Suleman, the Company's Executive Vice President, Chief Financial Officer, Treasurer and Secretary. CBS will also make available certain services, including financial, tax and legal services, to the Company. The Company will pay CBS its allocated costs for these management and other services. The Intercompany Agreement also establishes certain principles governing the allocation of marketing opportunities, costs and revenues, the provision of promotional time and space, access to programming and other aspects of the Company's operating relationship with CBS on terms that are generally consistent with past practices between the parties. As a result of CBS's controlling interest in the Company and their overlapping managements and boards of directors, relationships between CBS and the Company will not always be on arm's-length terms. INFINITY LOGO On September 18, 1998, Old Infinity issued a floating rate promissory note as a dividend to CBS, in the aggregate principal amount of $2.5 billion (the "CBS Note"). The dividend was declared and paid in the form of the CBS Note in order to provide CBS with funds to be used for CBS's general corporate purposes. The CBS Note is payable on September 18, 2003. The Company intends to use the net proceeds of the Offerings to prepay the CBS Note. Any proceeds in excess thereof will be used by the Company to purchase from CBS any notes or debentures previously issued by American Radio ("American Radio Bonds") that are owned by CBS on the date of consummation of the Offerings, and thereafter for the Company's general corporate purposes, including working capital, repayment of debt and possible acquisitions. See "Use of Proceeds." Consistent with past practice between CBS and the Company, prior to the consummation of the Offerings, the Company will have transferred to CBS an amount not to exceed $42.0 million from the Company's cash-on-hand at September 30, 1998, together with all cash generated from the Company's operations during the period from October 1, 1998, through the date prior to the consummation of the Offerings. For a more detailed discussion of the Company's relationships with CBS, see "Risk Factors -- Risks Relating to Control by CBS" and "Relationships Between the Company and CBS." THE OFFERINGS Of the 135,000,000 shares of Class A Common Stock being offered hereby by the Company, 114,750,000 shares are being offered initially in the United States and Canada by the U.S. Underwriters and 20,250,000 shares are being offered initially outside the United States and Canada by the International Managers. See "Underwriting." Class A Common Stock Offered by the Company(1): U.S. Offering........................ 114,750,000 shares International Offering............... 20,250,000 shares ------------------ Total(1)..................... 135,000,000 shares Common Stock to be Outstanding After the Offerings: Class A Common Stock(1)(2)........... 135,000,000 shares Class B Common Stock(3).............. 700,000,000 shares ------------------ Total(1)(2).................. 835,000,000 shares Voting Rights.......................... The Class A Common Stock and Class B Common Stock vote as a single class on all matters, except as otherwise required by law, with each share of Class A Common Stock entitling its holder to one vote and each share of Class B Common Stock entitling its holder to five votes. All of the shares of Class B Common Stock are beneficially owned by CBS. After the Offerings, CBS will beneficially own shares of Common Stock having approximately 96.3% of the combined voting power of the outstanding shares of Common Stock (approximately 95.8% if the over- allotment options are exercised in full). See "Principal Stockholders and Stock Ownership" and "Description of Capital Stock." Use of Proceeds........................ The Company intends to use the net proceeds from the Offerings to prepay the CBS Note. Any proceeds in excess thereof will be used by the Company to purchase from CBS American Radio Bonds owned by CBS on the date of consummation of the Offerings, and thereafter for the Company's general corporate purposes, including for working capital, repayment of debt and possible acquisitions. See "Use of Proceeds."
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the consolidated financial statements and notes thereto appearing elsewhere in this Prospectus. Information contained in this Prospectus gives effect to the 100-to-1 stock split to be effected immediately prior to the Offering. THE COMPANY The Company is a leading designer and manufacturer of high-power, fault-tolerant, uninterruptible electronic power supplies and other power systems used in mission critical applications. The Company's electronic power supply systems are used in computer data storage, large computer systems, telecommunications equipment (particularly wireless base stations) and transportation equipment such as aircraft, ships and locomotives. The power supply industry covers a wide range of products from low-power commodity products to high-power and custom-designed units produced for demanding specialty applications. The Company develops products for niche markets in the high-end or premium segment of the power supply market where there is an emphasis on providing mission critical or uninterruptible supply of power. For example, in order to eliminate the risk of computer system failure or shutdown at a money center bank, power supplies must be redundant both in terms of (i) external source of power (e.g., battery back up in the event of an electric power failure) and (ii) power supply systems (i.e., back up sub-systems). The transition to the redundant power source or sub-system must be seamless so that no transactions are lost. The Company, founded in 1951, was primarily a supplier to the defense industry through the early 1990s. For fiscal 1998, substantially all of the Company's $116 million net sales were to non-defense related, original equipment manufacturers ("OEM"). The Company's OEM customers include EMC Corporation ("EMC"), Tandem Computer Inc. (a subsidiary of Compaq Computer Corporation), Glenayre Technologies Inc., Aspect Telecommunications Corporation, IPC Information Systems Inc., Bell Atlantic Mobile Service, GTE Corporation, Raytheon Company, BE Aerospace, Lockheed Martin Corporation and Schlumberger Ltd. The Company's largest customer is EMC. The Company began selling power supplies to EMC in 1991 initially developing one power supply model for use in one of EMC's product lines. Since 1996, the Company has been the primary supplier of power supply systems for EMC. Sales to EMC represented 64% of the Company's consolidated net sales for fiscal 1998. In fiscal 1998, EMC acquired 7.5% of the Company's then-outstanding common stock. See "Principal and Selling Shareholders." The Company's customers frequently operate with short lead times for product development and demand innovative products, superior quality, high reliability and meticulous customer service. As it has with EMC, the Company seeks to develop collaborative ("partnering") relationships with its customers to position itself as the primary source for its customers' product development needs and thereby maintain or acquire a large percentage of that customer's power supply business. The Company currently manufactures substantially all of its products in the United States which has enabled the Company to operate in close proximity to its customers, allowing it to respond to customer needs more quickly and efficiently. The Company recently expanded its operations internationally with the opening of design, manufacturing and sales facilities in Cork, Ireland that are intended primarily to support EMC's manufacturing operations in Ireland and which the Company expects will provide it with more immediate access to the European markets. The Company recently established limited manufacturing operations in Shenzen Province, China to develop a presence in the Asian telecommunications power supply markets. The Company is a New Jersey corporation, its principal executive offices are located at 85 Horsehill Road, Cedar Knolls, New Jersey 07927, and its telephone number is (973) 267-1900. THE OFFERING <TABLE> <S> <C> Common Stock offered: By the Company....................... 2,150,000 shares. By the Selling Shareholders(1) 1,450,000 shares. Common Stock to be outstanding after the Offering......................... 11,306,800 shares. Use of proceeds......................... The net proceeds to the Company from the Offering, estimated to be approximately $27 million, will be used to repay substantially all of the Company's existing indebtedness (approximately $8.4 million at September 21, 1998), and for general corporate purposes. The Company will not receive any proceeds from the sale of shares by the Selling Shareholders. See "Use of Proceeds" and "Principal and Selling Shareholders." Dividend policy......................... After the Offering, the Company intends to retain any earnings to finance its operations and future growth and does not expect to pay dividends for the foreseeable future. See "Dividend Policy." Listing................................. The Company will file an application to list the shares of Common Stock on the New York Stock Exchange. Proposed New York Stock Exchange symbol............................... "TDV." </TABLE> - ------------------ (1) Does not include up to 540,000 shares of Common Stock issuable if the Underwriters exercise in full the over-allotment option to be granted by the Selling Shareholders. See "Underwriting". SUMMARY FINANCIAL AND OPERATING DATA The following table summarizes certain summary financial data, which should be read in conjunction with the Company's Consolidated Financial Statements and notes thereto included elsewhere herein and with "Management's Discussion and Analysis of Financial Condition and Results of Operations." The selected financial data as of and for each of the fiscal years in the four year period ended July 31, 1998 have been derived from the Company's consolidated financial statements which have been audited by Arthur Andersen LLP, the Company's independent auditors. The report of Arthur Andersen LLP on such Financial Statements as of July 31, 1998 and for each of the fiscal years in the three year period ended July 31, 1998 appears elsewhere in this Prospectus. The selected financial data as of and for the fiscal year ended July 31, 1994 were not audited by Arthur Andersen LLP but were derived from financial statements audited by the Company's former auditors with certain adjustments made by the Company's management so as to be consistent with the presentation for fiscal 1995 through 1998. In the opinion of management, such financial statements were prepared on the same basis as the financial statements audited by Arthur Andersen LLP and include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial position and the results of operations of the Company as of and for such fiscal year. <TABLE> <CAPTION> AS OF AND FOR THE YEAR ENDED JULY 31, ---------------------------------------------------------------------------------- 1998 1994 1995 1996 1997 (53-WEEK YEAR) ----------- ----------- ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales $ 42,317 $ 64,763 $ 80,277 $ 102,711 $ 115,653 Cost of goods sold 32,431 47,027 54,265 75,819 78,741 ----------- ----------- ----------- ----------- ----------- Gross profit on sales 9,885 17,736 26,012 26,892 36,912 Selling, general and administrative expenses 5,528 8,654 9,368 12,906 16,061 Research and development expenses 2,227 2,239 3,148 3,113 4,140 ----------- ----------- ----------- ----------- ----------- Operating income 2,130 6,843 13,496 10,873 16,711 Interest expense 561 691 821 1,265 1,412 Interest income (13) (6) (9) (76) (54) Other expense (income) (132) (9) 124 51 (368) Litigation expense -- -- -- 2,221(1) -- ----------- ----------- ----------- ----------- ----------- Income from continuing operations before provision for income taxes and minority interest 1,714 6,167 12,560 7,412 15,721 Provision for income taxes 550 2,478 5,117 3,020 6,511 ----------- ----------- ----------- ----------- ----------- Income before minority interest 1,164 3,689 7,443 4,392 9,210 ----------- ----------- ----------- ----------- ----------- Minority interest in net loss of consolidated subsidiary -- -- -- -- 15 ----------- ----------- ----------- ----------- ----------- Income from continuing operations 1,164 3,689 7,443 4,392 9,225 ----------- ----------- ----------- ----------- ----------- Loss (gain) from operations of discontinued division in Florida (88) (17) 924 207 -- Loss (gain) on disposal of Florida division including operating losses during phase-out period -- -- -- 325 (119) ----------- ----------- ----------- ----------- ----------- Total discontinued operations (88) (17) 924 532 (119) ----------- ----------- ----------- ----------- ----------- Net income $ 1,252 $ 3,706 $ 6,519 $ 3,860 $ 9,344 =========== =========== =========== =========== =========== </TABLE> <TABLE> <CAPTION> AS OF AND FOR THE YEAR ENDED JULY 31, --------------------------------------------------------------------------------- 1998 1994 1995 1996 1997 (53-WEEK YEAR) ----------- ----------- ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> SHARE DATA (2): Income from continuing operations per share: Basic $ 0.14 $ 0.43 $ 0.90 $ 0.54 $ 1.04 Diluted 0.14 0.43 0.89 0.52 1.02 Net income per share: Basic 0.15 0.44 0.79 0.47 1.05 Diluted 0.15 0.44 0.78 0.46 1.03 Cash dividends per share 0.02 0.02 0.04 0.05 0.05 Weighted average shares outstanding: Basic 8,488,800 8,511,900 8,304,200 8,185,400 8,893,400 Diluted 8,495,400 8,518,900 8,370,400 8,466,000 9,032,100 SELECTED OPERATING DATA: Gross profit margin 23.4% 27.4% 32.4% 26.2% 31.9% EBITDA(3) $ 3,703 $ 8,388 $ 15,128 $ 13,235 $ 19,683 EBITDA margin 8.8% 13.0% 18.8% 12.9% 17.0% Cash flows from: Operating activities $ 2,576 $ 2,568 $ 4,723 $ 6,109 $ 8,647 Investing activities (1,172) (3,408) (6,163) (11,604) (794) Financing activities (1,389) 1,295 1,449 6,372 (3,870) Capital expenditures 1,151 3,421 6,189 12,000 3,689 BALANCE SHEET DATA: Working capital $ 17,020 $ 23,282 $ 18,266 $ 33,779 Total assets 45,164 52,483 68,314 74,402 Total debt 9,911 11,492 18,790 10,004 Total stockholders' equity 22,297 27,788 31,308 45,852 </TABLE> - ------------------ (1) Litigation expense included $1,292 of legal fees incurred during fiscal 1997 in connection with an indictment brought against the Company that was resolved favorably to the Company and $929 incurred in connection with the settlement of a related civil suit. See "Business--Legal Proceedings" and Note 9 of Notes to the Consolidated Financial Statements. (2) Per share data has been adjusted to reflect a 100-to-1 split of the Common Stock to be effected prior to the Offering. (3) EBITDA consists of income from continuing operations plus interest expense, income taxes, depreciation and amortization, and less interest income. EBITDA for fiscal 1997 does not include litigation expense of $2,221. EBITDA for fiscal 1998 does not include a gain of $368 on the sale of property and assets. EBITDA is a supplemental financial measurement used by the Company in the evaluation of its business and by many analysts in the Company's industry. However, EBITDA should only be read in conjunction with all of the Company's financial data summarized above and its financial statements prepared in accordance with generally accepted accounting principles appearing elsewhere herein, and should not be construed as an alternative either to operating income as an indicator of the Company's operating performance, or to cash flows from operating activities as a measure of liquidity.
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index 0000000000000000000000000000000000000000..9da136cb4e03152230003db9c79cfe2a9063c81b
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+++ b/parsed_sections/prospectus_summary/1998/CIK0001071026_telereunio_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. AS USED IN THIS PROSPECTUS, UNLESS THE CONTEXT OTHERWISE REQUIRES, THE TERMS THE "COMPANY" AND "TELSCAPE" REFER TO TELSCAPE INTERNATIONAL, INC., A TEXAS CORPORATION, AND ITS SUBSIDIARIES, COLLECTIVELY. THE COMPANY Telscape is a rapidly growing emerging multinational telecommunications carrier focused on Latin America. The Company provides international wholesale long distance services for calls originating in the United States and terminating in markets in Latin America. As a way to generate increased international long distance traffic to countries it serves, the Company markets long distance services principally to Hispanic consumers in the United States through the distribution of prepaid telephone calling cards ("Prepaid Cards") under the TELEFIESTA(R) brand name. In addition to these wholesale and retail international long distance services, the Company also provides a broad range of systems integration and value-added voice and data services to major public and private sector customers in Mexico. Telscape intends to significantly expand its facilities-based telecommunications operations over the next 18 months and to broaden its service offerings in markets where it has established, or expects to establish, a significant presence. In June 1998, Telereunion S.A. de C.V., a Mexican corporation and an affiliate of the Company ("Telereunion S. A."), received a 30-year, facilities-based carrier license from the Mexican government allowing it to construct and operate a network over which the Company can carry long distance traffic in Mexico (the "Mexican Concession"). To deliver its services, the Company, through Telereunion S.A., intends to construct a combined fiber-optic and microwave long distance network, connecting the United States, the Gulf region of Mexico and targeted Mexican cities (the "Mexican Network"). The Company's ability to construct the Mexican Network depends on its ability to raise capital, and on other factors, many of which are beyond its control. Telscape is a holding company, the principal assets of which are its operating subsidiaries in the United States and Mexico. As a holding company, Telscape is dependent upon dividends and distributions from its subsidiaries to meet its cash needs. MSN Communications, Inc. ("MSN"), Telscape USA, Inc. ("Telscape USA"), Telereunion, Inc. ("Telereunion") and TSCP International, Inc. ("Telscape International"), are wholly-owned subsidiaries of the Company, and INTERLINK Communications, Inc. ("INTERLINK") is 90%-owned by the Company. The Company's ownership interests in its Mexican subsidiaries are held through Telereunion. The chart on page 46 illustrates the Company's operational structure. The Company believes that it is well-positioned to capitalize on the opportunities presented by the large and growing international telecommunications services market. According to Global Telecommunications Traffic Statistics & Commentary 1997/98 published by TELEGEOGRAPHY in November 1997 (the "Telegeography Report"), revenues generated from the provision of international long distance services increased to $61.3 billion in 1996 from $23.9 billion in 1987, a compound annual growth rate of 11.0%. Management believes that Latin American traffic, including traffic between the United States and Latin America, will grow faster than the international telecommunications market as a whole as a result of the (i) underlying economic growth within Latin America, (ii) growth of regional trade as a result of free trade initiatives such as the North American Free Trade Agreement ("NAFTA"), Mercado Comun del Sur ("Mercosur") and the Andean Pact, (iii) deregulation and privatization of telecommunications carriers in the region, (iv) projected regional increases in telephone density, (v) growth in the Hispanic population in the United States and (vi) increasing demand for bandwidth-intensive applications. See "Business -- Industry." Telscape intends to capitalize on the growth in the Latin American telecommunications market by providing international long distance services to and from targeted Latin American countries. The Company also intends to position itself as an integrated telecommunications provider in Mexico by providing domestic and international long distance services over the Mexican Network. The Company believes that NOTE REGARDING FORWARD-LOOKING STATEMENTS The statements contained in this Prospectus that are not historical facts are "forward-looking statements" (as such term is defined in the Private Securities Litigation Reform Act of 1995), which can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "estimates," "will," "should," "plans," or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. Such statements include, but are not limited to, statements under the captions "Prospectus Summary," "Risk Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere in this Prospectus as to the Company's plans to implement its growth strategy, improve its financial performance, expand its infrastructure, develop new products and services, expand its sales force, expand its customer base and enter international markets. In addition, from time to time, the Company or its representatives have made or may make forward-looking statements, orally or in writing. Furthermore, such forward-looking statements may be included in, but are not limited to, various filings made by the Company with the Securities and Exchange Commission (the "Commission"), or press releases or oral statements made by or with the approval of an authorized executive officer of the Company. With respect to this Registration Statement, the Private Securities Litigation Reform Act of 1995 does not apply to the Company's subsidiaries that are guaranteeing the Company's obligations under the Notes. Management wishes to caution the reader that the forward-looking statements referred to above and contained herein in this Prospectus regarding matters that are not historical facts involve predictions. No assurance can be given that the future results will be achieved; actual events or results may differ materially as a result of risks facing the Company. Such risks include, but are not limited to, changes in business conditions, changes in the telecommunications industry and the general economy, competition, changes in service offerings, and risks associated with the Company's limited operating history, entry into developing markets, managing rapid growth, international operations, dependence on effective information systems, ability to consummate acquisitions or enter into joint ventures with companies on terms acceptable to the Company, and development of its network, as well as regulatory developments that could cause actual results to vary materially from the future results indicated, expressed or implied, in such forward-looking statements. See "Risk Factors." expanding its owned and leased transmission facilities in Latin America will allow it to increase the percentage of minutes of traffic carried over its own facilities and over transmission capacity owned or leased on a fixed cost basis ("on-net"), which will enable it to increase margins and profitability and ensure quality of service on both international and domestic long distance traffic. See "Business -- Network," "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Gross Margin." STRATEGY The Company's objective is to become a leading provider of high quality, competitively priced international long distance services between the United States and Latin America, and a leading provider of international long distance services, domestic long distance services and integrated value-added services to customers in Mexico and other targeted countries in Latin America. The key elements of the Company's strategy are to: (i) expand its Latin American presence; (ii) expand its network facilities; (iii) provide an integrated suite of service offerings; (iv) expand the scale and scope of its retail business; (v) pursue strategic alliances, joint ventures and acquisitions; and (vi) build brand awareness. For a discussion of the Company's business strategy, see "Business --Strategy." The Company's ability to pursue its business strategy depends on many factors, including the availability of financing, economic and regulatory conditions in its markets and competition. There can be no assurance that the Company's business strategy will be successful. See "Risk Factors." ------------------------ THE NOTES OFFERING <TABLE> <CAPTION> <S> <C> SECURITIES OFFERED.......................... $125.0 million in aggregate principal amount of % Senior Notes due 2008. ISSUER...................................... Telscape International, Inc. GUARANTORS.................................. All of the Company's wholly-owned U.S. subsidiaries (the "Guarantors"), including, as of the Issue Date, Telscape USA, Telereunion, MSN and TSCP International. MATURITY DATE............................... , 2008. INTEREST PAYMENT DATES...................... Interest on the Notes will accrue from the date of issuance and will be payable semi-annually on and of each year, commencing , 1999. GUARANTEES.................................. The Notes will be fully and unconditionally guaranteed on an unsecured senior basis (the "Guarantees") by the Guarantors. RANKING..................................... The Notes will be general unsecured senior obligations of the Company and will be PARI PASSU in right of payment to existing and future senior unsecured indebtedness of the Company. As of June 30, 1998, all of the Company's and the Guarantors' Indebtedness would have ranked PARI PASSU with or be effectively senior to the Notes and the Guarantees, respectively. The Notes will also be effectively subordinated to all secured indebtedness of the Company and its subsidiaries to the extent of the assets securing such indebtedness. As of June 30, 1998, after giving effect to the Notes Offering, the Company would have had approximately $136.1 million of senior indebtedness outstanding, of which $5.2 million would have been secured. The Guarantees will be general unsecured obligations of the Guarantors and will be PARI PASSU in right of payment to all existing and future senior unsecured indebtedness of the Guarantors. The Guarantees will also be effectively subordinated to all secured indebtedness of the Guarantors to the extent of the assets securing such indebtedness. As of June 30, 1998, after giving effect to the Notes Offering, the Guarantors would have had approximately $4.8 million (exclusive of the Guarantees of the Notes) of senior indebtedness outstanding, of which $1.9 million would have been secured. OPTIONAL REDEMPTION......................... The Notes will be redeemable, in whole or in part, at the option of the Company on or after , 2003, at the redemption prices set forth herein, plus accrued and unpaid interest to the date of redemption. In addition, at any time on or prior to , 2001, the Company may, at its option, redeem up to 35% of the aggregate principal amount of the Notes originally issued with the net cash proceeds of one or more Public Equity Offerings (as defined), at a redemption price equal to % of the aggregate principal amount of the Notes to be redeemed plus accrued and unpaid interest to the date of redemption; PROVIDED, HOWEVER, that, after giving effect to any such redemption, at least 65% of the aggregate principal amount of the Notes originally issued remains outstanding. CHANGE OF CONTROL........................... Upon a Change of Control (as defined), each holder will have the right, subject to certain conditions, to require the Company to repurchase such holder's Notes at a price equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest to the date of repurchase. CERTAIN COVENANTS........................... The Indenture governing the Notes (the "Indenture") will contain certain covenants that limit the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make investments and certain other restricted payments, consummate certain asset sales, enter into certain transactions with af- filiates, incur liens, impose restrictions on the ability of a subsidiary to pay dividends or make certain payments to the Company and its subsidiaries, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. In addition, under certain circumstances, the Company will be required to offer to purchase the Notes, in whole or in part, at a purchase price equal to 100% of the aggregate principal amount thereof plus accrued and unpaid interest, if any, to the date of repurchase, with the proceeds of certain Asset Sales (as defined). All of such covenants are subject to significant qualifications and exceptions. </TABLE> For additional information regarding the Notes, see "Description of the Notes." RECENT DEVELOPMENTS In July 1998, the Company filed a registration statement with the Commission to offer 3.64 million shares of its Common Stock (the "Equity Offering"). Due to recent market developments, on September 15, 1998, the Company withdrew the Equity Offering from the Commission. USE OF PROCEEDS The Company intends to use the net proceeds from the Notes Offering as follows: (i) approximately $98.0 million to complete the Mexican Network; (ii) approximately $15.0 million to acquire international switching and transmission facilities; and (iii) the balance to pursue joint ventures, strategic alliances or acquisitions and for working capital and other general corporate purposes. See "Use of Proceeds."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1998/CIK0001071031_tscp_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001071031_tscp_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..9da136cb4e03152230003db9c79cfe2a9063c81b
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1998/CIK0001071031_tscp_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. AS USED IN THIS PROSPECTUS, UNLESS THE CONTEXT OTHERWISE REQUIRES, THE TERMS THE "COMPANY" AND "TELSCAPE" REFER TO TELSCAPE INTERNATIONAL, INC., A TEXAS CORPORATION, AND ITS SUBSIDIARIES, COLLECTIVELY. THE COMPANY Telscape is a rapidly growing emerging multinational telecommunications carrier focused on Latin America. The Company provides international wholesale long distance services for calls originating in the United States and terminating in markets in Latin America. As a way to generate increased international long distance traffic to countries it serves, the Company markets long distance services principally to Hispanic consumers in the United States through the distribution of prepaid telephone calling cards ("Prepaid Cards") under the TELEFIESTA(R) brand name. In addition to these wholesale and retail international long distance services, the Company also provides a broad range of systems integration and value-added voice and data services to major public and private sector customers in Mexico. Telscape intends to significantly expand its facilities-based telecommunications operations over the next 18 months and to broaden its service offerings in markets where it has established, or expects to establish, a significant presence. In June 1998, Telereunion S.A. de C.V., a Mexican corporation and an affiliate of the Company ("Telereunion S. A."), received a 30-year, facilities-based carrier license from the Mexican government allowing it to construct and operate a network over which the Company can carry long distance traffic in Mexico (the "Mexican Concession"). To deliver its services, the Company, through Telereunion S.A., intends to construct a combined fiber-optic and microwave long distance network, connecting the United States, the Gulf region of Mexico and targeted Mexican cities (the "Mexican Network"). The Company's ability to construct the Mexican Network depends on its ability to raise capital, and on other factors, many of which are beyond its control. Telscape is a holding company, the principal assets of which are its operating subsidiaries in the United States and Mexico. As a holding company, Telscape is dependent upon dividends and distributions from its subsidiaries to meet its cash needs. MSN Communications, Inc. ("MSN"), Telscape USA, Inc. ("Telscape USA"), Telereunion, Inc. ("Telereunion") and TSCP International, Inc. ("Telscape International"), are wholly-owned subsidiaries of the Company, and INTERLINK Communications, Inc. ("INTERLINK") is 90%-owned by the Company. The Company's ownership interests in its Mexican subsidiaries are held through Telereunion. The chart on page 46 illustrates the Company's operational structure. The Company believes that it is well-positioned to capitalize on the opportunities presented by the large and growing international telecommunications services market. According to Global Telecommunications Traffic Statistics & Commentary 1997/98 published by TELEGEOGRAPHY in November 1997 (the "Telegeography Report"), revenues generated from the provision of international long distance services increased to $61.3 billion in 1996 from $23.9 billion in 1987, a compound annual growth rate of 11.0%. Management believes that Latin American traffic, including traffic between the United States and Latin America, will grow faster than the international telecommunications market as a whole as a result of the (i) underlying economic growth within Latin America, (ii) growth of regional trade as a result of free trade initiatives such as the North American Free Trade Agreement ("NAFTA"), Mercado Comun del Sur ("Mercosur") and the Andean Pact, (iii) deregulation and privatization of telecommunications carriers in the region, (iv) projected regional increases in telephone density, (v) growth in the Hispanic population in the United States and (vi) increasing demand for bandwidth-intensive applications. See "Business -- Industry." Telscape intends to capitalize on the growth in the Latin American telecommunications market by providing international long distance services to and from targeted Latin American countries. The Company also intends to position itself as an integrated telecommunications provider in Mexico by providing domestic and international long distance services over the Mexican Network. The Company believes that NOTE REGARDING FORWARD-LOOKING STATEMENTS The statements contained in this Prospectus that are not historical facts are "forward-looking statements" (as such term is defined in the Private Securities Litigation Reform Act of 1995), which can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "estimates," "will," "should," "plans," or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. Such statements include, but are not limited to, statements under the captions "Prospectus Summary," "Risk Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere in this Prospectus as to the Company's plans to implement its growth strategy, improve its financial performance, expand its infrastructure, develop new products and services, expand its sales force, expand its customer base and enter international markets. In addition, from time to time, the Company or its representatives have made or may make forward-looking statements, orally or in writing. Furthermore, such forward-looking statements may be included in, but are not limited to, various filings made by the Company with the Securities and Exchange Commission (the "Commission"), or press releases or oral statements made by or with the approval of an authorized executive officer of the Company. With respect to this Registration Statement, the Private Securities Litigation Reform Act of 1995 does not apply to the Company's subsidiaries that are guaranteeing the Company's obligations under the Notes. Management wishes to caution the reader that the forward-looking statements referred to above and contained herein in this Prospectus regarding matters that are not historical facts involve predictions. No assurance can be given that the future results will be achieved; actual events or results may differ materially as a result of risks facing the Company. Such risks include, but are not limited to, changes in business conditions, changes in the telecommunications industry and the general economy, competition, changes in service offerings, and risks associated with the Company's limited operating history, entry into developing markets, managing rapid growth, international operations, dependence on effective information systems, ability to consummate acquisitions or enter into joint ventures with companies on terms acceptable to the Company, and development of its network, as well as regulatory developments that could cause actual results to vary materially from the future results indicated, expressed or implied, in such forward-looking statements. See "Risk Factors." expanding its owned and leased transmission facilities in Latin America will allow it to increase the percentage of minutes of traffic carried over its own facilities and over transmission capacity owned or leased on a fixed cost basis ("on-net"), which will enable it to increase margins and profitability and ensure quality of service on both international and domestic long distance traffic. See "Business -- Network," "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Gross Margin." STRATEGY The Company's objective is to become a leading provider of high quality, competitively priced international long distance services between the United States and Latin America, and a leading provider of international long distance services, domestic long distance services and integrated value-added services to customers in Mexico and other targeted countries in Latin America. The key elements of the Company's strategy are to: (i) expand its Latin American presence; (ii) expand its network facilities; (iii) provide an integrated suite of service offerings; (iv) expand the scale and scope of its retail business; (v) pursue strategic alliances, joint ventures and acquisitions; and (vi) build brand awareness. For a discussion of the Company's business strategy, see "Business --Strategy." The Company's ability to pursue its business strategy depends on many factors, including the availability of financing, economic and regulatory conditions in its markets and competition. There can be no assurance that the Company's business strategy will be successful. See "Risk Factors." ------------------------ THE NOTES OFFERING <TABLE> <CAPTION> <S> <C> SECURITIES OFFERED.......................... $125.0 million in aggregate principal amount of % Senior Notes due 2008. ISSUER...................................... Telscape International, Inc. GUARANTORS.................................. All of the Company's wholly-owned U.S. subsidiaries (the "Guarantors"), including, as of the Issue Date, Telscape USA, Telereunion, MSN and TSCP International. MATURITY DATE............................... , 2008. INTEREST PAYMENT DATES...................... Interest on the Notes will accrue from the date of issuance and will be payable semi-annually on and of each year, commencing , 1999. GUARANTEES.................................. The Notes will be fully and unconditionally guaranteed on an unsecured senior basis (the "Guarantees") by the Guarantors. RANKING..................................... The Notes will be general unsecured senior obligations of the Company and will be PARI PASSU in right of payment to existing and future senior unsecured indebtedness of the Company. As of June 30, 1998, all of the Company's and the Guarantors' Indebtedness would have ranked PARI PASSU with or be effectively senior to the Notes and the Guarantees, respectively. The Notes will also be effectively subordinated to all secured indebtedness of the Company and its subsidiaries to the extent of the assets securing such indebtedness. As of June 30, 1998, after giving effect to the Notes Offering, the Company would have had approximately $136.1 million of senior indebtedness outstanding, of which $5.2 million would have been secured. The Guarantees will be general unsecured obligations of the Guarantors and will be PARI PASSU in right of payment to all existing and future senior unsecured indebtedness of the Guarantors. The Guarantees will also be effectively subordinated to all secured indebtedness of the Guarantors to the extent of the assets securing such indebtedness. As of June 30, 1998, after giving effect to the Notes Offering, the Guarantors would have had approximately $4.8 million (exclusive of the Guarantees of the Notes) of senior indebtedness outstanding, of which $1.9 million would have been secured. OPTIONAL REDEMPTION......................... The Notes will be redeemable, in whole or in part, at the option of the Company on or after , 2003, at the redemption prices set forth herein, plus accrued and unpaid interest to the date of redemption. In addition, at any time on or prior to , 2001, the Company may, at its option, redeem up to 35% of the aggregate principal amount of the Notes originally issued with the net cash proceeds of one or more Public Equity Offerings (as defined), at a redemption price equal to % of the aggregate principal amount of the Notes to be redeemed plus accrued and unpaid interest to the date of redemption; PROVIDED, HOWEVER, that, after giving effect to any such redemption, at least 65% of the aggregate principal amount of the Notes originally issued remains outstanding. CHANGE OF CONTROL........................... Upon a Change of Control (as defined), each holder will have the right, subject to certain conditions, to require the Company to repurchase such holder's Notes at a price equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest to the date of repurchase. CERTAIN COVENANTS........................... The Indenture governing the Notes (the "Indenture") will contain certain covenants that limit the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make investments and certain other restricted payments, consummate certain asset sales, enter into certain transactions with af- filiates, incur liens, impose restrictions on the ability of a subsidiary to pay dividends or make certain payments to the Company and its subsidiaries, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. In addition, under certain circumstances, the Company will be required to offer to purchase the Notes, in whole or in part, at a purchase price equal to 100% of the aggregate principal amount thereof plus accrued and unpaid interest, if any, to the date of repurchase, with the proceeds of certain Asset Sales (as defined). All of such covenants are subject to significant qualifications and exceptions. </TABLE> For additional information regarding the Notes, see "Description of the Notes." RECENT DEVELOPMENTS In July 1998, the Company filed a registration statement with the Commission to offer 3.64 million shares of its Common Stock (the "Equity Offering"). Due to recent market developments, on September 15, 1998, the Company withdrew the Equity Offering from the Commission. USE OF PROCEEDS The Company intends to use the net proceeds from the Notes Offering as follows: (i) approximately $98.0 million to complete the Mexican Network; (ii) approximately $15.0 million to acquire international switching and transmission facilities; and (iii) the balance to pursue joint ventures, strategic alliances or acquisitions and for working capital and other general corporate purposes. See "Use of Proceeds."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1998/CIK0001071116_united_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001071116_united_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..4a51f59f1e690d36309c053b500db707b7b1f276
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1998/CIK0001071116_united_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. The term "the Acquired Companies" refers collectively to the 72 companies acquired by the Company during the period from its formation in September 1997 through September 14, 1998. All financial and operating data for the Company contained herein with respect to the year ended December 31, 1997 is on a pro forma basis after giving effect to the acquisition of the Acquired Companies and the financing thereof as of January 1, 1997. United Rentals, Inc. is principally a holding company (the "Holding Company") and principally conducts its operations through its wholly owned subsidiary United Rentals (North America), Inc. ("URI") and subsidiaries of URI. URI was incorporated in August 1997, initially capitalized in September 1997 and commenced equipment rental operations in October 1997. The Holding Company was incorporated in July 1998 and became the parent company of URI on August 5, 1998 pursuant to the reorganization (the "Reorganization") described under "Business--Background." Prior to the Reorganization, the name of United Rentals (North America), Inc. was United Rentals, Inc. Unless otherwise indicated, (i) the terms "United Rentals" and "the Company" refer collectively to URI and its subsidiaries, with respect to periods prior to the Reorganization, and to the Holding Company and its subsidiaries, with respect to periods thereafter and (ii) the term "Common Stock" refers to the common stock of URI, with respect to periods prior to the Reorganization, and to the common stock of the Holding Company, with respect to periods thereafter. THE COMPANY The Company is a large, geographically diversified equipment rental company with 269 rental locations in 31 states and Canada. The Company rents a broad array of equipment to a diverse customer base that includes construction industry participants, industrial companies, homeowners and other individuals. The Company also sells used rental equipment, acts as a distributor for certain new equipment, and sells related merchandise and parts. The Company commenced equipment rental operations in October 1997 by acquiring six established companies and acquired 66 additional companies in the first nine months of 1998 (through September 14, 1998). During the year ended December 31, 1997, the Company on a pro forma basis rented equipment to approximately 395,000 customers (with the top ten customers representing less than 1% of total revenues) and had pro forma revenues of $768.9 million. The types of rental equipment offered by the Company include a broad range of light to heavy construction and industrial equipment (such as backhoes, forklifts, aerial lifts, skid-steer loaders, compressors, pumps and generators), general tools and equipment (such as hand tools and garden and landscaping equipment) and, to a lesser extent, special event equipment (such as tents, tables and chairs). The equipment mix varies at each of the Company's locations, with some locations offering a general mix and some specializing in specific equipment categories. As of September 14, 1998, the Company's rental equipment included approximately 153,000 units (not including special event equipment), had an original purchase price of approximately $849 million and had a weighted average age (based on original purchase price) of approximately 32 months. PENDING MERGER GENERAL On June 15, 1998, the Company entered into an Agreement and Plan of Merger, as amended and restated on August 31, 1998 (the "Merger Agreement"), with U.S. Rentals, Inc., a Delaware corporation ("U.S. Rentals"). The Merger Agreement provides, subject to the terms and conditions set forth therein, for a subsidiary of United Rentals to be merged with and into U.S. Rentals (the "Merger"). Following the Merger, U.S. Rentals will become a wholly owned subsidiary of URI. At the effective time of the Merger, (i) each outstanding share of U.S. Rentals common stock will be converted into 0.9625 shares of Common Stock of United Rentals (the "Exchange Ratio") and (ii) all outstanding options to purchase shares of U.S. Rentals common stock will be assumed by United Rentals and converted into options to purchase Common Stock of United Rentals, subject to adjustment for the Exchange Ratio. The Merger is expected to be accounted for as a "pooling of interests" for financial accounting purposes. See "Certain Information Concerning Pending Merger." payments required to be made upon redemption of the Preferred Securities or liquidation of the Issuer. If United Rentals does not make interest payments on the Debentures, the Issuer will not have sufficient funds on hand to pay Distributions on the Preferred Securities. In such event, the Guarantee would not require payment (since the Guarantee only guarantees payments to the extent that the Issuer has funds on hand available therefor), but holders of the Preferred Securities may institute legal proceedings directly against United Rentals to enforce payment under the Debentures. The obligations of United Rentals under the Guarantee are subordinate and junior in right of payment to all existing and future Secured Indebtedness of United Rentals and are structurally subordinated to all obligations of the subsidiaries of United Rentals. See "Description of the Guarantee." Taken together, United Rentals' obligations under the Debentures, the Indenture (as defined herein), the Trust Agreement (as defined herein) and the Guarantee provide, in the aggregate, a full, irrevocable and unconditional guarantee of payments of Distributions and other amounts due on the Preferred Securities. No single document standing alone or operating in conjunction with fewer than all of the other documents constitutes such guarantee. See "United Rentals Trust I," "Description of the Guarantee" and "Description of the Debentures." In the event of the liquidation of the Issuer, after satisfaction of liabilities to creditors of the Issuer as provided by applicable law, the holders of the Preferred Securities will be entitled to receive a liquidation preference of $50 per Preferred Security plus accumulated and unpaid Distributions thereon to the date of payment, which may be in the form of a distribution of such amount in Debentures, subject to certain exceptions. See "Description of the Preferred Securities--Liquidation Distribution Upon Dissolution." The Preferred Securities are represented by global certificates registered in the name of The Depository Trust Company ("DTC") or its nominee. Beneficial interests in the Preferred Securities are shown on, and transfers thereof are effected only through, records maintained by participants in DTC. Preferred Securities in certificated form are not issued in exchange for the global certificates except under certain limited circumstances. See "Description of the Preferred Securities--Form, Transfer, Exchange and Book-Entry Procedures-- Exchanges of Book-Entry Certificates for Certificated Preferred Securities" and "--Certain Book-Entry Procedures for Global Certificates." SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN FACTORS TO BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE OFFERED SECURITIES. ---------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ---------------- - -------- * QUIPS is a servicemark of Goldman, Sachs & Co. The date of this Prospectus is , 1998. U.S. Rentals is the second largest equipment rental company in the United States and the largest in the Western United States based on 1997 rental revenues. U.S. Rentals currently operates 131 equipment rental locations in 23 states and Mexico and generates an average of approximately 145,000 rental contracts per month from a diverse base of customers including commercial and residential construction, industrial and homeowner customers. U.S. Rentals management estimates that more than 280,000 customers did business with U.S. Rentals in 1997. U.S. Rentals owns more than 101,000 pieces of rental equipment comprised of approximately 600 equipment categories, including aerial work platforms, forklifts, paving and concrete equipment, compaction equipment, air compressors, hand tools, plumbing, landscaping and gardening equipment. U.S. Rentals management believes that U.S. Rentals' fleet, which had a weighted average age of approximately 20 months and an original equipment cost of approximately $725 million at June 30, 1998, is one of the most comprehensive and well-maintained equipment rental fleets in the industry. U.S. Rentals also sells new equipment manufactured by nationally known companies, used equipment from its rental fleet and rental-related merchandise, parts and supplies. COMBINED OPERATIONS OF THE COMPANY AND U.S. RENTALS The Company and U.S. Rentals on a combined basis (the "Combined Company") currently operates 400 rental locations (360 in the United States, 39 in Canada and one in Mexico). During the year ended December 31, 1997, the Combined Company rented equipment to over 675,000 customers, of which the top 10 customers represented less than 2.0% of total revenues, and had revenues of $1,193.6 million, on a pro forma basis (giving effect to the Merger and the acquisitions of the Acquired Companies). As of September 14, 1998, the Combined Company's rental equipment included approximately 254,000 units (excluding special event equipment) and had an original purchase price of approximately $1,574.0 million and a weighted average age (based on original purchase price) of approximately 26 months. THE INDUSTRY The Company estimates that the U.S. equipment rental industry (including used and new equipment sales by rental companies) generates annual revenues in excess of $20 billion. The combined equipment rental revenues of the 100 largest equipment rental companies have increased at an estimated compound annual rate of approximately 23% from 1992 through 1997 (based upon 1992 revenues and 1997 pro forma revenues, giving effect to certain acquisitions completed after the beginning of 1997, reported by the Rental Equipment Register, an industry trade publication). The Company believes that growth in the equipment rental industry primarily reflects increasing recognition by customers of the many advantages that equipment rental may offer compared with ownership, including the ability to: (i) avoid the large capital investment required for equipment purchases, (ii) reduce storage and maintenance costs, (iii) supplement owned equipment, thereby increasing the range and number of jobs that can be worked on, (iv) access a broad selection of equipment and select the equipment best suited for each particular job, (v) obtain equipment as needed and minimize the costs associated with idle equipment, and (vi) access the latest technology without investing in new equipment. The equipment rental industry is highly fragmented and consists of a small number of multi-location regional or national operators and a large number of relatively small, independent businesses serving discrete local markets. Based upon rental revenues reported by the Rental Equipment Register for 1997: (i) there were only 10 equipment rental companies that had 1997 equipment rental revenues in excess of $100 million (with the largest company having had 1997 equipment rental revenues of approximately $460 million), (ii) the largest 100 equipment rental companies combined had less than a 22% share of the market based on 1997 equipment rental revenues and the Company's estimate of the size of the market (with the largest company having had a market share of less than 3%), and (iii) there were approximately 100 equipment rental companies that had 1997 equipment rental revenues between $5 million and $100 million. In addition, the Company estimates that there are more than 20,000 companies with annual equipment rental revenues of less than $5 million. The Company believes that the fragmented nature of the industry presents substantial consolidation and growth opportunities for companies with access to capital and the ability to implement a disciplined acquisition program and effectively integrate and operate acquired companies. GROWTH STRATEGY The Company's growth strategy is to continue to expand through internal growth, a disciplined acquisition program and the opening of new rental locations, and to further diversify its equipment categories and customer markets. The Company believes that it has competitive advantages relative to many smaller operators, including greater purchasing power, a lower cost of capital, the ability to provide customers with a broader range of equipment and services and with newer and better maintained equipment, greater flexibility to transfer equipment among locations in response to customer demand, and greater ability to efficiently dispose of used equipment through direct sales to customers. The Company is seeking to make acquisitions of varying size, including acquisitions of smaller companies to complement existing or anticipated locations and combinations with relatively large companies that have an established presence in one or more regions. In evaluating potential acquisition targets, the Company considers a number of factors, including the quality of the target's rental equipment and management, the opportunities to improve operating margins and increase internal growth at the target, the economic prospects of the region in which the target is located, the potential for additional acquisitions in the region, and the competitive landscape in the target's markets. The Company will continue to seek expansion opportunities in North America and to pursue acquisition candidates with varying types of equipment and customer specializations. The Company believes that geographic and customer diversification will allow the Company to participate in the overall growth of the equipment rental industry and reduce the Company's sensitivity to fluctuations in regional economic conditions, adverse weather impacting a particular region or changes that affect particular market segments. The Company focuses substantial efforts on improving operating margins and increasing internal growth at acquired companies. The Company seeks to improve operating margins by efficiently integrating new and existing operations, eliminating duplicative costs, reducing overhead, centralizing functions such as purchasing and information technology, and applying best practices. The Company seeks to increase internal growth by investing in additional and more modern equipment, using advanced information technology systems to improve asset utilization and tracking, increasing sales and marketing efforts, cross- marketing between locations that offer different equipment categories, expanding the customer segments and geographic areas served, and opening complementary locations. The Company believes that the potential to increase growth through capital investment is particularly significant at many acquired companies because a lack of capital has constrained many small and mid-sized equipment rental companies from adequately expanding and modernizing their equipment. BACKGROUND The Company was founded by eight of the Company's officers, who contributed an aggregate of $44.4 million in cash to the capital of the Company. Each of the founders was formerly a senior executive of United Waste Systems, Inc. ("United Waste"), a solid waste management company that was sold in August 1997, or a senior member of United Waste's acquisition team. United Waste executed a growth strategy that combined a disciplined acquisition program (including over 200 acquisitions completed from January 1995 through August 1997), the integration and optimization of acquired facilities, and internal growth. The Company believes that the extensive experience of its management team in acquiring and effectively integrating and operating acquisition targets should enable the Company to capitalize on consolidation opportunities in the equipment rental industry. URI was incorporated in August 1997, initially capitalized in September 1997 and commenced equipment rental operations in October 1997. The Holding Company was incorporated in July 1998 and became the parent company of URI on August 5, 1998, pursuant to the Reorganization. UNITED RENTALS TRUST I The Issuer is a statutory business trust formed under the Delaware Business Trust Act (the "Trust Act") pursuant to (i) a trust agreement, dated as of July 22, 1998, executed by United Rentals, as depositor (the "Depositor"), and certain of the trustees of the Issuer (the "UR Trustees") and (ii) the filing of a certificate of trust with the Secretary of State of the State of Delaware on July 22, 1998 (the "Certificate of Trust"). Such trust agreement has been amended and restated in its entirety (as so amended and restated, the "Trust Agreement"). United Rentals owns Common Securities having an aggregate liquidation preference equal to approximately 3% of the total capitalization of the Issuer. The Issuer exists for the exclusive purposes of (i) issuing and selling the Preferred Securities and Common Securities representing undivided beneficial interests in the assets of the Issuer and investing the gross proceeds from the sale of the Preferred Securities and Common Securities in the Debentures; (ii) distributing the Issuer's income; and (iii) engaging in only those other activities necessary or incidental thereto. Accordingly, the Debentures are the sole assets of the Issuer, and payments under the Debentures will be the sole revenue of the Issuer. The Issuer has a term of approximately 40 years, but may terminate earlier as provided in the Trust Agreement. See "United Rentals Trust I." United Rentals will pay all fees and expenses related to the Issuer and the Offering and will pay, directly or indirectly, all ongoing costs and expenses of the Issuer. See "Description of the Debentures-- Expenses of Issuer." The principal place of business of the Issuer is c/o United Rentals, Inc., Four Greenwich Office Park, Greenwich, Connecticut 06830. THE OFFERING See "Risk Factors" for a discussion of certain factors to be considered in connection with an investment in the Preferred Securities, including the period and circumstances during and under which payments on the Preferred Securities and the Debentures may be deferred and the related federal income tax consequences. SECURITIES TO WHICH THIS PROSPECTUS RELATES This Prospectus relates to the following securities that may from time to time be sold by the Selling Holders: (i) up to 6,000,000 Preferred Securities which are currently outstanding, (ii) any Debentures that may hereafter be acquired by the holders of the Preferred Securities in exchange for Preferred Securities and (iii) any Common Stock that may hereafter be acquired upon conversion of the Preferred Securities and Debentures. USE OF PROCEEDS Neither United Rentals nor the Issuer will receive any of the proceeds from the sale of the Offered Securities by the Selling Holders. CERTAIN INFORMATION CONCERNING THE PREFERRED SECURITIES Original Issuance............... 6,000,000 Preferred Securities were issued on August 5, 1998 Issuer.......................... United Rentals Trust I, a statutory business trust formed under the laws of the State of Delaware. Distributions................... Distributions on the Preferred Securities will be cumulative from the date of original issuance of the Preferred Securities and will be payable at the annual rate of 6 1/2% of the liquidation preference of $50 per Preferred Security. Distributions will be made quarterly in arrears on February 1, May 1, August 1 and November 1 of each year, commencing November 1, 1998 when and to the extent that funds of the Issuer are available therefor. Interest payment periods on the Debentures will be quarterly, but may be deferred from time to time by United Rentals for periods of up to 20 consecutive quarters, so long as no Debenture Event of Default (as defined herein) has occurred and is continuing. In the event of such a deferral, the Issuer will be unable to make quarterly Distribution payments on the Preferred Securities during the period of any such deferral. During any such deferral period, interest on the Debentures will continue to accrue (and the amount of Distributions to which holders of the Preferred Securities are entitled will accumulate at the stated rate per annum set forth herein, compounded quarterly) and holders of Preferred Securities will continue to be required to accrue interest income for United States federal income tax purposes. See "Description of the Debentures--Option to Extend Interest Payment Period" and "Certain Federal Income Tax Consequences--U.S. Holders-- Interest Income and Original Issue Discount." Interest Deferral Provisions.... United Rentals has the right to defer payment of interest on the Debentures at any time or from time to time for a period not exceeding 20 consecutive quarters with respect to each deferral period (each, an "Extension Period"), provided that no Extension Period may extend beyond the stated maturity of the Debentures. Upon the termination of any such Extension Period and the payment of all amounts then due, United Rentals may elect to begin new Extension Periods subject to the requirements set forth herein. If United Rentals defers interest payments, subject to certain exceptions, it will be prohibited from paying dividends on any of its capital stock or making payments with respect to its debt securities that rank pari passu with or junior to the Debentures, until quarterly interest payments are resumed and all accrued and unpaid interest on the Debentures is brought current. United Rentals will have the right to make partial payments of such interest during a deferral of interest payments. See "Description of Debentures--Option to Extend Interest Payment Period." Liquidation Preference.......... $50 per Preferred Security, and all accrued and unpaid Distributions. Conversion into Common Stock.... Each Preferred Security is convertible in the manner described below at the option of the holder, at any time prior to the Conversion Expiration Date, into shares of Common Stock at the rate of 1.14593 shares of Common Stock for each Preferred Security (equivalent to a conversion price of $43.6325 per share of Common Stock), subject to adjustment in certain circumstances. A holder of Preferred Securities wishing to exercise its conversion right shall surrender any or all of such Preferred Securities, together with an irrevocable conversion notice, to the paying, conversion and exchange agent acting on behalf of the holders of Preferred Securities (the "Conversion Agent"), which shall exchange the Preferred Securities for a portion (equal to the aggregate liquidation preference of the Preferred Securities being so converted) of the Debentures held by the Issuer and immediately convert such Debentures into Common Stock. A holder generally will not recognize taxable gain or loss upon the exchange through the Conversion Agent of the Preferred Securities for a proportionate share of the Debentures, followed immediately thereafter by the conversion of the Debentures into Common Stock. See "Certain Federal Income Tax Consequences--U.S. Holders--Conversion of Preferred Securities into Common Stock." Whenever United Rentals issues shares of Common Stock, subject to certain conditions, upon conversion of Preferred Securities and, at such time, United Rentals has in effect a Rights Plan (as defined herein) under which holders of Common Stock are issued Rights (as defined herein), United Rentals will issue, together with each such share of Common Stock, an appropriate number of such Rights. Expiration of Conversion At any time on or after August 2, 2001, Rights.......................... United Rentals may, at its option, cause the conversion rights of holders of the Preferred Securities to expire. United Rentals may exercise this option only if for 20 trading days within any period of 30 consecutive trading days, including the last trading day of such period, the Current Market Price of Common Stock exceeds 120% of the conversion price of the Preferred Securities, subject to adjustment in certain circumstances. In order to exercise its option to cause the conversion rights of holders of the Preferred Securities to expire, United Rentals must issue a press release for publication on the Dow Jones News Service announcing the date upon which conversion rights will expire, prior to the opening of business on the second trading day after any period in which the condition in the preceding sentence has been met, but in no event prior to August 2, 2001. The date upon which such conversion rights are to expire (the "Conversion Expiration Date") shall be a date not less than 30 and not more than 60 days following the date of such press release. The press release shall announce the Conversion Expiration Date and provide the current conversion price and Current Market Price of the Common Stock, in each case as of the close of business on the trading day next preceding the date of the press release. Notice will be mailed by first-class mail by the Property Trustee to each holder of Preferred Securities not more than four Business Days after issuance of the press release. In the event of any redemption of the Preferred Securities, the conversion rights with respect to the Preferred Securities will expire two Business Days prior to the scheduled date for the mandatory redemption of the Preferred Securities if United Rentals has not exercised its option to cause the conversion rights of holders of the Preferred Securities to expire. See "Description of the Preferred Securities--Conversion Rights--Expiration of Conversion Rights." Redemption...................... Except as provided below, the Preferred Securities are not redeemable by the Issuer prior to August 2, 2001. From time to time on or after such date, the Preferred Securities will be subject to redemption, in whole or in part, at the redemption prices set forth herein (together with all accrued and unpaid Distributions to the date fixed for redemption) upon any permitted redemption of Debentures by United Rentals. However, the aggregate liquidation preference of the Preferred Securities and any Common Securities so redeemed will equal the aggregate principal amount of Debentures redeemed by United Rentals which may not exceed the amount of the proceeds derived, directly or indirectly, by United Rentals from the issuance and sale of Common Stock within the 12 months preceding the date fixed for redemption. The Preferred Securities will not be redeemable unless and until all accrued and unpaid Distributions thereon have been paid in full on all outstanding Preferred Securities through the last Distribution Date (as defined herein) prior to and including the date of redemption. See "Description of the Preferred Securities--Optional Redemption" and "Description of the Debentures--Optional Redemption." In the event that, at any time after the Conversion Expiration Date, less than 5% of the Preferred Securities remains outstanding, such Preferred Securities shall be redeemable at the option of the Issuer, in whole but not in part, at a redemption price equal to the liquidation preference for such Preferred Securities and all accrued and unpaid Distributions. See "Description of the Preferred Securities--Optional Redemption." The Preferred Securities will be subject to mandatory redemption upon the repayment at maturity or as a result of acceleration of the Debentures. See "Description of the Preferred Securities--Trust Agreement Events of Default; Notice" and "Description of the Preferred Securities--Mandatory Redemption." Special Event Exchange or Upon the occurrence of a Tax Event (as Redemption...................... defined below) or an Investment Company Event (as defined below), the UR Trustees shall direct the Conversion Agent to exchange all outstanding Preferred Securities for Debentures, provided that, in the case of a Tax Event, the UR Trustees shall have the right to direct that less than all of the Preferred Securities be so exchanged if and for so long as United Rentals shall have elected to pay Additional Sums (as defined below) such that the amounts received by the holders of Preferred Securities that remain outstanding are not reduced thereby and shall not have revoked any such election or failed to make such payments. Upon the occurrence of a Tax Event, the Debentures may be redeemed, in whole but not in part, for cash by United Rentals at the Tax Redemption Price (as defined below) per Debenture, plus accrued and unpaid interest thereon. In the event the Debentures are redeemed by United Rentals, the Preferred Securities will be redeemed by the UR Trustees at the Tax Redemption Price per Preferred Security together with accrued and unpaid Distributions thereon. See "Description of the Preferred Securities--Special Event Exchange or Redemption." A "Special Event" means a Tax Event or an Investment Company Event. A "Tax Event" means the receipt by the Property Trustee, on behalf of the Issuer, of an opinion of counsel, rendered by a law firm having a national tax and securities practice (which opinion shall not have been rescinded by such law firm), to the effect that, as a result of any amendment to, or change (including any announced prospective change) in, the laws (or any regulations thereunder) of the United States or any political subdivision or taxing authority thereof or therein affecting taxation, or as a result of any official administrative pronouncement or judicial decision interpreting or applying such laws or regulations, which amendment or change is effective or such pronouncement or decision is announced on or after the date of issuance of the Preferred Securities under the Trust Agreement, there is more than an insubstantial risk in each case after the date hereof that (i) the Issuer is, or will be within 90 days of the date thereof, subject to United States federal income tax with respect to income received or accrued on the Debentures, (ii) interest payable by United Rentals on such Debentures is not, or within 90 days of the date thereof will not be, deductible by United Rentals, in whole or in part, for United States federal income tax purposes, or (iii) the Issuer is, or will be within 90 days of the date thereof, subject to more than a de minimis amount of other taxes, duties or other governmental charges. "Investment Company Event" means the receipt by the Property Trustee (as defined herein), on behalf of the Issuer, of an opinion of counsel, rendered by a law firm having a recognized national tax and securities practice (which opinion shall not have been rescinded by such law firm), to the effect that, as a result of the occurrence of a change in law or regulation or a change in interpretation or application of law or regulation by any legislative body, court, governmental agency or regulatory authority (a "Change in 1940 Act Law"), that there is more than an insubstantial risk that the Issuer is or will be considered an "investment company" that is required to be registered under the Investment Company Act of 1940, as amended (the "Investment Company Act"), which Change in 1940 Act Law becomes effective on or after the date of original issuance of the Preferred Securities. "Additional Sums" means the additional amounts as may be necessary in order that the amount of Distributions then due and payable by the Issuer on the outstanding Preferred Securities and Common Securities of the Issuer shall not be reduced as a result of any additional taxes, duties and other governmental charges to which the Issuer has become subject as a result of a Tax Event. "Tax Redemption Price" means, with respect to a Debenture or Preferred Security, on any redemption date (A) prior to August 2, 2001, the greater of (i) the principal amount of such Debenture or the liquidation preference of such Preferred Security, as applicable; and (ii) the greater of (a) the average of the Market Price (as defined herein) of a Preferred Security over the five trading days immediately preceding the day on which the notice of redemption (the "Redemption Notice") is given by the Property Trustee or the Debenture Trustee, as applicable; and (b) the Market Price of a Preferred Security on the trading day immediately preceding the day on which the Redemption Notice is given by the Property Trustee or the Debenture Trustee, as applicable; and (B) on or after August 2, 2001, the principal amount of such Debenture or the liquidation preference of such Preferred Security, as applicable. "Market Price" means on any trading day, the closing price of a Preferred Security on such trading day as determined by the Board of Directors of United Rentals and Goldman, Sachs & Co. in good faith by agreement, or in the event that no such agreement can be reached, the average of the mid-point of the last bid and ask prices for a Preferred Security from each of at least three nationally recognized investment banking firms which trade Preferred Securities, to be selected for this purpose by the Board of Directors of United Rentals and Goldman, Sachs & Co. in good faith by agreement. Distribution of Debentures...... At any time, United Rentals has the right to dissolve the Issuer and, after satisfaction of the liabilities to creditors of the Issuer as provided by applicable law, cause the Debentures to be distributed to the holders of the Preferred Securities in liquidation of the Issuer. See "Description of the Preferred Securities--Distribution of Debentures." Guarantee....................... Pursuant to the Guarantee, United Rentals has irrevocably agreed, on a subordinated basis (as to all Secured Indebtedness of United Rentals), to guarantee the payment in full of (a) the Distributions payable by the Issuer on the Preferred Securities, to the extent the Issuer has funds on hand available therefor, (b) the redemption price (together with accumulated and unpaid Distributions) payable by the Issuer with respect to any Preferred Securities called for redemption, to the extent the Issuer has funds on hand available therefor, and (c) amounts payable in respect of the Preferred Securities upon liquidation of the Issuer (unless the Debentures are distributed to the holders of the Preferred Securities), to the extent that there are assets of the Issuer available for distribution to holders of the Preferred Securities. A holder of Preferred Securities may enforce United Rentals' obligations to make the aforesaid payments under the Guarantee directly against United Rentals, and United Rentals waives any right to require that an action be brought against the Issuer or any other person before proceeding against United Rentals. The Guarantee is unsecured and is subordinate and junior in right of payment to all existing and future Secured Indebtedness of United Rentals and structurally subordinated to all obligations of the subsidiaries of United Rentals. The Guarantee ranks pari passu with any unsecured indebtedness now existing or hereafter incurred by United Rentals. See "Risk Factors--Subordination of the Debentures and the Guarantee," "Risk Factors--Risks Associated with Holding Company Structure" and "Description of the Guarantee." Voting Rights................... Holders of Preferred Securities generally have limited voting rights relating only to the modification of the Preferred Securities. Holders of Preferred Securities are not entitled to vote to appoint, remove or replace the UR Trustees, which voting rights are vested exclusively in the holder of the Common Securities. The UR Trustees and United Rentals may amend the Trust Agreement without the consent of holders of Preferred Securities to ensure that the Issuer will be classified for United States federal income tax purposes as a grantor trust even if such action adversely affects the interests of such holders. See "Description of the Preferred Securities--Voting Rights; Amendment of the Trust Agreement." Debentures...................... The Debentures have a maturity of 30 years from the date of original issuance and bear interest at the rate of 6 1/2% per annum payable quarterly in arrears. United Rentals has the right from time to time to select an interest payment period or periods longer than one quarter (during which period or periods interest will compound quarterly), provided that no such deferral of interest payments will exceed 20 consecutive quarters and provided further that no such deferral of interest payments may extend beyond the stated maturity of the Debentures. Accordingly, Distribution payments on the Preferred Securities may not be deferred beyond the stated maturity of the Debentures. If United Rentals defers interest payments, subject to certain exceptions, it will be prohibited from paying dividends on any of its capital stock or making payments with respect to its debt securities that rank pari passu with or junior to the Debentures, until quarterly interest payments are resumed and all accrued and unpaid interest on the Debentures is brought current. United Rentals will have the right to make partial payments of such interest during a deferral of interest payments. The Debentures are convertible into shares of Common Stock at the option of the holders thereof at a conversion rate of 1.14593 shares of Common Stock for each $50 in principal amount of Debentures (equivalent to a conversion price of $43.6325 per share of Common Stock) subject to certain adjustments set forth herein. The Issuer has covenanted not to convert Debentures except pursuant to a notice of conversion delivered to the Conversion Agent by a holder of Preferred Securities. On and after August 2, 2001, the Debentures will be redeemable at the option of United Rentals at any time, in whole or in part, at the redemption prices set forth herein, together with accrued and unpaid interest to the date fixed for redemption; provided, that the aggregate principal amount of the Debentures redeemed may not exceed the amount of the proceeds derived, directly or indirectly, by United Rentals from the issuance and sale of Common Stock within the 12 months preceding the date fixed for redemption. The Debentures may not, however, be redeemed unless and until all accrued and unpaid interest thereon has been paid in full on all outstanding Debentures through the last interest payment date prior to and including the date of redemption. See "Description of the Debentures-- Optional Redemption." The Debentures are also redeemable, in whole but not in part, upon the occurrence and continuation of a Tax Event. See "Description of the Preferred Securities--Special Event Exchange or Redemption." The Debentures are subordinate and junior in right of payment to all existing and future Secured Indebtedness of United Rentals and are structurally subordinated to all obligations of the subsidiaries of United Rentals. The Loan Guarantees constitute Secured Indebtedness of United Rentals. At June 30, 1998, on a pro forma basis (after giving effect to the Loan Guarantees, all acquisitions completed by the Company subsequent to such date (through September 14, 1998) and the financing thereof) (i) United Rentals would have had outstanding $603.2 million of Secured Indebtedness and (ii) the subsidiaries of United Rentals would have had outstanding approximately $1,533.6 million of obligations (not including the obligations guaranteed by United Rentals pursuant to the Loan Guarantees which constitute Secured Indebtedness). The terms of the Securities do not place any limitation on the amount of Secured Indebtedness or other indebtedness that may be incurred by United Rentals or subsidiaries of United Rentals. See "Risk Factors--Subordination of the Debentures and the Guarantee" and "Risk Factors-- Risks Associated with Holding Company Structure." While the Preferred Securities are outstanding, the Issuer does not have the right to amend the Indenture or the terms of the Debentures in a way that materially adversely affects the holders of the Preferred Securities or to waive a Debenture Event of Default without the consent of holders of at least a majority in aggregate liquidation preference of the Preferred Securities and, in certain cases, the Common Securities then outstanding. See "Description of the Debentures--Modification of Indenture."
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+PROSPECTUS SUMMARY This is only a summary and does not contain all the information that may be important to you. You should read the entire Prospectus, especially the "Risk Factors" section and the Financial Statements and notes to those statements, before deciding to invest in shares of our Common Stock. In this Prospectus, the "Company," "we," "our" and "us" refer to Molecular Circuitry, Inc., unless the context otherwise requires. OUR BUSINESS: We have developed an instrument, the MC-18, to detect certain harmful bacteria, or pathogens, in meat, poultry, dairy and other food products. We believe that recent adverse publicity relating to cases of food contamination and new government regulations directed at reducing these problems has increased the interest of food producers in pathogen testing. Our goal is to offer a testing instrument that can streamline the testing process and offer significant benefits over currently available testing methods. OUR PRODUCT: The MC-18 is a compact, desktop instrument that detects electronically the chemical reactions that occur between harmful pathogens in a food sample and pathogen antibodies placed in the MC-18. Through this method, known as an electroimmunoassay, users will be able to determine the presence of certain pathogens in food samples. We plan to generate revenue through the sale of disposable test kits that are required to be used with the MC-18, as well as through the sale of the instrument itself. We have developed tests for the four pathogens which, according to a 1995 study by the Center for Disease Control and Prevention, account for a majority of laboratory-confirmed cases of food contamination in the United States: Salmonella; E. coli O157:H7; Listeria; and Campylobacter. We plan to add capability to test for more types of pathogens in the future. DEVELOPMENT STAGE: Our Company is still in the development stage. We are field testing the MC-18 and have not begun to sell it. We do not yet have any full-time employees. We will begin hiring upon our leasing of a corporate office and production facility. OUR MARKET: Potential customers for the MC-18 and test kits include producers and distributors of food products worldwide. A principal concern for meat, poultry and dairy safety is bacterial contamination. Typically, food producers use separate tests to detect each type of pathogen. Our product is designed to provide the ability to simplify testing by using one platform to test for multiple pathogens simultaneously. We will be marketing the MC-18 and the related test kits through an exclusive agreement with VWR Scientific Products Corporation, a leading worldwide distributor of laboratory supplies, chemicals and equipment. ADVANTAGES OF OUR TECHNOLOGY: We believe our potential customers will find the MC-18 competitive and cost effective because of the following features and abilities: - High volume capability, meaning the MC-18 can test multiple samples and detect multiple pathogens simultaneously. - High level of sensitivity, meaning the MC-18 is able to detect relatively small quantities of bacteria. - High level of specificity, meaning the MC-18 can differentiate between pathogenic and nonpathogenic bacteria, thereby reducing the likelihood of false positive test results. - High level of automation, reducing customers' dependence on skilled technicians and the chance of operator error. - Capacity to create a permanent computer record. REGULATIONS: We believe that recent United States government action, including the adoption of regulations and establishment of a National Food Safety Council, will create an increased market demand for more efficient and cost-effective testing methods. POTENTIAL FUTURE APPLICATIONS: We believe our technology may have medical applications, such as testing for hormones, drugs and disease-associated organisms, as well as environmental applications, such as testing of soil, air and water. OUR OFFICES: Our executive offices are currently located at 321 Spruce Street, Suite 525, Scranton, Pennsylvania 18503 and our telephone number is (717) 207-7200. In early 1999, we plan to move to a new facility located in the Philadelphia area. THE OFFERING Common Stock Offered............ 3,000,000 shares Common Stock to be Outstanding after the Offering............ 12,929,947 shares (1)(2) Use of Proceeds................. The renovation, equipping and maintenance of our new corporate office and production facility, research and development, repayment of certain debt, and working capital and general corporate purposes. See "Use of Proceeds." Risk Factors.................... You should consider the factors set forth in the "Risk Factors" section, beginning on page 8, as well as the other cautionary statements throughout the Prospectus, before investing in our Common Stock. Proposed Nasdaq Stock Market Symbol........................ BUGS - ------------------------- (1) Based on shares outstanding as of September 30, 1998 as well as 6,188,394 shares expected to be issued at closing upon conversion of an aggregate of $2.5 million principal amount of 10% subordinated convertible debentures (the "Debentures"), 52,545 shares expected to be issued in lieu of interest on the Debentures from January 1, 1999 through January 31, 1999 and 21,460 shares issuable to certain creditors. The Debentures mature on the date of closing of the Offering, unless the holder elects to convert the Debentures and interest thereon into shares of Common Stock. Keystone Foods Corporation, the holder of 88.8% of the outstanding Debentures, has advised the Company that it intends to exercise its conversion rights. (2) Does not include 910,000 shares issuable pursuant to outstanding stock options and 450,000 shares which are issuable if the Underwriters exercise their over-allotment option. SUMMARY FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) The summary financial data set forth below as of and for the years ended December 31, 1996 and 1997 and as of and for the nine months ended September 30, 1998 has been derived from the financial statements of the Company, which have been audited by Deloitte & Touche LLP, independent auditors. The summary financial data set forth below as of and for the years ended December 31, 1994 and 1995 and as of and for the nine months ended September 30, 1997 has been derived from the unaudited financial statements of the Company included elsewhere in this Prospectus and, in the opinion of management of the Company, includes all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation thereof. The results of operations set forth below are not necessarily indicative of results to be expected for any future period. The information below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements of the Company, including the notes thereto, included elsewhere in this Prospectus. <TABLE> <CAPTION> NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, --------------------------------------------------- ------------------------ 1994 1995 1996 1997 1997 1998 ----------- ----------- ---------- ---------- ----------- ---------- (UNAUDITED) (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Sales...................... $ 33 $ 364 Cost of sales.............. 32 350 ---------- ---------- Gross profit.......... 1 14 Engineering, research and development.............. 1,193 2,258 $ 551 $ 1,627 $ 1,066 $ 1,002 Compensation related to stock options............ -- -- -- -- -- 2,192 General and administration........... 519 533 310 392 262 691 Interest expense........... 12 18 60 564 531 696 Depreciation and amortization............. 3 3 5 39 27 29 Write-off of impaired assets................... -- -- 279 -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Total expenses........ 1,727 2,812 1,205 2,622 1,886 4,610 ---------- ---------- ---------- ---------- ---------- ---------- Loss before extraordinary item..................... (1,726) (2,798) (1,205) (2,622) (1,886) (4,610) Extraordinary item -- gain on forgiveness of debt... -- -- -- 1,833 1,833 -- ---------- ---------- ---------- ---------- ---------- ---------- Net loss................... $ (1,726) $ (2,798) $ (1,205) $ (789) $ (53) $ (4,610) ========== ========== ========== ========== ========== ========== </TABLE> <TABLE> <CAPTION> NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, --------------------------------------------------- ------------------------ 1994 1995 1996 1997 1997 1998 ----------- ----------- ---------- ---------- ----------- ---------- (UNAUDITED) (UNAUDITED) (UNAUDITED) <S> <C> <C> <C> <C> <C> <C> Basic and diluted net loss per common share before extraordinary item....... $ (0.30) $ (0.27) $ (0.11) $ (0.61) $ (0.41) $ (1.26) Extraordinary item......... -- -- -- 0.43 0.40 -- ---------- ---------- ---------- ---------- ---------- ---------- Basic and diluted net loss per common share after extraordinary item....... $ (0.30) $ (0.27) $ (0.11) $ (0.18) $ (0.01) $ (1.26) Weighted average number of common shares outstanding.............. 5,780,590 10,261,569 10,578,875 4,306,061 4,535,441 3,665,740 </TABLE> <TABLE> <CAPTION> SEPTEMBER 30, 1998 --------------------------- ACTUAL AS ADJUSTED(1) ---------- -------------- <S> <C> <C> BALANCE SHEET DATA: Working capital (deficit)................................. $ (961) 31,214 Total assets.............................................. 793 32,399 Total long-term debt...................................... (2,762) -- Total stockholders' equity (deficit)...................... (3,168) 31,783 </TABLE> - ------------------------- (1) Gives effect to (i) the Offering at an assumed public offering price of $12.00 per share and the application of the net proceeds therefrom, (ii) the expected conversion of the Debentures and interest thereon from January 1, 1999 through January 31, 1999 and (iii) the issuance of 21,460 shares to certain creditors.
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diff --git a/parsed_sections/prospectus_summary/1998/CIK0001074438_peachtree_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIK0001074438_peachtree_prospectus_summary.txt
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+PROSPECTUS SUMMARY THIS PROSPECTUS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN THE COMMON STOCK. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE FINANCIAL STATEMENTS AND THE NOTES THERETO. YOU SHOULD ALSO CONSIDER CAREFULLY THE INFORMATION SET FORTH UNDER THE CAPTIONS "RISK FACTORS" AND "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS." FOR YOUR CONVENIENCE, PEACHTREE REFERS YOU TO SPECIFIC PAGE NUMBERS IN THIS PROSPECTUS FOR MORE DETAILED INFORMATION ON CERTAIN TERMS AND CONCEPTS USED THROUGHOUT THIS PROSPECTUS. FOR PURPOSES OF CALCULATING THE NUMBERS AND PERCENTAGES OF SHARES OUTSTANDING, UNLESS NOTED OTHERWISE WE HAVE ASSUMED THAT THE UNDERWRITERS HAVE NOT EXERCISED THEIR OVER-ALLOTMENT OPTION. PLEASE NOTE THAT CERTAIN INDUSTRY AND MARKET DATA USED IN THIS PROSPECTUS ARE BASED ON PUBLICLY AVAILABLE REPORTS FROM IDC AND PC DATA, INC. WE BELIEVE THAT THIS DATA IS GENERALLY RELIABLE, BUT CANNOT ASSURE YOU THAT IT IS ACCURATE IN ALL RESPECTS. PEACHTREE Peachtree is a leading provider of financial and accounting software for small businesses. For the last 20 years, Peachtree has been a technological leader and innovator. We have achieved many retail software industry firsts, including the first DOS accounting package, the first Microsoft Windows-based accounting package, the first widely available accounting application seamlessly integrated with Microsoft Office and, most recently, the first widely available Windows 98-certified accounting package. As an established industry leader, we enjoy strong brand recognition and customer loyalty and an excellent reputation among accounting industry professionals. Our extensive, award-winning line of software solutions provides the features and functionality necessary to automate business processes, improve and standardize reporting and management of financial data and gain better business controls at a price attractive to small businesses. We acquire new customers through our sales of packaged software in the retail channel, and earn the majority of our revenue from direct aftermarket sales of upgrades, payroll tax services, business forms and support services to our existing customers. Our growing customer base of over one million registered small businesses represents one of the largest customer bases in the financial and accounting software market. We view our customer base as a valuable source of aftermarket sales and service revenue. A more detailed description of our business begins on page - . INDUSTRY BACKGROUND The financial and accounting software market is well-established and growing rapidly. According to IDC, the overall market for accounting software totaled $5.3 billion in worldwide licensing and maintenance revenue in 1997. We focus principally on the personal finance, small office/home office (SOHO) and small business market as defined by IDC. Small businesses have experienced significant growth over the past several years and are the largest source of new companies, jobs and revenue in the U.S. economy. In 1998, this market comprised approximately 7.4 million small businesses with 1 to 99 employees. According to IDC, this market generated $1.0 billion in license and maintenance revenue in 1997 and is expected to grow at a compound annual growth rate of 14% to $1.9 billion in 2002. Within this market, we primarily target the approximately 3.2 million businesses with 5-99 employees where a greater opportunity exists to sell aftermarket products and services. See page - . New small businesses and small businesses automating for the first time often lack in-house accounting expertise, formal business processes and dedicated information technology support. They desire financial and accounting software that is easy to use, inexpensive and serves a broad range of needs. As businesses increase in size and complexity, they desire solutions that have the following characteristics: - are customizable and tailored to meet their needs; PEACHTREE SOFTWARE AWARDS, 1997-1998 <TABLE> <CAPTION> SPONSORING ORGANIZATION/ DATE AWARD/RECOGNITION PUBLICATION PRODUCT - --------------------------- --------------------------- --------------------------- --------------------------- <S> <C> <C> <C> December 1998 Codie Awards Nominee SOFTWARE PUBLISHERS Office Accounting (Best New Business ASSOCIATION Software) November 1998 HOC 100 Silver Award HOME OFFICE COMPUTING Office Accounting September 1998- Win List WINDOWS Complete Accounting August 1996 June 1998 World Class Award PC WORLD Complete Plus Time & Billing June 1998 Win 100 Award WINDOWS Complete Plus Time & Billing June 1998 Win 100 Award WINDOWS Accounting for Windows March 1998 Codie Awards Finalist SOFTWARE PUBLISHERS Complete Plus Time & ASSOCIATION Billing February 1998 Top 25 Software Products SMALL BUSINESS COMPUTING Complete Plus Time & Billing February 1998 Readers' Choice Awards, COMPUTER CURRENTS Complete Plus Time & runner-up Billing February 1998 Best Buy HOME OFFICE COMPUTING Complete Plus Time & Billing January 1998 Analysts' Choice INFOWORLD Complete Plus Time & Billing December 1997 Top 100 Software Packages ACCOUNTING TODAY Complete Plus Time & Billing December 1997 Top 100 Software Packages ACCOUNTING TODAY One-Write Plus November 1997 Editors' Choice Award HOME OFFICE COMPUTING Complete Plus Time & Billing November 1997 MVP Award Finalist PC COMPUTING Complete Plus Time & Billing October 1997 Best Buy PC WORLD Complete Plus Time & Billing July 1997 World Class Award, PC WORLD Complete Accounting Runner-up June 1997 Win 100 Award WINDOWS Complete Accounting May 1997 Editors' Choice PC MAGAZINE Complete Accounting March 1997 Codie Awards Finalist SOFTWARE PUBLISHERS Complete Accounting ASSOCIATION January 1997 Top 100 Software Packages ACCOUNTING TODAY Complete Accounting January 1997 Top 100 Software Packages ACCOUNTING TODAY One-Write Plus </TABLE> - are scalable with the ability to share information among multiple users through a network; - deliver greater depth and breadth of functionality than that provided by traditional packaged solutions; and - integrate with other business productivity software applications. Despite these increasingly sophisticated needs, growing small businesses require solutions that are affordable, are easy to install and set up and have low total ownership costs. See pages - through - . THE PEACHTREE SOLUTION Peachtree offers a broad array of products and services designed to meet the varied and dynamic financial and accounting needs of the small business market. Specifically, our products and services deliver the following key benefits: - value and depth of features; - ease of installation, set up and use; - improved efficiency and better business management; - open, customizable and scalable technology; and - extensive service and support. See pages - through - . In keeping with our tradition of technological leadership, in May 1998 we introduced the first financial and accounting solution widely available at retail based on an open architecture platform. Unlike existing packaged accounting software, Peachtree Office Accounting allows customers to interface seamlessly with other business productivity applications, most notably Microsoft Office. Customers can eliminate multiple databases with redundant information as well as tailor products to suit their business-specific and industry-specific needs. Peachtree Office Accounting is the first product to be built on our new Peachtree Open Architecture platform. Peachtree Open Architecture is designed to allow us to offer open, scalable, customizable and affordable financial and accounting solutions. In the near future, Peachtree Open Architecture products will enable us to enter the Windows NT and client/server markets. See pages - through - . STRATEGY Our strategic objective is to be the leading provider of financial and accounting software solutions for small businesses with 5-99 employees. To achieve this objective, we are pursuing a strategy focused on new product initiatives based on Peachtree Open Architecture while enhancing our current products and services. As an independent entity, we intend to devote more of our resources to implementing our growth strategy. The key elements of our strategy are to: - expand and exploit Peachtree Open Architecture; - pursue new distribution and marketing initiatives; - target and attract larger and growing small businesses; - leverage our large and growing registered customer base of over one million small businesses; and - capitalize on our strong brand recognition and retail presence. See pages - through - . SALES AND DISTRIBUTION We currently sell our products through retail channels and directly to customers. We sell our products to new customers through a broad range of retail outlets nationwide, including Office Depot, TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ----- <S> <C> Prospectus Summary......................................................................................... 1 Risk Factors............................................................................................... 5 Special Note Regarding Forward-looking Statements.......................................................... 15 Use of Proceeds............................................................................................ 17 Dividend Policy............................................................................................ 17 Capitalization............................................................................................. 17 Dilution................................................................................................... 18 Selected Historical Financial Information.................................................................. 19 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 21 Business................................................................................................... 34 Management................................................................................................. 47 Principal and Selling Stockholder.......................................................................... 59 Relationship with ADP...................................................................................... 59 Description of Capital Stock............................................................................... 64 Certain Anti-takeover Provisions........................................................................... 65 Shares Eligible for Future Sale............................................................................ 67 Underwriting............................................................................................... 68 Legal Matters.............................................................................................. 70 Experts.................................................................................................... 70 Index to Financial Statements.............................................................................. F-1 </TABLE> Accounting Works-Registered Trademark-, One-Write Plus-Registered Trademark-, Peach-Registered Trademark-, PeachCalc-Registered Trademark-, PeachCare-Registered Trademark-, PeachLink-Registered Trademark-, PeachPak-Registered Trademark-, PeachPay-Registered Trademark-, PeachTax-Registered Trademark-, PeachText-Registered Trademark-, PeachText 5000-Registered Trademark-, Peachtree-Registered Trademark-, Peachtree Complete-Registered Trademark-, Peachtree Data Query-Registered Trademark-, Peachtree First Accounting-Registered Trademark-, Peachtree Office Accounting-Registered Trademark-, Peachtree Software-Registered Trademark-, Peachtree Supply Source-Registered Trademark- and PeachWare-Registered Trademark- are registered trademarks or service marks of Peachtree, and natural peach logo, peach logo, peach device logo, "Peachtree Software" and peach logo and "Peachtree Software" and tree logo are registered design trademarks or service marks of Peachtree. In addition, Accounting Behind the Screens, Accountcare, Accounting Under the Hood, EZ Add-ins, Peachtree 2000, Peachtree Complete Plus and Peachtree Office Accounting are trademarks and service marks of Peachtree. All other trademarks and registered trademarks and service marks and registered service marks used in this Prospectus are the property of their respective owners. As used in this Prospectus, unless the context requires otherwise, "ADP" means Automatic Data Processing, Inc., together with its subsidiaries (other than Peachtree); "By-laws" means our Amended and Restated By-laws as in effect at the time of the Offering; "Charter" means our Amended and Restated Certificate of Incorporation as in effect at the time of the Offering; "Commission" means the Securities and Exchange Commission; "Common Stock" means the common stock, $.01 par value per share, of Peachtree; "Exchange Act" means the Securities Exchange Act of 1934, as amended; "IDC" means International Data Corporation; "Microsoft" means Microsoft Corporation; "Offering" means the Offering of Common Stock contemplated by this Prospectus; "Peachtree" means Peachtree Software, Inc. and its subsidiaries; "Securities Act" means the Securities Act of 1933, as amended; "VAPs" means Value Added Providers; and "VARs" means Value Added Resellers. Unless otherwise noted, numbers and percentages of shares of Common Stock outstanding have been adjusted to reflect a - -for-one split of the Common Stock to be effected in connection with the Offering. You should rely only on the information contained in this Prospectus. We have not authorized anyone else to provide you with information that is different. We are not making an offer of these Office Max, Staples, Best Buy and CompUSA. We sell most of our aftermarket products and services through our internal marketing teams using direct mail, telemarketing and the Internet. See pages - through - . PEACHTREE AND ADP ADP acquired Peachtree in 1994 and has since operated Peachtree as one of its wholly owned subsidiaries. Following the closing of the Offering, ADP will own approximately - % of our outstanding Common Stock. In connection with the Offering, we intend to enter into various agreements and transactions with ADP which will separate our business from ADP's other operations. This separation will be governed by an Intercompany Agreement between Peachtree and ADP and certain other agreements. Because these agreements will be entered into at a time when Peachtree is still a wholly owned subsidiary of ADP, they will not be the result of arm's-length negotiations between the parties. See "Relationship with ADP" beginning on page - and "Risk Factors--Relationship with ADP; Potential Conflicts of Interest" on page - . THE OFFERING <TABLE> <S> <C> Common Stock Offered......................... - shares (including - shares offered by Peachtree and - shares offered by ADP) Common Stock Outstanding Following the Offering..................... - shares (excluding - shares to be reserved for issuance pursuant to employee benefit and stock option plans) Use of Proceeds.............................. Peachtree will use the proceeds from the Offering for working capital and other general corporate purposes. Peachtree will not receive any of the proceeds from the sale by ADP of Common Stock in the Offering. See "Use of Proceeds." Nasdaq National Market Symbol................ PEAC </TABLE> Our principal executive offices are located at 1505 Pavilion Place, Norcross, GA 30093. The main telephone number of our principal executive offices is (770) 724-4000. securities in any state where the offer is not permitted. You should not assume that the information in this Prospectus is accurate as of any date other than the date on the front of this Prospectus. Until - , 1999 (25 days after the date of this Prospectus), all dealers that effect transactions in these securities, whether or not participating in this Offering, may be required to deliver a Prospectus. This is in addition to the dealers' obligation to deliver a Prospectus when acting as Underwriters and with respect to their unsold allotments or subscriptions. SUMMARY FINANCIAL INFORMATION (in thousands, except share data) The following tables set forth summary financial data derived from the consolidated financial statements of Peachtree. The data should be read in conjunction with the Consolidated Financial Statements and Notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other financial information included elsewhere in this Prospectus. <TABLE> <CAPTION> THREE MONTHS FISCAL YEAR ENDED ENDED --------------------------------------------------------------- ------------- JUNE 30, JUNE 30, JUNE 29, JUNE 28, JUNE 27, SEPTEMBER 27, 1994(1) 1995 1996 1997 1998 1997 ----------- ----------- ----------- ----------- ----------- ------------- <S> <C> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenue.................................... $ 29,450 $ 34,925 $ 35,294 $ 46,908 $ 52,534 $ 9,898 Gross profit............................... 19,647 22,438 21,552 26,974 33,556 6,350 Operating expenses (2)..................... 25,923 21,809 22,800 27,830 33,424 7,571 Operating income (loss) (2)................ (6,276) 629 (1,248) (856) 132 (1,221) Income (loss) before income taxes.......... (7,281) 724 (967) (355) 696 (1,150) Net income (loss).......................... (4,361) 129 (946) (509) 249 (412) Basic and diluted earnings per share (3)... $ $ $ $ $ $ Weighted average common shares outstanding(3)........................... <CAPTION> SEPTEMBER 26, 1998 ------------- <S> <C> CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenue.................................... $ 11,681 Gross profit............................... 7,471 Operating expenses (2)..................... 9,450 Operating income (loss) (2)................ (1,979) Income (loss) before income taxes.......... (1,747) Net income (loss).......................... 188 Basic and diluted earnings per share (3)... $ Weighted average common shares outstanding(3)........................... </TABLE> <TABLE> <CAPTION> AS OF SEPTEMBER 26, 1998 -------------------------------- ACTUAL AS ADJUSTED(4) --------- --------------------- <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash.................................................................................... $ -- $ Intercompany receivable from ADP(5)..................................................... 16,147 Working capital......................................................................... 16,702 Total assets............................................................................ 57,213 Total stockholders' equity.............................................................. 37,640 $ </TABLE> - ------------------------------ (1) ADP acquired all of the outstanding shares of Peachtree on April 5, 1994. Due to the insignificant period of time between the acquisition date and year-end, in the opinion of management, separate presentation of the pre-acquisition and post-acquisition periods is not meaningful. Revenue for the pre-acquisition and post-acquisition periods was $25,728 and $3,722. Net income for the pre-acquisition and post-acquisition periods was $6,958 and $(11,319). (2) Includes acquisition-related amortization of $1,185, $4,742, $4,830, $5,620, and $5,687 for the fiscal years ended June 30, 1994, June 30, 1995, June 29, 1996, June 28, 1997 and June 27, 1998, and $1,405 and $1,445 for the three months ended September 27, 1997 and September 26, 1998. Excluding this acquisition-related amortization, operating income (loss) would have been $(5,091), $5,371, $3,582, $4,764 and $5,819 for the fiscal years ended June 30, 1994, June 30, 1995, June 29, 1996, June 28, 1997 and June 27, 1998, and $184 and $(534) for the three months ended September 27, 1997 and September 26, 1998. See Notes 2 and 10 of Notes to Consolidated Financial Statements. (3) See Note - of Notes to Consolidated Financial Statements for information concerning the computation of earnings per share. (4) Adjusted to reflect the sale by Peachtree of - shares of Common Stock offered hereby at the public offering price of $ - per share after deducting the underwriting discount and the estimated offering expenses payable by Peachtree. (5) Upon consummation of the Offering, the intercompany receivable from ADP will be collected in cash by Peachtree.
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diff --git a/parsed_sections/prospectus_summary/1998/CIX_compx_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/CIX_compx_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary should be read in conjunction with, and is qualified in its entirety by, the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. As used in this Prospectus, unless the context requires otherwise, the terms "Company" and "CompX(TM)" refer to CompX International Inc. and its subsidiaries. Unless otherwise indicated or the context otherwise requires, all share and per-share data in this Prospectus and all other information relating to the Offering (i) assume no exercise of the Underwriters' over-allotment option; (ii) give effect to the amendment to the Company's certificate of incorporation to change the Company's authorized capital stock to Class A Common Stock and Class B Common Stock and preferred stock, par value $.01 per share (the "Preferred Stock"), effected on February 4, 1998; and (iii) give effect to the reclassification of each outstanding share of the Company's previously outstanding common stock, par value $1 per share, into 10,000 shares of its newly created Class B Common Stock which was also effected on February 4, 1998. The Company's operations are comprised of a 52 or 53 week fiscal year. Each of the years ended December 31, 1993 through 1997 consisted of a 52 week year. THE COMPANY CompX(TM) is a leading manufacturer of ergonomic computer support systems, precision ball bearing drawer slides and medium-security mechanical locks for office furniture and a variety of other applications. The Company's products are principally designed for use in medium- to high-end applications, where product design, quality and durability are critical to the Company's customers. CompX(TM) believes that, in the North American market, it is among the largest producers of ergonomic computer support systems for office furniture manufacturers, among the largest producers of precision ball bearing drawer slides and among the largest producers of medium-security cabinet locks. In 1997, CompX(TM) generated net sales of $108.7 million, a 22% increase from 1996. During 1997, ergonomic computer support systems, precision ball bearing drawer slides and medium-security mechanical locks accounted for approximately 34%, 39% and 26% of net sales, respectively. OFFICE FURNITURE INDUSTRY DYNAMICS Approximately 75% of the Company's products are sold to the office furniture manufacturing industry while the remainder (principally mechanical locks) are sold for use in other products, such as vending equipment, postal boxes, electromechanical enclosures and other non-office furniture and equipment. The U.S. office furniture market generated wholesale sales of approximately $11 billion in 1997, according to estimates by the Business and Institutional Furniture Manufacturer's Association ("BIFMA"). The dollar value of U.S. office furniture industry shipments has increased in 23 of the past 25 years and, according to BIFMA, is currently estimated to have grown at a compound annual rate of approximately 8.4% over the four year period ended December 31, 1997. BIFMA currently estimates that office furniture sales over the next two years will grow at a compound annual rate of approximately 7%. The rate of growth in this industry ultimately will be affected by certain macroeconomic conditions such as service industry employment levels, corporate cash flow and non-residential construction levels. CompX(TM) management believes that sales of its ergonomic computer support systems are experiencing substantially higher rates of growth than the office furniture industry as a whole. The Company believes that fundamental shifts in technology, health considerations and work processes in the office workplace provide new growth opportunities in the office furniture industry. Increased use of technology has caused businesses to redesign their workspaces with greater emphasis on the space efficient integration of computers and other office technologies into the office workplace as well as the protection of computing equipment from damage and theft. Additionally, increased regulatory sensitivity to ergonomic concerns and heightened focus on the risks of repetitive stress injury have also influenced redesign of the office workplace. In 1996, California became the first state to adopt legislation relating to ergonomics in the workplace. Such legislation should have a direct effect on the demand for ergonomically designed office furniture products, which allow workers to adjust and re-arrange the orientation of office equipment and INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED MARCH 6, 1998 PROSPECTUS 5,200,000 SHARES COMPX INTERNATIONAL INC. CLASS A COMMON STOCK ------------------ All of the shares of Class A Common Stock, par value $.01 per share (the "Class A Common Stock"), being offered hereby (the "Offering") are being sold by CompX International Inc. ("CompX" or the "Company"). A portion of the net proceeds to the Company from the Offering will be used to fully repay certain bank indebtedness which was incurred to satisfy a $50 million note payable to Valcor, Inc., the Company's sole stockholder prior to the Offering. See "Use of Proceeds." Each share of Class A Common Stock entitles its holder to one vote, and each share of Class B Common Stock, par value $.01 per share (the "Class B Common Stock" and together with the Class A Common Stock, the "Common Stock"), of the Company entitles its holder to one vote on all matters except the election of directors on which each share of Class B Common Stock is entitled to ten votes. All the shares of Class B Common Stock are owned by Valcor, Inc. Immediately after consummation of the Offering (assuming no exercise of the over-allotment option granted to the Underwriters), Valcor will beneficially own shares of Common Stock having approximately 65% of the combined voting power (95% for election of directors) of the outstanding shares of Common Stock. Prior to the Offering, there has not been a public market for the Class A Common Stock of the Company. The initial public offering price for the Shares of Class A Common Stock included in the Offering has been determined by negotiations between the Company and the Representatives. See "Underwriting" for information relating to the factors considered in determining the initial public offering price. The Class A Common Stock has been approved for listing on the New York Stock Exchange (the "NYSE") under the symbol "CIX." SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE CLASS A COMMON STOCK. ------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. <TABLE> <CAPTION> ======================================================================================================================= UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS(1) COMPANY(2) - ----------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Per Share $20.00 $1.40 $18.60 - ----------------------------------------------------------------------------------------------------------------------- Total(3) $104,000,000 $7,280,000 $96,720,000 ======================================================================================================================= </TABLE> (1) For information regarding indemnification of the Underwriters, see "Underwriting." (2) Before deducting expenses estimated at $500,000 payable by the Company. (3) The Company has granted to the Underwriters a 30-day option to purchase up to 780,000 additional shares of Class A Common solely to cover over-allotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $119,600,000, $8,372,000 and $111,228,000, respectively. ------------------ The shares of Class A Common Stock are being offered by the several Underwriters named herein, subject to prior sale, when, as and if accepted by them and subject to certain conditions. It is expected that certificates for the shares of Class A Common Stock offered hereby will be available for delivery on or about March 11, 1998, at the office of Smith Barney Inc., 333 West 34th Street, New York, New York 10001. ------------------ SALOMON SMITH BARNEY NATIONSBANC MONTGOMERY SECURITIES LLC WHEAT FIRST UNION March 6, 1998 supplies for greater comfort and productivity. Businesses increasingly are seeking changes in work processes to achieve more efficient workspace utilization, resulting in the creation of new office furniture designs that embrace office sharing concepts such as office "hoteling" and open office designs. The Company's products target manufacturers of new furniture designed to address these industry dynamics as well as customers that specialize in retrofitting existing office furniture. COMPETITIVE STRENGTHS CompX(TM) believes that it is well positioned to realize continued growth in market share in its existing markets and to build on its strengths to expand into related product lines and markets. Industry brand recognition and management experience. The Company's business traces its roots to 1903 when it began manufacturing cabinet locks. The Company is a supplier to major original equipment manufacturers ("OEMs") and believes its brand names are well recognized in the industry. CompX(TM) currently markets its drawer slides and ergonomic computer support systems under the Waterloo Furniture Components Limited(R) name and markets its medium-security locks under the National Cabinet Lock(R) name. The top seven executive management personnel have over 100 years of combined industry experience. Emphasis on customer collaboration. CompX(TM) has been a leader in collaborating with customers to develop innovative customized solutions to their unique needs for product design, application, performance and cost. An important ingredient to this approach is the Company's full-time engineering staff of 25 and approximately $3 million in annual expenditures for product design, development and engineering. Management believes that the Company's responsiveness and commitment to work with customers has been critical to its success to date. Efficient manufacturing base. CompX(TM) has established highly automated manufacturing systems and uses statistical process control techniques to achieve its demanding quality standards. The Company designs and custom modifies certain of the high-volume equipment it uses to improve the manufacturing and assembly of its products, and has invested substantial capital in manufacturing automation and vertical integration. The Company believes that these initiatives reduce the Company's costs and improve product quality, productivity and delivery response time. Integrated information systems. The Company regularly invests in its information systems to reduce inventories, improve the efficiency of its manufacturing processes and reduce customer order fulfillment times. With recently installed systems upgrades both in Canada and the United States, CompX(TM) has fully integrated all stages of manufacturing process information and order fulfillment. These investments have allowed the Company to continually reduce order fulfillment times and increase the use of just-in-time supplier relationships. Breadth of product line. CompX(TM) has a broad product line in its core product areas, which allows the Company to serve an increasing proportion of its customers' requirements. This provides several benefits to the Company, including the simplified logistics and reduced cost of shipping higher volumes of product to its customers, closer working relationships with its key customers and increased cross-selling opportunities. GROWTH STRATEGY The Company focuses on certain niche segments of the middle to high end of the office furniture market. To achieve its targeted growth rates, CompX(TM) intends to pursue several growth initiatives: Continue to create innovative products. The Company intends to continue its focus on engineering and customer collaboration to develop and sell customized versions of its core product line and to develop new versions of existing product lines to meet the changing requirements of office furniture manufacturers. The Company will attempt to increase its share of the total OEM market for components such as electronic locking systems, a service workplace safety-oriented "Cushion-Close(TM)" drawer slide and a locking laptop computer drawer. CompX(TM) will also consider expanding its product line to include other furniture components with similar attributes such as one or more of the components used in the rapidly growing seating industry. [FROSTED 7 1/2' X 9' PHOTOGRAPH OF AN OFFICE ENVIRONMENT USED AS A BACKDROP FOR INSETS OF PHOTOGRAPHS OF THE VARIOUS COMPX PRODUCTS USED IN THE OFFICE ENVIRONMENT.] National Cabinet Lock(R), STOCK LOCKS(R), Waterloo Furniture Components Limited(R), KeSet(R), Fort Lock Corp.(R), Fortronics(R) and Leverlock(R) are registered trademarks of CompX International Inc. CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON STOCK, INCLUDING OVERALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." Extend into non-furniture applications. The Company's precision ball bearing drawer slide products increasingly are designed for and used in applications other than traditional office furniture. For example, the Company has designed and currently sells precision ball bearing drawer slides to facilitate the movement of component parts in imaging machines, for professional tool storage cabinets and other uses. CompX(TM) will continue to explore alternative applications for its products based on core product design and manufacturing strengths. Continue to make strategic acquisitions. In addition to internal growth, the Company intends to grow through selective acquisitions. The markets in which the Company competes have a large number of relatively small regional manufacturers and consequently offer potential consolidation opportunities. The Company seeks acquisitions that complement its existing products, manufacturing/design skills or customer base. The Company historically has been able to benefit from acquisitions through economies of scale in purchasing, manufacturing, marketing and distribution and through the application of the Company's manufacturing and management skills. On March 3, 1998, the Company completed the purchase of all of the outstanding stock of Fort Lock Corporation, the net assets of Fortronics, Inc., an affiliate of Fort Lock Corporation by common ownership (collectively the "Fort Lock Group") and Fort Lock Group's manufacturing facility. The Fort Lock Group is a vertically integrated manufacturer of highly engineered mechanical locks for a diverse customer base of original equipment manufacturers and locksmith distributors. See "Recent Developments." Promote alternative distribution programs. While office furniture OEMs are expected to remain the Company's primary customers, CompX(TM) also intends to explore new distribution arrangements for the Company's products. The Company's innovative STOCK LOCKS(R) distribution program, for example, offers a broad range of products that generally ship within 48 hours of order placement to customers that purchase the Company's locks in small quantities. Currently, approximately 30% of the Company's lock sales are made through this program. In 1992, the Company began to implement similar alternative distribution programs for its ergonomic computer support systems and precision ball bearing drawer slides to allow the Company to reach an expanded range of customers of these products on an economically attractive basis. Since their addition to the Company's distributor product line in 1992, sales of these products to the distributor market have increased and now represent approximately 10% of combined ergonomic computer support systems and precision ball bearing drawer slide net sales to the United States. Expand into international markets. While CompX(TM) has historically focused on marketing its products in North America, the Company has a small but growing presence in international markets. The Company believes that there is significant potential demand for its quality, precision products in overseas markets, and intends to increase its international presence, particularly in Asia, Europe and Latin America, via expanded distributor relationships and, potentially, joint venture arrangements. SECURITY OWNERSHIP The Company is a wholly-owned subsidiary of Valcor, a wholly-owned subsidiary of Valhi, Inc., a publicly traded company. Contran Corporation owns, directly and through subsidiaries (Valhi Group, Inc.; National City Lines, Inc.; NOA, Inc.; Dixie Rice Agricultural Corporation, Inc.; Dixie Holding Company and Southwest Louisiana Land Company, Inc.), approximately 93% of the outstanding stock of Valhi. Substantially all of Contran's outstanding voting stock is held by trusts established for the benefit of certain children and grandchildren of Harold C. Simmons, of which Mr. Simmons is the sole trustee. Mr. Simmons, the Chairman of the Board and Chief Executive Officer of each of the foregoing companies, may be deemed to control each of such companies and the Company. See "Security Ownership in the Company and its Affiliates." [TWO PAGE FOLD OUT GRAPHIC ON INSIDE FRONT COVER WITH A BACKGROUND COLLAGE OF ILLUSTRATIONS OF VARIOUS END-USER PRODUCTS AND INSET PHOTOGRAPHS OF THE COMPX PRODUCT USED IN SUCH END-USER PRODUCTS.] RECENT DEVELOPMENTS On December 12, 1997, the Company paid a $50 million dividend to Valcor in the form of a demand note payable (the "Valcor Note"). The Note was unsecured and bore interest at a fixed rate of 6% per annum. On February 26, 1998, the Company entered into a new $100 million revolving bank credit facility (the "Revolving Senior Credit Facility"). The Revolving Senior Credit Facility is an unsecured five-year revolving facility. Borrowings are available for the Company's general corporate purposes, including potential acquisitions. On February 26, 1998, the Company utilized borrowings under the Revolving Senior Credit Facility to fully repay the Valcor Note. Such borrowings under the Revolving Senior Credit Facility are expected to be repaid with approximately $75 million of the net proceeds of the Offering. On March 3, 1998, the Company completed the acquisition of the Fort Lock Group and its manufacturing facility for an aggregate purchase price of approximately $32.9 million (the "Fort Lock Acquisition"). The Fort Lock Group, a vertically integrated manufacturer of highly engineered mechanical locks for a diverse customer base of original equipment manufacturers and locksmith distributors, is headquartered in River Grove, Illinois. The Fort Lock Group has over 40 years experience supplying cam locks, switch locks and special purpose locks to a wide variety of industries which include personal computing, automotive products, security devices, office furniture, lockers, safes and coin operated devices. Fortronics, Inc. designs, manufactures and distributes electronic locking systems to customers throughout the United States. Similar to CompX(TM), the Fort Lock Group emphasizes customized engineering capabilities that permit collaboration with customers to develop innovative products designed to specifically address unique end product application requirements. The Company believes that the acquisition of the Fort Lock Group will enhance the Company's product offerings and provide synergies through the combined technical resources of both Companies. For its most recent fiscal year ended June 28, 1997, the Fort Lock Group reported net sales of approximately $26.8 million and net income of approximately $2.4 million. See historical consolidated combined financial statements of the Fort Lock Group presented elsewhere in this Prospectus. The aggregate purchase price is subject to possible reduction pending the completion of a post closing audit and the outcome of certain contingencies for which the Company has been indemnified by the sellers. Funding of the Fort Lock Acquisition was provided by available cash on hand and borrowings under the Revolving Senior Credit Facility, which borrowings are expected to be repaid with a portion of the net proceeds of the Offering. THE OFFERING Class A Common Stock offered.................. 5,200,000 shares Common Stock to be outstanding after the Offering: (a) Class A Common Stock..... 5,364,880 shares Class B Common Stock..... 10,000,000 shares Total.................. 15,364,880 shares Use of Proceeds............ Approximately $75 million of the net proceeds of the Offering will be used to repay borrowings incurred under the Revolving Senior Credit Facility to repay the Valcor Note and to consummate the Fort Lock Acquisition. The remainder will be available for the Company's general purposes. Voting Rights.............. The Class A Common Stock and Class B Common Stock vote as a single class on all matters, except as otherwise required by law, with each share of Common Stock entitling its holder to one vote on all matters except the election of directors where each share of Class B Common Stock entitles its holder to ten votes. All of the shares of Class B Common Stock are owned by Valcor. Immediately after completion of the Offering, Valcor will beneficially own shares of Common Stock having approximately 65% of the combined voting power (95% for director elections) of the outstanding shares of Common Stock (approximately 62%, and 94%, respectively, if the Underwriters' over-allotment option is exercised in full). Economic Interest.......... The shares of Class B Common Stock will represent approximately 65% of the economic interest in the Company (approximately 62% if the Underwriters' over-allotment option is exercised in full). NYSE Symbol................ CIX - --------------- (a) Includes an aggregate of 164,880 shares of Class A Common Stock to be issued to certain executives and directors of the Company upon completion of the Offering (the Management Shares, as defined herein) and excludes approximately 1.3 million additional shares reserved for issuance under the Incentive Plan (as defined herein), including 440,000 shares of Class A Common Stock issuable upon the exercise of stock options which will be granted upon completion of the Offering to certain employees and directors of the Company and Valhi at an exercise price equal to the initial public offering price. See "Management -- Incentive Compensation Plan."
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED OR THE CONTEXT OTHERWISE REQUIRES, (I) THE INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTIONS ARE NOT EXERCISED AND THE REORGANIZATION (AS DEFINED IN "--REORGANIZATION AND CORPORATE STRUCTURE") HAS BEEN CONSUMMATED; (II) REFERENCES TO THE "COMPANY" INCLUDE THE COMPANY AND ITS SUBSIDIARIES; AND (III) ALL PRO FORMA INFORMATION CONTAINED IN THIS PROSPECTUS GIVES EFFECT TO THE REORGANIZATION, BORROWINGS UNDER THE CREDIT FACILITY AND THE APPLICATION OF PROCEEDS THEREFROM, ACQUISITIONS COMPLETED AS OF THE DATE HEREOF (THE "COMPLETED ACQUISITIONS"), THE PENDING ACQUISITIONS, AND THE OFFERINGS AND THE APPLICATIONS OF PROCEEDS THEREFROM (COLLECTIVELY, THE "TRANSACTIONS"). THE COMPANY Cumulus Media Inc. ("Cumulus" or the "Company") is a radio broadcasting company focused on the acquisition, operation and development of radio stations in mid-size and smaller radio markets in the U.S. The Company currently owns and operates 67 stations in 15 markets and provides sales and marketing services under LMA agreements (pending FCC approval of acquisition) to 44 stations in 16 markets. Upon consummation of the Pending Acquisitions, the Company will be one of the five largest radio broadcasting companies based on number of stations, and among the fifteen largest based on net revenues, in the U.S. and will own and operate 176 radio stations (124 FM and 52 AM) clustered in 34 U.S. markets. The Company has assembled market-leading clusters with stations comprising the first or second ranked radio group, in terms of revenue share and/or audience share, in all of its U.S. markets. On a pro forma basis, after giving effect to the Transactions, the Company would have generated net revenues of approximately $111.8 million and $27.0 million and Broadcast Cash Flow (as defined under "Certain Definitions and Market and Industry Data") of approximately $23.9 million and $3.1 million for the year ended December 31, 1997 and for the three months ended March 31, 1998, respectively. Cumulus operates and develops clusters of stations in demographically attractive and fast growing mid-size and smaller markets. Relative to the 100 largest markets in the U.S., the Company believes that the mid-size and smaller markets (MSA 100-267) represent attractive operating environments and generally are characterized by: (i) a greater reliance on radio advertising as evidenced by the greater percentage of total media revenues captured by radio than the national average; (ii) rising advertising revenues as the larger national and regional retailers expand into these markets; (iii) small independent operators, many of whom lack the capital to produce high quality locally-originated programming and/or to employ more sophisticated research, marketing, management and sales techniques; and (iv) lower overall susceptibility to economic downturns. The Company believes that the attractive operating characteristics of mid-size and smaller markets coupled with the relaxation of FCC ownership limits create significant opportunities to form clusters within markets and regions that will enable the Company to achieve revenue growth and cost efficiencies. As a result, management believes that the Company can grow revenues at rates equal to or better than larger market growth rates and generate Broadcast Cash Flow margins that are comparable to the higher margins that previously were generally achievable only in the top 100 markets. The Company believes that mid-size and smaller radio markets provide an excellent opportunity to acquire attractive properties at favorable purchase prices due to the size and fragmented nature of ownership in these markets and to the historically greater attention given to the larger markets by radio station acquirors. According to BIA, there are approximately 1,600 FM and 1,000 AM stations in the 168 U.S. radio markets ranked MSA 100-267. These 2,600 stations are owned by approximately 1,100 different operators. In addition, there are nearly 4,700 stations in unranked markets owned by approximately 2,700 operators. The Company's principal strategy is to establish its position as a leader in its markets and regions and to expand into additional mid-size and smaller markets and regions where it believes a leadership position can be achieved by assembling clusters. Cumulus seeks to enhance the quality of radio for listeners and the utility of the radio medium for advertisers in order to maximize the advertising revenues and Broadcast Cash Flow of its radio stations. To that end, Cumulus utilizes extensive research to properly position the formats of stations in a given market and also significantly increases the amount of locally-originated programming. Upon consummation of the Pending Acquisitions, the Company's portfolio of stations will be diversified in terms of format, target audience, geographic location and stage of development. Because of the size and diversity of its portfolio and its individual radio station groups or "clusters", the Company believes it is not reliant upon the performance of any single station or any specific format. MANAGEMENT TEAM Members of the Company's senior management team have an aggregate of over 75 years of experience in the media and radio broadcasting industry. To date, management has successfully negotiated 61 separate acquisition transactions on behalf of the Company. The Company's Executive Chairman and Treasurer, Richard W. Weening, has over 20 years of operating experience in media and information companies including significant experience in corporate finance and mergers and acquisitions. Lewis W. Dickey, Jr., Executive Vice Chairman, has over 15 years of experience in the radio and television broadcasting industry and is a successful owner-operator of radio stations in larger and mid-size markets. Mr. Dickey is also a nationally regarded business strategy and marketing consultant to the radio and television broadcasting industry. William M. Bungeroth, the Company's President, has over 20 years of experience in the radio broadcasting industry and has developed an expertise in enhancing revenue at stations under his management. Mr. Bungeroth manages the broadcasting business along with the General Managers of each market, the Director of Programming and the regional Directors of Sales. The Company's Vice President and Chief Financial Officer, Richard J. Bonick, Jr., has 20 years of experience in the radio broadcasting industry. Mr. Bonick manages the financial reporting and control systems as well as the operational aspects of the Company's broadcasting business. STATION PORTFOLIO The Company has four regions in the U.S. as its primary focus: the Midwest, Southeast, Southwest and Northeast. The following chart sets forth certain information as of June 16, 1998 with respect to the Company's stations in these regions, before and after giving effect to the Pending Acquisitions: <TABLE> <CAPTION> PENDING ACQUISITIONS (1) NUMBER OF STATIONS --------------------------------------------------- NUMBER OF NUMBER OF NUMBER OF TOTAL PRO CURRENTLY STATIONS STATIONS TO STATIONS TO BE FORMA OWNED CURRENTLY BE PLACED ACQUIRED STATIONS MARKET ----------- UNDER UNDER WITHOUT ------------- MARKET(2) RANK FM AM LMA(3) LMA LMA FM - ----------------------- --------- ----- ----- --------------- --------------- ----------------- ------------- <S> <C> <C> <C> <C> <C> <C> <C> MIDWEST REGION Ann Arbor, MI.......... 146 2 2 -- -- -- 2 Appleton-Oshkosh/ Green Bay, WI.............. 138/182 3 2 2 -- -- 5 Dubuque, IA............ 217 1 -- -- -- 4 4 Marion Carbondale, IL.. 209 -- -- 6 -- -- 4 Bismarck, ND........... 259 -- -- -- -- 4 3 Kalamazoo, MI.......... 172 -- -- -- -- 3 2 Faribault-Owatonna- Waseca, MN........... -- -- -- -- -- 8 4 Mankato, MN............ -- -- -- -- -- 3 2 Mason City, IA......... -- -- -- -- -- 7 5 Monroe, MI............. -- -- -- 1 -- -- 1 New Ulm-Springfield- Marshall, MN......... -- -- -- -- -- 3 2 Rochester, MN.......... -- -- -- -- -- 4 2 Toledo, OH............. 76 4 2 -- -- -- 4 SOUTHEAST REGION Albany, GA............. 205 -- -- 6 -- -- 4 Augusta, GA(6)......... 109 4 2 2 -- 1 6(2) Chattanooga, TN........ 102 -- -- 1 3 -- 3 Columbus, GA........... 166 3 2 -- -- -- 3 Florence, SC........... 198 2 2 5 1 -- 7 <CAPTION> ADULTS 12+ REVENUE MARKET(2) AM SHARE (%) RANK(4) - ----------------------- ------------- ------------- ------------- <S> <C> <C> <C> MIDWEST REGION Ann Arbor, MI.......... 2 8.7 1 Appleton-Oshkosh/ Green Bay, WI.............. 2 20.2(5) 2 Dubuque, IA............ 1 34.8 1 Marion Carbondale, IL.. 2 32.4 2 Bismarck, ND........... 1 37.7 1 Kalamazoo, MI.......... 1 22.3 1 Faribault-Owatonna- Waseca, MN........... 4 -- 1 Mankato, MN............ 1 -- 1 Mason City, IA......... 2 -- 1 Monroe, MI............. 0 -- 1 New Ulm-Springfield- Marshall, MN......... 1 -- 1 Rochester, MN.......... 2 -- 2 Toledo, OH............. 2 31.2 2 SOUTHEAST REGION Albany, GA............. 2 23.2 2 Augusta, GA(6)......... 3 29.3 1 Chattanooga, TN........ 1 22.3 1 Columbus, GA........... 2 32.5 1 Florence, SC........... 3 42.2 1 </TABLE> <TABLE> <CAPTION> PENDING ACQUISITIONS (1) NUMBER OF STATIONS --------------------------------------------------- NUMBER OF NUMBER OF NUMBER OF TOTAL PRO CURRENTLY STATIONS STATIONS TO STATIONS TO BE FORMA OWNED CURRENTLY BE PLACED ACQUIRED STATIONS MARKET ----------- UNDER UNDER WITHOUT ------------- MARKET(2) RANK FM AM LMA(3) LMA LMA FM - ----------------------- --------- ----- ----- --------------- --------------- ----------------- ------------- <S> <C> <C> <C> <C> <C> <C> <C> Montgomery, AL......... 143 -- -- 4 -- -- 2 Myrtle Beach, SC....... 175 3 1 2 -- -- 5 Salisbury-Ocean City, MD................... 153 4 2 2 -- -- 6 Savannah, GA........... 154 -- -- 5 -- 2 5 Tallahassee, FL........ 165 3 1 1 -- -- 4 Wilmington, NC......... 178 4 1 -- -- -- 4 SOUTHWEST REGION Abilene, TX............ 224 3 -- 1 -- -- 4 Amarillo, TX........... 188 4 2 -- -- -- 4 Beaumont-Port Arthur, TX................... 128 3 2 -- -- -- 3 Grand Junction, CO..... 247 -- -- -- -- 6 4 Lake Charles, LA....... 203 -- -- -- -- 4 3 Odessa-Midland, TX..... 174 -- -- 5 -- -- 4 Topeka, KS............. 180 -- -- -- -- 4 2 Wichita Falls, TX...... 236 3 -- 1 -- -- 4 NORTHEAST REGION Augusta-Waterville, ME................... 245 -- -- -- -- 6 5 Bangor, ME............. 263 -- -- -- -- 2 2 --- --- --- --- --- --- TOTAL 34 U.S. MARKETS.............. 46 21 44 4 61 124 <CAPTION> ADULTS 12+ REVENUE MARKET(2) AM SHARE (%) RANK(4) - ----------------------- ------------- ------------- ------------- <S> <C> <C> <C> Montgomery, AL......... 2 34.4 1 Myrtle Beach, SC....... 1 20.3 1 Salisbury-Ocean City, MD................... 2 31.2 1 Savannah, GA........... 2 36.0 2 Tallahassee, FL........ 1 32.8 1 Wilmington, NC......... 1 17.3 2 SOUTHWEST REGION Abilene, TX............ 0 26.7 2 Amarillo, TX........... 2 30.6 2 Beaumont-Port Arthur, TX................... 2 29.4 2 Grand Junction, CO..... 2 42.7 1 Lake Charles, LA....... 1 49.7 1 Odessa-Midland, TX..... 1 39.7 1 Topeka, KS............. 2 24.1 2 Wichita Falls, TX...... 0 28.6 2 NORTHEAST REGION Augusta-Waterville, ME................... 1 25.6 1 Bangor, ME............. 0 30.4 1 -- TOTAL 34 U.S. MARKETS.............. 52 </TABLE> - ------------------------ (1) The Company expects to consummate most of the Pending Acquisitions during the third and fourth quarters of 1998, although there can be no assurance that the transactions will be consummated within that time frame. In two of the markets in which there are Pending Acquisitions (Dubuque, IA and Grand Junction, CO), petitions or informal objections have been filed against the Company's FCC assignment applications. In addition, FCC staff inquiries and U.S. Department of Justice ("DOJ") reviews has raised questions concerning whether the Company will be permitted to acquire its full complement of proposed stations in two markets, based on local market concentration concerns. There can be no assurance that applications for other Pending Acquisitions will not be subjected to similar challenges, FCC staff inquiries or DOJ investigations. The FCC staff has also requested additional information regarding attributable media interests of one of the Company's non-attributable investors to determine compliance with the FCC's cross-interest policy in one market. All such petitions, objections and FCC staff inquiries must be resolved before FCC approval can be obtained and the acquisitions consummated. (2) The listed markets correspond to station clusters of the Company, but may vary from the "markets" defined for purposes of the FCC's multiple-ownership rules, which are defined by reference to the signal coverages of the stations involved. Thus, in some instances (E.G., Augusta, GA, Florence, SC, and Salisbury-Ocean City, MD), the number of stations following the Pending Acquisitions as listed in the above table exceeds the number of radio stations specified in the FCC's rules that one person or entity may own, operate or control within a single market, but is still consistent with these rules. (3) Includes radio stations to which the Company currently provides programming and on which the Company sells advertising pursuant to an LMA. (4) Market revenue rankings for Faribault-Owatonna-Waseca, MN, Mankato, MN, Mason City, IA, Rochester, MN and New Ulm-Springfield-Marshall, MN are based on Company estimates. (5) Indicates Adults 12+ share of Appleton-Oshkosh market. (6) The FCC staff recently dismissed the assignment application for one of the six FM stations in Augusta, GA based on the unacceptability of the Company's supplemental engineering analysis in demonstrating compliance with the FCC's multiple-ownership rules. The Company will not be permitted to acquire more than five FM and three AM stations in this market unless it succeeds in obtaining FCC approval to modify the facilities of one or more of its currently owned stations or successfully appeals the FCC staff dismissal of its assignment application for the sixth FM station. The Company also owns and operates five radio stations and one leased frequency in various locations throughout the English-speaking Eastern Caribbean, including among other places, Trinidad, St. Kitts and St. Lucia. ACQUISITION STRATEGY Cumulus has focused its acquisition strategy on acquiring radio broadcasting stations in demographically attractive and fast growing mid-size to smaller markets that it believes offer substantial growth opportunities for the Company. In executing this strategy, the Company adheres to certain key acquisition criteria. Primary among these criteria are targeting markets with: (i) growing economies that are not dependent upon any single industry or employer; (ii) a regional fit with the Company's overall portfolio concentration in the Midwest, Southeast, Southwest and Northeast regions of the U.S.; (iii) close proximity to larger markets that may lead to increased economic expansion into the Company's markets; (iv) previously unconsolidated markets with fragmented individual ownership of stations; (v) the opportunity to assemble a cluster of stations diversified in format to provide a range of target demographic options for advertisers; and (vi) the opportunity to increase sales performance through greater coverage of potential advertisers with more sales people per station. In targeting specific stations, the Company seeks stations with a position of leadership in their market in terms of ratings and format, with the opportunity to significantly increase revenues and Broadcast Cash Flow (as defined under "Certain Definitions and Market and Industry Data"). Additionally, Cumulus seeks high quality technical and operating facilities, capable local management and an FCC license which enables coverage of the entire market. The Company believes that its acquisition strategy will have a number of benefits, including: (i) growth and diversification of revenue and Broadcast Cash Flow across a greater number of stations and markets; (ii) improved Broadcast Cash Flow margins through the consolidation of facilities and the elimination of redundant expenses; (iii) enhanced utilization of certain corporate overhead functions, including its senior management team; (iv) improved leverage in various key vendor negotiations; (v) greater ability to recruit top industry management talent; and (vi) increased overall scale, which should facilitate the Company's future capital raising activities. INTEGRATION OF ACQUIRED BUSINESSES The Company has developed, through its 61 Completed and Pending Acquisitions, an efficient process for the integration of newly acquired properties into the Cumulus portfolio and respective geographic cluster, as well as into the overall Cumulus culture and operating philosophy. The Company's station integration plan consists of six key elements: (i) employ sophisticated market research to refine station formats, enrich the listener experience and increase audience and revenue share relative to other stations in the market; (ii) expand the size and the effectiveness of the sales organization through active recruitment and in-depth training to enhance demand for the station's spot inventory to increase both revenue and margin; (iii) add the station to the Cumulus in-market local area network and install the Company's proprietary system for real-time monitoring by management of station sales and inventory performance; (iv) install Cumulus's centralized networked accounting system for financial reporting, budget control, payables management and cash management; (v) establish revenue and expense budgets consistent with the programming and sales strategy and make necessary cost adjustments; and (vi) implement necessary improvements in transmission facilities, audio processing and studio facilities. From time to time, in compliance with applicable law, the Company will enter into an LMA or consulting arrangement with a target property prior to FCC final approval and the consummation of the acquisition in order to gain a "head start" on the integration process. OPERATING STRATEGY The Company's operating strategy has the following principal components: ASSEMBLE AND MANAGE MARKET CLUSTERS WITH REGIONAL CONCENTRATIONS. The Company has assembled the first or second ranked cluster of stations based on revenue share and/or audience share in all of its U.S. markets in four regional concentrations, the Midwest, Southeast, Southwest and Northeast. The Company believes that by offering a diversity of radio formats within a given market, Cumulus provides customized and efficient marketing solutions to meet advertisers' needs. By assembling market clusters with a regional concentration, the Company believes that it will be able to increase revenues by offering regional coverage of key demographic groups that were previously unavailable to national and regional advertisers. The Company also believes that its cluster approach will allow it to operate its stations with more highly skilled local management teams equipped with greater resources and to eliminate redundant operating and overhead expenses. MAXIMIZE EACH STATION'S POTENTIAL THROUGH POSITIONING AND BRANDING. The Company utilizes extensive market research to refine the programming of each of its stations and to position each as a separate brand within a particular cluster. The objective of this strategy is to optimize each station's potential in terms of audience ratings and revenue share while providing the widest possible range of choice to listeners and advertisers. Such stations can better capitalize on the operating leverage inherent in the radio industry because the costs of operating a radio station are generally fixed and, therefore, increased revenues generally result in disproportionately larger increases in Broadcast Cash Flow (as defined under "Certain Definitions and Market and Industry Data"). FOCUS ON PROGRAMMING. A principal Company operating strategy is to enhance each station's programming appeal, including both the quality and quantity of local programming as a means of enriching the listener experience. The Company believes that adopting this commitment to high quality, locally originated programming will provide its stations with a competitive advantage and increase each station's audience share. Moreover, the Company believes that the efficiencies and scale afforded by the operation of multiple stations in the same market and region working together with information technology make it possible to substantially improve programming and the quality of the listener experience without a comparable increase in cost. EXPAND DEDICATED SALES FORCE AND OPTIMIZE INVENTORY MANAGEMENT. Underpinning the Company's strategy for optimizing the potential of each station within a cluster is the practice of dedicating a sales force for each of its stations. The Company believes that many of the acquired stations have dramatically underperformed in sales, due primarily to undersized sales staffs responsible for selling air time on multiple stations, thus diluting their ability to cover all of the potential advertisers with strong advocates for each station. The Company believes its practice of utilizing a dedicated sales force for each station will attract a larger number of advertisers thereby increasing the demand for each station's commercial spot inventory. Accordingly, the Company has significantly expanded the number of salespeople for each of its stations. Salespeople are typically compensated exclusively on a commission basis. Also, in each of its market clusters, the Company utilizes Internet-based sales reporting systems to monitor its sales activity and to formulate and implement rate structure and inventory management on a continual basis. INCREASE RADIO REVENUE SHARE. The Company believes that its strategy of larger and dedicated station sales staffs, brand development, regional concentration, and market clusters will help increase advertising volume and revenues from existing customers and increase the number and scope of new advertisers. This strategy enables the Company to compete more effectively with other local and regional media such as newspapers and cable and broadcast television stations, because it can now offer a competitively priced alternative to reach the target audience that advertisers desire. The Company's sales management team has substantial experience in the areas of generating new sources of revenues including promotional events, retailer co-op advertising and other sources including business-to-business advertising. IMPLEMENT STRICT COST CONTROLS. The Company's management imposes strict financial reporting requirements and expense budget limitations on each of its stations. In addition, management maintains a centralized accounting system which allows it to monitor the performance and operations of each of its stations. Management believes such centralization allows the Company to achieve expense savings in certain areas, including purchasing and administrative expenses. Management believes that the Company will also achieve expense savings through the elimination of certain duplicate costs within its markets and market clusters. IMPLEMENT INTERNET-BASED MANAGEMENT INFORMATION SYSTEMS. The Company is implementing a proprietary application using Internet software standards to support daily sales and inventory performance reporting by station, by market and by cluster. The Company has completed implementation of the daily sales reporting application and anticipates full implementation of the inventory performance application by the end of 1998. Upon full implementation, this application will allow the Company to compare each station's actual performance (including revenue and inventory management) to budget on a regular basis and deploy resources on a timely basis to those stations not achieving budgetary goals. RECRUIT AND RETAIN SKILLED MANAGERS. The Company believes that operating a top-ranked cluster of stations in a market will enable the Company to recruit and retain high caliber radio management personnel who might otherwise be attracted to larger markets. The Company believes that regional management and coordination will enable it to maximize the benefits of operating a growing number of stations in geographically diverse locations, while maintaining controls over local operations. Local management is also central to the Company's strategy and is primarily responsible for building and developing a sales team capable of converting the stations' audience rankings into revenues. The Company's general managers and sales managers are motivated through incentive compensation based primarily upon their station's cash flow performance and secondarily on their ability to convert their station's audience share into market revenue share. REORGANIZATION AND CORPORATE STRUCTURE In March 1998, the Company amended its articles of incorporation to change its name from Cumulus Holdings, Inc. to Cumulus Media Inc. Until immediately prior to the closing of the Offerings, all of the outstanding common stock of the Company will have been held by Cumulus Media, LLC, a Wisconsin limited liability company ("Media LLC"), whose members include State of Wisconsin Investment Board, NationsBanc Capital Corp. ("NationsBanc"), Heller Equity Capital Corporation, The Northwestern Mutual Life Insurance Company ("NML") and certain members of the Company's management or affiliates of management. See "Principal and Selling Stockholders." Immediately prior to the closing of the Offerings, (i) all of the shares of the NML Preferred Stock will be exchanged for shares of Series A Preferred Stock as described below; and (ii) Media LLC will be liquidated and the shares of Class A Common Stock, Class B Common Stock and Class C Common Stock held by Media LLC will be distributed by Media LLC to its members in liquidation (the "Reorganization"). All shares of the Company's 12% Class A Cumulative Preferred Stock (the "NML Preferred Stock") which were held by NML immediately prior to the Offerings plus all accrued and unpaid dividends thereon as of the exchange date will be exchanged for shares of Series A Preferred Stock having an equivalent aggregate liquidation value pursuant to the Preferred Stock Offering. As of June 1, 1998, the liquidation value of the NML Preferred Stock was approximately $34.2 million. Subject to certain conditions, the Series A Preferred Stock will be exchangeable on any dividend payment date, at the Company's option, for the % Subordinated Exchange Debentures due 2009 (the "Exchange Debentures"). See "Description of Capital Stock." Upon the consummation of the Reorganization, the capital stock of the Company will consist of the Class A Common Stock, the Class B Common Stock, the Class C Common Stock and the Series A Preferred Stock. The Company's U.S. radio operations are conducted primarily through Cumulus Broadcasting, Inc., a Nevada corporation ("Broadcasting") and a wholly-owned subsidiary of the Company, which owns the radio stations acquired pursuant to asset purchase agreements. The Company also owns the stock of radio groups or stations acquired pursuant to stock purchase agreements. Cumulus Licensing Corp., a Nevada corporation ("Licensing") and a wholly-owned subsidiary of Broadcasting, holds virtually all the FCC licenses for the Company's stations. Certain other FCC licenses are held by wholly-owned subsidiaries of the Company and the Company intends in the near future to transfer those licenses to Licensing or to newly created subsidiaries that hold only FCC licenses. Caribbean Communications Company Ltd., a corporation organized under the laws of Montserrat ("CCC") and a wholly-owned subsidiary of the Company, owns radio stations throughout the English-speaking Eastern Caribbean, including among other places, Trinidad, St. Kitts and St. Lucia. CCC is currently constructing an FM station in Barbados and Tortola, BVI. The Company will be the issuer of the Class A Common Stock, the Series A Preferred Stock and the Notes, and is the borrower under the Credit Facility. Broadcasting and Licensing are guarantors of the Company's obligations under the Credit Facility. See "Description of the Credit Facility and Notes." PENDING ACQUISITIONS The Company has entered into definitive purchase agreements to acquire 109 stations in 28 markets for an aggregate purchase price of approximately $245.1 million in transactions which have not yet been consummated (the "Pending Acquisitions"). The Company expects to consummate most of the Pending Acquisitions during the third and fourth quarters of 1998, although there can be no assurance that the transactions will be consummated within that time frame. In two of the markets in which there are Pending Acquisitions (Dubuque, IA and Grand Junction, CO), petitions or informal objections have been filed against the Company's FCC assignment applications. In several other markets, FCC staff questions and/or requests for additional information relating to local market concentration or the FCC's cross-interest policy have been raised with respect to pending assignment applications. All such petitions, objections and FCC staff inquiries must be resolved before FCC approval can be obtained and the acquisitions consummated. There can be no assurances that other Pending Acquisitions will not be subjected to similar challenges, or that the Pending Acquisitions will be consummated. The Company believes that the proceeds of the Offerings will be sufficient to finance the consummation of the Pending Acquisitions. The Company from time to time enters into non-binding arrangements with potential sellers to conduct a diligence review of their radio stations and propose the terms of a possible purchase agreement. At the present time, discussions with potential sellers are at an early stage and no diligence reviews have been commenced. FINANCING PLAN The Company intends to use the proceeds of the Offerings to finance the Pending Acquisitions and to repay certain indebtedness. The following table presents the sources and uses of funds, pro forma for the Offerings, the acquisitions consummated after March 31, 1998 (the "Subsequent Acquisitions") and the Pending Acquisitions as if such transactions had occurred as of March 31, 1998: <TABLE> <CAPTION> (DOLLARS IN THOUSANDS) --------------------- <S> <C> SOURCES OF FUNDS: Common Stock offered to public....................................... $ 100,000 Debt Offering........................................................ 150,000 Preferred Stock offered to public(1)................................. 91,488 Cash on hand......................................................... 21,916 Escrow funds(2)...................................................... 12,522 -------- Total............................................................ $ 375,926 -------- -------- USES OF FUNDS: Purchase price of the Subsequent Acquisitions and the Pending Acquisitions....................................................... $ 279,532 Repayment of Credit Facility(3)...................................... 79,696 Fees and expenses.................................................... 16,698 -------- Total............................................................ $ 375,926 -------- -------- </TABLE> - ------------------------------ (1) Excludes exchange of NML Preferred Stock concurrent with the Preferred Stock Offering. The Company will not receive any proceeds from the exchange of the NML Preferred Stock for the Series A Preferred Stock. (2) Represents funds deposited into escrow by the Company in connection with the Subsequent and Pending Acquisitions. (3) Affiliates of Lehman Brothers Inc. act as arranger and lender under the Credit Facility. The Company is an Illinois corporation with its principal executive offices located at 111 East Kilbourn Ave., Suite 2700, Milwaukee, Wisconsin 53202, telephone number (414) 615-2800. THE STOCK OFFERINGS <TABLE> <S> <C> Class A Common Stock Offered by the Company....... 6,250,000 shares Class A Common Stock Offered by the Selling Stockholder...................... 1,170,000 shares ---------------- Total......................................... 7,420,000 shares Class A Common Stock Offered to Public: U.S. Offering................................... 5,936,000 shares International Offering.......................... 1,484,000 shares ---------------- Total......................................... 7,420,000 shares Common Stock Outstanding after the Stock Offerings(1): Class A Common Stock(2)......................... 7,613,450 shares Class B Common Stock............................ 8,711,367 shares Class C Common Stock............................ 2,433,808 shares ---------------- Total......................................... 18,758,625 shares Voting Rights..................................... Except with respect to voting and conversion, the rights of holders of Class A Common Stock, Class B Common Stock and Class C Common Stock are identical. Except upon the occurrence of certain events, holders of the Class B Common Stock are not entitled to vote, whereas holders of the Class A Common Stock are entitled to one vote per share and subject to certain exceptions holders of the Class C Common Stock are entitled to ten votes per share. Under certain conditions and subject to prior governmental approval, each share of Class B Common Stock is convertible into one share of Class A Common Stock or one share of Class C Common Stock at the option of the holder, and each share of Class C Common Stock is convertible into one share of Class A Common Stock at the option of the holder. See "Description of Capital Stock." Use of Proceeds................................... Approximately $245.1 million of the net proceeds of the Offerings will be used to finance the Pending Acquisitions. The balance of the net proceeds of the Offerings will be used to repay the principal amount of indebtedness currently outstanding under the Credit Facility for which affiliates of Lehman Brothers Inc. act as arranger and lender. See "Use of Proceeds" and "Description of Credit Facility and Notes." Proposed Nasdaq National Market Symbol.......................................... CMLS Concurrent Offerings.............................. Concurrently with the Stock Offerings, the Company is offering 125,000 shares of its % Series A Cumulative Exchangeable Redeemable Preferred Stock due 2009 (with a liquidation preference of $1,000 per share) and $150 million aggregate principal amount of its % Senior Subordinated Notes due 2008. Each Offering is conditioned upon consummation of each of the other Offerings. See "Risk Factors -- Significant Capital Requirements" and "Use of Proceeds." </TABLE> - -------------------------- (1) As of March 31, 1998, the Company had 1,000 shares of common stock outstanding. Pursuant to the Reorganization, Media LLC will exchange all 1,000 shares of outstanding common stock of the Company for 193,450 shares of Class A Common Stock, 9,881,367 shares of Class B Common Stock and 2,433,808 shares of Class C Common Stock. Media LLC will be liquidated and such shares will be distributed to its members in liquidation. Of the 9,881,367 shares of Class B Common Stock distributed to Media LLC's members, 1,170,000 of such shares will be converted into shares of Class A Common Stock and are being offered hereby by the Selling Stockholder. (2) If the Underwriters' over-allotment options were exercised in full, 8,550,950 shares of Class A Common Stock would be outstanding after the Stock Offerings. See "Underwriting" and "Description of Capital Stock."
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus, other than historical financial statements, gives effect to the Reorganization (as such term is defined below) and assumes no exercise of the Underwriters' over-allotment option. THE COMPANY PC Connection is a direct marketer of brand-name personal computers and related peripherals, software, accessories and networking products. The Company's primary target customers are small and medium-sized organizations ("SMORGS") comprised of 20 to 1,000 employees. PC Connection sells its products through a combination of targeted direct mail catalogs, outbound telemarketing, its Internet Web site and advertisements on the Internet and in selected computer magazines. The Company offers a broad selection of approximately 15,000 products targeted for business use at competitive prices, including products from Compaq, Hewlett-Packard, Toshiba, IBM, Microsoft, Sony, Hitachi and Apple. Net sales of Microsoft Windows or MS-DOS based personal computers ("PCs") and compatible products were approximately 78.1% of net sales in 1997. The Company's most frequently ordered products are carried in inventory and are typically shipped to customers the same day that the order is received. The Company has experienced rapid growth in sales, profitability, number of orders and average order size as a result of: (i) a substantial increase in the number and assortment of products carried by the Company; (ii) increases in outbound telemarketing personnel and improvements in productivity; (iii) increases in catalog circulation; and (iv) improvements in inbound telemarketing productivity. The Company recorded net sales of $550.6 million and income from operations of $7.2 million in 1997, representing increases of 65.2% and 16.6%, respectively, over 1996. Excluding additional stockholder/officer compensation of $12.1 million (which represented Company- related federal income tax obligations payable by stockholders under Subchapter S of the Internal Revenue Code (the "Code")), income from operations was $19.4 million in 1997, representing an increase of 159.4% over the comparable amount in 1996. The Company recorded net sales of $333.3 million and income from operations of $6.2 million in 1996, representing increases of 32.2% and 143.9%, respectively, over 1995. Excluding additional stockholder/officer compensation of $1.3 million (which represented Company-related federal income tax obligations payable by stockholders under Subchapter S of the Code), income from operations was $7.5 million in 1996, representing an increase of 193.4% over the comparable amount in 1995. According to industry data published by Merrin Information Services, Inc. ("Merrin") in May 1997, domestic sales of personal computers and related products were $77.8 billion in 1996 and are projected to be $138.2 billion in 2000, representing a compound annual growth rate of 15.4%. The Company believes that the direct marketing channel will be among the fastest growing distribution channels for the domestic personal computer and related products industry. As a leading participant in the direct marketing channel, the Company believes it is well positioned to capitalize on the expected growth in the industry. The Company's growth strategies are to: (i) increase penetration of its existing customer base; (ii) broaden its product offerings to include higher margin products such as network servers and communications equipment; and (iii) expand its customer base. The Company plans to target a greater number of its existing customers with outbound telemarketing, more aggressively pursue first- to-market product offerings, provide specialized offerings to targeted segments of its customer base and increase its investments in electronic commerce and Internet related marketing opportunities. Since its founding in 1982, the Company has focused on serving customer needs by providing innovative, reliable and timely customer service and technical support, and offering an extensive assortment of branded products, through knowledgeable, well-trained sales and support teams. The effectiveness of this strategy is reflected in the recognition accorded the Company, including the Company's receipt of the PC World "World Class Award for Best Mail-Order Company" in 1997, as voted by its readers, for the seventh time in the past eight years, and receipt of the highest ranking of only two direct resellers included in the first-ever ranking of the "100 Most Influential Companies in the Computer Industry" by PC Magazine in July 1997. The Company believes that its consistent customer focus has also resulted in the development of strong brand name recognition and a broad and loyal customer base. At December 31, 1997, the Company's mailing list consisted of approximately 2,000,000 customers and potential customers, of which approximately 500,000 had purchased products from the Company within the last twelve months. Approximately 65% of the Company's net sales in the year ended December 31, 1997 were made to customers who had previously purchased products from the Company. The Company believes it has also developed strong relationships with vendors, resulting in favorable product allocations and marketing assistance. Commencing in late 1995, the Company significantly increased its business-to- business marketing efforts targeting SMORGS, a rapidly growing sector of the personal computer market that the Company believes is particularly receptive to purchases from direct marketers. To serve this growing part of its business more effectively, the Company has increased the number of its outbound telemarketing account managers from 48 at December 31, 1995 to 155 at December 31, 1997, including 90 new account managers with less than 12 months of outbound telemarketing experience with the Company. Historically, outbound account managers become significantly more productive in their second year with the Company. In addition, in late 1995 the Company initiated programs to increase training of inbound telemarketing personnel and to provide incentive compensation based upon sales productivity. The Company's two major catalogs are PC Connection(R), focused on PCs and compatible products, and MacConnection(R), focused on Apple Macintosh personal computers ("Macs") and compatible products. With colorful illustrations, concise product descriptions, relevant technical information, along with customer service benefits and toll-free telephone numbers for ordering, the Company's catalogs are recognized as a leading source for personal computer hardware, software and other related products. The Company distributed approximately 34 million catalogs during the year ended December 31, 1997. The Company also markets its products and services through its Internet Web site, www.pcconnection.com, which provides customers and prospective customers with Company and product information and enables customers to place electronic orders for all of the Company's products. The Company believes that as the Internet becomes a more important commercial medium, it will be well positioned to capitalize on growth through this emerging channel. The Company operates in a competitive industry and there can be no assurance that the Company will sustain historical growth rates. See "Risk Factors." The Company has a 102,000-square foot, full-service distribution and order fulfillment center in Wilmington, Ohio and a related 25,700-square foot warehouse in Xenia, Ohio. The Company also operates telemarketing centers in Hudson, Keene and Milford, New Hampshire. ---------------- The Company's principal executive offices are located at 528 Route 13, Milford, New Hampshire 03055, and its telephone number is (603) 423-2000. The Company's Internet Web site is located at www.pcconnection.com. Neither the information contained in the Company's Internet Web site nor Internet Web sites linked to the Company's Internet Web site shall be deemed to be a part of this Prospectus. ---------------- PC Connection(R), MacConnection(R), Everything Overnight(R) and the Raccoon Character(s) are registered trademarks of the Company. This Prospectus also includes product and company names, trademarks and trade names of companies other than the Company. REORGANIZATION OF THE COMPANY The Company was incorporated in New Hampshire in September 1983 and expects to reincorporate in Delaware prior to consummation of the Offering (the "Reincorporation"). Pursuant to the Reincorporation the Company will convert all of the issued and outstanding shares of Series A Non-Voting Common Stock, $.01 par value per share (the "Non-Voting Common Stock"), and Series B Voting Common Stock, $.01 par value per share (the "Voting Common Stock"), of the New Hampshire Corporation into 11,798,793 shares of the Delaware corporation's Common Stock, $0.01 par value per share (the "Common Stock"), on a one-for-one basis. For all periods described in the Prospectus, the Company has elected to be treated as an S Corporation under Subchapter S of the Code, and applicable state tax laws. As a result of the S Corporation status of the Company, the stockholders of the Company were taxed directly on the earnings of the Company. Upon the consummation of the Offering, the status of the Company as an S Corporation will terminate and the Company will be subject to federal and state income taxes at applicable corporate tax rates (the "S Corporation Termination," and together with the Reincorporation, the "Reorganization"). Prior to the consummation of the Offering, the Company will declare a dividend (the "S Corporation Dividend") to its then existing stockholders (the "S Corporation Stockholders") in an amount equal to substantially all previously taxed, but undistributed, S Corporation earnings (estimated to aggregate approximately $35 million at the time of consummation of the Offering). After the consummation of the Offering, the Company will use a portion of the net proceeds from the Offering to pay the S Corporation Dividend to the S Corporation Stockholders. See "Use of Proceeds." THE OFFERING <TABLE> <C> <S> Common Stock offered by the Company............................ 3,125,000 shares Common Stock to be outstanding after the Offering....................... 14,923,793 shares(1) Use of Proceeds..................... Payment of the S Corporation Dividend; repayment of debt; and working capital and other general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol............................. PCCC </TABLE> - -------------------- (1) Does not include (a) 1,124,163 shares of Common Stock issuable upon the exercise of stock options outstanding as of January 31, 1998 with a weighted average exercise price of $3.65 per share and (b) an additional 800,000 shares of Common Stock reserved for future issuance under the Company's 1997 Stock Incentive Plan and 225,000 shares of Common Stock reserved for future issuance under the Company's 1997 Employee Stock Purchase Plan. SUMMARY FINANCIAL AND OPERATING DATA <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------- 1993 1994 1995 1996 1997 ------------- ------------- ------------- ------------- ------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SELECTED OPERATING DATA) <S> <C> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Net sales.............. $163,390 $196,659 $252,217 $333,322 $550,575 Gross profit........... 26,124 30,702 40,918 51,205 75,966 Selling, general and administrative expenses.............. 29,602 32,653 38,373 43,739 56,596 Additional stockholder/officer compensation(1)....... -- -- -- 1,259 12,130 Income (loss) from operations............ (3,478) (1,951) 2,545 6,207 7,240 Net income (loss)...... (3,385) (2,341) 1,273 4,756 5,204 PRO FORMA DATA(2): Net income....................................................... $10,890 ============= Basic net income per share(3).................................... $ 0.79 ============= Diluted net income per share(3).................................. $ 0.76 ============= SELECTED OPERATING DATA: Active customers(4).... 258,000 295,000 353,000 424,000 510,000 Catalogs distributed... 10,000,000 16,900,000 16,800,000 18,600,000 33,800,000 Orders entered(5)...... 695,000 803,000 854,000 910,000 1,252,000 Average order size(5).. $264 $282 $346 $453 $524 </TABLE> <TABLE> <CAPTION> AS OF DECEMBER 31, 1997 -------------------------------------- PRO FORMA ACTUAL PRO FORMA(6) AS ADJUSTED(6)(7) ------- ------------ ----------------- <S> <C> <C> <C> BALANCE SHEET DATA: Working capital......................... $18,907 $(10,827) $31,673 Total assets............................ 105,442 109,942 109,942 Short-term debt......................... 29,568 29,568 20,068 Long-term debt (less current portion)... 3,250 3,250 -- Total stockholders' equity (deficit).... 24,120 (4,380) 41,370 </TABLE> - -------------------- (1) Represents amounts accrued or distributed in excess of aggregate annual base salaries approved by the Board of Directors and generally represents Company-related federal income tax obligations payable by the stockholders. (2) The pro forma data gives effect to (i) the elimination of stockholder/officer compensation expense of $12,010 for the year ended December 31, 1997, representing amounts in excess of aggregate annual base salaries of $600 to be in effect as of the closing date of the Offering and (ii) the Reorganization, including the Reincorporation, and the provision for income taxes at an assumed rate of 39% based upon pro forma income of the Company as if it had not elected to be treated as an S Corporation. The increase in taxes amounted to $6,324 for the year ended December 31, 1997 to reflect taxation as a C Corporation. (3) The denominator used to determine basic net income per share includes (i) the weighted average common shares outstanding for the year and (ii) the number of shares required to pay the S Corporation Dividend (assuming a price per share of $16.00) (which dividend, if made at December 31, 1997, would have approximated $33,000). The denominator used to determine diluted net income per share includes the shares used in the calculation of basic net income per share plus dilutive weighted average options outstanding in 1997. (4) All customers included in the Company's mailing list who have made a purchase within the last twelve-month period. (5)Does not reflect cancellations or returns. (6) Reflects the declaration of the S Corporation Dividend estimated to be in the amount of $33,000 at December 31, 1997 and establishment of an additional net deferred income tax asset estimated to be approximately $4,500 at December 31, 1997 resulting from the termination of the Company's S Corporation status. (7) Adjusted to give effect to the Offering and the application of the estimated net proceeds therefrom to repay bank indebtedness and to pay the S Corporation Dividend.
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY SHOULD BE READ IN CONJUNCTION WITH, AND IS QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS (I) ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTIONS, (II) GIVES RETROACTIVE EFFECT TO THE RECAPITALIZATION DESCRIBED IN "DESCRIPTION OF CAPITAL STOCK" AND (III) GIVES RETROACTIVE EFFECT TO A 0.59-FOR-ONE REVERSE SPLIT OF THE COMMON STOCK EFFECTED IN MARCH 1998. THE COMPANY Columbia Sportswear Company ("Columbia" or the "Company") is a global leader in the design, manufacture, marketing and distribution of active outdoor apparel. As one of the largest outerwear manufacturers in the world and the leading seller of skiwear in the United States, the Company has developed an international reputation across an expanding product line for quality, performance, functionality and value. The Company believes its award-winning advertising campaigns effectively position the Columbia brand as active, outdoor, authentic and distinctly American. Established in 1938, the family-owned Company has grown from a small, regional hat distributor to a global leader in the active outdoor apparel industry. The Company has its roots and developed its initial expertise in the production of high quality, rugged outdoor fishing and hunting gear for the serious sportsman. Known for durability and dependability at a reasonable price, the Company leveraged its brand awareness in the 1990s by expanding into related merchandise categories and developing its "head-to-toe" outfitting concept. The Columbia brand appeals to a large, increasingly international consumer base. Today, the Company distributes its products to over 10,000 retailers in 30 countries. The Company's sales and operating income have increased to $353.5 million and $44.3 million in 1997 from $18.8 million and $1.6 million in 1987, representing compound annual growth rates of 30.6% and 35.1%, respectively. The Company believes it will continue to grow by enhancing the productivity of existing retailers, expanding distribution in international markets and further developing merchandise categories. The Company groups its broad range of competitively priced merchandise into four categories-- outerwear, sportswear, rugged footwear and related accessories. The durability, functionality and affordability of Columbia's products make them ideal for use in a wide range of outdoor activities, including skiing, snowboarding, hunting, fishing, hiking and golf, as well as for casual wear. Throughout the product development cycle, merchandising and design teams collaborate with retailers, the Columbia sales force and consumers to ensure that the final product assortment of coordinated "head-to-toe" merchandise meets or exceeds customer expectations. Across all of its product lines, Columbia brings a commitment to innovative, functional product design and a reputation for durable, high quality materials and construction. Columbia believes it offers consumers one of the best price-value equations in the outdoor apparel industry. BUSINESS STRENGTHS ESTABLISHED AND DIFFERENTIATED OUTDOOR LIFESTYLE BRAND. The Company believes the Columbia brand represents a differentiated, active, outdoor, authentic and distinctly American image built on quality, functionality, performance and value. The Company's award-winning international marketing campaigns, which feature Chairman Gertrude Boyle in the role of "Mother Boyle," an overbearing taskmaster who enforces tough Columbia quality standards, emphasize this distinctive brand image. BROAD AND GROWING APPEAL. Columbia's merchandise appeals to a broad range of consumers of varying ages and income levels, from serious outdoorsmen to weekend sports enthusiasts. The Company's price-value equation is attractive to a large segment of the $10.4 billion U.S. retail outdoor apparel market. Columbia is effectively positioned to compete against lower priced or unbranded products based on brand image and product features, and against higher priced, largely technical or fashion brands based on superior value and generally lower price points. The Company has benefited in the past and expects to continue to benefit from the trend toward casual dressing and from the growth in demand for active lifestyle apparel. PREMIUM QUALITY AT A REASONABLE PRICE. Columbia maintains a strong focus on providing a superior mix of quality and value, which are defining elements of the brand. The Company believes it is able to offer merchandise similar in quality to its competitors at attractive price points by using its long-standing supplier relationships to source high quality products from around the world while controlling costs, relying on Company-supervised production of merchandise by independent manufacturers, involving itself in the supply chain at an earlier stage than is typical in the industry and avoiding the overdesign of its products. PROVEN AND EXPERIENCED MANAGEMENT TEAM. Senior management of Columbia has substantial experience in the apparel industry and a demonstrated track record of sales and earnings growth. Chairman Gertrude Boyle has been involved in the business since 1970; President and Chief Executive Officer Timothy P. Boyle joined Columbia in 1971; and Executive Vice President and Chief Operating Officer Don Richard Santorufo joined the Company in 1979. Under their leadership over the past decade, the Company's sales and operating income have increased at compound annual growth rates of 30.6% and 35.1%, respectively. Immediately following the Offerings, senior management will own over 76.8% of the Company. FUNCTIONAL AND PERFORMANCE-ORIENTED DESIGN. All Columbia merchandise is designed and developed in-house by experienced merchandising and design teams. Working closely with internal sales and production teams as well as with retailers and consumers, the Company's merchandising and design teams can reduce the risks of fashion swings by developing superior products that are tailored specifically to meet consumer requirements. Because its products are designed for functionality and durability, the Company does not attempt to lead consumer preferences or differentiate its products based primarily on fashion. In fact, many new products are based on existing designs, such as the Bugaboo Parka, a consistent best seller for more than a decade. EFFECTIVE "HEAD-TO-TOE" MERCHANDISING. Columbia's "head-to-toe" merchandising strategy presents retailers and consumers with a wide selection of apparel and rugged footwear that shares common color palettes and outdoor themes. Retailers and consumers both benefit from the ability to use Columbia as a single source for an attractive array of merchandise. The Company's flagship store, recently opened in Portland, Oregon, and the Company's successful store-within-a-store concept ("concept shops") provide showcases for Columbia's coordinated merchandise. SOURCING AS A COMPETITIVE ADVANTAGE. Columbia's merchandise is produced worldwide by independent manufacturers selected, monitored and coordinated by local Columbia employees to assure conformity to strict quality and cost standards. The Company believes the use of independent manufacturers, in conjunction with the use of Columbia sourcing personnel rather than agents, increases its production flexibility and capacity and allows it to maintain control over critical aspects of the sourcing process, while at the same time substantially reducing capital expenditures and avoiding the costs of managing a large production work force. SUPERIOR INVENTORY MANAGEMENT. From the time of purchasing through production, distribution and delivery, the Company manages its inventory to reduce risk. The sequencing of the product design, sourcing, production and selling cycle mitigates inventory risk, in part by offering special discounts to customers that purchase merchandise early. Because the Company's products are not based primarily on fashion, and because Columbia undertakes extensive analysis to ensure that its products are what consumers require, the Company believes its inventory risk is not as great as that of some of its competitors. A new state-of-the-art inventory management information system, expected to be fully operational in late 1998, is expected to further enhance the Company's ability to manage its inventory. GROWTH STRATEGY ENHANCE CHANNEL PRODUCTIVITY OF EXISTING CUSTOMERS. The Company plans to improve the productivity of its existing customers by expanding its concept shops and installing brand enhancement systems. Concept shops, which promote a consistent brand image, are located within the stores of the Company's customers and are dedicated exclusively to selling Columbia merchandise. As of December 31, 1997, the Company had 164 concept shops worldwide and plans to double this number by the end of 1998. The Company believes its concept shops increase sales by displaying a complete selection of merchandise and promoting cross-merchandising opportunities on a year-round basis. Smaller-scale brand enhancement systems, which include signage and fixtures that prominently display consolidated groupings of Columbia merchandise, offer benefits similar to concept shops. By the end of 1998, the Company also expects to have installed 1,000 in-store brand enhancement systems. LEVERAGE THE COLUMBIA BRAND NAME IN INTERNATIONAL MARKETS. The Company intends to capitalize on its size, strong U.S. brand position and worldwide brand recognition by targeting certain high opportunity markets for development or expansion. The Company has identified Europe and Asia as regions where outdoor activities are consistently popular and where the Company can exploit its active, outdoor, authentic and distinctly American brand image and reputation for value. The Company is seeking to enhance its distribution in a number of countries, including the United Kingdom, Italy, France, Spain, The Netherlands, Sweden and Germany. The Company will assume control of the distribution of its products in Japan in late 1998 and recently opened sales counters dedicated to Columbia merchandise in 15 retail stores in South Korea. Although the Company has made significant progress in international expansion over the last several years, substantial opportunity for growth exists. Net sales outside North America have increased from $9.0 million in 1993 to $35.4 million in 1997, but still represented only 10.0% of the Company's total net sales in 1997. DEVELOP EXISTING MERCHANDISE CATEGORIES. The Company intends to realize growth by further developing existing product categories, such as sportswear and rugged footwear, where there remains ample room for growth in market share. The Company's success in designing and marketing products has allowed Columbia to significantly broaden its assortment in existing categories. From 1993 through 1997, outerwear and sportswear sales increased 43.7% and 221.5%, respectively, in part as a result of new product introductions. Since it was introduced in 1993, net sales of the Company's rugged footwear have increased from $1.2 million to $24.3 million in 1997. The Company believes opportunities exist for continued rapid growth in sales of rugged footwear as distribution is expanded to sporting goods and specialty outdoor stores that carry the Company's outerwear and sportswear categories. SELECTIVELY BROADEN RETAIL DISTRIBUTION. The Company believes that over the longer term significant opportunities exist to increase sales of its products to department stores and footwear specialty shops. Although sales to department stores accounted for less than 19% of the Company's U.S. net sales in 1997, the Company believes this percentage will rise because department store retailers often prefer to purchase products from vendors that can offer complete head-to-toe product lines. The Company was established in 1938 and was incorporated under Oregon law in 1961. The Company's executive offices are located at 6600 North Baltimore, Portland, Oregon 97203, and its telephone number is (503) 286-3676.
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+PROSPECTUS SUMMARY This following summary should be read in conjunction with, and is qualified in its entirety by, the more detailed information, including "Risk Factors" and the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Prospectus. The terms "fiscal 1993," "fiscal 1994," "fiscal 1995," "fiscal 1997" and "fiscal 1998" refer to the 52-week periods ended November 27, 1993, November 26, 1994, November 25, 1995, November 29, 1997 and November 28, 1998, respectively, and the term "fiscal 1996" refers to the 53-week period ended November 30, 1996. Unless otherwise indicated, all information in this Prospectus (i) reflects the amendment and restatement of the Company's articles of organization, (ii) reflects a 52-for-1 stock split to be effected in the form of a dividend of 51 shares of Common Stock per share of Common Stock outstanding before the closing of the Offering and (iii) assumes no exercise of the Underwriters' over-allotment option. See "Underwriting." THE COMPANY Charles River Associates Incorporated ("CRA" or the "Company") is a leading economic and business consulting firm that applies advanced analytic techniques and in-depth industry knowledge to complex engagements for a broad range of clients. Founded in 1965, the Company provides original and authoritative advice for clients involved in many high-stakes matters, such as multi-billion dollar mergers and acquisitions, new product introductions, major capital investment decisions, and complex litigation, the outcome of which often has significant implications or consequences for the parties involved. The Company offers two types of services: legal and regulatory consulting and business consulting. Through its legal and regulatory consulting practice, CRA provides law firms and businesses involved in litigation and regulatory proceedings with expert advice on highly technical issues such as the competitive effects of mergers and acquisitions, damages calculations, measurement of market share and market concentration, liability analysis in securities fraud cases, and the impact of increased regulation. In addition, the Company uses its expertise in economics, finance and business analysis to offer clients business consulting services for strategic issues such as establishing pricing strategies, estimating market demand, valuing intellectual property and other assets, assessing competitors' actions, and analyzing new sources of supply. To complement its analytical expertise in advanced economic and financial methods, the Company offers its clients in-depth industry expertise in specific vertical markets, including chemicals, electric power and other energies, healthcare, materials, media/telecommunications, and transportation. The Company's services are provided by its highly credentialed and experienced staff of consultants. As of February 20, 1998, CRA employed 120 full-time professional consultants, including 47 consultants with Ph.D.s and 26 consultants with other advanced degrees, who have backgrounds in a wide range of disciplines, including economics, business, corporate finance, materials sciences and engineering. Since maintaining its reputation is paramount and its engagements are typically complex, the Company is extremely selective in its hiring of consultants, recruiting individuals from leading universities, industry and government. Many of the Company's consultants are nationally recognized as experts in their respective fields, having published scholarly articles, lectured extensively and been quoted in the press. To enhance the expertise it provides to its clients, CRA maintains close working relationships with a select group of renowned academic and industry experts ("Outside Experts"). Through its offices in Boston, Massachusetts, Washington, D.C. and Palo Alto, California, CRA has completed more than 2,500 engagements for clients, including major law firms, domestic and foreign corporations, federal, state and local government agencies, governments of foreign countries, public and private utilities, and national and international trade associations. While the Company has particular expertise in certain vertical markets, the Company provides services to a diverse group of clients in a broad range of industries. During its last three fiscal years, the Company had over 1,200 engagements for clients that included 59 of the 100 largest U.S. law firms (ranked by The American Lawyer based on 1996 revenues) and 109 Fortune 500 companies (based on 1996 revenues). During that period, the Company's clients included Cravath, Swaine & Moore; Ford Motor Company; Jones, Day, Reavis & Pogue; Procter & Gamble Company Inc.; Skadden, Arps, Slate, Meagher & Flom LLP; and Time Warner Inc. No single client accounted for over 10% of the Company's revenues in fiscal 1997. The environment in which businesses operate is becoming increasingly complex due to the broader application of technology, the globalization of many industries and increased competition. This increasing complexity and the changing nature of the business environment are also forcing governments to adjust their regulatory strategies, resulting in more frequent and more complex litigation and increased interaction with government agencies. In response to these trends, companies are increasingly relying on sophisticated economic and financial analysis to solve complex problems and improve decision-making. As the need for complex economic and financial analysis becomes more widespread, CRA believes that companies will increasingly turn to outside consultants for access to specialized expertise, experience and prestige that are not available to them internally. CRA intends to capitalize on these industry trends and enhance its position as a leading economic and business consulting firm by pursuing a multi-pronged growth strategy. Since its consultants are its most important asset, CRA will continue to aggressively recruit and retain high quality consultants. In addition, the Company will continue to expand its expertise by establishing relationships with additional Outside Experts. The Company also intends to expand its current client base by increasing marketing activities and expanding its current service offerings. Finally, the Company plans to pursue strategic acquisitions and alliances in order to gain access to additional consultants, new service offerings, additional industry expertise, a broader client base or an expanded geographic presence. Officers and directors of the Company completed a management buy-out in March 1995, resulting in a broad expansion of the Company's ownership principally from its three founders to all of its officers and directors at that time. In order to align each officer's interest with the overall interests and profitability of CRA, the Company adopted, as part of the management buy-out, a policy requiring that each of its officers have an equity interest in CRA. As of the date of this Prospectus, the Company's stock is broadly held among over 30 officers and directors. In connection with the management buy-out, the Company refocused its efforts on improving profitability and expanding its areas of expertise and its client base. The Company's revenues and income from operations have increased from $31.8 million and $2.5 million in fiscal 1995 to $44.8 million and $4.7 million in fiscal 1997, respectively, representing compound annual growth rates of 18.6% and 37.8%, respectively. The Company was incorporated in the Commonwealth of Massachusetts on February 19, 1965. The Company's principal executive offices are located at 200 Clarendon Street, Boston, Massachusetts 02116 and its telephone number is (617) 425-3000. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company......................... 1,562,500 shares Common Stock offered by the Selling Stockholders............ 625,500 shares Common Stock to be outstanding after the Offering........... 8,081,740 shares (1) Use of proceeds............................................. Payment of dividends and general corporate purposes, including working capital and possible acquisitions. See "Use of Proceeds." Proposed Nasdaq National Market symbol...................... CRAI </TABLE> - --------------- (1) Excludes 970,000 shares of Common Stock reserved for issuance under the 1998 Incentive and Nonqualified Stock Option Plan and 243,000 shares of Common Stock reserved for issuance under the 1998 Employee Stock Purchase Plan. At the time of the Offering, there are outstanding under such Option Plan options to purchase an aggregate of 345,000 shares of Common Stock at exercise prices equal to the initial public offering price. See "Management--Benefit Plans." SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE DATA) <TABLE> <CAPTION> FISCAL YEAR ENDED ------------------------------------------------------------------------ NOVEMBER 27, NOVEMBER 26, NOVEMBER 25, NOVEMBER 30, NOVEMBER 29, 1993 1994 1995 1996 1997 ------------ ------------ ------------ ------------ ------------ (53 WEEKS) <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenues.................... $25,937 $26,249 $31,839 $37,367 $44,805 Costs of services........... 15,446 16,160 19,760 23,370 28,374 Supplemental compensation (1)....................... -- -- 1,212 1,200 1,233 -------- -------- -------- -------- -------- Gross profit................ 10,491 10,089 10,867 12,797 15,198 Income from operations...... 2,002 1,885 2,470 3,737 4,689 Net income (2).............. $ 1,848 $ 1,545 $ 2,414 $ 3,588 $ 4,967 ======== ======== ======== ======== ======== Basic and diluted net income per share................. $0.23 $0.19 $0.40 $0.59 $0.78 ====== ====== ====== ====== ====== Pro forma net income (3).... $3,134 ======= Pro forma net income per share (3)................. $0.48 ====== Weighted average number of common shares outstanding used in basic and diluted net income per share...... 7,902,752 7,935,512 5,987,384 6,091,384 6,355,873 Weighted average number of common shares outstanding used in pro forma net income per share (4)...... 6,505,873 <CAPTION> QUARTER ENDED --------------------------- FEBRUARY 21, FEBRUARY 20, 1997 1998 ------------ ------------ <S> <C> <C> CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenues.................... $9,648 $11,137 Costs of services........... 6,106 6,486 Supplemental compensation (1)....................... 280 -- ------- -------- Gross profit................ 3,262 4,651 Income from operations...... 1,128 1,897 Net income (2).............. $1,061 $ 1,875 ======= ======== Basic and diluted net income per share................. $0.17 $0.29 ====== ====== Pro forma net income (3).... $1,181 ======= Pro forma net income per share (3)................. $0.18 ====== Weighted average number of common shares outstanding used in basic and diluted net income per share...... 6,212,440 6,519,240 Weighted average number of common shares outstanding used in pro forma net income per share (4)...... 6,669,240 </TABLE> <TABLE> <CAPTION> FEBRUARY 20, 1998 ----------------------------------------- PRO FORMA ACTUAL PRO FORMA(5) AS ADJUSTED(6) ------- ------------ -------------- <S> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Working capital........................................ $ 9,558 $ 1,836 $22,700 Total assets........................................... 23,828 17,325 38,189 Total long-term debt................................... 773 773 773 Total stockholders' equity............................. 10,522 2,800 23,664 </TABLE> - --------------- (1) Represents discretionary payments of bonus compensation to officers and certain Outside Experts under a bonus program that has been discontinued after fiscal 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview" and Note 7 of Notes to Consolidated Financial Statements. (2) Since fiscal 1988, the Company has been taxed under subchapter S of the Internal Revenue Code of 1986, as amended (the "Code"). As an S corporation, the Company is not subject to federal and some state income taxes. The Company's S corporation status will terminate on the closing of the Offering. See "S Corporation Distributions and Termination of S Corporation Status." (3) Pro forma net income and pro forma net income per share for fiscal 1997 and the quarter ended February 20, 1998 have been computed by adjusting net income, as reported, to record income tax expense that would have been recorded had the Company been a C corporation during those periods, assuming effective tax rates for the year ended November 29, 1997 and the quarter ended February 20, 1998 of 43% and 42%, respectively. See Note 11 of Notes to Consolidated Financial Statements. (4) See Note 1 of Notes to Consolidated Financial Statements for a description of the computation of the number of shares used in the per share calculation. (5) Pro forma balance sheet data has been adjusted to reflect (i) an increase in the Company's net deferred income tax liability, which increase would have been approximately $1.2 million as of February 20, 1998, that will be recognized as a result of the termination of the Company's S corporation status and (ii) the declaration and payment of the S Corporation Distribution (as defined below), which would have been approximately $6.5 million as of February 20, 1998. The amounts of the increase in the net deferred income tax liability and the S Corporation Distribution will be revised based upon the results of operations and financial condition of the Company between February 20, 1998 and the date of the closing of the Offering and may be significantly larger or smaller than the foregoing amounts. See "Use of Proceeds," "S Corporation Distributions and Termination of S Corporation Status" and Note 11 of Notes to Consolidated Financial Statements. (6) Adjusted to reflect (i) the sale of the 1,562,500 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $16.00 per share, after deducting the estimated underwriting discount and estimated offering expenses payable by the Company, (ii) the declaration and payment of the Dividend (as defined below) of $2.4 million and (iii) the receipt of payments of $914,000 on notes receivable from stockholders. See "Use of Proceeds" and "Capitalization."
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diff --git a/parsed_sections/prospectus_summary/1998/DENN_denny-s_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/DENN_denny-s_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary is qualified in its entirety by the more detailed information and financial statements contained elsewhere in this Prospectus. Unless the context otherwise requires, the term "Company," as used in this Prospectus, refers to Advantica, including its predecessors, FCI and Flagstar, and its subsidiaries on a consolidated basis. As described elsewhere herein, as of April 1, 1998, the Company consummated the sale (the "FEI Sale") of Flagstar Enterprises, Inc. ("FEI"), its wholly-owned subsidiary which had operated the Company's Hardee's restaurants under licenses with Hardee's Food Systems, Inc. ("HFS"). Nevertheless, unless otherwise expressly stated, the information set forth in this Prospectus continues to reflect the Company's Hardee's operations since such operations are included in the historical financial statements contained elsewhere in this Prospectus. The Company Advantica, through its wholly-owned subsidiaries, is one of the largest restaurant companies in the United States, operating (directly and through franchisees and including its just sold Hardee's operation) approximately 3,300 moderately priced restaurants. Advantica's operations are conducted through six restaurant chains or concepts, four chains in the full-service mid-scale dining segment and two in the quick-service segment (including Hardee's). Denny's, the Company's largest concept, is the nation's largest chain of family-style full-service restaurants, with more than 1,650 units in 49 states, two U.S. territories and two foreign countries. Denny's largest concentration is in California and Florida, with 552 units in these two states. Management believes that Denny's has the leading share of the national market in the family-style category. Quincy's, with 180 locations (69 of which management intends to close during 1998), is one of the largest chains of family-steak restaurants in the southeastern United States. El Pollo Loco is a chain of 247 quick-service restaurants featuring flame-broiled chicken and related Mexican food items. Coco's is a regional bakery restaurant chain operating 493 units in seven western states and three foreign countries, offering a wide variety of fresh-baked goods and value priced meals that capitalize on emerging food trends in the western United States. The Carrows chain, consisting of 154 units in seven western states, specializes in traditional American food, with emphasis on quality, homestyle fare at an excellent value. Hardee's is a chain of quick-service restaurants of which Advantica (prior to the FEI Sale (as defined above)), with 557 units located primarily in the Southeast, was the largest franchisee. Although specializing in sandwiches, these Hardee's restaurants serve fried chicken and offer a breakfast menu that accounts for approximately 47% of total sales and features the chain's famous "made-from- scratch" biscuits. Although operating in two distinct segments of the restaurant industry -- full-service and quick-service -- the Company's restaurants benefit from a single management strategy that emphasizes superior value and quality, friendly and attentive service and appealing facilities. FCI was organized as a holding company in 1988 in order to effect the 1989 acquisition of Flagstar. In 1992, FCI and Flagstar consummated the principal elements of a recapitalization (the "1992 Recapitalization"), as a result of which two partnerships affiliated with Kohlberg, Kravis, Roberts & Co. ("KKR") acquired control of the Company. Prior to June 16, 1993, FCI and Flagstar had been known, respectively, as TW Holdings, Inc. and TW Services, Inc. As further described elsewhere herein, in early 1997, the Company's management concluded, in light of operating trends experienced by the Company since 1989 (and continuing into 1997) and the Company's liquidity and capital needs, that the reorganizational alternative best designed to recapitalize the Company's enterprise over the long-term and maximize the recovery of all stakeholders was through a prepackaged plan pursuant to Chapter 11 of the Bankruptcy Code. Toward that end, beginning in February 1997, FCI and Flagstar commenced intensive negotiations with various creditors in an effort to enable the Company to restructure its indebtedness through such a prepackaged filing. The prepackaged plan, the principal terms of which were announced by FCI and Flagstar on March 17, 1997 (the "Original Plan"), was the result of such negotiation and effort. On June 5, 1997, FCI and Flagstar commenced a solicitation of votes on the Original Plan by holders of impaired claims and impaired equity interests entitled to vote thereon. The Original Plan was accepted by all but one class that voted, and a voluntary Chapter 11 case was commenced by FCI and Flagstar on July 11, 1997 in the Bankruptcy Court. The Plan of Reorganization (as amended following the resolution of certain issues before the Bankruptcy Court) was confirmed by the Bankruptcy Court pursuant to an order entered as of November 12, 1997 and became effective on January 7, 1998. See "The Company -- The 1997 Restructuring." On the Effective Date, among other things, Flagstar merged with and into FCI, the surviving corporation, FCI changed its name to Advantica Restaurant Group, Inc., and Advantica issued 40,000,000 shares of Common Stock subject to the completion of the exchange of securities as contemplated by such plan. The Company's principal executive offices are located at 203 East Main Street, Spartanburg, South Carolina 29319-9966. Its telephone number is (864) 597-8000. The Plan of Reorganization Material features of the Plan of Reorganization, as it became effective as of January 7, 1998, are as follows: (a) Flagstar merged with and into FCI, the surviving corporation, and FCI changed its name to Advantica Restaurant Group, Inc.; (b) The following securities of Flagstar and FCI were cancelled, extinguished, and retired as of the Effective Date: (i) Flagstar's 10 7/8% Senior Notes due 2002 (the "10 7/8% Senior Notes") and 10 3/4% Senior Notes due 2001 (the "10 3/4% Senior Notes" and, collectively with the 10 7/8% Senior Notes, the "Old Senior Notes"), (ii) Flagstar's 11.25% Senior Subordinated Debentures due 2004 (the "11.25% Debentures") and 11 3/8% Senior Subordinated Debentures due 2003 (the "11 3/8% Debentures" and, collectively with the 11.25% Debentures, the "Senior Subordinated Debentures"), (iii) Flagstar's 10% Convertible Junior Subordinated Debentures due 2014 (the "10% Convertible Debentures"), (iv) FCI's $2.25 Series A Cumulative Convertible Exchangeable Preferred Stock (the "Old Preferred Stock") and (v) FCI's $.50 par value common stock (the "Old Common Stock"); (c) Advantica had 100,000,000 authorized shares of Common Stock (of which 40,000,000 shares were deemed issued and outstanding on the Effective Date) and 25,000,000 authorized shares of preferred stock (none of which are currently outstanding). Pursuant to the Plan of Reorganization, ten percent (10%) of the number of shares of Common Stock issued and outstanding on the Effective Date, on a fully diluted basis, is reserved for issuance under a new management stock option program. Additionally, 4,000,000 shares of Common Stock are reserved for issuance upon the exercise of new warrants expiring January 7, 2005 that were issued and outstanding on the Effective Date and entitle the holders thereof to purchase in the aggregate 4,000,000 shares of Common Stock at an exercise price of $14.60 per share (the "Warrants"); (d) Each holder of the Old Senior Notes received such holder's pro rata portion of 100% of Advantica's 11 1/4% Senior Notes due 2008 (the "New Senior Notes") in exchange for 100% of the principal amount of such holders' Old Senior Notes and accrued interest through the Effective Date; (e) Each holder of the Senior Subordinated Debentures received such holder's pro rata portion of shares of Common Stock equivalent to 95.5% of the Common Stock issued on the Effective Date; (f) Each holder of the 10% Convertible Debentures received such holder's pro rata portion of (i) shares of Common Stock equivalent to 4.5% of the Common Stock issued on the Effective Date and (ii) 100% of the Warrants issued on the Effective Date; and (g) Advantica refinanced its prior credit facilities by entering into a new credit agreement with The Chase Manhattan Bank ("Chase") and other lenders named therein providing the Company (excluding FRI-M Corporation ("FRI-M"), the subsidiary that operates the Company's Coco's and Carrows operations) with a $200 million senior secured revolving credit facility (the "Credit Facility"). For more detailed information concerning the Plan of Reorganization, see "The Company -- The 1997 Restructuring." The Offering Common Stock Offered for Resale. 9,301,820 shares. See "Description of Common Stock." Common Stock Currently Outstanding........... 40,002,259 shares. NASDAQ Symbol for Common Stock... The Common Stock is listed for trading as a NASDAQ National Market security on The NASDAQ Stock MarketSM under the trading symbol "DINE." Use of Proceeds................. All shares of Common Stock being offered for resale hereby are being so offered for the account of the Selling Stockholder. Advantica will not receive any proceeds from the sale of the Common Stock hereby. Certain Risk Factors PURCHASERS OF THE COMMON STOCK OFFERED HEREBY SHOULD CAREFULLY CONSIDER ALL THE INFORMATION CONTAINED IN THIS PROSPECTUS, ESPECIALLY THE FACTORS SET FORTH IN THE FOLLOWING PARAGRAPH AS MORE FULLY DESCRIBED IN "RISK FACTORS." Purchasers should consider that: (i) although consummation of the Plan of Reorganization significantly reduced the Company's debt obligations, the Company still has a substantial amount of indebtedness; (ii) the ability of Advantica to gain access to additional capital, if needed, cannot be assured; (iii) following consummation of the Plan of Reorganization and the transactions contemplated thereby, the financial condition and operating results of Advantica are not comparable in all respects to that reflected in Advantica's predecessors' historical financial statements; (iv) the Company's restaurant operations are subject to substantial competition from a variety of national, regional and local restaurant companies, some of which have substantially greater financial resources than the Company; and (v) the Company's restaurant operations are subject to changes in consumer tastes, national, regional and local economic conditions and demographic trends. Recent Developments On February 18, 1998 Advantica entered into a definitive agreement with CKE Restaurants, Inc. ("CKE") for the sale of stock of FEI, a wholly-owned subsidiary which has operated the Company's Hardee's restaurants under licenses from HFS. HFS is a wholly-owned subsidiary of CKE. The FEI Sale was consummated on April 1, 1998. As contemplated by such agreement, the Company received $380.8 million in cash (subject to certain adjustments) in exchange for all of the outstanding stock of FEI. In addition, CKE assumed $45.6 million of capital leases. The definitive agreement with CKE includes a covenant not to compete which expires on the second anniversary of the closing date of the FEI Sale. In general, the covenant requires that the Company not engage, directly or indirectly, in the quick-service hamburger restaurant business in certain designated market areas. Approximately $173.1 million of the proceeds of the FEI Sale (together with $28.6 million previously on deposit with respect to certain Mortgage Financings as herein defined) was applied to effect an in-substance defeasance of such Mortgage Financings of FEI and Quincy's Restaurants, Inc. with a book value of $177.6 million at December 31, 1997 plus accrued interest of $2.3 million. Such Mortgage Financings had been collateralized by certain assets of FEI and its wholly-owned subsidiary Spardee's Realty, Inc. and certain assets of Quincy's Restaurants, Inc. and its wholly-owned subsidiary Quincy's Realty, Inc. The Company replaced such collateral principally through the purchase of Defeasance Eligible Investments (as defined in documents governing such Mortgage Financings) which were deposited with the collateral agent with respect to such Mortgage Financings to satisfy principal and interest payments under such Mortgage Financings through the stated maturity date in the year 2000. For additional information concerning such in-substance defeasance, see "Description of Indebtedness -- Mortgage Financings." The transaction required consents of the lenders under the Credit Facility, and the Company negotiated the terms of an amendment which included such consent. Certain terms and provisions of the Credit Facility described herein reflect such amendment. See "Description of Indebtedness -- The Advantica Credit Agreement." As a result of the adoption of fresh start reporting as of the Effective Date (as further discussed in Note 1 to the Consolidated Financial Statements included herein), the net assets of FEI will be adjusted to fair value less estimated costs of disposal based on the terms of the definitive agreement. To the extent that the final terms of the disposition reflect a different fair value than that used as of the Effective Date, the effect of such difference will be an adjustment to the reorganization value in excess of amounts allocable to identifiable assets. Accordingly, the Company anticipates that there will be no additional gain or loss on the disposition of FEI in periods subsequent to the Effective Date. SUMMARY HISTORICAL FINANCIAL DATA Set forth below are certain summary financial data concerning the Company for each of the five years ended December 31, 1997. Such data generally have been derived from the Consolidated Financial Statements of the Company for such periods, which have been audited. The following information should be read in conjunction with the Consolidated Financial Statements of the Company and Notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Pro Forma Financial Statements" presented elsewhere herein. <TABLE> <CAPTION> Year Ended December 31, -------------------------------------- 1993(a) 1994(a) (in millions, except per share amounts) ------------------- ------------------ <S> <C> <C> Income Statement data: Operating revenue ....................................... $ 2,615.2 $ 2,666.0 Operating income (loss) ................................. (1,102.4)(c) 211.5 (d) Loss from continuing operations (g) ..................... (1,238.6) (16.8) Basic and diluted loss per share applicable to common shareholders (h): Continuing operations ................................... (29.56) (0.73) Discontinued operations (g) ............................ (9.67) 9.27 Net income (loss) (i) .................................. (40.14) 8.26 Cash dividends per common share (j) ..................... -- -- Ratio of earnings to fixed charges (k) .................. -- -- Deficiency in the coverage of fixed charges to earnings before fixed charges (k) ...................... 1,318.2 19.3 Balance Sheet data (at end of period): Current assets (l) ...................................... 122.2 186.1 Working capital (deficiency) (l)(m) ..................... (273.0) (205.6) Net property and equipment .............................. 1,167.2 1,196.4 Total assets ............................................ 1,538.9 1,587.5 Long-term debt .......................................... 2,341.2 2,067.6 Other data: EBITDA (o) .............................................. 331.0 333.9 Net cash flows provided by operating activities ......... 128.9 54.6 Net cash flows (used in) provided by investing activities ............................................. (136.0) 296.9 (p) Net cash flows provided by (used in) financing activities ............................................. 10.6 (308.9) <CAPTION> Year Ended December 31, -------------------------------------------------------- 1995(a) 1996(a)(b) 1997 (in millions, except per share amounts) ------------------ ------------------ ------------------ <S> <C> <C> <C> Income Statement data: Operating revenue ....................................... $ 2,571.5 $ 2,542.3 $ 2,609.5 Operating income (loss) ................................. 98.2 (e) 156.4 130.4 (f) Loss from continuing operations (g) ..................... (132.9) (85.5) (134.5) Basic and diluted loss per share applicable to common shareholders (h): Continuing operations ................................... (3.47) (2.35) (3.50) Discontinued operations (g) ............................ 1.82 -- -- Net income (loss) (i) .................................. (1.64) (2.35) (3.50) Cash dividends per common share (j) ..................... -- -- -- Ratio of earnings to fixed charges (k) .................. -- -- -- Deficiency in the coverage of fixed charges to earnings before fixed charges (k) ...................... 133.0 101.9 132.7 Balance Sheet data (at end of period): Current assets (l) ...................................... 285.3 185.5 132.8 Working capital (deficiency) (l)(m) ..................... (122.2) (297.7) (248.9) Net property and equipment .............................. 1,104.4 1,168.6 758.4 Total assets ............................................ 1,507.8 1,687.4 1,439.1 Long-term debt .......................................... 1,996.1 2,179.4 807.4 (n) Other data: EBITDA (o) .............................................. 298.3 286.3 296.9 Net cash flows provided by operating activities ......... 19.5 19.5 76.0 Net cash flows (used in) provided by investing activities ............................................. 186.4 (q) (109.4)(r) (36.0) Net cash flows provided by (used in) financing activities ............................................. (75.6) (14.7) (78.3) </TABLE> - --------- (a) Certain amounts for the four years ended December 31, 1996 have been reclassified to conform to the 1997 presentation. (b) Reflects the acquisition in May 1996 of Coco's and Carrows. (c) Operating loss for the year ended December 31, 1993 reflects charges for the write-off of goodwill and certain other intangible assets of $1,104.6 million and the provision for restructuring charges of $158.6 million. (d) Operating income for the year ended December 31, 1994 reflects a recovery of restructuring charges of $7.2 million. (e) Operating income for the year ended December 31, 1995 reflects a provision for restructuring charges of $15.9 million and a charge for impaired assets of $51.4 million. (f) Operating income for the year ended December 31, 1997 reflects a provision for restructuring charges of $10.5 million and a charge for impaired assets of $15.1 million. (g) The Company has classified as discontinued operations, Canteen Corporation, a food and vending subsidiary, sold in 1994, TW Recreational Services, Inc. ("TWRS"), a recreation services subsidiary, and Volume Services, Inc. ("VS"), a stadium concessions subsidiary. TWRS and VS were sold during 1995. (h) The earnings per share amounts prior to 1997 have been restated as required to comply with Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). For such periods, under the new standard, basic loss per share excludes any dilutive effects of options, warrants and convertible securities, and diluted per share amounts do not differ from basic per share amounts since the Company's options, warrants and convertible debt and preferred stock have an antidilutive impact on per share amounts due to losses from continuing operations in those periods. For further discussion of earnings per share and the impact of SFAS 128, see the Notes to the Consolidated Financial Statements included herein. (i) For the year ended December 31, 1993, net loss includes extraordinary losses of $0.62 per share related to the repurchase of the 10% Convertible Debentures and to the charge off of unamortized deferred financing costs related to a prepayment of Flagstar's senior term loan; net loss for 1993 also includes a charge of $0.29 per share due to a change of accounting method relating to the discount rate applied to the Company's liability for self insurance claims pursuant to Staff Accounting Bulletin No. 92. For the year ended December 31, 1994, net income includes an extraordinary loss of $0.28 per share, relating to the charge off of unamortized deferred financing costs associated with the Company's prepayment of its senior term loan and working capital facility during the second quarter of 1994. For the year ended December 31, 1995, net loss includes a $0.01 per share extraordinary gain relating to the repurchase of $25.0 million of senior indebtedness net of the charge off of unamortized deferred financing costs. (j) The Company's bank facilities have prohibited, and its public debt indentures have significantly limited, distributions and dividends on Advantica's (and its predecessor's) common equity securities. See Note 8 to the accompanying Consolidated Financial Statements appearing elsewhere herein. (k) The ratio of earnings to fixed charges has been calculated by dividing pre-tax earnings by fixed charges. Earnings, as used to compute the ratio, equal the sum of income from continuing operations before income taxes and fixed charges excluding capitalized interest. Fixed charges are the total interest expense including capitalized interest, amortization of debt expenses and a rental factor that is representative of an interest factor (estimated to be one third) on operating leases. (l) The current assets and working capital deficiency amounts presented exclude assets held for sale of $103.2 million and $77.3 million as of December 31, 1993 and 1994, respectively, $5.1 million as of December 31, 1996 and $242.5 million as of December 31, 1997. Such assets held for sale relate to the Company's food and vending and concessions and recreation services subsidiaries for the years ended December 31, 1993 and 1994. For the year ended December 31, 1997, net assets held for sale relate to FEI. (m) A negative working capital position is not unusual for a restaurant operating company. The decrease in the working capital deficiency from December 31, 1993 to December 31, 1994 is due primarily to an increase in cash following the sale of the Company's food and vending subsidiary during 1994. The decrease in the working capital deficiency from December 31, 1994 to December 31, 1995 is due primarily to an increase in cash following the 1995 sales of the Company's (i) distribution subsidiary, PFC, net of current assets and liabilities of such subsidiary, and (ii) the concession and recreation services subsidiaries. The increase in the working capital deficiency from December 31, 1995 to December 31, 1996 reflects the use of the proceeds from the 1995 sales noted above and the proceeds of the sale of PTF for operating needs and for the acquisition of Coco's and Carrows. The decrease in the working capital deficiency from December 31, 1996 to December 31, 1997 is attributable primarily to a reclassification of accrued interest from current liabilities to liabilities subject to compromise, largely offset by a reduction in cash and cash equivalents which has been used for Company operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1998/FLEX_flex-ltd_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/FLEX_flex-ltd_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..f8b14c7b6bfaeaf9ff5b0f47ebd6d943c88a0137
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1998/FLEX_flex-ltd_prospectus_summary.txt
@@ -0,0 +1 @@
+SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and the consolidated financial statements and notes thereto, appearing elsewhere in this Prospectus. In this Prospectus, references to "U.S. dollars" and "$" are to United States currency and references to "Singapore dollars" and "S$" are to Singapore currency. THE COMPANY Flextronics International Ltd. ("Flextronics" or the "Company") is a provider of advanced contract manufacturing services to original equipment manufacturers ("OEMs") in the communications, computer, consumer electronics and medical device industries. Flextronics offers a full range of services including product design, printed circuit board ("PCB") fabrication and assembly, materials procurement, inventory management, final system assembly and testing, packaging and distribution. The components, subassemblies and finished products manufactured by Flextronics incorporate advanced interconnect, miniaturization and packaging technologies, such as surface mount ("SMT"), chip-on-board ("COB"), ball grid array ("BGA") and miniaturized gold-plated PCB technology. The Company's strategy is to use its global manufacturing capabilities and advanced technological expertise to provide its customers with a complete manufacturing solution, highly responsive and flexible service, accelerated time to market and reduced production costs. The Company targets leading OEMs, in growing vertical markets, with which it believes it can establish long-term relationships, and serves its customers on a global basis from its strategically located facilities in Asia, the United States, Mexico and Europe. The Company's customers include Advanced Fibre Communications, Braun/ThermoScan, Cisco Systems, Ericsson, Harris DTS, Lifescan (a Johnson & Johnson company), Microsoft, Philips Electronics and 3Com/US Robotics. Since 1994, the Company has substantially expanded its manufacturing capacity, technological capabilities and service offerings, both through acquisitions and internal growth. On March 27, 1997, the Company acquired from Ericsson Business Networks AB ("Ericsson") two manufacturing facilities (the "Karlskrona Facilities") located in Karlskrona, Sweden and related inventory, equipment and other assets for approximately $82.4 million in cash and entered into a multi-year purchase agreement with Ericsson (the "Purchase Agreement"). In addition, in fiscal 1997 the Company expanded its advanced PCB design capabilities by acquiring Fine Line Printed Circuit Design, Inc. ("Fine Line") for 223,321 Ordinary Shares; expanded its presence in China by investing in FICO Investment Holding Limited ("FICO"), a producer of injection molded plastics for Asian electronics companies; opened an additional manufacturing facility in San Jose, California; closed manufacturing operations at its Richardson, Texas facility; and downsized manufacturing operations in Singapore. On October 30, 1997 the Company acquired 92% of the outstanding ordinary shares of Neutronics Electronics Industries Holding AG ("Neutronics"), an Austrian PCB assembly company with operations in Austria and Hungary, in exchange for 2,806,000 Ordinary Shares of the Company. In addition, in fiscal 1998, the Company acquired DTM Products, Inc., a Colorado-based producer of injection molded plastics for North American OEMs, in exchange for 252,469 Ordinary Shares, Energipilot AB, a Swedish company principally engaged in providing cables and engineering services for Northern European OEMs, in exchange for 229,990 Ordinary Shares, and Altatron, a California-based contract manufacturer, in exchange for a total of 788,650 Ordinary Shares of which 157,730 are to be issued upon the resolution of certain general and specific contingencies, and Conexao, a Brazilian contract manufacturer, in exchange for a total of 421,593 Ordinary Shares of which 118,305 are to be issued upon the resolution of certain general and specific contingencies. See "Risk Factors -- Acquisitions" and "Business -- Recent Acquisitions." The Company has recently substantially expanded its manufacturing operations by expanding its integrated campus in Doumen, China, constructing a new manufacturing campus in Guadalajara, Mexico and adding facilities in San Jose, California.
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1998/GLBZ_glen_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/GLBZ_glen_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..042181fa0e303417bd49399f1546f89cd8e91802
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1998/GLBZ_glen_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary is qualified in its entirety by the more detailed information regarding the Company, the Bank and the Plans and the Consolidated Financial Statements of the Company appearing elsewhere in this Prospectus. The Company Glen Burnie Bancorp (the "Company") is a bank holding company organized in 1990 under the laws of the State of Maryland. It presently owns all the outstanding shares of capital stock of The Bank of Glen Burnie (the "Bank"), a commercial bank organized in 1949 under the laws of the State of Maryland, serving Anne Arundel County and surrounding areas from its main office in Glen Burnie, Maryland and branch offices in Odenton, Riviera Beach, Crownsville and Severn, Maryland. The Bank is engaged in the commercial and retail banking business as authorized by the banking statutes of the State of Maryland, including receiving of demand and time deposits, and the making of loans to individuals, associations, partnerships and corporations. Real estate financing consists of residential first and second mortgage loans, home equity lines of credit and commercial mortgage loans. Commercial lending consists of both secured and unsecured loans. The Bank's deposits are insured up to applicable limits by the Federal Deposit Insurance Corporation ("FDIC"). The Company's principal executive office is located at 101 Crain Highway, S.E., Glen Burnie, Maryland 21061. Its telephone number at such office is (410) 766-3300. The Dividend Reinvestment and Stock Purchase Plan Purpose. The Dividend Reinvestment Plan offers stockholders of record a simple and convenient way to invest their cash dividends in additional shares of the Common Stock without the payment of brokerage commissions, service charges and other expenses. How to Participate. Any stockholder of record is eligible to participate in the Dividend Reinvestment Plan by signing and returning the Stockholder Authorization Form which accompanies this Prospectus. Stockholders holding their shares in "street name" through brokers are not eligible to participate in the Dividend Reinvestment Plan. Stockholders may enroll at any time. If a Stockholder Authorization Form is received prior to the record date for a dividend, that dividend will be reinvested. No fees or transactional costs are charged for participating in the Dividend Reinvestment Plan. What Will be the Purchase Price. The purchase price for Common Stock acquired through the Dividend Reinvestment Plan will be the fair market value of the Common Stock (defined as the price at which the latest share sale was consummated by Legg Mason prior to any dividend declaration date) less a 5% discount unless the Board of Directors determines otherwise. In no event, however, may shares be purchased at less than their par value of $10.00 per share. Administration of the Dividend Reinvestment Plan. The Dividend Reinvestment Plan is administered by the Company. All correspondence relating to the Dividend Reinvestment Plan should be addressed to: President Glen Burnie Bancorp 107 Crain Highway, S.E. Glen Burnie, Maryland 21601
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1998/GPOR_gulfport_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/GPOR_gulfport_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..2ff07719dfdd902de0af8217ff475c487d8052d3
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1998/GPOR_gulfport_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements (including the notes thereto) appearing elsewhere in this Prospectus. Unless the context otherwise requires, (i) the term the "Company" means Gulfport Energy Corporation, formerly known as WRT Energy Corporation, and its subsidiaries taken as a whole, either prior to or after the Effective Date (as defined in the second paragraph under "-- The Company"), as the context requires, (ii) the term "Gulfport" means Gulfport Energy Corporation and its subsidiaries taken as a whole after the Effective Date, and (iii) the term "Old WRT" means WRT Energy Corporation and its subsidiaries taken as a whole prior to the Effective Date. Certain terms relating to the oil and gas business are defined in the "Glossary" section of this Prospectus. The Company intends to amend its Certificate of Incorporation to increase the number of authorized shares of Common Stock. The closing of the Rights Offering on the terms described herein is subject to effectiveness of such amendment. THE COMPANY The Company owns and operates mature oil and gas properties in the Louisiana Gulf Coast area. The Company seeks to achieve reserve growth and increase its cash flow by entering into strategic alliances with companies possessing Gulf Coast exploration experience and by undertaking lower risk development projects. The Company was organized in July 1997 and merged with WRT Energy Corporation, a Texas corporation ("Old WRT"), on July 11, 1997 upon the consummation of Old WRT's bankruptcy reorganization. On February 14, 1996 (the "Petition Date"), Old WRT filed a petition with the United States Bankruptcy Court for the Western District of Louisiana (the "Bankruptcy Court") for protection under Chapter 11 of the United States Bankruptcy Code. Such case is referred to herein as the "Reorganization Case." By order dated May 5, 1997, the Bankruptcy Court confirmed the Joint Plan of Reorganization (the "Plan") of Old WRT and co-proponents DLB Oil and Gas, Inc. ("DLB") and Wexford Management, LLC. The Plan was consummated and became effective on July 11, 1997 (the "Effective Date"). On such date, Old WRT was merged with and into Gulfport, which was a newly formed Delaware corporation named "WRT Energy Corporation." Effective March 30, 1998, the Company changed its name to "Gulfport Energy Corporation." Certain Eligible Stockholders, which own in the aggregate 10,677,894 shares of Common Stock and will receive Rights to purchase an aggregate of 96,737,579 Shares, are affiliates of Charles E. Davidson, a director of the Company, Mike Liddell, the Chairman of the Board and Chief Executive Officer of the Company, or Mark Liddell, the President of the Company. These Eligible Stockholders are referred to in this Prospectus as the Affiliated Eligible Stockholders. As of October 7, 1998, the Company owed (i) the Affiliated Eligible Stockholders an aggregate of $3.0 million under the Stockholder Credit Facility and (ii) three of the Affiliated Eligible Stockholders approximately $1.6 million as the holders of a receivable for services provided to the Company under the Administrative Services Agreement. The Subscription Price for Shares and Excess Shares, if any, purchased by the Affiliated Eligible Stockholders will be paid through the forgiveness of an equal amount owed to them by the Company and any outstanding amounts will be repaid to such stockholders in cash out of the proceeds of the Rights Offering to the extent such funds are available. If such funds are not sufficient, any outstanding amounts will be repaid from other funds as they become available. The ability of the Company to satisfy its capital requirements and implement its business strategy is dependent upon the success of the Rights Offering. The Company believes that it will need to raise at least $7.5 million from the Rights Offering, including any amounts forgiven by the Affiliated Eligible Stockholders as payment of their Subscription Price. At that level, assuming that the full $4.6 million owed to the Affiliated Eligible Stockholders is forgiven as payment of the Subscription Price for Shares, the Company would receive gross cash proceeds of $2.9 million. Of this amount, approximately $1.5 million would first be used to pay outstanding obligations consisting primarily of overdue trade payables. The balance of any cash proceeds from the Rights Offering would be used to meet the Company's immediate and near-term capital requirements consisting primarily of operating and general and administrative expenses and, to the extent possible, relatively low risk projects, such as workovers and recompletions, intended to generate positive cash flow. If the PROSPECTUS GULFPORT ENERGY CORPORATION 200,000,000 SHARES OF COMMON STOCK --------------------- Gulfport Energy Corporation, a Delaware corporation formerly known as WRT Energy Corporation, is distributing to the holders of its Common Stock non-transferable rights (the "Rights") to subscribe for and purchase an aggregate of approximately 200,000,000 shares (the "Shares") of Common Stock. Holders of Common Stock of record as of October 16, 1998 ("Eligible Stockholders") are entitled to receive one Right for each 0.11038 share of Common Stock held as of such date. Each Right entitles the holder to subscribe to purchase one Share for $0.05. Holders of Rights who exercise all of their Rights will have the right to oversubscribe for additional Shares at $0.05 per Share, subject to pro rata allocation based on the number of Shares oversubscribed by each holder of Rights. No fractional rights or cash in lieu thereof will be distributed by the Company, and the number of Rights distributed to each Eligible Stockholder will be rounded up to the nearest whole number. The distribution of the Rights and sale of shares of Common Stock are referred to as the "Rights Offering." The Rights will expire at 5:00 p.m., New York City time, on November 20, 1998, unless extended by the Company (such date and time, the "Expiration Date"), and thereafter will be void and of no effect. Holders who do not exercise their Rights prior to the Expiration Date will relinquish the value inherent in the Rights. Once a holder has exercised any Rights, such exercise may not be revoked. The Board of Directors of the Company may, in its sole discretion, amend the terms and conditions of the Rights Offering or terminate the Rights Offering and revoke the Rights at any time prior to the Expiration Date. The ability of the Company to satisfy its capital requirements and implement its business strategy is dependent upon the success of the Rights Offering. The Company believes that it will need at least $7.5 million to pay outstanding obligations consisting primarily of overdue trade payables and to meet the Company's immediate and near-term capital requirements consisting primarily of operating and general and administrative expenses and, to the extent possible, relatively low cost projects, such as workovers and recompletions, and may include payments on indebtedness and receivables owed to affiliates of officers and directors of the Company. See "Use of Proceeds." If such funds are not raised, the Company believes that it will be forced to seek protection from its creditors under applicable bankruptcy laws. In such an event, the Company believes that holders of the Common Stock may lose their entire investment in the Company. The Company currently has no financing plan to raise such capital other than the Rights Offering. The Company's predecessor emerged from bankruptcy in July 1997. There is no minimum number of Shares that must be subscribed for in the Rights Offering for it to be completed. Subscription payments will not be placed in an escrow account. Once a holder has paid the subscription price, the Company will not refund any portion of such subscription price even if the Company fails to raise $7.5 million. The Common Stock is traded in the over-the-counter market under the symbol "GPOR." On October 28, 1998, the closing bid price of the Common Stock, as reported on the over-the-counter ("OTC") Bulletin Board, was $0.08. See "Price Range of Common Stock and Dividend Policy." SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY. --------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- <TABLE> <CAPTION> SUBSCRIPTION PROCEEDS TO PRICE COMPANY(1) <S> <C> <C> - --------------------------------------------------------------------------------------------------------- Per share of Common Stock................................... $ 0.05 $10,000,000 - --------------------------------------------------------------------------------------------------------- Total............................................. $10,000,000 $10,000,000 - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- </TABLE> (1) Before deducting expenses payable by the Company with respect to the Rights Offering, estimated at approximately $150,000. The Shares are being offered and sold directly by the Company, and no commission or other remuneration will be paid to any person for soliciting purchases of Shares in the Rights Offering. See "The Rights Offering." --------------------- THE DATE OF THIS PROSPECTUS IS OCTOBER 30, 1998 Affiliated Eligible Stockholders do not forgive the full amount owed to them by the Company in exercise of the Subscription Price, the balance of any cash proceeds may also be used to repay amounts owed to Affiliated Eligible Stockholders. At the $7.5 million level, the Company believes that the balance of the cash proceeds from the Rights offering, together with cash flow from operations, will be sufficient to meet the Company's capital requirements until the Company's recent farmouts start generating sufficient cash flow. There can be no assurance, however, that such funds will be sufficient to meet the Company's needs. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Further, the failure of the Company to raise at least $7.5 million through the Rights Offering or a private placement of Common Stock on or before November 30, 1998 is an event of default under the Company's principal credit agreement with ING (U.S.) Corporation (the "Amended Credit Agreement"). If such funds are not raised, the Company believes that it will be forced to seek protection from its creditors under applicable bankruptcy laws. In such an event, the Company believes that holders of the Common Stock may lose their entire investment in the Company. The Company currently has no financing plan to raise such capital other than the Rights Offering. The Company's principal executive offices are located at 6307 Waterford Blvd., Suite 100, Oklahoma City, Oklahoma 73118, and its telephone number is (405) 848-8807. THE RIGHTS OFFERING Rights..................... Each Eligible Stockholder will receive one non-transferable Right for each 0.11038 share of Common Stock held of record by such holder at the close of business on October 16, 1998 (the "Record Date"). No fractional rights or cash in lieu thereof will be distributed by the Company; instead the number of Rights distributed by the Company to each holder of Common Stock will be rounded up to the nearest whole number. An aggregate of approximately 200,000,000 Rights will be distributed pursuant to the Rights Offering. Each Right will entitle the holder thereof to subscribe to purchase one Share for the Subscription Price. An aggregate of approximately 200,000,000 shares of Common Stock will be sold upon exercise of all the Rights. See "The Rights Offering -- The Rights." Basic Subscription Privilege................ Each Right will entitle the Eligible Stockholder to receive, upon payment of the Subscription Price, one Share (the "Basic Subscription Privilege"). See "The Rights Offering -- Subscription Privileges -- Basic Subscription Privilege." Oversubscription Privilege................ Each Eligible Stockholder who exercises in full such holder's Basic Subscription Privilege may also subscribe for Excess Shares, if any, at the Subscription Price (the "Oversubscription Privilege"). If an insufficient number of Excess Shares is available to satisfy all exercises of the Oversubscription Privilege, the available Excess Shares will be prorated among Eligible Stockholders who exercise their Oversubscription Privilege in proportion to the respective number of Rights exercised by the holder pursuant to the Basic Subscription Privilege. See "The Rights Offering -- Subscription Privileges -- Oversubscription Privilege." Excess Shares.............. All of the Shares not initially subscribed for through the exercise of the Basic Subscription Privilege by the Eligible Stockholders (the "Excess Shares"). Subscription Price......... $0.05 per Share. Expiration Date............ 5:00 p.m., New York City time, on November 20, 1998 (subject to extension by the Company). Rights not exercised prior to the Expiration Date will be void and will no longer be exercisable by the holder. Procedure for Exercising Rights................... The Basic Subscription Privilege and the Oversubscription Privilege may be exercised by properly completing and signing the Subscription Certificate evidencing the Rights (each, a "Subscription Certificate") and forwarding such Subscription Certificate by mail, hand or overnight/ express mail carrier (or following the guaranteed delivery procedures), together with payment of the Subscription Price for each Share subscribed for pursuant to the Basic Subscription Privilege and the Oversubscription Privilege, to American Stock Transfer & Trust Company, as subscription agent (the "Subscription Agent"), on or prior to the Expiration Date to the following address: American Stock Transfer & Trust Company 6201 15th Avenue Brooklyn, NY 11129 If forwarding Subscription Certificates by mail, it is recommended that insured, registered mail be used. No interest will be paid on funds delivered in payment of the Subscription Price. See "The Rights Offering -- Exercise of Rights." No Revocation.............. Once a holder of Rights has exercised the Basic Subscription Privilege or the Oversubscription Privilege, such exercise may not be revoked. See "The Rights Offering -- No Revocation." Transferability of Rights................... The Rights are non-transferable and will not be traded during the period they are outstanding. Material Federal Income Tax Considerations........... For United States federal income tax purposes, Rights holders generally will not recognize taxable income in connection with the issuance to them or exercise by them of Rights. Rights holders may incur gain or loss upon the sale of the shares of Common Stock upon the exercise of the Rights or upon the receipt of dividends. See "Material Federal Income Tax Considerations." Use of Proceeds............ Net cash proceeds, if any, from the Rights Offering will be used by the Company to pay outstanding obligations consisting primarily of overdue trade payables and to meet the Company's immediate and near-term capital requirements. See "Use of Proceeds."
\ No newline at end of file
diff --git a/parsed_sections/prospectus_summary/1998/HZO_marinemax_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/HZO_marinemax_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..48e0652a75bd01727f571798c5f12ba77fbca683
--- /dev/null
+++ b/parsed_sections/prospectus_summary/1998/HZO_marinemax_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless the context otherwise requires, all references to "MarineMax" mean MarineMax, Inc. prior to the effectiveness of the Mergers and Property Acquisitions (collectively, the "Combination Transactions"), and all references to the "Company" mean, as a combined company, MarineMax, Inc., the six recreational boat dealers (the "Merged Companies") acquired by MarineMax in separate merger transactions (the "Mergers"), and the property companies (the "Property Companies") acquired by MarineMax in separate contribution transactions (the "Property Acquisitions") and which own real properties used in the operations of the Merged Companies. Unless otherwise indicated, the information set forth herein assumes no exercise of the Underwriters' over-allotment option. THE COMPANY The Company is the largest recreational boat dealer in the United States in terms of revenue. Through 28 retail locations in Florida, Texas, California, Georgia, and Arizona, the Company sells new and used recreational boats, including pleasure boats (such as sport boats, sport cruisers, sport yachts, and yachts), fishing boats, bass boats, pontoon boats, and high-performance boats, with a focus on premium brands in each segment. The Company also sells related marine products, including engines, trailers, parts, and accessories. In addition, the Company arranges related boat financing, insurance, and extended service contracts; provides repair and maintenance services; and offers boat brokerage services. See "Business." The Company is the nation's largest retailer of Sea Ray, Boston Whaler, and other boats manufactured by Brunswick Corporation ("Brunswick"), which is the world's largest manufacturer of recreational boats. Sales of new Brunswick boats accounted for 84% of the Company's new boat sales in calendar 1997, which the Company believes represented approximately 20% of all new Sea Ray boat sales and approximately 5% of all Brunswick marine product sales during that period. The Company acquired five of the Merged Companies and the Property Companies on March 1, 1998 and acquired the sixth Merged Company on April 30, 1998. See "Formation of the Company." Each Merged Company is a party to a 10-year dealer agreement with Brunswick covering Sea Ray products. For the 12 months ended December 31, 1997, the Company had pro forma revenue of approximately $233,779,000, pro forma operating income of approximately $22,353,000, and pro forma net income of approximately $13,377,000 (assuming the adjustments described herein had occurred as of January 1, 1997). MarineMax itself, however, had no operations and generated no operating revenue prior to its March 1, 1998 acquisition of five of the Merged Companies. The Company's same-store sales increased by approximately 19% in calendar 1997, following 16% and 15% increases in calendar 1996 and 1995, respectively. The combination of the six Merged Companies permits the Company to capitalize on the experience and success of each of the Merged Companies in order to establish a new national standard of customer service and responsiveness in the highly fragmented retail boating industry. The Merged Companies were organized between 1946 and 1983, and each is the exclusive dealer of Sea Ray boats in its geographic market and ranks in the top 25 Sea Ray dealers in the United States. See "Formation of the Company." While the Company believes the average new boat retailer generated less than $3 million in annual sales in 1997, the retail locations of the Merged Companies averaged $10 million in annual sales in 1997. As a result of the Company's emphasis on premium brand boats, the Company's average selling price for a new boat in 1997 was approximately $39,000 compared to the Company's estimated industry average selling price of approximately $14,000. The senior executives of the Merged Companies have an average of more than 21 years of experience in the recreational boat industry and have maintained long-term business and personal relationships with each other. The Company is adopting the best practices of the Merged Companies as appropriate to enhance its ability to attract more customers, foster an overall enjoyable boating experience, and offer boat manufacturers stable and professional retail distribution. The Company believes that its prime retail locations, extensive facilities, full range of services, MarineMax Value-Price sales approach, and emphasis on customer service and satisfaction before and after a boat sale are competitive advantages and enable it to be more responsive to the needs of existing and prospective customers. See "Business -- General." The recreational boating industry generated approximately $19.3 billion in retail sales in 1997, including sales of new and used boats; marine products, such as engines, trailers, equipment, and accessories; and related expenditures, such as fuel, insurance, docking, storage, and repairs. Retail sales of new boats, engines, and trailers accounted for approximately $10.0 billion of such sales in 1997. The Company estimates that the boat retailing industry includes more than 4,000 boat retailers, most of which are small retailers that operate in a single market and provide varying degrees of merchandising, professional management, and customer service. Based on the knowledge, experience, and relationships of its senior executives as operators of privately owned dealers, the Company believes that many dealers are finding it increasingly difficult to make the managerial and capital commitments necessary to achieve higher customer service levels and upgrade systems and facilities as required by boat manufacturers, particularly during a period of stagnant industry growth. The Company also believes that many dealers lack an exit strategy for their owners. See "Business -- U.S. Recreational Boating Industry." The Company's executive offices are located at 18167 U.S. 19 North, Suite 499, Clearwater, Florida 33764, and its telephone number is (813) 531-1700. The Company was incorporated in the state of Delaware in January 1998. STRATEGY The Company's goal is to enhance its position as the leading operator of recreational boat dealerships. Key elements of the Company's operating and growth strategies include the following: Operating Strategies Implementing Best Practices. The Company is implementing the "best practices" of each of the Merged Companies as appropriate throughout its dealerships. In particular, the Company is phasing in throughout its dealerships the MarineMax Value-Price sales approach, recently implemented at certain of its dealerships. Under the MarineMax Value-Price approach, the Company sells its boats at posted prices, generally representing a discount from the manufacturer's suggested retail price, without further price negotiation, thereby eliminating the anxieties of price negotiations that occur in most boat purchases. In addition, the Company will adopt, where beneficial, the best practices of each Merged Company in terms of location design and layout, product purchases, maintenance and repair services (including extended service hours and mobile or dockside services), product mix, employee training, and customer education and services. Achieving Operating Efficiencies and Synergies. The Company plans to increase the operating efficiencies of and achieve certain synergies among its dealerships in order to enhance internal growth and profitability. The Company is centralizing certain administrative functions at the corporate level, such as accounting, finance, insurance coverage, employee benefits, marketing, strategic planning, legal support, purchasing and distribution, and management information systems. Centralization of these functions should reduce duplicative expenses and permit the dealerships to benefit from a level of scale and expertise that would otherwise be unavailable to each dealership individually. The Company expects to realize cost savings from reduced inventory carrying costs as a result of purchasing boat inventories on a national level and directing boats to dealership locations that can more readily sell such boats; lower financing costs through new credit facilities; and volume purchase discounts and rebates for certain marine products, supplies, and advertising. Emphasizing Customer Satisfaction and Loyalty. The Company seeks to achieve a high level of customer satisfaction and establish long-term customer loyalty by creating an overall enjoyable boating experience beginning with the negotiation-free purchase process. The Company further enhances and simplifies the purchase process by offering financing and insurance at its retail locations with competitive terms and streamlined turnaround. The Company provides the customer with a thorough in-water orientation of boat operation as well as ongoing boat safety, maintenance, and use seminars and demonstrations for the customer's entire family. The Company continues its customer service after the sale by leading and sponsoring Getaways! group boating trips to various destinations, rendezvous gatherings, and on-the-water organized events to provide its customers with pre-arranged opportunities to enjoy the pleasures of the boating lifestyle. The Company also endeavors to provide superior maintenance and repair services, often at the customer's wet slip and with extended service department hours, to minimize the hassles of boat maintenance. Operating with Decentralized Management. The Company has adopted a decentralized approach to the operational management of its dealerships. The decentralized management approach takes advantage of the extensive experience of local managers, enabling them to implement policies and make decisions, including the appropriate product mix, based on the needs of the local market. Local management authority also fosters responsive customer service and promotes long-term community and customer relationships. In addition, the centralization of certain administrative functions at the corporate level enhances the ability of local managers to focus their efforts on day-to-day dealership operations. Utilizing Technology Throughout Operations. The Company believes that its management information system, which was being utilized by each Merged Company prior to the Mergers and was developed over the past six years through cooperative efforts with a common vendor, enhances the Company's ability to integrate successfully the operations of the Merged Companies and future acquired dealers. The system facilitates the interchange of information and enhances cross-selling opportunities throughout the Company. The system integrates each level of operations on a Company-wide basis, including purchasing, inventory, receivables, financial reporting and budgeting, and sales management. The system also enables management to monitor each retail location's operations on a daily basis in order to identify quickly areas requiring additional focus. Growth Strategies Pursuing Strategic Acquisitions. The Company intends to capitalize upon the significant consolidation opportunities available in the highly fragmented recreational boat dealer industry by acquiring additional dealers and improving their performance and profitability through the implementation of the Company's operating strategies. The primary acquisition focus will be on well-established, high-end recreational boat dealers in geographic markets not currently served by the Company, particularly geographic markets with strong boating demographics, such as the coastal states and the Great Lakes region. The Company also may seek to acquire boat dealers that, while located in attractive geographic markets, have not been able to realize favorable market share or profitability and that can benefit substantially from the Company's systems and operating strategies. The Company may expand its range of product lines and its market penetration by acquiring dealers that distribute recreational boat product lines different from those currently offered by the Company. The Company believes it will be regarded as an attractive acquiror by boat dealers because of (i) the Company's historical performance and the experience and reputation of its management team within the industry; (ii) the Company's decentralized operating strategy, which enables the managers of an acquired dealer to continue their involvement in dealership operations; (iii) the ability of management and employees of an acquired dealer to participate in the Company's growth and expansion through potential stock ownership and career advancement opportunities; and (iv) the ability to offer liquidity to the owners of acquired dealers through the receipt of Common Stock or cash. The Company's acquisition strategy depends on the consent of Brunswick and possibly other manufacturers to the acquisitions of their dealers. See "Risk Factors -- Necessity for Manufacturers' Consent to Dealer Acquisitions and Market Expansion." Brunswick has agreed to cooperate in good faith with the Company and not to unreasonably withhold its consent to the acquisition by the Company each year of Sea Ray boat dealers with aggregate total revenue not exceeding 20% of the Company's revenue in its prior fiscal year to the extent such dealers desire to be acquired by the Company. Brunswick consented to the acquisition of Stovall Marine, Inc. ("Stovall") by the Company (the "Stovall Acquisition") on April 30, 1998 and agreed that the Stovall Acquisition would not count against the 20% benchmark. See "Business -- Brunswick Agreement Relating to Acquisitions." The Company has no current or pending agreements, arrangements, plans, understandings, or negotiations with respect to any material acquisitions. Opening New Facilities. The Company intends to establish additional retail facilities in its existing and new territories. The Company believes that the demographics of its existing geographic territories support the opening of additional facilities and has opened two new retail locations since the Mergers that occurred in March 1998. The Company also plans to reach new customers by expanding various innovative retail formats developed by the Merged Companies, such as mall stores and floating retail facilities. The Company currently operates one mall store and four floating retail facilities, and plans to open a new mall store in 1998. Costs to open a new retail facility depend on many factors, including whether the facility is leased or purchased and the location of the facility. The Company has no current or pending plans, agreements, arrangements, or negotiations with respect to opening any additional new facilities. The Company's Dealer Agreements with Brunswick require Brunswick's consent to open, close, or change retail locations that sell Sea Ray products, which consent cannot be unreasonably withheld, and other dealer agreements generally contain similar provisions. See "Risk Factors -- Risks Related to Internal Growth and Operating Strategies; Management of Growth" and "Business -- Dealer Agreements With Brunswick." Offering Additional Product Lines and Services. The Company plans to offer throughout its existing and acquired dealerships product lines that have been offered only at certain of its locations. The Company also may obtain additional product lines through the acquisition of distribution rights directly from manufacturers and the acquisition of dealerships with distribution rights. In addition, the Company plans to increase its used boat sales and boat brokerage services through an increased emphasis on these activities and cooperative efforts among its dealerships. The Company also plans to offer enhanced financing and insurance packages designed to better serve customers and thereby increase sales and improve profitability. FORMATION AND STRUCTURE OF THE COMPANY MarineMax was founded in January 1998 to acquire five businesses that operated in the recreational boat industry under their principal owners for an average of more than 21 years. MarineMax itself, however, conducted no operations until the acquisition of five of the Merged Companies on March 1, 1998. The Company acquired the sixth Merged Company on April 30, 1998. See "Formation of the Company." The Merged Companies consist of Bassett Boat Company of Florida (which operates four retail locations in Florida); Louis DelHomme Marine (which operates seven retail locations in Texas); Gulfwind USA, Inc. (which operates three retail locations in Florida); Gulfwind South, Inc. (which operates two retail locations in Florida); Harrison's Boat Center, Inc. and Harrison's Marine Centers of Arizona, Inc. (which operate eight retail locations in California and Arizona); and Stovall Marine, Inc. (which operates four retail locations in Georgia). The Merged Companies are continuing their operations as wholly owned subsidiaries of the Company. See "Formation of the Company -- The Merged Companies and the Property Companies." The senior executives of the Merged Companies have entered into five-year, full-time employment agreements with the Company, and senior executives constitute a majority of the Company's Board of Directors and executive officers. The senior executive of each Merged Company will continue to be responsible for the day-to-day operations of such Merged Company. See "Formation of the Company," "Management," "Principal and Selling Stockholders," and "Certain Transactions." THE OFFERING Common Stock offered by the Company........................... 3,515,824 shares(1) Common Stock offered by the Selling Stockholders.............. 1,264,745 shares(2) Common Stock to be outstanding after the Offering................ 13,200,000 shares(3) Use of proceeds................... To repay indebtedness, to enhance the Company's management information system, and to provide working capital and funds for future acquisitions. See "Use of Proceeds." Proposed New York Stock Exchange symbol................. HZO - --------------- (1) Includes 1,861,200 shares being offered to Brunswick. See "Sale of Shares to Brunswick." (2) Assumes the Underwriters' over-allotment option is not exercised. See "Underwriting." (3) Does not include (a) 1,980,000 shares of Common Stock reserved for issuance under the Company's 1998 Incentive Stock Plan, or (b) 500,000 shares of Common Stock reserved for issuance under the Company's 1998 Employee Stock Purchase Plan. See "Management -- 1998 Incentive Stock Plan" and "Management -- Employee Stock Purchase Plan."
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+PROSPECTUS SUMMARY AS THE FOLLOWING IS ONLY A SUMMARY, THE READER SHOULD CAREFULLY REVIEW THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING LATER IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED. THE COMPANY Lithia Motors is a leading retailer of new and used vehicles in western United States, offering 21 domestic and imported makes of new automobiles or light trucks at 22 locations: 12 in California, 7 in Oregon and 3 in Nevada. The Company sells new and used cars and light trucks, sells replacement parts, provides vehicle maintenance, warranty, paint and repair services, and arranges related financing and insurance for its automotive customers. Since December 1996 when the Company completed its initial public offering, Lithia has acquired 17 dealerships, has two acquisitions pending and is actively pursuing additional acquisitions. In 1997, the Company generated record total sales, net income and unit sales of new and used vehicles. Total sales increased to $319.8 million in 1997 from $142.8 million in 1996, an increase of 124%. Same store sales increased 5% while the addition of new dealerships contributed the balance of the growth in sales. For the same period, net income increased to $6.0 million from $2.6 million (pro forma), an increase of 129%. In the fourth quarter of 1997, the Company's total sales and net income were $113.1 million and $1.9 million, respectively, representing growth of 203% and 234% compared to the same period in 1996. New vehicle unit sales increased to 7,493 in 1997 from 3,274 in 1996, an increase of 129%, and retail used vehicle unit retail sales increased from 4,156 to 7,148, an increase of 72%. Lithia was founded in 1946 and its two senior executives have managed the Company for over 27 years. Management has developed and implemented its acquisition and operating strategies which have enabled the Company to successfully identify, acquire and integrate dealerships, achieving profitability superior to industry averages. In 1997, the Company was able to achieve a gross profit margin of 16.7% and a pre-tax margin of 3.0%, versus 12.9% and 1.5%, respectively, for the industry (latest 1996 data). GROWTH STRATEGY The Company is a leading acquiror of automobile dealerships in the western United States and intends to continue to take advantage of the consolidation opportunities in the $673 billion automotive retailing industry. The Company pursues a well defined and disciplined acquisition strategy, targeting acquisitions in certain under-dealered markets where management believes the Company has the opportunity to acquire a cluster of dealerships over time and build a significant market presence. This strategy is patterned after the Company's initial core operations in southern Oregon where it operates six dealerships. Over the last 16 months, the Company has completed the purchase of 17 dealerships with pre-acquisition annual revenues of approximately $454 million for a total purchase price (excluding real estate purchases) of $101.3 million and an aggregate net investment of $49.3 million (excluding real estate purchases) for goodwill, working capital, notes issued to sellers and other initial investments. The following table sets forth certain information regarding recent acquisitions: <TABLE> <CAPTION> PRIOR-YEAR ANNUAL REVENUES* REGION LOCATION BRANDS (MILLIONS) DATE ACQUIRED - ----------------------------------- ------------------- -------------------- ------------- ------------------ <S> <C> <C> <C> <C> South-Central Oregon Eugene Dodge, Dodge Trucks $ 32 December-96 Medford Nissan, BMW 15 February-98 Northeast Bay Area, California Vacaville Toyota 28 December-96 Concord Dodge, Dodge Trucks, Isuzu 39 April-97 Napa Ford, Lincoln- Mercury 24 July-97 Concord Ford 70 August-97 Concord Volkswagen ** August-97 South-Central Valley, California Bakersfield Nissan 41 October-97 Bakersfield BMW, Acura ** October-97 Fresno Ford 60 December-97 Fresno Mazda ** December-97 Fresno Nissan 40 January-98 Fresno Jeep, Hyundai ** January-98 Bakersfield Jeep 18 March-98 Northern Nevada Reno Isuzu, Lincoln- Mercury, Suzuki, Audi 78 October-97 Sparks Isuzu, Lincoln- Mercury, Suzuki ** October-97 Reno Volkswagen 9 February-98 ----- Total $ 454 ----- ----- </TABLE> - ------------------------ * Revenues derived or estimated by the Company from unaudited dealer financial statements for the year prior to acquisition. ** Revenues for this dealership not separately reported but are included with the dealer acquired on the same date and set forth in the preceding entry. Prior to December 1996, the Company operated five dealerships in Medford, Oregon. These initial core dealerships generated sales of $136 million in 1997. Based upon its current dealership locations, the percentage share of the Company's total revenues from each region is approximately: South-Central Oregon--31%; Northeast Bay Area, California--27%; South-Central Valley, California--27%; and Northern Nevada--15%. The Company's growth strategy is dependent upon its ability to identify acceptable acquisition candidates, consummate the acquisitions on terms favorable to the Company, obtain the consent of automobile manufacturers, hire and train professional management and sales personnel and profitably integrate the acquired operations into the Company. Although management believes substantial acquisition opportunities continue to exist, manufacturer-imposed limitations, financial constraints and competition factors could materially effect the Company's ability to further implement this strategy. See "Risk Factors." OPERATING STRATEGY The Company's operating strategy consists of the following elements: MAINTAIN COOPERATIVE RELATIONSHIP WITH MANUFACTURERS. The Company recognizes that its success is closely tied to its relationships with the automobile manufacturers. The manufacturers are committed to the franchise system to sell their vehicles and, accordingly, have a strong interest in the strength and responsiveness of their franchise dealers. The manufacturers provide support to the Company in training its employees, designing operating systems, offering incentives and rebates to sell slower-moving vehicles and providing regional and national advertising. The Company relies on and encourages this assistance as a welcomed partner and cooperates with the manufacturers in the Company's facilities design, marketing efforts and program support. PROVIDE A BROAD RANGE OF PRODUCTS AND SERVICES. The Company offers a broad range of products and services including a wide selection of new and used cars and light trucks, vehicle financing and insurance and replacement parts and service. At its 22 locations, the Company offers, collectively, 21 makes of new vehicles including Dodge, Dodge Trucks, Chrysler, Plymouth, Jeep, Ford, Lincoln-Mercury, Toyota, Isuzu, Nissan, Volkswagen, Audi, Honda, Acura, Suzuki, BMW, Saturn, Pontiac, Mazda and Hyundai. FOCUS ON USED VEHICLE SALES. In addition to the sale of new vehicles, a key element of the Company's operating strategy is to focus on the sale of used vehicles. The Company believes that a well-managed used vehicle operation at each location affords it an opportunity to (i) generate additional customer traffic from a wide variety of prospective buyers, (ii) increase new and used vehicle sales by aggressively pursuing customer trade-ins, (iii) generate incremental revenues from customers financially unable or unwilling to purchase a new vehicle, and (iv) increase ancillary product sales to improve overall profitability. The Company's goal is to sell 1.5 retail used vehicles for every new vehicle sold, compared to an industry average ratio of 0.8-to-1. The Company strives to attract customers and enhance buyer satisfaction by offering multiple financing options, a 10-day/500-mile "no questions asked" exchange program and a 60-day/3,000-mile warranty on every used vehicle sold. EMPHASIZE SALES OF HIGHER MARGIN PRODUCTS AND SERVICES. The Company generates substantial incremental revenue and achieves higher profitability through the sale of certain ancillary products and services such as financing and insurance, extended service contracts and vehicle maintenance. In 1997, the Company arranged financing for 71% of its new vehicle sales and 74% of its used vehicle sales, compared to 42% and 51%, respectively, for the average automobile dealership in the United States (1996 data). Sales of these other ancillary products and services represent 14% of Lithia's total sales, compared to 12% for the average U.S. dealership. EMPLOY PROFESSIONAL MANAGEMENT TECHNIQUES. The Company employs professional management practices in all aspects of its operations, including information technology, employee training, profit-based compensation and centralized cash management. Each dealership is its own profit center and is managed by a trained and experienced general manager who has primary responsibility for decisions relating to inventory, advertising, pricing and personnel. In addition, each dealership is supported by one of the Company's operations teams consisting of specialists in the areas of new vehicle sales, used vehicle sales, finance and insurance, service and parts, and back office administration (including accounting and management information systems). FOCUS ON CUSTOMER SATISFACTION AND LOYALTY. The Company emphasizes customer satisfaction throughout its organization and continually seeks to maintain its reputation for quality and fairness. The Company trains its sales personnel to identify an appropriate vehicle for each of its customers at an affordable price. In 1996, the Company implemented an innovative customer-oriented marketing program entitled "Priority You" which provides the Company's retail customers six value-added services which the Company believes are important to overall customer satisfaction. The Company has received a number of dealer quality and customer satisfaction awards from various manufacturers. Most recently, Lithia's Medford and Grants Pass, Oregon Chrysler product dealerships achieved Chrysler's highest recognition for dealer excellence, the Five-Star Certification. The Medford location was one of the first to receive this certification in the Pacific Northwest. The Company maintains its principal executive offices at 360 E. Jackson Street, Medford, Oregon 97501, and its telephone number is (541) 776-6899. THE OFFERING <TABLE> <S> <C> Common Stock offered by the Company... 3,000,000 shares of Class A Common Stock Common Stock to be outstanding after the Offering.......................... 5,931,715 shares of Class A Common Stock(1) 4,110,000 shares of Class B Common Stock Use of proceeds....................... Acquisitions of additional automobile dealerships and for general corporate purposes. Prior to such use, the funds will be used to reduce borrowings under the Company's lines of credit. See "Use of Proceeds." Nasdaq National Market symbol......... LMTR </TABLE> - ------------------------ (1) Does not include (i) 6,165 shares of Class A Common Stock issued pursuant to the Company's 1996 Stock Incentive Plan in March 1998; (ii) an aggregate of 613,285 shares of Class A Common Stock reserved for issuance under the Company's 1996 Stock Incentive Plan, 559,674 of which were subject to outstanding options as of March 31, 1998 (see "Management--1996 Stock Incentive Plan"); (iii) an aggregate of 15,000 shares of Class A Common Stock reserved for issuance under the Company's 1997 Non-Discretionary Stock Option Plan for Non-Employee Directors, 6,000 of which were subject to outstanding options as of March 31, 1998 (see "Management--Director's Compensation"); (iv) an aggregate of 250,000 shares of Class A Common Stock reserved for issuance under the Company's Employee Stock Purchase Plan (see "Management--Employee Stock Purchase Plan"); (v) an aggregate of 250,000 shares of Class A Common Stock reserved for issuance to the Company's profit sharing plan; and (vi) an additional 415,000 shares of Class A Common Stock to be reserved for issuance under the Company's 1996 Stock Incentive Plan, which increase has been approved by the Board of Directors, subject to completion of this Offering. SUMMARY CONSOLIDATED FINANCIAL DATA The following table presents summary consolidated financial data of the Company as of the dates and for the periods indicated. The summary consolidated financial data should not be construed as representative of future operating results or financial position. The summary consolidated financial data should be read in conjunction with the consolidated financial statements and related notes thereto of the Company and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ----------------------------------------------------- 1993(1) 1994(1) 1995(1) 1996(1) 1997 --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Total sales................................................. $ 92,239 $ 109,423 $ 114,196 $ 142,844 $ 319,795 Cost of sales............................................... 74,224 89,709 93,559 118,333 266,363 --------- --------- --------- --------- --------- Gross profit................................................ 18,015 19,714 20,637 24,511 53,432 Selling, general and administrative......................... 14,721 14,781 16,333 19,830 40,625 Depreciation and amortization(2)............................ 401 393 402 448 1,169 --------- --------- --------- --------- --------- Operating income............................................ 2,893 4,540 3,902 4,233 11,638 Other income (expense), net................................. (551) 47 (175) (4) (2,141) --------- --------- --------- --------- --------- Income before income taxes(3)............................... 2,342 4,587 3,727 4,229 9,497 Income taxes................................................ 890 1,743 1,430 1,623 3,538 --------- --------- --------- --------- --------- Net income(4)............................................... $ 1,452 $ 2,844 $ 2,297 $ 2,606 $ 5,959 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Basic net income per share(4),(5)............................. $ 0.64 $ 1.03 $ 0.50 $ 0.56 $ 0.85 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Diluted net income per share(4),(5)........................... $ 0.64 $ 1.03 $ 0.50 $ 0.52 $ 0.82 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- OTHER OPERATING DATA: New vehicles sold........................................... 2,464 2,744 2,715 3,274 7,493 Used vehicles sold (retail and wholesale)................... 4,718 5,206 5,144 6,504 12,138 Gross margin................................................ 19.5% 18.0% 18.1% 17.2% 16.7% Selling, general and administrative as a percentage of sales..................................................... 16.0% 13.5% 14.3% 13.9% 12.7% Operating margin............................................ 3.1% 4.2% 3.4% 3.0% 3.6% Pre-tax margin.............................................. 2.5% 4.2% 3.3% 3.0% 3.0% </TABLE> <TABLE> <CAPTION> QUARTER ENDED ----------------------------------------------------------- DECEMBER MARCH SEPTEMBER DECEMBER 1996(1) 1997 JUNE 1997 1997 1997 ----------- --------- --------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <S> <C> <C> <C> <C> <C> CONSOLIDATED STATEMENT OF OPERATIONS DATA: Total sales............................................... $ 37,278 $ 54,704 $ 66,422 $ 85,573 $ 113,096 Gross profit.............................................. 6,337 8,949 10,716 14,185 19,582 Operating income.......................................... 534 1,785 2,299 3,023 4,531 Net income(4)............................................. 560 1,144 1,368 1,579 1,868 Basic net income per share(4)............................. $ 0.12 $ 0.17 $ 0.20 $ 0.23 $ 0.27 Diluted net income per share(4)........................... $ 0.11 $ 0.16 $ 0.19 $ 0.22 $ 0.25 </TABLE> <TABLE> <CAPTION> AS OF DECEMBER 31, 1997 -------------------------- ACTUAL AS ADJUSTED(6) ---------- -------------- (IN THOUSANDS) <S> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Working capital..................................................................... $ 23,870 $ 64,141 Total assets........................................................................ 166,526 166,526 Short-term debt..................................................................... 85,385 45,114 Long-term debt, less current maturities............................................. 26,558 21,558 Total shareholders' equity.......................................................... 37,877 83,148 </TABLE> - ------------------------------ (1) Restated to give effect for the Company's conversion from the LIFO method of accounting for inventory to the FIFO method, which was effective January 1, 1997. (2) Does not include depreciation included in cost of sales related to leased vehicles. See "Consolidated Statements of Cash Flows" for total depreciation and amortization. (3) Prior to 1994, the Company paid cash bonuses to its shareholders and members in amounts approximating their respective income tax liability on their undistributed earnings ($1.0 million in 1993), in addition to their normal salaries. These cash bonuses are reflected in selling, general & administrative expense. In 1994 and subsequent periods, cash to meet the shareholders' and members' tax liabilities was distributed to the shareholders and members as dividends. The Company believes that for a fair evaluation of its historical performance, results for 1993 should be adjusted to eliminate the cash bonus payments. (4) The Company was an S Corporation and accordingly was not subject to federal and state income taxes prior to 1996. Net income prior to 1996 is presented on a pro forma basis to reflect the elimination of minority interest pursuant to the restructuring at the time of the initial public offering, and federal and state income taxes as if the Company had been a C Corporation, based on the effective tax rates that would have been in effect during these periods. See Notes 1 and 8 to the Company's Consolidated Financial Statements. (5) The historical capital structure of the Company prior to the restructuring and the initial public offering was not comparable with the capital structure subsequent to these events. See Note 1 to the Consolidated Financial Statements for a reconciliation of the basic and diluted income per share. (6) Adjusted to reflect the sale of 3 million shares of Class A Common Stock offered hereby by the Company (at an assumed public offering price of $16.25 per share and after deducting underwriting discounts and estimated offering expenses payable by the Company) and the application of the net proceeds therefrom. See "Use of Proceeds."
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including the financial statements and notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus assumes that (i) the Underwriters' over-allotment options will not be exercised, (ii) all outstanding shares of Series A Convertible Preferred Stock, par value $.01 per share, will be converted into Common Stock upon the closing of this Offering and (iii) the Company's Restated Articles of Organization will be amended upon the closing of this Offering to reduce the number of authorized shares of Preferred Stock, par value $.01 per share, from 2,000,000 to 1,000,000 shares and to eliminate all shares of Series A Convertible Preferred Stock. The Company's fiscal year begins on July 1 and ends on June 30 of each year. See "Description of Capital Stock" and "Underwriting." Mercury designs, manufactures and markets high performance, real-time digital signal processing computer systems that transform sensor generated data into information which can be displayed as images for human interpretation or subjected to additional computer analysis. These multicomputer systems are heterogeneous and scalable, allowing them to accommodate several microprocessor types and to scale from a few to hundreds of microprocessors within a single system. Mercury's system architecture is specifically designed for digital signal processing applications which are typically computation intensive and require I/O capacity and interprocessor bandwidth not available on a general purpose PC or workstation. The two primary markets for Mercury's products are defense electronics and medical diagnostic imaging. Both of these markets have computing needs which benefit from the unique system architecture developed by the Company. Mercury's computer systems are generally used on real world signal data to enable a military commander to "see" the battle space through natural barriers such as clouds, darkness, water or foliage, so that the position and strength of the enemy can be determined, or to enable a physician to "see" within the body instead of performing invasive surgery. During the past three fiscal years, the majority of the Company's revenues has been generated from sales of its products to the defense electronics market, generally for use in intelligence gathering electronic warfare systems. The Company's activities in this area have focused on the proof of concept, development and deployment of advanced military applications in radar, sonar and airborne surveillance. The Company has established relationships with many of the major prime contractors to the worldwide defense industry, including Lockheed Martin Corporation, Hughes Aircraft Company, Raytheon/E-Systems, Inc., Raytheon/TI Systems, Inc., Northrop Grumman Corporation, MIT/Lincoln Laboratory, GEC Marconi Limited, Ericsson Microwave Systems AB, MATRA Systemes & Information, Mitsubishi Heavy Industries, Ltd. and a prime contractor owned by the Israeli Ministry of Defense. Medical diagnostic imaging is the other primary market currently served by the Company. Mercury's computer systems are embedded in magnetic resonance imaging ("MRI"), computed tomography ("CT") and positron emission tomography ("PET") machines. Mercury has supplied computer systems for use in several of General Electric Medical Systems, Inc.'s medical diagnostic imaging systems since 1987, and has established relationships with Siemens Medical Systems, Inc., Toshiba Corp. and Elscint, Inc. The major medical imaging manufacturers are currently developing the next generation of MRI, CT and digital x-ray machines, which are expected to provide better performance at lower cost. Mercury has recently secured design wins on programs with certain of the major medical imaging manufacturers for their next generation MRI, CT and digital x-ray machines. The Company believes that the available market in 1998 for digital signal processing systems and upgrades for the MRI, CT and digital x-ray markets is expected to be an aggregate of approximately $123 million. Mercury's computer systems are designed to process continuous streams of data from sensors attached to radar, sonar, medical imaging equipment and other devices. The resulting image is transmitted to the battlefield commander, pilot, technician or physician in order to assist in the decision making or diagnostic process. Due to the nature of the applications in which many of Mercury's computer systems are embedded, they are frequently confined in limited spaces and therefore are designed to generate a minimum amount of heat. The Company employs the RACEway Interconnect, an industry standard system area network ================================================================================ DEFENSE ELECTRONICS - ----------------------------- - ----------------------------- [PICTURE OF AIRPLANE] MERCURY'S systems are embedded into air, sea and land-based platforms for processing radar, sonar and signal intelligence applications. These applications allow a military commander to "see" the battle space through natural barriers such as clouds, darkness, water or foliage, so that the position and strength of the enemy can be determined. [PICTURE OF MERCURY Due to the environmental COMPUTER SYSTEM] constraints of these applications, MERCURY'S systems are frequently confined in limited spaces, and they are designed to generate a minimum amount of heat. MERCURY provides high performance embedded computer systems to the defense electronics market, and works closely with defense contractors to complete a design which matches [AERIAL the specified requirements of a military PHOTOGRAPH] application. developed by Mercury which allows for high interprocessor bandwidth and I/O capacity. The Company uses its proprietary application specific integrated circuits ("ASICs") to integrate microprocessors, memory and related components into the RACEway Interconnect to provide optimum system performance. The Company uses industry standard microprocessors, such as Intel Corporation's i860, Motorola, Inc.'s PowerPC, Texas Instruments Incorporated's C80 and Analog Devices, Inc.'s SHARC, in the same system. The Company believes that the RACEway Interconnect and its proprietary ASICs, working together with a group of mixed microprocessors in the same system, allow the most efficient use of space and power with an optimal price/performance ratio. Since July 1996, Mercury has targeted the shared storage market for introduction of a new product which draws on the Company's core competencies in systems engineering and the development of real-time software. In fiscal 1997, Mercury introduced SuiteFusion, its first shared storage product designed to meet the needs of the broadcast and post-production industry. SuiteFusion is an open, scalable software application that allows work groups to share commodity, fibre channel attached disk arrays, eliminating the need for an expensive, intermediate file server. Early end users include Turner Broadcasting Systems Inc.'s CNN Interactive, Nickelodeon's Blue's Clues television show and Hughes Aircraft (through a subsidiary) for use at the U.S. Army National Training Center. The Company believes that the shared storage market includes a number of distinct applications, such as digital video editing, electronic computer aided design, webcasting, cable advertising insertion and pre-press. The Company's executive offices are located at 199 Riverneck Road, Chelmsford, Massachusetts 01824, and its telephone number is (978) 256-1300. The Company was incorporated in Massachusetts in 1981. THE OFFERING Common Stock Offered by the Company..... 2,000,000 shares Common Stock Offered by the Selling Stockholders............................ 1,500,000 shares Common Stock to be Outstanding after the Offering................................ 9,864,023 shares(1) Use of Proceeds by the Company.......... For working capital and other general corporate purposes, including construction of additional office space. See "Use of Proceeds." Proposed Nasdaq National Market Symbol.................................. MRCY - --------------- (1) Excludes 1,095,923 shares of Common Stock issuable upon exercise of outstanding stock options under the Company's stock option plans at October 31, 1997, with a weighted average exercise price of $4.89 per share, of which 447,559 shares were exercisable as of such date at a weighted average exercise price of $3.45 per share. See "Management -- Stock Option and Stock Purchase Plans."
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the consolidated financial statements and related notes thereto and the other financial information included elsewhere in this Prospectus. Except as otherwise noted or unless the context otherwise requires, (i) "Ritchie Bros." or the "Company" refers to Ritchie Bros. Auctioneers Incorporated, either alone or together with its subsidiaries, (ii) the information in this Prospectus gives effect to the combination of the predecessor entities to the Company as if completed on May 1, 1992, (iii) "fiscal" in connection with a year means the 12 months ended April 30 of the calendar year specified, (iv) "$" or "dollars" refers to United States dollars and (v) the information in this Prospectus assumes that the Underwriters' over-allotment option will not be exercised. See "-- The Company," "The Reorganization" and "Underwriting." The financial statements included elsewhere in this Prospectus have been prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP"), and are subject to Canadian auditing and auditor independence standards, and thus may not be comparable to financial statements prepared in accordance with United States generally accepted accounting principles ("U.S. GAAP"). Effective December 31, 1997, the Company changed its fiscal year end from April 30 to December 31. The Ritchie Bros. logo and Ritchie Bros. Auctioneers are among the Company's trademarks. Trademarks of other entities are also included in this Prospectus. THE COMPANY Ritchie Bros. is the world's leading auctioneer of industrial equipment, operating through 50 locations in 13 countries in North America, Europe, Asia and Australia. The Company sells, through public auctions, a broad range of used industrial equipment, including equipment used in the construction, transportation, mining, forestry, petroleum and agricultural industries. Ritchie Bros. conducts its auctions on an unreserved basis, with each and every item being sold to the highest bidder on the day of the auction, and no minimum prices or bidding permitted on behalf of consignors. Ritchie Bros. attracts a broad international base of customers to its auctions through its worldwide marketing efforts and reputation for conducting auctions through a fair selling process. Many of the Company's customers are both consignors and buyers. Management believes that the Company's reputation and leading market position, as well as the breadth and international composition of the customers at Ritchie Bros.' auctions, result in a greater volume of consigned equipment and higher gross auction sales than in other auction venues. Ritchie Bros.' auction business has experienced significant growth over the last five years. During that period, the Company's gross auction sales have grown from $477.1 million in its fiscal year ended April 30, 1993 to $792.9 million in its fiscal year ended April 30, 1997, representing a compound annual growth rate of 13.5%. During the same five fiscal years, the Company's annual auction revenues have grown from $45.0 million to $72.2 million, representing a compound annual growth rate of 12.5%, and income before income taxes has grown from $13.0 million to $25.0 million, representing a compound annual growth rate of 17.8%. During the eight-month period ended December 31, 1997, the Company had gross auction sales of $681.4 million and auction revenues of $60.0 million, representing growth over the corresponding period in 1996 of 29.1% and 27.2%, respectively. KEY STRENGTHS Ritchie Bros. has several key operating strengths that provide distinct competitive advantages which have enabled the Company to achieve significant and profitable growth. Reputation for Conducting Fair Auctions. Management believes that the Company's highly publicized commitment to fair dealing and the unreserved auction process has been a key contributor to the Company's past growth and success. All Ritchie Bros. auctions are unreserved, meaning that there are no minimum prices; each and every item is sold to the highest bidder on the day of the auction. By contract, each consignor is prohibited from bidding on its own consigned items at the auction, or in any way artificially affecting the auction result. In addition, the Company adheres to a policy prohibiting it from artificially affecting the auction result by bidding on any items being auctioned. Each bidder has confidence that if he or she makes the highest bid for an item, even if that bid is less than the item's anticipated sale price, the item will be sold to that bidder. Management believes that Ritchie Bros.' reputation for conducting fair auctions is a major competitive advantage. Ritchie Bros.' auctions generally draw a larger number of bidders than other industrial equipment auctions. The larger bidder audience at a Ritchie Bros. auction attracts potential consignors who reason that a large number of bidders competing for the same items is the best way to maximize the selling price of their equipment. Greater volume and selection of consigned equipment at an auction, in turn, attracts more bidders to the auction in a process that is self reinforcing. High Quality Services for Consignors and Bidders. Ritchie Bros.' auction operations are conducted on a standardized basis around the world and provide consignors assurance that they will obtain the best return on their dispositions of equipment and bidders confidence that they will be given the opportunity to obtain equipment at a fair price. For consignors, Ritchie Bros.' comprehensive services typically begin with an equipment appraisal that gives the prospective consignor a reliable and credible estimate of the value of the appraised equipment. Ritchie Bros. stands behind each of its appraisals with a proposal, tailored to the consignor, that may include an alternative commission structure based upon a guaranteed minimum level of gross sale proceeds, or an outright purchase. Ritchie Bros.' willingness to take consignment of a customer's full equipment fleet (and all ancillary assets, including inventories, parts, tools, attachments and construction materials), rather than only the most desirable items, is another important service to the consignor. Ritchie Bros. also offers repair and refurbishment services to consignors, and provides advice on how to present the equipment in order to maximize the consignor's proceeds. On behalf of the consignors, the Company contracts with selected painters and other trade service providers at each of its auction sites and often provides facilities for on-site cleaning and refurbishment of equipment. For bidders, Ritchie Bros. provides an array of services to make the bidding and purchasing process convenient. Ritchie Bros. personnel perform extensive title searches on the equipment consigned, and the Company warrants free and clear title to each buyer. Equipment being offered at the auction is available for inspection by prospective buyers prior to the auction. Other services include a reception on the evening before the auction, expedited check-in procedures, streamlined paperwork and the provision of meeting rooms, third party financing, access to trucking and freight forwarding, vehicle registration and customs brokerage services at the auction site. International Scope. Ritchie Bros. markets each auction to a global customer base of potential bidders and consignors. Because international buyers are willing to travel to a Ritchie Bros. auction, consignors have confidence that they will receive the highest possible price for their equipment. Ritchie Bros. has conducted auctions in 16 countries throughout the world, and has offices in 13 countries. Approximately 17% of Ritchie Bros.' gross auction sales for its fiscal year ended April 30, 1997 represented purchases by bidders from countries outside of the country in which the auction was held. Proprietary Databases and Software. The Company's proprietary databases provide access to information regarding potential bidders and equipment valuations that, in the view of management, significantly enhances the Company's ability to effectively market its auction services. The Company's customer database contains over 250,000 names from over 160 countries and provides, in respect of each customer, information that can be used in developing a relationship with that customer, such as auction attendance, trade association membership, buying and travel habits and sales tax and banking information. The Company's database of equipment valuations, drawn from sale prices at its own auctions as well as other sources of information, allows the Company to identify market trends that both facilitate accurate appraisals and allow the Company to target its marketing in response to those trends. Size and Financial Strength. In the highly fragmented industrial equipment auction market, Ritchie Bros. is the world's largest auction company. Based upon an industry source that reports sales by companies in the construction equipment segment of the industrial equipment auction market, in calendar 1997 the reported gross auction sales of Ritchie Bros. in that segment exceeded the combined gross auction sales of the other 41 reported companies and exceeded three times the gross auction sales of the next largest auctioneer. Although the Company is not relying on such industry source as an expert, the Company believes that the information provided is reliable. Dedicated and Experienced Workforce. Ritchie Bros.' dedicated and motivated employees are an important strength of the Company. Of the Company's 146 sales and managerial employees, 43 have been with the Company for over 10 years and an additional 37 have been with the Company for over five years. Average annual turnover among the same group has been less than 7% over the three fiscal years ended April 30, 1997. All employees participate in a performance bonus plan tying their overall compensation to corporate and personal performance. Key employees have a substantial equity stake in the Company. The 15 beneficial owners of the Company's predecessor entities, all of whom have entered into employment agreements with the Company, have a combined 300 years of experience with Ritchie Bros., an average of 20 years per individual. See "Business -- Employees" and "Management." GROWTH STRATEGY Ritchie Bros.' strategic objective is to continue its profitable growth by increasing income from operations in the Company's existing markets through developing new and upgrading existing permanent auction sites, and by expanding into new geographic markets. The Company is also assessing possible opportunities to expand its presence in market segments that the Company has not historically emphasized. Increase Income from Operations in Existing Geographic Markets. Management believes that developing new and upgrading existing permanent auction sites will increase the Company's income from operations. Such permanent, purpose-built sites enable the Company to enhance its corporate identity and establish a long-term presence in the communities in which they are located. By establishing itself in its local markets and by holding frequent and regularly scheduled auctions at its permanent sites, the Company is able to more consistently attract a large volume of consignors and bidders to its auctions. Expand into New Geographic Markets. The Company intends to continue to geographically expand its operations by (i) establishing additional auction operations in markets where it has had a strong long-term presence, such as parts of the United States, (ii) increasing its presence in newer markets, such as Europe, Asia, Australia and the Middle East, where it has begun to develop significant business, and (iii) entering new markets such as South America. Management believes that the Company's experience and demonstrated success in developing new geographic markets, its established international base of customers and its reputation as the world's preeminent industrial equipment auctioneer will provide significant advantages to the Company in its efforts to expand into new geographic markets. Expand into New Auction Market Segments. Ritchie Bros. will continue to assess possible opportunities to expand its presence in market segments that the Company has not historically emphasized. Management believes that expansion opportunities exist in agriculture and certain transportation segments of the industrial equipment auction market, among others. Such expansion could be pursued either by acquiring existing businesses, by hiring experienced personnel, or by internally generated growth. --------------- The Company's principal executive offices are located at 9200 Bridgeport Road, Richmond, British Columbia, Canada V6X 1S1, and its telephone number is (604) 273-7564. The Company maintains a web site on the internet at www.rbauction.com. THE OFFERING Common Shares offered hereby..................... 2,900,000 shares(1) Common Shares to be outstanding after the Offering................. 16,113,666 shares(1)(2) Use of proceeds............ The net proceeds to the Company from the Offering, after deducting estimated underwriting commissions and estimated expenses, are estimated to be $39.6 million and will be used (i) to acquire and develop additional permanent auction sites, (ii) to replace or to fund improvements at existing permanent auction sites and (iii) for general corporate purposes, including working capital. Listing.................... The Common Shares have been approved for listing on the New York Stock Exchange, subject to official notice of issuance, under the symbol "RBA." - --------------- (1) Excludes up to 435,000 Common Shares that may be sold by the Company to the Underwriters to cover over-allotments, if any. (2) Excludes 1,500,000 Common Shares reserved for issuance pursuant to awards under the Company's 1997 Stock Option Plan (the "Stock Option Plan"), of which 196,333 Common Shares are subject to options with an exercise price of $0.10 per share granted to employees pursuant to the Employee Equity Participation Program. See "Management -- Employee Equity Participation Program" and "-- Stock Option Plan."
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diff --git a/parsed_sections/prospectus_summary/1998/RBCAA_republic_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/RBCAA_republic_prospectus_summary.txt
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+PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS NOT INTENDED TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. ALL PER SHARE DATA OF REPUBLIC INCLUDED IN THIS PROSPECTUS HAVE BEEN RESTATED TO REFLECT A STOCK SPLIT EFFECTED AS A STOCK DIVIDEND IN FEBRUARY, 1996. IN CONJUNCTION WITH THE STOCK SPLIT, A RECLASSIFICATION WAS ALSO EFFECTED, AND, AS A RESULT OF THE RECLASSIFICATION AND SPLIT, TWO CLASSES OF COMMON STOCK, THE CLASS A AND CLASS B COMMON STOCK, REPLACED THE COMMON STOCK OF THE COMPANY THEN OUTSTANDING. SHARE INFORMATION INCLUDED IN THIS PROSPECTUS ALSO HAS BEEN RESTATED TO REFLECT A TWO-FOR-ONE SPLIT OF THE COMMON STOCK EFFECTIVE JULY 1, 1998. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED. IN ADDITION, UNLESS OTHERWISE INDICATED, ALL REFERENCES TO "THE COMPANY" OR "REPUBLIC" IN THIS PROSPECTUS REFER TO REPUBLIC BANCORP, INC. AND ITS CONSOLIDATED SUBSIDIARIES, INCLUDING THE BANK. THE COMPANY Republic, a bank holding company headquartered in Louisville, Kentucky, derives substantially all of its revenue and income from the operation of its wholly-owned subsidiary, a Kentucky state bank. As a result of the efforts of a group of local businessmen headed by Mr. Bernard M. Trager, the Bank became a full service commercial bank in Louisville, Kentucky in 1982. In 1994, the Bank expanded its operations in Kentucky by combining with Republic Bank of Shelby County, a state chartered bank, and Republic Savings Bank, F.S.B., a federal savings bank, which also were controlled by Mr. Bernard M. Trager and members of his family. The Bank has 18 full-service banking locations, eight of which are located in the Louisville metropolitan area, including the Company's principal offices, and four of which are located in the Lexington metropolitan area, Kentucky's two largest urban areas. At March 31, 1998, Republic had total assets of $1.1 billion, total deposits of $728 million and total stockholders' equity of $73 million. Republic is the fourth largest independent Kentucky based bank holding company. In 1997 Republic made the strategic decision to concentrate its Kentucky banking operations in the North Central and Central Kentucky markets. As a result, the Company entered into a series of transactions in which it sold the deposits and fixed assets of substantially all of its Western Kentucky banking centers. The last of these transactions was completed during the first quarter of 1998. In total, Republic sold approximately $180 million in deposits and approximately $3.7 million in fixed assets while initially retaining substantially all of the loan portfolio associated with those banking centers. Republic's business continues to reflect the Company's successful community banking origins by providing a broad line of financial products and services to individuals, professionals and businesses. Republic believes that its "super community" brand of banking is an important factor in the success and growth of the Company. This philosophy allows for flexible, responsive decision making at each banking center in Republic's banking network and focuses on long-standing client relationships and personalized service. Management believes that its community oriented approach and commitment to customer service afford Republic a distinct competitive advantage in its markets. Republic's overall business strategy is to (i) continue to service individuals, professionals and businesses by providing personal, responsive, quality service through its super community banking network, (ii) continue to coordinate its loan and deposit growth and thereby enrich its earning asset mix, (iii) expand its commercial banking and preferred client services, and (iv) expand its business through internal growth and selective acquisitions in product lines or markets considered strategically attractive by management. In implementing its strategy, management emphasizes the following services and product lines: - RELATIONSHIP BANKING. Republic serves all of its clients with highly skilled retail, technical, and managerial personnel in order to maintain its quality delivery of banking services at each of its banking centers. Republic believes a key to establishing and maintaining a long-term relationship with its banking clients is to offer competitively priced products tailored to meet clients' needs with personalized service and professional delivery. The advisory boards that the Bank maintains in each of its banking center communities further enhance client relationships and community awareness and establish local involvement. - CUSTOMER SERVICE AND CONVENIENCE. Through extended lobby and drive-up hours and experienced personnel, clients of Republic can obtain full banking services at any banking center. Seventeen of the Company's banking centers are open on Saturdays. Republic strives to develop customer loyalty by promoting a "hands-on" approach and offering quick decision-making in its delivery of banking products and services to existing and potential clients. The Company enhances its client service by marketing loan and deposit products through its telebanking services. Republic offers telebanking services during normal business hours and account information access 24 hours a day, 7 days a week. To further enhance customer service and convenience, all executive officers spend time each month in banking centers assessing the needs of both clients and the Republic associates serving those clients. - DEDICATED, SALES-ORIENTED ASSOCIATES. Republic instills within its work force a sales-oriented culture to promote customer service and market penetration. Republic seeks to enhance employee performance through training and Company-wide annual evaluations. To further promote customer service and enhance performance, Republic emphasizes performance-based compensation, rewarding employees who achieve or exceed corporate objectives and effectively cross-sell the organization's services. - MORTGAGE LENDING. Republic uses its banking centers and commissioned originators to offer a variety of single family residential mortgage products. The Company generally retains mortgage loans with variable rates and sells fixed rate loans into the secondary market. During the year ended December 31, 1997, Republic originated $430 million of mortgage loans. Mortgage loan originations during the three months ended March 31, 1998, totaled $141 million. - PREFERRED CLIENT SERVICES. Republic has established extensive long standing relationships with the medical communities in its primary markets. Special loan and deposit products, including 100% financing on first home purchases for medical students and residents, personalized deposit products and affinity cards, have been tailored to meet the needs of physicians and their practices. In addition to its exclusive participation in various programs at the two state medical schools, Republic has received the exclusive endorsement of the Jefferson County Medical Society, the members of which account for nearly 600 depository relationships representing $41 million in deposits as of April 30, 1998. Republic intends to expand these services to other special business groups. - CONSUMER BANKING. Republic continues to expand its retail client base with the aid of competitive consumer loan and deposit products. Republic has developed an attractive home equity loan product with competitive terms, generating over $118 million in new lines of credit since June, 1996. Traditional checking combined with preferential money market accounts and certificates of deposit have resulted in increased fee income and deposit balances. - COMMERCIAL BANKING. In response to client demand, Republic has increased its emphasis on commercial loan and cash management services by establishing centralized commercial lending and cash management departments. The Company intends to expand this business by broadening its relationships with its current as well as prospective commercial clients. The Company was incorporated in Kentucky in 1974 and became a registered bank holding company in 1982, when the Bank commenced its commercial banking business. The executive offices of Republic are located at 601 West Market Street, Louisville, Kentucky 40202, telephone number (502) 584-3600. THE OFFERING <TABLE> <S> <C> Class A Common Stock offered by the Company..................... 1,740,000 shares. See "DESCRIPTION OF CAPITAL STOCK." Class A Common Stock offered by the Selling Shareholder......... 400,000 shares Class A Common Stock outstanding prior to the Offering........... 12,541,062 shares Class A Common Stock to be outstanding after the Offering........................ 14,281,062 shares(1) Class B Common Stock outstanding..................... 2,418,074 shares Total Class A and Class B Common Stock to be outstanding after the Offering.................... 16,699,136 shares(1) Proposed Nasdaq symbol............ RBCA Use of Proceeds................... The proceeds of the Offering are expected to be used for continued banking center expansion, broadening of existing business lines, potential acquisitions and other general corporate purposes. See "USE OF PROCEEDS."
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diff --git a/parsed_sections/prospectus_summary/1998/SCS_steelcase_prospectus_summary.txt b/parsed_sections/prospectus_summary/1998/SCS_steelcase_prospectus_summary.txt
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements included elsewhere in this Prospectus. Unless otherwise indicated, the information contained in this Prospectus assumes that the Underwriters' over- allotment options are not exercised and gives effect to the recapitalization, including a 700-for-1 stock split of Class B Common Stock (as defined herein) effected as a stock dividend and the subsequent conversion of the Existing Preferred Stock (as defined herein) into shares of Class B Common Stock (the "Recapitalization") described under "Description of Capital Stock-- Recapitalization". The information contained herein assumes the conversion of the Existing Preferred Stock, and gives pro forma effect to the Repurchase and the Employee Stock Grant (each as defined herein), at an initial public offering price of $23.00 per share. As used herein in conjunction with any given year, the term "Fiscal" refers to the fiscal year of the Company, which prior to March 1995 ended on February 28 and thereafter ends on the last Friday in February. For example, Fiscal 1996 ended on February 23, 1996. See Note 1 to Consolidated Financial Statements of the Company included elsewhere in this Prospectus. THE COMPANY Steelcase Inc. ("Steelcase" or the "Company") is the world's largest manufacturer and provider of office furniture, office furniture systems and related products and services. The Company has led the U.S. office furniture industry in sales for 24 consecutive years and believes it has the industry's largest base of installed products. In Fiscal 1997, the Company's consolidated net sales were $2.4 billion and in the year ended December 31, 1996, unconsolidated joint ventures in which the Company generally holds 50% interests generated approximately $0.5 billion in net sales. To enhance its industry leadership position, the Company focuses on research, development and design methods that analyze individual and group work processes to create work environments that enable workers to perform more effectively. Since 1994, the Company has won 24 design awards for new products and product enhancements across its product lines. In calendar 1998, the Company plans to introduce more than 75 new products and product enhancements, including Pathways, a unique portfolio of products that, in addition to office furniture and work tools, will include architectural elements such as interior walls and floors designed to integrate entire work spaces. Pathways is designed to be compatible with the Company's current products. The Company offers its extensive range of products and services to commercial and non-commercial organizations worldwide through a network of independent dealers in more than 650 locations. These dealers provide local expertise and ongoing customer support services and remain in close contact with customers during and after the completion of a project to help ensure customer satisfaction and to encourage repeat business. Steelcase has strong brand recognition and a reputation for quality among architects, contract interior designers and corporate facility managers who typically influence purchasing decisions. The Company's dealer network and sales organization utilize Workplace Performance, a consultative process supported by proprietary software-based tools, to help demonstrate early in the planning process the impact of office space and the work environment on productivity and occupancy costs. Steelcase's comprehensive portfolio of furniture products and related products and services, together with its extensive knowledge of work environments, enables the Company to satisfy virtually all of its customers' furniture-related needs. These needs include not only furniture and related products but also initial workspace planning, rapid delivery and installation, ongoing support services, furniture asset management, leasing and, if desired, refurbishing or remanufacturing. The Company's primary product categories include: (i) office furniture systems, including Series 9000, Avenir, Context, Elective Elements and Montage; (ii) seating products, including Sensor, Criterion, Rally and Springboard; (iii) group and individual storage products, including filing units and cabinets; and (iv) desk and casegood products, such as bookcases and credenzas. The Company sells and markets primarily steel and wood products under the Steelcase and Turnstone brands as well as various other brand name products manufactured through joint ventures such as Steelcase Strafor S.A. ("Steelcase Strafor"), the Company's 50% joint venture with Strafor Facom S.A., licensing arrangements and the Steelcase Design Partnership, a group of six Steelcase entities that focuses on specialty markets (the "Steelcase Design Partnership"). INDUSTRY DYNAMICS The Business and Institutional Furniture Manufacturer's Association ("BIFMA") reports that U.S. office furniture industry shipments totaled approximately $10 billion in calendar 1996 and grew at a compound annual growth rate ("CAGR") of approximately 7.2% over the three-year period ended December 31, 1996. Strong growth continued in 1997, with BIFMA reporting that U.S. office furniture industry shipments increased $1.1 billion, or 14.9%, to $8.5 billion for the nine-month period ended September 30, 1997, from $7.4 billion for the comparable period in the prior year. Overall growth in the office furniture industry is primarily a function of increased white-collar employment, increased commercial construction and increased capital spending. The Company believes that certain other recent trends are also affecting, and will continue to affect, the demand for the Company's products and services. The growing use and integration of technology, changes in organizational structures and work processes, greater awareness of health and safety issues and continued focus on cost efficiency are driving businesses to increasingly pursue more effective ways to support their workers and utilize their existing work spaces. The Company believes these trends will increase demand for its existing products and services and will create opportunities to introduce new products and to develop new markets. COMPETITIVE STRENGTHS The Company believes it will continue to be the leader in its industry as a result of the following competitive strengths: MARKET LEADERSHIP AND STRONG BRAND FRANCHISE. The Company has maintained the largest total market share of any manufacturer in the U.S. office furniture industry since 1973. In calendar 1996, based on BIFMA statistics, the Company had a market share of approximately 20%, nearly twice that of its nearest competitor. "Steelcase" is the most widely recognized brand name in the industry, and the Company believes it has earned a reputation for producing a broad range of high quality office furniture and related products. The Company's industry leadership and brand recognition are key marketing tools for expanding its customer base and entering new markets and market segments. LONG-TERM CUSTOMER RELATIONSHIPS; LARGE INSTALLED BASE. The Company, together with its dealer network, has developed strong, long-term relationships with a large number of commercial and non-commercial organizations. As a result of its sales leadership and these long-term relationships, the Company believes it has the largest base of installed products in the U.S. office furniture industry. Through this installed base, the Company generates significant annual sales from repeat and expansion orders. By purchasing additional Steelcase products, these customers ensure compatibility and conformity with existing products and retain the local Steelcase dealer as a single contact for ongoing services. The Company believes that as its existing customers expand and reconfigure their workplaces their need for additional Steelcase products and dealer services will increase. GLOBAL DEALER NETWORK. The Company's strong relationships with its worldwide network of independent dealers in more than 650 locations, built over many years of consistent partnership, allow the Company to focus on the core functions of design, manufacturing and distribution while benefiting from the dealers' local market expertise and ongoing customer support. This network, which includes dealers in more than 200 locations outside of the United States and Canada, complements the Company's global distribution capability and enables Steelcase to address the product and support service needs of its multinational customers in virtually any non- domestic market. The Company's relationships with its dealers are typically long-term in nature, providing continuity in customer relationships and a strong foundation of product knowledge. In addition, the dealers, together with the Company's sales representatives, maintain close relationships with local architects, contract interior designers and corporate facility managers who typically influence purchasing decisions. LEADERSHIP IN DESIGN, RESEARCH AND INNOVATION. The Company utilizes its extensive knowledge of work processes, its ongoing research and its user- centered design methodology to create innovative products and concepts which address evolving customer needs. The Company's Corporate Development Center provides a creative environment for 750 of the Company's research, design, engineering and marketing personnel and houses 10 laboratories for testing sound, lighting, ergonomics, flammability and product durability. The Company's personnel use the Corporate Development Center to conduct over 14,000 product tests annually. Since 1994, the Company has won 24 design awards for new products and product enhancements across its product lines. The Company, through its commitment to design, research and innovation, has developed a strong reputation among, and close ties with, leading independent architectural and design firms and design schools which play a significant role in the industry. KNOWLEDGE OF WORKPLACE NEEDS; CONSULTATIVE MARKETING APPROACH. The Company, through ongoing research and interaction with its broad customer base, has gained an extensive knowledge of how people work and how businesses can use furniture and related products to facilitate more effective work processes. In 1995, the Company introduced Workplace Performance, a consultative process supported by proprietary software-based tools that incorporates an extensive database of customer information and industry research and trends. With the aid of Workplace Performance, the Company's dealers and salesforce work with customers early in the planning process to illustrate possible work space configurations and product packages that help the customers improve their productivity and lower their occupancy costs. The Company believes that its ability to provide more comprehensive support to customers in the early stages of the planning process is a significant competitive advantage. MANUFACTURING AND DISTRIBUTION CAPABILITY. The Company believes it has the largest office furniture manufacturing capacity in the world with more than 50 manufacturing facilities, including those operated by joint ventures. In addition, the Company has an extensive distribution system in the United States and Canada and uses commercial transport and delivery services in both the United States and abroad. The Company's products, including those offered by the Company's joint ventures, are generally available throughout the world. CORPORATE CULTURE. Management believes that the Company's corporate culture and values strengthen relationships with employees, customers, dealers and the communities in which it operates. For Steelcase employees, this corporate culture fosters loyalty and productivity as demonstrated by the fact that the Company's employees in the United States and Canada have an average tenure of approximately 12 years. As an example of its commitment to its employees, the Company will grant at the time of the Offerings (as defined herein) to each of approximately 15,000 employees 10 shares of Class A Common Stock (as defined herein) and an option, exercisable approximately 70 days after the Offerings, to purchase a maximum of 100 shares of Class A Common Stock at a purchase price equal to 85% of the initial public offering price. GROWTH STRATEGY Steelcase's objectives are to strengthen its industry leadership position and increase its revenues and profitability. To achieve these objectives, the Company will: FOCUS ON PRODUCT INNOVATION. The Company intends to strengthen its leadership position in the office furniture industry and increase its revenues through the development of aesthetically pleasing and technologically-sophisticated new products and product enhancements. In Fiscal 1995, 1996 and 1997, the Company spent approximately $40 million, $50 million and $65 million, respectively, on research and development. In calendar 1998, the Company plans to introduce more than 75 new products and product enhancements, including Pathways and Answer, an office furniture systems line under the Turnstone brand which is designed to work with Pathways. The Company's user-centered design efforts address significant workplace trends and result in products that support individual worker needs, including health, safety and comfort. In addition, these products integrate technology and further support the new work processes being adopted by organizations. The Company believes its new products and product enhancements will offer superior flexibility and help its customers improve organizational performance, better utilize their work space and work more effectively. PURSUE NEW MARKET OPPORTUNITY--PATHWAYS. In addition to enhancing its existing product categories, the Company intends to leverage its extensive knowledge of work processes to penetrate new markets and develop new market segments for the work environment. The Company recently developed Pathways, a unique portfolio of products and architectural elements designed to create total interior space solutions. Pathways is designed to enable customers to create, outfit and reconfigure technologically-sophisticated work environments faster and more economically than they can today. Pathways uses a design logic that makes its architectural elements and other products compatible with the Company's current products, as well as competitors' products. The Pathways portfolio includes removable, reconfigurable architectural elements such as floor and wall systems, power, lighting and complementary furniture and work tools. The Company believes Pathways offers a superior means to integrate all workplace elements, including building operating systems, and accommodate all technological workplace needs. As a result, the Company believes Pathways represents a significant opportunity for increased sales from customer projects which involve new construction or building refurbishment. The Company expects to begin shipping Pathways products in the first quarter of calendar 1998. LEVERAGE INSTALLED BASE THROUGH KNOWLEDGE OF WORK. As a result of its sales leadership and long-term relationships with many of its customers, the Company believes it has the largest base of installed products in the industry. The Company believes its knowledge of work has enabled it to develop a strong reputation for improving workplace effectiveness and performance through the integration of people, processes, technology and work space. As a result, the Company's customers increasingly look to the Company and its dealers for advice and consultation on general workplace issues in addition to furniture. This offers the Company the opportunity to analyze customers' needs and to offer solutions that include the application of the Company's products across all of its product lines. The Company intends to increase sales to its existing customers by capitalizing on its broad range of product solutions and its Workplace Performance consultative approach, as well as new product applications, to drive incremental growth across all product categories. LEVERAGE DEALER NETWORK AND INCREASE SALES OPPORTUNITIES. To leverage further its strong dealer network, the Company intends to continue to invest in dealer programs and training that expand the service and operations capabilities of its dealers as well as promote Steelcase products. In addition, the Company intends to increase its percentage of a dealer's sales by continually enhancing and expanding its portfolio of knowledge, products and services to ensure that dealers can satisfy virtually all of a customer's furniture-related needs through sales of Steelcase products. As the Company broadens its portfolio, it also supports dealers in expanding their customer base. For example, the Company's Turnstone brand product offering allows dealers to compete effectively in the value-priced market segment. PURSUE STRATEGIC ACQUISITIONS, JOINT VENTURES AND ALLIANCES. The Company has historically acquired companies with complementary or ancillary businesses or products, entered into joint ventures and established strategic or commercial alliances with various companies. The Company will continue to evaluate similar transactions that it believes are consistent with its growth strategy or otherwise present attractive opportunities for growth, entry into new markets or introduction of new products. ENHANCE GLOBAL PRESENCE. The Company intends to support the existing global operations of its Steelcase International operating unit ("Steelcase International") and of Steelcase Strafor by investing in product development for regional market needs, expanding existing dealer operations and services and developing alliances to penetrate further the markets served by the Company. In addition, the Company intends to support the worldwide needs of its multinational customers as they expand their global operations, as well as service local organizations in regional markets. THE OFFERINGS(1) Class A Common Stock offered by the Selling Shareholders: U.S. Offering.................... 9,720,000 shares International Offering........... 2,430,000 shares ---------------- Total.......................... 12,150,000 shares ================= Common Stock to be outstanding after the Offerings: Class A Common Stock............. 12,300,000 shares(2) Class B Common Stock............. 144,125,400 shares(3) ------------------ Total.......................... 156,425,400 shares ================== Voting Rights......... There will be two classes of common stock outstanding after the Offerings: class A common stock ("Class A Common Stock") entitled to one vote per share and class B common stock ("Class B Common Stock") entitled to 10 votes per share. Class A Common Stock and Class B Common Stock generally will vote as a single class with respect to all matters submitted to a vote of shareholders. The Class A Common Stock and the Class B Common Stock are collectively referred to in this Prospectus as "Common Stock". See "Description of Capital Stock--Class A Common Stock and Class B Common Stock". Conversion............ Class B Common Stock is convertible into Class A Common Stock on a share-for-share basis (i) at the option of the holder thereof at any time, (ii) upon transfer to a person or entity which is not a Permitted Transferee (as defined in the Second Restated Articles of Incorporation of the Company), (iii) with respect to shares of Class B Common Stock acquired after the Recapitalization, at such time as a corporation, partnership, limited liability company, trust or charitable organization ceases to be 100% controlled by Permitted Transferees and (iv) on the date on which the number of shares of Class B Common Stock outstanding is less than 15% of the then outstanding shares of Common Stock (without regard to voting rights). See "Description of Capital Stock-- Class A Common Stock and Class B Common Stock". Use of Proceeds....... All of the proceeds from the sale of the 12,150,000 shares of Class A Common Stock offered hereby will be received by the Selling Shareholders. See "Use of Proceeds". Proposed New York Stock Exchange ("NYSE") symbol...... SCS - -------- (1) The offering of 9,720,000 shares of Class A Common Stock initially being offered in the United States (the "U.S. Offering") and the concurrent offering of 2,430,000 shares of Class A Common Stock initially being offered outside the United States (the "International Offering") are collectively referred to in this Prospectus as the "Offerings". The Selling Shareholders have granted the Underwriters an option for 30 days to purchase an aggregate of up to an additional 1,822,500 shares of Class A Common Stock. See "Underwriting". (2) Includes 150,000 shares of Class A Common Stock which will be granted to certain employees of the Company at the time of the Offerings (the "Employee Stock Grant"). Excludes (i) up to 2,660,000 shares of Class A Common Stock issuable upon the exercise of incentive options to be granted to designated employees pursuant to the Incentive Compensation Plan (as defined herein) at the time of the Offerings at an exercise price equal to the initial public offering price and (ii) up to 1,500,000 shares of Class A Common Stock to be sold upon the exercise of options to be granted to certain employees pursuant to the Purchase Plan (as defined herein) at the time of the Offerings (the "Employee Discount Option Grant") which will be exercisable approximately 70 days after the Offerings at 85% of the initial public offering price. See "Management--Stock Incentive Plans". The Company intends to purchase 1,650,000 shares of Class B Common Stock from the Selling Shareholders at the same price at which the shares of Class A Common Stock are being sold to the Underwriters in the Offerings (the "Repurchase") to avoid equity dilution in connection with the Employee Stock Grant and the Employee Discount Option Grant. (3) Includes 17,120,400 shares of Class B Common Stock to be issued upon conversion of the Company's existing class A preferred stock, par value $100 per share ("Existing Class A Preferred Stock"), and existing class B preferred stock, par value $50 per share ("Existing Class B Preferred Stock", and, together with the Existing Class A Preferred Stock, the "Existing Preferred Stock"), in connection with the Recapitalization (as adjusted to eliminate fractional shares). See "Description of Capital Stock--Recapitalization".
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+PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information included elsewhere in this Prospectus. Unless the context otherwise requires, all references in this Prospectus to the "Company" shall mean Seneca Foods Corporation and its subsidiaries on a consolidated basis. This Prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. The Company's actual results could differ materially from those set forth in the forward-looking statements. See "Risk Factors" for a discussion of certain factors that might cause such a difference. The Company The Company, which was founded in 1949, conducts its business almost entirely in food processing, which currently accounts for approximately 99% of the Company's sales. Canned and frozen vegetables represent approximately 78% and fruit and fruit juice products approximately 22%, of the Company's food processing volume. Apple products contribute approximately 10% of the Company's sales; the Company's Seneca(R) brand frozen apple concentrate is the largest-selling brand of frozen apple concentrate in the United States. Of the remaining sales in the fruit and fruit juice products, grape products account for approximately 2%, and bottled, canned and frozen fruit juice drinks account for approximately 10% of the Company's sales. Approximately 19% of the Company's food products are packed under its own brands including Seneca(R), Libby's(R) (under license), Aunt Nellie's Farm Kitchen(R), Blue Boy(R) and TreeSweet(R). Approximately 30% of the processed foods are packed under private labels, that is, under brand names owned or controlled by the purchasers, and approximately 11% are sold to institutional food distributors. The remainder, approximately 40%, is packed pursuant to a 20 year First Amended and Restated Alliance Agreement dated December 8, 1994 as amended on February 10, 1995, February 25, 1997 and July 1, 1998 (the "Alliance Agreement") with The Pillsbury Company ("Pillsbury") and Grand Metropolitan Incorporated ("GMI"), the parent of Pillsbury (on those dates) and a wholly-owned subsidary of Grand Metropolitan plc and carry Pillsbury's Green Giant(R) brand name. See "Risk Factors--Dependence on Alliance Agreement." The Company's sole non-food division, Seneca Flight Operations, provides air charter service primarily to industries located in upstate New York and contributes approximately 1% to the Company's sales. The address and telephone number of the Company's principal executive offices are: 1162 Pittsford-Victor Road, Pittsford, New York 14534, (716) 385-9500. The Company maintains a website at www.senecafoods.com. The Offering The Rights Offering. The Board of Directors of the Company has determined to make a Rights Offering to the holders of its Common Stock, whereby each holder of Common Stock will receive one-half of a right (the "Right") to purchase for the Subscription Price, shares of the New Preferred Stock. The shares of New Preferred Stock will be immediately convertible on a share-for- - 5 - <PAGE> share basis into shares of Class A Common Stock. The Company will distribute one-half of a Right for each share of Common Stock held of record as of the Record Date. Each whole Right will entitle the holder thereof (a "Rights Holder") to receive upon payment of the Subscription Price, one share of New Preferred Stock. The Rights will be evidenced by subscription certificates which are transferable by the holders thereof ("Subscription Certificates"). Unless the Rights Offering is extended, the Rights that are not exercised by the holders thereof will expire at 5:00 p.m., Eastern Daylight Time, on August 27, 1998 (the twentieth calendar day after commencement of the Rights Offering) (the "Expiration Date"). Rights may be exercised by delivering to Sarah S. Mortensen (the "Subscription Agent"), on or before the Expiration Date, the properly completed Subscription Certificate evidencing such Rights with any required signatures guaranteed, together with payment in full of the Subscription Price. Once a Rights Holder has exercised the subscription privilege, such exercise may not be revoked. The Rights may be purchased or sold through usual investment channels, including banks and brokers. Resales of the Rights have not been registered with the Commission. The Stock Purchase Agreement and its Relationship to the Rights Offering. The Company has entered into a Stock Purchase Agreement dated as of June 22, 1998 (the "Stock Purchase Agreement") with Carl Marks Strategic Investments, L.P., and related entities (collectively, the "New Investors") whereby, subject to the terms and conditions of the Stock Purchase Agreement, the New Investors have agreed to (i) purchase 1.167 million shares of New Preferred Stock at a price of $12.00 per share (for total consideration of $14 million) and (ii) purchase at $12.00 per share up to 2.5 million shares of New Preferred Stock which the Company's shareholders do not purchase in the Rights Offering. If not less than 2.5 million shares become available for purchase by the New Investors, their total purchase price for the 2.5 million shares will be $30 million. Pursuant to the terms of the Stock Purchase Agreement, the New Investors have the right to purchase up to 1,181,996 shares of New Preferred Stock (the "Option Shares"). The Option Shares may be purchased at any time prior to the closing of the Transaction (as hereinafter defined) and may be purchased even if shareholder approval of the Rights Offering and Charter Amendments (as hereinafter defined) is not obtained. The Company will not be required to issue in connection with the Stock Purchase Agreement (including the Option Shares) and the Rights Offering more than 4,166,667 shares of New Preferred Stock, or a total sale of up to $50,000,004 (the "$50 Million Limit") to the New Investors and to shareholders who exercise their purchase rights under the Rights Offering. This limitation affects only the purchase rights of the New Investors. Each of the Company's shareholders who is issued Rights under this Rights Offering may exercise all Rights so received, except for those shareholders who have agreed not to exercise their Rights as described in the following paragraphs. Concurrently with the Stock Purchase Agreement, the Company and certain of its substantial shareholders, including the New Investors, and the Related Marks Shareholders (as hereinafter defined) entered into a Shareholders Agreement (the "Shareholders Agreement") whereby certain substantial holders of the Company's stock, including members of the Wolcott and Kayser families who control the Company, agreed that they would not exercise, sell or otherwise transfer the Rights to which they were entitled pursuant to the terms of the Rights Offering and will vote all of their voting securities in favor of the Transaction (as hereinafter defined) in any shareholder vote of the Company. In a separate agreement, - 6 - <PAGE> Pillsbury has also agreed that it will not exercise, sell or otherwise transfer the Rights to which it is entitled pursuant to the terms of the Rights Offering and that it will vote all of its voting securities in favor of the Transaction (as hereinafter defined) in any shareholder vote of the Company (the "Pillsbury Agreement"). The Stock Purchase Agreement (including the purchase of the Option Shares by the New Investors), Shareholders Agreement and the Rights Offering are sometimes collectively referred to herein as the "Transaction." Inasmuch as certain of the Company's shareholders have agreed not to exercise, sell or otherwise transfer their Rights distributed on their present holdings of 1,620,747 shares of Common Stock pursuant to the Shareholders Agreement and the Pillsbury Agreement, the New Investors are assured of acquiring not less than 1,977,041 shares of New Preferred Stock in the Transaction, and, subject to the $50 Million Limit, may purchase additional shares of New Preferred Stock. Assuming none of the Company's shareholders exercise their Rights, the New Investors will be entitled to purchase 3.667 million shares of New Preferred Stock which if immediately converted into 3.667 million shares of Class A Common Stock would give the New Investors ownership of 4.6% of the voting power of the Company. The combined voting power of the New Investors and the Related Marks Shareholders in the election of directors will be 16.6% (assuming conversion of the New Preferred Stock into Class A Common Stock). The consummation of the Transaction results in significant participation by the New Investors in the governance of the Company. The number of directors comprising the Company's Board of Directors will be increased from seven to nine members, with the two new positions being filled by designees of the New Investors (the "Investor Designees"). The Investor Designees will continue to be nominated for election to the Board and shareholders who executed the Shareholders Agreement will continue to vote for the Investor Designees until the Stock Purchase Agreement is terminated or such time as the New Investors no longer own, in the aggregate, at least 10% of the Class A Common Stock (assuming conversion of all shares of the New Preferred Stock into Class A Common Stock). The Shareholders Agreement also requires that the Investor Designees will comprise at least 22% of any committee of the Board of Directors. The New Investors also required as a condition to consummation of the Transaction, that the Company's Restated Certificate of Incorporation, as amended (the "Charter") be amended to require unanimous approval of the Company's Board of Directors (excluding directors who choose to abstain) for certain defined "major corporate actions", including (i) any amendment or modification to the Company's Charter or Bylaws (as hereinafter defined); (ii) any business combination; (iii) any sale or transfer of all or substantially all of the assets of the Company; (iv) certain issuances of securities; (v) any acquisitions or dispositions of assets involving gross consideration in excess of $15 million; (vi) certain changes in the Company's line of business; (vii) any change in the Company's certified public accountants; (viii) the settlement of certain litigation; or (ix) the commencement by the Company of proceedings relating to bankruptcy, insolvency, reorganization or relief of debtors. A shareholder who votes in favor of the Rights Offering is not --- obligated to exercise the Rights and purchase shares of New Preferred Stock if the Rights Offering is approved. When the Rights are issued, each shareholder may decide at that time whether to exercise the Rights which that shareholder receives. The Charter Amendments. To accomplish the intent of the Transaction, the Company will amend its Charter by filing a Certificate of Amendment (the "Certificate of Amendment") which will: (i) increase the number - 7 - <PAGE> of authorized shares of Class A Common Stock from 10,000,000 shares to 20,000,000 shares; (ii) increase the number of authorized shares of Preferred Stock with $0.025 par value per share, Class A from 4,000,000 shares to 8,200,000 shares; (iii) create a new series of Preferred Stock with $0.025 par value per share, Class A to be designated as Convertible Participating Preferred Stock, $0.025 par value per share, convertible immediately into shares of Class A Common Stock of the Company; (iv) require unanimous approval of the Company's Board of Directors to authorize certain Major Corporate Actions (as hereinafter defined); and (v) amend Article 4, paragraph (a)(C) to remove from operation of the Class A Special Rights (as hereinafter defined) provisions, the acquisition by the New Investors of the shares of Class A Common Stock issuable upon conversion of the New Preferred Stock acquired by the New Investors in the Transaction. See "Description of Capital Stock--Description of Class A Common Stock and Class B Common Stock--Class A Special Rights." The Reason For The Transaction. For reasons described below (see "Risk Factors--High Ratio of Debt to Equity"), the Company has concluded that its level of debt should be reduced in the amount of between $44 million and $50 million. At March 31, 1998, the close of its fiscal year, the Company was in violation of certain financial covenants in its agreements with its short and long-term lenders. See "Risk Factors--Defaults as to Certain Loan Covenants." The purpose of the Transaction is to apply the net proceeds of the Transaction to reduce the Company's indebtedness. See "Use Of Proceeds." - 8 - <PAGE>
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diff --git a/parsed_sections/prospectus_summary/2005/CE_celanese_prospectus_summary.txt b/parsed_sections/prospectus_summary/2005/CE_celanese_prospectus_summary.txt
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+Prospectus Summary 1 Risk Factors 14 Special Note Regarding Forward-Looking Statements 33 The Transactions 35 The Recent Restructuring 42 The Recent Financings 46 Use of Proceeds 47 Price Range of Common Stock 47 Dividend Policy 47 Capitalization 49 Unaudited Pro Forma Financial Information 50 Selected Historical Financial Data 58 Management's Discussion and Analysis of Financial Condition and Results of Operations 60 Industry Overview 133 Business 138 Management 171 Principal and Selling Stockholders 184 Certain Relationships and Related Party Transactions 187 Description of Indebtedness 191 Description of Capital Stock 198 Description of Convertible Perpetual Preferred Stock 203 Shares Eligible for Future Sales 206 Certain United States Federal Income and Estate Tax Consequences to non-U.S. Holders 208 Plan of Distribution 211 Validity of the Shares 213 Experts 213 Where You Can Find Additional Information 214 Index to Consolidated Financial Statements F-1 You should rely only on the information contained in this prospectus. None of the Issuer nor its subsidiaries has authorized anyone to provide you with information different from that contained in this prospectus. The prospectus may be used only for the purposes for which it has been published and no person has been authorized to give any information not contained in this prospectus. If you receive any other information, you should not rely on it. The Issuer is not making an offer of these securities in any state where the offer is not permitted. PROSPECTUS SUMMARY This summary highlights selected information in this prospectus, but it may not contain all of the information that you should consider before deciding to invest in our stock. You should read this entire prospectus carefully, including the
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diff --git a/parsed_sections/prospectus_summary/2005/CIK0000793044_ckx-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2005/CIK0000793044_ckx-inc_prospectus_summary.txt
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+PROSPECTUS SUMMARY On February 7, 2005, a management group led by Robert F. X. Sillerman acquired control of our company, which had been inactive since it sold all of its assets in August 2002. Information about our company in this prospectus reflects the completion of that transaction, our acquisition of a controlling interest in the entities which own and/or control certain content relating to Elvis Presley, as well as our acquisition of 19 Entertainment Limited, the creator and co-producer of the American Idol series in the United States. For more information related to these transactions, please see "Business" beginning on page 75. For information related to our company's business and operations prior to February 7, 2005, please see "Certain Information Relating to Our Company Prior to Recent Transactions" beginning on page 116. This summary highlights selected information contained elsewhere in this prospectus. It does not contain all of the information that may be important to you. You should read the following summary together with the more detailed information regarding our company, the common stock being sold in this offering and our consolidated and combined financial statements, including the notes to those statements, appearing elsewhere in this prospectus. Except where the context requires otherwise, in this prospectus the terms "company," "CKX," "we," "us" and "our" refer to CKX, Inc., and, where appropriate, its subsidiaries. Except as otherwise noted, all information in this prospectus is based on the assumption that the underwriters do not exercise their over-allotment option. You should carefully consider all information in this prospectus, including the matters discussed in "Risk Factors" beginning on page 13. CKX, INC. Our Business We are engaged in the ownership, development and commercial utilization of entertainment content. To date, we have focused on acquiring globally recognized entertainment content and related assets, including the rights to the name, image and likeness of Elvis Presley (1935 1977), the operations of Graceland and proprietary rights to the IDOLS television brand, including the American Idol series in the United States (which first aired in June 2002 and completed its fourth series in May 2005), the Pop Idol series in the United Kingdom (which first aired in October 2001 and completed its second series in December 2003) and local adaptations of the IDOLS television show format which, collectively, air in over 30 countries around the world. We plan to continue to make strategic acquisitions of, or partner or align with, companies or individuals that control various forms of established entertainment content, which may include intellectual property rights in music, film, television programming, written works and characters, rights to names, images and likenesses, video games, corporate brands and other related assets. We believe our corporate management team and our existing infrastructure will enhance and expand commercial opportunities for existing content and enable the companies we acquire or individuals with whom we partner or align to more effectively develop, acquire, license, market and promote content. As new technologies emerge and are adopted by consumers, we believe that new modes of distribution of entertainment content will enable consumers to more easily and readily consume content when, where and how they choose. We believe that the ability of consumers to exert greater control over the timing and method of content consumption will increase demand for entertainment content generally and, correspondingly, will increase the value of our globally recognized entertainment properties. We plan to strategically deploy capital in ways which we believe will allow us and our partners to gain or retain greater control over the assets which we and they create and to challenge the existing economic relationship between owners and distributors of content. We do not intend to make significant investments in new technologies, as we believe our ownership, development and control of entertainment content will become more valuable, regardless of which distribution technologies are adopted by consumers. Net cash inflow from returns on investments and servicing of finance 46 30 Taxation (3,069 ) (485 ) Capital expenditure and financial investment Payment to acquire tangible fixed assets (198 ) (406 ) Sale of tangible fixed assets Our existing properties have generated recurring revenues across multiple entertainment platforms, including music, film and television; sponsorship, licensing and merchandising; artist management; themed attractions and touring/live events. We are in active discussions with companies and individuals that control other popular entertainment content. We believe our recent acquisitions, together with the infrastructure our senior management has built and continues to develop, will support the anticipated growth of our business and enable us to effectively manage the content we already own and additional content we develop or acquire in the future. Our Strengths We believe the following are our key competitive and business strengths. Strong Management Team. The members of our senior corporate management group, including Robert F.X. Sillerman, Michael G. Ferrel, Mitchell J. Slater, Howard J. Tytel and Thomas P. Benson, have worked in the media and entertainment business for an average of 25 years, including almost ten years together as a management team. They previously built, managed, and sold five public companies, the most recent of which was SFX Entertainment, Inc. These companies, in the aggregate, raised over $4.7 billion of capital through external financings and consummated and integrated over 50 acquisitions. Our senior corporate management team has, at prior companies, identified and realized synergies among unique and diverse businesses and has demonstrated its ability to acquire and integrate these businesses to capitalize on and enhance their combined value. Creative and Experienced Managers of Content. Simon Fuller, the Chief Executive Officer of our recently acquired 19 Entertainment subsidiary and a key member of our management team, has been the driving force behind the creation, development and marketing of multiple globally successful entertainment properties, including the Spice Girls, S Club 7 and, most recently, the IDOLS television show format. Since founding 19 Entertainment in 1985, Mr. Fuller's accomplishments include launching and managing artists, songwriters and producers who have had more than 100 number one albums and 80 number one singles in the United States and United Kingdom. Mr. Fuller also helped launch the television show format behind, and co-executive produces, American Idol, which was the most watched regularly scheduled prime time television program in the United States for the most recently completed television season, according to Nielsen Media Research. In addition to continuing to oversee the operations of 19 Entertainment and its subsidiaries, Mr. Fuller will play a key role in planning and implementing our company's overall creative direction. Jack Soden and Gary Hovey, the Chief Executive Officer and Executive Vice President, respectively, of our Elvis Presley Enterprises, Inc. subsidiary, has each built a strong reputation in his field and contributed to the preservation and enhancement of the popular public image of Elvis Presley. Mr. Soden has managed the operations of Graceland and its related properties, as well as licensing and marketing activities, since Elvis Presley Enterprises was formed in 1981. Mr. Hovey has managed the administration of Elvis' recorded music, music publishing, film and television interests since 1990. Messrs. Soden and Hovey will continue to oversee the operations of the Presley business. Each of Messrs. Fuller, Soden and Hovey has entered into a long-term employment agreement with our company. See "Management Executive Officer Employment Agreements." Globally Recognized Content. The entertainment content we have acquired to date, including, most notably, the rights to the name, image and likeness of Elvis Presley and the IDOLS television show format, has a proven history of generating recurring revenues across multiple platforms. Elvis is the best-selling solo musical recording artist in U.S. history, having sold more than one billion albums and singles worldwide and having set records for the most albums and singles that have been certified Gold and Platinum by the Recording Industry Association of America (RIAA). In each of the past four years, Forbes Magazine has listed Elvis as the top earning deceased celebrity. During that time, REVENUES Trade debtors 3,776 2,562 Other debtors including taxation and social security 654 2,860 Prepayments and accrued income 14,114 9,255 Deferred tax (see note 16) 24 13 Other Revenues Trade debtors 1,883 3,776 Other debtors including taxation and social security 3,413 654 Prepayments and accrued income 5,083 14,114 Deferred tax 67 24 Other UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 more than eleven million Elvis albums have been sold worldwide and an average of approximately 571,000 people have visited Graceland annually. Adaptations of the IDOLS television show format have been broadcast in over 30 countries around the world and have set notable viewership records in the United States, the United Kingdom, Finland, Germany, the Netherlands, Australia and New Zealand, among other markets. Every American Idol winner to date has produced a number one album or single (as measured by Nielsen SoundScan) and winners and finalists have collectively sold over 18 million albums and singles in the United States alone. Access to New Content and Acquisition Opportunities. We believe that the combination of our management's broad network of relationships in the entertainment industry and the array of globally recognized entertainment content we already own, provides us with a competitive advantage in accessing potential strategic acquisitions and partnerships. In addition, we believe our management's reputation and successful track record have encouraged and will continue to encourage potential partners and sellers of content, including those who might not have previously been willing to consider transaction opportunities, to initiate contact with us regarding partnerships and other transactions. Established and Extensive Infrastructure. We believe our recent acquisitions, together with the infrastructure our senior management has built and continues to develop, will allow us to manage and enhance the value of additional companies and content we may acquire. We currently possess in-house capabilities to provide multiple and comprehensive services designed to maximize the brand sustainability and profitability of our talent and content worldwide, including creative development, television production, music recording and publishing, royalty accounting, artist and brand management, touring and live events promotion, licensing and merchandising, and sponsorship sales. With offices in New York, Los Angeles, Memphis, London, Paris and Hamburg, our geographic breadth will help us manage our anticipated growth as we acquire additional assets in the future. Our Business Strategy We intend to leverage our strengths to pursue the growth of our business by utilizing the following strategies. Acquire/Partner with Valuable Content. We plan to make strategic acquisitions of, or partner or align with, individuals or companies that control various forms of entertainment content which could offer multiple revenue opportunities across various entertainment platforms and distribution channels. In some instances, we will seek to acquire control of, or work with partners to enhance, existing content. In other cases, we will seek transaction opportunities with entities or individuals that we believe will allow us and them to create and develop new content. Capitalize on Recognition of Existing Properties. We believe the global recognition of our existing content, including the name, image and likeness of Elvis Presley, the IDOLS television show format and our joint venture with David Beckham, a globally recognized celebrity athlete, and Victoria Beckham, a fashion and lifestyle personality whose career Mr. Fuller managed as a member of the Spice Girls and now manages, will provide us with numerous opportunities for substantial growth through new and diverse projects. For example, we intend to license the "Presley" and "Graceland" names for use at Elvis-related attractions or venues in Las Vegas and other strategic locations throughout the world, including in Asia, the Middle East and Europe. We have engaged Bear, Stearns & Co. Inc. to act as our advisor in identifying potential partners for our participation in or development of Elvis-related casino gaming and/or themed venue projects. Diversify and Broaden Revenue Opportunities. We intend to capitalize on our existing infrastructure and experience across various entertainment platforms and distribution channels to develop additional revenue opportunities for content we currently control or may develop or acquire in the future. We currently have important strategic relationships with sponsors, licensees, merchandisers, promotional Amendment No. 3 to Form S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 and other partners who enhance the consumer awareness and revenue producing potential of our content. We plan to utilize our global capabilities for television production, music publishing, merchandising, live touring, licensing, creative development, royalty accounting, music recording and sponsorship sales to develop revenue opportunities across various entertainment platforms and distribution channels for each of our company's artists under management and our content. Capitalize on Technological Advancements. Distribution models based upon actively marketing and advertising pre-packaged content to consumers are being displaced by consumers' desire and ability to actively seek out and access content and to determine the timing and method of its consumption. As personalized channels of distribution become more prevalent, we believe the demand for and value of popular, high-quality content will increase. While we do not intend to make significant investments in content distribution technologies, we are positioning our company and our content to capitalize on whichever new distribution technologies prevail in the marketplace and are broadly adopted by consumers, including broadband Internet access, satellite/digital cable television, digital video recorders, satellite radio, cellular telephones/personal digital assistants and other devices that support digitally distributed content. Presley Acquisition On February 7, 2005, we acquired an 85% interest in the entities which own and/or control the commercial utilization of the name, image and likeness of Elvis Presley, the operation of the Graceland museum and related attractions, as well as revenue derived from Elvis Presley's television specials, films and certain of his recorded musical works. We decided to launch our content-focused strategy with the acquisition of the Presley business primarily because Elvis Presley is a global icon, the Presley business has proven itself both successful and profitable and because we believe there is potential to significantly enhance and expand the "Elvis" presence both in the United States and throughout the world. The Presley business consists primarily of two components: first, intellectual property, including the licensing of the name, image, likeness and trademarks associated with Elvis Presley, as well as other owned and/or controlled intellectual property and the collection of royalties from certain motion pictures, television specials and recorded musical works and music compositions; and second, the operation of the Graceland museum and related attractions and retail establishments, including Elvis Presley's Heartbreak Hotel and other ancillary real estate assets. We believe the name, image and likeness of Elvis Presley, as well as related intellectual property assets, are prime examples of the type of content that offers opportunities to generate increased revenues from diverse platforms and distribution channels. While, to date, the Presley business has been successful in accomplishing its primary goal of protecting and preserving the legacy of Elvis Presley, we believe there is a significant opportunity to further enhance the image of Elvis Presley and develop commercial opportunities for the Presley business. For example, we, together with our advisor Bear, Stearns & Co. Inc., are exploring opportunities to bring Elvis-related attractions and/or themed venues to Las Vegas and other strategic locations throughout the world, including Asia, the Middle East and Europe. We are committed to preserving the integrity of the Elvis legacy and to judiciously selecting future commercial opportunities. We have provided for a close and continuing relationship with Lisa Marie Presley and Priscilla Presley. Lisa Marie Presley has retained a 15% interest in the Presley business and is a stockholder in our company. Priscilla Presley is a director of our company and has been engaged as a consultant, under a ten-year consulting agreement. 19 Entertainment Acquisition On March 17, 2005, we acquired 19 Entertainment Limited and entered into a long-term employment agreement with Simon Fuller, its founder and the creative force behind its most successful Film and Television 30 % Music 28 % Sponsorship and Merchandising 18 % Touring 20 % Management Total current tax 3,345 3,029 1,177 Deferred tax Timing differences, origination and reversal (25 ) (11 ) 2 Adjustments in respect of prior periods 3 11 projects. In addition to continuing to oversee the operations of 19 Entertainment and its subsidiaries, Mr. Fuller will play a key role in planning and implementing our overall creative direction. 19 Entertainment, based in the United Kingdom, is a leading creator, producer and promoter of entertainment properties. Since forming 19 Entertainment in 1985, Mr. Fuller has been instrumental in creating, developing and marketing multiple globally successful and profitable entertainment properties, including the Spice Girls, S Club 7 and, most recently, the IDOLS television show format. Each of these was conceived as a multi-platform entertainment property and has experienced substantial success on a worldwide basis, generating multiple revenue streams, including recorded music, music publishing, television, film, merchandising, sponsorship, artist management and promotion. Mr. Fuller's and 19 Entertainment's success is further evidenced by the following: The American Idol series produced the highest rated night of entertainment programming in the Fox television network's history. The recently completed fourth season of the American Idol series averaged over 27 million viewers per episode, making it the season's most watched regularly scheduled prime time television program in the United States, according to Nielsen Media Research. The Pop Idol series in the United Kingdom was awarded the 2002 Golden Rose of Montreux as Europe's top television show. The Spice Girls music group, launched and initially managed by 19 Entertainment, sold over 40 million albums worldwide between 1996 and 2000, generated multiple global sponsorship deals, performed live concerts in 17 countries and starred in a major motion picture that generated $77.5 million in global box office sales. 19 Entertainment was instrumental in producing, developing and marketing the S Club 7 platform, which debuted as a scripted television show and subsequently produced four television series which, to date, have aired in more than 100 countries. The show also established a fan base for the teen pop band S Club 7 which, to date, has sold over 10 million albums and singles worldwide. Artists, songwriters and producers managed by 19 Entertainment have had more than 80 albums and over 100 singles that have attained number one rankings in the United States and United Kingdom. Artists, songwriters and producers managed or represented by 19 Entertainment have also been awarded an Academy Award , a Golden Globe award, an Ivor Novello award and multiple Grammy awards. 19 Entertainment strategically develops and retains an ownership interest in content specifically tailored for distribution across various entertainment platforms in order to capitalize on multiple revenue opportunities. For example, the IDOLS television show was designed to serve as a platform for identifying and validating new talent with proven popularity among mass audiences. In the final competition of American Idol's third broadcast season, over 65 million votes were cast by viewers via telephone and instant text-messaging. The debut album of American Idol's third season winner, Fantasia Barrino, was certified Platinum with over one million units in sales. We believe this demonstrates that the IDOLS television show format is an effective means of identifying and launching successful new artists with less economic risk than is typical in the music industry. Recently, 19 Entertainment entered into a joint venture with David Beckham and Victoria Beckham. We believe this relationship with the Beckhams creates an ideal opportunity to develop and share in new and valuable content and relationships, each offering multiple revenue opportunities across various entertainment platforms and distribution channels. We recently announced plans for The David Beckham Academy, which will be developed in partnership with Anschutz Entertainment Group and will offer soccer training facilities and programs for children of all skill levels. The first facility will be located in London and a sister academy is scheduled to open in Los Angeles in early 2006. Film and Television $ 48,479 57 % $ 23,547 30 % Music 14,571 17 % 20,916 27 % Touring 10,436 12 % 15,514 20 % Sponsorship and Merchandising 9,019 11 % 13,496 18 % Management 2,311 3 % 3,799 650 Madison Avenue New York, New York 10022 (212) 838-3100 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) Our principal executive offices are located at 650 Madison Avenue, New York, New York 10022 and our telephone number is (212) 838-3100. We maintain a website at www.ckx.com. The information contained on our website is not incorporated by reference and does not constitute a part of this prospectus. Trademarks registered in the United States which we own or co-own include American Idol (registered for certain limited applications, including television shows based on the IDOLS brand), S Club 7 , Elvis , Elvis Presley , Graceland and Heartbreak Hotel . Unregistered trademarks and trademarks for which registration applications have been filed, which we own or co-own include Pop Idol , Ruben Studdard , Clay Aiken , Will Young , Fantasia Barrino , Kelly Clarkson , Justin Guarini , Carrie Underwood , Bo Bice , All American Girl and I Dream . All other trademarks, trade names and service marks appearing in this prospectus are the property of their respective owners. Licensing Fees and Royalties $ 12,575 29 % $ 12,862 29 % $ 13,506 32 % Tour and Exhibit 10,297 24 % 10,699 24 % 11,129 27 % Graceland Retail 15,188 35 % 15,088 34 % 11,133 27 % Hotel Room Revenues 3,169 7 % 3,318 8 % 3,294 8 % Apartment Rent and Other 2,415 5 % 2,409 5 % 2,596 OPERATING PROFIT 3 10,104 9,615 3,518 Interest receivable 5 54 18 68 Interest payable and similar charges 1,380 1,154 Currents assets Stocks 5 5,128 4,634 Debtors Mr. Robert F.X. Sillerman Chairman and Chief Executive Officer CKX, Inc. 650 Madison Avenue New York, New York 10022 (212) 838-3100 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) Except as otherwise noted, the number of shares to be outstanding after this offering excludes: 5,051,596 shares of common stock issuable upon the exercise of currently exercisable outstanding warrants at a weighted average exercise price of $2.79 per share, of which 4,551,596 expire on February 7, 2007 and 500,000 expire on February 7, 2008; 1,491,818 shares of common stock issuable upon the conversion of outstanding shares of preferred stock, all of which were convertible as of June 20, 2005; 3,958,000 shares of common stock reserved for future issuances under our 2005 Omnibus Long-Term Incentive Compensation Plan; and 2,250,000 shares of common stock issuable upon the exercise of the underwriters' over-allotment option. PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION 10,117 9,587 3,572 Tax charge on profit on ordinary activities Current tax Corporation tax 3,412 3,057 1,170 Adjustment in respect of prior years (67 ) (28 ) 18,212 25,659 Creditors: amounts falling due within one year Copies to: Alan I. Annex, Esq. Greenberg Traurig, LLP 200 Park Avenue New York, New York 10166 (212) 801-9200 Marc D. Jaffe, Esq. Latham & Watkins LLP 885 Third Avenue New York, New York 10022 (212) 906-1200 SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA Prior to the acquisition of control of our company by a management group led by Robert F.X. Sillerman and our acquisition of the Presley business, each of which occurred on February 7, 2005, our company was a non-operating publicly traded shell company. The following summary historical data was derived from the financial statements of our company, the Presley business and 19 Entertainment appearing elsewhere in this prospectus and should be read in conjunction with our Consolidated Financial Statements and Notes thereto and the Presley business' Combined Financial Statements and Notes thereto and the 19 Entertainment Consolidated Financial Statements and Notes thereto, included elsewhere in this prospectus, as well as the information appearing in "Unaudited Pro Forma Condensed Combined Financial Information," "Selected Historical Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The following tables set forth certain summary historical financial and operating data for each of: our company; the Presley business; and 19 Entertainment. The tables also set forth summary pro forma financial and operating data of our company for the year ended December 31, 2004 and for the three months ended March 31, 2005, giving effect to certain transactions, including the acquisition of control of our company by a management group led by Robert F.X. Sillerman, the investment in our company by The Huff Alternative Fund, L.P. and its affiliate (and the subsequent conversion of their Series A Convertible Redeemable Preferred Stock into shares of common stock), the Presley short term senior loan, the 19 Entertainment short term senior loan, the exercise of certain warrants on February 7 and March 15, 2005, our acquisitions of the Presley business and 19 Entertainment as well as this offering (and the application of the proceeds therefrom), as if each of the foregoing had occurred on January 1, 2004. The summary pro forma financial and operating data does not reflect any shares that may be issued pursuant to the exercise of the underwriters' over-allotment option. PROFIT FOR THE FINANCIAL YEAR 6,794 6,558 2,389 Dividends UK corporation tax at 30% 3,035 2,876 1,072 Expenses not deductible for tax purposes 119 200 79 Capital allowances in excess of depreciation 28 (18 ) (2 ) Chargeable gains 13 Overseas tax rate differences 180 Overseas losses utilised 14 Overseas tax losses carried forward 30 Prior period adjustments (67 ) (29 ) 7 Other 6 Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. (a)See "Unaudited Pro Forma Condensed Combined Financial Information." (b)Reflects corporate expenses, including the impact of a lease agreement for corporate office space as well as salaries and benefits for new corporate employees. We also estimate that we will incur approximately $2.1 million of additional annual corporate overhead costs for which we have no contractual commitments. These costs include incremental annual audit and legal costs (above that of a public company with no operating assets), costs to comply with the Sarbanes-Oxley Act of If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If delivery of the Prospectus is expected to be made pursuant to Rule 434, please check the following box. Bank interest on overdraft 12 13 14 Bank charges 27 23 Other 2 As of 1 July 10 As of 30 June (12 ) Net deferred tax (assets)/liabilities on accerated capital allowances (12 ) Operating profit 10,104 9,615 3,518 Depreciation and amortization 265 250 110 Increase in debtors (3,880 ) (9,453 ) (2,499 ) (Decrease)/increase in creditors (1,911 ) 5,221 (1,120 ) (Increase)/decrease in stocks (2,897 ) 32 (541 ) Increase in provisions 12 66 Net cash inflow/(outflow) before financing and increase/(decrease) in net cash in the period CALCULATION OF REGISTRATION FEE (a)The Presley business' summary historical financial data presents amounts at 100% of the Presley business' operating results. We own an 85% interest in the Presley business. (b)All of the historical debt was repaid or defeased upon our acquisition of the Presley business on February 7, 2005. FIXED ASSETS Intangible assets 9 112 126 Tangible assets 10 1,042 925 Investments The average number of employees (including directors) were: Number of distribution staff 74 59 45 Number of administrative staff 37 20 Title of Each Class of Securities to be Registered Amount to be Registered Proposed Maximum Offering Price Per Share Proposed Maximum Aggregate Offering Price(1)(2) Amount of Registration Fee(1)(2)(3) (a)The historical data presented for 19 Entertainment is reflected as converted from UK to US generally accepted accounting principles (GAAP) and translated from U.K. pounds sterling ( ) to U.S. dollars ($). For additional information, see "Selected Historical Financial Data." (b)19 Entertainment's business is seasonal and the results for the six months ended December 31, 2003 and 2004 are not necessarily indicative of full year results. Current tax Corporation tax 174 (864 ) Deferred tax Timing differences, origination and reversal 67 Common Stock, $.01 par value per share $422,625,000 $49,742.96
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diff --git a/parsed_sections/prospectus_summary/2005/CIK0000877931_vertical_prospectus_summary.txt b/parsed_sections/prospectus_summary/2005/CIK0000877931_vertical_prospectus_summary.txt
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+highlights information contained elsewhere in this prospectus. This summary is not complete and does not contain all of the information you should consider before investing in our common stock. You should carefully read the entire prospectus, including Risk Factors and our financial statements and related notes, before you decide whether to invest in our common stock. References to we, our, our company or Artisoft refer to Artisoft, Inc. and its subsidiaries. Our Company We develop, market and sell business phone systems software, hardware and associated services. We sell our products through distributors, resellers and system integrators such as AT&T, Fujitsu, IBM and Scansource, and we engage in alliances with those parties and other technology vendors to assist us in selling and marketing our products. Most of our end user customers rely upon resellers or systems integrators to implement our products, and these resellers and systems integrators can significantly influence our customers purchasing decisions. We market and sell our products in the United States, Europe and Latin America. We also have distributor relationships in Africa, Asia, Australia and Middle East. We were formed in 1982 and reincorporated by merger in Delaware in July 1991. We manufactured network interface cards and certain other communication devices until the year ended June 30, 1998. From the year ended June 30, 1996 to the year ended June 30, 1998, we were engaged in the design, development, sales and support of business communications software, including Visual Voice, a computer telephony development toolkit, and LANtastic, a local area network peer-to-peer operating system. Since March 1998, our company has focused on the development of computer telephony products and associated services. We sold our Visual Voice product line in December 1999, and we formally ended our affiliation with Visual Voice in July 2000. In June 2000, we sold our communications software group, which ended our involvement in the LANtastic product line. Since June 2000, we have focused on business phone systems, initially with the software-based phone system, TeleVantage. On September 28, 2004, we acquired substantially all of the assets, other than patents and patent rights, of Vertical Networks, Inc. We have also received a patent license for the use of all of Vertical Networks patents and patent applications other than Vertical Networks rights under specified patents that do not relate to the business we purchased. In addition, we assumed specific liabilities of Vertical Networks. As a result of the acquisition, we now offer our enterprise customers and dealer network the InstantOffice telephony system and associated software. The combination of these two IP-PBX providers created a company with more than 15 years of collective telephony experience. In January 2005, we began doing business as Vertical Communications, Inc., emphasizing the key vertical markets we serve. The acquisition was financed with a portion of the proceeds from a $27.5 million common stock financing also completed on September 28, 2004 and shortly thereafter, pursuant to which we sold a total of 24,159,468 shares of our common stock to several investors at a per share purchase price of $1.1386. In connection with the 2004 equity financing, the holders of all shares of our preferred stock converted those shares into common stock. On September 1, 2005, the United States Bankruptcy Court for the District of Delaware approved an asset purchase agreement by and among us, Comdial Corporation, a Delaware corporation, and Vertical Communications Acquisition Corporation, our wholly-owned subsidiary. Pursuant to this asset purchase agreement, we, through our subsidiary, acquired substantially all of Comdial s assets and assumed certain liabilities of Comdial, all as set forth in the asset purchase agreement. On September 28, 2005, we completed the acquisition of the Comdial assets. With the acquisition of the Comdial assets we have added three additional phone systems product lines to our product offerings. Capitalized software development costs, net $ 121 $ 37 $ Purchased technology, net 123 120 145 Recoverable security deposits 133 106 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Table of Contents Index to Financial Statements We financed the acquisition of the Comdial assets with the proceeds of a common stock financing completed pursuant to a stock purchase agreement entered into on September 28, 2005, between us and certain investors, together with amounts borrowed under a loan and security agreement, also entered into on September 28, 2005, by and among us, Silicon Valley Bank and our acquisition subsidiary. We also executed a promissory note in favor of Comdial in the original principal amount of $2,500,000. We acquired the Comdial assets principally for Comdial s customer relationships and dealer distribution network. In addition, its products and a team of telephony experts are expected to add value to our company, accelerate our growth and help us realize our vision faster. The combination of our company and the Comdial assets and personnel is expected to make us a significant player within the IP-PBX space, with the momentum to make a greater impact on the IP telephony market. With reported Comdial revenues of $39.6 million for the 12 months ended December 31, 2004, the addition of the Comdial assets more than doubles our size from a revenue perspective. We believe that dealers and customers will benefit from our larger combined research and development investment, which will accelerate the development and delivery of next-generation products. Likewise, we expect to benefit from larger consolidated marketing expenditures, which will allow us to launch more robust awareness and demand generation programs designed to raise our profile, increase the number of transactions we participate in, and improve our win rate. In addition, we believe that the combination of our historic products and our new Comdial products will create a more complete end-to-end product offering for customers. Corporate Information Our executive offices are located at One Memorial Drive, Cambridge, Massachusetts 02142 and our telephone number is 617.354.0600. Our website address is www.vertical.com. Information contained on our website does not constitute part of this prospectus. Stockholders equity: Common stock, $0.01 par value per share (50,000,000 shares authorized, actual; 45,777,309 shares issued and outstanding) 458 Additional paid-in capital 87,849 Accumulated other comprehensive income Form S-1 REGISTRATION STATEMENT Under THE SECURITIES ACT OF 1933 Table of Contents Index to Financial Statements The Offering Common stock offered by selling stockholders 46,997,154 shares Use of proceeds We will not receive any proceeds from the sale of common stock. However, upon exercise of the outstanding warrants, we will receive the exercise price of the warrants. As of the date of this prospectus, the per share exercise price of the outstanding warrants ranges from $0.01 to $2.85.
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diff --git a/parsed_sections/prospectus_summary/2005/CIK0000913665_terrestar_prospectus_summary.txt b/parsed_sections/prospectus_summary/2005/CIK0000913665_terrestar_prospectus_summary.txt
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+PROSPECTUS SUMMARY This summary outlines and highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including the "Risk Factors" section and the financial statements and related notes before you make an investment decision. Whenever we refer in this prospectus to "Motient," "the Company," "we," "us," or "our," we mean Motient Corporation, a Delaware Corporation, and, unless the context indicates otherwise, its predecessors and subsidiaries, including its majority owned subsidiary, TerreStar Networks Inc. Our Business Segments Motient owns, operates and develops two-way wireless communications businesses. We are currently developing a satellite communications service via our majority ownership of TerreStar Networks Inc., a development stage company in the process of building its first satellite. TerreStar was formerly a subsidiary of another satellite communications company, Mobile Satellite Ventures LP, or MSV, as it is commonly known. We own 49% of MSV, but do not have operating control of its business. In addition, we own and operate a two-way wireless data network (our DataTac network) which we use to provide our customers with two-way wireless data communication services, and we also have the capabilities to provide our customers with convenient and cost-effective access to other wireless data networks, such as the Sprint and Cingular networks. In September, 2005, we announced a transaction that would result in the consolidation of the ownership of MSV and TerreStar within Motient, thereby simplifying the ownership and governance of both and better enabling them to pursue more effectively their deployment of separate hybrid satellite and terrestrial based communications networks. We also announced that this transaction would likely lead to the spin-off of TerreStar as well. Our Satellite Communications Business - TerreStar On May 11, 2005, we acquired approximately an additional 13.4% ownership in TerreStar Networks, Inc. for a total ownership interest of 61% in, and operating control over TerreStar. Prior to that date, TerreStar was a subsidiary of MSV established to, among other things, develop a satellite communications system using frequencies in the 2 GHz frequency band that are part of what is often known as the "S-band." We acquired our ownership interest in TerreStar when, in conjunction with a spin-off of TerreStar to the owners of MSV, we purchased an additional $200 million of newly-issued TerreStar common stock. In conjunction with this transaction, TerreStar also received a perpetual, royalty-free license to utilize MSV's patent portfolio, including those patents related to "ancillary terrestrial component", or ATC, which we anticipate will allow us to deploy a communications network that seamlessly integrates satellite and terrestrial communications, giving a user ubiquitous wireless coverage across North America. By offering Mobile Satellite Service, or MSS, in the S-band in conjunction with ATC, TerreStar can effectively deploy a hybrid satellite and terrestrial wireless communications network. This network could, for instance, eventually allow a user to utilize a mobile device that would communicate with a traditional land-based wireless network when in range of that network, but communicate with a satellite when not in range of such a land-based network. These mobile devices could be used for a myriad of communications applications, including potentially voice, data and video services. TerreStar is currently in the process of building its first satellite pursuant to a construction contract with Space Systems/Loral, Inc. This satellite is scheduled to be completed in November 2007, with commercial operations scheduled to begin in 2008. Once launched, the satellite, with an antenna almost sixty feet across, will be able to communicate with terrestrial base stations and standard wireless devices. Our ability to offer these services depends on TerreStar's right to receive certain regulatory authorizations allowing it to provide MSS in the S-band. These authorizations are subject to various regulatory milestones relating to the construction, launch, and operational date of the satellite system required to provide this service. In order to use ATC, TerreStar will need to apply for authority with the FCC, which it has not yet done. For additional information regarding TerreStar, please see the financial statements of TerreStar beginning on page T-1. Our Terrestrial Wireless Business - Motient Communications Inc. We provide two-way, wireless data transmission services and wireless internet access on a nationwide basis through our wholly-owned subsidiary, Motient Communications Inc. Our customers can access several different wireless communications networks, including the wireless networks of Sprint, Cingular and our own DataTac network. We can also sell and support multiple software applications and communications devices for use on all of those wireless networks. Additionally, we can also design and manage various custom wireless applications our customers may need. In seeking to meet the wireless needs our customers, we have the ability to: o provide access to multiple wireless networks, including GPRS (Cingular), 1XRTT (Sprint), and our own proprietary DataTac network and integrate the access to those networks in a single, seamless solution; o support wireless data systems used by companies involved in data transmission and processing, so they can connect remote equipment, such as wireless point-of-sale terminals, with a central monitoring facility; o support mobile data and mobile management systems used by transportation and other companies so they can wirelessly coordinate remote, mobile assets and personnel; and o sell and support various two-way wireless internet services, including BlackBerry TM wireless email service, providing personal consumers and corporate customers with wireless access to a broad range of email and information services via our own DataTac wireless radio data network or via other GPRS or 1XRTT wireless radio data networks. Mobile Satellite Ventures We directly and indirectly own 49% of Mobile Satellite Ventures LP, or MSV, a provider of mobile satellite-based communications services. MSV uses two satellites to provide service, which allow customers access to satellite-based wireless data, voice, fax and dispatch radio services almost anywhere in North and Central America, northern South America, the Caribbean, Hawaii and in various coastal waters. MSV is also developing a next-generation system, a hybrid satellite/terrestrial wireless network over North America that MSV expects will utilize new satellites working with MSV's patented ATC technology. With access to over 28 MHz of L-band spectrum, MSV expects to be able to deploy terrestrial two-way radio network technology in thousands of locations across the United States, allowing subscribers to integrate satellite-based communications services with more traditional land-based wireless communications services. MSV is headquartered in Reston, VA, with an office in Ottawa, ON, Canada. MSV is structured as a limited partnership, of which Motient is one of the limited partners. Motient also holds a proportionate ownership interest in the corporate general partner. Motient has certain rights to appoint directors to the sole general partner of the limited partnership, but does not have any direct or indirect operating control over MSV. For additional information regarding MSV, please see the financial statements of MSV beginning on page M-1. Acquisition of MSV and TerreStar On September 22, 2005, we announced that we had entered into a non-binding letter of intent to consolidate the ownership of MSV and TerreStar within Motient. We anticipate that this transaction will, if consummated, simplify the ownership and governance of both MSV and TerreStar, better enabling both of them to more effectively pursue deployment of their separate hybrid satellite and terrestrial based communications networks. The networks will be able to provide ubiquitous wireless coverage in North America in the L-band and S-band, respectively. The letter of intent sets forth the basic terms of the proposed transaction, which include, among other things, (i) our issuance of approximately 93 million chares of our common stock in exchange for the MSV interests and TerreStar shares not already owned by us, (ii) a possible spin-off of TerreStar after the closing (the spin-off would be executed if it is judged by Motient's Board of Directors to be in the best interests of its stockholders following the closing), and (iii) the reconstitution of the boards of Motient, MSV and TerreStar with nine members mutually acceptable to the parties and in compliance with the independence rules and regulations of NASDAQ. The interests of MSV and TerreStar held by one of the owners, TMI Communications and Company, will not be transferred at the time of the closing. Instead, TMI would receive the right to exchange its interests in MSV and TerreStar at any time at the same exchange ratios that are being offered to the other shareholders and would subscribe for shares of a new class of Motient preferred stock with nominal economic value but having voting rights in Motient equivalent to those TMI would receive upon exchange of its MSV and TerreStar interests for Motient common stock. The consummation of the transaction will require successful completion of due diligence, negotiation and execution of definitive documentation, board and stockholder approval, and various regulatory approvals. Because the letter of intent is non-binding, the parties have no obligation to negotiate such documentation or otherwise consummate the transactions. Therefore, the transactions may not be consummated on the currently proposed terms or may never be consummated. Business Structure As of November 8, 2005, we have six wholly-owned subsidiaries, a 61% ownership interest in, and operating control of, TerreStar, and a 49% direct and indirect interest in MSV. Motient Communications Inc. owns the assets comprising Motient's terrestrial wireless business, except for Motient's Federal Communications Commission, or FCC, licenses, which are held in a separate subsidiary, Motient License Inc. TerreStar holds all of the satellite assets that Motient has operating control over. Motient's other subsidiaries have no material assets other than Motient's ownership interests in MSV and Motient's various subsidiaries. We are a Delaware corporation with our principal executive offices located at 300 Knightsbridge Parkway, Lincolnshire, Illinois 60069. Our telephone number is (847) 478-4200. TerreStar is headquartered in Reston, Virginia. You may find all of our public filings with the Securities and Exchange Commission in the "Investor Relations" section of our website, www.motient.com. THE OFFERING <TABLE> <S> <C> Common stock offered by the selling stockholders.................... 29,206,009 shares, including 3,638,960 shares underlying vested warrants Common stock outstanding as of November 8, 2005..................... 62,527,413 shares Series A preferred stock outstanding as of November 8, 2005......... 90,000 shares Series B preferred stock outstanding as of November 8, 2005......... 318,500 shares Use of proceeds..................................................... All of the net proceeds from the sale of the common stock covered by this prospectus will go to the selling stockholders who offer and sell shares of the common stock. We will not receive any proceeds from the sale of the common stock offered by the selling stockholders. Trading symbol...................................................... MNCP </TABLE> SUMMARY FINANCIAL DATA The following table summarizes our financial results as of and for the fiscal years ended December 31, 2000 through December 31, 2004. The consolidated balance sheet data and the consolidated statement of operations data as of December 31, 2000, 2001 and 2002 are derived from the consolidated financial statements of Motient, which were audited by Ehrenkrantz Sterling & Co. LLC, an independent registered public accounting firm. The consolidated balance sheet data and the consolidated statement of operations data as of December 31, 2003 and 2004 are derived from the consolidated financial statements of Motient, which were audited by Friedman LLP, successors-in-interest to Ehrenkrantz Sterling & Co. LLC, an independent registered public accounting firm. You should also read the section in this prospectus captioned "Selected Financial Data," our audited financial statements and their accompanying notes, and "Management's Discussion and Analysis of Financial Condition and Results of Operation," all of which are included elsewhere in this prospectus. The financial statements for certain historical periods have been restated to give effect to the accounting treatment with respect to transactions and certain additional financial statement adjustments discussed more fully in the notes to the consolidated financial statements. Motient's plan of reorganization in bankruptcy became effective on May 1, 2002. <TABLE> <CAPTION> Years Ended December 31, ------------------------------------------------------------------------------------ 2000 2001 2002 2003 2004 -------------- -------------- ------------- ------------ ------------- Income Statement Data: (dollars in thousands. except for per share data) ---------------------- <S> <C> <C> <C> <C> <C> Revenues $ 95,756 $ 90,265 $ 58,990 $ 54,485 $ 36,880 Net income (loss) before XM Radio preferred stock dividend and beneficial conversion charges (142,563) (269,497) 172,420 (62,122) (72,329) XM Radio preferred stock dividend and beneficial conversion charges -- -- 49,519 -- -- Net income (loss) attributable to Common Stockholders (192,082) (269,497) 172,420 (62,122) (72,329) Basic and diluted Income (loss) per common share $ (3.89) $ (5.27) $ 1.61 $ (2.47) $ (2.21) Dividends on Common Stock -- -- -- -- -- Consolidated Balance Sheet Data: Cash and Cash Equivalents $ 227,423 $ 33,387 $ 5,840 $ 3,618 $ 16,945 Property and Equipment, net 175,706 64,001 46,405 31,381 17,261 Total Assets 1,572,036 240,465 202,221 157,028 248,080 Current Liabilities 149,763 440,962 25,260 31,032 12,674 Long-Term Liabilities 753,376 30,652 33,913 33,189 675 Minority Interest 648,613 -- -- -- -- Stockholders' Equity (Deficit) $ 20,584 $ (231,149) $ 143,048 $ 92,807 $ 234,731 </TABLE>
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diff --git a/parsed_sections/prospectus_summary/2005/CIK0001076881_stentor_prospectus_summary.txt b/parsed_sections/prospectus_summary/2005/CIK0001076881_stentor_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read the following summary together with the entire prospectus, including the more detailed information in our consolidated financial statements and related notes appearing elsewhere in this prospectus. You should carefully consider, among other things, the matters discussed in
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diff --git a/parsed_sections/prospectus_summary/2005/CIK0001086795_team_prospectus_summary.txt b/parsed_sections/prospectus_summary/2005/CIK0001086795_team_prospectus_summary.txt
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+PROSPECTUS SUMMARY 1
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diff --git a/parsed_sections/prospectus_summary/2005/CIK0001138812_cotherix_prospectus_summary.txt b/parsed_sections/prospectus_summary/2005/CIK0001138812_cotherix_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read the entire prospectus carefully before deciding to invest in shares of our common stock. Overview We are a biopharmaceutical company focused on licensing, developing and commercializing therapeutic products for the treatment of cardiopulmonary and other chronic diseases. We began selling our product Ventavis (iloprost) Inhalation Solution in March 2005. The FDA approved Ventavis on December 29, 2004 for the treatment of pulmonary arterial hypertension, or PAH, for patients with New York Heart Association Class III or IV symptoms. PAH is a chronic, progressive and often fatal disease characterized by severe constriction of the blood vessels in the lungs that leads to very high pulmonary arterial pressure. In October 2003, we licensed the exclusive U.S. rights to Ventavis for the treatment of pulmonary hypertension from Schering AG, which markets Ventavis in various European countries and Australia. We have orphan drug exclusivity for the use of Ventavis in treating PAH through December 2011. Ventavis is an inhaled formulation of iloprost, a synthetic compound structurally similar to prostacyclins, which are naturally occurring molecules that cause the blood vessels to dilate. Ventavis is delivered to patients using an inhalation device. We believe Ventavis offers a number of advantages over other prostacyclin therapies for PAH, which are continuously delivered subcutaneously and intravenously. We believe these advantages include ease of administration and minimized invasiveness. We are conducting the following development activities to expand the commercial potential of Ventavis: Combination therapy with bosentan the STEP Trial. We completed and are continuing follow-up on a Phase II trial, called the STEP Trial, assessing combination therapy of Ventavis with Tracleer (bosentan), an approved oral treatment for PAH. In March 2005, we announced top-line data from this clinical trial indicating that patients who received the combination of Ventavis with bosentan tolerated the combination. The data also suggest that the combination provides clinical benefit in patients with PAH. In August 2005, the FDA approved the modification of the Ventavis label to include information regarding the tolerability and dosing of Ventavis in combination with bosentan. More portable hand-held delivery device. We assisted Profile Drug Delivery Ltd., or Profile, a wholly-owned subsidiary of Respironics, Inc., in its development of the I-neb device, a hand-held, battery-operated inhalation device. We believe the I-neb device will be more convenient than the commercially available Prodose device, also supplied by Profile. The FDA approved our supplemental new drug application, or sNDA, with respect to the administration of Ventavis using the I-neb device on August 24, 2005, and Profile received 510(k) clearance for the device on September 23, 2005. We believe the I-neb device will increase market adoption of Ventavis, thereby expanding our patient base and increasing the commercial potential of Ventavis. We anticipate the launch of the I-neb device by the end of 2005. Modification of I-neb device for shorter inhalation time. In the first half of 2006 we plan to initiate a clinical trial to evaluate the potential to deliver Ventavis more rapidly into the lungs using a modified I-neb device. If successful, we believe the delivery time of Ventavis could be reduced from the current 8 to 10 minutes per dose to 4 to 5 minutes per dose. Evaluation in patients with IPF and pulmonary hypertension the ACTIVE Trial. We initiated a Phase II clinical trial, known as the ACTIVE Trial, in June 2005 to evaluate the effectiveness of Ventavis in the treatment of patients with pulmonary hypertension associated with idiopathic pulmonary fibrosis, or IPF. IPF is a progressive and potentially fatal disease that results in fibrosis, or scarring, of the lungs. We believe that Ventavis could be an effective therapy for pulmonary hypertension in some of these patients. Due to slower-than-expected enrollment, we plan to modify the enrollment criteria of this trial. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents Index to Financial Statements Combination therapy with sildenafil the VISION Trial. In the first half of 2006 we plan to begin a pivotal clinical trial to evaluate the safety and efficacy of adding Ventavis to patients receiving sildenafil, an approved oral treatment for PAH. Extended-release formulation. We are in the early stages of working with Quadrant Drug Delivery Limited, or Quadrant, to develop an extended-release formulation of iloprost, the active ingredient in Ventavis, which could require as few as four single-breath inhalations a day. Business Strategy We intend to be a leading provider of therapeutic products for cardiopulmonary and other chronic diseases. The key elements of our strategy are to: Maximize the Commercial Potential of Ventavis. We intend to maximize the commercial potential of Ventavis through further clinical development and by improving the administration of Ventavis so it is more convenient for patients. License or Acquire Products and Product Candidates. We intend to continue to identify and license or acquire products or product candidates with a focus on cardiopulmonary and other chronic diseases. We have experience in identifying and evaluating strategic opportunities in multiple disease areas. In addition, we have substantial regulatory and clinical development experience. Furthermore, we believe we can leverage our sales and marketing organization to attract, obtain reimbursement for, and commercialize other products and product candidates. We are focused on products or product candidates that are both developmentally and commercially efficient. Establish Strategic Collaborations. We plan to continue to complement our internal capabilities by selectively forming collaborations to enhance our ability to develop and commercialize products. We have an experienced sales and marketing organization for the continued commercialization of Ventavis in the United States. We have deployed 30 people in the field, which includes professional sales representatives, medical science liaisons and reimbursement specialists. Our sales force targets approximately 1,500 pulmonary and cardiology specialists involved in treating most PAH patients. We estimate that 500 to 600 of these physicians treat approximately 80% of PAH patients. Our medical science liaisons continue to build awareness of Ventavis with PAH opinion leaders, physicians, nurses and patients to further expand the number of patients diagnosed and treated for PAH as well as increase the use of Ventavis. We have entered into agreements with Accredo Health Group, Inc., or Accredo, a Medco company, and Priority Healthcare Corporation, or Priority, pursuant to which each has been appointed as one of our specialty pharmacy distributors of Ventavis and the inhalation devices used to administer Ventavis. These specialty pharmacies provide services such as reimbursement assistance, patient education and patient counseling to monitor compliance. We believe these services help patients successfully use Ventavis. Accredo is our primary specialty pharmacy distributor and is the exclusive provider of call center support services for Ventavis. Cardinal Health PTS, LLC, or Cardinal Health, is the exclusive distribution agent to our specialty pharmacy distributors. Net cash provided by financing activities AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 The name CoTherix is our trademark. We have applied to register CoTherix and the CoTherix logo with the U.S. Patent and Trademark Office. We have an exclusive license in the United States with Schering AG, Germany to the trademark of Ventavis. Other service marks, trademarks and trade names referred to in this prospectus are the property of their respective owners. All references in this prospectus to Schering AG refer to Schering AG, Germany. You should rely only on information contained in this prospectus. We have not, and the underwriters have not, authorized anyone to provide you with information that is different. We are offering to sell and seeking offers to buy shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus. CoTherix, Inc. (Exact name of registrant as specified in its charter) Delaware 2836 04-3513144 (State or Other Jurisdiction of Incorporation or Organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 5000 Shoreline Court, Suite 101 South San Francisco, CA 94080 (650) 808-6500 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) Table of Contents Index to Financial Statements The Offering Common stock to be offered 4,000,000 shares Common stock to be offered by selling stockholders 500,000 shares Common stock to be outstanding after this offering 27,996,946 shares Use of proceeds For continued commercialization of Ventavis; additional development of Ventavis; licensing or acquiring and developing additional product candidates; and general corporate purposes. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders. See Use of Proceeds. The Nasdaq National Market symbol CTRX The number of shares of common stock to be outstanding after the closing of the offering is based on 23,996,946 shares of common stock outstanding as of September 15, 2005 and excludes: 3,584,490 shares of common stock issuable upon the exercise of options outstanding as of September 15, 2005 with a weighted average exercise price of $4.68 per share; an additional 245,129 shares of common stock reserved for future stock option grants and purchases under our 2004 Equity Incentive Plan; and an additional 431,973 shares of common stock reserved for issuance under our 2004 Employee Stock Purchase Plan. Except as otherwise indicated, all information in this prospectus assumes no exercise by the underwriters of their over-allotment option. Donald J. Santel Chief Executive Officer 5000 Shoreline Court, Suite 101 South San Francisco, CA 94080 (650) 808-6500 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: John W. Campbell, Esq. Jaclyn Liu, Esq. William W. Yeung, Esq. Jeremy N. Liegl, Esq. Morrison & Foerster LLP 425 Market Street San Francisco, CA 94107 (415) 268-7000 Laura A. Berezin, Esq. Cooley Godward LLP Five Palo Alto Square 3000 El Camino Real Palo Alto, CA 94306 (650) 843-5000 (unaudited) (in thousands) Balance Sheet Data Cash and cash equivalents and securities available-for-sale $ 55,330 $ 105,390 Working capital 54,221 104,281 Total assets 69,927 119,987 Accumulated deficit (73,472 ) (73,472 ) Total stockholders equity 63,916 113,976 The table above presents summary balance sheet data on an actual basis and on an as adjusted basis. The as adjusted numbers reflect the sale of 4,000,000 shares of our common stock at the assumed public offering price of $13.52 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement. Table of Contents Index to Financial Statements
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diff --git a/parsed_sections/prospectus_summary/2005/CIK0001139029_algorx_prospectus_summary.txt b/parsed_sections/prospectus_summary/2005/CIK0001139029_algorx_prospectus_summary.txt
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+PROSPECTUS SUMMARY You should read the following summary together with the entire prospectus, including the more detailed information in our financial statements and related notes appearing in the back of this prospectus. You should carefully consider, among other things, the matters discussed in Risk Factors. References in this prospectus to we, us and our refer to AlgoRx Pharmaceuticals, Inc. and its subsidiaries, unless the context requires otherwise. Our Business Overview We are an emerging pharmaceutical company focused on developing and commercializing a diversified portfolio of pharmaceutical product candidates to address pain, a large and under-served market. We have three product candidates that we are developing in four clinical programs and one preclinical program. Two of our product candidates are in late-stage clinical development, including ALGRX 3268 which is being evaluated in two phase III clinical trials. ALGRX 4975 (capsaicin for injection and capsaicin gel for intraoperative use) is being developed in three programs for pain: severe postsurgical pain, post-trauma neuropathic pain, a form of pain resulting from direct injury to nerves that remains long after traumatic injuries, and musculoskeletal pain, including osteoarthritis and tendonitis. In these programs, we have completed one phase I clinical trial and three phase II clinical trials. Our phase II clinical trials have yielded statistically significant improvements in pain scores and have provided us with favorable safety data. We are continuing to evaluate ALGRX 4975 in five phase II clinical trials across the three programs. ALGRX 3268, our most advanced product candidate, is a powder formulation of the local anesthetic lidocaine delivered into the skin using our proprietary needle-free dispenser. We are developing ALGRX 3268 to reduce the pain associated with needle-sticks from blood draws or intravenous line insertions in children. We have recently commenced two phase III clinical trials for ALGRX 3268. We recently in-licensed a third product candidate, ALGRX 1207, a new molecular entity in a new class of anesthetics that is undergoing preclinical development as a topical local anesthetic. We expect to file an investigational new drug application for ALGRX 1207 with the U.S. Food and Drug Administration in the second half of 2005. The Market Opportunity Pain management is a large, under-served market for which currently used therapies often provide insufficient efficacy or cause significant side effects. Even with these shortcomings, drugs that treat pain, known as analgesics, generated an estimated $28 billion of worldwide prescription sales in 2003 according to Global Industry Analysts, Inc. Several analgesics that were commercialized during the past decade have achieved high sales volume even though they generally represented only minor improvements over existing therapies and are often associated with patient and physician dissatisfaction. We believe there is a large market opportunity for analgesics that address the shortcomings of current therapies, which include: insufficient efficacy; lack of site specificity; occurrence of side effects; need for frequent dosing; slow onset of action; and potential to cause physical dependence. Table of Contents Our Product Candidates ALGRX 4975 (capsaicin for injection and capsaicin gel for intraoperative use) ALGRX 4975 is our product candidate for the treatment of site-specific severe or intractable pain. These types of pain are poorly treated by existing drugs such as opioids. We are developing ALGRX 4975 to treat patients in three broad areas: severe postsurgical pain following a variety of surgical procedures, including bunion removal surgery, total knee replacement and abdominal surgery, such as hernia repair, hysterectomy and gall bladder removal; post-trauma neuropathic pain; and pain resulting from musculoskeletal diseases, such as osteoarthritis and tendonitis. During a surgical procedure, ALGRX 4975 is applied directly onto the cut surfaces of skin, muscle and bone. For post-trauma neuropathic pain and musculoskeletal pain, ALGRX 4975 is delivered to the site of pain using a needle and syringe. Although the active ingredient in ALGRX 4975, capsaicin, has been available for many years in over-the-counter products, we believe we are the first to evaluate formulations of capsaicin for use inside the body. We believe that by harnessing capsaicin s ability to cause changes in nerve endings for a period of 12 weeks or more, ALGRX 4975, if approved, may represent a novel method of providing long lasting, site-specific analgesia without many of the significant side effects associated with opioids and other methods of treating pain. ALGRX 4975 has been studied in four AlgoRx-sponsored clinical trials that have enrolled a total of 250 patients. An additional five ongoing phase II clinical trials involving a total of 254 patients are designed to study the safety and efficacy of a variety of doses in a broad range of pain conditions. In addition, we believe that ALGRX 4975 may provide long lasting pain relief with infrequent dosing, potentially only four times per year, for patients with certain chronic pain conditions. ALGRX 3268 (PowderJect Dermal Lidocaine) ALGRX 3268 is our product candidate that delivers lidocaine powder into the skin using our proprietary needle-free dispenser. It is intended to provide rapid, easy-to-administer local analgesia to reduce the pain associated with needle-sticks from blood draws or the insertion of intravenous lines in patients. Existing products for this use are characterized by a lengthy onset of action from at least 10 minutes to over an hour. This delay makes the use of these products inconvenient for both health care providers and patients. Current topical anesthetic products also tend to be messy and bulky since they are often formulated as creams and may require patches to be applied over the treatment area. By comparison, ALGRX 3268 has shown efficacy in one minute following application and is administered using a convenient, disposable needle-free dispenser. The primary target market for ALGRX 3268 would be the estimated 42 million needle-stick procedures that are performed in children in the United States each year. We believe that this market is highly under-served by existing products. Based on our company estimates of unit sales, EMLA and L.M.X.4 , two leading products, are used in fewer than 15% of pediatric needle-stick procedures. We believe that, if approved, ALGRX 3268 s rapid onset of action, convenience of use and efficacy in reducing pain would be welcomed by health care professionals and would be important factors for increasing physician use of analgesia prior to needle-stick procedures. We have completed our clinical program through phase II involving 1,139 adults and children to evaluate the ability of ALGRX 3268 to reduce pain when used prior to needle-stick procedures. In clinical studies designed to assess efficacy, ALGRX 3268 achieved statistically significant reductions in pain associated with needle-sticks when compared to placebo, with no serious side effects. We have initiated a phase III clinical program to confirm the safety and efficacy of ALGRX 3268. If this phase III clinical program is successful, we believe that we will submit a new drug application to the FDA for ALGRX 3268 by the end of 2005. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 AMENDMENT NO. 4 To FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents Preclinical Product Candidate ALGRX 1207, our preclinical product candidate, is a new molecular entity that we are developing as a topical local anesthetic to potentially treat patients with certain types of neuropathic pain and for pre-procedural administration to reduce the pain associated with procedures on the skin. Certain types of neuropathic pain, including pain associated with postherpetic neuralgia, painful HIV polyneuropathy and painful diabetic polyneuropathy, affect almost two million patients in the United States and are not well-treated by current therapies. We believe that a simple-to-use, topical, local anesthetic with a long duration of action and deep penetration into the skin would represent an improvement over existing therapies. Based on studies in animals, ALGRX 1207 has been shown to provide analgesia more rapidly and with a longer-lasting effect than currently available topical anesthetics following direct administration to the skin. In addition, we believe that ALGRX 1207, if approved, could address a wide variety of procedures involving the skin, including dermatological surgery, cosmetic skin treatments and catheter placement, as well as pain arising from surgical incisions that does not subside after surgery has taken place. Our Strategy Our goal is to become a leading pharmaceutical company focused on the commercialization of drugs to treat various types of pain. The key elements of our strategy for achieving this goal are to: Continue to build, through acquisition or in-licensing, a balanced portfolio of product candidates that leverages our understanding of the mechanisms of pain and the pain management market; Complete clinical development and obtain regulatory approval for our product candidates utilizing our management team s extensive experience in developing and commercializing drugs for pain management; Develop a specialized sales and marketing team to commercialize our product candidates, if approved, in the United States; and Establish corporate partnerships to assist in the clinical development, regulatory approval process and commercialization of our products in the United States and major foreign markets. Risks Our business is subject to a number of risks, which you should be aware of before making an investment decision. These risks are discussed more fully in Risk Factors. All of our product candidates are in clinical or preclinical stages of development. Accordingly, we have not received regulatory approval for, or commercial revenues from, any of our product candidates. It is possible that we may never successfully commercialize any of our product candidates. As of December 31, 2004, we had incurred $60.1 million in net losses since inception. We expect to continue to incur increasing losses over the next several years, and we may never become profitable. Company Information We were incorporated in Delaware in March 2001. Our principal executive offices are located at 500 Plaza Drive, 2nd Floor, Secaucus, New Jersey 07094-3619, and our telephone number is (201) 325-6900. Our website is located at www.algorx.com. The information contained in or that can be accessed through our website is not part of this prospectus. AlgoRx is our registered trademark. Other service marks, trademarks and trade names referred to in this prospectus are the property of their respective owners. AlgoRx Pharmaceuticals, Inc. (Exact name of Registrant as specified in its charter) Delaware 2834 943392501 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification No.) 500 Plaza Drive, 2nd Floor Secaucus, New Jersey 07094-3619 (201) 325-6900 (Address, including zip code and telephone number, including area code, of Registrant s principal executive offices) Ronald M. Burch, M.D., Ph.D. Chief Executive Officer AlgoRx Pharmaceuticals, Inc. 500 Plaza Drive, 2nd Floor Secaucus, New Jersey 07094-3619 (201) 325-6900 (Name, address, including zip code and telephone number, including area code, of agent for service) Table of Contents THE OFFERING Common stock offered by AlgoRx: 6,800,000 shares, or 7,820,000 shares if the underwriters over-allotment option is fully exercised Common stock to be outstanding after this offering: 22,168,997 shares, or 23,188,997 shares if the underwriters over- allotment option is fully exercised Proposed Nasdaq National Market symbol: AGRX Use of proceeds: For general corporate purposes, including conducting clinical trials, research and development expenses, general and administrative expenses, manufacturing expenses and potential acquisitions of companies, products and technologies that complement our business. See Use of Proceeds. The number of shares of common stock to be outstanding after this offering is based on 15,368,997 shares of common stock outstanding as of December 31, 2004, and excludes: 2,352,340 shares of common stock issuable upon exercise of outstanding options as of December 31, 2004 at a weighted average exercise price of $1.30 per share; 3,413 shares of common stock reserved for future grants under our 2001 Equity Incentive Plan as of December 31, 2004; 250,000 shares of common stock reserved for future issuance under our 2005 Employee Stock Purchase Plan; and 69,265 shares of common stock issuable upon the exercise of an outstanding warrant as of December 31, 2004 at an exercise price of $5.925 per share that, by its terms, terminates upon completion of this offering. Except as otherwise indicated, all information in this prospectus: gives effect to our amended and restated certificate of incorporation, which we will file immediately prior to the closing of this offering; gives effect to a 1-for-10 reverse stock split of our common stock which occurred on February 4, 2005; gives effect to the automatic conversion of all outstanding shares of our preferred stock into 14,275,747 shares of common stock upon the closing of this offering; and assumes no exercise by the underwriters of their option to purchase up to 1,020,000 shares of our common stock in this offering to cover over-allotments. Copies to: Stephen M. Davis, Esq. Peter DiIorio, Esq. Heller Ehrman White McAuliffe LLP 120 West 45th Street New York, New York 10036 Phone: (212) 832-8300 Fax: (212) 763-7600 Paul M. Kinsella, Esq. Paul Laurino, Esq. Ropes Gray LLP One International Place Boston, MA 02110-2624 Phone: (617) 951-7000 Fax: (617) 951-7050 Basic and diluted net loss per share $ (79.27 ) $ (110.36 ) $ (59.75 ) $ (27.68 ) Shares used to compute basic and diluted net loss per share 17,866 182,949 259,182 832,024 Pro forma basic and diluted net loss per share (unaudited) $ (1.70 ) Shares used to compute pro forma basic and diluted net loss per share (unaudited) 13,536,599 Approximate date of commencement of proposed sale to public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: (In thousands) Balance Sheet Data: Cash, cash equivalents and marketable securities $ 39,858 $ 39,858 $ 85,226 Total assets 43,254 43,254 88,622 Convertible preferred stock 87,687 Deficit accumulated during the development stage (60,126 ) (60,126 ) (60,126 ) Total stockholders equity (net capital deficiency) (47,877 ) 39,810 85,178 Pro forma basic and diluted net loss per common share is calculated assuming, and the pro forma balance sheet data as of December 31, 2004 gives effect to, the conversion of all outstanding shares of our preferred stock into 14,275,747 shares of common stock upon completion of this offering as if such conversion had occurred at the date of original issuance. The pro forma as adjusted balance sheet data as of December 31, 2004 also gives effect to the sale of 6,800,000 shares of common stock offered by this prospectus at an assumed initial public offering price of $7.50 per share, after deducting underwriting discounts and commissions and estimated offering expenses. CALCULATION OF REGISTRATION FEE Table of Contents RISK FACTORS Before you invest in our common stock, you should understand the high degree of risk involved. You should consider carefully the following risks and other information in this prospectus, including our historical financial statements and related notes, before you decide to purchase shares of our common stock. If any of the following risks actually occurs, our business, financial condition and operating results could be adversely affected. As a result, the trading price of our common stock could decline and you could lose part or all of your investment. Risks Related to Our Company Clinical trials may fail to adequately demonstrate the safety or efficacy of ALGRX 3268, ALGRX 4975 or any future product candidates, preventing or significantly delaying their regulatory approval. Before obtaining regulatory approval to commercialize any of our product candidates, we must subject them to extensive preclinical and clinical testing. We have recently commenced two phase III clinical trials for ALGRX 3268, and we are currently conducting phase II clinical trials for ALGRX 4975. These clinical trials are designed to provide both efficacy and safety data, which will help determine the steps we need to take to continue development of these product candidates. Clinical trial programs are expensive, time-consuming and typically take years to complete. In particular, we do not expect to receive approval from the FDA to market ALGRX 3268 until 2007 at the earliest, if at all. We believe that ALGRX 4975 will not receive approval for marketing for any indication until 2009 at the earliest, if at all. We are developing an injectable formulation of ALGRX 4975 to potentially treat patients with pain resulting from musculoskeletal diseases, such as osteoarthritis and tendonitis. No drug has ever been approved by the FDA for the treatment of tendonitis or many other musculoskeletal diseases. Thus, it is difficult to estimate the types of clinical trials that the FDA might require and the time it will take to complete such trials. We are developing ALGRX 4975 in both a gel and an injectable formulation. In our clinical trials to date, we have used only a liquid form of ALGRX 4975, though we plan to use the gel formulation in some of our later trials. To date, no clinical trials have been completed using the gel formulation. We may encounter unexpected difficulties in developing the gel formulation, which may delay the development of ALGRX 4975 to treat severe postsurgical pain. This may occur for various reasons, including efficacy or safety issues arising from the use of the gel formulation in our later clinical trials and concerns that may be raised by the FDA about the gel formulation. Such difficulties may delay or prevent our efforts to develop a gel formulation of ALGRX 4975. In connection with clinical trials, we face the risks that: a product candidate may not prove to be efficacious; we may discover that a product candidate causes harmful side effects; patients may die or suffer other adverse medical effects for reasons that may or may not be related to the product candidate being tested; the results may not meet the level of statistical significance required by the FDA or other regulatory agencies; the results may not confirm positive results of earlier trials; and the FDA may place a clinical hold on studies of our product candidates. Both ALGRX 4975 and ALGRX 3268 were placed on clinical hold by the FDA at separate times during 2003. In the case of ALGRX 3268, the FDA requested the results from several nonclinical studies regarding the ways in which particles were ejected from the device. In the case of ALGRX 4975, the FDA requested that we provide them with the results of an ongoing osteoarthritis clinical trial then underway in the United Kingdom under the clinical trials exemption. In both cases, the FDA subsequently Table of Contents lifted each hold to allow us to initiate or continue the trials after we submitted the information they had requested. Imposition of additional clinical holds could substantially delay our current product development efforts. The FDA may place our clinical trials on clinical hold due to a variety of factors, including safety concerns, or results obtained from other trials of the same product candidate. If a clinical trial of ours were placed on hold, we would have to suspend enrollment or cancel the trial, and would be unable to enroll any patients unless and until the FDA allowed us to continue. The results from the phase II clinical trials for ALGRX 3268 may not be predictive of results that may be obtained in our phase III clinical trials. The results from the phase I and II clinical trials for ALGRX 4975 for injection may not be predictive of results obtained in additional phase II and phase III clinical trials. Future clinical trials may indicate previously undetected side effects or fail to demonstrate efficacy in a statistically significant manner. If our ALGRX 4975 or ALGRX 3268 clinical trials are not completed, significantly delayed or fail to demonstrate that the product candidates are safe and efficacious to the FDA s satisfaction, our business and reputation would be harmed and our stock price would be negatively affected. To obtain regulatory approval to market our product candidate ALGRX 1207, we will need to conduct nonclinical studies in animals, and the results of these nonclinical studies may not demonstrate adequate efficacy and, even if they do, the results may not necessarily be predictive of results in human trials. As part of the regulatory approval process, we must conduct, at our own expense, nonclinical studies in laboratory animals and clinical trials in humans. Nonclinical studies for ALGRX 1207 were commenced by Bridge Pharma, Inc. prior to our in-license of this product candidate in October 2004, and we will be required to continue nonclinical studies for this product candidate. The number of nonclinical trials that the regulatory authorities will require varies depending on the product candidate, the disease or condition the product candidate is being developed to address and regulations applicable to the particular product candidate. We may need to perform multiple nonclinical studies using various doses and formulations of ALGRX 1207 before we can begin clinical trials, which could result in delays in our ability to develop ALGRX 1207. Furthermore, nonclinical results in animal studies are not necessarily predictive of outcomes in human clinical trials. After we have conducted nonclinical studies in animals for ALGRX 1207, we must demonstrate in clinical trials that ALGRX 1207 is safe and efficacious for use on humans in order to receive regulatory approval for commercial sale. Even if initial results of nonclinical studies for ALGRX 1207 are positive, we may obtain different results in later stages of drug development, including failure to show desired safety and efficacy. Failure to enroll patients for clinical trials may cause delays in developing our product candidates, and delays in the commencement of clinical testing of our current product candidates could result in increased cost to us and delay our ability to generate revenues. We are currently enrolling or seeking to enroll patients in five clinical trials for our phase II studies of ALGRX 4975 and in two phase III clinical trials for ALGRX 3268. We will encounter delays or possibly regulatory rejections if we are unable to enroll enough patients to complete clinical trials. Patient enrollment depends on many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites and the eligibility criteria for the trial. While we have not experienced significant delays in patient enrollment in our completed or ongoing clinical trials, any delays in planned patient enrollment in the future may result in increased costs and delays, which could harm our ability to develop product candidates. Delays in the commencement of clinical testing could significantly increase our product development costs and delay product commercialization. In addition, many of the factors that may cause, or lead to, a delay in the commencement of clinical trials may also ultimately lead to denial of regulatory approval of a product candidate. The commencement of clinical trials can be delayed for a variety of reasons, including delays in: demonstrating sufficient safety and efficacy to obtain regulatory approval to commence a clinical trial; Proposed Maximum Amount of Title of Each Class of Aggregate Registration Securities to be Registered Offering Price(1) Fee(2) Table of Contents reaching agreement on acceptable terms with prospective contract research organizations and trial sites; manufacturing sufficient quantities of a product candidate; obtaining release from an FDA imposed clinical hold on an IND application; and obtaining institutional review board approval to conduct a clinical trial at a prospective site. There may be delays in developing ALGRX 4975 because we need to conduct studies to evaluate the potential of the product candidate to cause cancer and drug interaction studies. In addition to our clinical trials, we are required to conduct studies to evaluate the potential of the product candidate to cause cancer in laboratory rodents in support of our planned NDA to market ALGRX 4975 for the treatment of post-trauma neuropathic pain and for pain resulting from musculoskeletal diseases. Such studies require about three years to complete and report. The time frame of our development program for these indications is also affected by the International Conference on Harmonisation guidelines that dictate that at least 1,500 patients must be exposed to the drug prior to submission of a registration application and at least 500 patients be exposed to a new drug for one year. Thus, the length of the development program for ALGRX 4975 for post-trauma neuropathic pain and for pain resulting from musculoskeletal diseases is expected to be longer than our development program seeking approval of ALGRX 4975 for severe postsurgical pain. In addition to the time required to conduct these studies, the results of such studies may demonstrate harmful side effects of ALGRX 4975 which would impair or prevent our ability to develop this product candidate. Assuming there are no delays with our development program for ALGRX 4975 for post-trauma neuropathic pain, we could submit an NDA to the FDA by the end of 2008 at the earliest. Further, if we are unsuccessful for any reason in developing a gel formulation of ALGRX 4975 for use during surgical procedures to treat severe postsurgical pain, and instead rely on the liquid formulation to address this indication, the FDA may raise concerns of significant off-label use of ALGRX 4975 and may require that we complete studies to evaluate the potential of the product candidate to cause cancer prior to submission of the NDA for this indication. For instance, the FDA may be concerned that the liquid formulation of ALGRX 4975 may be prescribed for patients with osteoarthritis, a disease which would otherwise require drug interaction studies and a lengthier approval process as discussed below. If such a program is required, then submission of the NDA for ALGRX 4975 for use during surgical procedures to treat severe postsurgical pain will be delayed considerably. Osteoarthritis is a chronic disease that mostly afflicts elderly patients. Since these patients often take many drugs for a variety of ailments, clinical development of new products for osteoarthritis tends to require many drug interaction studies and studies of elderly patients with other disease conditions, such as liver failure or kidney failure. Consequently, the development of a new drug for osteoarthritis requires exposure of far more patients to the drug than for many other indications. We expect that a submission of an NDA for treatment of osteoarthritis would require several years and expect that an NDA submission may not occur before 2010, if at all. In addition to the time required to conduct such drug interaction studies and the studies to evaluate the potential of the product candidate to cause cancer described above, the results of such studies may demonstrate adverse side effects of ALGRX 4975, which would harm our ability to develop this product candidate to treat osteoarthritis. The independent clinical investigators and contract research organizations that we rely on to conduct clinical trials may not be diligent, careful or timely, and may not allocate adequate resources to our trials which could result in incomplete collection of data that would require us to perform additional trials thereby increasing cost and time to regulatory approval. We depend on several independent clinical investigators and contract research organizations to conduct our clinical trials under their agreements with us. We are not employing these investigators, and we cannot control the amount of time or resources that they devote to our programs. Our contracts with Common Stock, $0.001 par value per share $62,400,160 $7,345 Table of Contents these investigators may involve fixed fees. If the costs of performing the clinical trials exceed estimates, these investigators may fail to devote sufficient time and resources to our drug development programs, fail to enroll patients as rapidly as expected, or otherwise fail to perform in a satisfactory manner, and therefore potential regulatory approval and introduction of new products would be delayed. We contract with contract research organizations for execution of our clinical trials for our product candidates. Failure of the contract research organizations to meet their obligations could adversely affect clinical development of our product candidates. Moreover, these independent investigators and contract research organizations may also have relationships with other commercial entities, some of which may compete with us. Failure to perform by these third parties may increase our development costs, delay our ability to obtain regulatory approval and prevent the commercialization of our drug candidates. We currently use approximately 20 contract research organizations to perform services for our preclinical and clinical trials. While we believe that there are numerous alternative sources to provide these services, in the event we seek alternative sources, we may not be able to enter into replacement arrangements without delays or additional expenditures. We cannot estimate these costs or delays with certainty, but do not expect them to be material. To date, we have not experienced any significant difficulties with these independent investigators or contract research organizations and do not currently expect that their future performance will be less than satisfactory. If we fail to obtain U.S. regulatory approvals for product candidates under development, we will not be able to generate revenue in the U.S. market. We must receive FDA approval for ALGRX 3268, ALGRX 4975 and ALGRX 1207 before we can commercialize or sell these product candidates in the United States. Even if one of our product candidates is approved by the FDA, the approval may be significantly limited to specific disease indications, patient populations and dosages. For instance, we will likely need separate FDA approvals before ALGRX 4975 can be commercialized to treat each of the three indications for which this product candidate is being developed: severe postsurgical pain, post-trauma neuropathic pain and musculoskeletal pain. The FDA can limit or deny its approval for many reasons, including: a product candidate may be found to be unsafe or ineffective; regulators may interpret data from preclinical testing and clinical trials differently and less favorably than we do; regulators may not approve the manufacturing processes or facilities that we use; and regulators may change their approval policies or adopt new regulations. Failure to obtain FDA approval or any delay or setback in obtaining such approval would: adversely affect our ability to market any drugs that we develop and generate product revenues; and impose additional costs and diminish any competitive advantages that we may attain. Even if we obtain FDA approval, our product candidates may not be approved for all indications that we request, which could limit the uses of our products and adversely impact our potential product sales and royalties. If FDA approval of a product is granted, such approval will be subject to limitations on the indicated uses for which the product may be marketed and could require costly, post-marketing follow-up studies. As to any product for which marketing approval is obtained, the labeling, packaging, adverse event reporting, storage, advertising, promotion and record keeping related to the product will be subject to extensive regulatory requirements. The subsequent discovery of previously unknown problems with the product, such as an adverse side effect, may result in restrictions on the product, including withdrawal of the product from the market. We may be slow to adapt, or we may never adapt, to changes in existing requirements or adoption of new requirements or policies. If we fail to comply with applicable U.S. regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution. 1 .1 Form of Underwriting Agreement 3 .1+ Third Amended and Restated Certificate of Incorporation, as currently in effect 3 .2+ Form of Amended Restated Certificate of Incorporation (to be filed in connection with the closing of this offering) 3 .3+ Bylaws, as currently in effect 3 .4+ Form of Amended and Restated Bylaws (to be effective upon the closing of this offering) 3 .5+ Form of Certificate of Amendment to the Third Amended and Restated Certificate of Incorporation (to be filed prior to the effective date of the Registrant s public offering) 4 .1+ Second Amended and Restated Investor Rights Agreement, entered into as of February 17, 2004, by and among AlgoRx Pharmaceuticals, Inc. and certain investors named therein 4 .2+ Investor Rights Agreement entered into as of October 28, 2004, by and between AlgoRx Pharmaceuticals, Inc. and Bridge Pharma, Inc. 4 .3+ Specimen Common Stock Certificate 5 .1+ Opinion of Heller Ehrman White McAuliffe LLP 10 .1**+ 2001 Equity Incentive Plan, as amended and restated 10 .2**+ Form of Stock Option Grant Notice under AlgoRx Pharmaceuticals, Inc. 2001 Equity Incentive Plan 10 .4**+ Form of Stock Option Agreement for Employee under AlgoRx Pharmaceuticals, Inc. 2001 Equity Incentive Plan 10 .5**+ Form of Stock Option Agreement for Senior Management under AlgoRx Pharmaceuticals, Inc. 2001 Equity Incentive Plan 10 .6**+ Form of Stock Option Agreement for Senior Management under AlgoRx Pharmaceuticals, Inc. 2001 Equity Incentive Plan with acceleration provisions 10 .7+ Form of Early Exercise Stock Purchase Agreement under AlgoRx Pharmaceuticals, Inc. 2001 Equity Incentive Plan 10 .8+ Lease Agreement dated August 27, 1997, by and between AlgoRx Technologies, Inc. (formerly PowderJect Technologies, Inc.) and John Arrillaga, or his Successor Trustee, UTA dated 07/20/77 (the John Arrillaga Survivor s Trust) as amended and Richard T. Peery, Trustee, or his Successor Trustee, UTA 7/20/77 (Richard T. Peery Separate Property Trust) as amended 10 .9+ Lease dated May 10, 2004, between AlgoRx Pharmaceuticals, Inc. and 500 Plaza Drive Corp. 10 .10+ License Agreement entered into as of August 28, 2001, among AlgoRx Pharmaceuticals, Inc. and James N. Campbell, M.D., Richard Meyer, M.S. and Marco Pappagallo, M.D. 10 .11+ License Agreement entered into as of August 28, 2001, between AlgoRx Pharmaceuticals, Inc. and Marco Pappagallo, M.D. 10 .12 + License Agreement entered into as of March 22, 2002, by and between AlgoRx Pharmaceuticals, Inc. and PowderJect Research Limited 10 .13+ First Amendment to License Agreement entered into as of July 7, 2003, between AlgoRx Pharmaceuticals, Inc. and PowderJect Research Limited 10 .14+ Assignment, Assumption and Consent Agreement made as of May 14, 2004, by and among PowderMed Limited, PowderJect Research Limited, PowderJect Technologies Limited, AlgoRx Pharmaceuticals, Inc. and AlgoRx Technologies, Inc. 10 .15+ Letter Agreement entered into as of September 30, 2004, between AlgoRx Pharmaceuticals, Inc. and PowderJect Research Limited 10 .16 + Supply Agreement entered into as of March 22, 2002, between AlgoRx Pharmaceuticals, Inc. and PowderJect Research Ltd. 10 .17 + First Amendment to Supply Agreement entered into as of July 7, 2003, between AlgoRx Pharmaceuticals, Inc. and PowderJect Technologies Limited. 10 .18 + Collaboration, Development and License Agreement made as of October 28, 2004, between AlgoRx Pharmaceuticals, Inc. and Bridge Pharma, Inc. 10 .19**+ 2005 Employee Stock Purchase Plan Table of Contents If we fail to obtain regulatory approvals in other countries for our product candidates under development, we will not be able to generate revenue in such countries. In order to market our products outside of the United States, we must establish and comply with numerous and varying regulatory requirements of other countries. Approval procedures vary among countries and can involve additional product testing and additional administrative review periods. The time required to obtain approval in other countries might differ from that required to obtain FDA approval in the United States. The regulatory approval process in other countries may include all of the risks detailed above regarding FDA approval. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may negatively impact the regulatory process in others. Failure to obtain regulatory approval in other countries or any delay or setback in obtaining such approval could have the same adverse effects detailed above regarding FDA approval in the United States, including the risk that our product candidate may not be approved for all indications that we request, which could limit the uses of our product and adversely impact our potential royalties and product sales, and such approval may be subject to limitations on the indicated uses for which the product may be marketed or require costly, post-marketing follow-up studies. If we fail to comply with applicable foreign regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution. Competition in the biotechnology and pharmaceutical industries is intense, and even if our product candidates are approved and commercialized, competitive products may impede market acceptance of our products. Our business is characterized by extensive research and development efforts, rapid developments and intense competition. Our competitors may have or may develop superior technologies or approaches, which may provide them with competitive advantages. Our potential products may not compete successfully. If our competitors get to the marketplace before we do with better or less expensive drugs, our product candidates, if approved for commercialization, may not be profitable to sell or worthwhile to continue to develop. Technology in the pharmaceutical industry has undergone rapid and significant change, and we expect that it will continue to do so. Any compounds, products or processes that we develop may become obsolete or uneconomical before we recover any expenses incurred in connection with their development. The success of our product candidates will depend upon factors such as product efficacy, safety, reliability, availability, timing, scope of regulatory approval, acceptance and price, among other things. Other important factors to our success include speed in developing product candidates, completing clinical development and laboratory testing, obtaining regulatory approvals and manufacturing and selling commercial quantities of potential products to the market. Our product candidates are intended to compete directly or indirectly with existing drugs. Even if approved and commercialized, our products may fail to achieve market acceptance with hospitals, physicians or patients. Hospitals, physicians or patients may conclude that our potential products are less safe or effective or otherwise less attractive than these existing drugs. If our product candidates do not receive market acceptance for any reason, our revenue potential would be diminished, which would materially adversely affect our ability to become profitable. ALGRX 4975, if approved and commercialized, will face significant competition. For severe postsurgical pain, morphine administered by infusion pump is a common treatment method. Several other oral, injectable and patch opioids are also used, including Vicodin (Abbott Labs), OxyContin (Purdue Pharma), and Duragesic (Johnson Johnson). For localized neuropathic pain, Neurontin (Pfizer) and tricyclic antidepressants are used to treat neuropathic pain. For later-stage osteoarthritis, hyaluronic acid products, including Synvisc (Genzyme), a market leader in 2003, are injected locally and several oral opioids, most prominently OxyContin (Purdue Pharma) and Duragesic (Johnson Johnson) are used. For the treatment of tendonitis, glucocorticosteroids are used. VR1, which is involved in the transmission of pain signals to the brain and which is affected by ALGRX 4975, has become a popular target for the (1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) of the Securities Act of 1933, as amended. (2) A registration fee of $11,721 has previously been paid in connection with this Registration Statement. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. Table of Contents pharmaceutical industry. VR1 inhibitors that may also compete with ALGRX 4975 are being developed by several companies, including Merck-Neurogen, Amgen, Schwarz Pharma-Amore Pacific, Purdue Pharma, and PainCeptor. These VR1 inhibitors are expected to advance to clinical evaluation shortly. We believe there are other products that are in development that may compete with our current product candidates. ALGRX 3268, if approved and commercialized, will face significant competition. During 2003, two leading products for local anesthesia prior to needle-stick procedures were L.M.X.4 , a cream-based product (formerly ELA-MAX, Ferndale Labs), and EMLA , a cream-based product sold by AstraZeneca. EMLA has historically been the market leader, and in 2003, several generic versions of EMLA that are manufactured by Fougera, Atrix, Geneva, and Hi-Tech Pharmaceuticals were approved by the FDA. These products already have established distribution channels and are well known to physicians and hospitals. There are additional products including Numby Stuff (Iomed) and LidoSite (Braun-Vyteris) with more rapid onset than the cream-based products above, and two other products, including S-Caine Patch (ZARS), for which an NDA has been submitted that may also compete with ALGRX 3268. If ALGRX 3268 is unable to deliver lidocaine to patients without pain, the product will not be readily adopted by hospitals, physicians or patients, if at all. ALGRX 1207, if approved and commercialized, will face competition from existing products, including LidoDerm (Endo), which is a lidocaine patch, and a variety of local anesthetic creams and products with alternative means of delivering lidocaine, including EMLA cream (AstraZeneca) and its generic equivalents, L.M.X.4 (Ferndale Labs), S-Caine Patch (ZARS) and LidoSite (Braun-Vyteris). There are also capsaicin products in development by NeurogesX and Winston Labs, which would be applied to the skin and which may be approved prior to ALGRX 1207. If approved, ALGRX 1207, which will also likely be formulated as a cream or patch, will compete with existing products based on factors such as efficacy, convenience and onset time of pain relief. Most of our competitors, including many of those listed above, have substantially greater capital resources, research and development staffs, facilities and experience in conducting clinical trials and obtaining regulatory approvals, as well as in manufacturing and marketing pharmaceutical products. As a result, they may achieve product commercialization or patent protection earlier than we can. We have no experience selling, marketing or distributing products and have minimal capabilities to do so. If we receive regulatory approval to commence commercial sales of any of our product candidates, we will have to establish a sales and marketing organization with appropriate technical expertise and distribution capability. At present, we have no sales and only one marketing employee. Factors that may inhibit our efforts to commercialize our products without strategic partners or licensees include: difficulty recruiting and retaining adequate numbers of effective sales and marketing personnel; the inability of sales personnel to obtain access to, or persuade adequate numbers of, physicians to prescribe our products; the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage against companies with broader product lines; and unforeseen costs associated with creating an independent sales and marketing organization. As an alternative to establishing our own sales and marketing organization, we may engage other pharmaceutical or health care companies with an existing distribution system and direct sales organization to assist us. We may not be able to negotiate favorable distribution partnering arrangements, if at all. To the extent we enter co-promotion or other licensing arrangements, any revenues we receive will depend on the efforts of third parties and will not be under our control. Table of Contents If third party manufacturers of our products fail to devote sufficient time and resources to our concerns, or if their performance is substandard, our clinical trials and product introductions may be delayed and our costs may rise. We have no manufacturing facilities, and we have no experience in the commercial manufacturing of drugs or in designing drug manufacturing processes. We have contracted with third party manufacturers to produce, in collaboration with us, our product candidates for clinical trials. We intend to rely on third party contract manufacturers to manufacture, supply, store and distribute any resulting products. The BOC Group plc acts as the sole supplier for the cylinder of compressed helium gas, a key component in the dispenser for ALGRX 3268. While we have not experienced any significant problems with our third party manufacturers to date, our reliance on these third party manufacturers, particularly The BOC Group plc, the sole supplier of cylinders used in our ALGRX 3268 product candidate, exposes us to the following risks, any of which could delay or prevent the completion of our clinical trials, the approval of our product candidates by the FDA or other regulatory agencies, or the commercialization of our products, result in higher costs, or deprive us of potential product revenues: Contract manufacturers are obliged to operate in accordance with FDA-mandated current good manufacturing practices, or cGMPs. A failure of any of our contract manufacturers to establish and follow cGMPs or to document their adherence to such practices may lead to significant delays in the availability of material for clinical trials, may delay or prevent filing or approval of marketing applications for our products and may impair our ability to commercialize our products. Changing contract manufacturers may be difficult, and the number of potential manufacturers is limited. Changing manufacturers may require re-validation of the manufacturing processes and procedures in accordance with FDA-mandated cGMPs. Such re-validation may be costly and time-consuming. It may be difficult or impossible for us to find replacement manufacturers on acceptable terms quickly, if at all. Drug manufacturers are subject to ongoing, periodic unannounced inspections by the FDA and corresponding state and foreign agencies to ensure strict compliance with cGMPs, other government regulations and corresponding foreign standards. We are not aware of any violations by our third party manufacturers of any of these regulations or standards. While we are obligated to audit the performance of third party contractors, we do not have control over our third party manufacturers compliance with these regulations and standards. Failure by our third party manufacturers or us to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure of the government to grant approval of product candidates, delays, suspension or withdrawal of approvals, seizures or recalls of products, operating restrictions and criminal prosecutions. Our third party manufacturers may not be able to manufacture our product candidates in commercial quantities, which would prevent us from commercializing our product candidates. To date, our product candidates have been manufactured in small quantities by third party manufacturers for preclinical and clinical trials. If any of these product candidates are approved by the FDA or other regulatory agencies for commercial sale, we will need to manufacture them in larger quantities. Our third party manufacturers may not be able to successfully increase their manufacturing capacity for any of our product candidates in a timely or economic manner, or at all. Significant scale-up of manufacturing may require additional validation studies, which the FDA must review and approve. If we are unable to successfully increase the manufacturing capacity for a product candidate, the regulatory approval or commercial launch of that product candidate may be delayed or there may be a shortage in the supply of the product candidate. Our product candidates require precise, high quality manufacturing. The failure of our third party manufacturers to achieve and maintain these high manufacturing standards, including the incidence of manufacturing errors, could result in patient injury or death, product recalls or withdrawals, delays or failures in product testing or delivery, cost overruns or other problems that could seriously harm our business. Table of Contents Materials necessary to make ALGRX 3268 may not be available on commercially reasonable terms, or at all, which may delay our development and commercialization of the drug. There are a small number of suppliers of the materials which are necessary to manufacture ALGRX 3268 and, in the case of the cylinder used in ALGRX 3268, we rely on a sole supplier. The cylinder of compressed helium gas is a key component in the dispenser for ALGRX 3268. We acquire the cylinders for our ALGRX 3268 product candidate from PowderJect Technologies Limited under a long-term supply agreement. PowderJect Technologies Limited is currently our sole supplier and source of cylinders, which are manufactured for PowderJect Technologies Limited by The BOC Group plc, and to date we have not identified an alternative source. If we are required to seek an alternative source for the cylinders, we might not be successful in establishing an alternative commercial arrangement with a supplier, or, if we were successful in finding an alternate supplier, it could be on terms which are less favorable than our current supply agreement with PowderJect Technologies Limited. Our contract manufacturers for ALGRX 3268 need to purchase the materials required for ALGRX 3268 for our clinical trials and they or we will need to purchase these materials for commercial distribution if we obtain regulatory approval for ALGRX 3268. Suppliers may not sell us these materials at the time we need them or on commercially reasonable terms. If our manufacturers are unable to obtain these materials for our clinical trials, product testing and potential regulatory approval of ALGRX 3268 would be delayed, significantly impacting our ability to develop the product candidate and potentially increasing our costs. If we obtain regulatory approval for ALGRX 3268 and our manufacturers or we are unable to purchase these materials, the commercial launch of ALGRX 3268 would be delayed or there would be a shortage in supply of ALGRX 3268, which would harm our ability to generate revenues from the sale of ALGRX 3268. If suppliers increase the price of these materials, the price for ALGRX 3268 may increase which may make ALGRX 3268 a less competitive product for the relief of needle-stick pain. If we change suppliers for any of these materials or any of our suppliers experiences a shutdown or disruption in the facilities used to produce these materials, due to technical, regulatory or other problems, it could harm our ability to manufacture our products. While we have not suffered any shortages to date of any of the materials required for ALGRX 3268, our inability to obtain these materials for any reason could substantially impair our development activities or the production, marketing and distribution of ALGRX 3268. If we are unable to retain and recruit qualified personnel or if any of our key executives, Ronald M. Burch, M.D., Ph.D, Paul R. Hamelin, R.Ph., or Jeffrey D. Lazar, M.D., Ph.D, discontinues his employment with us, it may delay our development efforts. One of our key strategies for successfully building our company is utilizing the extensive expertise and experience of our senior management and scientific staff, especially of our Chief Executive Officer, Ronald M. Burch, M.D., Ph.D., our President and Chief Operating Officer, Paul R. Hamelin, R.Ph. and our Executive Vice President of Clinical and Regulatory Affairs, Jeffrey D. Lazar, M.D., Ph.D. Therefore, we consider our business to be highly dependent on these individuals. The loss of any of our key employees could impede the achievement of our development objectives. We do not expect to lose the services of any of our key employees in the near future. We have no key-man insurance on any members of our management team. Furthermore, recruiting and retaining qualified personnel to perform research and development work in the future is critical to our success. We may be unable to attract and retain personnel on acceptable terms given the competition among biotechnology and pharmaceutical companies, universities and non-profit research institutions for experienced scientists. To date, we have been able to attract and hire qualified candidates to meet our personnel needs. We have a history of losses, and we may never achieve sustained profitability. Since our inception, we have incurred significant net losses, including net losses of $15.5 million and $23.0 million for the years ended December 31, 2003 and 2004, respectively. As of December 31, 2004, our cumulative net loss was $60.1 million. We have not yet completed the development, including obtaining regulatory approvals, of any of our product candidates and, consequently, have not generated Table of Contents The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED FEBRUARY 10, 2005 6,800,000 Shares Common Stock Table of Contents revenues from the sale of products. Even if we succeed in developing and commercializing one or more of our product candidates, we expect to incur substantial losses for the foreseeable future. We also expect to continue to incur significant operating and capital expenditures and anticipate that our expenses will increase substantially in the foreseeable future as we: continue the development and the preparation for possible commercialization of ALGRX 4975 and ALGRX 3268, including establishing sales and marketing capabilities; continue the preclinical development and commence the clinical development of ALGRX 1207 which we recently in-licensed in October 2004; expand our development programs; and increase our administrative functions. We also expect to experience negative cash flow for the foreseeable future as we fund our operating losses and capital expenditures. We will need to generate significant revenues to achieve profitability. We may not be able to generate these revenues, and we may never achieve profitability. Our failure to achieve profitability could negatively impact the market price of our common stock. Even if we do become profitable, we may not be able to sustain or increase profitability on a quarterly or annual basis. If we cannot raise additional capital on acceptable terms, we may be unable to complete planned clinical trials, obtain regulatory approvals or commercialize our product candidates. We believe that existing cash reserves, together with proceeds from this offering, will fund our planned activities for at least the next 24 months. However, we will require substantial future capital in order to continue to conduct the research and development, preclinical and clinical programs and regulatory activities necessary to bring our product candidates to market and to establish commercial manufacturing, sales and marketing capabilities. During the year ended December 31, 2004, our net cash used in operating activities was $18.2 million and we had net capital expenditures of $131,000 for the same period. Our future capital requirements depend on many factors, including: the progress of preclinical development and clinical trials; the time and costs involved in obtaining regulatory approvals; delays that may be caused by evolving requirements of regulatory agencies; the number of product candidates we pursue; the costs involved in filing and prosecuting patent applications and enforcing or defending patent claims; our plans to establish sales and/or marketing capabilities; our ability to establish and maintain selected strategic alliances required for product commercialization; the acquisition of technologies or products and other business opportunities that require financial commitments; and our revenues, if any, from successful development and commercialization of our products. We may seek additional funding through strategic collaborations and may seek funding through private or public sales of our securities or by licensing all or a portion of our technology. This funding may significantly dilute existing stockholders or may limit our rights to our technology. We may not be able to obtain additional funding on favorable terms, or at all. If we cannot obtain adequate funds, we may: terminate or delay preclinical development or clinical trials for one or more of our product candidates; delay establishment, or fail to establish, manufacturing, sales, and/or marketing capabilities; Prior to this offering, there has been no public market for our common stock. The initial public offering price of our common stock is expected to be between $7 and $8 per share. Our common stock has been approved for listing on the Nasdaq National Market under the symbol AGRX . The underwriters have an option to purchase a maximum of 1,020,000 shares of common stock to cover over-allotments of shares. Investing in our common stock involves risks. See Risk Factors beginning on page 7. Underwriting Price to Discounts and Proceeds to Public Commissions AlgoRx Table of Contents curtail significant product development programs that are designed to identify new product candidates; not be in a position to acquire technologies or pursue other business opportunities that require financial commitments; and/or relinquish rights to our product candidates. If we lose our licenses from PowderMed Limited for ALGRX 3268, certain individuals for ALGRX 4975 or Bridge Pharma, Inc. for ALGRX 1207, we will not be able to continue development of our current products. We are party to three significant license agreements relating to patents, patent applications and know-how covering the technology relating to ALGRX 4975, ALGRX 3268 and ALGRX 1207, our three product candidates. These license agreements impose various diligence, commercialization, royalty and other obligations on us. If we fail to comply with the obligations in the license agreements, the licensor may have the right to terminate the license and we may not be able to market products that were covered by the license. Our license agreement with James N. Campbell, M.D., Richard A. Meyer, M.S. and Marco Pappagallo, M.D. relates to the steps of administering capsaicin for pain reduction that we use in our product candidate, ALGRX 4975, and our rights under this agreement can be terminated on 10 days written notice if we fail to make a payment or fulfill any material obligation under the agreement and the failure is not cured by us within 180 days of receiving notice of such failure. Our license agreement with PowderMed Limited relates to technology underlying our product candidate, ALGRX 3268. Our agreement with PowderMed Limited can be terminated immediately by either party if the other party ceases to do business in the ordinary course, or assigns all or substantially all of its assets for the benefit of creditors. Either party can also terminate for material breach if not cured within 60 days of notice or if not cured within 30 days of notice if the breach relates to payment provisions. Our agreement with Bridge Pharma, Inc. relates to proprietary analgesic and local anesthetic pharmaceutical agents and technology underlying our product candidate ALGRX 1207, and our rights under this agreement can be terminated for cause by Bridge Pharma, Inc. if we breach any material provision of the agreement and fail to cure the breach within 60 days of the receipt of the notice of breach. Either party may terminate the agreement immediately in the event the other party suffers certain insolvency events. To date, we believe we have met our obligations under all of these agreements. If we fail to enter into additional in-licensing agreements or if these arrangements are unsuccessful, our business and operations might be adversely affected, and if we engage in any acquisition or in-licensing, we will incur a variety of costs, and we may never realize the anticipated benefits of the transaction. Since our inception, we have acquired three product candidates, ALGRX 4975, ALGRX 3268 and ALGRX 1207, through in-licensing. One of our strategies for expanding our business is the acquisition of products and additional product candidates. The success of this strategy depends upon our ability to identify, select and acquire the right pharmaceutical product candidates and products. We may be unable to enter into any additional in-licensing agreements because suitable product candidates that are within our expertise may not be available to us on terms that are acceptable to us or because competitors with greater resources seek to in-license the same product candidates. Product candidates that we would like to develop may not be available to us because they are controlled by competitors who are unwilling to license the rights to the drug compound or candidate to us. We may also need to in-license drug delivery or other technology in order to develop future drug candidates. If we are unable to enter into additional agreements to license drug candidates, drug delivery technology or other technology or if these arrangements are unsuccessful, our development efforts could be adversely affected. We may attempt to acquire product candidates, or other potentially beneficial technologies, through in-licensing or the acquisition of businesses, services, products or programs that we believe are a strategic fit with our business. Although we currently have no commitments or agreements with respect to any acquisitions, if we undertake an acquisition, the process of integrating the acquired business, technology, Table of Contents services, product or programs may result in unforeseen operating difficulties and expenditures and may divert significant management attention from our ongoing business operations. Moreover, we may fail to realize the anticipated benefits of any acquisition for a variety of reasons, such as an acquired product candidate proving to not be safe or effective in later clinical trials. We may fund any future acquisition by issuing equity or equity-linked securities, which could dilute the ownership percentage of our equity holders. We may also incur debt to pay for an acquisition. The holders of the debt may have priority in the event of a subsequent liquidation or bankruptcy, which would impair value for our equity holders. Acquisition efforts can require substantial expenditures, which could detract from our other programs. In addition, we may devote resources to potential acquisitions that are never completed. We may not be able to succeed in our business model of seeking to enter into collaborations with partners at the early stages of developing our product candidates, and even if we do our collaborations would be subject to many risks that could prevent us from developing and commercializing our product candidates. Our business strategy includes entering into collaborations or marketing and distribution arrangements with corporate partners, primarily pharmaceutical companies, for the development, commercialization, marketing and distribution of certain of our product candidates. No such arrangements presently exist. We may enter into a significant corporate collaboration, or we may not be able to enter into any. If we are able to enter into a collaboration, the terms may be onerous and we may be compelled to give up a large portion of our interest in our products. We do not know at this time what the extent of such interest may be. We may be dependent on a corporate collaboration to fund clinical testing, to make certain regulatory filings and to manufacture and market products resulting from the collaboration. Risks that we face in connection with entering into collaborations include the following: collaborators may underfund or not commit sufficient resources to the testing, marketing, distribution or development of our products; collaborators may not properly maintain or defend our intellectual property rights, or they may utilize our proprietary information in such a way as to invite litigation that could jeopardize or potentially invalidate our proprietary information or expose us to potential liability; collaborators may pursue alternative technologies or develop alternative products either on their own or in collaboration with others; collaborators may encounter conflicts of interest, changes in business strategy or other business issues, which could adversely affect their willingness or ability to fulfill their obligations to us; for example, pharmaceutical and biotechnology companies historically have re-evaluated their priorities following mergers and consolidations, which have been common in recent years in these industries; and disputes may arise between us and our collaborators delaying or terminating the research, development or commercialization of our product candidates, resulting in significant litigation or arbitration that could be time-consuming and expensive, or causing collaborators to act in their own self-interest and not in the interest of our stockholders. A reduction in sales efforts or a discontinuance of sales of any developed products by any collaborative partner could result in reduced revenues and have a material adverse effect on our business, financial position and results of operations. Our current strategy for developing and commercializing our product candidates includes securing collaborations with pharmaceutical and biotechnology companies relatively early in the drug development process and for these collaborators to undertake the advanced clinical development and commercialization of our product candidates. It may be difficult for us to find third parties that are willing to enter into collaborations for our other product candidates at an early stage of development or on favorable economic terms. If we are not able to enter into collaborations for our product candidates at relatively early stages, we could be required to undertake and fund further development, clinical trials, manufacturing and Table of Contents marketing activities solely at our own expense. Alternatively, we would have to substantially reduce our development efforts which would delay the commercialization of our product candidates. Because we have operated as a private company, we have no experience attempting to comply with public company obligations, including recently enacted changes in securities laws and regulations; attempting to comply with these requirements will increase our costs and require additional management resources and we still may fail to comply. As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies to include a report of management on the company s internal controls over financial reporting in their annual reports on Form 10-K. In addition, the public accounting firm auditing the company s financial statements must attest to and report on management s assessment of the effectiveness of the company s internal controls over financial reporting. This requirement will first apply to our annual report on Form 10-K for our fiscal year ending December 31, 2005. If we are unable to conclude that we have effective internal controls over financial reporting or, if our independent auditors are unable to provide us with an unqualified report as to the effectiveness of our internal controls over financial reporting as of December 31, 2005 and future year ends as required by Section 404 of the Sarbanes-Oxley Act of 2002, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our securities. We are a small company with limited resources. We have operated as a private company, not subject to many of the requirements applicable to public companies. The number and qualifications of our finance and accounting staff are consistent with those of a private company. While we plan to expand our staff if we become public, we may encounter substantial difficulty attracting qualified staff with requisite experience due to the high level of competition for experienced financial professionals. Furthermore, we have not begun a formal process to evaluate our internal controls over financial reporting. Given the status of our efforts, coupled with the fact that guidance from regulatory authorities in the area of internal controls continues to evolve, substantial uncertainty exists regarding our ability to comply by applicable deadlines. Risks Related to Our Industry Claims that we infringe a third party s intellectual property may give rise to burdensome litigation, result in potential liability for damages or stop our development and commercialization efforts. Third parties may assert patent or other intellectual property infringement claims against us with respect to technologies used in our potential products. While we have conducted patent searches to determine whether our products infringe patents held by third parties, we expect that numerous patent applications are currently pending and may be filed in the future for technologies generally related to our technologies, including many patent applications that remain confidential after filing. Due to these factors and the inherent uncertainty in conducting patent searches, we may violate third party patent rights. There may also be patent applications filed by these or other parties in the United States and various foreign jurisdictions that are in the same fields as some of our product candidates. These patent applications, if issued, could subject us to infringement actions. The owners or licensees of these and other patents may file one or more infringement actions against us. Patent litigation can involve complex factual and legal questions, and its outcome is uncertain. Any claim relating to infringement of patents that is successfully asserted against us may require us to pay substantial damages. Even if we were to prevail, any litigation could be costly and time-consuming and would divert the attention of our management and key personnel from our business operations. Furthermore, as a result of a patent infringement suit brought against us, we may be forced to stop or delay developing, manufacturing or selling potential products that are claimed to infringe a third party s intellectual property unless that party grants us rights to use its intellectual property. In such cases, we may be required to obtain licenses to patents or proprietary rights of others in order to continue to commercialize our products. However, we may not be able to obtain any required licenses on acceptable terms, or at all. Even if we were able to obtain rights to the third party s Per Share $ $ $ Total $ $ $ Delivery of the shares of common stock will be made on or about , 2005. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Credit Suisse First Boston Citigroup Piper Jaffray Lazard The date of this prospectus is , 2005. Table of Contents intellectual property, these rights may be non-exclusive, thereby giving our competitors access to the same intellectual property. Ultimately, we may be unable to commercialize some of our potential products or may have to discontinue development of a product candidate or cease some of our business operations as a result of patent infringement claims, which could severely diminish our commercial prospects. Third parties may also challenge the validity of our issued patents on various grounds. In fact, one of our issued European patents covering capsaicin for injection has been challenged by Grunenthal, a German pharmaceutical company, in the European Patent Court. In response, we submitted proposed modifications to the patent, which the patent court approved and published in November 2004. Any party, including Grunenthal, can object to the amended patent within the two month period after the amended patent is published by the court. The two month period for filing an objection has expired, and we are not aware of any objections filed against the amended patent. If any future challenge by Grunenthal or any other party is ultimately successful in invalidating the patent, then the ability of third parties to market competing technologies to ALGRX 4975 in Europe could be enhanced. Also, because the Grunenthal opposition resulted in our amending the claims of one of our patents in Europe, a competitor could seek to exploit that result by using arguments similar to Grunenthal s to challenge claims in issued patents, including U.S. patents, licensed by us and in the same patent family as the amended European patent. We may be subject to damages resulting from claims that we or our employees have wrongfully used or disclosed alleged trade secrets of their former employers. Many of our employees were previously employed at other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although no claims against us are currently pending, we may be subject to claims that these employees or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management. If we fail in defending such claims, in addition to paying money claims, we may lose valuable intellectual property rights or personnel. A loss of key personnel or their work product could hamper or prevent our ability to commercialize certain product candidates, which would adversely affect our commercial development efforts. If we are unable to protect our intellectual property rights, our competitors may develop and market products with similar features that may reduce demand for our potential products. The following factors are important to our success: receiving patent protection for our product candidates; preventing others from infringing our intellectual property rights; and maintaining our patent rights and trade secrets. We will be able to protect our intellectual property rights in patents and trade secrets from unauthorized use by third parties only to the extent that such intellectual property rights are covered by valid and enforceable patents or are effectively maintained as trade secrets. We try to protect our proprietary position by filing U.S. and foreign patent applications related to our important proprietary technology, inventions and improvements. Because the patent position of pharmaceutical companies involves complex legal and factual questions, the issuance, scope and enforceability of patents cannot be predicted with certainty. For instance, the issued patent underlying ALGRX 4975 covers injection of capsaicin. If that patent were determined not to cover application of ALGRX 4975 for use during surgical procedures in circumstances where the capsaicin is applied by means other than through a syringe, we may not have an exclusive right to that application of capsaicin unless and until, for instance, we were issued a valid claim covering non-injection internal use of capsaicin or covering the gel formulation that we are developing for use during surgical procedures. Patents, if issued, may be challenged, invalidated or circumvented. U.S. patents and patent applications may also be subject to interference proceedings, and U.S. patents may be subject to reexamination proceedings in the Table of Contents U.S. Patent and Trademark Office and foreign patents may be subject to opposition or comparable proceedings in corresponding foreign patent offices, which proceedings could result in either loss of the patent or denial of the patent application or loss or reduction in the scope of one or more of the claims of the patent or patent application. In addition, such interference, reexamination and opposition proceedings may be costly. Thus, any patents that we own or license from others may not provide any protection against competitors. Furthermore, an adverse decision in an interference proceeding can result in a third party receiving the patent rights sought by us, which in turn could affect our ability to market a potential product to which that patent filing was directed. Our pending patent applications, those we may file in the future, or those we may license from third parties may not result in patents being issued. If issued, they may not provide us with proprietary protection or competitive advantages against competitors with similar technology. Furthermore, others may independently develop similar technologies or duplicate any technology that we have developed. We rely on third party payment services for the payment of foreign patent annuities and other fees. Non-payment or delay in payment of such fees, whether intentional or unintentional, may result in loss of patents or patent rights important to our business. Many countries, including certain countries in Europe, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. For example, compulsory licenses may be required in cases where the patent owner has failed to work the invention in that country, or the third party has patented improvements. In addition, many countries limit the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of the patent. Moreover, the legal systems of certain countries, particularly certain developing countries, do not favor the aggressive enforcement of patent and other intellectual property protection which makes it difficult to stop infringement. In addition, our ability to enforce our patent rights depends on our ability to detect infringement. It is difficult to detect infringers who do not advertise the compounds that are used in their products. Also, in the case of ALGRX 4975, it is not the composition of the capsaicin that is covered by the issued patent, but rather its method of use. This means that a manufacturer of an injectable form of capsaicin may not infringe the patent except indirectly, which is more difficult to prove, and any claim for direct infringement might be against only a clinician injecting the product. Any litigation to enforce or defend our patent rights, even if we were to prevail, could be costly and time-consuming and would divert the attention of our management and key personnel from our business operations. We also rely on trade secrets, know-how and technology, which are not protected by patents, to maintain our competitive position. We try to protect this information by entering into confidentiality agreements with parties that have access to it, such as our strategic partners, collaborators, employees and consultants. Any of these parties may breach these agreements and disclose our confidential information or our competitors might learn of the information in some other way. If any trade secret, know-how or other technology not protected by a patent was to be disclosed to or independently developed by a competitor, our business, financial condition and results of operations could be materially adversely affected. Governmental and third party payors may impose sales and pharmaceutical pricing restrictions or controls on our potential products that could limit our future product revenues and adversely affect profitability. The commercial success of our potential products is substantially dependent on whether third party reimbursement is available for the ordering of our products by the medical profession for use by their patients. Medicare, Medicaid, health maintenance organizations and other third party payors may not cover or provide adequate payment for our potential products. They may not view our potential products as cost-effective and reimbursement may not be available to consumers or may not be sufficient to allow our potential products to be marketed on a competitive basis. Reimbursement will most likely not be available for ALGRX 3268. Hospitals are currently reimbursed a fixed amount of money for the needle-stick procedures in which ALGRX 3268 would be used. The cost of ALGRX 3268 would be an expense associated with that procedure and therefore would reduce the hospital s profit. Hospitals may determine that the cost of ALGRX 3268 is not worth the benefit and decline to use it. Likewise, legislative or TABLE OF CONTENTS Page Table of Contents regulatory efforts to control or reduce health care costs or reform government health care programs could result in lower prices or rejection of our potential products that we may commercialize. Changes in reimbursement policies or health care cost containment initiatives that limit or restrict reimbursement for our products may cause our revenue to decline. Another development that may affect the pricing of drugs is regulatory action regarding drug reimportation into the United States. The Medicare Prescription Drug, Improvement and Modernization Act of 2003, which became law in December 2003, requires the Secretary of the U.S. Department of Health and Human Services to promulgate regulations allowing drug reimportation from Canada into the United States under certain circumstances. These provisions will become effective only if the Secretary certifies that such imports will pose no additional risk to the public s health and safety and result in significant cost savings to consumers. To date, the Secretary has made no such finding, but he could do so in the future. Proponents of drug reimportation may also attempt to pass legislation that would remove the requirement for the Secretary s certification or allow reimportation under circumstances beyond those anticipated under current law. If legislation is enacted, or regulations issued, allowing the reimportation of drugs, it could decrease the reimbursement we receive for any products that we may commercialize, negatively affecting our anticipated revenues and prospects for profitability. We face potential product liability exposure far in excess of our limited insurance coverage. The use of any of our product candidates in clinical trials, and the sale of any approved products, may expose us to product liability claims. These claims might be made directly by consumers, health care providers, pharmaceutical companies or others selling our products. We have obtained limited product liability insurance coverage for our clinical trials in the amount of $5 million per occurrence and $5 million in the aggregate. However, our insurance may not reimburse us or may not be sufficient to reimburse us for expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive, and we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. If we obtain marketing approval for any of our product candidates in development, we intend to expand our insurance coverage to include the sale of commercial products, but we may be unable to obtain commercially reasonable product liability insurance for any products approved for marketing. On occasion, juries have awarded large judgments in class action lawsuits based on drugs that had unanticipated side effects. In addition, the pharmaceutical and biotechnology industries, in general, have been subject to significant product liability litigation. A successful product liability claim or series of claims brought against us would decrease our cash reserves and could cause our stock price to fall. Risks Related to Our Common Stock We expect that our stock price will fluctuate significantly. Prior to this offering, you could not buy or sell our common stock publicly. An active public market for our common stock may not develop or be sustained after this offering. We will negotiate and determine the initial public offering price with the underwriters based on several factors. This price may vary from the market price of our common stock after this offering. You may be unable to sell your shares of common stock at or above the initial offering price. The stock market, particularly in recent years, has experienced significant volatility particularly with respect to pharmaceutical and biotechnology stocks. The volatility of pharmaceutical and biotechnology stocks often does not relate to the operating performance of the companies represented by the stock. Factors that could cause this volatility in the market price of our common stock include: the timing and the results from our clinical trial programs, including the initiation and completion of phase II clinical trials for ALGRX 4975 and phase III clinical trials for ALGRX 3268; the timing and results from our preclinical and future clinical studies relating to ALGRX 1207; the in-licensing or acquisition of additional product candidates; FDA or international regulatory actions; Table of Contents failure of any of our product candidates, if approved, to achieve commercial success; announcements of new products by our competitors; market conditions in the pharmaceutical and biotechnology sectors; developments concerning intellectual property rights; litigation or public concern about the safety of our potential products; comments by securities analysts; actual and anticipated fluctuations in our quarterly operating results; deviations in our operating results from the estimates of securities analysts; rumors relating to us or our competitors; additions or departures of key personnel; third party reimbursement policies; and developments concerning current or future strategic alliances. These and other factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management. Future sales of common stock by our existing stockholders may cause our stock price to fall. The market price of our common stock could decline as a result of sales by our existing stockholders of shares of common stock in the market after this offering, or the perception that these sales could occur. These sales might also make it more difficult for us to sell equity securities at a time and price that we deem appropriate. The lock-up agreements delivered by our executive officers and directors and substantially all of our stockholders and optionholders provide that Credit Suisse First Boston LLC and Citigroup Global Markets Inc., in their sole discretion, may release those parties, at any time or from time to time and without notice, from their obligation not to dispose of shares of common stock for a period of 180 days (which period could be extended by those underwriters for up to an additional 34 days under certain circumstances) after the date of this prospectus. Credit Suisse First Boston LLC and Citigroup Global Markets Inc. have no pre-established conditions to waiving the terms of the lock-up agreements, and any decision by them to waive those conditions would depend on a number of factors, which may include market conditions, the performance of the common stock in the market and our financial condition at that time. Also, 107,848 shares that are not subject to the lock-up agreements with the underwriters are subject to pre-existing lock-up agreements with us that generally provide that the holders of these shares will not sell, transfer, sell short or grant any option to purchase these shares for a period not to exceed 180 days after the effective date of a registration statement filed under the Securities Act of 1933, as amended. After this offering, approximately 14,505,012 shares of our common stock will be subject to registration rights. Please see Shares Eligible for Future Sale. Our directors and management will exercise significant control over our company which may delay, prevent or deter corporate actions that may be in the best interest of our stockholders. After this offering, our directors and executive officers and their affiliates will collectively control approximately 38.9% of our outstanding common stock, assuming that the underwriters over-allotment option is not exercised. As a result, these stockholders will collectively be able to significantly influence all matters requiring approval of our stockholders including the election of directors and approval of significant You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document. Dealer Prospectus Delivery Obligation Until (25 days after commencement of the offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions. Table of Contents corporate transactions. The concentration of ownership may delay, prevent or deter a change in control of our company even when such a change may be in the best interest of all the stockholders, could deprive stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company or assets and might affect the prevailing market price of our common stock. We will have broad discretion in how we use the proceeds of this offering, and we may not use these proceeds effectively, which could affect our results of operations and cause our stock price to decline. We will have considerable discretion in the application of the net proceeds of this offering. We currently intend to use the net proceeds of this offering for general corporate purposes, including clinical trials, research and development expenses, general and administrative expenses, and potential acquisitions of companies, products and technologies that complement our business. We may use the net proceeds for corporate purposes that do not yield a significant return or any return at all for our stockholders. Provisions of Delaware law or our charter documents could delay or prevent an acquisition of our company, even if the acquisition would be beneficial to our stockholders, and could make it more difficult for you to change management. Provisions of our certificate of incorporation and bylaws which we plan to adopt immediately prior to this offering may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. This is because these provisions may prevent or frustrate attempts by stockholders to replace or remove our current management or members of our board of directors. These provisions include: a classified board of directors; a prohibition on stockholder action through written consent; a requirement that special meetings of stockholders be called only by the Chairman of the board of directors, the Chief Executive Officer, or the board of directors pursuant to a resolution adopted by a majority of the total number of authorized directors; advance notice requirements for stockholder proposals and nominations; a requirement that 66 2/3% of stockholders approve certain amendments to our certificate of incorporation and amendments to our by-laws; and the authority of the board of directors to issue preferred stock with such terms as the board of directors may determine. As a result, these provisions and others available under Delaware law could limit the price that investors are willing to pay in the future for shares of our common stock. We have never paid dividends on our capital stock, and we do not anticipate paying any cash dividends in the foreseeable future, and, consequently, any gains from an investment in our common stock will depend on whether the price of our common stock increases. We have paid no cash dividends on any of our classes of capital stock to date and we currently intend to retain our future earnings, if any, to fund the development and growth of our businesses. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future. Consequently, in the foreseeable future, you will only experience a gain from your investment in our common stock if the price of our common stock increases. Table of Contents Investors in this offering will pay a much higher price than the book value of our common stock and will incur immediate dilution. If you purchase common stock in this offering, you will pay more for your shares than the amounts paid by existing stockholders for their shares. You will incur immediate and substantial dilution of $3.66 per share, representing the difference between our pro forma net tangible book value per share after giving effect to this offering and an assumed initial public offering price of $7.50 per share. In the past, we issued options and warrants to acquire common stock at prices significantly below the assumed initial public offering price. To the extent these outstanding options or warrants are ultimately exercised, you will sustain further dilution. 10 .21+ Lease dated January 12, 2005 between AlgoRx Pharmaceuticals, Inc. and Sunnyvale Village Associates 10 .22 Employment Agreement dated March 30, 2001 between AlgoRx Pharmaceuticals, Inc. and Ronald M. Burch, M.D., Ph.D. 10 .23 Letter Agreement dated September 16, 2004 between AlgoRx Pharmaceuticals, Inc. and Paul R. Hamelin 10 .24 Letter Agreement dated June 27, 2002 between AlgoRx Pharmaceuticals, Inc. and Jeffrey Lazar, M.D., Ph.D. 10 .25 Letter Agreement dated September 3, 2002 between AlgoRx Pharmaceuticals, Inc. and Jeffrey A. Rona 21 .1+ List of subsidiaries 23 .1 Consent of Ernst Young LLP, independent auditors 23 .2+ Consent of Heller Ehrman White McAuliffe LLP (included in Exhibit 5.1) Table of Contents FORWARD-LOOKING STATEMENTS This prospectus, including the sections entitled Prospectus Summary, Risk Factors, Management s Discussion and Analysis of Financial Condition and Results of Operations and Business, contains forward-looking statements. Forward-looking statements include, but are not limited to, statements about: our ability to in-license or acquire new technology or product candidates; the progress, timing and completion of our research, development and clinical trials for product candidates; our ability to receive regulatory approvals to develop and commercialize our product candidates; our ability to build an internal sales and marketing infrastructure; our ability to contract for and maintain third party manufacturing services; our ability to achieve market acceptance for our product candidates and successfully compete in the market; our ability to enter into collaborative or strategic relationships to assist in the clinical development and commercialization of our product candidates; our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others; our estimates for future performance; and our estimates regarding anticipated operating losses, use of proceeds from this offering, future revenues, capital requirements and our needs for additional financing. These statements relate to future events or our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These risks and other factors include those listed under Risk Factors and elsewhere in this prospectus. In some cases, you can identify forward-looking statements by terminology such as may, will, should, expects, intends, plans, anticipates, believes, estimates, predicts, potential, continue or the negative of these terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We do not intend to update any of the forward-looking statements after the date of this prospectus or to conform these statements to actual results. Neither the Private Securities Litigation Reform Act of 1995 nor Section 27A of the Securities Act of 1933 provides any protection for statements made in this prospectus. Table of Contents USE OF PROCEEDS We estimate that we will receive net proceeds from the sale of shares of our common stock in this offering of approximately $45.4 million, or $52.5 million if the underwriters fully exercise their over-allotment option, based upon an assumed initial public offering price of $7.50 per share and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We estimate that we will use the net proceeds of this offering together with our cash on hand toward funding: approximately $19 million for continuing development of our product candidate ALGRX 3268, including the continuation of our clinical trial program. We expect, with these funds, to file our NDA with the FDA and fund our pre-commercialization activities. approximately $22 million for continuing development of our product candidate ALGRX 4975, including the continuation of our clinical trial program and toxicology program. We expect, with these funds, to complete multiple phase II clinical trials and begin our phase III program. approximately $14 million for developing our most recently in-licensed candidate, ALGRX 1207. We expect, with these funds, to complete multiple phase I and phase II clinical trials. We intend to use the balance of the net proceeds of this offering, if any, to fund operations, to provide working capital and for other general corporate purposes, which may include in-licensing or acquiring additional product candidates. We have no current agreements or commitments with respect to any future acquisitions or in-licensing, and we are not currently engaged in any negotiations with respect to any transactions of that nature. As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to be received upon the completion of this offering. The amounts and timing of our actual expenditures may vary significantly from our expectations depending upon numerous factors, including the progress of our development and commercialization efforts, the progress of our clinical trials, and our operating costs and capital expenditures. Accordingly, our management will have broad discretion in the application of the net proceeds, and investors will be relying on the judgment of our management regarding the application of the proceeds of this offering. Pending these uses, we plan to invest the net proceeds in short-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the United States. The goal with respect to the investment of these net proceeds is capital preservation and liquidity so that funds are readily available to fund our research and development operations. In March 2004, our board of directors adopted our written investment policy. The investment policy imposes restrictions on our investments designed to ensure that we preserve our principal and maintain our liquidity. Any investment of the net proceeds from this offering will be made in accordance with the terms of our investment policy. DIVIDEND POLICY We have never declared or paid cash dividends on our capital stock. We do not anticipate paying any cash dividends on our capital stock in the foreseeable future. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business. The actual number of shares of common stock shown as issued and outstanding in the table above excludes: 2,352,340 shares of common stock issuable upon the exercise of options outstanding as of December 31, 2004, with exercise prices ranging from $1.00 to $10.00 per share and a weighted average exercise price of $1.30 per share; 3,413 additional shares of common stock reserved for future grants under our 2001 Equity Incentive Plan as of December 31, 2004; 250,000 shares of common stock reserved for future issuance under our 2005 Employee Stock Purchase Plan; and 69,265 shares of common stock issuable upon the exercise of an outstanding warrant as of December 31, 2004 at $5.925 per share, or $410,000 in the aggregate, that, by its terms, terminates upon completion of this offering. Table of Contents
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+S-1/A 1 c91812a1sv1za.htm AMENDMENT TO REGISTRATION STATEMENT sv1za Table of Contents As filed with the Securities and Exchange Commission on February 22, 2005 Registration No. 333-121824 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Amendment No. 1 to Form S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Volkswagen Auto Lease Trust 2005-A (Issuer with respect to the Notes) Volkswagen Auto Lease Underwritten Funding, LLC (Originator of the Note Issuer and Transferor of the Transaction SUBI Certificate to the Note Issuer) (Exact name of registrant as specified in its charter) VW Credit Leasing, Ltd. (Issuer with respect to the Transaction SUBI Certificate) Delaware 6189 11-365048-3 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 3800 Hamlin Road Auburn Hills, Michigan 48326 (248) 754-5000 (Address, including zip code, and telephone number, including area code, of the principal executive offices of Volkswagen Auto Lease Trust 2005-A, Volkswagen Auto Lease Underwritten Funding, LLC and VW Credit Leasing, Ltd.) Allen Strang, Esq. VW Credit, Inc. 3800 Hamlin Road Auburn Hills, Michigan 48326 (248) 754-5396 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: Stuart M. Litwin, Esq. Mayer, Brown, Rowe Maw LLP 190 South LaSalle Street Chicago, Illinois 60603 (312) 782-0600 Table of Contents IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS Content of Prospectus You should rely only on the information contained in this prospectus. We and the underwriters have not authorized anyone to provide you with different information. If you receive any other information, you should not rely on it. You should not assume that the information in this prospectus is accurate as of any date other than the date at the bottom of the front cover page. We include cross-references in this prospectus to the captions herein under which you can find additional related information. The table of contents lists the pages on which these captions are located. You can find a listing of the pages where the principal terms are defined under Index of Principal Terms beginning on page 87. In this prospectus, the term we refers to Volkswagen Auto Lease Underwritten Funding, LLC. Limitations on Offers or Solicitations We do not intend this document to be an offer or solicitation: (1) if used in a jurisdiction where the offer or solicitation is not authorized; (2) if the person making the offer or solicitation is not qualified to do so; or (3) if the offer or solicitation is made to anyone to whom it is unlawful to make the offer or solicitation. Dealer Prospectus Delivery Requirements Until 90 days after the date of this prospectus, all dealers that effect transactions in the notes, whether or not participating in this offering, may be required to deliver a prospectus. This requirement is in addition to the dealers obligation to deliver a prospectus when acting as underwriters with respect to their unsold allotments or subscriptions. The transferor, VW Credit, Inc., VW Credit Leasing, Ltd. and the issuer have filed with the Securities and Exchange Commission (the Commission ) a Registration Statement under the Securities Act of 1933, as amended, with respect to the notes being offered in this prospectus. This prospectus does not contain all of the information in the Registration Statement. The Registration Statement is available for inspection and copying at the public reference facilities of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission at http://www.sec.gov. VW Credit, Inc., on behalf of the issuer, will also file or cause to be filed with the Commission periodic reports required under the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder. Table of Contents SUMMARY This summary highlights selected information from this prospectus and may not contain all of the information that you need to consider in making your investment decision. This summary provides an overview of certain information to aid your understanding and is qualified in its entirety by the full description of this information appearing elsewhere in this prospectus. You should carefully read this entire prospectus to understand all of the terms of the offering. Basic Terms of the Notes Issuer: Volkswagen Auto Lease Trust 2005-A Transferor: Volkswagen Auto Lease Underwritten Funding, LLC Servicer: VW Credit, Inc. Administrator: VW Credit, Inc. Owner Trustee: The Bank of New York (Delaware) Indenture Trustee: JPMorgan Chase Bank, N.A. Origination Trust: VW Credit Leasing, Ltd. Transaction SUBI Trustee: U.S. Bank National Association Notes to be Offered: Principal Amount Interest Class of Notes (Approximate) Rates A-1 Notes $ 425,000,000 % A-2 Notes $ 420,000,000 % A-3 Notes $ 485,000,000 % A-4 Notes $ 170,000,000 % Interest Basis: Class A-1 Notes: Actual number of days elapsed and a 360-day year Class A-2 Notes, Class A-3 Notes and Class A-4 Notes: A 360-day year of twelve 30-day months Cutoff Date: Close of business on December 26, 2004 Credit Enhancement: A reserve account and overcollateralization Payment Dates: The 20th day of each month or the next business day, if that day is not a business day First Payment Date: March 21, 2005 Final Scheduled Payment Dates: Class A-1 Notes: March 20, 2006 Class A-2 Notes: April 20, 2007 Class A-3 Notes: May 20, 2008 Class A-4 Notes: October 20, 2010 Closing Date: Expected on or about March 3, 2005 Transaction Structure General Motor vehicle dealers in the Volkswagen and Audi network of dealers have assigned closed-end retail lease contracts and the related leased vehicles to VW Credit Leasing, Ltd., which we call the origination trust. Some of the leases and the related leased vehicles assigned to VW Credit Leasing, Ltd. have been allocated to a separate pool of assets, which we call the Transaction SUBI. The Transaction SUBI is a beneficial interest in the origination trust, which represents rights in, but not direct ownership of, the leases and vehicles in that pool. The Transaction SUBI, not the vehicles and leases in the pool, will be transferred to Volkswagen Auto Lease Trust 2005-A, a Delaware statutory trust, which we call the issuer. Neither the issuer nor holders of the issuer s notes will have any interest in assets other than those in that pool. Payment of the notes will be backed by the Transaction SUBI. Table of Contents Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is to be a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the registration statement of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number if the earlier effective registration statement for the same offering. If the delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. CALCULATION OF REGISTRATION FEE Proposed Maximum Proposed Maximum Proposed Title of Each Class of Amount to Be Offering Aggregate Amount of Securities to be Registered Registered Price Per Unit(1) Offering Price(1) Registration Fee(4) Auto Lease Asset Backed Notes, Class A-1 $425,000,000 100% $ $50,022.50 Auto Lease Asset Backed Notes, Class A-2 $420,000,000 100% $ $49,434.00 Auto Lease Asset Backed Notes, Class A-3 $485,000,000 100% $ $57,084.50 Auto Lease Asset Backed Notes, Class A-4 $170,000,000 100% $ $20,009.00 2005-A Special Unit of Beneficial Interest Certificate(2) (3) (3) (3) (3) Total $1,500,000,000 100% $ $176,550.00 (1) Estimated solely for the purpose of calculating the registration fee. (2) The 2005-A Special Unit of Beneficial Interest ( Transaction SUBI ) issued by VW Credit Leasing, Ltd. will constitute a beneficial interest in specified assets of VW Credit Leasing, Ltd., including certain leases and the automobiles relating to those leases. The Transaction SUBI is not being offered to investors hereunder. A 2005-A Special Unit of Beneficial Interest Certificate (the Transaction SUBI Certificate ) issued by VW Credit Leasing, Ltd. and representing the Transaction SUBI will be transferred to Volkswagen Auto Lease Trust 2005-A, the issuer of the Auto Lease Asset Backed Notes, Class A-1, Class A-2, Class A-3 and Class A-4. The Transaction SUBI Certificate is not being offered to investors hereunder. (3) Not applicable. (4) $117.70 has been previously paid. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. Table of Contents TABLE OF CONTENTS Page TRANSACTION OVERVIEW iv SUMMARY 1
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. You should read this entire prospectus carefully, especially the risks of investing in our Class A common stock discussed under Risk Factors beginning on page 10 and our consolidated financial statements and related notes, before making an investment decision. Unless otherwise indicated, the information set forth in this prospectus assumes that the underwriters will not exercise their over-allotment option to purchase up to an additional 2,530,500 shares of Class A common stock, and assumes that the Warburg Pincus Entities will exercise all outstanding warrants to acquire 6,361,383 shares of Class A common stock in connection with this offering, with the exercise price of the warrants to be paid in cash. Overview We provide the North American communications industry with essential clearinghouse services. We operate the authoritative directories that manage virtually all telephone area codes and numbers, and enable the dynamic routing of calls among thousands of competing communications service providers in the United States and Canada. All communications service providers, or CSPs, that offer telecommunications services to the public at large, or telecommunications service providers, such as Verizon Communications Inc., Sprint Corporation, AT T Corp. and Cingular Wireless LLC, must access our clearinghouse as one of our customers to properly route virtually all of their customers calls. We also provide clearinghouse services to emerging CSPs, including Internet service providers, cable television operators, and voice over Internet protocol, or VoIP, service providers. In addition, we manage the authoritative directories for the .us and .biz Internet domains, as well as for Common Short Codes, part of the short messaging service relied upon by the U.S. wireless industry. We are in a unique position with respect to many of the services we offer in that there are no other providers currently providing the services we offer. See Business Competition. With respect to these services, the databases we maintain are the definitive resource for the communications industry, which requires that there be one authoritative source for the information in these databases. We provide our services from our clearinghouse, which includes unique databases and systems for workflow and transaction processing. Our customers access our clearinghouse databases through standard connections, which we believe is the most efficient and cost-effective way for CSPs to exchange operationally essential data in a secure environment that does not favor any particular customer or technology. In addition, we believe that our clearinghouse positions us well to meet the complex needs of the communications industry going forward. Today, our services allow our customers to manage competitive turnover of their customers, subscriber growth, technology change, network optimization and industry consolidation. Furthermore, we believe our services are essential to the growth of new CSPs and new end-user services as the industry shifts from conventional circuit-switched communications to Internet protocol, or IP, and third generation wireless technology. We provide the communications industry in North America with critical technology services that solve the addressing, interoperability and infrastructure needs of CSPs. These services are used by CSPs to manage a range of their technical and operating requirements, including: Addressing. We enable CSPs to use critical, shared addressing resources, such as telephone numbers, Internet top-level domain names and Common Short Codes. Interoperability. We enable CSPs to exchange and share critical operating data so that communications originating on one provider s network can be delivered and received on the network of another CSP. Infrastructure and Other. We enable CSPs to more efficiently manage changes in their own networks by centrally managing certain critical data they use to route communications over their own networks. Table of Contents The information in this preliminary prospectus is not complete and may be changed. The selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and the selling stockholders are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. Subject to Completion. Dated December 6, 2005. PRELIMINARY PROSPECTUS 16,870,000 Shares Class A Common Stock The selling stockholders are offering 16,870,000 shares of Class A common stock. We will not receive any of the proceeds from the sale of shares by the selling stockholders. We have two classes of authorized common stock, Class A common stock and Class B common stock. Our Class B common stock is substantially identical to our Class A common stock, except that the Class B common stock has no public market. Shares of Class B common stock may be exchanged for shares of Class A common stock at any time at the election of the holder. Our Class A common stock is listed on the New York Stock Exchange under the symbol NSR. The last reported sale price on November 22, 2005 was $31.22. Per Share Total Public offering price $ $ Underwriting discounts and commissions $ $ Proceeds, before expenses, to selling stockholders $ $ The underwriters have an option to purchase up to an additional 2,530,500 shares of Class A common stock from the selling stockholders to cover over-allotments at the public offering price less underwriting discounts and commissions. The underwriters expect to deliver the shares to purchasers on . Investing in our Class A common stock involves risks. See Risk Factors beginning on page 10 to read about factors you should consider before buying shares of our Class A common stock. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. JPMorgan Credit Suisse First Boston Banc of America Securities LLC Bear, Stearns Co. Inc. UBS Investment Bank Jefferies Broadview ThinkEquity Partners LLC The date of this prospectus is . Table of Contents The shares of Class A common stock offered by this prospectus may not be offered, transferred, sold or delivered to any individual or legal entity other than to persons who trade or invest in securities in the conduct of their profession or trade (which includes banks, securities intermediaries (including dealers and brokers), insurance companies, pension funds, other institutional investors and commercial enterprises which as an ancillary activity regularly invest in securities) in the Netherlands. Table of Contents Demand Drivers for Our Clearinghouse Services A number of trends in the communications industry are driving growth in the demand for our clearinghouse services. These trends include: Emergence of IP services. VoIP service providers are rapidly expanding their operations. The total number of U.S. VoIP customers is expected to grow from 1.1 million in 2004 to 17.7 million in 2007, representing a compound annual growth rate of 155.4%, according to International Data Corporation. The need of VoIP service providers to have access to an inventory of telephone numbers, manage their network architecture and route traffic between traditional voice networks and new IP networks will drive the use of clearinghouse services. Dynamic growth in wireless. The use of wireless services continues to grow. Not only are more people using wireless phones, but there are entirely new kinds of wireless service providers entering the market, such as mobile virtual network operators. Demand for advanced services, such as third generation wireless technology, is projected to grow at a compound annual rate of 37% from 67 million users in 2004 to 174 million in 2007, according to International Data Corporation. These changes in the wireless industry drive increased demand for clearinghouse services. Consolidations in the industry, such as Cingular-AT T Wireless and SBC-AT T. Consolidation is resulting in significant demand for clearinghouse services. As large, traditional CSPs integrate disparate systems after mergers, they face two critical challenges. First, consolidating CSPs update network addressing information to associate end-users with the consolidated network. This update requires them to employ our addressing and interoperability services. Second, consolidating CSPs optimize their consolidated networks by changing the routing of traffic among their switches. CSPs use our interoperability and infrastructure services to accomplish this change. Pressure on carriers to reduce costs. Competition has placed significant pressure on CSPs to reduce costs. At the same time, the complexity of back office operations has increased as CSPs work to manage the proliferation of new technologies and new, complex end-user services provided across a large number of independent networks. Clearinghouse services assist CSPs in equipping their back office systems to manage the added complexity of sharing essential data with other CSPs in this environment. Our Strengths We believe that we are well positioned to continue to benefit from the ongoing changes in the communications industry that are driving the need for a trusted, neutral clearinghouse. Our competitive strengths include: Authoritative provider of essential services. We are the authoritative provider for many clearinghouse services, including the addressing and routing functions that are required for the ongoing operation of our customers networks and real-time delivery of services to their end-customers. Proven, adaptable clearinghouse. We believe that our clearinghouse databases and their open accessibility to CSPs are an efficient and cost-effective means of delivering a broad set of services. We designed our clearinghouse to meet the demanding functional, quality, capacity and security requirements of the changing communications industry. High degree of integration with our customers. Because our clearinghouse services are integrated into the network operations and service delivery functions of virtually all CSPs, we have an unmatched ability to deliver clearinghouse services to the entire communications industry. We also have the ability to introduce new services to our customers in a cost-effective manner because they already interface with our clearinghouse. Strong customer relationships. We believe we have excellent relationships with our customers. We strive to maintain a position of trust with our customers by delivering high quality and reliable service; neutral application of all operational methods and procedures; open, honest and timely Table of Contents TABLE OF CONTENTS Page Prospectus Summary 1
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, especially the risks of investing in our common stock discussed under "Risk Factors" on pages 7 - 13. Greenhill We are an independent investment banking firm that (i) provides financial advice on significant mergers, acquisitions, restructurings and similar corporate finance matters and (ii) manages merchant banking funds and commits capital to those funds. Greenhill acts for clients located throughout the world from offices in New York, London, Frankfurt and Dallas. We were established in 1996 by Robert F. Greenhill, the former President of Morgan Stanley and former Chairman and Chief Executive of Smith Barney. Since our founding, Greenhill has grown steadily, recruiting managing directors from major investment banks and other institutions, with a range of geographic, industry and transaction specialties and different sets of corporate management and other relationships. As part of this expansion, we opened a London office in 1998, raised a merchant banking fund in 2000, opened a Frankfurt office later in 2000 and began offering financial restructuring advice in 2001. On May 11, 2004, we converted from a limited liability company to a corporation, and completed an initial public offering of our common stock. We completed the initial closing of our second merchant banking fund in March of 2005 and opened our Dallas office in April of 2005. We have 28 managing directors and two senior advisors globally. We have demonstrated strong financial results, producing revenue and earnings growth in a variety of economic and market conditions, including a prolonged period in which global merger and acquisition activity declined significantly. Our revenue grew from $36.9 million in 1997 (our first full year of operation) to $151.9 million in 2004, representing a compound annual growth rate of 22%. Our revenue growth rate each year during this period ranged from a decline of 10.3% in 2001 compared to 2000, to an increase of 120.4% in 1999 compared to 1998. Principal Sources of Revenue Our principal sources of revenue are financial advisory and merchant banking fund management. Financial Advisory We provide a broad range of advice to U.S. and non-U.S. clients in relation to mergers, acquisitions, restructurings and similar corporate finance matters and are generally involved at each stage of these transactions, from initial structuring to final execution. Our focus is on providing high-quality advice to senior executive management and boards of directors of prominent large and mid-cap companies in transactions that typically are of the highest strategic and financial importance to those companies. Financial advisory services accounted for 86% and 96% of our revenues in 2004 and 2003, respectively. Non-U.S. clients are a significant part of our business, generating 46% and 52% of our financial advisory revenues in 2004 and 2003, respectively. Merchant Banking Fund Management Our merchant banking fund management activities currently consist primarily of management of Greenhill Capital Partners, or GCP, a family of merchant banking funds that invest in portfolio companies, including the commitment of capital to these merchant banking funds. Merchant banking funds are private investment funds raised from contributions by qualified institutional investors and financially sophisticated individuals. The funds make substantial, sometimes controlling, investments, generally in non-public companies and typically with a view toward divesting within 3 to 5 years. Our The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. Subject to Completion. Dated May 6, 2005. 4,000,000 Shares Greenhill & Co., Inc. Common Stock All of the shares of common stock in the offering are being sold by the selling stockholders identified in this prospectus. Greenhill will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders. The common stock is listed on the New York Stock Exchange under the symbol "GHL". The last reported sale price of the common stock on May 5, 2005 was $30.96 per share. See "Risk Factors" beginning on page 7 to read about factors you should consider before buying shares of the common stock. Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. Per Share Total Public offering price $ $ Underwriting discount $ $ Proceeds, before expenses, to the selling stockholders $ $ To the extent that the underwriters sell more than 4,000,000 shares of common stock, the underwriters have the option to purchase up to an additional 600,000 shares from the selling stockholders at the initial price to the public less the underwriting discount. Upon completion of this offering, our managing directors and their affiliated entities will collectively own 68.5% of the total shares of common stock outstanding (or 66.5% if the underwriters' option to purchase additional shares is exercised in full). The underwriters expect to deliver the shares against payment in New York, New York on , 2005. Goldman, Sachs & Co. UBS Investment Bank Keefe, Bruyette & Woods Wachovia Securities Prospectus dated , 2005. merchant banking activities historically have generated revenue almost entirely from fees earned for our management of GCP funds. In 2003, we started investing our own capital into our first merchant banking fund (or Fund I) in material amounts, in addition to that previously invested by our managing directors and other professionals of Greenhill. In March 2005, we committed $85 million to our new merchant banking fund, Greenhill Capital Partners II (or Fund II), which we expect will represent approximately 10% of committed capital to Fund II. In addition, our managing directors (including all of our executive officers), senior advisors and other professionals have personally committed a further $135 million of capital to Greenhill Capital Partners II. We pursue merchant banking fund management activities in addition to our financial advisory activities because: (i) our senior advisory professionals, and those we seek to recruit, are attracted by the opportunity to participate in merchant banking fund management, including the ability to invest in managed funds; and (ii) it allows us to further leverage our managing directors' industry knowledge and client contacts. We believe we can pursue merchant banking opportunities without creating conflicts with our advisory clients by typically focusing on significantly smaller companies than those with respect to which we seek to provide financial advice. Our merchant banking funds typically invest in companies with valuations that are between $100 million and $500 million at the time of investment. Competitive Strengths Independence – We are an independent firm managed and majority-owned by our managing directors, free of many of the conflicts that can arise at larger, diversified financial institutions. Focus on Advisory Activities – We are focused on advising clients, particularly large and mid-size corporations, rather than on a broad range of securities businesses. We believe this focus has helped and will continue to help us attract clients and recruit financial advisory professionals who want to work in a firm where their activities are the central focus. Breadth of Advisory Capabilities – While our origin was as an advisor on mergers and acquisitions, we have acquired considerable experience and capabilities in financial restructuring situations. International Capabilities – Unlike many small investment banking firms, we have aggressively sought to develop a broad geographic scope rather than focusing on any one particular market. From 2000 through 2004, 52% of our advisory revenues were derived from clients based outside the United States, primarily from the United Kingdom and, to a lesser extent, continental Europe, Latin America and Canada. Experience – Our 28 managing directors and two senior advisors have an average of 23 years of relevant experience. Prior to joining Greenhill, 24 of those individuals were managing directors at other leading financial advisory firms or occupied comparably senior roles in leading private equity firms, law firms or corporations. Strong Corporate Culture – While Greenhill is relatively young, we have developed a strong corporate culture. We are united by our desire to build a firm where client advisory activities are at the core, and by our commitment to excellence in those activities. Only two managing directors have departed in more than 8 years, and 14 of the 28 current managing directors have five years' tenure at Greenhill. Notwithstanding these competitive strengths, we face a number of competitive challenges, including intense competition from larger firms that have a greater range of products and services and greater financial and other resources than we have and that may pose a threat to our ability to recruit and retain key employees. See "Risk Factors" for a discussion of the factors you should consider before buying shares of our common stock. Strategy Our strategy is principally to enhance our position as an independent advisor on important merger, acquisition and restructuring transactions, grow our financial advisory business and expand our merchant banking fund management business. We also aim to maintain a balance of activities across geographic regions and to increase the stability of our earnings. Our strategy is heavily dependent on retaining and recruiting managing directors and other senior professionals.
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+PROSPECTUS SUMMARY This summary may not contain all of the information that may be important to you. You should read the entire prospectus, including the financial statements and related notes, before making an investment decision. For convenience in this prospectus, PRA International, PRA, we, us, and our refer to PRA International and its subsidiaries, taken as a whole. PRA International We are a leading global contract research organization, or CRO, with approximately 2,500 employees working from 24 offices located in North America, Europe, Africa, South America, Australia, and Asia. CROs assist pharmaceutical and biotechnology companies in developing and taking drug compounds, biologics, and drug delivery devices through appropriate regulatory approval processes. The conduct of clinical trials, in which a product candidate is tested for safety and efficacy, forms a major part of the regulatory approval process. Completing the approval process as efficiently and quickly as possible is a priority for sponsoring pharmaceutical and biotechnology companies because they must receive regulatory approval prior to marketing their products anywhere in the world. Revenue for CROs is typically generated on a fee for service basis on either a time and materials or a fixed-price contract arrangement with the client organization. We conduct clinical trials globally and are one of a few CROs in the world with the capability to serve the growing need of pharmaceutical and biotechnology companies to conduct complex clinical trials in multiple geographies concurrently. We incorporated in Delaware in April 2001, with predecessors dating back to 1976. Our qualified and experienced clinical and scientific staff has been delivering clinical drug development services to our customers for over 25 years, and our service offerings now encompass all points of the clinical drug development process. We provide our expertise in several therapeutic areas of strategic interest to our customers, including oncology, central nervous system, or CNS, cardiovascular, and respiratory/allergy product development. We perform a broad array of services across the spectrum of clinical development programs, from the filing of Investigational New Drug applications, or INDs, and similar foreign regulatory applications, to the conduct of all phases of clinical trials, to drug registration and post-marketing studies. Our core global clinical development services include the following: creating drug development and regulatory strategy plans; executing Phase I clinical trials; performing Phase II through IV multi-center, international clinical trials; developing and analyzing integrated global clinical databases; preparing and submitting regulatory filings around the world; and managing long-term drug safety programs. Since 1999, we have conducted over 2,300 clinical trial programs for over 295 clients. We have collaborated with nine of the ten largest pharmaceutical companies and seven of the ten largest biotechnology companies over the last two years in all major therapeutic areas. In 2004, we generated service revenue of $277.5 million, of which approximately 52% was derived from biotechnology companies, 38% from large pharmaceutical companies, and 10% from Japanese pharmaceutical companies. Our Industry Companies in the pharmaceutical and biotechnology industries outsource clinical product development services to CROs in order to manage the drug development process more efficiently and cost-effectively and to speed time to market. PRA and other CROs provide clinical drug development services, including protocol design and management of Phase I through IV clinical trials, data management, laboratory The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED JUNE 14, 2005 6,000,000 Shares Common Stock The selling stockholders named in this prospectus are selling 6,000,000 shares of common stock. We will not receive any of the proceeds from the shares of common stock sold by the selling stockholders. Our common stock is listed on The Nasdaq National Market under the symbol PRAI. On May 26, 2005, the last reported sale price of our common stock was $26.17 per share. The underwriters have an option to purchase a maximum of 900,000 additional shares from the selling stockholders to cover over-allotments of shares. Investing in our common stock involves risks. See Risk Factors beginning on page 9. Underwriting Proceeds to Price to Discounts and the Selling Public Commissions Stockholders Per Share $ $ $ Total $ $ $ Delivery of the shares of common stock will be made on or about , 2005. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Credit Suisse First Boston Bear, Stearns Co. Inc. William Blair Company Jefferies Company, Inc. The date of this prospectus is , 2005. testing, and statistical analysis. Some other CROs also provide preclinical services. CROs provide services that generate high-quality and timely data in support of applications for regulatory approval of new drugs or reformulations of existing drugs as well as to support new and existing marketing claims. CROs derive substantially all of their revenue from pharmaceutical and biotechnology companies research and development expenditures, which have increased substantially in recent years. Specifically, Frost and Sullivan estimates that research and development expenditures by such companies totaled $58.5 billion in 2003, an increase from $41.1 billion in 2000, representing a compounded annual growth rate of 12.5%. Excluding spending related to administrative functions to support the research and development process, which are not typically outsourced to CROs, estimated research and development expenditures totaled $47.2 billion in 2003, up from $32.6 billion in 2000, representing a 13.2% compounded annual growth rate. Of this amount, approximately $27.4 billion in 2003 was directly related to Phase I through Phase IV clinical trials. Such spending, which excludes expenditures related to pre-clinical activities, increased between 2000 and 2003 at a compounded annual growth rate of 12.5%, and represents the total amount of research and development spending that could potentially be outsourced to PRA or its competitors offering similar services. According to Frost and Sullivan, in 2003 pharmaceutical and biotechnology companies outsourced to CROs approximately $8.4 billion, or 30.7% of their total research and development spending devoted to Phase I through Phase IV clinical trials, and outsourcing of such spending is expected to increase to $18.5 billion by 2010, representing a compounded annual growth rate of 12.1%. We believe that a number of factors have contributed, and will continue to contribute, to the growth of the CRO industry, including the globalization of drug development, the increased number of product candidates entering clinical development, the growth of the biotechnology industry, increased regulatory scrutiny, and the growing need for quick, efficient, and cost-effective drug development. Our Strategy We intend to continue building PRA into the best clinical development organization in the world by: Continuing to Leverage and Build Our Expertise in Key Therapeutic Areas. We believe that our extensive therapeutic expertise is critical to our customers and for the proper design and management of all clinical phases of drug development. We intend to continue capitalizing on our market positions in our existing therapeutic categories. We have established a therapeutic business development initiative that is focused on identifying early clinical drug candidates in our core therapeutic competencies. We believe that oncology, CNS, cardiovascular, and respiratory/allergy, which according to a report in R D Directions (October 2003) together represented approximately 58% of all drug candidates being developed by pharmaceutical and biotechnology companies, will be significant drivers of our growth. Furthermore, we plan to continue to expand our depth of therapeutic expertise in other attractive therapeutic areas. Expanding the Breadth and Depth of Our Service Offering. We plan to build upon our existing expertise in Phase II and III clinical trials and to enhance our existing service offerings in Phase I and IV clinical trials, which are among the fastest growing segments of the CRO industry, according to Frost and Sullivan. In addition, we intend to expand our regulatory and drug safety capabilities around the globe to further serve our clients. Leveraging Our Infrastructure to Improve Operational Efficiencies. We have made significant investments and corporate acquisitions over the past eight years to enhance our global infrastructure and product offerings. Past investments include recruiting and training qualified professionals, developing a worldwide network of offices, and building an integrated information technology platform. We believe that these investments will enable us to improve patient recruitment, improve efficiency of global clinical trial data collection, and speed regulatory submissions for customers, resulting in improved project margins and overall profits. We plan to continue to enhance our information technology platform to maintain our competitiveness and our adaptable and flexible business support environment. We continue to make additional investments and staff training commitments in our proprietary quality management system, called PRA Management System, or PRAMS, and have obtained International Standards Organization 9001:2000 registration certification. We believe ISO 9001:2000 certification will assist us in obtaining more global projects and measuring output and customer satisfaction. PRAMS reinforces Project Assurancesm, our company-wide commitment to consistently achieving customer requirements every time, at every location. Augmenting Our Geographic Reach in Latin America and Asia. We intend to replicate the success we have achieved in North America, Europe, and existing Southern Hemisphere locations to further expand in Latin America and in Asia, both of which have large population bases and developing clinical scientific infrastructures. Continuing to Pursue a Disciplined Acquisition Strategy. We have demonstrated skill in identifying, purchasing, and integrating high-quality strategic acquisitions. We have developed a well-refined integration process to ensure a consistent and streamlined assimilation of the staff and expertise of the acquired company. We expect to opportunistically pursue acquisitions that broaden our product development platform, geographic reach, and therapeutic capabilities. Our Competitive Strengths Global Leadership Position. We have significant global reach with resources and knowledge that enable us to seamlessly conduct trials on six continents concurrently. Our global scale enables us to select locations that produce more efficient and cost-effective clinical drug development. Therapeutic Expertise and Scientific Depth. Our breadth of experience allows us to offer drug development services, vendor management, and patient recruitment access across a broad spectrum of therapeutic indications. We believe that we are a world leader in oncology, CNS, cardiovascular, and respiratory/allergy drug development, which are all therapeutic areas requiring significant scientific expertise and which collectively accounted for 72.8% of all global research and development spending by pharmaceutical and biotechnology companies in 2003, according to Frost and Sullivan. Attractive Customer Base. We have collaborated with nine of the ten largest pharmaceutical companies and seven of the ten largest biotechnology companies over the last two years in all major therapeutic areas and have a particular strength in serving the expanding biotechnology industry. We currently provide services to an active customer base of over 220 clients, and have established preferred vendor relationships with seven of the world s leading pharmaceutical and biotechnology companies. Proven and Incentivized Management Team and Workforce. We are led by our experienced executive management team, which has an average tenure of over 11 years with us or our acquired companies. This team has been responsible for building our global platform, maintaining strong client relationships, and for our significant growth in revenue and earnings. We believe our employees are well-regarded in the drug development industry for their scientific expertise and their experience in managing many complex drug studies. Strategic Challenges In the execution of our business strategy, we have faced and will continue to face the following challenges: Reduction in Outsourcing. The CRO industry depends upon companies in the pharmaceutical and biotechnology industries outsourcing clinical development projects. Consequently, if pharmaceutical and biotechnology companies experience a general industry downturn, reduce their research and development spending, or expand their in-house development capabilities, our business may be adversely affected. Potential for Contract Termination. Most of the contracts we sign allow for termination without cause upon 30 to 60 days notice. The loss or delay of a large contract or multiple smaller contracts could adversely affect our business by causing decreased staff utilization. Variations in Quarterly Operating Results. Our quarterly results vary because of factors such as the commencement, completion, or cancellation of significant contracts, the timing of acquisitions, the mix of contracted services, the fluctuation of foreign exchange rates, the timing of start-up expenses for new offices and services, and the costs associated with integrating acquisitions. Possible Regulatory Reform. Regulatory entities in both the United States and foreign jurisdictions have instituted stringent regulatory and statutory controls over the development and approval of drug and biological products, resulting in larger and more complex clinical studies. We believe that these trends have created an increased demand for CRO services. However, if the scope of regulatory requirements narrows, such as the introduction of simplified marketing applications for pharmaceuticals and biological products, our business could be adversely affected. Customer Concentration. A significant portion of our service revenue is derived from a limited number of clients. In 2004, approximately 43% of our service revenue was derived from our top five clients. We have preferred vendor relationships with three of these five clients, resulting in a concentration of service revenue generated from these relationships. Although the service revenue from each of these clients results from numerous contracts spread over many divisions of the client, and typically across multiple jurisdictions, the loss of, or a significant decrease in business from, one or more of these clients could adversely affect our business. We incorporated in Delaware in April 2001, with predecessors dating back to 1976, and our principal executive offices are located at 12120 Sunset Hills Road, Suite 600, Reston, Virginia 20190. Our telephone number is (703) 464-6300, and our website address is http://www.prainternational.com. Information contained on our website is not a prospectus and does not constitute part of this prospectus. The Offering Common stock offered by the selling stockholders 6,000,000 shares Common stock to be outstanding after this offering 22,382,491 shares Use of proceeds We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders in this offering. Nasdaq National Market symbol PRAI Unless we indicate otherwise or unless the context otherwise requires, all information in this prospectus assumes no exercise of the underwriters over-allotment option. In addition, unless we indicate otherwise or unless the context otherwise requires, all information in this prospectus excludes: 3,553,049 shares of our common stock that may be issued upon the exercise of options outstanding as of May 15, 2005; and 1,865,004 shares of our common stock that are reserved for issuance under our stock option and incentive plans.
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+S-1/A (Unaudited) September 30, 2004: Securities available for sale: U.S. Government and federal agency obligations $ 37,691 $ 6 $ (205 ) $ 37,492 Mortgage-backed securities 53,869 56 (2,051 ) 51,874 Other bonds and obligations 5,086 Deferred tax provision (benefit): Federal 22 4 5 (37 ) State 8 1 (Unaudited) Cash basis of accounting $ (4 ) $ (3 ) $ (4 ) Net unrealized gain on securities available for sale (19 ) (45 ) (146 ) Depreciation and amortization (62 ) (32 ) (9 ) Deferred income (78 ) (43 ) (13 ) Allowance for loan losses 511 474 430 Other Table of Contents result in an expense, and a reduction in earnings, of $4.0 million, offset in part by a corresponding tax benefit, during the quarter in which the contribution is made, and reduce our pro forma market value and, accordingly, the number of shares that we otherwise would have offered for sale in the stock offering. See Risk Factors The Contribution of Shares to the Charitable Foundation Will Dilute Your Ownership Interests and Adversely Affect Net Income in 2005 on page # , Comparison of Independent Valuation and Pro Forma Financial Information With and Without the Foundation on page # and The Benjamin Franklin Bank Charitable Foundation on page # . As a private foundation under Section 501(c)(3) of the Internal Revenue Code, the Benjamin Franklin Bank Charitable Foundation will be required to distribute annually in grants or donations a minimum of 5.0% of the average fair market value of its net investment assets. Assuming that the fair market value of the Charitable Foundation s net investment assets is $4,000,000, the Charitable Foundation would make annual grants or donations of at least $200,000. This level of annual charitable giving compares to an average of $79,000 per year for the past three fiscal years. As a community bank whose business depends to a large extent upon our ties to and relationships with customers in our local communities, we believe that this increased level of charitable giving is appropriate, especially given our larger asset size and larger geographic market following completion of the conversion and the Chart Bank merger. Delivery Of Stock Certificates Certificates representing shares of common stock sold in the offering will be mailed to the certificate registration address noted on the order form, as soon as practicable following completion of the offering and receipt of all necessary regulatory approvals. It is possible that, until certificates for the common stock are available and delivered to purchasers, purchasers might not be able to sell the shares of common stock that they ordered, even though the common stock will have begun trading. Expiration of the Offering The subscription offering will expire at 10:00 a.m., Massachusetts time, on date , 2005, unless extended by Benjamin Franklin Bancorp with the approval of the Massachusetts Commissioner of Banks and the Federal Reserve Board, if required. The direct community and syndicated community offerings, if conducted, must be completed by date , 2005 unless extended, with regulatory approval, if necessary. If the subscription offering and/or direct community and syndicated community offerings extend beyond date , 2005, we will be required to resolicit subscribers before proceeding with the offering. In no event may we extend the offering beyond October 28, 2006. Steps We May Take If We Do Not Receive Orders For The Minimum Number Of Shares If we do not receive orders for at least 4,250,000 shares of common stock in the subscription offering, we may take several steps in order to issue the minimum number of shares of common stock in the offering range. Specifically, we may: (i) make shares available to the public in a direct community offering, Loans greater than 90 days delinquent and still accruing $ 65 $ 5 $ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents At or for the Years Ended December 31, 2004 2003 Selected Financial Ratios and Other Data: Performance Ratios: Return on assets (ratio of net income to average total assets) 0.41 % 0.83 % Return on equity (ratio of net income to average equity) 5.51 % 10.28 % Average interest rate spread (1) 3.44 % 3.83 % Net interest margin (2) 3.56 % 3.96 % Efficiency ratio (3) 80.07 % 70.09 % Non-interest expense to average total assets 3.22 % 3.13 % Average interest-earning assets to average interest bearing liabilities 106.32 % 106.08 % Dividend payout ratio (4) 60.61 % 12.51 % Asset Quality Ratios: Non-performing assets to total assets 0.11 % 0.10 % Non-performing loans to total loans 0.16 % 0.15 % Allowance for loan losses to total loans 1.00 % 1.17 % Capital Ratios: Equity to total assets at end of period 6.88 % 8.29 % Average equity to average assets 7.39 % 8.10 % Tier 1 risk-based capital ratio at end of period 10.80 % 11.30 % Other Data: Number of full service offices 3 PRE-EFFECTIVE AMENDMENT NO. 2 to FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents At or For the Nine Months Ended September 30, At or For the Years Ended December 31, 2004 2003 2003 2002 2001 2000 1999 Selected Financial Ratios and Other Data: Performance Ratios: Return on assets (ratio of net income to average total assets) (1) 0.44 % 0.86 % 0.83 % 0.81 % 0.80 % 0.35 % 0.11 % Return on equity (ratio of net income to average equity) (1) 5.95 % 10.61 % 10.28 % 10.31 % 10.37 % 4.43 % 1.48 % Average interest rate spread (1) (2) 3.40 % 3.87 % 3.83 % 3.88 % 3.39 % 2.99 % 3.21 % Net interest margin (1)(3) 3.52 % 4.00 % 3.96 % 4.06 % 3.81 % 3.56 % 3.75 % Efficiency ratio (4) 79.29 % 70.06 % 70.09 % 82.75 % 92.34 % 94.70 % 98.60 % Non-interest expense to average total assets (1) 3.19 % 3.16 % 3.13 % 3.72 % .5 % 3. % 4. % Average interest-earning assets to average interest-bearing liabilities 106.87 % 105.65 % 106.08 % 106.90 % 110.92 % 97.15 % 99.86 % Dividend payout ratio(5) 76.15 % 16.36 % 12.51 % 22.63 % 5.01 % % % Asset Quality Ratios: Non-performing assets to total assets 0.06 % 0.01 % 0.10 % 0.01 % 0.13 % 0.00 % 0.25 % Non-performing loans to total loans 0.08 % 0.02 % 0.15 % 0.02 % 0.18 % 0.00 % 0.32 % Allowance for loan losses to total loans 0.99 % 1.22 % 1.17 % 1.23 % 1.09 % 1.07 % 1.02 % Capital Ratios: Equity to total assets at end of period 6.85 % 8.31 % 8.29 % 7.91 % 8.25 % 7.93 % 6.55 % Average equity to average assets 7.47 % 8.08 % 8.10 % 7.87 % 7.71 % 7.92 % 7.46 % Tier 1 risk-based capital ratio at end of period 10.90 % 11.30 % 11.30 % 10.80 % 10.60 % 11.80 % 9.80 % Other Data: Number of full service offices 3 3 3 3 4 4 Benjamin Franklin Bancorp, Inc. (Exact name of registrant as specified in its charter) Massachusetts 6712 04-3336598 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of incorporation or organization) Classification Code Number) Identification Number) 58 Main Street Franklin, Massachusetts 02038-0309 (508) 528-7000 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) 43 (207 ) (117 ) (481 ) 960 Change in valuation reserve Thomas R. Venables President and Chief Executive Officer Benjamin Franklin Bancorp 58 Main Street Franklin, Massachusetts 02038-0309 (508) 528-7000 (Name, address, including zip code, and telephone number, including area code, of agent for service) Table of Contents At or For the Nine Months Ended September 30, At or For the Years Ended December 31, 2004 2003 2003 2002 2001 2000 1999 Selected Financial Ratios and Other Data: Performance Ratios: Return on assets (ratio of net income to average total assets) (1) 0.36 % 0.40 % 0.36 % 0.61 % 0.01 % (1.09 %) 0.76 % Return on equity (ratio of net income to average equity) (1) 5.85 % 6.13 % 5.65 % 9.45 % 0.16 % (16.32 %) 10.23 % Average interest rate spread (1) (2) 2.67 % 2.76 % 2.76 % 3.32 % 3.29 % 2.87 % 3.47 % Net interest margin (1)(3) 3.03 % 2.93 % 2.98 % 3.47 % 3.51 % 3.57 % 4.30 % Efficiency ratio (4) 79.31 % 87.13 % 84.78 % 75.69 % 72.84 % 78.07 % 73.53 % Non-interest expense to average total assets (1) 2.61 % 2.76 % 2.73 % 2.76 % 2.64 % 2.53 % 2.70 % Average interest-earning assets to average interest bearing liabilities 124.43 % 110.89 % 114.38 % 108.04 % 106.92 % 88.16 % 86.56 % Asset Quality Ratios: Non-performing assets to total assets 0.08 % 0.14 % 0.10 % 0.00 % 0.04 % 0.04 % 0.04 % Non-performing loans to total loans 0.11 % 0.24 % 0.16 % 0.00 % 0.06 % 0.06 % 0.07 % Allowance for loan losses to non-performing loans 714.93 % 394.35 % 544.92 % 115,600.00 % 749.68 % 603.39 % 657.22 % Allowance for loan losses to total loans 0.80 % 0.95 % 0.87 % 0.88 % 0.46 % 0.38 % 0.44 % Capital Ratios: Equity to total assets at end of period 5.91 % 6.22 % 6.39 % 6.59 % 6.26 % 5.60 % 6.67 % Average equity to average assets 6.19 % 6.47 % 6.42 % 6.49 % 5.82 % 6.67 % 7.45 % Risk-based capital ratio (bank only) at end of period 13.05 % 14.01 % 13.94 % 13.54 % 9.65 % 7.69 % 10.08 % Other Data: Number of full service offices 6 6 6 6 6 6 Table of Contents At or for the Years Ended December 31, 2004 2003 Selected Financial Ratios and Other Data: Performance Ratios: Return on assets (ratio of net income to average total assets) 0.34 % 0.36 % Return on equity (ratio of net income to average equity) 5.59 % 5.65 % Average interest rate spread (1) 2.63 % 2.76 % Net interest margin (2) 3.00 % 2.98 % Efficiency ratio (3) 79.09 % 84.78 % Non-interest expense to average total assets 2.58 % 2.73 % Average interest-earning assets to average interest bearing liabilities 123.91 % 114.38 % Asset Quality Ratios: Non-performing assets to total assets 0.07 % 0.10 % Non-performing loans to total loans 0.09 % 0.16 % Allowance for loan losses to non-performing loans 940.56 % 544.92 % Allowance for loan losses to total loans 0.82 % 0.87 % Capital Ratios: Equity to total assets at end of period 6.05 % 6.39 % Average equity to average assets 6.13 % 6.42 % Risk-based capital ratio (bank only) at end of period 12.26 % 13.94 % Other Data: Number of full service offices 6 30 5 Copies to: Peter W. Coogan, Esq. Eric Luse, Esq. Carol Hempfling Pratt, Esq. Marc P. Levy, Esq. Foley Hoag LLP Luse Gorman Pomerenk Schick P.C. 155 Seaport Boulevard 5335 Wisconsin Ave. N.W. Boston, Massachusetts 02210 Washington, D.C. 20015 Telephone: (617) 832-1000 Telephone: (202) 274-2000 Telecopy: (617) 832-7000 Telecopy: (202) 362-2902 Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. (Unaudited) Federal funds $ 6,215 $ 16,031 $ 14,039 Bank Investment Liquidity Fund 577 4,937 23,825 Money market account 39 5 Table of Contents PROSPECTUS LOGO OF BENJAMIN FRANKLIN BANCORP, INC. (Holding Company for Benjamin Franklin Bank) Up to 6,612,500 Shares of Common Stock Benjamin Franklin Bancorp, Inc., Franklin, Massachusetts, is offering shares of its common stock in connection with its conversion from its current form as a Massachusetts-chartered mutual holding company, known as Benjamin Franklin Bancorp, M.H.C., to a Massachusetts-chartered business corporation and stock holding company. Benjamin Franklin Bancorp now owns all of the common stock of Benjamin Franklin Bank and will continue to do so after the conversion. Currently, there are no outstanding shares of Benjamin Franklin Bancorp common stock. We have applied to have the common stock of Benjamin Franklin Bancorp quoted on the Nasdaq National Market under the symbol BFBC. At the same time as the conversion, Benjamin Franklin Bancorp will acquire Chart Bank of Waltham, Massachusetts, using $22,492,000 of the net proceeds of the offering, together with 2,401,575 newly issued shares of our common stock, assuming that the Chart Bank options are cashed out at the closing rather than being exercised by optionees prior to the closing. We are offering up to 5,750,000 shares of common stock for sale on a best efforts basis. We may sell up to 6,612,500 shares of common stock because of demand for the shares positive changes in market conditions or regulatory considerations, without resoliciting subscribers. In addition, we will donate to a charitable foundation to be established by Benjamin Franklin Bank 8.0% of the number of shares we actually sell in the offering, up to a maximum of 400,000 shares. We must issue a minimum of 4,250,000 shares in the offering. The contribution of the common stock to the Benjamin Franklin Bank Charitable Foundation will not be considered in determining whether the minimum number of shares of common stock, 4,250,000, has been sold in order to complete the offering. The minimum order size is 25 shares. The offering is expected to expire at 10:00 a.m., Massachusetts time, date , 2005. We may extend this expiration date without notice to you until date , 2005, unless the Massachusetts Commissioner of Banks approves a later date, which may not be beyond date , 2005. Once submitted, orders are irrevocable unless the offering is terminated or is extended beyond date , 2005 or the number of shares of common stock to be sold is increased to more than 6,612,500 shares or decreased to less than 4,250,000 shares. In any of these cases, subscribers will have the right to modify or rescind their purchase orders. Funds received during the offering will be held in a segregated account at Benjamin Franklin Bank and will earn interest at our passbook savings rate. Ryan Beck Co., Inc. will assist us in selling our shares of common stock on a best efforts basis. As Ryan Beck Co., Inc. is not underwriting the offering, it is not required to purchase any shares of the common stock that are being offered for sale. The purchase price is $10 per share. Purchasers will not pay a commission to purchase shares of common stock in the offering. Offering Summary Price: $10 per share Minimum Maximum Adjusted Maximum Number of Shares 4,250,000 5,750,000 6,612,500 Gross Offering Proceeds $ 42,500,000 $ 57,500,000 $ 66,125,000 Estimated Offering Expenses (1) 1,553,850 1,691,370 1,770,720 Estimated Net Proceeds $ 40,946,150 $ 55,808,630 $ 64,354,280 Estimated Net Proceeds/Share $ 9.63 $ 9.71 $ 9.73 (1) Includes fees payable to Ryan Beck Co. as marketing agent for the offering. See Pro Forma Data beginning on page # and Plan of Distribution and Marketing Arrangements beginning on page # . This investment involves a degree of risk, including the possible loss of principal. Please read Risk Factors beginning on page # . These securities are not deposits or accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. None of the Securities and Exchange Commission, the Massachusetts Commissioner of Banks nor any state securities regulator has approved or disapproved of these securities or determined if this prospectus is accurate or complete. Any representation to the contrary is a criminal offense. For assistance, contact the Stock Information Center at (800) 290-0793. Ryan Beck Co. (Unaudited) Change in unrealized holding gains (losses) on securities available for sale $ (87 ) $ (1,896 ) $ (2,361 ) $ 1,081 $ (133 ) Tax effect 62 79 237 (374 ) Deferred tax provision (benefit): Federal 27 (140 ) (73 ) (221 ) 977 State The date of this prospectus is date , 2005 Table of Contents (Unaudited) September 30, 2004: Federal agency obligations $ 170 $ 30,417 $ 35 $ 6,054 Other bonds and obligations 30 4,559 Mortgage-backed securities Table of Contents SUMMARY The following summary explains the significant aspects of the conversion and the offering. It may not contain all the information that is important to you. For additional information, you should read this entire document carefully, including the consolidated financial statements and the notes to the consolidated financial statements of Benjamin Franklin Bancorp and Chart Bank. The Companies Benjamin Franklin Bancorp. Benjamin Franklin Bancorp, M.H.C. is the Massachusetts-chartered mutual holding company of Benjamin Franklin Bank, a Massachusetts-chartered savings bank. Upon the conversion, Benjamin Franklin Bancorp, M.H.C. will exchange its mutual holding company charter for the charter of a Massachusetts business corporation and will change its name to Benjamin Franklin Bancorp, Inc. Benjamin Franklin Bancorp s principal activity is, and after the conversion will continue to be, the ownership of 100.0% of the outstanding capital stock of Benjamin Franklin Bank. Our executive offices are located at 58 Main Street, Franklin, Massachusetts 02038-0309. Our telephone number at this address is (508) 528-7000. Benjamin Franklin Bank. Benjamin Franklin Bank is a full-service, community-oriented financial institution offering products and services to individuals, families and businesses through six offices located in Norfolk and Worcester Counties in Massachusetts, and specifically in the towns of Franklin, Foxboro, Bellingham, Milford, and Medfield. Benjamin Franklin Bank was originally organized as a Massachusetts state-chartered mutual savings bank in 1871, and reorganized into the mutual holding company structure and became the wholly-owned subsidiary of Benjamin Franklin Bancorp in 1996. At September 30, 2004, Benjamin Franklin Bank had total assets of $517.1 million and total deposits of $402.0. million. Pursuant to our merger agreement with Chart Bank, Chart Bank will merge into and become a part of Benjamin Franklin Bank immediately following the completion of the conversion. Benjamin Franklin Bank s business consists primarily of making loans to its customers, including residential mortgages, commercial real estate loans, construction loans, commercial business loans and consumer loans, and investing in a variety of investment and mortgage-backed securities. Benjamin Franklin Bank funds these lending and investment activities with deposits from the general public, funds generated from operations and selected borrowings. Chart Bank. Chart Bank, A Cooperative Bank, is a Massachusetts cooperative bank that was formed in 1985. Chart Bank primarily conducts its business from two banking offices in Waltham, Massachusetts and one banking office in Newton, Massachusetts. Chart Bank is engaged principally in the business of investing in various types of residential and commercial mortgages, consumer and commercial loans, and investment securities, funded primarily with deposits from the general public and Federal Home Loan Bank of Boston borrowings. Chart Bank offers a wide variety of deposit and loan products and services to individual and commercial customers. Additionally, Chart Bank, through its subsidiary, Creative Strategic Solutions, Inc., or CSSI, supplies cash to automatic teller machines, or ATMs, owned by independent service organizations and provides related cash management services to a nationwide customer base. Our Business Strategy Since its inception, Benjamin Franklin Bank has maintained a community-focused orientation, through attention to superior levels of customer service coupled with a diverse product menu designed to meet the needs of individuals and businesses located in its market area. As a result of the conversion and - 1 - Table of Contents simultaneous acquisition of Chart Bank, Benjamin Franklin Bank will be a larger, more geographically diverse and well-capitalized institution, with a management team and structure geared toward implementing operating strategies that build on these strengths and draw on the best of the business strategies currently being used at Benjamin Franklin Bank and Chart Bank. Important elements of the business strategy that we will be pursuing going forward can be summarized as follows: 1. Increase Loan Assets And Change Loan Mix. In addition to concentrating on increasing the loan portfolio generally, we expect to continue our focus in particular on increasing originations of commercial real estate and commercial business loans, with a goal of increasing these types of loans as a proportion of our loan portfolio from the September 30, 2004 level of 22.3% of total loans. Our acquisition of Chart Bank is an important step in the direction of achieving this goal; at September 30, 2004 on a pro forma basis including Chart Bank s loan portfolio, commercial real estate and commercial business loans would have represented 33.9% of total loans. We also expect to hire additional lending personnel, and intend to establish a commercial lending department, headed by Chart Bank s senior commercial lender, that will focus specifically on the origination of commercial business loans and related commercial deposit opportunities. 2. Maintain Asset Quality. We will continue to focus on managing credit risk to maintain our favorable asset quality. While focusing on expanding our lending activities, and our commercial lending activities in particular, we will continue to emphasize what we believe are prudent underwriting standards, as well as diligent monitoring and collection efforts and maintaining adequate loan loss reserves. 3. Geographic Expansion. We intend to continue the geographic expansion of our franchise represented by the Chart Bank acquisition. We intend to open new branch offices, to the extent our financial resources permit, in communities located between the Benjamin Franklin Bank and Chart Bank franchises as well as in other communities contiguous to those currently served by Benjamin Franklin Bank. While the precise number of new branches and related timing has not yet been determined, we consider it likely that we will establish at least one new branch in each of the years 2005 through 2007. We will also remain open to the possibility of further expansion through whole-bank and branch acquisitions, as opportunities arise. 4. Increase Deposit Market Share in the Markets We Serve. Retail deposits are our primary source of funds for our lending and investing activities. By offering a variety of deposit products and superior customer service, we will seek to retain and expand existing customer relationships as well as to attract new deposit customers. Personalized service and flexibility with regard to customer needs will continue to be augmented with a variety of delivery channels to maximize customer convenience. These include extended branch hours, ATMs, Internet banking, automated bill payment and telephone banking. Through our continued focus on these deposit-gathering efforts in existing branch locations, coupled with our plans for geographic expansion, we expect to increase the overall level of deposits and our market share in the markets we serve. 5. Increase Non-interest Income. Traditionally, Benjamin Franklin Bank s profits have relied heavily on the net interest income derived from its lending and investing activities. Over the past several years, management has initiated activities to decrease that reliance on net interest income, by offering fee-based products such as investment advisory services and insurance. Going forward, Benjamin Franklin Bank will continue to pursue initiatives to increase non-interest income, including the potential expansion of the activities of Chart Bank s subsidiary, CSSI, which supplies cash to automatic teller machines, or ATMs, owned by independent service organizations and provides related cash management services to a nationwide customer base. - 2 - Table of Contents 6. Improve Operating Efficiency And Cost Control. While our operating efficiency has improved over the past two years, with the ratio of non-interest expense to average total assets declining from 2.76% in 2002 to 2.73% in 2003, we believe there is potential for further improvement. We recognize that our growth strategies and our public company status will require greater investments in personnel, marketing, premises and equipment, and these investments will have a negative impact on our expense ratios over the short term. However, we will continue our efforts to monitor and control costs throughout the organization, and over the long term, as our assets grow, we expect our ratio of non-interest expense to total average assets to decline. The increased scale that will result from the acquisition of Chart Bank is one important factor in achieving this goal. Reasons for the Conversion The primary reasons for converting from the mutual form (meaning no stockholders) to the stock form (100% owned by public stockholders) and raising additional capital through the stock offering are: to provide us with the capital and the form of consideration necessary to acquire Chart Bank, as discussed below; to support internal growth through lending in the communities we serve; to enhance existing products and services and support the development of new products and services; to facilitate growth through de novo branching; to facilitate growth through branch and whole bank acquisitions as opportunities arise; and to improve our overall competitive position. As a stock holding company, we will have greater flexibility in structuring further mergers and acquisitions, including the form of consideration that we can use to pay for an acquisition. Our current mutual holding company structure precludes us from offering shares of common stock as consideration in a merger or acquisition. Potential sellers often want stock for at least part of the purchase price, because the exchange of stock provides the opportunity to enjoy future investment growth and to defer the recognition of capital gains. Our new stock holding company structure will enable us to offer stock or cash consideration, or a combination thereof and will, therefore, enhance our ability to compete with other bidders when acquisition opportunities arise. Other than our agreement to acquire Chart Bank, we currently have no arrangements or understandings regarding any specific acquisition. Chart Bank Acquisition We decided to undertake the conversion in connection with our decision to acquire Chart Bank, a Massachusetts-chartered cooperative bank in stock form with $256.3 million in assets and $216.0 million in deposits as of September 30, 2004. Pursuant to our merger agreement with Chart Bank, dated September 1, 2004, Chart Bank will merge into and become a part of our subsidiary bank, Benjamin Franklin Bank, immediately following completion of the conversion. The acquisition will enable us to expand our branch network into Middlesex County, Massachusetts, where Chart Bank maintains two offices in Waltham and one office in Newton. In addition to expanding our geographic branching outreach, this acquisition will enable us to leverage our capital base and is - 3 - Table of Contents expected to improve operating efficiency through increased scale. Our pro forma assets and deposits, after giving effect to the acquisition and the stock offering, assuming 6,612,500 shares are sold in the offering, would have been $836.7 million and $616.2 million, respectively, at September 30, 2004. See Pro Forma Data on page # . In our merger agreement with Chart Bank, we agreed that the Chart Bank stockholders may elect to receive either $30.75 in cash or 3.075 shares of our common stock for each share of Chart Bank stock held by them, with 45.0% of the aggregate consideration to be paid in cash and 55.0% of the aggregate consideration to be paid in common stock. The aggregate consideration for the Chart Bank acquisition will be $22,492,000 in cash and 2,401,575 shares of our common stock, assuming that the Chart Bank options are cashed out at the closing rather than being exercised by optionees prior to the closing. By subscribing for or purchasing shares of Benjamin Franklin Bancorp common stock in the offering, subscribers and other purchasers will be approving and consenting to the completion of the Chart Bank acquisition. If, for any reason, the Chart Bank acquisition cannot be completed, our Board will consider whether to proceed with the conversion. If we were to decide to proceed with the conversion without Chart Bank, we would resolicit subscribers, send them a modified prospectus and provide them with an opportunity to increase, decrease or rescind their orders. If for any reason the conversion cannot be completed, we will not proceed with the Chart Bank acquisition. Terms of The Conversion and Offering We are offering between 4,250,000 and 5,750,000 shares of common stock of Benjamin Franklin Bancorp for sale to the public at an offering price of $10 per share. The subscription offering is made to Benjamin Franklin Bank s eligible depositors, our tax qualified employee benefit plans and our officers, directors and employees. Shares not sold to these persons may be made available to the public in a direct community offering, and shares not purchased in the subscription offering or the direct community offering may be offered for sale through a syndicated community offering. The maximum number of shares that we sell in the offering may increase by up to 15.0%, to 6,612,500 shares, as a result of demand for the shares in the offering, positive changes in financial markets in general and with respect to financial institution stocks in particular or regulatory considerations. Unless the number of shares of common stock to be offered is increased to more than 6,612,500 or decreased to less than 4,250,000, or the offering is extended beyond date , 2005, subscribers will not have the opportunity to modify or rescind their stock orders. In addition, we will contribute shares of our authorized but unissued common stock to the Benjamin Franklin Bank Charitable Foundation, a new charitable foundation to be established by Benjamin Franklin Bank, in an amount up to 8.0% of the number of shares we actually sell in the offering, up to a maximum of 400,000 shares, which is 8.0% of the number of shares that would be issued at the 5,000,000 share midpoint of the offering range. All investors will pay the same $10 purchase price per share. Investors will not be charged a commission to purchase shares of common stock. Ryan Beck Co., Inc., our marketing agent in the - 4 - Table of Contents offering, will use its best efforts to assist us in selling shares of our common stock. Ryan Beck Co., Inc. is not obligated to purchase any shares of common stock in the offering. How We Determined The Offering Range And The $10 Per Share Stock Price The amount of common stock we are offering in the conversion is based on an independent appraisal of the estimated market value of Benjamin Franklin Bancorp, assuming the offering, the funding of the Benjamin Franklin Bank Charitable Foundation and the acquisition of Chart Bank are completed. RP Financial, LC., our independent appraiser, has estimated that, as of November 26, 2004, this market value ranged from $69.9 million to $85.5 million, with a midpoint of $78.0 million. Based on this valuation and the $10 per share price, the number of shares of common stock being offered for sale by Benjamin Franklin Bancorp will range from 4,250,000 shares to 5,750,000 shares. In addition, we will contribute shares of our authorized but unissued common stock to the Benjamin Franklin Bank Charitable Foundation in an amount up to 8.0% of the number of shares we actually sell in the offering, up to a maximum of 400,000 shares, which maximum is 8.0% of the number of shares that would be issued at the 5,000,000 share midpoint of the offering range. The contribution of shares of our common stock to the Benjamin Franklin Bank Charitable Foundation will have the effect of reducing our pro forma valuation. See Comparison of Independent Valuation and Pro Forma Financial Information With and Without the Foundation on page # . We will issue an additional 2,401,575 shares of common stock to the Chart Bank stockholders as consideration for the Chart Bank merger. These shares are in addition to the shares issued in the offering. The $10 per share price was selected primarily because it is the price most commonly used in mutual-to-stock conversions of financial institutions. The appraisal is based in part on Benjamin Franklin Bancorp s financial condition and results of operations, the effect of the additional capital raised by the sale of shares of common stock in the offering, the acquisition of Chart Bank and an analysis of a peer group of 10 publicly traded thrift holding companies that RP Financial, LC. considered comparable to Benjamin Franklin Bancorp. The following table presents a summary of selected pricing ratios for the peer group companies and the pricing ratios for Benjamin Franklin Bancorp. The estimated appraised value and the resulting premium/discount took into consideration the potential financial impact of the conversion, the contribution to the Benjamin Franklin Bank Charitable Foundation, adoption of stock based benefit plans consistent with industry practice, and the proposed acquisition of Chart Bank. The ratios for Benjamin Franklin Bancorp reflect the new accounting rule that will require us to expense the cost of stock options that we expect to grant under the stock-based incentive plan; the peer group ratios do not reflect such an expense because the new rule has not yet gone into effect. Price as a % of Price as a Price as a % of Pro Forma Multiple of Pro Pro Forma Tangible Forma Earnings Stockholders Stockholders Per Share Equity Per Share Equity Per Share Benjamin Franklin Bancorp (pro forma data as of September 30, 2004): Maximum 41.67x 83.40 % 129.70 % Minimum 34.09x 78.31 % 132.63 % Valuation of Peer Group Companies as of November 26, 2004 Averages 19.04x 166.24 % 178.05 % Medians 20.34x 159.61 % 169.23 % - 5 - Table of Contents The independent appraisal does not indicate market value. Investors should not assume or expect that the valuation of Benjamin Franklin Bancorp as indicated above means that the common stock will trade at or above the $10 purchase price after the conversion. The independent appraisal will be updated prior to the completion of the conversion. Any changes to the appraisal would be subject to regulatory approval. The estimated pro forma market value of Benjamin Franklin Bancorp common stock to be sold in the conversion may be increased over the maximum level of $57.5 million by up to 15.0%, to up to $66.1 million, without notification to those who subscribed for shares in the offering. If this occurs, the maximum number of shares to be sold will correspondingly increase. See Pro Forma Data on page # . In the event that the updated appraisal results in an increase in the maximum valuation range to more than $66.1 million, or a decrease in the minimum valuation range below $42.5 million, the offering would not be completed without a resolicitation of subscribers. See Pro Forma Data on page # , and The Conversion And The Offering Stock Pricing and Number of Shares to be Issued on page # . After-Market Performance Information Provided by Independent Appraiser The following table presents information provided by RP Financial, LC., our independent appraiser, for all standard mutual-to-stock conversion transactions completed between January 1, 2003 and February 4, 2005. The information shows the average and median after-market performance of the trading price of the common stock at certain points after the completion of the stock conversion. Based on the independent valuation, Benjamin Franklin Bancorp has initial pro forma price-to-tangible stockholders equity ratios as of September 30, 2004 of 132.63%, 131.41%, 129.70%, and 128.21% at the minimum, midpoint, maximum, and maximum as adjusted of the valuation range, respectively. During the period, the average closing price to tangible stockholders equity ratios in the conversions listed below were lower than the range of pro forma price to book ratios for Benjamin Franklin Bancorp and, with the exception of NewAlliance Bancshares, Inc. of Connecticut, which also involved the acquisition of other financial institutions, there were no other mutual-to-stock conversions with pro forma price-to-tangible stockholders equity ratios exceeding 100.0%. Thus, the pro forma price-to-tangible stockholders equity ratios for Benjamin Franklin Bancorp exceed by a significant amount essentially all of the comparable pro forma pricing ratios for standard mutual-to-stock conversions completed during the January 1, 2003 to February 4, 2005 period that did not also involve acquisitions of other financial institutions. The high pro forma price-to-tangible stockholders equity ratios for Benjamin Franklin Bancorp may have a negative effect on any potential price appreciation of our stock. The information shown in the following table was not included in the appraisal report. Standard Mutual-to-Stock Conversion Offerings with Completed Closing Dates between January 1, 2003 and February 4, 2005 Appreciation From Initial Trading Date Through Conversion February Transaction Date 1 day 1 week 1 month 4, 2005 Royal Financial, Inc. IL 01/21/05 16.0 % 26.0 % 25.6 % 25.6 % Third Century Bancorp, Inc. IN 06/30/04 13.2 % 10.5 % 12.5 % 37.0 % SE Financial Corp. PA 05/06/04 (0.5 %) (1.5 %) (6.0 %) 10.5 % NewAlliance Bancshares, Inc. CT 04/02/04 51.7 % 45.3 % 36.5 % 49.4 % KNBT Bancorp, Inc. PA 11/03/03 68.8 % 67.5 % 70.5 % 67.1 % Rainier Pacific Fin Group WA 10/21/03 69.9 % 66.0 % 61.9 % 75.0 % Community First Bancorp, Inc. KY 06/27/03 20.0 % 20.0 % 20.5 % 33.0 % Rantoul First Bank, s.b. IL 04/02/03 15.1 % 20.0 % 23.5 % 75.0 % Provident Fin. Services, Inc. NJ 01/16/03 55.0 % 56.5 % 51.5 % 80.5 % CCSB Financial Corp. MO 01/09/03 20.0 % 23.1 % 25.0 % 50.0 % Average 32.9 % 33.3 % 32.2 % 50.3 % Median 20.0 % 24.6 % 25.3 % 49.7 % - 6 - Table of Contents The following table presents information for all stock offerings involving mutually-owned thrifts between June 30, 2004 and February 4, 2004, including all standard mutual-to-stock conversion offerings, mutual holding company minority stock offerings, and second step mutual-to-stock conversion offerings of mutual holding companies that had previously had minority stock offerings. The table provides an indication of the most recent trends in the aftermarket trading of mutual stock offerings. The recent trends in aftermarket trading, including the several offerings trading at or below their initial offering prices, may have a negative effect on any potential price appreciation in our stock. The information shown in the table was not included in the appraisal report. Standard Mutual-to-Stock Conversion Offerings (Standard), Mutual Holding Company Minority Offerings (MHC), and Second Step Mutual-to-Stock Conversion Offerings (Second Step) with Completed Closing Dates between June 30, 2004 and February 4, 2005 Appreciation From Initial Trading Date Through Conversion February Transaction Date 1 day 1 week 1 month 4, 2005 Home Federal Bancorp, Inc. LA (MHC) 1/21/05 (1.0 %) 0.5 % (0.1 %) (0.1 %) Royal Financial, Inc. IL (Standard) 1/21/05 16.0 % 26.0 % 25.6 % 25.5 % BV Financial, Inc. MD (MHC) 1/14/05 (6.5 %) (5.0 %) (2.0 %) (2.0 %) Georgetown Bancorp, Inc. MA (MHC) 1/6/05 2.0 % (0.5 %) 0.5 % 0.5 % SFSB, Inc. MD (MHC) 12/31/04 7.5 % (0.9 %) (1.5 %) (2.0 %) Ocean Shore Holding Company NJ (MHC) 12/22/04 21.5 % 22.0 % 6.3 % 10.3 % Lincoln Park Bancorp, Inc. NJ (MHC) 12/20/04 10.0 % 12.5 % 0.0 % 0.5 % Abington Community Bancorp, Inc. PA (MHC) 12/17/04 33.5 % 33.0 % 29.0 % 31.2 % Home Federal Bancorp, Inc. ID (MHC) 12/7/04 24.9 % 26.8 % 23.3 % 26.0 % PSB Holdings, Inc. CT (MHC) 10/5/04 5.0 % 6.0 % 5.0 % 9.1 % Atlantic Coast Federal Corp. GA (MHC) 10/5/04 17.5 % 23.1 % 30.0 % 32.4 % Roebling Financial Corp. NJ (Second Step) 10/1/04 (1.0 %) (0.5 %) (8.0 %) (2.0 %) Naugatuck Valley Fin. Corp CT (MHC) 10/1/04 8.0 % 8.1 % 8.0 % 12.4 % SI Financial Group, Inc. CT (MHC) 10/1/04 12.0 % 10.6 % 10.3 % 11.5 % DSA Financial Corporation -IN (Second Step) 7/30/04 (2.0 %) (5.0 %) (7.0 %) 5.0 % Partners Trust Financial Group, Inc. NY (Second Step) 7/15/04 (0.1 %) (0.2 %) (1.9 %) 6.9 % Third Century Bancorp IN (Standard) 6/30/04 13.2 % 10.5 % 12.5 % 37.0 % Average 9.4 % 9.8 % 7.6 % 11.9 % Median 8.0 % 8.1 % 5.0 % 9.1 % RP Financial, LC. advised the Board that the appraisal was prepared in conformance with the regulatory appraisal methodology. That methodology requires a valuation based on an analysis of the trading prices of comparable public companies whose stocks have traded for at least one year prior to the valuation date of November 26, 2004. RP Financial, LC. also advised the Board that the aftermarket trading experience of recent transactions was considered in the appraisal as a general indicator of current market conditions, but was not relied upon as a primary valuation methodology. The tables above are not intended to be indicative of how our stock may perform. Stock appreciation is affected by many factors, including, but not limited to, the factors set forth below. Before you make an investment decision, we urge you to carefully read this prospectus, including, but not limited to, the Risk Factors generally, beginning on page # . Data represented in the tables were calculated using a small sample. The data, therefore, may not be meaningful for investors. For example, in the period between January 1, 2003 and February 4, 2005, only one standard mutual-to-stock conversion transaction had closed where the initial pro forma price-to-tangible stockholders equity ratio was 100.0% or greater. While stock prices of converting institutions have, on average, increased for the transactions presented, there can be no assurance that our common stock will not trade below $10.00 per share, as has been the case for some converted mutual institutions. In addition, the conversion transactions from which the data are derived occurred primarily during a falling interest rate environment, during which time the market for financial institution stocks typically increases. If interest rates rise, our net interest income and the value of our assets could be reduced, which could negatively affect our stock price. The increase in any particular company s stock price is subject to various factors, including the amount of proceeds a company raises and the quality of management and management s ability to deploy proceeds (such as through investments, the acquisition of other financial institutions or other businesses, the payment of dividends and common stock repurchases). In addition, stock prices may be affected by general market conditions, the interest rate environment, the market for financial institutions, merger or takeover transactions, the presence of professional and other investors who purchase stock on speculation, as well as other unforeseeable events not necessarily in the control of management. Our Board of carefully reviewed the information provided to it by RP Financial, LC. through the appraisal process, but did not make any determination regarding whether prior standard mutual-to-stock conversions have been undervalued on a price to tangible stockholders equity basis, nor did the Board draw any conclusions regarding how the historical data reflected above may affect Benjamin Franklin Bancorp s appraisal. Instead, the Board engaged RP Financial, LC. to help it understand the regulatory process as it applies to the appraisal and to advise the Board as to how much capital Benjamin Franklin Bancorp would be required to raise under the regulatory appraisal guidelines. Benefits to Management Resulting from the Conversion In order to align the interests of our employees, officers and directors more closely to our shareholders interests, we intend to establish certain benefit plans in connection with the conversion, some of which use our common stock as compensation. These new plans include the following: Employee Stock Ownership Plan. We have adopted an employee stock ownership plan that will award shares of our common stock to eligible employees primarily based on their compensation. At the completion of the conversion, we will make, or contribute funds to a subsidiary to enable it to make, a 30-year loan to the employee stock ownership plan to enable it to purchase shares of our common stock in the offering or in the open market following completion of the offering. It is expected that our employee stock ownership plan will purchase 8.0% of the shares issued in the offering, including shares issued to the Benjamin Franklin Bank Charitable Foundation. If we receive orders for more shares of common stock than the maximum of the offering range, the employee stock ownership plan will have first priority to purchase shares over this maximum, up to the total of 8.0% of shares of common stock issued in the offering. This plan is a tax-qualified retirement plan for the benefit of all our employees. See Summary Value of Stock-Based Benefits; Dilution to Stockholders on page # below. Stock-based Incentive Plan. We intend to adopt a stock-based incentive plan that would provide for grants of stock options and restricted stock to directors, officers and employees. The stock-based incentive plan cannot be established sooner than six months after the offering and requires the approval of our stockholders. The stockholder approval required is a two thirds vote of all outstanding shares of Benjamin Franklin Bancorp common stock if the stock-based incentive plan is implemented less than one year after the offering, and a majority vote of the shares of Benjamin Franklin Bancorp common stock present and voting if the plan is implemented more than one year after the offering. We expect that the number of options granted and restricted shares awarded under the plan will be equal to 10.0% and 4.0%, respectively, of the total shares issued in the offering, including shares issued to the Benjamin Franklin Bank Charitable Foundation. See Summary Value of Stock-Based Benefits; Dilution to Stockholders on page # below. Employment and Change in Control Agreements. We have entered into employment agreements with three of our executive officers and change in control agreements with six of our executive officers, which would provide for, among other benefits, severance benefits in the event of a change in control of Benjamin Franklin Bancorp. This includes our President and Chief Executive Officer, who has an existing employment agreement that is being amended in connection with the conversion. Based solely on the current salary and most recent bonus of the nine senior officers of Benjamin Franklin Bank for whom employment agreements or change of control agreements are proposed, the aggregate change of control payments provided for in those agreements would be approximately $3.2 million. The actual payments under those agreements may be significantly higher, since the calculation of the benefits under the employment agreements will be based on the officers highest yearly compensation during the three years preceding termination of employment. This calculation could include other items of compensation in addition to salary and bonus, such as the value of nonqualified stock options that the officer may exercise during the year preceding the year in which the benefit is calculated. See Management of Benjamin Franklin Bancorp and Benjamin Franklin Bank Employment and Change in Control Agreements on page # . Benefit Restoration Plan. We have adopted a benefit restoration plan which would provide certain restorative payments to our President and Chief Executive Officer and our Chief Financial Officer, who are prevented from receiving earned benefits under the employee stock ownership plan and 401(k) plan by statutory limitations, and would provide to these officers, upon retirement, or upon termination of employment following a change in control, additional restorative payments equal to the projected value of shares of Benjamin Franklin Bancorp common stock that would have been allocated to the executive under the employee stock ownership plan over the remaining term of any loan to the employee stock ownership plan, as if employment had continued through the full term of the loan. See Management of Benjamin Franklin Bancorp and Benjamin Franklin Bank Benefit Plans on page # . Director Fee Continuation Plan. We have adopted a director fee continuation plan, which provides a retirement benefit for directors in the nature of the continuation of director fees for a period of five years following retirement, subject to certain vesting requirements. See Management of Benjamin Franklin Bancorp and Benjamin Franklin Bank Benefit Plans , on page # . - 7 - Table of Contents additional income in Benjamin Franklin Bank which is taxed at a higher rate for state tax purposes, and capital losses in 2004 for which Benjamin Franklin Bank received no tax benefit. Table of Contents Value of Stock-Based Benefits; Dilution to Stockholders The following table summarizes the stock benefits that our officers, directors and employees may receive following the reorganization and offering, at the maximum of the offering range and assuming that we initially implement a stock-based incentive plan granting options to purchase 10.0% of the shares issued in the offering and issued to the Benjamin Franklin Bank Charitable Foundation and awarding shares of restricted stock equal to 4.0% of the shares issued in the offering and issued to the Charitable Foundation (the maximum permissible amount of grants and awards if such plan is adopted less than one year from the date of completion of the offering). The table also shows the dilution to stockholders if all these shares are issued from authorized but unissued shares, instead of shares purchased in the open market. A portion of the stock grants shown in the table below may be made to non-management employees. - 8 - Table of Contents RECENT DEVELOPMENTS OF CHART BANK The following tables contain certain audited and unaudited information concerning the financial position and results of operations of Chart Bank at the dates and for the periods indicated. The data as of and for the year ended December 31, 2004 are unaudited. The data as of and for the year ended December 31, 2003 are derived from Chart Bank s audited consolidated financial statements. You should read this information in conjunction with the audited consolidated financial statements included in this document. In the opinion of management, the financial information at December 31, 2004 and for the year then ended reflects all adjustments (consisting only of normal recurring adjustments) which are necessary to present fairly the results for the periods included. At December 31, 2004 2003 (Dollars in thousands) Selected Financial Condition Data: Total assets $ 258,321 $ 209,854 Loans, net 176,511 139,890 Investment securities 36,117 29,369 Deposits 208,683 175,801 Borrowings 31,000 15,930 Stockholders equity 17,765 17,399 For the years ended December 31, 2004 2003 (Dollars in thousands) Selected Financial Condition Data: Interest and dividend income $ 10,984 $ 10,091 Interest expense 3,772 3,452 Net interest income 7,212 6,639 Provision for loan losses 120 120 Net interest income after provision for loan losses 7,092 6,519 Non-interest income 2,629 2,665 Non-interest expense 7,782 6,406 Income before income tax provision 1,939 2,778 Income tax provision 955 1,076 Net income $ 984 $ 1,702 Balance at September 30, 2004 (unaudited) 1,420 $ 1,420 $ 11,575 $ 4,524 $ Table of Contents Aggregate Number of Shares to be Granted or Purchased Value of Grants (3) Dilution As a Resulting if At the At the Percentage We Issue At the At the Minimum Maximum of Common New Shares Minimum Maximum of the of the Stock to be for Stock of the of the Offering Offering Issued in the Benefit Offering Offering Range Range Offering(1) Plans (2) Range Range (Dollars in thousands) Employee stock ownership plan 367,200 492,000 8.0 % 5.4 % $ 3,672 $ 4,920 Stock options under stock-based incentive plan 459,000 615,000 10.0 6.7 % 1,767 2,368 Restricted stock awards under stock-based incentive plan 183,600 246,000 4.0 2.8 % 1,836 2,460 Total 1,009,800 1,353,000 22.0 % 13.7 % $ 7,275 $ 9,748 (1) The average interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted- average cost of interest-bearing liabilities for the period. (2) The net interest margin represents net interest income as a percent of average interest-earning assets for the period. (3) The efficiency ratio represents non-interest expense for the period divided by the sum of net interest income (before the loan loss provision) plus non-interest income (excluding net gains (losses) on sales of bank assets and deposits and loan brokerage fees). (4) The dividend payout ratio is calculated by dividing total dividends declared per share by net income per share for the period. Comparison of Financial Condition at December 31, 2004 and December 31, 2003 General. Chart Bank s total assets increased $48.5 million, or 23.1 %, to $258.3 million at December 31, 2004, compared to $209.9 million at December 31, 2003. The increase in assets was mainly attributable to a $36.6 million increase in net loans, a $6.7 million increase in securities and a $4.5 million increase in cash and cash equivalents. The growth in assets was primarily funded by an increase in deposit account balances of $32.9 million and advances from the Federal Home Loan Bank of Boston of $15.1 million. Net Loans. Net loans increased $36.6 million, or 26.2%, from $139.9 million at December 31, 2003 to $176.5 million at December 31, 2004, primarily as a result of increased residential mortgage loans, commercial mortgage loans and construction loans. Residential mortgage loans increased $27.0 million, or 71.7%, from $37.7 million at December 31, 2003 to $64.7 million at December 31, 2004, mainly due to additional residential mortgage loan originations primarily resulting from refinancing activity in a low interest rate environment and the purchase of $14.0 million of residential mortgage loans from another institution. Commercial mortgage loans increased $8.8 million, or 9.6%, from $91.8 million at December (1) Includes shares issued to the Benjamin Franklin Bank Charitable Foundation, but does not include shares issued to Chart Bank stockholders as merger consideration. (2) Calculated at the maximum of the offering range, including shares issued to the Benjamin Franklin Bank Charitable Foundation and shares issued to the Chart Bank stockholders in the merger. (3) The actual value of restricted stock grants will be determined based on their fair value as of the date grants are made. For purposes of this table, fair value is assumed to be the same as the offering price of $10.00 per share. The fair value of stock options has been estimated at $3.85 per option using the Black-Scholes option pricing model with the following assumptions; a grant-date share price and option exercise price of $10.00; dividend yield of zero; expected option life of 10 years; risk free interest rate of 4.27%; and a volatility rate of 14.89% based on the SNL Index of publicly traded thrift institutions. The value of the shares to be granted as restricted stock awards under the stock-based incentive plan will be based on the price of Benjamin Franklin Bancorp s common stock at the time those shares are purchased on the open market or issued, which, subject to stockholder approval, cannot be implemented until at least six months after the offering. The following table presents the total value of all shares we expect to be available for award as restricted stock under the stock-based incentive plan, assuming the shares for the plan are purchased or issued in a range of market prices from $8.00 per share to $14.00 per share. Value of Shares To Be Available for Award as Restricted Stock 280,500 Shares 183,600 Shares 216,000 Shares 246,000 Shares Awarded at Awarded at Awarded at Awarded at Maximum, as Minimum of Midpoint of Maximum of adjusted, of Share Price Offering Range Offering Range Offering Range Offering Range (Dollars in thousands) $ 8.00 $ 1,469 $ 1,728 $ 1,968 $ 2,244 10.00 1,836 2,160 2,460 2,805 12.00 2,203 2,592 2,952 3,366 14.00 2,570 3,024 3,444 3,927 The grant-date fair value of the options granted under the stock-based incentive plan will be based in part on the price of Benjamin Franklin Bancorp s common stock at the time the options are granted, which, subject to stockholder approval, cannot be implemented until at least six months after the offering. The value will also depend on the various assumptions utilized in estimating the value using the Black-Scholes option pricing model. The following table presents the total estimated value of the options we - 9 - Table of Contents 31, 2003, to $100.6 million at December 31, 2004, primarily due to additional commercial mortgage originations. Construction loans increased $1.3 million, or 19.4%, from $6.5 million at December 31, 2003 to $7.8 million at December 31, 2004, primarily due to additional construction loan originations. Securities. Available for sale securities decreased $1.9 million, or 35.0%, from a fair value of $5.4 million at December 31, 2003 to a fair value of $3.5 million at December 31, 2004. Held to maturity securities increased $8.6 million, or 36.1%, from an amortized cost of $24.0 million at December 31, 2003 to $32.6 million at December 31, 2004. The decrease in available for sale securities and the increase in held to maturity securities primarily resulted from the reinvestment of proceeds from maturities, calls and sales of available for sale securities in held to maturity securities and an additional net increase of $6.7 million of federal agency securities, which were classified as held to maturity securities. Cash and Cash Equivalents. Cash and cash equivalents increased $4.5 million, or 12.9%, from $34.9 million at December 31, 2003 to $39.4 million at December 31, 2004, primarily as a result of a $6.1 million, or 22.4%, increase in the cash deployed in ATMs by CSSI from $27.0 million at December 31, 2003 to $33.1 million at December 31, 2004 and a $1.4 million increase in short-term investments, partially offset by a $2.9 million decrease in cash and due from banks, primarily resulting from fluctuations in the ordinary course of business. Deposits and Borrowed Funds. Deposits totaled $208.7 million at December 31, 2004, an increase of $32.9 million, or 18.7%, compared to $175.8 million at December 31, 2003. Certificates of deposit increased $25.0 million, or 39.5%, from $63.3 million at December 31, 2003 to $88.3 million at December 31, 2004. Savings and money market accounts increased $3.7 million, or 5.1%, from $72.5 million at December 31, 2003 to $76.2 million at December 31, 2004. NOW and demand deposit accounts increased $4.2 million, or 10.4%, from $40.0 million at December 31, 2003 to $44.2 million at December 31, 2004. Borrowed funds from the FHLBB increased $15.1 million, or 94.6%, from $15.9 million at December 31, 2003 to $31.0 million at December 31, 2004. Non-performing Assets, Delinquencies and Allowance for Loan Losses. Non-performing assets, all of which consisted loans, totaled $288,000 at December 31, 2004, compared to $213,000 at December 31, 2003, an increase of $75,000. The allowance for loan losses was $1.8 million at December 31, 2004, an increase of $126,000 from the $1.7 million recorded at December 31, 2003. The allowance for loan losses as a percentage of gross loans was 1.00% at December 31, 2004 as compared to 1.17% at December 31, 2003. The allowance for loan losses as a percentage of non-performing loans was 619% at December 31, 2004, as compared to 778% at December 31, 2003. The amount of the unallocated allowance was $114,000 at December 31, 2004, as compared to $180,000 at December 31, 2003. Stockholders Equity. Total stockholders equity increased $366,000, or 2.1%, to $17.8 million at December 31, 2004 compared to $17.4 million at December 31, 2003. The increase is due primarily to net income of $984,000 for the year ended December 31, 2004, partially offset by $597,000 in dividends paid to stockholders during the year ended December 31, 2004 and a reduction in accumulated other comprehensive income. The decrease in accumulated other comprehensive income was due to a reduction in the unrealized gain on securities available for sale, net of taxes of $21,000. The decline in the unrealized gain was due to the realization of $67,000, or $39,000 net of taxes, of security gains during the year ended December 31, 2004 and a higher interest rate environment reducing the fair value of Chart Bank s fixed income portfolio. Table of Contents expect to be available for grant under the stock-based incentive plan, assuming the market price and exercise price for the stock options are equal and the range of market prices for the shares are $8.00 per share to $14.00 per share. Estimated Value of Options To Be Available For Grant 701,250 459,000 540,000 615,000 Options at Grant-Date Options at Options at Options at Maximum of Market/Exercise Price Fair Value Minimum of Midpoint of Maximum of Range, as Per Share per Option Range Range Range Adjusted (Dollars in thousands, except per share and per option data) $ 8.00 $ 3.08 $ 1,414 $ 1,663 $ 1,894 $ 2,160 10.00 3.85 1,767 2,079 2,368 2,700 12.00 4.62 2,121 2,495 2,841 3,240 14.00 5.39 2,474 2,911 3,315 3,780 The employee stock ownership plan and the restricted stock awards and stock option grants under the stock-based incentive plan will increase our future compensation costs, thereby reducing our earnings. Based on the assumptions set forth on the introductory page of Management s Discussion and Analysis of Benjamin Franklin Bancorp on page # , this increased compensation expense is estimated to be an annual amount of $187,000, $561,000 and $540,000 for the employee stock ownership plan, restricted stock awards and stock option grants, respectively, for the period during which the benefits are allocated (in the case of the employee stock ownership plan) or vest (in the case of restricted stock awards and option grants under the stock-based incentive plan). One of the assumptions on which these estimates are based is that the shares of common stock have a fair market value of $10.00 per share for the period during which the benefits are allocated or vest. If, in the future, the shares of common stock have a fair market value greater or less than $10.00 per share, the annual compensation expense attributable to these plans will increase or decrease accordingly. Additionally, while our intention is to fund our stock-based incentive plan with shares purchased on the open market, stockholders will experience a dilution in their ownership interest if newly issued shares of common stock are used to fund stock options and stock awards. See Risk Factors-The Implementation of Stock-Based Benefit Plans Will Dilute Your Ownership Interest , Risk Factors-Our Stock Benefit Plans Will Increase Our Costs, Which Will Reduce Our Income and Management of Benjamin Franklin Bancorp and Benjamin Franklin Bank-Benefit Plans on page # . Who May Order Shares Of Common Stock In The Offering Under the terms of our plan of conversion, we are offering the shares of common stock of Benjamin Franklin Bancorp in a subscription offering, in the following descending order of priority: (1) First, to depositors with accounts at Benjamin Franklin Bank with aggregate balances of at least $50.00 on May 31, 2003; (2) Second, to depositors (other than Benjamin Franklin Bank officers, directors, trustees, corporators and their associates) with accounts at Benjamin Franklin Bank with aggregate balances of at least $50.00 on December 31, 2004; (3) Third, to Benjamin Franklin Bancorp s and Benjamin Franklin Bank s tax qualified employee plans, including our employee stock ownership plan; and (4) Fourth, to Benjamin Franklin Bancorp s and Benjamin Franklin Bank s officers, directors, trustees and employees who do not have a higher priority right. Any remaining shares may be offered for sale in a direct community offering that can begin concurrently with, during or immediately following the subscription offering. Orders received in the direct community offering will be subordinate to subscription offering orders. Shares will be allocated in the community offering, to the extent available, first to natural persons who live in the communities served and to be served by Benjamin Franklin Bank upon completion of the conversion and the Chart Bank merger, then to the general public. The communities served and to be served by Benjamin Franklin Bank upon completion of the conversion and the Chart Bank merger consist of the following Massachusetts cities and towns: Attleboro, Ashland, Bellingham, Belmont, Blackstone, Brookline, - 10 - Table of Contents Comparison of Operating Results for the Years Ended December 31, 2004 and 2003 Net Income. Net income for the year ended December 31, 2004 was $984,000 compared to $1.7 million for the year ended December 31, 2003. The decrease of $718,000 was mainly the result of an increase in non interest expense of $1.4 million, primarily resulting from merger-related expenses and increases in salaries and employee benefits, partially offset by a $573,000 increase in net interest income. Net Interest Income. Net interest income increased $573,000, or 8.6%, to $7.2 million for 2004 compared to $6.6 million for 2003. The increase was primarily due to higher average loans and a lower cost of funds, partially offset by lower asset yields. Interest Income. Total interest and dividend income increased $893,000, or 8.8%, to $11.0 million for 2004 from $10.1 million for 2003. Interest income on loans increased $953,000, or 10.6%, to $9.9 million in 2004, compared to $9.0 million for 2003. The increase was due to a $30.2 million increase in the average balance of net loans outstanding partially offset by a 70 basis point decrease in the average yield on loans. The increase in loan volume and the decrease in yield were mainly due to a lower interest rate environment, additional originations primarily resulting from prepayments and refinancing activity in a low interest rate environment and the purchase of $14.0 million of residential mortgage loans from another institution during 2004 compared to 2003. Interest and dividend income from investment securities, short-term investments and other investments decreased $60,000, or 5.4%, to $1.1 million in 2004 from $1.1 million in 2003. The decrease in income was due to a 46 basis point decrease in the average yield on these investments partially offset by a $4.6 million increase in the average balance of these investments outstanding. The lower yields on these investments resulted from a lower interest rate environment in 2004 compared to 2003. Interest Expense. Interest expense increased $320,000, or 9.3%, to $3.8 million for 2004 from $3.5 million for 2003. The increase was primarily due to an increase in interest-bearing liabilities of $32.3 million, or 20.4% to $190.5 million in 2004 from $158.2 million in 2003 partially offset by a decrease in the average cost of funds for interest-bearing liabilities of 20 basis points. The average cost of interest-bearing liabilities for the 2004 was 1.98% as compared to 2.18% for 2003. The decrease in the average cost of interest-bearing liabilities was primarily due to a lower interest rate environment. The higher average balance of interest-bearing liabilities for 2004 primarily resulted from a $16.3 million increase in the average balance of certificates of deposit, a $9.0 million increase in the average balances in money market/NOW accounts and a $10.7 million increase in the average balance of Federal Home Loan Bank of Boston advances, partially offset by a $3.7 million decrease in savings deposits. Provision for Loan Losses. The provision for loan losses was $120,000 for 2004 and 2003. Noninterest Income. Noninterest income was $2.6 million for 2004 as compared to $2.7 million for 2003, a decrease of $36,000, or 1.4%. The decrease in noninterest income was due primarily to a decrease in loan brokerage fees of $103,000 as more loans originated by Chart Bank were for its own portfolio and a decrease in customer service fees of $117,000 due to a reduction in service fees on deposit accounts that was instituted in the fourth quarter of 2003, partially offset by increases in revenues from net gain on sales and redemptions of securities of $61,000 and ATM service contract fees of $128,000. Noninterest Expense. Noninterest expense increased $1.4 million, or 21.5%, from $6.4 million for 2003 to $7.8 million for 2004. The increase in noninterest expense from the prior year was primarily due to merger-related expenses of $637,000 and increases in expenses relating to salaries and employee benefits of $532,000, data processing of $189,000 due to added volume and new services offered, advertising and marketing expenses of $98,000, legal fees of $27,000 and audit and exam related costs of Table of Contents Dover, Franklin, Foxboro, Holliston, Hopedale, Hopkinton, Lexington, Lincoln, Mansfield, Medfield, Medway, Mendon, Milford, Millis, Millville, Needham, Newton, Norfolk, North Attleboro, Northbridge, Norton, Plainville, Sharon, Sherborn, Upton, Uxbridge, Walpole, Waltham, Watertown, Wellesley, Weston and Wrentham. Shares of common stock not purchased in the subscription offering or the direct community offering may be offered for sale through a syndicated community offering managed by Ryan Beck Co., Inc. We have the right to accept or reject, in our sole discretion, orders we receive in the direct community offering and syndicated community offering. If we receive orders for more shares than we are offering, we may not be able to fully or partially fill your order. Shares will be allocated pursuant to our plan of conversion. A detailed description of share allocation procedures can be found in the section entitled The Conversion And The Offering. How You May Purchase Shares Of Common Stock In the subscription offering and the community offering you may pay for your shares only by: (1) personal check, bank check or money order made payable directly to Benjamin Franklin Bancorp, Inc. (do not endorse third-party checks); or (2) authorizing us to withdraw money from your Benjamin Franklin Bank deposit account(s). If you wish to use your Benjamin Franklin Bank individual retirement account to pay for your shares, please be aware that you must first transfer your funds to a self-directed retirement account with a trustee other than Benjamin Franklin Bank. The transfer of such funds to a new trustee takes time, so please contact the Stock Information Center promptly for further information. Also, Benjamin Franklin Bank is not permitted to lend funds (including funds drawn on a Benjamin Franklin Bank line of credit or overdraft checking) to anyone for the purpose of purchasing shares of common stock in the offering. You can subscribe for shares of common stock in the offering by delivering to Benjamin Franklin Bancorp a signed and completed original stock order form, together with full payment or authorization to withdraw from one or more of your Benjamin Franklin Bank deposit accounts without checkwriting privileges, provided we receive the stock order form before 10:00 a.m. Massachusetts time on date 2005 (regardless of when the reply envelope is postmarked). Checks and money orders will be immediately deposited by us into a Benjamin Franklin Bank segregated savings account or, at our discretion, another insured depository institution. We will pay interest at Benjamin Franklin Bank s passbook savings rate from the date those funds are received until completion or termination of the offering. Withdrawals from certificates of deposit at Benjamin Franklin Bank for the purpose of purchasing common stock in the offering may be made without incurring an early withdrawal penalty. All funds authorized for withdrawal from deposit accounts with Benjamin Franklin Bank must be available within the deposit accounts at the time the stock order form is received. However, funds will not be withdrawn from the accounts until the offering is completed and will continue to earn interest at the applicable contractual deposit account rate until the completion of the offering. A hold will be placed on - 11 - Table of Contents $16,000, partially offset by decreases in telephone costs of $42,000, stationary and supplies costs of $28,000, and occupancy and equipment expenses of $34,000 as certain assets became fully depreciated. Provision for Income Taxes. The provision for income taxes decreased $121,000 from $1.1 million for 2003 to $955,000 for 2004. The effective tax rate for 2004 increased to 49.3% from 38.7% in the prior year, primarily due to merger-related expenses that are not deductible for tax purposes. Table of Contents the amount of funds designated on your stock order form. Those funds will be unavailable to you during the offering. After we receive an order, the order cannot be revoked or changed. Payment may not be made by wire transfer or any other electronic transfer of funds. In addition, we are not required to accept copies or facsimiles of order forms. For a further discussion regarding the stock ordering procedures, see The Conversion and the Offering Procedure for Purchasing Shares on page # . Limits On How Much Common Stock You May Purchase The minimum number of shares of common stock that may be purchased is 25. No person, or persons exercising subscription rights through a single qualifying deposit account held jointly, may purchase more than 15,000 shares of common stock ($150,000) in the offering. If any of the following persons purchase stock, their purchases, when combined with your purchases, cannot exceed 25,000 shares ($250,000) in all categories of the offering, combined: Your spouse, or any relative of you or your spouse, who either shares your home or is a director, trustee or officer of Benjamin Franklin Bancorp or Benjamin Franklin Bank; Companies or other entities in which you are a director, officer or partner, or have a 10.0% beneficial ownership interest; Trusts or other estates in which you have a substantial beneficial interest or as to which you serve as a trustee or in another fiduciary capacity; or Other persons who may be acting together with you as associates or persons acting in concert. Persons living at the same address and persons exercising subscription rights through qualifying deposit accounts registered to the same address will be subject to this overall purchase limitation. Subject to regulatory approval, we may increase or decrease the purchase limitations at any time. For additional information on purchase limitations, including the detailed definitions of associates and acting in concert, see The Conversion And The Offering Limitations On Common Stock Purchases on page # . We have the right to determine, in our sole discretion, whether prospective purchasers are associates or acting in concert. Our tax-qualified employee benefit plans, including our employee stock ownership plan, are authorized to purchase up to 10.0% of the shares issued in the offering (including shares issued to the Benjamin Franklin Bank Charitable Foundation) without regard to these purchase limitations. Deadline For Orders Of Common Stock If you wish to purchase shares, a properly completed original stock order form, together with full payment for the shares of common stock, must be received by us (not postmarked) no later than 10:00 a.m., Massachusetts time, on date , 2005. You may submit your order form in one of three ways: by mail using the return envelope provided, by overnight courier to the address indicated on the order form or by taking the stock order form and payment to our Stock Information Center located at our headquarters, 58 Main Street, Franklin, Massachusetts. Stock order forms may not be hand-delivered to branches of Benjamin Franklin Bank. Once submitted, your order is irrevocable unless the offering is terminated or extended beyond date , 2005. - 12 - Table of Contents You May Not Sell Or Transfer Your Subscription Rights If you order stock in the subscription offering, you will be required on the stock order form to state that you are purchasing the stock for yourself and that you have no agreement or understanding to sell or transfer your subscription rights. We intend to take legal action, including reporting persons to federal or state regulatory agencies, against anyone who we believe sells or gives away their subscription rights. We will not accept your order if we have reason to believe that you sold or transferred your subscription rights. In addition, you may not add the names of others for joint stock registration unless you share the same subscription offering eligibility priority. The stock order form requires that you list all deposit accounts in which the subscriber had an interest, giving all names on each account and the account number at the applicable eligibility date, May 31, 2003 or December 31, 2004. Failure to provide this information, or providing incomplete or incorrect information, may result in a loss of part or all of your share allocation. How We Intend To Use The Proceeds From The Offering We estimate net proceeds from the offering will be between $40.9 million and $55.8 million, or $64.4 million if the offering range is increased by 15.0%. We intend to use the net proceeds for the cash merger consideration portion of the acquisition of Chart Bank, approximately $21,469,000 assuming that the Chart Bank options are cashed out at the closing rather than being exercised by optionees prior to the closing and netting out the tax benefit of such option cash out. We also intend to use the net proceeds for a loan to the employee stock ownership plan to fund its purchase of shares of common stock, between $3.7 million and $4.9 million, or $5.6 million if the offering is increased by 15.0%. Of the net proceeds remaining, we intend to retain at the parent-company level between $10.9 million and $20.8 million of the net proceeds, or $26.6 million if the offering range is increased by 15.0%, and to invest in Benjamin Franklin Bank approximately $4.9 million to $8.6 million of the net proceeds, or $10.7 million if the offering range is increased by 15.0%. Benjamin Franklin Bancorp may use the funds to pay cash dividends, repurchase shares of common stock and for general corporate purposes. Funds invested in Benjamin Franklin Bank will be used to support increased lending and new products and services. We may also use the net proceeds for future business expansion by establishing new branches or by acquiring branches or other whole banks. Initially, a substantial portion of the net proceeds could be used to pay down certain Federal Home Loan Bank of Boston borrowings, as well as invested in short-term investments, investment-grade debt obligations and mortgage-backed securities. Our Issuance Of Shares Of Common Stock To The Benjamin Franklin Bank Charitable Foundation To further our commitment to our local community, we intend to establish a charitable foundation as part of the conversion and issue shares of common stock to it immediately following completion of the conversion. We intend to make an initial contribution to the foundation of a number of shares of our authorized but unissued common stock in an amount up to 8.0% of the number of shares actually sold in the offering, up to a maximum of 400,000 shares. Assuming that we issue this maximum number, our contribution would have an initial market value of $4.0 million and we would record a pre-tax expense of approximately $4.0 million during the quarter in which the conversion is completed. The charitable foundation will be dedicated exclusively to supporting charitable causes and community development activities. The issuance of these additional shares of common stock to the charitable foundation will: dilute the voting interests of purchasers of shares of our common stock in the offering by up to 7.4% and 6.5% at the minimum and maximum, respectively, of the offering range; - 13 - Interest income recognized on a cash basis on impaired loans $ 22 $ 25 $ 60 $ 30 $ (Unaudited) 2004 $ 75 $ 319 2005 150 233 2006 138 138 2007 138 138 2008 34 Table of Contents (iii) increase the purchase and ownership limitations; (iv) seek regulatory approval to extend the offering beyond the date , 2005 expiration date, provided that any such extension will require us to resolicit subscriptions received in the offering; and (v) terminate the offering, returning the subscription funds with interest and canceling deposit account withdrawal authorizations. Purchases By Officers And Directors Our directors and executive officers will pay the same $10 per share purchase price paid by all other persons who purchase shares of common stock in the offering. We expect our directors and executive officers, together with their associates, to subscribe for 196,750 shares of common stock in the offering. Following the conversion and the issuance of additional shares to the Benjamin Franklin Bank Charitable Foundation and to the Chart Bank stockholders in the acquisition, these shares will represent 2.5% of our total outstanding shares of common stock at the midpoint of the offering range. In addition, the Chart Bank directors who will become Benjamin Franklin Bancorp directors are expected to beneficially own 825,128 shares of common stock, or 10.6% of our total outstanding shares of common stock at the midpoint of the offering range, based on these directors current beneficial ownership of Chart Bank common stock and assuming that such directors exchange 55.0% of their Chart Bank shares for shares of Benjamin Franklin Bancorp common stock and that all Chart Bank options held by these directors are cashed out at the closing rather than being exercised prior to the closing. Market For Common Stock Currently, there are no outstanding shares of Benjamin Franklin Bancorp common stock. We have applied to have the common stock of Benjamin Franklin Bancorp quoted on the Nasdaq National Market following the conversion, under the symbol BFBC. See Market For The Common Stock on page # . Our Dividend Policy Upon completion of the conversion, our Board of Directors will have the authority to declare dividends on our common stock, subject to statutory and regulatory requirements. While our Board of Directors intends to consider a policy of paying cash dividends, payment of dividends will depend upon a number of factors, including our future operating results and financial condition, ongoing capital requirements, regulatory limitations, tax considerations and general economic conditions. As a result, we cannot assure you that Benjamin Franklin Bancorp will pay dividends, or if paid, the amounts of such dividends, or whether such dividends will continue to be paid in the future. See Our Policy Regarding Dividends on page # . Tax Consequences of the Conversion Based on certain factual representations and assumptions, which we believe are consistent with the facts that will exist at the effective time of the conversion, our legal counsel Foley Hoag LLP, has delivered to us its legal opinion that the conversion will constitute or be part of a tax-free reorganization for federal income tax purposes. As such, neither Benjamin Franklin - 15 - Table of Contents Bank nor Benjamin Franklin Bancorp will recognize gain or loss as a result of the conversion and eligible account holders and supplemental eligible account holders will not recognize gain or loss upon their receipt of nontransferable subscription rights to purchase shares of Benjamin Franklin Bancorp common stock. The opinion of our legal counsel, however, is not binding on the Internal Revenue Service. See The Conversion And The Offering Tax Aspects Of The Conversion And The Chart Bank Acquisition on page # . Conditions to Completion of the Conversion We cannot complete our conversion and related offering unless: We issue at least the minimum number of shares of common stock offered; We receive the approval of the Massachusetts Commissioner of Banks and the Federal Reserve Board; We complete the conversion by date . In addition, we intend to complete the conversion together with the completion of the Chart Bank acquisition. If, for any reason, the Chart Bank acquisition cannot be completed, our Board would consider whether to proceed with the conversion. If we were to decide to proceed with the conversion without Chart Bank, we would resolicit subscribers, providing them with a modified prospectus and provide them with an opportunity to increase, decrease or rescind their orders. If for any reason the conversion cannot be completed, we will not proceed with the Chart Bank acquisition. How You Can Obtain Additional Information Stock Information Center The employees of Benjamin Franklin Bank s branch offices may not, by law, assist with investment related questions about the offering. If you have any questions regarding the stock offering, you may call our Stock Information Center, toll free, at (800) 290-0793, Monday through Friday between 9:30 a.m. and 4:00 p.m., Massachusetts time. You may also visit our Stock Information Center, which is located at our headquarters, 58 Main Street, Franklin, Massachusetts. The Stock Information Center will be closed on weekends and bank holidays. Our branches will not have offering materials and cannot accept completed order forms. To ensure that each person receives a prospectus at least 48 hours before the offering deadline, we may not mail prospectuses any later than five days prior to such date or hand-deliver prospectuses later than two days prior to that date. Stock order forms may only be delivered if accompanied or preceded by a prospectus. We will make reasonable attempts to provide a prospectus and offering materials to holders of subscription rights. The subscription offering and all subscription rights will expire at 10:00 a.m., Massachusetts time, on date , 2005, whether or not we have been able to locate each person entitled to subscription rights. - 16 - Table of Contents The Issuance of Additional Shares May Dilute Your Ownership Interest. The exact number of shares of common stock to be issued in the conversion will not be determined until RP Financial, LC. updates its appraisal immediately prior to the completion of the sale of the common stock. However, in general, the higher the number of shares of common stock issued, the lower our pro forma net income per share and pro forma stockholders equity per share, and the higher the purchase price of a share of our common stock as a percentage of pro forma stockholders equity per share and as a multiple of net income per share. Due to the intangibles (goodwill and core deposit value) created from the acquisition of Chart Bank, our pro forma tangible stockholders equity per share increases with a higher number of common shares issued, and therefore the purchase price of a share of our common stock as a percentage of pro forma stockholders tangible equity per share decreases. See Pro Forma Data Pro Forma Unaudited Financial Statements Giving Effect to Conversion and Acquisition on page # . In addition, the issuance of shares to stockholders of Chart Bank in connection with the merger will dilute the ownership interest of purchasers of shares of common stock in the conversion. Relatively High Price to Pro Forma Tangible Stockholder s Equity May Negatively Affect After-Market Stock Performance Compared with Other Recently Converted Institutions. Prospective investors should be aware that, as a result of the relatively high purchase price of a share of our common stock as a percentage of pro forma tangible stockholders equity per share, the after-market performance of our common stock may be less favorable during the period immediately following the conversion than the price performance of common stock sold in recent mutual-to-stock conversions. The purchase price of a share of our common stock as a percentage of pro forma tangible stockholders equity per share ranges from 132.63% at the minimum of the estimated offering range to 128.21% at the maximum, as adjusted, of the estimated offering range, taking into consideration the shares to be issued to the Chart Bank stockholders in the merger. This ratio exceeds by a significant amount the comparable ratios with respect to common stock sold in standard mutual-to-stock conversions to date that do not also involve acquisitions of other financial institutions. The purchase price of a share of our common stock as a percentage of pro forma stockholders equity per share ranges from 78.31% at the minimum of the estimated offering range to 83.40% at the maximum, as adjusted, of the estimated offering range, taking into consideration the shares to be issued to the Chart Bank stockholders in the merger. This ratio is consistent with the comparable ratios with respect to common stock sold in standard mutual-to-stock conversions to date that do not also involve acquisitions of other financial institutions. The ratios of purchase price to pro forma tangible stockholders equity and of purchase price to pro forma stockholders equity are also consistent with or in excess of the comparable ratios of the two recent conversions involving acquisitions of other financial institutions: NewAlliance Bancshares, Inc. converted with a pro forma price to tangible stockholders equity ratio of 123.9% and a pro forma price to stockholders equity ratio of 80.3%; and KNBT Bancorp, Inc. converted with a pro forma price to tangible stockholders equity ratio of 90.3% and a pro forma price to stockholders equity ratio of 79.8%. Although the common stock of those companies experienced significant market appreciation immediately following the offerings, and both stocks continue to trade well above the initial offering price, there can be no assurance that our common stock will not trade below $10.00 per share, as has been the case for some converted mutual institutions, including some institutions that have recently converted. The increase in any particular company s stock price is subject to various factors, including the amount of proceeds a company raises, the market in which it operates and the quality of management and management s ability to deploy the conversion proceeds. In addition, stock prices may be affected by general market conditions, the interest rate environment, the market for financial institutions, merger or takeover transactions, the presence of professional and other investors who purchase stock on speculation, as well as other unforeseeable events not necessarily in the control of management. Finally, those transactions occurred primarily during a falling interest rate environment, during which time the market for financial institution stocks typically increases. If interest rates rise, our net interest income and the value of our assets could be reduced, which could negatively affect our stock price. Our Stock-Based Benefit Plans Will Increase Our Costs, Which Will Reduce Our Income. We have adopted an employee stock ownership plan, and we expect to adopt a stock-based incentive plan after the conversion, subject to stockholder approval. The allocation to employees of shares under the employee stock ownership plan and the granting of restricted stock awards and stock options under the stock-based incentive plan will increase our future compensation costs, thereby reducing our earnings. Based on the assumptions set forth on the introductory page of Management s Discussion and Analysis of Benjamin Franklin Bancorp on page # , we estimate that this increased compensation expense will be an annual amount of $187,000, $561,000 and $540,000 for the employee stock ownership plan, restricted stock awards and stock option grants, respectively, for the period during which the benefits are allocated to employees (in the case of the employee stock ownership plan) or vest (in the case of restricted stock awards and option grants under the stock-based incentive plan). One of the assumptions on which these estimates are based is that the shares of common stock have a fair market value of $10.00 per share for the period during which the benefits are allocated or vest. If, in the future, the shares of common stock have a fair market value greater than $10.00 per share, the annual compensation expense attributable to these plans will increase accordingly. The Implementation of Stock-Based Benefit Plans Will Dilute Your Ownership Interest. We expect to adopt a stock-based incentive plan following the conversion, subject to stockholder approval, and such plan could dilute the voting rights of our stockholders. Federal and state banking regulations allow our Board of Directors, and the Board may decide, to adopt one or more stock plans for the benefit of our employees, officers and directors. See Management of Benjamin Franklin Bancorp and Benjamin Franklin Bank Benefit Plans Stock-Based Incentive Plan on page # . This stock-based incentive plan will be funded either through open market purchases, if permitted, or from the issuance of authorized but unissued shares of common stock of Benjamin Franklin Bancorp. While our intention is to fund this plan through open market purchases, stockholders will experience a reduction or dilution in ownership interest of approximately 12.9% (approximately 9.1% dilution for stock options and approximately 3.8% dilution for restricted stock awards) in the event newly issued shares are used to fund stock options and stock awards made under this plan. The Contribution of Shares to the Charitable Foundation Will Dilute Your Ownership Interests and Adversely Affect Net Income in 2005. Table of Contents SELECTED CONSOLIDATED FINANCIAL INFORMATION OF BENJAMIN FRANKLIN BANCORP The following tables contain certain information concerning the financial position and results of operations of Benjamin Franklin Bancorp at the dates and for the periods indicated. This information should be read in conjunction with the Consolidated Financial Statements of Benjamin Franklin Bancorp, M.H.C. and Subsidiaries and notes thereto commencing on page # of this prospectus and the Management s Discussion and Analysis of Benjamin Franklin Bancorp commencing on page # of this prospectus. The selected financial data and selected operating data of Benjamin Franklin Bancorp as of December 31, 2003 and 2002 and for the years then ended have been derived from Benjamin Franklin Bancorp s consolidated financial statements which have been audited by Wolf Company, P.C., independent accountants. See Experts on page # . The data presented at and for the nine months ended September 30, 2004 and 2003 were derived from unaudited consolidated financial statements and reflect, in the opinion of management, all adjustments (consisting only of normal recurring adjustments) which are necessary to present fairly the results for such interim periods. Interim results at and for the nine months ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ended December 31, 2004. The selected financial condition data and selected operating data of Benjamin Franklin Bancorp at or for the years ended December 31, 2001, 2000 and 1999 have been derived from Benjamin Franklin Bancorp s consolidated financial statements that have been audited by Arthur Andersen LLP. Because Arthur Andersen has ceased accounting and auditing operations, Benjamin Franklin Bancorp is unable to obtain written consent of Arthur Andersen to incorporate their report in this prospectus. Because Arthur Andersen has not consented to incorporating their report in this prospectus, investors will not be able to recover against Arthur Andersen in connection with the use of their report. In addition, the ability of Arthur Andersen to satisfy any claims (including claims arising from its provision of auditing and other services to Benjamin Franklin Bancorp) is limited as a result of the diminished amount of assets of Arthur Andersen that are now or may in the future be available to satisfy claims. See Risk Factors Risks Related to Prior Auditors of Benjamin Franklin Bancorp on page # . At September 30, At December 31, 2004 2003 2002 2001 2000 1999 (Dollars in thousands) Selected Financial Condition Data: Total assets $ 517,931 $ 458,844 $ 452,230 $ 430,084 $ 443,092 $ 429,635 Loans, net 375,516 288,862 261,933 257,566 284,232 269,125 Investment securities 101,551 110,254 114,728 86,136 112,884 113,315 Deposits 399,562 380,257 373,300 360,979 388,332 324,050 Short-term borrowings 29,000 0 0 0 19,400 48,280 Long-term debt (1) 55,000 45,000 45,000 36,000 6,000 21,000 Retained earnings 30,586 29,301 29,814 26,937 24,794 28,652 Securities held to maturity: Mortgage-backed securities $ 986 $ (1) Long-term debt includes advances from the Federal Home Loan Bank of Boston and subordinated debt. See Business of Benjamin Franklin Bancorp Sources of Funds Borrowings on page # . - 17 - (1) Refer to Management s Discussion and Analysis of Benjamin Franklin Bancorp, beginning on page # for discussion of changes in the provision for loan losses for the periods from 2001 forward. For the year ended December 31, 2000, the provision declined to $1,000 from $70,000 recorded for the 1999 period, due primarily to the fact that impaired loans dropped to $308,000 at December 31, 2000 from $1.3 million at December 31, 1999. (2) Refer to Management s Discussion and Analysis of Benjamin Franklin Bancorp, beginning on page # for discussion of changes in income tax expense for the periods from 2001 forward. For the year ended December 31, 2000, Benjamin Franklin recorded income tax expense of $708,000 despite incurring a pre-tax loss. This is because a valuation allowance was established for a deferred tax asset associated with an impairment charge we recorded to reflect unrealized net losses on equity securities. - 18 - Table of Contents For the Nine Months Ended September 30, For The Years Ended December 31, 2004 2003 2003 2002 2001 2000 1999 (Dollars in thousands) Selected Operating Data: Interest and dividend income $ 15,223 $ 14,529 $ 19,532 $ 21,406 $ 26,441 $ 28,064 $ 24,730 Interest expense 5,024 5,134 6,752 7,594 12,397 16,216 12,533 Net interest income 10,199 9,395 12,780 13,812 14,044 11,848 12,197 Provision for loan losses (1) 470 300 625 1,412 51 1 70 Net interest income after provision for loan losses 9,729 9,095 12,155 12,400 13,993 11,847 12,127 Non-interest income 1,658 2,450 2,990 1,285 1,752 1,819 1,510 Gain (loss) on sales of securities, net 8 113 86 1,569 (2,529 ) (6,784 ) 1,402 Non-interest expense 9,457 9,626 12,724 12,115 11,565 10,851 10,280 Income (loss) before income tax expense 1,938 2,032 2,507 3,139 1,651 (3,969 ) 4,759 Income tax expense (2) 626 651 819 443 1,610 708 1,858 Net income (loss) $ 1,312 $ 1,381 $ 1,688 $ 2,696 $ Net income $ 1,312 $ 1,381 $ 1,688 $ 2,696 $ Comprehensive income: Net income 41 (1) Ratios for the nine months ended September 30, 2004 and 2003 are annualized. (2) The average interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted- average cost of interest-bearing liabilities for the period. (3) The net interest margin represents net interest income as a percent of average interest-earning assets for the period. (4) The efficiency ratio represents non-interest expense for the period minus expenses related to the amortization of intangible assets divided by the sum of net interest income (before the loan loss provision) plus non-interest income (excluding net gains (losses) on sale of bank assets and the pension plan curtailment loss). - 19 - Table of Contents SELECTED CONSOLIDATED FINANCIAL INFORMATION OF CHART BANK The following tables contain certain information concerning the financial position and results of operations of Chart Bank at the dates and for the periods indicated. This information should be read in conjunction with the Consolidated Financial Statements of Chart Bank, A Cooperative Bank and Subsidiaries and notes thereto commencing on page # of this prospectus and the Management s Discussion and Analysis of Chart Bank commencing on page # of this prospectus. The selected financial data and selected operating data of Chart Bank as of December 31, 2003, 2002, 2001, 2000 and 1999, and for the years then ended have been derived from Chart Bank s consolidated financial statements which have been audited by Wolf Company, P.C., independent accountants. See Experts on page # . The data presented at and for the nine months ended September 30, 2004 and 2003 were derived from unaudited consolidated financial statements and reflect, in the opinion of management, all adjustments (consisting only of normal recurring adjustments) which are necessary to present fairly the results for such interim periods. Interim results at and for the nine months ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year December 31, 2004. At September At December 31, 30, 2004 2003 2002 2001 2000 1999 (Dollars in thousands) Selected Financial Condition Data: Total assets $ 256,261 $ 209,854 $ 202,932 $ 181,645 $ 168,702 $ 142,823 Loans, net 175,572 139,890 122,965 126,088 121,237 107,237 Investment securities 35,495 29,369 29,532 21,585 19,589 15,853 Deposits 215,972 175,801 170,279 145,549 152,749 129,436 Borrowings 22,000 15,930 14,986 19,731 1,923 3,449 Stockholders equity. 17,546 17,399 16,061 14,980 13,384 9,362 For the Nine Months Ended September 30, For the Years Ended December 31, 2004 2003 2003 2002 2001 2000 1999 (Dollars in thousands) Selected Operating Data: Interest and dividend income $ 8,006 $ 7,621 $ 10,091 $ 11,033 $ 11,718 $ 11,023 $ 8,838 Interest expense 2,732 2,648 3,452 4,466 5,870 6,061 4,595 Net interest income 5,274 4,973 6,639 6,567 5,848 4,962 4,243 Provision for loan losses 90 90 120 120 120 131 180 Net interest income after provision for loan losses 5,184 4,883 6,519 6,447 5,728 4,831 4,063 Non-interest income 1,916 2,048 2,665 3,270 3,544 1,529 1,033 Non-interest expense 5,636 4,806 6,406 7,190 7,004 5,954 4,914 Income before income tax provision (benefit) 1,464 2,125 2,778 2,527 2,268 406 182 Income tax provision (benefit) 680 823 1,076 958 850 (141 ) 48 Net income $ 784 $ 1,302 $ 1,702 $ 1,569 $ 1,418 $ 547 $ 134 - 20 - (1) Ratios for the nine months ended September 30, 2004 and 2003 are annualized. (2) The average interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted- average cost of interest-bearing liabilities for the period. (3) The net interest margin represents net interest income as a percent of average interest-earning assets for the period. (4) The efficiency ratio represents non-interest expense for the period divided by the sum of net interest income (before the loan loss provision) plus non-interest income (excluding net gains (losses) on sales of bank assets and deposits and loan fees). (5) The dividend payout ratio is calculated by dividing total dividend declared per share by net income per share for the period. - 21 - Table of Contents RECENT DEVELOPMENTS OF BENJAMIN FRANKLIN BANCORP The following tables contain certain audited and unaudited information concerning the financial position and results of operations of Benjamin Franklin Bancorp at the dates and for the periods indicated. The data as of and for the year ended December 31, 2004 are unaudited. The data as of and for the year ended December 31, 2003 are derived from Benjamin Franklin Bancorp s audited consolidated financial statements. You should read this information in conjunction with the audited consolidated financial statements included in this document. In the opinion of management, the financial information at December 31, 2004 and for the year then ended reflects all adjustments (consisting only of normal recurring adjustments) which are necessary to present fairly the results for the periods included. At December 31, 2004 2003 (Dollars in thousands) Selected Financial Condition Data: Total assets $ 517,393 $ 458,844 Loans, net 383,373 288,862 Investment securities 93,262 110,254 Deposits 396,516 380,257 Short-term borrowings 4,250 0 Long-term debt (1) 81,000 45,000 Retained earnings 31,327 29,301 (1) Long-term debt includes advances from the Federal Home Loan Bank of Boston and subordinated debt. See Business of Benjamin Franklin Bancorp Sources of Funds Borrowings on page # . For the years ended December 31, 2004 2003 (Dollars in thousands) Selected Operating Data: Interest and dividend income $ 20,795 $ 19,532 Interest expense 7,032 6,752 Net interest income 13,763 12,780 Provision for loan losses 620 625 Net interest income after provision for loan losses 13,143 12,155 Non-interest income 2,148 2,990 Gain (loss) on sales of securities, net (24 ) 86 Non-interest expense 12,686 12,724 Income before income tax expense 2,581 2,507 Income tax expense 892 819 Net income $ 1,689 $ 1,688 - 22 - Table of Contents Name (1) Age Position Claire S. Bean 52 Executive Vice President/Chief Financial Officer, Benjamin Franklin Bank; Treasurer and Chief Financial Officer, Benjamin Franklin Bancorp Stephen F. Banks 52 Executive Vice President/Chief Information Officer, Benjamin Franklin Bank; Vice President, Benjamin Franklin Bancorp Ronald E. Baron 48 Senior Vice President/Treasurer, Benjamin Franklin Bank Mariane E. Broadhurst 47 Senior Vice President/Retail Banking, Benjamin Franklin Bank Rose M. Buckley 37 Senior Vice President/Senior Commercial Lending Officer, Benjamin Franklin Bank Michael J. Piemonte 50 Senior Vice President/Risk Management and Compliance, Benjamin Franklin Bank Brian E. Ledwith 36 Vice President/Senior Retail Lending Officer, Benjamin Franklin Bank Kathleen P. Sawyer (1) The average interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted- average cost of interest-bearing liabilities for the period. (2) The net interest margin represents net interest income as a percent of average interest-earning assets for the period. (3) The efficiency ratio represents non-interest expense for the period minus expenses related to the amortization of intangible assets divided by the sum of net interest income (before the loan loss provision) plus non-interest income (excluding net gains (losses) on sale of bank assets). Comparison of Financial Condition At December 31, 2004 and December 31, 2003 Total Assets. Total assets increased by $58.5 million, or 12.8%, from $458.8 million at December 31, 2003 to $517.4 million at December 31, 2004. This increase was largely the result of an increase in the loan portfolio, offset by reductions in cash, short-term investments and investment securities. Cash and Short-term Investments. Cash and correspondent bank balances decreased by $6.0 million to $8.7 million as of December 31, 2004 when compared to December 31, 2003. Over the same period, short-term investments, comprised of overnight fed funds sold and money market funds, decreased $15.5 million to $5.5 million at December 31, 2004. These reductions in short-term liquidity served primarily to fund increases in Benjamin Franklin Bank s loan portfolio. Securities. The investment portfolio totaled $93.3 million at December 31, 2004, a decrease of $17.0 million, or 15.4%, from $110.3 million at December 31, 2003. This reduction, caused by net pay-downs in mortgage-backed securities totaling $25.4 million, offset by increases in holdings of U.S. federal - 23 - Table of Contents agency securities and corporate bonds totaling $3.7 million and $5.0 million, respectively, was used to fund growth in Benjamin Franklin Bank s loan portfolio. Net Loans. Net loans as of December 31, 2004 were $383.4 million, an increase of $94.5 million, or 32.7%, over net loan balances of $288.9 million as of December 31, 2003. Loan growth occurred in most product categories, including residential mortgage loans ($69.0 million), commercial real estate ($17.3 million), construction ($4.7 million), and consumer ($5.0 million), offset by a decline in commercial business loans ($1.2 million). The significant growth in residential mortgage loans can be attributed to the attractive rates offered on adjustable-rate mortgages and 15-year bi-weekly mortgage loans. Deposits. Deposits increased by $16.3 million to $396.5 million at December 31, 2004, an increase of 4.3% over balances of $380.3 million at December 31, 2003. The largest increases came in certificates of deposit ($13.9 million), money market accounts ($3.1 million) and demand accounts ($2.0 million), offset by a decline in checking accounts ($2.2 million). The deposit increases overall were the result of Benjamin Franklin Bank s continued marketing and promotional efforts in its market area, including efforts to remain competitive in all of its deposit product offerings. Borrowed Funds. Funds borrowed from the Federal Home Loan Bank of Boston increased by $40.3 million to $76.3 million at December 31, 2004, a 111.9% increase over balances of $36.0 million as of December 31, 2003. These additional funds were borrowed in order to fund the continued growth in the Bank s loan portfolio during the year ended December 31, 2004. The $9.0 million balance in subordinated debt remained unchanged from December 31, 2003 to December 31, 2004. Retained Earnings. Retained earnings increased by $2.0 million to $31.3 million at December 31, 2004, an increase of 6.9% from a balance of $29.3 million as of December 31, 2003. This change was the result of net income for the year of $1.7 million and a decline of $365,000 in the net unrealized loss on marketable securities. Comparison of Operating Results For The Year Ended December 31, 2004 and December 31, 2003 Net Income. Net income for the year ended December 31, 2004 was $1,689,000, essentially unchanged when compared to net income of $1,688,000 for 2003. A $983,000 increase in net interest income in 2004 was almost entirely offset by a decline in other income of $842,000 and a $110,000 reduction in net gains incurred on sales of securities. Net Interest Income. Benjamin Franklin Bancorp earned net interest income of $13.8 million and $12.8 million in the years ended December 31, 2004 and 2003, respectively. The increase between the two periods of $983,000 or 7.7%, is due to a $30.5 million, or 7.1%, increase in average interest-earning assets, and to a lesser degree to a 2 basis point, or 0.7%, increase in the net interest margin. Within earnings assets, higher-yielding loans increased on average by $67.9 million, while lower-yielding investment securities and short-term investments declined by $37.4 million on average. Within Benjamin Franklin s funding liabilities, the mix shifted somewhat in favor of non-interest bearing accounts, which increased by $30.7 million on average. This shift was caused primarily by a change made in Benjamin Franklin Bank s primary checking account product in September 2003, whereby the payment of interest was eliminated. Interest Income. Interest income rose $1.3 million, or 6.5%, to $20.8 million for the year ended December 31, 2004 from $19.5 million for the year ended December 31, 2003. The increase was caused primarily by a $30.5 million increase in interest-earning assets, which had the effect of increasing interest income by $3.2 million. Loans increased on average by $67.9 million, offset by decreases in the average balances of investment securities ($15.4 million) and short-term investments ($21.9 million). Despite the fact that the average yield on loans declined from 5.74% for the year ended December 31, 2003 to 5.12% - 24 - (1) Shows the effect of the mutual-to-stock conversion of Benjamin Franklin Bancorp, assuming gross proceeds of $42.5 million, the minimum of the offering range, offering expenses of $1.6 million, a contribution to the Benjamin Franklin Bank Charitable Foundation of $3.4 million of common stock, and establishment of an employee stock ownership plan and a stock-based incentive plan that will acquire 8.0% and 4.0%, respectively, of the number of shares issued in the offering including the shares issued to the Benjamin Franklin Bank Charitable Foundation. The employee stock ownership plan is assumed to purchase its shares in the offering and in open market purchases. It is assumed that Benjamin Franklin Bancorp will purchase, for grant as restricted stock under the stock-based incentive plan, shares in the open market after receiving stockholder approval to adopt the plan. Open market purchases by the employee stock ownership plan and for the stock-based incentive plan are assumed at $10 per share. The reduction in retained earnings reflects the one-time expense of funding the Benjamin Franklin Bank Charitable Foundation net of a deferred tax asset. Table of Contents for the same period in 2004, the overall yield on interest earning assets remained almost unchanged at 4.56% and 4.53% for 2003 and 2004, respectively, due to the change in the mix of interest earning assets. Interest Expense. Interest expense for the year ended December 31, 2004 increased by $280,000, or 4.1%, to $7.0 million as compared to interest expense of $6.8 million for the year ended December 31, 2003. The effect a 10 basis point, or 5.6%, increase in the average rates paid on interest-bearing liabilities was offset in part by an increase in non-interest-bearing liabilities, which grew by an average of $30.7 million in the 2004. The increase in non-interest-bearing liabilities was primarily due to a change made in Benjamin Franklin Bank s primary checking account product, which was converted to a non-interest bearing account in September 2003. Provision for Loan Losses. Benjamin Franklin records a provision for loan losses as a charge to its earnings when necessary in order to maintain the allowance for loan losses at a level sufficient to absorb potential losses inherent in the loan portfolio. Refer to Business of Benjamin Franklin Bancorp Asset Quality on page # for additional information about Benjamin Franklin s methodology for establishing its allowance for loan losses. Benjamin Franklin recorded $620,000 and $625,000 in loan loss provisions during the years ended December 31, 2004 and 2003, respectively. Provisions in both years were reflective of growth in the loan portfolio, and in the case of the 2003 period, the recording of net charge-offs of $414,000. In 2004, net recoveries of $29,000 were realized. At December 31, 2004, the allowance for loan losses totaled $3.2 million, or 0.82% of the loan portfolio, compared to $2.5 million, or 0.87%, of total loans at December 31, 2003. Non-interest Income. Non-interest income for the year ended December 31, 2004 declined to $2.1 million, a reduction of $952,000, or 31.0%, when compared to non-interest income of $3.1 million during the year ended December 31, 2003. An $852,000 decline in gains on loan sales, a $110,000 decrease in gains on sales of securities, an $82,000 reduction in loan servicing fees and a $46,000 reduction in deposit service fees were partially offset by an additional $111,000 in miscellaneous income and a $27,000 increase in income earned on bank-owned life insurance. The decline in gain on loan sales was attributable to the rise in market interest rates in 2004, which in turn caused a decline in the origination of fixed rate residential mortgage loans that the Bank typically sells at a small gain in the secondary market. Loan servicing fee income was also negatively affected by the reduction in fixed rate loan originations sold with servicing rights retained. The increase in miscellaneous income in the 2004 period was primarily attributable to an increase in fees earned on investment product sales, brought about by the addition of a second sales representative in the fourth quarter of 2003. Non-interest Expense. Non-interest expense was essentially unchanged at $12.7 million for the years ended 2004 and 2003. Reductions in occupancy and equipment costs, and professional fees were offset by an increase in salaries and employee benefits. Salaries and employee benefits expenses increased $820,000, or 12.3%, to $7.5 million for the year ended December 31, 2004. The increase was primarily due to normal merit increases averaging 4.5%, the addition of one senior officer position, and significantly lower deferral of loan origination costs due to a lower volume of loan originations in 2004 when compared to 2003. Occupancy and equipment expenses declined $378,000, or 21.1%, to $1.4 million for the year ended December 31, 2004. Most of this reduction was attributable to a decline in depreciation expense associated with branch-related capital expenditures made five years earlier. Professional fees decreased $611,000, or 62.0%, to $374,000 for the year ended December 31, 2004, due primarily to a decline in legal costs and loan origination expenses. Income Taxes. Income tax expense was $892,000 for the year ended December 31, 2004, an increase of $73,000, or 8.9%, compared to $819,000 for the year ended December 31, 2003. The effective tax rates for the 2004 and 2003 years were 34.6% and 32.7%, respectively, and the increase was due to - 25 - Table of Contents (2) Reflects the purchase accounting and acquisition adjustments related to the acquisition of Chart Bank for a price of $30.75 per share in cash and newly issued common stock. (3) Calculate as follows: (Dollars in thousands) Gross conversion proceeds $ 42,500 Offering expenses (1,554 ) ESOP adjustment (3,672 ) Stock-based incentive plan (restricted stock grants) adjustment (1,836 ) Pro forma cash adjustment $ 35,438 (4) Deferred tax asset resulting from funding the Benjamin Franklin Bank Charitable Foundation based on marginal tax rate of 36.0%. (5) The employee stock ownership plan loan is assumed to be funded internally with a loan from Benjamin Franklin Bancorp, thus no borrowing liability will be recorded on the consolidated balance sheet of Benjamin Franklin Bancorp. (6) No par value common stock. (7) Calculate as follows: (Dollars in thousands) Net proceeds of offering $ 40,946 Common stock issued to Foundation 3,400 Pro forma adjustment $ 44,346 (8) After-tax impact to retained earnings from the $3.4 million expense for funding the Benjamin Franklin Bank Charitable Foundation based on a marginal tax rate of 36.0%. (9) Contra-equity account established to reflect the unallocated shares in the employee stock ownership plan, anticipated to purchase 8.0% of the shares issued in the offering (including shares contributed to the Benjamin Franklin Bank Charitable Foundation). (10) Contra-equity account established to reflect the unvested shares of restricted stock under the stock-based incentive plan equal to 4.0% of offering plus foundation shares. (11) Includes the cash portion of the merger consideration paid to Chart Bank, non-tax deductible transaction costs remaining to be paid at September 30, 2004, tax deductible one time acquisition costs, and one time expenses that will be incurred by Benjamin Franklin Bancorp to consolidate Chart Bank, net of cash received from return of the Chart Bank Cooperative Central Bank deposit. (Dollars in thousands) Cash portion of merger consideration $ 21,469 Non-tax deductible transaction expenses 983 Tax deductible transaction expenses 3,091 One time expenses incurred to consolidate Chart Bank 3,075 Return of Chart Bank Cooperative Central Bank Deposit (536 ) Total cash adjustment $ 28,082 (12) Yield adjustment to reflect the difference between portfolio yields and market rates as of September 30, 2004 for loans acquired in the acquisition. Yield adjustments were calculated using present value analysis as follows: (a) the acquired loan portfolio was segregated into pools of similar loans; (b) cash flow projections were prepared for each loan pool based interest rates, balances, remaining terms to maturity, and estimated prepayment speeds for each pool; (c) cash flows were discounted to present value using risk adjusted discount rates for comparable loans; and (d) the resulting difference between the present value of future cash flows for each pool and the corresponding principal balance was the yield adjustment. Yield adjustments on acquired loans are amortized into interest income using the interest method over the estimated lives of the acquired loans, which range between 0.5 years and 8.3 years, depending upon the type of loan (average is 4.2 years). (13) Reflects the difference between market values and net book values of fixed assets acquired in the acquisition. (14) Goodwill is an intangible asset that is not subject to amortization. The goodwill balance will be tested annually for impairment. Goodwill is calculated as follows: (Dollars in thousands, except per share data) Purchase price per share $ 30.75 Number of shares acquired 1,420,000 Number of options acquired 137,000 Average exercise price of options $ 10.00 Cost of purchasing shares $ 43,665 Cost of purchasing options 2,843 Tax effect of purchasing options (1,024 ) Net interest income 10,199 9,395 12,780 13,812 14,044 Provision for loan losses 470 300 625 1,412 Table of Contents (Dollars in thousands, except per share data) Purchase price (net of tax effect of purchasing options) 45,484 Less: acquired stockholders equity (17,546 ) Plus: estimated non-tax deductible transaction costs 983 Plus: taxable purchase accounting adjustments Estimated tax deductible expenses (pretax) 3,091 Yield adjustment for acquired CDs 703 Yield adjustment for acquired borrowings (29 ) Yield adjustment for acquired loans (299 ) Core deposit intangible (3,799 ) Market value adjustment for fixed assets (427 ) Tax effect at 36.0% marginal tax rate 274 Goodwill $ 28,435 (15) Core deposit intangible is an identifiable intangible asset representing the economic value of the acquired Chart Bank deposit base, calculated as the present value benefit of funding operations with the acquired deposit base versus using an alternative wholesale funding source. The core deposit intangible asset is amortized into expense on an accelerated basis using the double declining balance method over 8.3 years. (16) Calculate as follows: (Dollars in thousands) Deferred tax entry for taxable transaction costs (footnote 14) $ (274 ) Deferred tax entry for one time merger charges (footnote 21) 1,108 Repayment of Chart Bank Cooperative Central Bank deposit (536 ) Pro forma adjustment $ 298 (17) Yield adjustment to reflect the difference between portfolio yields and market rates as of September 30, 2004 for time deposits acquired in the acquisition. Yield adjustment is calculated as the difference between the current portfolio balances for time deposits and the present value of projected cash flows related to the time deposits discounted using current market rates. Current market rates were based on average rates paid by institutions competing in the regional market area based on rate surveys on or around September 30, 2004. The yield adjustment for time deposits will be accreted into income using the interest method over the lives of the acquired time deposits based on their monthly maturities (5 years). (18) Yield adjustment to reflect the difference between portfolio yields and market rates as of September 30, 2004 for borrowings acquired in the acquisition. Yield adjustment is calculated as the difference between the current portfolio balance for borrowings and the present value of projected cash flows related to the borrowings discounted using current market rates. Current market rates were based on rates offered by the Federal Home Loan Bank of Boston as of September 30, 2004. The yield adjustment for borrowings will be amortized into expense using the interest method over the lives of the acquired borrowings based on their monthly maturities (4 years). (19) Eliminate Chart Bank common stock par value. Newly issued shares of Benjamin Franklin Bancorp have no par value. (20) Calculate as follows: (Dollars in thousands) Eliminate existing Chart Bank paid-in capital $ (11,575 ) Common stock (par value) issued in acquisition 24,016 Adjustment to paid-in capital $ 12,441 (21) Calculate as follows: (Dollars in thousands) Eliminate existing Chart Bank retained earnings $ (4,524 ) One-time merger charges incurred: Restructure FHLB advances and conversion of accounts (3,075 ) Tax effect at marginal rate of 36.0% 1,107 Adjustment to retained earnings $ (6,492 ) (22) Calculate to eliminate the capital account entries of Chart Bank pursuant to purchase accounting. (1) Shows the effect of the mutual-to-stock conversion of Benjamin Franklin Bancorp, assuming gross proceeds of $66.1 million, the maximum, as adjusted, offering expenses of $1.8 million, a contribution to the Benjamin Franklin Bank Charitable Foundation of $4.0 million of common stock, and establishment of an employee stock ownership plan and the stock-based incentive plan that will acquire 8.0% and 4.0%, respectively, of the number of shares issued in the offering including the shares issued to the Benjamin Franklin Bank Charitable Foundation. The employee stock ownership plan is assumed to purchase its shares in the offering and in open market purchases. It is assumed that Benjamin Franklin Bancorp will purchase, for grant as restricted stock under the stock-based incentive plan, shares in the open market after receiving stockholder approval to adopt the plan. Open market purchases by the employee stock ownership plan and for the stock-based incentive plan are assumed at $10 per share. The reduction in retained earnings reflects the one-time expense of funding the Benjamin Franklin Bank Charitable Foundation net of a deferred tax asset. (2) Reflects the purchase accounting and acquisition adjustments related to the acquisition of Chart Bank for a price of $30.75 per share in cash and newly issued common stock. Table of Contents (3) Calculate as follows: (Dollars in thousands) Gross conversion proceeds $ 66,125 Offering expenses (1,771 ) ESOP adjustment (5,610 ) Stock-based incentive plan (restricted stock grants) adjustment (2,805 ) Pro forma cash adjustment $ 55,939 (4) Deferred tax asset resulting from funding the Benjamin Franklin Bank Charitable Foundation based on marginal tax rate of 36.0%. (5) The employee stock ownership plan loan is assumed to be funded internally with a loan from Benjamin Franklin Bancorp, thus no borrowing liability will be recorded on the consolidated balance sheet of Benjamin Franklin Bancorp. (6) No par value common stock. (7) Calculate as follows: (Dollars in thousands) Net proceeds of offering $ 64,354 Common stock issued to Foundation 4,000 Pro forma adjustment $ 68,354 (8) After-tax impact to retained earnings from the $4.0 million expense for funding the Benjamin Franklin Bank Charitable Foundation based on a marginal tax rate of 36.0%. (9) Contra-equity account established to reflect the unallocated shares in the employee stock ownership plan, anticipated to purchase 8.0% of the shares issued in the offering (including shares contributed to the Benjamin Franklin Bank Charitable Foundation). (10) Contra-equity account established to reflect the unvested shares of restricted stock under the stock-based incentive plan equal to 4.0% of offering plus foundation shares. (11) Includes the cash portion of the merger consideration paid to Chart Bank, non-tax deductible transaction costs remaining to be paid at September 30, 2004, tax deductible one time acquisition costs, and one time expenses that will be incurred by Benjamin Franklin Bancorp to consolidate Chart Bank, net of cash received from return of the Chart Bank Cooperative Central Bank deposit. (Dollars in thousands) Cash portion of merger consideration $ 21,469 Non-tax deductible transaction expenses 983 Tax deductible transaction expenses 3,091 One time expenses incurred to consolidate Chart Bank 3,075 Return of Chart Bank Cooperative Central Bank Deposit (536 ) Total cash adjustment $ 28,082 (12) Yield adjustment to reflect the difference between portfolio yields and market rates as of September 30, 2004 for loans acquired in the acquisition. Yield adjustments were calculated using present value analysis as follows: (a) the acquired loan portfolio was segregated into pools of similar loans; (b) cash flow projections were prepared for each loan pool based interest rates, balances, remaining terms to maturity, and estimated prepayment speeds for each pool; (c) cash flows were discounted to present value using risk adjusted discount rates for comparable loans; and (d) the resulting difference between the present value of future cash flows for each pool and the corresponding principal balance was the yield adjustment. Yield adjustments on acquired loans are amortized into interest income using the interest method over the estimated lives of the acquired loans, which range between 0.5 years and 8.3 years, depending upon the type of loan (average is 4.2 years). (13) Reflects the difference between market values and net book values of fixed assets acquired in the acquisition. (14) Goodwill is an intangible asset that is not subject to amortization. The goodwill balance will be tested annually for impairment. Goodwill is calculated as: (Dollars in thousands, except per share data) Purchase price per share $ 30.75 Number of shares acquired 1,420,000 Number of options acquired 137,000 Average exercise price of options $ 10.00 Cost of purchasing shares $ 43,665 Cost of purchasing options 2,843 Tax effect of purchasing options (1,024 ) Purchase price (net of tax effect of purchasing options) 45,484 Less: acquired stockholders equity (17,546 ) Table of Contents (Dollars in thousands, except per share data) Plus: estimated non-tax deductible transaction costs 983 Plus: taxable purchase accounting adjustments Estimated tax deductible expenses (pretax) 3,091 Yield adjustment for acquired CDs 703 Yield adjustment for acquired borrowings (29 ) Yield adjustment for acquired loans (299 ) Core deposit intangible (3,799 ) Market value adjustment for fixed assets (427 ) Tax effect at 36.0% marginal tax rate 274 Goodwill $ 28,435 (15) Core deposit intangible is an identifiable intangible asset representing the economic value of the acquired Chart Bank deposit base, calculated as the present value benefit of funding operations with the acquired deposit base versus using an alternative wholesale funding source. The core deposit intangible asset is amortized into expense on an accelerated basis using the double declining balance method over 8.3 years. (16) Calculate as follows: (Dollars in thousands) Deferred tax entry for taxable transaction costs (footnote 14) $ (274 ) Deferred tax entry for one time merger charges (footnote 21) 1,108 Repayment of Chart Bank Cooperative Central Bank deposit (536 ) Pro forma adjustment $ 298 (17) Yield adjustment to reflect the difference between portfolio yields and market rates as of September 30, 2004 for time deposits acquired in the acquisition. Yield adjustment is calculated as the difference between the current portfolio balances for time deposits and the present value of projected cash flows related to the time deposits discounted using current market rates. Current market rates were based on average rates paid by institutions competing in the regional market area based on rate surveys on or around September 30, 2004. The yield adjustment for time deposits will be accreted into income using the interest method over the lives of the acquired time deposits based on their monthly maturities (5 years). (18) Yield adjustment to reflect the difference between portfolio yields and market rates as of September 30, 2004 for borrowings acquired in the acquisition. Yield adjustment is calculated as the difference between the current portfolio balance for borrowings and the present value of projected cash flows related to the borrowings discounted using current market rates. Current market rates were based on rates offered by the Federal Home Loan Bank of Boston as of September 30, 2004. The yield adjustment for borrowings will be amortized into expense using the interest method over the lives of the acquired borrowings based on their monthly maturities (4 years). (19) Eliminate Chart Bank common stock par value. Newly issued shares of Benjamin Franklin Bancorp have no par value. (20) Calculate as follows: (Dollars in thousands) Eliminate existing Chart Bank paid-in capital $ (11,575 ) Common stock (par value) issued in acquisition 24,016 Adjustment to paid-in capital $ 12,441 (21) Calculate as follows: (Dollars in thousands) Eliminate existing Chart Bank retained earnings $ (4,524 ) One-time merger charges incurred: Restructure FHLB advances and conversion of accounts (3,075 ) Tax effect at marginal rate of 36.0% 1,107 Adjustment to retained earnings $ (6,492 ) (22) Calculate to eliminate the capital account entries of Chart Bank pursuant to purchase accounting. Table of Contents RISK FACTORS Please consider the following risk factors, in addition to those you may find elsewhere in this Prospectus, when deciding whether to purchase our common stock in the conversion. Our Financial Success Depends In Part On The Success Of Our Acquisition of Chart Bank. Our future operating performance will depend, in part, on the success of the merger with Chart Bank, which will be the largest merger Benjamin Franklin Bancorp has consummated. The success of the merger will, in turn, depend on a number of factors, including our ability to: integrate into Benjamin Franklin Bank the operations and branches of Chart Bank, retain Chart Bank s deposits and customers, control future non-interest expenses in a manner that enables us to improve our overall operating efficiencies, retain and integrate key personnel of Chart Bank into our operations, particularly those with specialized expertise in the CSSI ATM management business. Integration of Chart Bank into Benjamin Franklin Bank following the merger will require the dedication of the time and resources of our management and may temporarily distract management s attention from our day-to-day business. No assurance can be given that we will successfully integrate Chart Bank s operations into our own, or that we will achieve anticipated benefits of the merger or achieve earnings results in the future similar to those we, or Chart Bank, have achieved in the past. Further, no assurance can be given that we will effectively manage any growth resulting from the merger. Our Commercial Real Estate, Construction And Commercial Business Loans May Expose Us To Increased Credit Risks, And This Risk Will Increase If We Succeed In Increasing These Types Of Loans. Residential real estate loans represent a smaller proportion of our loan portfolio than the average for savings institutions in New England. As of September 30, 2004, commercial real estate, construction and commercial business loans represented 28.9% of our loan portfolio. This percentage would have been 39.9% on a pro forma basis as of that date with the acquisition of Chart Bank, and we intend to grow commercial real estate and commercial business loans further as a proportion of our portfolio over the next several years. Construction loans, while they are not likely to increase as a percentage of total loans, are expected to increase in absolute terms in line with the overall growth in the bank s loan portfolio. In general, construction loans, commercial real estate loans and commercial business loans generate higher returns, but also pose greater credit risks, than do owner-occupied residential mortgage loans. As our various commercial loan portfolios increase, the corresponding risks and potential for losses from these loans may also increase. The repayment of construction and commercial real estate loans depends on the business and financial condition of borrowers and, in the case of construction loans, on the economic viability of projects financed. A number of our borrowers have more than one construction or commercial real estate loan outstanding with us. Further, these loans are concentrated primarily in Eastern Massachusetts. Economic events and changes in government regulations, which we and our borrowers cannot control, could have an adverse impact on the cash flows generated by properties securing our construction and commercial real estate loans and on the values of the properties securing those loans. Commercial properties tend to decline in value more rapidly than residential owner-occupied properties during economic recessions. We held $104.3 million in construction and commercial real estate loans in our - 32 - September 30, 2004 (unaudited) Securities available for sale: Federal agency obligations $ 2,009 $ 26 $ $ 2,035 Marketable equity securities 1,614 Table of Contents loan portfolio as of September 30, 2004 representing 27.6% of total loans on that date. On a pro forma basis on that date, assuming that the merger with Chart Bank had been completed, we would have had $212.2 million of these loans in our portfolio representing 38.3% of total loans. We make both secured and some short-term unsecured commercial business loans, holding $5.0 million of these loans in our loan portfolio as of September 30, 2004, representing 1.3% of total loans on that date. On a pro forma basis on that date, assuming that the merger with Chart Bank had been completed, we would have had $9.1 million of commercial business loans in our portfolio, representing 1.6% of total loans. Repayment of both secured and unsecured commercial business loans depends substantially on borrowers underlying business, financial condition and cash flows. Unsecured loans generally involve a higher degree of risk of loss than do secured loans because, without collateral, repayment is wholly dependent upon the success of the borrowers businesses. Secured commercial business loans are generally collateralized by equipment, leases, inventory and accounts receivable. Compared to real estate, that type of collateral is more difficult to monitor, its value is harder to ascertain, it may depreciate more rapidly and it may not be as readily saleable if repossessed. Our Continuing Concentration Of Loans In Our Primary Market Area May Increase Our Risk. Our success depends primarily on the general economic conditions in the counties in which we conduct business, and in the Boston metropolitan area in general. Unlike larger banks that are more geographically diversified, we provide banking and financial services to customers primarily in Norfolk and Worcester Counties, Massachusetts, southwest of Boston, and to lesser degree in Middlesex and Suffolk Counties, which include the City of Boston and areas east of Boston. Following our proposed acquisition of Chart Bank, we will expand our presence in Middlesex and Suffolk Counties. The local economic conditions in our market area have a significant impact on our loans, the ability of the borrowers to repay these loans and the value of the collateral securing these loans. A significant decline in general economic conditions caused by inflation, recession, unemployment or other factors beyond our control would affect these local economic conditions and could adversely affect our financial condition and results of operations. Additionally, because we have a significant amount of commercial real estate loans, decreases in tenant occupancy may also have a negative effect on the ability of many of our borrowers to make timely repayments of their loans, which would have an adverse impact on our earnings. Our Return On Equity May Initially Be Low Compared To Other Financial Institutions. A Low Return Could Lower The Trading Price Of Our Common Stock. Net income divided by average equity, known as return on equity, is a ratio many investors use to compare the performance of a financial institution to its peers. Our return on equity may be reduced due to the expenses we will incur in pursuing our growth strategies, the costs of being a public company and added expenses associated with our employee stock ownership plan and planned stock-based incentive plan. The increase in our core deposit intangible asset created by the Chart Bank acquisition will also have a negative impact on our return on equity, and if our periodic evaluation of the goodwill created by the Chart Bank acquisition results in a determination of impairment, we would be required to reduce its carrying value through a charge to earnings. Until we can increase our net interest income and non-interest income, we expect our return on equity to be below the industry average for public thrifts, which may negatively affect the value of our common stock. At the midpoint of the offering range, pro forma return on equity is estimated to be 2.43% compared to our comparable peer group return on equity of 9.38%. - 33 - Table of Contents We May Have Difficulty Meeting Our Branch Expansion Goals, And Our Branch Expansion Strategy May Not Be Accretive To Earnings. Our growth plans include the opening of new branch offices in communities located between the Benjamin Franklin Bank and Chart Bank franchises as well as in other communities contiguous to those currently served by Benjamin Franklin Bank. Our ability to establish new branches will depend upon whether we can identify suitable sites and negotiate acceptable lease or purchase and sale terms, and we may not be able to do so, or it may take longer than we expect. Moreover, once we establish a new branch, numerous factors will contribute to its performance, such as a suitable location, qualified personnel and an effective marketing strategy. Additionally, it takes time for a new branch to gather significant loans and deposits to generate enough income to offset its expenses, some of which, like salaries and occupancy expense, are relatively fixed costs. There can be no assurance that our branch expansion strategy will be accretive to our earnings, or that it will be accretive to earnings within a reasonable period of time. Strong Competition Within Our Market Area May Limit Our Growth And Profitability. We face significant competition both in attracting deposits and in the origination of loans. See Business of Benjamin Franklin Bancorp Market Area and Competition on page # . Savings banks, credit unions, savings and loan associations and commercial banks operating in our primary market area have historically provided most of our competition for deposits. In addition, and particularly in times of high interest rates, we face additional and significant competition for funds from money-market mutual funds and issuers of corporate and government securities. Competition for the origination of real estate and other loans comes from other thrift institutions, commercial banks, insurance companies, finance companies, other institutional lenders and mortgage companies. Many of our competitors have substantially greater financial and other resources than ours. Moreover, we may face increased competition in the origination of loans if competing thrift institutions convert to stock form, because such converting thrifts would likely seek to invest their new capital into loans. Finally, credit unions do not pay federal or state income taxes and are subject to fewer regulatory constraints than savings banks and as a result, they may enjoy a competitive advantage over us. This advantage places significant competitive pressure on the prices of our loans and deposits. Our Ability to Grow May Be Limited if We Cannot Make Acquisitions. In an effort to increase our loan and deposit growth, we will continue to seek to expand our banking franchise, including through acquisitions of other financial institutions or branches if opportunities arise. Our ability to grow through selective acquisitions of other financial institutions or branches will depend on successfully identifying, acquiring and integrating them. We compete with other financial institutions with respect to proposed acquisitions. We cannot assure you that we will be able to identify attractive acquisition candidates or make acquisitions on favorable terms. In addition, we cannot assure you that we can successfully integrate any acquired financial institutions or branches into our banking organization in a timely or efficient manner, that we will be successful in retaining existing customer relationships or that we can achieve anticipated operating efficiencies. We Operate In A Highly Regulated Environment And May Be Adversely Affected By Changes In Law And Regulations. We are subject to extensive regulation, supervision and examination. See Regulation and Supervision on page # . Any change in the laws or regulations applicable to us, or in banking regulators supervisory policies or examination procedures, whether by the Massachusetts Commissioner of Banks, the FDIC, the Federal Reserve Board, other state or federal regulators, the United States Congress or the Massachusetts legislature could have a material adverse effect on our business, financial condition, results of operations and cash flows. - 34 - Table of Contents We are subject to regulations promulgated by the Massachusetts Division of Banks, as our chartering authority, and by the FDIC as the insurer of our deposits up to certain limits. We also belong to the Federal Home Loan Bank System and, as a member of such system, we are subject to certain limited regulations promulgated by the Federal Home Loan Bank of Boston. In addition, the Federal Reserve Board regulates and oversees Benjamin Franklin Bancorp, as a Bank holding company. This regulation and supervision limits the activities in which we may engage. The purpose of regulation and supervision is primarily to protect our depositors and borrowers and, in the case of FDIC regulation, the FDIC s insurance fund. Regulatory authorities have extensive discretion in the exercise of their supervisory and enforcement powers. They may, among other things, impose restrictions on the operation of a banking institution, the classification of assets by such institution and such institution s allowance for loan losses. Regulatory and law enforcement authorities also have wide discretion and extensive enforcement powers under various consumer protection and civil rights laws, including the Truth-in-Lending Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Real Estate Settlement Procedures Act and Massachusetts s deceptive acts and practices law. These laws also permit private individual and class action law suits and provide for the recovery of attorneys fees in certain instances. No assurance can be given that the foregoing regulations and supervision will not change so as to affect us adversely. Changes in Market Interest Rates Could Adversely Affect Our Financial Condition and Results of Operations. Our profitability, like that of most financial institutions, depends to a large extent upon our net interest income, which is the difference, or spread, between our gross interest income on interest-earning assets, such as loans and securities, and our interest expense on interest-bearing liabilities, such as deposits and borrowed funds. Accordingly, our results of operations and financial condition depend largely on movements in market interest rates and our ability to manage our interest-rate-sensitive assets and liabilities in response to these movements, including our adjustable-rate mortgage loans, which represent the largest portion of our residential loan portfolio. Changes in interest rates could have a material adverse effect on our business, financial condition, results of operations and cash flows. Because, as a general matter, our interest-bearing liabilities re-price or mature more quickly than our interest-earning assets, an increase in interest rates generally would result in a decrease in our interest rate spread and net interest income. See Management s Discussion and Analysis of Benjamin Franklin Bancorp Financial Condition and Results of Operations Quantitative and Qualitative Disclosure About Risk Management on page # . Changes in interest rates also affect the value of our interest-earning assets, including, in particular, the value of our investment securities portfolio. Generally, the value of investment securities fluctuates inversely with changes in interest rates. At September 30, 2004, our securities portfolio totaled $101.6 million, including $94.4 million of securities available for sale. Unrealized gains and losses on securities available for sale are reported as a separate component of surplus, net of related taxes. Decreases in the fair value of securities available for sale therefore would have an adverse affect on our stockholders equity. See Business of Benjamin Franklin Bancorp Investment Activities on page # . We are also subject to reinvestment risk relating to interest rate movements. Decreases in interest rates can result in increased prepayments of loans and mortgage-related securities, as borrowers refinance to reduce their borrowing costs. Under these circumstances, we are subject to reinvestment risk to the extent that we are not able to reinvest funds from such prepayments at rates that are comparable to the rates on the prepaid loans or securities. On the other hand, increases in interest rates on adjustable-rate mortgage loans result in larger mortgage payments due from borrowers, which could potentially increase our level of loan delinquencies and defaults. - 35 - (1) Shows the effect of the mutual-to-stock conversion of Benjamin Franklin Bancorp, assuming gross proceeds of $42.5 million, the minimum of the offering range, offering expenses of $1.6 million, a contribution to the Benjamin Franklin Bank Charitable Foundation of $3.4 million of common stock, and establishment of an employee stock ownership plan that will acquire 8.0% of the number of shares issued in the offering including the shares issued to the Benjamin Franklin Bank Charitable Foundation. The employee stock ownership plan is assumed to purchase its shares in the offering and in open market purchases. The loan taken down by the employee stock ownership plan will be amortized over 30 years on a straight line basis. The employee stock ownership plan expense shown reflects the estimated amortization expense on a pretax basis for the period shown. Benjamin Franklin Bancorp also intends to adopt a stock-based incentive plan that will award shares of restricted stock in the amount 4.0% of the number of shares issued in the offering plus the shares issued to the Benjamin Franklin Bank Charitable Foundation. The shares to be granted by the stock-based incentive plan as restricted stock are assumed to be purchased in the open market after receiving stockholder approval. Open market purchases by the employee stock ownership plan and for the stock-based incentive plan are assumed at $10 per share. Also under the stock-based incentive plan, Benjamin Franklin Bancorp intends to grant options to purchase 10.0% of the number of shares issued in the offering plus shares issued to the Benjamin Franklin Bank Charitable Foundation. The exercise price of the options is assumed to be $10 per share and the grant-date price of the shares is also assumed to be $10 per share. Adjustments to record estimated stock-based incentive plan expenses, including expenses of the restricted stock awards and option grants, and interest income to be earned on net proceeds of the offering, will be recorded as incurred. Since these estimates are non-recurring, they are not reflected in the calculations of pro forma income. The estimated interest income assuming net cash proceeds of $35.4 million from the offering are invested at an average pretax yield of 2.16% for the nine months ended September 30, 2004 would be approximately $0.6 million pretax. The yield utilized approximates the yield on a one year U.S. Treasury security as of September 30, 2004. The estimated restricted stock expense for the stock-based incentive plan assuming gross proceeds of $42.5 million is $0.3 million pretax for the nine months ended September 30, 2004. The employee stock ownership plan loan is amortized over 30 years on a straight-line basis. Employee stock ownership plan shares are assumed to be released at $10 per share. The estimated stock option expense for the stock-based incentive plan assuming gross proceeds of $42.5 million is $0.3 million pretax for the nine months ended September 30, 2004. Restricted shares under the stock-based incentive plan are assumed to vest over 5 years on a straight-line basis. The fair value of the stock options are expensed over 5 years on a straight-line basis, and only 15.0% of the stock option expense is tax deductible. Taxes are calculated on an assumed marginal rate of 36.0%. No expenses are included for the shares issued to the Benjamin Franklin Bank Charitable Foundation or other merger-related charges, all of which are one time expenses. (2) Employee stock ownership plan loan is assumed to be funded internally, so no interest expense is recorded on the consolidated income statement for Benjamin Franklin Bancorp. Employee stock ownership plan expense thus reflects only the amortization of principal for the period shown below: Table of Contents (Dollars in thousands) Employee stock ownership plan loan $ 3,672 Divided by amortization period in years 30 Annual expense $ 122 Nine months expense $ 92 (3) Chart Bank operating results for the nine months ended September 30, 2004 include $382,000 of merger-related expenses. (4) Reflects the purchase accounting and acquisition adjustments related to the acquisition of Chart Bank for a price of $30.75 per share in cash and newly issued common stock. (5) Adjustment to interest income is the amortization of the loan premium on the Chart Bank loans resulting from purchase accounting. Adjustments to record estimated interest income to be foregone as a result of funding the cash portion of the merger consideration paid to stockholders of Chart Bank and the expense of the acquisition will be recorded as incurred. Since these estimates are non-recurring, they are not reflected in the Pro forma income statements. The estimated reduction in interest income assuming total funding requirements of $28.1 million for the acquisition and related expenses, assuming such cash costs were funded with investments yielding 2.16% for the nine months ended September 30, 2004, would be approximately $0.5 million. The yield approximates the yield on the one year U.S. Treasury security on September 30, 2004. (6) Adjustment to interest expense is calculated as follows: (Dollars in thousands) Accretion of deposit premium from purchase accounting $ 533 Amortization of borrowings discount from purchase accounting (16 ) Adjustment to interest income $ 517 (7) Adjustment to non-interest expense is calculated as follows: Amortization of new core deposit intangible $ (684 ) Depreciation adjustment for market value of fixed assets (12 ) Adjustment to non-interest expense $ (696 ) (8) Marginal tax rate of 36.0%. $ 96,646 $ Table of Contents We will make a contribution to the Benjamin Franklin Bank Charitable Foundation of 8.0% of the shares actually sold in the offering, up to a maximum of 400,000 shares of common stock, valued at the $10 offering price. Persons purchasing shares in the offering will have their ownership and voting interests in Benjamin Franklin Bancorp diluted by up to 7.4% and 6.5% at the minimum and maximum, respectively, of the offering range. This contribution will have a material adverse effect on our reported net income for the quarter and year in which the contribution to the Benjamin Franklin Bank Charitable Foundation is made. Assuming that the contribution will be fully deductible, the after-tax expense of the contribution will reduce net income that we report in our 2005 fiscal year by approximately $2.6 million, assuming the foundation is funded with 400,000 shares. If the contribution is determined to be less than fully deductible, then the after-tax expense recorded in that quarter could be a maximum of $4.0 million. We believe that our contribution to the Benjamin Franklin Bank Charitable Foundation should be deductible for federal income tax purposes. However, we do not have any assurance that the IRS will grant tax-exempt status to the Benjamin Franklin Bank Charitable Foundation. If the contribution is not deductible, we would not receive any tax benefit from the contribution. In addition, even if the contribution is tax deductible, we may not have sufficient profits to be able to fully use the deduction over the six years allowed. For additional discussion, see The Benjamin Franklin Bank Charitable Foundation on page # . There May Be Delays in Completion of the Offering and the Chart Bank Acquisition, and Stock Orders are Irrevocable. We will hold funds submitted to purchase shares of common stock in connection with the offering until we complete or terminate the offering, and we may not complete or terminate the offering for an extended period of time. The offering may be delayed one or more times because its completion will be subject to various conditions, including the receipt of regulatory approvals of both the conversion and the Chart Bank merger. If, for any reason, the Chart Bank acquisition cannot be completed, our Board will consider whether to proceed with the conversion. If we were to decide to proceed with the conversion without Chart Bank, we would resolicit subscribers, providing them with a modified prospectus and an opportunity to increase, decrease or rescind their orders. However, unless we resolicit subscribers or terminate the conversion, orders to purchase shares of common stock made in connection with the offering will be irrevocable. No assurance can be given that we will complete or terminate the offering on or before any particular date. However, if the offering is not completed by date , 2005, the offering will be terminated and all subscribers will have applicable subscription funds returned promptly with interest (or have applicable withdrawal authorizations canceled). We Have Never Issued Stock and We Cannot Guarantee That An Active Trading Market Will Develop. As a mutual institution, Benjamin Franklin Bancorp has never issued capital stock and, consequently, there is currently no existing market for our common stock. We have applied for, and expect to receive, approval to have our common stock quoted on the Nasdaq National Market under the symbol BFBC subject to the completion of the conversion and compliance with initial listing conditions, including the presence of at least three market makers. A public trading market having the desirable characteristics of depth, liquidity and orderliness depends upon the existence of willing buyers and sellers at any given time, the presence of which is dependent upon the individual decisions of buyers and sellers over which neither we nor any market maker has control. Accordingly, there can be no assurance that an active and liquid trading market for our common stock will develop or that, if developed, it will continue. The failure of an active and liquid trading market to develop would likely have a material adverse effect on the value of the our common - 37 - (1) Shows the effect of the mutual-to-stock conversion of Benjamin Franklin Bancorp, assuming gross proceeds of $66.1 million, the maximum, as adjusted, of the offering range, offering expenses of $1.8 million, a contribution to the Benjamin Franklin Bank Charitable Foundation of $4.0 million of common stock, and establishment of an employee stock ownership plan that will acquire 8.0% of the number of shares issued in the offering including the shares issued to the Benjamin Franklin Bank Charitable Foundation. The employee stock ownership plan is assumed to purchase its shares in the offering and in open market purchases. The loan taken down by the employee stock ownership plan will be amortized over 30 years on a straight line basis. The employee stock ownership plan expense shown reflects the estimated amortization expense on a pretax basis for the period shown. Benjamin Franklin Bancorp also intends to adopt an stock-based incentive plan that will award shares of restricted stock in the amount of 4.0% of the number of shares issued in the offering plus the shares issued to the Benjamin Franklin Bank Charitable Foundation. The shares to be granted by the stock-based incentive plan as restricted stock are assumed to be purchased in the open market after receiving stockholder approval. Open market purchases by the employee stock ownership plan and for the stock-based incentive plan are assumed at $10 per share. Also under the stock-based benefit plan, Benjamin Franklin Bancorp intends to grant options to purchase 10.0% of the number of shares issued in the offering plus shares issued to the Benjamin Franklin Bank Charitable Foundation. The exercise price of the options is assumed to be $10 per share and the grant-date price of the shares is also assumed to be $10 per share. Adjustments to record estimated stock-based incentive plan expenses, including expenses of the restricted stock awards and option grants, and interest income to be earned on net proceeds of the offering, will be recorded as incurred. Since these estimates are non-recurring, they are not reflected in the calculations of pro forma income. The estimated interest income assuming net cash proceeds of $55.9 million from the offering are invested at an average pretax yield of 2.16% for the nine months ended September 30, 2004 would be approximately $0.9 million pretax. The yield utilized approximates the yield on a one year U.S. Treasury security as of September 30, 2004. The estimated restricted stock expense for the stock-based incentive plan assuming gross proceeds of $66.1 million is $0.4 million pretax for the nine months ended September 30, 2004. The estimated stock option expense for the stock-based incentive plan assuming gross proceeds of $66.1 million is $0.4 million pretax for the nine months ended September 30, 2004. The employee stock ownership plan loan is amortized over 30 years on a straight-line basis. Employee stock ownership plan shares are assumed to be released at $10 per share. Restricted shares under the stock-based incentive plan are assumed to vest over 5 years on a straight-line basis. The fair value of the stock options are expensed over 5 years on a straight-line basis, and only 15.0% of the stock option expense is tax deductible. Taxes are calculated on an assumed marginal rate of 36.0%. No expenses are included for the shares issued to the Benjamin Franklin Bank Charitable Foundation or other merger-related charges, all of which are one time expenses. Table of Contents stock. In addition, no assurance can be given that a purchaser in the conversion will be able to resell our common stock at or above the purchase price of the shares, nor can any assurance be given that a Chart Bank stockholder receiving shares in the merger will be able to sell those shares at or above the $10 price used in the calculation of the exchange ratio for the merger. See Market for The Common Stock on page # . Our Stock Value May Suffer From Anti-Takeover Provisions That May Impede Potential Takeovers. Our governing statute, and our articles and by-laws, contain provisions (sometimes known as anti-takeover provisions) that may impede efforts to acquire us, or stock purchases in furtherance of an acquisition, even though acquisition efforts or stock purchases might otherwise have a favorable effect on the price of our common stock. Those provisions will also make it more difficult to remove our board and management. The Massachusetts Business Corporation Law provides for staggered directors terms, limits the stockholders ability to remove directors and empowers only the directors to fill board vacancies. Even if our board elects to opt out of these statutory provisions, our articles contain similar provisions. Our articles and by-laws also provide for, among other things, restrictions on the acquisition of more than 10.0% of our outstanding voting stock for a period of five years after completion of the conversion, and approval of certain actions, including certain business combinations, by specified percentages of our disinterested Directors (as defined in the articles) or by specified percentages of the shares outstanding and entitled to vote. The articles also authorize the Board of Directors to issue shares of preferred stock, the rights and preferences of which may be designated by the Board, without the approval of our stockholders. The articles also establish supermajority voting requirements for amendments to the articles and by-laws, limit stockholders ability to call special meetings of stockholders, and impose advance notice provisions on stockholders ability to nominate directors or to propose matters for consideration at stockholder meetings. Our employee stock ownership plan, which expects to purchase 8.0% of the shares issued in the offering, contains provisions that permit participating employees to direct the voting of shares held in the employee stock ownership plan, and those provisions may have anti-takeover effects. The Benjamin Franklin Bank Charitable Foundation will be funded with up to 400,000 shares of our common stock, approximately 5.1% of the shares issued and outstanding after the conversion (at the midpoint of the valuation range), including shares issued to the Chart Bank stockholders in the merger. The Benjamin Franklin Bank Charitable Foundation s Board of Directors will consist of current directors of Benjamin Franklin Bancorp. Federal and state regulations and laws may also have anti-takeover effects. The Change in Bank Control Act and the Bank Holding Company Act, together with Federal Reserve Board regulations under those acts, require that a person obtain the consent of the Federal Reserve Board before attempting to acquire control of a bank holding company. In addition, Massachusetts laws place certain limitations on acquisitions of the stock of banking institutions and imposes restrictions on business combination transactions between publicly held Massachusetts corporations and stockholders owning 5% or more of the stock of those corporations. For more information about the anti-takeover effects of our articles and by-laws, the employee stock ownership plan and certain federal and state regulations and laws, see Restrictions on Acquisition of Benjamin Franklin Bancorp and Benjamin Franklin Bank on page # . - 38 - Table of Contents (2) Employee stock ownership plan loan is assumed to be funded internally, so no interest expense is recorded on the consolidated income statement for Benjamin Franklin Bancorp. Employee stock ownership plan expense thus reflects only the amortization of principal for the period shown below: (Dollars in thousands) Employee stock ownership plan loan $ 5,610 Divided by amortization period in years 30 Annual expense $ 187 Nine months expense $ 141 (3) Chart Bank operating results for the nine months ended September 30, 2004 include $382,000 of merger-related expenses. (4) Reflects the purchase accounting and acquisition adjustments related to the acquisition of Chart Bank for a price of $30.75 per share in cash and newly issued common stock. (5) Adjustment to interest income is the amortization of the loan premium on the Chart Bank loans resulting from purchase accounting. Adjustments to record estimated interest income to be foregone as a result of funding the cash portion of the merger consideration paid to stockholders of Chart Bank and the expense of the acquisition will be recorded as incurred. Since these estimates are non-recurring, they are not reflected in the Pro forma income statements. The estimated reduction in interest income assuming total funding requirements of $28.1 million for the acquisition and related expenses, assuming such cash costs were funded with investments yielding 2.16% for the nine months ended September 30, 2004, would be approximately $0.5 million. The yield approximates the yield on the one year U.S. Treasury security on September 30, 2004. (6) Adjustment to interest expense is calculated as follows: (Dollars in Thousands) Accretion of deposit premium from purchase accounting $ 533 Amortization of borrowings discount from purchase accounting (16 ) Adjustment to interest expense $ 517 (7) Adjustment to non-interest expense is calculated as follows: Amortization of new core deposit intangible $ (684 ) Depreciation adjustment for market value of fixed assets (12 ) Adjustment to non-interest expense $ (696 ) (8) Marginal tax rate of 36.0%. Table of Contents Risks Related To Prior Auditors Of Benjamin Franklin Bancorp Arthur Andersen LLP, which audited the financial statements included in this prospectus of Benjamin Franklin Bancorp for the year ended December 31, 2001, was convicted on June 15, 2002 of federal obstruction of justice arising from the government s investigation of Enron Corp. As it has ceased operations, Arthur Andersen LLP has not consented to include in this prospectus their report on the financial statements of Benjamin Franklin Bancorp for the year ended December 31, 2001. Under Section 11 of the Securities Act of 1933, investors may have no effective remedy against Arthur Andersen LLP in connection with a material misstatement or omission in the 2001 financial statements of Benjamin Franklin Bancorp included in this prospectus. FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements, which can be identified by the use of such words as estimate, project, believe, intend, anticipate, plan, seek, expect and similar expressions. These forward-looking statements include: statements of our goals, intentions and expectations; statements regarding our business plans and prospects and growth and operating strategies; statements regarding the asset quality of our loan and investment portfolios; and estimates of our risks and future costs and benefits. These forward-looking statements are subject to significant risks, assumptions and uncertainties, including, among other things, the following important factors that could affect the actual outcome of future events: our ability to consummate the acquisition of Chart Bank; our ability to integrate the Chart Bank merger successfully; our ability to enter new markets successfully and take advantage of growth opportunities; significantly increased competition among depository and other financial institutions; inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments; general economic conditions, either nationally or in our market areas, that are worse than expected; adverse changes in the securities markets; legislative or regulatory changes that adversely affect our business; changes in consumer spending, borrowing and savings habits; changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board and the Public Company Accounting Oversight Board; and - 39 - (1) Shows the effect of the mutual-to-stock conversion of Benjamin Franklin Bancorp, assuming gross proceeds of $42.5 million, the minimum of the offering range, offering expenses of $1.6 million, a contribution to the Benjamin Franklin Bank Charitable Foundation of $3.4 million of common stock, and establishment of an employee stock ownership plan that will acquire 8.0% of the number of shares issued in the offering including the shares issued to the Benjamin Franklin Bank Charitable Foundation. The employee stock ownership plan is assumed to purchase its shares in the offering and in open market purchases. The loan taken down by the employee stock ownership plan will be amortized over 30 years on a straight line basis. The employee stock ownership plan expense shown reflects the estimated amortization expense on a pretax basis for the period shown. Benjamin Franklin Bancorp also intends to adopt an stock-based incentive plan that will award shares of restricted stock in the amount of 4.0% of the number of shares issued in the offering plus the shares issued to the Benjamin Franklin Bank Charitable Foundation. The shares to be granted by the stock-based incentive plan as restricted stock are assumed to be purchased in the open market after receiving stockholder approval. Open market purchases by the employee stock ownership plan and for the stock-based incentive plan are assumed at $10 per share. Also under the stock-based benefit plan, Benjamin Franklin Bancorp intends to grant options to purchase 10.0% of the number of shares issued in the offering plus shares issued to the Benjamin Franklin Bank Charitable Foundation. The exercise price of the options is assumed to be $10 per share and the grant-date price of the shares is also assumed to be $10 per share. Adjustments to record estimated stock-based incentive plan expenses, including expenses of the restricted stock awards and option grants, and interest income to be earned on net proceeds of the offering, will be recorded as incurred. Since these estimates are non-recurring, they are not reflected in the calculations of pro forma income. The estimated interest income assuming net cash proceeds of $35.4 million from the offering are invested at an average pretax yield of 1.26% for the year ended December 31, 2003 would be approximately $0.5 million pretax. The yield utilized approximates the yield on a one year U.S. Treasury security as of September 30, 2004. The estimated restricted expense for the stock-based incentive plan assuming gross proceeds of $42.5 million is $0.4 million pretax for the year ended December 31, 2003. The estimated stock option expense for the stock-based incentive plan assuming gross proceeds of $42.5 million is $0.3 million pretax for the nine months ended September 30, 2004. The employee stock ownership plan loan is amortized over 30 years on a straight-line basis. Employee stock ownership plan shares are assumed to be released at $10 per share. Restricted shares under the stock-based incentive plan are assumed to vest over 5 years on a straight-line basis. The fair value of the stock options are expensed over 5 years on a straight-line basis, and only 15.0% of the stock option expense is tax deductible. Taxes are calculated on an assumed marginal rate of 36.0%. No expenses are included for the shares issued to the Benjamin Franklin Bank Charitable Foundation or other merger-related charges, all of which are one time expenses. Securities held to maturity: Federal agency obligations $ 31,826 $ Table of Contents changes in our organization, compensation and benefit plans; and the risk factors described above. Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. We discuss these and other uncertainties in Risk Factors beginning on page # . We disclaim any intent or obligation to update forward-looking statements whether in response to new information, future events or otherwise. HOW WE INTEND TO USE THE NET PROCEEDS FROM THE OFFERING The amount of net proceeds will depend on the total number of shares of common stock sold in the offering, which in turn will depend on RP Financial, LC. s appraisal as well as regulatory and market considerations, and the expenses incurred in connection with the offering. Although we will not be able to determine the actual net proceeds from the sale of the common stock until we complete the offering, we estimate the net proceeds will be between $40.9 million and $55.8 million, or $64.4 million if the offering is increased by 15.0%. The net proceeds may vary because the total expenses relating to the offering may be more or less than our estimates. For example, our expenses would increase if a syndicated community offering is used to sell shares not purchased in the subscription offering and community offering. The net proceeds will also vary if the number of shares to be sold in the offering is adjusted to reflect a change in the estimated pro forma market value of Benjamin Franklin Bancorp or if our employee stock ownership plan purchases shares in the open market at an average cost that is higher or lower than the $10 per share offering price. Payments for shares made through withdrawals from existing deposit accounts at Benjamin Franklin Bank will not result in the receipt of new funds for investment but will result in a reduction of Benjamin Franklin Bank s deposits. We are undertaking the conversion and offering at this time primarily in order to provide the consideration for the acquisition of Chart Bank. For further information, see The Acquisition of Chart Bank on page # . The table below indicates the net proceeds to us based on the number of shares sold in the offering. Adjusted Minimum Midpoint Maximum Maximum (Dollars in thousands) Gross proceeds $ 42,500 $ 50,000 $ 57,500 $ 66,125 Less offering expenses (1,554 ) (1,622 ) (1,691 ) (1,771 ) Net offering proceeds 40,946 48,378 55,809 64,354 Less: Cash for acquisition of Chart Bank (1) (21,469 ) (21,469 ) (21,469 ) (21,469 ) Employee stock ownership plan loan (3,672 ) (4,320 ) (4,920 ) (5,610 ) Cash/excess 15,805 22,589 29,420 37,275 Distribution of cash/excess: To Benjamin Franklin Bank 4,869 6,727 8,585 10,721 Retained by Benjamin Franklin Bancorp. 10,936 15,862 20,835 26,554 Balance at December 31, 2003 1,420 1,420 11,575 4,337 (1) Equals cash portion of acquisition price of $19,649,250 plus cost of cashing out all outstanding options of $2,842,750, net of tax benefit of option cash-out of $1,023,390. Does not include $6,613,000 of other miscellaneous cash costs of the Chart Bank acquisition, consisting primarily of personnel contract payouts, contract termination fees, deal advisor fees and prepayment penalty on Federal Home Loan Bank of Boston - 40 - Table of Contents advance repayments. Assumes that the Chart Bank options are cashed out at the closing rather than being exercised by optionees prior to the closing. The cash retained by Benjamin Franklin Bancorp, after paying the cash acquisition costs of the Chart Bank merger, lending funds to the employee stock ownership plan and contributing a portion to Benjamin Franklin Bank as shown above, would be used for general operating purposes. No specific uses are contemplated at this time. The additional funds available could be used as follows: To pay cash dividends to stockholders; To repurchase shares of our common stock; To invest in securities; To finance the acquisition of other financial institutions or branches although, except for the proposed acquisition of Chart Bank, we do not currently have any agreements or understandings regarding any specific acquisition transaction; and for other general corporate purposes, including investment of additional funds in Benjamin Franklin Bank. Initially, a substantial portion of the remaining net proceeds will be invested in short-term investments, investment grade debt obligations and mortgage-backed securities. Massachusetts regulations restrict our ability to repurchase shares of our common stock for a three-year period following the conversion. See Restrictions on Acquisition of Benjamin Franklin Bancorp and Benjamin Franklin Bank Statutory and Regulatory Restrictions Massachusetts Banking Law on page # . Benjamin Franklin Bank could use funds from the offering provided to it by Benjamin Franklin Bancorp as follows: to pay down Federal Home Loan Bank of Boston borrowings, including a prepayment penalty of approximately $2.0 million; to fund new loans, including single-family mortgage loans, multi-family residential and commercial mortgage loans, commercial business loans, construction loans and consumer loans; to expand its retail banking franchise by establishing new branches; to enhance existing products and services and to support new products and services; to invest in securities; and for other general corporate purposes. OUR POLICY REGARDING DIVIDENDS Following completion of the offering, our Board of Directors will have the authority to declare dividends on our common stock, subject to statutory and regulatory requirements. In the future, our Board intends to consider a policy of paying cash or stock dividends on the common stock. However, no - 41 - Table of Contents decision has been made with respect to whether or when the payment of dividends may occur. The payment of dividends will depend upon a number of factors, including capital requirements, Benjamin Franklin Bancorp s and Benjamin Franklin Bank s financial condition and results of operations, tax considerations, statutory and regulatory limitations and general economic conditions. No assurances can be given that any dividends will be paid or that, if paid, will not be reduced or eliminated in the future. The only funds available for the payment of dividends on the capital stock of Benjamin Franklin Bancorp will be cash and cash equivalents held by Benjamin Franklin Bancorp, dividends paid by Benjamin Franklin Bank to Benjamin Franklin Bancorp and borrowings. Benjamin Franklin Bank will be prohibited from paying cash dividends to Benjamin Franklin Bancorp to the extent that any such payment would reduce Benjamin Franklin Bank s capital below required capital levels or would impair the liquidation account to be established for the benefit of Benjamin Franklin Bank s eligible account holders and supplemental eligible account holders at the time of the conversion. See The Conversion and The Offering Effects of the Conversion Liquidation Rights on page # . FDIC regulations limit Benjamin Franklin Bank s ability to pay dividends to Benjamin Franklin Bancorp under certain circumstances. For example, Benjamin Franklin Bank could not pay dividends if it was not in compliance with applicable regulatory capital requirements. In addition, Massachusetts law provides that dividends may not be declared, credited or paid by Benjamin Franklin Bank so long as there is any impairment of capital stock. No dividend may be declared on Benjamin Franklin Bank s common stock for any period other than for which dividends are declared upon preferred stock, except as authorized by the Massachusetts Commissioner of Banks. The approval of the Commissioner is also required for Benjamin Franklin Bank to declare a dividend, if the total of all dividends declared by it in any calendar year shall exceed the total of its net profits for that year combined with its retained net profits of the preceding two years, less any required transfer to surplus or a fund for the retirement of any preferred stock. If Benjamin Franklin Bancorp issues preferred stock, the holders of the preferred stock may have dividend preferences over the holders of common stock. MARKET FOR THE COMMON STOCK We have not previously issued common stock, so there is currently no established market for the common stock. We have applied to have our common stock quoted on the Nasdaq National Market under the symbol BFBC after completion of the offering. Ryan Beck Co., Inc. has advised us that it intends to make a market in the common stock following the conversion, but is under no obligation to do so. We will encourage and assist additional market makers to make a market in our common stock. The development of an active trading market depends on the existence of willing buyers and sellers, the presence of which is not within our control, or the control of any market maker. The number of active buyers and sellers of the common stock at any particular time may be limited. Under such circumstances, you could have difficulty selling your shares on short notice, and, therefore, you should not view the common stock as a short-term investment. We cannot assure you that an active trading market for the common stock will develop or that, if it develops, it will continue, nor can we assure you that if you purchase shares you will be able to sell them at or above $10 per share. We also cannot assure that a Chart Bank stockholder receiving Benjamin Franklin Bancorp shares in the Chart Bank acquisition will be able to sell those shares at or above $10 per share. See Risk Factors We Have Never Issued Stock And We Cannot Guarantee That An Active Market Will Develop on page # and The Acquisition of Chart Bank on page # . - 42 - Table of Contents REGULATORY CAPITAL COMPLIANCE At September 30, 2004, Benjamin Franklin Bancorp and Benjamin Franklin Bank independently exceeded all their regulatory capital requirements. The following table sets forth the historical regulatory capital of Benjamin Franklin Bancorp and Benjamin Franklin Bank and the approximate pro forma regulatory capital of Benjamin Franklin Bancorp and Benjamin Franklin Bank after giving effect to the conversion and the Chart Bank acquisition, based on the assumptions set forth in the table on page # as to net offering proceeds and the cash cost of the Chart Bank acquisition and the employee stock ownership plan loan. The pro forma risk-based capital amounts assume the investment of the net proceeds in assets which have a risk-weight of 20.0% under applicable regulations as if such net proceeds had been received and so applied at September 30, 2004. The Federal Reserve Board has adopted capital adequacy guidelines for bank holding companies (on a consolidated basis) substantially similar to the FDIC s capital requirements for Benjamin Franklin Bank. On a pro forma basis after completion of the conversion and the acquisition, Benjamin Franklin Bancorp s and Benjamin Franklin Bank s pro forma regulatory capital will exceed these requirements. See Regulation and Supervision Federal Regulation Capital Requirements on page # . Pro Forma at September 30, 2004 based on (1) Benjamin Franklin 4,250,000 Shares 5,000,000 Shares 5,750,000 Shares 6,612,500 Shares Historical at Sold @ $10 Per Sold @ $10 Per Sold @ $10 Per Sold @ $10 Per September 30, 2004 Share Share Share Share Percent Percent Percent Percent Percent of of of of of Assets Assets Assets Assets Assets Amount (2) Amount (2) Amount (2) Amount (2) Amount (2) (Dollars in thousands) Benjamin Franklin Bancorp: Total capital shown on financial statements $ 30,586 5.91 % $ 89,296 10.94 % $ 95,972 11.67 % $ 02,503 12.36 % $ 10,013 13.15 % Tier 1 leverage capital 37,281 7.42 % 63,758 8.27 % 70,434 9.06 % 76,965 9.82 % 84,475 10.67 % Tier 1 leverage requirement 20,093 4.00 % 30,832 4.00 % 31,099 4.00 % 31,361 4.00 % 31,661 4.00 % Excess capital $ 17,188 3.42 % $ 32,926 4.27 % $ 39,335 5.06 % $ 45,604 5.82 % $ 52,814 6.67 % Tier 1 risk-based capital 37,281 11.71 % 63,758 13.25 % 70,434 14.59 % 76,965 15.90 % 84,475 17.40 % Tier 1 risk-based requirement 12,738 4.00 % 19,254 4.00 % 19,307 4.00 % 19,359 4.00 % 19,419 4.00 % Excess capital $ 24,543 7.71 % $ 44,504 9.25 % $ 51,127 10.59 % $ 57,606 11.90 % $ 65,056 13.40 % Total risk-based capital 40,298 12.65 % 68,528 14.24 % 75,204 15.58 % 81,735 16.89 % 89,245 18.38 % Total risk-based requirement 25,476 8.00 % 38,507 8.00 % 38,614 8.00 % 38,718 8.00 % 38,839 8.00 % Excess capital $ 14,822 4.65 % $ 30,021 6.24 % $ 36,590 7.58 % $ 43,017 8.89 % $ 50,406 10.38 % Footnotes on following page - 43 - Table of Contents Pro Forma at September 30, 2004 based on (1) Benjamin Franklin 4,250,000 Shares 5,000,000 Shares 5,750,000 Shares 6,612,500 Shares Historical at Sold @ $10 Per Sold @ $10 Per Sold @ $10 Per Sold @ $10 Per September 30, 2004 Share Share Share Share Percent Percent Percent Percent Percent of of of of of Assets Assets Assets Assets Assets Amount (2) Amount (2) Amount (2) Amount (2) Amount (2) (Dollars in thousands) Benjamin Franklin Bank: Total capital shown on financial statements $ 38,785 7.50 % $ 83,498 10.37 % $ 84,708 10.49 % $ 85,965 10.63 % $ 87,412 10.78 % Tier 1 leverage capital 36,481 7.27 % 48,960 6.44 % 50,170 6.58 % 51,427 6.73 % 52,874 6.90 % Tier 1 leverage requirement 20,059 4.00 % 30,407 4.00 % 30,481 4.00 % 30,555 4.00 % 30,641 4.00 % Excess capital $ 16,422 3.27 % $ 18,553 2.44 % $ 19,689 2.58 % $ 20,872 2.73 % $ 22,233 2.90 % Tier 1 risk-based capital 36,481 11.50 % 48,960 10.22 % 50,170 10.47 % 51,427 10.72 % 52,874 11.01 % Tier 1 risk-based requirement 12,685 4.00 % 19,158 4.00 % 19,173 4.00 % 19,188 4.00 % 19,205 4.00 % Excess capital $ 23,796 7.50 % $ 29,802 6.22 % $ 30,997 6.47 % $ 32,239 6.72 % $ 33,669 7.01 % Total risk-based capital 39,498 12.45 % 53,730 11.22 % 54,940 11.46 % 56,197 11.72 % 57,644 12.01 % Total risk-based requirement 25,371 8.00 % 38,317 8.00 % 38,347 8.00 % 38,376 8.00 % 38,411 8.00 % Excess capital $ 14,127 4.45 % $ 15,413 3.22 % $ 16,593 3.46 % $ 17,821 3.72 % $ 19,233 4.01 % (1) Pro forma capital compliance figures shown for Benjamin Franklin Bancorp and Benjamin Franklin Bank. (2) Adjusted total or adjusted risk-weighted assets, as appropriate. Pro forma adjusted risk-weighted assets assume that funds infused into Benjamin Franklin Bank are held in assets that carry a risk-weighting of 20.0%. - 44 - Table of Contents At or for the nine months ended September 30, 2004 Maximum, Midpoint of As Adjusted, Minimum of Offering Maximum of of Offering Offering Range Offering Range Range 5,000,000 Range 6,612,500 4,250,000 Shares Shares 5,750,000 Shares Shares at $10 per at $10 per at $10 per at $10 per share share share share (1) At September 30, 2004 Stockholders equity per share Historical $ 7.52 $ 6.75 $ 6.16 $ 5.59 Estimated net proceeds 5.86 6.20 6.53 6.84 Plus: tax benefit of shares issued to foundation (2) 0.18 0.18 0.17 0.15 Plus: shares issued to foundation (2) 0.49 0.51 0.47 0.42 Less: shares issued to foundation (2) (0.49 ) (0.51 ) (0.47 ) (0.42 ) Less: common stock acquired by ESOP (4) (0.53 ) (0.55 ) (0.58 ) (0.60 ) Less: common stock acquired for restricted stock awards (5) (0.26 ) (0.28 ) (0.29 ) (0.30 ) Pro forma stockholders equity per share 12.77 12.30 11.99 11.68 Intangible assets (10) (5.23 ) (4.69 ) (4.28 ) (3.88 ) Pro forma tangible stockholders equity per share $ 7.54 $ 7.61 $ 7.71 $ 7.80 Shares used for pro forma stockholders equity per share 6,991,575 7,801,575 8,551,575 9,414,075 Stock price as a percentage of equity per share (5) 78.31 % 81.30 % 83.40 % 85.62 % Stock price as a percentage of tangible equity per share (5)(8)(10) 132.63 % 131.41 % 129.70 % 128.21 % (1) As adjusted to give effect to an increase in the number of shares which could occur due to an increase in the estimated offering range of up to 15.0% as a result of regulatory considerations, demand for the shares, or changes in market or general financial and economic conditions following the commencement of the offering. (2) Benjamin Franklin Bancorp will make a contribution to the Benjamin Franklin Bank Charitable Foundation amounting to the lesser of 8.0% of the shares actually sold in the offering and 400,000 shares of its common stock. The pro forma net income does not take into account the non-recurring expense that will be recognized as a result of the establishment of the Foundation. Benjamin Franklin Bancorp expects to recognize a tax benefit of and an after tax expense related to the contribution to the Benjamin Franklin Bank Charitable Foundation. (3) Assumes 2,401,575 shares of Benjamin Franklin Bancorp common stock will be issued to Chart Bank stockholders in the acquisition. (4) It is assumed that the employee stock ownership plan will purchase up to 8.0% of the shares issued in the offering, including shares issued to the Benjamin Franklin Bank Charitable Foundation. The employee stock ownership plan is assumed to be funded internally with a loan from Benjamin Franklin Bancorp. Benjamin Franklin Bank intends to make annual contributions to the employee stock ownership plan in an amount at least equal to the principal and the interest requirement of the debt. Benjamin Franklin Bank s total annual payments on the employee stock ownership plan debt is based upon 30 equal installments of principal and interest. The pro forma adjustments assume the employee stock ownership plan shares are allocated in equal installments based on the number of loan repayment installments assumed to be paid by Benjamin Franklin Bank, the fair value of the common stock remains at the subscription price and the employee stock ownership plan expense reflects an effective combined federal and state tax rate of 36.0%. The unallocated employee stock ownership plan shares are reflected as a reduction of stockholders equity. No reinvestment rate is assumed on the proceeds contributed to the fund the employee stock ownership plan. The pro forma net income further assumes (i) that 9,180, 10,800, 12,300 and 14,025 shares were committed to be released during the period at the minimum, midpoint, maximum and the adjusted maximum of the offering range, Table of Contents CAPITALIZATION The following table presents the historical capitalization of Benjamin Franklin Bancorp and Chart Bank at September 30, 2004, and the approximate pro forma consolidated capitalization of Benjamin Franklin Bancorp after giving effect to the conversion and the Chart Bank acquisition. Benjamin Franklin Bancorp Pro Forma based upon a sale at $10 per share Benjamin Franklin Bancorp Maximum Pro Forma Minimum Midpoint Maximum as adjusted Benjamin Pro Forma Consolidated 4,250,000 5,000,000 5,750,000 6,612,500 Franklin Chart Merger Pre- Price of Price of Price of Price of Bancorp Bank Adjust- Conversion $10 per $10 per $10 per $10 per Historical Historical ments (1) (2) share share share share (3) (Dollars in thousands) Deposits (4) $ 399,562 $ 215,972 $ 703 $ 616,237 $ 616,237 $ 616,237 $ 616,237 $ 616,237 Borrowings (5) 75,000 22,000 (29 ) 96,971 96,971 96,971 96,971 96,971 Subordinated Debt 9,000 9,000 9,000 9,000 9,000 9,000 Total deposits and 8 8 borrowed funds $ 483,562 $ 237,972 $ 674 $ 722,208 $ 722,208 $ 722,208 $ 722,208 $ 722,208 Stockholders equity: Common Stock, no par value, 75 million shares authorized; shares to be issued as reflected $ $ 1,420 $ (1,420 ) $ $ $ $ $ Additional paid-in capital 11,575 12,441 24,016 68,362 76,394 83,825 92,370 Retained earnings (6) 32,620 4,524 (6,492 ) 30,652 30,652 30,652 30,652 30,652 Less expense of contribution to foundation (7) (3,400 ) (4,000 ) (4,000 ) (4,000 ) Plus: tax benefit of contribution to foundation (8) 1,224 1,440 1,440 1,440 Accumulated other comprehensive income (loss) (2,034 ) 27 (27 ) (2,034 ) (2,034 ) (2,034 ) (2,034 ) (2,034 ) Less: common stock acquired by ESOP (9) (3,672 ) (4,320 ) (4,920 ) (5,610 ) Less: common stock acquired for restricted stock awards (10) (1,836 ) (2,160 ) (2,460 ) (2,805 ) Total stockholders equity $ 30,586 $ 17,546 $ 4,502 $ 52,634 $ 89,296 $ 95,972 $ 102,503 $ 110,013 Table of Contents respectively, and (ii) only the employee stock ownership plan shares committed to be released during the period were considered outstanding for purposes of net income per share calculations. (5) If the stock-based incentive plan is approved by Benjamin Franklin Bancorp's stockholders, Benjamin Franklin Bancorp may purchase an aggregate number of shares of common stock equal to 4.0% of the shares to be sold in the offering (or possibly a greater number of shares if the plan is implemented more than one year after completion of the conversion, although such plan, including the amount awarded under such plan, may remain subject to supervisory restrictions), to be awarded as restricted stock to officers and directors under the stock-based incentive plan. Stockholder approval of the stock-based incentive plan and purchases of stock for grant under the plan may not occur earlier than six months after the completion of the conversion. The shares may be issued directly by Benjamin Franklin Bancorp or acquired through open market purchases. The funds to be used purchase the shares to be awarded by the stock-based incentive plan will be provided by Benjamin Franklin Bancorp. The table assumes that (i) the shares to be awarded under the stock-based incentive plan are acquired through open market purchases at $10 per share, (ii) 15.0% of the amount contributed to the stock-based incentive plan is amortized as an expense during the year ended December 31, 2003 and (iii) the stock-based incentive plan expense reflects an effective combined federal and state tax rate of 36.0%. Assuming stockholder approval of the stock-based incentive plan and that shares of common stock (equal to 4.0% of the shares sold in the offering) are awarded through the use of authorized but unissued shares of common stock, stockholders would have their ownership and voting interests diluted by approximately 2.7%. (6) Represents the cash portion of the purchase price of Chart Bank, transaction expenses related to the Chart Bank acquisition and cash merger expenses of Benjamin Franklin Bancorp as follows: (Dollars in thousands) Acquisition of Chart Bank (net of tax-effect of option cash-out) $ 21,469 Transaction expenditures 983 Merger expenses 3,091 One time operating expenses 3,075 Less: Recovery of Chart Bank Cooperative Central Bank deposit (536 ) Total acquisition cash costs $ 28,082 The pro forma acquisition adjustments to net income reflects the after-tax amount of interest income foregone as a result of the payment of acquisition cash costs out of the gross proceeds of the offering for the nine months ended September 30, 2004, assuming an interest rate of 2.16% and a marginal tax rate of 36.0%. (7) Historical net income includes the historical net income of Benjamin Franklin Bancorp and Chart Bank, and the impact of the recurring purchase accounting adjustments. (8) Gives effect to the options we expect to grant under the stock-based incentive plan, which is expected to be adopted by Benjamin Franklin Bancorp following the offering and presented for approval not earlier than six months after the completion of the conversion. We have assumed that options will be granted to acquire 10.0% of the shares sold in the offering, including shares issued to the Benjamin Franklin Bank Charitable Foundation. In calculating the pro forma effect of the stock options, it is assumed that the exercise price of the stock options and the trading price of the stock at the date of grant were $10.00 per share, the estimated grant-date fair value pursuant to the application of the Black-Scholes option pricing model was $3.85 for each option, the aggregate grant-date fair value of the stock options was amortized to expense on a straight line basis over a five year vesting period of the option, and that 15.0% of the amortization expense (or the assumed portion relating to options granted to directors) resulted in a tax benefit using an assumed tax rate of 36.0%. Under the above assumptions, the granting of options under the stock-based incentive plan will result in no additional shares under the treasury stock method for purposes of calculating earnings per share. There can be no assurance that the actual exercise price of the stock options will be equal to the $10.00 price per share. If a portion of the shares to satisfy the exercise of options under the stock-based incentive plan are obtained from the issuance of authorized but unissued shares, our net income per share and stockholders equity per share will decrease. This will also have a dilutive effect of up to 6.7% on the ownership interest of persons who purchase common stock in the offering. (9) Historical stockholders equity includes the historical equity of Benjamin Franklin Bancorp and the impact of the Chart Bank acquisition. (10) Equity is adjusted to exclude $36.6 million of goodwill and other intangibles on a pro forma basis reflecting the acquisition as of September 30, 2004. Other income: ATM service contract fees 1,368 1,344 1,755 1,437 Customer service fees 446 535 713 611 Loan brokerage fees 29 155 158 747 Gain on sale of banking premises 316 Net gain on sales and redemptions of securities 53 6 6 85 Miscellaneous income 20 8 33 (1) Reflects the pro forma impact of the acquisition of Chart Bank, including entries to reflect the application of purchase accounting and the payment of cash and stock merger consideration equal to $30.75 per share of Chart Bank common stock. (2) Reflects the pro forma impact of the acquisition of Chart Bank, with the stock portion of the purchase price paid in newly issued shares of Benjamin Franklin Bancorp at a price of $10 per share and the purchase accounting mark-to-market adjustments required to adjust the deposits and borrowings of Chart Bank to market values. Additional paid-in capital reflects the issuance of 2,401,575 shares of common stock in the acquisition of Chart Bank. See footnote 11 to the pro forma balance sheets on pages # - # for the assumptions as to cash consideration and expenses in the acquisition. (3) As adjusted to give effect to an increase in the number of shares which could occur due to an increase in the offering range up to approximately 15.0% to reflect changes in market and financial conditions before the conversion is completed. (4) Does not reflect withdrawals from deposit accounts for the purchase of common stock in the conversion. Such withdrawals would reduce pro forma deposits by the amount of such withdrawals. (5) Pro forma borrowings reflect the employee stock ownership plan loan funded internally and eliminated in consolidation, but do not reflect the possible repayment of certain Federal Home Loan Bank of Boston borrowings after completion of the conversion. - 45 - Table of Contents At or for the year ended December 31, 2003 Maximum, Midpoint of As Adjusted, Minimum of Offering Maximum of of Offering Offering Range Offering Range Range 5,000,000 Range 6,612,500 4,250,000 Shares Shares 5,750,000 Shares Shares at $10 per at $10 per at $10 per at $10 per share share share share (1) (Dollars in thousands, except per share data) Gross proceeds $ 42,500 $ 50,000 $ 57,500 $ 66,125 Plus: shares issued to the foundation (2) 3,400 4,000 4,000 4,000 Plus: shares issued to Chart Bank (3) 24,016 24,016 24,016 24,016 Pro Forma Market Capitalization $ 69,916 $ 78,016 $ 85,516 $ 94,141 Gross proceeds $ 42,500 $ 50,000 $ 57,500 $ 66,125 Less: conversion expenses (1,554 ) (1,622 ) (1,691 ) (1,771 ) Estimated net proceeds 40,946 48,378 55,809 64,354 Less: common stock acquired by ESOP (4) (3,672 ) (4,320 ) (4,920 ) (5,610 ) Less: common stock acquired for restricted stock awards (5) (1,836 ) (2,160 ) (2,460 ) (2,805 ) Estimated net proceeds 35,438 41,898 48,429 55,939 Estimated acquisition cash costs (6) $ (28,082 ) $ (28,082 ) $ (28,082 ) $ (28,082 ) For the 12 Months ended December 31, 2003 Consolidated net income Historical consolidated net income (7) $ 3,053 $ 3,053 $ 3,053 $ 3,053 Pro forma income on net proceeds 286 338 391 451 Pro forma acquisition adjustment (8) (226 ) (226 ) (226 ) (226 ) Pro forma ESOP adjustment (4) (78 ) (92 ) (105 ) (120 ) Pro forma restricted stock adjustment (5) (235 ) (276 ) (315 ) (359 ) Pro forma stock option adjustment (8) (334 ) (393 ) (448 ) (511 ) Pro forma net income $ 2,466 $ 2,404 $ 2,350 $ 2,288 Per share net income (reflects SOP93-6) Historical $ 0.46 $ 0.41 $ 0.38 $ 0.35 Pro forma income on net proceeds 0.04 0.05 0.05 0.05 Pro forma acquisition adjustment (6) (0.03 ) (0.03 ) (0.03 ) (0.03 ) Pro forma ESOP adjustment (4) (0.01 ) (0.01 ) (0.01 ) (0.01 ) Pro forma restricted stock adjustment (5) (0.04 ) (0.04 ) (0.04 ) (0.04 ) Pro forma stock option adjustment (8) (0.05 ) (0.05 ) (0.06 ) (0.06 ) Pro forma net income per share $ 0.37 $ 0.33 $ 0.29 $ 0.26 Shares used for calculating pro forma earnings per share 6,636,615 7,383,975 8,075,975 8,871,775 Stock price as a multiple of pro forma earnings per share (5)(8) 27.03x 30.30x 34.48x 38.46x At December 31, 2003 Stockholders equity: Historical consolidated stockholders equity (9) $ 51,349 $ 51,349 $ 51,349 $ 51,349 Estimated net proceeds 40,946 48,378 55,809 64,354 Plus: tax benefit of shares issued to foundation (2) 1,224 1,440 1,440 1,440 Plus: shares issued to foundation (2) 3,400 4,000 4,000 4,000 Less: shares issued to foundation (2) (3,400 ) (4,000 ) (4,000 ) (4,000 ) Less: common stock acquired by ESOP (4) (3,672 ) (4,320 ) (4,920 ) (5,610 ) Less: common stock acquired for restricted stock awards (5) (1,836 ) (2,160 ) (2,460 ) (2,805 ) Pro forma stockholders equity 88,011 94,687 101,218 108,728 Intangible assets (10) (36,855 ) (36,855 ) (36,855 ) (36,855 ) Pro forma tangible stockholders equity $ 51,156 $ 57,832 $ 64,363 $ 71,873 Footnotes on following page Table of Contents (6) The retained earnings of Benjamin Franklin Bancorp will be substantially restricted after the conversion. See The Conversion and the Offering Certain Effects of the Conversion Liquidation Rights on page # and Regulation and Supervision on page # . (7) Represents the pre-tax expense of the contribution of common stock to the Benjamin Franklin Bank Charitable Foundation. (8) Represents the tax benefit of the contribution of common stock in the Benjamin Franklin Bank Charitable Foundation based on an estimated tax rate of 36.0%. (9) Assumes that 8.0% of the common stock issued in the offering including shares contributed to the Benjamin Franklin Bank Charitable Foundation (but excluding shares to be issued to Chart Bank stockholders), will be acquired by the employee stock ownership plan. The common stock acquired by the employee stock ownership plan is reflected as a reduction in stockholders equity. (10) Gives effect to the restricted stock awards under the stock-based incentive plan that Benjamin Franklin Bancorp expects to adopt after the conversion and Chart Bank acquisition and present to stockholders for approval at a meeting of stockholders to be held at least six months after conversion and the acquisition are completed. No shares will be purchased in the conversion for restricted stock awards under the stock-based incentive plan, and no shares can be purchased for such purpose until stockholder approval has been obtained. If the stock-based incentive plan is approved by the Benjamin Franklin Bancorp stockholders, Benjamin Franklin Bancorp intends to purchase, for award as restricted stock under the plan, an amount of common stock equal to 4.0% of the shares of common stock sold in the offering including shares contributed to the Benjamin Franklin Bank Charitable Foundation, but excluding shares to be issued to Chart Bank stockholders. The table assumes that stockholder approval has been obtained and that such shares are purchased in the open market at $10 per share. The common stock so acquired is reflected as a reduction of stockholders equity. If the shares are purchased at prices higher or lower than the initial price of $10 per share, such purchases would have a greater or lesser impact, respectively, on stockholders equity. If the restricted stock awards under the stock-based incentive plan are made by issuing authorized but unissued shares, such issuance would dilute the voting interests of existing stockholders by approximately 2.7% if 5,000,000 shares were sold in the conversion. See Management of Benjamin Franklin Bancorp and Benjamin Franklin Bank Benefit Plans Stock-Based Incentive Plan on page # . - 46 - Table of Contents At or for the year ended December 31, 2003 Maximum, Midpoint of As Adjusted, Minimum of Offering Maximum of of Offering Offering Range Offering Range Range 5,000,000 Range 6,612,500 4,250,000 Shares Shares 5,750,000 Shares Shares at $10 per at $10 per at $10 per at $10 per share share share share(1) (Dollars in thousands, except per share data) At December 31, 2003 Stockholders equity per share Historical $ 7.34 $ 6.58 $ 6.00 $ 5.45 Estimated net proceeds 5.86 6.20 6.54 6.85 Plus: tax benefit of shares issued to foundation (2) 0.18 0.18 0.17 0.15 Plus: shares issued to foundation (2) 0.49 0.51 0.47 0.42 Less: shares issued to foundation (2) (0.49 ) (0.51 ) (0.47 ) (0.42 ) Less: common stock acquired by ESOP (4) (0.53 ) (0.55 ) (0.58 ) (0.60 ) Less: common stock acquired for restricted stock awards (5) (0.26 ) (0.28 ) (0.29 ) (0.30 ) Pro forma stockholders equity per share 12.59 12.13 11.84 11.55 Intangible assets (10) (5.27 ) (4.72 ) (4.31 ) (3.92 ) Pro forma tangible stockholders equity per share $ 7.32 $ 7.41 $ 7.53 $ 7.63 Shares used for pro forma stockholders equity per share 6,991,575 7,801,575 8,551,575 9,414,075 Stock price as a percentage of equity per share (5) 79.43 % 82.44 % 84.46 % 86.58 % Stock price as a percentage of tangible equity per share (5)(8)(10) 136.61 % 134.95 % 132.80 % 131.06 % (1) As adjusted to give effect to an increase in the number of shares which could occur due to an increase in the estimated offering range of up to 15.0% as a result of regulatory considerations, demand for the shares, or changes in market or general financial and economic conditions following the commencement of the offering. (2) Benjamin Franklin Bancorp will make a contribution to the Benjamin Franklin Bank Charitable Foundation amounting to the lesser of 8.0% of the shares actually sold in the offering and 400,000 shares of its common stock. The pro forma net income does not take into account the non-recurring expense that will be recognized as a result of the establishment of the Foundation. Benjamin Franklin Bancorp expects to recognize a tax benefit of and an after tax expense related to the contribution to the Benjamin Franklin Bank Charitable Foundation. (3) Assumes 2,401,575 shares of Benjamin Franklin Bancorp common stock will be issued to Chart Bank stockholders in the acquisition. (4) It is assumed that the employee stock ownership plan will purchase up to 8.0% of the shares issued in the offering, including shares issued to the Benjamin Franklin Bank Charitable Foundation. The employee stock ownership plan is assumed to be funded internally with a loan from Benjamin Franklin Bancorp. Benjamin Franklin Bank intends to make annual contributions to the employee stock ownership plan in an amount at least equal to the principal and the interest requirement of the debt. Benjamin Franklin Bank s total annual payments on the employee stock ownership plan debt is based upon 30 equal installments of principal and interest. The pro forma adjustments assume the employee stock ownership plan shares are allocated in equal installments based on the number of loan repayment installments assumed to be paid by Benjamin Franklin Bank, the fair value of the common stock remains at the subscription price and the employee stock ownership plan expense reflects an effective combined federal and state tax rate of 36.0%. The unallocated employee stock ownership plan shares are reflected as a reduction of stockholders equity. No reinvestment rate is assumed on the proceeds contributed to the fund the employee stock ownership plan. The pro forma net income further assumes (i) that 12,240, 14,400, 16,400 and 18,700 shares were committed to be released during the period at the minimum, midpoint, maximum and the adjusted maximum of the Table of Contents PRO FORMA DATA Pro Forma Unaudited Financial Statements Giving Effect to Conversion and Acquisition The following Pro Forma Unaudited Consolidated Balance Sheets at September 30, 2004 and December 31, 2003, and the Pro Forma Unaudited Consolidated Statements of Income for the nine months ended September 30, 2004 and the year ended December 31, 2003 give effect to the proposed conversion and the Chart Bank acquisition based on the assumptions set forth below. The pro forma unaudited financial statements are based on the unaudited consolidated financial statements of Benjamin Franklin Bancorp and Chart Bank as of and for the nine months ended September 30, 2004 and the audited consolidated financial statements of Benjamin Franklin Bancorp and Chart Bank as of and for the year ended December 31, 2003. The pro forma unaudited financial statements give effect to the conversion and the acquisition using purchase accounting as required by accounting principles generally accepted in the United States. Chart Bank stockholders will receive in the acquisition either $30.75 in cash or 3.075 shares of Benjamin Franklin Bancorp common stock for each share of Chart Bank stock held by them, with 45.0% of the aggregate consideration to be paid in cash and 55.0% of the aggregate consideration to be paid in common stock. The purchase price for purposes of the pro forma presentation for Chart Bank was calculated as follows: As of September 30, 2004 (Dollars in thousands) Net assets acquired $ 17,546 Fair value adjustments: Estimated non-tax deductible merger costs remaining at September 30, 2004 (983 ) Estimated tax deductible capitalized merger expenses (3,091 ) Loans(1) 299 Deposits(1) (703 ) Borrowings(1) 29 Fixed assets(2) 427 Core deposit intangible asset(3) 3,799 Tax impact of purchase accounting adjustments (274 ) Goodwill 28,435 Purchase price (net of tax effect of cashing out Chart Bank options) 45,484 Tax effect of cashing out Chart Bank options 1,024 Purchase price $ 46,508 (1) Loans, CDs and borrowing adjustments reflect the market value adjustment assigned to each class of these items. Market value adjustments are calculated using portfolio balances, portfolio rates and market rates as of September 30, 2004. Each adjustment was determined using present value analysis, discounting the difference between market rates of interest and portfolio rates of interest to present value over the contractual or estimated lives of the respective assets and liabilities. Cash flows were discounted at the estimated risk-adjusted market rate. Fair value adjustments are amortized using the interest method over the contractual or estimated lives of the respective assets and liabilities. (2) Fixed asset adjustments based on estimated current market values of acquired fixed assets. Fixed asset adjustments are amortized as depreciation expense over the estimated remaining lives of the fixed assets. (3) Core deposit intangibles reflect the present value benefit to Benjamin Franklin Bancorp of utilizing the acquired core deposits as a funding source relative to wholesale funding costs based on the rates of Federal Home Loan Bank advances. The core deposit intangible is calculated using deposit balances and interest rates as of September 30, 2004. Costs of the acquired core deposits include - 47 - Table of Contents interest costs, plus estimated operating expenses, less estimated non-interest income to be derived from the core deposits. Acquired core deposits are projected to decay based on assumptions promulgated by the Office of Thrift Supervision. The yield benefit for each period is discounted to present value using a weighted average cost of capital. The core deposit intangibles are amortized over the estimated lives of the core deposits using the double declining balance accelerated amortization schedule. The pro forma adjustments in the tables assume the sale of 4,250,000 shares and 6,612,500 shares, respectively, in the offering at a price of $10 per share, which is the minimum and maximum, as adjusted, of the offering range, respectively. In addition, the pro forma adjustments in the tables assume the issuance of 2,401,575 shares to Chart Bank stockholders in the acquisition, and the contribution of 340,000 and 400,000 shares, respectively, of Benjamin Franklin Bancorp common stock to the Benjamin Franklin Bank Charitable Foundation. The number of shares issued to Chart Bank stockholders may vary if Chart Bank options are exercised prior to closing. The net proceeds are based upon the following assumptions: Benjamin Franklin Bancorp will sell all shares of common stock offered in the conversion in the subscription offering; Benjamin Franklin Bancorp s employee stock ownership plan will purchase 8.0% of the shares of common stock issued in the offering, including shares contributed to the Benjamin Franklin Bank Charitable Foundation. The employee stock ownership plan is assumed to be funded internally with a loan from Benjamin Franklin Bancorp; Benjamin Franklin Bancorp will make a contribution to the Benjamin Franklin Bank Charitable Foundation amounting to 340,000 and 400,000 shares, respectively, at the minimum and maximum, as adjusted, of its common stock with an assumed value of $10 per share; Fixed expenses of the offering, other than the fees to be paid to Ryan Beck Co., Inc., are estimated to be $1.1 million; and Ryan Beck Co., Inc. will receive reimbursement of legal fees and other expenses in the amount of $100,000, in addition to fees equal to 1.0% of the aggregate purchase price of the shares of stock sold in the offering, excluding any shares purchased by any employee benefit plans, purchased by any of Benjamin Franklin Bancorp s directors, officers or employees or members of their immediate families, issued to the Benjamin Franklin Bank Charitable Foundation or issued to the Chart Bank stockholders in the acquisition. The expenses of the conversion and the acquisition may vary from those estimated, and the fees paid to Ryan Beck Co., Inc. will vary from the amounts estimated if the amount of shares of Benjamin Franklin Bancorp common stock sold varies from the amounts assumed above or if a syndicated community offering becomes necessary. Additionally, certain one-time charges to operating results are expected to occur following the conversion and the acquisition, which expenses are currently estimated to be approximately $3.1 million, pre-tax. These items, net of income tax effects, are shown as a reduction in stockholders equity in the balance sheets but are not shown as a reduction in net income for the periods shown in the income statements. Pro forma net income has been calculated for the nine months ended September 30, 2004 and for the year ended December 31, 2003 for Benjamin Franklin Bancorp and Chart Bank as if the shares of Benjamin Franklin Bancorp common stock to be issued in the offering had been sold and the shares issued to Chart Bank stockholders happened as of the beginning of the first period presented. Pro forma net income has also been calculated assuming the acquisition of Chart Bank had happened as of the - 48 - Table of Contents beginning of each period. Pro forma merger adjustments to net income include entries to reflect the estimated difference between contractual yields and costs on financial assets and liabilities and comparable market yields and costs and the amortization of identifiable intangible assets created in the acquisition. Excluded from the calculation of pro forma net income are any adjustments to reflect the estimated interest income to be earned on the net proceeds of the offering, the estimated interest income to be foregone on the cash required to fund the acquisition of Chart Bank and related expenses, and other estimated expense reductions from consolidating the operations of Chart Bank with those of Benjamin Franklin Bancorp. Such entries will be recorded as incurred, are non-recurring, and are thus not reflected in the calculations of pro forma income. The pro forma unaudited consolidated statements of financial condition assume the conversion and the acquisition were consummated as of September 30, 2004 and as of the year ended December 31, 2003, respectively. The pro forma unaudited consolidated balance sheets reflect the estimated impact of the offering on Benjamin Franklin Bancorp and the estimated merger adjustments to reflect the acquisition of Chart Bank. Estimated merger adjustments reflect the application of the purchase method of accounting, including adjustments to reflect the difference between historical carrying values and estimated market values for financial assets and liabilities and fixed assets and the creation of intangible assets. The pro forma stockholders equity represents the combined book value of Benjamin Franklin Bancorp and Chart Bank, as adjusted for the offering and the acquisition, computed in accordance with generally accepted accounting principles used in the United States. This amount is not intended to represent fair market value nor does it represent amounts, if any, that would be available for distribution to stockholders in the event of liquidation. The pro forma unaudited financial statements are provided for informational purposes only. The pro forma financial information presented is not necessarily indicative of the market value of Benjamin Franklin Bancorp or the actual results that would have been achieved had the conversion and the acquisition been consummated on September 30, 2004 or December 31, 2003 or at the beginning of the periods presented, and is not indicative of future results. The pro forma unaudited financial statements should be read in conjunction with the consolidated financial statements and the notes thereto of Benjamin Franklin Bancorp and Chart Bank contained elsewhere in this prospectus. - 49 - Table of Contents September 30, 2004 Pro Forma Balance Sheet Minimum of Offering Range. The following table presents pro forma balance sheet information at September 30, 2004 for Benjamin Franklin Bancorp and Chart Bank assuming the sale of 4,250,000 shares at the minimum of the offering range. Benjamin Benjamin Pro Forma Franklin Pro Forma Franklin Merger Bancorp Conversion Bancorp as Chart Bank Adjustments Pro Forma Historical Adjustments (1) Converted Historical (2) Consolidated (Dollars in thousands) Assets Cash and cash equivalents $ 15,126 $ 35,438 (3) $ 50,564 $ 38,773 $ (28,082) (11) $ 61,255 Securities available for sale, at fair value 94,423 94,423 3,669 98,092 Securities held to maturity, at amortized cost 266 266 31,826 32,092 Loans, net 375,516 375,516 175,572 299 (12) 551,387 Restricted equity securities, at cost 6,862 6,862 1,662 8,524 Premises and equipment, net 11,280 11,280 2,171 427 (13) 13,878 Goodwill 4,248 4,248 28,435 (14) 32,683 Core deposit intangible 91 91 3,799 (15) 3,890 Other amortizing intangible assets 720 720 720 Other assets 9,399 1,224 (4) 10,623 2,588 298 (16) 13,509 Total assets $ 517,931 $ 36,662 $ 554,593 $ 256,261 $ 5,176 $ 816,030 Liabilities Deposits $ 399,562 $ $ 399,562 $ 215,972 $ 703 (17) $ 616,237 FHLB advances and other borrowings 75,000 (5) 75,000 22,000 (29) (18) 96,971 Other liabilities 3,783 3,783 743 4,526 Subordinated debt 9,000 9,000 9,000 Total liabilities 487,345 487,345 238,715 674 726,734 Stockholder s equity Common Stock (6) 1,420 (1,420) (19) Additional paid-in capital 44,346 (7) 44,346 11,575 12,441 (20) 68,362 Retained earnings 32,620 (2,176) (8) 30,444 4,524 (6,492) (21) 28,476 Employee stock ownership plan shares (3,672) (9) (3,672 ) (3,672 ) Restricted shares under stock-based incentive plan (1,836) (10) (1,836 ) (1,836 ) Accumulated other compre-hensive (loss) income. (2,034 ) (2,034 ) 27 (27) (22) (2,034 ) Total stockholders equity 30,586 36,662 67,248 17,546 4,502 89,296 Total liabilities and stockholders equity $ 517,931 $ 36,662 $ 554,593 $ 256,261 $ 5,176 $ 816,030 Table of Contents September 30, 2004 Pro Forma Balance Sheet Maximum, as Adjusted, of Offering Range. The following table presents pro forma balance sheet information at September 30, 2004 for Benjamin Franklin Bancorp and Chart Bank assuming the sale of 6,612,500 shares at the maximum, as adjusted, of the offering range. Benjamin Benjamin Franklin Pro Forma Franklin Bancorp Conversion Bancorp as Chart Bank Pro Forma Merger Pro Forma Historical Adjustments (1) Converted Historical Adjustments (2) Consolidated (Dollars in thousands) Assets Cash and cash equivalents $ 15,126 $ 55,939 (3) $ 71,065 $ 38,773 $ (28,082 )(11) $ 81,756 Securities available for sale, at fair value 94,423 94,423 3,669 98,092 Securities held to maturity, at amortized cost 266 266 31,826 32,092 Loans, net 375,516 375,516 175,572 299 (12) 551,387 Restricted equity securities, at cost 6,862 6,862 1,662 8,524 Premises and equipment, net 11,280 11,280 2,171 427 (13) 13,878 Goodwill 4,248 4,248 28,435 (14) 32,683 Core deposit intangible 91 91 3,799 (15) 3,890 Other amortizing intangible assets 720 720 720 Other assets 9,399 1,440 (4) 10,839 2,588 298 (16) 13,725 Total assets $ 517,931 $ 57,379 $ 575,310 $ 256,261 $ 5,176 $ 836,747 Liabilities Deposits $ 399,562 $ $ 399,562 $ 215,972 $ 703 (17) $ 616,237 FHLB advances and other borrowings 75,000 (5) 75,000 22,000 (29) (18) 96,971 Other liabilities 3,783 3,783 743 4,526 Subordinated debt 9,000 9,000 9,000 Total liabilities 487,345 487,345 238,715 674 726,734 Stockholder s equity Common Stock (6) 1,420 (1,420) (19) Additional paid-in capital 68,354 (7) 68,354 11,575 12,441 (20) 92,370 Retained earnings 32,620 (2,560) (8) 30,060 4,524 (6,492) (21) 28,092 Employee stock ownership plan shares (5,610) (9) (5,610 ) (5,610 ) Restricted shares under stock-based incentive plan (2,805) (10) (2,805 ) (2,805 ) Accumulated other comprehensive (loss) income (2,034 ) (2,034 ) 27 (27) (22) (2,034 ) Total stockholders equity 30,586 57,379 87,965 17,546 4,502 110,013 Total liabilities and stockholders equity $ 517,931 $ 57,379 $ 575,310 $ 256,261 $ 5,176 $ 836,747 Total securities available for sale $ 3,623 $ (Unaudited) Balance at beginning of period $ 352 $ 257 $ 257 $ 120 Deferred tax (provision) benefit (30 ) (5 ) (6 ) 49 Change in deferred tax effect of net unrealized gain/loss on securities available for sale 26 83 101 Table of Contents December 31, 2003 Pro Forma Balance Sheet Minimum of Offering Range. The following table presents pro forma balance sheet information at December 31, 2003 for Benjamin Franklin Bancorp and Chart Bank assuming the sale of 4,250,000 shares at the minimum of the offering range. Benjamin Pro Forma Benjamin Franklin Conversion Franklin Chart Pro Forma Bancorp Adjustments Bancorp as Bank Merger Pro Forma Historical (1) Converted Historical Adjustments (2) Consolidated (Dollars in thousands) Assets Cash and cash equivalents. $ 35,485 $ 35,438 (3 ) $ 70,923 $ 34,874 $ (28,082 ) (11 ) $ 77,715 Securities available for sale, at fair value 102,646 102,646 5,404 108,050 Securities held to maturity, at amortized cost 386 386 23,965 24,351 Loans, net 288,862 288,862 139,890 299 (12 ) 429,051 Restricted equity securities, at cost 7,222 7,222 1,060 8,282 Premises and equipment, net 11,199 11,199 2,400 427 (13 ) 14,026 Goodwill 4,248 4,248 28,582 (14 ) 32,830 Core deposit intangible 226 226 3,799 (15 ) 4,025 Other amortizing intangible assets 862 862 862 Other assets 7,708 1,224 (4 ) 8,932 2,261 298 (16 ) 11,491 Total assets $ 458,844 $ 36,662 $ 495,506 $ 209,854 $ 5,323 $ 710,683 Liabilities Deposits $ 380,257 $ $ 380,257 $ 175,801 $ 703 (17 ) $ 556,761 FHLB advances and other borrowings 36,000 (5 ) 36,000 15,930 (29 ) (18 ) 51,901 Other liabilities 4,286 4,286 724 5,010 Subordinated debt 9,000 9,000 $ 9,000 Total liabilities 429,543 429,543 192,455 674 622,672 Stockholder s equity Common Stock (6 ) 1,420 (1,420 ) (19 ) Additional paid-in capital 44,346 (7 ) 44,346 11,575 12,441 (20 ) 68,362 Retained earnings 31,308 (2,176 ) (8 ) 29,132 4,337 (6,305 ) (21 ) 27,164 Employee stock ownership plan shares (3,672 ) (9 ) (3,672 ) (3,672 ) Restricted shares under stock-based incentive plan (1,836 ) (10 ) (1,836 ) (1,836 ) Accumulated other comprehensive (loss) income (2,007 ) (2,007 ) 67 (67 ) (22 ) (2,007 ) Total stockholders equity 29,301 36,662 65,963 17,399 4,649 88,011 Total liabilities and stockholders equity $ 458,844 $ 36,662 $ 495,506 $ 209,854 $ 5,323 $ 710,683 (1) Shows the effect of the mutual-to-stock conversion of Benjamin Franklin Bancorp, assuming gross proceeds of $42.5 million, the minimum of the offering range, offering expenses of $1.6 million, a contribution to the Benjamin Franklin Bank Charitable Foundation of $3.4 million of common stock, and establishment of an employee stock ownership plan and the stock-based incentive plan that will acquire 8.0% and 4.0%, respectively, of the number of shares issued in the offering including the shares issued to the Benjamin Franklin Bank Charitable Foundation. The employee stock ownership plan is assumed to purchase its shares in the offering and in open market purchases. It is assumed that Benjamin Franklin Bancorp will purchase, for grant as restricted stock under the stock-based incentive plan, shares in the open market after receiving stockholder approval to adopt the plan. Open market purchases by the employee stock ownership plan and for the stock-based incentive plan are assumed at $10 per share. The reduction in retained earnings reflects the one-time expense of funding the Benjamin Franklin Bank Charitable Foundation net of a deferred tax asset. (2) Reflects the purchase accounting and acquisition adjustments related to the acquisition of Chart Bank for a price of $30.75 per share in cash and newly issued common stock. - 56 - Table of Contents (3) Calculate as follows: (Dollars in thousands) Gross conversion proceeds $ 42,500 Offering expenses (1,554 ) ESOP adjustment (3,672 ) Stock-based incentive plan (restricted stock grants) adjustment (1,836 ) Pro forma cash adjustment $ 35,438 (4) Deferred tax asset resulting from funding the Benjamin Franklin Bank Charitable Foundation based on marginal tax rate of 36.0%. (5) The employee stock ownership plan loan is assumed to be funded internally with a loan from Benjamin Franklin Bancorp, thus no borrowing liability will be recorded on the consolidated balance sheet of Benjamin Franklin Bancorp. (6) No par value common stock. (7) Calculate as follows: (Dollars in thousands) Net proceeds of offering $ 40,946 Common stock issued to Foundation 3,400 Pro forma adjustment $ 44,346 (8) After-tax impact to retained earnings from the $3.4 million expense for funding the Benjamin Franklin Bank Charitable Foundation based on a marginal tax rate of 36.0%. (9) Contra-equity account established to reflect the unallocated shares in the employee stock ownership plan, anticipated to purchase 8.0% of the shares issued in the offering (including shares contributed to the Benjamin Franklin Bank Charitable Foundation). (10) Contra-equity account established to reflect the unvested shares of restricted stock under the stock-based incentive plan equal to 4.0% of offering plus foundation shares. (11) Includes the cash portion of the merger consideration paid to Chart Bank, non-tax deductible transaction costs remaining to be paid at September 30, 2004, tax deductible one time acquisition costs, and one time expenses that will be incurred by Benjamin Franklin Bancorp to consolidate Chart Bank, net of cash received from return of the Chart Bank Cooperative Central Bank deposit. (Dollars in thousands) Cash portion of merger consideration $ 21,469 Non-tax deductible transaction expenses 983 Tax deductible transaction expenses 3,091 One time expenses incurred to consolidate Chart Bank 3,075 Return of Chart Bank Cooperative Central Bank Deposit (536 ) Total cash adjustment $ 28,082 (12) Yield adjustment to reflect the difference between portfolio yields and market rates as of September 30, 2004 for loans acquired in the acquisition. Yield adjustments were calculated using present value analysis as follows: (a) the acquired loan portfolio was segregated into pools of similar loans; (b) cash flow projections were prepared for each loan pool based interest rates, balances, remaining terms to maturity, and estimated prepayment speeds for each pool; (c) cash flows were discounted to present value using risk adjusted discount rates for comparable loans; and (d) the resulting difference between the present value of future cash flows for each pool and the corresponding principal balance was the yield adjustment. Yield adjustments on acquired loans are amortized into interest income using the interest method over the estimated lives of the acquired loans, which range between 0.5 years and 8.3 years, depending upon the type of loan (average is 4.2 years). (13) Reflects the difference between market values and net book values of fixed assets acquired in the acquisition. (14) Goodwill is an intangible asset that is not subject to amortization. The goodwill balance will be tested annually for impairment. Goodwill is calculated as: (Dollars in thousands, except per share data) Purchase price per share $ 30.75 Number of shares acquired 1,420,000 Number of options acquired 137,000 Average exercise price of options $ 10.00 Cost of purchasing shares $ 43,665 Cost of purchasing options 2,843 Tax effect of purchasing options (1,024 ) Purchase price (net of tax effect of purchasing options) 45,484 - 57 - Table of Contents (Dollars in thousands, except per share data) Less: acquired stockholders equity (17,399 ) Plus: estimated non-tax deductible transaction costs 983 Plus: taxable purchase accounting adjustments Estimated tax deductible transaction expenses (pre-tax) 3,091 Yield adjustment for acquired CDs 703 Yield adjustment for acquired borrowings (29 ) Yield adjustment for acquired loans (299 ) Core deposit intangible (3,799 ) Market value adjustment for fixed assets (427 ) Tax effect at 36.0% marginal tax rate 274 Goodwill $ 28,582 (15) Core deposit intangible is an identifiable intangible asset representing the economic value of the acquired Chart Bank deposit base, calculated as the present value benefit of funding operations with the acquired deposit base versus using an alternative wholesale funding source. The core deposit intangible asset is amortized into expense on an accelerated basis using the double declining balance method over 8.3 years. (16) Calculate as follows: (Dollars in thousands) Deferred tax entry for taxable transaction costs (footnote 14) $ (274 ) Deferred tax entry for one time merger charges (footnote 21) 1,108 Repayment of Chart Bank Cooperative Central Bank deposit (536 ) Pro forma adjustment $ 298 (17) Yield adjustment to reflect the difference between portfolio yields and market rates as of September 30, 2004 for time deposits acquired in the acquisition. Yield adjustment is calculated as the difference between the current portfolio balances for time deposits and the present value of projected cash flows related to the time deposits discounted using current market rates. Current market rates were based on average rates paid by institutions competing in the regional market area based on rate surveys on or around September 30, 2004. The yield adjustment for time deposits will be accreted into income using the interest method over the lives of the acquired time deposits based on their monthly maturities (5 years). (18) Yield adjustment to reflect the difference between portfolio yields and market rates as of September 30, 2004 for borrowings acquired in the acquisition. Yield adjustment is calculated as the difference between the current portfolio balance for borrowings and the present value of projected cash flows related to the borrowings discounted using current market rates. Current market rates were based on rates offered by the Federal Home Loan Bank of Boston as of September 30, 2004. The yield adjustment for borrowings will be amortized into expense using the interest method over the lives of the acquired borrowings based on their monthly maturities (4 years). (19) Eliminate Chart Bank common stock par value. Newly issued shares of Benjamin Franklin Bancorp have no par value. (20) Calculate as follows: (Dollars in thousands) Eliminate existing Chart Bank paid-in capital $ (11,575 ) Common stock (par value) issued in acquisition 24,016 Adjustment to paid-in capital $ 12,441 (21) Calculate as follows: (Dollars in thousands) Eliminate existing Chart Bank retained earnings $ (4,337 ) One-time merger charges incurred: Restructure FHLB advances and conversion of accounts (3,075 ) Tax effect at marginal rate of 36.0% 1,107 Adjustment to retained earnings $ (6,305 ) (22) Calculate to eliminate the capital account entries of Chart Bank pursuant to purchase accounting. - 58 - Table of Contents December 31, 2003 Pro Forma Balance Sheet Maximum, as Adjusted, of Offering Range. The following table presents pro forma balance sheet information at December 31, 2003 for Benjamin Franklin Bancorp and Chart Bank assuming the sale of 6,612,500 shares at the maximum, as adjusted, of the offering range. Benjamin Benjamin Franklin Pro Forma Franklin Chart Pro Forma Bancorp Conversion Bancorp as Bank Merger Pro Forma Historical Adjustments (1) Converted Historical Adjustments (2) Consolidated (Dollars in thousands) Assets Cash and cash equivalents $ 35,485 $ 55,939 (3 ) $ 91,424 $ 34,874 $ (28,082 ) (11 ) $ 98,216 Securities available for sale, at fair value 102,646 102,646 5,404 108,050 Securities held to maturity, at amortized cost 386 386 23,965 24,351 Loans, net 288,862 288,862 139,890 299 (12 ) 429,051 Restricted equity securities, at cost 7,222 7,222 1,060 8,282 Premises and equipment, net 11,199 11,199 2,400 427 (13 ) 14,026 Goodwill 4,248 4,248 28,582 (14 ) 32,830 Core deposit intangible 226 226 3,799 (15 ) 4,025 Other amortizing intangible assets 862 862 862 Other assets 7,708 1,440 (4 ) 9,148 2,261 298 (16 ) 11,707 Total assets $ 458,844 $ 57,379 $ 516,223 $ 209,854 $ 5,323 $ 731,400 Liabilities Deposits $ 380,257 $ $ 380,257 $ 175,801 $ 703 (17 ) $ 556,761 FHLB advances and other borrowings 36,000 (5 ) 36,000 15,930 (29 ) (18 ) 51,901 Other liabilities 4,286 4,286 724 5,010 Subordinated debt 9,000 9,000 9,000 Total liabilities 429,543 429,543 192,455 674 622,672 Stockholder s equity Common Stock (6 ) 1,420 (1,420 ) (19 ) Additional paid-in capital 68,354 (7 ) 68,354 11,575 12,441 (20 ) 92,370 Retained earnings 31,308 (2,560 ) (8 ) 28,748 4,337 (6,305 ) (21 ) 26,780 Employee stock ownership plan shares (5,610 ) (9 ) (5,610 ) (5,610 ) Restricted shares under stock-based incentive plan (2,805 ) (10 ) (2,805 ) (2,805 ) Accumulated other comprehensive (loss) income (2,007 ) (2,007 ) 67 (67 ) (22 ) (2,007 ) Total stockholders equity 29,301 57,379 86,680 17,399 4,649 108,728 Total liabilities and stockholders equity $ 458,844 $ 57,379 $ 516,223 $ 209,854 $ 5,323 $ 731,400 (1) Shows the effect of the mutual-to-stock conversion of Benjamin Franklin Bancorp, assuming gross proceeds of $66.1 million, the maximum, as adjusted, offering expenses of $1.8 million, a contribution to the Benjamin Franklin Bank Charitable Foundation of $4.0 million of common stock, and establishment of an employee stock ownership plan and the stock-based incentive plan that will acquire 8.0% and 4.0%, respectively, of the number of shares issued in the offering including the shares issued to the Benjamin Franklin Bank Charitable Foundation. The employee stock ownership plan is assumed to purchase its shares in the offering and in open market purchases. It is assumed that Benjamin Franklin Bancorp will purchase, for grant as restricted stock under the stock-based incentive plan, shares in the open market after receiving stockholder approval to adopt the plan. Open market purchases by the employee stock ownership plan and for the stock-based incentive plan are assumed at $10 per share. The reduction in retained earnings reflects the one-time expense of funding the Benjamin Franklin Bank Charitable Foundation net of a deferred tax asset. (2) Reflects the purchase accounting and acquisition adjustments related to the acquisition of Chart Bank for a price of $30.75 per share in cash and newly issued common stock. - 59 - Table of Contents (3) Calculate as follows: (Dollars in thousands) Gross conversion proceeds $ 66,125 Offering expenses (1,771 ) ESOP adjustment (5,610 ) Stock-based incentive plan (restricted stock grants) adjustment (2,805 ) Pro forma cash adjustment $ 55,939 (4) Deferred tax asset resulting from the expense of funding the Benjamin Franklin Bank Charitable Foundation based on marginal tax rate of 36.0%. (5) The employee stock ownership plan loan is assumed to be funded internally with a loan from Benjamin Franklin Bancorp, thus no borrowing liability will be recorded on the consolidated balance sheet of Benjamin Franklin Bancorp. (6) No par value common stock. (7) Calculate as follows: (Dollars in thousands) Net proceeds of offering $ 64,354 Common stock issued to Foundation 4,000 Pro forma adjustment $ 68,354 (8) After-tax impact to retained earnings from the $4.0 million expense for funding the Benjamin Franklin Bank Charitable Foundation based on a marginal tax rate of 36.0%. (9) Contra-equity account established to reflect the unallocated shares in the employee stock ownership plan, anticipated to purchase 8.0% of the shares issued in the offering (including shares contributed to the Benjamin Franklin Bank Charitable Foundation). (10) Contra-equity account established to reflect the unvested shares of restricted stock under the stock-based incentive plan equal to 4.0% of offering plus foundation shares. (11) Includes the cash portion of the merger consideration paid to Chart Bank, non-tax deductible transaction costs remaining to be paid at September 30, 2004, tax deductible one time acquisition costs, and one time expenses that will be incurred by Benjamin Franklin Bancorp to consolidate Chart Bank, net of cash received from return of the Chart Bank Cooperative Central Bank deposit. (Dollars in thousands) Cash portion of merger consideration $ 21,469 Non-tax deductible transaction expenses 983 Tax deductible transaction expenses 3,091 One time expenses incurred to consolidate Chart Bank 3,075 Return of Chart Bank Cooperative Central Bank Deposit (536 ) Total cash adjustment $ 28,082 (12) Yield adjustment to reflect the difference between portfolio yields and market rates as of September 30, 2004 for loans acquired in the acquisition. Yield adjustments were calculated using present value analysis as follows: (a) the acquired loan portfolio was segregated into pools of similar loans; (b) cash flow projections were prepared for each loan pool based interest rates, balances, remaining terms to maturity, and estimated prepayment speeds for each pool; (c) cash flows were discounted to present value using risk adjusted discount rates for comparable loans; and (d) the resulting difference between the present value of future cash flows for each pool and the corresponding principal balance was the yield adjustment. Yield adjustments on acquired loans are amortized into interest income using the interest method over the estimated lives of the acquired loans, which range between 0.5 years and 8.3 years, depending upon the type of loan (average is 4.2 years). (13) Reflects the difference between market values and net book values of fixed assets acquired in the acquisition. (14) Goodwill is an intangible asset that is not subject to amortization. The goodwill balance will be tested annually for impairment. Goodwill is calculated as: (Dollars in thousands, except per share data) Purchase price per share $ 30.75 Number of shares acquired 1,420,000 Number of options acquired 137,000 Average exercise price of options $ 10.00 Cost of purchasing shares $ 43,665 Cost of purchasing options 2,843 Tax effect of purchasing options (1,024 ) Purchase price (net of tax effect of purchasing options) 45,484 Less: acquired stockholders equity (17,399 ) - 60 - Table of Contents (Dollars in thousands, except per share data) Plus: estimated non-tax deductible transaction costs 983 Plus: taxable purchase accounting adjustments Estimated tax deductible transaction expenses (pre-tax) 3,091 Yield adjustment for acquired CDs 703 Yield adjustment for acquired borrowings (29 ) Yield adjustment for acquired loans (299 ) Core deposit intangible (3,799 ) Market value adjustment for fixed assets (427 ) Tax effect at 36.0% marginal tax rate 274 Goodwill $ 28,582 (15) Core deposit intangible is an identifiable intangible asset representing the economic value of the acquired Chart Bank deposit base, calculated as the present value benefit of funding operations with the acquired deposit base versus using an alternative wholesale funding source. The core deposit intangible asset is amortized into expense on an accelerated basis using the double declining balance method over 8.3 years. (16) Calculate as follows: (Dollars in thousands) Deferred tax entry for taxable transaction costs (footnote 14) $ (274 ) Deferred tax entry for one time merger charges (footnote 21) 1,108 Repayment of Chart Bank Cooperative Central Bank deposit (536 ) Pro forma adjustment $ 298 (17) Yield adjustment to reflect the difference between portfolio yields and market rates as of September 30, 2004 for time deposits acquired in the acquisition. Yield adjustment is calculated as the difference between the current portfolio balances for time deposits and the present value of projected cash flows related to the time deposits discounted using current market rates. Current market rates were based on average rates paid by institutions competing in the regional market area based on rate surveys on or around September 30, 2004. The yield adjustment for time deposits will be accreted into income using the interest method over the lives of the acquired time deposits based on their monthly maturities (5 years). (18) Yield adjustment to reflect the difference between portfolio yields and market rates as of September 30, 2004 for borrowings acquired in the acquisition. Yield adjustment is calculated as the difference between the current portfolio balance for borrowings and the present value of projected cash flows related to the borrowings discounted using current market rates. Current market rates were based on rates offered by the Federal Home Loan Bank of Boston as of September 30, 2004. The yield adjustment for borrowings will be amortized into expense using the interest method over the lives of the acquired borrowings based on their monthly maturities (4 years). (19) Eliminate Chart Bank common stock par value. Newly issued shares of Benjamin Franklin Bancorp have no par value. (20) Calculate as follows: (Dollars in thousands) Eliminate existing Chart Bank paid-in capital $ (11,575 ) Common stock (paid-in capital) issued in acquisition 24,016 Adjustment to paid-in capital $ 12,441 (21) Calculate as follows: (Dollars in thousands) Eliminate existing Chart Bank retained earnings $ (4,337 ) One-time merger charges incurred: Restructure FHLB advances and conversion of accounts (3,075 ) Tax effect at marginal rate of 36.0% 1,107 Adjustment to retained earnings $ (6,305 ) (22) Calculate to eliminate the capital account entries of Chart Bank pursuant to purchase accounting. - 61 - Table of Contents December 31, 2003 Pro Forma Income Statement Minimum of Offering Range. The following table presents pro forma income statement information for the year ended December 31, 2003 for Benjamin Franklin Bancorp and Chart Bank assuming the sale of 4,250,000 shares at the minimum of the offering range. Benjamin Pro Forma Benjamin Franklin Pro Forma Franklin Bancorp Conversion Bancorp as Chart Bank Merger Pro Forma Historical Adjustments (1) Converted Historical Adjustments (3) Consolidated (Dollars in thousands) Interest income $ 19,532 $ $ 19,532 $ 10,091 $ (187 )(4) $ 29,436 Interest expense (6,752 ) (6,752 ) (3,452 ) 588 (5) (9,616 ) Net interest income before provision for loan losses 12,780 12,780 6,639 401 19,820 Provision for loan losses (625 ) (625 ) (120 ) (745 ) Net interest income after provision for loan losses 12,155 12,155 6,519 401 19,075 Non-interest income 3,076 3,076 2,665 5,741 Non-interest expense (12,724 ) (122 )(2) (12,846 ) (6,406 ) (928 )(6) (20,180 ) Income before provision for income taxes 2,507 (122 ) 2,385 2,778 (527 ) 4,636 Provision for income taxes (819 ) 44 (775 ) (1,076 ) 190 (7) (1,661 ) Net income $ 1,688 $ (78 ) $ 1,610 $ 1,702 $ (337 ) $ 2,975 Table of Contents (2) Employee stock ownership plan loan is assumed to be funded internally, so no interest expense is recorded on the consolidated income statement for Benjamin Franklin Bancorp. Employee stock ownership plan expense thus reflects only the amortization of principal for the period shown below: (Dollars in thousands) Employee stock ownership plan loan $ 3,672 Divided by amortization period in years 30 Annual expense $ 122 Nine months expense $ 92 (3) Reflects the purchase accounting and acquisition adjustments related to the acquisition of Chart Bank for a price of $30.75 per share in cash and newly issued common stock. (4) Adjustment to interest income is the amortization of the loan premium on the Chart Bank loans resulting from purchase accounting. Adjustments to record estimated interest income to be foregone as a result of funding the cash portion of the merger consideration paid to stockholders of Chart Bank and the expense of the acquisition will be recorded as incurred. Since these estimates are non-recurring, they are not reflected in the Pro forma income statements. The estimated reduction in interest income assuming total funding requirements of $28.1 million for the acquisition and related expenses, assuming such cash costs were funded with investments yielding 1.26% for year ended December 31, 2003, would be approximately $0.4 million. The yield approximates the yield on the one year U.S. Treasury security on December 31, 2003. (5) Adjustment to interest expense is calculated as follows: (Dollars in thousands) Accretion of deposit premium from purchase accounting $ 606 Amortization of borrowings discount from purchase accounting (18 ) Adjustment to interest income $ 588 (6) Adjustment to non-interest expense is calculated as follows: Amortization of new core deposit intangible $ (912 ) Depreciation adjustment for market value of fixed assets (16 ) Adjustment to non-interest expense $ (928 ) (7) Marginal tax rate of 36.0%. - 67 - Table of Contents December 31, 2003 Pro Forma Income Statement Maximum, as Adjusted, of Offering Range. The following table presents pro forma income statement information for the year ended December 31, 2003 for Benjamin Franklin Bancorp and Chart Bank assuming the sale of 6,612,500 shares at the maximum, as adjusted, of the offering range. Benjamin Pro Forma Benjamin Pro Forma Franklin Conversion Franklin Merger Bancorp Adjustments Bancorp as Chart Bank Adjustments Pro Forma Historical (1) Converted Historical (3) Consolidated (Dollars in thousands) Interest income $ 19,532 $ $ 19,532 $ 10,091 $ (187 )(4) $ 29,436 Interest expense (6,752 ) (6,752 ) (3,452 ) 588 (5) (9,616 ) Net interest income before provision for loan losses 12,780 12,780 6,639 401 19,820 Provision for loan losses (625 ) (625 ) (120 ) (745 ) Net interest income after provision for loan losses 12,155 12,155 6,519 401 19,075 Non-interest income 3,076 3,076 2,665 5,741 Non-interest expense (12,724 ) (187 )(2) (12,911 ) (6,406 ) (928 )(6) (20,245 ) Income before provision for income taxes 2,507 (187 ) 2,320 2,778 (527 ) 4,571 Provision for income taxes (819 ) 67 (752 ) (1,076 ) 190 (7) (1,638 ) Net income $ 1,688 $ (120 ) $ 1,568 $ 1,702 $ (337 ) $ 2,933 (1) Shows the effect of the mutual-to-stock conversion of Benjamin Franklin Bancorp, assuming gross proceeds of $66.1 million, the maximum, as adjusted, of the offering range, offering expenses of $1.8 million, a contribution to the Benjamin Franklin Bank Charitable Foundation of $4.0 million of common stock, and establishment of an employee stock ownership plan that will acquire 8.0% of the number of shares issued in the offering including the shares issued to the Benjamin Franklin Bank Charitable Foundation. The employee stock ownership plan is assumed to purchase its shares in the offering and in open market purchases. The loan taken down by the employee stock ownership plan will be amortized over 30 years on a straight line basis. The employee stock ownership plan expense shown reflects the estimated amortization expense on a pretax basis for the period shown. Benjamin Franklin Bancorp also intends to adopt an stock-based incentive plan that will award shares of restricted stock in the amount of 4.0% of the number of shares issued in the offering plus the shares issued to the Benjamin Franklin Bank Charitable Foundation. The shares to be granted by the stock-based incentive plan as restricted stock are assumed to be purchased in the open market after receiving stockholder approval. Open market purchases by the employee stock ownership plan and for the stock-based incentive plan are assumed at $10 per share. Also under the stock-based benefit plan, Benjamin Franklin Bancorp intends to grant options to purchase 10.0% of the number of shares issued in the offering plus shares issued to the Benjamin Franklin Bank Charitable Foundation. The exercise price of the options is assumed to be $10 per share and the grant-date price of the shares is also assumed to be $10 per share. Adjustments to record estimated stock-based incentive plan expenses, including expenses of the restricted stock awards and option grants, and interest income to be earned on net proceeds of the offering, will be recorded as incurred. Since these estimates are non-recurring, they are not reflected in the calculations of pro forma income. The estimated interest income assuming net cash proceeds of $55.9 million from the offering are invested at an average pretax yield of 1.26% for the year ended December 31, 2003 would be approximately $0.7 million pretax. The yield utilized approximates the yield on a one year U.S. Treasury security as of September 30, 2004. The estimated restricted stock expense for the stock-based incentive plan assuming gross proceeds of $66.1 million is $0.6 million pretax for the year ended December 31, 2003. The estimated stock option expense for the stock-based incentive plan assuming gross proceeds of $66.1 million is $0.4 million pretax for the nine months ended September 30, 2004. The employee stock ownership plan loan is amortized over 30 years on a straight-line basis. Employee stock ownership plan shares are assumed to be released at $10 per share. Restricted shares under the stock-based incentive plan are assumed to vest over 5 years on a straight-line basis. The fair value of the stock options are expensed over 5 years on a straight-line basis, and only 15.0% of the stock option expense is tax deductible.. Taxes are calculated on an assumed marginal rate of 36.0%. No expenses are included for the shares issued to the Benjamin Franklin Bank Charitable Foundation or other merger-related charges, all of which are one time expenses. - 68 - Table of Contents (2) Employee stock ownership plan loan is assumed to be funded internally, so no interest expense is recorded on the consolidated income statement for Benjamin Franklin Bancorp. Employee stock ownership plan expense thus reflects only the amortization of principal for the period shown below: (Dollars in thousands) Employee stock ownership plan loan $ 5,610 Divided by amortization period in years 30 Annual expense $ 187 Nine months expense $ 141 (3) Reflects the purchase accounting and acquisition adjustments related to the acquisition of Chart Bank for a price of $30.75 per share in cash and newly issued common stock. (4) Adjustment to interest income is the amortization of the loan premium on the Chart Bank loans resulting from purchase accounting. Adjustments to record estimated interest income to be foregone as a result of funding the cash portion of the merger consideration paid to stockholders of Chart Bank and the expense of the acquisition will be recorded as incurred. Since these estimates are non-recurring, they are not reflected in the Pro forma income statements. The estimated reduction in interest income assuming total funding requirements of $28.1 million for the acquisition and related expenses, assuming such cash costs were funded with investments yielding 1.26% for year ended December 31, 2003, would be approximately $0.4 million. The yield approximates the yield on the one year U.S. Treasury security on December 31, 2003. (5) Adjustment to interest expense is calculated as follows: (Dollars in thousands) Accretion of deposit premium from purchase accounting $ 606 Amortization of borrowings discount from purchase accounting (18 ) Adjustment to interest income $ 588 (6) Adjustment to non-interest expense is calculated as follows: Amortization of new core deposit intangible $ (912 ) Depreciation adjustment for market value of fixed assets (16 ) Adjustment to non-interest expense $ (928 ) (7) Marginal tax rate of 36.0%. - 69 - Table of Contents Pro Forma Conversion Data The actual net proceeds from the sale of Benjamin Franklin Bancorp common stock in the offering cannot be determined until the conversion is completed. However, the net proceeds in the offering are currently estimated to be between $40.9 million and $55.8 million, or up to $64.4 million at the maximum, as adjusted, in the event the offering range is increased by approximately 15.0%, based upon the following assumptions: Benjamin Franklin Bancorp will sell all shares of common stock in the subscription offering; Benjamin Franklin Bancorp s employee stock ownership plan will purchase 8.0% of the shares of common stock issued in the offering, including shares contributed to the Benjamin Franklin Bank Charitable Foundation. The employee stock ownership plan is assumed to be funded internally with a loan from Benjamin Franklin Bancorp; Benjamin Franklin Bancorp will acquire, through open market purchases, 4.0% of the shares of common stock issued in the offering, including shares contributed to the Benjamin Franklin Bank Charitable Foundation, for purposes of granting restricted stock awards under the stock-based incentive plan; Benjamin Franklin Bancorp will make a contribution to the Benjamin Franklin Bank Charitable Foundation amounting to 340,000 shares of its common stock at the minimum of the offering range and 400,000 shares of its common stock at the midpoint, maximum and maximum as adjusted of the offering range, with an assumed value of $10 per share; Expenses of the offering, other than the fees to be paid to Ryan Beck Co., Inc. are estimated to be $1.1 million; Ryan Beck Co., Inc. will receive reimbursement of legal fees and other expenses in the amount of $100,000, in addition to fees equal to 1.0% of the aggregate purchase price of the shares of stock sold in the offering, excluding any shares purchased by any employee benefit plans, by any of Benjamin Franklin Bancorp s directors, officers or employees or members of their immediate families, issued to the Benjamin Franklin Bank Charitable Foundation or issued to the Chart Bank Stockholders in the acquisition; 2,401,575 shares will be issued to Chart Bank s stockholders in the acquisition; and The cash required to fund the acquisition of Chart Bank was $28.1 million as of December 31, 2003 and September 30, 2004. Benjamin Franklin Bancorp has prepared the following tables, which set forth Benjamin Franklin Bancorp s historical consolidated net income and stockholders equity in combination with Chart Bank prior to the conversion, and Benjamin Franklin Bancorp s pro forma consolidated net income and stockholders equity following the conversion and acquisition of Chart Bank. In preparing these tables and in calculating pro forma data, the following assumptions have been made: Pro forma earnings have been calculated assuming the stock had been sold at the beginning of the period and the net proceeds, if any, had been invested at an average yield of 2.16% and 1.26% for the nine months ended September 30, 2004 and the year ended December 31, 2003, respectively, which approximates the yield on a one-year U.S. Treasury bill adjusted to a constant maturity (CMT) on September 30, 2004 and December 31, 2003, respectively; - 70 - Table of Contents The pro forma after-tax yield on the net proceeds from the offering is assumed to be 1.38% and 0.81% for the nine months ended September 30, 2004 and the year ended December 31, 2003, respectively, based on a marginal tax rate of 36.00%; No withdrawals were made from Benjamin Franklin Bancorp s deposit accounts for the purchase of shares in the offering; Benjamin Franklin Bancorp will grant options under the stock-based incentive plan to acquire common stock equal to 10.0% of the shares of common stock issued in the offering, including shares contributed to Benjamin Franklin Bank Charitable Foundation, and the estimated fair value of such options, estimated using an application of the Black-Scholes option pricing model, is recognized as expense over the vesting term of the options; Historical and pro forma per share amounts have been calculated by dividing historical and pro forma amounts by the indicated number of shares of stock issued in the conversion, issued to Chart Bank stockholders and issued to the Benjamin Franklin Bank Charitable Foundation, as adjusted in the pro forma net income per share to give effect to the purchase of shares by the employee stock ownership plan; Pro forma stockholders equity amounts have been calculated as if Benjamin Franklin Bancorp common stock had been sold in the offering on September 30, 2004 and December 31, 2003, respectively, and, accordingly, no effect has been given to the assumed earnings effect of the transactions; and Pro forma tangible stockholders equity amounts have been calculated by subtracting the estimated balances of intangible assets from pro forma stockholders equity; intangible assets include assets such as core deposit intangibles and goodwill. The following pro forma information may not be representative of the financial effects of the conversion at the date on which the conversion and the acquisition actually occur and should not be taken as indicative of future results of operations. Pro forma stockholders equity represents the difference between the stated amount of Benjamin Franklin Bancorp assets and liabilities computed in accordance with generally accepted accounting principles used in the United States. Stockholders equity does not give effect to intangible assets in the event of a liquidation. The pro forma stockholders equity is not intended to represent the fair market value of the common stock and may be different than amounts that would be available for distribution to stockholders in the event of liquidation. Stockholders equity gives no effect to the liquidation account to be established for the benefit of eligible account holders and supplemental eligible account holders. See The Conversion And The Offering Effects Of The Conversion Liquidation Rights on page # . The tables on the following pages present historical data of Benjamin Franklin Bancorp and Chart Bank (as defined in the footnotes to the table), and Benjamin Franklin Bancorp s pro forma data at or for the dates and periods indicated based on the assumptions set forth above and in the tables and should not be used as a basis for projection of the market value of the common stock following the conversion and the acquisition. - 71 - Table of Contents At or for the nine months ended September 30, 2004 Maximum Minimum of Midpoint of Maximum of As Adjusted Offering Offering Offering of Offering Range Range Range Range 4,250,000 5,000,000 5,750,000 6,612,500 Shares at shares shares shares $10 per share at $10 per share at $10 per share at $10 per share (1) (Dollars in thousands, except per share data) Gross proceeds $ 42,500 $ 50,000 $ 57,500 $ 66,125 Plus: shares issued to the foundation (2) 3,400 4,000 4,000 4,000 Plus: shares issued to Chart Bank (3) 24,016 24,016 24,016 24,016 Pro Forma Market Capitalization $ 69,916 $ 78,016 $ 85,516 $ 94,141 Gross proceeds $ 42,500 $ 50,000 $ 57,500 $ 66,125 Less: conversion expenses (1,554 ) (1,622 ) (1,691 ) (1,771 ) Estimated net proceeds 40,946 48,378 55,809 64,354 Less: common stock acquired by ESOP (4) (3,672 ) (4,320 ) (4,920 ) (5,610 ) Less: common stock acquired for restricted stock awards (5) (1,836 ) (2,160 ) (2,460 ) (2,805 ) Estimated net proceeds as adjusted 35,438 41,898 48,429 55,939 Estimated acquisition cash costs (6) $ (28,082 ) $ (28,082 ) $ (28,082 ) $ (28,082 ) For the nine months ended September 30, 2004 Consolidated net income Historical consolidated net income (7) $ 1,881 $ 1,881 $ 1,881 $ 1,881 Pro forma income on net proceeds 367 434 502 580 Pro forma acquisition adjustment (6) (291 ) (291 ) (291 ) (291 ) Pro forma ESOP adjustment (4) (59 ) (69 ) (79 ) (90 ) Pro forma restricted stock adjustment (5) (176 ) (207 ) (236 ) (269 ) Pro forma stock option adjustment (8) (251 ) (295 ) (336 ) (383 ) Pro forma net income $ 1,471 $ 1,453 $ 1,441 $ 1,428 Per share net income (reflects SOP93-6) Historical consolidated net income $ 0.28 $ 0.26 $ 0.24 $ 0.21 Pro forma income on net proceeds 0.06 0.06 0.06 0.06 Pro forma acquisition adjustment (6) (0.04 ) (0.04 ) (0.04 ) (0.03 ) Pro forma ESOP adjustment (4) (0.01 ) (0.01 ) (0.01 ) (0.01 ) Pro forma restricted stock adjustment (5) (0.03 ) (0.03 ) (0.03 ) (0.03 ) Pro forma stock option adjustment (8) (0.04 ) (0.04 ) (0.04 ) (0.04 ) Pro forma net income per share $ 0.22 $ 0.20 $ 0.18 $ 0.16 Shares used for calculating pro forma earnings per share 6,633,555 7,380,375 8,071,875 8,867,100 Stock price as a multiple of pro forma earnings per share (5)(8) 34.09x 37.50x 41.67x 46.88x At September 30, 2004 Stockholders equity: Historical consolidated stockholders equity (9) $ 52,634 $ 52,634 $ 52,634 $ 52,634 Estimated net proceeds 40,946 48,378 55,809 64,354 Plus: tax benefit of shares issued to foundation (2) 1,224 1,440 1,440 1,440 Plus: shares issued to foundation (2) 3,400 4,000 4,000 4,000 Less: shares issued to foundation (2) (3,400 ) (4,000 ) (4,000 ) (4,000 ) Less: common stock acquired by ESOP (4) (3,672 ) (4,320 ) (4,920 ) (5,610 ) Less: common stock acquired for restricted stock awards (5) (1,836 ) (2,160 ) (2,460 ) (2,805 ) Pro forma stockholders equity 89,296 95,972 102,503 110,013 Intangible assets (10) (36,573 ) (36,573 ) (36,573 ) (36,573 ) Pro forma tangible stockholders equity $ 52,723 $ 59,399 $ 65,930 $ 73,440 - 72 - Table of Contents The following table presents the dollar amount of changes in interest income and interest expense for the major categories of Benjamin Franklin s interest-earning assets and interest-bearing liabilities. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to (i) changes attributable to changes in volume (i.e., changes in average balances multiplied by the prior-period average rate) and (ii) changes attributable to rate (i.e., changes in average rate multiplied by prior-period average balances). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate. Nine Months Ended September 30, Years Ended December 31, Years Ended December 31, 2004 vs. 2003 2003 vs. 2002 2002 vs. 2001 Increase Increase Total (Decrease) Total Increase Total (Decrease) Due to Increase Due to Increase (Decrease) Due to Increase Volume Rate (Decrease) Volume Rate (Decrease) Volume Rate (Decrease) (Dollars in thousands) Interest-earning assets: Loans $ 2,604 $ (1,637 ) $ 967 $ 1,381 $ (2,173 ) $ (792 ) $ (1,844 ) $ (2,189 ) $ (4,033 ) Investment securities (229 ) 364 135 1,552 (2,268 ) (716 ) 948 (1,049 ) (101 ) Interest-earning deposits (324 ) (84 ) (408 ) (369 ) 3 (366 ) 202 (1,102 ) (900 ) Total interest-earning assets 2,051 (1,357 ) 694 2,564 (4,438 ) (1,874 ) (694 ) (4,340 ) (5,034 ) Interest-bearing liabilities: Savings deposits 24 24 65 (166 ) (101 ) 157 (511 ) (354 ) Money market 24 19 43 35 (260 ) (225 ) 173 (406 ) (233 ) NOW accounts (55 ) (55 ) (29 ) (102 ) (131 ) 46 (182 ) (136 ) Certificates of deposits 131 (361 ) (230 ) (143 ) (769 ) (912 ) (1,878 ) (2,294 ) (4,172 ) Total deposits 124 (342 ) (218 ) (72 ) (1,297 ) (1,369 ) (1,502 ) (3,393 ) (4,895 ) Short-term borrowings and long-term debt 84 24 108 347 180 527 106 (13 ) 93 Total interest-bearing liabilities 208 (318 ) (110 ) 275 (1,117 ) (842 ) (1,396 ) (3,406 ) (4,802 ) Change in net interest income $ 1,843 $ (1,039 ) $ 804 $ 2,289 $ (3,321 ) $ (1,032 ) $ 702 $ (934 ) $ (232 ) Table of Contents Comparison of Financial Condition At September 30, 2004 and December 31, 2003 Total Assets. Total assets increased by $59.1 million, or 12.9%, from $458.8 million at December 31, 2003 to $517.9 million at September 30, 2004. This increase was largely the result of an increase in the loan portfolio, offset by reductions in cash and short-term investments. Cash and Short-term Investments. Cash and correspondent bank balances decreased by $6.2 million to $8.3 million as of September 30, 2004 when compared to December 31, 2003. Over the same 9-month period, short-term investments, comprised of overnight fed funds sold and money market funds, decreased $14.1 million to $6.8 million at September 30, 2004. These reductions in short-term liquidity served primarily to fund increases in the Bank s loan portfolio. Securities. The investment portfolio aggregated $94.7 million at September 30, 2004, a decrease of $8.3 million, or 8.1%, from $103.0 million at December 31, 2003. This reduction, caused by net paydowns in mortgage-backed securities totaling $20.5 million offset by increases in holdings of U.S. Agency securities and corporate bonds totaling $7.1 million and $5.1 million, respectively, was used to fund growth in the Bank s loan portfolio. Net Loans. Net loans as of September 30, 2004 were $375.5 million, an increase of $86.7 million, or 30.0%, over net loan balances of $288.9 million as of December 31, 2003. Loan growth occurred in most product categories, including residential mortgage loans ($72.2 million), commercial real estate ($10.5 million), construction ($1.1 million), and consumer ($3.4 million). The significant growth in residential mortgage loans can be attributed to the attractive rates offered on adjustable-rate mortgages and 15-year bi-weekly mortgage loans. Deposits. Deposits increased by $19.3 million to $399.6 million at September 30, 2004, an increase of 5.1% over balances of $380.3 million at December 31, 2003. The largest increases came in certificates of deposit ($9.8 million), money market accounts ($4.3 million) and savings accounts ($3.7 million). The deposit increases overall were the result Ben Franklin s continued marketing and promotional efforts in its market area, including efforts to remain competitive in all of its deposit product offerings. Borrowed Funds. Funds borrowed from the Federal Home Loan Bank of Boston increased by $39.0 million to $75.0 million at September 30, 2004, a 108.3% increase over balances of $36.0 million as of December 31, 2003. These additional funds were borrowed in order to fund the continued growth in the Bank s loan portfolio during the nine months ended September 30, 2004. The $9.0 million balance in subordinated debt remained unchanged from December 31, 2003 to September 30, 2004. Retained Earnings. Retained earnings increased by $1.3 million to $30.6 million at September 30, 2004, an increase of 4.4% from a balance of $29.3 million as of December 31, 2003. This change was the result of net income for the first nine months of $1,312,000, offset by a small increase ($27,000) in the net unrealized loss on marketable securities. Comparison of Operating Results For The Nine Months Ended September 30, 2004 and September 30, 2003 Net Income. Net income for the nine months ended September 30, 2004 was $1,312,000, a decrease from net income of $1,381,000 for the first nine months of 2003. An $897,000 decline in other income and a $170,000 increase in the provision for loan losses were almost entirely offset by an increase in net interest income of $804,000 and a $169,000 reduction in operating expenses. Table of Contents Net Interest Income. The tables on pages # and # set forth the components of Benjamin Franklin s net interest income, yields on interest earning assets and interest bearing liabilities, and the effect on net interest income arising from changes in volume and rate. Benjamin Franklin earned net interest income of $10.2 million and $9.4 million in the first nine months of 2004 and 2003, respectively. The increase between the two periods of $804,000, or 8.6%, is due to a 10 basis point, or 3.4%, increase in the net interest margin coupled with a $21.9 million, or 5.1%, increase in average interest-earning assets. Though average yields and rates declined generally from the nine months ended September 30, 2003 to the same period in 2004, the 10 basis point increase in the net interest margin from 2003 to 2004 was achieved primarily through a change in mix in both earning assets and in funding liabilities. Within earnings assets, higher-yielding loans increased by $59.6 million between periods, while lower-yielding investment securities and short-term investments declined by $37.7 million on average. Within Benjamin Franklin s funding liabilities, the mix shifted somewhat in favor of non-interest bearing accounts, which increased by $42.7 million on average. This shift was caused by a change made in the Bank s primary checking account product in September 2003, whereby the payment of interest was eliminated. Interest Income. Interest income rose $694,000, or 4.8%, to $15.2 million for the nine months ended September 30, 2004 from $14.5 million for the nine months ended September 30, 2003. The increase was caused primarily by a $21.9 million increase in interest-earning assets, which had the effect of increasing interest income by $2.0 million. Loans increased on average by $59.6 million between the two periods, offset by decreases in the average balances of investment securities ($11.5 million) and short-term investments ($26.2 million). Despite the fact that the average yield on loans declined from 5.84% for the nine months ended September 30, 2003 to 5.17% for the same period in 2004, the overall yield on interest earning assets remained almost unchanged at 4.54% and 4.52% for the 2003 and 2004 periods, respectively, due to the change in the mix of interest earning assets. Interest Expense. Interest expense for the nine months ended September 30, 2004 declined (by $110,000 or 2.1%) to $5.0 million as compared to interest expense of $5.1 million for the nine months ended September 30, 2003. The effect of an increase in non-interest-bearing liabilities, which grew by an average of $42.7 million in the 2004 period, was offset partially by a 7 basis point, or 3.9%, increase in the average rates paid on interest-bearing liabilities. The increase in non-interest-bearing liabilities was due to a change made in the Bank s primary checking account product, whereby the payment of interest was eliminated. Provision for Loan Losses. Benjamin Franklin records a provision for loan losses as a charge to its earnings when necessary in order to maintain the allowance for loan losses at a level sufficient to absorb potential losses inherent in the loan portfolio. Refer to Business of Benjamin Franklin Bancorp Asset Quality on page # for additional information about Benjamin Franklin s methodology for establishing its allowance for loan losses. Benjamin Franklin recorded $470,000 and $300,000 in loan loss provisions during the nine months ended September 30, 2004 and 2003, respectively. Provisions in both years were reflective of growth in the loan portfolio and the realization of net recoveries of $24,000 and $38,000 in the nine months ended September 30, 2004 and 2003, respectively. At September 30, 2004, the allowance for loan losses totaled $3.0 million, or 0.80% of the loan portfolio, compared to $2.7 million, or 0.95%, of total loans at September 30, 2003. Non-interest Income. Non-interest income for the nine month period ended September 30, 2004 declined to $1.7 million, a reduction of $0.9 million, or 35.0%, when compared to non-interest income of $2.6 million earned during the nine month period ended September 30, 2003. An $845,000 decline in gains on loan sales, a $122,000 reduction in loan servicing fees and a $105,000 decrease in gains on sales of securities were partially offset by a $52,000 increase in deposit service fees and an additional $123,000 December 31, 2003 Securities available for sale $ 5,292 $ Table of Contents in miscellaneous income. The largest area of decline, on loan sales, was attributable to the rise in market interest rates in 2004, which in turn caused a decline in the origination of fixed rate residential mortgage loans that the Bank typically sells at a small gain in the secondary market. Loan servicing fee income was also negatively affected by the reduction in fixed rate loan originations sold with servicing rights retained. The increase in miscellaneous income in the 2004 period was primarily attributable to an increase in fees earned on investment product sales, brought about by the addition of a second sales representative in the fourth quarter of 2003. Non-interest Expense. Non-interest expense declined, by $169,000 or 1.8%, to $9.5 million for the nine months ended September 30, 2004, compared to $9.6 million for the nine months ended September 30, 2003. Reductions in occupancy and equipment costs, and professional fees were offset in part by an increase in salaries and employee benefits. Salaries and employee benefits expenses increased $673,000, or 13.4%, to $5.7 million for the nine months ended September 30, 2004. The increase was primarily due to normal merit increases averaging 4.5%, the addition of one senior officer position, and significantly lower deferral of loan origination costs due to a lower volume of loan originations in the 2004 period when compared to 2003. Occupancy and equipment expenses declined $285,000, or 21.6%, to $1.0 million for the nine months ended September 30, 2004. Most of this reduction was attributable to a decline in depreciation expense associated with branch-related capital expenditures made five years earlier. Professional fees decreased $629,000, or 76.6%, to $192,000 for the nine months ended September 30, 2004, due primarily to a decline in legal costs and loan origination expenses. Income Taxes. Income tax expense was $626,000 for the nine months ended September 30, 2004, a decrease of $25,000, or 3.8%, compared to $651,000 for the nine months ended September 30, 2003. The effective tax rate remained essentially unchanged between years, at 32.3% and 32.0% in 2004 and 2003, respectively. Comparison of Financial Condition At December 31, 2003 and December 31, 2002 Total Assets. Total assets increased by $6.6 million, or 1.5%, from $452.2 million at December 31, 2002 to $458.8 million at December 31, 2003. This increase was largely the result of an increase in the loan portfolio, offset by a reduction in investment securities. Cash and Short-term Investments. While cash and correspondent bank balances remained essentially the same from year to year, short-term investments consisting of overnight fed funds sold and money market funds declined by $16.9 million to $21.0 million at September 30, 2003. This reduction in short-term liquidity served primarily to fund an increase in the loan portfolio. Securities. The investment portfolio aggregated $103.0 million at December 31, 2003, a decline of $6.5 million, or 5.9%, from $109.5 million at December 31, 2002. Within the securities portfolio, decreases in U.S. Treasury and Agency securities ($37.2 million) and other bonds and obligations ($14.5 million), offset by a $45.3 million increase in holdings of mortgage-backed securities, were used to fund increases in the Bank s loan portfolio. The change in the securities portfolio mix is due to the more favorable yields available on mortgage-backed securities of like duration. Net Loans. Net loans as of December 31, 2003 were $288.9 million, an increase of $26.9 million, or 10.3%, over net loan balances of $261.9 million as of December 31, 2002. Most loan product categories increased during this period, including residential ($7.1 million), commercial real estate ($17.3 million), construction ($2.9 million), and consumer ($0.7 million). In 2003, Benjamin Franklin had its highest level of new loan activity to date, with total originations of $246.9 million, the product of its ability to offer Securities held to maturity $ 23,965 $ Table of Contents competitive, attractive interest rates resulting from a historically low interest rate environment. Of that amount, $96.3 million of fixed rate loan originations were sold in the secondary market, with servicing rights retained. The low interest rate environment also brought significant refinancing activity, which resulted in total loan repayments and prepayments of $149.6 million during 2003. Deposits and Borrowed Funds. Deposits increased slightly, by 1.9% or $7.0 million, to $380.2 million at December 31, 2003 from $373.3 million at December 31, 2002. A modest shift in the mix of deposits occurred with increases in savings accounts ($8.6 million) and money market accounts ($5.9 million), offset by net reductions in demand deposits and NOW accounts ($6.4 million) and certificates of deposit ($1.2 million). Funds borrowed from the Federal Home Loan Bank of Boston remained unchanged from December 31, 2002 to December 31, 2003, at $36 million. The balance of subordinated debt also remained unchanged year over year, at $9.0 million. Retained Earnings. Retained earnings declined by $0.5 million to $29.3 million at December 31, 2003, a decrease of 1.7% from a balance of $29.8 million as of December 31, 2002. This change was the result of net income for the year of $1.7 million, offset by an increase in the net unrealized loss on marketable securities of $2.2 million. Comparison of Operating Results For The Years Ended December 31, 2003 and December 31, 2002 Net Income. Net income declined $1.0 million, or 37.4%, to $1.7 million for the year ended December 31, 2003 compared to $2.7 million for the year ended December 31, 2002. The decrease was primarily the result of a reduction in net interest income, an increase in operating expenses, an increase in income taxes, offset in part by an increase in other income and a reduction in the provision for loan losses. Net Interest Income. The tables on pages # and # set forth the components of Benjamin Franklin s net interest income, yields on interest earning assets and interest bearing liabilities, and the effect on net interest income arising from changes in volume and rate. Benjamin Franklin earned net interest income of $12.8 million and $13.8 million in the years ended December 31, 2003 and 2002, respectively. The decline between the two periods of $1.0 million, or 7.5%, was caused by a 49 basis point, or 14.1%, reduction in the net interest margin, which had the effect of reducing net interest income by $3.3 million. This was offset in part by an increase in the volume of interest-earning assets, which grew by $30.7 million, or 7.7%, in 2003 as compared to 2002, which served to increase net interest income by $2.3 million. Interest Income. Interest income declined $1.9 million, or 8.8%, to $19.5 million for 2003 from $21.4 million for the prior year. The decrease was due to lower average yields on loans and investment securities, which was offset in part by higher average balances in both asset classes. In 2003 as compared to 2002, the yield earned on loans declined by 81 basis points, or 12.4%, to 5.74%, a change that reflected the drop in market interest rates generally in 2003. Offsetting this to some degree was an increase in loans outstanding, which grew by $21.1 million, or 8.5%. Consistent with the lower interest rate environment in 2003, yields on investments securities also dropped significantly when compared to 2002, falling by 186 basis points to 2.81% for the 2003 year. A $9.6 million net increase in the average balances of investment securities and short-term investments in 2003 partially offset the decline in yields. Interest Expense. Interest expense declined $842,000, or 11.1%, to $6.8 million for the year ended December 31, 2003 from $7.6 million in the prior year. The primary cause was a reduction in the rates paid on interest-bearing deposit accounts, which declined by 41 basis points, or 23.2%, to 1.36% for 2003 from 1.77% for 2002. The drop in deposit rates reflected the lower interest rate environment generally in Table of Contents offering range, respectively, and (ii) only the employee stock ownership plan shares committed to be released during the period were considered outstanding for purposes of net income per share calculations. (5) If the stock-based incentive plan is approved by Benjamin Franklin Bancorp s stockholders, Benjamin Franklin Bancorp may purchase an aggregate number of shares of common stock equal to 4.0% of the shares to be sold in the offering (or possibly a greater number of shares if the plan is implemented more than one year after completion of the conversion, although such plan, including the amount awarded under such plan, may remain subject to supervisory restrictions), to be awarded as restricted stock to officers and directors under the stock-based incentive plan. Stockholder approval of the stock-based incentive plan and purchases of stock for grant under the plan may not occur earlier than six months after the completion of the conversion. The shares may be issued directly by Benjamin Franklin Bancorp or acquired through open market purchases. The funds to be used purchase the shares to be awarded by the stock-based incentive plan will be provided by Benjamin Franklin Bancorp. The table assumes that (i) the shares to be awarded under the stock-based incentive plan are acquired through open market purchases at $10 per share, (ii) 15.0% of the amount contributed to the stock-based incentive plan is amortized as an expense during the year ended December 31, 2003 and (iii) the stock-based incentive plan expense reflects an effective combined federal and state tax rate of 36.0%. Assuming stockholder approval of the stock-based incentive plan and that shares of common stock (equal to 4.0% of the shares sold in the offering) are awarded through the use of authorized but unissued shares of common stock, stockholders would have their ownership and voting interests diluted by approximately 2.7%. (6) Represents the cash portion of the purchase price of Chart Bank, transaction expenses related to the Chart Bank acquisition and cash merger expenses of Benjamin Franklin Bancorp as follows: (Dollars in thousands) Acquisition of Chart Bank (net of tax-effect of option cash-out) $ 21,469 Transaction expenditures 983 Merger expenses 3,091 One time operating expenses 3,075 Less: Recovery of Chart Bank Cooperative Central Bank deposit (536 ) Total acquisition cash costs $ 28,082 The pro forma acquisition adjustment to net income reflects the after-tax amount of interest income foregone as a result of the payment of acquisition cash costs out of the gross proceeds of the offering of the nine months ended September 30, 2004, assuming an interest rate of 2.16% and a marginal tax rate of 36.0%. (7) Historical net income includes the historical net income of Benjamin Franklin Bancorp and Chart Bank, and the impact of the recurring purchase accounting adjustments. (8) Gives effect to the options we expect to grant under the stock-based incentive plan, which is expected to be adopted by Benjamin Franklin Bancorp following the offering and presented for approval not earlier than six months after the completion of the conversion. We have assumed that options will be granted to acquire 10.0% of the shares sold in the offering, including shares issued to the Benjamin Franklin Bank Charitable Foundation. In calculating the pro forma effect of the stock options, it is assumed that the exercise price of the stock options and the trading price of the stock at the date of grant were $10.00 per share, the estimated grant-date fair value pursuant to the application of the Black-Scholes option pricing model was $3.85 for each option, the aggregate grant-date fair value of the stock options was amortized to expense on a straight line basis over a five year vesting period of the option, and that 15.0% of the amortization expense (or the assumed portion relating to options granted to directors) resulted in a tax benefit using an assumed tax rate of 36.0%. Under the above assumptions, the granting of options under the stock-based incentive plan will result in no additional shares under the treasury stock method for purposes of calculating earnings per share. There can be no assurance that the actual exercise price of the stock options will be equal to the $10.00 price per share. If a portion of the shares to satisfy the exercise options under the stock-based incentive plan are obtained from the issuance of authorized but unissued shares, our net income per share and stockholders equity per share will decrease. This will also have a dilutive effect of up to 6.7% on the ownership interest of persons who purchase common stock in the offering. (9) Historical stockholders equity includes the historical equity of Benjamin Franklin Bancorp and the impact of the Chart Bank acquisition. (10) Equity is adjusted to exclude $36.9 million of goodwill and other intangibles on a pro forma basis reflecting the acquisition as of December 31, 2003. - 77 - Table of Contents 2003 as compared to 2002. The average balances of deposits and short-term Federal Home Loan Bank of Boston borrowings were virtually unchanged from year to year, while the average balance of long-term debt including subordinated debt increased by $7.5 million to an average of $45.0 million for 2003 from $37.5 million for 2002. The effect of the increase in this item, which paid rates equivalent to 5.03% and 4.63% for 2003 and 2002, respectively, was to increase interest expense by $527,000. Provision for Loan Losses. Benjamin Franklin s provision for loan losses decreased by $787,000, or 55.7%, to $625,000 in 2003 from $1.4 million in 2002. Contributing to the higher level of provision in 2002 was the creation of a specific reserve in the amount of $250,000 for a non-performing loan with an outstanding balance of $462,000 at December 31, 2002. This loan was charged-off it its entirety in 2003. Further, in 2002 management decided to increase general reserve levels for the portfolio as a whole after a thorough reevaluation of the Bank s methodology for establishing the allowance for loan losses. This analysis considered economic conditions, peer comparisons and management s estimate of losses inherent in the portfolio, and resulted in increases in general reserves for commercial real estate, commercial business and home equity loans. Also affecting the provisions for 2003 and 2002 were net charge-offs aggregating $414,000 and $277,000, respectively. The allowance for loan losses of $2.5 million at December 31, 2003 represented 0.87% of total loans, essentially unchanged when compared to 0.88% at December 31, 2002. Non-interest Income. Total non-interest income was $3.1 million in 2003, an increase of $222,000, or 7.8% from $2.9 million for 2002. The increase was primarily the result of a $904,000 rise in gains realized on sales of fixed rate residential mortgage loans sold in the secondary market and the fact that a $741,000 loss realized on the curtailment of the Bank s pension plan was recognized in 2002, offset in part by a $1.5 million reduction in net gains realized on sales of investment securities. Also contributing to the change between years were a $189,000 decline in loan servicing fees and an increase of $180,000 in other income. The decrease in loan servicing fees was primarily the result of accelerated amortization of mortgage servicing rights due to accelerated principal payments caused by a reduction in market interest rates. The increase in other income was primarily caused by a $50,000 increase in fees earned on investment product sales due to the addition of a second sales representative during 2003 and a $125,000 increase in income from $1.3 million of BOLI contracts Benjamin Franklin purchased in the second half of 2003. Non-interest Expense. Non-interest expense increased $609,000, or 5.0%, to $12.7 million in 2003 as compared to $12.1 million in 2002. The largest increases occurred in salaries and benefits and professional fees, offset partially by a reduction in other general and administrative expenses. Salaries and employee benefits expenses increased $518,000, or 8.4%, to $6.7 million for the year ended December 31, 2003. Normal merit increases averaging 4.8% accounted for over half of this difference, supplemented by increases in retirement costs, medical insurance costs and an increase in the incentive bonus plan. Professional fees increased $262,000 or 36.2%, to $985,000 for 2003. This increase was caused primarily by increases in legal fees and loan origination costs. Other general and administrative expenses fell $223,000, or 10.8%, to $1.8 million for the year ended December 31, 2003. Contributing to this decline were reductions in fees paid to Board members, the result of fewer meetings in 2003 than 2002, and a drop in supplies expense as the Bank negotiated more favorable terms with its primary supplies vendor. Income Taxes. Income tax expense was $819,000 for the year ended December 31, 2003 an increase of $376,000, or 84.9%, compared to $443,000 for the year ended December 31, 2002. The effective tax rate was 32.7% in 2003 compared to 14.1% in 2002. The effective tax rate was unusually low in 2002 due to a $524,000 reduction in the deferred tax asset valuation allowance, a reduction made possible by the capital gain income realized on the sale of investment securities during the year. Table of Contents COMPARISON OF INDEPENDENT VALUATION AND PRO FORMA FINANCIAL INFORMATION WITH AND WITHOUT THE BENJAMIN FRANKLIN BANK CHARITABLE FOUNDATION As set forth in the following table, if Benjamin Franklin Bancorp was not making a contribution to the Benjamin Franklin Bank Charitable Foundation as part of the conversion, RP Financial, LC. estimates that the pro forma valuation of Benjamin Franklin Bancorp would be greater, which would increase the amount of common stock offered for sale in the offering. Without the foundation, the amount of common stock offered for sale in the offering at the midpoint of the offering range would be approximately $6.0 million greater. If the Benjamin Franklin Bank Charitable Foundation were not established, there is no assurance that the appraisal prepared at the time of conversion would conclude that the pro forma market value of Benjamin Franklin Bancorp would be the same as the estimate set forth in the table below. The information presented in the following table is for comparative purposes only. It assumes that the conversion, the contribution to the Benjamin Franklin Bank Charitable Foundation and the Chart Bank acquisition were completed at September 30, 2004. It shows gross proceeds of $42.5 million, $50.0 million $57.5 million and $66.1 million, respectively, at the minimum, midpoint, maximum and maximum, as adjusted, of the offering range, and the establishment of an employee stock ownership plan that would acquire 8.0% of the number of shares issued in the offering including the shares issued to the Benjamin Franklin Bank Charitable Foundation. It reflects the establishment of a stock-based incentive plan that would grant restricted stock awards and options to acquire shares of stock in an amount equal to 4.0% and 10.0%, respectively, of the shares issued in the offering including the shares issued to the Benjamin Franklin Bank Charitable Foundation. It assumes that the employee stock ownership plan will purchase shares in the offering and open market and that Benjamin Franklin Bancorp will purchase, for award as restricted stock under the stock-based incentive plan, shares in the open market within one year of the conversion. Open market purchases are assumed at $10 per share. It also assumes that options are granted with a $10.00 exercise price and that the grant-date price of the stock is $10.00 per share. For comparative purposes, the table also shows the effects of the conversion, assuming no contribution to the foundation and gross proceeds of $47.6 million, $56.0 million, $64.4 million and $74.1 million, respectively, at the minimum, midpoint, maximum and maximum, as adjusted, of the offering range. At the Maximum, At the Minimum At the Midpoint At the Maximum as adjusted, 4,250,000 Shares 5,000,000 Shares 5,750,000 Shares 6,612,500 Shares With Without With Without With Without With Without Foundation Foundation Foundation Foundation Foundation Foundation Foundation Foundation (Dollars in thousands, except per share amounts) Estimated offering amount (1) $ 42,500 $ 47,600 $ 50,000 $ 56,000 $ 57,500 $ 64,400 $ 66,125 $ 74,060 Pro forma market capitalization (2) 69,916 71,616 78,016 80,016 85,516 88,416 94,141 98,076 Pro forma total assets (3) 816,030 819,653 822,706 826,967 829,237 834,282 836,747 842,694 Pro forma total liabilities (4) 726,734 726,734 726,734 726,734 726,734 726,734 726,734 726,734 Pro forma stockholders equity 89,296 92,919 95,972 100,233 102,503 107,548 110,013 115,960 Pro forma net income (5) 1,471 1,504 1,453 1,491 1,441 1,478 1,428 1,463 Pro forma stockholders equity per share 12.77 12.97 12.30 12.53 11.99 12.16 11.68 11.82 Pro forma tangible stockholders equity per share 7.54 7.86 7.61 7.96 7.71 8.02 7.80 8.09 Pro forma net income per share(5) $ 0.22 $ 0.22 $ 0.20 $ 0.20 $ 0.18 $ 0.18 $ 0.16 $ 0.16 Footnotes on following page - 78 - Table of Contents Comparison of Operating Results For The Years Ended December 31, 2002 and December 31, 2001 Net Income. Net income rose to $2.7 million in 2002 from $41,000 in 2001. The primary reasons for the increase in income were a $4.1 million net change between years in the gain/loss realized on sale of securities and a significant reduction in the effective tax rate in 2002 when compared to 2001. Net Interest Income. The tables on pages # and # set forth the components of Benjamin Franklin s net interest income, yields on interest earning assets and interest bearing liabilities, and the effect on net interest income arising from changes in volume and rate. Benjamin Franklin earned net interest income of $13.8 million and $14.0 million in the years ended December 31, 2002 and 2001, respectively. The decline between the two periods of $232,000, or 1.7%, resulted from a 4 basis point, or 1.1%, reduction in the net interest margin, and a $2.7 million, or 0.7%, drop in interest-earning assets. Interest Income. Interest income fell by $5.0 million, or 19.0%, to $21.4 million for 2002 from $26.4 million for the prior year. The decline was caused primarily by 1.23% reduction in the yield on interest-earning assets, which averaged 5.38% for 2002 as compared to 6.61% for 2001. All interest-earning asset categories experienced declines in yield between the two years, with loans declining 88 basis points to 6.55%, investment securities declining 117 basis points to 4.67% and short-term investments declining by 187 basis points to 1.56%. All yield declines were consistent with an interest rate environment that was lower generally in 2002 than in 2001. Though earning asset average balances declined by only $2.7 million in the aggregate, average loans outstanding fell by $24.8 million to an average of $249.3 million from $274.1 million in 2001, as a consequence of heavy refinancing activity in late 2001 and 2002. The Company s liquidity position increased as a result, with increases in average balances of investment securities and short-term investments aggregating $16.2 million and $5.9 million, respectively. The net effect of these changes in earning asset volumes was to reduce interest income by $694,000 year over year. The $4.3 million remaining reduction in interest income from 2001 to 2002 was the result of the decline in earning-asset yields. Interest Expense. Interest expense declined $4.8 million, or 38.7%, to $7.6 million for the year ended December 31, 2002 from $12.4 million in the prior year. A 125 basis point, or 37.8%, decline in the average rate paid on interest-bearing liabilities, from 3.31% in 2001 to 2.06% in 2002 was responsible for $3.4 million of the reduction in interest expense. The remaining decline of $1.4 million was caused by a shift in the mix of deposits as well as by an overall reduction in deposit balances of $8.7 million or 2.6%. In response to the low interest rate environment existing in 2002, customers shifted funds out of term certificates into money market, savings and transaction accounts. The average volume of certificates of deposit declined by $36.5 million, or 21.8%, to an average of $131.1 million outstanding in 2002 from $167.6 million in 2001. Average balances of savings, money market and interest-bearing checking increased in the aggregate by $27.8 million from 2001 to 2002. Provision for Loan Losses. Benjamin Franklin s provision for loan losses increased to $1.4 million for 2002 from $51,000 in 2001. The higher level of provision in 2002 was attributable in part to the creation of a specific reserve in the amount of $250,000 for a $462,000 non-performing loan classified doubtful and to a decision by management to increase general reserve levels for the portfolio as a whole. This decision was based on a review of economic conditions, peer comparisons and management s estimate of losses inherent in the portfolio. As a result of this analysis, general reserves for commercial real estate, commercial construction, commercial business and home equity loans were increased significantly, by 100.0% to 167.0% of previous levels. For further discussion of the Benjamin Franklin s current methodology, please refer to Business of Benjamin Franklin Bancorp Asset Quality on page # . The provision in 2002 also included an amount sufficient to replenish the allowance for the effect of net charge-offs aggregating $277,000. In 2001, net recoveries of $58,000 were reflected in determining Table of Contents At the Maximum, At the Minimum At the Midpoint At the Maximum as adjusted, 4,250,000 Shares 5,000,000 Shares 5,750,000 Shares 6,612,500 Shares With Without With Without With Without With Without Foundation Foundation Foundation Foundation Foundation Foundation Foundation Foundation (Dollars in thousands, except per share amounts) Pro forma pricing ratios Offering price as a percent of pro forma stockholders equity per share 78.31 % 77.10 % 81.30 % 79.81 % 83.40 % 82.24 % 85.62 % 84.60 % Offering price as a percent of pro forma tangible stockholders equity per share 132.63 % 127.23 % 131.41 % 125.63 % 129.70 % 124.69 % 128.21 % 123.61 % Offering price as a multiple of pro forma net income per share (6) 34.09 34.09 37.50 37.50 41.67 41.67 46.88 46.88 Offering price to assets 8.57 % 8.74 % 9.48 % 9.68 % 10.31 % 10.60 % 11.25 % 11.64 % Pro Forma Financial Ratios Return on assets (7) 0.24 % 0.24 % 0.24 % 0.24 % 0.23 % 0.24 % 0.23 % 0.23 % Return on stockholders equity (8) 2.20 % 2.16 % 2.02 % 1.98 % 1.87 % 1.83 % 1.73 % 1.68 % Stockholders equity to assets 10.94 % 11.34 % 11.67 % 12.12 % 12.36 % 12.89 % 13.15 % 13.76 % Tangible stockholders equity to assets 6.76 % 7.20 % 7.56 % 8.05 % 8.32 % 8.90 % 9.18 % 9.85 % Table of Contents the provision for the year. The allowance for loan losses of $2.3 million at December 31, 2002 represented 0.88% of total loans, as compared to 0.46% at December 31, 2001. Non-interest Income. Total non-interest income was $2.9 million in 2002 as compared to net other charges aggregating $777,000 for the 2001 year. The swing between years was caused primarily by a $4.1 million change in gains/losses on sales of securities. In 2001, the Bank realized a net loss on securities sales of $2.5 million, while in 2002, net gains of $1.6 million were recorded. Offsetting this somewhat in 2002 was a $741,000 loss incurred on the curtailment of the Bank s pension plan. Loan servicing fees also increased significantly in 2002, to $525,000 from $86,000 in 2001 as a result of an increase in fixed rate residential loans serviced. Non-interest Expense. Non-interest expense increased $550,000, or 4.8%, to $12.1 million in 2002 as compared to $11.6 million in 2001. Most of this increase occurred in salaries and benefits, which increased $529,000, or 9.4%, to $6.2 million for the year ended December 31, 2002. This increase was due to normal merit increases averaging 4.3% and costs associated with transitioning to a new CEO during 2002. Income Taxes. Income tax expense was $443,000 for the year ended December 31, 2002, a reduction of $1,167,000, or 72.5%, when compared to $1.6 million for the year ended December 31, 2001. The effective tax rate fell to 14.1% in 2002 as compared to 97.5% in 2001. The effective tax rate was unusually low in 2002 and unusually high in 2001 due to changes in the Bank s deferred tax asset valuation allowance. In 2002, the valuation allowance was reduced by $524,000, a reduction allowed for by the capital gain income realized on the sale of investment securities during the year. In 2001, the valuation allowance increased by $1.0 million due to the fact that the capital losses on sales of securities realized during the year were not deductible for tax purposes. Losses and Regulatory Action Arising from Equity Investments in 1999 and 2000 Benjamin Franklin Bank entered into a Memorandum of Understanding (MOU) in June 2001 in response to regulatory concerns over equity investments made by the Bank under prior management in 1999 and 2000. The MOU was lifted in October 2002. In February 2001, the FDIC informed the Bank that both the size and concentration of its equity securities portfolio exceeded regulatory limits. The FDIC found that the $36 million equity securities portfolio at March 31, 2000 represented 154.0% of the Bank s Tier 1 capital, and that technology stocks comprised approximately 50.0% of the total. The FDIC ordered Benjamin Franklin Bank to immediately cease equity investment activities and to liquidate the remaining equity securities in its portfolio. In March 2001, Benjamin Franklin Bank sold a substantial portion of its equity portfolio, resulting in an aggregate loss of $15.2 million. On this basis, Benjamin Franklin Bancorp determined that an other-than-temporary impairment existed with regard to certain equity securities in its portfolio as of December 31, 2000, and recorded an impairment charge of $11.4 million in the year ended December 31, 2000. After giving effect to the impairment charge and the net losses recognized upon the liquidation of the equity securities portfolio, partially offset by net gains on sales of other investment securities, Benjamin Franklin Bancorp reported a net loss of $4.7 million for the year ended December 31, 2000, and net income of only $41,000 for the year ended December 31, 2001. In June 2001, the Board of Directors of Benjamin Franklin Bank entered into an MOU with the FDIC and the Massachusetts Commissioner of Banks. The significant provisions of the MOU required the Board to evaluate its management team using an independent consultant, to prepare a management and staffing plan, and to retain qualified management consistent with such plan. The MOU also prohibited the Bank from purchasing any equity security without regulatory approval, called for a profit (1) Gross proceeds of the offering, based on the midpoint of the preliminary pro forma valuation prepared by RP Financial, LC. as of November 26, 2004. (2) Gross proceeds of the offering, plus shares issued to the Benjamin Franklin Bank Charitable Foundation and shares issued to Chart Bank stockholders in the acquisition. (3) Pro forma total assets are equal to Benjamin Franklin Bancorp s total assets at September 30, 2004, plus estimated net proceeds and the tax benefit created by the shares issued to the Benjamin Franklin Bank Charitable Foundation plus the assets of Chart Bank, as adjusted to reflect acquisition and purchase accounting adjustments. (4) Pro forma total liabilities are equal to Benjamin Franklin Bancorp s total liabilities at September 30, 2004, plus the liabilities assumed through the acquisition of Chart Bank as adjusted to reflect acquisition and purchase accounting adjustments. (5) Pro forma earnings per share for the nine months ended September 30, 2004. If the contribution to the Benjamin Franklin Bank Charitable Foundation had been expensed during the nine months ended September 30, 2004, Benjamin Franklin Bancorp would have incurred a net loss. (6) Offering price of $10 per share divided by annualized pro forma net income per share. (7) If the contribution to the Benjamin Franklin Bank Charitable Foundation had been expensed during the nine months ended September 30, 2004, annualized pro forma return on assets would have been (0.12%), (0.18%), (0.18%), and (0.18%) at the minimum, midpoint, maximum, and maximum, as adjusted, respectively. (8) If the contribution to the Benjamin Franklin Bank Charitable Foundation had been expensed during the nine months ended September 30, 2004, annualized pro forma return on equity would have been (1.05%), (1.54%), (1.46%) and (1.37%), at the minimum, midpoint, maximum, and maximum, as adjusted, respectively. - 79 - Table of Contents plan and revisions to the Bank s liquidity and funds management policy, and required an increase in Tier 1 capital to at least 7.0%. In February 2002, the Bank s former president retired, and the Board hired Thomas R. Venables as President and CEO. In October 2002, the FDIC and the Commissioner lifted the MOU in recognition of the substantial progress the Bank had made in satisfying its terms, and the Board of Directors adopted a Board Resolution addressing the matters remaining to be resolved. In July 2003, the Bank s former Executive Vice President and Treasurer resigned. In August 2003, the FDIC and the Commissioner allowed the Board to rescind the Board Resolution, as all of the terms of the Resolution and the previous MOU had been satisfied. Quantitative And Qualitative Disclosures About Risk Management Management and the Board of Benjamin Franklin recognize that taking and managing risk is fundamental to the business of banking. Through the development, implementation and monitoring of its policies with respect to risk management, the Bank strives to measure, evaluate and control the risks it faces. The Board and management understand that an effective risk management system is critical to the safety and soundness of the Bank. Chief among the risks faced by Benjamin Franklin are credit risk, market risk including interest rate risk, liquidity risk, operational (transaction) risk and compliance risk. Within management, the responsibility for risk management rests with the Risk Management Committee, chaired by the Compliance and Risk Management Officer. Other members of the Committee include the Chief Executive Officer, Chief Financial Officer, Treasurer, Chief Information Officer, and the senior officers responsible for lending, retail banking and human resources. The Risk Management Committee meets on a monthly basis to review the status of the Company s risk management efforts, including reviews of internal and external audit findings, loan review findings, and the activities of the Asset/Liability Committee with respect to monitoring interest rate and liquidity risk. The Committee tracks any open items requiring corrective action with the goal of ensuring that each is addressed on a timely basis. The Compliance and Risk Management Officer reports all findings of the Risk Management Committee directly to the Board s Audit and Risk Management Committee. Management of Credit Risk. Benjamin Franklin considers credit risk to be the most significant risk it faces, in that it has the greatest potential to affect the financial condition and operating results of the Bank. Credit risk is managed through a combination of policies established by the Board, the monitoring of compliance with these policies, and the periodic evaluation of loans in the portfolio, including those with problem characteristics. In general, Benjamin Franklin s policies establish maximums on the amount of credit that may be granted to a single borrower (including affiliates), the aggregate amount of loans outstanding by type in relation to total assets and capital, and loan concentrations. Collateral and debt service coverage ratios, approval limits and other underwriting criteria are also specified. Policies also exist with respect to performing periodic credit reviews, the rating of loans, when loans should be placed on non-performing status and factors that should be considered in establishing the Bank s allowance for loan losses. For additional information, refer to Business of Benjamin Franklin Bancorp Lending Activities, on page # . Management of Market Risk. Market risk is the risk of loss due to adverse changes in market prices and rates, and typically encompasses exposures such as sensitivity to changes in market interest rates, foreign currency exchange rates, and commodity prices. Benjamin Franklin has no exposure to foreign currency exchange or commodity price movements. Because net interest income is Benjamin Franklin s primary source of revenue, interest rate risk is a significant market risk to which the Bank is exposed. December 31, 2003: Securities available for sale: U.S. Government and federal agency obligations $ 30,272 $ 91 $ (16 ) $ 30,347 Mortgage-backed securities 74,502 Table of Contents BUSINESS OF BENJAMIN FRANKLIN BANCORP General Benjamin Franklin Bancorp was organized in 1996 as a mutual holding company in connection with Benjamin Franklin Bank s reorganization into the mutual holding company form of organization. Benjamin Franklin Bancorp is registered with the Federal Reserve Board as a bank holding company under the Bank Holding Company Act. Since the formation of Benjamin Franklin Bancorp, it has owned 100.0% of Benjamin Franklin Bank s outstanding capital stock and will continue to do so after the completion of the conversion. At September 30, 2004, Benjamin Franklin Bancorp had total assets of $517.9 million and total deposits of $399.6 million. Benjamin Franklin Bank is a full-service, community-oriented financial institution offering products and services to individuals, families and businesses through 6 offices located in Norfolk and Worcester counties in Massachusetts. Benjamin Franklin Bank was originally organized as a Massachusetts state-charted mutual savings bank in 1871. In 1996, it became a Massachusetts-chartered savings bank in stock form upon the formation of Benjamin Franklin Bancorp as its mutual holding company. Benjamin Franklin Bank s business consists primarily of making loans to its customers, including residential mortgages, commercial real estate loans, construction loans, commercial business loans and consumer loans, and investing in a variety of investment and mortgage-backed securities. Benjamin Franklin Bank funds these lending and investment activities with deposits from the general public, funds generated from operations and selected borrowings. On September 1, 2004, we entered into an agreement to acquire Chart Bank, which operates through two offices in Waltham and one office in Newton, Massachusetts. At September 30, 2004, Chart Bank had total assets of $256.3 million and total deposits of $216.0 million. This acquisition will expand Benjamin Franklin Bank s geographic branching outreach, leverage its capital base and is expected to improve operating efficiency through increased scale. Market Area and Competition We offer a variety of financial products and services designed to meet the needs of the communities we serve. Our primary deposit-gathering area is concentrated southwest of Boston in the communities in which our six banking offices are located specifically in the towns of Franklin, Foxboro, Bellingham, Milford, and Medfield and in contiguous communities in Norfolk and Worcester Counties. Our lending area is broader than our deposit-gathering area and includes all of Massachusetts and northern Rhode Island, although most of our loans are made to customers located in our primary deposit-gathering market area. We are headquartered in Franklin, Massachusetts, located 41 miles southwest of Boston. Five of the six Benjamin Franklin Bank offices are located in Norfolk County, while one office is located just across the county border in the town of Milford, in Worcester County. The counties in which Benjamin Franklin Bank currently operates include a mixture of rural, suburban and urban markets. The economies of these areas were historically based on manufacturing, but similar to many areas of the country, have now evolved into more service-oriented economies with employment in most large economic sectors including wholesale/retail trade, service, manufacturing, finance, real estate and government. A large portion of Norfolk County residents work in other nearby areas, including the City of Boston and the greater Boston area. There is also significant employment located along the I-495 corridor, which runs directly through Benjamin Franklin Bank s Norfolk County market area. - 80 - Table of Contents Interest rate risk is the exposure of Benjamin Franklin s net interest income to adverse movements in interest rates. Net interest income is affected by changes in interest rates as well as by fluctuations in the level and duration of Benjamin Franklin s assets and liabilities. Over and above the influence that interest rates have on net interest income, changes in rates may also affect the volume of lending activity, the ability of borrowers to repay variable rate loans, the volume of loan prepayments and refinancings, the flow and mix of deposits, and the market value of the Bank s assets and liabilities. Exposure to interest rate risk is managed by Benjamin Franklin through periodic evaluations of the current interest rate risk inherent in its rate-sensitive assets and liabilities, coupled with determinations of the level of risk considered appropriate given the Bank s capital and liquidity requirements, business strategy, and performance objectives. Through such management, Benjamin Franklin seeks to reduce the vulnerability of its net interest income to changes in interest rates. Strategies used by Benjamin Franklin to reduce the potential volatility of its earnings include: Emphasizing the origination and retention of adjustable-rate mortgage loans, variable rate commercial loans and variable rate home equity lines-of-credit; Investing in securities with relatively short maturities and/or expected average lives; Classifying nearly all of the investment portfolio as available for sale in order to provide for flexibility in liquidity management. Benjamin Franklin s Asset/Liability Committee, comprised of several members of senior and middle management, is responsible for managing interest rate risk. On a quarterly basis, the Committee reviews with the Board of Directors its analysis of the Bank s exposure to interest rate risk, the effect subsequent changes in interest rates could have on the Bank s future net interest income, its strategies and other activities, and the effect of those strategies on Benjamin Franklin s operating results. The Committee is also actively involved in the Bank s planning and budgeting process as well as in determining pricing strategies for deposits and loans. The Committee s primary method for measuring and evaluating interest rate risk is income simulation analysis. This analysis considers the maturity and repricing characteristics of assets and liabilities, as well as the relative sensitivities of these balance sheet components over a range of interest rate scenarios. Interest rate scenarios tested generally include instantaneous rate shocks, rate ramps over a one year period, and static (or flat) rates. The simulation analysis is used to measure the exposure of net interest income to changes in interest rates over a specified time horizon, usually a two year period. The table below sets forth, as of September 30, 2004, the estimated changes in Benjamin Franklin s net interest income that would result from the designated instantaneous changes in the U.S. Treasury yield curve. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results. Percentage Change in Estimated Net Interest Income over 12 months 300 basis point increase in rates (6.85 %) 200 basis point increase in rates (4.21 %) 100 basis point increase in rates (1.86 %) Flat interest rates 100 basis point decrease in rates (2.47 %) Table of Contents According to published statistics, Norfolk County s population has grown by 0.3% since the year 2000 to a total of 657,000 in 2004. Per capita income for the county has grown by 4.0% since 2000 to $38,037, 27.5% higher than that of Massachusetts and 57.9% higher than the U.S. as a whole. Median household income for Norfolk County was $72,764, 27.6% higher than for the state and 56.6% higher than the U.S. average. The unemployment rate for the county stood at 4.5% as of August 2004, lower than the state average of 4.6% and the U.S. average of 5.4%. We face substantial competition in our efforts to originate loans and attract deposits and other fee-based business. We face direct competition from a significant number of financial institutions, many with a state-wide, regional or national presence. Many of these financial institutions are significantly larger and have greater financial resources than Benjamin Franklin Bank. Lending Activities General. Benjamin Franklin Bank s gross loan portfolio aggregated $377.3 million at September 30, 2004, representing 72.9% of total assets at that date. In its lending activities, Benjamin Franklin Bank originates residential real estate loans secured by one-to-four-family residences, commercial real estate loans, residential and commercial construction loans, commercial loans, home equity lines-of-credit, fixed rate home equity loans, and other personal consumer loans. While Benjamin Franklin Bank makes loans throughout Massachusetts and northern Rhode Island, most of its lending activities are concentrated in its market area. Loans originated totaled $246.9 million in 2003 and $162.6 million in the first nine months of 2004. Residential mortgage loans sold in the secondary market, on a servicing-retained basis, totaled $96.3 million and $28.6 million during those same periods. Loans originated by Benjamin Franklin Bank are subject to federal and state laws and regulations. Interest rates charged by Benjamin Franklin Bank on its loans are influenced by the demand for such loans, the amount and cost of funding available for lending purposes, current asset/liability management objectives and the interest rates offered by competitors. The following table summarizes the composition of Benjamin Franklin Bank s loan portfolio as of the dates indicated: - 81 - Table of Contents As indicated in the table above, the result of an immediate 100 basis point increase in interest rates is estimated to decrease net interest income by 1.86% over a 12-month horizon, when compared to the flat rate scenario. For an immediate 200 basis point parallel increase in the level of interest rates, net interest income is estimated to decline by 4.21% over a 12-month horizon, when compared against the flat rate scenario. Inherent in these estimates is the assumption that transaction and savings account deposit rates would only increase by 25 basis points and that money market deposit account rates would only increase by 75 basis points for each 100 basis point increase in market interest rates. These assumptions are based on the Bank s past experience with the changes in rates paid on these non-maturity deposits coincident with changes in market interest rates. The estimated change in net interest income from the flat rate scenario for a 100 basis point decline in the level of interest rates is a decrease of 2.47%, which assumes no decrease in savings and interest-bearing checking rates, and an average decrease in money market rates of only 58 basis points. Effectively, in the declining interest rate scenario, Benjamin Franklin Bank does not reap the full potential benefit of lower rates because its core deposit accounts are either already at their effective floors or reach those floors without giving full effect to the rate decline. This simulation also incorporates the assumption that $29 million of short-term FHLBB borrowings at September 30, 2004 are replaced with longer-term borrowings with maturities ranging from 2 years to 2.75 years in mid-October, 2004. This lengthening of the average maturity of Benjamin Franklin Bank s borrowings in mid-October, 2004 had the effect of decreasing the liability-sensitivity of the balance sheet. This decreased liability sensitivity, coupled with the fact that Banjamin Franklin Bank s core deposit accounts reach their effective floors in the simulation analysis without giving full effect to the 100 basis point decline in rates, causes the estimated decline in net interest income of 2.47% when compared to the flat interest rate scenario. There are inherent shortcomings in income simulation, given the number and variety of assumptions that must be made in performing the analysis. The assumptions relied upon in making these calculations of interest rate sensitivity include the level of market interest rates, the shape of the yield curve, the degree to which certain assets and liabilities with similar maturities or periods to repricing react to changes in market interest rates, the degree to which non-maturity deposits react to changes in market rates, the expected prepayment rates on loans and mortgage-backed securities, the degree to which early withdrawals occur on certificates of deposit and the volume of other deposit flows. As such, although the analysis shown above provides an indication of Benjamin Franklin s sensitivity to interest rate changes at a point in time, these estimates are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on Benjamin Franklin s net interest income and will differ from actual results. In its management of interest rate risk, Benjamin Franklin also relies on the analysis of its interest rate gap, which is the measure of the mismatch between the amount of Benjamin Franklin s interest-earning assets and interest-bearing liabilities that mature or reprice within specified timeframes. An asset-sensitive position (positive gap) exists when there are more rate-sensitive assets than rate-sensitive liabilities maturing or repricing within a particular time horizon, and generally signifies a favorable effect on net interest income during periods of rising interest rates and a negative effect during periods of falling interest rates. Conversely, a liability-sensitive position (negative gap) would generally indicate a negative effect on net interest income during periods of rising rates and a positive effect during periods of falling rates. Net interest income 5,274 4,973 6,639 6,567 Provision for loan losses 90 90 120 Table of Contents At December 31, At September 30, 2004 2003 2002 2001 2000 1999 Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent (Dollars in thousands) Mortgage loans on real estate: Residential $ 244,363 64.76 % $ 172,123 59.22 % $ 165,007 62.58 % $ 172,959 66.99 % $ 206,918 72.69 % $ 190,027 70.43 % Commercial 79,173 20.98 % 68,652 23.62 % 51,357 19.48 % 45,532 17.64 % 44,456 15.62 % 43,734 16.21 % Construction 25,079 6.64 % 23,936 8.23 % 21,082 8.00 % 19,106 7.40 % 13,117 4.61 % 19,429 7.20 % Home equity 21,883 5.80 % 18,171 6.25 % 16,507 6.26 % 11,161 4.32 % 9,778 3.44 % 8,167 3.03 % 370,498 98.18 % 282,882 97.32 % 253,953 96.32 % 248,758 96.35 % 274,269 96.36 % 261,357 96.87 % Other loans: Commercial business 4,972 1.32 % 5,559 1.92 % 6,552 2.48 % 5,512 2.14 % 5,951 2.09 % 4.649 1.72 % Consumer and other 1,879 0.50 % 2,219 0.76 % 3,157 1.20 % 3,899 1.51 % 4,417 1.55 % 3,811 1.41 % 6,851 1.82 % 7,778 2.68 % 9,709 3.68 % 9,411 3.65 % 10,368 3.64 % 8,460 3.13 % Total loans 377,349 100.00 % 290,660 100.00 % 263,662 100.00 % 258,169 100.00 % 284,637 100.00 % 269,817 100.00 % Other items: Deferred loan origination costs 1,184 725 583 574 663 491 Allowance for loan losses (3,017 ) (2,523 ) (2,312 ) (1,177 ) (1,068 ) (1,183 ) Total loans, net $ 375,516 $ 288,862 $ 261,933 $ 257,566 $ 284,232 $ 269,125 - 82 - Table of Contents The table below shows Benjamin Franklin s interest sensitivity gap position as of September 30, 2004, indicating the amount of interest-earning assets and interest-bearing liabilities that are anticipated to mature or reprice in each of the future time periods shown. Generally, these assets and liabilities are shown in the table based on the earlier of the time remaining to repricing or contractual maturity. However, residential mortgage loans and mortgage-backed securities have been presented in a manner that also incorporates the estimated effects of prepayment assumptions. Interest-bearing checking, savings and money market deposit accounts are assumed to have annual rates of withdrawal (decay rates) of 12.7%, 46.1% and 47.7%, respectively. More than More than More than More than two years three years four years Up to one year to to three to four to five More than one year two years years years years five years Total (Dollars in thousands) Interest-earning assets: Loans $ 124,891 $ 61,882 $ 73,424 $ 31,222 $ 41,131 $ 44,442 $ 376,992 Investment securities 26,729 30,643 10,752 4,978 4,396 26,276 103,774 Short-term investments 6,831 6,831 Total interest-earning assets 158,451 92,525 84,176 36,200 45,527 70,718 487,597 Interest-bearing liabilities: Savings deposits 46,007 24,798 13,366 7,205 3,883 4,540 99,799 Money market 25,944 13,569 7,096 3,712 1,941 2,128 54,390 NOW accounts 3,198 2,792 2,437 2,128 1,857 12,767 25,179 Certificates of deposits 95,097 27,129 6,687 4,660 16 133,589 Short-term borrowings 29,000 29,000 Long-term debt 10,000 6,000 39,000 55,000 Total interest-bearing liabilities 199,246 68,288 39,586 17,705 13,697 58,435 396,957 Interest rate sensitivity gap $ (40,795 ) $ 24,237 $ 44,590 $ 18,495 $ 31,830 $ 12,283 $ 90,640 Interest rate sensitivity gap as a % of total assets (7.88 %) 4.68 % 8.61 % 3.57 % 6.15 % 2.37 % Cumulative interest rate sensitivity gap (40,795 ) (16,558 ) 28,032 46,527 78,357 90,640 Cumulative interest rate sensitivity gap as a % of total assets (7.88 %) (3.20 %) 5.41 % 8.98 % 15.13 % 17.50 % Certain factors may serve to limit the usefulness of the measurement of the interest rate gap. For example, interest rates on certain assets and liabilities are discretionary and may change in advance of, or may lag behind, changes in market rates. The gap analysis does not give effect to changes Benjamin Franklin may undertake to mitigate interest rate risk. For example, in mid-October 2004, $29 million of short-term borrowings were replaced with longer-term borrowings with maturities ranging from 2 years to 2.75 years. Had the analysis at September 30, 2004 given effect to this change, Benjamin Franklin s interest rate sensitivity gap within one year would have been 2.27% of total assets instead of 7.88%. Certain assets, such as adjustable-rate loans, have features that may restrict the magnitude of changes in interest rates both on a short-term basis and over the life of the assets. Further, in the event of changes in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in the gap analysis. Lastly, should interest rates increase, the ability of borrowers to service their debt may decrease. Table of Contents Residential Real Estate Loans. Benjamin Franklin Bank offers, fixed-rate and adjustable-rate residential mortgage loans with maturities of up to 30 years and maximum loan amounts generally of up to $1.5 million. As of September 30, 2004, this portfolio totaled $244.4 million, or 64.8% of the total gross loan portfolio on that date, and had an average yield of 4.82%. Of the residential mortgage loans outstanding on that date, 59.9% were adjustable-rate loans with an average yield of 4.2% and 40.1% were fixed-rate mortgage loans with an average yield of 5.3%. Residential mortgage loans originations totaled $183.3 million and $103.1 million for 2003 and the first nine months of 2004, respectively. The decision to originate loans for portfolio or for sale in the secondary market is made by the Bank s Asset/Liability Management Committee, and is based on the organization s interest rate risk profile. Current practice is to sell almost all newly originated fixed-rate 15 and 30 year monthly payment loans. At September 30, 2004, 15 and 30 year fixed rate monthly payment loans held in portfolio totaled $9.4 million, or 3.8% of total residential real estate mortgage loans at that date. Benjamin Franklin Bank originates most such loans under forward rate commitments to Freddie Mac and Fannie Mae. Benjamin Franklin Bank continues to service loans sold to Freddie Mac and Fannie Mae and earns a fee equal to 0.25% of the loan amounts outstanding for providing these services. The total of loans serviced for others as of September 30, 2004 is $133.2 million. Benjamin Franklin Bank also offers fixed-rate bi-weekly residential mortgage loans with maturities generally ranging between 10 and 30 years. Generally, Benjamin Franklin retains in its portfolio bi-weekly loans with terms of 15 years or less and sells those with terms greater than 15 years in the secondary market, with servicing rights retained. As of September 30, 2004, bi-weekly residential mortgage loans held in portfolio totaled $88.6 million, or 36.3 % of total residential mortgage loans on that date. The adjustable-rate mortgage (ARM) loans offered by Benjamin Franklin Bank make up the largest portion of the residential mortgage loans held in portfolio. At September 30, 2004, ARM loans totaled $146.4 million or 59.9% of total residential loans outstanding at that date. ARMs are offered for terms of up to 30 years with initial interest rates that are fixed for 1, 3 or 5 years. After the initial fixed-rate period, the interest rates on the loans are reset based on the relevant U.S. Treasury CMT (Constant Maturity Treasury) Index plus add-on margins of varying amounts, for periods of 1, 3 or 5 years. Interest rate adjustments on such loans are typically limited to no more than 2.0% during any adjustment period and 6.0% over the life of the loan. This feature of ARM loans that allows for periodic adjustments in the interest rate charged helps to reduce Benjamin Franklin Bank s exposure to changes in interest rates. However, ARM loans may possess an element of credit risk not inherent in fixed-rate mortgage loans, in that borrowers are potentially exposed to increases in debt service requirements over the life of the loan in the event market interest rates rise. Higher payments may increase the risk of default, though this risk has not had a material adverse effect on Benjamin Franklin Bank to date. In its residential mortgage loan originations, Benjamin Franklin Bank lends up to a maximum loan-to-value ratio of 95.0% on mortgage loans secured by owner-occupied property, with the condition that private mortgage insurance is required for loans with a loan-to-value ratio in excess of 80.0%. Title insurance, hazard insurance and, if appropriate, flood insurance are required for all properties securing real estate loans made by the Bank. A licensed appraiser appraises all properties securing residential first mortgage loans. In an effort to provide financing for low and moderate-income first-time home buyers, Benjamin Franklin Bank originates and services residential mortgage loans with private mortgage insurance provided by the Mortgage Insurance Fund (MIF) of the Massachusetts Housing Finance Agency, or MassHousing. The program provides mortgage payment protection as an enhancement to mortgage - 83 - Table of Contents Liquidity Risk Management. Liquidity risk, or the risk to earnings and capital arising from an organization s inability to meet its obligations without incurring unacceptable losses, is managed by Benjamin Franklin s Treasurer, who monitors on a daily basis the adequacy of Benjamin Franklin s liquidity position. Oversight is provided by the Asset/Liability Committee, which reviews Benjamin Franklin s liquidity on a weekly basis, and by the Board of Directors, which reviews the adequacy of Benjamin Franklin s liquidity resources on a monthly basis. Benjamin Franklin s primary sources of funds are from deposits, amortization of loans, loan prepayments and the maturity of loans, mortgage-backed securities and other investments, and other funds provided by operations. While scheduled payments from amortization of loans and mortgage-backed securities and maturing loans and investment securities are relatively predictable sources of funds, deposit flows and loan prepayments can be greatly influenced by general interest rates, economic conditions and competition. Benjamin Franklin maintains excess funds in cash and short-term interest-bearing assets that provide additional liquidity. At September 30, 2004, cash and due from banks, short-term investments and debt securities maturing within one year totaled $31.8 million or 6.1% of total assets. Benjamin Franklin also relies on outside borrowings from the Federal Home Loan Bank of Boston, as an additional funding source. In the first nine months of 2004, Benjamin Franklin has expanded its use of Federal Home Loan Bank of Boston borrowings to fund growth in the loan portfolio and to assist in the management of its interest rate risk. Since December 31, 2003, Benjamin Franklin has increased Federal Home Loan Bank of Boston borrowings by $39 million to a total of $75 million outstanding as of September 30, 2004. On that date, Benjamin Franklin had the ability to borrow an additional $79.1 million from the Federal Home Loan Bank of Boston. Benjamin Franklin uses its liquidity to fund existing and future loan commitments, to fund maturing certificates of deposit and borrowings, to fund other deposit withdrawals, to invest in other interest-earning assets and to meet operating expenses. Benjamin Franklin anticipates that it will continue to have sufficient funds and alternative funding sources to meet its current commitments. With the recent growth in Benjamin Franklin s balance sheet, some of our cash flow characteristics and patterns have changed. Refer to the Consolidated Statements of Cash Flows on pages F-7 and F-8 of this prospectus. Specifically, in the nine months ended September 30, 2004, cash provided by financing activities increased by $40.8 million, or 232.2%, to $58.3 million from $17.5 million in the nine months ended September 30, 2003. This increase, consisting primarily of additional borrowings from the FHLBB, occurred in order to fund growth in the bank s assets, as seen by a $43.0 million increase in cash used by investing activities, and in particular to fund an increase residential mortgage loans outstanding. Upon the consummation of the stock conversion and merger with Chart Bank, we expect to have liquidity in excess of 20% of total assets. Tangible capital as a percentage of total assets is expected to range between 6.76% at the minimum of the offering range and 9.18% at the maximum, as adjusted, of the offering range. See Comparison of Independent Valuation and Pro Forma Financial Information With and Without the Foundation on page # . As noted in Summary Our Business Strategy on page # , we intend to grow our loan assets further after the stock conversion and merger with Chart Bank. The cash flow required to fund those potential increases in loans will likely be provided primarily by increases in deposits, as we implement our strategy to expand our franchise geographically and to increase our deposit market share in the areas served by Benjamin Franklin and Chart Bank at present. To the extent that cash flow provided by our deposit-gathering efforts does not completely fund increases in assets, we will likely borrow funds from the FHLBB to provide the necessary cash flow. The capital necessary to support future growth in assets is anticipated to be provided by our capital resources in hand following the conversion and merger, augmented over time by increases from net income, net of dividends paid, if any. Table of Contents insurance coverage. This no-cost benefit, known as MI Plus , provides up to six monthly principal and interest payments in the event of a borrower s job loss. Commercial Real Estate Loans. Benjamin Franklin Bank originated $27.1 million and $17.7 million of commercial real estate loans in 2003 and the first nine months of 2004, respectively, and had $79.2 million of commercial real estate loans, with an average yield of 5.82%, in its portfolio as of September 30, 2004. We have placed increasing emphasis on commercial real estate lending over the past several years, and as a result such loans have grown from 16.2% of the total loan portfolio at December 31, 1999 to 21.0% as of September 30, 2004. Benjamin Franklin Bank intends to further grow this segment of its loan portfolio, both in absolute terms and as a percentage of its total loan portfolio. Management of Benjamin Franklin Bank believes that there exist additional profitable commercial real estate lending opportunities in its market area and that of Chart Bank. Further, management believes that there exists an opportunity to leverage the considerable resources already invested by both institutions in commercial real estate lending operations to tap the potential of these markets. Benjamin Franklin Bank generally originates commercial real estate loans for terms of up to 25 years, typically with interest rates that adjust over periods of one to seven years based on various rate indices. Commercial real estate loans are generally secured by multi-family income properties, small office buildings, retail facilities, warehouses, industrial properties and owner-occupied properties used for business. Generally, commercial real estate loans do not exceed 80.0% of the appraised value of the underlying collateral. In its evaluation of a commercial real estate loan application, Benjamin Franklin Bank considers the net operating income of the borrower s business, the borrower s expertise, credit history, and the profitability and value of the underlying property. In addition, for loans secured by rental properties, Benjamin Franklin Bank will also consider the terms of the leases and the quality of the tenants. Benjamin Franklin Bank generally requires that the properties securing these loans have debt service coverage ratios (the ratio of cash flow before debt service to debt service) of at least 1.20x. Benjamin Franklin Bank generally requires the borrowers seeking commercial real estate loans to personally guarantee those loans. Commercial real estate loans generally have larger balances and involve a greater degree of risk than residential mortgage loans. Loan repayment is often dependent on the successful operation and management of the properties, as well as on the collateral value of the commercial real estate securing the loan. Economic events and changes in government regulations could have an adverse impact on the cash flows generated by properties securing Benjamin Franklin Bank s commercial real estate loans and on the value of such properties. See Risk Factors Our Commercial Real Estate, Construction and Commercial Business Loans May Expose Us To Increased Credit Risks on page # . Construction Loans. Benjamin Franklin Bank originates land acquisition, development and construction loans to builders and developers, as well as loans to individuals to finance the construction of residential dwellings for personal use. Benjamin Franklin Bank originated $16.2 million and $25.6 million in construction loans during 2003 and during the first nine months of 2004, respectively, and as of September 30, 2004 had $25.1 million in construction loans in its portfolio, representing 6.6% of such portfolio, with an average yield of 6.11%. Acquisition loans help finance the purchase of land intended for further development, including single family houses and condominiums, multi-family houses and commercial income property. In some cases, Benjamin Franklin Bank makes an acquisition loan before the borrower has received approval to develop the land as planned. In general, the maximum loan-to-value ratio for a land acquisition loan is 75.0% of the lower of the cost or appraised value of the property. Benjamin Franklin Bank also makes - 84 - (1) Secured under a blanket security agreement on qualifying assets, principally 1-4 Family Residential mortgage loans. Advances shown with a maturity of greater than three years may be called by the Federal Home Loan Bank of Boston during the period remaining to maturity. (2) Represents contracts for technology services and employee compensation. Table of Contents development loans to builders in its market area to finance improvements to real estate, consisting mostly of single-family subdivisions, typically to finance the cost of utilities, roads, waste treatment and other costs. Builders typically rely on the sale of single-family homes to repay development loans, although in some cases the improved building lots may be sold to another builder. The maximum amount loaned is generally limited to the cost of the improvements, not to exceed 80.0% of the appraised value, as completed. Advances are made in accordance with a schedule reflecting the cost of the improvements. Benjamin Franklin Bank also grants construction loans to area builders, often in conjunction with the development loans. In the case of residential subdivisions, these loans finance the cost of completing homes on the improved property. Advances on construction loans are made in accordance with a schedule reflecting the cost of construction. The maximum amount of the loan is generally limited to the lower of 80.0% of the appraised value of the property, as completed, or the property s cost of construction. For construction loans on residential units being constructed without a pre-sale agreement, the loan amount is limited to 75.0% of the appraised value of the property, as completed. Repayment of construction loans on residential subdivisions is normally expected from the sale of units to individual purchasers. In the case of income-producing property, repayment is usually expected from permanent financing upon completion of construction. Benjamin Franklin Bank commits to provide the permanent mortgage financing on most of its construction loans on income-producing property. For owner-occupied, one-to-four family properties, Benjamin Franklin Bank will lend up to 95.0% of the lesser of appraised value upon completion of construction or the cost of construction, provided that private mortgage insurance coverage is obtained for any loan with a loan-to-value or loan-to-cost in excess of 80.0%. Land acquisition, development and construction lending exposes Benjamin Franklin Bank to greater credit risk than residential mortgage lending to owner occupants. The repayment of these loans depends on the sale of the property to third parties or the availability of permanent financing upon completion of all improvements, and on the business and financial condition of the borrowers. In the event Benjamin Franklin Bank makes an acquisition loan on property that is not yet approved for the planned development, there is the risk that approvals will not be granted or will be delayed. Development and construction loans also expose Benjamin Franklin Bank to the risk that improvements will not be completed on time in accordance with specifications and projected costs. In addition, the ultimate sale or rental of the property may not occur as anticipated. These events, as well as economic events and changes in government regulations could have an adverse impact on the value of properties securing construction loans and on the borrowers ability to repay. See Risk Factors Our Commercial Real Estate, Construction and Commercial Business Loans May Expose Us To Increased Credit Risks on page # . Home Equity Lines-of-Credit and Loans. Benjamin Franklin Bank offers home equity lines-of-credit and home equity term loans. Benjamin Franklin Bank originated $17.1 million and $13.4 million of home equity lines-of-credit and loans during 2003 and during the first nine months of 2004, respectively, and at September 30, 2004 had $21.9 million of home equity lines-of-credit and loans outstanding , representing 5.8% of the loan portfolio, with an average yield of 4.66% at that date. Home equity lines-of-credit and loans are secured by second mortgages on one-to-four family owner occupied properties, and are made in amounts such that the combined first and second mortgage balances do not exceed 80.0% of the value of the property serving as collateral. The lines-of-credit are available to be drawn upon for 10 years, at the end of which time they become term loans amortized over 10 years. Interest rates on home equity lines normally adjust based on Benjamin Franklin Bank s prime rate of interest. The undrawn portion of home equity lines-of-credit total $28.8 million at September 30, 2004. - \85 - Table of Contents Commercial Business Loans. Benjamin Franklin Bank originates secured and unsecured commercial business loans to business customers in its market area for the purpose of financing equipment purchases, working capital, expansion and other general business purposes. Benjamin Franklin Bank originated $1.6 million and $1.7 million in commercial business loans during 2003 and during the first nine months of 2004, respectively, and as of September 30, 2004 had $5.0 million in commercial business loans in its portfolio, representing 1.3% of such portfolio, with an average yield of 7.04%. Benjamin Franklin Bank intends to grow this segment of its lending business in the future. Benjamin Franklin Bank s commercial business loans are generally collateralized by equipment, accounts receivable and inventory, supported by personal guarantees. Benjamin Franklin Bank offers both term and revolving commercial loans. The former have either fixed or adjustable-rates of interest and generally fully amortize over a term of between three and seven years. Revolving loans are written for a one year term, renewable annually, with floating interest rates that are indexed to Benjamin Franklin Bank s prime rate of interest. When making commercial business loans, Benjamin Franklin Bank considers the financial statements of the borrower, the borrower s payment history with respect to both corporate and personal debt, the debt service capabilities of the borrower, the projected cash flows of the business, the viability of the industry in which the borrower operates and the value of the collateral. Benjamin Franklin Bank s commercial business loans are not concentrated in any one industry. Commercial business loans generally bear higher interest rates than residential mortgage loans of like duration because they involve a higher risk of default since their repayment is generally dependent on the successful operation of the borrower s business and the sufficiency of collateral, if any. Because commercial business loans often depend on the successful operation or management of the business, repayment of such loans may be affected by adverse changes in the economy. Further, collateral securing such loans may depreciate in value over time, may be difficult to appraise and to liquidate, and may fluctuate in value. See Risk Factors Our Commercial Real Estate, Construction and Commercial Business Loans May Expose Us To Increased Credit Risks on page # . Consumer and Other Loans. Benjamin Franklin Bank offers a variety of consumer and other loans, including auto loans and loans secured by passbook savings or certificate accounts. Benjamin Franklin Bank originated $1.6 million and $1.1 million of consumer and other loans during 2003 and during the first nine months of 2004, respectively, and at September 30, 2004 had $1.9 million of consumer and other loans outstanding , representing 0.5% of the loan portfolio at that date, with an average yield of 7.14%. Loan Origination and Underwriting. Loan originations come from a variety of sources. The primary source of originations are our salaried and commissioned loan personnel, and to a lesser extent, local mortgage brokers, advertising and referrals from customers. From time to time Benjamin Franklin Bank purchases adjustable-rate residential mortgages from mortgage correspondents in the greater Boston area with whom the Bank has established relationships. Benjamin Franklin Bank also occasionally purchases participation interests in commercial real estate loans from banks located in the Boston area. Benjamin Franklin Bank underwrites such residential and commercial purchased loans using its own underwriting criteria. Benjamin Franklin Bank issues loan commitments to prospective borrowers conditioned on the occurrence of certain events. Commitments are made in writing on specified terms and conditions and are generally honored for up to 60 days from approval. At September 30, 2004, Benjamin Franklin Bank had loan commitments and unadvanced loans and lines-of-credit totaling $53.0 million. For information about Benjamin Franklin Bank s loan commitments outstanding as of September 30, 2004, see - 86 - Table of Contents Management s Discussion and Analysis of Benjamin Franklin Bancorp Financial Condition and Results of Operations Quantitative and Qualitative Disclosure About Risk Management Liquidity Risk Management on page # . Benjamin Franklin Bank charges origination fees, or points, and collects fees to cover the costs of appraisals and credit reports on most residential mortgage loans originated. Benjamin Franklin Bank also collects late charges on real estate loans, and origination fees and prepayment penalties on commercial mortgage loans. For information regarding Benjamin Franklin Bank s recognition of loan fees and costs, please refer to Note 1 to the Consolidated Financial Statements of Benjamin Franklin Bancorp beginning on page # . The following table sets forth certain information concerning Benjamin Franklin Bank s portfolio loan originations, inclusive of loan purchases: For the Nine Months Ended September 30, For the Years Ended December 31, 2004 2003 2003 2002 2001 2000 1999 (Dollars in thousands) Loans at beginning of period $ 290,660 $ 263,662 $ 263,662 $ 258,169 $ 284,637 $ 269,817 $ 244,584 Originations: Mortgage loans on real estate: Residential 103,120 172,210 183,263 151,241 94,461 32,084 67,027 Commercial 17,659 18,280 27,105 23,383 9,371 6,929 5,759 Construction 25,612 11,152 16,176 22,524 32,301 27,975 39,585 Home equity 13,350 13,584 17,115 14,509 9,104 8,071 6,794 159,741 215,226 243,659 211,657 145,237 75,059 119,165 Other loans: Commercial business 1,724 570 1,584 1,310 1,933 5,754 2,604 Consumer and other 1,126 1,281 1,625 1,953 3,502 3,131 4,073 2,850 1,851 3,209 3,263 5,435 8,885 6,677 Total loans originated 162,591 217,077 246,868 214,920 150,672 83,944 125,842 Purchases of mortgage loans 34,207 26,332 26,546 1,298 853 11,739 0 Deduct: Principal loan repayments and prepayments 81,534 132,286 149,623 140,554 114,717 74,067 87,570 Loan sales 28,566 92,606 96,256 69,752 63,244 6,645 12,678 Charge-offs 9 63 537 419 32 151 361 Total deductions 110,109 224,955 246,416 210,725 177,993 80,863 100,609 Net increase/(decrease) in loans 86,689 18,454 26,998 5,493 (26,468 ) 14,820 25,233 Loans at end of period $ 377,349 $ 282,116 $ 290,660 $ 263,662 $ 258,169 $ 284,637 $ 269,817 Residential mortgage loans are underwritten by the Bank s staff of residential loan underwriters. Conforming loans sold to Freddie Mac or Fannie Mae require the approval of the Senior Underwriter. Residential mortgage loans of less than $500,000 to be held in portfolio require the approval of the Senior Residential Loan Officer. Residential mortgage loans of $500,000 or more but less than $1 million require the approval of the management Credit Committee. Residential mortgage loans $1 million or greater require the approval of the Executive Committee of the Board. - 87 - Table of Contents Commercial real estate and commercial business loans are underwritten by commercial credit analysts. For commercial real estate loans, loan officers may approve loans up to $75,000, while loans up to $300,000 may be approved by the Senior Commercial Loan Officer. Commercial real estate loans of up to $750,000 may be approved by the management Credit Committee. For Commercial business loans, individual loan officer authority is limited to $65,000 ($25,000 for unsecured loans). The Senior Commercial Loan Officer may approve commercial loans of up to $100,000 ($50,000 if unsecured), while the management Credit Committee may approve loans of up to $200,000 ($50,000 if unsecured). Loans over these limits require the approval of the Executive Committee of the Board. Consumer loans are underwritten by consumer loan underwriters. Loan officers and Branch Managers have approval authorities ranging from $25,000 to $35,000 ($3,500 to $10,000 if unsecured) for these loans. The Senior Residential Loan Officer may approve consumer loans of up to $100,000 ($25,000 if unsecured) while the management Credit Committee may approve loans of up to $300,000 ($25,000 if unsecured). All consumer loans in excess of these limits require the approval of the Executive Committee of the Board. Pursuant to its loan policy, Benjamin Franklin Bank generally will not make loans aggregating more than $5.0 million to one borrower (or related entity). Exceptions to this limit require the approval of the Executive Committee of the Board prior to loan origination. Benjamin Franklin Bank s internal lending limit is lower than the Massachusetts legal lending limit, which is 20.0% of a bank s surplus and capital stock accounts, or $7.3 million for Benjamin Franklin Bank as of September 30, 2004. Benjamin Franklin Bank has established a risk rating system for its commercial real estate, construction and commercial loans. This system evaluates a number of factors useful in indicating the risk of default and risk of loss associated with a loan. These ratings are performed by commercial credit analysts who do not have responsibility for loan originations. See Asset Quality Classification of Assets and Loan Review on page # . - 88 - Table of Contents Loan Maturity. The following table summarizes the scheduled repayments of Benjamin Franklin Bank s loan portfolio at September 30, 2004. Demand loans, loans having no stated repayment schedule, and overdraft loans are reported as being due in one year or less: Residential Mortgage Commercial Mortgage Construction Weighted Weighted Weighted Average Average Average Amount Rate Amount Rate Amount Rate (Dollars in thousands) Due less than one year $ 12,242 5.07 % $ 5,242 6.05 % $ 15,027 6.51 % Due after one year to five years 42,217 4.99 % 17,429 5.84 % 1,510 5.58 % Due after five years 189,904 4.77 % 56,502 5.79 % 8,542 5.50 % Total $ 244,363 4.82 % $ 79,173 5.82 % $ 25,079 6.11 % Home Equity, Consumer Commercial Business and Other Total Weighted Weighted Weighted Average Average Average Amount Rate Amount Rate Amount Rate (Dollars in thousands) Due less than one year $ 2,202 6.80 % $ 12,215 4.86 % $ 46,928 5.67 % Due after one year to five years 1,696 7.38 % 1,250 6.63 % 64,102 5.33 % Due after five years 1,074 6.98 % 10,297 4.63 % 266,319 5.01 % Total $ 4,972 7.04 % $ 23,762 4.85 % $ 377,349 5.15 % The following table sets forth, at September 30, 2004, the dollar amount of total loans, net of unadvanced funds on loans, contractually due after September 30, 200 5 and whether such loans have fixed interest rates or adjustable interest rates. Fixed Adjustable Total (Dollars in thousands) Residential mortgage $ 97,940 $ 146,423 $ 244,363 Commercial mortgage 24,601 54,572 79,173 Construction 20,669 4,410 25,079 Commercial business 2,494 2,478 4,972 Home equity, consumer and other 3,878 19,884 23,762 Total Loans $ 149,582 $ 227,767 $ 377,349 - 89 - Table of Contents Asset Quality General. One of Benjamin Franklin Bank s most important operating objectives is to maintain a high level of asset quality. Management uses a number of strategies in furtherance of this goal including maintaining sound credit standards in loan originations, monitoring the loan portfolio through internal and third-party loan reviews, and employing active collection and workout processes for delinquent or problem loans. Delinquent Loans. Management performs a monthly review of all delinquent loans. The actions taken with respect to delinquencies vary depending upon the nature of the delinquent loans and the period of delinquency. Generally, the Bank s requirement is that a delinquency notice be mailed no later than the 10th or 16th day, depending on loan type, after the payment due date. A late charge is normally assessed on loans where the scheduled payment remains unpaid after a 10 or 15 day grace period. After mailing delinquency notices Benjamin Franklin Bank s loan collection personnel call the borrower to ascertain the reasons for delinquency and the prospects for repayment. On loans secured by one-to-four family owner-occupied property, Benjamin Franklin Bank initially attempts to work out a payment schedule with the borrower in order to avoid foreclosure. Any such loan restructurings must be approved by the level of officer authority required for a new loan of that amount. If these actions do not result in a satisfactory resolution, Benjamin Franklin Bank refers the loan to legal counsel and counsel initiates foreclosure proceedings. For commercial real estate, construction and commercial loans, collection procedures may vary depending on individual circumstances. - 90 - Table of Contents The following table sets forth delinquencies in Benjamin Franklin Bank s loan portfolio as of the dates indicated: Loans Delinquent For 60-89 Days 90 Days and Over Total Number Amount Number Amount Number Amount (Dollars in thousands) At September 30, 2004 Residential mortgage $ 1 $ 64 1 $ 64 Commercial mortgage Construction Commercial business 1 10 1 10 Home equity, consumer and other 15 11 5 1 20 12 Total 16 $ 21 6 $ 65 22 $ 86 At December 31, 2003 Residential mortgage 5 $ 538 $ 5 $ 538 Commercial mortgage Construction Commercial business 1 160 1 160 Home equity, consumer and other 12 12 8 5 20 17 Total 18 $ 710 8 $ 5 26 $ 715 At December 31, 2002 Residential mortgage 1 $ 41 $ 1 $ 41 Commercial mortgage Construction Commercial business Home equity, consumer and other 3 13 1 2 4 15 Total 4 $ 54 1 $ 2 5 $ 56 Other Real Estate Owned. Benjamin Franklin Bank classifies property acquired through foreclosure or acceptance of a deed in lieu of foreclosure as other real estate owned ( OREO ) in its financial statements. When property is placed into OREO, it is recorded at the lower of the carrying value or the fair value less estimated costs to sell at the date of foreclosure or acceptance of deed in lieu of foreclosure. At the time of transfer to OREO, any excess of carrying value over fair value is charged to the allowance for loan losses. Management inspects all OREO property periodically. Holding costs and declines in fair value result in charges to expense after the property is acquired. At September 30, 2004, Benjamin Franklin Bank had no property classified as OREO. Classification of Assets and Loan Review. Benjamin Franklin Bank uses an internal rating system to monitor and evaluate the credit risk inherent in its loan portfolio. At the time a loan is approved, all commercial real estate, construction and commercial business loans are assigned a risk rating based on all of the factors considered in originating the loan. The initial risk rating is recommended by the credit analyst charged with underwriting the loan, and subsequently approved by the relevant loan approval authority. Current financial information is sought for all commercial real estate, construction and commercial borrowing relationships, and is evaluated on at least an annual basis to determine whether the risk rating classification is appropriate. - 91 - Table of Contents In Benjamin Franklin Bank s loan rating system, there are three classifications for problem assets: Substandard, Doubtful and Loss. An asset is considered Substandard if it is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard assets are characterized by the distinct possibility that Benjamin Franklin Bank will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of Substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full questionable, on the basis of currently existing facts, and there is a high possibility of loss. Assets classified Loss are considered uncollectible and of such little value that continuance as an asset of Benjamin Franklin Bank is not warranted. Assets that possess some weaknesses, but that do not expose Benjamin Franklin Bank to risk sufficient to warrant classification in one of the aforementioned categories, are designated as Special Mention. If an asset or portion thereof is classified as Loss, it is charged off in the quarter in which it is so classified. For assets designated as Special Mention, Substandard or Doubtful, Benjamin Franklin Bank establishes reserves in amounts management deems appropriate within the allowance for loan losses. This determination as to the classification of assets and the amount of the loss allowances established are subject to review by regulatory agencies, which can order the establishment of additional loss allowances. See Asset Quality Allowance for Loan Losses on page # and Management s Discussion and Analysis of Benjamin Franklin Bancorp Critical Accounting Policies Allowance for Loan Losses on page # . Benjamin Franklin Bank engages an independent third party to conduct a semi-annual review of its commercial real estate, construction and commercial loan portfolios. These loan reviews, which typically include a 70.0% penetration of the various commercial portfolios, provide a credit evaluation of individual loans to determine whether the risk ratings assigned are appropriate. In addition, independent loan reviews are performed on a quarterly basis for the residential mortgage portfolio, based on a sampling of newly originated loans during the period. Independent loan review findings are presented directly to the Executive Committee of the Board of Directors. At September 30, 2004, loans classified Substandard totaled $3.2 million, consisting of $2.4 million in commercial real estate loans and $0.8 million in commercial loans. Special Mention loans totaled $2.1 million, consisting of $2.0 million in commercial real estate loans and $0.1 million in commercial loans. One commercial loan in the amount of $10,000 was classified as Doubtful and no loans were classified as Loss on September 30, 2004. - 92 - Table of Contents Non-Performing Assets. The table below sets forth the amounts and categories of our non-performing assets at the dates indicated. At each date presented, we had no troubled debt restructurings (loans for which a portion of interest or principal has been forgiven and loans modified at interest rates materially less than current market rates). At September At December 31, 30, 2004 2003 2002 2001 2000 1999 (Dollars in thousands) Non-accrual loans: Residential mortgage $ $ $ $ $ $ Commercial mortgage Construction Commercial business 357 458 157 Home equity, consumer and other Total non-accrual loans 357 458 157 Loans greater than 90 days delinquent and still accruing: Residential mortgage 64 177 180 Commercial mortgage Construction Commercial business Home equity, consumer and other 1 5 2 Total loans 90 days delinquent and still accruing 65 5 2 0 177 180 Total non-performing loans 422 463 2 157 177 180 Total non-performing assets $ 422 $ 463 $ 2 $ 157 $ 177 $ 180 Ratios: Non-performing loans to total loans 0.11 % 0.16 % 0.00 % 0.06 % 0.06 % 0.07 % Non-performing assets to total assets 0.08 % 0.10 % 0.00 % 0.04 % 0.04 % 0.04 % Loans are placed on non-accrual status either when reasonable doubt exists as to the full timely collection of interest and principal, or when a loan becomes 90 days past due unless an evaluation by the management Credit Committee clearly indicates that the loan is well-secured and in the process of collection.. Restructured loans represent performing loans for which concessions were granted due to a borrower s financial condition. Such concessions may include reductions of interest rates to below-market terms and/or extension of repayment terms. Allowance for Loan Losses. In originating loans, Benjamin Franklin Bank recognizes that losses will be experienced on loans and that the risk of loss will vary with many factors, including the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the security for the loan over the term of the loan. Benjamin Franklin Bank maintains an allowance for loan losses to absorb losses inherent in the loan portfolio, and as such, this allowance represents management s best estimate of the probable known and inherent credit losses in the loan portfolio as of the date of the financial statements. The allowance for loan losses is evaluated on a regular basis by management and is based upon management s periodic review of the collectibility of the loans in light of historical experience, portfolio volume and mix, geographic and large borrower concentrations, estimated credit losses based on internal and external portfolio reviews, adverse situations that may affect the borrower s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. - 93 - Table of Contents The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as either doubtful, substandard or special mention. See Asset Quality Classification of Assets and Loan Review on page # . For such loans that are also classified as impaired, an allowance is established when the discounted cash flows or collateral value or observable market price of the impaired loan is lower than the carrying value of the loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. A loan is considered impaired when, based on current information and events, it is probable that Benjamin Franklin Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Impairment is measured on a loan by loan basis for commercial loans by either the present value of expected future cash flows discounted at the loan s effective interest rate or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, Benjamin Franklin Bank does not separately identify individual consumer and residential loans for impairment disclosures. At September 30, 2004, impaired loans totaled $357,000 and none of those loans carried a valuation allowance. While Benjamin Franklin Bank believes that it has established adequate specific and general allowances for losses on loans, adjustments to the allowance may be necessary if future conditions differ substantially from the information used in making the evaluations. In addition, as an integral part of their examination process, Benjamin Franklin Bank s regulators periodically review the allowance for loan losses. These regulatory agencies may require the Bank to recognize additions to the allowance based on their judgments of information available to them at the time of their examination, thereby negatively affecting Benjamin Franklin Bank s financial condition and earnings. - 94 - Table of Contents The following table sets forth activity in Benjamin Franklin Bank s allowance for loan losses for the periods indicated: At or for the Nine Months Ended September 30, At or For the Years Ended December 31, 2004 2003 2003 2002 2001 2000 1999 (Dollars in thousands) Balance at beginning of period $ 2,523 $ 2,312 $ 2,312 $ 1,177 $ 1,068 $ 1,183 $ 1,418 Charge-offs: Mortgage loans on real estate: -$ Other loans: Commercial business (43 ) (43 ) (389 ) (10 ) (138 ) (325 ) Consumer and other (9 ) (20 ) (494 ) (30 ) (22 ) (13 ) (36 ) Total other loans (9 ) (63 ) (537 ) (419 ) (32 ) (151 ) (361 ) Total charge-offs (9 ) (63 ) (537 ) (419 ) (32 ) (151 ) (361 ) Recoveries: Mortgage loans on real estate 20 20 Other loans: Commercial business 23 94 100 132 55 9 48 Consumer and other 10 7 23 10 15 6 8 Total other loans 33 101 123 142 70 15 56 Total recoveries 33 101 123 142 90 35 56 Net (charge-offs) recoveries 24 38 (414 ) (277 ) 58 (116 ) (305 ) Provision for loan losses 470 300 625 1,412 51 1 70 Balance at end of period $ 3,017 $ 2,650 $ 2,523 $ 2,312 $ 1,177 $ 1,068 $ 1,183 Ratios: Net (charge-offs) recoveries to average loans outstanding (annualized) 0.01 % 0.01 % (0.15 %) (0.11 %) 0.02 % (0.04 %) (0.12 %) Allowance for loan losses to non-performing loans at end of period 714.93 % 394.35 % 544.92 % 115,600.00 % 749.68 % 603.39 % 657.22 % Allowance for loan losses to total loans at end of period 0.80 % 0.95 % 0.87 % 0.88 % 0.46 % 0.38 % 0.44 % - 95 - Table of Contents The following tables set forth Benjamin Franklin Bank s percent of allowance by loan category and the percent of the loans to total loans in each of the categories listed at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories: At December 31, At September 30, 2004 2003 2002 Percent Percent Percent of Loans of Loans of Loans Loan in Each Loan in Each Loan in Each Allowance Balances Category Allowance Balances Category Allowance Balances Category for Loan by to Total for Loan by to Total for Loan by to Total Losses Category Loans Losses Category Loans Losses Category Loans (Dollars in thousands) Mortgage loans on real estate: Residential $ 615 $ 244,363 64.76 % $ 485 $ 172,123 59.22 % $ 552 $ 165,007 62.58 % Commercial 1,279 79,173 20.98 % 1,136 68,652 23.62 % 549 51,357 19.48 % Construction 358 25,079 6.64 % 338 23,936 8.23 % 422 21,082 8.00 % Home equity 127 21,883 5.80 % 108 18,171 6.25 % 82 16,507 6.26 % 2,379 370,498 98.18 % 2,067 282,882 97.32 % 1,605 253,953 96.32 % Other loans: Commercial 400 4,972 1.32 % 421 5,559 1.92 % 181 6,552 2.48 % Consumer and other 24 1,879 0.50 % 27 2,219 0.76 % 276 3,157 1.20 % Unallocated 214 0 0.00 % 8 0 0.00 % 250 0 0.00 % 638 6,851 1.82 % 456 7,778 2.68 % 707 9,709 3.68 % Total $ 3,017 $ 377,349 100.00 % $ 2,523 $ 290,660 100.00 % $ 2,312 $ 263,662 100.00 % At December 31, 2001 2000 1999 Percent Percent Percent of Loans of Loans of Loans Loan in Each Loan in Each Loan in Each Allowance Balances Category Allowance Balances Category Allowance Balances Category for Loan by to Total for Loan by to Total for Loan by to Total Losses Category Loans Losses Category Loans Losses Category Loans (Dollars in thousands) Mortgage loans on real estate: Residential $ 433 $ 172,959 66.99 % $ 517 $ 206,918 72.69 % $ 508 $ 190,027 70.43 % Commercial 236 45,532 17.64 % 227 44,456 15.62 % 250 43,734 16.21 % Construction 143 19,106 7.40 % 98 13,117 4.61 % 194 19,429 7.20 % Home equity 28 11,161 4.32 % 25 9,778 3.44 % 28 8,167 3.03 % 840 248,758 96.35 % 867 274,269 96.36 % 980 261,357 96.87 % Other loans: Commercial 90 5,512 2.14 % 94 5,951 2.09 % 91 4,649 1.72 % Consumer and other 30 3,899 1.51 % 33 4,417 1.55 % 19 3,811 1.41 % Unallocated 217 0 0.00 % 74 0 0.00 % 93 0 0.00 % 337 9,411 3.65 % 201 10,368 3.64 % 203 8,460 3.13 % Total $ 1,177 $ 258,169 100.00 % $ 1,068 $ 284,637 100.00 % $ 1,183 $ 269,817 100.00 % - 96 - Table of Contents Investment Activities General. Benjamin Franklin Bank s investment policy is established by its Board of Directors. The Chief Executive Officer, Chief Financial Officer and Treasurer, as authorized by the Board, implement this policy based on the established guidelines within the written policy. The primary objective of the investment portfolio is to achieve a competitive rate of return without incurring undue interest rate and credit risk, to complement Benjamin Franklin Bank s lending activities, to provide and maintain liquidity, and to assist in managing the interest rate sensitivity of its balance sheet. Individual investment decisions are made based on the safety of the investment, liquidity requirements, potential returns, cash flow targets, and consistency with Benjamin Franklin Bank s asset/liability management objectives. SFAS NO. 115 requires Benjamin Franklin Bank to designate its securities as held to maturity, available for sale or trading, depending on Benjamin Franklin Bank s intent with regard to its investments at the time of purchase. At September 30, 2004, $94.4 million or 92.9% of the portfolio was classified as available for sale, and $0.3 million or 0.3% of the portfolio was classified as held to maturity. At September 30, 2004, the net unrealized loss on securities classified as available for sale was $2.2 million. Benjamin Franklin Bank does not currently maintain a trading portfolio of securities. U.S. Government and Agency Obligations. At September 30, 2004, Benjamin Franklin Bank s U.S. Government and Agency securities portfolio, totaled $37.5 million or 36.9% of the total portfolio on that date. Corporate Obligations. At September 30, 2004, Benjamin Franklin Bank s portfolio of corporate obligations totaled $5.1 million, or 5.0% of the portfolio at that date. Benjamin Franklin Bank s policy requires that investments in corporate obligations be restricted only to those obligations that are readily marketable and rated A or better by a nationally recognized rating agency at the time of purchase. At September 30, 2004, all investments in corporate obligations were rated A or better. Mortgage-Backed Securities. At September 30, 2004, Benjamin Franklin Bank s portfolio of mortgage-backed securities totaled $52.1 million, or 51.3% of the portfolio on that date, and consisted of pass-through securities ($4.5 million) and collateralized mortgage obligations ($47.6 million) directly insured or guaranteed by Freddie Mac, Fannie Mae or the Government National Mortgage Association (Ginnie Mae). In its purchase of collateralized mortgage obligations, Benjamin Franklin Bank has targeted instruments in the three to five year weighted average life tranches, with expected average life extensions up to a maximum of seven years in a rising rate environment. The objective of this strategy has been to limit the potential interest rate risk due to extension of this portfolio in a rising rate environment. Restricted Equity Securities. At September 30, 2004, Benjamin Franklin Bank s portfolio of restricted equity securities totaled $6.9 million or 6.8% of the portfolio at that date. These securities consisted primarily of stock in the Federal Home Loan Bank of Boston ($4.3 million) which must be held as a condition of membership in the Federal Home Loan Bank System and as a condition to Benjamin Franklin Bank s borrowing under the Federal Home Loan Bank of Boston advance program. The remainder ($2.5 million) consisted of certain other equity investments in Savings Bank Life Insurance, the Community Investment Fund and the Depositors Insurance Fund of Massachusetts. - 97 - Table of Contents The following table sets forth certain information regarding the amortized cost and market values of Benjamin Franklin Bank s investment securities at the dates indicated: At December 31, At September 30, 2004 2003 2002 2001 Amortized Fair Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value Cost Value (Dollars in thousands) Securities available for sale: U.S. Government and agency obligations $ 37,691 $ 37,492 $ 30,272 $ 30,347 $ 67,513 $ 67,582 $ 38,506 $ 39,113 State agency and municipal obligations 0 0 0 0 570 570 1,942 1,915 37,691 37,492 30,272 30,347 68,083 68,152 40,488 41,028 Corporate bonds and other obligations 5,086 5,057 0 0 3,536 3,716 23,091 23,214 42,777 42,549 30,272 $ 30,347 71,619 71,868 63,539 64,242 Mortgage-backed securities 53,869 51,874 74,502 72,299 26,376 26,446 13,432 13,536 Total debt securities 96,646 94,423 104,774 102,646 97,995 98,314 76,971 77,778 Marketable equity securities: Bank Investment Fund Fund One 0 0 0 0 10,206 10,206 0 0 Total securities available for sale $ 96,646 $ 94,423 $ 104,774 $ 102,646 $ 108,201 $ 108,520 $ 76,971 $ 77,778 Securities held to maturity: Mortgage-backed securities $ 266 $ 271 $ 386 $ 398 $ 986 $ 1,023 $ 2,749 $ 2,774 Restricted equity securities: Federal Home Loan Bank of Boston stock $ 4,347 $ 4,347 $ 3,707 $ 3,707 $ 3,707 $ 3,707 $ 3,707 $ 3,707 Access Capital Strategies Community Investment Fund. 2,000 2,000 3,000 3,000 1,000 1,000 1,000 1,000 Savings Bank Life Insurance and Depositors Insurance Fund stock 515 515 515 515 515 515 902 902 Total restricted equity securities $ 6,862 $ 6,862 $ 7,222 $ 7,222 $ 5,222 $ 5,222 $ 5,609 $ 5,609 - 98 - Table of Contents The table below sets forth certain information regarding the amortized cost, weighted average yields and contractual maturities of Benjamin Franklin Bank s debt securities portfolio at September 30, 2004. In the case of mortgage-backed securities, the table shows the securities by their contractual maturities, however there are scheduled principal payments for these securities and there will also be unscheduled prepayments prior to their contractual maturity: More than One Year More than Five Years One Year or Less through Five Years through Ten Years Weighted Weighted Weighted Amortized Average Amortized Average Amortized Average Cost Yield Cost Yield Cost Yield (Dollars in thousands) Securities available for sale: U.S. Government and agency securities $ 15,152 1.71 % $ 22,539 2.26 % $ 0 Corporate bonds and other obligations 1,480 2.35 % 3,606 2.41 % 0 Mortgage-backed securities: 7 7.50 % 35 6.50 % 6,475 3.74 % Total debt securities 16,639 1.77 % 26,180 2.29 % 6,475 3.74 % Securities held to maturity: Mortgage-backed securities 0 221 6.00 % 0 Total investment securities $ 16,639 1.77 % $ 26,401 2.32 % $ 6,475 3.74 % More than Ten Years Total Securities Weighted Weighted Amortized Average Amortized Fair Average Cost Yield Cost Value Yield (Dollars in thousands) Securities available for sale: U.S. Government and agency securities $ 0 $ 37,691 $ 37,492 2.04 % Corporate bonds and other obligations 0 5,086 5,057 2.39 % Mortgage-backed securities: 47,352 4.20 % 53,869 51,874 4.15 % Total debt securities 47,352 4.20 % 96,646 94,423 3.23 % Securities held to maturity: Mortgage-backed securities 45 6.00 % 266 271 6.00 % Total investment securities $ 47,397 4.21 % $ 96,912 $ 94,694 3.24 % Sources of Funds General. Deposits are the primary source of Benjamin Franklin Bank s funds for lending and other investment purposes. In addition to deposits, Benjamin Franklin Bank obtains funds from the amortization and prepayment of loans and mortgage-backed securities, the sale or maturity of investment securities, advances from the Federal Home Loan Bank of Boston, and cash flows generated by operations. - 99 - Table of Contents Deposits. Consumer and commercial deposits are gathered primarily from Benjamin Franklin Bank s primary market area through the offering of a broad selection of deposit products including checking, regular savings, money market deposits and time deposits, including certificate of deposit accounts and individual retirement accounts. The FDIC insures deposits up to certain limits (generally, $100,000 per depositor) and the DIF fully insures amounts in excess of such limits. The maturities of Benjamin Franklin Bank s certificate of deposit accounts range from three months to four years. In addition, Benjamin Franklin Bank offers a variety of commercial business products to small businesses operating within its primary market area. Currently, Benjamin Franklin Bank does not generally negotiate interest rates to attract jumbo certificates of deposit, but accepts deposits of $100,000 or more from customers within its market area based on posted rates. Benjamin Franklin Bank does not use brokers to obtain deposits. Benjamin Franklin Bank relies primarily on competitive pricing of its deposit products, customer service and long-standing relationships with customers to attract and retain deposits. Market interest rates, rates offered by financial service competitors, the availability of other investment alternatives, and general economic conditions significantly affect Benjamin Franklin Bank s ability to attract and retain deposits. The following tables set forth certain information relative to the composition of Benjamin Franklin Bank s average deposit accounts and the weighted average interest rate on each category of deposits: Nine months ended September 30, 2004 Year ended December 31, 2003 Weighted Weighted Average Average Average Average Balance Percent Rate Balance Percent Rate (Dollars in thousands) Deposit type: Demand deposits $ 89,289 22.45 % 0.00 % $ 57,253 14.81 % 0.00 % NOW deposits 23,955 6.02 % 0.15 % 60,751 15.71 % 0.15 % Money market deposits 51,779 13.02 % 0.85 % 48,256 12.48 % 0.81 % Regular savings 99,172 24.94 % 0.50 % 93,501 24.18 % 0.50 % Total transaction accounts 264,195 66.43 % 0.37 % 259,761 67.18 % 0.37 % Certificates of deposit 133,492 33.57 % 2.49 % 126,856 32.82 % 2.79 % Total deposits $ 397,689 100.00 % 1.08 % $ 386,617 100.00 % 1.16 % Years ended December 31, 2002 2001 Weighted Weighted Average Average Average Average Balance Percent Rate Balance Percent Rate (Dollars in thousands) Deposit type: Demand deposits $ 36,870 10.04 % 0.00 % $ 36,798 9.79 % 0.00 % NOW deposits 69,832 19.01 % 0.31 % 61,957 16.48 % 0.58 % Money market deposits 45,648 12.43 % 1.35 % 37,919 10.08 % 2.24 % Regular savings 83,878 22.83 % 0.68 % 71,651 19.06 % 1.29 % Total transaction accounts 236,228 64.31 % 0.59 % 208,325 55.41 % 1.02 % Certificates of deposit 131,073 35.69 % 3.40 % 167,566 44.59 % 5.14 % Total deposits $ 367,301 100.00 % 1.60 % $ 375,891 100.00 % 2.86 % - 100 - Table of Contents The following table sets forth the time deposits of Benjamin Franklin Bank classified by interest rate as of the dates indicated: At September 30, At December 31, 2004 2003 2002 2001 (Dollars in thousands) Interest Rate Less than 2% $ 50,247 $ 55,034 $ 39,945 $ 387 2.00%-2.99% 60,282 37,753 38,374 46,442 3.00%-3.99% 8,713 7,776 9,808 29,213 4.00%-4.99% 10,967 13,960 17,353 28,278 5.00%-5.99% 1,443 4,034 12,641 36,287 6.00%-6.99% 1,937 5,226 6,832 Total $ 133,589 $ 123,783 $ 124,953 $ 140,607 The following table sets forth the amount and maturities of time deposits at September 30, 2004: After Year ending September 30, September 30, 2005 2006 2007 2008 2008 Total (Dollars in thousands) Interest Rate Less than 2% $ 49,579 $ 668 $ $ $ $ 50,247 2.00%-2.99% 36,486 17,780 4,850 1,166 60,282 3.00%-3.99% 1,640 1,770 1,837 3,466 8,713 4.00%-4.99% 4,028 6,911 28 10,967 5.00%-5.99% 1,443 1,443 6.00%-6.99% 1,921 16 1,937 Total $ 95,097 $ 27,129 $ 6,687 $ 4,676 $ $ 133,589 - 101 - Table of Contents As of September 30, 2004, the aggregate amount of outstanding certificates of deposit in amounts greater than or equal to $100,000 was approximately $38.7 million. The following table sets forth the maturity of those certificates as of September 30, 2004: At September 30, 2004 (Dollars in thousands) Three months or less $ 8,859 Over three months through six months 14,949 Over six months through one year 5,049 Over one year to three years 7,982 Over three years 1,858 Total $ 38,697 Borrowings. Benjamin Franklin Bank utilizes advances from the Federal Home Loan Bank of Boston, primarily in connection with the funding of growth in its assets. Federal Home Loan Bank of Boston advances are secured primarily by certain of Benjamin Franklin Bank s mortgage loans, certain investment securities and by Benjamin Franklin Bank s holding of Federal Home Loan Bank of Boston stock. As of September 30, 2004, Benjamin Franklin Bank had outstanding $75.0 million in Federal Home Loan Bank of Boston advances, and had the ability to borrow up to a total of $154.6 million based on available collateral. The following table sets forth certain information concerning balances and interest rates on Benjamin Franklin Bank s Federal Home Loan Bank of Boston advances at the dates and for the periods indicated: At or For the Nine Months Ended September 30, At or For the Years Ended December 31, 2004 2003 2003 2002 2001 (Dollars in thousands) Balance at end of period $ 75,000 $ 36,000 $ 36,000 $ 36,000 $ 36,000 Average balance during period $ 44,421 $ 36,000 $ 36,000 $ 36,000 $ 35,242 Maximum outstanding at any month end $ 75,000 $ 36,000 $ 36,000 $ 36,000 $ 36,150 Weighted average interest rate at end of period 3.21 % 4.47 % 4.47 % 4.47 % 4.47 % Weighted average interest rate during period 3.99 % 4.47 % 4.47 % 4.47 % 4.67 % Of the $75.0 million in advances outstanding at September 30, 2004, $36.0 million, bearing a weighted-average interest rate of 4.47%, are callable by the FHLBB at its option and in its sole discretion. In the event the FHLBB calls these advances, the Bank will evaluate its liquidity and interest rate sensitivity position at that time and determine whether to replace the called advances with new borrowings. In 2002, Benjamin Franklin Bancorp raised net proceeds of $8.7 million in a sale of $9.0 million of subordinated debentures to Benjamin Franklin Capital Trust I (the Trust ). The Trust funded the purchase by participating in a pooled offering of 9,000 capital securities representing preferred ownership interests in the assets of the Trust with a liquidation value of $1,000 each. Interest payable on the - 102 - Table of Contents subordinated debentures and cumulative dividends payable quarterly on the preferred securities is 6.94% for the first five years and thereafter will be at a rate equal to the three month LIBOR rate plus 3.45%. Benjamin Franklin Bancorp has the option to defer interest payments on the subordinated debentures for up to five years and, accordingly, the Trust may defer dividend distributions for up to five years. The debentures and the preferred securities mature in November 2032 unless Benjamin Franklin Bancorp elects and obtains regulatory approval to accelerate the maturity to November 2007 or thereafter. Properties Benjamin Franklin Bank conducts its business through its main office located in Franklin, Massachusetts and five other offices located southeast of the Boston metropolitan area. All of Benjamin Franklin Bank s office facilities are owned by the Bank. The following table sets forth information about our offices as of September 30, 2004: Location Year Opened Main Office: 58 Main Street, Franklin, MA 02038 1935 Branch Offices: 231 East Central St., Franklin, MA 02038 1998 4 North Main St., Bellingham, MA 02019 1982 1 Mechanic St., Foxborough, MA 02035 1998 76 North Street, Medfield, MA 02052 1998 221 Main Street, Milford, MA 01757 1992 Subsidiary Activities Benjamin Franklin Bancorp conducts its principal business activities through its wholly-owned subsidiary, Benjamin Franklin Bank. Subsidiaries of Benjamin Franklin Bancorp and Benjamin Franklin Bank are as follows: Benjamin Franklin Bank Capital Trust I, a Delaware Trust, is a wholly-owned subsidiary of Benjamin Franklin Bancorp. In 2002, Benjamin Franklin Bancorp raised net proceeds of $8.7 million in a sale of $9.0 million in junior subordinated notes due 2032 to Benjamin Franklin Capital Trust I (the Trust ). The Trust funded the purchase by participating in a pooled offering of 9,000 capital securities representing preferred ownership interests in the assets of the Trust with a liquidation value of $1,000 each. The interest rate payable on the subordinated notes is 6.94% for the first five years and thereafter will be at a rate equal to the three month LIBOR rate plus 3.45%. Benjamin Franklin Securities Corp., a Massachusetts corporation, is a wholly-owned subsidiary of Benjamin Franklin Bank. Benjamin Franklin Securities Corp. ( BFSC ) engages exclusively in buying, selling and holding investment securities on its own behalf and not as a broker. The income earned on BFSC s investment securities is subject to a significantly lower rate of state tax than that assessed on income earned on investment securities maintained at Benjamin Franklin Bank. At September 30, 2004, BFSC had total assets of $73.7 million, consisting primarily of cash and investment securities. Legal Proceedings Benjamin Franklin Bank is not involved in any legal proceedings other than routine legal proceedings occurring in the ordinary course of business. Management believes that those routine legal proceedings involve, in the aggregate, amounts that are immaterial to the financial condition and results of operations of Benjamin Franklin Bank. - 103 - Table of Contents Employees As of September 30, 2004, Benjamin Franklin Bank had 110 full-time and 21 part-time employees. Employees are not represented by a collective bargaining unit and Benjamin Franklin Bank considers its relationship with its employees to be good. - 104 - Table of Contents MANAGEMENT S DISCUSSION AND ANALYSIS OF BENJAMIN FRANKLIN BANCORP This section is intended to help potential investors understand the financial performance of Benjamin Franklin Bancorp and Benjamin Franklin Bank through a discussion of the factors affecting our financial condition at September 30, 2004, December 31, 2003 and December 31, 2002 and our consolidated results of operations for the nine months ended September 30, 2004 and 2003 and for the years ended December 31, 2003, 2002 and 2001. This section should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements that appear elsewhere in this prospectus. The financial condition and results of operations reported at September 30, 2004 and for the nine-month period ending September 30, 2004 are not necessarily indicative of the financial condition and results of operations that will result for the fiscal year ended December 31, 2004. In this section, we sometimes refer to Benjamin Franklin Bank and Benjamin Franklin Bancorp together as Benjamin Franklin since the financial condition and results of operation of Benjamin Franklin Bancorp closely reflect the financial condition and results of operation of its sole operating subsidiary, Benjamin Franklin Bank. Following the completion of the conversion, we anticipate that our non-interest expense will increase as a result of the increased costs associated with managing a public company, increased compensation expenses associated with the purchases of shares of common stock by our employee stock ownership plan, the costs of funding the Benjamin Franklin Bank Charitable Foundation and the adoption of a stock-based incentive plan, if approved by Benjamin Franklin Bancorp s stockholders. Assuming that the adjusted maximum number of shares is sold in the offering (6,612,500 shares) and 400,000 shares are issued to the Benjamin Franklin Bank Charitable Foundation: i. the contribution to the Benjamin Franklin Bank Charitable Foundation will be approximately $4,000,000 million, all of which will be expensed in the quarter during which the conversion is completed; ii. the employee stock ownership plan will acquire 561,000 shares of common stock with a $5.6 million loan that is expected to be repaid over 30 years, resulting in an annual compensation expense (pre-tax) of approximately $187,000 (assuming that the common stock maintains a value of $10 per share); iii. the stock-based incentive plan would award a number of shares of restricted stock equal to 4.0% of the shares sold in the offering (including shares issued to the Benjamin Franklin Bank Charitable Foundation), or 280,500 shares to eligible participants, which would be expensed as the awards vest. Assuming that all shares of restricted stock under the stock-based incentive plan are awarded at a price of $10 per share, and that the awards vest over a five year period, the corresponding annual expense (pre-tax) associated with shares awarded under the stock-based incentive plan would be approximately $561,000. iv. the stock-based incentive plan would grant options to acquire common stock equal to 10% of the shares issued in the offering (including shares issued to the Benjamin Franklin Bank Charitable Foundation), or 701,250 options, to eligible participants, which would be expensed as the awards vest. Using the Black-Scholes option pricing model, assuming that all option grants are made at a grant-date share price and option exercise price of $10 and that options vest over a 5 year period, the corresponding annual expense (pre-tax) associated with options granted under the stock-based incentive plan would be approximately $540,000. - 105 - Table of Contents The actual expense that will be recorded for the employee stock ownership plan will be determined by the market value of the shares of common stock as they are released to employees over the term of the loan, and whether the loan is repaid faster than its contractual term. Accordingly, increases in the stock price above $10 per share will increase the total employee stock ownership plan expense, and any accelerated repayment of the loan will increase the annual employee stock ownership plan expense. Further, the actual expense of the restricted stock awards granted under the stock-based incentive plan will be determined by the fair market value of the stock on the grant date, which might be greater than $10 per share. The actual expense of the options granted will be determined by the results of the Black-Scholes option pricing model for the actual period under measurement. The assumptions and factors considered in this pricing model will include the grant-date share price and option exercise price, the dividend yield, if any, the expected option life, the option vesting period, the risk-free interest rate, and the volatility rate for the stock, all of which may differ from the information used herein to estimate the effect of stock option grants on future earnings. Overview Income. Benjamin Franklin Bancorp s results of operations are dependent mainly on net interest income, which is the difference between the income earned on its loan and investment portfolios and interest expense incurred on its deposits and borrowed funds. Results of operations are also affected by fee income from banking and non-banking operations, provisions for loan losses, gains (losses) on sales of loans and securities available for sale, loan servicing income and other miscellaneous income. Expenses. Benjamin Franklin s expenses consist primarily of compensation and employee benefits, office occupancy, technology, marketing, general administrative expenses and income tax expense. Results of operations are also significantly affected by general economic and competitive conditions, particularly with respect to changes in interest rates, government policies and actions of regulatory authorities. Future changes in applicable law, regulations or government policies may materially impact Benjamin Franklin s financial condition and results of operations. See Risk Factors beginning on page # . Critical Accounting Policies Critical accounting policies are those that involve significant judgments and assessments by management, and which could potentially result in materially different results under different assumptions and conditions. Benjamin Franklin considers the following to be critical accounting policies: Allowance for Loan Losses. This accounting policy is considered critical due to the high degree of judgment involved, the subjectivity of the underlying assumptions used, and the potential for changes in the economic environment that could result in material changes in the amount of the allowance for loan losses considered necessary. The allowance is evaluated on a regular basis by management and is based on a periodic review of the collectibility of the loans in light of historical experience, the nature and size of the loan portfolio, adverse situations that may affect borrowers ability to repay, the estimated value of any underlying collateral and prevailing economic conditions. For a full discussion of the allowance for loan losses, please refer to Business of Benjamin Franklin Bancorp Asset Quality on page # . Income Taxes. Benjamin Franklin uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance related to deferred tax assets is established when, in management s judgment, it is more likely than not that all or a portion of such deferred tax - 106 - Table of Contents assets will not be realized. Deferred tax assets applicable to capital loss carryforwards that expire in 2006 are recoverable only to the extent that capital gains can be realized during the carryforward period. Accordingly, given Benjamin Franklin s limited opportunity to realize capital gains through the sale of capital assets within the required timeframe, management has provided a valuation allowance of $2.3 million against 100% of the deferred tax assets related to capital loss carryforwards at September 30, 2004 and December 31, 2003 and 2002. This valuation allowance is assessed periodically for recoverability. The judgments applied by management consider the likelihood that capital gain income will be realized within the carryforward period in light of Benjamin Franklin s tax planning strategies and changes in market conditions. Intangible Assets. Benjamin Franklin considers accounting for goodwill to be critical because significant judgment is exercised in performing periodic valuations of this asset, which arose through the acquisition of Foxboro National Bank. Goodwill is evaluated for potential impairment on an annual basis as of each December 31st , or more frequently if events or circumstances indicate a potential for impairment. At the time of acquisition, the operations of Foxboro National Bank were combined with the operations of Benjamin Franklin based on similar economic characteristics. Accordingly, discrete financial information is not separately maintained to evaluate the operating results of the former Foxboro National Bank and, as a result, in performing a goodwill impairment evaluation, Benjamin Franklin measures the fair value of the entire company, rather than that of Foxboro separately. If impairment is detected, the carrying value of goodwill is reduced through a charge to earnings. The evaluation of goodwill involves estimations of discount rates and the timing of projected future cash flows, which are subject to change with changes in economic conditions and other factors. Such changes in the assumptions used to evaluate this intangible asset affect its value and could have a material adverse impact on Benjamin Franklin s results of operations. This discussion has highlighted those accounting policies that management considers to be critical, however all accounting policies are important, and therefore the reader is encouraged to review each of the policies included in Note 1 to the consolidated financial statements to gain a better understanding of how Benjamin Franklin s financial performance is measured and reported. Analysis of Net Interest Income Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income also depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them. The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense. - 107 - Securities held to maturity $ 13,026 $ Table of Contents Nine Months Ended September 30, At September 30, 2004 2004 2003 Weighted Average Average Average Yield/ Outstanding Yield/ Outstanding Yield/ Balance Rate Balance Interest Rate(1) Balance Interest Rate(1) (Dollars in thousands) Interest-earning assets: Loans $ 375,516 5.00 % $ 324,944 $ 12,567 5.17 % $ 265,369 $ 11,601 5.84 % Investment securities 101,551 3.77 % 109,898 2,549 3.10 % 121,402 2,413 2.66 % Interest-earning deposits 6,831 1.71 % 15,382 107 0.93 % 41,565 515 1.66 % Total interest-earning assets 483,898 4.70 % 450,224 15,223 4.52 % 428,336 14,529 4.54 % Non-interest-earning assets 34,033 33,760 37,560 Total assets $ 517,931 $ 483,984 $ 465,896 Interest-bearing liabilities: Savings deposits $ 99,799 0.50 % $ 99,172 368 0.50 % $ 92,652 345 0.50 % Money market 54,391 1.14 % 51,779 332 0.86 % 47,836 290 0.81 % NOW accounts 25,179 0.14 % 23,955 27 0.15 % 73,403 82 0.15 % Certificates of deposits 133,589 2.35 % 133,492 2,494 2.50 % 127,370 2,722 2.86 % Total deposits 312,958 1.37 % 308,398 3,221 1.40 % 341,261 3,439 1.35 % Short term borrowings 29,000 1.68 % 6,195 56 1.21 % 0.00 % Long-term debt 55,000 4.72 % 47,226 1,747 4.94 % 45,000 1,695 5.03 % Total interest-bearing liabilities 396,958 1.86 % 361,819 5,024 1.85 % 386,261 5,134 1.78 % Non-interest bearing liabilities 90,387 92,207 49,501 Total liabilities 487,345 454,026 435,762 Equity 30,586 29,958 30,134 Total liabilities and equity $ 517,931 $ 483,984 $ 465,896 Net interest income $ 10,199 $ 9,395 Net interest rate spread (2)(5) 2.84 % 2.67 % 2.76 % Net interest-earning assets (3) $ 86,940 $ 88,405 $ 42,075 Net interest margin (4) N/A 3.03 % 2.93 % Average interest-earning assets to interest-bearing liabilities 124.43 % 110.89 % Footnotes on following page - 108 - Table of Contents Years Ended December 31, 2003 2002 2001 Average Average Average Outstanding Yield/ Outstanding Yield/ Outstanding Yield/ Balance Interest Rate Balance Interest Rate Balance Interest Rate (Dollar in thousands) Interest-earning assets: Loans $ 270,342 $ 15,530 5.74 % $ 249,260 $ 16,322 6.55 % $ 274,088 $ 20,355 7.43 % Investment securities 122,570 3,450 2.81 % 89,295 4,166 4.67 % 73,069 4,267 5.84 % Interest-earning deposits 35,293 552 1.56 % 58,980 918 1.56 % 53,084 1,819 3.43 % Total interest-earning assets 428,205 19,532 4.56 % 397,535 21,406 5.38 % 400,241 26,441 6.61 % Non-interest-earning assets 37,495 41,978 37,154 Total assets $ 465,700 $ 439,513 $ 437,395 Interest-bearing liabilities: Savings deposits $ 93,501 465 0.50 % $ 83,878 567 0.68 % $ 71,651 921 1.29 % Money market 48,256 392 0.81 % 45,648 617 1.35 % 37,919 849 2.24 % NOW accounts 60,751 92 0.15 % 69,832 221 0.32 % 61,957 360 0.58 % Certificates of deposits 126,856 3,538 2.79 % 131,073 4,451 3.40 % 167,566 8,622 5.15 % Total deposits 329,364 4,487 1.36 % 330,431 5,856 1.77 % 339,093 10,752 3.17 % Short-term borrowings 0 0 0.00 % 0 0 0.00 % 0 0 0.00 % Long-term debt 45,001 2,265 5.03 % 37,504 1,738 4.63 % 35,242 1,645 4.67 % Total interest-bearing liabilities 374,365 6,752 1.80 % 367,935 7,594 2.06 % 374,335 12,397 3.31 % Non-interest bearing liabilities 61,454 43,041 37,612 Total liabilities 435,819 410,976 411,947 Equity 29,881 28,537 25,448 Total liabilities and equity $ 465,700 $ 439,513 $ 437,395 Net interest income $ 12,780 $ 13,812 $ 14,044 Net interest rate spread (5) 2.76 % 3.32 % 3.30 % Net interest-earning assets (3) $ 53,840 $ 29,600 $ 25,906 Net interest margin (4) 2.98 % 3.47 % 3.51 % Average interest-earning assets to interest-bearing liabilities 114.38 % 108.04 % 106.92 % (1) Yields and rates for the nine months ended September 30, 2004 and 2003 are annualized. (2) Net interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities at September 30, 2004. (3) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities. (4) Net interest margin represents net interest income divided by average total interest-earning assets. (5) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities for the nine months ended September 30, 2004 and 2003 and the years ended December 31, 2003, 2002 and 2001. - 109 - (Unaudited) Deferred tax asset: Federal $ 534 $ 504 $ 467 State 184 174 (Unaudited) Current tax provision: Federal $ 533 $ 621 $ 872 $ 845 State 117 197 198 Table of Contents Contractual Obligations. The following tables present information indicating various contractual obligations and commitments of Benjamin Franklin as of the dates indicated and the respective maturity dates: September 30, 2004 More than More than One Year Three One through Years Over Year or Three Through Five Total Less Years Five Years Years (Dollars in thousands) Federal Home Loan Bank of Boston Advances (1) $ 75,000 $ 29,000 $ 10,000 $ 6,000 $ 30,000 Subordinated debt 9,000 9,000 Other (2) 4,557 1,153 2,216 1,188 Total contractual obligations $ 88,557 $ 30,153 $ 12,216 $ 7,188 $ 39,000 Table of Contents December 31, 2003 More than More than One Year Three One through Years Over Year or Three Through Five Total Less Years Five Years Years (Dollars in thousands) Federal Home Loan Bank of Boston Advances (1) $ 36,000 $ $ $ $ 36,000 Subordinated debt 9,000 9,000 Other (2) 5,160 1,136 2,229 1,599 196 Total contractual obligations $ 50,160 $ 1,136 $ 2,229 $ 1,599 $ 45,196 (1) Secured under a blanket security agreement on qualifying assets, principally 1-4 Family Residential mortgage loans. These advances may be called by the Federal Home Loan Bank of Boston during the period remaining to maturity. (2) Represents contracts for technology services and employee compensation. Loan Commitments. The following tables present certain information about Benjamin Franklin Bank s loan commitments outstanding as of the dates indicated: September 30, 2004 More than More than One Year Three One through Years Over Year or Three through Five Total Less Years Five Years Years (Dollars in thousands) Commitments to grant loans (1) $ 7,055 $ 7,055 $ $ $ Commercial loan lines-of-credit 3,412 3,412 Unused portion of home equity loans (2) 28,839 28,839 Unused portion of construction loans (3) 11,483 10,083 1,400 Unused portion of personal lines-of-credit(4) 2,158 2,158 Total loan commitments $ 52,947 $ 20,550 $ 1,400 $ $ 30,997 December 31, 2003 More than More than One Year Three One through Years Over Year or Three through Five Total Less Years Five Years Years (Dollars in thousands) Commitments to grant loans(1) $ 11,567 $ 11,567 $ $ $ Commitments to purchase real estate loans 2,953 2,953 Commercial loan lines-of-credit 3,717 3,717 Unused portion of home equity loans (2) 24,812 0 24,812 Unused portion of construction loans (3) 10,264 8,065 2,199 Unused portion of personal lines-of-credit(4) 2,200 0 2,200 Total loan commitments $ 55,513 $ 26,302 $ 2,199 $ $ 27,012 General: Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract and generally have fixed expiration date or other termination clauses. Footnotes on following page - 124 - Table of Contents maturities and sales of securities of $9.5 million. Chart Bank experienced a net increase in total deposits of $40.2 million for the nine months ended September 30, 2004. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by Chart Bank and its local competitors and other factors. Net Federal Home Loan Bank of Boston advances for the nine months ended September 30, 2004 were $6.1 million. During the years ended December 31, 2003 and 2002, Chart Bank s loan originations, net of repayments totaled $17.0 million and a decline of $3.0 million, respectively. For the years ended December 31, 2003 and 2002, Chart Bank purchased federal agency obligations totaling $23.1 million and $24.6 million, respectively, and had proceeds from maturities, calls and sales of securities of $22.9 million and $16.5 million, respectively. Chart Bank experienced a net increase in total deposits of $5.5 million and $24.7 million for the years ended December 31, 2003 and 2002, respectively. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by Chart Bank and its local competitors and other factors. Net Federal Home Loan Bank of Boston advances for the years ended December 31, 2003 and 2002 were $944,000 and a reduction of $4.7 million, respectively Chart Bank closely monitors its liquidity position on a daily basis. If Chart Bank should require funds beyond its ability to generate them internally, additional sources of funds are available through Federal Home Loan Bank of Boston advances and through a borrowing agreement with the Federal Reserve Bank of Boston at an interest rate that adjusts daily. Outstanding commitments for all loans and unadvanced construction loans and lines-of-credit totaled $31.7 million and $27.6 million at September 30, 2004 and December 31, 2003, respectively. Management of Chart Bank anticipates that it will have sufficient funds available to meet its current loan commitments. Certificates of deposit that are scheduled to mature in one year or less from September 30, 2004 totaled $17.4 million and from December 31, 2003 totaled $20.6 million. Chart Bank relies primarily on competitive rates, customer service, and long-standing relationships with customers to retain deposits. Occasionally, Chart Bank will also offer special competitive promotions to its customers to increase retention and promote deposit growth. Based upon Chart Bank s historical experience with deposit retention, management believes that a significant portion of its deposits will remain with Chart Bank. Chart Bank must satisfy various regulatory capital requirements administered by the federal banking agencies including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At September 30, 2004, Chart Bank exceeded all of its regulatory capital requirements with a leverage capital level of $17.5 million, or 6.8% of average assets, which is above the required level of $10.4 million, or 4.0%, and total risk-based capital of $19.4 million, or 12.0% of risk weighted assets, which is above the required level of $12.9 million, or 8.0%. Chart Bank is considered well capitalized under regulatory guidelines. At December 31, 2003, Chart Bank exceeded all of its regulatory capital requirements with a leverage capital level of $17.3 million, or 8.4% of average quarterly assets, which was above the required level of $8.3 million, or 4.0%, and total risk-based capital of $19.0 million, or 12.4% of risk weighted assets, which is above the required level of $12.3 million, or 8.0%. At December 31, 2003, Chart Bank was considered well capitalized under regulatory guidelines. The following table summarizes our principal contractual obligations as of September 30, 2004 and the effects such obligations are expected to have on our liquidity and cash flows in future periods. Table of Contents (1) Commitments for loans are extended to customers for up to 180 days after which they expire. (2) Unused portions of home equity loans are available to the borrower for up to 10 years. (3) Unused portions of construction loans are available to the borrower for up to two years for development loans and up to one year for other construction loans. (4) Unused portion of checking overdraft lines-of-credit are available to customers in good standing indefinitely. Management of Other Risks. Two additional risk areas that receive significant attention by management and the Board are operational risk and compliance risk. Operational risk is the risk to earnings and capital arising from control deficiencies, problems with information systems, fraud, error or unforeseen catastrophes. Compliance risk is the risk arising from violations of, or nonconformance with, laws, rules, regulations, prescribed practices, internal policies and procedures or ethical standards. Compliance risk can expose the Company to fines, civil money penalties, payment of damages and the voiding of contracts. Benjamin Franklin addresses such risks through the establishment of comprehensive policies and procedures with respect to internal control, the management and operation of its information and communication systems, disaster recovery, and compliance with laws, regulations and banking best practice . Monitoring of the efficacy of such policies and procedures is performed through a combination of Benjamin Franklin s internal audit program, through periodic internal and third-party compliance reviews, and through the ongoing attention of its managers charged with supervising compliance and operational control. Oversight of these activities is provided by the Risk Management Committee and the Audit and Risk Management Committee of the Board. Off-Balance-Sheet Arrangements Benjamin Franklin Bancorp does not have any off-balance-sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. Impact of Inflation and Changing Prices The financial statements, accompanying notes, and related financial data of Benjamin Franklin presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollar amounts without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of Benjamin Franklin operations. Most of Benjamin Franklin s assets and liabilities are monetary in nature, and therefore the impact of interest rates has a greater impact on its performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. Impact of Recent Accounting Standards In January 2003, the Financial Accounting Standards Board ( FASB ) issued Interpretation No. 46, Consolidation of Variable Interest Entities. (FIN 46) requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity s activities or is entitled to receive a majority of the entity s residual returns, or both. FIN 46 also requires disclosures about variable interest entities that a company is not required to consolidate, but in which it has a significant variable interest. On December 17, 2003, the FASB revised FIN 46 and deferred the effective date of FIN 46 to no later than the end of the first reporting period that ends after March 15, 2004. The adoption of FIN 46 and Interpretation No. 46R did not have a material effect on Benjamin Franklin s financial statements. - 125 - Table of Contents Payments Due by Period Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years (in thousands) Contractual Obligations: FHLBB borrowings $ 22,000 $ 17,000 $ 2,000 $ 3,000 $ Operating lease obligations 571 227 275 69 Data processing contracts 1,250 480 770 Total $ 23,821 $ 17,707 $ 3,045 $ 3,069 $ Off Balance Sheet Information Chart Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments included commitments to extend credit of approximately $31.7 million, $27.6 million and $14.6 million as of September 30, 2004, December 31, 2003 and 2002, respectively, and standby letters of credit of approximately $618,000, $542,000 and $232,000 as of September 30, 2004, December 31, 2003 and 2002, respectively. Management of Chart Bank anticipates that it will have sufficient funds available to meet its current loan commitments. These consolidated financial instruments involve, to varying degrees, elements of credit and interest rate risk. Chart Bank s exposure to credit loss in the event of non-performance by the other party to the financial instrument is represented by the contractual amount of those instruments. Chart Bank uses the same credit policies in making commitments as it does for existing loans. Management believes that Chart Bank controls the credit risk of these financial instruments through credit approvals, lending limits, monitoring procedures and the receipt of collateral when deemed necessary. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments could expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Chart Bank s management evaluates each customer s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by Chart Bank, upon extension of credit, is based on management s credit evaluation of the customer. Collateral held varies but may include income producing commercial properties, accounts receivable, inventory and property, plant and equipment. Standby letters of credit are conditional commitments issued by Chart Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in existing loan facilities to customers. Chart Bank holds real estate and marketable securities as collateral supporting those commitments for which collateral is deemed necessary. Impact of Inflation and Changing Prices The consolidated financial statements of Chart Bank and related data presented in this document have been prepared in conformity with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Unlike many industrial companies, substantially all of the assets and liabilities of Chart Bank are monetary in nature. As a result, interest rates have a more significant impact on Chart Bank s Table of Contents In April 2003, the FASB issued Statement of Financial Accounting Standards ( SFAS ) No. 149, Amendment of Statement 133, Accounting for Derivative Instruments and Hedging Activities, which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133. This Statement was effective for contracts and hedging relationships entered into or modified after June 30,2003. This Statement did not affect Benjamin Franklin s consolidated financial statements. In March 2004, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 105, Application of Accounting Principles to Loan Commitments, which provides guidance regarding loan commitments that are accounted for as derivative instruments. In this SAB, the Securities and Exchange Commission determined that an interest rate lock commitment should generally be valued at zero at inception. The rate locks will continue to be adjusted for changes in value resulting from changes in market interest rates. This SAB did not have any effect on Benjamin Franklin Bancorp s financial position or results of operations. On December 16, 2004, the FASB issued SFAS No. 123R, Share-Based Payment, which is an amendment of FASB Statement Nos. 123 and 95. SFAS No. 123R changes, among other things, the manner in which share-based compensation, such as stock options, will be accounted for by both public and non-public companies, and will be effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. For public companies, the cost of employee services received in exchange for equity instruments including options and restricted stock awards generally will be measured at fair value at the grant date. The grant date fair value will be estimated using option-pricing models adjusted for the unique characteristics of those options and instruments, unless observable market prices for the same or similar options are available. The cost will be recognized over the requisite service period, often the vesting period, and will be re-measured subsequently at each reporting date through settlement date. The changes in accounting will replace existing requirements under SFAS No. 123, Accounting for Stock-Based Compensation, and will eliminate the ability to account for share-based compensation transactions using APB Opinion No. 25, Accounting for Stock Issued to Employees, which does not require companies to expense options if the exercise price is equal to the trading price at the date of grant. The accounting for similar transactions involving parties other than employees or the accounting for employee stock ownership plans that are subject to American Institute of Certified Public Accountants ( AICPA ) Statement of Position 93-6, Employers Accounting for Employee Stock Ownership Plans, would remain unchanged. On September 30, 2004, the FASB issued FASB Staff Position ( FSP ) Emerging Issues Task Force ( EITF ) Issue No. 03-1-1 delaying the effective date of paragraphs 10-20 of EITF 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, which provides guidance for determining the meaning of other-than-temporarily impaired and its application to certain debt and equity securities within the scope of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, and investments accounted for under the cost method. The guidance requires that investments which have declined in value due to credit concerns or solely due to changes in interest rates must be recorded as other-than-temporarily impaired unless the Bank can assert and demonstrate its intention to hold the security for a period of time sufficient to allow for a recovery of fair value up to or beyond the cost of the investment which might mean maturity. The delay of the effective date of EITF 03-1 will be superseded concurrent with the final issuance of proposed FSP Issue 03-1-a. Proposed FSP Issue 03-1-a is intended to provide implementation guidance with respect to all securities analyzed for impairment under paragraphs 10-20 of EITF 03-1. Management continues to closely monitor and evaluate how the provisions of EITF 03-1 and proposed FSP Issue 03-1-a will affect Benjamin Franklin Bancorp. - 126 - Table of Contents performance than the general level of inflation. Over short periods of time, interest rates may not necessarily move in the same direction or in the same magnitude as inflation. Impact of New Accounting Standards On December 16 , 2004, the Financial Accounting Standards Board ( FASB ) issued Statement of Financial Accounting Standards ( SFAS ) No. 123R, Share-Based Payment, which is an amendment of SFAS Nos. 123 and 95 . SFAS 123R changes , among other things, the manner in which share-based compensation, such as stock options, will be accounted for by both public and non-public companies. SFAS 123R allows nonpublic entities, such as Chart Bank, to elect to measure compensation cost of awards of equity share options and similar instruments at intrinsic value through the date of settlement and therefore, is not expected to have a material impact on Chart Bank s consolidated financial statements. On September 30, 2004, the FASB issued FASB Staff Position ( FSP ) Emerging Issues Task Force ( EITF ) Issue No. 03-1-1 delaying the effective date of paragraphs 10-20 of EITF 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments , which provides guidance for determining the meaning of other-than-temporarily impaired and its application to certain debt and equity securities within the scope of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities , and investments accounted for under the cost method. The guidance requires that investments which have declined in value due to credit concerns or solely due to changes in interest rates must be recorded as other-than-temporarily impaired unless the Bank can assert and demonstrate its intention to hold the security for a period of time sufficient to allow for a recovery of fair value up to or beyond the cost of the investment which might mean maturity. The delay of the effective date of EITF 03-1 will be superceded concurrent with the final issuance of proposed FSP Issue 03-1-a. Proposed FSP Issue 03-1-a is intended to provide implementation guidance with respect to all securities analyzed for impairment under paragraphs 10-20 of EITF 03-1. Management continues to closely monitor and evaluate how the provisions of EITF 03-1 and proposed FSP Issue 03-1-a will affect Chart Bank. Quantitative and Qualitative Disclosures About Market Risk Chart Bank s most significant form of market risk is interest rate risk. The principal objectives of Chart Bank s interest rate risk management are to evaluate the interest rate risk inherent in certain balance sheet accounts, determine the level of risk appropriate given its business strategy, operating environment, capital and liquidity requirements and performance objectives, and manage the risk consistent with its established policies. Chart Bank has an Asset/Liability Committee, responsible for reviewing its asset/liability policies and interest rate risk position, which meets quarterly and reports trends and interest rate risk position to the Finance Committee of the Board of Directors and the Board of Directors quarterly. The extent of the movement of interest rates is an uncertainty that could have a negative impact on the earnings of Chart Bank. Chart Bank manages interest rate risk by: (1) Maintaining a high quality securities portfolio that provides adequate liquidity and flexibility to take advantage of opportunities that may arise from fluctuations in market interest rates, the overall maturity and duration of which is monitored in relation to the repricing of its loan portfolio; (2) Promoting lower cost liability accounts such as demand deposits savings and money market deposits; and (3) Using advances from the Federal Home Loan Bank of Boston to better structure maturities of its interest rate sensitive liabilities. Table of Contents Chart Bank s investment policy authorizes it to be a party to financial instruments with off-balance sheet risk in the normal course of business to reduce its exposure to fluctuations in interest rates. All counter-parties must be pre-approved by Chart Bank s Executive Committee and reported to its Finance Committee. Quantitative Aspects Of Market Risk Chart Bank analyzes its interest rate sensitivity position to manage the risk associated with interest rate movements through the use of balance sheet simulation and gap analyses. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are interest rate sensitive. An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. Chart Bank s goal is to manage asset and liability positions so as to moderate the effects of interest rate fluctuations on net interest income. Balance sheet simulations are completed quarterly and presented to the Board of Directors. The simulations provide an estimate of the impact of changes in interest rates on net interest income under a range of assumptions. The numerous assumptions used in the simulation process are what Chart Bank s management believes to be the most appropriate assumptions about customer and competitor behavior in the specified interest rate scenario and are reviewed by its Asset/Liability Committee on a quarterly basis. In performing the simulations, Chart Bank assumes that there is no overall growth, decline or change in the mix of its interest-bearing assets and liabilities during the period measured. Simulation analysis may have certain limitations caused by market conditions varying from those assumed in a model. Actual results can often differ due to the effects of prepayments and refinancings of loans and investments, as well as the repricing or runoff of deposits, which may be different from that which has been assumed. Changes to these assumptions can significantly affect the results of the balance sheet simulation. Chart Bank s current limits on interest-rate risk specify that if interest rates were to ramp up a total of 100, 200 or 300 basis points or down a total of 100 basis points over a twelve month period beginning October 1, 2004 as a result of equal monthly increases or decreases, estimated net interest income for the two-year period beginning October 1, 2004 should not increase or decrease by greater than 5% per year. The results of these simulations are shown below: Calculated increase (decrease) in projected net interest income for the year ending September 30, 2005 2006 Changes in interest rates: 300 bps 1.15 % 3.91 % 200 bps 1.24 3.58 100 bps 0.62 1.65 -100 bps -1.00 -3.65 Policy Limit /-5.00 % /-5.00 % As noted above, one of the tools used to measure rate sensitivity is the funds gap. The funds gap is defined as the amount by which a bank s rate sensitive assets exceed its rate sensitive liabilities. A positive gap exists when rate sensitive assets exceed rate sensitive liabilities. This indicates that a greater volume of assets than liabilities will reprice during a given period. This mismatch will improve earnings in a rising rate environment and inhibit earnings when rates decline. Conversely, when rate sensitive liabilities exceed rate sensitive assets, the gap is referred to as negative and indicates that a greater volume of liabilities than assets will reprice during the period. In this case, a rising rate environment will inhibit earnings and declining rates will improve earnings. Notwithstanding this general description of the effect on income of the gap position, it may not be an accurate predictor of changes in net interest income. (1) In addition to the Directors set forth in this table, six members of Chart Bank s board of directors will be appointed to the Benjamin Franklin Bancorp Board of Directors upon completion of the Chart Bank acquisition: Richard E. Bolton, Jr., Paul E. Capasso, Jonathan A. Haynes, Daniel F. O Brien, Donald P. Quinn, and Neil E. Todreas. (2) Date Elected indicates the date the Director first joined the Board of Trustees or Board of Directors of Benjamin Franklin Bancorp or Benjamin Franklin Bank. The principal occupation and business experience for the last five years for each of Benjamin Franklin Bancorp s Directors is set forth below. All Directors have held their present positions for five years unless otherwise stated. Dr. Mary Ambler is a retired physician and a Professor Emeritus of Brown University. William P. Bissonnette is a partner in the firm of Little Bissonnette, CPAs. William F. Brady, Jr., D.D.S. is a retired dentist. John C. Fuller is retired. He was formerly a Vice President and member of the Board of Directors of the Foxboro Company, a controls and instrumentation company located in Foxboro, Massachusetts. - 127 - (1) Excludes the allowance for loan losses and net deferred loan costs. (2) Regular savings and NOW accounts have been included in the over five year timeframe; money market accounts have primarily been included in the one day to six months category. THE ACQUISITION OF CHART BANK We decided to undertake the conversion in connection with our decision to enter into an Agreement and Plan of Merger with Chart Bank dated September 1, 2004. Based on September 30, 2004 unaudited financials for Benjamin Franklin Bancorp and Chart Bank at the minimum of the valuation range, the combined entity would have on a pro forma basis total assets of $815.9 million, total deposits of $6l6.2 million, and net loans of $551.4 million. For pro forma income statements and balance sheets, see Pro Forma Data on page # . For historical financial information about Chart Bank, see Selected Consolidated Financial Information of Chart Bank on page # and the Consolidated Financial Statements of Chart Bank, A Cooperative Bank and Subsidiaries on page # . Background and Reasons for the Acquisition. We believe that the acquisition of Chart Bank furthers our expansion strategy, including geographic market area, customer base and asset size, while maintaining our loan portfolio quality and relatively low cost of funds. Although it is a cooperative bank, Chart Bank has a significant amount of commercial loans, which furthers our goal of increasing such loans. We believe that our current product offerings and corporate culture will blend well with that of Chart Bank, which will facilitate the integration of the two companies after the acquisition. Over the past few years, our Board has come to the conclusion that we need to grow Benjamin Franklin Bank in order to have the scale to effectively compete with the larger institutions in our market and to continue to be a meaningful provider of financial services to our communities. In a series of special meetings to consider various growth strategies, the Board invited outside speakers from time to time to Table of Contents Anne M. King, Clerk of Benjamin Franklin Bancorp and Benjamin Franklin Bank, is a retired journalist and currently works part-time in public relations. Richard D. Mann is an owner of Buckley Mann, Inc., a textile manufacturer located in Norfolk, Massachusetts. He also serves as a member of the Board of Trustees of Clark-Cutler-McDermott Co. of Franklin, Massachusetts and of Draper Knitting Co. of Canton, Massachusetts. John D. Murphy is self-employed in the field of real estate. Charles F. Oteri is the Chief Executive Officer and Funeral Director of Oteri Funeral Home in Franklin, Massachusetts. Thomas R. Venables has served as President and Chief Executive Officer of Benjamin Franklin Bancorp and Benjamin Franklin Bank since 2002. Prior to 2002, Mr. Venables co-founded Lighthouse Bank of Waltham, Massachusetts in 1999 and served as its President and Chief Executive Officer. From 1998 to 1999, Mr. Venables was employed as a consultant with Marsh and McLennan Capital, Inc. He was employed by Grove Bank of Newton, Massachusetts from 1974 until it was acquired by Citizens Bank in 1997, serving as its President and Chief Executive Officer for the last 11 years of his tenure. Alfred H. Wahlers, is the Chairman of the Board of Benjamin Franklin Bancorp and Benjamin Franklin Bank. Mr. Wahlers is a retired insurance executive. Charles Yergatian is a retired residential real estate developer. Upon completion of the Chart Bank acquisition, six directors of Chart Bank will be appointed as directors of Benjamin Franklin Bancorp and Benjamin Franklin Bank. The principal occupation and business experience for the last five years for each of these Chart Bank directors is set forth below. All of these individuals have held their present positions for five years unless otherwise stated. Richard E. Bolton, Jr. has served as the President and Chief Executive Officer of Chart Bank since 1995. He has served as President of Chart Bank s subsidiary, CSSI, since 1999. Mr. Bolton is 45 years old. Paul E. Capasso is the President of Capasso Realty Corporation located in Newton, Massachusetts, a real estate investment company specializing in apartment and office building ownership. Mr. Capasso is 48 years old. Jonathan A. Haynes is the President of Haynes Management, a real estate management firm located in Wellesley Hills, Massachusetts, and President of D.M. Bernardi, a general contracting firm located in Wellesley Hills, Massachusetts. Mr. Haynes is 48 years old. Daniel F. O Brien is a certified public accountant and owner and president of O Brien, Riley and Ryan, a CPA firm located in Boston. Mr. O Brien is also the manager of State Street Wealthcare Advisors, LLC, a financial services company and State Street Consulting, LLC, a computer services consulting firm. Mr. O Brien is also a practicing attorney. Mr. O Brien is 49 years old. Donald P. Quinn is an attorney in private practice in Plymouth, Massachusetts. He was formerly a partner concentrating in commercial business and real estate matters at Goodwin Procter LLP , a law firm located in Boston. Mr. Quinn is 66 years old. - 128 - Table of Contents help educate the Board about the strategic alternatives available to Benjamin Franklin Bancorp, including a representative of Ryan Beck Co., Inc., who met with the Board on February 25, 2004 and again on April 20, 2004, and a representative of BNK Advisory Group, who met with the Board on July 24, 2004. At the times the Ryan Beck representative made presentations to the Board, neither Benjamin Franklin Bank nor Chart Bank had engaged Ryan Beck to provide it with any investment banking services. In the course of these meetings, the alternatives considered by the Board included the possible merger with another mutual institution, but such transactions are difficult to initiate. The Board recognizes that our ability to grow by internal expansion has been hampered somewhat by our capital level; as a mutual institution, our primary means of increasing our capital is through retaining our earnings, and earnings take time to generate. The Board determined that it was willing to consider a mutual to stock conversion or minority stock issuance if necessary to facilitate an expansion opportunity. In May, 2004, Chart Bank engaged Ryan Beck Co., Inc. to assist the Chart Bank board in considering strategic alternatives for Chart Bank. In that capacity, a representative of Ryan Beck contacted Thomas R. Venables, our President and Chief Executive Officer, and asked him if Benjamin Franklin Bancorp would be interested in exploring a strategic transaction with Chart Bank. Mr. Venables met with Richard E. Bolton, Jr., Chart Bank s President and Chief Executive Officer, and the parties signed a confidentiality agreement pursuant to which Chart Bank provided Mr. Venables with preliminary information regarding Chart Bank to enable him to assess whether Benjamin Franklin Bancorp would be interested in pursuing a transaction with Chart Bank. Mr. Venables met with the Benjamin Franklin Bancorp Board on July 8, 2004, and discussed the possible transaction with Chart Bank, including the necessity to undergo a full conversion to a public company in order to effect the transaction. After a lengthy discussion, the Board authorized Mr. Venables to move to the next stage of the process. On July 13, the Board held another special meeting at which the Board authorized the engagement of McConnell Budd Romano, investment advisors, and Foley Hoag LLP, legal counsel, to assist in formulating a proposal to acquire Chart Bank and in negotiating the terms of a possible transaction. Representatives of both McConnell Budd Romano and Foley Hoag LLP were present at that meeting and engaged in a detailed discussion of the process that a transaction with Chart Bank would follow. Over the next three weeks, Mr. Venables and his team of advisors worked to formulate a financial proposal for the possible acquisition of Chart Bank. During this period, Mr. Venables also hired as Chief Financial Officer Claire Bean, who had worked with him as chief financial officer at two prior banks. On July 28, 2004, the Benjamin Franklin Bancorp Board met again with representatives of McConnell Budd Romano and Foley Hoag, as well as with senior management of Benjamin Franklin Bank. After a thorough discussion of the financial analysis presented by McConnell Budd representatives, and a discussion of various strategic alternatives available to the institution, the Board authorized management and representatives of McConnell Budd to submit to Chart Bank a non-binding expression of interest in pursuing a transaction and to conduct price negotiations in a range of $30.50 to $31.50, with 55.0% of the consideration to be paid in stock and 45.0% of the consideration to be paid in cash. The transaction would be conditioned on Benjamin Franklin Bancorp s conversion to stock form. Subsequent to the July 28, 2004 Board meeting, management of Benjamin Franklin Bancorp, with the assistance of its legal and financial advisors, engaged in discussions with Chart Bank, and the parties proceeded to draft a letter of intent to form the basis of negotiations of a definitive merger agreement. After several days of negotiations, Benjamin Franklin Bancorp and Chart Bank agreed to some, but not all, of the material terms of a transaction, including a price of $30.75 per share, and executed a non-binding letter of intent on August 11, 2004. Pursuant to the letter of intent, the parties agreed to work together diligently towards execution of a definitive agreement. After the parties executed the letter of intent, legal counsel for Benjamin Franklin Bancorp prepared and circulated a draft merger agreement and the parties began negotiations concerning the terms of the Table of Contents Neil E. Todreas is a professor of nuclear engineering and a professor of mechanical engineering at Massachusetts Institute of Technology. He also provides consulting services through his company, Energy Technology Associates, Inc. Mr. Todreas is 69 years old. Meetings of the Board of Directors and Committees Benjamin Franklin Bank s Board of Directors meets on a monthly basis and may hold additional special meetings. During 2004, the Board held twelve regular meetings, one of which was an annual meeting, and five special meetings. The Board of Trustees of Benjamin Franklin Bancorp held four regular meetings and eight special meetings during 2004. The Benjamin Franklin Bancorp regular meetings are held immediately before or after the Benjamin Franklin Bank Board meeting scheduled for that month. Following the conversion, the Board of Directors of Benjamin Franklin Bancorp is expected to meet on a monthly basis, or more often as may be necessary. The Boards of Directors of Benjamin Franklin Bank and Benjamin Franklin Bancorp currently have three standing Board Committees. Those Board Committees are the Executive Committee, the Audit and Risk Management Committee and the Compensation Committee. In addition, in anticipation of the conversion, the Board of Benjamin Franklin Bancorp will appoint a Governance Committee. Each of the Audit and Risk Management Committee, Compensation Committee and Governance Committee will be comprised solely of independent directors within the meaning of the rules promulgated under the Sarbanes-Oxley Act of 2002 and the Nasdaq listing requirements. The Board of Directors may, by resolution, designate one or more additional committees. The following committee descriptions set forth the current members of each of Benjamin Franklin Bancorp s existing Board committee. However, immediately after completion of the Chart Bank acquisition, each committee will be reconstituted to integrate the six Chart Bank directors who will join the Board such that, to the extent feasible, former Chart directors serve on each committee in the same proportions as they serve on the Board of Directors. This committee reorganization is also likely to result in certain changes in the committee assignments of the current Benjamin Franklin Bancorp Board members. The Executive Committee currently consists of Dr. William Brady, Jr., William Bissonnette, Anne King, John Murphy, Thomas Venables, Alfred Wahlers, Charles Yergatian, with Dr. Brady serving as Chair. The Executive Committee meets semi-monthly to review ongoing activities and performance of the Bank. The Committee approves loan originations that exceed certain internal limitations, and reviews other loans originations, the monthly asset/liability report and monthly financial reports. The Executive Committee met twenty-five times during 2004. The Audit and Risk Management Committee currently consists of Charles Oteri, Dr. Mary Ambler, John Fuller, Richard Mann, with Mr. Oteri serving as Chair. Each member of the Audit and Risk Management Committee is an independent director as determined in accordance with the Sarbanes-Oxley Act of 2002 and the Nasdaq listing requirements. The Audit and Risk Management Committee, which operates under a charter, oversees the independent auditor relationship, the internal audit, risk management and compliance functions. The Audit and Risk Management Committee met five times during 2004. The Compensation Committee currently consists of William Bissonnette, Richard Mann, John Murphy, Charles Oteri and Alfred Wahlers, with Mr. Bissonnette serving as Chair. The Compensation Committee oversees Director and executive officer compensation and certain employee benefit plans. - 129 - Table of Contents merger agreement. Drafts of consulting agreements and payments and waiver agreements with Richard E. Bolton, Sr. and Richard E. Bolton, Jr. and a draft voting agreement to be executed by certain stockholders of Chart Bank, also were prepared and circulated for discussion. On August 21, 2004, representatives of Benjamin Franklin Bancorp and Chart Bank conducted more specific financial, business, regulatory and legal due diligence at an off-site location. During the period between August 21 and August 30, 2004, the parties discussed and negotiated various issues, including without limitation, the representations and warranties to be made by Chart Bank, the treatment of Chart Bank s employees in the transaction, the conduct of the respective parties businesses between signing and closing of the transaction, the parties respective conditions to closing, the rights of the parties to abandon the transaction, the voting agreements to be entered into by certain stockholders of Chart Bank pursuant to which such stockholders would agree to vote their shares of Chart Bank stock in favor of the transaction, and the consulting and payments and waiver agreements for Mr. Bolton, Sr. and Mr. Bolton, Jr. On August 25, 2004, the Board of Trustees of Benjamin Franklin Bancorp met to discuss the status of the merger negotiations and to hear presentations by senior management about their due diligence review of Chart Bank. On August 30, 2004, the Board met again to consider the terms of the merger agreement, the potential advantages and risks associated with the merger and the conversion and an update of the financial analyses of McConnell Budd Romano. Following a discussion by the Benjamin Franklin Bancorp Board, McConnell Budd Romano delivered an oral opinion concerning the fairness, from a financial point of view, of the proposed consideration to be paid to Chart Bank s stockholders as set forth in the merger agreement, which opinion was later confirmed in writing . Following discussion, by the unanimous vote of all of the directors, the Benjamin Franklin Bancorp Board approved and adopted the merger agreement, authorized management to enter into the merger agreement and directed management and legal counsel to move promptly toward preparation of a plan of conversion and other documents related to the conversion. Chart Bank and Benjamin Franklin Bancorp executed the merger agreement and related agreements on September 1, 2004 and the transaction was publicly announced later that same day. The acquisition will immediately expand our geographic market toward the more densely populated suburbs closer to Boston and will result in a larger branch network for the benefit of the customers of the combined institution. The market served by Chart Bank is a logical geographic extension of our current market area, and is an area in which our Chief Executive Officer and our Chief Financial Officer have significant banking experience. We currently operate in communities southwest of the city of Boston, and the merger with Chart Bank will extend our market area northeast toward Boston. Over the next several years, we intend to open new banking offices in select towns located between the two market areas, which will further enhance the accessibility and convenience of the organization for our combined customer base. Our Board believes that the combination with Chart Bank will enhance the competitive position of the combined entity and will enable the resulting institution to compete more effectively than would the individual institutions alone. We currently compete with a variety of financial institutions, including many that have competitive advantages due to greater financial resources, larger loan limits, larger branch networks and a broader offering of financial services. The combination with Chart Bank will result in a larger company with a larger branch network and greater financial resources that can be utilized to enhance the services we offer. Among the factors considered by our Board were the following: The ability of Benjamin Franklin Bank to establish its physical presence in Middlesex County, which is a contiguous market that offers the opportunity for us to reach new customers and expand our franchise; The beneficial impact of the conversion and the Chart Bank acquisition on the depositors, employees, customers and communities served by the two institutions. The conversion and Table of Contents The Governance Committee is expected to consist of six directors. The Governance Committee will be responsible for establishing criteria for Directors, making recommendations for the nomination of Directors, overseeing self-assessment evaluations for the Board and its Committees and addressing other governance issues. Compensation of Directors During 2004, members of the Benjamin Franklin Bank Board of Directors received an annual retainer of $4,000 for their service on the Board and $450 for each Board meeting that they attended. The Chairman of the Board and the Clerk each received an additional $1,000 retainer for his or her service in that capacity. During 2004, members of the Executive Committee and the Audit and Risk Management Committee received $450 and $600, respectively, for each committee meeting that they attended, but did not receive a separate retainer, except that the Chairman of each committee and the Clerk of the Executive Committee received a $1,000 annual retainer. Upon completion of the conversion, and in recognition of Benjamin Franklin Bank s increased size and change to public company form, the Board and Committee fees will be adjusted as follows. The annual Board retainer will increase to $10,000 per year, and the per meeting fee for Board of Directors meetings will increase to $500 per meeting attended. The annual retainer for the Chairman of the Board and the Clerk of Benjamin Franklin Bank will increase to $2,000 per year. The Executive Committee s per meeting fee will also increase to $500, and the Executive Committee Chairman s annual retainer will increase to $2,000, but the Executive Committee Clerk will no longer receive a retainer. Members of the Audit and Risk Management Committee, Governance Committee and Compensation Committee will not receive per meeting fees, but will receive annual retainers of $8,000, $3,000 and $3,000, respectively. The Chair of each of these three committees will receive an additional annual retainer of $2,000. Members of the Board who are employees of Benjamin Franklin Bank or Benjamin Franklin Bancorp do not receive these fees. Generally, Benjamin Franklin Bancorp s Board of Directors meets immediately prior to or after a Benjamin Franklin Bank Board meeting. In such instances, directors do not receive additional fees for attendance at meetings of Benjamin Franklin Bancorp s Board. Otherwise, the directors of Benjamin Franklin Bancorp receive the same fees they receive for attendance at a Benjamin Franklin Bank Board meeting. Executive Officers The names, ages as of November 15, 2004, and positions of each of our executive officers, other than Thomas R. Venables, who is included in the description of directors above, are set forth below. - 130 - Table of Contents acquisition results in a larger, well-capitalized company that will have greater resources and more locations to serve its depositors, customers and communities. The creation of the charitable foundation will provide additional benefits to the community. As a larger company, we will be better able provide career development opportunities for our employees. The difficulty and expense of expanding our presence through de novo branching in contrast to the efficacy of expanding through acquisition; Information concerning the pro forma financial condition, results of operations, capital levels, asset quality and prospects of the combined institutions which provided a basis for our board to understand and ultimately approve of the transaction; The ability to substantially increase our commercial business and commercial real estate loans, which represent key components of our lending activities; The general structure of the transaction and the compatibility of the respective managements and business philosophies that are thought to have beneficial implications with respect to the integration of the companies; The ability of the combined enterprise to compete more effectively as described above; and General industry and economic conditions that were viewed as favorable with respect to our plans for expansion through acquisition. As a result of the acquisition, six members of Chart Bank s Board of Directors (including Richard E. Bolton Jr., Chart Bank s Chief Executive Officer) will serve on both the Benjamin Franklin Bancorp and the Benjamin Franklin Bank Boards of Directors. We anticipate that when the acquisition is completed, a majority of the employees of Chart Bank will become employees of Benjamin Franklin Bank. Former employees of Chart Bank will be entitled to benefits afforded to our existing employees generally. We will be working to identify operational efficiencies that may be obtained through the consolidation of the entities in the acquisition. It is anticipated that some management and support positions will be eliminated following the acquisition. We have no continuing obligation under the terms of the merger to retain any specific employees of Chart Bank as our employees. On October 13, 2004, after the merger agreement had been approved by our Board and Chart Bank s board, signed by the parties and publicly announced, we retained Ryan Beck Co., Inc. to act as our marketing agent for the conversion stock offering. Prior to our retention of Ryan Beck, both our Board and Chart Bank s board considered, with the advice of counsel, the potential conflicts of interest that might arise if Ryan Beck were to serve as both financial advisor to Chart Bank for the period following execution of the merger agreement and at the same time marketing agent for us in connection with the offering. Our Board determined that it would be in the best interests of Benjamin Franklin Bancorp to engage Ryan Beck as our marketing agent in connection with the offering in view of Ryan Beck s knowledge of the banking markets in which we conduct our business and Ryan Beck s experience in serving as a conversion offering selling agent in connection with transactions of this type. Our Board also considered Ryan Beck s knowledge of and familiarity with the businesses of Benjamin Franklin Bancorp and Chart Bank, as well as Ryan Beck s reputation in the financial services industry generally. Table of Contents In considering Ryan Beck s potential conflict of interest, our Board noted that Benjamin Franklin Bancorp, Chart Bank and Ryan Beck shared a common interest in the successful completion of the conversion offering. Our Board addressed a potential future conflict of interest by conditioning its engagement of Ryan Beck on Ryan Beck s and Chart Bank s agreement that Ryan Beck would not provide financial advisory services to Chart Bank in connection with, or opine on the financial merits of, any potential competing merger or acquisition offer that might be received by Chart Bank subsequent to the announcement of the merger with Benjamin Franklin Bancorp. The Chart Bank board determined that Ryan Beck s service as marketing agent in connection with the offering would be in the best interests of the shareholders of Chart Bank for substantially the same reasons noted above. Although the Chart Bank board recognized that there might be an inconvenience associated with having to retain a new, independent financial advisor if Chart Bank were to receive a competing offer, the Chart Bank board concluded that the benefits of having Ryan Beck serve as marketing agent in connection with the offering, which would further both our interests and Chart Bank s interests in ensuring that the offering and merger are successfully completed, were substantially greater than the burden of this potential inconvenience. With regard to Ryan Beck s services in connection with the merger, Chart Bank will pay an advisory fee equal to 1.00% of the final aggregate transaction value, 80% of which is contingent upon the consummation of the merger. Based upon the aggregate value of the merger consideration on September 1, 2004, the date of announcement of the merger, Ryan Beck s total fee would be approximately $465,000 of which $93,000 was paid shortly after signing the merger agreement. In addition, Chart Bank has agreed to reimburse Ryan Beck for its reasonable out-of-pocket expenses, including the fees and disbursements of Ryan Beck s legal counsel, which will not exceed $5,000 without Chart Bank s prior consent. Chart Bank has also agreed to indemnify Ryan Beck and related persons against certain liabilities, including liabilities under federal securities law, incurred in connection with its services. See Plan of Distribution and Marketing Arrangements beginning on page # for a description of the fees we will pay to Ryan Beck for its services as marketing agent in the conversion. The Chart Bank Merger Agreement The following is a brief summary of the significant provisions of the merger agreement between Benjamin Franklin Bancorp and Chart Bank dated as of September 1, 2004. The merger agreement is filed as an exhibit to the registration statement of which this prospectus is a part and is incorporated by reference herein. The merger agreement contains the complete terms of that agreement and this summary is qualified in its entirety by reference to that agreement. General; Exchange Ratio. Our merger agreement with Chart Bank provides that Chart Bank will merge into Benjamin Franklin Bank immediately after completion of the conversion of Benjamin Franklin Bancorp into stock form. At the effective time of the merger, each outstanding share of Chart Bank common stock will be converted into the right to receive either $30.75 in cash or 3.075 shares of Benjamin Franklin Bancorp common stock, plus cash in lieu of any fractional share, subject to election and allocation procedures. Each Chart Bank option outstanding at the effective time of the merger will be terminated in exchange for a cash payment equal to $30.75, minus the exercise price applicable to the option, multiplied by the number of Chart Bank shares subject to the option. Chart Bank is a closely-held cooperative bank, so its shares are not publicly traded. Chart Bank stockholders will be given the opportunity to elect to receive all cash, all stock or a combination of cash and stock. The election and allocation procedures set forth in the merger agreement will ensure that 55.0% of the shares of Chart Bank common stock will be converted into the right to receive shares of Benjamin Franklin Bancorp common stock and 45.0% of the shares of Chart Bank (Unaudited) Current tax provision (benefit): Federal $ 473 $ 752 $ 863 $ 1,304 $ (546 ) State 105 158 125 144 (1) Upon completion of the Chart Bank merger, two officers of Chart Bank, Alfred F. Odoardi and James Golden, are expected to become our executive officers. Their biographies are included below. Claire S. Bean has served as Executive Vice President/Chief Financial Officer of Benjamin Franklin Bank since July, 2004. Prior to her employment with Benjamin Franklin Bank, Ms. Bean served as Banking Advisor in the Capital Markets Group of FINCA International, Inc. and later as Regional Director of FINCA for Eastern Europe and NIS. From May 2002 to June 2003, Ms. Bean served as Director of Economic Development in Kyrgyzstan for the Mercy Corps, and from June 2003 to September 2003, she served as Manager of Micro-enterprise and Economic Development for the same organization. In addition, from 1999 to 2001, Ms. Bean served as Chief Operating Officer and Chief Financial Officer of Lighthouse Bank of Waltham, Massachusetts. From 1991 to 1997, Ms. Bean served as Executive Vice President/Treasurer of Grove Bank of Chestnut Hill, Massachusetts. Stephen F. Banks has served as Executive Vice President/Chief Information Officer of Benjamin Franklin Bank since January 2001. Mr. Banks joined the Bank in 1996 as Assistant Vice President/ Operations and was promoted to Senior Vice President of Systems/Operations in 1998. Prior to his employment at Benjamin Franklin Bank, Mr. Banks served as a data center manager at Bankline New England from 1995 to 1996 and as Vice President/Senior Operations Officer of Quincy Savings Bank from 1987 to 1995. Ronald E. Baron has served as Senior Vice President/Treasurer of Benjamin Franklin Bank since April, 2003. Mr. Baron joined the Bank in June 1997 as Assistant Vice President/Controller. He was promoted to Vice President/Treasurer and Controller in January 2002 and to Senior Vice President in April 2003. Prior to his employment at Benjamin Franklin Bank, Mr. Baron served as Vice President of Finance at Educor, Inc. for three years and was a Credit Specialist at Federal Deposit Insurance Corporation from 1991 to 1994. Mariane E. Broadhurst has served as Senior Vice President/Retail Banking of Benjamin Franklin Bank since April, 2003. Ms. Broadhurst joined the Bank in August 1992 as a Branch Manager. She was promoted to Assistant Vice President/Branch Administrator in December 1997 and in April 2002 was promoted to Vice President of Retail Banking. Prior to her employment with Benjamin Franklin Bank, Ms. Broadhurst was employed as an Assistant Treasurer/Branch Sales Manager of Heritage Bank in Worcester, Massachusetts, beginning in 1988. Rose M. Buckley has served as Senior Vice President/Senior Commercial Lending Officer of Benjamin Franklin Bank since April 2003. She joined the Bank in 1984 as a commercial loan officer. - 131 - Table of Contents She was promoted to Assistant Vice President/Commercial Lending in April 1997 and to Vice President/Commercial Lending in April 1998. Michael J. Piemonte has served as Senior Vice President/Risk Management and Compliance of Benjamin Franklin Bank since December, 2003. He joined Benjamin Franklin Bank in March, 1998 as Assistant Vice President/Auditor/Compliance and Loan Review Officer in the Internal Audit Department. He became Assistant Vice President/Compliance Officer in the Compliance Department in July 2001 and became Vice President/Risk Management and Compliance in December 2001. Brian E. Ledwith has served as Vice President/Senior Retail Lending Officer of Benjamin Franklin Bank since September, 2004. He joined the Bank in February, 2004 as Vice President/Commercial Lending. Prior to his employment with Benjamin Franklin Bank, Mr. Ledwith served as Vice President/Senior Loan Officer of Medway Cooperative Bank of Medway, Massachusetts. From 2000 to 2002, Mr. Ledwith served as Vice President of Commercial Lending Department of Strata Bank in Franklin, Massachusetts. In addition, from 1998 to April 2000, Mr. Ledwith served as Vice President of Commercial Banking of Rockland Trust in Brockton, Massachusetts. Kathleen P. Sawyer has served as Vice President/Human Resources of Benjamin Franklin Bank since April, 2003. Ms. Sawyer served as a Human Resources Officer of Benjamin Franklin Bank from 1996 to 2000, and as Assistant Vice President/Human Resources from 2000 to 2003. Upon completion of the Chart Bank acquisition, the following two officers of Chart Bank are expected to become executive officers of Benjamin Franklin Bank. Alfred J. Odoardi, has served as Senior Vice President Commercial Lending and Senior Loan Officer of Chart Bank since August 1995. Upon completion of the Chart Bank acquisition, Mr. Odoardi is expected to become Senior Vice President of Benjamin Franklin Bank and will be responsible for the commercial business loan department that Benjamin Franklin Bank intends to establish following the acquisition. Mr. Odoardi is 55 years old. James Golden is Vice President of Chart Bank s ATM cash management and settlement services subsidiary, CSSI, a position he has held since October 2001. Previously, he served as Chart Bank s Vice President Retail Banking, from October 2001 to October 2003, and as a branch manager from August 1997 to January 2000. Mr. Golden has also served Chart Bank as its Compliance Officer since October 1997 and as its Security Officer and CRA Officer since January 1998. Upon completion of the Chart Bank acquisition, Mr. Golden is expected to become a Vice President of Benjamin Franklin Bank and will continue to be responsible for the CSSI ATM cash management and settlement services business. Mr. Golden is 41 years old. Indemnification and Limitation of Liability The By-Laws of Benjamin Franklin Bancorp provide that each director of Benjamin Franklin Bancorp and each officer appointed or elected by the Board of Directors of Benjamin Franklin Bancorp who is serving in the level of vice president or above shall be indemnified by Benjamin Franklin Bancorp to the maximum extent permitted by law against all expenses and other liabilities incurred by such person in connection with any threatened, pending or completed proceeding in which he or she is involved as a result of (i) his or her serving or having served as a director of Benjamin Franklin Bancorp, (ii) his or her serving or having served as an officer of Benjamin Franklin Bancorp, or (iii) while he or she is or was serving as a director or officer of Benjamin Franklin Bancorp, his or her serving or having served in any capacity with respect to any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise at the request or direction of Benjamin Franklin Bancorp. The Board of Directors may, in - 132 - Table of Contents its discretion, indemnify officers serving below the level of vice president and employees of Benjamin Franklin Bancorp. The articles of organization of Benjamin Franklin Bancorp provide that, to the maximum extent permitted by the Massachusetts Business Corporation Act, no director shall be personally liable to Benjamin Franklin Bancorp or its stockholders for monetary damages for breach of fiduciary duty as a director notwithstanding any provision of law imposing such liability. Executive Officer Compensation The following table sets forth certain information as to the total remuneration paid by Benjamin Franklin Bancorp and Benjamin Franklin Bank during the fiscal years ended December 31, 2004 and 2003 to the President and Chief Executive Officer of Benjamin Franklin Bancorp and Benjamin Franklin Bank and to the five most highly compensated executive officers of Benjamin Franklin Bancorp and Benjamin Franklin Bank other than the President and Chief Executive Officer who served as executive officers during or at the end of 2004 and who received total annual compensation in excess of $100,000. Each of the individuals listed on the table below is referred to as a named executive officer. Summary Compensation Table Name and Principal Position with Annual Compensation Benjamin Franklin Bancorp and Other Annual All Other Benjamin Franklin Bank Year Salary Bonus (1) Compensation (2) Compensation Thomas R. Venables, President and Chief Executive Officer of Benjamin Franklin Bancorp and Benjamin Franklin Bank 2004 2003 $ $ 275,000 250,000 $ $ 50,000 50,000 $ $ 72,247 89,032 (3) Stephen F. Banks, Executive Vice President and Chief Information Officer of Benjamin Franklin Bank 2004 2003 $ $ 139,300 135,200 $ $ 20,000 20,000 $ $ 48,370 23,900 (4) Ronald E. Baron, Senior Vice President and Treasurer of Benjamin Franklin Bank and Treasurer of Benjamin Franklin Bancorp 2004 2003 $ $ 100,000 95,000 $ $ 4,000 4,750 $ $ 6,285 2,777 (5) Rose M. Buckley, Senior Vice President and Senior Commercial Lending Officer of Benjamin Franklin Bank 2004 2003 $ $ 96,300 90,000 $ $ 18,000 9,000 $ $ 5,778 7,200 (5) Mariane E. Broadhurst, Senior Vice President/Retail Banking of Benjamin Franklin Bank 2004 2003 $ $ 90,000 80,000 $ $ 12,600 7,200 $ $ 5,400 6,417 (5) Patrick E. Niro (6) 2004 2003 $ $ 247,118 155,000 (7) $ $ 12,500 12,425 $ $ 96,586 28,014 (8) (1) Represents bonuses earned in 2004 and 2003, but paid in 2005 and 2004, respectively. (2) Perquisites and other personal benefits paid to each named executive officer in each instance did not, in the aggregate, equal or exceed the lesser of either $50,000 or 10% of the total annual salary and bonus set forth in the columns entitled Salary and Bonus for each officer and, accordingly, are omitted from the table as permitted by the rules of the Securities and Exchange Commission. (3) Includes Benjamin Franklin Bank s matching contribution of $12,300 under its 401(k) plan and an accrual in connection with Mr. Venables s salary continuation agreement in the amount of $59,947. (4) Includes Benjamin Franklin Bank s matching contribution of $9,558 under its 401(k) plan and an accrual in connection with Mr. Banks s supplemental executive retirement plan in the amount of $38,812. (5) Represents Benjamin Franklin Bank s matching contributions under its 401(k) plan. Footnotes continued on following page - 133 - Table of Contents (6) Mr. Niro served as Executive Vice President and Senior Retail Lending Officer of Benjamin Franklin Bank and Vice President of Benjamin Franklin Bancorp until his retirement on September 17, 2004. (7) In addition to salary in the amount of $139,300, includes payments of $45,909 for consulting services during the period September 17, 2004 through December 31, 2004 and a severance payment of $79,575. (8) Includes Benjamin Franklin Bank s matching contribution of $12,300 under its 401(k) plan and a lump sum payment of $84,286 under Mr. Niro s salary continuation agreement. Employment and Change in Control Agreements Employment Agreements. In connection with the conversion, Benjamin Franklin Bancorp will enter into employment agreements with its Chief Executive Officer, Mr. Venables, and its two Executive Vice Presidents, Ms. Bean and Mr. Banks. The agreements provide for an annual base salary, subject to increase (which increased amount becomes a floor below which the officer s base salary may not fall during the term of the agreement), and certain benefits. They also guarantee customary corporate indemnification and errors and omissions insurance coverage throughout the employment term and for six years after termination. The current base salary of each of Mr. Venables, Ms. Bean and Mr. Banks is $315,000, $200,000, and $150,000, respectively. The initial term of each agreement is three years, with the term automatically extended by one day for each day that the officer is employed by Benjamin Franklin Bancorp and Benjamin Franklin Bank, although the automatic extensions may be discontinued at any time by Benjamin Franklin Bancorp, Benjamin Franklin Bank or the officer. For a one-year period following termination of the executive s employment, the executive must adhere to a non-competition restriction and refrain from soliciting employees or certain large commercial loan customers. Such provision is not operative after the occurrence of a change in control of Benjamin Franklin Bancorp. In the event the officer s employment is terminated by Benjamin Franklin Bancorp or Benjamin Franklin Bank for other than specially-defined cause or by the officer for good reason, each as defined in the agreements, the officer will be entitled to receive a lump sum severance benefit equal to three times the highest yearly compensation paid to the officer in the three fiscal years preceding the termination, plus certain other benefits. These benefits include continuation of disability and medical benefits for three years following termination, an adjustment to the officer s pension, and acceleration of all vesting of stock awards and options. If the executive s employment is terminated following a change in control, the non-competition and nonsolicitation provisions described above would not apply. Mr. Venables and Ms. Bean would also be entitled to receive an additional tax indemnification payment if payments under the employment agreements or any other payments triggered liability under Section 280G of the Internal Revenue Code as an excise tax constituting excess parachute payments. Under applicable law, the excise tax is triggered by change in control-related payments that equal or exceed three times the executive s average annual compensation over the five calendar years preceding the change in control. The excise tax equals 20.0% of the amount of the payment in excess of one times the executive s average compensation over the preceding five calendar year period. In the event payments and benefits under Mr. Banks s employment agreement, together with other payments and benefits he may receive, would constitute an excess parachute payment under Section 280G of the Internal Revenue Code, such payments would be reduced to an amount necessary to avoid such payments constituting parachute payments. Change in Control Agreements. Benjamin Franklin Bancorp will also enter into change in control agreements with six of its senior officers in connection with the conversion. The change in control agreements provide for a lump sum severance payment equal to approximately one times (in the case of Mr. Baron, Mr. Ledwith, Mr. Piemonte and Ms. Sawyer) or two times (in the case of Ms. Broadhurst and - 134 - December 31, 2002: Securities available for sale: U.S. Government and federal agency obligations $ 67,513 $ 72 $ (3 ) $ 67,582 State and municipal bonds 570 570 Mortgage-backed securities 26,376 160 (90 ) 26,446 Other bonds and obligations 3,536 Table of Contents Ms. Buckley) the officer s base salary plus the highest annual bonus paid during the three most recent calendar years and certain other benefits upon termination of the officer s employment under certain circumstances. Pursuant to the terms of the change in control agreements, these severance payments will be triggered if, within two years after a change in control, as defined in the agreements, of Benjamin Franklin Bancorp or Benjamin Franklin Bank, the officer s employment is terminated for any reason other than death, deliberate dishonesty or gross misconduct of the officer with respect to Benjamin Franklin Bancorp or any of its subsidiaries, or conviction of the officer for the commission of a felony. These payments will also be triggered if the officer terminates his or her employment following: (i) a reduction in the officer s annual base salary; (ii) a relocation of the offices of Benjamin Franklin Bancorp or Benjamin Franklin Bank at which the officer is principally employed by more than a specified number of miles; (iii) a failure of Benjamin Franklin Bancorp or Benjamin Franklin Bank to pay any portion of compensation due to the officer within seven days of the date such compensation is due; (iv) a failure by Benjamin Franklin Bancorp or Benjamin Franklin Bank to continue the officer s participation in any material compensation, incentive bonus or benefit plan (or in a successor plan) or the failure of a successor in interest to make available its benefits plans to the officer on a basis that is not substantially less favorable than the successor generally affords to its other employees holding similar positions; or (v) a failure of Benjamin Franklin Bancorp or Benjamin Franklin Bank to obtain a satisfactory agreement from any successor to assume and agree to perform the officer s change in control agreement. In addition, if the officer s employment is terminated for the reasons described above, Benjamin Franklin Bancorp will continue to pay to the officer the disability and medical benefits existing as of and at the level in effect on the date of termination, at no greater cost to the officer than the officer is currently paying, for one year (in the case of Mr. Baron, Mr. Ledwith, Mr. Piemonte and Ms. Sawyer) or two years (in the case of Ms. Broadhurst and Ms. Buckley). In the event payments and benefits under the change in control agreements, together with other payments and benefits the officers may receive, would constitute an excess parachute payment under Section 280G of the Internal Revenue Code, such payments would be reduced to an amount necessary to avoid such payments constituting parachute payments. Benefit Plans Employee Stock Ownership Plan. In anticipation of the conversion, Benjamin Franklin Bank has established an employee stock ownership plan for its employees. Employees who have been credited with at least 1,000 hours of service during a consecutive twelve-month period and who have attained age 21 will be eligible to participate in Benjamin Franklin Bank s employee stock ownership plan. As part of the conversion, the employee stock ownership plan intends to purchase 8.0% of the common stock issued in the offering (including shares issued to the Benjamin Franklin Bank Charitable Foundation). Benjamin Franklin Bank anticipates that the employee stock ownership plan will borrow from Benjamin Franklin Bancorp (or a subsidiary established for that purpose) to fund these purchases. The loan from Benjamin Franklin Bancorp to the employee stock ownership plan will be repaid principally from Benjamin Franklin Bank s contributions to the employee stock ownership plan over a period of 30 years and the collateral for the loan will be the stock purchased by the employee stock ownership plan. The interest rate for the employee stock ownership plan loan from Benjamin Franklin Bancorp will be fixed and is expected to be at Benjamin Franklin Bank s prime rate at the date the loan is entered into with the employee stock ownership plan. Benjamin Franklin Bank and Benjamin Franklin Bancorp may, in any plan year, make additional discretionary contributions for the benefit of plan participants in cash, shares of common stock, or other property. The timing, amount and manner of future contributions to the employee stock ownership plan will be affected by various factors, including prevailing regulatory policies, the requirements of applicable laws and regulations and market conditions. - 135 - Table of Contents Shares purchased by the Benjamin Franklin Bank employee stock ownership plan will be held in a suspense account and released for allocation to participants on a pro rata basis as debt service payments are made. Shares released from the employee stock ownership plan will be allocated to each eligible participant s employee stock ownership plan account based on the ratio of each such participant s compensation, as defined, to the total compensation of all eligible employee stock ownership plan participants. Forfeitures shall be reallocated among remaining participating employees. Upon the completion of two years of service, the account balances of participants within the employee stock ownership plan will become 20.0% vested. The vested percentage of participants account balances will thereupon be increased by an additional 20.0% for each additional year of service, until account balances reach 100.0% vesting upon the completion of six years of service. Credit is given for years of service with Benjamin Franklin Saving Bank or any of its affiliates prior to the adoption of the employee stock benefit plan. In the event of a change in control, as defined in the employee stock ownership plan, however, participants will become immediately fully vested in their account balances. Participants will also become fully vested in their account balances upon death, disability, retirement, termination of this plan, or the permanent and complete discontinuance of contributions by Benjamin Franklin Bank and any of its affiliates to this plan. Benefits may be payable upon retirement or separation from service. It is currently expected that an independent corporate trustee will be appointed by Benjamin Franklin Bank to serve as the trustee of the Benjamin Franklin Bank employee stock ownership plan. Under the terms of the Benjamin Franklin Bank employee stock ownership plan, the trustee must generally vote all allocated shares held in the employee stock ownership plan in accordance with the instructions from the participating employees. Unallocated shares and allocated shares for which no written instructions have been received by the trustee regarding voting will be voted by the trustee in a manner calculated to most accurately reflect the instructions the trustee has received from participants regarding allocated shares, and must be voted in a manner determined by the trustee to be solely in the best interests of the participants and beneficiaries of the plan. Generally accepted accounting principles require that any third party borrowing by the Benjamin Franklin Bank employee stock ownership plan be reflected as a liability on Benjamin Franklin Bank s balance sheet. If the employee stock ownership plan borrows the necessary funds from Benjamin Franklin Bancorp, the loan will not be treated as a liability but instead will be excluded from stockholders equity. If the employee stock ownership plan purchases newly issued shares from Benjamin Franklin Bancorp, total stockholders equity would neither increase nor decrease, but per share stockholders equity and per share net earnings would decrease as the newly issued shares are allocated to the employee stock ownership plan participants. Benjamin Franklin Bank s employee stock ownership plan will be subject to the requirements of the Employee Retirement Income Security Act of 1974, as amended, and the applicable regulations of the Internal Revenue Service and the Department of Labor. 401(k) Plan. Benjamin Franklin Bank maintains the SBERA 401(k) Plan as adopted by Benjamin Franklin Bank, a tax-qualified plan under Section 401(a) of the Internal Revenue Code with a cash or deferred arrangement under Section 401(k) of the Internal Revenue Code. In general, all salaried and hourly employees who are at least age 21 become eligible to make salary reduction contributions in the 401(k) plan and to receive matching contributions from Benjamin Franklin Bank under the 401(k) plan on the first day of the month following the completion of three months of employment with Benjamin Franklin Bank. - 136 - Table of Contents Under the 401(k) plan, participants may elect to have Benjamin Franklin Bank contribute up to 75.0% of their compensation to the 401(k) plan, subject to the dollar limitations imposed by the Internal Revenue Code. Benjamin Franklin Bank currently makes matching contributions to the 401(k) plan equal to 200.0% of the first 3.0% of compensation deferred by a participant. Compensation for purposes of the 401(k) plan generally consists of total taxable income of a participant as reported on Form W-2 with all pre-tax contributions added, but excluding compensation received from the Vacation Buy Back Program. The level of matching contributions under the 401(k) plan may change from time to time. Currently, participants in the 401(k) plan may direct the investment of their accounts in several types of investment funds. In connection with the conversion, Benjamin Franklin Bank has amended the 401(k) plan to permit participants in the 401(k) plan to direct the investment of their accounts in common stock of Benjamin Franklin Bancorp, which shares will be held in a newly formed Employer Stock Fund. Investment in the Employer Stock Fund will generally be limited to 20.0% of a participant s 401(k) account, but a participant may waive this limitation upon signing a certification that he or she understands the risk of Benjamin Franklin Bancorp stock ownership. Participants in the 401(k) plan will be given the opportunity to direct the 401(k) plan trustee to subscribe for shares of Benjamin Franklin Bancorp common stock in the conversion based on their individual subscription priorities, using the funds in the participants 401(k) plan accounts. See The Conversion and the Offering Subscription Offering and Subscription Rights on page # . Participants are always 100.0% vested in their elective deferrals and related earnings under the 401(k) plan. In addition, participants become fully vested in matching contributions and related earnings when such contributions are deposited. Participants may receive distributions from the 401(k) plan in the form of a single lump payment or installment payments. Benefit Restoration Plan. In connection with the conversion, Benjamin Franklin Bank intends to establish the Benefit Restoration Plan, a non-tax-qualified plan that will provide restorative payments to certain executives who are prevented from receiving earned benefits under Benjamin Franklin Bank s 401(k) plan or employee stock ownership plan because of limitations in the Internal Revenue Code applicable to tax-qualified plans. The initial participants in the benefit restoration plan will be Mr. Venables and Ms. Bean, with the Board of Directors of Benjamin Franklin Bank designating certain management personnel or highly compensated employees as additional participants in the benefit restoration plan from time to time. The Board of Directors of Benjamin Franklin Bank may also limit which benefits such additional participants will receive under the benefit restoration plan. Eligible participants will receive a restorative payment equal to the amount of additional benefits the participants would receive under the 401(k) plan if there were no income limitations imposed by the Internal Revenue Code. Eligible participants will also receive a restorative payment in lieu of shares that cannot be allocated to participants under the employee stock ownership plan due to the legal limitations imposed on tax-qualified plans. In addition, eligible participants who retire before the repayment in full of the loan to the employee stock ownership plan will receive restorative payments equal to the projected value of shares of Benjamin Franklin Bancorp common stock that would have been allocated to the executive over the remaining term of any loan, as if employment had continued through the full term of the loan, regardless of limitations in the Internal Revenue Code. Retirement is defined in the benefit restoration plan as the first to occur of termination of employment at any time following satisfaction of the requirements for early or normal retirement under the employee stock ownership plan (unless otherwise permitted by the Benjamin Franklin Bank Board of Directors), death while employed as a full-time employee, or the occurrence of a change in control, regardless of whether the participant continues in the employ of the employer or any successor following the change in control. - 137 - Table of Contents Executive Salary Continuation Agreement and Supplemental Executive Retirement Plan. Each of Mr. Venables and Mr. Banks is also entitled to retirement benefits pursuant to the terms of a Salary Continuation Agreement with Benjamin Franklin Bank and Benjamin Franklin Bancorp (in the case of Mr. Venables) or a Supplemental Executive Retirement Plan with Benjamin Franklin Bank (in the case of Mr. Banks). These benefit arrangements are sometimes referred to as SERPs. Under the terms of his SERP, Mr. Venables is entitled to an annual retirement benefit at age 65, payable in monthly installments for a period of 20 years, equal to 75.0% of his total compensation for the last full calendar year of employment, but reduced by his annual annuity retirement benefit from Benjamin Franklin Bank s contributions to his 401(k) plan and his annual social security benefit. Under the terms of his SERP, Mr. Banks is entitled to an annual retirement benefit at age 65, payable in monthly installments for a period of 15 years, equal to 65.0% of the average of his annual compensation during the 36 consecutive calendar months during his last ten years of employment by Benjamin Franklin Bank in which such compensation was the highest, but reduced by the annual amount of benefits payable to him arising from Benjamin Franklin Bank s contributions to his 401(k) plan, the annual amount of benefits payable to him from any other non-qualified supplemental retirement plan of Benjamin Franklin Bank, the annual amount of benefits payable to him from any qualified defined benefit pension plan of Benjamin Franklin Bank, and one-half of his annual social security benefit. Each of Mr. Venables and Mr. Banks is entitled to a reduced benefit upon retirement prior to age 65 equal to the liability then accrued on Benjamin Franklin Bank s books for the costs of benefits payable pursuant to the executive s SERP. Based upon current compensation levels (adjusted for inflation at the rate of 5%) and assuming retirement at age 65, Mr. Venables would be entitled to an annual benefit of $443,832 under his SERP and Mr. Banks would be entitled to an annual benefit of $125,415 under his SERP. In connection with the conversion, Benjamin Franklin Bancorp intends to amend Mr. Venables s and Mr. Banks s SERPs to include a provision that any amounts payable under these agreements will be reduced by amounts payable to each executive under the employee stock ownership plan and, in the case of Mr. Venables, the benefit restoration plan. Benjamin Franklin Bancorp also intends to amend Mr. Venables s SERP so that his annual retirement benefit, payable under the SERP, will be reduced by one-half of his annual social security benefit, instead of the full amount of his annual social security benefit. In addition, Benjamin Franklin Bancorp intends to amend Mr. Venables s and Mr. Bank s SERPs to comply with a new provision of the Internal Revenue Code, Section 409A, which is effective January 1, 2005, and applies to deferred compensation arrangements. In order to comply with Section 409A, both SERPs will be amended to provide that any payment upon termination of employment, other than in the case of death, shall not be made until at least 6 months after such termination. Also, both SERPs will be amended to remove the potential for Benjamin Franklin Bancorp or Mr. Venables or Mr. Banks to exercise discretion with regard to the timing or form of payment under the SERP. These amendments will not be implemented until the Internal Revenue Service issues further guidance regarding Section 409A, which is expected to be issued in the first half of 2005. In addition, after the IRS issues that further guidance, Benjamin Franklin Bancorp intends to implement an additional salary continuation agreement to provide for supplemental retirement benefits to Ms. Bean, upon terms similar to those of Mr. Banks s agreement. Employee Salary Continuation Plan. Benjamin Franklin Bancorp has established, effective upon completion of the conversion, an employee salary continuation plan, which will provide eligible employees with severance pay benefits and other benefits in the event that their employment is terminated within a year after a change in control of Benjamin Franklin Bancorp or Benjamin Franklin Bank. Severance benefits will be equal to the greater of (i) two weeks salary for each year or partial year of service, up to a maximum of 52 weeks salary, or (ii) the applicable minimum benefit. For Senior Vice Presidents or higher, the minimum benefit is 52 weeks salary, for Vice Presidents, it is 39 weeks salary, for Assistant Vice Presidents, it is 26 weeks salary, for all other exempt employees, it is 13 - 138 - Table of Contents weeks salary, for all other full-time employees, it is 8 weeks salary, and for all part-time employees, it is 6 weeks salary. Employees entitled to severance also receive continued employer-paid life and health insurance coverage for the greater of (a) six months or (b) the number of weeks of salary continuation benefits to which the employee is entitled under the plan, as well as professional outplacement and job assistance services. These benefits are also available to employees who resign because they have not been offered a comparable position following a change in control. A comparable position is defined as a position which is offered to an employee where (a) there is no reduction in base salary or scheduled hours, and (b) the employee will be principally employed at a location not more than 25 miles from the office where the employee is principally employed immediately prior to the change in control. Director Fee Continuation Plan. Benjamin Franklin Bancorp has established, effective upon completion of the conversion, a director fee continuation plan, which provides certain benefits to all eligible non-employee members of the boards of directors of Benjamin Franklin Bank and Benjamin Franklin Bancorp upon retirement. A director is eligible to receive these benefits (provided that the director was not terminated for cause) if the director has served as a director for three years or more with Benjamin Franklin Bank or Benjamin Franklin Bancorp. Service with a corporate predecessor, such as Chart Bank, is not included in determining whether this three-year service requirement has been met. A director who has served on the board or as clerk for at least 15 years (10 years for those who have attained age 70) is entitled to receive an annual payment, commencing upon termination of service and payable for five years, equal to the average total yearly fees for services as a director paid by Benjamin Franklin Bancorp or Benjamin Franklin Bank to the director for the three calendar years preceding the year of the director s retirement. Service with a corporate predecessor, such as Chart Bank, is included in determining the amount of the normal retirement benefit. Eligible directors who retire prior to attaining the full 15 (or 10) years of service are entitled to receive a reduced retirement benefit, based upon the director s number of years of service, payable annually for five years following termination of service. In the event of a change in control, as defined in the directors fee continuation plan, if an eligible director s service is terminated or if the director is not proposed for reelection within three years following the change in control, the director is entitled to receive a full normal retirement benefit (as if he had served as a director for 15 years) as a lump sum upon termination of service. An eligible director who becomes disabled prior to age 70 is also entitled to receive the normal retirement benefit, payable in equal installments over five years and commencing upon termination of service. In addition, upon the death of an eligible director prior to termination of service, the director s beneficiary is entitled to receive a normal retirement benefit, and upon the death of an eligible director after retirement, the director s beneficiary is entitled to receive the remainder of any benefit payments to which the director is entitled, with each such benefit payable annually and commencing upon the death of the director. Stock-Based Incentive Plan. Following the conversion we intend to implement a stock-based incentive plan that will provide for grants of stock options and restricted stock to directors, officers and employees. The stock-based incentive plan cannot be established sooner than six months after the offering and, if implemented less than one year after the offering, would require the approval of our stockholders by two-thirds of the outstanding shares of Benjamin Franklin Bancorp common stock. If the stock-based incentive plan is implemented more than one year after the offering, the stock-based incentive plan must be approved by a majority of the shares of Benjamin Franklin Bancorp present and voting. If such plan is adopted less than one year after completion of the offering, the number of options granted and restricted shares awarded under the plan may not exceed 10.0% and 4.0%, respectively, of the total shares issued in the offering, including shares issued to the Benjamin Franklin Bank Charitable Foundation. However, these limitations would not apply if such stock-based incentive plan is implemented one year or more after the completion of the offering. Finally, if adopted within one year, - 139 - Table of Contents the stock-based incentive plan would be subject to such other limitations as may be imposed by the Massachusetts Commissioner of Banks, including the following requirements: Non-employee directors in the aggregate may not receive more than 30.0% of the options and restricted awards authorized under the plan; Any one non-employee director may not receive more than 5.0% of the options and restricted awards authorized under the plan; Any officer or employee may not receive more than 25.0% of the options and restricted awards authorized under the plan; The options and restricted awards may not vest more rapidly than 20.0% per year, beginning on the first anniversary of stockholder approval of the plan; and Accelerated vesting is not permitted except for death or disability. After the first anniversary of the conversion, we may amend the plan to change or remove these restrictions. If we adopt a stock-based incentive plan within one year after the conversion, we expect to amend the plan later to remove these restrictions and to provide for accelerated vesting in cases of retirement and change of control. We may obtain the shares needed for this plan by issuing additional shares or through stock repurchases. We have not decided whether we will implement this plan before or after the one-year anniversary of the conversion. Transactions with Directors and Executive Officers Federal law and regulation generally require that all loans or extensions of credit to directors and executive officers must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with the general public and must not involve more than the normal risk of repayment or present other unfavorable features. However, regulations also permit directors and executive officers to receive the same terms through benefit or compensation plans that are widely available to other employees, as long as the director or executive officer is not given preferential treatment compared to the other participating employees. Pursuant to such a program, loans have been extended to directors and executive officers, which loans are on substantially the same terms as those prevailing at the time for comparable transactions with the general public. These loans do not involve more than the normal risk of repayment or present other unfavorable features. The six directors of Chart Bank who will become directors of Benjamin Franklin Bancorp are stockholders of Chart Bank, and in such capacity they have a material interest in the merger agreement between Benjamin Franklin Bancorp and Chart Bank. The following table summarizes the number of shares of Benjamin Franklin Bancorp common stock and amount of cash that each of these directors will receive in the merger in exchange for his shares of Chart Bank common stock and Chart Bank options. The information in the table is based on the number of shares of Chart Bank common stock in which a director has or shares a direct or indirect pecuniary interest as of December 6, 2004, which in some cases is different from the number of shares that the director beneficially owns, and assumes that each director exchanges 55% of his Chart Bank shares for shares of Benjamin Franklin Bancorp common stock and 45% of his Chart Bank shares for cash and that all Chart Bank options are cashed out at the closing rather than being exercised prior to the closing. - 140 - Table of Contents Director Shares Cash Richard E. Bolton, Jr. 14,375 $ 947,625 Paul E. Capasso 35,711 292,207 Jonathan A. Haynes (1) 115,287 943,296 Daniel F. O Brien 17,250 141,150 Donald P. Quinn (2) 58,863 481,641 Neil E. Todreas 116,273 951,333 (1) Includes 40,792 shares and $333,770 in which Mr. Haynes s children have a pecuniary interest. (2) Includes 7,120 shares and $ 58,282 in which Mr. Quinn s spouse has a pecuniary interest, but with respect to which Mr. Quinn disclaims beneficial ownership. See The Acquisition of Chart Bank Interests of Chart Bank s Directors and Officers in the Merger for a description of the payments and waiver agreement and consulting and non-competition agreement we have entered into with Richard E. Bolton Jr. and the severance agreement between Alfred Odoardi and Chart Bank. Mr. Odoardi is expected to become an executive officer of Benjamin Franklin Bank after completion of the Chart Bank acquisition. Compensation Committee Interlocks and Insider Participation The Board of Trustees of Benjamin Franklin Bancorp established a Compensation Committee in connection with the adoption of various compensation plans and agreements in anticipation of the conversion. The members of the Compensation Committee are William Bissonnette, Richard Mann, John Murphy, Charles Oteri and Alfred Wahlers. No person now serving as a member of the Compensation Committee is a current or former officer or employee of Benjamin Franklin Bancorp or Benjamin Franklin Bank or engaged in certain transactions with Benjamin Franklin Bancorp or Benjamin Franklin Bank that are required to be disclosed by SEC regulations. Additionally, there are no compensation committee interlocks, which generally means that no executive officer of Benjamin Franklin Bancorp or Benjamin Franklin Bank served as a director or member of the compensation committee of another entity, one of whose executive officers serves as a Director or member of the Compensation Committee. - 141 - Table of Contents PURCHASES BY BENJAMIN FRANKLIN BANCORP MANAGEMENT IN THE OFFERING The following table sets forth information regarding intended common stock purchases by each of our directors and executive officers and their associates, and by all directors and executive officers as a group, assuming the availability of shares. In the event the individual maximum purchase limitation is increased, persons subscribing for the maximum amount may increase their purchase order. This table excludes shares to be purchased by the employee stock ownership plan. The table also shows the shares to be issued in the Chart Bank acquisition to the directors and officers of Chart Bank who will become our directors and officers after completion of the acquisition, assuming that 55% of the shares of Chart Bank common stock beneficially owned by these persons are exchanged for shares of Benjamin Franklin Bancorp common stock and that all Chart Bank options are cashed out at the closing rather than being exercised prior to the closing. Proposed Purchases in Total Common Stock the Offering Shares to be to be Held Number of Aggregate Issued in the Number of % of Total Shares Price Acquisition Shares Outstanding (1) Current Benjamin Franklin Bancorp Directors Dr. Mary Ambler 20,000 $ 200,000 0 20,000 0.26 % William P. Bissonnette 10,000 100,000 0 10,000 0.13 % William F. Brady, Jr., D.D.S 15,000 150,000 0 15,000 0.19 % John C. Fuller 10,000 100,000 0 10,000 0.13 % Anne M. King 5,000 50,000 0 5,000 0.06 % Richard D. Mann 20,000 200,000 0 20,000 0.26 % John D. Murphy 15,000 150,000 0 15,000 0.19 % Charles F. Oteri 5,000 50,000 0 5,000 0.06 % Thomas R. Venables 25,000 250,000 0 25,000 0.32 % Alfred H. Wahlers 5,000 50,000 0 5,000 0.06 % Charles Yergatian 15,000 150,000 0 15,000 0.19 % Chart Bank Directors who will become Benjamin Franklin Bancorp Directors Richard E. Bolton, Jr. 0 0 14,375 (2) 14,375 (2) 0.18 % Paul E. Capasso 0 0 35,711 (3) 35,711 (3) 0.46 % Jonathan A. Haynes 0 0 210,472 (4) 210,472 (4) 2.70 % Daniel F. O Brien 0 0 17,250 17,250 0.22 % Donald P. Quinn 0 0 431,047 (5) 431,047 (5) 5.53 % Neil E. Todreas 0 0 116,273 116,273 1.49 % Current Executive Officers of Benjamin Franklin Bancorp who are not Directors Claire S. Bean 25,000 $ 250,000 0 25,000 0.32 % Stephen F. Banks 6,500 65,000 0 6,500 0.08 % Rose M. Buckley 5,000 50,000 0 5,000 0.06 % Mariane E. Broadhurst 10,000 100,000 0 10,000 0.13 % Ronald E. Baron 250 2,500 0 250 * Michael J. Piemonte 1,000 10,000 0 1,000 0.01 % Kathleen P. Sawyer 2,500 25,000 0 2,500 0.03 % Brian E. Ledwith 1,500 15,000 0 1,500 0.02 % Chart Officers who will become Benjamin Franklin Bancorp Executive Officers Alfred F. Odoardi 0 0 0 0 0 James Golden 0 0 0 0 0 All Directors and Executive Officers as a Group 1,021,878 13.10 % * Less than 0.01% (Footnotes on following page) - 142 - (Unaudited) Allowance for loan losses $ (1,150 ) $ (959 ) $ (852 ) Employee benefit plans (84 ) (151 ) (139 ) Net unrealized gain/loss on securities available for sale (189 ) (121 ) 125 Depreciation and amortization 615 604 573 Net deferred loan costs 484 297 239 Mortgage servicing rights 295 353 364 Capital loss carryforward (2,278 ) (2,273 ) (2,325 ) Other, net 94 62 Table of Contents (1) Based on an assumed 7,801,575 shares outstanding, including 5,000,000 shares issued in the offering at the midpoint of the offering range, 400,000 shares issued to the Benjamin Franklin Bank Charitable Foundation and 2,401,575 shares issued to the Chart Bank stockholders in the acquisition. (2) Includes 6,765 shares of common stock held by a voting trust of which Richard E. Bolton, Sr. is the sole trustee and with respect to which Mr. Bolton, Jr. has sole investment power. (3) Includes 14,943 shares of common stock held by a voting trust of which Donato D. Capasso is the sole trustee and with respect to which Mr. P. Capasso has sole investment power. (4) Includes 149,574 shares of common stock held by The Charter Voting Trust 1996, of which Mr. Haynes is the sole trustee and with respect to which Mr. Haynes has sole voting power. Mr. Haynes may also be deemed to have sole investment power with respect to 54,389 of the 149,574 shares of common stock held by The Charter Voting Trust 1996, including 40,792 shares beneficially owned by Mr. Haynes s children. (5) Includes (a) 47,557 shares of common stock held in an IRA account of Mr. Quinn and (b) 383,490 shares of common stock held by Village Voting Trust - 1995, of which Mr. Quinn is the sole trustee and with respect to which Mr. Quinn has sole voting power. Mr. Quinn may also be deemed to have sole investment power with respect to 12,151 of the 383,490 shares of common stock held by Village Voting Trust 1995, including 6,698 shares beneficially owned by Mr. Quinn s spouse and 1,690 shares beneficially owned by a limited partnership of which Mr. Quinn is the sole general partner. BUSINESS OF CHART BANK General Chart Bank, A Cooperative Bank, is a Massachusetts cooperative bank that was formed in 1985. Chart Bank primarily conducts its business from two banking offices in Waltham, Massachusetts and one banking office in Newton, Massachusetts. Chart Bank is engaged principally in the business of investing in various types of residential and commercial mortgages, consumer and commercial loans, and investment securities, funded primarily with deposits from the general public and loan proceeds from the Federal Home Loan Bank of Boston. Chart Bank offers a wide variety of deposit and loan products and services to individual and commercial customers. Additionally, Chart Bank, through its subsidiary, Creative Strategic Solutions, Inc., or CSSI, manages cash for owners of automatic teller machines, or ATMs, and provides related cash management services to a nationwide customer base. As a Massachusetts cooperative bank, Chart Bank is regulated by the Massachusetts Division of Banks, the FDIC and the Cooperative Central Bank. Chart Bank s deposits are insured by the FDIC up to FDIC limits (generally $100,000 per depositor) and by the Share Insurance Fund of the Cooperative Central Bank for the portion of deposits in excess of that insured by the FDIC. Chart Bank is also a member of the Federal Home Loan Bank System. Chart Bank s main office is located at 75 Moody Street, Waltham, Massachusetts 02453. Its telephone number is 781-398-2700. Market Area Chart Bank s primary market area is centered in Waltham, Massachusetts, where its main office is located, and Newton, Massachusetts, both approximately 10 miles west of Boston, and includes other cities and towns of Middlesex County, Massachusetts. The majority of Chart Bank s customers reside in or maintain their principal offices in Middlesex County, Massachusetts. Middlesex County, and Waltham and Newton in particular, have a relatively diversified employment base, with employment spread among most economic sectors. Education-related employment is particularly significant in this area. Other dominant sectors include services, manufacturing and wholesale/retail trade. - 143 - Table of Contents According to published statistics, Middlesex County s population has grown by 0.1% since the year 2000 to a total of 1,470,000 in 2004. Per capita income for the county has grown by 3.8% since 2000 to $36,220, which is 21.4% higher than that of Massachusetts and 50.3% higher than the United States as a whole. Median household income for Middlesex County was $69,234 in 2004, which is 21.4% higher than that of Massachusetts and 49.0% higher than the U.S. average. The unemployment rate for Middlesex County stood at 4.4% as of August 2004, lower than the average for Massachusetts of 4.6% and the U.S. average of 5.4%. Chart Bank faces significant competition from savings, cooperative and commercial banks, as well as from a variety of non-bank financial institutions. Many of these competitors are larger and have a state-wide, regional or national presence, and have greater financial resources than Chart Bank. Lending Activities Chart Bank s principal business is lending, and loans represent a large portion of Chart Bank s assets. Chart Bank s lending activity has focused on the origination of commercial loans secured by liens on real estate and first mortgage loans for the purchase, refinance or construction of residential properties in Chart Bank s market area. Currently, Chart Bank maintains the commercial loans it originates in its loan portfolio, although, in some instances, other financial institutions may also participate in these loans. Chart Bank typically retains the adjustable-rate residential mortgages that it originates in its portfolio. Chart Bank typically does not originate fixed-rate residential mortgages for its portfolio; however, it does act as broker for other lenders in originating these mortgages and receives loan brokerage fees for its services as loan broker. Loans secured by mortgages on a borrower s principal residence are generally viewed as the least vulnerable to major economic changes and at the same time provide an attractive source of interest income. Chart Bank s loan portfolio consists of many types of loans, including residential mortgage loans, including home equity lines-of-credit, monthly installment loans for consumers, as well as commercial loans that include lines-of-credit, short-term loans, Small Business Administration loans and real estate loans for business customers. The following table summarizes the composition of Chart Bank s loan portfolio as of the dates indicated: - 144 - Table of Contents December 31, September 30, 2004 2003 2002 Amount Percent Amount Percent Amount Percent (Dollars in thousands) Real estate mortgage loans: Residential (1)(2) $ 64,953 36.63 % $ 37,666 26.61 % $ 33,719 27.09 % Commercial (2) 99,682 56.21 % 91,788 64.85 % 83,619 67.16 % Construction 8,225 4.64 % 6,498 4.59 % 3,327 2.67 % 172,860 97.48 % 135,952 96.05 % 120,665 96.92 % Commercial loans: Secured 4,029 2.27 % 3,913 2.76 % 3,182 2.56 % Unsecured 95 0.06 % 512 0.36 % 255 0.20 % 4,124 2.33 % 4,425 3.12 % 3,437 2.76 % Consumer loans: Consumer share secured 132 0.07 % 741 0.53 % 61 0.05 % Other consumer 209 0.12 % 429 0.30 % 338 0.27 % 341 0.19 % 1,170 0.83 % 399 0.32 % Total loans 177,325 100.00 % 141,547 100.00 % 124,501 100.00 % Allowance for loan losses (1,753 ) (1,657 ) (1,536 ) Loans, net $ 175,572 $ 139,890 $ 122,965 December 31, 2001 2000 1999 Amount Percent Amount Percent Amount Percent (Dollars in thousands) Real estate mortgage loans: Residential (1)(2) $ 41,118 32.25 % $ 44,765 36.53 % $ 39,531 36.49 % Commercial (2) 76,406 59.94 % 68,995 56.30 % 60,490 55.83 % Construction 3,936 3.09 % 2,535 2.07 % 2,794 2.58 % 121,460 95.28 % 116,295 94.90 % 102,815 94.90 % Commercial loans: Secured 5,470 4.29 % 5,587 4.56 % 4,377 4.04 % Unsecured 65 0.05 % 57 0.04 % 534 0.49 % 5,535 4.34 % 5,644 4.60 % 4,911 4.53 % Consumer loans: Consumer share secured 76 0.06 % 267 0.22 % 335 0.31 % Other consumer 404 0.32 % 342 0.28 % 277 0.26 % 480 0.38 % 609 0.50 % 612 0.57 % Total loans 127,475 100.00 % 122,548 100.00 % 108,338 100.00 % Allowance for loan losses (1,387 ) (1,311 ) (1,101 ) Loans, net $ 126,088 $ 121,237 $ 107,237 (1) Includes home equity lines-of-credit. (2) Includes net deferred loan costs and purchase premiums. - 145 - Commitments and contingencies (Note 12) Retained earnings 32,620 31,308 29,620 Accumulated other comprehensive (loss) income (2,034 ) (2,007 ) Balance at December 31, 2002 29,620 Table of Contents Loan Maturity. The following table summarizes the scheduled repayments of Chart Bank s loan portfolio at September 30, 2004. Demand loans, loans having no stated repayment schedule, and overdraft loans are reported as being due in one year or less: Residential Mortgage Commercial Mortgage Construction Weighted Weighted Weighted Average Average Average Amount Rate Amount Rate Amount Rate (Dollars in thousands) Due less than one year $ 16,197 5.07 % $ 27,410 6.38 % $ 8,225 6.70 % Due after one year to five years 44,340 5.41 % 66,980 6.54 % Due after five years 4,416 5.00 % 5,292 6.25 % Total $ 64,953 5.30 % $ 99,682 6.48 % $ 8,225 6.70 % Commercial Loans Consumer Loans Total Weighted Weighted Weighted Average Average Average Amount Rate Amount Rate Amount Rate (Dollars in thousands) Due less than one year $ 4,124 6.39 % $ 279 9.59 % $ 56,235 6.07 % Due after one year to five years 62 8.87 % 111,382 6.09 % Due after five years 9,708 5.68 % Total $ 4,124 6.39 % $ 341 9.46 % $ 177,325 6.06 % The following table sets forth, at September 30, 2004, the dollar amount of total loans, net of unadvanced funds on loans, contractually due after September 30, 2005 and whether such loans have fixed interest rates or adjustable interest rates. Fixed Adjustable Total (Dollars in thousands) Residential mortgage $ 8,015 $ 40,741 $ 48,756 Commercial mortgage 19,597 52,675 72,272 Consumer loans 62 62 Total Loans $ 27,674 $ 93,416 $ 121,090 Loan Originations, Purchases and Sales. The following table sets certain information concerning Chart Bank s loan activity during the periods indicated: For the Nine Months Ended September 30, For the Years Ended December 31, 2004 2003 2003 2002 2001 2000 1999 (Dollars in thousands) Loans at beginning of period $ 141,547 $ 124,501 $ 124,501 $ 127,475 $ 122,548 $ 108,338 $ 84,628 Originations: Residential mortgage 18,222 12,711 16,318 6,628 10,658 10,446 15,279 Commercial mortgage 20,294 16,501 26,260 28,738 18,815 19,889 23,965 - 146 - Table of Contents For the Nine Months Ended September 30, For the Years Ended December 31, 2004 2003 2003 2002 2001 2000 1999 (Dollars in thousands) Construction 10,566 6,325 9,161 6,968 2,515 4,882 5,010 Commercial 1,799 2,556 3,770 801 2,315 2,053 4,006 Consumer and other 967 2,653 2,687 4,041 2,262 822 2,642 Total loans originated 51,848 40,746 58,196 47,176 36,565 38,092 50,902 Purchases of mortgage loans 14,002 Total additions 65,850 40,746 58,196 47,176 36,565 38,092 50,902 Deduct: Principal loan repayments and prepayments 30,078 32,415 41,151 50,179 31,594 24,051 27,293 Charge-offs (recoveries), net. (6 ) (1 ) (1 ) (29 ) 44 (79 ) (101 ) Total deductions 30,072 32,414 41,150 50,150 31,638 23,972 27,192 Net increase (decrease) in loans. 35,778 8,332 17,046 (2,974 ) 4,927 14,120 23,710 Loans at end of period $ 177,325 $ 132,833 $ 141,547 $ 124,501 $ 127,475 $ 122,548 $ 108,338 Investment Activities Chart Bank s investment portfolio is an important component of its balance sheet, and interest and dividends represent an important source of its earnings. Chart Bank s investment policy is designed to complement its lending activities, provide an alternative source of income through interest, dividends and capital gains, diversify Chart Bank s assets and improve liquidity while minimizing Chart Bank s tax liability. Investment decisions are made in accordance with Chart Bank s investment policy and are based upon the quality of a particular investment, its inherent risks, the composition of the balance sheet, market expectations, Chart Bank s liquidity and income needs and how the investment fits within Chart Bank s interest rate risk strategy. Chart Bank s investment portfolio is comprised of obligations of various federal agencies, and corporate equity securities. At September 30, 2004, Chart Bank s investment portfolio totaled $35.5 million, which represents approximately 13.9% of total assets. - 147 - Table of Contents The following table presents the amortized cost, gross unrealized gains and losses and fair value of Chart Bank s securities at the dates indicated. At December 31, 2003, 2002 and 2001, all securities consisted of federal agency obligations. Gross Gross Amortized Unrealized Unrealized Fair Cost Gain Losses Value (Dollars in thousands) September 30, 2004 Securities available for sale: Federal agency obligations $ 2,009 $ 26 $ $ 2,035 Marketable equity securities 1,614 59 (39 ) 1,634 Total securities available for sale $ 3,623 $ 85 $ (39 ) $ 3,669 Securities held to maturity: Federal agency obligations $ 31,826 $ 66 $ (150 ) $ 31,742 December 31, 2003 Securities available for sale $ 5,292 $ 112 $ $ 5,404 Securities held to maturity $ 23,965 $ 113 $ (118 ) $ 23,960 December 31, 2002 Securities available for sale $ 16,142 $ 364 $ $ 16,506 Securities held to maturity $ 13,026 $ 146 $ $ 13,172 December 31, 2001 Securities available for sale $ 21,000 $ 587 $ (2 ) $ 21,585 Securities held to maturity $ $ $ $ - 148 - Table of Contents The table below sets forth certain information regarding the amortized cost, weighted average yields and contractual maturities of Chart Bank s debt securities portfolio at September 30, 2004: Over One Year One Year or Less through Five Years Total Weighted Weighted Weighted Amortized Average Amortized Average Amortized Fair Average Cost Yield Cost Yield Cost Value Yield (Dollars in thousands) Securities available for sale: Federal agency obligations $ 1,500 4.37 % $ 509 4.41 % $ 2,009 $ 2,035 4.38 % Securities held to maturity: Federal agency obligations 31,826 2.65 % 31,826 31,742 2.65 % Total debt securities $ 1,500 4.37 % $ 32,335 2.68 % $ 33,835 $ 33,777 2.76 % - 149 - Table of Contents Deposit Activities and Other Sources of Funds Deposits are the major external source of funds for Chart Bank s lending and investment activities. Chart Bank offers a wide variety of deposit accounts with a range of interest rates and terms, including, among others, interest bearing checking, non-interest bearing checking, regular savings, money market savings, NOW accounts and certificates of deposit. Chart Bank also generates funds internally from loan principal repayments and prepayments and maturing investment securities. In addition, Chart Bank is a member of the Federal Home Loan Bank of Boston which permits Chart Bank to borrow from the Federal Home Loan Bank of Boston to fund asset growth when other sources of funds are unavailable. At September 30, 2004, Chart Bank had total deposits of $216.0 million and the ability to borrow a total of $37.2 million from the Federal Home Loan Bank of Boston, in addition to the outstanding borrowings from the Federal Home Loan Bank of Boston of $22.0 million. The following tables set forth certain information relative to the composition of Chart Bank s average deposit accounts and the weighted average interest rate on each category of deposits: Nine Months Ended Year Ended September 30, 2004 December 31, 2003 Weighted Weighted Average Average Average Average Balance Rate Balance Rate (Dollars in thousands) Demand deposits $ 30,728 $ 28,651 Money market/ NOW deposits 68,349 1.41 % 60,408 1.37 % Savings deposits 17,521 0.80 % 20,643 0.94 % Total non-certificate accounts 116,598 0.95 % 109,702 0.93 % Certificates of deposit 77,982 2.57 % 64,672 3.08 % Total deposits $ 194,580 1.60 % $ 174,374 1.73 % Years Ended December 31, 2002 2001 Weighted Weighted Average Average Average Average Balance Rate Balance Rate (Dollars in thousands) Demand deposits $ 25,721 $ 24,862 Money market/NOW deposits 52,280 2.06 % 44,486 2.95 % Savings deposits 18,244 1.70 % 16,770 2.35 % Total non-certificate accounts 96,245 1.44 % 86,118 1.98 % Certificates of deposit 64,734 3.89 % 74,593 5.45 % Total deposits $ 160,979 2.43 % $ 160,711 3.59 % - 150 - Table of Contents As of September 30, 2004, the aggregate amount of outstanding certificates of deposit in amounts greater than or equal to $100,000 was approximately $43.7 million. The following table sets forth the maturity of those certificates as of September 30, 2004: At September 30, 2004 (Dollars in thousands) Three months or less $ 6,365 Over three months through six months 2,323 Over six months through one year 24,204 Over one year to three years 8,901 Over three years 1,933 Total $ 43,726 The following table sets forth certain information concerning balances and interest rates on Chart Bank s Federal Home Loan Bank of Boston advances at the dates and for the periods indicated: At or For the Nine Months Ended At or For the Years Ended September 30, December 31, 2004 2003 2003 2002 2001 (Dollars in thousands) Balance at end of period $ 22,000 $ 13,794 $ 15,930 $ 14,986 $ 19,731 Average balance during period $ 22,913 $ 12,051 $ 12,491 $ 15,932 $ 2,378 Maximum outstanding at any month end $ 30,593 $ 15,901 $ 15,930 $ 21,208 $ 19,731 Weighted average interest rate at period end 2.52 % 3.68 % 2.92 % 3.14 % 3.07 % Weighted average interest rate during period 2.33 % 3.50 % 3.51 % 3.50 % 4.29 % Cash Management Business - CSSI Subsidiary Chart Bank s subsidiary, Creative Strategic Solutions, Inc. or CSSI, manages cash for owners of ATMs and provides related cash management services to a nationwide customer base. CSSI s primary business is supplying cash funds to ATMs owned by independent service organizations, who are its customers, and processing the transactions effected at those ATMs. Currently, CSSI manages over 1700 ATMs for numerous independent service organizations in the United States. CSSI typically receives fees based on the amount of cash in the ATMs and in transit, tied to a floating index rate such as the Prime Rate. Chart Bank considers this business as an important part of its asset liability management program, and as of September 30, 2004 was using $31.2 million, or approximately 12.2% of its total assets, in this business. The cash used in this business remains an asset of Chart Bank. CSSI employs independent, bonded transit companies to transport the cash, and also insures the cash in ATMs against theft or loss through common insurance carriers. - 151 - Table of Contents Non-Performing Assets The table below sets forth the amounts and categories of Chart Bank s non-performing assets at the dates indicated. At each date presented, Chart Bank had no troubled debt restructurings (loans for which a portion of interest or principal has been forgiven and loans modified at interest rates materially less than current market rates). At September At December 31, 30, 2004 2003 2002 2001 2000 1999 (Dollars in thousands) Non-accrual loans: Residential mortgage $ 119 $ 120 $ $ $ $ Commercial mortgage Construction Commercial Consumer and other Total non-accrual loans $ 119 $ 120 $ $ $ $ Loans greater than 90 days delinquent and still accruing: Residential mortgage $ $ $ $ $ $ Commercial mortgage 68 351 Construction Commercial 25 25 25 230 Consumer and other Total loans greater than 90 days delinquent and still accruing $ 25 $ 93 $ 25 $ 230 $ $ 351 Total non-performing loans $ 144 $ 213 $ 25 $ 230 $ $ 351 Total real estate owned $ $ $ $ $ $ Total non-performing assets $ 144 $ 213 $ 25 $ 230 $ $ 351 Ratios: Non-performing loans to total loans 0.08 % 0.15 % 0.02 % 0.18 % % 0.32 % Non-performing assets to total assets 0.06 % 0.10 % 0.01 % 0.13 % % 0.25 % - 152 - Table of Contents The following table sets forth activity in Chart Bank s allowance for loan losses for the periods indicated: At or for the Nine Months Ended September 30, At or For the Years Ended December 31, 2004 2003 2003 2002 2001 2000 1999 (Dollars in thousands) Balance at beginning of period $ 1,657 $ 1,536 $ 1,536 $ 1,387 $ 1,311 $ 1,101 $ 820 Charge-offs: Real estate mortgage loans: Residential Commercial 47 47 Commercial loans 25 Consumer loans 6 5 5 6 7 5 14 Total charge-offs 6 5 5 31 54 5 14 Recoveries: Real estate mortgage loans Residential 4 4 1 1 21 100 Commercial 45 5 62 12 4 4 46 6 83 112 Commercial loans 11 14 Consumer loans 1 2 2 4 1 3 Total recoveries 12 6 6 60 10 84 115 Net (charge-offs) recoveries 6 1 1 29 (44 ) 79 101 Provision for loan losses 90 90 120 120 120 131 180 Balance at end of period $ 1,753 $ 1,627 $ 1,657 $ 1,536 $ 1,387 $ 1,311 $ 1,101 Ratios: Net (charge-offs) recoveries to average loans outstanding (annualized) 0.00 % 0.00 % 0.00 % 0.02 % (0.04 %) 0.07 % 0.11 % Allowance for loan losses to non-performing loans at end of period 1,217.36 % 1,122.07 % 777.93 % 6,144.00 % 603.04 % 0.00 % 313.68 % Allowance for loan losses to total loans at end of period 0.99 % 1.22 % 1.17 % 1.23 % 1.09 % 1.07 % 1.02 % - 153 - Table of Contents The following tables set forth Chart Bank s percent of allowance by loan category and the percent of the loans to total loans in each of the categories listed at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories: At December 31, At September 30, 2004 2003 2002 Percent Percent Percent of Loans of Loans of Loans Loan in Each Loan in Each Loan in Each Allowance Balances Category Allowance Balances Category Allowance Balances Category for Loan by to Total for Loan by to Total for Loan by to Total Losses Category Loans Losses Category Loans Losses Category Loans (Dollars in thousands) Real estate mortgage loans : Residential $ 197 $ 64,953 36.63 % $ 123 $ 37,666 26.61 % $ 108 $ 33,719 27.09 % Commercial 1,114 99,682 56.21 % 1,083 91,788 64.85 % 941 83,619 67.16 % Construction 237 8,225 4.64 % 179 6,498 4.59 % 102 3,327 2.67 % 1,548 172,860 97.48 % 1,385 135,952 96.05 % 1,151 120,665 96.92 % Commercial loans 95 4,124 2.33 % 85 4,425 3.12 % 58 3,437 2.76 % Consumer loans 6 341 0.19 % 7 1,170 0.83 % 8 399 0.32 % Unallocated 104 180 319 Total $ 1,753 $ 177,325 100.00 % $ 1,657 $ 141,547 100.00 % $ 1,536 $ 124,501 100.00 % At December 31, 2001 2000 1999 Percent Percent Percent of Loans of Loans of Loans Loan in Each Loan in Each Loan in Each Allowance Balances Category Allowance Balances Category Allowance Balances Category for Loan by to Total for Loan by to Total for Loan by to Total Losses Category Loans Losses Category Loans Losses Category Loans (Dollars in thousands) Real estate mortgage loans : Residential $ 119 $ 41,118 32.25 % $ 124 $ 44,765 36.53 % $ 115 $ 39,531 36.49 % Commercial 906 76,406 59.94 % 887 68,995 56.30 % 803 60,490 55.83 % Construction 108 3,936 3.09 % 86 2,535 2.07 % 84 2,794 2.58 % 1,133 121,460 95.28 % 1,097 116,295 94.90 % 1,002 102,815 94.90 % Commercial loans 63 5,535 4.34 % 101 5,644 4.60 % 90 4,911 4.53 % Consumer loans 10 480 0.38 % 9 609 0.50 % 9 612 0.57 % Unallocated 181 104 Total $ 1,387 $ 127,475 100.00 % $ 1,311 $ 122,548 100.00 % $ 1,101 $ 108,338 100.00 % - 154 - (Unaudited) Interest and dividend income: Interest and fees on loans $ 7,225 $ 6,747 $ 8,971 $ 9,573 Interest and dividends on securities: Taxable interest on securities 667 775 990 1,218 Dividends on securities 57 24 31 39 Other interest income 57 75 99 Table of Contents MANAGEMENT S DISCUSSION AND ANALYSIS OF CHART BANK The following discussion should be read in conjunction with Selected Consolidated Financial Information of Chart Bank and the Consolidated Financial Statements of Chart Bank, A Cooperative Bank and Subsidiaries and related Notes appearing elsewhere in this prospectus. Forward-Looking Statements This management s discussion and analysis of Chart Bank s financial condition and results of operations contains forward-looking statements that are based on assumptions and describe future plans, strategies and expectations of Chart Bank, including those with respect to its pending acquisition by Benjamin Franklin Bank. These forward-looking statements are generally identified by use of the words believe, expect, intend, anticipate, estimate, project, or similar expressions. Chart Bank s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of Chart Bank include, but are not limited to, changes in interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in Chart Bank s market area and accounting principles and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Subject to applicable laws and regulations, Chart Bank does not undertake and specifically disclaims any obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events. General Chart Bank s results of operations depend primarily on net interest income, which is the difference between the interest income earned on its interest-earning assets, such as loans and securities, and the interest expense on its interest-bearing liabilities, such as deposits and borrowings. Chart Bank also generates noninterest income primarily from fees charged on customers accounts and income generated through Chart Bank s subsidiary, CSSI. CSSI provides cash to ATMs owned by independent service organizations nationwide. Fees are collected from the independent service organizations for managing the ATMs and for the use of the cash in the machines. Chart Bank s noninterest expenses primarily consist of employee compensation and benefits, occupancy, advertising and other operating expenses. Chart Bank s results of operations are affected by general economic and competitive conditions, notably changes in market interest rates, government policies and regulations. Chart Bank exceeded all of its regulatory capital requirements at December 31, 2003 and at September 30, 2004. Critical Accounting Policies The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of income and expenses during the reporting periods. Note 1 of the Notes to Chart Bank s consolidated financial statements includes a summary of the significant accounting policies and methods used in the preparation of Chart Bank s consolidated financial statements. The following is a brief discussion of the critical accounting policy used by Chart Bank in preparation of its financial statements. - 156 - Table of Contents Allowance For Loan Losses. The most significant estimate made by Chart Bank in the preparation of its financial statements relates to determining the allowance for loan losses. The actual amount of loan losses could differ significantly from this estimate. Senior management has discussed the development and selection of this accounting estimate, the assumptions on which this estimate is based, and the related disclosures with the audit committee of Chart Bank s Board of Directors. Chart Bank devotes significant attention to maintaining high loan quality through its underwriting standards, active servicing of loans and aggressive management of nonperforming assets. The allowance for loan losses is maintained at a level estimated by management to provide adequately for probable loan losses inherent in the loan portfolio. Probable loan losses are estimated based on a monthly review of the loan portfolio, loss experience, specific problem loans, economic conditions and other pertinent factors. In assessing risks inherent in the portfolio, management considers the risk of loss on non-performing and classified loans including an analysis of collateral in each situation. Chart Bank s methodology for assessing the appropriateness of the allowance for loan losses includes several key elements. Problem loans are identified and analyzed individually to detect specific losses including an analysis of estimated cash flows for impaired loans. The loan portfolio is also segmented into pools of loans that are similar in type and risk characteristics (i.e., commercial, consumer and mortgage loans). Loss factors based on Chart Bank s historical charge offs are applied using Chart Bank s historical experience and may be adjusted for significant factors that, in management s judgment, affect the collectability of the portfolio as of the evaluation date. Additionally, the portfolio is segmented into pools based on internal risk ratings with estimated loss factors applied to each rating category. Other factors considered in determining probable loan losses are any changes in concentrations in the portfolio, trends in loan growth, the relationship and trends in recent years of recoveries as a percentage of prior charge offs and peer bank s loss experience. Although management believes that it uses the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary, and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while Chart Bank believes it has established its existing allowance for loan losses consistent with accounting principles generally accepted in the United States of America, there can be no assurance that regulators, in reviewing Chart Bank s loan portfolio, will not request Chart Bank to increase its allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Material increases in the allowance for loan losses will adversely affect Chart Bank s financial condition and results of operations. Changes in Chart Bank s Financial Condition and Results of Operations The following analysis discusses changes in the financial condition and results of operations for the nine months ended September 30, 2004 and 2003, and for the years ended December 31, 2003 and 2002, and should be read in conjunction with Chart Bank s consolidated financial statements and the notes thereto, appearing elsewhere herein. Comparison of Chart Bank s Financial Condition at September 30, 2004 and December 31, 2003 General. Chart Bank s total assets increased $46.4 million, or 22.1%, to $256.3 million at September 30, 2004 as compared to $209.9 million at December 31, 2003. The increase in assets was mainly attributable to a $35.7 million increase in net loans, a $6.1 million increase in securities and a $3.9 million increase in cash and cash equivalents. The growth in assets was primarily funded by an increase in deposit account balances of $40.2 million and advances from the Federal Home Loan Bank of Boston of $6.1 million. - 157 - Table of Contents Net Loans. Net loans increased $35.7 million, or 25.5%, from $139.9 million at December 31, 2003 to $175.6 million at September 30, 2004, primarily as a result of increased residential mortgage loans, commercial mortgage loans and construction loans. Residential mortgage loans increased $27.3 million, or 72.4%, from $37.7 million at December 31, 2003 to $65.0 million at September 30, 2004 mainly due to additional residential mortgage loan originations primarily resulting from refinancing activity in a low interest rate environment and the purchase of $14.0 million of residential mortgage loans from another institution. Commercial mortgage loans increased $7.9 million, or 8.6%, from $91.8 million at December 31, 2003, to $99.7 million at September 30, 2004, primarily due to additional commercial mortgage originations. Construction loans increased $1.7 million, or 26.6%, from $6.5 million at December 31, 2003 to $8.2 million at September 30, 2004, primarily due to additional construction loan originations. Securities. Available for sale securities decreased $1.7 million, or 32.1%, from a fair value of $5.4 million at December 31, 2003 to a fair value of $3.7 million at September 30, 2004. Held to maturity securities increased $7.9 million, or 32.8%, from an amortized cost of $24.0 million at December 31, 2003 to $31.8 million at September 30, 2004. The decrease in available for sale securities and the increase in held to maturity securities primarily resulted from the reinvestment of proceeds from maturities, calls and sales of available for sale securities in held to maturity securities and an additional net increase of $6.2 million of federal agency securities, which were classified as held to maturity securities. Cash and Cash Equivalents. Cash and cash equivalents increased $3.9 million, or 11.2%, from $34.9 million at December 31, 2003 to $38.8 million at September 30, 2004, primarily as a result of a $4.2 million, or 15.5%, increase in the cash deployed in ATMs by CSSI from $27.0 million at December 31, 2003 to $31.2 million at September 30, 2004 and a $1.0 million increase in short-term investments, partially offset by a $1.3 million decrease in cash and due from banks primarily resulting from fluctuations in the ordinary course of business. Deposits and Borrowed Funds. Deposits totaled $216.0 million at September 30, 2004, an increase of $40.2 million, or 22.9%, compared to $175.8 million at December 31, 2003. Certificates of deposit increased $29.2 million, or 46.1%, from $63.3 million at December 31, 2003 to $92.5 million at September 30, 2004. Savings and money market accounts increased $6.6 million, or 9.0%, from $72.5 million at December 31, 2003 to $79.0 million at September 30, 2004. NOW and demand deposit accounts increased $4.4 million, or 11.0%, from $40.0 million at December 31, 2003 to $44.5 million at September 30, 2004. Borrowed funds from the Federal Home Loan Bank of Boston increased $6.1 million, or 38.1%, from $15.9 million at December 31, 2003 to $22.0 million at September 30, 2004. Non-performing Assets, Delinquencies and Allowance for Loan Losses. Non-performing assets, all of which consisted of loans, totaled $144,000 at September 30, 2004, compared to $213,000 at December 31, 2003, a decrease of $69,000. On a monthly basis, management informs the Board of Directors of the amount of loans delinquent for more than 30 days, all loans in foreclosure and all foreclosed and repossessed property that Chart Bank owns. Chart Bank ceases accruing interest on mortgage loans when principal or interest payments are delinquent 90 days or more unless management determines that the loan principal and interest is fully secured and in the process of collection. Once the accrual of interest on a loan is discontinued, all interest previously accrued is reversed against current period interest income. The allowance for loan losses was $1.8 million at September 30, 2004, an increase of $96,000 from the $1.7 million recorded at December 31, 2003. The allowance for loan losses as a percentage of gross loans was 0.99% at September 30, 2004 as compared to 1.17% at December 31, 2003. The allowance for loan losses as a percentage of non-performing loans was 1,217% at September 30, 2004 as compared to 778% at December 31, 2003. - 158 - Table of Contents Franklin Bank Charitable Foundation must be voted in the same ratio as all other shares of the common stock on all proposals considered by stockholders of Benjamin Franklin Bancorp. The Benjamin Franklin Bank Charitable Foundation s place of business will be located at our administrative offices. The board of directors of the Benjamin Franklin Bank Charitable Foundation will appoint such officers and employees as may be necessary to manage its operations. To the extent applicable, we will comply with the affiliates restrictions set forth in Sections 23A and 23B of the Federal Reserve Act and regulations governing transactions between Benjamin Franklin Bank and the foundation. The Benjamin Franklin Bank Charitable Foundation will receive working capital from: (1) any dividends that may be paid on Benjamin Franklin Bancorp s shares of common stock in the future; (2) within the limits of applicable federal and state laws, loans collateralized by the shares of common stock; or (3) the proceeds of the sale of any of the shares of common stock in the open market from time to time. As a private foundation under Section 501(c)(3) of the Internal Revenue Code, the Benjamin Franklin Bank Charitable Foundation will be required to distribute annually in grants or donations a minimum of 5.0% of the average fair market value of its net investment assets. Legislation has been introduced that, if enacted, could have the impact of increasing the charitable foundation s required annual distribution in grants or donations. One of the conditions imposed on the gift of common stock is that the amount of common stock that may be sold by the Benjamin Franklin Bank Charitable Foundation in any one year shall not exceed 5.0% of the average market value of the assets held by the Benjamin Franklin Bank Charitable Foundation, except where the board of directors of the charitable foundation determines that the failure to sell an amount of common stock greater than such amount would result in a long-term reduction of the value of its assets and/or would otherwise jeopardize its capacity to carry out its charitable purposes. Tax Considerations Our tax counsel, Foley Hoag LLP, has advised us that an organization created for the above purposes should qualify as a private foundation that is exempt from federal income tax because it is described in Section 501(c)(3) of the Internal Revenue Code. Foley Hoag LLP has not, however, rendered any advice on whether the Foundation s ability to qualify as tax exempt will be affected by the regulatory requirement that all shares of common stock of Benjamin Franklin Bancorp held by the Foundation must be voted in the same ratio as all other outstanding shares of common stock of Benjamin Franklin Bancorp. The Foundation will submit a timely request to the Internal Revenue Service to be recognized as an exempt organization. As long as the Benjamin Franklin Bank Charitable Foundation files its application for tax-exempt status within 15 months from the date of its organization, and the Internal Revenue Service approves the application, the effective date of the Benjamin Franklin Bank Charitable Foundation s tax exemption will be the date of its organization. Benjamin Franklin Bank is authorized by federal law to make charitable contributions. We believe that the conversion presents a unique opportunity to establish and fund a charitable foundation given the substantial amount of additional capital being raised. In making such a determination, we considered the dilutive impact to our stockholders of the contribution of shares of common stock to the Benjamin Franklin Bank Charitable Foundation. We believe that the contribution to the Benjamin Franklin Bank Charitable Foundation in excess of the 10.0% annual limitation on charitable deductions described below Table of Contents The allowance for loan losses consists of a formula allowance for various loan portfolio classifications and an amount for loans identified as impaired, if necessary. The allowance is an estimate, and ultimate losses may vary from current estimates. See Critical Accounting Policies Allowance for Loan Losses on page # for a discussion of the factors considered in making this estimate and the risks associated with using those factors. Changes in the estimate are recorded in the results of operations in the period in which they become known, along with provisions for estimated losses incurred during that period. A portion of the allowance for loan losses is not allocated to any specific segment of the loan portfolio. This unallocated reserve is maintained for two primary reasons: there exists an inherent subjectivity and imprecision to the analytical processes employed, and the prevailing business environment, as it is affected by changing economic conditions and various external factors, which may impact the portfolio in ways currently unforeseen. Moreover, management has identified certain risk factors, which could impact the degree of loss sustained within the portfolio. These include: market risk factors, such as the effects of economic variability on the entire portfolio, and unique portfolio risk factors that are inherent characteristics of Chart Bank s loan portfolio. Market risk factors may consist of changes to general economic and business conditions that may impact Chart Bank s loan portfolio customer base in terms of ability to repay and that may result in changes in value of underlying collateral. Unique portfolio risk factors may include industry or geographic concentrations, or trends that may exacerbate losses resulting from economic events which Chart Bank may not be able to fully diversify out of its portfolio. Due to the inherent imprecise nature of the loan loss estimation process and ever changing conditions, these risk attributes may not be adequately captured in data related to the formula-based loan loss components used to determine allocations in Chart Bank s analysis of the adequacy of the allowance for loan losses. Management, therefore, has established and maintains an unallocated allowance for loan losses. The amount of the unallocated allowance was $ 104 ,000 at September 30, 2004 as compared to $ 180 ,000 at December 31, 2003. Stockholders Equity. Total stockholders equity increased $147,000, or 0.8%, to $17.5 million at September 30, 2004 compared to $17.4 million at December 31, 2003. The increase is due primarily to net income of $784,000 for the nine months ended September 30, 2004, partially offset by $597,000 in dividends paid to stockholders during the nine months ended September 30, 2004 and a reduction in accumulated other comprehensive income. The decrease in accumulated other comprehensive income was due to a reduction in the unrealized gain on securities available for sale, net of taxes of $40,000. The decline in the unrealized gain was due to the realization of $53,000, or $32,000 net of taxes, of security gains during the nine months ended September 30, 2004 and a higher interest rate environment reducing the fair value of Chart Bank s fixed income portfolio. Comparison of Chart Bank s Operating Results for the Nine Months Ended September 30, 2004 and 2003 Net Income. Net income for the nine months ended September 30, 2004 was $784,000 compared to $1.3 million for the nine months ended September 30, 2003. The decrease of $518,000 was mainly the result of an increase in noninterest expense of $830,000, primarily resulting from merger-related expenses and increases in salaries and employee benefits, partially offset by a $301,000 increase in net interest income. Net Interest Income. Net interest income increased $301,000, or 6.1%, to $5.3 million for the first nine months of 2004 compared to $5.0 million for the first nine months of 2003. The increase was primarily due to higher average loans and a lower cost of funds, partially offset by lower asset yields. - 159 - Table of Contents is justified given Benjamin Franklin Bank s capital position and its earnings, the substantial additional capital being raised in the conversion and the potential benefits of the Benjamin Franklin Bank Charitable Foundation to our community. See Capitalization on page # , Regulatory Capital Compliance on page # , and Comparison of Independent Valuation and Pro Forma Financial Information With and Without the Foundation on page # . The amount of the contribution will not adversely affect our financial condition. We therefore believe that the amount of the charitable contribution is reasonable given our pro forma capital position, and it does not raise safety and soundness concerns. We have received an opinion from our tax counsel that, subject to the limitations described below, our contribution of shares of our stock to the Benjamin Franklin Bank Charitable Foundation will be deductible for federal income tax purposes in an amount equal to the fair market value of the shares at the time of the contribution. Foley Hoag LLP based its opinion, in part, on factual representations provided by us, as well as on certain assumptions, including an assumption that the Benjamin Franklin Bank Charitable Foundation will qualify as a tax exempt organization described in Code section 501(c)(3). In any one year we are limited in the amount we may deduct for our charitable contributions. In particular, in any one year we may deduct as charitable contributions an aggregate amount equal to no more than 10.0% of our annual taxable income for such year. We may, however, carry forward for up to five years the value of our charitable contributions for the year that exceed 10.0% of our annual taxable income, and can deduct such excess to the extent permitted in such succeeding years. We estimate that substantially all of the value of the contribution of the shares to the Foundation should be deductible over this six-year period. However, we may not have sufficient earnings to be able to use the deduction in full. We do not expect to make any further contributions to the Foundation within the first five years following the initial contribution, unless such contributions would be deductible under the Internal Revenue Code. Any such decision would be based on an assessment of, among other factors, our financial condition at that time, the interests of our stockholders and depositors, and the financial condition and operations of the Foundation. Although we have received an opinion from our tax counsel that we will be entitled to a deduction for a charitable contribution to the Benjamin Franklin Bank Charitable Foundation if it is tax exempt, there can be no assurances that the Internal Revenue Service will recognize the Benjamin Franklin Bank Charitable Foundation as a tax exempt organization, nor can there be assurance that the charitable deduction will be permitted. If the Benjamin Franklin Bank Charitable Foundation does not receive recognition as a tax exempt organization or if the charitable deduction is disallowed, our contribution to the Benjamin Franklin Bank Charitable Foundation might have to be expensed for financial accounting purposes without tax benefit, resulting in a reduction in earnings for financial accounting purposes in the year in which the Internal Revenue Service makes such a determination. As a tax exempt organization that is classified as a private foundation, the Benjamin Franklin Bank Charitable Foundation s income generally will be exempt from federal and state income taxation. Nevertheless, the Benjamin Franklin Bank Charitable Foundation s investment income, such as interest, dividends and capital gains, will generally be subject to federal income taxation at a rate of 2.0% . After the Foundation s first year, the rate of this tax on the Foundation s net investment income could be reduced to 1.0% if certain distribution requirements are met. The Foundation will be required to file an annual return with the Internal Revenue Service within four and one-half months after the close of its fiscal year, and to make its annual return available for public inspection. The annual return for a private foundation includes, among other things, an itemized list of all grants made or approved, showing the amount of each grant, the recipient, any relationship between a grant recipient and the foundation s managers and a concise statement of the purpose of each grant. Table of Contents Interest Income. Total interest and dividend income increased $385,000, or 5.1%, to $8.0 million for the first nine months of 2004 from $7.6 million for the first nine months of 2003. Interest income on loans increased $478,000, or 7.1%, to $7.2 million for the nine months ended September 30, 2004 compared to $6.7 million for the nine months ended September 30, 2003. The increase was due a $27.3 million increase in the average balance of net loans outstanding partially offset by an 81 basis point decrease in the average yield on loans. The increase in loan volume and the decrease in yield were mainly due to a lower interest rate environment, additional originations primarily resulting from prepayments and refinancing activity in a low interest rate environment and the purchase of $14.0 million of residential mortgage loans from another institution during the first nine months of 2004 compared to the first nine months of 2003. Interest and dividend income from investment securities, short-term investments and other investments decreased $93,000, or 10.6%, to $781,000 for the nine months ended September 30, 2004, compared to $874,000 for the nine months ended September 30, 2003. The decrease in income was due to a 74 basis point decrease in the average yield on these investments partially offset by a $6.4 million increase in the average balance of these investments outstanding. The lower yields on these investments resulted from a lower interest rate environment during the first nine months of 2004 compared to the first nine months of 2003. Interest Expense. Interest expense increased $84,000, or 3.2%, to $2.7 million for the nine months ended September 30, 2004 compared to $2.6 million for the nine months ended September 30, 2003. The increase was primarily due to an increase in interest-bearing liabilities of $29.7 million, or 18.9%, to $186.8 million for the nine months ended September 30, 2004 from $157.1 million for the nine months ended September 30, 2003 partially offset by a decrease in the average cost of funds for interest-bearing liabilities of 30 basis points. The average cost of interest-bearing liabilities for the first nine months of 2004 was 1.95% as compared to 2.25% for the first nine months of 2003. The decrease in the average cost of interest-bearing liabilities was primarily due to a lower interest rate environment. The higher average balance of interest-bearing liabilities for the first nine months of 2004 primarily resulted from a $12.9 million increase in the average balance of certificates of deposit, a $8.7 million increase in the average balances in money market/NOW accounts and a $10.9 million increase in the average balance of Federal Home Loan Bank of Boston advances, partially offset by a $2.7 million decrease in savings deposits. Provision for Loan Losses. The provision for loan losses was $90,000 for the nine months ended September 30, 2004 and $90,000 for the nine months ended September 30, 2003. Noninterest Income. Noninterest income was $1.9 million for the nine months ended September 30, 2004 as compared to $2.0 million for the nine months ended September 30, 2003, a decrease of $132,000, or 6.4%. The decrease in noninterest income was due to a decrease in loan brokerage fees of $126,000 as more loans originated by Chart Bank were for its own portfolio and a decrease in customer service fees of $89,000 due to a reduction in service fees on deposit accounts that was instituted in the fourth quarter of 2003, partially offset by increases in revenues from net gain on sales and redemptions of securities of $47,000, ATM service contract fees of $24,000 and miscellaneous income of $12,000. Noninterest Expense. Noninterest expense increased $830,000, or 17.3%, from $4.8 million for the nine months ended September 30, 2003 to $5.6 million for the nine months ended September 30, 2004. The increase in noninterest expense from the prior year period was primarily due to merger-related expenses of $382,000 and increases in expense relating to salaries and employee benefits of $345,000, data processing of $90,000 due to added volume and new services offered, advertising and marketing expenses of $81,000 and legal fees of $38,000, partially offset by decreases in telephone costs of $34,000, exam and audit related costs of $9,000, stationary and supplies costs of $25,000, and occupancy and equipment expenses of $31,000 as certain assets became fully depreciated. - 160 - Table of Contents Regulatory Requirements Imposed On The Charitable Foundation Establishment of the Benjamin Franklin Bank Charitable Foundation is expected to be subject to the following conditions to be agreed to by the Benjamin Franklin Bank Charitable Foundation as a condition to receiving the Massachusetts Commissioner of Banks s approval to the conversion: the foundation be dedicated to charitable purposes within certain specified communities, including the communities in which Benjamin Franklin Bank and Chart Bank currently maintain banking offices and certain contiguous communities; the foundation must vote its shares in the same ratio as all other holders of shares; the Massachusetts Division of Banks can examine the foundation; the foundation must comply with all supervisory directives or regulatory bulletins imposed by the Massachusetts Division of Banks; the foundation will operate according to written policies adopted by its board of directors, including a business plan and a conflict of interest policy; the foundation will provide annual reports to the Massachusetts Division of Banks describing the grants made and the grant recipients; and the foundation will not engage in self-dealing and shall comply with all laws necessary to maintain its tax-exempt status under the Internal Revenue Code. The Benjamin Franklin Bank Charitable Foundation will also need to comply with the requirement that the establishment and funding of the Benjamin Franklin Bank Charitable Foundation be approved by: (1) a majority vote of Benjamin Franklin Bancorp s corporators present and voting at a special meeting called for such purpose; and (2) the majority vote of all independent corporators (who shall not constitute less than sixty percent (60%) of all corporators eligible to vote) present and voting at a special meeting called for such purpose. Finally, the Federal Reserve Board required that Benjamin Franklin Bancorp make the following commitments in connection with the Benjamin Franklin Bank Charitable Foundation: The Foundation will be considered an affiliate of Benjamin Franklin Bank for purposes of sections 23A and 23B of the Federal Reserve Act. Benjamin Franklin Bancorp will notify the Federal Reserve Board should its direct or indirect ownership in a company, when aggregated with the ownership position of Foundation, exceed 5% of the outstanding shares of any class of voting securities of the company. At its organizational meeting, the Benjamin Franklin Bank Charitable Foundation will adopt a resolution requiring prior approval of the Federal Reserve Board for acquisitions of Benjamin Franklin Bancorp stock. The resolution will contain an exception for transactions affecting one or more classes of Benjamin Franklin Bancorp shareholders generally (e.g., stock splits and stock dividends), and also provide that any gifts of Benjamin Franklin Bancorp stock will be promptly sold. Consummation of the conversion and the offering of common stock is not conditioned upon corporator or regulatory approval of the charitable foundation. Failure to approve the charitable $ 104,774 $ Table of Contents Provision for Income Taxes. The provision for income taxes decreased $143,000 from $823,000 for the first nine months of 2003 to $680,000 for the nine months ended September 30, 2004. The effective tax rate for the nine months ended September 30, 2004 increased to 46.4% from 38.7% in the prior year period, primarily due to merger-related expenses that are not deductible for tax purposes. Comparison of Chart Bank s Financial Condition at December 31, 2003 and 2002 General. Chart Bank s total assets increased $6.9 million, or 3.3%, to $209.9 million at December 31, 2003 as compared to $203.0 million at December 31, 2002. The increase was primarily due to a $16.9 million increase in net loans, partially offset by a $9.9 million decrease in cash and cash equivalents. The growth in assets was primarily funded by an increase in deposits of $5.5 million and advances from the Federal Home Loan Bank of Boston of $944,000. Net Loans. Net loans increased $16.9 million, or 13.8%, from $123.0 million at December 31, 2002 to $139.9 million at December 31, 2003, primarily as a result of increased commercial mortgage loans, residential mortgage loans and construction loans. Commercial mortgage loans increased $8.2 million, or 9.8%, from $83.6 million at December 31, 2002 to $91.8 million at December 31, 2003, primarily as a result of additional originations of commercial mortgage loans. Residential mortgage loans increased $3.9 million, or 11.7%, from $33.7 million at December 31, 2002 to $37.7 million at December 31, 2003, primarily as a result of additional originations of residential mortgage loans. Construction loans increased $3.2 million, or 95.3%, from $3.3 million at December 31, 2002 to $6.5 million at December 31, 2003, primarily as a result of additional originations of construction loans. Securities. Available for sale securities decreased by $11.1 million, or 67.3%, from a fair value of $16.5 million at December 31, 2002 to a fair value of $5.4 million at December 31, 2003. Held to maturity securities increased $10.9 million, or 84.0%, from an amortized cost of $13.0 million at December 31, 2002 to $24.0 million at December 31, 2003. The decrease in available for sale securities and the increase in held to maturity securities primarily resulted from the reinvestment of proceeds from maturities, calls and sales of available for sale securities and held to maturity securities in held to maturity securities. Cash and Cash Equivalents. Cash and cash equivalents decreased $9.9 million, or 22.1%, from $44.8 million at December 31, 2002 to $34.9 million at December 31, 2003, primarily as a result of a $9.1 million decrease in short-term investments and a $781,000 decrease in cash and due from banks primarily resulting from fluctuations in the ordinary course of business. The decrease in cash and cash equivalents was mainly due to the deployment of cash and cash equivalents in loans. Cash deployed in ATMs by CSSI increased from $26.7 million at December 31, 2002 to $27.0 million at December 31, 2004. Deposits and Borrowed Funds. Deposits totaled $175.8 million at December 31, 2003, an increase of $5.5 million, or 3.1%, compared to $170.3 million at December 31, 2002. The deposit growth reflects an increase in nonmaturity deposits partially offset by a decrease in certificates of deposit. Nonmaturity deposits (savings, money market, NOW and demand deposit accounts) increased $6.6 million, while certificates of deposit decreased $1.1 million. Chart Bank shifted its marketing focus during 2003 to obtain nonmaturity deposit accounts to take advantage of their lower cost of funds when compared to certificates of deposit. Advances from the Federal Home Loan Bank of Boston increased $944,000, or 5.9%, to $15.9 million at December 31, 2003 from $15.0 million at December 31, 2002. These funds were primarily used to fund loan growth. Non-Performing Assets, Delinquencies and Allowance for Loan Losses. Non-performing assets, all of which consisted of loans, totaled $213,000 at December 31, 2003, compared to $25,000 at December 31, 2002, representing an increase of $188,000. The increase in non-performing assets was an - 161 - Table of Contents foundation may, however, materially increase the pro forma market value of Benjamin Franklin Bancorp. See Comparison of Independent Valuation and Pro Forma Financial Information With and Without the Foundation on page # . FEDERAL AND STATE TAXATION OF BENJAMIN FRANKLIN BANCORP AND BENJAMIN FRANKLIN BANK Federal Taxation General. Benjamin Franklin Bancorp and Benjamin Franklin Bank will be subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. Benjamin Franklin Bancorp s federal income tax returns are not currently under audit and have not been audited during the past five years. The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to Benjamin Franklin Bancorp. Bad Debt Reserves. Benjamin Franklin Bank is permitted to establish a reserve for bad debts and to make annual additions to the reserve. These additions can, within specified formula limits, be deducted in connection with the calculation of Benjamin Franklin Bank s taxable income. Pursuant to the Small Business Protection Act of 1996, savings institutions were required to recapture (over a six year period) of the excess of tax bad debt reserves accumulated after December 31, 1987. Taxable Distributions and Recapture. Prior to the Small Business Protection Act of 1996, bad debt reserves created prior to January 1, 1988 were subject to recapture into taxable income should Benjamin Franklin Bank fail to meet certain thrift asset and definitional tests. New federal legislation eliminated these thrift related recapture rules. However, under current law, pre-1988 reserves remain subject to recapture should Benjamin Franklin Bank make certain non-dividend distributions, pay dividends in excess of earnings and profits or cease to maintain a bank charter. At September 30, 2004, Benjamin Franklin Bank s total federal pre-1988 reserve was $3.1 million. This reserve reflects the cumulative effects of federal tax deductions by Benjamin Franklin Bank for which no federal income tax provision has been made. Minimum Tax. The Internal Revenue Code imposes an alternative minimum tax (AMT) at a rate of 20.0% on a base of regular taxable income plus certain tax preferences, (the alternative minimum taxable income or AMTI). The AMT is payable to the extent such AMTI is in excess of an exemption amount and the AMT exceeds the regular income tax. Net operating losses can offset no more than 90.0% of AMTI. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. Benjamin Franklin Bank has not been subject to the alternative minimum tax and has no such amounts available as credits for carryover. Net Operating Loss Carryovers. A financial institution may carry back net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years. At September 30, 2004, Benjamin Franklin Bank had no net operating loss carryforwards for federal income tax purposes. Capital Loss Carryovers. A financial institution may carry back capital losses to the preceding three taxable years and forward to the succeeding five taxable years. At September 30, 2004, Benjamin Franklin Bank had $6.7 million in capital loss carryforwards for federal income tax purposes which expire on December 31, 2006. Corporate Dividends-Received Deduction. Benjamin Franklin Bancorp may exclude from its income 100.0% of dividends received from Benjamin Franklin Bank since they are both members of the same affiliated group of corporations. Table of Contents increase in non-performing residential mortgage loans of $120,000 and an increase in non-performing commercial mortgage loans of $68,000. The allowance for loan losses was $1.7 million at December 31, 2003, an increase of $121,000 from the $1.5 million recorded at December 31, 2002. The allowance for loan losses as a percentage of gross loans was 1.17% at December 31, 2003 as compared to 1.23% at December 31, 2002. The allowance for loan losses as a percentage of non-performing loans was 778% at December 31, 2003 as compared to 6,144% at December 31, 2002. The amount of the unallocated allowance, which is not allocated to any specific segment of the loan portfolio, was $180,000 December 31, 2003 as compared to $319,000 at December 31, 2002. The allowance is an estimate, and ultimate losses may vary from current estimates. See Critical Accounting Policies Allowance for Loan Losses on page # for a discussion of the factors considered in making this estimate and the risks associated and the risks associated with using those factors. Stockholders Equity. Total stockholders equity increased $1.3 million, or 8.3%, to $17.4 million at December 31, 2003, compared to $16.1 million at December 31, 2002. The increase was primarily due to net income of $1.7 million during the year ended December 31, 2003, partially offset by dividends paid to stockholders during 2003 of $213,000 and the reduction of accumulated other comprehensive income of $151,000. The decrease in accumulated other comprehensive income was due to a reduction in the unrealized gain on securities available for sale, net of taxes of $151,000. The decline in the unrealized gains was primarily due to a higher interest rate environment reducing the fair value of Chart Bank s fixed income portfolio. Comparison of Chart Bank s Operating Results for the Years Ended December 31, 2003 and 2002 Net Income. Net income for the year ended December 31, 2003 was $1.7 million compared to net income of $1.6 million for the prior year. The increase of $133,000 was mainly the result of a decrease in noninterest expense of $784,000, partially offset by a decrease in noninterest income of $605,000, both of which primarily related to the partial discontinuation of the residential loan brokerage program. Net Interest Income. Net interest income remained consistent at $6.6 million for 2003 from 2002. Net interest income increased as a result of higher interest income from an increase in the level of average interest earning assets, but was offset by lower yields and higher interest expense resulting from an increase in the level of average interest bearing liabilities. Interest Income. Total interest and dividend income decreased $942,000, or 8.5%, to $10.1 million for 2003 from $11.0 million for 2002. Interest income on loans decreased $602,000, or 6.3%, to $9.0 million in 2003 from $9.6 million in 2002. The decrease was due to a 70 basis point decrease in the average yield on loans, partially offset by a $4.2 million increase in the average balance of net loans outstanding. The decrease in yield and increase in loan volume was due to a lower interest rate environment and higher prepayments and refinancing of residential and commercial mortgage loans in 2003 compared to 2002. Interest and dividend income from investment securities, short-term investments and other investments decreased $340,000, or 23.3%, to $1.1 million in 2003 from $1.5 million in 2002. The decrease was due to a 114 basis point decrease in the average yield on these investments, partially offset by a $2.1 million increase in the average balance of these investments outstanding. The lower yields on these investments resulted from a lower interest rate environment in 2003 compared to 2002. Interest Expense. Interest expense decreased $1.0 million, or 22.7%, to $3.5 million for 2003 from $4.5 million for 2002. The decrease was primarily due to a decrease in the average cost of funds for interest-bearing liabilities of 77 basis points, partially offset by an increase in the average balance of interest-bearing liabilities of $7.0 million, or 4.6%, to $158.2 million in 2003 from $151.2 million in - 162 - Table of Contents State Taxation For Massachusetts income tax purposes, a consolidated return cannot be filed. Instead, each entity files separate annual income tax returns. Benjamin Franklin Bancorp s state tax returns, as well as those of its subsidiaries, are not currently under audit and have not been audited during the past five years. In 1995, legislation was enacted to reduce the Massachusetts bank excise (income) tax rate and to allow Massachusetts-based financial institutions to apportion income earned in other states. Further, this legislation expanded the applicability of the tax to non-bank entities and out-of-state financial institutions. The Massachusetts excise tax rate for savings banks is currently 10.5% of federal taxable income, adjusted for certain items. Taxable income includes gross income as defined under the Internal Revenue Code, plus interest from bonds, notes and evidences of indebtedness of any state, including Massachusetts, less deductions, but not the credits, allowable under the provisions of the Internal Revenue Code, except for those deductions relating to dividends received and income or franchise taxes imposed by a state or political subdivision. Carryforwards and carrybacks of net operating losses are not allowed. A financial institution or business corporation is generally entitled to special tax treatment as a security corporation under Massachusetts law provided that: (a) its activities are limited to buying, selling, dealing in or holding securities on its own behalf and not as a broker; and (b) it has applied for, and received, classification as a security corporation by the Commissioner of the Massachusetts Department of Revenue. A security corporation that is also a bank holding company under the Code must pay a tax equal to 0.33% of its gross income. A security corporation that is not a bank holding company under the Code must pay a tax equal to 1.32% of its gross income. Benjamin Franklin Bancorp is considering whether to seek to qualify as a security corporation. To do so, it would need to (a) apply for, and receive, security corporation classification by the Massachusetts Department of Revenue; and (b) not conduct any activities deemed impermissible under the governing statutes and the various regulations, directives, letter rulings and administrative pronouncements issued by the Massachusetts Department of Revenue. If it decides to seek such qualification, it would establish a subsidiary for the purpose of making the loan to the employee stock ownership plan, since making such a loan directly could disqualify it from classification as a security corporation. REGULATION AND SUPERVISION General Benjamin Franklin Bank is a Massachusetts-chartered stock savings bank and a wholly owned subsidiary of Benjamin Franklin Bancorp. Benjamin Franklin Bank s deposits are insured up to applicable limits by the FDIC through the Bank Insurance Fund and by the Depositors Insurance Fund of the Deposit Insurance Fund of Massachusetts for amounts in excess of the FDIC insurance limits. Benjamin Franklin Bank is subject to extensive regulation by the Massachusetts Division of Banks, as its chartering agency, and by the FDIC, as its deposit insurer. Benjamin Franklin Bank is required to file reports with, and is periodically examined by, the FDIC and the Massachusetts Division of Banks concerning its activities and financial condition and must obtain regulatory approvals prior to entering into certain transactions, including, but not limited to, mergers with or acquisitions of other savings institutions. Benjamin Franklin Bank is a member of the Federal Home Loan Bank and is subject to certain limited regulation by the Federal Reserve Board. Benjamin Franklin Bancorp, as a bank holding company, is subject to regulation by the Federal Reserve Board and is required to file reports with the Federal Reserve Board. Table of Contents 2002. The average cost of interest-bearing liabilities for 2003 was 2.18% as compared to 2.95% for 2002. The decrease in the average interest-bearing liabilities was primarily due to a lower interest rate environment. The higher average balance of interest-bearing liabilities in 2003 primarily resulted from an $8.1 million increase in the average balances in money market/NOW accounts and a $2.4 million increase in savings deposits, partially offset by a $3.4 million decrease in the average balance of Federal Home Loan Bank of Boston advances. Provision for Loan Losses. The provision for loan losses was $120,000 for 2003 and 2002. Noninterest Income. Noninterest income decreased $605,000, or 18.5%, to $2.7 million for 2003 as compared to $3.3 million for 2002. The decrease in noninterest income was due to the decrease in loan brokerage fees of $589,000 due to the partial discontinuation of the residential loan brokerage program due to lack profitability, gain on the sale of the Hyannis banking office of $316,000 in 2002, which did not recur in 2003, the decrease in gains from sales and redemptions of securities of $79,000, partially offset by increases in revenues from ATM service contracts of $318,000 and customer service fees of $102,000 and $41,000 in miscellaneous income due to a legal settlement. Noninterest Expense. Noninterest expense decreased $784,000, or 10.9%, to $6.4 million for 2003 from $7.2 million for 2002. The decrease in noninterest expense for 2003 was primarily due to decreases in expenses relating to salaries and employee benefits of $432,000 due to the partial discontinuation of the residential loan brokerage program, and reductions in advertising and marketing of $129,000, data processing of $85,000, professional services of $46,000 and other general and administrative of $91,000. Provision for Income Taxes. The provision for income taxes increased $118,000, or 12.3%, to $1.1 million for 2003 from $958,000 in for 2002. The effective tax rates were 38.7% for 2003 and 37.9% for 2002. Average Balances, Interest And Average Yields/Cost. The following table presents certain information for the periods indicated regarding average balances of assets and liabilities, as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities and the resulting average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. Average balances were derived from average daily balances. The yields and rates include fees which are considered adjustments to yields. The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense. - 163 - Table of Contents Massachusetts Bank Regulation General. As a Massachusetts-chartered savings bank, Benjamin Franklin Bank is subject to supervision, regulation and examination by the Massachusetts Division of Banks and to various Massachusetts statutes and regulations which govern, among other things, investment powers, lending and deposit-taking activities, borrowings, maintenance of surplus and reserve accounts, distribution of earnings and payment of dividends. In addition, Benjamin Franklin Bank is subject to Massachusetts consumer protection and civil rights laws and regulations. The Massachusetts Commissioner of Banks s approval is required for a Massachusetts bank to establish or close branches, merge with other banks, organize a holding company, issue stock and undertake certain other activities. In response to a Massachusetts law enacted in 1996, the Massachusetts Commissioner of Banks adopted rules that generally give Massachusetts banks powers equivalent to those of national banks. The Commissioner also has adopted procedures reducing regulatory burdens and expense and expediting branching by well-capitalized and well-managed banks. Investment Activities. In general, Massachusetts-chartered savings banks may invest in preferred and common stock of any corporation organized under the laws of the United States or any state provided such investments do not involve control of any corporation and do not, in the aggregate, exceed 4.0% of the bank s deposits. Massachusetts-chartered savings banks may in addition invest an amount equal to 1.0% of their deposits in stocks of Massachusetts corporations or companies with substantial employment in the commonwealth which have pledged to the Massachusetts Commissioner of Banks that such monies will be used for further development within the Commonwealth. See also Federal Regulation Investment Activities on page # for federal restrictions on equity investments. At the present time, Benjamin Franklin Bank does not have authority to invest in equity securities. Lending Activities. Massachusetts banking laws grant banks broad lending authority. However, with certain limited exceptions, total obligations of one borrower to a stock bank may not exceed 20.0% of the total of the capital stock, surplus account and undivided profits (for banks with capital of at least $500,000) and may not exceed 20.0% of the capital stock or 10.0% of the total of the capital stock, surplus account and undivided profits, whichever is greater (for all other banks). Dividends. A Massachusetts stock bank may declare from net profits cash dividends not more frequently than quarterly and non-cash dividends at any time. No dividends may be declared, credited or paid if the bank s capital stock is impaired. The approval of the Massachusetts Commissioner of Banks is required if the total of all dividends declared in any calendar year exceeds the total of its net profits for that year combined with its retained net profits of the preceding two years. Net profits for this purpose means the remainder of all earnings from current operations plus actual recoveries on loans and investments and other assets after deducting from the total thereof all current operating expenses, actual losses, accrued dividends on preferred stock, if any, and all federal and state taxes. Regulatory Enforcement Authority. Any Massachusetts bank that does not operate in accordance with the regulations, policies and directives of the Massachusetts Commissioner of Banks may be subject to sanctions for non-compliance, including seizure of the property and business of the bank and suspension or revocation of its charter. The Massachusetts Commissioner of Banks may under certain circumstances suspend or remove officers or directors who have violated the law, conducted the bank s business in a manner which is unsafe, unsound or contrary to the depositors interests or been negligent in the performance of their duties. In addition, upon finding that a bank has engaged in an unfair or deceptive act or practice, the Massachusetts Commissioner of Banks may issue an order to cease and desist and impose a fine on the bank concerned. Finally, Massachusetts consumer protection and civil rights statutes applicable to Benjamin Franklin Bank permit private individual and class action law suits and provide for the rescission of consumer transactions, including loans, and the recovery of statutory and punitive damages and attorneys fees in the case of certain violations or those statutes. Table of Contents \ Nine Months Ended September 30, At September 30, 2004 2004 2003 Weighted Average Average Average Outstanding Yield/ Outstanding Yield/Rate Outstanding Yield/Rate Balance Rate Balance Interest (1) Balance Interest (1) (Dollars in thousands) Interest-earning assets: Loans, net $ 175,572 6.07 % $ 156,122 $ 7,225 6.17 % $ 128,862 $ 6,747 6.98 % Investment securities 40,658 2.65 43,467 781 2.40 37,107 874 3.14 Total interest-earning assets 216,230 5.43 199,589 8,006 5.35 165,969 7,621 6.12 Non-interest-earning assets 40,031 35,860 36,640 Total assets $ 256,261 $ 235,449 $ 202,609 Interest-bearing liabilities: Savings deposits $ 14,630 0.77 $ 17,521 105 0.80 $ 20,215 148 0.98 Money market/NOW accounts 75,649 1.42 68,349 722 1.41 59,694 618 1.38 Certificates of deposit 92,488 2.63 77,982 1,504 2.57 65,128 1,566 3.21 Total deposits 182,767 1.98 163,852 2,331 1.90 145,037 2,332 2.14 FHLB advances 22,000 2.52 22,913 401 2.33 12,051 316 3.50 Total interest-bearing liabilities 204,767 2.04 186,765 2,732 1.95 157,088 2,648 2.25 Non-interest-bearing liabilities 33,948 31,106 29,153 Total liabilities 238,715 217,871 186,241 Stockholders equity 17,546 17,578 16,368 Total liabilities and stockholders equity $ 256,261 $ 235,449 $ 202,609 Net interest income $ 5,274 $ 4,973 Net interest rate spread (2)(5) 3.39 % 3.40 % 3.87 % Net interest-earning assets (3) $ 11,463 $ 12,824 $ 8,881 Net interest margin (4) 3.52 % 4.00 % Average interest-earning assets to interest-bearing liabilities 106.87 % 105.65 % (Footnotes on following page) - 164 - Table of Contents Insurance Sales. Massachusetts banks may engage in insurance sales activities if the Massachusetts Commissioner of Banks has approved its plan of operation for insurance activities and it obtains a license from the Massachusetts Division of Insurance. A bank may be licensed directly or indirectly through an affiliate or a subsidiary corporation established for this purpose. DIF. All Massachusetts-chartered savings banks are required to be members of the Deposit Insurance Fund of the Depositors Insurance Fund of Massachusetts, a corporation that insures savings bank deposits in excess of federal deposit insurance coverage. The DIF is authorized to charge savings banks an annual assessment of up to 1/50th of 1.0% of a savings bank s deposit balances in excess of amounts insured by the FDIC. Federal Regulations Capital Requirements. Under FDIC regulations, federally insured state-chartered banks that are not members of the Federal Reserve System ( state non-member banks ), such as Benjamin Franklin Bank and Chart Bank, are required to comply with minimum leverage capital requirements. For an institution determined by the FDIC to not be anticipating or experiencing significant growth and to be, in general, a strong banking organization rated composite 1 under the Uniform Financial Institutions Ranking System established by the Federal Financial Institutions Examination Council, the minimum capital leverage requirement is a ratio of Tier 1 capital to total assets of 3.0%. For all other institutions, the minimum leverage capital ratio is not less than 4.0%. Tier 1 capital is the sum of common stockholders equity, noncumulative perpetual preferred stock (including any related surplus) and minority investments in certain subsidiaries, less intangible assets (except for certain servicing rights and credit card relationships) and certain other specified items. The FDIC regulations require state non-member banks to maintain certain levels of regulatory capital in relation to regulatory risk-weighted assets. The ratio of regulatory capital to regulatory risk-weighted assets is referred to as a bank s risk-based capital ratio. Risk-based capital ratios are determined by allocating assets and specified off-balance sheet items (including recourse obligations, direct credit substitutes and residual interests) to four risk-weighted categories ranging from 0.0% to 100.0%, with higher levels of capital being required for the categories perceived as representing greater risk. For example, under the FDIC s risk-weighting system, cash and securities backed by the full faith and credit of the U.S. government are given a 0.0% risk weight, loans secured by one- to four-family residential properties generally have a 50.0% risk weight, and commercial loans have a risk weighting of 100.0%. State non-member banks must maintain a minimum ratio of total capital to risk-weighted assets of at least 8.0%, of which at least one-half must be Tier 1 capital. Total capital consists of Tier 1 capital plus Tier 2 or supplementary capital items, which include allowances for loan losses in an amount of up to 1.25% of risk-weighted assets, cumulative preferred stock and certain other capital instruments, and a portion of the net unrealized gain on equity securities. The includable amount of Tier 2 capital cannot exceed the amount of the institution s Tier 1 capital. Banks that engage in specified levels of trading activities are subject to adjustments in their risk based capital calculation to ensure the maintenance of sufficient capital to support market risk. The Federal Deposit Insurance Corporation Improvement Act (the FDICIA ) required each federal banking agency to revise its risk-based capital standards for insured institutions to ensure that those standards take adequate account of interest-rate risk, concentration of credit risk, and the risk of nontraditional activities, as well as to reflect the actual performance and expected risk of loss on multi- family residential loans. The FDIC, along with the other federal banking agencies, has adopted a regulation providing that the agencies will take into account the exposure of a bank s capital and economic value to changes in interest rate risk in assessing a bank s capital adequacy. The FDIC also has authority to establish individual minimum capital requirements in appropriate cases upon determination Table of Contents Years Ended December 31, 2003 2002 2001 Average Average Average Outstanding Yield/ Outstanding Yield/ Outstanding Yield/ Balance Interest Rate Balance Interest Rate Balance Interest Rate (Dollars in thousands) Interest-earning assets: Loans $ 130,425 $ 8,971 6.88 % $ 126,264 $ 9,573 7.58 % $ 126,178 $ 10,168 8.06 % Investment securities 37,416 1,120 2.99 % 35,365 1,460 4.13 % 27,149 1,550 5.71 % Total interest-earning assets 167,841 10,091 6.01 % 161,629 11,033 6.83 % 153,327 11,718 7.64 % Non-interest-earning assets 36,517 31,792 24,007 Total assets $ 204,358 $ 193,421 $ 177,334 Interest-bearing liabilities: Savings deposits $ 20,643 194 0.94 % $ 18,244 310 1.70 % $ 16,770 394 2.35 % Money market/NOW accounts 60,408 828 1.37 % 52,280 1,079 2.06 % 44,486 1,311 2.95 % Certificates of deposit 64,672 1,992 3.08 % 64,734 2,520 3.89 % 74,593 4,063 5.45 % Total deposits 145,723 3,014 2.07 % 135,258 3,909 2.89 % 135,849 5,768 4.25 % FHLB advances 12,491 438 3.51 % 15,932 557 3.50 % 2,378 102 4.29 % Total interest-bearing liabilities 158,214 3,452 2.18 % 151,190 4,466 2.95 % 138,227 5,870 4.25 % Non-interest-bearing liabilities 29,592 27,013 25,432 Total liabilities 187,806 178,203 163,659 Stockholders equity 16,552 15,218 13,675 Total liabilities and stockholders equity $ 204,358 $ 193,421 $ 177,334 Net interest income $ 6,639 $ 6,567 $ 5,848 Net interest rate spread (5) 3.83 % 3.88 % 3.39 % Net interest-earning assets (3) $ 9,627 $ 10,439 $ 15,100 Net interest margin (4) 3.96 % 4.06 % 3.81 % Average of interest-earning assets to interest-bearing liabilities 106.08 % 106.90 % 110.92 % Table of Contents that an institution s capital level is, or is likely to become, inadequate in light of the particular circumstances. As a bank holding company, Benjamin Franklin Bancorp is subject to capital adequacy guidelines for bank holding companies similar to those of the FDIC for state-chartered banks. On a pro forma consolidated basis, after the offering, Benjamin Franklin Bancorp s pro forma stockholders equity will exceed these requirements. Standards for Safety and Soundness. As required by statute, the federal banking agencies adopted final regulations and Interagency Guidelines Establishing Standards for Safety and Soundness to implement safety and soundness standards. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The guidelines address internal controls and information systems, internal audit system, credit underwriting, loan documentation, interest rate exposure, asset growth, asset quality, earnings and compensation, fees and benefits. Most recently, the agencies have established standards for safeguarding customer information. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. Investment Activities. Since the enactment of FDICIA, all state-chartered FDIC insured banks, including savings banks, have generally been limited in their investment activities to principal and equity investments of the type and in the amount authorized for national banks, notwithstanding state law. FDICIA and the FDIC permit exceptions to these limitations. For example, state chartered banks may, with FDIC approval, continue to exercise state authority to invest in common or preferred stocks listed on a national securities exchange or the Nasdaq National Market and in the shares of an investment company registered under the Investment Company Act of 1940, as amended. The maximum permissible investment is 100.0% of Tier 1 Capital, as specified by the FDIC s regulations, or the maximum amount permitted by Massachusetts law, whichever is less. Chart Bank received grandfathered authority from the FDIC to invest in listed stock and/or registered shares. Benjamin Franklin does not currently have authority to invest in equity securities. Such grandfathered authority may be terminated upon the FDIC s determination that such investments pose a safety and soundness risk. In addition, the FDIC is authorized to permit such institutions to engage in state authorized activities or investments not permissible for national banks (other than non-subsidiary equity investments) if they meet all applicable capital requirements and it is determined that such activities or investments do not pose a significant risk to the Bank Insurance Fund. The FDIC has adopted revisions to its regulations governing the procedures for institutions seeking approval to engage in such activities or investments. The Gramm-Leach-Bliley Act of 1999 specifies that a nonmember bank may control a subsidiary that engages in activities as principal that would only be permitted for a national bank to conduct in a financial subsidiary if a bank meets specified conditions and deducts its investment in the subsidiary for regulatory capital purposes. Interstate Banking and Branching. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, or the Interstate Banking Act, permits adequately capitalized bank holding companies to acquire banks in any state subject to specified concentration limits and other conditions. The Interstate Banking Act also authorizes the interstate merger of banks. In addition, among other things, the Interstate Banking Act permits banks to establish new branches on an interstate basis provided that such action is specifically authorized by the law of the host state. Prompt Corrective Regulatory Action. Federal law requires, among other things, that federal bank regulatory authorities take prompt corrective action with respect to banks that do not meet minimum capital requirements. For these purposes, the law establishes five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized (1) Yields and rates for the nine months ended September 30, 2004 and 2003 are annualized. (2) Net interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities at September 30, 2004. (3) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities. (4) Net interest margin represents net interest income divided by average total interest-earning assets. (5) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities for the nine months ended September 30, 2004 and 2003 and the years ended December 31, 2003, 2002 and 2001. - 165 - Table of Contents The FDIC has adopted regulations to implement the prompt corrective action legislation. An institution is deemed to be well capitalized if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater and a leverage ratio of 5.0% or greater. An institution is adequately capitalized if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 4.0% or greater, and generally a leverage ratio of 4.0% or greater. An institution is undercapitalized if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 4.0%, or generally a leverage ratio of less than 4.0%. An institution is deemed to be significantly undercapitalized if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 3.0%, or a leverage ratio of less than 3.0%. An institution is considered to be critically undercapitalized if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%. As of September 30, 2004, Benjamin Franklin Bank and Chart Bank were well capitalized institutions. Undercapitalized banks must adhere to growth, capital distribution (including dividend) and other limitations and are required to submit a capital restoration plan. A bank s compliance with such a plan is required to be guaranteed by any company that controls the undercapitalized institution in an amount equal to the lesser of 5.0% of the institution s total assets when deemed undercapitalized or the amount necessary to achieve the status of adequately capitalized. If an undercapitalized bank fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized. Significantly undercapitalized banks must comply with one or more of a number of additional restrictions, including but not limited to an order by the FDIC to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, cease receipt of deposits from correspondent banks or dismiss directors or officers, and restrictions on interest rates paid on deposits, compensation of executive officers and capital distributions by the parent holding company. Critically undercapitalized institutions are subject to additional measures including, subject to a narrow exception, the appointment of a receiver or conservator within 270 days after it obtains such status. Transactions with Affiliates. Transactions between banks and their affiliates are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a bank is any company or entity that controls, is controlled by or is under common control with the bank. In a holding company context, the parent bank holding company and any companies which are controlled by such parent holding company are affiliates of the bank. Generally, Sections 23A and 23B of the Federal Reserve Act (i) limit the extent to which the bank or its subsidiaries may engage in covered transactions with any one affiliate to an amount equal to 10.0% of such institution s capital stock and surplus, and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20.0% of such institution s capital stock and surplus and (ii) require that all such transactions be on terms substantially the same, or at least as favorable, to the institution or subsidiary as those provided to a non-affiliate. The term covered transaction includes the making of loans, purchase of assets, issuance of a guarantee and other similar transactions. In addition, loans or other extensions of credit by the financial institution to the affiliate are required to be collateralized in accordance with the requirements set forth in Section 23A of the Federal Reserve Act. The Gramm-Leach-Bliley Act amended several provisions of section 23A and 23B of the Federal Reserve Act. The amendments provide that so-called financial subsidiaries of banks are treated as affiliates for purposes of sections 23A and 23B of the Federal Reserve Act, but the amendment provides that (i) the 10.0% capital limit on transactions between the bank and such financial subsidiary as an affiliate is not applicable, and (ii) the investment by the bank in the financial subsidiary does not include retained earnings in the financial subsidiary. Certain anti-evasion provisions have been included that relate to the relationship between any financial subsidiary of a bank and sister companies of the bank: (1) any purchase of, or investment in, the securities of a financial subsidiary by any affiliate of the parent bank is considered a purchase or investment by the bank; or (2) if the Federal Reserve Board determines Table of Contents The following table presents the dollar amount of changes in interest income and interest expense for the major categories of Chart Bank s interest-earning assets and interest-bearing liabilities. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to (i) changes attributable to changes in volume (i.e., changes in average balances multiplied by the prior-period average rate) and (ii) changes attributable to rate (i.e., changes in average rate multiplied by prior-period average balances). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate. Nine Months Ended September 30, Years Ended December 31, Years Ended December 31, 2004 vs. 2003 2003 vs. 2002 2002 vs. 2001 Increase Total Increase Total Increase Total (Decrease) Due to Increase (Decrease) Due to Increase (Decrease) Due to Increase Volume Rate (Decrease) Volume Rate (Decrease) Volume Rate (Decrease) (Dollars in thousands) Interest-earning assets: Loans $ 1,320 $ (842 ) $ 478 $ 308 $ (910 ) $ (602 ) $ 7 $ (602 ) $ (595 ) Investment securities 135 (228 ) (93 ) 80 (420 ) (340 ) 401 (491 ) (90 ) Total interest-earning assets 1,455 (1,070 ) 385 388 (1,330 ) (942 ) 408 (1,093 ) (685 ) Interest-bearing liabilities: Savings deposits (18 ) (25 ) (43 ) 48 (164 ) (116 ) 39 (123 ) (84 ) Money market/NOW accounts 91 13 104 216 (467 ) (251 ) 327 (559 ) (232 ) Certificates of deposits 278 (340 ) (62 ) (2 ) (526 ) (528 ) (669 ) (874 ) (1,543 ) Total deposits 351 (352 ) (1 ) 262 (1,157 ) (895 ) (303 ) (1,556 ) (1,859 ) FHLB advances 216 (131 ) 85 (121 ) 2 (119 ) 477 (22 ) 455 Total interest-bearing liabilities 567 (483 ) 84 141 (1,155 ) (1,014 ) 174 (1,578 ) (1,404 ) Change in net interest income $ 888 $ (587 ) $ 301 $ 247 $ (175 ) $ 72 $ 234 $ 485 $ 719 Liquidity and Capital Resources Liquidity is the ability to meet current and future financial obligations of a short-term nature. Chart Bank further defines liquidity as the ability to respond to the needs of depositors and borrowers as well as maintaining the flexibility to take advantage of investment opportunities. Primary sources of funds consist of deposit inflows, loan repayments, maturities, pay downs, and sales of mortgage obligations and investments and advances from the Federal Home Loan Bank of Boston. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit outflows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. Chart Bank s primary investing activities are: (1) originating and purchasing commercial mortgage loans, residential mortgage loans, construction loans, commercial business loans and consumer loans (2) investing in federal agency obligations and corporate equity securities and (3) funding cash in ATMs for Chart Bank s subsidiary CSSI. These activities are funded primarily by principal and interest payments on loans, deposit growth, Federal Home Loan Bank of Boston advances and maturities of securities. During the nine months ended September 30, 2004, Chart Bank s loan originations and purchases, net of repayments, totaled $35. 8 million, including the purchase of $14.0 million in residential mortgage loans from another institution. For the nine months ended September 30, 2004, Chart Bank purchased federal agency obligations and corporate equity securities totaling $15.7 million and had proceeds from - 166 - Table of Contents that such treatment is necessary, any loan made by an affiliate of the parent bank to the financial subsidiary is to be considered a loan made by the parent bank. Effective April 1, 2003, the Federal Reserve Board adopted Regulation W that deals with the provisions of Sections 23A and 23B. The regulation unifies and updates staff interpretations issued over the years, incorporates several new interpretations and provisions (such as to clarify when transactions with an unrelated third party will be attributed to an affiliate), and addresses new issues arising as a result of the expanded scope of nonbanking activities engaged in by banks and bank holding companies in recent years and authorized for financial holding companies under the Gramm-Leach-Bliley Act. In addition, Sections 22(h) and (g) of the Federal Reserve Act place restrictions on loans to executive officers, directors and principal stockholders. Under Section 22(h) of the Federal Reserve Act, loans to a director, an executive officer and to a greater than 10.0% stockholder of a financial institution, and certain affiliated interests of these, may not exceed, together with all other outstanding loans to such person and affiliated interests, the financial institution s loans to one borrower limit, generally equal to 15.0% of the institution s unimpaired capital and surplus. Section 22(h) of the Federal Reserve Act also requires that loans to directors, executive officers and principal stockholders be made on terms substantially the same as offered in comparable transactions to other persons and also requires prior board approval for certain loans. In addition, the aggregate amount of extensions of credit by a financial institution to insiders cannot exceed the institution s unimpaired capital and surplus. Furthermore, Section 22(g) of the Federal Reserve Act places additional restrictions on loans to executive officers. Enforcement. The FDIC has extensive enforcement authority over insured savings state banks, including Benjamin Franklin Bank and Chart Bank. This enforcement authority includes, among other things, the ability to assess civil money penalties, issue cease and desist orders and remove directors and officers. In general, these enforcement actions may be initiated in response to violations of laws and regulations and unsafe or unsound practices. The FDIC has authority under Federal law to appoint a conservator or receiver for an insured bank under limited circumstances. The FDIC is required, with certain exceptions, to appoint a receiver or conservator for an insured state non-member bank if that bank was critically undercapitalized on average during the calendar quarter beginning 270 days after the date on which the institution became critically undercapitalized. The FDIC may also appoint itself as conservator or receiver for an insured state non-member institution under specific circumstances on the basis of the institution s financial condition or upon the occurrence of other events, including: (1) insolvency; (2) substantial dissipation of assets or earnings through violations of law or unsafe or unsound practices; (3) existence of an unsafe or unsound condition to transact business; and (4) insufficient capital, or the incurring of losses that will deplete substantially all of the institution s capital with no reasonable prospect of replenishment without federal assistance. Insurance of Deposit Accounts. The FDIC has adopted a risk-based insurance assessment system. The FDIC assigns an institution to one of three capital categories based on the institution s financial condition consisting of (1) well capitalized, (2) adequately capitalized or (3) undercapitalized, and one of three supervisory subcategories within each capital group. The supervisory subgroup to which an institution is assigned is based on a supervisory evaluation provided to the FDIC by the institution s primary federal regulator and information which the FDIC determines to be relevant to the institution s financial condition and the risk posed to the deposit insurance funds. An institution s assessment rate depends on the capital category and supervisory category to which it is assigned. Assessment rates for insurance fund deposits currently range from 0 basis points for the strongest institution to 27 basis points for the weakest. Bank Insurance Fund members are also required to assist in the repayment of bonds issued by the Financing Corporation in the late 1980 s to recapitalize the Federal Savings and Loan Insurance Corporation. For the nine months ended September 30, 2004 and 2003, the total FDIC assessment was $45,958 and $45,157, respectively, for Benjamin Franklin Bank, and $19,445 and $18,540, respectively for Chart Bank. The FDIC is authorized to raise the assessment rates. The FDIC has Table of Contents exercised this authority several times in the past and may raise insurance premiums in the future. If such action is taken by the FDIC, it could have an adverse effect on the earnings of Benjamin Franklin Bank. The FDIC may terminate insurance of deposits if it finds that the institution is in an unsafe or unsound condition to continue operations, has engaged in unsafe or unsound practices, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. The managements of Benjamin Franklin Bank and Chart Bank do not know of any practice, condition or violation that might lead to termination of deposit insurance. Federal Reserve System The Federal Reserve Board regulations require depository institutions to maintain non-interest-earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The Federal Reserve Board regulations generally require that reserves be maintained against aggregate transaction accounts as follows: for that portion of transaction accounts aggregating $42.1 million or less (which may be adjusted by the Federal Reserve Board) the reserve requirement is 3.0%; and for amounts greater than $42.1 million, 10.0% (which may be adjusted by the Federal Reserve Board between 8.0% and 14.0%), against that portion of total transaction accounts in excess of $42.1 million. The first $6.0 million of otherwise reservable balances (which may be adjusted by the Federal Reserve Board) are exempted from the reserve requirements. Benjamin Franklin Bank and Chart Bank are in compliance with these requirements. Federal Home Loan Bank System Benjamin Franklin Bank and Chart Bank are members of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a central credit facility primarily for member institutions. Members of the Federal Home Loan Bank are required to acquire and hold shares of capital stock in the Federal Home Loan Bank in an amount at least equal to 1.0% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or 1/20 of its advances (borrowings) from the Federal Home Loan Bank, whichever is greater. Benjamin Franklin Bank was in compliance with this requirement with an investment in Federal Home Loan Bank stock at September 30, 2004 of $4.3 million. At September 30, 2004, Benjamin Franklin Bank had $75.0 million in Federal Home Loan Bank advances. Chart Bank was in compliance with this requirement with such an investment at September 30, 2004 of $1.7 million. At September 30, 2004, Chart Bank had $22.0 million in Federal Home Loan Bank advances. The Federal Home Loan Banks are required to provide funds for certain purposes including the resolution of insolvent thrifts in the late 1980s and to contributing funds for affordable housing programs. These requirements could reduce the amount of dividends that the Federal Home Loan Banks pay to their members and result in the Federal Home Loan Banks imposing a higher rate of interest on advances to their members. If dividends were reduced, or interest on future Federal Home Loan Bank advances increased, a member bank affected by such reduction or increase would likely experience a reduction in its net interest income. Recent legislation has changed the structure of the Federal Home Loan Banks funding obligations for insolvent thrifts, revised the capital structure of the Federal Home Loan Banks and implemented entirely voluntary membership for Federal Home Loan Banks. For the nine months ended September 30, 2004 and 2003, cash dividends from the Federal Home Loan Bank to Benjamin Franklin Bank amounted to approximately $87,000 and $72,000, respectively, and to Chart Bank, approximately $22,917 and $24,149. There can be no assurance that such dividends will continue in the future. Further, there can be no assurance that the impact of recent or future legislation on the Federal Home Loan Banks also will not cause a decrease in the value of the Federal Home Loan Bank stock held by Benjamin Franklin Bank and Chart Bank. Table of Contents Holding Company Regulation General. As a bank holding company, Benjamin Franklin Bancorp is subject to comprehensive regulation and regular examinations by the Federal Reserve Board. The Federal Reserve Board also has extensive enforcement authority over bank holding companies, including, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to require that a holding company divest subsidiaries (including its bank subsidiaries). In general, enforcement actions may be initiated for violations of law and regulations and unsafe or unsound practices. As a bank holding company, Benjamin Franklin Bancorp must obtain the approval of the Federal Reserve Board before: (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5.0% of such shares (unless it already owns or controls the majority of such shares); (ii) acquiring all or substantially all of the assets of another bank or bank holding company; or (iii) merging or consolidating with another bank holding company. In addition, Benjamin Franklin Bancorp must obtain the approval of the Massachusetts Board of Bank Incorporation before becoming a bank holding company for Massachusetts law purposes. Under Massachusetts law, a bank holding company is generally defined as a company that directly or indirectly owns, controls or holds with power to vote 25.0% of the voting stock of each of two or more banking institutions. Under Federal Reserve Board policy, a bank holding company must serve as a source of strength for its subsidiary bank. Under this policy, the Federal Reserve Board may require, and has required in the past, a holding company to contribute additional capital to an undercapitalized subsidiary bank. The Banking Holding Company Act also prohibits a bank holding company, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5.0% of the voting shares of any company which is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities which, by statute or by Federal Reserve Board regulation or order, have been identified as activities closely related to the business of banking or managing or controlling banks. The list of activities permitted by the Federal Reserve Board includes, among other things: (i) operating a savings institution, mortgage company, finance company, credit card company or factoring company; (ii) performing certain data processing operations; (iii) providing certain investment and financial advice; (iv) underwriting and acting as an insurance agent for certain types of credit-related insurance; (v) leasing property on a full-payout, non-operating basis; (vi) selling money orders, travelers checks and United States Savings Bonds; (vii) real estate and personal property appraising; (viii) providing tax planning and preparation services; (ix) financing and investing in certain community development activities; and (x) subject to certain limitations, providing securities brokerage services for customers. Benjamin Franklin Bancorp has no present plans to engage in any of these activities. Dividends. The Federal Reserve Board has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve Board s view that a bank holding company should pay cash dividends only to the extent that the holding company s net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the holding company s capital needs, asset quality and overall financial condition. The Federal Reserve Board also indicated that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, under the prompt corrective action regulations adopted by the Federal Reserve Board, the Federal Reserve Board may prohibit a bank holding company from paying any dividends if the holding company s bank subsidiary is classified as undercapitalized. See Regulatory Capital Compliance on page # . Commitments and contingencies (Note 11) Stockholders equity: Preferred stock; $1 par value, 3,000,000 shares authorized; none issued Common stock - Series B; $1 par value; 3,000,000 shares authorized; none issued Common stock - Series A; $1 par value; 3,000,000 shares authorized; 1,420,000 shares issued and outstanding 1,420 1,420 1,420 Additional paid-in capital 11,575 11,575 11,575 Retained earnings 4,524 4,337 2,848 Accumulated other comprehensive income 27 67 Balance at December 31, 2002 1,420 1,420 11,575 2,848 Table of Contents Bank holding companies are required to give the Federal Reserve Board prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10.0% or more of the consolidated net worth of the bank holding company. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, Federal Reserve Board order or any condition imposed by, or written agreement with, the Federal Reserve Board. This notification requirement does not apply to any company that meets the well-capitalized standard for commercial banks, is well managed within the meaning of the Federal Reserve Board regulations and is not subject to any unresolved supervisory issues. Financial Modernization. The Gramm-Leach-Bliley Act permits greater affiliation among banks, securities firms, insurance companies, and other companies under a type of financial services company known as a financial holding company. A financial holding company essentially is a bank holding company with significantly expanded powers. Financial holding companies are authorized by statute to engage in a number of financial activities previously impermissible for bank holding companies, including securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; and merchant banking activities. The act also permits the Federal Reserve Board and the Treasury Department to authorize additional activities for financial holding companies if they are financial in nature or incidental to financial activities. A bank holding company may become a financial holding company if each of its subsidiary banks is well capitalized, well managed, and has at least a satisfactory Community Reinvestment Act rating. A financial holding company must provide notice to the Federal Reserve Board within 30 days after commencing activities previously determined by statute or by the Federal Reserve Board and Department of the Treasury to be permissible. Benjamin Franklin Bancorp has not submitted notice to the Federal Reserve Board of its intent to be deemed a financial holding company. However, it is not precluded from submitting a notice in the future should it wish to engage in activities only permitted to financial holding companies. Miscellaneous Regulation Community Reinvestment Act. Under the Community Reinvestment Act (CRA), as amended as implemented by FDIC regulations, a bank has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA does require the FDIC, in connection with its examination of a bank, to assess the institution s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution, including applications to acquire branches and other financial institutions. The CRA requires the FDIC to provide a written evaluation of an institution s CRA performance utilizing a four-tiered descriptive rating system. Benjamin Franklin Bank s latest FDIC CRA rating was satisfactory. Chart Bank s most recent CRA rating was satisfactory. Massachusetts has its own statutory counterpart to the CRA which is also applicable to Benjamin Franklin Bank and Chart Bank. The Massachusetts version is generally similar to the CRA but utilizes a five-tiered descriptive rating system. Massachusetts law requires the Massachusetts Commissioner of Banks to consider, but not be limited to, a bank s record of performance under Massachusetts law in considering any application by the bank to establish a branch or other deposit-taking facility, to relocate an office or to merge or consolidate with or acquire the assets and assume the liabilities of any other banking institution. Benjamin Franklin Bank s most recent rating under Massachusetts law was high satisfactory and Chart Bank s was satisfactory. Total temporarily impaired securities $ Table of Contents Consumer Protection And Fair Lending Regulations. Massachusetts savings banks are subject to a variety of federal and Massachusetts statutes and regulations that are intended to protect consumers and prohibit discrimination in the granting of credit. These statutes and regulations provide for a range of sanctions for non-compliance with their terms, including imposition of administrative fines and remedial orders, and referral to the Attorney General for prosecution of a civil action for actual and punitive damages and injunctive relief. Certain of these statutes authorize private individual and class action lawsuits and the award of actual, statutory and punitive damages and attorneys fees for certain types of violations. DESCRIPTION OF CAPITAL STOCK OF BENJAMIN FRANKLIN BANCORP General Upon completion of the conversion, Benjamin Franklin Bancorp will be authorized to issue up to 75 million shares of common stock. As of the date of this Prospectus, none of these shares has been issued. Benjamin Franklin Bancorp currently expects to issue between 4,250,000 and 5,750,000 shares of common stock in the conversion, with an adjusted maximum of 6,612,500 shares, and 2,401,575 shares of common stock in the merger (based on 1,420,000 outstanding shares of Chart Bank common stock, which is exclusive of options to purchase 137,000 shares of Chart Bank common stock outstanding as of Sept. 30, 2004). Benjamin Franklin Bancorp Common Stock General. Each issued and outstanding share of Benjamin Franklin Bancorp common stock will have the same rights as, and will be identical in all respects with, each other share of common stock. Upon payment of the purchase price for the conversion shares in accordance with the plan of conversion, and upon issuance of the exchange shares in accordance with the provisions of the merger agreement, all such shares will be duly authorized, fully paid, validly issued and non-assessable. Voting Rights. Each holder of Benjamin Franklin Bancorp common stock will be entitled to one vote for each share of common stock held. Holders of common stock will not have cumulative voting rights in connection with the election of directors. Dividends. Holders of Benjamin Franklin Bancorp common stock will be entitled to receive and share equally in such dividends as the board of directors of Benjamin Franklin Bancorp may declare out of funds legally available for such payments. If Benjamin Franklin Bancorp issues preferred stock, holders of such stock may have a priority over holders of common stock with respect to the payment of dividends. See Preferred Stock on page # . State and federal laws and regulations place limitations on the payment of dividends. See Our Policy Regarding Dividends on page # . Liquidation or Dissolution. In the event of a liquidation or dissolution of Benjamin Franklin Bancorp, holders of Benjamin Franklin Bancorp common stock will be entitled to receive, after payment or provision for payment of all debts and liabilities of Benjamin Franklin Bancorp (including all deposits in Benjamin Franklin Bank and accrued interest thereon) and after distribution of the liquidation account established upon the completion of the conversion for the benefit of eligible account holders and supplemental eligible account holders who continue their deposit accounts at Benjamin Franklin Bank, all assets of Benjamin Franklin Bancorp available for distribution. If Benjamin Franklin Bancorp issues preferred stock, holders of such stock may have a senior interest over holders of common stock in such a distribution. No Preemptive or Redemption Rights. Holders of Benjamin Franklin Bancorp common stock will not have preemptive rights with respect to any shares of the capital stock of Benjamin Franklin Table of Contents The following table shows the amounts of interest-earning assets and interest-bearing liabilities at September 30, 2004 that reprice during the periods indicated: Repricing or Maturity Date One Day Over Six Over One to Six Months to Year to Over Five Months One Year Five Years Years Total (Dollars in thousands) Interest earning assets: Loans(1) $ 43,844 $ 15,519 $ 107,300 $ 10,217 $ 176,880 Investment securities 10,815 3,204 26,619 20 40,658 Total interest-earning assets 54,659 18,723 133,919 10,237 217,538 Interest bearing liabilities: Deposits non-certificates(2) 63,757 26,522 90,279 certificates 20,506 49,395 22,587 92,488 Borrowings 13,000 4,000 5,000 22,000 Total interest-bearing liabilities 97,263 53,395 27,587 26,522 204,767 Net interest rate sensitivity gap $ (42,604 ) $ (34,672 ) $ 106,332 $ (16,285 ) $ 12,771 Cumulative interest rate sensitivity gap $ (42,604 ) $ (77,276 ) $ 29,056 $ 12,771 Table of Contents Bancorp that may be issued. Shares of Benjamin Franklin Bancorp common stock will not be subject to call for redemption. Preferred Stock Benjamin Franklin Bancorp s board of directors may, without stockholder approval but subject to certain regulatory approvals, reclassify any unissued shares of common stock into one or more series of preferred stock and designate and issue one or more series of preferred stock, establish the number of shares in each such series, fix and state the voting powers, designations, preferences and the relative or special rights or privileges of the shares of any series so established and the qualifications thereon without further vote or action by the stockholders. Any issuance of preferred stock could have an adverse effect on the voting and other rights of holders of common stock. Each series of preferred stock issued after the conversion may rank senior to shares of common stock with respect to dividend rights and liquidation preferences, may have full, limited or no voting rights and may be convertible into shares of common stock. RESTRICTIONS ON ACQUISITION OF BENJAMIN FRANKLIN BANCORP AND BENJAMIN FRANKLIN BANK General Benjamin Franklin Bancorp s articles of organization and by-laws, which will become effective upon completion of the conversion, contain certain provisions relating to corporate governance and rights of stockholders that might discourage future takeover attempts by impeding efforts to acquire Benjamin Franklin Bancorp or stock purchases in furtherance of such an acquisition. Such provisions will also make it more difficult to remove the board and Benjamin Franklin Bancorp s management. Certain state and federal laws and Benjamin Franklin Bank s employee stock ownership plan could have a similar effect. Although the board of directors of Benjamin Franklin Bank and the board of trustees of Benjamin Franklin Bancorp are not aware of any effort that might be made to obtain control of Benjamin Franklin Bancorp following the conversion, the boards believe, as discussed below, that it is appropriate to include certain provisions in the articles of organization and by-laws to protect the interests of Benjamin Franklin Bancorp and its stockholders from takeovers that the board might conclude are not in the best interest of Benjamin Franklin Bank, Benjamin Franklin Bancorp or Benjamin Franklin Bancorp s stockholders. These provisions will also increase protections available to Benjamin Franklin Bancorp against transactions that, although not resulting in an acquisition of a majority of Benjamin Franklin Bancorp s capital stock, nevertheless may harm Benjamin Franklin Bancorp and its stockholders by disrupting Benjamin Franklin Bank s operations and management and by causing Benjamin Franklin Bancorp to incur substantial expenses. The following is a general summary of the material provisions of Benjamin Franklin Bancorp s articles and by-laws and of certain provisions of the employee stock ownership plan and certain laws that may have an anti-takeover effect. The descriptions are necessarily general and, with respect to provisions contained in the articles and by-laws, reference should be made to the document in question, each of which is part of Benjamin Franklin Bancorp s application to the Massachusetts Commissioner of Banks and Registration Statement on Form S-1 filed with the SEC. See Additional Information on page # . Table of Contents Certain Provisions of Benjamin Franklin Bancorp s Articles and By-Laws and the Massachusetts Business Corporation Law Directors. The articles of organization and by-laws of Benjamin Franklin Bancorp contain certain provisions that may make it difficult to change majority control of Benjamin Franklin Bancorp s board of directors. The Massachusetts Business Corporation Act also contains provisions similar to certain of the provisions of the articles, as described below. Benjamin Franklin Bancorp s articles, as well as Section 8.06(b) of the Massachusetts Business Corporation Act, require that Benjamin Franklin Bancorp have three classes of directors elected for three-year staggered terms, so that ordinarily no more than approximately one-third of Benjamin Franklin Bancorp s directors will stand for election in any one year. Thus, it would take two annual elections to replace a majority of Benjamin Franklin Bancorp s board. The stockholders do not have cumulative voting rights in the election of directors. Benjamin Franklin Bancorp s articles, as well as Section 8.06(e) of the Massachusetts Business Corporation Act, also provide that any vacancy occurring in the board of directors, including vacancies resulting from an increase in the number of directors, may be filled only by a vote of a majority of the directors (even if such directors do not constitute a quorum). The articles further provide that if, at the time a board vacancy occurs, there is an interested stockholder, the vacancy may be filled only by vote of a majority of the independent directors then in office. Since Section 8.06(e) does not include a similar provision requiring the vote of the independent directors if there is an interested stockholder, this provision of the articles will not be effective unless the board of directors or the shareholders by a two-thirds vote elect to opt out of Section 8.06(b) of the Massachusetts Business Corporation Act. In addition, the by-laws impose certain advance notice and informational requirements on the nomination by stockholders of candidates for election to the board of directors. See Certain Provisions of Benjamin Franklin Bancorp s Articles and By-laws Stockholder Proposals and Director Nominations on page # . Finally, Benjamin Franklin Bancorp s articles, as well as Section 8.06(d) of the Massachusetts Business Corporation Act, provide that directors may be removed only for cause and only by the shareholders. The articles require a two-thirds vote of the shareholders to remove a director, while Section 8.06(d) requires only a majority vote of the shareholders. The majority vote provision contained in Section 8.06(d) will govern (rather than the two-thirds vote provision contained in the articles) unless the board of directors or the shareholders by a two-thirds vote elect to opt out of Section 8.06(b) of the Massachusetts Business Corporation Act. The board of directors has not elected to opt out of 8.06(b) of the Massachusetts Business Corporation Act, but it could choose to do so at any time. Definitions of independent director and interested stockholder appear in the last subsection of Certain Provisions of Benjamin Franklin Bancorp s Articles and By-laws on page # . Meetings of Stockholders. The articles and by-laws provide that a special meeting of stockholders may be called at any time by the president, a majority of the directors then in office (unless at the time there is an interested shareholder, in which case such call by the board of directors shall also require the affirmative vote of a majority of the independent directors then in office), or by the secretary upon the written request of one or more stockholders who hold at least 80% in interest of the capital stock entitled to vote at such meeting. Only those matters set forth in the call of the special meeting may be considered or acted upon at such meeting, unless otherwise provided by law. With respect to annual meetings of stockholders, the by-laws impose certain advance notice and informational requirements for any business that a stockholder may wish to propose for consideration at such a meeting. See Certain Provisions of Benjamin Franklin Bancorp s Articles and By-laws Stockholder Proposals and Director Table of Contents Nominations on page # . The by-laws provide that any action by the stockholders may be taken without a meeting if all stockholders entitled to vote on the matter consent to such action in writing. Authorized Stock. The articles authorize the board of directors to issue any of the 75 million shares of Benjamin Franklin Bancorp common stock not issued in the conversion and the merger that are authorized but unissued. The board of directors may, without stockholder approval but subject to certain regulatory approvals, reclassify any unissued shares of common stock into one or more series of preferred stock and designate and issue one or more series of preferred stock, establish the number of shares in each such series, fix and state the voting powers, designations, preferences and the relative or special rights or privileges of the shares of any series so established and the qualifications thereon without further vote or action by the stockholders. In the event of a proposed merger, tender offer or other attempt to gain control of Benjamin Franklin Bancorp that the board of directors does not approve, it might be possible for the board of directors to authorize the issuance of a series of preferred stock with rights and preferences that might impede the completion of such a transaction. Benjamin Franklin Bancorp has no present plans or understandings for the issuance of any shares of preferred stock. Vote Required to Approve Business Combinations Involving Interested Stockholders. The articles contain a so-called fair price provision pursuant to which certain mergers, acquisitions, stock issuances, dispositions of assets, liquidations or recapitalizations (these transactions are referred to as business combinations ) involving an interested stockholder and Benjamin Franklin Bancorp or any subsidiary would require stockholder approval by the affirmative vote of holders of at least 75.0% of the outstanding shares of Benjamin Franklin Bancorp entitled to vote in elections of directors. The 75.0% vote is not required if the business combination is approved by two-thirds of the independent directors then in office or if certain procedures and price requirements are met. An affirmative vote of the holders of at least 75.0% of the outstanding voting stock is required to amend or repeal, or adopt any provisions inconsistent with, the fair price provision. Vote Required for Certain Transactions. The articles further provide that, unless a higher percentage vote is required by law or the fair price provision of the articles, any sale, lease or exchange of all or substantially all of Benjamin Franklin Bancorp s property or assets, including goodwill, or the merger, share exchange or consolidation of Benjamin Franklin Bancorp with or into any other entity must be approved by an affirmative vote of at least two-thirds of the total votes that may be cast by Benjamin Franklin Bancorp s stockholders on such a transaction. However, only a majority vote of Benjamin Franklin Bancorp s stockholders is necessary if the transaction has been recommended to the stockholders for approval by two-thirds of the directors then in office (unless there is an interested stockholder, in which case the recommendation to stockholders must also be approved by the vote of a majority of the independent directors then in office). Restrictions on Acquisitions of Securities. The articles provide that, for a period of five years following the date of completion of Benjamin Franklin Bancorp s conversion from mutual to stock form, no person may directly or indirectly offer to acquire or acquire the beneficial ownership of more than 10.0% of the issued and outstanding voting stock of Benjamin Franklin Bancorp. Shares acquired in excess of this limitation will not be entitled to vote or to take other stockholder action or to be counted in determining the total number of outstanding shares for purposes of any matter involving stockholder action, and such shares may be required to be sold through an independent trustee. The foregoing provision of the articles does not apply to: Table of Contents Benjamin Franklin Bancorp or any subsidiary or any pension, profit-sharing, stock bonus or other compensation plan maintained by Benjamin Franklin Bancorp or by a member of a controlled group of corporations or trades or businesses of which Benjamin Franklin Bancorp is a member for the benefit of the employees of Benjamin Franklin Bancorp or any subsidiary, or any trust or custodial arrangement established in connection with any such plan; any offer or acquisition of shares of voting stock that has been approved in advance by an affirmative vote of not less than two-thirds (2/3) of the directors then in office (plus an affirmative vote of two-thirds (2/3) of the independent directors then in office if there is an interested stockholder at the time of the offer or acquisition); any offer with a view toward public resale made exclusively to Benjamin Franklin Bancorp by underwriters or a selling group acting on its behalf; or a corporate reorganization without a change in the respective beneficial ownership interests of Benjamin Franklin Bancorp s stockholders other than pursuant to the exercise of any dissenters appraisal rights. Provisions for Amendment of Articles and By-laws. The articles provide that, in general, amendment of the articles and the by-laws requires the vote of 75.0% of the votes eligible to be cast by Benjamin Franklin Bancorp s stockholders or, if two-thirds of the independent directors vote to recommend that the stockholders approve such amendment, the vote of a majority of the votes eligible to be cast by Benjamin Franklin Bancorp s stockholders . In addition, any provision of the articles that requires a greater than majority vote of stockholders can only be amended by such greater vote. In addition, the directors may amend the by-laws without stockholder approval by a majority vote (plus an affirmative vote of two-thirds of the independent directors if there is an interested stockholder). Stockholder Proposals and Director Nominations. Stockholders may submit proposals for inclusion on the agenda of an annual meeting of stockholders, and may submit nominations for election to the board of directors at an annual meeting, only by delivering a notice thereof to the secretary of Benjamin Franklin Bancorp at least 120 days but not more than 150 days in advance of the first anniversary of the date of the proxy statement for the previous year s annual meeting (for the first annual meeting following the conversion, the deadline is ten days after the day on which notice of the date of the scheduled annual meeting is publicly disclosed). The stockholder notice must: state the stockholder s name, the name of other stockholders who support the proposal or nominee and the class and number of shares owned by them, in the case of a proposal, describe the matter proposed and the reason for considering it at the annual meeting and must set forth any financial interest that the proposing stockholder has in the proposal, and in the case of a nomination, the name, age, business address and residence address, principal occupation or employment of the nominee, the class and number of shares owned by the nominee, and any other information relating to the nominee that is required under the securities laws to be disclosed in solicitations of proxies with respect to nominees for election as directors, including, but not limited to, the written consent of the nominee to serve as a director if elected. Table of Contents The board of directors may reject a stockholder s proposal or nomination if the stockholder does not fully and timely comply with the foregoing notice requirement. Purpose and Takeover Defensive Effects of Articles and By-Laws. The boards of Benjamin Franklin Bancorp and Benjamin Franklin Bank believe that the provisions described above are prudent and will reduce Benjamin Franklin Bancorp s vulnerability to takeover attempts and to certain other transactions that have not been negotiated with and approved by Benjamin Franklin Bancorp s board of directors. These provisions will also assist Benjamin Franklin Bancorp and Benjamin Franklin Bank in the orderly deployment of the offering proceeds into productive assets during the initial period after the offering. The boards believe these provisions are in the best interests of Benjamin Franklin Bank, Benjamin Franklin Bancorp and its stockholders. Attempts to acquire control of financial institutions and their holding companies have become increasingly common. Takeover attempts that have not been negotiated with and approved by boards of directors present to stockholders the risk of a takeover on terms that may be less favorable than might otherwise be available. A transaction that is negotiated and approved by the board of directors of Benjamin Franklin Bancorp, on the other hand, can be carefully planned and undertaken at an opportune time in order to obtain maximum value for Benjamin Franklin Bancorp and its stockholders, with due consideration given to matters such as the management and business of the acquiring corporation and maximum strategic development of Benjamin Franklin Bancorp s assets. An unsolicited takeover proposal can seriously disrupt the business and management of a corporation and cause it great expense. Although a tender offer or other takeover attempt may be made at a price substantially above then-current market prices, such offers are sometimes made for less than all of the outstanding shares of a target company. As a result, stockholders may be presented with the alternative of partially liquidating their investment at a time that may be disadvantageous or retaining their investment in an enterprise that is under different management and the objectives of which may not be similar to those of the remaining stockholders. Potential Anti-Takeover Effects. Despite the belief of Benjamin Franklin Bank and Benjamin Franklin Bancorp as to the benefits to stockholders of the provisions described above, these provisions will have the effect of discouraging any takeover attempt that would not be approved either by regulatory policy or by Benjamin Franklin Bancorp s board of directors but pursuant to which stockholders may receive a substantial premium for their shares over then-current market prices. As a result, stockholders who might desire to participate in such a transaction may not have any opportunity to do so. Such provisions will also make it more difficult to remove the board and Benjamin Franklin Bancorp s management. The Boards of Benjamin Franklin Bank and Benjamin Franklin Bancorp, however, have concluded that the potential benefits outweigh the possible disadvantages. Definition of Interested Stockholder and Independent Director. An interested stockholder is any person (other than Benjamin Franklin Bancorp, any direct or indirect subsidiary of Benjamin Franklin Bancorp or any employee stock ownership plan formed by Benjamin Franklin Bancorp) who or which: is the beneficial owner, directly or indirectly, of 10.0% or more of the voting power of the outstanding voting stock of Benjamin Franklin Bancorp; is an affiliate of Benjamin Franklin Bancorp and at any time within the two-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of 10.0% or more of the voting power of the then outstanding voting stock of Benjamin Franklin Bancorp; or Table of Contents is an assignee of or has otherwise succeeded to any shares of voting stock of Benjamin Franklin Bancorp that were at any time within the two-year period immediately prior to the date in question beneficially owned by any interested stockholder, if such assignment or succession has occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933 and was not approved by two-thirds (2/3) of the independent directors. An independent director is defined in Benjamin Franklin Bancorp s articles of organization as any director of Benjamin Franklin Bancorp at any time when there is no interested stockholder and, when there is an interested stockholder, any director who is not, and was not at any time during the two-year period immediately prior to the date in question, an affiliate or associate of an interested stockholder, and is not an employee of Benjamin Franklin Bancorp or any of its affiliates. Employee Stock Ownership Plan The Benjamin Franklin Bank employee stock ownership plan, which expects to purchase 8.0% of the shares issued in the offering, including shares issued to the Benjamin Franklin Bank Charitable Foundation, contains certain provisions permitting participating employees to direct the voting of shares held in the plan. Such provisions may be considered to have anti-takeover effects. See Management of Benjamin Franklin Bancorp and Benjamin Franklin Bank Benefit Plans Employee Stock Ownership Plan on page # . Statutory and Regulatory Restrictions Federal Change in Bank Control Act. Federal law provides that no person, acting directly or indirectly or through or in concert with one or more other persons, may acquire control of a bank holding company unless the Federal Reserve Board has been given 60 days prior written notice. For this purpose, the term control means the acquisition of the ownership, control or holding of the power to vote 25.0% or more of any class of a bank holding company s voting stock, and the term person includes an individual, corporation, partnership, and various other entities. In addition, a person is presumed to acquire control if the person acquires the ownership, control or holding of the power to vote of 10.0% or more of any class of the holding company s voting stock if the bank holding company s shares are registered pursuant to Section 12 of the Exchange Act, or no other person will own, control or hold the power to vote a greater percentage of that class of voting securities. Accordingly, the prior approval of the Federal Reserve Board would be required before any person could acquire 10.0% or more of the common stock of Benjamin Franklin Bancorp. The Federal Reserve Board may prohibit an acquisition of control if: it would result in a monopoly or substantially lessen competition; the financial condition of the acquiring person might jeopardize the financial stability of the institution; or Table of Contents common stock will be converted into the right to receive shares of Benjamin Franklin Bancorp common stock and 45.0% of the shares of Chart Bank common stock will be converted into the right to receive cash. Thus, Chart Bank stockholders may not receive exactly the form of consideration that they elect. Instead, they may receive a pro rata amount of cash and Benjamin Franklin Bancorp common stock even if they elect all cash or all stock. As of November 30, 2004, there were 1,420,000 shares of Chart Bank common stock and options to purchase 137,000 shares of Chart Bank common stock outstanding. The aggregate consideration for the Chart Bank acquisition will be $22,492,000 in cash and 2,401,575 newly issued shares of Benjamin Franklin Bancorp common stock, assuming that the Chart Bank options are cashed out at the closing rather than being exercised by optionees prior to the closing. Conditions to the Merger. The merger agreement provides that completion of the acquisition is subject to the satisfaction or waiver of specified conditions by Benjamin Franklin Bancorp and Chart Bank. The respective obligations of each party under the merger agreement are subject to the fulfillment or waiver of the following conditions at or prior to the completion of the merger: approval of the merger agreement by the stockholders of Chart Bank. approval of the merger agreement and the conversion by our corporators, both of which were obtained on February 2, 2005. receipt of all regulatory approvals required to consummate the conversion and the merger, which approvals do not contain any conditions, restrictions or requirements which our Board reasonably determines in good faith would, individually or in the aggregate, materially reduce the benefits of the conversion and the merger to such a degree that we would not have entered into the merger agreement if the conditions, restrictions or requirements had been known, and expiration of all applicable waiting periods. absence of any law, judgment, decree, injunction or other order of any governmental authority prohibiting consummation of the conversion or the merger. effectiveness under the Securities Act of 1933 of the registration statements registering the shares of our common stock to be issued in the conversion and the merger and absence of a stop order suspending the effectiveness or proceedings for that purpose initiated by the SEC and not withdrawn. authorization for listing on the Nasdaq National Market of the shares of our common stock to be issued in the merger and the conversion, subject to official notice of issuance. completion of the conversion, resulting in net proceeds sufficient to enable Benjamin Franklin Bank to remain well-capitalized under applicable federal banking law and otherwise to meet regulatory capital requirements after giving effect to the merger. receipt by both parties of an opinion dated as of the effective date of the merger that the merger will constitute a tax-free reorganization described in section 368(a) of the Internal Revenue Code. receipt by Benjamin Franklin Bancorp of an opinion dated as of the effective date that the conversion will constitute a tax-free reorganization described in section 368(a) of the Internal Revenue Code. the accuracy of the representations and warranties of the other party in all material respects as of September 1, 2004 and as of the closing date (except to the extent that a representation or warranty speaks as of an earlier date), except that any inaccuracies in a party s representations and warranties shall not prevent that party s satisfaction of this condition unless the cumulative effect of all inaccuracies, taken together, would be reasonably likely to be material and adverse to the financial condition, results of operation or business of that party, or would materially impair the ability of that party to perform its obligations or would - 176 - Table of Contents the competence, experience or integrity of the acquiring person indicates that it would not be in the interest of the depositors or of the public to permit the acquisition of control by such person. Federal Bank Holding Company Act. Federal law provides that no company may acquire control of a bank directly or indirectly without the prior approval of the Federal Reserve Board. Any company that acquires control of a bank becomes a bank holding company subject to registration, examination and regulation by the Federal Reserve Board. Pursuant to federal regulations, the term company is defined to include banks, corporations, partnerships, associations, and certain trusts and other entities, and control of a bank is deemed to exist if a company has voting control, directly or indirectly of at least 25.0% of any class of a bank s voting stock, and may be found to exist if a company controls in any manner the election of a majority of the directors of the bank or has the power to exercise a controlling influence over the management or policies of the bank. In addition, a bank holding company must obtain Federal Reserve Board approval prior to acquiring voting control of more than 5.0% of any class of voting stock of a bank or another bank holding company. An acquisition of control of a bank that requires the prior approval of the Federal Reserve Board under the Bank Holding Company Act is not subject to the notice requirements of the Change in Bank Control Act. Accordingly, the prior approval of the Federal Reserve Board under the Bank Holding Company Act would be required before any bank holding company could acquire 5.0% or more of the common stock of Benjamin Franklin Bancorp and before any other company could acquire 25.0% or more of the common stock of Benjamin Franklin Bancorp. Restrictions applicable to the operations of bank holding companies may also deter companies from seeking to obtain control of Benjamin Franklin Bancorp. See Regulation and Supervision on page # . Massachusetts Banking Law. Massachusetts banking law also prohibits any company, defined to include banking institutions as well as corporations, from directly or indirectly controlling the voting power of 25.0% or more of the voting stock of two or more banking institutions without the prior approval of the Massachusetts Board of Bank Incorporation. Additionally, an out-of-state company that already directly or indirectly controls voting power of 25.0% or more of the voting stock of two or more banking institutions may not also acquire direct or indirect ownership or control of more than 5.0% of the voting stock of a Massachusetts banking institution without the prior approval of the Board of Bank Incorporation. Finally, for a period of three years following completion of a conversion to stock form, no person may directly or indirectly offer to acquire or acquire beneficial ownership of more than 10.0% of any class of equity security of a converting mutual holding company without prior written approval of the Massachusetts Commissioner of Banks. Massachusetts Anti-Takeover Laws. The Massachusetts General Laws contain two anti-takeover statutes that are applicable to certain public corporations in Massachusetts Chapter 110F, the business combinations law and Chapter 110D, the control share acquisition law. Chapter 110F of the Massachusetts General Laws generally prohibits a publicly held Massachusetts corporation from engaging in a business combination with an interested stockholder for a period of three years after the date of the transaction which results in the stockholder becoming an interested stockholder, unless: the corporation s board of directors approves the business combination or transaction which results in the stockholder becoming an interested stockholder prior to such event; or Table of Contents otherwise materially impede the completion of the conversion or the merger, such change or effect being referred to as a material adverse effect . performance by the other party in all material respects of all obligations required to be performed by it under the merger agreement. no change that individually or in the aggregate has a material adverse effect on the other party, excluding the impact of any (1) changes in banking and similar laws or interpretations of these laws by governmental authorities, (2) changes in generally accepted accounting principles or regulatory accounting requirements, (3) changes in economic conditions affecting financial institutions generally, including changes in general levels of interest rates, (4) direct effects of complying with the merger agreement and (5) the effects of any action or omission otherwise contemplated by the merger agreement or any related document.. In addition, Benjamin Franklin Bancorp s obligation to consummate the merger is subject to the fulfillment of each of the following conditions: shares of Chart Bank common stock as to which Chart Bank stockholders have exercised dissenters rights shall represent less than 10.0% or more of the outstanding shares of Chart Bank common stock. each of Richard E. Bolton, Jr., the President and Chief Executive Officer of Chart Bank, and Richard E. Bolton, Sr., the Chairman of the Board of Directors of Chart Bank shall have entered into, and performed in all material respects, a payments and waiver agreement which, among other things, terminates the officer s existing employment arrangements with Chart Bank upon the effectiveness of the merger in consideration of specified termination payments. all consents of third parties, other than of regulatory authorities, necessary to permit lawful completion of the merger have been obtained, except if the failure to obtain such consents would not individually or in the aggregate have a material adverse effect on Benjamin Franklin Bancorp after giving effect to the conversion and the merger, and none of the consents shall contain any term or condition which would, individually or in the aggregate, have a material adverse effect on Chart Bank or Benjamin Franklin Bancorp. Chart Bank shall have not taken any action or made any payment that would result in a parachute payment under section 280G, or in a payment that would be nondeductible under Section 162(m), of the Internal Revenue Code. Conduct of Business Prior to the Merger. Each of Chart Bank and Benjamin Franklin Bancorp has each agreed that between the date of the merger agreement and the completion of the merger it will conduct its business in the ordinary course of business. In addition, Chart Bank has agreed that it will continue to operate in the same geographic markets serving the same market segments. maintain its current loan, deposit, banking products and service programs on substantially the same terms and conditions. use commercially-reasonable efforts to preserve its business organization, keep available the present services of its officers, employees and directors and preserve current relationships and goodwill with customers, suppliers and others. Each of Chart Bank and Benjamin Franklin Bancorp has agreed that, except as otherwise expressly contemplated or permitted by the merger agreement or consented to in writing by the other, it will not do any of the following: - 177 - Table of Contents the interested stockholder owns at least 90% of the corporation s outstanding voting stock upon completion of the transaction that resulted in its becoming an interested stockholder, excluding shares held by directors who are also officers of the corporation and by certain employee stock plans, or the business combination is approved by both the corporation s board of directors and the holders of two-thirds of the corporation s outstanding voting stock at a meeting of stockholders, excluding shares held by the interested stockholder. The Massachusetts General Laws defines the term business combination to include a merger, a stock or asset sale, and certain other transactions resulting in a financial benefit to the interested stockholder. An interested stockholder is generally a person who, together with affiliates and associates, owns, or within the prior three years, owned, 5% or more of a corporation s voting stock. Benjamin Franklin Bancorp s articles contain a provision opting out of the applicability of Chapter 110D, in light of the provisions contained in Benjamin Franklin Bancorp s articles that provide similar anti-takeover protections. TRANSFER AGENT AND REGISTRAR FOR BENJAMIN FRANKLIN BANCORP COMMON STOCK American Stock Transfer Trust Company will act as the transfer agent and registrar for issued and outstanding shares of Benjamin Franklin Bancorp common stock. LEGAL OPINIONS Foley Hoag LLP, Boston, Massachusetts, will give its opinions on behalf of Benjamin Franklin Bancorp concerning the legality of the shares issued in the offering and concerning certain tax matters. Foley Hoag LLP has consented to the references herein to its opinions. Certain legal matters will be passed upon for Ryan Beck Co., Inc. by Luse Gorman Pomerenk Schick, P.C. of Washington, D.C. EXPERTS The consolidated financial statements of Benjamin Franklin Bancorp as of December 31, 2003 and 2002 and for the years then ended included in this prospectus have been so included in reliance on the report of Wolf Company, P.C., independent accountants, given on the authority of said firm as experts in auditing and accounting. The consolidated financial statements of Chart Bank as of December 31, 2003 and 2002 and for the years then ended included in this prospectus have been so included in reliance on the report of Wolf Company, P.C., independent accountants, given on the authority of said firm as experts in auditing and accounting. Arthur Andersen LLP, which audited the financial statements of Benjamin Franklin Bancorp for the year ended December 31, 2001 in this prospectus, was convicted on June 15, 2002 of federal obstruction of justice charges arising from the government s investigation of Enron Corp. At the time of Arthur Andersen LLP s conviction, it ceased accounting and auditing operations, and the Board of Trustees of Benjamin Franklin Bancorp declined to retain Arthur Andersen LLP to provide further services. At that time, there were no disagreements on the part of Arthur Andersen LLP with Benjamin Franklin Bancorp, and the reports of Arthur Andersen LLP concerning the above financial statements of Benjamin Franklin Bancorp contained no adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles. Because Arthur Andersen LLP has ceased accounting Table of Contents take any action that would materially adversely affect or delay its ability to obtain any necessary approvals of any governmental authority for the transactions contemplated by the merger agreement or perform its covenants and agreements under the merger agreement or any related document. acquire the assets, business, deposits or properties of any other entity, including through merger or consolidation, , other than in the ordinary course of business or, in the case of Benjamin Franklin Bancorp, as would not be expected to prevent, impede or materially delay the completion of the transactions contemplated by the merger agreement and related documents. change its accounting principles, practices or methods. take any action that would prevent the merger (or conversion, for Benjamin Franklin Bancorp) from qualifying as a tax-free reorganization. take any action that is intended or is reasonably likely to result in: any of its representations or warranties in the merger agreement being or becoming untrue in any material respect at any time at or prior to the effectiveness of the merger; any of the conditions to the merger not being satisfied; or a material violation of any provision of the merger agreement or related documents. In addition, Chart Bank has agreed that, except as otherwise expressly contemplated or permitted by the merger agreement or consented to in writing by Benjamin Franklin Bancorp, it will not do any of the following: issue, sell or otherwise permit to become outstanding any additional shares of stock, other than upon exercise of existing stock options. grant stock options. declare or pay any dividends or other distributions on its capital stock except for a regular quarterly cash dividend not in excess of $0.16 per share or, if declared after April 1, 2005, $0.18 per share. enter into, amend or terminate any material contracts. adjust, split, combine, redeem, reclassify, purchase or otherwise acquire any shares of its capital stock. hire any new employees, except to fill vacancies for positions with a base salary, including bonus, not in excess of stated limits. enter into new or amend existing benefit plans, including stock option, deferred compensation, pension, retirement and bonus plans, or accelerate the vesting or exercisability of any benefits or awards under these plans, except for the acceleration of vesting of existing stock options. sell, transfer, mortgage, encumber or otherwise dispose of or discontinue any of its assets, deposits, business or properties, or cancel or release any indebtedness or claims held by any person, except in the ordinary course of business. enter into new or amend existing employment, consulting, severance or similar agreements with directors, officers and employees or increase compensation or any employee benefit, including bonuses, beyond stated limits. foreclose upon or take a deed or title to any commercial real estate without first conducting a Phase I environmental assessment of the property, or foreclose if the environmental - 178 - Table of Contents and auditing operations in 2002, Benjamin Franklin Bancorp has not obtained, as contemplated by the Securities and Exchange Commission s regulations, a letter from Arthur Andersen LLP confirming the above statements. Arthur Andersen LLP has not consented to the incorporation of their report on the financial statements of Benjamin Franklin Bancorp for the year ended December 31, 2001 in this prospectus, and we have dispensed with the requirement to file their consent in reliance upon Rule 437a of the Securities Act of 1933. Because Arthur Andersen LLP has not consented to the incorporation by reference of their reports in this prospectus, you will not be able to recover against Arthur Andersen LLP under Section 11 of the Securities Act of 1933 for any untrue statements of a material fact contained in the financial statements audited by Arthur Andersen LLP or any omissions to state a material fact required to be stated therein. See Risk Factors Risks Related To Prior Auditor Of Benjamin Franklin Bancorp on page # . RP Financial, LC. has consented to the publication in this prospectus of the summary of its report to Benjamin Franklin Bancorp setting forth its opinion as to the estimated pro forma market value of the shares of common stock upon completion of the conversion and the offering. ADDITIONAL INFORMATION We have filed a registration statement with the SEC under the Securities Act of 1933 with respect to the common stock offered through this prospectus. As permitted by the rules and regulations of the SEC, this prospectus does not contain all the information set forth in the registration statement. You may examine this information without charge at the public reference facilities of the SEC located at 450 Fifth Street, NW, Washington, D.C. 20549. You may obtain copies of the material from the SEC at prescribed rates. The registration statement also is available through the SEC s world wide web site on the internet at http://www.sec.gov. This document contains a description of the material features of certain contracts and other documents filed as exhibits to the registration statement. The statements as to the contents of such exhibits are of necessity brief descriptions and are not necessarily complete. Each such statement is qualified by reference to the contract or document. Benjamin Franklin Bancorp has filed an application for conversion with the Massachusetts Commissioner of Banks and has also requested the Federal Reserve Board s approval of the conversion. This prospectus omits some information contained in those applications. The Massachusetts conversion application may be examined at the Massachusetts Division of Banks, One South Station, Boston, Massachusetts 02110 and the public portion of the materials filed with the Federal Reserve Board may be examined at the offices of the Federal Reserve Bank of Boston, 600 Atlantic Avenue, Boston, Massachusetts 02106. In connection with the offering, we will register the common stock with the Securities and Exchange Commission under Section 12(g) of the Exchange Act. Upon this registration, Benjamin Franklin Bancorp will become subject to the Securities and Exchange Commission s proxy solicitation rules and periodic reporting requirements. You may obtain a copy of the plan of conversion as well as the Articles of Organization and bylaws of Benjamin Franklin Bancorp without charge from us by contacting Claire S. Bean at Benjamin Franklin Bank, 58 Main Street, Franklin, Massachusetts, 02038. Copies of the appraisal report of RP Financial, LC. and the detailed memorandum of the appraiser setting forth the method and assumptions for such appraisal are available for inspection at the main office of Benjamin Franklin Bank by contacting Claire S. Bean as indicated above. Table of Contents assessment indicates the presence of material amounts of hazardous substances on that property. make any investments in any other company, except as otherwise permitted in connection with its investment securities portfolio. make capital expenditures beyond stated limits and only in the ordinary course of business. amend its charter or by-laws. settle any lawsuits or similar proceedings for an amount in excess of stated limits or resulting in the imposition of any material restriction on its business. enter into any derivatives contract, except in the ordinary course of business. make any commercial, commercial real estate or industrial loan other than in the ordinary course of business and consistent with existing lending policies and practices. restructure or materially change its investment securities portfolio, other than in the ordinary course of business. make equity investments in real estate, other than in foreclosed properties, settlements in lieu of foreclosure or troubled loan or debt restructurings in the ordinary course of business. change in any material respect its loan or investment policies and procedures. enter into, renew, amend or terminate any agreement with respect to office space, operations space or branch space except in the ordinary course of business, or enter into, renew, amend or terminate any such agreement exceeding stated dollar and term limits, whether or not in the ordinary course of business. materially breach any material contract or license or any agreement with a governmental authority. make an excess parachute payment within the meaning of 280G of the Internal Revenue Code or a payment that would be nondeductible under Section 162(m) of the Internal Revenue Code. become responsible for the obligations of any other entity or incur any indebtedness for borrowed money, with certain exceptions. renew, amend or permit to expire, lapse or terminate any of its material insurance policies, with certain exceptions. No Solicitation of Third Party Proposals to Acquire Chart Bank. Chart Bank has also agreed, subject to certain exceptions relating to the fiduciary duties of the Chart Bank board of directors, that neither it nor its officers, directors, employees, agents or representatives will, directly or indirectly: initiate, solicit, encourage or otherwise facilitate any inquiries regarding, or the making of any proposal to engage in, a change in control transaction with respect to Chart Bank; or engage in any negotiations concerning, or provide any confidential information or data to or have any discussions with any person or entity relating to, a proposal to engage in a change in control transaction with respect to Chart Bank; or enter into any agreement, arrangement or understanding with respect to a change in control transaction with respect to Chart Bank, or requiring it (or conditioned upon requiring it) to abandon, terminate or fail to consummate the merger with Benjamin Franklin Bank or any other transactions contemplated by the merger agreement. - 179 - Table of Contents STOCK INFORMATION CENTER If you have any questions regarding the offering or the conversion, please call our Stock Information Center, toll free, at (800) 290-0793. Table of Contents A change in control transaction is a merger or similar transaction involving Chart Bank, the disposition of 25.0% or more of the consolidated assets of Chart Bank or the issuance, sale or other disposition of securities representing 19.9% or more of the voting power of Chart Bank or any subsidiary. Chart Bank has agreed that it will notify Benjamin Franklin Bancorp immediately if any inquiries, proposals or offers are received by, any such information is requested from, or any discussions or negotiations are sought to be initiated or continued with, any of its officers, directors or employees relating to a proposal to engage in a change in control transaction. Chart Bank has agreed that it will promptly advise Benjamin Franklin Bancorp following receipt of any such proposal and the substance of the proposal, and will keep Benjamin Franklin Bancorp apprised of any related developments, discussions and negotiations of any such proposal on a current basis. Employee Matters. The merger agreement contains certain agreements of the parties with respect to various employee matters, which are briefly described below. As soon as administratively practicable after the effective time of the merger, Benjamin Franklin Bancorp will take all reasonable action so that employees of Chart Bank and its subsidiaries will: receive employee benefits which are no less favorable than those generally afforded to other employees of Benjamin Franklin Bancorp and its subsidiaries holding similar positions; and be entitled to participate in the Benjamin Franklin Bancorp employee benefit plans of general applicability to the same extent as similarly-situated employees of Benjamin Franklin Bancorp and its subsidiaries. For purposes of determining eligibility to participate in, the vesting of benefits and for all other purposes (but not for determining the amount of benefits or determining accrual of benefits) under the Benjamin Franklin Bancorp employee benefit plans, Benjamin Franklin Bancorp will recognize years of service with Chart Bank and its subsidiaries to the same extent as such service was credited for such purpose by Benjamin Franklin Bancorp. If employees of Chart Bank or any of its subsidiaries become eligible to participate in a medical, dental or health plan of Benjamin Franklin Bancorp, Benjamin Franklin Bancorp will cause each such plan to: waive any preexisting condition limitations to the extent such conditions are covered under the applicable medical, health or dental plans of Benjamin Franklin Bancorp; waive any waiting period limitation or evidence of insurability requirement that would otherwise be applicable to such employee on or after the effective time of the merger to the extent such employee had satisfied any similar limitation or requirement under an analogous plan prior to the effective time of the merger; and provide full credit under such plans for any deductibles, co-payments and out-of-pocket expenses incurred by the employees and their beneficiaries during the portion of the calendar year prior to such participation. Employees of Chart Bank or its subsidiaries (other than employees who are a party to an employment agreement, a severance agreement or a special termination agreement) whose employment is involuntarily terminated other than for cause within two years after the effective time of the merger will be entitled to receive severance payments in accordance with Chart Bank s merger severance benefit program. - 180 - Table of Contents Other Covenants. In the merger agreement, each of Benjamin Franklin Bancorp and Chart Bank agreed to use its reasonable best efforts, in good faith, to take all actions necessary, proper, desirable or advisable to enable the conversion and the merger to be completed, and to: cooperate in preparing applications for approval of regulatory authorities and securities filings; provide ongoing access to information about itself to the other party, subject to confidentiality requirements; consult with the other party before issuing a press release relating to the merger or conversion, and, except as required by law, rule or regulation, not issue such a release without the other party s consent, which shall not be unreasonably withheld; notify the other party of facts, events and circumstances that would have been required to have been disclosed if known as of the date of the merger agreement; provide current financial statements and internal control reports to the other party; notify the other of material changes in its business, or the institution or threat of material litigation; consult with each other on the introduction of new products and services not currently offered by Chart; or make changes or elections with respect to tax matters or accounting methods Benjamin Franklin Bancorp agreed to take certain additional actions, including: making all regulatory and securities filings necessary for the completion of the conversion and the merger by specified dates; convening a special meeting of its corporators to vote on the conversion and the merger, and recommending that the corporators approve the conversion and the merger; listing its common stock on the Nasdaq National Market; taking steps required to cause the acquisition of its stock under the merger agreement to be exempt from Rule 16b-3 under the Securities Exchange Act of 1934. Chart Bank agreed to take certain additional actions, including: convening a special meeting of its stockholders to vote on the merger, and recommending that the stockholders approve the merger, except as otherwise required in order for its directors to comply with their fiduciary duties under applicable law; cause its affiliates to deliver to Benjamin Franklin Bancorp an affiliate agreement to comply with the requirements of Rule 145 under the Securities Act of 1933 in connection with the sale or transfer of Benjamin Franklin Bancorp common stock received by them in the merger; manage its assets and liabilities in accordance with its asset and liability management policy in effect on the date of the merger agreement, and consult on investment programs to be administered by Chart Bank. consistent with generally accepted accounting principles, the rules and regulations of the Securities and Exchange Commission and applicable banking laws and regulations, modify or change its loan, other real estate owned, accrual, reserve, tax, litigation and real estate - 181 - Table of Contents valuation policies and practices (including loan classifications and levels of reserves) so as to be applied on a basis that is consistent with that of Benjamin Franklin Bancorp. Representations and Warranties. The merger agreement contains representations and warranties by Benjamin Franklin Bancorp and Chart Bank regarding various legal, regulatory, financial and business matters including, but not limited to, the following: organization, standing and authority capital structure; subsidiaries; corporate power and authority; regulatory approvals, reports and other matters; absence of violation of organizational documents and terms of agreements; financial statements; absence of undisclosed liabilities; material contracts; tax matters; loan portfolio and allowance for loan losses; capitalization; absence of material adverse change; environmental matters; legal proceedings; employee benefit plans; properties; investment securities; transactions with affiliates; labor matters; compliance with the Community Reinvestment Act, Bank Secrecy Act and privacy of customer information requirements contained in any federal and state privacy laws and regulations; compliance with laws; use of brokers; risk management instruments; bank owned life insurance; intellectual property; fiduciary accounts; books and records; - 182 - Table of Contents insurance; credit card accounts; and merchant credit card processing services. The merger agreement also contains additional representations and warranties by Chart Bank relating to: required vote for the merger and absence of anti-takeover provisions applicable to the merger; material interests of certain persons; and receipt of a fairness opinion. Except as otherwise provided in the merger agreement, these representations and warranties do not survive after the effective time of the merger. Termination and Termination Fees. The merger agreement may be terminated at any time prior to the effective time as follows: by mutual consent of Benjamin Franklin Bancorp and Chart Bank. by either party if the merger shall not have occurred on or before July 15, 2005 or a later date agreed to in writing by the parties, unless the failure of the merger to occur by that date results from the knowing action or inaction of the party seeking to terminate or, in the case of a termination by Chart Bank, its stockholders actions in violation of their obligations under the merger agreement or related voting agreements. by either party if the approval of any governmental authority required for completion of the merger shall have been denied by final nonappealable action or an application for approval shall have been permanently withdrawn at the request of a governmental authority. by either party if Benjamin Franklin Bancorp s board of trustees or corporators shall have not approved the conversion, the approval of any governmental authority required for completion of the conversion shall have been denied by final nonappealable action or an application for approval shall have been permanently withdrawn at the request of a governmental authority or a court of competent jurisdiction or other governmental authority shall have issued an order, decree or ruling prohibiting the conversion, which order, decree or ruling shall have become final and nonappealable. by either party in the event of a material breach by the other party of any representation or warranty contained in the merger agreement which breach would constitute, if occurring or continuing on the closing date, the failure of the conditions to completion of the merger relating to the accuracy of the representations and warranties and which cannot be or has not been cured within 30 days after the giving of written notice to the breaching party of the breach. by either party in the event of a material breach by the other party of any of the covenants or agreements contained in the merger agreement, which breach cannot be or has not been cured within 30 days after the giving of written notice to the breaching party of the breach. by either party if the Chart Bank stockholders do not approve the merger, provided that Chart Bank may not terminate if it has materially breached its covenants relating to the stockholders meeting. by either party if the corporators of Benjamin Franklin Bancorp do not approve the merger and the conversion , provided that Benjamin Franklin Bancorp may not terminate if it has - 183 - Table of Contents materially breached its covenants relating to the corporators meeting and obtaining all necessary regulatory approvals for the conversion and the merger. by Benjamin Franklin Bancorp if, prior to the Chart Bank stockholders meeting at which the merger is considered: Chart Bank materially breaches its covenant regarding third party proposals to acquire Chart Bank, or the Chart Bank board fails to recommend to its stockholders that they approve the merger, withdraws such recommendation or modifies or changes such recommendation in a manner adverse in any respect to the interests of Benjamin Franklin Bancorp or Chart Bank materially breaches its obligations to call, give notice of, convene and hold the Chart Bank stockholders meeting. by Benjamin Franklin Bancorp if a tender offer is commenced, other than by Benjamin Franklin Bancorp, and the Chart Bank board recommends that its stockholders tender their shares in the tender offer or otherwise fails to recommend that its stockholders reject the tender offer. If the merger agreement is terminated as a result of a breach of a representation, warranty, covenant or other agreement that is caused by the gross negligence or willful or intentional breach of a party to the merger agreement, the breaching party is liable to the non-breaching party for all out-of-pocket costs and expenses, including reasonable fees and expenses of lawyers, accountants and investment bankers, incurred by the non-breaching party in connection with the merger agreement, up to a maximum of $500,000. In addition, Benjamin Franklin Bancorp would be liable to Chart Bank for Chart Bank s out-of-pocket costs and expenses, up to a maximum of $500,000: if the merger agreement is terminated because the conversion was not approved by the trustees or corporators of Benjamin Franklin Bancorp or by the regulatory authorities or because the conversion was prohibited by a court or other governmental authority (except under circumstances in which a breach of a representation, warranty or covenant by Chart Bank materially adversely affected Benjamin Franklin Bancorp s ability to obtain the necessary approvals), or if Benjamin Franklin Bancorp has not completed the conversion by July 15, 2005, except that such expense payment would not apply in circumstances where Benjamin Franklin Bancorp is obligated to pay the termination fee described in the next paragraph, and Benjamin Franklin Bancorp would not be obligated to make such a payment if a breach of a representation, warranty or covenant by Chart Bank has materially adversely affected Benjamin Franklin Bancorp s ability to complete the conversion in a timely manner. The merger agreement provides that Benjamin Franklin Bancorp must pay Chart Bank a termination fee of $2.3 million if: Benjamin Franklin Bancorp has failed to consummate the conversion by July 15, 2005 as a result of a material failure to perform or comply with any of its covenants or agreements in the merger agreement, or Chart Bank has terminated the merger agreement because Benjamin Franklin Bancorp has intentionally or willfully breached any of its representations or warranties in the merger agreement or intentionally and willfully failed to perform or comply with any of its covenants - 184 - Table of Contents or agreements in the merger agreement, in each case to such an extent as to permit Chart Bank to terminate the merger agreement. The merger agreement provides that Chart Bank must pay Benjamin Franklin Bancorp a termination fee of $2.3 million if a payment event has occurred before the special payment termination date. A payment event means any of the following events: without Benjamin Franklin Bancorp s prior written consent, Chart Bank or the stockholders of Chart Bank have entered into an agreement to effect or have consummated a change in control transaction with a third party. Benjamin Franklin Bancorp has terminated the merger agreement because Chart Bank has materially breached its covenant regarding third party proposals to acquire Chart Bank, or the Chart Bank board has failed to recommend to its stockholders that they approve the merger, has withdrawn such recommendation or has modified or changed such recommendation in a manner adverse in any respect to the interests of Benjamin Franklin Bancorp or Chart Bank has materially breached its obligations to call, give notice of, convene and hold the Chart Bank stockholders meeting; or the Chart Bank board has recommended that the stockholders of Chart Bank tender their shares to a third party in a tender offer. Benjamin Franklin Bancorp has terminated the merger agreement because Chart Bank has intentionally or willfully breached any of its representations or warranties in the merger agreement or intentionally and willfully failed to perform or comply with any of its covenants or agreements in the merger agreement, in each case to such an extent as to permit Benjamin Franklin Bancorp to terminate the merger agreement. The special payment termination date is the earliest to occur of the effectiveness of the merger. the date that is 12 months after termination of the merger agreement following the occurrence of a time extension event. the date on which the merger agreement is terminated in accordance with its terms, but only if the termination takes place prior to the occurrence of a payment event or a time extension event. A time extension event is any of the following events: a third party has commenced a tender offer for the Chart Bank common stock. a third party (or a group) has acquired beneficial ownership of or has the contractual right to acquire beneficial ownership of 15.0% or more of the then outstanding shares of Chart Bank common stock. following a third party proposal for a change in control transaction with respect to Chart Bank, the holders of Chart Bank common stock fail to approve the merger agreement at the Chart Bank stockholder meeting. following a third party proposal for a change in control transaction with respect to Chart Bank, the Chart Bank stockholders meeting to approve the merger is not held in violation of - 185 - Table of Contents Chart Bank s obligations, Chart Bank s board has withdrawn or modified in a manner adverse to Benjamin Franklin Bancorp the recommendation of Chart Bank s board with respect to the merger with Benjamin Franklin Bank, or Chart Bank has willfully or intentionally breached any representation, warranty, covenant or obligation in the merger agreement and such breach would entitle Benjamin Franklin Bancorp to terminate the merger agreement. Amendment and Waiver. Prior to the effectiveness of the merger, any provision of the merger agreement may be waived by the party benefited by the provision or amended or modified by an agreement in writing among the parties to the merger agreement, except that after the Chart Bank stockholders meeting no amendment may be made that changes in kind or reduces in amount the merger consideration without the further approval of Chart Bank s stockholders. Voting Agreements; Release Agreements. Directors of Chart Bank beneficially owning 38.1% of Chart Bank s outstanding common stock as of the record date for the stockholders meeting at which the approval of the merger agreement is to be considered have entered into voting agreements with Benjamin Franklin Bancorp pursuant to which each such director has agreed that at any meeting of the stockholders of Chart Bank, or in connection with any written consent of the stockholders of Chart Bank, the director shall cause all of the shares of Chart Bank common stock that he beneficially owns to be counted as present for purposes of calculating a quorum and vote those shares: in favor of adoption and approval of the merger agreement and the transactions contemplated thereby; against any action or agreement that would result in a breach of any covenant, representation or warranty or any other obligation or agreement of Chart Bank contained in the merger agreement or of the director contained in the voting agreement; and against any third party proposal to acquire Chart Bank or agreement or transaction that is intended, or could reasonably be expected, to materially impede, interfere with, delay, postpone, discourage or materially and adversely affect completion of the merger or any of the transactions contemplated by the merger agreement. The voting agreements also provide that the director executing the agreement will not, directly or indirectly, sell, transfer, pledge, assign or otherwise dispose of, or enter into any contract, option, commitment or other arrangement or understanding with respect to the sale, transfer, assignment or other disposition of, any of the shares or option or right to obtain shares of Chart Bank common stock owned by him or her, except as may be permitted under the terms of the voting agreement. The voting agreements will remain in effect until the earlier of the special payment termination date of the mutual written agreement of the parties. In addition, each Chart Bank director has entered into a release agreement pursuant to which the director has agreed to release Chart Bank and Benjamin Franklin Bancorp from certain claims such director may have in his capacity as a stockholder of Chart Bank. Interests of Chart Bank s Directors and Officers in the Merger Chart Bank s directors and executive officers have interests in the merger that are different from, or are in addition to, their interests as shareholders of Chart Bank generally. These include, among other things, severance payments and agreement with Richard E. Bolton, Sr., Richard E. Bolton, Jr., Alfred J. Odoardi, Dean Kenney, non-continuing directors and other executive officers of Chart Bank, consulting and non-competition agreements with Messrs. Bolton, Sr. and Bolton, Jr., indemnification rights and insurance coverage and payment of director fees to Chart Bank directors who will serve on the Benjamin Franklin Bancorp board. - 186 - Table of Contents Severance Agreements and Payments. In connection with the Chart Bank merger agreement, we entered into payments and waiver agreements with Richard E. Bolton, Jr., the President and Chief Executive Officer of Chart Bank, and Richard E. Bolton, Sr., the Chairman of the Board of Directors of Chart Bank and an executive officer of its wholly owned subsidiary, CSSI. The payments and waiver agreements provide for the termination of Mr. Bolton, Jr. s employment agreement and Mr. Bolton, Sr. s employment and consulting agreement and all of Mr. Bolton, Jr. s and Mr. Bolton, Sr. s employment and director relationships with Chart Bank and its subsidiaries, effective upon the merger. Additionally, in exchange for Mr. Bolton, Sr. and Mr. Bolton, Jr. agreeing to relinquish the right to receive certain payments in the event of a change of control of Chart Bank under their existing agreements with Chart Bank, the payments and waiver agreements provide for Chart Bank to make termination payments of $486,000 and $620,000 to Mr. Bolton, Sr. and Mr. Bolton, Jr., respectively, immediately prior to the effectiveness of the merger. However, in no event will the amounts under the payments and waiver agreements exceed the amount that may be paid without causing any portion of such payment to be deemed an excess parachute payment within the meaning of Section 280G of the Code. Mr. Bolton, Jr. s payments and waiver agreement also provides that he will be appointed as a director of Benjamin Franklin Bancorp and Benjamin Franklin Bank as of the effective time of the merger. In addition, Chart Bank entered into a Special Termination Agreement with Alfred J. Odoardi, Senior Vice President of Chart Bank, as of August 20, 2004. Under the special termination agreement, Mr. Odoardi is entitled to certain severance benefits in the event that his employment with Chart Bank is terminated after a change in control for any reason other than death, disability, or cause, each as defined in the agreement, including continuation of his base salary and medical benefits for 18 months following termination and full vesting of all unexercisable stock options held by Mr. Odoardi on the date of termination. The value to Mr. Odoardi of the severance pay and benefits continuation under this agreement is $214,645, based on his current level of his base salary and medical benefits. Although the completion of the merger will constitute a change in control under the special termination agreement, it is not expected that Mr. Odoardi s employment will terminate following the merger. As part of the negotiation of the merger, we also agreed that if Dean Kenney, the Treasurer and Chief Financial Officer of Chart Bank, is terminated within two years of the effective date of the merger, if his title or position is reduced or changed during the first two years after the effective date, if his base salary as of the effective date is reduced, or if his new designated place of employment is more than 30 driving miles from his principal place of residence, he will receive severance benefits, including two years of his annual base salary and continuation of his medical and dental benefits for two years following the date of termination. The value to Mr. Kenney of the severance pay and benefits continuation under this agreement is $245,194 based on his current level of his base salary and medical benefits. Chart Bank s other officers whose employment is terminated in connection with the merger, or who resign following the merger by reason of a reduction in pay or increase in commute of greater than 10 miles, will be entitled to receive severance benefits under Chart Bank s employee severance benefit program. Officers at the level of Vice President and above are entitled to receive severance in an amount equal to five times the officer s weekly base pay multiplied by the officers whole and partial years of service with Chart Bank. Any employee who has completed five full years of service as of the date of the completion of the merger will be entitled to receive an additional lump-sum severance benefit equal to 15.0% of the employee s annual base salary. Pursuant to the terms of the merger agreement, Chart Bank may make severance payments in the aggregate amount of $120,000 to four of the members of the Chart Bank Board of Directors who will not become directors of Benjamin Franklin Bancorp or Benjamin Franklin Bank following the completion of the merger. - 187 - Table of Contents Consulting and Non-Competition Agreements. We have also entered in consulting and non-competition agreements with Messrs. Bolton, Sr. and Bolton, Jr. in connection with the merger. Under these agreements, Messrs. Bolton, Sr. and Bolton, Jr. have agreed to provide consulting services to us and have agreed to non-competition obligations for a period of one year after the effectiveness of the merger. We will pay Messrs. Bolton, Sr. and Bolton, Jr. fees of $310,000 and $150,000, respectively, and will reimburse each of them for their travel or other expenses incurred in connection with the services provided under the consulting and non-competition agreements. Indemnification and Insurance. We have agreed that if the merger becomes effective, we will indemnify and hold harmless Chart Bank s directors, officers and employees arising from actions taken before the effectiveness of the merger, as provided in Chart Bank s articles of organization and bylaws. The merger agreement also provides for continued directors and officers liability insurance coverage for Chart Bank s directors and officers, with respect to acts and omissions in their capacities as officers and directors of Chart Bank prior to the merger, for a period of six years from the effectiveness of the merger. That insurance may also protect Benjamin Franklin Bancorp and Benjamin Franklin Bank in connection with their obligations to indemnify those directors and officers. Director Fees. Six of Chart Bank s directors will continue as directors of Benjamin Franklin Bancorp and Benjamin Franklin Bank following the merger. These directors will be entitled to receive payment of the directors fees and other benefits provided to directors of these entities, including, among other things, the annual $10,000 retainer, per meeting fees and annual retainers for committee members. THE CONVERSION AND THE OFFERING General Our Board of Trustees adopted the plan of conversion on October 28, 2004. Pursuant to the plan, Benjamin Franklin Bancorp will convert from a Massachusetts-chartered bank holding company in mutual form to a Massachusetts-chartered bank holding company in stock form, and will drop M.H.C. and add Inc. to its name. Benjamin Franklin Bank is now and will continue to be the wholly-owned subsidiary of Benjamin Franklin Bancorp. As part of the conversion, Benjamin Franklin Bancorp is offering between 4,250,000 and 5,750,000 shares of common stock to the public, which offering may be increased to 6,612,500, and is forming a new charitable foundation, to which additional shares of Benjamin Franklin Bancorp common stock will be contributed. We intend to use the net proceeds for the cash merger consideration portion of the acquisition of Chart Bank, approximately $22,492,000 assuming that the Chart Bank options are cashed out at the closing rather than being exercised by optionees prior to the closing; and for the loan to the employee stock ownership plan to fund its purchase of shares of common stock, between $3.7 million and $4.9 million, or $5.6 million if the offering is increased by 15.0%. Of the net proceeds remaining, we intend to retain at the parent-company level between $10.9 million and $20.8 million of the net proceeds, or $26.6 million if the offering range is increased by 15.0%, and to invest in Benjamin Franklin Bank approximately $4.9 million to $8.6 million of the net proceeds, or $10.7 million if the offering range is increased by 15.0%. The conversion will be consummated only upon the issuance of at least the minimum number of shares of our common stock offered pursuant to the plan of conversion. The plan of conversion provides that we will offer shares of common stock for sale in the subscription offering to eligible account holders, supplemental eligible account holders, our tax-qualified employee benefit plans (specifically our employee stock ownership plan) and to officers, directors and employees of Benjamin Franklin Bank who are not eligible or supplemental eligible account holders. - 188 - Table of Contents Subject to the purchase priority rights of these holders of subscription rights, we may also offer the common stock for sale in a direct community offering to members of the general public, with a preference given to natural persons residing in the following Massachusetts cities and towns: Attleboro, Ashland, Bellingham, Belmont, Blackstone, Brookline, Dover, Franklin, Foxboro, Holliston, Hopedale, Hopkinton, Lexington, Lincoln, Mansfield, Medfield, Medway, Mendon, Milford, Millis, Millville, Needham, Newton, Norfolk, North Attleboro, Northbridge, Norton, Plainville, Sharon, Sherborn, Upton, Uxbridge, Walpole, Waltham, Watertown, Wellesley, Weston and Wrentham. The direct community offering may begin at the same time as, during or after the subscription offering. We may sell any shares of Benjamin Franklin Bancorp common stock that are not sold in the subscription offering or the direct community offering to the general public in a syndicated community offering. We have the right to accept or reject, in whole or in part, any orders to purchase shares of the common stock received in the direct community offering or the syndicated community offering. The community offerings must be completed within 45 days after the completion of the subscription offering unless otherwise extended by the Massachusetts Commissioner of Banks. See Direct Community Offering on page # and Syndicated Community Offering on page # . We determined the number of shares of common stock to be offered in the offering based upon an independent valuation appraisal of the estimated pro forma market value of the Benjamin Franklin Bancorp common stock, which takes into account the sale of shares in the offering, the contribution of shares to the Benjamin Franklin Bank Charitable Foundation and the anticipated Chart Bank acquisition. All shares of common stock to be sold in the offering will be sold at $10 per share. The independent valuation will be updated and the final number of the shares of common stock to be issued in the offering will be determined at the completion of the offering. See Stock Pricing and Number of Shares to be Issued on page # for more information as to the determination of the estimated pro forma market value of the common stock. Reasons For The Conversion The primary reasons for the conversion and related stock offering are: to provide us with the capital and the form of consideration (stock) necessary to acquire Chart Bank; to facilitate growth through other acquisitions and de novo branching opportunities; to increase our capital base so as to support internal growth through lending in communities we serve; to enhance existing products and services and support the development of new products and services; and to improve our overall competitive position. - 189 - Table of Contents As a stock holding company, we will have greater flexibility in structuring further mergers and acquisitions, including the form of consideration that we can use to pay for an acquisition. Our current mutual holding company structure limits our ability to offer shares of common stock as consideration for a merger or acquisition since a mutual holding company is required to own a majority of the outstanding shares of common stock of its subsidiary bank. Potential sellers often want stock for at least part of the purchase price. Our stock holding company structure will enable us to offer stock or cash consideration, or a combination thereof, and will therefore enhance our ability to compete with other bidders when acquisition opportunities arise. Except for the agreement to acquire Chart Bank, we do not have any agreement or understanding as to any specific acquisition. Effects Of The Conversion General. Each depositor in a mutual savings bank has both a deposit account in the institution and a pro rata interest in the equity of the institution based upon the balance in the depositor s account. This interest may only be realized in the event of a liquidation of the savings institution. However, this ownership interest is tied to the depositor s account and has no tangible market value separate from such deposit account. Any depositor who opens a deposit account obtains a pro rata ownership interest in the equity of the institution without any additional payment beyond the amount of the deposit. A depositor who reduces or closes such depositor s account receives the balance in the account but receives nothing for such depositor s ownership interest in the equity of the institution, which is lost to the extent that the balance in the account is reduced. Consequently, depositors of a mutual savings bank have no way to realize the value of their ownership interest, except in the unlikely event that the mutual savings bank is liquidated. In such event, the depositors of record at that time would share pro rata in any residual surplus and reserves after other claims, including claims of depositors to the amounts of their deposits, are paid. When a mutual savings bank converts to stock form, permanent non-withdrawable capital stock is created to represent the ownership of the institution s equity and the former pro rata interest of depositors is thereafter represented exclusively by their liquidation rights as described below. Capital stock is separate and apart from deposit accounts and cannot be and is not insured by the FDIC or any other governmental agency. Certificates are issued to evidence ownership of the capital stock sold in connection with the conversion. The stock certificates are transferable, and, therefore, the stock may be sold or traded with no effect on any deposit account the seller or trader may hold in the institution. Continuity. While the conversion is pending, our normal business of accepting deposits and making loans will continue without interruption. Benjamin Franklin Bank will continue to be subject to regulation by the Massachusetts Commissioner of Banks and the FDIC. After the conversion, we will continue to provide existing services to depositors, borrowers and other customers under Benjamin Franklin Bank s current policies by its present management and staff, as supplemented by Chart Bank personnel. The directors and officers of Benjamin Franklin Bank at the time of the conversion will continue to serve as directors and officers of Benjamin Franklin Bank after the conversion, and the trustees and officers of Benjamin Franklin Bancorp at the time of the conversion will continue to serve as directors and officers of Benjamin Franklin Bancorp after the conversion. In each case, upon completion of the Chart Bank merger, six directors of Chart Bank will become directors of both Benjamin Franklin Bank and Benjamin Franklin Bancorp. See Management of Benjamin Franklin Bancorp and Benjamin Franklin Bank Directors of Benjamin Franklin Bancorp on page # . Effect on Deposit Accounts. The conversion will have no effect on Benjamin Franklin Bank s deposit accounts, except to the extent that funds in the account are withdrawn to purchase conversion shares and except with respect to liquidation rights. Subject to certain limitations, each such account will be insured by the FDIC to the same extent as before the conversion, and each such account will continue - 190 - Table of Contents to be insured in full for amounts in excess of FDIC limits by the excess insurer of savings bank deposits, the DIF. Depositors will continue to hold their existing certificates, passbooks and other evidences of their accounts. Effect on Loans. No loan outstanding from Benjamin Franklin Bank will be affected by the conversion, and the amount, interest rate, maturity and security for each loan will remain as they were contractually fixed prior to the conversion. Tax Effects. Benjamin Franklin Bancorp has received a favorable opinion regarding the federal income tax consequences of the conversion to the effect that the conversion will not result in any adverse federal or state tax consequences to eligible account holders. See Tax Aspects Of The Conversion And The Chart Bank Acquisition on page # . Liquidation Rights. The plan of conversion provides for us to establish and maintain a liquidation account for the benefit of eligible account holders and supplemental eligible account holders, in an amount equal to the net worth of Benjamin Franklin Bancorp as set forth in the most recent consolidated statement of financial condition contained in this prospectus. In the unlikely event of a complete liquidation of Benjamin Franklin Bancorp, and only in such event, each eligible account holder and supplemental eligible account holder who continues to maintain such account holder s deposit account at Benjamin Franklin Bank following the conversion would be entitled to a distribution from the liquidation account prior to any payment to the holders of Benjamin Franklin Bancorp s capital stock (but following all liquidation payments to creditors, including depositors). Each eligible account holder and supplemental eligible account holder would initially have a pro rata interest in the total liquidation account based on the proportion that the aggregate balance of such person s qualifying deposit accounts on May 31, 2003 (the eligibility record date) and December 31, 2004 (the supplemental eligibility record date), as applicable, bears to the aggregate balance of all qualifying deposit accounts of all eligible account holders and supplemental eligible account holders on such dates. For this purpose, qualifying deposit accounts include all savings, time, demand, interest bearing demand, money market and passbook savings accounts maintained at Benjamin Franklin Bank (excluding any escrow accounts). The liquidation account will be an off-balance sheet memorandum account that will not be reflected in the published financial statements of Benjamin Franklin Bank or Benjamin Franklin Bancorp. If, however, on the last day of any fiscal year of Benjamin Franklin Bancorp commencing after the completion of the conversion, the amount in any deposit account is less than either the amount in such deposit account on May 31, 2003 (with respect to an eligible account holder) or on December 31, 2004 (with respect to a supplemental eligible account holder), or the amount in such deposit account on any previous fiscal year closing date, then the interest in the liquidation account relating to such deposit account would be reduced in an amount proportional to the reduction in such deposit balance, and such interest will cease to exist if such deposit account is closed. In addition, no interest in the liquidation account would ever be increased despite any subsequent increase in the related deposit account. Neither Benjamin Franklin Bank nor Benjamin Franklin Bancorp will be required to set aside funds for the purpose of establishing the liquidation account, and the creation and maintenance of the liquidation account will not operate to restrict the use or application of any of the net worth accounts of Benjamin Franklin Bank or Benjamin Franklin Bancorp, except that neither Benjamin Franklin Bank nor Benjamin Franklin Bancorp, as the case may be, shall declare or pay a cash dividend on, or repurchase any of, its capital stock if the effect of such a transaction would be to cause its net worth to be reduced below the amount required for the liquidation account. - 191 - Table of Contents Any payments to eligible account holders or supplemental eligible account holders pursuant to liquidation rights would be separate and apart from the payment to them of any insured deposit accounts. Any assets remaining after the above liquidation rights of eligible account holders and supplemental eligible account holders are satisfied would be distributed to the stockholders of Benjamin Franklin Bancorp. We have no plans to liquidate. Approvals Required Our Board of Trustees and corporators (including a majority of our independent corporators) have approved our plan of conversion and the establishment and funding of the Benjamin Franklin Bank Charitable Foundation. The Massachusetts Commissioner of Banks and the Federal Reserve Board have also conditionally approved the plan of conversion; such approvals, however, do not constitute a recommendation or endorsement of the plan of conversion by the Massachusetts Commissioner of Banks or the Federal Reserve Board. The Massachusetts Commissioner of Banks must issue a further approval (based on the final updated appraisal) before we can consummate the conversion and issue shares of common stock. Our Board of Trustees also has approved the merger agreement for the acquisition of Chart Bank. The merger agreement also has been approved by the Board of Directors of Chart Bank, but has not yet been approved by the stockholders of Chart Bank. The merger must be also be approved by the Massachusetts Commissioner of Banks and the Federal Deposit Insurance Corporation. Benjamin Franklin has filed applications for approval of the merger with the Commissioner and the FDIC, and has received the approval of the FDIC. In addition, the Massachusetts Board of Bank Incorporation has advised Benjamin Franklin Bancorp that Board of Bank Incorporation approval of the merger is required as well. Accordingly, Benjamin Franklin Bancorp has filed an application with the Board of Bank Incorporation, although it does not believe that it is or would become at any point in connection with the merger a bank holding company under Massachusetts law or that the approval of the Board of Bank Incorporation is legally required. The Stock Offering We are offering between 4,250,000 and 5,750,000 shares of common stock (subject to adjustment to up to 6,612,500) pursuant to this prospectus and the plan of conversion. The shares of common stock are being offered for sale at a purchase price of $10 per share in the subscription offering pursuant to subscription rights in the following order of priority to: eligible account holders: each holder of deposit accounts with aggregate balances of $50.00 or more on May 31, 2003; supplemental eligible account holders: each holder of deposit accounts (other than Benjamin Franklin Bancorp officers, directors, trustees, corporators and their associates) with aggregate balances of $50.00 or more on December 31, 2004; our tax qualified employee plans, specifically our employee stock ownership plan; and officers, directors, and employees of Benjamin Franklin Bank who do not have a higher priority right. - 192 - Table of Contents Subject to the prior rights of holders of subscription rights, remaining shares of common stock may be offered in the direct community offering at $10 per share to certain members of the general public, with a preference first given to natural persons residing in the following Massachusetts cities and towns: Attleboro, Ashland, Bellingham, Belmont, Blackstone, Brookline, Dover, Franklin, Foxboro, Holliston, Hopedale, Hopkinton, Lexington, Lincoln, Mansfield, Medfield, Medway, Mendon, Milford, Millis, Millville, Needham, Newton, Norfolk, North Attleboro, Northbridge, Norton, Plainville, Sharon, Sherborn, Upton, Uxbridge, Walpole, Waltham, Watertown, Wellesley, Weston and Wrentham. The direct community offering may begin at the same time as the subscription offering, or after the subscription offering begins. We also may offer shares of common stock not purchased in the subscription offering or the direct community offering through a syndicated community offering. We have the right to reject any order submitted in the offering by a person we believe is making false representations or who we otherwise believe, either alone or acting in concert with others, is violating, evading, circumventing, or intends to violate, evade or circumvent, the terms and conditions of the plan of conversion. Stock Pricing And Number Of Shares To Be Issued The plan of conversion and regulations require that the aggregate purchase price of the common stock issued in the offering must be based on the appraised pro forma market value of the common stock, as determined by an independent valuation. Benjamin Franklin Bancorp has retained RP Financial, LC. to make this valuation. For its services in preparing the initial valuation, RP Financial, LC. will receive a fee of $75,000. This amount does not include a fee of $15,000 to be paid to RP Financial, LC. for assistance in the preparation of a business plan. We have agreed to indemnify RP Financial, LC. and its employees and affiliates against specified losses, including any losses in connection with claims under the federal securities laws, arising out of its services as appraiser, except where RP Financial, LC. s liability results from its bad faith, willful misconduct or gross negligence. The independent valuation states that as of November 26, 2004, the estimated pro forma market value of the shares to be outstanding immediately following the conversion (including the shares to be issued to the Chart Bank stockholders in the acquisition and shares to be issued to the Benjamin Franklin Bank Charitable Foundation), was $69,915,750 at the minimum of the valuation range and $85,515,750 at the maximum of the valuation range, with a midpoint value of $78,015,750. Based on the $10 per share offering price determined by the Board of Trustees of Benjamin Franklin Bancorp, this valuation range equates to total shares outstanding of 6,991,575 at the minimum, 8,551,575 at the maximum and 7,801,575 at the midpoint of the valuation range. Based on this valuation range, the estimated pro forma market value of the shares to be sold in the offering (not including shares issued to the Chart Bank stockholders in the acquisition or the shares issued to the Benjamin Franklin Bank Charitable Foundation) is as follows: $42,500,000 at the minimum and $57,500,000 at the maximum, with a midpoint of $50,000,000. Based on the $10 per share offering price determined by the Board of Trustees, the minimum of the offering range is 4,250,000 shares, the midpoint of the offering range is 5,000,000 shares and the maximum of the offering range is 5,750,000 shares. In addition, we are contributing to the Benjamin Franklin Bank Charitable Foundation a number of shares of our authorized but unissued common stock in an amount up to 8.0% of the number of shares actually sold in the offering, up to a maximum of 400,000 shares. The contribution of the common stock to the Benjamin Franklin Bank - 193 - Total loans 176,881 141,442 124,470 Allowance for loan losses (1,753 ) (1,657 ) (1,536 ) Net deferred loan origination costs 200 105 31 Net loan purchase premiums Table of Contents Charitable Foundation will not be considered in determining whether the minimum number of shares of common stock (4,250,000) has been issued in order to complete the offering. The Board of Trustees of Benjamin Franklin Bancorp reviewed the independent valuation and, in particular, considered the following: Our financial condition and results of operations; Comparison of our financial performance ratios to those of other financial institutions of similar size; and Stock market conditions generally and in particular for financial institutions. All of these factors are set forth in the independent valuation. The Board of Trustees also reviewed the methodology and the assumptions used by RP Financial, LC. in preparing the independent valuation and the Board believes that such assumptions were reasonable. The offering range may be amended with the approval of the bank regulators, if required, as a result of subsequent developments in our financial condition or market conditions generally. In the event the independent valuation is updated to amend the pro forma market value of the Benjamin Franklin Bancorp common stock to less than $42.5 million or more than $66.1 million, the appraisal will be filed with the Securities and Exchange Commission by post-effective amendment. The independent valuation is not intended, and must not be construed, as a recommendation of any kind as to the advisability of purchasing our common stock. RP Financial, LC. did not independently verify the financial statements and other information that Benjamin Franklin Bancorp provided to them, nor did RP Financial, LC. independently value the assets or liabilities of Benjamin Franklin Bancorp. The independent valuation considers Benjamin Franklin Bancorp as a going concern and should not be considered as an indication of the liquidation value of Benjamin Franklin Bancorp. Moreover, because the valuation is necessarily based upon estimates and projections of a number of matters, all of which may change from time to time, no assurance can be given that persons purchasing our common stock in the offering will thereafter be able to sell their shares at prices at or above the $10 price. Following commencement of the subscription offering, the maximum of the valuation range may be increased by up to 15.0% to up to $66.1 million, which will result in a corresponding increase of up to 15.0% in the maximum of the offering range to up to 6,612,500 shares, to reflect changes in the market and financial conditions, demand for the shares or regulatory considerations, without resoliciting subscribers. We will not decrease the minimum of the valuation range and the minimum of the offering range without a resolicitation of subscribers. The subscription price of $10 per share will remain fixed. If the update to the independent valuation prior to the completion of the conversion results in an increase in the maximum of the offering range to more than $66.1 million and a corresponding increase in the offering size to more than 6,612,500 shares, or a decrease in the minimum of the offering range to less than $42.5 million and a corresponding decrease in the offering size to fewer than 4,250,000 shares, then, after consulting with the bank regulators, we may terminate the plan of conversion and cancel deposit account withdrawal authorizations and return by check all funds received promptly with interest at Benjamin Franklin Bank s applicable passbook savings rate. Alternatively, we may hold a new offering with a new offering range, extend the offering period and commence a resolicitation of subscribers or take other actions as permitted by the bank regulators in order to complete the conversion and the offering. In the event that a resolicitation is commenced, all subscribers will have the right to increase, decrease or rescind their subscriptions. Unless we receive an affirmative response from an investor within a reasonable designated period of time, we will return all funds received promptly to the investor as - 194 - Table of Contents described above. Any resolicitation would not exceed 45 days unless further extended with the approval of the bank regulators. An increase in the number of shares to be issued in the offering would decrease both a subscriber s ownership interest and Benjamin Franklin Bancorp s pro forma earnings and stockholders equity on a per share basis while increasing pro forma earnings and stockholders equity on an aggregate basis. A decrease in the number of shares to be issued in the offering would increase both a subscriber s ownership interest and Benjamin Franklin Bancorp s pro forma earnings and stockholders equity on a per share basis, while decreasing pro forma earnings and stockholders equity on an aggregate basis. For a presentation of the effects of these changes, see Pro Forma Data on page # . Copies of the appraisal report of RP Financial, LC. are available for inspection at the main office of Benjamin Franklin Bank and as specified under Additional Information on page # . Subscription Offering And Subscription Rights In accordance with the plan of conversion, rights to subscribe for shares of common stock in the subscription offering have been granted in the following descending order of priority. The filling of all subscriptions that we receive will depend on the availability of common stock after satisfaction of all subscriptions of all persons having prior rights in the subscription offering and to the maximum, minimum and overall purchase limitations set forth in the plan of conversion and as described below under Limitations on Common Stock Purchases on page # . Priority 1: Eligible Account Holders. Each eligible account holder will receive, as first priority and without payment, nontransferable rights to subscribe for common stock in an amount of up to $150,000. See Limitations on Common Stock Purchases on page # . If there are not sufficient shares available to satisfy all subscriptions by eligible account holders, shares first will be allocated so as to permit each subscribing eligible account holder to purchase a number of shares sufficient to make such eligible account holder s total allocation equal to the lesser of 100 shares or the number of shares subscribed for. Thereafter, unallocated shares will be allocated among the remaining eligible account holders whose subscriptions remain unfilled in the proportion that the amount of their respective qualifying deposit bears to the total amount of qualifying deposits of all eligible account holders whose subscriptions remain unfilled. However, no fractional shares shall be issued. To ensure proper allocation of stock, each eligible account holder must list on his or her stock order form all deposit accounts in which he or she had an ownership interest on the eligibility record date of May 31, 2003. Failure to list an account could result in fewer shares being allocated than if all accounts had been disclosed. The subscription rights of eligible account holders who are also directors, trustees, corporators or officers of Benjamin Franklin Bank or Benjamin Franklin Bancorp, and the associates of such persons, will be subordinated to the subscription rights of other eligible account holders to the extent attributable to increased deposits in the one year period preceding May 31, 2003. Associates is defined below under Limitations on Common Stock Purchases on page # . Priority 2: Supplemental Eligible Account Holders. To the extent that there are shares remaining after satisfaction of the subscriptions by eligible account holders, each supplemental eligible account holder will receive, as a second priority and without payment, non-transferable rights to subscribe for common stock in an amount of up to $150,000. See Limitations on Common Stock Purchases on page # . If there are not sufficient shares available to satisfy all subscriptions by supplemental eligible account holders, shares first will be allocated so as to permit each subscribing supplemental eligible - 195 - Table of Contents account holder to purchase a number of shares sufficient to make such supplemental eligible account holder s total allocation equal to the lesser of 100 shares or the number of shares subscribed for. Thereafter, unallocated shares will be allocated among the remaining supplemental eligible account holders whose subscriptions remain unfilled in the proportion that the amount of their respective qualifying deposit bears to the total amount of qualifying deposits of all supplemental eligible account holders whose subscriptions remain unfilled. However, no fractional shares shall be issued. To ensure proper allocation of stock, each supplemental eligible account holder must list on his or her stock order form all deposit accounts in which he or she had an ownership interest on the supplemental eligibility record date of December 31, 2004. Failure to list an account could result in fewer shares being allocated than if all accounts had been disclosed. Priority 3: The Tax-Qualified Employee Benefit Plans. On a third priority basis, our tax-qualified employee benefit plans will receive, as a third priority and without payment therefor, non-transferable subscription rights to purchase up to 10.0% of the common stock to be issued in the offering. As a tax-qualified employee benefit plan, our employee stock ownership plan expects to purchase 8.0% of the shares issued in the offering, including shares issued to the Benjamin Franklin Bank Charitable Foundation. Subscriptions by the employee stock ownership plan will not be aggregated with shares of common stock purchased directly by or which are otherwise attributable to any other participants in the subscription and community offerings, including subscriptions of any of Benjamin Franklin Bank s directors, officers or employees. In the event that the total number of shares offered is increased to more than 5,750,000 shares, the tax qualified plans will have a first priority right to purchase any such shares up to an aggregate of 10.0% of the shares issued in the offering and issued to the Benjamin Franklin Bank Charitable Foundation. Unsubscribed shares applied toward the merger consideration payable to Chart Bank stockholders in order achieve the minimum of the offering range are considered issued in the offering for purposes of calculating the subscription rights of the tax qualified plans. We reserve the right to purchase shares of common stock in the open market following the offering in order to fund the employee stock ownership plan, rather than subscribing for shares in the subscription offering. Priority 4: Employees, Officers, Directors and Trustees of Benjamin Franklin Bank or Benjamin Franklin Bancorp. On a fourth priority basis, each employee, officer, director and trustee of Benjamin Franklin Bank or Benjamin Franklin Bancorp at the time of the offering who is not eligible in the preceding priority categories shall receive non-transferable subscription rights to subscribe for common stock in an amount up to $150,000. See Limitations on Common Stock Purchases on page # . In the event that persons in this category subscribe for more shares of stock than are available for purchase by them, shares will be allocated among such subscribing persons on an equitable basis, such as by giving weight to the period of service, compensation and position of the individual subscriber. Direct Community Offering To the extent that shares remain available for purchase after satisfaction of all subscriptions of the eligible account holders, supplemental eligible account holders, Benjamin Franklin Bank s tax qualified employee benefit plans, officers, directors trustees and employees of Benjamin Franklin Bank, we may, at our discretion, offer shares pursuant to the plan of conversion to members of the general public in a direct community offering. In the direct community offering, preference will be given to natural persons residing in the following Massachusetts cities and towns: Attleboro, Ashland, Bellingham, Belmont, Blackstone, Brookline, Dover, Franklin, Foxboro, Holliston, Hopedale, Hopkinton, Lexington, Lincoln, Mansfield, Medfield, Medway, Mendon, Milford, Millis, Millville, Needham, Newton, Norfolk, North Attleboro, Northbridge, Norton, Plainville, Sharon, Sherborn, Upton, Uxbridge, Walpole, Waltham, Watertown, Wellesley, Weston and Wrentham. - 196 - Table of Contents The term residing means any person who occupies a dwelling within the indicated counties, has an intent to remain for a period of time and manifests the genuineness of that intent by establishing an ongoing physical presence together with an indication that such presence is something other than merely transitory in nature. We may utilize depositor or loan records or such other evidence provided to us to make a determination as to whether a person is a resident. In all cases, the determination of resident status will be made by us in our sole discretion. Stock sold in the direct community offering will be offered and sold in a manner to achieve a wide distribution of the stock. No person may purchase more than $150,000 of common stock in the direct community offering. Orders accepted will each be filled to a maximum percentage to be determined by us and not to exceed the purchase limitations in the plan. Thereafter remaining shares will be allocated on an equal number of shares per order basis until all orders have been filled. Allocation of shares if an oversubscription occurs in this category of the offering will give preference to natural persons residing in the counties listed above, so that each such Person may receive 100 shares, and thereafter, on an equal number of shares basis until all available shares have been allocated. The direct community offering, if any, may commence concurrently with or subsequent to the commencement of the subscription offering and shall terminate no later than 45 days after the expiration of the subscription offering unless extended by Benjamin Franklin Bancorp, with the approval of the Massachusetts Commissioner of Banks and the Federal Reserve Board, if necessary. We may terminate the direct community offering or the syndicated community offering at any time after we have received orders for at least the minimum number of shares available for purchase in the offering. Syndicated Community Offering If feasible, our Board may decide to offer for sale shares of common stock not subscribed for or purchased in the subscription and direct community offerings to the general public by a selling group of broker-dealers in a syndicated community offering, subject to such terms, conditions and procedures as we may determine, in a manner that will achieve the widest distribution of the common stock. However, we retain the right to accept or reject in whole or in part any orders in the syndicated community offering. In the syndicated community offering, any person may purchase up to $150,000 of common stock, subject to the overall maximum purchase limitation. See Limitations on Common Stock Purchases on page # . Any syndicated offering will likely begin as soon as possible after the expiration of the subscription and direct community offerings. The syndicated community offering will be conducted in accordance with certain SEC rules applicable to best efforts offerings. Generally under those rules, Ryan Beck Co., Inc., a broker-dealer, will deposit funds it receives prior to the closing date from interested investors into a separate non-interest bearing bank account. If and when all the conditions for the closing are met, funds for common stock sold by Ryan Beck in the syndicated community offering will be promptly delivered to us. If the offering closes, but some or all of an interested investor s funds are not accepted by us, those funds will be returned to the interested investor promptly after the closing, without interest. If the offering does not close, funds in the account will be promptly returned, without interest, to the potential investor. Normal customer ticketing will be used. In the syndicated community offering, stock order forms will not be used. - 197 - Table of Contents Expiration Date of the Offering. The subscription offering will expire at 10:00 a.m., Massachusetts time, on date , 2005, unless we extend this period with the approval of the Massachusetts Commissioner of Banks and, if necessary, the Federal Reserve Board. Subscription rights will expire then, whether or not each eligible depositor can be located. We may decide to extend the expiration date of the subscription offering for any reason, whether or not subscriptions have been received for shares at the minimum, midpoint or maximum of the offering range. Subscription rights which have not been exercised prior to the expiration date, as extended, will become void. We will not execute orders until at least the minimum number of shares in the offering range has been issued. This minimum issuance may include shares allocated to Chart Bank stockholders as merger consideration. If at least 4,250,000 shares have not been issued within 45 days after the expiration of the subscription offering and the Massachusetts Commissioner of Banks and the Federal Reserve Board, if necessary, have not consented to an extension, all funds delivered to us to purchase shares of common stock in the offering will be returned promptly to the subscribers with interest at Benjamin Franklin Bank s passbook savings rate and all deposit account withdrawal authorizations will be canceled. If an extension beyond the 45-day period following the subscription offering expiration date is granted by the Massachusetts Commissioner of Banks and the Federal Reserve Board, if necessary, we will notify subscribers of the extension of time and of the rights of subscribers to increase, decrease or cancel their subscriptions during that time. Unless we receive an affirmative response from an investor within a reasonable designated period of time, we will return all funds received promptly to the investor as described above. Extensions may not go beyond October 28, 2006, which is two years after the approval of the plan of conversion by the Board of Trustees. Limitations On Common Stock Purchases The plan of conversion includes the following limitations on the number of shares of common stock that may be purchased during the conversion: (1) No person, or persons exercising subscription rights through a single qualifying deposit account, may purchase fewer than 25 shares of common stock; (2) Our tax qualified employee benefit plans are entitled to purchase up to 10.0% of the shares issued in the offering and issued to the Benjamin Franklin Bank Charitable Foundation. As a tax qualified employee benefit plan, our employee stock ownership plan intends to purchase 8.0% of the shares issued in the offering, including shares issued to the Benjamin Franklin Bank Charitable Foundation. (3) Except for our employee stock ownership plan, no person may subscribe for more than $150,000 of common stock in the offering. In the subscription offering, no persons exercising subscription rights through a single qualifying deposit account held jointly may purchase more than this amount. (4) Except for the employee stock ownership plan, no person, together with associates or persons acting in concert with such person (please see definitions of associate or acting in concert below), may purchase more than $250,000 of common stock in all categories of the offering combined. - 198 - Table of Contents (5) The aggregate number of shares of common stock that may be purchased in all categories of the offering by officers, directors, trustees and corporators of Benjamin Franklin Bancorp and Benjamin Franklin Bank and their associates may not exceed 30.0% of the total shares issued in the offering. Depending upon market or financial conditions, our Board of Trustees may increase or decrease the individual and overall maximum purchase limitations, provided that the purchase limitations may not be increased to a percentage that is more than 5.0% of the common stock offered for sale and may not be decreased to a percentage that is less than one-tenth of a percent (0.10%) of the common stock offered for sale in the conversion. Such an increase or decrease would require the approval of the bank regulators but would not require further approval of Benjamin Franklin Bancorp s corporators unless the bank regulators so require. If a purchase limitation is increased, subscribers in the subscription offering who ordered the maximum amount will be, and some other large subscribers may be, given the opportunity to increase their subscriptions up to the then applicable limit. The effect of this type of resolicitation will be an increase in the number of shares owned by subscribers who choose to increase their subscriptions. In the event of an increase in the offering range of up to 15.0% of the total number of shares of common stock offered in the offering, shares will be allocated in the following order of priority in accordance with the plan of conversion: (1) to fill the employee benefit plans subscription for up to 10.0% of the total number of shares of common stock issued in the offering and issued to the Benjamin Franklin Bank Charitable Foundation; (2) in the event that there is an oversubscription at the eligible account holder or supplemental eligible account holder levels, to fill unfulfilled subscriptions of these subscribers according to their respective priorities; and (3) to fill unfulfilled subscriptions in the community offering, with preference given first to natural persons residing in the Massachusetts cities and towns listed above under Direct Community Offering on page # , and then to other members of the general public. The term associate of a person means: (1) any corporation or organization of which the person is an officer, partner or 10.0% stockholder (other than Benjamin Franklin Bancorp, Benjamin Franklin Bank or a majority-owned subsidiary of either of them); (2) any trust or other estate in which the person has a substantial beneficial interest or serves as a trustee or in a similar fiduciary capacity; (3) any relative or spouse of the person, or any relative of the spouse, who either has the same home as the person or who is a director or trustee or officer of Benjamin Franklin Bancorp or Benjamin Franklin Bank, and (4) any person acting in concert with any of the persons or entities specified in clauses 1-3 above. The term acting in concert means (1) knowing participation in a joint activity or conscious parallel action towards a common goal, whether or not pursuant to an express agreement; or - 199 - Table of Contents (2) persons seeking to combine or pool their voting or other interests (such as subscription rights) in the securities of an issuer for a common purpose, pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise. We have the sole discretion to determine whether prospective purchasers are associates or acting in concert. Persons living at the same address, and persons exercising subscription rights through qualifying deposits registered at the same address, whether or not related, will be deemed to be acting in concert unless we determine otherwise. Trustees and directors of Benjamin Franklin Bancorp and Benjamin Franklin Bank are not treated as acting in concert solely as a result of their board membership. Other Restrictions Notwithstanding any other provision of the plan of conversion, no person is entitled to purchase any shares of common stock to the extent the purchase would be illegal under any federal or state law or regulation, including state blue sky registrations, or would violate regulations or policies of the National Association of Securities Dealers, Inc., particularly those regarding free riding and withholding. We may ask for an acceptable legal opinion from any purchaser as to the legality of his or her purchase and we may refuse to honor any purchase order if an opinion is not timely furnished. We will make reasonable efforts to comply with the securities laws of all states in the United States in which depositors entitled to subscribe for shares reside. However, no shares are expected to be offered or sold under the plan of conversion to any person who resides in a foreign country, or in a state of the United States in which fewer than 100 persons otherwise eligible to subscribe for shares under the plan of conversion reside and where Benjamin Franklin Bancorp, Benjamin Franklin Bank or their employees would be required to register, under the securities laws of the state, as a broker, dealer, or agent. No payments will be made in lieu of the granting of subscription rights to any person. Certain Restrictions On Purchase Or Transfer Of Our Shares After Conversion Shares of common stock purchased in the offering by the directors, trustees, officers and corporators of Benjamin Franklin Bancorp and Benjamin Franklin Bank generally may not be sold for a period of one year following the closing of the conversion, except in the event of the death or substantial disability, as determined by the Massachusetts Commissioner of Banks, of such person, or upon the written approval of the Commissioner^. Each certificate for restricted shares will bear a legend giving notice of this restriction on transfer, and instructions will be issued to the effect that any transfer within this time period of any certificate or record ownership of the shares other than as provided above is not to be recognized or effected. Any shares of common stock issued at a later date as a stock dividend, stock split, or otherwise, with respect to the restricted stock will be similarly restricted. The directors and officers of Benjamin Franklin Bancorp and Benjamin Franklin Bank and their associates may not purchase Benjamin Franklin Bancorp common stock for three years after the conversion is completed without the Massachusetts Commissioner of Banks s approval except through a broker or dealer registered with the Securities and Exchange Commission. This restriction does not apply to negotiated transactions involving more than 1.0% of Benjamin Franklin Bancorp s outstanding common stock or to stock purchases under a stock-based incentive plan. The directors and officers also will be restricted by the insider trading rules and other applicable requirements of the federal securities laws. Under NASD guidelines, members of the NASD and their associates are subject to certain restrictions on transfer of securities purchased in accordance with subscription rights and to certain reporting requirements upon purchase of these securities. - 200 - Table of Contents Plan Of Distribution And Marketing Arrangements Offering materials have been initially distributed through mailings to those eligible to subscribe in the subscription offering. To assist in the marketing of our common stock, we have retained Ryan Beck Co., Inc., which is a broker/dealer registered with the National Association of Securities Dealers, Inc. Ryan Beck Co., Inc. will assist us in the offering by: (1) Acting as our financial advisor for the conversion, providing administrative services and managing the Stock Information Center; (2) Targeting our sales efforts, including assisting in the preparation of marketing materials; and (3) Soliciting orders for common stock. For these services, Ryan Beck Co., Inc. will receive a marketing fee equal to 1.0% of the dollar amount of common stock sold in the subscription and direct community offerings. No fee will be payable to Ryan Beck Co., Inc. with respect to shares purchased by officers, directors and employees or their immediate families, the Benjamin Franklin Bank Charitable Foundation, any common stock purchased by our tax-qualified and non-qualified employee benefit plans, or any shares issued to the Chart Bank stockholders as merger consideration. In the event that Ryan Beck Co., Inc. sells common stock through a group of broker-dealers in a syndicated community offering, it will be paid a fee equal to 1.0% of the dollar amount of total shares sold in the syndicated community offering, which fee along with the fee payable to selected dealers (which may include Ryan Beck Co., Inc. for the shares it sells) shall not exceed 6.0% in the aggregate. Ryan Beck Co., Inc. will also be reimbursed for its allocable expenses in an amount not to exceed $25,000 and for its legal fees in an amount not to exceed $75,000. We will indemnify Ryan Beck Co., Inc. against liabilities and expenses, including legal fees, incurred in connection with certain claims or litigation arising out of or based upon untrue statements or omissions contained in the offering materials for the common stock, including liabilities under the Securities Act of 1933. If we seek Ryan Beck s assistance in purchasing shares of our common stock on the open market to fund our stock-based incentive plan, Ryan Beck would earn a brokerage commission on those purchases. The amount of such commission would depend on the market price of our stock at the time any such purchases were made, the number of shares purchased through Ryan Beck brokers and the per share brokerage commission, which would be a negotiated amount. Although we do not have any agreement or arrangement with Ryan Beck to purchase any shares through Ryan Beck s brokers, it is likely that we will use Ryan Beck brokers for this purpose if we are able to negotiate competitive terms. Some of our Directors and executive officers may participate in the solicitation of offers to purchase common stock. These persons will be reimbursed for their reasonable out-of-pocket expenses incurred in connection with the solicitation. Other regular, full-time employees of Benjamin Franklin Bank may assist in the offering, but only in ministerial capacities, and may provide clerical work in effecting a sales transaction. No offers or sales may be made by tellers or at the teller counters. All sales activity will be conducted in a segregated or separately identifiable area of our executive offices apart from they area accessible to the general public. Investment-related questions of prospective purchasers will be directed to executive officers or registered representatives of Ryan Beck Co., Inc. Our other employees have been instructed not to solicit offers to purchase shares of common stock or provide advice regarding the purchase of common stock. We will rely on Rule 3a4-1 under the Securities Exchange Act of 1934, and sales of common stock will be conducted within the requirements of Rule 3a4-1, so as to permit officers, directors, trustees and employees to participate in the sale of common stock. None of our officers, directors, trustees or employees will be compensated in connection with their participation in the offering. - 201 - Table of Contents Timing and Procedure For Purchasing Shares Expiration Date. The offering is expected to expire at 10:00 a.m., Massachusetts time, on date , 2005, unless extended by Benjamin Franklin Bancorp with the approval of the Massachusetts Commissioner of Banks and the Federal Reserve Board, if required. If the offering is extended beyond date , 2005, we will be required to resolicit subscribers before proceeding. In no event may we extend the offering beyond October 28, 2006. Prospectus Delivery. To ensure that each purchaser receives a prospectus at least 48 hours before the expiration date of the offering in accordance with Rule 15c2-8 of the Securities Exchange Act of 1934, no prospectus will be mailed any later than five days prior to this date or hand delivered any later than two days prior to this date. Execution of an order form will confirm receipt of delivery in accordance with Rule 15c2-8. Order forms will be distributed only if preceded or accompanied by a prospectus. Subscription funds will be maintained in a segregated account at Benjamin Franklin Bank. Termination of Offering; Rejection of Orders. We reserve the right in our sole discretion to terminate the offering at any time and for any reason, in which case we will cancel any deposit account withdrawal holds and promptly return all funds submitted, plus interest at Benjamin Franklin Bank s applicable passbook savings rate from the date of receipt. We have the right to reject any order submitted in the offering by a person who we believe is making false representations or who we otherwise believe, either alone or acting in concert with others, is violating, evading, circumventing, or intends to violate, evade or circumvent the terms and conditions of the plan of conversion. Use of Order Forms. In order to purchase shares of common stock in the subscription offering and direct community offering, you must complete an order form and remit payment. Incomplete order forms or order forms that are not signed are not required to be accepted. We will not be required to accept orders submitted on photocopied or facsimiled stock order forms. All order forms must be received prior to 10:00 a.m. Massachusetts time on date , 2005. We are not required to accept order forms that are not received by that time, are executed defectively or are received without full payment or without appropriate withdrawal instructions. We are not required to notify subscribers of incomplete or improperly executed order forms, and we have the right to waive or permit the correction of incomplete or improperly executed order forms. We do not represent, however, that we will do so and we have no affirmative duty to notify any prospective subscriber of any such defects. You may submit your order form and payment in one of three ways: by mail using the return envelope provided, by overnight delivery to the indicated address noted on the back of the order form or by hand delivery to the Stock Information Center located at 58 Main Street, Franklin, Massachusetts. Order forms may not be delivered to Benjamin Franklin Bank branch offices. Once tendered, an order form cannot be modified or revoked without our consent. We reserve the absolute right, in our sole discretion, to reject any order form received in the community offering, in whole or in part, at the time of receipt or at any time prior to completion of the offering. If you are ordering shares, you must represent that you are purchasing shares for your own account and that you have no agreement or understanding with any person for the sale or transfer of the shares. Our interpretation of the terms and conditions of the plan of conversion and of the acceptability of the order forms will be final. By signing the order form, you will be acknowledging that the common stock is not a deposit or savings account that is federally insured or otherwise guaranteed by Benjamin Franklin Bank or the Federal government, and that you received a copy of this prospectus. However, signing the order form will not result in you waiving your rights under the Securities Act of 1933 or the Securities Exchange Act of 1934. - 202 - Table of Contents Payment for Shares. Payment for all shares of common stock will be required to accompany all completed order forms for the purchase to be valid. Payment for shares may be made by: Personal check, bank check or money order made payable directly to Benjamin Franklin Bancorp, Inc. (do not endorse third-party checks); or Authorization of withdrawal from Benjamin Franklin Bank deposit accounts. Instructions for designating withdrawals from deposit accounts at Benjamin Franklin Bank are provided on the order form. The funds designated must be available in the account(s) at the time the order form is received. A hold will be placed on these funds, making them otherwise unavailable to the depositor. Please do not designate withdrawal from accounts with check-writing privileges. Provide a check, instead, because we do not intend to place holds on these type of accounts. If you request that we do so, we reserve the right to interpret that as your authorization to immediately withdraw the funds as if you had remitted a check in the amount. Funds authorized for withdrawal will continue to earn interest within the account at the contract rate until the conversion is completed, at which time the designated withdrawal will be made. Interest penalties for early withdrawal applicable to certificate accounts will not apply to withdrawals authorized for the purchase of shares of common stock; however, if a withdrawal results in a certificate account with a balance less than the applicable minimum balance requirement, the certificate will be cancelled at the time the conversion is completed without penalty and, thereafter, the remaining balance will earn interest at Benjamin Franklin Bank s applicable passbook savings rate. In the case of payments made by check or money order, these funds must be available in the account(s) and will be immediately cashed and placed in a segregated account at Benjamin Franklin Bank and interest will be paid at Benjamin Franklin Bank s applicable passbook savings rate, calculated from the date payment is received until the conversion is completed or terminated. Third party checks and Benjamin Franklin Bank line of credit checks may not be remitted as payment for your order, nor will wire transfers be accepted as payment. Once we receive your executed order form, it may not be modified, amended or rescinded without our consent, unless the offering is not completed by date , 2005 or the offering range is revised, in which events purchasers will be given the opportunity to increase, decrease or rescind their orders for a specified period of time. Using IRA Funds. Owners of self-directed IRAs may use the assets of such IRAs to purchase shares of common stock in the subscription and community offerings, provided that such IRAs are not maintained at Benjamin Franklin Bank. Persons who wish to use assets in IRAs maintained at Benjamin Franklin Bank may not authorize direct withdrawal from these accounts. They must have their IRA accounts transferred to an unaffiliated institution or broker to purchase shares of common stock in the subscription and community offerings. Assistance on how to transfer IRAs maintained at Benjamin Franklin Bank can be obtained from the Stock Information Center. If you are interested in using funds in a Benjamin Franklin Bank IRA or any other IRA to purchase common stock, contact the Stock Information Center as soon as possible, preferably at least two weeks prior to the end of the offering period, because processing such transactions takes additional time, and whether such funds can be used may depend on limitations imposed by the institution where such funds are currently held. We cannot guarantee that you will be able to use such funds. Our employee stock ownership plan will not be required to pay for shares purchased in the offering until completion of the offering, provided there is a loan commitment from an unrelated financial institution or Benjamin Franklin Bancorp to lend to the employee stock ownership plan the necessary amount to fund the purchase. Regulations prohibit Benjamin Franklin Bank from lending funds or extending credit to any persons to purchase shares of common stock in the offering. - 203 - Table of Contents Delivery of Stock Certificates. Certificates representing shares of common stock issued in the offering and Benjamin Franklin Bank checks representing any applicable refund and/or interest on subscriptions made by personal check, money order or bank check will be mailed to the persons entitled thereto at the certificate registration address noted on the order form, as soon as practicable following completion of the offering and receipt of all necessary regulatory approvals. Any certificates returned as undeliverable will be held by the transfer agent until claimed by persons legally entitled thereto or otherwise disposed of in accordance with applicable law. Until certificates for the common stock are available and delivered to purchasers, purchasers may not be able to sell the shares of common stock which they ordered, even though the common stock will have begun trading. Restrictions On Transfer Of Subscription Rights And Shares Applicable regulations and the plan of conversion prohibit any person with subscription rights, including the eligible account holders, supplemental eligible account holders, and officers, directors and employees of Benjamin Franklin Bancorp and Benjamin Franklin Bank, from transferring or entering into any agreement or understanding to transfer the legal or beneficial ownership of the subscription rights issued under the plan of conversion or the shares of common stock to be issued upon their exercise. These rights may be exercised only by the person to whom they are granted and only for his or her account. When registering your stock purchase on the order form, you should not add the name(s) of persons who have no subscription rights or who qualify in a lower purchase priority than you do. Doing so may jeopardize your subscription rights. Each person exercising subscription rights will be required to certify that he or she is purchasing shares solely for his or her own account and that he or she has no agreement or understanding regarding the sale or transfer of such shares. The regulations also prohibit any person from offering or making an announcement of an offer or intent to make an offer to purchase subscription rights or shares of common stock to be issued upon their exercise prior to completion of the offering. We will pursue any and all legal and equitable remedies in the event we become aware of the transfer of subscription rights, and we will not honor orders that we believe involve the transfer of subscription rights. Persons affiliated with us, including our trustees, directors and executive officers, received subscription rights based only on their deposits with Benjamin Franklin Bank as account holders. While this aspect of the offering makes it difficult, if not impossible, for insiders to purchase stock for the explicit purpose of meeting the minimum of the offering, any purchases made by persons affiliated with us for the explicit purpose of meeting the minimum of the offering must be made for investment purposes only, and not with a view towards redistribution. Purchasers Consent to the Merger By subscribing for or purchasing shares of Benjamin Franklin Bancorp common stock in the offering, subscribers and other purchasers will be approving and consenting to the completion of the Chart Bank merger, which is expected to occur immediately following completion of the conversion. The Order Form, which each subscriber in the subscription offering and any direct community offering will be required to sign, contains an acknowledgment of such approval and consent. Stock Information Center If you have any questions regarding the stock offering, you may call our Stock Information Center, toll free, at (800) 290-0793, Monday through Friday between 9:30 a.m. and 4:00 p.m., Massachusetts time. You may also visit our Stock Information Center, which is located at our headquarters, 58 Main Street, Franklin, Massachusetts. The Stock Information Center will be closed on weekends and bank holidays. Our branches will not have offering materials and cannot accept completed order forms. - 204 - Commercial loans: Secured 4,029 3,913 3,182 Unsecured 95 512 Table of Contents Tax Aspects Of The Conversion And The Chart Bank Acquisition The Conversion. Based in part upon representations of Benjamin Franklin Bank and Benjamin Franklin Bancorp, Foley Hoag LLPhas rendered its opinion regarding the material federal income tax consequences of the conversion. Foley Hoag LLP has opined that the conversion will constitute or be part of a reorganization described in Code section 368(a). As such: (1) neither Benjamin Franklin Bank nor Benjamin Franklin Bancorp will recognize gain or loss as a result of the conversion; and (2) eligible account holders and supplemental eligible account holders will not recognize gain or loss upon their receipt of nontransferable subscription rights to purchase shares of Benjamin Franklin Bancorp. The Chart Bank Merger. In connection with the registration of the shares to be issued to the stockholders of Chart Bank in the Chart Bank Merger, Foley Hoag LLP has rendered an opinion that the Chart Bank Merger will constitute or be part of a reorganization described in Section 368(a) of the Internal Revenue Code. Such opinion is based upon facts existing at the effective time of the Chart Bank Merger, and in rendering such opinion Foley Hoag LLP required and relied upon factual representations and assumptions provided by Benjamin Franklin Bancorp and Chart Bank. As a result of the treatment of the Chart Bank Merger as a reorganization described in Section 368(a) of the Internal Revenue Code, for federal income tax purposes none of Benjamin Franklin Bancorp, Benjamin Franklin Bank, or the shareholders of Benjamin Franklin Bancorp, will recognize any taxable gain or loss as a result of the merger. The foregoing opinions are also based on the Internal Revenue Code, existing and proposed Treasury Regulations and judicial and administrative determinations, as each is in effect as of the date of this registration statement. All of the foregoing are subject to change at any time, possibly with retroactive effect, and all are subject to differing interpretation. No advance ruling has been sought or obtained from the Internal Revenue Service regarding the United States federal income tax consequences of the conversion or the merger. The opinions are not binding on the Internal Revenue Service or a court. As a result, we cannot assure you that the tax consequences or such opinions will not be challenged by the Internal Revenue Service or sustained by a court if so challenged. Accounting Treatment Of The Conversion And The Chart Bank Merger As a result of purchase accounting treatment, the assets and liabilities of Chart Bank will be adjusted for purposes of generally accepted accounting principles to reflect their market value to Benjamin Franklin Bancorp with any excess purchase price becoming goodwill. See Pro Forma Data on page # . THE BENJAMIN FRANKLIN BANK CHARITABLE FOUNDATION General. In furtherance of our commitment to the communities we serve, we intend to establish a new charitable foundation, the Benjamin Franklin Bank Charitable Foundation, in connection with the conversion. The plan of conversion provides that the Foundation will be established as a non-stock corporation and will be funded with an initial contribution of a number of shares of our authorized but unissued common stock in an amount up to 8.0% of the number of shares actually sold in the offering, up to a maximum of 400,000 shares. The contribution of common stock to the Benjamin Franklin Bank - 205 - Table of Contents Charitable Foundation will be dilutive to the interests of stockholders and will have an adverse impact on the reported earnings of Benjamin Franklin Bancorp in 2005, the year in which the foundation is established. The contribution of the common stock to the Benjamin Franklin Bank Charitable Foundation will not be included in determining whether the minimum number of shares of common stock (4,250,000) has been sold in order to complete the offering. Purpose of the Benjamin Franklin Bank Charitable Foundation The purpose of the Benjamin Franklin Bank Charitable Foundation is to provide funding to support charitable causes and community development activities in the communities we serve, including the communities in which the Chart Bank offices are located. The Benjamin Franklin Bank Charitable Foundation will be dedicated completely to community activities and the promotion of charitable causes, and may be able to support such activities in manners that are not presently available to us. We believe that the Benjamin Franklin Bank Charitable Foundation will enable us to assist the communities within our market area in areas beyond community development and lending and will enhance our current activities under the Community Reinvestment Act. We further believe that the funding of the Benjamin Franklin Bank Charitable Foundation with shares of Benjamin Franklin Bancorp common stock will allow our community to share in the potential growth and success of Benjamin Franklin Bank long after the conversion. The Benjamin Franklin Bank Charitable Foundation will accomplish that goal by providing for continued ties between it and Benjamin Franklin Bank, thereby forming a partnership within the communities in which Benjamin Franklin Bank operates and surrounding marketing areas. Structure Of The Charitable Foundation The Benjamin Franklin Bank Charitable Foundation will be incorporated under Massachusetts law as a non-stock, nonprofit corporation. Under its Bylaws, the Benjamin Franklin Bank Charitable Foundation s Board of Directors will be comprised of individuals that are existing or former directors or officers of Benjamin Franklin Bancorp or Benjamin Franklin Bank. The Articles of Organization of the Benjamin Franklin Bank Charitable Foundation will provide that the corporation is organized exclusively for charitable purposes as set forth in Section 501(c)(3) of the Internal Revenue Code. The Benjamin Franklin Bank Charitable Foundation s articles of organization will further provide that no part of the net earnings of the charitable foundation will inure to the benefit of, or be distributable to, its directors, officers or members. The board of directors of the Benjamin Franklin Bank Charitable Foundation will be responsible for establishing its grant and donation policies, consistent with the purposes for which it was established. As directors of a nonprofit corporation, directors of the Benjamin Franklin Bank Charitable Foundation will at all times be bound by their fiduciary duty to advance the charitable foundation s charitable goals, to protect its assets and to act in a manner consistent with the charitable purposes for which the charitable foundation is established. The directors of the Benjamin Franklin Bank Charitable Foundation also will be responsible for directing the activities of the charitable foundation, including the management and voting of the shares of common stock of Benjamin Franklin Bancorp held by the charitable foundation. However, as required by regulatory authorities, all shares of common stock held by the Benjamin - 206 - Net deferred tax asset $ 348 $ 352 $ Net deferred tax asset $ 348 $ 352 $ Balance at end of period $ 348 $ 335 $ 352 $ Securities held to maturity: Mortgage-backed securities $ 266 $ 5 $ $ Table of Contents BENJAMIN FRANKLIN BANCORP, M.H.C. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) September 30, December 31, (Unaudited) ASSETS Cash and due from banks $ 8,295 $ 14,512 $ 14,162 Short-term investments 6,831 20,973 37,874 Total cash and cash equivalents 15,126 35,485 52,036 Securities available for sale, at fair value 94,423 102,646 108,520 Securities held to maturity, at amortized cost 266 386 986 Restricted equity securities, at cost 6,862 7,222 5,222 Loans 378,533 291,385 264,245 Allowance for loan losses (3,017 ) (2,523 ) (2,312 ) Loans, net 375,516 288,862 261,933 Premises and equipment, net 11,280 11,199 11,847 Accrued interest receivable 1,495 1,388 1,299 Goodwill 4,248 4,248 4,248 Bank-owned life insurance 5,619 4,074 2,593 Other assets 3,096 3,334 3,546 $ 517,931 $ 458,844 $ 452,230 LIABILITIES AND RETAINED EARNINGS Deposits $ 399,562 $ 380,257 $ 373,300 Short-term borrowings 29,000 Long-term debt 55,000 45,000 45,000 Other liabilities 3,783 4,286 4,116 Total liabilities 487,345 429,543 422,416 Total retained earnings 30,586 29,301 29,814 $ 517,931 $ 458,844 $ 452,230 Table of Contents BENJAMIN FRANKLIN BANCORP, M.H.C. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Dollars in Thousands) Nine Months Ended September 30, Years Ended December 31, Total interest and dividend income 15,223 14,529 19,532 21,406 26,441 Interest expense: Interest on deposits 3,221 3,439 4,487 5,856 10,752 Interest on short-term borrowings 56 Interest on long-term debt 1,747 1,695 2,265 1,738 1,645 Consumer loans: Consumer share secured 132 741 61 Other consumer 209 429 Total interest expense 5,024 5,134 6,752 7,594 12,397 Balance at December 31, 2001 1,420 $ 1,420 $ 11,575 $ 1,634 $ Net interest income, after provision for loan losses 9,729 9,095 12,155 12,400 13,993 (Unaudited) Average recorded investment in impaired loans $ 429 $ 565 $ 594 $ 568 $ Mortgage servicing rights amortized $ 423 $ 732 $ 892 $ 535 $ Total other income (charges) 1,666 2,563 3,076 2,854 (777 ) December 31, 2002 Securities available for sale $ 16,142 $ Operating expenses: Salaries and employee benefits 5,679 5,006 6,668 6,150 5,621 Occupancy and equipment 1,035 1,320 1,788 1,814 1,922 Data processing 1,047 1,115 1,446 1,368 1,225 Professional fees 192 821 985 723 651 Other general and administrative 1,504 1,364 1,837 2,060 2,146 Total operating expenses 9,457 9,626 12,724 12,115 11,565 Table of Contents BENJAMIN FRANKLIN BANCORP, M.H.C. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN RETAINED EARNINGS Nine Months Ended September 30, 2004 (Unaudited) and the Years Ended December 31, 2003, 2002 and 2001 (Dollars in Thousands) Accumulated Other Total Retained Comprehensive Retained Earnings Income (Loss) Earnings Balance at December 31, 2000, as restated (See Note 1) $ 26,883 $ (1,589 ) $ 25,294 Total comprehensive income 2,143 Comprehensive income: Net income 2,696 2,696 Change in net unrealized gain/loss on securities available for sale, net of reclassification adjustment and tax effects (319 ) (319 ) Securities held to maturity: Mortgage-backed securities $ 386 $ 12 $ $ (Unaudited) Deferred tax liability: Federal $ 1,223 $ 1,153 $ 1,345 State 399 370 341 1,170 Total comprehensive income 2,377 Comprehensive loss: Net income 1,688 1,688 Change in net unrealized gain/loss on securities available for sale, net of reclassification adjustment and tax effects (2,201 ) (2,201 ) Interest expense: Interest on deposits 2,331 2,332 3,014 3,909 Interest on borrowed funds: Short-term 178 126 148 153 Long-term 223 190 290 Total comprehensive loss (513 ) Balance at December 31, 2003 31,308 (2,007 ) 29,301 Comprehensive income: Net income (unaudited) 1,312 1,312 Change in net unrealized gain/loss on securities available for sale, net of reclassification adjustment and tax effects (unaudited) (27 ) (27 ) Total comprehensive income (unaudited) 1,285 Balance at September 30, 2004 (unaudited) $ 32,620 $ (2,034 ) $ 30,586 $ 108,201 $ Table of Contents BENJAMIN FRANKLIN BANCORP, M.H.C. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) Nine Months Ended September 30, Years Ended December 31, (Unaudited) Cash flows from operating activities: Net income $ 1,312 $ 1,381 $ 1,688 $ 2,696 $ 41 Adjustments to reconcile net income to net cash provided by operating activities: Net amortization of securities 703 554 833 316 104 Amortization of deferred loan costs, net 214 363 407 582 551 Loss (gain) on sales of securities, net (8 ) (113 ) (86 ) (1,569 ) 2,529 Provision for loan losses 470 300 625 1,412 51 Amortization of mortgage servicing rights 423 732 892 535 358 Income from bank-owned life insurance (145 ) (129 ) (181 ) (59 ) Depreciation expense 509 688 872 1,008 688 Deferred income tax (benefit) provision 48 (259 ) (169 ) (1,005 ) 1,981 Gain on sale of loans, net (106 ) (951 ) (975 ) (71 ) (167 ) Loans originated for sale (28,566 ) (92,606 ) (96,256 ) (69,752 ) (63,411 ) Proceeds from sales of loans 28,672 93,557 97,231 69,823 63,578 Changes in assets and liabilities: Accrued interest receivable (107 ) (241 ) (89 ) 919 536 Other assets (185 ) (1,385 ) (511 ) 2,294 (450 ) Other liabilities (483 ) 1,753 LIABILITIES AND STOCKHOLDERS EQUITY Deposits $ 215,972 $ 175,801 $ 170,279 Federal Home Loan Bank advances: Short-term 11,000 5,202 4,000 Long-term 11,000 10,728 10,986 Mortgagors escrow accounts 417 307 280 Other liabilities 326 Net cash provided by operating activities 2,751 3,644 4,697 5,582 4,425 Cash flows from investing activities: Activity in available-for-sale securities: Sales 2,015 17,123 30,886 110,420 64,995 Maturities, calls, and principal repayments 35,829 202,015 211,994 62,883 4,028 Purchases (30,411 ) (236,088 ) (240,200 ) (202,921 ) (41,579 ) Activity in held-to-maturity securities: Maturities and principal repayments 120 373 600 1,763 969 Purchases (1,000 ) Net change in restricted equity securities 360 (2,000 ) (2,000 ) Loan purchases of mortgage loans (34,207 ) (26,332 ) (26,546 ) (1,298 ) (853 ) Loan (originations) principal payments, net (53,131 ) 7,189 (1,415 ) (4,727 ) 27,466 Purchase of bank-owned life insurance (1,400 ) (500 ) (1,300 ) (2,534 ) Additions to premises and equipment (590 ) (178 ) (224 ) (501 ) (477 ) Net cash (used) provided by investing activities (81,415 ) (38,398 ) (28,205 ) (36,915 ) 53,549 Income before income taxes 1,938 2,032 2,507 3,139 1,651 Provision for income taxes 626 651 819 Table of Contents BENJAMIN FRANKLIN BANCORP, M.H.C. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded) (Dollars in Thousands) Nine Months Ended September 30, Total tax provision $ 626 $ 651 $ 819 $ Years Ended December 31, (Unaudited) Cash flows from financing activities: Net increase (decrease) in deposits 19,305 17,549 6,957 12,178 (27,353 ) Proceeds from short-term borrowings 29,000 Net proceeds from long-term debt 10,000 9,000 10,600 Net cash provided (used) by financing activities 58,305 17,549 6,957 21,178 (16,753 ) Banking premises and equipment, net 2,171 2,400 2,594 Federal Home Loan Bank stock, at cost 1,662 1,060 1,060 Co-operative Central Bank deposit 536 536 536 Accrued interest receivable 966 816 779 Deferred income taxes 348 352 257 Other assets 738 557 Non-accrual loans $ 357 $ Net change in cash and cash equivalents (20,359 ) (17,205 ) (16,551 ) (10,155 ) 41,221 Cash and cash equivalents at beginning of year 35,485 52,036 52,036 62,191 20,970 (Unaudited) Total impaired loans with no valuation allowance $ 357 $ 458 $ Cash and cash equivalents at end of year $ 15,126 $ 34,831 $ 35,485 $ 52,036 $ 62,191 Table of Contents BENJAMIN FRANKLIN BANCORP, M.H.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Use of estimates In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of deferred tax assets. Reclassifications Certain amounts in the 2002 and 2001 consolidated financial statements have been reclassified to conform to the 2003 presentation. Prior period adjustment As a result of an overstatement of deferred tax liabilities in connection with temporary income tax differences, identified during 2002, a prior period adjustment was made to retained earnings as of December 31, 2000, as follows: Retained Earnings Balance, as restated $ 26,883 Table of Contents BENJAMIN FRANKLIN BANCORP, M.H.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Income taxes (concluded) A valuation allowance related to deferred tax assets is established when, in the judgement of management, it is more likely than not, that all or a portion of such deferred tax assets will be realized. (See Note 11) Advertising costs Advertising costs are expensed as incurred. Comprehensive income/loss Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the retained earnings section of the consolidated balance sheet, such items, along with net income, are components of comprehensive income/loss. The components of other comprehensive income/loss and related tax effects are as follows: Nine Months Ended September 30, Years Ended December 31, (Unaudited) Fixed-rate advances maturing: 2003 $ % $ % $ 5,000 3.25 % 2004 2,000 4.25 5,500 3.91 5,500 3.91 2005 4,000 1.44 2006 2,000 2.82 2,000 2.82 2008 3,000 3.79 3,000 3.79 Amortizing advance, due September 30, 2004, requiring monthly principal and interest of $23,500 228 6.38 Reclassification adjustment for gains realized in income (8 ) (113 ) (86 ) (1,569 ) 2,529 Balance, as previously reported $ 26,383 Effect of prior period adjustment on opening balance Net deferred tax liability $ 65 $ 85 $ $ 65 $ 85 $ Net-of-tax amount (2 ) (108 ) (77 ) (1,026 ) 2,219 Total change $ (27 ) $ (1,925 ) $ (2,201 ) $ (319 ) $ 2,102 Balance at December 31, 2001 26,924 Table of Contents BENJAMIN FRANKLIN BANCORP, M.H.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands) 3. SHORT-TERM INVESTMENTS Short-term investments consist of the following: September 30, December 31, $ 6,831 $ 20,973 $ 37,874 4. SECURITIES The amortized cost and fair value of securities with gross unrealized gains and losses follows: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses (Unaudited) Cash flows from operating activities: Net income $ 784 $ 1,302 $ 1,702 $ 1,569 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 90 90 120 120 Gain on sale of banking premises (316 ) Net gain on sales and redemptions of securities (53 ) (6 ) (6 ) (85 ) Depreciation and amortization 307 320 429 434 Deferred tax provision (benefit) 30 5 6 (49 ) Net (increase) decrease in accrued interest receivable (150 ) (14 ) (37 ) 71 Other, net (243 ) (928 ) (961 ) Value Tax effect 6 5 9 Table of Contents BENJAMIN FRANKLIN BANCORP, M.H.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands) SECURITIES (continued) Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value Total debt securities 97,995 412 (93 ) 98,314 Bank Investment Fund 10,206 10,206 Table of Contents BENJAMIN FRANKLIN BANCORP, M.H.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands) SECURITIES (continued) The amortized cost and estimated fair value of debt securities, excluding mortgage-backed securities, by contractual maturity at September 30, 2004 (unaudited) and December 31, 2003 is as follows. Expected maturities will differ from contractual maturities on certain securities because of call or prepayment provisions. September 30, 2004 December 31, 2003 Amortized Fair Amortized Fair Cost Total loans 377,349 290,660 263,662 Allowance for loan losses (3,017 ) (2,523 ) (2,312 ) Net deferred loan costs 1,184 725 Value Cost Value $ 42,777 $ 42,549 $ 30,272 $ 30,347 Net cash provided by financing activities 45,754 Table of Contents BENJAMIN FRANKLIN BANCORP, M.H.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands) SECURITIES (concluded) Information pertaining to securities with gross unrealized losses at September 30, 2004 (unaudited) and December 31, 2003, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows: Less Than Twelve Months Over Twelve Months Gross Gross Unrealized Fair Unrealized Fair Losses Value Losses Value Less Than Twelve Months Over Twelve Months Gross Gross Unrealized Fair Unrealized Fair Losses Value Losses Value Table of Contents BENJAMIN FRANKLIN BANCORP, M.H.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands) 5. LOANS A summary of the balances of loans follows: September 30, December 31, 718 678 (Unaudited) Mortgage loans on real estate: Residential $ 244,363 $ 172,123 $ 165,007 Commercial 79,173 68,652 51,357 Construction 25,079 23,936 21,082 Home equity 21,883 18,171 16,507 370,498 282,882 253,953 6,851 7,778 9,709 Other income (charges): Deposit service fees 684 632 928 859 856 Loan servicing fees 187 309 336 525 86 Gain on sale of loans, net 106 951 975 71 167 Gain (loss) on sales of securities, net 8 113 86 1,569 (2,529 ) Income from bank-owned life insurance 145 129 181 59 Pension plan curtailment loss (741 ) Miscellaneous 536 429 570 512 Loans, net $ 375,516 $ 288,862 $ 261,933 An analysis of the allowance for loan losses follows: Nine Months Ended September 30, Years Ended December 31, (Unaudited) Balance at beginning of year $ 2,523 $ 2,312 $ 2,312 $ 1,177 $ 1,068 Provision for loan losses 470 300 625 1,412 51 Recoveries 33 101 123 142 90 Charge-offs (9 ) (63 ) (537 ) (419 ) (32 ) Balance at end of year $ 3,017 $ 2,650 $ 2,523 $ 2,312 $ 1,177 Table of Contents BENJAMIN FRANKLIN BANCORP, M.H.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands) LOANS (concluded) The following is a summary of the impaired and non-accrual loans: September 30, December 31, No additional funds are committed to be advanced in connection with impaired loans. Nine Months Ended September 30, Years Ended December 31, Table of Contents BENJAMIN FRANKLIN BANCORP, M.H.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands) SERVICING (concluded) Mortgage servicing rights included in other assets at September 30, 2004 (unaudited), December 31, 2003 and 2002 were $721, $862 and $889, respectively. The fair value of mortgage servicing rights was $1,021, $1,008 and $984 at September 30, 2004 (unaudited), December 31, 2003 and 2002, respectively. Information applicable to mortgage servicing rights is as follows: Nine Months Ended Years Ended September 30, December 31, Net-of-tax amount (25 ) (1,817 ) (2,124 ) 7. PREMISES AND EQUIPMENT A summary of the cost and accumulated depreciation of premises and equipment follows: September 30, December 31, Useful Lives (Unaudited) Premises: Land $ 4,357 $ 4,357 $ 4,357 Buildings and improvements 10,505 10,458 10,389 5 - 39 years Equipment 4,657 4,114 3,959 2 - 10 years (Unaudited) Mortgage servicing rights capitalized $ 282 $ 780 $ 865 $ 721 $ 19,519 18,929 18,705 Less accumulated depreciation (8,239 ) (7,730 ) (6,858 ) $ 11,280 $ 11,199 $ 11,847 (Unaudited) Within 1 year $ 16,632 $ 16,584 $ 6,134 $ 6,140 After 1 year through 5 years 26,145 25,965 23,418 23,482 After 10 years 720 Table of Contents BENJAMIN FRANKLIN BANCORP, M.H.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands) 8. DEPOSITS A summary of deposit balances, by type, is as follows: September 30, December 31, (Unaudited) Demand deposits $ 86,605 $ 85,681 $ 36,730 NOW 25,179 24,581 79,904 Regular and other savings 99,799 96,118 87,536 Money market deposits 54,390 50,094 44,177 Total non-certificate accounts 265,973 256,474 248,347 Term certificates less than $100,000 94,892 93,643 96,734 Term certificates of $100,000 or more 38,697 30,140 28,219 Total certificate accounts 133,589 123,783 124,953 Total deposits $ 399,562 $ 380,257 $ 373,300 Total comprehensive income (unaudited) A summary of term certificate accounts by maturity is as follows: September 30, 2004 December 31, 2003 December 31, 2002 Weighted Weighted Weighted Average Average Average Amount Rate Amount Rate Amount Rate (Unaudited) Within 1 year $ 93,965 1.63 % $ 89,585 2.25 % $ 80,873 2.59 % Over 1 year to 3 years 34,618 2.91 28,633 3.47 35,462 3.99 Over 3 years to 5 years 5,006 3.13 5,565 2.75 8,618 3.87 $ 133,589 2.02 % $ 123,783 2.55 % $ 124,953 3.07 % Table of Contents BENJAMIN FRANKLIN BANCORP, M.H.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands) 10. LONG-TERM DEBT Long-term debt consists of the following: September 30, December 31, (Unaudited) FHLB advances $ 46,000 $ 36,000 $ 36,000 Subordinated debt 9,000 9,000 9,000 Net cash provided by operating activities 765 $ 55,000 $ 45,000 $ 45,000 FHLB Advances Additional information pertaining to FHLB advances at September 30, 2004 (unaudited) and December 31, 2003 and 2002 are as follows: September 30, 2004 December 31, 2003 and 2002 Weighted Weighted Average Average Maturity Date Amount Rate Amount Rate (Unaudited) 2007 $ 10,000 3.12 % $ % 2009* 6,000 4.91 6,000 4.91 2011* 30,000 4.38 30,000 4.38 $ 46,000 4.18 % $ 36,000 4.47 % Table of Contents September 30, 2004 Pro Forma Income Statement Minimum of Offering Range. The following table presents pro forma income statement information for the nine months ended September 30, 2004 for Benjamin Franklin Bancorp and Chart Bank assuming the sale of 4,250,000 shares at the minimum of the offering range. Benjamin Pro Forma Benjamin Franklin Pro Forma Franklin Bancorp Conversion Bancorp as Chart Bank Merger Pro Forma Historical Adjustments (1) Converted Historical (3) Adjustments (4) Consolidated (Dollars in thousands) Interest income $ 15,223 $ $ 15,223 $ 8,006 $ (158 )(5) $ 23,071 Interest expense (5,024 ) (5,024 ) (2,732 ) 517 (6) (7,239 ) Net interest income before provision for loan losses 10,199 10,199 5,274 359 15,832 Provision for loan losses (470 ) (470 ) (90 ) (560 ) Net interest income after provision for loan losses 9,729 9,729 5,184 359 15,272 Non-interest income 1,666 1,666 1,916 3,582 Non-interest expense (9,457 ) (92 )(2) (9,549 ) (5,636 ) (696 )(7) (15,881 ) Income before provision for income taxes 1,938 (92 ) 1,846 1,464 (337 ) 2,973 Provision for income taxes (626 ) 33 (593 ) (680 ) 121 (8) (1,152 ) Net income $ 1,312 $ (59 ) $ 1,253 $ Table of Contents September 30, 2004 Pro Forma Income Statement Maximum, as Adjusted, of Offering Range. The following table presents pro forma income statement information for the nine months ended September 30, 2004 for Benjamin Franklin Bancorp and Chart Bank assuming the sale of 6,612,500 shares at the maximum, as adjusted, of the offering range. Pro Forma Benjamin Franklin Pro Forma Benjamin Conversion Bancorp as Chart Bank Merger Pro Forma Franklin Historical Adjustments (1) Converted Historical(3) Adjustments (4) Consolidated (Dollars in thousands) Interest income $ 15,223 $ $ 15,223 $ 8,006 $ (158 )(5) $ 23,071 Interest expense (5,024 ) (5,024 ) (2,732 ) 517 (6) (7,239 ) Net interest income before provision for loan losses 10,199 10,199 5,274 359 15,832 Provision for loan losses (470 ) (470 ) (90 ) (560 ) Net interest income after provision for loan losses 9,729 9,729 5,184 359 15,272 Non-interest income 1,666 1,666 1,916 3,582 Non-interest expense (9,457 ) (141 )(2) (9,598 ) (5,636 ) (696 )(7) (15,930 ) Income before provision for income taxes 1,938 (141 ) 1,797 1,464 (337 ) 2,924 Provision for income taxes (626 ) 51 (575 ) (680 ) 121 (8) (1,134 ) Net income $ 1,312 $ (90 ) $ 1,222 $ Net income $ Table of Contents BENJAMIN FRANKLIN BANCORP, M.H.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands) 11. INCOME TAXES Allocation of the federal and state income taxes between current and deferred portions is as follows: Nine Months Ended September 30, Years Ended December 31, 650 The reasons for the differences between the statutory federal income tax rate and the effective tax rates are summarized as follows: Nine Months Ended September 30, Years Ended December 31, (Unaudited) Statutory rate 34.0 % 34.0 % 34.0 % 34.0 % 34.0 % Increase (decrease) resulting from: State taxes, net of federal tax 4.1 3.0 2.1 (2.4 ) 6.3 Change in valuation reserve (2.5 ) (2.1 ) (16.7 ) 61.9 Officers life insurance (1.8 ) (2.1 ) (3.4 ) (0.5 ) Change in estimate (4.0 ) Other, net (0.3 ) 2.1 (0.3 ) (4.7 ) Effective tax rates 32.3 % 32.1 % 32.7 % 14.1 % 97.5 % Table of Contents BENJAMIN FRANKLIN BANCORP, M.H.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands) INCOME TAXES (continued) The components of the net deferred tax liability, included in other liabilities, are as follows: September 30, December 31, Other loans: Commercial 4,972 5,559 6,552 Consumer 980 1,309 2,313 Passbook and stock-secured 899 910 1,622 1,523 1,744 Deferred tax asset: Federal (3,438 ) (3,339 ) (3,250 ) State (397 ) (372 ) (319 ) (3,835 ) (3,711 ) (3,569 ) Valuation reserve 2,278 2,273 2,325 (1,557 ) (1,438 ) (1,244 ) $ 535 $ The tax effects of each type of income and expense item that give rise to deferred taxes are as follows: September 30, December 31, December 31, 2003: Federal agency obligations $ 16 $ 6,379 $ $ Mortgage-backed securities 2,295 63,998 26 Total temporarily impaired securities $ 2,311 $ 70,377 $ 26 $ (2,213 ) (2,188 ) (1,825 ) Valuation reserve 2,278 2,273 2,325 Table of Contents BENJAMIN FRANKLIN BANCORP, M.H.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands) INCOME TAXES (concluded) The federal income tax reserve for loan losses at the Bank s base year amounted to $3,055. If any portion of the reserve is used for purposes other than to absorb loan losses, approximately 150% of the amount actually used (limited to the amount of the reserve) would be subject to taxation in the year in which used. As the Bank intends to use the reserve only to absorb loan losses, a deferred tax liability of $1,253 has not been provided. 12. COMMITMENTS AND CONTINGENCIES In the normal course of business, there are outstanding commitments which are not reflected in the accompanying consolidated financial statements. Loan commitments The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and advance funds on outstanding lines-of-credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The Bank s exposure to credit loss is represented by the contractual amount of the commitments. The Bank uses the same credit policies in making commitments as it does for on-balance-sheet instruments. At September 30, 2004 (unaudited), December 31, 2003 and 2002, the following financial instruments were outstanding whose contract amounts represent credit risk: September 30, December 31, Table of Contents BENJAMIN FRANKLIN BANCORP, M.H.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands) MINIMUM REGULATORY CAPITAL REQUIREMENTS (continued) As of December 31, 2003, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since the notification that management believes have changed the Bank s category. The Company s and the Bank s actual capital amounts and ratios as of September 30, 2004 (unaudited), December 31, 2003 and 2002 are also presented in the table. Minimum To Be Well Minimum Capitalized Under Capital Prompt Corrective Actual Requirements Action Provisions Amount Ratio Amount Ratio Amount Ratio Table of Contents BENJAMIN FRANKLIN BANCORP, M.H.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands) MINIMUM REGULATORY CAPITAL REQUIREMENTS (concluded) Minimum To Be Well Minimum Capitalized Under Capital Prompt Corrective Actual Requirements Action Provisions Amount Ratio Amount Ratio Amount Ratio Table of Contents BENJAMIN FRANKLIN BANCORP, M.H.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands) EMPLOYEE BENEFIT PLANS (concluded) Supplemental executive plan The Bank has adopted a Supplemental Executive Retirement Plan, which provides for certain of the Bank s executives to receive monthly benefits upon retirement, subject to certain limitations as set forth in the Plan. The present value of these future benefits is accrued over the executives terms of employment, and the expense for the nine months ended September 30, 2004 and 2003 (unaudited) and years ended December 31, 2003, 2002 and 2001 amounted to $78, $71, $101, $70 and $60, respectively. Executive employment agreement The Bank has entered into an Executive Employment Agreement with the President which expires on December 31, 2006 and provides for, among other things, an annual base salary and severance upon termination of employment. However, such employment may be terminated for cause, as defined, without incurring any continuing obligation. The agreement also provides for automatic extensions for one year on the anniversary date of the agreement. 15. LOANS TO RELATED PARTIES In the ordinary course of business, the Bank grants loans to its officers and directors and their affiliates as follows: Nine Months Ended Years Ended December 31, (Unaudited) Beginning balance $ 2,563 $ 2,759 $ 2,477 Originations 369 1,216 1,338 Payments and change in status (504 ) (1,412 ) (1,056 ) Ending balance $ 2,428 $ 2,563 $ 2,759 Table of Contents BENJAMIN FRANKLIN BANCORP, M.H.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands) FAIR VALUE OF FINANCIAL INSTRUMENTS (concluded) Deposits: The fair values disclosed for non-certificate accounts are, by definition, equal to the amount payable on demand at the reporting date which is the carrying amount. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. Short-term borrowings: The carrying amounts of short-term borrowings approximate fair value. Long-term debt: Fair values of long-term debt are estimated using discounted cash flow analyses based on the Company s current incremental borrowing rates for similar types of borrowing arrangements. Accrued interest: The carrying amount of accrued interest approximates fair value. Derivative financial instruments: Fair values of derivative financial instruments are based on the present value of the difference between the committed interest rate and the current interest rate for similar agreements, taking into account the remaining terms of the agreements. Off-balance-sheet instruments: Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties credit standing. The fair value of these instruments is not material. The estimated fair values, and related carrying amounts, of the Company s financial instruments are as follows: September 30, December 31, (Unaudited) Interest and dividend income: Loans, including fees $ 12,567 $ 11,601 $ 15,530 $ 16,322 $ 20,355 Debt securities: Taxable 2,379 2,233 3,186 3,903 3,774 Tax-exempt 14 14 35 128 Dividends 170 166 250 228 365 Short-term investments 107 515 552 Carrying Fair Carrying Fair Carrying Fair Amount Value Amount Value Amount Value Table of Contents CHART BANK, A COOPERATIVE BANK AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) September 30, December 31, (Unaudited) ASSETS Cash and due from banks $ 35,808 $ 32,882 $ 33,663 Short-term investments 2,965 1,992 11,090 Total cash and cash equivalents 38,773 34,874 44,753 Operating expenses: Salaries and employee benefits 2,775 2,430 3,279 3,711 Occupancy and equipment 927 958 1,260 1,261 Professional services 293 240 343 389 Advertising and marketing 268 187 242 371 Data processing 423 333 433 518 Merger expenses 382 Other general and administrative 568 658 849 Securities available for sale, at fair value 3,669 5,404 16,506 Securities held to maturity, at amortized cost 31,826 23,965 13,026 Loans 177,325 141,547 124,501 Allowance for loan losses (1,753 ) (1,657 ) (1,536 ) Loans, net 175,572 139,890 122,965 $ 256,261 $ 209,854 $ 202,932 Total liabilities 238,715 192,455 186,871 Income before income taxes 1,464 2,125 2,778 2,527 Income tax provision 680 823 1,076 $ 680 $ 823 $ 1,076 $ Total stockholders equity 17,546 17,399 16,061 $ 256,261 $ 209,854 $ 202,932 Table of Contents CHART BANK, A COOPERATIVE BANK AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Dollars in Thousands) Nine Months Ended September 30, Years Ended December 31, Total interest and dividend income 8,006 7,621 10,091 11,033 578 910 Total interest expense 2,732 2,648 3,452 4,466 Net interest income, after provision for loan losses 5,184 4,883 6,519 6,447 Total other income 1,916 2,048 2,665 3,270 Total operating expenses 5,636 4,806 6,406 7,190 Table of Contents CHART BANK, A COOPERATIVE BANK AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY Nine Months Ended September 30, 2004 (Unaudited) and Years Ended December 31, 2003 and 2002 (Dollars in Thousands) Accumulated Common Stock Additional Other Total Paid-in Retained Comprehensive Stockholders Shares Amount Capital Earnings Income Equity Comprehensive income: Net income 1,569 1,569 Change in net unrealized gain/loss on securities available for sale, net of reclassification adjustment and tax effects (133 ) (133 ) Total comprehensive income 1,436 Cash dividends declared ($.25 per share) (355 ) (355 ) Comprehensive income: Net income 1,702 1,702 Change in net unrealized gain/loss on securities available for sale, net of reclassification adjustment and tax effects (151 ) (151 ) Total comprehensive income 1,551 Cash dividends declared ($.15 per share) (213 ) (213 ) Comprehensive income: Net income (unaudited) 784 784 Change in net unrealized gain/loss on securities available for sale, net of reclassification adjustment and tax effects (unaudited) (40 ) (40 ) Cash dividends declared ($.42 per share) (unaudited) (597 ) (597 ) Table of Contents CHART BANK, A COOPERATIVE BANK AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) Nine Months Ended September 30, Years Ended December 31, Cash flows from investing activities: Activity in securities available for sale: Maturities and redemptions 3,158 10,331 10,831 11,901 Sales 900 2,567 Purchases (2,346 ) (9,550 ) Activity in securities held to maturity: Maturities and redemptions 5,482 10,614 12,114 1,999 Purchases (13,362 ) (19,081 ) (23,077 ) (15,031 ) Net loan (originations) principal payments (21,770 ) (8,404 ) (17,045 ) 3,003 Purchase of loans (14,002 ) Purchase of banking premises and equipment (78 ) (197 ) (235 ) (405 ) Proceeds from the sale of banking premises 475 Purchase of Federal Home Loan Bank stock (602 ) (73 ) Net cash used by investing activities (42,620 ) (6,737 ) (17,412 ) (5,114 ) Table of Contents CHART BANK, A COOPERATIVE BANK AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded) (Dollars in Thousands) Nine Months Ended September 30, Years Ended December 31, (Unaudited) Cash flows from financing activities: Net increase in deposits 40,171 1,948 5,522 24,730 Activity in Federal Home Loan Bank advances: Net increase (decrease) in advances with maturities within three months (5,202 ) (4,000 ) 1,202 (1,004 ) Proceeds from issuance of advances with maturities greater than three months 15,000 3,000 3,000 7,500 Repayments of advances with maturities greater than three months (3,728 ) (192 ) (3,258 ) (11,241 ) Net change in mortgagors escrow accounts 110 49 27 (79 ) Cash dividends paid on common stock (597 ) (213 ) (213 ) (355 ) Net change in cash and cash equivalents 3,899 (5,376 ) (9,879 ) 16,714 Cash and cash equivalents at beginning of period 34,874 44,753 44,753 28,039 Cash and cash equivalents at end of period $ 38,773 $ 39,377 $ 34,874 $ 44,753 Table of Contents CHART BANK, A COOPERATIVE BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded) Recent accounting pronouncements (concluded) On September 30, 2004, the FASB issued FASB Staff Position ( FSP ) Emerging Issues Task Force ( EITF ) Issue No. 03-1-1 delaying the effective date of paragraphs 10-20 of EITF 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments , which provides guidance for determining the meaning of other-than-temporarily impaired and its application to certain debt and equity securities within the scope of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities , and investments accounted for under the cost method. The guidance requires that investments which have declined in value due to credit concerns or solely due to changes in interest rates must be recorded as other-than-temporarily impaired unless the Bank can assert and demonstrate its intention to hold the security for a period of time sufficient to allow for a recovery of fair value up to or beyond the cost of the investment which might mean maturity. The delay of the effective date of EITF 03-1 will be superceded concurrent with the final issuance of proposed FSP Issue 03-1-a. Proposed FSP Issue 03-1-a is intended to provide implementation guidance with respect to all securities analyzed for impairment under paragraphs 10-20 of EITF 03-1. Management continues to closely monitor and evaluate how the provisions of EITF 03-1 and proposed FSP Issue 03-1-a will affect the Bank. 2. SECURITIES The amortized cost, gross unrealized gains and losses and fair value of securities follows. At December 31, 2003 and 2002, all securities consisted of federal agency obligations. Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value Table of Contents CHART BANK, A COOPERATIVE BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands) SECURITIES (continued) Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value The carrying value and estimated fair value of debt securities by contractual maturity at September 30, 2004 (unaudited) and December 31, 2003, follows. Expected maturities may differ from contractual maturities because the issuer may have the right to call or prepay obligations with or without call or prepayment penalties. Available for Sale Held to Maturity Amortized Fair Amortized Fair Cost Value Cost Value September 30, 2004 (unaudited) Within 1 year $ 1,500 $ 1,514 $ $ Over 1 year to 2 years 509 521 17,019 16,967 Over 2 years to 5 years 14,807 14,775 $ 2,009 $ 2,035 $ 31,826 $ 31,742 December 31, 2003 Within 1 year $ 3,777 $ 3,826 $ $ Over 1 year to 2 years 1,515 1,578 3,002 3,051 Over 2 years to 5 years 20,963 20,909 $ 5,292 $ 5,404 $ 23,965 $ 23,960 Table of Contents CHART BANK, A COOPERATIVE BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands) 3. LOANS The composition of the balance of loans follows: December 31, (Unaudited) Real estate mortgage loans: Residential $ 57,696 $ 31,113 $ 29,015 Home equity lines-of-credit 6,881 6,462 4,640 Commercial 99,614 91,774 83,652 Construction loans 8,225 6,498 3,327 172,416 135,847 120,634 4,124 4,425 3,437 Loans, net $ 175,572 $ 139,890 $ 122,965 An analysis of the allowance for loan losses follows: Nine Months Ended Years Ended September 30, December 31, (Unaudited) Balance at beginning of period $ 1,657 $ 1,536 $ 1,536 $ 1,387 Provision for loan losses 90 90 120 120 Recoveries 12 6 6 60 Charge-offs (6 ) (5 ) (5 ) (31 ) Balance at end of period $ 1,753 $ 1,627 $ 1,657 $ 1,536 Table of Contents CHART BANK, A COOPERATIVE BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands) LOANS (concluded) At September 30, 2004 (unaudited), impaired and non-accrual loans amounted to $119. For the nine months ended September 30, 2004 and 2003 (unaudited), the average balance of impaired loans was $89 and $10, respectively, and $10 and $0, respectively, in interest income was recognized on impaired loans on the cash basis during the period they were impaired. At December 31, 2003, impaired and non-accrual loans amounted to $120. For the year ended December 31, 2003, the average balance of impaired loans was $40 and $1 in interest income was recognized on impaired loans on the cash basis during the period they were impaired. There were no non-accrual or impaired loans at or for the year ended December 31, 2002. At September 30, 2004 (unaudited) and December 31, 2003 and 2002, accruing loans past due greater than ninety days amounted to $25, 93 and $25, respectively. Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balance of mortgage loans serviced for others was $10,475, $10,553 and $10,945 at September 30, 2004 (unaudited), December 31, 2003 and 2002, respectively. Loans sold did not contain recourse provisions. 4. BANKING PREMISES AND EQUIPMENT A summary of the cost and accumulated depreciation and amortization of banking premises and equipment follows: December 31, Useful Lives (Unaudited) Banking premises: Land $ 380 $ 380 $ 380 Building and improvements 1,181 1,181 1,181 10-35 years Leasehold improvements 671 665 653 10 years Furniture, fixtures and equipment 2,862 2,790 2,578 3-10 years 5,094 5,016 4,792 Less accumulated depreciation and amortization (2,923 ) (2,616 ) (2,198 ) $ 2,171 $ 2,400 $ 2,594 Table of Contents CHART BANK, A COOPERATIVE BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands) 5. DEPOSITS A summary of deposit balances by type follows: December 31, (Unaudited) Demand deposits $ 33,205 $ 30,458 $ 27,701 NOW accounts 11,266 9,601 9,384 Money market deposits 64,383 50,977 49,848 Other savings accounts 14,630 21,479 18,988 Total non-certificate accounts 123,484 112,515 105,921 Term certificates less than $100 48,762 32,013 38,094 Term certificates of $100 or more 43,726 31,273 26,264 Total certificate accounts 92,488 63,286 64,358 $ 215,972 $ 175,801 $ 170,279 A summary of term certificates by maturity at follows: September 30, December 31, Weighted Weighted Weighted Average Average Average Amount Rate Amount Rate Amount Rate (Unaudited) Within 1 year $ 17,359 1.99 % $ 20,600 1.71 % $ 23,020 2.36 % Over 1 year to 3 years 70,041 2.72 39,684 2.89 39,859 4.05 Over 3 years to 5 years 5,088 3.59 3,002 3.38 1,479 5.48 $ 92,488 2.64 % $ 63,286 2.53 % $ 64,358 3.48 % Table of Contents CHART BANK, A COOPERATIVE BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands) 6. BORROWED FUNDS Borrowed funds consist of advances from the Federal Home Loan Bank of Boston ( FHLB ). Short-term advances mature within one year and have a weighted average interest rate of 2.20%, 1.24% and 1.56% at September 30, 2004 (unaudited), December 31, 2003 and 2002, respectively. Long-term advances are as follows: September 30, December 31, Weighted Weighted Weighted Average Average Average Amount Rate Amount Rate Amount Rate $ 11,000 2.84 % $ 10,728 3.73 % $ 10,986 3.72 % Table of Contents CHART BANK, A COOPERATIVE BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands) 7. INCOME TAXES The allocation of income taxes between current and deferred portions is as follows: Nine Months Ended September 30, Years Ended December 31, For the nine months ended September 30, 2004 and 2003 (unaudited), and years ended December 31, 2003 and 2002, the reason for the difference between the statutory federal income tax rate of 34% and the effective rates of 46.4%, 38.7%, 38.7% and 37.9%, respectively, is state taxes, net of federal tax benefit and, for the nine months ended September 30, 2004 (unaudited), a 6.6% increase in the effective tax rate due to non-tax deductible merger expenses. The components of the net deferred tax asset are as follows: December 31, Deferred tax liability: Federal (277 ) (247 ) (289 ) State (93 ) (79 ) (82 ) (370 ) (326 ) (371 ) Table of Contents CHART BANK, A COOPERATIVE BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands) INCOME TAXES (concluded) The tax effects of each type of income and expense item that gives rise to deferred taxes are as follows: December 31, A summary of the change in the net deferred tax asset is as follows: Nine Months Ended Years Ended September 30, December 31, Table of Contents CHART BANK, A COOPERATIVE BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands) MINIMUM REGULATORY CAPITAL REQUIREMENTS (concluded) As of September 30, 2004 (unaudited) and December 31, 2003, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since the notification that management believes have changed the Bank s category. The Bank s actual capital amounts and ratios as of September 30, 2004 (unaudited), December 31, 2003 and 2002 are also presented in the table. Minimum To Be Well Minimum Capitalized Under Capital Prompt Corrective Actual Requirements Action Provisions Amount Ratio Amount Ratio Amount Ratio Table of Contents CHART BANK, A COOPERATIVE BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands) COMMITMENTS AND CONTINGENCIES (continued) Loan commitments (concluded) The contract amount of financial instruments which represent credit risk are as follows: September 30, December 31, (Unaudited) Commitments to grant loans $ 8,623 $ 12,176 $ 1,134 Unadvanced funds on home equity lines-of-credit 6,637 4,988 4,637 Unadvanced funds on commercial lines-of-credit 11,803 7,714 6,428 Unadvanced funds on construction loans 4,601 2,749 2,411 Standby letters-of-credit 618 542 232 Commitments to grant loans are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for home equity and commercial lines-of-credit may expire without being drawn upon, therefore, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer s credit worthiness on a case-by-case basis and these financial instruments are generally collateralized by real estate or other assets. Standby letters-of-credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those letters-of-credit are primarily issued to support public and private borrowing arrangements. Essentially all letters-of-credit issued have expiration dates within one year. The credit risk involved in issuing letters-of-credit is essentially the same as that involved in extending loan facilities to customers. The Bank collateralizes those commitments for which collateral is deemed necessary. Lease commitments Pursuant to the terms of lease agreements in effect at the dates noted, pertaining to banking premises, future minimum rent commitments are as follows: Year Ending September 30, December 31, December 31, Table of Contents CHART BANK, A COOPERATIVE BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands) FAIR VALUE OF FINANCIAL INSTRUMENTS (concluded) Loans: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms, adjusted for credit risk. Accrued interest: The carrying amounts of accrued interest approximate fair values. Deposits: The fair values for non-certificate accounts are, by definition, equal to the amount payable on demand at the reporting date which is the carrying amount. Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. FHLB advances: The fair value of FHLB advances is estimated using discounted cash flow analyses based on the Bank s current incremental borrowing rates for similar types of borrowing arrangements. Off-balance-sheet instruments: Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties credit standing. The estimated fair values of off-balance-sheet instruments are immaterial. The estimated fair values, and related carrying amounts, of the Bank s financial instruments are as follows: September 30, December 31, Carrying Fair Carrying Fair Carrying Fair Amount Value Amount Value Amount Value Table of Contents CHART BANK, A COOPERATIVE BANK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands) SEGMENT REPORTING (continued) Information about reportable segments, and reconciliation of such information to the consolidated financial statements at or for the periods ended follows: Intersegment Consolidated Bank CSSI Elimination Totals Table of Contents You should rely only on information contained in this prospectus. We have not authorized anyone to provide you with different information. This prospectus is not an offer to sell nor is it seeking an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. The information contained in this prospectus is correct only as of the date of this prospectus, regardless of the time of the delivery of this prospectus or any sale of these securities. Up to 6,612,500 Shares of Common Stock BENJAMIN FRANKLIN BANCORP, INC. (Holding Company for Benjamin Franklin Bank) _________________________________ PROSPECTUS _________________________________ Ryan Beck Co., Inc. _____________ , 2005 Until the later of _____ 2005 or 25 days after commencement of the syndicated community offering, if any, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. Table of Contents PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution. * Legal fees and expenses $ 675,000 * Printing, postage and mailing 75,000 * Appraisal and business plan fees and expenses 95,000 * Accounting fees and expenses 75,000 * Conversion agent and data processing fees 45,000 ** Marketing agent fees and expenses 465,000 * Filing fees (Massachusetts Commissioner of Banks, Massachusetts Secretary of State, NASD, Nasdaq and * SEC) 196,000 * Other 100,000 * Total $ 1,726,000 * Estimated ** Benjamin Franklin Bancorp has retained Ryan Beck Co., Inc. to assist in the sale of common stock on a best efforts basis in the offering. Fees are estimated at the midpoint of the offering range Item 14. Indemnification of Directors and Officers. Sections 8.50-8.59 of the Massachusetts Business Corporation Act authorize a Massachusetts corporation to indemnify its present and former directors and officers under certain conditions. Article 7 of our by-laws provides that we shall indemnify each person who serves or has served as a director or officer at the level of Vice President or above to the fullest extent permitted by applicable law, against expenses (including attorney s fees), judgments, fines, ERISA excise taxes, penalties, and amounts reasonably paid in settlement incurred in connection with any threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism, inquiry, investigation, administrative hearing or any other proceeding whether civil, criminal, administrative, arbitrative or investigative (without regard to whether the basis of such proceeding is alleged action in an official capacity as a director or officer or in any other capacity for or on behalf of Benjamin Franklin Bancorp while serving as a director or officer) or any claim, issue or matter therein, which proceeding such director or officer is, or is threatened to be made, a party to or participant in by reason of the fact that he or she is or was one of our directors or officers or was serving at our request as a director, officer, trustee, or in a similar capacity with another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise. The rights of indemnification continue as to a director or officer after he or she has ceased to be a director or officer and shall inure to the benefit of his or her heirs, estate, executors, administrators and personal representatives. No amendment, termination or repeal of the provisions of Article 7 of our by-laws or of the relevant provisions of the Massachusetts Business Corporation Act shall affect or deprive a director or officer of the benefit of those by-laws or applicable law with respect to any proceeding arising out of or relating to any actions, transactions or facts occurring prior to such amendment, termination or repeal. Section 2.02 of the Massachusetts Business Corporation Act authorizes a Massachusetts corporation to adopt a charter provision eliminating or limiting the personal liability of directors to the corporation for monetary damages for breach of fiduciary duty as directors, provided that the provision may not eliminate or limit the liability of directors for: any breach of the director s duty of loyalty to the corporation or its stockholders; II-1 Table of Contents any acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; any improper distributions to stockholders under Section 6.40 of the Massachusetts Business Corporation Act; or any transaction from which the director derived an improper personal benefit. Section 6.5.4 of Benjamin Franklin Bancorp s articles of organization provides that, to the maximum extent permitted by the Massachusetts Business Corporation Act, none of our directors shall be personally liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director notwithstanding any provision of law imposing such liability. No amendment to or repeal of the provisions of Section 6.5.4 shall apply to or have any effect on the liability or alleged liability of any director for or with respect to any act or failure to act of such director occurring prior to such amendment or repeal. If the Massachusetts Business Corporation Act is subsequently amended to further eliminate or limit the personal liability of directors or to authorize corporate action to further eliminate or limit such liability, then the liability of the directors will be eliminated or limited to the fullest extent permitted by the Massachusetts Business Corporation Act as so amended. A principal effect of Section 6.5.4 is to limit or eliminate the potential liability of our directors for monetary damages arising from breaches of their duty of care, unless the breach involves one of the four exceptions described above. Section 8.57 of the Massachusetts Business Corporation Act also authorizes a Massachusetts corporation to obtain insurance on behalf of its directors and officers against liability incurred by them in those capacities. We have procured a directors and officers liability and company reimbursement liability insurance policy that insures (a) our directors and officers against losses, above a deductible amount, arising from specified types of claims made against them by reason of enumerated acts done or attempted by our directors or officers and (b) us against losses, above a deductible amount, arising from any of the specified types of claims, but only if we are required or permitted to indemnify our directors or officers for those losses under statutory or common law or under provisions of our articles of organization or by-laws. Item 15. Recent Sales of Unregistered Securities. None. Item 16. Exhibits and Financial Schedules. (a) Exhibits Exhibit No. Description 1.1 Engagement Letter between Benjamin Franklin Bancorp and Ryan Beck Co. * 1.2 Form of Agency Agreement between Benjamin Franklin Bancorp and Ryan Beck Co.* 2.1 Plan of Conversion of Benjamin Franklin Bancorp.* 2.2 Agreement and Plan of Merger among Benjamin Franklin Bancorp, M.H.C., Benjamin Franklin Savings Bank and Chart Bank, a Cooperative Bank, dated as of September 1, 2004.* 3.1 Articles of Organization of Benjamin Franklin Bancorp, Inc. * 3.2 Bylaws of Benjamin Franklin Bancorp, Inc. * 4.1 Form of Common Stock Certificate of Benjamin Franklin Bancorp, Inc.* II-2 Table of Contents Exhibit No. Description 5.1 Opinion of Foley Hoag LLP regarding legality of securities being registered. 8.1 Tax Opinion of Foley Hoag LLP . 10.1.1 Form of Employment Agreement with Thomas R. Venables.* 10.1.2 Form of Employment Agreement with Claire S. Bean.* 10.1.3 Form of Employment Agreement with Stephen F. Banks.* 10.2 Form of Change in Control Agreement with six other Executive Officers.* 10.3 Form of Benjamin Franklin Bank Benefit Restoration Plan.* 10.4.1 Benjamin Franklin Bank Salary Continuation Agreement with Thomas R. Venables dated as of August 22, 2002.* 10.4.2 Benjamin Franklin Bank Supplemental Executive Retirement Plan with Stephen F. Banks dated as of January 1, 2000.* 10.5 Benjamin Franklin Bancorp Director Fee Continuation Plan. ** 10.6 Benjamin Franklin Bancorp Employee Salary Continuation Plan.* 10.7.1 Payments and Waiver Agreement among Richard E. Bolton, Jr., Benjamin Franklin Bancorp, M.H.C., Benjamin Franklin Savings Bank and Chart Bank, a Cooperative Bank, dated as of September 1, 2004.* 10.7.2 Consulting and Noncompetition Agreement between Richard E. Bolton, Jr. and Benjamin Franklin Bancorp, M.H.C., dated as of September 1, 2004.* 10.8 Special Termination Agreement between Alfred F. Odoardi and Chart Bank dated as of August 20, 2004. * 21 Subsidiaries of Registrant* 23.1 Consent of Foley Hoag LLP (contained in Opinion included as Exhibit 5) 23.2 Consent of Foley Hoag LLP (contained in Opinion included as Exhibit 8.1) 23.3 Consent of Wolf Company, P.C. with respect to Benjamin Franklin Bancorp 23.4 Consent of Wolf Company, P.C. with respect to Chart Bank 23.5 Consent of RP Financial, LC. * 24 Power of Attorney * 99.1 Appraisal Agreement between Benjamin Franklin Bancorp and RP Financial, LC. * 99.2 Appraisal Report of RP Financial, LC.* *** 99.3 Business Plan Agreement between Benjamin Franklin Bancorp and RP Financial, LC. * 99.4 Marketing Materials* 99.5 Order and Acknowledgment Form* 99.7 Prospectus Supplement for participants in the Benjamin Franklin Bank 401(k) 99.8 Consents of Richard E. Bolton, Jr., Paul E. Capasso, Jonathan A. Haynes, Daniel F. O Brien, Donald P. Quinn, and Neil E. Todreas, to be identified as proposed directors * * Previously filed ** Incorporated by reference to the Registrant s Registration Statement on Form S-4 filed on December 23, 2004 *** Excludes certain tabular and statistical information falling within the hardship exemption granted pursuant to Rule 202 of Regulation S-T. II-3 Table of Contents (b) Financial Statement Schedules All schedules are omitted because they are not applicable or the required information is shown in our financial statements and related notes. Item 17. Undertakings. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission that indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against those liabilities (other than our payment of expenses incurred or paid by one of our directors, officers or controlling persons of the registrant in the successful defense of any action, suit or proceeding) is asserted by our directors, officers or controlling persons in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether that indemnification by us is against public policy as expressed in the Securities Act and we will be governed by the final adjudication of such issue. We hereby undertake: (1) To file, during any period in which it offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20.0% change in the maximum aggregate offering price set forth in the Calculation of Registration Fee table in the effective registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. II-4 Table of Contents SIGNATURES Pursuant to the requirements of the Securities Act of 1933, Benjamin Franklin Bancorp, M.H.C. has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Franklin, Commonwealth of Massachusetts, as of February 10, 2005. Benjamin Franklin Bancorp, M.H.C. By: /s/ Thomas R. Venables Thomas R. Venables President and Chief Executive Officer In accordance with the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the indicated capacities as of February 10, 2005. Signature Title /s/ Thomas R. Venables President and Chief Executive Officer, Director Thomas R. Venables (Principal Executive Officer) /s/ Claire S. Bean Treasurer and Chief Financial Officer Claire S. Bean (Principal Financial and Accounting Officer) * Mary Ambler Director * William P. Bissonnette Director * William F. Brady, Jr. Director John C. Fuller Director * Anne M. King Director * Richard D. Mann Director II-5 Table of Contents Signature Title John D. Murphy Director * Charles F. Oteri Director * Alfred H. Wahlers Director * Charles Yergatian Director * By: /s/ Thomas R. Venables Thomas R. Venables, Attorney-in-fact II-6 Table of Contents Employees Chart Bank s workforce at September 30, 2004 was 48 employees, of whom 44 were full-time and 4 were part-time. Properties Chart Bank currently conducts its business through its main office located in Waltham, Massachusetts and two other full-service banking offices. In addition, Chart Bank operates eight off-site ATMs. Location Leased or Owned Year Opened Expiration of Lease Main Office: 75 Moody Street, Waltham, Massachusetts 02453 Leased 1996 March 2008 Branch Offices: 1290 Main Street, Waltham, Massachusetts 02451 Owned 1996 N/A 40 Austin Street, Newton, Massachusetts 02460 Owned 1998 N/A Administrative Office: 295 Weston Street Waltham, Massachusetts 02453 Leased Estimated September 30, September 30, September 30, Estimated September 30, September 30, September 30, Table of Contents MANAGEMENT OF BENJAMIN FRANKLIN BANCORP AND BENJAMIN FRANKLIN BANK Directors of Benjamin Franklin Bancorp The Board of Benjamin Franklin Bancorp (which is now known as the Board of Trustees but will be renamed the Board of Directors upon the completion of the conversion) currently consists of 11 members, each of whom belongs to one of three classes. Directors serve three-year staggered terms so that only approximately one-third of the Directors will be elected at each annual meeting of stockholders. Upon the completion of the Chart Bank acquisition, six directors from Chart Bank will join the Benjamin Franklin Bancorp Board of Directors: Richard E. Bolton Jr., the President and Chief Executive Officer of Chart Bank, Paul E. Capasso, Jonathan A. Haynes, Daniel F. O Brien, Donald P. Quinn, and Neil E. Todreas. Such former directors of Chart Bank will be classified evenly, to the extent practicable, into each of the three Board classes. Each of the directors of Benjamin Franklin Bancorp also serves as a director of Benjamin Franklin Bank, and following the completion of the Chart Bank acquisition each of the designated Chart Bank directors named above will also join the Board of Directors of Benjamin Franklin Bank. The following table sets forth the current Directors names, ages as of November 15, 2004, the years when they began serving as Directors, and when their current term expires. Date Name (1) Age Elected (2) Term Expires Dr. Mary Ambler 72 1977 2008 William P. Bissonnette 58 1997 2006 William F. Brady, Jr., D.D.S. 72 1985 2007 John C. Fuller 72 1998 2007 Anne M. King 75 1997 2006 Richard D. Mann 69 1967 2007 John D. Murphy 74 1984 2006 Charles F. Oteri 59 1984 2008 Thomas R. Venables 49 2002 2008 Alfred H. Wahlers 71 1973 2007 Charles Yergatian 76 1980 Table of Contents BENJAMIN FRANKLIN BANCORP, M.H.C. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm F-2 Report of Independent Public Accountants F-3 Consolidated Balance Sheets as of September 30, 2004 (Unaudited) and December 31, 2003 and 2002 F-4 Consolidated Statements of Income for the Nine Months Ended September 30, 2004 and 2003 (unaudited) and for the Years Ended December 31, 2003, 2002 and 2001 F-5 Consolidated Statements of Changes in Retained Earnings for the Nine Months Ended September 30, 2004 (unaudited) and for the Years Ended December 31, 2003, 2002 and 2001 F-6 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2004 and 2003 (unaudited) and for the Years Ended December 31, 2003, 2002 and 2001 F-7 Notes to Consolidated Financial Statements F-9 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Audit Committee Benjamin Franklin Bancorp, M.H.C. Franklin, Massachusetts We have audited the accompanying consolidated balance sheets of Benjamin Franklin Bancorp, M.H.C. and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of income, changes in retained earnings and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The consolidated financial statements of Benjamin Franklin Bancorp, M.H.C. and subsidiaries for the year ended December 31, 2001 (before they were restated for the matter discussed in Note 1 to the consolidated financial statements) were audited by other auditors who have ceased operations and whose report, dated April 12, 2002, and included herein, expressed an unqualified opinion on those statements. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the 2003 and 2002 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Benjamin Franklin Bancorp, M.H.C. and subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. WOLF COMPANY, P.C. Boston, Massachusetts February 27, 2004, except for Note 17 as to which the date is October 28, 2004 Table of Contents Report of Independent Public Accountants To the Audit Committee of Benjamin Franklin Bancorp, M.H.C. and subsidiaries We have audited the accompanying consolidated balance sheets of Benjamin Franklin Bancorp, M.H.C. and subsidiaries (the Company) as of December 31, 2001 and 2000 and the related consolidated statements of operations, changes in surplus and comprehensive income (loss) and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly in all material respects, the consolidated financial position of the Company as of December 31, 2001 and 2000 and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Boston, Massachusetts April 1, 2002 This Report of Independent Public Accountants is a copy of a previously issued Arthur Andersen LLP (Andersen) report and has not been reissued by Andersen in connection with this filing on Form S-1. The inclusion of this previously issued Andersen report is made pursuant to Section 2.02(e) of regulation S-X. Note that this previously issued Andersen report includes references to the year ended December 31, 2000 which is not required to be presented in the accompanying consolidated financial statements as of and for the years ended December 31, 2003. See accompanying notes to consolidated financial statements. See accompanying notes to consolidated financial statements. See accompanying notes to consolidated financial statements. (continued) See accompanying notes to consolidated financial statements. Supplemental cash flow information: Interest paid on deposits $ 3,222 $ 3,444 $ 4,492 $ 5,871 $ 11,014 Interest paid on short-term borrowings 39 Interest paid on long-term debt 1,726 1,723 2,280 1,632 1,645 Income taxes paid (refunded) 640 940 942 (356 ) 1,363 See accompanying notes to consolidated financial statements. Table of Contents BENJAMIN FRANKLIN BANCORP, M.H.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Nine Months Ended September 30, 2004 and 2003 (Unaudited) and Years Ended December 31, 2003, 2002 and 2001 (Dollars in Thousands) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of presentation and consolidation The consolidated financial statements include the accounts of Benjamin Franklin Bancorp, M.H.C. (the Company ) and its wholly-owned subsidiary, Benjamin Franklin Bank (the Bank ). The Company s wholly-owned subsidiary, Benjamin Franklin Capital Trust, was included in the Company s consolidated financial statements for December 31, 2003 and 2002 and recorded on the equity method effective January 1, 2004 (See Note 1 - Recent Accounting Pronouncements). The Bank has one subsidiary, Benjamin Franklin Securities Corp., formed for the purpose of buying, holding, and selling securities. All significant intercompany balances and transactions have been eliminated in consolidation. The financial information included herein as of September 30, 2004 and for the interim periods ended September 30, 2004 and 2003 is unaudited; however, in the opinion of management the information reflects all adjustments (consisting solely of normal recurring adjustments) that are necessary for a fair presentation. The results shown for nine months ended September 30, 2004 and 2003 are not necessary indicative of the results to be obtained for a full year. Business and operating segments The Company provides a variety of financial services to individuals and small businesses through its six offices in Norfolk and Worcester counties. Its primary deposit products are checking, savings and term certificate accounts, and its primary lending products are residential and commercial mortgage loans. The Bank also provides non-deposit investment products to customers. Management evaluates the Company s performance and allocates resources based on a single segment concept. Accordingly, there are no separately identified operating segments for which discrete financial information is available. The Company does not derive revenues from, or have assets located in, foreign countries, nor does it derive revenues from any single customer that represents 10% or more of the Company s total revenues. Cash and cash equivalents Cash and cash equivalents include cash and balances due from banks and short-term investments, all of which mature within ninety days. Table of Contents BENJAMIN FRANKLIN BANCORP, M.H.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Securities Debt securities that management has the positive intent and ability to hold to maturity are classified as held to maturity and recorded at amortized cost. Securities not classified as held to maturity, including equity securities with readily determinable fair values, are classified as available for sale and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income/loss. Purchase premiums and discounts are recognized into interest income using the interest method over the contractual terms of the securities. Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Gains and losses on the sale of securities are recorded on the trade date and determined using the specific identification method. Restricted equity securities, which consist of Federal Home Loan Bank stock and stock in a community investment fund, are carried at cost. Loans The Bank grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by mortgage loans in Franklin, Massachusetts and surrounding communities. The ability of the Bank s debtors to honor their contracts is dependent upon the local real estate market and general economic conditions in this area. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Table of Contents BENJAMIN FRANKLIN BANCORP, M.H.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Loans (concluded) All interest accrued but not collected for loans that are placed on non-accrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Allowance for loan losses The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as either doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows or collateral value or observable market price of the impaired loan is lower than the carrying value of the loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Impairment is measured on a loan by loan basis for commercial loans by either the present value of expected future cash flows discounted at the loan s effective interest rate, or the fair value of the collateral if the loan is collateral dependent. Table of Contents BENJAMIN FRANKLIN BANCORP, M.H.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Allowance for loan losses (concluded) Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment disclosures. Servicing Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. For sales of mortgage loans, a portion of the cost of originating the loan is allocated to the servicing right based on relative fair value. Fair value is based on market prices for comparable mortgage servicing contracts. Capitalized servicing rights are reported in other assets and are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets, and are adjusted for prepayments. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights by the original term of maturity ranging from 10 to 30 years and using a weighted average interest rate and maturity date with each strata. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance for an individual stratum, to the extent that fair value is less than the capitalized amount for the stratum. Premises and equipment Land is carried at cost. Buildings and improvements and equipment are carried at cost, less accumulated depreciation computed on the straight-line method over the estimated useful lives of the assets. Transfers of financial assets Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Table of Contents BENJAMIN FRANKLIN BANCORP, M.H.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Goodwill Prior to January 1, 2002, goodwill, arising from the acquisition of Foxboro National Bank, was being amortized on a straight-line basis over 15 years. Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards ( SFAS ) No. 142, Goodwill and Other Intangible Assets and goodwill, which amounted to $4,248 at September 30, 2004 (unaudited), December 31, 2003 and 2002, is no longer amortized, but is evaluated for impairment. In evaluating the goodwill, the Company does not track the separate fair value of Foxboro National Bank, but instead measures the fair value of the entire Company. If the Company determines that goodwill is impaired, the carrying value of goodwill would be reduced through a charge to earnings. If goodwill amortization of $385 had not been recorded for the year ending December 31, 2001, net income as reported for 2001 would have increased by $375. Derivative financial instruments The derivative financial instruments currently used by the Company are rate-lock commitments and forward investor loan sale commitments. Rate-lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. Accordingly, such commitments, along with related fees received from potential borrowers, are recorded at fair value in derivative assets and liabilities, with changes in fair value recorded in the net gain or loss on sale of mortgage loans, if material. The Company manages the interest rate risk on rate-lock commitments by simultaneously entering into forward loan sale contracts, whereby the Company obtains the right to deliver residential loans to investors in the future at a specified yield. Such contracts are accounted for as derivatives and, along with related fees paid to investors, are recorded at fair value in derivative assets or liabilities, with changes in fair value recorded in the net gain or loss on sale of mortgage loans, if material. Fair value is assumed to be zero on the date the derivative financial instruments are entered into. To date, any subsequent changes in fair value have been immaterial and, therefore, not recorded in the financial statements. Retirement plan The Company accounted for pension plan benefits on the net periodic pension cost method for financial reporting purposes. This method recognized the compensation cost of an employee s pension benefit over the employee s approximate service period. The aggregate cost method was utilized for funding purposes. The Bank elected to curtail the pension plan effective December 31, 2000 (See Note 14). Income taxes Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted accordingly through the provision for income taxes. The Bank s base amount of its federal income tax reserve for loan losses is a permanent difference for which there is no recognition of a deferred tax liability. However, the loan loss allowance maintained for financial reporting purposes is a temporary difference with allowable recognition of a related deferred tax asset, if deemed realizable. Table of Contents BENJAMIN FRANKLIN BANCORP, M.H.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Recent accounting pronouncements In April 2003, the Financial Accounting Standards Board ( FASB ) issued Statement of Financial Accounting Standards ( SFAS ) No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This Statement amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. This Statement is effective for contracts entered into or modified after June 30, 2003, except in certain circumstances, and for hedging relationships designated after June 30, 2003. This Statement did not have a material effect on the Company s consolidated financial statements. In December 2003, the FASB issued a revision to Interpretation No. 46, Consolidation of Variable Interest Entities, ( FIN 46 ) which establishes guidance for determining when an entity should consolidate another entity that meets the definition of a variable interest entity. FIN 46 requires a variable interest entity to be consolidated by a company if that company will absorb a majority of the expected losses, will receive a majority of the expected residual returns, or both. FASB deferred the effective date of FIN 46 to no later than the end of the first reporting period that ends after March 15, 2004. The Company adopted FIN 46 as of January 1, 2004 which resulted in the Company no longer consolidating its wholly-owned subsidiary, Benjamin Franklin Capital Trust, and recording it on the equity method. The Interpretation and the revision had no material effect on the Company s consolidated financial statements. In March 2004, the Securities and Exchange Commission ( SEC ) issued Staff Accounting Bulletin ( SAB ) No. 105, Application of Accounting Principles to Loan Commitments, which provides guidance regarding loan commitments that are accounted for as derivative instruments. In this SAB, the SEC determined that an interest rate lock commitment should generally be valued at zero at inception. The rate locks will continue to be adjusted for changes in value resulting from changes in market interest rates. This SAB did not have any effect on the Company s financial position or results of operations. Table of Contents BENJAMIN FRANKLIN BANCORP, M.H.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Recent accounting pronouncements (continued) On December 16, 2004, the FASB issued SFAS No. 123R, Share-Based Payment, which is an Amendment of FASB Statement Nos. 123 and 95 SFAS No. 123R changes, among other things, the manner in which share-based compensation, such as stock options, will be accounted for by both public and non-public companies, and will be effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. For public companies, the cost of employee services received in exchange for equity instruments including options and restricted stock awards generally will be measured at fair value at the grant date. The grant date fair value will be estimated using option-pricing models adjusted for the unique characteristics of those options and instruments, unless observable market prices for the same or similar options are available. The cost will be recognized over the requisite service period, often the vesting period, and will be remeasured subsequently at each reporting date through settlement date. The changes in accounting will replace existing requirements under SFAS No. 123, Accounting for Stock-Based Compensation, and will eliminate the ability to account for share-based compensation transactions using APB Opinion No. 25, Accounting for Stock Issued to Employees, which does not require companies to expense options if the exercise price is equal to the trading price at the date of grant. The accounting for similar transactions involving parties other than employees or the accounting for employee stock ownership plans that are subject to American Institute of Certified Public Accountants ( AICPA ) Statement of Position 93-6, Employers Accounting for Employee Stock Ownership Plans, would remain unchanged. Table of Contents BENJAMIN FRANKLIN BANCORP, M.H.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded) Recent accounting pronouncements (concluded) On September 30, 2004, the Financial Accounting Standards Board ( FASB ) issued FASB Staff Position ( FSP ) Emerging Issues Task Force ( EITF ) Issue No. 03-1-1 delaying the effective date of paragraphs 10-20 of EITF 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments , which provides guidance for determining the meaning of other-than-temporarily impaired and its application to certain debt and equity securities within the scope of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities , and investments accounted for under the cost method. The guidance requires that investments which have declined in value due to credit concerns or solely due to changes in interest rates must be recorded as other-than-temporarily impaired unless the Company can assert and demonstrate its intention to hold the security for a period of time sufficient to allow for a recovery of fair value up to or beyond the cost of the investment which might mean maturity. The delay of the effective date of EITF 03-1 will be superceded concurrent with the final issuance of proposed FSP Issue 03-1-a. Proposed FSP Issue 03-1-a is intended to provide implementation guidance with respect to all securities analyzed for impairment under paragraphs 10-20 of EITF 03-1. Management continues to closely monitor and evaluate how the provisions of EITF 03-1 and proposed FSP Issue 03-1-a will affect the Company. 2. RESTRICTIONS ON CASH AND DUE FROM BANKS The Bank is required to maintain average balances on hand or with the Federal Reserve Bank. At September 30, 2004 (unaudited), December 31, 2003 and 2002, these reserve balances amounted to $973, $6,760 and $4,703, respectively. Proceeds from the sale of securities available for sale for the nine months ended September 30, 2004 and 2003 (unaudited) amounted to $2,015 and $17,123, respectively. Gross gains of $9 and $150, and gross losses of $1 and $37, were realized during the nine months ended September 30, 2004 and 2003 (unaudited), respectively. Proceeds from the sale of securities available for sale during the years ended December 31, 2003, 2002 and 2001 amounted to $30,886, $110,420 and $64,995, respectively. Gross realized gains of $189, $1,823 and $1,344, and gross losses of $103, $254 and $3,873, were realized during the years ended December 31, 2003, 2002 and 2001, respectively. At September 30, 2004 (unaudited) and December 31, 2003, the Company s mortgage-backed securities have unrealized losses with an aggregate depreciation of 3.6% and 3.1%, respectively, from the amortized cost basis. Significant portions of these investments are in collateralized mortgage obligations, commonly referred to as CMOs. The unrealized losses will continue to exist as market interest rates rise above the purchase yield of the individual securities. Management s intent is to hold these securities until maturity, as a core element of the total investment portfolio. The current CMO securities are all early-tranche investments thereby providing significant cash flows early in the life of the security. The issuers of the investments are the Federal Home Loan Mortgage Corporation ( FHLMC ) and the Federal National Mortgage Corporation ( FNMA ). The residential mortgage collateral, backing these investments and the guarantees of the federal agency issuers do not indicate that these declines are other than temporary. At September 30, 2004 (unaudited), December 31, 2003 and 2002, loans with a principal balance of $17,794, $23,590 and $22,915, respectively, were pledged to the Federal Reserve Bank of Boston as part of the Borrower-in-Custody advance program for which there are no outstanding advances as of September 30, 2004 (unaudited), December 31, 2003 and 2002. 6. SERVICING Loans serviced for others by the Bank amounted to $133,210, $131,845 and $127,316 at September 30, 2004 (unaudited), December 31, 2003 and 2002, respectively. All loans sold and serviced for others were sold without recourse provisions. Depreciation expense for the nine months ended September 30, 2004 and 2003 (unaudited) and years ended December 31, 2003, 2002 and 2001 amounted to $509, $673, $872, $1,008 and $688, respectively. 9. SHORT-TERM BORROWINGS Short-term borrowings consist of Federal Home Loan Bank ( FHLB ) advances maturing within one year at a weighted average rate of 1.68% at September 30, 2004 (unaudited). The advances are secured by a blanket lien on qualified collateral as described in Note 10. * All advances are callable during the remaining period until maturity by the FHLB at its option and in its sole discretion. The Bank also has an available line of credit with the FHLB at an interest rate that adjusts daily. At September 30, 2004 (unaudited), December 31, 2003 and 2002, borrowings under the line were limited to $500, none of which was outstanding. Borrowings under the line are limited to 2% of the Bank s total assets. All borrowings from the Federal Home Loan Bank are secured by a blanket lien on qualified collateral, defined principally as 75% of the carrying value of first mortgage loans on owner-occupied residential property and 90% of the market value of U.S. Government and federal agency securities. At September 30, 2004 (unaudited), December 31, 2003 and 2002 the carrying amount of assets qualifying as collateral for FHLB advances amounted to $223,956, $167,559 and $162,519, respectively. Table of Contents BENJAMIN FRANKLIN BANCORP, M.H.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands) LONG-TERM DEBT (concluded) Subordinated Debt During the fourth quarter of 2002, the Company raised net proceeds of $8.7 million in a sale of $9.0 million of subordinated debentures to Benjamin Franklin Capital Trust I (the Trust ), a wholly-owned subsidiary of the Company. The Trust funded the purchase by participating in a pooled offering of 9,000 capital securities representing preferred ownership interests in the assets of the Trust with a liquidation value of $1,000 each. Using interest payments made by the Company on the debentures, the Trust will pay quarterly dividends to preferred security holders. The percentage rate of interest payable on the subordinated debentures and the cumulative dividends payable quarterly on the preferred securities is 6.94% for the first five years and thereafter will be at a rate equal to the three month Libor rate plus 3.45%. The Company has the option to defer interest payments on the subordinated debentures for up to five years and, accordingly, the Trust may defer dividend distributions for up to five years. The debentures and the preferred securities mature in November 2032 unless the Company elects and obtains regulatory approval to accelerate the maturity date to November 2007 or thereafter. The outstanding preferred securities are classified as subordinated debt and may be included in regulatory Tier 1 capital (See Note 13), subject to a limitation that such amounts not exceed 25% of Tier 1 capital. At September 30, 2004 (unaudited), December 31, 2003 and 2002, subordinated debt aggregating $8,724, $8,945 and $8,321, respectively, is included in Tier 1 capital. Deferred debt financing costs are included in other assets and are amortized over the life of the debentures. At September 30, 2004 (unaudited) and December 31, 2003, the Company has a capital loss carryover of $6,701 and $6,684, respectively, available to offset future capital gains which expires in 2006. The change in the valuation reserve for the nine months ended September 30, 2004 (unaudited) and the year ended December 31, 2003 is due to the change in the capital loss carryforward. (Unaudited) Commitments to grant loans $ 7,055 $ 11,567 $ 16,123 Commitments to purchase loans 2,953 540 Unadvanced funds on construction loans 11,483 10,264 9,722 Unadvanced funds on home equity lines-of-credit 28,839 24,812 19,250 Unadvanced funds on commercial lines-of-credit 3,412 3,717 4,412 Unadvanced funds on personal lines-of-credit 2,158 2,200 2,443 Table of Contents BENJAMIN FRANKLIN BANCORP, M.H.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands) COMMITMENTS AND CONTINGENCIES (concluded) Loan commitments (concluded) Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for lines-of-credit may expire without being drawn upon, therefore, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer s credit worthiness on a case-by-case basis. Funds disbursed under commitments to grant loans and home equity lines-of-credit are primarily secured by real estate, and commercial lines-of-credit are generally secured by business assets. Personal lines-of-credit are unsecured. Other commitments As of September 30, 2004 (unaudited) and December 31, 2003, the Bank had entered into two purchase and sale agreements to sell two parcels of land, one located in Medway, Massachusetts for $450 and the other located in Wrentham, Massachusetts for $400. Derivative financial instruments The Bank uses rate-lock agreements with individual borrowers and investor loan sale commitments for mortgage banking activities. These transactions involve both credit and market risk. From time to time, the Bank enters into rate lock agreements with individual borrowers which require the Bank to originate a loan at a specific interest rate upon completion of various underwriting requirements. In addition, the Bank generally enters into investor loan sale commitments which represent agreements to sell these loans to investors at a predetermined price. If the individual loan is not available for sale (i.e. the loan does not close), the Bank may fill the commitment with a similar loan, or pay a fee to terminate the contract. At September 30, 2004 (unaudited), December 31, 2003 and 2002, the Bank had $557, $715 and $14,748, respectively, in loan commitments to sell mortgage loans under rate lock agreements with borrowers. At September 30, 2004 (unaudited), December 31, 2003 and 2002, the Bank had $557, $715 and $14,748, respectively, in outstanding investor loan sale commitments. The gain or loss related to these derivative financial instruments is not material. Other contingencies Various legal claims also arise from time to time in the normal course of business which, in the opinion of management, will have no material effect on the Company s consolidated financial statements. Table of Contents BENJAMIN FRANKLIN BANCORP, M.H.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands) 13. MINIMUM REGULATORY CAPITAL REQUIREMENTS The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company s and the Bank s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Mutual holding companies are not covered by the prompt corrective action provisions of the capital guidelines. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined) to risk-weighted assets (as defined) and of Tier 1 capital to average assets (as defined). Management believes, as of September 30, 2004 (unaudited), December 31, 2003 and 2002, that the Company and the Bank meet all capital adequacy requirements to which they are subject. September 30, 2004 (Unaudited): Total capital to risk weighted assets: Consolidated $ 40,298 12.7 % $ 25,476 8.0 % N/A N/A Bank 39,498 12.5 25,371 8.0 $ 31,714 10.0 % Tier 1 capital to risk weighted assets: Consolidated 37,281 11.7 12,738 4.0 N/A N/A Bank 36,481 11.5 12,685 4.0 19,028 6.0 Tier 1 capital to average assets: Consolidated 37,281 7.4 20,093 4.0 N/A N/A Bank 36,481 7.3 20,059 4.0 25,074 5.0 December 31, 2003: Total capital to risk weighted assets: Consolidated $ 38,357 14.2 % $ 21,647 8.0 % N/A N/A Bank 37,717 13.9 21,647 8.0 $ 27,058 10.0 % Tier 1 capital to risk weighted assets: Consolidated 35,779 13.2 10,823 4.0 N/A N/A Bank 35,194 13.0 10,823 4.0 16,235 6.0 Tier 1 capital to average assets: Consolidated 35,779 7.8 18,461 4.0 N/A N/A Bank 35,194 7.6 18,416 4.0 23,020 5.0 December 31, 2002: Total capital to risk weighted assets: Consolidated $ 36,276 13.8 % $ 20,988 8.0 % N/A N/A Bank 35,527 13.5 20,988 8.0 $ 26,235 10.0 % Tier 1 capital to risk weighted assets: Consolidated 33,285 12.7 10,494 4.0 N/A N/A Bank 33,215 12.7 10,494 4.0 15,741 6.0 Tier 1 capital to average assets: Consolidated 33,285 7.4 17,942 4.0 N/A N/A Bank 33,215 7.4 17,933 4.0 22,416 5.0 14. EMPLOYEE BENEFIT PLANS Pension plan The Bank had provided pension benefits for eligible employees electing participation through the Savings Bank s Employee Retirement Association s (SBERA) Pension Plan (the Plan ). Effective December 31, 2000, the Bank elected to curtail the pension plan subject to the Bank s capital to assets ratio exceeding 7%. As the Bank exceeded the required capital ratio during the year ended December 31, 2002, a curtailment loss of $741 was recognized. Effective August 14, 2003, assets of the Plan were fully settled and allocated to the participants. 401(k) plan The Bank adopted a 401(k) savings plan, which provides for voluntary contributions by participating employees up to seventy-five percent of their compensation, subject to certain limitations. Under the terms of the plan, the Bank at its discretion will match two hundred percent of an employee s contribution to the 401(k) plan subject to a maximum of 6% of the employee s compensation. Total expense under the 401(k) plan for the nine months ended September 30, 2004 and 2003 (unaudited) and years ended December 31, 2003, 2002 and 2001, amounted to $279, $321, $437, $413 and $418, respectively. Table of Contents BENJAMIN FRANKLIN BANCORP, M.H.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands) 16. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Statement of Financial Accounting Standards No. SFAS 107, Disclosures about Fair Value of Financial Instruments, excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amounts of these instruments approximate fair values. Securities: Fair values for securities, excluding restricted equity securities, are based on quoted market prices. The carrying value of restricted equity securities approximates fair value based on the redemption provisions of the issuers. Loans: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for residential mortgage loans and certain consumer loans are generally based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. Fair values for commercial real estate and investment property mortgage loans, commercial and industrial loans and certain consumer loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for non-performing loans are estimated using the lower of underlying collateral values or cost. (Unaudited) Financial assets: Cash and cash equivalents $ 15,126 $ 15,126 $ 35,485 $ 35,485 $ 52,036 $ 52,036 Securities available for sale 94,423 94,423 102,646 102,646 108,520 108,520 Securities held to maturity 266 271 386 398 986 1,023 Restricted equity securities 6,862 6,862 7,222 7,222 5,222 5,222 Loans, net 375,516 374,133 288,862 288,535 261,933 279,443 Accrued interest receivable 1,495 1,495 1,388 1,388 1,299 1,299 Financial liabilities: Deposits 399,562 399,816 380,257 381,479 373,300 374,518 Short-term borrowings 29,000 29,000 Long-term debt 55,000 58,036 45,000 46,461 45,000 47,852 Accrued interest payable 263 263 225 225 254 254 On-balance sheet derivative financial instruments: Rate-lock agreements-(liability) asset 2 4 (87 ) Investor loan sale commitments-asset (liability) (2 ) (4 ) 87 Table of Contents BENJAMIN FRANKLIN BANCORP, M.H.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in Thousands) 17. SUBSEQUENT EVENTS Stock Conversion On October 28, 2004, the Board of Trustees of the Company adopted a Plan of Conversion (the Plan ) whereby the Company will convert to a Massachusetts-chartered stock corporation known as Benjamin Franklin Bancorp, Inc. (the Stock Holding Company ) and offer Stock Holding Company stock on a priority basis to qualifying depositors, tax-qualified employee plans, and employees, officers, directors and trustees of the Bank and the Company, with any remaining shares to be offered to the public in a direct community offering and possibly in a syndicated community offering (the Conversion ). As part of the Conversion, the Company will establish a liquidation account in an amount equal to the net worth of the Company as of the date of the latest consolidated balance sheet appearing in the final prospectus distributed in connection with the Conversion. The liquidation account will be maintained for the benefit of eligible account holders and supplemental eligible account holders who maintain their accounts at the Company after the Conversion. The liquidation account will be reduced annually to the extent that such account holders have reduced their qualifying deposits as of each anniversary date. Subsequent increases will not restore an account holder s interest in the liquidation account. In the event of a complete liquidation, each eligible account holder will be entitled to receive balances for accounts then held. Subsequent to the Conversion, the Company may not declare or pay dividends on, and may not repurchase, any of its shares of common stock if the effect thereof would cause stockholders equity to be reduced below applicable regulatory capital maintenance requirements or if such declaration, payment or repurchase would otherwise violate regulatory requirements. Conversion costs will be deferred and reduce the proceeds from the shares sold in the Conversion. If the Conversion is not completed, all costs will be expensed. As of September 30, 2004, no Conversion costs have been incurred. As part of the Conversion, the Bank intends to enter into employment agreements or change of control agreements with certain executive officers, which in the case of the President would replace his existing employment agreement. In addition, as part of the Conversion, the Bank intends to implement an employee stock ownership plan and other benefit and salary continuation plans for directors, officers and employees. Table of Contents BENJAMIN FRANKLIN BANCORP, M.H.C. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded) (Dollars in Thousands) SUBSEQUENT EVENTS (concluded) Charitable Foundation As part of the Conversion, the Company intends to form a charitable foundation (the Foundation ) by donating to the Foundation a number of shares of its authorized but unissued common stock in an amount up to 8% of the lesser of (i) the number of shares actually sold in the Conversion or (ii) the number of shares that would have been sold at the midpoint of the estimated valuation range of the Conversion. Merger Agreement On September 1, 2004, the Company and the Bank signed an Agreement and Plan of Merger with Chart Bank, A Cooperative Bank ( Chart ), a Massachusetts-chartered stock bank located in Waltham, Massachusetts, whereby Chart, subject to the Company s Conversion, will be acquired by the Company and merged into the Bank. Upon completion of the Company s Conversion, each share of Chart s common stock issued and outstanding immediately prior to the merger shall be converted into, and shall be cancelled in exchange for, the right to receive 3.075 shares of the Company s common stock or a cash amount equal to $30.75 per share of Chart s common stock. The per share stock consideration assumes a $10 per share price for the Company s common stock to be sold in the Conversion. In addition, each option to purchase Chart s stock outstanding at the effective date of the merger, whether or not vested, shall be terminated and each grantee thereof shall be entitled to receive an amount of cash equal to the excess of the $30.75 per share cash consideration over the option exercise price. The merger is subject to regulatory approval and satisfaction of certain closing conditions. The Conversion and merger of Chart are expected to close on the same day and at substantially the same time, however, the Conversion is not conditioned upon the merger of Chart. TABLE OF CONTENTS Summary 1
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+The following summary highlights information contained elsewhere in this prospectus but may not contain all information important to you. This summary is qualified in its entirety by reference to, and should be read together with, the more detailed information and financial statements included elsewhere in this prospectus. You should carefully consider, among other things, the matters discussed under Risk Factors included elsewhere in this prospectus. In this prospectus, unless expressly stated otherwise or unless the context otherwise requires: (1) Century Aluminum, we, us, our and ours refer to Century Aluminum Company and its consolidated subsidiaries; (2) pro forma shall mean, at any date or for any period, giving pro forma effect to the transactions referred to in Unaudited Pro Forma Consolidated Financial Data ; (3) Gramercy assets refers to the alumina refinery in Gramercy, Louisiana and related bauxite mining assets acquired from Kaiser Aluminum Chemical Corporation; (4) Gramercy acquisition refers to all of the transactions related to our joint acquisition of the Gramercy assets with Noranda Finance Inc.; and (5) 2004 refinancing refers to the completion of the tender offer and consent solicitation for our 11.75% senior secured first mortgage notes due 2008 and the related sale of our 1.75% convertible senior notes due August 1, 2024 and our 7.5% senior notes due August 15, 2014. Business Overview We are a producer of primary aluminum. Our primary aluminum facilities produce value-added and standard-grade products. We are the second largest primary aluminum producer in the United States, behind Alcoa Inc., having produced over 1.1 billion pounds in 2003 with net sales of $782.5 million. In April 2004, we acquired Nordural, an Icelandic facility which is our first facility located outside of the United States. We now have an annual primary aluminum production capacity of approximately 1.4 billion pounds of primary aluminum with pro forma net sales of $883.4 million for the year ended December 31, 2003. Our current capacity of approximately 1.4 billion pounds is 849 million pounds higher than our capacity at the end of 1999. We currently own: the Hawesville facility, located in Hawesville, Kentucky, which began operations in 1970 and has an annual production capacity of 538 million pounds of primary aluminum; the Ravenswood facility, located in Ravenswood, West Virginia, which began operations in 1957 and has an annual production capacity of 375 million pounds of primary aluminum; a 49.7% interest in the Mt. Holly facility, located in Mt. Holly, South Carolina, which began operations in 1980 and contributes 243 million pounds to our overall annual production capacity; the Nordural facility, located in Grundartangi, Iceland, which began operations in 1998 and has an annual production capacity of 198 million pounds of primary aluminum, which will increase by up to 269 million pounds to approximately 467 million pounds upon completion of an ongoing expansion in 2006; a 50% joint venture interest in the Gramercy alumina refinery, located in Gramercy, Louisiana, which has an annual production capacity of 1.2 million metric tons of alumina; and a 50% joint venture interest in bauxite mining operations in Jamaica, which have an annual production capacity of approximately 4.5 million dry metric tons. Our strategic objectives are to grow our aluminum business by acquiring primary aluminum reduction facilities that offer favorable investment returns and lower our unit production costs, to diversify our geographic presence, and to pursue opportunities in bauxite mining and alumina refining. Our growth activities have been concentrated in acquiring primary aluminum assets. Toward this objective, we: sold the Ravenswood rolling mill in 1999; acquired an additional 23% interest in the Mt. Holly facility in April 2000; acquired an 80% interest in the Hawesville facility in April 2001; acquired the remaining 20% interest in the Hawesville facility in April 2003; and acquired the Nordural facility in April 2004. Amendment No. 1 To FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents In addition, we recently completed the purchase through a joint venture of our first alumina refining facility, together with related bauxite mining assets. See The Gramercy Acquisition. Recent Trends in the Primary Aluminum Industry The primary aluminum industry is currently experiencing a period of strong prices based on favorable production and consumption trends. Spot aluminum prices, as quoted on the LME, averaged $0.78 per pound during the year ended December 31, 2004 and remain above the five- and ten-year averages. We believe that the current strong pricing environment is due to factors that include: strengthening global demand for aluminum driven by the global economic recovery and strong demand growth in China; a tight market for alumina, the major raw material input for aluminum, which has resulted in a rapid escalation of alumina prices globally; and the weakening of the U.S. dollar. Global demand for aluminum increased approximately 9.0% to 66.3 billion pounds in 2004. Global aluminum supply has not kept pace with this increase in consumption as global aluminum production increased approximately 6.5% in 2004 to 65.7 billion pounds. During the year ended December 31, 2004, LME inventories declined 54% from 1.5 million metric tons to 695,000 metric tons. Competitive Strengths Our key competitive strengths are: Focus on Upstream Production. We currently operate mainly in the production of primary aluminum and also recently acquired assets in bauxite mining and alumina refining. By operating solely in upstream production, we are better able to focus our resources, minimize overhead costs and avoid exposure to fluctuations in demand in any single end-use market. Long-Term Customer Contracts. We have competitive long-term contracts with our major customers to sell a significant portion of our production. These contracts reduce our marketing costs and provide a stable source of demand. We have long-term contracts to sell approximately 70% of our production at prices based on the LME or U.S. Midwest market price for primary aluminum. Proximity to Major Customers. Our Hawesville and Ravenswood facilities are located adjacent to their principal customers. Under our long-term contracts with these major customers, we are able to deliver molten aluminum, thereby eliminating our casting and shipping costs and our customers remelting costs. Secure Power Supply. Electricity is our single largest operating cost. Substantially all of the electricity used at our U.S. facilities is supplied at affordable rates under long-term contracts, the fixed price portions of which expire at various dates from the end of 2005 through 2010. The Nordural facility purchases power sourced from hydroelectric and geothermal facilities under a long-term contract that expires in 2019 at prices based on the LME price for primary aluminum. Power for the Nordural expansion capacity will be sourced from geothermal facilities using LME-based pricing. Both hydroelectric and geothermal energy are competitively priced and renewable sources of power. Long-Term Alumina Supply Contracts. Alumina is the principal raw material used to produce primary aluminum. All of our alumina requirements at our Ravenswood and Mt. Holly facilities are purchased under long-term contracts at prices linked to the LME price for primary aluminum. These contracts help us avoid the current volatility of the spot alumina market and help us maintain our margins at those facilities during periods when primary aluminum prices fall. Nordural s long-term tolling agreement with a subsidiary of BHP Billiton for its existing capacity provides it with similar economic benefits. Alumina used at our Hawesville facility is purchased under a contract with Gramercy Alumina LLC, a joint venture company we own 50/50 with Noranda Finance Inc., at a purchase price based on the cost of production. See Risk Factors Risks Relating to Our Business Changes or disruptions to our current alumina supply arrangements could increase our raw material costs included elsewhere in this prospectus. Dividends Common, $0.20 per share (4,236 ) (4,236 ) Preferred, $3 per share (1,500 ) (1,500 ) Issuance of preferred stock $ 25,000 25,000 Issuance of common stock compensation Plans Century Aluminum Company (Exact name of registrant as specified in its charter) Delaware 3334 13-3070826 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification Number) 2511 Garden Road, Building A, Suite 200 Monterey, California 93940 (831) 642-9300 (Address, including zip code, and telephone number, including area code, of registrant s principal executive offices) (See table of additional registrant guarantors on the inside facing page) Table of Contents ABOUT THIS PROSPECTUS Before making your investment decision, you should read this entire prospectus carefully. This prospectus is part of a registration statement that we have filed with the Securities and Exchange Commission, or the SEC, using a shelf registration process. Under this shelf registration process, the selling securityholders may from time to time offer and sell their notes and the shares of common stock issuable upon conversion of the notes described in this prospectus in the general manner described in Plan of Distribution. This prospectus also relates to the issuance of shares of our common stock upon conversion of the notes by holders other than the selling securityholders, unless such issuance qualifies for the exemption under Section 3(a)(9) of the Securities Act. This prospectus provides you with a general description of the securities that the selling securityholders may offer. Each time a selling securityholder sells securities, that selling securityholder is required to provide you with a prospectus and/or a prospectus supplement that contains information about the selling securityholder and the securities being offered. The prospectus supplement may add, update or change information in this prospectus. If there is any inconsistency between the information in this prospectus and any prospectus supplement, you should rely on the information in the prospectus supplement. You should read both this prospectus and any prospectus supplement together with the additional information described under the heading Where You Can Find More Information. You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell the notes and the shares of common stock issuable upon conversion of the notes described in this prospectus. The information in this document may only be accurate on the date of this document. MARKET AND INDUSTRY DATA We obtained the market data included in this prospectus from our own research and from surveys or studies conducted by third parties and cited in industry or general publications, including studies prepared by CRU International Inc., an internationally recognized research firm which collects and analyzes data about the aluminum industry. Industry and general publications and surveys generally state that they have obtained information from sources believed to be reliable, but do not guarantee the accuracy and completeness of such information. While we believe that each of these studies and publications is reliable, we have not independently verified such data and do not make any representation as to the accuracy of such information. Similarly, we believe our internal research is reliable but it has not been verified by any independent sources. WHERE YOU CAN FIND MORE INFORMATION We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and file annual, quarterly and special reports, proxy statements and other information with the SEC. You may read and copy these reports, proxy statements and other information at the SEC s public reference room at Room 1024, 450 Fifth Street, N.W., Washington, D.C. You can request copies of these documents by writing to the SEC and paying a fee for the copying cost. Please call the SEC at 1-800-SEC-0330 for more information about the operation of the public reference room. The SEC maintains a web site at http://www.sec.gov that contains reports, statements and other information regarding registrants that file electronically. You may also obtain additional information about us from our web site, which is located at www.centuryaluminum.com. Our website provides access to filings made by us through the SEC s EDGAR filing system, including our annual, quarterly and current reports filed on Forms 10-K, 10-Q and 8-K, respectively, and ownership reports filed on Forms 3, 4 and 5 after December 16, 2002 by our directors, executive officers and beneficial owners of more than 10% of our outstanding common stock. Information contained in our website is not incorporated by reference in, and should not be considered a part of, this prospectus. You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. This prospectus is not an offer to sell the notes and the shares of common stock issuable upon conversion of the notes in any state where the offer or sale is not permitted. You should not assume that the information in this prospectus is accurate as of any date other than the date on the front of the document. Table of Contents High-Purity and Value-Added Products. We produce high-purity and value-added products, including rolling ingot, foundry alloys and extrusion billet, which we sell at a premium to standard-grade products. Relationship with Glencore. We benefit from our business relationship with our largest shareholder, Glencore International AG, a leading privately-held, diversified natural resources group. Glencore has been an important business partner for us and has assisted us in the execution of our growth strategy and metal hedging program. In addition, Glencore is a major customer, which helps us reduce our marketing and distribution costs, and a major alumina supplier, which provides us with a stable and reliable source of raw materials. Experienced Management Team. Our senior management has an average of over 19 years of experience in the aluminum industry, a demonstrated ability to recognize and respond quickly to strategic opportunities and an excellent track record of integrating acquisitions. Business Strategy Our objective is to continue to grow by focusing on the production of primary aluminum, bauxite and alumina to capitalize on improvements in industry fundamentals. Our strategy for achieving this objective is to: Become a Larger Upstream Producer in the Aluminum Industry. We believe that by becoming a larger upstream producer we can strengthen our position in the competitive global aluminum industry. We regularly evaluate opportunities to acquire primary aluminum reduction facilities that would lower our average unit production costs. Since 2000, we have more than doubled our capacity and lowered our average unit costs without significant increases in corporate overhead. The Nordural acquisition helped us to implement our business strategy by increasing our primary aluminum capacity and lowering our average unit production costs. In addition to primary aluminum, we have recently expanded into bauxite mining and alumina production, which we believe are also attractive upstream segments of the aluminum industry. Diversify our Primary Aluminum Operations. We actively pursue opportunities to acquire primary aluminum production facilities that provide diversification through either their geographic location, product mix or power sources. The Nordural facility, our first facility located outside of the United States, uses hydroelectric power, a competitively-priced and renewable source of energy. Through the Hawesville acquisition, we added high-purity aluminum to our product mix, which has a unique market niche that few domestic aluminum producers are able to supply. Enhance Profitability of Production Assets. We seek to further reduce costs at our production facilities by investing in high-return capital improvements, optimizing labor productivity and implementing projects that improve the operating and energy efficiencies of the primary aluminum production process. In addition, we seek to maximize the profitability of our facilities by optimizing our product mix between standard-grade and value-added products. Other Information Our principal executive offices are located at 2511 Garden Road, Building A, Suite 200, Monterey, California 93940. Our telephone number at that address is (831) 642-9300. You may also obtain additional information about us from our website, which is located at www.centuryaluminum.com. Information on our website is not incorporated by reference in, and should not be considered a part of, this prospectus. CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings 425,569 Repayment of debt third party (422,846 ) Repayment of debt related party (14,000 ) Financing fees (12,805 ) (297 ) Dividends (3,311 ) (11 ) Issuance of common stock 214,982 Financing activities: Financing Fees (297 ) (297 ) Dividends (11 ) (11 ) Intercompany transactions (65,013 ) (1,124 ) 66,137 Issuance of common stock 3 Gerald J. Kitchen, Esq. Executive Vice President, General Counsel, Chief Administrative Officer and Secretary Century Aluminum Company 2511 Garden Road, Building A, Suite 200 Monterey, California 93940 (831) 642-9300 (Name, address, including zip code, and telephone number, including area code, of agent for service) Table of Contents THE OFFERING Issuer Century Aluminum Company. Securities offered $175,000,000 aggregate principal amount of our 1.75% convertible senior notes due August 1, 2024 and shares of our common stock issuable upon conversion of the notes. This prospectus also relates to the issuance of shares of our common stock upon conversion of the notes by holders other than the selling securityholders, unless such issuance qualifies for the exemption under Section 3(a)(9) of the Securities Act. Selling Securityholders The securities to be offered and sold under this prospectus will be offered and sold by the selling securityholders identified in this prospectus under Selling Securityholders. Original issue date August 9, 2004. Interest The notes bear interest at 1.75% per annum on the principal amount, payable semi-annually in arrears in cash on February 1 and August 1 of each year, beginning February 1, 2005. Maturity date August 1, 2024. Conversion The notes are convertible at any time at an initial conversion rate of 32.7430 shares of common stock per $1,000 principal amount of notes, subject to adjustment for certain events. The initial conversion rate is equivalent to a conversion price of approximately $30.5409 per share of common stock. See Description of the Notes Conversion Rights. Upon conversion, subject, if we so elect, to the right of the exchange institution to exchange the notes in lieu of conversion by us, we will deliver cash up to the aggregate principal amount of notes to be converted and, at our election, cash, common stock or a combination thereof in respect of the remainder, if any, of our conversion obligation in excess of the principal amount of notes to be converted. See Description of the Notes Conversion Rights Payment Upon Conversion. If you convert your notes in connection with a fundamental change that occurs prior to August 6, 2009, as described below, you will also receive a make whole premium, if any, and accrued and unpaid interest, if any, on the notes that you convert. See Description of the Notes Determination of the Make Whole Premium. Exchange institution We will designate a financial institution as the exchange agent to which notes surrendered for conversion will be offered for exchange, if we so elect, in lieu of conversion by us. In order to accept for exchange those Federal statutory rate 35 % 35 % 35 % Effect of: Permanent differences (9 ) State taxes, net of Federal benefit 7 3 3 Minority interest (5 ) (5 ) Other Basic EPS: Income applicable to common shareholders 6,270 27,542 $ 0.23 11,599 21,070 $ 0.55 Effect of Dilutive Securities: Plus: Incremental shares from assumed conversion of stock options 117 Copy to: Table of Contents notes, such exchange agent must agree to deliver to the holder of those notes cash up to the aggregate principal amount of notes to be converted and shares of our common stock in respect of the remainder, if any, of our conversion obligation in excess of the principal amount of notes to be converted. If such exchange institution declines to accept for exchange any notes, in whole or in part, or if such exchange institution does not timely deliver the cash and common stock, if any, owing to the holder, the notes will be converted by us. It is currently anticipated that Credit Suisse First Boston LLC will be the initial exchange institution. Optional redemption We may redeem some or all of the notes on or after August 6, 2009 at a price equal to 100% of the principal amount of the notes being redeemed, plus accrued and unpaid interest, if any. See Description of the Notes Optional Redemption of Notes. Purchase at holder s option on specified dates You may require us to purchase for cash all or part of your notes on each of August 1, 2011, August 1, 2014 and August 1, 2019 at a price equal to 100% of the principal amount of the notes being purchased, plus accrued and unpaid interest, if any. See Description of the Notes Purchase of Notes at the Option of the Holder. Make whole premium upon a fundamental change If a fundamental change (as described under the heading Description of the Notes Repurchase at the Option of the Holder Upon a Fundamental Change ) occurs prior to August 6, 2009, we will pay a make whole premium on notes converted in connection with, or tendered for repurchase upon, a fundamental change. The make whole premium will be payable in our stock (or the consideration into which our stock has been converted or exchanged in connection with such fundamental change) on the repurchase date for the notes after the fundamental change, both for notes tendered for repurchase and for notes converted in connection with the fundamental change. The amount of the make whole premium, if any, will be based on our stock price and the effective date of the fundamental change. A description of how the make whole premium will be determined and a table showing the make whole premium that would apply at various stock prices and fundamental change effective dates is set forth under Description of the Notes Determination of the Make Whole Premium. No make whole premium will be paid if the stock price is less than $24.83 per share. Repurchase at holder s option upon a fundamental change You may require us to purchase your notes upon the occurrence of a fundamental change in cash at a price Dividends Common, $0.15 per share (3,091 ) (3,091 ) Preferred, $3 per share (1,500 ) (1,500 ) Issuance of common stock compensation Plans 1 544 545 Issuance of common stock pension plans Financing activities: Dividends (4,591 ) (4,591 ) Intercompany transactions (23,380 ) (13,185 ) 36,565 Issuance of common stock 5 Jeffrey N. Ostrager, Esq. Curtis, Mallet-Prevost, Colt Mosle LLP 101 Park Avenue New York, New York 10178 (212) 696-6000 Table of Contents equal to 100% of the principal amount of the notes being repurchased, plus accrued and unpaid interest, if any, plus the make whole premium, if any, payable in shares of our common stock (or the consideration into which our stock has been converted or exchanged in connection with such fundamental change). See Description of the Notes Repurchase at the Option of a Holder Upon a Fundamental Change. Guarantors The notes are guaranteed by each of our substantial existing and future domestic restricted subsidiaries if and for so long as such subsidiaries guarantee our senior notes. See Description of the Notes Guarantees. Ranking The notes and the note guarantees rank equally in right of payment with all of the existing and future senior indebtedness of Century Aluminum Company and the guarantors (including our senior notes), as the case may be, and rank senior in right of payment to all of their existing and future subordinated indebtedness, but are effectively junior to secured obligations, including borrowings under our credit facility and our outstanding first mortgage notes, to the extent of the value of the assets securing such obligations. As of September 30, 2004, Century Aluminum Company and the guarantors had $17.7 million of senior secured indebtedness outstanding and a borrowing base of $76.8 million under our secured revolving credit facility at September 30, 2004. None of our foreign subsidiaries are required to guarantee the notes. All of the creditors of the non-guarantor subsidiaries have priority over Century Aluminum Company and the noteholders with respect to claims to the assets of those subsidiaries. As of September 30, 2004, our non-guarantor subsidiaries had $188.7 million of liabilities, including trade payables but excluding intercompany obligations. Use of proceeds We will not receive any of the proceeds from the sale by any selling securityholder of the notes or the shares of common stock issuable upon conversion of the notes. See Selling Securityholders for a list of the selling securityholders that may sell from time to time under this prospectus the notes or the shares of common stock issuable upon conversion of the notes. Registration rights We have filed with the SEC a registration statement, of which this prospectus is a part, for the resale of the notes and the shares of common stock issuable upon conversion of the notes and to register the issuance of shares of our common stock upon conversion of the notes by holders other than selling securityholders. We have agreed to use our best efforts to keep such registration statement effective until the earliest of: Operating income (loss) 10,668 (4,528 ) (29 ) 6,111 Interest expense third party (10,334 ) (30 ) 23 (10,341 ) Interest expense affiliates (1,000 ) (1,000 ) Interest income 83 83 Net loss on forward contracts (3,481 ) (3,481 ) Other income (expense), net 10 (26 ) Approximate date of commencement of proposed sale to the public: From time to time after the effective date of this Registration Statement as determined based on market conditions and other factors. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant files a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. Table of Contents (a) the second anniversary of the effective date of the shelf registration statement, (b) such time as all the registrable securities have been sold pursuant to the shelf registration statement, transferred pursuant to Rule 144 under the Securities Act or otherwise transferred in a manner that results in such securities not being subject to transfer restrictions under the Securities Act and the absence of a need for a restrictive legend regarding registration under the Securities Act, and (c) such time when all of the registrable securities held by our non-affiliates (from the time of issuance) are eligible for sale pursuant to Rule 144(k) under the Securities Act or any successor rule or regulation thereto. We have agreed to pay additional interest to the holders of the notes if we do not comply with our registration obligations. No additional interest will accrue on any shares of common stock into which notes have been converted. See Description of the Notes Registration Rights. Dividend policy Since the beginning of the fourth quarter of 2002, we have not declared dividends on our common stock. From April 1996 through the third quarter of 2002, we declared and paid a $0.05 per share quarterly dividend on our common stock. Trading The notes issued in the private placement are eligible for trading in the PORTAL market of the National Association of Securities Dealers, Inc. The notes sold under this prospectus will no longer be eligible for trading on PORTAL. Our common stock is traded on The NASDAQ Stock Market under the symbol CENX. We do not intend to apply for listing of the notes on any securities exchange or for the inclusion of the notes in any automated quotation system. Trustee, paying agent, conversion agent and registrar Wilmington Trust Company
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+PROSPECTUS SUMMARY This summary might not contain all of the information that is important to you. Before investing in our Class A common stock, you should read this entire prospectus carefully, including the "Risk Factors" section and the consolidated financial statements and the accompanying notes included in this prospectus. Our Company We are a diversified North American paper and forest products company. We conduct our business in the following four operating segments: Paper. We are a major producer of uncoated free sheet, including commodity and value-added papers. Packaging & Newsprint. We manufacture containerboard, corrugated containers and newsprint. Wood Products. We are a leading producer of engineered wood products, plywood and ponderosa pine lumber. Building Materials Distribution. We are a leading national distributor of a wide range of building materials manufactured by us and by third parties. Historically, our paper and forest products businesses were owned by OfficeMax Incorporated, or OfficeMax, formerly known as Boise Cascade Corporation. On October 29, 2004, we acquired these businesses and our sister company acquired OfficeMax's timberlands operations, or the "timberlands operations." On February 4, 2005, the timberlands operations were sold to an unaffiliated third party for cash, and the proceeds were used to repay borrowings incurred in connection with these acquisitions. We refer to the October 2004 acquisition from OfficeMax of its paper and forest products businesses (other than the timberlands operations) and related financing transactions as the "Acquisition," and to the February 2005 sale of the timberlands operations as the "Timberlands Sale." See "Certain Relationships and Related Transactions The Acquisition" and " Timberlands Sale." We generated sales, pro forma net income from continuing operations before nonrecurring charges directly attributable to the transactions and pro forma EBITDA of $5.7 billion, $157.4 million and $490.1 million, respectively, during 2004, after giving pro forma effect to, among other things, the Acquisition, the Timberlands Sale and our conversion to a corporation. During the three months ended March 31, 2005, we generated sales, pro forma net income from continuing operations before nonrecurring charges directly attributable to the transactions and EBITDA of $1.4 billion, $32.3 million and $111.5 million, respectively. For an explanation of our pro forma adjustments, see "Unaudited Pro Forma Financial Data," and for a reconciliation of pro forma EBITDA to pro forma net income (loss), see " Summary Historical and Unaudited Pro Forma Financial Data." Paper. According to the 2003-2004 Pulp & Paper Global Fact & Price Book, we are the fourth-largest manufacturer of uncoated free sheet in North America, with annual production capacity of approximately 1.6 million tons and market share of approximately 10% in 2003. Our products include cut-size office paper, commercial printing paper, business forms and envelopes, and a wide range of value-added papers. Our value-added grades include bright and colored office papers and specialty papers that are custom-developed for various uses, including label and release, security and food wrap applications. We manufacture our paper products at four integrated pulp and paper mills, which are complemented by sheeting and converting operations and an efficient logistics network. Our Paper segment generated sales, pro forma income before interest and taxes and pro forma EBITDA of $1.37 billion, $81.4 million and $131.4 million, respectively, (dollars in thousands) ASSETS Current Cash $ 142,074 $ 838,000 (a) $ 62,074 (918,000) (b) Receivables Trade, less allowances 364,067 364,067 Related parties 48,011 48,011 Other 17,309 17,309 Inventories 647,705 647,705 Deferred income taxes 36,801 (h) 55,102 16,745 (c) 1,556 LVL/I-joist plants 3 Louisiana, Oregon and Canada Plywood and veneer plants 11 Louisiana (2), Oregon (7), Washington and Brazil Sawmills(1) 6 Alabama, Oregon (3) and Washington (2) Particleboard plant 1 Oregon Wood beam plant during 2004. This segment also generated sales, income before interest and taxes and EBITDA of $357.8 million, $29.2 million and $42.2 million, respectively, during the three months ended March 31, 2005. As part of the Acquisition, OfficeMax agreed to purchase from us all of its North American requirements for cut-size office paper through December 2012. We also have an agreement with OfficeMax that reduces our exposure to cut-size office paper price volatility through October 2010. See "Certain Relationships and Related Transactions The Acquisition Paper Supply Agreement" and " Additional Consideration Agreement" for additional information on these agreements. Packaging & Newsprint. We manufacture containerboard and newsprint at our DeRidder, Louisiana mill, which had an annual production capacity of 555,000 tons of linerboard and 448,000 tons of newsprint as of December 31, 2004. We also operate five corrugated container plants in the Pacific Northwest that collectively consumed, either directly or through trades with other producers, approximately 54% of our linerboard and corrugating medium production in 2004. Our Packaging & Newsprint segment generated sales, pro forma income before interest and taxes and pro forma EBITDA of $694.5 million, $15.3 million and $51.4 million, respectively, during 2004. This segment also generated sales, income before interest and taxes and EBITDA of $193.8 million, $4.5 million and $13.7 million, respectively, during the three months ended March 31, 2005. Wood Products. According to Resource Information Systems, Inc., or RISI, we are a leading producer of engineered wood products, or EWP, comprised of laminated veneer lumber, or LVL, a high-strength engineered lumber often used in beams; I-joists, a structural support typically used in floors and roofs; and laminated beams. We also produce plywood, dimension lumber and high-quality ponderosa pine lumber. Our 20 manufacturing facilities are located primarily in integrated clusters in areas with ample timber resources, increasing our access to fiber and limiting inbound freight costs. Approximately 37% of the wood products we manufactured in 2004, including more than half of our EWP, were sold at market prices to our Building Materials Distribution segment. Our Wood Products segment generated sales, pro forma income before interest and taxes and pro forma EBITDA of $1.36 billion, $178.4 million and $251.2 million, respectively, during 2004. This segment also generated sales, income before interest and taxes and EBITDA of $322.4 million, $33.1 million and $38.4 million, respectively, during the three months ended March 31, 2005. Building Materials Distribution. According to Home Channel News, we are a leading national inventory-carrying wholesale distributor of building materials. Our nationwide network of 28 strategically located distribution facilities markets a broad line of building materials, most of which we purchase from third parties, including EWP, oriented strand board, plywood, lumber, siding and general line items such as framing accessories, composite decking, roofing and insulation. Approximately 18% of the products purchased by this segment during 2004 were purchased from our Wood Products segment. Our Building Materials Distribution segment generated sales, pro forma income before interest and taxes and pro forma EBITDA of $2.84 billion, $93.5 million and $102.3 million, respectively, during 2004. This segment also generated sales, income before interest and taxes and EBITDA of $696.2 million, $24.4 million and $26.4 million, respectively, during the three months ended March 31, 2005. For a discussion of our income (loss) before interest and taxes and our EBITDA by segment, see Note 16 to our audited consolidated financial statements and Note 12 to our unaudited consolidated financial statements, in each case included in this prospectus. For a reconciliation of our 2004 pro forma EBITDA and pro forma income (loss) before interest and taxes for each segment, see Note (9) to "Unaudited Pro Forma Financial Data." Pulp and paper mills 4 Alabama, Minnesota, Oregon and Washington Distribution centers 4 California, Illinois, New Jersey and Oregon Converting facilities SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Our Competitive Strengths Leadership in Key Markets According to the 2003-2004 Pulp & Paper Global Fact & Price Book, we are the fourth- largest manufacturer of uncoated free sheet in North America. We are also the second-largest manufacturer of EWP in North America, according to RISI, and a leading national inventory-carrying wholesale distributor of building materials, according to Home Channel News. Strong Paper Business Supported by Long-Term Customer Contract The most significant portion of our paper business is the manufacturing of cut-size office paper. We have a long-term paper supply agreement with OfficeMax, our largest customer. Our relationship with OfficeMax allows us to maximize utilization of our largest machines, optimize production runs and achieve supply chain efficiencies throughout our system. Efficient Manufacturer of Higher-Margin Products in Attractive Markets Our assets are well-suited to the efficient production of value-added papers and EWP. We produce higher-margin value-added papers on our smaller machines within integrated mills, which we believe provides us with a cost advantage over many of our competitors. Our large-scale EWP production facilities are integrated with our plywood operations to optimize our veneer utilization, which we believe positions us as a cost-effective producer in the growing higher-margin EWP business. Rapidly Growing Nationwide Distribution Business Our Building Materials Distribution segment has achieved double-digit growth rates over the past decade and generated returns significantly in excess of our cost of invested capital. This growth has provided our Wood Products segment with access to one of the industry's broadest and fastest-growing distribution channels. Favorable Acquisition Structure We expect the terms and structure of the Acquisition to improve our cash flows compared to historical periods. Key benefits include a stepped-up asset tax basis, pension plans with improved funding transferred by OfficeMax and OfficeMax's agreement to limit our exposure to pre-Acquisition liabilities. Experienced Management Team with Substantial Equity Incentives Our senior management team has a track record of financial and operational excellence in the paper and forest products industry. Tom Stephens, our chief executive officer, previously served as chief executive officer of MacMillan Bloedel Inc., Manville Corporation and Riverwood Corp. Approximately 170 of our key managers invested a total of $18.6 million in our company and received additional equity incentives in connection with the Acquisition. Upon the completion of this offering, management will own equity in FPH representing approximately 6.1% of our outstanding common stock. Principal Stockholder with Proven Paper, Packaging and Forest Products Expertise Since 1993, Madison Dearborn, our principal stockholder, has consummated approximately $15.5 billion of management buyout transactions in the paper, packaging and forest products industries, several of which are now public companies, including Packaging Corporation of America and Buckeye Technologies, Inc. AMENDMENT NO. 7 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Our Strategy Our new management team is committed to transforming our company by creating a culture of empowerment and accountability in a flat, decentralized organization. We seek to enhance our cash flow by optimizing the use of our assets, improving our operational efficiencies, reducing our costs and taking advantage of selective growth opportunities. Immediately after the Acquisition, our management completed an in-depth business review and developed the strategies outlined below. Implement Operational Enhancements and Cost Reductions We have identified significant potential operating cash flow improvements, including energy efficiency projects, operational optimization of our paper and wood products facilities, productivity and technology enhancements and reduction of overhead. Furthermore, our management is focused on managing capital expenditures and working capital and aggressively monetizing non-core and non-operating assets. Leverage Cut-Size Office Paper Manufacturing and Marketing Expertise Our long-term supply agreement with OfficeMax allows us to focus our largest paper machines on producing commodity products in long, high-volume production runs. This relationship allows us to continue to improve the capacity utilization of our largest paper machines, leverage supply-chain efficiencies, and develop and test product and packaging innovations. We plan on leveraging the cost efficiencies and expertise derived from this relationship to better service our customers and develop new customers and products. Increase Value-Added Paper Production and Innovation To grow our sales of higher-margin value-added papers, we seek to work closely with our customers to develop innovative value-added papers and service programs that respond to their changing needs and technical requirements. On our smaller machines, we will continue to displace the production of commodity grades with higher-margin value-added grades, which we believe we can produce cost competitively. Grow Our Leadership Position in EWP We are focused on leveraging our competitive cost structure, comprehensive customer service offering, design support capabilities and efficient distribution network to continue gaining share in the growing, higher-margin EWP market. For example, we are expanding our LVL capacity by 7.5 million cubic feet, or approximately 40%, in 2005. We plan to take advantage of further opportunities to cost-effectively increase our capacity in the future. Expand Building Materials Distribution Business We intend to continue expanding our building materials distribution network into new geographic markets and aggressively grow our presence in existing markets. Since 1999, we have expanded our distribution network from 15 to 28 facilities, with much of this expansion occurring in the eastern United States, providing us with a national footprint. We expect to continue to grow sales and profitability at our existing facilities by expanding our product line, improving marketing, adding value-added services and growing the proportion of higher-margin products in our business mix. BOISE CASCADE COMPANY (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 5030 (Primary Standard Industrial Classification Code Number) 20-2807265 (I.R.S. Employer Identification Number) 1111 West Jefferson Street, Boise, Idaho 83702, Telephone: (208) 384-6161 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Our Challenges In consideration of our competitive strengths and business strategies, you should also consider the following challenges we face. Our industry is highly cyclical, and the prices of and demand for many of our products are subject to wide fluctuations. The fact that we are more highly leveraged than some of our competitors may exacerbate this risk. We also depend to a significant degree on our ability to obtain raw materials, particularly wood fiber, energy and chemicals, at favorable prices. In addition, we face intense competition in many of our businesses, including the distribution of building materials and the manufacturing of our value-added paper and building products, where a shift in market tastes in favor of competing products and/or competing distribution networks would slow our growth. We also depend on OfficeMax, both as a purchaser of uncoated free sheet and insofar as it indemnifies us against losses we may incur related to our business during periods prior to the Acquisition. For additional information on these and other risks relating to our business and an investment in our Class A common stock, see "Risk Factors" beginning on page 15. Our Industry We believe the following industry conditions and trends have benefited our business: Improving economic conditions have increased demand for paper products and corrugated containers. This recent increase in demand, combined with supply rationalization from 2000 to 2003, has led to improved prices in the paper and packaging and newsprint industries. According to RISI, prices of benchmark grades in these industries improved recently, yet remained below historical highs. For example, according to RISI, the following price increases occurred between December 2003 and April 2005: a 13% increase in the price of 84 brightness, 20 lb. cut-size office paper, from $730 to $825 per ton; a 23% increase in the reported transaction price of 42 lb. linerboard, from $350 to $430 per ton; and a 13% increase in the price of 48.8 gram newsprint, from $515 to $584 per metric tonne. Strong new housing starts and the increasing size of new homes built, according to the U.S. Census Bureau, as well as favorable demographic trends, low interest rates, a strong repair and remodeling market and a recovering light commercial construction market. Increasing demand for EWP as a substitution for wide-dimension lumber, according to the 2003-2004 Paper and Forest Products Industry Survey by Standard & Poor's. Growing demand among building materials customers for nationwide inventory and supply chain management. For additional detail on the industries in which we operate and how we derived the industry data set forth in this prospectus, see "Industry" and "Industry and Market Data." Pulp and paper mill 1 Louisiana Corrugated container plants John W. Holleran Karen E. Gowland Boise Cascade Company 1111 West Jefferson Street Boise, Idaho 83702 Telephone: (208) 384-6161 (Name, address, including zip code, and telephone number, including area code, of agent for service) Principal Stockholder Madison Dearborn is a leading private equity investment firm, with approximately $8 billion of capital under management. Madison Dearborn has over 100 companies in its investment portfolio and is considered to be among the most active private equity investors in the United States in the paper, packaging and forest products industries. Since 1993, Madison Dearborn has consummated approximately $15.5 billion of management buyout transactions in these industries, including buyouts of Jefferson Smurfit Group, Packaging Corporation of America, Riverwood Holding Corp. (now known as Graphic Packaging Corporation) and Buckeye Technologies, Inc. Madison Dearborn was the lead sponsor in each of these transactions, other than Graphic Packaging Corporation. General Our principal executive offices are located at 1111 West Jefferson Street, Boise, Idaho 83702. The telephone number for our principal executive offices is (208) 384-6161. Our internet address is www.bc.com. This internet address is provided for informational purposes only. The information at this internet address is not a part of this prospectus. Copies of all communications, including communications sent to agent for service, should be sent to: Dennis M. Myers, P.C. Carol Anne Huff Kirkland & Ellis LLP 200 East Randolph Drive Chicago, Illinois 60601 Telephone: (312) 861-2000 William V. Fogg Cravath, Swaine & Moore LLP 825 Eighth Avenue New York, New York 10019 Telephone: (212) 474-1000 Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. The Offering Class A Common Stock Offered 16,000,000 shares of Class A common stock. Over-allotment Option 2,400,000 shares of Class A common stock. Total Common Stock Outstanding After this Offering 67,000,000 shares, consisting of 20,479,375 shares of Class A common stock (including 2,400,000 shares that will be either sold to the underwriters if they exercise their over-allotment option or distributed to holders of our Class B common stock as a dividend if the underwriters do not exercise their over-allotment option) and 46,520,625 shares of Class B common stock. Use of Proceeds We expect that all of the net proceeds from this offering will be paid, either directly or indirectly, to our existing stockholders, FPH and OfficeMax. Specifically, we intend to use the net proceeds of this offering to (1) redeem from OfficeMax all of our outstanding preferred stock, which is expected to have a liquidation value, including accrued and unpaid dividends, of $38.0 million as of the closing date of this offering, and (2) repay approximately $226.8 million owing under a loan from Boise Land & Timber Corp., a sister corporation, which loan we expect to have an aggregate amount of $257.5 million, including accrued and unpaid interest, immediately prior to such payment. We expect the amounts repaid to Boise Land & Timber Corp. will be distributed to its existing stockholders, FPH and OfficeMax. We also expect to distribute a dividend to our existing stockholders consisting of (1) net proceeds from any shares of our Class A common stock sold pursuant to the underwriters' over-allotment option and (2) any shares of our Class A common stock not sold pursuant to this option. FPH will use the proceeds it receives in connection with this offering to purchase shares of our common stock held by OfficeMax at a price per share equal to the initial public offering price less the underwriting discount. To the extent the proceeds received by FPH exceed the aggregate purchase price paid for all of our common stock held by OfficeMax, FPH will distribute the excess to Madison Dearborn and members of our management. See "Use of Proceeds," "Reorganization as a Corporation" and "Certain Relationships and Related Transactions Proceeds of this Offering," and " Amended and Restated Going Public Agreement." CALCULATION OF REGISTRATION FEE Dividends We currently intend to declare and pay quarterly dividends of approximately $0.125 per share on all outstanding shares of our Class A common stock and Class B common stock. We currently expect that the first quarterly dividend will be declared and paid in the third quarter of 2005. The declaration and payment of this and any future dividends will be at the discretion of our board of directors, subject to our actual future earnings and capital requirements, and contractual and legal restrictions. For a discussion of the factors that will affect the determination by our board of directors to declare and pay dividends, see "Dividend Policy and Restrictions." We also expect to declare and pay to holders of our Class B common stock (1) a stock dividend consisting of shares of our Class A common stock with respect to which the underwriters' over-allotment option is not exercised and (2) a cash dividend to the extent of proceeds from the sale of shares sold pursuant to the underwriters' over-allotment option. To the extent that we receive proceeds from this offering in excess of the amount required to redeem our preferred stock held by OfficeMax and to repay in full the loan from Boise Land & Timber Corp., we will also pay a special dividend, which we refer to as the "Special Dividend," to existing holders of our Class B common stock. See "Dividend Policy and Restrictions","Description of Capital Stock Common Stock" and "Use of Proceeds." Voting Rights The holders of our Class A common stock and Class B common stock will be entitled to one vote per share on all matters submitted to a vote of our stockholders and will vote together as a single class. Title of Each Class of Securities to be Registered Amount to be Registered(1) Proposed Maximum Offering Price Per Unit(2) Proposed Maximum Aggregate Offering Price(1)(2) Amount of Registration Fee(3) Class B Common Stock Our existing stockholders will hold all of the Class B common stock. Shares of our Class A common stock and shares of our Class B common stock will be identical, including with respect to voting rights and rights to future dividends declared by our board of directors, except with respect to the right of the holders of our Class B common stock to receive (1) a cash dividend from the net proceeds of any shares sold pursuant to the underwriters' over-allotment option, (2) a stock dividend consisting of shares of our Class A common stock with respect to which the underwriters' over-allotment option is not exercised and (3) the Special Dividend, if any. In addition, the holders of our Class B common stock will have the right to consent to any changes to our governing documents that would adversely affect the Class B common stock. Each share of Class B common stock may be converted into a share of Class A common stock at any time at the option of the holder, and will be automatically converted upon the conversion of a majority of the Class B common stock. As used in this prospectus, the term "common stock" means the Class A common stock and the Class B common stock, unless otherwise specified. NYSE Symbol "BCC"
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+PROSPECTUS SUMMARY This section summarizes some of the information and financial statements that appear later in this prospectus and is qualified in its entirety by the more detailed information and financial statements included elsewhere in this prospectus. This summary may not contain all of the information that may be important to you. As an investor or prospective investor, you should carefully review the entire prospectus, including the risk factors and the more detailed information and financial statements that appear later in this prospectus. We use the term deadweight tons, or dwt, in describing the size of our drybulk carriers, which are also commonly referred to as drybulk vessels, and tankers. Unless we specify otherwise, all references and data in this prospectus to our business, our vessels and our fleet refer to our fleet of 21 vessels that we will own shortly after the closing of this offering, including nine Panamax drybulk carriers that we have agreed to acquire from an affiliate with the net proceeds from this offering and our new secured credit facility and one tanker of which we intend to take delivery upon completion of its construction following the closing of this offering. Unless the context otherwise requires, when used in this prospectus, the terms "Golden Energy," the "Company," "we," "our" and "us" refer to Golden Energy Marine Corp. and its consolidated subsidiaries. References to "combined" financial data include the nine vessel owning companies that we have agreed to acquire with the net proceeds of this offering and our new secured credit facility. Unless otherwise indicated, all references to currency amounts in this prospectus are in U.S. dollars. Our Company We are a newly-formed international shipping company that was formed to transport a variety of drybulk commodities, crude oil and petroleum products. Following our incorporation in February 2005, companies owned by our existing shareholders contributed to us all of the issued and outstanding stock of three Marshall Islands holding companies in exchange for all our issued and outstanding stock. These three holding companies own, through 12 separate vessel owning subsidiaries, our 11 current vessels, consisting of two Suezmax tankers, five Panamax product tankers and four Handymax product tankers, and one Panamax product tanker that is under construction. Following delivery to us later this year of nine Panamax drybulk carriers, which we (through our newly-formed intermediate holding company, Grand Prix Corp., a Marshall Islands company) have agreed to acquire from our affiliate, Lincoln Finance Corp., or Lincoln, as well as the one tanker under construction, we will own and operate a diversified fleet of 21 vessels. This fleet will consist of nine Panamax drybulk carriers, two Suezmax crude oil tankers, six Panamax product tankers and four Handymax product tankers. We refer to all 21 of these vessels in this prospectus as "our fleet." We believe that our fleet is one of the youngest fleets in the world, with an average age of 4.1 years as of October 31, 2005. As of September 30, 2005, our fleet had an appraised value of approximately $1.0 billion. We intend to continue to grow the size of our fleet following this offering through timely and selective acquisitions of additional new and secondhand tankers, drybulk carriers and other types of vessels or through whole or partial fleet acquisitions that complement our business strategy and are accretive to earnings and dividends per share. We believe that the experience of our management team in locating and acquiring suitable vessels and fleets and managing our expansion to date will assist us in this process. Our Fleet Our Drybulk Fleet. We will use the net proceeds of this offering and our new secured credit facility to purchase secondhand a fleet of nine Panamax drybulk carriers from Lincoln, with a total capacity of approximately 660,000 dwt, for a purchase price of $290.1 million (subject to adjustment for net operating profits or losses during the period between August 31, 2005 and the delivery of the ENFORCEABILITY OF CIVIL LIABILITIES Golden Energy Marine Corp. is a Marshall Islands company and our executive offices are located outside of the U.S. All of our directors, officers and some of the experts named in this prospectus reside outside the U.S. In addition, a substantial portion of our assets and the assets of our directors, officers and experts are located outside of the U.S. As a result, you may have difficulty serving legal process within the U.S. upon us or any of these persons. You may also have difficulty enforcing, both in and outside the U.S., judgments you may obtain in U.S. courts against us or these persons in any action, including actions based upon the civil liability provisions of U.S. federal or state securities laws. Furthermore, there is substantial doubt that the courts of the Marshall Islands or Greece would (1) enter judgments in original actions brought in those courts predicated on U.S. federal or state securities laws or (2) recognize or enforce against us or any of our officers, directors or experts judgments of courts of the U.S. predicated on U.S. federal or state securities laws. INDUSTRY Clarkson Research Services Limited, or CRS, has provided us with industry statistical data that we use in the discussion of the shipping industry contained in the sections of this prospectus entitled "The International Tanker & Drybulk Carrier Industry" and "Business." We believe that the statistical information supplied by CRS is accurate in all material respects and we have relied upon it for purposes of this prospectus. CRS has advised us that the statistical information contained herein is drawn from its internal database and other sources. CRS has advised us that: some information in CRS' database is derived from estimates or subjective judgments; the information in the databases of other maritime data collection agencies may differ from the information in CRS' database; while CRS has taken reasonable care in the compilation of the statistical and graphical information and believes it to be accurate and correct, data compilation is subject to limited audit and validation procedures and may accordingly contain errors; CRS, its agents, officers and employees cannot accept liability for any loss suffered in consequence of reliance on such information or in any other manner; and the provision of such data, graphs and tables does not obviate the need to make appropriate further inquiries. shares in the vessel owning companies to us). Lincoln paid $298.0 million for these drybulk carriers, which were part of the fleet it acquired from Malaysia International Shipping Corporation Berhad, or MISC, in December 2004. Lincoln has agreed to deliver these vessels to us within 14 days of the closing of this offering. Our drybulk carriers transport drybulk commodities on global trading routes, including from Australia and South America to the Far East. These drybulk commodities include major commodities such as coal, iron ore and grains as well as minor drybulk commodities such as steel, sugar and fertilizer. The average age of our drybulk carriers is approximately 8.9 years, compared to an average worldwide drybulk fleet industry age of 15 years (calculated for vessels above 10,000 dwt). Our Tanker Fleet. Our tanker fleet consists of 12 vessels with a total capacity of approximately 946,000 dwt. Eleven of these vessels, consisting of two Suezmax crude oil tankers, four Handymax product tankers and five Panamax product tankers, are currently in operation. The remaining vessel, a Panamax product tanker, is currently under construction for us, with delivery expected by October 31, 2005. As of September 30, 2005, our tanker fleet had an appraised value of approximately $742.5 million. All the vessels in our tanker fleet are double hull in order to meet International Maritime Organization, or IMO, regulations banning all single hull tankers by 2010 or 2015 depending on the port or flag state. Currently, 38% of the worldwide tanker fleet is not double hull. Our product tankers, which are our Panamax and Handymax tankers, are generally used to transport refined petroleum products to consuming regions of the world, primarily the United States, Europe and Asia. Our product tankers are designed to transport several different refined petroleum products simultaneously in segregated cargo tanks that are coated with an epoxy-based paint that allows us to carry an array of petroleum products. These petroleum products typically include gasoline, jet fuel, kerosene, naphtha and heating oil. Our crude oil tankers, which are our Suezmax tankers, are used to transport crude oil typically from oil producing regions, such as West Africa and the Arabian Gulf, to refining regions located throughout the world. The average age of our tanker fleet is approximately 0.6 years, compared to a worldwide tanker fleet average of 11.7 years (calculated for vessels above 10,000 dwt). SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (1)The average age of our fleet on October 31, 2005 will be 4.1 years. Consistent with shipping industry practice, vessel ages are calculated on a calendar year basis and newly built vessels are considered to be zero years old for the duration of the calendar year during which they are delivered. (2)Management estimates, which include a daily management fee of $515 per vessel and vessel operating expenses. Daily operating expenses do not apply to the one Panamax tanker currently under construction. *This number includes the one Panamax tanker that will be delivered by October 31, 2005. Corporate Information We maintain our principal executive offices at 2 Gamma Street, 167 77 Elliniko, Athens, Greece. Our telephone number at that address is (011) (30)(210) 894 5110. Chartering Strategy Our strategy is to deploy our two Suezmax tankers and 50% of the rest of our fleet in the spot market and the other 50% of our fleet under period charters of at least one year. We will continually AMENDMENT NO. 4 TO FORM F-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 monitor developments in the shipping industry and make charter-related decisions based on market conditions and our cash needs. We historically have operated our vessels in both the spot market, which allows us to take advantage of potentially higher market rates, and under period charters, which allows us to manage our cash flows and achieve the high utilization rates that are associated with longer-term fixed employment under period charters. We intend to continue to operate some of our vessels in the spot market and some of our vessels under period charters. We believe that this balanced approach to chartering will provide us with relatively stable revenue streams while enabling us to participate in favorable market developments. Industry Trends The maritime shipping industry is fundamental to international trade because it is the only practicable and cost-effective means of transporting large volumes of many essential commodities and finished goods. It is a global industry whose performance is closely tied to the level of economic activity in the world. Since the fourth quarter of 2002, the shipping industry has experienced relatively high charter rates and vessel values due to the favorable imbalance between the supply of and demand for ships. We believe that this favorable trend is likely to continue for the following reasons: Supply: shipyards in Asia are fully booked until 2008, limiting the number of new vessels that will enter the market in coming years; increasingly stringent regulations, such as those that require the phase-out of single hull tankers, will continue to compel the retirement of vessels before the end of their physical useful lives; and port congestion worldwide has reduced the net supply of available vessels, and contributed to the imbalance of supply and demand. Demand: in general, increasing global production and consumption and international trade have driven the strong demand for ships; demand for oil tankers, as measured by the amount of oil transported in tankers multiplied by the distance over which the oil is carried, has been growing due to increased demand for oil in regions that are remote from most of the oil-producing nations; demand for product tankers has increased as refined products such as gasoline, kerosene and jet fuel are produced at further distances from consuming regions; and China and India have helped drive demand for drybulk carriers as they continue to: expand iron ore imports and steel production; become net importers of coal; and increase their grain inventories. However, vessel charter rates and values have historically been extremely volatile and are affected by numerous variables including demand for liquid and bulk commodities, many of which are outside of our control. We cannot predict or offer assurances as to charter rates or vessel values in any period or that the industry trends described above will continue following the closing of this offering. Golden Energy Marine Corp. (Exact name of registrant as specified in its charter) Republic of the Marshall Islands 4412 N/A (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification No.) Golden Energy Marine Corp. Attention: Dale Ploughman 2 Gamma Street 167 77 Elliniko, Athens Greece (011)(30) 210 894-5110 (Address and telephone number of Registrant's principal executive offices) Seward & Kissel LLP Attention: Gary J. Wolfe, Esq. One Battery Park Plaza New York, New York 10004 (212) 574-1200 (Name, address and telephone number of agent for service) Our Competitive Strengths We believe that we possess a number of competitive strengths in our industry: Diverse fleet. Our fleet's diversity in size, product, trade routes and pricing helps us to minimize the effects of volatility in the drybulk and tanker sectors, provide our customers with a variety of shipping options, and maximize our fleet utilization. Modern, well-maintained fleet. We have a modern, high quality and well-maintained fleet. This provides us with a competitive advantage in securing employment for our vessels, reduced maintenance and operating costs and reduced down time on our vessels. Strong customer relationships. Our senior management team has established and maintained relationships with, and has achieved acceptance by, leading charterers, major national and private industrial users, commodity producers and traders around the world. Experienced management team. Our Chief Executive Officer, Dale Ploughman, has more than 40 years of experience in the shipping industry. In addition, as of the closing of this offering, our five senior executive officers and key employees will have more than 370 combined years of experience in the shipping industry. Efficient and dependable vessel operations. Our fleet manager, Enterprises Shipping and Trading S.A., or EST, an affiliate of ours, has established its reputation as an efficient and dependable fleet manager. EST is the first and only shipping company to receive the "EFQM Committed to Excellence in Europe" award given by the European Foundation of Quality Management. Uniform fleet consisting of five groups of sister ships. Our tankers fall within three groups of sister ships and our drybulk carriers fall within two groups of sister ships. Sister ships are designed and built upon similar design specifications and, therefore, use substantially the same parts and equipment. Our Business Strategy We focus our business strategy on employing our modern, diversified fleet in both the spot market and on period charters in a manner that maintains our financial flexibility and produces attractive cash flow. The principal elements of our business strategy consist of: Paying dividends out of available cash. We currently intend to pay regular cash dividends on a quarterly basis, beginning with an estimated dividend of $0.48 per share which we intend to declare in January 2006 (based on our operations for the full fourth quarter of 2005), subject to applicable law and the limitations discussed in "Dividend Policy" below. The declaration and payment of dividends will be subject to the discretion of our board of directors. Maintaining a diversified fleet and fleet expansion through acquisitions. We intend to maintain a diversified fleet of drybulk carriers and tankers. We intend to grow our fleet through timely and selective acquisitions of vessels and whole or partial fleets when the acquisition fits within our growth strategy. Maintaining financial flexibility. We intend to pursue a financial strategy that maximizes our flexibility. In addition to using free cash flow to pay dividends, we plan to maintain a reserve for growth and to limit our outstanding indebtedness to readily serviceable levels. Balanced fleet employment. We intend to actively and strategically employ our fleet between period charters of at least one year and spot charters. Our Fleet Management We provide our own commercial management services for each of our vessels on an exclusive basis. Commercial management services include operations, chartering, sale and purchase, post-fixture administration, accounting and freight invoicing. Our affiliate, EST, is the technical manager of our vessels pursuant to separate ship management agreements with each of our vessel owning subsidiaries. Copies to: Gary J. Wolfe, Esq. Robert E. Lustrin, Esq. Seward & Kissel LLP One Battery Park Plaza New York, New York 10004 (212) 574-1200 (telephone number) (212) 480-8421 (facsimile number) William J. Whelan, III, Esq. Cravath, Swaine & Moore LLP Worldwide Plaza 825 Eighth Avenue New York, New York 10019 (212) 474-1000 (telephone number) (212) 474-3700 (facsimile number) EST provides comprehensive ship management services, including technical supervision such as repairs, maintenance and inspections, monitoring safety and quality, providing crewing and training (through affiliates), as well as supply provisioning. The ship management business of EST was established in 1973 by Stamatis Restis. EST supervises the operation of a diversified fleet of approximately 80 vessels with over 5,000,000 dwt, and we believe it is a leading provider of quality and efficient ship management services to vessel owners in each of the drybulk, tanker and reefer sectors. EST has obtained documents of compliance for its office and safety management certificates for the vessels under its management as required by the ISM Code. EST is compliant with ISO 9001 and 14001, the International Organization for Standardization's quality and environmental management standards, respectively. EST is the first and only shipping company in the world to receive the "EFQM Committed to Excellence in Europe" award given by the European Foundation of Quality Management. In addition, the managing director of EST was named the "European Quality Leader 2005." Our Dividend Policy Our board of directors has adopted a dividend policy, effective upon the closing of the offering, which reflects an intention to distribute the majority of our operating cash flow to shareholders as regular quarterly dividends, while retaining a portion of cash flow for reinvestment in the business. Retained cash flow may be used, among other things, to fund vessel or fleet acquisitions that we believe to be accretive to earnings and cash flow, debt repayment and dry docking costs, as determined by management and the board of directors. This policy reflects our judgment that, by retaining a portion of cash flow in our business, we can provide better value to our shareholders by enhancing our dividend paying capacity over the long-term. On the basis of our existing operations, we intend to declare our first dividend of $0.48 per share in January 2006, based on our operations for the full fourth quarter of 2005. Thereafter, we intend to pay dividends on a quarterly basis. Declaration and payment of any dividend is subject to the discretion of our board of directors. The timing and amount of dividend payments will be dependent upon our earnings, financial condition, cash requirements and availability, fleet renewal and expansion, restrictions in our loan agreements, the provisions of Marshall Islands law affecting the payment of distributions to shareholders and other factors. The payment of dividends is not guaranteed or assured and may be discontinued at any time at the discretion of our board of directors. Because Golden Energy Marine Corp. is a holding company with no material assets other than the stock of its subsidiaries, its ability to pay dividends will depend on the earnings and cash flow of its subsidiaries and their ability to pay dividends to it. If there is a substantial decline in the tanker or drybulk charter markets, our earnings will be negatively affected, thereby limiting our ability to pay dividends. We refer you to "Risk Factors Company Specific Risk Factors We cannot assure you that we will pay dividends" for a discussion of the risks related to our ability to pay dividends. Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. The Offering Common stock offered by us 7,500,000 shares Underwriters' over-allotment option 1,125,000 shares Common stock to be outstanding immediately after this offering 36,500,000 shares Use of proceeds We expect to use the net proceeds of this offering and our new secured credit facility to acquire nine Panamax drybulk carriers for their appraised value, subject to adjustments, from an affiliate and for general corporate purposes. See "Use of Proceeds." We will not receive any of the proceeds from the sale of our common stock by the selling shareholders if the underwriters' over-allotment option is exercised. Dividend policy Subject to the discretion of our board of directors, we intend to pay quarterly dividends to the holders of our common stock each year representing the majority of our operating cash flow while retaining a portion of our cash flow for reinvestment. Nasdaq National Market listing Our shares of common stock have been approved for quotation on The Nasdaq National Market under the symbol "SHIP."
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary does not contain all the information you should consider before investing in shares of our common stock. You should read this entire prospectus carefully, including the Risk Factors and Forward-Looking Statements sections and our financial statements and the related notes, before making an investment decision. Who We Are We are a focused provider of personal and commercial property and casualty insurance products to individuals and small to medium-size businesses primarily in Texas, Louisiana, Oklahoma and New Mexico, a large and fast-growing region. We have written insurance in Texas consistently throughout our entire 101-year history while many of our competitors have moved in and out of the state. Our long-standing presence and deep market knowledge have allowed us to develop a loyal network of over 450 independent agents and a select group of managing general agents ( MGAs ) who provide us access to what we believe are among the most profitable markets underserved niches primarily in rural and small to medium-size metropolitan markets. On August 29, 2003, Republic Companies Group, Inc., backed by our investor group, acquired all of the issued and outstanding capital stock of our operating companies from a subsidiary of Winterthur Swiss Insurance Company ( Winterthur ) (the 2003 Acquisition ). We subsequently hired Parker W. Rush from The Chubb Group of Insurance Companies, where he was the Managing Director responsible for the Southern U.S., as our President and Chief Executive Officer. Mr. Rush and our management team have reemphasized a business philosophy that embraces the principles on which we were founded over a century ago a commitment to insuring short-tail risks in the Southwest within our areas of underwriting expertise while targeting consistent underwriting profitability. As of March 31, 2005, we had assets of $740.1 million and shareholders equity of $153.7 million. As of December 31, 2004, we had assets of $731.6 million and shareholders equity of $169.4 million. For the year ended December 31, 2004, we produced gross written premiums of $478.1 million, net premiums earned of $233.5 million, net income of $21.9 million and a return on average equity of 13.8%. For the three months ended March 31, 2005, we produced gross written premiums of $113.5 million, net premiums earned of $60.0 million and net income of $7.5 million. What We Do We target underserved markets that have been and continue to be largely ignored by national insurance companies because these markets require underwriting expertise that most carriers have been unwilling to develop given the small volume of premiums produced by local agents. Within these markets, we capitalize on our superior local knowledge to identify profitable underwriting opportunities. We apply a high level of selectivity in the risks we underwrite and use a risk-adjusted return approach to capital allocation, which we believe allows us to consistently generate underwriting profits. We believe that we distinguish ourselves from our competitors by delivering tailored product solutions, providing a high level of customer service and responding quickly to the needs of our agents and policyholders. Our personal lines products, sold through our network of independent agents and our two affiliated MGAs, include homeowners, low-value dwelling, dwelling fire, standard auto, nonstandard auto and umbrella coverages. Our commercial lines products, sold through our network of independent agents and unaffiliated MGAs, include commercial package, auto, workers compensation, property, casualty, farm and ranch, employers nonsubscriber and prize indemnification coverages. These commercial lines products are designed for small to medium-size businesses, generally in underserved service industries, such as garages, family-owned restaurants and artisan contractors. Net cash provided from financing activities 1,017 105,000 Net (decrease) increase in cash (274 ) 434 1 Cash at beginning of period 435 Cash at end of period $ 161 $ 435 $ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Competitive Strengths We believe that we are well-positioned to compete profitably and grow in our region because of our core competitive strengths. The Regional Company of Choice in the Southwest We have been underwriting insurance policies in Texas for over a century and for over 40 years in Louisiana, Oklahoma and New Mexico. During this time, The Republic Group has become a trusted brand and we have developed strong partnerships with our agents and policyholders and a broad and deep knowledge of our target markets within our primary four-state region. As a result, we believe we are able to be highly responsive to the preferences and needs of our agents and policyholders, providing us with distinct competitive advantages over our national competitors. Segmented underwriting approach based on superior regional market knowledge We have utilized our broad and deep regional knowledge to develop an underwriting model that segments our four target states into ten specific regions. We further segment these regions by economic demographics, pricing tiers, premium size, loss history and weather patterns. This approach assists us in identifying profitable opportunities that may go unnoticed by our competitors, which has led to significantly improved underwriting results. Expertise in and ability to identify underserved markets We work in consultation with our independent agents and MGAs to identify customer needs and then create product solutions to meet those needs rather than expecting agents to find a market for generic products. We Assets Investment in subsidiary $ 166,256 $ 147,330 Receivable from subsidiaries 1,405 Cash 161 435 Short-term investments 3,405 Deferred tax asset 433 Federal income tax recoverable 536 Other Cash flows from operating activities: Net income $ 21,876 $ 41,344 $ Adjustments to reconcile net income to net cash provided by operating activities: (Decrease) increase in payable to subsidiary 1,379 (Decrease) increase in federal income tax payable (1,139 ) 1,139 Increase in receivable from subsidiary 1,405 (1,405 ) Increase in federal income tax recoverable (536 ) Equity in undistributed net income of subsidiary (21,923 ) (41,392 ) Stock based compensation 1,050 Other AMENDMENT NO. 4 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents offer tailored products within our areas of expertise to meet market demand while developing underwriting and pricing guidelines that enable us to earn underwriting profits. Strong and long-standing relationships with multi-channel distribution network We distribute our products through a broad network of over 450 independent agents and a select number of MGAs. Approximately 60% of the gross written premiums produced by our independent agents in 2004 were generated by agents who have been producing business for us for over a decade. Texas General Agency, Inc. ( TGA ), our largest MGA, has represented us for 19 years. Members of our management, marketing and underwriting teams regularly meet in person with our agents and MGAs to maintain an open dialogue about their specific markets and how we can better meet customer needs. We believe agents and MGAs want to work with us because we provide multiple coverages, user-friendly systems, a high level of responsiveness and stability in their local markets. Proven leadership and highly experienced management and underwriting team Our management team, led by our President and Chief Executive Officer, Parker W. Rush, has an average of over 25 years of property and casualty insurance experience, predominantly focused in Southwestern states. Our underwriters have an average of 21 years of experience. Furthermore, we employ four actuaries, who are designated as Fellows of the Casualty Actuarial Society, and have an average of 15 years of actuarial experience in personal and commercial lines insurance, including program management. We believe that our management team is highly regarded among the independent agents and MGAs in our region due to our proven understanding of their needs and of the particular demands of marketing insurance products primarily in rural and small to medium-size metropolitan markets. Strategy We have developed the following strategy that we believe will help us achieve our growth and profitability objectives. Increase penetration in underserved markets in the Southwest region We work closely with our agents to identify underserved markets in our four target states and then develop profitable personal and commercial insurance products and services that will meet their needs. We believe many of our customers prefer to work with a single insurance company for their multiple insurance needs. Consequently, our broad suite of products improves our ability to capture additional business from our existing policyholders. We intend to actively search for acquisitions of companies or books of business that are consistent with our strategy. Opportunistically deploy capital to generate underwriting profits We price our business to generate underwriting profits by applying a high level of selectivity in the risks that we underwrite and by using a risk-adjusted return approach to capital allocation. We allocate our capital and other resources across our product lines in response to changing market conditions, which we believe we identify faster than our competitors due to our strong knowledge of our target markets, the continuous focus of our management and underwriting teams on these issues and our ability to analyze return on capital by business segment. Commit to short-tail lines of business We primarily target property and short-tail lines of casualty insurance rather than long-tail lines of insurance, such as product liability and general liability. We believe our focus on short-tail risks enables us to REPUBLIC COMPANIES GROUP, INC. (Exact name of registrant as specified in its charter) Table of Contents price our insurance products and reserve for potential claims more accurately, which we believe, in turn, reduces the volatility of our financial results compared to long-tail underwriters. Based on recent history, we have paid 97% of losses on our policies within four years from policy inception. Identify and grow profitable agents We intend to continue to seek out and develop new agent relationships to profitably grow our book of business in our desired markets. Since the 2003 Acquisition, we have instituted more rigorous audit review criteria to analyze the performance of our existing independent agent base. At the same time, we have placed a strong emphasis on appointing additional agents that meet our new standards. In considering new independent agents for appointment, we evaluate their business profile, experience, loss history, reputation and location. Since the 2003 Acquisition, we have terminated relationships with 128 agents and have added 23 new agents. Company History We trace our origin back to 1903 with the formation of the Commonwealth Fire Insurance Company in Dallas, Texas. As a Texas-based stock fire company, we served as an alternative to the Eastern U.S.-based insurers that, through intense competition, had eliminated nearly all Texas-based insurance companies by 1895. Initially, we focused on providing fire coverage for owner-occupied single family dwellings. During the next 80 years, we gradually expanded our operating territory and business mix. In 1982, Winterthur acquired the stock of Republic Financial Services, Inc. and further expanded its presence in the United States and internationally with additional acquisitions in the 1980s and early 1990s. As part of a reorganization of Winterthur s U.S. operations in 1995, we refocused on our core property and casualty operations in Southwestern states. On August 29, 2003, Republic Companies Group, Inc., backed by an investor group, acquired all of the issued and outstanding capital stock of our top tier operating companies from Winterthur. Since the arrival of Parker W. Rush, our President and Chief Executive Officer, in December 2003, we have implemented a series of initiatives that has enabled us to capitalize on our strong presence primarily in rural and small to medium-size metropolitan markets, expand our product offerings through our multiple distribution channels and improve our profitability. These initiatives have included: strengthening our management team; adding underwriting and marketing talent; resegmenting our core markets by geography; improving our relationships with our most profitable agents and terminating our least profitable agents; changing our key performance measures to emphasize return on capital by business segment; cutting unnecessary expenses; making additional investments in technology; reunderwriting our entire commercial lines book of business; and identifying new lines of business that fall within our core underwriting expertise that we believe can generate attractive returns in all market conditions. We believe these efforts have contributed to significantly improved underwriting results as our net combined ratio, which is the sum of our net loss ratio and net expense ratio, decreased from 111.2%, an underwriting loss, in 2002 to 91.8%, an underwriting gain, in 2004, demonstrating a significant improvement in our book of business. Net increase in cash and cash equivalents 2,896 4 197 (10,295 ) Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period $ 2,900 $ Net increase in cash and cash equivalents (2,900 ) (4 ) Cash and cash equivalents, beginning of period 2,900 Delaware 6331 30-0175923 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) 222 Delaware Avenue, Suite 900 Wilmington, Delaware 19801 (302) 658-3613 (Address, including zip code, and telephone number, including area code, of registrant s principal executive office) Parker W. Rush President and Chief Executive Officer Republic Companies Group, Inc. 222 Delaware Avenue, Suite 900 Wilmington, Delaware 19801 (302) 658-3613 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: T. Mark Kelly Vinson & Elkins L.L.P. First City Tower 1001 Fannin Street, Suite 2300 Houston, Texas 77002-6760 (713) 758-2222 Jeffrey A. Chapman Vinson & Elkins L.L.P. 3700 Trammell Crow Center 2001 Ross Avenue Dallas, Texas 75201-2975 (214) 220-7700 Michael E. Ditto Vice President and General Counsel Republic Underwriters Insurance Company 5525 Lyndon B. Johnson Freeway Dallas, Texas 75240 (972) 788-6000 Ethan T. James Davis Polk & Wardwell 450 Lexington Avenue New York, New York 10017 (212) 450-4000 Table of Contents Organization and Principal Executive Offices Our executive office is located at 222 Delaware Avenue, Suite 900, Wilmington, Delaware 19801, and our telephone number at that location is (302) 658-3613. The principal executive offices of our operating subsidiaries and controlled affiliates are located at 5525 Lyndon B. Johnson Freeway, Dallas, Texas 75240, and our telephone number at that location is (972) 788-6000. As of June 30, 2005, we had 316 full-time employees and three part-time employees. Our website address is www.republicgroup.com. The information on our website does not constitute a part of this prospectus. We are rated A- (Excellent) by A.M. Best Company, Inc. with a stable outlook. The objective of the A.M. Best rating system is to provide an opinion of an insurer s financial strength and ability to meet ongoing obligations to its policyholders. Our ratings reflect A.M. Best s opinion of our financial strength and are not evaluations directed to investors in our common stock nor recommendations to buy, sell or hold our common stock. Risks Relating to Our Company Investing in our common stock involves substantial risk. In particular, we may not be able to successfully implement our business strategy or capitalize on our perceived strengths. Additionally, if: we cannot price our business accurately, our profitability and the profitability of our insurance companies could be materially and adversely affected; our actual loss and loss adjustment expenses exceed our loss reserves, our financial condition and results of operations could be materially and adversely affected; we are unsuccessful in competing against larger or more well-established rivals, our financial condition and results of operations could be adversely affected; or we cannot obtain adequate reinsurance protection for the risks we underwrite, we may be exposed to greater losses from these risks or we may reduce the amount of business we underwrite, which may adversely affect our financial condition and results of operations. In addition, the occurrence of severe catastrophe events, or the loss of our agents to our competitors, could have a material and adverse effect on our financial conditions and results of operations. If any of the foregoing events or circumstances occur, an investment in our common shares may be materially impaired. You should read Risk Factors beginning on page 12 for a more complete discussion of certain factors you should carefully consider together with all other information included in this prospectus before making an investment decision. Adjusted estimated fair value of net assets acquired 151 Final purchase price 114 Acquisition costs Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. CALCULATION OF REGISTRATION FEE (1) The number of shares of our common stock outstanding after this offering excludes: 59,472 shares of common stock that may be issued upon exercise of options outstanding at the time of this offering at a weighted average exercise price of $10.00 per share; and 42,625 shares that may be issued upon the exercise of options to be granted at the time of the closing of this offering at an exercise price equal to the initial public offering price. The number of shares of our common stock outstanding after this offering includes: 3,513,265 shares of common stock to be issued upon the conversion of our shares of Class A common stock; 1,783,133 shares of common stock to be issued upon the conversion of our shares of Class B common stock; and 1,810,667 shares of common stock to be issued upon the conversion of our shares of Series A preferred stock that are not redeemed with the proceeds of this offering (using the midpoint of the price range set forth on the cover page of this prospectus to calculate the conversion ratio). Except as otherwise indicated, all information in this prospectus assumes no exercise of the underwriters over-allotment option and gives pro forma effect to a 5.5:1 stock split of our common shares which we effected on July 18, 2005. (Dollars in thousands) Other invested assets: RIG Capital Trust Preferred I $ 310 $ 310 $ 310 $ 310 RIG Statutory Capital Trust Preferred II 619 619 619 619 Dallas National Bank 50 64 50 68 Lucent warrants Year ended December 31, 2002: Independent Agents Personal Lines $ 13,949 $ 50,323 $ 71,816 $ 117,858 $ (2,411 ) $ 97,325 $ 26,085 $ 10,001 $ 135,904 Independent Agents Commercial Lines 7,008 50,802 34,995 65,481 (1,361 ) 50,431 16,029 7,132 70,252 Program Management 2,376 53,923 51,735 45,100 (1,022 ) 24,409 16,109 5,790 50,733 Insurance Services and Corporate 68,754 67,666 1,018 (48 ) Title of Each Class of Securities to be Registered Proposed Maximum Aggregate Offering Price(1)(2) Amount of Registration Fee Common stock, par value $.01 per share $ 117,300,000 (3) Table of Contents SUMMARY FINANCIAL INFORMATION You should read the summary financial information set forth below in conjunction with Management s Discussion and Analysis of Financial Condition and Results of Operations and our financial statements and the related notes thereto included elsewhere in this prospectus. The following tables set forth our summary financial information for the periods ended and as of the dates indicated. Republic Companies Group, Inc. had no operations prior to the 2003 Acquisition. In the 2003 Acquisition, we acquired the operating companies, but not the holding companies, of Republic Financial Services, Inc. ( Predecessor Company ). We refer to the acquired companies as the Subject Companies. The selected statement of operations data for the year ended December 31, 2004, the period from August 29, 2003 to December 31, 2003, the period from January 1, 2003 to August 28, 2003 and for the year ended December 31, 2002, and the selected balance sheet data as of December 31, 2004 and December 31, 2003 are derived from our audited financial statements included elsewhere in this prospectus. The selected data as of March 31, 2005 and for the three months ended March 31, 2005 and 2004 are derived from our unaudited consolidated financial statements, which include all adjustments, consisting of normal recurring accruals, that management considers necessary for a fair presentation of our financial position and results of operations as of the dates or for the periods presented. The selected statement of operations data for periods prior to January 1, 2002 and the selected balance sheet data as of August 28, 2003, and December 31, 2002, 2001, 2000 and 1999 are derived from the Predecessor Company s audited financial statements, which are not included in this prospectus, and reflect the Subject Companies on a combined basis excluding the Predecessor Company holding companies. The combined information provides investors with historical information regarding the Subject Companies. The financial statement information for periods beginning August 29, 2003 is reported on a purchase GAAP basis of accounting. Financial statement information for periods prior to August 29, 2003 is reported on a historical GAAP basis of accounting and may not be comparable to periods after that date. These historical results are not necessarily indicative of results to be expected for any future period. For a discussion of the comparability of our income statement data with that of our Predecessor Company, see Management s Discussion and Analysis of Financial Condition and Results of Operations Comparability of Financial Statement Information. All common share and earnings per share data for the Company gives effect to a 5.5:1 stock split of our common shares which we effected on July 18, 2005. (1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933. (2) Includes common stock issuable upon the exercise of the underwriters over-allotment option. (3) An aggregate fee of $13,806.21 was previously paid with prior filings of this Registration Statement. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. Weighted average number of common shares outstanding, diluted 4,976,523 4,879,041 4,923,487 4,806,978 (1) Commissions includes commissions paid to independent agents and sliding scale commissions paid to MGAs, which are generally based on the profitability of the underlying book of business produced by the independent agents and MGAs and also includes the change in the deferred policy acquisition costs asset associated with commissions. (2) Includes premium taxes, general operating expenses related to underwriting operations and amortization of deferred acquisitions costs associated with acquisition expenses. (3) We record our 29.8% investment in Seguros Atlas, S.A. on an equity basis of accounting. Information to develop U.S. GAAP balances on an equity basis of accounting is not available for the balance sheet data prior to December 31, 2001 and for the statement of operations data for periods prior to 2002. (4) Net written premiums are calculated by adding to gross written premiums the premiums assumed from other insurers and by subtracting from the resulting sum the premiums ceded to reinsurers for excess per risk reinsurance and catastrophe reinsurance in the Independent Agents Personal Lines and Independent Agents Commercial Lines segments and excess per risk and quota share reinsurance in the Program Management and Insurance Services and Corporate segments. (5) The net loss ratio is calculated by dividing net losses and loss adjustment expenses by the net insurance premiums earned. This ratio is net of amounts ceded to reinsurers. (6) The net expense ratio is calculated by dividing the total underwriting, acquisition and operating expenses by the net insurance premiums earned. This ratio is net of amounts ceded to reinsurers. (7) The net combined ratio is the sum of the net loss ratio and the net expense ratio. (8) This is the reported statutory surplus as regards policyholders ( statutory surplus ) of our lead insurance company, Republic Underwriters Insurance Company. See Business Regulation Statutory Accounting Principles. (9) The net underwriting leverage ratio is the ratio of annual net written premiums divided by end of year statutory surplus. The ratio for 2003 is computed by dividing the sum of the net written premiums for the period January 1, 2003 to August 28, 2003 plus the period August 29, 2003 to December 31, 2003 by the statutory surplus as of December 31, 2003. Since the premiums for both of the 2003 periods are aggregated for this calculation, the same net underwriting leverage ratio is applicable to both of the 2003 periods. (10) Redeemable preferred stock was issued to fund the 2003 Acquisition. Originally, the shares could be redeemed at the election of certain stockholders and the stock was presented as mezzanine financing until December 2004. Our Certificate of Incorporation was amended in 2004 to remove the stockholder election and the redeemable preferred stock was reclassified as permanent equity as of December 31, 2004. (11) Per share data is computed based on net income from continuing operations available to common shareholders after giving effect to accrued dividends on Series A preferred stock. (Dollars in thousands) (Dollars in thousands) Fixed maturities $ 9,699 $ 2,447 $ 4,961 $ 6,712 Common stocks 33 179 Short-term investments 329 163 374 702 Real estate 655 336 804 1,179 Other investments 118 Basic and diluted income per share computation: Net income $ 7,451 $ 6,706 Less: Preferred stock dividends accrued (3,566 ) (3,399 ) Accretion of preferred stock discount Revenues: Investment income $ Table of Contents Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state. Subject to completion, dated August 3, 2005 Prospectus 6,000,000 Shares Common Stock Republic Companies Group, Inc. is selling shares of common stock in this offering. This is the initial public offering of our common stock. The estimated initial public offering price is between $15.00 and $17.00 per share. Prior to this offering, there has been no public market for our common stock. After the pricing of the offering, we expect our common stock will trade on the Nasdaq National Market under the symbol RUTX. Investing in our common stock involves risks. See Risk Factors beginning on page 12. Per Share Total Initial public offering price $ $ Underwriting discounts $ $ Proceeds to Republic Companies Group, Inc., before expenses $ $ We have granted the underwriters an option for a period of 30 days to purchase up to 900,000 additional shares of our common stock on the same terms and conditions set forth above to cover overallotments, if any. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense. The underwriters expect to deliver the shares of our common stock to investors on or about , 2005. Net combined ratio (7) 87.2 % 90.6 % 91.8 % 89.2 % 110.9 % 111.2 % 113.7 % 107.3 % 97.5 % Statutory surplus (8) $ 160,968 $ 140,441 $ 154,858 $ 133,701 $ 101,388 $ 114,684 $ 115,449 $ 141,352 $ 149,486 Net underwriting leverage ratio (9) 1.5x 1.6x 1.6 x 2.1 x 2.1 x 2.2 x 1.7 x 1.1 x 0.9 Table of Contents
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+This summary highlights selected information contained elsewhere in this prospectus. This summary is not complete and does not contain all of the information that you should consider before deciding whether or not to invest in the notes. For a more complete understanding of our company and this offering, we encourage you to read this entire document, including Risk Factors, the financial information included in this prospectus and the documents to which we have referred. Unless otherwise indicated or required by the context, as used in this prospectus, the terms Dress Barn, we, our and us refer to The Dress Barn, Inc. and all its subsidiaries. On January 3, 2005, as of the close of business on January 1, 2005, we acquired Maurices Incorporated, a specialty apparel retailer whose stores are concentrated in small markets. Our fiscal year ends on the last Saturday of July of each year. Prior to our acquisition of Maurices, its fiscal year ended on the last Saturday of February of each year. Unless otherwise indicated, when we refer to a fiscal year, such as fiscal 2004, we are referring to Dress Barn s fiscal year ended on the last Saturday of July of that year. The notes are jointly and severally guaranteed by our subsidiaries, Maurices, The Men s Company, Inc., D.B.R., Inc., DBX, Inc. and Dress Barn Credit Management LLC, all of which are referred to as the subsidiary guarantors in this prospectus. This prospectus is offering an aggregate principal amount of $115,000,000 of our 2.50% convertible senior notes due 2024 and shares of our common stock issuable upon conversion of the notes. The selling securityholders acquired the notes in a private placement on December 15, 2004 and the resultant resale by the initial purchasers of the notes under Rule 144A of the Securities Act of 1933, as amended, or the Securities Act. We are receiving no proceeds from the sale of securities offered for sale hereunder. We have agreed to pay the expenses associated with registering the securities of the selling securityholders. We may suspend the use of this prospectus during certain periods of time described in the section of this prospectus entitled Description of Notes Registration Rights if the prospectus would, in our judgment, contain a material misstatement or omission as a result of an event that has occurred and is continuing, and we determine in good faith that the disclosure of this material non-public information would have a material adverse effect on us and our subsidiaries taken as a whole. The Dress Barn, Inc. We operate a chain of primarily women s apparel specialty stores, operating principally under the names Dress Barn and Dress Barn Woman and, since our January 2005 acquisition of Maurices Incorporated, Maurices. Our Dress Barn stores are operated mostly in a combination of Dress Barn and Dress Barn Woman stores, or Combo stores, which carry both Dress Barn and larger-sized Dress Barn Woman merchandise, as well as freestanding Dress Barn and Dress Barn Woman stores. These stores offer in-season, moderate to better quality career and casual fashion to the working woman at value prices. Our Maurices stores are concentrated in small markets in the United States and their product offerings are designed to appeal to the apparel and accessory needs of the 17- to 34-year-old woman and, to a lesser extent, the casual apparel needs of the 17- to 34-year-old male. As of April 2, 2005, we operated 1,258 stores in 45 states and the District of Columbia, consisting of 550 Combo stores, 186 Dress Barn stores, 49 Dress Barn Woman stores and 473 Maurices stores. Our principal executive offices are located at 30 Dunnigan Drive, Suffern, New York 10901. Our telephone number is (845) 369-4500. Our common stock is quoted on the Nasdaq National Market under the symbol DBRN. We maintain a web site at www.dressbarn.com; however, the information on our web site is not part of this prospectus, and you should rely only on the information contained in this prospectus when making a decision whether to invest in the notes. For additional information concerning our business operations, see Description of the Business. David R. Jaffe President, Chief Executive Officer and Director The Dress Barn, Inc. 30 Dunnigan Drive Suffern, New York 10901 Telephone: (845) 369-4500 Fax: (845) 369-4595 (Name, address, including zip code, and telephone number, including area code, of agent for service) The Offering The summary below describes the principal terms of the notes. Certain of the terms and conditions described below are subject to important limitations and exceptions. The Description of Notes section of this prospectus contains a more detailed description of the terms and conditions of the notes. Issuer The Dress Barn, Inc., a Connecticut corporation. Seller One or more of the securityholders. See Selling Securityholders. We are not a selling securityholder. Securities Offered $115,000,000 aggregate principal amount of 2.50% convertible senior notes due 2024, which we refer to as the notes, and common stock issuable upon conversion of the notes. Maturity December 15, 2024, unless earlier converted, redeemed or repurchased. Guarantees The notes are jointly and severally guaranteed on an unsecured senior basis by each of the subsidiary guarantors. Each of the subsidiary guarantors will only guarantee the notes for so long as such subsidiary guarantor is a subsidiary guarantor under our senior secured credit facility. Ranking The notes are our direct, unsecured and unsubordinated obligations and rank equal in priority with all of our existing and future unsecured and unsubordinated indebtedness and senior in right of payment to all of our existing and future subordinated indebtedness. The notes effectively rank junior to any of our existing and future secured indebtedness and to our subsidiary guarantors existing and future secured indebtedness, including indebtedness under our senior secured credit facility, to the extent of the value of the assets securing such indebtedness. The notes effectively rank junior to the indebtedness and other liabilities, including trade payables, of subsidiaries that are not subsidiary guarantors. In connection with the acquisition of Maurices, we entered into a senior secured credit facility consisting of a $150 million revolving credit facility and a $100 million term loan facility. This senior secured credit facility is secured by substantially all of our and our subsidiary guarantors assets. As of January 29, 2005, our long-term debt, including current maturities, aggregated $248 million, consisting of a $100 million term loan under our senior credit facility, $115 million principal amount of the notes and a $33 million mortgage on our principal offices and distribution center. Interest Payment 2.50% per year on the principal amount, payable semi-annually in arrears on June 15 and December 15 of each year, beginning June 15, 2005, except that from March 15, 2005 to May 2, 2005, the notes bore interest at the rate of 2.75% per year, because we failed to file a shelf registration statement with the SEC on or prior to the 90th day after the first date of the original issuance of the notes as required in the registration rights agreement described elsewhere in this prospectus. Copies of communications to: Steven Kirshenbaum, Esq. Proskauer Rose LLP 1585 Broadway New York, New York 10036 Telephone: (212) 969-3000 Fax: (212) 969-2900 Contingent Interest Beginning with the period commencing on December 22, 2011 and ending on June 14, 2012, and for each of the six-month periods thereafter commencing on June 15, 2012, we will pay contingent interest during the applicable interest period if the average trading price of the notes during the five trading days ending on the third day immediately preceding the first day of the applicable interest period equals or exceeds 120% of the principal amount of the notes. The amount of contingent interest payable per $1,000 principal amount of notes during the applicable interest period will equal an annual rate of 0.25% of the average trading price of such $1,000 principal amount of notes during the applicable five-trading-day reference period, payable in arrears. Conversion Rights You may convert the notes into cash and shares of our common stock, if any, at a conversion rate of 47.5715 shares per $1,000 principal amount of notes (equal to a conversion price of approximately $21.02 per share), subject to adjustment, only under the following circumstances: during any fiscal quarter, if the last reported sale price of our common stock is greater than or equal to 120% of the conversion price for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter; during the five business day period after a five consecutive trading day period in which the trading price per $1,000 principal amount of the notes for each day of that period was less than 98% of the average conversion value per note during the period, where the conversion value per note on any day is equal to the product of the closing stock price on that day multiplied by the applicable conversion rate on that day; if we have called the notes for redemption and the redemption has not yet occurred; or upon the occurrence of specified corporate transactions described under Description of Notes Conversion Rights Conversion Upon Specified Corporate Transactions. You will not receive any cash payment or additional shares representing accrued and unpaid interest upon conversion of a note, except in limited circumstances. Instead, interest, including contingent interest and additional amounts, if any, will be deemed paid by the cash and common stock, if any, delivered to you upon conversion. Notes called for redemption may be surrendered for conversion prior to the close of business on the second business day immediately preceding the redemption date. Upon a surrender of your notes for conversion, we will deliver cash equal to the lesser of the aggregate principal amount of notes to be converted and our total conversion obligation and shares of our Approximate date of commencement of proposed sale to the public: At such time or times after the effective date of this Registration Statement as the selling securityholders shall determine. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. x If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. o common stock in respect of the remainder, if any, of our conversion obligation as described under Description of Notes Conversion Rights Payment Upon Conversion. If you elect to convert your notes in connection with certain corporate transactions that occur on or prior to December 15, 2011, we will increase the conversion rate by a number of additional shares of common stock upon conversion as described under Description of Notes Conversion Rights General or, in lieu thereof, we may in certain circumstances elect to adjust the conversion rate and related conversion obligation so that the notes are convertible into shares of the acquiring or surviving company, as described under Description of Notes Conversion Procedures Conversion Rate Adjustments Adjustments for Conversion After a Public Acquirer Change of Control. Optional Redemption Prior to December 22, 2011, the notes will not be redeemable. On or after December 22, 2011, we may redeem some or all of the notes in cash, at any time, upon at least 30 days notice at a price equal to 100% of the principal amount of the notes to be redeemed plus accrued and unpaid interest, including contingent interest and additional amounts, if any, up to but not including the date of redemption. Repurchase of Notes at the Option of the Holder You may require us to repurchase for cash all or a portion of your notes on December 15, 2011, December 15, 2014 and December 15, 2019 at a repurchase price equal to 100% of the principal amount of the notes to be repurchased plus accrued and unpaid interest, including contingent interest and additional amounts, if any, up to but not including, the date of repurchase. Fundamental Change If we undergo a fundamental change (as defined in this prospectus) prior to maturity of the notes, you will have the right, subject to certain conditions, to require us to repurchase for cash all or a portion of your notes at a repurchase price equal to 100% of the principal amount of the notes being repurchased, plus accrued and unpaid interest, including contingent interest and additional amounts, if any, up to but excluding the date of repurchase. Registration Rights Under the registration rights agreement that we entered into with the initial purchasers, we and our subsidiary guarantors agreed to: file a shelf registration statement with the SEC on or prior to the 90th day after the first date of original issuance of the notes covering resales of the notes and the shares of common stock issuable upon conversion of the notes; use reasonable efforts to cause the shelf registration statement to become effective within 180 days after the first date of original issuance of the notes; and use reasonable efforts to keep the shelf registration CALCULATION OF REGISTRATION FEE Title of each class of securities to be registered Amount to be registered Proposed maximum offering price per unit Proposed maximum aggregate offering price Amount of registration fee 2.50% Convertible Senior Notes due 2024 $115,000,000 100%(1) $115,000,000 $13,536 Common Stock, par value $.05 per share 5,470,722(2) Guarantees of the 2.50% Convertible Senior Notes due 2024 (3) (3) Total $13,536 (1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act. (2) This number represents the number of shares of common stock that are initially issuable upon conversion of the notes registered hereby, at the rate of 47.5715 shares of common stock for each $1,000 principal amount at maturity of notes. Pursuant to Rule 416 under the Securities Act, such number of shares of common stock registered hereby shall include an indeterminate number of shares of common stock that may be issued in connection with a stock split, stock dividend, recapitalization or similar event. No additional consideration will be received for the common stock, and therefore no registration fee is required pursuant to Rule 457(i). statement effective until the earlier of: the second anniversary of the last date of original issuance of the notes; the sale pursuant to the shelf registration statement or Rule 144 under the Securities Act of all of the notes and any shares of our common stock issued upon their conversion; and the expiration of the holding period applicable to the notes and the shares of our common stock issuable upon their conversion held by persons that are not our affiliates under Rule l44(k) under the Securities Act, or any successor provision. If we fail to comply with these obligations under the registration rights agreement, we will be required to pay additional amounts to the holders of the notes or, in lieu of additional amounts, additional shares to holders who convert when a registration default exists with respect to the common stock. We failed to file a shelf registration statement with the SEC on or prior to the 90th day after the first date of the original issuance of the notes and, accordingly, we are required to pay additional interest at the rate of 0.25% per year from March 15, 2005 until May 2, 2005, the date of the filing of the registration statement of which this prospectus is a part. Use of Proceeds We will not receive any of the proceeds from the sale by the selling securityholders of the notes or shares of common stock underlying the notes. United Stated Federal Income Tax Considerations The notes are debt instruments subject to the United States Treasury regulations governing contingent payment debt instruments and to our determination of the rate at which interest will accrue for United States federal income tax purposes. We compute and report accruals of interest based upon a yield of 8.0% per year, computed on a semiannual bond equivalent basis, which we have determined represents the yield required to be reported under applicable Treasury regulations. You will be required to include this interest on the notes in your gross income as it accrues regardless of your method of tax accounting. The rate at which the interest will accrue on the notes in any tax year may exceed actual cash payments of interest. In accordance with the contingent payment debt Treasury regulations, you will also recognize gain or loss on the sale, exchange, conversion, purchase by us or redemption of a note in an amount equal to the difference between the amount realized, including the fair market value of any common stock received, and your adjusted tax basis in the note. Any gain recognized by you generally will be treated as ordinary interest income. Any loss will be treated as ordinary loss to the extent of the interest previously included in income and thereafter, as capital loss. See Important United States Federal Income Tax Considerations. Trustee, Paying Agent and Conversion Agent The Bank of New York. Book-Entry Form The notes have been issued in book-entry form and are represented by a global certificate or certificates deposited with, or on behalf of, The Depository Trust Company, or DTC, and registered in the name of a nominee of DTC. Beneficial interests in any of the notes are shown on, and transfers will be effected only through, records maintained by DTC or its nominee and any such interest may not be exchanged for certificated securities except in limited circumstances. Trading The notes issued in the original private offering are eligible for trading on Nasdaq s screen-based automated trading system known as PORTAL, Private Offerings, Resale and Trading through Automated Linkages. However, notes sold using this prospectus will no longer be eligible for trading in the PORTAL Market. Trading Symbol for Our Common Stock Our common stock is quoted on the Nasdaq National Market under the trading symbol DBRN.
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diff --git a/parsed_sections/prospectus_summary/2005/CIK0001321451_appalachia_prospectus_summary.txt b/parsed_sections/prospectus_summary/2005/CIK0001321451_appalachia_prospectus_summary.txt
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@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary does not contain all of the information that you should consider before investing in the trust units. To understand this offering fully, you should read the entire prospectus carefully, including the risk factors and the financial statements and notes to those statements. You will find definitions for terms relating to the natural gas business in Glossary of Certain Oil and Natural Gas Terms. Ryder Scott Company, L.P., an independent engineering firm, provided the estimates of proved natural gas reserves as of December 31, 2004 included in this prospectus. These estimates are contained in a summary prepared by Ryder Scott of its reserve report as of December 31, 2004 for the underlying properties described below and for the royalty interests in the underlying properties held by the trust. This summary is located at the back of this prospectus as Exhibit A and is referred to in this prospectus as the reserve report. References to Energy Corporation of America or ECA in this prospectus include Energy Corporation of America and its subsidiaries. Unless otherwise indicated, all information in this prospectus assumes no exercise of the underwriters over-allotment option. Appalachian Gas Royalty Trust Appalachian Gas Royalty Trust was formed in March 2005 by Energy Corporation of America, which we refer to as ECA. At the closing of this offering, ECA will convey a royalty interest to the trust from ECA s net revenue interests in 312 producing gas wells located in the Appalachian Basin in the States of West Virginia, Pennsylvania and Kentucky, which we refer to as the PDP royalty interest. ECA will also convey a royalty interest to the trust from ECA s net revenue interests in all of its current lease acreage in two specified geographic areas in the States of West Virginia and Kentucky, excluding its net revenue interests in existing producing wells and other associated assets located within these areas. We refer to this royalty interest as the PUD royalty interest. ECA will be obligated to drill 180 development wells in these specified areas by March 31, 2009. ECA intends to use commercially reasonable efforts to drill all of these development wells by March 31, 2008 and will be obligated to drill not less than 45 development wells per year on a cumulative basis. We refer to ECA s net revenue interests in these properties as the underlying properties. As of December 31, 2004, proved reserves attributable to the trust s royalty interests in the underlying properties, based on prices at December 31, 2004, were 45.3 Bcf. In addition to the PDP royalty interest and the PUD royalty interest, at the closing of this offering ECA will contribute to the trust a portion of certain natural gas floor price contracts that will relate to a portion of the natural gas production attributable to the trust s royalty interest. The PDP royalty interest will entitle the trust to receive 90% of the net proceeds (calculated as described below) from the sale of production of natural gas attributable to ECA s interest from 312 existing natural gas producing wells for a term of 20 years commencing on January 1, 2005. The PUD royalty interest will entitle the trust to receive 50% of the net proceeds (calculated as described below) from the sale of future production of natural gas attributable to ECA s interest for a term of 20 years commencing on January 1, 2005, resulting from the drilling of 180 development wells from ECA s lease acreage in two geographic areas in the States of West Virginia and Kentucky, which we refer to as areas of mutual interest or AMIs and which are more fully described in this prospectus under The Underlying Properties. The two AMIs currently contain an aggregate of approximately 55,700 acres under lease and approximately 333 proved undeveloped well locations that have been identified by ECA. ECA will grant the trust a lien on all of ECA s interests in the underlying PUD properties located in one of the AMIs to secure its obligation to the trust to drill the 180 development wells. The trust s net proceeds attributable to the PDP royalty interest and PUD royalty interest will be based on prices realized for natural gas produced from the underlying properties for each calendar quarter during the term of the royalty interests, except that: for the calendar quarter ended March 31, 2005, the trust s net proceeds will be based on the actual prices received for 100% of the natural gas production attributable to the royalty interests; Table of Contents for the last three calendar quarters of 2005, the trust s net proceeds relating to 100% of the natural gas production attributable to the royalty interests will be based on prices ranging from $7.25 per MMBtu to $7.55 per MMBtu (subject to upward price adjustments based on basis differentials as described below); for calendar year 2006, the trust s net proceeds relating to 220,000 MMBtu per month (equivalent to 2,620,000 MMBtus annually) of the natural gas production attributable to the royalty interests will be based on a price of $7.16 per MMBtu (subject to upward price adjustments based on basis differentials as described below); and for calendar year 2007, the trust s net proceeds relating to 7,200 MMBtu per day (equivalent to 2,628,000 MMBtus annually) of the natural gas production attributable to the royalty interests will be based on a price of $6.60 per MMBtu (subject to upward price adjustments based on basis differentials as described below). The prices set forth above for the last three calendar quarters of 2005 and for calendar years 2006 and 2007 are subject to upward price adjustments equal to the basis differential received by ECA from the sale of natural gas production attributable to the underlying properties during these periods. In general, the basis differential is the difference in prices realized for natural gas delivered at a particular delivery point on a pipeline as compared to a reference price for natural gas futures contracts such as those traded on the New York Mercantile Exchange, referred to as NYMEX. The price adjustment for the volumes of natural gas production subject to this adjustment as specified above will equal the amount by which the actual sales price realized for natural gas production attributable to the underlying properties that is delivered at a specific pipeline location in the Appalachian Basin for a particular period exceeds the NYMEX futures contract price for natural gas delivered at Henry Hub, Louisiana for the same period. For the five-year period ended December 31, 2004, the average basis differential for natural gas production delivered to delivery points in the Appalachian Basin on the Columbia Gas Transmission Corp. Appalachia Pipeline and the Dominion Transmission Inc. Appalachia Pipeline was $0.220 per MMBtu and $0.325 per MMBtu, respectively. The volumes of natural gas production subject to the pricing provisions described above will cover all of the natural gas production attributable to the underlying properties during the last three calendar quarters of 2005, and will cover approximately 81.5% of the estimated natural gas production attributable to the underlying properties as reflected in the reserve report included as Exhibit A to this prospectus during calendar year 2006 and approximately 69.8% of the estimated natural gas production attributable to the underlying properties as reflected in the reserve report included as Exhibit A to this prospectus during calendar year 2007. At the closing of this offering, ECA will also contribute to the trust a portion of certain natural gas floor price contracts that will relate to the remaining estimated volumes of natural gas production from the underlying properties not subject to the pricing provisions described above during 2006 and 2007. These contracts will entitle the trust to receive payment from the counterparty to such contract to the extent that the NYMEX reference price for the applicable reference period is below $5.75 per MMBtu. ECA has entered into hedging arrangements with institutional third parties with respect to certain volumes of natural gas production during the period April 1, 2005 through December 31, 2007. These volumes of natural gas relate the volumes of natural gas production subject to the pricing provisions described above. Under the terms of these hedging arrangements, ECA would be entitled to receive payments from the counterparties in the event that the NYMEX reference prices for the periods covered are less than the prices set forth in the hedging arrangements. The payment required to be made by the counterparty to ECA will be equal to the volume of gas subject to the hedging arrangements for any reference period multiplied by the amount by which the NYMEX reference price for the applicable Table of Contents Table of Contents reference period is below the price set forth in the hedging arrangements for the applicable reference period. The volumes of natural gas and the prices subject to the hedging arrangements are as follows: for the calendar quarter ending June 30, 2005, the hedging arrangements relate to 200,000 MMBtu per month of natural gas production based on a price of $7.25 per MMBtu; for the last two calendar quarters of 2005, the hedging arrangements relate to 7,200 MMBtu per day of natural gas production based on a price of $7.55 per MMBtu; for the calendar year 2006, the hedging arrangements relate to 220,000 MMBtu per month of natural gas production based on a price of $7.16 per MMBtu; and for the calendar year 2007, the hedging arrangements relate to 7,200 MMBtu per day of natural gas production based on a price of $6.60 per MMBtu. Although these hedging arrangements will not be directly dedicated or pledged to the trust, ECA expects that payments received by it under these hedging arrangements will assist it with its financial obligations to make payments to the trust based on the pricing provisions of the royalty interests described above during any periods when these prices exceed the market prices for natural gas production. For all quarterly periods during the term of the royalty interests, the trust s net proceeds will be determined after deduction of all gathering/post-production costs and applicable taxes associated with the trust s interest. Gathering/post-production costs will generally consist of costs incurred to gather, transport, process and market the natural gas produced. Applicable taxes will generally consist of all general property (ad valorem), production, severance, sales, gathering, excise and other similar taxes. The trust will not be responsible for any costs related to the drilling of development wells or any other development or production costs. We refer to the underlying properties subject to the PDP royalty interest as the underlying PDP properties and the underlying properties subject to the PUD royalty interest as the underlying PUD properties. The trust will make quarterly cash distributions of substantially all of its quarterly cash receipts, after deduction of fees and expenses of the administration of the trust and the amount of any quarterly incentive distributions payable to ECA, to holders of its trust units during the term of the trust. The first quarterly distribution is expected to be made on or about June 15, 2005 with respect to net proceeds from production attributable to the royalty interests during the quarter ended March 31, 2005. The royalty interests will terminate on December 31, 2024 and the trust will soon thereafter wind up its affairs and terminate. Because payments to the trust will be generated by depleting assets and the trust has a finite life with the production from the underlying properties diminishing over time, a portion of each distribution will represent a return of your original investment. The business and affairs of the trust will be managed by the trustee. ECA has no ability to manage or influence the operations of the trust. Structure of the Trust The trust will issue 7,750,000 units to ECA prior to the completion of this offering, and ECA will sell approximately 90% of these units in this offering, or 100% if the underwriters over-allotment option is exercised in full. Until , 2005 (25 days after the date of this prospectus), federal securities laws may require all dealers that effect transactions in the trust units, whether or not participating in this offering, to deliver a prospectus. This is in addition to the dealers obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. TABLE OF CONTENTS Prospectus Summary 1
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diff --git a/parsed_sections/prospectus_summary/2005/CIK0001324570_volcom-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2005/CIK0001324570_volcom-inc_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..a1f3e47c2af3f5be6bc3401dbc822f6821adba63
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2005/CIK0001324570_volcom-inc_prospectus_summary.txt
@@ -0,0 +1 @@
+Prospectus Summary 1
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diff --git a/parsed_sections/prospectus_summary/2005/CIK0001326873_cavan_prospectus_summary.txt b/parsed_sections/prospectus_summary/2005/CIK0001326873_cavan_prospectus_summary.txt
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index 0000000000000000000000000000000000000000..dd5094e2bc27415e33c9d1a757046cc5a60a1b18
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2005/CIK0001326873_cavan_prospectus_summary.txt
@@ -0,0 +1 @@
+Wexford Vessels Anita Malta Panamax 72,495 1999 Koyo Dock, Japan Koby Malta Panamax 72,495 1998 Imabari S.B., Japan Paige Malta Handymax 45,518 1994 Tsuneishi, Zosen, Japan (in thousands, except other fleet data) Statement of Income Data: Revenues $ 18,962 $ 3,175 $ 18,825 Expenses: Voyage expenses and commissions 1,231 203 1,320 Vessel operating expenses 2,404 560 1,745 Depreciation 2,429 366 2,200 Amortization of deferred costs 124 33 90 Management fees 363 88 274 General and administrative expenses 250 124 180 Foreign currency (gains)/losses 21 (in thousands) Statement of Income Data: Revenues $ 18,962 $ 3,175 $ 18,825 Expenses: Voyage expenses and commissions 1,231 203 1,320 Vessel operating expenses 2,404 560 1,745 Depreciation 2,429 366 2,200 Amortization of deferred costs 124 33 90 Management fees 363 88 274 General and administrative expenses 250 124 180 Foreign currency (gains)/losses 21 EXPENSES: Voyage expenses and commissions (Notes 1 and 9) 1,231 203 1,320 Vessel operating expenses (Note 9) 2,404 560 1,745 Depreciation 2,429 366 2,200 Amortization of deferred charges 124 33 90 Management fees (Note 1) 363 88 274 General and administrative expenses 250 124 180 Foreign currency (gains)/losses 21 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Identified Vessels VOC Orchid Bahamas Handymax 45,513 1996 Jiangnan, China VOC Enterprise Bahamas Ultrahandymax 52,483 2005 Tsuneishi Heavy Industries, Philippines Clipper Gem Liberia Panamax 64,619 1990 Jiangnan, China Clipper Glory Liberia Panamax 64,615 1990 Jiangnan, China The Identified Vessels will be purchased with approximately $ of the net proceeds from this offering, together with approximately shares of our common stock and, if necessary, up to $ of borrowings under our new credit facility. The Wexford Vessels will be acquired from our affiliates for approximately shares of our common stock. See "Related Party Transactions." We expect to employ our fleet of modern dry bulk carriers on an opportunistic basis in the spot charter market, under period time charters and in dry bulk carrier pools. We believe that this flexible employment strategy will allow us to take advantage of favorable market conditions. Our Fleet Managers We will outsource both commercial and technical fleet management to third parties in arm's length transactions at standard market terms. It is intended that VOC Bulk Shipping USA, Inc. (our "Commercial Manager") will provide us with commercial management services for which we will pay $8,500 per vessel per month. Our Commercial Manager is an affiliate of VOC. See "Related Party Transactions." We intend to employ Atlantic Marine Limited Partnership as our technical manager (our "Technical Manager") which will provide us with technical management services for which we expect to pay $105,000 per vessel per year plus crewing costs of approximately $4.7 million per year for our Combined Fleet. The Dry Bulk Shipping Industry The dry bulk shipping industry is an essential link in international trade, with ocean-going vessels representing the most efficient, and often the only, method of transporting large volumes of basic commodities and finished products. In 2004, approximately 2.5 billion tons of dry bulk cargo were transported by sea, comprising more than one-third of all international seaborne trade. According to Drewry Shipping Consultants, since the fourth quarter of 2002, the shipping industry has experienced the highest charter rates and vessel values in its modern history due to the favorable imbalance between the supply of and demand for ships. For dry bulk shipping, this imbalance is currently a function of: Supply: Shipyards where new ships are constructed are fully booked until 2008, limiting the number of new vessels that will enter the market in coming years. The supply of dry bulk carriers is a result of both the number of ships in service and also the operating efficiency of the worldwide fleet. Port congestion absorbed additional tonnage and therefore tightened the underlying supply/demand balance. Amendment No. 2 to FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Demand: The increased demand for dry bulk carrier capacity has been driven by the underlying demand for commodities transported in dry bulk carriers. Between 1999 and 2004, trade in all dry bulk commodities increased from 1.97 billion tons to 2.46 billion tons, an increase of 25% overall. China has been the main driving force behind the recent increase in seaborne dry bulk trades and the demand for bulk carriers. In addition to coal and iron ore, Chinese imports of steel products have also increased sharply in the last five years, thereby creating additional demand for dry bulk carriers. Charter hire rates and vessel values are primarily a function of the underlying balance between vessel supply and demand, although at times other factors may play a role including demand for commodities that are transported by sea. However, vessel charter rates and vessel values historically have been volatile and are affected by numerous factors outside our control. Our Competitive Strengths We believe that we possess a number of strengths that distinguish our Company within the dry bulk shipping industry: Wexford relationship. Wexford has been active in managing and operating both asset-based and non-asset based companies at all stages of development, including from inception. Wexford also has experience in arranging a wide variety of equity and debt financings for these companies. We will be managed by Wexford under an administrative services agreement that we believe will enable us to manage our business more efficiently than could otherwise be achieved on a stand alone basis. This will give us access to an established infrastructure and a team of professionals with significant expertise. Management experience in the shipping industry. Wexford executives will determine the strategic direction of our Company and manage our business operations as they have historically done with the Wexford Vessels. In addition to management and operations, this team has experience in the shipping sector through individual vessel purchases, consolidation of a number of shipping operations and its investment in an existing shipping company. We believe that the combination of Wexford's management experience and investment expertise will be a competitive advantage as we grow and manage our business. Modern, high quality fleet. Following the Transaction, we will have a fleet of seven modern dry bulk carriers with an average age of 9.2 years as of June 30, 2005. We are focused on maintaining our fleet to a high standard of operational excellence. We believe that a young, well-maintained and well-built fleet of dry bulk carriers will attract high quality charterers at favorable charter hire rates. Additionally, we believe that modern vessels that have been properly maintained will realize superior returns as a result of lower operating expenses and will initially require lower amounts of capital spending than older vessels. Quality service. Based on the experience of our management in operating the Wexford Vessels, we expect our Combined Fleet to serve a variety of quality customers engaged in industrial, commodity and raw material production and trading. In operating the Wexford Vessels, our management has maintained rigorous standards for vessel quality, condition and operations while providing reliable and dependable service. We believe that, as a result of these high standards and the level of service provided by the Wexford Vessels, we will have an excellent reputation among our customer base. Cavan Maritime Limited (Exact name of Registrant as specified in its charter) Republic of the Marshall Islands (State or other jurisdiction of Incorporation or organization) 4412 (Primary Standard Industrial Classification Code Number) Not Applicable (I.R.S. Employer Identification Number) Wexford Plaza 411 West Putnam Avenue Greenwich, CT 06830 (203) 862-7000 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive office) Frederick B. Simon Chief Executive Officer Cavan Maritime Limited Wexford Plaza 411 West Putnam Avenue Greenwich, CT 06830 (203) 862-7000 (Name, address, including zip code, and telephone number, including area code, of agent for service) Our Growth Strategy We intend to grow our fleet and our margins as we seek to become a leading vessel provider in the dry bulk shipping sector. The principal elements of our growth strategy are as follows: Strategically grow our fleet. We believe that the dry bulk shipping industry is highly fragmented and can be consolidated. We intend to participate in this consolidation and to grow our fleet primarily through the timely acquisition of high quality second hand dry bulk carriers. Our goal is to create a diversified fleet of dry bulk carriers, across all sizes, which will be capable of supplying a broad spectrum of global transportation solutions to our customers worldwide. We intend to continually monitor market conditions for opportunities to acquire modern second hand vessels that represent favorable investment opportunities. Pursue balanced and opportunistic charter strategy. We intend to employ our fleet on an opportunistic basis in the spot charter market, under period time charters and in dry bulk carrier pools managed by third parties. We believe this chartering strategy will balance the predictability of earnings achieved through time charters with the opportunity to realize superior charter rates in the spot market and thus maximize our return on our vessel investment. We also intend to continually monitor market conditions and relevant global macroeconomic trends and adjust our strategy in order to take advantage of the full variety of options available in the chartering market. Leverage operational and financial model. We believe that the Transaction will result in managerial and operational efficiencies for our Combined Fleet because our fixed costs will be spread over a larger revenue base. The increased scale of the Company will allow us to achieve lower capital costs than previously realized. We believe that these benefits will continue to be realized as we add to our fleet. Additionally, we believe that an expanded fleet operated by a professional management team should attract high quality, high volume customers over time. As a result, we believe our fleet acquisition strategy will enhance revenue and profit potential. Corporate Matters Prior to the closing of this offering, we will enter into an administrative services agreement with Wexford to provide us with general management, oversight and administrative functions and cash management and treasury services for a fee of $1.5 million per year for our Combined Fleet, plus an additional $14,000 per month for each new vessel we acquire. See "Related Party Transactions." Corporate Structure We are a holding company incorporated under the laws of the Republic of the Marshall Islands. We maintain our principal executive offices c/o Wexford Capital LLC, at Wexford Plaza, 411 West Putnam Avenue, Greenwich, Connecticut 06830. Our telephone number at that address is (203) 862-7000. (unaudited) Australian Wheat Board Ltd. 49 % 100 % 14 % Cargill 42 % Fratelli D Amato 24 % 2 % SK Shipping Co Ltd. 12 % Armada Bulk Carriers Ltd. 15 % 13 % Bunge 24 % Other Copies to: Gregg J. Berman, Esq. Fulbright & Jaworski L.L.P. 666 Fifth Avenue New York, NY 10103 (212) 318-3000 Facsimile: (212) 318-3400 Alan P. Baden, Esq. Vinson & Elkins L.L.P. 666 Fifth Avenue New York, NY 10103 (212) 237-0000 Facsimile: (212) 237-0100 (1)The number of shares outstanding after the offering: excludes shares of common stock reserved for issuance upon exercise of stock options which will be granted in conjunction with this offering at an exercise price equal to the initial public offering price hereof; and includes approximately shares of common stock to be issued to our affiliates in connection with our acquisition of the Wexford Vessels and shares of common stock to be issued as a portion of the consideration for our purchase of the Identified Vessels. These shares are not part of this offering.
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diff --git a/parsed_sections/prospectus_summary/2005/DLB_dolby_prospectus_summary.txt b/parsed_sections/prospectus_summary/2005/DLB_dolby_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..4c2d54bbc3d8655a834fca95cf7c7f8ddf7c74cf
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2005/DLB_dolby_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus and does not contain all of the information you should consider in making your investment decision. You should read this summary together with the more detailed information,
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diff --git a/parsed_sections/prospectus_summary/2005/GLP-PB_global_prospectus_summary.txt b/parsed_sections/prospectus_summary/2005/GLP-PB_global_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..cfcd0cbd452407026a4062f64c065c9dc71c447f
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2005/GLP-PB_global_prospectus_summary.txt
@@ -0,0 +1 @@
+This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including the historical and pro forma financial statements and the notes to those financial statements. The information presented in this prospectus assumes an initial public offering price of $21.50 per common unit and that the underwriters' option to purchase additional common units is not exercised unless otherwise noted. You should read "Risk Factors" for information about important risks that you should consider before buying our common units. Market and industry data and other statistical data used throughout this prospectus are based on independent industry publications, government publications and other published independent sources. Please read "Industry" for additional information on these sources. References in this prospectus to "Global Partners LP," "we," "our," "us" or like terms when used in a historical context refer to the business of Global Companies LLC and its affiliates, Glen Hes Corp., Global Montello Group LLC and Chelsea Sandwich LLC, that is being contributed to Global Partners LP in connection with this offering. When used in the present tense or prospectively, those terms refer to Global Partners LP and its subsidiaries. We include a glossary of some of the terms used in this prospectus as Appendix C.
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diff --git a/parsed_sections/prospectus_summary/2005/TSSI_tss-inc_prospectus_summary.txt b/parsed_sections/prospectus_summary/2005/TSSI_tss-inc_prospectus_summary.txt
new file mode 100644
index 0000000000000000000000000000000000000000..fff640a0e74da8b37c33258b957c5d3b59358776
--- /dev/null
+++ b/parsed_sections/prospectus_summary/2005/TSSI_tss-inc_prospectus_summary.txt
@@ -0,0 +1 @@
+PROSPECTUS SUMMARY This summary highlights certain information appearing elsewhere in this prospectus. For a more complete understanding of this offering, you should read the entire prospectus carefully, including the risk factors and the financial statements. Unless otherwise stated in this prospectus, references to we, us or our company refer to Fortress America Acquisition Corporation. The term "public stockholders" means the holders of common stock sold as part of the units in this offering or in the aftermarket, including any existing stockholders to the extent that they purchase or acquire such shares. Unless we tell you otherwise, the information in this prospectus assumes that the underwriters will not exercise their over-allotment option. We are a blank check company organized under the laws of the State of Delaware on December 20, 2004. We were formed to acquire, through a merger, capital stock exchange, asset acquisition or other similar business combination, an operating business in the homeland security industry. To date, our efforts have been limited to organizational activities. We believe the homeland security industry is among the fastest growing industries in the United States. We expect that the billions of dollars of governmental and private sector expenditures for homeland security should result in increased demand for homeland security products and services. We believe that this anticipated growth should create attractive acquisition opportunities with significant potential for capital appreciation. The homeland security industry is not an easily defined market. In July 2002, the Department of Homeland Security published the National Strategy for the Homeland Security, which defines homeland security as a concerted national effort to prevent terrorist attacks within the United States, reduce America s vulnerability to terrorism, and minimize the damage and recover from attacks that do occur. It identifies six mission areas: Intelligence and Warning Border and Transportation Security Domestic Counterterrorism Protection of Critical Infrastructure and Key Assets Defense Against Catastrophic Threats Emergency Preparedness and Response We intend to strategically focus our efforts on four major phases encompassing global and domestic security threats: planning, prevention, response, and recovery. Although we may consider a target business in any segment of the homeland security industry, we currently intend to focus on companies with dual-use applications (i.e., companies with solutions for the commercial private sector and government) in the following segments: Planning: Companies that help prepare for a possible attack or disaster, including: Security risk assessment, probability analysis, and simulation software for disaster planning; Bio-information systems for casualty analysis; Training for law enforcement, emergency, medical, security, food safety, and environmental remediation personnel; and Medical and public health preparedness. Prevention: Companies that help anticipate and take action to block attacks or avoid or limit the consequences of disasters, including: Individual tracking and identification, including access control systems, smart cards, hardware readers, software, and biometrics; Surveillance and monitoring, including communication interception, digital video surveillance, intrusion detection, and infrared systems; UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 AMENDMENT NO. 3 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 FORTRESS AMERICA ACQUISITION CORPORATION (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 6770 (Primary Standard Industrial Classification Code Number) 20-2027651 (I.R.S. Employer Identification Number) 3 Bethesda Metro Center Suite 700 Bethesda, MD 20814 (301) 961-1533 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Harvey L. Weiss, President and Chief Executive Officer Fortress America Acquisition Corporation 3 Bethesda Metro Center Suite 700 Bethesda, MD 20814 (301) 961-1533 (Name, address, including zip code, and telephone number, including area code, of agent for service) Kenneth R. Koch, Esq. Jeffrey P. Schultz, Esq. Mintz Levin Cohn Ferris Glovsky and Popeo, P.C. 666 Third Avenue New York, New York 10017 (212) 935-3000 (212) 983-3115 Facsimile James J. Maiwurm, Esq. Kristine M. Wellman, Esq. Squire, Sanders & Dempsey L.L.P. 8000 Towers Crescent Drive, 14th Fl. Tysons Corner, VA 22182-2700 (703) 720-7890 (703) 720-7801 Facsimile Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. x If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. x Chemical, biological, radiological, nuclear and other explosive detection and identification products and services; Other remote sensing of air, food, and water screening; Physical security products, including personnel and vehicle armor, ballistic and blast protection, nonlethal munitions, safe rooms, and alarm systems; Food safety products and services; Software for intelligence, security and data analysis; Data, cyber security and information assurance; Other critical infrastructure security products and services for the private sector; Integrated security solution providers; and Risk mitigation including consultative services, background screening, and investigative services. Response: Companies that help challenge attacks underway or cope with the immediate aftermath of an attack, including: Personal protection equipment; Rapid containment products and services for chemical, biological or radiological agents; Decontamination products and services to manage disaster occurrences; Emergency alert and response communication hardware, software and services; Advance fire suppression techniques; Medical and public health disaster management, including treatment for bio-terror; Terrorism-related insurance products and services; and Mobile medical and command and control units. Recovery: Companies that help restore and reconstruct governments and private enterprises after an attack or disaster, including: Environmental infrastructure cleanup and disaster management services; Recovery products such as hydration, temporary housing, first aid materials, etc.; and Business continuity and substitute services for temporary loss of major services from attacks or disasters. While we may seek to effect business combinations with more than one target business, our initial business combination must be with a target business or businesses whose collective fair market value is at least equal to 80% of our net assets at the time of such acquisition. Consequently, it is likely that we will have the ability initially to consummate only a single business combination, although this may entail the simultaneous acquisitions of several operating businesses. We may not be able to acquire more than one target business because of various factors, including possible complex domestic or international accounting issues, which would include generating pro forma financial statements reflecting the operations of several target businesses as if they had been combined, and numerous logistical issues, which could include attempting to coordinate the timing of negotiations, proxy statement disclosure and closings with multiple target businesses. In addition, we would also be exposed to the risks that conditions to closings with respect to the acquisition of one or more of the target businesses would not be satisfied bringing the fair market value of the initial business combination below the required fair market value of 80% of net assets threshold. We may further seek to acquire a target business that has a fair market value significantly in excess of 80% of our net assets. Although as of the date of this prospectus we have not engaged or retained, had any discussions with, or entered into any agreements with, any third party regarding any such potential financing transactions, we could seek to fund such a business combination by raising additional funds through the sale of our securities or through loan arrangements. However, if we were to seek such additional funds, any such arrangement would only be consummated simultaneously with our consummation of a business combination. CALCULATION OF REGISTRATION FEE Title of each Class of Security being registered Amount being Registered Proposed Maximum Offering Price Per Security (1) Proposed Maximum Aggregate Offering Price (1) Amount of Registration Fee Units, each consisting of one share of Common Stock, $.0001 par value, and two Warrants (2) 8,050,000 Units $ 6.00 $ 48,300,000 $ 5,684.91 Shares of Common Stock included as part of the Units (2) 8,050,000 Shares (3 ) Warrants included as part of the Units (2) 16,100,000 Warrants (3 ) Shares of Common Stock underlying the Warrants included in the Units (4) 16,100,000 Shares $ 5.00 $ 80,500,000 $ 9,474.85 Representative s Unit Purchase Option 1 $ 100 $ 100 (3 ) Units underlying the Representative s Unit Purchase Option ( Underwriter s Units ) (4) 700,000 Units $ 7.50 $ 5,250,000 $ 617.93 Shares of Common Stock included as part of the Underwriter s Units (4) 700,000 Shares (3 ) Warrants included as part of the Representative s Units (4) 1,400,000 Warrants (3 ) Shares of Common Stock underlying the Warrants included in the Representative s Units (4) 1,400,000 Shares $ 6.25 $ 8,750,000 $ 1,029.88 Total $ 142,800,100 $ 16,807.57(5 ) As used in this prospectus, a target business shall include an operating business in the homeland security industry and a business combination shall mean the acquisition by us of such a target business. Although we may consider a target business outside the United States as a result of the increased globalization of business and heightened security concerns abroad, we currently intend to concentrate our search on companies in the United States. We have not prioritized among any segments and do not currently have a preference as to which segment we would prefer to consummate a business combination. We do not have any specific business combination under consideration or contemplation and we have not, nor has anyone on our behalf, contacted any prospective target business or had any discussions, formal or otherwise, with respect to such a transaction. We have not, nor has anyone on our behalf, either directly or indirectly, contacted any potential target businesses or their representatives or had any discussions, formal or otherwise, with respect to effecting any potential business combination with our company. Moreover, we have not engaged or retained any agent or other representative to identify or locate any suitable acquisition candidate for us. Other than reviewing several industry reports, including those published by the Department of Homeland Security, in order to define the homeland security industry, neither we nor any of our agents or affiliates has yet taken any measure, directly or indirectly, to locate a target business. Although we believe there are many positive trends that make acquisition candidates in the homeland security industry attractive, there are various risks of acquiring a business in such industry, including substantial government regulations. For a more complete discussion of the risks relating to operations in the homeland security industry, see the section below entitled Risk Factors. Our offices are located at 3 Metro Center Suite 700, Bethesda MD 20814 and our telephone number is (301) 961-1533. Upon completion of the initial public offering, our offices will be located at 4100 North Fairfax Drive, Suite 1150, Arlington, Virginia 22203-1664. (1) Estimated solely for the purpose of calculating the registration fee. (2) Includes 1,050,000 Units and 1,050,000 shares of Common Stock and 2,100,000 Warrants underlying such Units which may be issued on exercise of a 45-day option granted to the Underwriters to cover over-allotments, if any. (3) No fee pursuant to Rule 457(g). (4) Pursuant to Rule 416, there are also being registered such indeterminable additional securities as may be issued as a result of the anti-dilution provisions contained in the Warrants. (5) Previously paid. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. The Offering Securities offered: 7,000,000 units, at $6.00 per unit, each unit consisting of: one share of common stock; and two warrants. The units will begin trading on or promptly after the date of this prospectus. Each of the common stock and warrants will trade separately on the 20th trading day after the earlier to occur of the expiration of the underwriter's over-allotment option or its exercise in full. We will file a Current Report on Form 8-K, including an audited balance sheet, upon the consummation of this offering, which is anticipated to take place three business days from the date of this prospectus. The audited balance sheet will include proceeds we receive from the exercise of the over-allotment option if the over-allotment option is exercised prior to the filing of the Form 8-K. If the over-allotment option is exercised following the initial filing of such Form 8-K, an amended Form 8-K will be filed to provide updated financial information to reflect the exercise of the over-allotment option. Common stock: Number outstanding before this offering 1,750,000 shares Number to be outstanding after this offering 8,750,000 shares Warrants: Number outstanding before this offering 0 Number to be outstanding after this offering 14,000,000 warrants Exercisability Each warrant is exercisable for one share of common stock and may be exercised on a cashless basis. Exercise price $5.00 Exercise period The warrants will become exercisable on the later of: the completion of a business combination with a target business, or [ ], 2006 [one year from the date of this prospectus]. The warrants will expire at 5:00 p.m., New York City time, on [ ], 2009 [four years from the date of this prospectus] or earlier upon redemption. Redemption We may redeem the outstanding warrants, including any warrants issued to the underwriters if they exercise their purchase option, with Sunrise Securities Corp. s prior consent: in whole and not in part, at a price of $.01 per warrant at any time after the warrants become exercisable, upon a minimum of 30 days prior written notice of redemption, and if, and only if, the last sales price of our common stock equals or exceeds $8.50 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption and the weekly trading volume of our common stock has been at least 200,000 shares for each of the two calendar weeks before we send the notice of redemption. We have established this criteria to provide warrant holders with a significant premium to the initial warrant exercise price as well as a sufficient degree of liquidity to cushion the market reaction, if any, to our redemption call. If the foregoing conditions are satisfied and we call the warrants for redemption, each warrant holder shall then be entitled to exercise his or her warrant, prior to the date scheduled for redemption, by payment of the exercise price or on a cashless basis in lieu of paying the cash exercise price as described in this prospectus. However, there can be no assurance that the price of the common stock will exceed the call trigger price or the warrant exercise price after the redemption call is made. Because we may redeem the warrants only with the prior consent of Sunrise Securities Corp. and it may hold warrants subject to redemption, it may have a conflict of interest in determining whether to consent to such redemption. We cannot assure you that Sunrise Securities Corp. will consent to such redemption if it is not in its best interest even though it may be in our best interest. Proposed OTC Bulletin Board symbols for our: Units [ ] Common stock [ ] Warrants [ ] Offering proceeds to be held in trust: $37,660,000 of the proceeds of this offering ($5.38 per unit) will be placed in a trust account at JPMorgan Chase NY Bank maintained by Continental Transfer & Trust Company, pursuant to an agreement to be signed on the date of this prospectus. These proceeds will not be released until the earlier of the completion of a business combination or our liquidation. Therefore, unless and until a business combination is consummated, the proceeds held in the trust fund will not be available for our use for any expenses related to this offering or expenses which we may incur related to the investigation and selection of a target business and the negotiation of an agreement to acquire a target business. These expenses may be paid prior to a business combination only from the net proceeds of this offering not held in the trust fund (initially, approximately $1,080,000 after the payment of the expenses relating to this offering). There will be no fees, reimbursements or cash payments made to our existing stockholders and/or officers and directors other than: The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. Preliminary Prospectus Subject to Completion, July 13, 2005 PROSPECTUS $42,000,000 FORTRESS AMERICA ACQUISITION CORPORATION 7,000,000 units Fortress America Acquisition Corporation is a blank check company recently formed for the purpose of acquiring, through a merger, capital stock exchange, asset acquisition or other business combination, an operating business in the homeland security industry. We do not have any specific business combination under consideration or contemplation and we have not, nor has anyone on our behalf, contacted any potential target business or had any discussions, formal or otherwise, with respect to such a transaction. This is an initial public offering of our securities. Each unit consists of: one share of our common stock; and two warrants. Each warrant entitles the holder to purchase one share of our common stock at a price of $5.00. Each warrant will become exercisable on the later of our completion of a business combination or , 2006 [one year from the date of this prospectus], and will expire on , 2009 [four years from the date of this prospectus], or earlier upon redemption. We have granted the underwriters a 45-day option to purchase up to 1,050,000 additional units solely to cover over-allotments, if any (over and above the 7,000,000 units referred to above). The over-allotment will be used only to cover the net syndicate short position resulting from the initial distribution. We have also agreed to sell to Sunrise Securities Corp., the representative of the underwriters, for $100, as additional compensation, an option to purchase up to a total of 700,000 units at a per unit offering price of $7.50. The units issuable upon exercise of this option are identical to those offered by this prospectus except that the warrants included in the option have an exercise price of $6.25 (125% of the exercise price of the warrants included in the units sold in the offering). The purchase option and its underlying securities have been registered under the registration statement of which this prospectus forms a part. There is presently no public market for our units, common stock or warrants. We anticipate that the units will be quoted on the OTC Bulletin Board under the symbol on or promptly after the date of this prospectus. Once the securities comprising the units begin separate trading, the common stock and warrants will be traded on the OTC Bulletin Board under the symbols and , respectively. We cannot assure you that our securities will continue to be quoted on such market in the future. Investing in our securities involves a high degree of risk. See Risk Factors beginning on page 10 of this prospectus for a discussion of information that should be considered in connection with an investment in our securities. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Public offering price Underwriting discount and commissions(1) Proceeds, before expenses, to us Per unit $ 6.00 $ 0.42 $ 5.58 Total $ 42,000,000 $ 2,940,000 $ 39,060,000 (1) Includes a non-accountable expense allowance in the amount of 1% of the gross proceeds, or $0.06 per unit ($420,000 in total) payable to Sunrise Securities Corp. Of the net proceeds we receive from this offering, $37,660,000 ($5.38 per unit) will be deposited into a trust account at JPMorgan Chase NY Bank maintained by Continental Transfer & Trust Company acting as trustee. Repayment of a $60,000 interest-free loan made by our affiliates to cover offering expenses; Payment of up to $7,500 per month to an affiliate of C. Thomas McMillen, our chairman of the board, for office space and administrative services; and Reimbursement for any expenses incident to the offering and finding a suitable business combination. None of the warrants may be exercised until after the consummation of a business combination and, thus, after the proceeds of the trust fund have been disbursed. Accordingly, the warrant exercise price will be paid directly to us and not placed in the trust account. We will pay the costs of liquidation and dissolution from our remaining assets outside of the trust fund. Stockholders must approve business combination: We will seek stockholder approval before we effect any business combination, even if the nature of the acquisition would not ordinarily require stockholder approval under applicable state law. In connection with the vote required for any business combination, all of our existing stockholders, including all of our officers and directors, have agreed to vote the shares of common stock owned by them immediately before this offering in accordance with the majority of the shares of common stock voted by the public stockholders. The term public stockholders means the holders of common stock sold as part of the units in this offering or in the aftermarket, including any existing stockholders to the extent that they purchase or acquire such shares. We will proceed with a business combination only if a majority of the shares of common stock voted by the public stockholders are voted in favor of the business combination and public stockholders owning less than 20% of the shares sold in this offering exercise their conversion rights described below. Conversion rights for stockholders voting to reject a business combination: Public stockholders voting against a business combination will be entitled to convert their stock into a pro rata share of the trust fund (initially $5.38 per share), including any interest earned on their portion of the trust fund, if the business combination is approved and completed. Public stockholders who convert their stock into their share of the trust fund will continue to have the right to exercise any warrants they may hold. Because the initial per share conversion price is $5.38 per share (plus any interest), which is lower than the $6.00 per unit price paid in the offering and which may be lower then the market price of the common stock on the date of the conversion, there may be a disincentive on the part of public stockholders to exercise their conversion rights. There may also be a corresponding incentive to our existing stockholders to exercise their conversion rights with respect to shares acquired in the open market after the consummation of this offering, if any, in light of the fact that our existing stockholders weighted average cost per share (taking into account the shares acquired for a nominal amount prior to the offering in addition to those securities purchased in the aftermarket, if any) will be significantly less than the amount payable upon the exercise of the conversion right ($5.38 per share). We note, that at the date of this prospectus, none of our existing stockholders currently intends to purchase our securities in the aftermarket. Liquidation if no business combination: We will dissolve and promptly distribute only to our public stockholders the amount in our trust fund plus any remaining net assets if we do not effect a business combination within 12 months after consummation of this offering (or within 18 months from the consummation of this offering if a letter of intent, agreement in principle or definitive agreement has been executed within 12 months after consummation of this offering and the business combination has not yet been consummated within such 12-month period). Our existing stockholders have agreed to waive their respective rights to participate in any liquidation distribution occurring upon our failure to consummate a business combination, but only with respect to those shares of common stock acquired by them prior to this offering. Escrow of existing stockholders shares: On the date of this prospectus, all of our existing stockholders, including all of our officers and directors, will place the shares they owned before this offering into an escrow account maintained by Continental Transfer & Trust Company, acting as escrow agent. Subject to certain limited exceptions, such as transfers to family members and trusts for estate planning purposes and upon death while remaining subject to the escrow agreement, these shares will not be transferable during the escrow period and will not be released from escrow until [ ], 2008 [three years from the date of this prospectus] unless we were to consummate a transaction after the consummation of the initial business combination which results in all of the stockholders of the combined entity having the right to exchange their shares of common stock for cash, securities or other property. Risks In making your decision on whether to invest in our securities, you should take into account not only the backgrounds of our management team, but also the special risks we face as a blank check company, as well as the fact that this offering is not being conducted in compliance with Rule 419 promulgated under the Securities Act of 1933, as amended, and, therefore, you will not be entitled to protections normally afforded to investors in Rule 419 blank check offerings. See Comparison of Offerings of Blank Check Companies beginning on page 35 of this prospectus. Additionally, our initial security holders initial equity investment is below that which is required under the guidelines of the North American Securities Administrators Association, Inc. You should carefully consider these and the other risks set forth in the section entitled Risk Factors beginning on page 10 of this prospectus.
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+PROSPECTUS SUMMARY This summary may not contain all of the information that may be important to you. You should read this summary together with the entire prospectus, including the
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+PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. You should read this entire prospectus carefully, including Risk Factors and our consolidated financial statements and the notes to those financial statements included elsewhere in this prospectus. We have provided definitions for the oil and natural gas terms used in this prospectus in the Glossary of Oil and Natural Gas Terms included as Appendix A to this prospectus. Unless otherwise indicated, the information contained in this prospectus assumes that the underwriters do not exercise their over-allotment option. Unless the context requires otherwise, references in this prospectus to W&T, we, us and our refer to W&T Offshore, Inc. and our consolidated subsidiaries. The share and per share information in this prospectus gives effect to a 6.669173211-for-1 split of our common stock effective November 30, 2004. About W&T Offshore, Inc. We are an independent oil and natural gas acquisition, exploitation and exploration company. Our goal is to generate a high return on equity through profitably increasing production and reserves. We are focused primarily in the Gulf of Mexico area, where we have developed significant technical expertise and where the high production rates associated with hydrocarbon deposits have historically provided us the best opportunity to achieve a rapid payback on our invested capital. We believe this focus and our historic success provide a solid foundation for higher impact capital projects in the Gulf of Mexico, including the deepwater (water depths in excess of 500 feet) and the deep shelf (well depths in excess of 15,000 feet). Based on a reserve report prepared by Netherland, Sewell & Associates, Inc., our independent petroleum consultants, our proved reserves at December 31, 2003 were 444.7 Bcfe. We calculate that our proved reserves had a PV-10 of $1.1 billion and a standardized measure of after tax discounted cash flows of $760.9 million as of December 31, 2003. Of those reserves, 67% were proved developed reserves and 52% were natural gas reserves. Since our inception in 1983 with an initial equity capitalization of $12,000, we have significantly grown our reserves, production and cash flow through a combination of acquisition, exploitation and exploration activities. Shareholders equity increased $158.7 million, or 284%, solely from net income (after distributions) during the five-year period ended December 31, 2003. As of January 10, 2005, we had no long-term debt outstanding under our credit facility. We have increased shareholder value through: Growth in net income and EBITDA In the five years ended December 31, 2003, our annual net income increased from $14.0 million to $116.6 million, with aggregate net income over this period of $244.4 million. During the same period, our net income plus income tax, net interest, depreciation, depletion, amortization and accretion, or EBITDA, increased from $42.8 million to $323.7 million, with aggregate EBITDA over this period of $728.8 million. Significant production growth Our net average daily production more than tripled from approximately 58 MMcfe per day in 1999 to approximately 217 MMcfe per day in 2003, representing a compounded annual growth rate of approximately 39%. During the first nine months of 2004, our net production averaged approximately 229 MMcfe per day. Significant reserve growth In the five years ended December 31, 2003, our proved reserves increased from 77.9 Bcfe to 444.7 Bcfe, representing a compounded annual growth rate of approximately 40%. Efficient capital deployment In the three-year period ended December 31, 2003, we deployed $443.5 million of capital on acquisitions, exploitation and exploration and added 415.9 Bcfe of proved reserves. As of December 31, 2003, the future development cost related to all proved reserves was $246.9 million. Long-term debt: Revolving loan facility $ $ Shareholders equity: Preferred stock, $.00001 par value, 2,000,000 shares authorized, 2,000,000 issued and outstanding actual; no shares issued and outstanding as adjusted (1) 45,435 Common stock, $.00001 par value, 118,330,000 shares authorized, 52,611,674 shares issued and outstanding actual; 65,969,224 shares issued and outstanding as adjusted (2) SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Table of Contents Index to Financial Statements Acquisitions, Exploitation and Exploration Acquisitions and exploitation. During the five-year period ended December 31, 2003, we completed five significant acquisitions for a total purchase price of approximately $186.4 million, which added an aggregate of approximately 343.2 Bcfe to our net proved reserves. We have focused on acquiring properties where we can develop an inventory of drilling prospects that enable us to continue to add reserves post-acquisition. Subsequent to the completion of these five acquisitions, we deployed resources to realize the value of the proved developed reserves, to exploit the proved undeveloped reserves and to explore for upside potential by drilling for unproven reserves. From the time of acquisition of these properties through December 31, 2003, we invested an additional $223.0 million in exploitation, exploration and the exercise of preferential rights of purchase. Through these activities, we added an incremental 182.8 Bcfe of proved reserves, including reserve revisions, while producing 152.6 Bcfe from these properties. As of December 31, 2003, the remaining proved reserves for these acquired properties totaled 373.4 Bcfe, with a PV-10 value of $1,068 million (before plug and abandonment cost). A substantial portion of the increase in value subsequent to these acquisitions has come through additional drilling. Through December 31, 2003, we had received cash proceeds from sales of production from these properties representing a compounded annual pre-tax return of approximately 80% on the cash we invested in acquiring, developing, operating and exploiting these properties, before considering the value of future production. For the year ended December 31, 2004, we spent approximately $33.6 million in acquisition activities, including our exercise of preferential rights. We have an acquisition pending, which involves a capital expenditure of approximately $3.6 million. Exploration. We have the right to explore for and develop oil and natural gas reserves on approximately 927,000 gross acres in the Gulf of Mexico. We believe that our large acreage position and significant discretionary cash flow provide a strong base from which to conduct our exploration activities. During the three-year period ended December 31, 2003, we drilled 38 exploratory wells, of which 34 were successful (which we define as completed or planned for completion). During this period, we spent $157.4 million on exploration activities and added 110.1 Bcfe of proved reserves through our exploration activities. We estimate we spent approximately $265 million on capital expenditures during the fiscal year ended December 31, 2004, including $150 million for the drilling of 32 exploration wells and seven development wells, $66 million for completion and facility cost, $10 million on budgeted drilling cost currently in progress, $15 million on plug and abandonment, and $24 million for other identified projects. All of the development wells were successful. Of the 32 exploration wells, 21 were successful and five of the successful wells are in the deepwater. We operate a total of 16 of the 21 successful exploratory wells, including four wells that we operate in the deepwater. We have identified over 30 exploratory wells and 5 development wells to be drilled in 2005. In addition, we have identified 45 additional exploration prospects for 2006 and beyond, all of which are supported by 3-D seismic data and are in various stages of evaluation. The majority of these are single well prospects, with 19 located in the deepwater, ten targeted for the deep shelf, 39 located on other parts of the outer continental shelf and seven located onshore. We have become more active in bidding for Gulf of Mexico leases on the outer continental shelf (the OCS ) at lease sales conducted by the U.S. government through the Minerals Management Service ( MMS ). At the March 2004 OCS lease sale, the MMS awarded us leases for a 100% working interest in seven OCS blocks located in the central Gulf of Mexico, three of which are in the deepwater. At the August 2004 OCS lease sale, the MMS awarded us leases for a 100% working interest in six OCS blocks located in the western Gulf of Mexico, four of which are in the deepwater. Gross: Productive 18 6 10 Non productive 2 AMENDMENT NO. 5 to FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Table of Contents Index to Financial Statements Business Strategy Our goal is to generate a high return on equity through profitably increasing production and reserves. We will seek to achieve this goal by acquiring and exploiting reserves at an attractive cost, by producing our reserves at the highest and most economic rates and by exploring for reserves on our extensive acreage holdings. We expect to continue to focus on acquiring properties that provide for a rapid return of our initial investment. We believe there are significant opportunities for us to expand our exploration activities, particularly in the deepwater and the deep shelf. Continued acquisition and exploitation focus in the Gulf of Mexico. We plan to continue to acquire and exploit reserves on the OCS of the Gulf of Mexico, the area of our historical success, or in other areas outside of the Gulf of Mexico that are compatible with our technical expertise and could yield rates of return comparable to those we have historically achieved. We believe attractive acquisition opportunities will continue to arise in the Gulf of Mexico as the major integrated oil companies and other large independent oil and gas exploration and production companies continue to divest properties to focus on larger and more capital-intensive projects that better match their long-term strategic goals. Deepwater acquisitions and drilling. During recent years, we have gradually extended our acquisition and drilling activities into the deeper waters of the Gulf of Mexico. We believe this is a natural extension of our historical activity and experience in the shallow water of the Gulf of Mexico. In 2000, we acquired our first deepwater interest. From our incorporation through December 31, 2004, we have drilled or participated in 12 wells on properties in the deepwater, seven of which have been successful. Our deepwater projects have been in water depths up to 4,200 feet and located in areas where we can drill from existing infrastructure or where we are able to connect our subsea wells to existing infrastructure. We believe our opportunities for deepwater exploration have been enhanced by technological advances in recent years that enable the connection of subsea wells to existing infrastructure over longer distances, eliminating the requirement for new, dedicated production facilities, the installation of which requires long lead times and large capital investments. We also believe asset divestitures and resource constraints of major integrated oil companies and other large upstream companies may allow us to acquire attractive deepwater prospects at favorable prices with a significant portion of the up-front development expenses, such as infrastructure and seismic, already invested. Deep shelf exploration. We believe a significant portion of our acreage has exploration potential below currently producing zones, including deep shelf reserves. We consider deep shelf targets to be hydrocarbon-bearing horizons located in shallow water areas of the Gulf of Mexico at subsurface depths greater than 15,000 feet. Although the cost to drill deep shelf wells can be significantly higher than shallower wells, the reserve targets are typically larger and the use of existing infrastructure and recent royalty suspension incentives from the MMS should partially offset higher drilling cost. Risks Related to Our Strategy Prospective investors should carefully consider the matters set forth under the caption Risk Factors beginning at page 11, as well as the other information set forth in this prospectus, including risks related to our reserve replacement challenges, risks related to oil and natural gas prices and operating risks inherent in the oil and natural gas business. One or more of these matters could negatively impact our ability to implement our business strategy successfully. Competitive Strengths We believe we are well positioned to execute our business strategy because of the following competitive strengths: Substantial acreage position. Approximately 81% of our 927,000 gross acres in the Gulf of Mexico is held-by-production. Our held-by-production acreage has significant existing infrastructure, which reduces Gross: Productive 24 9 16 Non productive 1 2 W&T Offshore, Inc. (Exact name of registrant as specified in its charter) Table of Contents Index to Financial Statements development lead times and cost. This infrastructure frequently allows for relatively quick tie back of production from deep shelf discoveries. Acreage held-by-production is attractive because it permits us to maintain all of our exploration, exploitation and development rights (including deep rights below currently producing zones) in the leased area as long as production continues. We have the right to propose future deep shelf exploration and development projects on at least 84% of our acreage. During the three-year period ended December 31, 2003, we drilled 55 exploitation and exploration wells on our held-by-production acreage, of which 49 were successful. Our contracts with seismic providers give us access to data on a total of approximately 40.0 million acres including substantially all the acreage we hold. We have access to the data at a reduced cost but do not incur any additional expense until the data is requested. Our acreage position will continue to be the primary source of our near to medium term exploitation and exploration activities. Proven acquisition strategy. Our method of identifying and evaluating acquisitions has translated into a high rate of return on acquisitions. Our acquisition strategy involves: targeting under-exploited assets; identifying additional sources of value through the application of technical resources; and acquiring proven reserves at an attractive rate of return along with significant upside potential from exploration opportunities. Strong operational capabilities. We have operated offshore and onshore properties in excess of 20 years, and we have gained valuable experience in all aspects of drilling and production in the shallow and deep water of the Gulf of Mexico. We own working interests in approximately 108 offshore fields in the Gulf of Mexico, and we operated the wells accounting for approximately 57% of our average daily production for month of November of 2004. In 1995, we received recognition for our exceptional operations record from the MMS, the regulatory agency that has primary jurisdiction over our operations. As a result of our operating capabilities and financial strength, the MMS also has historically exempted us from supplemental bonding requirements in the Gulf of Mexico. Committed, experienced management. We have assembled a senior management team with considerable technical expertise and industry experience. Our founders, Tracy W. Krohn, Chairman, Chief Executive Officer, President and Treasurer, and Jerome F. Freel, Chairman Emeritus and Corporate Secretary, each have more than twenty years of experience as executive managers of oil and gas companies. Mr. Krohn and Mr. Freel will collectively own more than 72.5% of our outstanding capital stock (71.9% if the underwriters over-allotment option is exercised in full) immediately after this offering. This stock ownership represents the majority of their respective financial net worth. The other members of our management team average more than 20 years of experience in the industry, including an average of approximately six years with us. Most members of the team have previously worked for a major oil company or a large independent producer. These managers will collectively own approximately 2.9% of our outstanding common stock immediately after this offering. The board of directors has adopted a long-term incentive compensation plan to provide for additional incentives for continued performance and service to the Company. Conservative financial approach. We believe our conservative financial approach has contributed to our success and has positioned us to capitalize on new opportunities as they develop. We have typically relied solely on net cash provided by operating activities and traditional commercial bank credit facilities to fund our growth. We have historically limited annual capital spending for exploration, exploitation and development activities to net cash provided by operating activities and typically used our bank credit facility for acquisitions and to balance working capital fluctuations. Texas 1311 72-1121985 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification No.) Eight Greenway Plaza, Suite 1330 Houston, Texas 77046 (713) 626-8525 (Address, including zip code and telephone number, including area code, of registrant s principal executive offices) Tracy W. Krohn Eight Greenway Plaza, Suite 1330 Houston, Texas 77046 (713) 626-8525 (Name, address, including zip code, telephone number, including area code, of agent for service) Table of Contents Index to Financial Statements In the future, as we further expand our operations into the higher impact deepwater and deep shelf areas of the Gulf of Mexico, our capital spending may exceed net cash provided by operating activities, in which event we may issue debt or equity securities to fund such future expenditures. Recent Events During the three months ended September 30, 2004, our oil and natural gas production averaged 215 MMcfe per day and, based upon preliminary estimates, our production averaged 214 MMcfe per day during the three months ended December 31, 2004. Our financial results for the three months ended December 31, 2004 will reflect approximately $9 million in expenses resulting from the recording of expenses associated with this offering and from an employee bonus granted by our board of directors to all employees of record on December 31, 2004. The bonus will be paid in two installments, on June 1, 2005 and January 3, 2006 solely to individuals who are still employed on those dates. We estimate that the total cost of the bonus will be approximately $10 million. Corporate Information We are a Texas corporation. Our principal executive offices are located at Eight Greenway Plaza, Suite 1330, Houston, Texas 77046. Our telephone number is (713) 626-8525. We intend to maintain a web site at www.wtoffshore.com, which will contain information about us. Our web site and the information contained on it and connected to it will not be deemed incorporated by reference into this prospectus. Copies to: Virginia Boulet Adams and Reese LLP 4400 One Houston Center 1221 McKinney Houston, Texas 77010 (713) 652-5151 Kelly B. Rose Baker Botts L.L.P. One Shell Plaza 910 Louisiana Street Houston, Texas 77002-4995 (713) 229-1796 (1) Includes 19,200 shares, which is the approximate number of shares that will be issued to certain employees upon the consummation of this offering and gives effect to the conversion of our outstanding preferred stock into shares of our common stock which will occur immediately prior to the completion of this offering. Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. CALCULATION OF REGISTRATION FEE Consolidated Cash Flow Information: Net cash provided by operating activities $ 123,884 $ 147,809 $ 263,155 $ 187,695 $ 259,789 Capital expenditures 126,399 116,759 203,400 105,911 173,590 Other Financial Information (unaudited): EBITDA (6) $ 132,764 $ 147,399 $ 323,659 $ 392,662 $ 246,566 $ 293,123 Title of each class of securities to be registered Proposed Maximum Offering Price(1) Amount of Registration Fee(2) Common Stock, par value $.00001 per share $230,431,250 $29,147.26 (1) Gives effect to a transaction with ConocoPhillips completed in December 2003, as if consummated on January 1, 2003. See the unaudited pro forma financial statements for more information regarding this transaction. (2) Effective January 1, 2003, we adopted Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations. The cumulative effect of the change in accounting principle is $220,900, ($143,585 net of tax). See Note 2 to our consolidated financial statements. (3) The amount for the year ended December 31, 2003 includes $9.3 million of compensation expense resulting from an incentive compensation grant to certain key employees (other than the Chief Executive Officer and the Corporate Secretary), of which approximately $5.5 million was restricted common stock and approximately $3.8 million was cash. The amount for the nine months ended September 30, 2004, includes $579,615 of compensation expense resulting from an incentive compensation grant to certain key employees (other than the Chief Executive Officer and the Corporate Secretary), of which $389,923 was restricted common stock and $189,692 was cash. (4) This impairment is related to the sale of a subsidiary to two of our shareholders. See Notes 4 and 15 to our consolidated financial statements. (5) On December 3, 2002, we revoked our election under Subchapter S of the Internal Revenue Code and began paying income tax at the corporate level. Current and deferred tax liabilities recorded in 2002 reflected the cumulative effect of certain tax liabilities, as more fully described in Note 9 to our consolidated financial statements. (6) We define EBITDA as net income plus income tax expense, net interest expense, depreciation, depletion, amortization and accretion. See Note 7 to the first table in Selected Historical and Pro Forma Financial Information for a reconciliation of EBITDA to net income. Although not prescribed under generally accepted accounting principles ( GAAP ), we believe the presentation of EBITDA is relevant and useful because it helps our investors understand our operating performance and makes it easier to compare our results with those of other companies that have different financing, capital or tax structures. EBITDA should not be considered in isolation from or as a substitute for net income, as an indication of operating performance or cash flows from operating activities or as a measure of liquidity. EBITDA, as we calculate it, may not be comparable to EBITDA measures reported by other companies. In addition, EBITDA does not represent funds available for discretionary use. (1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act. (2) Of that amount, $28,508 was previously paid by wire transfers on May 3, 2004 and July 29, 2004. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. Operating Data: Net sales: Natural gas (MMcf) 28,412 39,368 52,807 39,688 40,263 Oil (MBbls) 2,314 2,465 4,373 3,139 3,732 Total natural gas and oil (MMcfe) (1) 42,296 54,158 79,045 58,522 62,658 Average daily equivalent sales (MMcfe/d) (5) 115.9 148.5 216.6 214.4 228.7 Average realized sales price (6): Natural gas ($/Mcf) $ 4.11 $ 3.34 $ 5.60 $ 5.83 $ 5.92 Oil ($/Bbl) 22.66 23.57 28.74 28.93 34.99 Average per Mcfe data ($/Mcfe): Lease operating expenses $ 0.52 $ 0.49 $ 0.83 $ 0.85 $ 0.85 Gathering, transportation cost and production taxes 0.12 0.07 0.13 0.13 0.17 Depreciation, depletion, amortization and accretion (7) 1.54 1.66 1.82 1.79 1.93 General and administrative (8) 0.23 0.19 0.29 0.33 0.21 Net cash provided by operating activities 2.93 2.73 3.33 3.21 4.15 EBITDA (9) 3.14 2.72 4.09 4.21 4.68 (1) One billion cubic feet equivalent (Bcfe), one million cubic feet equivalent (MMcfe) and one thousand cubic feet equivalent (Mcfe) are determined using the ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids (totals may not add due to rounding). (2) The preliminary draft of our reserve report prepared by our independent petroleum consultants as of January 1, 2005, indicates their estimate that our volume of proved oil and gas reserves may increase by two to three percent, compared to our proved reserves as of January 1, 2004. (3) The present value of estimated future net revenues attributable to our reserves was prepared using constant prices, as of the calculation date, discounted at 10% per year on a pre-tax basis. Oil prices are based on December 31, 2003 West Texas Intermediate posted price, adjusted by lease for quality, transportation fees, and regional price differentials. Gas prices are based on December 31, 2003 Henry Hub spot market price, adjusted for energy content, transportation fees and regional price differentials. Prices are held constant in accordance with SEC guidelines. The PV-10 has been reduced by our estimated discounted cost of future plug and abandonment expenses. (4) The standardized measure of discounted future net cash flows represents the present value of future cash flows after income tax, discounted at 10%. (5) Based on our initial estimates, our sales for the year ended December 31, 2004 will be approximately 82.2 Bcfe, or approximately 225 MMcfe per day. We will not have final results until our year-end financial statements are completed. (6) Average realized sales prices do not include any effects of hedging, because we did not engage in any financial hedge transactions during the periods presented. (7) Accretion expense is only included in the data presented for the year ended December 31, 2003 and the nine-month periods ended September 30, 2003 and 2004, subsequent to our adoption of Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations, on January 1, 2003. (8) The amount for the year ended December 31, 2003 includes $9.3 million ($0.12 per Mcfe) of compensation expense resulting from an incentive compensation grant to certain key employees (other than the Chief Executive Officer and the Corporate Secretary), of which approximately $5.5 million was restricted common stock and approximately $3.8 million was cash. The amount for the nine months ended September 30, 2004 includes $579,615 of compensation expense resulting from an incentive compensation grant to certain key employees (other than the Chief Executive Officer and the Corporate Secretary), of which $389,923 was restricted common stock and $189,692 was cash. (9) We define EBITDA as net income plus income tax expense, net interest expense, depreciation, depletion, amortization and accretion. See footnote 7 to the first table in Selected Historical and Pro Forma Financial Information for a reconciliation of EBITDA to net income. Although not prescribed under GAAP, we believe the presentation of EBITDA is relevant and useful because it helps our investors understand our operating performance and makes it easier to compare our results with those of other companies that have different financing, capital or tax structures. EBITDA should not be considered in isolation from or as a substitute for net income, as an indication of operating performance or cash flows from operating activities or as a measure of liquidity. EBITDA, as we calculate it, may not be comparable to EBITDA measures reported by other companies. In addition, EBITDA does not represent funds available for discretionary use. Table of Contents Index to Financial Statements The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. Subject to Completion, dated January 12, 2005 PROSPECTUS 11,450,000 Shares Common Stock Table of Contents Index to Financial Statements
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